Tuesday, February 9, 2010

2/9/10 Midday Report: Greece once again open for business, no longer a Euro school dropout

The market is up strongly this morning after EU Bank president Jean-Claude Trichet decided to leave Australia where he was attending the Reserve Bank of Australia’s 50th Anniversary Symposium which was a party likely as raucous as a staring contest between Bea Arthur and JD Salinger (mainly because they're both dead).  Even so, we are told things got a little out of control when the bankers let their toupees down and played a little game of "name your favorite currency" with Vietnam's Dong easily winning out even if it is not as big as the other currencies.  Trichet flew back to Europe where he was invited to a summit of European leaders called by the deligthfully named Herman Van Rompuy (and Money McBags is calling bullshit on this whole thing because no one is named Herman Van Rompuy).  This is leading to speculation that the EU has a plan to bail out Greece, and Portugal, and Spain, and maybe Italy, and then maybe even Freedonia (where time flies like an arrow and fruit flies like a banana).  As one analyst said: “The markets are smelling a deal for Greece, and for that reason, we’re seeing some stabilization."  Of course, that smell could actually be Greece and not a deal for Greece but Money McBags remains optimistic because as he has been saying all along, the Euro is not going away, it's just not.  Now it's unclear how the EU plans to deal with the struggling countries, whether it's a good old fasion bail out, some kind of debt guarantee, or a lifetime ban on Nia Vardalos movies, but help is on the way.

In US macro news, there's not a whole lot of new information.  Wholesale inventories unexpectedly dropped by .8% in December while sales rose .8%.  Both numbers were marginally below estimates yet close enough that the market let out a collective yawn.  Inventories bear watching though as we've made it through the obvious restocking and now we're at the point where they need to at least maintain their new level in order to signal new steady state or some real growth.

In stock news, KO had a blow out quarter as earnings rose 55% thanks to India and China who love them some sugary water.  Overall revenues were up by 5.4% even though they were down 4.5% in the US thanks to some people apparently giving a shit about not being fat.  Luckily, developing countries haven't yet reached the point where they have large middle classes whose teenage girls read People magaine and stress about weight from the caloric intake of soft drinks and thus KO benefitted from 19% growth in Latin America, 29% in China, and 20% in India.  Coke also annonuced they bought back $1.5B (known colloquially as a "shitload") of their own stock last year which was $500MM more than they committed.  Money McBags is an owner of KO for the simple reason that it has ginormous brand equity in developing countries and is a relatively cheap product that people can buy to feel like they are part of American/pop culture (kind of like Paris Hilton's vagina).   MCD, another longtime holding of Money McBags came out with their monthly sales numbers which featured a 2.9% rise in same store sales driven by a 4.3% increase overseas.  Sure, people were disappointed that US same store sales were down .7% but people were also disappointed that the Kim Kardashian sex tape was a bit grainy.  So as always, you can't please everyone (unless you are Blake Lively and are manning the free blumpkin and waffles booth at the local greeting center), but you can be happy with MCD's numbers and Money McBags owns them for the exact reason he owns KO.  They sell cheap shit with huge brand equity that developing countries love the fuck out of (and this will be the first sentence in When Genius Prevails' short and illustrious history that will end in a preposition).  Also, ERTS put up a terrible quarter as their attempt to take on the Grand Theft Auto franchise with Moral Theft: Vatican City failed to generate sales while damning them all to hell (or as it is more commonly known, the guest audience of The View).

In small cap news, two companies Money McBags follows reported today with TMRK putting up a marginal quarter with lackadaisical guidance and DFZ slipping it's quarter some ruphies and having their way with it like a young Charlie Sheen at the Viper Room.  DFZ has been a small holding of Money McBags for a few quarters because it has been cheaper than Valtrex at Lindsay Lohan's house in addition to being a well run company with growth prospects completely under the radar of investors because their business is more boring than a Jane Austen novel or watching two pieces of lint hump (and now that I think about it, watching lint hump may not be so boring afterall, so scratch that).  They are the market leader in slippers, yeah, you know, the things your significant other bought you that you never wear.  The point is that even though the market is small (about $300MM), they dominate it like Nipsey Russell dominated the 1970s Hollywood game show circuit.  They have 35% of the market and are the sole owner (pun intended) of the slipper business for a little company called Walmart.  DFZ continues to win business from smaller players as their supply chain and logistics management give them an advantage in winning business by giving buyers confidence in their ability to easily handle a relatively unimportant vertical.  Since turning the business around, they have had yearly EBITDA no worse than $12MM and had been trading at 6x that trough EBITDA even though prior to their announcement last night, they guided for slight growth.  In the quarter released last night, they earned $.74 per share, which was around 30% growth on sales growth of nearly 15% ($56MM compared to $49MM) thanks to margins moving from 39% to 43%.  Cash on hand was up to $37.5MM and they have no debt so they are now trading at around 4x to 5x EV/EBITDA depending on how much credit you want to give them for growth in the second half of the year (Money McBags has not had a chance to listen to their conference call yet).  Before this huge Q, Money McBags was pegging them to earn $.80 per share this fiscal year by maintaining a 41% margin but they almost beat that $.80 number just this quarter.  Now it's likely they'll earn closer to $1 (again, Money McBags has not listened to their call yet to know if there was any guidance) so they are trading at less than 10x fiscal year 2010 earnings and they have a June Q so they are probaly closer to 8x full year 2010 earnings.  The company is so cheap it makes my balls hurt, or in the case of DFZ, it makes the balls of my feet hurt which can be soothed by slipping on my DFZ made Dearfoams.  Not only are they cheap, but they have been rumored to be in talks with WMT's international business to expand there and were actively looking to get into Payless/DSW/other shoe stores and to be honest, Money McBags is shocked they are not already in those stores.  The other rumor is that they are looking at acquisitions, potentially of a sandal or flip flop company to help smooth out the seasonality of the slipper business.  They also recently launched a Levis brand and earlier last year turned down a take out offer of $7.50 per share for the company, so we have some good downside protection in cash and in potential buyers if this company were to shit the bed.  There is no reason this company shouldn't trade for at least 12x earnings which would yield at a minimum a $12 stock price and it is currently trading for $9.50 (and this is not even to mention the now stupid multiple of EBITDA for which it currently trades).  The downside is that it is a tiny company with little institutional ownership and almost no coverage, but that is more of an opportunity than a concern.  Money McBags is happy with his current position and may buy more should it dip down tomorrow or after he goes through their call.

As for TMRK, they gave guidance for $95MM to $100MM 2011 EBITDA so despite a decent quarter, they are already trading at around 8x 2011 EBITDA.  While that is cheaper than competitors, and while TMRK is in a terrific growth market as Money McBags believes more in the growth of cloud computing and colocation than he does in the existence of Hanna Hilton (and as he watched about 22 hours of her terrific performances yesterday, he is 99.87% sure she is real),  they do carry around a large amount of debt and have significant cap ex.  This was Money McBags analysis of TMRK from last month and he stands by it (especially as TMRK was trading at around where it fell back to today).  The growth targets announced this Q are a bit below expectations but if the stock continues to drop, Money McBags will likely start a position.  No need to get involved today as the momentum buyers fly out, but worth watching.

No comments: