The Razor's Edge

2-Year Price History

A Word Of Caution

Stocks trading for less than $1 are loosely termed "penny" stocks. Hypercom Corporation (HYC) is selling for less than $1 per share. While, we stand by our ratings methodology for long term value investors, often times "penny" stocks will be more volatile. Because many "penny" stocks are lightly traded their stock price can fluctuate because of a single large trade. Also, there is generally less analyst coverage of such "penny" stocks and thus less information from which to base our rating.

Therefore, (and as always), check additional sources and available information regarding Hypercom Corp before making an investment decision.

Ockham's Rating

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HYC Revenue

As a value investing shop, we are interested in seeing how HYC's revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock's current underlying value. Using this method, we have established a high range for Price to Sales of 1.39x and the low end of the range at 0.65x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for HYC of 0.08x is well below its normal historic Price to Sales levels. At a price of $0.79, HYC is 93% below where we would expect to see it. Clearly, this stock looks undervalued compared to historical levels, at least on a Price to Sales basis. This will positively affect our analysis because it is rare to find a stock this far below historical norms, and we would expect some price appreciation to bring this metric back towards a more normal range.

HYC Cash Earnings

As the old saying goes, "Cash is King!" However, we prefer to capture a few other items within our analysis to identify "cash earnings". Nevertheless, an analysis of Cash Earnings is absolutely pivotal to assessing a company's value, and currently HYC is significantly below its historical average multiple of Cash Earnings. Looking at the last 8 years we can get a good understanding of what investors have grown to expect from HYC. For example, HYC's Cash Earnings ratio per share has fluctuated between 33.03 and 59.78 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where HYC is with respect to prior business periods.

So with HYC's current price (latest close of $0.79) and most recent level of Cash Earnings reported, we see significant opportunity from a value perspective. At its current price level, HYC is 96% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn't exist in a vacuum. So if the market doesn't recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with HYC.

HYC Dividends

A positive Ockham rating does not require a company to pay out an inviting dividend or a dividend at all. However, we believe dividends provide a useful measure on a company's inherent expectations. While we do like to see companies with healthy and growing dividends, it is not appropriate for all companies, especially those focused on growth. We regard HYC as neutral in terms of dividends because they have no history of paying a dividend and continue to reinvest that money for growth purposes.