Description

ePlus is trading at 65 percent of our March 2008 year end tangible book value (which should be fairly liquid) for a company with the following attributes: 1997-2007 revenue up 825%, never lost money from an operating basis over 13 years with consistent year over year growth in revenue and profitability, and is trading at 4.5x EV/EBTDA-CAPEX for FY08E March end. ePlus is no stranger to VIC. Much has changed over the previous write ups that we think could allow the stock to more than double over the next year with little downside risk. Key points are tangible book value should be over $15.00 per share (for 3Q06A it was $13.75), EBTDA FY07 should be approximately $2.60 per share (excluding settlement win – see below for more details), and organic revenue growth has been north of 15% over the last several years. PLUS was written up @ 9.10 in June of 2002, $10.92 in Dec 2004, and $9.55 May of 2007, today the stock stands at $10.00. Why again? Revenue has improved $575 ‘05A, $650 ‘06A, $798 ‘07A (’07 new information), and should be on pace over $900mn ‘08E for (March 2008 year end).  In addition, over the last three years the company has won $35mn in net litigation/settlements (40% of the current market cap) from Ariba and SAP for patent infringement and been paid most recently $17.5mn in Dec 2006. Briefly, the stock is cheap because it was delisted from the NASDAQ in late July 2007 because of delinquent filings (the company should be current within 60-90 days, more on this below). With only 8.6mn shares outstanding the company should do $105+ in sales per share for FY08 and run a 2.5% EBTDA margin, which is over $2.50 in EBTDA per share.

We do not consider this a high quality business due to high working capital needs and thin operating margins but it should not be selling for less than 4x EBTDA and 2/3 of Tangible book value. Comparable companies and recent M&A transactions trade at 2x the current valuation of EV/sales and EV/EBTDA. ePlus is in the bottom of the 8^th inning (20 months) as we are nearing the end of a painful process related to an options restatement that will reduce net income by approximately $3mn over a 10 year time period and on top of that another ~$8+mn for Deloitte & Touche to do an exhaustive restatement (which are reflected in our numbers below). The company at the ongoing rate should be current on all financials next 60-90 days and should be ready to re-list on NASDAQ early 2008. In fact, the company has reported 3 of their 5 late filings in the last 7 weeks. Given what is priced into the stock, each filing that comes in should be a catalyst as the company is growing and profitable. The last 3Q’s that were filed show a $2.26 per share jump in tangible book.

The company focuses on what they call Enterprise Cost Management. In plain English they can handle every aspect of the procurement, leasing options, VAR, and IT consulting and hence offer a whole IT lifecycle solution. ePlus is a top reseller and service provider for HP, CSCO, and IBM. For a very concise overview and strategy of what sets ePlus apart: http://www.eplus.com/web/BaseRenderer.aspx?id=1 . In addition, Forrester rates their overall offering as a “strong performer” for details see:

http://www.forrester.com/Research/Document/Excerpt/0,7211,42038,00.html. The company provides services to mainly Fortune 1000 companies such as Wells Fargo, CVS, PayChex, Cisco, Xerox, NASDAQ, Wachovia, Visa, ALCOA, Pepsi, Gannett, Georgia Pacific, and Quest Diagnostics. Since the hardware cost is actually only 10% of Total Cost of Ownership, ePlus offers products and service to also benefit from the other 90% of TCO.  The company objective is to become the ADP for managing technology assets which is the ability to integrate the above services from one company versus multiple sources.  ePlus has been in business for 13 years and never lost money on an operating basis.  We think the downside is $9 and the upside is $20+, with the stock at $10. At $9 the company would be at 58% of our year end ’08 tangible book value, trade at 9% of sales, and under 4x EBTDA. At $20 the stock would be less than 8x normalized EBTDA FY07, 1.3x tangible book value, and about 10x FY07 EPS, not out of line numbers for a growing company. ePlus has repurchased 20% of the shares over the between 2001-2006 and have been locked out from buying stock until they are current on their filings.  Given their history of buying up to 110% of tangible book, we would expect the company to be an aggressive buyer of their shares at up to $16+. In 2005 the company average cost on the buyback was $12.75 and in 2006 it was $13.88. Business should be up 40% from 2006 to 2008 (March year end) and tangible book should have increased 25%+ since they last repurchased stock in 2006. These purchase prices should look good relative to what the underlying business is worth.

To figure out the normalized earnings power of the business we adjusted for various factors: netted out settlements, estimated normalized legal/audit fees (between $5mm and $7mm per year) and to be conservative, for EBTDA, we only netted out the D&A for PLUS not the D&A from the operating leases.  Here are our estimates for normalized earnings:

We believe the stock is cheap due to the obvious issues, frustration with late filings and delisting from the NASDAQ. We think all these issues will be resolved over the next 3 months with the added bonus of a business that has created significant value over the interim period especially over the last 8 weeks when few were following the company.  Management did a secondary in 2000 at $28.50 per share for 1,000,000 shares and from 2001-2006 repurchased about 3,000,000 shares (20% of the company) at $11.04 per share. The reason we mention tangible book value is a lot shareholder value gets tied up in the balance sheet given the working capital needs of the business combined with the high organic growth rates but this creates an opportunity where you can pay 65 cents on the dollar of tangible book for a growing technology company.

Shareholder base and history

The management owns 35% of the equity.  Hovde financial owns 15% and got 2 board seats in November 2006. Hovde has held the stock since 1999. ePlus has been profitable 15 of the 16 years it has been in business (every year has been profitable from an operations perspective with the exception of a law suit). Management has been with the company since its founding in the early 1990’s and been in the industry since the late 1970s. This is a heavily working capital business that is growing rapidly. Cash is being sucked up into A/R and Inventories as the business grows.  

Additional points:

In September 2007 the company hired two senior sales executives from HP with 30 years experience each.

Investor presentation: http://www.eplus.com/web/Brochures/2006-4%20financial%20roadshow.pdf

The tables below show competitors and recent industry transactions easily going for twice ePlus’ current valuation: