About a month ago, one of the three followers of the blog emailed me to inquire about some companies. He gave me six ideas. I quickly passed on two of them because they were outside my circle of competence. One of the two was C-Com Satellite Systems (CMI on the venture). Since then I have spent some time getting to know the company and the industry in which it operates.
C-Com offers mobile internet solutions through its proprietary iNetVu platform. The iNetVu system is self pointing antenna system and delivers broadband based satellite internet services to mobile locations as long as you are stationary. C-Com provides 2-way high speed connectivity to many different end users. The power source is simple 12V car battery or an electrical outlet.
C-Com was incorporated in 1997 with an IPO in 2000. The original IPO price was $1.00 (you know you shouldn’t buy IPO’s right?), though it was quoted in the prospectus as “speculative”. Use of the proceeds was to expand infrastructure, increase marketing, purchase capital equipment, and continue product development.
After a long slog the company finally turned a profit in 2005, and continues to deliver record results. We can use 2005 as a base line (even though revenue is now 50% higher). Since then revenue has grown around 9% per year and margins have slightly improved. R+D expenditures are around 6-8% per year but may lower due to increased scale. Same with S,G+A expenses.
Given how small the company is and the amount of large orders, the CCC can be quite lumpy, so I left it out of the chart. But I don’t think it is anything to worry about.
- 1.25X book (and tangible book)
- EV/EBITDA is 2.8, with 3yr EBITDA it’s 3.2
- EV/FCF around 4X
- DCF fair value at $0.70, (giving 52% MOS)
- EPV (with no growth) at $0.48, a 30% MOS
- Graham formula gives me $0.73 fair value, or 54% MOS
Obviously the company is cheap if you consider the $0.17/share in net cash. For cash I included what is labelled as long term investment on the balance sheet minus lease obligations and 5% of revenue (to fund current operations). CMI has a credit line of $600,000 if needed.
Insider Ownership and Compensation
The CEO owns around 35% of the company (and has owned around 30% since 2001). Other insider ownership is minimal, but a director owns another 2%. There has been no major insider buying or selling. In 2001 one the original promoters stepped down and sold all his shares. At the time he owned 20% of the company.
Compensation for management has been mainly composed of stock options. This has led to an increased share count, but lower management salaries. The CFO is even compensated by contract at $750/day.
Why so cheap?
So, everything looks pretty good. But why is CMI so cheap? There is always the fear of obsolescence. That is a legitimate fear. Technology changes fast. I’m in my (late) 20’s and can remember MS-DOS. My recent trip to Disneyland put my age into perspective. I was trying to explain how the tram that takes you from the parkade to the themepark works (because it is really long), and all I could think of was that the carts followed exactly were the front cart went, like “Nibbles” the worm (an old video game). Nobody knew what I was talking about.
I think that CMI is cheap is because of poor investor relations. Saj Karsan notes this here and here. The company goes through the trouble of issuing a press release when a major dealer has signed on and even when a significant insider (that stepped down) is selling shares, but no release for a big dividend. Also, the “outlook” section of the M,D+A has been almost exactly the same for 5 years. Some more clarity on the earnings breakdown and a regular dividend (with the appropriate news release) would be huge.
The stock options doesn’t bother me, but I would like to see some longer dated options with higher exercise prices ($0.75 or higher). This would give the CEO some real incentive to increase the share price.
There has also been a number of management changes outside the CEO over the last eight years. This is probably weighing on the stock. The independent board directors do not own many shares and are not buying. A small insider buy (outside an option exercise) would help.
Third party transactions are relatively high. A conference call or news release explaining their nature is needed.
The company does quite a large portion of sales and expenses in the U.S. dollars, and there is no use of foreign exchange contracts to minimize the severity of currency changes. A 10% rise in the Canadian dollar would result in a decrease in earnings by $500,000 (which is quite a bit when the company’s net income is around $2,000,000).
Given a reasonable timeframe, I think obsolescence isn’t the biggest risk. I think that this could be dead money if the investor relations issues aren’t addressed. The CEO has skin in the game, but could do a better job of bringing recent achievements into the spotlight. This is a company that is enjoying some short to medium term tailwinds. There are still big orders coming in and the economy seems to have turned the corner. There is a ton of cash on the balance sheet that can be put to better use.
Many companies wish to stay on the Venture exchange as there is less investor following and examination. The costs associated with increased disclosure are quite high for a company like CMI, but some extra relations costs would help the share price.
Given that you are buying a company with a huge cash position ($0.17/share) and minimal debt with record earnings, I think you can own some CMI here. I have a trigger of $0.38 (or less) and current fair value of $0.75, and more aggressive fair value near $1. With my limited knowledge of the industry I will limit my position size to 5%. I would be willing to pay more with some more clarity. Good luck to all.
P.S. After my order finally was filled today, CMI shot up 15%. Naturally I annualized the return, called myself and expert and started writing a book about successful trading strategies. 🙂
Disclosure: Author is long CMI.to at time of writing.