A Quick Note on Computer Services, Inc. – CSVI

Computer Services, Inc. is an example of a hugely successful public company that is not listed on a major exchange. The company has an impressive long-term track record that exceeds nearly all its exchange-traded peers, yet remains relatively unknown. The company has 10 year revenues and earnings growth rates of 8.8% and 13.4%, respectively. Dividends have grown 16.7% annually over the same period. Shares outstanding have declined by 11.9% since 2002.

I first profiled the company back in May, but passed on investing. Even with the company’s stellar track record of growth, I couldn’t justify paying 19.2 times earnings. Since then, shares are down 13.9% even as the S&P 500 index returned 7%. Through the first two quarters of 2012, the company’s revenues have increased by 7.1% on an annualized basis. The company also raised its dividend by 12%. The result is a much cheaper company.

Though revenues are up, net income was nearly flat for the first half of the year. The company explains in its quarterly report released October 8, saying,

“Our first half operating expenses increased at a faster rate than our revenue growth due to higher costs associated with our Strategic Growth Initiative (SGI) and the incurrence of conversion costs to bring on major new processing customers. We expect additional revenue from new accounts to more than offset higher expense levels in the second half of the fiscal year.”

The company continues to win new customers and make strategic acquisitions. I am generally skeptical of companies that grow by acquisition, but Computer Services has proven to be superb at identifying, purchasing and integrating smaller companies. As integration costs recede, the company’s net income should rise.

While not “cheap” by traditional value investing metrics, Computer Services should command a premium as a superior operator in an industry with high switching costs. Since 2002, the company’s average return on equity has been 24.8%. Clearly, the company is able to reinvest retained earnings at attractive rates and has avoided “growth for the sake of growth” transactions.

Since 2002, Computer Services has traded at an average trailing P/E ratio of 17.1 (calculated using June 1 closing prices and trailing earnings data from annual reports released each May). The company is as strongly financed as ever, carrying no debt. What’s more, Computer Services operates much more efficiently than in 2002, recording a 22.66% operating margin in 2012 compared to 16.28% in 2002. When the market offers investors opportunities to buy high-quality companies at discounts to their long-term historical valuations, investors should take notice.


Disclosure: No position.



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