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elanziv on MAIL Raises Guidance - Stock Should Really Trade Higher Michael, nice job covering this stock over time...
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Great Cash Flow, Good Balance Sheet and Low P/E Make Incredimail a Prime Target For An LBO
As someone who has been involved in analyzing, structuring, financing, and investing in Leveraged Buyouts (LBOs), I see IncrediMail (MAIL) as a prime candidate for an LBO. Given the high level of free-cash flow, combined with the incredibly low valuation currently attributed to the company, (and the current low interest rate environment), an LBO of incredimail could be a highly attractive transaction.
Background on LBOs
Leveraged buyouts enable private equity investors and entrepreneurial management teams to re-capitalize and take purchase companies whose market valuations are not properly reflecting the potential cash flows and business value of the enterprise.
The idea behind an LBO is for the purchasers of the company (often times including top-management ) to use excess cash on the balance sheet and ongoing free-cash-flow generation to help fund the purchase of the company, often using debt as a means finance the transaction.
Companies with the following characteristics make for more attractive leverage buyout targets:
Incredimail matches all of these criterion with flying colors: MAIL currently generates approximately $10-12mm of annual free cash flow, has over $30mm of cash on the balance sheet and no debt, and trades at an enterprise-value multiple of less than 5X.
The strategy of buying an asset using leverage (real estate is a classic example) is to use the cash-flow generated by the asset to comfortably pay interest and principal payments and still have cash left over. If financed correctly, the buyers of a highly cash-generative business can use a relatively small amount of up-front equity, but can end up owning all of the equity over time, greatly enhancing the actual returns on their equity investment. Incredimail is currently generating so much excess cash, that it could easily be acquired without a large upfront payment, and the purchasers could end up owning the whole business (by paying down the debt) over a relatively short timeframe.
Let’s take a look at the numbers.
1. Let’s assume that an acquirer paid a generous 25% premium to buy o MAIL (typical take-over premiums are 20-30% for public companies). Based on today’s close the price tag would be $10, or a market cap of $98mm.
2. MAIL currently has roughly $30mm of cash on the balance sheet. Let’s assume that $27mm of that cash could be used towards the purchase price, so the enterprise value, or actual price to buy the business, would be $71mm.
3. Ofer Adler, CEO, owns approx. 1.8mm shares, and in order for an LBO to work, he would remain CEO, and would take an active role in the transaction. His shares would be “rolled over”, and would not need to be acquired. So the purchase price is now $53mm.
4. A buyer could likely use $15-20mm in equity (cash) and $33-38mm in debt financing, equivalent to a very modest level of debt of 3-3.5X EBITDA.
5. Generally, banks or other sources of financing are willing to provide generous debt-financing for highly cash generative businesses. Even if banks demanded 7-8% interest rates on the debt financing (which seems quite high in today’s ultra-low rate environment), total interest expense on $35mm would be approx. $2.8mm.
6. So, after financing the transaction, there would still be about $8+mm of free-cash-flow per year to either pay down debt (and increase the owners’ equity stake) and/or to pay out dividends to the new owners (and management) of the company. In addition, as a private company, MAIL would likely save over $1mm of public-company expenses.
7. The new owners could eventually either re-IPO or sell the company when the time is right, or keep it private and continue to enjoy a very high level of cash flow.
In summary, a buyer could likely purchase Incredimail –a company generating $10-12mm in cash flow per year - - for roughly $15-20mm in equity, and likely pay down the debt used to finance the transaction in approximately 4 years.
There are three key elements to make such a transaction both feasible and highly profitable:
1. The sustainability of the cash flows - Incredimail does not even need to grow from current levels (though it certainly seems to have a solid growth trajectory), but does need to be able to sustain a level of cash flow generation similar to the current level. While it would seem that the current business model should continue to work, any potential acquirer would need to assess the longer term sustainability. This is true both in terms of the GOOG searc h revenue which has been the company's growth engine. And, sustainability is also tied to the company's ongoing ability to execute on simple and creative products
2. Management’s willingness to undertake such a transaction - With the CEO holding close to 20% of the stock, his agreement and active participation as ongoing CEO would be crucial.
3. Financing - while it seems to me that banks should be eager to provide financing to a company with the cash flow characteristics of Incredimail (and I have personally been involved in debt financings of companies with far less attractive cash flow metrics), banks have become more cautious over the past 6-12 months.
All in all, this is another indicator that MAIL is undervalued stock and a potential target for an LBO.
MAIL Raises Guidance - Stock Should Really Trade Higher
Let me review again why this stock should trade materially higher. These are all themes you have read here before:
1. $11M in profit = $1.22 per share of operating profit. At today's share price that is approximately a P/E of 6.5
2. $3.8MM dividend - Assuming the Israeli Tax Authority approves the dividend (a reasonable assumption), even if you bought the stock at $10 per share it would pay you 4% almost immediately. you can'd do that in T-bills today.
3. MAIL has approximately $3 per share of cash, net of the Dividend. That puts the effective P/E around 4X this years earnings. I think it should trade at at least 10X earnings with the growth MAIL is enjoying.
4. The comps - ANSW, which is a direct comparable, is trading at a FORWARD P/E of 20. I grant you that ANSW has one of the hottest web properties right now in wikianswers.com. Nonetheless, it does not explain the disparity between ANSW's 20X multiple and MAIL's 4X multiple on THIS YEAR'S earnings. MAIL's multiple on next years earnings is, of course, less than 4X.
5. Today is November 1 - Given Google's daily reporting of search revenue to partners, one could imagine that MAIL has seen the October numbers already and is comfortable with the Q4 CPCs that GOOG is showing and the rate of growth for Q4. This is true even though MAIL has not reported Q3 numbers yet.
6. MAIL has learned to manage the street - The Company has upped guidance in each of the last two quarters. I do not think they would have pushed the envelope to a point where they cannot exceed the current new guidance. Management, and specifically, CEO Ofer Adler, owns too much of the company to make that mistake.
One word of caution: I am not convinced that Yaron Adler has finished selling yet so if you see dips, it could be his selling his shares so look for buying opportunities.
i continue to be bullish on the stock and full disclosure: Long MAIL
Vocaltec: Cash and A Growing Business in Emerging Markets
I have recently accumulated a position in Vocaltec (VOCL) for the following reasons:
1. VOCL market cap is around $9MM and cash is approximately $9.5MM at a share price of $1.70. This means you get the revenues free, assuming that management is managing the burn rate effectively, which I think they are.
2. Ido Gur, the company's CEO purchased shares on the open market. Mr. Gur is an accomplished executive with lots of telecom experience from his days at ECI Telecom. I believe in his leadership and vision for the company.
3. The Company is focused on selling its VOIP boxes in the developing world such as Brazil and Nigeria. The stock market under appreciates the growth in these market segments today and makes more sense than the challenged western economies for a small company.
4. The core original VOIP technologist is the still with the company as CTO. As a venture investor, I can tell you that this is key for a turnaround.
5. VOCL has key channels such as IBM that provide leverage in the model.
I wish I had bought my large position back in May but I think this stock has legs.
Full Disclosure: Long VOCL, MAIL and Babylon
P.S. I was unable to retrieve the conference call transcript from the VOCL website to quote from it.
MAIL - Enough is Enough. I bought more
I wrote in the previous post:
The drop in the share price is, as far as i can tell, not based on fundamentals. I think it is based on further selling by Yaron Adler. Here is why i think that:
1. Volume in the stock is pretty high. This means someone is selling a lot. Yaron Adler started this process with around 1.25 million shares. He is the only one other than Ofer Adler with enough stock to sell in these volumes unless some big institution is unloading.
2. There seems to be a floor price of $7.50 on the sell order. Every time I try to buy at $7.50, it snaps up a bit. That was a pretty low floor to put in for someone who bought on the open market recently.
3. I checked with the company today and they are not in closed trading windows. So a board member can sell.
I know this is circumstantial and not conclusive but with a dividend coming after it works its way through the Israeli courts paying 40 cents a share and no negative news on the business that I can see, this is my only conclusion. So, as I said, today I bought even more MAIL.
Full Disclosure: Very Long MAIL
Incredimail - Buying Opportunity Because the Market Does Not Understand the Stock Sales
As MAIL's share price is off 20% since its peak and is off almost one dollar today, I think a little perspective is in order.
1. Yaron Adler has not been active of involved in the company for a long time. Despite being on the board, based on all the data I have collected he is not involved. As the stock price appreciated, Yaron had a chance to take cash off the table and further disassociate from the company and he did. Further, Yaron Adler is up for reeelection as a director at the next elections (end of year I believe). I would not expect to see him back on the board after the election.
2. Ofer Adler sold $3.6MM worth of stock or some 350,000 shares.Ofer Adler purchased double that amount of stock when the stock was in the two dollar range with cash out of his pocket ($2.1MM worth of cash). By taking roughly $3.5MM off the table he took approximately a $1.5MM profit on a bold move he made 6-12 months ago when he showed investors confidence in the company. He remains by far the largest shareholder with almost 19% of the company and is well incentivized to make the company successful for the long term.
3. Ofer is a smart guy. there is no way he would have sold the stock and replenished the out-of-pocket money he laid out if he did not believe the company was on target for its numbers. The company has a 12 month history of conservative projections and he is not going to mess up the long term trajectory for a $3MM stock sale. I believe that the hope of economic recovery has led to a stabilization in Google's CPCs and that MAIL's Hiyo IM product is beginning to scale.
All this leads me to believe that the Street has misjudged this and that this is another buying opportunity in MAIL.
Full Disclosure: Long MAIL
Incredimail (MAIL) Cracks the $10 Barrier - Where to from here?
The stock has moved in the last two weeks approximately 25%. Why?
1. The stock has begun to interest institutions, particularly in Israel since it is safely above $5 per share and the volumes have increased. Whereas at the beginning of 2009, MAIL traded about 10,000 shares on a good day, it's 3 month average trading volume is now 80,000 shares a day according to Yahoo Finance.
2. Investors have woken up the fact that there is almost $3 per share in cash in the company so the enterprise value is only $60MM and that the company is safely ahead of its revised projections of $9MM in operating income this year. MAIL did $5.6 in Operating income in the first half of 2009. That is a ~6X multiple for a company growing very rapidly and generating a lot of cash.
3. Incredimail has shown a willingness to pay a dividend. If they repeat the dividend of earlier this year of 50 cents per share that is still a 5% yield which is better than you can get in bonds or anywhere else.
4. Most importantly, I think investors believe that CPCs at GOOG have stabilized and will likely head north as we move into the 4th quarter and Christmas shopping season. The lower CPCs keep down earnings at MAIL and other Google partners. This also explains the almost 15% rise in Google's stock over the last 50 days.
5. The release of the 2.0 mail product announced last week, should both increase searches (as I assume it was designed with then new business model in mind) plus increase virtual item pack sales.
So where to from here? When i initially bought the stock, I had a $9 target in mind. After the revised earnings projections, I revised my thinking to $12 as a price target. I am now thinking that $15 is certainly within reach if the GOOG CPCs have in fact stabilized and institutions are on board and buying this tightly held stock.
There is also one wildcard here in my opinion (outside of the economy and a giant market fall): IACI. MAIL is a perfect (and accretive fit) for IAC's Smiley Central business. IACI can also afford to pay more for it since it has a better revenue split with GOOG.
Full Disclosure: Long MAIL