Description

Mapics is an E-business software company, that has a consistent record of generating strong FCF (last 3yrs FCF/EV = 38.1%), a focused market niche (mid market manufacturers), a large installed user base (3,600 customers), and a differentiated market structure (affiliate channel). Mapics is a cheap software stock (EV/CF= 4.86, EV/FCF=7.10) that is coming out of an industry and macro economic slowdown. The industry slow down occurred in March of 1999 as investors realized IT departments would avoid implementing ERP systems until post 2000, due to potential Y2K integration issues. Then weak IT budgets ensued as Internet bubble burst and economy slowed.

Mapics was created by IBM in 1980 to drive sales of their A/S 400 platform, and later sold to MarCam, then spun off late ‘90s. Mapics sells enterprise software to mid market manufacturers (Transport, Industrial, Fabricated metals, auto parts suppliers, semiconductors, Medical devices) targeting company’s with revs between $20mm and $1billion dollars. The company has been able to generate strong FCF due to the company’s distribution system of affiliates. The company's affiliate structure minimizes its fixed costs by having affiliates sell and install Mapics solutions to the end users. This competitive advantage has allowed the company to pay down $46mm in debt in 2 years and generate strong FCF (see below).

Products: ERP is a slow growth business 4%, Growth will come from supply chain management (product from pivotpoint acq), Product lifecycle management, Customer relationship software solutions. Pivotpoint was acquired to give MAPX solutions for Windows NT, UNIX, and Linux platforms (which made up 55% of the mid market operating platforms). The company recently wrote off half of the goodwill (as impaired) last quarter (current goodwill is .45 per share).

Management: Brutally honest (as evidenced by the current valuation), every qtr they release: Full Statement of CF, Inc, and b-sheet (most company’s leave off St of CF). Hired new CFO in Sept ’01 (formerly CFO with iXL and MANH $800 Mkt. cap).

What the business is worth.
a) DCF: assuming 6% top line, EBITA margin 15.6%, 38% Tax Rate, Beta .76, ERP 6%, Risk Free 4%
Value of $16.47,
Assuming 0% growth gets a value of $11.77 per share

b) Mapics EV/Sales .75, P/FCF (depressed) 7.1
In my opinion I think the stock could see $12-14 in the next year based on 1.5x EV/sales (assuming no growth) and 14x FCF

The Safety Net:
Cash flow, Installed base of 3500 (which provides recurring revs for about 60% total revs annually, and very high switching costs), and potential buyout candidate.

Cash Flow from Operations
1997 $27.74
1998 $38.82
1999 $23.19
2000 $20.56
2001 $23.24

Total Cash Flow from Ops $144.5mm in 6yrs (140% of current EV)

CAPEX
1997 $8.4
1998 $13.29
1999 $12.73
2000 $10.56 (Plus Pivotpoint $47.2mm)
2001 $7.5







Compelling factors:
1) Small consistent insider buying throughout ’01, no selling.
2) FCF
3) IT budgets should open in mid ’02.
4) Take out candidate
5) Strong consistent operating history 20 years in business/High customer satisfaction
6) High Switching costs
7) Opportunity to sell Pivotpoint products into installed base
8) No expectations priced into the stock: no coverage, very tough business climate last 24 months
9) Quality Installed base: Bayer,Volvo, SmithKline, Michelin, Dukane, York, Honda, GE, Goodyear, and Anaren Microwave.
10) Cash up 50% yr/yr, debt down
11) Competitors are preannouncing upside (environment improving)
Epicor:+204% off October low, (Jan 3, company sees 20% growth in software lis qtr/qtr)
JD Edwards: +166% off October low, (Nov ’01, pre-announces upside and stock doubles)
Mapics: +25% off October low.
10) The biggest catalyst: a resurgence in software license growth (highest margin business).

Catalyst

Company's powerful FCF used to enhance SH value (2yrs ago bought back 20% of company), Improving economy and IT spending, Take Out, Should generate tremendous returns on equity and assets this yr.. which should lead to improving valuation