Westell Technologies (WSTL) designs and delivers carrier-class communications equipment used by service providers and industrial customers to meet their needs for point-of-demarcation transport and termination, digital transmission, remote monitoring, and power distribution.
The stock is currently trading at $2.34/share which puts its market value at $155.6 million.
What is interesting is the strong balance sheet that the company currently enjoys. A quick look at the following key numbers will paint the picture:
- Cash and Investments = $149.4 m
- Total Current Assets = $175.7 m
- Total Liabilities (Debt = 0) = $15.2 m
- Net Current Asset Value (NCAV) = $160.5 m
The stock is trading just below its Net Current Asset Value or NCAV.
Cash Windfall Due to Disposition of Assets
In 2011, Westell sold its Customer Networking Solutions (CNS) Division and ConferencePlus product for a pre-tax gain of $31.7 m and $32.8 m respectively. The CP sale resulted in a net cash inflow of $37.7 m and the CNS sale resulted in a net cash inflow of $36.6 m. As a result, the company is now a pure play Outside Plant Systems (OSP) provider to wireline and wireless companies such as AT&T, CenturyTel, Verizon, Qwest, etc. Its products now include Cabinets and enclosures, copper and fiber edge connection and protection, power distribution and remote monitoring, DS1, DS3, and Ethernet transmission plugs, and Custom Systems Integration services. The company is focusing on growing its wireless business with Ethernet-based cellular backhaul switches for Cellular Backhaul, Smart Grid and other integrated cabinet-based markets
Its Remaining OSP Segment is Profitable
A vast majority of net-net stocks have profitability issues, which is why they are valued so low in the market. For Westell though, the segment that remains is a profitable segment. In fact, OSP segment boasts of gross margins in excess of 40% compared to the CNS segment that operated at a gross margin of approximately 20%. So in essence, the company has chosen to sell off its lower margin business and focus on its higher margin business.
The OSP revenues in 2010, 2009 and 2008 were approximately 30% of the total revenues and ranged from $53 – $59 m/year. The company has not previously broken out R&D and other costs by divisions but a rough calculation estimates a forward annual eps of around $0.03 to $0.04 per share.
The selling off of CNS and ConferencePlus cuts down the total revenues of the company by over two thirds, which means the stock is priced high compared to the earnings one can expect going forward. However, the management has significant cash on the balance sheet that it is trying to return to the share holders with share buy backs. The company is also looking for growth through organic means and through acquisitions.
How Should You Analyze the Stock
A quick way to consider the valuation of the earnings is to back out the excess cash from its Price and recalculate the P/E based on the expected EPS going forward. I estimate that the company can, if it chooses, return $141 m or $2.13/share in cash to the shareholders (there is $7.4 m in restricted cash and about $1 m in cash that the company should maintain as part of its maintenance capital). That will leave it with an adjusted Price of $0.23/share. At a $0.03/share annual forward eps, the PE ratio is about 7.3 which indicates a fairly undervalued stock.
The strong balance sheet and share repurchases puts a floor on the stock price. The appreciation potential depends on Westell’s ability to grow its OSP business in new markets (wireless) either organically or through acquisitions as the current OSP earnings are too small to support a meaningful stock price appreciation. Until specific growth plans are developed, the stock may continue to tread water. The downside is fairly protected, so for an investor willing to invest and wait for the catalyst to arrive will be amply rewarded.