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Stock to watch: DirectCash poised to make money

DirectCash Payments Inc.

Wednesday's close: $24.70, unchanged

52-week trading range: $20.25 - $25.31 a share

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Annual dividend: $1.38 a share for a yield of 5.6 per cent

Analysts' ratings: There was 1 buy, 2 holds and no sells, according to Bloomberg data. Targets ranged from $24.50 to $28.65 a share.

Recent history: Shares of the Calgary-based provider of automated teller machines gained nearly 29 per cent [including dividends] over the past year. [It went public in late 2004 as Direct Cash Income Fund, but converted into a corporation in 2011.] The stock's momentum began to build last year with two acquisitions aimed at international expansion. DirectCash acquired Australian-based Customers Ltd. as a launching pad for growth in the Asia-Pacific region, and bought the ATM business of British-based InfoCash Holdings Ltd. to expand into Europe. The company now operates more than 19,000 ATMs globally.

Outlook: The acquisitions are the largest by far and a "company changer," said Jean-François Tardif, a portfolio manager and founder of Timelo Investment Management Inc. "DirectCash did make lots of acquisitions in Canada, but they were small ones...They have grown every year [since going public], and the company generates a lot of cash flow."

Revenue at DirectCash is expected to climb to nearly $300-million in 2013, according to Bloomberg consensus estimates, from about $112-million in 2011, said Mr. Tardif, who has owned the stock since last summer. "I personally think it will be a bit higher versus what analysts have in their forecasts."

The company has almost tripled the size of their business, and management has said it sees a lot of potential in Australia because the penetration of the number of machines per capita are half of that in Canada, Mr. Tardif added.

When the company released third-quarter results, it reported a loss of nearly $2.5-million versus a profit of nearly $4.4-million a year earlier. But "the accounting earnings don't reflect the true economic earnings because of the amortization of intangible assets" that amounts to an annualized $2.28 a share based on the third-quarter, he said. "There could be a lot of free cash flow once the company has done all the cost-cutting, and starts its international growth. On top of this, the company is still willing to make acquisitions in the future."

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There is little coverage of the stock, but "I am convinced that the stock will be around the $30 a share within the next 18 months," he suggested. "The company has a lot of debt because they made this acquisition...When the debt level is low enough [because the company generates a lot of free cash flow], they will be able to increase their dividend, but I don't think it will be before 2014."

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