WidePoint Corp (WYY)

[Methinks]

WidePoint: The Party Is Just Getting Started - THAT'S WHAT I SAID!!!

https://seekingalpha.com/article/4384129-widepoint-party-is-just-getting-started?

We've covered WidePoint (WYY) - a leading provider of technology-based management solutions - in depth over the past five months. We've outlined why the company is undervalued and how WYY, as the incumbent, should re-win a $500 million contract from the U.S. Government this month. We alerted investors that an acquisition was in the works - of which management later publicly acknowledged - and we were proven right about the company's latest press release regarding raised guidance.

In our last article, "WidePoint: Undervalued, Upcoming Catalysts And Why Shares Are A No-Brainer" we showed investors how the future has never been brighter. On Sunday, we wrote about how WYY's recent announcement - detailing the ratio of the reverse split - would likely be followed up with press releases as the company looks to prop up the share price since reverse splits tend to have a very negative connotation in the market. Like clockwork, the company issued a press release Monday morning informing investors that they are raising EBITDA guidance by more than 50%. This, of course, was terrific news for investors.

This article takes a look at the recent announcements, what it means for investors going forward as well as our new price target. As we've noted before, the company is only doing a reverse split in order to get more institutional support. As explained by WYY CEO Jin Kang, institutions have repeatedly wanted in, however, because the share price currently trades under $1, the internal policies of these institutions does not allow them to purchase shares at current levels. Again, WYY does not have any delisting or compliance issues. The company is cash flow positive, debt free, and is in the strongest position that it's ever been. The move is to simply broaden its pool of investors.

Latest Announcements
In August, a special shareholders meeting took place in which the results of the reverse split proposal were announced. In total, 47.98 million votes were in favor of a reverse split, while 13.68 million were against the move. At the time, the company added that while the proposal had passed, they wouldn't go through with a reverse split unless it absolutely made sense.

Two months later, management made the decision to go forward with the move. With the range between 1-for-5 and 1-for-15, the Board of Directors decided on a 1-for-10 reverse stock split. Shares will begin trading on a post-split basis on Monday, Nov. 9, 2020.

"We are confident that completing a reverse stock split and thereby increasing the per share trading price of our common stock will better position WidePoint for long-term success. While many companies effectuate a reverse split out of necessity, we are doing so from a position of strength. WidePoint is in the midst of one of its most financially and operationally successful years, and we are taking proactive measures to expand upon that momentum. We believe that increasing the price per share will make the Company's stock more attractive to investors, which we believe will benefit current and prospective shareholders over the long-run." - Jin Kang, WYY President and CEO

Not surprisingly, the approval of the reverse split in August seemed to be already priced in by the market. This is evident by the fact that shares closed the day higher and in positive territory after the announcement that the proposal had passed. However, just like the market, shares have traded sideways since. On Monday, shares started out the day up 6-7%, before falling into negative territory thanks to the massive sell-off in the market thanks to rising COVID-19 cases in the U.S., as well as Congress and the White House failing to reach a stimulus deal. A positive sign for investors is that shares have held steady despite the market selloff this week. While the market has tumbled 7%, shares of WYY are up 2% this week.

Investors should remember that reverse splits can be beneficial when done for the right reasons. We've seen it a number of times and WYY certainly fits the criteria. Trading as a penny stock has limited WYY in getting more institution and investor support as evident with how undervalued the company is at the moment. The company currently trades with a forward price-to-sales ratio of just 0.22. This is despite all the positive news, earnings, orders and partnership announcements that have come in the past six months.

Investors also need to understand that a reverse split does not change WYY's market cap. The only thing that changes is the amount of shares that investors own. The overall value of the position remains the same because those shares are now worth 10X more after the split. For example, with it being a 1-for-10 reverse split, an investor who owns 10,000 shares (a $5,500 position) will end up owning 1,000 shares post split. Instead of owning 10,000 shares at $0.55, that investor will now have 1,000 shares priced at $5.50 ($5,500 position).

Raised Guidance
In June, WYY raised its 2020 revenue guidance to $185 million - $195 million, and EBITDA guidance of $3.0 million - $3.4 million. On Monday, management reiterated its revenue expectations of $185 million - $195 million, but raised its EBITDA forecast to $4.7 million - $4.9 million, which, at the midpoint, represents a 50% increase over previously issued guidance. Even more impressive is that it represents a 69% increase compared to fiscal 2019.

"Throughout the year, we've added higher margin business and improved our operational efficiency, both of which are driving a more profitable year than we originally anticipated. By nearly every metric, fiscal 2020 will be a record year for WidePoint. We look forward to leveraging the momentum of this year to build a stronger organization that will continue to prosper for many years to come." - Jin Kang, WYY President and CEO

This was big news for shareholders as it shows that management has really turned the corner with the company. Profitability has been a big issue with the company as previous management always talked a big game, but never delivered for shareholders.

However, since Jin took over three years ago, the company has made several changes and is arguably in its strongest position ever. But, you wouldn't know it just by looking at the stock price as shares have given back all of their gains after soaring more than 60% from May-August. This is despite record-breaking Q2 revenues that crushed analyst expectations, as well as posting earnings per share "EPS" of $0.01 for the second consecutive quarter. This represented another major milestone for the company as it had consecutive quarters of positive EPS. This comes after years of breakeven or negative EPS.

In our last article, we outlined several reasons for the 40% fall and why a combination of things led to a massive overreaction by investors. As we noted, we've been in the market for a very long time and the Q2 earnings selloff was arguably one of the most irrational things that we've ever seen.

One area that we would like to bring attention is regarding the company's guidance and how our forecast lined up perfectly with management's recently raised guidance.

Part of the Q2 earnings selloff was due to investors expecting the company to raise its outlook for the rest of the year. Through the first two quarters, WYY posted revenues of $94.5 million and EBITDA of $2.2 million and was well on track to easily surpass its initial guidance of $190 million in revenue and $3.2 million in EBITDA. The fact that management didn't raise expectations at that time, and informed investors that they were going to bump up spending throughout the remainder of the year - due to an increase in headcount and upgrades for computer hardware and software - investors and traders sold first and asked questions later.

While some investors are on the sidelines waiting to see what happens, we saw the writing on the wall and took the opportunity to double down on our position. As we've noted several times, management is very cautious and loves to under promise so that they can over deliver. In our article last month, we updated our figures and told investors that we see revenues coming in around $200 million with EBITDA hitting between $4-$5 million. Below is an excerpt from that article.

As we've noted before, management is very cautious and loves to under promise so that they can over deliver. This is evident by the fact that the company just posted another blowout quarter. The trend is obvious and when connecting all the dots, we believe our estimates will be met. We see revenues coming in around $195-$205 million this year ($200 million midpoint), and believe EBITDA ($4+ million) will come in higher as well. We've been spot on with our estimates and feel confident in our updated projections.

At the time of writing, WYY currently has a market cap of $45 million. During the 52-week run back in August, WYY's market cap hit $83 million. With EBITDA guidance raised more than 50%, there is no reason why shares shouldn't at least test the 52-week high ($0.99).

But it will take some time as investors seem to be waiting on the sidelines as they watch to see how the reverse split is received by the market as well as waiting to see if the company will re-win the $500 million government contract. This is part of the reason why shares haven't soared at the moment, but it won't be long. As we will discuss later in the article, we firmly believe the company will re-win the $500 million contract, and those investors waiting on the sidelines will have to pay a nice premium once it's announced.

There are two ways to value WYY, however, we believe that since the company is still in its early stages of growing its EPS, the best way to value the company is based on the price-to-sales ratio.

Currently, WYY trades at 0.29 on a trailing twelve month basis, and at 0.22 based on full-year 2020 estimates. For a company that is on track to deliver nearly 100% revenue growth this year, that is extremely cheap.

Based on the P/S multiples for comparable companies in the information technology services market, WYY should be trading anywhere from 1-to-3 times sales. Below is a breakdown on how much shares would be worth if the company traded at 1X, 2X and 3X forward sales. As you can see, Wall Street is severely underestimating the company at the moment.

Based on past performance and trading history, the market has shown that it won't support a premium valuation of 2X or 3X sales at the moment. This is why our current bull case is based on 1X sales. However, it hasn't helped either that the company has traded like a penny stock over the years which has prevented some funds from getting in due to internal policies. But that will all change with the upcoming reverse split as the company looks to broaden its pool of investors.

As the company continues to execute and deliver on its promise to shareholders like management has done, the market will come around and begin to reward the company even more. If the company can grow and expand its managed services - which are close to 50% margin - and make strides with its SYNNEX (SNX) partnership to expand sales of its TM2 solutions, those price targets of 2X sales ($4.70 or $47 post split) and 3X sales ($7.05 or $70.5 post split) won't be out of the question.

After the upcoming reverse split to broaden its pool of investors, specifically institutions, the company will also have the ability to get picked up by ETF's as well. In 2015, HACK - the first ETF on the market that focused on cybersecurity - added WYY to its portfolio. This caused a sudden surge in the share price in which shares of the company climbed more than 50% to more than $2 per share. We believe these opportunities could turn WYY into a market darling and join a bunch of other high-flying tech stocks this year.

While revenue growth has surged thanks in part to the work the company has done for the 2020 Census, the company will need to fill that next year in order to keep revenue growth going. As we've noted before, the 2020 Census project is both good and bad. Although the project is bringing in more revenue for the company, it is very low margin and is dragging down the company's overall margins.

On the bright side, the project creates a tremendous selling point for the company for future deals going forward as they can say they worked on the largest managed mobility services contract in the country. On top of that, because of the COVID-19 pandemic, WYY proved how efficient the company is by scaling up quickly (700,000 devices and 10,000 locations), and did not have any hiccups. We believe this is going to catch a lot of companies' attention going forward which should result in the company getting more high-margin contracts in the near future.

Most of the census revenue falls under carrier services - low-margin - however, some of it does fall under managed services - high margin. The good news is that during the Q2 conference call, management revealed that they have a big pipeline and will backfill the census revenue on the managed services side. Management also added that they still expect to see revenue growth next year on the managed services side. This is great news as management is following through on its promise of focusing on the high-margin side of the business.

Factoring everything into account - reverse split, likely lower revenues in 2021 combined with higher margins, SYNNEX partnership and the company re-winning its $500 million government contract, we give a base case price target of $1.50 ($15 post split). This represents potential upside of 180%. We feel this is the most likely outcome over the next 12 months and if institutions or ETFs jump in, investors can expect prices to climb even higher.

Let's not forget either that the company currently has no debt and has $7.5 million in cash, which represents 17% of the company's total market cap. When factoring in cash on hand, WYY's current market cap would fall to $37.5 million, despite being on track to deliver nearly 100% in revenue growth this year. Talk about undervalued!

Of these three scenarios, this is the least likely to happen. This bear case factors in the company losing the $500 million contract award it previously won. As we explain later in this article, WYY, being incumbent, is pretty much a lock for the contract. Nevertheless, this contract represents a large portion of revenue for the company with a mix of both low-margin and high-margin contracts. We are very confident that WYY will re-win the contract, but if for some reason they don't, investors can expect shares to fall around $0.40 ($4 post split). This represents potential downside of 25% from current prices.

The $500 Million Catalyst
All eyes are on the Cellular Wireless Managed Services (CWMS) contract that is up for grabs this year. To make a long story short, WYY has been the incumbent since 2014 and was awarded a 12-month interim sole source Indefinite Delivery Indefinite Quantity (IDIQ) contract back in April.

This interim contract ($65 million) runs through April 2021. The new contract, which will likely be awarded in the next two weeks, has a base year with the option for an additional four years. The total value of the contract is worth $498.1 million.


Source: Government Contracts

Investors will notice that the base period is for 2020, while WYY's contract runs through April 2021. This is because the government is risk averse and does not want to risk any services being turned off. The overlap is typical as the government has buffers for when contracts start and end, so that there's no lapse in coverage/contracts. Lastly, the dates got pushed back a couple weeks with the new dates as follows:

Earlier this month, oral presentations took place and now investors will wait to see who wins the award. In June, we outlined why we believe WYY will win the contract, and management went a step further by making its case in the shareholder meeting. Here's a few of the reasons why management believes they will win the award:

WYY has an excellent past performance with DHS.
The company meets all the security and certifications that are required. WYY has all the technical requirements and their systems have been customized to match the workflows policies and procedures. The company's intelligent telecommunication management system has been integrated into DHS' internal IT infrastructure. WYY also has subject matter experts who have deep experience supporting DHS.
WYY also represents the lowest risk and value to DHS as there will be no transition costs, no down time, no implementation costs, no customization, or configurations that would be required.
The last phase, which recently took place earlier this month, looks at the following factors:

1. Management approach

2. Web portal capability

3. Past performance

4. Price.

In typical contracts, the evaluation factors are ranked by order of importance. This tells us that price is the least significant compared to the other factors, including past performance, of which WYY has a great track record working with the DHS. This is great news and based on the evaluation factors, WYY should be a lock to re-win the award! And because the award is based on "best value" as opposed to lowest cost as it has been in the past, WYY should have higher margins with this award compared to past years.

Conclusion
The uncertainty of the $500 million contract award as well as the upcoming reverse split are the two main reasons why shares haven't taken off yet. But here's the thing investors need to remember. WYY has always been the clear favorite and as the incumbent, the company has the inside track to re-win the award. Lastly, the contract has been set aside for only small businesses, which is another huge benefit for WYY.

Let's not forget the timing of everything either. The company decided to go forward with a reverse split with shares trading on post-split basis on Monday, Nov. 9. Fiscal Year 2020 EBITDA guidance was just raised by 50% and the company just announced earnings for Nov. 16 - a couple days later than what they typically do. With the $500 million contract likely being awarded in the next 1-2 weeks, we believe earnings got pushed back a couple of days so that management could talk in greater detail about the award and other business details. Management knows that a reverse split has a negative connotation in the market and it is our belief that the company has more positive announcements and developments coming, and that is why they feel comfortable going forward with a reverse split at this time.

Looking at the fundamentals, WYY is solid. It has a market cap of $45 million, is cash flow positive, debt free, and is arguably in its strongest position ever. The company is on track to have a record year, including a 69% increase in EBITDA year-over-year, insiders continue to purchase shares, institutions have increased their positions and management continues to focus more on the high-margin side of the business.

If everything goes smoothly, we believe shares could hit our bull case of $2.35, or $23.50 post split (340% upside). However, as we noted, it's very likely that shares will fall into our base case scenario ($1.50 or $15 post split), which still offers investors 180% in upside potential. Our bear case forecast sees 25% downside potential if the company doesn't win the government award. The current contract runs through April so there wouldn't be an immediate impact on the company's financials.

Overall, we feel shares are in a low risk/high reward position right now. Investors could lose as much as 25%, but could also see gains of 180% to 340%. With raised guidance for the second time this year as well as the positive announcements and partnerships the company has had this year - and with more announcements likely coming soon - we believe shares are a no-brainer at these levels and have continued to add to our position.

Risk Factors
With a market cap of $45 million, WYY currently falls into the nano-cap sector. Companies in this range come with a higher degree of risk compared to more well known and established companies.

Because WYY competes in a competitive market and against both private and public companies, some competitors are able to offer more scale, which can enable them to significantly discount their services in order to maintain market share. If the company has to resort to deals with lower margins, profitability would suffer. Lastly, WYY's revenue from government contracts is quite large. A change in the spending policies, budget priorities, or a government shutdown could cause the company to lose revenues. The loss of any contract would also have big implications for the company.