Saturday, June 16, 2007

Currently Out of Town

Sorry for the delay in posts, but I am currently in Israel on an educational visit scouting new investment opportunities. I will be back to doing my roughly once every two days posting routine once I am back in the states. Good luck to everyone!

Monday, June 11, 2007

Big Cap Value Screen

I ran a notorious value screen for companies with a market cap of over $10 billion and below $100 billion with a current price no greater than 5% above the yearly low. Some of the more notable names were Motorola, Starbucks, Newmont Mining, Southwest Airlines, and Gold Fields Ltd.



Motorola is the famous manufacturer of wireless products such as cell phones and network products. They recently have had issues with earnings due to struggles in the mobile device business. Motorola has had trouble replicating the success of their Razr phones and that has led to bad quarterly results. They also had a change in upper management with David Devonshire being replaced by Thomas J. Meredith as the CFO. Carl Icahn has also dabbled with Motorola. There are a lot of famous investors on the long side of Motorola such as Bill Miller, George Soros and Edward Lampert.

Starbucks is the world famous coffee company that everyone loves, including investors until recently. They have been growing just not as fast as the market expected, even an in-line quarter can’t keep the stock up. The expectations that the market has set on this company is that even a slight growth slowdown will beat up the stock. There is some upbeat happenings, there has been a recent insider buy and George Soros is an investor.

Newmont Mining and Gold Fields Ltd are both gold miners. They are both around 35% off their recent highs in early 2006. Even though gold prices are only 10% off its peak, both of these stocks have been significantly down since their early 2006 highs. They both pay a dividend of at least 1%. They are both trading at their 52wk lows. Newmont Mining is owned by George Soros and David Dreman.

Southwest Airlines is the famous low-cost airline. They are 10% off their multi-year lows of $13 a share. The recovering oil price has definitely affected their stock price negatively. Even though their earnings were in-line, their stock has been pressured recently due to slower than expected growth in the upcoming quarters by Wall Street analysts.

Disclosure: I don’t have a position in any of the companies listed.

Friday, June 8, 2007

Finish Line: Struggles Continue (FINL)

A few weeks I mentioned how Finish Line is currently struggling and will continue to struggle in the near future, well they just cut their 1st quarter estimate significantly. Analysts were estimating $.06 per share for the 1st quarter while the company guided $(.09) to $(0.11), which is a significant difference from the expected EPS. The Finish Line comparable store net sales continue to decrease and decreased 4.1% compared to the same quarter last year. Net Sales decreased 0.2% year over year.

On the bright side, even with this significant negative news, the stock only went down 3%. Seems like the market is at the point where any negative news from Finish Line is expected, and any neutral or positive news will send the stock higher.

What was surprising is that the company has so far failed to repurchase any shares in 2007 even though they still have shares left on their program that ends at the end of this year. They have repurchased shares at around this price in their current program. Does this mean they expect cheaper prices or they are running out of cash?

Disclosure: I don't have a position in FINL.

Thursday, June 7, 2007

Travelzoo: Smart Investments to Further Growth

Travelzoo is an internet company that provides travel companies with a place to advertise their deals and consumers with a great tool to search for travel deals. Their product provides consumers a free search to look for travel offers. Some of their big advertisers are companies such as airlines, hotels, cruise lines, vacation packagers and other travel companies. Their products include their Travelzoo website, the Travelzoo Top 20 e-mail newsletter, SuperSearch and their Newsflash e-mail product. Their operations are based in North America and Europe. Their founder, Ralph Bartel, is still with the company and owns 50.2% of the outstanding shares.

The recent stock downfall was due to a 1st quarter that did not reach analyst expectations. Analysts expected $0.32 per share but they earned only $0.25 per share. It was still an increase compared to the same time period last year, but that was only because of the smaller number of shares outstanding, Net Income went down. The increased expenses can mostly be attributed to a rise in sales and marketing expenses and an increase in the income tax rate. Its Canadian and European operations, which were just recently launched, are still experiencing losses.

They are also currently experiencing downward price pressure on the stock due to their program to make cash payments to people who failed to convert their shares of Travelzoo.com Corporation to Travelzoo Inc., this is due to their mergers of different Travelzoo companies. There is no estimate of how much this program will cost the company.

Industry

This is a booming industry, travel companies are involved in a lot of advertising and the internet offers them significant medium advantages over newspapers. First, the company can update their ads real-time, unlike in newspapers where you have to wait until their customer service opens and a delay to update the ad. Second, these ads are more effective, targeting people who are looking for travel deals. Third, these are cheaper than placing ads in the newspaper and the travel deals are being sold direct, not through a 3rd party such as a travel agent. The internet offers travel companies much more flexibility than a newspaper does. Travelzoo will continue to benefit in the shift to internet advertising.

Travelzoo faces competition from big competitors such as Microsoft, Google, Yahoo! and other internet websites that offer a travel search similar to Travelzoo’s. This industry is part of the internet mega trend.

A downturn in the economy will hurt their performance due to the sensitivity of the travel market to the economy. Also, terrorist attacks might severely hurt Travelzoo’s operation due to fear like after the horrific events of 9/11.

Company

95% of their revenue comes from the United States. They recently had a slip in revenue per employee due to new growth expansion. They currently have 94 employees. Technology is very important for Travelzoo, they will have to continue to innovate to compete with different internet travel websites. Brand awareness is essential for success in the internet travel industry. The amount of new subscribers to their two email services have been steadily going down. Their total subscribers has been increasing but the number of new subscribers has been increasing at a decreasing rate. Their goal is to continue expanding into other geographical locations and expand their reach. Their executives are relatively low paid compared to the outrageous salaries executives are earning now.

Valuation

TZOO is currently trading at a trailing P/E ratio of 25.12 and a forward p/e ratio for fiscal year 2008 of 18.75. Their full year 2007 and 2008 earnings have both been revised down recently. Their balance sheet is strong, they have almost $40 million of cash and cash equivalents and no debt. Insiders own almost 57% of the shares outstanding. Their share count has been shrinking with recent buybacks. They bought back 1,000,000 shares in 2006 and just authorized an additional 1 million share buy back. Their free cash flow is strong. Revenues have been growing at an exceptional level, even in a bad quarter like last quarter, revenues grew 17% year-over-year. TZOO was in the top 25 Magic Formula stocks with a market cap of over $100m as of 6/6/2007.

Technicals

Currently TZOO is trading at below its three major moving averages. The 50DMA just crossed below the 200DMA, not a good sign for things to come. The big recent drop on higher volume does not bode well for short-term momentum. It is currently right around very solid support of $25 a share. The $25 level has acted as support for over a year. TZOO has traded between $25 and $40 a share for the past year. RSI is giving an oversold signal with a slight bullish divergence. MACD is showing slight bullish momentum.



Conclusion

Travelzoo will continue to benefit from industry trends such as the continuous shift of advertising from newspapers to the internet and the wider use of the internet. This slipup in the first quarter was not major, they are continuing to spend on growth and short-term earnings will suffer because of that. Growth always involves an initial investment which will create downwards pressure on earnings. I would be more concerned if Travelzoo was not making new investments. If these sales & marketing investments were capitalized, similar to new equipment investments of a manufacturer, this would alleviate the pressure on earnings. Revenue is still growing at a brisk pace.

Disclosure: I don’t have a position in TZOO.

Tuesday, June 5, 2007

Select Comfort: Great Company and Great Price

Select Comfort is an upscale vertically integrated mattress and other sleep accessories designer, manufacturer, marketer and retailer. Their mattresses are marketed under the Sleep Number brand name and based on their proprietary air-chamber technology which adjusts the softness of the bed with the touch of a button. The bed’s two sides adjust separately from each other which increase each partner’s experience. Their beds are clinically proven to provide people who sleep on their mattresses better sleep than people who sleep on the traditional innerspring mattresses.

Select Comfort is a Minnesota based corporation which was founded in 1987. They were ranked as the 6th largest mattress manufacturer in 2005 according to Furniture/Today. At that point, they held a 5% market share of industry revenue and a 2% market share of industry units.

They run a lean inventory system with most of the mattresses manufactured after a purchase. Their inventory on hand is minimal. They are currently working on dual sourcing suppliers because their proprietary parts are mostly made by one manufacturer. This will help Select Comfort continue normal business operations if something happened to their main suppliers.

Industry


The mattress industry is stable and mature. It has been growing steadily. Over the past 20 years, the annual growth rate for U.S. wholesale bedding shipments is 6.8%. It is a very competitive and fragmented industry. There are also a wide variety of government regulations. The main competitors for air-bed products consist of Simmons and Sealy. Their largest competitors from the innerspring mattresses consist of Sealy, Serta, Simmons and Spring Air.

Select Comfort will benefit from the health mega trend and the aging of baby boomers mega trend. People will want better mattresses that will help them with a better sleeping experience. This in turn will help people be more productive during the day.

Company

Select Comfort makes some of the most expensive mattresses on the market, with prices averaging from $900 to $4,000 per mattress. They offer a 20 year warranty on all of their brand new Sleep Number mattresses. There is an exclusive Comfort Club for members who have purchased Sleep Number beds through company owned channels, members are provided with gifts if they refer someone to purchase a mattress. Select Comfort also provides a Home Delivery Service, which offers delivery, assembly and mattress removal services to improve the total customer experience, with the purchase of their mattress. Over 90% of their sales come from their three company owned distribution channels, retail, direct and e-commerce. Wholesale and e-commerce have been the two fastest growing channels; they are the only two channels that grew in the 1st quarter compared to the same time period in 2006. Select Comfort consistently spends over 40% on Sales and Marketing expenses. They have been working on expanding their presence in other retailers, they currently have 841 stores that carry their products. With all of this extra retail exposure, will it dilute their brand? Historically they have sold only through company controlled channels. Select Comfort has partnership agreements with Winnebago and Radisson Hotels to help promote their brand.

Valuation

SCSS is currently trading at a trailing p/e ratio of 21.43 and a forward p/e ratio for 2008 of 15.02. Their PEG ratio is .9. Their current ratio is .897, which is troublesome. Their balance sheet is solid, no debt and $66.8 million in cash and investments. 9.2% of the company is owned by insiders. Their accounts receivable rose significantly in 2006 compared to 2005, accounts receivable turnover decreased from over 110 times in 2005 to just over 66 times in 2006. They have been actively repurchasing their shares and shrinking the share count going from 59,252 outstanding diluted shares in 2004 to 51,798 outstanding diluted shares as of last quarter. Select Comfort just authorized an additional $250 million of share repurchases for a current total of $290 million. Their Capital Expenditures are a significant use of their cash, they had expenses of $31 million in 2006, $26 million in 2005 and $21 million in 2004. Their CAPEX are mostly due to their retail store openings and as of recently, for their SAP implementation. Nevertheless, they still provided Free Cash Flow of $28 million, $62 million and $31 million in the past 3 years. SCSS is owned by Ron Baron, who is a famous growth investor. He mostly invests in small and medium size growth companies. This was a top 50 Magic Formula Stock with a market cap bigger than $100 million as of 6/3/2007.

Technicals

It is currently trading at around $18 a share. The long-term trend is down, the short-term trend is up and the medium-term trend is neutral. It just recently crossed above the 20DMA and the 50DMA. It is still below the 200DMA. The $17 level is proving to be a very strong support level. It’s been trading between $17 and $20 a share in the past 6 months. MACD and RSI are both showing a positive divergence. Both of them are trending up while the stock has been stuck in the range. Volume is also showing a positive divergence with the On Balance Volume in an uptrend. All three indicators are showing positive signs, but the stock is still stuck in its range and not trading above its three major moving averages. This bears watching, it could be due for a breakout with volume accumulating in bullish hands.



Conclusion

Select Comfort operates in a mature and stable market with solid growth. They are a narrow-scope differentiator and they know what they are, they do not try to be everything to everyone. Management expected 2007 to be challenging for their company, but they still managed to beat 1st quarter analyst estimates. Their outlook for 2007 is earnings between $1.02 and $1.09 per share. Currently, the analysts estimate $1.00 a share. The resignation of J. Douglas Collier, who was their Chief Marketing Officer, should not be a problem since he was there for a very short time. The recent drop of stock price is due to the prospects of a challenging 2007 and their struggles late in 2006.

There is a lot to like about Select Comfort, their product, cash flows, management, growth and the price. I will be keeping a VERY close eye on it.

Disclosure:
I don’t have a position in SCSS.

Monday, June 4, 2007

Intevac: Great Run But Tough Business (IVAC)

Intevac is the world’s industry leader in the disk sputtering equipment market. What this equipment does is deposits “highly engineered thin-films onto magnetic disks used in hard disk drives.” That is their main business and constitutes for over 90% of their revenue. They are also involved in the imaging business, which consists of developing products which “allowing imaging or analytical detection in extreme low light situations.” The imaging group also works with the military. For their imaging department, most of their revenues have come from R&D contracts with the U.S. government. Their stock has recently fallen due to revised downward earnings guidance for the upcoming quarter.

Intevac has great growth plans. The internet and the digitalization mega trends taking place will benefit Intevac. First, the hard drive market is projected to grow at a brisk pace due to new products that require higher storage capacity. TrendFocus projects 14.4% annual growth in hard drive shipments through 2010.

Here is a list of the major growth drivers that will benefit Intevac:

1) New consumer electronics applications, are requiring bigger and bigger storage capacities for streaming video.
2) New PC growth in emerging markets in Europe and Asia.
3) Enterprises have increased needs to store data. The transformation from paper storage to digital storage is still taking place.
4) Security tapes are transforming from the historical tape standard to a new digital standard storage solution.

The imaging business is slowly growing. They also have a growth initiative to produce a manufacturing system that will work with the etch segment of semiconductors. Revenues from the etch segment manufacturing systems are not expected until 2008.

Intevac has support centers next to their major disk-sputtering equipment customers to help improve customer relationships. They also plan to build more support centers to help develop these relationships and work closer with their major customers.

Industry


This disk-sputtering equipment industry is very competitive due to the small number of customers and the high price of equipment. The customers consist of companies that operate in the hard drives industry. Those companies are large manufacturers such as Fuji Electronic, Hitachi Global Storage Technologies and Seagate Technology. It is very consolidated which could lead to price pressures in the future. Intevac’s competition consists of disk-sputtering equipment manufacturers such as Anelva Corporation, Ulvac and Oerlikon. Intevac is the industry and market share leader with a hold of 60% of the market share.

On the imaging front, Intevac competes with such military giants as ITT Industries and Northrop Grumman for military vision devices. For long-range vision, Intevac competes with CMC Electronics, DRS, FLIR Systems and Raytheon. They also compete in the commercial markets with companies such as Texas Instruments and Roper Scientific in the sensor and camera products market and with companies like InPhotonics and Ocean Optics in the portable Raman spectrometer market.

Both of these products have a long sales cycle which is due to the high degree of customization that customers require. Revenues and earnings for Intevac are very volatile due to the small number of customers and high average price of products. Intevac also benefits from the falling dollar since their international sales for the past 3 years have been 90%, 71% and 68% of total revenues.

Valuation

IVAC is trading at a trailing price/earnings ratio of 8.53 and a forward price/earnings ratio of 12.55. The price/earnings/growth ratio is only .7. Their balance sheet is very strong with over $102 million in cash, cash equivalents, and short term investments. They have done a great job in managing their accounts receivable, improving from over 73 days average account receivable outstanding in the same quarter last year to just under 40 days average account receivable outstanding this year. In 2006 it was just over 56 days compared to almost 114 days in 2005. Shares outstanding have been rising over the past few years, there was a big jump in 2004 due to a secondary public offering. Gross Margin has been healthy, it came in at 42.9% over the past quarter, which is a record for Intevac. Operating Margin has also looked good, checking it at 17.1% in the last quarter. They have consistently spent over 10% of revenue on R&D. Free cash flow was positive in 2006 for the first time since 1997. Insiders own 6.4% of the company. The current backlog is the lowest in dollar terms since the end of 2005. As of June 2nd, 2007, they were in the top 25 Magic Formula stocks with a minimum market cap of $100 million.

Technicals

The long-term trend is bullish but the short and middle term trends are bearish. It is currently trading below all three of its major moving averages. RSI is close to being at the oversold level and MACD is showing momentum to be negative although there was a recent bullish cross over. There has been an increase in volume in the recent drop which started in late February. The chart does not look very good right now, it looks like the stock will dip to at least $18 a share, which is the first strong support level. The second strong support level will be $15 a share.



Conclusion


Intevac seems to be very well run and has great technology and a great growth plan, but the industry is very cyclical and I don’t have the slightest idea of what point we are in the cycle currently. Their founder is still with the company and they have been making great advances in cutting costs such as selling, general and administrative expenses. They also stay true to their word and invest in Research and Development Expenses. One of the main issues I have with the company is their cash flow, they just had their first positive cash flow year since 1997, that does not bode well. Unless they are having a good year, their cash flows will be negative. I would stay away from Intevac due to the unpredictability of their earnings, the cyclicality of the industry they are in, and the cash flows that they produce, the chart isn’t exactly bullish either.

Disclosure:
I don’t have a position in IVAC.

Friday, June 1, 2007

OmniVision Earnings Correction

A big thank you goes out to Jim Hurley in California for this correction. Regarding earnings from yesterday's conference call, the actual earnings that I posted were actually for GAAP earnings while the estimates were for non-GAAP. They actually beat earnings by a wide margin and not missed as I reported. Earnings guidance was higher by a wide margin as well.

Non-GAAP earnings stood at 0.06 per share while the consensus analyst non-GAAP earnings estimate was (0.01) per share. Therefore, OmniVision beat earnings by 0.07 a share.

Guidance by management was between 0.13 to 0.21 non-GAAP earnings per share for the following quarter ending 7/31/2007 while the consensus analyst non-GAAP earnings estimate was 0.06 per share.

Disclosure: I am long OVTI.

OmniVision Turnaround Under Way (OVTI)

Just yesterday OmniVision reported earnings for the quarter ending April 30th. Revenues blew out analyst estimates and earnings missed.


Guidance, for the 4th quarter ending July 31st, 2007, blew away estimates.


Gross Margin was still low due to the lower-margin VGA products. They still have a very solid balance sheet with over $305 million in cash and cash equivalents and short-term investments. Starting with the 2nd quarter in the 2007 fiscal year, which ended on 10/31/06, they ramped up inventory production. Management was right in increasing inventories, since new demand is coming in right on target. Also, most of the high-cost inventory is gone, that should help the gross margin.

Demand is strong and is getting stronger. It was driven by entry level phones which use OmniVision’s VGA chip. They have gross margin initiatives that they will invest a lot of resources into and they are saying that it will rise. Their R&D expense was strong coming in over 13% of revenues compared to almost 9% in the same quarter a year ago. There are also new products in the pipeline. Just about a week ago, they came out with new 1.75 micron OmniPixel3 architecture.

There will be further demand strength driven by such sources as the automotive market, the medical market, and the laptop market. Their colonoscopy partner just got an FDA approval to make the colonoscopy products using OmniVision’s camera chips. The higher-resolution camera chips is OmniVision’s prime target because there is less competition there than in the lower resolution chips.

The start of the turnaround is in good shape, there will be further gains ahead.

Disclosure: I am long OVTI.