ITEX Corp. ITEX
April 14, 2008 - 4:28pm EST by
sea946
2008 2009
Price: 0.92 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 16 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

As the leading barter exchange in North America, ITEX enjoys high returns on capital and has an uncharacteristically wide moat for a company its size. It is a rare nano-cap with the kind of high-quality management and large market opportunity that could make it a billion-dollar company some day. Despite its wonderful business profile, ITEX trades at a trailing EBIT yield of 9% and free cash flow yield of 15%. The company has more than $15 million in NOLs.
Price
$0.92
Shares outstanding
18 million
Market value
$16 million
Enterprise value
$16 million
 
Number-One Barter Exchange
 
Bellevue, Washington-based ITEX Corp. (OTC BB: ITEX) is the largest barter exchange in North America, ahead of New Berlin, Wisconsin-based International Monetary Systems Ltd. (OTC BB: INLM). Despite ITEX’s market-leading position, stronger balance sheet and superior profitability, INLM has roughly twice the market value of ITEX. Praetorian Capital Management is a large institutional shareholder of INLM, while ITEX has no large institutional holder.
 
ITEX has 24,000 small business members, more than $270 million of annual trade volume, and franchised operations across the United States and Canada. Small business members buy and sell using ITEX’s proprietary currency, the ITEX dollar. ITEX’s payment processing platform ensures that trades are settled properly and that members can easily review their account activity and balances. ITEX also issues an annual tax-reporting document to each member. Members pay ITEX a fixed monthly fee and a transaction-based fee. All fees are payable in U.S. dollars.
 
Capable, Shareholder-Friendly Management Team
 
CEO Steve White and his team have transformed ITEX since taking control in a proxy battle in 2003. What used to be a money-losing company in a marginal industry has become a highly efficient, highly profitable enterprise with huge growth potential.
 
As the following table shows, White has focused relentlessly on improving ITEX’s profitability and free cash flow. While revenue growth has come primarily from the acquisition of competitor BXI in 2005, recent initiatives to boost organic growth are seeing early signs of success.
 
 
 
 
 
 
 
 
Six Months Ended
TTM
 
Fiscal Years Ended Jul 31,
Jan 31,
Ended
 
2002
2003
2004
2005
2006
2007
2007
2008
1/31/08
Revenue
10.1
10.6
10.3
10.2
14.7
14.2
7.5
8.0
14.7
EBIT
(0.8)
(0.6)
0.6
0.7
1.4
1.5
0.8
0.8
1.4
Net income
(0.6)
(0.6)
2.2
3.1
3.4
4.5
0.6
0.5
4.4
EPS
(0.03)
(0.04)
0.12
0.17
0.18
0.25
0.03
0.03
0.24
 
 
 
 
 
 
 
 
 
 
Cash from ops
(0.6)
(0.1)
0.0
0.8
1.8
2.1
1.4
1.8
2.5
CapEx
0.1
0.1
0.1
(0.0)
(0.1)
(0.1)
(0.1)
(0.0)
(0.1)
Free cash flow
(0.6)
0.0
0.1
0.8
1.8
2.0
1.3
1.7
2.4
FCF per share
(0.03)
0.00
0.01
0.04
0.10
0.11
0.07
0.10
0.13
 
 
 
 
 
 
 
 
 
 
Diluted shares
17.1
17.7
18.3
18.6
18.6
18.1
18.3
17.8
18.1
 
White owns 9% of the company and has run ITEX in a shareholder-friendly way. Diluted shares outstanding have increased only modestly over the years and have declined recently due to share repurchases. The company has also eliminated all stock option programs in order to minimize dilution. In another small but telling sign of shareholder friendliness, the company recently reduced annual director compensation from 40,000 to 30,000 shares of stock.
 
The Value Proposition of Barter
 
Small businesses join ITEX because it allows them both to conserve cash when making purchases and to win new customers more easily. ITEX maintains an online member directory, and ITEX franchisees facilitate trading between members on a local and national level.
 
Why would a small business sell its goods or services for ITEX dollars? Think of ITEX as a liquidator of excess inventory, and therefore a competitor to companies like Overstock.com or eBay (though ITEX focuses exclusively on small businesses). ITEX is most valuable to the seller when the gross margin on the product or service sold is high, as is the case with hotels or restaurants that have unfilled capacity. ITEX essentially allows a member to buy other products at his own cost of goods.
 
ITEX’s effort to attract more members could benefit from a recession, as the “conserve cash” message resonates with more small businesses.
 
ITEX as a Small Business Membership Community: Opportunity to Break Out of Confines of Barter Industry
 
ITEX’s management has shown that it can execute in the traditional barter industry and make accretive acquisitions of smaller barter companies. Acquisition opportunities remain in the barter industry, and ITEX is cheap based solely on its current numbers and the potential for future FCF-per-share accretion from small acquisitions and modest organic growth.
 
However, the reason to own ITEX is to benefit from the ongoing evolution of the company from a barter exchange to a “membership trading community” for small businesses. While ITEX already has 24,000 small business members, it is barely scratching the surface of the 25 million-strong U.S. small business community. If ITEX can combine its barter platform with additional value-added services for small businesses, it could reach the tipping point where the $20 monthly membership fee makes sense for almost every small company out there.
 
ITEX’s goal is to become indispensable to every small business owner in North America by offering a value proposition that small businesses cannot resist. Over the past year, ITEX has launched Executive Privileges, an offering that pushes the company closer to the tipping point. Executive Privileges leverages the buying power of ITEX’s community to bring the member base exclusive co-branded services. For example, the ITEX co-branded MasterCard has no annual fee and offers members 60 days interest-free purchases. This is a big deal for businesses strapped for working capital. Other offerings include ITEX Payroll (powered by ADP) and ITEX Job Listings (powered by Simply Hired). Early signs are that the new initiatives are gaining traction.
 
Another growth avenue for ITEX is the licensing of its unique payment processing platform via a Software-as-a-Service (SaaS) model. This revenue stream is currently zero but could be very meaningful given the latent demand and ITEX’s unique ability to track both cash transactions and those based on non-cash currencies, such as rewards, points, units or other consideration a vendor decides to use.  ITEX launched SaaS in March 2008.
 
Finally, ITEX has huge growth opportunities in the area of “community.” ITEX’s website is fairly simple at present and does not allow members to interact in an engaging way. Given the strong demand for affinity-based online communities, ITEX has an opportunity to create an online community for small business owners. Such a community would generate both advertising revenue for ITEX as well as boost the volume of transactions done on the ITEX platform.
 
As a payments company with a unique processing technology and a sharp focus on small businesses, ITEX has an incredibly long runway of growth ahead. I believe the company has the management in place to take advantage of its manifold growth opportunities.
 
The Biglari Factor: Pending Tender Offer for ITEX
 
On December 12, 2007, Western Sizzlin (Nasdaq: WEST) announced the commencement of an unsolicited exchange offer for ITEX shares. Western is controlled by Lion Fund founder Sardar Biglari, an up-and-coming value investor. Western offered 0.06623 shares for each ITEX share, implying a modest premium to ITEX’s trading price at the time. Fewer than 10% of ITEX shareholders tendered their shares, and Western has extended its tender offer several times.
 
Most recently, Western extended its offer through the end of April and announced that it might accept tendered shares even if they did not give it control of ITEX. My view is that Western realizes it will not be able to win ITEX at the current exchange ratio, and therefore wants to preserve the option of accumulating at least some ITEX shares on the cheap.
 
Decent Liquidity May Exist Despite Tiny Market Cap
 
As of March 26, 2008, 905,309 shares of ITEX had been tendered into and not withdrawn from the Western exchange offer. The offer currently values each ITEX share at $0.93 (based on Western closing price of $14 on April 14, 2008).
 
It may not be unreasonable to assume that the 900,000+ shares tendered but not yet accepted in the Western offer may be up for grabs if a buyer offers more than $0.93 in the open market. The tendered shares could be withdrawn from the offer and sold in the open market. The Western offer may thus have created an opening to buy ITEX shares in volume at only a modest premium to the current market price.
 
More Information
 
CEO White: Company Overview Presentation at Roth Capital Partners, 2/21/2008:
http://www.itex.com/aboutus/videos.asp?cat_id=C&video_id=2
 
CEO White: SaaS Presentation at Montgomery Technology Conference, 3/11/2008:
http://www.itex.com/aboutus/videos.asp?cat_id=C&video_id=1
 
Catalysts
  • Organic growth from recent initiatives, including Executive Privileges and SaaS
  • Tuck-in accretive acquisitions of small barter exchanges
  • EPS accretion from recent Intagio and ATX acquisitions
 
Disclaimer
This is not a solicitation to buy or sell stocks. Please do your own independent analysis before buying or selling ITEX (or any other stock). We have a long position in ITEX at the time of this write-up that can change at any time without notice. There are no plans to provide future updates on our ITEX buying or selling activities.

Catalyst

(1) Organic growth from recent initiatives, including Executive Privileges and SaaS;
(2) Tuck-in accretive acquisitions of small barter exchanges;
(3) EPS accretion from recent Intagio and ATX acquisitions
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