Optimal Group, Inc. (NASDAQ:OPMR)

I picked OPMR due to their purchase of Wowwee Toys for $55M. I was hoping there would be some way to play Wowwee's growth, and OPMR made it possible. They have a great line of personal robotics, have some excellent technical talent (Mark Tilden et al) and are positioned to be a market leader in a whole new category of personal consumer electronics (personal robotics).

gaming

The gambling ban seems to half cut OPMRs sales in half, so assuming that their book value has been cut in half as well (which can be an overestimate due to a large amount of cash OPMR had at the time or a conservative estimate based on the profitability of the gambling unit) it leaves us with a Price/Book of .86. Though their annualized return on equity has not been great for a business service or toy company (they are really a mix of both now with the acquisition of WowWee) at 5.8% over the last 5 years and worse before that, they seem to have made a lot of money selling parts of the company, which still counts the same though it may not be reflected in return on equity. Just looking at it as a business service company, the business services industry has increased its return on equity to 25.8% from a 5 year average of 17.0%, and toy companies have increased their ROE to 24.0% from a 5 year average of 21.1%. If OPMR can get the return on equity of its peers, it would outperform them by between 400%-500% given my assumption as to its current Price/Book. That is a screaming deal.

OPMR is trading at about 1/2 book value right now. They have a lot of cash that they are not burning and no debt. OPMR will make the turn back to profitability and their stock will follow suit.

This company goes to show what can happen without good capital management. I made the pick based on the huge amount of cash on the balance sheet, but the company has just blown that away buying a company that appears to have no fit with the corporation. My guess is that management didn't want to let go of the assets. I predict future missteps with current management. Look to sell out at the next favorable opportunity.

Value nearly at cashlevel. Below book value.

MFI CAP 88 TOP 50 8/16/07

lots of cash 0 debt, been hit hard

should outperform

I dont know anything about the company. I never read any anual reports and I have no idea of what their business model is... and I'm honest.

But... I know that companies with high Return on Invested Capital and high Earnings Yield usually outperform the market big time, which this company doesnt have, but it used to :-)

The other thing is that Market Cap is less than one third than enterprise value, and that's absolutely cool. At the day I write this, you are paying 181M for a company that has 128M in cash ready to spend, and 13% insider ownership.

The company doesnt need to do good to be a bonanza stock. If it just performs alright, then it's enough to be a jackpot.

Sounds good uh ?

cbata reject

Ouch. Do I accept a 50% loss or double down? Has it stopped bleeding yet? I don't know, but I do think it will crawl back to $15 over the next 2 years as analysts recognize that it's still a viable business.

Forecasts.

OPMR has been beaten down with the rest of the online gambling world since the U.S. Govt passed legislation last fall. The good news is that this company is still going to be profitable and has room to grow in the coming years. Even with the possibility of paying $20M to the U.S. Govt, OPMR still trades at book value. I am sure some people would argue over the true value of Goodwill on the balance sheet, but the future earnings right now are just about free.

If we assume that the stock is trading at or close to intrinsic value, then the earnings should be valued at the following: Taking the estimates of the 2 analysts(not a statistically high sample) covering the stock, EPS for 07 and 08 are $.22 and $.62 respectively. YahooFinance lists the 5 year growth rate at over 60%. I am not about to suggest that the earnings should be worth $37.20 (=$.62 x 60) but that is a nice ceiling. Lets say that the EPS for 07 is even half the estimate of $.11/share. Multiply that by a 20% growth rate, and you get $2.20 per share. That is a 28% return over the current share price ($7.74/share).

There are a lot of holes in my argument regarding earnings estimates and growth rates as I only have analyst estimates to justify them. My excuse is that I am on vacation and don't want to look through anymore SEC Filings and figure out a DCF. If those 2 analysts are worth even half their salaries, then there is significant upside to this beaten down stock.

One last thing to note: This company has a high rate of share dilution that could really slow down earnings in the future. But for the short term, this is a great value play.

They are sitting on a TON of cash, Canadian Interest Rates are about to go up, and the Canadian dollar is at a 30 year high.

This company is at risk of losing $20 million in cash (ONLY a risk, not a guarantee) and still, in that case, it will have a Price/Book less than 1. This company would have to lose twice as much cash just to even out at Price/Book = 1.

On top of that, it is trading at a low because of depression from this news and an analyst downgrade. I'm not saying it's bottommed out, but it's got lot's of room to top out. Maybe not so much because of the potential for a buyout. Any larger competitor would be HAPPY to swallow this for a 10-30% premium.

PD pick

Unfairly beaten down by a downgrade of a profitable company. Think we've hit bottom, looking for the rebound as time goes on.

GOOD FOUNDATION COMPANY FOR MONEY PROCESSING

Skyrocketing profits, sitting on a ton of cash with a great business model.

A profitable company with no debt trading AT book value. If you were in an investment class, this would be a textbook example of when to buy.