Tableau Software, Inc. (DATA-NYSE): Fast growing, undervalued stock

Recommendation

I recommend taking a long position in Tableau Software Inc. (DATA-NYSE), a developer of software products for business intelligence applications, which currently trades at $92.26 per share, because it is significantly undervalued.

The Company continues to experience rapid growth both domestically and internationally. The revenues continue to increase both on a YoY and a QoQ basis and the Company has been able to both maintain and increase its customer base.  Company has been making conscious efforts towards its R&D and continues to innovate. It recently released the latest version of its software, Tableau 9.0, which offers advances in the areas of visual analytics, performance, scalability, data preparation, and enterprise capabilities.

Key investment risks include the inability to sustain high growth rate and increased competition from other software companies.

Company Background

The company makes software products for business intelligence applications. It currently makes four key products: Tableau Desktop, a self-service, powerful analytics product for anyone with data; Tableau Server, a business intelligence platform for organizations; Tableau Online, a cloud-based hosted version of Tableau Server; and Tableau Public, a free cloud-based platform for analyzing and sharing public data.

The company has released nine major versions of its software, each expanding and improving its products' capabilities and recently released Tableau 9.0, which offers advances in the areas of visual analytics, performance, scalability, data preparation, and enterprise capabilities. In addition, Tableau Server and Tableau Online have been re-designed to deliver a faster, more scalable, and extensible platform for customers.

Company’s products are used by people of diverse skill levels across all kinds of organizations, including Fortune 500 corporations, small and medium-sized businesses, government agencies, universities, research institutions, and non-profits. As of June 30, 2015, Company had over 32,000 customer accounts located in over 150 different countries.

Company’s distribution strategy is based on a "land and expand" business model and is designed to capitalize on the ease of use, low up-front cost and collaborative capabilities of software. To facilitate rapid adoption of it’s products, Company provides fully-functional free trial versions of its products on its website and has created a simple pricing model. After an initial trial or purchase, which is often made to target a specific business need at a grassroots level within an organization, the use of its products often spreads across departments, divisions, and geographies, via word-of-mouth, discovery of new use cases, and its sales efforts.

Investment Thesis

I believe the stock is underpriced due to the following reasons:

1. The existing market for analytics software is underserved and the Company has a large market allowing it to substantially expand its customer base. The rapid growth experienced by Tableau as well as an increase in its overall revenue and international revenue is a testimony to this fact. The company reported an increase of 65.2% YoY for Q2, 2015 and its international revenue increased by 83% for the same period. The international revenue now accounts for 24.5% of the Company’s total revenue and international market offers many possibilities to continue the strong growth demonstrated by the company in US.
2. The Company currently has 32,000 customers located in over 150 countries, which is an increase of 52.3% YoY and an increase of 8.8% QoQ. The Company is aggressively expanding its direct sales force and indirect sales channels outside the United States and currently has products that support eight languages. It signed its first seven-figure deal in Asia-Pacific and recently opened an office in Shanghai, China and Paris, France, which represents Company’s third largest market behind Great Britain and Germany.
3. Company continues to invest in its R&D efforts and its ability to continue to innovate, improve functionality, and adapt to new technologies. It recently released the latest version of its software, Tableau 9.0, which offers advances in the areas of visual analytics, performance, scalability, data preparation, and enterprise capabilities. Actions like these as well as rapid release cycles for various software allows the Company to maintain its competitive position.

Underserved market, increasing customer base, re-investment in R&D and strong ability to innovate, offer significant upside in taking a long position in this stock.

Valuation

I performed a DCF calculation for FY 2015 E to FY 2019 E using a multiples method.  I made the following operating assumptions in doing my DCF analysis:

*Please note that the projections were based on prior period actuals, information from company financials and data obtained from Bloomberg and Capital IQ.

On the basis of these operating assumptions I made the following Cash Flow Projections:

For the DCF analysis I performed a sensitivity analysis wherein I choose a Discount Rate (WACC) ranging from 10% to 16.5% and Terminal EBITDA multiples for a range of 30.0x to 150.0 x. These numbers were selected by me on the basis of comparable companies as well as Tableau’s performance in prior periods.

Based on the above analysis I got a range of values. Based on the strong historical performance of the company thus far, and its ability to innovate along with strong customer acquisitions, improved expansion rates and increasing deal sizes, a much more conservative EBITDA multiple should be 75.0x, which increases the valuation of the company from its current stock price of $92.26. Additionally, a WACC rate of 12.5% is more realistic and therefore, I believe a stock price of $137.16 is more realistic and the company is undervalued. Even, if the company were sold at a very small EBITDA multiple of 35.0 x (which is highly unrealistic at this point), the company’s stock should still be trading at $103.65 using a WACC of 12.5%. Therefore, I believe that at the very minimum the share is undervalued by 12%, although a more realistic estimate would put the share price to be undervalued by 49% (share price of $137.16).

Risk factors and how to mitigate them

1.      The company continues to aggressively grow its business. It is hiring new employees at a rapid pace, particularly in its sales and engineering groups. Inability to train these new employees, including its direct sales force, could negatively impact the company’s sales as customers may loose confidence in the knowledge and capability of its employees.

2.     Company’s sales are subject to rapidly changing technology and evolving standards. There is competition not only from large software companies including suppliers of traditional business intelligence products but also business analytics software companies like Qlik, MicroStrategy, TIBCO Spotfire Inc. Therefore, the company operates in a highly competitive environment and needs to continue innovating and investing in its R&D. Inability to do so would negatively impact Company’s top and bottomline.

We can mitigate these risks via put options.

Kelso Technologies Inc. (KLS-TSX): Regulatory play, undervalued stock

Kelso Technologies Inc. (KLS-TSX): Regulatory play, undervalued stock

Recommendation

I recommend taking a long position in Kelso Technologies Inc. (KLS-TSX), a railroad equipment supplier, which currently trades at $ 4. 26 per share, because it is undervalued by at least 40%.

The company is experiencing increased growth on account of increased demand for safety in the transportation of flammable liquids by rail in North America.  Additionally, the rail safety equipment industry has significant barriers to entry, which would help the company to protect its market share. Lastly, the company has and continues to develop additional products which are expected to contribute substantially to the future financial growth of the company.

The US Department of Transportation passed new requirements on May 1, 2015 for rail tank cars used in the transportation of flammable liquids by rail. These new requirements will contribute significantly in the growth of the company. Additionally, the company continues to demonstrate strong growth year over year, has a cash of $7.3 million and has no debt on its balance sheet, allowing the company to continue its strong growth.

Key investment risks include the fact that the company is dependent on a small number of customers and that the company’s production facilities may not be large enough to handle growing market demand for the company’s products if demand is beyond projected levels.

We can mitigate these risks via put options after taking a long position in the company’s stock.

Company Background

The company is a railroad equipment supplier which produces tank car components to reduce risk and improve reliability in the transport of hazardous commodities in North America. The railroad industry has been slow in adopting new technologies and the technology designs have not changed in decades even though environmental sensitivities, human safety issues and regulatory engineering problems continue to challenge the railroad industry. This provides Kelso with its ongoing opportunities to use its engineering creativity to provide unique technology services to the railroad industry and grow a successful multi-million dollar business.

Investment Thesis

I believe the stock is underpriced due to the following reasons:

1.      The rail road industry is entering a boom period due to the rapid growth of crude oil shipments in North America. Additionally, the rail road industry has been slow in adoption of new technology and has not taken any significant steps towards the transportation of hazardous materials in over 70 years.  However, the social liabilities, environmental sensitivities and worker safety issues have increased government pressure and spurred new regulations in both Canada and United States. These factors combined will prompt the transportation industry to adopt new technologies at a much faster pace providing Kelso with a solid foundation to grow a sustainable, profitable business.

2.      The company operates in regulatory environment, wherein lengthy qualification process to achieve regulatory compliance, patent protection and production infrastructure provide significant barriers to entry for market penetration. Therefore, this positions the company for a solid growth without fear of new entrants taking share of the industry.

3.      The company has many products in the pipeline that are currently patent pending. These products address additional safety concerns for the loading, unloading and transportation of hazardous materials. The company’s strong growth year over year is a testimony to increased concerns over safe transportation of hazardous materials, and these additional products are expected to contribute substantially to the future financial growth of the company.

These reasons are significant and even if one of these factors ends up making an impact, there is a significant upside in taking a long position in this stock.

Catalysts

Key catalysts in the next 6-12 months include, (i) regulatory developments supporting product adoption, (ii) railroad and regulatory alliances and influences, and (iii) creation and acquisition of new or established products that can grow new markets.

1.      Catalyst # 1 is important as the company reported on May 1, 2015 that Transport Canada (TC) and Department of Transportation (DOT) of United States passed new rail tank car regulations. These new rules govern the retrofit of existing rail tank cars and production of new rail tank cars and will play a significant role in ensuring Kelso’s strong growth in the future years. The fact that there significant barriers to entry in this industry as discussed above will also lead to continued growth in future.

2.      Catalyst # 2 and # 3 are important as Kelso already has business and engineering alliances in place with other companies for some of its additional products. For example, it entered into a strategic alliance with Saferack (a leading expert in crude oil and liquid natural gas terminal engineering, procurement and construction services for the railroad and trucking industry), for incorporating its KKM technology as an integral part of a new generation of high-capacity crude oil loading terminal systems designed and provided by Saferack. These alliances and additional products developed/being developed by Kelso will lead to additional sources of revenue in the wake of society becoming more socially and environmentally conscious.

Valuation

I performed a DCF calculation for FY 2015 E to FY 2019 E using a multiples method.  I made the following operating assumptions in doing my DCF analysis:

*Operating assumptions derived from prior period actual financials and company MDA.

On the basis of these operating assumptions I made the following Cash Flow Projections:

For the DCF analysis I performed a sensitivity analysis wherein I choose a Discount Rate (WACC) ranging from 10% to 16% and Terminal EBITDA multiples for a range of 5.0x to 10.0 x. These numbers were selected by me on the basis of comparable companies.

Based on the above analysis I got a range of values, which allowed me to conclude that the minimum share price above is $5.98 and since the current price is $4.26 the company is undervalued by at least 40% in the worst case scenario.

Risk factors and how to mitigate them

1.      The Company is dependent on two major US corporations as customers. Although, the customers have displayed a pattern of consistent product orders over the past 24 months and timely payment of amounts owing, there is no guarantee that sales to these customers will continue at current levels, or that these customers will continue to satisfy their payment obligation to the company in a timely manner. The company does not have any formal agreements for long term, large scale purchase orders with these customers and only sells to them when purchase orders are received. The company expects that these customers will continue to represent a substantial portion of its sales for the foreseeable future. The loss of any of these customers could have a material negative impact upon the company and its results of operations.

2.      The company’s production facilities may not be large enough to handle growing market demand for the company’s products if demand is beyond projected levels. This may have a material negative demand on the company’s ability to maintain existing customers and expand its customer base, and its ability to generate revenue at current and projected levels.

We can mitigate these risks via put options.

Disclaimer

The material provided on this blog is for general informational purposes only and should be treated as ideas and not personalized investment advice. The information on the site should not be relied upon for purposes of transacting securities or other investments. I cannot and do not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. Please do your own work and/or seek personalized professional opinion.

Also any information shared in this blog does not reflect the view point or investment advice of my employer.

Trican Well Service (TCW-TSX) : Highly Levered, Still Overvalued.

Trican Well Service (TCW-TSX) : Highly Levered, Still Overvalued.

Recommendation

I recommend shorting Trican Well Service (TCW-TSX), an oilfield services company, which currently trades at $ 3.98 per share, because it is currently overvalued by approximately 25-40%. The company released its earnings last week and missed analysts’ expectations.

The company is highly levered and is expected to breach its interest coverage ratio at some point during H2/15 and Q1/16. The high debt levels in a sluggish industry combined with increased competition and a new NDP government in Alberta, will lead to a decline in the operating income, increase in the taxes, decrease in the working capital and a decreased free cash flow. These factors would lead to a decline in the intrinsic value of the company from a Discounted Cash Flow perspective.

The company is currently contemplating the sale of its Russian operations to deal with its liquidity issues. Additionally, it has taken other cash containment efforts such as suspension of its semi-annual dividend, cutting jobs as well as ring fenced its fleet to minimize capital expenditures.

Key investment risks include increase in commodity prices leading to an increase in activity and decrease in competition leading to higher margins, and company not having to sell its Russian operations along with an appreciation of the ruble leading to increase in both the top and bottom-lines.

We can mitigate these risks via call options and by setting a strict buy-stop order after shorting the company’s stock

Company Background

The company is engaged in the provision of specialized products, equipment, services and technology for use in the drilling, completion, stimulation and reworking of oil and gas wells in western Canada, Russia, Kazakhstan, the United States, and Algeria.

It is currently trading at 11.5 x 2016 E EV/EBITDA which is higher than its North American peer group average of 9.1 x.

Investment Thesis

The stock price has declined by 14% following the Q1 earnings release, but I believe the stock price will go even lower due to the following reasons:

• The company is highly levered and is expected to breach its interest coverage ratio covenant at some point during H2/15 and Q1/16. At the end of Q1/15, Trican held $61 million in cash and had undrawn borrowing capacity of ~ 290 million. However, in order for the company to draw upon this borrowing capacity, it would need covenant relief. Inability to access the borrowing capacity could negatively impact operations, thereby negatively impacting the operating income and the valuation of the company from a Discounted Cash Flow model.

• Trican has $120 million in principal obligations due next year and remains highly levered as it currently had $667 million in debt at the end of Q1, 2015. The austerity measures taken by the company in terms of cutting the dividends, cutting jobs and potential sale of international business may not be enough. There is a risk that the company may go offside on its covenants again and the company can face liquidity challenges later in the year, thereby negatively impacting the free cash flow available and intrinsic valuation of the company.

The company’s US business has underperformed even during the best times. During these times, especially, the market is significantly overcapitalized and although a slight recovery in oil prices is expected, it would not be enough to overcome excess capacity. Therefore, this would lead to a decrease in margins as company competes with other players, and these factors would negatively impact the share price.

The victory of the NDP in Alberta and its policies on increasing the corporate taxes and royalty review will impact the company’s bottom line negatively, further driving share price down.

These reasons are significant as they directly impact the company’s valuation not only from a Discounted Cash Flow but also a Public Company Comparable approach. Even if one of these factors ends up making an impact, there is a significant upside in shorting this stock.

Catalysts

Catalysts in the next 6-12 months include, the sale of the Russian operations, increased competition, and sale of other North American assets.

• Management is currently working with lenders to obtain this covenant relief, and the potential sale of the Russian/Kazakhtsan operations could increase the complexity of management’s discussions with the company’s lenders. Therefore, there is a risk that the Russian operations are sold at less than their true value/ expected prices in order to meet interest coverage covenant. Additionally, demand in Russia is expected to grow and the sale of these operations would lead to foregoing that revenue. These factors could drive the current share price further down.

•   In an effort to contain its costs, the company has ring fenced ~35% of its domestic fleet and ~50% of its US fleet to minimize sustaining capital expenditures and remains open to the idea of selling its North American assets, should attractive bids emerge. Due to the increased competition, high debt levels and sluggish industry, it is possible that the company may be required to sell these assets at a loss to overcome its liquidity issues. This will in turn impact the stock price and send a negative signal to the markets.

Valuation

I performed a DCF calculation for FY 2015 E to FY 2019 E using both a multiples method as well as a Gordon growth method.  For the purpose of my calculations, I made the following assumptions:

• I used a WACC rate of 10% , which is a reasonable rate considering the company is highly levered.

• I looked at the Historical actual statements for FY 2012 till FY 2015 Q1 to make some operating assumptions, such as revenue growth %. I considered the current state of the industry and looked at company’s MDA to ensure assumptions were accurate.

• I performed sensitivity analysis for both the models using a range for the WACC from 10% to 16% and Terminal EBITDA multiple range from 3 x to 8 x. I considered prior periods EV/EBITDA to arrive at this range of 3x to 8x.

Based on the above analysis I got a range of values, which allowed me to conclude that the company is currently overvalued by approximately 25-40%.

Risk factors and how to mitigate them

•  Management does not believe that the company’s covenant relief is contingent upon its potential sale of the Russian/ Kazakhstan operations. The company has taken some positive measures such as suspending its semi-annual dividend, which would save the company $45 mm/ year and has also received an unsolicited offer for its Russian and Kazakhstani pressure pumping business for an undisclosed offer price (likely $200 mm). Additionally, Trican has cut 2,000 jobs to save costs. It is always a possibility that the company may be able to get a covenant relief and may not have to sell its Russian operations. The Russian operations form a significant part of the company’s backbone and the demand in Russia is expected to grow. If the ruble appreciates or the weak ruble is offset by a strong demand, and the company has not sold off its operations, it would lead to a positive topline and bottomline for the company, which could drive the prices up.

• It is possible that the oil and gas prices recover significantly, triggering an increased activity and thereby eliminating the current competitive landscape. This in turn could improve the top and bottom line for the company and eliminate its liquidity issues and drive its share price up.

We can mitigate these risks via call options and/or to set a strict buy-stop order in the $4.75-$5 range to limit our potential losses to approximately 20-25% (versus the potential upside of 25%-40%).

Disclaimer

The material provided on this blog is for general informational purposes only and should be treated as ideas and not personalized investment advice. The information on the site should not be relied upon for purposes of transacting securities or other investments. I cannot and do not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. Please do your own work and/or seek personalized professional opinion.

Also any information shared in this blog does not reflect the view point or investment advice of my employer.