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Volt: Deeply Ignored Staffing Company With a Tremendous Turn-Around Opportunity

This potential outsized opportunity is based on multiple evolving factors

August 11, 2017 | About:

Volt Information Sciences (VISI) provides staffing, outsourcing and IT services. The company's business segments are Staffing Services (North American, International, Technology Outsourcing) and Corporate/Other. It was founded in 1950 by the Shaw family, who currently own roughly 20% of shares outstanding. Volt was the first public staffing company.

This potential outsized opportunity is based on multiple evolving factors.

Opportunties:

* The 21-trailing-month market value dropped 55.92%. This contrasts with a period of multiple operational and financial improvements. These contrasting attributes only strengthen Volt's case for short and long-term mean reversion. The current market price is $3.65 per share or $76.39 million.

During the trailing-21-month period, these are a few specific improvements.

  • The sale of non-core businesses, management's focus and realization of higher margins.
  • Material investment in information technology to improve competitive position, operations and costs reductions.
  • System implementation completed this quarter. Twenty months ago a new turnaround specialist and CEO (Michael Dean) was recruited during board-level changes forced by activist investors.
  • Additionally, this quarter received a long-awaited tax refund payment used to pay down debt. VISI sits on $146 million federal NOL and $55 million in other federal tax credits.

* Positive macro industry trends exist for temporary staffing. Further, the industry's fragmented attributes offer future M&A activity for potential company sale of thecompany or growth after a fully realized turnaround. Note that as of July 31, staffing company CDI received a go-private deal and is up 33% today on news. Also, an engineering industry's study reported 2% of the workforce is temporary. But, the current 2% workforce is a fraction of future years' estimates of 10% based on macroeconomics and political trends. The trend higher for a fractionalized work force is inevitable.

Volt's temporary staffing business is healthy and provides a majority of total revenues. Technology and Engineering's permanent staffing business drags on its profitable progress. Additionally, opportunities exist if they focus exclusively on temp staffing and sell permanent placement business.

* The current market price of $3.65 or $76 million market capitalization and $147 million enterprise value does not fairly handicap management's value-unlocking activities, low business-risk profile, capital-light requirements and higher probabilistic future value. Also, VISI is historically and relatively valuation cheap. (more on this covered below).

* Management sits on an exceptional company requiring only modest improvements to grow its free cash flow with existing large revenue base. A small 1% improvement in operational margins is reachable. That change will indeed impact free cash flow and its tiny $76 million market value with just 14.19 million shares in the public float.

* Additional positive factors to consider: Approximately 30% is held by insiders with the founding family at around 20%, coupled with proactive/activist shareholders (Glacier Peak Capital as one example). This ownership structure will continue pushing market value enhancements. Moreover, the lack of analyst coverage is not helping the stock price. VISI's TTM revenue of $1.289 billion, $61.70 in revenue per share deserves and should see future coverage. Last is positive 2016 and 2015 insider activity with neutral 2017.

Notable enhancing historical valuation attributes:

  • Strong and improving capital structure with a stable share count and debt reduction.
  • Gross margin improvements and a stock that now trades at a 75% of the TTM gross profit.

Another interesting ratio is EV/MC. My guess is this should stay stable. But the market value dropped more than enterprise value, which may signal market overreaction. Last, it has an improving F score, asset turnover and deep valuation discounts for EV/GP and EV/Revenue.

HistoricalValuationv1.png

Relative valuation

Volt ranks at or near the lowest for the following: percentage above 52-week low, EV/sales, shares short as percentage of float, market and enterprise value drop, high F score of 6, insider ownership, percentage off 52-week high and financial strength. These metrics support the large discount thesis to the 18 industry staffing peers.

Industry%2BComparison.png

Long-term activist shareholders with incentivzed insider ownership to turn around the company.

Ownership.png

Risks:

* Many uncertainties exist such as continually falling revenues, declining operational margins and growing losses. These negatives will impact liquidity and flexibility to buy back shares if operations don't stabilize over the next few quarters. In addition, the longer time to realize profitability and stability significantly reduces the present value of VISI and confidence of shareholders.


Rating: 0.0/5 (0 votes)

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GuruFocus has detected 1 Warning Sign with Volt Information Sciences Inc $VISI.
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