BUY QADA (NASDAQ) at $11.80

QAD Inc. (NASDAQ--QADA)

Valuation-$$28.27
Price June 7, 2013-$11.80
Pays a $.29 annual dividend

We have watched QAD for years now. We ran our first valuation back in early 2006. It pretty much has been a value trap for the past 7 years. We think this will change, we could be wrong but QAD is trading at such a huge discount to our valuation there seems to be limited downside (the stock traded as low as $10.95 over the last 12 months and a big potential upside if the majority shareholders decide to take care of the rest of the shareholders.

QAD makes and sells ERP systems that focus on manufacturing and operations. We actually evaluated their system about 4 years ago and it seemed to be the best of the bunch we looked at, except for one feature that was in development. We didn’t want to wait so we went with another solution, it was probably a mistake.

Their latest quarterly results weren’t great (creating a buying opportunity in our view). Sales were $61.9 million down from $63.7 last year due at least in part to more “cloud” sales which is a monthly subscription service rather than an outright license sale. They also reported an operating loss of $1.7 million versus an operating profit of $4 million last year. The CEO acknowledged that they need to rein in expenses going forward.  Over 60% of their revenue is recurring (maintenance and subscription fees).

Our valuation is $28.27 and QAD has $4.74 per share in cash.

QAD is closely held by the founder (President and Chairman) and her husband the CEO. Together they control about 60% of the shares. The CEO is 61 and the founder is 59. Any sale of the company would need their agreement.

QAD pays a small dividend to boot-2.3% a year—better than most bank rates.

There are about 15.6 million Class A and B shares outstanding and it trades about 14,000 shares a day, so careful buying is required.

About QAD:

QAD is a leading provider of enterprise applications for global manufacturing companies specializing in automotive, consumer products, electronics, food and beverage, industrial and life sciences products. QAD applications provide critical functionality for managing manufacturing resources and operations within and beyond the enterprise, enabling global manufacturers to collaborate with their customers, suppliers and partners to make and deliver the right product, at the right cost and at the right time.