Why MER Telemanagement Solutions Should Be Trading Over $10

| About: MER Telemanagement (MTSL)

Since my last article, MER Telemanagement Solutions Ltd. (NASDAQ:MTSL) recorded record EPS of $0.15 for the third quarter.

MTSL is a worldwide provider of products and services for comprehensive telecom expense management and enterprise mobility management solutions -- telecom billing solutions used by telecommunication service providers and mobile virtual network operators and enablers (MVNO/MVNE) solutions used by mobile service providers. It has an impressive list of customers that includes Lowe's, Siemens, Costco, and Novartis.

On Nov. 8, 2012, MTSL reported $0.15 EPS for the quarter. This represented an operating income increase of 180% on revenue growth of 12%. The company generated $1.3 million in free cash flow for the first nine months of 2012. EPS for each of the first three quarters in 2012 has been $0.07, $0.10, and $0.15, respectively. You can see the pattern. The story here is that MTSL, which is relatively unknown and underfollowed, has been cutting costs and signing new contracts, which now renders it undervalued by at least 100% and realistically more.

MTSL has experienced a business turnaround that has left it profitable with great year-over-year growth. Here's what CEO Eytan Bar had to say:

Our third quarter results represent continued improvements in our financial results and indicators as a result of our efforts to develop our MVNE activity and the Telecom Expense Management opportunities through partners, new customer acquisitions and expanding our existing customer base.

As we previously announced, we extended our largest existing MVNO services contract, with minimum revenues of $3.6 million during 2013. In addition, following last quarter's announcement that we signed a new managed service agreement, we recently were able to successfully launch our MVNE service with this new MVNO in the U.S. The company sees other opportunities in this market and we are working diligently to turn them into new contracts. We are looking forward to improving both our top- and bottom-line performance.

On Oct. 15, MTSL announced a contract renewal for 2013 with itslargest customer. The great news is that the minimum revenue in the 2013 contract is $3.6 million, which represents 44% growth from the 2012 contract for this customer. If MTSL does around $13 million in 2012, this contract alone represents 9% growth in total revenues for 2013. Combine this with the new customer it mentioned it signed in the second-quarter press release and that it is working diligently to sign contracts with new MVNOs -- along with the significant increase in profitability (180% operating income growth) -- and you can see why the future is looking bright for MTSL in terms of growth.

MTSL has a cloud-based, award-winning software that provides ROI for companies that use it. A growth company of this type would typically have a P/E of 20 if it were to IPO today.

MTSL has recorded $0.32 EPS for the first nine months of 2012. My estimate is that it will record at least $0.47-$0.52 EPS for 2102. The new cost structure is in place and has proven itself for the last three quarters, and revenue has been improving. With the renewal contract, the new customer, the increase in profitability, and management looking forward to top- and bottom-line growth, it is easy to make a case as to why MTSL could conservatively record $0.60-$0.75 EPS in 2013. Obviously, this could be higher if it continues to win new customers and expand existing revenue.

If you take the 2012 EPS of $0.50, a P/E of 10 would make it a $5.00 stock. A P/E of 15 would make it a $7.60 stock, and a P/E of 20 (which profitable cloud software companies have at a minimum) would make it a $10.00 stock. 2013 EPS should continue to climb higher, justifying at least a P/E of 20 for a cloud software growth company that delivers ROI to users. What is clear is that MTSL is significantly undervalued at $2.83. Whether the stock has been suppressed because it is underfollowed, or due to shorting by naked short sellers, growth and EPS usually win out in the end.

I believe MTSL is about to experience a market adjustment for the turnaround in its business and could more than double based on the above facts. It should be trading over $10 based on the above facts and valuation analysis.

Disclosure: I am long MTSL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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