On Dec.24, Mario Gabelli, the chairman and chief executive officer of GAMCO Investors Inc., added Communications Systems Inc. (JCS, Financial) at an average price of $11.05 and currently holds 330,172 shares of the stock. It was the fifth time he added the stock during this year, which makes me feel that he is betting in favor of a positive future for the consumption of network capacity.
Recommendations of the Board
Communications Systems is engaged in the manufacture and sale of modular connecting and wiring devices for voice and data communications, digital subscriber line filters, and structured wiring systems, and through its Transition Networks business unit in the manufacture of media and rate conversion products for telecommunications networks.
Few months ago the firm announced a series of actions to increase revenues and improve profitability. The first change was to operate as a holding company, monitoring and supporting all the business units: Suttle, Transition Networks (TN) unit and JDL Technologies. With this “new format”, each unit will operate with a high degree of autonomy. This will result in the reduction of labor costs, the emphasizing of accountability in the units as well as better recognition of performance. "While difficult decisions for the Board, we believe the changes we have taken to restructure our parent company as a holding company and to focus on individual business unit performance is in the best interest of our shareholders and will increase shareholder value" said Curtis A. Sampson, the Company's Board Chair and Interim CEO. Furthermore, strategic investments in the TN unit such as marketing, sales and product development will boost revenues in the future.
Severe Warning Signs
Not all is good news. We found three severe warning signs issued by GuruFocus: Piotroski F-Score of 2 is low, which usually implies poor business operation; revenue has been in decline over the past three years; and operating margin has been in five-year decline (the average rate of decline per year is 9.1%).
Valuation
In terms of valuation, its price-to-book ratio of 1.1 indicates a discount versus the industry average of 1.83 while the price-to-sales ratio of 0.7 is below the industry average of 1.12 and is close to one-year low of 0.67.
Earnings per share (EPS) decreased dramatically in the most recent quarter compared to the same quarter a year ago and it has demonstrated a positive trend until last year. We include in the next graph the stock price because EPS often lead the stock price movement.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to its ROE from the same quarter one year prior. This is a signal of weakness and is negative for investors.
Competitors such as Ikanos Communications Inc. (IKAN, Financial) trade for 2.9 times book but also has a negative ROE of 37.7%. An alternative could be Vocera Communications Inc. (VCRA, Financial) with a positive ROE of 2.3%, but for investors searching for a higher ratio, Emerson Electric Co. (EMR, Financial) will be the best option.
Final Comment
The firm’s revenue growth has increased in an important magnitude compared to the same quarter a year prior gaining market share over it peers. In addition, the strong cash flow makes the company has a dividend yield of 5.9% which is higher than 91% of the companies in the Communication Equipment industry and demonstrates its commitment to return cash to investors.
Hedge fund gurus have also been active in the company. John Keeley has also invested in it.
Disclosure: Victor Selva holds no position in any stocks mentioned.
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