Monday, April 19, 2010

4/19/10 Midafternoon Report: Goldman causing Wall Street to rethink how they do business, instituting "no more e-mail" rule

The market is teetering again as the big news remains the SEC's charges of fraud against Goldman Sachs.   These charges have Money McBags giddier than a emetophiliac at a Phillies game because Goldman has long been manipulating the markets while massaging the government's taint to get away with it.  The best part about this is after GS (or BS for Boldman Sachs) goes down like Janine Lindemulder in Where the Boys Aren't 12, the rating agencies will be next as they were as complicit in the financial disaster as hydrogen was in the crashing of the Hindenburg or as Jane Austen was in ruining high school English for generations of virile males.

Not only is the SEC getting their investigation on, but Europe is following their lead, which is somewhat similar to the blind leading the blind or Ron Gallagher following Leo Gallagher (though with fewer watermelons).  Prime Miniser Gordon Brown's knickers are all in a bunch and he has been seen taking puffs of a fag to calm himself down over GS's "alleged fraud" claiming to be shocked at the "moral bankruptcy" exhibited by the investment bank.  Though frankly, being shocked at the moral bankruptcy of an investment bank is a bit like being shocked about abstinence programs not working with teenagers, Shannon Tweed starring in a bad (yet delicious) movie, or the late great He Ping Ping not being able to dunk a basketball.  Germany's Chancellor Angela Merkel is also tryng to get involved in the mob rally against GS by demanding details from the SEC in what could be Germany's first hostile action against the Jews in 70 years (and for those of you new to WGP, Money McBags lights the menorah, so he's allowed an occasional Jewish joke).  Of course tomorrow GS reports their quarter which will likely show a huge (manipulated) trading profit so the market should be more susceptible to violent swings over the next few days than a schizophrenic dropping E at Burning Man or Mike Tyson on a Tuesday afternoon.

Macro news was very positive today with the leading US economic indicators rising by 1.4% in March which was the most in ten months and the biggest rise it has had since discovering Olivia Munn.  The rise was better than economist guesses as seven of the ten indicators increased led by interest rate spreads, factory hours, and box office receipts due to Amanda Seyfried's latest work, the NSFW Chloe (and we hear the US economic indicators gave the movie to GDPs up).  The index of coincident indicators also rose by .1% with payrolls, not coincidentally, making their first substantial contribution.

In stock news, C earned $4.4B thanks to trading profits, slightly lower reserving, and the government bailing them the fuck out last year.  There is less reason for this bank to exist than there is for the  institution of marriage as C was one of the worst offenders in the destruction of the global economy over the past several years and should have been divorced from the financial system instead of the system paying C alimony and child support for all of its bastard businesses.  C was more poorly managed and had worse risk controls than Jamie Lynn Spears but hey, what a difference a $45B bailout can make.  I guess the old adage is untrue as apparently you can polish a turd.  CEO Vikram Pandit claimed to be "proud of our first-quarter results" and some analysts are praising management which is a bit like praising a pregnant intravenous drug using woman who slept with Eazy-E and shared needles with Althea Flynt for giving birth to a healthy baby.  C's adjusted earnings were $.14 per share which was ahead of analyst guesses for a break even quarter and was helped by decreasing their loan loss reserves by 5% from the previous quarter and 16% from Q1 last year.  C still saw weakness in their Citigroup Holding carveout which lost ~$900M and is of course where C siphoned off all of their bad mortgages, bad credit card assets, and Charles Prince's last remaining shred of dignity.  C's book value is now slightly over $4 per share which is still more than Money McBags would pay for it.  Their beat, like every other financial beat, was due to trading gains and with GS about to get the "turn your head and cough" treatment from the SEC, regulation is on its way which will start hindering these fictitious trading gains.  In other stock news, Haliburton's earnings were down 45% as Dick Cheney is no longer the VP and Eli Lilly beat analyst EPS guesses but is down due to warning that the new health care law will cut into revenue since they are now going to be restricted from selling drugs at usury prices.

In small cap news, TMRK slipped under $7 despite this positive article on cloud computing today (though it was in the NY Times so could have been made up like unicorns, leprechauns, and Brooklyn Decker (because seriously, no one is that hot)), while PALM shares continue to fall after investors come to their senses about the valuation in an acquisition.  Also, Money McBags has been looking in to EPAX lately and while you'd still be earlier in buying it than Roman Polanski is early on the statutory rape scale (except for maybe in West Virginia), it is worth keeping an eye on it.

EPAX's main business is to book/plan/promote educational international travel tours mostly to school students and school groups.  They have obviously been hit during the recession as parents have reigned in their spending more than young laidies have reigned in full bushes in the 2000s (and Money McBags is very appreciative of that).  However, sending your kids overseas is a once in a lifetime experience that many families are going to continue to do because little Johnny really needs to go to Amsterdam to learn that not all red lights are bad.  The point is, there is always going to be some demand for these kind of experiences and this has been a very well run business throughout the last decade with high returns and good cash flow.  The company has earned $1 per share over the last two years after peaking at $1.53 in 2007 and is currently trading just above $12 with $43MM in deployable cash which is ~$2 per share.  So in a normalized world, they should earn at least $1 per share and thus are currently trading at 10x that plus the $2 in cash which is way below where a company with high returns and a nice business model should trade.  They used to trade at 20x to 25x earnings so if they can grow earnings again, there should be multiple expansion (of course if they wanted their mulitple to expand, they could just show it a picture of Jessica Pare, but that would be too easy).  The key issue is when do parents start feeling safe enough about their incomes that they send their kids overseas again to see the Mona Lisa and that certain place in France where the ladies wear no pants (and for the record, Money McBags is told there is a hole in wall where the kids can see it all)?

Since this travel occurs mostly in the summer and is booked way ahead of time, trips for this year have continued to fall off a fucking cliff.  As of February, bookings were down 21% from a year ago and it is not likely that number will shift very much between now and the summer.  So if we take last year's revenue, reduce it by 21%, use the same gross margins and reduce operating cost by the 5% of the workforce they plan to layoff this year, we get to a measly $.49 of earnings for 2010 which is fuck-awful bad for this company.  Analyst guesses are ~$.60 so Money McBags' rough estimate is a bit worse than the Street, but the number is less relevant than the direction.  The point is, this year is already a fucking wash and everyone knows it.  The key question is what happens next year.  If the economy gets better, parents will start spending on this shit again, guaran-fucking-teed so if they can get their revenue back up to where it was in 2009 (~$98MM) when the economy also sucked balls that  would be around 25% growth and the leverage in model should allow them to quickly move back to ~$1 eps which would be 70%-100% earnings growth from 2010 and wouldn't you pay more than the current 10x for that?  Again, Money McBags is flying blinder here than Ricky Martin at a Rick's Cabaret as he has no idea when the spend for this travel comes back.  It may lag by another year since these trips are more expensive and discretionary than a Bar Mitzvah party, but it will come back eventually.  So here is a company with $1 to $1.50 in earnings power, still struggling, but trading at a very low multiple of potential future earnings with the questoin being do those earnings come back in 2011 or 2012.  It is definitely worth looking in to and perhaps buying a sliver now, but there is no rush.  Money McBags is going to wait for another quarter to see if there is any guidance for what 2011 looks like, and if it is positive, he will be starting a position.


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