Cass Information Systems: Quality Business with Float and Optionality

Jonathan Isaac of Quilt Investment Management presented his in-depth investment thesis on Cass Information Systems (Nasdaq: CASS) at Best Ideas 2018.

Cass Information Systems is a leading provider of processes, software, people, and systems to manage and control the complexity of telecom, waste, utility, and transportation expenses (“complex payables”). Cass’s commercial bank invests “float” generated in the payment process, and engages in its own niche-focused banking. Float, a non-interest bearing liability, is a structural advantage for Cass because it lowers the average cost of funds for the bank and results in earning assets outnumbering interest-bearing liabilities. This imbalance powers net interest margin as interest rates rise. Cass also possesses optionality towards higher energy prices, as float per transportation invoice and fee revenue partly bear the impact of energy prices. Rebasing Cass’s historical results with a constant net interest margin shows the economies of scale of the complex payables business. The bond-like operating standard deviation of the complex payables fee revenue also shows a sticky business relatively unscathed by the financial crisis. Cass is well-positioned to benefit as interest rates and, to a lesser extent, energy prices “normalize”, and the impact is largely incremental to earnings before tax. Jonathan’s valuation model is predominately based on historical financial trends and modifications of the NIM; due to scale economies, even a consistent NIM produces decent returns, while an increasing NIM produces powerful effects. As the need for control and comfort with delegating control becomes more intrinsic to daily life, a Mungerian lollapalooza effect brews. Furthermore, US Bancorp, historically an acquirer in the field, looms as a potential acquirer.

Disclosure: “Certain accounts managed by Quilt Investment Management for clients own shares of CASS. Disclosures from the presentation also apply to this summary.”

About the instructor:

Jonathan Isaac, CFA, CFP® is President and Portfolio Manager of Quilt Investment Management, LLC, a registered investment adviser based in Tucson, Arizona. Quilt seeks to reconcile value investing with more modern concerns such as control, instability, and complexity. In addition to financial analysis and valuation work, Jonathan enjoys reading contemporary philosophy, composing experimental music, and the animal kingdom. Jonathan worked as a financial adviser in the Greater Los Angeles area for over four years before moving to Tucson and founding his firm. A graduate of Grinnell College, Jonathan received an education that, years later and with ongoing maintenance, continues to furnish surprising insights and perspectives.

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