Advant-E Corp (ADVC) is a tiny software company that has flown under the radar during 2010 despite outstanding financial performance and near term catalysts in the form of a special dividend.

The stock remains significantly undervalued at current prices.

Financial Highlights

ADVC reported a 6% improvement in second quarter revenues compared to the second quarter of 2009.

Net income also jumped by 28% in the quarter, due to a pickup in sales on the Merkur side of the business, along with strong cost controls across the board.

Merkur Group – Enterprise Software

The traditional software side of the business has struggled throughout the recession, posting revenue declines over the past several quarters. Impressively, the company has managed to squeak out a profit over that time period due to lower commission rates and cost controls.

The latest release shows the first glimpses of a turnaround for Merkur.

Quarterly revenues increased 2% from the same period last year, and 54% compared to the first quarter of 2010. This is an encouraging sign that ADVC’s customers are returning after pushing off purchases throughout 2008 and 2009.

Edict Systems – SaaS (Internet-Based)

The steady growth in the Edict Systems business has been amazing, considering the economic climate over the past 2-3 years.

Going back the past 14 quarters, this is the first quarter where the company didn’t produce sequential quarterly revenue increases:

The company has no debt and an unused $1.5m credit line. ROE and CROIC come in at 21.6% and 25.6% respectively, both outstanding.

Overall, the company reported record quarterly income, the 28th consecutive profitable quarter, and is on track for the highest FCF year in company history.

Special Dividend

In November 2009, the board of directors voted to approve a 10-for-1 stock split and corresponding special dividend of $0.03 per share, a 21% ROI based on the stock’s closing price at announcement.

The dividend would be paid in 3 quarterly installments due in December 2009, June 2010, and December 2010.

Although I missed out on the Dec ’09 dividend, $0.02 per share in dividends during the course of 2010 is an 11% return at current prices.

Valuation

Even with the near term catalyst and impressive financials, the stock is trading well below its normal multiples in a number of categories:

Current vs 5 yr Averages

P/E – 9.7 vs 13.7

P/B – 3.0 vs 3.8

P/Sales – 1.4 vs 1.9

Based on both DCF and EPV valuation methodology, ADVC should be trading closer to $0.30, providing substantial upside (and dividend) at its current price.

Conclusion

So, we have a stock that is paying a cash dividend, setting record net income & cash flow levels, increasing revenues each quarter during the worst economic downturn since the Great Depression, and yet is trading well below its 5 year averages?

Seems cheap to me – what do you think?

Disclosure

Long ADVC

To give some background on my investing decisions, I’ve included a sampling of my recent stock writeups:

CHDN / UBET – Churchill Downs & Youbet Merger – My first ‘special situation’ investment of the year, a merger arbitrage play. Still offering a 13% spread for a merger that will likely close in the next few weeks, although it has ran a bit the date I estimated for. Already received shareholder approval, both management teams are committed to making it work, and CHDN has sold off the necessary businesses – just need final approval from regulators.

TPCS – Techprecision Corp – A growth stock with potential that is too hard to ignore. Heavy dependence on the solar market. Stock took a huge hit after its largest customer, GT Solar, canceled a multi-million dollar order last year. Recent filings show the return of GT Solar’s business, and the company is trying to diversify and take advantage of other macro trends in medical devices and nuclear power. Cheap even if the other growth prospects don’t materialize. Value: $2 or more.

APNC – Access Plans, Inc – Went through a major acquisition last year that more than doubled the size of the company. Alternative insurance-like products in high demand as people lose their jobs and cancel traditional medical insurance. Market does not seem to be pricing in the potential of the combined entity. Insiders hold 71% of outstanding shares and have been buying more. Value is more than double the current price.

ITI – Iteris, Inc – Strong insider buying back in Feburary. Stock has dropped back after reporting tough Q4 results. Large NOL carryforwards, meaning the company won’t be paying income taxes for a long time. Upside potential once the heavy truck market picks back up and a very neat technology that has real potential. Value: $3 with upside north of $4.50

ADVC – Advant-e Corporation – Small software company with steady revenues throughout the recession. Management is paying out another $.02/share in dividends in 2010 – that’s an easy 12% return. Value: $.30

NOOF – New Frontier Media – Stock is down almost 20% from its March highs on no real news. Insiders were buying up stock at around this price back in late 2009. Large goodwill writedown in 2009 scared many investors away. Outstanding CROIC numbers >50% and very aggressive company repurchase program should drive help drive price upwards. Value: at least $4.

SPAN – Span-America Medical Systems – Company has been paying dividends for 82 consecutive quarters and just paid out a $1 special dividend, a great sign. Average CROIC of 26.5 over the past three years. Owner’s earnings of 5.2m in 2009 was the company’s highest ever despite slow sales during the recession. Value is $25+

ACU – Acme United Corporation – Maker of school supplies has been around since 1867. >5% ownership interest from two institutional investors and insiders hold 26.7% of outstanding stock. 2009 was rough but the company should bounce back and continue to deliver solid income and FCF.  Ultra conservative valuation of $13/share. Under normal growth scenarios, it should be trading between $17-$20.

Disclosure

*Long TPCS, APNC, ITI, ADVC, NOOF, SPAN, ACU, UBET. Short CHDN