 TOP IDEAS: RDM Corporation (TSX: RC) adds to cash in Q1. What's next, an acquisition?
Few small cap companies can boast a net working capital position of US$20 million, of which over US$15 million is held in cash, but RDM Corporation can.
Since we added RDM to Investorfile's Top Ideas list for small cap value stocks (See blog post: Cash-rich small cap turnaround, offers value and opportunity), the Company has accumulated another US$277 thousand of cash and continues to operate free of any debt.
Our takeaway from the recently reported Q1 results is confirmation that RDM's core business, the recurring revenues from the Company's payment processing services earned from its electronic check technology, is a cash cow.
RDM has pioneered electronic check conversion systems and web-based image and transaction management services for banks, retailers, payment processors and government agencies in the USA.
The Company reported that it added 956 new end users of its electronic check conversion technology during the first quarter ended December 31, 2011, an increase of 18.5% compared to Q1 2011 and 5% compared to the prior quarter.
More end user sites equate to more processing fees and recurring revenues for RDM. The Company continues to scale up this business segment and management has indicated that RDM earns 70% gross margins on the recurring revenue stream derived from each new end user customer site it adds. Overall, RDM reported gross margins of 49% in Q1.
RDM has considerable cash resources which continue to grow. All things being equal, it is safe to assume that when the Company reports Q2 results, the cash balance will have raised again.
As cash accumulates, so does the likelihood of a shareholder-value enhancing event such as an acquisition, dividend or even a takeover.
Our conclusion for small cap value investors is: given the cash hoard, RDM stock price's downside seems limited, and its upside much less limited.
RDM share price currently trades up 20% since Investorfile's first blog post earlier this year.
Author's Ownership Position TSX: RC - Long
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This article is for informational purposes only. This article is based on the author's independent analysis and judgment and does not guarantee the information's accuracy or completeness. The information contained in this article is subject to change without notice, and the author assumes no responsibility to update the information contained in this article. The information contained within this article should not be construed as offering of investment advice. Those seeking direct investment advice, should consult a qualified, registered, investment professional. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock.
Investorfile.com is not engaged in an investor relations agreement with RDM Corporation nor has it received any compensation from RDM Corporation for the preparation or distribution of this article.
The author of this article has acquired and may trade shares of RDM Corporation through open market transactions and for investment purposes only.
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