Dear King Ralph, thesurf and Tellitlikeitis,
Thank you for that in depth analysis and constructive criticism of DCTC. With all the information you provided, I was unable to discern your analysis of the "true value" of DCTC stock. I would like to know what you believe to be the value based on an analysis of the company? Then, all the readers will have the benefit of your knowledge & keen insight and know when DCTC is a "buy". I do not believe any of you will offer this board that type of an analysis because it is obvious you have not done your homework. I have and I will offer one analysis of the company, not only to you, but more importantly to other new comers who have the courtesy to criticize in a civilized manner and who want to know what the value of DCTC is based on facts (one of you was asking for facts, so I will provide them for you).
I will let it be known up front that I value stocks from a fundamental approach. I take a long term approach to investing. Also, DCTC represents a significant portion of my stock portfolio.
First of all, the most recent share dilution should surprise no one. For if you have read this board over the past few weeks/months or had spent the time to read the companies 10Qs/Ks, you would have known that full share dilution is around 22 million (counting all options etc .. this is a number from the CEO and which can be calculated from an analysis of the 10Qs/Ks - I'll take Joe Murphy's word on it). So my finale analysis of the value of the company will be based on 22 million shares outstanding. Not the 12.7 million listed for the end of Q3 in the most recent 10Q [pg 3, Feb 18 10Q].
In regards to the recent share dilution, you have taken it completely out of context of the deal that lead to the issuing of those shares. I will give you my analysis of that deal and why I believe it has added value to DCTC.
First, I look at the price of the deal. DCTC bought CardCall for about $7.5 million and issued about 7.5 million shares (actually 7.75 million, but 7.5 makes nice round numbers for the analysis [pg 6, Feb 18 10Q]). So the shares at the time of the purchase had an inherent value of $1/sh. The WHSmith contract has brought in around $11.5 million (326,531,000 shares of SMTK @ 31 7/8 plus $1 million cash [pg 6, Feb 18 10Q]). The sale of this small portion of CardCall has already generated more income than the then price of the original deal, $ 7.5 million. From some of Joe Murphy's comments, I believe the rest of CardCall is worth at least $18.5 million (that would be around 3 times revenue, DCTC got about 5 times revenue for the WHSmith contract). Thus, the value of those 7.5 million shares is now around $4/sh. Not a bad return on investment. Unfortunately "you can't get something for nothing" (Joe M. & Co. does a good job trying), so we have to accept the share dilution - that's the nature of a M&A company. But the inherent value of DCTC has been increased by the deal.
People have asked the question on this board about why the selling of these shares has occurred in the first place and when will it stop? Here is my analysis. Of the 7.75 million shares, about 10% are options at $4/sh, so we don't have to worry about them until a stock price somewhat higher than that is reached. The remaining 7 million shares are issued as options at @ $0.20/sh [Feb 18 10Q]. These are 10 baggers for many people, hence they want out for a variety of reasons: diversification, take the money and run, they don't believe in DCTC...whatever. I believe that over half have already been issued and likely sold. Between the 10Q associated with 2nd and 3rd Q, an additional 2.2 million shares from options were issued. I would guess many of the shares from some of the high volume days in October-December were these shares being sold. From the high volume spikes in Jan. and Feb., I would guess at least another 1 million have been issued and sold (won't know until the next 10k, although the shares outstanding as of Feb 11 were 14,371,517 [pg 1 Feb 10Q], an increase of 1.656 million from the end of Q3). Let's use 1.5 million instead of 1 million. DCTC has gobbled up another 800,000, maybe a little more. That brings us close to 4.5 million. I am assuming MJZ and his brother control a large block of these options being they built CardCall. I doubt if they are selling. Other CardCall insiders must hold some of these options and I doubt if they are selling. Lets assume they control 2 million shares all combined (We're basically saying that 28% of the 7 million shares are owned by long term believers in DCTC - seems like a reasonably conservative estimate). That leaves around a 500,000 shares left. These shares could also gradually be sold on a typical day when we're seeing 50,000 shares traded (assuming double counting only 25,000 shares would actually trade). In 20 days we'd burn through another half million shares. So a rough guess is that we are close to "out". Joe Murphy a while back stated he thought there was about 300,000 weak shares left. Recent posts on this board have communicated that Joe Murphy believes the selling to be done. Overall, those posts agree with this analysis in a rough estimate sort of way.
Now I will do a quick analysis of DCTC, based on revenues and multiples there of. I have looked up other telecommunications companies in the Value Line Investment Survey. I have seen valuations ranging from 2-8 times revenues. In general, 2-4 is more typical. Many of these companies are up to their "ears" in debt. DCTC is basically debt free.
Current Value.
DCTC will come in around $9-$10 million in revenues this year. Using a valuation of 2 to 4 times revenue that gives $18-40 million. Based on 22 million shares outstanding, the present value is somewhere between $.82/sh to $1.82/sh. So one could say DCTC is fairly or overvalued right now - based on full dilution. Of course, one should be forward looking (I don't really care about this year) and try to figure out what DCTC will be worth in the future.
Future Value?
What about fiscal 1999 which begins April 1, 1998? Here are my conservative revenue estimates. Note that they include only present revenues and deals released to the press. They do not count anything else that may be in the works.
WPC:$19.5 million (I don't know their growth rate but the press release claimed they had been growing rapidly the past few years, lets assume about 30% growth on the present 15 million in revenues).
Cyberfax: $12.5 million (DCTC has contracts for $7.5 million and Joe Murphy posted that they had signed another six contracts - lets assume they are about the same average value as the other contracts).
CardCall: $7 million (our portion - if we still own it by then, assuming about 15% growth on present revenues).
MuellerMedia: $2 million (assuming no growth).
Being I have no good estimates for what the rest of the businesses (PEL, DCI UK...etc) will do in revenues, I will assume none.
Total: $41 million.
Doing the 2 to 4 time revenue valuation, gives a value between
$81-$162 million. Dividing by the 22 million outstanding shares gives $3.68/sh to $7.36/sh. Hmmmmm, based on forward revenues, DCTC is considerably undervalued. That is what I care about - where DCTC will be a year from now. Yes, there is risk here. The WPC deal has not closed, but is expected to shortly. I don't know the true value of the new Cyberfax contracts - but my estimate is reasonable. Also, the low end valuation above leaves about a 100% cushion at DCTC's present price based on full share dilution. That is value to me! Note: I have not included share dilution from the WPC deal. I wrote a detailed post a week or two ago on why this will result in little share dilution. I will not repeat it here, you can go back and look it up.
Finally, one other thing (what follows is my opinion from study/following DCTC). I believe in Joe Murphy and the DCTC management team. In general, they do what they say they are going to do. Sometimes they under-estimate how long it will take, but the job gets done. Their number one priority is to increase shareholder value. Many CEOs and companies forget this. Joe Murphy and most of the officers, as he put it, are in it for the money. What more could a shareholder want to have on his side. Joe Murphy also has integrity, from what I have seen on these boards. Perhaps you should reflect on that.
Well, I hope this helps you get the facts straight. I welcome any and all real, constructive criticism of this analysis.
JJ |
