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.

3/9/10 Midafternoon Report: Happy birthday bear market low, now go fuck yourself

Today marks the one year anniversary of the bear market's devilish low of 666.  To celebrate the nearly 70% rise since then, unemployed workers throughout the country are taking a day off from job hunting to resole their well worn and tattered shoes while Wall Street bankers are wiping their delicate behinds with their beluga caviar scented toilet paper made from the eyelashes of the Dalai Lama as a symbol of their spoils.  That said, macro news is more non-existent today than John Edwards' ethics.  The only slight news comes from Federal Reserve Bank of Chicago President Charles Evans saying that weakness in the job market will cause the Fed to keep rates low for some time and they will continue to be more accommodative than Mr. Roarke was to Heather Locklear when she visited Fantasy Island (and one can only imagine the fantasies Tattoo had about her islands).  Mr. Evans also said that as a result of the deep recession, policy makers may need to shift their view of full employment to correspond to a 5.25% unemployment rate as opposed to the 4.75% they currently use as a base line.  So good on you Charles.  Way to lower the bar instead of trying to find proactive solutions.  It's like if Perfect 10 magazine(NSFW) all of a sudden started putting 9s in their photo spreads or if Einstein rejiggered his theory of general relativity by adding some fictitious comological constant (umm, ok, maybe scratch that last one).  At least we now know why Charles Evans is considered to be one of the Fed's fluff girls as he is a Federal Reserve Bank President and yet not a voting member of the FOMC.

In international news Greek Prime Minister George Papadopolis is supposed to meet with President Obama, though there is no word as to whether Mr. Papadopolis will be bringing Webster along with him.  In the meeting, the Greek Prime Minister will walk through his detailed plans of economic recovery with President Obama which will include vilifying hedge funds who bet against Greece and their faltering economy while placing the rest of the blame on a faulty johnson rod Greece had installed last year.

In stock news, Burger King had disappointing same store sales numbers for the first two months of the year posting 8% declines across the US and Canada.  They blamed 3% of the decline on bad weather and the other 5% on shitty food.  This comes a day after McDonalds posted slightly up US same store sales.  Burger King's CFO Ben Wells said "For us weather is a big deal because you don't stroll to a Burger King restaurant, you have to be in an automobile."  Now look, Money McBags is no Le Corbusier so he is not an authority on how cities are laid out, but if the weather is bad, wouldn't more people be getting in to their fucking cars and driving places than walking?  Yeah, I get that if you're snowed in you're not going anywhere, but that should have hit McDonalds too.  Consider Money McBags skeptical of that excuse.

In small cap news MLNK came out with their earnings last night and to call their earnings crappy would be an insult to crap everywhere.  Now Money McBags is an owner of MLNK and has been touting them on When Genius Prevailed from time to time, so this just shows that nobody is perfect (except for maybe Jayde Nicole).  This was Money McBags' break down of MLNK last Q, the key part being management said this Q (their fiscal Q2) would be flat with fiscal Q1 and the end of the year would see an uptick.  So they earned $18MM of EBITDA in fiscal Q1 and taking their guidance that put them at a $72MM run rate or an EV/EBITDA so ridonkuously cheap that even Matthew Lesko couldn't believe it.  That said, they fell short of their guidance this Q and earned only $13MM of EBITDA and then took down guidance for next Q (fiscal Q3) saying it will be flat to lower than fiscal Q2, with fiscal Q4 then being up sequentially from fiscal Q3 (though unclear if it will be up from this Q).  Oy, fucking vey.  So let's use $13MM as the new EBITDA run rate assuming it drops next Q but picks up to this level again in 2Qs, with anything after that being unknown (though it should be up).  So a $52MM annual EBITDA run rate with $163MM in cash on the balance sheet and no debt yields an EV/EBITDA of still only 5.5x after today's drop.  So it is still cheap and Money McBags has no intention of selling, but the fact that they were down when ther biggest customer HP had revenue up 8% this Q (and HP is 28% of revenue) is a bit head scratching (though if it were Money McBags' head and Destiny Dixon were doing the scratching, everything would be ok).  MLNK revenues in the Q were down 9% Y/Y and 4.5% sequentially, but those numbers include $4.8MM of revenue from their acquisition of Tech For Less, so comparable revenues were actually down about 2% more than that (though they said this is usually a sequentially down Q).  The good news is that gross margins were up 100bps and they generated about $30MM of FCF and guided to positive FCF for the year.  Europe was a main driver of weakness, down 16%, as were getting new engagements which were down 62% from last year's fiscal Q2 which probably isn't a great sign unless you hate making money.  They said this was "a direct result of our clients delayed decision-making due to the economic headwinds in the spring and summer of 2009" but then later they say that the six month lead times they get should put them at the front of the cycle.  Hmm, Money McBags is now more confused about their business cycle than Larry Craig is about his sexuality (or at least publicly about his sexuality, because he knows in private he loves burgling turds).  Luckily, Money McBags is not the only astute one out there as some guy from Harvest Capital Strategies spoke up on the conference call and asked: "you initially had expected Q2 to be flattish with Q1 and then a gradual uptick in Q3 and Q4 to now a down Q2 versus Q1 and the subsequent down Q3 versus Q2 before we see a resumption of sequential growth. Maybe if you can can just provide a little more color around what changed in the last three months?”   Management said there were three reasons for the change:  1. Volumes were simply less than they expected in their base business.  2.  Start-up activity is taking longer to get up and running so new business that was supposed to be in Q2 will now be in late Q3 and early Q4.  3.  A little something called "Shut the fuck up" (ok, maybe they didn't say this one).  Anyway, to sum this all up Money McBags can't be right all of the time.  With consumer technology spending bottoming out, he though MLNK would see the benefits (as did their management) and they didn't.  That said, the company remains cheap (thanks to the 10% drop today) but their growth may now take longer to come back than John Travolta's career after Staying Alive or Tiger Woods' dignity (ok, hopefully not that long).  Money McBags is not selling here, but he's not buying either.  This company simply should have done better.

Also, WILC is up almost 10% today on big volume after their Q last week.  Money McBags will break that Q down in the next couple of days, but he has let you know many times that this company isn't just chopped liver.

2/24/10 Midafternoon Report: Bernanke channels his inner Greenspan and promises to keep rates low until the next bubble

Dizzam, Benny B went in front of the House Financial Services Commitee today and let everyone know that rates will be kept low for a more "extended period" than a menometrorrhagia sufferer.  Despite last week's back and forth between Bernanke and his henchman Thomas "T-Ho" Hoenig about the language used by the Fed in their minutes (and Money McBags would vote for Esperanto just to switch things up), Benny B held to his guns and let congress know he isn't going to raise rates until he sees the whites of the recovery's eyes (or the P in their GDP).  Bernanke also said he believes the recent uptick in business growth was just an inventory restocking which is exactly what Money McBags has been yelling through the gold-plated window of his ivory tower for the past several months.

Bernanke stated: “As the impetus provided by the inventory cycle is temporary, and as the fiscal support for economic growth likely will diminish later this year, a sustained recovery will depend on continued growth in private-sector final demand for goods and services." (Bolding is from Money McBags, multisyllabic, excessive, and painfully boring verbiage is from Bernanke as apparently he gets paid by the snore).

Bernanke cited the diminishing skills of workers who have been forced into long term unemployment, the current deficit, and Hannah Hilton's apparent cinematic retirement as concerns potentially inhibiting a full recovery.  He did say he expected the unemployment rate to drop to 7% by 2012, but he didn't say that it was likely going to be as a result of a massive numerator shift caused by those currently longterm unemployed workers starving to death in the new Dust Bowl, or aptly named for our times, The Capital One Mortgage Bowl:  What Used to Be in Your Wallet?  Bernanke also said that inflation would be "subdued" for some time as the US printed so much money that investors are still trying to count it to figure out exactly how much there is, so until that time, the market will remain blissfully ignorant.  Call it the "Too Big To Count" theory. 

In other macro news, prices of new homes fell surprising everyone except for the 15MM to 20MM unemployed Americans.  Despite the government extending the tax credit for first time home buyers, purchases still declined by 11% and fell to their all-time low as any first time home buyers had likely already taken advantage of the tax credit last year by rushing in to buy before the previous deadline.  Therefore extending the tax credit was like offering lunch to the Nathan's Hot Dog Eating Contest contestants immediately after the final gag sounded.  There is currently a 9 month inventory of houses on the market and 3MM more houses are forecast to be foreclosed upon this year which is great for vermin, but not so great for the economy.

In stock news, Dollar Tree destroyed their analyst estimates as if those estimates were Joanie's rectum and they were Chachi after a blue-balled night of doing body shots off of Pinky Tuscadero.  DLTR beat estimates of $1.44 eps by $.08 thanks to better gross margins and gave guidance well above analyst estimates for Q1 and the full year with EPS slated to be $3.96 to $4.23 for 2010.  They also generate a ton of cash and for those who have been on the planet Melmac for the past few years living off of toasted feline (and to be honest, if it were Jayde Nicole's "cat" being served on Melmac, Money McBags would immediately build a spaceship) and aren't familiar with the company, they sell incredibly cheap shit in a recessionary environment.  They are now trading at around 14x 2010 guidance but this environment for them should be as profitable as the guy operating the lifeboat booth on the Titanic or whoever was selling bullets at the Alamo.  Money McBags has not followed DLTR as closely as he should have, but the story makes sense and the valuation isn't horrible.  They'll probably trade down tomorrow after today's jump, but this stock is worth investigating further.

As for small caps, CTGX reported their quarter last night and it was inline but their guidance was better than Money McBags was expecting.  Money McBags previewed ther quarter the other day and was perfectly content with their release last night as he was just expecting more of the same for now in their core business and that is what he got.  Their revenue for the Q was down 19% with equal declines in their solutions and staffing business.  Honestly, Money McBags can't do anything but yawn about this as it is completly irrelevant to the story as he previously outlined.  As long as the core business doesn't blow up (and there is really no reason it should), the EMR business CTGX is in should provide the real growth for this company over the next 3 to 5 years.  This was Money McBags favorite quote from their press release (he'd quote their call, but it was fantastically bland, like a primetime sitcom or anything written by that Michael Crichton guy):


"Looking further out, with the billions of dollars in federal stimulus money for EMRs from ARRA, Medicare, and Medicaid still unspent, we expect demand for EMR implementation support will steadily accelerate as these funds become available and access to the credit markets opens up for providers.  Based on our deep EMR experience for large providers and communitywide health information exchanges, we are confident in our ability to secure significant new EMR work over the next three years, particularly as the 2014 deadline for having systems meeting meaningful use criteria in place draws closer."  (Bolding again from Money McBags).

That is pretty much all you need to know.  Now guidance for 2010 is for eps of $.46-$.56 on 11% revenue growth.  So they are trading at around 15.5x the midpoint of guidance and they actually see their staffing business picking up into the year and have begun hiring.  Also, their balance sheet is cleaner than the grout on germaphobe's tiled bathroom floor and they are buying back shares.  There is not much reason for the company to take off right now, but EMR is coming so this stock is the definition of buy and hold, especially as it isn't horribly priced (it isn't all that cheap though).