Analysis on Demand

[David Randolph]

How about AVCI, looks like a good one for long-term hold.

1. Profile

Avici Systems, Inc. (AVCI) provides high-speed data networking equipment that enables networking service providers to transmit data, voice, and video across their networks in North America and Europe. Its primary routing product family consists of three chassis platforms and various line cards. The company provides three equipment configurations, such as the Terabit Switch Router product for the stresses of carrier core routing in large Internet protocol (IP) networks; Stackable Switch Router, a rack-mountable scalable router for service providers with smaller core networks; and Quarter-rack Scalable Router. Its routers are designed to provide high performance across large IP-based core networks; stability and interoperability; and in-service modular scalability to enable non-disruptive incremental capacity additions to the network. The company's products provide these benefits through its proprietary technologies, including its application specific integrated circuits, Velociti switch fabric and distributed system design, IPriori system software, Composite Links, and Non Stop Routing technologies. In addition, it offers support and maintenance, as well as installation and service. The company was founded in 1996 and is headquartered in North Billerica, Massachusetts.

2. Stock Price History



The long term chart above could suggest the existence of heavy dilution, but the small numbers in blue below the price line, which tell you the number of shares outstanding (in millions), shows that wasn't the case.

AVCI's problem was of another nature: heavy losses over the years. But, after losing $425 M between 1997 and 2005, the company posted its first ever positive net income number in 2006, which makes this stock quite an interesting case.

Let's study the last couple of years in some more detail.

3. 2006 and 2007 history



Wow, so many brutal gaps. Let me try to find out what happened in those gap days.

1 - In April 20, 2006, the stock rose 84% in one day, with 10.8 million shares changing hands. The company reported 1st quarter earnings on that day:

«"Strong first quarter order volume coupled with the initial positive affects experienced from our business restructuring and cost structure re-alignment have resulted in Avici's highest quarterly revenue since mid-2001 and produced our first ever positive bottom line result, before special charges," said Bill Leighton, Chief Executive Officer.»

Non gap EPS was $0.15, which made people think $0.60 for a full year and made the stock close at $8.02 for a 13.4 earnings multiple.

After this big news the stock came off on low volume, almost to the initial point before the news.

2 - Then on July 21st, 2006, second quarter results were out, and again, AVCI opened with a blast, rising 34% at the open. The news was:

«"Due to a surge and acceleration in demand this quarter's revenue and bottom line results have far exceeded our expectations and resulted in the company turning cash flow positive. We expect to continue to see strong revenue and bottom line results in 2006, but caution that the business conditions driving this increased demand can change significantly. As we have previously announced, we have restructured our business to be profitable at what we believe is a reasonable going forward revenue baseline over the near term in a multi-vendor environment, even though we expect that 2006 will substantially exceed those levels," said Bill Leighton, Chief Executive Officer.»

These results were much better than the 1st quarter, with GAAP EPS of $0.58 for the quarter. But the stock rose less, initially, because people were burned from buying this stock on a very big gap up. The stock didn't change much until February 2nd, 2007, when ...

3 - There were reports of an institutional investor, Dimensional Fund Advisors, was holding 661,706 shares of the company, or 4.78%.

This piece of information moved the stock from $7.54 to a high of $13.96, when ...

4 - There was a 33% fall at the open, due to the following news:

• Avici Slips on Soapstone Shift
at TheStreet.com (Thu, Apr 19)

This is very interesting, the company changed its business model completely, because management saw router orders from AT&T drying in the near future (this probably explains the recurrent low earnings multiple). Those orders presumably would go to Cisco or Juniper. AVCI had $70 M in cash and management said they move the company to the software business.

Let's see what we have over the next few chapters.

5 - Point 5 isn't on the chart, but you can see the gap down between points 4 and 6. This happened as a response to the following news:

Strange, I can't find any news to explain this sudden 26% decline. Ah, ok, I found it later, it was because of the ex-dividend date of a $2 cash dividend.

6 - AVCI rose 35% on the following news release:

• Avici Systems Reports Second Quarter 2007 Results
Business Wire (Thu, Jul 19)

Earnings for the quarter were spectacular, but because they came from discontinued operations, the stock fell back down to close the gap and then some. AVCI paid a $28 M cash dividend and still had $61 M in cash at this point.

4. What do we have now?

We now have a $151 M market cap company with $61 M in cash entering a new business. The past isn't any guide for the future in this case, because a few quarters from now AVCI will be an entirely new business (SoapStone Networks will be the new name).

So, the issue is, how much is SoapStone worth? More or less than $151 M - $61 M = $90 M?

I've read some press releases about SoapStone and the company's website at www.soapstonenetworks.com and unfortunately I don't understand the product very well and can't judge its market potential.

As Buffet says, "invest only in businesses you understand". This clearly isn't my case with AVCI. Perhaps one of you guys is a telecommunications engineer and knows something about the need for this SoapStone product.

5. Conclusion

AVCI's old business is ending and the market currently values its new business at $90 M. I don't know if that's a lot or if it's well below fair value, because I don't understand and can't judge the product, its price, or its market potential. An investment in AVCI shares would be a complete shot in the dark for me. My opinion is neutral.

[phabrux]

David,

Could you pls relook at SVA, one of your old pic, if you remember?

Its doing pretty nicely the few last days.

Thanks

Phabrux

[nicknite20]

Hi David
I was wondering about NTRZ?
It's come down quite a bit and I keep seeing good news.
Thanks and Best
GMan

guitarman,
Dont get into NTRZ..the dilution is scary..they have over 100m shares outstanding and they barely make a penny per share. Theyre good at issuing pr's..thats it.
jmo. Nick

[David Randolph]

hi David,
please check IMOS again:
http://www.3stocksonfire.org/trading/index.php?board=2.0
(updated informations: http://www.3stocksonfire.org/trading/index.php?board=2.0 )

AKNS now on the Nasdaq!
please check AKNS instead of IMOS!
http://www.3stocksonfire.org/trading/index.php?topic=10250.msg106017#msg106017

thanks
Oliver

1. Profile

Akeena Solar, Inc. (AKNS) engages in the design, integration, installation, marketing, and sale of solar power systems for residential and small commercial customers in the United States. It principally focuses on the design and integration of grid-tied solar power systems, which are electrically connected to the utility grid so that excess energy produced during the day flows backwards through the utility's electric meter. The company also works on solar thermal or solar pool systems. It serves commercial customers, including schools, and housing and owner occupied businesses consisting of wineries and small commercial offices, as well as residential customers, including high-income professionals. Akeena Solar sells its products through print, Web, and radio advertisements, as well as through participation in industry trade shows, individual consultations with prospective customers, and sales force. The company was founded in 2001 and is headquartered in Los Gatos, California.

2. Stock Price History



AKNS had its IPO in August 31st, 2006, through a reverse merger with Fairview Energy Corporation, Inc.

On September 14, 2006, AKNS had 15,136,136 shares outstanding. The stock closed at $2.95 on that day, so the market cap was $44.65 M.

After a series of PIPEs (Private Investments in Public Equity), the number of shares outstanding rose to 23,625,941 in August 8th, 2007:



The current market cap is $189 M.

All this "strengthening financial foundation" activity caused 56% dilution in one year to existing shareholders. AKNS needed the money, because, even though revenues are growing very rapidly ...



... the company keeps losing money and it appears that the more it sells, the more it loses. In Q2 2007 the company beat two records, the sales level (at $7.5 M) and the losses level (at $1.9 M).

I'm not sure why this happens. Perhaps it is because AKNS, being at the top of the value chain ...



... is squeezed on its margins by the producers and the consumers.

I think I'm starting to get this business. AKNS is like a retailer, but one of those that has to take the product to your house and then install it, or else, it wouldn't sell anything. This adds to costs and lowers the margins. It appears to me that the business also has very low barriers to entry. If I wanted to I could start a company similar to AKNS in not much more than a month, I would just have to buy the solar panels, hire people to install them, make some marketing and then start selling. In my opinion this will always be a low margin business, say, 5% net profit margin at best.

With the available information I've derived the usual estimates for my valuation model.

3. Valuation Model



1 - Dilution factor of 20%

Since we've had 56% dilution in the past year I see management's propensity to dilute shareholder's value. Also because I expect the company to keep losing money, at least for another year, it will probably keep doing PIPE deals and other types of financing and stock options incentive plans. I see the share count rising from about 24 million now to 41 million in early 2010.

2 - Revenue CAGR

Management already said it expects 135% revenue growth in 2007, from the 2006 level of $13.4 M. I guess this kind of revenue growth will continue in 2008 and 2009 and therefore I see 2009 revenues of $179 M, growing from about $31.5 M in 2007. This is exceptional revenue growth, but I fear there's the risk of growing losses too, since this has been the recent history of the company.

3 - Net profit margin

Net profit margin in the 6 months so far in 2007 was -20.7%. I hope this improves a lot, but I don't think it will ever exceed 5%, and this is what I have in my valuation model.

4 - EPS multiple

I put 25 there just because solar energy is a hot sector now and I expect it to remain that way for years to come.

The final results tell me AKNS isn't an attractive long term investment at this point, because if my fundamental estimates are met, the share price will decline 13% a year between now and mid 2010.

4. Conclusion

To me, AKNS's problem is its low profit margins and the fact that losses are rising as revenue grows. It shouldn't be that way, if the business had healthy fundamental trends.

Anyway, solar energy is very hot in the stock market now and at first sight AKNS looks like a great investment opportunity (when I started looking at the company's website I got excited and went talking to my wife about setting an AKNS franchise or something here in Portugal - like I had nothing more to do ).

But, on a second thought and after some study, I must say that not everything in the solar energy space is a great investment. Companies need to have an innovative technology and a reasonably fat net profit margin perspective to be outstanding long term investments.

So, my final take on AKNS is that the chart is bullish and it can rise some more, but I think over the long term, dilution, competition and it being a low margin business will put the advance in check. I believe it has a poor reward/risk ratio.

I can be wrong though, good luck la-onda and thanks for bringing this one to my attention

[pinoleropuro]

good morning or afternoon to you over in Europe.
can you look at SFEG.OB?

All this per the interview from the Christian Financial Radio Network on Podcasts.
MIO environmentaly friendly resources owned by the company's inground value is substantial.
per the CEO production has not been announced.
MIO is widely used in europe not so widely used in USA yet since here we have mainly used Zinc instead.
MIO is also less expensive to produce.


Open 0.00
Previous Close 0.58
Day's Range 0.00 - 0.00
52 - Week Range 0.22 - 1.445
9/11/07 - 3/28/07
Avg Volume (10 days) 256,970
Price / Earnings (TTM) 0.0x
Earnings Per Share(TTM)  0.00
Market Cap 39.9 M
Shares Outstanding 68.8 M
Beta 1.3
Dividend Yield 0.00%
Declared Dividend 0.00
Ex-Dividend Date --
Dividend Payable Date --

12 month target price is 3/share

stock price decline- "...since march of this year we've been issuing stock to pay down convertible notes in connection with the 3.5 million dollar financing we completed last year. recently we elected to repay the remaining 1million in cash rather than in stock..." qouting the CEO
per ceo value of inground assets are substancial and he approximates value of 400million after extraction therefore he sees the projected price of $3/share pretty conservative.
santafegoldcorp.com

they are also planning on adding more to their company. aquasitions.



Thanks.

[2bun]

Hi David,could you possibly have a look at tattf for me? I got in a couple weeks ago in low 12's and it's almost 14 now,seems very strong but not a lotta shares traded. Thanks,Randy

[David Randolph]

WRLS...looks very attractive with latest guidance update.

1. Profile

Telular Corporation (WRLS) engages in the design, development, manufacture, and marketing of component elements, and telecommunications equipment assemblies and other complementary products. These products provide the capability to connect alarm panels, telephones, fax machines, and data modems directly to cellular networks. It primarily offers Fixed Cellular Terminals and Fixed Cellular Phones that are used in various applications, such as wireless security, Internet access, least cost routing, machine-to-machine, wireless basic telephone services, and cellular public phones. Its customers include security system installation companies, and security system distributors and dealers in the North and South America, El Salvador, Guatemala, Mexico, India, South Africa, and Venezuela. Telular was founded in 1986 and is headquartered in Chicago, Illinois.

2. Stock Price History



In the 13 years period between 1994 and 2006, WRLS lost money in 12 of those years. It was profitable only in 2001. This is the primary explanation to why the stock is down 93% from its IPO price back in 1994. The second explanation is dilution, since the share count rose from 7.9 million in 97 to 18.3 million shares outstanding now.

However, it seems something is changing, because Q2 2007 was marginally profitable (the first profitable quarter going back 11 quarters):

• Telular Corporation Reaches Profitability in the Third Quarter of 2007
Business Wire (Tue, Jul 24)

3. Short Term Chart



The reaction to the earnings news is marked with a 1 on the chart above. I think the "juice" in the press release is:

«We continue to serve the residential cellular security market with our leading, cellular security product, Telguard Digital, and with less than eight months left until the "sunset date," when analog cellular networks will be deactivated, we are starting to experience an acceleration of analog to digital upgrade activity and receive significant orders. Based on this demand and increased backlog, we currently expect sequential growth in revenue from our Telguard products of over 30% in the fourth quarter.»

A couple of months later they raised guidance for the fiscal 4th quarter:

• Telular Raises Telguard Revenue Guidance Due to Strong Demand For Digital Cellular Communicators
Business Wire (Wed, Sep 12)

The reaction originated the gap up marked with a 2 on the chart. The talk is:

«During the current fiscal fourth quarter, Telular has seen a dramatic increase in sales of its fully digital line of security products fueled by the approaching analog cellular sunset date. Previously, Telular estimated Telguard product revenue was expected to grow 30% sequentially for the fourth quarter and now estimates that growth to exceed 90% sequentially.»

You see, the problem of all this is that the revenue growth is being fueled by a temporary effect. When the "sunset date" passes, there's going to be an hangover and revenue will decline to the previous level or even lower.

4. Conclusion

WRLS wasn't a good investment before, since the company lost money in 12 out of 13 years (and diluted shareholder's value for cash) and it probably won't be a good investment in the future, after the temporary effect of the change from analog to digital alarms is gone. The short term positives seem to be baked into valuation, with the stock up 100% over the past 6 months or so.

So, my long term outlook for WRLS is neutral at best.

[David Randolph]

David,
Could you pls relook at LAYN? Its done pretty nicely for me since we last discussed it..i think it goes higher..

http://www.3stocksonfire.org/trading/index.php?topic=9240.0

Thanks,
Nick

1. Profile

Layne Christensen Company (LAYN) provides drilling and construction services and related products to water and wastewater infrastructure and mineral exploration markets. It also produces unconventional natural gas for the energy market. The company operates in four divisions: Water and Wastewater Infrastructure, Mineral Exploration, Energy, and Other. The Water and Wastewater Infrastructure division provides a range of water-related services and products, including hydrological studies, site selection, well design, drilling and well development, pump installation, and well rehabilitation. It also offers design and construction of water treatment facilities, and the provision of filter media and membranes to treat volatile organics and other contaminants, such as nitrates, iron, manganese, arsenic, radium, and radon in groundwater. This division also offers environmental drilling services to assess and monitor groundwater contaminants. The Mineral Exploration division provides a range of drilling services for the mineral exploration industry. Its aboveground and underground drilling activities include various phases of core drilling, diamond, reverse circulation, dual tube, hammer, and rotary air-blast methods. The Energy division focuses on the exploration and production of unconventional gas properties. The Other division offers specialty energy services. The company operates in North America, as well as Africa, Australia, Europe, Canada, Mexico, and South America. As of January 31, 2007, the company had 361 net producing wells. Its customers include municipalities, investor-owned water utilities, industrial companies, global mining companies, consulting and engineering firms, heavy civil construction contractors, oil and gas companies, and agribusiness. Layne Christensen was founded in 1981 and is headquartered in Mission Woods, Kansas.

2. Stock Price History



I think the video analysis I made in April 4, 2007, explains fairly well LAYN's history between 1992 and 2004:

A video Analysis from 3StocksOnFire.org

In my forecasts I expected LAYN to rise about 20%, on average, for the next 10 years. However, the stock is up 43% over the last 6 months, that is, since I made the analysis, so why the stronger pace?



Before I try to give a plausible explanation, let me give my congratulations to nicknite20 for buying and holding LAYN, it has been a great investment. His posts at the Stock Picking board have some motives for the steep bull trend.

One plausible explanation could be that I used to work under a 10 year valuation model, instead of the current 3 year model, which I believe can capture medium term fundamental swings better. If, instead of the 10 year calculus I had made a three year forecast, since the last three years average revenue growth was 39% (not 25% as I have in the video analysis), the model would return a higher than 20% share price CAGR.

Also, when I made the initial analysis I didn't pay enough attention to the business model, I was more concerned about the fundamental trends. I still didn't get as far as trying to understand the true nature of the business. Today, when I make an analysis, I'm much more dedicated to understanding the business and its potential. I look to the future in a more subjective way, instead of just extrapolating the past financial trends into the future.

Or else I would have probably seen that drinkable water is a scarce good and it would be in high demand for years to come. The market has been paying a high price for companies in this industry, because it understands the value of drinkable water and its scarcity.

The following article, posted by ravenquork, explains this quite well:

An Arid West No Longer Waits for Rain

But enough of that analysis, what to think of LAYN now?

We've already seen that the business sector is quite appealing. The company is a $938 M market cap company, and it is expected to have revenue of $842 M in 2007 and $916 M in 2008. EPS estimates are $1.99 in 07 and $2.18 in 08. This means the stock is trading at about 26 times next year earnings. Did I say the market is paying a high price for this type of companies?

Let me make a new valuation model, this time for the next three years:



I've derived these estimates using my sensibility and some of the available information. I see about 21% annual return for 2008, 2009 and 2010, on average. I would like to put a higher revenue CAGR number, but since analysts are forecasting just 8.8% growth for 2008, probably that's because they see some of the company's businesses with softening demand (the CEO himself mentioned that). 30% seems the maximum we can hope for. The positive surprise could come from a larger than 5% net profit margin in the future, net profit margin is hard to predict though. Much easier to grasp the demand factors (revenue) than how a specific company will handle its costs.

3. Conclusion

I still think LAYN is an attractive long term investment in more or less the same way as I did before. I probably should have bought it earlier, but now I'm not willing to pay 26 times next year earnings for this type of company, even though I understand the appeal of the "find drinkable water" industry.

Continuation of a good investment nicknite20

[stock]

david can you look at prgn    it is a shipping company

[nicknite20]

David,
Thanks a lot for the analysis, and very happy to see a positive endorsement from you.
Also, thanks for words of encouragement.
Nick

[BigSully1]

Just wondering what everyone thinks, especially David, about the sky rocketing Chinese stocks and ADR's recently, many on NO news at all.   O.K., we all knowabout the solar stocks and others like JRJC, CPSL, EFUT etc., but then there's CEA, SSRX, XFMC, ATV, ZNH, SDTH to name just a few.

Is it irrational exuberance or is there more to it?

Todays rockets in order of gain (52 to 15%) include INTN, CRGI, CBAK, JADE, ORS, KUN, CDS, FSIN, YTEC, NWD, NINE, FFHL.

Maybe not the thread for it, but;
Starting a list of Chinese/Asian U.S. traded stocks acoording to year to date rate of gain as of yesterday. Todays movements change the whole rankings, like KUN's 50% move today.

Symbol Name YTD Change
1 JRJC China Finance Online 878%
2 CEA China Eastern Airlines 389%
3 ZNH China Southern Airlines 280%
4 TSL Trina Solar 234%
5 CHNR China Natural Rsrcs 226%
6 ACH Aluminum Corp. of China 223%
7 JASO JA Solar 202%
8 MHJ Man Sang Holdings 194%
9 BIDU Baidu.com 184%
10 YGE Yingli Green Energy 180%
11 YZC Yanzhou Coal Mining 166%
12 LDK LDK Solar 153%
13 SVA Sinovac Biotech 147%
14 SYUT Synutra International 144%
15 WX WuXi PharmaTech 142%
16 CAF MS China A Sh. Fund 116%
17 HRBN Harbin Electric 116%
18 EJ E-House 103%
19 CHL China Mobile 99%
20 EDU New Oriental Education 93%
21 KUN China Shenghuo Pharm. 92%
22 MR Mindray Medical Int'l 88%
23 LFC China Life Insurance 85%
24 CEO CNOOC 78%
25 FMCN Focus Media 77%
26 PWRD Perfect World 76%
27 GIGM GigaMedia 75%
28 CTRP Ctrip.com 74%
29 SNDA Shanda 73%
30 SINA Sina Corp. 71%
31 FXI FTSE/Xinhua China ETF 70%
32 SOHU Sohu.com 68%
33 PGJ Halter USX China ETF 66%
34 SHI Sinopec Shanghai 66%
35 YTEC Yucheng Technologies 61%
36 CMED China Medical Tech. 59%
37 CHA China Telecom 54%
38 CHN China Fund Inc. 50%
39 HNP Huaneng Power Int'l 49%
40 ATS APT Satellite 48%
41 CHU China Unicom 44%
42 CYD China Yuchai 44%
43 GSOL Global Sources 38%
44 SNP Sinopec 37%
45 PTR PetroChina 35%
46 ATV Acorn International 35%
47 JFC JF China Region Fund 35%
48 TBV Tiens Biotech 31%
49 GSH Guangshen Railway 30%
50 CHDX Chindex International 29%
51 CTDC China Tech. Development 25%
52 ASIA AsiaInfo 24%
53 STP Suntech Power 21%
54 CBAK China BAK Battery 20%
55 JOBS 51job 19%
56 JADE LJ International 19%
57 SOLF Solarfun Power 18%
58 SCR Simcere Pharmaceutical 17%
59 INTN INTAC International 15%
60 JST Jinpan International 11%
61 TCM Tongjitang Ch. Medicines 10%
62 SSRX 3SBio Inc. 8%
63 SMI Semiconductor Mfg. Int'l 3%
64 SPRD Spreadtrum Comm. 3%
65 CN China Netcom 3%
66 COGO Comtech 1%
67 AOB American Oriental Bio. 0%
68 CSUN China Sunergy 0%
69 NCTY The9 0%
70 HMIN Home Inns & Hotel Mgmt -3%
71 CSIQ Canadian Solar -4%
72 ADY American Dairy -7%
73 SORL Sorl Auto Parts -9%
74 NTES NetEase -11%
75 MPEL Melco PBL Entertainment -11%
76 CPSL China Precision Steel -11%
77 NINE Ninetowns Internet Tech. -12%
78 DSWL Deswell Industries -13%
79 PACT PacificNet -13%
80 HRAY Hurray! -14%
81 NTE Nam Tai Electronics -15%
82 CHINA CDC Corp. -17%
83 XING Qiao Xing Univ Telephone -19%
84 KONG KongZhong -19%
85 QXM Qiao Xing Mobile -19%
86 LONG eLong -21%
87 TSTC Telestone Technologies -26%
88 CNTF China Techfaith -26%
89 ACTS Actions Semiconductor -27%
90 CAAS China Automotive Sys. -28%
91 LTON Linktone -29%
92 NWD New Dragon Asia Corp. -31%
93 SEED Origin Agritech -32%
94 XFML Xinhua Finance Media -35%
95 FFHL Fuwei Films -39%
96 EFUT eFuture -44%
97 GRRF China GrenTech -46%
98 VIMC Vimicro International -48%
99 ASTT ASAT Holdings -53%
100 UTSI UTStarcom Inc. -54%

[guitarman]

David
Got a new tip.

How does MVIS look to you?

Thanks and Best
GMan

[poli]

David,

On Sept 20th I requested time permitting if you could take a look at SIMG.  I imagine you are really busy but If you get a chance in the next week or two could you take a look and see what you think?  I bought it in the mid 5's.

Thanks, POLI

[David Randolph]

David,

On Sept 20th I requested time permitting if you could take a look at SIMG.  I imagine you are really busy but If you get a chance in the next week or two could you take a look and see what you think?  I bought it in the mid 5's.

Thanks, POLI

Sure Poli, SIMG is in 8th place on the requests list, so probably eight trading days from now I'll write an analysis on it. But it looks attractive at first sight, nice catch poli

I've been kind of slow in making new analysis, especially now that I have to write 15 daily updates ... today my wife showed some openness about me expanding my working hours a bit, so I'll try to write the updates right after the market close (at least a few), so that I have more time in the morning to cover new stocks.

Thanks for your interest

[Jim897]

David,

Could you take a look at ABAT?  It is moving to the AMEX tomorrow and is up 1200% ytd.  It is a Chinese stock.  BigSully, you should add it to your Chinese stock list.  I think I also did not see UTVG there, another one to pay attention to.

Jim