(As advance notice, this is a microcap writeup suitable for personal accounts.)
ITEX Incorporated (OTCBB: ITEX) owns and administers a cashless payment network in operation for more than 30 years, where merchants can process transactions through a barter-like system. Given its low valuations to trailing earnings and cash flow, an attractive business model with very low ongoing requirements for capital investment, a generous cash dividend yield, and management's prior history of repeated returns of capital to shareholders, ITEX shares represent an attractive addition to a microcap value portfolio.
Business and valuation
ITEX provides record-keeping and payment transaction processing services for its members, and generates revenues by charging percentage-based transaction fees, in addition to earning 30% of revenues via a recurring stream of association and franchise fees from participating regional "brokers" who recruit small business participants to use the network.
Although the company has recently struggled to achieve top-line growth in its admittedly small niche, and 2015 revenues are down year over year, the company recently launched ITEX Mobile, a cashless transactions app which is now available for Android and iOS and could significantly broaden the platform's appeal going forward.
While it remains to be demonstrated whether this will generate a return to top-line growth; the business does have attractive structural characteristics including self-reinforcing network effects from its participant network, limited ongoing needs for capital, and the potential for high-margin growth from its mobile cashless transaction apps given the recent popularity of non-cash transaction systems such as Bitcoin (and recent security setbacks for Bitcoin itself). ITEX has been consistently profitable and cash flow positive as described below; in contrast many money-losing startups with purported network effects could be valued far above the current EV. Due to shareholder friendly management with a large ownership stake, an potential buyout by a strategic acquirer could create another route to realizing shareholder value substantially above market prices.
The balance sheet has no debt and over $1.7 million in net current assets. The company has earned $0.7 to $1.07 million in net income and $1.2 to $1.9 million in cash from operations over each of the last four fiscal years; each representing attractive multiples to the current $6.4 million market cap. ITEX additionally has more than $9.5 million in federal NOLs expiring from 2019 through 2026.
Management and capital allocation
Since joining the company in 2003, ITEX CEO Steve White has focused on consistent cash flow generation and substantial and repeated returns of capital to shareholders. The company has recently completed a tender offer to repurchase 750,000 shares (26.1% of its outstanding common stock), at a price of $4.00 per share, leaving 2.1 million shares outstanding as of April 2015. I participated in the recent tender, and am again accumulating shares as an attractive microcap position near current levels. ITEX previously executed a separate tender during 2012 repurchasing nearly 30% of outstanding shares at $4.20.
Outside of tender offers, the company has spent nearly $1 million in open market buybacks over the past four years. The company additionally pays semi-annual cash dividends of $0.10, for a trailing yield of over 6.6%. The CEO personally owns 627,684 shares, totaling 21.8% of the company before the recently announced buyback. Ongoing expansion of management?s ownership stake through further buybacks should continue to reinforce alignment with shareholder interests.
Due to the favorable combination of low ongoing needs for capital and a consistent record of direct returns of capital to shareholders, I believe a position in ITEX shares should be an attractive long-term holding for microcap value investors, as well as creating the opportunity for a high cash-on-cash IRR should the company again tender for additional shares in the coming years.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
potential growth in recurring and transaction fee revenues driven by recent release of ITEX Mobile apps
cash dividend yield
continued returns of capital through buybacks and tender offers