Monday, February 1, 2010

2/1/10 Midday Report: Pat Sajak miffed as $3.8T budget allows government to buy as many vowels as they'd like.

Obama's budget is out and it looks like more stimulus is coming as the administration continues to try to sweep the recession under the rug (though I hear it is a delightful afgahn this time as Mrs. Obama has uncomparable taste).  The budget is roughly $3.8T which is equivalent to 190MM lap dances or as it is known in the NFL, "Wednesday."  Who knows, spending our way out of this recession may work, as I have found that spending my way out of depressions by dropping $20 bills like they're unpinned hand grenades (which is fast, furious, and with immaculate precision) at my local Rick's cabaret, is a suitable remedy.  Basically, the new budget is attempting to buy more time for the economy to recover on its own while channeling its inner Keynes and hoping the multiplier on GDP is somewhere near 1 billion.  Given the exponential pace of technological innovation and Keynes' logically thought out and unprovable equations (like all of economics with its oh so idealisitic goals which never work in the complexity of the real world, like a contractor with no competition or anything made in China) it is possible it could work.  The only problem is it gives investors more mixed signals than an indecisive three year old with tourettes.  Q4 GDP seemed decent, but it was driven largely by stimulus spend so it is hard to gauge if the economy really did improve (Money McBags maintains that inventories were just being built back up and may have even overshot their targets since consumer spend was stimulus driven).  Of course, to pay for the new stimulus, taxes will go up on the evil banks who we bailed out who continue to get money for free, big businesses, oil, gas and coal producers, people who make more than $250k, and Gabe Kaplan.  But fear not because the budget does contain a plan to trim future deficits to give or take $1T (that is unless things remain bad) so Keynesians can still rejoice that in either case the US will still owe a fuckload of money.

In macro news, the market is up today as the ISM reported that manufacturing in the US expanded at its fastest rate since August of 2004, back when everyone was buying new flat screen tvs for the 8 houses they were about to flip.  The index rose to 58.4, besting analysts forecasts and the 54.9 reading of December.  Anything over 50 signals expansion which means my pants are constantly over 50 whenever Jessica Simpson comes over for dinner.  Also, personal income was up .4% slightly ahead of estimates while consumer spending was also up .2% but below estimates.

In stock news, Exxon Mobil's proft fell 23% but they still beat estimates thanks to their exploration and production businesses as well as higher oil prices (OPEC this, bitches).  They did have some weakness in refining to the tune of a $287MM loss which may signal a shift from those gas guzzling SUVs and will likely require CEO Lee Raymond to stop double dipping his balls in gold (only one dip now Mr. Raymond).

In small stock news ARTG and ISYS both beat estimates and yet are trading very differently today with ARTG, to use a technical term, taking it in the yingus.  ARTG provides services to help power and optimitize e-commerce and we all know that even in this poor economy, e-commerce continues to grow faster than a Yeti's taint hair (and trust me that is fast, but don't ask how I know).   They earned $.06 non-gaap on 9% revenue growth and recurring revenue grew to over 50%.  They did around $10MM of EBITDA which would put them at a EV/EBITDA run rate of 10x to 11x but if they can continue to grow even modestly, they could earn almost $.30 next year.  With $85MM in cash, the company is now trading at around 13x next year's earnings with a nice cash cushion, though not as nice as Carmen Kinsley's cushion.  But here's the thing, they annonuced a 25MM share offering today despite all of that cash and gave the bland statement that it is for working capital and other general corporate purposes, such as possible acquisitions and the beginning of "Lobster Tail Tuesday's" in the company cafeteria.  With 134MM shares already outstanding, adding another 25MM dilutes the company by about 16% and thus the previous numbers all have to be reduced (the $.30 eps this year is more like $.25).  The stock is down 10% on the dilution, so actually up a bit on the decent quarter and now trading at around 16x a potential $.25 eps number which is still relatively cheap for a company growing like ARTG and selling at a lower multiple than comps.  The big unknown is why a company with $85MM in cash and with positive cash flow from operations who could have been an acquisition candidate themselves, needs to dilute shareholders for another $100MM.  Their biggest competitor is IBM so clearly $180MM is not going to allow them to take over Big Blue, so the question becomes who do they plan to buy with the capital raise or what business do they plan to enter?  Money McBags awaits to get some clarity on their use of cash but the company remains in an advantaged market and is trading at a reasonable, though not cheap multiple, so deserves paying attention to.  As for ISYS, they earned $37MM in revenue and had net income grow 50% to $2MM with gross margins expanding above their target 37% to 38.4%.  ISYS basically builds satellite systems for the military and after going through a few years of CEO turmoil and being in tertiary businesses, they have seemingly turned the company around and started to focus on their core capabilities.  The company has talked about a goal for 2010 of $20MM of EBITDA (analysts are closer to $15MM) and the company currently has about a $120MM enterprise value so is trading at 6x EV/EBITDA that goal.  Of course, the recent Q had $2.5ishMM of EBITDA so the $20MM relies on the rest of the year to pick-up.  They are up 5% today on their decent Q and if they can continue to improve margins and win deals, they could easily trade above $10.  It's not the sexiest company in the world, but the relaince on military spending which per Obama's new budget isn't subject to the discretionary freeze, should give them ample revenue opportunities.


Anonymous said...

Re: ARTG and the offering.

During the CC the CEO said that they're looking for further acquisitions and want to be nimble. He also said that some clients like to see a certain amount of cash on the balance sheet, so this offering will give them the cushion that they need to be able to do quick, cash acquisitions, yet still have enough cash to soothe the clients.

Money McBags said...


Thanks for the update. I hadn't had a chance to listen to the call before producing the Midday Report because readers demand Money Mcbags' update in a timely fashion and dick jokes aren't written in a day. Well actually they are, but I didn't get to the call until late because I spent an inordinate amount of time searching for the right Jessica Simpson photo (My job is tough and often times thankless, but I am here to serve the people, especially if the people are female and enjoy giving sponge baths and superbowl blumpkins).

I did have time to go through ARTG's call once the midday report was up and it was pretty impressive, especially where they expound on the $3.6B market opportunity. There is no doubt that the company is in a growing market, and they picked up some nice deals like DSW and sounds like they got increases Vodaphone and Sprint business. That said, they wouldn't be raising so much capital if they thought they could keep growing into that $3.6B market as they currently are constituted.

Here are the exact quotes from their call about the equity raise:

"Our future plans are to accelerate growth through market leading product development, geographic expansion, and strategic acquisitions. In order to achieve these aggressive goals we need access to capital allowing us to be nimble and opportunistic in a rapidly expanding global e-commerce market."

"Obviously we're raising this for general corporate purposes, but obviously as we look out we have made four acquisitions in six years. We would like to pick the pace of that up. We think there is a great market opportunity right now. We think there is a lot of opportunities in e-commerce. We definitely see the pace of that picking up."

"Well, basically if you look at our cash position, we enjoyed over $85 million as we closed the quarter last quarter. Obviously used $17 million of that for InstantService. We aren't necessarily locked into a cash position. We on the other hand go up against people like IBM on a regular basis. People do look on the our cash balance and expect to us have some amount. So if you think about that -- that is obviously -- limits the amount that we have on hand to go out and make acquisitions, and obviously from time to time being able to have a different mix of cash is helpful for making the acquisition happen and also obviously the size of that acquisition. As we go forward we're thinking of leveraging our funds in both ways."

"The company did well this year so we wanted to give all of our employees Maybachs filled with beluga caviar and the wings of a pegasus. That shit ain't cheap so we needed to sell some shares"

Ok, I made the last one up but they are definitely looking to pick-up the pace of acquistions with the cash and maybe get into/expand their market research optimization capabilities.

The stock is moderately priced with good growth opportunities, so investors need to try to assess ARTG's ability to integrate a big deal because that seems like what is coming.