Michael Liu, Analyst at Intelligent Fanatics Capital Management, discusses Cogstate (ASX: CGS) / (OTCQX: COGZF). Cogstate provides computerized cognitive tests for Alzheimer's clinical trials. Michael came on to discuss his thesis on Cogstate and how a failed takeover attempt could create an interesting special situation.
Interesting company. Top line growing at about 11% per annum on average over the past decade. Gross margins stable and strong at about 50% and operating margins have grown a great deal (not sure that they have much further to go). the combination of strong top line growth, margin growth and multiple expansion have driven shareholder returns over the past 5 years.
There are two problems.
First, the multiples have expanded too far. With adjusted economic earnings margins (free cash flow variant) in high single digits, this is a company that can't justify trading a much more than parity against sales. But it trades at 6.4x top line currently. Even if the top line doubles in the next year or two, the price is still too high and a 3.2x multiple still impossible to defend. The price has run too far ahead of the fundamentals. Multiple contraction is highly likely and that would bite hard.
Second, dilution is a problem. Over the past 5 years shareholders have been diluted 35% (9% CAGR) due to an expansion in equity outstanding. This isn't a new phenomenon. Over the past 11 years shareholders have been diluted 61.6% (9.1% annually).
This appears to be largely due to stock based compensation which was 1.73% of revenue in 2021, rising to 2.5% a year later and on a LTM basis has risen to 5.07%.
This appears to be a company run for the benefit of insiders at the expense of shareholders.
The stock buy-back that has recently been announced doesn't even offset the dilution of recent years. Shareholder equity is leaking out the back door and although the share price will be artificially driven higher, at least in the short term, by creating artificial market demand via a buy back program, the shareholders continue to be diluted by over 9% per year. For a shareholder it is like taking two steps backwards for every one step forward.
This is definitely not one for me. The risk skew is heavily weighted to the downside.
There are way better opportunities out there IMHO.
Interesting company. Top line growing at about 11% per annum on average over the past decade. Gross margins stable and strong at about 50% and operating margins have grown a great deal (not sure that they have much further to go). the combination of strong top line growth, margin growth and multiple expansion have driven shareholder returns over the past 5 years.
There are two problems.
First, the multiples have expanded too far. With adjusted economic earnings margins (free cash flow variant) in high single digits, this is a company that can't justify trading a much more than parity against sales. But it trades at 6.4x top line currently. Even if the top line doubles in the next year or two, the price is still too high and a 3.2x multiple still impossible to defend. The price has run too far ahead of the fundamentals. Multiple contraction is highly likely and that would bite hard.
Second, dilution is a problem. Over the past 5 years shareholders have been diluted 35% (9% CAGR) due to an expansion in equity outstanding. This isn't a new phenomenon. Over the past 11 years shareholders have been diluted 61.6% (9.1% annually).
This appears to be largely due to stock based compensation which was 1.73% of revenue in 2021, rising to 2.5% a year later and on a LTM basis has risen to 5.07%.
This appears to be a company run for the benefit of insiders at the expense of shareholders.
The stock buy-back that has recently been announced doesn't even offset the dilution of recent years. Shareholder equity is leaking out the back door and although the share price will be artificially driven higher, at least in the short term, by creating artificial market demand via a buy back program, the shareholders continue to be diluted by over 9% per year. For a shareholder it is like taking two steps backwards for every one step forward.
This is definitely not one for me. The risk skew is heavily weighted to the downside.
There are way better opportunities out there IMHO.