3/29/10 Midday Report: Who needs yeast as market rises on Passover

Break out the menorahs as it's Passover and thus time to light the candles, forgo yeast, and drink Manischewitz until the market makes sense and Mayim Bialik becomes atttractive.  The market is up today as economists ponder their own four questions:  1.  "Why is this market different than any other market?"  2. "Why in this economy does the market not dip when in all other recessions it dips twice?"  3.  "Why does the market continue to go upright, instead of reclining for a bit as news has been only marginally not bad?"  4.  "What does a Jew have to do to get a table dance (And in honor of passover, Money McBags would only take table dances from fellow yids Nikki Reed, Bar Refaeli, Emmanuelle Chriqui, and Joan Rivers)?  That said, in macro news today consumer spending was up modestly by .3% which was a bit less than the .4% from January and a whole lot less than that of you know, a healthy fucking economy.  It could have been worse though with February snowstorms but luckily most people were still able to consume by staying inside and ordering shit they didn't need from QVC with money they don't really have.  Excluding food and fuel as the Fed likes to do when looking at consumer spend (which is a bit like excluding Enron when talking about financial fraud, excluding Fischer Black when talking about Myron Scholes, or exculding rhyming couplets when analyzing Dr. Seuss), spending was equal to last month's spending and up 1.8% from last year.  Salaries for the month were flatter than a Steve Forbes tax rate and household savings fell once again to 3.1% of disposable income or the lowest it has been in over 2 years.  It's good that people didn't learn anything in this downturn and continue to run their personal finances like the US government runs their Keynesian budget.  The difference of course being the government can't max out on their AMEX black card while consumers can only run up so much debt before getting BAC to renegotiate their mortgages.

In international news, Greece is selling 5B euros of 7 year bonds to try to pay for all of the shit it bought after having one ouzo too many and winding up face down on the floor of a Greek massage parlor in a puddle of it's own debenture.  This is the first bond offering since the EU and IMF said they would bail Greece out of their fiscal calamity and will likely to be the most expensive bond offering since the Quantum of Solace (and Jay Leno, feel free to steal that one when your Jaywalking bit becomes stale.  Oh wait, we're already five years late for that).  The good news is that the Greek government just needs to raise another 48B euros by the end of the year, the bad news is that the Greek government needs to raise 48B euros by the end of the year.  So I guess Greece's financial position depends on whether you see the glass as half full, half empty, or as cracked as Alexis Texas' backside.  The seven year offering should help extend the average maturity of Greece's debt and thus divert this crisis until the next remake of Clash of the Titans (and Money McBags eagerly awaits the parody to come out titled "Ass of the Titans" starring Kim Kardashian's better half). 

In stock news, the US Treasury announced that they are going to sell all 7.7B common shares of C they own sometime in 2010, as soon as they find a big enough sucker, I mean buyer.  The Treasury assures investors though that C is in good standing, at least that is what Money McBags thinks they said in between coughs that sounded like "bullshit."  In other stock news, Ford sold Volvo before it crashed (though if Volvo had crashed, at least no one would have been harmed).  Ford is getting $1.8B for Volvo from a Chinese conglomerate called Zhejiang Geely Holding Group and seeing as how Ford only paid $6B for Volvo 11 years ago, their -70% return makes it Ford's best business decision since cancelling the Edsel.  So good on you Ford.  Money McBags really likes this acquisition for China because if ever anybody needed a safe car (other than maybe Mary Jo Kopechne), it is asian drivers.

In small cap news QCOR continues to rise and Money McBags broke QCOR down for all of you after their earnings in the first week of March.  The company is up ~40% since then and there is still value there as they could earn $.70 this year and thus are trading at less than 12x that number and still at only ~.3 EV/sales.  They have a drug which people need (its demand is as inelasitic as the demand for medical care, an Olivia Munn nude scene, or chocolate Necco wafers) and are finding new markets for it to grow (multiple sclerosis spasms, nephrology spasms).  Money McBags is still waiting for a sell off to buy.  More importantly, KITD is having their earnings call tomorrow and Money McBags is anticipating this more eagerly than he is anticipating the movie Chloe which features Amanda Seyfried in all her sapphic glory.  Money McBags has broken KITD down on When Genius Prevailed more times than an Olsen twin has binged and purged and more times than Michael Lewis has inserted himself into his books.  This was the last detailed post on KITD but in a nut shell (and it's not clear why anyone would be in a nut shell, but whatever), the company has 99% recurring revenue, 99% retention rates, and this year is going to grow more than 99% (though almost half through acquisitions).  Of course there was a glaring error in Money McBags break down of KITD in the blog post to which he alluded, and for that he is more ashamed and embarrassed than Kathy Hilton on take your daughter to work day.  Money McBags took Google Finance's market cap as fact when in fact Google's calculation uses KITD's sharecount from the end of the previous quarter.  Since then, KITD has raised a number of shares for acquisitions and to pay off warrants so their actual share count is now 17.7MM which puts their actual market cap at $223MM, not the $125MM implied by Google Finance.  Therefore, KITD is trading at 11x their upside EBITDA for the year and isn't quite as cheap as an Albanian hooker, yet is still cheaper than 2010 Kansas Final Four t-shirts.  The company is going to book $85MM to $100MM of revenue this year and next year it is not inconceivable that they can grow by $50MM (or the same absolute amount they will grow this year).  They are in a market (IP video) which is 4% of the overall online video market and is cheaper than competing technologies such as digital video or simply hiring the people from online videos to perform live at your house.  Not only that, but even if they don't gain share from more expensive alternatives, the online video market is growing at a 38% CAGR (which isn't quite as exciting as a sorority kegger, but still pretty good) so just by inertia or as they say in business school "being in the fucking market" they should be able to grow.  So if they just grow at the market rate, that is $138MM in revenue next year and if they just gain a bit of share from the current 4% IP video market share increasing, they can get to that $150MM number.  Their EBITDA margins are 17.5%+ so let's say they get those to their 20% target , then the upside is $30MM of EBITDA next year, so they are trading at 6x to 7x EV/2011 EBITDA.  Not only that, they should become EPS positive.  With 48% gross margins at $150M in revenue they could earn $72M in gross profits.  SG&A has been running at $32-$35MM a year, but let's say they somehow have to increase their cost structure (even though they really don't in order to grow) and have $40MM in SG&A in 2011, that gets them to $32MM in operating earnings and since they have more NOLs than the Pythagorean theorem has proofs, that $32MM should all flow to the bottom line.  With 17.7MM shares, that is an upside of $1.80 eps which puts the stock at 7x 2011 earnings.  And honestly, that number is so fucktasticly low that surely Money McBags' maff must be wrong so feel free to run your own numbers.  As for downside, let's say they come in at a low $85MM in revenue this year and grow 20% off that to reach $100MM next year (as opposed to the $150MM upside).  Using the same cost structure, they would earn $.45 per share next year and be trading at ~25x that right now which would be a bit expensive for a 20% top line grower, but not outrageous.  So downside seems pretty limited if you trust the management of a company run out of Prague by guys who are in the business of building companies quickly and flipping them (and yes that last sentence made Money McBags want to throw up on his socks).  Tomorrow's earnings will be very interesting and if there is a guidance raise, Money McBags will likely be buying even more.  That said, if they disappoint, this stock could easily trade down 20% because they have to execute given their current business stage.