Saturday, October 13, 2007
SCMR at first glance is a valuation play, with $3.25 of cash and short-term investments on the books and the stock trading at $4.04. Their earnings have been all over the place, but it looks like their revenues are starting to grow slowly. With the acquisition of Eastern Research, pro forma results indicate growth of roughly 10% in revenues FY07 over FY06, but still the company was not profitable. The company is actually far from being profitable considering it had a $60 mln loss from operations, the reason SCMR came so close to breaking even is that the company earned over $47 million from the cash hoard. Analysts roughly project a 13% growth in revenues in FY08. The market is currently valuing SCMR as cash on hand plus 1.5x sales, that sounds about right.
Lets say an investor takes and tries to value Sycamore through their non-GAAP earnings trailing P/E. That would give a trailing EPS of $0.09, but once Interest Income is netted out, that leaves a non-GAAP loss of roughly $0.07 per share. Even in FY06 when the company was GAAP profitable, netting out interest income would give a loss of roughly $0.07 per share.
With Sycamore projected to grow revenues 10% over the the next 2 years, and no GAAP profitability net of interest income, this looks like it is valued properly on the market. Regardless of the sales multiple an investor value SCMR at, it will not be much different than the value of the company right now. There are also no catalysts on the horizon. It could be worth something when its trading closer to cash value, but there is not enough upside to get involved.
Disclosure: I don't have a position in SCMR.
Posted by Alexander Shadunsky at 2:03 PM
Thursday, October 11, 2007
So there has been a lot of talk regarding American Software on the Yahoo Message boards and in the MF Caps, everyone seems to think its undervalued and a great "Asset play." From further analysis, it is far from it. Here is the math:
AMSWA owns 88% of LGTY = $165.8 mln
Cash on the books is $75.6 mln, but $30 mln is from LGTY so net of $45.6 mln
So that gives a value of $211.4 mln for AMSWA so far.
The last portion of the calculation would be AMSWA the company, separate from LGTY. The last three years for AMSWA performance has been dismal separate from LGTY, their Net Income has roughly been $3.16 mln, -$2.03 mln, and $3.82 mln. They have roughly 26.8 mln shares outstanding which leads to roughly $0.06 per share on average over the past three years. Maybe a P/E of 10 in the best case scenario gives a valuation of $0.60 for AMSWA solo. Here are the revenue calculations:
So, $7.89 valuation of cash on the books plus LGTY stake. Plus a valuation of $0.60 for the co itself suggests roughly a $8.50 valuation for each AMSWA share. With a P/E of 20 that yields roughly a $9.10. Regardless of how an investor values AMSWA by itself, the stock is fairly valued. The only reason AMSWA stock has been moving has been because of LGTY.
Disclosure: I don't have a position in AMSWA.
Posted by Alexander Shadunsky at 4:27 PM
Saturday, October 6, 2007
A few weeks ago a lawsuit against the company was dismissed, it roughly saves the company $200k a quarter. This won't have a significant effect on Q3 earnings, but its roughly $0.10 per diluted share a year afterwards. Not too big, but when the stock is trading for only $3.20, that is significant. There has not been much significant news besides that, except that price has been slowly rising and there has been a significant pickup in volume since the lawsuit was dropped. This could still be a case of the "value trap," but I think based on their past history, I think the company will be able to turn around falling earnings in the near future. Management has done a good job of managing their balance sheet, most of their book value is back by cash on the books. Accounts Receivables has also been shrinking. FORD still has $2.67 of cash per share and that gives a significant downside protection, that's roughly a 20% downside. Investors still have to watch for new contracts and if the Motorola contract will be renewed as it expires at the end of the year. Any positive news will send the stock running with the low float and small market cap. I think it is worth the risk at these prices.
Disclosure: I am long FORD.
Posted by Alexander Shadunsky at 12:11 PM
Friday, August 17, 2007
I have been looking through lists of lists of companies and decided I wanted to something a little different than the usual Magic Formula Stock write up. I decided to find companies with rock solid assets. Basically, something I KNOW that the company has and I don't have to analyze or value. Well, there is nothing better for those purposes than cash. Here is a list of companies and a brief summary of companies that have at least 75% of their share price covered in cash + short-term investments net of debt. Thanks to CHEAP STOCKS as some of the companies I found were straight from them.
FORD - Forward Industries designs, markets and distributes carrying cases for portable electronics such as cell phones, cameras and other consumer electronic products. The majority of their business is cell phone cases/accessories and cases/accessories for diabetics. They have had a recent drop off in sales due to the change of strategy at Nokia and Motorola to not package cell phone accessories with their cell phones. They have $2.67 of cash per share, they are currently trading at $2.80. Insiders own 10% of the company. There has been recent insider buying.
USEG - US Energy is involved in a handful of businesses but their main business is in acquiring, exploring, developing and/or selling or leasing mineral and other properties. I can't figure out why they are down, most likely because most of the other miners are down as well. But here is the breakdown, they have $4.44 of cash and short-term investments and marketable securities on their books net of debt. They are currently trading for $4.60 a share. Insiders own 19% of the company.
ANDS - Anadys Pharmaceuticals, don't know anything about this company besides that it's a pharmaceutical. I just know they have $2.40 of cash per share, and they are currently trading at $2.10. 8% of the company is owned by insiders. There has been some major insider buying recently by the CEO.
ADPT - Adaptec provides storage solutions that reliably move, manage and protect critical data and digital content. They were a high flyer in the tech bubble. ADPT has been down trading in this range for a while, it's not new for them. They are sitting on $3.11 of cash and marketable securities net of debt per share and are trading at $3.54 a share. Steel Partners has been aggressively purchasing shares of ADPT, they own roughly 15%.
SCMR - Sycamore develops and markets optical networking products and provide services associated with such products for telecommunications service providers worldwide. Another tech bubble high flyer, they have $3.20 of cash per share, and trading for $3.90. They also have been trading in the lower range as of recent. Almost 36% of the company is owned by insiders. There is also a legendary value investing mutual funded invested in SCMR, Third Avenue Management.
All of these companies are sitting on piles of cash, that's an excellent margin of safety right there. You are buying the operations of these companies on pennies on the dollar. An activist shareholder or a buyout would be the logical solution to value these companies properly in the open market.
Posted by Alexander Shadunsky at 8:57 PM
Sunday, July 15, 2007
New Frontier Media is in the adult entertainment media business. They have three different segments that provide products for that market. First, they have a Pay TV Group which distributes adult TV to cable and satellite companies through pay-per-view and video-on-demand. This is the biggest segment and a majority of the revenues come from the Pay TV Group. They also have the Film Product Group which produces original adult themed movies and is a sales agency that helps independent filmmakers license their product; they were acquired in February of 2006. Their third segment is the Internet Group which distributes adult content through the internet.
They recently had earnings in early June and missed analyst estimates and that sent the stock down. The big contributor to the earnings drop was an increase of 43% in operating expenses. Organic revenue growth, not taking into account the Film Production Group acquisition, was negative compared to the same quarter last year.
Their primary competitor in the Adult Entertainment TV industry is Playboy and to a minor degree Hustler and Playgirl. They do face competition from other sorts of erotic material such as adult video/dvd rentals, adult books and magazines, telephone adult chat lines and other adult oriented services. Kagan Research LLC predicts that the adult pay-per-view and video on demand market will grow to $1.4 billion in 2014, the last recorded figure for this was 2004 when it was $761 million.
The adult entertainment industry on the internet is ultra competitive and websites are constantly competing with each other for new members. The Film group competes with other adult video producers like Girls Gone Wild and Jerry Springer Uncensored. The sales agency competes with other similar companies.
There has been a very positive development in the TV segment in that Playboy is struggling with their adult entertainment TV and that could create a big opportunity for New Frontier Media to increase their penetration to more households. The big advantage that their TV has over Playboy’s is that they offer a wide variety of adult content from a lot of different independent producers, they do not use their own movies, this gives their TV channels an edge over Playboy’s. Their TV channels are the market leaders in adult oriented TV.
Their revenues have been growing at a very slow rate as of late; they actually had negative organic growth in Fiscal 2006, this is a concern. Their revenue growth rate over the past 4 years has been just under 8%. They have growth initiatives for this year such as their launch of a video-on-demand service for a New York City cable TV operator that has 3.1 million basic cable subscribers.
NOOF is currently trading at a trailing price/earnings ratio of 16.93 and a forward price/earnings ratio for Fiscal 2009 of 13.79. They have $26 million of cash and cash equivalents and no debt. They pay a hefty dividend of 50 cents a year, which is a yield of about 6%, and it is sustainable due to the strength of their free cash flows. If just to assume that NOOF is a never ending stream of $.50 yearly payments, the stock is worth about $10 at today’s interest rates. Their cash flow from operations has been higher than their Net Income for each of the past 3 years, that shows the quality of their earnings and the strength of their cash flows. About 7% of the company is owned by insiders. Their ROE has not been exceptional with a 5 year average of 10.9%. NOOF was a top 25 magic formula stock for companies over $100m on 7/15/2007.
NOOF had a significant run up in 2003 and most recently it has been trading in a range between $6 and $10 a share. It has been holding support at $8.5 for all of 2007. Volume recently has been relatively low. It has been in a down trend since around the start of 2007 and that has been carrying the stock down. The P/E ratio is in the middle of its trading range over the past 3.5 years.
I think at the P/E NOOF is trading, it is close to fair value since the growth prospects they are offering are not too exciting. However, during a recessionary environment, NOOF would be a great holding because of the stability and the 6% dividend it offers.
Disclosure: I don’t have a position in NOOF.
Posted by Alexander Shadunsky at 2:58 PM
Thursday, July 12, 2007
Domino’s is the largest pizza operator in the U.S. All of their domestic stores and most of their international stores do not offer a dine-in option so their stores are very small and lean. That gives them a cost advantage compared to other pizza delivery operations that have dine-in sections. They have two basic operations in the U.S. where they make money, first the franchises that sell the pizza, and second the domestic distribution center which manufactures dough and distributes food. Domino’s has their own fleet of tractors and trailers to help them distribute the food to their franchises. Purchasing food from the domestic distribution centers is voluntary, but almost all Franchises purchase food from the domestic distribution centers anyway. This helps create cohesiveness.
Usually there is some kind of negative news or just a negative cloud surrounding a stock to make it a Magic Formula Stock, but Domino’s is unique in that it just completed a recapitalization plan that included a $13.50 special dividend. Well, the special dividend was just completed, the stock price dropped and now it’s just trading for $18.73 compared to over $30 per share before the dividend.
But before I go any further, I have to clear this up. I ran the screen for top 25 stocks with a market cap over $100m and DPZ was on it, but it should not be because the screener is not taking the new post-recapitalization $1.7 billion of debt into account because the recapitalization closed in the 2nd quarter. The last available quarterly statements do not take this into account. The Pre-Tax Earnings Yield should actually be about 7%. Here is the calculation involved:
EBIT last 4 quarters = $199.2 million
Enterprise Value = $1.7 billion in debt + $1.2 billion in market value
Pre-Tax Earnings Yield = 6.9%
The pizza U.S. quick service restaurant industry is very competitive. Domino’s main competitors domestically are Pizza Hut, Papa John’s and other local pizza restaurants. Internationally they compete with Pizza Hut and other local restaurants. Domestically, they are the #1 pizza delivery company with a market share of 19% based on dollar value. This is a very stable industry, it is growing at the rate of inflation, maybe a bit higher.
One issue I see with the pizza industry in general is that it does not follow any of the major trends happening inside the country, I don’t know about the rest of the world. People are becoming more health conscious and that will ultimately hurt the pizza industry. Basically, pizza goes against one of the major trends sweeping across the country.
Domino’s has been making pizza for a while, almost half a century. In 1998 Bain Capital acquired a 93% stake in the company and in 2004 it went public, probably so Bain Capital can cash out of their big investment. They have economies of scale for their food manufacturing unit for their retail stores because of their big market presence which gives them a cost advantage over smaller competitors. They are very unique in their treatment of franchises because a majority of the time person has to work/train in the Domino’s system for some time before he/she is allowed to become a sole operator of a Franchise. They promote entrepreneurship inside their franchisees.
Domino’s Pizza is a strong brand being one of the most known consumer brands in the world. They spend a lot of money on advertising, over the past 5 years they have invested an estimated of $1.4 billion in the United States. Domino’s also has marketing affiliations with NASCAR and Coca-Cola.
They plan on growing through the growth of their store count. Additional stores will not cost a lot of money due to the size of the stores and the distribution system available. Domino’s has been struggling with their domestic stores same store sales growth, they were negative in 2006 and just in the past quarter they were negative as well. Their domestic distribution system and their international operations have been the two growing areas of the company.
Something to keep in mind, they are currently defendants in a couple of lawsuits all accusing them of bad working conditions in regards to breaks and meal time.
One major factor that bothers me about Domino’s is their debt load, which is $1.7 billion, over half of the company is financed by debt. Their P/E earnings ratios look good at 13.58 for the trailing twelve months and 14.64 for fiscal year 2008. 2.9% of the company is owned by insiders. They have an attractive dividend yield of 2.6%. Domino’s is a great cash generator, cash flow from operations for the past 3 years has been higher than Net Income.
One great part of Domino’s is that they do a great job managing their working capital. Historically, they have had very little or negative working capital. This is because they receive their receivables a lot faster than they have to pay their payables.
Papa John’s (PZZA) is trading at a Earnings Yields of over 10% compared to Domino’s of almost 7%. Their cash flow from operations(ttm)/enterprise value is 22.3%. Domino’s cash flow from operations(ttm)/enterprise value is 9.7%. Analysts expect PZZA to grow their earnings a bit faster than DPZ in 2008 compared to 2007 earnings expectations.
There is a whole list of issues I have with Domino’s:
1) Their huge debt load
2) They are not a “real” top 25 magic formula stock
3) The lawsuits they are facing in regard to working conditions
4) They are facing the health trend head-on
5) Their pizza is not that good
6) They are overvalued compared to Papa John’s (PZZA)
I would not be a buyer of DPZ.
Disclosure: I don’t have a position in DPZ.
Posted by Alexander Shadunsky at 4:07 PM