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.

“Best Case Scenario Valuation” for CPY …….

In the previous post I laid out a valuation framework using what I feel are very bearish assumptions with the conclusion being that buying the stock anywhere between $21 and $34 per share provides for expected rate of return of 15% to 10%.

Today I will silence my inner and ever present skeptic and will try to put some numbers on what the upside looks like assuming some good things happen over the next few years:

BEST CASE SCENARIO assumptions ……

-EBITDA at Sears would stay flat over the next two years (not all that bullish as EBITDA has been growing over the last 2 years)

-immediate incremental improvement in Wal-Mart EBITDA (not all that bullish as EBITDA can be drastically improved by simply closing underperforming stores)

-Wal-Mart would eventually achieve similar margins as Sears and FCF would double (very bullish assumption as the Wal-Mart business serves a lower end consumer at lower average sales price)

-PCA is not sold under this scenario, so the NOL’s that came with the acquisition can be included in the valuation analysis

Under this best case scenario, the CPY shares would trade at $90 per share assuming a 10x EV/FCF multiple. At a 7x EV/FCF multiple the shares would trade at $60 per share.

The best and worst case valuation scenarios I laid out highlight why I am so bullish on CPY over the next 3 years. Based on worst case assumptions, the stock has very little downside of 20% at which point you would be buying the CPY business at 7x free cash flow. However, the upside is up to 200% assuming the company’s management can do with the Wal-Mart business what they did with the Sears business.

As I see it, as an investor in CPY shares for every $1 in downside risk I am getting $9 in upside potential ….and that’s pretty damn attractive.

* 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.

“Worst Case Scenario Valuation” for CPY …….

In the previous three posts I discussed the following points:

-reported earnings are substantially lower than operating earnings due to acquisition accounting

-sittings at Sears are still falling at almost a 10% clip and CPY can only raise prices by 5% so this is a serious problem, however EBITDA for Sears is still growing and both gross and sg&a margins are improving YoY

-CPY’s management will be using the Sears blue print for the acquired Wal-Mart business with a realistic chance that this company can generate $80M - $90M in EBITDA in 2010 and has a market value under $200M with $71M in net interest bearing long term debt

-Knightspoint (aka Ramius) increased their stake by 75% as the stock fell ….basically, very smart people who control the company and know the most about it are doubling down

Alright, here comes the fun part – what does valuation look like? In this post I will try to assign a “WORST CASE SCENARIO” price to CPY shares.

Here are my WORST CASE SCENARIO assumptions ……

-by the end of 2009 the PCA acquisition has proved to be a complete failure

-CPY’s management losses focus and the Sears business sees a decline in EBITDA to $40M per year – from $45M over the last 12 months -- so FCF comes in at $26 ($40 - $5 Capex - $9.2M in tax assuming $14M in D&A) in 2009

-there is no improvement in Wal-Mart EBITDA for the next two years (I think this is extremely conservative since they will surely improve EBITDA by just closing underperforming stores)

-CPY is forced to sell the Wal-Mart business at ½ acquisition price of $82.5M + ½ of the money invested in digital equipment which is targeted to be $38M …..non of PCA’s NOL’s are used or valued under this scenario

Under this worst case scenario, over the next 2 years CPY would use most of its FCF for the digital upgrade at Wal-Mart. CPY would than sell the Wal-Mart business at ½ its total investment and be left with just the Sears business which is now earning less due to loss of focus. Here is how the numbers look……

(I know that the picture is hard to read .....if you double click on it it will enlarge....if you want the excel version shoot me an email at offthebeatenpathinvestments@gmail.com)

Unless I am completely missing something, at current price of $25 per share we get to buy a stock that will have an estimated cash yield of 13% even if a lot of things go wrong. At $21 per share the forward cash yield is at 15%. If you are targeting a cash yield of 10% your buy point is $34 per share which is 20%+ above trading price.

* 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.

Knightspoint is loading up

October 16, 2007 …………From the filling ……..

New total Knightspoint ownership increased to 1.850M total shares or 29%. Knightspoint continues to add to their position as the stock is falling!

September 10, 2007 ………..From the filling ………..

Announced that Knightspoint (through other entities they control) has purchased an additonal 536,750 shares worth $23.1M. The stock was bought between 9/10 and 9/12 at an avg price of $43. This brings their total Knightspoint ownership to 1.598M total shares or 25%.

Here is a Bloomberg GPTR screen that plots insider buys (green arrows) against the stock price.

These insider purchases indicate that the largest investors in the company, who also happen to have the most insider information, control CPY's future and cash flows, and happen to be sophisticated financial buyers just increased their position in the stock by 75% as the stock is falling off a cliff!

Enough said.

* 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.

Key points from Q2:2007 Conf Call

Here are my notes from the CPY conference call ….

In my previous post, I adjusted EBITDA for the $8.1M in unbooked revenue. It looks like reported eps was $1 per share lower than operating eps …

"Our overall second quarter results were significantly negatively impacted as a result of purchase accounting adjustments associated with our acquisition of PCA, which closed on June 8. The overall acquisition negatively impacted per share results and net earnings by $1 and $6.4 million respectively."

Looks like sittings will continue to decline in the next quarter. Keep in mind that this was stated on August 29th so the quarter is over by now ...

"The preliminary net sales for the Sears Portrait Studio Division for the first four weeks of fiscal 2007 third quarter represent an approximate 5% decline over the comparable period ended August 19, 2006."

Guidance on digital conversion .....

"We plan to convert up to 400 PictureMe Studios to digital technology before the 2007 holiday selling season. The balance of the US studios are planned to be converted prior to 2008 busy season with the conversion of the Canadian and Mexican studios to follow in 2009. Preliminary estimates of capital requirements to complete the PictureMe integration, over $15 million in 2007 and $23 million in 2008."

Below is the most important portion of the conference call because it show how investors and CPY's management are thinking about the PCA acquisition as well as the attractiveness of CPY shares ones the PCA business is fully integrated by the end of 2009 ......

Q: “Quickly on the PictureMe integration, just thinking about the acquired business back of the envelope there is roughly twice as many studios each of which is delivering about half the revenues as SPS, gross margins are a little bit lower but not that much. Is there really any reason given that the per studio CapEx should sort of come down pretty rapidly given that technology curve since you did the same thing at SPS. If there any reason structurally why the ability to extract free cash over time from PictureMe should be at all inhibited related to the experience at SPS?

A (from CPY CEO): Obviously, that was the part of the attraction to us being able to acquire those assets, as we talked about on previous calls may have the ability to significantly leverage our corporate infrastructure here to realize the cost synergies that make this makes sense but in addition we are confident that by installing digital technology, training the PictureMe associates in the digital technology and having access to the unrivalled foot traffic that you do have in the Wal-Mart stores, that what you just described would certainly be our expectation.

Q: And just sort of thinking back to where we are now with SPS in terms of free cash flow, looks like in the trailing 12 months your somewhere between 40 and $45 million of free cash flow out of SPS.

A: Right

Q: If that doesn’t erode too awfully much over the next couple of years, once we get into ‘09 and you are through the CapEx injection into Picture Me. If we start getting similar free cash flow numbers out of those Picture Me studios, we could be talking about 80, $90 million of free cash flow being delivered by the whole company and yet we’re sitting here looking at a market cap under $300 million, which just strikes me as unbelievably attractive."

Here is the best part ........the cash flow projections have not changed but the stock has been cut in half since the conference call to roughly $160M.

What’s the next level after “unbelievably attractive?”

* 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 Q2:2007 Earnings Analysis

By just about any measure, CPY has been a pig of a stock. I first posted about it on 6/11/07 when the share price was $71. I have bought shares for the Marketocracy Best Ideas portfolio at an average price of $40.75 and the position now makes up 5% of that portfolio. I have bought shares for my personal account at $45, $40, and $30.5. Any way you look at it, this has been a bad investment thus far.

Obviously, at this point the question is do I cut my losses, do I add to my position or do I hold on. The next few posts will concentrate on CPY and I hope that I can come up with a reasonable answer.

First, the latest quarterly earnings analysis …….

The company reported fiscal Q2 earnings on 8/28/07 with this being the first quarter that included 6 weeks of results from the acquired Wal-Mart business. In their fillings, the company is calling the Wal-Mart business “Picture Me” and the legacy Sears business is called “SPS.”

GAAP reported net income in the quarter is NEGATIVE $3.4M vs. +$0.64M last year. However, it looks like the reported GAAP numbers are substantially understated. As I understand it, the company essentially booked 3 weeks worth of revenue from Picture Me--deferring $8.1M worth of revenue--but full 6 weeks worth of expenses.

Below is a breakdown by business line and what actual EBITDA looks like once the $8.1M deferral is added back:

The real bad news is that Sears continuous to see declining sales with sittings down 9.4% while avg price per order was up 4.8% for a net Sears revenue decline of 5.6%.

The good news is that despite the sales decline management is finding more costs to cut and EBITDA is still growing. Sears EBITDA was up $2M in absolute terms. Sears EBITDA margin up to 14.5% from 10.1% in Q2:2006. Margin improvement came from BOTH GROSS AND SG&A MARGINS.

Interest expense increased as the company is now carrying $115M in debt. D&A increased due to the acquisition. The 10Q stated that D&A from the PCA acquisition will be $14M annually.

From a purely financial perspective, I would say this quarter was substantially better than it looks. The Picture Me business will probably continue to distort earnings for another few quarters as CPY’s management starts to upgrade to digital, raise prices, and starts cutting costs – basically they will follow their Sears game plan from a few years ago. Negative sitting continues to be a concern, however average prices per customer are still rising and EBITDA is still growing.

In the next few posts I will highlight key points from the conference call, talk about the massive insider buying activity, and how I am looking at valuation.

* 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.

New CEO Appointed and INFS no longer on the selling block

As I have not posted in a while, I am going to catch up on major changes in the companies I analyzed for this blog and are in the Offthebeatenpathinvestments Best Ideas Marketocracy portfolio (and more importantly my own portfolio).

Looks like INFS appointed a new CEO and decided that the acquisition offers it received are not good enough. I am not particularly surprised that no deal went through and I wrote that I expect that much in one my original posts on INFS:

“ ….my feeling is that it would be hard for any CEO to justify buying a money losing operation even if he/she feels there is value to be added. Also, since Caxton is actively involved it’s highly likely that they would be looking for a very high premium – again, something most CEO’s could not justify to their boards, shareholders, or analysts.”

I don’t really have much more to add on this topic so will move on to the new CEO, Robert “Bob” O’Malley. Its amazing what a few hours and Google can turn up!

Here is an article talking about O’Malley’s departure from Tech Data. This article does not give me much confidence in the new CEO of INFS. It's full on “cover your ass” complements and ambiguities but short on any results attributed to O’Malley.

Phrases like this usually make me cringe: “O'Malley was an anchor” ……” He was driving a lot of the initiatives” …..WHAT THE HELL DOES THAT MEAN?

Here is O’Malley’s work history prior to INFS that I pieced together:

3/2005 – 9/2007, Tech Data -- VP of Marketing
10/2002 – 3/2005, UNKNOWN
10/2000 -- 10/2002, Immersion (IMMR) – CEO
6/1999 – 7/2000, Intermac (sub of UNA) -- President
1998 – 4/1999, MicroAge -- CEO of Pinacor
5/1995 -- 1998, MicroAge -- President of MicroAge Data Services
1/1976 – 5/1995, IBM -- Left as President of Desktop PC division

O'Malley's track record gives me even less hope than the praises of his Tech Data colleagues.

O’Malley was effectively fired from Pinacor in 1999 after being the CEO of that company for little over a year. He was actually moved to the Board of Directors but that’s what small companies do to CEO’s whom they want to fire to protect their public and industry reputation.

On his watch, Pinacor lost its biggest customer, Compaq, which accounted for 26% of sales at the time. It should be noted that Compaq fired a lot of distributors as it cut the number from 39 to 4. It should also be noted that Tech Data was a direct Pinacor competitor (they were one of the 4 that Compaq kept) and did end up hiring O’Malley which is somewhat of a sign of confidence. (http://www.crn.com/it-channel/159402582)

Still, Pinacor was one of the biggest in the business at the time and it’s the CEO’s job to protect key relationships.

O’Malley than turned up as President of Intermac and resigned 1 year later to move to Immersion. He lasted 1 year at Immersion. I was not able to find any more info on his employment between Immersion and Tech Data.

As I see it, this guy fashions himself as a CEO but was only able to last at management jobs at IBM and TechData – two behemoths where underperformers can slip through the cracks for years. His did not last more than two years at 3 small technology firms that he was given to run.

From his track record, there is not one shred of evidence that this guy can manage -- much less turnaround -- a small, money losing company that faces an onslaught of competition. Running INFS is a completely different challenge than a cushy marketing job at Tech Data or a management job at the mother ship, IBM.

I can’t believe this guy was actually compared to Michael Dell at one point.

This appointment basically says that either 1) Caxton did not do as much research on O’Malley as I did (which I seriously doubt) or 2) INFS is in so much trouble that O’Malley is the only guy they can find to run the company.

Either case is not an attractive proposition for INFS shareholders.

This appointment is making me seriously rethink my investment in INFS and I am considering cutting my losses.

* 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 -- “Final Thoughts”

In the previous 5 posts I talked at length about the problems faced by INFS as well as the attractive aspects of an investment in the company.

INFS continues to see prices for its products drop by double digit rates due to roughly 30-40 competing projector manufacturers as well as the ascent of LCD/Plasma televisions.

However, INFS is now controlled by a hedge fund which is the firm’s largest shareholder and will be picking the new management team and setting the new policies, the company has a fortress balance sheet, and it appears that the stock is trading at a discount to the combination of tangible liquidation value + non-tangible assets that certainly posses value for an acquirer.

If there is value for the shareholder, why didn’t anyone purchase INFS when it effectively put itself up for sale a few months ago?

I don’t have a definitive answer to this question but my feeling is that it would be hard for any CEO to justify buying a money losing operation even if he/she feels there is value to be added. Also, since Caxton is actively involved it’s highly likely that they would be looking for a very high premium – again, something most CEO’s could not justify to their boards, shareholders, or analysts.

There will be more key data points coming from the company within the next 6 months. The biggest in my opinion will be hiring of the new CEO and CFO by Caxton and the plan that will be outlined to other shareholders to turn the company around. There will also be a new proxy filled and it will be key to see how the two top people at the firm will be incentivised. Will their biggest gains come only if shareholders benefit (mostly long term restricted stock based compensation plan) or will they be awarded with mostly cash salaries and large parachutes?

Another two key data points in the next few quarters will be the trend in Gross Margins and G&A expense. Obviously these are key metrics for any company any time, but in the case of INFS the trends in Gross Margins and G&A expense will make the difference between survival and bankruptcy.

On the last quarterly call the recently departed CFO stated that gross margins took a 360bps SEQUENTIAL hit due to the company clearing out inventory of IN72 projectors and selling a lot more of the lower price point IN24 and IN26 projectors causing sequential volumes to go up 15% while revenue was down 7%. The CFO stated that they “aggressively sold these products” which of course in the real world means: “CRAZY EDDIE HERE, AND EVERYTHING MUST GO. SALE, SALE, SALE!!!!!!!” While aggressive discounting of course kills margins, the positive is that it clears the deck of old products and turns inventory into cash which the company needs right now. While not as clearly, that much was stated by management on the last call.

The company also needs to cut G&A expense immediately. While there is always a degree of uncertainty around new product introductions which management has no control over, expenses are completely under management’s control. The company needs to cut expenses and needs to do it immediately – this is where a new CEO/CFO team can make an immediate impact. Again, on the last conference call guidance was for $14.5M - $15.5M in quarterly G&A as the goal by year end from the current level of $19.2M in Q1:2007. It will be up to new management to cut expenses without cutting R&D. Cutting costs is great, but where to cut with manufacturing and call centers already outsourced?

One place where I think some cuts can be made is in the development/support of the dealer network as well as some general “home office” jobs. As I understand the business model, the company spends a lot of time training and supporting dealers that sell their product. This is a key function of course, but there maybe room to trim the least profitable dealers (which will mean giving up sales) and the people employed to support them (more profits from fewer dealers). This is by no means a given and in my experience the odds are against any new management team faced with this task.

So is INFS going to be added to the Watch List or the Best Ideas portfolio?

Based on my previous post, I think INFS is trading at a substantial discount to what an acquirer would be willing to pay for the company. The company is now run by the largest shareholders and it the company has the balance sheet needed for such a massive turnaround. Therefore I have added a 1% position in INFS to the Best Ideas portfolio. You will recall that my target for this portfolio is to have 10 full positions at roughly 8% each and 10 smaller positions that will hopefully be increased to full positions eventually.

What will I be watching for in the next few quarters?

I will be looking for a sequential bounce in Gross Margins as the company has apparently moved out the old discounted inventory and should see an increase as it starts selling more higher priced products. I don’t think the company is close to hitting the long term targeted GM of 16% to 18%, but not seeing an immediate increase would be a very bad sign.

After new management is hired I will be looking for declining G&A – are they heading towards previously guided $14.5M to $15.5M? What is management doing to cut expenses immediately?

Details of new CEO’s and CFO’s long term compensation – is it long term stock based or mostly cash?

I will also be looking for trends in revenue and average prices in Q3 and especially Q4. The projector industry is seasonal with most of the sales done in Q3 and Q4, with Q4 being by far the most important. Right now the stated plan is to migrate customers to higher margin IN24+ and IN26+ as well as new product launches like the IN10 ultra mobile projector. If after clearing out inventory the company can’t increase Gross Margins and show at least some initial increase in sales, there is no reason to own this 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.

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.

CPY -- Final Thoughts

To sum up, the bullish case is that management is shareholder friendly (as they are major shareholders) and they have had a lot of initial success turning the company around. The bearish case is that they are still in the process of a turning around, the recently hired CEO left, and they have recently announced an acquisition that has sent their shares soaring erasing all of the margin of safety.

I think it’s pretty obvious that I like this company and like what management is doing to turn things around, but when I consider all the things that can go wrong I can’t justify the current share price.

For starters, acquisitions are usually a bad deal for shareholders. Big acquisitions, like doubling the revenue of the company are even less likely to work out. Big acquisitions in an industry facing a lot of headwind is usually suicide.

Also, its not clear that management can execute the conversion to digital at PCA as smoothly as they did at CPY (I am taking it as a given that they will try to convert to digital). Yes, they are doing it a second time and will not make the same mistakes. But, they must convert 3x as many stores (PCA’s store count is 3,000 vs. 1,041 for CPY) which are more spread out geographically (PCA has stores in Europe and Mexico as well as Canada and U.S.). There are also many times more employees to re-train and supervise.

Furthermore, I think that the market is assuming that after a few years and the conversion to digital the margins of the two businesses will be identical so cash flow will at least double. I am not going to waste time speculating about this until CPY provides more information but with 3x as many stores and identical revenue this means that per store sales are 1/3 at PCA compared to CPY. I have a hard time seeing how they will be able to squeeze the same margins from each Wal-Mart store at 1/3 sales per store.

Plus, its not a given that CPY’s Sears business is out of the woods yet. They are still seeing sitting fall by double digit rates. They are taking on this huge integration as well as substantial debt load, while they are still turning around their core business. Needless to say that they will have to execute perfectly to meet expectations implied by the current share price and hope that consumer spending does not contract.

What would be the a good entry point given all these concerns? Again I am not going to waste time with this until there is more information but here are some basic calculations:

EBITDA from Sears in 2009 $44
EBITDA from Wal-Mart in 2009: $22 (Wal-Mart at ½ margin of Sears)
Maintenance CAPEX $10M
Interest Expense on $100M $8
Taxes: $0 (assume NOL’s since they are buying PCA out of bankruptcy and should come with losses)
Net Income in 2009: $51M

2009 S&P 500 P/E = 14.1x
Implied Priced = $106 per share

If the stock trades down to $64 per share which is the $106 implied price minus 40% for maring of safety, than I will consider buying even if there is no new information about PCA.

Things I will be watching for next quarter is the 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 operations and terms of the debt that will pay for PCA will be watched for and will provide additional info.


* 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 -- “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.

CPY -- “Da Bears” Part I

Despite the three part bullish case for an investment in CPY there are some real areas of concern. The one sentence bearish case would be that the company is still experiencing double digit sitting declines, the CEO hired in 2005 to lead the company abruptly left in 2006, and the recently announced acquisition represents a large unknown.

No matter how long I look at the improvement in operations over the last few years and how rational and shareholder friendly the board and management action have been, I still can’t seem to ignore the elephant in the room -- that the number of customers walking through the door has been falling at double digit rates for the last two years. In the most recent fourth quarter, which generally represents 35% of annual revenue and 100% or more in annual net income, the company saw seating decline by 12% and in the year before sitting fell 17% (full year sittings in 2006 fell more than in 2005 but the fourth quarter is the only one that matters). Based on announced first quarter revenue guidance, it looks like we can expect more decline in sitting volumes.

I believe the company when they say that the decline in sittings is orchestrated and that the customers they keep are far more profitable than the ones they lose but I still have a hard time seeing how earnings are going to increase at any meaningful rate. Eventually the company’s undesirable customers will run-off meaning that the growth in revenue per customer will fall drastically. I also have a hard time envisioning the customers that do stay accepting yearly price increases at any meaningful rate.

With no wind in their back, to show any semblance of growth this company has to constantly introduce new products and price their products perfectly, essentially they have execute flawlessly -- this is a rare occurrence and I would not bet on it. Without growth there is no multiple expansion.

Another disconcerting aspect of this investment is that the newly higher CEO Paul Rassmusen suddenly left the company. This seems odd in that he would leave a senior position at Kodak, relocated to take the job in mid-2005 and than leave a year later. I would be much less concerned if he left for a ginormous pay package at another company, but based on Google searches I can’t seem to find where he landed. A publicly traded company would have issued a press release. The CEO was immediately replaced by Renato Cataldo who was originally brought in as a consultant during the early days of the re-org and took a position in 2005 as COO. I am not sure exactly how bad of a sign this is since its obvious that the guys at Knightspoint are still making the big decisions, but it is certainly not a positive to have such a high rate of turnover at the top post.

On top of all this, professional photography is still a discretionary item and demand will fluctuate with overall consumer spending. Yes, you are still going to get pictures of the new baby taken to send to grandma but you may only pay for half as many prints if times are tight.

Also, much like FTAR (http://offthebeatenpathinvestments.blogspot.com/search/label/FTAR) the company still only has one customer and has much less control over its destiny. However, that may be changing ……


* 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 – “Da Bulls” Part III

The first two bullish posts covered the company’s shareholder friendliness as well as the company’s vision for the future. In this post I will cover CPY’s cash generation ability and why I think cash generated is higher than stated GAAP net income.

If the company can maintain its current level of revenue and profitability, CPY’s can generate $44 million in EBITDA.

Revenue $294
EBITDA $44

From here it gets interesting as reported depreciation/amortization was $17 million but CAPEX was only $3 million. The company actually expected to have $5 million of CAPEX in 2007. It’s a little difficult to guess the exact level of CAPEX going forward since the company basically threw out a lot of its old equipment which consisted not only of cameras but the equipment needed to print the pictures and fill the orders. However, it looks like managements guidance for CAPEX is $5 million at least for the next few years. At $5 million of CAPEX and a 40% tax rate applied to this higher cash flow …..

EBITDA $44
CAPEX $5
TAX $15.6
FCF $23.4M or $3.67/sh
Reported GAAP Net Income for 2007: $16M or $2.60/sh

I think my estimate of FCF is actually conservative by about $5M for at least a few years since the company will pay less taxes on the lower net income than what I calculated here.

What about working capital? Interestingly, it seems that unlike the department stores that they do business in which must spend cash upfront on inventory to growth, CPY actually has NEGATIVE working capital. This largely comes from the fact that they carry almost no inventory and very little receivables but they do take deposits upfront from their customers (there are broken out in the 10K but are probably lumped into “other CA” everywhere else).


* 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.