If Futura Loyalty traded like SelectCore, BOTH companies would be trading well over 50 cents. Right now one is there while the other is under 5 cents. You do the math.
People like to compare SelectCore (TSXV:SCG) to Green Dot (NYSE:GDOT) in the US. The argument is that SCG can grow to as much as half the size of Green Dot based SelectCore's exclusive agreement to sell the Iridium MasterCard in Canada and take on a significant chunk of the US market as they can focus on smaller retail chains:
PR about their Canadian Agreement
PR about their US Agreement
An excerpt from the Canadian agreement is as follows:
"TORONTO, ON: SelectCore Ltd. (TSX-V: SCG), a provider of prepaid telecom and financial solutions for the credit challenged and unbanked consumer market is pleased to announce that it has entered into a 5 year exclusive distribution agreement for the sale of Iridium MasterCard in over 200 retail locations including Long Distance Phone Card banner stores in major shopping malls across the GTA (Greater Toronto Area) such as Lawrence Square, Parkway Mall, Woodside Square, The Albion Centre, Shoppers World Brampton, Pacific Mall, Jane & Finch Mall, Rockwood Mall, Eglington Square, Centrepoint Mall, Woodbine Centre, Ceadarbrae Mall and Bridalwood Mall."
Let's compare that to one of Futura's recent releases:
"Toronto, Canada – May 10, 2011 – The Futura Loyalty Group Inc. (TSX-V:FUT) (the "Company") today announced that since completing its partnership with The Toronto Automobile Dealers Association (TADA), the Company has executed 23 agreements with member dealers. The first group of dealers has now launched and is actively promoting and issuing Aeroplan Miles to customers. Working closely with the Company, individual dealers have the flexibility to customize their program to suit their business needs and seasonality.
“We are very excited about being able to leverage the Aeroplan program at our dealership,” said Cynthia Cochrane, Controller Town + Country BMW / Mini Markham. “We see this as a great marketing tool that will help us attract new customers while at the same time retain and grow our business with existing customers. The flexibility and ease of focusing the program on specific areas of our business at particular times is very appealing.”
About TADA
SINCE 1908, TADA serves over 340 new car dealers in the Greater Toronto Area and represents every manufacturer's brand and franchise."
Both of these releases sound kind of similar don't they? To capture the Canadian market, a great strategy is to capture Toronto first. And both companies have. SCG and FUT have carved out excellent business plans for themselves where they can pick away at the duopolies that are too big to focus on the niches that both companies thrive on. In case you don't know, the duopoly that SCG is taking on is Green Dot and NetSpend (NASDAQ:NTSP) in the prepaid "credit card" segment. Futura is taking on (and using the platform of) Groupe Aeroplan (TSX:AER) and Alliance Data Systems (NYSE:ADS), the Air Miles company, in the Loyalty Rewards segment.
Actually, the words taking on aren't exactly accurate. It's not like SelectCore and Futura are trying to compete with the big boys. Both companies are filling up an underserviced niche that no one else covers. SelectCore wants to enable those people who don't have credit cards a convenient way to pay for their goods at, for example, a local convenience store. Futura wants to enable companies to do everything they can when trying to retaining clients for future revenue opportunities. With the TADA contract, this specifically applies to everyone who drives, gets their car fixed or is planning to purchase a new car in the Greater Toronto Area. There is a saying that goes it's 10 times more expensive to obtain a new client than it is to retain an old client for the same revenue opportunity. If you're a car dealership, a loyal client captured at an early age might be purchasing 5, 10 or more $20,000 vehicles at your place in their lifetime. From the dealer's perspective, hiring a company like Futura to handle the loyalty rewards program and retain clients is well worth the investment.
Note the portion of Futura's news release above that states TADA serves as the association for 340 car dealerships in Toronto. Since signing the agreement with TADA on February 17th, FUT has already reached an agreement with 23 of these dealers to provide their loyalty services. It is reasonable to expect that contracts with the bulk of the dealers in the association will be signed. Once that happens, 20% of ALL Canadian drivers will soon be earning loyalty rewards and making revenue for Futura with EVERY mile they drive. And assuming that similar targets in Vancouver, Montreal, Calgary and other urban centers are had by Futura, EVERY Canadian driver could potentially be covered.
Not a knock on SelectCore, but I like the target market of Canadian drivers over the target market of North Americans who can't get credit a lot more. But either way, based on the niches they serve both SCG and FUT will have similar successful long term fates.
Now let's focus on the comparative valuation:
SCG has a total of 117.16M fully diluted shares outstanding. At a 57 cent stock price, that implies a $66.8M market cap. GDOT currently has a $1.6B market cap. If SCG were to grow to 50% of GDOT, that would imply a stock price of $6.83, over a 1000% gainer from current levels.
Now let's compare FUT to Groupe Aeroplan (TSX:AER). FUT has a total of 164M shares outstanding. At 3.5 cents this implies a $5.7M market cap. AER has a market cap of $2.38B. If FUT was to grow to merely 10% of AER's market cap, that would imply a worth of $238M, or a stock price of $1.45. That's over a 4000% gainer from today's price.
Another way to think about it is that SCG currently trades at about 4-5% of GDOT's market cap. If FUT were to trade at just 4-5% of AER's market cap, that would be a stock price of 58-73 cents vs a stock price of 3-4 cents today. The argument could be made that Futura is extremely undervalued to SelectCore at today's prices vs the long-term prospects of each company, even as SCG appears undervalued relative to GDOT.
Of course you could point out that SCG's revenues are far ahead of FUT's. SCG had revenues of $100M last year, nearly a quarter of GDOT's, but those are primarily extremely low margin prepaid airtime revenues which are not substantially growing and will provide the company with little profit growth potential down the road. Every $100M of those revenues comes with about a $95M in cost of goods sold for a 5% gross margin BEFORE the general and admin costs. Those revenues are not what will make SCG. If investors cared about those revenues there would have been no way SCG would have traded at 5 cents or less in the first place as SCG traded at a price to sales multiple similar to YRC Worldwide at those levels. The future Iridium MasterCard revenues are what will make SCG and those are equally as new and exciting as Futura's Loyalty revenues.
Of course you could turn this analysis completely on its head and compare both FUT and SCG revenues to INT and suggest that BOTH companies are undervalued in the 1000x's.
Click here to see a comparison of FUT to INT
SCG is a great company to invest in. A long-term goal of 10X potential gain in stock price is really good. However when you compare SCG to FUT, FUT is much more undervalued.
SCG can grow from over 50 cents to nearly $7 if it is 50% as successful as Green Dot.
FUT can grow from 3-4 cents to nearly $1.50 if it is 10% as successful as Groupe Aeroplan.
A 10x gain in FUT's stock price to 35 cents would imply a market cap of less than 2.5% of AER's vs SCG's 50% compared to Green Dot.
The math favours Futura.
Click here for more information on Futura
No comments:
Post a Comment