PSB Monthly Issue November 2014

You just got done at the gym or went for a walk on a hot day, and you’re parched. Fortunately, you see a vending machine offering ice cold drinks just around the corner.

As you walk up to the machine, reality hits.  You don’t have any cash! All you have is a credit/debit card.  That does you no good.

Sound familiar?

You may or may not be one of the many Americans who no longer carries cash.  But, you’ve almost certainly come across a vending machine that doesn’t accept cards.

Only something like 5% of all vending machines in the US have the ability to accept credit/debit card payments.  That means the rest only accept cash.  The vending business is way behind the times!

And it’s not just vending machines.  There are cash-only kiosks and terminals all over the place.  The list includes laundry, kiosks, games, and more.

All told, we’re talking about an estimated $120 billion industry.  The most interesting part is only about 7% of this massive industry takes card swipes.

Talk about a huge market opportunity!

That’s where USA Technologies (NASDAQ: USAT) comes in.

THE VENDING BUSINESS

USAT provides wireless networking, cashless transactions, asset monitoring, and other services related to the small ticket unattended retail markets.  In other words they focus on vending machines, kiosks, and other self-serve retail spots.

The company’s primary product is ePort Connect, a service that handles electronic payment options.  If you’ve ever swiped a credit card at a vending machine, chances are you’ve used ePort.  It pretty much dominates that particular market.

More specifically, ePort offers POS options, card processing, wireless connectivity, online sales reporting, telemetry and data transfer, and other solutions for electronic payment scenarios.  ePort has essentially been adopted by all the major vending companies in the US.

Here’s the thing…

As I mentioned earlier, there’s massive growth potential in this space.  There are something like 7 million vending machines in the US, and market penetration is estimated at less than 5%.

What’s more, widespread adoption of this technology is basically a foregone conclusion.  That’s because more and more people are going cashless.

Moreover, the market is bigger than just vending machines.  There are more like 13-15 million potential spots for ePort.  For example, there are laundry machines, tolls, taxis, amusement rides, arcade games, automated car wash spots, parking vendors, and various other self-serve kiosks.

And that’s not all…

The introduction of Apple Pay makes the shift to cashless customers even more likely. USAT has wisely updated their technology to accept Apple Pay.  As more consumers begin using Apple Pay, the demand for ePort products is going to grow even faster than it has been.

THE NUMBERS

Speaking of growth, in the recently completed fiscal year, USAT increased their customer base 44% from a year ago.  They have a total of 7,300 clients using 266,000 total connections (over ePort).  That’s over halfway to the company’s goal of 500,000 connections.

The company is also getting about 86% renewals from existing customers, suggesting clients are pleased with the product.  As always, excellent customer retention is a very positive sign.

The total volume of transactions increased 32% during last fiscal year as well.  That’s roughly $83 million worth of transactions.  Over the same period the company generated over $42 million in revenues.

USAT is also a very efficient company, with a very scalable product.  The company’s gross margin is nearly 36%, and operating margin is positive.  As more users are adopted, operating margin will climb to 13%-17%, a strong figure regardless of industry.

Finally, the company has $9 million in cash compared to $5 million in debt.  That’s a reasonable ratio, which should expand quite a bit as cash flow improves (on new user adoptions).

Overall, it’s hard to find many, if any, financial concerns with USAT.

INVESTMENT RISKS

As with any small cap investment, USAT does have a few risks.

A slowdown in the overall economy could slow the rollout of new ePort stations at self-serve locations.

Although unlikely, additional competition in the space could slow growth and put pressure on pricing.

Finally, changes in technology could force USAT to spend money on upgrading their products and increase costs.

POTENTIAL RETURN OF 100% OR MORE

The sky’s the limit with USAT.  The company is already the leader in a rapidly growing market. Widespread adoption of its product is almost a foregone conclusion.

Despite the company’s growth prospects, the stock is trading at a miniscule 2.1x earnings.

It’s almost impossible to justify this low of a price for such a compelling opportunity. The share price could easily double or triple in the next year.  Investing in USAT is about as no-brainer as it gets, in my opinion.

Based on our analysis, we see USAT climbing to $3.30 a share or more.  Buy the shares now for potential gains of 100% or more!

ACTION RECOMMENDATION

BUY USA Technologies (NASDAQ: USAT) up to $2.00 per share.

Don’t forget your position sizing and stop-loss rules.