This one is seriously undervalued at this level. I’d say it is priced at least at a 30% discount. How do I figure this?
Current backlog of orders is $8M. I translate that into a solid sales forecast for the next twelve months. Under the company’s current cost structure they are operating at a 63.5% gross profit margin based on the Sept quarter results release. Their cost structure should remain about the same as the company plans to eliminate debt by 30 Nov and continue to promote their products. The R&D is pretty much behind them now.
So I broke the $8M sales into quarters ($2M each). Then I reduced that by 36.5% COGS. Leaving $1,270,000 gross profits per quarter. For the Sept quarter their costs equaled a little over $500,000, but for simplicity I’ll use that figure. I would not expect costs to drastically change over the short term. Therefore that results in $770,000 profit per quarter. Spread that over the 770 million outstanding shares and you have a quarterly EPS of $0.001. That is $0.004 annual EPS.
Now you have to look at the type of company this is and what the outlook appears to be in order to establish a realistic PE ratio. At the current levels of about $0.075 we are trading at just under 19 PE. Not bad for a slow growth value company, but wait, the current plan is to grow pretty quickly over the next few years. My estimates are only based on current purchase agreement orders and there are no US government orders factored in there.
I would recommend a PE ratio of 25 to 30 for HISC. Around those levels we would accurately capture the expansion potential as we find new uses for the CYBERTRACKER. Currently only a few school districts use the tracker to protect their school buses and one large order from Pro Sec in the Middle East. No port security contracts yet, no municipality contract to protect their vehicles, no airports or subways, no European sales, no Canadian contract yet. Talk about an extensive contract pipeline waiting to be developed. The potential is definitely there to post multiples of my previous sales forecast.
But for now let’s use the lower PE of 25 and the already captured purchase agreements as a conservative estimate. 25 x $0.004 = $0.10. That’s 33% above the current price level. Right now HISC is attending several conferences and expos a month to get the product name out there and exposed. The White Pages were completed and pitched to several government agencies and port authorities. HISC prices are competitive with similar technologies (real time GPS push-to-talk tracking devices). There are service fees associated with these trackers as well that HISC will likely profit from into the future, so be sure to add that to current and future contract amounts when formulating estimates.
The company expects to be debt free by Nov 30th of this year. The cash flow clearly turned positive lately enabling them to reduce the debt. In the future that free cash can be used to grow the business or possibly buy back shares. A move to the OTCBB is imminent which means more investors will have HISC on their screens. When the stock was trading at $0.02 none of this had materialized, but now we are trading at a deep discount. My near term price target is $0.10 with a long term target closer to $0.25 after the move to the OTCBB.
