Barb --
Although I usually post on stocks I'm short, I've had a (small) long position in TAVA since last Fall, and it has been quite profitable for me.
While this is normally considered a Y2K stock, it's not a ZITL (which I'm short). TAVA has a real business in factory floor systems integration, but historically it's not been profitable for them. Y2K gives them the opportunity to increase their sales volume short-term, which should translate into some profitable quarters before 1/1/2000. My expectation is that they'll use the resulting profit and the relationships gained through Y2K to consolidate what remains a fragmented industry, so that they'll have a profitable business in systems integration after the 2000 hype is over.
The historical financials are poor, but their announcement of over $12 million in Y2K bookings in May suggests that things will improve in the current quarter. Last year their AMJ quarter revenues were $9.5 million, resulting in a loss of $3.2 million (-$.34/share). If you assume their base revenue in Q2 resembles Q1 (not much seasonality in this business), and that conservatively half of the May Y2K bookings is incremental, this results in revenue of $17.7 million, an 86% gain over year-ago. If you use the first quarter gross margin rate of 44.3% (even though the Y2K business is probably more lucrative), that gives GM of $7.8 million. Subtract $4.5 million of SG&A (I assume it's mostly fixed), and you have a net profit of $3.3 million (roughly $.17/share), which I assume is tax-exempt due to prior-year carryforwards. If their actual results are in line with my "back of the envelope" estimates, they'll significantly exceed the analyst expectations, and I'd expect the stock to pop nicely. Annualize those figures and you get earnings of $.68/share, which implies a P/E of around 14 at the current price. That's pretty reasonable, and it doesn't take into account that both volume and margins are likely to increase as we get closer to December 1999. If we assumed that TAVA could bill $12 million of Y2K business *every* month, then earnings would probably be over $2.00/share, but we don't have to be that extreme to conclude that the stock is probably undervalued at its current price.
Their balance sheet is in good shape, as well, with a 2.5:1 current ratio, $6 million in cash, and low debt relative to equity.
Don't let me put words in your mouth, but I think the bear case is that a) the company has never made any significant money, b) Y2K is overhyped, and c) even if the company does make some money out of Y2K, it's a one-time event and the market will discount it accordingly. Of these, a) is certainly true, but the release of May orders suggests they've turned the corner. B is certainly true as far as it relates to the mainframe side of the business, but potential problems with embedded systems are just now coming to the forefront, and most major manufacturers and utilities are going to at least be concerned enough to do an audit. Keep in mind that the factory floor systems in many industries are truly mission-critical, unlike say databases or accounting programs, and publicity-hungry congressmen will keep banging the drum. The answer to C will depend on how successful TAVA is at Y2K and what strategic moves their management makes. The JFM conference call suggested they're acutely aware of this perception, and they're working hard to insure they have a future beyond Y2K. My guess is that we'll have a good AMJ earnings report, which hopefully will issue on a reasonably timely basis (June 30 is the company's fiscal year-end). That should move the stock, and momentum players and maybe a couple of institutions will jump on, moving it up further. That should get me to the 1-year holding period for capital gains, at which point I'll reassess whether to hang on for 18 months or bail.
I needn't tell you to do your own due diligence, but I thank you for prompting me to review my reasons for holding the stock.
Regards,
CMason |
