Online banking software maker Corillian (NASDAQ:CORI) bills itself as "the top provider of online banking solutions to leading financial institutions." I don't know whether the company deserves that title, but Corillian's write-up in today's Wall Street Journal is certainly impressive.
According to the Journal, and to a press release put out by Corillian yesterday, the new Corillian Fraud Detection System actively monitors the Internet for signs of phishing attacks before they take place. On the prevention front, Corillian's software searches for evidence of spoofed bank websites being created, and for test runs of phishing emails being prepared and mailed. And in case an attack gets under way despite these measures, the software also keeps an eye out for evidence of personal account information being collected, verified, and used in a suspicious manner.
Corillian's product could not have arrived at a better time. In all likelihood, a fair number of Fool readers will have read the Journal article on Corillian this morning and will be thinking to themselves: "Gee, could this be a small-cap Hidden Gem in the making?" Well, let's apply the 7 Steps for giving potential gems a quick lookover and see how Corillian fares.
Market cap
Corillian's $220 million market cap makes it a definitive small cap.
Enterprise value-to-free cash flow
Corillian's $197 million enterprise value, divided by its $7 million in free cash flow, yields an EV/FCF ratio of 28 -- far above our target level of 10 or under.
Historical and projected earnings growth
Historically, the company has been a money loser, but it recently achieved positive generally accepted accounting principles earnings and positive free cash flow. Like competing software makers serving the banking industry -- for example, Online Resources (NASDAQ:ORCC), Digital Insight (NASDAQ:DGIN), or Motley Fool Hidden Gems recommendation Pegasystems (NASDAQ:PEGA) -- Corillian is projected to post quick earnings growth in the future (20% per year over the next five years).
EV/FCF/G
Based on its projected earnings growth, Corillian is priced at a 40% premium to our desired EV/FCF/G ratio of 1.0 or less.
Return on equity
Corillian's return on equity, on the other hand, is phenomenal: 43%. An aggressive investor might prefer to evaluate Corillian on the resulting EV/FCF/ROE ratio of 0.65.
Insider ownership
Insiders have a high degree of confidence in this company, as demonstrated by the low level of insider selling and the high level of insider ownership (38%).
Share dilution
Corillian has a dark past of rapid share dilution, but over the past two years, dilution has slowed markedly. At roughly 4.5% per year, the company is no longer in the same league with serial diluters such as Intel (NASDAQ:INTC), Oracle (NASDAQ:ORCL), or McAfee (NYSE:MFE).
Conclusion
Corillian is not at all your standard value investment. Everything -- and I mean everything -- has to work out exactly as planned for this company to be worth buying at the current valuation. That means Corillian needs to maintain its astounding level of return on investment; its growth rate must accelerate even faster than analysts expect; and banks must travel from far and wide, bearing bags of cash, begging to purchase Corillian's new anti-phishing software. Buying at this valuation requires a leap of faith that all those things will come to pass.
Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article. The Fool has a disclosure policy.
