ActivIdentity Turnaround in the Early Stages

Yesterday, ActivIdentity (ACTI) released earnings results for the March Quarter. As expected the company burned thru more of its cash hoard, but on a more positive note signaled that the cash losses would begin to decline steadily with cash breakeven expected later this year. In addition, the company is guiding towards modest revenue growth next quarter. Finally, we should hear sometime this year what the company plans to do with its $140 million cash balance (down to $135 million by the end of the year). As mentioned in the first write-up, I think the company is way overcapitalized and I hope for a special one-time dividend to be announced.

Overall, with only several months with the new management team in place, I was not surprised by the losses this quarter. As mentioned in the past, it takes quite awhile for a new management team to restructure business operations and position a former troubled company for growth.  Overall, I still remain optimistic that the company´s financial results and stock price will improve in late 2006 and more importantly throughout 2007.

At its current price, I believe the stock price has little downside risk and about 25% upside potential over the next twelve months. As is generally the case with turnarounds, patience will be required in order to reap the potential rewards. In these instances, I think it is best to just put the stock away and look at it again every three months when earnings come in. The daily and weekly price movements provide zero useful information to a serious investor.

As regards to the downside and upside here, I  have prepared the following "worst-case" chart to illustrate the various scenarios for ActivIdentity´s (ACTI) stock price in 2007. My assumptions are that ActivIdentity will be at a $50 million a year revenue run rate by 2007 and will reach cash-flow breakeven with about $130 million in cash. In addition, I assume practically zero revenue growth for the company in 2007, even though this is unlikely given the many growth opportunities available for the compay. Furthermore, I have not given any additional value to the cash in the event of a one-time dividend or acquisition. For the multiples below I have used comparative multiples based on current market values of competitors and recent acquisitions in the industry (e.g. RSA acquistion of PassMark). As can be seen, the expected gain (the simple mean of the various scenarios) is about 25%, which I consider a good return for minimal risk. The real upside for the ActivIdentity can occur when and if the company is able to reignite revenue growth. If that happens, these price targets will seem conservative.

 

                                                                 

Current Price	4,2
Shares Outstanding	45
Net Cash	130
Estimated Revenue	50
Multiple Scenarios		Capital Gain
1X Revenue to EV	4	-5%
2X Revenue to EV	5,11	22%
3.5X Revenue to EV	6,78	61%
Expected Gain	26%

* EV = Enterprise Value (Market Cap of Company - Cash + Debt)

Please Note: I first recommended ActivIdentity (ACTI) at $4.37, and still hold a position in the stock. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Comments

[doey]

Does ACTI have a shot at the TWIC program? I vaguely remember it being mentioned during the call, but at the time I was unfamiliar with the acronym. See story in the URL.

[doey]

re: TWIC, it appears that they'll have difficulty getting a contract if they're not connected in some way to Hal Rogers, according to this NYTimes piece

http://www.nytimes.com/2006/05/14/washington/14rogers.html

As far as looking for a bottom in the stock, did you choose 3.50 because that's where management's options are priced? I'll be looking for an entry around there.