Infomedia Limited (ASX: IFM) sells software to the car industry and boasts most of the major car makers as its customers. In particular it has two key products, Microcat, an electric parts catalogue and Superservice, a system that helps dealers improve their customer service levels.
The business has some excellent characteristics.
- Recurring revenue from its subscription-based model
- Occupies a niche position in the global automotive market
- Is capital light allowing it to pay out most of its profits as dividends whilst continuing to grow the business
- Has no debt and $13 million in cash
The stock has performed strongly over recent years as the lower dollar has provided improved trading conditions and the market has bought into Infomedia's growth story.
Whilst the Microcat business is quite mature, Superservice is a relatively new operation still very much in its growth phase. A number of trials will be completed shortly, offering the potential for significant contract wins in the near term.
Generally speaking, Infomedia's customers are very sticky in that once signed up, they rarely leave. However, in January 2015 the company announced that Jaguar Land Rover chose not to renew its Superservice agreement. Whilst this may be a one off, investors should be alert to the possibility of further contract losses, which could indicate problems with the product.
Infomedia is a strong business but unfortunately this is built into the current price which implies a forward enterprise value to free cash flow multiple (EV/FCF) of over 23.
A missed opportunity
As mentioned earlier, the share price has performed strongly over recent years and was trading at just 20 cents as recently as July 2012 compared to $1.19 today. Interestingly, at the time the company was paying a 2.4 cents dividend and had earnings per share of around 2.8 cents.
So in July 2012, you could buy this great business with $6.6 million of cash and no debt for under 7x EV/FCF. It is ridiculous to think that it is worth 6x more today than what it was worth in 2012, but that is what the market is saying.
It appears that the only difference between now and then is that the market has decided to buy into the growth story. Whilst I believe there is an opportunity for Infomedia to flourish over coming years, this was also the case in 2012, when it was selling largely the same products to the same customers.
Interestingly, between 2010 and 2014, profit grew by a measly 8.3% from $11.3 million to $12.3 million. However, between the day of the 2010 results announcement and the day of the 2014 release, the share price rose by nearly 260%!
Foolish Takeaway
I think the reality is that in 2012, the market was vastly understating Infomedia's true worth (providing an excellent investment opportunity) and today, the market is perhaps overvaluing the company.
Buying quality companies like Infomedia for bargain prices is the essence of value investing. There was plenty of time for investors to do exactly this between 2010 and 2012 when the stock traded no higher than 30 cents.
Whilst such opportunities are rare, they do exist and it is a mistake to overpay for any company, no matter how bright its future seems.
