Sunday, May 22, 2011

More on Service Point Solutions’ “Results for Q1 2011”

On May 9th, we did a post with the title, “Service Point Solutions is Back in the Black”, which was the same title that SPS used for its Press Release on May 9th about its Q1 2011 results.

Here’s what we said at the outset of that post…..


Joel’s comment: “Speaking in $USD dollars” (and based on the EURO/USD exchange rate this morning), Service Point Solutions earned a whopping $92,147 bottom line profit on sales of $78,757,100. (Should I have used the term “ekes out” instead of the word, “whopping”? Well, all kidding aside, a profit – any profit - is better than a loss!)

By now, SPS has posted its Q1 2011 results on its web-site. You can click on this link to access that document:

SPS reported higher sales in Q1 2011 than it did for Q1 2010. (That was not the case for ARC; ARC’s Q1 2011 sales were less than its sales in Q1 2010.) But, in spite of the fact that SPS reported higher qtr over qtr sales (Q1 2011 vs. Q1 2010), SPS’ gross profit was lower in 2011 than it was in 2010.

In the Q1 2011 report, SPS says this….

“Strategic revenue diversification by Service Point and the priority focus placed on the online channel mitigated the lingering weakness in the AEC segment.”

On a head-to-head comparison basis, SPS is not directly comparable to ARC, because ARC’s sales are much more heavily reliant on sales of reprographics services to firms in the A/E/C industry than is the case with SPS’ sales. And, as reprographers in the U.S. are aware, the A/E/C industry has not yet shown evidence of a recovery, and that situation is, of course, putting a damper of sorts on ARC’s recovery (and growth) picture. Economists who follow and report on A/E/C activity in the U.S. market, and, in particular, on “construction” activity in the U.S. market, are mixed in their predictions for the remainder of 2011.

Right after the close of Q1 2011, SPS – finally resurrecting its acquisition activities after being out of that activity for a couple of years – completed (on April 30, 2011) the acquisition of Holmberg’s, a Sweden-based reprographics company with operations in Sweden and Denmark. Holmberg’s is a well-known, well-established, old-line company, so I’ve been informed by friends who are knowledgeable about the reprographics business and industry in Europe. I would not be at all surprised if SPS announced at least one more acquisition – in Scandinavia – before the end of 2011. I say that because SPS previously stated, during the mid-part of 2010, that it was investigating several acquisition opportunities in Europe, pointing out Scandinavia in particular.

In its Q2 2011 results report, SPS indicated that, for Holmbergs, SPS paid a purchase price of 4.35x Holmberg’s 2010 EBITDA. As to the payment of the purchase price (and, I did not see the actual purchase price disclosed in the report), the owner(s) of Holmbergs received a) 5 mil Euro in cash, b) an unspecified number newly-issued shares of SPS stock, and c) an earnout tied to EBITDA growth.

In a previous statement about Holmbergs, SPS said, to the best of my recollection, that Holmbergs had more than 1 mil Euro in cash. I don’t know if SPS acquired Holmberg’s cash when SPS acquired Holmbergs, but I suspect that was the case, since SPS made a point of mentioning Holmberg’s cash on more than one occasion. If SPS did acquire Holmberg’s cash, then that did have an inflating-effect on the purchase price SPS paid for Holmbergs.

As to the EBITDA multiple that SPS paid for Holmbergs, if we used that same exact EBITDA multiple, 4.35, to compute a purchase price value for SPS itself, based on “annualizing” SPS’ Q1 2011 EBITDA (which was 4.70 mil Euro), that would compute a purchase price value of 77.7 mil Euro for SPS.

Per the chart I found on the Bolsa (Spanish) stock exchange for SPS shares, SPS’ shares closed at .385 Euro on May 20, 2011 and the chart reflected an overall “market capitalization” of 42.8 mil Euro for SPS on that date. (Market cap is “price per share” x “number of shares outstanding.”)

So, compare the 77.7 mil Euro number to the 42.8 mil Euro number. I think this means that Service Point management values SPS’ business – and Holmberg’s business – at higher values than investors value SPS itself. As SPS makes further progress the remainder of 2011, I would think we should see an improvement in SPS’ stock price.

Considering SPS’ stock price and market cap on May 20, 2011, and if we annualized SPS’ Q1 2011 (on that basis, annualized sales would be approximately 220 mil Euro), SPS was valued at around 19.5% of “sales.”

Based on ARC’s stock price and market cap on May 22, 2011 (per Google Finance) and considering ARC’s 2010 total sales, ARC is (currently) valued at round 91.6% of “sales” (trailing annual sales.)

In the above comparisons, I realize that I’ve not used the exact same dates. But, the main point I’m trying to make is that, comparatively speaking, SPS, for some reason, is valued at a much lower number than ARC is, when you compare ARC’s “sales” to ARC’s “market cap” and SPS’ “sales” to SPS’ “market cap.” And this is despite the fact that ARC lost money in Q1 2011 whereas SPS earned a profit in Q1 2011. Perhaps ARC’s significantly higher valuation is simply a matter of ARC being on the NYSE and SPS being on the Bolsa (Spanish) Stock Exchange? Admittedly, I’m not smart enough to figure out why there’s such a big difference in valuations. SPS’ current stock price (.385 Euro) and overall market cap looks low to me.

SPS’ U.S. division (subsidiary) contributed 407,000 Euro (approximately $578,000 USD at an exchange rate of 1.42) to SPS’ overall EBITDA in Q1 2011. In a previous post I speculated that SPS’ sales in the U.S. were greater than $42 mil (USD) prior to the recession and prior to the departure of SPS’ former U.S. division CEO , Mark DiPasquale. (Mark is now the CEO, and along with Jane Simmons, also ex of SPS’ US division, one of the two founders of Archimedia Solutions Group.)

I encourage you to read SPS’ entire Q1 2011 results report, since, in that report, SPS provides a list of its current and forward growth initiatives.

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