3/3/10 Midday Report: Service sector expands thus providing most valuable service: A rising market

The market is up again as the service industry grew more than forecast last month thanks to more people stopping off at McDonalds on their way to the unemployment office and then washing their sorrows away by watching touching interpretative dances at their local Rick's Cabaret in order to warm the cockles of their jobless hearts.  The ISM's index of non-manufacturing businesses was up to 53 from 50.5 and in theory measures 90% of the legal economy (it doesn't take the lovely Ashlee Dupre to let us know there are many illegal services performed in this country).  That was higher than the 51 estimate and we are all acutely aware that a number above 50 signals growth (while a number above 36DD usually signals growth for Money McBags).  Also ADP was out with a report estimating companies cut 20k jobs in February which would be the smallest drop in 2 years were that number not likely to be revised next month.  Economic data gets revised more often than a politician's stance on issues (cough Harold Ford cough Mitt Romney cough), modern history, or the background of an old rich guy's wife (she was a student, she worked with kids, they were my kids and she was in high school, but....).  The good news is that there is the whiff of real recovery in some of these numbers, though that could also just be the smell of Ben Bernanke's taint after an all-nighter spent trying to right this economy.

In international news, Greece has approved an economic plan which will save $5.5B through a 30% cut in holiday bonuses, a 2% increase in value added sales tax, and a promise to cut down their spending on noise pollution by simply having Nia Vardalos shut the fuck up.  Money McBags is anxiously looking forward to the day Greece's fiscal problems are solved and not because it will help shore up the market but because he has fewer Greek jokes left in his arsenal than a eunuch has balls.  Seriously, if Money McBags knew he was going to have to write so many one-liners about hellenic culture he would have majored in Greek history, Epic poetry, or Maria Menounos while in college.  For fucksake Money McBags may have to stress his long syllable and start writing this blog in dactylic hexameter if the Greeks don't get their shit together (and if he is going to stress his long syllable, he can assure you that Alice Eve will be very involved).   Of course the Greeks were less than thrilled with the cuts, including taxi drivers who apparently stayed home for a second day because according to the NY Times (so it could be totally fictional), they were "protesting tax reforms which would oblige them to issue receipts, keep account books and pay tax according to their income."  While that would make Charles Rangel proud since he loves finding ways around the means of paying taxes, protesting the loss of the ability to cook one's books is as preposterous as Heidi Montag's singing career or anyone finding Jay Leno funny.

In stock news today Ethan Allen is running (though this time not from the British) as they said their orders for the first two months of 2010 were up 25% as apparently it was time to buy new furniture for Fort Ticonderoga.   Dine Equity announced their quarterly results and decimated estimates thanks to increased traffic at Applebees and only a moderate downtick in IHOP business.  Adjusted earnings came in at $.76 cents easily beating analyst estimates of $.15 as the company was able to create significant operating leverage, pay down debt, and somehow disguise the taste of their food to make people actually want to eat it.  Money McBags is not saying that Applebees is bad, but not even chronic ageusia sufferers will go there.  So it is understandable that analysts would have underestimated earnings, that said, being off by a factor of 5 is as bad as trying to forecast the length of Lindsey Vonn's celebrity and using any metric loner than days.  Finally, BJ's Wholesale club reported earnings up 4.6% but guidance was below estimates sending BJs down on the day.  Money McBags is a bit confused as he doesn't find anything disappointing with BJs, but should they continue to gag or see a lenghty decrease, they may be forced to change their name to Blumpkin's Wholesale Club.

In small stock news, LOV received a take out offer for $3.10 per share and "other possible business combination transactions" from big shareholder Great Hill Partners.  The stock has shot up to $3.30 so those "other possible business combination transactions" either mean "another $.20" or merger-arb traders are betting the company put themselves on buyashittycompany.com and are expecting a counter offer.  Money McBags broke LOV down last week and came up with a $2 valuation so either Great Hill Partners has more of a Jewish fetish than anyone who has dated Barbara Streisand (because why else would anyone want to date that?) and thus needs to own JDate or "Great Hills" is yiddish for "Sucker."  Yesterday Money McBags briefly mentioned QCOR but he finally had time to go over their Q last night and he loves what he sees.  Money McBags has followed this stock for almost a year and a half and has watched the issues they have had with their FDA filing for IS marketing approval, their asstastic sales into the IS market last Q, their sales force ramp up in MS, and their out of nowhere medicade reimbursement and reserving issues from last quarter.  Honestly, their last Q finally got Money McBags out of the stock as it wasn't clear what was going on with their sales as a potential competitor had emerged and the reserving issue they reported was more confusing than a post-op lesbian tranny (I mean if you like chicks, why cut the thing off?).  Money McBags still liked the company though as their management team had generally done a good job on strategy (with their execution being a bit concerning because how many times does it really take to file a fucking sNDA?  One?  Maybe two? But having to refile more than twice creates more red flags than a Beijing pennant maker.).  That said, this quarter easily beat Money McBags' top line estimates and their phone call was chock full of goodness.  Money McBags had an estimate of $23MM in net sales for QCOR based on IS sales remaining flat (it was down big last Q in what looks like an anomaly) and 15% Q/Q growth in MS sales.  Well IS sales rebounded to the mean of their historical range and MS sales grew 50% Q/Q.  While the reimbursement rate was about 1.5% higher than Money McBags estimated, their net sales still came in about $2.5MM above his estimates.  Sales were strong enough to give shareholders spasmodic seizures (which of course should be good for QCOR since that what their drug aims to stop).  Anyway, there were many other positives such as the potential emergence of a market for Achtar (the drug QCOR sells) into the nephrotic market.  QCOR sold 14 vials to this market and estimates that there are 50k people their drug could treat and those people on average would use 2x the doses of an IS patient and 4x to 5x the doses of a MS patient.  The company estimates this as a potential $1B market for them and will start allocating a bit of their sales force's time to contacting nephrologists.  Now look, it is way too early to get too excited about this as the data is very sparse but it does mimic the MS market for them just two years ago so there is some real potential here.  Additionally QCOR has straightened out their Tricare reimbursement issue which may now contribute to 10% growth and said the FDA will get back to them on their ability to market to IS doctors by June 11, 2010.   Oh yeah, the CEO addressed the potential competitive drug Sibril and said in the six months it has been on the market, they have not seen it make a dent in their sales.  The only way this quarter could have been bette for QCOR was if they found out Achtar also acts as a pheremone for Brooklyn Decker's mouth.  In terms of forecasting a baseline, just assume they get nothing from the nephrotic market, IS remains at its historical mean (so flat from here), and MS grows 20% per Q (which is aggressive, but whatever).  Additionally assume a modest uptick in operating costs, no more reimbursement issues (they claim they are fully reserved for past medicare claims), and a 500k per q share buyback (they bought back 2MM shares last Q and have 5MM left on their buyback so it could be more), and you get to around $.76 eps for 2010.  So on those baseline earnings, the company is still trading at less than 10x earnings even after being up almost 30% in two days.  Plus they are only trading at 2.5x or so EV/sales and companies like this trade at 3x to 4x.  Of course that $.76 eps number could be too low if the nephrotic market can get traction, the FDA approves them to market IS to doctors, and MS continues to run.  The concerns still remain that the drug is hella expensive and the quarters can be lumpier than Alexis Texas' backside, especially as they have little control on IS sales, so there is a reason for it to trade at a bit of a discount.  Also, QCOR's hiring of a Chief Medical Officer to investigate buying other assets with all of their cash is a bit worrisome because a company with their supposed growth opportunities in MS and NS shouldn't need to be wasting time on non-core products.  That said, there could still be a ton of value here.  Plus with borrowing rates only to go up, M&A is getting hotter than Olivia Munn on the planet Mercury, so this could be a nice little take out candidate.  Money McBags will likely buy on a pull back and is kicking himself for not having owned this, but their last Q was so bad it made it Lady Gaga look fuckable.

Oh yeah, Money McBags picked up some KITD yesterday at around $10.

2/23/10 Midafternoon Report: Consumers are very confident in the economy getting shittier

The market has hit a speed bump today as consumer confidence fell to its lowest level in 10 months.  Consumers are now less confident than a slightly overweight 16 year old girl with bad acne and a spastic colon on her first day in a new school.  The confidence index dropped to 46, which is below the 56 economists were expecting, and Money McBags has no idea what 46 means but he is confident it is not good in the same way he is confident having one's ladyfriend say "we need to talk" is also not good.  While the consumer confidence index is a forward looking metric (and if you really want to look forward, just tape a picture of Kate Bosworth to your glasses), the measure of present conditions came in at its lowest level in 27 years.  Wow.  That is not an exaggeration.  People are not only finding jobs harder to get, but growth in the job market seems to be more stagnant than Bobby Jindal's political career (and as an aside, Money McBags doesn't give a fuck about politics because they are all the same person, just a different suit, but has any politician ever had a faster and bigger fall than this Bobby Jindal guy has had without mismanaging a war, getting caught in a crack house, or banging Peggy Eaton?  Jeesh, that guy has disappeared so fast he was on the back of my milk carton this morning).  Anyway, the point here is that investors are now worried that retail spending will be weaker than expectations with the drop in consumer confidence providing a swift kick to the nuts.  In slightly positive macro news, home prices declined but the annual pace of decline slowed from "holy shit" to "is it hot in here?"  The decline was .2% and was worse than the flat expectations, but only by a rounding error.  Interestingly, 15 of the 20 metro areas saw price declines and that sound you just heard was Money McBags throwing up in his mouth.  Ugh.  The market is now teetering after such a nice totter last week, but that is why this is called an inflection point.

In stock news, Home Depot followed competitor Lowe's strong quarter yesterday with solid results of their own including their first increase in same store sales since 2006.  Of course the comps for same store sales were much easier due to the fact that the only people buying anything at Home Depot in Q4 last year were repo men and the guys who strip empty houses of their copper wire, but still, a 1.4% increase is positive.  Home Depot also gave fairly rosy guidance and said they gained 100bps of market share which was likely a result of their November promotion "buy two shower heads, and we'll throw in a golden one for free."  In other stock news Barnes and Noble is down after posting an inline-ish quarter after they announced same store sales were down 5% and then blamed it on something called the fucking internet.  Sorry guys, but the classic brick and mortar book selling business is about to go the way of video rental stores, address books, and civility.  Sure Barnes and Noble had strong growth in their online business, but that is a fraction of their sales.

In small cap news, EBIX is getting a case of the dropsies again while ISLE crapped out on another quarter as people don't like gambling in run down casinos.  And yesterday, long time Money McBags reader and ninja assassin (and Money McBags loves any word with two "ass"es in it) Matty McSacks put up some solid thoughts on LOV in the comments section.  Matty treated the comments section like he was two girls and it was one cup with his mancrush on LOV.  Apparently he loves LOV so much that he is lobbying for them to start intrinsicvaluedate.com, where investors can go to WACC off while getting their shorts squeezed.  Anyway, Money McBags knew nothing of LOV until yesterday but he spent some time last night reading their 10Q, playing around on their site, and watching some Tori Black videos on Spankwire (and you may be asking what the Tori Black videos have to do with LOV, and the answer is absolutely nothing).  LOV apparently runs about 30 online dating sites with their crown jewel being JDate which accounts for 50% of the company's subscribers.  Now Money McBags lights the menorah but he never understood the appeal of JDate as he prefers his ladies to be over 5 foot 2 and without what I believe is referred to in medical circles as the "nag you to fucking death" gene.  Other sites LOV runs are Blackchristiansingles.com, Singleparentsmingle.com, and Canadwarfgetatabledance.com (ok, one of those is made up).  They also run a delicious dating site aimed at weight challenged people called Moretolove.com which Matty claims is their fastest growing site and Money McBags only hopes that the pun was completely intended.  And while Money McBags loves this concept, he would have named it either Cushionforthepushin.com or Dinnerfor3.com.  Anyway, Matty values this stock at at least $5 based on $8MM-$10MM free cash flow per year and some brand value for JDate.  Hmmmmm.  Let's see.  They earned $.05 per share last Q and while there may have been a sequential lift in subscribers (unclear if that was seasonality), JDate still had a 6% decline on a year over year basis in lonely Jews and those who are looking for some gifelte fish on the side.  But here's the weird part, revenue declined by 16% in that segment which is more than subscribers declined which means they are either discounting more or are losing their premium clients (and it's unclear what their premium clients get, perhaps a chance to date the one Jewish girl who swallows, and again, Money McBags is a yid, so he can make those jokes).  Not only is their revenue dropping faster than they are losing subs, but their marketing cost went up as a % of income by 300bps.  And here is another red flag, industry sources have the online dating industry growing 10% to 15% a year (though that industry source is Piper Jaffray, so buyer beware as one should never trust anything from a person who chooses to live in Minnesota).  But let's assume that the number is directionally correct.  So the market is a moderate double digit grower and yet this great affinity site JDate is losing subscribers.  Something doesn't smell kosher.  The company claims to have had $8MM of adjusted EBITDA in the first 9 months but there was also $1.7MM of income from a legal judgment which I believe they included in that number.  So really closer to $6MM of EBITDA or an $8MM annual run rate.  That puts the company with it's very marginal balance sheet at a run rate of around 7.5x EV/EBITDA to go along with their 15x run rate p/e.  So the multiples aren't too high, but the investment in this company really has to come down to whether or not you think it can actually grow, especially with increasing competition from Facebook, Twiter, and the completely NSFW Guesshermuff.  JDate has been around for several years already and given that it has grown through word of mouth and the Jewish population is closer knit than a purl stitched willy warmer, there probably isn't much more free growth left.  The point being, 99.95% of Jews already know about JDate and if they haven't yet signed up, they are not going to do so.  As for the Jews just reaching dating age, they are simply using twitter and the like and not dropping $40 a month or whatever in order to have a mitzvah.  So I am very skeptical that the drop in JDate subscribers is just the economy and also very skeptical that they will be able to keep their spanktastic margins in that business because marketing costs simply have to go up.  You can only rely on word of mouth for so long, unless that mouth belongs to Faye Reagan and the word is "enter."  Anyway, having the stock 45% owned by a PE shop certainly doesn't hurt because we know PE funds rarely make mistakes (just ask Warburg Pincus about their MBIA investment), but the fundamentals of the business still remain weak.  Matty did a nice job on NLS last time so he does get mad props here for his calls on companies who are sucking and have yet to show things are getting better, but LOV just doesn't have the margin of safety to make Money McBags comfortable and he fears their business is going to continue to face headwinds.  If the company were to show some growth and get to an industry growth rate, then sure, Money McBags could see it trade up to $4 or $4.50 but until then, a $.20 eps annual run rate company with no growth and few barriers to entry should probably trade closer to 10x which would make this a $2 stock and thus leave us with 33% downside.  If you really want to invest in a shitty internet affinity play, why not just buy INET who at least has exhibited solid business growth?  Money McBags will monitor LOV, but he'd rather own a company like KITD right now that is trading at like 7x EV/EBITDA and growing 60% a year with 17% EBITDA margins.