Wednesday, June 23, 2010

6/23/10 Midafternoon Report: Economy of Stale

The market was only marginally down today despite terrible macro data and a Fed statement about as optimistic as Nouriel Roubini at a funeral (the funeral of course would be for the US economy).  New home sales dropped 33% to a record low as once again, and for all of you keeping score at home, THE GOVERNMENT TAX CREDIT EXPIRED (caps and exasperation intentional).  According to the New York Times, analysts guessed home sales would drop to 400k from April's previously reported 504k, while according to CNBC, analysts guessed home sales would drop to 410k, and finally according to the WSJ analysts guessed home sales would drop to 430k, so no matter what news source you used, analyst guesses were still fuck awful and worse than Manute Bol's skin.  On average, analysts predicted a ~19% drop in new home sales but the number being reported is a drop to 300k, so analysts' guesses of a 19% drop were off by ~25%.  Wow.  Money McBags wonders if their regression models suffer from colinearity, heteroskedasticty, or just stupid fucking dependent variables.  To be that wrong about something and yet still be called professionals stretches the definition of the word "credibility" in ways that would make even Noah Webster's dictionary flaccid.  And as usual, making the numbers seem slightly better is that last month's new home sales number was manipulated (Money Mcbags means readjusted) downward to 446k from 504k.  So the drop being reported is 33%, or 446k to the all-time record low measurement of 300k when in actuality, the number fell 40% from 504k (which was the reported fucking number last month) to 300k.  Readjusting the number downward before the awful report left 7% of "down" out of the reaction of investors who weren't paying attention and instead were busy trying to figure out who they have to fuck to get a job at CNN (And now we finally have a delightful answer to that).  Making matters worse is that the supply of homes on the market was up 47% leaving an 8.5 month inventory (though the denominator in that equation, which Money McBags believes is the current annualized sales rate, is creeping towards zero which means we are getting closer to an undefined supply of homes on the market at which point Money McBags believes they should all logically be free and thus homelessness in this country will cease to exist, so perhaps that is the admirable goal of all of this).  The point is, home sales/employment/Heidi Montag were all manipulated up over the past few months by tax breaks, stimulus plans, and plastic surgeons, but now that that is over, they are starting to turn back down and that could be worse than eating a shit sandwich with extra E. coli.

In addition to the drop in new home sales, the Fed came out today with their statement from their June meeting which was about as uplifting as the Diary of Anne Frank or nut cancer.  According to the statement:

1.  Housing starts remain at a depressed level
2.  Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad
3.  Bank lending has continued to contract in recent months
4.  Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit
5.  Investment in nonresidential structures continues to be weak
6.  Employers remain reluctant to add to payrolls 
7.  Hanna Hilton remains retired from porn

Honestly, all of that was taken verbatim from the Fed's statement (well, except for maybe the last one, but they were all thiking it).  The Fed's statement paints a bleaker picture of the US economy than what Picasso would have done in his blue period.  The Fed then went on to say the rates would stay between 0 bps and 25 bps for an extended period and at least we're not fucking Greece, yet.  Money McBags doesn't see how anyone can get excited about the markets after reading that, but then again, he can't understand how anyone can get excited over soccer, so what does he know?  But as an aside, congrats to the US soccer team for beating a country with 1/10th of the population of the US on a last minute goal.  Truly impressive.  For their next feat, Money McBags hears the US soccer team will challenge Michael J. Fox to a game of Jenga.

In Europe, data was just as bleak as in the US although it was reported with one of those foreign accents so it sounded much more charming.  The Eurozone PMI is having a bit of PMS as it cramped up and fell to 55.4 from 56.2 while Germany's Ifo was stronger than expectations but future sentiment eroded and stunk like month old sauerkraut left out in hot sun.

In stock news, JBL rocketed up after beating estimates, announcing above the street guidance, and promising to body slam the competition as if the competition were the lovely Meredith Whitney.   Also CarMax's earnings took off and beat expectations thanks to selling cheap ass cars in an recessionary environment.  The company earned $.44 per share, up from $.13 and easily beating analyst guesses of $.33 while growing revenue by 23%.

In small cap news, there isn't a lot going on but Money McBags wanted to spend some time talking about KIRK today as it has been selling off and is now getting to be cheap enough that you all should consider adding it to your portfolios.  KIRK basically sells cheap shitty trinkets that midwestern housewives love to put on their mantels, on their side tables, or over their walls to cover up the beer stains.  In yiddish, they're called tchotchkes and in english they're called garbage.  That said, the company has been selling a lot of this shit as people are staying home more often and not travelling and thus they are looking for cheap ways to spruce up their houses with a nice Elephant Mother/Baby statue, a Drama Queen plaque, or (and I am not making this up) book boxes to give the illusion that they have some of that fancy learning while keeping the practicality of having somewhere to store their spare teeth and can of wintergreen Skoal.  The point is, the company sells goods that are perfect for a recession as they are inexpensive and can brighten up the place where people spend most of their time.

Not only should there be demand for their products, but management has done a fantastic job of turning this company around.  Basically a few years ago a PE firm had taken over and the management team was smart enough to saddle themselves with expensive mall based real estate, add too many product skus, and try to bring their products up market and sell their customers gold plated mirrors when all they really wanted were some monogrammed candles and a fucking amber wall sconce or two.  The point is, the management team had misread their customers, killed their margins through higher operating expenses, and basically performed worse than a John Meriwether investment vehicle.  Of course this was all happening as the recession was starting so it made everything much worse, but luckily Carl Kirkland got fed up with the dumb shit and took over his company again and brought in a management team to turn things around.  Since then they have cut the skus, pared expensive real estate (they are now ~75% off mall), and focused the strategy back on selling cheap tasteless crap, and that has worked phenomenally.  The company's revenue was flat in 2008 and grew in 2009 and last Q revenue was up 12% despite having 15 fewer stores (they now have ~280 stores).  The plan is to open ~20 net new stores in the second half of the year and thus grow for the first time since the recession hit.

But here's the best reason to like this company, it is fucking cheap.  They earned $1.71 last year and estimates for this year are ~$1.60 due to an increasing tax rate.  That said, top line guidance is for 5% to 8% growth with 3% increase in operating margins so if you take the best case scenario, the company could actually earn ~$1.85 to $1.90 for the year.  The stock has sold off recently and is now ~$18 which is <10x best case scenario and ~11x analyst guesses but they have ~$3.50 cash per share on the balance sheet and no debt which makes this almost as attractive as Nicole Trunfio.  At a minimum this company should have a 14x market type multiple and throwing that on analyst guesses (which could be low) yields a $22.50 price and if you add the $3.50 in cash to that and you get to ~$26 target price which is ~40% upside to today.  Also, they had ~$52MM of EBITDA last year ($47MM op. income + $~$15MM depreciation) and have a current EV of ~$300MM so are trading at <6x forward EBITDA since EBITDA should grow with growing top line and slightly improving margins.  The negatives are that margins have pretty much topped out, they now have to show they can profitably grow new stores, and like all retailers they need to keep their merchandise relevant.   That said, the stock has traded off for no reason so it's a good time to start a position (and if the position is a reverse eiffel tower, even better) because it's cheap and they seem to have a solid grasp of their target market.


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