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MER Telemanagement Solutions Ltd. (MTSL), a global provider of Mobile Virtual Network Enabler (MVNE), Mobile Money and telecommunications expense management solutions and services, yesterday announced its financial results for the fourth quarter and the year ended December 31, 2012.

For the quarter, MTSL recorded $0.20 of EPS. This represents a run rate of $0.80 EPS on an annualized basis. The company has grown operating income 410% in 2012 over 2011.

The company also announced that its largest customer will not renew in 2014. The market, in my opinion, greatly overreacted to this fact. While this represents an amount of revenue of approximately 25%, there are several mitigating factors. If MTSL were to not grow revenue at all in 2013, the EPS run rate would be $0.80. Additionally, if there was not any growth in 2014, the EPS run rate would still be $0.60. However MTSL has told us in the press release that it is diligently working to take advantage of new opportunities and sign new contracts. MTSL has all of 2013 to replace the lost revenue from this contract.

MTSL is also entering into new growth areas like mobile banking. It is the leader in servicing the growing mobile virtual network industry. MTSL is a cloud based software company that provides ROI to the users of its software. All of these areas typically generate P/Es of 10+.

Two similar companies are Tangoe Inc. (NASDAQ:TNGO) and Veramark Technologies Inc. (OTC:VERA). VERA just reported $0.07 EPS for the year and trades at a 10 PE. TNGO will do approximately $0.70 EPS for the year and trades at a PE of 17.

So at a minimum, if you took an unrealistically conservative approach and did not think MTSL will grow anymore, at a 10 PE on the $0.60 of 2014 EPS this should be a $6 stock. As MTSL signs new business and replaces the lost revenue, EPS will grow back to the $0.80+ range and the stock will deserve an even higher valuation. I believe this stock will bounce back to the $4-$6 range as these facts are realized and short sellers cover.

The overreaction to the MTSL announcement presents an opportunity to participate in the rebound. The EPS numbers that remain will be realized and MTSL should continue to sign new contracts.

Potential risk - as with any small cap stock, generating new revenue may take time. However the above facts present a floor of $4 based on the numbers.

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.

Source: MER Telemanagement Solutions Dip Presents A Buying Opportunity