MER Telemanagement Solutions: Small Cap Turnaround Opportunity

| About: MER Telemanagement (MTSL)

MER Telemanagement Solutions Ltd. (NASDAQ:MTSL) is a worldwide provider of innovative products and services for comprehensive telecom expense management (TEM) and enterprise mobility management (EMM) 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.

In August, MTSL reported $0.10 EPS for the quarter. This represented an operating increase of 170% on revenue growth of 10%. They generated $1mm of free cash flow for the first six months of 2012.

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.

Step one was that MTSL has experienced a business turnaround that has left it very profitable with great year-over-year growth. This is what the CEO had to say:

"Our second quarter results represent continued improvements in our financial results and indicators as a result of our efforts to develop our Telecom Expense Management opportunities through partners, new customer acquisitions and expanding our existing customer base," said Eytan Bar, CEO of MTS. "In addition, our company's Billing and Mobile Virtual Network Operator (MVNO) activity as a managed service has grown and we were able to sign an additional managed service agreement with a new MVNO in the U.S. and we see other opportunities in this market. We are looking forward to improving both our top and bottom line performance," concluded Mr. Bar.

The CEO mentions three items: First is that their efforts to grow are bearing fruit. Second they signed a new customer (I will come back to this). Lastly, the CEO looks forward to improving top and bottom line performance. This last statement confirms that management is focused and believes they are in growth mode going forward.

On October 15, MTSL announced a contract renewal for 2013 with their largest customer. The great news is that the minimum revenues in the 2013 contract is $3.6mm which represents 44% growth from the 2012 contract for this customer. If MTSL will do around $13mm in 2012, then this contract alone represents 9% growth in total revenues for 2013. Combine this with the new customer they mentioned that they signed in the last earnings press release, along with the significant increase in profitability (170% growth), and you can see why the growth future is looking bright for MTSL.

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

MTSL has recorded $0.17 EPS for the first six months of 2012. My estimate is that they will do at least $0.35-0.40 EPS for 2102. With the renewal contract and the new customer, along with the increase in profitability and managements looking forward to top and bottom line growth, it is easy to make a case why MTSL could conservatively do $0.45-0.55 EPS in 2013. Obvioulsy, this could be higher if they continue to win new customers and expand existing revenue.

If I take the low point of my 2013 estimate of $0.45, a 10 PE would be a $4.50 stock, a 15 PE would be a $6.75 stock price, and a 20 PE would be a $9.00 stock price. What is clear is that MTSL is significantly undervalued at $2.50. 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 their business and could at least double based on the above facts.

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.