Monday, July 19, 2010

David Stern Stock

At the July 1 closing price of $5.45, DJSP has a $134M market cap and $233M enterprise value. Current guidance is for ~$60M in EBITDA and ~$33M net income, so the business trades for only 4x EBITDA and also has a P/E of 4x. This fundamentally sound business generated over $40M in free cash flow in 2008 and nearly $46M of FCF in 2009. If DJSP maintains $40M or higher of FCF in 2010 and beyond, the stock currently sports a 30%+ FCF yield.

To see how this could play out, let’s assume $65M-$75M in 2012 EBITDA (relative to $69M in 2009) at a 5x-8x multiple for an EV of $325M-$600M. If DJSP produces $100M in incremental FCF through 2012 and eliminates its current net debt, the implied market cap would also be roughly $325M-$600M, or $11-$20 per share, for a CAGR of 30%-95% over the next 2-3 years. Continued growth combined with multiple expansion could easily produce greater than 50% annual returns.

DJSP also recently acquired Timios, a national title insurance agency operating in 38 states, broadening both its capabilities and geographic footprint. It seems reasonable that DJSP could leverage its existing customer relationships to gain incremental share in Florida and replicate its growth strategy across additional states.

In summary, DJSP appears significantly underpriced relative to its growth prospects and FCF generation. The CEO has been actively buying more shares in the open market over the past several weeks. An added bonus is that DJSP provides a natural hedge against greater than expected economic deterioration, and even if the economy finds its legs, the level of foreclosures will remain elevated, making DJSP shares a compelling opportunity. More aggressive investors could also consider buying the publicly traded warrants which have a $5 strike price. More conservative investors could wait for the Q2 results and updated guidance to get a better handle on whether the earlier issues are abating or mounting.

For those wishing to do more research, DJSP's investor presentation (pre the Q1 miss and forecast reduction) can be found here.