JCTCF -- “Da Bears”

I generally try to summarize the bearish case with one sentences, in the case of JCTCF it can be summarized with one work – INCONSISTENCY.

For example, in the last fiscal quarter of 2006 (ending on August 2006) the company reported positive sales growth while YoY eps doubled. Furthermore, for the full fiscal year 2006 operating eps (which is actually lower than reported eps due to a one time gain) was up 115% on YoY basis. Based on the report the company looked like it was well on the way to driving margin improvement in its two biggest businesses and the turnaround was well under way.

However, the following quarter (fiscal 2007:Q1 and calendar November 2006) the company “crapped all over itself” to use a favorite moniker that our trading desk assigns to stocks that drop from $13 to $10 in one day. Revenue fell 15% YoY, operating net income which excludes the positive effect of $150K inventory write-down reversal fell by 56%.

Even worse, JCLC which holds the hidden asset of “non-wood” products and is in my mind the only reason to own this stock actually experienced a 26% decline in operating income and margins in that business unit actually fell. This kind of inconsistency really makes investors question why they should own a tiny, highly illiquid, microcap with management that rarely publicly talks to investors and provides no business updates. The revenue decline is bad enough, but that can be excused by the fact that most of the business is still based on commodity pricing but the decline in margins in JCLC was inexcusable.

In the following quarter, (fiscal 2007:Q2 and calendar February 2007) the company reported another strong quarter -- by my calculations the company registered 38% YoY operating income growth. However, the quarter was “mixed” as revenue fell again by double digit rates and cash flow was negative compared to positive the previous year at this point as inventory drastically increased.

The point is that while there certainly appears to be a turnaround going on at JCTCF and the company is heading in the right direction, the result have been inconsistent.

Also, it can be added to the bearish case that JCTCF still makes most of its revenue and income from commodity products. The revenue decline that has precipitated over the last few quarters—0%, -14%, -15% in the last three most recent quarters—is a perfect example of the danger that faces companies that sell a commodity product, of course JCTCF has been trying to change that.

While I am not spending much time on this – as it should be evident – an investment in JCTCF comes will all the dangers associated with highly illiquid, highly volatile, tiny winy microcaps.



* 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.