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Monday, February 11, 2008

Volt Information Sciences - overlooked small-cap

Back on January 27 when I rolled out the first Alert HQ list of stock picks, one of the stocks on the list was Volt Information Sciences (VOL).

The stock closed at $17.45 on the Friday just prior to running the analysis. It is now at $19.10, up almost 9.5%. It was up over 2% today.

So what's up with VOL? It peaked at about $40 just over a year ago and had been carving out a ragged down hill trend since then. It hit its low point on December 4th and shortly afterward gapped up on an earnings report.

Background --

The company has four lines of business:
  • Staffing Services - includes temporary/contract personnel employment, consulting, outsourcing and turnkey project management
  • Telephone Directory services - publishes independent telephone directories, as well as provides telephone directory production, commercial printing, database management, sales, and marketing services; and licenses directory production and contract management software systems to directory publishers and others.
  • Telecommunications Services - provides telecommunications and other services, including the design, engineering, construction, installation, maintenance, and removal of telecommunications equipment for the outside plant and central offices of telecommunications and cable companies. It also provides turnkey services for wireless telecommunications carriers and wireless infrastructure suppliers.
  • Computer Systems - provides telephone directory services, information services, and other operator services systems. It also designs, develops, sells, leases, and maintains computer-based directory assistance services with other database management and related services, primarily to the telecommunications industry. In addition, VOL provides an Application Service Provider ("ASP") model which also provides information services, including infrastructure and database content, on a transactional fee basis.
In that last earnings report, VOL reported that expenses were down and profits were up. In fiscal 2007, the company's consolidated sales totaled $2.4 billion and its consolidated segment operating profit totaled $107.3 million, both figures representing historical records for the company. Net income for fiscal 2007 was $39.3 million compared to $30.7 million in the prior fiscal year.

These results were based on increased operating profits of the Telecommunications Services segment of $6.2 million, the Computer Systems segment of $3.3 million, and the Telephone Directory segment of $1.3 million, partially offset by a reduction in the operating profit of in the Staffing Services segment of $5.2 million.

Outlook --

Looking forward to the rest of 2008, can Volt keep up the momentum?

The Directory services segment typically sees seasonal strength in the second half of the year. That's a positive for future quarters.

The Telecommunications segment had a sales backlog at the end of fiscal 2007 of approximately$93 million, as compared to a backlog of approximately $56 million at the end of fiscal 2006. This should support further growth as 2008 progresses.

During the fourth quarter of fiscal 2007, Volt Delta Resources, LLC ("Volt Delta"), the principal business unit of the Computer Systems segment, acquired LSSi for $70.0 million and combined it and its DataServ division into LSSiData. The acquisition is expected to become accretive to earnings in the second quarter of fiscal year 2008.

The staffing segment, however, had relatively flat results in fiscal 2007 and the outlook now is questionable due to the macro-economic outlook. If the US is truly entering a recession, the staffing business could suffer.

Conclusion --

In summary, Volt Information Sciences seems to have good prospects for at least three of its four segments. The staffing segment is the largest segment in terms of revenues so it will be critical for the company to ensure that growth does not flag in that particular area. In the meantime, investors seem to be favoring the stock and we could very well be witnessing a long-term trend reversal with bullish implications.

UPDATE --

Wow, what a difference a day makes! Yesterday I'm poking through a 10-Q and finding fairly positive information and pointing out how the stock appears to have turned around. Today, Reuters reports that Volt said it expects to incur a first-quarter charge of not more than $12 million in its Telecommunications Services unit. The following is from Volt's press release:

"The Company recently learned that it may not be reimbursed for certain work performed under an installation contract. The charge is to establish a reserve for certain costs included in inventory related to work performed and for additional costs expected to be incurred to complete that work under the contract. The charge includes a provision for contract add-ons, out of scope work and rework. While the Company believes that it is entitled to be compensated for a certain portion of the amount included in the reserve, it cannot at this time determine the amount for which it will be reimbursed."

The company traditionally reports approximately break even results for the first quarter of its fiscal years and will now report a pre-tax loss for the first quarter of its 2008 fiscal year.

As can be expected, the stock got spanked today, dropping $2.25 for an 11.78% loss. It is now at$16.85, below the level at which it was first identified as a BUY candidate. It just proves how "event risk" can trump both technical analysis and fundamental analysis.

Disclosure: author has no position in VOL

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