Sunday, August 16, 2009 0 comments ++[ CLICK TO COMMENT ]++

An interesting microcap: Magic Software (MGIC)

Two of my favourite contrarians are the Canadian duo at Contra-the-heard, Benj Gallander and Ben Stadlemann. They publish a newsletter and although I have never subscribed to their letter, I encounter their opinions either through articles they write for The Globe & Mail or on television at Business News Network (this is Canada's business cable channel.) They got killed last year but they seem to have a good long-term record. They generally only invest in microcaps and small-caps, with many of them penny stocks trading for less than $0.50, so I don't really follow through on their ideas very much. They also invest in distressed companies and I don't see the merit in some of their picks. These guys are like me :) and invest in very high risk stuff so be careful with their picks.

Anyway, one of their picks, Magic Software (MGIC), that I was interested in, but never looked at because it wasn't cheap, hit price levels that made it attractive. But that was 3 or 4 months ago when I first started writing this post (some of my posts are composed over a long period). It isn't cheap right now so I am not going to delve into much detail other than simply introduce the company to you. The stock ran up 30% or 40% in the last couple of months and I would only buy it if went back down (unless fundamentals improved.) When I looked at it a few months ago, the P/E was 8, whereas the P/E is 12.7 now.

Magic Software (MGIC) is an Israeli software company that provides software tools to facilitate integration of enterprise software such as SAP or (If anyone works in the industry, can you leave a comment saying what you think of their products? Thanks). You can read this article the Contra guys wrote last year, when prices were higher, to get a rough idea of the company.

I haven't looked through the official financial documents thoroughly but, roughly speaking, it is a $58-million company that is majority owned by insiders. But its enterprise value is only around $21 million (it was actually around $6m million when I looked.)

Preliminary Look

With these small companies, one can never be sure if the financial statements published at websites like Yahoo! Finance or Google Finance or Morningstar are accurate but I'm going to rely on them for now—until I read through their official documents. Usually I only read the official docs if I am interested in the company after preliminary thoughts—preliminary view is usually driven by whether I like it from a macro point of view (I'm bullish on technology so I like the sector; but don't understand its industry or its specific business yet.)

Here are some basic numbers for MGIC:

Market Cap: $57m
Enterprise Value: $21m

TTM P/E: 12.7
Forward P/E: no estimates

P/BV: 0.85
Price to Tangible Book Value: 1.5

Dividend yield: 0%

Long-term debt: negligible

Operating margin TTM: 7.7%
Profit margin TTM: 7.9%
ROE: 7%

Check SEC filings for the reports or Magic's official website. Here is the link to the latest (2Q 09) quarterly report (unaudited).

Magic is not that interesting to me right now but I'm planning to ramp up my research in case the stock crashes later in the year. It was very interesting when its enterprise value was less than $10 million but not now, when EV is $21m. I haven't read its history thoroughly but I believe it sold a division or some intellectual property or something like that, and that's why it has aroud $37m in cash.

A few months ago, Magic Software used to be close to a net-net with market cap less than current assets less total liabilities. It actually may have been a net-net at the absolute bottom but that's hard to time.

When I quickly looked at Magic, the thing I did not like was how their profitability was fluctuating. They seem to have lost money every three or four years (check this 10 year financials from Morningstar; note that the summarized financials may be wrong sometimes so one needs to confirm these numbers). Without digging deeper I don't know why or whether this problem is fixable. Non-cylicals that post a loss once in a while is not exactly a good thing.

Anyway, something for those interested in smallcaps to take a look. There is political risk and currency risk. I was surprised to see the stock go from around $1.30 to $1.80. I didn't think it would rally and was taking my time. I'm waiting for it it drop back to the $1.30 level.

Let me know if anyone has any thoughts...


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