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Avram Fisher, Founder & Portfolio Manager of Long Cast Advisers, is a former equity analyst at CSFB and BMO covering industrials and business services. He has prior experience in private equity; as a corporate governance analyst; as a writer; reporter and private investigator; and as a lifeguard and busboy (I still clear plates when my kids don't). This blog is an open book of ideas about patient investing and about starting up a small-cap focused RIA. It is part decision-diary, part investment observations and part general musings. Nothing on this blog is a solicitation for business nor a recommendation to buy or sell securities. It is simply a way to organize and share thoughts with an expanding audience of independent, patient and talented small cap investors. www.longcastadvisers.com

Wednesday, July 16, 2014

OTCM: Commanding Marketshare and Scaleable Growth at 9x EBITDA

Here is a company with 14M shares authorized and 10.8M outstanding trading at $12.50 ($10 when I started this) for a $135M market cap.

Over the last three years, revenues have grown 9% CAGR,  EBITDA 17% CAGR and shareholder equity 26% CAGR without debt or acquisitions. The company has more than $15M in net cash. According to Factset, there are 25 US listed companies with metrics as good or better than these trading for less than 10x EV / EBITDA.

Now throw in the fact that each year over the last 3, more than 70% of EBITDA has rolled down to FCF (before accounting for the ~2% div yield), and yes, how many companies like this even pay a dividend?

The universe has shrunk to three companies.

You have heard of two of them: AAPL and QCOR. The third one is OTCM, and while you may not have heard of it, if you're an investor, it sits right under your nose.

OTCM is a financial services company that enables companies to list on the over the counter (OTC) market, brokers / dealers to make quotes on the OTC market and investors to get information on the OTC market. Also called the "bulletin board" market or traditionally the "pink sheet" market, the OTC maret is a decentralized marketplace where quotes and trades are negotiated between broker / dealers.

In the minds of many institutional investors, the BB / OTC market is viewed as a backwater market of mis-priced pink sheets. As in Star Wars' Mos Eisley, it is viewed as "a wretched hive of scum and villainy."

To carry that analogy a bit further, OTCM is "The Cantina" at Mos Eisely. That is the place where pilots and traders meet, and where Luke and Obie Wan meet Han Solo. Let me emphasize. OTMC is "THE" cantina. According to its annual report, since 2009, "our share of the quotes of securities on our marketplaces has risen from 74% to over 99%."

If you want to quote, trade or know about unlisted securities, the OTCM trading system is the only show in town.

The company actually offers three primary services ...

Issuer services (26% of 2013 revs) >> provides companies that want to be public but don't met the NASDAQ, NYSE or FINRA thresholds the ability to trade as a public company
Trading services (32%) >> allows broker / dealers to access quotes and trade unlisted securities, via its electronic trading platform ("OTC Link ATS")
Market data services (42%) >> provides news, quotes, data and statistics to Bloomberg, Thomson and other agencies that consolidate and report financial information

... and a fourth "Corporate Services" that I view as ancillary to issuer services that basically upsells outsourced IR, reporting and communications functions to its listed clients.

This company is on track to do $36M revenues and $12M EBITDA in 2014, implying annual growth of 7% and 20% for the year. A price increase in the company's "Market Data Services" should accelerate revenue and profit growth in 2014 and 2015. While the company is investing in its technology, it still throws off cash and pays a dividend. It is a scaleable business.

It is also an "owner / operator" business. Decisions are made by a principal or owner, as opposed to an agent or hired manager. The emphasis is on creating long term value and long term rewards not a short term mentality of a hired manager. And the CEO, not surprisingly, is the largest shareholder. [As a side note, there are two classes of securities; the bulk are Class A but there are 130,000 Class C shares that convert at $19.62 / share to Class A shares. There are no other classes of equity in the capital structure]. 

The company has no debt and $1.60 / share in net cash. And despite being a growth company with a scaleable business, it is trading at only 9x EV / EBITDA (using annualized 1Q EBITDA). And finally, there is - at latest check - no institutional ownership.

The biggest risk to the company - it would obviate its entire MO - is FINRA QCF, which proposes to "create a Quotation Consolidation Facility (“QCF”) for OTC Equity Securities for regulatory and transparency purposes that would serve as a data consolidator for all quote data in the over-the-counter equity market; (2) delete the FINRA Rule 6500 Series, which governs the operation of the OTC Bulletin Board Service (“OTCBB”); and (3) modify the position charge from $6.00/security/month to $4.00/security/month." 

http://www.sec.gov/rules/sro/finra/2009/34-60999.pdf

The company will fight this tooth and nail. I am an owner and will share more as time permits.

2 comments:

  1. Any sense on the relative profit margins across the various business segments and how they have evolved over time? What do you forecast steady-state future margins will be?

    Thoughts on on-going dilution from stock options? Running at 1-2% per year which is very high, and there has been no leverage on the comp. expense as % of sales line.

    Do you foresee continued growth in the # of companies on the OTCQX/OTCQB (in a material way) or will growth in corp. services be driven by revenue/user?

    What are the 1-2 key questions you would want to ask mgmt?

    ReplyDelete
  2. how they've evolved over time is in the quarterly / annual results. what happens to margins will reflect demand for new listings, plus the volume / price of OTC link broker dealer service and the market data licenses. Both are susceptible to consolidation headwinds, but I think are unlikely to be replaced.

    so rare does one hear attention called to rising exec comp; if only more investors were focused on it! but when you dig into the P&L the gain in comp is mostly offset by decline in marketing exp, and revenues have grown so much faster than TOTAL expenses. i mean, over last two years ending 12/31/15 ...

    net revs from $33M to $49M, +50%
    total op expenses up from $25M to $31M, +20%
    and EPS from $0.51 to $0.91, exactly $0.20 / year

    ... so the rate of growth is slowing but it's still impressive.

    i own this b/c they have a unique and unusual property - it's essentially a payment platform at scale - and at scale it will generate cash flow. growth might occur as investments pay off over time in new venture related marketplaces or JOBS ACT listings - they are trying different ideas - but prob not from the "core" listing business.

    I can't predict the future but that's the framework of inputs I think about.

    if Coulson shows he's worth what he's getting paid and invests the capital wisely as he's done then returns will continue to grow, but not always at the same pace. i think the next dilution occurs with the series C at $19.62. that's a tradeoff I'm happy to make.

    thank you for reading ...

    ReplyDelete