From the Alert Investor newsletter:
THIS WEEK'S PICK
Regular readers of this newsletter know how inefficiently the microcap market prices many stocks. This week's recommendation, ZMAX (ZMAX,2 13/16,NAS) is another amazing case of the stock price being completely out of sync with the fundamentals. Here is a profitable NASDAQ company, growing both revenues and earnings at a triple digit rate, with a stock trading near the year's low, with a market cap that's 1.3 times sales and selling at only double its book value. Do I have your attention? I hope so.
ZMAX is flying under the radar because at one point in the past it was a Y2K software company. That group, if the companies were unable to reinvent themselves (and there are many examples), is rightfully undervalued as 1999 draws to a close. ZMAX is soon to be called WidePoint and now operates (and is still acquiring) a number of very attractive IT businesses that provide e-business solutions to middle market companies. The company used its cashflow and management expertise to make 2 highly synergistic and
accretive acquisitions in the last 2 years. Now ZMAX is a key provider of "e-value-chain total solutions" with clients such as Levi Strauss, Mars and Corvis. Here's a telling quote: "the Company's 1999 revenues have been less
concentrated on Y2K products and commencing in 2000, the Company expects its business will be entirely focused on information services".... not that you could tell by the depressed stock price.
The company's list of offerings includes some of the hottest areas of enterprise software: enterprise resource planning (ERP) through its Parker division, enterprise application integration (EAI) through Eclipse and internet application integration (IAI). The Company employs approximately 200 people in seven regional offices across the U.S. and is continually adding offices. Among the subsidiaries, I would like to mention the largest one first, Eclipse, a provider of solutions to distributed client server environments, ERP packaged solutions, internet and intranet, network solutions, client servers and AS/400 solutions. The original business, CSI, is moving away from Y2K work into things "such as migrating a client's software application from a mainframe to a client-server environment". All these are very important and high-growth areas of e-commerce. Also notable is the recently acquired Parker Management Consulting, whose results will
show up in ZMAX's financials this coming quarter for the first time. Parker "markets IT consulting services that specialize in delivering ERP solutions to a variety of commercial companies". It also bears pointing out that the
ZMAX warrants issued to Parker's management are exercisable at $5.
Among its competitors in the ERP space, Proxicom (PXCM) is selling at 25 times revenues and is unprofitable, Sapient (SAPE) at 27 times revenues and 150 times earnings and Viant (VIAN) at 24 times revenues and is just now turning profitable. Even the largest of the three, SAPE, is only 9 times ZMAX's size in terms of sales, so it's valid to make comparisons. Every one of the three has tripled in price in the last 4 months while ZMAX is down 20% from it's July peak.
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ZMAX's most recent quarter showed revenues of more than $8M, a 212% increase over 1998 and the 9th straight quarter of revenue growth, and EPS of 8c, a 137% increase over last year (13M shares o/s). The quarter's sales were equal to 80% of sales for all of last year, and the 8c EPS was the
same as the June quarter - all without Parker. The company cautioned that going forward "a large percentage of the Company's revenues are expected to be derived from a relatively small number of large-scale, comprehensive
projects. Consequently, the Company's revenues and operating results may be subject to substantial fluctuations". A growth company that focuses its business is fine by me, and a bargain is still a bargain. They should do over $9.5M in sales this quarter and the earnings comparison will be easy, vs.a 2c loss per share last year. Everything is in gear here, all the divisions are now co-branded under the WidePoint name, and a 4th quarter EPS of 8-9c would put the year's earnings at 22c before extraordinary charges. If they toss a few skeletons out the window and take some write-offs, we are still looking at 14-15c for the year and a current PE at 20; leave the write-offs in and the PE falls below 13. Again, the price to sales is about 1.3!!
If ZMAX did no more than $35M in revenues next year (a measly 20% growth rate, and there will be an acquisition or two to boost that) and only brought 12% to the bottom line, pre-tax would be close to 35c per share for the year. Since there are sizable tax loss carryforwards to shelter the
earnings, this $2.80 stock would be selling at 8 times next year's earnings. In reality, I think ZMAX/WidePoint will actually earn 40-45c per share in 2000 with the benefit of another accretive acquisition, and the stock will trade up to a PE of 22-25, or $10. The math is very compelling.
ZMAX was an $11 stock last year and still traded at $6 early this year, but it's been drifting down ever since. Now the stock has apparently completed a major bottom at $2 and is ready to move up dramatically. The volume has been rising in the last couple of weeks and the momentum indicators were improving too. On Friday, there was a high-volume move off the bottom and across the 50-day moving average, indicating the start of an upleg, possibly to the 3«-4 area in the short run and to the year's highs around
5-6 before too long. In addition, the company is planning a campaign to promote its new identity for the new year, and a recommendation from a regional brokerage firm couldn't be far behind. I am very excited about this stock and I think many of you will agree. Buy it and hold it for a few
months, it'll prove very rewarding. As I said, it could be a $10 stock by next summer.
This newsletter has received no compensation whatsoever from ZMAX Corp. |
