09:27am EST 19-Dec-00 Janney Montgomery Scott Safeguard Scientifics, Inc. (SFE) An Assessment of Where We Are
JANNEY MONTGOMERY SCOTT LLC
December 19, 2000 rjacobs@jmsonline.com
Safeguard Scientifics, Inc.* (SFE-$6)
An Assessment of Where We Are
Current Estimated Value of Public
Portfolio Companies per SFE Share : $6.47
Current Estimated Asset Value Per Share*: $16.88
*The sum of the PPV, the carrying value of the
private porfolio ($8), investment in private equity
partners ($1), and cash ($2).
Yield: 0.0% Market Cap.: $1.9 Billion
Dividend: $0.00 Rating: BUY 12-Month Target Price: $17*
*Reported earnings are not an indication of operating results, or shareholder
value, and will vary widely due to the inclusion of unrealized capital gains
and losses in the income statement.
Safeguard Scientifics, Inc. is a partnership of entrepreneurial companies
focused on internet infrastrucure companies. The Company's partnership
companies deliver technology services and products, including the
configuration of personal computers, internet technology, application
software, network integration, technical support, multimedia technology,
telecommunications technology, and other services.
Continuing its seemingly unending decline, SFE shares fell 17% yesterday, to
a new annual low of 5 13/16. I thought it might be useful to look at the
various issues afflicting the stock, and our understanding and position in
regards to each.
1) As of yesterday's close, the value of the public portfolio value (PPV) was
$770 million, or $6.47 per share. This means the stock price is selling at
a 12% discount to this value, which of course has also been dropping sharply
- it was $10.80 per share at 11/8/00, with ICGE (ICBE-$4) then selling at
$10.93 per share.
2) It is only in the last two days that the market price of SFE has dropped
below the PPV. Historically, we have to go back to 10/27/98 to find this
relationship, when SFE shares were selling at the adjusted price of $5.67 per
share. Also historically, SFE has always shown the greatest value when it
sells for this discount, valuing nothing for either the private portfolio or
cash and equivalents.
3) Speaking of liquid resources, at the end of September, SFE had $240
million in cash and a $300 million unused credit line. By the end of this
year, cash should be in the $200 million range. My understanding is that
operational cash burn for 2001 will be in the $45 - $50 million range, with
capital commitments (for existing and possible acquisitions) of about $150
million more. In other words, even with no further access to capital
markets, SFE has at least 2+years of available resources.
4) With the acquisition of Palarco and the formation of Safeguard Global
Resource, SFE is trying to generate operating cash flow using internal
operations. While this is not a unique strategy, it seems to be off to a
decent start, and something to keep our eyes on.
5) The public's focus in the last 2 weeks, of course, has been CEO Pete
Musser's forced liquidation of 7.5 million shares, which even though it
became public two weeks ago (12/5), had most recently hit the press on
Sunday, with additional information. I think this has accelerated tax
selling and just general bail-outs. In addition, it seems obvious that much
of that stock was placed in agency hands, and has been traded every day
since. Look at the chart since 12/1/00- there have been between 2 million
and 5 million shares traded every day, which hasn't helped.
6) Two senior executives have left. Jon Ounsworth, the corporate council
(actually, he is scaling back his activities) and Steve Andriole, the CTO.
Steve is a wonderful technology visionary and speaker, and spoke to our
Investor day this October. Our understanding is that he is moving back to
academia. Ounsworth, who invented the subscription rights plan, has been
replaced by a very competent successor. To our knowledge, the more
operationally vital executives are still firmly in place.
6) Finally, we have been following this company for a long time, and have
seen highly negative periods before (although none following a period like
the hyper-speculation of last spring). In these times, when the market will
not capitalize anything in the private portfolio until the IPO market opens,
the stock will trade no higher than the PPV. This in itself is now dependent
on the small tech market, still a only place to be. When deals can be done,
and SFE does have a registration filing for Nextone Communications, the PPV
premium will return.
7) In summary, as painful as this period has been for everyone, SFE has good
liquidity, its private portfolio has a number of excellent companies (Atlas
Commerce, Mi8, TechSpace, and Wireless.online, among others), which in a
receptive market, could be solid offerings. Until that happens, SFE will
trade with the tech group, and especially the internet stocks within it. I
believe the shares are a long-term buy, given the substantial amount of
non-valued assets, but recognize that the capital markets will have to open
before many investors are willing to pay for it.
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