Growth Stock
MAM Software
(Nasdaq - MAMS) $8.00
MAM Software is a leading provider of software used by the automotive aftermarket industry. Customers include tire dealers, service centers, collision repair shops, and parts retailers. The company also supports wholesalers and e-commerce operators. The aftermarket business is a massive industry with hundreds of thousands of locations. Several chains use modern internally developed systems. But a majority of the industry still relies on character-based programs that are slow, hard to use, unreliable, and difficult to maintain. MAM converted its technology to a cloud-based format in 2010. That design improved reliability. It also made innovation easier, while cutting costs. The company's initial emphasis was on smaller customers. Penetration was strongest in the United Kingdom, where the company gained a 75% market share. MAM developed an enterprise version over the past few years, aimed at much larger customers in the United States. That product now is being rolled out. Sales and earnings are poised to accelerate rapidly during the next few years. Those deals promise to sustain earnings over the long haul, moreover. Switching software is a major effort. Once a new generation is adopted customer retention often lasts for decades.
MAM internally financed "Vast Online," its new enterprise system. The company's first customer, Goodyear, supplied additional R&D funding. Those payments don't preclude MAM from selling the software to other users. Commercialization took more time than MAM originally had in mind. Goodyear returned a stream of fixes and corrections. It also dreamed up several new retail concepts during the development process. (Buy your tires online. Install them at your house.) The software now is locked down. Goodyear has 600 company owned stores, plus 525 franchised locations. The company owned units are beginning the roll out in February. All of the corporate sites are scheduled to be upgraded over the next 18 months. The franchised dealers aren't required to switch. But once the corporate units adopt the software a large percentage is expected to follow suit. Total sales could rise 15%-20% as a result of the Goodyear contract. Profits could increase 25%-50%.
Goodyear is the tip of the iceberg. There are 130 large tire dealers in the United States. Several now are queued up to purchase the software. One regional dealer in Phoenix has 1,000 locations. Other venture capital backed roll-ups are ready to jump on board, as well. Private equity backed companies are especially good candidates. They typically expand by making acquisitions. Using cloud based software makes it easier to integrate new locations. Software delivered from the cloud also is simpler to update, and more consistent across the entire chain.
Profit margins already are well above average. So is return on invested capital. Most cloud-based software companies are barely profitable because of their pricing structure. Software-as-a-service is billed monthly, while expenses are incurred upfront. Reported earnings typically are low as a result. MAM already generates pretax margins above 20% despite that timing mismatch. Its return on capital is above normal, as well, in the 25%-30% range.
Margins are likely to expand further over the long haul. Recurring revenue will climb as new customers are added. And costs should stabilize, since support and R&D will be leveraged by the cloud delivery format. In 2-3 years income could achieve $.75-$.95 a share (fully taxed). A stronger performance is possible. Applying a P/E multiple of 30x to the midpoint suggests a target price of $25 a share, appreciation of 200% from the current quote. Limit orders are advised.
MAM internally financed "Vast Online," its new enterprise system. The company's first customer, Goodyear, supplied additional R&D funding. Those payments don't preclude MAM from selling the software to other users. Commercialization took more time than MAM originally had in mind. Goodyear returned a stream of fixes and corrections. It also dreamed up several new retail concepts during the development process. (Buy your tires online. Install them at your house.) The software now is locked down. Goodyear has 600 company owned stores, plus 525 franchised locations. The company owned units are beginning the roll out in February. All of the corporate sites are scheduled to be upgraded over the next 18 months. The franchised dealers aren't required to switch. But once the corporate units adopt the software a large percentage is expected to follow suit. Total sales could rise 15%-20% as a result of the Goodyear contract. Profits could increase 25%-50%.
Goodyear is the tip of the iceberg. There are 130 large tire dealers in the United States. Several now are queued up to purchase the software. One regional dealer in Phoenix has 1,000 locations. Other venture capital backed roll-ups are ready to jump on board, as well. Private equity backed companies are especially good candidates. They typically expand by making acquisitions. Using cloud based software makes it easier to integrate new locations. Software delivered from the cloud also is simpler to update, and more consistent across the entire chain.
Profit margins already are well above average. So is return on invested capital. Most cloud-based software companies are barely profitable because of their pricing structure. Software-as-a-service is billed monthly, while expenses are incurred upfront. Reported earnings typically are low as a result. MAM already generates pretax margins above 20% despite that timing mismatch. Its return on capital is above normal, as well, in the 25%-30% range.
Margins are likely to expand further over the long haul. Recurring revenue will climb as new customers are added. And costs should stabilize, since support and R&D will be leveraged by the cloud delivery format. In 2-3 years income could achieve $.75-$.95 a share (fully taxed). A stronger performance is possible. Applying a P/E multiple of 30x to the midpoint suggests a target price of $25 a share, appreciation of 200% from the current quote. Limit orders are advised.
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