GTSI Corporation – a tale of public sector

GTSI is a reseller of microcomputer and workstation hardware, software, and networking products to the U.S. government. The company sells to all departments and agencies of the government, most state governments, and systems integrators and prime contractors selling to the government market. The company resells products manufactured by more than a thousand vendors.

Stock under cash balance

I spotted this stock in relation with its massive cash balance compared to market cap.  In last quarter GTSI reported 46M$ in available cash against no debt!  Sometimes you may have a discount on cash due to foreign country cash deposit that cannot be repatriated to the united states without a major tax, but this company operates solely in the US to US government paid in US dollars!  This cannot be the cause of the massive discount (the company currently trades at 42M$).

Maybe there are events subsequent to the last reporting quarter affecting cash.  If you browse news and sec filings, there are lots of news since last quarter!

GTSI earlier formed Eyaktek corporation with other US government suppliers and had a dispute with the actual owners.  Instead of long legal fees to solve the issues, GTSI sold its ownership in Eyaktek for 20M$!  Not a bad choice…  So we may add this figure to our initial 46M$ and get to 66M$!  But at the same time, GTSI announced its purchase of Information Systems Consulting Group, Inc. (InSysCo), a privately held Federal
IT professional service provider, for 15M$!  GTSI will be able to increase its revenu and diversify its income with higher margin sales but until it is proven, we must reduce cash by this amount to 51M$.

What a better way to enhance share value then buying back its own shares for 82¢ on a dollars of cash!  GTSI tought the same and started a share repurchase plan for up to 12% of all available shares!  This is a 5M$ investment.  We must then reduce the cash accordingly back to our original 46M$.

This major increase in cash is mainly due to reduction of receivable accounts.  Well, GTSI is selling to the US government.  I think we can put a fair value of recovery probability near 100%!  What are the current receivables you’ll ask?  85M$…but comes with 75M of payables.  We could add a 10M$ to the cash balance to get our net current assets at 56M$.

Revenues

Why is this stock so depressed?  Are revenues so bad we burn cash like a previous stocks discussed here.  Are we in presence of a value trap?  Lets look at historical earnings.  They are everything else than impressive.  Over the course of 10 years, the average profit per share is 19¢ per year!  That is it!  If you use this figure to evaluate your purchase price, you get a P/E ratio of 23!  The same ratio that google got! I’m sure GTSI is not as hot as Google is.  Actually if you take 2008 and 2009 earning average (0.75) you get a P/E of 6.5 which is a lot close to comparable companies.  If you adjust this P/E with the share repurchase plan, you get a P/E of 5.7.

Those two years were good years for GTSI.  It was before the big bang!  Yes GTSI lost its supplier compliance with US Government in Q4 2010!  This was a major hit to GTSI revenues dropping around 50% in a single day!  It regained its supplier compliance in the same month but GTSI had to rebuild a major list of contracts.  Can revenues come back to prior levels?

It seems like so.  Last month, GTSI was awarded a major contract of up to 423M$ if fully exercised.  This is the equivalent of half of 2009 revenues!

The TTM earnings comes in at 0.08. In the previous three years (including the big bang year), GTSI free cash flow never went under 3M$ loss.  So we are not burning cash but not making much neither.

Resume

GTSI has a major downside protecting in its cash position and net current assets values but lack the revenue stream to propels its shares.  If GTSI income could increase to 2009 levels, this stock should be at a P/E closer to the industry average of 9.6.  Because of the not so shiny history of GTSI, I would target lower than industry.  This would give us a selling price from 4$ to 5.5$.  That is if you do not adjust the cash in the price per share.  If you add the cash balance to the price, you get a target around 9$ a 100% gain at the current price of 4.4$.

To adjust a share for the cash, you must ensure that management will return this cash to the shareholders.  In the past, GTSI had a poor history of return to shareholders.  No dividend or share repurchase plan were voted in the previous 10 years.  But it changed this year!  A new management team was put in place following major big bang ban from US suppliers and this new management team instituted a share repurchase plan.

I would not put everything in GTSI due to recent history of management friendliness and poor historical profitability.  I initiated a small position due to the HUGE downside protection and may increase following further positive quarterly reports.

Disclosure : Author has a position in shares of GTSI.

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Posted in GTSI, NASDAQ

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