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Friday, May 30, 1997
Cotelligent
Group HOW DID IT FIND TROUBLE? Cotelligent Group went public on Valentine's Day in 1996. Despite the whirlwind honeymoon, one in which the shares more than doubled in its first year, the last few months have been quite the heartbreaker as shares have fallen from a high of $26 3/4 to as low as $7 1/4. In March, when the company announced that earnings would fall well shy of analyst estimates, investors signed their Dear Stock letters and took back their sweet nothings. For a company that had lived up to all of its 1996 promise, few expected that it would miss its quarterly earnings estimate of $0.21 a share. When Cotelligent proposed $0.15 a share on bended knee, investors fled with wounded knees. BUSINESS DESCRIPTION Cotelligent came public as a group of four software companies specializing in on-call information technology (IT) consulting services. Taking advantage of the fragmented nature of the IT industry, the San Francisco company used its clout to buy up eight of its competitors in stock transactions. FINANCIAL FACTS Income Statement 12-month sales: $146.8 million 12-month income: $6.3 million 12-month EPS: $0.64 Profit Margin: 4.3% Market Cap: $121.7 million Balance Sheet Cash: $14 million Current Assets: $26.6 million Current Liabilities: $9.3 million Long-term Debt: $0.2 million Ratios Price-to-earnings: 19.1 Price-to-sales: 0.8 HOW COULD YOU HAVE SEEN IT COMING? While the company could have been faulted for going on a shopping spree joyride using share certificates as legal tender, it was buying companies that it knew well -- its peers. With every acquisition, the company's expectations grew along with the share price. It's not clear whether the company simply became too large to manage itself or the analysts had been permanently fitted with rose-colored glasses. The pre-announcement of its dismal quarter came not only after a spectacular quarter, but also after a self-promotional press release the month before entitled "Cotelligent Valentine Goes Straight to Investors' Hearts." Right, like a wooden stake. Investors were blindsided. WHERE TO FROM HERE? Walking through the ruins of the relationship between Cotelligent and its shareholders it would appear that much of the rubble has already been accounted for in the lower share price and the watered down earnings estimates. As bad as its fiscal fourth quarter was, EPS was still up 25%. The pair of analysts following the stock seem to think that growth will continue to slow as they have lowered their earnings target to $0.75 a share this year, just 17% over the fiscal 1997 showing. However, there is an interesting situation here. Cotelligent acquired many of these companies when its stock price was higher. As shares of the company fell over the last few months so did the perceived cost of these buyouts. If the company finds the synergy it had hoped for in its collection of a dozen related companies, and if the due diligence on the acquisitions was thorough and the price paid reasonable, then this could potentially be an undervalued company. If so, it won't be long until the suitors begin to line up at Cotelligent's door... again. -Rick Aristotle Munarriz ([email protected])
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