Money McBags was in a good mood this morning when he learned that a woman named Cynthia Cooper-Dyke is being inducted in to the Basketball Hall of Fame (no doubt for her love of boxing out, her ability to play such solid defense that she would literally be “in the shirt” of her opponent, and her intense on court demeanor where she was known for liberally giving tongue lashings to those who got in he way), but that changed when the market began to sink as a result of mediocre macro news and Bennie B.’s henchman, Thomas “T Ho” Hoenig getting all inflationary on the market and saying rates need to rise.

Now look, Money McBags is no economist, mainly because he does not suck at his job (though his undergraduate degree is in Economics, so buyer beware), but one day it’s inflation and the next day it’s deflation so for fucksake can’t we all just come to some kind of agreement here (other than that Leticia Cline is hot)?  There is so much uncertainty that it would even rankle Werner Heisenberg and perhaps the only way to figure out what is going on is to exhume John von Neumann and have him go all Monte Carlo on the economy and game theory shit out.

Anyway, T Ho said:

“We need to get off of the emergency rate of zero, move rates up slowly and deliberately,” and followed that up by saying “if we don’t move rates all up in this bitch, we’re gunna just have mo’ shit to deal wit later and let me ax you this, you want more shit to deal wit?  Economist please.” And he finally added: “For a while longer, it should remain even below the long-run equilibrium rate. However, the economy is improving and is growing at a rate faster than the last two recoveries.” And perhaps only 2 of those quotes are from him, but whatever.


As Money McBags understands it, the gist behind T Ho’s rate envy is that he thinks the economy has moderately recovered, though he must be looking at different macro data from what Money McBags sees every day, or perhaps his glass is just half full (with Courvoisier no doubt).  He believes the economy will continue to moderately recover by itself so the need to gently stroke its taint by keeping interest rates at zero is unwarranted and may just cause another bubble to rise while leaving the Fed very little wiggle room to affect the economy in the future (which may not be a bad thing).  Money McBags loves that T Ho is a loose cannon but hopes he knows about what the fuck he is loose cannoning.

In macro news, consumer sentiment rose to 69.6 from 67.8 and was within spitting distance of analyst guesses of 69.3 (though was also within swallowing distance of the whole economy).  On one hand, increasing confidence seems to indicate consumers may still spend, on the other hand, none of them have jobs so assuming they will continue to spend may be more wishful thinking than dreaming of a threesome with Eva Wyrwal and Alektra Blue.  Pretty much every metric in the consumer sentiment survey rose so that’s marginally good news, unfortunately it was rising from almost yearly lows.

In other macro news, Retail sales were up .4% driven by auto sales (pun intended) and gas which is the first increase in three months.  However, excluding auto and gas (and if retail sales just ate a Taco Bell bean burrito, Money McBags insists gas be excluded), sales were down .1% and economists had guessed at a slight rise which shows that even a broken field of study might not be right twice a day, or ever.  Eight of the twelve sectors measured showed declines including clothes stores, furntiure stores, restaurants and bars, and Mel Gibson DVDs.  Finally, the CPI was out today and showed that prices rose by .3% in July or only .1% if one strips out food and energy costs and only looks at shit people don’t actually need to buy (you know like how economists look at inflation).   Kind of a ho hum number which is a victory given the volatility of the markets.  Anyway, all of this is just more evidence that the market is crawling along at best in search of stimulus (and if the market would just read When Genius Prevailed, Money McBags would knock some stimulus in to it) so investors need to be careful.

Internationally, the Euro-area economy, which involves all 16 EU countries and Gisele Bundchen‘s pants, grew 1% last Q which was better than guesses and was led by Germany which grew at 2.2% with ~1/3 of that caused by an increase in schadenfreude as a result of Greece’s economy shrinking by 1.5%.  The 2.2% surge in Germany puts the economy at a pace to expand by 8.8% for the year which is a rate they haven’t reached since Claudia Schiffer was still hot.  Germany’s economy is taking advantage of a lower Euro thanks to the PIIGS slopping their budgets and thus they are seeing an increase in exports of cars, scat films, and coldness.  That said, this Q was a bit of an anomaly for them as a brutal winter pushed back construction projects in to this Q and thus was a key element of the outperformance.  Either way, Germany is hogtied to the rest of the rest of the EU and those countries are seeing stagnant to negative growth so while the cheaper Euro may help Germany in the short term. a continued weak EU and a collapse of the Euro will be about as good for that country as the Potsdam Agreement or a relaunch of favorite son’s David Hasselhoff’s music career.

In market news, Nordstrom was down despite maintaining guidance and reporting a 39% increase in profits as they reported inventory rose 14% which is the largest rise in inventory since their line of Paris Hilton scratch and sniff thongs failed to take off.  Also, JC Penney reported a strong Q but was down on disappointing guidance of $1.40 to $1.50 per share which is below the $1.64 per share guidance they issued in May as Penney is feeling the pinch of the recession (and Jay Leno, feel free to use that one).  Finally Dynegy was up > 50% after Blackstone said they were going to acquire the power producer for $543B.  Money McBags doesn’t have a fucking clue what Dynegy does, but for $543MM, he’ll do the same thing for 15% less.

In small cap news, a little company Money McBags follows and has only mentioned in passing here called EPAY put up a decent Q today.  The company basically automates the invoice/payment/document needs of businesses (kind of the opposite of a company like Standard Register, ticker SR, which would make a great pair trade of long EPAY and short SR, though not as great of a pair trade as the Shannon twins).

Anyway, the company had $41.5MM in revenue this Q which was up 19% and stripping out acquisition, restructuring, and equity based comp expense, core net income was up 28% to $.24 per share and for the fiscal year core net income was $.99 per share.  The company has $122MM of cash (they raised $62MM more during the quarter to pursue further acquisitions) which is just under $5 per share and means the company is trading at <10x trailing 12 month EPS ex. cash despite ~20% growth.  That said, they are actively looking to use that cash for acquisitions (and When Genius Prevailed is available for the right price) so it is a bit disingenuous to subtract it out when looking at valuation.  For the fiscal year, the company had $34MM of EBITDA so with an enterprise value of ~$250MM it is trading at ~7.5x EBITDA, which again, is cheap for their growth but EV is a bit misleading since as mentioned previously, a bunch of that cash is going to be spent (though if it is spent on an accretive acquisition, earnings will obviously be higher as well).

Positive things about the quarter included subscription and transaction revenue up 54% to >25% of revenue and remember that is recurring revenue which should be as sticky as Money McBags’ computer screen after he watches a Faye Reagan opus.  Additionally, gross margins were up nearly 200bps from last year and management said they should expand from ~55% to the low 60% range over the next three years with 25% operating margins as result of the move to a SaaS model.  The company also generated $8MM in cash from operations and gave revenue guidance for fiscal 2011 of $171MM to $174MM with 20% net income growth which would yield ~$1.20 per share.  If Money McBags does the math correctly, that sounds a bit aggressive as on $158MM of revenue this past year their core net income margin was ~17% and 17% of $174MM would yield ~$1.11 per share but margins are increasing at a decent clip and a 200bp increase in operating margins should get them to the $1.20 they are forecasting.

Not only is this comany moving to more of a SaaS model (yet still trading at a traditional software company multiple), but the icing on the cake (or the extra F in MFF video if you will) is that they acquired a network called Paymode from Bank of America about a year ago and are still building it up.  Paymode is a payment network used to link businesses to vendors in order to avoid having to cut checks and allows businesses to seamlessly pay for inventory/services.  Think of it as PayPal for businesses (though with fewer Nigerian princes) and EPAY was able to merge their software with BAC’s vendor list to try to build this out but as part of the agreement, they have yet to be able to sign up other banks who can then offer this service to large customers which in turn helps EPAY not just bring in revenue with transactions, but build out the network to make it more complete.  It is always good to own a network as the operating leverage is ridonkulous and if EPAY can make this work, it could pay off nicely.  That said, it is still in its early stages and Money McBags doesn’t think it is material to earnings or in guidance but it could be a very nice earnings stream for years to come.

Basically, this is a nice little company that isn’t all that expensive, that is growing, that is growing recurring revenue, and that has some real upside.  They have suffered a bit as they are levered to some degree to banks as they handle a lot of cash management needs and if you remember banks almost went out of business a few quarters ago, so the fear was banks would stop spending on new technologies, but the company has been able to continue growing in spite of those fears.  In fact on the call they said new financial regulation may even help them as banks will have to deal with increasingly diverse needs.  Anyway, the stock seems at worst fairly priced with some some nice upside and as long as they don’t make a bad acquisition it has room to move up.  Definitely worth doing your work here as this stock is down ~30% in the last month and the business looks like it is working.

Have a nice weekend.

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