Editor’s Note: This article was changed on Sept. 3, 2020 to correct the warrant prices and total debt figure.
XpresSpa Group (NASDAQ:XSPA) announced a $35.3 million direct offering Aug. 25 that gave investors one share of XSPA stock and short-term warrants to purchase another at $3.15.
The news sent the share price for the provider of Covid-19 screening and testing services at JFK International Airport and Newark Liberty International Airport down 20% at the Aug. 26 market open. It’s now lower than it’s been since the beginning of June.
Last month, I predicted that if the company’s pilot program to provide screening and testing to JFK employees was successful, XSPA would surely revisit $7. Down below $3 on the offering, nothing’s changed, in my opinion, to alter my view.
At less than $3, XSPA stock is a screaming speculative buy. Here’s why.
XSPA Stock Offering is Dilutive
The company reported second-quarter earnings on Aug. 19. As of Aug. 14, 56.78 million shares were outstanding. Add in 22.44 million shares for the direct offering (assumes the exercise of warrants within 24 months), and you get 79.22 million shares outstanding.
According to Morningstar, XpresSpa has an enterprise value of $164.2 million. Add in the $35.3 million in cash, $13.7 million in total debt, and a current share price as I write this of $2.72, and you get a revised enterprise value of $194.8 million.
So, on a per-share basis, the company’s enterprise value falls by 15%. On the surface, that would be bad as it means a buyer of the entire company would theoretically have to pay 15% less to buy XpresSpa.
However, in the big picture, XpresSpa is now worth $30.6 million more than it was before the announcement. If it can take the proceeds of the direct offering and turn it into revenue, the odds of its share price falling too much further diminish significantly.
While your one share of stock now owns slightly less than it did before the announcement, in six months that won’t matter if XpresSpa continues to make inroads with its Covid-19 testing.
How’s It Doing So Far?
XpresSpa plans to use the proceeds of the direct offering for future locations, working capital, and general corporate purposes. The company made the offering because it needs the money to move beyond the two Covid-19 XpresCheck testing facilities (JFK, Newark) that it’s opened in 2020. JFK opened in June while Newark opened Aug. 17.
In its Q2 2020 press release, the company pointed out there are approximately 30 major U.S. airports. These airports employ an average of 30,000 people. They’re considered “Large Hubs.” There are an additional 30 airports that are considered “Medium Hubs.” They average 15,000 staff.
XpresSpa has existing facilities at 19 of the large-hub airports and four of the medium-hubs. At present, it only has XpresCheck locations at two of the large hubs. It is in active discussions with most of these airports.
The potential near-term and medium-term opportunities are significant. The JFK facility can do up to 500 tests a day while Newark can do 350.
However, on Aug. 24, XpresSpa announced that it had signed a contract with Abbott Labs (NYSE:ABT) to secure 100 ID NOW testing instruments. These instruments reduce the waiting time for results from 48 hours or more to less than 15 minutes.
“Securing the use of the Abbott devices is part of XpresCheck’s strategy to deliver transformative testing and healthcare services to airports across the country. This first mover advantage in the airport space will roll out in September at its flagship locations in JFK International Airport and Newark Liberty International Airport,” the company’s press release stated.
In any long-term return to regular business and personal air travel, a 15-minute test makes it far safer for airport employees and travelers. Sure, a whole bunch could go wrong, but even if a vaccine is created, testing is still going to remain an excellent way to reduce the possible transmission of Covid-19.
XpresSpa seems to be doing all that it can to ensure airports are safe, and yet there remain people who want to see them fail.
My question is, why?
Spend Money to Make Money
Do you know the saying, “You have to spend money to make money?” Well, I believe this applies to XpresSpa.
To pivot from spa treatments — on hold since March and not likely to resume operations until the fourth quarter or later — to Covid-19 takes a big step up in capital requirements. Given it’s generating very little cash flow, traditional financing would be difficult to obtain. A share offering at attractive terms was the only way.
Under this scenario, for CEO Doug Satzman and the rest of the board to not pull the trigger on a direct offering, would, in my opinion, be a breach of their fiduciary duty. To let the company die rather than dilute the shareholders would have been irresponsible and reckless.
Should you buy on the dip?
As I wrote in July, it’s a speculative buy. It was trading around $3.50. Down 22% since the latest news about a 15-minute test combined with $35 million in cash provides investors with an even better risk to reward ratio.
Buy away.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
