Description

Global Axcess owns, manages or operates 4,500 automated teller machines (ATMs) in 43 states, with another 4,750 ATM locations in the sales pipeline. The company is earning net income at an annualized run-rate of nearly $2 million-and growing-yet the equity trades at a market value of $15 million. With a high-return operating model and profit-minded management in place, investors would probably earn respectable long-term returns even if they paid $30 million for the business. At $15 million, an opportunity exists to realize both an outsized return over the next year or so and to keep compounding capital at a double-digit rate thereafter.

We judge Global Axcess to have strong downside protection due to (1) capable, profit-oriented management, (2) long-term services contracts that produce recurring revenue and predictable profitability, (3) strong and growing net income, (4) ample growth opportunities, and (5) an attractive valuation.

What's Happened at Global Axcess

The ATM management services industry hit upon hard times a few years ago, as low barriers to entry spawned a large number of non-bank ATM companies, which deployed ATMs to locations that were barely economical or uneconomical. Several publicly traded ATM companies, including Global Axcess, fell on hard times. Some, such as TRM Corporation, never recovered in their original form.

Global Axcess was pushed to the brink due to a weak balance sheet and bad management. However, in October 2006, ATM services veteran George McQuain became CEO. McQuain immediately started cutting costs and eliminating unprofitable ATM services deals, boosting cash flow and improving the balance sheet. The company also settled a dispute with a debt holder, removing significant uncertainty. McQuain's focus on reestablishing profitability showed that management can make a big difference in a turnaround situation. In fact, good management was the difference at Global Axcess.

Fast-forward to today. Global Axcess is the sixth-largest non-bank ATM company in the U.S. It has barely above 1% market share of a highly fragmented industry, and it is gaining share. With good management and high service levels, the company is poised to keep winning ATM services deals-long-term contracts with attractive terms. This gives the company a stream of recurring revenue and fairly predictable core profitability.

What We Expect to Happen at Global Axcess

As much as McQuain has been focused on rationalizing his way to profitability, he now seems to be shifting gears toward profitable growth. Financial institutions, especially local and regional banks and credit unions are increasingly looking to outsource some or all of their ATM management functions to third parties. Global Axcess is in a good position to compete for such lucrative deals.

More significantly, Global Axcess recently started marketing itself as "an independent provider of self-service kiosk solutions." ATMs are one type of "self-service kiosk," but there are many others. The video rental industry seems to be moving from stores to kiosks, and Global Axcess can operate and service such rental locations, too. The company's DVD kiosk initiative, currently in pilot mode, has been "a success operationally," according to McQuain. While the ATM network should keep driving operating results for a long time, other kiosk management deals could accelerate top- and bottom-line growth.

Our Estimate of Fair Value

We value Global Axcess common stock at $0.97-1.46 per share. While we base our valuation analysis on multiples of net income, we note that the company's GAAP income is burdened by large non-cash items, such as amortization of merchant contracts and depreciation.

Global Axcess - Estimate of Fair Value

Sources: Company filings, Manual of Ideas estimates and analysis.

Global Axcess generated adjusted EBITDA of $1.2 million in Q3, suggesting an annualized run-rate of nearly $5 million. At a fair value EBITDA multiple of 8x, the enterprise may be worth up to $40 million. Subtracting $5 million of net debt would yield an equity value of nearly $35 million, roughly matching the high end of our valuation range.

A Few Words on Investing in Global Axcess

Global Axcess trades on the OTC Bulletin Board, with average trading volume of 65,000 shares per day over the past three months. The bid ask spread-the difference between the prices at which shares can be bought or sold-is generally quite wide in percentage terms. As a result, any investment in Global Axcess should be viewed as a long-term investment rather than a short-term trade. Moreover, limit orders should always be used when attempting to buy or sell shares. We further believe that buying on weakness rather than "chasing" the shares is the prudent way to accumulate a position. It is better not to buy any shares than to pay too much.

Q&A on Global Axcess

Q: If you subtract the carrying value of merchant contracts and intangible assets from common equity on the balance sheet, it seems that Global Axcess has no tangible book value. In addition, it has about $5 million of net debt. How can you say it has "strong downside protection"?
A: It's true that Global Axcess represents a departure from some of the other companies featured in this report in the past. We typically want very strong asset values on the balance sheet backing up the market value of the company, so that even if the business performs poorly, we may not lose much money.
In the case of Global Axcess, the strong profitability of the business seems more certain and more sustainable than at most of the other companies we have featured to date. Couple this with good management and we believe you have "strong downside protection" despite the absence of tangible book value.

Q: How does Global Axcess actually make money?
A: The company deploys and manages ATMs under several different types of agreements, which can be organized into two groups:
Under the "ownership model," merchants or banks outsource ATM functions to Global Axcess. In the customer's eyes, the company "owns" the ATM machines (they are actually leased under capital leases).
Under the "merchant model," merchants own ATM machines and contract with Global Axcess for processing and other services.
The company derives revenue primarily from surcharges and convenience fees (56% of revenue) and interchange fees (34%). The latter are paid to Global Axcess by the issuers of the credit or debit cards used to draw cash from ATMs.

Q: What risks are you most concerned about?
A: Besides the manifold execution risks present in any turnaround, we are mindful that low short-term interest rates may not persist. Global Axcess benefits from low rates due to the associated lower cost of ATM vault cash. If short-term rates spike, the company's cost of doing business will increase accordingly.

Disclosure: This is not investment advice. We own shares in Global Axcess and may sell them at any time without prior notice.

Catalyst

Continued strong execution, revenue growth, balance sheet improvement