Soapstone Keeps from Slipping

We maintain our Hold recommendation on the shares of Soapstone Networks, Inc. (SOAP - Analyst Report). The company’s shares continue to drift down with a lack of news regarding customers for its PNC (Provider Network Controller) product.

Soapstone is primarily focused on developing and marketing its Soapstone PNC framework. The company has made several announcements regarding new products, including successful interoperability testing of the IPsphere Forum Service Structuring Stratum. However, it currently appears that PBT, which was expected to be the key driver for PNC, is having a difficult time catching on with tier 1 carriers.

Although we believe it is too early to judge how successful Soapstone products will ultimately be, the company has a strong balance sheet with $7.09 in net cash per share, which will provide some support to the share price. Our price target on SOAP is based on the company’s cash balance.

We estimate that Soapstone will have approximately $6.67 per share in cash in six months, the horizon of our target price. Although the stock is likely to trade below its cash value until Soapstone shows traction from its PNC business, we believe its strong cash balance will provide some support given that it will not burn through all its cash for years.

If new initiatives are unsuccessful, it is always possible that the company liquidates or chooses another strategic option to return the cash to its shareholders. On the other hand, the shares are unlikely to appreciate without any meaningful customer news. We therefore maintain a Hold rating on SOAP shares and cut our six-month price target to $4.25.

Read the analyst note on SOAP

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