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To
OTC Journal Members:
My staff and I have been involved
in the small and microcap market for nearly 20 years. Over the course of
20 years you develop a network of acquaintances. Some good, some not so
good.
In February of 2003, one of those
acquaintances called me and shared an idea. This individual manages a hedge
fund with over $100 million in assets. The fund specializes in small and
microcap investments.
He suggested I look at Cam Commerce
Solutions (NASDAQ: CADA). The value was compelling, so I published
on the stock February
3, 2003 at $4.30.
Those of you who acted on the idea
should remember it with great fondness. The stock hit the $20 price
target 16 months later, at which point I suggested liquidating some or
all of your position.
Today's idea comes from the same
source. Today's idea is for you PE guys who love an undervalued, under
followed situation with great growth and strong earnings per share. Based
on estimated earnings for CY 2004, the stock is currently trading at a
PE
of 3.8 with an annual growth rate of 64%.
All microcap stocks are risky. There
are various levels of risk. In my view, thanks to an annual revenue run
rate of over $50 million and earnings per share of $.09 through the first
half of '04, this is one of the least risky microcap situations you are
likely to find for $.70. For those readers who have not been interested
in earlier high risk ideas, this one's for you.
For your consideration:
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October Profile:
BrandPartners (OTC BB: BPTR) |
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BrandPartners is in the bank
service industry. They are one of three major players in a market estimated
to be about $2 billion annually.
There are 106,000 bank branches in
the US. US Banks are now building about 1,000 new branches annually. 92%
of all customers go into their branch at least once a month. Products and
services offered through the local branch have become the strongest source
of profits in the banking industry over the last several years.
Just like a hotel, bank branches
need a makeover once every three to five years. Mergers and acquisitions
also fuel the need to redesign and rebrand the interior of bank branches.
Changing product offerings require specialized point-of-purchase design.
BrandPartners provides the
service of redesigning and rebranding bank branches. Their expertise includes
creative point-of-sale design, fixture design, traffic flow analysis, and
promotional and advertising materials within branches. Up to your right
is the interior of a Flagstar Branch, designed and built by BrandPartners.
In addition to organic growth, mergers
in the banking industry are fueling BrandPartners' growth. There
have been 69 major mergers since 1994 with an estimated transaction value
of $670 billion. By the end of May this year, there had already been the
second most bank mergers in history in one calendar year.
Their customer base includes nearly
every major name you can think of including Bank of America, M&T,
Wells Fargo, Sun Trust, Regents Bank, and City Financial (subsidiary
of Citigroup). BrandPartners was awarded a substantial contract
as a result of the highly publicized merger between Bank Of America
and Fleet earlier this year.
To your left is a stand alone marketing
display BrandPartners developed for Wells Fargo. This is a point-of-purchase
display BPTR designed for a specific Wells Fargo product.
They are also expanding beyond their
core competency in the banking industry into other financial services.
For example, on your right is a picture of a branch of TD Waterhouse
located in lower Manhattan. Customers can come in off the streets and use
the trading stations which were designed and built by BrandPartners.
BPTR is making substantial
profits and has grown at a rate of 64% through the first half of
2004 as compared to the first half of 2003. The company feels it can continue
to maintain its growth rate by expanding to both the banking community
overseas and other financial service businesses which might include brokerage
firms and check cashing stores.
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A
Brief History |
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There is a reason BPTR does
not trade at a reasonable valuation relative to its accomplishments and
earnings. Few investors know about it. The company fell off the radar screen
and was on the verge of bankruptcy at this time one year ago.
The company was formerly on the NASDAQ,
and had traded over $7 per share in 2000 and 2001. In the go-go days of
the late 90's, BrandPartners was over overvalued, over ambitious,
under financed, and mismanaged.
Until this year, BrandPartners
was overburdened with debt. They acquired Willey Brothers in January of
2001. Established in 1983, Willey Brothers was a leader in the retail financial
services design business. They grossly over paid for Willey Brothers and
financed the purchase with debt. In addition, they ran a high overhead
operation with upscale office space in Manhattan. The company had $12.7
million in long term debt at the end of 2003.
Under revamped management BPTR
went to its creditors and suggested it would be closing its doors without
debt relief. They shut down their high price New York operations and moved
to corporate friendly New Hampshire. They did a small financing, and used
the money to convince creditors to accept reduction of principal in return
for immediate payment.
Net result: BPTR booked a
one time gain of $8.4 million for forgiveness of debt in
Q1'04. It makes the company look as if they earned $.40 per share in the
Q1.
In reality, once the oppressive burden
of the debt was relieved, the company generated a real profit of $1.7 million
in the quarter, which equates to about $.06 per share in earnings.
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Financial
Performance |
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The table below lays out BPTR's
financial
performance through the first half of 2004 as compared to the first half
of 2003. As you can see, the company has earned $.09 per share
from operations through June. Assuming business remains about the same
through the remainder of the year the company will deliver $.18 per share
in earnings. Therefore, the current PE ratio on the stock is 3.8
on 2004 earnings at $.70 per share.
BrandPartners Historical Performance First
Half '03 and '04
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Q1'03
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Q1'04
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Q2'03
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Q2'04
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Growth Rate
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Revenues
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$9.5 million
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$15.6 million
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$6.88 million
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$11.3 million
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64%
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Profits (Losses)
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($1.8 million)
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$1.9 million
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($2.1 million)
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$1 million
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Earnings Per Share Excluding
One Time Gain
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($.10)
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$.06
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($.12)
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$.03
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$.09 EPS For First Half of '04
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There are currently 31.5 million
shares issued and outstanding, equating to a market capitalization of $22
million on an annual revenue run rate of over $50 million. By any measurement
this stock is absurdly undervalued.
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Conclusion |
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I am quite certain BrandPartners
will continue at its current pace of growth for the foreseeable future.
The company has announced five new contracts since the 1st of September.
Last week's alone was over $5 million.
They achieved $27 million through
the first six months of 2004. Adding up announced contracts places them
at about $36 million in booked business ytd. Therefore, I expect the remainder
of the year to be just as strong as the 1st half.
This stock simply needs a catalyst
to get it going. Fund managers are starting to take notice. Gruber McBaine
Capital, a Bay Area fund, filed an ownership statement with the SEC recently.
The fund disclosed it had accumulated 1.97 million shares in
the open market.
If the market continues improving
through the end of the year as it normally does, hedge fund managers will
be chasing performance and looking for undervalued situations.
The chart shows a stock that has
been grinding in a range since May. Right now, the stock is challenging
the high end of its range, and a breakout could be in the cards. Last April
the stock broke out and ran to the $1.20 level. It happened about one month
in front of quarterly earnings, which is where we are today.
The underlying fundamentals are too
strong for this stock to stay at these levels much longer. Even at a mere
10 times 2004 earnings, the stock would be trading at $2 (185% above today's
levels). Companies in growth industries with strong profits and 64% growth
rates generally trade at a minimum of 20 times current earnings.
The balance sheet is also strong.
The forgiveness of $8.4 million in debt earlier this year took care of
balance sheet concerns. At the end of June, the company boasted $13.25
million in shareholders equity, which equates to $.40 per share.
In February of 2003 I argued you
could buy $20 million in annual sales and $1.5 million in profits for next
to nothing. CADA had nearly $3.75 in cash and no debt when the stock
was trading at $4.70. CADA was thinly traded at the time, and no
one knew about it. The stock hit the target price of $20 in May, and still
trades in the $17 range today. Net Return over 15 months: 325%.
Today I am arguing you can buy earnings
in BPTR for about twenty five cents on the dollar at $.70
per share. This stock could and should be trading at 20 times 2004
EPS, which would put the stock at about $3.80.
If we can get halfway to a reasonable
valuation, BPTR would trade in the $1.50 to $2 range.
I am looking for the stock to trade to this level within the next six months,
and possibly much sooner.
In the interest of full disclosure
we inform you that MarketByte LLC, the owner and publisher of the OTC Journal,
has purchased 100,000 shares of BPTR at a cost of $.60 per share.
We can buy or sell shares at any time without notice. This should be viewed
as a potential conflict of interest.
Send your comments on BrandPartners
to editor@otcjournal.com. I'll
be very interested in any negatives you perceive on this idea. Positive
comments are also welcome of course.
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