Posts tagged LOW
The markets fell again today as US macro news was mediocre at best, fears in China have risen from red alert to Kung Pao levels, and Germany has banned naked short selling of stocks and CDS (though you are still encouraged to get long Salzgitter and Money McBags’ “salzgitter” would get very long for Sonya Kraus and he would certainly let her take the other side of his Siemens trade). With the ban on naked short selling in Germany, the markets floundered as traders sought to unwind positions and find alternative ways, or countries, to continue with the same bets they have been making. This market reeks of dislocation worse than Ronnie Brown’s lisfranc.
Not helping matters was that US macro data was more mixed than a can of nuts (and please, write your own punchline). Home building rose in April with new home starts up 5.8%, the most since October 2008 as home builders prove to be more optimistic than Brooklyn Decker‘s bikini waxer. However, construction plans fell to their lowest level this year as the tax credit ran out and people remain unfucking employed. Building permits were down 11.5% and economists had guessed that they would be moderately up which once again proves that a broken clock is wrong 86,498 times a day. In other macro news, seasonally adjusted PPI was down .1% last month due to more people keeping their eyelids shut as a result of allergies (and yes Money McBags has used the PPI pun before, but it is still horribly funny). Core PPI, which excludes the essentials such as food, energy, and oxygen, was up .2%. Money McBags always loves that economists apparently don’t care about food and energy prices as a gauge of inflation which is as rational as a pareto inefficient nash equilibrium like the prisoner’s dilemma (and if Money McBags were ever a prisoner, he would have no dilemma because he simply wouldn’t pick up the soap). Interestingly, energy prices actually slumped by .8% thanks to natural gas prices retreating from booming to silent but deadly and food prices declined by .2% despite meat rising 5.1% and thus beating meat price rises going back seven years. The good news though is that inflation appears to be tamer than a Dane Cook stand up routine.
Internationally, in addition to Germany banning naked shorting (and Money McBags hopes they don’t ban naked cavorting), the EU sent 14.5B euro to Greece today and told them to keep the tip. With that 14.5B, the EU hopes to stave off Greek defaults, restore order to the European financial system, and receive a free two-liter of coke with their souvlaki since their order exceeded $20. Also, the ZEW Center for European Economic Research (ZEW of course standing for zero economic worth) said its indicator of German economic sentiment fell in May to 46 from 53. The good news is that the indicator’s historical average is 27, the bad news is that the 46 was below the consensus guess of 47, and the even worse news is that Lucy Pinder has never been in my kitchen. But it’s not just Europe that is going in to the crapper like last night’s bean burrito washed down with an extra large cup of metamucil and healthy dollop of “we’re fucked,” but also China as Chinese investors are also starting to get more nervous than Jackie Chan trying to roll his “r”s. The stock market in China remains lackluster, down 21% for the year despite being sprinkled with MSG to keep investors coming back for more. Driving the sell off has been expectations of rising interest rates, fear of tighter bank lending to help rein in inflation and quiet soaring property prices, and fortune cookies throughout the region reading “You’re going down” (in bed. Booooyah!!). The markets remain more jittery than Sarah Palin in a spelling bee, so remain careful.
In stock news, Walmart put up a good quarter beating analyst guesses of $.85 eps by $.03. The world’s largest seller of cheap crap had sales of $99B which were up 6% despite a 1.4% drop in same store sales. Guidance was generally inline though management said sales are shifting away from entertainment and apparel and into do-it yourself auto repairs, pharmacy, and tight fitting tops. Home Depot announced a good quarter and raised their outlook, yet the stock traded down as analysts think the outlook to be too rosy after Lowe’s took a giant dump on Q2 forecasts yesterday. Finally, financials fell again as potential new credit card regulations hit card issuers and fear of Europe imploding hit banks. In all, it is uglier out there than Minnie Driver‘s face and tomorrow could get much much worse as fear has seeped back in to the market.
In small cap stocks, everything sucked. KITD got hit with another big block trade around midday despite both Merriman Curhan Ford and Roth Capital’s analysts raising price targets after yesterday’s Q. Money McBags promised he would listen to or watch their quarterly call today but he has been too busy to follow through on that, so his analysis from yesterday still stands. The fact is it is a weird little company, exposed to many different currencies, and highly acquisitve in a market that may soon like none of those three things. So the market may trade this down on technicals and fears, but fundamentally, if you don’t mind some pain for awhile, it is worth holding on to like a drowning straight man would hold on to Christina Hendricks‘ life preservers.
The market was somehow flat today after spending most of the day down again as the perilousness of Europe’s debt situation continues to worry investors like laryngitis worries Pavarotti or like coming in to contact with Paris Hilton worries osmophobes. Not only is Europe raining ash on the market’s parade (both literally and figuratively, though to be fair, the market’s parade today was in honor of Norwegian Constitution Day (better known as pedophilia Christmas for the tradtion of children’s parades), which ranks somewhere between the invention of nose hair clippers and the launch of the Edsel in the pantheon of modern events, so not a big deal) but US macro news was mildly disappointing as well. The NY Fed released their monthly manufacturing report and the gauge of general business conditions fell to empty. The business index dropped from 31 to 19 and analysts had guessed it would be 30. As always, Money McBags has no idea what the difference between 31 and 19 is (other than maybe a few kids and a meth problem), but he knows that they’re both legal. The new order index also tried to make this a Blue Monday by falling from 29 to 14 as inventories have been restocked (or un-destocked, whatever). One positive aspect of the report though was that employment strengthened as payrolls grew the fastest they have in six years as NY manufacturing plants try to keep up with demand for tools and building materials to help batten down foreclosed on houses. In other US macro news, home builders’ sentiment hit a 2.5 year high as apparently delusion has finally creeped in to lift their spirits. The index rose to a whopping 22 while analysts guessed it would be 20, so the difference is a rounding error or a stutter. The bigger issue is that 50 or greater means more people are optimistic, so with the index only at 22, people are just slightly less negative, like a guy who breaks up with Amy Winehouse to date Mayim Bialik.
Internationally, the Euro continues to sink today as if it were a Brazilian Real in 1999 or had just hired Ted McGinley to star in its new TV drama (tentatively to be called The Big Crash Theory). The ECB was out buying 16.5B of sovereign debt and in order to try to show they aren’t just printing Euros, they will be taking in 16.5B of deposits from banks and paying out interest. Wow. So the banks get some free money while the ECB gets worthless bonds and has to pay interest on the money they didn’t “print.” Seems a bit odd but then again, so does Rene Zellweger‘s face and that’s never seemed to hinder her. Also, bank lending in Europe is taking a significant hit as the rates banks charge each other for loans in dollars rose to a nine month high. The Libor-OIS spread (which isn’t nearly as interesting as the rumored Rachel Uchitel Playboy spread) increased to 24 basis points, the most since August, thus signaling that banks in Europe are as interested in lending as the FED is interested in transparency or as Ellen Degeneres is interested in penis.
In stock news, GM posted their first profit as apparently people can now only afford shitty cars. GM earned $865MM and proved that all you need to do to succeed in business is suck badly at your job, lose a ton of money, and then get bailed out by good old Uncle Sam and his magic printing press. Money McBags only laments that he missed that class during his business school days. Not only did GM post a profit, but they are on course to go public again in Q4 to try to see if the investors have learned the old adage “Fool me once, shame on you, fool me twice, go fuck yourself.” Additonally, GM is said to be looking to get back in to the financing business which is a bit like letting Bernie Madoff handle the prison finances, filling the Goodyear blimp with hydrogen, or hiring Roman Polanski to babysit your 14 year old daughter. In other earnings news, LOW beat earnings forecasts but like all companies in the past week, gave guidance more disappointing than Nicole Eggert‘s movie career (and Money McBags had so much hope). CEO Robert Niblock said that 2010 will be a “year of transition” while significant growth won’t happen until 2011, and if it doesn’t, no one will remember he said it would. Guidance for Q2 was $.57 to $.59 per share which was below analyst estimates of $.62 per share and sent the stock down for the day.
In small cap news, KITD had their quarterly earnings release today and you all know Money McBags loves KITD like Joanie loves Chachi or high frequency traders love turning off liquidity when the market is tumbling. The stock is trading down heavily thanks to some block trades around midday where someone just wanted to puke this out like a bulimic with emetophilia at an all you can eat Sizzler buffet. Money McBags hasn’t had a chance to listen to or watch their call, though he will tonight or tommorow, but he did go through their Q and hear the last 20 minutes of Q&A. To be honest, their Q was a bit lighter on the revenue side than Money McBags would have liked to see. Revenue of $17.4MM was up 80% y/y but up only 8% sequentially, though management explained that this is typically a sequentially down revenue Q due to reduced digital media consumption in the industry. That said, EBITDA margins were only 17% after being 19% last Q and accounts receivables continue to be higher than John Belushi at a Chateau Marmont casino night. Management explained that as they are a small company with Fortune 500 clients, they have about as much leverage in bill collecting as He Ping Ping does on a see saw with Shaquille O’Neal (and that’s not just because Mr. Ping Ping was so small, but also because he is dead). As they explained, they have been getting business in towards the end of the Q which causes A/R to spike right before the Q but their larger clients get around to paying them within 45 to 60 days typically since KITD’s services are usually a small expense for them. An interesting point made by CEO Tuzman was that they could factor their receivables but they choose not to because they are not worried about collecting and thus don’t want to give up the economics. Their customers are going to pay as they are big, established companies, but they just take a bit longer. Three other interesting points:
1. In the press release they say: “In answer to a couple of investors’ questions, we have not seen any slow-down in IP video-related expenditures in Europe as a result of the
2. They purchased a company called Benchmark which gives them a presence in Singapore, mainland China, and Southeast Asia. Benchmark is supposed to have $10MM in revenue in the next 12 months and they paid ~$11MM for it if Money McBags did the math correctly. The deal should be immediately accretive and will open up opportunities in Asia for them where there are two main competitors who they hinted that they may already be in negotiations with to do JVs or acquisitions. Money McBags is glad they are finding shit to buy with all of the dilutive equity they just raised.
3. Kelly Brook is hot.
Anyway, guidance for this year which was released a few quarters ago was $75MM+ revenue but since then they have added Multicast which should be ~$12MM revenue and 9 months of Benchmark which should be ~$7.5MM revenue, so they are now on pace for ~$94MM in revenue. However, they only earned $17.5MM this Q so in the next 3 Qs they are going to have to average ~$25MM revenue which seems a bit like a stretch. In terms of earnings, gross profit was up to 61%, a number they said will likely continue to climb a bit depending on mix and after stripping out merger, restructuring, non-cash stock comp, and integration expense, Money McBags has KITD with ~$1.5MM of operating income this Q and with the 23MM shares they now have, that would have been ~.07 EPS. So not great, but on the right track. To give you an idea about the leverage though, if they had earned $25MM in revenue, they would have had another ~$4.5MM of gross profit and even if op ex rose $1MM, that would have earned another $.15 putting them at $.22 eps or ~$.88 eps run rate and they are trading at ~15x that with today’s sell off. As highlighted earlier, guidance and acquisitions now get us to $25MM revenue quarters so over the next year that type of operating EPS is possible, and with 50% growth, KITD remains very cheap.
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.