Showing posts with label GTSI Corp. Show all posts
Showing posts with label GTSI Corp. Show all posts
Friday, September 2, 2011
Activism At GTSI
GTSI Corp has been discussed a few times on this site, most recently as a company trading at a discount to its net cash balance! An activist looking to realize this value for shareholders recently contacted me, and agreed to do an interview and share for publication a letter he sent to GTSI's CEO Sterling Philips.
Monday, August 22, 2011
Action At GTSI
Last week was an eventful one for potential value stock GTSI. Because of news the company issued after markets closed on Friday, the stock's price action today will be interesting to watch. Depending on how the stock price moves today, value investors may be interested in either buying or selling!
Tuesday, May 24, 2011
GTSI At Large Discount
GTSI Corp (GTSI) is a troubled company that is losing money and that operates in an industry with a weak outlook. These three items are a recipe for a beat-up stock price. But troubles don't last forever and costs can be reduced, so for value investors with a long-term perspective, GTSI may be a stock with strong upside potential combined with limited downside risk.
GTSI is an IT product re-seller that trades for $45 million despite net current assets of $67 million. But the balance sheet attractiveness doesn't end there, as the company has long-term receivables of $5.5 million and an equity investment in a company called Eyaktek carried at almost $12 million. This carrying value is likely an underestimate of this investment's fair value, as equity income from this investment in 2010 and 2011 Q1 was almost $8 million and over $1 million, respectively. Furthermore, following a dispute with Eyaktek's majority owner, it is quite possible that GTSI will sell its stake in this investment, which could turn this long-term asset into cash.
Of course, there's a reason this stock trades at such a large discount to its assets, so it's worth understanding whether the risks to this company are temporary or long-term in nature. First off, GTSI relies on various US government departments (mostly federal) for virtually all of its revenue. Considering that the US federal government deficit is huge and unsustainable, it is quite likely that revenues will take a hit in the coming years. So the question is whether GTSI can reduce its costs, if necessary, such that it can still be relatively profitable should business turn south.
To a large extent, GTSI operates on contract, which gives it some visibility into future revenues. This should help management align costs and revenues appropriately. Furthermore, most of the company's costs are in the form of re-sold hardware (from vendors such as Cisco, Dell and Microsoft etc.); clearly, these are variable costs. Finally, the company does not have any onerous recurring obligations. The new management team has also shown a willingness to cut costs when revenues aren't up to snuff, as evidenced by the more than 10% reduction in staff that occurred last month.
Having said that, that doesn't mean the company's earnings can't be negative over the coming quarters. Costs almost always fall only after revenues have already fallen, resulting in periods of negative earnings while cost cuts have yet to take effect. Furthermore, the company's continued involvement in a government investigation into its practices could not only result in fines, but will reduce customer interest in GTSI and add to costs, as the company complies with a new agreement with the government. Continued litigation with the parent of Eyaktek could also be costly, but hopefully the new management team is able to strike a successful deal on that front this quarter, as was hinted to in the company's latest conference call.
While the earnings over the next little while might be poor, they shouldn't meaningfully reduce the company's asset margin of safety. This is not an earnings play; rather, shareholders are purchasing assets at a discount. These are assets that should become free (to distribute or employ productively) if revenue shrinks. As such, the downside appears to be protected while the upside potential (from a distribution of capital, company sale or productive deployment of assets) is high at the current price.
Disclosure: Author has a long position in shares of GTSI
GTSI is an IT product re-seller that trades for $45 million despite net current assets of $67 million. But the balance sheet attractiveness doesn't end there, as the company has long-term receivables of $5.5 million and an equity investment in a company called Eyaktek carried at almost $12 million. This carrying value is likely an underestimate of this investment's fair value, as equity income from this investment in 2010 and 2011 Q1 was almost $8 million and over $1 million, respectively. Furthermore, following a dispute with Eyaktek's majority owner, it is quite possible that GTSI will sell its stake in this investment, which could turn this long-term asset into cash.
Of course, there's a reason this stock trades at such a large discount to its assets, so it's worth understanding whether the risks to this company are temporary or long-term in nature. First off, GTSI relies on various US government departments (mostly federal) for virtually all of its revenue. Considering that the US federal government deficit is huge and unsustainable, it is quite likely that revenues will take a hit in the coming years. So the question is whether GTSI can reduce its costs, if necessary, such that it can still be relatively profitable should business turn south.
To a large extent, GTSI operates on contract, which gives it some visibility into future revenues. This should help management align costs and revenues appropriately. Furthermore, most of the company's costs are in the form of re-sold hardware (from vendors such as Cisco, Dell and Microsoft etc.); clearly, these are variable costs. Finally, the company does not have any onerous recurring obligations. The new management team has also shown a willingness to cut costs when revenues aren't up to snuff, as evidenced by the more than 10% reduction in staff that occurred last month.
Having said that, that doesn't mean the company's earnings can't be negative over the coming quarters. Costs almost always fall only after revenues have already fallen, resulting in periods of negative earnings while cost cuts have yet to take effect. Furthermore, the company's continued involvement in a government investigation into its practices could not only result in fines, but will reduce customer interest in GTSI and add to costs, as the company complies with a new agreement with the government. Continued litigation with the parent of Eyaktek could also be costly, but hopefully the new management team is able to strike a successful deal on that front this quarter, as was hinted to in the company's latest conference call.
While the earnings over the next little while might be poor, they shouldn't meaningfully reduce the company's asset margin of safety. This is not an earnings play; rather, shareholders are purchasing assets at a discount. These are assets that should become free (to distribute or employ productively) if revenue shrinks. As such, the downside appears to be protected while the upside potential (from a distribution of capital, company sale or productive deployment of assets) is high at the current price.
Disclosure: Author has a long position in shares of GTSI
Tuesday, October 5, 2010
Sell While You Can
Investors in undervalued small-cap companies are occasionally offered significant premiums to their share prices by potential acquirers. The most recent example discussed on this site is that of Nu Horizons. When such an offer occurs, the investor may be tempted to wait for a better offer or wait for the share price to converge with the offer price. This is likely to be a mistake.
As an example, consider GTSI Corp (GTSI), a provider of IT solutions to government customers. It had looked undervalued for a number of months, but was never discussed on this site because of its reliance on a single customer. (Having only a few customers is a source of revenue risk.) Nevertheless, because of the extremely low stock price, some value investors may have considered the risk-reward to be compelling.
These investors were rewarded last month when an offer to buy GTSI was revealed, sending share prices 40% higher. Unless one is a merger arbitrage expert, this was the opportune time to exit for the value investor. But for those who held out for a higher offer price, the news would not be good.
On Friday, the customer on which GTSI is reliant announced that GTSI would be suspended from new business due to violations in how it has performed work in the past. Since this source represents around 75% of GTSI's revenues, this is a major blow to the company's future earnings if it is not quickly rectified. The offer to purchase the company was withdrawn, and GTSI's shares subsequently fell below its pre-offer level.
If the investor is an arbitrage expert and can understand the downside risk versus the upside return of such investments, perhaps remaining in post-offer GTSI shares made sense. For the vast majority of owners of GTSI, however, there was no need to stay in such a risky company (due to its revenue risk as a result of its customer concentration) once the price point was no longer compelling.
The investor should allocate his capital in a manner consistent with his investing strategy. If putting large amounts of capital at risk (which is what a decision not to sell amounts to) for a 5% - 10% gain is not consistent with the investor's strategy, holding on for an arbitrage gain is probably a mistake. A good rule of thumb for the investor is to consider whether he would buy into such an arbitrage situation, or whether he is simply staying in because he already owns the stock. If the latter, the investor is likely better off putting the appreciated capital to work on his next undervalued idea.
Disclosure: None
As an example, consider GTSI Corp (GTSI), a provider of IT solutions to government customers. It had looked undervalued for a number of months, but was never discussed on this site because of its reliance on a single customer. (Having only a few customers is a source of revenue risk.) Nevertheless, because of the extremely low stock price, some value investors may have considered the risk-reward to be compelling.
These investors were rewarded last month when an offer to buy GTSI was revealed, sending share prices 40% higher. Unless one is a merger arbitrage expert, this was the opportune time to exit for the value investor. But for those who held out for a higher offer price, the news would not be good.
On Friday, the customer on which GTSI is reliant announced that GTSI would be suspended from new business due to violations in how it has performed work in the past. Since this source represents around 75% of GTSI's revenues, this is a major blow to the company's future earnings if it is not quickly rectified. The offer to purchase the company was withdrawn, and GTSI's shares subsequently fell below its pre-offer level.
If the investor is an arbitrage expert and can understand the downside risk versus the upside return of such investments, perhaps remaining in post-offer GTSI shares made sense. For the vast majority of owners of GTSI, however, there was no need to stay in such a risky company (due to its revenue risk as a result of its customer concentration) once the price point was no longer compelling.
The investor should allocate his capital in a manner consistent with his investing strategy. If putting large amounts of capital at risk (which is what a decision not to sell amounts to) for a 5% - 10% gain is not consistent with the investor's strategy, holding on for an arbitrage gain is probably a mistake. A good rule of thumb for the investor is to consider whether he would buy into such an arbitrage situation, or whether he is simply staying in because he already owns the stock. If the latter, the investor is likely better off putting the appreciated capital to work on his next undervalued idea.
Disclosure: None
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