IIG?

[David Randolph]

1. Introduction

IIG came up on my technical filter and when I saw its profile, I was immediately interested, because once I had a start up company, called Utilnet Lda (it translates to Usefulnet Ltd) with about the same business model. My start up failed because it was just too early for the business here in Portugal, we were doing it in 1999. Also, our working capital was my salary as a stocks analyst  

But I always believed the idea. Apparently IIG is breaking through and getting awesome revenues and profits. But, I have to make the full analysis to know if it's really attractive or not.

2. Profile

iMergent, Inc. (IIG), an eServices company, provides eCommerce solutions to entrepreneurs and small businesses. Its solutions enable its customers to market and sell their business products or ideas via the Internet. The company offers the StoresOnline Software, a Web-based software product that enables customers to develop Internet Web sites for commerce.

3. Technical Analysis
3.1. All History Chart



See, 99 was too early for this business

3.2. Medium Term Chart



The stock is up 237% in 2006, is this still a buying opportunity? I need to check the fundamentals before I can answer this question, but the fact that it is up 237% so far this year is a positive factor, not a negative one. The market perceives the business as having more and more value, and the market is always right.

3.3. Short Term Chart



Gee, what a shot the last couple of days ... I wish I saw IIG a few days ago ... what a loser statement this was, the only thing that matters in the market is the NOW moment. And now, IIG is bullish.

Let's make some fundamental tests.

4. Fundamental Analysis
4.1. Number of Shares Outstanding



The graph above explains how the company survived from 1999 to 2003: selling shares in the open market, making private placements, that is, diluting shareholder value. But since 2003, there wasn't any major share sale, and more, the company is starting to buyback its own shares, thus reducing the number of shares outstanding. This, by itself, increases Earnings Per Share.

The current market cap is 12,289,410*$23.63 = $290.4 M

4.2. Liquidity



The company now has $20.5 M in working capital and $31.5 M in cash and equivalents. Not a spectacular balance sheet, but acceptable.

4.3. Revenues



As you can see, revenues had a big jump in fiscal 2006 (ended June 06) and they're expected to decline in fiscal 07, because of this:

«As previously announced, in fiscal 2007, the company expects product and other revenues to decrease as a result of the recognition of a significant amount of revenue that occurred in fiscal 2006 as a result of the change in the Company's business model in December 2005.»

But then, the company says this on the 1Q 2007 earnings release:

«Danks added, "Due to strong demand and response to our marketing, we are increasing guidance for full year 2007. We now expect net dollar volume of contracts written to grow between 25 percent and 30 percent compared to fiscal 2006. Additionally, we continue to anticipate non-GAAP pre-tax income will grow at a faster rate than net dollar volume of contracts written."»

On the previous earnings release they said:

«Danks added, "We have laid the groundwork for fiscal 2007 and, consequently, we are targeting net dollar volume of contracts written to grow between 15 percent and 20 percent for the year. Additionally, we anticipate pre-tax income will grow at a faster rate than net dollar volume of contracts written."»

You can see the big push in guidance this latest quarter, and that explains the rally of the last couple of days.

The revenue multiple is $290.4 M / $125.32 M = 2.31. The average revenue multiple for the Internet Software & Services industry is 2.64.

4.4. Profits



This graph isn't very good, but I can explain: in those early years the company lost big bucks per share (they also had just a few shares outstanding). In 2006 they recognized revenue due to a change in their business model (basically, they would recognize revenue over 5 years of the duration of the contract, instead of recognizing it right away since they received the money - GAAP principles are in accordance with this latest view). So they made $8.76 EPS in 2006. Estimates for fiscal 07 are $0.93 and for fiscal 08 they are $1.35.

Considering the 07 estimates, the earnings multiple of IIG is $23.63/$0.93 = 25.4, and the industry's average is 40.86. So IIG looks cheap at this point, despite the latest surge in the share price.

5. General Overview

I like the charts and love the fact that the company is buying back shares. I also enjoy the revenue and EPS growth. Moreover, I think the sector is a sector of the future, not one of the past.

Companies that survived the post-bubble era of the internet are poised to make a killing over the coming years, provided they have a profitable business model. At least this is my view.

I want to buy, but I'm a little afraid because the stock did run up so much over the short term. It may retrace $3 just on profit taking. I think it can easily run up $24, but I'm worried about the risk of a $3 drawdown. This doesn't make sense. I need to be able to risk $3 a share if I want to win $24 a share !

6. Trading Plan

Given what I said above, I plan to add IIG to the 3 Stocks on Fire Portfolio today, let's try at $23 - $23.30 (I'm not that brave, and I do expect some profit taking).

[David Randolph]

Sorry, I had some "B" where I should have "M", and there's a biiiggggg difference 

I just corrected the post.

[David Randolph]

Given what I said above, I plan to add IIG to the 3 Stocks on Fire Portfolio today, let's try at $23 - $23.30 (I'm not that brave, and I do expect some profit taking).

Nice intraday entry point, huh? Well, you can't miss them all 

I don't see any meaningful profit taking before we hit the $26.5 resistance level. I'll continue holding IIG.

[David Randolph]

I'm glad I was brave enough 

Those bulls on the chart are controlling the situation on IIG. I wouldn't mess with them.

[David Randolph]

I've read enough about this company. Read and confirmed all Stocklemon reports. I believe there are some things that are true in those reports, but some others don't make all that much sense, as the comparison with Microsoft's Office Live.

This company's business model probably won't last long, because it is based on consumer ignorance. They sell a software that probably isn't worth $50 for $6,000 because of their direct marketing strategy.

Here's how it works. IIG goes to a city, say, Miami, reserves an hotel dinning room or conference room and then mails Miami people offering them a dinner and $120 of stuff, like pens, business organizers, etc. The subject of the conference is "Internet Marketing Conference".

Then they do everything they can to make you sign a contract where you'll pay $6,000 for their OnlineStores software. Of course, many people don't know much about the internet, and they think they're making a great deal, getting access to hundreds of millions of potential costumers, working from home, etc.

Later people feel they were deceived and make all sort of complaints, but it's of no use, since they signed the papers, paid and got the product. Yet, as www.stocklemon.com says, they're offering a business opportunity, not just a software, so, according to law, they need to disclose their costumers performance before new costumers buy their product. Of course, if they disclosed performance of their costumers they would never sell another $6,000 software.

IIG is making efforts so they're not considered as selling a business opportunity, just software, and so far they were successful. But this risk and the basis of the business model should put the stock trading at a much below average valuation, not just a bit below.

I wouldn't short IIG either, since they can, for some time, say a year or two, continue with the current business model and drive revenues and profits up. But I'm not willing to continue holding these shares, since the risk is too high.

IIG will be removed from the 3 Stocks on Fire Portfolio at Monday's opening prices. I guess I was brave, but misinformed when I bought the stock. Anyway, I'll be out with a small profit.