Knobias ClipReport (8-9-2007)

Submitted from Knobias ClipReport

As many know, the overall market could be setting itself up for a pullback of sorts. The credit crunch, inflationary concerns, and the subprime spillover have been on the minds of every investor in the market. When this happens, money that stays in equities hides in consumer staples, high yielding dividends, and cheap stocks.

With the majority of consumer staples, and high dividend names lying outside the realm of the small cap space, cheap stocks can still be found in the lower market cap area even with the bull market that has been experienced over the years.

One of many names that has stood out recently because of strong earnings, a substantial cash position, and is involved in an international growth area is ARC Wireless Solutions Inc. (ARCW). The Company offers a wide variety of wireless network components and solutions for service providers, businesses, integrators, resellers and consumers.

The wireless industry has gone through a long and arduous transformation over the years. From hand held radios and portable phones to everything imaginable now becoming wireless. The single link between them all is that antennas are used to transfer the information.

The antenna industry is also one that is highly fragmented and has only recently started a consolidation. Competitors compete on the basis of price and quality which is mostly the way many tangible goods producers try to gain an advantage over others. While the leaders in the area normally produce a wide array of other products, some have decided to become pure play and only expand within the antenna market.

ARC has done a little of both. The Company divested its wholly owned subsidiary, Winncom Technologies for $17 million in cash and has used a small portion of the money to invest in its core antenna business.

“The Winncom business was low risk and low return,” noted Randall P. Marx, CEO of ARC Wireless. “We divested that business for $17 million, paid off the debt, and invested some into our antenna business which is something we’ve never really done before.”

As of their latest 10-Q which was released on Monday, the Company still had some $15 million on cash on hand. The market cap for the Company was also $15 million. The numbers mean that even though the Company reported a profit of 3c compared to a loss of (14c) per share in the quarter last year, the market either A. has discounted their operations going forward, or B. doesn’t know the story.

The Company’s revenue for the period was $2.09 million compared to $1.82 million. Attributed to the revenue gains was the investment in itself by management. The hiring of additional sales staff in the Wireless Communication Solutions division caused sales for antennas in the mobile (GPS and cellular), panel (Wifi, Wimax), and base station categories to increase some 15%.

With these growth numbers, one would think that the Company would continue to add additional staff, but that’s not the case.

“We aren’t looking to add staff at the time being,” noted Marx. “We will, however, add an international sales person in the future.”

The international arena is where much of the new growth will come. With the wireless internet area and the latest addition of wireless internet to cell phones and other devices, the US infrastructure is very well developed.

“Probably half our business is international. The infrastructure is great domestically. International is where we’ll see the growth,” quipped Marx.

Internationally is where the Company has attempted to capitalize, but not just from the increased sales aspect. The Company’s bottom line for the quarter was 3c which was caused by a gross profit increase to 38% from 22% due to the successful transition of some of the Company's production to China through their Hong Kong subsidiary, which resulted in the reduction of operating overhead in the Company's U.S. operations.

“We’ve moved 70% of our production to China,” noted Marx, “We build all military products in our Colorado facility, but with other proprietary systems, we’ll begin the production process here, and move the rest of the production to China.”

The Company is also about to begin production in China of its proprietary product. Termed ‘Freedom Antenna’, the addition allows extra reception on handhelds with an antenna port. The product could certainly be something to watch in the fourth quarter when the Company begins to produce.

The Company has also begun the long process of determining if an additional acquisition in upstream, downstream, or completely unrelated markets would be in the interest of holders. But with the depressed stock price and valuation, any leveraging or combination purchase with shares and cash makes some buys uneconomical.

“We definitely think we’re undervalued,” finished Marx. “We just need to get the word out.”

With the $15 million in hand, a burgeoning international market, positive sales traction, expanding margins, and competent management, the market cap is the one thing that leaves many puzzled but could very easily remedy itself. Investors would be wise to watch.




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