SPECIAL ALERT: Seizing the opportunity in USAT shares
Key points inside this issue:
- Because we find today’s sharp drop in USA Technologies (USAT) shares on news that is far from new or expected, we are using that weakness to scale into the shares, adding an additional USAT position to the Tematica Select List, significantly improving our cost basis.
- Our price target on USAT shares remains $10.
Over the last few months, as USA Technologies (USAT) has discussed its internal Board investigations into revenue recognition and subsequent management changes — including the resignation of the prior CFO and the recent appointment of a new one — the company has been clear that it would eventually publish restated financials. As a reminder, it was the initial news of this investigation that led us to shed USAT shares last September, and the shares have since fallen more than 50%. As the company and its Board started to address the issues, we added USAT shares back to the Select List near $5.50.
For those of us that have been following the story of the last few months, last night’s announced resignation of accounting firm RSM US as USA Technologies’ auditor is far from a surprise. In fact, I am surprised it didn’t happen earlier in the process. And in terms of the circumspect quarters in question, the Audit Committee has substantially completed its internal investigation and “aggregate reduction to previously reported revenues during the fiscal quarters in question is not expected to exceed $5.5 million.”
In my view, should that $5.5 million be the end result, it’s a small fraction of the $198 million the company reported in revenue for the quarters in question. The somewhat larger question will be the restatement associated with “certain items that had been recorded as expenses, such as the payment of marketing or servicing fees, were more appropriately treated as contra-revenue items in earlier fiscal quarters.” But here, too, USA Technologies had been flirting with break-even status on its bottom line and, in our view, worst case, the restatement leads to another few quarters of negative EPS. Not great, but also not worth today’s sharp drop in the share price.
Does the resignation of RSM US reveal anything new about the USA story? No.
Does this slow the growing adoption of mobile payments? No.
Will investors continue to focus on revenue growth as the valuation metric for USA Technologies? Most likely, and we’ve already given our target price a haircut to reflect that.
Will certain folks on Wall Street use today’s news to renew their call that USA should sell itself? Most likely.
Based on those questions and answers, I find the potential upside with USAT shares far outweighs the downside as consumer continue to embrace the mobile payment aspect of our Digital Lifestyle investing theme. When a company like Apple (AAPL) continues to expand the reach of Apple Pay to a greater number of retailers and supported banks, it’s a pretty safe bet mobile payment adoption has much further to go.
In short, I see today’s drop in USAT shares as a rare opportunity that is likely to correct itself as time goes on. Because we find today’s sharp drop in USA Technologies (USAT) shares on news that is far from new or expected, we are using that weakness to scale into the shares, adding another position in USAT on the Tematica Select List, significantly improving our cost basis. Our price target on USAT shares remains $10.
