PUTTING IT IN PERSPECTIVE
NewMarket Technology's aggressive acquisition and growth strategy
is evident in their revenue growth during the past two years.
In 2003, NMKT reported revenues of $2.3 million with a tiny
profit. In 2004, the company reached $25 million, again scratching
out a minute profit. And for the first nine months of 2005, NMKT
has achieved $35 million in revenues with $1.2 million in
earnings.
During the same period, however, the number of outstanding shares
for NewMarket has nearly doubled from 51 million to 98 million.
What's more, on a fully diluted basis (assuming the exercise and
conversion of all outstanding stock options, warrants, etc.) the
company now sports a hefty 175 million shares.
A major portion of the increase in shares outstanding is due to
conversion of debt (used to fund several of NewMarket's
acquisitions) to common shares.
Based on the current shares outstanding, NMKT's market value is a
very modest $36 million, well below the company's annualized
sales. When we calculate market value on the fully diluted figure,
NMKT's market cap goes up to $65 million.
Assuming NewMarket winds up 2005 with revenues topping $50
million, then on a price-to-sales basis the shares are still
modest. To its credit, the company has maintained profitability
while making acquisitions while also suffering through all kinds
of growing pains on the OTC Bulletin Board.
As much as we appreciate management's aggressive strategy for
growth and their ability to change in response to internal and
external events, we do have concerns that go beyond the sharp
increase in shares.
The first is NewMarket's decision to de-emphasize VOIP and rapidly
spread out into the new areas of homeland security technologies
and China -- a heck of a big bite for a small company. The second
is the company's zealous campaign to promote its spin-off and
dividend strategy before ever completing a single transaction.
Finally, in their battle for investor respectability, NewMarket's
management issues press releases more often than Terrell Owens
puts his foot in his mouth, with many of their communications
bordering on the ridiculous. And, most serious, the company often
reports estimates of annual revenue and other developments, only
to fall short of the mark.
Much of NewMarket's problems stem from its lack of experience as a
public company and especially a company listed on the OTC Bulletin
Board. We'll give them a little slack on this point.
But on business fundamentals, we cannot let anything slide. We
will focus very carefully on organic growth of existing operations
and margins. These numbers will tell the story and will largely
determine the true value of NewMarket's growth strategy.
Still, looking at NewMarket's overall picture, we believe the
stock is modestly priced and thus could conceivably double during
the next six to 12 months. Additionally, NMKT's upcoming Amex
listing should improve the trading environment for the shares.
Given all of these developments, we're lowering our Buy Up To 40
cents, which we think is a more realistic level.
From ChangeWave Investing
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