Shares of TSR Inc. (TSRI, Financial), a microcap company, trade below net current asset value (NCAV), making it a net-net stock. The definition of a net-net is when market capitalization exceeds NCAV (total current assets – total liabilities). TSR's price Friday was $3.64 per share and NCAV, as of November 2015, (($14,116,443 - $4,840,482)/ 1,962,062 diluted shares outstanding) comes out to $4.73 per share.
The company’s net-net working capital per share comes out to $3.76 using November 2015 numbers. The net-net working capital (NNWC) is a more conservative take on net current asset value. The NNWC formula fully values cash, discounts a company's accounts receivable at 75% of its value, its inventory at 50% of value and subtracts total liabilities.
Company
TSR is an IT staffing firm that serves the New York Metropolitan Area. The company was founded in 1969 and has built an extensive database of contractors. From the company’s 2015 10-K:
TSR’s customers for its contract computer programming services consist primarily of Fortune 1000 companies with significant technology budgets. With more than 40 years experience in the information services business, TSR is positioned to fulfill virtually any information technology temporary staffing contract requirement. Extensive recruiting efforts are employed to create and maintain a database of highly qualified professionals who are well-versed in the latest technological advances. TSR’s professional staff has extensive experience across a broad range of industries from telecommunications and pharmaceuticals to banking and insurance.
Per GuruFocus, the company’s trailing 12-month metrics are listed below:
- ROE %: 3.09.
- ROA %: 2.00.
- ROC %: 15.60.
- ROIC %: 8.69.
- Debt: No debt.
- PE: 24.80.
- P / FCF : 5.41.
- EV / EBIT: 1.58.
Net income trend
From the chart below, you can see the net income trajectory since 1996.
From fiscal years 2012 to 2014, TSR lost money, but it was profitable every other year from fiscal year 2001 to 2015.
Management
The company was founded by Joseph F. Hughes who has served as the chairman, president, chief executive officer and treasurer and as a director of TSR since 1969. Hughes is 84 years old and owns 46.9% of the company’s shares outstanding. His annual salary is $500,000 and he received an additional $51,000 in other benefits in 2015. His son is Christopher Hughes who serves as the senior vice president. He received $445,000 in total compensations for 2015.
Risks
Net income for fiscal year 2015 was $193,000. It should be noted that both the CEO and senior vice president received compensation more than double the company’s total net income. There seems to be a conflict of interest between management and shareholders as senior management is handsomely paid.
The company also has significant customer concentration risk. Its largest 10 customers accounted for 80% of its revenue in fiscal 2015. Its largest two customers, Citigroup (C, Financial) and Pontoon, accounted for 19.2% and 15.7% of the company’s consolidated revenue. In addition, approximately 34% of the company’s revenue is derived from end customers in the financial services business who are susceptible to economic downturns.
It’s easy to see why TSR’s stock price has fallen into net-net territory when looking at its risks. Investors will need to decide if the margin of safety sufficiently offsets the risk. Keep in mind this is a microcap so if trading, using limit orders is highly recommended.
