|
|
|
This Feature |
|
Related Items |
|
Tuesday, March 10,
1998
Omega Research Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OMGA)") else Response.Write("(Nasdaq: OMGA)") end if %>
Phone: 305-551-9991
Website:
http://www.omegaresearch.com
Price (3/9/98): $3 15/32
HOW DID IT FIND TROUBLE?
It wasn't supposed to be this way. Hot on the heels of a seven-year bull
market a company on the cutting edge of institutional investment software
went public in October. Oktoberfest? Nope.
Omega Research shares were priced at $11 a pop and debuted at $12 1/4 a share,
but after that it was all downhill for the company that lived up to its moniker's
position in the Greek alphabet -- the end. Despite the accolades and the
bull market, fiscal disappointments, lawsuits, and gradual shareholder defection
ate away at the share price.
One burning question remains, did the company's Dow Jones TradeStation software
package, which makes trading decisions based on strategy input, recommend
a sell on its own shares? If not, then why the accolades?
BUSINESS DESCRIPTION
Far away from Wall Street, heck, just five miles away from my home, Omega
Research is producing award-winning investment analysis software in the Miami
suburbs.
Omega's TradeStation evaluates trading goals and will backtest and then implement
the user's unique trading strategy. The program recommends a course of action
either automatically or by pager if the customer is not in front of the computer.
The company's OptionStation software enables professional investors who are
not experts to take a position in the options market based on risk and the
customer's profile.
FINANCIAL FACTS
Income Statement
12-month sales: $29.2 million
12-month income: $5.4 million
12-month EPS: $0.26
Profit Margin: 18.5%
Market Cap: $79.4 million
Balance Sheet
Cash: $12.3 million
Current Assets: $26.4 million
Current Liabilities: $2.2 million
Long-term Debt: None
Ratios
Price-to-earnings: 13.3
Price-to-sales: 2.7
HOW COULD YOU HAVE SEEN IT COMING?
Insider ownership is always commendable, but in this case it was condemnable,
too. Even after the offering, co-CEOs William and Ralph Cruz owned 83% of
the shares outstanding. How can this be bad? The large number of shares
outstanding that had little tangible book value relative to the initial public
offering issues meant huge dilution on the way in.
A shareholder should always expect some dilution at the IPO level, but this
was excessive. Omega Research was trading at 12 times sales and 12 times
shareholder equity at the open. You can fault the underwriters for their
euphoria or the company for its ego -- but both should have known better
since analyzing the stock market was their business.
While revenues had shot up 88% over the last nine months before going public,
the offering was priced unreasonably high. That became all too clear when,
in the December quarter, a demand slowdown found the top line rising just
34% while earnings were cut in half.
The shares were already Daily Trouble fodder even before the January 6
pre-announcement regarding disappointing fourth quarter results. The bad
news only served to cement the company's fate. This was clearly a rich issue,
and anyone who had requested a prospectus and given it even a customary glance
would have seen the major dilution in book value and been at least cautious
over a $15 million dividend payout that went, in part, to Omega's officers.
WHERE TO FROM HERE?
What the underwriters failed to do, price this stock fairly, the market took
care of. But now at a third of its opening day price, are the shares undervalued?
Part of the reason for the lackluster demand was the normal hesitation to
commit to an elaborate software package when Omega was already working on
upgrades that will be released in the spring.
That said, the company remains optimistic that this will be a record year.
Despite the poor fourth quarter, where earnings came in at $0.02 a share
when the estimates had called for $0.07 a share and despite downward estimate
revisions towards flat earnings growth for this year, the fundamentals are
on a roll.
In January the company named E*Trade <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> CEO Christos Cotsakos
to the Omega board of directors. Two weeks later the companies teamed up
for a marketing alliance.
At that time, Technical Analysis of Stocks & Commodities magazine
announced its Readers Choice Awards and Omega was a big winner. After four
years of Bloomberg owning the institutional trading platform category, Dow
Jones TradeStation captured the top spot.
Ultimately, pricing an IPO is a delicate issue. The company wants to get
a fair price while the underwriter also wants a little room for immediate
upside without making the company feel it left money on the table. This time
it backfired. With Robertson Stephens and Hambrecht & Quist, arguably
two of the most efficient tech underwriters who tend to homer more than they
strike out, this rare whiffer has to hurt. Undoubtedly the walk back to the
dugout has to have one thinking how this seemed all wrong at $11 -- yet somehow
quite an attractive pitch to swing at now.
-Rick Aristotle Munarriz
([email protected])
Check out the Daily Trouble Message Board!
|