TSR Inc. TSRI
August 22, 2003 - 1:03pm EST by
bowd57
2003 2004
Price: 6.57 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 29 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

This is short write-up about a short-term trade. TSRI has announced that it will be paying $.60 annual dividend -- a 9.1% yield at the current price -- but hasn't declared it yet, so the stock doesn't show up on any dividend screens. They'll declare the dividend sometime in early September. I expect the price to rise as yield-seekers discover the stock. Even if the trade doesn't work out, the company is still pretty cheap. Given the limited liquidity, small size and short time-frame, this is a personal-account only idea.


The Skinny

TSRI provides contract programmers in the New York City area. Hmm ... technology ... New York City ... as you can imagine, business hasn't been great lately. I saw a recent statistic in the New York Times pegging technology job losses in the city at over 30%. Earnings have declined from a peak of $.87 in 2000 to $.53 in 2003. But the company has still been solidly profitable despite the worst imaginable environment. As they point out, "TSR believes it is one of the few small IT companies that has been able to remain profitable and build its cash during this very severe IT slump." I believe them; a quick comp search turned up these tickers, none of which are making money:

TSCC
THTH.OB
VTPR.OB
JUDG
HAKI
BUTL


Book/share increased from $3.23 in 1999 to $5.26 at fiscal year end of 2003 and cash has been increasing the whole time.

The Business

The staffing industry is competitive and fragmented. Barriers to entry are low -- get a cell-phone and a web-site, and you're in business. You don't even need an office; Manhattan is filled with convenient hotel lobbies.

On the other hand, it's all about relationships and reputation, intangible assets that take a long time to build but can be destroyed in a hurry. TSR has been in business in 1969 so they're doing something right. Also, contract programming is higher-value than other segments of the staffing industry. Hiring programmers in general is tough because resumes and credentials mean nothing. And when you need them in a hurry for a short term project, you can't afford any mistakes. A staffing agency that can actually produce qualified people is valuable.

(For the propellerheads out there, I once asked an interviewee to find and remove a node from a linked list by id. Given:

struct Node {
int id;
Node* next;
};

, he was to implement:

Node* FindAndRemoveNode(const Node* root, const int idToFind);

What he came up with was:

main(){

Node node;
string str;
while (1) {
scanf(str);
printf(str);
}
}

-- and this guy claimed 10 years experience _teaching_ C++! If you're not a propellerhead, the guy produced clueless gibberish and this is an example of the difficulties of technical recruiting.)

Trading History

If you look at a long term chart you'll see a huge spike around '98-'99, when the company benefitted from the Year 2000 Remediation bubble. Given declining earnings and disappointed stockholders, it's not suprising that it drifted down to unreasonable levels. For most of the last couple of years, the stock has been trading for less than net current assets (in the spirit of full disclosure and bragging rights, that's where I was buying, although I'm also eating my own cooking on this trade). The spike in mid-June of this year was due their announcement of a $2 special dividend and the initiation of a regular $.15 quarterly dividend.

Valuation

The company had net current assets of $22.75MM at year end consisting of cash, securities and high quality receivables. The $2 special decreased NCA to about $14.2MM. TTM earnings were $2.36MM. At current prices, you're buying the company for net current assets plus 6.2x depressed earnings, or cash + 8.4x. That's cheap. Given management's success in navigating the downturn, I think the company might deserve a premium valuation. I don't know when demand for IT services is going to turn back up in the NYC metropolitan region, but it presumably will someday. It's interesting to note that brokers have been reporting decent results lately.

Catalyst/Target

At current prices, TSRI will be one of the highest yielding C-corps. It's true that they didn't cover the $.60 dividend this year, but they did last year, and 2002 was NOT a good year for IT services. With $9MM in cash and securities left, it will be about 32 years before the shortfall starts to hit if earnings stabilize at the current level. Management owns almost 50% of the company, so they're motivated to continue the dividend. I think the stock will be very attractive to taxable income investors. My guess is that over the next 2 months it will trade up to at least an 8% yield, or $7.50, for a 14% gain. That annualizes to the usual huge number. If things work out, it's a nice way to quickly sock a couple of grand in your IRA; if not, the stock is still cheap.

Risks

Business could continue to deteriorate.
They might renege on the dividend.
Too many people participating in the trade will limit any pop -- small bills only, guys!

Catalyst

Dividend declaration
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