1/22/2011

Deep Value Opportunity in the economically favorable business of Bartering

ITEX CORP (ITEX.OB)

Price 4.50

ITEX provides business services that enable member business to trade goods and services without exchanging cash. ITEX administers the marketplace and is a third party record keeper for its members. A network of franchises, independent brokers and corporate owned offices serves this cashless member community.

Business can buy and sell to each other and no cash changes hands. The potential benefits to the ~ 28 million small businesses in the USA are profound. Members come to ITEX because they want new customers or maybe monetize unproductive assets with needed services or products. A small business could exchange slow moving or obsolete items for advertising or website design as an example from any one of the 24,000 active ITEX members. The possibilities for cashless exchanges and the associated benefits are profound and endless. Small businesses leverage and conserve their cash by using ITEX corp. ITEX is registered to sell franchises in all 50 states. About 8% of their business is in Canada. Their product is the ITEX dollar.

Use ITEX dollars to purchase advertising, printing, marketing services, accounting, accommodations, legal services, website design, vacations, employee incentives, medical and dental services and much more. With ITEX, you no longer have to trade with one other business. As a General Contractor, you pay the Dentist (with ITEX dollars), using your trade dollars - the Dentist prints their business forms. The printer calls the Florist to send his girlfriend flowers and the Florist uses their Itex Trade dollars to have a new deck installed on their home - by you! For a concept that goes way back in time”

Insiders hold 33.61%  and continues to be supported by a recent strong diversified group of insider buying. The shareholder base consist of long term proven value investors and a small group of value oriented institutions (4.40%). Kennedy Capital Management holds 4.7%

Most recent insider activity

Sardar Biglari, (Steak and Shake, Western Sizzler, Friendly’s) made a tender offer back in 2007 recognizing the huge potential of this tiny company’s concept, execution and platform. Some shares were tendered but  not in the numbers desired. Managment was not interested in working with or selling to Biglar.
Financial data to support the discounted valuation;

The current dividend yield is 3.50% supported by a  large growing cash balance (5.4 mill or 33% of market value) and strong free cash flow and FCF margins.

Per Share Value

Price = 4.50; EV = 3.68; Cash = 1.508; AR = .5318; Total Liabilities = .697; Sales = 4.88; Book Value = 4.19; FCF = .6902

Market Value = 16,280,000 ; EV = $13,208,000; Cash = 5,399,000; AR = 1,904,000; Total Liabilities = 2,497,000

Recent Annual Sales = 17.11 million with YOY Quarterly Revenue change of 4.80%

The Gross Margin % for the TTM was reported at 37.40%. This is a nice improvement relative to the past 5 years. 2006 29.20%, 2007 31.80%, 2008 35.30%, 2009 36.30%, TTM 37.40%

FCF/Sales; consistent and strong FCF/Sales: TTM 13.94%; 2010 14.59%; 2009 16.67%; 2008 14.17%, 2007 13.70%, 2006 12.17%

A company that can generate this kind of consistent FCF margins over many years has a great business
model. The model at ITEX is scalable so the potential future value is extremely promising.

TTM after tax return on invested capital was only 5.73%. This was significantly off the 2006 39.49% and 2007 36.47% return. The growing SGA as a percentage of sales and the larger asset base has slowed down the spectacular 06 and 07 ROIC. But future improvement in the efficient use of use of assets will help push ROIC to its full potential.

Stock performance was 21.31% for the prior 12 months but only 5.51% (3 years) and 8.75% (5 Years).

The capital structure is clean. Shares outstanding were reduced from the 2006 balance, 2010 3,581,000; 2009 3,577,000; 2008 3,565,000 ; 2007 3,620,600 2006 3,724,600. No long term debt.

EV/FCF for the TTM = 5.52

EV/Avg FCF from 2006 = 5.81

EV/S = .77

Long ITEX.OB

6 comments:

reader in daly city said...

Hi. Long time reader first time poster.

I start companies in silicon valley and thought about this one a few years ago....but then I thought I read a law that said you can't barter using a fake currency bc it is considered tax evasion.. I believe there was a courtcase in texas that took down a bartering community for this reason.

Curious if this is somehow different.

ShadowStock said...

Thanks for stopping by!

The company requires everyone’s Tax ID! ITEX is a 100% legitimate business.

Watch the presentations in the clips below.

The company is technology driven. Technology helps the company manage growth and add services to members. There has been a struggle for board membership and critical questions about management’s allocation of capital. David Polonitza and others associated have a greater than 5% ownership and have been pushing for change. Others have also attempted to force shareholder friendly change. I have no connection with anyone pushing for change. I just like the stock and this blog is for the generation of value based ideas.

ITEX provides a nice dividend. If the company leverages their existing membership base or add members to their scalable technology the future looks promising, IMO. I purchased shares years ago and added additional shares during 2010.

Good luck
John

http://www.itex.com/aboutus/videos.asp?cat_id=C&video_id=2

http://www.itex.com/aboutus/videos.asp?cat_id=C&video_id=1

Anonymous said...

John,

This company has some sleazy practices. Mainly counting fiat "IDEX dollars" as actual revenue on the 10-Ks. This is a huge red flag for any investor. I have done the DD on this in the past and it looks like a scam.

ShadowStock said...

That doesn’t sound encouraging as a shareholder.

But they have been building cash and keeping debt and share count consistent. Cash moved from a 2006 balance of 314,000 to the current 5,169,000. Total debt during this time period was 2,695,000 at the end of 2006 and now sits at 2,749,000. Share count was reduced during from 3,724,600 2006 fully diluted balance to 3,581,000 TTM.

My dividend wasn’t in ITEX dollars. Sounds like they could use and benefit with stronger financial leadership and audit firm.

Thanks for the input!

Good luck
John

Anonymous said...

hi john -

nice ideas. i appreciated the portfolio section of your old blog. any way you can restart that section - that way we can see which ideas you particularly deem worthy of purchase?

ShadowStock said...

Hi,

“My 2011 objective is simple; Provide a continuous flow of the best overlooked value based ideas.”

I was thinking of creating more of a value journal and let readers build their own portfolio. But if you want I can begin tracking the ideas posted. Give me a few days and I will create a new “portfolio page” and start tracking.

best
John