Keynote Systems: Buy One Dollar For 74 Cents?
This post is a continuation of my original analysis on Keynote Systems.
The wait is over. I finally scooped up a few shares of Keynote Systems this morning after a stunning 25% tumble — courtesy of a downgrade by Ferris Baker Watts from buy to neutral. *
Their latest quarterly results are out and they look pretty sharp. Revenues are up 12%, and net income is break-even compared to a loss of $369 million a year ago. (Note that my calculation of net income is Non-GAAP net income minus stock-based compensation.) The company just repurchased about 1.5 million shares since November 2007, and the board authorized, yet, another 2 million shares.
Keynote Systems now only has 17.8 million shares left due to the company’s aggressive repurchase program. Who can blame them? At $9.74 (after-hour trading), it’s a highway robbery.
The stock is cheap, and I believe the arithimatic is very simple. In theory, you can go to the open market and buy the entire company for a mere $173.4 million. But, this debt-free company is worth so much more. Strip away all their employees. Strip away all their intellectual properties. Strip away all their software and computer equipments. Nevermind goodwill and intangible assets. You’re still left with:
- An empty mortgage-free headquarter that’s worth $135 million**
- A bank account with $99 million in it
That’s a total of $235 million backed by hard assets, or a case of buying one dollar for 74 cents.
Who else is saying “yes” to free money?
Another value investor, Brad from Triaging My Way To Financial Success, sent me a heads up on the bargain and picked up a few shares himself.
* Couldn’t google any explanation on the downgrade. In general, I take these ratings with a grain of salt anyway. Keynote has a potent balance sheet that enables them to buy back tons of shares; a characteristic that most analysts hate because they tend not to receive a lot of underwriting businesses from corporations who are too rich to ask for more capital.
** Estimate based on $85 millions purchase price and 6% annual appreciation since 2000.
It looks like the downgrade was a a gift to you. I have bought a couple of stocks in a similar set of circumstances. It can certainly work to the favor of a long-term investor.
Best Wishes,
D4L