They Cut Costs, You Make Money
By
Michael Brush
June
22, 2005
Tiny ePlus (PLUS),
based in Herndon, VA, sells the software and hardware other businesses need
to cut costs and run smoothly.
The company – which flies under the investor radar screen with a market cap
of just $114 million – sells software that helps with tasks like
Internet-based procurement, tracking orders and shipping, and managing
online catalog content.
On the hardware side, it sells everything from routers and storage systems,
to personal computers and Voice over Internet Protocol (VoIP) phone systems.
Wind at its back
The company has several forces working in its favor. Most businesses these
days are flush with cash. Plus the economy is strong and likely stay that
way. Both factors mean companies are more willing to invest in technology
and buy products from ePlus.
As for more specific trends: VoIP is a popular way to cut costs. And some of
the software ePlus sells can help public companies manage the onerous record
keeping tasks imposed by the Sarbanes-Oxley legislation.
But does ePlus really have a leg up on competitors like CDW (CDWC),
Insight Enterprises (NSIT)
and Pomeroy IT Solutions (PMRY)?
I don’t know for sure, but I’d bet it does. Because while insiders at those
competitors are selling or neutral, ePlus insiders are on a buying spree.
The insider buying spree
Since May 4, ePlus insiders have purchased an impressive $1.9 million worth
of stock at prices between $11.47 and $12.53, according to Thomson
Financial. That’s right around where the stock recently traded.
Granted, these purchases are by beneficial owners, which blunts the signal.
They report their buys because they already have large holding, and not
because they are line officers with day-to-day knowledge of operations.
But the purchases are simply too big to ignore for a small company like
this. It’s hard not to see them as a solid buy signal.
Looks cheap
Besides, ePlus has also been buying back stock at levels above recent prices
– which strongly suggests the board thinks shares are undervalued. What’s
more, ePlus not only looks cheap, but it has lots of cash. Both should
protect against annoying downside moves.
For example, tiny ePlus sells for just .23 times sales and just under one
times book value. In contrast, CDW (which admittedly merits higher
valuations because it is so much bigger) sells for .78 times sales and 3.86
times book. Insight Enterprises sells for .30 times sales and 1.69 times
book.
Only Pomeroy IT Solutions sells for less. It goes for .17 and .60 times book
value. But ePlus comes close to those levels if you strip out its $2 per
share in cash. The company has about $18.6 million in cash.
One reason for the discount
Besides selling software and hardware, ePlus has leasing division -- which
may help explain the cheap valuation. In short, ePlus looks like it has more
debt than it really has, which scares some investors away.
Here’s why. The company uses what’s called “non-recourse” lending. This
means it borrows money to buy expensive equipment that it leases out – and
these loans appear on the books of ePlus.
In reality, however, the loans are secured by the leased equipment and paid
back by ePlus customers. In case of default, lenders go after those
customers, taking back the equipment and whatever else necessary to make up
the difference. They don’t go after ePlus. Sure, ePlus would lose revenue in
a default. But the key takeaway is that this lease debt doesn’t really
represent as much risk for ePlus as regular debt does, even though it looks
that way.
For example, even though ePlus has strong financials and a strong cash
position, it appears to have debt of $141 million – much more than its
market cap – because of all those leases. That’s enough to scare away many
potential investors who don’t bother to dig in to the details and recognize
that the lease debt doesn’t reflect much financial risk.
Bottom line: The real question is, will the discount linked to
misperceptions about debt levels ever go away? That’s hard to say. But in
the meantime, the key thing to remember is that ePlus is probably a lot more
financially sound than many people think. So you’ll have protection against
downside moves while you wait for a steady flow of high tech sales -- as the
economy stays strong – to power ePlus shares higher. I’d buy right here.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in
any of the companies listed in this column. Mr. Brush is an independent
columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
|
|
