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This week’s discussion topic
I. Global market leader at fire-sale pricing
Hemisphere GPS (TSX: T.HEM, Stock Forum; 58 cents)
www.hemispheregps.com
> Positioning and Navigation Systems
> Guidance and Machine Control Systems
> Precision GPS Receivers and Antennas
> Calgary base with sales in over 50 countries
Shares outstanding: 61 million
Market cap: $35 million
Financials ending: Sept 30th
Working capital: $12 million
Inventory: $19 million
Property & equip: $6 million
Nine-month revenue: $55 million
Positive cash flow: $4.6 million/$7 million on R&D
Hemisphere’s working capital, inventory and equipment have a book value of $37 million. This means that the market values its technology, patents, global distribution, and profitable annual revenue in excess of $70 million, at a negative $2 million (market cap less the $37 million). This is hard to imagine for a company with such strong technology and global market penetration. For investors it could create a very attractive opportunity if they have the patience and risk tolerance to carry it into 2012.
In early October National Bank analyst Robert Winslow downgraded his view on the agriculture sector. National Bank had been a large shareholder of Hemisphere GPS and thanks to the one opinion of this in-house analyst, National managed to destroy the HEM share price. Between October 1st and this week they dumped 4.8 million shares and continually hit bids or offered large blocks of stock. National did a great job of crushing the share price from 75 cents to 60 cents. Once herd mentality kicked in, other shareholders assumed the professional money managers were correct and followed suit.
So how distorted can this market be or how wrong can these professional money managers and analysts be? Well consider the recent case of Formation Metals (TSX: T.FCO, Stock Forum; 67 cents), which we bottom fished through Ticker Trax recently in the low 40-cent range. Formation has a large cobalt project in the U.S. and more than $50 million in cash worth over 60 cents/share.
Between October 15 and 31, Formation Metals sellers at CIBC and an anonymous brokerage house dumped 3.4 million shares in the low/mid 40-cent range. This was followed by TD and another firm who followed suit with another 2.3 million shares. In total these sellers relentlessly pounded the share price at huge discount to underlying cash value. Almost six million shares approaching $3 million was sold to crush the share price and draw in unsuspecting smaller investors who followed the trend and assumed the large sellers must know what they were doing.
Within 30 days FCO hit 75 cents on strong volume and positive new developments. All those sellers missed gains in the range of 70 percent! This makes as much sense as seeing Hemisphere GPS trading below 60 cents. I am not saying HEM is going to gain 70% before year- end but I am saying that a company with such global market share and almost $70 million in annual revenue should never be trading at such bizarre levels. While this seems to be a common theme right now for micro cap stocks, it may create significant opportunities for astute investors/speculators.
Hemisphere makes precision commercial GPS systems and has been in business for 20 years with 70 patents issued and pending globally. Significant productivity, job quality, workflow and profitability gains are being realized through GPS and complimentary machine guidance and control technology.
The company has three divisions:
1) Ground agriculture, which steers equipment and provides centimetre level guidance for planting, spraying, and harvesting of crops;
2) Air products group for crop spraying, pest control, forestry, and firefighting;
3) Earthworks product group and other that includes surveying, marine, positioning and control of buckets, drills, and blades, automated steering of heavy equipment, flow control of materials, and reports on areas covered, operation time, speed, etc.
Hemisphere’s core focus and primary area of growth is agriculture. Its GPS (Global Positioning System) tracking and GIS (Geographic Information System) mapping is having a dramatic impact on the farming industry worldwide. Fields are planted and harvested within a fraction of an inch and on the more advanced systems the equipment is even steered automatically.
This accuracy avoids overlap and field compression that in itself can pay for the system within a couple years. Overall productivity and efficiency improves dramatically (along with crop yields). The application of chemicals and fertilizer is also dramatically improved and this leads to major improvements cost cutting – something that will take on critical importance going forward as input costs continue to rise.
Importance of October 21st news - CLAAS
Last month the company issued an excellent news release but it was all but ignored thanks to risk aversion in the market. Hemisphere has worked with CLAAS Agrosystems for the past decade but October 21st announced a new development agreement whereby HEM will develop next-generation precision farming solutions for integration into CLAAS machinery. They will develop new intelligent machine control solutions including precise guidance, advanced automated steering, application controls and remote data management.
This news is very important to investors because of who CLAAS is - one of the world's leading agriculture manufacturers with 14 production plants around the globe. CLAAS harvesters are the European market leader, and CLAAS foragers are No. 1 worldwide. The product range includes tractors, balers, green harvest machinery, telescopic loaders and state-of-the-art agricultural information technology.
Conclusion
This is a company where the market values them as though the large annual revenue, technology, and market share is worth a NEGATIVE $2 million. And this doesn’t take into consideration the $42 million on its books from intangible assets or goodwill (I have assigned zero value to this).
The economic outlook for 2012 is still very cloudy. However, unlike the analyst from National Bank who feels agriculture is a dead-end sector, I disagree entirely and question whether the analyst has even been on a farm this past year. I live in agriculture-rich central Alberta and originate from Saskatchewan. Farmers and ranchers are happier than they have been in decades. Countries like China and India are trying to feed two billion people and grain productivity improvements through technology are critically important for them. The same applies throughout Europe and South America.
Disclosure: Danny Deadlock owns 25,000 shares of Hemisphere GPS (TSX: T.HEM)