QuinStreet: Poised To Grow Margins With QRP Catalyst (NASDAQ:QNST)


Company Overview

QuinStreet (QNST) lays claim to the term ‘pioneer’ of performance marketing. With a history of over 20 years, the company specializes in delivering clicks, leads, inquiries, calls, applications, or customers to its clients. This performance marketing strategy is attractive to QuinStreet’s clients, who pay solely based on tangible execution. QuinStreet operates in financial services, education and home services. M&A is a big part of the business model: the company has acquired three companies since 2018 (AmOne, CCM, and MBT) primarily to increase its number of customer relationships. Although digital ad spend has been down during the pandemic, the macro-shift toward online advertising is resolute. QuinStreet is well-positioned to profit from this transition as long as management can successfully increase margins.

Business Model

QuinStreet’s business model is fairly simple. The company is paid a commission for its marketing performance on a per-quote basis. The variable model runs very few fixed costs as the cost of revenue is largely media-based. When revenue drops, so too does the company’s largest cost. Unfortunately, this low-risk model returns less than favorable margins. The company has TTM gross margins of 11%. Management plans to increase these margins by divesting its unprofitable businesses and rolling out SaaS-like products. Additionally, the company plans to continue its heavy emphasis on growth-oriented acquisitions. On the 2Q 2020 Earnings Call, CEO Doug Valenti remarked:

We plan to narrow our focus to a smaller number of our best-performing businesses and market opportunities and to restructure to align resources and efforts with those areas…We also expect faster margin expansion from top-line leverage on a smaller cost base and a heavier mix of businesses with SaaS-like margins

These plans will need to be monitored by investors over the next few months as the changes begin to be recognized. If the plan is followed through successfully, QuinStreet will prove to be undervalued at its current price.

Financial Highlights

The last few years have been rocky for QuinStreet. After increasing revenue by 35% YoY in 2018, the top line grew just 13% in 2019 and is expected to grow just 7% at the end of the fiscal year in July. This volatility in top-line growth has led to a wavering stock price, as shown below:

Zimlon Insurance Company Analysis

As shown in the graph, QuinStreet’s earnings have been up and down and it is reflected in the steep declines in price. Breaking down its revenue, financial services represented 77% of total revenue in Q3 FY2020. The majority of other revenue comes from the education vertical, representing ~12% of revenue. Financial services grew 15% YoY in the most recent period, while education showed meager 4% growth. The company has struggled to gain ground in education since 2019 when it lost Dream Center Education Holdings, which represented upwards of 20% of revenue. Client diversification remains a risk for QuinStreet as Progressive Corporation (PGR) represents 22% of net revenue. One strong positive for QuinStreet is its balance sheet. The company has upwards of $97 million in cash on hand, representing 17% of its market cap. This gives management a cushion if ad-spend falls off temporarily due to coronavirus. It also may allow management to pursue acquisitions or develop new products to increase margin.

Catalyst

Although the company hasn’t grown its top line favorably over the last few years, it has an exciting catalyst which management expects to grow margins. The QuinStreet Rating Platform (QRP) is an enhanced workflow system designed to vastly improve the sales efficiency of carrier partners and their agents. Carrier partners will get much better workflow management and control, ultimately allowing them to reduce costs. CEO Doug Valenti cited on the Q3 2020 Earnings call that QuinStreet has the most end-to-end integrations with the biggest carriers, allowing them to provide agents with accurate and timely quotes. Although the product has not been completely rolled out, Valenti said the pilot company realized upwards of 40% lift in productivity.

The most exciting part of this catalyst is the SaaS-like margins. Management expects QRP to have 80% gross margins and rise steadily with use. Valenti also noted that the pipeline for the product is extremely deep. In the Q3 2020 Earnings Call, he had this to say regarding QRP:

Launched QRP clients already represent over $6 million dollars in estimated annual revenue opportunity once fully ramped. Signed and near-signed clients (not yet launched) represent $12 million of additional estimated annual revenue opportunity. The balance of clients in the advanced pipeline (not yet at signing stage) represents $36 million more of estimated annual revenue opportunity. That means we believe we already have line-of-sight to over $50 million of estimated annual QRP revenue. We believe the full pipeline and market represent an estimated revenue opportunity of well over $100 million per year.

The excitement for this catalyst is evident in the management’s rhetoric. The company has yet to recognize revenue for the product, but expect to do so sometime in the next few months. Until then, investors can rely on the testimonial of Tom Lyons, Chief Operations Officer of Plymouth Rock Management Company of New Jersey:

QRP will help us improve response time to client inquiries while preparing the most competitive insurance quotes possible. We view QRP as a mission-critical enterprise workflow management application that should significantly drive our business value to customers and help us expand sales.

It should be clear to investors that QRP is a great opportunity for QuinStreet in the near future. The product offers great reward to carriers and their agents, and will allow QuinStreet to improve upon its poor margins. Management expects to see 8-digit revenue from QRP in FY2021 which is just shy of 15 months from now.

Risk

Aside from the bright future surrounding QRP, the company has a few risks. As mentioned earlier, 22% of its revenue is derived from Progressive Corporation. Although no other companies represent more than 10% of revenue, this heavy reliance on a single company could be reason to worry. Progressive currently has a strong balance sheet, but further virus implications could force the company to reduce ad-spend. Doing some simple math, a 50% reduction in ad-spend would wipe more than 10% of QuinStreet’s revenue. This is a very real risk and deserves to be recognized in any financial projections.

Another risk lies in the company’s business model. Management has promised to continue to pursue acquisitions. While the company certainly has enough cash to do so, the underlying principle is cause for concern. One bad acquisition could prove costly to a growth company like QuinStreet. Investors will be putting their trust in management, relying on them to choose the right acquisitions at the right cost.

Valuation

Given the risk of decreased ad-spend from Progressive and/or other carriers, any valuation deserves two scenarios. A DCF model captured both scenarios. The following table shows the inputs and assumptions of the model:

5-Year CAGR

QRP Revenue Growth

50%

Other Revenue Growth

10%

QRP Gross Profit Margin

80%

Other Gross Profit Margin

11%

Operating Expenses (% of Revenue)

10%

Tax Rate

20%

Growth rate in perpetuity

2%

WACC

7%

Beta

1.25

Risk-free Rate

2%

Market return

6%

The above assumptions were present in both scenarios. In the first scenario, FY2021 revenue (consisting of Financial services/Education/Other) decreased by 10% from FY2020. The effect of the loss on earnings is somewhat diminished by QRP revenue which represented $10M in 2021, in line with management guidance. Discounting the 2025 value back to present, the model returns a price target of $12.25. This should be viewed as a baseline price target.

In scenario 2, FY2021 revenue has no growth, followed by 10% growth in subsequent periods. This results in a price target of $13.83, representing 35% upside from the current price. It should be noted that both models incorporated QRP revenue as management guided, forecasting for 8-digit revenue in FY2021. QRP revenue tops out around $50M in 2025 in the model, although management foresees revenue reaching $100M in the future. As seen in the chart below, profit margins will steadily increase as QRP gains ground in the market.

Zimlon Insurance Company Analysis

As the company becomes more profitable with QRP and other SaaS-like products, the stock price is sure to follow. Both of these scenarios were relatively conservative and thus clearly exhibit a considerable margin of upside for investors.

Conclusion

To sum up, QuinStreet is an undervalued company with room to grow. Revenue growth has been up and down in recent years, but the impending QRP product will rejuvenate the company’s earnings. Keen investors will notice QuinStreet trading at an absurd 38 P/E ratio. Normally this high of a ratio would be cause for concern. However, QRP promises to lift earnings over the next few years and management remains focused on growth-oriented acquisitions. The successful combination of these two will result in a profitable business worth more than 35% of its current share price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.





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Renault poised to announce 15,000 layoffs worldwide: union By Reuters


2/2
© Reuters. A logo of Renault carmaker is pictured at a dealership in Nantes

2/2

PARIS (Reuters) – French carmaker Renault (PA:) is poised to announce 15,000 layoffs worldwide on Friday as it unveils a plan to boost its profitability and cope with faltering sales, a representative for the CFDT union said after meeting with the company.

Some 4,500 jobs would go in France, though largely through a voluntary departure plan and a retirement scheme, the CFDT’s Franck Daout told Reuters on Thursday.

The overall cuts would affect just under 10% of Renault’s 180,000 global workforce. The firm has around 48,500 staff in France.

“They’ve insisted on the fact everything will be negotiated,” Daout said, adding that unions and state bodies would be involved in talks over potential job losses in France.

Renault declined to comment. The carmaker’s board signed off on the plans to launch its cost savings programme on Thursday, a source familiar with the matter said.

The French group, which is 15% owned by the government, had earlier this year flagged a looming “no taboo” plan to cut 2 billion in costs after posting its first loss in a decade last year.

That raised concern for some of its factories, including in France, although closures could be politically sensitive.

The French government has already said it will not sign off on a planned 5 billion euro state loan for Renault – an aid measure linked to the coronavirus pandemic – until management and unions conclude talks over the carmaker’s French workforce and plants in France.

The coronavirus crisis has compounded the company’s problems, accentuating a slump in demand that was already hurting sales.

Renault’s plans to invest in and extend operations in Morocco and Romania are likely to be frozen, Les Echos newspaper reported on Thursday, while its worldwide production capacity could be cut by 4 million vehicles to 3.3 million.

The restructuring follows a retrenchment by Japanese partner Nissan (T:), which is closing some plants and planning to become smaller and more efficient.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Justice Department, state attorneys general poised to hit Google with antitrust lawsuits: report


The Justice Department and a group of state attorneys general may file antitrust lawsuits against Alphabet Inc.’s Google as soon as this summer, according to a Wall Street Journal report that published Friday afternoon and cited people familiar with the matter.

The states’ probes are centered on the Alphabet Inc.
GOOGL,
+1.19%

GOOG,
+1.25%

subsidiary’s online advertising business.

The Justice Department, which is also scrutinizing Google’s ad technology, is focusing more broadly on how Google leverages its dominant search business to stifle competition, sources told the Journal.

The Justice Department could bring a case this summer, followed by some AGs — led by Texas Republican AG Ken Paxton — in the fall, the Journal reported. The Justice Department was not immediately available for comment.

“We continue to engage with the ongoing investigations led by the Department of Justice and Attorney General Paxton, and we don’t have any updates or comments on speculation,” a Google spokeswoman told MarketWatch. “Our focus is firmly on providing services that help consumers, support thousands of businesses, and enable increased choice and competition.”

For more: Four reasons why antitrust actions will likely fail to break up Big Tech

“We’ve issued [civil subpoenas] to Google and impacted third parties. We hope to have the investigation wrapped up by fall,” Paxton said in a statement, according to the Journal. “If we determine that filing is merited we will go to court soon after that.”

U.S. Attorney General William Barr, who continues to treat the investigation of Google as a priority despite the COVID-19 pandemic, told the Journal in March that he wanted a decision on the matter by the summer.

If filed, the lawsuits would pose a significant threat to Google’s rougly $170-billion-a-year business and rank among the biggest antitrust cases in U.S. history, alongside the government’s case against Microsoft Corp.
MSFT,
+1.45%

in the late 1990s.

Despite its status as a tech titan with a market value of $769 billion, Google has largely avoided federal government enforcement actions. The Federal Trade Commission, which shares antitrust authority with the Justice Department, conducted a broad investigation of Google but closed it in 2013, citing a lack of evidence.

With the expected federal actions, Google becomes the first of the four major tech companies under antitrust scrutiny to face action. The other three – Apple Inc.
AAPL,
-0.59%

, Facebook Inc.
FB,
+1.96%

, and Amazon.com Inc.
AMZN,
+0.87%

– and Google formally became the focus of the Justice Department and FTC nearly a year ago.

See also: Feds target four of the biggest tech companies in U.S., and their stocks are getting slammed

Alphabet shares fell about 2% in after-hours trading Friday afternoon following the release of the report immediately after the regular trading session ended.

Alphabet shares have held up recently despite concerns about antitrust charges and effects of COVID-19 on the online advertising market, rising 2.5% so far this year as the S&P 500 index
SPX,
+0.39%

has declined 11.7%.



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Asian shares poised to climb after Wall Street rallies By Reuters


© Reuters. Passersby wearing protective face masks are reflected on a screen displaying stock prices outside a brokerage in Tokyo

By Chris Prentice

(Reuters) – Asian markets looked poised on Tuesday to attempt another day of gains after stocks rallied on signs of a slowdown in coronavirus-related deaths, as oil prices resumed their decline on doubts about a potential Saudi-Russian pact to cut output.

Hong Kong futures were up and Australia futures also rose in early trade.

futures opened lower but were 2.3% above the cash close. The yen eased 0.01% as traders awaited more details on the government’s stimulus package.

On Monday, Japanese Prime Minister Shinzo Abe pledged to roll out an unprecedented economic stimulus, equal to 20% of economic output, as his government vowed to take “all steps” to battle deepening fallout from the coronavirus.

Equity investors kicked off the week encouraged by the slowing death toll from the virus across major European nations, including France and Italy. U.S. stocks rallied on Monday, with the S&P 500, , and all gaining more than 7%.

“Markets started the trading week with a more positive tone following early signs of improvement in virus data for key hot spots,” ANZ Research economists said in a morning note.

Emerging market stocks rose 2.66% at the start of the week. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 2.77% higher.

The governors of New York and New Jersey pointed to tentative signs that the coronavirus outbreak in their states was starting to plateau but warned against complacency, while across the Atlantic British Prime Minister Boris Johnson, who has the COVID-19 disease caused by the virus, was taken to intensive care, driving down the pound.

Reported cases of coronavirus, have exceeded more than 1.27 million globally and 70,395 have died, according to a Reuters tally.

Oil futures resumed their decline, falling more than $1 per barrel on Monday, after Saudi Arabia and Russia delayed a key meeting aimed at resolving growing excess supplies at a time the pandemic has pushed down demand.

Prices had previously notched two sessions of double-digit gains on hopes the producers would meet and agree to production cuts.

Gold prices rose, touching a fresh 3-1/2-week high.

Demand for gold, seen as a store of value, has jumped as governments around the world roll out stimulus packages to soften the economic blow of the pandemic, but effectively diluting their currencies.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Eltek Ltd: A Company Poised And Ready To Take Advantage Of The Global Supply Chain Shift – Eltek Ltd. (NASDAQ:ELTK)


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Introduction

(Disclosure: I am a 5%+ shareholder of ELTK and an Activist Investor in the Company. All statements not sourced are my opinion only. Full disclosure statement appears at the end of this article.)

Eltek Ltd. (NASDAQ: ELTK) is a high-end global supplier and manufacturer of sophisticated and highly advanced Printed Circuit Boards (PCBS) based in Petah Tikva, Israel. Following Phase 1 of a turnaround plan, the Company delivered an operating profit as well as a net profit for three consecutive quarters. ELTK is a premiere leader in PCBs, in business for 50 years, and its customers include leading companies in the defense, aerospace, and medical industries in Israel, the United States, Europe, and Asia. Additionally, ELTK is benefited from ownership and control by Nistec, a much larger organization.

“The Company is controlled by Nistec Golan Ltd (“Nistec Golan”). Nistec Golan is controlled indirectly by Mr. Yitzhak Nissan.”

-Source: SEC: ELTK INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Getting to Know ELTK

Understanding the Growing High-End PCB Market

The general PCB industry’s expected to grow to “$89.7 billion by 2024 with a CAGR of 4.3% from 2019 to 2024.”

Source: GlobeNewswire, Inc. – market report published by Lucintel

Within this growing PCB market, the high-end Flexible Printed Circuit Boards, “market size expected growth is 11.2% CAGR through 2025.” ELTK is a Recognized Worldwide Leader in this high-end growing tech niche and I believe ELTK will benefit through continued revenue and profit growth.

“The ongoing trend of miniaturization and development of multi-feature electronic devices is pushing PCB manufacturers to produce highly dense and high-speed flexible PCBs. The market is highly consolidated with the top five manufacturers accounting for major share and generally determines the overall trend. Key players operating in the global market include” Eltek Ltd and others.

Source: Printed Electronics NOW

Thomas Publishing Company lists ELTK as number 4 of the Top Global PCB Manufacturing Companies (Source: Thomasnet.com)

Phase 1 Turnaround – How ELTK Became Profitable

Increased margins through a mix of product churning and better order fulfillment selection, in addition to management of their expenses for cash flow, made ELTK profitable. These changes were not short-term cuts at the expense of long-term growth. ELTK continued to maintain GAAP profitability during in both Q2 and Q3 while growing revenue to the highest in years in Q3 and all the while increasing margins.

CEO Eli Yaffe stated during Q1 2019 earnings call:

“We are glad that this quarter results reflect the first stage of our turnaround plan, which we started during the last quarter of 2018. We identified the products that were underpriced and have declined such orders in order to increase profitability. We’re also closely monitoring our personnel expenses with a focus on cash flow.”

“Our revenue in the first quarter of 2019 was $8.7 million as compared to revenue of $8.9 million in the first quarter of 2018.”

Source: Seeking Alpha: ELTK Q1 2019 Results – Earnings Call Transcript

For Q1 2019, ELTK delivered $242,000 net profit, providing net cash from operating activities of $1.6 million compared to net cash used of $859,000 during the first quarter of 2018.

Source: SEC: ELTK Reports 2019 First Quarter Financial Results

Long Term Contracts

Company Press Release, January 9, 2020.

“Eltek Ltd. Received an Additional Order for Up To $1.4 Million From a Governmental Authority. In addition, to enable the execution of the project, the customer shall lend the Company, for no consideration, equipment in a total value of approximately $630,000.”

CEO Eli Yaffe, commented: “The original selection of Eltek by this customer attests to the trust in the Company’s technological capabilities.” (Source: SEC: Company Press Release)

US-China Trade-War, Supply Chain Shift, Coronavirus

Companies are in the process of diversifying and shifting their supply chains out of sole reliance on China. The trade-war and now the coronavirus accelerated this supply chain shift.

Forbes states, “Coronavirus Could Be the End of China as A Global Manufacturing Hub.” (Source: Forbes Mar 1, 2020)

I believe ELTK and Nistec are in a leading position to benefit from this global supply chain shift.

Info Graphic Source: Author’s – Michael McGauley

Many companies, including the largest in the world, are having difficulties locating alternative manufacturing centers. Vietnam and Thailand are two alternative locations sometimes mentioned; however, I believe Israel is another potential beneficiary because its technological capabilities.

Two news articles supporting and detailing the desires and challenges in shifting the manufacturing supply chain are:

“Apple, Microsoft, Google look to move production away from China. That’s not going to be easy.”

-Source: CNBC – MAR 4, 2020

“Tesla delivered cars to customers in China with lower-performance Autopilot hardware than promised. Tesla blamed its decision to use the older version of their hardware in new Model 3s on supply chain disruptions.

-Source: CNBC – MAR 4, 2020

Backwinds from Macro-environment

During the 2019 Q2 conference call, CEO Eli Yaffe said, “The macro-environment and tariffs in the U.S. market for the products imported from China may provide a positive backwind for the segment of military product that Eltek produces.”

(Note: My name is spelled wrong in the earnings call transcript.)

I asked for further clarification about the backwinds, CEO Eli Yaffe answered,

“What I meant when I speak about backwind is tariff that was changed in United States mainly for import from China for military products, not for mobile. And since we are partners and players in the defense market, it’s a backwind for us.”

-Source: Seeking Alpha: ELTK Q2 2019 Results – Earnings Call Transcript

Three months later during the Q3 call earnings call CEO Eli Yaffe again mentioned backwinds.

“We are glad that this quarter results continue to reflect the implementation of our previously announced turnaround plans. Even so, it is still not reflected in our revenue; the macro-environment enters in the U.S product imported from China may provide positive backwind for the segment of the military products that Eltek produce. The increase in our total line reflects a continued market recognition of our high quality and reliable products.”

-Source: Seeking Alpha: ELTK Q3 2019 Results – Earnings Call Transcript

ELTK is a Special Microcap Company with a 50 Year History and Support from Nistec

Founded in Israel in 1970, ELTK’s survived and competed at a world-class level for 50 years. I don’t know any other micro-caps that can make this claim. Additionally, Nistec provides sales channels and other synergistic savings.

As noted by the company,

RELATED PARTY BALANCES AND TRANSACTIONS

PCB purchases by Nistec – Nistec purchases PCBs from the Company solely to provide assembled boards to its customers and not for re-sale.

Soldering and assembly services – The Company may acquire soldering services and/or purchasing services from Nistec.

Insurance expenditures – The Company may share with Nistec costs of insurance consulting and insurance premiums.

Employees social activities – The Company may purchase social activities for the benefit of its employees together with Nistec.

Marketing activities – The Company may purchase services together with Nistec.

-Sources: SEC: ELTK Form 20-F Annual Report

Nistec also granted ELTK loans at very favorable interest rates and terms. (SEC NOTICE OF ANNUAL GENERAL MEETING OF SHAREHOLDERS – Section INTEREST AGREEMENT WITH OUR CONTROLLING SHAREHOLDER)

History of Shareholder Friendly Benefits

Early in 2019 ELTK, was trading around in the mid-$1 range after losing money for several years, going through a 5 to 1 reverse stock split, and needing recapitalization. ELTK’s Board and the executive team chose to offer existing shareholder subscription rights whose terms and conditions were generous and favorable, not to a Wall Street investment firm, but instead to mom-and-pop investors. Investors in ELTK had a first chance opportunity to participate in the recapitalization. Unlike typical micro-cap company’s that continue issuing new shares and diluting to raise capital, this was the first time ELTK ever issued additional shares under Nistec Golan Ltd. ownership.

Details of the Subscription Rights:

“We will distribute to you five (5) subscription rights for every three (3) ordinary shares that you own on the record date. Your rights will be rounded down to the nearest whole number and accordingly, no fractional rights will be issued in the rights offering. Each right entitles the holder to purchase, at a price of $1.464 per share, one ordinary share.”

-Source: SEC: ELTK SUBSCRIPTION RIGHTS TO PURCHASE

Shareholders who purchased these rights potentially made up to about 5x profit when the Company turned profitable in 2019 Q1.

Financial Metrics

P/E Ratio: Sometimes, P/E is a simple, easy way to value a company; however, it does not apply in every situation, and I believe it is misleading when looking at ELTK. For example, finance.yahoo.com showed the P/E ratio of ELTK about 13.91x on March 3, 2020, when the stock was trading for about $3.50.

Source: Yahoo Finance (March 3, 2020)

However, this P/E ratio states it is TTM (Trailing Twelve Months). In the case of ELTK, they did not become profitable until Q1 2019; hence data before the company turnaround is likely negatively impacting the P/E ratio and other financial metrics. I believe its a mistake using those metrics for value decision making without understanding the details. If ELTK continues to maintain profitability for a 4th consecutive quarter, assuming all else is equal, then the PE should be lower.

Other statistics, such as a 52-week range, EPS (TTM), will likewise only be updated to relevant post-turn-around metrics sometime after the 2019 Q4 earnings release.

Price-To-Sales Ratio:

Calculated by using Market Cap / Total Revenue over the past 12 months.

Using the Market Cap of $15.115M as March 3, 2020, and a TTM Revenue of $34.040M, the most recent price-to-sales ratio is a mere 0.44x indicating the Company is severely undervalued. A 0.44x price-to-sales ratio is low for a growth-oriented company in an industry undergoing expansion and favorable macro-economic factors moving into the future.

Source: Yahoo Finance: Eltek Ltd. (ELTK) Income Statement

Historical Background

A Brief Explanation of the Past 1 Year Stock Chart:

Source: Yahoo Finance: Eltek Ltd. (ELTK) Interactive Stock Chart, Analysis and Annotation: Author’s – Michael McGauley

In 2018, ELTK was losing money. A new CEO Eli Yaffe, and CFO Alon Mualem, took over to make the changes needed to make ELTK profitable.

The new executive team put together and executed a successful phase 1 of a turnaround plan detailed below. Since becoming profitable in Q1 2019, ELTK’s continued maintaining its GAAP profitability for all subsequent quarters.

Q1 Price Spike – GAAP Profitable

The market was shocked about the profitability news, and the stock soared 550% in two days. Given the exuberant reaction from the report and the known fundamentals at that time, it is not surprising that the stock had a bit of a pullback. However, the turnaround was real.

“Chief Executive Officer Eli Yaffe said that the Company was delighted that the results are a reflection of the first stage of the implementation of its turnaround plan that commenced in Q4 2018. He added that the Company continues with its effort of enhancing operating efficiencies, improving customer experience, formulating effective sales strategies as well as its continued implementation of the plan to achieve sustained profitability.”

-Source: SmallCap Exclusive

Diagnosing More Recent Trading and Volatility (Q2 2019, Q3 2019, and COVID-19)

Q2 2019 Price Spike

Momentum traders piled into ELTK before the Q2 earnings release in anticipation of an excellent report and given the previous price spike ELTK exhibited following Q1 earnings. For Q2 net cash provided by operating activities was $1.3 million, and ELTK had a $7,000 operating profit as compared to an operating loss of $721,000 in the second quarter of 2018. However, while ELTK was profitable, most of the earnings came from an insurance payment on broken equipment required for manufacturing operations. “Other Income was $871,000 in the second quarter of 2019, mainly attributable to receipt of payment on an insurance claim made.” (Source: SEC: ELTK Reports 2019 Second Quarter Financial Results)

Following the Q2 earnings report, ELTK went back to trading in the mid-three-dollar range.

Q3 2019 Price Spike

ELTK delivered its best quarter in years.

“As Eli mentioned, revenues for the third quarter of 2019 increased to $9.3 million, compared to revenues of $8.5 million during the third quarter of 2018. Gross profit increased from $973,000 or 11.4% of revenues in the third quarter of 2018 to $1.8 million or 18.9% of revenues in the third quarter of 2019.

During the third quarter, we had an operating profit of $568,000 as compared to an operating loss of $307,000 in the third quarter of last year. Net profit was $391,000 or $0.09 per fully diluted share compared to a net loss of $463,000 or $0.23 per fully diluted share in the same quarter last year.”

-Source: Seeking Alpha: Eltek Ltd. (ELTK) CEO Eli Yaffe on Q3 2019 Results – Earnings Call Transcript

Traders drove the shares of ELTK up to a high of $5.55 two days before the earnings release. Many people perceiving a downward series of spikes based upon Q1 and Q2, set their trading strategy to sell the stock before earnings. Examining the trading around the Q3 earnings release in the table below shows this activity. ELTK stock initially spiked on November 15th and 18th; however, the high $5.55 was lower than the spike, which occurred before Q2 earnings. ELTK then started to sell off November 19, the day before earnings on November 20. By the close of trading on December 20, the day of earnings, ELTK was down to $3.96 per share.

ELTK Historical Price Table Q3 Earnings

Day

Fri

Mon

Tue

Wed

Thu

Date

15-Nov-19

18-Nov-19

19-Nov-19

20-Nov-19

21-Nov-19

Open

3.88

4.18

4.82

5.03

3.82

High

4.12

5.55

5.03

5.2

3.89

Low

3.73

4.16

4.33

3.52

3.62

Close*

4.06

4.68

4.54

3.96

3.69

Volume

45,900

1,186,700

364,900

727,000

171,100

Comments

Start of Price Runup

High Price 2 Days before earnings

1 Day Before Earnings First Selloff

Earnings Release Selloff

Back to Trading in the $3 Range

Data Source: Yahoo Finance: Eltek Ltd. (ELTK) Stock Historical Prices & Data

Why the Selloff After Q3 Earnings?

I believe, going into the Q3 earnings release, momentum traders, including short traders, were counting on the stock to go up before the earnings release and go down on “sell-the-news” mentality as per the trend of the prior two quarters. To the shorts’ surprise, the Q3 earnings were ELTK’s best in years. Caught on the wrong side, and facing initial upward momentum from the earnings report, shorts ensued to devalue the stock in the premarket and early trading to rattle the short-term momentum traders looking for a sudden rise in the price. The shorts succeeded in shaking out the upward momentum players and changing the momentum of the stock towards a downtrend.

Looking at short interest report information in the table below, we can see how shorts contributed to the share price fall following Q3 earnings. The short interest in ELTK spiked to an all-time high of 142,662 shares on 12/13/2019. The only previous time ELTK had such a substantial short interest was after the exuberant spike in ELTK stock to $11.56 per share following Q1 earnings.

Short Interest Table

SETTLEMENT DATE

SHORT INTEREST

% Change

COMMENTS

5/15/2019

590

-85.56%

5/31/2019

128,020

21598.31

After Q1 Eltek Popped to $11.56 per share 11/5/2019

6/14/2019

66,727

-47.88

6/28/2019

87,109

30.55

7/15/2019

52,974

-39.19

7/31/2019

46,769

-11.71

8/15/2019

41,498

-11.27

8/30/2019

60,871

46.68

9/13/2019

80,490

32.23

9/30/2019

31,101

-61.36

10/15/2019

31,300

0.64

10/31/2019

27,453

-12.29

11/20/2019

Q3 Earnings Report

11/15/2019

44,309

61.4

11/29/2019

135,734

206.34

First Short Interest Report Following Q3 Earnings

12/13/2019

142,662

5.1

The all-time highest number of short shares

12/31/2019

115,302

-19.18

1/15/2020

123,431

7.05

Shorts increased after a great news release of government contracts.

1/31/2020

20,906

-83.06

2/14/2020

15,681

-24.99

2/28/2020

?

?

Next dissemination date of short interest (3/10/2020)

Data Source: NASDAQ: Eltek Ltd. Ordinary Shares (ELTK) Short Interest

COVID-19 – Coronavirus Impact to Stock Price

Most recently, ELTK stock price fell with the general market coronavirus fears. The stock went from low $4 range to a low of $3.23 on Friday, February 28. However, this fall in stock price occurred on low single-digit % outstanding share volume. See Coronavirus Stock Price Impact Table below.

Coronavirus Stock Price Impact Table

Day

Tuesday

Wednesday

Thursday

Friday

Monday

Date

25-Feb-20

26-Feb-20

27-Feb-20

28-Feb-20

2-Mar-20

Open

4.06

3.89

3.89

3.51

3.53

High

4.06

3.94

3.89

3.52

3.64

Low

3.86

3.82

3.66

3.23

3.36

Close*

3.96

3.88

3.66

3.34

3.5

Volume

21,100

27,700

40,300

58,800

15,200

% of Outstanding Shares Traded

1.64%

2.15%

3.13%

4.56%

1.18%

Rebutting a Potential Short Argument of Additional Shares

Shorts traders may try to make the following false argument: “ELTK filed a registration for additional securities and ELTK stock will collapse upon issuance of $10 million of securities that are 60% of their market cap.”

My research shows this case is unlikely based on constraints within the F-3, specifically preventing any significant dilution.

Those constraints in the SEC F-3 filing state:

“The aggregate maximum offering price of all securities covered by this Registration Statement will not exceed $10,000,000.”

“In no event will we sell securities pursuant to this prospectus with a value of more than one-third of the aggregate market value of our Ordinary Shares held by non-affiliates in any 12-month period, so long as the aggregate market value of our Ordinary Shares held by non-affiliates is less than $75,000,000.”

The aggregate market value of “outstanding Ordinary Shares held by non-affiliates on August 7, 2019“, “was approximately $4.9 million.”

Based on the above, if ELTK had issued securities on August 7, 2019, then the maximum value would have been $1.6 million, or 10.6% of its market cap at that time.

Example Calculation: One-third of $4.9 million is approximately $1.6 million. ELTK traded at a high of $3.41 on August 7, 2019, with a market cap of roughly $15 million (slightly lower than today’s market cap). Given this, $1.6 million is 10.6% of $15 million.

Additionally, as of this time:

The registration filing was on 2019-08-08. It is now March 2020, 7 months after the initial registration, and there is no issuance of additional securities.

CFO Alon Mualem, during the Q3 earnings call, described the filing as a baby shelf prospectus “to provide the company the ability to raise funds, if market condition[s] will support such fundraising.” (Q3 Earnings Call Source: Seeking Alpha: Eltek Ltd. (ELTK) CEO Eli Yaffe on Q3 2019 Results – Earnings Call Transcript)

Lastly, an assumptive question on the Q3 earnings call asked about “future potential offerings to raise capital for the company to continue operations.” CFO Alon Mualem responded it was to “provide the company the ability to raise funds if market condition[s] will support such fundraising.” Subsequently, when asked if, from a cash flow perspective, ELTK is in “financially stable condition leading into 2020 at this point?” CEO Eli Yaffe stated, Our current cash flow is positive.

ELTK does not need the money “to continue operations,” if they were in such dire need cash for operations, they would have issued the securities by now. Speculative productive uses of the potential funds are growth initiatives or paying down debt to shore up the balance sheet. CEO Eli Yaffe said, “we’re all focused on expanding our business.”

For all these reasons, I view the SEC F3 Registration filing for possible additional securities as favorable and within the interest of shareholders.

Why I Invested in ELTK

The market has not yet recognized ELTK is a profitable and robust global leader in the fast-growing high-end PCB manufacturing space and a potential beneficiary to the worldwide supply chain shift.

I believe ELTK is significantly undervalued. Neither the current fundamental value nor the significant longer-term growth potential is recognized yet. Potential new longs are being gifted a low entry point due to market mispricing.

Even though investing in a microcap stock is considered highly risky, this is a particular case microcap. With a 50-year business history, three consecutive quarters of GAAP profitability and revenue growth, favorable macroeconomic conditions, world-leading technology, control, and ownership by Nistec, ELTK is at a real competitive advantage.

After doing months of due diligence, and completing my 5+% purchase of ELTK, I visited ELTK’s factory and toured all of the Nistec facilities. Unlike some activist investors, I fully support ELTK’s management team and look forward to working with Nistec owner Mr. Yitzhak Nissan, CEO Mr. Eli Yaffe, and CFO Alon Mualem in the Company’s evolution.

Eltek is an excellent company with the right tech in the right space at the right time.

Disclosure

I am long ELTK, and I own 5%+ of the Company as filed in Schedule 13D with the SEC. Information presented in this article is my own opinion and is for informational purposes only; it does not intend to make an offer or solicitation for the sale or purchase of any securities, and should not be considered investment advice. Be sure to first consult with a qualified financial adviser and tax professional before implementing any strategy discussed here. Information provided reflects my views as of specific periods; such opinions are subject to change at any point without notice. I will not trade in ELTK during the next 72 hours.

Disclosure: I am/we are long ELTK.





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