Description

This stock very thinly, so this is a PA idea only, but it is possible to build up a six figure position with some patience.

ITEX is a Bellevue, WA based small-business barter exchange.  Stock price $4.40, 1.6 million FDS, $7.0 million market cap, $5.7 million net cash, $1.3 million EV.  TTM net income is $861k and FCF is $1.4 million.  The company pays a $0.20 annual dividend and has done a major tender offer every 3 years or so going back a decade, the last one being at $4.25/share for $1.9m or 19% of shares outstanding in 2019.  Fiscal year ends 7/31/2021.  Gross cash is about a $1 million higher than current assets less current liabilities, that is somewhat balanced out by a $585k deferred tax asset that is still burning off from the dot.com era.

ITEX has been written up on VIC 3 times, in 2008 at $0.92/share , 2012 at $4.06/share, and 2015 at $3.05/share.  The story has not materially changed.  Since 2012, the company has paid $2/share in dividends and sharecount has shrunk from 3.3 million shares to 1.5 million shares via share repurchases/tender offers.  The stock currently trades at 0.3x EV/revenue and 1.9x EV/EBIT.

The business has been shrinking steadily for the last 20 years, and revenue is down from $16 million in 2011 to 7 million TTM.  The company has managed that decline very well, with EBIT margins actually increasing over that period from 7% to 16%,, and the company has produced over $1.2 million FCF ever year for the last decade.  I am not going to go into the details of the appeal of the barter business.  The 3 prior writeups cover it well and there are numerous articles online about ITEX and its main competitors International Monetary Systems (which trades on pink sheets), as well as details on the company websites.  The important facts are that that the business is run via a franchise network, the franchisees are independent business owners who own a geographic area with local customers, and barter appears to have an appeal to a certain end-customer base.  It’s a weird little niche that has been around a long time.  I think it’s likely the business will continue to decline slowly and pump out a ton of cash.

Steven White is the Chairman and President and stepped down in May as CEO.  He owns 31.7% of the company.   White took control in 2003 after a proxy fight and has seen his relative stake in the company almost 4x via the share repurchases over time.  He has run the company very well and in a shareholder friendly manner.  The new CEO, Robert Benson, was a longtime VP at ITEX.

The Lion Fund (Sardar Biglari’s fund that is entwined with Biglari Holdings) owns 21.4%.  Biglari acquired the stake in a 2008 exchange offer for Western Sizzlin’ at $0.93/share where he tried to take over the company.

This is a very simple investment – it’s a well run, shareholder friendly company that pays a 4.5% dividend, trades at 1.9x EV/EBIT, and maybe you wake up one day and get a nice pop in a sale.  You also may get a chance to exit via a tender at some point soon.  As I mentioned, the company has done 3 in the last decade and cash has now built up to the highest point in that period.

I think it’s unlikely that you lose money at this price.

Catalyst

Tender offer.