BAMM reported its fiscal Q1 results on 5/29/07
Here is what I was looking for when reading the press release:
“For a long position, I am looking for continued operating improvements, lack of insider sales, falling stock price (at roughly $12 the stock would trade at roughly half the valuation of the broad market), positive SSS. To make a short trade I am looking for the opposite to happen.” http://offthebeatenpathinvestments.blogspot.com/2007/05/bamm-final-thoughts.html
Looks like the company continues to improve operationally:
GMargin up 40bps YoY
EBITDA Margin up 55bps to 5.84% YoY
EPS up 44% YoY to $0.13 per share, also beat estimates by 1c and it looks like 2007 full year estimates were raised by 5c to $1.20
From the SSS perspective the company continues to struggle with SSS down 50bps.
At current price of $16.44, BAMM trades at roughly 15x of market value. The company has a lower EV than Market value making the valuation seem a little lower at 12x but due to the nature of the business you could not pull the cash out and still run the business.
I continue to think that the current valuation is to high to provide any margin of safety for a company facing negative SSS in an industry with some serious problems, also I can’t forget the massive insider sales the last time the stock had a decent up move (http://offthebeatenpathinvestments.blogspot.com/2007/05/bamm-da-bears.html)
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
May 31, 2007
CPY -- Final Thoughts
To sum up, the bullish case is that management is shareholder friendly (as they are major shareholders) and they have had a lot of initial success turning the company around. The bearish case is that they are still in the process of a turning around, the recently hired CEO left, and they have recently announced an acquisition that has sent their shares soaring erasing all of the margin of safety.
I think it’s pretty obvious that I like this company and like what management is doing to turn things around, but when I consider all the things that can go wrong I can’t justify the current share price.
For starters, acquisitions are usually a bad deal for shareholders. Big acquisitions, like doubling the revenue of the company are even less likely to work out. Big acquisitions in an industry facing a lot of headwind is usually suicide.
Also, its not clear that management can execute the conversion to digital at PCA as smoothly as they did at CPY (I am taking it as a given that they will try to convert to digital). Yes, they are doing it a second time and will not make the same mistakes. But, they must convert 3x as many stores (PCA’s store count is 3,000 vs. 1,041 for CPY) which are more spread out geographically (PCA has stores in Europe and Mexico as well as Canada and U.S.). There are also many times more employees to re-train and supervise.
Furthermore, I think that the market is assuming that after a few years and the conversion to digital the margins of the two businesses will be identical so cash flow will at least double. I am not going to waste time speculating about this until CPY provides more information but with 3x as many stores and identical revenue this means that per store sales are 1/3 at PCA compared to CPY. I have a hard time seeing how they will be able to squeeze the same margins from each Wal-Mart store at 1/3 sales per store.
Plus, its not a given that CPY’s Sears business is out of the woods yet. They are still seeing sitting fall by double digit rates. They are taking on this huge integration as well as substantial debt load, while they are still turning around their core business. Needless to say that they will have to execute perfectly to meet expectations implied by the current share price and hope that consumer spending does not contract.
What would be the a good entry point given all these concerns? Again I am not going to waste time with this until there is more information but here are some basic calculations:
EBITDA from Sears in 2009 $44
EBITDA from Wal-Mart in 2009: $22 (Wal-Mart at ½ margin of Sears)
Maintenance CAPEX $10M
Interest Expense on $100M $8
Taxes: $0 (assume NOL’s since they are buying PCA out of bankruptcy and should come with losses)
Net Income in 2009: $51M
2009 S&P 500 P/E = 14.1x
Implied Priced = $106 per share
If the stock trades down to $64 per share which is the $106 implied price minus 40% for maring of safety, than I will consider buying even if there is no new information about PCA.
Things I will be watching for next quarter is the trend in Sears sitting and sales per customer, difference between CAPEX and reported dep/amor, insider trading by Knightspoint. Obviously any new information regarding PCA operations and terms of the debt that will pay for PCA will be watched for and will provide additional info.
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
I think it’s pretty obvious that I like this company and like what management is doing to turn things around, but when I consider all the things that can go wrong I can’t justify the current share price.
For starters, acquisitions are usually a bad deal for shareholders. Big acquisitions, like doubling the revenue of the company are even less likely to work out. Big acquisitions in an industry facing a lot of headwind is usually suicide.
Also, its not clear that management can execute the conversion to digital at PCA as smoothly as they did at CPY (I am taking it as a given that they will try to convert to digital). Yes, they are doing it a second time and will not make the same mistakes. But, they must convert 3x as many stores (PCA’s store count is 3,000 vs. 1,041 for CPY) which are more spread out geographically (PCA has stores in Europe and Mexico as well as Canada and U.S.). There are also many times more employees to re-train and supervise.
Furthermore, I think that the market is assuming that after a few years and the conversion to digital the margins of the two businesses will be identical so cash flow will at least double. I am not going to waste time speculating about this until CPY provides more information but with 3x as many stores and identical revenue this means that per store sales are 1/3 at PCA compared to CPY. I have a hard time seeing how they will be able to squeeze the same margins from each Wal-Mart store at 1/3 sales per store.
Plus, its not a given that CPY’s Sears business is out of the woods yet. They are still seeing sitting fall by double digit rates. They are taking on this huge integration as well as substantial debt load, while they are still turning around their core business. Needless to say that they will have to execute perfectly to meet expectations implied by the current share price and hope that consumer spending does not contract.
What would be the a good entry point given all these concerns? Again I am not going to waste time with this until there is more information but here are some basic calculations:
EBITDA from Sears in 2009 $44
EBITDA from Wal-Mart in 2009: $22 (Wal-Mart at ½ margin of Sears)
Maintenance CAPEX $10M
Interest Expense on $100M $8
Taxes: $0 (assume NOL’s since they are buying PCA out of bankruptcy and should come with losses)
Net Income in 2009: $51M
2009 S&P 500 P/E = 14.1x
Implied Priced = $106 per share
If the stock trades down to $64 per share which is the $106 implied price minus 40% for maring of safety, than I will consider buying even if there is no new information about PCA.
Things I will be watching for next quarter is the trend in Sears sitting and sales per customer, difference between CAPEX and reported dep/amor, insider trading by Knightspoint. Obviously any new information regarding PCA operations and terms of the debt that will pay for PCA will be watched for and will provide additional info.
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
May 30, 2007
CPY -- “Da Bears” Part II
Up to this point I have purposely ignored the recently announced acquisition of PCA (Portrait Corporation of America) since I was not sure if it should go into the bullish or bearish column.
On May 2nd CPY announced that it has won the right to acquire PCA out of bankruptcy for $100 million in cash which CPY will borrow. This is what ultimately gapped the stock up from $53 to $75. Based on the market reaction, investors believe that the PCA acquisition is going to be an immediate positive and justifies an immediate 40%+ increase in the share price.
Ultimately, I think this is going to be a successful acquisition for CPY and based on their recent execution I am willing to give them the benefit of the doubt to a certain extent. However, the RECENT PRICE MOVE HAS REMOVED ALL OF THE MARGIN OF SAFETY from CPY (the 8k that was filed on May 25th has no operating details about PCA’s business).
Here is why …….
Current Market Value at $78.50 per share: $500M
Last 12 months EBITDA: $44M
Current MkValue to EBITDA: 11.3x
Current MkValue to EBITDA of SPX: 9.9x
Last 12 months NI (replace $17M in Dep with $5M in Capex) = $28M
L12M P/E = 17.6x
S&P 500 L12M P/E = 17.7x (Reuters estimates data)
Based on this naïve valuation, CPY is trading in-line or at a 15% premium to the S&P 500, while my guess is that it should be trading at a discount (more on this later).
What self respecting analyst looks at last years results, you say. Stop leaving in the past man and look into the future, you say. Have a little vision, you say. Ok, lets play with some numbers to get an idea of what the current $78 share price implies about future earnings.
Current S&P 500 forward multiples are …….
2007 S&P 500 P/E = 16.5x
2008 S&P 500 P/E = 15.4x
2009 S&P 500 P/E = 14.1x
At the current price, for CPY to have a 2009 forward multiple similar to the SPX the company must earn $35M in net income. Let’s say you agree with the negative issue I raised in the previous post http://offthebeatenpathinvestments.blogspot.com/2007/05/cpy-da-bears-part-i.html and want apply a 30% margin of safety you are looking at a 2009 fwd multiple of 9.9x which implies net income of $50M.
My biggest problem with CPY at the current price is that I think the lack of information about CPA’s financials combined with the recent success management has had executing the Sears business turnaround has caused an over reaction to this announcement.
The only thing that was disclosed in the fillings dealing with the acquisition is that PCA has $290M in revenues which is almost identical to 2006 revenue at CPY. I think that the initial back of the envelope analysis would imply that in a couple of years management can work their magic and net income double which gets us to $50M and a multiple that is at a 30% discount to the broad market – when I looked at this stock I did exactly these calculations and thought that it was still pretty damn cheap despite the big pop in price.
And they are now the sole provider of photography to the world’s biggest retailer? What’s not to like.
In the next and concluding post on CPY I will try to highlight why this back of the envelope valuation is not enough to justify a purchase and try to put some kind of target price on the stock ……..
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
On May 2nd CPY announced that it has won the right to acquire PCA out of bankruptcy for $100 million in cash which CPY will borrow. This is what ultimately gapped the stock up from $53 to $75. Based on the market reaction, investors believe that the PCA acquisition is going to be an immediate positive and justifies an immediate 40%+ increase in the share price.
Ultimately, I think this is going to be a successful acquisition for CPY and based on their recent execution I am willing to give them the benefit of the doubt to a certain extent. However, the RECENT PRICE MOVE HAS REMOVED ALL OF THE MARGIN OF SAFETY from CPY (the 8k that was filed on May 25th has no operating details about PCA’s business).
Here is why …….
Current Market Value at $78.50 per share: $500M
Last 12 months EBITDA: $44M
Current MkValue to EBITDA: 11.3x
Current MkValue to EBITDA of SPX: 9.9x
Last 12 months NI (replace $17M in Dep with $5M in Capex) = $28M
L12M P/E = 17.6x
S&P 500 L12M P/E = 17.7x (Reuters estimates data)
Based on this naïve valuation, CPY is trading in-line or at a 15% premium to the S&P 500, while my guess is that it should be trading at a discount (more on this later).
What self respecting analyst looks at last years results, you say. Stop leaving in the past man and look into the future, you say. Have a little vision, you say. Ok, lets play with some numbers to get an idea of what the current $78 share price implies about future earnings.
Current S&P 500 forward multiples are …….
2007 S&P 500 P/E = 16.5x
2008 S&P 500 P/E = 15.4x
2009 S&P 500 P/E = 14.1x
At the current price, for CPY to have a 2009 forward multiple similar to the SPX the company must earn $35M in net income. Let’s say you agree with the negative issue I raised in the previous post http://offthebeatenpathinvestments.blogspot.com/2007/05/cpy-da-bears-part-i.html and want apply a 30% margin of safety you are looking at a 2009 fwd multiple of 9.9x which implies net income of $50M.
My biggest problem with CPY at the current price is that I think the lack of information about CPA’s financials combined with the recent success management has had executing the Sears business turnaround has caused an over reaction to this announcement.
The only thing that was disclosed in the fillings dealing with the acquisition is that PCA has $290M in revenues which is almost identical to 2006 revenue at CPY. I think that the initial back of the envelope analysis would imply that in a couple of years management can work their magic and net income double which gets us to $50M and a multiple that is at a 30% discount to the broad market – when I looked at this stock I did exactly these calculations and thought that it was still pretty damn cheap despite the big pop in price.
And they are now the sole provider of photography to the world’s biggest retailer? What’s not to like.
In the next and concluding post on CPY I will try to highlight why this back of the envelope valuation is not enough to justify a purchase and try to put some kind of target price on the stock ……..
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
May 29, 2007
CPY -- “Da Bears” Part I
Despite the three part bullish case for an investment in CPY there are some real areas of concern. The one sentence bearish case would be that the company is still experiencing double digit sitting declines, the CEO hired in 2005 to lead the company abruptly left in 2006, and the recently announced acquisition represents a large unknown.
No matter how long I look at the improvement in operations over the last few years and how rational and shareholder friendly the board and management action have been, I still can’t seem to ignore the elephant in the room -- that the number of customers walking through the door has been falling at double digit rates for the last two years. In the most recent fourth quarter, which generally represents 35% of annual revenue and 100% or more in annual net income, the company saw seating decline by 12% and in the year before sitting fell 17% (full year sittings in 2006 fell more than in 2005 but the fourth quarter is the only one that matters). Based on announced first quarter revenue guidance, it looks like we can expect more decline in sitting volumes.
I believe the company when they say that the decline in sittings is orchestrated and that the customers they keep are far more profitable than the ones they lose but I still have a hard time seeing how earnings are going to increase at any meaningful rate. Eventually the company’s undesirable customers will run-off meaning that the growth in revenue per customer will fall drastically. I also have a hard time envisioning the customers that do stay accepting yearly price increases at any meaningful rate.
With no wind in their back, to show any semblance of growth this company has to constantly introduce new products and price their products perfectly, essentially they have execute flawlessly -- this is a rare occurrence and I would not bet on it. Without growth there is no multiple expansion.
Another disconcerting aspect of this investment is that the newly higher CEO Paul Rassmusen suddenly left the company. This seems odd in that he would leave a senior position at Kodak, relocated to take the job in mid-2005 and than leave a year later. I would be much less concerned if he left for a ginormous pay package at another company, but based on Google searches I can’t seem to find where he landed. A publicly traded company would have issued a press release. The CEO was immediately replaced by Renato Cataldo who was originally brought in as a consultant during the early days of the re-org and took a position in 2005 as COO. I am not sure exactly how bad of a sign this is since its obvious that the guys at Knightspoint are still making the big decisions, but it is certainly not a positive to have such a high rate of turnover at the top post.
On top of all this, professional photography is still a discretionary item and demand will fluctuate with overall consumer spending. Yes, you are still going to get pictures of the new baby taken to send to grandma but you may only pay for half as many prints if times are tight.
Also, much like FTAR (http://offthebeatenpathinvestments.blogspot.com/search/label/FTAR) the company still only has one customer and has much less control over its destiny. However, that may be changing ……
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
No matter how long I look at the improvement in operations over the last few years and how rational and shareholder friendly the board and management action have been, I still can’t seem to ignore the elephant in the room -- that the number of customers walking through the door has been falling at double digit rates for the last two years. In the most recent fourth quarter, which generally represents 35% of annual revenue and 100% or more in annual net income, the company saw seating decline by 12% and in the year before sitting fell 17% (full year sittings in 2006 fell more than in 2005 but the fourth quarter is the only one that matters). Based on announced first quarter revenue guidance, it looks like we can expect more decline in sitting volumes.
I believe the company when they say that the decline in sittings is orchestrated and that the customers they keep are far more profitable than the ones they lose but I still have a hard time seeing how earnings are going to increase at any meaningful rate. Eventually the company’s undesirable customers will run-off meaning that the growth in revenue per customer will fall drastically. I also have a hard time envisioning the customers that do stay accepting yearly price increases at any meaningful rate.
With no wind in their back, to show any semblance of growth this company has to constantly introduce new products and price their products perfectly, essentially they have execute flawlessly -- this is a rare occurrence and I would not bet on it. Without growth there is no multiple expansion.
Another disconcerting aspect of this investment is that the newly higher CEO Paul Rassmusen suddenly left the company. This seems odd in that he would leave a senior position at Kodak, relocated to take the job in mid-2005 and than leave a year later. I would be much less concerned if he left for a ginormous pay package at another company, but based on Google searches I can’t seem to find where he landed. A publicly traded company would have issued a press release. The CEO was immediately replaced by Renato Cataldo who was originally brought in as a consultant during the early days of the re-org and took a position in 2005 as COO. I am not sure exactly how bad of a sign this is since its obvious that the guys at Knightspoint are still making the big decisions, but it is certainly not a positive to have such a high rate of turnover at the top post.
On top of all this, professional photography is still a discretionary item and demand will fluctuate with overall consumer spending. Yes, you are still going to get pictures of the new baby taken to send to grandma but you may only pay for half as many prints if times are tight.
Also, much like FTAR (http://offthebeatenpathinvestments.blogspot.com/search/label/FTAR) the company still only has one customer and has much less control over its destiny. However, that may be changing ……
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
May 28, 2007
CPY – “Da Bulls” Part III
The first two bullish posts covered the company’s shareholder friendliness as well as the company’s vision for the future. In this post I will cover CPY’s cash generation ability and why I think cash generated is higher than stated GAAP net income.
If the company can maintain its current level of revenue and profitability, CPY’s can generate $44 million in EBITDA.
Revenue $294
EBITDA $44
From here it gets interesting as reported depreciation/amortization was $17 million but CAPEX was only $3 million. The company actually expected to have $5 million of CAPEX in 2007. It’s a little difficult to guess the exact level of CAPEX going forward since the company basically threw out a lot of its old equipment which consisted not only of cameras but the equipment needed to print the pictures and fill the orders. However, it looks like managements guidance for CAPEX is $5 million at least for the next few years. At $5 million of CAPEX and a 40% tax rate applied to this higher cash flow …..
EBITDA $44
CAPEX $5
TAX $15.6
FCF $23.4M or $3.67/sh
Reported GAAP Net Income for 2007: $16M or $2.60/sh
I think my estimate of FCF is actually conservative by about $5M for at least a few years since the company will pay less taxes on the lower net income than what I calculated here.
What about working capital? Interestingly, it seems that unlike the department stores that they do business in which must spend cash upfront on inventory to growth, CPY actually has NEGATIVE working capital. This largely comes from the fact that they carry almost no inventory and very little receivables but they do take deposits upfront from their customers (there are broken out in the 10K but are probably lumped into “other CA” everywhere else).
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
If the company can maintain its current level of revenue and profitability, CPY’s can generate $44 million in EBITDA.
Revenue $294
EBITDA $44
From here it gets interesting as reported depreciation/amortization was $17 million but CAPEX was only $3 million. The company actually expected to have $5 million of CAPEX in 2007. It’s a little difficult to guess the exact level of CAPEX going forward since the company basically threw out a lot of its old equipment which consisted not only of cameras but the equipment needed to print the pictures and fill the orders. However, it looks like managements guidance for CAPEX is $5 million at least for the next few years. At $5 million of CAPEX and a 40% tax rate applied to this higher cash flow …..
EBITDA $44
CAPEX $5
TAX $15.6
FCF $23.4M or $3.67/sh
Reported GAAP Net Income for 2007: $16M or $2.60/sh
I think my estimate of FCF is actually conservative by about $5M for at least a few years since the company will pay less taxes on the lower net income than what I calculated here.
What about working capital? Interestingly, it seems that unlike the department stores that they do business in which must spend cash upfront on inventory to growth, CPY actually has NEGATIVE working capital. This largely comes from the fact that they carry almost no inventory and very little receivables but they do take deposits upfront from their customers (there are broken out in the 10K but are probably lumped into “other CA” everywhere else).
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
CPY – “Da Bulls” Part II
The second bullish aspect of this stock is that they seem to have a clear business strategy and more importantly have the balance sheet to execute their plans.
As it stands now, two major tiers have emerged in the professional photo industry with the bottom of the group competing solely on price mainly by offering larger/more prints at discounted prices as well as instituting “no session fee” policies. The top of the group is competing more on quality, service, and number of choices but at higher prices.
Reading through the last 2 annual letters to shareholders penned by David Meyer who is the Chairman of the Board as well as the co-founder of the investment firm that led the hostile takeover in 2004, it becomes obvious that the key CPY’s long-term strategy is to be in the top tier by preventing the commoditization of their products. While digital photography has caused some pain for the company, it is now seen as the best way to achieve long term growth and profitability. Pretty ballsy ……
I am not going to quote extensively from the Chairman’s annual letters but they are important to read to understand what the guy calling the shots is thinking, they are also refreshing compared what these letters usually sound like. Here are what I feel are the most notable quotes:
2004 letter: “digital has arrived, and there is no looking back”
2004 letter: “our customers are not inherently price sensitive when it comes to genuine
differentiation”
2005 letter: “despite facing an aggressive promotional environment, we will not
participate in the commoditization of our valuable service”
2005 letter: “I am frequently asked if I am concerned about our sittings declines. The
answer, candidly, is no.”
(link to annual letters: http://phx.corporate-ir.net/phoenix.zhtml?c=103013&p=irol-reportsannual ….. the 2003 letter is missing for some reason)
I think these give a pretty clear indication of what direction management is going to take this company. I did not spend much time reading the letters from the pre-2004 management, but one quote did jump out at me and highlights the 180 degree turn in the direction of this company:
2002 letter: “In 2003 we will continue to focus on the fair price for the value and service
we provide, but we must also recognize that over the long-term, we need to get new Moms to try us.”
To me this is a nice way of saying that we are going to slash prices to get more people through the door and worry about profitability later. Oh yeh, the only operating target offered as a company stated goal for the following year was a revenue target with no mention of profitability.
Looking over the last 2 years operating results, it looks like management is doing what they said they would and is having some initial success. In 2006 and 2005 sitting volume (the number of customers walking through the door) declined 17.7% and 16% compared to the previous year. However, total revenue showed a small positive increase in both years due to a 22.4% and 22.9% increase in sales per customer due to introduction of new digital products and a price increase instituted in 2005. Yes, this company actually increased prices and customers came back!
Looking at the balance sheet, it also looks like the company has the financial wherewithal to fund its long term plans. AFTER spending $32 million buying back stock and roughly $35 million to upgrade its studios to digital the company is still virtually debt free with $27M in free cash and $16M in debt outstanding that will be paid off by 2009 and $23M in long term liabilities for legacy pensions. The company can generate roughly $25M in free cash flow (see next post for calculations), so if things stay as they are the company will have roughly $70-$75M in free cash on the balance sheet and no debt by the end of 2009.
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
As it stands now, two major tiers have emerged in the professional photo industry with the bottom of the group competing solely on price mainly by offering larger/more prints at discounted prices as well as instituting “no session fee” policies. The top of the group is competing more on quality, service, and number of choices but at higher prices.
Reading through the last 2 annual letters to shareholders penned by David Meyer who is the Chairman of the Board as well as the co-founder of the investment firm that led the hostile takeover in 2004, it becomes obvious that the key CPY’s long-term strategy is to be in the top tier by preventing the commoditization of their products. While digital photography has caused some pain for the company, it is now seen as the best way to achieve long term growth and profitability. Pretty ballsy ……
I am not going to quote extensively from the Chairman’s annual letters but they are important to read to understand what the guy calling the shots is thinking, they are also refreshing compared what these letters usually sound like. Here are what I feel are the most notable quotes:
2004 letter: “digital has arrived, and there is no looking back”
2004 letter: “our customers are not inherently price sensitive when it comes to genuine
differentiation”
2005 letter: “despite facing an aggressive promotional environment, we will not
participate in the commoditization of our valuable service”
2005 letter: “I am frequently asked if I am concerned about our sittings declines. The
answer, candidly, is no.”
(link to annual letters: http://phx.corporate-ir.net/phoenix.zhtml?c=103013&p=irol-reportsannual ….. the 2003 letter is missing for some reason)
I think these give a pretty clear indication of what direction management is going to take this company. I did not spend much time reading the letters from the pre-2004 management, but one quote did jump out at me and highlights the 180 degree turn in the direction of this company:
2002 letter: “In 2003 we will continue to focus on the fair price for the value and service
we provide, but we must also recognize that over the long-term, we need to get new Moms to try us.”
To me this is a nice way of saying that we are going to slash prices to get more people through the door and worry about profitability later. Oh yeh, the only operating target offered as a company stated goal for the following year was a revenue target with no mention of profitability.
Looking over the last 2 years operating results, it looks like management is doing what they said they would and is having some initial success. In 2006 and 2005 sitting volume (the number of customers walking through the door) declined 17.7% and 16% compared to the previous year. However, total revenue showed a small positive increase in both years due to a 22.4% and 22.9% increase in sales per customer due to introduction of new digital products and a price increase instituted in 2005. Yes, this company actually increased prices and customers came back!
Looking at the balance sheet, it also looks like the company has the financial wherewithal to fund its long term plans. AFTER spending $32 million buying back stock and roughly $35 million to upgrade its studios to digital the company is still virtually debt free with $27M in free cash and $16M in debt outstanding that will be paid off by 2009 and $23M in long term liabilities for legacy pensions. The company can generate roughly $25M in free cash flow (see next post for calculations), so if things stay as they are the company will have roughly $70-$75M in free cash on the balance sheet and no debt by the end of 2009.
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
May 27, 2007
CPY -- “Da Bulls” Part I
The one sentence bullish thesis for CPY is that the company is shareholder friendly, management has the foresight and the balance sheet to grow the top line when the number of customers walking through the door is falling, and it looks like GAAP net income understates the company’s true cash flow generation ability.
Alright, lets take these one by one ……
Many company’s get labeled as “shareholder friendly” but it often means that the execs are buying you dinner before they have their way with your company. Things like stock buybacks, management’s vision and execution are NOT shareholder friendliness – this is what management is supposed to do! What is shareholder friendly is to have executive compensation aligned with shareholders.
Reading CPY’s proxy statements over the last 3 years one quickly gets the feeling that management knows exactly what is going to make them richer. For example, lets take the 2005 proxy and look at the Executive Compensation discussion, here is what we will find:
“Under our new performance plan, executives and other participants have the potential to earn significant gains in overall compensation, if pre−established, objective targets are met and exceeded. For fiscal year 2005, the incentive pool from which all awards were drawn (from the Chief Executive Officer on down) was determined on the basis of EBITDA generated by the Company. ….. The Board of Directors resets the EBITDA targets each year to provide performance awards designed to yield corresponding growth in stockholder value. ……..The Company exceeded pre−established performance benchmarks for fiscal year 2005. Accordingly, recipients throughout the organization, including hourly and salaried employees as well as key managers, were recognized and rewarded for their individual contributions. Importantly, a substantial portion of the total awards was paid in restricted shares, thus aligning the interests of our employees with those of stockholders.”
It appears that this board of directors understands the concepts of profitability, inflation, and that if you are not going to compete on price than share the wealth with the people actually servicing your customers.
The now ex-CEO that was hired in 2005 received 50% of his bonus in restricted stock that will not fully vest until 2010. The company states that non of the key execs have received base salary raises in the previous three years which further focuses them on the level of the stock.
Here is another golden nugget from the 2005 proxy:
The employment agreements for these executives [these are the guys that cashed in and also got canned after Knightspoint took over] also provide that following a Change of Control, the executive is entitled to a base salary at least equivalent ….[you know how the rest goes] ……The employment agreements for Mr. Rasmussen [at the time the new CEO] and Dr. Cataldo [at the time the new COO and now the new CEO] do not contain Change of Control provisions.”
Oh yeh, the new CEO and COO don’t get a pension either.
The one negative I found in the proxy is that one board member and co-founder of Knightspoint awarded himself roughly $650,000 in CPY stock for a years worth of work which is embarrassingly small by Wall Street standards but is substantially higher than many of the other execs received. Why did this happen? Despite owning arpox 15% of the company, Knightspoint effectively controls CPY due to the structure of the board of directors. Since 2004, they lowered the number of board seats to 5 from 9 when they took over and of the 5 seats they control 3.
All in all, this is pretty clean and provides a lot of evidence that management is on the side of shareholders. The proxy for 2006 should be coming out within a few weeks and the compensation structure of the newly hired CEO will provide more evidence on how management is incentivised.
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
Alright, lets take these one by one ……
Many company’s get labeled as “shareholder friendly” but it often means that the execs are buying you dinner before they have their way with your company. Things like stock buybacks, management’s vision and execution are NOT shareholder friendliness – this is what management is supposed to do! What is shareholder friendly is to have executive compensation aligned with shareholders.
Reading CPY’s proxy statements over the last 3 years one quickly gets the feeling that management knows exactly what is going to make them richer. For example, lets take the 2005 proxy and look at the Executive Compensation discussion, here is what we will find:
“Under our new performance plan, executives and other participants have the potential to earn significant gains in overall compensation, if pre−established, objective targets are met and exceeded. For fiscal year 2005, the incentive pool from which all awards were drawn (from the Chief Executive Officer on down) was determined on the basis of EBITDA generated by the Company. ….. The Board of Directors resets the EBITDA targets each year to provide performance awards designed to yield corresponding growth in stockholder value. ……..The Company exceeded pre−established performance benchmarks for fiscal year 2005. Accordingly, recipients throughout the organization, including hourly and salaried employees as well as key managers, were recognized and rewarded for their individual contributions. Importantly, a substantial portion of the total awards was paid in restricted shares, thus aligning the interests of our employees with those of stockholders.”
It appears that this board of directors understands the concepts of profitability, inflation, and that if you are not going to compete on price than share the wealth with the people actually servicing your customers.
The now ex-CEO that was hired in 2005 received 50% of his bonus in restricted stock that will not fully vest until 2010. The company states that non of the key execs have received base salary raises in the previous three years which further focuses them on the level of the stock.
Here is another golden nugget from the 2005 proxy:
The employment agreements for these executives [these are the guys that cashed in and also got canned after Knightspoint took over] also provide that following a Change of Control, the executive is entitled to a base salary at least equivalent ….[you know how the rest goes] ……The employment agreements for Mr. Rasmussen [at the time the new CEO] and Dr. Cataldo [at the time the new COO and now the new CEO] do not contain Change of Control provisions.”
Oh yeh, the new CEO and COO don’t get a pension either.
The one negative I found in the proxy is that one board member and co-founder of Knightspoint awarded himself roughly $650,000 in CPY stock for a years worth of work which is embarrassingly small by Wall Street standards but is substantially higher than many of the other execs received. Why did this happen? Despite owning arpox 15% of the company, Knightspoint effectively controls CPY due to the structure of the board of directors. Since 2004, they lowered the number of board seats to 5 from 9 when they took over and of the 5 seats they control 3.
All in all, this is pretty clean and provides a lot of evidence that management is on the side of shareholders. The proxy for 2006 should be coming out within a few weeks and the compensation structure of the newly hired CEO will provide more evidence on how management is incentivised.
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
CPY -- First Look
I initially discovered this company a couple of months ago when doing research on FTAR thinking that if shoe sales can be outsourced by major retailers why not photo studios, electronics departments, optical centers, etc. Unfortunately this company fell into the black hole I call my “watch list” and I forgot about it until I saw it pop up on the daily biggest gainers list as the stock went from roughly $57 to $75 on May 2, 2007.
Initially, I was attracted to the stock for the following reasons:
-operating cash flow on the CF Statement is substantially higher than reported GAAP net income for the last 2 years, despite the lack of large one time charges
-huge swings in CAPEX over the last two years
- dep/amort in 2007 substantially higher than CAPEX
-19% decline in shares outstanding
-solid balance sheet
-appearance of NEGATIVE working capital (is that possible?)
Currently:
Share price: $79
Market Value: $525
Enterprise Value: $536
Investment Type: Turnaround Situation
CPI Corp. (CPY) operates 1,041 professional photo studios in U.S., Canada and Puerto Rico which are located inside Sears stores (actually, 32 stores are free standing but carry the sears name). CPI has been operating photo studios for the last 60 years and has been Sear’s only photo studio operator since 1986.
There are several aspects beyond what is initially evident from the financial statements that are driving the share price. First, the company has gone through a major shake up since 2004. In early 2004, Knightspoint Partners effectively took over the company in a hostile takeover battle and proceeded to replace 6 of the 9 board members, lower the number of board seat to 8, and fire the CEO and his top 2 lieutenants. As a side note, it appears that Knightspoint is a grown up version of Ashton Kutcher. Based on this article from December 2003 it looks like the guy leading the charge was previously a paid advisor to the company when he was and ibanker at CSFB, now this is what I call getting punk’d. http://www.bizjournals.com/stlouis/stories/2003/12/08/story3.html
Second, it appears that professional photo industry in the midst of major upheaval driven by the advent of digital photography. In the last 24 months the company has effectively switched to all digital (there are a few studios in Canada that are still transitioning) which has required a major investment from the company -- more on this later. It also appears that two major tiers have emerged with the bottom of the group competing solely on price and the top of the group competing more on quality, service, and number of choices.
Third, the company announced that it will be acquiring Portrait Corp of America (PCA) out of bankruptcy which operates all the portrait studios located in Wal-Mart stores and up to this point was one of CPY’s biggest competitors. This announcement has major implications for the company that will be discussed in depth in later posts.
To be completely honest, I have done very little analysis up to this point and have basically summarized the major points from the 10K (http://phx.corporate-ir.net/phoenix.zhtml?c=103013&p=irol-sec) . I hope to change this with the next few post …….
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
Initially, I was attracted to the stock for the following reasons:
-operating cash flow on the CF Statement is substantially higher than reported GAAP net income for the last 2 years, despite the lack of large one time charges
-huge swings in CAPEX over the last two years
- dep/amort in 2007 substantially higher than CAPEX
-19% decline in shares outstanding
-solid balance sheet
-appearance of NEGATIVE working capital (is that possible?)
Currently:
Share price: $79
Market Value: $525
Enterprise Value: $536
Investment Type: Turnaround Situation
CPI Corp. (CPY) operates 1,041 professional photo studios in U.S., Canada and Puerto Rico which are located inside Sears stores (actually, 32 stores are free standing but carry the sears name). CPI has been operating photo studios for the last 60 years and has been Sear’s only photo studio operator since 1986.
There are several aspects beyond what is initially evident from the financial statements that are driving the share price. First, the company has gone through a major shake up since 2004. In early 2004, Knightspoint Partners effectively took over the company in a hostile takeover battle and proceeded to replace 6 of the 9 board members, lower the number of board seat to 8, and fire the CEO and his top 2 lieutenants. As a side note, it appears that Knightspoint is a grown up version of Ashton Kutcher. Based on this article from December 2003 it looks like the guy leading the charge was previously a paid advisor to the company when he was and ibanker at CSFB, now this is what I call getting punk’d. http://www.bizjournals.com/stlouis/stories/2003/12/08/story3.html
Second, it appears that professional photo industry in the midst of major upheaval driven by the advent of digital photography. In the last 24 months the company has effectively switched to all digital (there are a few studios in Canada that are still transitioning) which has required a major investment from the company -- more on this later. It also appears that two major tiers have emerged with the bottom of the group competing solely on price and the top of the group competing more on quality, service, and number of choices.
Third, the company announced that it will be acquiring Portrait Corp of America (PCA) out of bankruptcy which operates all the portrait studios located in Wal-Mart stores and up to this point was one of CPY’s biggest competitors. This announcement has major implications for the company that will be discussed in depth in later posts.
To be completely honest, I have done very little analysis up to this point and have basically summarized the major points from the 10K (http://phx.corporate-ir.net/phoenix.zhtml?c=103013&p=irol-sec) . I hope to change this with the next few post …….
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
May 26, 2007
FTAR -- Selleing HQ
It looks like FTAR has put its headquarters up for sale accoriding to a link on Google Finance. I missed this as I almost never use Google Finance.
This story was not reflected on my Reuters station and I am almost certain not reflected by Bloomberg but will have to double check on Tuesday. I just searched the 10Q reported 1 day before this story ran and can find no mention of this. Checked all the 8-ks since the begining of the year, nothing. This seems rather odd and leads me to the following thoughts.........
If the good people at globest.com report that FTAR is selling their HQ and no one hears it, did it really happen? http://www.globest.com/news/903_903/newjersey/160542-1.html
More importantly, the sale of the headquarters will provide 2 key data points that are going to shed substantially more light on my bullish thesis for FTAR. First, I used $16.5M for the value of this building in my liquidation value analysis which translates to $0.80 per share. They may sell it for more or less than I estimate but it will make at least one uncertainty certain.
Second, the terms of the sale will be a huge clue as to what is likely to happen with the K-Mart option. If its a sale leaseback agreement with a long duration I think this is a big clue that there maybe an agreement coming down the pipe. If this is an outright sale with FTAR moving out in late 2008 or early 2009 than I think the K-Mart option goes to way way way way out of the money (from the current level of way way out of the money).
* DISCLOSURE: I or accounts I manage are long FTAR.OB. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
This story was not reflected on my Reuters station and I am almost certain not reflected by Bloomberg but will have to double check on Tuesday. I just searched the 10Q reported 1 day before this story ran and can find no mention of this. Checked all the 8-ks since the begining of the year, nothing. This seems rather odd and leads me to the following thoughts.........
If the good people at globest.com report that FTAR is selling their HQ and no one hears it, did it really happen? http://www.globest.com/news/903_903/newjersey/160542-1.html
More importantly, the sale of the headquarters will provide 2 key data points that are going to shed substantially more light on my bullish thesis for FTAR. First, I used $16.5M for the value of this building in my liquidation value analysis which translates to $0.80 per share. They may sell it for more or less than I estimate but it will make at least one uncertainty certain.
Second, the terms of the sale will be a huge clue as to what is likely to happen with the K-Mart option. If its a sale leaseback agreement with a long duration I think this is a big clue that there maybe an agreement coming down the pipe. If this is an outright sale with FTAR moving out in late 2008 or early 2009 than I think the K-Mart option goes to way way way way out of the money (from the current level of way way out of the money).
* DISCLOSURE: I or accounts I manage are long FTAR.OB. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
Things that make me happy .....
Took a night off from the usual Friday night "dog and pony show" at the clubs, I suppose it will not kill me or my social life, and caught up on some recent conference calls for Q1.
This is part of Q&A from April with Universal Forest Products (UFPI) management. Since this is a stock I recently initiated a position in I will do a write-up on them before long, but one of the most attractive things about the stock to me is the management team. Here is one of the reasons why I want to let these guys run my business .......
April 17, 2007
A from William Currie, Chairman: If we didn’t have an intercompany policy that stated there’d be no insider trading within 48 hours of our release, we would have been buying shares back this morning. Our focus is – it looks to us like our best return on investment over the near term, we’ll switch our focus from acquisitions to stock buybacks, number one; capital expenditures for our industrial operations, number two; and acquisitions, number three.
A from Michael Cole, CFO: Yes, 1.5 million shares [1.5M shares represent almost 8% of current diluted shares outstanding] . So we have plenty of approved.
This is part of Q&A from April with Universal Forest Products (UFPI) management. Since this is a stock I recently initiated a position in I will do a write-up on them before long, but one of the most attractive things about the stock to me is the management team. Here is one of the reasons why I want to let these guys run my business .......
April 17, 2007
Q from analyst: Okay. Finally, obviously, your cash flow is – cash flow numbers in from operations are quite solid. Can you just address share buybacks? Just looking at performance over the last number of years, we’ve been in a depressed market for about 12 months now. Your stock price has pretty much averaged at these levels for the last 12 months. The last time you bought stock was approximately two years ago at a little bit below where we are now. Can you just give me some thoughts there?
A from William Currie, Chairman: If we didn’t have an intercompany policy that stated there’d be no insider trading within 48 hours of our release, we would have been buying shares back this morning. Our focus is – it looks to us like our best return on investment over the near term, we’ll switch our focus from acquisitions to stock buybacks, number one; capital expenditures for our industrial operations, number two; and acquisitions, number three.
Q from analyst: Is there currently an authorization by the Board for stock buybacks?A from William Currie: Yes.
A from Michael Cole, CFO: Yes, 1.5 million shares [1.5M shares represent almost 8% of current diluted shares outstanding] . So we have plenty of approved.
I will post my analysis of this company soon (eventually) but hearing stuff like this from one of the my management teams makes me happy ......
* DISCLOSURE: I or accounts I supervise are long UFPI. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
May 25, 2007
FTAR.OB -- Final Thoughts
In the previous 4 posts I have outlined the bullish and bearish case for FTAR. As a final thought I will spend some time on short term catalysts that have made the stock even more attractive and have caused me to add to my position recently.
First, management has removed a lot of uncertainty by issuing a special (hopefully not) one time dividend that was paid at the end of April ….oh yeah!, daddy needs a new pair of K-Mart shoes. By the way, if you are looking at financial statements subtract roughly $105M from cash on hand, the small shortfall is going to be financed by the line of credit that will be paid of with this years cash flow.
The biggest concern prior to the special dividend announcement was about management’s intention for the boatload of cash on the books and cash being generated. I think this concern has largely been removed and a liquidation scenario with all cash going to shareholders is a real option. FTAR was trading at $6.5 before the announcement of the dividend and adding back the $5 per share now trades at $9.6 so the dividend payout has removed a lot of overhang and moved the shares by 50%.
Also, the new management team has done and outstanding job streamlining the business which has cause EBITDA margin to increase from 4.5% when the company started trading again to 8.1% over the last 12 months (see Bull case Part I for additional margin discussion http://offthebeatenpathinvestments.blogspot.com/2007/05/bamm-da-bulls-part-i.html
Third, while I don’t want to read into the latest quarter to much since it’s the weakest quarter for the company it looks like the company is continue to improve and at an increased pace. As mentioned in the earlier post, SSS finally have a plus sign in front of them and Rite-Aid SSS were up over 4% with store count up slightly.
Gross Margins were up 130 bps YoY (again, this is huge for a company that had EBITDA margins of 8.1% last year), but keep in mind that the first quarter has the lowest sales and lowest margins so even small changes look big. Also, SG&A expense decline again and SG&A as % of sales improved by 50bps. All in all this was a pretty outstanding quarter, if this company had analyst coverage they would have reported a huge earnings beat.
My last point is more anecdotal but there are some things I have noticed in the 4 months I have owned the stock that put a smile on my face. For example, the annual report I received was on cheap black and white paper stapled together rather than an expensive book – this is good! Another example is that the company just announced a great quarter by any measure and they did not even put out a press release so none of the major alert services picked it up -- just a filling and that’s it. In a case like FTAR where they are going to be holding my cash for a while, these are all things that make me sleep better at night.
Things I will be watching for in the next earnings report are the trend in SSS, trend in K-Mart closings, and Gross and EBITDA margins.
* DISCLOSURE: I or accounts I supervise are long FTAR.OB. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
First, management has removed a lot of uncertainty by issuing a special (hopefully not) one time dividend that was paid at the end of April ….oh yeah!, daddy needs a new pair of K-Mart shoes. By the way, if you are looking at financial statements subtract roughly $105M from cash on hand, the small shortfall is going to be financed by the line of credit that will be paid of with this years cash flow.
The biggest concern prior to the special dividend announcement was about management’s intention for the boatload of cash on the books and cash being generated. I think this concern has largely been removed and a liquidation scenario with all cash going to shareholders is a real option. FTAR was trading at $6.5 before the announcement of the dividend and adding back the $5 per share now trades at $9.6 so the dividend payout has removed a lot of overhang and moved the shares by 50%.
Also, the new management team has done and outstanding job streamlining the business which has cause EBITDA margin to increase from 4.5% when the company started trading again to 8.1% over the last 12 months (see Bull case Part I for additional margin discussion http://offthebeatenpathinvestments.blogspot.com/2007/05/bamm-da-bulls-part-i.html
Third, while I don’t want to read into the latest quarter to much since it’s the weakest quarter for the company it looks like the company is continue to improve and at an increased pace. As mentioned in the earlier post, SSS finally have a plus sign in front of them and Rite-Aid SSS were up over 4% with store count up slightly.
Gross Margins were up 130 bps YoY (again, this is huge for a company that had EBITDA margins of 8.1% last year), but keep in mind that the first quarter has the lowest sales and lowest margins so even small changes look big. Also, SG&A expense decline again and SG&A as % of sales improved by 50bps. All in all this was a pretty outstanding quarter, if this company had analyst coverage they would have reported a huge earnings beat.
My last point is more anecdotal but there are some things I have noticed in the 4 months I have owned the stock that put a smile on my face. For example, the annual report I received was on cheap black and white paper stapled together rather than an expensive book – this is good! Another example is that the company just announced a great quarter by any measure and they did not even put out a press release so none of the major alert services picked it up -- just a filling and that’s it. In a case like FTAR where they are going to be holding my cash for a while, these are all things that make me sleep better at night.
Things I will be watching for in the next earnings report are the trend in SSS, trend in K-Mart closings, and Gross and EBITDA margins.
* DISCLOSURE: I or accounts I supervise are long FTAR.OB. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
May 24, 2007
FTAR.OB -- “Da Bears”
Of course FTAR faces the same economic sensitivity problems that any consumer discretionary company faces.
The company may also not be a “long term” holding in that it may not be there after 2008 – but that’s one of the bullish scenarios.
To a certain extent the company does not control its own destiny. They are always going to be dominated by someone else who owns the stores they sell their products in. As department stores and discounters consolidate they will have more clout to get better revenue sharing agreements out of FTAR.
To a certain extent they operate in the commodity business of selling cheap shoes. They do own some brand names but I have never heard of them and would not assign much value to discount brands sold at the “bottom of the pile” retailers.
* DISCLOSURE: I or accounts I supervise are long FTAR.OB. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
The company may also not be a “long term” holding in that it may not be there after 2008 – but that’s one of the bullish scenarios.
To a certain extent the company does not control its own destiny. They are always going to be dominated by someone else who owns the stores they sell their products in. As department stores and discounters consolidate they will have more clout to get better revenue sharing agreements out of FTAR.
To a certain extent they operate in the commodity business of selling cheap shoes. They do own some brand names but I have never heard of them and would not assign much value to discount brands sold at the “bottom of the pile” retailers.
* DISCLOSURE: I or accounts I supervise are long FTAR.OB. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
FTAR.OB -- “Da Bulls” Part II
Picking up where I left off in Part I, in addition to the better upside odds than downside FTAR also comes with a FREE call option that expires in the end of 2008.
Per the agreement with K-Mart, FTAR can be fired by their largest client in the end of 2008 which would cause the liquidations scenario I described in Part I. However, if K-Mart decides to extend their relationship FTAR now becomes a going concern generating roughly $20M and $40M in annual free cash flow.
Simply attaching a 10x multiple to that cash flow (which assumes tax expense), adding back the PV of the NOL’s that are now worth more as they will be realized and subtracting the long term liabilities I get a market value of $270 - $450 which equates to $13 - $22 per share. This value excludes some hard assets and other assumptions made under the liquidation scenario ….. but who cares, if I am off by a dollar or two at this level its still a damn good return.
* DISCLOSURE: I or accounts I supervise are long FTAR.OB. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
Per the agreement with K-Mart, FTAR can be fired by their largest client in the end of 2008 which would cause the liquidations scenario I described in Part I. However, if K-Mart decides to extend their relationship FTAR now becomes a going concern generating roughly $20M and $40M in annual free cash flow.
Simply attaching a 10x multiple to that cash flow (which assumes tax expense), adding back the PV of the NOL’s that are now worth more as they will be realized and subtracting the long term liabilities I get a market value of $270 - $450 which equates to $13 - $22 per share. This value excludes some hard assets and other assumptions made under the liquidation scenario ….. but who cares, if I am off by a dollar or two at this level its still a damn good return.
* DISCLOSURE: I or accounts I supervise are long FTAR.OB. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
FTAR.OB -- “Da Bulls” Part I
Before moving on to the rest of my post, the one sentence bullish thesis is basically that the agreement with K-Mart and the recent actions by management have provided for a limited downside with a fairly good possibility of positive absolute returns as well as a free 1.5 year option that is likely to expire worthless but can turn FTAR into a 3-5 bagger between now and end of 2008.
I am going to do my best to turn my spreadsheet into words but I suggest e-mailing me at offthebeatenpathinvestments@gmail.com and requesting a copy and double checking my figures (and letting me know if I made a mistake). To get to my price range of $3.5 - $7.5 I made some “worst case scenario” and “best case scenario” assumptions. By the way if anyone knows how to post excel spreadsheets into Bloger let me know.
In my Worst Case Scenario I am assuming that
1) sales fall 10% in 2007 and 2008,
2) gross margins decline in 2007 by 100bps from 2006 levels (100bps decline in gross margins is HUGE for a company with EBITDA margins of 8.1% in 2006) and stay the same in 2008, and
3) SG&A expense falls only 3% YoY, basically I am assuming that for a compounded decline of 21% in sales over next 2 years, SG&A only declines 6.1%
Bearish indeed …….
Those of you that actually look at the recent financials will say that a 10% YoY decline in sales does not sound very bearish when you consider recent trends in sales. I will point out that FTAR’s K-Mart business SSS (same store sales) have improved substantially with SSS in 2006 at negative 3.8% and SSS in 2005 at negative 7.5. Also, SSS were actually positive in Q1-2007 with +0.7%, however this is the company’s weakest quarter so it may not represent a trend.
Another reason why I think total and SSS will not be similar to the most recent past (and therefore a 10% decline would represent a Worst Case Scenario) is that K-Mart has gone through a re-org of its own and I am sure Eddie Lampert closes his worst performing stores first just like anyone else. Also, the actual number of FTAR’s K-Mart stores declined by 3 in Q1-2007 on track for 12 closed stores for the full year. In 2006 FTAR lost 29 K-Mart stores and in 2005 they lost 61.
In my Best Case Scenario I am assuming that:
1) total sales stay flat in 2007 and 2008 -- actually this is an assumption that SSS will be positive as its likely that there will be a number of K-Mart stores closed in that time, and
2) Gross margin increase by 50bps in 2007 and 2008 for a compounded increase of 1% over next 2 years, and
3) SG&A expense will fall by 1.5% in 2007 and 2008 for a compounded decline in SG&A expense of 3% on flat sales
While these assumptions are certainly bullish, they are not impossible. For example, on a rolling 12 month basis GM has increased in each of the last five quarters from 31.5% to 32.2% (again a 70bps move is huge for a company with EBITDA margins of 8.1%). Furthermore, SG&A as % of sales has fallen in each quarter from 26.5% to 24.1%.
Under the worst case I get FCF (assuming $2M in capex annually) of $30M and $16M which are worth $40.5 today discounted at 10%. Under the best case I get FCF of $59M and $61M which are worth $103.5 today.
But that’s not all folks, you also get all your inventory taken out at BV (not liquidation fire sale value) which I calculate as being worth $33M discounted at 6%. To get this I simply net A/R + Inventory against A/P and Accrued Expenses and discount.
If you call now, you will also get the estimated value of the non-K Mart business which is growing by the way, the company headquarters that are almost all paid for and the value of the NOL’s that FTAR has. Net out the liabilities as well as my estimate for $10M-$15M in liquidation costs and I get a price range of $3.5 - $7.5 per share.
At current trading price of $4.6 you get downside of 23% for upside of 64%, those are 3 to 1 odds from where I come from.
* DISCLOSURE: I or accounts I supervise are long FTAR.OB. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
I am going to do my best to turn my spreadsheet into words but I suggest e-mailing me at offthebeatenpathinvestments@gmail.com and requesting a copy and double checking my figures (and letting me know if I made a mistake). To get to my price range of $3.5 - $7.5 I made some “worst case scenario” and “best case scenario” assumptions. By the way if anyone knows how to post excel spreadsheets into Bloger let me know.
In my Worst Case Scenario I am assuming that
1) sales fall 10% in 2007 and 2008,
2) gross margins decline in 2007 by 100bps from 2006 levels (100bps decline in gross margins is HUGE for a company with EBITDA margins of 8.1% in 2006) and stay the same in 2008, and
3) SG&A expense falls only 3% YoY, basically I am assuming that for a compounded decline of 21% in sales over next 2 years, SG&A only declines 6.1%
Bearish indeed …….
Those of you that actually look at the recent financials will say that a 10% YoY decline in sales does not sound very bearish when you consider recent trends in sales. I will point out that FTAR’s K-Mart business SSS (same store sales) have improved substantially with SSS in 2006 at negative 3.8% and SSS in 2005 at negative 7.5. Also, SSS were actually positive in Q1-2007 with +0.7%, however this is the company’s weakest quarter so it may not represent a trend.
Another reason why I think total and SSS will not be similar to the most recent past (and therefore a 10% decline would represent a Worst Case Scenario) is that K-Mart has gone through a re-org of its own and I am sure Eddie Lampert closes his worst performing stores first just like anyone else. Also, the actual number of FTAR’s K-Mart stores declined by 3 in Q1-2007 on track for 12 closed stores for the full year. In 2006 FTAR lost 29 K-Mart stores and in 2005 they lost 61.
In my Best Case Scenario I am assuming that:
1) total sales stay flat in 2007 and 2008 -- actually this is an assumption that SSS will be positive as its likely that there will be a number of K-Mart stores closed in that time, and
2) Gross margin increase by 50bps in 2007 and 2008 for a compounded increase of 1% over next 2 years, and
3) SG&A expense will fall by 1.5% in 2007 and 2008 for a compounded decline in SG&A expense of 3% on flat sales
While these assumptions are certainly bullish, they are not impossible. For example, on a rolling 12 month basis GM has increased in each of the last five quarters from 31.5% to 32.2% (again a 70bps move is huge for a company with EBITDA margins of 8.1%). Furthermore, SG&A as % of sales has fallen in each quarter from 26.5% to 24.1%.
Under the worst case I get FCF (assuming $2M in capex annually) of $30M and $16M which are worth $40.5 today discounted at 10%. Under the best case I get FCF of $59M and $61M which are worth $103.5 today.
But that’s not all folks, you also get all your inventory taken out at BV (not liquidation fire sale value) which I calculate as being worth $33M discounted at 6%. To get this I simply net A/R + Inventory against A/P and Accrued Expenses and discount.
If you call now, you will also get the estimated value of the non-K Mart business which is growing by the way, the company headquarters that are almost all paid for and the value of the NOL’s that FTAR has. Net out the liabilities as well as my estimate for $10M-$15M in liquidation costs and I get a price range of $3.5 - $7.5 per share.
At current trading price of $4.6 you get downside of 23% for upside of 64%, those are 3 to 1 odds from where I come from.
* DISCLOSURE: I or accounts I supervise are long FTAR.OB. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
May 22, 2007
FTAR.OB -- First Look
Initially looked at the stock in February 2007 for several reasons:
-recently emerged from bankruptcy with no debt and approximately ½ of the market value in cash (before the recently announced speical dividend)
-eps is roughly $2/sh while the stock is trading between $6 - $7 per share (before dividend was paid out)
-originally written up on valueinvestorsclub.com
Currently:
Share Price: $4.60
Market Value $96 million
Enterprise Value: $110 million
Investment Type: Special Situation
Footstar (FTAR) operates footwear departments at lower end stores with the company’s K-Mart business representing over 90% of sales -- if you buy shoes at K-Mart’s serviced by FTAR you are buying them from FTAR not K-Mart. Per the latest 10Q (filed in May 2007 http://www.sec.gov/Archives/edgar/data/1011308/000095012307007054/0000950123-07-007054.txt) the company currently services 1,389 K-Mart stores and 857 Rite-Aid stores. The company also operates a wholesale business which consists of owned brand names (Thom McAn, etc.) and generics which are supplied on a wholesale basis to Wal-Mart and Rite-Aid.
At this point FTAR represents a special situation investment with the likely termination date of 12/2008. As part of the recent re-org (in which FTAR paid out 100% of its debt obligation and did not dilute share count) as part of the bankruptcy re-org, FTAR ended up with 100% of Meldisco (previously a JV with K-Mart) but K-Mart is only required to do business with FTAR until the 12/2008. When the contract runs out, K-Mart can end its relationship with FTAR or renew the contract. If K-Mart ends the relationship it has to buy out all of FTAR’s inventory related to its stores at book value – since K-Mart is 90% of FTAR’s business essentially all its inventory is K-Mart related.
The investment opportunity really hinges on inventory buyout in the K-Mart agreement. Based on present value of the estimated cash flow that FTAR will generate until 12/2008 and the value of the non-K-Mart businesses I believe the stock is worth somewhere between $3.5 – $7.5 (more about my calculations in the next post). However, as an investor in FTAR you also get a free option on FTAR signing new agreement with K-Mart at which point FTAR would no longer trade at liquidation level valuation of 2x-3x cash flow and would be worth somewhere betwee $13 - $22 per share (more about my calculations in the next post).
* DISCLOSURE: I or accounts I supervise are long FTAR.OB. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
-recently emerged from bankruptcy with no debt and approximately ½ of the market value in cash (before the recently announced speical dividend)
-eps is roughly $2/sh while the stock is trading between $6 - $7 per share (before dividend was paid out)
-originally written up on valueinvestorsclub.com
Currently:
Share Price: $4.60
Market Value $96 million
Enterprise Value: $110 million
Investment Type: Special Situation
Footstar (FTAR) operates footwear departments at lower end stores with the company’s K-Mart business representing over 90% of sales -- if you buy shoes at K-Mart’s serviced by FTAR you are buying them from FTAR not K-Mart. Per the latest 10Q (filed in May 2007 http://www.sec.gov/Archives/edgar/data/1011308/000095012307007054/0000950123-07-007054.txt) the company currently services 1,389 K-Mart stores and 857 Rite-Aid stores. The company also operates a wholesale business which consists of owned brand names (Thom McAn, etc.) and generics which are supplied on a wholesale basis to Wal-Mart and Rite-Aid.
At this point FTAR represents a special situation investment with the likely termination date of 12/2008. As part of the recent re-org (in which FTAR paid out 100% of its debt obligation and did not dilute share count) as part of the bankruptcy re-org, FTAR ended up with 100% of Meldisco (previously a JV with K-Mart) but K-Mart is only required to do business with FTAR until the 12/2008. When the contract runs out, K-Mart can end its relationship with FTAR or renew the contract. If K-Mart ends the relationship it has to buy out all of FTAR’s inventory related to its stores at book value – since K-Mart is 90% of FTAR’s business essentially all its inventory is K-Mart related.
The investment opportunity really hinges on inventory buyout in the K-Mart agreement. Based on present value of the estimated cash flow that FTAR will generate until 12/2008 and the value of the non-K-Mart businesses I believe the stock is worth somewhere between $3.5 – $7.5 (more about my calculations in the next post). However, as an investor in FTAR you also get a free option on FTAR signing new agreement with K-Mart at which point FTAR would no longer trade at liquidation level valuation of 2x-3x cash flow and would be worth somewhere betwee $13 - $22 per share (more about my calculations in the next post).
* DISCLOSURE: I or accounts I supervise are long FTAR.OB. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
May 21, 2007
BAMM -- Final Thoughts
Based on the last 3 posts, its pretty obvious that I am not planning to buy shares at this point. Just to recap ....... management is unloading shares, the valuation does not look particularly cheap, YoY growth is due to one time gains, SSS are negative, the industry is in a secular decline.
So why not short, management is after all unloading shares into up moves in case that point was not made obvious already?
The main reason I am not getting a short ticket ready is that I don’t want to bet against management at valuations that are no longer in the ridiculous category. It looks like management is making incremental improvements in operations every quarter and are not wasting their cash – that’s usually not a recipe for good short trades.
If the company can continue to improve operations over the next few years this stock can do very well despite the problems with the industry. For example, despite the recent improvement BAMM is still behind Borders (BGP) from an inventory turns perspective. If BAMM can get to BGP’s level of efficiency, the business can throw off somewhere between $100M - $150M in free cash over the next 2-3 years, if they can get half way there they can dislodge $50 - $75M in cold hard cash. This is a huge windfall for a stock with market value of $277M.
The problem is that I don’t know if the low hanging fruit has been picked or if there are still more easy improvements to be made. A secondary concern is the Harry Potter release, who knows how much hysteria this will generate.
What am I looking for to make a trade? For a long position, I am looking for continued operating improvements, lack of insider sales, falling stock price (at roughly $12 the stock would trade at roughly half the valuation of the broad market), positive SSS. To make a short trade I am looking for the opposite to happen.
Overall, my sense is that this stock is trading at a valuation that is a premium for a declining business because management has gained some credibility and effects of Harry Potter are being discounted by the market.
So why not short, management is after all unloading shares into up moves in case that point was not made obvious already?
The main reason I am not getting a short ticket ready is that I don’t want to bet against management at valuations that are no longer in the ridiculous category. It looks like management is making incremental improvements in operations every quarter and are not wasting their cash – that’s usually not a recipe for good short trades.
If the company can continue to improve operations over the next few years this stock can do very well despite the problems with the industry. For example, despite the recent improvement BAMM is still behind Borders (BGP) from an inventory turns perspective. If BAMM can get to BGP’s level of efficiency, the business can throw off somewhere between $100M - $150M in free cash over the next 2-3 years, if they can get half way there they can dislodge $50 - $75M in cold hard cash. This is a huge windfall for a stock with market value of $277M.
The problem is that I don’t know if the low hanging fruit has been picked or if there are still more easy improvements to be made. A secondary concern is the Harry Potter release, who knows how much hysteria this will generate.
What am I looking for to make a trade? For a long position, I am looking for continued operating improvements, lack of insider sales, falling stock price (at roughly $12 the stock would trade at roughly half the valuation of the broad market), positive SSS. To make a short trade I am looking for the opposite to happen.
Overall, my sense is that this stock is trading at a valuation that is a premium for a declining business because management has gained some credibility and effects of Harry Potter are being discounted by the market.
BAMM -- “Da Bulls”
BAMM’s management has drastically improved operations over the last 3 years and looks like the company is becoming more efficient every quarter. Inventory turnover has increased consistently as inventory levels have grown slower than sales.
The company could have wasted cash on aggressively expanding its store base, instead management reduced debt from a high of $45M to a current level of $7M. At $45M in debt, debt-to-equity was 45% while currently debt-to-capital is at 4%.
The company raised its dividend rate by 60% in fy2007 to 32c per share and raised it again for fy2008 by 12.5% to 36c per share. This is certainly a good sign in management’s confidence in the cash flow generation ability of the business.
The company is coming up on arguably the biggest book sales even in recent memory with the last installment of Harry Potter hitting stores in July. This will be a huge event for the company and due to the strength of the balance sheet BAMM is in better financial position to wring out max number of sales.
The company could have wasted cash on aggressively expanding its store base, instead management reduced debt from a high of $45M to a current level of $7M. At $45M in debt, debt-to-equity was 45% while currently debt-to-capital is at 4%.
The company raised its dividend rate by 60% in fy2007 to 32c per share and raised it again for fy2008 by 12.5% to 36c per share. This is certainly a good sign in management’s confidence in the cash flow generation ability of the business.
The company is coming up on arguably the biggest book sales even in recent memory with the last installment of Harry Potter hitting stores in July. This will be a huge event for the company and due to the strength of the balance sheet BAMM is in better financial position to wring out max number of sales.
BAMM -- “Da Bears”
I think the single worst thing about BAMM is the signal that management is sending to shareholders by their latest actions. On April 2, 2007 the company reported their fiscal 4th quarter results which showed significant YoY improvement (due to 1 extra week + one time gain), the stock popped from $14.25 to $17.50 and kept going up until it hit $19+change a couple of weeks later.
On April 9th, 5 different insiders unloaded 1.321 million shares at $17.92 which is a huge amount of stock for a company with 8M share float and 16M in total shares outstanding. How should investors read this? Management is basically saying that they are going to unload a lot of shares whenever the stock has a decent move up.
I think there are two main reasons that prospects for the stock look dim at this price.
First, the industry is in secular decline. There is nothing that management can do about this. They can be the best book store operator in the industry, but an industry in decline is a huge headwind to fight against. This is effecting BAMM in the form of same store sales which were down 0.6% in the latest fiscal year and were down 2.4% in their most important fourth quarter. Unless there is some major change in industry fundamentals, investing in BAMM (or other old line book retailers) will be like swimming against the tide.
Second, at the right price an investment in a bad industry might be justified. However, it does not appear that BAMM is particularly cheap. Based on my previous post the company is currently trading at an adjusted FCF/EV of 6% which is a P/FCF of 16x – 17x which is roughly in line with where S&P 500 is trading.
More importantly, based on pretty bullish SSS estimates for FY2008 BAMM doesn’t look particularly cheap. Based on my previous post, the company should generate roughly $19M in operating cash flow (actual free cash flow maybe more/less due to difference between my assumption for maintenance CAPEX and actual CAPEX) which would increase cash on hand to roughly $53M less $7M in long-term debt. This gives a forward FCF/EV of 8.2% or forward EV/FCF of 12x-13x.
Furthermore, the cash yields provided assume that all cash can be taken out of the business and distributed to shareholders. The reality is that this is a very capital intensive business and there is absolutely no way the company can distribute all its cash and maintain similar cash flow. BAMM basically spends down most of its cash on hand by the end of fiscal Q3 (ending in October) in preparation for the big fourth quarter and gets it back at the end of the Q4. Looking at historical working capital requirements it looks like the company can basically pay off its long term debt but the rest of the cash is needed to run the business.
Assuming the working capital needs, a mor realist valuation is 18x-19x trailing and 14x – 15x forward price/fcf.
On April 9th, 5 different insiders unloaded 1.321 million shares at $17.92 which is a huge amount of stock for a company with 8M share float and 16M in total shares outstanding. How should investors read this? Management is basically saying that they are going to unload a lot of shares whenever the stock has a decent move up.
I think there are two main reasons that prospects for the stock look dim at this price.
First, the industry is in secular decline. There is nothing that management can do about this. They can be the best book store operator in the industry, but an industry in decline is a huge headwind to fight against. This is effecting BAMM in the form of same store sales which were down 0.6% in the latest fiscal year and were down 2.4% in their most important fourth quarter. Unless there is some major change in industry fundamentals, investing in BAMM (or other old line book retailers) will be like swimming against the tide.
Second, at the right price an investment in a bad industry might be justified. However, it does not appear that BAMM is particularly cheap. Based on my previous post the company is currently trading at an adjusted FCF/EV of 6% which is a P/FCF of 16x – 17x which is roughly in line with where S&P 500 is trading.
More importantly, based on pretty bullish SSS estimates for FY2008 BAMM doesn’t look particularly cheap. Based on my previous post, the company should generate roughly $19M in operating cash flow (actual free cash flow maybe more/less due to difference between my assumption for maintenance CAPEX and actual CAPEX) which would increase cash on hand to roughly $53M less $7M in long-term debt. This gives a forward FCF/EV of 8.2% or forward EV/FCF of 12x-13x.
Furthermore, the cash yields provided assume that all cash can be taken out of the business and distributed to shareholders. The reality is that this is a very capital intensive business and there is absolutely no way the company can distribute all its cash and maintain similar cash flow. BAMM basically spends down most of its cash on hand by the end of fiscal Q3 (ending in October) in preparation for the big fourth quarter and gets it back at the end of the Q4. Looking at historical working capital requirements it looks like the company can basically pay off its long term debt but the rest of the cash is needed to run the business.
Assuming the working capital needs, a mor realist valuation is 18x-19x trailing and 14x – 15x forward price/fcf.
BAMM -- First Look
Initially attracted to the stock for the following reasons:
-operates in an industry that everyone knows is in secular decline, when everyone is sure of something there is often an opportunity
-ebitda and eps up 17% and 56% YoY, but stock down from a high of $23.7 in the beginning of the year to a current price of $16.8
-lots of cash and very little debt, cash net debt is $27M or $1.60 per share
-company has made significant operating improvements over the last 4 years
Books-a-Million (BAMM) is a book retailer with stores located in the Southeastern states of the country. The company has 3 retail store concepts with 206 total stores, a wholesaling business, and an internet sales operation (link to latest 10K http://www.booksamillioninc.com/report/index.html)
The stock has grown nicely from $2 in early 2003 to a high of $22.5 in late 2006 and has since sold off to $17. The big move upmove in the stock is largely due to management’s ability to improve operating performance. Based on some rough calculations, the company has been able to pull out $50M-$60M in working capital since the end of fy2003 which has been used to pay off debt, increase the dividend, and increase the company cash stash.
Over the last 10 years the company has grown the top line steadily but faced some operating challenges between 2001-2003.
10yr Revenue CAGR 5.5%
10yr Gross Profit CAGR 6.4%
10yr EBITDA CARG 10.7%
Two things to keep in mind when looking at these growth rates. First, 2007 figures are adjusted to remove a one time gain from “card breakage” (more on this later). Second, all the EBITDA growth has occurred in the last 3 years as EBITDA more than doubled between end of 2004 and end of 2007. Between 1998 and 2004, BAMM was much better in destroying shareholder value than selling books. In the 7 years between 1998 and 2004, EBITDA declined 3.3% in nominal terms and much more so in real terms.
It looks like there is one analyst that covers the company with a 2008 eps estimate of $1.15. Without reading the report, I think he/she is making the assumption for 5% SSS which without any stock buybacks gets me to $1.13 - $1.17 per share in 2008. The only way I can see SSS changing from negative (SSS down 0.6% in fy2007) to positive is due to the last Harry Potter release scheduled for July 2007 and will be reflected in Q2 for fiscal 2008.
Based on adjustments made to 2007 reported numbers (for an extra week, one time gain from card breakage, maintance capex), I get revenue of $504, EBITDA of $38, and FCF of $15 -- the main point to take away is that these numbers are vitually the same as last year despite the reported jump in sales and profit. Using the published $1.15 eps estimate as a guidline and 5% SSS I get revenue of $528, EIBTDA of $43 and FCF of $19.
Based on $16.5 trading price the market value is $277M and if you assume you can pull all the cash out of the business and pay off debt I get and EV of $250, if you add the expected FCF in 2008 I get 2008 EV of $231M. On a traling 12 month basis BAMM is at roughly EV/FCF of 17x (250/15) and based and a forward 12 month EV/FCF of 12x (231/19).
-operates in an industry that everyone knows is in secular decline, when everyone is sure of something there is often an opportunity
-ebitda and eps up 17% and 56% YoY, but stock down from a high of $23.7 in the beginning of the year to a current price of $16.8
-lots of cash and very little debt, cash net debt is $27M or $1.60 per share
-company has made significant operating improvements over the last 4 years
Books-a-Million (BAMM) is a book retailer with stores located in the Southeastern states of the country. The company has 3 retail store concepts with 206 total stores, a wholesaling business, and an internet sales operation (link to latest 10K http://www.booksamillioninc.com/report/index.html)
The stock has grown nicely from $2 in early 2003 to a high of $22.5 in late 2006 and has since sold off to $17. The big move upmove in the stock is largely due to management’s ability to improve operating performance. Based on some rough calculations, the company has been able to pull out $50M-$60M in working capital since the end of fy2003 which has been used to pay off debt, increase the dividend, and increase the company cash stash.
Over the last 10 years the company has grown the top line steadily but faced some operating challenges between 2001-2003.
10yr Revenue CAGR 5.5%
10yr Gross Profit CAGR 6.4%
10yr EBITDA CARG 10.7%
Two things to keep in mind when looking at these growth rates. First, 2007 figures are adjusted to remove a one time gain from “card breakage” (more on this later). Second, all the EBITDA growth has occurred in the last 3 years as EBITDA more than doubled between end of 2004 and end of 2007. Between 1998 and 2004, BAMM was much better in destroying shareholder value than selling books. In the 7 years between 1998 and 2004, EBITDA declined 3.3% in nominal terms and much more so in real terms.
It looks like there is one analyst that covers the company with a 2008 eps estimate of $1.15. Without reading the report, I think he/she is making the assumption for 5% SSS which without any stock buybacks gets me to $1.13 - $1.17 per share in 2008. The only way I can see SSS changing from negative (SSS down 0.6% in fy2007) to positive is due to the last Harry Potter release scheduled for July 2007 and will be reflected in Q2 for fiscal 2008.
Based on adjustments made to 2007 reported numbers (for an extra week, one time gain from card breakage, maintance capex), I get revenue of $504, EBITDA of $38, and FCF of $15 -- the main point to take away is that these numbers are vitually the same as last year despite the reported jump in sales and profit. Using the published $1.15 eps estimate as a guidline and 5% SSS I get revenue of $528, EIBTDA of $43 and FCF of $19.
Based on $16.5 trading price the market value is $277M and if you assume you can pull all the cash out of the business and pay off debt I get and EV of $250, if you add the expected FCF in 2008 I get 2008 EV of $231M. On a traling 12 month basis BAMM is at roughly EV/FCF of 17x (250/15) and based and a forward 12 month EV/FCF of 12x (231/19).
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