Small cap power: CIMT

[tokyopua]

Nice, I couldnt resist getting on YMB and taunting the basher boy, pretty childish of me, I admit, BUT REAALLY DAMN FUN LOL!!!!!

[pinoleropuro]

I checked it out. 
great job Tokyo.
just wondering about the low volume and hoping this thing takes off tomorrow and closes at least above the "patience Island". That will definately strenghthen the earnings report's effect on the stock price. I think that if it doesn't than we are probably going back to the island until the possibly the next quarter reports. that is if institution don't buy it before then.
I truly want to get off and stay off the island before the year is over, in fact before December and on higher volume too.
I guess we shall see.

[Se7en]

Results were announced after the market close, volume AH was more than during the day and in March - April CIMT ran to the 4.70's on much weaker earnings ...

[David Randolph]

The conference call replay still isn't available at Cimatron's website.

3rd quarter results are very encouraging, marking the 4th straight quarter of profitability for CIMT:

• Cimatron Reports Record Revenues and Improved Profits in the Third Quarter of 2007
PR Newswire (Wed 4:00pm)

Considering the CEO's comments in the press release ...

«"We are very pleased with our continued revenue and profit growth, marked by significant growth in software license sales," said Danny Haran, President and Chief Executive Officer of Cimatron.»

... and the positive effect of seasonality in the 4th quarter, I'm absolutely convinced that the company will earn $0.10 EPS in Q4.

I'm very optimistic for CIMT over the long term, because of the leverage I see in the business model:

«Gross profit for the third quarter of 2007 was $6.38 million, as compared to $4.18 million in the same period in 2006, a 53% increase. Gross margin in the third quarter was 81% of revenues, compared to 83% of revenues in the third quarter of 2006.»

As it happens with most software companies, CIMT has a very fat gross margin, of 81% in Q3 2007. However, net profit margin for this quarter was just 6.14%. This is due to the relatively high R&D and SG&A costs. However, when sales rise, these costs don't rise in the same proportion, therefore increasing net profit margin. This is called "leverage".

If indeed it is true that there's strong demand for the company's products (I'm a believer), we'll have strong revenue growth going forward and that will mean net profit margin expansion.

With $7.9 M in revenue CIMT makes $0.06 EPS. But with, say, $15 M, my dear, it will make, according to my calculations (considering R&D and SG&A costs will rise 20% and 20% tax rate), $0.49 EPS.

It's pretty incredible, if revenue doubles EPS is multiplied by 8 times. Perhaps it wouldn't be this way, maybe costs would rise more than 20%, but you see what I mean about leverage.

One thing you can be confident, CIMT didn't dilute shareholder's value in 11 years since its IPO and with core shareholders owning 2/3 of the company, there won't be any dilution going forward either. Acquisitions are made with available cash.

I'll keep holding CIMT for the long term.

[tokyopua]

Hmmm, not quite the big pop we were all expecting 

[pinoleropuro]

yeah, we may have to wait until the 4Q results to get the result we were looking for unless CIMT puts out some press realeases that bring it to the forefront.  It's got the fundies which thanks to David we all know it. That is why I am holding with strong hands. I am just glad I bought more when it went down to $2/share.
big volume is what I am looking forward to now.

[David Randolph]

Hmmm, not quite the big pop we were all expecting 

True. I guess this happened because the market isn't receptive to micro cap stocks now. With most stocks deeply in the red yesterday (especially small caps), investors didn't feel like pushing a micro cap way up, regardless of the fundamental change. But the fundamental improvement is there, it wasn't lost.

I've listened to the conference call and I felt like Cimatron's management is very smart and will know how to build sustainable long term shareholder value. I felt like they didn't need to play any tricks to prop up the share price, because the fundamental improvement is strong enough to do it on its own.

When asked about China, the CEO gave an answer that I enjoyed:

«We had strong growth in China, but China still represents a small part of our business, less than 10%. We don't want to play the China card too often».

This tells me they've learned that just mentioning the "China" word doesn't add any sustainable value to the company.

And this leads me to the substantive part, the current financial trends and outlook.

Management said, and that is confirmed by the following historical information, that Q3 is the weakest quarter of the year from a seasonal standpoint:



Note that this is the average revenue for all quarters going back to 2000. The 3rd quarter is the weakest because of European Summer vacations (CIMT's revenues in this latest quarter came 71% from Europe). So, CIMT achieved these awesome results on its weakest quarter of the year. I'm fully convinced that in the seasonally stronger 4th quarter we'll see $9 M plus in revenue and $0.10 EPS, so everything is on track with my initial forecasts.

Another issue on the conference call which was quite pleasing was that the revenue and EPS growth didn't came mainly from the Microsystem's consolidation, the CEO said "CIMT organic" (it means CIMT without Microsystems consolidation) sold 32% more value in software licenses, because of the version 8.0 new features in die design and 5-axis production. He said the new version is being very well accepted in the marketplace.

License software accounts for 39% of the company's revenue, maintenance accounts for 42% and hardware sales account for 7% (this is from Microsystems). I didn't catch where the remaining 12% come from. Of course, the more licenses sold, the more maintenance revenue thereafter.

Longer term, if this type of revenue growth continues as I believe it will, net profit margin will start to expand in a meaningful way. It was just 6.14% in Q3, but I can see it expanding to 20-25% two years from now (I have 15% in my valuation model).

As for the market reaction, patience is the word. I've been reading Peter Lynch's marvelous stock market book, "One Up on Wall Street", and when referring to time frame he says his investments in stocks are from 3 to 15 years.

So far CIMT is the longest investment I've ever made, and I own it for just nine months. I plan to own it for at least three years.

[David Randolph]

CIMT was the only stock of the Main Portfolio closing in positive territory yesterday

There was a press release out:

• Cimatron and DMG Host a Seminar on Micro Milling
PR Newswire (Mon 9:05am)

Someone at the conference call asked "what are you doing in micro-milling?" or something like that, hence this press release, I think.

We've already seen the 4th quarter is the strongest from a seasonal standpoint and CIMT's leveraged business model, which can make CIMT not just a 5 bagger, but a 10 bagger (after all, it just needs to be a $200 M market cap to be a 10 bagger). But it's going to take a loooottttt of patience my friends.

I'll keep holding CIMT for the long term.

[Garoh]

Any News ?! 

[David Randolph]

Any News ?! 

Hi Garoh, no, no news out for CIMT, the stock just continues to be stuck inside the $2.5 - $3 range.

Just out of curiosity, Cimatron will hold its annual shareholders meeting on Christmas day:

« You are cordially invited to attend the Annual General Meeting of Shareholders of Cimatron Ltd. (the "Company") to be held at 10:00 A.M. (Israel time), on December 25, 2007, at the Company's offices at 11 Gush Etzion Street, Givat Shmuel, Israel»

I guess this is because Jews don't celebrate Christmas or not on the same date we do, but I'm totally ignorant on religious matters.

Fundamentally, on any "normal" market, CIMT would be much higher than what it is now ... fortunately over the long term value always comes up. I expect $0.10 EPS in Q4 2007, bringing the full year 2007 EPS number to $0.22, up from $0.07 in 2006.

I'll keep holding CIMT for the long term.

[eyalgo]

hi! David
I lieve in israel and i can participate in the meeting if  anyone have ideas please be my guest

[Garoh]

Any News ?! 

Hi Garoh, no, no news out for CIMT, the stock just continues to be stuck inside the $2.5 - $3 range.

Just out of curiosity, Cimatron will hold its annual shareholders meeting on Christmas day:

« You are cordially invited to attend the Annual General Meeting of Shareholders of Cimatron Ltd. (the "Company") to be held at 10:00 A.M. (Israel time), on December 25, 2007, at the Company's offices at 11 Gush Etzion Street, Givat Shmuel, Israel»

I guess this is because Jews don't celebrate Christmas or not on the same date we do, but I'm totally ignorant on religious matters.

Fundamentally, on any "normal" market, CIMT would be much higher than what it is now ... fortunately over the long term value always comes up. I expect $0.10 EPS in Q4 2007, bringing the full year 2007 EPS number to $0.22, up from $0.07 in 2006.

I'll keep holding CIMT for the long term.

Hi david thanks for the reply ..
I'm expecting a good jump for this stock , we just need the market to calm down ..

We'er moving in a channel moving very slowly up , I'm just waiting for the good news to come up ..

[David Randolph]

hi! David
I lieve in israel and i can participate in the meeting if  anyone have ideas please be my guest

Thanks for this help eyalgo, but considering the purposes of the meeting ...



... I guess it would be a waste of your time (especially on Christmas day, ok, I need to investigate this - What do Jews do on Christmas? - let's move on, forget this issue) and expenses on the trip.

But thanks

I'm expecting a good jump for this stock , we just need the market to calm down ..

We'er moving in a channel moving very slowly up , I'm just waiting for the good news to come up ..

Yep, the market needs to calm down and hopefully it will respond accordingly to the $0.10 EPS I'm expecting for the 4th quarter.

I'll keep holding CIMT for the long term.

[David Randolph]

CIMT's patience island is getting really long here, especially considering all the positive developments over the last couple of quarters, but I remain confident this story will have an happy ending.

CIMT is a software company. Companies in the Technical & System Software industry trade at an average P/E of 35, yet CIMT's P/E is just 11, if we extrapolate the 3rd quarter results into the future (CIMT earned $0.06 per share in Q3 2007, which, as we've seen, is the weakest quarter of the year from a seasonal standpoint).

The company has a strong balance sheet and it will probably grow through sensible acquisitions, like it did with Microsystem.

I'll keep holding CIMT for the long term. 

[Se7en]

Time to move up, price just above the 200MA now ...