Focus Stock: International Card Establishment, Inc.

Sunday, November 19, 2006

(Note: The Regular HotLine Originally Scheduled for November 27, 2006, Is Still a 'Go')

Lets face facts.  Companies trading in the penny stock market aren't supposed to make money.  Most are simply too young.  They have little in the way of sales momentum and unending start-up costs.  They're like college kids . intoxicated with enthusiasm and high on hope, but still looking for that first good job and a way to pay off their student loans.  There is, of course, the occasional exception.

International Card Establishment, Inc. ( Nasdaq/BB: ICRD - $0.23), is one of them.

Founded in late 2003, International Card Establishment was anything but established.  Aside from a few hundred thousand in seed money, ICRD had nothing - no customers, no contracts, no sales.

Now, here we are in late 2006.  Just three years from inception and ICRD has gone from zero to an annualized run rate of better than $11 million - and growing.  In September, ICRD signed Sweet Factory - the nation's largest candy store chain.  In October, it signed KaBloom - the nation's largest floral retailer.  In November (last Wednesday, to be precise), it signed with an event promoter to help 200 national and international wineries entertain the cashless transactions of the 10,000 visitors expected to attend an upcoming gour­met wine show aboard the Queen Mary.

This is a nice deal because revenues to ICRD will be both substantial and almost instantaneous.  However, the real win will occur in the weeks that follow the show.  ICRD will have the records of every transaction for all 200 wineries.  In short, the Company will have a dream list for its sales force.  Additionally, the wine show credential could be a springboard for ICRD's entry into the festival market. 

But the thing I really want to talk about today is the numbers.  For me, this is a real treat.  Like I said, profitable penny stocks are an OTC anomaly.  Equally rare in the penny sector is the opportunity afforded by good and truthful management - i.e., the kind of opportunity that enables guys like me to get the information needed to be very correct in assessing a company's financial goals months before those goals are actually attained.  As evidence, I quote:

The Stewart Report HotLine of July 27:  ICRD's recently submitted 10-K shows a current book value of 35 cents a share - in a stock that's trading at just 20 cents a share.  However, until the Company issues one or more of its pending news announcements regarding possible funding, cost cutting, restructuring, whatever, all I can do is reiterate the gut-instinct advice offered in the last HotLine when I listed ICRD as a speculative HOLD/BUY.

The Stewart Report HotLine of Aug. 20:  The stock stands at just 18 cents a share, but that should quickly improve as the Company turns cash-flow positive in the current Q3 - and the entire operation turns profitable during Q4.

The Stewart Report HotLine of Sept. 1:  This stock, now trading at just 21 cents a share, will prove to be extremely satisfying if put away for three to five months. By then, the Q3 numbers will be printed. The Company will be cash-flow positive at that time, providing investors with black-and-white evidence that the red ink is disappearing.

The Stewart Report HotLine of Oct. 25:  With the stock now just 20 cents per share, there is an obvious opportunity. A year from now - perhaps sooner - everybody involved with this Company is going to look very smart.

ICRD News Release of Nov. 15: "Company Reports Positive Net Income on 143% Net Revenue Increase."

In Wall Street parlance, what that last item means is that our "Forward-Looking Statements" actually did became factual figures.  The Q3 projections came to pass.  Surpass, actually.  Not only did ICRD turn cash-flow positive, it also posted its first-ever profit.  It was a tiny one, to be sure (just under $30,000), but a significant milestone all the same. Especially since management assured me it wasn't a fluke; that continued quarter-to-quarter to quarter profitability will be sustainable.

It should also be noted that the profit was understated due to the massive restructuring and the way the CPAs accounted for it.  In truth, the pure profit EBTIDA - which is Earnings Before Taxes, Interest, Depreciation and Amortization - came in at $305,015.  That's 10 times more than the $29,278 reported to the government.

I'm not trying to gild the lily, but I do want you to see the other side of the leaf.  Obviously, taxes and interest are ongoing and every net profit must be net of these items. However, the restructuring also created substantial one-time-only items, which is why I'm explaining all this.  In short and all things being equal, the Company is probably earning about $200,000 per month, net/net.

Not only has the ink gone from red to black, the revenue growth has been explosive.  Nine-month results for 2006 showed net revenues of $7.7 million, versus $2.7 million for the same period in 2005.  Year-to-year, that's a rise of 143%. 

As you know, this kind of growth is not sustainable over the long run - especially since ICRD has sold off all of its unprofitable divisions.  (Keep in mind that, profitable or not, those divisions were revenue drivers.) Near-term, however, the growth will likely continue.  The current Q-4 will absolutely stomp last year's results.  It will even show a nice improvement over the most recent quarter, simply because holiday shopping means lots of credit card usage - and we're in the credit card business!

Speaking of holidays, I'm taking a brief one myself to write this unscheduled report, enjoy the copious amenities of The Balboa Bay Club and the serious luxury of a friend's yacht.  At just over 100 feet, this thing has everything but a helipad.  I'm not bragging because it's not my yacht.  It's just that I'm alone on this monster, pretending to be The Donald (except with good hair), and I feel a large need to tell somebody.  Besides, I also need a segue to the discussion of ICRD's balance sheet - and this is it.

Ironically, the opportunity to use this boat, same as the opportunity to write this report, was completely coincidental.  The latter came about because the last phone call I made before I took off was to ICRD's chairman, Bill Lopshire.  Immediately after we spoke and I was able to put the details of the Q3 and nine-month financials into perspective, I knew something had to be written - and written fast. 

Clearly, not my forte.  In this instance, however, it probably doesn't matter.  The information Bill and I discussed was so compelling this Report has almost written itself.

First, we established a baseline.  Aside from forgetting to mention that ICRD has only $1.4 million in debt at an interest rate of just 6.5%, I think the information above brings you to the same starting point Bill and I worked from. As such, we can now take a forward look to 2007.

In terms of next year's revenue growth, our theoretical Income Statement would easily show $12 million at the top, based on the nearly $3 million it grossed in Q3.  However, a 4-x-$3mm, straight-math projection produces an almost stupidly conservative projection.  We don't need that.  What we're looking for is accuracy.  Bill is confident the company will grow 50% in 2007. That would put next year's revenues at $18 million and - a figure I'm comfortable with, too.

As for net income, using the $200,000-per-month figure I noted on Page 2 produces an easy expectation for 2007 - i.e., $2.4 million.  But even that number would be ultra, ultra conservative. 

Why?  For one thing, the current business operation is so established - contractually and otherwise - that management could take all of next year off, fly to Hawaii, come back at Christmas, and still find that $2.4 million waiting in the coffers. Consider too that, even after you allow for the probable costs associated with growing revenues by 50%, the net income would still have to be at least 25% higher (especially when you recognize that the increased sales also bring the advantages of scalability).

After having factored all this in, I believe $250,000 per month - albeit still a very conservative estimate - is the revenue figure to work from.  That would put the Company's net income EBTIDA at $3 million for 2007.

As for capitalization, International Card Establishment has approximately 33 million shares outstanding.  The current cash position is fine (especially now that it has stopped losing money).  Its credit line is strong.  However, ICRD also has a growing sales force that will eventually earn stock options, so there still needs to be some allowance for dilution.  Bill said my guess-timate of 35 million shares by the end of 2007 sounded about right.

Based on this set of numbers, ICRD will earn approximately 9 cents per share in the next calendar year.  The stock closed Friday at 23 cents per share.  If I'm anywhere even close to being accurate, we have a stock now trading at just over 2X next year's earnings! 

Of course, once this becomes evident, the stock will soar.  It will have no other choice.  Even at just 12X 2007 earnings, ICRD would be at a buck a share. And that, my friends, would be a four-banger. Except for Amarillo last year, it's been a long time since we had one of those. We're overdue.

On the other hand, even if the Company were to stall out and make no further progress (which I certainly don't think it's going to do), we'd still be looking at nearly 7 cents per share and a stock priced at probably 80 cents or better.  Point being, even the worst-case scenario paints an excellent profit picture in a reasonable time frame.

Revenues are another metric for valuation - especially within the bankcard sector.  Revenue multiples are popular in the bankcard industry for much the same reason they were the touchstone in the early days of the dot.com sector:  Almost nobody was turning a profit, so revenues were the only thing to value. 

Fortunately for us, ICRD is a bit different. Aside from real-time profitability, we have a strong argument for $18 million in revenues in CY 2007.  The tricky part is trying to find something to compare that figure to.  Today, the industry consists of countless mom-and-pop shops and a handful of multi-billion-dollar goliaths. There's almost nothing in the middle. That's because, as noted in prior HotLines, virtually (if not literally) every publicly traded player in bankcard has been either privatized or bought out. 

And that might be the best thing going for us.  From Day One, I've gone out of my way to make one thing crystal clear: International Card Establishment was being built for the sole purpose of being sold.  For us, the exit strategy has been the only strategy.  As for everybody else, I really can't say.

Apparently, other Wall Street analysts aren't yet looking at International Card Establishment.  And, if they are, they aren't looking very hard.  It's either that or the boutique firms that do keep an eye on ICRD believe the third-quarter turnaround was a complete fluke.  If they do, then they're completely wrong. Period.

Either way I find it difficult to understand how the Company could be so cheap.  Then again, I find it easy to invest in such an obvious bargain. BUY - with both hands.

As always, thank you for subscribing. 

J. David Stewart

Analyst and Publisher, The Stewart Report

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice. J. David Stewart owns 150,000 common shares of International Card Establishment, Inc. David has also subscribed to purchase an additional 100,000 ICRD shares Restricted under Rule 144. J. David Stewart also owns 100,000 shares of Amarillo Biosciences, Inc., common stock and another 100,000 shares of Amarillo Biosciences Restricted under Rule 144. J. David Stewart and affiliates of The Stewart Report may also have other long or short positions in these and other securities discussed herein, including warrants and/or options, and may buy or sell same at their own discretion. This report contains or may contain forward-looking statements within the meaning of the "safe-harbor" provisions of the US Private Securities Litigation Reform Act of 1995. This report is intended for informational purposes only and does not have regard for or take into consideration the reader's investment objective, financial situation or suitability for this security. Consult with your financial advisor and perform your own due diligence. Copyright © The Stewart Report, 2006.