Yesterday morning FTAR
filled the long expected 8K stating that the KMart contract will not be extended beyond 12/31/08 which effectively means the company will wind down and cease to exist shortly after the end of this year.
KMart will pay $13M for FTAR’s intellectual property (i.e. ThomMcAnn) as well as honoring the post-bankruptcy master agreement which stipulates that KMart will buy all inventory at book value.
Also, the company will be terminating retiree benefits and life insurance which will remove $14.7M of long term debt from the balance sheet and result in a one time earnings gain.
This announcement essentially puts in writing what everyone already knows and makes the investment thesis even simpler. I have updated my figures ( for the most recent news and believe that at worst FTAR is worth $7 per share (up 45% from current levels) and at best $8.4 (up 75%).
[**I am still trying to figure out how to post Excel tables in Blogger so I will add my calculations for the $7 and $8.4 price as soon as I get a hang of this. If you have any suggestion on how I can do this other than posting a picture file that is all but unreadable let me know at offthebeatenpathinvestments@gmail.com]
The biggest difference between the worst and best case scenarios is my estimate of 2008 FCF generated by FTAR. In the worst case I assume sales down 10% over 2007 and some margin erosion while in the best case I assume flat YoY sales and slight margin expansion.
There could also be upside if FTAR sells its HQ for higher than book value, if the non-KMart business is worth more than $0, $80M in NOLs are worth more than I expect, and wind-down costs are less than I estimate.
FTAR currently represents 10% of the “Best Ideas Portfolio” (and roughly that much of my own account) and I plan on raising the stocks weight to 15%.
* 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.
8 comments:
Is Footstar going to file chapter 11? I don't understand the value thesis if they go bankrupt. Shareholders won't see any of that right?
Mark -- FTAR is not going to file a Ch11. There are two things that might happen with the stock post 12/2008:
1) sell everything off, pay the cash out to shareholders in a big divi and close up shop, or
2) buy something with the cash
the odds of #1 are substantially larger than #2. The bet with this stock is that current cash+cash generated in 2008+current less liabilities are worth more than the current stock price.
thanks for reading,
offthebeatenpathinvestments
thanks. Ever looked at CTHR they're sub NCAV right now and a lot of that is jewelry inventory that I imagine has easily estimated worth. a little like Lazare LKI
Mark -- why did sales get cut in half for CTHR? Pricing is down or volume? or both?
i'll have to take a closer look ....just looking at the financials, if the fake gems are selling for 1/2 less than before than the inventory should be worth 1/2 of whats stated on the b/s which gives $26M in current assets less $5M in CL which is basically what this stock is selling for ....so you get everything below the Current Assets line for free.
why the big just in PP&L without anything reflected on the cash flow statement? (at least on yahoo)
I don't know the company very well. Its just one that popped up in a screen and I think may be worth following its news to see what happens. nice work on footstar.
Big FTAR fan here. Thanks for the great analysis.
It occurred to me that management could drive excess profits by deeply discounting the product toward the end of the year (Christmastime too). Why end up with 100 million of inventory you can liquidate at cost when you could sell it for $120 million (as opposed to the $150 million under "normal" gross margins).
Usually you wouldn't do this because you don't want to cannibalize future sales, but not an issue here.
FTAR could also order a bunch of excess inventory in order to facilitate this plan--no skin off their back if it doesn't sell.
There are some really perverse incentives due to the K Mart contract. These are some; there may be others.
To avoid games like this, I wouldn't count out the possibility that K Mart might just go ahead and purchase FTAR before the end of the year.
Any update on this idea? FTAR has fallen quite a bit. Looks like a bargain.
Thanks!
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