miniseries/E+ via Getty Images
Introduction
For Cass Information Systems, Inc. (NASDAQ:CASS) the last 12 months have proven somewhat volatile. The last report for example showed some difficulties in growing the bottom line as softer activity from operating clients dragged it down. Besides this, CASS is also in the process of renewing its systems and this is causing some higher operating expenses as well. However, the outlook provided by the company is quite positive as it sees profitability improving and the likelihood of onboarding new and more clients as very high.
I think, however, that there needs to be some proof before one can buy into CASS right now. On a p/b and p/s metric, the company continues to look quite expensive, exhibiting a premium to the sector median in both cases. I think that CASS could come down further in price as a result of this if the market sees a broad correction. For the long-term though, I think that CASS can prove to be a very solid dividend income opportunity as historically the company has been raising it for 21 consecutive years. As a result of this, I will be rating the company a hold for now.
Company Structure
CASS is a company that specializes in offering comprehensive payment and information management solutions to businesses across diverse industries. Their services are designed to help businesses streamline payment procedures, effectively manage expenses, and gain improved financial transparency. With a range of offerings, CASS supports organizations in optimizing their financial operations and achieving greater efficiency in their payment processes.

Company Overview (Investor Presentation)
CASS primarily specializes in three critical areas of service: freight invoice payment and auditing, utility invoice payment and information management, and telecom expense management. These core areas represent the company’s expertise in facilitating efficient payment processes, ensuring accuracy and compliance in financial transactions, and helping businesses effectively manage their expenses in the fields of freight, utilities, and telecommunications. The company has seen some challenges like lower transportation dollar volumes but thus has been largely offset somewhat by better and higher interest rates in the short term. Looking at the net interest for the company it has jumped to 3.25% now and is a solid improvement from the 2.54% it had a year prior.

Loans Overview (Investor Presentation)
Looking at the loan portfolio for the company I think that it looks quite good right now. There was some good growth seen in the last quarter and the largest portion of it right now is faith-based at 36%. The ending investment for the last quarter was $637 million and was the result of some sell-offs and amortization for the company and the sell-off of $50 million in US securities. I don’t see the decline as something one should be too concerned about right now.
Earnings Transcript
From the last report, the CEO of CASS Martin Resch had some good comments on the recent performance and how they are navigating the current market environment.
The Company has been focused on updating and upgrading the technology platforms used to ingest and process documents received from the vendors/carriers of our clients. Most of 2022 was spent identifying partners and documenting the processes surrounding those platforms. In the first quarter of 2023, we experienced success in implementing a production environment for the Waste line of business well ahead of schedule and therefore we made the decision to accelerate the development across all payment businesses”.
With the priority right now being to update the software and technologies I think that some higher operating expenses are to be expected for the coming couple of quarters. However, where I see the risk right now is around the stickiness of these expenses. If CASS is unable to bring them down and does not see the improvements in the operations by implementing these things then the likely result will be a cut to the valuation. The markets are anticipating quite strong growth going forward, and if there is a lack of this a correction will be due in my opinion.
Valuation & Comparison

GGM Model (Author)
I think that the GGM model showcases quite well that right now you are not getting the best deals with CASS unfortunately. The company may have grown very well over the last few years, but that may stagnate if they can’t raise the margins or the space becomes too competitive. What can be said about the company though is that they have been good at raising the dividend, and a terminal 5% increase doesn’t seem too unrealistic in my opinion. But as the target prices are far lower than the current one I will be sticking with my hold rating for now.
Risk Associated
When evaluating the competitive landscape, prospective investors should carefully assess the potential for new entrants armed with cutting-edge technologies. These newcomers may leverage AI, Blockchain, or IoT solutions to revolutionize and streamline the services offered by CASS. The emergence of such technologically advanced competitors could disrupt the traditional market dynamics. AI, for instance, has the potential to automate complex tasks, enhance efficiency, and reduce costs significantly. Blockchain’s transparent and secure ledger system might provide greater trust and traceability in financial transactions. IoT solutions could offer real-time data insights and connectivity that revolutionize how assets are managed and tracked.

Funding Overview (Investor Presentation)
Regarding CASS’s profit margins, there has been a recent decline, and they currently fall below the historical averages for the company. This trend raises concerns about the company’s financial performance. If there is no improvement in the medium term, or if margins continue to stagnate, it could lead to a reduction in the company’s valuation.

Margins (Seeking Alpha)
Investors should closely monitor how CASS addresses this margin challenge. Strategies to improve efficiency, reduce costs, or enhance revenue streams will be critical. Additionally, keeping an eye on the competitive landscape and industry trends will help assess whether CASS can regain its historical margins or if valuation adjustments are warranted.
Investor Takeaway
CASS is a quite diversified company that is right now battling with updating and getting their systems even more modern and adaptable to hopefully improve the workflow and eventually the margins of the business as well. I am quite skeptical about the actuality of this in the short term. Margin contraction seems like a real possibility but what keeps me from rating it a sell is the string dividend history the company has and with investors getting a 3% dividend now at least. This concludes me rating CASS a hold for now.