Espial is a buy despite “significant” risks, says Haywood

A strong third quarter and a large market for Espial Group’s (Espial Group Stock Quote, Chart, News: TSX:ESP) Reference Design Kit-based set top box client trumps some real investment risks, says Haywood analyst Massimo Voci.

Yesterday, shares of Espial fell after the company announced it had earned $213,970 on revenue of $5.1-million, a topline that was up 34% from the same period last year.

In a conference call following the report, the company did say that a previously announced “proof-of-concept” paid trial is no longer moving forward, but also announced that it had entered into another proof-of-concept that will take place through to through mid-2015.

Voci says he rates the overall risk rating of Espial as “high”. Contributing to this, he says, is a long sales cycle. He thinks this period will eventually shorten, but notes that it currently stands at more than a year. And while bullish on the company’s prospects, the analyst points out that Espial has announced just a single customer to date. Another risk, says Voci, is the ever-present potential for lumpy sales due to the nature of software license revenue, which is paid upon deployment of products. Lastly, the analyst says Espial is undercapitalized compared to some of it “potential future competitors”

Despite these risks, Voci is bullish on the company’s long-term prospects. In a research update to clients yesterday, he maintained his “Buy” rating and $4.25 one-year target on Espial, a price that implied a return of 102% at the time of publication.

“We believe the company is well positioned to grow considerably in the coming years as Pay TV operators responds to increasing competitive pressures and Smart TVs proliferate globally,” said Voci in the update. “Espial is particularly well positioned to capitalize on the these trends to the early adoption of Comcast Corp’s RDK and expertise with HTML5”.

At press time, shares of ESP were down 4.5% to $1.91.

More Cantech Software