Micro-Cap CSPI Is Low Hanging Fruit For Acquirers

One of the cheapest stocks in our Small and Micro-Cap Deep Value Stock Screener is CSP Inc. (NASDAQ:CSPI).

CSPi Technology Solutions provides consulting, managed services and technology integration solutions across a range of information technology specialties including network solutions, wireless and mobility, unified communications, data center and advanced security. The company has extensive partnerships with some of the IT industry’s most respected and established global brands.

A quick look at the company’s share price over the past twelve months shows the price has risen by 75% but there’s still more growth to come.

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(Source: Google Finance)

Latest Financial Results Q3, 2016

CSPi recently released its Q3, 2016 financial results. Highlights included:

  • Revenue was $26.9 million compared with $22.3 million for the pcp
  • Gross margin grew to 26.8% from 23.6% for the pcp due to leverage on higher volumes
  • Net income was $1.3 million, or $0.32 per diluted share, compared with $249,000, or $0.07 diluted per share for the pcp
  • Cash and short-term investments increased to $11.6 million from $10.4 million for the pcp

In Q3, 2016 CSPi’s High Performance Products Division received royalty revenue for three E-2D planes, as well as additional revenue from parts shipments to support future E-2D plane builds. Separately, the company received product revenue from an existing international customer. In Q4 CSPi expects to receive royalties from one E-2D plane, in line with its initial projections.

At CSPi’s Technology Solutions Division, the core strategy continues to be increasing sales of managed services to generate higher-margin profits. The company is seeing steady progress on this front in the U.S and closing managed services deals at a greater frequency while the recurring revenue stream is increasing.

In Germany, the company is making tactical changes to drive higher managed services sales to augment the already strong advanced security sales. In the reorganized U.K. business CSPi is focusing on building its sales pipeline while improving efficiency to drive increased profitability.

CSPi has had a great quarter, its legacy Myricom product line, known as the Myricom ARC Series C-Class, continues to perform very well. During the quarter, the company fully launched its next-generation FPGA network adapter product, branded as the ARC Series E-Class.The product has one the industry’s best combination of high functionality and low latency; which is crucial for a finance community focused on automated trading.

For the remainder of 2016, the company will be concentrating on ramping up the adoption of its ARC Series of 10GbE network adapters, not only in the finance markets but also in the packet capture and video broadcast markets.

CSPi Named in CRN’s 2016 Solution Provider 500 List

CSPi is starting to become recognised as a successful solutions provider. Back in June, CSPi announced that CRN®, a brand of The Channel Company, has named CSPi Technology Solutions division in its 2016 Solution Provider 500 list. The SP500 list is CRN’s annual ranking of the largest technology integrators, solution providers and IT consultants in North America by revenue.

The SP500 is CRN’s predominant channel partner award list, serving as the industry standard for recognition of the most successful solution providers in the channel since 1995.

“CSPi is excited to be a part of the 2016 Solution Provider 500 list,” said Victor Dellovo, CEO. “The commitment and dedication of our engineering and integration staff is evident in our ability to deliver leading edge managed IT services and highly regarded technology solutions. Our success is rooted in a three-pronged strategy that highlights a strong portfolio of industry-leading technology partners, expertise in a wide range of technology developments, and unparalleled talent. We are proud of our commitment to the success of our business partners.”

Real Value

To understand the value of CSPi to acquirers we use The Acquirer’s Multiple® – Deep Value Stock Screener.

The Acquirer’s Multiple® is the valuation ratio financial acquirers use to find attractive takeover candidates.

It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization and capital expenditures.

The Acquirer’s Multiple® is calculated as follows:

Enterprise Value / Operating Earnings*

The Acquirer’s Multiple® differs from EBIT and EBITDA because operating earnings are constructed from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up.

* The Deep Value Stock Screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”.

Growing Net Profit

A quick look at CSPi’s income statement (below) for the trailing twelve months shows that while the company is maintaining its revenues, its net profit was grown by 92% to $1.3 million in Q3 2016 from $653,000 in Q4 2015. This was due mainly to the reductions in its cost of sales which consist of engineering and development costs and SG&A expenses.

Quarterly Income Statement (values in 000’s)
Quarter: 3rd 2nd 1st 4th
Quarter Ending: 6/30/2016 3/31/2016 12/31/2015 9/30/2015
Total Revenue $26,912 $27,139 $23,676 $27,712
Gross Profit 7,205 $6,333 $5,190 $5,923
Operating Income $1,853 $878 $343 $1,091
Net Income $1,257 $503 $283 $653

 

Value on the Balance Sheet

A quick look at CSPi’s balance sheet (below) for the trailing twelve months shows that as of June 30, 2016 the company had $11.6 million in cash and cash equivalents and zero debt. These are the types of companies that acquirers love.

Quarterly Balance Sheet (values in 000’s)
Quarter: 3rd 2nd 1st 4th
Quarter Ending: 6/30/2016 3/31/2016 12/31/2015 9/30/2015
Current Assets
Cash and Cash Equivalents $11,590 $10,020 $10,531 $11,181
Total Current Assets $41,420 $41,154 $38,211 $40,082
Total Assets $48,399 $48,248 $45,117 $46,996
Current Liabilities
Short-Term Debt $0 $0 $0 $0
Total Current Liabilities $18,136 $18,609 $15,829 $17,382
Long-Term Debt $0 $0 $0 $0
Total Liabilities $27,499 $28,327 $25,575 $27,406

 

With a market cap of $43 million and cash exceeding debt by $11.6 milliion that means CSPi has an Entreprise Value of $32 million.

When you take into consideration operating earnings of $4 million (ttm), that gives CSPi an Acquirer’s Multiple® of 7.61.

Solid Free Cashflow

Finally, a quick look at CSPi’s statement of cashflows for the trailing twelve months shows that the company had $3.7 million in operating cashflow and $812,000 in capex which means CSPi generated $2.9 million in free cashflow or $0.75 in free cashflow per share. That equates to a FCF/EV Yield of 10%.

Quarterly Statement of Cashflows (values in 000’s)
Quarter: 3rd 2nd 1st 4th
Quarter Ending: 6/30/2016 3/31/2016 12/31/2015 9/30/2015
Net Income $1,257 $503 $283 $653
Net Cash Flow-Operating $2,441 $502 -$413 $1,157
Capital Expenditures -$141 -$156 -$189 -$326

 

Interest From Institutions

According to Nasdaq.com we’re not the only ones interested in CSPi with institution ownership now up to 23.49%. If we dig a little deeper we can see six new positions from institutions in CSPi as at September 30, 2016 and while I agree that these positions are relatively small, does it mean that CSPI is finally flying above the radar?

Summary

So there you have it. CSPi is a great little micro-cap with lots of upside. In terms of its financials, the company has growing net profits, solid margins, a strong balance sheet and loads of free cashflow. CSPi provides great value and growth opportunities, currently trading on a P/E of 15, a P/B of 2, a P/S of 0.40 and an Acquirer’s Multiple of 7.61. At the same time it provides a nice FCF/EV Yield of 10% and a Dividend Yield of 4%.

Don’t forget to check out our FREE Large Cap 1000 – Deep Value Stock Screener, at The Acquirer’s Multiple:

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”