PSB Monthly Issue January 2012
January 2012
FIREARMS MANUFACTURING
We live in a violent world.
All you need to do is watch the nightly news to see all of the crazy stuff going on in the world today.
We’re constantly being bombarded with news about wars in the Middle East, riots in Europe, and hostile tensions with rogue nations like Iran and North Korea.
And closer to home, most major cities see some sort of violent crime like murder, armed robbery, or home invasion happening on a daily basis!
Hopefully, humanity will figure out a way to live in peace someday. But until then, it’s up to us to defend ourselves from those who wish harm upon us.
That’s why firearms manufacturers play such an important role in our world today.
Think about it, we’re all protected by guns.
Whether you own a gun or not, you’re still protected by a military and police force that use guns. And the reality is more Americans are exercising their Second Amendment right to bear arms than ever before.
In fact, gun sales are up 50% in the past five years.
The majority of growth comes from increased sales of handguns. In 2006, there were 2.5 million handguns sold in the US. By 2009, handgun sales had ballooned to 4.5 million. Sales fell off slightly in 2010 to 4.4 million guns. But the number of handgun sales is expected to accelerate again in 2011.
Judging by one statistic, 2011 will be the best year of gun sales ever.
As you know, the US requires gun retailers to perform background checks before they can sell a gun. So, when the number of National Instant Criminal Background Checks (NICS) increases, it’s a good indication gun sales are going up too.
Get this…
The FBI just reported the number of NICS in December topped the previous one-month record of 1,534,414 inquiries. When was that record set? In November!
No doubt about it, two consecutive months of record high background checks can only mean one thing… gun sales are going to be off the charts.
That’s why we’re so excited about Smith & Wesson Holding Corp (NASDAQ: SWHC).
Name: Smith & Wesson Holding Corp Ticker Symbol: SWHC Market Cap: $282 million Recent Price: $4.36 PSB Rating System 4.8 Stars Raging Revenue: (4.9 stars) Last quarter’s revenues increased more than 10% year over year, to $92.3 million. And revenue is expected to increase 15% for the full fiscal year 2012. Beautiful Books: (4.9 stars) The balance sheet is strong with $49.2 million in cash, no borrowings under their $60.0 million credit line, and working capital of $84.3 million. And it should only get stronger as costs fall in 2012. Stellar Structure: (4.6 stars) Insiders and institutions own more than half of all shares outstanding. The smart money clearly has faith in the firearms manufacturer. Valuation Verification: (4.7 stars) At a forward P/E of just 14.4, SWHC is nicely undervalued. Based on our valuation analysis, we think the stock is worth at least $7.50 a share. That’s upside potential of 72%. Meaningful Milestones: (5.0 stars) New management took control in September and immediately refocused SWHC on what they do best… make guns. |
THE FIREARMS BUSINESS
SWHC is one the world’s leading manufacturers of firearms. They make a wide array of handguns, modern sporting rifles, hunting rifles, black powder firearms, handcuffs, and firearm-related products and accessories. Their customers include gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, and individuals desiring home and personal protection. They also sell weapons to law enforcement, security agencies, and military agencies. They’re also the largest US exporter of handguns.
Smith & Wesson is synonymous with handguns. Their iconic revolver was featured in the Clint Eastwood movie, Dirty Harry. So tell me, “Do you feel lucky, punk?”
The company’s had its ups and downs over the years. However, the one constant has been brand recognition. Amazingly, 93% of consumers automatically think of handguns when they hear Smith & Wesson.
Obviously, most companies with this level of brand recognition are blue chips… a company like Coca-Cola (KO) that’s synonymous with soft drinks. So finding a penny stock with this type of brand recognition is a rarity. And a huge asset as well.
Now, a new management team is building on their strong brand recognition.
James Debney was appointed as President and CEO in September. And he wasted little time in charting a new course for the company.
This is where it gets exciting…
SWHC is consolidating the operations of their newly acquired Thompson/Center Arms division, divesting their security solutions business, and cutting costs across the board.
More importantly, they’re getting back to what Smith & Wesson does best… make guns.
They also shipped their new Military & Police (M&P) firearms to a number of police departments in the United States. And they started shipping the M&P pistol to the Belgium Federal Police on their largest multi-year contract they’ve signed to date.
Make no mistake – these are huge milestones for Smith & Wesson.
What’s more, the company is a leading innovator of new firearms. Over the last six years, they’ve brought 12 new guns to market. These guns range from sport rifles for target shooting, to handguns for self protection, and even new sub-machine guns for military and police.
The bottom line is strong brand recognition, soaring firearm sales, new management, and innovative new guns has SWHC in position to soar in the weeks ahead.
Let’s take a closer look at the financials…
THE NUMBERS
Fiscal year 2012 (which runs from May 2011 to April 2012) is the start of a lean and mean Smith & Wesson. But they’ve only just begun to reap the benefits from cost saving efforts and focusing on their core business of selling guns.
In the second fiscal quarter, ending October 31, 2011, SWHC’s sales increased more than 10%, year over year, to $92.3 million. They saw strong sales growth in all business segments but hunting in the quarter.
Earnings per share fell to $0.01from $0.04 from the same quarter a year ago. However, they lost $0.07 per share due to unusual onetime costs from a product recall and an ongoing SEC investigation. Without these one off costs, EPS would have increased 75%!
But that’s not all…
Their order backlog is growing too. It increased from $32.4 million in the second quarter last year to $149.9 million today! An eye-popping 362% gain in the last year. And it’s still going up. In the most recent quarter, their backlog increased $1.1 million.
In other words, they can’t make guns fast enough to meet demand! That’s a great problem to have.
Amazingly, their outlook is even better than their recent performance.
The company recently raised their sales guidance for fiscal 2012 to between $385 million and $395 million. That’s a 2% increase from prior guidance. And more importantly, their year-over-year growth estimate now stands at between 13% and 15%.
The company also expects gross margins to expand to nearly 30% while operating expenses fall to between 21% and 22% of sales.
Even better, the company’s balance sheet is in great shape.
As of October 31st, they had $49.2 million in cash, no borrowings under their $60.0 million credit line, and working capital of $84.3 million.
Let’s take a look at a few investment risks…
INVESTMENT RISKS
As with any investment, Smith and Wesson has a few risks.
As a manufacturer of a consumer product, an economic slowdown would hurt consumers’ ability to buy their products and impair sales growth.
Another risk comes from regulation. The firearm business is regulated by the ATF. Any regulations prohibiting the sale of firearms would negatively impact SWHC’s business.
Finally, budget cuts to federal and local governments could impact sales of firearms to military and police agencies.
POTENTIAL RETURN OF 72% OR MORE
SWHC’s new management has the company on the right track. Sales are growing and expenses are falling.
Some savvy investors have already taken notice of the company’s improving fundamentals. At a recent price of $4.36, the stock has nearly doubled from the 52-week low of $2.29.
Despite the surging share price, SWHC’s still trading at a nice discount.
As of this writing, the shares are priced at a forward PE of just 14.4x. That’s a nice discount for a company that’s supposed to grow earnings at 47% next year and 14.5% over the next five years.
Clearly, there’s still plenty of upside for SWHC.
Based on our analysis, we see the stock trading up to at least $7.50. Grab your shares of SWHC now for potential gains of 72%!
ACTION RECOMMENDATION
BUY Smith & Wesson Holding Corp (NASDAQ: SWHC) up to $4.80 per share.
Recent price is $4.36.
Use a stop-loss of $3.25 on this position.
Don’t forget your position sizing and stop-loss rules.
Cloud computing is taking information technology by storm.
The cloud provides software, data access, and storage services at a remote location. The user accesses the services with a computer or mobile device over the internet.
Consumers are already accustomed to using cloud based applications. You may be using the cloud without even realizing it. For example, anyone who uses Google’s (GOOG) g-mail or Yahoo’s (YHOO) webmail is using the cloud.
And now, businesses are taking flight for the cloud as well. You see, the cloud allows businesses to implement new technology without huge upfront costs.
Think about it…
Before cloud computing, it required a huge commitment for a company to use a new software program. They had to purchase the software and the hardware to run it on. They had to have an IT department to make it work. And they had to train all of their employees to use it.
What’s more, the company was responsible for maintaining everything once they had it up and running. All of those steps take time and money.
But today, a business can implement a cloud-based software application much more easily. They don’t have to buy software and hardware or employ an IT department to maintain everything.
The cloud company takes care of everything. The business simply pays for as much of the service as the need for as long as they want it. When they’re done, they can cancel the service and move on.
It’s a much simpler and less expensive way to manage technology.
Here’s the thing…
As more businesses transition to cloud-based solutions, the amount of money spent on cloud computing is going to skyrocket. According to research firm Gartner, revenue from cloud services will jump from $74 billion in 2010 to $89 billion in 2011.
That’s a projected increase of more than 20%!
In fact, revenue from cloud services is expected to grow five times faster than overall enterprise IT growth. And by 2013, cloud computing is expected to generate annual revenue of $129 billion.
One small company capitalizing from the shift to the cloud is Callidus Software(NASDAQ: CALD). This tiny technology firm is landing whales like Apple (AAPL),Pfizer (PFE), Johnson & Johnson (JNJ), Verizon (VZ), JP Morgan Chase (JPM) andSun Life Financial (SLF) just to name a few.
Let’s take a closer look at this interesting cloud company now.
Name: Callidus Software Ticker Symbol: CALD Market Cap: $209 million Recent Price: $6.42 PSB Rating System 4.7 Stars Raging Revenue: (4.9 stars) Revenues are growing at a 14% annual clip. And they’re expected to surge by 80% to $150 million in the next three years. Beautiful Books: (4.7 stars) A return to profitability has allowed the company to build a $60 million cash hoard. They’ve also restructured and begun to pay down their outstanding debts. A trend that should continue in 2012. Stellar Structure: (4.6 stars) Insiders own about 3% of shares outstanding. But institutional ownership is an impressive 61%. In fact, a number of technology-centric hedge funds have built sizable positions. They clearly have confidence in CALD. Valuation Verification: (4.7 stars) CALD is significantly undervalued versus other SAAS companies. Based on our valuation analysis, we think the stock is worth at least $12 a share. That’s upside potential of 87%. Meaningful Milestones: (4.8 stars) The company was named Company of the Year in Computer Software in the Eight Annual International Stevie Awards. |
THE SOFTWARE-AS-A-SERVICE BUSINESS
Callidus Software is the leader in cloud computing and sales effectiveness. Their easy-to-use solutions drive sales effective-ness in the areas of sales hiring, sales enablement, incentives, commissions, and learning.
Think of it this way…
Callidus does for sales what the Oakland A’s did for baseball. If you’ve ever read the bookMoneyball (or seen the movie), you know what I mean.
You see, the Oakland A’s gained a competitive edge against larger-market teams by questioning conventional wisdom. Instead of doing thing like every other team, they looked at more predictive gauges of success.
In other words, the A’s figured out what statistics were important to winning baseball games. In the same way, CALD drills down to what really drives top sales performance. Then they identify the right behaviors to measure and coach.
And business is rolling in…
In 2010, CALD added a record number of on-demand customers as well as total new customers. They now have 5 of the 10 largest insurance companies, 5 of the 10 largest banks, 6 of the 10 largest communications companies, and all 5 of the world’s largest pharmaceutical companies using CallidusCloud!
It’s not very often you find a penny stock with a client base like that!
And get this… they retain 90% of their new business after their initial contract expires. Callidus is clearly delivering on their promise of increasing sales performance.
Here’s where the story gets exciting.
Now that CALD is profitable, they’re in full blown expansion mode. They’re aggressively targeting other small cloud computing firms for acquistion.
In fact, they’ve already pulled the trigger on a number of acquisitions.
In just the last few years, they’ve acquired Actek, Rapid Intake, iCentera, ForceLogix, Litmos, and Webcom. These additions have grown their customer base to over 2.5 million users at more than 890 businesses.
What’s more, Callidus can now cross sell the new products to their existing customers. And they can sell their old products to the new customers they got in the acquisitions.
Best of all, the company can do it all on one great platform… the CallidusCloud.
And they’re not done yet…
CALD is still hunting for more acquisition targets. And with their recurring revenue business model and track record of retaining customers, Callidus is primed to soar to new heights.
Now, let’s take a look at the company’s financials…
THE NUMBERS
2010 was a turning point for CALD. They’ve completely changed their business model. And they’ve set their sights on generating long term sustainable and profitable growth.
As you might imagine, this was no small undertaking.
Prior to 2010, CALD was a traditional business software company. They developed software to help other companies increase sales. But starting in 2010, CALD embraced the cloud.
Now they sell their products using the software-as-a-service (SAAS) model. And the results have been spectacular.
When CALD began their business model transition, around 20% of their revenue was recurring. Today, over 75% of their revenue is recurring.
That’s the beauty of selling a service instead of a product. As long as their customers keep using the service, they keep getting paid! And last quarter, Callidus grew their new recurring revenues by 36%!
Overall, recurring revenues shot up 21% in the last year to $16 million. And total revenue hit an all time high of $21.1 million last quarter.
What’s more, CALD is doing a great job of managing expenses. Operating expenses are growing at a slower rate than revenue.
As a result, Callidus became profitable in the 3rd quarter of 2009. And they’ve posted six consecutive quarters of breakeven or positive earnings since. More importantly, earnings are expected to increase by an eye-popping 366% next year.
But that’s not all…
CALD expects revenue to continue increasing over the next three years at a pace of more than 30% per year. Annual revenue is expected to climb from $83.5 million to more than $150 million. That’s nearly an 80% increase in just a few short years.
In addition to robust growth, CALD also has a solid balance sheet.
The company’s sitting on nearly $60 million in cash. They’ve recently restructured their long term debt on more favorable terms. And they paid off $20 million of their debt last quarter.
Plus, their current ratio of 1.9x is excellent. Clearly, the company has no problems meeting short term liquidity needs.
No question about it, CALD is in sound financial shape.
Now, let’s look at some risks…
INVESTMENT RISKS
One concern is that a global economic slowdown could spark cutbacks in business tech spending. A drop in spending would likely hurt CALD’s revenue growth.
Another risk to their long term profitability is cost management. If costs unexpectedly rise, CALD might not be able to remain profitable.
Lastly, a substantial portion of revenues come from insurance, pharmaceutical, and manufacturing industries. A disruption of the financial markets could impact sales.
POTENTIAL RETURNS OF 87%
As you can see, there’s a lot to like about Callidus. The company’s growing like crazy and they’re on the verge of making a huge leap forward in profitability.
At a recent price of $6.42, CALD is up 62% from its 52-week low of $4.05. The stock is still about 9% below the 52-week high. But it’s clearly on the upswing.
Amazingly, CALD is cheap for a cloud stock.
Right now, the company is trading at Price/Sales ratio of 2.6x. That’s well below the industry average is 9.5x. For instance, cloud company Salesforce.com (CRM) has P/S of 6.6x and NetSuite (N) has P/S of 12.3x.
No question about it, CALD is much cheaper than both CRM and N.
If CALD were to trade at just 75% of Salesforce.com’s multiple, the shares would nearly double to $12.12.
This looks like a golden opportunity to buy CALD. Grab your shares now before it commands a multiple similar to that of the other leading cloud stocks.
Based on our analysis, we can see the stock trading up to at least $12.00 per share. Grab your shares of CALD now for a potential gain of 87%.
ACTION RECOMMENDATION
BUY Callidus Software (NASDAQ: CALD) up to $7.00 per share.
Recent price is $6.42.
Use a stop-loss of $4.50 on this position.
Don’t forget your position sizing and stop-loss rules.
- None at this time.
Category: PSB Monthly Issues
