Ewing Morris & Co. – Investment Case Study
DDS Wireless (TSX-DD) A “Cheap Asset”
We generally apply a private equity mindset to public companies. This means we focus our investments on a limited number of carefully chosen, well-researched companies that we expect to hold for several years. There are of course differences. Private equity investors usually own a controlling interest. This provides the authority to make key changes to the management and capital structure and allocation. But stock market investors, like us, have one unique advantage – we get opportunities to buy fractions of businesses at prices which no rational owner would sell the whole company. For this reason we tend to focus on smaller companies where there is less competition from large investment firms and more frequent mispricing.
An example is our investment in a company called DDS Wireless. DDS is the global leader in dispatch and in-car software for taxi companies. DDS also sells para-transit dispatch software to transit authorities like New York City Transit (MTA).
The product is what we call “mission critical” because taxi companies cannot operate without dispatch software or payment processing. Furthermore, a good dispatch system can significantly improve fleet efficiency. The product also has high “switching costs” because switching to another software provider means significant downtime while taking cabs off the road to replace hardware and taking dispatchers off the phone to retrain them. For taxi companies, those business risks aren’t worth switching software.
Consequently, software companies selling mission critical products with high switching costs usually have high customer retention rates and pricing power that produces recurring, high margin revenue. When combined with modest capital requirements this leads to sustainably high returns on capital. DDS also has a good CEO in founder Vari Ghai. Mr. Ghai created the technology in the 1980s, has a history of making smart acquisitions and still owns 56% of the company.
We were first introduced to the company in 2006 during an investor presentation when the stock traded above $3 per share. In late 2011, the company appeared on the 52-week low list. This was the catalyst to review the company and we realized that while revenue and profits had doubled since 2006, the stock price was down almost 50%. After re-evaluating the business, meeting with management, speaking with customers and competitors we decided to make an investment.
In our opinion, DDS’s shares are worth at least $5.00 per share which is considerably more than their recent trading price of $2.10. Their shares are available today at an attractive price because the company is small and relatively unknown and the founder has no interest in selling his majority stake at the current price.