Unisys (UIS) and Volt Information Sciences (VISI) are two of my favorite long-term holdings, but both got crushed in recent days. I love the lower prices and plan to buy more, but it's tough to field the calls and e-mails that I get whenever a stock pick tanks (and oddly, I don't get similar responses when a recommendation soars).
Let's take a look at both:
Volt Information Sciences
Volt, which I just wrote about the other day, has been one of my favorite stocks for some time now -- and my opinion hasn't changed even though the stock lost more than 16% yesterday. VISI has rebounded some 5.5% so far today, but tanked after releasing weaker-than-expected earnings Wednesday night.
There's feeling that a turnaround under new CEO Michael Dean will take longer than expected, but the truth is that Dean was originally named as just interim CEO and didn't become VISI's permanent chief until October. As such, his team has only had a few quarters at the company.
I would have loved to have seen VISI release a positive earnings surprise, but I nonetheless think things are heading in the right direction. I spoke via e-mail this morning with activist investor and Volt shareholder David Neuhauser of Livermore Partners, and his views aren't all that different from mine.
Neuhauser told me that while he's been "extremely frustrated by the price action, VISI's new board and management are making the right moves to transform (Volt) into a true global operating company that has the potential to compete again."
His other thoughts:
"Years of mismanagement have (to be) factored into the equation, so the turnaround -- even with new management -- will take time. That said, the non-core-asset sales we pushed for back in 2014 are taking hold. VISI should in fact be near net debt free by summertime, with total non-core-asset sales to bring forth $60 million to 90 million in cash.
This would allow (VISI) to buy back shares as revenues turn up, and therefore, the leverage of the new operating model -- with more than $10 million in lower costs -- allows strong cash flow and eventually earnings per share, providing an avenue for the company to use its more than $140 million NOL and shield taxes.
Trading at 0.11x sales and soon to be net debt free with a true turnaround occurring, the equity has much potential. It has been a long road, but the opportunity to 're-rate' the equity is finally in front of us today.
This is a true dislocation of value and one to be bought, though management and the board must be bold and close the gap on what is now a 50%+ gap to its true intrinsic value."
Simply put, I concur.
Unisys this week announced a convertible bond offering that substantially dilutes shareholders, so the market immediately priced in the dilution and UIS dropped some 28% on Wednesday.
While I'm obviously not a fan of the stock's dilution, the reality is that the convertible bond offering will give Unisys the cash that it needs to execute a turnaround.
True, an increased share count will mean that the company's planned $200 million in annual cost savings will be spread a little wider. But I still estimate that savings will total about $2.80 a share once they're at a full run rate next year.
Moody's jumped into the fray on Wednesday and lowered the company's debt rating to B2, citing concerns about near-term cash flows and revenue weakness. That's a valid concern, but it's also why Unisys sold $190 million of convertible debt in the first place.
In fact, Moody's did say that "although the operational restructuring entails considerable execution risks due to the staff reductions, Moody's notes that Unisys has also directed resources toward revenue growth, recently filling the remaining open senior-executive positions in its restructured sales organization."
The rating agency added:
"Unisys has a diversified services portfolio, which includes a large public-sector (22% of fiscal 2015 total revenue) and U.S. federal component (19% of fiscal 2015 total revenue) and a geographic mix in which more than half of revenues are international. This customer-base diversity adds some stability to the revenue streams."
At the end of the day, I'm still a big fan of Unisys CEO Peter Altabef and his plans for the future. Altabef has overseen two very successful prior turnarounds that put big dollars in shareholders' pockets, and I think that will happen again with UIS.
I think the company's Stealth cybersecurity product will eventually drive revenue and earnings growth, and that UIS will sell for much, much higher prices in five to seven years.