There was little news in the market today as investors waited for AA’s earnings tonight as a signal of things to come as everyone knows aluminum production is what really drives the economy (and yes that was sarcasm). Without much macro news other than shit continuing to get worse with temporary census jobs ending, republicans filibustering extended unemployment benefits to further punish the people who likely had little to do with the recession (other than likely borrowing way beyond their means), and no new actresses coming out as bisexual this week, we were left with a flurry of M&A driving the market (as opposed to a flurry of T&A, which likely would have led to a strong rise).
The biggest M&A deal occured between two companies about whom no one gives a fuck, as AON is purchasing Hewitt for $4.9B in cash, stock, and old actuarial tables signed by Elizur Wright. While AON will be in flux for a bit, they should be able to immediately make use of Hewitt’s human resource and outsourcing capabilities to fire the appropriate amount of people while making sure that everyone gets a smiley face cupcake. Once done, they can further get value out of Hewitt’s consulting business by leveraging them for a business case to try figure out why the hell anyone would have paid a 41% premium of 7.5x forward EBITDA for Hewitt. Of course using their now fully owned Hewitt for that study would either be considered a virtuous circle, a vicious circle, or the least fun daisy chain since full bush was still in style.
In other M&A news, Hugh Hefner wants to take Playboy private (after years of taking it to his privates) at a 40% premium to current price, or about what he pays to the Shannon sisters. Playboy magazine sales were down 48% in Q1 as the business continues to struggle with the invention of a little something called the internet where people can now read the hard hitting and biting journalism Playboy offers for free. The company has gone through a major facelift over the past year by laying off staff, streamlining functions, and putting out bigger and more well-rounded (and very NSFW) articles. The fact is, Playboy still has a recognizable and aspirational (as well as ass-pirational) brand and now that Hefner is opening up his robe for the company, there appear to be multiple bidders including PE firms, top competitor Friend Finder, and the creepy guy in the airport gift shop. The company is definitely at a tipping point with the internet producing more free porn per minute than David Duchovny can view, but in the right hands, and with a stroke of luck, the brand could come strongly back.
In other M&A news, BP may be selling assets in order to pay for a new Gulf. The company is said to be in negotiations with Apache to divest $18B worth of some of the largest Alaskan assets in the world. Finally, JNJ is buying MEND, a company that makes a device for treating brain aneurysms in stroke victims just in time to catch the growing popularity of the KFC Double Down.
Internationally, the European Commission came out with a reform package to boost consumer confiidence from “holy fuck we’re screwed” to “at least we’re not Kazakhstan.” The package includes EU-wide measures to protect bank account holders by guaranteeing savings accounts up to 100k euro and investment accounts up to 50k euro while promising to pay account holders within seven days of the almost certain to come bank failures. Lastly, China anounced exports grew by 44% as more people sink to poverty and can only afford the cheap shit made in China.
In large cap stocks, MSFT is up on news that they are going to make it rain in the cloud computing space by teaming up with Fujitsu to invest money in the growing cloud technology sector while GOOG continues to rise after having their license renewed in China. Money McBags was told that to get their license renewed, GOOG just had to follow the chinese road rules of stopping at yellow lights, driving 20 miles under the speed limit, and using their turn signal sparingly.
In small cap stocks, NLS is up 16% on no news that Money McBags could find other than people hate making money. If you remember back in December, longtime reader Matty McSacks hypothesized that NLS was worth ~$4 per share and it was trading at $1.85 at the time. Money McBags looked in to the matter and thought those estimates seemed high since the company sells expensive discretionary items during a little bit of a recession and after a hella confusing quarterly release and a jump up, NLS has settled back to where it was at the beginning of the year with today’s run up. In their last Q, NLS trimmed their losses to only a loss of $.08 per share but their biggest segment, retail, shed 30% of their revenues as if revenue had spent the entire Q working out on a Mobia. The drop in direct business was driven by a 37% drop in credit approvals from their finance partner and while Money McBags is no Fair Isaacs, it doesn’t take Isaac Hayes to see that credit isn’t going to get better anytime soon. With the direct business lagging, gross margin dropped to 50% from 56% but thanks to restructuring, the company did away with $10MM of operating expenses which allowed them to lose only $2MM and have near breakeven EBITDA. The company hasn’t made money since 2006 and with the economy sputtering again, it’s not clear who the fuck is going to be out looking for a new Universal machine to build muscle since they won’t be able to afford to buy supplements to help maintain that muscle. The only arguments that can be made for this company are that it is trading at ~.35 of sales, they didn’t burn cash last Q, and they have ~$12MM of unrestricted cash which is ~20% of their market cap. That said, rat tails, hammer pants, and Bea Arthur will come back before this company does as gyms aren’t upgrading their equipment, people continue to get lazier and fatter, and those who used to be able to afford expensive clothes holders for their bedroom (which NLS machines invariably windup being), remember they have something less expensive called a closet and a floor. So even though the stock is up big today signalling something is happening (like potentially a big short investor getting a capital call), Money McBags would not be a buyer because the consumer remains weaker than a virgin tequila shot.
And before we go, on Friday Money McBags told you about TSYS and the opportunity it presented for a short term trade. The company was up 3.5% today (though on light volume) with IWO down ~120bps so something seems to be going on there. The company is hella cheap and while their earnings releases and segment financials are more complicated to decipher than a Rube Goldberg contraption or what the fuck your lady friend is actually saying to you, they are in growing markets and seem to be winning business. Money McBags doesn’t have a great longterm feel for the company since he doesn’t quite get the step function revenue stream of their text messaging business and why they never seem to make that next step up, but if they can really hit their guidance of $80MM-$85MM of EBITDA this year, this stock should see solid appreciation now that it has seemingly bottomed.
7/9/2010 Midafternoon Report: Investors get excited and take off their shorts to allow long exposure to grow
The only US macro data released today was slightly positive (unless you actually read the release and not just the headline) as wholesale inventories rose by .5%, though that will likely be revised downward like last month’s number (and every other data point released in the past two years) which was revised down from .4% to .2%. The good news is that the inventory to sales ratio is only 1.14 which is near a record low, the bad news is that people aren’t buying shit because they don’t have jobs and their money is becoming more worthless by the day. While the headlines tout the increase in wholesale inventories (which is mildly positive), they bury the part about wholesale sales decreasing by .3%, and yes Money McBags understands the difference between a leading indicator and a lagging indicator, but this is the first decline in over a year so is likely the reason why inventories to sales remain so low (ie. the people in charge of stocking up see sales slumping in the future and thus are keeping inventories thinner than OJ’s alibi or an Olsen twin) .
Internationally, other than a sumo wrestling gambling scandal throwing Japan in to a tizzy (and Money McBags would hate to be the officer in charge of the cavity searches in that case), news remains light. Jean-Claude Trichet was out talking again about the EU’s financial crisis and he said that it is too early to claim the crisis is over, that bank stress tests should help the recovery process (wink, wink), and that there needs to be stricter penalties for countries who ignore the EU’s deficit limits such as having to move to Latvia, having to hand copy the entire novel Pride and Prejudice while listening to the melodic soul singing of Celine Dion, and having all pictures of Zita Gorog taken away. Most interestingly, Monsieur Trichet maintained that austerity measures and cutting government spending will not hinder economic growth thereby figuratively pissing on John Maynard Keynes’ ashes and Paul Krugman’s soul (though Krugman clearly sold his soul to Mephistopheles years ago as it is the only way to explain his ascent to NYTimes columnist).
In the market, China renewed Google’s license to operate in the country instead of revoking it or simply giving it to Sum Dum Gai. Google could have been forced to shut down their chinese operations but instead they will continue to allow users to opt-in to receive either censored or NSFW uncensored search results. In other news, RIMM is rocketing up today as NTP has filed a lawsuit against AAPL, GOOG, and others claiming their wireless handsets infringe on NTP’s patent of awesomeness. RIMM had settled previously with NTP for $612MM so they are free from this round of lawsuits and thus, for a day at least, can enjoy their declining market share and substandard product in peace.
In small cap news, two ridiculously cheap stocks that Money McBags has written about before have started rallying proving the old value investor theory that what goes down, must go up (unless it’s ZAGG). One of those is NTZ which a month ago and 20% above its open today, Money McBags said:
“buying shares of NTZ is dumber than jumping in to a Hot Tub Time Machine set for the 1980s and then going Lucky Pierre between Magic Johnson and Rock Hudson. You might as well have bought shares of Amercian Home Mortgage right as the subprime mortgage market was melting down, invested in Daguerreotypes in the mid 19th century, or hired Bernie Madoff to manage your assets.”
As Money McBags explained before, NTZ (or more commonly known to longterm holders as NTZero) sells high end furniture, mainly in Europe, and seeing as how Europe is instituting a little something called austerity measures and high end furniture is a more expensive and discretionary purchase than caviar infused lobster tails or a night with Heather Vandeven, that doesn’t bode well for the company. That said, NTZ is trading at <3.5x EV/EBITDA and has 1/3 of their market cap in cash (even though they burned some last Q). The point remains that this company is either going to blow through their cash and go out of business (5% chance), is eventually going to come out of this and be worth a fuckload more than it is today (70% chance), or is a total fraud since Italy’s version of the SEC is likely more hands off than Richard Simmons at a Rick’s Cabaret (25% chance). Money McBags will wager a couple of Vietnamese dongs (as always, his currency of choice) that this is a real company and while he has absolutely no idea when it will turn around, has no faith in the global economy rebounding, and still thinks owning a high end furniture maker in a global recession/depression is as wise as covering yourself in chocolate and shouting “fire” while standing in the doorway of a crowded theatre filled with overweight arsonphobia sufferers, at some point this stock should trade for at least 7x EV/EBITDA which makes it a double from here (unless the EBITDA falls off a cliff, though if it does, there is more of a cusion right now than in Jessica Biel‘s pants) but that may not happen until 2025, so act accordingly.
The other name that is runnning now is TSYS and Money McBags first wrote about them in February and since then they have done nothing but go down like they were auditioning for a role in The Curious Taste of Benjamin’s Button. Their last quarter was decent enough and their guidance has been fine but margins have been compressing, there has been concern about government spending drying up, and it is harder to get one’s arms around their business than it is for a young lass to get her arms around Whitezilla’s “business” (and you can google that at your own risk). They have a number of sort of related yet disparate businesses including a mobile location based software business, a text message enabling license selling business, and a government satellite communications software business. The company announced a new deal with the Army last night that could pay them as much as $9.8MM through 8/2011. TSYS’s EV is ~$325MM and their guidance remains for $80MM-$85MM EBITDA, so it is currently trading at ~4x EV/EBIDTA and oh by the way, they just grew EBITDA by 45% last Q and revenue was up by 30% (though most of it was driven by acquisitions in the commercial segment). Again, this is a bit of a confusing company and portfolio managers just don’t want to spend the time learning the different businesses and the complicated way in which results are reported (honestly, try reading one of their quarterly earnings releases, it makes Thomas Pynchon seem like Dr. fucking Seuss). That said, it is ridiculously cheap and with the new contract, perhaps there is more faith that government spending for their technology will continue. The stock has pretty much spent all of 2010 dropping but it may finally have bottomed out (because how much lower can it really go?) so this might make a nice short term trade.
With the market rallying, if you’re itching to go long it’s best to pick up these already beaten down names than ones that can still fall when the rally ends next week. So if Money McBags were you, the first thing he would do is empty your bank account and take one hella long trip to Vegas, but the second thing he would do is spend some time this weekend trying to get a better handle on TSYS because there is a very good chance of a solid return at these levels.
The market jolted up on unemployment news this morning before remembering it had already gone up yesterday and thus quickly settled in like an environmentally friendly squatter in Al Gore’s mansion. The big macro news is that new claims for unemployment dropped to 454k or some number higher than that depending on how much the (No) Labor Department manipulates/readjusts numbers next week. Money McBags is not a betting man (unless there is money to be won or young ladies to impress) but he is willing to wager that next week we learn that new claims for this week should have actually been 459k. Anyway, claims were down by 21k, unless you use the number the (No) Labor Department released last week of 472k (not the 475k they redjusted it to this week) and in that case claims were down 18k (though when this week’s number gets manipulated up to ~459k, this week’s drop will go down in the books as only a 13k drop, but whatever). Regardless of what the number actually was, it likely beat analyst guesses of 460k which would be great if 450k+ new unemployment claims didn’t signal an economy less healthy than a Grilled Cheese Burger Melt topped with a spread of Crisco and Pam Anderson’s hepatitis.
To be frank (and if Money McBags is going to be frank, he only hopes it is the awesomely named Frank AllCock and not Frank Stallone), the high unemployment rate and the inability of the global economy to bounce out of this is more confusing to Money McBags than a condom is to Shawn Kemp or the definition of securities fraud is to SEC promoted Meaghan Chung. Money McBags understands there are unkowns, half-knowns, and can’t-knows in a dynamic global economy, but there are 15k+ PhDs of economics in just the US alone so either all of them are complete idiots or that degree is more worthless than the smallest Vietnamese dong. Seriously, how can we have all of these people who trained for years on this one specific topic not have any fucking answers?
For fucksake, a solar powered plane just flew for 26 consecutive hours and while Money McBags is not a heliologist (though he ardently studies Page 3 of The Sun), he is pretty sure for many of those hours the sun wasn’t even fucking out. So let me get this straight. The human race can build something that goes 28k feet in the air and flies around for 26 hours, powered by nothing but the sun and will continue to fly when there is no fucking sun, and yet we can’t figure out how to find jobs for 20MM people? WTF? Money McBags is officially announcing the death of the entire field of Economics until one of the 15k+ US PhDs can figure something the fuck out. What other discipline awards titles for studying theories that don’t work and coming up with hypotheses that can’t be proved? Just think about it. The profession of an economist is a more worthless calling than an Amish computer camp instructor or Heidi Montag‘s singing instructor. Anyway, the economy continues to struggle and economists continue to watch it melt as they are more helpless than a dyslexic trying to use a calculator set for reverse polish notation (as opposed to reverse polish cowboy).
In other US news, retailers announced same store sales and results were mixed despite discounts, warm weather, and a flurry of unconventional sales efforts including Sam’s Cub making small business loans, Office Depot selling items for a penny, and Hot Topic giving away free canwiches with every purchase of a Twilight t-shirt. The Gap led the disappointments with flat sales compared to guesses of up 3.4% as apparently the late 1990s are officially over.
Internationally, the IMF raised their growth forecast from none to none +1, or 4.2% to 4.6% for 2010, whichever you prefer best. They also warned that risks of a calamity have increased faster than the popularity of the high school girl who puts out first and that growth will slow at the end of this year and next year. To quote the release:
“In the near term, the main risk is an escalation of financial stress and contagion, prompted by rising concern over sovereign risk, this could lead to additional increases in funding costs and weaker bank balance sheets, and hence to tighter lending conditions, declining business and consumer confidence, and abrupt changes in exchange rates.”
So no biggie, right? Sign me up for the 4.6% revised upwards growth, nothing to see here. Unfortunately the IMF was not so positive on US growth prospects estimating that growth will fall short of 3% annually for at least the next five years and urged the US to raise taxes, cut spending, and give Alice Eve her own 24 hour cable channel.
Also internationally, the ECB and the Bank of England held rates at historic lows in order to allow already toxic banks to continue to not lend to people and Greece approved a pension overhaul which will raise the retirement age to 65 from birth, will calculate retirement benefits on average pay rather than highest pay, and will cut annual vacation days from 365 to 340.
In US stock news GPS has a bit more than a gap in their strategy (one may call it a hole more gaping than whatever is in the Octomom’s pants) as it is plunging like Lara Bingle’s neckline. As mentioned earlier, their same store sales disapointed with Old Navy posting flat comps, Banana Republic up 6% after a 20% down in the year ago quarter, and The Gap seeing same store sales drop 3% on top of a 10% down comp. Wow, that is so bad that not even Johnnie Cochran would have defended it. Finally, tax preparer HRB was down ~7% to a 9 year low due to the surprising resignation of their CEO who claims he is about to get a CEO job at a bigger company and HRB should just write-off the losses anyway.
In small cap stocks, news is light today as investors wait for earnings and try not to panic sell everything as they think about the challenges of the economy and the illiquidity of most of these names. LHCG had its second strong day in a row after getting clobbered last week on news that competitors AFAM and AMED were being investigated for false medicare claims. Money McBags broke them down for you last week and thinks it is an ok entry point right now if you need some healthcare exposure. They are in a growing market, offer a superior service, and are relatively cheap for their growth. Sure they don’t have control over the majorty of their pricing, sure they are a roll up story, and sure these companies have been dicier than a night in the Baghdad Hilton Suites, but people aren’t getting any younger or healthier and hospitals aren’t getting any bigger. So if you want a way to play the “we’re all getting old and sick and can’t pay for it” trend, this is a company to do that with and at a reasonable mulitple.
The market was up today because we are due for a brief rally until we resume our fall in to the abyss like King Midas’ son Anchurus (only without saving the Earth) or like Alan Greenspan’s reputation. The market has reached the point where some stocks have simply been oversold and with the lack of meaningful macro data and the beginning of earnings season, it should take less to get the market excited in the short term than it takes a teenage boy with a bad case of priapism to get excited. We basically have a tired market that is succumbing to VIX (not unlike a tired Gay succumbs to Dix). Today’s rally is being driven by State Street announcing they will beat earnings and by retail sales defying all logic, common sense, and income levels and being estimated to have grown at their fastest pace in 4 years.
The International Council of Shopping Centers (known more familiarly as ICSC or “Who?”) preannounced the results of the study they will release tomorrow, in affect scooping themselves in a strategic move to try to keep LeBron James’s choice of teams for free agency out of the news and to make the ICSC more of a household acronym than PETA, ROTC, and NAMBLA . The ICSC remarked that retail sales “probably” came in at 3% to 4% growth for the month and will average 4% for the first five months of the year. Of course you all might remember that the ICSC also said Teddy Ruxpin will “probably” make a huge comeback, Walmart shoppers “probably” understand that one size doesn’t fit all, and Lindsay Lohan will “probably” show up for her treatment any time now, so buyer beware.
Internationally, Europe has installed a cap on bank bonuses with bankers not allowed to take more than 30% of their bonuses in cash. The remaining 70% will now be awarded in stock, gold, or the still beating hearts of freshly clubbed baby seals. Europe bank stocks are also rallying because the rumor is that the haircuts they will have to take on Spanish bonds will be done by Ken Paves and not some dildo with a flowbee at Supercuts. It was leaked that Spanish bonds will only be written down by 3% and not the presumed 10% to 20% some people estimated while German bonds will get no haircuts and thus will go for the Chrystal Gayle look. In other international news, The Agricultural Bank of China raised $19.2B in their IPO yesterday which gives it a valuation richer than C, GS, or Christina Hendrick‘s bra.
In US stock news, STT is rallying the entire market as they expect to beat earnings guesses soundly by bringing in $.93 per share vs. guesses of $.72. They also announced a $251 injection of capital to support certain trust funds managed by State Street Global Advisors that engage in securities lending and other types of fraud, I mean portfolio maintenance. In theory, this “mitigates potential liability concerns” unless someone really wanted to sue them because there isn’t one financial services company that is not involved in shady activities. In other stock news, Family Dollar dropped ~9% after beating quarterly analyst guesses but giving below consensus guidance. Guidance was for $.46-$.51 per share next Q and guesses were for $.53 while CEO Howard Levine said “The environment remains challenging for consumers, and customers continue to buy close to need, that said, we are being conservative but think ultimately we will do well since we sell cheap shit and people can only afford cheap shit” (though the last part of that quote could have bee made up). The sell off seems overdone to Money McBags but he doesn’t follow FDO so he is not sure where comps are trading right now but at the high end their full year guidance is only $.01 below street guesses so either the whisper number on the street was much higher (and thus analysts as usual were scared to stick their necks out) or dropping 9% on guidance a Khagendra Thapa Maga nut hair below guesses is a buying opportunity.
In small cap news everything is up (well everything except for ZAGG). KITD is finally rallying after yesterday when Money McBags said “This is the time to be building a position here even though the market is totally full of shit. You wait for chances like this to buy good companies cheaply.” Look, Money McBags knows he talks about this company as if they made blow jobs and caviar, but it is one of his biggest holdings and he thinks it has great long term potential and now it is just trading so fuck cheap that if you’re going to buy it, you should have a full position. An interview with their CEO was posted yesterday by an industry follower and it is a great read for those trying to understand exactly what the company does, though it does get a bit technical. For instance you learn of their expansive definition of an enterprise customer, their deeper-in-the stack, multi screen strategy (not to be confused with Lexington Steele’s “deeper in the sack, multi-scream” strategy), and that 40%-45% of their business deals with the back end side (which is similar to Alexis Texas as 45% of her work also deals with the back end side).
From a stock perspective, the CEO once again addresses the organic growth rate by saying it has been ~55% of their growth, he mentions that they are able to keep “virtually” all of acquired companies’ clients, and he talks about some of the stresses of being a public company especially when your stock is down 40% and investors are breathing down your neck and thus need to be coddled like the lovely Emanuelle Chriqui. He also reaffirms that they will beat $75MM revenue guidance as with their last two acquisition they are near $100MM and says their goal for the next couple of years is to grow their global market share from 15%-20% to 50%. Most interestingly, he talked about their last assrammingly dilutive equity raise where shareholders were treated like Mel Gibson at a gay pride parade by saying:
“The raise was driven by an unsolicited reverse inquiry from a large institutional investor. It was a tough decision to take in the money (given the resultant dilution), but ultimately we felt it was the right thing to do in that it allows management to focus on building our business without the distraction of frequently accessing the capital markets to finance future strategic moves.”
This was all very intersting stuff and while there wasn’t a ton of new information, it was nice to hear the story again and have guidance confirmed given the assawful stock action of the past month. That said, Money McBags is calling bullshit on the $100MM revenue number. Last month Money McBags made the argument that with the declining Euro and ~70% of their business non-US, the exchange rate should make their topline unattainable. In fact, it could crush next year’s revenue as well. The company currently has 23.3MM shares so ~210MM market cap and ~$57MM in cash (Money McBags believes those are the pro-forma numbers after their last equity raise and acquisition, but the cash figure may be closer to ~$30MM), so ~$150MM in enterprise value. With the decline in the Euro, Money McBags estimated that next year’s EBITDA could be ~$20MM on the low end but in a best case scenario, he thinks they can earn ~$30MM EBITDA. So even on a worst case scenario they are cheap and in a best case scenario, they are cheaper than a Kevin Federline autographed picture as they are trading at ~5x EBITDA with plenty of cash. If you don’t have your position built yet, this is the time to get in. It may drop a bit tomorrow after today’s run up, and it may drop a bit more with the market, but this is a solid opportunity to step in to this company as a longterm holding.
Holy crap is it hot out today. It’s so hot that the only difference between the East Coast and hell is that Jim Cramer isn’t in hell, yet. Anyway, the market was rebounding a bit after downing several vials of muscle relaxant to help cure the severe case of lockjaw it developed from going down so much and so frequently over the past few weeks, but that all changed in the afternoon when reality sunk back in to investors’ portfolios. While this was likely a minor temporary relief rally, like Mel Gibson’s career after his first anti-semitic tirade but before his second tirade where he told his wife that that he was going to burn the house down among other colorful and completely insane ramblings, you should all trade in to it carefully. And yes, things have now gotten so bad that Money McBags is forced to use Mel Gibson’s racist rants as analogies for the market, so we’ve got that going for us, but at least we’ll always have the dot-com boom.
The main problem today is that macro news is lighter than Suze Orman’s resume and that is why the market tried to rally a bit. The ISM released their non-manufacturing index which measures 90% of the legal economic activity in the US and to the surprise of no one (other than analysts, economists, and CNBC), it fell to 53.8 which was a 4 month low and below the 55 guess of analysts. Out of the 11 metrics the ISM measures, 10 slowed down and one stayed the same (something called Supplier Deliveries, and in this economy all deliveries are being supplied in the rear).
Internationally, Australia kept interest rates at 4.5% claiming “uncertainty about the pace of future global growth.” Though if you read the fine print, they say the uncertainty is whether it will be 0%, negative, or global economy crushing. Finally, the market waits for Thursday’s ECB policy meeting where Jean-Claude Trichet will try to the soothe the market’s fear of european banks failing by assuring them that stress tests will be run and then offering the market a nice sitz bath. While it’s nice that the ECB is contemplating stress tests (which will no doubt show that european banks need to add more fish oil to their diets, start running for 30 minutes a day, and clean up their fucking balance sheets to try to get healthy), there is absolutely no way that european banks don’t get a clean bill of health and there is absolutley no way the ECB’s assessment will be correct. 151 banks just rushed to get funding from the ECB which is the most in a year and if that is a signal of health, than my name isn’t Money McBags.
In large cap stocks, a report from the Semiconductor Industry Association showed chip sales were up 47% last month thanks to demand from China, India, and the Lawson family. This has helped lift chip stocks and regardless of the economy, Money McBags is a believer that the pace of technological advancement will continue to accelerate and thus having some semi exposure in your portfolio should be a longterm benefit like windpower should be a benefit to the environment, saving should be a benefit to the economy, and a tracheotomy to Lady Gaga should be a benefit to ending noise pollution. Also, BP was up today after an upgrade by RBS from “Hold” to “Buy.” In addition to that upgrade, RBS announced they will be dropping the “R” from their name to hereby just go as “BS” and are retroactively initiating coverage on Enron with an “Accumulate” and Kate Beckinsale with a “Sell.”
In small cap news, it is ugly out there. Money McBags favorites KITD and KIRK continue to get pounded even though they are so cheap that if they were materials, not even China would use them. KITD is a bit funky because so much of their revenue is Euro driven so Money McBags has no feel for their upcoming revenue because a lot will depend on the average fx rate they use in conversion as well as the actual revenue split. So he expects them to miss analyst revenue estimates in the short term but long term, this company is growing 50%+ ex. currency effects, it is in a fast growing market, and they are among the biggest players with cash to spend to continue the roll up. This is the time to be building a position here even though the market is totally full of shit. You wait for chances like this to buy good companies cheaply, same with KIRK, so keep KITD and KIRK front of mind.
One interesting name which continues to fall and is becoming more appealing is IMAX. Money McBags broke them down a few months ago but basically they have been able to grow rapidly due to a JV theater strategy that has allowed them to open more theatres and take less risk. The did $42MM of adjusted EBITDA in Q1 but that was driven by a little something called Avatar which has now passed through the theater system like a kidney stone through a urethra only with less pain and with more aliens.
In the quarter prior to last, the company did ~$20MM in EBITDA (so $80MM annual run rate) and estimates are for $100M both this year and next year with the Avatar business leaving but new theaters picking up that lost growth. The current EV is ~$800MM so the company is trading as 8x to 10x EV/EBITDA which isn’t terribly cheap on the high end, but at the low end, it is getting to be attractive (not quite Alice Eve attractive, but probably Amber Lancaster attractive, and Money Mcbags is ok with that). The problems are that there has been a lot of retail money in this name which needs to get out, there is fear of pricing pressure killing their high ticket premiums, it is unknown how many JVs they opened this Q, and the business still relies on content and content is fickle (as noted by the brilliant WGP which every now and then misses the mark, like perhaps today, but in Money McBags’ defense it is very very hot).
The most recent Shrek movie underperformed because at some point even little kids can only take so much of Mike Myers so that, on the heels of Avatar going CGbye, is setting up IMAX for a top line miss. Today, the stock was down 10%+ on no news other than pretty decent numbers for the latest Twilight movie which is sure to slowly, unoriginally, and vapidly kill pre-teen brain cells everywhere. IMAX brought in $9MM from that likely abortionally bad movie in the opening week which is certainly at least as good as they could have expected.
Look, Money McBags could talk about EBITDA, revenue growth, and Ashley Greene in 3D, until he turns bluer in the face than a depressed smurf but the issue with IMAX stock is not the fundamentals, it’s the investor base. The stock was a high flyer, a momentum trendy name that drew in a lot of retail investors who institutional investors and hedge funds were able to continue to milk until deciding to blow out. Basically, once Avatar left and the story went from “we have the hottest fucking movie in history in a unique format” to “come watch an animated donkey in 3D,” growth investors ran. They bought the rumor and sold the news as if the news had slept with Magic Johnson. So now IMAX is in that weird stage where momentum investors have left and it is not yet cheap enough for value investors to buy. That thesis makes less fundamental sense than string theory, but it is what it is. So with institutions having puked this out, retail sellers are now taking their losses and when they wash out, value investors may start to kick the tires, check the oil, and make sure all of the company’s johnson rods are in order.
So look, Money McBags thinks this company is certainly on pace to do $80MM-$100MM of EBITDA this year and will likely at least hit those same numbers next year as JVs grow and people take even fewer vacations and thus spend more money on cheap family entertainment. So if you are a longterm owner, you don’t need to ditch anything here. That said, this should trade down with the market as people take gains and value investors probably won’t get interested until ~6x EV/EBITDA and if they earn $80MM-$100MM of EBITDA, that is still 25%-40% down to go, so you can probably still find a better entry point. Now it is possible for the company to earn much more than $100MM of EBITDA next year, but one has to make a few leaps of faith on JV openings, content, and the economy not going to $0, to get there, which is why Money McBags prefers to use the safer $80MM-$100MM run rate. The company basically needs to show they can perform without Avatar and while Money McBags thinks it is likely they will continue to drive traffic, he would hold off buying for another 20% down (and if it rockets up and you miss it, you need to be ok with that) because no matter how much you try there are four things you shouldn’t do in life: Spit in to the wind, start a land war in Asia, forget to look for the Adam’s apple, and fight the market. So keep IMAX on your watch list and get ready to pounce when it washes out.
Money McBags was initially in a good mood this morning as when he was scouring the internet for news/data/information, he learned that Wonder Woman was turning a delicious 69 (and it is news like that for which Money McBags lives), but then the jobs number came out and didn’t just put a turd in his punchbowl, but took the punchbowl, spilled out all of the punch, and then proceeded to fill it with a cacophony of fetid bile made up of what had to be 10 year old kimchi, expired mayonnaise, and Lindsay Lohan‘s saliva. The headline was that 83k private sector jobs were created despite 125k overall job losses due to the firing of 225k temporary census workers. And while that is mostly true, it obfuscates exactly how bad the numbers were like Goldman has obfuscated their real derivatives dealings with AIG. Money McBags doesn’t usually drop tables here (instead he drops all kinds of rules of decorum, manners, and grammar) but he has to do it today to explain exactly how bad the jobs number was and why it is a terrible sign for the economy going forward. So Money McBags went to the BLS’ actual press release (and readers should know the “L” in “BLS” is silent) and broke out the numbers since financial reporters hate doing work like Kafka hates writing endings to novels. That said, below is his table showing the actual jobs report numbers:
There are several things of note:
1. The BLS said the Government lost 225k temporary census jobs but had total loss of only 208k jobs, so one can backsolve in to a 17k government job creation number ex. census workers, which is kind of like a pyrrhic victory only without the fucking victory. Anyway, there is no way to know if those 17k job adds are temporary or permanent workers, but whatever, 208k net losses still sucks worse than a hooker with a bad case of xerostomia.
2. Of the 84k private sector jobs that the headline touts as somehow being positive, 21k of them were temporary, and the last time Money McBags checked his dictionary for “temporary” it hadn’t changed to being a synonym for “permanent.” The point is, only 63k real “thank the great Nipsey Russell in the sky I don’t have to look for another job in a month or so” jobs were created, not 84k.
3. The birth/death model plug which as noted before is the biggest black box Money McBags has seen since Vanessa Del Rio’s in the 1980s, added 147k jobs to the total and it would be easier to verify that the meaning of life is in fact “42″ than anything from the birth/death goalseek. Again, you can read all about the model here but it is basically the BLS’ way to rig the numbers, I mean estimate the number of jobs created/destroyed by new or dead businesses not in their survey. Now look, Money McBags is no Dale T. Mortensen and wouldn’t be able to debate the merits of the Beveridge curve or a backward bending labor supply curve (though he would like to give some beverages to Olivia Munn to see if she would bend backwards over his supplied curve), but how the fuck are more businesses being added now than are closing, when economy is going south faster than Mel Gibson’s chances of winning an NAACP image award? Yeah, Money McBags gets it, big businesses are no longer hiring so people are trying to start their own things, sure that could be one solution. But what about all of the small businesses that are dying because people don’t have fucking income? Are we really supposed to believe that 144k more people started businesses or joined start-up businesses than were laid off because their companies died? Sorry, but that doesn’t pass Money McBags’ sniff test and he’s got a hella good olfactory system. So taking out the fictitious birth/death model, 271k jobs were lost and 63k private sector jobs (temporary and/or permanent) were destroyed. Feel free to believe the birth/death model is remotely accurate, but Money McBags has more faith in Alan Greenspan winning this year’s Playgirl Man of the Year than he does that phony model.
4. As always, and not sure why Money McBags even keeps pointing this out, but analysts missed the number by a margin wider than a Larry Craig stance. Analysts guessed that 110k private sector jobs would be added and as you can see from above (and excluding the birth/death plug) only 84k or 63k were added, depending on if you give a shit about temporary workers. So Wall Street, WHY ARE YOU PAYING THESE GUYS? Money McBags is giving you better insight for free (well the cost of your dignity), so for the price you pay those highly distinguished economists, hire 20 people who are unemployed and Money McBags bets at least half of them come up with a better guess than the supposed experts.
So now that we know the jobs number was worse than reported, do we even bother debunking the drop in unemployment rate from 9.7% to 9.5%? Yeah, it fell, but that’s because the labor force participation number dropped by 652k as more people just gave the fuck up. The drop in unemployment rate is more full of shit than the birth/death model, Eliot Spitzer, or a constipated elephant with an overactive liver. Using what type of math can job losses increase, but the unemployment rate go down? No really? Is it some arcane rule of boolean algebra or perhaps Pythagoras’ lost theorem that says A^2 + B^2 = Whatever the fuck you want? The point is, the economy is not recovering (the real unemployment rate including discouraged workers was 16.5%) and with the stimulus running out, republicans denying extended unemployment benefits (so up to 4MM-5MM people potentially losing their safety nets), and retirement funds dropping daily as the market tries to find a new bottom (and as always, Money McBags only hopes it is Brooklyn Decker’s bottom), we are now at the tipping point where either Uncle Obama steps in again or we double dip our way back to 666 or below.
In other US news, factory orders declined by 1.4% which was triple what analysts had guessed, though that shouldn’t surprise anyone since we have already proved that the economy is getting worse and analysts suck at their jobs.
Internationally, Europe’s unemployment rate held at 10% (which Money McBags believes converts to 12.2% in American) but it’s still the highest rate in 12 years since the great black jeans shortage of 1998. Austria came in with the lowest unemployment rate of 4% which would be great if anyone actually lived there and Latvia came in with the highest rate at 20% which is great that no one lives there.
As for both large and small cap stock news, who really gives a crap today. It’s all going down right now so even though this is a party weekend, keep your shorts on as long as you can. And remember, follow WGP on facebook and Twitter and enjoy the fireworks on this 4th of July weekend.
It was another volatile day in the market as initial jobless claims came out and were much worse than expectations which is not surprising to anyone except for those who make those expectations. Claims were up by 13k to 472k while analysts had guessed that they would drop to 452k which means on average they couldn’t even get the 50-50 directional guess right. And as usual, claims were part of the weekly we suck at math derby (also known as “Numbers Manipulation Thursday”) as last week initial claims were 457k, so if they grew by 13k this week, that should have made claims 470k, but of course the (No) Labor Department wants to try to mitigate the fuckawfulness of the economy so they always release a slightly better number and then revise it worse when no one is paying attention. So last week’s claims were revised up to 459k and thus we get the true mathmatical equation 459k + 13k = Holy shit we’re fucked (or 472k, potato, puh-tato). The good news is that people claiming extended benefits dropped by 376k, the bad news is that number fell because the government voted to stop paying them, so um, welcome to the double dip (and not the kind where you only get bacteria), make sure you are properly supplied with canned foods, matches, and plenty of viewing material because this could get interesting. And to reiterate, Republicans filibustered a bill to continue extended unemployment benefits which is the first time this has ever happened with an unmeployment rate above 7.5% during a recession and it immediately cuts off 1.5MM unemployed people from cash flow they may need. If ever Money McBags wanted to lose an election, that is exactly what he would do, fuck the people who need help in the midst of the biggest recession in history. What wasn’t reported was that Republican Senators also filibustered dignity and common sense while proposing legislation to have unemployed people serve as speed bumps on Pennsylvania Avenue to keep drivers from going to fast.
In other US macro news, pending home sales also hit the shitter (and hit it with the force of a taco bell bean burrito slathered in extra hot sauce and Ecoli) which surprised analysts but shouldn’t have surprised readers of WGP. The pending home sales index fell to 77.6 from 110.9 because the first time home buyers tax went away which is only something that has been known for months. The 30% drop in the index dwarfed the 12% drop analysts had guessed once again proving that past performance is no indication of future performance in regression models when we live in a fat tailed economy. Finally the House passed a financial overhaul bill which will now go to the Senate for a vote on what should be sweeping changes but has been watered down more than Christina Hendricks in a wet t-shirt contest.
In addtion to macro news that was so bad not even Chris Dodd could have done something to make it worse, Goldman was further questioned by the FCIC today on their derivatives trading as relates to AIG (and as usual Money McBags would love to have the FCIC’s Heather Murren question him about the exposure of his long derivative). CFO David Vinnar was nice enough to constantly conflict himself by telling the commission that Goldman doesn’t have a “derivatives business,” but when questioned on how Goldman can call themselves a “top five derivatives dealers in the world,” he acknowledged that Goldman’s derivatives business is “a very big part of what we do.” Money McBags guesses that kind of logical fallacy or semantics masturbation is bound to happen when one talks out of their ass. Anyway, this whole thing is just theatre since if the government really wanted to shut themselves, I mean Goldman, down, it would take about 3 minutes of actual investigation.
Internationally, China is showing more signs of slowing down than Robert Byrd, as new data shows the second derivative of their manufacturing sector is likely abating. Two indexes (indices? indi? indiyouknowwhatthefuckimean) came in below analyst guesses, though still showed expansion (but that expansion is now more like from flaccid to quarter chub as opposed to full pitched tent). Tao Wang (not to be confused with Tiger Wang, Dong Wang, Peter Wang, or Wang Chung) an economist at UBS China said “economic growth is strong but momentum has peaked” and if that is true, the global recovery may need another shot of stimulus or else it could flatline worse than Gina Lee Nolin‘s acting career. In other intentational news, Spain was able to sell 3.5B of 3 year Euro bonds after promising not to default on them and promising to have Rebecca Ronda personally deliver them to all buyers along with a refreshing spanish milkshake. The fact that Spain was able to get their bonds out and not at a too exorbitant yield is a positive, though Moody’s has now placed Spain’s credit ranking on review for a possible downgrade, citing “deteriorating” growth prospects, challenges in meeting deficit targets, and the fact that no one in the country works. That said, Money McBags cares what Moody’s has to say about as much as he cares about Donald Rumsfield’s thoughts war strategy, Chuck Klosterman’s opinion on pop culture, or Aristotle’s view on the heliocentric universe.
In stock news it’s uglier out there today than it was in Barbara Streisand’s bridal suite when James Brolin went out for a smoke. One stock moving nicely up though is Ford as they announced a 13% rise in sales for the month of June led by the Ford Focus, their Super Duty F1 series, and pure luck. That said, the company announced a $4B buyback yesterday so has had good news two days in a row which currently qualifies it for the award as greatest stock ever. In other news, financials continue to sputter because there is currently less faith in the financial system than there is in Norse mythology. The Treasury department has been reducing their holdings of C which is good because the government shouldn’t own public companies, especially ones going $0.
In small cap news, ZAGG is unsurprisingly selling off after it hit $3 for no reason the other day and Money McBags broke down why the stock was at least $1 too expensive. One sector that Money McBags has liked but is getting destroyed today like a college senior’s hopes and dreams is the home health care sector. Small cap names AFAM and LHCG have been solid performers as they offer a service that is both cheaper than hospital stays and better for patients as home recovery rates are better than hospitalization recovery rates. The problem is these companies rely heavily on medicare funding and their billing practices have always been questioned.
Well today, the SEC announced they are launching an investigation in to AFAM and AMED around the companies billing more home visits to medicare than they actually made. That news is less good than waking up next to an unshaven Kathy Bates. As a result the sector is down 10% today and rightfully so, in fact if Money McBags owned any of these companies he would be puking them out like a bulimic with a vomit fetish. That said, LHCG does not seem to be part of the investigation so it could be a good time to try to pick this up on the cheap once things settle. Money McBags has always preferred LHCG in this group because they are a bit more rural than the others and therefore face less competition. That said, the market is enticing as it is growing 10%-15% a year as the population ages and home health care becomes a more ready solution. It costs medicare $132 per home health care visit vs. $6k for a hospital stay and as mentioned before, recovery rates are better at home because patients aren’t around so many fucking sick people all day.
LHCG earned $.64 a share in Q1 and gave guidance for $615MM to $625MM in full year revenues and $2.75 to $2.85 eps. With the sell off today the stock is trading at only 9x this year’s eps guidance and yet the market is growing by double digits. Revenue was up 17% last Q and guidance does not take in to account any de novo branches which only take a year to reach full margins. The company has ~$13MM net cash to still make acquisitions and the market is ripe for continued rolling up as the top 4 players are only ~10%-12% of the market. The problems are the reliance on medicare funding and the government’s ability to slash that at any time, the need for continued acquisitions, the uncertainty of any future medical liability issues (as with all health care providers), and the current SEC investigation on competitors. Still, this is a growing market and is a cheaper alternative for medicare and insurance companies that ultimately provides better service and better results so why not buy this for 9x earnings when you can? As he said, Money McBags would let this settle because the last time fudged billing fears struck the industry, these stocks got pulverized even though none of the public companies were found to be complicit. So bide your time but put this on your buy list. And to reitirate for those of you new to WGP (and if you’re new, don’t forget to join WGP on Facebook), Money McBags’ buy/interesting list consists of KIRK, KITD, TMRK, CTGX, CRUS, QCOR, NTRI, EPAX and now LHCG among others. Many of those are getting to be pretty washed out (KIRK, KITD, CTGX) and yet have nice earnings streams and solid longterm businesses so once the market is done dying, those are companies that should see positive momentum. And while the market drops, there is always WGO and ZAGG to short, or just buy TWM and watch Wall Street burn.
The market was flattish for most of the day until the last hour as some of the fears about Europe abated in the morning thanks to their banking system remaining open for at least another three months (so long enough for depositors to carve out space in their mattresses and pull their funds before the next bank run). The big news is that european banks didn’t seek as much capital from the ECB as people feared they would with the ECB’s 442B Euro line about to expire like the late great Diaperman. Banks only needed an additional 131B Euro 3 month loan which was below the 210B Euro estimate and only 131B Euro above being healthy. In other international news, German unemployment was down for the 12th straight month as German workers have to put in overtime to make sure their Spanish counterparts can take their proper siestas. Ahhh, to be young and in the Euro.
In US macro news, private employers added 13k jobs in the US in June according to ADP which makes a huge dent in the 20MM unemployed/underemployed/already given up people in the US (and by huge dent, Money McBags means the opposite of that). Really, 13k out of 20MM is as significant as a null hypothesis with a p-value of 1 trillion or as likely to change the current atmosphere as a stink bug crawling in to Lady Gaga’s underwear changes her cuntosis. Analysts had guessed that 60k jobs would be added in June so they were only ~250% too high which for them is good enough to win Institutional Investor’s golden shovel as analysts of the year which can then be used clear out all the crap they have been spewing. One has to remember that analysts have confidence intervals wider than the divergent opinions on global warming or Taylor Rain’s rectum. The report should quell hopes of Friday’s Labor Department jobs number release being positive so the government may need to hire Melissa Archer to deliver the release in order to keep investors from paying attention to the actual numbers. In other US news, the FCIC is beginning their two day hearings on AIG and Goldman’s relationship to understand how those firms exacerbated the financial meltdown through their selling of derivatives and then how Goldman profited when AIG was bailed out as AIG used the bail out money to repay their mortgage partners of which Goldman was one (Goldman was repaid to the tune of $12B and Money McBags is told that tune is a mash up of Flight of the Bumblebees and Don’t Worry Be Happy). While Money McBags doesn’t believe anything will come from this inquiry, if it just puts the FCIC’s Heather Murren in the spotlight for a few minutes, he will at least be moderately titillated (and yes, that is Heather on the left).
In market news, S&P is cutting their ratings of Moody’s which is a bit like Jeffrey Skilling calling Dennis Kozlowski a fraud, Attila the Hun calling Ivan the Terrible a bit mean-spirited, or Lindsay Lohan calling Paris Hilton a whore. S&P cited that with new financial regulation investors now may be able to sue (and rightfully so Money McBags will vociferously add) rating agencies for sucking at their jobs (and as a reminder, their only job is to recognize when bad debt exists, and they missed the entire subprime/Alt-A fiasco like an anorexic misses dinner), there could be reduced demand for ratings if regulation removes the need for companies to be rated by nationally recognized organizations (here here), and Moody’s sucks at their job. It is only a matter of time before Moody’s lowers their ratings of S&P on the same concerns and we get a tit-for-tat ratings agency cock-off. In other news, Playboy announced a restructuring where they will become even thinner by eliminating low level workers but will keep senior executives to remain properly top heavy and Ford was rising after paying down $4B of debt and telling people they changed their name to Tesla.
In small cap news, ISLE continues to get shellacked and was doing so even when the market was slightly up today. Two day ago Money McBags told you all shorting ISLE would be a good trade and now you should be up 8% to 15% on it depending at what price you were able to short. A healthy company with a ton of debt doesn’t just dilute shareholders by ~23% unless bad shit is happening. That said, this was purely a trade so if you want to lock in your profits and go home, Money McBags would applaud that move like he applauds charitable donations, rags to riches stories, and rainbow parties. Also, old friend COOL has dropped below $.70 and remember Money McBags broke them down after their last Q and said the $1 they were trading at was much too high and he would be short if the stock were more liquid. Well if you were able to short it, congratulations but you might want to start covering because the easy money has been made. The point is, Money McBags has been hitting some good names for you all and providing you with enough dick jokes to make even Bob Saget shudder so tell a friend, tell an enemy, and follow WGP on twitter and facebook because the revolution has begun.
It was ugly out there today, real ugly, like a Lady Gaga- Alan Greenspan love child with a bad case of facial neurofibromatosis. Investors are worried that China is slowing down (they are), that Europe won’t be able to roll their debt (eventually they won’t), and that US consumer spend will shrivel up like Khagendra Thapa Magar‘s muchkin in a cold shower (it will). Leading the the market down was a sell off in China after the dynamically named research group The Conference Board (which apparently researches everything but how to market a business) said they had recalculated the leading economic index for China to show a 0.3% gain in April which is much lower than the 1.7% gain they reported two weeks ago and they blamed it on a calculation error (no really they did, but Money McBags doesn’t believe that for a second because aren’t asians supposed to be the good ones at math? Oh right, The Conference Board isn’t asian). Anyway, with the people calculating the economic data unable to actually calculate it properly, we are once again left guessing at what is really going on and all we have to go by is what we see and that is a lot of closed retail stores, packed job fairs, and blurry objects as our health care ran out and we can’t afford new glasses. As China is the engine that is fueling the global recovery (the lobster in the bisque, the plutonium in the flux capacitor, or the extra F in the MFF, if you will) any slow down in their economy will certainly put a damper on economic growth and thus reduce all of us to subsisting off of Ramen Noodles and our tears of despair. Also, with Spain having to roll over debt on Thursday, the same day the whole European banking sector will have their one year 442B Euro line of credit from the ECB expire, Europe is jitterier than Michael J. Fox going through the DTs. Thursday could be a momentous day in the market as Spanish banks are hinting that the ECB’s line of credit is crucial to their viability so we may see a financial crash so bad one would think Ted Kennedy were driving it over a bridge.
Unfortunately, US macro news wasn’t any better with consumers only confident that the economy sucks. The Conference Board (the research group who miscalculated China’s leading indicators, so take the following with a grain of salt, though if you’re feeling really adventurous, take it with several grains of salt firmly planted around the rim of a shot glass containing tequila) reported the US consumer confidence index fell to 52.9 from 62.7, a number which was also downwardly revised (likely due to a goal seek input error in Excel). Basically every metric measured by The Conference Board fell except for belief that things will get worse, belief that there will be fewer jobs, and belief that Keynesian economics is a farce. Not helping matters was that the Case-Shiller index posted only a .8% gain despite government tax credits still juicing the system like a Lance Armstrong steroid cocktail. Sure a gain is better than a loss, but the gain should have been higher even with 18 out of 20 cities showing increases. Of course with that tax credit now expiring, there is certain to be a pull back next month so large that it will make even Kenny Rogers shudder. If there were ever going to be a double dip recession, now is the time, so sit back and cross your fingers that the government will re-stimulate the economy and push the second dip off for another few years when you’ll be too old to care.
In stock news, shares of C were halted at one point today because the market couldn’t believe the company hasn’t hit zero yet. The stock traded down 17% thanks to what is being reported as a fat finger trading error (and again, we call that the Portia Di Rossi because someone who looks like this must have some hella fat fingers to keep the lovely Ms. Di Rossi satisfied) though it was likely just the run of the mill high frequency trading stock manipulation. New circuit breakers were put to work for the second day in a row and trading in C stock was shut down for five minutes until it had time to cool down and think about what it had done before re-opening down only 5%. In other news Barnes and Noble dropped 20% as with the advent of TV, the internet, and the NSFW spankwire.com people no longer read books. The CEO announced the company will be investing $140MM in to their digital book business and their digital book reader, the absurdly named NOOKie (and if Money McBags were running BKS the first thing he would do would be to change the name of the NOOK to something more catchy like “iPhone” or more honest like the “not going to be around for long” since the market is going to be dominated by the Kindle and iPad). Anyway, 2011 guidance was for break even to a $.40 loss per share due to falling margins and investment, and as analysts had guessed the company would be profitable, shares sank faster than General McChrystal’s chance at winning a Medal of Honor this year. Finally Verizon was break even in a down market as they are rumored to be signing a deal with Apple and Tesla Motors (TSLA) shot up 40% on its first day of trading despite never earnings a profit, having $300MM of lifetime losses, not forecasting a profit until 2012, and having their business revolve around selling an electric car when we all know eletric cars only exist in the land of make believe where it rains gumdrops and every Friday is free blumpkin day at the local Rick’s Cabaret.
In small cap news everything was down except for ZAGG which Money McBags exhaustively broke down for all of you earlier today (so check it out, really). A name Money McBags told you about last week, KIRK, continues to get hammered but it is getting to the point where one may have to actually step in, put some gloves on, and catch the falling knife as it’s now at 8x Money McBags’ high end earnings estimates with ~20% of its market cap in cash. Also ISLE was down 6% after Money McBags said yesterday it would make a good short trade. Of course Money McBags isn’t bragging about that call because everything went down faster than a call girl working for tips only, so any short call from yesterday looks prescient. There may be a short term rally tomorrow but Money McBags is warier of this market than Thomas Hoenig is wary of keeping rates too low for too long, so he is staying on the sidelines for now.
And don’t forget WGP is on Facebook, even though it goes against everything in which Money McBags believes.
Money McBags will get his daily market update out later today, but he got a bit verbose with a small cap name this morning so will pump that out here in a separate post. The company he is talking about is ZAGG and it has caught Money McBags’ attention again as it has been moving up over the last few days despite a market more pissawful than a halitosis sufferer’s breath after a “shower” with R. Kelly. Money McBags told you ZAGG was a short way back in January and it has done nothing but fall until recently. The company was up 10% yesterday on news that their new Zagg InvisibleShield Dry will be available at all AT&T stores for customers to walk past and not buy. Here’s the deal, this company sells an overpriced commodity product that takes way too fucking long to apply and they don’t even own the patent on the materials that go in to it. What they sell is a plastic wrap that goes over your iPhone, blackberry, Xbox, nutsack, to keep it from getting scratched or damaged. It’s a nice product to have but it takes a day to fully adhere to your device and one needs to be a PhD in putting shit together to apply the Shield. And it’s not just that, but the company is selling these things for $25 a pop when there are cheaper and easier to apply alternatives out there ranging from fewer than $10 for this kind of stuff to free for simply not being a dipshit and putting your iPhone in a different fucking pocket from your keys. And let me touch on one point Money McBags previously mentioned, they don’t actually own the patent on the materials that go in to the Shields, they merely have exclusive marketing rights and Money Mcbags is pretty sure that if this were a real business opportunuty, Apple would out negotiate Zagg for those exclusive marketing rights and sell the product themselves.
Anyway, ZAGG’s new dry product is supposed to be easier to apply unless you google it and find that it is still the same pain in the ass for people to put on their PDAs (and Money McBags would love to put on some PDA with Sara Underwood who would certainly look delightful under his wood). Some of the recent stock movement up was the company being moved to the Russell Microcap Index last week and the rest is purely a way for shorts to once again make money. Not only is this company a one product company whose other ventures have yet to really add anything (this was their big new idea business venture a few Qs ago whose failure is as surprising as findng out that Chris Henry had brain dammage or Robert Byrd died), but their earnings keep getting worse. While revenue in Q1 grew 8%, net income fell from $1MM to $800k dropping eps from $.05 to $0.03 because gross margins sunk by 800bps as they had to move in to the more expensive whoesale channel from the cheaper internet channel where their margins are obviously lower on the overpriced commodity product they sell. Oh yeah, there’s also this which is the one fucking thing about this company which Money McBags doesn’t understand (other than who would buy their product) and would love for someone to explain to him (though if you could use small words and lots of pictures, he’d be happy), their invoiced shipping costs were $267k and the actual cost to them for shipping was ~$1MM. So they lost $750k on shipping? Pardonnez-moi, s’il vous fucking plait? How the fuck does that happen? Is this an industry norm (and really it may be) as it seems more bizarre than sell side economics or the popularity of that Twilight thing.
The company earned $.14 per share last year but in the past 2 quarters, despite revenue growth, has only earned $.04 and that includes their supposedly biggest Q that ends in December which saw costs ramp up faster than Nouriel Roubini’s heartbeat when spelling “double dip recession”. So one could annualize the $.03 from Q1 and say the company will earn $.12 (even though Q4 should not perform like the other Qs), but that is sort of the easy way out. The problem is, there are three huge unknowns with this company:
1. How low will gross margins fall? Last Q1 they were 64% with the wholesale channel accounting for 45% of sales and the internet channel accountng for 45% of sales. This Q1 they were 56% with wholesale accounting for 62% of sales and the internet accounting for only 22% of sales. So how much more does this mix skew?
2. Is this really a growth company anymore? Revenue grew 8% last q. Excuse me while I yawn myself to fucking death. The growth story is that as iPhones grow, so will ZAGG, and while Money McBags may not be as smart as Stephen Hawking (though he is certainly far more mobile and verbally melodic), it doesn’t take a nuclear scientist to realize the iPhone has been growing like a fucking steroidal weed while ZAGG’s sales only grew 8%. iPhone sales were up more than 100% last Q and all smart phone sales were up 50% and yet ZAGG grew by fewer than 10%. Growth story, de-mythed.
3. What the fuck are they going to fail at next? First it was the ear buds that no one cared about, then it was the appstore which has revolutionized the app business like the Edsel revoutionized the car market, and next the CEO has been talking about ZAGG stores which are not just likely to be expensive, but complete busts as selling dinky plastic coverings for PDAs are not enough to pay the rent (unless the store is located in Detroit where businesses can operate rent free, though they are also sales free).
The Merriman Curhan Ford analyst somehow thinks this stock is worth $5 to $6 but there’s a reason that analyst works for Merriman and not a reputable organization like WGP. Seriously, to get to a $5 valuation, you have to think this company can earn $.25 a share and trade at 20x and the company can do that if they grow revenue by 25% while keeping margins flat (and as mentioned, margins have been falling faster than Larry Craig’s shorts at a gay pride parade), so Money McBags guesses it is possible, but if anything, that growth will take until 2011 and why would you put a 20x multiple on a company that will take 2 years to grow revenues 25%? What is more likely is that this one product company continues on with single digit growth and decreasing margins and maybe, maybe, squeaks out $.10 to $.15 in eps this year and Money McBags wouldn’t pay anything more than 14x for that which gives us a target price of $1.40 to $2.10. The company may be too small to short or to even give a fuck about, but Money McBags would rather be long Afghanistan than long ZAGG.