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.