Saturday, April 23, 2005

Inforte Corp: Not Quite Below NCAV, but close, and compelling
Ticker: INFT
Price: $3.33
Market Cap: $37 (million)
Net Current Asset Value (estimated): $31
Average daily volume: 38,000

Inforte is a Chicago based consulting company, specializing in customer management, business intelligence and analytics and operational stratregy. In 2004, according to the company’s 10K, the top 5 clients represented 39 percent of total revenue, while the top 10 represented 56 percent. Clients include NASA, Cadbury Schweppes, Guardian Life Insurance, Sony Pictures, and Vodafone, among others.

Not Quite Below NCAV
Our initial research recently identified this company as trading below its NCAV. But after further research, we determined that the reason it appeared on our screen, is because the company recently paid a special cash dividend of $1.50 per share (or $17.3 million in total), which is reflected in the company’s price and market cap, but not in the company’s latest financial statements. Confused? There is a simple explanation. Companies file quarterly reports, so any transactions affecting the financial statements that are done between quarters don’t show up until the next quarterly filing. Meanwhile, transactions that effect price, such as a dividend, are reflected immediately. So, while Inforte’s price and market cap (an integral part of the NCAV equation) have dropped because of the dividend payment, it’s most recent balance sheet data (another integral part of the NCAV calculation) has not yet been adjusted. Feel free to e-mail us at Cheap Stocks if this still does not make sense.

The Numbers
Fiscal year 2004 sales were $50.5 million, up 35 percent from 2003’s $37.4 million. Net loss was $560 thousand in 2004, versus net income of $1.75 million in 2003. However, 2004’s net loss included an after tax loss of $1.3 million, so income from continuing operations was $.07 for 2004 versus $.16 for 2003. First quarter 2005 sales were down 21 percent to $9.5 million, from the same quarter last year ($12.1 million). Sales declines were due to the loss of a significant client, however, there was no surprise here. Management guidelines for sales were met.

The Balance Sheet
As of 3/30/05, the company had $46 million in cash and short-term marketable securities, $6.1 million in long-term marketable securities, and no debt. If we subtract the $17.3 million special dividend payment-we are assuming it was paid out of cash and short-term securities-that leaves $34.8 million in cash and securities, or $3.04 per share. Keep in mind that the stock is trading at just $3.48. All in all, this is a strong balance sheet.

The NCAV Calculation (in millions)
As we stated above, this company is not trading below it’s NCAV, but here’s the calculation, anyway
Current Market Cap: $37.1
Current Assets: $40 (estimated, after paying special dividend)
Current Liabilities: $9
Long Term Liabilities: $0
Net Current Asset Value: $31
NCAV/Market Cap: .84

The Street/Institutional Ownership
Currently, just two analysts are covering this company. There is however, some institutional ownership.
Fidelity: 9.7%
Dimensional Fund Advisors: 8.3 %
Bank of America: 8.1%
Royce & Associates: 6.8 %
Vanguard: 1.7%
Bridgeway Capital: 1.6%
(Several Others are at or below 1%)

2004 showed nice sales growth for this company. However, as 2005’s first quarter displayed, one of the risks here is the dependence on a handful of clients. Lose one or two, and sales will take a hit. On the positive side, Inforte’s balance sheet is rock solid, and offers a great deal of downside protection. If you purchase the stock at todays closing price of $3.33, you are theoretically buying $3.04 in cash and securities, and getting the business, and its other assets for $.29. That’s the kind of story that we like here at Cheap Stocks.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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