Copper Mountain CMTN S
September 02, 2004 - 9:21pm EST by
2004 2005
Price: 4.07 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 31 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT
Borrow Cost: NA

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A short position in Copper Mountain represents an excellent risk/reward opportunity, that could could see the stock decline another 60-100% in the very near future. The company is burning its meager amount of cash, and essentially gave up on any hope of operating as a viable business on Tuesday. There are very few negatives to the story, except the borrow is tight; however we were able to get a decent number of shares to add, to our position in the last few days.

Copper Mountain was a high-flying DSL company that peaked at extrodinary levels, like most telecom stocks in July 200. The fall from grace has been dramatic. The company's last ditch effort to save themselves has been completely devoted to broadband remote access servers (BRAS) which operates on the edge of the switching network to theoretically manage and optimize traffic. The company has essentially predicated this service and the entire company on providing it to SBC. Within the telecom sector, this has been considered a real long shot, as they have to compete with companies such at Redback which have much more attractive technology, and a balance sheet capable of supporting the business.

On Tuesday the company announced that "a recent cancellation of a large carrier update project, and delays by decisions of major carriers" has forced them to consider straegic options. This translates to "game over" and they have capitulated.

In evaluating the balance sheet, it is clear that the company is almost dead. As of end of August they had $18 million in cash and $6 million in liabilities ($4 million of it accounts payable); so they had $12 million in cash with $31 million market cap. The company has confirmed their burn rate is $6-7 million a quarter. With 7.6 million shares outstanding the company is worth $1.6 today and will be worth approximately $1.3 ($2 million burn/month) on October 1st. With a recent capital raise, and no adoption of their poduct in the industry, there is essentially no chance of any additional capital raising.

The only real question mark is if there is any value to the technology. I have spoken to industry analysts who say there MIGHT be a small amount, but the highest estimate was about $5 million, which would equate to about .65 cents per share. This stands to reason, as despite all of their attemtps they have not been able to land a major carrier, and only have a few small customers, representing about $8 million in annual revenue, which was essentially given away.

With at least a $2 million monthly burn, and $12 million of net cash, they will run out of cash, with no real hope of capital raising in two quarters. Even in the unlikely event that the technology is worth more than we estimate, it will most likely be bought out of bk at a depressed price. There is a chance the company could slam on the breaks, and fire everyone, but with 108 employees, etc they would need to take significant write downs. Even if they were able to shut down the company, incur no further liabilities, and get $5 million for the technology, the stock would only be worth $2.2, 50% below where it is currently trading. The most likely event, is that they will file soon, and the stock will trade down to around $1.

In sum, we find that CMTN is at least 50% overvalued, with catalysts in place for the stock to decline significantly more; and the negatives are the remote possibility that there is value in the technology, and a tight borrow.


The company has only 2 quarter of cash left at most, and have already announced they are exploring strategic alternatives.
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