Today’s new idea comes from Tom Byrne’s Byrne Investment Research, publishers of The Periscope Report. Here’s an excerpt of his latest research report on a micro-cap payment technology company listed on the Nasdaq.
“We are initiating coverage on USA Technologies, Inc. (USAT, $2), a microcap company with a macro opportunity in the field of cashless payment. In our humble opinion, we are moving to a cashless society, and USA Technologies (USAT) has become a strong player in this field. The company has made significant progress over the last year under a new CEO, and we think it has reached critical mass.
“USAT will reach profitability this quarter and we think margins will expand due to efficiencies of scale and a recurring revenue model (USAT receives a fee for every cashless transaction, so more transactions leads to higher margins.)
“The market opportunity is enormous. The entire world is going cashless. For example, 92% of all retail transactions in Europe are cashless, up from 30% ten years ago. There is over $4 trillion made in cashless transactions per year, with the market growing 20% - 30% per year. ... USAT dominates one sector, which is kiosks, or the ‘small ticket unattended retail market,’ a market that is in the early stages of cashless adoption. USAT has more than 50% market share for all cashless transactions made at kiosks. ... Most kiosks are movie rental kiosks, but food companies are starting to experiment, including a large pie retailer in California. ... Another key driver is the growth in single application credit card solutions, such as the emergence of pay-at-the-table in restaurants, which is capitalizing on the development of wireless communications infrastructure. ...
“Stephen Herbert was elected Chairman and Chief Executive Officer of USA Technologies in December 2011. ... Mr. Herbert started a turnaround plan exactly one year ago when he took over as CEO. The goal was to turn profitable and cash flow positive in one fiscal year, or by June 2013. The company has been EBITDA positive for the past two quarters due to cost-cutting, and the company will be profitable this quarter and for the next fiscal year. USAT has pushed through the challenges of the Durbin Amendment, a leadership transition, and a proxy contest in the last 12 months.
“Mr. Herbert has positioned the business for the future by expanding the customer base and driving innovation with new customer-focused offerings. He also made across-the-board improvements in corporate governance, including the composition of the board of directors, in order to improve investor transparency. (The Durbin Amendment drastically lowered swipe fees — the fee charged to merchants every time a customer pays with plastic. It took effect on October 1, 2011.) Given the lower cost structure and the recurring nature of the majority of revenues, non-GAAP net income is now sustainable.
“During the first quarter, USAT signed a marketing agreement with Isis, which is a mobile payment and commerce system joint venture between AT&T, T-Mobile and Verizon that promotes cashless adoption in tandem with Isis mobile wallet acceptance. Isis has launched in two markets: Austin, Texas, and Salt Lake City, Utah. As part of the collaboration, Isis also stated that it will provide USAT with access to financing. Mr. Herbert thinks the deal with Isis is a huge market opportunity and the primary reason to invest in his stock. ... We always say that an investment in a company is really an investment in the CEO. That idiom especially holds true for USAT, which is being led by a dynamic CEO.
“USAT expects to achieve non-GAAP net income for the first time in the second fiscal quarter ended December 2012, a significant milestone and one of the main reasons we are recommending the company. ... USAT is a micro-cap company with two analysts on coverage, which presents a great opportunity for our clients. We are the first independent equity research firm to pick up coverage and we think institutional ownership will increase in 2013 because once USAT turns profitable, it will start hitting more radar screens. ...
“We are expecting sales to grow 47% in fiscal 2014 to $56 million. The net profit will grow 140% to $1.8 million, or $0.06 per share. The P/E on the 2014 estimate is 36.6, which seems high. But, the PEG ratio is 0.26, which is very attractive.
“USAT made significant strides in 2012 to grow customers, reduce costs, sign new partners and reach profitability. Now, it sits at the forefront of a tremendous market opportunity: using mobile phones (or NFC) to pay for things. Within five years, NFC will be the standard for cashless payments, which means USAT will be a much bigger company five years from now.”
- Tom Byrne, The Periscope Report, January 23, 2013