INFS -- “Da Bulls” Part III

The first two bullish posts talked about shareholders controlling the firms destiny and INFS having the balance sheet required for a turnaround. This post will concentrate on valuation.

Since we are in the early innings of the “turnaround” and its impossible (at least for me) to estimate future cash flow, the only relevant way to value this company is by trying to calculate an acquisition value.

Lets see what this pig is worth ……fist lets look at the tangible liquidation value

Cash & Equivalents ……. $78M
Net Receivables …… $35M (reported $47M, discount by 25%)
Inventory …… $18M (reported $36M, discounted by 50%)
Other CA $9M

Current Liabilities……. ($83M)
Other LT Liab ……. ($4M)
Tangible Liquidation Value …$53M or $1.33M per share

Value of Motif* ……. $23M (50% share of 15x 2006 net income of $3.1)
Non-Cancelable Leases….. ($17M)
Revenue from Sub-Leasing** …$8.5M
Intangible Liquidation Value …..$10.2M (total intangible value $14.5M discounted by 30%)

Total Liquidation Value $63.2M or $1.60/sh
Current Market Value $97M or $2.44/sh

*Motif is a 50/50 JV with Motorola. Net income in 2006, 2005, 2004 has been $3.1M, $7.3M, $4.7M respectively (note 12 in 2006 10K).

**INFS currently sub-leases some the properties it liquidated as part of the restructuring. To be conservative, I assumed they could sub-lease their current properties at 50% of what they are paying.

What is not included in this liquidation value but is worth something to an acquirer?

1) by far the biggest thing that is missing from $1.60 liquidation value I calculated above is the over $200M in NOL’s that INFS is currently carrying. The problem is that you can’t just discount the $200M and add it to value of the company because the nature of tax laws give different acquires different abilities to use the NOL’s. On the last conference call, the CFO (who is no longer with the company) said that much. However, he also said that to the right buyer the NOL’s have real dollar value.

How much could they be worth? Well, lest say the acquirer can only use 50% of the NOL’s over the next 10 years. Discounted at 6%, the PV is $56M or $1.41/share.

2) another exclusion from the above liquidation value is INFS “intellectual property” (patents, R&D department, brand name, etc.) and its reseller network. While its hard for me to assign a specific dollar value to the company’s intellectual property I think it has a value of more than zero. Despite its problems, INFS still has patents and the know how to make high quality projectors and I feel that this technology is worth something to a potential acquirer. They also have years of relationships with resellers and do posses shelf space that has a tangible dollar value to an acquirer.

I am not going to spend a lot of time talking about the “brand name” even though they state (very often) that they have the largest installed base of projectors and leading brand name. I think its pointless to talk about your “brand name” when you have seen ASP’s fall by double digit rates over the last 4 years– obviously your brand name is not very strong.

So what does this all mean?

Well, I think at the current market price of $2.44 per INFS share you are getting $1.60 of tangible liquidation value as wells as $200M+ of NOLs and the company’s intellectual property which I think is worth over $1.50 per share – even if the acquirer can only use half of the NOL’s they are worth $1.40/share by my calculations.

Obviously INFS is a very high risk investment in the early stages of a shareholder led transformation, but at current prices you are paying a discount to acquisition value.

The next post will conclude my analysis of INFS.

* 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.

INFS -- “Da Bulls” Part II

The other bullish aspects of an investment in INFS is that the despite the horrible financial performance the company still has a great balance sheet and the valuation seems to be attractive.

Lets looks at the easy part first …..

INFS has $78M in cash on hand based on the latest quarterly results (Q1:2007), no long-term bank debt, and $4M in “other long term debt”. This translates to $74M ($1.86/sh) in free cash that can be used to cover negative cash flow and reinvestment into the business.

Based on 2006 FCF Statement, INFS had negative operating cash flow of $15M and capex of $5.3M for a total cash burn of $20M. Assuming no improvement in operations, INFS has enough cash to remain solvent for over 3 years. Why is this important?

Well …. Having the financial wherewithal to stay solvent until those activist shareholders and/or new management team can work their magic is another must that I look for when investing in turnarounds. The cash hoard and no interest payments gives INFS management some breathing room as they work on turning the company around and gives them the cash to make investments in R&D and/or Capex to effect the turnaround.

Ok, so the board has the same interest as the shareholders and the company is not going to go bankrupt anytime soon. But, does the current valuation provide enough margin of safety to compensate for the huge amount of risk that is involved in investing in a company that is bleeding cash and does not seem to have any apparent “moat” around its business? Or is this a coin toss?

I originally planned on including the valuation in this post, but it is getting long. The third bullish post will go over my calculation of liquidation value for INFS.

INFS -- “Da Bulls” Part I

The one sentence bullish case for INFS is that the company’s largest shareholder now controls the board of directors and will be handpicking the new management team, the company has the balance sheet needed to turn itself around, and the stock is currently trading at a discount to acquisition value.

As I mentioned in my initial post on INFS, one of the reasons that I am looking at this stock is because Caxton is now the largest shareholder of the company with 11.2% of the shares outstanding and they control the board. Stated another way, going forward the shareholder with the most money at stake will be running the show.

If you read my posts on CPY, you know that I consider such direct aligning of interests between shareholders and the people running the company (board of directors and management as their agents) as a must for profitable turnaround investments. Because of this, I consider piggy-backing onto large institutional investors who are planning to act as activists to facilitate the turnaround as a very attractive strategy.

If you read the original letter written by Caxton when they reported their holding but before they were given their first 2 board seats , their discontent with INFS is pretty generic:

1. board has no vision
2. board has no significant shareholders
3. must have a new business plan that assures profitability or sell the company

So far, Caxton has been able to fix one of the three points. As part of their agreement with the company to call of a proxy fight, Caxton got to name 2 directors in April if INFS was not sold. With the April and June appointments, Caxton has control of the board and there is now representation on the board from a significant shareholder.

Off the four Caxton board members, two have industry experience and the other two are from the financial sector. Robert Ladd was one of the two directors appointed on June 6^th, Ladd runs Laddcap Value Associates which owns 0.6% of INFS shares.

Interestingly, the other director from the financial sector is John Abouchar who according to this article covered INFS as a sell side analyst and was critical of the company. You don’t often get to see sell side guys getting to make changes in the company’s they cover

Its unclear at this point what Caxton will do to regarding the other two points raised in their letter, 1) vision, and 3) new business plan.

According to the previously linked article, Caxton has called for INFS to turn itself into a an intellectual property company as opposed to a manufacturer, call center provider, parts manufacturer, etc. I have only listened to the latest few conference call and the only thing I have ever heard the Caxton guy say is that he is upset about the company performance and as the largest shareholder they are pissed-off. Naturally!

I think the intellectual property route is an attractive one for INFS. This company will never be able to compete with the big boys (Sony, etc.) or the low cost generic manufacturers so spending less time and money on the non-research related business functions would free up time and resources to spend on being a technology innovator. The company has already outsourced all its manufacturing but there are still a lot of non-R&D functions done by the company that I think Caxton and the new CEO will be looking to cut.

As I said in the beginning of the post, I consider having a large shareholder on the board of directors as a must before investing in a turnaround situation.

* 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.

INFS -- “Da Bears” Part II

The second major bearish case for INFS is that this company may never again earn a sufficient rate of return for shareholders. The company has been in a perpetual state of restructuring for the last five years with no sustained improvement achieved. For example, in the last 16 quarters the company has recorded 13 negative “one time charges” and this does not include inventory write-offs which are dumped into cost of goods—needless to say that at this point these are no longer one time in nature.

Here is a brief history of restructuring expenses:
2003
$15.7M inventory write-down (COGS)
$6.7M “restructuring charge” -- lease breakage, severance costs, etc.
$26.4M long lived asset impairment charge

2004
Negligible

2005
$27M inventory write-down (COGS)
$11.1M “restructuring charge”
$9.8M long lived asset impairment charge
$5.1M in SMT related losses

2006
$8.4M inventory write-down (COGS)
$5.4M “restructuring charge”
$9.4M regulatory assessment charge due to China customs case
$7M in SMT write-downs and TUN write-off

INFS also took a $7.4M charge in 2006 to write-down value for investments in technology companies that did not work out.

Looking at this restructuring history leads me to think about the following maxim: “turnarounds seldom ever turn.”

Over the last few years management has made other notable mistakes, specifically the failed and unnecessary JV to incubate a 3rd party manufacturer and the export problems with China. I am not going to spend any more time on these as 1) you can read about them in the latest 10K and I can’t add much more insight than that, 2) the management team that was responsible for these mistakes is no longer with INFS, 3) while these missteps have cost shareholders real money, I don’t think these missteps provide any indication about INFS’s core problems and really are one time in nature.

As I see it, the two main reasons not to own shares of INFS is that the company may never earn above average rate of return for an extended period of time due to
1) consumer and business electronics is a cut-throat industry with very little room for any managerial mistakes, and
2) the fact that INFS has been constantly restructuring without any consistent positive results maybe a sign that there is something inherently wrong with the business model that no amount of investment or managerial talent can fix


* 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.

INFS -- “Da Bears” Part I

Since there is a lot more bad than good to talk about with INFS, I will jump right into the bearish case. The one sentences bearish case for INFS is that the company was grossly mismanaged just as the projector industry experienced a severe inventory glut and competition from LCD/Plasma televisions.

The mismanagement at INFS over the last few years has come in several flavors …..

First, the company’s management simply failed to properly position their business for the continued price compression in the projector industry. You could make the argument that there is not way management could foretell this, even though its part of their job description. Fine ……

The real mistake that INFS made is that it significantly invested in inventory at the worst possible time. Inventory on hand increased from $62M at the end of 2003 to $155M at the end of 2004. Of the $93M increase, $73M came in the form of “finished goods” (see Note #3 of 2004 10K) which is basically finished projectors sitting in the company’s warehouse, collecting dust and depreciating every single day.

Just as the company significantly invested in inventory, ASP (average sales price) continued their sharp declines …. (all data is from the 10K’s)

2006 (vs. 20005)……-15.5%
2005 ……..-17%
2004………-20%
2003………-27%

This has cost the company dearly in the form of severe gross margin compression as INFS had to lower prices and simply write-off a big chunk of inventory in 2005. Gross Margins fell to 8% in 2005 (this includes the $27M inventory write-off) and 15% in 2006.

On its own terms this is bad enough, however this becomes even a bigger problem when you consider the fact that INFS operates in a highly competitive industry and really cannot afford such missteps. Unfortunately, business and consumer electronics is not an industry where dumb management will be overcome by superior industry dynamics.

INFS is facing severe price pressures from Asian electronics companies that can produce projectors cheaper, have diversified product lines so they can withstand some margin compression on projectors, and have superior financial position to withstand an industry shake out.

Also driving ASPs lower is the emergence of LCD and Plasma televisions as a real competitor. I called one and visited another high end home entertainment provider and my sense is that projectors (both home entertainment and fixed business use projectors) still provide a bigger and better picture per dollar spent compared to LCD or Plasma televisions in similar price range. However, LCD and Plasma TVs are simply a hot product right now and provide a good enough picture which means they are stealing sales and projector manufacturers must lower prices to compete with these often cheaper alternatives (as well as other projector manufacturers).

I will continue with other bearish aspects in the next 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.

INFS -- First Look

Initially attracted to the stock for the following reasons
-James Altucher posted on his Daily Blog Watch that Caxton Associates announced that they have accumulated an 8.9% position in the stock and will be acting as an activist shareholder
-$1.96 per share in unrestricted cash & equivalents and no debt, stock price at $2.60
-operating CF as reported on FCF Statement substantially higher than reported GAAP EBITDA and Net Income
-great products, awful financial performance

Currently
Share Price: $2.44
Market Value: $97M
Enterprise Value: $23M
Investment Type: Turnaround Situation

InFocus Corp. (INFS) is a developer of projectors used for business, education, and home entertainment. The company has a spectrum of products retailing from $500 to over $10,000. In the latest annual report the company uses such words as “industry pioneer,” “worldwide leader,” and “premium.” The company also states that they have the largest installed base of projectors compared to anyone in the industry. While all of these statements might be true I have a hard time assigning such praise to a company that has not reported twelve months worth of positive EBITDA since the third quarter of 2002.

INFS was a high flying tech stock in the “good old days” with peak revenue of $887 million in 2000 and EBITA of $97M in that year. Share price in early October 2000 hit an all time high of $56 per share giving the company a market value of $2.3 billion. The big boost to sales in 1999 (sales up 125%) and 2000 (sales up 29% YoY) came from the growth of “ultraportable” and “microportable” projectors that were above 1,000 lumens and could be carried around and attached to laptops. The first ultraportable projectors were introduced in Q1-1999 and by 2000 accounted for almost 80% of sales.

Don’t know what a “lumen” is? Basically, higher lumen count = brither colors http://en.wikipedia.org/wiki/Lumen_(unit)

Oh how the mighty have fallen …..

In the latest fiscal year ended December 2006, the company reported revenue of $375M and EBITDA of negative $29M.

While it’s not hard to understand why revenue fell by a third between 2000 and 2003—business spending dried up and even the best tech firms experienced similar problems—it is imperative to understand why revenue has not recovered with the economy.

In the last six months there has been substantial developments with the company. Caxton has raised their stake to almost 12% of oustanding share. In February 2007, the company allowed Caxton to nominate 2 directors to the board in order to prevent a proxy fight. INFS unsuccessfully put itself up for sale. The CEO retired in May. And on June 6th, Caxton appointed 2 more directors to the board giving it effective control of the company and the ability to hand pick the new CEO.

As always, I will continue with my analysis by laying out a bullish and bearish case and make a final decision on whether to add this stock to the Watch List Portfolio or the Best Ideas Portfolio.

* 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 Q1:2007 Earnings Analysis

CPY reported first quarter earnings on 6/5/2007. Based on my previous post this is what I was looking for while reading the release:

“…….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 …..”

The trend in Sears sitting continues to be negative with sittings down 13% while the trend in sales per customer continues to be positive with sales per customer up 11%. Overall, net sales were down 4% and the fact that the increase in sales per customer is not offsetting sittings decline is a bearish sign. However, I can make a strong case (at least to myself) to own the stock at the right price without growth in Sears sales so this continued sales decline is not monumental.

EPS increased 40% YoY to $0.40 per share with most of the increase due to a mysterious 9c benefit for a “change in vacation policy.” Its unclear to me if we can expect an additional 9c in each of the remaining quarters or is this a one time deal.

It looks like the second quarter is going to experience the same trends in sitting declines. The company reported that for the first 5 weeks of the second quarter sitting are down 10% YoY and total sales are down 4%.

On the PCA front nothing groundbreaking was disclosed. If you listen to the conference call the only thing worth noting is that it looks like management will start working on converting the studios to digital right away. It looks like the expectation is to do some in 2007 and finish up most if not all by 2008. I mentioned this in my earlier post as “a given” but it’s nice to have a confirmation on this anyway.

The only other thing that was mentioned is that management feels they have the capacity in place already to service all of PCA’s digital infrastructure. The implication is that margins are going to improve with addition of PCA. While this is a nice thought, I am waiting to see the numbers to incorporate this into my projections.

Knightspoint did not sell any shares and GAAP dep/amort continues to be substantially higher than maintenance CAPEX.

Overall, this quarter did not provide any info that would cause me to change my opinion on the stock. If the stock falls below $65 per share before any meaningful PCA info is disclosed I am going to start nibbling, otherwise I am taking a wait and see approach.

Things I will be watching for in Q2:2007 remain the trend in Sears sitting and sales per customer, difference between CAPEX and reported dep/amor, insider trading by Knightspoint, new info regarding PCA. Also, I will be looking to see if the vacation policy change will have the same positive effect on Q2 as it did on Q1.

Oh yeh ….. it looks like CPY continues to be underfollowed. Only two people asked question on the conference call despite the big announcements and sharp share price increase in the last 3 months. There maybe an opportunity for us in CPY yet …….

* 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.

BAMM -- $3 Special Dividend

BAMM announced a one time, $3 per share cash dividend that will be paid out on 7/5/2007. The dividend will cost BAMM approximately $50.4 million.

First of all, where will the cash for the dividend come from? While there was no cash balance released in the filed 8K, based on historical trends BAMM should have roughly $40 million in cash.

Also, due to the release of Harry Potter next month the company maybe experiencing an unusually high number of prepayments. I called the customer service line (1-800-201-3550) and they told me that if I want to pick up the Harry Potter book on the day of the release I can go into the store and get a voucher but I have to pay for it upfront. I am not sure how big of a cash influx this will create but there is certainly some.

Even if the company can pay out the entire $50 million without borrowing, it will have to borrow at some point in 2008 to fund the build up in inventory for the large Q4 selling season. BAMM has plenty of liquidity to fund the dividend as they have a $100 million credit facility which is 100% available to fund operations.

The bigger question is what does this dividend signal about BAMM’s long term prospects?

I think the dividend announcement reinforces the point I made in an earlier post on BAMM. While I still don’t like the valuation and the industry is facing some serious problems, this announcement shows once again that management is focused on generating value for the shareholder -- and I don’t want to bet against them with a short position.

I think the immediate impact of the dividend will be to increase ROE as book value will fall and this company can certainly service a little debt if they have to borrow to fund the dividend.

In the long term I think nothing changes. The company is still posting negative SSS which means that if they want to post any type of top line growth (even to keep up with inflation) they need to keep investing in more stores which will show diminishing returns every year if SSS trends remain negative. And the stock is still not cheap, including Q1 results BAMM is still trading at 15x earnings.


* 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.

BOOT -- “Final Thoughts”

Just to recap, BOOT has really turned around their operations over the last 4 years and has seen substantial margin improvement. However, the company continues to have operating margins below the industry medians even after the increase in recent years.

My favorite way to look at valuation for small cap turnaround stocks is
1) ATTEMPT to calculate a price that a larger public competitor would be willing to pay
2) ATTEMPT to calculate a price that I would be willing to pay for the business

I find this to be a good exercise for those stocks that have publicly traded peer groups. This allows me to calculate a rough buy and sell price, but that’s the smaller benefit. The bigger benefit is that it clearly highlights discreptencies between what I think is the right price and what the market thinks is the right price for a group of similar stocks.

I am going to spend a lot of time talking about what BOOT would be worth as an acquisition candidate. However, I want to reiterate that ITS HIGHLY UNLIKELY THAT BOOT WILL BE ACQUIRED.

Why would the CEO agree to sell the company when his family owns half the shares and the board is made up of his father’s friends? While the current management has added a lot of value since they took over in 2000, the fact remains that “shareholder accountability” is nothing more than lip services. The CEO knows that the board will keep paying him a million bucks a year even if BOOT’s operating performance continues to lag the industry.

Enough with the background noise ……. Is this stock going into the Best Ideas Portfolio or is it getting trashed into the Watch List Portfolio?

Using the peer group that I described earlier we can calculate that sales growth for the last 3 years has been 9.7% annually and EBITDA margins were 13.5%. If we make a very naïve assumption that the group will grow at that rate for the next 3 years and maintain the same margins than the industry is trading at following forward valuations

P/FWD 2007 EBITDA …… 9.48x
P/FWD 2008 EBITDA …… 8.65x
P/FWD 2009 EBITDA …… 7.89x

If we assume sales growth of 8% for BOOT over the next 3 years and its takes 3 years for the acquirer to get BOOT’s EBITDA to industry median levels than the valuation looks something like this:

P/FWD 2007 EBITDA …… 8.07x
P/FWD 2008 EBITDA …… 6.83x
P/FWD 2009 EBITDA …… 5.83x

You are looking at discounts of 25% to 35% to industry levels. To get in line with industry valuations that stock would have to be trading at $23 to $21.5 per share. Haircutting that price by 30% to provide for a margin of safety I get a peer group derived buy price of $16 to $15 per share -- which is a bit lower than the current price of $17.10 per share.

So far so good …….But what would I be willing to pay for BOOT?

Since I don’t have $100+ million I will have to borrow the entire sum. Let’s say I can borrow at 7% (I think most of the peer group I use would be rated A to BBB+ so they would be issuing 10 year paper at roughly Treasury yield + 100bps which gets us to about 6.15% but lets be conservative).

Using the same forward 3 year assumptions as under the peer group analysis, I calculate that I can pay $31 per share for BOOT and if my assumptions are correct I will still break even after 3 years. The $31 target price implies 80% total return and 22% annualized over next 3 years. I think the $31 share price is the highest possible price BOOT can be trading at over the next 3 years.

But I don’t want to just break even, I want to earn a satisfactory rate of return. For me to get a 10% rate of return on this investment I would have to pay no more than $20 per share to acquire BOOT. Haircutting that price by 30% to provide for a margin of safety I get a buy price of $14 per share -- which is almost 20% lower than the current price of $17.10 per share.

Its pretty clear that I don’t think that BOOT is wildly under or over valued. I think the stock is trading roughly in line or at a discount to where others in the industry are trading. Unfortunately, it’s not trading low enough to provide me with a large enough margin of safety to initiate a position at this time. I will be adding the stock to the Watch List portfolio and will be waiting for new data or a lower share price.

Going forward, I will be watching for trends in gross margins and SG&A as % of sales and if revenue is trending above or below the 8% level set by management as the goal.


* 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.

BOOT -- “Da Bears”

The one sentence bearish case for BOOT is that outside shareholders are second class citizens without any power to effect changes, that the company is a below average operator, and that the combination of these two factors demands a discounted valuation.

The Schneider family owns roughly 42% of the outstanding shares so the CEO Joseph Schneider can prevent any takeover or management change no matter how bad things get operationally. Also, the entire board of directors except 1 member is pre-March 2005 meaning that they are all buddy’s of the CEO’s late father who died in 2005 but held on to the Chairman’s title until his last days.

Concentrated ownership controlled by one family (in this case they were not the founding family but George Schneider led the management buyout in 1982) does not generally bode well for unlocking the maximum shareholder value. While the current management has certainly done a good job turning the company around, in cases where the CEO has the board under his thumb one always has to wonder how much more could have been done and will be done in the future.

While the compensation structure detailed in the latest proxy is by no means egregious, a few less noticeable details support the point made above. For example, looking over the last two annual proxy statements it looks like the CEO’s total compensation doubled in 2006 versus the previous year. The increase in total comp was almost entirely due to increase in incentive compensation. So, what? After all, the company had a good year.

The interesting thing is that the increased incentive was achieved by changing how calculations are made to decide if management met their goals. The change in calculation was small (revenue growth became 40% of goal vs. 50% the previous year) but it was enough to ensure a higher payout. Also, management is only taking a small part of their total compensation in the form of options or restricted equity. They can basically take the money now as opposed to taking stock linked compensation and only get rewarded if shareholders get rewarded.

The second part of the bearish case is that BOOT is a below average operator in the industry. Measured by both gross and ebitda margins, BOOT is below the industry medians. Also, the company has less revenue, less EBITDA, and virtually identical book value as it did 9 years ago (this is as far as I have data). It’s true that the company has most recently consolidated its business and walked away from less profitable revenue, but the point is that the company has been a below average operator in the industry.

Considering the fact that BOOT is a less efficient operator than its peers combined with a CEO who knows he will keep his job even if he lags the industry, its no wonder that BOOT is trading at a discount valuation to the group. On top off all that, BOOT gets almost all its sales in the U.S. and is highly depended on both U.S. consumer spending and domestic economic growth.


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.

BOOT -- “Da Bulls”

The one sentence bullish case for BOOT is that the company has undergone a series transformation and has become solidly positive, it still has room for improvement, and it currently sports one of the lowest valuations among its competitors.

Even though I found some prominent warts on this management teams face and will discuss them in the bearish post, its hard not to commend them for the turnaround they have engineered over the last 4 years. Looking at the year end results for 2002, a year in which sales were down 22% and the stock hit an all time low of around $1.70, EBITDA was $2.14 or 2.2% of Sales and pre-one time charges EPS was negative 36c per share.

Since 2002, the level of gross profit and EBITDA has increased in every year. Also, gross margin and EBITDA margin increased in every year compared to the year before. Gross Margin increase by almost 1100bps while EBITDA margin has increased by 800bps. Further more, the company has been able to maintain the level of working capital virtually unchanged since the end of 2002 but it now generates more than 5x EBITDA and net income.

The median Gross Margin for shoes manufacturers (this EXCLUDES retailers like Payless) over the last 12 months is 43% v. 41% for BOOT. The 200bps difference in margins is HUGE for an industry with median EBITDA margin 12.6%. If BOOT can close the gap and it has been making strides in that direction every year since 2002, this will add somewhere between $5M - $6M to after tax net income or $0.80 - $0.95 per share. This would nearly double net income.

Its hard to say if the company will be able to continue to increase gross margin at the same pace. On average, BOOT has added 270bps to gross margin in each of the last 3 years, but that number declined last year and will be harder to maintain as the easy fruit is always picked first. Still, in the fiscal first quarter reported in May 2007 gross margin was up over 100bps relative to the same quarter in 2006 but it’s the last two quarters that are important due to seasonality inherent in the business.

Of course, “below industry margin with a lot of room for improvement” can be rephrased as “inefficient operator,” more on this in the next post ……

Despite the strong price move in the stock recently, BOOT still trades at discounts to the industry medians based on sales, ebitda, and book value. On average, BOOT trades at a 25% discount to the industry despite reporting better sales and ebitda growth than many of its competitors. I am not getting into a detailed valuation discussion at this point as I plan to discuss it in my concluding post on BOOT.

Companies used to calculate industry median valuations and margins: KSWS, WEYS, TBL, RCKY, WWW, DECK, SKX, SHOO

Companies excluded from median valuations despite industry participation: HLYS, CROX, NKE


* 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.

BOOT – First Look

Initially attracted to the stock for the following reasons
-strong operational improvement from quarter to quarter
-strong momentum in the form of rising earnings estimates, positive price momentum, and earnings surprises
-hidden assets in the form of NOL
-premium brands trading at discount valuation

Currently:
Share Price: $17.2
Market Value: $108M
Enterprise Value: $98M
Investment Type: Long term holding

LaCrosse Footwear (BOOT) has been making boots for over a hundred years. In 1994 the company acquired Danner, Inc an its line up of premium leather boots. Currently the company’s revenue is almost evenly split between the work and outdoor market. The LaCrosse branded boots are sold at lower price points while the Danner boots have a strong brand name and sell at a substantial premium.

Fast forwarding to the most recent past, BOOT has undergone a substantial turnaround and has drastically improved margins. Over the last 5 years the company jettisoned a substantial number of businesses (PVC boots, children boots, mass market apparel, etc.) and has concentrated on its highest margin products.

The turnaround has been pronounced ……

Looking at the 2002 annual report, a year in which the stock hit $1 per share, the company reported 22% decline in sales due to both weakening economy and discontinuation of several business lines and retail outlets. Gross margins were reported at 26.8% (which was actually a 270 bps improvement from the previous year) and EBITDA was a negative $4 million. In 2002 and 2001 the company relocated its headquarters and most of the remaining U.S. manufacturing to Portland, Oregon and shut down a number of plants in Wisconsin (the company was originally founded as a rubber shoe manufacturer based in Wisconsin).

What a difference 4 years makes …..

Looking over the latest 10K, BOOT reported gross margins of 39.2% and EBITDA of positive $8.84 million. Also, based on the latest filling the company manufactures 80% of its products (by sales dollars) outside of the U.S. and has re-positioned itself into a designer and innovator rather than a sub par manufacturer.

* 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.

Marketocracy Portfolios Created

In order to keep some type of investment performance track record of the stocks analyzed on this blog I have created 2 Marketocracy portfolios that I describe below.

Those of you that are familiar with Marketocracy know that they have some basic holdings rules for portfolios to be in “compliance” and included in their rankings. I don’t plan to follow those rules and any compliance is accidental -- wow, in an environment where I have to get our firm’s compliance department to sign off before I go to the bathroom writing that actually felt liberating.

For those of you not familiar with the Marketocracy service I suggest you check them out at www.marketocracy.com. I think if used properly, people new to investing can learn some valuable lessons and save themselves some investment losses. Keep in mind that I am only referring to their free services, I have never used the premium service and have no idea if its worth the price or not.

I plan to post and discuss performance on a monthly basis. Below is a description of the two portfolios I created …….

“Watch List” portfolio -- this portfolio will hold a position in every stock that has been analyzed in detailed and written up on this blog. I don’t have any performance expectation for this portfolio. The main purpose of this portfolio is to simply remind me to check up on these stocks on a monthly basis. The secondary purpose is to provide me with some clues about how my personal idea generation process and the stocks that attract me compare with picking stock ideas at random -- on average, am I fishing in the more fertile parts of the lake?

“Best Ideas” portfolio -- this portfolio will hold full positions in a maximum of the 10 best ideas from this blog at any given time as well as much smaller positions in a maximum of 10 “watch list” stocks. I plan on using the 80/20 rule to assign position weights, with the best 10 names making up around 80% and the less attractive names making up around 20%. THIS IS NOT A RECOMMENDED INVESTMENT PORTFOLIO. THIS PORTFOLIO IS FOR PERFORMANCE TRACKING PURPOSES ONLY. THIS PORTFOLIO IS ONLY RELAVENT IN THE CONTEXT OF THIS BLOG. MY PERSONAL PORTFOLIO LOOKS SUBSTANTIALLY DIFFERENT. DO NOT REPLICATE THIS PORTFOLIO IN ANY INVESTMENT ACCOUNT. The main purpose of this portfolio is to see if I can identify the best stocks from all those that are analyzed on this blog.

I will use two benchmarks to grade myself:

1) Rate of inflation (as measured by Core CPI) + 10%
2) Russell 2000

I will use cumulative returns since inception until I reach a 3 year track record. After that I will use a 3 year moving average as well as cumulative performance. I would not pay much attention to the returns versus these benchmarks until there is at least an 18 month rack record and there has been at least one 12 month period with the major indexes down 10% or more.


OMF -- Watch List Portfolio
http://www.marketocracy.com/cgi-bin/WebObjects/Portfolio.woa/ps/FundPublicPage/source=FmOgDiEgEgFcOnMlMaKiAbDf


OTB -- Best Ideas Portfolio
http://www.marketocracy.com/cgi-bin/WebObjects/Portfolio.woa/ps/FundPublicPage/source=FmOaDeKbEgFgOoKjMaKiAbDe/maxDays=10000