PSB Monthly Issue May 2011

But that’s only half the story…

The company has a unique business model fueled by two fantastic businesses built into one.

The “first half of this company” provides technology solutions to commercial cellular providers.  The other half serves the needs of the U.S. Military.

So who is this incredible company you ask?

Introducing Telecommunication Systems (NASDAQ: TSYS).

THE TELECOMMUNICATIONS BUSINESS

TSYS provides secure, reliable communication technology solutions worldwide.  They have long term contracts with commercial mobile phone carriers and US governmententities.

The commercial division offers a full suite of communication software known as “Location Based Services” or LBS.

LBS software powers global positioning systems (GPS), automotive navigation, and text messaging.  If you own a vehicle with GPS, you’re already using this company’s incredible technology!

Let’s take a quick look at the sales chain…

Cellular companies buy ”white label” software from TSYS and make it the backbone of their cellular platforms.  Next, carriers brand the product, selling applications and services to their customers.  And here’s the best part… every time an end user clicks on an application or sends a text, TSYS collects a small fee from the carrier.

You can see how revenues start to pile up quickly.

What’s more, the company’s customer list reads like a who’s who of the telecom industry…

TSYS enjoys long term relationships with the biggest names in the cellular industry. Powerhouses like AT&T, Verizon, Sprint, and US Cellular all use TSYS technology.  But the list doesn’t end there.

The company also has a firm international foothold with companies like Vodaphone of Spain and Tata in India.  No wonder sales growth at TSYS is growing fast.

And here’s the best part… demand for LBS is off the charts!

Over the next three years, demand for this cutting edge technology is estimated to grow by 71.9% per year.  In fact, analysts are projecting worldwide sales to soar from $2.6 billion in 2009 to $14.7 billion by 2014 – an explosive 460% increase!

Customers in emerging markets like Asia and India are expected to drive this phenomenal growth.  And they should keep TSYS on the fast track to profits in 2011.

Now, let’s look at the other half of the business…

US Military and government agencies across the country rely on TSYS too.  As you can imagine, government personnel require reliable, secure, encrypted communications – also known as Cyber Security…

Critical military missions and even simple phone calls within the Pentagon require the highest levels of security.  It’s no wonder the government relies on TSYS to meet their challenging communication needs!

Here’s what TSYS does…

They design and operate wireless communications and satellite links for the US military all over the world.  Products and services are marketed under the name SwiftLink Deployable Communications.

Over the last 10 years, TSYS has built a trusted relationship with the military by keeping US communications safe and secure. And with two wars ongoing, government demand for these products and services is skyrocketing.  It’s no surprise the military side of the business is growing rapidly.

And now there’s more great news from Uncle Sam…

The 2011 Federal budget has just been approved with very few increases.  However, a $2.3 billion boost in spending was approved for outsourced Cyber Security solutions. TSYS already provides these services and expects to grab a chunk of these budget dollars.

What’s even more exciting, TSYS already has a backlog of orders from the military.  As odd as this sounds, this is a VERY GOOD thing.  Here’s why…

You see, in 2010, budget constraints prevented the government from giving the green light on $900 million of backlog.  But this year things have turned around and government funding is back in place.  These projects can now be completed, and payments will be made to TSYS over the next few years.

In other words, the order backlog will provide a steady stream of revenue going forward.

One more thing…

TSYS has an almost unfair competitive advantage in the market.

The company owns over 130 patents protecting their products and technology.  This creates a nearly impervious protective shield, blocking competitors from entering their market.

You see, it’s very difficult to recreate the technology TSYS has developed.  They have long been recognized as the “Go-To” company for LBS and encryption software solutions… and it just keeps getting better.

THE NUMBERS

TSYS is a mammoth provider of LBS and technology services, surprisingly running both divisions with only 1,200 employees.  It’s true they have a very small market cap of only $250 million.  However, to their credit, TSYS performs and delivers like a company five times their size!

And 2010 was no exception.

Revenue jumped a hefty 30% year over year to $388 million.  Strong demand from cellular carriers drove the increase.  In fact, the commercial segment posted record revenue for the year.

At first blush, it looks like earnings declined in 2010.  But that’s not the case.  A one-time gain of $15.7 million from patent litigation boosted 2009 earnings by $0.24 per share.

If you exclude this one-time gain (and take into account an increase in shares outstanding), 2010 earnings were about even with 2009.

And the company’s now on track to improve on those numbers in 2011.

Revenue is expected to jump nearly 18% this year.  In fact, guidance has them nearly hitting the half billion dollar mark, setting yet another revenue record.  Strong demand and the company’s massive order backlog are helping drive solid revenue growth.

Now, earnings are expected to take a bit of hit in 2011, dropping to $0.13 per share. Higher costs related to five acquisitions over the past couple years are likely to take a bite out of profits.

However, earnings are expected to make a roaring comeback in 2012.  Analysts are forecasting earnings to almost double off of the 2011 figure to $0.24 per share.

The weaker outlook for 2011 earnings is actually a golden opportunity.  It gives us a chance to establish a position in TSYS at bargain prices.  As time goes on and the earnings outlook improves, the shares should rally sharply from current levels.

INVESTMENT RISKS

Every investment comes with some risk and TSYS is no exception.

Technology changes could impact the company’s bottom line.  Should TSYS fall short with research and development, they may be slow to market with new technology.

Another risk is cellular carriers not renewing their contracts with TSYS.  However, much of what’s provided to carriers are “White Label” products, which historically have a very high renewal rate.

Although unlikely, cellular companies and government agencies could try to replicate TSYS’s technology themselves.  However, the patents TSYS owns affords strong protection from this possibility.

POTENTIAL GAINS OF 89% OR MORE

TSYS is significantly misvalued by the market.

At a recent price of $4.45, TSYS is trading at just 15.9x earnings.  But the industry average is running significantly higher at 43.0x earnings.  If TSYS simply trades at the industry average, the share price would jump 171%!

Trading in line with the industry is possible, but let’s take a more conservative 30x multiple for a target price.  That works out to over $8.40 per share, or an incredible 89% return!

When government funding was in place in 2009, the stock routinely traded in the $7 to $10 range.  When the funding was cut in 2010, the shares dropped accordingly. Now, with the 2011 budget increasing spending on Cyber Security, we could easily see TSYS shares return to the 2009 highs.

Based on our analysis, we see the stock trading up to at least $8.40.  Buy TSYS now for potential gains of 89% or more.

ACTION RECOMMENDATION

BUY TeleCommunication Systems (NASDAQ: TSYS) up to $5.24 per share.

You may recall 2009 was a terrible year for businesses around the world.  Many industries were impacted by the global meltdown.  But one of the hardest hit areas was the consulting industry.

Listen to this…

In 2009, 80% of consultants didn’t receive increases in pay or bonuses from their clients.  It was the worst year since 2001.

Things “across the pond” were just as bad. In the United Kingdom, consultants had a 15% unemployment rate.  And many consultants left the industry altogether.

Why was it so bad?

Corporate profits were shrinking, so budgets had to be cut back.  And, the first area cut was consulting.

But 2011 is a very different story…

This year, everyone seems to be loosening up their belts and spending money. Companies are buying property and equipment left and right. Here are a couple of examples…

The Association of American Railroads says over $12 billion is going to be spent this year on new rail cars and locomotives.  And Food Processing.com reports industry spending is up by 20% on improving food plants and new hiring.

Clearly, the global turnaround which started in 2009 and gained steam in 2010, is really starting to pick up speed in 2011.

How does consulting fit into all this?

Remember, it doesn’t matter if a business sells hot dogs, insurance, or tractors. Outside expertise is often needed to help a company take things to the next level. And today, more companies are looking to consultants for guidance.

Need help ramping up production?  Call a consultant.  Employees need training?  Call a consultant.  Rebranding your business?  Call a consultant.

Without a doubt, consultants are once again playing a big role in corporate growth. And, this trend points us to a great investment opportunity…

Allow me to introduce The Hackett Group (HCKT).

Key Investment Data Name:  The Hackett Group Ticker Symbol:  HCKT Market Cap:  $179 million Recent Price:  $4.34 PSB Rating System 4.6 Stars Raging Revenue:  (4.3 stars) Revenue jumped an impressive 41% in 2010.  This year they’re expected to increase by a solid 7%. Beautiful Books:  (4.5 stars) Earnings soared 440% in 2010 and are expected to increase by an impressive 18% in 2011.  What’s more, the balance sheet is strong with $25 million in cash and no long term debt. Stellar Structure:  (4.9 stars) With ownership of nearly 10%, insiders are clearly confident in the company’s future.  Institutions like the company as well with ownership at 60%. Valuation Verification:  (4.7 stars) Despite a strong earnings outlook, the stock is dramatically under-valued.  Based on our valuation analysis, we think the stock is worth at least $6.50 a share.  That’s upside potential of 50% or more. Meaningful Milestones:  (4.8 stars) First quarter 2011 earnings are expected to come out on May 9th.  If the company beats estimates, the shares could be off to the races.

Hackett is a rising star in the consulting business.  They operate in the sweet spot of the industry.  And as a result, they’re growing by leaps and bounds.

What’s more, clients love what Hackett does for them… save money!  Over the last ten years, Hackett has saved their clients a whopping $25 billion.  That’s no chump change.

Let’s take a closer look at this exciting company…

THE CONSULTING BUSINESS

Hackett provides consulting services throughout the United States and Europe. They specialize in technology consulting and business advisory.  Remember, these areas are specifically seeing rapid growth.

The company operates through three different divisions.

One division works directly with companies in the Life Sciences and Manufacturing industries.

The primary service provided by this division is employee training.  It usually focuses on the client’s policies and procedures.  The goal is to help cut costs and make client companies more efficient.  And, to make sure employees stay “on their toes”, HCKT schedules follow up visits over the weeks and months after training.

Let’s move over to Hackett’s second division.

Many of you have borrowed money from a bank before.  So, you understand documents and loan terms can be confusing.  Businesses are no different.

A lot of companies need help understanding the conditions of their loans.  And some companies even require help deciding if a loan is needed in the first place.

That’s where Hackett comes in…

They have in-house financial expertise to analyze loan agreements and other financial instruments.  The company can even help with cash management procedures and controls.  Over the years, this division has saved clients millions in interest and fees.

Having well trained employees and good cash management is important, but it’s not enough.  A good IT system is also needed.

Hackett’s third division specializes in IT consulting.

They employ an end to end approach.  They look at a client’s current infrastructure, analyze the strengths and weaknesses, and then recommend solutions.

Sometimes it’s as simple as a new software package, or a change in personnel. Regardless, the focus is on getting the best ROI out of any technology investment.

Let’s take a look at a current Hackett project.

Right now colleges are under intense pressure to cut back on spending.  And Hackett’s working with a number of different universities on this very issue.

By “getting under the hood” of a school’s IT and payroll departments, Hackett often finds many ways to improve the organization.  And, many clients are learning to do more with less.  As a result, tuition at these schools is rising less rapidly, making for happy parents and students!

This is just one example of how Hackett can help an organization improve.  There are hundreds of similar stories with other corporate clients.

Let’s now look at how Hackett’s success is playing out in their financials…

THE NUMBERS

As I mentioned earlier, Hackett made a big turnaround last year.  Here’s a quick recap of the company’s stellar 2010 numbers.

Total revenue increased to $201 million, a 41% jump year over year.  The technology division was a big contributor to revenue growth.  They alone boosted their revenue by 39%.

Net income hit $14 million, a huge improvement from the prior year’s loss of $6.8 million.  And earnings surged more than fivefold to $0.27 per share.

Excellent growth by any measure!

Analysts are looking for another great year in 2011.  They’re forecasting earnings in the neighborhood of $0.32 to $0.34 per share.  That’s a projected jump of at least 18%.

What’s more, earnings are expected to outperform the industry over the next five years by an impressive 20%.

With all this fantastic news, shares are set to blast off… and May 9th could be just the catalyst we need.  That’s the day Hackett’s set to report first quarter results. Needless to say, I’ll be watching closely.

Hackett’s also in good financial shape.

Right now they’re sitting on a cash hoard of $25 million.  And, they have no long term debt!  Nothing says stability like a fat roll of cash in the bank.

INVESTMENT RISK

Now you know, no investment comes without risk.

Another economic downturn could lead to some projects getting delayed or cancelled. If so, Hackett’s financial results would likely suffer.

Also, the company depends on a small number of clients to generate a big portion of revenue.  Losing one or two major clients could hurt revenue growth.

Now let’s look at the stock’s huge upside potential…

POTENTIAL RETURNS OF 50% OR MORE!

Shares of HCKT are setting up to make a big move higher.

The company weathered the global recession to post a very strong 2010.  The industry is rebounding.  Business is picking up in a big way.  And, the company’s on strong financial footing.

But even with all these positives, the market hasn’t noticed yet.

At a recent price of $4.25, the shares are trading at just 12.5x times the 2011 estimate.  It’s an amazingly low P/E compared to the industry average of 23.0x.  By this measure, the stock is undervalued by a shocking 84%.

But that’s not all…

The shares are also misvalued on a price to book (P/B) basis.  Right now Hackett sports a book value of $2.71 per share.  That’s a P/B ratio of 1.5x… well below the industry average of 2.9x.

No matter how you slice it, HCKT is clearly undervalued.

What does the future hold?

Over the last five years, the stock has traded as high as $6.50 per share.  Based on my analysis, I’m expecting the shares to trade back up to that level… if not higher. Buy HCKT today for potential gains of 50% or more.

ACTION RECOMMENDATION

BUY The Hackett Group (NASDAQ: HCKT) up to $4.50 per share.

Recent price is $4.34.

Use a stop-loss of $2.17 on this position.

Don’t forget your position sizing and stop-loss rules.

Portfolio Update

• In our last Portfolio Update, we recommended selling Web.com Group (NASDAQ: WWWW) to lock in gains of 215% or more.  Congratulations on a huge winner!  We also recommended selling Zoo Entertainment (NASDAQ: ZOOG) after hearing the company will have to restate several financial statements from 2010.  If you haven’t yet, look to exit these positions as soon as possible.
• Carriage Services (NYSE: CSV) has quickly moved out of our buy range.  The shares are now up an impressive 17% in just a few weeks’ time.  Move CSV from buy to hold.
• Rodman & Renshaw (NASDAQ: RODM) shares are falling on disappointing first quarter numbers.  We’re moving RODM from buy to hold as a result.

 

Category: PSB Monthly Issues