Evaluating CNIT's extension of the $5M stock repurchase program

9/20/2011 EOD: $1.17
-0.05 (-4.10%)

On Friday, 9/16/2011, CNIT announced in a press release that they were extending the $5M stock repurchase program they initiated on 9/27/2010 (see the press release from the original announcement from last year here). There's a lot to say about what this announcement might indicate and what it might do to the stock price, but before that let's take a quick look at CNIT over the last month using this hourly chart.

We can clearly see that the stock is consolidating in the $1.15-$1.30 range, and that there's pretty strong support and resistance at these respective levels. Volume has been very low, frequently staying below 100k shares traded per day. Market conditions have been tough, though the stock has under-performed the overall market which has, in fact, risen over the last month. The stock is trading significantly below its 200 DMA, which is now at $3.09 (note that in the chart about the yellow line is the 200 hour MA, not the 200 DMA), and  also much lower than its 50 DMA which stands at $1.70.

Fundamentals of a stock repurchase program
Ok, so what's in store for CNIT now that they've extended their stock repurchase program? When a company announces a stock repurchase program, it generally is an indicator that the company is confident in business outlook. Fundamentally, repurchasing stock does a couple of things for the company:

• It reduces the number of shares outstanding, which in turn increases earnings per share
• It increases the portion of total shares owned by insiders (all other things equal)

As mentioned above, stock repurchase programs are usually indicators of confidence and generally speaking investors like when companies repurchase their stock.

It's very important to note that, of course, stock repurchase programs are one of many things that affect a stock's price. You can't look at it in a silo and forget about all the other factors that may increase or decrease the stock price.

Cash on deck

In order to repurchase stock, the company must have cash. In its latest 10-Q, CNIT shows cash and cash equivalents of $9.6M, which is down from the $18.2M they declared at the end of their FY10 (March 2011 10-K). This decrease in cash came primarily from investment activities, particularly for software purchases and software development costs. This cash (all other things equal) enables them to repurchase the full $5M of stock in the plan.

Repurchase activity since 9/27/2010

As far as I can tell (mind you, I'm no accountant), CNIT has not yet repurchased any stock as part of the program they announced on 9/27/2010. Their balance sheet shows no change in treasury stock since their '09 10-K, so unless there's something fundamental I'm missing then they still have $5M of stock to repurchase. This can be viewed as a good and a bad sign. The positive way to look at it is that they can still purchase a whole $5M of stock, which represents nearly 10% of the current market cap based on the current stock price. The negative way to look at it is that if they didn't purchase any since the first announcement, there's no telling whether they will after the extension announcement they made last Friday.

Possible effect on stock price

As noted above, a stock repurchase program is generally viewed as a good thing for the stock price, as a decrease in shares outstanding and an increase in EPS, combined with a boost of confidence in the company, can push the stock higher.

After the initial 9/27/2010 announcement of the stock repurchase program, CNIT climbed slowly for a few days and then surged, rising 50% at its high compared to the opening price on the day of the announcement.

The S&P 500, in that period, rose only a couple of points, though it's important to note that in the fall of 2010 markets were very bullish, while now the general feeling is that we're in a pretty bearish period. Also, after the initial announcement made in 2010 CNIT had 14 out 15 straight sessions in the green, whereas after Friday's announcement CNIT has already been down two sessions in a row.

Generally speaking, I am still long CNIT, though currently I am holding onto a position rather than adding more. What concerns me most is the weakness in the overall market, as well as the weakness seen in popular China names such as SINA, SOHU, and RENN, as well as big sell-offs in most small China stocks. I retain a great amount of confidence in CNIT's business model and ability to execute, but am cautious in my entire portfolio, and am thus reflecting this caution in my investments in CNIT as well.

A couple of things would make me feel better, such as a break through $1.30 on good volume, or a continued consolidation in the $1.15-$1.30 price in a down market. Pending further information and price movements, I'll sit back and watch for a while before making a call on CNIT at this time based on this news.