At the end of fiscal 2008, McDonald's Corporation (NYSE: MCD) operated 31, 967 restaurants in 118 countries in the McDonald's system, 25,465 operated by franchisees and 6,502 operated by the company.
Based on a five (5) year hold, the company is on our watch list with a Reasonable Value Estimate of $79, a Buy Target of $39, a First Sell Target of $77, and a Close Target of $83.
As found elsewhere in this report, management believes that the company will continue to drive success in 2009 and beyond by remaining focused on being better, not just bigger.
Management further believes that the company will do this by further enhancing its understanding of consumers’ needs and wants; facilitating greater sharing and adoption of best practices and new ideas worldwide; and leveraging a strategic approach to implementing initiatives to drive the best bottom-line impact.
We’ve heard bullshit in our day, but never has it been so eloquently presented. It is statements like that which lead us to believe, at least until proven to us otherwise, that management is not only clueless about the world economy, but the company’s place in that economy as well.
In our opinion, coupling bullshit like management’s outlook for 2009, with what we believe was a gamble on the part of management to keep the company’s stock price propped up during 2008 by buying back company stock instead of reducing or maintaining the status quo when it came to debt, will inevitably lead to disaster for the stockholders of this company.
Accordingly, it is our opinion that management has introduced, through their ineptitude, greater risk for investors. As a result we are lowering our Buy Target for the stock to from $39 to $20.
While this is a price point not seen since 2003, considering what we believe was and is the complete and utter folly of management, a $20 price point may be here faster than any of us knows.
Wax
DOWNLOAD THE COMPLETE REPORT HERE
Wax Ink Watch List - July 4, 2009
It contains 2625 stocks, of which 25 are foreign company stocks. It can be a pain the ass to read, and because it's a PDF file, it is probably a major pain in the ass to search for a stock.
We hope that you will cuss us as you attempt to find a stock that you are interested in. And we hope that all that cussing...helps you find a winner.
Happy searching.
Wax
Download Wax Ink Watch List Here
We hope that you will cuss us as you attempt to find a stock that you are interested in. And we hope that all that cussing...helps you find a winner.
Happy searching.
Wax
Download Wax Ink Watch List Here
Quest Diagnostics, Inc. - A Raw Value Report
The top guy makes almost $1.2 million a year, yet can't afford $6K for a home alarm system. The company paid one executive more than $18K to relocate at the same time it was laying off rank and file employees.
The board of directors contains a retired employee from a company that owns more than 16% of this company, yet the board has declared him independent, and one vice-president's compensation included $65 for use of the company aircraft.
The company is Quest Diagnostics, Inc. (NYSE: DGX), the world’s leading provider of diagnostic testing, information and services.
In short, we are not as impressed with Quest Diagnostics, as management seems to be with themselves.
Quest Diagnostics Raw Value Report
Wax
The board of directors contains a retired employee from a company that owns more than 16% of this company, yet the board has declared him independent, and one vice-president's compensation included $65 for use of the company aircraft.
The company is Quest Diagnostics, Inc. (NYSE: DGX), the world’s leading provider of diagnostic testing, information and services.
In short, we are not as impressed with Quest Diagnostics, as management seems to be with themselves.
Quest Diagnostics Raw Value Report
Wax
Wax Ink Watch List - June 21, 2009
A long time ago we decided that if we were going to write about a particular stock or company, it should at least be on our watch list. At the same time, we made the choice that of the stocks on our watch list, foreign company stocks should never exceed 1% of the total stocks.
As of this posting, we have 2,623 stocks on our watch list, and of those, 25, or 0.95%, are foreign company stocks.
Wax
Strayer Education - A Wax Ink Raw Value Report
How It Got Here
Financial information contained in this report is based on the company's Form 10-K filing for fiscal year ending December 31, 2008, as filed with the Securities and Exchange Commission on February 17, 2009.
The Company
Strayer Education, Inc. (Nasdaq: STRA) is a for-profit post-secondary education services corporation whose mission is to make high quality, post-secondary education achievable and convenient for working adults in today’s economy.
Founded in 1892, Strayer University is an institution of higher learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, and public administration at 65 physical campuses in Alabama, Delaware, Florida, Georgia, Kentucky, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, West Virginia, and Washington, D.C.
As of December 31, 2008, the university had more than 44,000 students enrolled in their programs. Strayer University is accredited by the Middle States Commission on Higher Education, one of the six regional collegiate accrediting agencies recognized by the U.S. Secretary of Education. As part of its program offering, the University also offers classes online via the Internet, providing its working adult students a flexible and convenient alternative.
Over the last several years, the company has experienced significant growth, primarily by expanding geographically by opening new campuses. Since the company's initial public offering in 1996, they have grown from eight campuses in one state and Washington, D.C., to 65 campuses in 14 states and Washington, D.C.
The company's stated mission is to serve working adults’ demand for post-secondary education. To achieve this objective the company has opened new campuses in promising areas in those states in which they currently operate physical campuses, as well as by expanding into contiguous states that exhibit strong demand for adult education in business and information technology programs.
The company has opened 51 of campuses since the beginning of 2001 and currently plans to open 11 new campuses in 2009, including five already opened.
Since receiving regulatory approval to offer our degree programs online in 1997, online programs have experienced rapid growth, with over 32,000 students enrolled in at least one class online during the 2008 fall term. To better serve students who do not reside or work near a physical campus location, the company plans to open a second Global Online Operations Center in 2009.
In May 2001, management hired a new senior management team, made significant investments in information technology infrastructure to support planned growth in its online programs, and began a long term program to open new campuses in areas where there is a strong demand for adult education. These efforts have allowed the company to grow revenues between 2000 and 2008 by 23% on a compound annual basis.
During the same period, diluted earnings per share grew at a compound annual rate of 19% including the impact of stock-based compensation which the company began recording in 2006.
Dollars In
The company charges tuition by the course. Each course is 4.5 credit hours. As of January 1, 2009, undergraduate full-time students are charged $1435.00 per course, undergraduate part-time students are charged $1510.00 per course, and students in graduate programs are charged at the rate of $1945.00 per course.
Accordingly, a full-time student seeking to obtain a bachelor’s degree in four years currently would pay approximately $14,000 per year in tuition.
Strayer University implemented a tuition price increase of approximately 5% per course effective January 1, 2009, which is reflected in the above tuition rates.
Under a variety of different programs, Strayer University offers scholarships and tuition discounts to active duty military students and in connection with various corporate and government sponsorship and tuition reimbursement arrangements.
Dollars Lost
Strayer University’s cohort (student loan) default rates on FFEL Program loans for the 2004, 2005, and 2006 federal fiscal years, the three most recent years for which this information is available, were 4.5%, 3.9%, and 3.8%, respectively, while the default rates for proprietary institutions nationally were 8.6%, 8.2%, and 9.7% in federal fiscal years 2004, 2005, and 2006, respectively.
Dollars Out
The company leases all of their campus and administrative facilities except for five campus facilities which they own. Their campuses are located in Alabama, Delaware, Florida, Georgia, Kentucky, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, West Virginia, and Washington, D.C., and their corporate headquarters is located in Virginia.
Leases generally range from five to ten years with one to two renewal options for extended terms. As of December 31, 2008, the company leased 67 campus and administrative facilities consisting of approximately 985,000 square feet. The facilities the company owns consist of approximately 110,000 square feet.
Management evaluates current utilization of facilities and projected enrollment growth to determine facility needs. The company anticipates that approximately an additional 200,000 square feet will be leased in 2009. The company also signed a lease for approximately 100,000 square feet in Herndon, Virginia for their corporate headquarters. Occupancy of the space is scheduled for 2010.
Dividends
The company paid dividends during fiscal 2008 of $3.65 per share. But that dividend payout, included a one-time special dividend of $2.00 per share as declared by the Board of Directors on October 30, 2007, and paid on January 16, 2008.
Majority/Controlling Stakeholders
According to the company's latest SEC Form DEF 14A filing of March 23, 2009, Fidelity Management and Research owns or controls 12.6% of the outstanding shares of company stock, Baron Capital Group owns or controls 9% of the outstanding shares of company stock, and the ever present Barclay's Global Investors owns or controls 5.4% of the outstanding shares of company stock.
Curiously, Chairman and CEO Rober Silberman owns only 2% of the outstanding share of company stock, but that 2% includes 183,680 restricted shares which were granted on February 10, 2009 and won't vest 100% until February 10, 2019. Mr. Silberman however does have the right to vote these shares that he does not yet own, as well as receive cash dividends on these shares that he does not yet own. He simply cannot sell them...because he doesn't yet own them?
Collectively, all of the Directors and Executive Officers of the company own outright, or have vesting interest in, 479,275 of the outstanding shares of company stock, or about 3.4% of the total shares outstanding.
Perquisites
The company does not offer any perquisites except for reimbursement of relocation expenses including tax gross-ups, when applicable. This perquisite is offered to any named executive officer hired from a different location to encourage prospective executives to relocate.
Director Compensation
Annual Retainer. Each eligible director is paid an annual fee of $80,000 in quarterly installments. Of this amount, 50% (or $40,000) of the annual fee is paid in cash and 50% in shares of restricted stock. Instead of receiving a cash payment, directors may elect to have up to 100% of their annual retainer paid in restricted stock.
Restricted Stock. As part of the annual retainer, $40,000 — $80,000 of restricted stock is issued to directors on the date of the annual meeting. The stock vests over three years, with one-third of the stock vesting each year. In the event any eligible Director wishes to retire from the Board of Directors, or wishes to resign from the Board to serve in another capacity that might preclude further service on the Board of Directors, and holds shares of unvested restricted stock in the corporation, the Board of Directors may, in its discretion, waive the remaining vesting period(s) for all or any portion of such shares provided that the Director shall have served at least five years on the Board of Directors of the Corporation.
Fees and Reimbursements. Members of the Audit Committee receive an additional fee of $1,000 per meeting, generally $4,000 per year. In addition, directors are reimbursed for out-of-pocket expenses incurred in connection with their attendance at Board and Committee meetings.
Related Parties
The company had no transactions with related parties during the fiscal year ended December 31, 2008, and prohibits conflict of interest activities by any Director or Officer unless specifically approved in advance and in writing by the company's General Counsel, CEO, and the Audit Committee of the Board of Directors after full disclosure of all aspects of the activity. In addition, company policy dictates that any such activity will be publicly disclosed.
Competition
While there are other companies in the same Industry Sector, there are few that can compete directly with Strayer. Certainly Apollo Group, Inc. (Nasdaq: APOL), Capella Education Company, Inc. (Nasdaq: CPLA), and Corinthian Colleges, Inc. (Nasdaq: COCO), all offer similar degree programs, but we believe only Strayer has taken the time to understand that tuition and campus location are the keys to success in their industry. Accordinly, we anticipate that the company will continue to dominate its competition.
Investment Thoughts
We are not about to pay $216.09 per share to own this stock, which was a recent closing price. The reason we are not is because it is on our watch list with a Reasonable Value Estimate of $146.74, a Buy Target of $73.37, a First Sell Target of $143.07, and a Close Target of $154.88.
Admittedly, we are impressed that the company has been able to execute a fairly aggressive growth strategy over the past several years while keeping itself debt free. Not only has the company been able to increase its 2008 earnings from 2007 levels by almost 20%, the company has also managed to increase its 2008 Free Cash Flow from 2007 levels by almost 70%, ending fiscal 2008 with Free Cash Flow of $5.89.
How is this possible? All of the company's campus facilities, with the exception of 5 such, are leased. In addition, the company is reimbursed by the lessor for improvements made to the leased facilities. These reimbursements were capitalized as leasehold improvements and a long-term liability established. The leasehold improvements and the long-term liability are amortized on a straight-line basis over the corresponding lease terms, which range from five to ten years.
The company then records rent expense on a straight-line basis over the initial term of a lease with the difference between the rent payment and the straight-line rent expense recorded as a long-term liability. The company also records the non-current portion of the gain related to the sale and lease back of a campus facility as a long-term liability.
We found one other noteworthy piece of information in the company's latest 10-K...restricted cash. Generally cash is restricted because a lender requires a company to withhold from general corporate purposes, a specific amount of cash. Often, before these restricted dollars can be spent, the company's lenders have to have full understanding as to why the funds are needed, and loan covenants must be modified.
In the case of Strayer, we found that the company does have $500,000 of restricted cash in an interest-bearing account, and that while not listed specifically as restricted cash, the amount is included as a long-term asset.
The reason for the restricted cash? The State of Pennsylvania requires the company to maintain a “minimum protective endowment” before it can operate in the state. We are not sure what actual purpose this "endowment" serves except to allow the company to do business in Pennsylvania.
Investment Opinion and Worksheet
As we have stated, we are impressed with many things about this company, and at least on paper, it all seems to make sense...the reason for the company's growth rate, the year over year increases in earnings and free cash flow, even the company's restricted cash. It all seems explicable.
But we keep thinking of Bernie Madoff and how his company kept improving year over year, until finally it became mathematically impossible that such improvements could occur. When that happened, lots of people lost lots of money.
Certainly we are not saying the same is true with Strayer Education. What we are saying is that the stock price has had a meteoric rise over the past 13 years, moving from $6.31 in June 1996, to a recent close of $216.09, and that in our opinion the stock is extremely overvalued, as noted by a recent trailing twelve month PE of 40.
We also note that Tangible Book Value at the end of fiscal 2008 was $12.40, about the same as it was at the end of fiscal 2007, which to us, when coupled with the recent PE of 40, and the company's cash on hand of $3.97 per share, increases investment risk.
Accordingly, because we believe there is increased investment risk, and because we further believe that such risk will increase going forward, we have lowered our Buy Target from $62 to $54, and currently have the stock rated as a Sell.
Strayer Education Worksheet 1208
Wax
Financial information contained in this report is based on the company's Form 10-K filing for fiscal year ending December 31, 2008, as filed with the Securities and Exchange Commission on February 17, 2009.
The Company
Strayer Education, Inc. (Nasdaq: STRA) is a for-profit post-secondary education services corporation whose mission is to make high quality, post-secondary education achievable and convenient for working adults in today’s economy.
Founded in 1892, Strayer University is an institution of higher learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, and public administration at 65 physical campuses in Alabama, Delaware, Florida, Georgia, Kentucky, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, West Virginia, and Washington, D.C.
As of December 31, 2008, the university had more than 44,000 students enrolled in their programs. Strayer University is accredited by the Middle States Commission on Higher Education, one of the six regional collegiate accrediting agencies recognized by the U.S. Secretary of Education. As part of its program offering, the University also offers classes online via the Internet, providing its working adult students a flexible and convenient alternative.
Over the last several years, the company has experienced significant growth, primarily by expanding geographically by opening new campuses. Since the company's initial public offering in 1996, they have grown from eight campuses in one state and Washington, D.C., to 65 campuses in 14 states and Washington, D.C.
The company's stated mission is to serve working adults’ demand for post-secondary education. To achieve this objective the company has opened new campuses in promising areas in those states in which they currently operate physical campuses, as well as by expanding into contiguous states that exhibit strong demand for adult education in business and information technology programs.
The company has opened 51 of campuses since the beginning of 2001 and currently plans to open 11 new campuses in 2009, including five already opened.
Since receiving regulatory approval to offer our degree programs online in 1997, online programs have experienced rapid growth, with over 32,000 students enrolled in at least one class online during the 2008 fall term. To better serve students who do not reside or work near a physical campus location, the company plans to open a second Global Online Operations Center in 2009.
In May 2001, management hired a new senior management team, made significant investments in information technology infrastructure to support planned growth in its online programs, and began a long term program to open new campuses in areas where there is a strong demand for adult education. These efforts have allowed the company to grow revenues between 2000 and 2008 by 23% on a compound annual basis.
During the same period, diluted earnings per share grew at a compound annual rate of 19% including the impact of stock-based compensation which the company began recording in 2006.
Dollars In
The company charges tuition by the course. Each course is 4.5 credit hours. As of January 1, 2009, undergraduate full-time students are charged $1435.00 per course, undergraduate part-time students are charged $1510.00 per course, and students in graduate programs are charged at the rate of $1945.00 per course.
Accordingly, a full-time student seeking to obtain a bachelor’s degree in four years currently would pay approximately $14,000 per year in tuition.
Strayer University implemented a tuition price increase of approximately 5% per course effective January 1, 2009, which is reflected in the above tuition rates.
Under a variety of different programs, Strayer University offers scholarships and tuition discounts to active duty military students and in connection with various corporate and government sponsorship and tuition reimbursement arrangements.
Dollars Lost
Strayer University’s cohort (student loan) default rates on FFEL Program loans for the 2004, 2005, and 2006 federal fiscal years, the three most recent years for which this information is available, were 4.5%, 3.9%, and 3.8%, respectively, while the default rates for proprietary institutions nationally were 8.6%, 8.2%, and 9.7% in federal fiscal years 2004, 2005, and 2006, respectively.
Dollars Out
The company leases all of their campus and administrative facilities except for five campus facilities which they own. Their campuses are located in Alabama, Delaware, Florida, Georgia, Kentucky, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, West Virginia, and Washington, D.C., and their corporate headquarters is located in Virginia.
Leases generally range from five to ten years with one to two renewal options for extended terms. As of December 31, 2008, the company leased 67 campus and administrative facilities consisting of approximately 985,000 square feet. The facilities the company owns consist of approximately 110,000 square feet.
Management evaluates current utilization of facilities and projected enrollment growth to determine facility needs. The company anticipates that approximately an additional 200,000 square feet will be leased in 2009. The company also signed a lease for approximately 100,000 square feet in Herndon, Virginia for their corporate headquarters. Occupancy of the space is scheduled for 2010.
Dividends
The company paid dividends during fiscal 2008 of $3.65 per share. But that dividend payout, included a one-time special dividend of $2.00 per share as declared by the Board of Directors on October 30, 2007, and paid on January 16, 2008.
Majority/Controlling Stakeholders
According to the company's latest SEC Form DEF 14A filing of March 23, 2009, Fidelity Management and Research owns or controls 12.6% of the outstanding shares of company stock, Baron Capital Group owns or controls 9% of the outstanding shares of company stock, and the ever present Barclay's Global Investors owns or controls 5.4% of the outstanding shares of company stock.
Curiously, Chairman and CEO Rober Silberman owns only 2% of the outstanding share of company stock, but that 2% includes 183,680 restricted shares which were granted on February 10, 2009 and won't vest 100% until February 10, 2019. Mr. Silberman however does have the right to vote these shares that he does not yet own, as well as receive cash dividends on these shares that he does not yet own. He simply cannot sell them...because he doesn't yet own them?
Collectively, all of the Directors and Executive Officers of the company own outright, or have vesting interest in, 479,275 of the outstanding shares of company stock, or about 3.4% of the total shares outstanding.
Perquisites
The company does not offer any perquisites except for reimbursement of relocation expenses including tax gross-ups, when applicable. This perquisite is offered to any named executive officer hired from a different location to encourage prospective executives to relocate.
Director Compensation
Annual Retainer. Each eligible director is paid an annual fee of $80,000 in quarterly installments. Of this amount, 50% (or $40,000) of the annual fee is paid in cash and 50% in shares of restricted stock. Instead of receiving a cash payment, directors may elect to have up to 100% of their annual retainer paid in restricted stock.
Restricted Stock. As part of the annual retainer, $40,000 — $80,000 of restricted stock is issued to directors on the date of the annual meeting. The stock vests over three years, with one-third of the stock vesting each year. In the event any eligible Director wishes to retire from the Board of Directors, or wishes to resign from the Board to serve in another capacity that might preclude further service on the Board of Directors, and holds shares of unvested restricted stock in the corporation, the Board of Directors may, in its discretion, waive the remaining vesting period(s) for all or any portion of such shares provided that the Director shall have served at least five years on the Board of Directors of the Corporation.
Fees and Reimbursements. Members of the Audit Committee receive an additional fee of $1,000 per meeting, generally $4,000 per year. In addition, directors are reimbursed for out-of-pocket expenses incurred in connection with their attendance at Board and Committee meetings.
Related Parties
The company had no transactions with related parties during the fiscal year ended December 31, 2008, and prohibits conflict of interest activities by any Director or Officer unless specifically approved in advance and in writing by the company's General Counsel, CEO, and the Audit Committee of the Board of Directors after full disclosure of all aspects of the activity. In addition, company policy dictates that any such activity will be publicly disclosed.
Competition
While there are other companies in the same Industry Sector, there are few that can compete directly with Strayer. Certainly Apollo Group, Inc. (Nasdaq: APOL), Capella Education Company, Inc. (Nasdaq: CPLA), and Corinthian Colleges, Inc. (Nasdaq: COCO), all offer similar degree programs, but we believe only Strayer has taken the time to understand that tuition and campus location are the keys to success in their industry. Accordinly, we anticipate that the company will continue to dominate its competition.
Investment Thoughts
We are not about to pay $216.09 per share to own this stock, which was a recent closing price. The reason we are not is because it is on our watch list with a Reasonable Value Estimate of $146.74, a Buy Target of $73.37, a First Sell Target of $143.07, and a Close Target of $154.88.
Admittedly, we are impressed that the company has been able to execute a fairly aggressive growth strategy over the past several years while keeping itself debt free. Not only has the company been able to increase its 2008 earnings from 2007 levels by almost 20%, the company has also managed to increase its 2008 Free Cash Flow from 2007 levels by almost 70%, ending fiscal 2008 with Free Cash Flow of $5.89.
How is this possible? All of the company's campus facilities, with the exception of 5 such, are leased. In addition, the company is reimbursed by the lessor for improvements made to the leased facilities. These reimbursements were capitalized as leasehold improvements and a long-term liability established. The leasehold improvements and the long-term liability are amortized on a straight-line basis over the corresponding lease terms, which range from five to ten years.
The company then records rent expense on a straight-line basis over the initial term of a lease with the difference between the rent payment and the straight-line rent expense recorded as a long-term liability. The company also records the non-current portion of the gain related to the sale and lease back of a campus facility as a long-term liability.
We found one other noteworthy piece of information in the company's latest 10-K...restricted cash. Generally cash is restricted because a lender requires a company to withhold from general corporate purposes, a specific amount of cash. Often, before these restricted dollars can be spent, the company's lenders have to have full understanding as to why the funds are needed, and loan covenants must be modified.
In the case of Strayer, we found that the company does have $500,000 of restricted cash in an interest-bearing account, and that while not listed specifically as restricted cash, the amount is included as a long-term asset.
The reason for the restricted cash? The State of Pennsylvania requires the company to maintain a “minimum protective endowment” before it can operate in the state. We are not sure what actual purpose this "endowment" serves except to allow the company to do business in Pennsylvania.
Investment Opinion and Worksheet
As we have stated, we are impressed with many things about this company, and at least on paper, it all seems to make sense...the reason for the company's growth rate, the year over year increases in earnings and free cash flow, even the company's restricted cash. It all seems explicable.
But we keep thinking of Bernie Madoff and how his company kept improving year over year, until finally it became mathematically impossible that such improvements could occur. When that happened, lots of people lost lots of money.
Certainly we are not saying the same is true with Strayer Education. What we are saying is that the stock price has had a meteoric rise over the past 13 years, moving from $6.31 in June 1996, to a recent close of $216.09, and that in our opinion the stock is extremely overvalued, as noted by a recent trailing twelve month PE of 40.
We also note that Tangible Book Value at the end of fiscal 2008 was $12.40, about the same as it was at the end of fiscal 2007, which to us, when coupled with the recent PE of 40, and the company's cash on hand of $3.97 per share, increases investment risk.
Accordingly, because we believe there is increased investment risk, and because we further believe that such risk will increase going forward, we have lowered our Buy Target from $62 to $54, and currently have the stock rated as a Sell.
Strayer Education Worksheet 1208
Wax
GameStop Corporation - A Wax Ink Raw Value Report
How It Got Here
Financial information contained in this report is based on the company's Form 10-K filing for fiscal year ending January 31, 2009, as filed with the Securities and Exchange Commission on April 1, 2009.
The Company
GameStop Corporation (NYSE: GME) is the world’s largest retailer of video game products and PC entertainment software, selling new and used video game hardware, video game software and accessories, as well as PC entertainment software, and related accessories and other merchandise. As of January 31, 2009, the company operated 6,207 stores in the United States, Australia, Canada and Europe, primarily under the names GameStop and EB Games.
In addition, the company operates the electronic commerce website www.gamestop.com and publishes Game Informer, the industry’s largest multi-platform video game magazine in the United States based on circulation, with approximately 3.5 million subscribers.
Segments
For fiscal year ended January 31, 2009, the company operated its business in the following segments: United States, Canada, Australia and Europe. Of their 6,207 stores, 4,331 stores are included in the United States segment and 325, 350 and 1,201 stores are included in the Canadian, Australian and European segments, respectively.
Each of the segments consists primarily of retail operations, with all stores engaged in the sale of new and used video game systems, software and accessories, referred to as Video Game Products, and PC entertainment software and related accessories. Used video game products provide a unique value proposition to the company's customers, and the company's purchasing of used video game products provides its customers with an opportunity to trade in their used video game products for store credits and apply those credits towards other merchandise, which in turn, increases stores sales.
The company's products are substantially the same regardless of geographic location, with the primary differences in merchandise carried being the timing of release of new products in the various segments. Stores in all segments are similar in size at an average of approximately 1,500 square feet, with corporate offices and one distribution facility housed in a 510,000 square foot facility in Grapevine, Texas.
Background
The company began operations in November 1996. In October 1999, the company was acquired by, and became a wholly-owned subsidiary of, Barnes and Noble, Inc. (NYSE: BKS). In February 2002, GameStop completed an initial public offering of its Class A common stock and was a majority-owned subsidiary of Barnes and Noble until November 2004 when Barnes and Noble distributed its holdings of outstanding GameStop Class B common stock to its stockholders.
In October 2005, GameStop acquired the operations of Electronics Boutique Holdings Corporation (EB), a 2,300-store video game retailer in the U.S. and 12 other countries, by merging its existing operations with EB under GameStop Corp.
In February 2007, all outstanding Class B common stock of the company was converted into Class A common stock of the company on a one-for-one basis and the company no longer had any Class B common stock. In March 2007, the company completed a two-for-one stock split of its Class A common stock and in January 2009, the company's Class A common stock traded on the New York Stock Exchange under the symbol GME.
In November 2008, GameStop France SAS, a wholly-owned subsidiary of the company, completed the acquisition of substantially all of the outstanding capital stock of SFMI Micromania SAS for $580.4 million, net of cash acquired. Micromania is a leading retailer of video and computer games in France with 332 locations, 328 of which were operating at the date of acquisition.
The company funded the transaction with cash on hand, funds drawn against its revolving credit facility totaling $275 million, and term loans totaling $150 million. As of January 2009, all amounts drawn against the revolving credit facility and the term loans have been repaid and the company’s operating results for the 52 weeks ended January 31, 2009 include 11 weeks of Micromania’s results.
Competition
The electronic game industry is intensely competitive and subject to rapid changes in consumer preferences and frequent new product introductions. In the U.S. the company competes with mass merchants and regional chains, including Wal-Mart Stores, Inc. (NYSE: WMT) and Target Corporation (NYSE: TGT).
The company also competes with product and consumer electronics stores, including Best Buy Co., Inc. (NYSE: BBY) and other video game and PC software specialty stores located in malls and other locations, as well as against toy retail chains, mail-order businesses, catalogs, direct sales by software publishers, and online retailers and game rental companies.
In addition, video games are available for sale and rental from many video stores, such as Movie Gallery, Inc. (Pink Sheets: MVGR.PK) and Blockbuster, Inc. (NYSE: BBI).
Competitors in Europe include Game Group plc (“Game Group”) and its subsidiaries, which operate in the United Kingdom, Ireland, Scandinavia, France, Spain and Portugal, and Media Markt, operating throughout Europe.
Canadian competitors include Wal-Mart, Best Buy and its subsidiary Future Shop, while the company's Australia competitors include Game Group, K-Mart, Target and JB HiFi stores.
Properties
All of the company's stores and most of its distribution facilities are leased. Leases typically provide for an initial lease term of three to ten years, plus renewal options. This arrangement gives the company the flexibility to pursue extension or relocation opportunities that arise from changing market conditions.
Management believes that as current leases expire the company will be able to obtain either renewals at present locations or leases for equivalent locations in the same area.
In addition, the company owns a 510,000 square foot facility in Grapevine, Texas, which houses their corporate headquarters and certain of distribution operations.
The company also owns an additional 65,000 square foot building at the Grapevine, Texas location which is currently being used for refurbishing operations.
Additionally, the company also owns an 80,000 square foot distribution facility in Arlov, Sweden, a 119,000 square foot distribution facility in Brampton, Ontario, Canada, a 120,000 square foot distribution facility in Milan, Italy, a 67,000 square foot distribution facility in Memmingen, Germany, and a 70,000 square foot distribution facility in Pinkenba, Queensland, Australia.
Legal Proceedings
On February 14, 2005, and as amended, Steve Strickland, as personal representative of the Estate of Arnold Strickland, deceased, Henry Mealer, as personal representative of the Estate of Ace Mealer, deceased, and Willie Crump, as personal representative of the Estate of James Crump, deceased, filed a wrongful death lawsuit against GameStop, Sony, Take-Two Interactive, Rock Star Games and Wal-Mart (collectively, the “Defendants”) and Devin Moore, alleging that defendants’ actions in designing, manufacturing, marketing and supplying defendant Moore with violent video games were negligent and contributed to defendant Moore killing Arnold Strickland, Ace Mealer and James Crump. Moore was found guilty of capital murder in a criminal trial and was sentenced to death in August 2005.
Plaintiffs’ counsel has named a new expert, a psychologist who testified at the criminal trial on behalf of the criminal defendant, who will opine, if allowed, that violent video games were a substantial factor in causing the murders. This same testimony from this same expert was excluded in the criminal trial from the same judge hearing this case. The testimony of plaintiffs’ psychologist expert was heard by the Court on October 30, 2008, and the motion to exclude that testimony was argued on December 12, 2008. The ruling on this motion will have an effect on whether the case is able to proceed.
The company is currently awaiting a ruling. There is no current trial date. The company does not believe there is sufficient information to estimate the amount of the possible loss, if any, resulting from the lawsuit.
Management
Management information contained in this report is based on the company's Form DEF14A filing, as filed with the Securities and Exchange Commission on May 22, 2009.
The Board of Directors consists of eleven directors, broken into three classes as directed by the company's certificate of incorporation, with the term of each class of director being three years.
In addition, the certificate of incorporation provides that the authorized number of directors may be changed only by resolution of the Board of Directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors.
Perquisites
The company does not have a formal program providing perquisites to its executive officers. Mr. DeMatteo (CEO), Mr. Fontaine (Executive Chairman), Mr. Raines (COO), Mr. Calrson (Executive VP and CFO), and Mr. Bartel (Executive VP Merchandising and Marketing) are eligible to use the company plane for personal use.
Mr. Morgan was eligible to use the plane until his resignation effective May 2, 2008.
Mr. DeMatteo, Mr. Fontaine, and Mr. Carlson occasionally use the plane for personal use and reimburse the Company for costs in accordance with IRS guidelines. Amounts disclosed for the personal use of the company plane represent actual incremental costs to operate the plane in excess of the amounts reimbursed in accordance with IRS guidelines.
In fiscal 2008, these amounts totaled $55,202, $43,743 and $4,684 for Mr. DeMatteo, Mr. Fontaine, and Mr. Carlson, respectively, and in fiscal 2007 these amounts totaled $75,559, $62,834 and $12,040 for Mr. Fontaine, Mr. DeMatteo and Mr. Morgan, respectively.
None of the named executive officers receives any other compensation or benefits which would be defined as perquisites.
Independent Registered Accounting Firm
The firm of BDO Seidman, LLP is the independent registered public accounting firm for the company.
The independent accountants examine annual financial statements and provide other permissible non-audit and tax-related services for the company. The company and the audit committee have considered whether the non-audit services provided by BDO Seidman are compatible with maintaining the independence of BDO Seidman in its audit of the company and are not considered prohibited services under the Sarbanes-Oxley Act of 2002.
Audit Fees. In fiscal 2008, the professional services of BDO Seidman totaled $2,756,740 for the audit of the company’s annual financial statements, for reviews of the company’s financial statements included in the company’s quarterly reports on Form 10-Q filed with the SEC, audit-related consultation concerning financial accounting and reporting standards and for the audit of the company’s internal control over financial reporting.
Included in the fiscal 2008 fees were $275,048 of non-recurring audit charges related to the Micromania acquisition.
In fiscal 2007, the professional services of BDO Seidman totaled $2,128,511 for the audit of the Company’s annual financial statements, for reviews of the Company’s financial statements included in the Company’s quarterly reports on Form 10-Q filed with the SEC, audit-related consultation concerning financial accounting and reporting standards and for the audit of the Company’s internal control over financial reporting.
Audit-Related Fees. In fiscal 2008 and fiscal 2007, the Company paid BDO Seidman $25,000 and $31,000, respectively, for services in respect of employee benefit plan audits.
Tax Fees. In fiscal 2008, the Company paid BDO Seidman $67,600 for tax-related services. In fiscal 2007, the Company paid BDO Seidman $207,076 for tax-related services. Tax-related services included professional services rendered for tax compliance, tax advice and tax planning.
All Other Fees. The Company did not pay BDO Seidman any other fees in fiscal 2008 or fiscal 2007.
Pre-approval Policies and Procedures. The audit committee charter adopted by the Board of Directors of the company requires that, among other things, the audit committee pre-approve the rendering by the company’s independent auditor of all audit and permissible non-audit services. Accordingly, as part of its policies and procedures, the audit committee considers and pre-approves any such audit and permissible non-audit services on a case-by-case basis. The audit committee approved all of the services provided by BDO Seidman referred to in this report.
Investment Thoughts
The stock is on the Wax Ink Watch List with a Reasonable Value Estimate of $65.00, a Buy Target of $32.50, a First Sell Target of $63.37, and a Close Target of $68.60, based on a five (5) year hold.
For fiscal 2009 while the current consensus for earnings growth is 12%, we believe that due to the current world economic malaise, earnings will decline approximately 15%.
In addition, we note that of the company's $4.52 billion in Total Assets, almost 47% is made up of Goodwill and Intangibles, which to us is the same thing as saying ketchup makes good soup. We also note that the company paid Specail Income Charges of $6.9 million during fiscal 2008.
The company touted in its 10-K filing that it had purchased French company Micromania SAS SAS, and that it had funded the purchase with its credit facility and term loans, all of which were fully repaid during fiscal 2008. Certainly we are always impressed when a company pays down or pays off its debt, and with GameStop there is no exception, we were very pleased that the company was able to fund the purchase of Micromania SAS with borrowings and repay those borrowings promptly.
What we are now wondering is, going forward, what is the plan to pay off the remaining $545.7 million in debt list on the company's books. At first glance we could not understand why the company continued to pay interest, $50.5 million in fiscal 2008, on loans that its Free Cash Flow, $790 million in fiscal 2008, would easily pay off.
However, once we looked a bit further, we found that the company spent $630.7 million during fiscal 2008 on Acquisitions, reducing the company's available Free Cash Flow from $4.71 per share to $0.95 per share.
We note that based on a recent close $23.89, the company has a trailing twelve month PE of 8.18, a Tangible Book value of $1.13 per share and Shareholder Equity of $13.71 per share, all of which should be pointing towards taking a position in the stock.
Yet we see no movement on the part of management to establish a plan to make the company debt free, or to start paying dividends.
Admittedly, dividends are way down the list for us when it comes to investment consideration, but when we encounter a financial statement like the company's, where acquisitions seem to be unplanned, and where no consideration could be found on the part of management for the state of the world economy, we happen to believe a little something something is in order for the common shareholder, and to us, dividends are what that little something something should be.
While we like the company over the very long term, it is our opinion that there is increased risk over the short-term, and since we believe in being well compensated for the risks we are willing to take, we have lowered our Buy Target from $32.50 to $15.00.
Wax
GameStop Corporation Worksheet 0109
Financial information contained in this report is based on the company's Form 10-K filing for fiscal year ending January 31, 2009, as filed with the Securities and Exchange Commission on April 1, 2009.
The Company
GameStop Corporation (NYSE: GME) is the world’s largest retailer of video game products and PC entertainment software, selling new and used video game hardware, video game software and accessories, as well as PC entertainment software, and related accessories and other merchandise. As of January 31, 2009, the company operated 6,207 stores in the United States, Australia, Canada and Europe, primarily under the names GameStop and EB Games.
In addition, the company operates the electronic commerce website www.gamestop.com and publishes Game Informer, the industry’s largest multi-platform video game magazine in the United States based on circulation, with approximately 3.5 million subscribers.
Segments
For fiscal year ended January 31, 2009, the company operated its business in the following segments: United States, Canada, Australia and Europe. Of their 6,207 stores, 4,331 stores are included in the United States segment and 325, 350 and 1,201 stores are included in the Canadian, Australian and European segments, respectively.
Each of the segments consists primarily of retail operations, with all stores engaged in the sale of new and used video game systems, software and accessories, referred to as Video Game Products, and PC entertainment software and related accessories. Used video game products provide a unique value proposition to the company's customers, and the company's purchasing of used video game products provides its customers with an opportunity to trade in their used video game products for store credits and apply those credits towards other merchandise, which in turn, increases stores sales.
The company's products are substantially the same regardless of geographic location, with the primary differences in merchandise carried being the timing of release of new products in the various segments. Stores in all segments are similar in size at an average of approximately 1,500 square feet, with corporate offices and one distribution facility housed in a 510,000 square foot facility in Grapevine, Texas.
Background
The company began operations in November 1996. In October 1999, the company was acquired by, and became a wholly-owned subsidiary of, Barnes and Noble, Inc. (NYSE: BKS). In February 2002, GameStop completed an initial public offering of its Class A common stock and was a majority-owned subsidiary of Barnes and Noble until November 2004 when Barnes and Noble distributed its holdings of outstanding GameStop Class B common stock to its stockholders.
In October 2005, GameStop acquired the operations of Electronics Boutique Holdings Corporation (EB), a 2,300-store video game retailer in the U.S. and 12 other countries, by merging its existing operations with EB under GameStop Corp.
In February 2007, all outstanding Class B common stock of the company was converted into Class A common stock of the company on a one-for-one basis and the company no longer had any Class B common stock. In March 2007, the company completed a two-for-one stock split of its Class A common stock and in January 2009, the company's Class A common stock traded on the New York Stock Exchange under the symbol GME.
In November 2008, GameStop France SAS, a wholly-owned subsidiary of the company, completed the acquisition of substantially all of the outstanding capital stock of SFMI Micromania SAS for $580.4 million, net of cash acquired. Micromania is a leading retailer of video and computer games in France with 332 locations, 328 of which were operating at the date of acquisition.
The company funded the transaction with cash on hand, funds drawn against its revolving credit facility totaling $275 million, and term loans totaling $150 million. As of January 2009, all amounts drawn against the revolving credit facility and the term loans have been repaid and the company’s operating results for the 52 weeks ended January 31, 2009 include 11 weeks of Micromania’s results.
Competition
The electronic game industry is intensely competitive and subject to rapid changes in consumer preferences and frequent new product introductions. In the U.S. the company competes with mass merchants and regional chains, including Wal-Mart Stores, Inc. (NYSE: WMT) and Target Corporation (NYSE: TGT).
The company also competes with product and consumer electronics stores, including Best Buy Co., Inc. (NYSE: BBY) and other video game and PC software specialty stores located in malls and other locations, as well as against toy retail chains, mail-order businesses, catalogs, direct sales by software publishers, and online retailers and game rental companies.
In addition, video games are available for sale and rental from many video stores, such as Movie Gallery, Inc. (Pink Sheets: MVGR.PK) and Blockbuster, Inc. (NYSE: BBI).
Competitors in Europe include Game Group plc (“Game Group”) and its subsidiaries, which operate in the United Kingdom, Ireland, Scandinavia, France, Spain and Portugal, and Media Markt, operating throughout Europe.
Canadian competitors include Wal-Mart, Best Buy and its subsidiary Future Shop, while the company's Australia competitors include Game Group, K-Mart, Target and JB HiFi stores.
Properties
All of the company's stores and most of its distribution facilities are leased. Leases typically provide for an initial lease term of three to ten years, plus renewal options. This arrangement gives the company the flexibility to pursue extension or relocation opportunities that arise from changing market conditions.
Management believes that as current leases expire the company will be able to obtain either renewals at present locations or leases for equivalent locations in the same area.
In addition, the company owns a 510,000 square foot facility in Grapevine, Texas, which houses their corporate headquarters and certain of distribution operations.
The company also owns an additional 65,000 square foot building at the Grapevine, Texas location which is currently being used for refurbishing operations.
Additionally, the company also owns an 80,000 square foot distribution facility in Arlov, Sweden, a 119,000 square foot distribution facility in Brampton, Ontario, Canada, a 120,000 square foot distribution facility in Milan, Italy, a 67,000 square foot distribution facility in Memmingen, Germany, and a 70,000 square foot distribution facility in Pinkenba, Queensland, Australia.
Legal Proceedings
On February 14, 2005, and as amended, Steve Strickland, as personal representative of the Estate of Arnold Strickland, deceased, Henry Mealer, as personal representative of the Estate of Ace Mealer, deceased, and Willie Crump, as personal representative of the Estate of James Crump, deceased, filed a wrongful death lawsuit against GameStop, Sony, Take-Two Interactive, Rock Star Games and Wal-Mart (collectively, the “Defendants”) and Devin Moore, alleging that defendants’ actions in designing, manufacturing, marketing and supplying defendant Moore with violent video games were negligent and contributed to defendant Moore killing Arnold Strickland, Ace Mealer and James Crump. Moore was found guilty of capital murder in a criminal trial and was sentenced to death in August 2005.
Plaintiffs’ counsel has named a new expert, a psychologist who testified at the criminal trial on behalf of the criminal defendant, who will opine, if allowed, that violent video games were a substantial factor in causing the murders. This same testimony from this same expert was excluded in the criminal trial from the same judge hearing this case. The testimony of plaintiffs’ psychologist expert was heard by the Court on October 30, 2008, and the motion to exclude that testimony was argued on December 12, 2008. The ruling on this motion will have an effect on whether the case is able to proceed.
The company is currently awaiting a ruling. There is no current trial date. The company does not believe there is sufficient information to estimate the amount of the possible loss, if any, resulting from the lawsuit.
Management
Management information contained in this report is based on the company's Form DEF14A filing, as filed with the Securities and Exchange Commission on May 22, 2009.
The Board of Directors consists of eleven directors, broken into three classes as directed by the company's certificate of incorporation, with the term of each class of director being three years.
In addition, the certificate of incorporation provides that the authorized number of directors may be changed only by resolution of the Board of Directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors.
Perquisites
The company does not have a formal program providing perquisites to its executive officers. Mr. DeMatteo (CEO), Mr. Fontaine (Executive Chairman), Mr. Raines (COO), Mr. Calrson (Executive VP and CFO), and Mr. Bartel (Executive VP Merchandising and Marketing) are eligible to use the company plane for personal use.
Mr. Morgan was eligible to use the plane until his resignation effective May 2, 2008.
Mr. DeMatteo, Mr. Fontaine, and Mr. Carlson occasionally use the plane for personal use and reimburse the Company for costs in accordance with IRS guidelines. Amounts disclosed for the personal use of the company plane represent actual incremental costs to operate the plane in excess of the amounts reimbursed in accordance with IRS guidelines.
In fiscal 2008, these amounts totaled $55,202, $43,743 and $4,684 for Mr. DeMatteo, Mr. Fontaine, and Mr. Carlson, respectively, and in fiscal 2007 these amounts totaled $75,559, $62,834 and $12,040 for Mr. Fontaine, Mr. DeMatteo and Mr. Morgan, respectively.
None of the named executive officers receives any other compensation or benefits which would be defined as perquisites.
Independent Registered Accounting Firm
The firm of BDO Seidman, LLP is the independent registered public accounting firm for the company.
The independent accountants examine annual financial statements and provide other permissible non-audit and tax-related services for the company. The company and the audit committee have considered whether the non-audit services provided by BDO Seidman are compatible with maintaining the independence of BDO Seidman in its audit of the company and are not considered prohibited services under the Sarbanes-Oxley Act of 2002.
Audit Fees. In fiscal 2008, the professional services of BDO Seidman totaled $2,756,740 for the audit of the company’s annual financial statements, for reviews of the company’s financial statements included in the company’s quarterly reports on Form 10-Q filed with the SEC, audit-related consultation concerning financial accounting and reporting standards and for the audit of the company’s internal control over financial reporting.
Included in the fiscal 2008 fees were $275,048 of non-recurring audit charges related to the Micromania acquisition.
In fiscal 2007, the professional services of BDO Seidman totaled $2,128,511 for the audit of the Company’s annual financial statements, for reviews of the Company’s financial statements included in the Company’s quarterly reports on Form 10-Q filed with the SEC, audit-related consultation concerning financial accounting and reporting standards and for the audit of the Company’s internal control over financial reporting.
Audit-Related Fees. In fiscal 2008 and fiscal 2007, the Company paid BDO Seidman $25,000 and $31,000, respectively, for services in respect of employee benefit plan audits.
Tax Fees. In fiscal 2008, the Company paid BDO Seidman $67,600 for tax-related services. In fiscal 2007, the Company paid BDO Seidman $207,076 for tax-related services. Tax-related services included professional services rendered for tax compliance, tax advice and tax planning.
All Other Fees. The Company did not pay BDO Seidman any other fees in fiscal 2008 or fiscal 2007.
Pre-approval Policies and Procedures. The audit committee charter adopted by the Board of Directors of the company requires that, among other things, the audit committee pre-approve the rendering by the company’s independent auditor of all audit and permissible non-audit services. Accordingly, as part of its policies and procedures, the audit committee considers and pre-approves any such audit and permissible non-audit services on a case-by-case basis. The audit committee approved all of the services provided by BDO Seidman referred to in this report.
Investment Thoughts
The stock is on the Wax Ink Watch List with a Reasonable Value Estimate of $65.00, a Buy Target of $32.50, a First Sell Target of $63.37, and a Close Target of $68.60, based on a five (5) year hold.
For fiscal 2009 while the current consensus for earnings growth is 12%, we believe that due to the current world economic malaise, earnings will decline approximately 15%.
In addition, we note that of the company's $4.52 billion in Total Assets, almost 47% is made up of Goodwill and Intangibles, which to us is the same thing as saying ketchup makes good soup. We also note that the company paid Specail Income Charges of $6.9 million during fiscal 2008.
The company touted in its 10-K filing that it had purchased French company Micromania SAS SAS, and that it had funded the purchase with its credit facility and term loans, all of which were fully repaid during fiscal 2008. Certainly we are always impressed when a company pays down or pays off its debt, and with GameStop there is no exception, we were very pleased that the company was able to fund the purchase of Micromania SAS with borrowings and repay those borrowings promptly.
What we are now wondering is, going forward, what is the plan to pay off the remaining $545.7 million in debt list on the company's books. At first glance we could not understand why the company continued to pay interest, $50.5 million in fiscal 2008, on loans that its Free Cash Flow, $790 million in fiscal 2008, would easily pay off.
However, once we looked a bit further, we found that the company spent $630.7 million during fiscal 2008 on Acquisitions, reducing the company's available Free Cash Flow from $4.71 per share to $0.95 per share.
We note that based on a recent close $23.89, the company has a trailing twelve month PE of 8.18, a Tangible Book value of $1.13 per share and Shareholder Equity of $13.71 per share, all of which should be pointing towards taking a position in the stock.
Yet we see no movement on the part of management to establish a plan to make the company debt free, or to start paying dividends.
Admittedly, dividends are way down the list for us when it comes to investment consideration, but when we encounter a financial statement like the company's, where acquisitions seem to be unplanned, and where no consideration could be found on the part of management for the state of the world economy, we happen to believe a little something something is in order for the common shareholder, and to us, dividends are what that little something something should be.
While we like the company over the very long term, it is our opinion that there is increased risk over the short-term, and since we believe in being well compensated for the risks we are willing to take, we have lowered our Buy Target from $32.50 to $15.00.
Wax
GameStop Corporation Worksheet 0109
Arkansas Best Corporation - A Wax Ink Raw Value Report
How It Got Here
Financial information contained in this report is based on the company's Form 10-K filing for fiscal year ending December 31, 2008, as filed with the Securities and Exchange Commission on February 20, 2009.
The Company
Arkansas Best Corporation (Nasdaq: ABFS), a Delaware corporation, is a holding company engaged through its subsidiaries primarily in motor carrier freight transportation. The company’s principal operations are conducted through ABF Freight System, Inc. and other affiliated subsidiaries of the company.
Headquartered in Fort Smith, Arkansas, ABF is the largest subsidiary of the company, accounting for 96% of the company’s consolidated revenues for 2008. The company is one of North America’s largest LTL motor carriers, providing direct service to more than 98% of U.S. cities having a population of 30,000 or more, as well as interstate and intrastate direct service to more than 41,000 communities through 286 service centers in all 50 states, Canada, Guam, Puerto Rico and the U.S. Virgin Islands.
Through arrangements with trucking companies in Mexico, the company provides motor carrier services to customers in that country as well.
Background
The company was publicly owned from 1966 until 1988, when it was acquired in a leveraged buyout by a corporation organized by Kelso & Company, L.P. In 1992 the company completed a public offering of its common stock, par value $.01. The company also repurchased substantially all of the remaining shares of common stock beneficially owned by Kelso, thus ending Kelso’s investment in the company.
In 1993 the company completed a public offering of 1,495,000 shares of $2.875 Series A Cumulative Convertible Exchangeable Preferred Stock. The company’s Preferred Stock was traded on The Nasdaq National Market under the symbol “ABFSP.” On July 10, 2000, the company purchased 105,000 shares of its Preferred Stock at $37.375 per share, for a total cost of $3.9 million. All of the shares purchased were retired.
On August 13, 2001, the company announced the call for redemption of the 1,390,000 shares of Preferred Stock that remained outstanding. At the end of the extended redemption period on September 14, 2001, 1,382,650 shares of the Preferred Stock were converted to 3,511,439 shares of Common Stock.
The remaining 7,350 shares of Preferred Stock were redeemed at the redemption price of $50.58 per share for a total cost of $0.4 million. The company delisted its Preferred Stock from trading on The Nasdaq National Market on September 12, 2001.
In 1995, pursuant to a tender offer, a wholly owned subsidiary of the company purchased the outstanding shares of common stock of WorldWay Corporation, for a total purchase price of approximately $76.0 million. WorldWay was a publicly held company engaged through its subsidiaries in motor carrier freight transportation.
In 1999, the company acquired 2,457,000 shares of Treadco, Inc. common stock for $23.7 million via a cash tender offer pursuant to a definitive merger agreement. As a result of the transaction, Treadco became a wholly owned subsidiary of the company. On September 13, 2000, Treadco entered into a joint venture agreement with The Goodyear Tire and Rubber Company, Inc. (NYSE: GT) to contribute its business to a new limited liability company called Wingfoot Commercial Tire Systems, LLC. On April 28, 2003, the company sold its 19.0% ownership interest in Wingfoot to Goodyear for $71.3 million.
In 2001, the company sold the stock of G.I. Trucking Company, a wholly owned subsidiary of the company acquired as part of the WorldWay transaction, for $40.5 million to a company formed by the senior executives of G.I. Trucking Company and Estes Express Lines.
In 2003, Clipper Exxpress Company, a wholly owned subsidiary of the company acquired in 1994, sold all customer and vendor lists related to Clipper’s less-than-truckload (LTL) freight business to Hercules Forwarding, Inc. of Vernon, California, for $2.7 million. With this sale, Clipper exited the LTL business.
On June 15, 2006, the company sold Clipper to a division of Wheels Group for $21.5 million. With this sale, the company exited the intermodal transportation business.
The company offers national, inter-regional and regional transportation of general commodities through standard, expedited and guaranteed LTL services. General commodities include all freight except hazardous waste, dangerous explosives, commodities of exceptionally high value and commodities in bulk. The company’s shipments of general commodities differ from shipments of bulk raw materials, which are commonly transported by railroad, truckload tank car, pipeline and water carrier.
General commodities transported by the company include, among other things, food, textiles, apparel, furniture, appliances, chemicals, non-bulk petroleum products, rubber, plastics, metal and metal products, wood, glass, automotive parts, machinery and miscellaneous manufactured products.
During the year ended December 31, 2008, no single customer accounted for more than 3.0% of company revenues, while the ten largest customers accounted for 7.2% of company revenues.
LTL Motor Carrier Operations
The company’s LTL (Less-Than-Truckload) motor carrier operations are conducted through ABF; ABF Freight System (B.C.), Ltd.; ABF Freight System Canada, Ltd.; ABF Cartage, Inc.; and Land-Marine Cargo, Inc.
LTL carriers service shipping customers by transporting a wide variety of large and small shipments to geographically dispersed destinations. Typically, shipments are picked up at customers’ places of business and consolidated at a local terminal. Shipments are consolidated by destination for transportation by intercity units to their destination cities or to distribution centers. At distribution centers, shipments from various terminals can be reconsolidated for other distribution centers or, more typically, local terminals.
Once delivered to a local terminal, a shipment is delivered to the customer by local trucks operating from the terminal. In some cases, when one large shipment or a sufficient number of different shipments at one origin terminal are going to a common destination, they can be combined to make a full trailer load. A trailer is then dispatched to that destination without rehandling.
In addition to the traditional long-haul model, the company has implemented a regional network to facilitate its customers’ next-day and second-day delivery needs.
Development and expansion of the regional network required added labor flexibility, strategically positioned freight exchange points and increased door capacity at a number of key locations.
Through a multi-phased program, ABF’s regional network now covers the eastern two-thirds of the United States. Marketing of the regional initiative was initiated in August 2006 in the East Coast states and in January 2007 in the South and Central regions. Further operational changes, which were implemented in August 2008 and marketed beginning in September 2008, reduced transit times in the regional network and in certain of ABF’s long-haul lanes.
The expansion of the regional network to the Western region of the United States may be implemented in 2009.
Competition, Pricing and Industry Factors
The trucking industry is highly competitive. The company’s LTL motor carrier subsidiaries actively compete for freight business with other national, regional and local motor carriers and, to a lesser extent, with private carriage, freight forwarders, railroads and airlines. Competition is based primarily on personal relationships, price and service.
Competition for freight revenue, however, has resulted in discounting which effectively reduces prices paid by shippers. In an effort to maintain and improve its market share, the company’s LTL motor carrier subsidiaries offer and negotiate various discounts.
The company charges a fuel surcharge based upon changes in diesel fuel prices compared to a national index. Throughout 2008, the fuel surcharge mechanism continued to have strong market acceptance among their customers, although certain nonstandard arrangements with some of the company’s customers have limited the amount of fuel surcharge recovered.
The trucking industry, including the company’s LTL motor carrier subsidiaries, is directly affected by the state of the residential and commercial construction, manufacturing and retail sectors of the North American economy. The trucking industry faces rising costs including government regulations on safety, equipment design and maintenance, driver utilization and fuel economy. The trucking industry is dependent upon the availability of adequate fuel supplies.
The company has not experienced a lack of available fuel but could be adversely impacted if a fuel shortage were to develop. In addition, seasonal fluctuations also affect tonnage to be transported. Freight shipments, operating costs and earnings also are affected adversely by inclement weather conditions.
The company competes with nonunion and union LTL carriers. Competitors include YRC Worldwide, Inc. (Nasdaq: YRCW), FedEx Corporation (NYSE: FDX), United Parcel Service, Inc. (NYSE: UPS), Con-way, Inc. (NYSE; CNW), Old Dominion Freight Line, Inc. (Nasdaq: ODFl), SAIA, Inc. (Nasdaq: SAIA), and a Canadian company, Vitran Corporation, Inc. (Nasdaq: VTNC).
The final hours of service rules regulating driving time for commercial truck drivers, announced by the U.S. Department of Transportation (“DOT”) in April 2003, became effective in January 2009. The rules, which were implemented by the company in January 2004, allow a driver to drive up to 11 hours within a 14-hour nonextendable window from the start of the workday, following at least 10 consecutive hours off duty. The hours of service rules have been challenged in federal court, and future modifications to the rules, if any, may impact the company’s operating practices.
The operational impact of these rules on the company's over-the-road line haul relay network has been to provide modest opportunity to increase driver and equipment utilization and improve transit times. The rules also have allowed LTL carriers, such as ABF, to adjust their over-the-road line haul relay network to take advantage of the 11 hours of drive time during a tour of duty.
Impacts on the truckload industry have included a decline in driver utilization and flexibility and, as a result, truckload carriers have increased charges for stop-off and detention services, making LTL carriers somewhat more competitive on many larger shipments.
Insurance, Safety and Security
Generally, claims exposure in the motor carrier industry consists of cargo loss and damage, third-party casualty and workers’ compensation. The company’s motor carrier subsidiaries are effectively self-insured for the first $1.0 million of each cargo loss, $1.0 million of each workers’ compensation loss and generally $1.0 million of each third-party casualty loss. The company maintains insurance which it believes is adequate to cover losses in excess of such self-insured amounts.
However, the company has experienced situations where excess insurance carriers have become insolvent. The company pays assessments and fees to state guaranty funds in states where it has workers’ compensation self-insurance authority. In some of these states, depending on each state’s rules, the guaranty funds may pay excess claims if the insurer cannot due to insolvency.
There can be no certainty of the solvency of individual state guaranty funds. The company has been able to obtain what it believes to be adequate coverage for 2009 and is not aware of problems in the foreseeable future which would significantly impair its ability to obtain adequate coverage at market rates for its motor carrier operations.
Since 2001, the company has been subject to cargo security and transportation regulations issued by the Transportation Security Administration. Since 2002, the company has been subject to regulations issued by the Department of Homeland Security. The company is not able to accurately predict how past or future events
will affect government regulations and/or the transportation industry, and believes that any additional security measures that may be required by future regulations could result in additional costs; however, other carriers would be similarly affected.
Employees
As of December 31, 2008, athe company had a total of 10,512 active employees. Employee compensation and related costs are the largest components of the company’s operating expenses. In 2008, such costs amounted to approximately 60% of company revenues. Approximately 75% of the company’s employees are covered under a collective bargaining agreement with the International Brotherhood of Teamsters.
The company’s current five-year agreement with the International Brotherhood of Teamsters expires on March 31, 2013, with the current agreement providing for compounded annual contractual wage and benefit increases of approximately 4%, subject to wage rate cost-of-living adjustments, which includes company contributions to various multi-employer plans maintained for the benefit of employees who are members of the International Brotherhood of Teamsters.
Amendments to the Employee Retirement Income Security Act of 1974 (“ERISA”), pursuant to the Multi-employer Pension Plan Amendments Act of 1980 (the “MPPA Act”), substantially expanded the potential liabilities of employers who participate in such plans. Under ERISA, as amended by the MPPA Act, an employer who contributes to a multi-employer pension plan and the members of such employer’s controlled group are jointly and severally liable for their share of the plan’s unfunded vested liabilities in the event the employer ceases to have an obligation to contribute to the plan or substantially reduces its contributions to the plan, in the event of plan termination or withdrawal by the company from the multi-employer plans for example.
Three of the largest LTL carriers are unionized and generally pay comparable amounts for wages and benefits. However, certain unionized competitors of the company were recently granted wage concessions which could effectively lower their cost structures beginning in 2009 and as a result may potentially increase pricing competition in the LTL market.
Union companies typically have similar wage costs and significantly higher fringe benefit costs compared to nonunion companies. The Company believes that union companies also experience lower employee turnover, higher productivity, lower loss and damage claims and lower accident rates compared to some non-union firms.
Due to its national reputation, its working conditions and its wages and benefits, the company has not historically experienced any significant long-term difficulty in attracting or retaining qualified employees, although short-term difficulties have been encountered in certain situations.
Investment Thoughts
The stock is on the Wax Ink watch list, with a Reasonable Value Estimate of $102, a Buy Target of $51, a First Sell Target of $99, and a Close Target of $107. Going forward, we are projecting an approximate 60% decline in our Reasonable Value Estimate for 2009 based on a projected decline in Net Operating Profits.
With a recent close of $26.57, the stock is currently carrying a PE of 5.89 based on the $4.51 per share in earnings the company generated in 2008.
In addition to keeping Debt low at $0.66 per share and Cash at a reasonable level of $3.99 per share, management was able to generate a Return On Invested Capital of more than 23%, increase Free Cash Flow to $5.22 per share, and maintain Sharehold Equity at close to $25 per share, while keeping Tangible Book Value at just above $22.
In our opinion, these are outstanding achievements for which management should be commended, especially when considering that the economy during the last four months of 2008 went straight into the proverbial crapper.
While be believe that a reasonable entry point for this stock is at or about $39, we are also aware that the general economy is still near collapse. We do not believe for one second, what the Federal Reserve and the Treasury Secretary are saying, that the economy is "on the mend".
Instead, we believe that the economy will not start to improve until sometime in mid to late 2011.
Admittedly, there will be bull runs amid the current bear market, but we are anticipating that over the coming months, new lows will be tested in the general markets and as such, it is our feeling that a more reasonable entry point for this stock is between $19 and $21.
Wax
Arkansas Best Corporation Worksheet 1208
Financial information contained in this report is based on the company's Form 10-K filing for fiscal year ending December 31, 2008, as filed with the Securities and Exchange Commission on February 20, 2009.
The Company
Arkansas Best Corporation (Nasdaq: ABFS), a Delaware corporation, is a holding company engaged through its subsidiaries primarily in motor carrier freight transportation. The company’s principal operations are conducted through ABF Freight System, Inc. and other affiliated subsidiaries of the company.
Headquartered in Fort Smith, Arkansas, ABF is the largest subsidiary of the company, accounting for 96% of the company’s consolidated revenues for 2008. The company is one of North America’s largest LTL motor carriers, providing direct service to more than 98% of U.S. cities having a population of 30,000 or more, as well as interstate and intrastate direct service to more than 41,000 communities through 286 service centers in all 50 states, Canada, Guam, Puerto Rico and the U.S. Virgin Islands.
Through arrangements with trucking companies in Mexico, the company provides motor carrier services to customers in that country as well.
Background
The company was publicly owned from 1966 until 1988, when it was acquired in a leveraged buyout by a corporation organized by Kelso & Company, L.P. In 1992 the company completed a public offering of its common stock, par value $.01. The company also repurchased substantially all of the remaining shares of common stock beneficially owned by Kelso, thus ending Kelso’s investment in the company.
In 1993 the company completed a public offering of 1,495,000 shares of $2.875 Series A Cumulative Convertible Exchangeable Preferred Stock. The company’s Preferred Stock was traded on The Nasdaq National Market under the symbol “ABFSP.” On July 10, 2000, the company purchased 105,000 shares of its Preferred Stock at $37.375 per share, for a total cost of $3.9 million. All of the shares purchased were retired.
On August 13, 2001, the company announced the call for redemption of the 1,390,000 shares of Preferred Stock that remained outstanding. At the end of the extended redemption period on September 14, 2001, 1,382,650 shares of the Preferred Stock were converted to 3,511,439 shares of Common Stock.
The remaining 7,350 shares of Preferred Stock were redeemed at the redemption price of $50.58 per share for a total cost of $0.4 million. The company delisted its Preferred Stock from trading on The Nasdaq National Market on September 12, 2001.
In 1995, pursuant to a tender offer, a wholly owned subsidiary of the company purchased the outstanding shares of common stock of WorldWay Corporation, for a total purchase price of approximately $76.0 million. WorldWay was a publicly held company engaged through its subsidiaries in motor carrier freight transportation.
In 1999, the company acquired 2,457,000 shares of Treadco, Inc. common stock for $23.7 million via a cash tender offer pursuant to a definitive merger agreement. As a result of the transaction, Treadco became a wholly owned subsidiary of the company. On September 13, 2000, Treadco entered into a joint venture agreement with The Goodyear Tire and Rubber Company, Inc. (NYSE: GT) to contribute its business to a new limited liability company called Wingfoot Commercial Tire Systems, LLC. On April 28, 2003, the company sold its 19.0% ownership interest in Wingfoot to Goodyear for $71.3 million.
In 2001, the company sold the stock of G.I. Trucking Company, a wholly owned subsidiary of the company acquired as part of the WorldWay transaction, for $40.5 million to a company formed by the senior executives of G.I. Trucking Company and Estes Express Lines.
In 2003, Clipper Exxpress Company, a wholly owned subsidiary of the company acquired in 1994, sold all customer and vendor lists related to Clipper’s less-than-truckload (LTL) freight business to Hercules Forwarding, Inc. of Vernon, California, for $2.7 million. With this sale, Clipper exited the LTL business.
On June 15, 2006, the company sold Clipper to a division of Wheels Group for $21.5 million. With this sale, the company exited the intermodal transportation business.
The company offers national, inter-regional and regional transportation of general commodities through standard, expedited and guaranteed LTL services. General commodities include all freight except hazardous waste, dangerous explosives, commodities of exceptionally high value and commodities in bulk. The company’s shipments of general commodities differ from shipments of bulk raw materials, which are commonly transported by railroad, truckload tank car, pipeline and water carrier.
General commodities transported by the company include, among other things, food, textiles, apparel, furniture, appliances, chemicals, non-bulk petroleum products, rubber, plastics, metal and metal products, wood, glass, automotive parts, machinery and miscellaneous manufactured products.
During the year ended December 31, 2008, no single customer accounted for more than 3.0% of company revenues, while the ten largest customers accounted for 7.2% of company revenues.
LTL Motor Carrier Operations
The company’s LTL (Less-Than-Truckload) motor carrier operations are conducted through ABF; ABF Freight System (B.C.), Ltd.; ABF Freight System Canada, Ltd.; ABF Cartage, Inc.; and Land-Marine Cargo, Inc.
LTL carriers service shipping customers by transporting a wide variety of large and small shipments to geographically dispersed destinations. Typically, shipments are picked up at customers’ places of business and consolidated at a local terminal. Shipments are consolidated by destination for transportation by intercity units to their destination cities or to distribution centers. At distribution centers, shipments from various terminals can be reconsolidated for other distribution centers or, more typically, local terminals.
Once delivered to a local terminal, a shipment is delivered to the customer by local trucks operating from the terminal. In some cases, when one large shipment or a sufficient number of different shipments at one origin terminal are going to a common destination, they can be combined to make a full trailer load. A trailer is then dispatched to that destination without rehandling.
In addition to the traditional long-haul model, the company has implemented a regional network to facilitate its customers’ next-day and second-day delivery needs.
Development and expansion of the regional network required added labor flexibility, strategically positioned freight exchange points and increased door capacity at a number of key locations.
Through a multi-phased program, ABF’s regional network now covers the eastern two-thirds of the United States. Marketing of the regional initiative was initiated in August 2006 in the East Coast states and in January 2007 in the South and Central regions. Further operational changes, which were implemented in August 2008 and marketed beginning in September 2008, reduced transit times in the regional network and in certain of ABF’s long-haul lanes.
The expansion of the regional network to the Western region of the United States may be implemented in 2009.
Competition, Pricing and Industry Factors
The trucking industry is highly competitive. The company’s LTL motor carrier subsidiaries actively compete for freight business with other national, regional and local motor carriers and, to a lesser extent, with private carriage, freight forwarders, railroads and airlines. Competition is based primarily on personal relationships, price and service.
Competition for freight revenue, however, has resulted in discounting which effectively reduces prices paid by shippers. In an effort to maintain and improve its market share, the company’s LTL motor carrier subsidiaries offer and negotiate various discounts.
The company charges a fuel surcharge based upon changes in diesel fuel prices compared to a national index. Throughout 2008, the fuel surcharge mechanism continued to have strong market acceptance among their customers, although certain nonstandard arrangements with some of the company’s customers have limited the amount of fuel surcharge recovered.
The trucking industry, including the company’s LTL motor carrier subsidiaries, is directly affected by the state of the residential and commercial construction, manufacturing and retail sectors of the North American economy. The trucking industry faces rising costs including government regulations on safety, equipment design and maintenance, driver utilization and fuel economy. The trucking industry is dependent upon the availability of adequate fuel supplies.
The company has not experienced a lack of available fuel but could be adversely impacted if a fuel shortage were to develop. In addition, seasonal fluctuations also affect tonnage to be transported. Freight shipments, operating costs and earnings also are affected adversely by inclement weather conditions.
The company competes with nonunion and union LTL carriers. Competitors include YRC Worldwide, Inc. (Nasdaq: YRCW), FedEx Corporation (NYSE: FDX), United Parcel Service, Inc. (NYSE: UPS), Con-way, Inc. (NYSE; CNW), Old Dominion Freight Line, Inc. (Nasdaq: ODFl), SAIA, Inc. (Nasdaq: SAIA), and a Canadian company, Vitran Corporation, Inc. (Nasdaq: VTNC).
The final hours of service rules regulating driving time for commercial truck drivers, announced by the U.S. Department of Transportation (“DOT”) in April 2003, became effective in January 2009. The rules, which were implemented by the company in January 2004, allow a driver to drive up to 11 hours within a 14-hour nonextendable window from the start of the workday, following at least 10 consecutive hours off duty. The hours of service rules have been challenged in federal court, and future modifications to the rules, if any, may impact the company’s operating practices.
The operational impact of these rules on the company's over-the-road line haul relay network has been to provide modest opportunity to increase driver and equipment utilization and improve transit times. The rules also have allowed LTL carriers, such as ABF, to adjust their over-the-road line haul relay network to take advantage of the 11 hours of drive time during a tour of duty.
Impacts on the truckload industry have included a decline in driver utilization and flexibility and, as a result, truckload carriers have increased charges for stop-off and detention services, making LTL carriers somewhat more competitive on many larger shipments.
Insurance, Safety and Security
Generally, claims exposure in the motor carrier industry consists of cargo loss and damage, third-party casualty and workers’ compensation. The company’s motor carrier subsidiaries are effectively self-insured for the first $1.0 million of each cargo loss, $1.0 million of each workers’ compensation loss and generally $1.0 million of each third-party casualty loss. The company maintains insurance which it believes is adequate to cover losses in excess of such self-insured amounts.
However, the company has experienced situations where excess insurance carriers have become insolvent. The company pays assessments and fees to state guaranty funds in states where it has workers’ compensation self-insurance authority. In some of these states, depending on each state’s rules, the guaranty funds may pay excess claims if the insurer cannot due to insolvency.
There can be no certainty of the solvency of individual state guaranty funds. The company has been able to obtain what it believes to be adequate coverage for 2009 and is not aware of problems in the foreseeable future which would significantly impair its ability to obtain adequate coverage at market rates for its motor carrier operations.
Since 2001, the company has been subject to cargo security and transportation regulations issued by the Transportation Security Administration. Since 2002, the company has been subject to regulations issued by the Department of Homeland Security. The company is not able to accurately predict how past or future events
will affect government regulations and/or the transportation industry, and believes that any additional security measures that may be required by future regulations could result in additional costs; however, other carriers would be similarly affected.
Employees
As of December 31, 2008, athe company had a total of 10,512 active employees. Employee compensation and related costs are the largest components of the company’s operating expenses. In 2008, such costs amounted to approximately 60% of company revenues. Approximately 75% of the company’s employees are covered under a collective bargaining agreement with the International Brotherhood of Teamsters.
The company’s current five-year agreement with the International Brotherhood of Teamsters expires on March 31, 2013, with the current agreement providing for compounded annual contractual wage and benefit increases of approximately 4%, subject to wage rate cost-of-living adjustments, which includes company contributions to various multi-employer plans maintained for the benefit of employees who are members of the International Brotherhood of Teamsters.
Amendments to the Employee Retirement Income Security Act of 1974 (“ERISA”), pursuant to the Multi-employer Pension Plan Amendments Act of 1980 (the “MPPA Act”), substantially expanded the potential liabilities of employers who participate in such plans. Under ERISA, as amended by the MPPA Act, an employer who contributes to a multi-employer pension plan and the members of such employer’s controlled group are jointly and severally liable for their share of the plan’s unfunded vested liabilities in the event the employer ceases to have an obligation to contribute to the plan or substantially reduces its contributions to the plan, in the event of plan termination or withdrawal by the company from the multi-employer plans for example.
Three of the largest LTL carriers are unionized and generally pay comparable amounts for wages and benefits. However, certain unionized competitors of the company were recently granted wage concessions which could effectively lower their cost structures beginning in 2009 and as a result may potentially increase pricing competition in the LTL market.
Union companies typically have similar wage costs and significantly higher fringe benefit costs compared to nonunion companies. The Company believes that union companies also experience lower employee turnover, higher productivity, lower loss and damage claims and lower accident rates compared to some non-union firms.
Due to its national reputation, its working conditions and its wages and benefits, the company has not historically experienced any significant long-term difficulty in attracting or retaining qualified employees, although short-term difficulties have been encountered in certain situations.
Investment Thoughts
The stock is on the Wax Ink watch list, with a Reasonable Value Estimate of $102, a Buy Target of $51, a First Sell Target of $99, and a Close Target of $107. Going forward, we are projecting an approximate 60% decline in our Reasonable Value Estimate for 2009 based on a projected decline in Net Operating Profits.
With a recent close of $26.57, the stock is currently carrying a PE of 5.89 based on the $4.51 per share in earnings the company generated in 2008.
In addition to keeping Debt low at $0.66 per share and Cash at a reasonable level of $3.99 per share, management was able to generate a Return On Invested Capital of more than 23%, increase Free Cash Flow to $5.22 per share, and maintain Sharehold Equity at close to $25 per share, while keeping Tangible Book Value at just above $22.
In our opinion, these are outstanding achievements for which management should be commended, especially when considering that the economy during the last four months of 2008 went straight into the proverbial crapper.
While be believe that a reasonable entry point for this stock is at or about $39, we are also aware that the general economy is still near collapse. We do not believe for one second, what the Federal Reserve and the Treasury Secretary are saying, that the economy is "on the mend".
Instead, we believe that the economy will not start to improve until sometime in mid to late 2011.
Admittedly, there will be bull runs amid the current bear market, but we are anticipating that over the coming months, new lows will be tested in the general markets and as such, it is our feeling that a more reasonable entry point for this stock is between $19 and $21.
Wax
Arkansas Best Corporation Worksheet 1208
Adams Golf, Inc. - A Wax Ink Raw Value Report
"At Adams Golf our most significant profitability measure is EBITDA..."
How it Got Here
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on March 11, 2009.
Executive compensation information contained in this report is based on the company's latest Form DEF 14A filing as filed with the SEC on April 15, 2009.
In addition, according to a Confidential Treatment Order certain information contained in the 10-K filing was approved for public exclusion until April 15, 2009.
The Company
Adams Golf, Inc. (Nasdaq: ADGF) incorporated in 1987, designs, assembles, markets and distributes golf clubs for all skill levels, including Speedline drivers and hybrid fairway woods, Idea Tech a4 and a4 OS I-woods and irons, Idea a3 and a3 OS I-woods and irons, Idea Pro Gold I-woods and irons and Insight Tech a4 and a4 OS drivers and hybrid-fairway woods, RPM family drivers and fairway woods and irons, the Ovation family of drivers, fairway woods and irons, and Tom Watson signature wedges. In addition, under Women's Golf Unlimited the company distributes the Lady Fairway and Square 2 brands.
Irons
In September 2008, the company launched the Idea Tech a4 and a4OS hybrid irons sets and hybrid irons and integrated sets. The a4 irons feature six forged cavity back irons integrated with two graphite-shafted hybrids. The Tech a4 OS irons are offered in three different eight piece configurations—one for men, one for women, and one for seniors. All sets have seven hybrid irons integrated into the set. The company also offers the Tech a4 OS Women’s 13 piece designer set with a bag by Keri Golf. During the year ended December 31, 2008, the Irons segment accounted for 62.5% of the company's net sales.
Drivers
The company offers different driver models based on the shape, size and material used in the club head. Adams Golf's driver heads are made of titanium, alloy and/or carbon fiber, depending on the model. The shafts of the company's drivers are generally graphite. During the first quarter of 2009, the company launched the Speedline driver line. In February 2008, it introduced its new Insight XTD series of drivers. In 2008, the Drivers segment accounted for 12.3% of the company's net sales.
Fairway Woods
During the first quarter of 2009, the Company launched the Speedline hybrid fairway woods line. The Speedline hybrid-fairway woods feature the playability of a hybrid and the distance of a fairway wood. The Speedline hybrid-fairway woods are offered in standard and draw variations with a variety of lofts and shaft flexes.
In February 2008 it introduced the Insight XTD hybrid-fairway woods. The Company offers a variety of individual hybrids in the recently introduced Idea Tech a4, a4 OS, Idea a3, a3 OS, and Idea Pro Gold lines. During 2008, the Fairway Woods segment accounted for 24.4% of the company's net sales.
Wedges and Other
As a complement to the Idea irons, the company offers the Tom Watson signature wedges with a classic profile and the Puglielli wedges. Adams Golf also offers a line of putters, golf bags, hats and other accessories. In 2008, the Wedges and Other segment accounted for 0.8% of the company's net sales.
Competition
The company competes with Callaway Golf Company, Adidas-Salomon AG, Nike, Inc., Fortune Brands, Inc., and Karsten Assembly Company (PING).
Backing Up
On February 4, 2008, the company's stockholders approved a 1-4 reverse stock split effective February 15, 2008. In addition, the stockholders approved moving the company's stock listing from the OTC Bulletin Board to the NASDAQ.
Related Party Transactions
According to company SEC filings, the company does not have a specific set of policies and procedures with respect to the approval of related party transactions, relying instead on their Code of Conduct, found in their Employee Information Guide, which governs the company's decision-making with respect to related party transactions.
The company stated that in general, related party transactions were infrequent in nature and are always disclosed to the Board,and that if a related party transaction affects a specific Board member, that Board member will be recused from voting with respect to the approval of the related party transaction. In fiscal 2008, there were no related party transactions that were reviewed for approval.
It was disclosed that Ms. Cindy Adams-Herington, the daughter of Chairman Barney Adams, owns 40% of Plano Paper and Supply and her husband, Mr. Tom Herington owns 60% of Plano Paper and Supply, and that Chairman Barney Adams, is a lender to Plano Paper and Supply.
Additionally, in June 2005, Adams Golf, in an open bid process, selected Plano Paper and Supply as a supplier of shipping boxes for their products, and during fiscal 2008, made total purchases of $359,751 from Plano Paper and Supply. This supply arrangement is subject to change at any time based on then current market conditions and an ongoing competitive bidding process.
The dollars spent with Plano Paper and Supply during fiscal 2008, was 359.75% of EBITDA.
Relationships
Two adult children of Chairman Barney Adams are employees of Adams Golf. Mr. Edwin Adams serves as General Counsel, and for fiscal 2008 received an annual base salary of $134,000 and a performance bonus of $14,500 related to second half 2007 fiscal year performance.
In addition, Ms. Cindy Adams-Herington holds the position of Vice President, Advertising and Marketing and received an annual base salary in fiscal 2008 of $168,826 and a performance bonus of $40,977 related to second half 2007 fiscal year performance.
Neither Edwin Adams nor Cindy Herington has employment contracts or change of control arrangements with the company.
The dollars spent for Mr. Adams' children during fiscal 2008 was 302.83% of EBITDA.
Executive and Director Compensation
There really isn't much reason to delve into the Directors and Named Executive Officers specific compensation and/or stock options, since there is no effective way to change it. However, what can be highlighted are the dollars spent to compensate Senior Executives and Directors over and above their standard compensation. Additional compensation that appears to have kept the company on the path to mediocrity.
Included in the 2008 compensation package for Mr. Brewer, the CEO was $24,586 for automobile expenses; $1,436 for Group Term Life insurance premiums; $21,833 for health and welfare benefits; $2,430 of non-reimbursed business expenses; $18,446 for country club memberships and $9,200 of 401k matching contributions. The dollars spent for Mr. Brewer's "additional" compensation for fiscal 2008 was 77.93% of EBITDA.
Included in the 2008 compensation package for Mr. Eric Logan, Senior VP and CFO was $455 for Group Term Life insurance premiums; $24,013 for health and welfare benefits; and $10,379 of 401k matching contributions. The dollars spent for Mr. Logan's "additional" compensation for fiscal 2008 was 34.85% of EBITDA.
Included in the 2008 compensation for Mr. Adams, Chairman of the Board of Directors, was $21,630 in automobile expenses, $6,995 in group term life insurance premiums, $18,167 for health and welfare benefits, $426 of non-reimbursed business expenses and $7,356 of 401k company matching contributions. The dollars spent for Mr. Adams' additional compensation for fiscal 2008 was 54.57% of EBITDA.
It is noted that for fiscal 2009, the company's non-employee directors, agreed to a reduction in their annual cash retainer, reducing it from $40,000 to $20,000.
In addition, CEO Brewer agreed to a fiscal 2009 salary reduction from $425,000 to $360,000, and CFO Logan agreed to a 2009 salary reduction from $215,000 to $200,000. There was no notice that Mr. Adams would reduce his $254,000 2008 salary for fiscal 2009.
Reasonable Value
Adams Golf is on the Wax Ink Watch List with a Reasonable Value Estimate of $3.99, a Buy Target of $2.00, a First Sell Target of $3.89, and a Close Target of $4.21. Based on a review of the previously referenced company SEC filings, the Buy Target has been reduced from $2.00, to $0.77.
Investment Thoughts
Management prattles on about the company's most "significant profitability measure" being EBITDA. Yet for fiscal 2008 EBITDA was 0.11% of Sales, a decrease from fiscal 2007 of just over 5.5%. So instead of reigning in a portion of Executive/Director compensation, which would have added almost $168,000 to the company's EBITDA, management kept their collective hands in the till and got what they and the company had agreed upon.
Certainly, these things were agreed to well in advance, and there was nothing noted in the company filings that mentioned employee or employee benefit reductions. Yet for a company with a market cap of $20 million, whose main asset is $6 million in cash, $5.3 million less than at the end of fiscal 2007, it just seems that management would be doing all it could to hold on to the company's most important asset. Especially in light of the current economy difficulties the world is experiencing.
Additionally, considering that the game of golf is not exactly an inexpensive game, with a set of golf clubs selling for more than $1500, not to mention golf shoes, a bag for the clubs, green fees and cart rentals, it just seems reasonable the management would be considering the future.
But, nowhere did management provide any discussion about how the consumer, strapped for cash and carrying far too much debt, was going to afford the products the company makes. It is almost as if management's plan is to simply stick its head in the sand and hope for the best.
While this is troubling, it really isn't surprising considering the management seemingly had no idea where the overall economy was going, nor apparently, did management have any plan in place, should the overall economic enter a slowing period.
We believe that an investment in Adams Golf, Inc. would be extremely ill advised, with the probability of investment loss high, and the probability that management would have a clue, even higher.
Indeed Tom Watson plays with them, and so do Aaron Baddeley, Brittany Lang, and Brittany Lincicome. Which is quite a contrast considering the only thing management seems able to play with is themselves.
Wax
Adams Golf Worksheet 1208
How it Got Here
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on March 11, 2009.
Executive compensation information contained in this report is based on the company's latest Form DEF 14A filing as filed with the SEC on April 15, 2009.
In addition, according to a Confidential Treatment Order certain information contained in the 10-K filing was approved for public exclusion until April 15, 2009.
The Company
Adams Golf, Inc. (Nasdaq: ADGF) incorporated in 1987, designs, assembles, markets and distributes golf clubs for all skill levels, including Speedline drivers and hybrid fairway woods, Idea Tech a4 and a4 OS I-woods and irons, Idea a3 and a3 OS I-woods and irons, Idea Pro Gold I-woods and irons and Insight Tech a4 and a4 OS drivers and hybrid-fairway woods, RPM family drivers and fairway woods and irons, the Ovation family of drivers, fairway woods and irons, and Tom Watson signature wedges. In addition, under Women's Golf Unlimited the company distributes the Lady Fairway and Square 2 brands.
Irons
In September 2008, the company launched the Idea Tech a4 and a4OS hybrid irons sets and hybrid irons and integrated sets. The a4 irons feature six forged cavity back irons integrated with two graphite-shafted hybrids. The Tech a4 OS irons are offered in three different eight piece configurations—one for men, one for women, and one for seniors. All sets have seven hybrid irons integrated into the set. The company also offers the Tech a4 OS Women’s 13 piece designer set with a bag by Keri Golf. During the year ended December 31, 2008, the Irons segment accounted for 62.5% of the company's net sales.
Drivers
The company offers different driver models based on the shape, size and material used in the club head. Adams Golf's driver heads are made of titanium, alloy and/or carbon fiber, depending on the model. The shafts of the company's drivers are generally graphite. During the first quarter of 2009, the company launched the Speedline driver line. In February 2008, it introduced its new Insight XTD series of drivers. In 2008, the Drivers segment accounted for 12.3% of the company's net sales.
Fairway Woods
During the first quarter of 2009, the Company launched the Speedline hybrid fairway woods line. The Speedline hybrid-fairway woods feature the playability of a hybrid and the distance of a fairway wood. The Speedline hybrid-fairway woods are offered in standard and draw variations with a variety of lofts and shaft flexes.
In February 2008 it introduced the Insight XTD hybrid-fairway woods. The Company offers a variety of individual hybrids in the recently introduced Idea Tech a4, a4 OS, Idea a3, a3 OS, and Idea Pro Gold lines. During 2008, the Fairway Woods segment accounted for 24.4% of the company's net sales.
Wedges and Other
As a complement to the Idea irons, the company offers the Tom Watson signature wedges with a classic profile and the Puglielli wedges. Adams Golf also offers a line of putters, golf bags, hats and other accessories. In 2008, the Wedges and Other segment accounted for 0.8% of the company's net sales.
Competition
The company competes with Callaway Golf Company, Adidas-Salomon AG, Nike, Inc., Fortune Brands, Inc., and Karsten Assembly Company (PING).
Backing Up
On February 4, 2008, the company's stockholders approved a 1-4 reverse stock split effective February 15, 2008. In addition, the stockholders approved moving the company's stock listing from the OTC Bulletin Board to the NASDAQ.
Related Party Transactions
According to company SEC filings, the company does not have a specific set of policies and procedures with respect to the approval of related party transactions, relying instead on their Code of Conduct, found in their Employee Information Guide, which governs the company's decision-making with respect to related party transactions.
The company stated that in general, related party transactions were infrequent in nature and are always disclosed to the Board,and that if a related party transaction affects a specific Board member, that Board member will be recused from voting with respect to the approval of the related party transaction. In fiscal 2008, there were no related party transactions that were reviewed for approval.
It was disclosed that Ms. Cindy Adams-Herington, the daughter of Chairman Barney Adams, owns 40% of Plano Paper and Supply and her husband, Mr. Tom Herington owns 60% of Plano Paper and Supply, and that Chairman Barney Adams, is a lender to Plano Paper and Supply.
Additionally, in June 2005, Adams Golf, in an open bid process, selected Plano Paper and Supply as a supplier of shipping boxes for their products, and during fiscal 2008, made total purchases of $359,751 from Plano Paper and Supply. This supply arrangement is subject to change at any time based on then current market conditions and an ongoing competitive bidding process.
The dollars spent with Plano Paper and Supply during fiscal 2008, was 359.75% of EBITDA.
Relationships
Two adult children of Chairman Barney Adams are employees of Adams Golf. Mr. Edwin Adams serves as General Counsel, and for fiscal 2008 received an annual base salary of $134,000 and a performance bonus of $14,500 related to second half 2007 fiscal year performance.
In addition, Ms. Cindy Adams-Herington holds the position of Vice President, Advertising and Marketing and received an annual base salary in fiscal 2008 of $168,826 and a performance bonus of $40,977 related to second half 2007 fiscal year performance.
Neither Edwin Adams nor Cindy Herington has employment contracts or change of control arrangements with the company.
The dollars spent for Mr. Adams' children during fiscal 2008 was 302.83% of EBITDA.
Executive and Director Compensation
There really isn't much reason to delve into the Directors and Named Executive Officers specific compensation and/or stock options, since there is no effective way to change it. However, what can be highlighted are the dollars spent to compensate Senior Executives and Directors over and above their standard compensation. Additional compensation that appears to have kept the company on the path to mediocrity.
Included in the 2008 compensation package for Mr. Brewer, the CEO was $24,586 for automobile expenses; $1,436 for Group Term Life insurance premiums; $21,833 for health and welfare benefits; $2,430 of non-reimbursed business expenses; $18,446 for country club memberships and $9,200 of 401k matching contributions. The dollars spent for Mr. Brewer's "additional" compensation for fiscal 2008 was 77.93% of EBITDA.
Included in the 2008 compensation package for Mr. Eric Logan, Senior VP and CFO was $455 for Group Term Life insurance premiums; $24,013 for health and welfare benefits; and $10,379 of 401k matching contributions. The dollars spent for Mr. Logan's "additional" compensation for fiscal 2008 was 34.85% of EBITDA.
Included in the 2008 compensation for Mr. Adams, Chairman of the Board of Directors, was $21,630 in automobile expenses, $6,995 in group term life insurance premiums, $18,167 for health and welfare benefits, $426 of non-reimbursed business expenses and $7,356 of 401k company matching contributions. The dollars spent for Mr. Adams' additional compensation for fiscal 2008 was 54.57% of EBITDA.
It is noted that for fiscal 2009, the company's non-employee directors, agreed to a reduction in their annual cash retainer, reducing it from $40,000 to $20,000.
In addition, CEO Brewer agreed to a fiscal 2009 salary reduction from $425,000 to $360,000, and CFO Logan agreed to a 2009 salary reduction from $215,000 to $200,000. There was no notice that Mr. Adams would reduce his $254,000 2008 salary for fiscal 2009.
Reasonable Value
Adams Golf is on the Wax Ink Watch List with a Reasonable Value Estimate of $3.99, a Buy Target of $2.00, a First Sell Target of $3.89, and a Close Target of $4.21. Based on a review of the previously referenced company SEC filings, the Buy Target has been reduced from $2.00, to $0.77.
Investment Thoughts
Management prattles on about the company's most "significant profitability measure" being EBITDA. Yet for fiscal 2008 EBITDA was 0.11% of Sales, a decrease from fiscal 2007 of just over 5.5%. So instead of reigning in a portion of Executive/Director compensation, which would have added almost $168,000 to the company's EBITDA, management kept their collective hands in the till and got what they and the company had agreed upon.
Certainly, these things were agreed to well in advance, and there was nothing noted in the company filings that mentioned employee or employee benefit reductions. Yet for a company with a market cap of $20 million, whose main asset is $6 million in cash, $5.3 million less than at the end of fiscal 2007, it just seems that management would be doing all it could to hold on to the company's most important asset. Especially in light of the current economy difficulties the world is experiencing.
Additionally, considering that the game of golf is not exactly an inexpensive game, with a set of golf clubs selling for more than $1500, not to mention golf shoes, a bag for the clubs, green fees and cart rentals, it just seems reasonable the management would be considering the future.
But, nowhere did management provide any discussion about how the consumer, strapped for cash and carrying far too much debt, was going to afford the products the company makes. It is almost as if management's plan is to simply stick its head in the sand and hope for the best.
While this is troubling, it really isn't surprising considering the management seemingly had no idea where the overall economy was going, nor apparently, did management have any plan in place, should the overall economic enter a slowing period.
We believe that an investment in Adams Golf, Inc. would be extremely ill advised, with the probability of investment loss high, and the probability that management would have a clue, even higher.
Indeed Tom Watson plays with them, and so do Aaron Baddeley, Brittany Lang, and Brittany Lincicome. Which is quite a contrast considering the only thing management seems able to play with is themselves.
Wax
Adams Golf Worksheet 1208
Investing in Later
The Hype
Over the past several months, we continue to read article after article about why now is the best time to put money to work in the markets.
While we happen to agree that the over the longer term, the best place for your hard won investment dollars is in the markets, we also don't believe that the information gleaned from investing television shows like Fast Money and Mad Money will ever make the average investor a penny.
How many good investing ideas have you gotten from Neil Cavuto, Maria Bartiromo, Erin Burnett, or Larry Kudlow? Granted they all have a great screen presence, but collectively they seem to know less about investing than a hog knows about the hereafter!
The Need
For example, over the past couple of weeks, we have been keeping an extremely informal track of stocks that have been recommended by the financial press, as "today" or "now" or "immediate" or "must have", investment stocks.
But what intrigued us was not one investment television show or investment website that recommended buying these stocks "at once", explained the need for urgency.
Not only did they not explain the need for urgency, none of them even attempted to hazard a guess as to what they thought a fair value for any of the stocks might be.
In other words, all of these places say buy this stock now because their wizards said so. The next thing that happens is all of the wizards head for the can, leaving the average investor standing there with his hand in his pants and his mind in Arkansas. And all the while those hard won investment dollars are becoming fewer and fewer.
Investment Consideration
So we thought we would present a few of the most recommended "immediate purchase" stocks. But instead of asking yourself what investing in these stocks "now" will do for your portfolio, we thought it might be more interesting for you to ask yourself two simple questions. The first one is why this stock? and the second one is why this stock now?
Disclaimer
We do not currently own any the stocks mentioned in this article. Our investment thoughts accompany each stock reviewed. As we have said in the past, we do not now, nor have we ever, worked in the financial services industry.
Titanium Metals Corporation
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 26, 2009.
Titanium Metals Corporation (NYSE: TIE) is one of the world's leading producers of titanium melted and mill products, and according to the company they are the only titanium producer with major facilities in both the United States and Europe, the world's principal markets for the material.
Titanium is used in many products, commercial and military aircraft, cars and trucks, chemical processes, oil and gas processes, sporting goods, and power generation equipment.
The company has been around since 1950, incorporating in 1955.
Investment Thoughts
Based on a five (5) year hold, we have the company on our watch list with a Reasonable Value Estimate of $14.66, a Buy Target of $7.33, a First Sell Target of $14.30, and a Close Target of $15.48.
It should go without saying that we are impressed that at the end of fiscal 2008, the company had no Debt, just as we are all in favor of the $0.34 per share annual Dividend, and while it isn't quite where we would like it, Free Cash Flow at $1.11 is acceptable.
A recent close of $7.67 puts the trailing twelve month PE at about 7.5 as well as making the Price to Tangible Book 1.3, and the Price to Free Cash Flow 6.9, all of which are positive attributes.
Yet we are not interested in buying at this time because we believe the current run up in the markets is not sustainable. As a result, we think the price will move lower over the coming months.
Accordingly, we have adjusted our Buy Target from $7.33 to $3.95.
Titanium Metals Corporation Worksheet
Starbucks Corporation
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending September 28, 2008, as filed with the SEC on November 24, 2008.
Starbucks Corporation (Nasdaq: SBUX) was formed in 1985 and today, according to the company, is the world’s leading roaster and retailer of specialty coffee.
The stated company objective is to establish Starbucks as one of the most recognized and respected brands in the world. To achieve this goal, the company plans to continue disciplined expansion of its retail operations, to grow its specialty operations and to selectively pursue other opportunities by introducing new products and developing new channels of distribution.
Investment Thoughts
While we think expansion can be a tremendous driver for future growth, we think if the management of Starbucks continues down this path, the company will find itself in bankruptcy court next to Chrysler LLC with General Motors Corporation (NYSE: GM) following soon.
In short, we are not impressed with management. We do not believe that management had the faintest idea that the economy was going to fall off of cliff. Nor do we believe that management, having now watched the economy fall of a cliff, has the faintest understanding of what has happened, or what to do next.
Based on a five (5) year hold, we have the company on our watch list with a Reasonable Value Estimate of $17.53, a Buy Target of $8.76, a First Sell Target of $17.09, and a Close Target of $18.50.
We are curious just how management will be able to continue the company's strategy of expansion of its retail operations, given an anemic Free Cash Flow of $0.90, Debt of $1.70, and Earnings of $1.12.
To us, it makes better sense for management to shelve expansion plans, and use the $0.42 Dividend to reduce Debt, which would then allow management to increase company cash on hand.
Because we view management as gnerally slow to react to the changes in its markets, we believe that a much lower Buy Target is in order, and have lowered ours from $8.76 to $3.37.
Starbucks Corporation Worksheet
Activision Blizzard, Inc.
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 27, 2009.
We note that on July 9, 2008, a business combination by and among Activision, Inc., Sego Merger Corporation, a wholly-owned subsidiary of Activision, Inc., Vivendi S.A., VGAC LLC, a wholly-owned subsidiary of Vivendi and Vivendi Games, Inc., a wholly-owned subsidiary of VGAC was consummated. As a result of the consummation of the Business Combination, Activision, Inc. was renamed Activision Blizzard, Inc.
Activision Blizzard, Inc. (Nasdaq: ATVI) a worldwide pure-play online, personal computer, console, and hand-held game publisher.
Through Blizzard Entertainment, Inc., they are the leader in terms of subscriber base and revenues generated in the subscription-based massively multiplayer online role-playing game ("MMORPG") category. Blizzard internally develops and publishes PC-based computer games and maintains its proprietary online-game related service, Battle.net.
Through Activision Publishing, Inc., the company is a leading international publisher of interactive software products and peripherals. Activision develops and publishes video games on various consoles, hand-held platforms and the PC platform through internally developed franchises and license agreements. Activision currently offers games that operate on the Sony Computer Entertainment PlayStation 2, Sony PlayStation 3, Nintendo Co. Ltd. Wii, Microsoft Corporation Xbox 360 console systems, the Sony PlayStation Portable, the Nintendo Dual Screen hand-held devices, and the PC.
Investment Thoughts
They had it all, the right mix of game development folks, managers that understood the company's markets, and a market niche other company's would have sold their souls to have. So what did the wizards do? They took all of the parts and pieces of several company's and divisions and merged them into one cohesive company, worth, in our opinion, about a third of what it was worth prior to the consolidation.
In the end, we don't think it is going to matter. The company simply has a business that is almost impenetrable. While of course anything is possible, we simply don't see an economic benefit for other companies attempting to get into this business.
To us, we don't find the need to purchase this stock immediately. Based on a five year hold, we have the stock on our watch list with a Reasonable Value Estimate of $11.31, a Buy Target of $5.65, a First Sell Target of $11.03, and a Close Target of $11.94.
One of the results of the recent consolidation has been to increase Cost in Excess (Goodwill) by almost 600%, from $0.94 per share to $5.56 per share. We believe that given current worldwide economic conditions, the value of this excess is going to end up Impaired, and that the company will end up adjusting its income to offset these impaired amounts.
Since we further believe the vast majority of investors have the faintest idea that this possibility even exists, much less understands it, we have adjusted our Buy Target from $5.65 to $4.15.
Activision Blizzard Worksheet
Amazon.com Corporation
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on January 29, 2009.
In our opinion, Amazon.com, Inc. (Nasaq: AMZN) has done more to revolutionize the Internet than Google, Inc. (Nasdaq: GOOG) will ever do.
The company incorporated in 1994 in the state of Washington and reincorporated in 1996 in the state of Delaware, opened its doors to the World Wide Web in July 1995, completed its initial public offering in May 1997, and according to the company, offers the "Earth’s Biggest Selection."
Investment Thoughts
Our only regret is that we passed on adding the company to our portfolio in late 1997 and again in early 1998 because at the time, the company simply didn't make any money.
Today of course, they are an investment media darling, and while we love their website, we think their stock price is extremely over valued.
We have the stock on our watch list with a Reasonable Value Estimate of $37.22, a Buy Target of $18.66, a First Sell Target of $36.38, and a Close Target of $39.39.
The stock closed recently at $73.31, which we note exceeds the 29% annual earnings growth factor the analysts are calling for making the company's PEG ratio 1.44. In addition, that recent close also places the company's trailing twelve month PE ratio at about 41 times earnings.
All of this begs the question why would anyone want to invest in Amazon.com stock at these levels? Has anyone investing in this company considered what will happen should the company miss earnings estimates? And yet the average daily volume for the stock is just above 9 million shares and we have heard repeatedly over the past month or so that now is the time to buy Amazon.com.
Excuse us when we say hooey. The only folks putting money into the stock of this company are the brain dead, the toothless, and the folks that forget to pull up their Depends.
Nobody in their right mind should even consider an investment in Amazon.com at these levels unless their understanding of investing is to buy high and sell low.
Amazon.com Worksheet
And in the End
Well there you have it. Four stocks that the wizards are saying you need to buy today, this instant, now. The only thing the wizards failed to tell you is why you need to buy these stocks now and how they know that "now" is the right time.
Hopefully a wizard that can explain economic demand will come forward and enlighten the world. But we sorta doubt it.
Wax
Over the past several months, we continue to read article after article about why now is the best time to put money to work in the markets.
While we happen to agree that the over the longer term, the best place for your hard won investment dollars is in the markets, we also don't believe that the information gleaned from investing television shows like Fast Money and Mad Money will ever make the average investor a penny.
How many good investing ideas have you gotten from Neil Cavuto, Maria Bartiromo, Erin Burnett, or Larry Kudlow? Granted they all have a great screen presence, but collectively they seem to know less about investing than a hog knows about the hereafter!
The Need
For example, over the past couple of weeks, we have been keeping an extremely informal track of stocks that have been recommended by the financial press, as "today" or "now" or "immediate" or "must have", investment stocks.
But what intrigued us was not one investment television show or investment website that recommended buying these stocks "at once", explained the need for urgency.
Not only did they not explain the need for urgency, none of them even attempted to hazard a guess as to what they thought a fair value for any of the stocks might be.
In other words, all of these places say buy this stock now because their wizards said so. The next thing that happens is all of the wizards head for the can, leaving the average investor standing there with his hand in his pants and his mind in Arkansas. And all the while those hard won investment dollars are becoming fewer and fewer.
Investment Consideration
So we thought we would present a few of the most recommended "immediate purchase" stocks. But instead of asking yourself what investing in these stocks "now" will do for your portfolio, we thought it might be more interesting for you to ask yourself two simple questions. The first one is why this stock? and the second one is why this stock now?
Disclaimer
We do not currently own any the stocks mentioned in this article. Our investment thoughts accompany each stock reviewed. As we have said in the past, we do not now, nor have we ever, worked in the financial services industry.
Titanium Metals Corporation
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 26, 2009.
Titanium Metals Corporation (NYSE: TIE) is one of the world's leading producers of titanium melted and mill products, and according to the company they are the only titanium producer with major facilities in both the United States and Europe, the world's principal markets for the material.
Titanium is used in many products, commercial and military aircraft, cars and trucks, chemical processes, oil and gas processes, sporting goods, and power generation equipment.
The company has been around since 1950, incorporating in 1955.
Investment Thoughts
Based on a five (5) year hold, we have the company on our watch list with a Reasonable Value Estimate of $14.66, a Buy Target of $7.33, a First Sell Target of $14.30, and a Close Target of $15.48.
It should go without saying that we are impressed that at the end of fiscal 2008, the company had no Debt, just as we are all in favor of the $0.34 per share annual Dividend, and while it isn't quite where we would like it, Free Cash Flow at $1.11 is acceptable.
A recent close of $7.67 puts the trailing twelve month PE at about 7.5 as well as making the Price to Tangible Book 1.3, and the Price to Free Cash Flow 6.9, all of which are positive attributes.
Yet we are not interested in buying at this time because we believe the current run up in the markets is not sustainable. As a result, we think the price will move lower over the coming months.
Accordingly, we have adjusted our Buy Target from $7.33 to $3.95.
Titanium Metals Corporation Worksheet
Starbucks Corporation
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending September 28, 2008, as filed with the SEC on November 24, 2008.
Starbucks Corporation (Nasdaq: SBUX) was formed in 1985 and today, according to the company, is the world’s leading roaster and retailer of specialty coffee.
The stated company objective is to establish Starbucks as one of the most recognized and respected brands in the world. To achieve this goal, the company plans to continue disciplined expansion of its retail operations, to grow its specialty operations and to selectively pursue other opportunities by introducing new products and developing new channels of distribution.
Investment Thoughts
While we think expansion can be a tremendous driver for future growth, we think if the management of Starbucks continues down this path, the company will find itself in bankruptcy court next to Chrysler LLC with General Motors Corporation (NYSE: GM) following soon.
In short, we are not impressed with management. We do not believe that management had the faintest idea that the economy was going to fall off of cliff. Nor do we believe that management, having now watched the economy fall of a cliff, has the faintest understanding of what has happened, or what to do next.
Based on a five (5) year hold, we have the company on our watch list with a Reasonable Value Estimate of $17.53, a Buy Target of $8.76, a First Sell Target of $17.09, and a Close Target of $18.50.
We are curious just how management will be able to continue the company's strategy of expansion of its retail operations, given an anemic Free Cash Flow of $0.90, Debt of $1.70, and Earnings of $1.12.
To us, it makes better sense for management to shelve expansion plans, and use the $0.42 Dividend to reduce Debt, which would then allow management to increase company cash on hand.
Because we view management as gnerally slow to react to the changes in its markets, we believe that a much lower Buy Target is in order, and have lowered ours from $8.76 to $3.37.
Starbucks Corporation Worksheet
Activision Blizzard, Inc.
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 27, 2009.
We note that on July 9, 2008, a business combination by and among Activision, Inc., Sego Merger Corporation, a wholly-owned subsidiary of Activision, Inc., Vivendi S.A., VGAC LLC, a wholly-owned subsidiary of Vivendi and Vivendi Games, Inc., a wholly-owned subsidiary of VGAC was consummated. As a result of the consummation of the Business Combination, Activision, Inc. was renamed Activision Blizzard, Inc.
Activision Blizzard, Inc. (Nasdaq: ATVI) a worldwide pure-play online, personal computer, console, and hand-held game publisher.
Through Blizzard Entertainment, Inc., they are the leader in terms of subscriber base and revenues generated in the subscription-based massively multiplayer online role-playing game ("MMORPG") category. Blizzard internally develops and publishes PC-based computer games and maintains its proprietary online-game related service, Battle.net.
Through Activision Publishing, Inc., the company is a leading international publisher of interactive software products and peripherals. Activision develops and publishes video games on various consoles, hand-held platforms and the PC platform through internally developed franchises and license agreements. Activision currently offers games that operate on the Sony Computer Entertainment PlayStation 2, Sony PlayStation 3, Nintendo Co. Ltd. Wii, Microsoft Corporation Xbox 360 console systems, the Sony PlayStation Portable, the Nintendo Dual Screen hand-held devices, and the PC.
Investment Thoughts
They had it all, the right mix of game development folks, managers that understood the company's markets, and a market niche other company's would have sold their souls to have. So what did the wizards do? They took all of the parts and pieces of several company's and divisions and merged them into one cohesive company, worth, in our opinion, about a third of what it was worth prior to the consolidation.
In the end, we don't think it is going to matter. The company simply has a business that is almost impenetrable. While of course anything is possible, we simply don't see an economic benefit for other companies attempting to get into this business.
To us, we don't find the need to purchase this stock immediately. Based on a five year hold, we have the stock on our watch list with a Reasonable Value Estimate of $11.31, a Buy Target of $5.65, a First Sell Target of $11.03, and a Close Target of $11.94.
One of the results of the recent consolidation has been to increase Cost in Excess (Goodwill) by almost 600%, from $0.94 per share to $5.56 per share. We believe that given current worldwide economic conditions, the value of this excess is going to end up Impaired, and that the company will end up adjusting its income to offset these impaired amounts.
Since we further believe the vast majority of investors have the faintest idea that this possibility even exists, much less understands it, we have adjusted our Buy Target from $5.65 to $4.15.
Activision Blizzard Worksheet
Amazon.com Corporation
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on January 29, 2009.
In our opinion, Amazon.com, Inc. (Nasaq: AMZN) has done more to revolutionize the Internet than Google, Inc. (Nasdaq: GOOG) will ever do.
The company incorporated in 1994 in the state of Washington and reincorporated in 1996 in the state of Delaware, opened its doors to the World Wide Web in July 1995, completed its initial public offering in May 1997, and according to the company, offers the "Earth’s Biggest Selection."
Investment Thoughts
Our only regret is that we passed on adding the company to our portfolio in late 1997 and again in early 1998 because at the time, the company simply didn't make any money.
Today of course, they are an investment media darling, and while we love their website, we think their stock price is extremely over valued.
We have the stock on our watch list with a Reasonable Value Estimate of $37.22, a Buy Target of $18.66, a First Sell Target of $36.38, and a Close Target of $39.39.
The stock closed recently at $73.31, which we note exceeds the 29% annual earnings growth factor the analysts are calling for making the company's PEG ratio 1.44. In addition, that recent close also places the company's trailing twelve month PE ratio at about 41 times earnings.
All of this begs the question why would anyone want to invest in Amazon.com stock at these levels? Has anyone investing in this company considered what will happen should the company miss earnings estimates? And yet the average daily volume for the stock is just above 9 million shares and we have heard repeatedly over the past month or so that now is the time to buy Amazon.com.
Excuse us when we say hooey. The only folks putting money into the stock of this company are the brain dead, the toothless, and the folks that forget to pull up their Depends.
Nobody in their right mind should even consider an investment in Amazon.com at these levels unless their understanding of investing is to buy high and sell low.
Amazon.com Worksheet
And in the End
Well there you have it. Four stocks that the wizards are saying you need to buy today, this instant, now. The only thing the wizards failed to tell you is why you need to buy these stocks now and how they know that "now" is the right time.
Hopefully a wizard that can explain economic demand will come forward and enlighten the world. But we sorta doubt it.
Wax
Netflix, Inc. - A Wax Ink Raw Value Update
Company Thoughts
With more than 10 million subscribers, Netflix, Inc. (Nasdaq: NFLX) is the largest online movie rental subscription service in the United States, offering a variety of subscription plans, with no due dates, no late fees, no shipping fees and no pay-per-view fees. They provide subscribers access to over 100,000 DVD and Blu-ray titles plus more than 12,000 streaming content choices.
Not only is the company in the movie rental business, Wax Ink has discovered a very mysterious, "covert" side to the company. A side that perhaps management was completely unaware of, but, according to "wanna be" postal sleuth Norman Baccash, allegedly exists.
According to allegations made by realtor Norman Baccash, it seems the company, perhaps under cover of darkness perhaps not, attempted to save on postage by falsely certifying that the company's DVD mailers qualified as machinable under the mailing standards of the United States Postal Service and thereby avoiding $260 million in surcharges for non-machinable mail.
That the company would do this has apparently taken its toll on Mr. Baccash who is seeking monetary relief in the amount of three times the damages suffered by the United States, civil penalties of between $5,500 and $11,000 for each violation of the Act, a monetary award pursuant to the Act, injunctive relief and costs.
If Mr. Baccash can pull this off, he should be at least nominated for an Oscar.
More Company Thoughts
Additionally, in February 2009, a number of purported anti-trust class action suits were filed against the company and Walmart, Inc. (NYSE: WMT) alleging that Netflix and Wal-Mart entered into an agreement to divide the markets for sales and online rentals of DVDs in the United States, which resulted in higher Netflix subscription prices.
The complaints assert violation of federal and/or state antitrust laws and seek injunctive relief, costs (including attorneys’ fees) and damages in an unspecified amount. Attorneys' fees! Who would have thought?
There are some other lawsuits highlighted in the company's most recent SEC Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 25, 2009. Just scroll down to Note 5 in the Notes to Consolidated Financial Statements section of the filing for more information.
Investment Thoughts
We have the company on our watch list with a Reasonable Value Estimate of $39.00, a Buy Target of $19.50, a First Sell Target of $38.00, and a Close Target of $41. However, given the following reasons, we have lowered our Buy Target from $19.50 to $12.00.
While we were glad to see the company end fiscal 2008 with an almost 11% increase in Operating Revenue over fiscal 2007, there were a few things we found very troubling, especially considering today's economic climate.
The things we found most noteworthy were the company's almost 27% decline in Cash, its drop in Marketable Securities by almost 32%, the elimination of $132.5 million of Intangibles, the 25% increase in Operating Cash Flow year over year, as most importantly to us, the 400% drop in year over year Free Cash Flow.
To us, these are significant changes in financial health, and were we shareholders, which we are not, we would be very concerned.
But to show that our investment philosophy is shared by an extremely small group of investors, we note that the company's PE stood at 9 at the end of fiscal 2007, 13 at the end of fiscal 2008, and now with the current economic thud in full swing, we notice that the company's tailing twelve month PE is near 18.
Final Thoughts
While the company may earn its money renting make believe, we believe at current levels, an investment in this company will not any money make.
Wax
Buffalo Wild Wings - A Wax Ink Raw Value Update
Back in February, we did a small piece on Buffalo Wild Wings, Inc. (Nasdaq: BWLD). The post contained a bit of information about the company, and our worksheet. Now that the company has filed its SEC Form 10-K for fiscal 2008, we thought it would be a good time to update our worksheet on the company.
On the positive side, the company ended the year with $0 Debt, $34.5 million in Cash and Marketable Securities, and a 22% increase in year over year Sales. In addition, Free Cash Flow for fiscal 2008 was $2.07, compared with $1.40 for fiscal 2007, a 48% year over year increase.
On the negative side, the company's Working Capital Ratio declined by 58%, its Quick Ratio declined by 46%, and there was a negligible increase, about 5%, in Return on Invested Capital.
Accordingly we have adjusted our Reasonable Value Estimate for the stock to $35.32, setting our Buy Target at $17.66, our First Sell Target at $34.44, and our Close Target at $37.28.
However, because we believe that the greater economy has not yet seen the full impact of the current economic downturn, we think a lowered entry point for the stock is warranted. Accordingly, we have lowered our Buy Target from $17.66, to $12.24.
Like last year, we still think the PE is too high, ending fiscal 2008 at 17.44, down from 18.03 for fiscal 2007, and as we have said many times, once the PE for a stock climbs above 15, our interest wanes.
So enjoy a cold beer, a few spicy wings, and remember this. The poor guy looking in the mirror everyday...is you.
Molybdenum Companies - A Wax Ink Raw Value Report
Molybdenum. It is has been hailed as an antioxidant that prevents cancer by protecting cells from free radicals, said to be able to prevent anemia, gout, and dental cavities, not to mention it is supposed to be able to prevent sexual impotence.
Several weeks ago Wax Ink was commissioned to research companies in the Molybdenum business. Having heard the aforementioned claims, we decided, perhaps the prevention of gout would be a noble cause.
Molybdenum (Mo)
According to the U.S. Geological Survey, Molybdenum is a refractory metallic element used principally as an alloying agent in steel, cast iron, and super alloys to enhance hardenability, strength, toughness, and wear and corrosion resistance।
The material is an essential ingredient in steel alloys used in the energy industry, the aerospace industry, and the automobile industry because it strengthens steel, improves weldability, reduces brittleness, and increases steel's resistance to corrosion. It is one of the key components in catalysts used in the petro-chemical industry to reduce sulfur in gasoline and diesel fuel.
Molybdenum is recovered as a by-product of copper and tungsten mining operations and is prepared from the powder made by the hydrogen reduction of purified molybdic trioxide or ammonium molybdate.
Properties
The metal is silvery white, very hard, but is softer and more ductile than tungsten. It has a high elastic modulus, and only tungsten and tantalum, of the more readily available metals, have higher melting points. It is a valuable alloying agent, as it contributes to the hardenability and toughness of quenched and tempered steels. It also improves the strength of steel at high temperatures.
Industrial Uses
Molybdenum is used in certain nickel-based alloys, such as the "Hastelloys(R)" which are heat-resistant and corrosion-resistant to chemical solutions. Since Molybdenum oxidizes at elevated temperatures (+4750F), the metal has found recent application as electrodes for electrically heated glass furnaces and forehearths. In addition, the metal is used in nuclear energy applications and for missile and aircraft parts.
Molybdenum is also used as a catalyst in the refining of petroleum, aiding in the reduction of sulfur during the production of gasoline and diesel fuel. The metal has also found applications as a filament material in electronic and electrical applications, and is an essential trace element in plant nutrition.
Molybdenum sulfide is useful as a lubricant, especially at high temperatures where oils would decompose. Almost all ultra-high strength steels with minimum yield points up to 300,000 psi (lb/in.2) contain molybdenum in amounts from 0.25 to 8%.
Ecological Uses
Ecologically, molybdenum as a trace element is necessary for nitrogen fixation and other metabolic processes, and is an essential trace element in plant nutrition. Land that contain no measurable concentrations of molybdenum, are often barren, or able to produce little sustainable organic material.
Medical Uses
Molybdenum is a scarce mineral that is present in very small quantities in the human body. It is involved in many important biological processes, possibly including development of the nervous system, waste processing in the kidneys, and energy production in cells. There is some evidence to suggest that too little molybdenum in the diet may be responsible for some health problems, with Molybdenum currently used as a treatment in rare cases of inborn errors of metabolism (such as Wilson disease) in which the body can’t process copper.
Research will continue into the use of Molybdenum in cancer treatment if human trials continue to show that it can slow cancer growth. The material has already shown promise in animal trials in reducing the effects of certain cancer drugs on the heart and lungs.
The Molybdenum Industry
According to Yahoo Finance, there are 130 companies in the Steel and Iron Industry, 64 companies in the Copper Industry, 499 companies in the Industrial Metals and Minerals Industry, 50 companies in the Gold Industry, 8 companies in the Silver Industry, and 76 companies in the Non-Metallic Mineral Mining Industry.
Of those 827 companies, there are 109 companies that that produce Molybdenum.
Things to Consider
Molybdenum currently sells for about $9 per pound, sliding in the last quarter of 2008 from what was a relatively stable price of near $30 per pound.
Additionally, the largest production of U.S. Molybdenum comes primarily from three mines; the Henderson Mine in Colorado, owned and operated by Freeport-McMoran Copper and Gold, Inc., the Molycorp Questa Mine in New Mexico, owned and operted by Molycorp Minerals, LLC, a private company, and the Thompson Creek Mine in Idaho owned and operated by Thompson Creek Metals Company, Inc.
As an aside, the world's largest producer of Molybdenum is Codelco Corporation, a Chilean company that produced 27,200 metric tonnes in 2006.
Finally, it is important to consider that the vast majority of companies that mine Molybdenum, also mine other metals, such gold, silver, and copper. With few exceptions, most metals mining companies mine Molybdenum almost as an accident to their other mining operations.
Research Selection
Generally, the first rule that we follow at Wax Ink is we only research companies that are on our watch list, which currently consists of 2613 companies. With the exception of 24 companies, all of the companies on our watch list are domestic companies. We would like to be able to tell you that the reason we have so few foreign companies is the that their tax dollars are paid to the United States government, but the truth of the matter is we simply prefer companies whose auditors follow GAAP accounting methodology.
Researching the companies in the Molybdenum business proved to be quite difficult, since out of a total of 109 companies that produce Molybdenum, almost none of them were on our watch list because almost none of them, were domestic companies.
In the end, we decided to research only the companies in the Molybdenum business, whether domestic or foreign, whose stock was traded on either the New York Stock Exchange, the American Stock Exchange, or the Nasdaq . This criteria reduced that number of companies from 109 to 11.
The Companies
Augusta Resource Corporation - Industrial Metals and Minerals Industry
Vancouver, British Columbia
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on March 31, 2009.
Augusta Resource Corporation (AMEX: AZC) incorporated on January 14, 1937, is engaged in the exploration and development of mineral properties in Pima County, Arizona. Augusta’s property is in the development stage. As of December 31, 2008, the company’s property was non-productive and did not generate any revenues. During the year ended December 31, 2008, the company drilled 20 core holes. During 2008, the company completed groundwater monitoring well system around Rosemont project site.
Rosemont Copper Company (Rosemont) is the wholly owned subsidiary of the company. Augusta’s Rosemont property consists of approximately 15,000 acres. Rosemont is approximately 50 kilometers southeast of Tucson, Arizona.
Rosemont consists of copper/molybdenum/silver skarn deposit, as well as other exploration targets. During 2008, Augusta had mineral reserves containing 546 million tons grading 0.45% copper, 0.015% molybdenum and 0.12 ounces per tonsilver in sulfide ore, and 70 million tons at 0.17% copper in oxide ore.
Wax Ink Opinion
This one had a recent close of $1.65, which is $1.65 more than it's worth. Lots of potential and a website are fine, but at the end of the day, we prefer to invest in companies with proven management and long history of large profits. Since we found neither with this 72 year old company, we have to believe that like preventing gout, neither ever will exist.
Accordingly, based on the fundamental metrics we employ, we have no investment interest in this company at the present time.
Augusta Resource Raw Value Worksheet
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Freeport-McMoRan Copper and Gold, Inc. - Copper Industry
Phoenix, Arizona
Financial information contained in this report is based on the company's latest SEC Form10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 26, 2009.
Freeport-McMoRan Copper and Gold, Inc. (NYSE: FCX) through its wholly owned subsidiary, Phelps Dodge Corporation (Phelps Dodge) is a copper, gold, and molybdenum mining company.
The company’s portfolio of assets includes the Grasberg minerals district in Indonesia, which contains single recoverable copper reserve and the single gold reserve of any mine; significant mining operations in North and South America, and the Tenke Fungurume development project in the Democratic Republic of Congo (DRC).
As of December 31, 2008, consolidated recoverable proven and probable reserves totaled 102.0 billion pounds of copper, 40 million ounces of gold, 2.48 billion pounds of molybdenum, 266.6 million ounces of silver and 0.7 billion pounds of cobalt.
Approximately 35% of its copper reserves were in Indonesia, approximately 31% were in South America, approximately 28% were in North America and approximately 6% were in Africa. Approximately 96% of its gold reserves were in Indonesia, with its remaining gold reserves located in South America. The molybdenum reserves are primarily in North America (approximately 85%), with its remaining molybdenum reserves in South America.
The company's mining revenues during the year ended December 31, 2008, include sales of copper (approximately 76%), molybdenum (approximately 14%) and gold (approximately 7%).
It has five operating copper mines in North America, four in South America and the Grasberg minerals district in Indonesia. It also has one operating primary molybdenum mine in North America. During 2008, approximately 60 % of its consolidated copper production was from its Grasberg, Morenci and Cerro Verde mines, and more than half of its mined copper was sold in concentrate, approximately 27% as rod (principally from its North America operations) and approximately 19% as cathodes.
Also during 2008, approximately 55% of its consolidated molybdenum production was from the Henderson molybdenum mine and approximately 45% was produced as a by-product primarily at its North America copper mines.
The company also produces gold as a by-product at its copper mines, primarily at the Grasberg minerals district in Indonesia, which accounted for approximately 90% of its consolidated gold production during 2008.
In North America, the company has five operating copper mines: Morenci, Sierrita, Bagdad and Safford in Arizona, and Tyrone in New Mexico. In addition, the Chino mine in New Mexico was placed on care-and-maintenance status in December 2008.
All of these operations are wholly owned, except for Morenci, an unincorporated joint venture, in which the company owns an 85% undivided interest. In addition to copper, the Morenci, Sierrita and Bagdad mines produce molybdenum as a by-product.
In Indonesia, PT Freeport Indonesia operates the Grasberg minerals district. The company has joint venture agreements with Rio Tinto plc (Rio Tinto), an international mining company, with respect to a portion of its mining activities in Indonesia.
The company also owns 90.64% of PT Freeport Indonesia and the Government of Indonesia owns the remaining 9.36% interest.
The company's Grasberg minerals district also produces significant quantities of gold and silver as by-products. PT Freeport Indonesia also owns 25% of PT Smelting, a smelting and refining company in Gresik, Indonesia.
The company produces molybdenum at its wholly owned Henderson molybdenum mine in Colorado. Additionally, it owns the Climax molybdenum mine in Colorado.
In addition to its operating mines, the company has mines in development. In Indonesia, it developing its underground mines. In Africa, it holds an effective 57.75% interest in the Tenke Fungurume copper and cobalt concession in the DRC.
The North America copper mines include open-pit mining, sulfide ore concentrating, leaching and SX/EW operations, with a majority of the copper produced at the North America copper mines cast into copper rod by the company’s Rod and Refining operations.
The North America copper mines division includes Morenci and Sierrita as reportable segments. The Morenci open-pit mine, located in southeastern Arizona, primarily produces copper cathodes and copper concentrates. In addition to copper, the Morenci mine produces a small amount of molybdenum concentrates as a by-product.
The Sierrita open-pit mine, located in Pima County, Arizona, primarily produces copper cathodes, copper concentrates and copper sulfate. In addition to copper, the Sierrita mine produces molybdenum concentrate as a by-product.
Other mines include the company’s other operating southwestern U.S. copper mines, Bagdad, Safford and Tyrone. In addition to copper, the Bagdad mine produces molybdenum concentrate as a by-product.
Other mines also include the company’s southwestern United States copper mines that are on care-and-maintenance status, including Miami and Chino.
The company has four operating copper mines in South America-Cerro Verde in Peru, and Candelaria, Ojos del Salado and El Abra in Chile. These operations include open-pit and underground mining, sulfide ore concentrating, leaching and SX/EW operations.
The South America copper mines division includes Cerro Verde. The Cerro Verde open-pit copper mine, located near Arequipa, Peru, produces copper cathodes and copper concentrates. In addition to copper, the Cerro Verde mine produces molybdenum concentrate as a by-product.
In the first quarter of 2009, the company announced plans to temporarily curtail the molybdenum circuit at Cerro Verde.
Other mines include the company’s Chilean copper mines – Candelaria, Ojos del Salado and El Abra, which include open-pit and underground mining, sulfide ore concentrating, leaching and SX/EW operations. In addition to copper, the Candelaria and Ojos del Salado mines produce gold and silver as by-products.
Indonesia mining includes PT Freeport Indonesia’s Grasberg minerals district. PT Freeport Indonesia produces copper concentrates, which contain significant quantities of gold and silver.
Africa mining includes the Tenke Fungurume copper and cobalt mining concessions in the Katanga province of the DRC. Construction activities are well advanced and initial production is targeted during the second half of 2009. The initial project at Tenke Fungurume is based on mining and processing ore reserves approximating 119 million metric tons with average ore grades of 2.6 % copper and 0.35 % cobalt.
The Molybdenum segment is an integrated producer of molybdenum, with mining, sulfide ore concentrating, roasting and processing facilities that produce high-purity, molybdenum-based chemicals, molybdenum metal powder and metallurgical products, which are sold to customers around the world, and includes the wholly owned Henderson molybdenum mine in Colorado and related conversion facilities.
The Henderson underground mine produces high-purity, chemical-grade molybdenum concentrates, which are typically further processed into value-added molybdenum chemical products. This segment also includes a sales company that purchases and sells molybdenum from the Henderson mine, as well as from the company’s North and South America copper mines that produce molybdenum as a by-product.
The Rod and Refining segment consists of copper conversion facilities located in North America.
Atlantic Copper, the company’s wholly owned smelting unit in Spain, smelts and refines copper concentrates and markets refined copper and precious metals in slimes. PT Freeport Indonesia and the South America copper mines generally sell a portion of their concentrate and cathode (South America) production to Atlantic Copper.
Wax Ink Opinion
Based on a five year hold, we have the company on our watch list with a Reasonable Value Estimate of $89, a Buy Target of $45, a First Sell Target of $87.50, and a Close Target of $95. While we like the company's fiscal 2008 numbers, we note that there are a couple of things that give us pause.
First is the company's effective tax rate of 21.39%. While this may seem an insignificant thing, the average corporation in the United States has an effective tax rate of near 35%. So to us, a company with an effective tax rate that is almost 14% lower than the average, bears watching.
The other thing we think is worth watching is the company's Debt to EBITDA ratio, which for fiscal 2008 was 1.54. While not an issue at this point, should the world economy continue to falter, total debt at $22.99 per share may become more costly to service.
As stated by the company; "... a copper production is expected to be reduced by 400 million pounds in 2009 and 800 million pounds in 2010 and molybdenum production is expected to be reduced by 20 million pounds in 2009 and 40 million pounds in 2010, compared with our previously announced October 2008 estimated production for 2009 and 2010. Projected copper production is expected to be 3.9 billion pounds in 2009 and 3.8 billion pounds in 2010. Projected molybdenum production is expected to be 60 million pounds in both 2009 and 2010. The affected mine sites will be idling or reducing utilization of a portion of their equipment fleets in connection with these curtailments."
Given managment's outlook for 2009 and 2010, as well as the on-going litigation as described in the notes to the financial statements (Note 15) of the company's current SEC 10-K filing, we believe a lowered entry point for this stock is appropriate.
Accordingly, based on the fundamental metrics we employ, we have reduced our Buy Target from $45 to $17.50.
Freeport-McMoRan Raw Value Worksheet
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General Moly, Inc. - Industrial Metals and Minerals Industry
Lakewood, Colorado
Financial information contained in this report is based on the company's latest SEC Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 27, 2009.
General Moly, Inc. (AMEX: GMO), incorporated on November 23, 1925, is a development stage company engaged in the business of exploration, development and mining of properties primarily containing molybdenum.
The company’s primary asset is an 80% interest in the Mt. Hope Project (Mt. Hope Project), a primary molybdenum property, located in Eureka County, Nevada. The company owns interest in the Liberty Property (the Liberty Property), located in Nye County, Nevada.
In addition, the company owns other non-core properties and mineral rights. In February 2008, the company formed a joint venture with POS-Minerals Corporation (POS-Minerals), an affiliate of POSCO, a Korean steel company for the development of the Mt. Hope Project.
Effective January 1, 2008, the company contributed all of its interest in the assets related to the Mt. Hope Project, including the company’s lease of the Mt. Hope property, into a newly formed entity, Eureka Moly and entered into a joint venture for the development and operation of the Mt. Hope Project with POS-Minerals.
The Mt. Hope Project is owned and operated by Eureka Moly, which is a joint venture between the company and POS-Minerals. As of December 31, 2008, Eureka Moly had a 30-year renewable lease with Mount Hope Mines, Inc. (MHMI) for the Mt. Hope Project (the Mt. Hope Lease). Located in Eureka County, Nevada, the Mt. Hope Project consists of 13 patented lode claims, one millsite claim, and 1,577 unpatented lode claims, of which 109 unpatented lode claims are owned by MHMI and 1,468 unpatented lode claims are owned by Eureka Moly. The Mount Hope Project is located on the eastern flank of Mount Hope approximately 21miles north of Eureka, Nevada.
The Mount Hope deposit is a molybdenum porphyry, is classified as a low-fluorine, sub-Climax type deposit. The main form of molybdenum mineralization is molybdenite (molybdenum disulfide) and occurs within the intrusive Quartz Porphyry rocks of the Mount Hope complex and to a lesser extent in the Vinini sedimentary formation adjacent to the southern margin of the mineralized domes.
The Mt. Hope Project has been extensively drilled and all core and assay results are available. The drilling at the Mt. Hope Project has been predominately performed by utilizing diamond core methods, and subsidiary reverse circulation (RC) in areas of condemnation and water well drilling. As of December 31, 2008, 257 holes have been drilled into the property for a total of 300,901 feet of drilling; 232,189 feet of which is core, the remaining 68,712 feet is RC.
In March 2006, the company purchased the Liberty Property, an approximately 10 square mile property in Nye County, Nevada, including water rights, mineral and surface rights, buildings and certain equipment, from High Desert Winds LLC. In January 2007, GMI purchased the company that owned a 12% net smelter royalty on the Liberty Property. The company also purchased mineral claims associated with this property that were not previously owned by the company, thus giving GMI control over all mineral rights within the boundary of the Liberty Property.
The company completed two drilling programs that, combined with previous evaluation work performed by former owners, identified mineralization totaling 433 million tons averaging 0.071% molybdenum and 0.07% copper. In April 2008, it completed a pre-feasibility study outlining the project.
As of December 31, 2008, the company owned several other, small, non-cores, properties located in the western United States. These properties include additional molybdenum deposits, as well as copper, silver and gold deposits.
Wax Ink Opinion
This is another company that in our opinion offers an investor lots of potential with little chance of a potential investment return.
We believe the stock has a reasonable value of $0.27 based on a five year hold, and that the reasonable value may improve dramatically if the company will ever generate any revenues, something we could not find going back 5 years.
Accordingly, based on the fundamental metrics we employ, we have no investment interest at the present time.
General Molly Raw Value Worksheet
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Harmony Gold Mining Co. Ltd. - Gold Industry
Randfontein, South Africa
Financial information contained in this report is based on the company's latest SEC Form 20-F filing for fiscal year ending June 30, 2008, as filed with the SEC on October 29, 2009.
Harmony Gold Mining Co. Ltd. (NYSE: HMY) is a gold producer. The company’s operations are located primarily on the Witwatersrand Basin in South Africa, including 10 underground operations, an open-pit mine and surface operations that includes four provinces, Gauteng, North West Province, Mpumalanga and the Free State.
Harmony’s exploration portfolio is focused on highly prospective areas in Papua New Guinea (PNG), including the Wafi-Golpu project, although renewed exploration activity has begun in South Africa.
During the fiscal year ended June 30, 2008 (fiscal 2008), Harmony produced 1.55 million ounces of gold, primarily from its operations in South Africa. As of June 30, 2008. Harmony’s ore reserves amounted to 50.5 million ounces of gold.
In December 2007, Dioro Exploration NL completed the acquisition of the South Kal Mine operations located near Kalgoorlie, Western Australia, from Harmony.
The Kalgold operations are located within the Kraaipan Greenstone Belt, 60 kilometer south of Mafikeng. This is part of the larger Amalia-Kraaipan Greenstone terrain, consisting of north trending linear belts of Archaean meta-volcanic and metasedimentary rocks, separated by granitoid units.
The mines of the Freegold operations Tshepong, Phakisa, Bambanani, West, Kudu, Sable, Nyala, Eland and St Helena are located to the north and west of Welkom, while Joel is situated 30 kilometer to the south. Joel is mining the shallow flat-dipping Beatrix/VS5 Reef, while the other mines primarily exploit the Basal Reef. During fiscal 2008, limited mining has taken place on Leader Reef, A Reef and B Reef in the past. Kudu, Sable, Nyala, Eland and St. Helena.
Wax Ink Opinion
It may be headquartered in South Africa, but if our perception counts for anything, this company is just as poorly managed as many companies in the United States, with one exception.
We got the impression, the management of this company wasn't really interested in their miners.
We also note that Current Liabilities exceed Current Assets, Total Debt is 2.5 times higher than EBITDA, and the company has an Operating Margin of 11.11%, which we don't believe is high enough to continue to service the company's debt as the global recessions drags on, a recent announcement by the company that it has now become "net debt free", not withstanding.
We also note that company seems to continue to face labor unrest and a newly filed lawsuit relating to the company's American Depositiry Receipts (ADR).
In addition, while the company has proclaimed it is making great strides in its safety efforts, we note that during the past 16 months the company has reported that 16 workers lost their lives in mining related accidents, 2 workers were injured, and 2 workers are, at this time, missing.
Admittedly, we are not qualified to comment on these safety reports, and we note that the company's safety record made indeed be acceptable in South Africa. Yet at the same time, we wonder just how long the company would remain "net debt free", were it to decided that worker safety is the company's first priority.
In short, we believe a Reasonable Value Estimate for this stock is $0, and in the short-term believe the stock has more potential downside risk than upside reward. Accordingly, based on the fundamental metrics we employ, we have no investment interest at the present time.
Harmony Raw Value Workshhet
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Northern Dynasty Minerals, Ltd. - Gold Industry
Vancouver, British Columbia
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2007, as filed with the SEC on March 31, 2008 as amended on April 2, 2008.
Northern Dynasty Minerals, Ltd. (AMEX: NAK) is a mineral exploration company focused on developing the Pebble copper-gold-molybdenum mineral project (Pebble Project). The Pebble Project is located in Alaska, 19 miles from the villages of Iliamna and Newhalen, and approximately 200 miles southwest of the city of Anchorage.
The company has also located two additional porphyry copper-gold-molybdenum deposits, a porphyry copper zone, a gold-copper skarn occurrence and several high-grade gold veins. The Pebble Project deposit’s resources include copper, gold, and molybdenum. Quantities of silver, palladium, and rhenium are also contained in the deposit. Northern Dynasty has been carrying out technical programs, including drilling a full spectrum of engineering assessments, and environmental and socio-economic studies on Pebble Project.
In 2008, the company’s engineering work focused on collection of additional site and underground geotechnical data to support ongoing design work, continuation of metallurgical testwork on both Pebble West and Pebble East to optimize conventional processing systems and designs, continuation of assessments of the infrastructure elements (access road, port, and power) in order to establish the optimum alternatives, and designs for these project components, and assessment of project mine plans that would extract portions of the mineral resources.
Wax Ink Opinion
We continue to be amazed at the number of companies that remain living, when in point of fact, they are worth less than nothing, with little to no hope of bettering their station in the world of publicly traded companies.
Northern Dynasty Minerals, Ltd. is no exception. The time we spent researching this company, is, in our humble opinion, worth at least twice what this company is worth, and accordingly, based on the fundamental metrics we employ, we have no investment interest at the present time.
Northern Dynasty Raw Value Worksheet
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Rio Tinto - Steel and Iron Industry
London, England
Financial information contained in this report is based on the company's latest SEC Form 20-F filing for fiscal year ending December 31, 2008, as filed with the SEC on April 2, 2008.
Rio Tinto plc (NYSE: RTP) operates as one business organization (Rio Tinto), a mining and exploration company.
The company’s business is finding, mining and processing mineral resources. Its major products include aluminum, copper, diamonds, energy products, gold, industrial minerals (borates, titanium dioxide, salt and talc), and iron ore.
Rio Tinto’s activities are represented in Australia and North America. There are also businesses in South America, Asia, Europe and southern Africa.
The company’s product groups comprise: Aluminum; Copper and Diamonds; Energy and Minerals, and Iron Ore.
Rio Tinto's business support groups include Exploration and Technology and Innovation.
In January 2009, the company completed the sale of its 50% equity share of the Alcan Ningxia aluminum joint venture in China to Qingtongxia Aluminium Group Co Ltd.
In April 2008, Hecla Mining Company completed the transaction to acquire the Rio Tinto subsidiaries that held a 70.27% interest in the Greens Creek silver mine and joint venture located near Juneau, Alaska. As a result of the transaction, Hecla subsidiaries hold 100% of the Greens Creek joint venture.
On September 11, 2008, Rio Tinto acquired a 14.9% stake in Kalahari, and a 10.9% stake in Extract Resources, in which Kalahari's subsidiary Kalahari Uranium Limited holds a 39.11% interest.
In October 2008, Alcan Global Pharmaceutical Packaging, a division of Alcan Packaging, a business unit of Rio Tinto Alcan, acquired the Chakan flexible packaging plant from Associated Capsules Private Limited in India.
The company’s Aluminium product group, Rio Tinto Alcan, is a primary producer of bauxite, alumina and aluminum, benefiting from a sustainable, low cost energy supply. It operates mainly in Canada and Australia, with interests in Europe, New Zealand, Africa, South America and the United States. The group is organized into four business units: Bauxite and Alumina, Primary Metal, Engineered Products and Packaging, the latter two of which are to be divested.
Rio Tinto’s Copper and Diamonds group is engaged in the copper production, comprising Kennecott Utah Copper in the United States, and interests in some copper mines and development projects, including Escondida in Chile, Grasberg in Indonesia, the Resolution and Pebble projects in the United States, the Oyu Tolgoi project in Mongolia and the La Granja project in Peru.
The Diamonds group is a primary supplier of rough diamonds, comprising interests in the Diavik mine in Canada, the Argyle mine in Australia, and the Murowa mine in Zimbabwe, served by a diamond sales office in Belgium.
The company’s Energy and Minerals group is a major supplier in its markets, represented in coal by Rio Tinto Coal Australia and Coal and Allied in Australia, and by Rio Tinto Energy America in the United States. It also includes uranium interests in Energy Resources of Australia and the Rossing Uranium mine in Namibia.
The industrial minerals businesses is engaged in the supply and science of their products, comprising Rio Tinto Minerals, made up of borates and talc operations in the United States, South America, Europe and Australia, as well as Rio Tinto Iron and Titanium, which has interests in North America, South Africa and Madagascar.
The company’s Iron Ore group is a primary contributor to the world’s seaborne iron ore trade with interests that comprise Hamersley Iron and Robe River in Australia, Iron Ore Company of Canada, Corumba in Brazil, and the Simandou, Guinea, and Orissa, India, projects.
The group includes the HIsmelt direct iron making plant in Australia, employing a new, cleaner iron making process developed largely by Rio Tinto. It also includes the Dampier Salt operations at three sites in Western Australia.
The company’s Exploration group is organized into five teams based in North America, South America, Australia, Asia and Africa/Europe and a sixth project generation team that searches the world for new opportunities and provides specialized geological, geophysical and commercial expertise to the regional teams.
The Technology and Innovation group has bases in Australia, Canada, the United Kingdom and the United States. Its role is to identify and promote operational technology best practice across the Group and to pursue step change innovation of strategic importance to the development of orebodies of the future.
Wax Ink Opinion
We are impressed enough with this company that we have added it to our watch list with a Reasonable Value Estimate of $540, a Buy Target of $270, a First Sell Target of $526, and a Close Target of $570, based on a five year minimum hold.
While those numbers are huge compared to a recent close of $155.86, they don't represent the entire picture, and it is important to realise that they are Raw Value numbers, requiring countless additional hours of research before reaching investment status.
We note that the company's Working Capital or Current Ratio, is far less than we feel comfortable with, as is the company's Quick Ratio. Both of these concern us as we wonder if further research will yield an over leveraging on the part of managment, as evidenced to some degree by noting that company's Goodwill and Intangibles make up almost 23% of Total Assets.
In addition, while close to what we like to see, we also note that the company's Debt to EBITDA number is on the high side, with Debt exceeding EBITDA by 2.2 times. But with debt exceeding $125 per share, we are not overly surprised by this number.
We caution that while things often seem great on the surface, a little digging may well reveal potential troubles, as evidenced by the company's Tangible Book Value of $0.18, and its Equity Value of $34.46.
However, all things considered, with the stock currently trading at just about 4 times Free Cash Flow, which for fiscal 2008 was $39.55 per share, and carrying a trailing twelve month PE Ratio of around 5.5, spending the time needed to dig deep into this company may be time very well spent.
Yet, just because we were somewhat impressed with the company, we have not forgotten that we are value investors, and based on our review of the company's financial statements, we have adjusted our margin of safety and accordingly our Buy Target, lowering it from $270 to $62.35.
Rio Tinto Raw Value Worksheet
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Taseko Mines Ltd. - Copper Industry
Vancouver, British Columbia
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on April 1, 2008
Taseko Mines Ltd. (AMEX: TGB) incorporated on April 15, 1966, is a mining and mineral exploration company.
The company has one operating mine and three exploration projects, all located in British Columbia, Canada, which includes Gibraltar copper-molybdenum mine, the Prosperity gold-copper property, the Harmony gold property, and the Aley niobium property. On May 2, 2008, Taseko completed the acquisition of Oakmont Ventures Ltd.
The Gibraltar Mine site covers approximately 109 square kilometer (km) and the property consists of 249 tenures held 100% by the company. There are 30 mining leases at Gibraltar mine.
During the year ended December 31, 2008, the mill expansion was completed, which includes 34’ diameter Semi-Autogenous Grinding (SAG) mill, conversion of the rod and ball mill circuit to ball mill grinding only, and replacement of rougher and cleaner flotation cells with large cells. The rated throughput capacity increased from 36,000 tons per day to 46,000 tons per day.
The Gibraltar Mine mineral claims cover an area of gentle topography, local relief is in the order of 200 meters. The plant site is located at an elevation of approximately 1,100 meters above sea level. The Gibraltar Mine generally consists of seven separate mineralized zones, which includes Pollyanna, Granite, Connector, Gibraltar East, Gibraltar West, and Gibraltar West Extension.
Pyrite and chalcopyrite are the principal primary iron and copper sulphide minerals. Sixty percent of the copper occurs in fine-grained chalcopyrite. Coarser grained chalcopyrite also occurs, usually in quartz veins and shear zones. Small concentrations of bornite (a sulphide mineral of copper and iron), associated with magnetite and chalcopyrite, is present on the extremities of the Pollyanna and Sawmill deposits.
Oxide copper mineralization is also present between the Gibraltar East and Pollyanna open pits in the Connector Zone.
Molybdenite (molybdenum sulphide mineral) is a minor but economically important associate of chalcopyrite in the Pollyanna, Granite, and Sawmill deposits.
The Gibraltar Mine is a typical open pit operation that utilizes drilling, blasting, cable shovel loading, and large-scale truck hauling to excavate rock.
The Prosperity project consists of 124 mineral claims covering the mineral rights for approximately 121 square km. The property is located in the Clinton Mining Division, approximately 125 kilometers southwest of the City of Williams Lake, British Columbia. The Prosperity Project hosts porphyry gold-copper deposit. Pyrite and chalcopyrite are the principal sulphide minerals in the deposit. They are uniformly distributed in disseminations, fracture fillings, veins, and veinlets and may be accompanied by bornite and lesser molybdenite and tetrahedrite-tenantite. Native gold occurs as inclusions in and along microfractures with copper-bearing minerals and pyrite.
The Harmony Gold Project is located in the Skeena Mining Division, on Graham Island, Queen Charlotte Islands (also known as Haida Gwaii), on the northwestern coast of British Columbia, Canada. The Harmony project comprises of 58 mineral claims and 177 square km. The Harmony project hosts the Specogna epithermal gold deposit, controlled by the Sandspit fault.
The Aley Niobium Project is located in the Omineca Mining Division in British Columbia, Canada. It consists of 13 contiguous claims that cover 5,668 hectares.
Wax Ink Opinion
There are certain things that just make us go hmmmmmm, and this company was one of those things.
We at first felt pretty good about the company and what it does to earn its money, and that continued as we started to go through the numbers. It wasn't until we had taken a step back and considered what we had found, that we realized an investment in Taseko Mines was not in our future.
There were three distinct items that skewered any investment thoughts for this company. The first one was the effective tax rate of 4%. While most people would think this a great thing, we think it's a sign of indecision on the part of management, continually trying one thing or another, in an effort to grow the business. In othere words, there is no defined business plan.
The second thing was the company's lack of free cash flow. We simply are not interested in investing in company's with low, or in this case no, free cash flow. Again, we believe this points to a lack of cohesion on the part of management.
The third thing that made us sit up and take notice, was the company's debt. When you think about the business the company is in, $45 million in debt is really not that big a deal. But when you consider that the company's market cap is $197 million, the debt number looks pretty ominous. It became an even bigger number when we noticed that the company's average interest rate was over 15%.
Granted, we did not take the time to read through all of the debt obligations the company has, but we highlight this number because given today's interest rate market it seemed stageringly high.
In addition, we had to ask ourselves if the company is paying this sort of average interest rate in the low rate interest environment we have today, what is the interest rate going to be in the future, as interest rates climb to battle inflation?
Accordingly, based on the fundamental metrics we employ, we have no investment interest at the present time.
Taseko Mines Raw Value Worksheet
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Teck Cominco Limited - Industrial Metals and Minerals Industry
Vancouver, British Columbia
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on March 24, 2008
Teck Cominco Limited (NYSE: TCK) formerly Teck Cominco Limited, is engaged in the exploration for and development and production of natural resources.
The company’s principal products are copper, metallurgical coal, zinc and gold. Lead, molybdenum, various specialty and other metals, with chemicals and fertilizers as by-products produced at its operations.
The company also sells electrical power that is surplus to its requirements at the Trail metallurgical operations and owns a 20% interest in the Fort Hills oil sands project and a 50% interest in other oil sands leases in the Athabasca region of Alberta, Canada.
The company owns, or has interests in, 15 mines in Canada, United States, Chile and Peru, as well as one metallurgical complex in Canada.
In February 2009, the company announced the sale of its 50% interest in the Hemlo Operations, located in northwestern Ontario. In February 2009, it also announced the sale of its 50% interest in the Williams and David Bell mines in Ontario.
In August 2008, the company acquired the Relincho copper project from Global Copper Corp. On October 30, 2008, the company completed the acquisition of Fording Canadian Coal Trust (Fording), which primarily consists of Fording’s 60% interest in the Elk Valley Coal Partnership.
The company’s copper business unit includes its interests in Highland Valley Copper in south central British Columbia, the Antamina mine in the north central Peruvian Andes, the Quebrada Blanca and Carmen de Andacollo mines in Chile, and the Duck Pond copper-zinc mine in Newfoundland. The by-products produced at these mines include molybdenum and zinc. During the year ended December 31, 2008, the company produced a total of 313,000 tones of copper.
During 2008, Teck Cominco Limited acquired the Relincho copper project in Chile through its acquisition of Global Copper Corp. The company has a 97.5% interest in Highland Valley Copper, located in south central British Columbia. and a 22.5% interest in the Antamina mine, a copper and zinc mine at high elevation in Peru.
The company owns a 76.5% interest in Quebrada Blanca Mine, and has a 90% interest in Carmen de Andacollo mine in Chile.
The Duck Pond copper-zinc operation is located in central Newfoundland. Teck Cominco Limited’s other operations include Galore Creek Project, Relincho Project, Mesaba Project, Carrapateena Project and Petaquilla.
The company’s coal business unit includes six metallurgical coal mines in British Columbia and Alberta. It also exports seaborne metallurgical hard coking coal. Through October 29, 2008, its coal business included a 52% direct and indirect interest in the Teck Coal Partnership.
The company increased its ownership to 100%, effective October 30, 2008, with the purchase of the assets of Fording Canadian Coal Trust.
The company’s zinc business unit includes its Trail refining and smelting complex in south central British Columbia, the Red Dog Operations in northwest Alaska and the Pend Oreille mine in Washington State. The products produced at these operations are zinc and lead concentrates at its mines, and refined zinc and lead at Trail. Trail Operations also produces various precious and specialty metals, fertilizers and chemicals, and owns the Waneta dam, which produces electricity for the metallurgical facilities and for sale to third parties.
The company’s gold business unit includes its 40% interest in the Pogo mine located southeast of Fairbanks, Alaska; a 78.8% interest in the Morelos project in Mexico, and several gold exploration properties. The Pogo gold mine is located 145 kilometers southeast of Fairbanks, Alaska. The Hemlo operations, which consist of the Williams and David Bell mines, are located approximately 350 kilometers east of Thunder Bay, Ontario. During 2008, Pogo and Hemlo operations produced approximately 269,000 ounces of gold.
The company’s energy division includes its 20% interest in the Fort Hills oil sands project and 50% interest in various oil sands leases that it jointly owns with UTS Energy Corporation (UTS). All of these properties are located in the Athabasca region of Alberta, Canada.
The Fort Hills oil sands project includes approximately 24,720 contiguous hectares of oil sands leases located about 90 kilometers north of Fort McMurray in Northern Alberta. The Equinox oil sands project consists of approximately 2,890 hectares of oil sands leases (Lease 14) and is west of the Fort Hills Project.
Wax Ink Opinion
We ended up with a Reasonable Value Estimate for this company of $30.74, a Buy Target of $15.37, a First Sell Target of $29.97, and a Close Target of $32.45. But as you wil see, things change.
We do not like the company's Current Ratio at 0.44 as it tells us Current Liabilities exceed Current Assets, meaning, in our opinion, management has not been paying attention.
Further, we note the company's quick ratio, a test of the company's immediate liquidity, is at 0.30, which tells us that in an emergency, the company does not have sufficient cash reserves to cover it's current (due within one year) liabilities. Again we ask, where is management?
We also highlight the company's cash conversion cycle of 159 days, meaning it is simply taking to long to convert new inventory into cash.
Additionally, we note that the company's Days Receivables Outstanding number is 100 days and the company's Days Payables Outstanding number is 59 days. Again we ask, where is management, since they are allowing the company to finance the company's suppliers on an interest rate free basis.
Accordingly, based on the metrics we employ, we have adjusted our margin of safety for this company, making our revised Buy Target $6.99, even though we have no investment interest in this company at the present time.
Teck Cominco Raw Value Worksheet
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Thompson Creek Metals Company Inc. - Industrial Metals and Minerals Industry
Toronto, Ontario
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on April 9, 2008.
Thompson Creek Metals Company Inc. (NYSE: TC) is a Canadian molybdenum mining company with vertically integrated mining, milling, processing and marketing operations in Canada and the United States.
The company’s operations include the Thompson Creek Mine (mine and mill) in Idaho, the Langeloth Metallurgical Roasting Facility in Pennsylvania and a 75% joint venture interest in the Endako Molybdenum Mine Joint Venture (Endako Mine) (mine, mill and roaster) in British Columbia.
In addition, the company has two high-grade underground molybdenum development projects, the Davidson molybdenum property (Davidson Project), located in British Columbia, and the Mount Emmons molybdenum property, located in Colorado.
Thompson Creek Mine and mill are located near Challis, in central Idaho. The total property position is approximately 21,000 acres. The mill has a capacity of approximately 30,000 tons per day and operates with a crusher, SAG mill, ball mill and flotation circuit.
The company has a 75% interest in the Endako open-pit mine, mill and roaster, which is located near Fraser Lake, British Columbia. The total property position covers approximately 19,100 acres. The mill has a capacity of approximately 31,000 tons per day and a 30,900 to 35,300 pound per day multiple-hearth roaster. Its 75% share of molybdenum production at the Endako Mine increased to 2.9 million pounds during the year ended December 31, 2008.
The company operates the Langeloth Metallurgical Facility located near Pittsburgh, Pennsylvania. Operations at Langeloth include roasting of molybdenum sulfide concentrate into molybdenum oxide, upgrading molybdenum oxide to pure sublimed oxide, oxide briquettes, ferromolybdenum, as well as the roasting of other metal products. Langeloth also processes molybdenum and certain other metals for other third parties on a tolling, or cost-per-unit processed, basis.
The Davidson Project is an undeveloped molybdenum deposit in Canada. Blue Pearl Mining, a subsidiary of Thompson Creek Metals, focuses on building and operating a molybdenum mine producing an average of 2,000 metric tons of ore per day.
In August 2008, the company signed an option with United States Energy (USE) to acquire up to 75% of an underground molybdenum project in the United States in Colorado. The Mount Emmons Project is an undeveloped molybdenum deposit.
Wax Ink Opinion
The company is one of the few pure play Molybdenum producers and we believe a Reasonbable Value Estimate for the stock is $49.00, with a Buy Target of $24.50, a First Sell Target of $$48.00, and a Close Target of $52.00.
All of this sounds good, and when we look at the metrics we employ, we find that indeed many of them look good. We note however, that the company's free cash flow for fiscal 2008 was an anemic $0.04. Looking forward, this, to us, is extremely troubling.
As noted eariler, Molybdenum is currently selling in the $9 per pound range, down from $30 per pound. Common sense should dictate that in order for a company to be willing to invest the hundreds of millions of dollars necessary to develop a new Molybdenum mine, certain benchmark criteria must be in place.
For example, in the oil field development world a barrel of crude oil must average a certain amount of money per barrel in order for the field development to be profitable. If, because crude prices are low, a sufficient average price per barrel can be maintained, or the company through their forecasting efforts does not believe pricing can be maintained, then field development will be placed on hold. The mining business is no different.
We remind investors that senior management at Freeport-McMoran Copper and Gold noted in their most recent SEC 10-K filing; "... molybdenum production is expected to be reduced by 20 million pounds in 2009 and 40 million pounds in 2010. ...Projected molybdenum production is expected to be 60 million pounds in both 2009 and 2010. The affected mine sites will be idling or reducing utilization of a portion of their equipment fleets in connection with these curtailments."
We question why for fiscal 2009 and fiscal 2010, Thompson Creek an $800 million company, thinks it will fair any better than Freeport-McMoran, a $16 billion dollar company, especially since we agree with the prospects outline for fiscal 2009 and fiscal 2010 by FreeportMcMoran's management.
Accordingly, based on the metrics we employ, we have adjusted our margin of safety for Thompson Creek, lowering our Buy Target from $24.50, to $17.07, and remind investors that we have no investment interest in this company at the present time.
Thompson Creek Raw Value Report
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US Energy Corporation - Industrial Metals and Minerals Industry
Riverton, Wyoming
Financial information contained in this report is based on the company's latest SEC Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on March 13, 2009 and as amended on April 2, 2009.
US Energy Corporation (Nasdaq: USEG) acquires and develops energy-related and other mineral properties. The company is primarily involved in the acquisition of mineral properties, the exploration and development of those properties, and from time to time the sale and lease of mineral-bearing properties and production and/or marketing of minerals.
During 2008, the company completed its multifamily apartment project serving the residential market in Gillette, Wyoming.
The company is focused on developing the Mount Emmons molybdenum project (Mount Emmons) into a major operating mine with Thompson Creek Metals Company (USA).
The Mount Emmons Project includes a total of 25 patented and approximately 612 unpatented mining and mill site claims, which together approximate 7,427 acres, or over 8 square miles of claims. Thompson Creek Metals Company (USA) has an option to acquire up to a 75% interest in the Project.
Wax Ink Opinion
When the dust settles and the air clears, this company simply doesn't make any money, and in our opinion is just too small a company at $52 million to be a real player in this sector. Nor do we see the company as a take over target since the company simply doesn't own anything worth taking over.
One thing we do note, is that management should decide if the company is in the apartment development business or the mining business and fully develop the chosen business before it delves into another business.
It is our opinion that the company is worth somewhere close to $1.80 per share from a liquidation perspective, and as an on-going business concern, we think the company is fairly valued at its recent close, $2.24.
However from an investment perspective we think a Reasonable Value Estimate for the company is $0, and accordingly, based on the metrics we employ, we have no investment interest in this company at the present time.
US Energy Raw Value Report
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Yamana Gold, Inc. - Gold Industry
Toronto, Ontario
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on March 31, 2009.
Yamana Gold, Inc. (NYSE: AUY) is a Canada-based gold producer engaged in gold mining and related activities, including exploration, extraction, processing and reclamation. The company has significant properties involved in gold production, gold development, exploration and land positions throughout the Americas, including Brazil, Argentina, Chile, Mexico and Central America.
The company is producing gold and other precious metals at intermediate company production levels in addition to significant copper production.
During the year ended December 31, 2008, total production from all mines totaled approximately one million gold equivalent ounces.
During 2008, the company’s projects included Chapada Mine (Brazil), El Penon Mine (Chile), Gualcamayo Mine (Argentina), Jacobina Mine (Brazil), Minera Florida/Alhue Mine (Chile), Fazenda Brasileiro Mine (Brazil), Sao Vicente Mine (Brazil), Sao Francisco Mine (Brazil), San Andres Mine (Honduras), C1 Santa Luz (Brazil), Ernesto/Pau-a-Pique (Brazil), Pilar (Brazil) and Mercedes (Mexico).
Chapada is located in northern Goias State, Brazil. The project encompasses a series of mining and exploration licenses totaling 8,369 hectares. Chapada is Yamana’s original flagship operation. Chapada is an open-pit copper and gold mine in Brazil with milling facilities that produce a copper/gold concentrate, and is Yamana's largest property. As of December 31, 2008, proven and probable reserves totaled 345 million tons containing 2.5 million ounces of gold.
El Penon is a high-grade gold/silver mine located in the Atacama Desert in Region II of northern Chile. During 2008, the company received permission to increase throughput to 3,600 tons per day. As of December 31, 2008, proven and probable reserves totaled 8.9 million tons. During 2008, the company focused exploration on the North Block leading to the discovery of Bonanza North.
Gualcamayo is located in the northern San Juan province of Argentina. The main Gualcamayo block consists of one Cateo (exploration concession) and 57 Minas (mining property interests), covering 7,128 hectares of ground. The three main mineral deposits at Gualcamayo include the main Quebrada del Diablo (QDD) deposit, the Magdalena and Amelia Ines satellite deposits (AIM) and the QDD Lower West underground zone. It has a total reserve and resource base of approximately 3.9 million ounces of gold, including 2.9 million ounces in reserves.
The Jacobina complex of underground mines is located in the state of Bahia, in north eastern Brazil near the Serra do Jacobina mountains. It has a total reserve and resource base of more than 4.7 million] ounces of gold. At December 31, 2008, proven and probable reserves increased to approximately 1.4 million ounces of gold. At December 31, 2008, measured and indicated gold resources totalled 16.6 million tons containing 1.5 million ounces of gold.
Minera Florida is a gold, silver and zinc producing mine Located 73 kilometers south of Santiago in central Chile. As of December 31, 2008, Minera Florida had proven and probable reserves of 4.2 million tons containing 746,000 ounces of gold.
Fazenda Brasileiro is an underground gold mine. It is located in northeast Brazil, 180 kilometers north northwest of the state capital of Salvador.
Sao Vicente is located in west central Brazil. It is located close to the Bolivian border approximately 50 kilometers north of Yamana’s São Francisco mine.
Sao Francisco (Brazil) mine is located within the Guapore Gold Belt, a greenstone belt with numerous gold deposits and occurrences along its almost 200 kilometer strike length. The property is an open-pit, heap leach gold mine that involves three different streams of processing, including crushing-gravity-heap leach, crushing-heap leach, and run-of-mine heap leach.
Located in northwest Argentina, Yamana maintains a 12.5% equity interest in the Alumbrera mine. Alumbrera is a copper and gold mine.
The C1 Santa Luz project (Brazil) is located within Yamana’s 180,000 hectares of mineral claims on the Rio Itapicuru Greenstone Belt, approximately 140 kilometers north of Fazenda Brasileiro. It is planned as a conventional open-pit mine with throughput of 2.5 million tons per year or 6,800 tons per day.
The Ernesto/Pau-a-Pique project (Brazil) is located in the Guapore Gold Belt property, which covers 450,000 hectares. It is home to Yamana’s Sao Vicente and Sao Francisco Mines. Pau-a-Pique is planned as an underground bench and fill mine and Ernesto is planned to be mined both open-pit and cut-and-fill underground.
Located 80 kilometers south of Chapada (Brazil), the Pilar exploration concessions comprise 590 square kilometers overlying the Archean Greenstone Belt. Pilar is located on a greenstone belt known to host at least 38 gold occurrences.
The Mercedes project is located in northern Sonora, Mexico, approximately 200 kilometers south of Tucson, Arizona. It is planned as a bench and fill mine with throughput of 1,500 tons per day. At December 31, 2008, proven and probable reserves totaled 2.65 million tons containing 604,000 ounces of gold and 6.2 million ounces of silver.
Jeronimo is located in northern Chile approximately 30 kilometers south southwest of El Salvador at an elevation of 3,800 meters above sea level. The project is subject to a joint venture with Codelco, pursuant to which Yamana holds a 57% interest and acts as operator.
The La Pepa project lies within the prolific Maricunga Belt, a region in the Andean Cordillera of northern Chile containing gold and silver prospects. As of December 31, 2008, measured and indicated resources totaled 149 million tons containing 2.8 million ounces of gold.
Amancaya is located 120 kilometers southwest of Yamana’s El Penon mining operations in the Atacama Desert of northern Chile. The property is host to a low-sulphidation epithermal vein deposit that has been outlined along 1,200 meters of strike length and 250 meters of dip length.
Yamana owns 100% of the Agua Rica (Argentina) copper, gold and molybdenum deposit, a large feasibility-stage copper and gold project located just 34 kilometers from Alumbrera.
Wax Ink Opinion
It is a $5.9 billion dollar company with an Enterprise Value of $8.55, an Equity Value of $7.49, a Tangible Book Value of $8.81, a PE Ratio of slightly less than 15, and for fiscal 2008, it generated $1.63 in Free Cash Flow, and we think a a Reasonable Value Estimate for the stock is $10.13, with a Buy Target of $5.07, a First Sell Target of $9.88, and a Close Target of $10.69.
We also think that management appears so intent on new project development, it may not be keeping its eye on the company the way it should.
What has us a bit concerned is that Net Operating Profit After Taxes for fiscal 2008 was almost 38%, yet short-term debt actually increased year over year.
And while we did notice that on a year over year basis, Accrued Liabilities were reduced, Long-Term Debt was reduced, and Defered Taxes were reduced, for which management deserves a high five, we also noticed that shareholders saw their positions diluted through the addition of about 300 million shares of stock to the total shares outstanding.
This increase in the number of shares outstanding increased the company's dividend payout from $17.2 million in fiscal 2007, to $69.9 million in fiscal 2008. Normally we would find this very rewarding news, but given the current state of the economy, we believe that paying a dividend at all is pure bluster on the part of management, especially when the company ends the fiscal year with more than $500 million of debt on its books.
While we have no investment interest in this company at the present time, we are aware that other investors may have investment considerations forthe company. Accordingly, based on the metrics we employ, we have adjusted our margin of safety for Yamana Gold, lowering our Buy Target from $5.07, to $2.34.
Yamana Gold Raw Value Worksheet
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In Closing
To be a successful long-term investor requires, in our opinion, a minimal amount of luck and a hell of a lot of research, with, more often than not, the results of all of those countless hours of digging, leading to a company that may not be investment quality.
For example, we spent slightly more than 100 man-hours producing this report, a report we know from past experience will be scanned by many and fully read by few.
And as expected when we started, we have ended up with companies that require additional research before we would consider them investment opportunities.
So while we hope that this report offers some assitance to its readers, we are far more hopeful that just one person will take the time to fully investigate their investment choice before they actually invest their hard earned capital.
I mean we are talking about an end to impotence, cavities and gout.
Wax
Several weeks ago Wax Ink was commissioned to research companies in the Molybdenum business. Having heard the aforementioned claims, we decided, perhaps the prevention of gout would be a noble cause.
Molybdenum (Mo)
According to the U.S. Geological Survey, Molybdenum is a refractory metallic element used principally as an alloying agent in steel, cast iron, and super alloys to enhance hardenability, strength, toughness, and wear and corrosion resistance।
The material is an essential ingredient in steel alloys used in the energy industry, the aerospace industry, and the automobile industry because it strengthens steel, improves weldability, reduces brittleness, and increases steel's resistance to corrosion. It is one of the key components in catalysts used in the petro-chemical industry to reduce sulfur in gasoline and diesel fuel.
Molybdenum is recovered as a by-product of copper and tungsten mining operations and is prepared from the powder made by the hydrogen reduction of purified molybdic trioxide or ammonium molybdate.
Properties
The metal is silvery white, very hard, but is softer and more ductile than tungsten. It has a high elastic modulus, and only tungsten and tantalum, of the more readily available metals, have higher melting points. It is a valuable alloying agent, as it contributes to the hardenability and toughness of quenched and tempered steels. It also improves the strength of steel at high temperatures.
Industrial Uses
Molybdenum is used in certain nickel-based alloys, such as the "Hastelloys(R)" which are heat-resistant and corrosion-resistant to chemical solutions. Since Molybdenum oxidizes at elevated temperatures (+4750F), the metal has found recent application as electrodes for electrically heated glass furnaces and forehearths. In addition, the metal is used in nuclear energy applications and for missile and aircraft parts.
Molybdenum is also used as a catalyst in the refining of petroleum, aiding in the reduction of sulfur during the production of gasoline and diesel fuel. The metal has also found applications as a filament material in electronic and electrical applications, and is an essential trace element in plant nutrition.
Molybdenum sulfide is useful as a lubricant, especially at high temperatures where oils would decompose. Almost all ultra-high strength steels with minimum yield points up to 300,000 psi (lb/in.2) contain molybdenum in amounts from 0.25 to 8%.
Ecological Uses
Ecologically, molybdenum as a trace element is necessary for nitrogen fixation and other metabolic processes, and is an essential trace element in plant nutrition. Land that contain no measurable concentrations of molybdenum, are often barren, or able to produce little sustainable organic material.
Medical Uses
Molybdenum is a scarce mineral that is present in very small quantities in the human body. It is involved in many important biological processes, possibly including development of the nervous system, waste processing in the kidneys, and energy production in cells. There is some evidence to suggest that too little molybdenum in the diet may be responsible for some health problems, with Molybdenum currently used as a treatment in rare cases of inborn errors of metabolism (such as Wilson disease) in which the body can’t process copper.
Research will continue into the use of Molybdenum in cancer treatment if human trials continue to show that it can slow cancer growth. The material has already shown promise in animal trials in reducing the effects of certain cancer drugs on the heart and lungs.
The Molybdenum Industry
According to Yahoo Finance, there are 130 companies in the Steel and Iron Industry, 64 companies in the Copper Industry, 499 companies in the Industrial Metals and Minerals Industry, 50 companies in the Gold Industry, 8 companies in the Silver Industry, and 76 companies in the Non-Metallic Mineral Mining Industry.
Of those 827 companies, there are 109 companies that that produce Molybdenum.
Things to Consider
Molybdenum currently sells for about $9 per pound, sliding in the last quarter of 2008 from what was a relatively stable price of near $30 per pound.
Additionally, the largest production of U.S. Molybdenum comes primarily from three mines; the Henderson Mine in Colorado, owned and operated by Freeport-McMoran Copper and Gold, Inc., the Molycorp Questa Mine in New Mexico, owned and operted by Molycorp Minerals, LLC, a private company, and the Thompson Creek Mine in Idaho owned and operated by Thompson Creek Metals Company, Inc.
As an aside, the world's largest producer of Molybdenum is Codelco Corporation, a Chilean company that produced 27,200 metric tonnes in 2006.
Finally, it is important to consider that the vast majority of companies that mine Molybdenum, also mine other metals, such gold, silver, and copper. With few exceptions, most metals mining companies mine Molybdenum almost as an accident to their other mining operations.
Research Selection
Generally, the first rule that we follow at Wax Ink is we only research companies that are on our watch list, which currently consists of 2613 companies. With the exception of 24 companies, all of the companies on our watch list are domestic companies. We would like to be able to tell you that the reason we have so few foreign companies is the that their tax dollars are paid to the United States government, but the truth of the matter is we simply prefer companies whose auditors follow GAAP accounting methodology.
Researching the companies in the Molybdenum business proved to be quite difficult, since out of a total of 109 companies that produce Molybdenum, almost none of them were on our watch list because almost none of them, were domestic companies.
In the end, we decided to research only the companies in the Molybdenum business, whether domestic or foreign, whose stock was traded on either the New York Stock Exchange, the American Stock Exchange, or the Nasdaq . This criteria reduced that number of companies from 109 to 11.
The Companies
Augusta Resource Corporation - Industrial Metals and Minerals Industry
Vancouver, British Columbia
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on March 31, 2009.
Augusta Resource Corporation (AMEX: AZC) incorporated on January 14, 1937, is engaged in the exploration and development of mineral properties in Pima County, Arizona. Augusta’s property is in the development stage. As of December 31, 2008, the company’s property was non-productive and did not generate any revenues. During the year ended December 31, 2008, the company drilled 20 core holes. During 2008, the company completed groundwater monitoring well system around Rosemont project site.
Rosemont Copper Company (Rosemont) is the wholly owned subsidiary of the company. Augusta’s Rosemont property consists of approximately 15,000 acres. Rosemont is approximately 50 kilometers southeast of Tucson, Arizona.
Rosemont consists of copper/molybdenum/silver skarn deposit, as well as other exploration targets. During 2008, Augusta had mineral reserves containing 546 million tons grading 0.45% copper, 0.015% molybdenum and 0.12 ounces per tonsilver in sulfide ore, and 70 million tons at 0.17% copper in oxide ore.
Wax Ink Opinion
This one had a recent close of $1.65, which is $1.65 more than it's worth. Lots of potential and a website are fine, but at the end of the day, we prefer to invest in companies with proven management and long history of large profits. Since we found neither with this 72 year old company, we have to believe that like preventing gout, neither ever will exist.
Accordingly, based on the fundamental metrics we employ, we have no investment interest in this company at the present time.
Augusta Resource Raw Value Worksheet
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Freeport-McMoRan Copper and Gold, Inc. - Copper Industry
Phoenix, Arizona
Financial information contained in this report is based on the company's latest SEC Form10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 26, 2009.
Freeport-McMoRan Copper and Gold, Inc. (NYSE: FCX) through its wholly owned subsidiary, Phelps Dodge Corporation (Phelps Dodge) is a copper, gold, and molybdenum mining company.
The company’s portfolio of assets includes the Grasberg minerals district in Indonesia, which contains single recoverable copper reserve and the single gold reserve of any mine; significant mining operations in North and South America, and the Tenke Fungurume development project in the Democratic Republic of Congo (DRC).
As of December 31, 2008, consolidated recoverable proven and probable reserves totaled 102.0 billion pounds of copper, 40 million ounces of gold, 2.48 billion pounds of molybdenum, 266.6 million ounces of silver and 0.7 billion pounds of cobalt.
Approximately 35% of its copper reserves were in Indonesia, approximately 31% were in South America, approximately 28% were in North America and approximately 6% were in Africa. Approximately 96% of its gold reserves were in Indonesia, with its remaining gold reserves located in South America. The molybdenum reserves are primarily in North America (approximately 85%), with its remaining molybdenum reserves in South America.
The company's mining revenues during the year ended December 31, 2008, include sales of copper (approximately 76%), molybdenum (approximately 14%) and gold (approximately 7%).
It has five operating copper mines in North America, four in South America and the Grasberg minerals district in Indonesia. It also has one operating primary molybdenum mine in North America. During 2008, approximately 60 % of its consolidated copper production was from its Grasberg, Morenci and Cerro Verde mines, and more than half of its mined copper was sold in concentrate, approximately 27% as rod (principally from its North America operations) and approximately 19% as cathodes.
Also during 2008, approximately 55% of its consolidated molybdenum production was from the Henderson molybdenum mine and approximately 45% was produced as a by-product primarily at its North America copper mines.
The company also produces gold as a by-product at its copper mines, primarily at the Grasberg minerals district in Indonesia, which accounted for approximately 90% of its consolidated gold production during 2008.
In North America, the company has five operating copper mines: Morenci, Sierrita, Bagdad and Safford in Arizona, and Tyrone in New Mexico. In addition, the Chino mine in New Mexico was placed on care-and-maintenance status in December 2008.
All of these operations are wholly owned, except for Morenci, an unincorporated joint venture, in which the company owns an 85% undivided interest. In addition to copper, the Morenci, Sierrita and Bagdad mines produce molybdenum as a by-product.
In Indonesia, PT Freeport Indonesia operates the Grasberg minerals district. The company has joint venture agreements with Rio Tinto plc (Rio Tinto), an international mining company, with respect to a portion of its mining activities in Indonesia.
The company also owns 90.64% of PT Freeport Indonesia and the Government of Indonesia owns the remaining 9.36% interest.
The company's Grasberg minerals district also produces significant quantities of gold and silver as by-products. PT Freeport Indonesia also owns 25% of PT Smelting, a smelting and refining company in Gresik, Indonesia.
The company produces molybdenum at its wholly owned Henderson molybdenum mine in Colorado. Additionally, it owns the Climax molybdenum mine in Colorado.
In addition to its operating mines, the company has mines in development. In Indonesia, it developing its underground mines. In Africa, it holds an effective 57.75% interest in the Tenke Fungurume copper and cobalt concession in the DRC.
The North America copper mines include open-pit mining, sulfide ore concentrating, leaching and SX/EW operations, with a majority of the copper produced at the North America copper mines cast into copper rod by the company’s Rod and Refining operations.
The North America copper mines division includes Morenci and Sierrita as reportable segments. The Morenci open-pit mine, located in southeastern Arizona, primarily produces copper cathodes and copper concentrates. In addition to copper, the Morenci mine produces a small amount of molybdenum concentrates as a by-product.
The Sierrita open-pit mine, located in Pima County, Arizona, primarily produces copper cathodes, copper concentrates and copper sulfate. In addition to copper, the Sierrita mine produces molybdenum concentrate as a by-product.
Other mines include the company’s other operating southwestern U.S. copper mines, Bagdad, Safford and Tyrone. In addition to copper, the Bagdad mine produces molybdenum concentrate as a by-product.
Other mines also include the company’s southwestern United States copper mines that are on care-and-maintenance status, including Miami and Chino.
The company has four operating copper mines in South America-Cerro Verde in Peru, and Candelaria, Ojos del Salado and El Abra in Chile. These operations include open-pit and underground mining, sulfide ore concentrating, leaching and SX/EW operations.
The South America copper mines division includes Cerro Verde. The Cerro Verde open-pit copper mine, located near Arequipa, Peru, produces copper cathodes and copper concentrates. In addition to copper, the Cerro Verde mine produces molybdenum concentrate as a by-product.
In the first quarter of 2009, the company announced plans to temporarily curtail the molybdenum circuit at Cerro Verde.
Other mines include the company’s Chilean copper mines – Candelaria, Ojos del Salado and El Abra, which include open-pit and underground mining, sulfide ore concentrating, leaching and SX/EW operations. In addition to copper, the Candelaria and Ojos del Salado mines produce gold and silver as by-products.
Indonesia mining includes PT Freeport Indonesia’s Grasberg minerals district. PT Freeport Indonesia produces copper concentrates, which contain significant quantities of gold and silver.
Africa mining includes the Tenke Fungurume copper and cobalt mining concessions in the Katanga province of the DRC. Construction activities are well advanced and initial production is targeted during the second half of 2009. The initial project at Tenke Fungurume is based on mining and processing ore reserves approximating 119 million metric tons with average ore grades of 2.6 % copper and 0.35 % cobalt.
The Molybdenum segment is an integrated producer of molybdenum, with mining, sulfide ore concentrating, roasting and processing facilities that produce high-purity, molybdenum-based chemicals, molybdenum metal powder and metallurgical products, which are sold to customers around the world, and includes the wholly owned Henderson molybdenum mine in Colorado and related conversion facilities.
The Henderson underground mine produces high-purity, chemical-grade molybdenum concentrates, which are typically further processed into value-added molybdenum chemical products. This segment also includes a sales company that purchases and sells molybdenum from the Henderson mine, as well as from the company’s North and South America copper mines that produce molybdenum as a by-product.
The Rod and Refining segment consists of copper conversion facilities located in North America.
Atlantic Copper, the company’s wholly owned smelting unit in Spain, smelts and refines copper concentrates and markets refined copper and precious metals in slimes. PT Freeport Indonesia and the South America copper mines generally sell a portion of their concentrate and cathode (South America) production to Atlantic Copper.
Wax Ink Opinion
Based on a five year hold, we have the company on our watch list with a Reasonable Value Estimate of $89, a Buy Target of $45, a First Sell Target of $87.50, and a Close Target of $95. While we like the company's fiscal 2008 numbers, we note that there are a couple of things that give us pause.
First is the company's effective tax rate of 21.39%. While this may seem an insignificant thing, the average corporation in the United States has an effective tax rate of near 35%. So to us, a company with an effective tax rate that is almost 14% lower than the average, bears watching.
The other thing we think is worth watching is the company's Debt to EBITDA ratio, which for fiscal 2008 was 1.54. While not an issue at this point, should the world economy continue to falter, total debt at $22.99 per share may become more costly to service.
As stated by the company; "... a copper production is expected to be reduced by 400 million pounds in 2009 and 800 million pounds in 2010 and molybdenum production is expected to be reduced by 20 million pounds in 2009 and 40 million pounds in 2010, compared with our previously announced October 2008 estimated production for 2009 and 2010. Projected copper production is expected to be 3.9 billion pounds in 2009 and 3.8 billion pounds in 2010. Projected molybdenum production is expected to be 60 million pounds in both 2009 and 2010. The affected mine sites will be idling or reducing utilization of a portion of their equipment fleets in connection with these curtailments."
Given managment's outlook for 2009 and 2010, as well as the on-going litigation as described in the notes to the financial statements (Note 15) of the company's current SEC 10-K filing, we believe a lowered entry point for this stock is appropriate.
Accordingly, based on the fundamental metrics we employ, we have reduced our Buy Target from $45 to $17.50.
Freeport-McMoRan Raw Value Worksheet
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General Moly, Inc. - Industrial Metals and Minerals Industry
Lakewood, Colorado
Financial information contained in this report is based on the company's latest SEC Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 27, 2009.
General Moly, Inc. (AMEX: GMO), incorporated on November 23, 1925, is a development stage company engaged in the business of exploration, development and mining of properties primarily containing molybdenum.
The company’s primary asset is an 80% interest in the Mt. Hope Project (Mt. Hope Project), a primary molybdenum property, located in Eureka County, Nevada. The company owns interest in the Liberty Property (the Liberty Property), located in Nye County, Nevada.
In addition, the company owns other non-core properties and mineral rights. In February 2008, the company formed a joint venture with POS-Minerals Corporation (POS-Minerals), an affiliate of POSCO, a Korean steel company for the development of the Mt. Hope Project.
Effective January 1, 2008, the company contributed all of its interest in the assets related to the Mt. Hope Project, including the company’s lease of the Mt. Hope property, into a newly formed entity, Eureka Moly and entered into a joint venture for the development and operation of the Mt. Hope Project with POS-Minerals.
The Mt. Hope Project is owned and operated by Eureka Moly, which is a joint venture between the company and POS-Minerals. As of December 31, 2008, Eureka Moly had a 30-year renewable lease with Mount Hope Mines, Inc. (MHMI) for the Mt. Hope Project (the Mt. Hope Lease). Located in Eureka County, Nevada, the Mt. Hope Project consists of 13 patented lode claims, one millsite claim, and 1,577 unpatented lode claims, of which 109 unpatented lode claims are owned by MHMI and 1,468 unpatented lode claims are owned by Eureka Moly. The Mount Hope Project is located on the eastern flank of Mount Hope approximately 21miles north of Eureka, Nevada.
The Mount Hope deposit is a molybdenum porphyry, is classified as a low-fluorine, sub-Climax type deposit. The main form of molybdenum mineralization is molybdenite (molybdenum disulfide) and occurs within the intrusive Quartz Porphyry rocks of the Mount Hope complex and to a lesser extent in the Vinini sedimentary formation adjacent to the southern margin of the mineralized domes.
The Mt. Hope Project has been extensively drilled and all core and assay results are available. The drilling at the Mt. Hope Project has been predominately performed by utilizing diamond core methods, and subsidiary reverse circulation (RC) in areas of condemnation and water well drilling. As of December 31, 2008, 257 holes have been drilled into the property for a total of 300,901 feet of drilling; 232,189 feet of which is core, the remaining 68,712 feet is RC.
In March 2006, the company purchased the Liberty Property, an approximately 10 square mile property in Nye County, Nevada, including water rights, mineral and surface rights, buildings and certain equipment, from High Desert Winds LLC. In January 2007, GMI purchased the company that owned a 12% net smelter royalty on the Liberty Property. The company also purchased mineral claims associated with this property that were not previously owned by the company, thus giving GMI control over all mineral rights within the boundary of the Liberty Property.
The company completed two drilling programs that, combined with previous evaluation work performed by former owners, identified mineralization totaling 433 million tons averaging 0.071% molybdenum and 0.07% copper. In April 2008, it completed a pre-feasibility study outlining the project.
As of December 31, 2008, the company owned several other, small, non-cores, properties located in the western United States. These properties include additional molybdenum deposits, as well as copper, silver and gold deposits.
Wax Ink Opinion
This is another company that in our opinion offers an investor lots of potential with little chance of a potential investment return.
We believe the stock has a reasonable value of $0.27 based on a five year hold, and that the reasonable value may improve dramatically if the company will ever generate any revenues, something we could not find going back 5 years.
Accordingly, based on the fundamental metrics we employ, we have no investment interest at the present time.
General Molly Raw Value Worksheet
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Harmony Gold Mining Co. Ltd. - Gold Industry
Randfontein, South Africa
Financial information contained in this report is based on the company's latest SEC Form 20-F filing for fiscal year ending June 30, 2008, as filed with the SEC on October 29, 2009.
Harmony Gold Mining Co. Ltd. (NYSE: HMY) is a gold producer. The company’s operations are located primarily on the Witwatersrand Basin in South Africa, including 10 underground operations, an open-pit mine and surface operations that includes four provinces, Gauteng, North West Province, Mpumalanga and the Free State.
Harmony’s exploration portfolio is focused on highly prospective areas in Papua New Guinea (PNG), including the Wafi-Golpu project, although renewed exploration activity has begun in South Africa.
During the fiscal year ended June 30, 2008 (fiscal 2008), Harmony produced 1.55 million ounces of gold, primarily from its operations in South Africa. As of June 30, 2008. Harmony’s ore reserves amounted to 50.5 million ounces of gold.
In December 2007, Dioro Exploration NL completed the acquisition of the South Kal Mine operations located near Kalgoorlie, Western Australia, from Harmony.
The Kalgold operations are located within the Kraaipan Greenstone Belt, 60 kilometer south of Mafikeng. This is part of the larger Amalia-Kraaipan Greenstone terrain, consisting of north trending linear belts of Archaean meta-volcanic and metasedimentary rocks, separated by granitoid units.
The mines of the Freegold operations Tshepong, Phakisa, Bambanani, West, Kudu, Sable, Nyala, Eland and St Helena are located to the north and west of Welkom, while Joel is situated 30 kilometer to the south. Joel is mining the shallow flat-dipping Beatrix/VS5 Reef, while the other mines primarily exploit the Basal Reef. During fiscal 2008, limited mining has taken place on Leader Reef, A Reef and B Reef in the past. Kudu, Sable, Nyala, Eland and St. Helena.
Wax Ink Opinion
It may be headquartered in South Africa, but if our perception counts for anything, this company is just as poorly managed as many companies in the United States, with one exception.
We got the impression, the management of this company wasn't really interested in their miners.
We also note that Current Liabilities exceed Current Assets, Total Debt is 2.5 times higher than EBITDA, and the company has an Operating Margin of 11.11%, which we don't believe is high enough to continue to service the company's debt as the global recessions drags on, a recent announcement by the company that it has now become "net debt free", not withstanding.
We also note that company seems to continue to face labor unrest and a newly filed lawsuit relating to the company's American Depositiry Receipts (ADR).
In addition, while the company has proclaimed it is making great strides in its safety efforts, we note that during the past 16 months the company has reported that 16 workers lost their lives in mining related accidents, 2 workers were injured, and 2 workers are, at this time, missing.
Admittedly, we are not qualified to comment on these safety reports, and we note that the company's safety record made indeed be acceptable in South Africa. Yet at the same time, we wonder just how long the company would remain "net debt free", were it to decided that worker safety is the company's first priority.
In short, we believe a Reasonable Value Estimate for this stock is $0, and in the short-term believe the stock has more potential downside risk than upside reward. Accordingly, based on the fundamental metrics we employ, we have no investment interest at the present time.
Harmony Raw Value Workshhet
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Northern Dynasty Minerals, Ltd. - Gold Industry
Vancouver, British Columbia
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2007, as filed with the SEC on March 31, 2008 as amended on April 2, 2008.
Northern Dynasty Minerals, Ltd. (AMEX: NAK) is a mineral exploration company focused on developing the Pebble copper-gold-molybdenum mineral project (Pebble Project). The Pebble Project is located in Alaska, 19 miles from the villages of Iliamna and Newhalen, and approximately 200 miles southwest of the city of Anchorage.
The company has also located two additional porphyry copper-gold-molybdenum deposits, a porphyry copper zone, a gold-copper skarn occurrence and several high-grade gold veins. The Pebble Project deposit’s resources include copper, gold, and molybdenum. Quantities of silver, palladium, and rhenium are also contained in the deposit. Northern Dynasty has been carrying out technical programs, including drilling a full spectrum of engineering assessments, and environmental and socio-economic studies on Pebble Project.
In 2008, the company’s engineering work focused on collection of additional site and underground geotechnical data to support ongoing design work, continuation of metallurgical testwork on both Pebble West and Pebble East to optimize conventional processing systems and designs, continuation of assessments of the infrastructure elements (access road, port, and power) in order to establish the optimum alternatives, and designs for these project components, and assessment of project mine plans that would extract portions of the mineral resources.
Wax Ink Opinion
We continue to be amazed at the number of companies that remain living, when in point of fact, they are worth less than nothing, with little to no hope of bettering their station in the world of publicly traded companies.
Northern Dynasty Minerals, Ltd. is no exception. The time we spent researching this company, is, in our humble opinion, worth at least twice what this company is worth, and accordingly, based on the fundamental metrics we employ, we have no investment interest at the present time.
Northern Dynasty Raw Value Worksheet
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Rio Tinto - Steel and Iron Industry
London, England
Financial information contained in this report is based on the company's latest SEC Form 20-F filing for fiscal year ending December 31, 2008, as filed with the SEC on April 2, 2008.
Rio Tinto plc (NYSE: RTP) operates as one business organization (Rio Tinto), a mining and exploration company.
The company’s business is finding, mining and processing mineral resources. Its major products include aluminum, copper, diamonds, energy products, gold, industrial minerals (borates, titanium dioxide, salt and talc), and iron ore.
Rio Tinto’s activities are represented in Australia and North America. There are also businesses in South America, Asia, Europe and southern Africa.
The company’s product groups comprise: Aluminum; Copper and Diamonds; Energy and Minerals, and Iron Ore.
Rio Tinto's business support groups include Exploration and Technology and Innovation.
In January 2009, the company completed the sale of its 50% equity share of the Alcan Ningxia aluminum joint venture in China to Qingtongxia Aluminium Group Co Ltd.
In April 2008, Hecla Mining Company completed the transaction to acquire the Rio Tinto subsidiaries that held a 70.27% interest in the Greens Creek silver mine and joint venture located near Juneau, Alaska. As a result of the transaction, Hecla subsidiaries hold 100% of the Greens Creek joint venture.
On September 11, 2008, Rio Tinto acquired a 14.9% stake in Kalahari, and a 10.9% stake in Extract Resources, in which Kalahari's subsidiary Kalahari Uranium Limited holds a 39.11% interest.
In October 2008, Alcan Global Pharmaceutical Packaging, a division of Alcan Packaging, a business unit of Rio Tinto Alcan, acquired the Chakan flexible packaging plant from Associated Capsules Private Limited in India.
The company’s Aluminium product group, Rio Tinto Alcan, is a primary producer of bauxite, alumina and aluminum, benefiting from a sustainable, low cost energy supply. It operates mainly in Canada and Australia, with interests in Europe, New Zealand, Africa, South America and the United States. The group is organized into four business units: Bauxite and Alumina, Primary Metal, Engineered Products and Packaging, the latter two of which are to be divested.
Rio Tinto’s Copper and Diamonds group is engaged in the copper production, comprising Kennecott Utah Copper in the United States, and interests in some copper mines and development projects, including Escondida in Chile, Grasberg in Indonesia, the Resolution and Pebble projects in the United States, the Oyu Tolgoi project in Mongolia and the La Granja project in Peru.
The Diamonds group is a primary supplier of rough diamonds, comprising interests in the Diavik mine in Canada, the Argyle mine in Australia, and the Murowa mine in Zimbabwe, served by a diamond sales office in Belgium.
The company’s Energy and Minerals group is a major supplier in its markets, represented in coal by Rio Tinto Coal Australia and Coal and Allied in Australia, and by Rio Tinto Energy America in the United States. It also includes uranium interests in Energy Resources of Australia and the Rossing Uranium mine in Namibia.
The industrial minerals businesses is engaged in the supply and science of their products, comprising Rio Tinto Minerals, made up of borates and talc operations in the United States, South America, Europe and Australia, as well as Rio Tinto Iron and Titanium, which has interests in North America, South Africa and Madagascar.
The company’s Iron Ore group is a primary contributor to the world’s seaborne iron ore trade with interests that comprise Hamersley Iron and Robe River in Australia, Iron Ore Company of Canada, Corumba in Brazil, and the Simandou, Guinea, and Orissa, India, projects.
The group includes the HIsmelt direct iron making plant in Australia, employing a new, cleaner iron making process developed largely by Rio Tinto. It also includes the Dampier Salt operations at three sites in Western Australia.
The company’s Exploration group is organized into five teams based in North America, South America, Australia, Asia and Africa/Europe and a sixth project generation team that searches the world for new opportunities and provides specialized geological, geophysical and commercial expertise to the regional teams.
The Technology and Innovation group has bases in Australia, Canada, the United Kingdom and the United States. Its role is to identify and promote operational technology best practice across the Group and to pursue step change innovation of strategic importance to the development of orebodies of the future.
Wax Ink Opinion
We are impressed enough with this company that we have added it to our watch list with a Reasonable Value Estimate of $540, a Buy Target of $270, a First Sell Target of $526, and a Close Target of $570, based on a five year minimum hold.
While those numbers are huge compared to a recent close of $155.86, they don't represent the entire picture, and it is important to realise that they are Raw Value numbers, requiring countless additional hours of research before reaching investment status.
We note that the company's Working Capital or Current Ratio, is far less than we feel comfortable with, as is the company's Quick Ratio. Both of these concern us as we wonder if further research will yield an over leveraging on the part of managment, as evidenced to some degree by noting that company's Goodwill and Intangibles make up almost 23% of Total Assets.
In addition, while close to what we like to see, we also note that the company's Debt to EBITDA number is on the high side, with Debt exceeding EBITDA by 2.2 times. But with debt exceeding $125 per share, we are not overly surprised by this number.
We caution that while things often seem great on the surface, a little digging may well reveal potential troubles, as evidenced by the company's Tangible Book Value of $0.18, and its Equity Value of $34.46.
However, all things considered, with the stock currently trading at just about 4 times Free Cash Flow, which for fiscal 2008 was $39.55 per share, and carrying a trailing twelve month PE Ratio of around 5.5, spending the time needed to dig deep into this company may be time very well spent.
Yet, just because we were somewhat impressed with the company, we have not forgotten that we are value investors, and based on our review of the company's financial statements, we have adjusted our margin of safety and accordingly our Buy Target, lowering it from $270 to $62.35.
Rio Tinto Raw Value Worksheet
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Taseko Mines Ltd. - Copper Industry
Vancouver, British Columbia
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on April 1, 2008
Taseko Mines Ltd. (AMEX: TGB) incorporated on April 15, 1966, is a mining and mineral exploration company.
The company has one operating mine and three exploration projects, all located in British Columbia, Canada, which includes Gibraltar copper-molybdenum mine, the Prosperity gold-copper property, the Harmony gold property, and the Aley niobium property. On May 2, 2008, Taseko completed the acquisition of Oakmont Ventures Ltd.
The Gibraltar Mine site covers approximately 109 square kilometer (km) and the property consists of 249 tenures held 100% by the company. There are 30 mining leases at Gibraltar mine.
During the year ended December 31, 2008, the mill expansion was completed, which includes 34’ diameter Semi-Autogenous Grinding (SAG) mill, conversion of the rod and ball mill circuit to ball mill grinding only, and replacement of rougher and cleaner flotation cells with large cells. The rated throughput capacity increased from 36,000 tons per day to 46,000 tons per day.
The Gibraltar Mine mineral claims cover an area of gentle topography, local relief is in the order of 200 meters. The plant site is located at an elevation of approximately 1,100 meters above sea level. The Gibraltar Mine generally consists of seven separate mineralized zones, which includes Pollyanna, Granite, Connector, Gibraltar East, Gibraltar West, and Gibraltar West Extension.
Pyrite and chalcopyrite are the principal primary iron and copper sulphide minerals. Sixty percent of the copper occurs in fine-grained chalcopyrite. Coarser grained chalcopyrite also occurs, usually in quartz veins and shear zones. Small concentrations of bornite (a sulphide mineral of copper and iron), associated with magnetite and chalcopyrite, is present on the extremities of the Pollyanna and Sawmill deposits.
Oxide copper mineralization is also present between the Gibraltar East and Pollyanna open pits in the Connector Zone.
Molybdenite (molybdenum sulphide mineral) is a minor but economically important associate of chalcopyrite in the Pollyanna, Granite, and Sawmill deposits.
The Gibraltar Mine is a typical open pit operation that utilizes drilling, blasting, cable shovel loading, and large-scale truck hauling to excavate rock.
The Prosperity project consists of 124 mineral claims covering the mineral rights for approximately 121 square km. The property is located in the Clinton Mining Division, approximately 125 kilometers southwest of the City of Williams Lake, British Columbia. The Prosperity Project hosts porphyry gold-copper deposit. Pyrite and chalcopyrite are the principal sulphide minerals in the deposit. They are uniformly distributed in disseminations, fracture fillings, veins, and veinlets and may be accompanied by bornite and lesser molybdenite and tetrahedrite-tenantite. Native gold occurs as inclusions in and along microfractures with copper-bearing minerals and pyrite.
The Harmony Gold Project is located in the Skeena Mining Division, on Graham Island, Queen Charlotte Islands (also known as Haida Gwaii), on the northwestern coast of British Columbia, Canada. The Harmony project comprises of 58 mineral claims and 177 square km. The Harmony project hosts the Specogna epithermal gold deposit, controlled by the Sandspit fault.
The Aley Niobium Project is located in the Omineca Mining Division in British Columbia, Canada. It consists of 13 contiguous claims that cover 5,668 hectares.
Wax Ink Opinion
There are certain things that just make us go hmmmmmm, and this company was one of those things.
We at first felt pretty good about the company and what it does to earn its money, and that continued as we started to go through the numbers. It wasn't until we had taken a step back and considered what we had found, that we realized an investment in Taseko Mines was not in our future.
There were three distinct items that skewered any investment thoughts for this company. The first one was the effective tax rate of 4%. While most people would think this a great thing, we think it's a sign of indecision on the part of management, continually trying one thing or another, in an effort to grow the business. In othere words, there is no defined business plan.
The second thing was the company's lack of free cash flow. We simply are not interested in investing in company's with low, or in this case no, free cash flow. Again, we believe this points to a lack of cohesion on the part of management.
The third thing that made us sit up and take notice, was the company's debt. When you think about the business the company is in, $45 million in debt is really not that big a deal. But when you consider that the company's market cap is $197 million, the debt number looks pretty ominous. It became an even bigger number when we noticed that the company's average interest rate was over 15%.
Granted, we did not take the time to read through all of the debt obligations the company has, but we highlight this number because given today's interest rate market it seemed stageringly high.
In addition, we had to ask ourselves if the company is paying this sort of average interest rate in the low rate interest environment we have today, what is the interest rate going to be in the future, as interest rates climb to battle inflation?
Accordingly, based on the fundamental metrics we employ, we have no investment interest at the present time.
Taseko Mines Raw Value Worksheet
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Teck Cominco Limited - Industrial Metals and Minerals Industry
Vancouver, British Columbia
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on March 24, 2008
Teck Cominco Limited (NYSE: TCK) formerly Teck Cominco Limited, is engaged in the exploration for and development and production of natural resources.
The company’s principal products are copper, metallurgical coal, zinc and gold. Lead, molybdenum, various specialty and other metals, with chemicals and fertilizers as by-products produced at its operations.
The company also sells electrical power that is surplus to its requirements at the Trail metallurgical operations and owns a 20% interest in the Fort Hills oil sands project and a 50% interest in other oil sands leases in the Athabasca region of Alberta, Canada.
The company owns, or has interests in, 15 mines in Canada, United States, Chile and Peru, as well as one metallurgical complex in Canada.
In February 2009, the company announced the sale of its 50% interest in the Hemlo Operations, located in northwestern Ontario. In February 2009, it also announced the sale of its 50% interest in the Williams and David Bell mines in Ontario.
In August 2008, the company acquired the Relincho copper project from Global Copper Corp. On October 30, 2008, the company completed the acquisition of Fording Canadian Coal Trust (Fording), which primarily consists of Fording’s 60% interest in the Elk Valley Coal Partnership.
The company’s copper business unit includes its interests in Highland Valley Copper in south central British Columbia, the Antamina mine in the north central Peruvian Andes, the Quebrada Blanca and Carmen de Andacollo mines in Chile, and the Duck Pond copper-zinc mine in Newfoundland. The by-products produced at these mines include molybdenum and zinc. During the year ended December 31, 2008, the company produced a total of 313,000 tones of copper.
During 2008, Teck Cominco Limited acquired the Relincho copper project in Chile through its acquisition of Global Copper Corp. The company has a 97.5% interest in Highland Valley Copper, located in south central British Columbia. and a 22.5% interest in the Antamina mine, a copper and zinc mine at high elevation in Peru.
The company owns a 76.5% interest in Quebrada Blanca Mine, and has a 90% interest in Carmen de Andacollo mine in Chile.
The Duck Pond copper-zinc operation is located in central Newfoundland. Teck Cominco Limited’s other operations include Galore Creek Project, Relincho Project, Mesaba Project, Carrapateena Project and Petaquilla.
The company’s coal business unit includes six metallurgical coal mines in British Columbia and Alberta. It also exports seaborne metallurgical hard coking coal. Through October 29, 2008, its coal business included a 52% direct and indirect interest in the Teck Coal Partnership.
The company increased its ownership to 100%, effective October 30, 2008, with the purchase of the assets of Fording Canadian Coal Trust.
The company’s zinc business unit includes its Trail refining and smelting complex in south central British Columbia, the Red Dog Operations in northwest Alaska and the Pend Oreille mine in Washington State. The products produced at these operations are zinc and lead concentrates at its mines, and refined zinc and lead at Trail. Trail Operations also produces various precious and specialty metals, fertilizers and chemicals, and owns the Waneta dam, which produces electricity for the metallurgical facilities and for sale to third parties.
The company’s gold business unit includes its 40% interest in the Pogo mine located southeast of Fairbanks, Alaska; a 78.8% interest in the Morelos project in Mexico, and several gold exploration properties. The Pogo gold mine is located 145 kilometers southeast of Fairbanks, Alaska. The Hemlo operations, which consist of the Williams and David Bell mines, are located approximately 350 kilometers east of Thunder Bay, Ontario. During 2008, Pogo and Hemlo operations produced approximately 269,000 ounces of gold.
The company’s energy division includes its 20% interest in the Fort Hills oil sands project and 50% interest in various oil sands leases that it jointly owns with UTS Energy Corporation (UTS). All of these properties are located in the Athabasca region of Alberta, Canada.
The Fort Hills oil sands project includes approximately 24,720 contiguous hectares of oil sands leases located about 90 kilometers north of Fort McMurray in Northern Alberta. The Equinox oil sands project consists of approximately 2,890 hectares of oil sands leases (Lease 14) and is west of the Fort Hills Project.
Wax Ink Opinion
We ended up with a Reasonable Value Estimate for this company of $30.74, a Buy Target of $15.37, a First Sell Target of $29.97, and a Close Target of $32.45. But as you wil see, things change.
We do not like the company's Current Ratio at 0.44 as it tells us Current Liabilities exceed Current Assets, meaning, in our opinion, management has not been paying attention.
Further, we note the company's quick ratio, a test of the company's immediate liquidity, is at 0.30, which tells us that in an emergency, the company does not have sufficient cash reserves to cover it's current (due within one year) liabilities. Again we ask, where is management?
We also highlight the company's cash conversion cycle of 159 days, meaning it is simply taking to long to convert new inventory into cash.
Additionally, we note that the company's Days Receivables Outstanding number is 100 days and the company's Days Payables Outstanding number is 59 days. Again we ask, where is management, since they are allowing the company to finance the company's suppliers on an interest rate free basis.
Accordingly, based on the metrics we employ, we have adjusted our margin of safety for this company, making our revised Buy Target $6.99, even though we have no investment interest in this company at the present time.
Teck Cominco Raw Value Worksheet
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Thompson Creek Metals Company Inc. - Industrial Metals and Minerals Industry
Toronto, Ontario
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on April 9, 2008.
Thompson Creek Metals Company Inc. (NYSE: TC) is a Canadian molybdenum mining company with vertically integrated mining, milling, processing and marketing operations in Canada and the United States.
The company’s operations include the Thompson Creek Mine (mine and mill) in Idaho, the Langeloth Metallurgical Roasting Facility in Pennsylvania and a 75% joint venture interest in the Endako Molybdenum Mine Joint Venture (Endako Mine) (mine, mill and roaster) in British Columbia.
In addition, the company has two high-grade underground molybdenum development projects, the Davidson molybdenum property (Davidson Project), located in British Columbia, and the Mount Emmons molybdenum property, located in Colorado.
Thompson Creek Mine and mill are located near Challis, in central Idaho. The total property position is approximately 21,000 acres. The mill has a capacity of approximately 30,000 tons per day and operates with a crusher, SAG mill, ball mill and flotation circuit.
The company has a 75% interest in the Endako open-pit mine, mill and roaster, which is located near Fraser Lake, British Columbia. The total property position covers approximately 19,100 acres. The mill has a capacity of approximately 31,000 tons per day and a 30,900 to 35,300 pound per day multiple-hearth roaster. Its 75% share of molybdenum production at the Endako Mine increased to 2.9 million pounds during the year ended December 31, 2008.
The company operates the Langeloth Metallurgical Facility located near Pittsburgh, Pennsylvania. Operations at Langeloth include roasting of molybdenum sulfide concentrate into molybdenum oxide, upgrading molybdenum oxide to pure sublimed oxide, oxide briquettes, ferromolybdenum, as well as the roasting of other metal products. Langeloth also processes molybdenum and certain other metals for other third parties on a tolling, or cost-per-unit processed, basis.
The Davidson Project is an undeveloped molybdenum deposit in Canada. Blue Pearl Mining, a subsidiary of Thompson Creek Metals, focuses on building and operating a molybdenum mine producing an average of 2,000 metric tons of ore per day.
In August 2008, the company signed an option with United States Energy (USE) to acquire up to 75% of an underground molybdenum project in the United States in Colorado. The Mount Emmons Project is an undeveloped molybdenum deposit.
Wax Ink Opinion
The company is one of the few pure play Molybdenum producers and we believe a Reasonbable Value Estimate for the stock is $49.00, with a Buy Target of $24.50, a First Sell Target of $$48.00, and a Close Target of $52.00.
All of this sounds good, and when we look at the metrics we employ, we find that indeed many of them look good. We note however, that the company's free cash flow for fiscal 2008 was an anemic $0.04. Looking forward, this, to us, is extremely troubling.
As noted eariler, Molybdenum is currently selling in the $9 per pound range, down from $30 per pound. Common sense should dictate that in order for a company to be willing to invest the hundreds of millions of dollars necessary to develop a new Molybdenum mine, certain benchmark criteria must be in place.
For example, in the oil field development world a barrel of crude oil must average a certain amount of money per barrel in order for the field development to be profitable. If, because crude prices are low, a sufficient average price per barrel can be maintained, or the company through their forecasting efforts does not believe pricing can be maintained, then field development will be placed on hold. The mining business is no different.
We remind investors that senior management at Freeport-McMoran Copper and Gold noted in their most recent SEC 10-K filing; "... molybdenum production is expected to be reduced by 20 million pounds in 2009 and 40 million pounds in 2010. ...Projected molybdenum production is expected to be 60 million pounds in both 2009 and 2010. The affected mine sites will be idling or reducing utilization of a portion of their equipment fleets in connection with these curtailments."
We question why for fiscal 2009 and fiscal 2010, Thompson Creek an $800 million company, thinks it will fair any better than Freeport-McMoran, a $16 billion dollar company, especially since we agree with the prospects outline for fiscal 2009 and fiscal 2010 by FreeportMcMoran's management.
Accordingly, based on the metrics we employ, we have adjusted our margin of safety for Thompson Creek, lowering our Buy Target from $24.50, to $17.07, and remind investors that we have no investment interest in this company at the present time.
Thompson Creek Raw Value Report
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US Energy Corporation - Industrial Metals and Minerals Industry
Riverton, Wyoming
Financial information contained in this report is based on the company's latest SEC Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on March 13, 2009 and as amended on April 2, 2009.
US Energy Corporation (Nasdaq: USEG) acquires and develops energy-related and other mineral properties. The company is primarily involved in the acquisition of mineral properties, the exploration and development of those properties, and from time to time the sale and lease of mineral-bearing properties and production and/or marketing of minerals.
During 2008, the company completed its multifamily apartment project serving the residential market in Gillette, Wyoming.
The company is focused on developing the Mount Emmons molybdenum project (Mount Emmons) into a major operating mine with Thompson Creek Metals Company (USA).
The Mount Emmons Project includes a total of 25 patented and approximately 612 unpatented mining and mill site claims, which together approximate 7,427 acres, or over 8 square miles of claims. Thompson Creek Metals Company (USA) has an option to acquire up to a 75% interest in the Project.
Wax Ink Opinion
When the dust settles and the air clears, this company simply doesn't make any money, and in our opinion is just too small a company at $52 million to be a real player in this sector. Nor do we see the company as a take over target since the company simply doesn't own anything worth taking over.
One thing we do note, is that management should decide if the company is in the apartment development business or the mining business and fully develop the chosen business before it delves into another business.
It is our opinion that the company is worth somewhere close to $1.80 per share from a liquidation perspective, and as an on-going business concern, we think the company is fairly valued at its recent close, $2.24.
However from an investment perspective we think a Reasonable Value Estimate for the company is $0, and accordingly, based on the metrics we employ, we have no investment interest in this company at the present time.
US Energy Raw Value Report
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Yamana Gold, Inc. - Gold Industry
Toronto, Ontario
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on March 31, 2009.
Yamana Gold, Inc. (NYSE: AUY) is a Canada-based gold producer engaged in gold mining and related activities, including exploration, extraction, processing and reclamation. The company has significant properties involved in gold production, gold development, exploration and land positions throughout the Americas, including Brazil, Argentina, Chile, Mexico and Central America.
The company is producing gold and other precious metals at intermediate company production levels in addition to significant copper production.
During the year ended December 31, 2008, total production from all mines totaled approximately one million gold equivalent ounces.
During 2008, the company’s projects included Chapada Mine (Brazil), El Penon Mine (Chile), Gualcamayo Mine (Argentina), Jacobina Mine (Brazil), Minera Florida/Alhue Mine (Chile), Fazenda Brasileiro Mine (Brazil), Sao Vicente Mine (Brazil), Sao Francisco Mine (Brazil), San Andres Mine (Honduras), C1 Santa Luz (Brazil), Ernesto/Pau-a-Pique (Brazil), Pilar (Brazil) and Mercedes (Mexico).
Chapada is located in northern Goias State, Brazil. The project encompasses a series of mining and exploration licenses totaling 8,369 hectares. Chapada is Yamana’s original flagship operation. Chapada is an open-pit copper and gold mine in Brazil with milling facilities that produce a copper/gold concentrate, and is Yamana's largest property. As of December 31, 2008, proven and probable reserves totaled 345 million tons containing 2.5 million ounces of gold.
El Penon is a high-grade gold/silver mine located in the Atacama Desert in Region II of northern Chile. During 2008, the company received permission to increase throughput to 3,600 tons per day. As of December 31, 2008, proven and probable reserves totaled 8.9 million tons. During 2008, the company focused exploration on the North Block leading to the discovery of Bonanza North.
Gualcamayo is located in the northern San Juan province of Argentina. The main Gualcamayo block consists of one Cateo (exploration concession) and 57 Minas (mining property interests), covering 7,128 hectares of ground. The three main mineral deposits at Gualcamayo include the main Quebrada del Diablo (QDD) deposit, the Magdalena and Amelia Ines satellite deposits (AIM) and the QDD Lower West underground zone. It has a total reserve and resource base of approximately 3.9 million ounces of gold, including 2.9 million ounces in reserves.
The Jacobina complex of underground mines is located in the state of Bahia, in north eastern Brazil near the Serra do Jacobina mountains. It has a total reserve and resource base of more than 4.7 million] ounces of gold. At December 31, 2008, proven and probable reserves increased to approximately 1.4 million ounces of gold. At December 31, 2008, measured and indicated gold resources totalled 16.6 million tons containing 1.5 million ounces of gold.
Minera Florida is a gold, silver and zinc producing mine Located 73 kilometers south of Santiago in central Chile. As of December 31, 2008, Minera Florida had proven and probable reserves of 4.2 million tons containing 746,000 ounces of gold.
Fazenda Brasileiro is an underground gold mine. It is located in northeast Brazil, 180 kilometers north northwest of the state capital of Salvador.
Sao Vicente is located in west central Brazil. It is located close to the Bolivian border approximately 50 kilometers north of Yamana’s São Francisco mine.
Sao Francisco (Brazil) mine is located within the Guapore Gold Belt, a greenstone belt with numerous gold deposits and occurrences along its almost 200 kilometer strike length. The property is an open-pit, heap leach gold mine that involves three different streams of processing, including crushing-gravity-heap leach, crushing-heap leach, and run-of-mine heap leach.
Located in northwest Argentina, Yamana maintains a 12.5% equity interest in the Alumbrera mine. Alumbrera is a copper and gold mine.
The C1 Santa Luz project (Brazil) is located within Yamana’s 180,000 hectares of mineral claims on the Rio Itapicuru Greenstone Belt, approximately 140 kilometers north of Fazenda Brasileiro. It is planned as a conventional open-pit mine with throughput of 2.5 million tons per year or 6,800 tons per day.
The Ernesto/Pau-a-Pique project (Brazil) is located in the Guapore Gold Belt property, which covers 450,000 hectares. It is home to Yamana’s Sao Vicente and Sao Francisco Mines. Pau-a-Pique is planned as an underground bench and fill mine and Ernesto is planned to be mined both open-pit and cut-and-fill underground.
Located 80 kilometers south of Chapada (Brazil), the Pilar exploration concessions comprise 590 square kilometers overlying the Archean Greenstone Belt. Pilar is located on a greenstone belt known to host at least 38 gold occurrences.
The Mercedes project is located in northern Sonora, Mexico, approximately 200 kilometers south of Tucson, Arizona. It is planned as a bench and fill mine with throughput of 1,500 tons per day. At December 31, 2008, proven and probable reserves totaled 2.65 million tons containing 604,000 ounces of gold and 6.2 million ounces of silver.
Jeronimo is located in northern Chile approximately 30 kilometers south southwest of El Salvador at an elevation of 3,800 meters above sea level. The project is subject to a joint venture with Codelco, pursuant to which Yamana holds a 57% interest and acts as operator.
The La Pepa project lies within the prolific Maricunga Belt, a region in the Andean Cordillera of northern Chile containing gold and silver prospects. As of December 31, 2008, measured and indicated resources totaled 149 million tons containing 2.8 million ounces of gold.
Amancaya is located 120 kilometers southwest of Yamana’s El Penon mining operations in the Atacama Desert of northern Chile. The property is host to a low-sulphidation epithermal vein deposit that has been outlined along 1,200 meters of strike length and 250 meters of dip length.
Yamana owns 100% of the Agua Rica (Argentina) copper, gold and molybdenum deposit, a large feasibility-stage copper and gold project located just 34 kilometers from Alumbrera.
Wax Ink Opinion
It is a $5.9 billion dollar company with an Enterprise Value of $8.55, an Equity Value of $7.49, a Tangible Book Value of $8.81, a PE Ratio of slightly less than 15, and for fiscal 2008, it generated $1.63 in Free Cash Flow, and we think a a Reasonable Value Estimate for the stock is $10.13, with a Buy Target of $5.07, a First Sell Target of $9.88, and a Close Target of $10.69.
We also think that management appears so intent on new project development, it may not be keeping its eye on the company the way it should.
What has us a bit concerned is that Net Operating Profit After Taxes for fiscal 2008 was almost 38%, yet short-term debt actually increased year over year.
And while we did notice that on a year over year basis, Accrued Liabilities were reduced, Long-Term Debt was reduced, and Defered Taxes were reduced, for which management deserves a high five, we also noticed that shareholders saw their positions diluted through the addition of about 300 million shares of stock to the total shares outstanding.
This increase in the number of shares outstanding increased the company's dividend payout from $17.2 million in fiscal 2007, to $69.9 million in fiscal 2008. Normally we would find this very rewarding news, but given the current state of the economy, we believe that paying a dividend at all is pure bluster on the part of management, especially when the company ends the fiscal year with more than $500 million of debt on its books.
While we have no investment interest in this company at the present time, we are aware that other investors may have investment considerations forthe company. Accordingly, based on the metrics we employ, we have adjusted our margin of safety for Yamana Gold, lowering our Buy Target from $5.07, to $2.34.
Yamana Gold Raw Value Worksheet
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In Closing
To be a successful long-term investor requires, in our opinion, a minimal amount of luck and a hell of a lot of research, with, more often than not, the results of all of those countless hours of digging, leading to a company that may not be investment quality.
For example, we spent slightly more than 100 man-hours producing this report, a report we know from past experience will be scanned by many and fully read by few.
And as expected when we started, we have ended up with companies that require additional research before we would consider them investment opportunities.
So while we hope that this report offers some assitance to its readers, we are far more hopeful that just one person will take the time to fully investigate their investment choice before they actually invest their hard earned capital.
I mean we are talking about an end to impotence, cavities and gout.
Wax
Teradata Corporation - A Wax Ink Raw Value Report
Teradata Corporation
Financial information contained in this report is based on the company's latest SEC Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on March 02, 2009.
Company Overview
Teradata Corporation (NYSE: TDC) is a global leader in enterprise data warehousing (“EDW”), including enterprise analytic technologies and services. Their data warehousing solutions are comprised of software, hardware, and related business consulting and support services. Recognized as market leading by both industry analysts and customers, their solutions integrate an organization’s departmental and enterprise-wide data—about customers, financials, operations, and more—into a single enterprise-wide data warehouse.
The company's enterprise analytical technologies then transform that data into actionable “enterprise intelligence” allowing the company's customers a single view of their business, and the ability to leverage their organization’s data as a strategic corporate asset to gain competitive and operational advantage.
Businesses today realize that they require better information derived from their data to run their business, and are seeing data volumes and data sources continue to multiply. Using the company's solutions, they can access more timely and accurate information, obtain better insight about all aspects of their business, and make decisions with greater speed and precision to drive profitable growth.
Teradata is designed to enable their customers to maximize business value while minimizing their total costs.
Operating from three main locations in the United States: Johns Creek (Atlanta), Georgia; Miamisburg (Dayton), Ohio; and Rancho Bernardo (San Diego), California, the company serves customers across a broad set of industries from around the world, ranging from small departmental and corporate implementations to many of the world’s largest data warehouses. In addition, the company has sales and services offices located in approximately 40 countries.
For the full year ended December 31, 2008, the company had net income of $250 million and total revenues of $1.762 billion, of which approximately 56% was derived in the North America and Latin America region (the “Americas”), 26% from the Europe, Middle East and Africa region (“EMEA”), and 18% from the Asia Pacific and Japan region (“APJ”).
History and Development
Teradata was formed in 1979 as a Delaware corporation. The company established a relational database management system on a proprietary platform in 1984. In 1990, the company partnered with NCR Corporation (NYSE: NCR) to jointly develop next-generation database systems. In 1991, AT&T Corporation (NYSE: ATT) acquired NCR and later that year NCR purchased Teradata.
In 1996, AT&T spun off NCR, including Teradata, to form an independent, publicly-traded company, NCR Corporation. In 1999, NCR consolidated its Teradata data warehousing operations and product offerings into a separate operating division. Since 1999, the company has increased its investments and focus to extend the scope of their enterprise data warehousing solutions, including improvements to their leading database software, increasing their enterprise analytic software applications, and providing sophisticated support and professional consulting services.
Separation
In August 2007, NCR’s Board of Directors approved the separation of NCR into two independent, publicly-traded companies through the distribution of 100% of its Teradata data warehousing business to shareholders of NCR, referred to as the Separation.
To effect the Separation, Teradata was formed as a separate Delaware corporation in March 2007 as a wholly-owned subsidiary of NCR. Immediately prior to the Separation, the assets and liabilities of the Teradata data warehousing business of NCR were transferred to Teradata in return for 180.7 million shares of the company’s common shares. NCR accomplished the Separation through a distribution of one share of Teradata common stock for each share of NCR common stock in September 2007, with 100% of the Teradata shares distributed to NCR shareholders of record as of September 2007.
NCR Relationship
NCR and Teradata entered into an Interim Services and Systems Replication Agreement, pursuant to which certain transitional services are provided by NCR and its subsidiaries, and vice versa. The services include the provision of administrative and other services identified by the parties. The Interim Services and Systems Replication Agreement provided for a term of up to 18 months for such services, which ends in March 2009, and may be extended for an additional six months by mutual agreement of the parties. The pricing was based on actual costs incurred by the party rendering the services plus a reasonable fixed percentage.
As discussed in the Company’s Registration Statement on Form 10, filed on May 10, 2007, as amended on August 21, 2007 (the “Form 10”), NCR and the company also entered into certain other agreements including the Separation and Distribution Agreement, Tax Sharing Agreement, Employee Benefits Agreement and several commercial agreements. The commercial agreements that were entered into included a network support agreement, service and distributor arrangements, intellectual property agreements, and various real estate arrangements.
Industry Overview
The company's revenues are primarily generated in the multi-billion dollar data warehousing market. This market includes data warehouse database software; applications software; supporting hardware (servers, storage and interconnects); as well as professional, installation and maintenance services.
Management expects that the need for data warehousing will continue to grow as organizations increasingly rely on enterprise analytics to compete on a global basis. This need is further driven by the convergence of the following key market dynamics that management has observed.
High levels of data growth are being driven by globalization, merger and acquisition activities, alignment of information technology (“IT”) and business functions, and increased government regulation; Mission-critical applications used in business operations are increasingly requiring systems to be available at all times; Improved data warehousing affordability due to price/performance gains on server and disk hardware as well as software is enabling new types of usage, and the maintenance and analysis of more historical and near real-time data; the adoption by customers of more real time, or “active,” environments for enterprise intelligence is driving more applications, usage and capacity.
Data Warehousing Solutions
Data warehousing is the process of capturing, integrating, storing, managing, and analyzing data to answer business questions and make more informed, faster decisions. Customers use the company's data warehousing software and hardware technologies and related services to acquire, aggregate, store and integrate data from multiple sources, including transaction and enterprise resource planning systems, to manage and analyze these data with the Teradata database software and tools, data mining, master data management and other enterprise analytical applications, such as customer management, demand and supply chain management, enterprise risk management, and financial management, and to integrate analytics-based decisions into operational processes.
The company's solutions allow customers to (1) obtain an integrated view of their business, including customers, products, channels, financials, suppliers, partners, services, etc., and to transform business data into useful, insightful and actionable business intelligence.
In 2008, the company launched a new purpose-built Teradata Platform Family adding the Data Mart Appliance 551, the Data Warehouse Appliance 2550, and the Extreme Data Appliance 1550 to the existing Active Enterprise Data Warehouse 5550 platform.
The Teradata Platform Family was released to extend market reach and opportunity to new customers and to grow the company's share of information technology spending within their existing customer base, by providing solutions from data marts, to entry-level data warehouses, to specialized analytical solutions and their active data warehouses.
The company's purpose-built Platform Family allows customers to standardize on the Teradata database system, leveraging their existing training knowledge and experience, to meet all their analytical architecture needs at various price points.
The company extends the use of traditional data warehousing by integrating advanced analytics into enterprise business processes through a solution known as Active Enterprise Intelligence, which reduces the time between obtaining information and acting on it. Specifically, this advanced solution integrates detailed historical information with near real-time data, and then deploys timely, accurate strategic intelligence to knowledge workers in the corporate office as well as operational intelligence to front line users, customers and partners.
Properties
As of January 1, 2008, the company operated more than 90 facilities consisting of just over 1.1 million square feet throughout the world. On a square footage basis, 40% of these facilities are owned and 60% are leased. Within the total facility portfolio, the company operates 9 research and development facilities totaling approximately 570 thousand square feet, 81% of which are owned. The remaining approximately 570 thousand square feet of space includes office, repair, warehouse and other miscellaneous sites, and is 100% leased. the company maintains facilities in approximately 40 countries and believes its facilities are suitable and adequate to meet its current needs. The company's headquarters are located in Miamisburg, Ohio.
Legal Proceedings
In the normal course of business, the company is subject to proceedings, lawsuits, claims and other matters, including those that relate to the environment, health and safety, employee benefits, export compliance, intellectual property, tax matters, and other regulatory compliance and general matters.
The Company is subject to governmental investigations and requests for information from time to time. As previously reported, the United States Department of Justice is conducting an investigation regarding the propriety of the company’s arrangements or understandings with others in connection with certain federal contracts and the adequacy of certain disclosures related to such contracts.
The investigation arises in connection with civil litigation in federal district court filed under the qui tam provisions of the civil False Claims Act against a number of information technology companies, including the Company. The complaints against the Company remain under seal. The Company is conducting its own internal investigation focusing on the propriety of certain transactions under federal programs under which Teradata was a contractor. The Company has shared evidence with the Justice Department of questionable conduct that the Company has uncovered and intends to continue to cooperate with the Justice Department in its investigation. The Company has recorded a reserve of approximately $2 million related to the current best estimate of potential liability relating to this matter.
A separate portion of the government’s investigation relates to the adequacy of pricing disclosures made to the government in connection with negotiation of NCR’s General Services Administration Federal Supply Schedule as it relates to Teradata, and to whether certain subsequent price reductions were properly passed on to the government. Both NCR and the company are participating in this aspect of the investigation, with respect to certain products and services of each, and each will assume financial responsibility for its own exposures, if any, without indemnification from the other. At this time, the company is unable to determine whether it has liability with respect to this aspect of the investigation.
The company believes the amounts provided in its financial statements are adequate in light of the probable and estimable liabilities. However, because such matters are subject to many uncertainties, the outcomes are not predictable and there can be no assurances that the actual amounts required to satisfy alleged liabilities from the matter described above and other matters, and to comply with applicable laws and regulations, will not exceed the amounts reflected in the company’s financial statements or will not have a material adverse effect on its results of operations, financial condition or cash flows. Any costs that may be incurred in excess of those amounts provided as of December 31, 2008, cannot currently be reasonably determined at this time.
Future Trends
Management believes that demand for the company's solutions will continue to increase due to the continued increase in data volumes, the scale and complexity of business requirements, and the growing use of new data elements and more near real-time analytics over time. The adoption by customers of more near real-time analysis for enterprise intelligence is driving more applications, usage and capacity.
Recently, the U.S. and global economies have experienced a significant downturn driven by a financial and credit crisis that could continue to challenge such economies for some period of time, and may have a negative effect on the company's business.
Management has seen a lengthening of the sales cycle for enterprise data warehousing solutions as a result of closer scrutiny and tighter review processes for larger capital expenditures during 2008; however, management anticipates an opportunity for shorter sales cycles for the company's new purpose-built data warehouse appliance platforms.
The size, timing and contracted terms of large customer orders for the company's products and services can impact, both positively and negatively, their long-term operating results. In addition to the uncertainty created by the economic environment, management expects approximately 4 percentage points of negative impact from currency translation on its reported revenue and a corresponding currency impact on operating income, based on currency rates as of February 9, 2009.
While macroeconomic challenges and fluctuations in the information technology environment do occur, the company's long-term outlook remains positive.
The company did not experience significant changes in 2008 to competitive and/or technological pricing trends, although there is a risk that pricing pressure could occur in the future, and the company remains committed to new product development and achieving maximum yield from its research and development spending and resources, which are intended to drive revenue growth, as evidenced by the recent expansion of their purpose-built Teradata Platform Family.
Mnagement continues to evaluate opportunities to increase market coverage and is committed to continuing to expand the company's sales territories, in and effort to, among other things, drive future revenue growth.
Given the length of sales cycles in the data warehouse market, new sales account territories typically take a year or more, on average, to become productive. During 2009, management plans to actively scrutinize the company's overall selling expense, including monitoring the pace of adding new sales territories as well as tightly managing our professional services costs structure, to keep such cost in line with revenue trends.
Concentration of Risk
The company is potentially subject to concentrations of credit risk on accounts receivable and financial instruments such as hedging instruments, and cash and cash equivalents. Credit risk also includes the risk of nonperformance by counterparties, from which the maximum potential loss may exceed the amount recognized on the balance sheet. Exposure to credit risk is managed through credit approvals, credit limits, selecting major international financial institutions (as counterparties to hedging transactions) and monitoring procedures.
The company's business often involves large transactions with customers, and if one or more of those customers were to default in its obligations under applicable contractual arrangements, the company could be exposed to potentially significant losses. However, management believes that the reserves for potential losses were adequate at December 31, 2008 and 2007.
The company is also potentially subject to concentrations of supplier risk, especially since the company's hardware components are assembled exclusively by Flextronics Corporation.
Flextronics procures a wide variety of components used in the manufacturing process on the company's behalf. Although many of these components are available frommultiple sources, the company utilizes preferred supplier relationships to better ensure more consistent quality, cost and delivery. Typically, these preferredsuppliers maintain alternative processes and/or facilities to ensure continuity of supply.
Given the company’s strategy to outsource its manufacturing activities to Flextronics and to source certain components from single suppliers, a disruption in production at Flextronics or at a supplier could impact the timing of customer shipments.
Thoughts on Flextronics
According to management, Flextronics International, Ltd. (Nasdaq: FLEX) is the company's single source for product hardware.
Fresh off of the heels of its acquisition of International Display Works, Inc. as announced in September 2006, in October 2007 Flextronics acquired Solectron Corporation as announced in June 2007.
In addition, in August 2007, the company completed its acquisition of Avail Medical Products, Inc. and in May 2008 the company completed its acquisition of CEAG's FRIWO Mobile Power Business unit.
All of these acquisitions have left Flextronics with a total debt position of $3.42 billion, or $4.09 per share. That's quite a bit of debt when you consider that for every EBITDA revenue dollar the company generates it has $2.59 of debt. Coupled with the company's negative free cash flow for fiscal 2008 of ($1.09), and the current world wide economic/credit climate, I personally think Flextronics is going to be in serious trouble.
I think it is going to be very difficult for the company to borrow money, since more than 30% of the company's assets are made up of Goodwill and Intangibles. Additionally, I think lenders are going to want to see Gross Margins improve before they get real excited about lending anything to the company. Were I a lender, I simply would not be impressed with a fiscal 2008 gross margin of slightly less than 8%.
In May of 2008, the company announced that in June 2008, Thomas J. Smach the company's CEO was resigning to pursue other interests outside the company. While this is not really significant, it does make me wonder just how intuitive Mr. Smach was since he was able to cash in his chips so to speak, before the economy fell of the cliff.
SEC filings for the company can be found here.
Thoughts on Teradata
In a world in which more and more data is generated, and the need to capture and store that data is becoming ever greater, Teradata may be in the right place at the right time.
Management has not leaveraged the company into oblivion, nor have they allowed themselves to acquire the company's competition, two things that, whether actively done or done by accident, should serve the shareholders well as the global economy continues to collapse.
Operationally, management again has paid attention, with a receivables turnover ratio of 3.91, meaning that while the company extends credit to its customers, it also doesn't allow the money then owed the company to stay outstanding for extended periods. For fiscal 2008, the company collected its accounts receivable about every 93 days, and while I'm personally not impressed with that number, from an industry standpoint it seems to be close to average.
One of the things that I found that management needs to improve is the company's cash conversion cycle, which for fiscal 2008 stood at almost 67 days. This means that it took the company, on average, 67 days from the time the inventory was added to the company's books, to make the product, sell it, and collect its money, ready to start the cycle again.
One way to lower this number would be to improve the 93 day receivables turnover. Initially, I would want to see the days receivables outstanding number, lowered to the same number of days as the company's days payables outstanding number, which for fiscal 2008 was about 48 days. Not only would that help the company manage it's inventory, turned over about 17 times in fiscal 2008, it would also improve the company's available cash position, which as the end of fiscal 2008 stood at $2.24 per share.
As I said, the company collects money owed for services, about every 93 days. The problem is, the company pays its bills every 48 days, meaning the company is providing its creditors with a 45 day, interest free loan. As an investor, I like to see company's that have little to no debt, but it troubles me when I find companies that want to be their suppliers' banker. And given the current state of the world's economies, I expect the accounts receivable number to grow, perhaps peaking at around 145 days.
If the days accounts receivable outstanding number does indeed grow to something close to 145 days, Teradata should be able to pull in its wings and weather the storm. The company may indeed have to borrow some money to do that, and if it does, so be it. At least the company will have a chance at surviving, something, given the same scenario, I don't think the company's single source supplier will be able to do.
My Teradata Opinion
I have Teradata on my watch list with a Reasonable Value Estimate of about $35, a Buy Target of $17.50, a First Sell Target of $34, a Close Target of $37.
While I give company management kudos for keeping the company debt free in fiscal 2008, I also give company management a great big middle finger for staying with a single source supplier.
Not only did company management stay with this supplier, my perception is that management has done nothing to track the financial health of this supplier, a supplier that in my opinion not only carries more debt on its books than it can service today, but more debt than it will be able to service in the days to come.
In the end, I think that management should have demonstrated greater fiduciary integrity toward the company's shareholders by either moving away from a single source supplier, or selecting one far more fiscally conservative than the one the company has.
It is my opinion that the Teradata's management has added considerable risk to a longer-term investment in the company. Accordingly I have reduced my margin of safety Buy Target from $17.50, to $11.00.
Wax
Teradata Corporation - A Wax Ink Worksheet
Financial information contained in this report is based on the company's latest SEC Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on March 02, 2009.
Company Overview
Teradata Corporation (NYSE: TDC) is a global leader in enterprise data warehousing (“EDW”), including enterprise analytic technologies and services. Their data warehousing solutions are comprised of software, hardware, and related business consulting and support services. Recognized as market leading by both industry analysts and customers, their solutions integrate an organization’s departmental and enterprise-wide data—about customers, financials, operations, and more—into a single enterprise-wide data warehouse.
The company's enterprise analytical technologies then transform that data into actionable “enterprise intelligence” allowing the company's customers a single view of their business, and the ability to leverage their organization’s data as a strategic corporate asset to gain competitive and operational advantage.
Businesses today realize that they require better information derived from their data to run their business, and are seeing data volumes and data sources continue to multiply. Using the company's solutions, they can access more timely and accurate information, obtain better insight about all aspects of their business, and make decisions with greater speed and precision to drive profitable growth.
Teradata is designed to enable their customers to maximize business value while minimizing their total costs.
Operating from three main locations in the United States: Johns Creek (Atlanta), Georgia; Miamisburg (Dayton), Ohio; and Rancho Bernardo (San Diego), California, the company serves customers across a broad set of industries from around the world, ranging from small departmental and corporate implementations to many of the world’s largest data warehouses. In addition, the company has sales and services offices located in approximately 40 countries.
For the full year ended December 31, 2008, the company had net income of $250 million and total revenues of $1.762 billion, of which approximately 56% was derived in the North America and Latin America region (the “Americas”), 26% from the Europe, Middle East and Africa region (“EMEA”), and 18% from the Asia Pacific and Japan region (“APJ”).
History and Development
Teradata was formed in 1979 as a Delaware corporation. The company established a relational database management system on a proprietary platform in 1984. In 1990, the company partnered with NCR Corporation (NYSE: NCR) to jointly develop next-generation database systems. In 1991, AT&T Corporation (NYSE: ATT) acquired NCR and later that year NCR purchased Teradata.
In 1996, AT&T spun off NCR, including Teradata, to form an independent, publicly-traded company, NCR Corporation. In 1999, NCR consolidated its Teradata data warehousing operations and product offerings into a separate operating division. Since 1999, the company has increased its investments and focus to extend the scope of their enterprise data warehousing solutions, including improvements to their leading database software, increasing their enterprise analytic software applications, and providing sophisticated support and professional consulting services.
Separation
In August 2007, NCR’s Board of Directors approved the separation of NCR into two independent, publicly-traded companies through the distribution of 100% of its Teradata data warehousing business to shareholders of NCR, referred to as the Separation.
To effect the Separation, Teradata was formed as a separate Delaware corporation in March 2007 as a wholly-owned subsidiary of NCR. Immediately prior to the Separation, the assets and liabilities of the Teradata data warehousing business of NCR were transferred to Teradata in return for 180.7 million shares of the company’s common shares. NCR accomplished the Separation through a distribution of one share of Teradata common stock for each share of NCR common stock in September 2007, with 100% of the Teradata shares distributed to NCR shareholders of record as of September 2007.
NCR Relationship
NCR and Teradata entered into an Interim Services and Systems Replication Agreement, pursuant to which certain transitional services are provided by NCR and its subsidiaries, and vice versa. The services include the provision of administrative and other services identified by the parties. The Interim Services and Systems Replication Agreement provided for a term of up to 18 months for such services, which ends in March 2009, and may be extended for an additional six months by mutual agreement of the parties. The pricing was based on actual costs incurred by the party rendering the services plus a reasonable fixed percentage.
As discussed in the Company’s Registration Statement on Form 10, filed on May 10, 2007, as amended on August 21, 2007 (the “Form 10”), NCR and the company also entered into certain other agreements including the Separation and Distribution Agreement, Tax Sharing Agreement, Employee Benefits Agreement and several commercial agreements. The commercial agreements that were entered into included a network support agreement, service and distributor arrangements, intellectual property agreements, and various real estate arrangements.
Industry Overview
The company's revenues are primarily generated in the multi-billion dollar data warehousing market. This market includes data warehouse database software; applications software; supporting hardware (servers, storage and interconnects); as well as professional, installation and maintenance services.
Management expects that the need for data warehousing will continue to grow as organizations increasingly rely on enterprise analytics to compete on a global basis. This need is further driven by the convergence of the following key market dynamics that management has observed.
High levels of data growth are being driven by globalization, merger and acquisition activities, alignment of information technology (“IT”) and business functions, and increased government regulation; Mission-critical applications used in business operations are increasingly requiring systems to be available at all times; Improved data warehousing affordability due to price/performance gains on server and disk hardware as well as software is enabling new types of usage, and the maintenance and analysis of more historical and near real-time data; the adoption by customers of more real time, or “active,” environments for enterprise intelligence is driving more applications, usage and capacity.
Data Warehousing Solutions
Data warehousing is the process of capturing, integrating, storing, managing, and analyzing data to answer business questions and make more informed, faster decisions. Customers use the company's data warehousing software and hardware technologies and related services to acquire, aggregate, store and integrate data from multiple sources, including transaction and enterprise resource planning systems, to manage and analyze these data with the Teradata database software and tools, data mining, master data management and other enterprise analytical applications, such as customer management, demand and supply chain management, enterprise risk management, and financial management, and to integrate analytics-based decisions into operational processes.
The company's solutions allow customers to (1) obtain an integrated view of their business, including customers, products, channels, financials, suppliers, partners, services, etc., and to transform business data into useful, insightful and actionable business intelligence.
In 2008, the company launched a new purpose-built Teradata Platform Family adding the Data Mart Appliance 551, the Data Warehouse Appliance 2550, and the Extreme Data Appliance 1550 to the existing Active Enterprise Data Warehouse 5550 platform.
The Teradata Platform Family was released to extend market reach and opportunity to new customers and to grow the company's share of information technology spending within their existing customer base, by providing solutions from data marts, to entry-level data warehouses, to specialized analytical solutions and their active data warehouses.
The company's purpose-built Platform Family allows customers to standardize on the Teradata database system, leveraging their existing training knowledge and experience, to meet all their analytical architecture needs at various price points.
The company extends the use of traditional data warehousing by integrating advanced analytics into enterprise business processes through a solution known as Active Enterprise Intelligence, which reduces the time between obtaining information and acting on it. Specifically, this advanced solution integrates detailed historical information with near real-time data, and then deploys timely, accurate strategic intelligence to knowledge workers in the corporate office as well as operational intelligence to front line users, customers and partners.
Properties
As of January 1, 2008, the company operated more than 90 facilities consisting of just over 1.1 million square feet throughout the world. On a square footage basis, 40% of these facilities are owned and 60% are leased. Within the total facility portfolio, the company operates 9 research and development facilities totaling approximately 570 thousand square feet, 81% of which are owned. The remaining approximately 570 thousand square feet of space includes office, repair, warehouse and other miscellaneous sites, and is 100% leased. the company maintains facilities in approximately 40 countries and believes its facilities are suitable and adequate to meet its current needs. The company's headquarters are located in Miamisburg, Ohio.
Legal Proceedings
In the normal course of business, the company is subject to proceedings, lawsuits, claims and other matters, including those that relate to the environment, health and safety, employee benefits, export compliance, intellectual property, tax matters, and other regulatory compliance and general matters.
The Company is subject to governmental investigations and requests for information from time to time. As previously reported, the United States Department of Justice is conducting an investigation regarding the propriety of the company’s arrangements or understandings with others in connection with certain federal contracts and the adequacy of certain disclosures related to such contracts.
The investigation arises in connection with civil litigation in federal district court filed under the qui tam provisions of the civil False Claims Act against a number of information technology companies, including the Company. The complaints against the Company remain under seal. The Company is conducting its own internal investigation focusing on the propriety of certain transactions under federal programs under which Teradata was a contractor. The Company has shared evidence with the Justice Department of questionable conduct that the Company has uncovered and intends to continue to cooperate with the Justice Department in its investigation. The Company has recorded a reserve of approximately $2 million related to the current best estimate of potential liability relating to this matter.
A separate portion of the government’s investigation relates to the adequacy of pricing disclosures made to the government in connection with negotiation of NCR’s General Services Administration Federal Supply Schedule as it relates to Teradata, and to whether certain subsequent price reductions were properly passed on to the government. Both NCR and the company are participating in this aspect of the investigation, with respect to certain products and services of each, and each will assume financial responsibility for its own exposures, if any, without indemnification from the other. At this time, the company is unable to determine whether it has liability with respect to this aspect of the investigation.
The company believes the amounts provided in its financial statements are adequate in light of the probable and estimable liabilities. However, because such matters are subject to many uncertainties, the outcomes are not predictable and there can be no assurances that the actual amounts required to satisfy alleged liabilities from the matter described above and other matters, and to comply with applicable laws and regulations, will not exceed the amounts reflected in the company’s financial statements or will not have a material adverse effect on its results of operations, financial condition or cash flows. Any costs that may be incurred in excess of those amounts provided as of December 31, 2008, cannot currently be reasonably determined at this time.
Future Trends
Management believes that demand for the company's solutions will continue to increase due to the continued increase in data volumes, the scale and complexity of business requirements, and the growing use of new data elements and more near real-time analytics over time. The adoption by customers of more near real-time analysis for enterprise intelligence is driving more applications, usage and capacity.
Recently, the U.S. and global economies have experienced a significant downturn driven by a financial and credit crisis that could continue to challenge such economies for some period of time, and may have a negative effect on the company's business.
Management has seen a lengthening of the sales cycle for enterprise data warehousing solutions as a result of closer scrutiny and tighter review processes for larger capital expenditures during 2008; however, management anticipates an opportunity for shorter sales cycles for the company's new purpose-built data warehouse appliance platforms.
The size, timing and contracted terms of large customer orders for the company's products and services can impact, both positively and negatively, their long-term operating results. In addition to the uncertainty created by the economic environment, management expects approximately 4 percentage points of negative impact from currency translation on its reported revenue and a corresponding currency impact on operating income, based on currency rates as of February 9, 2009.
While macroeconomic challenges and fluctuations in the information technology environment do occur, the company's long-term outlook remains positive.
The company did not experience significant changes in 2008 to competitive and/or technological pricing trends, although there is a risk that pricing pressure could occur in the future, and the company remains committed to new product development and achieving maximum yield from its research and development spending and resources, which are intended to drive revenue growth, as evidenced by the recent expansion of their purpose-built Teradata Platform Family.
Mnagement continues to evaluate opportunities to increase market coverage and is committed to continuing to expand the company's sales territories, in and effort to, among other things, drive future revenue growth.
Given the length of sales cycles in the data warehouse market, new sales account territories typically take a year or more, on average, to become productive. During 2009, management plans to actively scrutinize the company's overall selling expense, including monitoring the pace of adding new sales territories as well as tightly managing our professional services costs structure, to keep such cost in line with revenue trends.
Concentration of Risk
The company is potentially subject to concentrations of credit risk on accounts receivable and financial instruments such as hedging instruments, and cash and cash equivalents. Credit risk also includes the risk of nonperformance by counterparties, from which the maximum potential loss may exceed the amount recognized on the balance sheet. Exposure to credit risk is managed through credit approvals, credit limits, selecting major international financial institutions (as counterparties to hedging transactions) and monitoring procedures.
The company's business often involves large transactions with customers, and if one or more of those customers were to default in its obligations under applicable contractual arrangements, the company could be exposed to potentially significant losses. However, management believes that the reserves for potential losses were adequate at December 31, 2008 and 2007.
The company is also potentially subject to concentrations of supplier risk, especially since the company's hardware components are assembled exclusively by Flextronics Corporation.
Flextronics procures a wide variety of components used in the manufacturing process on the company's behalf. Although many of these components are available frommultiple sources, the company utilizes preferred supplier relationships to better ensure more consistent quality, cost and delivery. Typically, these preferredsuppliers maintain alternative processes and/or facilities to ensure continuity of supply.
Given the company’s strategy to outsource its manufacturing activities to Flextronics and to source certain components from single suppliers, a disruption in production at Flextronics or at a supplier could impact the timing of customer shipments.
Thoughts on Flextronics
According to management, Flextronics International, Ltd. (Nasdaq: FLEX) is the company's single source for product hardware.
Fresh off of the heels of its acquisition of International Display Works, Inc. as announced in September 2006, in October 2007 Flextronics acquired Solectron Corporation as announced in June 2007.
In addition, in August 2007, the company completed its acquisition of Avail Medical Products, Inc. and in May 2008 the company completed its acquisition of CEAG's FRIWO Mobile Power Business unit.
All of these acquisitions have left Flextronics with a total debt position of $3.42 billion, or $4.09 per share. That's quite a bit of debt when you consider that for every EBITDA revenue dollar the company generates it has $2.59 of debt. Coupled with the company's negative free cash flow for fiscal 2008 of ($1.09), and the current world wide economic/credit climate, I personally think Flextronics is going to be in serious trouble.
I think it is going to be very difficult for the company to borrow money, since more than 30% of the company's assets are made up of Goodwill and Intangibles. Additionally, I think lenders are going to want to see Gross Margins improve before they get real excited about lending anything to the company. Were I a lender, I simply would not be impressed with a fiscal 2008 gross margin of slightly less than 8%.
In May of 2008, the company announced that in June 2008, Thomas J. Smach the company's CEO was resigning to pursue other interests outside the company. While this is not really significant, it does make me wonder just how intuitive Mr. Smach was since he was able to cash in his chips so to speak, before the economy fell of the cliff.
SEC filings for the company can be found here.
Thoughts on Teradata
In a world in which more and more data is generated, and the need to capture and store that data is becoming ever greater, Teradata may be in the right place at the right time.
Management has not leaveraged the company into oblivion, nor have they allowed themselves to acquire the company's competition, two things that, whether actively done or done by accident, should serve the shareholders well as the global economy continues to collapse.
Operationally, management again has paid attention, with a receivables turnover ratio of 3.91, meaning that while the company extends credit to its customers, it also doesn't allow the money then owed the company to stay outstanding for extended periods. For fiscal 2008, the company collected its accounts receivable about every 93 days, and while I'm personally not impressed with that number, from an industry standpoint it seems to be close to average.
One of the things that I found that management needs to improve is the company's cash conversion cycle, which for fiscal 2008 stood at almost 67 days. This means that it took the company, on average, 67 days from the time the inventory was added to the company's books, to make the product, sell it, and collect its money, ready to start the cycle again.
One way to lower this number would be to improve the 93 day receivables turnover. Initially, I would want to see the days receivables outstanding number, lowered to the same number of days as the company's days payables outstanding number, which for fiscal 2008 was about 48 days. Not only would that help the company manage it's inventory, turned over about 17 times in fiscal 2008, it would also improve the company's available cash position, which as the end of fiscal 2008 stood at $2.24 per share.
As I said, the company collects money owed for services, about every 93 days. The problem is, the company pays its bills every 48 days, meaning the company is providing its creditors with a 45 day, interest free loan. As an investor, I like to see company's that have little to no debt, but it troubles me when I find companies that want to be their suppliers' banker. And given the current state of the world's economies, I expect the accounts receivable number to grow, perhaps peaking at around 145 days.
If the days accounts receivable outstanding number does indeed grow to something close to 145 days, Teradata should be able to pull in its wings and weather the storm. The company may indeed have to borrow some money to do that, and if it does, so be it. At least the company will have a chance at surviving, something, given the same scenario, I don't think the company's single source supplier will be able to do.
My Teradata Opinion
I have Teradata on my watch list with a Reasonable Value Estimate of about $35, a Buy Target of $17.50, a First Sell Target of $34, a Close Target of $37.
While I give company management kudos for keeping the company debt free in fiscal 2008, I also give company management a great big middle finger for staying with a single source supplier.
Not only did company management stay with this supplier, my perception is that management has done nothing to track the financial health of this supplier, a supplier that in my opinion not only carries more debt on its books than it can service today, but more debt than it will be able to service in the days to come.
In the end, I think that management should have demonstrated greater fiduciary integrity toward the company's shareholders by either moving away from a single source supplier, or selecting one far more fiscally conservative than the one the company has.
It is my opinion that the Teradata's management has added considerable risk to a longer-term investment in the company. Accordingly I have reduced my margin of safety Buy Target from $17.50, to $11.00.
Wax
Teradata Corporation - A Wax Ink Worksheet
Barrett Business Services, Inc. - The Missing Link
I read an article on The Motley Fool site the other day titled One Outrageously Cheap Stock. The article was written by Tim Hanson, who writes lots of articles for The Motley Fool.
NEWSLETTERS
The thing that caught my eye about the article was the missing link. Mr. Hansen's article was written to attract subscribers to one of the newsletters at The Motley Fool, Hidden Gems.
Before I get tons of flames, let me say that I am a subscriber to one of the other Motley Fool newsletters, Stock Advisor, and while the newsletter is very well done, I find it sort of the same old thing.
Anyway, this link think made me curious, since it's the link thing that gets the articles picked up by the news services of the web, and it is the clicking on the link thing that gets TMF paid.
What was missing, was something that should have looked like this. Barrett Business Services, Inc. (Nasdaq: BBSI). Yet here was an article that hightlighted a TMF Hidden Gems company, a company in which the author of the article owns stock, and yet, no link.
THINGS THAT MAKE ME GO HMMM?
At first I found that to be very odd. Why TMF would not support a promoted company with a link. Then I realized that the other links in the article were far more likely to be clicked on than the link for Barrett Business Services, Inc.
I mean to many investors, information about Cisco Systems (Nasdaq: CSCO), MicrosoftMSFT), and Citigroup (NYSE: C) is far more important than information about Barrett. So the odds are far better that a reader will click on one of the other links, instead of Barrett, meaning the odds are greater that the TMF web traffic count will increase, not to mention all of the other things that the web clicking world does.
But I was curious about Barrett, a company that I have on my watch list with reasonable value estimate of $21.85, based on the company's latest SEC Form 10-K for fiscal year ending December 31, 2008.
So being curious, the first thing I did was scan the company's latest SEC DEF 14A Proxy Statement filing. (Nasdaq:
MY ASIDE
As an aside, I believe that the long-term success of an investment in a company comes down to three things. Buying the company's stock with a margin of safety, the transparency of managment, and the entrepreneurial spirit of management.
While I can get a sense about the abilities of management reading through a company's 10-K, for me it's the 14A that provides the greatest insight into management.
For example, Mr. Thomas J. Carley is a director. Mr. Carley is listed as a Co-founder of Portal Capital, an investment management company. Yet the only website I could find for Portal Capital was in Cleveland, Ohio, and Mr. Carley's name was not among the principals of that particular firm.
Another of the things that made me wonder was that Director Roger L. Johnson and Director Ljn L. Justeseen are cousins. Nothing wrong with that of course, and the 14A did disclose that fact. But what I found strange was the name Sherertz, as in Director and President and Chief Executive Office of the company, William W. Sherertz.
The 14A listed a Mr. William W. Sherertz as controlling 27.3% of the outstanding shares of the company, while a Ms. Nancy B. Sherertz controls 8.2% of the outstanding shares of the company. It is noted that Mr. Sherertz's shares include..."10,500 shares held by Mr. Sherertz’s wife, 91,479 shares held by Mr. Sherertz for his children, and 17,390 shares held by him for his niece, as to each of which he shares voting and dispositive power."
Why is any of this so odd?
MORE HMMMM THINGS
Well to me the name Sherertz is not a very common name. To be honest, until reading the company's Proxy Statement, I had never heard of the name. Yet according to the 14A, ..."Nancy B. Sherertz and William W. Sherertz are not related to each other." Wonder what the odds of that are?
One of the other things that a 14A does, is present all of the shareholders of a company the right to re-elect company officers, as provide the right to vote on matters requiring approval by a company's shareholders, such as changes in executive compensation and approval of stock incentive plans.
The Barrett proxy statement is no different. The company's upcoming annual meeting, includes an opportunity for all company shareholders to elect directors and to vote on the company's 2009 Stock Incentive Plan.
Simply put, the directors want the approval of the shareholders to dilute the value of the existing stock shares by adding 1,000,000 to the company's stock incentive plan, in order to recruit and keep the best and the brightest.
From the company's 14A...
"1.2 Purpose. The purpose of the Plan is to promote and advance the interests of Corporation and its shareholders by enabling Corporation to attract, retain, and reward key employees, directors, and outside consultants of orporation and its subsidiaries. It is also intended to strengthen the mutuality of interests between such employees, directors, and consultants and Corporation’s shareholders. The Plan is designed to serve these purposes by offering stock options and other equity-based incentive awards, thereby providing a proprietary interest in pursuing the long-term growth, profitability, and financial success of Corporation."
WHAT I REALLY THINK
Personally, I think it's all a large bunch of crap, and were I a CEO the deal would be simple. Work hard and contribute, you have a job and an annual bonus. Sit on your stones move the same piece of paper from one side of your desk to the other, you're gone.
And that would be for all of the suit people, not just management!
Look, I'm not saying there is any smoking gun with the management of Barrett, and certainly in scanning the company's 14A, there is nothing that appears out of the ordinary, although I would like to dig a little further into any relationships between the company and The Royce Funds since they control 13.6% of the company's outstanding shares. But that's more of a curiosity than a concern.
AND NOW THE BURNING QUESTION
As I said, it's the little things that mostly attract my attention.
Why do birds sitting on a wire mostly face the same direction? Why do the vast majority of guys button their shirts starting at the bottom? Why do a guy's pants hit the floor when he hits the can?
And why wasn't there a link thing to click on in the article Mr. Hanson wrote?
If I can ever separate my pants from my shirt and get out of this extremely confined space, maybe I can find an answer to that question.
Until then I think the burning question remains. Why aren't the two Sherertzs related?
Wax
Bally Technologies, Inc. - A Raw Value Report
The Gaming Activities Industry
According to Yahoo Finance!, there are approximately 110 companies in the Gaming Activities Industry. Of those 110 companies, 30 companies are publicly traded, and of those, 18 companies are OTC/Pink Sheet companies and two are foreign companies.
The remaining 10 companies are on my watch list. This is the story of only one of those ten.
Bally Technologies, Inc.
Financial information contained in this report is based on the company’s latest SEC Form10-K filing for fiscal year ending June 30, 2009, as filed with the SEC on August 29, 2009.
The Company
Bally Technologies, Inc. (NYSE: BYI), was incorporated in Nevada on September 30, 1968, under the name Advanced Patent Technologies. Following two other name changes, they became Alliance Gaming Corporation on December 19, 1994, and on March 6, 2006, the company names was changed to Bally Technologies, Inc.
The Business
They are a diversified, worldwide gaming company that designs, manufactures, distributes, and operates gaming devices and computerized monitoring and accounting systems for gaming devices.
In addition to selling gaming devices, they also offer a wide range of rental options. The company’s primary technologies include gaming devices for land-based, riverboat and Native American casinos, video lottery and central determination markets, and specialized system-based hardware and software products.
Their specialized system-based hardware and software products provide casinos with a wide range of marketing, data management, accounting, security and other software applications and tools to more effectively manage their operations.
The company also owns and operates the Rainbow Casino, a dockside riverboat casino in Vicksburg, Mississippi.
The company derives its revenue from:
Gaming Equipment - The sale of gaming devices and related equipment, parts and conversion kits.
Gaming Operations - Operation of linked progressive systems, video lottery and centrally determined systems and the rental of gaming devices and content.
Systems - Sale of computerized monitoring systems and related recurring hardware and software maintenance revenue
Casino Operations - Operation of the Rainbow Casino.
Investment Thoughts
Based on a five-year hold, the company is on my watch list with a Buy Target of $30.20, a First Sell Target of $58.89, and a Close Target of $63.75.
But because I’m not really impressed with management, I have reduced my buy target to $11.63.
To me, everything that is reflected in a company’s financial statement, is a direct result of the job management has done and is currently doing. Reading through a company’s 10-K filing I want to get a sense that management is entrepreneurial in its thinking, that it is taking considered steps to grow the business while at the same time preserving the interests of the company’s shareholders. That management will take a reasonable risk when being reasonably risky is required.
Unfortunately I didn’t find that with the management of BYI, and while the business model seems to work, I have to say I’m not so certain about management.
One thing that is a concern to me is that 3 cents out of every sales dollar is needed to pay the interest on the company’s debt, which when you examine the company’s total debt of $304.5 million, works out to an average interest rate of 8.83%!
My concern is that if the average interest rate is 8.83% today when overall interest rates are the lowest they have been in forever, how much of the company’s cash is going to be needed to service this debt in the future when interest rates once again escalate?
I’m also a bit concerned about how the company is leveraging assets to collateralize its debt, since almost 20% of the company’s total assets consist of goodwill and intangibles. In addition, the company’s debt exceeds fixed assets by 77%, so the amount of leverage the company seems to be employing is very much a concern.
It is especially disconcerting considering that the company spent $23.1 million in fiscal 2008 buying back its own stock, which I assume was financed with borrowed money, and done in an effort to keep the share price elevated, to satisfy debt covenants.
On the other hand, I am pleased with the company’s free cash flow of $2.02 per share, and the company’s return on invested capital of slightly more than 26%.
But after that, to me, there is little to get excited about. Tangible book value stands at $2.14 and shareholder equity comes in at $5.55, leading me to wonder just how this company is going to grow their earnings 22% year over year over for the next five years as some analyst predict.
Value Investment Opinion
At the end of the day, the long-term success of an investment in a company comes down to two things, a margin of safety and the entrepreneurial spirit of management.
In the case of Bally Technologies, Inc., I simply don’t believe that management possesses the entrepreneurial spirit needed to effectively grow this business, which is why, for me to consider the company as a viable investment candidate, a larger margin of safety is required.
And that brings me back to my opening comments regarding an adjusted buy target of $11.63, an almost 60% reduction in my $30.20 standard margin of safety buy target.
Wax
Bally1208.pdf
According to Yahoo Finance!, there are approximately 110 companies in the Gaming Activities Industry. Of those 110 companies, 30 companies are publicly traded, and of those, 18 companies are OTC/Pink Sheet companies and two are foreign companies.
The remaining 10 companies are on my watch list. This is the story of only one of those ten.
Bally Technologies, Inc.
Financial information contained in this report is based on the company’s latest SEC Form10-K filing for fiscal year ending June 30, 2009, as filed with the SEC on August 29, 2009.
The Company
Bally Technologies, Inc. (NYSE: BYI), was incorporated in Nevada on September 30, 1968, under the name Advanced Patent Technologies. Following two other name changes, they became Alliance Gaming Corporation on December 19, 1994, and on March 6, 2006, the company names was changed to Bally Technologies, Inc.
The Business
They are a diversified, worldwide gaming company that designs, manufactures, distributes, and operates gaming devices and computerized monitoring and accounting systems for gaming devices.
In addition to selling gaming devices, they also offer a wide range of rental options. The company’s primary technologies include gaming devices for land-based, riverboat and Native American casinos, video lottery and central determination markets, and specialized system-based hardware and software products.
Their specialized system-based hardware and software products provide casinos with a wide range of marketing, data management, accounting, security and other software applications and tools to more effectively manage their operations.
The company also owns and operates the Rainbow Casino, a dockside riverboat casino in Vicksburg, Mississippi.
The company derives its revenue from:
Gaming Equipment - The sale of gaming devices and related equipment, parts and conversion kits.
Gaming Operations - Operation of linked progressive systems, video lottery and centrally determined systems and the rental of gaming devices and content.
Systems - Sale of computerized monitoring systems and related recurring hardware and software maintenance revenue
Casino Operations - Operation of the Rainbow Casino.
Investment Thoughts
Based on a five-year hold, the company is on my watch list with a Buy Target of $30.20, a First Sell Target of $58.89, and a Close Target of $63.75.
But because I’m not really impressed with management, I have reduced my buy target to $11.63.
To me, everything that is reflected in a company’s financial statement, is a direct result of the job management has done and is currently doing. Reading through a company’s 10-K filing I want to get a sense that management is entrepreneurial in its thinking, that it is taking considered steps to grow the business while at the same time preserving the interests of the company’s shareholders. That management will take a reasonable risk when being reasonably risky is required.
Unfortunately I didn’t find that with the management of BYI, and while the business model seems to work, I have to say I’m not so certain about management.
One thing that is a concern to me is that 3 cents out of every sales dollar is needed to pay the interest on the company’s debt, which when you examine the company’s total debt of $304.5 million, works out to an average interest rate of 8.83%!
My concern is that if the average interest rate is 8.83% today when overall interest rates are the lowest they have been in forever, how much of the company’s cash is going to be needed to service this debt in the future when interest rates once again escalate?
I’m also a bit concerned about how the company is leveraging assets to collateralize its debt, since almost 20% of the company’s total assets consist of goodwill and intangibles. In addition, the company’s debt exceeds fixed assets by 77%, so the amount of leverage the company seems to be employing is very much a concern.
It is especially disconcerting considering that the company spent $23.1 million in fiscal 2008 buying back its own stock, which I assume was financed with borrowed money, and done in an effort to keep the share price elevated, to satisfy debt covenants.
On the other hand, I am pleased with the company’s free cash flow of $2.02 per share, and the company’s return on invested capital of slightly more than 26%.
But after that, to me, there is little to get excited about. Tangible book value stands at $2.14 and shareholder equity comes in at $5.55, leading me to wonder just how this company is going to grow their earnings 22% year over year over for the next five years as some analyst predict.
Value Investment Opinion
At the end of the day, the long-term success of an investment in a company comes down to two things, a margin of safety and the entrepreneurial spirit of management.
In the case of Bally Technologies, Inc., I simply don’t believe that management possesses the entrepreneurial spirit needed to effectively grow this business, which is why, for me to consider the company as a viable investment candidate, a larger margin of safety is required.
And that brings me back to my opening comments regarding an adjusted buy target of $11.63, an almost 60% reduction in my $30.20 standard margin of safety buy target.
Wax
Bally1208.pdf
MGM Mirage - Wax Ink Raw Value Report
The Business
It bills itself as one of the world’s leading development companies with significant gaming and resort operations. Company management believes the resorts the company owns, manages, and invests in, are among the world’s finest casino resorts.
The company acts largely as a holding company and its operations are conducted through its wholly-owned subsidiaries.
Company management has a strategy that is based on developing and maintaining competitive advantages by: Developing and maintaining a strong portfolio of resorts; Operating company resorts to ensure excellent customer service and maximize revenue and profit; Executing a sustainable growth strategy; Leveraging the company's brand and management assets.
To me, the flaw in management's strategy is the word "Leveraging".
The Company
It is the MGM Mirage (NYSE: MGM) oganized as the MGM Grand, Inc. in January of 1986, a Delaware corporation.
Financial information contained in this report is based on the company’s latest SEC Form10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on March 17, 2009.
Here's the Deal
I'm not going to go into some long drawn out discussion about how the company earns its money, if you are interested in a deeper understanding of the company, click on the link above and read through the latest SEC 10-K filing.
What I am going to go into is, just like the Las Vegas Sands Corporation (NYSE: LVS) the MGM Mirage is mired in debt, closing fiscal 2008 with a debt load of $13.46 billion dollars. Or to put this in more practical terms, 48.12 per share. Based on a recent close of $4.65, the company's debt is 10.35 times greater than a recent close.
And it gets even better. For every dollar in earnings the company has, before interest, taxes, depreciation, and amortization, the company has $7.49 of debt. Think about what I just said. For every dollar in earnings after the company's direct cost of sales, there is $7.49 of debt.
I know, I've heard the arguments about how the company has all these fixed assets that they are carrying on their books at cost, and on and on. The problem with that is if that's the case, is the company is leveraging (there's that word again) its fixed assets for debt.
And if I'm not mistaken, isn't that how America and the rest of the planet arrived in the financial quagmire we now all find ourselves immersed in?
The company has net fixed assets of $16.289 billion, or $58.22 per share. When I compare the net fixed asset number to debt, I find that company has leverage 83% of its net fixed asset value for debt, meaning if the company received 100 cents on the dollar for its net fixed assets, the company could pay off all of its debt and have about $10 a share left over. Given today's economic climate, that's just to tight for my liking.
I will say one thing about management however, they do understand what is required to generate free cash flow, closing fiscal 2008 with free cash flow of $6.89. But because of all of the debt, not to mention that current liabilities exceeded current assets by about 2 to 1, the company's tangible book is in the red at ($2.70) per share.
I'm not saying that the company doesn't have earnings either, earning $5.43 a share for fiscal 2008. What I'm saying is the company has far too much debt, and when I consider that the company paid an average of 4.53% interest on all of that during fiscal 2008, draining the company of $2.18 per share, I have to wonder what will happen when interest rates start to climb.
Certainly in the business the company is in, being debt free may not be a viable option. But what happens in 2011, or 2012, when hyper inflation starts to kick in because of all of the money the government is pouring into the economy today? Will the company be able to service its debt when interest rates are at 11%, or 13%? What rabbit will management be able to pluck from its collective hat then?
I for one happen to think that such hocus pocus will not produce the proverbial rabbit. Instead what will arise is the smell of carrot effluent.
Wax
MGM Mirage1208.pdf
The Las Vegas Corportion - A Wax Ink Raw Value Report
The Las Vegas Sands Corporation (NYSE: LVS) owns and operates The Venetian Resort Hotel Casino, The Palazzo Resort Hotel Casino, and The Sands Expo and Convention Center in Las Vegas, Nevada.
In addition, the company owns and operates the Sands Macao, The Venetian Macao Resort Hotel, the Four Seasons Hotel Macao, and the Cotai Strip in Macao, People’s Republic of China.
Additionally, the company is creating a master-planned development of integrated resort properties, anchored by The Venetian Macao, and referred to as the Cotai Strip in Macao.
The company is also developing Marina Bay Sands, an integrated resort in Singapore, and Sands Casino Resort Bethlehem, an integrated resort in Bethlehem, Pennsylvania.
At the end of fiscal 2007, the company had approximately $7.6 billion of debt. At the end of fiscal 2008, the company has $10.4 billion of debt, and increase of almost 37% in one year.
In the immortal words of Randolph Duke to Wilson..."Idiot! Get back in there and sell, sell"!
Las Vegas Sands Deal Report.pdf
Hornbeck Offshore Services, Inc. - A Wax Ink Raw Value Report
Long-Term Investment Opinion
It has long been the investment philosophy of Wax Ink, that when reasonable people make reasonable decisions, much can be achieved.
To that end we have reviewed the available financial information of Hornbeck Offshore Services, Inc. (NYSE: HOS) and at this time have no long-term interest in this company.
Short-Term Investment Opinion
We note that based on a recent close of $16.36, the company has a short-term upside potential of $28.70, a 75% increase from its recent close, while at the same time the company has short-term downside risk to $14.91, a 9% decline from its recent close.
While a short-term investment here may seem a good play, we are concerned about the investment risks from the greater economy.
Accordingly, we would maintain a 7.5% stop setting on this stock. As the stock price increased we would decrease the stop to 5% and finally decrease it to 3%, letting the stop close the investment position while locking in any investment gains and limiting any investment loses.
Wax
Hornbeck Offshore Services.pdf
It has long been the investment philosophy of Wax Ink, that when reasonable people make reasonable decisions, much can be achieved.
To that end we have reviewed the available financial information of Hornbeck Offshore Services, Inc. (NYSE: HOS) and at this time have no long-term interest in this company.
Short-Term Investment Opinion
We note that based on a recent close of $16.36, the company has a short-term upside potential of $28.70, a 75% increase from its recent close, while at the same time the company has short-term downside risk to $14.91, a 9% decline from its recent close.
While a short-term investment here may seem a good play, we are concerned about the investment risks from the greater economy.
Accordingly, we would maintain a 7.5% stop setting on this stock. As the stock price increased we would decrease the stop to 5% and finally decrease it to 3%, letting the stop close the investment position while locking in any investment gains and limiting any investment loses.
Wax
Hornbeck Offshore Services.pdf
Pharmaceutical Product Development, Inc. - A Raw Value Report
It's on my watch list with a Reasonable Value Estimate of $44.88. Along with my Reasonable Value Estimate, I've given the stock a Buy Target of $22.44, a First Sell Target of $43.76, and a Close Target of $47.37.
But here's the curious thing. I have a handful of metrics that are important to me when evaluating a company for investment, each one being equally weighted.
Collectively, these metrics represent what I call a company's Strength of Statement. The stronger the financial statement based on the metrics that are important to me, the more willing I am to pay the full Buy Target price for the stock.
For what it's worth, the financial statement of Pharmaceutical Product Development, Inc. (Nasdaq: PPDI) is the first one to have a Strength of Statement rating of 100%.
The financial information contained in this report, is based on the company latest SEC Form 10-K filing for fiscal year ending December 2008.
Wax
Axsys Technologies - A Wax Ink Raw Value Report
There was a news release from a company on my watch list the other day. The wording was so direct that it took me aback, as I'm not used to seeing anything so direct.
The press release wording said.."The company's enviable balance sheet, growth prospects, and market presence, which make Axsys an attractive acquisition candidate, also position Axsys as an effective stand-alone company. As a consequence, while Axsys' board of directors feels that it is appropriate to evaluate offers for the company, it is under no obligation to accept an offer that it does not believe is in the best interest of its shareholders. There can be no assurance made that a transaction will be consummated, if at all, on terms acceptable to Axsys and its shareholders."
It was the part about the enviable balance sheet that caught my attention, and made me want to take a little look see.
The Business
Axsys Technologies, Inc. (Nasdaq: AXYS) was originally incorporated in the State of New York in 1959 and reincorporated in the State of Delaware in 1968. According to the company's latest SEC10-K filing for the fiscal year ending December 31, 2008, as filed with the SEC on February 17, 2009, the company is the leading designer and manufacturer of precision optical solutions for defense, aerospace, homeland security and high-performance commercial applications.
These sophisticated solutions are typically found in applications that demand the finest optical surfaces, highest accuracy and tightest motion control tolerances. Application examples include weapon systems, long-range surveillance cameras and highly precise imaging telescopes. The company typically sells their products to government institutions such as the U.S. Border Patrol, Army, Navy and Air Force, or to large defense contractors for integration into larger platforms.
Axsys Technologies, Inc. is organized into two business segments: the Surveillance Systems Group and the Imaging Systems Group.
Surveillance Systems Group
The Surveillance Systems Group designs, manufactures and sells highly precise camera systems for deployment on ground, marine and aerial vehicles. The products are typically used in surveillance, reconnaissance, tracking and targeting applications, anc can be grouped into two primary areas: non-stabilized camera systems and gyrostabilized camera systems.
Non-stabilized camera systems are often deployed as fixed mounts on poles or masts. Typical applications for non-stabilized camera systems include border surveillance, port threat detection and perimeter security.
Gyrostabilized camera systems are usually deployed on airborne vehicles such as helicopters, manned and unmanned aerial vehicles, and marine vehicles. Gyrostabilization is usually necessary in air-and sea-based applications in order to maintain a steady image while the vehicle is moving on several axes. Typical applications for gyrostabilized camera systems include search and rescue, drug interdiction, border surveillance, criminal pursuit and movie production.
The focus markets for the company's Surveillance Systems Group are defense, homeland security, law enforcement, electronic news gathering and film production, with products both as stand-alone products and as constituent parts of larger, integrated surveillance networks. Sales are achieved through a combination of direct sales and a worldwide distributor network.
The core engineering requirements necessary to design, develop and manufacture our products include visible and infrared optical engineering, precision mechanical engineering, electrical engineering and embedded and application software engineering. The company's engineering staff is particularly skilled at designing to military-grade specifications, which require a high degree of precision and must conform to extremely tight tolerance and reliability requirements.
The Surveillance Systems Group has design and manufacturing facilities in Nashua, New Hampshire and Grass Valley, California. and generated approximately 31%, ($75.6 million) of the company's 2008 revenues.
Imaging Systems Group
The Imaging Systems Group designs, manufactures and sells optical and motion control subsystems and components for deployment in larger, integrated systems. Products in the Imaging Systems Group include visible and infrared lenses, scanning systems, laser positioners, long-range telescopes, stabilized sensor positioning systems, precision motion-control components and imaging optics.
These products are often embedded in larger systems that depend on precise optical control for accurate operation of critical functions. Many of the applications with which we are involved are part of the continuing development of next-generation targeting, navigation and surveillance systems for advanced weaponry, armored vehicles, military aircraft and space-based surveillance.
The company supplies critical guidance and seeker components for platforms such as the Minuteman intercontinental ballistic missile and the AIM-9X Sidewinder missile.
The company is involved in many large-scale programs including the MRAP vehicle, Apache Helicopter, Stryker Vehicle, M1A2 Abrams Tank and Thermal Weapons Site, with many of the company' products included on many platforms within the U.S. National Missile Defense program ("NMD").
The primary target markets for the Imaging Systems Group are defense, space and homeland security. However, they also serve high-performance commercial markets, such as thermographic camera systems and graphic arts capital equipment, with the company's products often designed to meet customer specifications. The company's products are sold as original equipment manufacturer ("OEM") solutions, which are integrated into a customers' products.
The core engineering requirements necessary to design, develop and manufacture the comapny's products include visible and infrared optical engineering, precision mechanical engineering, electrical engineering and embedded and application software engineering, with the company's engineering staff particularly skilled at designing to military-grade specifications, which require a high degree of precision and must conform to extremely tight tolerance and reliability requirements.
The Imaging Systems Group has design and manufacturing facilities in Nashua, New Hampshire, San Diego, California, Cullman, Alabama and Rochester Hills, Michigan and generated approximately 69% ($169.9 million) of the company's 2008 revenues.
Backlog and Orders
The company received new orders of $270.4 million in 2008, ending the year with a backlog of $165.1 million, of which 7.7% will be shipped beyond 12 months. The company's backlog increased by $24.9 million, or 17.8%, compared to their ending backlog of $140.2 million as of December 31, 2007.
Competition
The market for the company's products is competitive, with the company competing primarily on the basis of their ability to design and engineer products to meet performance specifications set by their customers. Some of the company's customers are OEMs that purchase component parts or subassemblies, which they incorporate into their end products. The company's thermal imaging cameras and gyrostabilized sensor systems are typically sold directly to equipment integrators, as well as government, military and commercial end users. Product pricing, quality, customer support, experience, reputation and financial stability are also important competitive factors.
There are a limited number of competitors in each of the markets for the various types of precision optical, infrared and motion control systems and components the company designs, manufactures, and sells. Competitors are often well entrenched, particularly in the aerospace and defense markets. Some of these competitors have substantially greater resources than the company does. The company believes that the quality of their technologies and product offerings provides them with a competitive advantage over certain manufacturers that supply only discrete components or who are not vertically integrated with enabling technologies.
The company expects their competitors to continue to improve the design and performance of their products, and cannot assure investors that their competitors will not develop enhancements to, or future generations of, competitive products that will offer superior price or performance features, or that new technology or processes will not emerge that render the company's products less competitive or obsolete.
Increased competitive pressure could lead to lower prices for the company's products, thereby adversely affecting their business, financial condition and results of operations.
Customers
The company's customers include end users, equipment integrators and OEMs that demand high-precision, high-performance products or subsystems. The company sells their products primarily to customers in the aerospace and defense, space, homeland security and high-performance commercial markets.
BAE Systems, an aerospace and defense systems supplier, represented 23.2% of total 2008 sales, 15.8% of total 2007 sales, and 14.6% of total 2006 sales. The company participates with BAE Systems on multiple programs, with the majority of their sales to BAE Systems relating to two armored vehicle programs and a thermal weapons sight program. Both programs are ultimately dependent on U.S. Department of Defense spending and could be canceled. However, night vision systems are a high priority for the U.S. military and, therefore, the company does not foresee any weakening of demand for these products in the short term.
The company's infrared lens products, which are used in BAE Systems' remote operated weapon station programs, represented 13% of total sales during 2008. No single product or class of similar products, represented 10% or more of total company sales in 2007 or 2006.
Raytheon Company, an aerospace and defense systems supplier, while not a material customer in 2008 or 2006, represented 10.9% of total sales during 2007.
The company had aggregate sales, both military and non-military, directly to the U.S. government, including its agencies and departments, of approximately $7.0 million in 2008, $6.2 million in 2007 and $4.8 million in 2006.
These sales accounted for approximately 2.8% of sales in 2008 and 3.6% of total sales in each of 2007 and 2006. Approximately 70.7% of total sales in 2008, 66.4% of total sales in 2007 and 68.9% of total sales in 2006 were derived from subcontracts with U.S. government contractors.
The majority of these contracts are subject to termination at the convenience of the U.S. government, and certain contracts are also subject to renegotiation. Currently, the company is not aware of any proposed termination or renegotiation of such contracts that would have a material adverse effect on their business.
Because a substantial part of the company's business is derived directly from contracts with the U.S. government, U.S. government agencies or departments, or indirectly through subcontracts with U.S. government contractors, the company's operational results could be materially affected by changes in U.S. government expenditures for projects or programs using the company's products.
However, company management believes that the broad number and diversity of the programs with which the company is involved, and the breadth of the company's product applications, may lessen company exposure to such risk.
About BAE Systems
BAE Systems plc (LSE: BA.L) is a premier global defense, security and aerospace company delivering a full range of products and services for air, land and naval forces, as well as advanced electronics, security, information technology solutions and customer support services. The company has approximately 105,000 employees worldwide, with 2008 sales exceeding £18.5 billion (US $34.4 billion).
Headquartered in Rockville, Maryland, BAE Systems, Inc., a subsidiary of BAE Systems plc, employs some 45,000 employees in the US, UK, Sweden, Israel and South Africa generating annual sales in excess of $10 billion. BAE Systems Inc. consists of three operating groups that provide support and service solutions for current and future defense, intelligence, and civilian systems; design, develop and manufacture a wide range of electronic systems and subsystems for both military and commercial applications; and design, develop, produce, and provide service support of armored combat vehicles, artillery systems and intelligent munitions.
Raw Materials Suppliers
The raw materials and components the company purchases are generally available from multiple suppliers. However, Brush Wellman, Inc., a subsidiary of Brush Engineered Materials, Inc. is the only U.S. source for beryllium, which is a material used extensively by the company. Historically, the company has had an excellent relationship with Brush Wellman and we have not encountered problems in obtaining our supply requirements.
While there is an alternative source in Kazakhstan, most of the company's military contracts preclude the use of non-U.S. material. Management believes that a partial or complete loss of Brush Wellman as a supplier of beryllium, or production shortfalls or interruptions that otherwise impair the supply of beryllium, would have a materially adverse effect on the company's business, financial condition and results of operations.
About Brush Engineered Materials, Inc.
Brush Engineered Materials, Inc. (NYSE: BW) through its wholly owned subsidiaries, is a leading international producer and supplier of high-performance engineered materials. Brush Wellman Inc. (BWI) is the only fully-integrated producer of beryllium, beryllium-containing alloys, and beryllia ceramic in the world. Engineered Material Systems are produced through Technical Materials, Inc. (TMI) , and precious metal and specialty alloy products through Williams Advanced Materials Inc. (WAM). International markets are served through Brush International (BI).
Brush’s materials continue to find new applications in a widening array of markets where superior performance and reliability are essential. Brush Engineered Materials’ four primary business segments, Advanced Material Technologies and Services, Specialty Engineered Alloys, Beryllium and Beryllium Composites, Engineered Materials Systems, provide the products to meet these growing demands.
Patents and Trademarks
Axsys Technologies is not dependent upon any single patent or trademark. They have a combination of patents, trademarks and trade secrets, non-disclosure agreements and other forms of intellectual property protection covering their proprietary technology. Although they believe that their patents and trademarks may have value, management believes that the company's future success will depend primarily on the innovation, technical expertise, manufacturing and marketing abilities of company personnel.
Competitors in the United States and foreign countries, many of which have substantially greater resources, may have applied for or obtained, or may in the future apply for and obtain, patents that will prevent, limit or interfere with the company's ability to make and sell some of the compan's products.
Environmental Regulation
At this time, the company believes that it is currently in compliance, in all material respects, with federal, state and local laws and regulations governing the use and discharge of hazardous substances and other pollutants into the environment or otherwise relating to the protection of the environment and that any non-compliance with such laws will not have a material adverse effect upon the company's business, financial condition, results of operations, capital expenditures, earnings or competitive position.
The company has incurred, and may incur in the future, costs and liabilities under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or similar state laws for the investigation and cleanup of hazardous waste or contamination at third-party waste disposal sites or at current or former facilities, related in part to historical practices or waste disposed of prior to the purchase of facilities by the company.
The company is in the process of remediating two formerly owned sites in Bedford, Ohio and St. Petersburg, Florida and is participating as a potentially responsible party ("PRP") at a third-party waste disposal site in Norwalk, Connecticut. Although liability under CERCLA is joint and several, meaning that liability can exceed a PRP's pro rata share of cleanup costs, management believes, based on currently available information, that it is remote that costs associated with these sites will have a material adverse effect on the company's business and financial condition.
As of December 31, 2008, the company had an accrual of $0.8 million for future costs related to the Ohio, Florida and Connecticut sites. These estimates have been developed in consultation with outside environmental and legal consultants handling these matters and are based upon an analysis of the anticipated remediation plans. Management does not anticipate these matters will have a material adverse effect on our consolidated financial position.
The company uses or generates certain hazardous substances in their manufacturing and engineering facilities. Mangement believes that the company's handling of these substances is in compliance with, and exceeds what is required by, applicable local, state and federal environmental, safety and health regulations at each operating location.
The company invests in protective equipment, process controls and specialized training to minimize risks to employees, surrounding communities and the environment due to the presence and handling of these hazardous substances, and regularly conducts employee physical examinations and workplace air monitoring related to these substances. When potential or actual exposure problems have been indicated, the company implemented corrective actions.
In general, re-occurrence has been minimal or non-existent, and te company does not carry environmental impairment insurance. Accordingly, any failure by the company to properly manage exposure to hazardous substances could have a materially adverse effect on the company's business, financial condition and operations.
Employees
As of December 31, 2008, the company employed 991 persons, including 728 in manufacturing, 60 in sales, 121 in engineering and 82 in administration. Currently, none of the company's employees are represented by unions and managment considers their relationship with their employees to be satisfactory. There has been no significant interruption of operations due to labor disputes.
Legal Proceedings
The company is a defendant in various lawsuits, none of which are expected to have a material adverse effect on the company's business or financial position.
Acquisitions
On April 13, 2007, the company acquired Cineflex, a privately held manufacturer of high-precision gyrostabilized aerial camera systems, for $26.7 million in cash. Additional incremental cash payments of up to $42.5 million are possible if certain revenue targets are exceeded as part of a three-year earn-out agreement.
In addition, a second contingent payment of up to 10% of all revenues to be recognized from multi-year orders in backlog at the end of the earn-out period is possible if revenues in the fourth year from the acquisition date exceed $40 million.
During 2007, an earn-out of $3 million was earned, which increased the purchase price to $30 million. This $3 million earn-out was paid in the first quarter of 2008. Additionally during 2008, an earn-out of $0.8 million was earned which increased the purchase price to $30.8 million.
In connection with the acquisition, the company incurred $0.4 million of legal, audit and other acquisition-related costs. Cineflex is a technology leader in the design and manufacture of highly stable, multi-sensor, multi-axis surveillance platforms serving customers in federal and local government and in the motion picture and electronic news gathering industries.
Liquidity and Capital Resources
The company's strategy to enhance stockholder value is dependent on its ability to take advantage of both internal and external business opportunities as they arise. Maximizing the utilization of the company's cash resources is crucial to the successful execution of that strategy. The company's secured revolving credit facility permits borrowings of up to $40.0 million, of which $3.0 million may be utilized to issue letters of credit. The company had no borrowings outstanding under our revolving credit facility at December 31, 2008; however, $2.5 million of the company's revolving credit facility was utilized for outstanding letters of credit.
The company's revolving credit facility remains available through May 2012, subject to optional prepayment in accordance with its terms. The company may elect to have any borrowing under the revolving credit facility bear interest either at the bank's prime rate or the LIBOR rate plus a margin of 100 to 200 basis points, depending on the company's consolidated funded debt-to-consolidated EBITDA ratio. The company has the option of selecting the 1-month, 2-month, 3-month or 6-month LIBOR rate.
The company's credit facility requires that the company maintain compliance with certain covenants, including covenants regarding minimum EBITDA, a minimum fixed charge coverage ratio and a maximum leverage ratio. As of December 31, 2008, the company was in compliance with all the covenant requirements of their credit facility. The credit facility is secured by a lien on all our assets and the assets of thec omapny's subsidiaries, including a pledge on the stock of their subsidiaries.
The company continues to invest in new growth opportunities and increase spending on research and development and capital equipment that is critical to increased production capacity. With the company's existing cash balance, anticipated cash flows from operations and available borrowings under our revolving credit facility, management believes that the company has sufficient liquidity to finance their operations, capital expenditures and working capital requirements for the foreseeable future, including at least the next twelve months.
Off-Balance Sheet Arrangements
As part of the company's ongoing business, they do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2008, the company was not involved in any special-purpose entities.
Critical Accounting Policies
Revenue Recognition
The company manufactures products that are sold to end users, equipment integrators and OEMs. Some of thier contracts are subject to customer acceptance and generally the customer will inspect and accept the product at the company's facility prior to shipment. Generally, legal title passes to the customer upon shipment. The company's policy is to recognize revenues when a product is either shipped to, or received by, the customer based on the terms of the specific sale. However, occasionally a product is shipped FOB destination. When the product is shipped FOB destination, revenues are not recognized until the customer receives the product.
Certain long-term contracts are accounted for under the percentage-of-completion method. Revenues and estimated gross profit are recognized as work is performed based on the percentage that incurred costs bear to estimated total costs. Cost estimates include direct and indirect costs such as labor, materials and overhead. These contracts require judgment relative to assessing risks, estimating, and making assumptions for schedule and technical issues. Contract changes are included when the costs can be reasonably estimated. Te company may receive progress payments that exceed costs incurred on these long-term contracts. Such advances are recognized as billings in excess of costs and are included in accrued expenses and other current liabilities on the company's consolidated balance sheets.
Deferred income results from advance payments from the company's customers on both military and commercial contracts as well as advance billings to the company's customers for the cost of beryllium, known as material only billings. These advance payments and material only billings are deferred and subsequently recognized as revenue only when the associated finished product is shipped.
The company monitors their contracts periodically to determine if actual costs are comparable to cost estimates used at the time of order acceptance. If the company determines that their actual costs are exceeding ehir original estimates, the company will adjust their margins accordingly and record a loss contract reserve if costs are expected to exceed contract revenues.
I have this stock on my watchlist with a Reasonable Value Estimate of $52, a Buy Target of $26, a First Sell Target of $50, and Close Target of $55. This means that for the stock to hit my Buy Target, based on a recent close of $40.46, the price of the stock would need to fall $14.46 before I would consider adding it to my portfolio.
But adding the stock to my portfolio wasn't really why I took a look at the company. It was the words from a recent press release, "...The company's enviable balance sheet, growth prospects, and market presence...", that made me want to take a look.
So based on my criteria for evaluating management, as well as my criteria for evaluating a balance sheet, I have reduced my buy target for the company from $26 to $12, as to me, the company's balance sheet is simply not that strong.
Free Cash Flow for fiscal 2008 was ($1.52) while the Free Cash Flow to Sales margin was (7.13%). The company's Acid Test ratio (Cash, Marketable Securites and Accounts Receivable divided by Current Liabilities) was 1.16, a number that leaves little room for the unforseen.
The company's Cash Conversion Cycle, the number of days it takes to turn Inventory into Sales is about 143 days, not very impressuive, at least to me. One thing I did like, was that while it took the company on average 40 days to collect its receivables, it took the company on average, 40 days to pay its payables.
One additional very very bright spot was that the company ended fiscal 2008 with $0 debt, which is a good thing since Goodwill and Intangibles make up almost 40% of Total Assets.
Is the company's balance sheet enviable? It may be to some, but it certainly isn't to me, and I don't think it will be for a prospective buyer.
As an investor, I personally would prefer the company's balance sheet contain the two things it is missing, a little bit of debt and a helluva lot of free cash flow.
Accordingly, I have no investment interest at this time, and rate the stock, a sell.
Axsys Technologies1208.pdf
Mariner Energy, Inc. - A Wax Ink Raw Value Worksheet
The Business
Mariner Energy, Inc. (NYSE: ME) is an independent oil and gas exploration, development, and production company incorporated in August 1983 as a Delaware corporation. The company's corporate headquarters are located at One BriarLake Plaza, Suite 2000, 2000 West Sam Houston Parkway South, Houston, Texas 77042.
During 2008, Mariner Energy, Inc. produced approximately 118.4 Bcfe and their average daily production rate was 323 MMcfe per day. At December 31, 2008, the company had 973.9 Bcfe of estimated proved reserves, of which approximately 57% were natural gas and 43% were oil, natural gas liquids (“NGLs”) and condensate. Approximately 70% of our estimated proved reserves were classified as proved developed.
All financial information found in this worksheet is based on the company's most recent SEC 10-K filing of March 6, 2009 for fiscal year ending December 12, 2008.
Areas of Operation
Mariner Energy currently operates in three geographic areas, the Permian Basin, the Gulf of Mexico Deepwater, and the Gulf of Mexico Shelf.
Permian Basin
The company is an active driller in the Spraberry field at depths between 6,000 and 10,000 feet. Our increasing Permian Basin operation, which is characterized by long reserve life, stable drilling and production performance, and relatively lower capital requirements, somewhat counterbalances the higher geological risk, operational challenges and capital requirements attendant to most of their Gulf of Mexico deepwater operations.
The company has expanded its presence in the region, targeting a combination of infill drilling activities in established producing trends, including the Spraberry, Dean and Wolfcamp trends, as well as exploration activities in emerging plays such as the Wolfberry and newer Wolfcamp trends.
Gulf of Mexico Deepwater
The company has actively conducted exploration and development projects since 1996 in water depths ranging from 1,300 feet up to 7,000 feet, participating on 84 deepwater wells.
Gulf of Mexico Shelf
The company drills or participates in, conventional shelf wells and deep shelf wells extending to 1,300 foot water depths. The company's current strategy is to acquire legacy producing fields believed to hold exploitation potential, and active exploration activities targeting conventional and deep shelf opportunities.
Considering the highly mature nature of this area and the steep production declines characteristic of most wells in this region, the goal of the company's shallow water or shelf operation, is to maximize cash flow for reinvestment in their deepwater and Permian Basin operations, as well as for expansion into new operating areas.
Recent Developments
Gulf of Mexico Deepwater Acquisition
On December 19, 2008, the company acquired additional working interests in their existing property, Atwater Valley Block 426 (Bass Lite), for approximately $32.6 million, increasing their working interest by 11.6% to 53.8%. Management's internally estimated proved reserves attributable to the acquisition of approximately 17.6 Bcfe (100% natural gas).
Acquisition of Incremental Spraberry Interests
On February 29, 2008 and December 1, 2008, the company acquired additional working interests in certain of thier existing properties in the Spraberry field in the Permian Basin, increasing the company's average working interest across these properties to approximately 80%. Management's internally estimated proved reserves attributable to the acquisition of approximately 27.4 Bcfe. The company operates substantially all of the assets. The purchase total purchase price was approximately $40.1.
Impact of Worldwide Financial Crisis and Lower Commodity Prices on Capital Program
In the second half of 2008, a world-wide economic recession and oversupply of natural gas in North America led to an unprecedented decline in oil and gas prices, with oil falling by more than $100.00 per barrel from its peak earlier in 2008. However, the inflated cost of oil field services resulting from sustained historically high commodity prices did not decrease in line with the decline in commodity prices. The prospect of continued low commodity prices and disproportionately high service costs has constrained the industry’s capital reinvestment and undermined rates of return in new projects, particularly those in areas characterized by high costs or long reserve lives.
In order to manage the company's capital program within expected cash flows, management tentatively has reduced the comapny's 2009 capital budget by more than 50% from 2008.
The company's 2009 activities in the Permian Basin will focus primarily on expanding beyond the company's typical Spraberry infill drilling operation into new exploration plays, such as the Wolfberry and Wolfcamp Detrital trends. The company plans to delineate prospects and determine their economic viability. The goal is to expand their prospect inventory and generate opportunities to drill when commodity prices or service costs adjust to levels expected to yield more attractive returns.
Until then, the company is scaling down infill drilling and development activities to primarily lease-saving operations and contractual drilling commitments.
The company also anticipates substantially reduced recompletion and development activities in their Gulf of Mexico shelf operation until commodity prices and service cost dynamics adjust, allowing a more attractive rate of return.
In addition, the comany is allocating a disproportionate portion of our its 2009 capital budget to their Gulf of Mexico deepwater exploration program, due primarily to contractual drilling commitments.
Employees
As of December 31, 2008, the company had 276 full-time employees, none of whom are not represented by any labor unions. The company has never experienced a work stoppage or strike and considers relations with their employees to be satisfactory.
Insurance Matters
Mariner Energy, Inc. is a member of OIL Insurance, Ltd. (“OIL”), an energy industry insurance cooperative, which provides the company's primary layer of physical damage and windstorm insurance coverage. Their coverage is subject to a $10.0 million per-occurrence deductible for their assets and a $250.0 million per-occurrence loss limit. However, if a single event causes losses to all OIL-insured assets in excess of $750.0 million, amounts covered for such losses will be reduced on a pro-rata basis among OIL members.
In addition to their primary coverage through OIL, the company also maintains commercial “difference in conditions” insurance that would apply (with no additional deductible) once their limits with OIL are exhausted, as well as partial business interruption insurance covering certain of their significant producing fields and certain other fields situated in hurricane prone areas.
Business interruption coverage begins to provide benefits after a 60-day waiting period once the designated field is shut-in due to a covered event and is limited to 35% of the forecast cash flow from each designated property.
The company's commercial policy expires annually on June 1, and is subject to a general limit of $100.0 million per occurrence and in the case of named windstorms, a combined annual aggregate limit of $100.0 million covering both property damage and business interruption.
In 2008, company operations were adversely affected by Hurricane Ike. The hurricane resulted in shut-in and delayed production as well as facility repairs and replacement expenses. Management is evaluating the nature and extent of damage resulting from the hurricane. Also with respect to Hurricane Ike, the comany's OIL coverage has a $10.0 million per occurrence deductible and a $250.0 million per occurrence limit, subject to an industry-wide loss limit per occurrence of $750.0 million. To the extent that aggregate claims exceed the OIL industry-wide loss limit per occurrence, the company expects their insurance recovery would be reduced pro-rata with all other competing claims from Hurricane Ike and the shortfall covered by their commercial excess insurance, subject to policy limits.
Applicable insurance for the company's Hurricane Katrina and Rita claims with respect to the Gulf of Mexico assets previously acquired from Forest is provided by OIL. Coverage for the former Forest properties is subject to a deductible of $5.0 million per occurrence and a $1.0 billion industry-wide loss limit per occurrence.
OIL has advised the company that the aggregate claims resulting from each of Hurricanes Katrina and Rita are expected to exceed the $1.0 billion per occurrence loss limit and that therefore, the company's insurance recovery is expected to be reduced pro-rata with all other competing claims from the storms.
During 2008, management settled the company's Katrina and Rita claims with their excess insurance providers for a one-time payment of $48.5 million. The insurance coverage for Mariner’s legacy properties is subject to a $3.75 million deductible.
Properties
Mariner Energy has offices in Houston and Midland, Texas and Lafayette, Louisiana. As of December 31, 2008, the company leases covered approximately 94,226 square feet, 6,580 square feet and 14,376 square feet of office space in Houston, Midland and Lafayette, respectively. The leases run through October 31, 2018, October 31, 2011 and September 30, 2013 in Houston, Midland and Lafayette, respectively. The total annual costs of our leases for 2008 was approximately $2.1 million.
Legal Proceedings
Mariner and its subsidiary, Mariner Energy Resources, Inc. (“MERI”), own numerous properties in the Gulf of Mexico. Certain of such properties were leased from the Minerals Management Service of the United States Department of the Interior (MMS) subject to the Royalty Relief Act (RRA).
Section 304 of the RRA relieves lessees of the obligation to pay royalties on certain leases until after a designated volume has been produced. Four of these leases held by Mariner and two held by MERI that are producing or have produced contain lease language (inserted by the MMS) that conditions royalty relief on commodity prices remaining below specified thresholds.
Since 2000, commodity prices have exceeded some of the predetermined thresholds, except in 2002. In May 2006 and September 2008, the MMS issued orders asserting that the price thresholds had been exceeded in calendar years 2000, 2001, and each of the years from 2003 through 2007, and, accordingly, that royalties were due under such leases on oil and gas produced in those years.
The potential liability of MERI under its leases relate to production from the leases commencing July 1, 2005, the effective date of Mariner’s acquisition of MERI.
Mariner and MERI believe that the MMS did not have the statutory authority to include commodity price threshold language in the leases governed by Section 304 of the RRA and accordingly have withheld payment of royalties. Mariner and MERI have challenged the MMS’s authority in pending administrative appeals for those leases for which the MMS has issued orders to pay.
The enforceability of the price threshold provisions in leases granted pursuant to Section 304 of the RRA is currently being litigated in several administrative appeals filed by other companies in addition to Mariner, as well as in Kerr-McGee Oil & Gas Corp. v. Allred, No. 08-30069 (5th Cir.).
In the Kerr-McGee litigation, the district court in the Western District of Louisiana granted Kerr-McGee’s motion for summary judgment, ruling that the price threshold provisions are unlawful and unenforceable under Section 304 of the RRA. Kerr-McGee Oil & Gas Corp. v. Allred, No. 2:06 CV 0439 (W.D. La.) (Mem. Ruling filed Oct. 30, 2007).
The Department of the Interior appealed that judgment to the United States Court of Appeals for the Fifth Circuit. On January 12, 2009, the Fifth Circuit affirmed the district court’s judgment that the price provisions are unlawful based on Section 304 of the RRA. Kerr-McGee Oil & Gas Corp. v. U.S. Dep’t of Interior, F.3d, 2009 WL 57883 (5th Cir. Jan. 12, 2009). Until the appeals process is complete, management will continue to monitor the case.
Given the judicial history of the case, management determined that as of December 31, 2008, the company will no longer record a liability for their estimated exposure to the MMS on their leases granted pursuant to Section 304 of the RRA.
At December 31, 2008, this liability would have been $57.3 million, including interest. In addition, as of December 31, 2008, the company began including in their estimated proved reserves, those reserves attributable to these RRA Section 304 leases which, at December 31, 2008, was approximately 18.1 Bcfe.
In the ordinary course of business, the company is a claimant and/or a defendant in various legal proceedings, including proceedings as to which they have insurance coverage and those that may involve the filing of liens against us or our assets. Management does not consider the comapny's exposure in these proceedings, individually or in the aggregate, to be material.
Mariner Energy1208.pdf
Leucadia National Corporation - A Raw Value Worksheet
LEUCADIA NATIONAL CORPORATION (NYSE: LUK) is is a diversified holding company engaged in a variety of businesses, including manufacturing, telecommunications, property management and services, gaming entertainment, real estate activities, medical product development and winery operations.
General Information
The Company also owns equity interests in operating businesses and investment partnerships which are accounted for under the equity method of accounting, including a broker-dealer engaged in making markets and trading of high yield and special situation securities, land based contract oil and gas drilling, real estate activities and development of a copper mine in Spain. The Company concentrates on return on investment and cash flow to maximize long-term shareholder value.
Additionally, the Company continuously evaluates the retention and disposition of its existing operations
and investigates possible acquisitions of new businesses. In identifying possible acquisitions, the Company tends to seek assets and companies that are out of favor or troubled and, as a result, are selling substantially below the values the Company believes to be present.
Shareholders' equity has grown from a deficit of $7,700,000 at December 31, 1978 (prior to the acquisition of a controlling interest in the Company by the Company's Chairman and President), to a positive shareholders' equity of $5,570,500,000 at December 31, 2007, equal to a book value per common share of the Company (a "common share") of negative $.04 at December 31, 1978 and $25.03 at December 31, 2007. Shareholders' equity and book value per share amounts have been reduced by the $811,900,000 special cash dividend paid in 1999.
In March 2007, the Company's 75% owned subsidiary, STi Prepaid, LLC ("STi Prepaid"), acquired the assets of Telco Group, Inc. and its affiliates ("Telco") for an aggregate purchase price of $121,800,000 in cash, including expenses. STi Prepaid is a provider of international prepaid phone cards and other telecommunications services in the U.S.
In June 2007, the Company completed the acquisition of ResortQuest International, Inc. ("ResortQuest") for a purchase price of $11,900,000, including expenses and working capital adjustments. ResortQuest is engaged in offering property management and other services to vacation properties in beach and mountain resort locations in the continental U.S.
The Company's manufacturing operations are conducted through Idaho Timber, LLC ("Idaho Timber") and Conwed Plastics, LLC ("Conwed Plastics").
Acquired in May 2005, Idaho Timber is headquartered in Boise, Idaho and primarily remanufactures dimension lumber and remanufactures, packages and/or produces other specialized wood products. Conwed Plastics manufactures and markets lightweight plastic netting used for a variety of purposes including, among other things, building and construction, erosion control, packaging, agricultural, carpet padding, filtration and consumer products.
The Company's gaming entertainment operations are conducted through its controlling interest in Premier Entertainment Biloxi, LLC ("Premier"), which is the owner of the Hard Rock Hotel & Casino Biloxi ("Hard Rock Biloxi"), located in Biloxi, Mississippi. The Hard Rock Biloxi was severely damaged by Hurricane Katrina on August 29, 2005 just prior to its originally scheduled opening; upon completion of reconstruction the Hard Rock Biloxi opened for business on June 30, 2007.
The Company's domestic real estate operations include a mixture of commercial properties, residential land development projects and other unimproved land, all in various stages of development and all available for sale.
The Company's medical product development operation is conducted through Sangart, Inc. ("Sangart"), which became a majority-owned subsidiary of the Company in 2005. Sangart is developing a product called Hemospan(R), which is a form of cell-free hemoglobin that is designed for intravenous administration to treat a wide variety of medical conditions, including use as an alternative to red blood cell transfusions.
The Company's winery operations consist of Pine Ridge Winery in Napa Valley, California and Archery Summit in the Willamette Valley of Oregon, and a vineyard development project in the Columbia Valley of Washington. The wineries primarily produce and sell wines in the ultra premium and luxury segments of the premium table wine market.
In April 2007, the Company and Jefferies & Company, Inc. ("Jefferies"), expanded and restructured the Company's equity investment in Jefferies Partners Opportunity Fund II, LLC ("JPOF II") and formed Jefferies High Yield Holdings, LLC ("JHYH"). Through its wholly-owned subsidiary, JHYH makes markets in high yield and special situation securities and provides research coverage on these types of securities.
The Company's land based contract oil and gas drilling investment is conducted by Goober Drilling, LLC ("Goober Drilling"), in which the Company has a 50% voting and equity interest at December 31, 2007. The Company has also made secured loans to Goober Drilling aggregating $171,000,000, at various interest rates, to finance new equipment purchases and construction costs, repay existing debt and finance working capital needs.
The Company owns 30% of Cobre Las Cruces, S.A. ("CLC"), a former subsidiary of the Company that holds the exploration and mineral rights to the Las Cruces copper deposit in the Pyrite Belt of Spain. During 2005, the Company sold a 70% interest in CLC to Inmet Mining Corporation ("Inmet"), a Canadian-based global mining company, in exchange for 5,600,000 newly issued Inmet common shares, representing approximately 11.6% of Inmet's current outstanding common shares. CLC expects to begin commercial production at the mine in the fourth quarter of 2008.
In August 2006, pursuant to a subscription agreement with Fortescue Metals Group Ltd ("Fortescue") and its subsidiary, FMG Chichester Pty Ltd ("FMG"), the Company invested in Fortescue's Pilbara iron ore and infrastructure project in Western Australia. In July 2007, Fortescue sold new common shares and the Company exercised its pre-emptive rights to maintain its ownership position. Fortescue is a publicly traded company on the Australian Stock Exchange (Symbol: FMG). The Company also owns a $100,000,000 note of FMG that matures in August 2019; interest on the note is calculated as 4% of the revenue, net of government royalties, invoiced from the iron ore produced from two specified project areas. Fortescue expects to begin shipping ore in May 2008. The Company's total cash investment in Fortescue aggregates $452,200,000; the market value of the Fortescue common shares owned by the Company was $1,824,700,000 at December 31, 2007.
The Company and certain of its subsidiaries have substantial net operating loss carryforwards ("NOLs") of approximately $5,400,000,000 at December 31, 2007.
As used herein, the term "Company" refers to Leucadia National Corporation, a New York corporation organized in 1968, and its subsidiaries, except as the context otherwise may require.
Investor Information
The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act"). Accordingly, the Company files periodic reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information regarding the Company and other issuers that file electronically.
In addition, material filed by the Company can be inspected at the offices of the New York Stock Exchange, Inc. (the "NYSE"), 20 Broad Street, New York, NY 10005, on which the Company's common shares are listed. The Company has submitted to the NYSE a certificate of the Chief Executive Officer of the Company, dated May 15, 2007, certifying that he is not aware of any violations by the Company of NYSE corporate governance listing standards.
The Company's website address is www.leucadia.com. The Company makes available, without charge through its website, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such reports are filed with or furnished to the SEC.
Financial Information about Segments
The Company's reportable segments consist of the operating units identified above, which offer different products and services and are managed separately. At acquisition, the Company's investment in Premier was reported as a consolidated subsidiary in the other operations segment; however, it was deconsolidated and classified as an investment in an associated company upon the filing of voluntary petitions for reorganization under chapter 11 of title 11 of the United States Bankruptcy Code in September 2006. While in bankruptcy Premier was classified as an investment in an associated company and its operating results were not reported in the gaming entertainment segment. Upon its emergence from bankruptcy in August 2007, Premier was once again consolidated by the Company and has been reported as an operating segment since that date. Other operations primarily consist of the Company's wineries and energy projects.
Associated companies include equity interests in other entities that the Company accounts for on the equity method of accounting.
Investments in associated companies include HomeFed Corporation ("HomeFed"), a corporation engaged in real estate activities, JHYH, Goober Drilling and CLC. The Company also has made non-controlling investments in entities that are engaged in investing and/or securities transactions activities which are accounted for as investments in associated companies including Pershing Square IV, L.P. ("Pershing Square"), Highland Opportunity Fund, L.P. ("Highland Opportunity"), HFH ShortPLUS Fund, L.P. ("Shortplus"), RCG Ambrose, L.P., ("Ambrose"), EagleRock Capital Partners (QP), LP ("EagleRock") and Wintergreen Partners Fund, L.P. ("Wintergreen").
Corporate assets primarily consist of investments and cash and cash equivalents and corporate revenues primarily consist of investment income and securities gains and losses. Corporate assets include the Company's investments in Fortescue and Inmet. Corporate assets, revenues, overhead expenses and interest expense are not allocated to the operating units.
Conwed Plastics has manufacturing facilities located in Belgium and Mexico, STi Prepaid has a customer care unit located in the Dominican Republic and other operations includes a small Caribbean-based telecommunications provider. These are the only foreign operations with non-U.S. revenue or assets that the Company consolidates, and are not material. Unconsolidated non-U.S. based investments include 38% of Light and Power Holdings Ltd., the parent company of the principal electric utility in Barbados, the 30% ownership of CLC and the investments in Fortescue and Inmet. From time to time the Company invests in the securities of non-U.S. entities or in investment partnerships that invest in non-U.S. securities.
Certain information concerning the Company's segments is presented in the following table. Consolidated subsidiaries are reflected as of the date of acquisition, which was June 2007 for ResortQuest, March 2007 for STi Prepaid, November 2005 for Sangart and May 2005 for Idaho Timber. As discussed above, Premier is reflected as a consolidated subsidiary from May 2006 until it was deconsolidated in September 2006; Premier once again became a consolidated subsidiary in August 2007.
Leucadia National Corporation1207.pdf
Mirant Corporation - A Wax Ink Short Report
“We are an independent power company with a solid fleet of assets, experienced leadership and financial strength. Through excellence, discipline and creativity, we are delivering value.”
Welcome to Mirant Corporation (NYSE: MIR) an energy company that produces and sells electricity in the United States.
The company owns or leases 10,280 MW of electric generating capacity located in markets in the Mid-Atlantic (5,244 MW) and Northeast regions (2,689 MW) and in California (2,347 MW). The company also operates an integrated asset management and energy marketing organization based in Atlanta, Georgia.
The comany's customers are ISOs, investor-owned utilities, municipal systems, aggregators, electric cooperative utilities, producers, generators, marketers and large industrial customers.
Mirant's generating portfolio is diversified across fuel types, power markets and dispatch types and serves customers located near many major metropolitan load centers. Their total net generating capacity is approximately 31% baseload, 57% intermediate and 12% peaking.
The company was incorporated in Delaware on September 23, 2005.
Pursuant to the Plan for Mirant and certain of its subsidiaries, on January 3, 2006, New Mirant emerged from bankruptcy and acquired substantially all of the assets of Old Mirant, a corporation that was formed in Delaware on April 3, 1993, and that had been named Mirant Corporation prior to January 3, 2006.
The Plan provides that New Mirant has no successor liability for any unassumed obligations of Old Mirant. Old Mirant was then renamed and transferred to a trust, which is not affiliated with New Mirant.
Financial Basis
All financial data is based on the company’s annual financial information for fiscal year end December 2007.
Short-Term Investor (Hold of one year or less)
Based on a recent close of $15.62, the stock has First Resistance at $18.16, a 16% increase from recent levels, Second Resistance at $25.93, a 66% increase from recent levels, and First Support at $11.99, a 23% decline from recent levels.
While I am enticed when I see a 66% delta between the Recent Close and Second Resistance (200 day moving average), I am far more leery that the stock can overcome its 52 week low of $11.99, something that must happen before the stock can move above its 50 day moving average of $18.66.
In the end, I simply don't believe the stock is poised to make such a move at this time, and so I have no short-term investment interest in this stock at the present time.
Long-Term Investor (Hold of 3-5 years)
I have added the stock to my watch list with a Reasonable Value Estimate of $12.93, a Buy Target of $6.47, a First Sell Target of $12.61, and a Close Target of $13.65.
Based on the financial metrics that are important to me when evaluating a company for potential investment, I have added a further reduction to my Buy Target of 69%, making my Strength of Statement Buy Target $1.99.
In the end, based on my perception of management's abilities, both prior and current, and in consideration of the vast number of lawsuits the company is currently facing, I simply do not believe that Mirant Corporation is a viable investment candidate at this time.
My Investment Opinion
I am rating this stock a strong sell. Considering the company's current Debt load of $11.17 per share, and Free Cash flow of ($3.31) I think the company will make for a very poor investment for a very long time.
Wax
Mirant Corporation1207.pdf
Welcome to Mirant Corporation (NYSE: MIR) an energy company that produces and sells electricity in the United States.
The company owns or leases 10,280 MW of electric generating capacity located in markets in the Mid-Atlantic (5,244 MW) and Northeast regions (2,689 MW) and in California (2,347 MW). The company also operates an integrated asset management and energy marketing organization based in Atlanta, Georgia.
The comany's customers are ISOs, investor-owned utilities, municipal systems, aggregators, electric cooperative utilities, producers, generators, marketers and large industrial customers.
Mirant's generating portfolio is diversified across fuel types, power markets and dispatch types and serves customers located near many major metropolitan load centers. Their total net generating capacity is approximately 31% baseload, 57% intermediate and 12% peaking.
The company was incorporated in Delaware on September 23, 2005.
Pursuant to the Plan for Mirant and certain of its subsidiaries, on January 3, 2006, New Mirant emerged from bankruptcy and acquired substantially all of the assets of Old Mirant, a corporation that was formed in Delaware on April 3, 1993, and that had been named Mirant Corporation prior to January 3, 2006.
The Plan provides that New Mirant has no successor liability for any unassumed obligations of Old Mirant. Old Mirant was then renamed and transferred to a trust, which is not affiliated with New Mirant.
Financial Basis
All financial data is based on the company’s annual financial information for fiscal year end December 2007.
Short-Term Investor (Hold of one year or less)
Based on a recent close of $15.62, the stock has First Resistance at $18.16, a 16% increase from recent levels, Second Resistance at $25.93, a 66% increase from recent levels, and First Support at $11.99, a 23% decline from recent levels.
While I am enticed when I see a 66% delta between the Recent Close and Second Resistance (200 day moving average), I am far more leery that the stock can overcome its 52 week low of $11.99, something that must happen before the stock can move above its 50 day moving average of $18.66.
In the end, I simply don't believe the stock is poised to make such a move at this time, and so I have no short-term investment interest in this stock at the present time.
Long-Term Investor (Hold of 3-5 years)
I have added the stock to my watch list with a Reasonable Value Estimate of $12.93, a Buy Target of $6.47, a First Sell Target of $12.61, and a Close Target of $13.65.
Based on the financial metrics that are important to me when evaluating a company for potential investment, I have added a further reduction to my Buy Target of 69%, making my Strength of Statement Buy Target $1.99.
In the end, based on my perception of management's abilities, both prior and current, and in consideration of the vast number of lawsuits the company is currently facing, I simply do not believe that Mirant Corporation is a viable investment candidate at this time.
My Investment Opinion
I am rating this stock a strong sell. Considering the company's current Debt load of $11.17 per share, and Free Cash flow of ($3.31) I think the company will make for a very poor investment for a very long time.
Wax
Mirant Corporation1207.pdf
Buffalo Wild Wings - A Wax Ink Raw Value Worksheet
Buffalo Wild Wings, Inc. (Nasdaq: BWLD) owns, operates and franchises restaurants featuring a variety of boldly flavored, made-to-order menu items, including the Buffalo, New York-style chicken wings spun in any of the Company's signature sauces. The Company's concept offers elements of the quick casual and casual dining restaurant concepts featuring a service model that allows its guests to choose among dining options, such as casual counter service, casual dining table service or take out. Buffalo Wild Wings' menu, priced between the quick casual and casual dining segments, features fresh chicken wings and other items, including boneless wings, chicken tenders, popcorn shrimp, specialty hamburgers and sandwiches, wraps, Buffalito soft tacos, appetizers and salads. As of December 30, 2007, the Company owned or franchised 493 Buffalo Wild Wings restaurants in 37 states, of which 161 were Company-owned and 332 were franchised.
The Company's restaurants feature a variety of menu items, including its Buffalo, New York-style chicken wings spun in one of its signature sauces (from sweet to screamin hot: Sweet BBQ, Teriyaki, Mild, Parmesan Garlic, Medium, Honey BBQ, Spicy Garlic, Asian Zing, Caribbean Jerk, Hot BBQ, Hot, Mango Habanero, Wild and Blazin'. The Company's fresh chicken wings can be ordered in sizes ranging from 6 to 100 wings, with larger orders available for parties. Buffalo Wild Wings' sauces complement and distinguish its chicken wings to create a bold flavor profile for its guests. In addition to chicken wings, its menu features a variety of food items, including boneless wings, chicken tenders, popcorn shrimp, specialty hamburgers and sandwiches, wraps, Buffalito soft tacos, finger foods and salads. Buffalo Wild Wings also provides a menu for kids less than 12. In addition, the Company's restaurants feature a full bar, which offers a selection of approximately 20 domestic and imported beers on tap, as well as bottled beers, wine and liquor.
The Company's restaurants also feature dining and bar areas and select restaurants have patio seating. Buffalo Wild Wings places approximately 40 televisions and up to seven projection screen televisions throughout the restaurant to allow for easy viewing. These televisions, combined with its sound system, Buzztime Trivia and assorted video games, provide a source of entertainment for its guests. The Company tailors the content and volume of its video and audio programming in each dining area to reflect its guests' tastes. Company-owned restaurants range in size from 4,500 to 8,200 square feet.
Buffalo Wild Wings1207.pdf
Volcom, Inc. - A Wax Ink Raw Value Worksheet
Volcom, Inc. (Nasdaq: VLCM), incorporated in 1991, is a designer, marketer and distributor of young mens and young womens clothing, footwear, accessories and related products under the Volcom brand name. Its products include t-shirts, fleece, bottoms, tops, jackets, boardshorts, denim, outerwear, sandals, girls swimwear and a complete collection of kids clothing for young boys ages 4 to 7 years. During the year ended December 31, 2007, it launched its product extensions to complement its product offerings. It has six primary product categories, which include mens, girls, boys, footwear, girls swim and snow. On January 17, 2008, the Company acquired all of the outstanding membership interests of Electric Visual Evolution LLC (Electric).
As of December 31, 2007, the Company’s customer base of retailers included approximately 2,250 accounts that operated approximately 4,800 store locations (of which approximately 1,150 accounts that operated approximately 2,950 stores are located in the United States) and 37 distributors in countries not serviced by its licensees. Its retail customers are consists of specialty boardsports retailers and several retail chains. Some of these include 17th Street Surf, Becker Surfboards, Froghouse, Hotline, Huntington Surf & Sport, IG Performance, K5 Board Shop, Laguna Surf & Sport, Macy’s, Nordstrom, Pacific Sunwear, Snowboard Connection, Sun Diego, Surfside Sports, Tilly’s, Val Surf, West Beach and Zumiez. Its products are sold over the Internet through selected authorized online retailers. At December 31, 2007, the Company operated six full-price Volcom branded retail stores located in California and Hawaii.
T-Shirts and Fleece
Majority of Volcom's items display a distinctive art style, utilizing treatments, placements of screened images, designs and embroideries. On some of its t-shirts and fleece, Volcom promotes its featured artist series, a program in which the Company works with boardsports athletes and relevant artists associated with its target market to design certain products. Most pieces display the Volcom name or The Volcom Stone.
Tops, Jackets and Suits
The Company’s knit and woven tops and casual jackets are recognizable for their bold and creative styling. Many of its designs are built on traditional fashions, with a distinctive Volcom image or style feature.
Bottoms
Volcom designs a range of casual and dress pants, shorts and skirts. The Company's bottoms are generally made using cotton or cotton-blend fabrics. Volcom's bottoms are designed to be both functional and distinctive, and generally have one or more elements that provide a Volcom look.
Denim
The Company introduced the Volcom brand jeans in 1993. The design and construction of the denim products is directly influenced by the Company's skateboard team. Volcom offers denim products in a range of washes and fits to suit individual preferences for appearance and functionality.
Boardshorts
Volcom introduced its boardshorts line in 1992. The Company's boardshorts are designed with input from the Company's surf team and incorporate technical features, such as welded seams, mesh paneling and enhanced waterproof zipper fly technology.
Outerwear
The Company's outerwear products, which were introduced in 2000, consist of technically advanced jackets and pants that are designed to meet the demands of snowboarding. Volcom's outerwear is designed with a number of technical features and fabrics. Some of the technical aspects of the Company's outerwear include Gore-Tex fabrics, taped and welded seam construction, waterproof zippers and Zip-Tech jacket/pant connection system.
Accessories
Volcom also sells a range of accessories. These include hats, wallets, ties, belts and bags to complement its clothing lines.
Creedlers
During the year ended December 31, 2007, the Company introduced a line of sandals, slippers and vulcanized slip-on footwear, branded Creedlers. These products are offered in its mens, boys and girls categories. They are generally distributed within its existing customer base.
Swim
The swimwear product complements its existing girls business and is merchandised with the girls sportswear, Creedlers and accessories. The Company’s swimwear is generally distributed within its customer base.
V.co-Operative
The Company designs certain product styles, called V.co-Operative, such as those designed in conjunction with team riders Bruce Irons, Mark Appleyard, Ozzie Wright, Ryan Sheckler, Dean Morrison, Bjorn Leines, Geoff Rowley and Dustin Dollin. It also generates revenues from the sale of music produced by its label, Volcom Entertainment, and films produced by Veeco Productions, its film production division. It also offers a line of sunglasses and goggles under the Electric brand name. It also offers t-shirts, fleece and accessories under the Electric brand name.
The Company competes with Quiksilver Inc., Billabong International Limited and Burton.
Volcom1207.pdf
Frontier Oil Corporation - A Wax Ink Raw Value Worksheet
Frontier Oil Corporation (NYSE: FTO) is an independent energy company engaged in crude oil refining and the wholesale marketing of refined petroleum products. The Company operates refineries (the Refineries) in Cheyenne, Wyoming and El Dorado, Kansas with a total annual average crude oil capacity of approximately 162,000 barrels per day (bpd). Frontier’s Cheyenne Refinery has a permitted crude oil capacity of 52,000 bpd on a 12-month average. The Company markets its refined products primarily in the eastern slope of the Rocky Mountain region, which encompasses eastern Colorado (including the Denver metropolitan area), eastern Wyoming and western Nebraska (the Eastern Slope). The Cheyenne Refinery has a coking unit, which allows the refinery to process amounts of heavy crude oil for use as a feedstock. During the year ended December 31, 2007, heavy crude oil constituted approximately 72% of the Cheyenne Refinery’s total crude oil charge. During 2007, the Cheyenne Refinery’s product yield included gasoline (42%), diesel fuel (30%) and asphalt and other refined petroleum products (28%). EMC's primary assets are a 25,000 bpd products terminal and blending facility located near Denver, Colorado. In February 2007, the Company acquired Ethanol Management Company.
The El Dorado Refinery is a refinery in the Plains States and the Rocky Mountain region with an average crude oil capacity of 110,000 bpd. The El Dorado Refinery selects from many different types of crude oil with its direct access to Cushing, Oklahoma, which is connected by pipeline to the Gulf Coast and to Canada. This access, combined with the El Dorado Refinery’s complexity (including a coking unit), gives it the flexibility to refine a wide variety of crude oils. During 2007, the El Dorado Refinery’s product yield included gasoline (50%), diesel and jet fuel (36%) and chemicals and other refined petroleum products (14%).
The primary market for the Cheyenne Refinery’s refined products is the Eastern Slope. During 2007, the Company sold approximately 88% of the Cheyenne Refinery’s gasoline volumes in Colorado and 11% in Wyoming. During 2007, it sold approximately 67% of the Cheyenne Refinery’s diesel in Wyoming and 30% in Colorado. The gasoline and remaining diesel produced by this Refinery are primarily shipped via pipeline to terminals for distribution by truck or rail. Pipeline shipments from the Cheyenne Refinery are handled mainly by the Plains All American Pipeline (formerly Rocky Mountain Pipeline), serving Denver and Colorado Springs, Colorado, and the ConocoPhillips Pipeline, serving Sidney, Nebraska.
In 2007, the Company obtained approximately 61% of the Cheyenne Refinery’s crude oil charge from Canada, 19% from Wyoming, 18% from Colorado and 2% from other domestic sources. During 2007, heavy crude oil constituted approximately 72% of the Cheyenne Refinery’s total crude oil charge. In 2007, Frontier obtained approximately 67% of the El Dorado Refinery’s crude oil charge from Texas, 20% from Canada, 6% from Kansas, 4% from the Gulf of Mexico, and the remaining 3% from other foreign and domestic locations.
The Company competes with Sinclair Oil Company and Suncor Energy (U.S.A.) Inc.
Frontier Oil Corporation1207.pdf
Hanes Brands, Inc. - A Wax Ink Raw Value Worksheet
Hanesbrands Inc. (NYSE: HBI) is a consumer goods company with a portfolio of apparel brands, including Hanes, Champion, Playtex, Bali, Just My Size, barely there and Wonderbra. The Company designs, manufactures, sources and sells a range of apparel essentials, such as t-shirts, bras, panties, men’s underwear, kids’ underwear, socks, hosiery, casualwear and activewear. Its products are sold through multiple distribution channels. The Company’s business is organized into five segments: innerwear, outerwear, hosiery, international and other.
In December 2007, the Company acquired a sheer hosiery manufacturing operation in Las Lourdes, El Salvador. In August 2007, the Company acquired the textile manufacturing operations in San Juan Opico, El Salvador of Industrias Duraflex, S.A. de C.V., which had been a supplier to the Company.
Innerwear
The innerwear segment focuses on core apparel essentials, and consists of products, such as women’s intimate apparel, men’s underwear, kids’ underwear, socks, thermals and sleepwear. The Company’s Hanes, Playtex, Bali, barely there, Just My Size and Wonderbra brands offer a line of bras, panties and bodywear. It is also a manufacturer and marketer of men’s underwear and kids’ underwear under the Hanes and Champion brand names. It also produces underwear products under a licensing agreement with Polo Ralph Lauren.
Outerwear
Through the Hanes, Champion and Just My Size brands, Hanesbrands Inc. offers products, such as t-shirts and fleece. Its casualwear lines offer a range of comfortable clothing for men, women and children marketed under the Hanes and Just My Size brands. The Just My Size brand offers casual apparel designed exclusively to meet the needs of plus-size women. In addition to activewear for men and women, Champion provides uniforms for athletic programs, and has launched an apparel program at Target stores, C9 by Champion. It also licenses its Champion name for collegiate apparel and footwear. The Company also supplies its t-shirts, sportshirts and fleece products primarily to wholesalers, who then resell to screen printers and embellishers through brands, such as Hanes, Champion, and Outer Banks. These products are sold primarily under the Hanes, Hanes Beefy-T and Outer Banks brands.
Hosiery
Hanesbrands Inc. is a marketer of women’s sheer hosiery in the United States. It markets hosiery products under Hanes, L’eggs and Just My Size brands.
International and Other
International segment includes products that span across the innerwear, outerwear and hosiery reportable segment and includes products marketed under the Hanes, Champion, Wonderbra, Playtex, Rinbros, Bali and Stedman brands. The Company’s net sales in this segment included sales in Latin America, Asia, Canada and Europe. It also has sales offices in India and China. The Company net sales in other segment comprise sales of nonfinished products, such as fabric and certain other materials in the United States and Latin America.
The Company competes with Fruit of the Loom, Inc., Warnaco Group Inc., VF Corporation, Maidenform Brands, Inc., Gildan Activewear, Inc., Russell Corporation, Nike, Inc., adidas AG, Berskhire Hathaway Inc., Victoria's Secret, Old Navy and The Gap.
Hanesbrands1208.pdf
Core Laboratories - A Wax Ink Raw Value Worksheet
Core Laboratories, NV (NYSE: CLB) is a leading provider of proprietary and patented reservoir description, production enhancement and reservoir management services for the global petroleum industry.
These services enable the Company's clients to optimize reservoir performance and maximize hydrocarbon recovery from their producing fields.
The Company has over 70 offices in more than 50 countries and is located in every major oil-producing province in the world. The Company provides its services to the world's major, national and independent oil companies.
Commercial Metals Company - A Wax Ink Raw Value Worksheet
Commercial Metals Corporation (NYSE: CMC), recycles, manufactures, fabricates and distributes steel and metal products and related materials and services through a network of locations throughout the United States and internationally.
For fiscal 2008, the company has realigned the management of their businesses into two operating divisions — CMC Americas and CMC International.
The company considers their business to be organized into five segments: Americas Recycling, Americas Mills, Americas Fabrication and Distribution, all operating as part of CMC Americas, with CMC International comprised of two segments, International Mills and International Fabrication and Distribution.
The company was incorporated in 1946 in the State of Delaware. The predecessor company to CMC, a metals recycling business, has existed since approximately 1915.
Adrift in a Dry Ship
Back in Novemember I posted an article called Ted Eats Fish, which were my thoughts on an article written by Rich Smith.
Several days ago, I was asked for my thoughts on one of the stocks in my original post, DryShips, Inc.
___________________________________________________________________________________
DryShips, Inc. (Nasdaq: DRYS) Financial statement data is based on the company’s latest 20-F filing dated December 2007.
What They Do
DryShips Inc. (DryShips) is a holding company that, through its subsidiaries, is engaged in the ocean transportation services of drybulk cargoes worldwide through the ownership and operation of the drybulk carrier vessels.
At the end of its last fiscal year, the company owned and operated a fleet of 38 vessels and eight new buildings consisting of nine Capesize drybulk carriers (including four new building Capesize drybulk carriers), 33 Panamax drybulk carriers (including two new building Panamax drybulk carriers), two new building Kamsarmax drybulk carriers and two Supramax drybulk carriers.
Its fleet carries a variety of drybulk commodities, including major bulks, such as coal, iron ore and grains, and minor bulks, such as bauxite, phosphate, fertilizers and steel products.
In addition to its owned fleet, DryShips has also chartered-in a Panamax drybulk carrier for a period of three years ending in December 2008. The average age of the vessels in the Company’s fleet is 8.8 years (10 years, 8.6 years and 5.5 years for the Capesize, the Panamax and the Supramax vessels, respectively).
As of April 25, 2008, the Company had acquired a 66.6% interest in Ocean Rig ASA. Ocean Rig is a drilling contractor in the area of offshore exploration, development and production, and operates two ultra deep-water drilling rigs, Leiv Eiriksson and Eirik Raude.
During the year ended December 31, 2007, the company took delivery of 15 second-hand drybulk carrier vessels and disposed 11 drybulk carrier vessels.
The company employs its vessels primarily in the short-term, or spot, charter market, under period time charters, in drybulk carrier pools, and on bareboat charters. Three of the Panamax drybulk carriers in the fleet are operated in a drybulk carrier pool. Thirty-two of its vessels are on time charter. The company's chartered-in vessel is on period time charter that runs concurrently with the time charter-in period, and three of the company’s vessels are on bareboat charter. Each of the company's vessels is owned through a separate wholly owned subsidiary established under the laws of Malta or the Marshall Islands.
DryShips manages the deployment of its fleet between long-term and short-term (spot market) voyage charters, which generally last from several days to several weeks, and long-term time charters and bareboat charters, which can last up to several years.
Under a bareboat charter, the vessel is chartered for a stipulated period of time, which gives the charterer possession and control of the vessel, including the right to appoint the master and the crew. Under bareboat charters, all voyage costs are paid by the company’s customers.
During 2007, the company’s customer, Baumarine AS, accounted for 12% of its voyage revenue. All of the company’s vessels are managed by Cardiff Marine Inc.
DryShips competes with Erato Owning Company, Mentor Owning Company Limited, Iris Owning Company Limited, Panatrade Shipping and Management S.A., Calypso Marine Corp., Oil Transport Investments Limited, Innovative Investments Limited and Ambassador Shipping Corporation.
The company’s principal offices are located in Amaroussion, Greece.
Short-Term Investor (Hold of 1 year or less)
Based on a recent close of $78.50, the stock has First Resistance at $82.78, a 5% increase from recent levels, Second Resistance at $86.72, a 10% decline from recent levels, and First Support at $138.30, a 51% decline from current levels.
Long-Term Investor (Hold of 3-5 years)
The stock is on my watch list with a Reasonable Value Estimate of $62.48, a Buy Target of $31.24, a First Sell Target of $60.92, and a Close Target of $65.95. The stock currently has a Risk Reward Ratio of (2.0).
Investment Fundamentals (Based on annual financial data)
For its most recent fiscal year, the company had Shareholder Equity of $27.91 per share, Earnings of $11.14 per share, and based on a recent close the stock has a trailing twelve-month PE ratio of 7.0.
Also for its most recent fiscal year, the company had a Return on Invested Capital of 18%, Average Free Cash Flow of ($15.06) per share, a Tangible Book Value of $27.91, and paid a $0.77 dividend.
The company has a Cash Conversion Cycle of (6) days, an Enterprise Value of $109.36 per share, and an Equity Value of $47.64 per share, and Total Debt of $33.89 per share.
Investment Ratios (Based on annual financial data)
The company ended its most recent fiscal year with a Current Ratio of 0.64, a Quick Ratio of 0.62, a Cash Ratio of 0.46 a Flow Ratio of 0.95, a Debt to Equity Ratio of 0.1.21, an Acid Test Ratio of 0.50, a Capital Efficiency Ratio of (0.43), and an Inventory to Sales Ratio of 0.01.
Dividends
My thoughts on individual stock dividends is pretty simple, send me the money. I personally am not interested in re-investing individual equity dividends. But for those of you that are, based on a recent close, the dividend yield for this stock is 1.0%.
My Short-Term Investment Strategy
From a trading perspective, there is more downside than upside, so, at this time, I have no short-term interest in this stock.
My Long-Term Investment Strategy
At this time, I have no long-term interest in the stock, as it currently trading above my reasonable value estimate.
And In Conclusion
You are in a hammock tied between two palm trees, the breeze is blowing softly, the sound of ocean waves crashing against shoreline rocks dulling your senses, when your cell phone rings.
The call is from your bank, they have just received another tax-free check and they need to know in which account to deposit it. You answer their question and resume your peaceful slumber. Ah…life is good.
Sounds like a something out of a movie doesn’t it? Welcome to DryShips, Inc., the Greek dry bulk shipping company with, count ‘em, two, that’s what I said bucko, two, employees.
From the company’s latest 20-F;
“We currently have two employees, our Chief Executive Officer who also acts as the Interim Chief Financial Officer, and our Internal Auditor. Following the resignation of our Chief Financial Officer on May 29, 2007, we are seeking to employ a Chief Financial Officer. We have no plans to hire additional employees.”
It seems that the company sub-contracts everything about the company, except the profits, to a company called Cardiff Marine, Inc., which is oddly enough a DryShips, Inc. affiliated company.
Of course as you can guess, Cardiff Marine, Inc. is a privately held company with no public financial information available.
Again from the company’s latest 20-F;
“We subcontract the commercial and technical management of our fleet, including crewing, maintenance and repair to Cardiff Marine Inc. (“Cardiff”), an affiliated company. 70% of the issued and outstanding capital stock of Cardiff is owned by a foundation which is controlled by Mr. Economou, our Chairman and Chief Executive Officer and a director of our Company. The remaining 30% of the issued and outstanding capital stock of Cardiff is owned by a company controlled by the sister of Mr. Economou. The loss of Cardiff’s services or its failure to perform its obligations to us could materially and adversely affect the results of our operations. Although we may have rights against Cardiff if it defaults on its obligations to us, you will have no recourse against Cardiff. Further, we are required to seek approval from our lenders to change our manager.”
So far, this seems like a pretty good business to be in, at least the way DryShips has it set up. But here’s the best part. The company is, by their interpretation of the law, a tax-exempt company.
From the company’s latest 20-F;
“Under the United States Internal Revenue Code of 1986, or the Code, 50% of the gross shipping income of a vessel-owning or chartering corporation, such as ourselves and our subsidiaries, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States may be subject to a 4% United States federal income tax without allowance for any deductions, unless that corporation qualifies for exemption from tax under Section 883 of the Code and the Treasury Regulations promulgated thereunder.
We expect that we and each of our subsidiaries qualify for this statutory tax exemption and we have taken and intend to continue to take this position for United States federal income tax return reporting purposes. However, there are factual circumstances beyond our control that could cause us to lose the benefit of this tax exemption and thereby become subject to United States federal income tax on our United States source income. Due to the factual nature of the issues involved, it is possible that our tax-exempt status or that of any of our subsidiaries may change.
If we or our subsidiaries are not entitled to this exemption under Section 883 for any taxable year, we or our subsidiaries could be subjected for those years to an effective 2% (i.e., 50% of 4%) United States federal income tax on United States-source gross shipping income. The imposition of this taxation could have a negative effect on our business and would result in decreased earnings available for distribution to our shareholders. For the 2007 taxable year, we estimate that our maximum United States federal income tax liability would be $1.13 million if we were to be subject to this taxation.”
See, I told you life was good. The problem, at least in my opinion, is it’s only good for both of the employees of DryShips, Inc.
Everybody else is adrift in dry ship without any oars.
WaxURS Makes Yard Bombs
URS Corporation (NYSE: URS) Financial statement data is based on the company’s latest 10-K filing dated December 2007.
What They Do
URS Corporation provides engineering, construction, and technical services in the United States and internationally.
It offers a range of program management; planning, design, and engineering; systems engineering and technical assistance; construction and construction management; operations and maintenance; and decommissioning and closure services to the U.S. federal government, state and local government agencies, as well as to private industry and international clients.
The company's program management services include logistics planning, acquisition management, risk management of weapons systems, safety management, and subcontractor management for military programs, as well as planning, coordination, schedule, and cost control services for capital improvement programs.
It provides planning, design, and engineering services for the construction of new transportation projects and for the renovation and expansion of existing transportation infrastructure, including bridges, highways, roads, airports, mass transit systems and railroads, and ports and harbors.
The company offers construction contracting and construction management services for transportation, environmental and waste management, power generation and transmission, industrial and manufacturing facilities, water resources and wastewater treatment, government building and facilities, and mining projects. In addition, the company provides operations and maintenance services in support of military installations and operations, and hazardous facilities, as well as for transportation systems, industrial and manufacturing facilities, and mining operations.
Further, it offers decommissioning and closure services for nuclear power plants, nuclear research and test facilities, production sites, and laboratories.
The company, whose headquarters are in San Francisco, California, was founded in 1904 and was formerly known as Broadview Research Corporation. The name was changed to URS Corporation in 1976.
Short-Term Investor (Hold of one year or less)
Based on a recent close of $64.19, the stock has First Resistance at $64.19, a 31% increase from recent levels, First Support at $48.66, a 1% decline from recent levels, and Second Support at $40.77, a 17% decline from current levels.
Long-Term Investor (Hold of 3-5 years)
The stock is on my watch list with a Reasonable Value Estimate of $44.53, a Buy Target of $22.27, a First Sell Target of $43.42, and a Close Target of $47.00. The stock currently has a Risk Reward Ratio of (0.4).
Investment Fundamentals (Based on annual financial data)
For its latest fiscal year, the company had Shareholder Equity of $41.76 per share, Earnings of $1.78 per share, and based on a recent close the stock has a trailing twelve-month PE ratio of 27.5.
Also for its latest fiscal year, the company had a Return on Invested Capital of 17%, Average Free Cash Flow of ($6.21) per share, a Tangible Book Value of ($2.81), and paid no dividend.
The company had a Cash Conversion Cycle of 0 days because, according to its balance sheet it has no inventory of any kind, an Enterprise Value of $61.57 per share, and an Equity Value of $36.35 per share.
Investment Ratios (Based on annual financial data)
The company ended its latest fiscal year with a Current Ratio of 1.54, a Quick Ratio of 1.54, a Cash Ratio of 0.15, a Flow Ratio of 1.40, a Debt to Equity Ratio of 0.38, an Acid Test Ratio of 1.33, and a Capital Efficiency Ratio of 0.07.
Dividends
My thoughts on individual stock dividends is pretty simple, send me the money. I personally am not interested in re-investing individual equity dividends. But for those of you that are interested in considering dividend income, based on a recent close, the dividend yield for this stock is 0.0%.
My Short-Term Investment Strategy
At this time, I have no short-term interest in this stock. However...
From a trading perspective, there is almost twice as much upside as there is downside. Were I going to trade this stock, I would get in at current levels ($48.96) with a buy of not more than 1000 shares, and immediately set a stop at $47.74, (2.5%).
If I get stopped out, I just get stopped out, and I loose $1.22 per share.
But shoulld the stock move up, I would maintain the stop percentage, and move the stop dollar amount up accordingly.
At about the $56.50, an approximate 50% trading gain, I would adjust my stop to 2% ($55.37) and maintain this percentage until the stock priced reached $60.00.
Once the stock reached $60.00, an additional 22% trading gain, I would again adjust my stop, this time to 1.5% ($59.10).
I would continue to adjust my stop as the stock moved upward, maintaining the 1.5% stop spread, until my stop took me out of the stock.
My Long-Term Investment Strategy
At this time, I have no long-term interest in the stock, as it appears to be trading at fair value.
And In Conclusion
When I was a kid, about 10 or 11, a bunch of us were playing hide and seek one summer night. Our vast hiding area consisted of the houses on either side of mine, and old lady Sloan’s, the big elm tree in her front yard being home base.
At any rate, Suzetta Perkins was chasing me, her being “it” and all, as I headed for home base. Just before I got to old lady Sloan’s dumb tree, I hit a yard bomb and sort of stumbled, which of course allowed Suzetta to tag me, thus making me…”it”.
Suzetta knew instantly what I had stepped in and started laughing, as she hollered her stupid head off that I stepped in it, and that I wasn’t wearing any shoes.
Rather than finding a water hose and trying to clean my foot, I tried to catch Suzetta so I could get some of it on her. Of course I stepped in it again, and as I looked up with disgust on my face, there was the rest of the nighttime gang, staring right at me.
They all started with their yuks, and grosses, and other monosyllabic noises, but I understood what they meant. I mean after all, the yard bomb was on the bottom of both of my bare feet.
Just as I started to chase after Kevin Jackson, his dad was the county sheriff and got to drive a police car home, which we all thought was ssssssssssooooooooo cool, Mrs. Campbell started calling for Steve to come in, which lead to a symphony of cries from other mothers, including my own.
I remember Kimmy Sams saying something along the lines of having to come in at dark during the summer was just plain retarded, a comment we all agreed with.
But in the end, the game was over, the yard bomb was still on the bottom of my feet, and another day of childhood was growing to a close.
As I hosed my feet clean, my mother fussing at me the entire time about why I didn’t pay attention to where I was running, I realized two things.
The first thing I realized was that the eyes in the front of my mother’s head didn’t seem to work as well as the ones in the back, I mean she was fussing at me about not paying attention to where I was running, completing missing the fact that it was pitch black at the time the yard bomb found me.
And the second thing I realized was that my feet, just like a long-term investment in URS Corporation, really did stink.
The analogy here is that as I cleaned my feet, in the dark, I knew they stunk because I could smell them. The same is true, in my opinion, with URS; something stinks because I can smell it. I may not know exactly what “it” is at the moment, but something is just not right.
Here is what amounts to a construction company, and according to their balance sheet, they have absolutely no inventory! I mean not an extra nail or piece of lumber. How very odd.
The company is also an engineering company. Engineering companies, as a general rule, are nothing but cash cows. Yet, URS has free cash flow to equity of ($22.40) because management allowed the company’s working capital to increase by $318 million, as they added $1.14 billion in new debt. Incredible!
So let this be a lesson for all who read these words.
Look before you leap, sniff before you step, and never under estimate the power of a mother’s vision.
Wax
What They Do
URS Corporation provides engineering, construction, and technical services in the United States and internationally.
It offers a range of program management; planning, design, and engineering; systems engineering and technical assistance; construction and construction management; operations and maintenance; and decommissioning and closure services to the U.S. federal government, state and local government agencies, as well as to private industry and international clients.
The company's program management services include logistics planning, acquisition management, risk management of weapons systems, safety management, and subcontractor management for military programs, as well as planning, coordination, schedule, and cost control services for capital improvement programs.
It provides planning, design, and engineering services for the construction of new transportation projects and for the renovation and expansion of existing transportation infrastructure, including bridges, highways, roads, airports, mass transit systems and railroads, and ports and harbors.
The company offers construction contracting and construction management services for transportation, environmental and waste management, power generation and transmission, industrial and manufacturing facilities, water resources and wastewater treatment, government building and facilities, and mining projects. In addition, the company provides operations and maintenance services in support of military installations and operations, and hazardous facilities, as well as for transportation systems, industrial and manufacturing facilities, and mining operations.
Further, it offers decommissioning and closure services for nuclear power plants, nuclear research and test facilities, production sites, and laboratories.
The company, whose headquarters are in San Francisco, California, was founded in 1904 and was formerly known as Broadview Research Corporation. The name was changed to URS Corporation in 1976.
Short-Term Investor (Hold of one year or less)
Based on a recent close of $64.19, the stock has First Resistance at $64.19, a 31% increase from recent levels, First Support at $48.66, a 1% decline from recent levels, and Second Support at $40.77, a 17% decline from current levels.
Long-Term Investor (Hold of 3-5 years)
The stock is on my watch list with a Reasonable Value Estimate of $44.53, a Buy Target of $22.27, a First Sell Target of $43.42, and a Close Target of $47.00. The stock currently has a Risk Reward Ratio of (0.4).
Investment Fundamentals (Based on annual financial data)
For its latest fiscal year, the company had Shareholder Equity of $41.76 per share, Earnings of $1.78 per share, and based on a recent close the stock has a trailing twelve-month PE ratio of 27.5.
Also for its latest fiscal year, the company had a Return on Invested Capital of 17%, Average Free Cash Flow of ($6.21) per share, a Tangible Book Value of ($2.81), and paid no dividend.
The company had a Cash Conversion Cycle of 0 days because, according to its balance sheet it has no inventory of any kind, an Enterprise Value of $61.57 per share, and an Equity Value of $36.35 per share.
Investment Ratios (Based on annual financial data)
The company ended its latest fiscal year with a Current Ratio of 1.54, a Quick Ratio of 1.54, a Cash Ratio of 0.15, a Flow Ratio of 1.40, a Debt to Equity Ratio of 0.38, an Acid Test Ratio of 1.33, and a Capital Efficiency Ratio of 0.07.
Dividends
My thoughts on individual stock dividends is pretty simple, send me the money. I personally am not interested in re-investing individual equity dividends. But for those of you that are interested in considering dividend income, based on a recent close, the dividend yield for this stock is 0.0%.
My Short-Term Investment Strategy
At this time, I have no short-term interest in this stock. However...
From a trading perspective, there is almost twice as much upside as there is downside. Were I going to trade this stock, I would get in at current levels ($48.96) with a buy of not more than 1000 shares, and immediately set a stop at $47.74, (2.5%).
If I get stopped out, I just get stopped out, and I loose $1.22 per share.
But shoulld the stock move up, I would maintain the stop percentage, and move the stop dollar amount up accordingly.
At about the $56.50, an approximate 50% trading gain, I would adjust my stop to 2% ($55.37) and maintain this percentage until the stock priced reached $60.00.
Once the stock reached $60.00, an additional 22% trading gain, I would again adjust my stop, this time to 1.5% ($59.10).
I would continue to adjust my stop as the stock moved upward, maintaining the 1.5% stop spread, until my stop took me out of the stock.
My Long-Term Investment Strategy
At this time, I have no long-term interest in the stock, as it appears to be trading at fair value.
And In Conclusion
When I was a kid, about 10 or 11, a bunch of us were playing hide and seek one summer night. Our vast hiding area consisted of the houses on either side of mine, and old lady Sloan’s, the big elm tree in her front yard being home base.
At any rate, Suzetta Perkins was chasing me, her being “it” and all, as I headed for home base. Just before I got to old lady Sloan’s dumb tree, I hit a yard bomb and sort of stumbled, which of course allowed Suzetta to tag me, thus making me…”it”.
Suzetta knew instantly what I had stepped in and started laughing, as she hollered her stupid head off that I stepped in it, and that I wasn’t wearing any shoes.
Rather than finding a water hose and trying to clean my foot, I tried to catch Suzetta so I could get some of it on her. Of course I stepped in it again, and as I looked up with disgust on my face, there was the rest of the nighttime gang, staring right at me.
They all started with their yuks, and grosses, and other monosyllabic noises, but I understood what they meant. I mean after all, the yard bomb was on the bottom of both of my bare feet.
Just as I started to chase after Kevin Jackson, his dad was the county sheriff and got to drive a police car home, which we all thought was ssssssssssooooooooo cool, Mrs. Campbell started calling for Steve to come in, which lead to a symphony of cries from other mothers, including my own.
I remember Kimmy Sams saying something along the lines of having to come in at dark during the summer was just plain retarded, a comment we all agreed with.
But in the end, the game was over, the yard bomb was still on the bottom of my feet, and another day of childhood was growing to a close.
As I hosed my feet clean, my mother fussing at me the entire time about why I didn’t pay attention to where I was running, I realized two things.
The first thing I realized was that the eyes in the front of my mother’s head didn’t seem to work as well as the ones in the back, I mean she was fussing at me about not paying attention to where I was running, completing missing the fact that it was pitch black at the time the yard bomb found me.
And the second thing I realized was that my feet, just like a long-term investment in URS Corporation, really did stink.
The analogy here is that as I cleaned my feet, in the dark, I knew they stunk because I could smell them. The same is true, in my opinion, with URS; something stinks because I can smell it. I may not know exactly what “it” is at the moment, but something is just not right.
Here is what amounts to a construction company, and according to their balance sheet, they have absolutely no inventory! I mean not an extra nail or piece of lumber. How very odd.
The company is also an engineering company. Engineering companies, as a general rule, are nothing but cash cows. Yet, URS has free cash flow to equity of ($22.40) because management allowed the company’s working capital to increase by $318 million, as they added $1.14 billion in new debt. Incredible!
So let this be a lesson for all who read these words.
Look before you leap, sniff before you step, and never under estimate the power of a mother’s vision.
Wax
Life in a Small Town
Continental Resources, Inc. (NYSE: CLR) Financial statement data is based on the company’s latest 10-K filing dated December 2007.
What They Do
Continental Resources, Inc. operates as a crude oil concentrated, independent oil and natural gas exploration and production company.
The company engages in the exploration, acquisition, exploitation, development, and production of oil and natural gas properties and has operations primarily in the Rocky Mountain, Mid-Continent, and Gulf Coast regions of the United States.
The company sells its oil and natural gas production to end users, marketers, and other purchasers.
At the end of fiscal 2007, the company's estimated proven reserves were 134.6 million barrels of oil equivalent (MMBoe), with estimated proven developed reserves of 101.2 MMBoe.
In addition, the company owned 733,132 net undeveloped and 372,329 net developed acres, as well as 12.7 net development wells and 19.9 net exploratory wells, and had interests in 1,822 gross wells as well as serving as the operator of 1,306 of these wells.
The company was founded in 1967 and is based in Enid, Oklahoma.
Short-Term Investor (Hold of one year or less)
Based on a recent close of $61.66, the stock has First Resistance at $63.69, a 3% increase from recent levels, First Support at $42.57, a 31% decline from recent levels, and Second Support at $27.41, a 56% decline from recent levels..
Long-Term Investor (Hold of 3-5 years)
The stock is on my watch list with Reasonable Value Estimate of $16.02, a Buy Target of $8.01, a First Sell Target of $15.62, and a Close Target of $16.90. The stock currently has a Risk Reward Ratio of (27.9).
Investment Fundamentals (Based on annual financial data)
For fiscal 2007, the company had Shareholder Equity of $3.69 per share, Earnings of $2.18 per share, and based on a recent close the stock has a trailing twelve-month PE ratio of 28.2.
Also for fiscal 2007, the company had a Return on Invested Capital of 34%, Average Free Cash Flow of ($2.11) per share, a Tangible Book Value of $3.69, and paid a $0.31 dividend.
Additionally, the company had a Cash Conversion Cycle of (370) days, a Capital Efficiency ratio of (0), an Enterprise Value of $62.58 per share, an Equity Value of $60.74 per share, a Current Ratio of 0.77, a Quick Ratio of 0.70, a Cash Ratio of 0.03, and a Flow Ratio of 0.74.
Investment Opinion (One investor’s conclusion)
At this time, I have no short-term interest in this stock. Also at this time, I have no long-term interest in this stock.
I wish I had something positive to say about this company but I simply don’t. As an investment it holds as much interest for me as wet socks.
I did read an article at the Forbes site the other day that mentioned the stock, and I think it’s great that the company is getting into shale and all of that. But in glancing at what the company does, I never found that management knows the first thing about how to extract oil from rocks.
Maybe they are going to repave the Kroger parking lot? I know Miss Edna would certainly be most unhappy about that, while Henry, her son-in-law, would probably dance a jig.
It seems like every time Miss Edna goes to the store, she ends up calling Henry to bring his wrecker so he can pull her car out of some pothole.
I asked Miss Edna once how come she always parked in that pothole, and if she could see okay, thinking maybe she didn’t realize the pothole was there.
She just grinned and told me she parked in it for two reasons. The first of course was to irritate Henry and the second was because it made it easier for her to get in and out of her car.
Admittedly, I never thought about reason number two. Ah, life in a small town.
Wax
What They Do
Continental Resources, Inc. operates as a crude oil concentrated, independent oil and natural gas exploration and production company.
The company engages in the exploration, acquisition, exploitation, development, and production of oil and natural gas properties and has operations primarily in the Rocky Mountain, Mid-Continent, and Gulf Coast regions of the United States.
The company sells its oil and natural gas production to end users, marketers, and other purchasers.
At the end of fiscal 2007, the company's estimated proven reserves were 134.6 million barrels of oil equivalent (MMBoe), with estimated proven developed reserves of 101.2 MMBoe.
In addition, the company owned 733,132 net undeveloped and 372,329 net developed acres, as well as 12.7 net development wells and 19.9 net exploratory wells, and had interests in 1,822 gross wells as well as serving as the operator of 1,306 of these wells.
The company was founded in 1967 and is based in Enid, Oklahoma.
Short-Term Investor (Hold of one year or less)
Based on a recent close of $61.66, the stock has First Resistance at $63.69, a 3% increase from recent levels, First Support at $42.57, a 31% decline from recent levels, and Second Support at $27.41, a 56% decline from recent levels..
Long-Term Investor (Hold of 3-5 years)
The stock is on my watch list with Reasonable Value Estimate of $16.02, a Buy Target of $8.01, a First Sell Target of $15.62, and a Close Target of $16.90. The stock currently has a Risk Reward Ratio of (27.9).
Investment Fundamentals (Based on annual financial data)
For fiscal 2007, the company had Shareholder Equity of $3.69 per share, Earnings of $2.18 per share, and based on a recent close the stock has a trailing twelve-month PE ratio of 28.2.
Also for fiscal 2007, the company had a Return on Invested Capital of 34%, Average Free Cash Flow of ($2.11) per share, a Tangible Book Value of $3.69, and paid a $0.31 dividend.
Additionally, the company had a Cash Conversion Cycle of (370) days, a Capital Efficiency ratio of (0), an Enterprise Value of $62.58 per share, an Equity Value of $60.74 per share, a Current Ratio of 0.77, a Quick Ratio of 0.70, a Cash Ratio of 0.03, and a Flow Ratio of 0.74.
Investment Opinion (One investor’s conclusion)
At this time, I have no short-term interest in this stock. Also at this time, I have no long-term interest in this stock.
I wish I had something positive to say about this company but I simply don’t. As an investment it holds as much interest for me as wet socks.
I did read an article at the Forbes site the other day that mentioned the stock, and I think it’s great that the company is getting into shale and all of that. But in glancing at what the company does, I never found that management knows the first thing about how to extract oil from rocks.
Maybe they are going to repave the Kroger parking lot? I know Miss Edna would certainly be most unhappy about that, while Henry, her son-in-law, would probably dance a jig.
It seems like every time Miss Edna goes to the store, she ends up calling Henry to bring his wrecker so he can pull her car out of some pothole.
I asked Miss Edna once how come she always parked in that pothole, and if she could see okay, thinking maybe she didn’t realize the pothole was there.
She just grinned and told me she parked in it for two reasons. The first of course was to irritate Henry and the second was because it made it easier for her to get in and out of her car.
Admittedly, I never thought about reason number two. Ah, life in a small town.
Wax
Elephant Pasta
Dear Smith;
I read an article on-line yesterday, a link from my old friend Merrill leading me to the site. The article was basically a discussion about how analysts from somewhere had re-rated a bunch of stocks. I think the name of the place was Starter Mind, or something like that.
So my friend Merrill asked me if I still wrote the Raw Value Report, the newsletter I used to put out 5 years ago, or maybe it was 6 years?
At any rate I told him no and asked what he wanted, and he told me he was curious about the gaming industry stocks that were in the article he sent me.
Merrill is good guy and because he spits a lot when he talks and limps when he walks I try to help him when I can.
Why he spits pretty good when he talks I’m not sure, but he limps when he walks because he has blisters on his toes, blisters he showed me once as we had coffee at Pearl’s Penniless Diner.
Arlene Commington and Covetta Klupsworthy were sitting at the table next to us when Merrill pulled off his boot, jerked down his sock and showed me his blisters. Thought them two ladies was gonna pass out there for a second, till I seen Arlene sort of licking her lips.
At any rate, this is what I told Merrill, and I thought I might share it with you as well. Use it wisely.
Wax
WMS Industries, Inc. (NYSE: WMS) Financial statement data is based on the company’s latest 10-K filing dated June 2007.
Short-Term Investor (Hold of one year or less)
Based on a recent close of $37.08, the stock has First Resistance at $37.15, a 0% increase from recent levels, and First Support at $34.21, an 8% decline from recent levels.
Long-Term Investor (Hold of 3-5 years)
The stock is on my watch list with Reasonable Value Estimate of $30.59, a Buy Target of $15.29, a First Sell Target of $29.82, and a Close Target of $32.28. The stock currently has a Risk Reward Ratio of (1.6).
Investment Fundamentals (Based on annual financial data)
For fiscal 2007, the company had Earnings of $0.70 per share, and based on a recent price has a PE ratio of 52.6. Also for fiscal 2007, the company had a Return on Invested Capital of 30%, Average Free Cash Flow of ($0.03) per share, a Tangible Book Value of $5.65, and paid a dividend of $0.00.
Additionally, the company had a Cash Conversion Cycle of 181 days, an Enterprise Value of $38.39 per share, an Equity Value of $35.77 per share, a Current Ratio of 3.95, a Quick Ratio of 3.03, a Cash Ratio of 0.43, and a Flow Ratio of 3.52.
Investment Opinion (One investor’s conclusion)
I have no investment interest in this stock at the present time either as a short-term trader or a long-term investor, as the stock appears to be fairly valued.
Las Vegas Sands Corporation (NYSE: LVS) Financial statement data is based on the company’s latest 10-K filing dated December 2007.
Short-Term Investor (Hold of one year or less)
Based on a recent close of $76.09, the stock has First Resistance at $98.88, a 30% increase from recent levels, and First Support at $74.72, a 2% decline from recent levels.
Long-Term Investor (Hold of 3-5 years)
The stock is on my watch list with Reasonable Value Estimate of $0.00, a Buy Target of $0.00, a First Sell Target of $0.00, and a Close Target of $0.00. The stock currently has a Risk Reward Ratio of 0.
Investment Fundamentals (Based on annual financial data)
For fiscal 2007, the company had Earnings of $0.15 per share, and based on a recent price has a PE ratio of 518.4. Also for fiscal 2007, the company had a Return on Invested Capital of 3%, Average Free Cash Flow of ($10.80) per share, a Tangible Book Value of $6.35, and paid a dividend of $0.00.
Additionally, the company had a Cash Conversion Cycle of 6 days, an Enterprise Value of $94.96 per share, an Equity Value of $57.22 per share, a Current Ratio of 0.92, a Quick Ratio of 0.91, a Cash Ratio of 0.57, and a Flow Ratio of 0.36
Investment Opinion (One investor’s conclusion)
At present the stock holds no longer-term interest for me. However, the stock does hold some potential short-term interest.
I would be a buyer of the stock at recent levels, placing a Stop under my trade at $72.25. I would not add to my position on price pullbacks, and would sell half my short-term position at or near $87.50, and close my short-term position at or near $99.
MGM Mirage, Inc. (NYSE: MGM) Financial statement data is based on the company’s latest 10-K filing dated December 2007.
Short-Term Investor (Hold of one year or less)
Based on a recent close of $52.03, the stock has First Resistance at $55.44, a 7% increase from recent levels, Second Resistance at $74.74, a 44% increase from recent levels, and First Support at $47.60, a 9% decline from recent levels.
Long-Term Investor (Hold of 3-5 years)
The stock is on my watch list with Reasonable Value Estimate of $0.90, a Buy Target of $0.45, a First Sell Target of $0.88, and a Close Target of $0.95. The stock currently has a Risk Reward Ratio of (565.3).
Investment Fundamentals (Based on annual financial data)
For fiscal 2007, the company had Earnings of $1.67 per share, and based on a recent price has a PE ratio of 31.1. Also for fiscal 2007, the company had a Return on Invested Capital of 7%, Average Free Cash Flow of ($17.56) per share, a Tangible Book Value of $14.88, and paid a dividend of $0.00.
Additionally, the company had a Cash Conversion Cycle of 11 days, an Enterprise Value of $88.11 per share, an Equity Value of $15.95 per share, a Current Ratio of 0.68, a Quick Ratio of 0.61, a Cash Ratio of 0.24, and a Flow Ratio of 0.44
Investment Opinion (One investor’s conclusion)
At present the stock holds no short-term or long-term interest for me.
Given the current uncertainty of the markets and the economy, I don’t believe the stock will be able to break out above first resistance, but if it should, I don’t believe such a breakout is sustainable. Since the short-term reward potential is at levels approaching second resistance, price levels that I don’t believe the stock can achieve, there is no short-term interest.
As a long-term investment, the company has too much debt at $37.46 per share. Already the company has negative cash flow, and interest expenses at 9.21% of Sales. As interest rates increase, the debt service will also increase, which will further erode cash flows and earnings.
Boyd Gaming Corporation (NYSE: BYD) Financial statement data is based on the company’s latest 10-K filing dated December 2007.
Short-Term Investor (Hold of one year or less)
Based on a recent close of $18.17, the stock has First Resistance at $19.09, a 5% increase from recent levels, Second Resistance at $31.49, a 73% increase from recent levels, and First Support at $17.10, a 6% decline from recent levels.
Long-Term Investor (Hold of 3-5 years)
The stock is on my watch list with Reasonable Value Estimate of $14.72, a Buy Target of $7.36, a First Sell Target of $14.35, and a Close Target of $15.54. The stock currently has a Risk Reward Ratio of (1.8).
Investment Fundamentals (Based on annual financial data)
For fiscal 2007, the company had Earnings of $1.24 per share, and based on a recent price has a PE ratio of 14.7. Also for fiscal 2007, the company had a Return on Invested Capital of 10%, Average Free Cash Flow of ($2.75) per share, a Tangible Book Value of $5.00, and paid a dividend of $0.58.
Additionally, the company had a Cash Conversion Cycle of (14) days, an Enterprise Value of $41.88 per share, an Equity Value of ($5.54) per share, a Current Ratio of 0.89, a Quick Ratio of 0.86, a Cash Ratio of 0.44, and a Flow Ratio of 0.46
Investment Opinion (One investor’s conclusion)
At present the stock holds no longer-term interest for me. However, the stock does hold some potential short-term interest.
I would be a buyer of the stock at recent levels, placing a Stop under my trade at $16.75. I would not add to my position on price pullbacks, and would sell half my short-term position at or near $25.00, and close my short-term position at or near $31.50.
International Game Technology, Inc. (NYSE: IGT) Financial statement data is based on the company’s latest 10-K filing dated September 2007.
Short-Term Investor (Hold of one year or less)
Based on a recent close of $36.19, the stock has First Resistance at $38.99, an 8% increase from recent levels, Second Resistance at $41.21, a 14% increase from recent levels, and First Support at $33.27, an 8% decline from recent levels.
Long-Term Investor (Hold of 3-5 years)
The stock is on my watch list with Reasonable Value Estimate of $39.38, a Buy Target of $19.69, a First Sell Target of $38.39, and a Close Target of $41.56. The stock currently has a Risk Reward Ratio of 1.4.
Investment Fundamentals (Based on annual financial data)
For fiscal 2007, the company had Earnings of $1.08 per share, and based on a recent price has a PE ratio of 33.4. Also for fiscal 2007, the company had a Return on Invested Capital of 48%, Average Free Cash Flow of ($1.23) per share, a Tangible Book Value of $0.27, and paid a dividend of $0.52.
Additionally, the company had a Cash Conversion Cycle of 79 days, an Enterprise Value of $39.90 per share, an Equity Value of $32.48 per share, a Current Ratio of 1.86, a Quick Ratio of 1.65, a Cash Ratio of 0.38, and a Flow Ratio of 1.46
Investment Opinion (One investor’s conclusion)
I have no investment interest in this stock at the present time either as a short-term trader or a long-term investor, as the stock appears to be fairly valued.
Wynn Resorts, Ltd. (Nasdaq: WYNN) Financial statement data is based on the company’s latest 10-K filing dated December 2007.
Short-Term Investor (Hold of one year or less)
Based on a recent close of $109.52, the stock has First Resistance at $120.32, a 10% increase from recent levels, and First Support at $103.93, a 5% decline from recent levels.
Long-Term Investor (Hold of 3-5 years)
The stock is on my watch list with Reasonable Value Estimate of $18.77, a Buy Target of $9.39, a First Sell Target of $18.30, and a Close Target of $19.81. The stock currently has a Risk Reward Ratio of (47.8).
Investment Fundamentals (Based on annual financial data)
For fiscal 2007, the company had Earnings of $1.08 per share, and based on a recent price has a PE ratio of 101.6. Also for fiscal 2007, the company had a Return on Invested Capital of 12%, Average Free Cash Flow of ($8.89) per share, a Tangible Book Value of $16.50, and paid a dividend of $0.
Additionally, the company had a Cash Conversion Cycle of (1) days, an Enterprise Value of $129.34 per share, an Equity Value of $89.70 per share, a Current Ratio of 2.70, a Quick Ratio of 2.58, a Cash Ratio of 2.18, and a Flow Ratio of 0.53
Investment Opinion (One investor’s conclusion)
I have no investment interest in this stock at the present time either as a short-term trader or a long-term investor, as the stock appears to be fairly valued.
The Dancing Pie
A couple of weeks ago my friend Leif asked me if I would review the Drug Store Industry to see if there was a company or two that he could add to his portfolio.
Let me say at the start, when it comes to investing, Leif isn’t exactly the sharpest knife in the drawer. In fact, when it comes to investing, he’s dumber than a stump. Were it not for his daughter Willow, I’m sure Leif would have lost all his money a long time ago.
So after arguing with him for a couple of weeks that he didn’t need to add a drug store stock to his portfolio, I gave in and told him I would take a look, but not until he paid me.
Several weeks later I ran into Leif at the bank and he asked me how things were going with the research he wanted. I reminded him that I wasn’t going to do anything until he paid me, unlike all of the times before this.
This led to a cussing match that the eavesdropping busybody, widow Mellon, found hysterical…which led to her dentures coming loose, which led to her almost swallowing them, which led to the paramedics being called, which led to the police being called, which led to more cussing, which led to the bank manager breaking the widow Mellon’s dentures when he stepped on them as he tried to break up the fisticuffs between me and Leif.
Thinking back on it, I guess it had to be sort of comical, two old geezers trying to go at it in the middle of the bank lobby. Now that’s something you don’t see every day.
Eventually the paramedics decided to take the widow Mellon to the hospital, just to make sure she was going to be okay, and Leif and I ended up in the back of Police Chief Olaf’s police car while Arvil Sturgeon, the Bank Manager, explained what had gone on.
About the time I started to wonder how much trouble Leif and I might be in, Leif looked at me and said he had a plan to get us off the hook. All I said was had he paid me like he said he would we wouldn’t be on a hook.
I knew what was coming before I said what I said, but being one those folks that just can’t resist, I said it anyway.
You guessed it, more cussing, more trying to get a good swing at each other, more injury inflicted on ourselves by ourselves than on each other, more and more and….
Our screaming and the attendant commotion led Police Chief Olaf to his car to see what was going on. As he walked up to my side of the car, Leif leaned forward and the next thing I know it was complete pandemonium.
When Leif leaned forward he was trying to turn on the siren, but instead he hit the gearshift lever, popping the idling police car into reverse. All of this happened just as Leif decided to implement his plan for getting us off the hook, which as it turned out was to make a run for it!
Hell, at his age Leif couldn’t run to the bathroom if he had loose bowels much less run from the police.
I once saw him try to run behind a tree in a desperate attempt to hide the fact from his daughter that he was still smoking cigars. Of course he never came close to reaching his hiding place before Willow caught him.
It seems that when Leif gets nervous his brain goes into ultra dumb mode, because aside from not being the sprinter of his dreams, Leif never thought to put out the cigar.
So when Willow caught him with the cigar in his hand as he tried to hide behind the tree, he looked her straight in the eye and told her the cigar wasn’t his…he found it.
He and I were on the outs for weeks and weeks after that incident. I mean I was there, I saw what happened. It isn’t like I was spreading a rumor all over town?
Things didn’t die down for Leif about the cigar tree incident till the town carpenter Stumpy Gurgle was caught sawing old lady Trimble in her backyard Gazebo. When the news broke about that, everybody forgot about Leif, which was just fine with him.
So back to Leif’s current plan, which was to make a run for it…as Leif opens the door and starts to get out, the car begins its backwards journey. Seeing that old fart stuck on that police car door with his head out the open window was one of the funniest things I had ever seen, and instead of trying to help, I started to laugh.
My laughing made Leif madder than he was in the bank lobby, especially when I started yelling at him that he must be the greatest criminal mind of our time to think up such a foolproof plan!
As I said, I know I should have done something, but the whole scene was just too funny.
Here was Leif stuck through the door of a police car that was in reverse heading toward Herb Shutterdam’s ice cream truck while the chief of police and the bank manager stood frozen in place wondering just what the hell was going on.
As we picked up speed, I noticed through the windshield that behind Chief Olaf, Clyde Dartsworthy was filming the goings on with his new cell phone. Clyde operates the town sewage treatment plant, and other than the widow Mellon, nobody seems to want to get real close to Clyde.
As soon as I saw him with that cell phone I started to feel a bit sad for the widow Mellon since she was missing the biggest thing to happen in this town…ever, and it was her that was at the center of the whole damn thing.
Anyway, Herb, seeing the police car heading right towards him, finally engages his brain and moves his worn out ice cream truck out of harm’s way just as the police car enters the extra wide wheel chair ramp that will, at its end, deposit the police car, me, and Leif, in the fountain in the middle of the town square.
And just as I was thinking about this, there was a loud thud, followed by a splash, followed by Leif falling into the fountain as he screamed in a high pitched voice for me to save him because he couldn’t swim.
I sat in the barbershop telling my new tale and explaining that in the end, it never occurred to Chief Olaf that master criminal Leif was trying to implement a dastardly plan that could not be foiled.
Instead, it seems the Chief wrongfully assumed that the running car had jumped into reverse just as he had read in True and Real Crime Drama Magazine.
My rendition of the events as they happened, while not being exactly chronologically correct, once again branded Leif the guffaw king, and with any luck my tale will survive long after Leif and I are banished to the great bank lobby in the sky.
As to the companies in the Drug Store Industry?
Well…..as it happened, Leif’s daughter Willow had bought the house across the street from her dad’s house, and on that fateful day was in the process of moving her family of one husband and seven cats into their new digs.
It seems that Leif is allergic to cats, but cats love Leif, and by the third day following Willow’s arrival, Leif couldn’t stop sneezing.
He would sneeze and sneeze and sneeze. Then he would start cussing those cats for all he was worth. Seems the more he cussed those cats, the more they would stay around his house, and the more Leif would sneeze.
Taking pity on him, I collected some allergy medicine coupons and took them over. When I dropped them off I told him that his allergies were justice for being such a jerk, which reminded him of his request for information on the drug store industry.
Allergy medicine is 20% off I told him and that’s all you’re getting until you pay me. Just as he started to cuss at me again, I pulled Elizabeth, a long haired Himalayan cat, from behind my back and before I could say grace, old Leif was grabbing his checkbook.
I reminded him of the price and was pleasantly surprised when I realized he paid me a touch extra. I had asked for $1500, but generous Leif paid me $5100.
In fairness to myself, I did try and explain his mistake to him. But with all that sneezing and snorting after I dropped Elizabeth in his lap…I don’t think he heard me.
Wax
According to Yahoo, there are 54 companies in this industry. Of those 54, I have seven (7) on my watch list.
The average price of those seven stocks as of the end of business on 05/09/08, is $30.66, with my average reasonable value estimate at $41.59, my average Buy target at $20.80, my average First Sell target at $40.55, and my average Close target at $43.90.
In addition my average Risk Reward for these seven stocks is 4.2, meaning that in comparing my average reasonable value estimates for these stocks with recent prices, the stocks average 4.2 times more upside reward than downside risk. I personally won’t buy a stock until the risk reward is at 5.
CVS Caremark Corporation (NYSE: CVS) Financial data is based on the company’s most recent SEC 10-K filing for the year ended December 2007.
The company is a provider of prescriptions and related healthcare services in the United States, filling or managing more than one billion prescriptions annually. In March 2007, the company closed its merger with Caremark Rx, Inc. (Caremark). Following the Caremark Merger, the company changed its name to CVS Caremark Corporation.
The company operates in two business segments: Retail Pharmacy and Pharmacy Services.
Short-Term Investor
For the short-term trader, based on a recent close of $41.34, the stock has first resistance at $42.60, a 3% increase from recent levels, first support at $40.34, a 2% decrease from recent levels, and second support at $39.23, a 5% decrease from recent levels.
Long-Term Investor
For the long-term, 3-5 year hold, investor, the stock is on my watch list with a reasonable value estimate of $46.45, a Buy target of $23.22, a First Sell target of $45.29, and a Close target of $49.03. The stock currently has a risk reward ratio of 1.7.
Investment Fundamentals
For fiscal 2007, the company earned $1.49 per share, and based on a recent price has a PE ratio of 27.7. Also for fiscal 2007, the company had a Return on Invested Capital of 34%, Average Free Cash Flow of $0.60 per share, a Tangible Book Value of ($2.11), and paid a dividend of $0.22.
Additionally, the company had a cash conversion cycle of 49 days, an Enterprise Value of $47.90 per share, an Equity Value of $34.78 per share, a Current Ratio of 1.31, a Quick Ratio of 0.57, a Cash Ratio of 0.10, and a Flow Ratio of 1.52.
Investment Opinion
I have no interest in owning this stock at the present time as either a short-term trader or long-term investor as I believe the stock is fairly valued at recent levels.Longs Drug Stores, Inc. (NYSE: LDG) Financial data is based on the company’s most recent SEC 10-K filing for the year ended January 2008.
The company operates in two business segments: retail drug stores, and through its RxAmerica subsidiary, pharmacy benefit services.
Through the company's retail drug store segment, it is a retail drug store chain on the West Coast of the United States and in Hawaii, with 510 stores as of January 31, 2008. Longs Drug Stores Corporation's retail drug store segment also operates a mail order pharmacy business.
The company's pharmacy benefit services segment provides a range of services related to pharmacy benefit management, including plan design and implementation, claims administration and formulary management to third-party health plans and other organizations.
Short-Term Investor
For the short-term trader, based on a recent close of $43.90, the stock has first resistance at $47.74, a 9% increase from recent levels, and first support at $41.42, a 2% decrease from recent levels.
Long-Term Investor
For the long-term, 3-5 year hold, investor, the stock is on my watch list with a reasonable value estimate of $80.17, a Buy target of $40.09, a First Sell target of $78.17, and a Close target of $84.62. The stock currently has a risk reward ratio of 5.1.
Investment Fundamentals
For fiscal 2007, the company earned $2.52 per share, and based on a recent price has a PE ratio of 17.4. Also for fiscal 2007, the company had a Return on Invested Capital of 20%, Average Free Cash Flow of $2.03 per share, a Tangible Book Value of $18.62, and paid a dividend of $0.55.
Additionally, the company had a cash conversion cycle of 48 days, an Enterprise Value of $49.22 per share, an Equity Value of $38.58 per share, a Current Ratio of 1.32, a Quick Ratio of 0.62, a Cash Ratio of 0.04, and a Flow Ratio of 1.35.
Investment Opinion
I have no interest in owning this stock at the present time as either a short-term trader or long-term investor. While valuations may tend to reflect the stock in a positive light, it is my opinion that when valuations are overlaid with the fundamentals, a purchase of stock at this time is ill advised.
While the company is very strong when compared with other stocks in this industry, it fails to measure up as investment quality given my parameters of low PE, high ROIC, and ratios above or below specific targets.
MedcoHealth Solutions, Inc. (NYSE: MHS) Financial data is based on the company’s most recent SEC 10-K filing for the year ended December 2007.
The company is a pharmacy benefit manager providing traditional and specialty prescription drug benefit programs and services for its clients and members.
The company provides pharmacy benefit management (PBM) services through its national networks of retail pharmacies and its own mail-order pharmacies, as well as through its Specialty Pharmacy segment, Accredo Health Group.
During the fiscal year ended December 29, 2007 (fiscal 2007), it introduced the Medco Therapeutic Resource Centers. The company's data center links its mail-order pharmacy operations, including its call center pharmacies and work-at-home sites, its Websites, and the retail pharmacies in its networks.
In April 2008, the company acquired a majority interest in Europa Apotheek Venlo, a privately held company providing clinical healthcare and mail-order pharmacy services in Germany.
Short-Term Investor
For the short-term trader, based on a recent close of $49.49, the stock has first resistance at $54.63, a 10% increase from recent levels, first support at $46.47, a 6% decrease from recent levels, and second support at $45.44, an 8% decrease from recent levels.
Long-Term Investor
For the long-term, 3-5 year hold, investor, the stock is on my watch list with a reasonable value estimate of $46.83, a Buy target of $23.42, a First Sell target of $45.66, and a Close target of $49.43. The stock currently has a risk reward ratio of 0.
Investment Fundamentals
For fiscal 2007, the company earned $1.33 per share, and based on a recent price has a PE ratio of 37.1. Also for fiscal 2007, the company had a Return on Invested Capital of 79%, Average Free Cash Flow of $0.48 per share, a Tangible Book Value of ($4.03), and paid no dividend.
Additionally, the company had a cash conversion cycle of 8 days, an Enterprise Value of $54.34 per share, an Equity Value of $44.64 per share, a Current Ratio of 1.23, a Quick Ratio of 0.85, a Cash Ratio of 0.15, and a Flow Ratio of 1.22.
Investment Opinion
I have no interest in owning this stock at the present time as either a short-term trader or long-term investor as I believe the stock is fairly valued at recent levels.
Omnicare, Inc. (NYSE: OCR) Financial data is based on the company’s most recent SEC 10-K filing for the year ended December 2007.
The company is a geriatric pharmaceutical services company operating in two segments: Pharmacy Services and Contract Research Organization Services (CRO Services).
The company provides pharmaceuticals and related ancillary pharmacy services to long-term healthcare institutions. Its clients include primarily skilled nursing facilities (SNFs), assisted living facilities (ALF's), retirement centers, independent living communities, hospitals, hospice, other healthcare settings and service providers.
The company also provides operational software and support systems to long-term-care pharmacy providers across the United States, and provides pharmaceutical distribution and patient assistance services for specialty pharmaceuticals.
Short-Term Investor
For the short-term trader, based on a recent close of $23.75, the stock has first resistance at $25.71, an 8% increase from recent levels, and first support at $19.06, a 20% decrease from recent levels.
Long-Term Investor
For the long-term, 3-5 year hold, investor, the stock is on my watch list with a reasonable value estimate of $42.80, a Buy target of $21.40, a First Sell target of $41.73, and a Close target of $45.18. The stock currently has a risk reward ratio of 5.
Investment Fundamentals
For fiscal 2007, the company earned $1.16 per share, and based on a recent price has a PE ratio of 20.5. Also for fiscal 2007, the company had a Return on Invested Capital of 16%, Average Free Cash Flow of $2.06 per share, a Tangible Book Value of ($11.28), and paid a $0.09 dividend.
Additionally, the company had a cash conversion cycle of 88 days, an Enterprise Value of $44.68 per share, an Equity Value of $2.82 per share, a Current Ratio of 3.77, a Quick Ratio of 3.08, a Cash Ratio of 0.42, and a Flow Ratio of 3.36.
Investment Opinion
Admittedly I like the numbers for this stock. The company reduced its debt load by $1.28 per share during the fiscal year, a move I generally always applaud.
Moreover, I like the company’s current and quick ratio numbers, as it tells me management’s collective head is in the game. On the flip side, the company’s flow ratio, a measure of cash flow management, is almost 2.5 times higher than what I require for an investment grade stock.
So while the company is certainly showing it’s here to do business, it hasn’t quite become an investment grade stock for me just yet.
Accordingly, I have no interest in owning this stock at the present time as either a short-term trader or long-term investor.
PharMerica Corporation (NYSE: PMC) Financial data is based on the company’s most recent SEC 10-K filing for the year ended December 2007.
The company is an institutional pharmacy services company serving healthcare facilities and providing management pharmacy services to hospitals. It operates 115 institutional pharmacies in 40 states.
The company's customers are typically institutional healthcare providers, such as nursing facilities, assisted living facilities, hospitals and other long-term alternative care settings. It also provides pharmacy management services to 86 hospitals in the United States.
The company operates two business segments: institutional pharmacies and hospital pharmacy management. Institutional pharmacies provide pharmacy services to nursing centers and other healthcare providers, and the hospital pharmacy management business provides management services to substantially all of Kindred Healthcare, Inc.'s (Kindred) hospitals.
Short-Term Investor
For the short-term trader, based on a recent close of $18.76, the stock has first resistance at $23.20, an 24% increase from recent levels, first support at $16.08, a 14% decrease from recent levels, and second support at $15.53, a 17% decrease from recent levels.
Long-Term Investor
For the long-term, 3-5 year hold, investor, the stock is on my watch list with a reasonable value estimate of $20.98, a Buy target of $10.49, a First Sell target of $20.46, and a Close target of $22.14. The stock currently has a risk reward ratio of 1.6.
Investment Fundamentals
For fiscal 2007, the company earned $0.48 per share, and based on a recent price has a PE ratio of 39.3. Also for fiscal 2007, the company had a Return on Invested Capital of 10%, Average Free Cash Flow of ($10.97) per share, a Tangible Book Value of $3.96, and paid a $4.11 dividend.
Additionally, the company had a cash conversion cycle of 73 days, an Enterprise Value of $25.93 per share, an Equity Value of $11.59 per share, a Current Ratio of 3.66, a Quick Ratio of 2.89, a Cash Ratio of 0.32, and a Flow Ratio of 3.34.
Investment Opinion
My issue with this stock is that it is the result of a merger of PharMerica Long-Term Care and Kindred Pharmacy, and while all seems quite lovely at the moment, there isn’t enough historical financial data of the merged companies to give me the warm fuzzies.
Accordingly, I have no interest in owning this stock at the present time as either a short-term trader or long-term investor.
Rite Aid Corporation (NYSE: RAD) Financial data is based on the company’s most recent SEC 10-K filing for the year ended February 2008.
The company, incorporated in 1968, is a retail drugstore chain in the United States operating drugstores in 31 states across the United States and in the District of Columbia.
As of March 1, 2008, it operated 5,059 stores. In its stores, the company sells prescription drugs and an assortment of other merchandise, which it calls front-end products. Front end products include over-the-counter medications, health and beauty aids, personal care items, cosmetics, household items, beverages, convenience foods, greeting cards, seasonal merchandise and numerous other everyday and convenience products, as well as photo processing. It offers approximately 3,000 products under the Rite Aid private brand.
In June 2007, the Company completed the acquisition of 1,854 Brooks and Eckerd stores and six distribution centers from The Jean Coutu Group (PJC) Inc., creating a drugstore chain on the East Coast.
Short-Term Investor
For the short-term trader, based on a recent close of $2.37, the stock has first resistance at $2.64, an 11% increase from recent levels, second resistance at $3.55, a 50% increase from recent levels, and first support at $1.91, a 19% decrease from recent levels.
Long-Term Investor
For the long-term, 3-5 year hold, investor, the stock is on my watch list with a reasonable value estimate of $0.00, a Buy target of $0.00, a First Sell target of $0.00, and a Close target of $0.00. The stock currently has a risk reward ratio of 0.
Investment Fundamentals
For fiscal 2007, the company earned ($1.04) per share, and based on a recent price has a PE ratio of (2.3). Also for fiscal 2007, the company had a Return on Invested Capital of 5%, Average Free Cash Flow of ($2.69) per share, a Tangible Book Value of ($1.52), and paid a $0.02 dividend.
Additionally, the company had a cash conversion cycle of 63 days, an Enterprise Value of $9.39 per share, an Equity Value of ($4.65) per share, a Current Ratio of 1.76, a Quick Ratio of 0.35, a Cash Ratio of 0.06, and a Flow Ratio of 1.82.
Investment Opinion
I have to admit that I have no clue what management was trying to prove with its recent purchases of the Brooks and Eckerd stores, but it goes without saying The Jean Coutu Group is very pleased.
Rite Aid investors on the other hand should demand their money back. The company has increased its debt level by $3.42 per share, bringing total debt to $7.21 per share, an amount that I believe will see little to no decline for many years to come.
With management’s demonstrated ability to be just plain stupid, I have no interest in owning this stock at the present time as either a short-term trader or long-term investor.
Walgreen Company, Inc. (NYSE: WAG) Financial data is based on the company’s most recent SEC 10-K filing for the year ended August 2007.
The company, incorporated in 1909, operates retail drugstore chains that are engaged in the retail sale of prescription and non-prescription drugs, and general merchandise.
General merchandise includes, among other things, beauty care, personal care, household items, candy, photofinishing, greeting cards, seasonal items and convenience foods. Customers can have prescriptions filled at the drugstore counter, as well as through the mail, by telephone and via the Internet.
During the fiscal year ended August 31, 2007 (fiscal 2007), the Company opened or acquired 563 stores, not including 58 locations acquired from Option Care, Inc. The total number of locations, at August 31, 2007, was 5,997 located in 48 states and Puerto Rico. The Company announced that it has created a Walgreens Health and Wellness division.
Short-Term Investor
For the short-term trader, based on a recent close of $34.99, the stock has first resistance at $36.42, a 4% increase from recent levels, second resistance at $38.91, an 11% increase from recent levels, and first support at $32.50, a 7% decrease from recent levels.
Long-Term Investor
For the long-term, 3-5 year hold, investor, the stock is on my watch list with a reasonable value estimate of $53.73, a Buy target of $26.87, a First Sell target of $52.39, and a Close target of $56.71. The stock currently has a risk reward ratio of 4.0.
Investment Fundamentals
For fiscal 2007, the company earned $1.37 per share, and based on a recent price has a PE ratio of 25.6. Also for fiscal 2007, the company had a Return on Invested Capital of 27%, Average Free Cash Flow of $2.08 per share, a Tangible Book Value of $9.98, and paid a $0.31 dividend.
Additionally, the company had a cash conversion cycle of 45 days, an Enterprise Value of $35.61 per share, an Equity Value of $34.37 per share, a Current Ratio of 1.41, a Quick Ratio of 0.40, a Cash Ratio of 0.04, and a Flow Ratio of 1.58.
Investment Opinion
If I were going to invest in a company in the Drug Store Industry, Walgreen’s would be the one. Unlike Rite Aid, the company has managed to add stores, which have added to sales and earnings, and low and behold, the company has done it with no increase in debt levels. In fact, the company has no long-term debt and short-term debt of $0.87 per share, and increase of $0.49 over the prior year.