According to Bloomberg data, ITEX Corp. (ITEX, Financial) returned 19% year to date. Despite this outstanding performance, the company is still being grossly undervalued by Mr. Market.
ITEX Corp. has a trailing 12-month price-to-earnings ratio of just 9 and price-to-sales ratio of 0.64, along with a dividend yield of 5.33% and payout ratio of 35%.
Just by the figures above, ITEX Corp. would appear an attractive purchase for any conservative investor, but one probably should take a bit of time assessing ITEX’s business competencies before investing.
Business overview
ITEX operates a marketplace in which products and services are exchanged by marketplace members using its own “virtual currency” (so-called ITEX dollars). According to a company presentation, ITEX identifies its business as a cashless marketplace, where the U.S. dollar is replaced. According to the company’s filings, the Internal Revenue Service recognizes one ITEX dollar as being equivalent to one U.S. dollar and treats all sale transactions as taxable events just like any cash transaction.
ITEX’s cashless marketplace provides access to an exclusive distribution channel where the ITEX dollar is the currency used. Through this channel, a merchant can then sell more, build lasting customer relationships and inevitably grow his business. In 2012, the company was the largest cashless marketplace in the U.S, with $250 million in transactions.
In 2011, the company estimated that the online cashless marketplace industry consisted of approximately 300 exchange locations servicing 90,000 members, which generated $680 million in gross merchandise value (GMV) transactions and $56 million in revenues.
(Gross merchandise volume or GMV is a term used in online retailing to indicate a total sales dollar value for merchandise sold through a particular marketplace over a certain time frame.)
ITEX advises its merchant members to advertise on its marketplace, and prospecting buyers will eventually show up with orders. The company wants its merchants accept ITEX dollars and use them in his other transactions, thereby increasing the currency's utility.
ITEX claimed that it is the marketplace exchange leader in the U.S. and Canada based on reported U.S.-dollar revenues. Further, it identified International Monetary Systems as the next largest exchange marketplace and competitor. Interestingly, International Monetary Systems over-the-counter stock had fallen 22% at the time of this writing (July 18) with no searchable reason. According to Bloomberg data, ITNM’s shares had returned a disappointing negative 50% year to date to its shareholders.
In addition to being a cashless marketplace, the company operates as an online distribution channel. Online distribution channel businesses have been around for decades. ITEX identifies its principal competitors as eBay (EBAY, Financial), Travelocity, Priceline (PCLN), Amazon (AMZN) and Overstock (OSTK). According to ITEX, these companies provide distribution channels to move excess or surplus inventory. ITEX also competes with them on price, ease of use and brand name awareness.
(How ITEX works, company website)
ITEX currently has thousands of businesses within its marketplace. There are three ways to transact in the ITEX marketplace: buy and sell online, work with a local ITEX franchisee or use ITEX checks. ITEX also provides detailed statements to its members 24/7, year-round.
Sales and profits
According to its annual filing, ITEX mainly relies on its transaction and association fees to generate its annual sales. In 2014, these fees generated 95% of ITEX’s total sales, totaling $13.5 million.
ITEX also charges various auxiliary fees to members, such as annual membership dues, late fees and insufficient fund fees. Further, the company charges members an operating cycle fee regardless of ITEX members' activity. An operating cycle occurs about 13 times a year. ITEX charges its members in U.S. dollars and partially in ITEX dollars too. Typically, ITEX earns more when its members pays these fees by check (7.5% charge), than through credit card (6%).
In terms of the annual charges concerning operating fees, ITEX charged $260, or $20 per cycle, and $130 ITEX dollars, or $10 ITEX dollars per cycle, totaling $390 of sales per ITEX member per year.
(ITEX annual sales and growth; *correction: sales numbers in million found on left side of graph, growth numbers on right)
Observably, ITEX’s sales and growth numbers had been declining for the past five years.
Dividends and cash flow
ITEX, as stated earlier, has a current dividend yield of 5.33%. Surely, this was just a part of the company's attractive features. Nonetheless, the company actually had a three-year (2012 to 2015) average dividend growth decline rate of 3.6%. In addition, ITEX Corp. also demonstrated an increasing payout ratio in both share repurchasing activities and dividend handouts. Payout ratios have actually exceeded 50% of the company’s profits in recent years.
Net payout ratio* is calculated by adding both the amount of shares repurchased and dividends paid divided by the company’s net income.)
Cash, debt and book value
According to GuruFocus data, ITEX Corp. has total cash of $2.7 million for the trailing 12 month, with no debt. The company also had a book value of $9.89 million. With an ongoing market value of $7.81 million, this gives ITEX Corp. a price-to-book ratio of just 0.79.
Conclusion
ITEX Corp. has several enticing characteristics that can be attractive to any aggressive value investor: ongoing low valuations and high dividend yield. Accompanied by no debt or leverage to worry about, the company can probably survive any prolonged business hardships over the medium and longterm.
Nonetheless, ITEX Corp. had been, in fact, already experiencing some decline in sales for the past five years. In addition, the company has been increasing its profit payouts to its shareholders. Given its unique business model and tenured management, there is a chance for the business to make a comeback and again grow sales accordingly.
Disclosure: I do not have ITEX Corp. shares nor plan to initiate a position in the company this week or the next.
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