3/08/2011

Question on current DWCH valuation

I agree the stock has had a nice run. But that hasn’t stopped the CEO from adding additional shares today (03/08/11) after yesterday’s reported buys. EV to sales is still only ~ 1.50 with FCF margins ~10% and ROIC 14.80%. So current valuation is fair and the multiple future catalysts may be the motivation for the CEO and Vice Chairman multiple open market buying. In my opinion, valuation will improve based on the new direction/product mix, future product upgrades, and a simple overdue increase in volume.


I strongly believe Michael Morison CEO and Vice Chairman David Mahoney did not join a tiny company like Datawatch and buy large number of shares if they didn’t believe in its future value. They both have a stellar background in BI turnarounds with the Applix in particular. Vice Chairman Dave Mahoney has been the CEO of LeadingSide, Verbind, Sovereign Hill Software and ePresence. From 1973 through 1983, Mahoney was the director of communication product development at Data General. “Mr. Mahoney became CEO of Applix, Inc. and led a restructuring that enabled the company to attain a sustained growth rate in excess of 35 percent annually and resulted in a successful merger in 2007 with Cognos, Inc. During his tenure at Applix, the company achieved a twenty times increase in market valuation. “

Back to valuation; At this point I’m not expecting any significant financial change this quarter that would immediately justify a significant run up in the near term. But I also see the stock much higher long term. From a relative valuation there are few comparisons but I do have the 2003 Data Junction take over by Pervasive (PVSW) for 51.70 million. They sold a very similar product and solution as Datawatch. Data Junction had only 25,000 customers at the time of the offer. Datawatch’s desktop Monarch currently has over 400,000 growing license users worldwide coupled with a group of derivative higher margin enterprise wide solutions. Datawatch solutions are used in more than 44,000 companies, institutions and government agencies worldwide. DWCH was trading at the end of today for 31.84 million with no long term debt and 7.84 million in cash or 1.26 per share. So in term of relative valuation Datawatch compares very favorably to the 51.70 million offer for Data Junction.

Another important valuation comparison is with Mobius (MOBI). Back on April 11, 2007, MOBI accepted an offer from the privately held Allen Systems Group for $10.05 cash per share. The total value of the offer was about 195 million or over 2 times sales. I don’t have the exact sales multiple figure. MOBI used to resells the Datawatch data analytics product, Monarch, under the Mobius product name DocuAnalyzer.

Intrinsic value also looks promising without doing a DCF calculation but looking at FCF margins @ 10% and real opportunity for improved FCF margins, ROIC and earnings yield driven by volume and improved product mix with enterprise related higher margin solutions.

I don’t want to make too much of the relative comparison with Applix take over by Cognos but in many ways Datawatch market position and barriers are very similar to those faced by Applix. I was a former share holder of Applix and remember Cognos took notice of Applix BI deal wins and then made their move to take the company at a large premium with multiple times sales.

Further improved valuation catalysts would include but not limited to repositioning the product, , new partnerships,forced upgrades do to current and future operating systems will force a significant portion of the +400k users to upgrade if using older versions of Monarch.

5 comments:

Anonymous said...

Thanks for this information. I've been watching DWCH for a bit now, and I agree with your evaluation.
Teresa

ShadowStock said...

Hi Teresa

The future looks so interesting with CEO Morrison. His energy based on his written statements sounds so genuine and on the mark to increase value long term. The road will be challenging but they have everything in place to succeed. The price action should level off but won’t be surprised if Morrison surprises with more beneficial news.

Best
John

Anonymous said...

Hi, this looks interesting to me, too, but--- 400k users and TTM revenue of 17.6mn? $44 a user? that seems way out of whack for BI software. any thoughts?

thanks,

(another) John

ShadowStock said...

John
Yes there are more than 400,000Datawatch Monarch report mining users.
“Monarch is the de facto standard in Report Mining, trusted by over 400,000 users to easily mine data from reports, PDFs and more into live, actionable data without programming and without IT help”
This was from 2007 so the number has grown.
http://63.127.194.162/monarch-report-newsletter/newsletter-march07.asp?id=1
“more than 44,000 companies”
http://www.datawatch.com/_customers/customer_list.php
“Company to Demonstrate How Monarch Report Mining Server Extends the Value of Existing Reports”
http://finance.yahoo.com/news/Datawatch-to-Exhibit-at-AIIM-iw-3097919929.html?x=0&.v=1
from what I've read and heard on the conference call one new direction is not to compete directly with large BI vendors like IBM but to let them know for a tiny portion of the cost of their BI instalation Datawatch with Monarch technology will substantially leverage the value of their reports and data sources.
Good luck
John

Anonymous said...

Thanks for the reply. I did buy dome DWCH. Congratulations on JVA! I wasn't smart enough to buy any there.