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.

Things that make me happy......

Recently ran across an interesting article talking about the trend of nice restaurants putting a table in the kitchen. Here is a relevant quote

In the United States, the honor of the first restaurant to feature a kitchen table is claimed by Charlie Trotter's restaurant in Chicago.

"The Kitchen Table dining experience is a way to make everything transparent," Trotter said in an e-mail.
"In the old days, seeing inside the kitchen was forbidden. I wanted to do the opposite - stand it on its head - not only see and tour the kitchen but have the opportunity to dine inside the kitchen. We try to elevate and showcase the 'behind the scenes' and the high level of professionalism that exists inside a kitchen."

Trotter's kitchen table, seating four to six, was introduced more than 20 years ago and is now the restaurant's most requested spot.

How is this related to investing? and why does this make me happy?

Well, its this king of thinking that I believe separates the truly great investors and entrepreneurs from the mediocre. To have the ability to go completely against every conventional wisdom and current trend is in my opinion one the most important characteristics that the truly great investors have.

It also makes me happy to know that there are people out there thinking up new ideas and willing to take risks to be successful ......

BOOT -- 2nd Quarter Earning Analysis

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”

BOOT reported on July 30th and while I am in danger of plagiarizing myself it looks like the quarter was mixed but with more positives than negatives.

The blow out was on the top line with total sales up 14.6% and substantially ahead of the 8% set by management as the de facto benchmark. Sales to the work market were up 6% and up 26% to the outdoor market with new products driving sales.

The only black mark was gross margin which came in at 39.2% and was down 60bps YoY due to an inventory write-down. SG&A margins came in better than last year at 33.3% of sales vs. 35.2% of sales in Q2:2006.

EBITDA was up 40% YoY with EPS up 36% when adjusted for an 8c tax related gain in Q2 last year. Looks like analysts don’t expect the strong YoY eps growth to continue in the last two quarter of the year which account for almost 75% of earnings. Despite two consecutive earnings beats analysts did not budge their 2007 estimates which are currently at $1.17 per share.

I bought a tiny 1.5% position in BOOT in the Best Ideas Marketocracy portfolio at $17.13 and at current prices of roughly $20 per share I am not compelled to add more or to sell. While I am very glad to see the stock continue to surprise on the upside I think the shares are fairly valued and don’t provide much margin of safety. If the stock pulls back to $17 per share I will add another 1% to the Best Ideas portfolio and hope that the momentum of the first two quarter carries into the third quarter.

If BOOT reports similar sales growth in the seasonally important 3rd quarter than estimates will surely go up and the stock will have a strong up side move.

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.


* 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.

More pain on the way?

I have been thinking a lot about the speech given by Robert Rodriguez, which was the subject of my previous post. With perfect timing the LA Times ran the following story ominously titled "Foreclosures may spur price drops: On L.A.'s edges, soaring repossessions could set off a downward spiral." (may require a free subscription)

Why shouldn't I just file this story under what I like to call the "new tires effect" which describes a strange phenomenon where I only notice, remember, and take interest in ubiquitous tire commercials exactly 1 week before I get new tires and than promptly forget them after the new tires are installed?

The reason why I think this story is of particular interest and why it dovetails nicely with the speech given by Mr. Rodriguez is because it describes carnage in the real estate market which has not yet occurred and I believe many investors (including myself) may not be factoring into their models for housing related stocks -- home builders, mortgage REITs, mortgage insurers, regional and super-regional spread lenders like WM.

The thing that made this story particularly interesting and different from many of the other "pain in the real estate market" stories that I read almost every day is that the future tense is used as opposed to the present or the past. The authors -- using data from First American which I believe is the same source that Mr. Rodriguez quotes in his speech -- make the point that the cracks are just starting to appear.

The article argues that the marginal ZIP codes in California that should be the first in the nation to experience the real pain have not entered the cycle of spiking repossessions that swell lender's inventories of unsold homes causing them to flood the market which in turn forces individual sellers to lower prices.

Here is an a quote that sums up the tone of the article nicely:

"We're going to have a bear market in housing for a while," said Christopher Cagan, director of research for First American CoreLogic in Santa Ana. "It's going to be bad to be a seller or someone forced to refinance in the impact zone."

Notice that he says that its "GOING" to be bad to be seller which I believe is different from the common perception that right now is the worst time to be a seller and we are now at or close to the bottom of the market and things will turn around before soon.

As I mentioned in my last post, I am taking this opportunity to better educate myself on publicly traded homebuilders. I think homebuilders represent great long term investments since they have a built in growth rate of 6% (3% from population growth and 3% from inflation), their product will never be outsourced, and the industry is still unconsolidated so the top guys can easily grow at 10% to 15% for years to come by taking market share and/or consolidating. However, it seems that the wises thing to do for anyone looking at homebuilders is to adjust their models for the possibility of the real estate market taking longer than a one or two years to recover and adjust their required margin of safety accordingly.

Absence of Fear

As as a portfolio manager I read a lot of market commentary and market research written by other money managers and the elite of Wall Street.

I would say that 99% of "macro" commentary/research that I read falls into one of two categories:

1) this is really good stuff because it reaffirms my opinion, 0r
2) this makes sense but I don't agree with it and the author did not present enough evidence to change my opinion

Once in a while I am lucky enough to come across a piece that looks at a commonly discussed topic and actually provides some original thinking.

A friend forwarded me this text of speech given by Robert Rodriguez to the CFA Society of Chicago. Mr. Rodriguez is the President and CIO of First Pacific Advisors and runs large equity and fixed income mutual funds as well as institutional money. This guy has been managing money longer than I and most of the people currently running money have been alive and has seen many a cycle in his career.

In this speech Mr. Rodriguez covers everything from subprime to private equity to energy prices and as you would expect for a guy holding 40% cash and 20% energy stocks in an equity mutual fund he is pretty bearish.

The great insight for me came in the section titled "Securitization Contamination." All the usual suspects of greed by banks and complacency by rating agencies are there. What I did not realize is that all the MBS models used by rating services assume a ZERO chance of home price DEPRECIATION for anything more than a year or two. To a certain extent this makes sense and based on the recent 50 years of history home prices falling or staying flat in nominal terms for more than a year or two would really be a black swan event.

But is it impossible? Mr. Rodriguez makes the argument that it is in fact possible to envision home prices falling or staying flat in nominal terms for an extended period of time. And if this happens or the market start believing that this can happen than we will really see blood on the streets.

How did this insight change my thinking? For one, I have started educating myself about mortgage REITs and homebuilders by reading annual reports and trying to get my hands around the accounting. Up until this point, I have thought about valuation and margin of safety with the mindset that there will be some pain for a few years but things will revert back to normal by around 2010 give or take 6 months and the strongest players will emerge stronger and with more market share.

Now, I have no choice but to model in the possibility of a serious contraction in mortgage lending and with it a necessary decline in housing starts for a longer period of time than a couple of years. I will have to adjust my margin of safety to assume that what happened in manufactured homes market where lenders backed away after gorging themselves and have not returned after nearly 5 years can happen in the broader housing market.

There is way to much other good stuff in this speech to summarize, so I will strongly encourage that you spend 10 minutes and read the entire thing. But here are a few tastes to get your appetite wet .....


"[we asked] what if HPA [home price appreciation] were to decline 1% to 2% for an extended period of time? They [Fitch's MBS rating group] responded that their models would break down completely."

Here is another great line .....

"when others are having headaches and need Tylenol, on other words, liquidity, we will provide it to them but at a very, very high price"

Keep in mind that many of the people in the audience were the "others" he was reffering to.....Ballsy!

And the coup de grace for anyone thinking that this guys is just a talking head or a pundit trying to capitalize on a correct market call .....

"We are willing to bet our firm and our reputation to be right. This may lead to investor defections, but that is the price one has to be willing to pay to be right."

This guy is the cream of the crop of investment business, both for his investment acumen and willingness to take career risk to do right by his clients. I feel lucky to be able to watch and learn.

FTAR .OB-- 2Q Earnings Analysis

FTAR announced Q2 earnings today and filed the 8K, actually this company does not announce earnings to any of the major news wires.

Before I dive into the earnings analysis here is what I was looking for when I last posted on the company:

"I will be watching for in the next earnings report are the trend in SSS, trend in K-Mart closings, and Gross and EBITDA margins."

I would say that the latest quarter was mixed but with more positives than negatives.

Looks like overall sales were down 9% YoY with SSS at Shoemart (these are the K-Mart stores that make up 98% of revenue) down 8% with Rite-Aid reporting a horrific 14.5% decline. Looks like no Shoemart stores were closed in the quarter which is good news. For the first six months total sales are down 5%.

The company blamed weak Easter and poor April sales...blah, blah, blah. When I initially posted on the company I used a 10% sales decline as the "Worst Case Scenario" assumption. If things continue at this trend we may hit that worst case scenario.

However, the rest of the report was nothing but good news.

Gross margin was up 80bps to 35% in the quarter and up 90bps to 33% for the first 6 months. This is tracking ahead of my "Best Case Scenario" assumption of 50bps improvement in GM.

SG&A expense fell more than revenue declined providing 50bps increase in margins for the quarter. For the the first six month SG&G as % of revenue is at 24.7% for a 30bps improvement. This is improvement is more or less in line with my Best Case scenario assumptions.

The margin improvement provided for positive EBITDA growth of 1% to $23.6 negating the 9% sales decline. EBITDA is basically free cash flow for FTAR since it does not pay taxes, have any debt, or CAPEX.

If the company can continue to offset sales declines with margin improvements, I believe my previous target price range of $3.5 - $7.5 per share is still valid and provides substantially more upside than downside at current price levels. As I mentioned before, the free option on the contract extension with K-Mart becomes less valuable with each passing day and I have personally assigned it a zero dollar value at this point.

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


* 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.