Advant-e (ticker:ADVC.OB) designs software for document capture and transfer-those unsung applications that keep companies organized and efficient. It is not a sexy industry. But it is a profitable and necessary one. In addition, corporations are loathe to change software providers as long as the software works well enough, which provides an economic moat. Ever worked for a company that has decided to change software systems on the fly? It’s painful and irritating.

Advant-e has two operating divisions, Edict Systems and Merkur Group. Edict Systems creates web-based applications, while Merkur Group’s products are software-based. It should be not a surprise that Edict Systems’ revenues have been rising healthily while Merkur Group’s sales have been only modest increases in recent years. Overall, the company has a very strong record of growth and profitability. Here’s a look at Advant-e’s historical results:

Over the past decade, Advant-e’s sales grew by an amazing 23.8% annually. However, annual sales growth slowed to 12.6% annually over the last five years and just 4.9% year over year. A lot of the slowdown can be attributed to the economic crisis, but it’s unlikely that sales growth will rebound to previous levels.

Advant-e’s growth did not come at the expense of margins. The company was successful in increasing margins all the while, hitting all-time highs in the last twelve months. Free cash flow has tracked higher right along with net income, effectively equaling or exceeding net income in each of the last four years.

The company’s balance sheet is as strong as ever with no debt and significant cash reserves:

Advant-e has responded to its slowing growth and continually increasing cash reserves by initiating an annual dividend of 1 cent per share, as well as a special additional 1 cent dividend in 2011.

Despite hitting record sales and earnings figures and paying a healthy dividend, Advant-e trades at a very modest valuation:

Advant-e has an earnings yield of 11.3% and a free cash flow yield of 12.8% without adjusting for excess cash. If the company can manage even a modest growth rate of 3-5%, investors are looking at the possibility of very attractive returns. In the meantime, investors benefit from a 4.4% dividend yield with a good chance of dividend increases or additional special payouts.

Are there risks? Absolutely. Advant-e is a tiny company in a crowded industry. One botched software edition roll-out or a larger competitor entering the field could have a severe impact on revenues or profitability. Advant-e is also a controlled company with CEO Jason Wadzinski owning a slight majority of shares outstanding. If Mr. Wadzinski wants dividends, that is what you get. If not, tough. The company has disclosed a few related-party transactions, none of which seem inappropriate.

Despite these risks, I view Advant-e as a growth company trading at a value price. Like many of the other stocks profiled on this blog, Advant-e Corp. trades with little volume and a wide bid/ask spread. Anyone attempting to buy in should use limit orders and more than a little patience.

No position.