INFS -- “Da Bulls” Part II

The other bullish aspects of an investment in INFS is that the despite the horrible financial performance the company still has a great balance sheet and the valuation seems to be attractive.

Lets looks at the easy part first …..

INFS has $78M in cash on hand based on the latest quarterly results (Q1:2007), no long-term bank debt, and $4M in “other long term debt”. This translates to $74M ($1.86/sh) in free cash that can be used to cover negative cash flow and reinvestment into the business.

Based on 2006 FCF Statement, INFS had negative operating cash flow of $15M and capex of $5.3M for a total cash burn of $20M. Assuming no improvement in operations, INFS has enough cash to remain solvent for over 3 years. Why is this important?

Well …. Having the financial wherewithal to stay solvent until those activist shareholders and/or new management team can work their magic is another must that I look for when investing in turnarounds. The cash hoard and no interest payments gives INFS management some breathing room as they work on turning the company around and gives them the cash to make investments in R&D and/or Capex to effect the turnaround.

Ok, so the board has the same interest as the shareholders and the company is not going to go bankrupt anytime soon. But, does the current valuation provide enough margin of safety to compensate for the huge amount of risk that is involved in investing in a company that is bleeding cash and does not seem to have any apparent “moat” around its business? Or is this a coin toss?

I originally planned on including the valuation in this post, but it is getting long. The third bullish post will go over my calculation of liquidation value for INFS.