Auric v. JEFFries, guess who is winning?: "POSO-Buy: Jefferies Analysts Reports on ProsoftTraining.com
2001-04-09 08:41 (New York)
** JEFFERIES **** JEFFERIES **** JEFFERIES **** JEFFERIES **** JEFFERIES**
ProsoftTraining.com (POSO) - $4 31/32
Peter L. Martin, CFA (415) 229-1448
52 Week Low Offers Excellent Opportunity To Buy
Rated Buy
52 Wk Range$18 13/16-$4 31/32 FY July 1999A 2000A 2001E 2002E
Shares Out -FD(MM) 24.9 Revenue 8.7 19.6 43.8 62.0
Institutional Ownership 74.2% Net Inc (11.6) 1.6 5.1 10.9
Float (MM) 19.7 EPS ($0.90) $0.06 $0.21 $0.46
Avg Dly Vol 282,252 Cash EPS NA $0.11 $0.33 $0.58
Equity Mkt Cap (MM) $123.7 P/E NA 45.2x 15.1x 8.6x
Long Term Debt -(MM) $1.178
($MM), except per share data.
We reiterate our Buy rating and $20 price target on shares of
ProsoftTraining.com. We believe the continued decline in the stock is
unjustified and offers an excellent buying opportunity. We believe investors
have overreacted to a reduction in growth expectations for both ILD providers
and unfilled IT jobs. Our channel checks continue to show demand for CIW
certification, which should enable the Company to be able to meet earnings
growth expectations. Furthermore, the market is significantly discounting the
Company's strong balance sheet, positive cash flow generation and strong
competitive position in the vendor neutral Internet skill certification and
courseware market. We would be aggressive buyers of the shares of POSO at
these levels.
n Softening in Demand for IT Training Overstated - We believe two recent
releases have created considerable concern among investors relating to
softening in the demand for IT professionals and IT skills training. Below we
provide what we believe are the primary drivers of the negative sentiment as
well as our response to each issue:
- On March 20, Learning Tree (LTRE - $20 7/16, NR) pre-announced an earnings
shortfall for their quarter ended March 31 and reduced internally estimated
courseware and training enrollment growth from 22% to approximately 9%.
On April 5th, we met with one of Learning Tree's competitors, New Horizons
(NEWH - $13 1/2, NR), which is Prosoft's largest Authorized Training Providers
(ATPs). Management is still experiencing growth in enrollments and the sale
of courseware, which underscores our belief that LTRE's shortfall and
subsequent estimate reduction should not be regarded as a proxy for the for
entire IT-related training and certification market. Furthermore, Prosoft's
CIW is currently New Horizon's second best-selling program, which illustrates
the strong demand for POSO products.
- In another report published April 2nd by the Information Technology
Association of America, the Association estimated that there will be 425,000
unfilled IT jobs at the end of 2001, substantially lower than previous
estimates of an 850,000 person gap.
We believe the operative word in this case is "unfilled". Regardless of the
reduction in estimates, fact remains that there will continue to be a
substantial disconnect between the number of IT jobs and the number of IT
professionals available to fill those jobs, creating a strong demand of IT
skills training and certification.
n POSO Continues to Establish the CIW Brand - Based on discussions with POSO
management, we are confident that Prosoft is continuing to accelerate the
issuance CIW certifications, which further establishes the Company as the de
facto provider of vendor neutral Internet skill certification and courseware.
Based on our estimates, we believe Prosoft will have issued over 20,000 CIW
certifications by the end of 3QFY01, which closes at the end of April. We
believe that this will be at least 2x its closest competitor, CompTIA. Note
that Prosoft offers equivalency degrees for IT professionals who have earned
CompTIA's i-Net+ certification in order get them back on the "CIW track",
which includes a variety of higher level certifications. Furthermore,
endorsements by Novell (NOVL - $3 15/16, NR), Intel (INTC - $23 5/8, NR), IWA,
AIP and iGeneration give the CIW brand considerable visibility within the IT
world. We believe the next major endorsement will come from Cisco (CSCO - $13
5/8, NR), which would add cache to the CIW name as well as a significant
revenue opportunity three to four quarters following the announcement.
n Strong Balance Sheet - As of the end of January 2001, Prosoft had $11.2
million in cash and equivalents and $1.2 million in long-term debt. In
addition, we believe the Company will not have trouble collecting accounts
receivable ($5.7mm as of the end of 2QFY01) due to low DSOs, which have held
in the mid-50s for the first half of FY2001. For the remainder of FY2001 and
FY2002 (i.e. the next six quarters), we estimate that Prosoft will generate
$18.4 million in EBITDA, which should sufficiently fund current capital
expenditures.
n Stock is Getting Crushed, Excellent Buying Opportunity - Our $20 price
target is based on a 35x multiple applied to our FY2002 cash-adjusted EPS
estimate of $0.58. Note that the 35x multiple is a discount to the low end of
the range of expected revenue growth in FY2002. Even if we were to base our
price target on 35x our FY2001 cash-adjusted EPS estimate of $0.33, our target
price would be $11.55, offering 132% upside to current trading levels. At
current trading levels, investors are able to buy shares of POSO at less than
9x FY2002 cash adjusted EPS, an excellent opportunity due to Prosoft's market
position, endorsements, its network of licensees and training providers, and
the strong present and expected demand for its products.
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