CreditRiskMonitor: Play Defense with this Counter Cyclical SaaS Company
CreditRiskMonitor: Play Defense with this Counter Cyclical SaaS Company
Illiquid microcap company with accelerating demand, a new product launch and improved profit margins moving forward; $4/share target (60% upside)
CreditRiskMonitor (OTCQX: CRMZ; $27 million market cap) provides software-as-a-service subscription products for corporate credit and procurement professionals to allow them to better analyze corporate financial risk. Management claims that their analytics and models can predict public company bankruptcy risk with 96% accuracy and 70% for private firms. More than 35% of the Fortune 1000 are subscribed to its CreditRiskMonitor service.
There have been a couple of solid Seeking Alpha write-ups on this name that I recommend checking out for a more comprehensive review of the company, competition, and risks (link here and here). This post will be different from my previous write-ups as I will provide a quick ‘one-pager’ on my investment thesis and price target.
Investment Thesis
This is not a complicated story: demand for CreditRiskMonitor’s services increases when credit conditions tighten. Growth should also accelerate with the recent launch of a new “sister” SupplyChainMonitor product which is geared toward providing more holistic supplier risk assessment tools, beyond just financial risk. Lastly, profit margins are headed higher as a significant portion of the incremental SG&A spending in the past couple years was driven by SupplyChainMonitor and other product enhancements that have been completed.
At ~7x EV / FY23 FCF (by my estimates), CreditRiskMonitor shares trade at an undemanding valuation and is a compelling investment given the following:
Demand for the firm’s credit risk software platform should increase with a recession. This product is a sticky recurring revenue business, given that contracts are typically one year long, and the company says customer retention is high (in the 90%+ range).
CreditRiskMonitor recently expanded its private company coverage in the fall of 2022 (they tripled the number of companies covered), allowing the offering to better compete with larger players in the space.
The company launched their new product SupplyChainMonitor in May 2022, allowing for faster future revenue growth vs. history and cross-selling opportunities with existing clients.
The expanded private coverage and the launch of SupplyChainMonitor were significant SG&A investments from FY19 to FY22. Now, the company will finally reap the benefits in the form of increased revenue and profitability in FY23 and beyond.
The company is over-capitalized (~$12mm of net cash on $27mm market cap), giving it plenty of flexibility to return cash to shareholders, which they have done via dividends pre-COVID. The Board also authorized a $1mm stock repurchase program in January 2022.
Outlook
From a top-line perspective, this has historically been a low to mid-single-digit grower, but revenue growth accelerated 8.5% in FY20 and FY21. I have modeled 7-8% growth moving forward, given the new product launch and customer retention.
I expect profitability to increase much faster than in recent history, given the launch of SupplyChainMonitor, which was previously a drag on margins as it took the company a couple of years to develop the product. Furthermore, most of the SG&A spending on improving the private company coverage should be in the rear-view mirror now. The company stated this in April 2021: “We are looking to introduce a new platform in the near future as well as important additions to our private company coverage. The significant costs to develop these two initiatives have and will continue to be borne by our company before we begin booking revenue; however, we believe these investments will, over time, produce meaningful returns.”
Valuation & Price Target
I arrive at a $4/share price target (60% upside) given high single-digit growth (7-8%/year) moving forward and sustainable ~12% FCF margins, up from the mid to high single percentage range in recent history) driven by lower SG&A as % of sales.
This is funny. I was literally tasked with writing a 2-page investment memo on this stock as a case study for a job I applied to recently. My DCF came to similar intrinsic value, at $3.70 ish I believe. However, I also used a multiples analysis (is my sell-side showing?) and then did a 50/50 weighted average which brought my Target Price closer to $3.30 ish and "only" 30% upside. My conclusion was to not buy the stock for lack of liquidity, lack of exposure/coverage (how will anyone buy the stock if no one knows about it?), the mgnt team doesn't do calls, doesn't market, etc. Its a good company, its spits CF, if they re-instate the dividend (which they could easily do as they aren't pouring cash into growth initiatives) then the story becomes much more attractive IMO. This is to compensate for lack of liquidity and the potential for the stock to go nowhere or sideways (as it has for 25 years). I just do not see a catalyst for it to get to that next leg up of growth (granted you are conservative at 5,7,8% - I similar revenue growth rates). Its a great business for majority owners (the Flum family) but as a retail investor, I am scared it may just be dead money despite it being a good company. Just my 2 cents!
I won't pretend that the below is sound investment analysis, but while the products are definitely delivering value to customers the screenshots of them look like absolute garbage (mid-2000s ERP vibes).
I think the UX/UI of their product is concerning for two reasons; (1) it's likely a drag on their sales/growth and (2) trying to fix it would consume cash.