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.