Eyes on Checkmate Electronics(CMEL). Currently @ 10.00:
Something's going on...a large portion of my stocks in my small cap stock watch are down considerably, but Nasdaq and other broad market indexes are up. I wonder if the recent illiquidity threatened by the market makers is affecting the small cap sector. Anyways, that is beside the point. A recent opportunity has arisen from it.
I'm recommending all others to pay particular attention to Checkmate Electronics(CMEL). It seems to have penetrated the bottom end of its channel, and it has been on a steady decline ever since. I believe this decline is more technical rather than fundamental, but just to make sure, I contacted the company. I was unable to speak to the CFO, but I was directed to another woman who tried to answer my questions. I left a message with the CFO to contact me today or tomorrow, and as soon as I hear the official word I will post the findings here immediately.
So anyways, when I asked the lady if there were any current business developments that were being reflected in the downtrending stock price, she replied in the negative. In addition, she noted that that company was aware of its languishing stock price, and would issue a statement sometime next week to address this.
For those who are unfamiliar with Checkmate Electronics, it is a company that manufactures "point-of-sale" payment systems for retail stores and financial institutions. Its core products are check readers and processors of credit, debit, and smart cards. What I like about this company is the relative simplicity and attractiveness of its core business: it is out there to fight check fraud and to increase the speed and efficiency for both merchants and customers at the checkout stand.
I have been involved with this company since I became aware of it in early October of last year, when it took a serious beating because it announced it would miss earnings estimates due to an irregularity in the timing of a business order. Aside from this, the fundamentals of the business remained strong and intact. It has recovered since and made positive progress in its business, but never did I expect that its stock price would once again come to that of the levels I experienced last year.
On a fundamental basis, the company has a very strong balance sheet, with 1% debt/equity, a very strong current ratio at 7.21, $1.75 cash per share, but an ROE of 10.1%. At 10, it has a p/sales of 1.56 and a p/e of 20.8. Looking at its historical p/e range, it had the following:
1995: high of 50, low of 23
1996: high of 36, low of 21
1997: high of 31, low of 20.8(current levels)
Now, looking at its projected earnings growth, analysts and other brokerage firms have recommended a p/e of 25-30, citing the favorable business climate and future growth opportunities due to the expansion of 1) check usage 2) credit/debt/smart card markets 3) the expansion of check fraud as computer technologies improve 4) the requirement of the government to have merchants accomodate something called Electronic Benefits Transfer(EBT), which will require the processing of alternative payment processes by those on welfare, food stamps, etc. (a little fuzzy on the details) and 5) the growing demand for signature capture.
For earnings figures, CMEL is projected to grow their earnings from $0.46 last year to $0.73 in 1997, to $0.95 in 1998. In percentage terms, for the upcoming seven quarters, CMEL is projected to grow their earnings by 47.7% on a compounded basis. At a current p/e of 20.8, this is a great bargain.
In addition, if the p/e relationship holds and the company successfully meets estimates for the close of this year, that $0.73 multiplied by a p/e of 25 means that this can/will someday trade for $18.25, a healthy premium of 82.5%. The large jump from last year's earnings to this year's earnings is due to the particularly weak 3rd quarter, where the company earned only $0.03/share. Assuming the company doesn't face timing irregularities in the 3rd quarter of this year as well, the trailing 12 month earnings stream will jump from $0.50 to $0.71, all because of the normalization of the timing of its business. A p/e of 25 for the new TTM at the close of the 3rq quarter will dictate a stock price at $17.75. You can do the math yourself.
As this is not meant to be a quick trade, it will require more patience than a regular day trader would be used to. For others more interested in acquainting themselves with the fundamentals of this business, I recommend others to contact the company to receive an investor packet.
Please note that my post has many underlying assumptions, and changing market conditions may or may not make those assumptions turn into reality. On a subjective basis, this is my most favorite long term stock, and I firmly believe that my investment in this company is well placed. For those who are interested, please keep posted for other updates and developments.
Regards,
Rainier Trinidad |
