CGA & VSEC
After CGA and VSEC were posted on another Board there was some interesting reaction from other members. I had already had some PM discussion regarding the stocks, so as a result of the general interest shown I thought I’d add my 2 cents worth ....
Firstly, I’d say that these two companies are good examples of the reflection of critical factors within a company's financials that show its ability to generate profits and operate efficiently, and how those aspects are eventually reflected in its price.
I liked the look of the stock, CGA. It might be a relatively small company at the moment but it has an excellent EBITDA margin (over 55%), a good pre-tax return on Cap. Employed, very little debt, etc.. etc.. It also has between 40% to 50% of its Revenue left over at the Bottom Line.
These excellent fundamentals have, IMO, been reflected in its ongoing four fold price increase (300%) since April ’09.
Unfortunately one can’t say the same for VSEC, in my opinion. Revenue has increased well over time BUT it has hardly anything left over at the EBITDA level. In its last Annual there was only 3.5% ($36.6mil.) left over from a Gross Revenue of over $1043mil. That, in turn, was reduced to only $19mil. (less than 2%) at the Bottom Line. It won’t take much of a problem for VSEC to report a loss.
However, it does have a very healthy pre-tax return on C.E. of over 37% and it also has no long term debt.
IMO the 'problem' lies in its very large “Cost of Sales” number.
A lot of Revenue "effort" for very little Bottom Line "reward".
There’s no doubt that VSEC did have a good price increase of over 65% between August and November ’09. But, since then, it’s been sideways to down. I suspect that investors possibly can’t see where any real Bottom Line growth can come from.
In its last 5 Quarterlies we’ve seen Revenue vary from between $240mil. to $306mil. and Bottom Line has only managed $4.6mil. to $7.7mil., which is generally below 2%. Once again, it won’t take much of a problem within VSEC’s business to result in a bottom line loss.
I can’t imagine the Ben Graham or Warren Buffett style Value Investors would see this company as having much of a “Margin of Safety”.
There are those who speculate that VSEC may be a takeover possibility. If that’s the case then it could be one way that its price may turn positive. If not, then one wonders what could influence its price upwards ? |
