Versant thinks market is snoozing on MKS

A US$20 million revenue quarter, when consensus was US$14 million, and Wellington Financial Fund I co. MKS (MKX:TSX) shares don’t move. It’s enough to make an equity research analyst pull his hair out. Which is exactly what Tom Liston of Versant Partners is doing via this note from earlier today:

“EVENT

This morning, MKS pre-announced Q4 results (April quarter), which includes the previously announced $5 million deal.

BOTTOM LINE

Although the company had prepared the market for a robust quarter given the record $5 million
deal, the pre-announced Q4 results are much better than our revised expectations. Thus, we have further increased our forecasts and are raising our target to $2.50 (from $2.15).

FOCUS POINTS

Revenue is expected to be approximately $21 million (we were expecting $17.3 million and
consensus is $14.3 million) and income before taxes approximately $4 million (we were expecting 2.3 million and consensus is $0.9 million). In early March, MKS announced that it had
signed its largest deal, a $5 million enterprisewide license agreement, with an existing customer in the automotive industry. We believe that the current share price represents an excellent mid-term entry point given the large deal momentum, inexpensive valuation, sector consolidation, dividend yield and significant recent insider buying.

Our C$2.50 target is based on 20x F2009 (ending April 2009) EPS. This equates to 2.0x
F2009 revenue. Both metrics are well below recent takeout multiples.

Largest Deal in company history plus a lot more…

In early March, MKS announced that it had signed a $5 million enterprise-wide license agreement with an existing customer in the automotive industry. The company also disclosed it has signed two other deals over $250k (one of which we believe could be closer to $1 million). The pre-announcement of $11 million of ALM license revenue indicates that MKS would have had an excellent quarter even without this large deal. ALM will be up 175% year over year and
will be a record high. This quarter should also give investors confidence that MKS is definitely gaining market share and is very competitive in even the largest ALM deals.

Insider buying in March and April

The lack of market reaction from the $5 million deal announced in early March prompted insiders’ to acquire MKS stock. Net insider buying (there was no selling) in the open market totalled approximately 300,000 shares in March and April. This amount does not include the exercise of options and trades made under a purchase/ownership plan. Insiders’ purchasing stock included senior management and one board member.

ESTIMATE REVISION AND VALUATION

We have revised our estimates based on Q4 pre-announcement. Our C$2.50 target is based on 20x F2009 (ending April 2009) EPS. This equates to 2.0x F2009 revenue. Both metrics are well below recent takeout multiples.”

For those who care about current pay, MKS also sports a 5% dividend (see prior post “Tech haves and have nots part 2” April 15-08).

MRM
(disclosure – I own MKS)