Tuesday, December 30, 1997

Analytical Surveys Inc.
(Nasdaq: ANLT)
Phone: 719-593-0093
Website: http://www.anlt.com
Price (12/29/97): $31 1/16


Digitizing a simple, two-dimensional map is easy to do. Any number of cheap scanners will do this without a hitch. Digitizing a two-dimensional map into a permanent computer file that can be pulled up with dedicated hardware and manipulated is a bit more difficult. Not only do you need to access the high-resolution equipment required, but you need the expertise and proprietary software required to remove distortions from aerial photographs and create clean, digitized maps.

The company has grown rapidly both through internal growth and via acquisitions, of which it has made a number over the past few years. Being public is an aid to the company as it gives management a currency besides cash to make acquisitions. This year the big acquisition was MSE Corp., which cost Analytical $11 million in cash and 925,000 shares worth $7 million at the time and bought $22 million in trailing sales and a backlog of $45 million in orders, a nice package indeed. Announced on July 2, the deal closed during Analytical's second quarter and powered fourth quarter revenues up 119%.


Analytical Surveys produces computerized maps and information files that will run on Geographic Information Systems (GIS). The company outsources just about anything that is not directly involved in this undertaking, using subcontractors to do the photography and the ground surveys. The main customers for this kind of work are state and local governments, utilities, engineering companies, and federal government agencies.

At the beginning of fiscal 1997, Analytical Surveys believed there were eight other companies of comparable size that it competed with in the same line of business. With the scale of its recent acquisitions, this number has probably dropped to around five or six. Analytical believes that there are several regional players that could have national ambitions, as well as satellite companies Space Imaging Inc. and EarthWatch Inc. that could conceivably compete with the company at some future point.


Income Statement
12-month sales: $40.8 million
12-month income: $3.3 million
12-month EPS: $0.60
Profit Margin: 8%
Market Cap: $198.5 million

Balance Sheet
Cash: $1.6 million
Current Assets: $32.8 million
Current Liabilities: $11.8 million
Long-term Debt: $14.1 million

Price-to-earnings: 51.8
Price-to-sales: 4.9


The fireworks at Analyical Surveys really began when it announced the massive, accretive acquisition of MSE Corp. This was one of those occurrences where efficient markets often break down. When a major acquisition like this happens, all players in the free market do not comprehend the significance at the same time. Maybe someone is on vacation for a week. Maybe it takes a while to confirm the financials of the company being acquired. Whatever it may be, at the time of the acquisition Analytical Surveys had $29.6 million in revenues, meaning that the acquisition doubled the revenue base of the company overnight. Even better, the acquisition also doubled the company's backlog, pushing it up to $90 million at the time of the deal. The cherry on top was that the deal was also accretive to earnings, meaning that the earnings per share of the combined company increased after the deal was done.

When Analytical Surveys acquired MSE, it effectively paid around $18 million for $22 million in trailing revenues, or a price-to-sales ratio of around 1.0. At the time, Analytical Surveys traded for 1.6 times sales, indicating that it bought MSE at a discount relative to its own current valuation, not even counting the fact that it was adding significantly to its sales base and its backlog. Whenever you see a company in a fast-growing industry acquire a competitor at a valuation below that of the acquiring company, pay close attention to the deal. These mergers or acquisitions can often prove to be extraordinary bits of value and can be huge boons for shareholders.


No surprise, the opportunity appears to have disappeared. The one factor in Analytical's favor is the fact that its acquisitive past makes the earnings look lower than they really are because of the amortization. On a cash basis net capital expenditures, Analytical earned $4.2 million, not the $3.3 million in after-tax net earnings the company reported. Even so, the company trades at 44.5 times this free cash flow and 5.04 times trailing sales.

However, if you look at the company's last quarter and focus on this alone, the valuation shrinks considerably. The company only trades at 3.2 times annualized sales and 40 times annualized earnings per share. Adding in the depreciation and amortization in the quarter, the company actually had $1.30 per share of cash flow, lowering the cash flow multiple to only 24.6. While the company still does not seem undervalued, Analytical Surveys is not necessarily dramatically overvalued either.

Given the company's $97 million in backlog relative to its $64.8 million revenue run-rate, the only limit Analytical seems to have over the next year is how fast it can do its work. If you assume the $800,000 in depreciation and amortization the company had in the fourth quarter will remain fixed, Analytical should earn $1.48 in cash flow per share in fiscal 1998 and $1.77 in fiscal 1999. With cash flow growing at 20%, the 18 multiple on fiscal 1999 cash flow doesn't warrant pessimism. If Analytical can find another MSE-class acquisition, the company could become cheap again. This would be the event to watch for, with a firm understanding that the accounting earnings understate the actual cash flow generated by the company.

-Randy Befumo
(TMF Templr)

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