o My Estimate of Fair Value (MFV)
o Return on Invested Capital (ROIC)
o Operating Earnings (OI)
o Enterprise Value (EV)
o Price-to-earnings Ratio (PE)
o Liquidation Value = Tangible Book Value (TBV)
o Book Value (BV)
Mind CTI Ltd provides billing and messaging software to telecom companies. To me, that’s not particularly relevant. What’s of greatest relevance is the differential between its market value and MFV. But, before those calculations, I measure the stock via a scorecard to highlight indicators that might make the stock more or less likely to be a winner. Correspondingly, pros and cons as I see them.
· The P/E is <10
o I love cheap stocks, and for others that do too, this is most likely the measure of relative value they are using
·The company is also cheap using OI/EV (~.17), my preferred relative value measure
·Market Cap is <$250mm
o I may have a counterparty advantage from these first two, e.g. institutional investors may have rules preventing the purchase of lower priced, smaller Market Cap stocks. If so, I’m competing against fewer buyers to purchase shares, but may have more buyers to sell shares to if the share price and/or Market Cap increase.
·The % of shares short is <5%
o Shorts take greater risk than (non-margined) longs, so I assume they’ve done some
·The company’s debt relative to its Market Cap is <25%
·Corporate insiders own a significant % of the company
o Theoretically, this should keep management’s priorities aligned with all shareholders
·The company appears to have a tough year-over-year OI comparison in the upcoming quarter
·Operating Profit Margin is down sequentially and year-over-year
Those pros and cons and—more importantly—the company’s average ROIC (21% over the last 10-years) make it seem likely that the company has durable competitive advantages. So, I deem the company good quantitatively. I am willing to assume—speculate—that durable competitive advantages will allow the company to grow earnings over time and therefore I value the company relative to $5.5mm OI, my estimate of what the company can reasonably earn over an average year. Given the company’s seemingly excellent balance sheet and 5-yr average multiple of PE x 9**, I think OI x 8 is a reasonably conservative fair value, which equates to MFV of $2.85.
At a recent price of $2.26, the differential between market value and MFV is -21%, thus I think shares are undervalued.
Conclusion: MNDO is an interesting company that appears to have competitive advantages (once software is installed and integrated into a Telecom’s internal systems, it can’t be easy to switch to a competitor). Yet, the company doesn’t grow. BV is only up ~9% over five years. This is largely because the company pays a large, annual dividend that often exceeds 10%. Since the company doesn’t grow, it is only relevant as a mean reversion candidate, i.e. I only buy at a discount to MFV and will sell at MFV or higher, regardless of holding period. And, if timed well, I can capture the dividend too.
My positioning: Long shares
For more information about how and why I designate companies good read here: (https://www.veriteventures.com/post/how-i-value-good-companies)
*Post prepared using data as of 3/9/23
**I’m using the company’s historical PE multiple as a proxy for OI because PE multiples are more readily available from data providers and because I will never pay more than the lessor of 1) OI x 10, 2) OI x the company’s own historical multiple, or 3) the S&P 500’s current OI multiple, which lessens the risk of over overestimating the company’s historical multiple via the PE to OI conversion.
The information in this post has not been audited and accuracy is not guaranteed. The post is for informational purposes only and is not investment advice. Consult a financial professional before making investment decisions. The author’s opinions and positions may change subsequently, without notice.