PITY DA FOOL WHO DOESN'T INVEST IN THE A CONSULTING TEAM
Information technology ("IT") consultants are in high demand these days, with demand far outstripping supply for top talent. No longer a mere peripheral component of most organizations, IT services instead have become integral to many key business processes. At the same time, the management of information technology has become more complex and expensive. Accordingly, organizations are increasingly turning to external organizations to develop, support and enhance their internal IT systems. IT outsourcing in the United States is expected, according to industry estimates, to double from about $50 billion in 1995 to some $100 billion by 2000.
One interesting publicly-traded company in this expanding industry, trading at an attractive valuation, is The A Consulting Team, Inc. (Nasdaq: TACX) -- no relation to "The A-Team" of Mr. T fame. TACX provides enterprise-wide information technology consulting, software, and training services to a broad range of Fortune 1000 companies and other large firms. The company generally serves as an outside resource to a client's internal IT staff, providing strategic IT consulting, solutions and professional services to improve the client's productivity, competitive position and performance. Additionally, TACX offers consultants and clients training and retraining in leading-edge technologies, and is a value-added reseller of third-party developed software products. Company Name The A Consulting Team, Inc.
Nasdaq National Market TACX
Stock price on date of report $6.9375 bid, $7.00 ask
52 Week Range low $4.00, high $12.75
Diluted shares outstanding 5,489,474
Market capitalization $38,426,318
Book value $4.44
Current ratio 6.6
Insider Ownership 62.2%
Institutional Ownership 11.9%
Website tact.com
The company has posted impressive growth in recent years, with revenues bursting from $11 million in 1994 to over $35 million in 1997. Though the first nine months of 1998, revenues totaled $35.5 million, a 40% increase over the year-ago period. Net income increased to $1.97 million for the nine months, compared to pro-forma net income of $1.4 million a year ago, a 41% increase. Earnings per share for the first three quarters rose just one cent from pro-forma $0.35 last year because the company's initial public offering resulted in more shares outstanding this year. TACX went public in August 1997 at $12 via underwriters Robinson-Humphrey and Wheat First Butcher Singer (currently known as Wheat First Union).
Analysts expect TACX to earn $0.50 per share in 1998 and $0.65 in 1999, giving the company a P/E ratio of 14 based on 1998 earnings and just 10.8 based on the 1999 projections. This is a low P/E for a company growing at this rapid pace and compared to other companies in the industry such as Cotelligent, Inc. (NYSE: CGZ) with a P/E of 20, and Complete Business Solutions, Inc. (Nasdaq: CBSI) with a P/E of 41.
TACX's cites strategies for continued growth, including:
Cross-selling additional IT services to existing clients
Identifying and cultivating additional customers in existing territories
Expanding its geographical territories (TACX opened a Solution Branch in Chicago in October 1998)
Increasing the number of services offered
Increasing sales and marketing of software products and training services
Selectively pursuing acquisitions and alliances
TACX has an impressive client list, including Alamo Rent-A-Car, Allied Signal, BMW of North America, Chase Manhattan Bank, Citibank, Dreyfus, General Electric, Goldman Sachs, IBM, Met Life, Merrill Lynch, Pacific Telecom, Pfizer, Prudential, and others. Sales to its top three customers represented approximately 42% of TACX revenues for the nine months ended September 30, 1998. Fortunately, the company seems to enjoy strong relationships with its clients, as the majority of its 20 top clients have conducted business with TACX for more than three years.
The A Consulting Team's appeal as an investment is brightened by its relationship with T3 Media, Inc. (http://www.t3media.com/), New York's largest independent Web integrator. In October 1998, TACX formed a strategic partnership with T3 Media, investing $3 million in exchange for convertible preferred stock representing 30% of T3 Media's equity. T3 Media is a highly regarded developer of Internet solutions for Fortune 500, entertainment, and media clients, including American Express, Microsoft, AlliedSignal, Nippon Telegraph and Telephone, Sony, Deutsche Bank, HIP and others. Not a bad client list!
T3 Media was recently awarded the "1998 Best Arts Site WebAward" by the Web Marketing Association for the Rodgers & Hammerstein Web site. Forrester Research, a leading technology research company, recently ranked T3 Media among America's top 10 "Transactive Content Integrators," companies that "seamlessly deliver business/marketing strategy, user experience, creative design and technology integration for iCommerce."
According to a May 1998 New York Post article, T3 Media is profitable and anticipates revenues of $4 million-$5 million in 1998. The article states that T3 Media "is known for concise project management and back-end systems that help change their clients' businesses." The strategic partnership looks like a win-win situation: T3 appears a good investment for TACX, and the partnership will likely help increase revenues for each company.
We believe The A Consulting Team ranks as an undervalued stock worthy of consideration by microcap investors. TACX boasts a low P/E ratio and impressive growth -- and strong growth potential. Financials look solid, with a strong balance sheet, plenty of cash and almost no long-term debt. And its stake in a quality Web company doesn't hurt either.
As long as the TACX growth strategy continues successfully, we feel it deserves a higher P/E ratio. A P/E of 17 on next year's estimated earnings of $0.65 would result in a stock price of $11.05. Therefore, our price target for TACX is $11, or 57% above the current price.
--The SmallCap Investor
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