Tuesday, September 26, 2006

Short-sale Side-Step

Pegasus Wireless (PGWC: Nasdaq) announced it intends to voluntarily delist its stock from the Nasdaq Market System and move to another exchange. At a time when many companies are fighting to retain their listing like Dell Computer (DELL: Nasdaq), why would one voluntarily give up listing?

In a word, Pegasus has its back against the wall with its shareholders. The delisting action appears to be the second tactical move on the part of Pegasus management to thwart what appears to be a tenacious manipulation of the stock. Last month Pegasus attempted to get shareholders to pull shares out of brokerage accounts by offering a warrant available only to shareholders holding stock in certificate form.


Here is the situation in summary. Pegasus shares have fallen dramatically from a 52-week high of $18.99 in early May 2006 to a closing price of $1.07 on September 25, 2006.

What fundamental disaster has befallen this company? Well, by all appearances it has performed quite well for an early stage operation. Its wireless hardware and software products appear to have gained good traction in the portable networking and Internet access market. Sales climbed from just $1.1 million in the September 2005 quarter to $25.4 million in the June 2006 quarter. Pegasus first achieved profitability in 2005 on $17.6 million in sales and since then the company has built up net income to $2.2 million on $62.9 million in sales in the trailing twelve months ending June 2006.

Despite the highly competitive nature of the networking and broadband access marketplace, it appears Pegasus’ prospects are strong. Its products embody leading edge technology such as its ECCO product for real-time video streaming presentation system. Management claims has new products in the pipeline that have the potential to take a bite out of Apple (AAPL: Nasdaq).

So why the sudden drop in price on the back of such good news? Well, first of all at the 52-week high of $18.99 the price to trailing earnings multiple was 633. Since there are no published earnings estimates for PGWC we do not have a forward PE. Even if earnings improved ten-fold it might be an easy argument to make that at that price level PGWC was overvalued.

This is what happens when the market sees a great story that is easy to hype.

So if the price at the 52-week high was not justified, is the new price at a buck and change a fairer valuation? The current PE ratio is 36 times trailing earnings. Pegasus is not exactly flush with cash - $2.5 million at the end of June 2006 - but, it has no debt and new orders coming in the door.

The short interest climbed to 8.8 million shares by mid-August 2006, representing 11% of the outstanding shares. The stock has been a frequent flyer on Nasdaq’s Reg SHO list, which includes securities for which shares have not been delivered against sales. (See our posts on Reg SHO, “
Failure to Deliver,” and the SEC’s recent tests of the uptick rule, “Uptick.”)

This is what happens when the market smells an overpriced stock for a vulnerable company.

Pegasus Wireless (PGWC: Nasdaq) announced it intends to voluntarily delist its stock from the Nasdaq Market System and move to another exchange. At a time when many companies are fighting to retain their listing like Dell Computer (DELL: Nasdaq), why would one voluntarily give up listing.

In short, Pegasus has its back against the wall with its shareholders. The delisting action appears to be the second tactical move on the part of Pegasus management to thwart what appears to be a tenacious manipulation of the stock. Last month Pegasus attempted to get shareholders to pull shares out of brokerage accounts by offering a warrant available only to shareholders holding stock in certificate form.

Here is the situation in summary. Pegasus shares have fallen dramatically from a 52-week high of $18.99 in early May 2006 to a closing price of $1.07 on September 25, 2006.

What fundamental disaster has befallen this company? Well, by all appearances it has performed quite well. Its wireless hardware and software products appear to have gained good traction in the portable networking and Internet access market. Sales climbed from just $1.1 million in the September 2005 quarter to $25.4 million in the June 2006 quarter. Pegasus first achieved profitability in 2005 on $17.6 million in sales and since then the company has built up net income to $2.2 million on $62.9 million in sales in the trailing twelve months ending June 2006.

Despite the highly competitive nature of the networking and broadband access marketplace, it appears Pegasus’ prospects are strong. Its products embody leading edge technology such as its ECCO product for real-time video streaming presentation system, which apparently has the potential to take a bite out of the Apple.

So why the sudden drop in price on the back of such good news? Well, first of all at the 52-week high of $18.99 the price to trailing earnings multiple was 633. Since there are no published earnings estimates for PGWC we do not have a forward PE. Even if earnings improved ten-fold it might be an easy argument to make that at that price level PGWC was overvalued.

This is what happens when the market sees a great story that is easy to hype.

So if the price at the 52-week high was not justified, is the new price at a buck and change a fairer valuation? The current PE ratio is 36 times trailing earnings. Pegasus is not exactly flush with cash - $2.5 million at the end of June 2006 - but, it has no debt and new orders coming in the door.

The short interest climbed to 8.8 million shares by mid-August 2006, representing 11% of the outstanding shares. The stock has been a frequent flyer on Nasdaq’s Reg SHO list, which includes securities for which shares have not been delivered against sales. (See our posts on Reg SHO, “Failure to Deliver,” and the SEC’s recent tests of the uptick rule, “Uptick.”)

This is what happens when the market smells an overpriced stock for a vulnerable company.

With volatility like that evidenced in PGWC in recent months it is no wonder the company is taking such extraordinary measures to side-step the short-sellers. The delisiting action much like the warrant offer serve to remove shares from the access of short-sellers who must borrow shares to deliver on their sales.


Stay tuned for our next post discussing the structural characteristics of our stock market institutions that may lead to such extraordinary measures.

2 comments:

Anonymous said...

Hi Debra, nice and honest article. Did you happen to be at their product presentation yesterday..?



Sincerely,
name provided in confidence

Dan Beisiegel said...

I just wanted to complement you on the great job you are doing with this blog. Best of luck in the future.

Dan