What next for APSG stockholders ?
The last twelve months have been something of a roller coaster ride for APSG shareholders.
Exactly one year ago the stock price was about $4.50, having languished around $5 for a
couple of years. In the past twelve months, anyone sensible enough to have bought at $4.50
could have quadrupled their investment as the stock price made reasonably steady progress
to above $19 in late March. A spectacular gain indeed !
However, many investors who bought the stock from October last year must be seriously
questioning the wisdom of their purchases after a recent "crash". The price is currently
showing no sense of direction at around the $12 level, which for those who purchased in the
six months to March represents a loss on their investment. Their confusion will no doubt be
compounded by the recommendation of Worth Magazine, which, as recently as two months ago,
apparently had APSG as a buy up to $20. (I have not seen this specific article, but details
can be found at - Message 3645419 )
In view of the relatively precipitous recent decline in APSG (losing >1/3 of it's value in
one month), many investors must be wondering whether the company is somehow damaged, and
whether they made a serious mistake in buying into the stock. In this context, the
imminent earnings announcement will be viewed with more than a little interest by a number
of small investors.
I have been a reasonably serious watcher of APSG for around 8 months, and have a modest
position (around 10% of a relatively small portfolio). My purchase was at around $9.50, so I
am one of the lucky ones who is still holding a profit. I first became interested in
the stock following a very well reasoned post that I found on "Sparky's Corner".
- techstocks.com
In the subsequent 8 months I have used APSG as a key stock to learn from (i.e. to help
develop my investment analysis & thinking). The following summarises some of my current
thoughts on the stock (for what it's worth).
Overview
========
APSG develops, manufactures and sells signal reconnaissance equipment. The equipment is
technically sophisticated (i.e. contains a large amount of intellectual property). Their
customers are predominantly US government departments (primarily the intelligence agencies).
Contracts are quite lumpy (i.e. few off, but large) but happen over long time periods.
There is room for further expansion in this market. Additional opportunities exist for
product sales to non-US governments, and for sales to the commercial market (although this
is NOT a current strategic objective for the company and would be a difficult transition).
Financial History & Analysis
============================
A five year financial overview for APSG can be found at Wall Street Research Net (WSRN) at -
wsrn.com
The key parameters from this information shows -
Revenue growth over the last 5 years has averaged 14% per annum. Growth has been reasonably
consistant, but was slightly below this average in 1994 and 1995, and above it in 1997.
Net Income growth over the last 5 years has averaged 18% per annum. Growth has been erratic,
with no growth in 1993 and 1994, a big decline in 1995, and rapid growth in 1997. They've had
a couple of loss-making quarters in this period, but no loss-making years.
The current ratio (current assets/liabilities) had a low around 2 in 1992, but has been
consistantly above 3 ever since. They are strong financially, with no long term debt.
Book value growth has tracked revenue growth and is currently around $53m ($6 a share).
Shares Outstanding is presently around 8.75m. At $12, market capitalisation is around $105m.
.
The table below is my own compilation of the quarterly figures over the last 3 years.
APSG's financial year runs two months ahead of the calendar year (i.e. Q1 is Nov-Jan, etc.)
The top part of the table is simply a compilation of the published data. Share numbers and
EPS calculations use the newer "diluted" numbers for the last few entries.
The bottom half of the table has a set of numbers derived from the top half.
GMs are the gross margins (the percentage of the revenues which not directly related to the
the sales revenues - typically the materials and direct labour costs of the sale).
NMs are the net margins (the profit which is left after all of the outgoings have
have been accounted for). This is the actual profit margin for the business.
The "trailing twelve month" figures are simply the sum of the four quarters up to the quarter
indicated. This is effectively the "full year" figure for the year to date. APSG, like many
hi-techs which derive revenues from product sales has seasonal variation of it's numbers (it
can easily be seen that the second quarter in each half year are relatively stronger than the
first quarter in each half year). By making running twelve month averages it is possible to
eliminate much of the seasonal variation.
Jan-95 Apr-95 Jul-95 Oct-95 Jan-96 Apr-96 Jul-96 Oct-96 Jan-97 Apr-97 Jul-97 Oct-97 Jan-98
============================== ============================== ============================== ======
Revs 13,821 13,030 14,330 26,483 15,798 16,970 19,504 25,138 20,084 23,987 22,600 29,588 24,361
Expenses
costs 8,459 8,964 11,274 16,721 10,815 12,180 12,624 17,714 13,136 15,742 13,793 17,732 15,095
R&D 1,813 1,660 2,399 4,001 1,912 2,155 2,281 3,032 2,470 2,394 2,269 3,004 1,593
G&A 1,983 2,015 2,651 4,572 2,840 2,528 2,877 3,709 3,182 3,171 3,062 4,227 4,205
Tot opx 12,255 12,639 16,324 25,294 15,567 16,863 17,782 24,455 18,788 21,307 19,124 24,963 20,893
Income
Ops 1,566 391 -1,994 1,189 231 107 1,722 683 1,296 2,680 3,476 4,625 3,468
Intrst 134 59 -9 4 19 -4 23 11 60 37 18 74 147
Income
B4 tax 1,700 450 -2,003 1,193 250 103 1,745 694 1,356 2,717 3,494 4,699 3,615
Tax 680 180 -801 377 100 24 610 243 495 992 1,351 1,762 1,410
Net inc 1,020 270 -1,202 816 150 79 1,135 451 861 1,725 2,143 2,937 2,205
Shares 7,651 7,991 7,194 7,687 7,782 7,905 8,062 8,035 8,114 8,156 8,517 8,749 8,954
EPS 0.13 0.04 -0.17 0.11 0.02 0.01 0.14 0.06 0.11 0.21 0.25 0.34 0.25
The following figures are calculated from the above figures
GMs % 38.8 31.2 21.3 36.9 31.5 28.2 35.3 29.5 34.6 34.4 39.0 40.1 38.0
NMs % 7.4 2.1 -8.4 3.1 0.9 0.5 5.8 1.8 4.3 7.2 9.5 9.9 9.1
Trailing twelve months -
Revenues 67,664 69,641 73,581 78,755 77,410 81,696 88,713 91,809 96,259 100,536
Costs 45,418 47,774 50,990 52,340 53,333 55,654 59,216 60,385 60,403 62,362
Gross Margins % 32.9 31.4 30.7 33.5 31.1 31.9 33.2 34.2 37.2 38.0
Net income 904 34 -157 2,180 1,815 2,526 4,172 5,180 7,666 9,010
Net Margin % 1.3 0 -0.2 2.8 2.3 3.1 4.7 5.6 8.0 9.0
EPS 0.11 0 -0.03 0.28 0.23 0.32 0.52 0.63 0.91 1.05
.
The following observations can be made about the trends of the last 10 quarters -
1) Revenues have improved on average by 4% per quarter (17% per annum). Growth is reasonably
stable.
2) Earnings have improved far more dramatically over the same period. (Although erratically !).
3) Earnings growth has come partly from the improvements in revenues, but primarily from
improvements in gross margins (i.e. APSG have done an increasingly good job of controlling
costs).
4) The improvement in Net Margin has tracked the Gross Margin improvements. Break-even has been
reduced from a GM level of >31% to around 29% - i.e. as revenues have grown, the company has
kept good control of operations so that they profit from the economies of scale.
5) R&D spend is about 9% of revenues.
Interpretations
===============
1) Sales revenues are growing consistantly at 14% - 17% (depending on the time-frame).
Management has stated an objective for future growth of 15-20%. It seems reasonable that this
could be sustained. (See siliconinvestor.com
2) Gross margins have improved steadily to a level of around 38%. Management has stated an
objective for future margins to be around 37-38%. It seems reasonable that this could be
achieved.
3) Net margins are running at around 9%. This seems to be a reasonable level for a smallish
capitalisation equipment manufacturer making sophisticated products for a specialised market.
I would expect an average margin over time of >7%, even though they have achieved an average
of less than this over the last five years. It could/should be a lot higher if APSG achieved a
position of dominance in their market. Their current breakeven at 29% GM should be sustainable,
especially if they continue to improve revenues. This would suggest that NMs could be 8.5%-ish
at management's target GMs.
4) Shares outstanding. The company has nearly 9m shares, but is cash rich. It has bought-back
stock in the past, including the recent past. It is sufficiently cash-rich to buy-back more
shares if it so wishes. This would be useful to improve employee stock schemes, and should
put a cap on stock dilution.
Stock price valuation
=====================
1) PEG basis. Revenues are growing at 17%. PER should therefore be 17. Company earns 8.5%
NM on $113m revenues for financial year 1998 (to Oct '98). On 9m shares, EPS would be $1.07,
and target stock price for the end of the year would be $18.70.
2) Price to Sales Ratio (PSR) basis. Stock is a small-cap in an equipment manufacturing sector.
Assume a neutral PSR of 1 for this type of company in a "normal market" or 1.4 (?) in a bull
market. A "strong buy" would be half this (PSR of <0.7), and a "strong sell" would be at twice
this (PSR >2.8). At $12, APSG presently has a PSR of about 1, which puts it in the buy region.
At the end of this year (and assuming the bull market continues), a "neutral" price for APSG
should be around $17.60.
Further comments
================
It is unlikely that APSG will sustain the earnings growth demonstrated over the last 18 months,
so anyone expecting massive future EPS and PER growth is likely to be disappointed. However,
at $12, the stock certainly looks under-valued. Recent discussions with management (via posts
at SI and Yahoo) suggests that nothing has changed at APSG, and that the current price decline
is solely a market issue. The company had a rough time 3 years ago as it moved into an area
that it wasn't equipped to handle (a "glitch"). Anyone who had identified this could have
bought the stock at <$5. Those who did so would have been generously rewarded as the stock
rapidly appreciated to more than $19. This was obviously too rapid an appreciation for the
stock, and those same savvy investors appear to have taken their (well earned) profits.
Provided nothing has really changed at APSG over the last couple of months (and we shall soon
get some clues) the stock seems presently to represent a buying opportunity. If $18 is
achieved by the end of the year, this would equate to an annualised return of 84%.
It is also possible that there are some upsides. If management have really taken control
of the bad situation which developed a few years ago, then it is possible that the gross
margin improvements could continue. In addition, the company could reduce the number of
shares in circulation by buying back more stock. These two items together could push the
EPS past $1.20 for the current year. If sales revenues were also to grow at the
higher end of management's targets, then a stock price over $20 could easily be warranted.
This situation could also be enhanced by other factors. Whilst management has demonstrated
good business management (particularly in the recent two years), there is still considerable
opportunity for improved stock-holder and market relations. (Excepting the good accessibility
of the senior managers to individual investors). Comments have been made by others about how
unsophisticated the company is in this respect. Some of the aspects which I particularly take
issue with include - the limited analyst coverage; scope for higher levels of institutional
investment; improvements in the number of press releases; improvement in the Report & Accounts
as a marketing/motivational tool. These aspects would have two effects. Firstly, there would
be improvements in the stock price (one off), and (more importantly) a reduction in the price
volatility. Secondly, a better marketing stance by the company would give it a higher
profile, thereby increasing staff morale, attracting new staff, improving efficiencies and
increasing sales opportunities. Everyone likes a glamorous successful company (suppliers,
employees, customers and the stock-market). The nature of APSG's business may limit what it
is able to say, but it does not limit how it says it.
Mark |
