Bottom Fishing For Cash-Rich Companies
Friday March 8, 8:30 am Eastern Time
Forbes.com
By Andrew Gillies
The market has knocked the stuffing out of Avici Systems , a North Billerica, Mass.-based maker of fiber-optic products. From a 52-week high, the stock has fallen 88% to $2.19. But with cash and equivalents of $129 million and not much long-term debt, Avici has $2.62 per share in cash.
ADVERTISEMENT
Sound interesting? It does to John Buckingham, co-editor of the Prudent Speculator investment newsletter and manager of the value-oriented Al Frank Fund, a mutual fund with $60 million in assets. Buckingham suggests that companies in situations such as that of Avici are often candidates for buyouts.
"We're not the only ones who see all that cash," he says, "and if you like the business, why not buy the company when you can basically get it for free?"
Of course, a downtrodden company such as Avici could confirm the market's fears and go bust. Public since July 2000, Avici has yet to turn a profit, and given the oversupply in fiber-optic cable and equipment, it's not surprising that the firm shows discouraging consensus forecasts for 2002 and 2003.
Analysts expect Avici to post a loss of $1.25 per share this year, narrowing to a loss of 92 cents in 2003. Over the next several quarters, Avici will probably have to tap into its cash hoard to pay for day-to-day operating expenses.
Still, at just over half book value, shares of Avici might be worth a flier, particularly if one has faith that there's still enormous untapped demand for broadband communications. Another positive: Over the past six months insiders have bought 50,000 shares, while refraining from selling.
3Com , whose cash position equals 37% of its market value, is another networking stock that Buckingham favors. Buckingham likes 3Com's cash per share and its progress on a turnaround program that was launched in January 2001. Santa Clara, Calif.-based 3Com specializes in hubs, routers and switches for telecommunications companies.
Shares of 3Com, which were at $21 almost two years ago, are down 28% from a 52-week high of $10. Beyond the telecom slowdown, legal woes have also hurt the stock. In December 2001, a federal district court ruled in favor of Xerox in its patent dispute with 3Com and Palm (a former 3Com subsidiary) over Graffiti, the electronic writing technology used in Palm-compatible digital organizers.
Using 3Com as a yardstick, we did some bottom fishing of our own. We started with companies where cash and equivalents minus long-term debt equal 37% or more of market capitalization. We further narrowed our screen with the following criteria: a share price greater than $1, projected three- to five-year annualized earnings growth of 10% or greater and latest 12-month revenue of $50 million or more.
At $44 million in market capitalization, micro cap is an apt definition for Candela , a Wayland, Mass.-based developer of laser technologies for treatment of varicose veins, hair removal and scar tissue. Excluding long-term debt, the firm's cash position is $21 million, or 48% of its market value.
Analysts reporting to Thomson Financial/IBES expect Candela to post a loss of 3 cents per share in 2002. By 2003, however, profits of 16 cents per share are anticipated. The stock currently sells for 27 times the latter number.Share-Price Challenged, But Cash Rich
Prices as of March 7. *Cash and short-term investments minus long-term debt; Sources: Bloomberg Financial Markets; Market Guide, FT Interactive Data via FactSet Research Systems. Company Price Change From 52-Week High Sales, Latest 12 Months Market Value ($) Cash*/Market Value
3Com $5.40 -28% $1,881 $1,921 37%
Avici Systems 2.19 -88 53 108 119
Candela 4.35 -46 62 44 48
Captaris 3.02 -45 92 95 81
Commerce One 1.89 -90 409 544 49
Commerce One 8.93 -11 136 246 40
InterNAP Network Services 1.03 -77 117 159 51
Tellium 2.92 -90 76 328 69
Related Links at Forbes.com
biz.yahoo.com |
