**AWTE UPDATE**
O.K. everyone, thanks for your patience. Working full-time, raising 2 active boys, and going on unexpected but welcomed visits to companies on my lunch hour keeps me very busy. I had really meant to get this out last night, but I spent last night and early this morning just reviewing the material and my notes from the day. Here is a summary of my visit to the ALLWest Systems, Inc. headquarters in Denver.
I met Douglas Fabijanic who handles IR for the company from Select Capital Advisors at the company headquarters and he gave me a complete tour of the facility and introduced me to many of the employees. I met the frontline folks who are actually producing ALLWest products, I toured their design facilities where they design their products, and I spent perhaps a half-hour meeting with AllWest's Chief Financial Officer, Robin Gilbert. I was given audited financial information from the past several years, as well as a corporate profile that was given to potential investors in March of this year, when the company went public. Both Doug and Robin were very open and honest about the company, it's prospects, clients, competitors, and financial condition.
Their headquarters is composed of 3 buildings and about 80 employee's. Their plant in California has about 20 employees. The buildings themselves are in a very busy commercial area of Denver, and while not new buildings, they were clean and well maintained. The most important thing I noticed was that it seemed that all the space in their buildings seemed to be fully utilized. AllWest is involved in providing Specialty Electronic Systems to the commercial and industrial markets. These systems include everything from Fire Alarm and Detection to Communications Systems, to monitoring systems for Correctional Facilities. Looking over their corportate profile, it shows that the MAJORITY of their contracts come from Government related contracts. Their main clients appear to be correctional facilities around the country. Their major competitors are Honeywell and Simplex. These are much bigger companies than AllWest, but it seems that AllWest is competing very well and have a good reputation.
In the Fiscal year ended March 31, 1998 AllWest had about 12.5 Million in sales and they are projecting this to grow to about 15 million for FY 1999, and $35 million by 2003. They did show a loss for the FY 1998 of abut $200,000, but project earnings of about $750,000 for FY 1999. They also currently have a record backlog of $5.5 million.
The proceeds from their IPO in March are to be used for primarily for several strategic acquisitions that could allow them to expand rapidly. The kinds of projects that AllWest works on requires that they be bonded, and they are limited right now on the size of that bonding by their revenues. With the acquisitions, AllWest would be able to compete on much larger projects than they can now. The shares sold in March came on the market at about $1.20 a share, went to about $2 and then quickly sold off, and are now at .20. I heard over and over again during my meeting that they felt this level is absurdly low, and they expect it to go higher soon. 80% of the companies shares are closely held and are currently restricted. There are only about 3.5 million shares right now in the public float. They do have an employee profit sharing plan and currently regular employee's own about 500,000 shares.
Robin Gilbert was quite open and upbeat about the strategic acquisitions that are currently being negotiated. If these acquistions go through as hoped, it could take the company to a whole new level of project size and scope and their sales could increase much more than currently projected.
Now that I given you some of the objective facts that I gleaned from the day and the large volumes of financial data, I want to give my subjective "feel" for this company in terms of a potential investment in their stock. When the stock came out at $1.20, and then when quickly to $2.00, those who got in on the IPO quickly took profits and tanked the stock. At .20, the stock is very undervalued based on projected earnings of $750,000 next year. There are about 15 million shares outstanding so they expect about .05 cents a share in earnings. I would think a reasonable PE for this company would be about 20, so that would mean this company should be about $1.00 a share. The projected 15 million in sales next year may be too low. With their acquisitions, it could be more in the $20 million range. Let's say they had $1 million in earnings, then that mould mean about a .07 cents a share earnings, and at a PE of 20, the stock price should be about $1.40.
Now, HERE IS THE RUB, in order to complete the strategic acquisitions I mentioned before, they need to raise an additional $1,000,000. They have filed the paperwork for another million dollar sale of stock to happen very soon. Based on the current price of AllWest's stock, that could mean another 5 million shares outstanding. At the conservative side then, that would mean .0375 cents a share earnings, and at a PE of 20, the stock should be about .75 a share. On the higher side, if they had $1,000,000 in earnings next year, with 20 million shares outstanding, this company would have .05 a share in earnings and would be fairly valued at a price of $1.
My gut instinct, my visit with the company, and the above analysis, tells me that this stock is currently undervalued by a factor of 3 to 4. It should be trading at least at .75 and maybe up to $1.40. This is the fair value. Now of course, this is all assuming a PE of 20. An argument could be made that a proper PE could be higher or lower. Since the marketplace really determines what a fair PE is, I used 20 as a middle ground.
AWTE traded as low as .17 on Thurday. I believe this is an opportunity knocking for at least a 300% to 400% gain if the stock goes to fair value. If speculation were to really takes off, AWTE could jump back to $2, but at that point, IMHO, it would be overvalued based on current conditions, and I would get out fast. There is definitely a good chance for a nice profit here. Also considering that the float is not outrageous, the Investors right here on SI could probably buy up a large part of that float and help the price rise and get more stable.
I really had a lot of info to go over. I know I didn't cover nearly everything, but I hope this gives you a start. I would strongly encourage anyone who wants more info to call Douglas Fabijanic at 303-691-9929. Also, I would be glad to look up info in the material I have if you have some questions that I might be able to answer.
IMHO, It's a safe play at this level. You probably won't loose much money, and if the investors and speculators on SI get hold of it, who knows...
Happy Investing,
R. Gates |
