Last week, The Wall Street Journal took serious issue with the actions of management at Internet connector-for-travelers iPass
April 22: iPass told investors it had "significant momentum going into the second quarter."
Late April: The company noticed it was losing customers because of an ill-considered reduction in the number of local access numbers it offered.
April 27-May 3: Several company insiders began selling large blocks of shares and informing the Securities and Exchange Commission of plans to sell even more shares.
May 13: iPass filed its first-quarter 10-Q with the SEC, making no mention that anything was amiss.
June 30: iPass warned shareholders of a second-quarter revenue shortfall.
Now, click here to see what the share price was doing along that timeline. It certainly looks suspicious, and the Journal was right to call iPass on this.
Still, there's a contrarian argument to be made here. Yes, the circumstantial evidence stinks to high heaven. But at the same time, it provides Foolish investors with a chance to buy into iPass at a seriously discounted price -- if they dare. Consider the company's most recent 10-Q for the first six months of 2004. Revenues increased 22% over the first half of 2003; GAAP profits rose 52%. More important, free cash flow rose from $6.6 million in the first half of 2003 to $14.3 million in the first half of 2004 for a 117% increase. That implies a free cash flow run rate of $28.6 million -- an improvement over Yahoo!
Compare that to the company's $220 million enterprise value, and you get an EV/FCF ratio of about 7.7. In a company growing earnings no faster than revenues (22%) that would be a bargain price. And if iPass can continue to increase earnings at rates many times faster than its revenue gains, that makes the company's current stock price of $6.18 an absolute steal.
Granted, iPass bears serious "management risk." However good the business is, management may decide to keep all the profits for itself and shut out minority shareholders. But that's a risk that Fools are sometimes willing to take, given a sufficient discount to intrinsic value. Hidden Gems Watch List stock DHB Industries
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Fool contributor Rich Smith owns no shares in any company mentioned in this article.