How Much is SpongeTech Worth?
Spongetech Delivery Systems, Inc. (SPNG) has surged more than 1,000 percent from just months ago when it began its nationwide advertising campaign. Now the company is booking millions in sales, but is the stock still a bargain?
Spongetech Delivery Systems, Inc. [[SPNG.OB]], a producer of cleaning sponge products that are pre-loaded with detergents and waxes, has seen its shares rise more than 1,000 percent since it began a hugely successful nationwide advertising campaign. The company is now booking millions in sales, but is a good bargain at these prices or should investors wait?
During the first quarter, Spongetech booked a shocking $13.2 million in revenues, which far exceeded the prior year’s $1.3 million. Cost of goods sold and advertising expenses also rose as a result of the advertising campaign and ramped up production, but the company still increased its net profits from $188,482 to over $1.5 million.
Unfortunately, Spongetech’s net income had to be divided by a large number of new shares that flooded the market. The company’s number of shares outstanding jumped from 115 million to over 1 billion during the first quarter, which resulted in an earnings per share number still below the $0.01 mark. And many investors are concerned about additional dilution.
A closer look reveals that many of these shares appear to be the result of convertible debt at low prices. In fact, a large number of the new shares issued this quarter went to RM Enterprises International, who received over 306.4 million shares in consideration for the conversion of $1.18 million in debt or an average of $0.0039 per share.
Fortunately, 526.5 million shares were cancelled when the company repurchased it from RM Enterprises, while the company is also involved in a program to repurchase additional shares. These programs help calm investor worries, as it shows that Spongetech is interested in reducing the number of outstanding shares and improving its earnings per share figure.
So, is Spongetech a bargain at these levels? Well, the company earned approximately $0.01 per share during the 9-months ended in February 2009. Assuming this pace keeps up and the company earns around $0.02 in 2009, this would imply a price-earnings ratio of around 5x. Given Spongetech’s growth rates of well-above 5 percent, this equates to a PEG ratio of well-below 1.0.
In the end, Spongetech’s stock may be undervalued, but it is important for investors to keep an eye on the company’s number of shares outstanding. Any efforts to substantially reduce this number could provide a major catalyst to its growing earnings per share number. And as long as the company is still rapidly growing its sales, there could still be a lot of upside.
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