Thursday, July 22, 2010

7/22/10 Midevening Report: Market shoots up on earnings, hopefully it wasn't sharing a needle with Greece

The market raced up today as if it were Icarus escaping from Crete and rapidly approaching the tantalizing Sun, though with luck it used better wings and thus will avoid the same fate.  Despite more negative macro news, a growing and unsustainable debt, and more longterm unemployed people than a fast food addict has bacne, the market is responding positively to a number of earnings reports because apparently four or five data points are much more relevant than the last 3 months of data, statistics, and common sense.

In macro news, new claims for unemployment were out and as usual, were much worse than analyst guesses.  Claims rose by 37k to 464k (though next week that number will likely be revised to 470k, because that's how the (NO) Labor department rolls).  Analysts were only slightly off in their predictions of claims rising by 17k and by slightly, Money McBags means whatever the opposite of slightly is, like considerably, greatly, or a fuckload.  But hey, only 45% of the 14.6MM unemployed people have been out of work for more than 6 months and if that doesn't scream market rally, then nothing does (and of course that number doesn't include people who simply stopped looking for work as they became more discouraged than the Edsel's marketing team or Stevie Wonder's shoe polisher after Mr. Wonder downs a Big Gulp and hits a urinal).

In other macro news, existing home sales fell by 5.1% but since analysts had guessed they would fall by 8.1%, the market reacted positively, choosing to ignore the absolute for the relative, which is a bit like getting excited about your daughter sleeping with Magic Johnson and only coming away with herpes.  There are 4MM homes on the market which at the current sales pace equates to a 9 month supply of homes which is bad news for sellers but good news for that one guy looking relocate.  And finally, the index of US leading indicators fell .2% but that was .1% better than guesses so another pyrrhic victory for the market to celebrate while it ignores the bigger picture like King Pyrrhus ignored the replenishing forces of roman soldiers.

Of course the big news today is earnings where several companies beat guesses, put out better guidance, and did it all with a straight face.  UPS beat analyst guesses and gave above street guidance thus figuratively dropping a deuce on estimates and showing what brown can really do.  New guidance was for $3.35 to $3.47 per share which was well above analyst guesses of $3.27 per share and driven by their international business and more people buying shit online since they can't afford gas for their cars.  Obviously an increased pace of shipping bodes well for a recovery somewhere so hopefully the uptick is a result of real business needs and not companies shipping left behind picture frames to the people they laid off.

Caterpillar is another company that put up a huge quarter which made more than just lepidopterists happy.  The company crawled its way to 31% revenue growth and 93% profit growth while raising their guidance and destroying analyst guesses as if those guesses were freshly laid ant larvae.  EPS was $1.09 and guesses were for $.85 eps and in this market, a beat that large is rarer than a Palos Verde Blue or a pair of underwear worn by Paris Hilton.  Also, AT&T called up analysts and told them they suck as the company forecast strong growth for the rest of the year.  Earnings of $.61 per share beat analyst guesses of $.57 per share and the beat was surprisingly due to their wireline business as more people celebrate the recession with staycations.  And finally regional banks everywhere led by PNC, STI, and BBT put up solid earnings on improving credit trends and a lowering of provisions which seems more shortsighted than Mr. Magoo with two eyepatches on but good for them (for now).

In other stock news GM is buying subprime lender AmeriCredit because they have such a great record running lending businesses.  This acquisition is like allowing Roman Polanski to pick up the baby sitter or Ben Stein to give you macroeconomic advice.  On the heels of this merger, the Federal Government is said to be already building a fund to be able to bail GM out again when they horribly mismanage this subprime book.

In small cap news, a Money McBags favorite, KITD preannounced their quarter this morning.  Now look, Money McBags has written about this company more often than Rudy Giuliani talks about 911 or Taylor Rain goes 5-hole because it is ridonkulously cheap and growing faster than Teddy Roosevelt's reputation after he singlehandedly corralled 3 outlaws for trial in the Dakota Badlands in 1885.  Anyway, KITD's preannouncement today was for at least $22.7MM in revenue for Q2 which is ~110% y/y growth ~30% sequential growth and EBITDA of at least $4MM which is up from $3MM last Q.

But here is the interesting part.  Money McBags has been worried about them due to the effect of the Euro dropping faster than the commercial prospects for any yet to be released Mel Gibson movie.  He first mentioned his concerns here which had to do with the Euro declining ~25% against the dollar in the Q and KITD being highly levered to the exchange rate.  Well the CEO addressed this today saying:

"Our record second quarter results superseded the devaluation of European currencies, which we estimate had about a 4% negative impact on our top-line during the period, as reported in U.S. dollars. We estimate that this currency devaluation actually had a small (less than 1%) positive impact on overall cash-flow, since we have slightly higher proportion of costs than revenues in European currencies."

Wow.  While Money McBags doesn't quite get how the impact was only a negative 4% topline hit, but he'll take that number all fucking day like a Spanish worker takes a siesta after five minutes of semi-intense labor.  So KITD must somehow be weighted more Asia and less Europe than Money McBags thought or something else is going on because he thought costs and revenues were in local currencies, but whatever.  That is a terrific number and Money McBags feels much much better about his low end estimates now being so low as to be more preposterous than a professional wrestler becoming a governor.

The other highly positive news on KITD was that their DSOs fell from a way too elevated 128 days to 90 days which had caused a hella lot of fear from investors because when a weird, dinky little company levered to Europe and growing way too rapidly starts having balance sheet issues, things usually turn out worse than one of Andy Reid's kids or a school for the deaf trying to sing in a round for their yearly concert.

Oh yeah, Money McBags also loved this tidbit:

"The proliferation of Internet-connected devices, coupled with the accelerating worldwide adoption of broadband connections and video-capable mobile networks (3G and 4G), appears to be fueling a strong, overall long-term growth trend in IP-based video asset management systems. "KIT digital is in the 'sweet spot' to benefit from this rising VAMs tide," said Isaza Tuzman. "With the extinguishment of most of our warrants and the incurrence of previous M&A restructuring charges now largely behind us, we are looking forward to providing greater visibility into our strong financial performance and industry positioning, starting with the reporting of our complete Q2 financial results, to be released in mid-August.""

So what we learned again is that this is a great space to be in and KITD is not just the biggest global player, but continues to leverage their software and relationships to stay in the sweet spot.  Plus, by getting rid of all of their income statement shenanigans that causes this company to report operating EBITDA which is not an easy metric for HFT's, quant funds, and portfolio managers to easily pick up in any universe screen, KITD will make themselves easier for investors to find and evaluate.  As Money McBags fully expects their EPS to be more positive than January Jones' prom date, being able to get rid of all the extraneous shit will only help the market properly value this company.

On the strength of their Q and the fact that revenue did not get mobelcrated by the declining Euro (mobelcrated of course being the thing that is just a bit worse than excoriated), Money McBags is going to maintain his initial estimates for this year of ~$95MM revenue and ~$19MM EBITDA.  The company has a current EV of ~$175MM so it's trading at ~8.5x this year's EBITDA and the company is getting 100% revenue growth.  Next year, $150MM revenue and $30MM EBITDA is not unachievable and thus at the high end this company is trading at ~6x EV/EBITDA which is way too low for the kind of growth market this company is in even if it is somewhat of a roll up, headquartered in Prague, and loves to dilute the shit out of shareholders.

But wait, let's throw out all of the nonsense on the income statement and lets say KITD hits $95MM revenue this year and grows 30% next year (again, a low estimate).  With 50% gross margins (which is a low estimate compared to the last few Qs) and say ~$40MM in operating costs, and enough NOLs to make even Wesley Snipes smile, you get ~$.95 eps and after today's run up, the company is trading at only 10x that.  Companies growing topline like KITD in this kind of market should not be trading at 10x forward eps, 2.5x current year revenue estimates, or 6x forward EV/EBITDA.

So if you can deal with the warts and likely volatility, this name should easily trade for 20x eps estimates or 10x EV/EBITDA which gives us at least 50% upside from here.  Yesterday Money McBags made the case for CRUS once again, today he is telling you he likes KITD better and reminding you that when the stock dipped below $9 on July 7th, Money McBags told you to load up (of course he told you that all the way down as well, but whatever).  In the longrun this company should see very nice appreciation so sit back and enjoy the ride as it might be rocky but it's should be very profitable.

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