Posts tagged UBS
First of all, apologies for the fuckawful headline pun, but some days you simply have to play the cards you are dealt. That said, the market was quiet today as it digested marginal macro news and even more marginal earnings news while it continues to wait for next week’s QE2 which promises to be a worse proposed sequel than Amistad II: The Return Trip Home.
On the QE2 front, New York Fed President and voting member of the FOMC William “Dollar Bill” Dudley got his college on today at Cornell University (known as the Harvard of Ithaca, NY) where in a speech he said “The Fed cannot wave a magic wand and make the problems remaining from the preceding period of excess vanish immediately.” He then explained “For the millionth time, we’re not magicians, we’re fucking witch doctors so we don’t waive magic wands, we dance around fires and chant incantations to the great Jobu. Come on people, that’s Wiccan 101 shit for you.”
Dudley went on to say that QE2 would be unwarranted unless “the economic outlook were to evolve in a way that made me more confident we would see better outcomes for both employment and inflation before too long.“ And with that, Money McBags can see why some teabaggers want the Fed to be shut down since evolution is a myth and thus the economy can’t evolve, it can only intelligently design itself to something better and do you trust these people to design anything intelligently?
As far as tangible macro news, consumer confidence rose slightly last month off of an unsurprisingly downwardly revised number and still remains near record lows as most consumers are only confident that the economy is getting worse than Bob Guccione‘s lungs (and Money McBags tips his jimmy hat to the great media mogul). Digging in to the number shows that the “jobs hard to get” index rose to 46.1% from 45.8%, the “jobs plentiful” index slipped to 3.5% from 3.8%, and the “jobs you’re never going to get again” index rose to “oh fuck I’m screwed.”
In other macro news, the Case Schiller index weakened, in what Money McBags calls the “no shit Sherlock” fact of the day. While the index rose 1.7% y/y which was below analyst guesses of 2.1%, it fell .2% sequentially or .3% on a seasonally adjusted basis. But here is what Money McBags loves most about the data, per the NY Times “S.& P. announced earlier this year that the unadjusted numbers were a more reliable indicator.” So riddle Money McBags this Mr. Case, Mr. Schiller, and Standard and fucking Poor’s, if the seasonally adjusted numbers are a worse indicator than the non-seasonally adjusted numbers, WHY THE FUCK DO YOU BOTHER ADJUSTING THEM? That is more mind boggling than the fact that they just now stopped making the Sony Walkman.
Seriously, why take shitty, dated, questionable data in the first place, and manipulate that data to make it even more worthless? It’s like whatever the opposite of putting lipstick on a pig is (perhaps putting Rosie O’Donnell in a bikini or Alan Greenspan on CNBC?). So while the adjustment didn’t matter this month, making data worse and then presenting that data as relevant can be more misleading than something called naked table building (which apparently involves no nudity, but plenty of wood), so why it is done is more perplexing to Money McBags than anything involving Randy Quaid.
One other piece of interesting news is that Warren Buffett, the original inspiration for the hit show Sister Wives, picked a successor to run the investment side of Berkshire Hathaway, a company that never saw a bail out it couldn’t manipulate. The successor is a 39 year old named Todd Combs (and we’re told he’s no relation to Sean “Puffy” Combs) who won the competition to be the next curmudgeon after blowing Buffett away with his financial stock selections, his refusal to tip more than 13% for subpar service, and his stunning closing statement in the debate part of the competition where he vociferously argued the affirmative side of “Dodd was Graham’s bitch.”
Internationally, Standard and Poor’s raised their outlook for Britain to AAA after running in to Lucy Pinder in a Heathrow bathroom. In addition to the ratings upgrade (though Money McBags cares what S&P rates Great Britain about as much as he cares what Stevie Wonder rates a fireworks show), Britain saw GDP expand by 0.8% from the previous quarter which was double analyst guesses and a result of the first dentist opening up shop in the country.
In the market, F posted their 6th consecutive profitable Q, announced they will be paying down debt, and then reiterated that GM and Chrysler are a bunch of ass hats. In WTF earnings of the day, Coach and Royal Caribbean Cruises both shot up 10%+ after putting up strong quarters in a signal that either the economy is not as weak as Money McBags thinks, or well, simply WTF? Elsewhere, steel makers were all down today as US Steel warned that demand was slowing, prices were falling, costs were rising, and no one is building shit anymore. And finally investment banking losses at UBS drove the stock down as revenue dropped in fixed income, currencies, commodities, and everything else people are no longer trading as they flock to gold while the market dances to beat of the algorithm of the night.
In small cap news, HSTM announced their Q yesterday and remember Money McBags talked about this stock a while ago as being cheap until it ran up in to the mid $6s and now is no longer such a great buy but still has some potential (kind of like Neve Campbell). As for their quarter, revenue was up ~18% to $16.6MM, operating income was up 57% to $1.7MM, and yes EPS was down by $.01 to $.04 because their tax valuation ran out so unlike last year, they had to pay Uncle Sam like the rest of us (well, that is all of us but Wesley Snipes). That said, their 53% tax rate seems exorbitant but it is what it is. The Q was essentially flat sequentially with gross profit margins down ~300bps to 62% and operating margins down to ~10% from 14% due to a pick up in Sales and Marketing costs which could be related to their SimVentures JV. With the quarter being more of he same, is there anything we should do with this company other than file it away for a rainy day selloff?
Well, updated guidance is for 12% to 14% growth for this year and with only one Q left, that means that revenue in Q4 will essentially be flat with the previous 2 Qs and up 11% y/y. Hold on, Money McBags is going to type more but he has to let out a big fucking YAWNNNNN, Ok, that’s better. Now guidance for operating income is for 30% growth and the tax rate to be ~45% which gets us to ~$.16 eps for the year and ~$.03 for next Q due to costs increasing a bit due to a SimVentures JV. So again, pretty fucking pedestrian, no matter what Craig-Hallum has to say with their bizzaro 8 year DCF model.
So look, lets say their learning segment keeps growing, they sign up some more hospitals, and maybe they get something out of SimVentures (which Money McBags understands less than Charlie Sheen understands moderation, but whatever), and they are able to push growth to 20% next year. If we use a 65% gross profit margin, juice up operating expenses to ~$9MM a Q, and tack on a 45% tax rate, we’re at ~$.30 in earnings per share, so the company is at >20x that which just seems too expensive. Yeah they have ~$1 per share of cash on the balance sheet and no debt so that is nice, but it does less for Money McBags than Minnie Driver.
So on superficial numbers, Money McBags isn’t changing his opinion that HSTM seems at best fairly valued, though most likely a bit expensive. That said, it is a nice little company that seems like it might have a competitive advantage in a growing market so if you can figure out how they can accelerate growth (maybe through SimVentures, maybe through more partnerships like they have with the American Nurses Association, or maybe by changing their whole business model to just selling taint tickles from Carmella Bing), perhaps Money McBags’ numbers are too low. If management is out there, shoot Money McBags an email at email@example.com and lets talk.
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.