Bottom of the Barrel: Actrade Financial Profits From Electronic Payments - TheStreet

If you're looking for an investment with a payoff, it might pay to take a look at

Actrade Financial Technologies

(ACRT)

.

Actrade is in the business of payoffs and is a market leader in providing electronic payment technologies. Its business is centered on two principal services: the Electronic Trade Acceptance Draft (E-TAD) Program and International Merchandise Trade.

The Internet bubble is over, but the tech impact lives on, as scores of companies revolutionized their procurement program using electronic purchasing and sales, the tools of the electronic business-to-business craze. The E-TAD system serves as a financing vehicle for buyers and sellers -- typically in the manufacturing sector -- that conduct B2B commerce, both physically and electronically. Through E-TAD, buyers can purchase with payment terms of up to six months while their suppliers receive immediate payment.

Actrade's international trade business -- sponsoring and financing the sale of merchandise into foreign markets -- provides about 50% of the company's sales and about 75% of the company's net income.

Electronic Growth

Actrade built itself on the international trade business, but is staking future growth on the E-TAD business. SunTrust Robinson Humphrey analyst Wayne Johnson says E-TAD could exceed 50% of Actrade's pretax income by the end of 2002. E-TAD's contribution to Actrade's bottom line grew to 39% in the second quarter of 2002 from just 17% in the same period last year. The company's fiscal year ends in June.

E-TAD is really nothing more than short-term revolving credit with a twist. It lets buyers defer payment up to 180 days while their suppliers receive immediate payment. The unsecured E-TAD facility supplements other vendor financing programs. Payment is made by an electronic payment obligation, making on-time payment more certain.

The system is catching on. In the second quarter, Actrade originated $145 million in E-TAD transactions, up 10% from the first quarter and 78% from a year ago. Moreover, operating margins increased to 65% from 50% last year with only $81.5 million in E-TAD originations.

The operating margin should continue to grow. "We believe Actrade is in the beginning stages of demonstrating operating leverage from increased transaction volume and higher revenue producing E-TAD sales," Johnson told clients after Actrade released earnings last week. "The larger the E-TAD, the greater the revenue stream from that instrument, which does not cost any more to process than a lower-value E-TAD."

Even as Actrade establishes E-TAD as a preferred method of short-term trade credit, E-TAD users' credit quality should improve. "The size and credit quality of Actrade's customers is improving, and the frequency and dollar value of E-TADs written per customer is rising," notes Johnson. "The company added 36 new customers in the second quarter, of which at least 12 were in the $100 million in revenue

range or above."

Johnson estimates the company will earn $3.07 for the year ending in June. He rates the stock buy with a 12-month price target of $39. His firm has not provided banking services to Actrade.

The Downside

Many investors have not thought Actrade stock was cheap enough. Since announcing a 64% increase in quarterly profits and indicating comfort with estimates of $3 to $3.10 for 2002 earnings, the stock has fallen more than 38%.

There are two potential reasons. First, the company revealed that one customer with an $8.8 million E-TAD balance outstanding has been moved to noncurrent and the E-TAD restructured into a four-year loan; $500,000 of the balance will be repaid in December and $345,000 has been written off. While any finance company will have bad loans, the magnitude of the loss -- roughly equal to second-quarter revenue attributed to E-TAD -- spooked investors.

"In Actrade's line of business inevitably there will be some nonperforming loans, and as long as they are not a frequent occurrence of this magnitude, we remain positive on the company and the stock," says Johnson.

Some will question whether the treatment of the nonperforming E-TAD as current by restructuring the debt as a term loan is tantamount to inflating Actrade's financial health. Post-

Enron

, investors are especially careful and critical of upstarts like Actrade.

Then there is the company's International Merchandise Trade business, which has the risks typically associated with multinational businesses: namely, currency, economic and political risks. That the business is domiciled in the Bahamas and doesn't pay U.S. tax is simply another level of complexity that investors may find puzzling as the focus on clean and understandable financial statements is at a premium.

Finally, the economic slowdown, if protracted, could hurt Actrade's commercial lending business. That impact was seen in the second quarter in which the company posted bad debt, expenses of $1.2 million, at the high end of the company's historic range.

All that said, if you can get comfortable with Actrade's accounting, you can certainly get comfortable with its potential. I like the potential of this company and, with comfort at a premium, like the stock anywhere below $20. The risk and complexity cost Actrade a half-barrel, so it gets two barrels.

For an explanation of our barrel rating system, see our recent description.

Looking Back

Below is a look at previous barrel picks and their performance. Continue to avoid

Goody's

(GDYS)

as its sales continue to weaken.

Conversely, watch

Hibbett Sporting Goods

(HIBB) - Get Report

for a strong fourth-quarter sales report next Thursday. Our intelligence suggests holiday comparable sales were up 5%, and January comps should be good as well.

Do you have candidates for Bottom of the Barrel? If so, shoot me an email with the company's name, why you think it qualifies and your full name and hometown. If we profile your suggestion, we'll send you a

TSC

gift to commemorate your pick.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to

Chris Edmonds.