The Long Case for CAM Commerce Solutions

In a recent edition of Value Investor Insight, Aaron Edelheit of Sabre Value Management described what he thinks the market is missing in CAM Commerce Solutions (CADA).

Describe in more detail the investment case for CAM Commerce, one of your specific fat pitches?

AE: I spoke earlier about how the company has focused on its X-Charge payment processing software, which it sells as an add-on both to its existing point-of-sale terminal customers and to companies that sell point-of-sale terminals to a wide variety of vertical markets, whether it’s doctors, dry cleaners or restaurants. The business model for X-Charge is quite compelling. For direct customers, CAM Commerce installs the software for free in return for a small cut of the dollar volume – about 50 basis points – of transactions processed. Because CAM aggregates the transaction volume of thousands of mom and pop stores, it’s able to charge a lower fee to the individual retailers than they would pay on their own. It’s a no brainer for the retailer and then CAM has an annuity business that is very unlikely to go away – as long as everything is up and working, small retailers will be hesitant to change. X-Charge is a 90% gross margin business with little or no capital spending required. The reseller business has only slightly lower margins, because the company gives the resellers a small piece of its processing fee.

Who is the competition?

AE: There are no other significant players in their niche. Big firms like Global Payments don’t care about one store outlets – they send their six figure salespeople to call on big chains. On the last conference call, CAM Commerce’s CEO said the company has more sales opportunities than salespeople, so they’re adding staff. The company currently processes about $4 billion in annual payments, which is growing at least $1 billion per year.

Is the cash register business dying?

AE: They’ve finally stabilized it, in large part because they’re bundling the X-Charge software with the terminals to differentiate the offer. In the fiscal year ended in September, half of CAM’s $32 million in total revenue came from hardware and servicing, with the other half from X-Charge. But X-Charge revenues grew 45%, so before long will dominate overall revenues.

With the shares up 55% in the past year, to a recent $38.50, the market has obviously taken notice.

AE: Yes, but there’s still no analyst coverage and I still believe the stock is very cheap. If I assume payments processed increase $1 billion per year, that’s $5 million per year in additional revenue, roughly 50% of which flows to the bottom line. In calendar 2008, even assuming a slowdown in overall consumer spending, I expect the company to earn around $1.75 per share. By 2010, as growth accelerates from the expanded sales effort, earnings should be $3.25 to $4 per share. The company has $7 per share in cash, so I’m effectively paying for the stock only 8-9x what I think the company can earn in three years. In addition, CAM has committed to paying out at least 75% of its annual operating income in dividends, which should result in another $5.50-6 paid to shareholders in the next three years. If they hit my revenue and margin numbers, there’s no reason this shouldn’t trade at 20x earnings – all in, I expect the stock to be worth more than double the current price within three years.

What are the biggest risks?

AE: Even if consumer spending falls off a cliff, you’ve still got a company with a rock solid balance sheet and a growing customer base. The shares would maybe get hit another 10-15% in a horrible economy, but that wouldn’t affect the longer term story. Given the cash on hand, the cash generated and the capital requirements, this company really doesn’t need to be public. They make 20-30 cents per share less by being a public company. If the market doesn’t recognize the value here, I’m confident that either a financial or corporate buyer would. The customer footprint with mom-and-pop stores could be extremely valuable to a company with other products to serve that market.