ELEMENTARY VALUE
  • Home
  • About
  • Forum
  • Books
  • Tools
  • Contact

Westell Technologies Corp (WSTL) -  Holding on for brighter days

11/20/2021

17 Comments

 
Picture

Today's market doesn't care about Westell Technologies Corp (WSTL). Most market participants are either repulsed by it, ignoring it, or have just forgotten about it altogether. Aside from a few net-net investors and some bottom fishers there's little attention being paid to it right now.

The less attention being paid to a stock, the more I am attracted to it. There's plenty of reasons why WSTL is sat  trading below NCAV on the pink-sheets but where others see risk I see opportunity. 

WSTL was founded back in  1980  and operates in the telecommunications industry. The company website describes their business as follows;

'Westell Technologies, Inc., headquartered in Aurora, Illinois, is a leading provider of high-performance network infrastructure solutions focused on innovation and differentiation at the edge of communication networks where end users connect. We enable service providers and network operators to improve performance and reduce operating expenses via a comprehensive set of products and solutions. With millions of products successfully deployed worldwide, we are a trusted partner for transforming networks into high-quality, reliable systems.'

Their markets include In-Building Wireless Solutions, Intelligent site management and Communications Network Solutions.  The stock has been pounded down into oblivion in recent years  for a variety  of reasons including declining revenues and chronic unprofitability.

Charts then numbers. 

Picture
WSTL 5 year chart

The stock is down from over $4 in late 2017 to  $1.11 today.  It bottomed out in early 2020 and is now building a base.  It has ticked up of late after it emerged  that Congresswoman Debbie Wasserman Schultz has recently bought a few shares. Someone get Pelosi on the phone!

 Lets zoom out a bit.

Picture
WSTL 10 year chart

Now we can really start to see the value destruction  that has taken place. Back in  late 2013 and early 2014 the stock was trading above $16. Whoever was buying up there has surely sold out by now . A decade of  brutal  share price decline will test the resolve of even the most diamond handed market participant!

Time for the big picture.

Picture
WSTL long-range chart

The long-range chart shows the tumultuous  history of WSTL in all its ugly glory. Back in 2003 the stock traded over $43. In the dotcom boom it  breached the $150 zone, and  back in the mid 1990's it even  traded in the low $200's. 

And now here we are, bouncing along support on low volume  at just over a buck. No wonder pretty much everyone has given up on the stock.

Management decided to delist in 2020 and did a  reverse/forward split  cash-out at $1.48 for holders of less than 1000 shares.   It was the right thing to do given the firm had racked up an accumulated deficit of over ($350 Mil ) and was bleeding red  in most years. 

The stock now resides on the 'limited info' tier of the pink-sheets and  volume is light.

On to the numbers.

Market Cap =   $12,391,350 (OTC Markets lists  this wrong as Class B shares are not included)
Share price = $1.11
Common outstanding (Combined Class A & B shares) =   11,163,378
Float   = 6,877,675
TBV =  $23,522,000
TTM Revenue = $31,531,000
TTM Operating Income = ($2,851,00)
NOL's = $40 Mil

On an assets basis WSTL is cheap and for good reason, several years of declining revenues and unprofitability will do that to a stock.

How cheap is cheap?

Picture
Picture
WSTL Q2 Report (Sept 2021)

The latest quarterly  reveals  the following;

Current assets =$31,241,000
Total Liabilities =$10,199,000

NCAV =$21,042,000  or $1.88 on a per share basis.

Once a few adjustments are made it gets even cheaper.

Lets scrub off the current and non-current deferred revenue of  $398k since they relate to maintenance    contracts (services) and not inventory (physical products). 

We can also scrub off around $1.64 Mil in liabilities since another PPP loan was just forgiven.


Adj. NCAV thus stands at  $23,077,522 or  $2.06 per share.

At this price the stock is trading at  0.59x NCAV and  0.53x Adj. NCAV


Now the obvious argument   here is that the discount is justified since WSTL is a melting ice cube. The company's financial history certainly supports this assertion. 

Picture
WSTL Historical annual financial performance. Chart courtesy of TIKR.com

Revenue down from  $236 Mil in 2004 to  TTM 31.5 Mil. 

Negative Operating Income for the last 10 years.

The picture looks bleak but  the descent into the abyss appears to be coming to a halt.

Here's the quarterly financial performance for the last few years.

Picture
WSTL Historical quarterly financial performance. Chart courtesy of TIKR.com

Notice how the downward trend in revenues seems to  stop in 2019?

Since then  they  appear to have stabilized and the  operating losses have narrowed.

In fact WSTL has posted a modest operating profit for the past two quarters. $10k in Q1 and $17k in Q2

Whilst I was going though some old filings and press releases I noticed that WSTL had appointed a new CEO in  Sept 2019.  Perhaps his appointment has led to a stabilization in the company, I can't say for sure but something positive seems to be happening. 

I know next to nothing about the Telecommunications industry but I figure WSTL might pick up some business from the continuing roll-out  of 5G. I've also noticed the growing trend toward smart buildings, Internet of Things (IOT) and the deployment of autonomous  monitoring systems. Maybe WSTL benefits from that, maybe some of those Biden infrastructure     dollars trickle down to them  too.

​It doesn't take much to move up a stock that's been left for dead.

What are the risks here.

The most obvious one is that the apparent stabilization of the company's financial performance is merely  'transitory' and the descent into the abyss will resume  in short order.

Losses could continue and the asset base could keep on melting away.

Another major issue is the dual class structure and insider control. One of the directors, namely  Robert  W. Foskett, owns 100% of the Class B shares which carry 4 votes for each 1 vote that the Class A shares carry. This means that insiders are in control and shareholder activism is off the table.

With that kind of voting power the board could pull all kinds of nefarious stunts and minority holders would be  powerless to stop them.

Maybe they just decide to take the company dark or private and rig it so minority shareholders get screwed in the process.

​There's all kinds of ways this could end badly.

As is customary for me, I let the long range chart and balance sheet lead the way. WSTL is cheap on an assets basis and I'll hang my hat on that.  The stock is sat close to its all time low on the long range chart and has begun to build a base on low volume.

The strength of the balance sheet creates a window of opportunity for the company's fortunes to improve.  The chart shows what's possible if business picks up.

My average cost basis is in the 90's and I've recently bought a little more above a buck, now the buying is done it's a question of holding on for  brighter days.


Thanks for reading,

David


Disclosure - Long WSTL
17 Comments
Thijs Roemaat link
11/21/2021 08:51:25 am

Hi David, great write up!
I have been following this one for a while, nice to have a different perspective on it. I kind of overlooked the ownership structure. Something to consider. I bought this one back at the 2020 lows and quickly sold it at the 1,20 spike. Coincidentally I bought it back a few weeks ago. Interesting company.

Reply
David
11/21/2021 12:26:35 pm

Thanks for reading Thijs,

Yeah, the ownership structure is an issue and it would help if they just did away with it and had a single class of stock instead. A few investors were complaining about it on the last conference call they did.

Reply
Bryan McPherson
11/21/2021 02:18:26 pm

Hi David,

Very informative article!

Bryan

Reply
David
11/21/2021 06:14:58 pm

Thanks for reading Bryan, much appreciated.

Regards,

David

Reply
Alex
11/21/2021 05:50:12 pm

Hi David,

I’m wondering why you felt it onay to scrub the current and non-current deferred revenue in your valuing process.

Always love your work. Thanks for another great post

- Alex

Reply
David
11/21/2021 06:14:00 pm

Hi Alex,

Thanks for reading.

In this instance the deferred revenue mostly related to maintenance contracts (service) rather than inventory (physical product) so I decided to scrub it. Depending on how conservative you wish to be with your valuation and how you think about deferred revenue you may wish you keep it there as a liability on the balance sheet.

A case can certainly be made that if the company went out of business and into liquidation it would have to return the payment depending upon the terms of the contract.

Regards,

David

Reply
Anthony
11/22/2021 12:21:08 am

David,

Great article and love hearing the insights towards your evaluation of the business. Look forward to reading the next one. Thanks for the great Sunday read.

Best Regards.
Anthony

Reply
Former Employee
11/29/2021 10:07:56 pm

I am a longtime (and now former) employee of Westell. As revenue has shrunk over the years, there have been continual employee layoffs, averaging once a year. I am one of the few who left of my own volition. Due to the shrinking number of employees, the release cycle of old products and development of new products is stretching. They have been largely unsuccessful in pivoting from old, dying products into new markets. I would look at more than just how cheap the stock is.

Reply
David
11/29/2021 11:07:17 pm

Hi,

Thanks for the insights. There's a lot of risk here for sure, the stock is dirt cheap for good reason.

I hope you have managed to find some good employment opportunities after leaving Westell. I wish you much success in the future and thanks for taking the time to stop by and comment, much appreciated!

Regards,

David

Reply
Soren Pack
12/6/2021 05:35:01 pm

Hello David,

I found you from your episode on The Investors Podcast. I really like your ideas of finding value in micro cap
stocks especially with how expensive the market is right now. However on most E trading platforms you cannot find these stocks. How would I go about investing in these.

Thanks,

Soren

Reply
David
12/8/2021 05:47:24 pm

Hi Soren,

Thanks for taking an interest in my work. The best platform I can recommend for buying these tiny obscure stocks is Interactive Brokers.

Regards,

David

Reply
Evan link
1/27/2022 11:48:31 am

Hi David,

Nice write up and your thesis mirrors mine closely. While I did not put much stock in the huge rallies in the distant past, I did put a lot more emphasis on the 5G rollout. If you look at how the stock performed during the past 3 rollouts, there were massive price moves. 5G is going to be larger than anything before it in termsnof infrastructure spend, and it is likely Westell will get some of that. If so, given where it is right now, another massive rally is in the works.

Did you manage to do any qualitative snooping about management's plan to relist on a major index since you wrote this piece? I suspect that they will relist to get maximum investment exposure and cash in through share sales.

Also, I saw that you blend technical and fundamental value - who's technical approach are you using?

All the best,
Evan

Reply
David
1/29/2022 12:42:14 pm

Hi Evan,

I agree regarding past stock price moves tallying with upgrades roll-outs. That's a big part of my thesis with the stock.

I have not reached out to management or IR at WSTL yet so not sure about any plans to re-list.


My technical approach is primarily based upon the book 'How to make the stock market make money for you' by the late Ted Warren. You can find copies of the book on Amazon, Alibris and Abe Books.

Regards,

David

Reply
Greg Z
8/7/2022 07:41:27 am

Hi David,
Interesting write-up. I wonder how you size positions in your portfolio to take into account risk in those "half-dead" companies?

Reply
David
8/7/2022 09:07:31 pm

Hi Greg,

With positions like this I'm normally size it at say 2-3% and then follow the company to see how things progress, if it looks like things are improving I'll add.

Regards,

David

Reply
Greg Z
8/7/2022 09:19:23 pm

Thanks, that's reasonable.

Pandya
8/22/2022 04:23:39 am

So, is Westell a good company to work for? They offered position in In Building products. I can't decide to whether to accept it or not. Thank you in advance.

Pandya

Reply



Leave a Reply.

    David J. Flood

    UK based Investor. I focus
    ​on Net-nets, Pico/Nano caps, AIM/OTC/Dark stocks & Special Situations. Balance sheets & Long-range price charts are my guide. Caveat Emptor!


    For updates enter your email address and hit subscribe


    RSS Feed



    Archives

    May 2022
    January 2022
    November 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    December 2020
    September 2020
    June 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    June 2019
    April 2019
    March 2019
    February 2019
    January 2019
    November 2018
    October 2018
    August 2018
    April 2018


    Categories

    All
    AFFY
    AWRY
    BVERS
    CDTI
    CWPS
    Dark Companies
    ECRO
    EESE
    ENET:AIM
    EQTL
    FULO
    GTC:AIM
    HDT:AIM
    HGPI
    HMGN
    IMUC
    IOF.L/IOFNF
    LTRE
    MFCO
    MGAG
    MIRI:AIM
    MNO:AIM
    MYRX
    MYX:AIM
    NFPC
    NTIP
    NVTRQ
    ORGN
    PCOA
    PHSC.AIM
    PLWN
    Podcasts
    PPMT
    PSSR
    SPCB
    Svenda's Manual Of OTC Stocks
    SYEV
    TCN:AIM
    TTYP
    WSTL
    ZCOM


    BLOGS I FOLLOW

    No Name Stocks

    Svenda's Manual of OTC Stocks
    ​
    Caveat Emptor Stocks
    Leaven Partners
    OTC Adventures
    Nothing But Net Nets
    Clark Street Value
    Value Investing Blog
    Alpha Vulture
    Deep Value Investments
    OddballStocks
    Value Stock Geek
    Barel Karsan - Value Investing
    Shadow Stock
    Hidden Value
    Yet Another Value Blog
    Streets Of Value
    TES Optimal Value Investing
    The Bad Investor
    ​
    Undervalued Japan
    ​Liquidation Almanac
    ​
    Adventures in Capitalism
    White Chip Stocks
    Light Blue Value
    ​Global Investing Insight
    ​Mesaba Range Value
    The  Market Plunger
    Neto's Notes
    ​Battleship Investing Blog
    The Investment Long-List
    Oceania  Value
    Grahamian Value Digest
    Stock Speaking
    Canadian Value Stocks
    Analyzing Bargain Stocks
    MicroValue
    ​
    Hidden Gem Investing
                                                             © COPYRIGHT 2018-2021 ALL RIGHTS RESERVED
  • Home
  • About
  • Forum
  • Books
  • Tools
  • Contact