GAXC is a micro-cap company with substantial growth opportunities and strong cash flow generation. At current prices you are getting the company at a discounted price based on current cash flow. If the growth opportunity pans out, you could have a substantial upside.

 

GAXC has been written-up on VIC about a year ago. I will focus on the aspects that have changed in the initial write-up. The company has two business segments: ATM machine management (written about in the initial write-up) and DVD Kiosks ala Redbox. The DVD Kiosks business is new to the company and should be a substantial growth driver for top and bottom line.

 

 

The company recently started providing DVD Kiosks to convenience stores, groceries, and military sites. The company recently signed a 3-year $21M contract w/ a Northeast based retailer (most likely A&P). The company recently finished the roll out of 323 kiosks. The DVD Kiosks market is dominated by two giants: RedBox (Coinstar) and Blockbuster Express. Even though these two companies own a large piece of the market, the rest is owned by smaller players. The company has been using its relationships with retailers and convenience stores to build out its kiosk business. For example, in the contract that was recently signed the company beat out the existing DVD kiosk provider (I believe RedBox was the provider that was replaced).

 

The company also recently acquired, Tejas Video, another kiosk provider with over 260 kiosks at Army and Air Force Exchange Service. Tejas was doing $4M of revenue and $1M of EBIDTA. The company also will be looking to use its relationship with the military to expand its locations for kiosks. Management has said this acquisition will be immediately accretive. I believe the company can use this new acquisition to increase the number of kiosks its manages and also use Tejas Video's experienced management team to help the company grow its DVD business.

 

The company will be creating strong cash flow once this new acquisition is integrated. I believe management will still be looking for smaller acquisition to grow its DVD business.

 

The financials on the DVD business is very good. Management has guided 30-35% gross margins on the DVD business. Based on the almost 600 kiosks, the company should be doing 11M of revenue, about 3M of gross margin.

 

 

The company has gone through a turnaround of sorts under the current CEO, George McQuain. McQuain has been at the helm since 2006 and done an excellent job at turning around the company. The company has turned around its ATM management business and created solid cash flow from this business. He has now turned around with major expansion with the DVD kiosks business and acquiring companies to expand its growth. He is focused and has shown the ability to do the make the right decisions and execute to create shareholder value.

 

 

The company's two business lines are ATM management and DVD kiosks. The ATM side of the business creates around 40-45% gross margins. The revenues are around 21M and have been growing at a decent pace. The company currently manages around 4,800 ATMs and has over 4,000 ATMs in the pipeline. So growth is strong. The DVD kiosk business should do around 11M annually, with gross margins of 30-35%. I expect the company to grow this business substantially in 2011.

 

So I expect the company to do around 11-12M of gross profit. The operating expenses for the most recent quarter were around $2.4M. The operating expenses include about 600K of depreciation and amortization. So the cash expense is around 1.8M per quarter, 7.2M annualized. So based on the current market cap of $10M, you are looking at substantial cash flow generation.

 

The company has around 7.5M of debt and 2.2M of cash. So even at an EV of around 15M, you are still looking at very cheap valuations.

 

 

The company is a micro-cap and is thinly traded. As such, building a position can take a while. Also, any position built in the company will require the investor to be patient, as getting out of the position will be difficult.

 

There are still big execution risks with the DVD kiosk business. The company has been able to sign one big customer and has been working with several others, although the company so far hasn't announced any other deals.

 

 

- New customers for the DVD kiosk business

- Strong cash flow generation from the DVD kiosk acquisition

- New acquisitions

- Growth in other business lines