Insider Trading Analysis: Cardtronics

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According to a filing with the SEC, Mark Rossi, who sits on the Board of Directors of Cardtronics (NASDAQ: CATM), had a family limited liability company purchase 3,000 shares of his company’s stock at an average price of $22.97 per share. Rossi had already owned close to 15,000 shares directly; his most recent purchase of Cardtronics had been in August 2011, at prices close to $25 per share. He also serves as a Board member at Maxwell Technologies. On average, stocks bought by insiders tend to beat the market (read more about studies on insider trading) and we think that this is because insiders have strong economic incentives to diversify their investments; when they purchase additional shares, odds are that it’s because they believe very strongly that the company is on its way up.

Cardtronics is a provider of ATMs and other financial services kiosks predominantly in the United States. The company’s business model is to operate a network of ATMs generally located in retail stores that are then branded by banks (whose customers can then use the ATMs without a surcharge); partner banks include Citigroup (NYSE: C) and JPMorgan (NYSE: JPM). The company’s most recent 10-Q, for the quarter ending in September, showed revenue up 21% from the third quarter of 2011. Net income was down, but this was entirely due to the removal of income tax benefits that had existed last year: income before taxes increased 23%, showing that margins were generally flat. The growth rate of pretax income was only slightly lower in the first half of 2012, so we would say that the business is doing well and perhaps even accelerating its growth in the short term. Segment EBITDA was up in the U.S., U.K., and in other international markets.

However, at a market capitalization just above $1 billion, Cardtronics seems to already be priced for strong growth. Its trailing P/E is 26, even after declining in price by 13% this year. Wall Street analysts expect better numbers next year, and so Cardtronics trades at 13 times forward earnings estimates. While that would be a good price for a company with such solid growth, we would be cautious as the implied growth rate seems high.

Cardtronics doesn’t seem to have much hedge fund interest. The two largest holders of the stock in our database of 13F filings- Tiger Cub David Gallo’s Valinor Management and billionaire Ken Griffin’s Citadel Investment Group- each cut their stake by over 50% in the third quarter. Check out Ken Griffin's and David Gallo's favorite stocks.

Two electronic payment services companies are Global Payments (NYSE: GPN) and Euronet Worldwide (NASDAQ: EEFT). There’s a similar expectation for dramatic improvement at these companies: on a trailing basis, their P/E multiples are 20 are or higher, while the forward P/Es are in the 11-12 range. Both peers experienced moderate revenue growth last quarter versus a year earlier, while Global Payments at least had a large drop in earnings. It seems to us that if we were going to make a call among these three companies, it would be to go with Cardtronics.

Still, Cardtronics’ customers are probably better investments than the company itself. We just aren’t sure that earnings growth will continue to be strong enough over the medium term to justify the current valuation, while large banks often trade at discounts to the book value of their equity and at P/e multiples of 10 or even lower.

This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in C. The Motley Fool owns shares of Citigroup Inc and JPMorgan Chase & Co. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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