KeyStone’s Your Stock Our Take: ZoomerMedia Limited (ZUM:TSX-V) and NamSys Inc. (CTZ:TSX-V) and STAR: Tesla Inc. (TSLA:NASDAQ).
Our first Your Stock Our Take is on, ZoomerMedia Limited (ZUM:TSX-V), a Canadian multimedia company targeting the 45+ aged demographic. The company owns and creates content on television, radio, in print, digital, as well as live events. A listener asks us our take on this company which screened well for him but he saw the CEO’s high compensation as an issue.
Our second Your Stock Our Take is NamSys Inc. (CTZ:TSX-V), a profitable micro-cap, with a solid balance sheet that develops and sells software solutions for currency management and processing for the banking and merchant industries principally in North America. A listener asks us our take on the stock which we have profiled for several years in our Cash Rich, Profitable Small-Cap Special Report.
Our Star of the Week, Tesla Inc. (TSLA:NASDAQ), which designs, develops, manufactures and sells high-performance fully electric vehicles and solar energy generation and energy storage products. The stock was up around 58% this week and up a whopping 292% in the past 6-months. We let you know if it is sustainable.
Your Stock, Our Take – Question
They’re an interesting company that would have screened through VERY high in my system except for the fact that a small company is paying their CEO 1.4M annually which to me is a reg flag. The CEO also has super high insider ownership (63%) which doesn’t bother me as much but is another factor I’d rather not see. If not for CEO pay I’d be all over them based on the profitable growth metrics and high cash position. I was curious if you guys came to a similar conclusion, or if you would forgive the high CEO pay and board control in light of the stellar growth and cash position.
- Andrew – via Facebook.
Your Stock, Our Take
ZoomerMedia Limited (ZUM:TSX-V)
Current Price: $0.055
Market Cap: $35.9 million
What does the company do?
ZoomerMedia Ltd is a Canadian multimedia company targeting the 45+ aged demographic. The company owns and creates content on television, radio, in print, digital, as well as live events. Television assets include VisionTV, OneTV, JoyTV and FaithTV. Radio assets include the New Classic FM station and ZoomerRadio. The company also owns the publication Everything Zoomer as well as additional publications and media assets.
I’m going to start with the listeners first concern about the company which is the CEO pay. When I want to know executive compensation for a Canadian stock, I look at the proxy circular which is released to investors every year. Our listener is correct that the CEO pay is approximately $1.4 million annually. I think that the compensation is ridiculous for a company the size of Zoomer. Nearly all of this compensation for 2019 was in the form of salary and not options which often make up a significant portion of CEO pay.
I would be less bothered by the high level of insider ownership which is generally a good sign. That said, my opinion here depends on how the CEO wields his power in the company and whether or not he is creating value for the other shareholders.
Recent Financial Performance
- The company released its fiscal Q1 results on January 16th.
- Quarterly revenue was $14.8 million which was up 6% compared to the same quarter in the previous year.
- Operating income was $1.4 million which was up from $237,000 in the previous year.
- Operating cash flow was $4.2 million, up from $2.2 million.
- The company does appear to have a strong cash balance of $14.8 million but there is a line item on the balance called “deferred lease liability” of $22 million. That essentially looks to be like its an operating lease which we would treat as debt.
- In the last fiscal year, revenue was about flat at about $53 million and net income was about $1.6 million compared to $110,000 in the year before.
- The company has 652,000,000 shares outstanding.
I’ll be frank…Zoomer is not the kind of company that KeyStone would recommend. There are some positive things to say about the company such as the growth in operating income in the last quarter and last fiscal year. However, there are some major concerns I would have as a potential investor.
I do believe that the CEO pay is a far too high. I have no issues with CEO’s making lots of money if they are adding value to investors. However, in the case of Zoomer, the stock price performance has not been good with little to no value provided to investors. Zoomer is a tiny company with a market cap of less than $40 million and $1.4 million in CEO pay sucks a lot of value out of the company and hasn’t in any way benefited shareholders.
Financially, there is some good profit growth and the company appears to generate significant cash flow. However, we aren’t confident that this will be a sustainably profitable growth stock. There isn’t much growth in revenue and margins are low. It seems that the growth in profit has been more the result of modest reduction in operating expenses. I am not personally familiar with any of the company’s media assets and I can’t make a determination on how successful they will be over the next 5 years in a rapidly changing media environment.
Finally, the company has a huge number of shares outstanding. 650 million shares for a company this size is a little ridiculous. There should probably be a share rollback at some point. Companies with such a huge number of shares outstanding need to generate a lot of earnings to produce any type of meaningful EPS.
We would take a hard pass on Zoomer.
Your Stock, Our Take
- Anthony – via email.
NamSys Inc. (CTZ:TSX-V)
Current Price: $1.04
Market Cap: $ 28.378 M
What does the company do?
NamSys is a Canada-based company which is engaged in the development and production of currency inventory management and control systems for financial institutions, retailers, currency carriers, casino and mass transit operators, and various government agencies. The company offers software solutions for currency management and processing for the banking and merchant industries principally in North America. The company generates its revenue in form of software license fees, systems maintenance fees.
Recent Financial Performance
Q4 2019 revenues, increased 30% to $1.11 million from $852,221 compared to Q4 2018. As the company continues to expand upon the “software-as-a service” model, the sales cycle is shortening, and the service is paid monthly. Recurring revenue, including maintenance, product support and hosted services (SaaS) revenue for the fourth quarter of 2019, represented 81.7% of total sales revenue in the quarter, as compared to 85.2% in the same quarter the previous year.
Reported net income decreased 9% to $255,269 for the fourth quarter of 2019, as compared to $280,104 in the fourth quarter of 2018. Adjusted EBITDA and adjusted net income decreased 9% and 8% respectively over the same period.
Management has observed that, on a worldwide basis, banks have been outsourcing entire fleets of ATMs to third parties, in addition to the more common action seen historically of just outsourcing service to said machines, such as emptying and refilling the devices. In some cases, the cash in transit companies are actually used to purchase the network of hardware from the bank and agree to operate it under the bank’s brand for a fee. The company is well positioned to take advantage of this trend with turnkey systems that allow cash in transit companies to immediately start up a cash vault processing service and a cash in transit service automated and integrated end-to-end. Additionally, as the Safe Banking Act sets into place, vendors that previously were unable to bank with federally regulated banks due to illegalities (such as the cannabis industry), are being granted more opportunities which Namsys has turnkey solutions to make use of. Management has said that new distribution partners along with new applications introduced in late 2019 bode well for results in 2020.
NamSys appears to be in a good space right now, with much of its revenue under a recurring model, and room to grow in the current market as it changes. Its balance sheet is very strong gas well, with $4.4 million in net cash, roughly equal to $0.16 16% of the company’s market cap. While the company’s third quarter had featured strong growth in revenue, adjusted EBITDA, and adjusted earnings up between 20% and 30% over the third quarter the previous year, the company’s fourth quarter had less growth, with falling margins and earnings dropping approximately 10%, despite revenue growth of 30% over the fourth quarter the prior year. The company’s shares currently trade for 15.7 times adjusted earnings, or 13.2 times adjusted earnings after adjusting for the $0.16 per share in net cash. This suggests the shares remains somewhat undervalued. But we caution investors, with in the range of $4 million in annual revenues, it remains a very small business and while we do not see physical cash being removed from the system near-term, digitization of currencies remains a threat.
Tesla Inc. (TSLA:NASDAQ)
Current Price: US$887.00
Market Cap: US$160 Billion
What does the company do?
Tesla designs, develops, manufactures and sells high-performance fully electric vehicles as well as designs, installs and sells solar energy generation and energy storage products.
The company operates through two segments: (1) Automotive, (2) Energy Generation and Storage.
The stock was up around 58% this week and up a whopping 292% in the past 6-months.
What is driving the stock?
The share price began making a substantial climb after the company reported a surprise profit in Q3, 2019. But now the share price is continuing its gains after the company has released its Q4, 2019, year-end financial results on January 29th, 2020, which were again better than expected.
- Revenue increased 2%, to $7.4 billion compared to the same quarter last year.
- Adjusted EBITDA improved 13% to $1.175 billion.
- Adjusted earnings per share (EPS) also improved 7% to $2.14 per share compared to $2.00 for Q4, 2018.
- Previously in the quarter Tesla had reported deliveries of 112,000 vehicles globally, which was a new best for the company and significantly topped Wall Street estimates.
- On the energy storage and solar side of Tesla’s business, the company said it deployed 54 MW of solar in Q4, up sequentially by 26% and the segment accounted for about $436 million in revenue.
Tesla did provide some optimistic guidance for 2020 saying that vehicle deliveries should “comfortably exceed 500,000 units.” Which would represent an increase of about 36% from 2019 deliveries. And the company made note that its solar storage deployments division should grow at least 50% in 2020.
Looking at the company’s balance sheet, they have a net-debt position of around $7.1 billion and are currently valued with a trailing EV-to-Adjusted EBITDA multiple of over 50 times, which indicates the company is very pricey right now as the market is anticipating a lot of growth for the company going forward.
Now it is positive to see that Tesla has been improving its business operations by delivering more cars and expanding its other business segment. But I believe that the huge share price appreciation in such a short period of time has not only been fuelled by the recent positive news but also investor’s ‘fear of missing out’ on the possibility of more gains and a typical short-seller squeeze taking place.
As many listeners are probably aware, Tesla has had a large outstanding short interest on the stock for some time. And just this past Monday, approximately 18% of the total shares available to trade on Tesla were short. Meaning that these speculators and investors were trying to profit by selling the stock at a higher price and buying it back at a lower level once the stock fell. But, as the stock continued its climb higher and these positions began to lose money, many of them ended up buying back the stock to close out their position – evidently causing more buying pressure to propel the stock even higher.
There is no doubt that Tesla is an interesting business and has potential to disrupt the automotive industry but considering its inconsistent profitability and very expensive current valuation we remain on the sidelines with the stock.
All in all, the company’s tremendous share price performance over the past week and months make it our Star of the Week.