I think it's good exercise to understand how activists think and act. You will become a better investor and increase the possibility of making more money ^^
So first, let's look at the most recent 10-K of PRGX.
10-Ks are good tools to learn about the firm, business, and the world because has it has a lot of information about the firm.Warren Buffet advised that reading 10-Ks is one of the best ways to learn about the business and investing. And I agree that is the advise that I took and I have been reading 10-Ks ever since.
1. Let's start with Item 1. Business, where it gives the overview of the company.
Recovery service firm, it collects delinquent accounts. From the item 1 service and technology description, and strategy, I have no idea whether it has a competitive edge.
Well, they have 30 years of experience, so they can't be that bad.
Competition is small players and two larger firms.
2. Item 1A. Risks. Usually, it is a boiler plate written by lawyers but you can spot out the most obvious risks.
1) Internal recovery department getting smarter...
2) Customer concentration risk. 30%
3) liquidity: credit facility with strict covenants..
4) Dependence of Medicare. Well, Medicare won't go away but there is some regulatory risk.
3.Stock chart. The stock has been around $3-#7...but mostly around $5. And it has underperformed NASDAQ and benchmark, no wonder activists are banging on the door. Lost 4% from 2009 to 2014 while NASDAQ gained 123% and the benchmark gained 93%.
4. Financials. Revenue is shrinking. There is operating loss in 2014. And a big loss from foreign currency translation...hmmmm..they don't know how to hedge? Operating profit is about 3%, ok....this is really razor thin business.
I would usually stop researching here...because it does not seem to be a good business due to low operating profit and it has not been doing well for the past four years...but let's see the MD&A
5. MD&A. Management discusses the firm and its future.Nothing much here.
6. Notes. Where all the interesting and dirty stuff are hidden.
I am cruising through and I don't find bleeding red flags. But lot of acquisitions, which you should really question because acquisitions can be used to boost earnings and do other accounting tricks.
For me, PGRX is a pass. Because it is outside of my circle of competence and it looks like a terrible business with low margins and lot of competition plus regulatory risk.
However, my intuition says that the activist will force the firm to sell either itself or a division, just my gut feeling. I am sure Becker knows much more than me and we'll see how the investment plays out.
P.S.
Took me 30 minutes to quickly go through the 10-K while writing the post :p
If I had more time, I would have looked at the management.
*From Snapshot Serengeti
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