About a month ago B.D. Bauden sent me a very warm private message welcoming me to the TAVA board, asking for my reasons for being short, and jokingly encouraging me to cover my short position so that you guys could get a rally going. At the time I didn't think there was much chance I'd cover. But a couple of weeks ago I changed my mind. Over the last couple of weeks I've been covering whenever the stock got to 5 7/8 (I was actually hoping to get some off lower than 5 7/8, but that darn Post Office announcement got in the way <g>). If any of you have noticed that the stock seems to have a lot of support at 5 7/8, now you know why! In any event, I moved a good deal yesterday and finally got the last piece off at the end of trading.
Because Bruce was so gracious, I sent him a private message telling him what I'd done and asking if he thought I should post my reasoning on the thread. Since Bruce knows my messages can be very long and involved, this was probably a difficult decision for him <g>, but he said that I should. If you object to the length of this message, complain to Bruce not me!
First of all, nothing has changed in my fundamental analysis of the company. Here's what I wrote Bruce a month ago:
Let's fast forward to 3rd qtr, 2000 (their first fiscal quarter). Let's try to reconstruct the likely earnings statement. Year 2000 revenue is way, way down. People on the thread don't seem to realize that TAVA's Y2K work has a much shorter "tail" than that of other Y2K companies. While TAVA is trying to get into IV&V consulting, the bulk of their work is still embedded systems. With an embedded system, there's not much remediation. If the thing doesn't work after 1/1/2000, you chuck it. Or at least you replace the offending chips. This is not like a critical database application, where you spend whatever is necessary to resuscitate it, even if it's been down for a year. There will have been some migration of clients to post-Y2K work (I have seen this personally among TAVA clients as early as a year ago), but I don't think there's going to be a stampede. So let's say that Jenkins has grown the core business by 50% by then (a considerable achievement). Add in a couple of straight-to-the-bottom-line bucks from from Colorado MedTech. That yields revenues at roughly two-thirds the level of 4th qtr, 1999.
Let's look at the expense side. The software amortization is gone. Some small amount of software advertising is gone from SG&A. But you've still got 700+ bodies to feed. The expense side will not fall much. This will result in a big loss. Even if Jenkins is able to double the core business, you're still looking at a significant loss. Incidentally, this is the reason why (in my opinion) the conference calls list anecdotal evidence but no numbers on the core business and migration of clients from Y2K work. The anecdotal stories are nice and true, but hard numbers would support the view that there are going to be major problems ahead.
Thus, instead of a company with an exciting story, rapidly increasing revenues and profits, in a high-margin business, you're looking at a company with plummeting revenues and large losses in an inherently low-margin business (consulting and systems integration). In my mind this will flush out the current crop of retail investors who would otherwise have had no interest in a small shop-floor consulting company. My guess is that the company will then trade at a small premium over net financial assets. Figuring the net financial assets to be worth 1.50 a share (I expect TAVA to exceed analyst expectations for 1999), the stock will probably trade in the 2's.
While I still believe this, I started to look at the stock from a different perspective. I've got a very nice profit so far. What will the stock price look like 9-12 months from now? In particular, what is the likelihood the stock will be trading in the 3 range, in the 6 range, or in the 12 range?
By the end of this year, Y2K hysteria will probably reach a feverish pitch. Also, I have no conviction about TAVA missing its '99 earnings estimates. Sure, TAVA might fall short, but at this point I don't see why they won't meet or exceed estimates, even with the software amortization and elimination of the tax loss carry-forward. So, in December during hysteria high season we're looking at a company that's earned almost a buck in the trailing twelve months, and in March we're looking at a company that in my opinion may have earned even more than a buck. How likely is it that I think the company will trade at a P/E of 3? Not likely. I'd say that there's a 60% chance the stock will be in the 6 range, a 10% chance the stock will be in the 3 range, and a 30% chance the stock will be in the 12 range. Thus, by my guesswork, it was 3 times more likely that I'd be able to re-enter my short at double the current price than it was that I would have missed the boat entirely. Plus, I'd have the benefit of at least 3 more 10-Q's to hear management's post-Y2K plans and to determine whether my concerns about expense control were well-founded. This seemed like a good deal, so I covered.
On a different subject: I believe that someone on the board posted that people were not taking into account what TAVA might do with their cash flow in terms of acquiring new businesses. I inferred that the person was suggesting that the dollar they earn over the next 12 months might somehow be worth more than a dollar in stock value because of the acquisitions. If that was what was meant, then I beg to differ.
There's a big difference between a dollar in cash and an engine that produces a dollar every year. A dollar is worth a dollar; a consistently dollar-producing engine is worth some multiple of a dollar. TAVA will most likely earn a dollar over the coming year, but it does not look to me like a dollar-producing engine. As for its acquisitions, if it spends a dollar, the value of the acquisition is likely to be a dollar, unless it either makes a particularly low-priced purchase or it's able to improve the acquisition. I have an opinion about the likelihood of this.
What I'm about to say represents either useful anecdotal evidence, sour-grapes prejudice, or irrelevant drivel; you decide. Last year, I and a couple of friends tried to acquire a company. We found ourselves in competition with a Y2K firm that was actually making money. They ended up getting the company, paying twice what we offered. Maybe they were smarter than we and were able to see value where we couldn't. Maybe they felt they were better managers and could run the company better (although I doubt this because they subsequently hired one of us as a high-level consultant to help them run their own business). However, I don't think it was either of these two explanations: I think it was that they were desperate to make an acquisition and show their stockholders that they had a post-Y2K plan. The acquisition was sexy, and their stock initially went up. But now it's way down. The company was not TAVA, so maybe the situations are not comparable, but, boy, I've seen what a desperate Y2K company can do when it's hungry for a "story". Thus, I'm not waiting for any acquisitions to change TAVA's picture. |
