10/20/10 Midnight Report: Market rallies again to the beat of algo-rhythm and Qs
The market rally was back on today with stocks shooting up faster than Ben Bernanke could chant “quantitative easing” over his bubbling cauldron (though he was heard incanting: “Double, double toil and trouble; Dollar burn, and assets bubble“) and faster than Sofia Vergara‘s son’s popularity on take your mom to school day. That said, with little news and sort of positive earnings results, the strength of the rally was more confusing than AIG’s balance sheet or why people with the last name Wadhams would name their son Dick.
Macro news was light today with mortgage applications falling by 10.5% (though as far as Money McBags knows, 10.5% of 0 is still 0) even with near record low mortgage rates. Refis were down 11% (due to something about not being able to borrow against an asset you no longer have equity in) and purchase mortgage applications were down ~7% (due to something about no one having any fucking jobs). The only other macro news was that Bernanke released his beige book today which was nowhere near as insightful as his little black book where we learned that it takes more than just a strong M2 to get in to Elizabeth Duke’s overnight facility.
The beige book basically showed an economy staler than Money McBags’ writing (and with 1/2 the dick jokes) as the recovery is now continuing on at merely a “modest pace” which was enough to erase any doubts of the upcoming QE2 (and it is not upcoming because it has Peyronie’s disease, but rather because it will occur at the beginning of November). Highlights of the modest growth include 8 of the Fed banks reporting some growth, 2 reporting mixed economies, 1 holding steady, and Atlanta reporting that “shit is still fucked up.”
The only other interesting story today was that according to Bloomberg, the government made an 8% return on the Wall Street bail out which not only beat returns on Treasuries and money market funds over that same time period, but the $25B the government made should be enough to fund the SEC’s tranny porn habit for years to come. That said, the TARP can now be seen as an unmitigated success (unless you also add back the loss from non-financial bailouts such as GM and the fact that the slippery slope of moral hazard for bank risk taking is now not only slipperier than Teflon with it’s coefficent of friction of .04 but sloped steeper than Ashlee Simpson’s new nose). Given that, Money McBags plans to run for Senate under the “Bail Outs Give Us Savings” platform, or BOGUS for short, as bailing out failing companies seems to be the only way the government may get out of debt. It’s a bit counter intuitive, and completely illogical, but with social security benefits soon to be fucked, the government has to do something to raise their returns and TARP II seems to be the best alternative.
Internationally, the Chancellor of the Exchequer George Osborne detailed the deepest budget cuts ever in Britain (though why the ex-chequer’s chancellor would be in charge of that and not the current chequer’s chancellor, is beyond Money McBags). The cuts will eliminate ~500k public sector jobs, add a new levy on banks, and limit the Queen’s Netflix plan to only two movies a month while completely shutting off her membership to the Bang Bus (google at your own peril). The new plan will also cut welfare by 7B euro by capping benefits to unemployed families, curbing payments for housing subsidies and tax credits, and simply rounding up poor people and telling them to get the fuck out.
Earnings news was mostly positive today with WFC reporting a huge Q driven by improved credit, increased revenue from community banking, and sleight of hand. As always, Money McBags believes in bank balance sheets and bank earnings as much as he believes in karma or female friends without benefits because bank assets remain less tangible than the Higgs Boson. And it’s not just Money McBags who feels this way as noted adventure capitalist to the stars Jim Rogers was on CNBC today and said bank stocks are still unattractive because of the uncertainty with their balance sheets. Um, Jim, you know what Money McBags calls uncertainty in bank balance sheets? Wednesday.
In other earnings news, BA flew above analyst guesses and earned $1.12 per share after a loss in the year ago quarter as jet deliveries picked up, YHOO searched for a good Q and came up with more of the same, and MS stumbled by earning only $.05 per share from continuing operations (and Money McBags would love to be part of the team that decides which of their operations should be continuing) vs. analyst guesses of $.15 per share. Also, just about every airline stock flew higher than Icarus (and luckily their wings were made out of metal) as Delta, American, and United all posted positive earnings which came in only four hours late.
In small cap stocks, most companies Money McBags follows had strong days as they tend to have high beta with the market due to their small size and yet high growth profiles. That said, Money McBags finally got around to looking at WGO’s Q and loyal readers will know he is prone to shitting all over this stock as if he’s filming his own scat film. Money McBags’ thesis remains that in a fucking recessionary environment, people are going to be less interested in buying ridiculously expensive completely discretionary products (when there are much cheaper alternatives) than Travis Henry is interested in buying a condom (or a financial planner). That said, they put up another meh quarter and have rebounded faster than Money McBags thought they would, but they are still trading at a valuation that is less attractive than Minnie Driver‘s gunt.
Revenue of $123MM was up 107% in the Q which would seem spanktastic but it is coming off an almost company killing low number and was down sequentially by ~9% which isn’t seasonality because in the sequential Q last year, revenue was up 30%. The company did manage to boost gross margin to 8.5% (ex,. the $750k LIFO adjustment) from ~7.5% and hold their operating costs flattish at ~$6.3MM. The interesting thing to Money McBags (besides Gia Allemand) is that their expensive Class A gas vehicles drove sales and were up a bit sequentially while their cheaper Class C vehicles were down ~33% sequentially, so Money McBags guesses as long as people are going to blow money on something they don’t need, they might as well go all out. Afterall, overspending is the American way.
So the company seems to have reached a stagnant/steady state sales level and earned $.17 but did not pay taxes due to carrying forward losses from 2009. Their Q isn’t out yet so Money McBags isn’t 100% sure how much of a benefit they have left but he thinks that they had ~$6MM last Q and would have used ~$3MM this Q so have about one more Q before they have to pay taxes, but again, Money McBags is pulling that so far out of his ass that there are still whole chunks of undigested food in it. So if we take the $.17 reported EPS, deduct out the 750k positive LIFO adjustment, and tax it at 35%, real run rate earnings are more like ~$.09 per share, and as a reminder, this company is trading at ~$9.50.
So what the fuck do we do with this as their business seems to have leveled off, the economy is not getting better, there is still a strong secondary market for used vehicles, and they have cut every cost they possibly can. Even if we take the best case scenario $.17 non-taxed LIFO infested EPS and annualize it, we get ~$.68 and the company is trading at ~14x that despite a sequential sales decline and backlog down 13% (and yes, Money McBags said backlog, huhuhhuh). Using the taxed EPS number, annualized EPS would be ~$.36 so they are trading at 25x that, which makes this valuation more out of whack than Rachel Uchitel‘s lips. EBITDA was ~$7.5MM so that would put them at a ~$30MM run rate and their EV is ~210MM so they are trading ~7x that which isn’t terribly expensive but one shitty economic Q and margins go back negative so there is still a fuckload of risk for this company.
Money McBags thinks earnings will remain ~$.10 to $.15 because growth has been basically flat for 3Qs so next year maybe they earn $.50 and Money McBags wouldn’t pay more than 10x for that so WGO is still something that is worth shorting. Fuck even if they hit $.60 for the year, is that worth paying 16x which is where the company is now trading?
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