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No. of Recommendations: 21
Hello all. I'm relatively new at doing valuations so your comments and criticisms are appreciated. Also, I still can't figure out table formatting so I'm going to straight-line my results.

Basically, I hadn't followed CNXS much. I was initially interested but it seemed (I guessed, I didn't really know why) out of my price range. After the recent smack-down I sat down to do the valuation. I bought in a bit at 11.06 to get some skin in the game and will use my valuation, and hopefully your commentary and suggestions, to decide what next steps to take.

METHODS:

1. A discounted cash flow analysis (DCF) using high and low estimates.
2. A 3-year target price based on low-high sales estimates and low-high P/E projections
3. Desired prices based on margin-of-safety discount to averaged value

DISCOUNTED CASH FLOW

Inputs for low estimate:

Cash $42M (includes short-term investments)
TTM FCF $5.3M
Growth Rates Years 1-5 = 10%
Years 6-10 = 6%
Terminal = 3%
Dilution Rate 1%
Discount 11% (Note: I prefer to keep this at the stock-return constant and manipulate growth estimates instead)

Results Intrinsic Value = $9.54 share ($6.46 in present value and $3.08 cash)

Inputs for high estimate:

Cash $42M (includes short-term investments)
TTM FCF $10.8M (this is the SFCF run rate based on last four quarters)
Growth Rates Years 1-5 = 15%
Years 6-10 = 8%
Terminal = 3%
Dilution Rate 0%
Discount 11% (Note: I prefer to keep this at the stock-return constant and manipulate growth estimates instead)

Results Intrinsic Value = $22.38 share ($19.30 in present value and $3.08 cash)

The average of the high and low is $15.96. Applying a further 33% margin of safety, my Buy Zone price is $10.69

THREE-YEAR ESTIMATED VALUE

1. Use the FY2003 sales of $79.1M as the Low Estimate and TTM sales of $85.8M as the High Estimate
2. Use 8% CAGR for Low Estimate and 15% CAGR for High Estimate (three year)
3. Apply projected net profit margin on sales of 9% (slightly less than ttm)
4. Compute Low and High Net Income numbers [8.97 and 11.74]
5. Assume 0% dilution rate (I feel this is fair for the next three years anyway) and EPS = .66 and .86
6. Estimate Low and High P/E based on historical values [13 and 25]
7. Compute target prices based on matrix of PEs and EPSs and we get the following
a. High PE and High EPS = 21.46
b. High PE and Low EPS = 16.39
c. Low PE and High EPS = 11.16
d. Low PE and Low EPS = 8.52
8. Average the low and high figures [14.99] and apply 33% margin of safety

Results: Buy Zone price = $10.04/share.

Regardless of method, CNS Inc. is currently in my buy zone. I'm considering doubling up my initial position. Some other numbers that I'm kicking around are:

+ debt = 0
+ Cash King Margin = 12.58%

- Flowie (2003 = 2.76, ttm = 3.68, MRQ = 3.43)

Unlike others, analysts included, I LOVE the idea of NOT launching a new product this year. Focus on what you do well. I like management, but they should do more with BreatheRight, learn how to truly build a dominant brand and THEN launch new stuff.

I feel that my low estimates are very conservative and that my highs aren't beyond reach. My highest used growth rate is still below the analyst estimates. Anyway, please comment. I'm trying to learn here. :)

All the best,

Blitzen94
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No. of Recommendations: 2
Blitzen94,

Wow! Very nicely done. I have been following CNXS since it first came out as a Hidden Gem last September. I owned some shares for a time, but got out with a small loss with the recent bad news.

I like how you look at both high and low estimates of intrinsic value and then further consider what would be a low risk buy range that gives you a decent upside. My own analysis is very similar to your results. I have a intrinsic value of $15.25/share and my buy zone based on P/E history is less than $11.25/share. MFTomG also recommending CNXS as a buy at less than $14/share in Jan 04. So why haven't I bought anymore?

Well a couple of factors are keeping me on the sidelines for now. First, look again at your low end estimate of $9.54/share. Some of the assumptions you make could turn into reality if the company can't grow revenue consistently in the coming year (look at last quarters numbers for example). With a current price around $10/share, CNXS may already be fairly valued with little potential for upside.

Also, inventory growth last quarter really outpaced sales, which raises a red flag for me. There have been some concerns about the international market for CNXS that may be a factor in this inventory buldge. Finally, while not a proponent of market timing, small caps have taken a beating of late and CNXS has certainly not been immune to this. I'm not a big fan of averaging down and CNXS may still have some more downside to it in the current market.

So what am I waiting for? I would like to see a solid quarter of renewed earnings growth with inventory coming back under control. Of course good news could push the stock back up again above my buy zone before I have time to react, but I'm willing to sit and watch for now. CNXS just doesn't look like enough of a sure thing at this point for me.

Chris
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No. of Recommendations: 1
Chris,

Great points. So...why didn't I "jump" right after I ran the numbers? I have similar concerns. My fear is that this might be a blind-squirrel that bumped into its acorn (Breath Right) early and will now systematically eat at it until it's gone.

The high Flowie (although it's not unusual w/ zero-debt companies), the inventory creep, and the emerging pattern of sub-optimal product launches give me some pause. I want to feel like I have a long-term slam dunk and I'm just short of that. I like the odds of beating the market but not as excited as I was about FARO at 21.

My next step will be to read everything I can get my hands on and go deeper into the history (pre-2002). I truly LIKE the management, now I want great reasons to TRUST them to significantly outperform others in their industry.

Thanks again for the comments,

Blitzen94
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No. of Recommendations: 0
Blitzen94,

Great post ... much appreciated. My main financial goal this year is to
study the best way to determine intrinsic value. Since CNXS is one of
the easier stocks to follow, I will definitely compare my notes with
yours to see how things turn out.

I agree with those on the board here that we'll have to see how management
grows the brand, and what new products might come out. I will have
patience with this, as I believe they are being cautious.

I am also considering adding to my position, but I'm personally trying
to take a bit of a breather on investing for now unless I start seeing
significant discounts to some of these stocks. FARO and CNXS are testing
me, that's for sure.

Regards,

Tom
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