ITEX: An Overlooked Potential Beneficiary Of An Economic Slowdown Ripe For Acquisition By Financial Services Firm
Summary
- With a $6.55 million market cap, ITEX is the U.S.’s largest publicly traded barter exchange. Barter activity is countercyclical and likely to increase in an economic slowdown.
- ITEX currently holds $4.547 million in cash and cash equivalents ($2.71 per share) and has virtually no debt.
- Enterprise value at 2/28/20 was $2.015 million ($1.20 per share), 2.7 times ITEX’s trailing 12 month net income of $736,000.
- ITEX has a network of several thousand member businesses whose relationships could be leveraged into additional business for an acquiring bank or other financial services firm.
- There is a large, untapped addressable market for ITEX services, since relatively few small business owners are currently familiar with the benefits of barter.
A Likely Beneficiary of An Economic Slowdown
Given that the coronavirus will likely result in an economic slowdown, entailing higher rates of unemployment and an overall lessening of demand for labor, ITEX Corp. (OTCPK:ITEX) would be well positioned to benefit from these developments and reverse its long term trend of declining revenues.
As is the case with barter in general, ITEX's business is countercyclical. In booming economies, the volume of business done through ITEX tends to decline. Businesses become less focused on conserving cash, hotels have fewer vacancies, retailers' inventories turn over more quickly, and service professionals have less idle time to fill. Not surprisingly, when economic booms create new jobs, some individuals accept these jobs and reduce (or abandon) their online trading in the sorts of items offered by ITEX members. Thus, ITEX's revenues are likely to decline in strong economies and rise in slow economies.
- Assuming that S&P 500 returns are an appropriate indicator of economic strength, that has, indeed, been the case. Starting in ITEX's FYE 7/31/07 (the second full year following its acquisition of the BXI Exchange), the company's revenues have risen in both years that the S&P 500 fell (i.e. during the years ended August 1, 2008 and 2009).
- During the 11 years the S&P 500 rose (i.e. those ended August 1 of 2007, as well as of 2010-2019), ITEX's annual revenues declined 10 times (every year except 2010).
- In other words, ITEX's revenues have moved counter to the S&P 500 in 12 years out of the last 13, giving reason to believe that they will increase when the economy slows down. In the meantime, however, ITEX has continued to squeeze surprisingly strong operating profits from its declining revenues.
2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |
Revenues | $14.6 | $14.2 | $16.0 | $16.5 | $16.9 | $16.4 | $15.8 |
Operating Income | $1,341 | $1,505 | $1,501 | $1,027 | $1,674 | $1,103 | $1,110 |
S&P 500 @ 8/1 | 1287.15 | 1454.62 | 1281.47 | 1009.73 | 1087.28 | 1185.31 | 1403.45 |
2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |
Revenues | $14.8 | $13.5 | $12.0 | $11.1 | $10.2 | $9.7 | $8.9 |
Operating Income | $1,464 | $849 | $957 | $1,228 | $1,071 | $1,262 | $1,155 |
S&P 500 @ 8/1 | 1670.09 | 1961.53 | 2039.87 | 2170.95 | 2456.22 | 2901.5 | 2980.38 |
Revenues in $000,000's are shown for FYE 7/31 | |||||||
Operating Income in $000's are shown for FYE 7/31 | |||||||
2016 Operating Income does not include Goodwill impairment charge | |||||||
| Sources: ITEX financial data is available in annual reports from OTC Markets Group S&P 500 data is from Yahoo Finance | |||||||
Business Description
ITEX operates a members-only marketplace in which member businesses barter goods and services with each other via use of a virtual currency issued by ITEX ("ITEX dollars"). The IRS considers ITEX dollar sales to be equivalent to USD sales and ITEX dollar expenses to be equivalent to USD expenses.
The benefits of membership include:
- A non-cash means of buying a wide variety of goods and services from fellow members
- An effective online venue for attracting new customers (i.e. from among other members)
- A way to monetize unproductive assets, excessive inventory, or idle capacity
- Support from a network of independent brokers and franchisees throughout the U.S. (with lesser coverage in Canada)
ITEX membership is particularly valuable to businesses whose products and services entail low variable cost and/or involve wasting assets. Hotel capacity, for example, is a wasting asset in that failure to fully utilize it when available results in a permanent loss of revenue - as opposed to items that can be stored for however long it takes to sell them.
Membership may also be valuable to individuals participating in the sharing economy, including those who are unemployed, working part-time or pursuing “side hustles.”
ITEX's primary revenue sources are:
- Association fees - up to $30 per four-week period ($390 per year, partially in ITEX dollars)
- Transaction fees - typically 6% of each member's purchases and sales (a total of 12% per transaction)
Results for Quarter Ended 1/31/20
ITEX posted net income of $200,000 (12.6 cents per share) on revenues of $2,254,000 for the quarter ended 1/31/20. Net income and revenues were down 5.7% and 6.9%, respectively, on a year over year basis. Sequentially, these figures increased 77.0% and 6.7%, respectively.
ITEX’s held cash and cash equivalents of $4,547,000 ($2.71 per share) as of 1/31/20. For the six months ended 1/31/20, net cash provided by operating activities declined 1.5%, from $406,000 to $400,000.
Based on the asked price for ITEX stock at the 2/28/20 close, enterprise value at 2/28/20 was $2.015 million ($1.20 per share), 2.7 times ITEX’s trailing 12 month net income of $736,000.
Favorable Valuation Metrics
By virtually any measure of value, ITEX stock is astonishingly cheap.
At a 2/28/20 closing asked price of $3.90 and 1,678,268 shares outstanding, its market cap was $6.55 million. Based on trailing 12 month earnings of $736,000, this works out to a P/E of 8.9x, significantly below the S&P 500 P/E median multiple of 14.8x.
Because ITEX is cash flow positive year round and currently maintains a cash balance of $4.55 million, however, its P/E of 8.9x is misleadingly high. Stripping ITEX of this cash allows us to assess the market-implied value of its underlying operations. Subtracting this $4.55 million from a $6.55 market cap (and adding back $.02 million in long term liabilities) gives us the market’s current pricing of these operations –i.e. an enterprise value (EV) of $2.02 million. Substituting EV for market cap in calculating P/E results in a ratio of 2.7x rather than 8.9x.
But even a 2.7x ratio is misleadingly high, as it fails to account for ITEX’s deferred tax asset of $955 thousand. During the most recent quarter, $52,000 of this asset was applied in reducing the cash required to pay off the $59,000 in tax expense incurred by ITEX. At the company’s current level of profitability and usage of this asset, the bulk of its tax expense could be offset in this manner for the next four to five years.
It is also appropriate to use EV rather than market cap in considering the Price/Sales ratio of ITEX’s operations. This figure is .23x for the trailing twelve months, far below the S&P 500 median of 1.47x.
Looking at ITEX’s balance sheet, we see that the stock is trading at just 1.2 times tangible book value (based on market cap). This is also well below the S&P 500 median of 2.77x.
Not to be overlooked is ITEX’s solid record of returning cash to shareholders. Not only has it been paying 20 cents per year in dividends (a 5.1% yield), but it also implemented significant stock buybacks in 2015 ($3 million) and 2019 ($1.8 million).
A Potential Takeover Candidate
ITEX is a potential takeover candidate despite the probable loss of deferred tax assets and other costs that a change of control would entail - partly because of its attractive value metrics, but also due to possible synergies with a bank or other financial services business.
ITEX is particularly ripe for a takeover, in view of its network that numbers several thousand members. As far as I can tell, they don't publicly disclose the exact number anymore, but you can get an idea of its size from the Member Directory, which had over 20,000 listings in late 2019 (some members having more than one listing, however).
Given that the great majority of ITEX's members are small businesses, significant synergies might be achievable with the right bank. ITEX services overlap the non-lending functions of traditional banks in such areas as checking, acceptance of deposits, and recordkeeping - but with a virtual currency rather than U.S. dollars.
ITEX has been highly profitable for well over a decade, testament to the market need for ITEX dollars as a medium of exchange. Thousands of ITEX members in dozens of different industries have found an ongoing need to transact business in ITEX dollars.
This being the case, it seems likely that greater customer convenience, as well as operational efficiencies, could be achieved by combining traditional U.S. dollar banking with ITEX virtual currency banking under a single corporate roof.
More interesting, however, are the business development possibilities that might be achieved through cross-selling of services. An acquiring bank would have an excellent opportunity to leverage relationships with thousands of current ITEX members (mostly small businesses) into profitable banking relationships.
Novantas research indicates that:
All told, the average lifetime value of a consumer banking customer ranges between $2,000 and $4,000. For a small business banking relationship, the CLV [Customer Lifetime Value] total can approach $10,000 (especially when the bank is able to serve both the enterprise and the household financial needs of the proprietor).
Moreover, affiliation with a bank would be helpful in opening the door for ITEX to provide its services to the bank's existing small business customers.
Particularly intriguing is the potential for that bank to bundle its products in creative ways with ITEX dollars and/or the goods and services offered by ITEX members. Possible promotions might involve:
- Paying bonus interest on savings accounts with ITEX dollars
- Giving bonus ITEX dollars to customers who reach specified activity levels in terms of banking business and/or buying from ITEX member businesses
Bank customers who do not sell through ITEX might be allowed to earn or purchase ITEX dollars if they pay a discounted rate for Association fees (which would be waived as appropriate).
A Large, Untapped Addressable Market
Generally speaking, ITEX’s addressable market could conceivably include the majority of small businesses and individuals who have a high margin product or service to sell – and who desire to sell more of it. Relatively few people are currently familiar with the benefits of barter, though, and therein is a huge opportunity.
ITEX’s consistent profitability has proven the viability of the barter exchange concept, despite the inhospitably strong economy of the past ten years or so.
Bright Prospects Priced For Failure
In a perfectly efficient stock market, businesses priced at 2.7 times trailing 12 month earnings would typically be facing some sort of imminent existential threat. As of last Friday, when ITEX released its quarterly report, however, no such threats were noted. I believe that this apparent undervaluation of ITEX shares is largely attributable to the obscurity that comes from being a sub-$10 million market cap company, as well as from management's focus on profitability, rather than on promoting the stock. (ITEX's quarterly and annual reports haven't been updated on Seeking Alpha since June 2017.)
ITEX's revenues have been declining since 2010, which could conceivably become an existential threat at some point. But its most recent quarterly figures were encouraging on this score, as the rate of this decline slowed down a bit - to 6.9% YOY, while sequential revenues increased 6.7%.
To a great extent, the decade-long revenue decline may be attributed to the unfavorable effect of a consistently booming economy upon countercyclical businesses (such as ITEX). Any economic slowdown resulting from the coronavirus, however, would likely provide a boost to the company's revenues and profitability.
ITEX provides a service that could logically complement the offerings of other companies in the financial services industry, functioning as a door opener for these businesses' salespeople. Its extensive member network could also prove valuable to an acquirer.
Risks Faced By ITEX Stockholders
There are a variety of risks associated with owning ITEX stock. Among them are:
- the possibility that revenues will continue to decline
- reliance upon the continued efforts of its broker network
- reliance on a small number of key employees, especially the CEO, Steven White, who is in his early 60s
- the possibility that new or existing competitors in the e-commerce space will lure business away from ITEX and/or cause its profit margins to decline
- the possibility that new regulations adverse to the barter industry will be adopted
Consider all these plus the illiquid nature of ITEX stock, which is likely to result in large losses if investors seek to sell their positions quickly.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
This article was written by
Analyst’s Disclosure: I am/we are long ITEX. 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.
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Comments (22)
They have disappeared from otcmarkets.
If I recall they are late on an annual meeting/proxy.
www.itex.com/...Because it gives the exact dates that individual members joined the ITEX network, It can be valuable to investors looking for clues re: how ITEX's recruitment efforts are going, as well as being a potential indicator of overall revenues. I did my own rough sampling of this data for over 1000 members, comparing 2020 join figures for February, March & April with corresponding joins for 2019 who are still members. Based on this analysis, I believe that the current economic slowdown has probably been beneficial to ITEX's member recruitment and overall revenues for the company's soon-to-be-reported-upon quarter ended 4/30/20.
Enterprise Value/TTM Operating Income = 1.3XPretty cheap for a consistently profitable business.
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During the six month period ended January 31, 2020, 3000 shares of common stock were repurchased.
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