Tickers in this Article: WSTL, NTGR, CISCO, AAPL
What's in a name? Those unfamiliar with Westell Technologies (Nasdaq:WSTL) might assume it provides technology-based products or services. This would be a good guess although its future in technology is up in the air at this point.Actually, it's in the clouds. Recent events suggest that now is the perfect time to be considering this micro-cap stock. I'll explain why.

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Westell's year-end was March 31, 2011. A couple weeks later, it closed a deal with Netgear (Nasdaq:NTGR), selling its Customer Networking Solutions division for $33.5 million. Under the terms of the agreement, it would retain a single customer through the end of the contract with that customer as well as the HomeCloud product development program. By selling its CNS division, it goes from three segments down to two, and more importantly, this allows it to focus on its more profitable businesses. In 2011, the CNS segment contributed almost half the overall revenue of $190 million but failed to generate an operating profit. Meanwhile, its Outside Plant Systems division, which provides outdoor cabinets for telecom companies, had revenues of $58.8 million, with an operating profit of $13.4 million, while Conference Plus, its provider of audio and video conferencing services, had revenues of $42.3 million and an operating profit of $4.9 million. This is a win-win situation for both companies. Westell removes itself from an untenable position, competing with the likes of Cisco (Nasdaq:CSCO), Apple (Nasdaq:AAPL), Belkin and D-Link, while Netgear gains additional revenue at relatively low costs. They'll surely be able to squeeze profits from the acquired revenues, something Westell couldn't.

Lean and Mean
Because Westell retains one large contract in its CNS division, 2012's revenues will be somewhat difficult to predict. According to company documents, the CNS division has $18.5 million in non-cancellable orders to the end of December 2011. It generated $90 million in revenue in fiscal 2011 and approximately half of it will now be in the hands of Netgear with the rest retained by Westell. Therefore, I'm going to assume the CNS revenue in 2012 will be no higher than $45 million with an operating loss of less than $1 million. That's the bad part. The two remaining divisions grew by 7.2% in 2011 to $101 million. Assuming a similar growth rate in 2012, revenues should be around $108.3 million. Add it all up and you get total revenues of approximately $153.3 million, an operating profit of $26.7 million and an estimated earnings per share of 34 cents. The one analyst covering the stock has a more conservative estimate of 21 cents a share. Even this is impressive considering it will be a smaller company moving forward.

There are two. The first is its HomeCloud application sharing and storage system that's currently in development and aims to provide at-home cloud technology for your various computer devices. I'm not a computer expert so I won't even attempt to assess the likelihood that it's successful. However, when you consider my second point, it should become clear where I'm heading with this. Westell had $86.4 million in cash at the end of March. Add to this another $33.5 million on the closing of the Netgear deal in April and it has $1.73 per share in cash with absolutely no debt. Westell's current forward P/E (March 2013) is 14.4 times earnings. That's without any consideration of the success or failure of its Home Cloud technology or the use of its large horde of cash. It could pay shareholders -cent special dividends between now and March 2013 and still have plenty of cash for the Home Cloud's product development. It's not a slam dunk but the downside appears minimal.

Bottom Line
Westell's stock traded above $34 in February 2000. While I'm not suggesting it's going back to those lofty levels, it certainly should be trading higher. How much higher depends on what it does with its wildcards. (For related reading, also check out Conglomerates With A Dividedn Angle.)

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