National Technical Systems, Inc.
(Nasdaq: NTSC)
Current Rating: 4
Current 12-18 month Price Target: $7.50
NTS operates in two segments: "Engineering and Evaluation" and "Technical Solutions". The business of the Company is conducted by a number of operating units, each with its own organization. The management of each operating unit has responsibility for its operations and for achieving sales and profit goals. The executive staff from the Company's corporate headquarters maintains overall supervision, coordination and financial control." The company has been in operation for over 40 years.
- Engineering and Evaluation
According to the company, NTSC's Engineering and Evaluation ("EE") business is one of the largest independent conformity assessment and management system registration organizations in the U.S. The company has EE facilities at various locations across the U.S. as well as facilities in Asia and in Western Europe. The EE business consists of approximately 400 highly technical personnel who conduct product certification, safety and product evaluation services both within the company's own facilities, as well as in some instances at the customer's sight if the subject of the testing cannot be effectively moved. Instances of the latter might include things like testing the integrity of a bridge, a nuclear facility or perhaps a large passenger jet.
The company's breadth in terms of the protocols and types of testing it can administer is highly impressive. For example, company marketing and sales information lists dozens of tests the company has/does perform many involving considerable certifications and other requirements. In addition, NTSC's aptitudes reach across a wide swatch of industries including aerospace, defense, computers and computer software, electronics, telecommunications, transportation and others. Again, the company's breadth both geographically and intellectually is considerable. Moreover, NTSC's position in these markets is well entrenched, as they suggest that the customer base approximates 5,000, with half of those customers utilizing the company's services on an ongoing basis.
-Technical Solutions
The Technical Solutions segment is a national provider of professional and specialty staffing services. Key elements of its business strategy include providing specialty staffing services to its customers specifically in the area of information technology, information systems, software engineering and construction needs. Technical Solutions provides its customers with a complete suite of services and a variety of workforce management solutions. This segment's objective is to build long-term relationships with companies and employees to minimize recruiting and sales costs.
The placement of highly skilled professionals requires an operational and technical knowledge to effectively recruit and screen personnel, match them to customer needs, and develop and manage the ongoing relationships. Contract professionals are placed on assignment at a customer site to perform specific tasks and projects for a predetermined period of time. A consultant (may consist of a contract employee or a subcontractor) can also be provided to customers on a customized contract basis for a specific period of time. At the completion of an assignment, customers may directly hire the contractor on previously negotiated terms. Technical Solutions also supports its customers on a direct hire basis. It researches and qualifies candidates presenting only the best available candidates to become additions to their staff. Technical Solutions also provides managed services and vendor-on-premises services to key customers.
The company's fiscal year ended January 31, 2005. Fiscal 2005, while not fully reported at this point, will finish relatively flat with respect to both revenues and earnings. That is a bit of a divergence from previous (recent) years where the company was able to grow both revenues and earnings. At least in part, previous growth was augmented by acquisition, which may help describe the lack of growth through 2005. In short, the company is a well entrenched player with a mature posture, resulting in limited internal growth opportunities. I think that notion has a lot to do with the company's limited trading activity and modest market cap in terms of certain metrics such as price to sales (currently about 42%). Granted, the company's challenge going forward will center on their ability to grow the business organically, although my sense is that they will not disregard appropriate acquisition opportunities that may arise. That being said, I think the company is focused on maximizing profitability within a limited growth posture. I also think they are implementing some strategies that may in fact enhance organic growth, albeit modestly, but that growth could lead to substantially greater expansion in corresponding profits.
In addition to the above, it should be noted that this is one of those stories that involves considerable levels of cash flow in excess of earnings. In this case, the contributions to cash beyond earnings come from multiple sources including measurable D&A as well as notable tax assets. As the full report I will provide subsequent to this summary illustrates, my basic thesis regarding the valuation of NTSC is that current cash flow run rates coupled with the growth I anticipate from even modest future revenue and earnings expansion speaks to higher valuations in the stock. Furthermore, as I suggested there are scenarios in this story that could lead to growth beyond that which I have modeled.
Lastly, NTSC possesses a hidden asset that I think is highly topical to the valuation herein. I often point out that my general approach to valuation and the resulting price targets is to simply project cash flow and discount it back to resulting present values utilizing discount rates that I find commensurate with a number of variables including prevailing inflation premiums, company specific risk profiles and at least conceptual long term costs of capital. However, every once in a while a company comes along that possesses a true hidden asset that has a value substantially greater than that which is reflected in the company's financial statements, yet makes no measurable contribution to the cash flow analysis. In cases such as that it is appropriate to attempt to value that hidden asset, and include that valuation on top of that which is derived from the discounted cash flow analysis. In the case of NTSC, the company currently owns two pieces of real estate in California and Virginia that collectively are likely worth several times the value they are reflected at in the company's financial statements. Furthermore, in neither case is the bulk of the real estate deployed in a revenue generating capacity. In other words, in each instance the majority of the real estate could be sold without affecting the company's operating activities therein. As my full initial coverage report elaborates, the value of those hidden assets could reasonably approximate the entire discount I am currently reflecting (or more) with respect to my price target vis-à-vis the stock's current value.
DISCLAIMER STATEMENT
The information contained in this report has been written by David Lavigne of EdgeWater Research Partners LLC ("Edgewater") and has been derived from sources considered reliable, but cannot be guaranteed by us. Edgewater and Lavigne are not aware of any material conflict of interest known at the time of the publication of this report. Financial projections and estimates herein represent our independent analysis based upon information in conjunction with the Company's publicly available financial statements. Edgewater and Lavigne may maintain positions in the securities referenced, which may change at any time without notice. Edgewater does not receive fees, warrants or any other compensation from issuers in connection with its research. It does however, encourage issuers and it representatives to subscribe to Edgewater's research, and from time to time, issuers and or their representatives may also purchase individual copies of Edgewater's research products. Edgewater and Lavigne may own options, rights or warrants to purchase any of the securities of the Company. This report is for informational purposes only and is not to be construed as specific investment advice or recommendations, nor as an offer to sell or a solicitation of an offer to buy any securities. The securities referenced are speculative in nature and may not be suitable for your specific investment objective. For specific investment advice or recommendations, please consult with your investment representative.
As of 04-10-05, Edgewater Research Partners LLC has received 0 annual "all services" subscriptions ($395 each) from NTSC employees and/or Directors. In addition, NTSC purchased $5,000 worth of "NTSC Initial Coverage" research reports at $50 each.
