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Tuesday, June 18, 2013

Why DWCH Corp Shares Could Double

Datawatch Corporation (DWCH) is a leader in providing information optimization products and solutions that allow organizations to deliver the greatest data variety possible into their big data and analytic applications.

Big data software companies have been some of the best performing stock of the last year. Tableau Software (DATA) priced it's IPO at $31 this year and now trades at $53 with a market capitalization of over $3 billion. Splunk Inc. (SPLK) trades at over $44 with a market capitalization of over $4 billion.

DWCH trades over $17 today and has a market cap of over $100 million. It announced an acquisition of Panopticon Software yesterday that per their conference call, will put them in closer competition with DATA and SPLK , offering unique industry advantages. From the press release:

The integration of Panopticon's advanced visual data discovery software makes Datawatch the first company to deliver real-time analytics and discovery by accessing the industry's broadest variety of data types simultaneously-including traditional structured relational databases, semi-structured sources like reports, PDF files, EDI streams, print spools and documents stored in files systems or enterprise content management systems, with a new mix of unstructured data such as machine data and social media stored in Big Data solutions or streaming directly from a host of real-time applications.

Associating all relevant data in a visually-rich, real-time analytical environment enables businesses to isolate and resolve problems as they occur, perceive hidden patterns, track emerging market trends, and identify opportunities for competitive advantage and improved business processes. Panopticon's customers span all vertical industries and include some of the largest multinational companies in the world, including Citigroup, Credit Suisse, HSBC, J.P. Morgan, Novartis, Pfizer, Vodafone, Cable & Wireless, Shell and BAE.

Additionally, "The acquisition of Panopticon is a transformative event for Datawatch and the industry," said Michael A. Morrison, President and CEO of Datawatch.

On the conference call Mr. Morrison stated, "I mean, I believe that this particular transaction will certainly bring Datawatch more in line with what you might see from a Tableau, in terms of applications and capabilities. So I would certainly see us on their radar, probably more frequently than you would have in the past. I would probably also say with the real-time nature of technology and our ability to work with various datasets in a high velocity manner. We'll probably see ourselves running into companies like Splunk more frequently with some of the machine data initiatives and file initiatives."

I also found this information from the press release to be interesting:

"Effective visualization of business information is in heavy demand; our research shows that 48 percent of organizations have indicated presenting data visually is an essential business analytics capability, with visual data discovery being one of the top three big data analytics needs not effectively delivered today, and that visualization is more important for businesses than just a focus on velocity or volume," said Mark Smith, CEO and Chief Research Officer, Ventana Research. "Datawatch's acquisition of Panopticon to extend the value of information optimization with analytical discovery, that maximizes the use of data and events, is what business has been demanding and the combination will bring new innovation to our industry."

Potential risks include the ability to successfully integrate this acquisition while keeping focus on running the business. The good news is the key Panopticon executives are staying on board.

Lastly, Panopticon CEO William De Geer said on the call , "in my opinion, I think, we got probably the most undervalued stock in the whole sector."

When we look at valuation:

DATA has a current price/sales of 11.9 (using current PPS of $53.20/ current years sales estimate of $258mm / 57.5m shares O/S)

SPLK has a current price/sales of 16.9 (using current PPS of $44.52/ current years sales estimate of $274mm / 103.8m shares O/S)

DWCH has a current price/sales of 4.4 (using current PPS of $17.5/ current years sales estimate of $29m for DWCH and $5mm per conference call for Panopticon = $34mm / 8.5m shares O/S which is the amount they said will be outstanding after the acquisition)

DWCH has done $0.17 of adjusted EPS for the first six months of this fiscal year. DATA and SPLK did not have EPS. If I use the current price/sales ratio range of DATA and SPLK for DWCH, then DWCH would have a price range of $47.43 - $67.46 instead of the $17.50 where it trades today. It is clear to me that DWCH is grossly undervalued when compared to peers and this acquisition should get them the attention they deserve. Lastly, DWCH has a tiny float of 2.8mm shares, so this stock could move quickly once it is noticed.

Disclosure: I am long DWCH in the low $17's. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Monday, June 17, 2013

EAC Set Up Nicely For A Short Squeeze

On June 13, 2013 , another Seeking Alpha author Richard Pearson, wrote an article on Erickson Air-Crane (EAC). Mr. Pearson disclosed he was short EAC shares. The article caused a big sell off in EAC shares and also caused short interest to rise on a stock with a 3mm shares float. I would like to address some of the points from Mr. Pearson's article.

1) "Evergreen has received a going concern letter from its auditor. It was in default on its debt. It was not even paying its accounts payable to such an extent that suppliers began withholding parts and Evergreen was unable to maintain its aircraft."

Response - Evergreen was owned by their parent Company Evergreen International Aviation (EIA). EIA owned numerous other divisions: See Page F-7 • Evergreen International Aviation, Inc. • Evergreen International Airlines, Inc. • Evergreen Aviation Ground Logistics Enterprise, Inc. • Evergreen Trade, Inc. • Evergreen Agriculture Enterprise, Inc. • Evergreen Defense and Security Services, Inc. • Evergreen Maintenance Center, Inc.; through the date of disposal (May 27, 2011)

So I post the question, was Evergreen Helicopters (EHI) performing poorly and as a result not paying their bills and had a going concern, or was the parent in trouble and needed cash so they sold EHI to EAC ? Well we already knew that EHI did approximately $200mm in revenue and approximately 25% EBITDA margins. When you look at page F-4 of the same financial statements that Mr. Pearson referenced you see that EHI did do those numbers and in addition they had $17 million in net income. But the real part of the story that was not included in Mr. Pearson's article was on page F-6 on the cash flow statement. EHI transferred $57mm of cash to what I assume to be their struggling parent !! Without that payment, EHI would have generated cash of $56mm which i would discount by $20mm for the increase in A/P. So EHI was and is very profitable and generating great free cash flow but they had to transfer cash to their parent (who sold them to EAC I'm guessing because they obviously needed the money) instead of paying their own bills.

2) "But in fact, the situation was set to get far worse for struggling Evergreen, given that over 60% of its revenues come from DOD contracts in Afghanistan. The US has already announced that the pullout from Afghanistan is set to accelerate and troop levels will be further reduced by 50% in the next year.But in fact, the situation was set to get far worse for struggling Evergreen, given that over 60% of its revenues come from DOD contracts in Afghanistan. The US has already announced that the pullout from Afghanistan is set to accelerate and troop levels will be further reduced by 50% in the next year."

Response - Mr. Pearson failed to note that EAC has already publicly responded to this question several times. Here is EAC's CEO Udo Rieder's response from the Q1 Conference call:

"So I would like to address some of the obvious questions about this portion of our revenues. First regarding sequestration, it's important to understand that the majority of the work which is for logistic supports for oversea deployments it's funded through the overseas contingency operation vehicle and is not subject to sequestration. Second approximately 65% of Evergreens total revenues are related to work that we do in Afghanistan.

We have good visibility on this work for the reminder of 2013 and we have growing expectation that the work remain brisk in 2014. I know that our business is not directly related to troop levels this include support for special operations which are likely to remain longer than most deployment and support for reconstruction work which also should persist for some years."

Additionally here is an article that states this type of work will be needed in Afghanistan for years or decades to come and is not tied to troop levels.

"The individual pay and contractor company revenues are lucrative, substantially above the civil rate in the U.S., reflecting operational costs and risks. Last year six civil helicopter companies-AAR Airlift, Canadian Helicopters, Columbia Helicopters, Construction Helicopters, Evergreen Helicopters and Vertical De Aviacion-received $417.9 million for their work in Afghanistan. This year that amount is expected to grow to $783.2 million, according to the Pentagon. A combination of new construction projects and the draw-down are keeping the rotors spinning. The new facilities are being custom built for forces anticipated to remain after next year, and they are likely to require civilian airlift support for years, if not decades, to come."

Lastly, there has been no mention of the massive increase in backlog for EAC. From page 43 of the same SEC filing:

"Our backlog as of December 31, 2012 was $178.8 million, of which $69.6 million was attributable to signed contracts and $109.2 million was attributable to anticipated exercises of customer extension options. We had total backlog of $213.8 million as of December 31, 2011, of which $106.0 million was from signed contracts and $107.8 million was from anticipated exercises of customer extension options. On a combined pro forma basis, we had approximately $894.5 million of backlog as of December 31, 2012, comprised of approximately $178.8 million, $445.7 million and $270.0 million from EAC, EHI, and Air Amazonia, respectively. Our $894.5 million of combined backlog consists of $293.7 million from signed contracts and $600.8 million from anticipated exercises of customer extension options."

Additionally, this link from a week ago shows that EHI just outbid three other Companies to win $10mm contract in Hawaii.

As far as the debt levels of the EAC combined companies post acquisition, they are in line with comps in the industry and EAC has stated they will generate $40mm free cash flow on a sustainable basis excluding one time acquisition charges this year.

3) "With respect to the distressed Evergreen acquisition, Erickson disclosed the following: - lack of experience in these business segments - lack of experience with these types of aircraft - lack of experience in these geographic regions (Middle East, South America and Africa) - NO experience with Department of Defense customers and projects"

Response - That is why you keep the key leaders from EHI on board as part of the acquisition. Mergers and Acquisitions 101 here, shocked this was used as a slam on the Company. IS EAC the first Company to make an acquisition in another geography or business than their core business ? I will not grace this point with any more of my time.

4) "The reason for the rise is that the stock benefited greatly from a strong fire season in late 2012. As a result, the company actually turned a meaningful profit in one quarter out of the past five."

Response - Yes fire fighting is seasonal so prior to the acquisitions EAC made most of their money in the quarter that fire fighting was strongest. This is often referred to as "seasonality" and is common for many companies ( again Business 101 here). Additionally, fire season is unfortunately very strong this year also.

5) ZM wants to sell all of their shares. ZM is an equity fund. Equity funds are usually in the business to invest money in early to mid stage companies, build them up to sell and make a profit and then do it again. They are typically not long term holders. Also, it is not uncommon for funds to invest in similar Companies (Like EAC and EHI) and then combine them to sell or take them public (roll up). Lastly, a shelf filing is a flexible arrangement and with this S-3 they have two years to sell the shares. With this amount of shares, I would say ZM would need to find strong institutional buyers that saw the future value in this Company.

6) If EAC were to sell 4mm new shares at some point, keep in mind that it would eliminate 8.25% interest debt if they used it to retire debt. This would be close to neutral on and EPS basis. If they used it for an acquisition, I would like to believe that it would be an accretive one. However I have updated my numbers assuming they sell 4mm new shares and compared them to industry comps:

So I will now update my numbers and price targets compared to similar companies, based on the guidance from EAC.

Bristow Group, Inc. (BRS) has a market cap of $2.3 billion + $900 million of debt less $200m cash divided by $294 million of EBITDA = 10.02 EBITDA multiple.

Seacor Holdings Inc. (CKH) has a market cap of $1.5 billion + $678 million of debt less $340m cash divided by $211 million of EBITDA = 8.7 EBITDA multiple.

Air Methods Corp. (AIRM) has a market cap of $1.4 billion + $663 million of debt divided by $233 million of EBITDA = 8.9 EBITDA multiple.

PHI Inc. (PHII) has a market cap of $511 million + $379 million of debt less $49 m of cash divided by $119 million of EBITDA = 7.1 EBITDA multiple.

If I take the mid-point of the EAC 2013 pro forma guidance of $112.5 million and conservatively assume no growth in Air Amazonia so I add $12.5mm of EBITDA they expect from that acquisition we have $125mm of EBITDA:

$125 million of EBITDA X 8 - $400 million of debt + $84mm of cash (assumes they sell at $21 closing price) = $684 million divided by 17.7 million shares outstanding (added 4m new shares) = $38.64 per share.

$125 million of EBITDA X 10 - $400 million of debt + $84mm of cash (assumes they sell at $21 closing price) = $934 million divided by 17.7 million shares outstanding(added 4m new shares) = $52.77 per share.

The average EBITDA multiple of the 4 similar companies is 8.7. That would imply a valuation of $43.59 per share with 4m new shares issued.

Risk - Clearly EAC needs to execute on their business and successfully integrate these acquisitions in the process. This would enable them to pay down the debt and continue to grow the business. ZM selling their shares does not create dilution, but they need to find buyers in strong hands.

Lastly, short interest is currently 17% of the approximate 3m float, so any momentum could ignite a very strong short squeeze. The numbers clearly show EAC as undervalued, and if ZM successfully sells shares that only confirms this. The 17% is of the last measure and I would guess that shot up much higher after the short article last week.

Disclosure - I originally wrote two articles when i was long EAC from the $17-$18 range. It then hit as high as $29. I sold some shares in the $27 area and I am still long EAC.

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Welcome to, blog home of Superman. Purpose of this blog is for me to discuss my trades and stock ideas (As well as opinions and rants on stock market related issues). I will mention the date and price I enter. As far as exits, I always try to take half off when I have some profit and if I believe in the stock, let the rest run further. I always also use mental stop limits, at which time I would exit and minimize any losses. I do not like to give price targets unless I can support them by P/E in some way or by comparison to another stock. I just post stock trades and ideas that I believe will go higher (or lower for shorts) and the reason I believe that. Individuals should have their own strategies for managing profits and losses. My stock picks tend to NOT be daytrades at all and many take time to move. I am not an investment advisor and this blog should not be considered or followed as investment advice.