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How To Invest After The State of The Union Address

During Tuesday night's State of the Union address President Obama spoke at great lengths about how government can make life better for Americans.

He presented the typical spending solutions – infrastructure, alternative energy, education…

But I think what most Americans want is for government to get out of the way, especially with the crushing debt it amasses trying to "fix" things. The solution to making life better for Americans, in my opinion, is to reduce the government's size and let the private sector make the system more efficient.

This can be done with public-private partnerships in many instances. In fact, if you look around you'll notice successful examples that you encounter in your everyday life. Some even involve publicly traded companies that you can invest in.

For example, take a look at the Department of Motor Vehicles.

I attribute no small measure of my positive attitude in recent years to not stepping foot in the DMV building. I now manage my vehicles (like renewing registrations) online instead of in person or via snail mail.

The clear advantages to this system – called eGovernment – is that completing and renewing government forms is much more efficient and requires fewer people on the government doll. And car registration is just one example.

This will also be the sixth year that I will re-register my Limited Liability Company with the Secretary of State online. I'll buy my Vermont and Rhode Island fishing licenses online too, in less than 5 minutes, and even on a Sunday night if I want to. If a guest visits we'll get a license for them too, without having to get to a tackle shop on a busy weekend.

This newfound efficiency is the result of great product development and the right pricing model from publicly traded NIC Inc. (Nasdaq:EGOV), a $1 billion market cap company headquartered in Kansas. NIC has been bringing electronic government to the people since 1992. Over the last 20 years it has signed up more than two dozen states and several federal-level clients.

Its bread and butter service is building state websites for DMVs, but it also branches out to other departments like liquor, fish and game and transportation.

NIC has been growing steadily, including 27% revenue growth in the latest quarter, fueled in part by a successful reoccurring revenue model.

The reason NIC's model works is because there are no upfront costs to a state to have NIC build its DMV website – the company puts up the capital, typically $0.5 to $1 million, and gets reimbursed as online transactions are completed.

This completely removes the taxpayer's potential pain for funding a new website from the discussion.

This is called a transaction-based self-funding model. When a user completes an online transaction a fee is assessed, which goes back to NIC. It collects an average of $0.50 per capita in revenue from DMV websites (it calls these 'portals') and in the first year of service generates around a 30% gross profit margin, increasing to around 40% over time.

Because DMV renewals are annual, this is where the recurring revenue comes from.

The sweetener, and the higher profit business, is in the add-on service revenue from "non DMV services", which rose by 43% in the latest quarter. These are services like vehicle inspection records, fishing licenses and business registrations.

Growth for NIC is therefore dependent not just on inking contracts with more states – although there is clearly room to grow there with nearly two dozen states left – but providing additional high-margin services.

On the negative side, this is clearly a company dependent on government contracts and must therefore navigate a sea of red tape to secure new business. That takes time. But for now I'm a believer in NIC’s future growth and government efficiency products. So are those in state government across the country, thankfully.

There is a final sweetener for shareholders of NIC – special dividends. Since 2007 the company has paid special dividends, including two in 2012.

Now we just need more companies like NIC to spring up and make government smaller, and more efficient.

Editor's Note: If you would like to learn more about growth stocks that can make life better, regardless of how you feel about the size of our government, consider taking a free, 30-day trial to our small cap growth stock service, Small Cap Investor PRO. You'll discover exactly how we built our growth stock portfolio and get access to every special report and investment recommendation. Click here to try Small Cap Investor PRO, free.

Good Investing,

Tyler Laundon, MBA

Editor, Pay Dirt

Analyst, Small Cap Investor PRO

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