Pulse Data Results Are Impressive

This morning Pulse Data (Toronto: PSD.TO or PLSDF.PK or in the US) reported financial results for the March 2006 quarter that far exceeded my expectations. Though the stock is down in Canada, I remain convinced based on these results and as detailed in my original writeup, that Pulse Data´s stock is quite undervalued at current levels, as compared to Seitel (SELA.ob), its chief, and much larger, US competitor. I would note that Seitel´s (SELA.ob) stock, as well as the larger PGS, continue to make new highs, and yet Pulse Data continues to lag. There are various reasons for this, as mentioned later in this post, but I think the reasons are temporary and that as Pulse´s results continue to exceed expectations and certain operational changes are completed, the stock will move alot higher throughout 2006. Overall, the risk/reward in Pulse shares is excellent and there are a few near-term triggers that can significantly increase the stock price.

Now onto the results. Pulse´s Seismic business increased data sales by 74 percent to $10.1 million for the three months ended March 31, 2006 compared to $5.8 million. To understand how incredible this is, I would just point out that during this same reporting period, Seitel (SELA.ob) increased cash seismic data sales by about 40% year-over-year to $33.5 million. So in essence, Pulse is growing at a much faster rate than Seitel (SELA.ob).

On the cash-flow front, Pulse reported $6.4 million in free cash-flow, up significantly from last year. It is important to note that Pulse did no seismic participation surveys in Q1 2006, as compared to a large one in Q1 2005 (Note: for an understanding of what Participation Surveys are please click here, a full explanation of the accounting for these surveys is given in Pulse´s presentation, available by clicking here). This difference effects both the cash-flow and income statement, reducing revenue and earnings on the income statement, but increasing cash-flow. However, in Q2 of 2006, Pulse will be recording revenue and earnings from a 3-D participation survey, so you can expect higher revenue and earnings, but a reduction in cash-flow.

If all of this is confusing, I agree. Accounting for seismic companies is exceedingly complex. However, the main thing to look at, as in all complex situations, is the balance sheet. On that end, Pulse is doing extremely well. The company is now sitting on  $20 million in cash and only $19 million in debt. That compares to $12 million in cash and $20 million in debt from the last quarter.

So with these solid results what is wrong with Pulse´s stock?

Well there are two issues. First off all, since the accounting treatment for seismic companies is confusing, Pulse´s income statement, which most investors focus on, is not all that impressive, since the company did no participation surveys in Q1 of 2006, as compared to last year. However, with a new participation survey scheduled for Q2 of 2006, I think that the income statement will finally show a huge improvement year-over-year and those investors who look at the income statement over the cash-flow statement will finally see the underlying growth of Pulse. In any case, I do not think that focusing on the income statement makes any sense for Pulse, since it is cash-flow that determines the ultimate health of the business, the level of dividends and eventually the stock price. So if the cash-flow growth at the company continues to increase dramatically, the stock will eventually move much higher.

The other negative issue, which I consider much more important as it pertains to Pulse´s stock price, is that the company´s non-seismic subsidiary, Terrapoint, continues to be a money-loser and the company may take future write-offs related to this subsidiary. The losses at Terrapoint, which were $2.3 million this quarter, are masking the incredible results at the seismic subsidiary leading to an undervalued stock.

However, management is currently addressing this issue, and I expect that losses at Terrapoint will diminish as the year progresses, beefing up the company´s income statement, cash-flow and stock price. Management had this to say about Terrapoint in the recent earnings release:

"Terrapoint has not produced the financial results we anticipated. We have spent a tremendous amount of effort to revamp and restructure its entire operations. The weakest part of Terrapoint's operations has been the high- range data collection systems, which require high maintenance and offer low reliability. These systems were part of the purchase of assets from the United States operations of Mosaic and were developed outside of our existing R&D group. While the base technology and science incorporated into these systems was sound and held promise for future development, the operational design was not conducive to a high production environment...While the remaining three older high- range systems continue to operate or to be capable of operating, we will continue to review the useful economic life of these systems, and we anticipate that depreciation relating to these systems may be accelerated. While this strategy will hurt short-term net earnings, it will increase production, competitiveness and reliability of our high-range business and bring gross profit margins in line with the low-range sector of this business which has exceeded expectations."

Overall, what ever happens with Terrapoint, it is clear that Pulse is undervalued. To understand why, just assign a zero value to Terrapoint and assume that the company completely writes-offs this business. Then Pulse is left with the Seismic subsidiary. I estimate the seismic business will throw off at least $30 million in cash in 2006, and that number could be low. With about 47 million shares out, that equates to over $0.60 per share. With a mere 10X multiple for that cash-flow (a discount to Seitel´s cash-flow multiple), the stock would be worth C$6.00, representing an over 90% gain from current levels.

Please Note: I first recommended Pulse Data (Toronto: PSD.TO or PLSDF.PK or in the US) at C$3.10, 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]

I picked up some PLSDF shares on the dip this morning. This is new territory for me.. do I collect the dividend on pink sheet shares?

[doey]

Pulse selling Trango:

http://biz.yahoo.com/cnw/060515/pulse_letter_intent.html?.v=1

[SCA]

Re: Toronto Exchange Oil and Gas related purchases... I have never looked back on purchases of Canadian Oil Sands (and other Oil plays) that trade on the Toronto Exchange.
It was "disconcerting" to me at first to have to buy on the pink sheets and OTC, but realized soon enough that as an investor, all implications were similar to buying direct on the Toronto Exchange.
Last year I bought some BVRTF.PK (BVI.TO) (at $8.865). I bought a bit of PBG.TO (PBEGF)on the recent dip.
-S

[doey]

Here's a new Pulse webcast from an Oilfield Services conference:

http://www.newswire.ca/fr/webcast/viewEvent.cgi?eventID=1493140