Monday, May 20, 2013


Westell, Boom or Bust?

On May 22, Westell will release their earnings report for the quarter ending March 31.   Westell is a micro-cap company of about $120m with more activity going on in the last few months than a prime time soap opera.  They are based out of Chicago and are in the telecommunications equipment business.

Westell popped up on one of my screen about 6 weeks ago and frankly, the stock price has done very little since that.  It's chart and price history would tell you that it is a quiet little stock with a low beta and has been trading in a range between $1.90 and $2.10 for a couple of months now.

Then I came across a press release from the company from November of last year that really caught my attention. The headline was: 

"Transit Wireless to Use Westell eSmartAccess Ethernet Switch in New York City’s Subway System"

My first thought was how much is the contract worth? My second thought was that the revenue probably wont start showing up until the first quarter of this year. 

Living in NYC, I know anything having to do with the subway system and the MTA is a huge undertaking. There are 277 subway stops in New York City and Westell is providing the routers for everyone of them. New York City will finally have WiFi underground, which means everybody will be using their smart phones on the subway.  Ahh, nothing like being more connected than we already are.  Another thing you should know about the people who run the NYC subway system is that they spend money as if it were going out of style, but they can afford to, because they are a mega-monopoly that can raise their prices at will and they don't hesitate to take full advantage of this. Remarkably, The MTA has increased fare prices in 4/5 years. 

Is the MTA terribly mismanaged?  Do farmers grow corn?  I would imagine that this had to be to the benefit of Westell's negotiators. The MTA knows full well going into any negotiation, that if they screw it up, its no big deal because they can pass the cost of their mismanagement along to their customers, who ride the subway everyday. (5.5 million rides per day during the work week and about 3 million a day on both Saturday and Sunday).  Mind boggling revenue.    

At this point, you might be wanting to know more about the company.  The basics are the following: their trailing 12 months of revenue is slightly more than $40M. There price/book ratio is a very low .71.  In addition they are flush with cash, approximately $115M with no debt and the current stock price is $2.03.
But that is not all, when you dig down a little further, more interesting things come up about this little known company.  On April 8, 2013, Brian Cooper, their Chief Financial Officer, Senior Vice President, Treasurer and Secretary gave notice of his decision to resign from his positions in order to pursue other interests. 
A week prior, On April 1, they finalized the acquisition of Kentrox Inc. for $30M.  Kentrox provides intelligent site management solutions, which includes remote site monitoring, management and control.  According to Mr. Cooper, the acquisition is expected to double revenues for Westell from $40M to $80M starting in 2014. In addition the blended gross margins would be over 40%.

On May 7 they announced, The Remote RMM-1421 by Kentrox has recently been tested and approved by Sprint for activation on their network. The Remote RMM-1421 is a monitoring and control device designed to enhance a company’s network management strategy, reduce operational costs, and improve operational efficiency.  It is not clear however, when and if Sprint will be actually be utilizing Kentrox's services.

And finally, their have been 8 insider transaction in 2013. All of them were sales, granted 2/8 were by Brian Cooper, which is understandable.

Conclusion: The only one that I can draw is that Westell looks like a good bet going forward. I'm not sure what is going to happen on May 22 (earnings day), but it appears, at the very least, Westell is worth taking a look at.

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