October 05, 2011 - 12:25pm EST by
2011 2012
Price: 8.85 EPS $0.56 $0.00
Shares Out. (in M): 26 P/E 15.8x 0.0x
Market Cap (in $M): 227 P/FCF 8.9x 0.0x
Net Debt (in $M): -88 EBIT 26 0
TEV ($): 139 TEV/EBIT 5.4x 0.0x

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  • Canada


Enghouse Systems (ESL-t) is a software company with a 52 week range of $7.60 to $10.87 and was previously posted by andrew152 so I will refer you to that post for a listing of the buisness .  I am reposting this idea cause more than a year has passed, this is a simple idea that anyone can understand, and it has all the criteria that should result in a higher stock price over time. 
These include:

*strong BS with net cash of $88m (sans deferred revenue).  Cash alone represents 39% of the market cap.

*high free cash flow yield.  This is equal to 24.6m/139 or 17.7%.  No, this isn't a typo - that's a 17.7% free cash flow yield on a trailing basis.  CFFO has been even higher than cash flow.

*high insider ownership (34%) with the CEO the largest holder.  One might assume the CEO is motivated.

*pays a growing dividend (20c) and will buy shares, though the company is very price senstive, perhaps too price sensitive

*most revenue is recurring.  In fiscal 2010, 61.3m or 61.5% of all revenue was derived from annual maintenance revewals and long-term consulting services.  Thus, there is a high predictability to sales and earnings.  

*ESL uses its cash flow to make acqusitions and as show on andrew's previous post, acquisition multiples are done on a low multiple of price to sales

*this is a software company and CapEx is minimal.  Trailing CapEx is less than 1m and have averaged less than 1m since the current CEO took over.

*there is no pension, and option issuances have been very reasonable

*the CEO has a history of building up previous companies and leaving when they are expensive

*trailing numbers include a recent acquisition (4 months) but no profits yet that should come soon enough

 Negatives include

 *Acquisitions an integral part of the story so you have rely on the CEO to continue to do a good job.  Per the company, smaller acquisition targets remain reasonably priced.  Given the CEO's background and focus on smaller acquisitions where apparently there is little PE interest or interest by anyone, I am very confident in letting this CEO be my money manager here.

*Organic growth is hard to pin down.  The company choses not to reveal organic growth rates but states they are in the low single digits.   Of course, organic growth is somewhat of a misnomer given the focus on acqusitions and the limited CapEx budget

*Company is not overly concerned with stock price.  CEO is not promotional and displays an air of indifference as to the stock price (for now at least)

*50% of revenue is in Europe, so if Europe is going to implode, then there could be issues here

*company is based in Canada, which in my view has possibly contributed to indifference here as Canada, at least in my experience, is generally ignored by US investors

*valuation looks higher than it is cash net income is a lot less than cash flow.  A recent Canadian money manager panned the stock cause he said there was 1) little float in the shares, which is true but not a good reason to ignore this company since the limited float is due to high insider ownership, 2) the company didn't make much money, which is just plain stupid cash this company is raking in the cash.  The problem is net income vastly understates cash flow.  If you use cash flow defined as net income + d/a of PPE + amortization of acquired software and other intangibles (which is run thru the income statement), cash flow equals 25.6m trailing vs 14m in reported net income).  Plus, you've got to throw in the cash levels which are nearing $100m again.  ESL is raking in so much cash that they can't keep up as recent acquisitions haven't dented the cash balances.

there isn't a lot more to this.  Just to summarize

*high insider ownership

*huge free cash flow

*absurd P/CF multiple

*management you can trust

*business that requires 1m in Capex a year

*nobody cares which is the negative that really matters, though if you are worried about Europe then there is risk here as the company is current composed.  Of course, with future acquisitions, ESL can diversify its revenue stream anyway they choose. 

A recent TDN report, done by the only analyst who even bothers to follow this stock, called ESL the "best value in Canadian tech".  With the CAD now down to 95c, you can buy ESL for $8.50 USD.   This is my largest position by a multiple of 4x.

To put this in terms anyone can understand, if ESL just generates the same amount of cash as it has in the past 12 months they will generate another 60m to add the 88m they already have (and I am deducting the dividend).  So by then the stock price will be 227m with 148m in cash generating 25m or a FCF yield of 32%.   





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