Monday, January 23, 2012

Be A Smart Pro

SmartPros (SPRO) provides training solutions for various markets. As per Google Finance, "[i]ts customers include professional firms and companies of all sizes who purchase the courses for use by their employees, and individuals who purchase courses, programs or subscriptions on a retail basis." This is a small company that trades for just $10 million, but has $6 million of cash and no debt, and has generated $1-2 million of annual free cash over the last few years (excluding acquisitions).

Since the recession began, earnings have been under pressure, as companies have cut back the kind of capital programs that would lend themselves to using one of SmartPros' training solutions. But a good chunk of SmartPros' revenue is recurring in the form of subscriptions, and this has kept the cash rolling in. The subscription business model gives the company a cash cushion as well, as the company's services are purchased in advance, leading to the aforementioned high cash balance and a deferred revenue account of $5+ million.

While the company is engaged in some modest buybacks, the bulk of the cash is unlikely to be returned to shareholders. Management's intention is to continue using its cash flow to grow through acquisition. This strategy has appeared to work in the past, as the company has grown revenue significantly while generating a decent ROE in the process, at least until the recession hit. But this remains a risk for shareholders; an investor might think he is buying a safe asset in the form of a significant cash position, but that position could be gone tomorrow!

The company's top executives do own about 15% of the company, but they also take home rather generous salaries for a company of this size. The top three executives took home nearly 10% of the company's current market cap (or about 5% of the company's annual sales) in salary in 2010 alone.

Don't be fooled by the recent red ink, however; this is a seasonal business, and the company's fourth quarter (which has not yet been reported) is its strongest. Therefore, in a month or so the company's balance sheet may look even stronger!

Some value investors may find SmartPros too cheap to pass up. The steady decline of its stock price over the last few years certainly makes it an intriguing prospect!

Disclosure: No position

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