ePlus PLUS
June 09, 2008 - 3:16pm EST by
zach721
2008 2009
Price: 10.80 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 90 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

ePlus is the cheapest healthy business we can find in public equity. Simply put the company has $90mn market cap with $65mn in cash and first 9 months the company delivered $24.2mn in EBIT or trading for about 1x EBIT off first 9 months of 2007 and 70% of tangible book. Much has changed since our last write up in November 2007, Tangible book has jumped $4 per share (+32%) and:
a) Cash has gone from $5 a share to nearly $8 per share
b) The company is on pace for $2 a share in Net Income 2008 (March Year end: $1.65 in net income first 3Q's)
c) The company has filed 3 Q's and 1 K and is now current on their filings. The last piece of the puzzle should be complete within 30 days filing the 3/31/08 10K by June 30th. At that point the company should re-list on NASDAQ.
d) The company has paid off all recourse debt, non-course debt has been cut by 33% (non-recourse debt is truly non-recourse unless there has been fraud)
e) Tangible book is $15.75 as of 12/31/07 and we think should end current year with $18.50+ tangible book
f) Won new customers Dow Chemical and Coca Cola Bottling (you can view webinar's with purchasing managers from both company's at www.eplus.com)
 
Despite all this progress the stock is up .60 or added $5mn in market value while tangible book is up $34mn and cash is up $40mn! 4 quarters have been reported and the company is current on their financials  which has taken a significant amount of risk has been taken out of the story.
 
Three parts to the business: value added reselling, IT Leasing, and proprietary software
 
All of the leasing today is Non-recourse to the company: no need for securitizations, etc
First several key points: a) The equipment leased is usually very high end equipment from Cisco, HP, or IBM not copiers or low end equipment. (see www.eplus.com for further details) b) the companies are usually between $25-$2bn in revenue and typically the last payment missed is for your server or other mission critical technology.
 
Cash could go up to $14.77 per share if they sold off 100% of the lease portfolio. This is attractive paper to banks. The lease obligation is recourse to the company leasing the IT equipment (companies with $25-2bn+ in annual revenue).
 
excess/liq Cash =Accts rev (108.45) + Investment in leases (161) - estimated unguaranteed residual value (see footnote $18mn)
excess/liq debt = all accts payable (85) + non-recourse debt (104.7)
 
We believe this is a conservative case by adding back the unguaranteed residual as it assumes they get nothing in the resale market and they have historically made 10%+/-.
 
We have a lot of confidence in this management team: a) 30 years experience 1978-1990 and 1991-current b) Hovde Capital runs a long/short financials hedge fund (one of the Hovde ePlus board members is Irving Beimler who was the former Chief Credit Officer at Fleet Bank a $10bn commercial bank and Riggs National Bank at $6 billion commercial bank).
 
Not only have they been very successful acquisitions and running the business. ePlus has some very valuable IP which we mentioned in the previous write up where they successfully sued and won against SAP and Ariba $45 million dollars. We estimate the company paid $4mn for this technology.
 
The company has won new customers in Dow Chemical and Coca Cola bottling. Two great webinar's on their site can be found with purchasing managers from both companies discussing why they chose with ePlus's OneSource and ContentPlus products.
 
Revenue's should reach $875-900mn in 2008 (year end 3/31/08).
 
We see even with a severe downturn in the economy the company should be in fairly decent shape given their valuation and strong cash balance to buy distressed competitors. ePlus business has counter balancing aspects as the company was profitable from 2000-2003, the last major downturn earning nearly $1 a year on a much smaller revenue base.

Risks: PLUS trades currently on the pink sheets and is fairly illiquid with average trading volume of 15,000 shares a day.

Disclaimer: This does not constitute a recommendation to buy or sell this stock.  We own shares of the company, and we may buy shares or sell shares at any time without updating the board.

 
Catalysts
Critical mass for investors to care about $875-900mn in revenue, Potential NASDAQ relisting very shortly, 70%+ of market cap in cash, $2 in EPS, and 70% of tangible book
 
This is a business that is very under levered and should generate attractive ROE's in the low teens without much risk. Certain parts of the business could be more volatile like their VAR business. The company has recently added new field offices in May in Austin, Tx and San Francisco (Network Architects). More importantly with a significant cash position of $65mn they can buy distressed competitors at very low multiples that should further their growth and EPS.
 
When the company re-lists: EPS should be on pace this year for $2.30 and we think the stock should trade at least 120% of tangible book. A competitor NSIT trades at 10x eps and 180% of tangible book. This valuation would give PLUS $28 off tangible book and $30 of EPS plus Cash.
 
Shares repurchased 2,978,990 shares @ an average cost of $11.04 spending $32.9mn, with their last purchase of 209,000 shares @ $13.88 per share in April 2006 (9/01-4/06). Today the company is significantly larger in terms of revenue, eps, and tangible book has increased significantly, while the balance sheet is in the best shape in the company's history.
 
Deloitte and Touche have been paid $8.5mn for the restatement which just has 3/31/08 10K to complete.
 
There is literally no "short thesis" as 1/10 of 1% of the stock is sold short.
 
Management owns 32% and Hovde Capital owns 15% (Hovde holds two board seats)
 
The company has one of the best balance sheets in the industry today with $65mn in net cash and climbing.

Catalyst

see above
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