Bear of the Day: KEYW (KEYW) - Bear of the Day

Although shares of KEYW have taken a beating the last several weeks, it still doesn't look like a value on a price to earnings or price to cash flow basis. Investors should consider avoiding this stock until its earnings momentum improves.

KEYW provides cybersecurity, cyber superiority and geospatial intelligence solutions to US Government defense, intelligence and national security agencies and commercial enterprises to meet the needs for agile intelligence and assist the US government in national security priorities. KEYW provides solutions, services and products to support the collection, processing, analysis, and use of intelligence data and information in the domains of cyberspace and geospace.

KEYW's CEO is former NSA official Leonard Moodispaw.

First Quarter Results

KEYW reported its first quarter results on May 1. The company reported a loss of 8 cents per share, which was less than the Zacks Consensus Estimate calling for a loss of 7 cents. The company reported a loss of 6 cents per share in the same quarter last year.

Revenue plunged 18% year-over-year to $63.8 million due in part to "lingering effects of sequestration and weather disruptions in the greater DC area". The company estimates the revenue impact from severe weather to be approximately $4 million in the quarter.

KEYW's primary segment, 'Government Solutions', experienced a 19% drop in revenue to $61.3 million. Meanwhile, its 'Commercial Cyber Solutions' saw top-line growth of 24% to $2.5 million.

Despite the overall revenue decline, KEYW's gross profit margin actually improved from 30.9% to 33.7% of total revenue. However, operating expenses jumped 10% year-over-year to more than offset this. This was driven by increased infrastructure costs within its 'Commercial Cyber Solutions' division, partially offset by cost reductions in 'Government Solutions'.

Estimates Falling

Analysts revised their estimates significantly lower for both 2014 and 2015 following the Q1 miss. This sent the stock to a Zacks Rank #5 (Strong Sell).

The 2014 Zacks Consensus Estimate is now $0.01, down from $0.21 just 90 days ago. The 2015 consensus is currently $0.58, down from $0.79 over the same period.

You can see the drop in both 2014 and 2015 estimates in the company's 'Price & Consensus' chart:

Premium Valuation

Shares of KEYW are down more than 50% since March 20. That is the same day the company announced that former CFO John Krobath would be stepping down.

Despite the significant haircut, shares of KEYW still don't look like a screaming value at more than 18x next year's consensus of $0.58 and 30x trailing 12-month operating cash flow.

KEYW also has a negative tangible book value.

The Bottom Line

With falling estimates and premium valuation, investors should consider avoiding KEYW at least until its earnings momentum improves.

Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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