3Pea: Strong Guidance, Uplisting, Should Propel Shares Higher

Summary

• Fourth quarter results continued to show significant top line growth and continued bottom line profitability.
• Management's guidance for 2018 calls for growth to meet or exceed the growth experienced in 2017.
• During the first quarter, the company began taking steps to meet the various requirements to apply for uplisting to a national exchange.
• The company has recently added several key executives from larger competitors.
• Despite a recent increase in share price, the company is still valued attractively compared to industry peers.

Back in November, I wrote about why I was accumulating 3Pea International (TPNL). And the stock is up over 80% subsequent to my analysis. The recent increase in share price has been for good reason: Management has executed flawlessly. Growth has continued to accelerate, profitability has increased (despite investing in new hires to support further growth), and according to management, the best is yet to come in 2018.

For readers unfamiliar with the company, 3Pea International designs and develops payment solutions, prepaid card programs, and processing services under the PaySign brand name for corporate, consumer, and government applications. The company offers various services, including transaction processing, cardholder enrollment, value loading, cardholder account management, reporting, and customer service.

It also develops prepaid card programs for healthcare reimbursement payments, pharmaceutical co-pay assistance, corporate expense and per diem payments, and donor payments for source plasma and automobile dealership incentives, as well as payroll cards, general purpose re-loadable cards, travel cards, and loyalty rewards cards for the hospitality industry.

Its principal target markets for processing services comprise prepaid card issuers, retail and private-label issuers, small third-party processors, and small and mid-size financial institutions in the United States and internationally.

Last week the company announced fourth quarter and year-end results. Revenues in the fourth quarter 2017 increased 51% to $4.6m. Net income increased 7% to $537,000. The lower growth in the bottom line number is attributable to the company continuing to add administrative staff, invest in infrastructure, and build out various departments to support growth.

Revenues for the year ended December 31, 2017 were $15,234,091, an increase of $4,817,419 compared to the year ended December 31, 2016. The increase in revenue of approximately 46% was primarily due to an increase in the number of new corporate incentive prepaid card products and growth within existing card products.

Gross profit in 2017 increased to $6.7 million, or 44.0% of total revenues, compared to $4.5 million, or 43.6% of total revenues in 2016. The Company expects gross profit margins will improve in 2018.

Net income in 2017 was $1.8 million, or $0.04 per diluted share, compared to net income of $1.4 million, or $0.03 per share in 2016.

The Company also provided a shareholder update:

In 2018, the Company’s revenue focus will be to increase our footprint in our existing markets, expand our product and services offerings to existing cardholders, while aggressively targeting new, high margin business in new markets and geographies. Recent investments in sales and marketing have resulted in the most robust sales pipeline in the company’s history. For 2018, the Company believes it will experience growth rates comparable to, or better than, those experienced in 2017 as a result of growth in our existing card products and the expected addition of new card products in various market verticals. The Company expects gross profit margins to see improvement in 2018. As of December 31, 2017, the Company had over 1,550,000 PaySign Cardholders participating in 205 card products and continues to increase the number of card products in its portfolio.

In the first quarter of 2018, The Company has begun taking the necessary steps to meet the various requirements to apply for uplisting to a national exchange.

Commenting on the results, Mark Newcomer, CEO, stated:

We are very pleased with our 2017 results. We recorded record revenue, increased our cardholder base significantly, and increased our net profits. We are executing on our strategy focused on expanding both the PaySign brand and our cardholder base in existing markets as we continue to build our sales team. In 2017, there were over 1,550,000 PaySign cardholders nationwide. We are extremely optimistic as we continue to experience a robust sales pipeline in both new and existing markets.

The company has also been aggressively adding new employees over the past several months. Many of these employees have been pried away from some much larger and more established payment companies. It's a testament to 3Pea's potential that these employees have left the relative safety of previous positions to join what is currently a tiny company. Some of these recent hires include:

Joan Herman - Chief Operating Officer. Previous: Senior Vice President, Payments Division, Sunrise Bank. Served as a Director at Heartland Payment Systems, which was acquired by Global Payments (GPN) in 2015 for $4.3 Billion.

Al Negron - Senior Vice President Business Development (Healthcare Vertical). Previous: PSKW (ConnectiveRx). Consulted with some of the most successful brand launch teams and product manufacturers including Alcon, Allergan, Eli Lilly, Novartis, Mylan and Pfizer.

Mark Jacobs - Sales Director. Previous: Blackhawk Network (HAWK); currently being acquired by Silver Lake for $3.5 Billion. Previous: Euronet Worldwide (EEFT). Veteran of the prepaid and incentives industry with over 18 years’ experience with achievements in revenue growth, market expansion and new product launches for high-profile clients, including: AAA, Ace Cash, Alcon, Cox Communications, The Hershey Company, QuikTrip, Rent-A-Center and SBC Communications.

Eric Trudeau - Chief Compliance Officer. Previous: Director of Card Operations & Risk Management, Global Cash Card. Previous: Sunrise Bank. Veteran of the prepaid industry with over twenty years’ experience. Vast knowledge of regulatory issues and compliance experience.

Leslie Remenek - Sales Director. Previous: Hawk Incentives, a Blackhawk Network business. More than 25 years of client leadership experience and achievements in revenue growth, market expansion, and brand recognition for high-profile clients including Eli Lilly and Company, Siemens USA, and Bayer Corporation.

Dennis DiVenuta, JD - Executive Vice President Strategy and Corporate Development. Attorney with 40 years of experience in healthcare, DiVenuta has provided employers and clients with legal counsel and strategic guidance in the deployment of a multitude of largely technology based solutions.

When I first wrote about this company last year, my biggest concern was what the growth rate would look like in 2018. When I gave my 12-month $1.50 price target back in November, I was only anticipating a growth rate of about 10-20% in 2018. In fact, my exact wording was:

My current 12-month price target for the stock is $1.50, roughly 150% higher than current levels. This is only assuming a growth rate of 10-20% in 2018, which is well below the current trajectory. As far as potential near-term catalysts, I am hopeful to see an announcement of a Nasdaq listing. But even if an uplisting is not in the cards, management continues to deliver exceptional results, and eventually, the fundamentals will give way to shareholder value.

With the company now guiding for revenue growth of 45%+ in 2018 and pursuing an uplisting to a national exchange, it's easy to see why I am increasing my target price. Based on current guidance, I'd expect 2018 revenue to be in the $22m range. I'd also expect EBITDA in the $4-5m range. Companies in this industry tend to receive higher multiples on revenue and EBITDA due to the recurring nature of the revenue and high margins.

The average premium on revenue is around 4x and the average EV/EBITDA is around 20x. Companies like Green Dot (GDOT) and Global Payments (GPN) enjoy these premiums despite growth rates that are less than what 3Pea is experiencing. 3Pea is also in a somewhat unique position because many of the smaller companies in this space like Payment Data Systems (PYDS) and JetPay (JTPY) are currently unprofitable.

While 3Pea's stock has seen some substantial gains recently, I believe this trend will likely continue. 2018 is shaping up to be a great year for 3Pea, and with an uplisting to a national exchange on the horizon, it should give way to further gains as more investors become aware of this opportunity. I am increasing my year-end price target to $2.00 from $1.50, roughly 70% higher than current prices near $1.15. This better aligns the company with average industry multiples, despite the fact 3Pea is growing significantly higher than industry averages.

I obviously liked this opportunity better when the stock was at lower valuations, but still think there is attractive upside potential from current levels. In fact, I'd say there is probably less risk at current prices than there was a few months ago simply because we have better clarity about the future. The company positioning to get the stock on a major exchange should provide bid support under the stock for the foreseeable future.

That said, you never get hit by the train you see coming. Investing in tiny companies is inherently risky and one should only invest in accordance with their own risk tolerance and investment goals. Smaller companies have less margin for error than their larger counterparts, and predicting financial results is often more difficult.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long TPNL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not a financial advisor. You should consult your own financial advisor before acting on recommendations to consider its suitability for your investment circumstances.