Employment sucks. We know that. BUT, we also know it will get better. Let’s look at a potential play on that improvement.
When the turn does come, where will we look? I am guessing employers will crawl, not rush into re-employment of staff. With that being said, I think companies that provide professional services will be the first to benefit from this trend. The cost/benefit to employer is huge and given any recovery will most likely be a shaky one, employers will want to add people at a minimal cost in term of both training and continued employment cost. Volt enables both of these scenarios.
Enter Volt Information Services (VOL):
Company Description:
Volt Information Sciences, Inc., incorporated in 1957, provides staffing services, and telecommunications and information solutions. The Company is organized in two businesses: Staffing Services and Telecommunications and Information Solutions. Staffing services segment provides a range of employee staffing services to a range of customers throughout North America, Europe and Asia/Pac, and has expanded operations in Latin America. Telecommunications services provide telecommunications and other services, including design, engineering, construction, installation, maintenance and removal of telecommunications equipment for the outside plant and central offices of telecommunications and cable companies. In September 2008, the Company sold the net assets of its DataNational and Directory Systems divisions.
Staffing Services
Services offered by the Staffing Services segment fall within three major functional areas: staffing solutions, information technology (IT) solutions and e-procurement solutions. Staffing solutions provides managed staffing, temporary/contract personnel employment and workforce solutions. This functional area comprises the Technical Resources (Technical) division and the Administrative and Industrial (A&I) division. This functional area also provides direct placement services and, upon request from customers, subject to contractual conditions, is focused to allow the customer to convert the temporary employees to full-time customer employees under negotiated terms. In addition, the Company’s Recruitment Process Outsourcing (RPO) services deliver end-to-end recruitment and hiring outsourced solutions to customers. The Technical division provides skilled employees, such as computer and other IT specialties, engineering, design, life sciences and technical support. The A&I division provides administrative, clerical, accounting and financial, call center and light industrial personnel.
E-procurement solutions provide global bid human capital acquisition and management solutions by combining Web-based tools and business process outsourcing services. IT solutions provides a range of services, including consulting, outsourcing and turnkey project management in the software and hardware development, IT infrastructure services and customer contact markets.
Telecommunications and Information Solutions
This segment is divided into three sub segments: telecommunications services, computer systems, and printing and other. Telecommunications Services segment designs, engineers, constructs, installs and maintains voice, data, video and utility infrastructure for public and private businesses, military, and government agencies.
Computer Systems segment provides directory and operator systems and services primarily for the telecommunications industry and provides IT maintenance services. The segment also sells information systems to its customers and, in addition, provides an application service provider (ASP) model, which also provides information services, including infrastructure and database data services to others. This segment consists of Volt Delta Resources LLC, Volt Delta International, LSSiData and the Maintech computer maintenance division.
Super…so why Volt?
1- Volt is global and stands to benefit as the global recovery takes hold
2- Professional/technical skills will be in high demand and Volt enables employers to better manage costs
3- Insiders/Founders/Directors own 42% of the outstanding shares
4- VALUATION…..
Let’s look closer at #4 because we value guys like that stuff.
Volt has typically traded at 16-20 times earnings and about twice book value (remember that). Earnings, as one would expect have suffered along with employment and Volt has reported operating loss from continuing operations in the 2009 six-month period of $21.7 million, or ($1.04) per share, compared to a loss from continuing operations of $12.3 million, or ($0.56) per share, in the fiscal 2008 six-month period. The Company incurred a restructuring charge of $7.1 million ($4.2 million, or $0.20 per share, net of taxes) and goodwill and long-lived intangible impairment charges of $7.3 million ($6.8 million, or $0.32 per share, net of taxes) in the first six months of fiscal 2009 as compared to a restructuring charge of $1.5 million in the comparable fiscal 2008 period.
About what you would expect given what has happen to employment…
So then, what to like?
1- Cash and cash equivalents, excluding restricted cash, totaled $141.5 million at the end of the second fiscal quarter of 2009.
At May 3, 2009, the Company had sold a participating interest in accounts receivable of $50.0 million under its securitization program and had the ability to finance an additional $125.0 million under the program. In addition, the Company may borrow under a $42.0 million five-year unsecured revolving credit facility (“Credit Facility”) and the Company’s wholly owned subsidiary, Volt Delta Resources (“Volt Delta”), may borrow under a separate $75.0 million revolving secured credit facility (“Delta Credit Facility”). At May 3, 2009, the Company had borrowed $10.7 million under its Credit Facility and Volt Delta had borrowed $41.7 million under the Delta Credit Facility.
Why does that matter? The company’s current market cap? $131 million meaning it is trading for LESS THAN THE CASH ON ITS BOOKS..
2- Book Value.
Currently about $18 a share. Remember earlier we said Volt tends to trade on average about 2x book? It current valuation of .3x book. Look close, this isn’t 3x it is point 3x book or 33%.
Lets look at it this way. Say tomorrow the company decide to close up, sell it all and distribute the proceeds to shareholders.
Right now you would pay $6.61 a share for the stock. The cash on hand comes to $6.77 a share so already your are up in the investment and not a single asset has been sold. Let then say the current book value of $18 a share gets slashed 80% (I am not saying it would, just picking an extreme scenario for illustration). That leaves $3.60 a share for shareholders for a nice total of $10.37 or 56% profit. The margin of safety here is huge..
Risks:
Simple, the global slowdown takes longer than anyone thinks to resolve itself. If US unemployment hits 10% and then stubbornly stays there for all of 2010, large share price recovery is put off. Now, depending on the global economy we could see improvement as it recovers absent the US but large shares gains will need US participation. The company has ample cash and debt availability to withstand a prolonged poor employment scenario. Because of this, the risk is not a “will it survive or not” but a “how long before shares recover” situation.
Like any of these deep value plays (especially ones tied to employment), because the valuation is so rock bottom, if you wait until you see clarity in employment you very well may be buying a $10-$12 stock vs $6.
Latest 10-Q:
Vol
Disclosure (“none” means no position):none
8 replies on “Playing Jobs With Volt”
Todd,
I don't think it means that much that they are trading for less than the value of the cash account. This isn't net cash. There are still $428m in liabilities that they would have to pay if they wanted to close up shop. They are selling at a discount to net current assets though. The problem with this is that almost 61 percent of their CA is made up of trade receivables so I’d definitely look into their customer list if possible to determine the likelihood of collection.
Additionally, I have heard that small and micro-caps trading at discounts to their net current assets aren’t necessarily good investments. You need either a catalyst or evidence that this is actually a good business. A share repurchase, dividend program, or talk of a possible takeover would quickly reduce the discount between intrinsic value and market value. And if it’s a good business, it will be increasing its intrinsic value, even in this environment, meaning you will have to see this growth as appreciation in the stock price unless the market increases the discount. Both scenarios are pretty attractive, this doesn’t seem like a particular good business. I’m not sure about catalysts you have identified.
But if it is a mediocre or poor business without a catalyst, intrinsic value will likely either stagnate or decline. Every stock priced like this will likely eventually find or have a catalyst, but your returns won’t be very impressive if it doesn’t happen for a few years. Walter Schloss made very impressive returns investing in these deep value plays, but he had a very well diversified portfolio and didn’t focus much on individual companies.
brendan,
if u look closer at the post you'll notice they have been able to securitize the receivable which means those buying them are confident as to their repayment.
another point here is that a bidder could finance a deal with cash/credit on the books. the deal does itself..
small/micro. not true. look at seth klarman. he has been buying a bunch of small caps. buffett, early in his career bought them (cant now due to co. size). there are great opportunities there..
for me the catalyst is the eventual return of employment… it will happen eventually
good comments…thank you
Todd,
Thanks for the reply. I didn't realize the securitization wasn't reflected in the 10-Q so that's certaintly a huge positive.
In regards to Buffett and Klarman, I was under the impression that their most successful small-cap investments were still good companies with distinct competitive advantages that were also undervalued. The RHIE that you posted about in the past clearly has a unique business model that makes its earnings much more reliable than other similar businesses. Is VOL a good business? I suppose this is much less of a factor now considering they are being very active in unlocking the value.
if u look back at the financials, it has been very profitable (obviously when employment was strong).
the advantage it has is that is serves a very select employment segment and based on what i can gleam, is a player there
that being said, i'm not sure any small cap can really have a "moat" for lack of a better word. i think the best you get is "best of class".
for that reason, these would not be real long term holds but buy dirt cheap and get out when valuation normalized.
BBSI is in a similar sector, but operates mostly in California. It also has no debt, and about 50% of the market cap is cash & short term securities.
I would say California is very uncertain in the near and possibly medium term, but half the reason it experienced such a bubble is because many of the expectations for its population growth etc were correct generally but people just came up with ridiculous numbers to represent the trend. Long term it should be sound.
Hi Todd,
Interesting idea for sure, though the cash will probably go away this year to pay for the long-term debt coming due. And for a small company, these seem to be in too many biz (directory publishing in Uruguay!!). Korn Ferry and Hedreick (HSII) also have ton of cash on their balance sheet – would love your thoughts on them.
Thanks, Gaurav
gaurav,
they have been selling the directory biz….
have not looked at the others but will assume valuations for the whole sector have come down dramatically
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