VSR - Versar Inc.

[west]

Versar does construction and environment projects for the US government (and, to a lesser degree, for private companies).

 

I think Versar grossly undervalued based on their expected future revenues and expected margins on those revenues.  More than likely Versar will do $200m in revenues if not in 2015, then in 2016.  If you apply the industry average operating margin (and their historical average operating margin) of 6% to $200m in expected revenues this will get you $12m in EBIT, and $7.2m in after-tax net income, assuming a 40% tax rate.

 

If you assume a discount rate on that net income of 10%, and assume zero future growth going forward (a very pessimistic assumption, see below), you get an EV calculation for the firm of $7.2m/10% = ~$72m.  Today their EV is ~$47m, with ~$16m of that being their debt net their non-operating cash and the rest being the equity.  If you assume there is no future debt issuance, this implies an upside for the equity of at least 70%.

 

Where did I come up with the revenue prediction for next year?  Versar’s funded backlog has historically represented from 90.6% (in the worst year) to 46.7% (in the best year) of the next twelve months revenues.  If you assume the median relationship over the last ten years of backlog book-to-bill % of 56.7%, you get expected revenues of $210m for next year based on the current funded backlog of $119m.  If you assume the mean relationship of 60.2%, you get expected revenues for next year of ~$200m.  (The $119m funded backlog figure does NOT include any increase in backlog due to the contract they signed on August 13th.)  In addition, the CEO has stated in a conference call that they expect (but have not given guidance) to hit $200m in revenues in the near future.

 

The kicker is Versar’s funded backlog has grown by an average (geometric) of 10% per year over the last ten years.  Assuming a stable relationship between funded backlog and the next twelve months of revenue, this implies an expected 10% growth in revenue per year on average going forward.  At least as long as you assume the future will look like the past.

 

Why is the stock cheap now?  They’ve had “digestion issues” in the last few quarters.  They recently bought two new companies and have had larger than expected costs related to the initial integration of them.  I’m pretty sure these issues will be worked out in the next few years, if not sooner, and that the firm’s margins will return to the industry’s (and Versar’s historic) average margins.

 

The one downside to the company is that they’ve had a tendency to grow through acquisitions.  I generally prefer organic growth myself (who doesn’t?), but my naive and not-too-in-depth analysis shows that their acquisitions in the past have not been poor, if they haven’t been great.

 

Dumb, numbers-only based analysis:

 

Current P/B: 0.85x

Historical ROIC for the last four years: 35.4% (variance of 0.047)

Historical BVPS growth (geometric): 14.5%

Lowest Price-to-Prior Year Book for the last eight years: 0.63x

Highest Price-to-Prior Year Book for the last eight years: 9.90x

 

PS- I am long.

 

[cobafdek]

Thanks for this.

 

However, decimal point misplacement?  Latest 10Q says notes payable $1.6M, instead of $16M.  Therefore, current EV more like $33M, implying an even better equity upside (assuming revenue projections play out)?

 

P.S.  Collected any Japanese net-nets yet?  How many?  Harder or easier to pull the trigger compared to VSR?

[west]

I capitalized future lease expenses and put them into the EV calculation which is probably why there's the big difference in the calculation.  They also recently went into debt to purchase a new company, which isn't reflected on their most recent quarter's balance sheet.  You have to go into the 8-K related to the acquisition and figure the new debt-net-of-excess-cash amount by hand.  And the excess cash amount changed as well from their last 10-Q since they paid out some of their excess cash for the acquisition.

 

From an upside standpoint, the Japanese stocks I posted probably will have better returns.  However, they might take longer to jump, individually, than Versar might, since they seem to be in an overlooked part of the world.

 

From an "enjoying the investment process" standpoint, I liked researching Versar a lot better.  First, I can read pretty much everything that's out there about it.  In addition, there was just enough information out there to make researching it a challenge, but not too hard, for someone who's at my skill level.

 

Fwiw, I don't have a huge position in Versar, but it's quite a bit larger than I have with any individual Japanese stock.  Unfortunately, I don't know the government contracting business well enough to be 100% confident with a more concentrated position in Versar.

 

[west]

I just wanted to dump (*edit: bump) this thread.  I would love to hear other people's thoughts/feedback on this idea.

[west]

Up about 50% from my purchase price on an unjustified hazmat products manufacturing+ebola craze in the market.  I still think it's worth at least $6, but it definitely went up for the wrong reason.

 

Sometimes it's better to be lucky than good, I suppose.

[west]

Sold!  At a 90.5% gain over about 46 days.  Or 717.91% annualized!

 

I am not unhappy!

 

(Even if the jump that happened happened because of luck...)

 

[yadayada]

now al you gotta do is not contract ebola, to come out on top.

[LesPaul]

Congrats!

[west]

Congrats!

 

Thanks :D

[Picasso]

Good job west! 

 

This seems to fall into my thesis that threads under a few pages are much more interesting investment wise than the 100+ page threads.

[AZ_Value]

Good job west! 

 

This seems to fall into my thesis that threads under a few pages are much more interesting investment wise than the 100+ page threads.

 

Picasso, you'd be surprised how much this is true.

With this one sentence you've unlocked one of the many mysteries of boards like the CoB&F board

[west]

I just wish these small caps were discussed a quarter as much as large caps like SHLD, AAPL, etc. are.  After all, to quote my signature:

 

My point is that to be successful in this business, you don't have to be better than everybody, everywhere, just better than everybody in the league in which you play.

- Julian Robertson

 

Why analyze a large cap when you can analyze a small cap, one that has significantly more upside and less uncertainty, in a quarter of the amount of time?

 

Also, in regards to "this board should focus more on the short threads", it is nice to hear other people opinions, since other people often see things or think about things I don't...

[Picasso]

I just wish these small caps were discussed a quarter as much as large caps like SHLD, AAPL, etc. are.  After all, to quote my signature:

 

My point is that to be successful in this business, you don't have to be better than everybody, everywhere, just better than everybody in the league in which you play.

- Julian Robertson

 

Why analyze a large cap when you can analyze a small cap, one that has significantly more upside and less uncertainty, in a quarter of the amount of time?

 

Also, in regards to "this board should focus more on the short threads", it is nice to hear other people opinions, since other people often see things or think about things I don't...

 

VSR seems to have practically round tripped.  Is there any change to your estimate of $6 fair value since the run up?

[west]

I just wish these small caps were discussed a quarter as much as large caps like SHLD, AAPL, etc. are.  After all, to quote my signature:

 

My point is that to be successful in this business, you don't have to be better than everybody, everywhere, just better than everybody in the league in which you play.

- Julian Robertson

 

Why analyze a large cap when you can analyze a small cap, one that has significantly more upside and less uncertainty, in a quarter of the amount of time?

 

Also, in regards to "this board should focus more on the short threads", it is nice to hear other people opinions, since other people often see things or think about things I don't...

 

VSR seems to have practically round tripped.  Is there any change to your estimate of $6 fair value since the run up?

 

My estimated price remains $6.20.  According to their most recent annual report, they shut down their Hazmat products division, so I don't think sales from that's going to add anything to the top line any time soon.  They might be able to spin it up (if demand actually requires), but I wouldn't bank on it.

 

I will say though, in their most recent conference call they stated explicitly that their backlog basicly doubled.  Meaning the thesis I presented above is basically guaranteed.  (I hope this fact is drowned out about non-investing talk on this board!  Less competition if the price drops again!).  I actually made this a huge position in my portfolio when I read this (I don't know the exact number, but around 30%).

 

I'm guessing Versar will dump below $3.50 once all this hysteria dies down.  I will buying if that happens.

[west]

I'm back in.  Earning are due out in the near future.

[west]

Lots of great news was released on Wednesday.  I highly recommend listening to their half-hour long earnings call or reading the transcript for it.  Here's an mp3 of the earnings call for the lazy:

 

http://www.versar.com/audio/Versar_110514.mp3

 

This is a fairly easy investment to understand and I believe it's going to have some pretty good upside in the next year or so.  I have already doubled my money once.  I'd love to have some more members of the board with me this time around :)

 

[Picasso]

That fact that no one else is interested makes me interested.  I'll dig in some more this weekend and open up a position if I like what I see.

 

Thanks for the updates west.

[NeverLoseMoney]

Thanks for the idea. I've taken a brief look at some filings and also listened to the conference call.

 

One thing that stands out for me is that the $98.3m runway repair contract for the Dover Air Force Base is 41% of the total backlog on September 30. At around 22:00 min. in the conference call, an analyst says that margins on this type of work are relatively low. The CEO responded that their team and the limited number of subs involved will allow them to do the work cost effective and profitable, but he didn't really dispute the analyst's claim that the margins are relatively low for this contract.

 

I don't have any insight about this unfortunately. It does seem important here because of the size of this contract.

[west]

Thanks for the idea. I've taken a brief look at some filings and also listened to the conference call.

 

One thing that stands out for me is that the $98.3m runway repair contract for the Dover Air Force Base is 41% of the total backlog on September 30. At around 22:00 min. in the conference call, an analyst says that margins on this type of work are relatively low. The CEO responded that their team and the limited number of subs involved will allow them to do the work cost effective and profitable, but he didn't really dispute the analyst's claim that the margins are relatively low for this contract.

 

I don't have any insight about this unfortunately. It does seem important here because of the size of this contract.

 

My guess, conservatively, is that the EBIT margins on that project will be 2% (no typo), and that 40% will be converted in 2015.  Even with those assumptions, if you look at the rest of Versar, I believe the upside potential is good.

[Haasje]

Sizeable deal for this compamy:

 

http://seekingalpha.com/pr/13205536-versar-inc-awarded-general-services-adminstration-contract-valued-at-4_5-million