FTAR.ob -- 3Q Earnings Analysis

FTAR announced Q3 : 2007 earnings last week. Here is the quick breakdown of reported earnings

Q3:2007
Rev $148 (down 3.8%)
GP $44.2 (GM up to 29.9% vs. 29.8% last year)
EBITDA $7.2M (down from $7.7M last year, EBITDA margin down to 4.9% vs. 5% last year)

YTD 2007
Rev $455M (down 6%)
EBITDA $32.9M (up from $30.8M)

When I last wrote about the company I stated that

“next quarter I will be watching for the trend in SSS, K-Mart closings, and EBITDA margin improvement”

While it looks like the sales decline is slowing, there is still a sales decline with SSS at Shoemart down 1.8% and store closings of 0.4%. While it is disappointing I can’t say that I am entirely surprised taking into account the warm winter and consumer spending problems at the low end shopper.

The big disappointment for me was the decline in EBITDA margin. FTAR has been able to offset the decline in sales with continued operating improvements but it looks like they finally ran out of places to cut cost. Not even the best mangers can keep swimming against the tide of negative sales growth – looks like this is the first quarter where this has caught up with FTAR.

So …..sales are down, store count is down, warm weather means less need for new shoes, FTAR’s customers have less money in their pockets, and cost cuts are not keeping up with sales declines ……WHO CARES?

FTAR is still going to generate somewhere between $15M and $25M in free cash flow in Q4 of 2007 and another $30M - $60M in free cash flow in 2008. It will sell its headquarters for north of $20M and already has $15M in cash. With K-Mart having to buy all its inventory at book value at the end of 2008, FTAR is worth somewhere between $5 per share (worst case scenario which assumes some very bad developments) and $8 per share (best case scenario that is way bullish).

In the following quarter, my expectation is that sales well be down roughly 5%. The thing I will be watching is how badly EBITDA margins get hit. Will they continue to fall or will management continue to work its magic.

* 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.

Watching the sun set ......

While I hate classifications like "value investor" and "growth investor" because by definition every investor is a value investor, if I had to put myself one group I would be in the value camp. I don't think its a stretch to say that just about every value investor is keeping an eye on publicly traded homebuilders as they have been decimated and there will undoubtedly be a very attractive investment opportunity.

The question is .....when?

I will not attempt to predict a bottom in the housing market and homebuilder shares ....not now, not ever. What I will do is share a short "anecdotal" list of things I am watching for to let me know that we are closer to the bottom than the top:

1) multiple bankruptcies of the weakest most leveraged players
2) insider purchase activity at the leading players in the industry
3) large net income losses and massive write-downs
4) largest players in the industry trading below $10 per share
5) politicians become "unanimously outraged" at something
6) nutty valuations

While this list is not in any specific order, my experience has been that when the bubble bursts and things really get hairy, the weakest players are the first to go. We got news on Friday that LEV has filled for Chapter 11. Also, the good people at Calculated Risk report that BZH is having a hard time paying some of its sub-contractors -- not technically a bankruptcy but close enough. My guess is that CHCI and TOA are next.

Points #2 - #4 are fairly straight forward. It looks like the chairman of NVR--probably the most attractive publicly traded homebuilder--just bought a bit over $1M in stock on the open market. Also, I know that I have provided zero evidence that a sub $10 stock price is anything but an arbitrary number and has any meaning what so ever but my experience has been that when this happens across an industry it's a good time to start looking and doing some non-arbitrary research.

Point #5 is a bit trickier but I am basically watching for bipartisan agreement that something bad has happened. When politicians can loudly agree on something it means that the problem has fully materialized and the public has experienced all the consequences -- meaning that the problem is old news, has been priced into the market, and savvy investors have started looking ahead. While its hard to state exactly what the government will do regarding the housing implosion there is no shortage of politicians giving their unanimously outraged opinions on the issue. Watching the Bernake testimony this Thursday reinforced the feeling that politicians are unanimously outraged at what has gone on and are itching to do something that can be used as tangible evidence to their constituents that they are outraged and are doing something about this outrageous outrageousness.

Point #6 should not be on this list because there is nothing anecdotal about it. This is the hardest thing to see and requires a lot of non-arbitrary number crunching. I will be doing more work on NVR (and posting it here) and maybe one or two other publicly traded homebuilders to get an idea of what price represents a truly crazy valuation.

Using my list, if one can apply the old adage that "its always darkest before dawn" to the publicly traded homebuilders than we are watching the sun set and its getting noticeably darker outside.

* 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.

Earnings estimates for BOOT going up .......

Looks like the only analyst that publishes on BOOT finally raised his/her estimates.

Full year 2007 EPS estimate increased to $1.17 from $1.12
Full year 2008 EPS estimate increased to $1.32 from $1.29

Based on my last post on BOOT, I think these are to conservative. One of the most often cited behavioral biases effecting equity investors (and analysts) is under-reaction to new information. One of the reasons I am bullish on BOOT is that I believe that after years of underperformance, investors are not changing their expectations fast enough and the market price does not fully reflect the strong earnings momentum that the company has enjoyed.

* 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.

Thoughts on BOOT article and furniture stocks

A nice article about BOOT from the The Oregonian. Thanks to joeletaxiiii from the yahoo message boards for the link.

The article briefly discusses how BOOT was able to engineer a turnaround over the last few years by getting out of low priced, low margin, commodity like businesses and re-focusing itself on producing super premium products and reinforcing its brand names.

While its nice to see this company get some ink, I discussed most of these points in my initial posting on BOOT. Still, this article did get me thinking about what other industries are prime candidates for reworking their business model and moving upmarket.

One industry and a number of publicly traded members of that industry that seem to be perfect for such a change are U.S. based residential furniture manufacturers. This industry has been decimated by foreign competitors that produce a much lower quality product but price it so cheap that it makes sense for the consumer to replace their shaky tables and squeaky sofas every few years rather than paying a premium for a higher quality product.

However, I believe there will always be a large opportunity for the higher end producers as everyone eventually gets older and wealthier and at some point you simply want to own a quality product that will last a lifetime and you are willing to pay a premium for it.

I think there is a big enough space between the low end and the super super high end parts of the market for some of the U.S. based manufacturers to dominate and produce a sufficient return on capital. A couple of names in this beaten down sector look interesting but require more work are FBN, ETH, and HOFT.


* 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.

NO ONE CARES ABOUT BOOT!

Here is a question ...if a company reports 30% YoY operating earnings per share growth and no one hears it, did it really happen?

When I last wrote about BOOT I stated that going forward I will be looking 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 also stated that “if BOOT reports similar sales growth in the seasonally important 3^rd quarter than estimates will surely go up and the stock will have a strong up side move.”

By just about every measure, BOOT reported impressive numbers in their fiscal 3rd quarter. The stock was up as much as 4.5% midday but finished up 1.2% with only 9,100 shares trading hands .... no one cared!

Revenue came in up 12% and ahead of the company’s long term growth target of 8%. Work boots were above average with 20% YoY sales growth and recreational boots came in at slightly below average at 7%.

While the revenue growth is very nice, the real jem is continued margin improvement due to good inventory management. Gross margins came in at 40.1% and up 10bps YoY (the reported GMargins are 39.1% however this includes Dep&Amort expense). Operating expense grew slower than sales at 9.1% causing EBITDA margins to come in at 14.4% and up 70bps from last year’s Q3.

For Q3:3007, GAAP NI was $3.3M and up 30% YoY, eps came in at $0.52 (beating the single analyst estimate by 4c) and up 27% YoY. Operating EPS for the first nine months of 2007 is $0.77 up 28% YoY (actual eps in first nine month of 2006 was $0.67 however that includes a 7c tax benefit).

The balance sheet continues to be pristine with one small black mark. Cash is $4.7M with no debt. Inventory grew slower than sales. The one black mark is that A/R are up roughly 19% YoY vs. sales up 12% -- generally not considered a good sign but there is a lot of quarter-to-quarter noise in those numbers.

Revenue $36.87
GProfit 14.8 (reported GP includes effects of Dep, this number adds back dep)
SG&A 9.5
EBITDA $5.32

L9M EBITDA $8.51
L12M EBITDA $12.6

Q4 EPS estimate $0.45 (this is my estimate, analysts are currently at $0.39 but that is before the earnings announcement so I assume these will be increasing). To get here I assumed 10% revenue growth, small improvement in GMargin and EBITDA margins of 13.7% which is 75bps ahead of last years Q4.

2008 EBITDA Estimate $15.1
2008 EPS Estimate $1.35

So at this point you have BOOT trading at roughly $17.5 with 2008 estimated earnings of $1.35 which gives me a very reasonable forward multiple of 13x 2008 estimates. While all signs point to the company growing operating earnings 30% this year, this growth rate will slow down next year.

Assuming the positive upside momentum continues, I think a fair price to pay is somewhere between $17 to $20. I am not wildly excited paying 13x-15x forward cash earnings but would allocate new money to this stock since you do get a growing company, with premium brand names (ask any avid hunter about Danner boots) with growing margins, and a fortress balance sheet.

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. I will also be watching the change in A/R relative to sales.

To answer my own question posted in the beginning of this entry.....It did happen and I hope no one hears it. Continued ignorance about BOOT increases the probability of the stock trading to or below my next buy point at roughly $17.

* 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.

Lack of posting .....

To the 5 people that are still regularly checking this blog .....thank you and I apologize for the lack of posting. I have been running at a pretty hectic pace lately with a lot of non-work and non-investment related issues taking up my free time.

So it appears that my blog schedule will be much like my personal investment schedule with periods of much productivity (not necessarily buying or selling stocks but researching) interjected with periods of little activity with little news flow from current holdings and little to be excited about in the way of new ideas.

There has been a lot of activity in the stocks I have written about on this blog:

INFS -- reported earnings today 10/30/07 and the stock popped 14%. Did not listen to the CC but my initial read is that things are heading in the right direction and the company could post a profit in the next 2 quarters.

BOOT -- reported earnings today 10/30/07 after market closed. By all indications the company blew away the quarter with something positive in every category. It will be interesting if the stock will move tomorrow considering there are some clear signs that NO ONE CARES about this company. There were only 300 shares traded today coming into the report which is low even for this company.

JCTCF -- reported earnings today 10/30/07 before the market opened. Skimmed over the release and while it looks like results were mixed, the story stays intact with higher margin non-wood products taking larger and larger portion of total sales and profits and still showing positive growth.

FTAR -- this is "the little engine that could" with the stock incrementally moving upward. The company has had zero in the way of newsflow since the last earnings release that I covered here but my guess that sales will be down more than the 9% decline booked last quarter. FTAR is right on the front lines of the recession selling low end footware to the lower end consumer. Plus the whether has been unseasonably warm which effect sales negatively.

CPY -- this is the stock with the most activity since I last posted on it on 6/11/2007. First, the stock is down to $33 from $71 on June 11th -- I bought for my personal account at $45 and $40 and will be looking to buy more. Second, the company completed the PCA acquisition and has started rolling out the digital upgrade. Third, Knightspoint has increased their ownership from 17% to 28% as the stock has fallen. I plan to devote more than a few post in the near future to 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.