Monday, May 17, 2010

5/17/10 Midafternoon Report: The Euro is falling! The Euro is falling!

The market was somehow flat today after spending most of  the day down again as the perilousness of Europe's debt situation continues to worry investors like laryngitis worries Pavarotti or like coming in to contact with Paris Hilton worries osmophobes.  Not only is Europe raining ash on the market's parade (both literally and figuratively, though to be fair, the market's parade today was in honor of Norwegian Constitution Day (better known as pedophilia Christmas for the tradtion of children's parades), which ranks somewhere between the invention of nose hair clippers and the launch of the Edsel in the pantheon of modern events, so not a big deal) but US macro news was mildly disappointing as well.  The NY Fed released their monthly manufacturing report and the gauge of general business conditions fell to empty.  The business index dropped from 31 to 19 and analysts had guessed it would be 30.  As always, Money McBags has no idea what the difference between 31 and 19 is (other than maybe a few kids and a meth problem), but he knows that they're both legal.  The new order index also tried to make this a Blue Monday by falling from 29 to 14 as inventories have been restocked (or un-destocked, whatever).  One positive aspect of the report though was that employment strengthened as payrolls grew the fastest they have in six years as NY manufacturing plants try to keep up with demand for tools and building materials to help batten down foreclosed on houses.  In other US macro news, home builders' sentiment hit a 2.5 year high as apparently delusion has finally creeped in to lift their spirits.  The index rose to a whopping 22 while analysts guessed it would be 20, so the difference is a rounding error or a stutter.  The bigger issue is that 50 or greater means more people are optimistic, so with the index only at 22, people are just slightly less negative, like a guy who breaks up with Amy Winehouse to date Mayim Bialik.

Internationally, the Euro continues to sink today as if it were a Brazilian Real in 1999 or had just hired Ted McGinley to star in its new TV drama (tentatively to be called The Big Crash Theory).   The ECB was out buying 16.5B of sovereign debt and in order to try to show they aren't just printing Euros, they will be taking in 16.5B of deposits from banks and paying out interest.  Wow.  So the banks get some free money while the ECB gets worthless bonds and has to pay interest on the money they didn't "print."  Seems a bit odd but then again, so does Rene Zellweger's face and that's never seemed to hinder her.  Also, bank lending in Europe is taking a significant hit as the rates banks charge each other for loans in dollars rose to a nine month high.  The Libor-OIS spread (which isn't nearly as interesting as the rumored Rachel Uchitel Playboy spread) increased to 24 basis points, the most since August, thus signaling that banks in Europe are as interested in lending as the FED is interested in transparency or as Ellen Degeneres is interested in penis.

In stock news, GM posted their first profit as apparently people can now only afford shitty cars.  GM earned $865MM and proved that all you need to do to succeed in business is suck badly at your job, lose a ton of money, and then get bailed out by good old Uncle Sam and his magic printing press.  Money McBags only laments that he missed that class during his business school days.  Not only did GM post a profit, but they are on course to go public again in Q4 to try to see if the investors have learned the old adage "Fool me once, shame on you, fool me twice, go fuck yourself."  Additonally, GM is said to be looking to get back in to the financing business which is a bit like letting Bernie Madoff handle the prison finances, filling the Goodyear blimp with hydrogen, or hiring Roman Polanski to babysit your 14 year old daughter.  In other earnings news, LOW beat earnings forecasts but like all companies in the past week, gave guidance more disappointing than Nicole Eggert's movie career (and Money McBags had so much hope).  CEO Robert Niblock said that 2010 will be a "year of transition" while significant growth won't happen until 2011, and if it doesn't, no one will remember he said it would.  Guidance for Q2 was $.57 to $.59 per share which was below analyst estimates of $.62 per share and sent the stock down for the day.

In small cap news, KITD had their quarterly earnings release today and you all know Money McBags loves KITD like Joanie loves Chachi or high frequency traders love turning off liquidity when the market is tumbling.  The stock is trading down heavily thanks to some block trades around midday where someone just wanted to puke this out like a bulimic with emetophilia at an all you can eat Sizzler buffet.  Money McBags hasn't had a chance to listen to or watch their call, though he will tonight or tommorow, but he did go through their Q and hear the last 20 minutes of Q&A.  To be honest, their Q was a bit lighter on the revenue side than Money McBags would have liked to see.  Revenue of $17.4MM was up 80% y/y but up only 8% sequentially, though management explained that this is typically a sequentially down revenue Q due to reduced digital media consumption in the industry.  That said, EBITDA margins were only 17% after being 19% last Q and accounts receivables continue to be higher than John Belushi at a Chateau Marmont casino night.  Management explained that as they are a small company with Fortune 500 clients, they have about as much leverage in bill collecting as He Ping Ping does on a see saw with Shaquille O'Neal (and that's not just because Mr. Ping Ping was so small, but also because he is dead).  As they explained, they have been getting business in towards the end of the Q which causes A/R to spike right before the Q but their larger clients get around to paying them within 45 to 60 days typically since KITD's services are usually a small expense for them.  An interesting point made by CEO Tuzman was that they could factor their receivables but they choose not to because they are not worried about collecting and thus don't want to give up the economics.  Their customers are going to pay as they are big, established companies, but they just take a bit longer.  Three other interesting points:

1.  In the press release they say: "In answer to a couple of investors' questions, we have not seen any slow-down in IP video-related expenditures in Europe as a result of the Greek fiscal crisis."  This is good news as most of their revenue comes from Europe, so Money McBags is happy to see this and hopes it holds.

2.  They purchased a company called Benchmark which gives them a presence in Singapore, mainland China, and Southeast Asia.  Benchmark is supposed to have $10MM in revenue in the next 12 months and they paid ~$11MM for it if Money McBags did the math correctly.  The deal should be immediately accretive and will open up opportunities in Asia for them where there are two main competitors who they hinted that they may already be in negotiations with to do JVs or acquisitions.  Money McBags is glad they are finding shit to buy with all of the dilutive equity they just raised.

3.  Kelly Brook is hot.

Anyway, guidance for this year which was released a few quarters ago was $75MM+ revenue but since then they have added Multicast which should be ~$12MM revenue and 9 months of Benchmark which should be ~$7.5MM revenue, so they are now on pace for ~$94MM in revenue.  However, they only earned $17.5MM this Q so in the next 3 Qs they are going to have to average ~$25MM revenue which seems a bit like a stretch.  In terms of earnings, gross profit was up to 61%, a number they said will likely continue to climb a bit depending on mix and after stripping out merger, restructuring, non-cash stock comp, and integration expense, Money McBags has KITD with ~$1.5MM of operating income this Q and with the 23MM shares they now have, that would have been ~.07 EPS.  So not great, but on the right track.  To give you an idea about the leverage though, if they had earned $25MM in revenue, they would have had another ~$4.5MM of gross profit and even if op ex rose $1MM, that would have earned another $.15 putting them at $.22 eps or ~$.88 eps run rate and they are trading at ~15x that with today's sell off.  As highlighted earlier, guidance and acquisitions now get us to $25MM revenue quarters so over the next year that type of operating EPS is possible, and with 50% growth, KITD remains very cheap.


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