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March 29, 2005 Stock Pick: NewMarket Technology, Inc. (NMKT)

Stock Price: $0.438 also

We released NMKT as a stock pick on November 9th of last year at $0.53. NMKT trended up steadily and hit $0.865 on December 2nd, up 64% in less than a month. NMKT is now at a level it should never be at considering their tremendous past revenue growth and future prospects. We expect Q4 and full year 2004 earnings to be released on or before this Thursday, March 31st.

NewMarket Technology, Inc. is in the business of continuously launching emerging communication technologies in the telecommunications, homeland security, healthcare, and financial service industries. They create economies of scale across these various industries through their robust service, support, and integration organization known as NewMarket Strategic Sourcing.

NewMarket Technology reported record revenue and net income on November 16th of last year. Net income was $513,000 on revenue of $7.87 million, an improvement of 1,117% from the same period last year. Full year 2004 is expected to be profitable with total revenue exceeding $25 million. For the company to meet its 2004 revenue goal, revenue will have to be $6.85 million, and for it to meet its 2004 profitability goal net income for Q4 will have to be $250,000. We believe they will exceed both of these goals when earnings are released this week. This is amazing considering they have acquired six majority interests and two minority interests in eight entrepreneurial early stage technology companies. Acquisition costs are not going to hold this company down especially now that they are hitting their major growth spurt.

Looking forward, NMKT expects to be profitable and generate revenue of $75 million in 2005 as well as issue three dividends to NMKT shareholders. The first dividend to be distributed is planned to be 1 share of DFTS for every 10 shares of NMKT. The record date for this stock dividend is July 1st, 2005. The revenue forecast for DFTS is $12 million in 2005. Other dividends to be issued include NewMarket China, NewMarket Latin America, and possibly their VoIP subsidiary Xiptel.

NewMarket Technology has a $150 million sales pipeline and $70 million acquisition pipeline. $50 million of the acquisition pipeline is made up of acquisition targets in China. It should not be hard for the company to blow away their conservative $75 million in revenue for 2005. NewMarket has almost always met its goals since the new CEO Phillip Verges took over in 2002.

Lets speculate a bit as to NewMarket earnings in 2005. First, the conservative case, earnings of $250,000 a quarter. $250,000 profit is what to expect for Q4, not Q1, so keep in mind Q1 earnings will probably be much better than $250,000. Going off the $250,000 earnings number, and 82,000,000 shares currently outstanding, assuming they stay the same, we come out with an annual EPS of $0.012195. This is our extremely conservative annual EPS number from Q404 to Q305. Thus, the forward P/E from our example right now is $0.438 divided by $0.012195 : 35.91. This is a low forward P/E considering NewMarket is an exciting, fast growing company with a totally unique business plan. Once again, our numbers in this case were extremely conservative.

Second, now lets speculate on a case that could very well happen in 2005. Lets say, the company will earn $500,000 in Q1, $1 million in Q2, $1.5 million in Q3, and $2.0 million in Q4. These numbers are not out of the question as revenues increase and the company continues to cut cots and synergize their core acquisitions in the system integration space. Once again, we will use the 82,000,000 shares outstanding number to calculate the EPS. Earnings would be $5 million for full year 2005 leading to an annual EPS of $0.06097. The forward P/E in this case is 7.18. That number speaks for itself.

Remember, the CEO of this company graduated from West Point and worked for the king of systems integration, EDS. The company has always set lofty goals, but not too lofty that they could not blow them away.

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