Value Find: Comarco, Inc.
Large and repeated insider buying coupled with a recent shake-up of Comarco, Inc.’s (Nasdaq:CMRO) management and board of directors suggest this beaten down microcap may have a second life.
Since early 2006, shares of tiny $29 million market capitalization Comarco have been in a downward spiral. The Lake Forest, Calif.-based tech name’s collapse in share price to less than $4 a share from $12 over this period is hardly surprisingly, given a painfully consistent string of negative news. Comarco operates across three business lines: ChargeSource, a provider of multi-function, universal mobile power products; Wireless Test Solutions (WTS), a provider of hardware and software tools for wireless carriers; and Comarco Wireless Technologies (CWT), a provider of call box systems for transportation and public safety agencies. The ChargeSource and WTS units have suffered in recent quarters from underperforming or discontinued partnerships, while the CWT unit is a mature business near the end of a current upgrade cycle.
In March, Comarco finally took concrete steps to inject fresh talent into the business and try to get the badly struggling company back on track. Comarco shook up its executive ranks, naming Sam Inman, a former executive of International Business Machines Corp. (NYSE:IBM), as the company’s new CEO. The company also brought in a new interim CFO in Winston Hickman. Turning to the boardroom, Comarco chairman Erik van der Kaay resigned and two new board members recommended by Broadwood Capital, Comarco’s largest shareholder, were added to the board. Inman has said that he intends to unlock value for shareholders by growing its ChargeSource business. Last December, Comarco announced its first large-scale ChargeSource OEM partnership with Lenovo Group, Ltd. (OTC:LNVGY). Inman’s previous experience and relationships with IBM should prove specifically useful in his new role at Comarco as Lenovo owns the former IBM personal computing division.
Wall Street’s skepticism toward a turnaround of Comarco is certainly warranted at this point, based on Comarco’s latest results. For the fourth quarter ended Jan. 31, 2008, Comarco reported revenue of $6.9 million, a 47% annual decrease, and a loss of $3.7 million, or $0.50 a share, compared with net income of $2.8 million, or $0.38 a share, a year earlier. This year’s fourth quarter included a $1.4 million investment gain, while the corresponding quarter last year included a $1.6 million gain. Revenue for the full year declined 51% to $23.2 million with a loss of $10.1 million, or $1.37 a share, compared with net income of $1.8 million, or $0.24 a share, the previous year. This year and last year included investment gains of $2 million and $1.7 million, respectively. Comarco ended January with $17 million in cash on hand and no long-term debt.
Even given these ugly results, Comarco’s two largest shareholders continue to buy the stock hand over fist. Over the past year, 20% Comarco shareholder Broadwood Capital and 15% shareholder Special Situtions Funds have plunked down over $4.5 million buying up shares of Comarco. This is huge insider buying for a microcap stock with a market capitalization of less than $30 million. The two investment firms most recently added to their positions last week around the $3.50 level. So far, at least, their confidence in a turnaround of Comarco hasn’t paid off. The two firms were paying as much as $6 a share for the stock last May and June.
Even with volume production of the Lenovo OEM deal having begun in January, the next few quarters for Comarco are likely to result in more losses. This being said, Comarco shares could benefit over this stretch from potential sales of its WTS and CWT units, which new CEO Inman seems to view as non-strategic. On Comarco’s recent fourth-quarter conference call Inman argued that each of Comarco’s units has value and that all three “aren’t currently reflected in our stock price.” Sales of these assets would likely inject additional cash onto Comarco’s balance sheet, lower its cost structure and could move it closer to breakeven. Plus, it would result in this microcap potentially becoming a cleaner, more compelling story for deep value investors.
At a recent price of $3.98 a share, Comarco fetches an enterprise value of $12 million, which values the name at just 0.4 times its deeply depressed run-rate revenue of $27.6 million. Granted, Comarco is likely to burn off much of this cash cushion over the next few quarters without a big jump in top-line revenue. If Comarco shares can be had for $3.50 or less, I think this is a gamble worth considering. Comarco doesn’t need a world-class turnaround to pay-off from current levels. On the flipside, cheap stocks can always get cheaper. As always, tread carefully.
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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