Is it Time to go All In on CRYP Cryptologic

Given all the new licensee soon joining the Cryptologic inc poker network. Maybe? now is the time go "ALL IN" on online poker and online casino stock CRYP Cryptologic Inc.

Value Investing Worlds new interesting blog, highlights why CRYP is also a very good buy:

Given the poor first quarter results and subsequent whacking to the share price, I thought it prudent to provide an update on what I think CRYP is worth.

Charlie Munger said at Berkshire Hathaway's annual meeting that "when trying to determine intrinsic value, margin of safety, etc. there is no one easy method. By definition, you will need multiple models." Although the value of any business is the discounted value of the cash that can be taken out of it over its life, it is certainly prudent and necessary not to get anchored on one value. I will admit, that I did not properly handicap the odds in my initial valuation for the years 2007 and 2008. I knew they would be very uncertain but made them normal anyway because it made the model look nice and neat. However, my thoughts about CRYP being a great investment haven't changed. As I type, a share in this business is trading for $23.25 and although it is now even more clear that the next 12-18 will be a little uncertain, CRYP has signed 2 very important new clients since my last post (Holland Casino and World Poker Tour) and I'm as bullish as ever.

The real disappointment with CRYP was with the poker revenue. This area was helping to really drive the growth and it slowed (actually, about stopped) in the first quarter of this year. Without a tailwind from the poker side of the business, it will be tougher for CryptoLogic to grow at a very high rate as their growth will be almost entirely based on signing new clients and entering new markets. Fortunately, CRYP has shown strength in signing new clients and expanding their market. Even though I believe the poker slow down for CRYP in their established markets will be temporary and that the industry still has a bright future, the fact of the matter is that I don't really know how it will all play out. Waiting for a clear picture won't make the risk won't go away. Investing is not about eliminating risk. It's about identifying it and taking advantage of it when it is mispriced. I believe it is mispriced here and I believe that we should all listen to Warren Buffett's wise words of advice:

"An argument is made that there are just too many question marks about the near future; wouldn't it be better to wait until things clear up a bit? You know the prose: "Maintain buying reserves until current uncertainties are resolved," etc. Before reaching for that crutch, face up to two unpleasant facts: The future is never clear and you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values."

There is uncertainty but I think the risk is much less than the uncertainty and I believe investors can take advantage of Mr. Market at these levels. And now for the valuation update.

Based on the first quarter and addition of new licensees that will come online in 2007, CRYP should earn about $80 million in revenue in 2007. If excess cash is backed out and normalized margins are assumed, CRYP would currently be trading at less than 15x normalized earnings for a business with 20%+ returns on equity and very bright growth and reinvestment prospects. However, margins likely will not get back to normal until 2009. Under this scenario, the income statement for 2009 should summarize as follows (estimating 20% revenue growth in 2008 and 2009):

Revenue..................$115,200,000
Operating Income.........23,328,000
Operating Margin..........20.25%
NOPAT.......................19,828,800
Net Margin..................21.65%
End of Year Cash.........145,000,000

Depending on the growth achieved after 2009 and the terminal multiple CRYP receives on its earnings (or the growth the market foresees and the multiple it assigns to those earnings), the value of CRYP 2.5 – 3 years should range as follows:

NOPAT......$19,828,800 Diluted Shares..14,000,000
Discount Rate..10.00% Excess Capital..$130,000,000

_________________Earnings Growth (6 Years after 2009)
Year 6____________0.00%__5.00%__10.00%_15.00%_20.00%
Term. Mult.
10.00____________$22.65_$26.17__$30.53__$35.89__$42.42 13.00____________$25.05_$29.39__$34.78__$41.43__$49.58 16.00____________$27.45_$32.60__$39.03__$46.98__$56.75 19.00____________$29.85_$35.81__$43.28__$52.53__$63.91 22.00____________$32.24_$39.03__$47.53__$58.08__$71.07 ________________Intrinsic Value per Share at the End of 2009

The company's future and prospects should still be very bright at the end of 2009 and although it is probably more likely that CRYP would exceed 20% growth in the 6 years following 2009 than achieve no growth, even the no growth scenario (that also assumes dilution) gives a value close to today's price which should provide nice downside protection. CRYP will most likely be worth $50-60 at the end of 2009, which would provide for an annual rate of return of 25-40% over the next 2-3 years with little downside risk.

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