| 2008 | 2009 | ||||||
| Price: | 4.00 | EPS | |||||
| Shares Out. (in M): | 0 | P/E | |||||
| Market Cap (in $M): | 18 | P/FCF | |||||
| Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
| TEV (in $M): | 0 | TEV/EBIT | |||||
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TSR Inc. (TSRI)
TSRI is a classic value stock selling at six times net income (net of cash) with 50% of its market value in cash and an 8% dividend yield. In the most recent quarter, even in a very competitive environment, sales grew over 9%. Management has been buying shares in the open market and a significant repurchase program was just announced in December. The company has successfully operated in the very competitive IT placement industry for almost forty years. Unlike many other analysts, I try not to make predictions about future stock prices, but at $4 per share I can state with some confidence that TSRI is a very cheap stock with a significant margin of safety.
Background
TSRI, established in 1969, is primarily engaged in the business of providing contract computer programming services to its clients (about 90 in fiscal 2007). The Company provides its clients with technical computer personnel to supplement their in-house information technology staff. The Company's clients for its contract computer programming services consist primarily of Fortune 1000 companies with significant technology budgets located in the
Staffing Services
TSRI’s contract computer programming services provide technical staff to clients to meet the specialized requirements of their IT operations. The technical personnel provided by the Company generally supplement the in-house capabilities of clients. The Company's approach is to make available to its clients a broad range of technical personnel to meet their requirements rather than focusing on specific specialized areas. The Company has staffing capabilities in the areas of mainframe and mid-range computer operations, personal computers and client-server support, internet and e-commerce operations, voice and data communications (including local and wide area networks) and help desk support. The Company's services provide clients with flexibility in staffing their day-to-day operations, as well as special projects, on a short-term or long-term basis.
Although there is significant competition for software professionals with the skills and experience necessary to perform the services offered by the Company, TSRI has been very successful over its history in attracting and placing personnel. In the past few years, as everyone knows, an increasing number of companies are using or are considering using low cost offshore outsourcing centers, particularly in
The Company is currently in the process of hiring additional account executives and technical recruiters in its existing offices to address increased competition and to promote revenue growth. The hiring process has been taking longer than expected due to a combination of limited qualified candidates and increased compensation expectations of qualified candidates.
Marketing and Clients
TSRI focuses its marketing efforts on large businesses and institutions with significant IT budgets and recurring staffing and software development needs. The Company provided services to approximately 90 clients during the 2007 fiscal year as compared to 80 in the prior fiscal year. The Company has historically derived a significant percentage of its total revenues from a relatively small number of clients. In the 2007 fiscal year, the Company had two clients which constituted more than 10% of consolidated revenues (Procurestaff Ltd. (AT &T), 19.1% and Ensemble-Chimes, 11.3%). Both these companies are “vendor management services” which are third party companies retained by clients to centralize the consultant hiring process. Under this system, the third party retains TSRI to provide contract computer programming services and TSRI bills the third party and the third party bills the ultimate customer. Unfortunately, this process has weakened the relationship between TSRI and its client contacts, the project managers, who the Company would normally work directly with to place consultants. These changes have also reduced TSRI’s profit margins over the past few years because the vendor management company is retained for the purpose of keeping costs down for the end client and receives a processing fee which is deducted from the payment to the Company. The Company has obviously been hurt by this trend, but has adapted well by trying to grow revenues and controlling SG & A.
Professional Recruitment
In addition to using internet based job boards such as Dice, Net Temps and Monster, TSRI maintains a database of over 100,000 technical personnel with a wide range of skills. The Company uses a sophisticated proprietary computer system to match a potential employee's skills and experience with client requirements. The Company periodically contacts personnel in its database to update their availability, skills, employment interests and other matters and continually updates its database. This database is made available to the account executives and recruiters at each of the Company's offices. TSRI considers its database to be a valuable competitive advantage.
RECENT PERFORMANCE
(Amounts in Thousands, Except Per Share Data)
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MAY 31, May 31, May 31, May 31, |
Revenues have held up well over the past few years, but margins have clearly been hurt by the trend to third-party vendor management services. It should be noted that revenues held up well despite the loss of a major customer, The New York City Department of Education.
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Three Months Ended |
Valuation
First quarter revenues increased over 9% from last year’s comparable quarter and about 5% sequentially. A higher tax rate versus last year kept EPS flat. The demand for higher skilled consultants drove revenues. The company appears to be on the road to make about $.40 per share this year. At $4 the stock would appear to have a P/E of about 10, which is deceptive given that the company has almost $2 per share in cash. If we back out interest and dividend income, EPS would be about 9 cents per share this quarter and about an expected 35 cents per share in fiscal 2008. Adjusting the share price for about $2 in cash, would give us an adjusted P/E of less than 6!
The balance sheet is pristine with, as we mentioned, $2 per share in cash, no debt and a current ratio of 4.2 (including long term marketable securities). Book value is a little over $3 per share.
The Company appears committed to rewarding shareholders. TSRI has committed to pay a $.32 dividend this year (the same a last year), resulting in a yield of about 8%. The company is paying out about 80% of its earnings to shareholders. In addition, the company announced a 300,000 share stock repurchase program in December.
What is a reasonable valuation for these shares? If we assume a conservative multiple of 10 times operating net income of $.35 and add the $2 in cash on the balance sheet we get a value of $5.50 for the shares, which is over 37% above the current share price.
This valuation assumes no growth. The CEO, Joe Hughes, has committed to put significant effort into growing the company in the coming quarters. The company is intensifying recruitment efforts for experienced sales personnel and actively (but selectively) looking to purchase a small staffing firm. The critical objective for an acquisition will be to retain the existing owners. I can’t forecast how successful Hughes will be in these efforts, but he knows this business well and has a reasonable probability of success.
Finally, Hughes has been an active buyer of the shares at the current $4 level over the past five months. This further confirms the value of the shares at the current levels.
Concerns
This opportunity looks enticing but, like almost all situations, there are some concerns here:
1) Although the shift to
2) The growth in third party relationship managers has hurt margins and may continue to impact the company.
3) The CEO, Hughes, own over 40% of the shares outstanding, which is not necessarily a negative, but he does pay himself over $700,000 in total compensation which is very high for a company of TSRI’s size.
4) The market cap and float are small and the shares are not very liquid. Purchase requires patience.
5) The company has demonstrated an ability to recover from the loss of major customers, but it still is dependant on several major accounts.
The Bottom Line
The company has been managed extremely well in a difficult and challenging IT environment. It has remained solidly profitable over the years and at the current valuation it appears to be significantly undervalued at less than six times operating after tax earnings and with 50% of its market cap in cash. Management continues to show confidence in the shares by paying a high dividend, purchasing shares in the open market for their own account and for the Company.
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