Description

 Valuation Statistics:

Thesis / Recommendation:

I am recommending a long position in Volt Information Sciences (VISI).  Volt is a US-focused staffing business with a strong brand and franchise, but is currently trading at a depressed valuation.  It trades at this depressed valuation, because it has been undergoing an accounting restatement since 2009, and was delisted to the OTC market in February 2011.  It is still not current on its financials, but in April 2013, the company finally completed the restatement and filed its 2010 10-K.  It is in the process of getting current—something that I anticipate will take until September or October of this year. 

The company was founded by the Shaw family in the 1950, and they currently own ~35% of the stock and exercise significant control over the company.  Over the years, Volt built a strong staffing franchise, particularly in technology / IT staffing, and is respected and thought of as a Tier 1 player by its Fortune 500 customers, which is confirmed by speaking with its staffing industry peers, and with customers and staffing industry executives.  However, Volt’s internal and financial management never grew up with the company, and this ultimately cost it dearly when it was forced to go through a major restatement process covering multiple areas of the business.  The restatement was not due to any fraud or intent to mislead but rather by extremely poor internal financial controls that snowballed over many years to create an extremely costly and time consuming clean-up process. 

About halfway into the restatement process, the Board appointed a new CEO and CFO.  The CFO was external to the company, and had been a partner at KPMG for many years prior, while the CEO was promoted internally, and replaced the founder’s son.  The new management team worked tirelessly to complete the restatement, as well as to upgrade and fix the internal processes that lead to the accounting issues.  Currently, the team is focused on improving the profitability of the business by exiting certain unprofitable business lines and contracts, and careful cost reduction.

Volt trades at less than half of peer valuations on EV / sales and EV / EBITDA on a normalized basis.  It currently trades at just 11% of LTM staffing revenues, or about 7% of staffing revenues if factoring in the valuation of its non-staffing segment.  If it trades closer to peer multiples and management is able to execute on its margin improvement plan, there is 150% to 200% upside over 12 to 24 months.  At the same time, there is little downside in the stock given that it trades at 20% to 30% discount to peer profitability multiples even with its current depressed margins, and just 60% of Tangible Book value of ~$13 per share.  The stock should appreciate materially over the next coming 12 to 24 months as it is relisted, gains greater liquidity, and margins improve through various management initiatives. 

Business Description:

Volt Information Sciences was founded in 1950 by the brothers Bill and Jerome Shaw and in 1957 became the first publicly traded staffing company. Currently an estimated 35% of the shares outstanding are held by members of the Shaw family.

Volt is currently has four divisions: Staffing Services, Computer Systems, Telecommunications Services and Directory Publishing. The Staffing and Computer Systems are the vast majority of the value in the company, while the Telecommunications Services and Directory Publishing businesses are either extremely small or being exited. The Staffing Services provides an estimated 80% of the profitability for the business, and the Computer Systems business provides the remaining 20%.  Volt is in the process of exiting the Telecommunications, Directory and various components of the Computer Systems business.

The Staffing Services:  This segment provides temporary staffing services to the technical services (70% of revenues) and the administrative and industrial (30% of revenues) sectors.  The technical services division provides specialized personnel for the information technology, engineering, design, life sciences, and technical support sectors.  The A&I division provides personnel for administrative, clerical, accounting and financial, call center, and light industrial applications.

The Computer Systems:  This segment is comprised of three divisions: Volt Delta, Maintech and LSSiDATA.  The company implies that three businesses are approximately 1/3 of revenues for this segement.  Volt Delta provides directory assistance systems for the telecommunications industry.  Maintech provides IT service solutions to corporate clients.  LSSiDATA, which was acquired in 2007 for $70M, takes consumer and business databases to provide companies with tools to improve their marketing capabilities

I will not spend time here discussing the Telecommunications or Directory businesses as they are not currently material to understanding Volt.

Background on Restatement:

The restatement covered multiple areas on the income statement and balance sheet, but did not have a net impact on cash flows, cash or debt balances.  It took almost 4 years to complete, and cost the company over $100M.   The primary focus of the restatement was on revenue recognition and cost recognition for contracts in the Computer Systems and in particular the Volt Delta segment.  A full discussion on the restatement and the reasons behind it would be an entire note in itself, but the focus now is on the much more straightforward task of getting current on 2011 through 2013 financials.  While I believe the restatement took significantly longer than expected, and shareholders and potential investors are right to question why it was so costly to complete this restatement, the current management team was not in place until 2012. 

Reason for Stock to Appreciate:

The stock should be relisted to the NYSE within the next year.  When that happens, it should essentially be a re-IPO of the company, with new management, new shareholder base and a fresh story.  In addition, management indicates that they are targeting significant margin improvement from current levels in the Staffing segment, as well as exiting several unprofitable businesses in the Computer Systems segment.  As fundamentals improve and the stock gets great liquidity and coverage by investors, I expect the shares to appreciate significantly. 

Valuation:

The table below outlines Volt’s valuation under different scenarios. 

On the staffing business, I assume in the bear case that the management team is unable to improve margins at all and in the bull case I assume that they hit their long term target of achieving margins closer to that of their closest public comparable, CDI Corporation.  CDI has 2.8% LTM EBIT margins, which is what I’ve assumed in my bull case. 

Because at least some pieces of the Computer Systems segment are likely to be shut down or divested, I do not attempt to estimate the EBITDA for the segment, and instead assign a value to the segment.  The best performing segment of the Computer Systems division is  Maintech, and it is producing about $8M of EBIT currently.  Valuing Maintech which is just 1/3 of segment revenues at a modest 6x equates to the bear case valuation range for this segment.  In addition, Volt paid $70M for LSSiData in 2007.  Even valuing this at a fraction of their purchase price and assigning a reasonable valuation to Maintech equates to the base case valuation range for the segment. 

In addition to revenues and earnings, there is significant downside protection in the stock based its balance sheet / balance sheet liquidation value even excluding the value of the operating businesses.  The company has significant net working capital, and I estimate that its net current assets less total liabilities equates to about $6 per share.  In addition, its tangible book value is currently approximately $13 per share. 

Lastly, staffing is a historically acquisitive industry and there are several companies which could be interested in acquiring a strong IT staffing franchise like Volt.  M&A multiples in the staffing industry for businesses similar to Volt have historically been 25% to 30% of revenues.  There are significant synergies to an acquirer in the staffing industry of Volt.  I have reason to believe that at least certain members of the Shaw family are frustrated with the slow pace of the relisting process as well as the share price.  In a take-out scenario, the shares are worth in the range of the bull case, or $25 to $30 per share.  It will take the shares to be relisted the stock to appreciate a bit in the market to achieve this M&A valuation, but it seems like a definitely possibility over a 1 to 2 year period. 

Risks:

The biggest risk is that the new management team fails to execute on its goals to improve margins and exit unprofitable businesses.  I believe that management has credible goals and that over half of the margin improvement can be accomplished through cost cutting initiatives and exiting unprofitable pieces of the computer systems segment.

The other risk is timing related to the company getting its financials current.  While we believe the risk is remote at this point that the company will run into issues preventing it from getting current, there is a risk that the process drags on and leads to investor fatigue and a reduced IRR on this investment. 

Catalyst