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Beacon Enterprises: Embedded in the Process

Last week was pretty rough on Beacon Enterprise shareholders, with the stock losing about 50% since early August, and really tumbling on Friday as it appeared some large block decided it didn't want to be in this stock anymore. Someone went to a "cash at any cost" mentality.

As is typical with these kinds of stomach wrenching events, the market, and the sellers over reacted. Psychologically, it's very tough. When you see the stock in a free fall your stomach tells you its all over, but your brain tells you to sit tight. We are emotional animals, and sometimes our emotions get the better of our rational side.

So, if you sold the stock as it dropped down near the $.30 level at the worst of it, you aren't participating in the inevitable rebound right now. In this case, the rebound back up to the $.60 level will likely be followed by a period of consolidation, with the stock finding its way to higher levels as we get past the summer and into what is likely to be a far better Q4 for equities in general. 

Beacon can put this event in the rear view mirror by simply performing, and most of the key elements for profitability remain very much intact. 

Before, I thought we'd be looking at a company with a 400% growth rate. After all, you don't find many of those on domestic soil these days, and this company is filling a niche that has absolutely enormous upside. Their annual revenue run rate was $10 million, and this year we were looking for $40 million. It's not going to happen. BEAC walked away from $25 million in today's business, and in the weirdest accounting treatment I have ever seen, made $11 million in past revenues simply disappear from the top line. 

In the words of the immortal Johnny Paycheck, they said "Take This Job and Shove It"- probably in a nice way to the client. Management just wasn't getting paid enough to act as the general contractor for the rebuild of a massive data center in Switzerland. 

The end game is all about gross profits vs the cost of running the company. When you generate revenues, you subtract your costs, and you have a gross profit left over. Then you pay all your bills. If the gross profits are greater than the cost of running the company, you have positive cash flow- the place to be. 

BEAC needs to make $.40 in gross profits for every $1 that comes in, and they weren't getting it with this business. They got out, and the shareholders, myself included, viewed it as a negative. 

Ultimately, the company will end up with higher gross profits, and therefore achieve a status of cash flow positive more readily. For shareholders, this is like a root canal. Painful during the process, but feeling much better down the road.

Going forward, I believe this company is likely to be better than ever, and here's some insight.
 

Embedded in the Process

There's a really robust need developing, especially for the venerable global Fortune 500 companies. Their technology infrastructure is crumbling, and in order to keep their employees productive and competitive, they need to beef up their infrastructure.

When we reference this infrastructure, we are talking mostly about wires- simply the wiring that the information flows on. I'm over simplifying, but it's not far off. 

The Ciscos, Microsofts, and Oracles of the world keep coming out with new technologies that make work forces more productive. The companies positioned to get the best return on investment implementing these new technologies are the giant multi nationals that have been in business for 100 years and have global locations.

BEAC's largest customer- Johnson and Johnson (NYSE: JNJ), has 120,000 employees in offices all over the world. The company has been in business forever, and needs to make investments to remain competitive. Hence, the first contract JNJ signed with BEAC had a value of $27 million.

JNJ's offices simply don't have the IT capability to run the latest and greatest stuff. They simply don't have the wiring in place to take advantage of all the cool new wireless and wired systems available today. As their need to implement grows, their need for bandwidth grows.

There are a number of manufacturers doing billions in revenue making wires of all sorts- these are the roads, bridges, and tunnels of the Information Superhighway. Those wires are sold through distributors, and the distributors tend to be regional. 

So, if JNJ wants a bunch of new wires installed- who do they work with? It might start with a distributor who suggests a local installation specialist. Here's the problem- JNJ's central IT department now has to deal with 100 different distributors and 100 different installers if they want to implement at 100 locations. 

While this works ok for a small company in one city, it's just don't cut it for a global behemoth who wants one solution- one provider- one price.

BEAC steps in here to fill the void, and the manufacturers and distributors know it now. They know by embedding BEAC in the process they will sell more product on a global basis because they are teaming with a global design and installation solution.

It's a $7 billion industry and growing. The large Telcos are the only competitors, but they don't really have the expertise on the installation side, nor the global reach. This company stands alone as a global specialist, and business is booming.

I started with this one last Fall at $.90, and the stock has since seen a high of about $1.50. The company simply kept delivering new contracts over the first six months, then the honeymoon ended.

BEAC decided to clean up its cap structure by lowering the exercise price of millions of warrants on a one time basis. They got a bunch of warrants off their books, but it hurt the stock by creating excess supply. The latest revelation has the company walking away from $25 million in business, and making $11 million in revenues disappear from their history. Also, rough on both shareholders and the stock price.

Looking out to the future, the backlog of business remains at about $75 million, meaning they have the next five years of business already booked depending on how quickly the customers choose to implement. And, they keep signing new contracts with large, Fortune 500 type global companies.

Their crumbling infrastructure is helping to fuel growth, but there's another driver as well- M&A activity will bring them new business. When Company A buys Company B, Company A wants the efficiencies of like technologies for the integrated final entity. This will be another growth driver.

OK guys- no more surprises. Just growth, margins over 40%, new contracts, and profitability. I don't think your shareholders can take many more surprises.

Surprise us on the upside in the next financial filing. I suspect BEAC will now turn profitable within one or two quarters, and never look back. 

The stock is rebounding nicely now in a really negative environment. It has doubled off the panic low, but is still very cheap. Friday was "capitulation". Monday and Tuesday have been the bounce. The whole ugly chart is shown here, and now the game starts all over.

I suspect as we get past this hideous summer and into the seasonally stronger Q4, this stock will find its way to higher levels. The weak hands are out.

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