Becker Drapkin – PRGX Global (PRGX) – Activist Investing

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Activist looks to recoup investment losses as PRGX’s longtime underperformance earns the attention of yet another activist investor.

April 20, 2015

PRGX Global Snapshot

Becker Drapkin is one of the premiere small-cap activist funds, with an average return of 85% on 21 targets with an average market cap of $161M.  More than half of Becker Drapkin’s targets are technology-related companies, with average returns that smash the S&P (62% vs. 21%), but PRGX is the fund’s only investment in Data Processing and Outsourced Services.  This isn’t the first time Becker has gone activist on PRGX.   It originally filed a 13D a little over a year ago (03/06/14).  Given that its cost basis is 36% above the current price per share, Becker Drapkin will likely push for changes to recoup its investment. Though Becker Drapkin has historically been successful at overhauling Boards and unlocking shareholder value, I wouldn’t bet on it with PRGX.  The Alternative Activist database shows PRGX has been the target of other activists, including Cannell Capital in 2003 and Discovery Group in 2010, and those investments were eventually sold with no meaningful change, and PRGX has continued to underperform.

For PRGX…

  1. The stock price has gotten hammered in the LTM, down 43%, and is trading just above its 5 year low
  2. Given the stock price decline, its valuation metrics are trading well below historical valuations, though that appears to be merited given the across-the-board margin declines
  3. Though the company has no debt and net cash is 27% of its market cap, the negative earnings and return on capital will eat away at that cash balance and I don’t have much confidence in management’s ability to take advantage of its net cash position

PRGX has been on activist investors radars for more than a decade and its underperformance is scary. Since Cannell Capital filed a 13D on 11/12/03, PRGX’s share price has lost 92% of its value, compared to a 98% GAIN for the S&P.  Ouch.  This feels like a value trap, I am staying away.

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