Penny Stocks: Acquisition improves outlook for BSM Technologies

BSM Technologies doubled its sales in the last quarter through its purchase of software company Webtech. At the same time, the GPS service provider expanded research spending to better retain its clients—the biggest transportation companies in North America.

BSM TECHNOLOGIES INC. (GPS on Toronto, www.bsmwireless.com) makes equipment and software that helps owners of truck, train and other fleets monitor those vehicles using global positioning system (GPS) technology.

Customers typically purchase the hardware for an upfront payment, and then enter into a long-term contract for software updates and monitoring services. Recurring revenue from servicing contracts provide two-thirds of BSM’s total revenue.

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The U.S. accounts for 54% of its sales, followed by Canada (44%) and other countries (2%).

BSM’s revenue fell 4.4%, from $14.5 million in 2011 to $13.8 million in 2012 (fiscal years end September 30). Thanks to more subscribers and acquisitions, revenue improved to $19.2 million in 2013, and jumped to $30.7 million in 2015.

Earnings soared from $578,000 in 2011 to $1.5 million in 2012. The company sold shares to fund its expansion, and as a result, earnings per share fell from $0.24 to $0.05. Earnings then jumped to $0.29 a share (or a total of $9.5 million) in 2013. Writedowns and restructuring costs then cut BSM’s earnings to nil per share (or $17,000) in 2015.

On September 30, 2015, the company acquired Webtech Wireless for $49.9 million in cash and stock. Webtech makes software that compiles and analyzes GPS data. This helps fleet managers comply with transport regulations and improve the fuel efficiency and driver safety record of their operations.

BSM shareholders now own 51% of the merged company; Webtech investors hold the remaining 49%.

Thanks to this purchase, the company’s revenue in the quarter ended March 31, 2016, jumped 99.3%, to $15.2 million from $7.6 million a year earlier. Due to the cost of integrating Webtech and higher marketing expenses, BSM lost $858,000, or $0.01 a share. A year earlier, it earned $843,000, or $0.02.

Penny Stocks: Research costs jump 45.7%

Research costs in the quarter also jumped, 45.7%, to $2.1 million (or 13.6% of revenue) from $1.4 million (18.7%).

The company can afford to keep investing in its operations. As of March 31, 2016, it held cash of $22.4 million, or $0.28 a share. Its long-term debt of $6.7 million is a low 8% of its market cap.

BSM will probably lose $0.01 a share in fiscal 2016. However, its earnings could rise to $0.03 a share in 2017. The stock trades at 37.7 times that forecast.

The company has some speculative appeal. Demand for GPS monitoring services is growing fast as the technology helps businesses cut their costs. Moreover, many of BSM’s clients are reluctant to switch providers due to the difficulty of transferring their data to a new platform. That should allow the company to hold on to its current customers while adding new ones. BSM’s clients now include six of the seven North American class I railroads (such as CN Rail, CP Rail and Norfolk Southern) and dozens of class II and class III railroads.

BSM Technologies is okay to hold for aggressive investors.

TSI Network recommendation: HOLD for aggressive investors

For our advice on how to reverse the odds and cut your risk with penny stocks, read 14 tips for investing in Canadian penny stocks.

For our recent report on a penny stock we see as a buy, read New operation set to expand cash flow for Amerigo Resources.

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