Mind CTI steaming ahead

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Onwards and up

Mind CTI Ltd. released its financial results for the third quarter of its 2013 fiscal year on November 5th, 2013.

As usual, I have summarized these results in a dynamic posting that you can find here.

As the reader of this blog probably knows by now, Mind CTI is an Israeli company that I follow with a lot of interest – primarily because I think that MNDO, the company’s equity, yields a significant earnings opportunity for myself, but also because the trading patterns that were found around MNDO in relation to the annual dividend payouts by MIND CTI during the period from 2009 through 2012 (but, I hasten to say, are no longer be in effect) are intellectually interesting.

The quarter’s results were quite good. Here are some of the highlights from the aforementioned dynamic posting:

Again, this quarter, the results were not in line with the stellar results of the last fiscal year, but, overall, they were not really bad. This quarter brought nice bumps in revenues, operating income, and net income compared to these of the last quarter.

The company continues closing business at a moderate to fair pace, adding one net-new customer and several follow-on orders this quarter.

The growth in the company’s staffing level and associated expenses continue, reflecting the challenge of increasing the number and size of customer engagements to make up for the recent loss of high-margin revenues. …

[T]he company made a tentative commitment to the yearly dividend, announcing that the company would seek court approval for a possible distribution for the year 2013 in the amount of up to $4.6 million, or +$0.20 per share…

[T]he company’s CEO commented on the company’s intent to undertake acquisitions:

“We are well positioned and have the required resources to respond to potentially increasing market needs and at the same time target potential acquisitions that could benefit the company results.”

The progress on a quarter-over-quarter basis is encouraging, and the promise of one or more acquisitions is exciting. Clearly, the company is executing on a well thought-out plan for restoring the bottom-line and boosting the top-line, and the dividend announcement is, I think, a strong indicator of the company’s confidence in its operations and sales.

The key to MNDO and Mind CTI as an investment is, of course, its unique, one in a million, dividend policy, which resembles that of an REIT, coupled with its uncanny ability to maintain profitability and generate huge cash-flow almost irrespective of the top-line.

Novgorodtsev’s second set of finding

Sometime last year, Mr. Igor Novgorodtsev wrote an article about a pattern of speculation around Mind CTI’s consistent dividend (you can read about Mr. Novgorodtsev article and the speculation in one of my earlier postings (here.))

Unfortunately for Mr. Novgorodtsev, the pattern that he had uncovered was a wave-event related to an extra-ordinary dividend paid by Mind CT in a couple of years ago, and, at the time that Mr. Novgorodtsev wrote his article, the waves had more or loss subsided into nothingness.

Mr. Novgorodtsev is now back, having written his second article about Mind CTI and the value inherent in MNDO. This time, however, he is focused on what long time investors has been aware of since before 2010: That Mind CTI is a uniquely consistent operational performer and dividend payer.

You can find Mr. Novgorodtsev’s article here. Although he has the competitive landscape quite a bit wrong, he fundamentally arrives at the right conclusion, so I will simply quote him:

MNDO has an unusual REIT-like dividend policy: it pays out the full EBITDA plus financial income minus taxes on income. Essentially, its payout ratio is above 100% but a strong free cash flow in excess of reported earnings makes it sustainable as it has very little CapEx. It has paid dividends in excess of 10% last 5 years and is likely to pay 14% this year (subject to approval by Israeli court). The management recognizes that MNDO business is slow-growing, so the excess cash should be given to the shareholders via the dividends and stock buy-backs.

There is only one true comp for MNDO valuation: a much larger telecom software provider and direct competitor, Amdocs. While both companies have similar P/E ratio, use no leverage, and few long-term liabilities, MNDO is a true “cash cow” with 15.1% free cash flow yield (Cash Flow from Operations minus CapEx divided by the market cap)….

On a free cash flow and EBITDA basis, MNDO trades at a 40-45% discount to Amdocs. Another way to estimate MNDO value is to use a dividend discount model to calculate its intrinsic value since it has no debt and pays out all its earnings:

Inputs:

Beta = 1.63

Rf = 2.75%

Risk premium = 5%

Nominal growth rate = 2% (long-term inflation)

Dividend = $4.6 million

Value:

$51.7 – 56% larger than its current market price!

By all measures, MNDO CTI is underpriced by the market at least 40%.

Bravo, Mr. Novgorodtsev. Welcome to the club of Mind CTI believers!

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