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Summary

  • Higher One has the services to corner the entire university payment processing market.
  • Litigation costs combined with a working capital deficit have backed Higher One into a liquidity corner, severely depressing earnings.
  • With the right company to take this one over, on the other side of litigation lies growth at the bargain price of $6.93 per share.

Higher One Holdings, Inc. (NYSE:ONE) is quite the unique gem. They have a broad offering of services, a large number of captive customers (university students), and virtually no directly comparable competition. So what's keeping them down?

By nearly all ratio analysis and valuations, Higher One Holdings, Inc. had an abysmal year in 2013.

  • 64% drop in Net Margin Percentage
  • 8% drop in Asset Turnover
  • 67% drop in Return on Assets (ROA)
  • 47% drop in Return on Equity (ROE)

I could go on all day, and it's easy to understand why the stock price for ONE has dropped 22% over the last year. So is this small-cap company worth a look from a big-time company looking for someone to buy? If you have the resources to stomach the blemishes, I believe so.

Business Model

Until recently, universities resorted to highly inefficient payment processing methods involving paper, snail-mail, and lots of manual, human-error-prone work; Higher One offers a 21st century alternative.

Payment processing is the industry every big player wants to be in. Amazon, Apple, Starbucks, Intuit -- you name it, they're trying to control the flow of cash. But while everyone else is focusing on becoming the payment processor for the masses, Higher One has found itself a niche in one of the industries that normally fights technological innovations. Everything from FAFSA distributions to tuition refunds, payments, payroll, even alumni donations, event tickets, and school stores have to pass through Higher One who collects fees along the way. And then they charge the university a service fee for the privilege.

But it doesn't stop there. Higher One offers financial education for students, analytics to predict which students will drop out or graduate, and even provide advice for advisors on how to help the students at risk reach their goal of graduation. Higher One is more than a payment processor for universities -- they are the complete package.

So where are the earnings?

In 2013, litigation settlement costs ate up 7% of Higher One's revenue, combined with rising SG&A, which now takes up nearly 28% of revenue, there is little left for the stockholders.

What about the cash flow?

Cash flow from operations is a healthy $47.5 million, despite coming down 11% from 2012 to 2013 due to a significant payment on deferred income taxes, and a surplus of piling up accounts receivable (receivables turnover dropped by 33%, showing poor collections).

Cash flows from investment activities, on the other hand, is a bright-red $59.8 million in 2013, and $50 million in 2012 from the acquisition of companies who have expanded Higher One's services offerings to the broad list above. It remains to be seen as to whether or not these investments will pay off, but so far, it seems clear that the acquisitions aren't paying off as planned.

Cash flow from financing activities, while seemingly innocent, paints an even scarier picture: Higher One took out $52 million in loans, paying back nearly 83% of it by the end of the year. A quick glance at the balance sheet shows why.

Liquidity

Cash is only 2.7% of total assets, and working capital is in the red by $17.5 million; the vast majority (83%) of assets are non-current. Accrued expenses shot up 142% making one wonder if they are having some trouble paying off their liabilities. If Higher One doesn't get a handle on its receivables turnover and start getting cash in the door, it may find itself in hot water.

What would it take to bring this company back to life?

Simply put: cash and control.

A cash infusion of at least $18 million would give Higher One the working capital it needs to leave the loans behind, reducing interest expense significantly. In 2013, interest expense jumped from $976,000 to $3,082,000.

So what's the point?

Higher One has a great business model and numerous acquired companies, which make it a very strategic purchase for a company wanting to take control of the niche university payment processing industry. This is a company with huge potential, which has backed itself into a corner, surrounded by liquidity issues, litigation problems, and out of control expenses.

On its own, the outlook for Higher One looks dire, and I would advise individual investors to steer clear of this one. However, if someone with the capital and resources to restore liquidity and rein in operational control were considering it, $6.93 per share makes this company look like it's on clearance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Is Higher One Holdings Ripe For A Takeover?