Armada Data

If you are lucky enough to be dealing with a large portfolio, in excess of several million dollars, there are two reasons not to read this post. 1) the author and 2) the market cap of the company detailed is less than $3 million. Yes, that’s million with an “m”.

Armada Data (ARD on the venture) is tiny. What’s worse for liquidity is that insiders own quite a bit, so the amount available is really tiny.

Divisions:

Armada Insurance

Armada insurance company outsourcing vendor that supplies the insurance company’s automobile claims departments with proprietary and detailed vehicle pricing reports (specific to their requests). The 4 main segments are:

Waiver of Depreciation claims reports
Actual Cash Value (ACV) claims reports
Replacement Vehicle (New Vehicles) claims reports
Insurance Company Employee Purchase Program (pricing reports/offers)

Waiver of Depreciation / 43 Endorsement

Waiver of depreciation is included in around 90% of new cars sold in Canada. Insurance services charges a reasonable fee to the insurance company for a detailed report that contains different settlement options. This saves the insurance company in claims expenses, as they pay the lowest of the different options detailed in the report.

Actual Cash Value (ACV)

If you don’t have a waiver of depreciation you will receive the ACV (actual cash value) of the vehicle. This is what the vehicle is worth to replace with something as close the current make and model as possible. They have a database of vehicles 1990 and newer. Again, a fee is charged to the insurance company for a report that Armada provides. This market is around 10x the size of 43r, but is more competitive.

Replacement Vehicles

More and more policies are written with an additional premium that includes a replacement provision. With these policies the insured is supplied with a new vehicle (or similarly equipped) for up to 5 years from the purchase date. Armada charges the same fee as a waiver of depreciation.

Employee Purchase Program (EPP)

Provides insurance company employees Armada’s reports for the same fee they charge the insurance company. This is for employees who are in the market for a new vehicle.

Some other points on the insurance division are:

  • Armada is testing a new more automated version of ACV
  • Armada currently works with 26 insurance companies
  • This division is around 40% of revenue

Retail/Car Cost Canada

This is a pricing report supplied to the consumer for around $40. One average the consumer ends up saving $1,000. This report supplies some pretty detailed reports on dealership pricing. Informing more people through more modern advertising (social media) would help. I have a friend who used this service personally and he said it was well worth the money. This is currently 28% of total revenue.

Dealer Services

Derives its revenue through leads provided to dealerships through CCC. This is 30% of total revenue. Why would dealerships want people armed with detailed pricing data in the showroom? These customers are serious. They won’t spend the money for the data if they didn’t want to buy a car. There is no tire-kickers here. The salesman has a quick sale and the ability to build a relationship. The push is also to keep the vehicle service in house.

AMGS

This is to maintain CAA credibility to the CCC website. The company has determined that members are 3x more likely to join CCC if it is CAA certified.

Advertising

This is just advertising on company websites. It is only around 3-4% of total revenue.

IT

The IT division was recently purchased. The idea is to use this division to streamline the different divisions. There is some revenue here from web hosting and website development.

Management

Senior management owns around 47% of the shares outstanding. The CFO (Paul Timoteo) has been buying share around these levels. A potential risk is that the CEO and CFO are owners of LeaseBusters. They have made it clear that the majority of their time and effort is now on Armada. Compensation is quite reasonable. There are 4 independent board directors. The IT department was purchased from a relative of management, so they may have paid above market rates. Also, the spouses of the CEO and CFO are employed by the company at market rates.

Potential

I have a current fair value of at least $0.35 with little or no growth. If ARD executes on some of their initiatives then I you could see a much higher share price. They pay an annual dividend with a current yield of 2.8%.

  • EV/Sales of 0.75
  • EV/E  of 7.9
  • P/TB 1.91 and P/B of 1.65
  • EV/FCF  of 7.5
  • DCF, EPV and Graham fair values of $0.31-0.39

The company got involved with a IR firm that aggressively promoted the shares to over $0.50. This relationship has been terminated and it is apparent that management feels this was a waste of money. This wasn’t a pump and dump as neither the CEO or CFO sold shares at the higher prices. The company issued a press release detailing some aggressive growth targets that are not likely to be met in the short time frame promised. Some of those growth targets are possible, but the current focus is clearly on profitability not top line growth.

The company is now operating out of one location. The addition of the IT division should help margins going forward. Thought the most recent quarter showed revenue down slightly year over year, margins expanded. ROC is quite nice, around 40% average over the last 5 years. The CCC (cash conversion cycle) has hovered around 40 days for the last 5 years as well.

Summary

When I started investing I read all the “important” books that everyone quotes when the talk about Warren Buffett and Ben Graham. Yet very few actually follow the philosophy that they outlined. Buy with a discount to intrinsic value and wait. This is very tough for most people, especially with micro-caps, because volatility is huge with little or no change in the long term earnings power of the business. I think under $0.20 ARD is a buy, and I can almost guarantee that patience is required with this one.

Dean

Disclosure: The author is long ARD.V at the time of writing.

Hat tip to Chip and DD for the idea, and doing most of the heavy lifting.

5 Comments

Filed under Company Analysis

5 responses to “Armada Data

  1. Hi Dean,

    I’ve been following Armada as well. Do you have any thoughts on their retail business in their latest quarter (Q2)? They blamed lower marketing expense for a 21% drop in their retail business. Also, this company appears way too confident. The CEO in 2009 said:

    “This puts us on pace to finish the year somewhere in the range $3,000,000-$3,200,000 in revenue with a net income of $600,000-$750,000 or 4.5-5.5 cents per share”

    That did not pan out!

    Not to mention this great one liner in the lastest earnings press release, where revenue fell.

    “It is expected that Management can meet these objectives regardless of economic conditions. Although a robust economy can lead to a greater number of cars sold and thus a potentially larger market opportunity for all of Armada’s divisions, a down economy has proven to have an equally positive impact as both individuals and insurance companies become more cost conscious.”

    Nothing can stop Armada I guess! It just concerns me that they have such confidence.

    • Thanks for the comment.

      I think that management was pressured to “sell” the company back in 2009. The hiring of the IR firm was a bad idea. I am just glad to see that the CEO and CFO did not sell any shares at the elevated prices.

      The retail (CCC) division is not really a worry (yet). As the drop in revenue has come with an increase in gross margins for the division. In order for the dealer services and CCC to play off each other to their maximum potential, there does need to be higher subscribers to CCC. Social media seems like the best avenue to gain members. Word of mouth can only do so much.

      I don’t read too much into the comments on the MD&A. I look for what the management is actually doing. The fact that the CFO has been buying recently gives me confidence.

      The focus has been of profitability as EBITDA margins have now improved to 16% (from 13%) for the first half of the fiscal year compared to the first half of last year. This is despite lower revenue. I think that margins still have room to expand with the addition of doing IT in house and having one location for all divisions.

      Though I can’t tell you if they will execute, I can tell you that they have a pretty vested interest in the company. The CEO and CFO have at least 5x their salary invested in the company at current prices. Buying at EV/EBITDA of 5.5, with EBITDA still growing, gives me enough margin of safety.

      Dean

  2. hanswu

    Hey thanks for the interesting analysis. I’ have been following the company for a while and been in and out, the nice pop today caught my eye. Looking at their last FS for November 2010 they don’t look very profitable. Without the tax carry forward they aren’t making much money. Could you let me know how you came to your valuation of 35c?

  3. Thanks for the comment.
    I get a no growth valuation of $0.32-0.35. I make sense if you look at the operating margins for the last few years. The company now has the scale to become profitable. TTM EBIT margins are mid teens and this doesn’t take the recent purchase to bring IT in house. So, mean reversion revenue at $3million, EBITDA margins at 16%, gives you 480,000. Take away the latest 24,000 for D+A and you have around 455,000 before tax. Less 35% gives you around 300k. Say 12x earnings, and you get $0.275/share. Plus net cash of $0.035, and you are at $0.31. You could give a higher multiple if you think it deserves it.
    This doesn’t take into consideration that depreciation is probably overstating what is needed to maintain the business. This number is extremely CRUDE. I just know that at this price there is quite a bit more upside then downside. The insider purchases gave me some confidence as well.
    Hope this helps.

    Dean

  4. Pingback: Armada Data - Petty Cash - B-Hive - WAGGLE

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