Friday, April 20, 2007

The Long Case for Optimal Group Inc

The Optimal Group is a payment processing firm that processes credit card payments for small and medium sized companies. They also process online gaming transactions that originate from non-US customers. In October, when the new gambling law was announced by the U.S. congress, this stock took a big hit because 80% of its subsidiary's revenue came from U.S. based gambling internet transactions. The stock received almost a 50% haircut from 14/share to almost 7/share. The gambing transactions segment is the high margin segment averaging 20.4% Profit Margin over the past 3 years, while the payment processing operations just turned a profit for the 1st time in 3 years in 2006.

On the bright side, they still have their payment processing firm, "Optimal Payments." The payment processing operations is turning the corner with having their first profitable year in 3 years in 2006. The gaming operations will just be 20%-25% of the total revenue compared to 50%. There will be considerable less volatility of earnings throughout the year because of the seasonality patterns of gambling transacations in the spring and summer months. The jewel of this situation though, is their net cash of $5.63 per issued and outstanding share. As of today, OPMR was last trading at $9/share, 62.5% of their current stock value is being backed by cash and short term investments. So, you are only paying $3.37 a share for ALL of their operations. This is a rock solid balance sheet as well. The safety of margin in this investment is there. Analysts project on average $121 million of revenue for 2007. They have 25,439,000 outstanding shares, that's $4.76 of revenue per share projected. They also have a 1,100,000 share buyback plan in place.

Technical wise, it just broke out of a descending triangle but I don't think it will just break through really tough resistance at $10 before it will be available at a better price. MACD and RSI have both been trending up while the stock has been moving sideways between $7.50 and $10. At $8.50 is a solid spot with the down trending line and the 50DMA meeting there.

I don't think online payment processing is going anywhere, and the price that their operations are selling for now is too cheap to pass up. I don't currently own a position.

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