Saturday, October 13, 2007

Sycamore Networks -- A Value Trap (SCMR)

SCMR at first glance is a valuation play, with $3.25 of cash and short-term investments on the books and the stock trading at $4.04. Their earnings have been all over the place, but it looks like their revenues are starting to grow slowly. With the acquisition of Eastern Research, pro forma results indicate growth of roughly 10% in revenues FY07 over FY06, but still the company was not profitable. The company is actually far from being profitable considering it had a $60 mln loss from operations, the reason SCMR came so close to breaking even is that the company earned over $47 million from the cash hoard. Analysts roughly project a 13% growth in revenues in FY08. The market is currently valuing SCMR as cash on hand plus 1.5x sales, that sounds about right.

Lets say an investor takes and tries to value Sycamore through their non-GAAP earnings trailing P/E. That would give a trailing EPS of $0.09, but once Interest Income is netted out, that leaves a non-GAAP loss of roughly $0.07 per share. Even in FY06 when the company was GAAP profitable, netting out interest income would give a loss of roughly $0.07 per share.

With Sycamore projected to grow revenues 10% over the the next 2 years, and no GAAP profitability net of interest income, this looks like it is valued properly on the market. Regardless of the sales multiple an investor value SCMR at, it will not be much different than the value of the company right now. There are also no catalysts on the horizon. It could be worth something when its trading closer to cash value, but there is not enough upside to get involved.

Disclosure: I don't have a position in SCMR.

Thursday, October 11, 2007

American Software is fairly valued (AMSWA)

So there has been a lot of talk regarding American Software on the Yahoo Message boards and in the MF Caps, everyone seems to think its undervalued and a great "Asset play." From further analysis, it is far from it. Here is the math:

AMSWA owns 88% of LGTY = $165.8 mln
Cash on the books is $75.6 mln, but $30 mln is from LGTY so net of $45.6 mln
So that gives a value of $211.4 mln for AMSWA so far.
The last portion of the calculation would be AMSWA the company, separate from LGTY. The last three years for AMSWA performance has been dismal separate from LGTY, their Net Income has roughly been $3.16 mln, -$2.03 mln, and $3.82 mln. They have roughly 26.8 mln shares outstanding which leads to roughly $0.06 per share on average over the past three years. Maybe a P/E of 10 in the best case scenario gives a valuation of $0.60 for AMSWA solo. Here are the revenue calculations:



So, $7.89 valuation of cash on the books plus LGTY stake. Plus a valuation of $0.60 for the co itself suggests roughly a $8.50 valuation for each AMSWA share. With a P/E of 20 that yields roughly a $9.10. Regardless of how an investor values AMSWA by itself, the stock is fairly valued. The only reason AMSWA stock has been moving has been because of LGTY.

Disclosure: I don't have a position in AMSWA.

Saturday, October 6, 2007

Forward Industries Update (FORD)

A few weeks ago a lawsuit against the company was dismissed, it roughly saves the company $200k a quarter. This won't have a significant effect on Q3 earnings, but its roughly $0.10 per diluted share a year afterwards. Not too big, but when the stock is trading for only $3.20, that is significant. There has not been much significant news besides that, except that price has been slowly rising and there has been a significant pickup in volume since the lawsuit was dropped. This could still be a case of the "value trap," but I think based on their past history, I think the company will be able to turn around falling earnings in the near future. Management has done a good job of managing their balance sheet, most of their book value is back by cash on the books. Accounts Receivables has also been shrinking. FORD still has $2.67 of cash per share and that gives a significant downside protection, that's roughly a 20% downside. Investors still have to watch for new contracts and if the Motorola contract will be renewed as it expires at the end of the year. Any positive news will send the stock running with the low float and small market cap. I think it is worth the risk at these prices.

Disclosure: I am long FORD.