The stock market, presented on paper as mere columns of names and prices, is not fairly characterized. In reality, the market is a huge wheel which rotates to pull stocks from the depths of obscurity to a pinnacle of overvaluation and back down again. Looking at companies currently riding the bottom of the wheel, one finds Victoria-based Vecima Networks (TSX: VCM), a next-generation industrial company trading at a buggy whip price.
Figure 1: Vecima – Rotating Downwards, then Turning Up?
Vecima Networks, founded in 1988 by engineering professor Dr. Surinder Kumar is in the business of creating devices that manage and transfer high volume data flows, the likes of which are found in cable networks, wireless communications systems and other similar applications.
The company’s products bridge the final network segment that connects a system directly to end-users, commonly referred to as “the last mile”, where Vecima’s special capabilities in radio frequency are employed. Key applications of Vecima’s technology include DOCSIS standard wireless broadband services and “QAM” (quadrature amplitude modification) that allows the simultaneous provision of video, voice and data services. Vecima’s customers include major cable operators such as Comcast Corp (Nasdaq: CMCSA) as well as large network original equipment manufacturers like Cisco Systems (Nasdaq: CSCO) with whom the company has enjoyed a productive fifteen-year relationship.
In addition, the company operates a nascent wireless data network operator called YourLink in Western Canada. It also acquired Burnaby-based Spectrum Signal processing in 2007 for approximately $20 million.
Vecima had revenues of $113 million in the year ending June 30, and profits of $0.8 million. The annual profit represented more than a 90% decline from FY 2009 net income of $13.2 million. Share prices have followed the decline in operating performance, dropping from $7.50/share earlier in 2010 to a recent all-time low south of $4.00.
Figure 2: Vecima Networks Stock Chart
Vecima’s troubles in 2010 appear to have stemmed from factors both within and beyond the company’s control. External factors include softer than expected end-demand in the US cable market, which has led to somewhat reduced capital spending by larger operators.
Controllable factors may also have contributed. In particular, the company’s large number of small-scale market initiatives may have diluted Vecima’s competitive positioning in key areas. For example, there appears to be little overlap between the business of supplying capital equipment to cable operators and running YourLink, which is essentially a retail operation. Yet these and other disparate businesses compete for management’s time and corporate resources.
To management’s credit, the project of re-focussing Vecima appears to be underway. The company has recently centralized some distributed R&D activities and more moves of this nature could be in store. Likewise, on the marketing front, Vecima is making a concerted push into a niche opportunity related to hotel HDTV networks. This initiative, being pursued directly as well as through a large OEM partner, addresses a market estimated at $450 million without significant established competition.
Valuation and Risks
While Vecima’s business is a little complicated, the valuation is easy. This is a cheap stock. Very solid net working capital is $48 million, property and plant (at a 50% haircut) adds $17 million, and wireless spectrum assets (based on recent transaction values) are worth a further $38 million. Net of debts, a liquidated Vecima is worth at least $100 million, or 10% more than the company’s quoted market capitalization. Beyond liquidation, if one believes that Vecima can recover even half of its historic levels of profitability, then an $8 share price would be well supported.
Due to a controlling stake held by Dr Kumar, Vecima is not a takeover candidate. However, at these levels a take-private bid would not be out of the question.
My main concerns with Vecima are more macro-economic in nature. The growth push into hotel HDTV networks occurs at a weak moment for hotel operators, who face continuing revenue challenges that have been further compounded by the bedbug scare. However, if we wait for the robins, spring will be over. Although we may not be at the absolute bottom for Vecima, I believe we are close enough to be confident of a solid return from current levels.