Posts tagged KITD
The market is largely in neutral today as investors await the Fed’s decision on interest rates this afternoon. With the lilkelihood of the Fed keeping rates at their current low levels somewhere between the likelihood of Michael Lewis droning on about his bond trading days in his new book or the likelihood of getting herpes from a night of snorkeling Paris Hilton (and that of course is a trick analogy, since the odds of both of those are 100%), investors are anxiously waiting to see if the language of the Fed will change (and as always, Money McBags votes for a change to Esperanto or perhaps even pig latin, you hear that Enbay Ernankebay?). It is likely that the Fed will tweak the language just enough to hint that their accomodative stance (though not as wide or accomodative as a Larry Craig stance) will only last for so long, but there is unlikely to be enough detail for anyone to feel confident in a time frame. If by now you haven’t figured out that rates are eventually going to go up, Money McBags can’t do anything for you other than to help you strap your helmet back on and buy one of your handmade potholders. In US macro news released today, US housing starts were down in February by 5.9% to 575k, but that was slightly better than the 570k economists were guessing. Multi-family dwelling construction was down 30% which is probably bad news for Mormons and John Edwards. The decline in housing starts though is largely being blamed on snow storms in the South and Northeast where construction was down 15.5% and 9.6% respectively, though construction of igloos was up 58% in both geographies. Surprisingly, the West and Midwest both showed greater than 7.5% increases in new home starts, or on an absolute level, 2 houses.
In international news, the 16 EU countries (there used to be 17 but they kicked out Grumpy) agreed to back Greece with loans if needed. While the plan was almost as vague as a Nostradamus prophecy, the term “sexual relations” to Bill Clinton, or the US’s bank bailout plan, European markets greeted it with open arms and one of those cheek to cheek kissing things they so much love to do. The issue could come to a head in April or May when Greece faces more than 20B euros in debt redemptions which is one hell of a night out in Athens. For 20B Euros there should have a been a huge Greek fiesta with Daniela Eleftheraki serving up plenty of pancakes and ouzo. Bouying this positive news in Europe was German investor sentiment which fell less than expected from “heilige Scheisse” to just a case of schadenfreude. Apparently the Germans are slightly more confident that their weiners will produce adequate amounts of schnitzel.
In stock news, GOOG is once again rumored to be pulling out of China which would put them in the same catergory as Sean Waltman. Money McBags will likely buy any dip caused by these rumors as China is a small part of Goog’s current earnings and even if they were to exit, it would likely only be temporary (forest through the trees my friends, forest through the trees). GE is up on a JP Morgan analyst upgrade as well as comments from their CFO. The analyst thinks credit losses have topped out while the CFO said GE will resume growing their dividend in 2011 (if we still have a global financial market) and will use excess cash for buybacks and acquistions (as opposed to hookers and blow I guess). As long as they aren’t acquiring a crappy network TV station or AIDS, Money McBags is all for them trying to grow the business again.
In small cap news KITD is beginning to run (and remember Money McBags told you all to buy and bought in himself in the low 10s the other week) as they presented at a Roth small cap conference yesterday and also announced a new acquisition and that they are buying back 4MM of their outstanding in-the-money warrants. They are buying a firm called Multicast Media Technologies for $18MM of cash and stock ($4.9MM cash, 1.3MM shares) and post deal will have $15MM in cash and 17.7MM shares outstanding. Now Multicast said they earn around $12MM a year in revenues from annualized recurring licensing fees for its IP video management software and KITD expects the acquisition to be immediately accretive. Now remember, KITD guided to at least 60% revenue growth to more than $75MM and EBITDA margin exceeding 17.5%. They’re now adding $12MM to that revenue and should be able to hit those EBITDA margins because they take out cost quickly in this business as all they really need to do is transfer the data to their platform and then fire everyone at Multicast (Sorry guys, but hey, you’ll have company). But let’s not give KITD the benefit of the doubt and we’ll say they only get 10% EBITDA margins on this acquisition in the first year. So now their EBITDA will go up by $1.2MM to $14.2MM. They are currently trading at $125MM market cap with $15MM cash, so on an EV/EBITDA basis that is around 8x in a worst case scenario. If they can get to the 17.5%+ margin on the acquisition, EBITDA will be at least $15MM and would put them at a 7x EV/EBITDA multiple. The company is trading at 1.5x revenues (and analysts and the company maintain that their competitor Brightcove was valued at 12x revenue, though it’s unclear where that rumor started so it should be discounted by as much as one discounts Donald Rumsfeld’s war strategies or Lehman Brother’s book keeping). The only thing holding this company back is that it just has some fundamentally weird things about it that serve as red flags to old and stuffy institutional investors. They have a promotional CEO (not to say he is bad, but he is clearly only in this business for the short run so the higher he can sell it for and the sooner, the better), they were located in Dubai and now have moved to Prague, they rely on acquisitions, and they are still almost as small as He Pingping (and as an aside, the whole editorial staff here at When Genius Prevailed poured out a thimble this morning for the passing of the great Mr. Pingping who died at the age of 21, thus he both figuratively and literally led a short life. Even though he was only 29 inches tall, he lived life to the fullest. So I ask you all to take a short moment of silence now for Mr. Pingping). That said, the numbers don’t lie (well unless you’re Enron, AIG, Refco, etc.) and this company is headed in the right direction. They could easily get their EBITDA in 2010 to $20MM (remember, their guidance says revenue of at least $75MM and EBITA margins of at least 17.5%, so if we call revenue $100MM since its already at $87 after the acquisition and call margins 20%, because it’s a nice round number, we’re at $20MM of EBITDA) and if they just trade at 8x that, there is almost 50% upside. Plus they think the worldwide online video market is $10B and is only 4% penetrated by the cheaper than digitial video IP solution which they provide. Money McBags may buy some more today or tomorrow as the story remains intriguing and the new acquisition will help them beat their already lowballed numbers (though probably not as low as Abe Vigoda’s balls).
The market is up again as the service industry grew more than forecast last month thanks to more people stopping off at McDonalds on their way to the unemployment office and then washing their sorrows away by watching touching interpretative dances at their local Rick’s Cabaret in order to warm the cockles of their jobless hearts. The ISM’s index of non-manufacturing businesses was up to 53 from 50.5 and in theory measures 90% of the legal economy (it doesn’t take the lovely Ashlee Dupre to let us know there are many illegal services performed in this country). That was higher than the 51 estimate and we are all acutely aware that a number above 50 signals growth (while a number above 36DD usually signals growth for Money McBags). Also ADP was out with a report estimating companies cut 20k jobs in February which would be the smallest drop in 2 years were that number not likely to be revised next month. Economic data gets revised more often than a politician’s stance on issues (cough Harold Ford cough Mitt Romney cough), modern history, or the background of an old rich guy’s wife (she was a student, she worked with kids, they were my kids and she was in high school, but….). The good news is that there is the whiff of real recovery in some of these numbers, though that could also just be the smell of Ben Bernanke’s taint after an all-nighter spent trying to right this economy.
In international news, Greece has approved an economic plan which will save $5.5B through a 30% cut in holiday bonuses, a 2% increase in value added sales tax, and a promise to cut down their spending on noise pollution by simply having Nia Vardalos shut the fuck up. Money McBags is anxiously looking forward to the day Greece’s fiscal problems are solved and not because it will help shore up the market but because he has fewer Greek jokes left in his arsenal than a eunuch has balls. Seriously, if Money McBags knew he was going to have to write so many one-liners about hellenic culture he would have majored in Greek history, Epic poetry, or Maria Menounos while in college. For fucksake Money McBags may have to stress his long syllable and start writing this blog in dactylic hexameter if the Greeks don’t get their shit together (and if he is going to stress his long syllable, he can assure you that Alice Eve will be very involved). Of course the Greeks were less than thrilled with the cuts, including taxi drivers who apparently stayed home for a second day because according to the NY Times (so it could be totally fictional), they were “protesting tax reforms which would oblige them to issue receipts, keep account books and pay tax according to their income.” While that would make Charles Rangel proud since he loves finding ways around the means of paying taxes, protesting the loss of the ability to cook one’s books is as preposterous as Heidi Montag‘s singing career or anyone finding Jay Leno funny.
In stock news today Ethan Allen is running (though this time not from the British) as they said their orders for the first two months of 2010 were up 25% as apparently it was time to buy new furniture for Fort Ticonderoga. Dine Equity announced their quarterly results and decimated estimates thanks to increased traffic at Applebees and only a moderate downtick in IHOP business. Adjusted earnings came in at $.76 cents easily beating analyst estimates of $.15 as the company was able to create significant operating leverage, pay down debt, and somehow disguise the taste of their food to make people actually want to eat it. Money McBags is not saying that Applebees is bad, but not even chronic ageusia sufferers will go there. So it is understandable that analysts would have underestimated earnings, that said, being off by a factor of 5 is as bad as trying to forecast the length of Lindsey Vonn‘s celebrity and using any metric loner than days. Finally, BJ’s Wholesale club reported earnings up 4.6% but guidance was below estimates sending BJs down on the day. Money McBags is a bit confused as he doesn’t find anything disappointing with BJs, but should they continue to gag or see a lenghty decrease, they may be forced to change their name to Blumpkin’s Wholesale Club.
In small stock news, LOV received a take out offer for $3.10 per share and “other possible business combination transactions” from big shareholder Great Hill Partners. The stock has shot up to $3.30 so those “other possible business combination transactions” either mean “another $.20″ or merger-arb traders are betting the company put themselves on buyashittycompany.com and are expecting a counter offer. Money McBags broke LOV down last week and came up with a $2 valuation so either Great Hill Partners has more of a Jewish fetish than anyone who has dated Barbara Streisand (because why else would anyone want to date that?) and thus needs to own JDate or “Great Hills” is yiddish for “Sucker.” Yesterday Money McBags briefly mentioned QCOR but he finally had time to go over their Q last night and he loves what he sees. Money McBags has followed this stock for almost a year and a half and has watched the issues they have had with their FDA filing for IS marketing approval, their asstastic sales into the IS market last Q, their sales force ramp up in MS, and their out of nowhere medicade reimbursement and reserving issues from last quarter. Honestly, their last Q finally got Money McBags out of the stock as it wasn’t clear what was going on with their sales as a potential competitor had emerged and the reserving issue they reported was more confusing than a post-op lesbian tranny (I mean if you like chicks, why cut the thing off?). Money McBags still liked the company though as their management team had generally done a good job on strategy (with their execution being a bit concerning because how many times does it really take to file a fucking sNDA? One? Maybe two? But having to refile more than twice creates more red flags than a Beijing pennant maker.). That said, this quarter easily beat Money McBags’ top line estimates and their phone call was chock full of goodness. Money McBags had an estimate of $23MM in net sales for QCOR based on IS sales remaining flat (it was down big last Q in what looks like an anomaly) and 15% Q/Q growth in MS sales. Well IS sales rebounded to the mean of their historical range and MS sales grew 50% Q/Q. While the reimbursement rate was about 1.5% higher than Money McBags estimated, their net sales still came in about $2.5MM above his estimates. Sales were strong enough to give shareholders spasmodic seizures (which of course should be good for QCOR since that what their drug aims to stop). Anyway, there were many other positives such as the potential emergence of a market for Achtar (the drug QCOR sells) into the nephrotic market. QCOR sold 14 vials to this market and estimates that there are 50k people their drug could treat and those people on average would use 2x the doses of an IS patient and 4x to 5x the doses of a MS patient. The company estimates this as a potential $1B market for them and will start allocating a bit of their sales force’s time to contacting nephrologists. Now look, it is way too early to get too excited about this as the data is very sparse but it does mimic the MS market for them just two years ago so there is some real potential here. Additionally QCOR has straightened out their Tricare reimbursement issue which may now contribute to 10% growth and said the FDA will get back to them on their ability to market to IS doctors by June 11, 2010. Oh yeah, the CEO addressed the potential competitive drug Sibril and said in the six months it has been on the market, they have not seen it make a dent in their sales. The only way this quarter could have been bette for QCOR was if they found out Achtar also acts as a pheremone for Brooklyn Decker‘s mouth. In terms of forecasting a baseline, just assume they get nothing from the nephrotic market, IS remains at its historical mean (so flat from here), and MS grows 20% per Q (which is aggressive, but whatever). Additionally assume a modest uptick in operating costs, no more reimbursement issues (they claim they are fully reserved for past medicare claims), and a 500k per q share buyback (they bought back 2MM shares last Q and have 5MM left on their buyback so it could be more), and you get to around $.76 eps for 2010. So on those baseline earnings, the company is still trading at less than 10x earnings even after being up almost 30% in two days. Plus they are only trading at 2.5x or so EV/sales and companies like this trade at 3x to 4x. Of course that $.76 eps number could be too low if the nephrotic market can get traction, the FDA approves them to market IS to doctors, and MS continues to run. The concerns still remain that the drug is hella expensive and the quarters can be lumpier than Alexis Texas’ backside, especially as they have little control on IS sales, so there is a reason for it to trade at a bit of a discount. Also, QCOR’s hiring of a Chief Medical Officer to investigate buying other assets with all of their cash is a bit worrisome because a company with their supposed growth opportunities in MS and NS shouldn’t need to be wasting time on non-core products. That said, there could still be a ton of value here. Plus with borrowing rates only to go up, M&A is getting hotter than Olivia Munn on the planet Mercury, so this could be a nice little take out candidate. Money McBags will likely buy on a pull back and is kicking himself for not having owned this, but their last Q was so bad it made it Lady Gaga look fuckable.
Oh yeah, Money McBags picked up some KITD yesterday at around $10.
The market has hit a speed bump today as consumer confidence fell to its lowest level in 10 months. Consumers are now less confident than a slightly overweight 16 year old girl with bad acne and a spastic colon on her first day in a new school. The confidence index dropped to 46, which is below the 56 economists were expecting, and Money McBags has no idea what 46 means but he is confident it is not good in the same way he is confident having one’s ladyfriend say “we need to talk” is also not good. While the consumer confidence index is a forward looking metric (and if you really want to look forward, just tape a picture of Kate Bosworth to your glasses), the measure of present conditions came in at its lowest level in 27 years. Wow. That is not an exaggeration. People are not only finding jobs harder to get, but growth in the job market seems to be more stagnant than Bobby Jindal’s political career (and as an aside, Money McBags doesn’t give a fuck about politics because they are all the same person, just a different suit, but has any politician ever had a faster and bigger fall than this Bobby Jindal guy has had without mismanaging a war, getting caught in a crack house, or banging Peggy Eaton? Jeesh, that guy has disappeared so fast he was on the back of my milk carton this morning). Anyway, the point here is that investors are now worried that retail spending will be weaker than expectations with the drop in consumer confidence providing a swift kick to the nuts. In slightly positive macro news, home prices declined but the annual pace of decline slowed from “holy shit” to “is it hot in here?” The decline was .2% and was worse than the flat expectations, but only by a rounding error. Interestingly, 15 of the 20 metro areas saw price declines and that sound you just heard was Money McBags throwing up in his mouth. Ugh. The market is now teetering after such a nice totter last week, but that is why this is called an inflection point.
In stock news, Home Depot followed competitor Lowe’s strong quarter yesterday with solid results of their own including their first increase in same store sales since 2006. Of course the comps for same store sales were much easier due to the fact that the only people buying anything at Home Depot in Q4 last year were repo men and the guys who strip empty houses of their copper wire, but still, a 1.4% increase is positive. Home Depot also gave fairly rosy guidance and said they gained 100bps of market share which was likely a result of their November promotion “buy two shower heads, and we’ll throw in a golden one for free.” In other stock news Barnes and Noble is down after posting an inline-ish quarter after they announced same store sales were down 5% and then blamed it on something called the fucking internet. Sorry guys, but the classic brick and mortar book selling business is about to go the way of video rental stores, address books, and civility. Sure Barnes and Noble had strong growth in their online business, but that is a fraction of their sales.
In small cap news, EBIX is getting a case of the dropsies again while ISLE crapped out on another quarter as people don’t like gambling in run down casinos. And yesterday, long time Money McBags reader and ninja assassin (and Money McBags loves any word with two “ass”es in it) Matty McSacks put up some solid thoughts on LOV in the comments section. Matty treated the comments section like he was two girls and it was one cup with his mancrush on LOV. Apparently he loves LOV so much that he is lobbying for them to start intrinsicvaluedate.com, where investors can go to WACC off while getting their shorts squeezed. Anyway, Money McBags knew nothing of LOV until yesterday but he spent some time last night reading their 10Q, playing around on their site, and watching some Tori Black videos on Spankwire (and you may be asking what the Tori Black videos have to do with LOV, and the answer is absolutely nothing). LOV apparently runs about 30 online dating sites with their crown jewel being JDate which accounts for 50% of the company’s subscribers. Now Money McBags lights the menorah but he never understood the appeal of JDate as he prefers his ladies to be over 5 foot 2 and without what I believe is referred to in medical circles as the “nag you to fucking death” gene. Other sites LOV runs are Blackchristiansingles.com, Singleparentsmingle.com, and Canadwarfgetatabledance.com (ok, one of those is made up). They also run a delicious dating site aimed at weight challenged people called Moretolove.com which Matty claims is their fastest growing site and Money McBags only hopes that the pun was completely intended. And while Money McBags loves this concept, he would have named it either Cushionforthepushin.com or Dinnerfor3.com. Anyway, Matty values this stock at at least $5 based on $8MM-$10MM free cash flow per year and some brand value for JDate. Hmmmmm. Let’s see. They earned $.05 per share last Q and while there may have been a sequential lift in subscribers (unclear if that was seasonality), JDate still had a 6% decline on a year over year basis in lonely Jews and those who are looking for some gifelte fish on the side. But here’s the weird part, revenue declined by 16% in that segment which is more than subscribers declined which means they are either discounting more or are losing their premium clients (and it’s unclear what their premium clients get, perhaps a chance to date the one Jewish girl who swallows, and again, Money McBags is a yid, so he can make those jokes). Not only is their revenue dropping faster than they are losing subs, but their marketing cost went up as a % of income by 300bps. And here is another red flag, industry sources have the online dating industry growing 10% to 15% a year (though that industry source is Piper Jaffray, so buyer beware as one should never trust anything from a person who chooses to live in Minnesota). But let’s assume that the number is directionally correct. So the market is a moderate double digit grower and yet this great affinity site JDate is losing subscribers. Something doesn’t smell kosher. The company claims to have had $8MM of adjusted EBITDA in the first 9 months but there was also $1.7MM of income from a legal judgment which I believe they included in that number. So really closer to $6MM of EBITDA or an $8MM annual run rate. That puts the company with it’s very marginal balance sheet at a run rate of around 7.5x EV/EBITDA to go along with their 15x run rate p/e. So the multiples aren’t too high, but the investment in this company really has to come down to whether or not you think it can actually grow, especially with increasing competition from Facebook, Twiter, and the completely NSFW Guesshermuff. JDate has been around for several years already and given that it has grown through word of mouth and the Jewish population is closer knit than a purl stitched willy warmer, there probably isn’t much more free growth left. The point being, 99.95% of Jews already know about JDate and if they haven’t yet signed up, they are not going to do so. As for the Jews just reaching dating age, they are simply using twitter and the like and not dropping $40 a month or whatever in order to have a mitzvah. So I am very skeptical that the drop in JDate subscribers is just the economy and also very skeptical that they will be able to keep their spanktastic margins in that business because marketing costs simply have to go up. You can only rely on word of mouth for so long, unless that mouth belongs to Faye Reagan and the word is “enter.” Anyway, having the stock 45% owned by a PE shop certainly doesn’t hurt because we know PE funds rarely make mistakes (just ask Warburg Pincus about their MBIA investment), but the fundamentals of the business still remain weak. Matty did a nice job on NLS last time so he does get mad props here for his calls on companies who are sucking and have yet to show things are getting better, but LOV just doesn’t have the margin of safety to make Money McBags comfortable and he fears their business is going to continue to face headwinds. If the company were to show some growth and get to an industry growth rate, then sure, Money McBags could see it trade up to $4 or $4.50 but until then, a $.20 eps annual run rate company with no growth and few barriers to entry should probably trade closer to 10x which would make this a $2 stock and thus leave us with 33% downside. If you really want to invest in a shitty internet affinity play, why not just buy INET who at least has exhibited solid business growth? Money McBags will monitor LOV, but he’d rather own a company like KITD right now that is trading at like 7x EV/EBITDA and growing 60% a year with 17% EBITDA margins.
2/22/10 Midday Report: M&A picking up as small companies take out their diaphrams hoping to trap acquirers before rates increase
The market is running in place today as it awaits further earnings and macro news later this week. The big M&A news today is that Schlumberger is buying Smith International for $11B, while the big T&A news today is that Rhian Sugden is hot. Schlumberger, which sounds like what is served for lunch in Berlin on the set of scat films in order to best prepare actors for their upcoming scenes, is purchasing Smith to improve their drilling technology. Wow, $11B seems like a lot of dough to get better at drilling when if they really wanted to learn how to drill better they could have just rented a Peter North compilation video for $5 and gone on their way (thanks, I’ll be here all week, enjoy the soup). This is the biggest M&A deal of the year so far and with rates as low as they are and only likely to go up (since it’s unlikely Bernanke would lower them below zero and thus pervert the entire financial system like Roman Polanksi on the set of High School Musical 4: Who Ordered the Pizza?), Money McBags is betting the M&A market only heats up from here so it is worth looking at small take-out candidates (like KITD or Meredith Eaton).
In international news, the Euro continues to sell off as investors grow more worried about Europe slipping back in to recession as a result of the potential Greek bail out. The WSJ has a long and narcolepsy curing expose today on Europe’s clandestine use of complex financial instruments to prop up their economy over the past few years which served to hide the actual amount of debt and deficit on the continent. Apparently European countries used currency swaps like a tranny uses a gaff to doll themselves up and make themselves presentable. Well with Greece leading the debt spiral, Europe’s adam’s apple is beginning to show and those investors who put money into Europe and quietly wondered why Europe would only give them moderate returns (oral) are now finding out exactly why that was. Things are still a bit dodgy overseas which will likely cause further market volatility over the next few weeks, but it could also offer some solid opportunities.
In market news, Lowe’s put up a good Q with top line revenue growth of 2% and 27% growth in earnings as they beat estimates by $.02. Lowe’s CEO said the results ”suggest the worst of the economic cycle is likely behind us” and cited an uptick in the sale of big ticket items, like bulldozers to demolish foreclosed upon houses and storage sheds to keep one’s valuables while the owners huddle in masses of cardboard boxes yearning to breathe air free from pollutants and disease. Lowe’s gave conflicting guidance saying they expect the recovery to boost sales but that the spring quarter’s profit will be below expectations and as a result, the stock is flatter than the singing voice of an American Idol contestant or the state of Illinois.
In the small cap space RICK is shaking off their awful quarter (which Money McBags broke down for you last week) and is up 10%. Now loyal readers know Money McBags was more disappointed with Rick’s quarter than Abraham Lincoln was with General McClellan’s slow pace in 1861, but somehow investors seem to be buying into the VCGH deal. Money McBags was considering selling some RICK after the Q, but he is glad he held on for now. That said, his target price was $16 and as RICK inches closer to that Money McBags will be reevaluating the company more often than Elin Woods reevalutes marriage or Christopher Reeve reevaluated riding horse back. In other small cap stocks, CTGX (a holdng of Money McBags) is due to report this week. CTGX has two businesses, one of them is basic, boring, and less sexy than Betty White in a GMILF video, and the other one has the potential to be hotter than any of the great Janine Lindemulder’s classic Where The Boys Aren’t movies. Their boring business is basically staffing and solutions to IBM for IBM’s server installation business. CTGX provides people and knowledge to allow IBM to outsource this function. It’s more boring than a Jane Austen novel and they have less control over it than an incontinent has over their urethra after drinking a 7-11 Big Gulp. Basically, if IBM is installing servers, CTGX gets work, if not, there is nothing they can do about it. The problem with this is that the staffing business has 3% margins and is 2/3 of their revenues with IBM being about 1/2 of that (and for you non-maffematicians, 1/2 of 2/3 is 1/3). Plus that business has been down 40ish% due to the economic decline. This is one of the reasons they started a new strategy a few years ago to focus on the health care IT market. The most exciting part of this strategy has been their foray into the electronic medical records business. Say what you want about Obama-care, but EMR is coming and the government will be funding it. CTGX’s health care IT business is now 25% of their revenues and growing (with EMR being about 1/3 of that). They are one of only 8 companies that can install EMR systems and they focus on the smaller hospitals and charge on the order of 40% less than competition (which of course means they can move their price up as the demand picks up). The goverment is already giving big monetary incentives to hospitals to install EMR but are mandating that hospitals have these systems up and running by 2015. Now look, Money McBags is not a health care expert but he does know there are a fuckload of hospitals and only 8% of them currently have adequate EMR systems. So the demand is going to be huge while the supply is shorter than a Britney Spears mini-skirt or an Ogden Nash couplet (for example, the government thinks it will take 212k people over ten years to install adequate systems and there are currently only 10k people trained to do this). CTGX won 6 new EMR deals last Q but they say the market is still slow as hospitals are having trouble getting funding due to banks tightening up on lending. That should pass and government incentives are picking up and CTGX thinks this business will take off in 2011. The company is trading at around 20x 2010 earnings estimates which is hella expensive for a 3% operating margin staffing business, but their health care business has higher margins and is growing. CTGX is basically an option right now. As long as their staffing business doesn’t completely fall off (and it appears to have stabilized), they should earn enough in the next few years to support their EMR busines while it continues to grow. It’s a small position for Money McBags as it is a bit early, but it will be interesting to see if their core business was able to maintain in the past quarter.
2/11/10 Midday Report: EU says they will bail Greek out but offers few details, claims they were drunk at the time
The Greek debt crisis in Europe is still causing uncertainty in the markets as the leaders of the EU gave a tepid, vague, and Spicoli-ian response to their discussions and plans to bailout the Greeks. The president of the EU, some guy named Jose Barroso who also doubles as the Prime Minister of some place called Portugal where he is said to survive off of the magic lillies from the river Tejo opined: “There is an accord.” He then went on to give a little more detail by saying: “it’s a Honda Accord, but still it’s an accord. Oh I keed I keed. We have a great accord, for me to poop on” as apparently Triumph the Insult Comic Dog is big in Portugal these days. German Chancellor Angela Merkel then said: “Greece won’t be left alone but there are rules and these rules must be adhered to. On this basis we will agree on a statement.” Of course the rules are that Greece has to drastically cut its spending, increase many of its taxes, and be home before 9pm, but the good news is that the leaders of the EU have finally agreed on a statement. So whoop-de-dam-doo, we have a statement. Unfortunately Money McBags has yet to find that statement anywhere and unless the statement is “we’re bailing out Greece, now pass the saganaki,” it is unclear what has actually been accomplished despite Herman Von Rompuy claiming that the EU will provide “determined and coordinated action if needed.” That’s great to know, really, but if you could provide that action BEFORE THE FUCKING EU IMPLODES, that would be much appreciated. You know Mr. Von Rompuy, if that’s even your real name, the rest of the world is trying to run an economic recovery here so could you stop pussyfooting around (unless it’s your foot and Abbey Lee’s pussy, then please take your time) and lend the Greeks some fucking money already. Jeesh. I haven’t seen a supposed plan with fewer details since Hank Paulson scribbled his TARP strategy on the back of a napkin using only ketchup packets and Alan Greenspan’s tears. The EU leaders are being so vague they are making Sorities paradox look easier to reach a conclusion about than Sarah Jessica Parker’s gender (trick question, because she’s a tranny).
As for the US macro economy, initial claims for unemployment were out today showing a drop of 43k last week to 440k overall. This is lowest level in five weeks and may signal a “drop in the administrative backlog” which of course was likely caused by not having enough administrators to process the claims since most of the administrators had been laid off. The US economy appears to be stagnant right now and the question remains how long any recovery will take.
As for stocks, Pepsi reported an inline quarter and reaffirmed guidance and announced they will be increasing their share buy backs due to stronger than expected free cash flow. Earnings were driven by their snacks business line which feature such products as Doritos, Lays, and their new launch of Cheetos’s Atherosclerosis sticks with the slogan “turning even your heart attacks orange.” The company thinks they will have low teens 2010 earnings growth and is currently trading at a perfectly respectable 15x 2010 estimates. If Money McBags did not pick KO in the Pepsi challenge, he might consider adding a little PEP here.
In small cap news, not a lot is going on today as WGO is about to drop through ther support levels and EBIX is about to test the $14 level. As far as new information, an analyst from SocGen initiated coverage on KITD with a sell rating and a $9 price target citing concerns about KITD’s lack of profitability, potential future goodwill impairments, and receivables growth outpacing revenue growth. Now just two weeks ago Money McBags broke down KITD for all of you with the main points being that they are in a growing market and are forecasting $13.5MM of EBITDA next year while trading at cheap EV/EBITDA and revenue multiples. As for SocGen’s criticisms, first of all, a bank that almost went under due to a fraudulent trade shouldn’t throw stones, unless those stones are made of diamonds, gold bullion, and Alexs Texas’s behind and aimed at those investors who lost money. Secondly, KITD’s receiveables did rise as they made several acquisitions and consolidated those receivables. The hope is that their collections will be better than the acquiree’s and that they can churn out better revenue growth. Money McBags does agree that it is something which needs to be watched. However, SocGen’s valuation might as well have been written in French because it makes less sense than people who give a crap about the Sports Illustrated Swimsuit issue (not that Money McBags is against scantily clad lovely ladies, but we have something called the internet which makes the SI Swimsuit model look about as risque as a Nun showing some ankle or Jay Leno’s monolgues. Honestly, the most entertaining part of the SI Swimuit issue this year was finding out there is a model named Cintia Dicker (dicker? Money McBags doesn’t even know her. Though to be honest, he would do more than just dick her)). The analyst’s $9 valuation is achieved by taking some weighted valuations (including a $10.60 value derived from a DCF, which is higher than the current $10 price) and applying some sort of sector, company, and speculative discounts to that weighted valuation (why the discount isn’t just put into the actual discount rate of the valuation is beyond Money McBags, but then again, so is the appeal of American Idol, so what do I know?). Anyway, Money McBags hasn’t seen anything that contrived since Michael Jackson married Elvis’s granddaughter. The analyst took down the valuation by 5% based on “company appeal” because of KITD’s low liquidity. Excuse-moi? Comment t’appelles tu? Merde Tete? The main point is KITD is a speculative play, something which Money McBags said in his initial review of them and that is why Money McBags is not yet an owner. That said, the company is a market leader in a fast growing market. Yes, the acquisition model is a bit worrisome and the management team is a bit too salesy, but there is real potential for a company like this with locked in recurring revenues from Fortune 100 companies, to be a big winner. It is worth following KITD and maybe even buying if you can comfortable with the risks, that said, it is not a “sell” as SocGen so daintily pulled out of their derrieres.
1/20/10 Midday Report: China flexes pimp hand and vows to curb lending, businesses cower in the corner and promise to work harder for daddy
The big news bringing the market down today is that China is beginning to realize they may have a bit of a bubble on their hands as they opened up their fortune cookie last night and saw their fortune was written on the back of a yuan (as for the fortune, it said “man who puts balls in peanut butter is fucking nuts”). As a result, China will reel in their profligate lending. The chairman of the China Banking Regulatory Commission said that he expects banks in China to decrease their loans by 22% in 2010. So in the year of the golden tiger (and also the year of Tiger Wang), businesses may not receive the showers of money they saw in 2009 (now aptly renamed from the year of the Ox, to the year of the golden shower). It is good that China is realizing that they need to reign in their stimulus sooner rather than later, but this news of course is putting fear in to investors who worry about the short term recovery from the global recession.
In US macro news, US wholesale prices showed virtually no inflation as energy price declines offset increases in food prices. This is bad news for fat people but good news for the Tin Man.
In stock news, BAC and WFC reported earnings, well to be more precise, WFC reported earnings and BAC reported losses. BAC underperformed analyst expectations by posting a loss of $.60 per share vs. estimates of a $.52 loss per share. They blamed the $.08 miss on analysts being really bad at math. Without the TARP repayment and dividends paid on preferred stock, the Q4 loss would have only been $194MM, and in related news, if I didn’t have a dick, I’d be a chick, so unfortunately the details matter (and if I were a chick, I would be totally gay for Aubrey O’Day). BAC also raised their provision for credit losses to $10.1B in Q4, from $8.5B a year earlier because of some little thing I believe they referred to as “people not wanting to fucking pay shit back.” They also had total write-downs for the year of $33.7B, more than double the $16.2B in 2008, so at least we finally know the price of dignity.
The point is, BAC benefited from the investment banking gains of Merrill Lynch while they still took it in the yingus from their consumer portfolio. They suffered a loss of $4.9B on their consumer credit card business, compared with a $3.3 billion loss a year earlier. So guess what market, things aren’t getting much better. People still love charging off like Martha Coakley loves being bad at politics (and I need to digress for a second here. Money McBags does not get involved in politics. He does not care one iota what the fuck happens in this world as long there is world peace, no capital gains tax, and free blumpkins for all. And to be honest, he’d be happy with just one of those three, unless that one was world peace, and then he’d need at least one of the other two. The point is, Money McBags is completely apolitical, for all he cares, a gay person could marry an abortion while smoking a joint through the barrel of a shotgun in the middle of the oval office while spraying chlorofluorocarbons all over a bald eagle, so the fact that he has an opinion on this senate race is unusual. But this must be said. For a democrat to lose Ted fucking Kennedy’s senate seat in Massachusetts after having a 30 point lead in the polls and without having killed someone, been arrested for fraud, or openly rooted for the Yankees and claimed Bill Russell was a bitch, is perhaps the worst performance not just in the history of politics, but in the history of anything. Think about it. Ted Kennedy killed a lady and that couldn’t stop him form winning election after election. All this Coakley broad had to do was be alive, and yet somehow she fucked that up. Sure the dude who beat her (and yes this is really him, and sorry to my straight male readers) had a secret weapon in his lovely daughter Ayla, for whom Money McBags would cure cancer (though not one of those hard cancers like nut cancer, something much easier, like cancer of the mouth, also known as Kathy Griffin), but Coakley’s loss is so colossal it should be part of the lexicon. So here we go, BAC did not lose $.60 per share this Q, they Coakleyed $.60 per share. Diatribe over).
Most interesting was the verbiage from BAC’s CEO who said “economic conditions remain fragile and we expect high unemployment levels to continue, creating an ongoing drag on consumer spending and growth.” Which seemed at odds with WFC’s CEO’s statement that: “While losses remained elevated during the quarter as expected, a more favorable economic outlook and improved credit statistics in several portfolios further increase our confidence that our credit cycle is turning, provided economic conditions do not deteriorate.” Of course, WFC managed to turn an $.08 profit compared with a ginormous loss last year, so things are looking a bit rosier for them, except if you look at their charge-off numbers which were up sequentially $300MM to$5.4B driven by commercial and consumer real estate.
So are all banks created equal or will performance differences really start to show now that the economy has sort of recovered? More importantly, has the economy actually recovered? Here are four interesting stats from this NYTimes article (as always, buyer beware with facts and the NYTimes):
1. Bank of America said the percentage of credit card loans it thinks will never be paid hit 13.53 percent in December. JPMorgan Chase expects to charge off 10.5 percent of its credit card portfolios in the first half of 2010.
2. Fourth quarter of 2009, the number of domestic credit card accounts has declined by 20 percent from its peak in the second quarter of 2008, to 341 million from 426 million
3. the amount of available credit on cards has declined by 21 percent since its peak, from $3.51 trillion in the third quarter of 2008 to $2.77 trillion in the fourth quarter of 2009, the data shows
4. Hayley Atwell is still really hot, and Money McBags will drive this bandwagon into the ground until playboy drops by the Atwell residence.
So available credit is shrinking for the US consumer. What would be interesting to know is how utilization rates have changed and whether anything can be gleaned from this other than people got rid of their 3rd and 4th credit cards which they rarely used anyway and unemployment is still high (no word on how it can afford to keep getting high though).
In small cap news, KITD, a company Money McBags is following closely announced they will be issuing shares in both the US and Prague (where they will soon be listed). They are seemingly raising capital for more acquisitions where they buy companies for their customers, fire all the employees, and enjoy the benefits of leverage. KITD is basically a large database of videos for internet/IP delivery. They get raw video from customers and then help clients manage, view, distribute, manipulate, and store that data. They have a greater than 99% customer renewal rate because once a customer gives them their data, it is a huge pain in the ass for that customer to get all of the data back and have to reformat it, etc. (it is more of a pain in the ass than Valentine’s day). KITD’s market is growing 100% a year as IP takes off, they have little competition, they also have a ton of NOLs, and 93% of their business is outside of the US. IP video is cheaper and better than digital and it represents only 23% of the global video market so there is a lot of room to grow. That said, the company is a bit odd as it has had headquarters in Dubai and now Prague and they are still unprofitable from an operating eps standpoint. Also, the CEO loves himself almost as much as he loves money and looking silly at the movies and the company basically just relaunched less than a year ago when this new CEO came in and developed a new strategy. Now the good news is that the CEO is the biggest owner and has a substantial portion of his net worth in the company, the bad news is that the CEO has led failed companies before. But he has had success recently and at least we are betting with him. Also, despite little US exposure, they did win the business of Verizon Fios which is the only IPTV telco user in the US. The company has little sell side coverage but recently announced fiscal 2010 guidance for revenue to increase at least 60% to more than $75 million, with an annual operating EBITDA margin exceeding 17.5%. Ok, so EBITDA will be somewhere around $13MM and their market cap $120MM is with $13MM of net cash as of their last 10Q, so they are trading at around 8x EV/EBITDA before their just announced capital raise and at around 1.5x revenues when companies like this who use the software as a service model tend to trade at between 2x and 6x revenues. These are relatively cheap multiples for a growing company with a high recurring revenue base which contains many blue chip customers. Money McBags does not yet own KITD because he is still trying to fully understand the company’s competitive advantage, but he is thinking about buying a starter position and will throw down the gauntlet to his loyal readers to do some of their own research here and see if they come up with anything else important.
Oh yeah, a Money McBags longtime reader e-mailed him about a Korean-American bank HAFC which is apparently now trading at around .5x of TBV (even with today’s big run-up) and promises to love you long time. Money McBags knows nothing about HAFC and how real their TBV really is but if it is even 80% correct then there is room to grow here. So you should all do some due diligence.