Carrier Access Corp (CACS) provides an opportunity to purchase a company in the despised telecommunications sector for less than its cash balance, at less than 40% of its working capital and which is expected to grow its cash position in 2003. In its most recent conference call the company announced that it expects to return to profitability in the second quarter of 2003. The company is reaping the benefits of its restructuring and revenue stabilization efforts.
Carrier Access manufactures high-performance equipment for telecommunications carriers. The company began operations over ten years ago. It is thus not a product of the internet bubble, but obviously certainly benefited from the boom. The company’s products deliver more than 2.5 million voice and data lines into 4,500 cities for customers, including all the incumbent carriers and the top wireless service providers and competitive cable companies. The company's products focus on three areas: broadband access from the Central Office, (a physical building where the local switching equipment is found), to the customer premise, enterprise voice and data service delivery and wireless infrastructure.
There are several factors that make CACS a very enticing opportunity:
1) The most important attraction is valuation. As of year-end the company had about $25.7 million in cash and an additional $7 million tax receivable. If one subtracts the companies total liabilities from this “cash” total we get a net cash position of $22.4 million which is about $.90 per share or just about equal to the company’s current stock price. In addition, the company has about $2.30 per share of net working capital, which means the company sells for about 40% of its working capital. You can find many companies in this sector that are cheap relative to their assets but invariably they are bleeding to death. This is clearly not the case here.
2) The company has worked diligently over the past two years to transition its customer base to the strongest carriers and channel partners and to reduce its expenses to a level consistent with its revenue prospects. The company believes the transition period is just about complete and expects to see the benefits of its efforts this year. The company expects revenues to grow steadily this year and for additional expense reduction to be implemented over the next few quarters. The company expects to achieve profitability in the second quarter and to end 2003 with a cash balance greater than the $25.7 million that it began the year with.
3) Management is in the same boat as shareholders as they own about 70% of the outstanding shares and CEO Koenig owns about 56% of the company. They have acted and continue to act as owners and not managers who simply want to preserve their jobs and salaries.
1) The company had a year-end inventory of about $24 million which gives it a very low turnover of 1.4 based on 2002 cost of goods sold. The company admitted during its recent conference call that the inventory level is high, but believes that it sellable and expects to significantly improve it’s turnover ratio in 2003. From an investment perspective even if the company were forced to write-off 50% of this balance ($12 million or $.50 per share) the stock would still be extremely cheap as it would still sell at about 50% of working capital.
2) Management owns such a significant portion of the equity that a danger always exists that they will take the company private at a very unreasonable valuation. This is mitigated by the current legal environment that is sympathetic to minority shareholders.
3) The liquidity of the shares is limited by the small float.
In summary, we have a company which is expected to return to profitability in the next quarter and expected to increase its cash balance during the year which can be purchased for its net cash balance and for less than 50% of its liquidation value.
1) The market has simply thrown this company in the same garbage pile with the rest of the bleeding sector and has not recognized the company’s substantial progress over the last six moths. An actual return to profitability in the second quarter should open some eyes.
2) A share repurchase program or privatization transaction looks like a distinct possibility.