2/2/11 Midnight Report: Mubarak Challenges Quantitative Easing for Title of Biggest Pyramid Scheme
The market was relatively quiet today as protesters in Egypt clashed with pro-government supporters (apparently one group wore plaid and another wore stripes, how gauche), earnings were more mixed than a Barack Obama-John Kerry love child (and with a terrific radio voice to boot), and investors gathered around their TVs to see if Lloyd Blankfein would see his shadow on Groundhog Day thus signifying six more weeks of snow jobbing clients (though it was a bit of a trick because we all know vampire (squids) cast no shadows).
While violence in Egypt ratcheted up to the point where even innocent bystanders like Anderson Cooper were attacked (which surprised him because it’s not usually the fists of young men that he takes to the face, not that there is anything wrong with that) and the ripple effect (though unfortunately not the nipple effect) of the recent uprisings in Tunisia, Egypt, and the Bush household spread to places like Jordan, the impact of major geopolitical change on the market was more muted than Stephen Hawking during a power outage. So even though the world is becoming less stable than Francium or Michael J. Fox, the S&P was down only slightly and it closed above the coskposterously high 1,300 psychological barrier that separates “holy shit the market is too high,” from “holy shit the market is too high but I have to buy the rip.”
In macro news, the ADP jobs report showed 187k jobs were added to the economy which beat analyst guesses of 140k and is most likely more irrelevant than capital structure (according to Mr. Modigliani and his pal Mr. Miller) or Bill O’Reilly’s views on science, or anything. And the reason why Money McBags doesn’t give a fuck about the ADP numbers is because they don’t include government workers (who by the way are getting shitcanned faster than moms at a NAMBLA convention), they will likely be revised as last month’s 297k job gain was revised down by 50k to 247k (so sorry 50k people who we thought were hired last month, we guess you’re still fucked, now run along and take the scent of despair with you, its bad for our complexion), and they are less correlated to the non-farm payroll numbers to be released on Friday than getting a Tattoo is now correlated to being cool (and guy, really?). So great, according to ADP 187k jobs were added with 166k being in the service sector (of which 150k were hired to service Charlie Sheen), but Money McBags puts as much stock in to that as he does a Paul Krugman opinion piece or Heidi Montag‘s singing career.
In other macro news, Challenger, Gray & Christmas’ outplacement survey showed planned layoffs rose to 38.5k in January which was up 20% from December, but will be down 46% from last January as employers have simply run out of people to layoff. The 38.5k planned layoffs are the fewest for any January since the survey began in 1993 which is great news for all but 38.5k people. Finally mortgage applications rose 11% recovering from the 13% fall last week and increasing the number of suckers who are buying declining assets at elevated prices.
Internationally, borrowing costs in Portugal dropped and bonds generally strengthened in Europe as European countries adopted the slogan “We’re not Egypt” for fixed income investors while expectations grow that policy makers will make it easier to bail out fucked countries. Elsewhere in Europe, S&P cut Ireland’s long-term credit rating to A- from A as they estimated that Ireland’s domestic bank debt is more than 170% of GDP which is so fucking bankrupt it makes John Edwards’ morals look solvent. S&P said it would be able to reassess the rating by April, which will only be a month or so after Ireland defaults, so much quicker than S&P usually misses on the news.
In the market, earnings were mixed with TWX beating forecasts thanks the strength of their movie division and a 21% increase in advertising sales. The company also raised their dividend by 11% and increased their stock purchase plan to $5B and said their goal is to increase the cash they return to shareholders because if they keep it, they’ll just do something stupid with it like buy AOL or greenlight another season of The Bachelor. Along with TWX, Electronic Arts put up a good Q and jumped up ~15% on strong sales as more people are forced to take staycations and thus look to find shit to do at home to stay entertained. Finally, something called Acme Packet was up 20% after strong revenue guidance and Money McBags has no idea what this company does but apparently it has to do with cloud computing so he’s sure it is on its way to a price of a billionty.
Not all companies beat earnings though as GNW was down 8% after posting a loss in its mortgage operations which surprised analysts (though the real surprise is that analysts have yet to figure out that GNW’s mortgage business remains full of shit). As Money McBags firmly believes that it is impossible to understand what the fuck is really happening on a financial services company’s balance sheet, especially one as convoluted as GNW, he wouldn’t touch this company with Rock Hudson’s dick.
In small cap news DTLK continues to rise faster than Money McBags support of Peta after watching this video (and all of Money McBags’ charitable donations will now be split three ways between PETA, the Femen movement, and bringing the NSFW muff guessing back from the dead). Money McBags pointed DTLK out just 3 months ago when it was trading at nearly 50% of what is today and he broke down their last Q and said even with no growth they could earn ~$.84 in non-GAAP eps. Thus even with the titriffic run up, the company is still trading at less than 10x that eps guess, so, um, this run ain’t over yet.
More importantly, Whitney Port has some terrific assets, but slightly less importantly, Money McBags wanted to finally get to his breakdown of NEI’s Q. Remember, Money McBags picked this stock up again after they popped up the other week before earnings on no news other than they were opening up a European manufacturing facility which in theory foreshadowed growth, unless of course they decided to put the cart before the horse or the money shot before the reverse cowboy.
Unfortunately, after earnings the company went down faster than Alan Greenspan’s reputation in 2007 or Raven Alexis in Kissing Cousins. However, that was mostly the result of momo names having jumped in pre-earnings and jumped out when guidance was “meh” at best and concerns about Egypt imploding caused small momentum names to sell off. So basically, now that the news has passed and the day traders are further out of this name than Mubarak is out of power or a penis is out of cousin Geri, it is time to evaluate whether we really want to own this.
As for the Q, they absolutely crushed the topline by bringing in $71MM of revenue, way ahead of the $59-$64MM guidance and a full $10MM above any other quarter. So color Money McBags impressed, especially if it will be Julianna Guill doing the coloring. Also encouraging is that their non-EMC, non-Tectronix business grew 28% sequentially which was faster than the 17% total topline growth and that is encouraging because they need to diversify away from their two main customers (who make up 70% to 75% of their revenues) as they are more levered to them than the US government is to China, or to Goldman Sachs.
Unfortunately, to get that new business they seem to be competing on price with gross margins falling to 10.5% from 13.7% last year and that is a worse trend than 3D movies or HD porn (because no one needs to see ass hairs). That said, they were able to keep their operating costs under $6MM and that is the key to this whole fucking story. If they can get grow the topline as they have been while keeping operating costs flattish, they will get enough leverage to finally make some money and thus make shareholders happy. Doing the math, they earned $.04 non-GAAP per share which puts them at a $.16 run rate and thus they are trading at ~12x that which is perfectly reasonable. As Money McBags said when he broke them down last week, if they can get to a $75MM quarterly run rate (just ~5% above this Q), with the leverage they have they can earn ~$.20 and that would be 37% topline growth which certainly could get a 20x multiple and thus the stock could trade at $4, double where it is today. And that seemed to be on track until they gave guidance more disappointing than the ending of The Castle or Pam Anderson and Tommy Lee’s old school sex tape.
Guidance for next Q is for only $60-$65MM of revenue which is down 9% sequentially, but up 13% y/y, so that is still ok-ish (though not as ok as this Qs 65%+ growth, but whatever). They also guided for 10% to 10.5% gross margins and $5.8MM to $6.4MM in operating expenses for non-GAAP net income of $.7MM to $1.3MM which is $.02 to $.03 per share, so they are back to a $.08 to $.12 run rate and with ~15% growth but some upside, at most you’d pay 15x for that so ~$1.50 seems like reasonable bottom. The weird part is that the reason they gave for next Q to be down sequentially is that “March is typically a seasonally lower revenue Q from December” which Money McBags could almost believe except last March’s Q was up 24% from December, so um, really? Shit, Money McBags just went back through their Qs and found that revenue was $37.4MM in the March 2009 Q which was slightly above revenue of $37.2MM in the December 2008 Q and revenue in the March 2008 Q was $55MM, slightly above revenue in the December 2007 Q of $54MM. So care to repeat that excuse again? Did you not think investors had access to data? Anyway, management also said this Q’s revenue was artificially higher as: “companies exhaust remaining budgets as the year comes to an end. This impact during a quarter was greater than we anticipated.”
So guidance is concerning (as is management’s explanation), gross margin declining is concerning (especially as some of it is driven by customers simply using off the shelf solutions more frequently), and the fact that many people are so fucking fat and lazy that we had to build ambulances for obese patients is hella concerning, though irrelevant to NEI. There were other positives though as management said they have three new large deals in the pipeline and some larger accounts are now close to closing (so perhaps this will allow them to beat their newly issued guidance), their NOLs are good to go, and their new Europe facility should help them better target large run-rate opportunities. The impetus to open a facility in Ireland wasn’t just to get closer to Claire Tully, but it was to help cut down delivery times and to open up the Europe market (and they think ~30% of their products end up in Europe). As for why Ireland, well they get tax breaks from being there and there are a fuckton of big customers close to their new facility. So win, win, win, win, win.
So what the fuck do we do? As Money McBags said, if they can get to $75MM per Q in revenue, then there is a lot of value here and a bunch of shit they said on the call leads Money McBags to think that is possible including the new Europe facility and well, just the general trajectory of the business which continues to grow. That said, guidance was disappointing (even if it is for 13% y/y growth) and if they can’t grow from there the company is probably reasonably valued. The good thing is that the business has momentum so Money McBags doesn’t think revenue will fall y/y in the next few Qs which means there probably isn’t much downside here. The bad thing is that revenue may just flat line from here which means the stock is dead money (which is the most likely scenario).
Money McBags bought a few shares purely as speculation in the low $2s and he is happy to hold on to them here because the technicals still look good (yeah it sold off but it bounced back off its previous base and returned to strength in a marginal tape today) and there is the possibility of 100% upside with fairly limited down side. So if you don’t own shares, now that the momo is gone, it is a decent time to start a position as long as you are ok knowing that this stock just might never work. Also, given the market cap and volume, Money McBags would expect it to be more volatile than the market, so if you own it, don’t worry. This is really a play on the next few Qs and if March’s Q hits guidance and June’s Q winds up being sequentially flat with that, well that will be the sign to sell.
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