Points International ( Nasdaq - PCOM ) -- Margin Leverage on Tap

Points International (PCOM $9.00) reported excellent on target Q3 results.  The company is the leading provider of loyalty program services.  Consumer oriented companies that issue miles and reward points hire Points to provide ancillary services like "topping off" and moving credits from one account to another.  Most partners embed a link to the company's servers on their own websites, making it look like their own operation.  Points actually performs the work and updates all the related databases.  The company also operates its own portal, "Points.com."  Consumers can trade directly with other users on a computer based exchange system to get rid of unwanted miles for a carrier they can use. 

Margins tend to increase as volume expands.  Part of that relates to typical economies of scale.  Performance also benefits from rising commission rates after quotas are achieved.  Fully taxed earnings advanced 17% in Q3 to $.07 a share.  Revenues improved 23% to $28.8 million.  Two new products were introduced in the period, impacting profitability.  Those costs are slated to fall in Q4.  Better commission rates are poised to kick in, as well.  And while the summer is usually a slow period for promotional activity, most of Points's partners ramp up those efforts in Q4.  So revenues should expand sequentially.  Earnings are likely to accelerate on the rising volume and expanding margins.

We estimate income will finish at $.25-$.30 a share (+79% to +114%) on sales of $130 million (+36%).  Next year $.50 a share represents a realistic target.  Sales could advance 23% to $160 million.  The long term outlook is bright.  Above average gains could be realized well into the decade.  Points faces little direct competition.  And the loyalty program industry is continuing to expand as new companies enter the fray and existing participants figure additional ways of printing their own money.

      ( Click on Table to Enlarge )