case study: GTSI

jamesmith

This is a write up from Michael Burry dated March 28th,2011. Always interesting to see ideas from the geniuses before they became famous. I will be posting a lot more of Burrys early thoughts and investment ideas. This one is a gem though, because it is pretty in-depth.



GTSI Corp(GTSI) $5.00 on Mar 28, 2001

A debt-free net net stock, now showing earnings growth and consistency for the first time. Known for its
trading range, with the highs in the range usually produced by some bit of good news paired to low
float, but there are some changes afoot that should set it free to the upside.
GTSI distributes technology products to the military, the IRS and others. Bsically, a B2G distributor.
Market Cap at 40 mill, sales over $650 mill. Low margin stuff. As like any distributor, they have to have
hot hands, and by and large they do. Located just outside D.C. New management arrived 4 years ago and
has started turning around a money-losing operation. Now, working capital is not overly bloated, they
turn inventory well (12 turns/year), and AR increases match AP increases well. They were profitable for
the third straight full year new management has been in place, and GTSI is starting to see gross margin
enhancement from hawkish working capital management, cost controls, more favorable contracts, and
increased sales. The result: $1.15 in diluted earnings last year, but that was with residual tax losses
creating a tailwind.
Management has given guidance, however, that they will beat last years earnings per share even after
full taxes are paid this year. So right off the bat we have an honest PE less than 5, no debt, and an
improving business with capable management and increasing contract wins.
Management has bought the stock aggressively up to just under 4, and there is a large outside
shareholder in Lacy Linwood, one of the founders of Ingram. Linwood has also been acquiring shares in
the open market hes the one providing all that support around 3 the past few years and now ones
over 25% of the shs out. Employees are participating in the employee stock plan but many are also
buying lesser amounts of stock in the open market.
In addition to the obvious advantages of having a large outside shareholder with an illiquid stake,
Linwood also provides some alleviation to the fear that Ingram or its ilk would jump in and compete
GTSI out. If anything, his actions seem to indicate GTSI makes a good takeout for such a company (his
stake is very very illiquid in terms of public market exit strategies yet he buys more).
In fact, knowing the business means knowing that such competition isnt much of a risk anyway. As with
a lot of government vendor stuff, this is a relationships business. GTSI is well-ingrained into the
procurement system, and has expertise in getting the right forms in the right hands at the right time.
GTSI just won the MMAD contract for over $857 million in technology products to be supplied to the
military, IRS, and other branches of government over 5 years. The news of this award sent the stock
skyrocketing last year. A protest was lodged, which was resolved in GTSIs favor. The poor stock market
has helped stifle any positive reaction in the stock. But the win is indeed real, and the company isnt sure
why the stock didnt react like it has in the past to such announcements. Indeed, in the 4 hours or so
after the news was announced, only 7,000 shares traded hands.

GTSI will compete with IBM for bids to supply various projects under the MMAD contract. GTSI is
confident of getting the majority of the money from this contract because historically they have done so
when competing against big name suppliers. Why? Basically GTSI is willing to pay more attention to the
process and get down and dirty in the whole government procurement area. They make money for the
same reason plumbers get paid well. As well, they have the longstanding relationships on their side.
The trading strategy with this stock has always been to buy just under 3 and wait for a spike there have
been a few and sell it. The last two spikes have occurred after the last two quarters produced blowout
earnings. The stock is starting to stick at higher prices though, as the more permanent nature of the
positive changes in the company is getting noticed. For the first time, true fundamental change for the
better is starting to gain traction in sustainably higher stock prices. A nice trend to join early.
Also, because the buyer here is the government, there is a tremendous built-in backlog of demand. The
computer equipment at the IRS, for instance, was legendary a decade ago. And the demand is seasonal
(government is a procrastinator, rushing to buy a lot at the end of contract terms and at the end of
years, therefore making contracts more profitable later in the cycle and years more profitable as the
quarters wear on), but not cyclical. Moreover, obsolescence is less an issue because the government
doesnt demand the latest and greatest. Management is taking advantage of the advantages of working
with the government while minimizing the disadvantages.
There is a lot of operating leverage in the business that is just starting to be realized on the positive side
(they lost over $2/share before new management came in), and with few shares outstanding, it would
not be surprising if pre-tax income starts to approximate the share price myself and others paid back in
the $3 range last year. Like Buffetts WPO, though on a much, much smaller scale. Im still accumulating
the stock.
A risk is a takeunder. I wouldnt get too extended in my buys from the price the large shareholder and
management have paid (which ranges up to 3.75). Im buying up to 5. Buying at 6 and waiting 3 years to
be bought out at 7 wouldnt be very fun.
As a side note, on the last conference call, a private investor called in and IDd herself as an employee of
GTSI. This was an error, though I know a few investors whose initial reaction was that something stunk. I
was one of them.

Catalyst

Gross margin improvement, better managements effects being felt and recognized, first-ever road show
coming up in next few months showcasing new COO (comes from the Executive Office of the President
with a lot of government contacts and know-how), expected strong stock price reaction to developing
trend of consistently good earnings (40% upside from here just to get to net net value), acquisition
target/buyout target, outside shareholder with illiquid, large minority stake and uncertain agenda/exit
strategy

jamesmith

GTSI is acquired by Unicom Systems earlier this year.
Looking back, Burry made a killing on GTSI in 2001 when Nasdaq drops significantly.

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