Investoid

Despite my tech background, I currently don’t have any tech stocks or index funds in my portfolio. I think part of the reason for that is that Canada’s tech index is so heavily weighted on RIM, but also because there is a dearth of up and coming public tech companies, relative to the U.S. I plan on looking at more Nasdaq-based companies in the future, but in the meantime I have been looking at Systems Xcellence (SXC – TSX / SXCI – Nasdaq), which is a company that has a dual listing.

Company Analysis

• SXC is a pharmaceutical software provider. Their business focuses on managing the prescription drug supply chain.
• Two primary market customers:
• Payor customers such as Blue Cross/Blue Shield and Governments
• Provider customers such as chain and independent pharmacies
• Currently the payor market represents approximately 70% of revenue, providers the remainder.
• Revenue is concentrated in the U.S. (over 95%).
• The company had a U.S. IPO on Nasdaq in the past six months, which has raised its profile in the U.S.

Market Analysis

• Total market size for payors and providers: $4.5B.
• Growth potential:
• The number of prescriptions being filled is increasing as North American population ages.
• In addition, number of prescriptions per individual is increasing.
• Payor customers are looking to increase operational efficiencies to reduce administration costs.
• Pharmacies require effective solutions to manage increasing volume.

Financial Analysis

Stock Analysis

• Since dropping to $12 (Canadian) in June, the company’s stock has increased dramatically. It reached a high of over $25, but has since pulled back to the $21.50 range.
• The stock is more volatile than the Canadian IT index (as represented by XIT), but is strongly correlated to it.
• According to the company, 12 analysts cover the stock on both sides of the border. According to GlobeInvestor, the consensus recommendation on the stock is a strong buy.

Opinion

Overall, I think this company is in a solid growth sector and has demonstrated strong organic growth over the years. I like the space they’re in and the fact that they are part of the solution to manage overall costs in the health care system, rather than being a cost driver.

Using my valuation models, I have arrived at fair value prices pretty close to SXC’s current price. I think that the stock is fairly valued at this point given future expectations, but if the stock continues to fall to $19 or so I think it becomes a good value and I will be looking to accumulate some for my portfolio.

Since March Madness is just getting underway, I decided to analyze Score Media (SCR: TSX) in depth. This company has been around for more than a decade now, and started a simple cable score ticker service. It has since morphed into a full fledged sports media company, with a comprehensive sports channel that has a mix of live sports, taped events and sports news, as well as various new media offerings.

Company Analysis

• Score Media Inc. is a media company with various broadcast (Score Television Network), internet (score.ca, scorepoker.com), mobile (Score Mobile) and next generation radio (Score Radio) assets.
• Score television is available in more than 5.9 million homes, while Score Radio is available around North America on SIRIUS Satellite Radio.
• The company is targeting the 18-34 (primarily male) demographic for its advertisers.
• In a December 2006 interview, John Levy, the CEO, saw ad rates growing for live event broadcasts, despite the impending crunch in ad rates for television overall.
• Nonetheless, the company has expanded into new media to retain its customer base and provide advertisers with a captive audience.
• On the television front, SCR’s primary competitors are Bell-owned TSN and Rogers-owned Sportsnet. Of the three, Score is the smallest in terms of audience.
• According to the CRTC, Levy and his relatives hold a rather large proportion of SCR (over 40%), while Alliance Atlantis holds about 22% (which was bought by CanWest Global in January 2007).

Stock Analysis

• The stock has risen dramatically in the past few months, primarily based on takeover rumors as well as large purchases by CanWest/Alliance Atlantis.
• The company’s shares are relatively illiquid, although trading activity has increased recently due to the above rumors and interest in the company.
• The company has one analyst covering it (Andrea Horan, Genuity Capital Markets), which rates it a buy. According to unverified reports, Genuity has been purchasing some modest amounts of SCR since January).

Financial Analysis

• Revenues were up 15% year over year (ending Aug 31, 2006), while cost of goods sold as a percentage of revenue has steadily dropped to 44% from 57% in 2002.
• The company has dramatically reduced its debt obligations (through a share offering and internal cash flow) and now a manageable debt load. As a result, interest expense has been dramatically reduced going forward.
• Earnings per share were up nearly 5 times to 0.14 from 0.03 in 2005. However, nearly 75% of total earnings was due to tax refunds due to loss carryforwards (ie. earnings were about 0.04 without the tax effect).
• The company has over $63 million in non-capital income losses tax credits available, the bulk of which expire in 2008 and 2009. Based on a ‘usable more likely than not’ valuation, the company pegs the value of these loss carryforwards at $9.1 million.
• Operating cash flows have been strong the past couple of years, with last year’s running about $0.04 per share.
• Analyst expectations for EPS this fiscal year is only 0.04, with FY 2008 being 0.06.

I created my own set of valuation models for this stock (which I typically do when analyzing a stock deeply). Even with generous growth and low income tax estimates for the near term, I could not justify the current $1.75 valuation on the stock. I believe that last year’s 0.13 EPS is a one-off due to the tax refund, and think this year’s EPS will be just 0.04 or 0.05 and will probably grow just a cent or two each year for the foreseeable future.

That said, I can see how this company is a desirable takeover target for CanWest. Furthermore, CanWest would be likely to be able to use all of SCR’s tax shelter, whereas the company itself will not generate sufficient earnings to use them prior to their expiration. Thus I can see the company being more valuable to CanWest or a similar profitable acquirer than as a standalone entity.

So, if you think SCR will be acquired in the near future, then it is currently undervalued. However, if the company is not bought out the shares look pretty pricey at the moment. I would be more interested in the stock if it pulls back to the $1.10-$1.15 range, which I think could happen if it is not purchased soon and as quarterly income figures come in below last year’s one-time spike.

Depending on your viewpoint, SCR is either a speculative buy or a sell right now. Since I can’t decide which is the more likely scenario, I am neutral.

Note: This is my personal opinion and not a recommendation for anyone else to buy this stock. This site does not purport to tell people, or suggest to people, what they should buy or sell for themselves. Please see my full disclaimer for all the details.