Inefficient Market

Value, long/short equity
Inefficient Market
Value, long/short equity
Contributor since: 2012
The Batiste contract runs through at least the end of December 2016. So not much immediate risk of losing it. I would guess they will know if it will be extended or cancelled around September of next year.
There is value in their brand name alone. Question is if management would be open to selling the company.
The stock is not expensive at ~$1.50 a share. But there is definitely downside if the Batiste contract goes away and they can't find something to replace it with.
Some of that cash does belong to PYDS, although the majority is money being held for payment processing services. The pre-paid card amount of that balance is small though. The long thesis on PYDS is not due to their cash position, although I expect free cash flow to continue to accelerate.
SLGD is excessively discounted for the reason you mentioned, although there is still over a year left on that contract. And there's really no reason to assume the contract won't be extended again.
Agree on PERI. Based on some comments on the conference call, I'd say they're getting ready to announce a share repurchase program.
Nice write-up, Nick. I'm long TPNL, and the recent lawsuit settlement took a lot of investors by surprise. That said, the stock is cheap in the 0.20's, with probably 4-5x upside if they can generate around $2m in net income per year.
I'll probably wait to see what Q3 earnings look like before I add more, but this has really attractive risk/reward at the moment.
Do you have any thoughts on the recent lawsuit settlement? Surprised they settled it so quickly given it was only filed in August.
Their current ratio is inline with industry averages. The present situation is about $4m in net cash and no debt.
Operating cash flow was only negative in Q2 because they had a change in liabilities (i.e. customer deposits, which is not their money anyway.) So backing that out, they generated about $600k of cash in Q2.
Going forward, this will continue to be a cash-generating machine. Stock-based comp really knocks down the net-income number, but it's a non-cash charge. I'd expect them to generate around $1m in operating cash flow during both Q3 and Q4.
Thanks for the article, Nick.
Just wanted to note, when you mention the stock awards, keep in mind those were issued before the reverse split. So the total would need to be divided by 15. And the current shares outstanding of ~12m fully reflects all awards, even if they have yet to vest. So the basic share count is around 7.4m shares in today's terms.
C&D already owns the shampoo, so they wouldn't gain anything except for SLGD's distribution chain. The wood cleaner and preservatives would definitely be something I could see C&D wanting to add to their portfolio. It's a well known and trusted product that should probably be owned by a larger company. I know several years ago there were acquirers who wanted to buy the company just for that reason alone. Not sure how receptive management is to selling the company at this point in time, but given the amount of stock they own I have to believe a buyout will be the ultimate endgame here.
The increase is primarily related to the stock awards from 2014 that have a 10 year vesting period, but those were not issued under any specific plan (which is what brought the shareholder suit for being excessive.) Regardless, those are fully reflected in the shares outstanding, but will not be fully realized until 2025. So the share count of 12m is probably more like 10m in today's terms.
I can speak to the last point and say there is no way they will grant the entire 5m shares under the 2015 Equity Plan, in 2015. I believe the last plan they had before that was from 1999. So it's going to spread out over years, if not decades.
I think your price target of $5.20 is probably close to where it should be trading, assuming only modest future expectations.
I personally think it's worth more than that, but I'm valuing it more from an acquisition perspective, which is typically the fate of these smaller processors.
The premiums paid for acquisitions in this space are considerably higher than other industries. When Global Payments acquired Realex Payments for $130m, Realex only had $20m in revenue and $2.4m in net income. And when PayPal acquired Xoom a few months ago they paid 100x EBITDA. So from that perspective, in a takeover I think PYDS is worth $8+.
The real lotto ticket here is Akimbo. Walter Isaacson was an early investor in that and called it a disruptive technology. I believe he is now a holder of PYDS stock as a result of the acquisition.
Obviously, at $3 and change I think the risk/reward is very favorable here. I started buying this when it was $0.06-$0.10 pre-split ($0.90-$1.50 a share in today's prices) and I believe there was considerably more risk then than there is now.
Thanks for the article. Thoroughly researched.
That had nothing to do with it. The fed met on Thursday anyway. Yesterday's decline in the last 5 minutes looked like some type of glitch. Happened with a handful of other stocks as well...CETX, MDVX, LNTH, RTTR, etc.
Stock-based compensation has been a concern here, although the stock awards have a vesting period of 10 years. Other than that, everything is clean.
Thanks for the article. I think the impact of rising rates is something that a lot of people overlook as a huge potential benefit to this company. Stock is cheap as it sits, and if rates ever go up it will be a nice tail wind.
Sorry for the late response. As I'm sure you figured out, the majority of that cash belongs to their customers. Net cash is around $4m.
Seems to me like the sales of Batiste were very good last year too, and Church & Dwight still ended up handing SLGD an even more lucrative distribution deal. I would think if C&D wanted it back, they would have done so last year.
So the only reason the stock went higher was because of activists? That's laughable. It had everything to do with returning to profitability.
The "activist" in this stock wanted the company sold for $0.50 a share several years ago. If management had listened to that advice, then shareholders would have really gotten screwed.
Yeah, it was a tax asset. I didn't include it in my calculations though.
I know there were some activists in the stock a few years ago who were really negative towards management. I think that mostly stemmed from the fact there were shareholders who wanted the company to be sold, and they claimed management wasn't listening to offers. Obviously, the company has performed really well financially over the last couple years and it looks like it was the correct decision to not sell the company.
I have heard more than a few people say Barry Levine, who was brought in as CFO in 2012, has been key to this turnaround.
The majority of those awards have 4-5 year vesting periods. Does not seem that excessive to me.
Appears there were several one-time charges related to the Nasdaq listing, and some one-time stock-based compensation expenses. I'm kind of surprised they didn't break it out on a non-GAAP basis to better show what was really going on.
Revenue came in about $150,000 lower than I estimated, but still grew from the year ago period.
July processing numbers were the highest in company history, so I'd expect Q3 and Q4 to be very good. Surprised the stock got clipped 15-20%, but that's life with micro-caps.
I can't ever recall investing in one undervalued company where somebody wasn't griping about management. Fact is, the management here has created a lot of shareholder value over the last 2 years. On the surface their stock awards may look excessive, until you realize they don't vest until 2025. And if any executive leaves the company before that, he forfeits his shares.
My suspicion is they are positioning the company to be sold, in which case the stock awards vest immediately and will reduce the premium shareholders would have normally received. So that is the drawback.
Those figures are entirely misleading. The majority of that compensation was stock awards that have a vesting period of 10 years.
Shareholder lawsuits for fiduciary breaches are common, and typically end up getting thrown out in court. I didn't mention it because there's nothing to mention. It's a non-event.
Update:
Q2 numbers released last week continue to demonstrate the company is on a path of increasing revenue and profitability. I still believe management is being too conservative with 2015 guidance as the company is already at $3.6m in net income for the first half of the year, but is only guiding for $6-7m for the entire year. The second half of the year is traditionally the strongest. I'm estimating net income of more like $8-9m for 2015. Further, I continue to see considerable tailwinds into 2016 as new initiatives in new markets take hold. The company continues to generate impressive free cash flow, and as a result, increased its share buyback program by over $5m. Additionally, M&A in the payments space continues to expand, and I wouldn't be surprised if the company is taken out by a larger player in the industry.
Since I've followed the company, I've been happy with management. I can't really speak to their tenure previous to early 2014. But as long as I've followed the company, they've done what they said they would do.
No, and the COO's 10b5-1 plan was discussed in previous articles.
I wasn't a shareholder in 2013 so I don't have first-hand specifics, but I did ask the company about it several months ago and they said the downturn was due to lower transaction volumes in echeck processing in the first three Q's of 2013. The volume was replaced in late Q3 of 2013.
In terms of 2015 EBITDA, I'd say ~$4m. 2nd half of the year is definitely the strongest, but that estimate is not factoring in a lot of contribution from the Akimbo acquisition...because I have no clue how profitable that will be.
Nice write-up. Carl has really done a great job here and I feel confident with him behind the controls. They report earnings next week and I'm looking for a raise in full-year guidance.
I would guess pretty soon. I was told by the company a few weeks ago they would do the reverse split once they had verbal approval from the Nasdaq. The r/s was done last week, so the listing has to be close.