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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.

No comments:

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