Pegasus Wireless Corp. PGWC S W
June 02, 2006 - 4:44pm EST by
lindsay790
2006 2007
Price: 10.35 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 778 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT
Borrow Cost: NA

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Description

PEGASUS WIRELESS CORP.: STRONG SELL
(Ticker: PGWC; Recent Price: $10.35; Target Price: $0.31)

Pegasus Wireless (PGWC) seeks to provide its customers with a number of broadband wireless networking solutions through a mix of hardware and software products. In a crowded market with large players such as Linksys (owned by Cisco Systems), D-Link, Netgear, and Belkin, we think this company is outmatched. In addition, PGWC sells products with weak patent protection which, if ever proven successful, could be easily manufactured by these competitors. We believe this company’s valuation is, at best, a product of momentum trading and, at worst, a complete sham.

PGWC has seen its share price increase from $3.30 in June 2005 to a recent high of $18.65 last month, bringing the company’s market capitalization at that time to nearly $1.2 billion. This meteoric rise comes on the back of three acquisitions aimed at vertical integration and insider buying at increasing share prices, mostly by the company’s president, Jasper “Jay” Knabb.

History of Jasper Knabb

Knabb has been involved with several companies that have had large increases in share value followed by large declines, a boom-bust pattern.

BeachAccess.net /Biofiltration Systems

In 1999 and 2000 Jasper Knabb was able to sell his wireless networking company, BeachAccess.net, to the water treatment company Biofiltration Systems, later BIFS Technologies (BIFT), in a 100 percent stock transaction while remaining CEO of the Beach Access subsidiary. It is interesting to note that there is no mention of Biofiltration Systems in Knabb’s PGWC biography. With the possible help of stock promoters, acquisitions, and a slew of press releases, the price of BIFT shares surged from a price of $0.03 on March 3, 2000 to a high of $2.26 in less than six months.

In an August 23, 2000 Bloomberg article, BIFT was linked with a stock promoter by the name of Orville Baldridge, a man accused of the illegal promotion of several pink sheet stocks and who owned as much as 6% of BIFT. According to the article, he had been sold the stock at $0.25 so he could resell those shares to the public at a profit “to get the stock going.” BIFT reported in February of 2000 that its revenue for its entire existence was only $2,000, and it had just $3,000 in the bank. Yet, this small water treatment company turned internet company had a market capitalization of nearly $1.2 billion a few months later.

It did not take long after the stock was valued at over $1 billion for investors to realize that the acquisitions made by BIFT were of no incremental value. In a 2000 quarterly report, BIFT said of its two most recent acquisition targets, Revcon Technologies and Alliance Computer Systems, “Neither . . . had significant operations during the six months ended June 30, 2000." By mid-September, the price had fallen to $0.41 per share, and by December it fell to $0.13.

Wireless Frontier Internet, Inc.

Four years later, Knabb was again at the head of an overvalued internet company, Wireless Frontier Internet, Inc. Between January and March of 2004, Wireless Frontier acquired four companies, leading to an increase in share price from $0.15 on January 21 of 2004 to $0.90 on March 23. Again, investors discovered the acquisitions were of little incremental value, and again Knabb’s company’s stock plunged—from its high of $0.93 on April 1 to only $0.13 by June 30.

PGWC’s share price rise

Once again Knabb is at a company that has had a huge increase in its stock price during a time of acquisitions and frequent press releases. In the months of December and January, PGWC acquired a 51% controlling interest in three companies as follows:


Company Name Cost
AMAX Information Technology, Inc. $8 Million
Cnet Technology, Inc. $1 Million
SKI Technologies, Inc. $1.3 Million


These three acquisitions were made for the purpose of adding distribution and manufacturing capabilities. The AMAX acquisition was financed with a 50/50 cash/stock mix for the purpose of leveraging AMAX’s distribution channels. In the company’s December 10-K, it attributes the $14 million increase in revenue solely to revenues from the AMAX acquisition. However, AMAX earned only an 11% gross margin; thus, little was added to the bottom line. Furthermore, as PGWC only has a 51% stake in AMAX, it is only entitled to 51% of this incremental revenue. Both Cnet and SKI were purchased as manufacturers for PGWC’s products. Cnet was purchased with cash and SKI was purchased with a 50/50 cash/stock mix. Both of these acquisitions and the cash portion of the AMAX acquisition were funded through Knabb’s purchase of stock. For the AMAX purchase he bought $4 million worth of stock for $7 per share. For Cnet and SKI, he bought $2 million worth of stock for each purchase and paid $9 and $10 per share respectively. As Knabb bought at higher and higher prices the stock climbed from $7.30 in mid December, prior to the acquisitions, to a high of $18.65 earlier this month. In addition to these acquisitions, PGWC signed an LOI to acquire a product line that would integrate Apple computers with home entertainment systems from a company called maccontrol.

PGWC’s financing

Knabb’s stock purchases used to fund acquisitions totaled $8 million. At the same time, he has never received a salary. It is surprising to see Knabb invest his own money so heavily into this company when his past efforts in the wireless sector have failed. We believe his stock purchases are giving false signs to the market leading to its current excessive valuation.

PGWC valuation

Prior to the acquisitions, PGWC was EBITDA-negative, so for valuation purposes, an incredibly generous valuation of 4x sales for the legacy business will be used. For the year ended June 30, 2005 the company had sales of $3.2 million implying the company was worth nearly $13 million. Adding the purchase price of the acquisitions, the company would be worth about $23 million at present date—nowhere near PGWC’s current market capitalization of nearly $800 million. No amount of synergies would justify this much incremental value over a sum-of-the-parts valuation.

PGWC’s products

As if the history of Jasper Knabb’s company and the hefty valuation were not enough to deter investors, its product line has questionable potential. Its flagship product, the WiJET, is an add-on device designed to wirelessly connect computers, projectors, and plasma/LCD screens on one network. The lure of such a device for businesses is supposed freedom while giving presentations on PowerPoint. But wireless functionality is hardly needed for stationary objects such as a projector or television screen. In addition, we think companies are likely to opt for wireless connectivity for presentations only when purchasing a new setup—not by upgrading an existing one. Furthermore, the development of projectors with internal wireless connectivity, by companies such as Epson and InFocus, render the WiJET subject to meaningful competition. In a discussion with a Gateway representative, we were told that sales of the wireless projectors by Epson and InFocus consistently surpass those of the PGWC products.

Within the consumer goods market, the WiJET would be primarily used to wirelessly access multimedia stored on the computer via a television screen. Currently, there are several competitors offering products with the same function. For example, D-Link offers a wireless media player that can connect to data on a computer’s hard disk. The device incorporates a DVD player for movies and a memory card reader for pictures, all for less than a complete WiJET setup.

Bottom Line

Through acquisitions, press releases, and insider buying, PGWC has been able to post enormous gains in its market capitalization. Upon closer examination, the acquisitions cannot support a valuation implied by the current share price. In addition, a member of the company’s top management, Knabb, has had a history of leading companies that post large gains in stock price over very short time frames only to have prices come crashing down soon thereafter. Most importantly, the company cannot afford to compete in a market consisting of larger, established players that have more capital and greater brand recognition.

PGWC’s acquisitions and insider buying have given the market a false sense of growth and momentum, in our opinion. The market capitalization seems irrational, and to us, it is only a matter of time until this company returns to penny stock status.

Catalyst

1. Announcement of earnings not supporting valuation.
2. Market coming to its senses.
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