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  CDI takeover target

BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR

Monday April 24, 2017

Often, when Benj is on the Business News Network (BNN), the interviewer expresses amazement at how much patience we show at Contra the Heard. While it is lovely the odd time that a stock is bought and sold within a year for a huge gain, that is certainly the exception rather than the rule. At the other end of the spectrum, positions held for longer than 10 years, such as Service Corp. and Stewart Enterprises, are unusual. Those were sold for gains of 207 per cent and 322 per cent, respectively, with dividends to boot, making patience a well rewarded virtue.

A company that we wrote about in May, 2010, CDI Corp. (CDI-NYSE), is currently of particular interest. Alas, the company was purchased in 2011 for $10.01 (U.S.) and currently trades near $8. That is a long time for dead money, although the quarterly dividend of 13 cents has alleviated the pain somewhat. Alack, that disappeared in 2015.

This staffing solutions company, which also provides engineering and IT solutions, has done poorly for understandable reasons. When the scariness of Y2K was in the air, CDI was booking revenues of $1.7-billion. Sales remained above $1-billion until the recession tightened its grip and they plummeted to $885-million, accompanied by a loss of $19.9-million. That dropped the stock price to the $7.50 range. As ugly as that was, it was nothing when measured against last year, when shares fell below $5.

The major culprits again were rapidly declining revenues, with 2016 tumbling to $865-million from $986-million. The loss was $31.6-million compared with $37-million, neither number offering bragging rights. At the same time, cash and cash equivalents dissolved; the tally of $45-million in 2013 shrunk to an anemic $3-million today. Fortunately, debt is non-existent, but one has to question how long that can remain the case with the significant red ink.

Given the negatives, why has this stock just jumped in interest for us? The primary reason is that CDI is examining strategic alternatives and as usual, the rationale behind that is to maximize shareholder value. It is clear in this instance that a sale of the enterprise is the No. 1 consideration, rather than a merger or takeover of another company. Normally, in situations such as this, a deal is at a premium to the trading price, so this could offer investors a nifty opportunity for a short-term gain.

The book value of CDI is better than $10. There are less than 19 million shares outstanding. Back in its heyday, prior to the recession, CDI clocked earnings of $34-million. The narrowing of the net loss in the latest quarter to $1.5-million indicates that much of the heavy lifting in transitioning this organization toward profitability has been done, making its digestion more palatable. Synergies and reducing duplication costs by tucking in this organization with another player should improve the combined entity’s bottom line.

Thus, at the end of the day, the question becomes, what would be a reasonable takeover price? A double-digit valuation seems eminently realistic, with up to about $13.25 not out of the question. In all likelihood, the marriage would conclude before the end of 2017, increasing the percentage of the gain when one looks at annual returns. This one could prove outstanding, if it does come to pass. The wild card of course is that a transaction does not happen and the stock price careens downward. That would be unsightly. However, our bet is on a deal and, for that reason, we are holding our position.


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