Friday, July 30, 2010

7/30/10 Midevening Report: GDP goes down again, claims it likes the taste

The big macro news today was that GDP slowed to 2.4% growth in Q2, that is until it's revised down next Q to keep up with the administration's "hold the shock and hope for no awe" strategy.  This strategy was further evident in today's release as GDP from the past 3 fucking years was revised downward because apparently the Commerce Department is still figuring out how to properly use the "solver" function in Excel.  The peak to trough decline is now seen to have been a 4.1% decline instead of a 3.7% drop, which officially makes this recession the worst since the 1940s which was so long ago that Abe Vigoda had only been dead for a decade and muff guessing still referred to fashion designers trying to figure out the latest in hand warming trends.

Surprisingly though, and in direct opposition to the downward revision strategy,  last quarter's GDP was revised up to 3.7% from 2.7% which makes today's number even worse.  It also goes against every fucking rule of manipulating data since, you know, the whole point of manipulating data is to use it to your advantage but apparently the new guy at the Commerce Department must have missed the memo while he was busy figuring out how to put a cover sheet on his fucking TPS report.

So GDP was below guesses of 2.6% growth and was mostly hurt by a trade deficit growing wider than the Octomom's cervix with imports spiking up 28% which is the largest jump in 25 years since the run on french cookies in the mid 1980s, consumer spend slowing to only 1.6% growth after growing 1.9% last Q, and a renaissance of common sense.  The one bright spot Money McBags could find was Jasmine Waltz, and the one bright spot he could find in the GDP report was that the equipment and software category grew at an annual rate of 21.9% as businesses need to buy a bunch of shit to do what people used to do.  The slower GDP growth comes a day after Fed Bank of St. Louis President James Bullard published an academic paper warning of the potential for the US economy to hit a period of deflation and turn in to Japan from 20 years ago which would be bad for everyone but the bukakke industry.

GDP is now slowing down, the economy has lost 8.4MM jobs, and Christina Hendricks still has not agreed to make a late night Skinamax movie, so any hopes of a speedy, stimulus driven recovery are becoming slimmer than Amy Fisher's parents hopes and dreams. Money McBags is sure the Fed will announce something soon to try to kickstart the economy, but based on the fact that they have been in existence for 100ish years and still haven't figured shit out (largely because economics is a more full of shit field of study than proctology), he's not holding his breath (though he would gladly hold anything of Hayley Atwell's).

In other US macro news, the University of Michigan's consumer sentiment index fell to 67.8 which is the lowest level since November and 10% below the 76 number it registered last month (though to be fair, it registered such a high number last month because it had put the thermometer next to the heater in hopes of being able to stay home from school).  As always, Money McBags has no idea what the difference between a 67.8 and a 76 is other than 8.2 so while market seems mildly happy that the 67.8 came in at .8 better than analysts' guesses, Money McBags is pretty sure an 8 point drop is worse than a .8 outperformance, even if it were measured on some weird logarithmic scale.

Finally in macro news, the Chicago PMI defied all common sense, data, and laws of supply and demand and rose by more than guessed for the month of July.  The PMI jumped from 59.1 to 62.3 while economists had guessed it would fall because, well, because we're in a fucking recession.  Interestingly enough, readings above 50 signal expansion so despite GDP slowing down and consistently high rates of foreclosures and unmeployment causing the midwest to be bleaker and more run down than Warsaw in 1945 or Barbara Walter's vagina, Chicago area manufacturing continues to grow.  It is as perplexing as the 9 dimensions needed for string theory to hold or the Lifetime channel. 

Internationally, Moody's cut Iceland's rating outlook to negative, said they they could cut it to junk, and warned Iceland that they better "check themselves, before they Reykjav√≠k themselves, because fucking with foreign currency loans is bad for yo' health."  Iceland defended themselves by properly pointing out that Moody's is a bunch of asshats and by saying they are a long way off from defaulting on any debt payments.  When asked what a "long way" was, Economy Minister Gyfli Magnusson simply replied that he'd like to buy a vowel before quickly mushing off on his dogsled.

In the market, MRK's profits fell 52% due to merger and restructuring charges associated with buying Schering-Plough and redoing the company cafeteria.  Without those one time charges the company beat analyst eps guesses by $.03 and earned $.86 on the Q but the stock dropped as the company trimmed their full year guidance due to price cuts on drugs from European governments and slowing sales of vaccines and Singulair.  A company spokesman said they would do their best to continue to promote bad and unhealthy behavior in order to boost sales of their products.

In other earnings news MET insured the fuck out of some shit and beat analyst guesses while Amgen also beat guesses despite lower revenue and profits as  both investors and osteoporosis sufferers bend over backwards with excitement over their drug Proli.  Also in the market Disney sold Miramax for $660MM to better focus on making shitty vapid films for kids to buy shittier vapider toys off of and C paid a $75MM fine for a little something called misleading investors about the amonut of subprime loans they held on their books.  C claimed they only had $13B of exposure when they had $50B but Money McBags is sure the $75MM fine will make up for the billions investors lost by believing any of the publicly audited financial statements C released.

In small cap news, TSYS sold off by 17% after their net income fell by 50% in another quarter more confusing than the ending of a Kafka novel.  Remember a couple of weeks ago Money McBags told you TSYS would make an interesting short term trade and on this past Tuesday he said:  

"TSYS was up 4% plus and remember on 7/9 Money McBags said it was too cheap and would make a nice short term trade and it's up just under 20% since then so good for you if you picked up some shares but don't get too greedy as news on the company remains thinner than OJ's alibi and it has traded down for a year for a reason."

So hopefully you didn't get too greedy and took your profits and went home because we were given more reasons for its shitacular performance this year.

That said, on the surface, the quarter wasn't horrible, as revenue was an alltime high $92MM, though pretty much flat with the first two quarters of the year and gross profit of $33MM was also up a bit sequentially.  EBITDA of $15MM was down a bit sequentially and barely up from last year when revenue was $25MM less so they are clearly having margin/expense issues with gross margin dropping from ~45% to ~36% from last year's Q.  Not really what you'd like to see out of a supposedly growing business.  Money McBags is a firm believer in not owning businesses with negative operating leverage unless they are in the start-up stage, so that is a huge red flag, especially for a company that has relied on acquisitions for much of their growth.

That said, the biggest problem seems to be that they saw their text message licensing business slow down and lead to fewer sales of pepetual licenses which was what Money McBags thought was a big growth area for this company.  People like the fuck out of texting so it was always a bit confusing why this company's revenue didn't scale faster with that and why that is now slowing down for them.

Money McBags hasn't had time to listen to their call yet as he has been busy trying to solve the Riemann hyopthesis (he thinks the answer is zero) and looking for more pictures of Sofia Vergara, but he's sure the call would have been as confusing and unilluminating as ever as this management team has overpromised and underdelivered more than an M. Night Shyamalan film.  That said, he's not sure if they are still guiding to $80MM-$85MM in EBITDA as they are only at ~$30MM half way through the year with one of their growth segments slowing and margins getting squeezed like Ines Sainz' ass in an airplane seat.

The company currently has an EV ~$280MM so it's pretty cheap if you think that they can double their EBITDA in the second half of the year but as Money McBags needs a fucking forensic accountant, a strategy consultant, the Amazing Kreskin, and a fuckload of luck to understand their press release and the different parts of their business, he's going to stay the fuck away.

Hopefully you all made a nice short term profit and perhaps their call explained a lot, as this company seems way too fucking cheap for what they claim to do.  That said, the market isn't usually this wrong when selling something off over this long of a period of time, so Money McBags will remain happily uninvested.  That said, if anyone can clearly and concisely explain their business in two sentences or fewer, Money McBags would be interested to understand.

Enjoy your weekend and don't forget, When Genius Prevailed is on Facebook and Twitter.

Thursday, July 29, 2010

7/29/10 Midevening Report: Fed warns deflation may be coming, investors run to buy protection as they don't know who deflation slept with last

Oh shit.  While most people have been spending their time worrying about the Fed printing up some inflation, Fed Bank of St. Louis President James "Jimmie B" Bullard got his academic on today and dropped some deflation all up in this bitch.

And Jimmie B aint be one of those lame ass non-voting members of the FOMC like Fed Bank of Minnesota President Narayana Kocherlakota whose last name sounds like a hella nasty venereal disease one would catch from a night with Paris Hilton (and for the record, being a Fed Bank President and yet not getting to vote as part of the FOMC is like being the fat cheerleader on the bottom of a pyramid or a bachelor party designated driver).  The point is Jimmie B knows the secret handshake, he drinks the juice, and his opinion matters so when he axes everyone if they know anything about some deflation and shit, people better start listening.

The deflationary concerns stem from a "provocative" paper Jimmie B wrote (provocative in the sense that it took a full three pages to put readers to sleep instead of the usual two, though to be fair, page one was a full picture of Katie Cleary dressed as a regression model, so whatever) in which he argued that the Fed needs to stop all of this extended period low interest rate bullshit and get their quantitative ease on by buying some debt instruments longer dated than Velveeta cheese or Betty White's vulva.  Not only that, but Jimmie B warned that if we continue this low rate poilicy, we're going to end up like Japan and be stuck in a long term no growth economy while living in constant fear of attacks from large fire breathing monsters like godzilla or Roseanne Barr.  So goodbye inflation (for now), hello deflation.  Money McBags is sure you'll both lead to hyperinflation eventually but until then, enjoy the soup. 

In other US macro news, new claims for unemployment fell by 11k to 457k, or by 7k if you use the non upwardly adjusted initial number released last week of 464k (Money McBags guessed that it would be upwardly revised to 470k, but it was only revised up 468k so good for the (No) Labor Department to only mildly be fudging the numbers).  Analyst guesses were for initital claims to come in at 459k, so in theory the data was slightly better than guesses until a week from today when initial claims are revised upward to 460k+.  The point is, the data isn't just hard to believe, but there is absolutley no way economists/analysts/The Great Gazoo can make any kind of relevant guess as to what the numbers will be since their regression models are all calibrated with data from the past 70 years or whatever, when the world wasn't as connected, volatile, and fat tailed.  All one can say is that people keep losing jobs which is more challenging for a recovery than geography is for Caitlin Upton or a high five is from Verne Troyer.

Internationally, the IMF got its panties all up in a bunch about China's trade surplus which may balloon as big as LeBron James' ego or Sheyla Hershey's shirt if China doesn't try to support domestic comsumption by letting its currency float  The report would not have been published had the IMF not removed a footnote saying how they calculated the undervaluation of China's currency and of course if the report had not been published, no one would have cared, not even the IMF's mom.

In the market, earnings were more mixed than the reviews for Kelly Brook's new movie Piranha 3-D (with reviews ranging from awful to boobalicious).  Sony had a strong quarter and swung back to a profit thanks to operational efficiencies, strength in emerging markets, and sales of flat screen TVs, Playstation 3, and a bunch of other shit which people can surprisingly still afford.  The stock was up 7% on the day as analysts had guessed Sony would report an operating loss which shows that even Japanese analysts suck at their jobs.  Other companies putting up good Qs included Radio Shack, thanks to sales of the iPhone and the four people who remembered the company was still in business, and Visa, though Visa sold off on the day as analysts were quick to cut forecasts when V's CEO warned of  new government regulation likely causing the debit market to "undergo changes" not unlike a pre-vagina'd Jamie Lee-Curtis.

That said, there were many companies that shit the proverbial bed today (and not any kind of shit, but an indian food, Jack Daniels, and Slim Jim shit).  Both Nvidia and Symantec fell ~10% after they cut guidance for Q2 citing weak consumer demand which turned their semis flaccid.  Kellogs was not great as they missed analyst guesses and cut their full year projections as apparently too many people were leggo-ing their eggos with waffle sales hurting the company's margins.  Kelloggs was also hurt by a $.10 per share charge as they had to recall a fuckton of cereal boxes last month  after customer complained of the boxes smelling too much like wax and end of the night stripper, but even exlcuding that charge, eps of $.89 still missed analyst guesses of $.94 eps.  Finally Colgate dropped nearly 7% despite beating guesses and maintaining guidance as they warned currency devaluation in Venezuela will have a bigger impact than they initially estimated.  Venezuelan currency continues to struggle after home grown Stefania Fernandez won the Miss Universe pageant and decided to leave the country to travel the world.

In small cap news, a Money McBags favorite QCOR put up a good Q and shot up 23 fucking percent on the day.  Holy fuck did that thing rise and Money McBags was expecting a lackluster quarter at best, so fuck him.  Money McBags has broken QCOR down numerous times on WGP so if you want to understand it better, put it in the search box (and if you want to understand divnity better, put it in Alice Eve's box).

As for the Q, net revenue was up12% from last year to $28.3MM and eps came in at $.14.  Money McBags' revenue estimate was pretty much right on but he had assumed $1MM higher operating costs and thus he was expecting $.13 in eps.  That said, the key driver of revenue was once again MS sales of Achtar which grew 145% y/y and 32% sequentially.  This drug is such a fucking hit with a demand curve more inelastic than the demand for Lucy Pinder's curves, that QCOR should raise the price of achtar again (and that is funny because they already raised to around 1 bazillion percent to ~$23k a vial).  The company now has ~$100MM cash which they are going to continue to deploy for buybacks and most importantly they announced they are going to double the size of their sales force to better attack the nephrology market where they have just started making headway.

So here is the deal, the nephrology market could be bigger than both the IS and the MS market for QCOR becuase patients need 9 to 10 vials of achtar over the course of six months to treat NS.  Anyway, these are some interesting tidbits from the call:

1.  With only the equivalent of 1 rep selling to the nephrology market last Q, QCOR manged to get 4 new prescriptions.  With 9 to 10 vials needed for NS patients, that is equivalent to ~$200k in net revenue for each nephrology prescription so those 4 new cases sold by effectively one full time person, should net $800k in revenue for the company.  As they say in France, "not fucking bad at all."

2.  They are now going to go from 38 reps to 77 reps to be able to call on more nephrology doctors and to be able to increase the chances of someone getting drunk at the company holiday party and taking their shirt off.

3.  Within the next couple of quarters, several papers on the effectiveness of Achtar will be coming out in medical journals with titles like "An Achtar a day will keep the pissing of blood away," "Achtar:  Fucking focal segmental glomerulosclerosis in the ass," and simply, "Nephrotic Syndrome This!"

4.  Out of the 8k nephrologists, fewer than 400 have written prescriptions for Achtar as QCOR hasn't had the sales force or the published medical data to reach the rest of the doctors.  Both of those are coming soon.

5.  MS is now 50% of their revenue with IS at ~40%, NS ~5%, and everything else 5%.

6.  Olivia Munn is still hot.

7.  They are no longer going to waste their time trying to use their $100MM in cash on acquiring another drug and will just focus all of their time on Achtar.  Money McBags brought this up before as a curious strategy by the management team as he didn't understand why they would be fucking around trying to buy some do shit other drug if their growth opportunity was as good as they said it was.  Now he is pleasantly pleased that they have decided to forego an acquisition and instead use their cash for buybacks, building a sales force, and one hell of a night out at their local Rick's Cabaret.

8.  The PDUFA date for IS being put on label for achtar is 9/11 which if approved, will finally allow QCOR to market to IS doctors.

Anyway, the news of a doubling of the sales force caused the stock to rocket today but Money McBags guesses a bunch of that was short covering because small stocks don't move that quickly without some shorts puking out shares faster than an Olsen twin pukes out last night's dinner.  That said, how do we value this company going forward?  They said costs will be up by ~$2MM in Q3 and $3MM in Q4 as they double the sales force and Money McBags doesn't think that sales force will really be affective until Q1 of next year.  So if Money McBags leaves IS flat for the rest of the year, grows MS by 20% in each of the next 2Qs sequentially, leaves NS as nothing, and adds the extra costs, he gets another $.32 in eps for the second half of the year or $.56 eps total in 2010.

But of course, who gives a shit about 2010 because it is 2011 where this company could start seeing even stronger growth.  So if Money McBags takes 2010, grows IS by 10%  (if Money McBags interpreted the CEO correctly, that business could grow 20% to 30% if the FDA allows them to put IS on label in September, so 10% growth seems like a decent enough way to discount that happening) and then grows the non-IS business by 30% (MS has been growing by 100% + y/y, but the law of large numbers and the ramp from nothing is going to have to catch up with them soon enough and NS is still so small that we'll ignore it for now even with the ramped sales force), then he gets ~$.78 eps for next year.

Of course that completely discounts NS doing anything even with an expanded sales force which seems way too harsh as in ~6 to 8 quarters MS has gone from nothing to 1/2 of the business, but Money McBags is trying not to get too excited as they only sold 11 vials for NS 2 Qs ago and 4 this last Q.  So we'll take ~$.80 as a reasonable low end base line for 2011 and the stock is trading for ~13x that plus the ~$1.50 in cash.

That said, if NS takes off, this company easily earns more than $1 in 2012 and you can buy that kind of growth right now for 10x  plus the cash which is almost as cheap as a an autographed Dick Pole.  So look to buy on a pull back, and yes, this is the 1000x time Money McBags has said that and this stock has yet to pull back so time the trade as you please.  Just remember, Money McBags first started writing about this stock in December when it was ~$5, so hopefully you all did your work and bought in and are now enjoying the fruits of your labor.

And don't forget, When Genius Prevailed is on Facebook and Twitter and only a few hundred thousand readers short (give or take 1MM) of Money McBags' goal of 1MM readers by the end of 2010.

7/29/10 Update: The best things come to those who wait, or some shit like that

Money McBags is running a bit late with his column today.  Hopefully it will be up by 6pm east coast time, but it may not be out until much later.  He apologizes for any delay that may cause in your pooping schedule.

Topics today will incude deflation, QCOR, and likely Sofia Vergara.

So until then, enjoy the breeze.

Wednesday, July 28, 2010

7/28/10 Midevening Report: Rally comes to an end and unfortunately it's not Jessica Biel's

The market sold off today as it couldn't keep ignoring the data and finally had to come to grips with where the bad macro news had touched it.  The biggest negative was the Fed's Beige Book report which failed to titillate the market like either Money McBags' book report on the Kama Sutra (which he described as both thought provoking and delicious) or Fonzie's little black book.

In Bernanke's beige book we found out that economic activity has slowed in some areas and that Federal Reserve Bank President of Cleveland Sandra Painalto doesn't let you get to second base on the first date (Newsflash Sandy:  If you ever want to get out of Cleveland, you're going to need to loosen up a bit, lower your reserve standards, and give Bennie B. some of that gold you've been hoarding).  Eight of the twelve regions tracked by the Fed saw growth including New York, Richmond, and Andy Roddick's pants (he is married to her, you know that right?), while Atlanta and Chicago saw a slowdown, and Cleveland and Kansas City held steady.  The Fed cited high unemployment, an ailing housing market, and consumers being more fucked than Lisa Ann in I'm a MILFaholic as reasons for the slower than hoped for recovery.

In other macro news, durable goods orders fell by 1% in June while analysts had guessed they would rise by 1% which makes guesses just an absolute value sign away from being correct which is a fuckload better than usual.  Orders for long lasting goods like machinery, metals, and herpes were down the most they have been in almost a year and a half.  Even worse, non-defense aircraft orders tumbled 25.6% after falling 30.2% last month as airlines brace for the continuing growth of staycations and poverty. 

Finally, mortgage applications fell 4.4% last week but were led by a 5.9% drop in refinancings as rates ticked up 10bps and anyone who still owns a non-foreclosed upon home has pretty much already refinanced it.  Surprisingly new home purchase mortgage applications were up 2% but since the majority of those will likely be rejected, that 2% number is more fictitious than the easter bunny, santa claus, or male affectionate lesbians.

In stock news, RIMM jobbed it's way up today despite the bad taste it has left in investors' mouths as of late.  Rumors are that the company will be launching a new operating system and potentially a new keypad before officially giving up to AAPL and thus becoming the second biggest thing to ever be defeated at Waterloo (fyi, RIMM's headquarters are in Waterloo, Ontario).

Also, BA nosedived a bit after reporting a strong bottom line but a weak topline which was down 10% from last year.  The company did reaffirm guidance which was slightly below analyst guesses but BA promised their new 787 would be more spacious and thus allow more opportunities for flyers to join the mile high club.  And finally, Moody's lowered their ratings on banks BAC, C, and WFC from stable to negative citing lessened government support for banks under new regulations and something about shitty track records which means those banks are going to eventually need that lessened government support.  And if any company knows what a poorly run company who sucks at their jobs looks like, it is certainly Moody's who never saw a huge market collapse it couldn't misinterpret.

In small cap news, beta sold off as these stocks had run strongly over the past week or so as if they were trying to catch a glimpse of the delightful Melissa Archer and thus it's not surprising that investors would want to take profits.  CTGX reported last night and results were pretty much inline with Money McBags' expectations.  The company grew revenue 21% thanks to both strong staffing and health care services businesses.  Health care services is now 27% of revenues and should start driving this business like Nipsey Russell drove all of the housevies crazy on the Hollywood game show circuit in the 1970s.  In addition to a solid topline, SG&A was down 120bps, operating margins were up from 3.6% to 4.3%, and EPS went from $.09 to $.12.

The stock sold off on the day though due to the general market taking it in the yingus and lowered full year EPS guidance by CTGX due to a reduction in demand for solutions work from one of their large customers in their energy practice.  Excuse me while Money McBags yawns on this one.  Full year revenue guidance was increased to $320MM to $328MM from $314MM to $322MM (which is 18% growth) while eps guidance was reduced to $0.45 to $0.51 from $0.47 to $0.55 and although it is down, it is still a 26% increase from 2009.  But the point is, Money McBags gives less of a shit about 2010 guidance than he does about Alan Greenspan's thoughts on the housing, Nassim Taleb's thoughts on lyrical prose, or Audrina Patridge's thoughts on anything other than which hole to enter.

As said frequently in this space, the coming electronic medical records implementations (and they are coming because the government has mandated them, not just because they ran in to Sonya Kraus in the hallway) are going to be huge for CTGX.  As the CEO said in the press release: "We believe we are still in the early stages of the significant increases in demand expected for EMR assessments, systems implementation, and development work." 

This Q, EMR was 1/2 of their health care business which was ~$10MM in revenue and means they were working on 13-20 installations at ~$2MM-$3MM a project annually.  But the thing is, only ~10% of  hosptials have EMR and they are MANDATED by the fucking government to have them at least underway by 2014 so this business should scale faster than a business selling bronzer, or Valtrex, on the Jersey Shore.

Money McBags has gone through his valuation on CTGX here on When Genius Prevailed many times, so feel free to throw it in the search box, but this company is set for strong growth over the next few years so use this sell off as a potential buying opportunity.  Obviously the lack of trading volume and the fact that CTGX's boring staffing business is still ~70% of their revenues is a concern, but as long as EMR is on the way and this company isn't full of shit about their ability to service that sector as aplombly as Bunny De La Cruz services the ding dong sector, the company should see solid growth.

And remember, When Genius Prevailed is on Facebook and Twitter.

Tuesday, July 27, 2010

7/27/10 Midafternoon Report: Consumers still confident the economy sucks

The market bounced around today as it tried to find a direction like scientists are trying to find the elusive "God particle" (though apparently scientists have figured out where it isn't which includes Jane Austen's writing, Bernie Madoff's bank account, and Jamaica.  But newsflash Einsteins, you might want to check Brooklyn Decker's vagina because if the "god particle" isn't there, Nietzsche may have been right.).

Anyway, the big macro news was that consumer confidence fell to a five month low with consumers still worried about jobs, the potential death of fiat currency and subsequent return to the barter system, and Eliza Dushku's consistent refusal to do nude scenes.  The index fell to 50.4 from an upwardly revised 54.3 and economists had guessed it would come in at 51, so good on them for almost correctly predicting one number out of the thousand they guess on yearly.  That said, a drop in consumer confidence could lead to further declines in spending which is as good for the economic recovery as fat tails are for trying to forecast using gaussian assumptions, tickets to the Ford theatre were for Abraham Lincoln, or The World's Biggest Gang Bang was to Annabel Chong's pelvis.

In headline manipulatedly (and yes that is more of a rehetorical tautology than "free gift," "short summary," or "Kathy Griffin manly") positive macro news, the Case-Shiller home price index was up 1.3% on a non-seasonally adjusted basis, .5% on a seasonally adjusted basis, 4.7% year over year, and 30% in the land of make believe where every party is as delightful as a rainbow.  Of course the numbers are more worthless than a hand job from a quadriplegic with carpal tunnel disease as the Case Shiller index uses a fucking three month average so inflated home sales from April due to the now expired the government tax credit are still in the numbers.  What we do know is that home prices are at least 29% below their inflated peak from four years ago, foreclosured properties are at record highs, and Sofia Vergara is hot.

The market remains at a headscratchingly confusing time (though if it were Money McBags' head and Diora Baird doing the scratching, that would be a lot less confusing) with macro data continuing to be marginally bad at best and yet earnings coming in moderately good at worst.  So which is the leading indicator and which is the lagging?  It is a question that is proving to be a bigger conundrum than anything the Sphinx, Hamlet, or Andy Rooney ever asked (go to ~1:13 in the video).

In Europe, all but one of the 27 members of the EU agreed in principle to new BASEL regulations, with only Germany holding out as they wait for a bigger signing bonus, guaranteed playing time, and use of the EU locker room to entertain groupies during breaks in the negotiations.  The new proposal is less onerous than earlier proposals and give banks more leeway to define what counts as Tier 1 capital potentially including stakes in other banks, future tax benefits, and monopoly money.  Regulators are still debating the amount that banks will ultimately need to hold as reserves but Money McBags is pretty sure that whatever the number winds up being, it won't be enough for the next bubble.

Also internationally,  Germany’s consumer confidence from the GfK institute rose to 3.9  but as Money McBags doesn't use the metric system, he has no idea what that means.  That said, with Germany being Europe's largest and least funny economy, rising confidence can't be a bad thing.

In the market, DuPont (ticker DD) announced a good Q which was the second time today the market got excited about a set of double Ds with JWOWW having rung the opening bell.  DD earned $1.17 per share, beating analyst guesses of $.94 eps as a result of 26% revenue growth driven by a 33% increase in emerging market sales.  They also raised 2010 earnings guidance to $2.90 to $3.05 per share from $2.50 to $2.70 and told analysts to suck it.

Deutsche bank made analysts look like deutsche bags by putting up a big Q as well.  DB posted a 9% rise in earnings despite weak performance from their investment banking business which had to take a quarter off from manipulating the market while new regulations were being discussed.  That said, it was a good Q for the German bank who is still likely drunk and throwing out the saran wrap from their traditional German scat party as a way to celebrate having passed the europe bank stress tests last week (though the tests were about as vigorous as a Kirstie Alley workout video).

Finally, BP was down after posting a $17B second quarter loss thanks to creating the worse unnatural disaster since the Lohans failed to get an abortion 24 year ago.  And Apple will now be forced to allow third party software on the iPhones which means porn lovers everywhere just lost another 30 minutes of their day.  The real purpose of the ruling by the copyright office is to allow iPhone users the ability to unlock their phones without any repercussions and thus have the ablilty to change their wireless service provider from AT&T to something that works a little bit better, like smoke signals, shouting, or semaphore.

In small cap news, CTGX reports tonight and Money McBags expects an inline quarter at best with EMR still a few Qs away.  TSYS was up 4% plus and remember on 7/9 Money McBags said it was too cheap and would make a nice short term trade and it's up just under 20% since then so good for you if you picked up some shares but don't get too greedy as news on the company remains thinner than OJ's alibi and it has traded down for a year for a reason.

Last week EPAX, a small, overlooked, and horribly performing name which Money McBags thinks is an interesting company put up a Q as crappy as expected.  Money McBags broke down this company in quite a bit of detail a few months ago but they basically arrange for international student travel so little Jimmy can lose his virginity to an Amsterdamian hooker all under the guise of educational experiences.  The point is, the business sucks right now as if it were Jesse Jane on the set of Island Fever 4.  The company sells expensive, completely discretionary trips to Europe in the biggest recession in 70 years when in the internet age all one has to do to spend a night in Paris is steal their neighbor's wifi signal.  This last Q, gross margin was down ~15% and with operating costs flat at $12MM, eps was down ~20% to $.79 per share in what is traditionally the strongest Q for the company as it is right before the summer travel season.

Money McBags' estimate remains at $.49 eps for this year and the company released guidance for $.48 eps to $.52 eps (and yes, Money McBags' $.49 eps estimate was from way back in April when the street was still at ~$.60, look it up, so his 15 minute earnings model proved to be more precise than sell side analyst models which is less surprising than finding out that Gary Colemn didn't live to age 50).  The point is, the company is still struggling with enrollments down 17% and their recently launched Discover Adventure travel progam having underwhelmed like a bachelor party in which Mayim Bialik jumps out of the cake (or more precisely, eats her way out).

So why the fuck would Money McBags be interested in a company whose EPS is going to decline by 50% and is trading at >20x current year guidance?  Simple, volume.  Well, actually volume has little to do with it but cash does.  The company has $53MM in deployable cash and a market value of $210MM so ~25% of their value is in cash or roughly $2.50 per share.  Not only that but this company can scale quickly as they are already running a lean operation and until this year were able to maintain $1 in earnings power.

So the upside is that people become a little less freaked out about the economy in a year, EPAX buys back shares with some of their cash, and Hanna Hilton comes out of retirement and offers her fans free ice cream sundaes for continuing to have supported her in her down time (and yes that has very little to do with EPAX, but whatever).

This company is an interesting way to play a recovering economy and while Money McBags doesn't think that is going to happen anytime soon, it is a cheap way to hedge one's negative bets.  Money McBags doubts the stock does anything for at least another 3Qs and he doesn't own it nor is he going to buy it, but it pays ~2% yield and is one way to play a market recovery with some downside protection.

And remember, When Genius Prevailed is on Facebook and Twitter.

Monday, July 26, 2010

7/26/10 Midevening Report: Market rally excites quants as S&P rubs up against upper bollinger band

The market ran again today as Fed Ex boosted guidance due to international companies wanting shit faster and macro data headlines were manipulatedly good (like Cameron Diaz' face on a magazine cover).  The big macro news was that new home sales jumped 24% which is the biggest jump since May of 1980 and totally sounds better than saying new home sales were the second lowest since 1963 (and you remember 1963, the year the Beatles released their first album, JFK was assassinated, Raquel Welch was breaking in to Hollywood, and full muff was the norm).  Of course 1963 is also when this data started being recorded, so for all we know it could also be the second lowest month since 1863, but whatever.  So before we start handing out lobster tails and buy one get one free blumpkin passes to Amber Lancaster's powder room (and Money McBags will take two of those please), perhaps we shoud look at the shittiness (which may be too technical of a term for most) of the absolute number and ignore the relative spin.

To start with, last month's new home sales were revised down from 300k to 267k which is only a minor 11 fucking percent downward revision (and minor in the way that reading a Thomas Pynchon book gives someone a minor headache or bumping in to Audrina Patridge would give someone a minor stiffy).  Anyway,  last month's number of 300k, which is now 267k, means that new home sales fell by 37%, 40%, or 47% last month depending on which of the manipulated numbers from two months ago you want to use as the base line (the 504k initially reported, the 446k downwardly revised number from last month, or the even more downwardly reviesed 422k reported this month, and yes, two fucking months after the data, the numbers are still being downwardly revised because apparently they have yet to hit zero).

The point is, the awfulness of last month's number keeps getting worse but investors are overlooking that because the headline growth for this month is 24% and 24% growth is a big fucking number (even though in absolute terms it is still the second worst number ever and will more than likely be revised down next month to 305k). So while economists and the Commerce Department can point to growth rates as a sign of accomplishment, it's as disingenuous as landing on an aircraft carrier and claiming Mission Accomplished in Iraq or telling Rosie O'Donnell she doesn't look fat in those jeans.  In short,  last month's historically bad number gets revised down more and thus this month's second worst historically bad number gets to look slightly better because of the BS growth rate off of the downward revision.  Just imagine how great this month's number would have looked if it went from one new home sold to two.

Anyway, the 330k number being reported is in fact ~24% higher then the 267k number (but only 10% higher than the 300k number that was actually reported last month) and it beat analyst guesses by 10k and since analysts have proven to be so right over the last 5 years to 3,000 years, a beat is such good fucking news that the commerce department can spend the day admiring the new portrait of Carlos Gutierez  instead of trying to fix shit.  But lets not let details get in the way of a good rally because that would be like letting a little hepatitis get in the way of boning Pam Anderson.

There wasn't much international news today except that Europe is starting an anti-trust case against IBM, though if Money McBags were IBM, he wouldn't trust the europeans in their black jeans and with their love of european fudge pops.  The EU is claiming that IBM may have abused their dominant position in the mainframe computer market like the dominant Ariel X abuses her defeated foes in the NSFW Ultimate Surrender Summer Vengeance tournament.  This anti-trust case stems out of complaints from a company called T3 communications which is a firm invested in by MSFT and other than Tiger Woods' ex-wife, MSFT is the foremost authority on anti-trust.

The big stock news of the day is that Fed Ex raised their guidance for fiscal 2011 from $4.40 to $5.00 per share to $4.60 to $5.20 per share and this comes after UPS showed everyone what Brown can do for them by squeezing out a solid quarter last week.  UPS' revised guidance was driven by increased demand for international priority packages where according to a Wellls Fargo analyst: "Growth in Asia has been red hot, fueled by the tech sector and iPhones and handheld devices and discounts on Hello Kitty's line of dildos."  Fed Ex is feeling good enough about their operational efficiences and global volume growth that they have reinstituted their 401k matching program so now employees can lose the company's money in addition to their own.

In other stock news, BP is getting a new CEO and hopefully this one won't won't be a dud even with a name like Robert Dudley (and that was such a bad pun that Jay Leno should feel free to steal it).  Dudley will be the first Amercian born CEO of BP as the company's board hopes to improve on the langauge barrier between themselves and the US government (as apparently "your shit is not safe" didn't translate correctly from US regulators to BPs former CEO).  Otherwise, it was a light earnings day on the market but Roper industries put up a nice Q despite a rumored take over from Furley Industriies which turned out just to be a wrongly overheard conversation in the company kitchen.

In small cap stocks, IMAX had a strong day on Inception's continued box office outperformance and the stock has bounced back nicely since Money McBags talked about it as something to avoid the other week.  Money McBags favorites CRUS and KITD also had solid days, as did just about everything else in the small cap space, except for IBKR which deserves to go down for how they made Money McBags feel after their earnings announcement last week which he was more highly anticipating than the inevitable Christina Hendricks playboy spread (and yes, it will happen).  Money McBags is short on time today so he won't be getting to any detailed small stock analysis but it should be a busy week with QCOR, IMAX, CTGX, and NTRI reporting so he promises he will have more compny breakdowns for you as necessary.  If you are craving for more dick jokes though, Money McBags was busy in the comments section from Friday's column, so enjoy.

Friday, July 23, 2010

7/23/10 Midafternoon Report: European banks pass stress test, results of colonoscopy still pending

The market was quiet in the morning despite a slew of solid earnings announcements as it waited for the release of the Europe bank stress tests which were more highly anticipated than Lindsay Lohan's jail stint, Avatar's opening weekend, or Mel Gibson's next career limiting phone call.  Well the results came out midday and were exactly as worthless as one could have hoped.  Only 7 out of 91 banks failed the stress test including Munich based Hypo Real Estate, Greek based ATE Bank (which apparently "ate" a fuckload of bad loans), some Spanish banks, and Italy's Bank of Madoffia.  Of course these stress tests were weaker than the efficient market hypothesis in the era of high frequency traders or Haiti's infrastructure, so it's hard to get too excited about the results.

The stress tests failed to analyze whether banks could withstand a debt default by any European country and neglected to look at the entirety of banks' balance sheets (which is a bit like asking a female out on date but forgetting to check for an Adam's Apple) including completely leaving out any government bonds being held to maturity which is only the fucking majority of the sovereign debt held, so that makes as much sense as trying to diagnose rectal cancer with a broken thermometer and a loving touch. 

From day one it was obvious that the stress tests were more bogus than Iraq having weapons of mass destruction, MBA programs teaching anything useful, or Ricky Martin being interested in any female who bangs.  There was no way the EU was going to have the test results come out and show that a fucklaod of banks had failed and yet they also wanted to try to have some credibility and not have every bank pass because that would have been less believable than the US bank stress tests or GS' non-admission of guilt in the Abacus CDO manipulations.  So the Committee of European Banking Supervisors managed to find some BS Goldilocks scenario where 7 banks would fail in a number deemed to be just right in not causing more fear but also just right in showing that there are some problems.  So jolly good show, hope no one in the CEBS tore their black jeans in their rigorous assessment of the data.

The point is, the banks may be healthy or they may not be healthy, but don't piss on Money McBags and tell him that it's raining (unless you are Kelly Brook and just downed a case 1787 Chateau Lafite, and in that case, piss away) by claiming the tests that were run give any kind of conclusive evidence about the health of the EU's banking system.  So excuse Money McBags while he yawns this one out while the market rallies on the news. 

In other european news, Britain had a 1.1% increase in GDP which was double what economists had guessed but is still nowhere near pre-recession levels.  The country hopes their newly introduced dental sector can help spur GDP higher.  In Germany, business confidence rose the most since reunification and to its highest level in three years as the whole country celebrates schadenfreude at the downfall of their fellow EU members.  Finally, Hungary's credit rating may be falling to junk after their talks with the IMF went worse than Sarah Palin's talks with Bristol about abstinence.  A lower credit rating could leave investors in Hungary starving and will cause it to be more difficult for the country to raise money which it won't likely to be able to pay back anyway.  That said, the threat of credit ratings downgrades are coming from S&P and Moody's who, as always, suck at their jobs worse than a closterphobic magician's assistant, so take it for what it is worth.

And in China, worries are getting out that banks may not be able to collect on nearly a quarter of the loans they made to local governments for the building of airports, highways, and lunch delivery of the nation's favorite soup, cream of Sum Yung Gai.  Banking regulators haven't addressed this potential shortfall but Money McBags is sure they will successfully manipulate their way out of it.

In market news, earnings are powering US companies like spinach powers Popeye or herpes powers Britney Spears (she does run on herpes, right?  It's the only logical conclusion with which Money McBags can come up for regarding the affair du Federline).  Ford reported a profit again and said they expect next year to be even better thanks to their new vibrating seats functionality.  The company was strongly cash flow positive with $2.6B of cash brought in and they say they will be in a net cash position by the end of next year (and net cash is Money McBags' third favorite position, right behind lowering taxes and reverse cowboy).  Ford's sales were up 28% in the first half which is twice the industry average as consumers move down market and no longer care about status.

In other earnings news, MCD beat estimates yet traded down as it missed whatever the whisper number analysts made up but were to chickenshit to actually put on paper was.  Money McBags will never understand the concept of a whisper number (unless it is Olivia Munn whispering Money McBags her number) because it is a bigger cop out than "it got lost in the mail," "I was young at the time," or running to Miami to play with Dwyane Wade.  In theory, sell side analysts get paid to provide their unbiased opinions while in practice they get paid to pump up the stocks for whom their firms are trying to raise money, to write meaningless daily updates, and to anally rape sheep (ok, one of those may be made up) and the lameness of not having the nuts to put a whisper number in any of their daily drivel says all one needs to know about paid research.  Anyway, MCD had a nice quarter with revenue up 5%, same store growth of 4.8%, $1.13 eps, and only 1k blocked coronary arteries in the Q.  Strong international growth helped fuel the results as MCD's cheap menu and and aspirational brand equity resonantes in countries with large poor populations such as India, China, and the United States.

Also, MSFT put up a big Q after running up yesterday in anticipation of good things happening like the resurgence of the corporate upgrade cycle, stronger sales of Windows, and Excel hardcoating goalseek to always find the lovely Sofia Vergara.  EPS was up 48% to $.51 and revenue grew from $13B to $15B, both numbers handily beating analyst guesses though the numbers could contain a trojan horse virus so no one wants to get close enough to them to really dig in.

Finally, Verizon slapped their cocks on the table and yelled "can you hear me now?" as they beat guesses by $.02 per share by earning $.58 per share despite flatish revenue growth and no exposure to the iPhone thanks to better operation.  And AXP beat estimates and tripled their profts as customer spend was up 16% and like all financial companies, they lowereed their provisioning, likely just in time to have to raise it again for the second dip in the upcoming recession.

Not all was lobster tails and blow jobs though as AMZN missed their earnings estimates despite growing the top and bottom lines by 40%+.  Analysts had guessed the company would earn $.54 per share but instead they earned $.45 per share due to an increase in operating expenses as the company has to spend more on advertising to convince people that the Kindle wasn't outdated two months ago with the release of the iPad or ~600 years ago with the release of the printing press.  Amazon has always seemed like a nebulous investment to Money McBags given the competition, relatively low barriers to entry for specialty sites, and consistently high valuation so he is as happy to not be involved in this stock as Dan Quayle is happy not to be involved in a spelling bee (and yes, Money McBags just whipped out a 20 year old punch line because frankly, 1k-1.5k words of dick jokes a day is a blistering pace, even for a talent like Money McBags).

In small cap news, IBKR reported and managed to shit all over themselves, and Money McBags' thesis, as if they didn't just have Montezuma's Revenge but had his ire, hatred, and angst as well.  Their results made Money McBags sadder than he was this morning when read that the inventor of the black box had died until he realized it was this guy and not Roxy Reynolds or Vanessa Del Rio's mom.

Anyway, before we get to IBKR's numbers, Money McBags wants to apologize for saying buying some options in this piece of shit company ahead of earnings would be a good strategy.  He believes his logic was sound, but unfortunately he made the mistake of believing he had correctly called the bottom of one of the biggest value traps the market has seen since AIG in 2006 or Elizabeth Berkley's acting career pre-Showgirls, so he is sorry for that.  Never again will he give a fuck about this shitty company whose market making business which is based on voaltility couldn't profit when the market was, umm, how to put this lightly, fucking volatile. 

IBKR earned $.09 per share in the Q which was down from $.31 per share in last year's Q and continued the unpredictable nature of this company whose quarters are more up and down than Oprah's weight (see, Money McBags could write for Leno, no problem) or Faye Reagan on a sybian (he could also write for the AVN awards, he is bi-comedial).  Their internet brokerage business fared well and continued to grow increasing accounts by 20% and customer equity by 43% but all of that was irrelevant because their market making business made a mockery of themselves and only had a 5% pre-tax profit margins leading to a profit of $3.9MM which was down 97% from last year.

The stock is such a peice of shit that their CEO who is an ~80% owner has given up trying to make it seem like anything someone would want to invest in and is instead now marketing the stock as some type of hedge for anyone who wants to keep their portfolio from growing too much.

The CEO said: "increasing fluctuations in foreign exchange markets have a corresponding impact on our reported results in U.S. dollars. This makes it ever more apparent that our shares would be more appropriately considered as an investment in a global enterprise based in a diversified basket of currencies rather than in U.S. dollars."

So any of you out there who own a global enterpirse, buy away.

On the call, CEO Peterffy claimed that the appreciation of the dollar cost them $72MM in revenue or $.16 per share because it's always one excuse or another.  Anyway, Money McBags clearly fucked up and was speculating on market volatility causing earnings to appreciate, which apparently they would have had the dollar not strengthened, but whatever.  As Money McBags was speculating, he said to buy options and not the stock so your losses would be minimized, but either way, fuck this company and if any of you ever read Money McBags trying to give an opinion on IBKR other than he has no idea and they hate turning out a profit, you have permission to punch Money McBags in the nuts while forcing him to listen to the melodic stylings of Celine Dion.

So have a good weekend and remember When Genius Prevailed is on Facebook and Twitter.

Thursday, July 22, 2010

7/22/10 Midevening Report: Market shoots up on earnings, hopefully it wasn't sharing a needle with Greece

The market raced up today as if it were Icarus escaping from Crete and rapidly approaching the tantalizing Sun, though with luck it used better wings and thus will avoid the same fate.  Despite more negative macro news, a growing and unsustainable debt, and more longterm unemployed people than a fast food addict has bacne, the market is responding positively to a number of earnings reports because apparently four or five data points are much more relevant than the last 3 months of data, statistics, and common sense.

In macro news, new claims for unemployment were out and as usual, were much worse than analyst guesses.  Claims rose by 37k to 464k (though next week that number will likely be revised to 470k, because that's how the (NO) Labor department rolls).  Analysts were only slightly off in their predictions of claims rising by 17k and by slightly, Money McBags means whatever the opposite of slightly is, like considerably, greatly, or a fuckload.  But hey, only 45% of the 14.6MM unemployed people have been out of work for more than 6 months and if that doesn't scream market rally, then nothing does (and of course that number doesn't include people who simply stopped looking for work as they became more discouraged than the Edsel's marketing team or Stevie Wonder's shoe polisher after Mr. Wonder downs a Big Gulp and hits a urinal).

In other macro news, existing home sales fell by 5.1% but since analysts had guessed they would fall by 8.1%, the market reacted positively, choosing to ignore the absolute for the relative, which is a bit like getting excited about your daughter sleeping with Magic Johnson and only coming away with herpes.  There are 4MM homes on the market which at the current sales pace equates to a 9 month supply of homes which is bad news for sellers but good news for that one guy looking relocate.  And finally, the index of US leading indicators fell .2% but that was .1% better than guesses so another pyrrhic victory for the market to celebrate while it ignores the bigger picture like King Pyrrhus ignored the replenishing forces of roman soldiers.

Of course the big news today is earnings where several companies beat guesses, put out better guidance, and did it all with a straight face.  UPS beat analyst guesses and gave above street guidance thus figuratively dropping a deuce on estimates and showing what brown can really do.  New guidance was for $3.35 to $3.47 per share which was well above analyst guesses of $3.27 per share and driven by their international business and more people buying shit online since they can't afford gas for their cars.  Obviously an increased pace of shipping bodes well for a recovery somewhere so hopefully the uptick is a result of real business needs and not companies shipping left behind picture frames to the people they laid off.

Caterpillar is another company that put up a huge quarter which made more than just lepidopterists happy.  The company crawled its way to 31% revenue growth and 93% profit growth while raising their guidance and destroying analyst guesses as if those guesses were freshly laid ant larvae.  EPS was $1.09 and guesses were for $.85 eps and in this market, a beat that large is rarer than a Palos Verde Blue or a pair of underwear worn by Paris Hilton.  Also, AT&T called up analysts and told them they suck as the company forecast strong growth for the rest of the year.  Earnings of $.61 per share beat analyst guesses of $.57 per share and the beat was surprisingly due to their wireline business as more people celebrate the recession with staycations.  And finally regional banks everywhere led by PNC, STI, and BBT put up solid earnings on improving credit trends and a lowering of provisions which seems more shortsighted than Mr. Magoo with two eyepatches on but good for them (for now).

In other stock news GM is buying subprime lender AmeriCredit because they have such a great record running lending businesses.  This acquisition is like allowing Roman Polanski to pick up the baby sitter or Ben Stein to give you macroeconomic advice.  On the heels of this merger, the Federal Government is said to be already building a fund to be able to bail GM out again when they horribly mismanage this subprime book.

In small cap news, a Money McBags favorite, KITD preannounced their quarter this morning.  Now look, Money McBags has written about this company more often than Rudy Giuliani talks about 911 or Taylor Rain goes 5-hole because it is ridonkulously cheap and growing faster than Teddy Roosevelt's reputation after he singlehandedly corralled 3 outlaws for trial in the Dakota Badlands in 1885.  Anyway, KITD's preannouncement today was for at least $22.7MM in revenue for Q2 which is ~110% y/y growth ~30% sequential growth and EBITDA of at least $4MM which is up from $3MM last Q.

But here is the interesting part.  Money McBags has been worried about them due to the effect of the Euro dropping faster than the commercial prospects for any yet to be released Mel Gibson movie.  He first mentioned his concerns here which had to do with the Euro declining ~25% against the dollar in the Q and KITD being highly levered to the exchange rate.  Well the CEO addressed this today saying:

"Our record second quarter results superseded the devaluation of European currencies, which we estimate had about a 4% negative impact on our top-line during the period, as reported in U.S. dollars. We estimate that this currency devaluation actually had a small (less than 1%) positive impact on overall cash-flow, since we have slightly higher proportion of costs than revenues in European currencies."

Wow.  While Money McBags doesn't quite get how the impact was only a negative 4% topline hit, but he'll take that number all fucking day like a Spanish worker takes a siesta after five minutes of semi-intense labor.  So KITD must somehow be weighted more Asia and less Europe than Money McBags thought or something else is going on because he thought costs and revenues were in local currencies, but whatever.  That is a terrific number and Money McBags feels much much better about his low end estimates now being so low as to be more preposterous than a professional wrestler becoming a governor.

The other highly positive news on KITD was that their DSOs fell from a way too elevated 128 days to 90 days which had caused a hella lot of fear from investors because when a weird, dinky little company levered to Europe and growing way too rapidly starts having balance sheet issues, things usually turn out worse than one of Andy Reid's kids or a school for the deaf trying to sing in a round for their yearly concert.

Oh yeah, Money McBags also loved this tidbit:

"The proliferation of Internet-connected devices, coupled with the accelerating worldwide adoption of broadband connections and video-capable mobile networks (3G and 4G), appears to be fueling a strong, overall long-term growth trend in IP-based video asset management systems. "KIT digital is in the 'sweet spot' to benefit from this rising VAMs tide," said Isaza Tuzman. "With the extinguishment of most of our warrants and the incurrence of previous M&A restructuring charges now largely behind us, we are looking forward to providing greater visibility into our strong financial performance and industry positioning, starting with the reporting of our complete Q2 financial results, to be released in mid-August.""

So what we learned again is that this is a great space to be in and KITD is not just the biggest global player, but continues to leverage their software and relationships to stay in the sweet spot.  Plus, by getting rid of all of their income statement shenanigans that causes this company to report operating EBITDA which is not an easy metric for HFT's, quant funds, and portfolio managers to easily pick up in any universe screen, KITD will make themselves easier for investors to find and evaluate.  As Money McBags fully expects their EPS to be more positive than January Jones' prom date, being able to get rid of all the extraneous shit will only help the market properly value this company.

On the strength of their Q and the fact that revenue did not get mobelcrated by the declining Euro (mobelcrated of course being the thing that is just a bit worse than excoriated), Money McBags is going to maintain his initial estimates for this year of ~$95MM revenue and ~$19MM EBITDA.  The company has a current EV of ~$175MM so it's trading at ~8.5x this year's EBITDA and the company is getting 100% revenue growth.  Next year, $150MM revenue and $30MM EBITDA is not unachievable and thus at the high end this company is trading at ~6x EV/EBITDA which is way too low for the kind of growth market this company is in even if it is somewhat of a roll up, headquartered in Prague, and loves to dilute the shit out of shareholders.

But wait, let's throw out all of the nonsense on the income statement and lets say KITD hits $95MM revenue this year and grows 30% next year (again, a low estimate).  With 50% gross margins (which is a low estimate compared to the last few Qs) and say ~$40MM in operating costs, and enough NOLs to make even Wesley Snipes smile, you get ~$.95 eps and after today's run up, the company is trading at only 10x that.  Companies growing topline like KITD in this kind of market should not be trading at 10x forward eps, 2.5x current year revenue estimates, or 6x forward EV/EBITDA.

So if you can deal with the warts and likely volatility, this name should easily trade for 20x eps estimates or 10x EV/EBITDA which gives us at least 50% upside from here.  Yesterday Money McBags made the case for CRUS once again, today he is telling you he likes KITD better and reminding you that when the stock dipped below $9 on July 7th, Money McBags told you to load up (of course he told you that all the way down as well, but whatever).  In the longrun this company should see very nice appreciation so sit back and enjoy the ride as it might be rocky but it's should be very profitable.

And as always, When Genius Prevailed is on Facebook and Twitter.

Wednesday, July 21, 2010

7/21/10 Midevening Report: Market "unusually certain" that it should go down

The market was chugging right along today like a Kennedy at a sorority mixer after Apple titillated the market with sales stronger than the breath of either of the world's foremost cunning linguists, the great Vladmir Nabokov and the greater Janine Lindemulder, until Ben Bernanke got up and threw his figurative Baby Ruth into the market's pool causing investors to run for safety.  Bennie B. got his best gangsta lean on and told the Senate Banking Committee, who never met a bubble they couldn't regulate after it had already deflated itself, that the recovery remains "unusually uncertain and shit" before repeatedly rhetorically axing "you know what I mean?"  His befuddling remarks caused the market to fall faster than Andrew Johnson's reputation in the Republican party after suceeding (or more appropriately, failing) Lincoln and thus negated a rare day where earnings were mostly positive.

While it's not entirely clear what "unusually uncertain" means, especially since Money McBags finds all uncertainties a bit unusual, he believes the term is Fed-bonics for "We have less of a fucking clue about what is happening than we usually do."  Bernanke did say the Fed is ready to step in as needed and while he didn't say what those steps may be, one can assume they include keeping rates low (for an extended period like a metrorrhagia sufferer), manipulating the Fed's balance sheet, and the Charleston.

Prior to Bennie B. unleashing his pimp hand and treating the market like his bottom bitch, President Obama signed the financial legislation bill which after two years of debate has been watered down more than a virgin bloody mary without the tomato juice or tobasco (though he signed it "Alan Smithee", so it's not clear if the bill will hold).  The most worrisome part of the bill is that many of the details are more open ended than Alexis Texas right before filming Buttwoman which leaves regulators plenty of wiggle room to fuck more shit up.  As far as Money McBags is concerned the bill didn't go far enough in regulating the use of derivatives, in limiting the size of banks, or in raising reserve requirements and making banks responsible for their greed which led to credit scoring models to be less frequently used than MySpace (does anyone remember that piece of crap?).

In macro news, mortgage applications jumped last week for the first time in five weeks in what surely is a fictitious number, or a typo.  What is more believable is that refi applications were at 14 month highs as record low mortgage rates of 4.59% have led homeowners to lower their interest payments faster than the Stoughton, MA police department lowered the boom on one of their officers who was just doing a little (and Money McBags stresses "little") due diligence

The real story of the day (other than Bennie B.'s uncertain uncertainty) was Apple's Q in which they sold what is known in the retail space as "a fuckload of shit" and put up a huge earnings number.  Apple's net income rose by 78% by selling 3.3MM iPads, 8.4MM iPhones despite people waiting until the end of the Q for the iPhone 4 launch in order to be able to make use of the front facing camera while masturbating for strangers on chatroulette from work bathroom stalls everywhere, and a whopping and quarterly high 3.5MM Macintosh computers making everyone loudly say "Apple sells computers?"  Revenue was up 60% to $15.7B, beating analyst guesses by $1B, and putting the company only $4B away from world domination.  Steve Jobs also defended the iPhone antenna problem by simply saying "deal with it.  And if you don't like it, go by one of those Blackberries and make sure it matches your 8-track player and Jams."  That said, Lenovo is set to launch a challenger to the iPad using GOOG's Android system and they are referring to it as "LePad" because apparently "LeThingThatIsn'tGoingToSell" was already taken.

In other strong earnings news, MS put up a ginormous Q, harkening back to the pre-2006 days when investment banks ruled the markets like Jessica Simpson ruled the short bus in her elementary school days.  Revenue grew 53% to $7.95B and beat analyst guesses of $7.93B driven by MS' trading business which earned $4.1B in operating profits after trading their souls for three more months of manipulating the markets and a good night kiss from Rose Huntington Whiteley.  Also, KO put up a good quarter on the heels of PEP's outperformance yesteray once again reinforcing the demand inelasticity of sugar and water.  KO earned $1.06 per share, beating analyst guesses of $1.03 per share, and saw 5% growth worldwide led by international growth ex. Europe of 6%.  Money McBags is a longterm owner of KO because it is a cheap aspirational brand that appeals to emerging markets that will continue to grow as the US slogs its way towards mediocrity (though mediocrity would be a good thing).  Finally, YHOO dropped 8% on a disappointing earnings report as revenue growth remains more challenging than Sudoku for a dyslexia sufferer.

In small cap news, Money McBags mentioned CRUS yesterday but he was in such a time rush that he missed their quarterly earnings release from earlier in the day which turned out to be more positive than Robin Williams' herpes test.  The company earned $.29 per share in the quarter on 118% y/y revenue growth and margins going to 57% from 52% last year and 56% last Q.  Most surprisingly, their energy business jumped up to $28MM from $22MM as a result of the both the power meter business and their energy exploration business.  On the call, they talked about this business but gave fewer useful details as to what is driving it than a republican strategist gives details about their plan to fix the economy.

That said, it's really CRUS' consumer audio business that has investors drooling over this company as if it were Hayley Atwell as they provide an audio chip for the iPhone and that segment absolutely killed it.  Revenue was up 32% sequentially in that segment with Apple moving to 35% of their overall revenues.  Company guidance was also stellar with next Q predicted to have at the midpoints $102MM in revenues, 57% gross margins, and $27MM non-Gaap op ex. and while Money McBags is no maffematecian (he only counts to two when told to turn his head and cough), those number should get them to ~$.44 eps as they still have more NOLs than Money McBags has broken dreams.

The hard part is forecasting this company since they are obviously a play on the iPhone and AAPL could find a new suplier or put more pricing pressure on them at any time.  Now look, Money McBags doesn't think that will happen anytime soon as their chip is supposed to provide the best audio quality and they are continually investing in R&D, but it is something of which investors should be aware.  Money McBags' previous estimate for fiscal year EPS was $1.20 but with CRUS earning $.29 per share  in Q1 and guiding for $.44 per share in Q2, $1.20 seems like it is lower than Andy Rooney's balls.  So Money McBags is going to get a bit conservative here and estimate that the energy business falls to ~$24MM quarterly run rate, the non-AAPL consumer business stays flat, and the AAPL business only grows 10% sequentially.

Doing that (and using 55% margins which may be on the low end and $110MM op ex), Money McBags gets an estimate of $1.47 which is about double what they should earn in the first half of the fiscal year.  Of course, those are very low end estimates as the AAPL business has been growing 30%+ sequentially and gross margins have been above 55%, so at the hgh end we could be looking at closer to $1.70 EPS for the fiscal year.

Either way, the stock is now trading at ~$19 which is ~13x Money McBags' low end estimate and the company has ~$2.50 in cash on the balance sheet and 13x for a company growing this fast is just way too fucking cheap.  If you want, throw a 20x on $1.47 and get to ~$30 for a target price.  As long as Apple doesn't pull the rug out from under these guys, there is plenty of room to move up even though it has already had a better run than a roidal Ben Johnson.

Tuesday, July 20, 2010

7/20/10 Midevening Report: Republicans fail to stop unemployment benefits from being extended, next up, trying to outlaw wheelchairs for quadriplegics

The market was moderately down today like a dysthymic after downing a plate of sugar coated prozac and a 2 liter of Jolt Cola before it ran up in the late afternoon due to the Senate extending unemployment benefits.  Earnings were the biggest disappointment early on with IBM, TXN, and GS all putting up subpar topline numbers (see Money McBags' prescient headline from yesterday) as if they were a Jerry Bruckheimer film or Greece.  That said, macro news also disappointed which is about as surprising as learning that BP may have more problems or Hilary Swank is really a man.

The main US macro news out today was that home construction declined because, well, because people don't even have enough money to build confidence, much less houses.  Construction of new homes fell 5% in June led by a 20% drop in the construction of condominiums and apartments but helped out by the increase in the construction of shanty towns and modern day Hoovervilles (and hopefully soon, Hootervilles, which will be made out of plenty of wood and pure awesomeness).  On the positive side, there was a 2.1% increase in the demand for new building permits though the Commerce Department listed it as "wishful thinking," and on the slightly more positive side Russian spy Anna Chapman may pose for Playboy.

The big news of the day was that the senate is set to extend jobless aid after some guy named Carte Goodwin was appointed to Robert Byrd's old Senate seat, making it in fact a "good win" for struggling people everywhere (and yes, that was an awful pun, nowhere near as good as someone named Mr. Goodjoint looking like this).  Yeah, Money McBags knows spending more money is not the best longterm strategy and that if the government keeps perpetuating this global ponzi scheme, we are all going to be more fucked than Lisa Ann on the set of Who's Nailin' Paylin, but having 4MM people surviving on month old pop tarts and feces is certainly not the answer.  There are easily other areas where one could cut spending to make up for supporting people who need extended unemployment benefits (like maybe buying 2 or 3 fewer stealth bombers, using credit cards instead of cash in Iraq, and taking memberships to Tranny porn sites out of the SEC's benefits package).

That said, never before has there been a need to cut costs to allow for extended unemployment and never before has the government tried to do that in the middle of a recession, but apparently Republicans hate winning elections.  Look, all of this money gets put right back in to the economy and is a mini stimulus which might buy the US another month or six to give it a chance to hit a patch of dumb luck and thus avoid being knocked in to bolivion.   Either way, Republicans blocking this package is among the stupidest political strategy blunders in American history, right up there with Nixon sweating through the Nixon-Kennedy debate, anyone allowing Sarah Palin to be interviewed, and Warren Harding banging a hooker with a teapot (or something like that).  Obviously the deficit needs to be better managed lest we fall further in to Keynes' folly, but cutting extended unemployment benefits is not the way to go unless one wants to speed up the oncoming anarchy and see what happens when crime starts moving to the suburbs.

In stock news, earnings disappointments led the day with Goldman missing estimates of ~$2.98 EPS by earning only ~$2.75 per share ex one-timers and if this keeps up, theWhite House GS' management team, may be in trouble.  Those one-timers included the $550MM settlement with the SEC, $600MM for a British bank payroll tax, and Raven Alexis the night of the company picnic after wowing her with how deep their structured products run.  It is a rare miss for the company, as they have perfected the ability to control both the markets and the government without winning a popular election or being likeable, but every once in a while even the great Ron Jeremy must come up flaccid.  The biggest issue with GS' Q was on the topline driven by revenue from trading of fixed income products, currencies and commodities, falling to $4.4B from $7.4B in Q1 and $6.8 billion in last year's Q2 which is a more precipitous decline than Lloyd Blankfein's hairline (or reputation) and caused him to vociferously utter "inconceivable" to anyone who would listen.  Of course with revenue falling, GS had to cut compensation in order to keep some profits (though profitability did fall 82% even with the cuts) and the ratio of compensation to net revenue fell to 43% in the first half from 49% in the first half of last year which means employees will now have to buy the in the lot Lamborghinis rather than have them custom made.

While last week Goldman settled with the SEC and admitted no wrongdoing (which is a bit like Roman Polanski claiming it was consensual or Eddie Murphy claiming he only acted in The Adventures of Pluto Nash and didn't write or direct it), the VP in charge of the (allegedly) fraudulent Abacus CDO, Fabulous Fab Tourre still faces a law suit from the SEC which could undermine Goldman's lack of admission of guilt, especially if Fab continues to blame it on the rain (and that reference will never stop being funny).  Tourre made a filing today with the courts saying that he isn't responsible “for any alleged failings” by GS and he didn't mean to sucker people out of their money, it just seemed like the thing to do.

In other earnings news, IBM's revenue came in short of analyst guesses at $23.72B vs. guesses of $24.17B due to a drop in service contracts which the company says were merely pushed back in to next quarter and sluggish growth in Europe due to it being siesta season overseas.  Also disappointing was TXN, whose earnings and revenue were at the midrange of guidance but failed to outperform whisper numbers (and Money McBags only hopes it was Alice Eve whispering the numbers).  Despite a 900bp increase in gross margins, 42% revenue growth, and above street guidance, the stock tumbled today as if it had downed a fifth of Jack Daniels and had vestibular neuritis.  On the positive side,  Pepsi beat estimates and earnings were driven by strength in emerging markets with sales in Asia/Middle East/Africa up 16% proving that the demand for sugary water is more inelastic than the demand for running water, shelter and malaria medicine.  After beating earnings estimates of $1.08 per share by $.01, PEP maintained their 11% to 13% earnings growth estimate for the year despite currency hurting their growth rate by 1% and Coke hurting their feelings by calling them copycats.

In small cap news, just about everything ran up end of day and Money McBags is pressed for time today so he'll just leave you with one thought: CRUS.  Apple reports tonight and CRUS provides an audio chip that goes in to their iPhone.  Money McBags has talked about this stock in depth here and all it has done is go up like the age of consent in Georgia over the past 200 years.  You can read Money McBags' analysis of CRUS by using the search function on WGP but he was alerting you to this stock when it was below $10 and his estimates have continued to go up with the surprisingly quick rebound of their energy business.  Money McBags thinks they can earn $1.20 per share and with the type of growth they have been witnessing, there is no reason the company shouldn't trade at 20x that which means you can still earn >25% here.  So pay attention to AAPL's release because strong iPhone sales should bode well for CRUS' upcoming Q.