Posts tagged PALM
4/29/10 Midday Report: HP thinks it bought a rosy PALM, no word on whether they will also buy her five sisters
The rally is back on thanks to solid earnings, Greece likely getting bailed out again (for now), and the FED reaffirming their promise to keep rates low until the next bubble. Not only that, but new claims for unemployment were down by 11k which was just shy of analyst guesses and just shy of asking Kristen Bell out on a date. In financial news, Republicans voted to finally allow debate on financial reform because somehow the good of the country became more important than the search for birth certificates, reigning in wide stances, and understanding what about tea bagging is so appealing to Sarah Palin. Money McBags hopes there will be real reform like you know, requiring reserves to be held on insurance contracts more commonly known as CDS, limiting the size of financial institutions, and closing down the ratings agencies whose business models incent them to do the opposite of give unbiased ratings and who sucked at their jobs like a blind skeet shooter or a fluff girl on the set of a Sabrina Johnson record breaking film. While there is no doubt Wall Street will eventually find the loopholes in any regulation because greed is a dish best served with caviar, Dom Perignon, and peach cobbler (the first definition of course) and that shit ain’t cheap, at least the government can make it a bit harder. Money McBags is all for the Volcker rule, for hedge fund regulation, and for derivatives regulation even if the last one may cause Warren Buffett like a millisecond of a sleepless night on his mattress made of gold and the tears of baby bald eagles. The SEC’s new found ballsac is refreshing and Money McBags hopes they are serious about regulating the markets and watching porn instead of just watching porn (unless it is first time lesbian porn, and then Money McBags understands).
Internationally, Greek is getting some drachma again as the IMF promised to raise their bailout funds from 45B euros to 120B over 3 years. However, as part of the stipulation for getting funding, Greece is going to have to put in place stricter austerity plans and better track and report their finances by allowing the IMF to inspect their “cash boxes” once a year on the island of Lesbos. Greek Prime Minister George Papandreou was said to have started negotiating with labor unions to cut two of their fourteen monthly salaries, to institute higher value added taxes, and to require they work longer than three hour work weeks. The real question is whether German Chancellor Angela Merkel stops being a sour kraut and agrees to help with the bailout or if she continues to waffle in hopes of maintaining support in Germany to propel her party to victory in the upcoming North Rhine-Westphalia election. That’s right, Merkel is letting Greece, Europe, and the global markets dangle in the wind because of some do shit election in a country that isn’t going to even exist should Europe go bankrupt. Angela, be a good girl and come listen to Money McBags. I know it is fiscally irresponsible to continue with the steroidal Wimpy strategy of getting a hamburger today and paying for ten of them on Tuesday, I know you want to stay in power (though Germans fighting for power scares the gifelte fish out of Money McBags), but sometimes you have to do stupid stuff for the greater fucking good. Yeah, Greece acted less fiscally responsible than Stephen Baldwin or a homeless crack addict on pay day, but as the great Zeno Cosini once said “complete freedom consists of being able to do what you like, provided you also do something you like less.” So fucking lend Greece the damn money already and enjoy the freedom to have a European economy. Now go get me a Kreppel but go light on the powdered sugar because Money McBags hates getting that shit on his fingers.
In stock news earnings were so jizztastic that the market is now expecting octuplets. But before we even get to earnings, HP is buying PALM for $1.2B in a move that had been rumored for weeks. Money McBags gets why HP did it as PALM has a good ass operating system and HPQ has the means to try to make it work with better hardware and distribution, but going after AAPL and Blackberry and GOOG is kind of like buying Dr. Pepper and trying to take on KO and PEP or thinking you can beat Lisa Ann and Alexis Texas in a nice ass contest relying on only the Butt Blaster and not implants. The handset market is more fully penetrated than Bridget the Midget in a tryst with Lexington Steele so sure you might get a little market share with HP behind a Pre-type phone/operating system, but $1.2B seems like a lot to pay for a company that was dying. Anyway, in other stock news MOT put up a quarter that beat on the bottom line thanks to aggressive cost cutting which did away with lobster thermidor Thursdays in the executive cafe. Mobile phone shipments fell 43% despite the rise in smartphone sales but the company’s guidance of $.07 to $.09 eps next Q was well ahead of analyst guesses of $.03 eps. BIDU also put up a ridonkulous quarter as chinese people apparently searched for more than just their freedom. Their profit was up 165% and BIDU’s market share in China rose by 600bps to 64% thanks to GOOG’s exit from the chinese market and thanks to Olivia Munn’s new billboard which was posted online. Other companies that beat earnings include V, HOT, FSLR, and anyone who sold anything anywhere over the last three months.
In small cap news CRUS continues to run while Money McBags’ largest small cap holding KITD is breaking out like Cameron Diaz’s face after a pepperoni pizza. Money McBags has blogged about this so many times that he is risking being more repetitive than a stutterer reading a tongue twister, so he will spare you the details (just use the search function on When Genius Prevails), but this stock is easily worth $20. They had a call the other day about the $50MM capital raise they just did and basically said it is a war chest to help them fend off Brightcove for acquisitions as Brightcove is going public, any deal they make will be immediately accretive and between 5% and 15% of revenue, they are still targeting 60% organic growth, and world domination is only months aways. Ok, that last one was made up but the point is the video asset management space is more fragmented than J Howard Marshall’s beneficiaries and KITD is in a strong position to help roll it up while putting on it’s nicest Sunday dress to appeal to buyers (and yes, KITD will be acquired in the next 1-3 years, that is the play). And it’s still not too late to get in. Money McBags has purchased three times and if you look at the archives, the first time was at ~$10 so hopefully you’re all doing well on this too. In other small cap news, another Money McBags holding, CTGX, put up a decent Q the other day. Money McBags broke down CTGX on 2/22/10 so read the full analysis there but the story is they are basically a shitty IT services/staffing outsourcing business with a growing health care IT focus and a specialty in installing electronic medical records. It’s a bit like Y2K IT firms in 2000 in that there is a specific event (hospitals moving to EMR) that will last a finite time (though probably 3 to 7 years starting in 2011), but there are only a few firms who can do this and CTGX is the lowest priced one with the best service. In this last quarter they finally saw revenue growth after a number of down quarters due to business spend going away in the recession like an 18 year old wanna be actress’ dignity on her first casting couch. Revenue was up 5%, operating income was up 28%, operating margin increased to 3.9%, and eps was $.11. No real surprises but a nice sold quarter and that is all we’re playing for right now. Just keep ticking along until hospitals spend their stimulus money and seek out IT professionals to give them the MANDATED EMR systems (and yes, caps were intentional because hospitals are required to have EMR systems up by 2015). The best news is that they said they closed a significant multi-year deal with a large physician practice for EMR, EMR proposal activity is accelerating, and “the first portion of the $19 billion in federal stimulus funds allocated to EMRs has been released to help states advance EMR projects.” Guidance was raised a bit for 2010 to 15% topline growth and EPS between $.47 and $.55, but if you go back and read Money McBags’ archives, you’ll know that 2010 is irrelevant. It is not until 2011 that EMR will hit for them and as those projects have greater than 10% margins and bring in $2MM to $3MM of revenue per year, it is not inconceivable that CTGX can earn an incremental ~$.25 per share in 2011 from EMR and thus if they just hold their main business steady (though it should increase if businesses start spending again), they could earn $.75 and thus are only trading at ~11.5x that despite the possibility for >50% growth. It’s still early for this stock but now is the time to get in before it takes off.
The market sold off at the open today but is climbing back like a Phoenix from the ashes or Paul Volcker’s economic reputation. Alcoa’s earnings initially brought the market down as they were a bit disappointing and Alcoa is considered to be the first bellweather company to report in this critical earnings season where baked in expectations are greater than they were for Ulysses S. Grant’s presidency, the launch of the Space Shuttle Challenger, or Jay Leno’s 10pm time slot. Alcoa missed on revenues earning only $4.9B instead of analyst guesses of $5.2B while putting up an inline earnings per share number. The company blamed the top line miss on the fact that they sell a fucking commodity and on Canada. Interestingly, even though they were short of analyst guesses on revenue, they still grew the topline by 18% thanks to a 49% surge in the price of aluminum off of the depressed levels of last year (apparently aluminum was depressed because it found copper cheating on him with silver. It’s his own fault though, as steel tried to warn aluminum that copper was a whore and would smelt anything, but he didn’t want to listen). That said, shipments of aluminum slid 3% so demand still has quite a way to go. In other macro news, the US trade deficit widened in February like a hooker‘s purse when seeing Eliot Spitzer walk by her after he has hit the ATM. The trade deficit was up 7.4% to $39B and signaled that US consumers are getting stronger as they once again pass up American made goods for shit produced overseas. Imports surged 1.7% with the majority of that coming from electronics, aparrel, and Laetitia Casta posters.
In international news, Greece had a bond offering to raise capital to help ease their budget deficit and the bonds are seeing stronger demand than Sarah Palin at a tea bag convention, potatoes during the great Irish famine, or Ann Darrow on Skull Island. The latest bond offering was more than 6x oversubscribed which is more oversubscribed than a New Century subprime mortgage B tranche in 2004, the theory of intelligent design in Texas, or the rumored Jessica Simpson Juggs magazine photo shoot. With the EU and IMF backing up Greece (and we all know the Greeks love getting backed-up), investors should have faith that the country won’t go bankrupt and thus the incremental yield being offered by these Greek bonds should be solid investments.
In other stock news, the markets eagerly await the earnings of large cap banks tomorrow while UBS’s regional bank anlayst is getting in front of those numbers by downgrading mid-sized banks. The analyst thinks banks’ earnings and valuations are unsustainable and they are due for a “meaningful pullback” as investors somehow forgot that normalized bank earnings no longer exist thanks to something called banks not lending any fucking money and reserving the shit out of their balance sheets. Ford announced revenues are tracking ahead of last year, though that is like being smarter than Carrie Prejean, creepier than Larry Craig, or less herpe-ridden than Paris Hilton. Ford has done a solid job of managing through the downturn and thinks the economy continues to get marginally better, like day old chinese food and the Winter Olympics. The market is not only anticipating bank earnings, but GOOG is trading up into their earnings release on Thursday after hours. Money McBags is long GOOG as the online advertising market isn’t going anywhere and they dominate it like Tony Danza dominated Judith Light in showing her who was the boss.
In small cap news, PALM is tumbling because potential buyers must be coming to their senses or must have read When Genius Prevailed yesterday to realize that buying the #6 player (and likely dropping with Microsoft introducing the Kin) in a competitive and near commodity market is about as good of a business decision as investing with Bernie Madoff or letting Dexter Manley write your presentations. In other small cap news, JOEZ is apparently still not fitting investors well despite offering a nice booty fit as it trades down another 4% to $2.60. Money McBags has put some analysis behind JOEZ numbers over the past couple of days and thinks it is getting to a more reasonable valuation (of course being down almost 30% in 4 days will do that to you). What is interesting is that the analyst from Roth Capital came out with an upgrade of JOEZ yesterday and had close to the same numbers as Money McBags with ~$.07 eps for 2010 and $.13 for fiscal 2011. The key difference being that Money McBags thinks $.13 is a bit of a stretch, though possible (In fact $.15 wouldn’t be out of the realm of possibilties), and that even if they were to hit $.13, they shouldn’t trade at 28x that which is where the Roth analyst’s price target is. The stock is now trading at 20x the fiscal 2011 $.13 estimate which is a reasonable valuation for JOEZ growth if you think $.13 is attainable. If Money McBags were a betting man, he’d bet that the butler did it, but he’d also bet that JOEZ will earn somewhere between $.10 and $.15 per share in fiscal 2011 which is actually not a very small range but he just doesn’t have a good feel for management’s ability to execute a business since their margins have yet to show the leverage associated with scale. Either way, the valuation is becoming more reasonable and if it were to drop a bit more, Money McBags might think about buying some. Until then, he’s going to wait for the institutions to finish puking this thing out and see where it is when the smoke clears as volume over the past few days has been higher than Lindsay Lohan on a Columbian vacation as people just want to get the fuck out of this stock right now.
Earnings season is about to begin and Money McBags is more excited than Thomas Malthus at a pro-abstinence conference or Tiger Woods at a sleepover in Charlie Sheen’s house. The Street is going in to this earnings seasons with expectations higher than those of Elin Nordegren in October of 2004 so a few slip-ups could cause the market to sell off faster than the career of a VH1 reality show contestant. Alcoa opens earnings season tonight with financial firms due to follow this week so keep your eyes on net interest margins, credit costs, and Lucy Pinder.
In international news, Europe has unified to bail out Greece with a line of aid in events less surprising than Michael Jackson dying of unnatural causes or a family values republican liking a little ding-a-ling. It is the most unified Europe has been since Charlemagne took Italy or since the Keeley Hazell sex tape was released. European leaders are offering Greece up to $40B at 5% interest which is a discount to market rates and will allow Greece to help cut their deficit and perhaps even improve their public works by adding more fire hydrants. Along with the EU, the IMF is offering Greece $20B of assistance while NAMBLA is offering them a mature shoulder on which to cry. Greek finance minister, George Papaconstantinou, and Greek Prime Minister George Papandreou, still think Greece can make it through this crisis without needing the capital infusion, while Greek cultural leader George Papasmurf couldn’t be reached as he was busy hiding from Gargamel.
In stock news UBS is out saying they will earn $2.35B in profits this quarter as apparently they started selling tickets to the fountain of youth and hired Bernie Madoff’s auditors. UBS has been hit hard by the financial meltdown and it’s nice to see they learned from it by not elaborating on how they swung to profitability. So good on you UBS for continuing to not provide shareholders with information. Also PALM continues to soar on takeout rumors. Money McBags addressed this a bit on Friday but he doesn’t understand why a PC company would want to buy the #6 player in the smartphone market, especially one whose estimates for the quarter were 50% below analyts guesses. Sure they have decent technology, but going after AAPL and Blackberry is a bit like taking on Visa and Mastercard, Coke and Pepsi, or getting ass implants and going after Coco or Kim Kardashian. Money McBags is guessing whoever buys PALM pays way too much for them unless they can somehow use PALM’s operating system in their PCs.
In small cap news, most companies are getting ready for earnings so Money McBags will address a reader named Richard who posted some thoughts on JOEZ in the comments section of Friday’s post. Money McBags will answer those questions here since the comment section handles long replies like the Meaghan Cheung handles ponzi scheme investigations. In Friday’s post, Money McBags broke down JOEZ quarter of strong growth but infinitesimal profitability and questioned whether they would earn more than $.07 this year. Richard responded by questioning Money McBags’ assumptions saying that 40% sales growth is too low due to an improving economy and operating leverage should drop to 36% with those improving sales and thus JOEZ could earn $.13. Now look, Money McBags has no position in JOEZ but would like to pursue this because it could be a great long or short and he is happy to collect all information in what right now is strictly an intellectual pursuit, like debating the existence of God or pondering why people drive on parkways and park on driveways.
So let Money McBags test those numbers out a little and see if they are possible. First of all, cost of goods sold in the last quarter rose to 51% as JOEZ either picked up their discounting to shed inventory or sold lower margin items. Anyway, let’s assume that doesn’t degrade further even as competition increases when fashions potentially change which would cause further discounting (and remember, consumers of fashionable items are more fickle than Hugh Hefner at a casting call). So call COGS 51% leaving gross margin at 49%. Then we’ll take Richard’s assumption that they can get their operating margins down to 36% and assume interest and any other charges are non-existent as Money McBags wants to keep this simpler than a Texas high school science class (you know, because the answer to everything is “God did it”). So before taxes, JOEZ has an at best 13% pre-tax margin (51% COGS + 36% operating costs). Now their tax rate is more inflated than Oprah Winfrey’s ego (and her gut) as the earnout from the acquisition of Joe’s is going to cause them to be taxed ~45% this year. So that brings their net margin down to ~7.2%. They have 63MM diluted shares so in order to hit $.13 eps for this calendar year (and remember, Money McBags thinks they will earn $.07), they need to earn $8.2MM in net income which means they need to earn $.12 or $7.6MM over the next 3 quarters. Now it doesn’t take Norman Einstein to see that in order to get to $7.6MM in net income over the next 3Qs with 7.2% net margins, they need to do >$100MM of revenue (~$105MM to be more exact). In the last 3 calendar Qs of last year they had $63MM of revenue, so in order to hit $105MM of revenue, they need to grow sales by 66%. To put that in perspective, these are the annual growth rates starting with 2006: 30%, 35%, 10%, 16%. So sure, there was a recession and sales sucked donkey dick through it (though to JOEZ credit they were still able to grow when most retail stores were taking it deeper in the yingus than Alexis Texas in Ass Titans 3) but 66% growth is above anything they have done in the past 4 years and there is something called the law of large fucking numbers which tends to hinder growth rates. While they grew 40% this last Q, Money McBags doesn’t get how that growth accelerates even more unless they open a fuckload more stores and institute blumpkin Wednesdays or just discount the shit out of everything, which would kill their gross margins. So it is doubtful that this year they earn $.13 even with an extrememly generous 36% operating cost assumption.
Of course it is possible Richard was talking about fiscal 2011 since he mentions an assumption of $30MM sales for Fiscal Q1 2011 (Q ending in November 2010), but he also mentions 12 month earnings, so it’s not quite clear which 12 months he was talkng about. As a result, Money McBags will go through this as if Richard were talking about fiscal 2011 and not calendar 2010. If so, to hit $30MM in revenue in fiscal Q1, they would need sales to just increase by 20%, which seems infinitely reasonable and would earn them ~$.03 (at 51% COGS and 36% op costs) which would annualize to ~.12 eps, which is exactly where we started. Of course if they keep growing that top line and keep margins at least flat, that $.12 could turn in to $.15-$.16 for fiscal 2011. The big question is, is the 36% SG&A reasonable or is that way too low? As companies grow, they should be able to get leverage out of their infrastructure since they don’t need to buy new computers porportional to sales and they don’t need to add another administrative assistant just because revenue was up (though sometimes two admin assistants are preferable). Since 2005, as a % of sales, SG&A has been running at 51%, 46%, 37%, 38%, and 39%. So is it reasonable to think 36% margins are achievable? Maybe. Though if they are launching new stores and promoting new products, margins will have trouble dropping as we saw in this last Q where there was a $700k “one-time” charge for promotional spend which led to a 43% all inclusive operating cost margin. Now Richard argues that the changing sales channels should help drop margins because JOEZ’ own stores somehow have a lower cost structure than pushing their product through department stores, but Money McBags does not know the difference in margin between the channels nor how many stores they plan to open (it may be public, but fuck if Money McBags is going to dig for it, so if you know the answer, kindly post it in the comments section). The point is, there has been no proof that JOEZ can hit 36% oparting cost margins and if that number stays in the 38% range, they will struggle to earn $.13 for fiscal 2011.
To wrap this all up, even taking aggressive margin assumptions, JOEZ would need to grow 66% in the remaining 9 months of this calendar year to earn $.13. That said, if they can get margins down to the 36% level as Richard suggests, with moderate growth $.15 looks possible for fiscal 2011. So best case scenario, JOEZ is now trading at about 20x that number which isn’t a horrible multiple for the growth rate, but to get there, you have to bet that management can lower the cost structure (something they haven’t done in 3 years despite top line growth) and that fashion trends continue. Money McBags prefers to stay on the sideline here (though he would prefer it more if Alice Eve joined him on the sideline) until a management team that thought a 7 year earnout causing a 40%+ income tax rate and a management team that has created more negative leverage than Emmanuel Lewis trapped under an avalanche, can start showing they can manage a business and not just grow revenue.
4/9/10 Midafternoon Report: Greek bail out back on causing market to fly like Icarus (though hopefully not quite as close to the sun)
The markets are higher today as fears of a Greek blow up subside for about the 69th time which is one more time than Ben Bernanke has taken an “accomodative stance” for the market in the past two months (and Money McBags isn’t quite sure what that means). In macro news, Retail sales were out yesterday and they posted their strongest monthly gains since the data started being collected in 2000 and since the introduction of the Snuggie. Sales were up 9.1% over March 2009 as people are feeling safe in their jobs and are now willing to once again run up their credit card debt and buy those Joe’s jeans that fit so snugly (and Money McBags will get to JOEZ later with their 40% revenue growth that avoided falling to the bottom line like Gabrielle Sidibie avoided salads). Easter falling a week earlier this year helped boost sales a bit so retailers aren’t quite ready to pop open the beluga and take the Dom off ice, but the number was much stronger than analyst guesses and bodes well for the recovery. A number of retailers including Target, Macy’s, Ross Stores, and Vivid Video (ok, Money McBags is just speculating on the last one based on his consumer spend) said their results beat expectations which is more positive news on the strength of the consumer. In other macro news, US wholesale inventories rose .6% in February which was apparently well above guesses, while wholesale sales were up .8%. What is interesting is that wholesalers still only have 1.16 months of inventory on hand which means there is still a fuckload of restocking potential (or un-destocking potential for those who want to nit pick). Money McBags has doubted the path of the economy for quite some time because the labor market is still weaker than a sand in the face Charles Atlas (shout out to the over 70 crowd. All the ladies in the house yell “Arthritis.”), but things look like they are legitimately getting better. Sure there could be more issues in Europe, and sure the S&P isn’t hella cheap, and sure with earnings season kicking off next week companies are going to have to put up better results than GE when they used to manage earnings or Tiger Woods in a full of shit contest, but things seem like they have a worst plateaued. Money Mcbags got longer the market today, at least for the short run.
In international news, the Greek bailout plan is on again today which is less surprising than when Ricky Martin came out of the closet, when Colin Powell admitted there were no WMDs in Iraq, or when Jennifer Aniston’s latest movie flopped. Greece still needs to raise around 15B euros by the end of next month which means they have to sell a whole lot of gyros and Julia Alexandratou sex tapes, but the rest of Europe will be buyers. The EU, IMF, and NAMBLA will not let Greece default and will issue them bilateral loans (which have all the benefits of lateral loans, only I am told the interest goes both ways). Look, Greece has been around for roughly 5k years since the Cyclades in the Bronze Age and has been through wars, revolutions, and prodigal son Yanni’s musical career, and none of that was enough to bring them down so a few poorly written CDOs/subprime mortgages/bad loans are not going to be the demise of this once great country. It’s not happening. There is more chance of Michelle Hunziker stopping by the When Genius Prevailed offices and handing out free ice cream sundaes than there is of Greece going bankrupt so buy anytime the market gets freaked out by Greek bond premiums shooting through the roof. In other Greek news, Fitch downgraded Greece’s credit rating today just in time for the latest bail out, so again great timing by credit rating agencies who continue to have less credibility than Amy Winehouse‘s stylist and Greta Van Susteren‘s plastic surgeon.
In stock news, despite yesterday’s strong retail sales report WMT announced a plan to lower prices in furthering their quest for world domination. With slowing same store sales, WMT is hoping lower prices will win back middle class customers, make them more competitive with grocery stores, and allow their shoppers to upgrade their wardrobes. In other stock news, PALM is mimicking their phones and flying through the roof (of course the roof their phones fly through is a sun roof as users forcibly and angrily chuck them out of their cars when the Pre’s operating system crashes on them for like the 42nd time) on rumors of being acquired. A large scale PC maker is said to be interested in buying Palm’s phone and technology because rather than being in just one ultra-competitive commodity business, they’d apparently like to be in two. A PC maker buying Palm makes a bit of strategic sense if there were no iPhone and blackberry, but given that the market is already saturated and with better products, a deal seems a bit implausible unless it is at bargain prices.
In small cap news, Money McBags bought more KITD today and is probably done buying for now unless it gets stupid cheap again. The stock is simply worth a fuckload more than it is trading for today so Money McBags is a bit less price sensitive than Richard Branson at a McDonalds. As discussed earlier, JOEZ announced their quarter last night and is selling off like their quarter created AIDS (and not regular AIDS, but AIDS of the anus). The stock is down 16% despite 40% top line growth because bottom line growth was non-existent (though showing a picture of Alice Eve would have caused Money McBags’ bottom line to grow). JOEZ exhibited less leverage than the immortal He Ping Ping on a see saw with Kirstie Alley (and that’s not just because He Ping Ping was only 29 inches tall, but because he’s dead). JOEZ margins were essentially unchanged with gross margins coming in a bit worse at 49% from 50% and operating margins improving by less than 100bps. What hurt them most was their tax rate jumping from 15% to 47% as a result of NOLs running out and having to accont for an earnout from their acquisition of the Joe’s business. Plus, they said they had an extra $700k in advertising expenses and a $150k expense from moving their headquarters, but even taking out that $850k in “one-time” expenses, that would have barely added back another penny. This business simply needs to figure out how to grow while managing expenses. As a quick exercise, do 25 jumping jacks. As a quicker exercise, assume the company grows sales 40% to $111MM for calendar 2010 (which is very aggressive, but work with me here). Then hit them with 50% gross margins (even though those might actually be getting worse as they are moving downstream in their pricing and products), 39% operating margins (which is what they were this Q absent the $850k “one-time” costs), hold interest and depreciation constant (though depreciation should grow as they open more stores), tax them at 46% (they said over time that should drop to 40%, but the earnout is over 7 years), and keep their diluted share count at 63MM. If you do all that and say Beetlejuice 3 times quickly, you get to earnings for the year of about $.07 per share. You see, that’s the problem with running a low margin no leverage business, you’re kind of fucked unless you can get scale quickly by ramping up sales faster than Lindsay Lohan snorts a dime bag. So if they can’t get any leverage and earn $.07 per share in 2010, they are now trading at 40x that which is way too expensive for anything not involving Hannah Hilton putting her musical skills to use and playing Money McBags’ rusty trombone. And remember, the exercise we just walked through assumes 40% topline growth which is huge. Now look, the company is doing a very good job of growing the top line and despite burning through $2MM of cash from operations, still has a decent balance sheet with $10MM cash and no debt, so it is possible they start figuring out how to manage the bottom line, that said, Money McBags is going to continue to take a pass on this until they fire the the Underpants Gnomes and figure out how to turn revenue into profit. Obviously a business growing top line at 40% has some good qualities, so it is worth monitoring, but unless Money McBags’ math was wrong in the analysis he laid out above (and while Money McBags has an MBA in Finance and a BA in Economics, he is not a maffamatecian so often has to work it out with a pencil), the numbers don’t make sense. If any of you have a better grip on the numbers, let Money McBags know because he wants to like this stock, but with crappy and unimproving margins, it’s not clear he can.
And don’t forget to enjoy your weekend.
Money McBags is busy today so just a few quick shout outs as the market goes through a bit of a sell off due to concerns over increased taxes in the health care bill, Germany backing out of bailing out Greece, and the officiating in the Robert Morris-Villanova basketball game yesterday which was so bad that investors are questioning the integrity of all markets (though it surely left Nova alum Tim Donaghy very proud).
The big news of the day is that Alan Greenspan is out with a begrudging mea culpa in the form of a paper titled “The Crisis or: How I Learned to Stop Worrying and Love the Bubble.” He’s presenting this paper to the Brookings Institute and when he’s done, the institute will likely use it to replace their dwindling toilet paper reserves. In the paper, he says about letting banks get bigger than Kirstie Allie’s tuchus after a week long Sizzler binge:“Regrettably, we did little to address the problem.” Wow, you think Captain Obvious? I hear Joseph Hazelwood also regrets doing little to avoid crashing into Bligh Reef and Lady Gaga regrets doing little contain this country’s noise pollution problem. About creating the housing bubble, Greenspan said “We had been lulled into a sense of complacency.” Awesome, really just awesome. The market had its biggest crash in 80 years because the guy in charge of trying to regulate it was lulled into inaction like a John after a post-coitis taint massage (of course that kind of inaction just leads to your wallet getting stolen while Greenspan’s inaction led to 10% unemployment). But Greenspan still refuses to take full responsibility and to quote the NYTimes article (notice how Money McBags sources his material, even when it is from the NYTimes so probably all made up anyway) he believes the housing bubble was caused by “a sharp drop in long-term interest rates from 2000 to 2005, brought about by export-oriented growth in developing economies, especially China, after the end of the cold war.” He then went on to blame the Chinese for stealing WMDs from Iraq before the US invaded, for any movie starring Adam Sandler, and for putting way too much pee pee in his coke. But to further drive home his innocence (upcoming bolding from Money McBags), he said “it was long term mortgage rates that galvanized prices, not the overnight rates of central banks, as has become the seeming conventional wisdom.” He then further decried conventional wisdom by saying it is ok to run with scissors, to swim fewer than 20 minutes after eating, and to say “Beetlejuice” 3 times quickly. He did lay out some ways to help curb another financial meltdown and those included higher capital requirements and liquidity ratios (which wouldn’t have mattered since there were no capital requirements on CDS), having debt convert to equity when capital levels fall to a certain level, and never to hire him to make policy decisions. He ended by placing the blame solely on the shoulders of capitalism: “Unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible.. Assuaging their aftermath seems the best we can hope for.” Ok, look, first of all Money McBags was not an English major and he admits he only read his copy of Strunk and White for the pictures (though he is still a bit scarred from the centerfold featuring the longest dangling particple he has ever seen) but Mr. Greenspan, you can’t end a sentence with a fucking preposition. “Assuaging their aftermath seems the best for which we can hope” fixes that problem, I mean for fucksake you have proofreaders, right? But diction aside (and Money McBags would love to serve Hayley Atwell a side of his diction), Greenspan gets all human nature on us by basically saying as long as people are greedy, bad shit is going to happen. And you know what? That is one thing about which this guy is right. No matter what regulations are put in to place, people will always find ways around them so it is up to the regulators to be pro-fucking-active to try to quell this rather than being lolled in to complacency by their Wall Street tickle friends like Senior Greenspan was during his reign of error. And if the Fed can’t do it, Money McBags would be happy to bring Warren G. in to regulate shit because Wall Street bankers aren’t going to fuck with the LBC.
In international news, Germany conjured up their second most famous citizen in history, Sargeant Shultz, by telling Greece, “I see nothing, I hear nothing, and I know nothing” and therefore, “you get nothing.” Germany basically called Greece out in their game of chicken and told them they won’t support a bail out and to take their problems to the IMF. It is embarrassing for Greece to be shunned by daddy like this but they shouldn’t have spent their whole allowance on ouzo and a night with Julia Alexandratou while still ordering those CDs from Columbia House (and if you’re going to order CDs from Columbia House, at least use a fake name like Richard Hertz from Holden, MA). France disagrees with this move citing the desire for the EU to remain united and reminding people what happened the last time everyone followed the Germans. In other international news, India surprisingly raised their interest rates today by 25bps to try to curb inflation brought on by their continued growth. Money McBags has no jokes for this, sometimes one just has to report the news.
In small stock news, PALM once again put up a quarter so bad that even Bernie Madoff questioned their integrity. They lost $.61 per share which was much worse than analyst estimates of a $.42 loss per share and gave revenue guidance for next Q of $150MM which is less than half of estimates. Wow. This has driven the stock down 20%+ and caused several analysts to question the company as an ongoing concern. Canaccord Adams’ analyst dropped his stock price to $0 and said “Palm’s troubles will only accelerate as carriers and suppliers increasingly question the company’s solvency and withdraw their support.” That is just awesome. Money McBags fully supports any analyst who comes out with a $0 price target for anything. Also, Money McBags unloaded his shares of WILC today. He made a small profit and believes the company has huge upside if you can believe anything management says. The problem is, their actions go against everything they say (which Money McBags broke down for you last week) so why bother fighting this one when there are easier ways to make money?
2/25/10 Midfternoon Report: Goldman Sachs seeks nobel prize for literature after (under)writing biggest Greek tragedy since Euripides
Greece’s debt issues are once again scaring the market like the snake ridden visage of the famous gorgon from ancient Greek mythology known more familiarly as Lady GaGa. Rising debt, a spiraling deficit, and a massive bidding up of CDS by traders betting against Greece has created somewhat of a Foucault current around the Greek islands which is now threatening to pull the entire EU and global economy in with it. Greece hasn’t been in such imminent trouble since the Battle of Thermopylae and they can only hope that the bankers whom they used for currency swaps did not run to the other side and push up the price of CDS with their inside knowledge of the obfuscated rising Greek debt and hence betray them like Ephialtes did in that same battle. Moodys is now threatening to downgrade Greece (perhaps to Jamaica, or maybe even Puerto Rico), so the global markets are very skittish today, since we all know how great Moodys is at predicting debt defaults (except when they happened to miss something called the entire global financial system meltdown). As if the Greek issue weren’t bad enough, the EU came out today (luckily their parents already knew) and forecast 2010 to be a year of fragile growth, even more fragile than the tears of a newborn unicorn upon learning it is just the figment of someone’s imagination.
In US macro news, orders for durable goods excluding transportation fell .6% which was below estimates of a 1% gain though they rose 3% when including the jump in aircraft orders. While durable good orders may have been down, non-durable goods orders or as their better known as, “shit made in China,” appear to still be doing very well. The new claims for unemployment number was also out today and it was much worse than expectations as it was up by 22k to 496k people filing first time claims. Luckily the labor department shrugged it off as being partially inflated by poor weather in the Northeast causing construction jobs to be cancelled over the past few weeks and also partially being inflated due to something else called employers laying a lot of fucking people off. They said without the weather, new claims would have been down by a “healthy” 10k to 440k jobs lost and if 440k job losses is considered healthy, then the labor department must think Michael Jackson has “just a little breathing problem.”
In stock news, CCE is up 33% on a takeout offer from KO, while KO is down 4% on that same news. KO’s CEO and Chairman said the move was a way to convert “passive capital into active capital” and when asked to clarify what exactly he meant by that, he simply said “Chewbacca was a wookie.” While Money McBags is an owner of KO, and thus 4% less happy today than he was yesterday, the global sales growth trends and brand equity have not changed at all by the deal and thus he is content to hold and potentially add a bit as soon as he can get a hold of some numbers on the deal. In other stocks reporting, SIRI somehow turned a profit this last quarter even if it was still less than $.01 per share. Subscriber growth in satellite radio has largely been stagnant due to the recession and the hundreds of other ways to get music for cheaper prices. With Howard Stern’s contract ending at the end of the year, Sirius may be more fucked than Houston during her 500 man gang bang. This company sells a product that is becoming outdated faster than the eight track or Jennifer Aniston (and take a few seconds on that pun, it will hit you in a bit, but e-mail me if you need help) as the prevelance of iPods, smart phones, and internet radio make paying a monthly fee for that same content as bad of a financial decision as the Olympics were for NBC or plastic surgery was for Greta Van Susteren. Money McBags would stay further away from SIRI stock than he would a hemophiliac AIDS patient in the throes of leprosy.
In small cap news PALM annouced their smartphones aren’t selling as well as they hoped as they have seemingly failed to put a dent in the duopoly that is the iPhone and the Blackberry (and honestly, taking on those two behemoths was about as smart of a move as introducing a soft drink to compete with Coke and Pepsi, a search engine to compete with Google and Yahoo!, or a cure for herpes to compete with Valtrex and staying 100 feet away from Paris Hilton). Palm also said their sales will be “well below” their forecasts like Vern Troyer is “well below” the clown’s hand to ride the roller coaster as apparently even a color blind lepidopterist is better at his/her job than Palm’s head of strategy is at his. Also Money McBags favorite WILC is up 10% today after a ridiculous and unwarranted sell-off over the past week. WILC remains the most ridiculous, cheapest name Money McBags has ever run across which is a bit worrisome because the last thing he thought was too good to be true was marriage, so buyer beware. And finally SMSI put up a decent Q and is up 14%. SMSI is a pretty interesting name in that they sell software that allows netbooks internet connectivity and net books continue to grow faster than a steroid user also suffering from pituitary gigantism. While the Board of Directors looks like they are waiting for the comet Hale-Bopp to hit the Earth, the company has done a decent job over the years of buying technologies in growing markets. SMSI is pretty much a one-trick pony right now with that one trick being connectivity and the pony having been purchased, but they are relatively cheap. Their wireless business grew 22% this year, though the pace slowed as the year wore on while overall topline growth was 9%. They guided to around 20% top line growth for 2009 and estimates are for them to earn in low $.70s per share which is about what they earned this year but their tax rate will be going up. The company has a nice balance sheet with $45MM of cash and no debt and is only trading at 12x estimates despite growing the topline 20%ish (again, profit growth may be negligible due to the tax rate increase). The issue with this company is that they have missed guidance before, have really only one product/area of focus, and rely on acquisitions to find the next new technology. While they have already wrapped up most of the big netbook producers as clients, competition is getting fiercer. So it’s not the best business model but it is moderately cheap with good prospects. The jump today is likely short covering but it is worth reading the transcript of the call and figuring out if a good entry point will exist once the short covering is over.