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MIND C.T.I., Ltd. Message Board

  • siddharthdhami siddharthdhami Mar 6, 2013 1:55 PM Flag

    Is Mr. Market valuing MNDO correctly?

    How much is MNDO's business worth? For $20 million ($40 million market cap minus $20 million cash) you are buying a business that generates $4-$5 million in annual FCF and a recurring revenue base. This means an ex-cash FCF yield of 20-25%!

    So board - What am I missing?

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    • Perhaps I can introduce another idea....

      From a pure fundamentals standpoint, yes, the market is wrong.

      However, from pure fundamentals standpoint, the market has been wrong 99% of the time when it comes to MNDO and Mind CTI -- perhaps never more so than when the company's per share price sunk to $0.65 per share, giving a valuation of somewhere in the range of $12.5 million for a company that since 2003 has thrown of several million dollars per year in dividend and has had ample cash reserves.

      Rolling with the $0.65 per share price, I am no longer expecting that the market understands -- or even cares -- about Mind CTI and its equity. In fact, I am more on the other side on the fence where I am taking a Buffett-like view and saying that the more the market is wrong, the cheaper MNDO is, and as long as it continues to throw of dividend payments at the pace that it has done to date, then it is hard to complain.

      You can rationally argue that the market is wrong by looking at fundamentals such as FCF, but until such time that Mind CTI begins growing its top-line, you can also argue that the market is right -- assuming that there is a way to achieve more than +10% ROE, something that I believe most investors fool themselves into thinking.

      The idea of investing in a sub $100 million micro-micro-cap company with the expectation of a regular +10% yield is simply not what most investors look for. In fact, to the extend that someone is chasing that dividend yield, I think they look for large companies such as, say, utilities, where they -- right or wrong -- can get some level of assurance that they can't get from a company such as Mind CTI.

      The formula for spectacular top-line growth is not nuclear physics: You invest in sales, marketing, and R&D or you invest in mergers and acquisitions, praying (and a prayer it is -- always) that you will get a return. The more growth you want, the more you invest, and the more you risk.

      ... Continued ...

      • 2 Replies to perajacobsen
      • An interesting analysis. I would suggest the following counterpoints:

        - MNDO management, and specifically Monica, tend to lean toward "do not lose" rather than "go for the win". I am suspect on her willingness, and subsequently the rest of management which reliably follow her lead, to take the risk necessary to significantly grow the top line through internal growth. The financial means are there. The strategic direction is not. There is little to no marketing, due to the elimination of the marketing department. Product direction is lead by opportunities signed. What you have is opportunity based selling and opportunity based product development. They have one guy hunting opportunities in North America, and that along with the Israel sales team members who work the rest of the world is the gate for such internal growth.

        - MNDO has been spotty on acquisitions. Sentori was an important contributor, but mostly because of that key sales resource they picked up. I believe they replaced the Sentori technology with their core product.

        I would suggest that what you see is what you get with MNDO. They do acquire a few new clients each year, and that seems to a little more than balance out the old maintenance contracts they lose as old clients move on. They know how to produce this level of revenue reliably, and that is what they will continue to do.

        If you are in at a good price, and you enjoy the return of the dividend year-to-year, the you are making money. Maybe MNDO would not weather a downturn as well as a major utility, and there are periods of low volume where you would have difficulty getting your investment out, but within those constraints you can get a good return.

        It is what it is.

      • Continued....

        And therein lies the rub....

        Should Mind CTI's management and Board of Directors wish to accelerate sales, they must (1) take a risk and (2) reduce the dividend (one way or another,) something which would, I am guessing, lead to a near-immediate drop in the per share price unless orchestrated very carefully from a PR standpoint (needless to say PR is not exactly Mind CTI's greatest strength.)

        To my mind, the answer is to grow the top-line in a measured way, minimizing the risk and the cash outlay, so as to protect the dividend (and, therefore, the capitalization.) This could be through a combination of some sort, but it would need to be a sure-fire, fire-sale kind of things, and those a few and far between.

        But, of course, that ain't sexy, and, since price increase requires market-participation, the return to some balanced fundamentals-to-capitalization may be a ways of.

        I genuinely think that this sort of approach is exactly what the company's Board of Directors and management team wants to take. However, unfortunately, we are now finding ourselves in a situation where the high-margin business is going away, and, so, the company has to focus its attention on replacing this business with something else (and current market logic dictates that the replacement for high margin is high revenue with lower margin) in order to -- again -- protect the dividend and the capitalization.

        Only once the high-margin business is replaced, can new market-capitalization increasing growth kick in.

        Personally, I think the challenge of protecting the dividend without running over the cliff because of expenses is a significant one, requiring the company's full attention. Although anyone can pontificate on how to do that, only a select few of them could actually handle such challenge.

        ... Continued ...

    • siddharthdhami, you asked, "Is Mr. Market valuing MNDO correctly?" In my opinion, the simple answer is "No". For starters, Mind CTI has $19.4 million in cash and no debt. As you point out in your post, the business generates $4-5 million in annual FCF. If the company were to use its $19.4 million cash pile to buy back its own shares at today's closing price of $2.26, it could buy back 45% of the outstanding shares. Also, after buying back those shares, it could suspend the dividend, and use its annual FCF to buy back about 20% of the remaining shares annually. If it did so, it would end up buying back all of the remaining shares in only 5 years or so, and the share price would rise to a very large number. (I'm oversimplifying this a bit. Obviously, if the company used its cash to buy back its own shares as I've described, the share price would rise, and the company would then be able to buy back fewer shares in each successive year with its $4-5 million in FCF. But, I still think my theoretical exercise is worthwhile, because it illustrates how the company could easily boost its share price if it chose to do so. It also suggests the current share price undervalues the real economic value of the shares.)
      CEO Monica Iancu understands Mind CTI's business better than anybody, which is probably why she owns 20.5% of the outstanding shares, as of April 2012. She is well aware than the company is not only cash-rich, it also generates prodigious amounts of cash.
      So, as for your last question, "What am I missing?", I would answer you that Mr. Market is missing the fact that MNDO shares are grossly mispriced. But, you apparently have a sharp eye for value, because you noticed that the valuation assigned to MNDO by Mr. Market makes no sense.
      So, that begs the question: If the shares are mispriced, then how much are they really worth, ite, what is the economic value of the company? IMO, a 6-8% dividend yield would probably be appropriate for this company.

      Sentiment: Strong Buy

    • Sid,

      That's a good question.

      It is also a very complicated question, and an answer involves a lot of factors beyond FCF.

      I am assuming that your question will prompt some answers from the regulars on this board, so let me, for now, just interject that your FCF picture, of you will, actually can be painted even more vivid if you consider that the annual per share price turbulence for MNDO has tended to cast about the market capitalization (while, of course, the cash position has been relatively fixed.))

      The trailing 52 weeks low on the per share price, for instance, is $1.64, implying a market capitalization of $30 million, effectively shifting your computation by 25% -- or if you will, thickening the plot.

      Best,

      pajacobsen

    • Is this not an example of a dollar bill selling for, well, substantially less than a dollar?

 
MNDO
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