ITEX Corp: Deep Value Opportunity in Bartering

Includes: BH, ITEX
by: John DiStanislao

ITEX Corp. (OTCPK:ITEX) provides business services that enable member business to trade goods and services without exchanging cash. ITEX administers the marketplace and is a third party record keeper for its members. A network of franchises, independent brokers and corporate owned offices serves this cashless member community.

Business can buy and sell to each other and no cash changes hands. The potential benefits to the ~ 28 million small businesses in the USA are profound. Members come to ITEX because they want new customers or maybe monetize unproductive assets with needed services or products. A small business could exchange slow moving or obsolete items for advertising or website design as an example from any one of the 24,000 active ITEX members. The possibilities for cashless exchanges and the associated benefits are profound and endless. Small businesses leverage and conserve their cash by using ITEX corp. ITEX is registered to sell franchises in all 50 states. About 8% of its business is in Canada. Its product is the ITEX dollar.

Use ITEX dollars to purchase advertising, printing, marketing services, accounting, accommodations, legal services, website design, vacations, employee incentives, medical and dental services and much more. With ITEX, you no longer have to trade with one other business. As a General Contractor, you pay the Dentist (with ITEX dollars), using your trade dollars - the Dentist prints their business forms. The printer calls the Florist to send his girlfriend flowers and the Florist uses their Itex Trade dollars to have a new deck installed on their home - by you! For a concept that goes way back in time

Insiders hold 33.61%. A diversified group of insiders have recently been adding shares. The shareholder base consists of long term proven value investors and a small group of value oriented institutions. Kennedy Capital Management holds 4.7%.

Most recent insider activity

Sardar Biglari of Biglari Holdings (NYSE:BH), (Steak and Shake, Western Sizzler, Friendly’s) made a tender offer back in 2007. Biglari recognized the huge potential of this tiny company’s concept, execution and platform. Some shares were tendered but not in the numbers S. Biglari desired. Management was not interested in working with or selling to Biglari.

Financial data to support the discounted valuation:

The current dividend yield is 3.50% supported by a large growing cash balance (5.4 mill or 33% of the market value) and strong free cash flow and FCF margins.

Per Share Value

  • Price = 4.50; EV = 3.68; Cash = 1.508; AR = .5318; Total Liabilities = .697; Sales = 4.88; Book Value = 4.19; FCF = .6902

  • Market Value = 16,280,000; EV = $13,208,000; Cash = 5,399,000; AR = 1,904,000; Total Liabilities = 2,497,000

  • Recent Annual Sales = 17.11 million with YOY Quarterly Revenue change of 4.80%

  • The Gross Margin % for the TTM was reported at 37.40%. This is a nice improvement relative to the past 5 years. 2006 29.20%, 2007 31.80%, 2008 35.30%, 2009 36.30%, TTM 37.40%

  • FCF/Sales is consistent and strong; FCF/Sales for the TTM 13.94%; 2010 14.59%; 2009 16.67%; 2008 14.17%, 2007 13.70%, 2006 12.17%

A company that can generate this kind of consistent FCF margins over many years has a great business model. The model at ITEX is scalable so the potential future value is extremely promising.

  • TTM after tax return on invested capital was only 5.73%. This was significantly off the 2006 39.49% and 2007 36.47% return. The growing SGA as a percentage of sales and the larger asset base has slowed down the spectacular 06 and 07 ROIC. But future improvement in the efficient use of use of assets will help push ROIC to its full potential.

  • Stock performance was 21.31% for the prior 12 months but only 5.51% (3 years) and 8.75% (5 Years).

  • The capital structure is clean. Shares outstanding were reduced from the 2006 balance, 2010 shares outstanding were 3,581,000; 2009 = 3,577,000; 2008 = 3,565,000; 2007 = 3,620,600 2006 = 3,724,600. No long term debt.

  • EV/FCF for the TTM = 5.52

  • EV/Avg FCF from 2006 = 5.81

  • EV/S = .77

Disclosure: I am long OTCPK:ITEX.