Mind CTI Earnings Update

Mind CTI reported earnings last week. Important items to note:

  • Revenue fell 2.1%
  • Operating income rose 27%
  • Net Income fell 18.7%
  • Multiple follow-on orders
  • Won two new deals with one being significant
    • I assume this is the same multi-million dollar deal that was announced back in Q2 but was scheduled for 2017.
  • Cash $19.8 million
  • Dividend of $6.2 million (11.2% of 3/6/17 closing Mkt cap of $54.79m) with ex-divided date of 3/7/2017
    • 25% Israeli withholding tax

This quarter was favorable considering the revenue trend of the prior three operating quarters. Gross profit and operating income were 10.7% and 26.7% higher, respectively, because of a one-time decrease in provisions but net income fell 18.7% primarily because of the significantly higher tax rate for the quarter. There is a lot of noise in this report, so it is especially difficult to figure out the reason for the variances. The 20-F has historically been filed around April and should shed some light in due time.

Valuation

Subtract total liabilities from current assets, which is 95% cash, to arrive at an NCAV of ~$12.8 million. The current market cap is $54.8m so under the assumption that the market cap falls tomorrow (ex-dividend date) to $48.6m = $54.8m-$6.2m, a normalized net income of $4.33m can be obtained by averaging the net income of the past seven years. Market Cap/ Net Income = 11.22 normalized P/E.

Given the nature of the business and no growth scenario, I feel uncomfortable holding this above $3/sh (post-dividend) and I will likely sell the majority of my shares before it hits that mark. There isn’t any correlation between the quarterly/yearly fluctuations in revenues and any perceived long-term issue with the business. I think what Monica Iancau has done is amazing — converting a niche market into a cash cow while being what is perhaps the most shareholder friendly executive I’ve come across in my short investing lifespan. Microcaps such as these tend to have very hostile management teams with terrible capital allocation policies, so what Monica has done/does is quite an amazing.

I am working on earnings updates for Walmart, Target, Syntel and should have them published this week.

Mind CTI Earnings Update $MNDO

MNDO Reported earnings last month (August). Earnings were about disappointing. I was hoping we would see stabilized revenues this quarter, that didn’t happen, but there is good news. Ms. Iancu reported:

While we are disappointed with our weak revenues in the second quarter we are happy to announce that after quarter end we closed a significant new win. We repeatedly mentioned the hesitance of carriers in the markets we are active in, to commit to large projects of business transformation and the very long sales cycles. Such a long cycle came to completion recently and we expect to recognize the revenue of this multi-million deal mainly during 2017.

Even if we assume that earnings fall 33% from FY 15’s $5 million to $3.3 million, the company carries $16.75 million cash and has a market cap of $40 million. Current assets ( Including the available for sale securities, which is investment grade bonds in the non-current section of the BS) are $18.65, subtract total revenues of $7.32 million, we have $11.33. Market cap of $41.5 million – 11.33 = $30.17m. We’re effectively paying $30.17 for the company. So assuming the worst case scenario for earnings, that’s just 9.1x, the stock is still cheap. The new win should be a tailwind going forward – we’ll see what 2017 has to offer.

Added some $BDL and $MNDO

I added some BDL and some more MNDO. They now, combined, makeup about 21% of the portfolio with an even split. Also increased the Trip Advisor short by 50% that one is now 1.7% of the portfolio. I regret not adding the Jan 2018 LULU puts. LULU reports in June, so hopefully we see a rally before it.

Game host is down today because they announced a dividend cut. This should have been glaringly obvious, but investors still reacted negatively. I placed a limit order for $9.40, but it didn’t execute. Pier 1 Import along with everything in retail (LULU included) has been hammered today because of Macy’s earnings. Updated position weightings are now updated as of yesterday on the homepage. The portfolio is currently 45% cash.

Mind C.T.I Ltd.: Conservative High Yielder

Purchase Price: $2.05 (4/3/2016) Market Capitalization: $39.35 Million
Enterprise Value: $25.71 Million EV/EBITDA: 3.34
Price Target: $3.08 (~50% upside) Time Frame: 24 months

(NASDAQ:MNDO) develops, manufactures, markets and implements real-time and off-line convergent billing and customer care software solutions for various types of communication providers, including traditional wire-line and wireless, VoIP, and broadband IP network operators, LTE operators, cable operators and mobile virtual network operators. The company operates under the following segments:

  • Billing and Customer Care – Provides real-time and off-line, scalable billing and customer care software, including mediation and rating, for providers of voice, data and content services that are designed to meet their complex, mission-critical provisioning, authentication, authorization, accounting and reporting needs.
  • Enterprise Software – Used by corporations for telecom expense management, call accounting, traffic analysis and fraud detection. PhonEX and MEIPS are call management systems that collect, record and store all call information in a customized database.
  • Professional Services – Provides professional services to customers, consisting primarily of project management, customization, installations, customer support, training and maintenance services.

 

MNDO Y-Charts

WHAT HAPPENED?

FY 2015’s revenues were down 16% compared to FY 2014. The reality is that revenues have historically fluctuated year to year, but have over the long-term, gone up. Even under the assumption that earnings stay flat from these levels going forward, the intelligent investor would receive a flat >10% dividend yield. Under the risks section of the 20-F, management, referring to the backlog, says:

Due to all of the foregoing, we cannot predict revenues for any future quarter with any significant degree of accuracy. Accordingly, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and you should not rely upon them as indications of future performance. In future quarters, our operating results may be below the expectations of public market analysts and investors, and as a result, the price of our ordinary shares may fall.

Given that investors prefer linear growth and despise volatility, it’s no surprise that the stock trades at a stunted valuation. The nature of the business and the services it offers causes the volatility we see in the top line — the recent mishaps is not an indication of a long-term issue.

RISKS

Currency Exposure

The company derives half of its revenues from the United States and reports in U.S. Dollars, but derives most of its expenses from Israel and Romania. A decline in the values of other currencies relative to the Dollar as we have seen over the past few years bodes well in terms of margins, but poorly in terms of revenues for MNDO, given that the international currencies will need to be converted to Dollars. The revenues/margins will mostly cancel each other out, I don’t see it as a relevant issue.

CATALYSTS

 

Dividends & Intelligent Capital Allocation

The pivotal reason for adding this stock to the portfolio is management’s financial acumen. The management team is led by CEO, Monica Iancu. Ms. Iancu owns 17.3% of the shares outstanding and pays out virtually all of the FCF as dividends. Dividend for the year 2016 was paid last month, the yield was 12% (they are paid once a year).  The average dividend paid dating back to 2003 – excluding the monster 2009 dividend was $4.40 million, representing an 11% yield on today’s prices.

The chart below is one of the dollar amount of share repurchases of S&P 500 companies. What’s odd is that corporations tend to repurchase stocks when they trade at inflated prices and steer clear when they should actually be buying (08/09 period)

Historical stock Buybacks
Quarterly buybacks dating back to 2005 (Source: FactSet)

The same holds true for M&A activity, which tends to fall precisely when it should be rising – during a recession when valuations are actually cheap.

M&A

I want to mention that MNDO has, over the past 15 years, only repurchased shares in two years – 2008 and 2009. The company repurchased 3,165,902 shares (15% of total) for $2.8 million, or at an average price of $0.88 – The stock trades at $2.05 today.

Reasonable Valuation

FY 15’s FCF was $6.2m, but averaging the Free cash flow – which btw, has been positive since 2001 (even in 2007/2008) – over the past 5 years comes $4.7m. The company has consistently cranked out cash at that level over the past 15 years. Current market cap is $39.35 and enterprise value is $25 million. EV/FCF ratio sits at just over 5; 50% upside from today’s prices places the EV/FCF ratio at 9.5 which is still fairly conservative in comparison to the general market level. This will make up 7% of the portfolio.