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Nighthawk (OTC
BB: NIHK): Five Fold Growth This Year? Here's How |
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This past Wednesday Nighthawk
put out its 10k annual report, and this massive, completely boring document,
sets the stage for what could be a breakout year for the company. A wonderful
read if you have insomnia. 5% of it is important.
A quick review: NIHK delivered
$1.7 million in revenues- up from $900k the year before. About $1.2 million
was from their legacy remote power management technology- the remaining
$500k came from their new hi def set top box business.
There's lots of improvements to talk
about on their balance sheet. For the first time in years they have positive
shareholders equity. They have over $1 million in cash, inventory, and
receivables, and $327k in payables. There is some accrued interest associated
with their preferred issuance, but they have assets $4.5 million in new
assets, the purchase of which was financed by the preferred issued in Q4
'07. All in all, some very nice improvements in the balance sheet.
There is continued slow but steady
growth in the legacy business of remote power disconnect, and some very
compelling upside in the set top box division they acquired in Q4 of '07.
The set top box business- they bought
this business from a failing company in Q4 of '07. It was the only component
left with value. This is not the every day set top boxes for your local
cable company- NIHK is now making hi-def set top boxes specifically
for the hospitality industry, which has very special needs.
For example- your cable service set
top box just has to deliver your television programming- hopefully, by
now, you have converted to Hi-Def. Hotels are very different. Their TVs
have to be able to serve up content flowing from a variety of different
sources- not just television, but hotel specific programming, your bill
and the check out functionality, and others as well.
NIHK's one big customer provides
services for 500,000 hotel rooms. About 5,000 of the rooms have hi def
set top boxes in them now. That leaves a potential market for this one
customer of 495,000 more hotel rooms. That's big bucks, and would evolve
NIHK
up into a whole different company.
In a rather un NIHK way, the
company forecasted the possibility of $10 million in sales in 2008
- that would be a more than five fold increase over 2007- where is that
going to come from?
I have some candid information to
share with you on that very issue which I explored in a conversation with
CEO Doug Saathoff. He believes the company could hit the $10 million revenue
mark this year, but it is predicated on two major developments- 1. They
have to double sales in the legacy business again, which would represent
$2 to $2.5 million in 2008, and 2. They have to land a second major customer
in hotel hi def set top boxes.
To achieve the landing of this second
customer, they have to perfect some aspects of the functionality of the
box (mostly related to software integration with all the different TVs
and individual hotel systems). Discussions are underway with potential
second customers at present.
Their current customer is anxious
to start taking delivery of 2,000 set top boxes each and
every month. NIHK is close to being able to deliver, and to manufacture
at a significant discount as compared to previous versions. Margins would
be enhanced greatly.
So, what does all this mean to the
stock price? Admit it- if you are still holding this stock, you are simply
dying for another of its legendary meteoric runs wherein NIHK triple
or quadruples in a relatively short period of time. It's happened twice
in the last two years. It's now been 13 months since the last huge run.
What would the catalyst be for another
such event? Hard to say, but I keep pointing out what I have been saying
about NIHK for some time. NIHK has not blown the doors off
the top line, but has delivered consistent growth over the last several
years. This consistent moderate improvement mitigates your downside risk.
This one is going to be around.
The company has lost money consistently
over these years, and the shareholders have paid for these losses in the
form off dilution. 2006 year end shares I&O were 85 million. By the
end of 2008: 134 million.
There is a convertible preferred
now- funds from which financed the purchase of the set top box business.
It is not debt, which is why their balance sheet has improved so significantly.
It is not nearly as toxic as past financings- you will be able to easily
tell from quarter to quarter if the preferred is being converted- just
look at the number of shares I&O, and look at the number of preferred
shares. If the number of shares I&O goes up, and the number of shares
of the Preferred B (currently 600,000) goes down, you know those shares
have been liquidated into the open market.
Even if you figure the company eventually
issues all 200 million authorized shares, you still only have a $10 million
valuation. At the current price, this means the company is valued by the
market at about $10 million fully diluted.
Based on last year's numbers, NIHK
is probably fairly valued. Based on 2,000 set top boxes sold monthly, a
new potential customer of equal size, and a significant bump in its legacy
business, NIHK is probably worth 5 times the current price.
Technically the stock is stuck in
a consolidation phase that has lasted nearly 3 months. A little blip of
one million shares is not going to get this stock rocketing up the chart.
If the stock pokes its nose up, there will be some sellers who say whew,
and get out. One or two more volume surges could clean it up and send it
higher.
A meteoric rise as in past years?
There are some catalysts on the horizon. Set top box sales ramping up will
help. Continued order flow out of the utility market will help. A second
major customer in hotel set top boxes could do the trick.
Look for a lot more information flow
out of the company from here forward.
My conclusion- not a lot of risk
to continue to hold the stock, and lots of upside with this new line of
business. Think of it as an option that doesn't expire. Will 2008 be their
break out year? The set top box business has changed everything. If you
are a mid to long term investor, there is every reason to hang in there
and find out.
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