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

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

Barrett Business Services Prelim1208.pdf

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

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"!

Wax

Las Vegas Sands Deal Report.pdf