Value Find: Peerless Systems Corp.
A balance sheet stuffed with cash and a left-for-dead stock price make Peerless Systems Corp. (Nasdaq:PRLS) a microcap tech play worth investigating.
The past two years have not been kind to shareholders of the El Segundo, Calif.-based company. At a recent price of $1.93 a share, and a market cap under $34 million, Peerless has seen its stock price shrivel by nearly 75% since 2006. Founded over 25 years ago, Peerless enjoyed a solid niche for many years providing software-based imaging and networking technologies for providers of printers, copiers and multifunction products. However, in recent years, Peerless’ customers, such as Konica Minolta Holdings, Inc., Kyocera-Mita Corporation and Ricoh Company, Ltd., have increasingly developed more technology in-house, putting pressure on Peerless’ margins. Understandably, investors dumped the stock as Peerless’ prospects dimmed.
Last year, activist investor Timothy Brog tried to shake things up at Peerless. His proxy contest resulted in a settlement last June in which Peerless agreed to add Brog to the board, as well as name two new independent directors. With the resignation last week of the lone remaining long-time director on the Peerless board, all of its directors have joined the board in only the past year or so. Peerless CEO Richard Roll took the top spot in December 2006. In January of this year, Roll announced an agreement to sell substantially all of Peerless’ intellectual property and other assets to major customer Kyocera-Mita for $37 million in cash. As part of the deal, Kyocera-Mita issued to Peerless a non-exclusive, worldwide, perpetual and royalty-free license on the transferred technologies. At the start of this month, the transaction officially closed.
The sale of most of Peerless’ intellectual property for a slug of cash essentially equates to a “restart” for the troubled company. In late February, Peerless signed a definitive agreement to acquire a small document solutions software company called Prism Software. Peerless will pay $1.75 million in cash upon closing and up to $1.5 million in stock. Peerless has argued that the Prism acquisition represents a key initial step in its move into new, high-growth segments of the digital content management industry. Peerless cites an analyst estimate that the U.S. office document solutions market is expected to grow at an annual rate of more than 25% from 2008 to 2011. Peerless management has publicly indicated that it is considering acquisitions in other segments of the digital content management industry, such as the media and entertainment markets, enterprise archiving and data searching, and email and Web content management.
It remains to be seen if Peerless’ management can successfully reposition this long-underperforming microcap into profitable, new growth markets, although the company certainly now has lots of cash to play with. For fiscal 2008 ended Jan. 31, Peerless reported total revenue of $28.4 million, a decline of nearly 15%, and net income before taxes of $5.2 million. As of the end of January, Peerless was sitting on $23.1 million in cash with no long term debt. This total doesn’t include the $37 million in pre-tax proceeds that Peerless received earlier this month with the closing of the asset sale to Kyocera-Mita. Peerless hasn’t yet disclosed the estimated after-tax proceeds from this deal. In addition, Peerless didn’t provide financial guidance for fiscal 2009 with its most recent earnings report and isn’t expected to do so until later this year. Also, Peerless has indicated that, for the intermediate term at least, it doesn’t intend to return its excess cash to shareholders in the form of dividends or stock buybacks. The company believes it can create more value through targeted acquisitions.
Almost half of Peerless’ fiscal 2008 revenue came from Kyocera-Mita. Most if not all of this revenue will disappear going forward. In addition, nearly a quarter of Peerless’ revenue last year came from a licensing arrangement with Adobe Systems Inc. (Nasdaq:ADBE). This agreement with Adobe expires at the end of June and isn’t expected to be renewed. Unless Peerless’ management can successfully re-deploy the company’s large cash pile, its financial results will likely only continue to decline. Major Peerless shareholders, Timothy Brog of E2 Investment Partners, with a 6% ownership stake, and Diker Management, with a 5% stake, should help keep Peerless’ management and board of directors in check. There was at least a token vote of confidence in the company’s future made in April by a Peerless insider. Peerless director Thomas Zender acquired nearly $10,000 worth of Peerless stock at the $1.97 level.
With a market cap of just $33 million, even not knowing the after-tax proceeds from the Kyocera-Mita deal, it’s clear that Peerless trades for a negative enterprise value. For the adventuresome value investor, this discarded microcap name may be worth picking at below the $1.70 level. Downside is limited by the cash value and upside rests on the company making one or more sensible acquisitions, sparking a new recognition by investors that Peerless has a future.
About the Author
Contributing author Matt Ragas is an investment writer and analyst with ten years of experience analyzing small and microcap stocks, with a particular emphasis on value and turnaround situations.
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