With substantial insider buying from its CEO, over $5 a share in cash, future dividends on the way and a payment processing division that is growing at over 80% a year, CAM Commerce is an unknown and unappreciated gem of a small cap.
Boring Hardware business gives way to Payment processing
CAM Commerce sells point of sale equipment to mom and pop retail stores, a boring business with terrible margins and little growth. However, three years ago CADA started selling payment processing software, called X-Charge, to its 10,000 user base. The X-Charge business was tiny three years ago, but now is becoming a material part of the business.
X-Charge is software that goes in a point of sale equipment and processes credit card, debit card and check transactions.
Future Success of X-Charge
In the latest quarter, X-Charge revenue doubled to $1.8 million, excluding the benefit of an accounting change last year. CADA installed 834 new accounts compared to 442 in the June quarter compared to last year, and the company has 4500 live accounts compared to 2000 live accounts in 2004.
CAM Commerce’s user base is mainly mom and pop retail stores. This means companies with 1 to 5 stores. Many of these stores have a cash register and a separate credit card machine. This causes multiple receipts and multiple entering in of numbers. Also, at the end of everyday managers or the owners have to cross check the dual receipts. By having a payment processing built into a machine like all retailers have, is that it eliminates that extra step.
The future of X-Charge’s revenue depends on penetration of its software with re-sellers not in it’s in own user base. CADA has been particularly adept at signing up resellers who sell into other mom and pop businesses that could use a payment processing system. For example, CADA has joined forces with veterinarian, gas station, and dry cleaner resellers to get their software into those locations.
CADA offers these resellers a percentage of the X-Charge annuity stream. Obviously, for these resellers, this is a no-brainer.
The key for CADA is that by focusing on the small niche of mom and pop stores, they are not running into the big payment processors, or point of sale equipment companies. It simply doesn’t make sense for these big behemoths to send a salesman out to one store, but it does for CADA.
Economics of X-Charge
Cam Commerce gets a little over 40 basis points for every dollar of transactional volume they process. The payment processing software has 90% plus margins. Simply, it is a fantastic annuity business with 90% gross margins. The capex requirements are minimal to non-existent. Can anyone say cash flow?
As of June 30th, CADA was at a $1.5 billion of run rate of transactional volume, indicating $6 million in annualized revenue for CADA. But this run rate misses the point that X-charge is growing at or near triple digit rates.
However, as the company signs up more resellers, CADA’s payment processing margin will decline slightly to 85% over time. 85% is still a gross margin, I can live with,
Cash Cow & Dividends
CADA generated $1.1 million in cash in the June quarter which is $0.25 a share in after tax cash flow. Seeing that they already have over $5 a share in cash and that they have no real capex requirements, management announced that they will pay 75% of ongoing operating income in a dividend every quarter.
The first dividend is payable to shareholders as of October 3rd and will be a $0.10 dividend.
CEO buying lots of shares on the open market
Insiders in the company own almost 20% of the company, and the CEO has been a strong buyer of the stock. CEO Geoff Knapp has bought almost $400K worth of his stock in the last six months. Despite owning almost $7 million of stock, the CEO has sunk more than 110% of his annual salary and bonus into his own stock.
CADA is a tiny market cap (only 4 million shares) company with no analyst coverage, a small daily volume average of about 10,000 shares a day. But CADA represents tremendous value. First, the company has no debt and over $5 a share in cash. Second, its business requires very little in the way of capex (less than $1 million a year). Third, the company has announced that they have so much cash and will be generating so much in the future that CADA is going to pay out 75% of ongoing earnings in a dividend form every quarter. Finally, investors are not only going to receive dividends, but will participate in a company that used to have no growth to one growing north of 50% in sales and north of 100% in earnings next year.
I think that CADA could earn $0.75 to $1.00 next calendar year. Put a 25 multiple on those earnings due to the annuity nature of the earnings and the 90% gross margin attributes, then add in the nearly $5.25 a share in cash, and you have stock price target of $24 to $30.25 a share, representing 41% to 78% upside without the dividend of at least 3% that an investor will receive. More important, what is the downside to this stock from here? The risk/reward is excellent in my opinion.
CADA is one of the few opportunities in which a lack of coverage and following have contributed to no one uncovering how fast the small company is really growing. With insider buying, dividends, a rock solid balance sheet and two really strong quarters ahead of it, CADA represents fantastic value at current prices.
I expect that two years from now CADA will not exist and will be gobbled up by a larger financial services company.
1) q3 and q4 earnings
2) Dividends growing
3) Continued X-Charge growth