A few weeks ago, I profiled three deep value stocks that I believe met the criteria proposed by Benjamin Graham for finding undervalued securities. One of these companies was Westell Technologies Inc. (WSTL, Financial), a micro-cap company trading at a significant discount to book value.
Westell intrigued me because, unlike so many other deep-value microcaps, the company is generating positive free cash flow, and the majority of its book value is cash.
So, I wanted to dive a bit deeper into this opportunity to explore whether or not it is an attractive investment at current levels.
Exploring Westell
Westell describes itself as "a leading provider of high-performance network infrastructure solutions" and a "trusted partner for transforming networks into high quality, reliable systems."
The company's divisions include the In-Building Wireless (IBW) arm, which helps businesses set up reliable wireless networks in properties such as colleges as well as build public safety networks to help communications for first responders. Then there is the company's Intelligent Site Management Solution (ISM) division, which provides professional services and equipment to help other telecommunications equipment owners manage their assets with tools such as environmental monitoring. And finally, there is the company's Communications Network Solutions (CNS) division, which supplies hardware to help expand network coverage on sites including things like outdoor cabinets to house transmission equipment.
According to Westell's figures for fiscal 2019, the largest of these divisions is ISM. For the 12 months ended March 31, 2019, ISM earned revenues of $17.3 million, nearly 40% of total sales of $43.6 million. It is also the most profitable division with a gross margin of 52.4% for the fiscal year 2019.
For the fiscal year 2018, the IBW business was the largest, making up 40% of revenues. According to the company's full-year earnings release, "IBW's revenue decrease was primarily due to new public safety product introduction delays and lower sales of commercial repeaters and DAS conditioners, partly offset by increased sales of existing public safety repeaters and passive RF system components."
Overall, group revenues for the 12 months ending March 31, 2019, declined 26% year-on-year. Off the back of this decline in revenues, as well as an increase in asset impairments, the company reported a net loss of $11.4 million for the 2019 fiscal year. On a cash basis, the company reported a cash outflow of around $1 million for fiscal 2019, compared to a cash inflow of approximately $6.6 million for fiscal 2018. This is what interests me about the business.
Cash-rich
While Westell isn't profitable and hasn't been at the operating level for many years, cash flow is a different story altogether. Over the past six years, the company's cash flow position has been roughly neutral with cash generated from operations offsetting outflows and capital spending.
Still, there's no denying that this is a business in decline. Revenues have decreased by more than 50% over the past six years, and the group's cash balance has fallen from $51 million to around $26 million.
However, management has recently declared that they want to take the company back to break-even on an accounting basis (which would likely be free cash flow positive) within a year. This is something most managements of loss-making companies promise at some point, so I will believe it when it happens.
But when you consider that the company is nearly cash flow break-even, has around $1.75 in cash per share (with no debt) and is dealing at a price-tangible book value ratio of 0.73, there's a good case to be made that this stock is worth buying ahead of a potential turnaround.
The downside is relatively limited with so much cash on the balance sheet, and even a slight improvement in Westell's fortunes could lead to a big jump in the share price.
Disclosure: The author owns no share mentioned.
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