I’ve mentioned several times that I’d love for readers to send me ideas- the smaller and more obscure the idea, the better. A reader recently sent me a very interesting stock, Startek (SRT), so I thought I’d write up my findings.
Startek is a provider of business process outsourcing services. Basically, large companies contract with Startek to work the phones for customer service.
The business is as it sounds- highly competitive, low moat, with low barriers to entry. There’s limited switching costs and potential customers are likely pretty ruthless in playing competitors off each other for price breaks. In other words, no one’s going to be mistaking this company for Coke.
But that doesn’t preclude it from being a value investment. What makes Startek so interesting is it trades at a huge discount to its tangible asset value. Book value per share comes in at ~$5.30, a huge premium to the current stock price of $2.10. NCAV per share comes in at just over $2.12 per share (basically equal to today’s stock price) and consists almost exclusively of cash or accounts receivable from blue chip companies like AT&T or T-Mobile.
What makes the stock even more interesting is the space is rife with acquisitions, and Startrek trades for a huge discount to the normal premiums in this space. The reader who pointed me to the email also pointed me to a set of analyst reports (found here; note you may need to sign up for them). The most recent buyout in the space (APAC by JPM P.E.) occurred at 1.25x EV / Sales and $37.4k EV / seats (an industry valuation metric- basically, your EV divided by employees). With SRT currently trading for ~0.14x EV / Sales and ~$3k EV / Seats, there’d be enormous upside in the event of an acquisition.
Even if SRT just got up to a peer multiple, there’d be substantial upside. The same report lists the average EV / Sales in the industry at 0.7x and the average EV / Seats at $23k, with the lowest peer trading for 0.34x and ~$10k. Those numbers would imply an upside for SRT somewhere between 3-7x today’s stock price- incredible!
However, I’m worried that the asset protection here might not be enough to give you a huge margin of safety. Results have consistently deteriorated over the past five years, with stagnant revenue, declining gross margins, and ever larger operating losses. In fairness, this is fully acknowledged and accounted for by both the reader I discussed the stock with and the analyst reports, and a good portion of the operating losses have been attributable to non-cash write downs, which I normally ignore (the write downs are from closing low margin U.S. call centers to higher margin, higher growth off shore centers, which should be a good thing)… but a portion of the operating losses are also caused by continually rising SG&A. The revenue decreases and margin contraction have accelerated in their most recent nine months, while SG&A costs continue to spike. And their revenues and profits may face further strain in the future- the company recently filed this report announcing the loss of a material customer.
How you feel about the company really depends on how you look at it. If you view it as a turnaround that’s just hitting bottom, there’s likely huge upside as it starts matching its peers metrics and receives a peer valuation. If you think they can operate at break-even in the near future or get taken over, there’s still pretty huge upside as they trade towards at least asset value.
However, if you’re worried that the losses while continue, the stock could be the proverbial “melting ice cube” as your large asset cushion continues to shrink in light of continuing operating losses, eroding your margin of safety and eventually leaving you with a big loss.
In sum, I think SRT is an interesting play. It’s very high risk / high reward. But, as I mentioned in my post on Paragon (PGNT), it’s all about opportunity cost to me- I just think there are microcaps out there with similar upside potential but much less downside, either in the form of larger discounts to NCAV or consistent operating profits (my top 5 portfolio holdings is a nice place to look for starters).
For now, I’m staying away, but readers looking for a little more speculative play or with turnaround investing experience might want to give this one a deeper look.
Disclosure- Long my top 5 portfolio holdings. No position in SRT or PGNT.
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The content contained in this blog represents only the opinions of its author(s). I may hold long or short positions in securities mentioned in the blog. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author(s).
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Great research will you please share what you got from your friend I means the information which you are talking about.
Hey business,
The friend forwarded it to me and I don’t feel comfy forwarding someone else’s hard work. I’m almost positive you can get the research by registering on the site though