Points International ( Nasdaq - PCOM ) - Just Rewards

Points International (PCOM $9.35) is the leading provider of loyalty program services for the travel and retail industries.  The company offers a family of specialized products that airlines and other types of customers embed into their own websites.  Those features give users more options with respect to their miles and reward points.  Points invented the "top up" more than a decade ago in conjunction with American Airlines, allowing travelers to purchase extra points so they'd qualify for free flights, hotel rooms, rental cars, or other services and merchandise.  Users are diverted from the main website when making those requests to Points's specialized system, where the transactions occur.  Results automatically are fed back to the airline's computer system to keep its records up to date.  Points earns a share of the extra revenue generated.  Margins usually improve as volume thresholds are achieved throughout the year, although every contract is different.  Other products include the ability to combine multiple accounts into a single stack of reward points; and a vehicle to move points from one person's account to another's, usually a relative or business partner.  Points has deals with approximately 50 companies.  A majority of revenue still is provided by the airline industry.  But large new accounts are being added on a regular basis.  Recent additions include Best Buy and Pay Pal.

Points.com is a stand alone website that allows users to manage multiple reward programs.  People can swap Delta miles for American miles, for instance.  Those transactions can be performed directly, usually at a steep discount; or on the company's trading platform, straight up with another user.  The Points.com website now represents just 5% of total revenue.  Awareness is starting to build, though, and some other Internet services the company is introducing could stimulate volume further in future periods.

The company launched a versatile rewards program for Internet retailers at the end of September.  The Incentify program sells generic points backed by the company to any online retailer that wants to establish a loyalty program.  Customers earn those points according to whatever formula the retailer wants.  Instead of be required to use the points with the same retailer customers can select from a list of partners that work with Points.com.  (For example, a customer might purchase $200 worth of running shoes from an online store, and turn the generic points earned into 200 miles on Lufthansa.)  More retailer networks and partners are being recruited, laying the foundation for a possible Christmas surge in activity.

Meantime, the core business continues to grow rapidly.  Rewards programs have expanded under all kinds of economic conditions over the past two decades.  That trend is continuing in the current malaise.  Airlines earn billions each year from the programs.  Other industries now are catching onto the benefits of printing their own money, too.  Points earns a share of the transactions it participates in.  The company is enjoying enjoys organic growth in the 20%-30% range.  New customers continue to be added.  A computer system upgrade in 2010 expanded capacity and facilitated the development of new services.  The company faces no direct competition, moreover.  While margins will be constrained somewhat by the sheer economic pressure of dealing with huge corporate customers, earnings are likely to expand faster than sales well into the future as volume builds, the company's own Internet activities gain momentum, and additional services are created.

We estimate 2011 sales will advance 31% to $125 million.  Earnings promise to accelerate in the second half of the year as volume thresholds are exceeded on most contracts, providing a boost in margins.  We estimate fully taxed earnings will climb 114% to $.30 a share for the entire year.  Next year income could rise another 67% to $.50 a share on sales of $160 million (+28%).  A stronger showing is possible if the general economy doesn't experience a recession.  In 2-3 years income could attain $1.25 a share on sales of $250 million.  Applying a P/E multiple of 20x suggests a target price of $25 a share, potential appreciation of 165% from the current quote.

( Click on Table to Enlarge )