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
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
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
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
All of the leasing today is
Non-recourse to the company: no need for
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
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
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.
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.
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
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)
company has one of the best balance sheets in the industry today with $65mn in
net cash and climbing.