INFS -- Comments from the Conference Call

As I discussed in the previous post, INFS reporting their first operating profit was certainly better news than the alternative. However, while analysts were congratulating the CEO on “a great quarter” there were two statements made that seem extremely disconcerting to me.

First, the CEO enthusiastically pointed out that 80% of the company’s products have been refreshed over the last 2 quarters. New products are the only way a technology company can grow as they replace the old technology that’s quickly falling in price with newer, more expensive products.

So am I the only one concerned that with 80% of the product line upgraded over the last 6 months, ASPs (average selling price) are DOWN 20% year-over-year?

Q4:2007 ASP=$856 94K units shipped
Q3:2007 ASP=$882 85K units shipped
Q2:2007 ASP=$1,022 72K units shipped
Q1:2007 ASP=$853 91K units shipped
Q4:2006 ASP=$1,090 79K units shipped
Q3:2006 ASP=$1,097 74K units
Q2:2006 ASP=$1,162 84K units
Q1:2006 ASP=$1,191 94K units

The second comment that is making me lose sleep at night is the following:

“the projection market is fiercely competitive excluding a few notable segments has been commoditized. … We [InFocus] will be faster to market with new products and better price points.”

My interpretation of this statement is that instead of trying to use its industry relationships and intellectual property to move up-market, INFS is going to try to compete on price. Compete on price against giant Asian manufacturers (Sony, Sharp, Panasonic, etc) with unlimited financial resources, diversified streams of revenue which means they can lose money on projectors for a few years, and cheaper labor pool.

When I look at INFS I see a company that can’t raise ASPs even with brand new products and a company that has decided to pick a fight it has a very small chance of winning. This is why I am not bullish on the long term prospects for my INFS shares.

So why am I still holding on to my position and buying more?

Despite the long term problems, I feel that INFS is trading at least 50% below liquidation value. And that’s just to good of a deal to pass up.

I am not particularly bullish on Las Vegas real estate but if someone offered to sell me a house in Vegas for half of what the cabinets, shingles and tiles inside were worth if sold separately I would jump on that opportunity.


* 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 -- Operating Income Turns Positive

Last time I posted on INFS I was pretty critical of the new CEO and stated that I am “seriously rethink[ing] my investment …. and I am considering cutting my losses.”

I still stand by my statements and more I think about the long term prospects for INFS the more I want to push the SELL button. However, the current undervaluation seems so egregious that I am willing to overlook the crumby business and less than inspiring CEO and hold on to my shares.

INFS reported fourth quarter earnings last week and posted an operating profit for the first time since anyone alive can remember. Excluding the $3.7M charge for lease losses on vacated facilities, INFS posted Operating Income of $1.1M or $0.09 per share in the company’s seasonally biggest quarter. Since I did not cover the 3^rd quarter, I will cover both at the same time.

The financials broke down as follows:

Q3:2007 results
Revenue $76M -- down 7% YoY
GProfit 13.8
GMargin 18.2% -- vs. 16.3% in Q2, 10.9% in Q1, 12.7% in Q3:06
EBT $(3.56)
D&A 1.0 -- estimated number since no CF statement yet
EBITDA $(2.56)

Q4:2007 results
Revenue $81M -- down 3% YoY
GProfit 16.5
GMargin 20.4%
EBT $1.1 -- excluded $3.7M lease write-off charge
D&A 1.0 -- estimated number since no CF statement yet
EBITDA $2.1

Q4:2007 ASP=$856 94K units shipped
Q3:2007 ASP=$882 85K units shipped
Q2:2007 ASP=$1,022 72K units shipped
Q1:2007 ASP=$853 91K units shipped
Q4:2006 ASP=$1,090 79K units shipped
Q3:2006 ASP=$1,097 74K units
Q2:2006 ASP=$1,162 84K units
Q1:2006 ASP=$1,191 94K units

Operating expenses excluding the lease charge were $15.4M, which was the target set previously by management. Based on comments made on the conference call, investors should not expect any further significant improvements in gross margins and operating expenses.

The balance sheet continues to be a thing of beauty with $84M in cash and zero debt or $2.11 per share in cash. In addition to the cash on hand, INFS still has over $200M in NOL’s.

In this post I calculated that if only half of the NOL’s can be used over the next 10 years they are worth roughly $1.50 per share today. So a stock trading at $1.70 has approximately $3.50 in cash on hand and NOL’s. The company also has an intellectual property portfolio that maybe worth something.

While I am not particularly bullish on the long term prospects for this company I believe that the stock is currently trading substantially below liquidation value. INFS represents 2.75% of the “Best Ideas” portfolio at a cost basis of $2.03 per share. I will be increasing the weighting to 4% of the 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.

CIM -- Taking a look under the hood ….

CIM released their first ever quarterly earnings report a few days ago. It appears that things are moving along and the company is ramping up its portfolio.

The key number from this report is the average spread on assets which is currently 134 bps annualized Here are my ballpark estimates of what earnings power for CIM will be over the next 12 months:

Book Value $539M
Earning Assets @ 8x - 10x leverage -- $4.85B to $5.93B
(book value * leverage factor + book value)
Spread on Assets -- 130 bps
Net Interest Income -- $63M to $77M
Base Management Fee -- $9.4M (book value * 1.75%)
Incentive Fee* -- $7 to $9.8M (assume 3% LIBOR)
Core Earnings -- $47 to $58M
Estimated EPS -- $1.24 to $1.54
Yield at current price of $19 -- 6.5% to 8.1%

*The incentive fee is even more of a moving target than net income estimates because it depends on net income and LIBOR which constantly changes.

Currently, CIM’s portfolio is almost entirely AAA rated mortgage backed securities and they are still building out the portion of their portfolio that will be in the form of securities. The next step will be to build the portfolio of the portfolio consisting of actual loans. The yield on raw loans should be higher and should help push the spread beyond 130 bps.

What is a realistic estimate for Core Earnings going forward?

I think looking at NLY is the first step in answering that question. NLY also reported earnings a few days ago and ended the quarter with spread of 99 bps. NLY is currently priced for that spread to increase.

I think its safe to assume that CIM will earn a higher spread than NLY, they already do. At a spread of 150 bps I get a current yield of 7.5% to 9.5% (P/E of 10x-13x). At 200 bps spread which is not unreasonable I get a yield of 10%-13% (P/E of 8x-10x).

I think at current levels CIM represents an attractive opportunity to earn a decent return on investment. If the stock were to sell off closer to book value of $14.26 the stock would become even more attractive.

I initiated a ½ percent position in the “Best Ideas” portfolio, and I will be raising this position to 2% after this earnings report.

* 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 -- 4th Quarter Earning Analysis

When BOOT last reported earnings, I wrote that next time 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. I will also be watching the change in A/R relative to sales.”

In that post I also stated that analysts (in BOOT’s case just one analyst) were underestimating the earnings power and I felt the company would report 45c per share in Q4 earnings.

BOOT reported Q4 earning on Januray 29^th of 38c per share which is up 8% YoY however below the 40c per share analyst estimate and my 45c per share estimate.

I am not going to waste time by regurgitating the earnings release which you can read yourself and will just state that the company blamed the unseasonably warm October and November for the 2% decline in outdoor footwear sales and the earnings miss.

The work market continued to chug along with 8% top line growth and both gross and SG&A margins improved on a YoY basis. The large inventory growth vs. sales was blamed entirely on the warm weather with the CEO stating on the conference call that BOOT is not going to take markdowns on this access inventory as its all basic, high turnover outdoor hunting products.

The CEO also hinted on the conference call that the decline in weather in the beginning of the first quarter is helping sell this access inventory. I believe the CEO’s is hinting that almost everything that was not sold in Oct/Nov is being sold in Dec/Jan. It was also announced that the company instituted a 3%-5% price increase across the board on its products in January.

Today, BOOT announced a special $1 per share dividend as well as its regular quarterly dividend to be paid March 18^th.

So, how attractive is the stock today? Here is how the numbers break down at ...

Market Value $89M
Cash on Hand $15M
Enterprise Value $74M

Estimated fcf over next 12 months $7.5M - $7.8M
Current Cash Yield 10% - 10.5%
Current Multiple 9.5x - 10x

If in fact the weather effected Q4 sales, than there should be another few million that will be dislodged from inventory and into cash in Q1 as sales catch up and that will lower the EV/free cash flow multiple to 9x – 9.5x.

At the time of the Q3 report I also wrote that “I think a fair price to pay is somewhere between $17.5 to $20. I am not wildly excited about paying 13x-15x forward cash earnings but would allocate new money to this tock since you do get a growing company with growing margins and a fortress balance sheet.”

I think the recent earnings miss is just a short term bump in the road and I am getting more excited about the long term capital appreciation prospect as the multiple falls below 10x. At this point, you get to buy a company with premium brands, fortress balance sheet with cash being returned to shareholders and you are paying a sub-10x cash flow multiple. Even if the next 12 -24 months are a little bumpy, in the long term BOOT shareholders will benefit from 8%-10% earnings growth as well as multiple expansion from the current sub-10x level.

In the next quarter I will be primarily looking for indication that the misstep in Q4 was due to weather rather than some broad negative trend. As always I will be looking for margin trends and changes in inventory and A/R relative to sales.

* 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.