KeyStone’s Your Stock Our Take is Baylin Technologies Inc. (BYL:TSX), Our Star is Twitter Inc. (TWTR:NYSE), Our Dog is Overstock.com Inc. (OSTK:NASDAQ)
This week in our Your Stock, Our Take segment we look at Baylin Technologies Inc. (BYL:TSX), Baylin focuses on research, design, development, manufacturing and sales of passive and active radio frequency products and services. The company appears to be in the midst of a transformational 2018 following two major acquisitions – one just announced this week. Is it a BUY, SELL, or HOLD – we’ll tell you. Our Star of the week is Twitter Inc. (TWTR:NYSE), social networking giant which has seen its stock jumped 30% in the past month after the company solidly broke into profitability in its latest quarter and reported a positive outlook. Finally, our Dog of the week is Overstock.com Inc. (OSTK:NASDAQ) – an online retailer which provides products and services through websites and is also firmly in the Blockchain space after a significant acquisition. On a year-to-date basis, the stock has fallen 52.2%. Is it a Dog or an opportunity?
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Now, let’s dig into the show.
I welcome back my co-host, KeyStone’s VP and Senior Analyst, Aaron Dunn.
Your Stock, Our Take
Sid in Vancouver – I noticed Baylin Technologies had another large acquisition this week. What do you think?
Baylin Technologies Inc. (BYL:TSX)
Current Price: $3.33
Market Cap: $118 million
What does the company do?
Founded in 1978, Baylin provides wireless antenna solutions, primarily antennas. Baylin focuses on research, design, development, manufacturing and sales of passive and active radio frequency products and services.
2018 Potential Transformational Year
On January 17th – paid $49 million to acquire the Advantech Wireless line of business, which designs and manufactures radio frequency and microwave products for wireless communications markets.
On June 28, 2018 (just this week), Baylin announced that it has entered into a share purchase agreement to acquire all of the issued and outstanding shares of Alga Microwave Inc. for total consideration of $27 million, consisting of up-front cash consideration of $21 million, $4 million in Baylin shares and $2 million in deferred consideration, as well as a related agreement to purchase Alga’s operational facilities in Kirkland, Quebec. In connection with the Acquisition, Baylin has entered into an agreement on a “bought deal” basis with a syndicate of underwriters led by Raymond James Ltd. for an offering of 6,451,613 subscription receipts of Baylin at a price of $3.10 per Subscription Receipt for gross proceeds of $20 million and $15 million principal amount of 6.5% extendible convertible unsecured debentures of the company at a price of $1,000 per Debenture for aggregate gross proceeds of $35.0 million.
Alga is a market leader in the engineering, design and development of radio frequency and microwave components, and a leading supplier of radio frequency and microwave solid state power amplifiers, pulsed amplifiers for radar applications, transmitter and transceiver products as well as radio frequency passive components and systems. The transaction is expected to be accretive to 2018 earnings per share as immediate cost savings have already been identified.
Recent Quarterly Financials:
- Revenue for the first quarter ended March 31, 2018 was $29.4 million, an increase of 48.7% over the prior year period.
- Gross profit grew to $10.6 million in the first quarter of 2018, compared to $5.9 million in the first quarter of 2017.
- Adjusted EBITDA was $1.45 million in the first quarter of 2018, compared to $0.2 million in the first quarter of 2017.
Our Take:
From a fundamental perspective Baylin is currently a challenge to value given the uncertainty surrounding cash flows moving forward given the recent two large acquisitions – and very unspecific guidance. At present, the company is trading at roughly an EV/EBITDA of 22 and a price to FFO of 28 – based on the last four quarters. This is a high relative multiple for its business. There is significant potential for the company’s EBITDA to increase over the course of 2018 which would lower the multiple, but the business has historically been lumpy and we continue to see risk in this respect moving forward. We expect year-over-year revenue growth in 2018, but with the recent proposed financing it is unclear as to whether the company can producer “per share” cash flow growth. We expect continued quarterly lumpiness which should be expected in its main business. We may see some value longer-term if cash flow can outstrip the dilution from the recent acquisition. We will continue to monitor the company.
Weekly Star
Twitter Inc. (TWTR:NYSE)
Current Price: $44.79
The stock was trading for $34.70 on May 31st and is trading now (10:55 June 28thth) for $44.38, up 28%. It reached a peak on June 14th, at $46.76, up 35% over the first 14 days of June.
What Does it Do?
Twitter Inc. is a social networking platform for public self-expression and conversation in real time. Its services are live, which includes live commentary, live connections, and live conversations. It generates a majority of its revenue from advertising.
What is Driving the Stock?
On May 3rd 2018, Twitter released quarterly earnings report that showed a large improvement over the same quarter in the previous year.
Quarterly (3 months ended March 2018 compared to 3 months ended March 2017)
- Revenue was $664.9 million compared to $548.3 million, up 21%
- Net Income was a gain of $61.0 million compared to a loss of $61.6 million
- On a diluted per-share basis, a gain of $0.08 compared to a loss of $0.09
- Adjusted Net Income was $133.3 million compared to $45.9 million, up 190%
- On a diluted per-share basis, $0.17 compared to $0.07, up 143%
- Adjusted EBITDA was $244.1 million compared to $169.9 million, up 44%
- On a diluted per-share basis, $0.32 compared to $0.25, up 28%
12 months ended March 2018
- Revenue was $2.6 billion
- Net Income was $14.5 million
- On a diluted per-share basis, it was $0.02
- Adjusted Net Income was $407.7 million
- On a diluted per-share basis, it was $0.54
- Adjusted EBITDA was $937.1 million
- On a diluted per-share basis, it was $1.25
Management Outlook
For Q2, we expect:
- Adjusted EBITDA to be between $245 million and $265 million
- Adjusted EBITDA margin to be between 37% and 38%
- Stock-based compensation expense to be in the range of $85 million to $95 million
For FY 2018, we expect:
- Stock-based compensation expense to be in the range of #350 million to $450 million
- Capital expenditures to be between $375 million and $450 million
Our Take:
Solid Balance Sheet
Balance Sheet as of March 31st
- Current Ratio: 10.23 (current assets $5.4 billion)
- Cash Ratio: 8.57
- Net Cash: $4.4 billion
- Extremely strong cash position
- Goodwill makes up 16% of total assets
- D/E: 0.03
- Very little debt
Valuation
- P/E: 2,219x.
- P/Adjusted Earnings: 82x
- Enterprise/EBITDA: 31x
Note: the company is coming out of losses into profits in the last year, so the P/E multiples using TTM earnings may be exaggerated
We are monitoring the stock as it appears to have transitioned into profitability – and it is about time – the gains over the past month make it our STAR of the week!
Dog of the Week
Overstock.com Inc. (OSTK:NASDAQ)
- com Inc is an online retailer which provides products and services through websites. It offers a broad range of products, including furniture and home décor, apparel and accessories, books, electronics, and other items.
- In late 2014, Overstock.com began working to develop and advance blockchain technology through the formation of a wholly-owned subsidiary Medici Ventures Inc. and acquisition of majority interest in fintech company t0.com, Inc. (tZERO).
- The stock was trading for $38.95 on June 20th and is trading now (9:21am June 28thth) for $29.40, a 25% drop. The majority of this drop happened between June 20th and June 25th. On June 25th, the stock was trading for $30.55, making it a 22% drop over 5 days. On a year-to-date basis, the stock has fallen 52.2%.
Relevant News
From Market Realist Article
- The company sources many of its products from China. In Overstock’s latest 10-K filing, the company stated that changes in tariffs, which increase products’ prices, could prove to be a drag on the financials.
- Overstock was also marred by a Supreme Court ruling on sales tax last week. According to the ruling, states can now collect sales tax from online retailers.
- Overstock added that the ruling won’t have much of an impact on its operations. Overstock underscored the compliance challenges associated with the ruling.
- Following the ruling, Overstock is looking to expand its online and physical presence across new states. The company said it has also started to collect sales tax from consumers in 12,000 US tax jurisdictions.
- Overstock’s bleak 4Q17 results and an impending SEC (Securities and Exchange Commission) investigation related to tZERO’s ICO (initial coin offering) have added to its troubles
- The company has been looking to sell its retail division to fund its blockchain initiatives for quite some time now, but so far, it hasn’t had any success.
Earnings/Growth
Quarterly (3 months ended March 2018 compared to 3 months ended March 2017)
- Revenue was $445.3 million compared to $432.4 million, up 3%
- Net Income was a loss of $50.9 million compared to a loss of $5.9 million
- On a diluted per-share basis, a loss of $1.74 compared to a loss of $0.23
- Adjusted EBITDA was a loss of $45.5 million compared to a Gain of $7.3 million
- On a diluted per-share basis, a loss of $1.59 compared to a gain of $0.29
Management Outlook
We continue to experience difficulties which we believe are due in part to changes that Google, Inc. (“Google”) has made in its natural search engine algorithms. It is taking us longer to analyze and to seek to adapt to the 2017 algorithm adjustments than it took us to respond to Google’s changes in previous years. We have reorganized a large number of resources around addressing this current challenge, as well as seeking to prevent it from occurring again. We have implemented a variety of innovations and technical improvements in this area and expect to continue to do so.
We are also experiencing an increasingly competitive digital marketing landscape. We have competitors who are spending significant amounts on advertising bidding up the cost of certain marketing channels, such as paid keywords. We expect this trend to continue. However, we do have a number of important digital marketing initiatives that we are testing and implementing that we believe will improve our competitive position in this area.
Balance Sheet as of March 31st
- Current Ratio: 1.42 (current assets $317.2 million)
- Net Cash: $219.6 million
- Very strong cash position
- D/E: 0.16
Valuation
- Not making money, no valuation, not investable based on our criteria.
