TPS Trade Alert – May 31, 2016
Recommendation:
Buy Ciber Inc. (NYSE: CBR) up to $1.40 per share.
The Opportunity:
When’s there’s revolution in the air, there’s always the promise of change.
Whether or not this promise comes to pass is another story. And if the change turns out to be profitable, well that’s an even different story.
So when we see boards revolt, throw out a CEO, and install one of their own directors as the new CEO, we’re intrigued.
Last month, the CEO and co-founder of a Colorado-based IT consulting company that’s been around since 1974 was told to pack up his office.
Bobby G. Stevenson will stick around as a board member, but there’s clearly a new direction for this 42-year-old company.
Ciber might fly under the radar, but it’s a good-sized firm with $1 billion in revenues and 6,000 employees.
Taking the helm as CEO is Mark Floyd. He’s a partner at TDF Ventures, a venture capital firm, and comes with a tech background.
TDF Ventures does not own a significant position in Ciber stock, but other institutional investors do. It’s a virtual who’s-who list including BlackRock and Boston Partners.
So… other than the recent changing of the guard, what do we like about Ciber?
Trade Rationale:
The company is open for business, putting revenue on the books despite the leadership changes. It’s out there cutting deals.
– A project for Oracle ERP implementation with the School District of Manatee County, FL.
– A project with The Family Health Network to move their computer systems to the cloud.
– A new agreement with Interval Leisure Group (ILG).
– An expanded project with ConnectYourCare (CYC) to work on mobile.
Like many companies going through a transition, the stock price has been driven down. It’s the penalty of uncertainty. And in the case of Ciber, we believe the penalty has been much too harsh.
Even though revenues have been sliding and there’s been a change of leadership, we believe this is a significantly undervalued stock.
Financials:
You don’t have to look hard to see the problem. Revenues both in North America and in global markets have taken a hit.
Overall Q1 revenue of $175.1 million fell 13% compared with last year’s first quarter.
Q1 2016 global revenue was $76.0 million, down 21% from Q1 2015 and down 13% from Q4 2015.
The Q1 net income came in at $3.3 million after a flurry of accounting moves.
One of the reasons why revenue has been slipping… the company is exiting deals where the margins have not been strong, or opportunities to expand the scope of the engagement have not been good.
Today, Ciber is forecasting stronger bookings, more projects, more revenue, and healthier operating margins.
On the balance sheet, long-term debt tripled to $32.7 million from 2014 to 2015. Cash in the bank fell from $45.9 million to $20.4 million.
Over the past three years, the value of the firm’s total assets has lost 10%.
Investment Risks:
Ciber is in a highly competitive business. Managed IT services will approach $200 billion in global revenues over the next few years, according to forecasts from MarketsAndMarkets.
There are formidable competitive pressures.
Tens of thousands of firms fight for pieces of business in a number of IT categories, including hardware as a service, help desks, hosting services, managed security services, managed storage, backup, disaster/recovery, network management, patch management, private cloud, remote monitoring, and software license management.
Ciber is focused on services application development and modernization, business intelligence, the cloud, enterprise information management, managed services, mobile, quality assurance and testing, and more.
There’s a lot of money on the table, a lot of work to be done, and an endless parade of firms like Ciber scrambling to do it.
Pricing could pressure margins. New technologies could lessen the need for support and further disrupt the business model of profitable, ongoing engagements.
Potential Return:
We expect the Ciber stock price to stabilize and trade in a fairly narrow range for the next few quarters. After that, it could easily double, and get back over $5.00, where it was trading in the summer of 2015.
The stock has bounced off recent lows. We never want to make a trade and “catch a falling knife” when a stock price is plunging.
When the stock price climbs back over $2.00, it should be in a good position to solidify gains and increase in value.
Key Facts:
Company: Ciber Inc
Ticker: $CBR
Recent Price: $1.24
Buy up to Price: $1.40
Market Cap: $100.04 million
Avg. Daily Volume (3 month): 613,466
Chart:
Category: TPS Trade Alert
