PSB Monthly Issue September 2014

The loan process is basically the same no matter what type of loan it is.  And in all cases, the process involves numerous steps and variables.

Perhaps that’s one of the reasons so many people have trouble getting the loans they need.

From a lender’s perspective, the challenges are equally daunting.  Since the Global Financial Crisis of 2008, companies are trying to collect as much information as possible before making a lending decision.

Here’s the deal…

Regardless of whose perspective you take, everyone wants to make the lending process easier and cheaper.

Lenders make money from lending.  Those receiving the funds obviously need the money.  So, it makes sense to find a solution for both parties.

Not to mention, we’re talking about an absolutely massive industry.  Auto loans alone are at least a $100 billion per year business in the US.

With such an enormous industry, the stakes are very high.  For the lenders, finding an effective solution to their bottleneck is a key concern.

That’s where NetSol Technologies (NASDAQ: NTWK) comes in.

We believe the most effective way to facilitate the lending process is by using powerful software.  And that’s exactly what NTWK offers.

THE LEASING SOFTWARE BUSINESS

NTWK develops software products for the automobile finance and leasing, banking, healthcare, and financial services industries across the globe.  The company also provides consulting and system integration in the IT leasing and financing space.

The primary offering from NTWK is its NetSol Financial Suite (NFS).  It’s an end-to-end solution covering the entire finance and leasing cycle.  Basically NFS consists of point of sale functionality, front office processing, credit processing, contract management, and everything in between.

The company initially focused on the automobile finance industry, but has since expanded into just about every area where leasing and financing is involved.  That includes construction, banking, transportation, retail, healthcare, and more.

Here’s the thing…

The finance and lending process is extremely complex.  There are so many variables and factors to consider, any type of leasing software has to be extremely robust.

It’s more than just looking up credit history and setting up payments.  There’s also business intelligence to consider, such as data analysis and performance indicators. Also, the more the process is automated, the easier and more cost effective it is to lenders.

The NFS platform does all these things and more.  NTWK’s systems can even interface with mobile devices, allowing tasks such as purchase approvals on the go.

Finally, NTWK is extremely assertive when it comes to international partnerships and aggressive growth.  The company plans to grow revenues by 15-25% per year for the next five years.  Given the products and industry, this seems entirely realistic.

THE NUMBERS

In the most recent reported quarter, NTWK had disappointing numbers on the surface. I say “on the surface” because the poor numbers don’t accurately reflect the gains the company is making.  Plus, the bad news will actually work to our advantage.

You see, revenues came in about $3 million lower than expected and operating income hasn’t improved as quickly as investors were hoping for.  The company also sold off a business unit so it could focus on its core businesses.

The negative quarter caused a selloff in the stock and a series of lawsuits to surface. These lawsuits claim the company mislead investors on its future earnings potential.

Basically, the lawsuits are a bunch of garbage.  These sorts of things happen all the time with smaller companies.  Predatory law firms attempt to bully a company into a settlement.  They get a bunch of angry investors who lost money and convince them they have a reason to sue, while hoping the companies being sued don’t have enough money to defend themselves. It’s pure nonsense.

While revenues haven’t been as strong as NTWK management expected, the company has been focusing on rolling out its next-gen products.  It’s also been investing in infrastructure and its sales pipeline.

And the results have already paid off…

NTWK just announced a brand new $16 million implementation of its next-gen NFS platform in Asia.  For a company who did about $42 million in sales over the last year, that’s a massive deal.  Also, NetSol can effectively shove this deal down the throats of those suing.

Finally, the company has over $12 million in cash and under $8 million debt.  Current assets are a solid 2.4x current liabilities.  And, over the last year, NetSol generated a robust $19 million in operating cash flow.

INVESTMENT RISKS

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

A slowdown in the overall economy could lessen demand for leasing software and hurt revenue generation.

The company’s sales pipeline could take longer to develop than expected causing investors to lose patience and jump ship.

Finally, other competitors could enter the space and put pressure on sales and negatively impact operating income.

POTENTIAL RETURN OF 138% OR MORE

NTWK has an excellent product in a massive industry.  The company has been severely punished by investors for a mediocre quarter and a fruitless class-action suit.

We believe NTWK shares are due for a significant rebound.

At the current price, the stock’s trading at just 6.7x projected earnings.  Industry leaders in the same space trade at 16x earnings or higher.  That means, NTWK could realistically climb 138% or more just to meet the industry average.

Based on our analysis, we see NTWK climbing to $4.25 a share or more.  Buy the shares now for potential gains of 138% or more!

ACTION RECOMMENDATION

BUY NetSol Technologies (NASDAQ: NTWK) up to $3.40 per share.

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