Though the name conjures up memories of “mindshare” and “eyeballs”, 800America.com has been profitable from day-1. It is a cash-generating, internet-based retailer selling for about 5x trailing fully-diluted GAAP earnings. On a market cap of $50mn, the company generates $800k-$1mn of free cash per month, and has over $14mn cash on hand and no debt. EBIT in 2001 was $12mn on capital employed of about $10mn, giving a trailing EV/EBIT of 4x and return-on-capital of 150%, mostly returned in the form of cash rather than additional working capital.
ACCO was originally called Sportsfair Television, but reverse merged into 800America, Inc. in July 1999. The current CEO is Jaques Pate, an excitable, hugely optimistic, and nice guy, who is NOT the same Pate as has been recently indicted on criminal charges. A word of warning: be prepared for a long conversation in order to understand the company. He does not communicate well to non-techies (like me). In addition I got some info from the 10k and Street research. Hopefully, I can clue you into the major points below:
ACCO has three main businesses: Rothman’s Closeouts (21% of '01 sales), OneTwoClick.com (65%), and newly developed IPS Payments. A file-transfer-protocol software division, File Shooter, accounted for almost 10% of 2001 sales of $21mn, but has a less meaningful impact going forward as all the growth is in Rothman’s and IPS.
Rothman’s closeouts is the leading web-based site for closeouts and surplus merchandise. This model brings together, for example, retailers and clothing manufacturers with surplus inventory. The company generates a commission of 10% per order, with a minimum order size of $300. In addition to the commissions, the company has some commissioned sales people in China who solicit suppliers to join the community. These suppliers pay a $50 registration fee (part going to the sales person) to join the site. Rothmans has been around since 1980, and is growing.
OneTwoClick.com is a multi-retailer community where ACCO generates a 5-20% commission on sales routed through the site. There is not much growth here, but the company has been able to successfully use its web-based "Internet Guide" magazine to retain customers and alert them to new deals on its site. 50% of their 700k customers were repeat buyers in 2001, spending between $20-$40 on average per transaction. Brands include Amazon, Saks, Macy's, and others. A total of 250+ stores are on the site.
File Shooter revenues are derived from a one-time $10 user fee. Again no growth here.
IPSPayments is a Pay-Pal competitor. Revenues are 1.5% of each transaction. Pay-Pal, as users of E-BAY already know, facilitates web-purchases by creating a third party, payment-clearing house that tries to create a sense of surety from the seller’s perspective. IPS will do the same but for less money (1.5% versus 2.9% of transactions value). According to management, IPS is already profitable and is growing. One analyst estimates almost $6mn of revenues from IPS in '02.
As a web-based retailer, there tends to not be a “moat”, though I have a belief that Rothman’s is a budding brand. Customer retention is around 50%, and the user-base continues to expand with minimal/no advertising. OneTwo grows with no ad help aside from the magazine, suggesting some sort of brand element as well. Apparently there's a brand here, I just can't put my finger on what "it" is. IPS has the ability to become a brand, but it seems easy for anyone to start a business like this. One advantage ACCO has, though, is that most users of IPS are existing customers, and ACCO has undoubtedly an idea of who is/is not a fraud risk among its own users.
Many risks. First, the reason margins are so high is that the company discontinued its commission rebates to customers in 2001. Rebates amounted to $2mn in 1999, $9mn in 2000, and $0 in 2001. By itself, this raised EBIT from $3mn to $12mn in ‘01. Had the rebates stayed the same, 2001 EBIT would have been lower than 2000’s. ACCO management determined it had no longer needed to offer the rebate because the businesses had gained traction. So a key risk is that there is no brand loyalty, and the company will be forced to “discount” again. In that case, EPS would be closer to 15 cents, and ACCO is trading at 15x P/E. In either case, however, ACCO is still free-cash-flow positive, and Rothman’s has to date not suffered any consequences from its decision. For what it's worth, ACCO has no plans to re-institute teh discount. Another risk is that 1/5th of Rothmans’ revenues (6% of total) are from those Chinese ‘registration fees’. Though I have no reason to suspect anything untoward, it makes me uncomfortable because I cannot independently verify this part of the business (is it pyramid scheme, etc).
In conclusion: a cheap stock of a growing, profitable, cash-generative business, with some risks that appear to be well discounted.
Tell me what I am missing...
Realization that the business can sustain itself, and that 2001 earnings are "real" and sustainable.