Some of the best investments can be found by following the most obvious trends. A look back at the poster-child stocks from the modern era reveals companies that rode tremendous growth waves in electricity, automobiles, and computing. But as corporate history buffs know, for every poster-child stock that rode atop an unstoppable trend, there were dozens of failures -- the auto industry is a prime example. In 1923, America had 108 car manufacturers. Now we've got two.
But for investing success, it's not necessary to find the company that will ride the very cusp of the wave. There are many solid markets within uptrending industries that aren't quite sexy or profitable enough to tempt the bigger players; these decent-but-not-spectacular niches can be great watering holes for businesses, and, by extension, for investors.
With roots in printed translations, the company aggressively expanded into much-needed translations for Internet and software applications. For instance, Lionbridge maintains IBM's
Though translation -- which Lionbridge insists on calling "globalization" -- is the bulk (I couldn't bring myself to say "lion's share") of its business, the company has been putting its brain and acquisition power toward expanding its humble offering. It's moved up to actually developing the sort of content that it would formerly just translate, as it's doing with educational material from Pearson
On the opposite front, Lionbridge is helping to test the translated material for compatibility, or to simply make sure it works smoothly and has the same functionality as the original; these testing services have been a nice cross-sell to Google, for instance. And the company's gotten so excited about this testing that it now even offers a stand-alone testing service, VeriTest, which is actually the only entity allowed to award the "Certified for (Microsoft) Windows Server" software designation.
To give an idea of a full-scale combo offering, I'll use an example Lionbridge gave recently: Hewlett-Packard
Profit at last
In the end, my financial analysis of Lionbridge is fairly simple, but that's mainly because certain complexities have invalidated traditional paths. The acquisitions it's made to expand beyond translation have in turn made both historical and peer group comparisons difficult, as substantive acquisitions always do. For that matter, Lionbridge doesn't really have much of a peer group, although admittedly that's part of its charm.
More specifically, the simple fact that now-profitable Lionbridge recently endured many years of losses makes historical multiple analysis a bit of a challenge. Even the incipient profitability leaves a trailing P/E of 70 -- nasty.
Forward P/E, however, is a far saner 17, and the PEG is a downright attractive 0.99. And that underlying growth in profitability is really what Lionbridge is all about. For starters, net income is strongly positive and growing with a vengeance. The more important (in this case, and in most) operating cash flow is strong as well, and the all-important free cash flow is reaching good form as the company leverages its past investments without the need for a slew of new ones.
|Operating cash flow||-6,719||1,215||-1,606||4,454|
|Free cash flow||-8,121||-136||-2,830||3,603|
This trend not only looks good to me, but apparently to Lionbridge's CEO and Chairman Rory Cowan as well, as he's recently completed some heavy buying. And on that note, insider ownership is 38% overall -- a great sign. On top of all this, the company is debt-free and boasts $34 million in cash (for perspective, 2003 revenues were $142 million and market cap is $374 million) and a near-3.0 current ratio, so a cash crunch isn't likely.
Traps that may snare this lion
But as much as I feel Lionbridge should succeed, I can see a few traps that may slow it down. While the company has built a strong enough market presence that a small or even midsize player would have a tough time catching up, it would be possible for a larger outfit to come in and spoof its offering. Ironically, our friend's saving grace might be that it's not oozing profitability, as such might lure these better-capitalized players -- who tend to push and shove -- into what's still something of a nerd party.
On the other hand, if Lionbridge's services were too easy to duplicate, more companies would be attempting them in house; and in-house work is really Lionbridge's main competition currently, aside from private player Bowne and British SDL -- neither of which takes dead aim at Lionbridge's offering.
One of the best things about Lionbridge is its ability to leverage its cost structure to crank out fantastic bottom-line growth (that's net income growth for those new to finance-speak). In other words, because it's spent a lot of money in the past, it shouldn't have to spend proportionately as much in the future -- yet the company's revenues should keep increasing.
My Pixar article got into more detail on this, but a fundamental method of valuation begins with projecting those future earnings, then expressing them in today's dollars. I did that for Lionbridge, beginning with its projected growth rates and trickling down (a necessity, as no company can grow quickly forever).
To get the present value of these future cash flows, I discounted them at 14%, which, like all stock discount rates, is simply a guesstimate of the minimum return investors might expect given the risk of the stock. Since I consider Lionbridge to be a tad risky, I used a higher discount rate than I'd normally use. Still, I got a value of over $12 per share, which is 50% more than the $8 the company trades at now. In other words, according to my quick-and-dirty calculations, this might be a nicely undervalued stock. And the more Viagra-like staying power those growth rates have, the more undervalued it will be.
Lionbridge doesn't have the juiced-up return potential of a "real" tech stock. But I don't think it has quite the corresponding risk, either. If you're looking to go global, it might be a safe place to start.
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