Posts tagged FDO
The market was relatively quiet today as QE2 continues to dominate the financial headlines like Pablo Picasso dominated the cubist scene in the early 1900s (and the current disjointed and broken market is perhaps an homage to the long gone cubists) or Eugene Fama dominated the Chicago school of thought in the 1970s with his quaint and now outdated belief in efficient markets (perhaps in addition to the “weak,” “semi-strong,” and “strong” efficient market hypotheses, Fama should have also devoted time to exploring the “Shit is fucked up” and the “Beats the fuck out of me” hypotheses). Interestingly, non-voting member of the Fed (which as always, is like being a fluff girl for a lesbian porn movie, and let that one sink in for a second) Narayana Kocherlakota (gesundheit) was out today saying he is not really in favor of QE2 as it will have a more “muted effect” than the original QE and at twice the calories.
Money McBags’ favorite part of the linked to article above is (bolding is from Money McBags):
Quantitative easing is often thought of as reducing the rate risk for the private sector, but it actually only shifts risk, from bondholders to taxpayers, he said.
“The ultimate macroeconomic impact of QE depends on the extent to which the extra tax risk deters economic activity on the part of this second group,” he said. “We know little about this effect, either theoretically or empirically.“
So with taxpayers already struggling, the Fed may exact some form of quantitative easing even though LITTLE IS KNOWN as to the effects of this on the taxpayer. Wow. Talk about throwing spaghetti against a crisco rubbed wall and hoping it sticks. So the Fed can do nothing, and there will be an uncertain, though slightly more certain outcome (deflation, potentially followed by hyperinflation, but letting the system start to work shit out) or the Fed can get their quantitative ease on once again and either make things worse or better, potato-puhtato. Sounds like a great plan to Money McBags because afterall, if the Fed does nothing, then it will seem like the market doesn’t need them and if that happens then Ben Bernanke will have to go back to teaching unproven theory at Princeton instead of testing that unproven theory out on unwitting taxpayers. Oh well, at least the latest government Treasury offering didn’t go off at it’s lowest yield ever (oh wait, scratch that).
The only macro news out today was that mortgage applications fell once again despite record low rates as why buy when you can squat? The slight good news (or as Money McBags likes to call it, randomness) was that the purchase index was up 2.4% and thus it was refi mortgage applications that drove the overall decline by being down 1.8% because apparently you can’t refi what you no longer own. Of course whether the number was up 2% or down 2%, it is completely irrelevant because until the economy picks up and people have job security (or jobs) housing will remain blissfully crawling along the bottom like an ass fetishist at Jessica Biel‘s house.
Internationally, Europe is on strike to protest austerity measures, economic uncertainty, and Madonna’s faux british accent. Spain is leading the way with their first general strike in 8 years and they say 72% of union workers joined the strike which also means that 28% of union workers showed up for work which is the 2nd most ever after last year’s Nereida Gallardo free calendar day. Of course most Europeans don’t know the difference between fellatio and inflation, so it’s not clear they understand that the current spending rates of European governments is less sustainable than a boner in Kathy Griffin‘s boudoir (unless it is her boner).
In stock news, Family Dollar put up a good Q as they beat wall street guesses, had same store sales growth of 6%, forecast earnings for 2011 that will likely beat analyst guesses, and simply said: “It’s the economy stupid.” As people in this country grow poorer (well, except for the ultra-rich and Lindsay Lohan‘s legal defense team), owning FDO, NDN, and other discount retailers should continue to yield outperformance, so while they’re not cheap, they’re also likely to continue to churn out growth unlike just about every retailer not named Apple. Finally Green Mountain Coffee (GMCR), a momo’s wet dream for the past several years dropped ~17% as they announced the SEC was looking in to how the company recognizes revenue (and apparently the answer “deliciously” was deemed unacceptable). The company has had a ridiculous run and has not been cheap for years so if Money McBags owned this stock, he would be puking it out faster than a 10 day old Filet-O-Fish sandwich because there is no point being involved in shit when the SEC is trying to remind people that they can be relevant.
In small cap stocks, CRUS is once again going nuts as apparently Jim Cramer yelled about them during his infomercial for euthanasia, or whatever it is he is now calling his show. Remember, Money McBags told you about this stock when it was in the $7s so hopefully you bought then so remember Money McBags when you are buying festivus gifts this year. The stock has actually been performing like shit for a while but Money McBags fully expects them to put up a HaYuge quarter when they report. This was Money McBags analysis of their last Q and nothing for him has changed since then, well except for his socks and his newfound love of everything Karissa Shannon.
In other small cap news, MLNK put up their quarter today and traded down ~14% and Money McBags would say they shit the bed this Q, but that wouldn’t have made a difference since they were already in a shit-infested bed from the previous two bed shitting quarters. No what they did was worse than shitting the bed, they actually shit the entire room, including the faucets, the phone receiver, and even inside the toothpaste tube. And remember, Money McBags first told you about this stock when it was ~$10, so you might want to hold off on that festivus present (well, unless it is a ticket to a Justin Bieber concert, because Money McBags loves him some Biebs. And yes, that was a fucking joke), though to be fair, last week he said the stock was running up and putting in a $7 limit sell order wasn’t a bad idea.
Anyway, MLNK’s revenue was basically flat with slight growth in core business (~3%), a bump up from acquisitions, and then a 33% drop to $26MM for new business, and this is the second quarter in a row in which new business has cratered which is probably a bit of a warning sign that this company might be fucked (and “a bit” of a warning sign in the same way that Veronica Varekova is “a bit” hot). They also saw their gross margins drop again, this time to 10.7% from 13%, which they said was a result of revenue mix, new client programs (though as they had fewer of these, so it is a bit flummoxing how that would lead lower margins, but logic be damned), and an increased bonus accrual because the company hit 2 of their 3 targets. And yes, read that last part again as Money McBags is not making it up. So despite horrible execution and a declining business, the management team is going to get bigger bonuses as apparently the two targets they beat were “running a shitty company” and “destroying value” while the third target “not sucking at their jobs” remains unattainable for the forseeable future.
The company also took a ~$25MM goodwill impairment, mostly on recently purchased businesses, so management proved they can not only suck at execution, but also at acquisitions. They had ~$5MM in operating cash flow (a decent enough proxy for EBITDA) which was down from $12.6MM last year and $8MM last Q in their race towards $0. Other highlights include a decrease in their business in Asia (which is their most profitable business), increasing pricing pressure (including a $4MM concession to a large customer), and guidance for things to remain this shitty as even though customers want to cut costs (which Money McBags thought was A SELLING POINT for MLNK), those customers are cutting costs by no longer holding inventory (and this all sounds very strange).
So what to do with this company? Honestly, stay the fuck away from it. They have ~$160MM in cash and a ~$270MM market cap with positive free cash flow, so in theory they should have ~30% downside protection, but Money McBags has no faith in this management team being able to do anything other than create declining EBITDA streams. We’re now at ~$20MM EBITDA run rate so the company is trading at ~5.5x that, and while EBITDA has been a fuckload higher in the past, this company deserves no credit for that so be glad you don’t own it and if you do, perhaps renting a NSFW room in Rome will cheer you up (and yes, Money McBags is morally and contractually obligated to link to that once a week).
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.