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

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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. 

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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. 

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WSTL 5 year chart

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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.

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WSTL 10 year chart

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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.

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WSTL long-range chart

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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.

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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?

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WSTL Q2 Report (Sept 2021)

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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. 

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

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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.

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

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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.

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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.

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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