2023-08-14 12:11:21 ET
Summary
- MIND C.T.I’s major telecom product is seeing increased competition.
- MIND C.T.I has maintained very stable financials with minimal decline but also very limited growth potential.
- A major initiative for the company is to acquire new high-growth businesses.
- This article focuses on the fundamentals, the real value versus the current share price, and if MIND C.T.I. is currently worth investing in.
MIND C.T.I. ( MNDO ) currently faces some challenges after the small pandemic increases, they saw in the last two years. The smaller messaging segment acquired by MIND C.T.I. was the major reason for the increases seen during Covid. These increases are not expected to persist according to the CEO of MIND C.T.I. The current customers of MIND C.T.I. skew toward the smaller carriers who cannot afford to produce their own CRM and account management software.
Due to the consolidation of these telecom carriers, MIND C.T.I is finding its major customer base to shrink as the carriers begin to have the means to create the software themselves at a positive NPV. These major headwinds have shifted the company's focus to acquiring profitable and growing business units that can shift its product offerings to better prospects. Whether they can succeed in this strategy remains suspect due to the MIND C.T.I.'s failure to acquire a game-changing company up to this point.
Aside from the poor growth potential, the company maintains very stable financials with a high dividend for investors. Pandemic levels are not going to return, but the company can still acquire an accretive acquisition that could turn the growth potential around. This gives some hope for potential returns to investors.
When considering these current stories about MIND C.T.I, we need to determine which news topics will have a long-term and ongoing effect on the company and its share price. Current earnings reports continue to state a strategy of acquisition due to the declining performance of its main telecom product. With over 4 years waiting for a good acquisition, the hope for this strategy struggles to breathe. However, some investors believe that MIND is getting better with their acquisition choices. After all, its previous acquisition of GTXX's messaging and message mobile products did experience a surge during the pandemic. MIND C.T.I. must continue to acquire more profitable companies and or develop successful products in the coming years to maintain relevance.
While current news stories, good or bad can sway our opinion about investing in a company, it's good to analyze the fundamentals of the company and to see where it's been in the past and in which direction it's heading.
This article will focus on the long-term fundamentals of the company, which tend to give us a better picture of the company as a viable investment. I also analyze the value of the company versus the price and help you to determine if MIND C.T.I is currently trading at a bargain price. I provide various situations which help estimate the company's future returns. In closing, I will tell you my personal opinion about whether I'm interested in taking a position in this company and why.
Snapshot of the Company
A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer's company rating score. MIND C.T.I shows a strong rating score of 80.25 out of 100. In summary, MIND C.T.I stock could provide potential returns for investors in the future due to the company's strong fundamentals.
Before jumping to conclusions, we'll have to look closer into individual categories to see what's going on.
Fundamentals
The share price has been steady over the last ten years with small rises over time. The recent fall is most likely due to reduced guidance from the messaging products surge during covid and the declining telecom product. The accretive acquisitions of its messaging products in 2019 did achieve some surge, even if it's relatively small overall. Expectations of large stock price growth quickly are unrealistic with the current stable business model of this company. Overall, the share price average has grown by about 101.01% over the past 10 years, or a Compound Annual Growth Rate of 8.06%. This is a decent return, especially when considering the massive dividend that this company pays.
Earnings
The earnings have been very stable for MIND C.T.I over the last 8 years. Even with the increased competition and price wars eating margins, the EPS remains steady. Additionally, the acquisitions in 2019 did have a positive impact on EPS gains even if they were modest overall. The stability of earnings even through a pandemic supports the notion that MIND C.T.I is a stable company with some immunity to downturns.
Since earnings and price per share don't always give the whole picture, it's good to look at other factors like the gross margins, return on equity, and return on invested capital.
Return on Equity
The return on equity has maintained relative stability over the last 5 years. Even though the chart shows a decline in the most recent year, keep in mind that ROE has maintained between 22 and 25% over the past 5 years. For return on equity ((ROE)), I look for a 5-year average of 16% or more. So, MIND C.T.I meets my requirements.
Let's compare the ROE of this company to its industry. The average ROE of 390 Software (System and Application) companies is 19.68%.
Therefore, MIND C.T.I's 5-year average of 23.92% is above its industry peers.
Return on Invested Capital
The return on invested capital again looks to match the ROE trend. Capital expenditure was stable until 2022 when it was increased by approximately 60% compared to levels in 2021. Most likely this is because of the need to offer differentiability in its current products to counter the price wars the company is dealing with. For every dollar spent in this increase the same return was not seen as in previous years. This makes sense for a company that is struggling and competing on price with its main revenue generator. For return on invested capital ((ROIC)), I also look for a 5-year average of 16% or more. So, MIND C.T.I passes this test as well.
Gross Margin Percent
The gross margin percentage ((GMP)) has fallen since its previous highs in 2018. The story continues to be maintained with its current GMP outlook. Increased competition and price wars are eating into MIND C.T.I's profit margins. Even with the current erosion of margin, the company still boasts a high margin of over 50% which is hard to obtain for most companies. I typically look for companies with gross margin percent consistently above 30%. So, MIND C.T.I far exceeds this guideline.
Financial Stability
Looking at other fundamentals involving the balance sheet , we can see that the debt-to-equity is less than 1. This is a positive indicator, telling us that the company can afford its obligations.
MIND C.T.I's Current Ratio of 3.92 showcases large cash reserves that can be used to pay off its obligations. MIND C.T.I. has been looking to acquire a company. That could explain the large Current ratio, since the company has been building up its reserves for a potential acquisition.
Ideally, we'd want to see a Current Ratio of more than 1, so MIND C.T.I exceeds this amount.
MIND C.T.I. is in great financial health with a large amount of cash on hand. The current debt levels of the company are low allowing it leverage to take on debt, especially if it needs to finance an acquisition. The company did recently pay down some of its long-term debt in 2022 as well.
MIND C.T.I. does pay an enormous annual dividend.
This analysis wouldn't be complete without considering the value of the company vs. share price.
Value Vs. Price
The company's Price-Earnings Ratio of 7.59 indicates that MIND C.T.I might be underpriced when comparing MIND C.T.I PE Ratio to a long-term market average PE Ratio of 15.
The 10-year and 5-year average PE Ratio of MNDO has typically been 10.38 and 9.21, respectively. This indicates that MNDO could be currently trading at a low price when comparing to its average historical PE Ratio range.
The Estimated Value of the Stock is $2.63, versus the current stock price of $1.92. This indicates that MIND C.T.I. could be currently selling below potential value.
For more detailed valuation purposes, I will be using a diluted EPS ttm of 0.25. I've used various past averages of growth rates and PE Ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity.
In the table below, you can see the different scenarios, and in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is towards the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.
According to the valuation analysis based on forward growth, MNDO is overpriced. But when considering the valuation with the dividend included, it is undervalued.
In my opinion, it's more important to be conservative and focus on the forward growth valuation of MNDO because the company has seen a downward trend in earnings, cashflow, and other fundamentals.
In summary, this forward growth analysis shows an average valuation range of around $1.79 to $1.86 per share versus its current price of about $1.92, this would indicate that MNDO is overpriced. But when you take into account the huge annual dividend of around 12%, the valuation would be between $2.00 and $2.08 versus a current share price of $1.92. This indicates that the stock is undervalued.
Summarizing the Fundamentals
MIND C.T.I. maintains high stability and a large dividend. The company shows great earnings stability even during the COVID onset; downward pressures were not seen with earnings even in extreme downturns. The dividend is currently almost equal to its net income annually. The current competitive challenges and price wars could see this net income reduce below current dividend amounts resulting in a loss of the dividend premium distributed. Seeing as the stock gains are minimal, the dividends are a large part of potential returns to investors.
The company's fundamentals are extremely stable, which does help with the downside risk. Even with reductions in gross margin, the company maintains over 50%. Other fundamentals such as ROE, ROIC are at quality levels.
In terms of valuation, my analysis shows that the stock is undervalued, if the large dividend maintains. In the very least, the stability of the company reduces risk even if the dividend is reduced.
MIND C.T.I. Vs. The S&P 500
Now, let's see how MIND C.T.I compares versus the US stock market benchmark S&P 500 over the past 10 years. From the chart below, we can see that MIND C.T.I has consistently beaten the S&P aside from 2023. The high dividend yield plays an important role in these returns since 2013. The trend does seem to be reversing with the S&P catching up and potentially soon overtaking MIND C.T.I. Or it might be the case that MNDO is now selling at a bargain price when comparing it's historical performance versus the S&P and its Price-Earnings relation to the S&P shows an opportune time to enter the stock.
Forward-Looking Conclusion
Because of the small size of the company, there isn't much analyst coverage of this stock. But, over the next five years, the analysts that follow this sector are expecting the sector to grow earnings at an average annual rate of 9.03%.
There also aren't any analyst price targets for this stock.
The Expected Annual Compounding Rate of Return is -5.2%.
Let's look at the actual past results of MIND C.T.I.
Here are the actual 10 and 5-year return results.
______________
10 Year Return Results if Invested in MNDO:
Initial Investment Date: 8/13/2013
End Date: 8/13/2023
Cost per Share: $1.70
End Date Price: $1.92
Total Dividends Received: $2.69
Total Return: 171.18%
Compound Annualized Growth Rate: 10%
_______________
5 Year Return Results if Invested in MNDO:
Initial Investment Date: 8/13/2018
End Date: 8/13/2023
Cost per Share: $2.11
End Date Price: $1.92
Total Dividends Received: $1.26
Total Return: 50.71%
Compound Annualized Growth Rate: 9%
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With the dividend, MNDO has produced returns of 9%-10% over the last 10 years. That's a solid return, but typically I'd just prefer to invest in the more diversified S&P 500 to achieve a similar result. However, I would consider investing in MNDO if it changed its direction and acquired some high-growth companies to counterbalance its decline in telecom.
There are also some reasons why the S&P 500 isn't so attractive to invest in at this time. First, the S&P 500 is overpriced right now. In addition, interest rates are climbing and inflation is affecting the economy. These combined scenarios leave less room for a decent return if I currently invest in the S&P 500.
Does MIND C.T.I. Pass My Checklist?
- Company Rating 70+ out of 100? Yes (80.25).
- Share Price Compound Annual Growth Rate > 12%? No (8.06%).
- Earnings history mostly increasing? Yes.
- ROE (5-year average 16% or greater)? Yes (23.92%).
- ROIC (5-year average 16% or greater)? Yes (22.01%).
- Gross Margin % (5-year average > 30%)? Yes (55.96%).
- Debt-to-Equity (less than 1)? Yes.
- Current Ratio (greater than 1)? Yes.
- Outperformed S&P 500 during most of the past 10 years? Yes.
- Do I think this company will continue to successfully sell their same main product/service for the next 10 years? No.
MIND C.T.I. scored 8/10 or 80%. Therefore, MIND C.T.I shows solid fundamentals that should be considered for a portfolio.
Is MIND C.T.I. currently selling at a bargain price?
- Price Earnings less than 16? Yes (7.59).
- Is MNDO's Value greater than Current Stock Price? Yes (Value with dividends $2.00 to $2.08 > $1.92 Stock Price).
Overall metrics show that MIND C.T.I is a stable company with a high dividend yield in its history. Just looking at the metrics, the company seems to be a great long-term investment due to the dividends generating high returns for investors. The stock has even seen some gains over the last few years adding to its return for investors. I do not believe that these factors tell the whole story though.
I have major concerns about the viability of this stock's returns in the short and long term. In the short term, price wars and competition will continue to drain its top telecom product causing further reductions in gross margin. This could result in a dividend reduction, which was the main reason for holding this stock. Additionally, the invested capital that MIND C.T.I is investing is not yielding an improved return, showing that the company needs to fund an acquisition to stay in business. The company has failed to acquire a game changer acquisition in a decade, and this might not change. Management shows no concrete plans to change its fate. The management has admitted the company's declining situation at its 2022 year-end earnings report:
"In our telecom markets, we experienced a decline mainly due to the continuous market trend of lower prices, low demand, and strong competition. We expect a continuation of these unfavorable trends in the foreseeable future."
In the end, I may add this stock to my watchlist and keep updated as to any new acquisitions. With the company's stable and solid fundamentals, it could be a great value play if a new acquisition could turn the company towards a more profitable route.
For further details see:
MIND C.T.I. And Its Real Value