Frank -- Let's look at this -- we now have a company that is selling over $400 million a year and has a market cap of about half that at $227 mil. While revenue is dropping -- BT Alex Brown projects year end revenue at 414, down from 421 -- many analysts that have been talking with Steuk predict that slide to stop, and for revenue to reach about $460 mil next year, a $50 mil increase, and for the company to write about .25 a share profit. So we see an end in sight.
Pluses:
-- new management is gaining analyst respect for its no-nonsense approach and brining of transparency to numbers -- particularly the write-offs on the capitalization of software.
--some hard decisions have been made in terms of products and people, and this will help bottom line next year
--the new business strategy is now more focused than Covey could ever get it (work with partners while targeting vertical markets within the middle-tier segment)
--very large installed client base to drive service revenue and to give them a leg up once they get their act together (very improtant on the take0ver side)
Down sides
-- product gaps, on the Unix side, NT, and its Euro version (scheduled for 10/98)...Euro is considered critical as Europe represents about 35% or revenue; more so improtant as a large number of SSAX clients are multinationals with European exposures, and thus the need to account in Euros
-- new customers will be a stretch, and current focus must be on retaining existing clients and fixing product gaps (seems to be the focus of new management)
My thoughts?
A balanced -- though somewhat risky play -- at this point. The company is certainly undervalued given next year's projections. Negative earnings and charges should already be factored into the price. A breakup or sell of the company wouold be worth much more than the current market cap -- particulary to gain access to the installed user base. I say we bounce up soon on any news. Management has suggested to analysts that the pipeline is "sizable" and that it increasingly inclsude new prospects...but more importantly, demand for services currently exceeds SSA's ability to meet it.
I don't see this company going under.
I see sales stabilizing. I see perhaps some partnerships or a takeover in the future. I see continued strength in services. And I see a minimum return to a market cap of 1x annual sales, or roughly $8-9 a share on clarity that the new management team's strategy is working. Indicators will appear at the next earnings announcements and with Phase IV of the restructuring plan. I say we have seen the lows (barring any major market meltdown), and will bounce back into the 5's soon. We should be in a holding pattern in the mid-sixes until earnings. If things are on tract and analysts are happy, we might move higher to the fair value range. We won't see higher unless: 1) a merger is announced at a premium value for the client base, 2) a major partnership is announced to develop the product gaps, 3) some major new wins are announced, 4) a better than expected performance on next earnings (my guess is around .17 to .18 loss a share), or 5) any combination of the above.
But given the ability to purchase under $5, there is room for a considerable return for volume purchases and the wait for the market cap ride back up to 1x annual sales. I am a net buyer on SSAX at these prices. Good luck all. Just my thoughts.
Richard |
