Belzberg Technologies (BLZ) provides technology-based brokerage services to institutions and hedge funds in Canada and the United States. This is a highly cyclical business, as seen from the chart below depicting Belzberg’s sales over the business cycle:
Consider the magnitude of the year-to-year revenue increases/decreases! As such, when revenues decline, the company will most certainly lose money until it can lower its costs accordingly. Operating profits for Belzberg continue to be negative, as the company is still scrambling to cut its costs in line with this new revenue environment.
But due to the nosedive in the company’s revenue and operating margin, the company’s stock price may have overreacted. While Belzberg trades for just $8 million, it has $20 million of cash against just $8 million of total liabilities. In addition, the company has a few million dollars of current receivables, sweetening up the offer for potential shareholders.
With such a large margin of safety and no debt against it, the company can continue to lose money for a few quarters before shareholders risk losing capital. However, to see large stock price gains, extraordinary sales or profit growth isn’t necessary. If management can cut expenses to the point where the company is at a break even level, shareholders at this price are likely to be rewarded. To that end, the company has announced layoffs and freezes that should help in this regard.
However, the company does have some fixed costs which are likely to be difficult to cut. If these poor revenue conditions continue for several quarters, a merger with a company with similar costs may be the only way to profitability. The current margin of safety on the company’s stock may allow shareholders to benefit from either of these options.
Disclosure: Author has a long position in shares of BLZ
