Computer Task Group

Buy Price
Holding Type
Investment Theme
Trade Date
December 7, 2016

I have been buying this between $4.30-4.40 per share. This is a simple yet complicated story at the same time. With 16.2m diluted shares, this has a $70m market cap. No debt and $9m in cash makes it a $61m EV. CTG operates in 2 divisions: IT staffing (~70% of sales) and IT consulting (30%).

Revenue and earnings have been on the decline for years. Sales were down 6% per year 2013-2015 and down 13% through 9 months of 2016. Pre-tax earnings declined from $24m in 2013 to $10m in 2015 and $2.7m through 9 months of 2016 ($3.6m annualized). These are pretty horrific results.

The balance sheet has been completely de-risked following the impairment of all goodwill/intangibles. As of September 30, the balance sheet consists of $9.7m in cash, $73.5m in receivables, property of $6m, $30.5m in cash value of life insurance, and $9.6m in other assets against total liabilities of $48.7m. This works out to tangible book value of $81m or $5 per share.

A $10m buyback program was recently announced. This amounts to ~14%+ of the current market cap.

Free cash flow is misleading. Working capital fluctuations have distorted the cash generation picture over the past few years. Net income plus D&A less capex provides a better picture. For 2015, this came to $8.8m ($0.54 per share) and trailing $3.8m ($0.24 per share).

A new 3-year strategic plan has laid out a path to 7% organic revenue growth and $0.48-0.55 per share in GAAP earnings. Given the strong balance sheet, returns could be much higher. The way I view it, if the company were to earn $0.50 per share in 2-3 years then the operating business should be worth at least $5; with $9m in cash, $5m or so in expected RE proceeds, and $30m in cash value life insurance policies, that adds another $2.70 per share for a $7.70 price target (~75% upside).

UPDATE: Sold 900 shares @$5.25 on 2/15/18 for a 14% total return on my cost basis. I still own 2000 shares so this sale was ~31% of the position. Company announced an acquisition with limited details today, sounds like it may be a dud and consumed the net cash position. I would have rather seen them buying back stock. Sold the remainder of my position at prices between $6.84 and $7.09 today (50%+ total return) – average sale price was $6.44 on a total cost basis of $4.60 (40% return).

These are the sorts of quick moves in an illiquid microcap stock that you need to be on the lookout for: