TSR Inc. (TSRI) is primarily engaged in the business of providing contract computer programming services to its clients. The company provides its clients with technical computer personnel to supplement their in-house information technology capabilities. TSR's clients for its contract computer programming services consist primarily of Fortune 1000 companies with significant technology budgets. TSR was founded in 1969 by three former IBM executives, including the current TSR Chairman Joseph Hughes. Its early market focus was offering mainframe computer time-sharing services as well as computer facilities management work. TSR’s services expanded to managing large and complex computer conversion projects, helping customers re-platform applications from one operating system environment or manufacturer to another. Today’s TSR’s focus includes IT staffing augmentation and consulting services.
TSR is a net-net trading at 0.79x P/NCAV and 0.78x P/NTA. After falling to a new historical low of 0.62x P/NTA in Aug. 2012, TSR's share price has been trending upwards in the past three months, currently trading close to its five-year average P/NTA of 0.80.
Financial and Business Risks
TSR is debt-free with cash of $4.5 million, representing 46% of its current market capitalization of $9.6 million.
In the past few years, an increasing number of companies are using or are considering using low-cost offshore outsourcing centers, particularly in India and other East Asian countries, to perform technology-related work and projects. This trend has contributed to the decline in domestic IT staffing revenue.
Many of TSR’s major customers have retained a third party to provide vendor management services and centralize the consultant hiring process. Under this system, the third party retains TSR to provide contract computer programming services, TSR bills the third party and the third party in turn bills the ultimate customer. This process has weakened the relationships that TSR has built with its clients over the years. These changes have also reduced the company’s profit margins because the vendor management company is retained for the purpose of keeping costs down for the end client and receives a processing fee which is deducted from the payment to TSR.
TSR’s two largest clients, Beeline and Credit Suisse, accounted for 13.9% and 10.7% of the company’s fiscal year 2012 consolidated revenue respectively. Beeline is a vendor management company through which TSR provides services to three end clients, of which Bristol Myers Squibb is the most significant. TSR’s top 10 clients constituted 73% of consolidated revenue in 2012. Receivable days for the past two years have increased to 70 days from an average of 60 days during the 2005 to 2010 period.
Business Quality and Capital Allocation
The technical staffing industry is highly competitive and fragmented and has low barriers to entry. TSR competes for potential clients with providers of outsourcing services, computer systems consultants and other providers of technical staffing services. Many of TSR’s competitors are significantly larger and have greater financial resources than TSR. This is reflected in a 5 year average ROE of 3.37% and a 5 year book value CAGR of 0.62%.
TSR has suffered three consecutive quarters of losses, which management attributed to the increase in selling, general and administrative expenses as a result of hiring additional recruiters and sales executives. Management expect losses to continue until such time as the company’s plan for internal growth generates a sufficient increase in revenue.
TSR declared a special one-time cash dividend of $1.50 per share in November 2012. The last time it paid a cash dividend was in 2009. Since then, TSR has elected to retain cash reserves to finance operations and growth. TSR has no current plans to implement a quarterly dividend program or pay any other special cash dividend.
TSR's chairman, Joseph Hughes, and members of his family own approximately 46% of the company. This restricts the voting power of minority shareholders and may deter a potential takeover that could give shareholders the opportunity to realize a premium over prevailing market prices.
Valuations are not as compelling after the recent share price surge. A reinstatement of TSR's quarterly dividend program will move my thinking in a more positive direction.
The author does not have a position in any of the stocks mentioned.