Rating Update: Stock Rating F-Lowest (7/10/19)-Aware Inc. (AWRE).

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BUSINESS

Aware, Inc. provides software and services for the biometrics industry in the United States, Brazil, and internationally. It offers biometrics software products, including biometric services platform, biometric search and match products, software development kits, mobile biometrics, biometric identity duplicate detection, and application products for fingerprint, facial, and iris modalities that enable various functions in biometrics systems, such as enrollment, analysis, and processing of biometrics images and data on workstations or mobile devices; integration of peripheral biometric capture devices; centralized workflow, transaction processing, and subsystem integration; matching of biometric samples against biometric databases to authenticate or verify identities; and analysis and processing of text-based identity data.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to fall short of the cost of capital, AWRE is expected to be a modest Value Eraser.

Aware has a current Value Trend Rating of F (Lowest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing consistent signals. Aware has a slightly negative Power Rating of 39 and a poor Appreciation Score of 23, triggering the Lowest Value Trend Rating.

Aware’s stock is selling well above targeted value. The current stock price of $3.29 compares to targeted value 12 months forward of $2.
Aware’s low appreciation potential results in an appreciation score of 23 (77% of the universe has greater appreciation potential.)
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Aware has a Power Rating of 39. (This slightly negative Power Rating indicates that Aware’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Contributing to this slightly negative Power Rating: recent price action has been slightly unfavorable. An offsetting factor is is currently in a modestly favorable positi.

INVESTMENT PROFILE

Aware’s financial strength is average. Financial strength rating is 59.
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Relative to the S&P 500 Composite, Aware Inc. has significant Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that AWRE is lower risk. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, low expected growth, low historical growth, and high earnings variability. Aware’s valuation is high: low dividend yield, high P/E ratio, and low price/book ratio. AWRE has unusually low market capitalization.

CURRENT SIGNALS

Aware’s current operations are strong. Return on equity is rising, reflecting: and rising tax keep rate.

Aware’s current technical position is neutral. The stock price is in a 29.6 month down move. The stock has declined 33.5% from its prior high. The 200 day moving average is in an uptrend. The stock price is below its 200 day moving average.

ALERTS

Important positive changes in Aware Inc. (NASDAQ: AWRE) investment behavior have recently occurred: positive upside/downside volume developed.
Recent minimal negative changes in fundamentals have affected Aware Inc. (NASDAQ: AWRE): significant quarterly earnings deceleration occurred.
The stock is currently rated F.
On 7/10/19, Aware Inc. (NASDAQ: AWRE) stock suffered a major decline of -12.5%, closing at $0.14. Moreover, trading volume in this decline was unusually high at 190% of normal. The stock has been weak relative to the market over the last nine months and is unchanged during the last week.

CASH FLOW

In 2018, Aware experienced no change in cash of $0.00 million (+0%). Sources of cash balanced uses. Cash generated from 2018 EBITDA totalled +$0.82 million. Non-operating sources contributed +$0.84 million (+102% of EBITDA). In 2018, there were no cash taxes paid. Re-investment in the business amounted to -$2.68 million (-326% of EBITDA). In 2018, debt investors had no impact on cash while equity investors furnished +$1.01 million (+123% of EBITDA).
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Aware’s Non-operating Income, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Aware Inc. Peer Group. (Since 2016 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, Aware was in the top quartile and second quartile. Currently, Aware is upper quartile at +102% of EBITDA (+$0.84 million).

Aware’s Cash Taxes, %EBITDA enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Aware Inc. Peer Group. In most years, Aware was in the top quartile and lower quartile. Currently, Aware is at the upper quartile at +1% of EBITDA ( $0.00 million).

Aware’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Aware Inc. Peer Group. (Since 2014 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Aware was in the top quartile and second quartile. Currently, Aware is substantially below median at -326% of EBITDA (-$2.68 million).

Aware’s Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Aware Inc. Peer Group. In most years, Aware was in the top quartile and second quartile. Currently, Aware is slightly above median at 0% of EBITDA ( $0.00 million).

Aware’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Aware Inc. Peer Group. (Since 2016 Equity Investors, %EBITDA has experienced a very sharp recovery.) In most years, Aware was in the top quartile and third quartile. Currently, Aware is at the upper quartile at +123% of EBITDA (+$1.01 million).

Aware’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Aware Inc. Peer Group. In most years, Aware was in the second quartile and top quartile. Currently, Aware is slightly above median at +0% of EBITDA ( $0.00 million).
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Aware’s Cash, %Revenue has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Aware Inc. Peer Group. (Since 2014 Cash, %Revenue has accelerated very sharply.) In most years, Aware was in the top quartile. Currently, Aware is upper quartile at +319%.

PROFITABILITY

Aware’s return on equity has improved modestly since 2009.
This modest improvement was due to strong positive trend in pretax operating return and very small negative trend in non-operating factors.
The productivity of Aware’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend.
Non-operating factors (income taxes and financial leverage) had a very small negative influence on return on equity.
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Aware’s return on equity is at median (3.2%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is at the upper quartile (3.1%) reflecting asset turnover that is slightly above median (0.26X) and above median pretax margin (11.8%).
Tax “keep” rate (income tax management) is above median (97.0%) resulting in after tax return on assets that is substantially above median.
Financial leverage (leverage) is lower quartile (1.06X).

GROWTH RATES

There are no significant differences between Aware’s longer term growth and growth in recent years.
Aware’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been -4.0% per year.

Total asset growth has been 0.5% per year.

Annual E.P.S. growth has been 0.4% per year. (More recently it has been -35.5%.)

Equity growth has been 0.4% per year.
No consensus growth rate forecast is available for Aware.
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Relative to the Aware Inc. Peer Group, Aware’s historical growth measures are erratic. E.P.S. growth (0.4%) has been slightly above median. Total asset growth (0.5%) has been at the lower quartile. Equity growth (0.4%) has been at the lower quartile. Revenue growth (-4.0%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Aware’s stock price performance has been variable and significantly below market. Between September, 2008 and July, 2019, Aware’s stock price rose +6%; relative to the market, this was a -59% loss. Significant price moves during the period: 1) January, 2016 – January, 2017: +109%; and 2) September, 2011 – November, 2012: +156%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -18.0% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through June, 2019 of -18.0% is slightly above median relative to Aware Inc. Peer Group.

Current 5-year total return performance of -6.6% is lower quartile relative to the S&P 500 Composite.
Through June, 2019, with lower quartile current 5-year total return of -6.6% relative to S&P 500 Composite, Aware’s total return performance is below median relative to Aware Inc. Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, AWRE’s overall valuation is quite low. Four of five factors are upper quartile. The highest factor is the price/earnings ratio, followed by the ratio of enterprise value/earnings before interest and taxes, then by the ratio of enterprise value/revenue, then by the price/equity ratio. The lowest factor, ratio of enterprise value/assets, is lower quartile.
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Aware has a very large value gap compared to the median. For AWRE to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.20X to 2.51X. If AWRE’s ratio of enterprise value/revenue were to rise to 2.51X, its stock price would be higher by $1 to $4.
For AWRE to achieve upper quartile valuation relative to the Aware Inc. Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.20X to 10.81X. If AWRE’s ratio of enterprise value/revenue were to rise to 10.81X, its stock price would increase by $8 from the current level of $3.29.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to fall short of the cost of capital, AWRE is expected to be a modest Value Eraser.
Aware’s current Price Target of $2 represents a -27% change from the current price of $3.29.
Aware’s low appreciation potential results in an appreciation score of 23 (77% of the universe has greater appreciation potential.)
Reinforcing this low Appreciation Score of 23, the moderately low Power Rating of 39 contributes to an Value Trend Rating of F.
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Aware’s current Price Target is $2 (-24% from the 2018 Target of $3 and -27% from the 07/10/19 price of $3.29). This fall in the Target is the result of a +2% increase in the equity base and a -26% decrease in the price/equity multiple. The forecasted decline in return on equity has a very large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a large negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a very slight positive impact.
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PTR’s return on equity forecast is 2.2% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2012 peak of 66%.

PTR’s growth forecast is 6.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is above the 2017 low of 2%.

PTR’s cost of equity forecast is 4.2% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2010 and 2018. The current forecast is well below the 2012 peak of 12.4%.
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At Aware’s current price of $3.29, investors are placing a positive value of $0 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 3.0% per year, and a return on equity of 4.0% versus a cost of equity of 3.8%.
PTR’s 2020 Price Target of $2 is based on these forecasts and reflects an estimated value of existing assets of $20 and a value of future investments of $-18.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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