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Monday, May 9, 2011

My Update: Now with Copeland Capital Management, a Like-Minded Investment Firm, as Portfolio Manager & Analyst

Dear Readers:

I am pleased to announce that I recently joined Copeland Capital Management, LLC as a Principal, as well as a Portfolio Manager and Analyst.

Copeland is an employee owned, dynamic and growing firm with offices in the Philadelphia and Boston areas. The firm offers a series of Dividend Growth, Relative Value, and Fixed Income/Balanced Strategies.

It has been a privilege sharing my research and views over the past two years. Thank you for visiting, leaving comments, and/or asking questions. I enjoyed getting to know some of you.

While I am no longer able to post on Common Stock Sense, I invite you to frequently visit Copeland's Web site for investment commentary:

Each quarter, the firm publishes The Copeland Review, a forward-looking investment quarterly on the markets and the economy which has been published for over ten years. As I performed my due diligence on the firm, I gained significant comfort after finding Copeland's perspective and tone through the last two years very similar to my own here on CS$.

Here is a partial snapshot of the Spring 2011 quarterly (click to enlarge):
Please visit Copeland's Newsroom for the full document and other updates.

As my schedule permits, I will continue to irregularly Tweet items of personal and business interest. You can find me here:

Thank you again for reading and all my best wishes.

Happy investing,

Jeffrey Walkenhorst

Disclosure: all research and views previously expressed on CS$ represent only my opinion and not necessarily that of Copeland Capital Management, LLC.

© 2011 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Thursday, March 24, 2011

Sonic Foundry (SOFO): When Will the "Market" Notice the Mediasite Franchise?

We started this post Tuesday and didn't have a chance to finish before -- boom -- Polycom (PLCM) announced the acquisition of Accordent Technologies Wednesday morning for approximately $50 million in cash, or 5.55 times 2010A sales of $9 million (per press release).

We tweeted the news yesterday and were surprised to see shares of Sonic Foundry (SOFO) actually trade down yesterday. However, the "Market" did seem to take notice today -- from Google Finance:

Before we go any further, we should say this: we have a short reprieve on our ability to publish on the broader technology sector and Sonic Foundry. As readers may recall, beginning late last year, we were unable to share our commentary on the sector and company.

At that time, our post included links back to our prior commentary and research. Importantly, we believe our prior analysis and core thesis remains fully in-tact today:
  • The company remains a leader in a rapidly growing and large addressable market, with reasonable fair values potentially double or better from current trading levels. Valuation estimates are readily supported by comparable M&A transactions, reproduction cost, and hidden balance sheet assets such as significant net operating loss carry-forwards and growing unearned revenue. Moreover, valuations can now be supported by earnings power and excess cash generation.
NOW, we have a fresh M&A comparable transaction where a large, cash rich, growth seeking technology company is scooping up a smaller competitor to Sonic Foundry for nearly 5.6 times trailing sales. We note that Accordent's annual revenue is less than half that of Sonic Foundry, with correspondingly lower market share. Arguably, any potential take-out of a market leader -- in any sector, whether technology, consumer packaged goods, real estate, or garbage collection -- warrants a premium multiple.

Interestingly, in a January 2010 post, we mentioned that Polycom could use Mediasite:
  • We suspect Polycom management would not only agree but likely prefer to use Mediasite to deliver their quarterly message (and other corporate events). Thus, as discussed in our "Get the Memo" post on 1/03/09, Polycom provides us with yet another example of an organization that needs Mediasite, albeit one sitting squarely in the video arena.
Okay, well... Polycom now has Accordent, which serves similar markets and sometimes competes against Sonic Foundry. YET, from our perspective, comparing the two companies remains somewhat of an apples and oranges exercise. We recommend all readers visit Accordent's Web site to learn more about the company's solutions and visit the "Resources" section to view case studies/Webinars/etc. Then, visit Sonic Foundry's Web site and do the same. Although we understand that Accordent has certain strengths, we see Sonic Foundry's broad, high quality product and service portfolio as industry leading.

Moreover, taking into account the entire Webcasting landscape, our objective analysis continues to support our "Did Your Firm Get the Memo" view:
  • As Webcasting becomes evermore pervasive, we submit that everyone can benefit from Mediasite -- from schools to corporations to government organizations to hospitals and all of their respective end-users.
We've been talking about the Mediasite Franchise since 2009. Importantly, we see ample evidence all around us that the franchise is bigger, better, and stronger than two years ago. Just a few examples:

(1) Third patent awarded by the U.S. PTO:
  • Sonic Foundry, Inc., the recognized market leader for rich media webcasting, lecture capture and knowledge management, announced today the company has been granted its third patent by the U.S. Patent and Trademark Office for its flagship Mediasite product line.
  • The patent, U.S. No. 7,913,156, entitled "Rich Media Event Production System and Method Including the Capturing, Indexing and Synchronizing of RGB-Based Graphic Content," strengthens the company's intellectual property position as it relates to Mediasite, the award-winning webcasting platform. Specifically, the patent further protects Sonic Foundry's market leadership position by recognizing Mediasite's unique ability to digitally capture RGB images during presentations via a video capture device, and allowing the images to be marked, synchronized and viewed both live and on-demand.
(2) Students praising Mediasite, via Jake McClure's blog in The Hardest Question to Answer from Interviewees on Their Interview Day (see link for full text):
  • But now a year further into my medical education, there is one thing that I would like to address… and it revolves around the use/impact/advantages/etc. related to “Mediasite”. I put Mediasite in quotes because at Vanderbilt, it is its own little culture—its own frequent viewers who tune in just as regularly as those sitting in class. Also, it is a verb... both past, present and future tense (i.e. “Did you Mediasite Dr. ________’s lecture from this morning?”, or “Yeah, I’m planning on Mediasiting that lecture after my research meeting.”)
  • So, for the prospective students considering either interviewing or actually coming to Vanderbilt that may be reading this, you may wonder, “Well, how does Mediasite actually work?”.
(3) Satisfied customers recounting why they chose Mediasite and how they use the solution -- well worth a listen:

Lecture Capture Systems in the Cloud: Why New York Law School Outsourced Hosting for Campus-Wide Capture

Lecture Capture Systems in the Cloud: Why New York Law School Outsourced Hosting for Campus-Wide Capture [Classic Player]

  • Why did New York Law School decide to host all of their lecture capture content – now more than 5,700 class recordings – outside their network? Because after a thorough analysis, they determined placing the Mediasite server back end in the cloud would save them time and money, let them scale faster without losing any features and avoid burdening their own network infrastructure.
We could go on, but there's plenty of information on the Web for consumption and research. One additional item we will relay is that online education is here to stay and is arguably transformational -- please see: "A glimpse of Online Education and the Internet in infographic" via @mcleod's Mind Dump.

SO, the fickle "Market" seemed to notice Sonic Foundry on Thursday. But, by "noticing," we really mean shares should be trading in the $20s (or better) for all of the reasons we've previously discussed.

There were "unconfirmed rumors" regarding a takeout of Sonic Foundry at $30 last month. Who knows where these things come from and management put the kibosh on the rumor at Sonic's recent Annual Shareholder Meeting. Nonetheless, the facts are as follows:
  • The company is growing annual revenue at a 20% plus clip and the current quarter (end-March) could see revenue grow 30-40% on an easier Y/Y comparison (which might attract more "Market" attention). Notably, the company's near- and long-term growth prospects remain solid and are even improving as all lines of business expand.
  • Operating income and cash earnings are becoming meaningful as operating leverage arrives.
  • The company's balance sheet is improving -- please see uptick in shareholder equity and net tangible assets.
  • The company remains undervalued on an absolute and relative basis.
  • Applying the Polycom/Accordent 5.6 times sales multiple to Sonic Foundry's trailing twelve month revenue of $21.9 million implies a $123 million market value, or $27 per fully diluted share (including all options and warrants).
  • Applying a more aggressive, Market-is-in-love-type (CRM)-like multiple of 10 times sales would imply an approximate $50 share price.
Let's revisit something we included in our initial May 2009 post from this section:
  • "Reproduction Value – Valuing a Technology Company with No History of Profitability" (toward bottom of post)
  • Conclusion: Sonic Foundry’s increasingly entrenched market position might suggest an additional purchase price premium, bringing an informed buyer to pay more than five times revenue. Informed buyers could include any number of large technology original equipment manufacturers (OEMs) including Cisco, IBM, HP, Dell, Tandberg, Polycom, and Blackboard. Nearly all of the large players face slowing growth in their core businesses and, with large net cash positions, are on the hunt for growth areas with sizable addressable markets. Specifically, Cisco is pursuing a “’build, buy, and partner’ innovation strategy to move quickly into new markets and capture key market transitions” and, in 2007, paid approximately seven times trailing revenue for WebEx.
AND, from an August 2009 post regarding Google's (GOOG) acquisition of On2 Technologies:
  • For all we know, Sonic Foundry may remain a stand-alone company indefinitely. However... An M&A team at fill-in-the-blank large tech company might consider paying such a multiple with the goal of using the company's clout, branding, and distribution to grow the Mediasite franchise into a $50 to $100 million revenue business with 20% operating margins. In this scenario [$120 million], the company would be paying 12 times operating income at the low-end.
We'll see what comes to pass, if anything, on the M&A front. But, we do know this: over the medium- to long-term, fundamentals always drive share prices and the "Market" eventually takes notice. Consider the equity performance of transformational companies such as (AMZN), Netflix (NFLX), and (PCLN) over the past decade. In some cases, it took years for for the Market to notice the companies, even while the companies were growing larger and more profitable year in and year out. While not perfect, we see a slight parallel to Sonic Foundry:
  • Fundamentals are sound and the company is the leader in markets expected to grow 20-30% over the next five years. We believe the ducks are in a row for continued favorable operating results and a revaluation by the Market.
Happy investing,

Jeffrey Walkenhorst

Disclosure: long SOFO.

© 2011 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Monday, March 21, 2011

FASCINATING SLIDES - What's Happening in the Global Containership Market?

Last week, we relayed favorable news from Seaspan (SSW) on several fronts, including a higher dividend in our post, Seaspan (SSW): No Smoke and Mirrors as Company Raises Dividend by 50% to $0.75 per Year; Cash Flow Keeps Growing.

Here, we briefly share two slides from Global Ship Lease's (GSL) 3/8/11 earnings deck that are worth revisiting. From GSL's Web site:

Mar 8, 2011
10:30 AM ET
Global Ship Lease Q4 2010 Earnings Conference Call
Webcast Listen to webcast
PDF View Presentation 1.7 MB Add to Briefcase

What's happening with fundamentals and what is the historical relatonship between key variables?
What's the supply/demand market balance for container ships?

We like these pictures, which are consistent with our prior commentary on improving shipping fundamentals. Even with the disaster in Japan, we expect global trade and the global economy will continue to grow this year and over time.

With their large fleets and liner/trading relationships, Seaspan and Global Ship Lease help facilitate global trade and growth. Moreover, we're looking for a dividend stream to arrive from Global Ship Lease to augment our growing Seaspan income stream.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long GSL and SSW.
© 2011 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Monday, March 14, 2011

Seaspan (SSW): No Smoke and Mirrors as Company Raises Dividend by 50% to $0.75 per Year; Cash Flow Keeps Growing

Seaspan announced 4Q10 results this morning as well as news of a new joint venture with The Carlyle Group. Notably, we were pleased to see the company increase the expected annual dividend for 2011 to $0.75 from the prior run-rate of $0.50.

We won't recount all details here, but recommend reviewing the press release, presentation, and conference call, all available on Seaspan's Web site. Below, we pull a few slides from recent events:

Mar 14, 2011
8:30 AM ET
Seaspan 4Q 2010 Earnings Conference Call
Webcast Listen to webcast
PDF View Presentation 783.5 KB Add to Briefcase
Mar 2, 2011
4:00 AM ET
DnB NOR Markets Oil, Offshore & Shipping Conference 2011
PDF View Presentation 6.3 MB Add to Briefcase

A few general highlights and observations (click slides to enlarge):

(1) Seaspan's operating strategy is straight forward and clear, which we like -

(2) Management continues to execute on the strategy and the company's in-service fleet and distributable cash flow keeps growing, as originally expected:

(3) Enabling higher dividends, as announced with today's results:

Accordingly, Wall Street continues to embrace the company - from "China Analyst" Analyst Actions this evening:
  • Cantor Fitzgerald upgraded Seaspan Corporation (NYSE:SSW) from Hold to Buy, and raised price target from $14 to $18. Lazard Capital Markets reiterated Buy rating and $19 price target on Seaspan Corporation (NYSE:SSW).
Sometimes, it's time to run (i.e., sell) when the broader Market embraces a position, yet in this case, we believe our original thesis remains in-tact. We see incremental upside as the company's distributable cash flow keeps increasing and relay commentary from our Just Like Clockwork post in January:
  • Given the stable business model and growing streams of distributable cash flow, we still believe a more reasonable intrinsic value is between $24-30 per share [or 8-10 times distributable cash flow].... Assuming the global economy keeps growing, we expect shares will once again achieve the $20s-30s even with dilution related to capital raised during the downturn to fund new builds. As "built-in" growth materializes through 2011 and 2012, we expect brokerage "price targets" will consistently bump higher.
Of course, as with the dreadful natural disaster in Japan, we never know what the future holds. Thus, as with life, all investments carry risks. We can only strive to mitigate risks through due diligence that carefully assesses risk/reward profiles.

Here, Seaspan continues to trade at only six times 2012E distributable cash flow. Moreover, a very capable and incentivized management team is actively pursuing growth opportunities (e.g. JV with Carlyle), and we're confident that Seaspan's ships will be steaming the oceans for the foreseeable future.

We still like the odds and our growing Seaspan income stream.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SSW.

© 2011 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Saturday, March 12, 2011 (BIDZ): At Last, Y/Y Growth Returns to Business in 4Q; Still Offered By Market "For Free," Mitigating Key Risks

Last month, we noted that (BIDZ) was "Finally Catching a Bid as Shares Go Boom Boom Pow!" In that post, we concluded:
  • Even with the recent uptick, we believe fair value remains meaningfully higher since the business is now only trading equal to net tangible book value. Reproduction cost is certainly not zero, nor is the value that would be assigned by an informed private market buyer. Further, if management can deliver renewed revenue growth with margin expansion, we could again consider EV/EBIT and P/E valuation metrics that might bring us back to our original mid- to high-single digit fair value estimates.
The company released year-end 2010 results Friday afternoon and we were very pleased to see Bidz deliver on prior guidance (link to 3Q results with outlook) calling for renewed growth -- from's 4Q10 release:
  • Net revenues for the fourth quarter of 2010 were $29.0 million, an increase of 5.7%, compared with $27.5 million reported in the fourth quarter of 2009. The percentages of the Company's domestic and international sales for the fourth quarter 2010 were 59.5% and 40.5%, respectively.
Management noted that this was the first Y/Y growth in two years and, in a frank fashion, explained that discretionary conditions remain difficult:
  • "In what continues to be a difficult economic climate, we delivered year-over-year top-line growth for the first time in approximately two years during the fourth quarter," stated, Leon Kuperman, President & Chief Technology Officer. "Since quarter end, we have begun to see a slight slowdown in consumer spending nevertheless, we are continuing to strengthen the scope of our product offering with an increased assortment of both low and high-end brand name items to fulfill our customer's needs."
Management also commented on the company's new Web site:
  • Leon Kuperman, continued, "Over the past several months we have been intensely focused on an overhaul to our website and believe the new site features will deliver an even stronger customer value proposition. The new layout offers comprehensive, easy-to-use tools including larger thumbnail images, navigation tools with 'Fly-Out' categories, faceted search as well an improved checkout processes. We believe over time the new site will help to increase conversion rates, improve overall customer satisfaction, increase average order value and result in decrease shopping cart abandonment, and lower customer acquisition costs. We are pleased with the overall progress of the new site and expect to launch later in March 2011."
Following the results, one headline noted 1Q11 guidance "Below the Street" -
Yet, according to Yahoo Finance, only one analyst currently covers the company:

Thus, in this case, comparing guidance for revenue of $23-25 million to "the Street" of $28.4 million means very little.... However, as a point of reference, Bidz generated sales of $28.2 million in the March quarter of 2010, implying that the return to Y/Y growth in 4Q is ephemeral. We would prefer to see the Y/Y growth trend continue in each quarter of 2011, especially with the smaller business becoming a larger portion of the overall business.

Nonetheless, the company's demonstrated progress during 4Q10, coupled with multiple business development initiatives (e.g. new Web site) and a healthy balance sheet, are more than sufficient to support our view that the's private market value remains materially above current trading levels.

The modest 4Q progress may be just enough to bring incremental Market attention to the company. We'll see.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long BIDZ.
© 2011 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Sunday, February 27, 2011

FASCINATING SLIDE: Emerging Economies Leading World Expansion; Insights from Navios Maritime and the Dry Bulk Trade

In our last "FASCINATING SLIDE" in January, we shared The Power of Compounding - P&G's 54 Consecutive Years of Dividend Increases. Here, we highlight economic growth in emerging markets and the dry bulk trade with help from Navios Maritime Holdings (NM).

We have no position in Navios or any other "dry bulker" given ongoing risk related to excess supply of vessels, but we are keeping tabs on Navios for general insights into the global economy. The company often includes very interesting data in management slide decks. For example, we mentioned Navios and shared content from the company in July of last year in Energy Demand and China: One Picture is Worth a Thousand Words. In this case, the "picture" was a slide illustrating a massive upward shift in Chinese coal imports.

Navios reported financial results last week and included the following slides - growth in emerging economies and contribution to global growth:

And, for additional context, we include one more slide - increases in the global dry bulk trade over time:

These slides reveal a very clear trend: despite potential or actual "bubbles" in certain parts of emerging economies such as China, the multi-year/decade secular shift in emerging regions is powerful. As we've said before, the train has seemingly left the station. In our view, the trend tells a story that likely has long legs, even with turmoil in Libya/elsewhere and inflation risks. For discussion of certain risk factors, please see this 2/26 NYT's article Suddenly, Emerging Markets Look Complicated Again.

With regard to the overall trend, Navios management commented in its 4Q10 release:
  • Ms. Frangou continued, "The shipping industry is going through transition at a time when there is healthy underlying demand for mineral and grain commodities and crude oil globally. While we are cautious about the near term, and continue to monitor closely the supply of vessels, we see continued demand for commodities from the urbanization of emerging markets."
SO, as the dry bulk industry works through its ship supply/demand imbalance and Gadhafi battles his people, the world keeps turning, and, quickly, too. For additional insight, please see our December post, Investing in Global Shifts: Brazil, Latin America, the Container Trade, and More.

Per our Global Shift and other posts, one way we expect to benefit from global growth is through our container shipping companies Seaspan (SSW) and Global Ship Lease (GSL). In both cases, we continue to see incremental upside and expect a growing dividend income stream over the medium term.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SSW, GSL.

© 2011 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Thursday, February 17, 2011

Weight Watchers (WTW): Instead of "Boom Boom Pow," Stock Just Goes POW! Single Day Revaluation Like No Other We've Seen

We mentioned in our post the other day how shares of (BIDZ) went Boom Boom Pow (borrowing from The Black Eyed Peas).

It's one thing for shares of a microcap company to surge (or decline) 20, 30, 40% in one day since trading in smaller companies is often illiquid, catalyst driven, and can have a mind of its own. But, it's quite another thing for a mid- or large cap company to see such extreme share price moves in a single day.

However, today, Weight Watchers International (WTW) surged by 46% to $65 per share on the back of favorable 4Q10 results and an earnings forecast that blew Wall Street consensus (and our) 2011 estimates out of the water: the company guided to $3.50 - $3.85 per diluted share versus a consensus estimate of $2.77:

Commentary from Weight Watchers' press release:
  • "I am gratified that we were able to deliver full year 2010 EPS of $2.56 per fully diluted share, above the original 2010 earnings guidance range we provided at this time last year," commented David Kirchhoff, President and Chief Executive Officer of the Company.

  • "Looking at 2011," added Kirchhoff, "we are seeing terrific enrollment volumes in our North American and UK meeting businesses and further strengthening in our business. We are providing a 2011 earnings guidance range of between $3.50 and $3.85 per fully diluted share."

AND, here's the one-day chart from Google Finance:

AGAIN, rarely does such a move happen for such a large company ($3+ billion market cap prior to move). We've really only seen such a move as a result of M&A activity, sometimes via unexpected, hostile takeover bids that -- at least from the Market's perspective -- seem to come from left field.

What happened? The company's very positive surprise brought an extreme positive revaluation from the Market. The Market now sees that, not only is the "coast clear" from a fundamental standpoint, but the business model's operating leverage is substantial and was -- to this point -- largely unappreciated. Amidst a massive upward earnings revision, more people can immediately see the positive WTW thesis we've been talking about since late 2009: Weight Watchers owns and operates high-quality, high-margin, high-ROIC business model with a powerful, difficult-to-replicate franchise.

Why such a gigantic move? We generally believe a 20 times price-to-current-earnings multiple (5% earnings yield) is fair for high quality businesses. With near-term earnings power now approximately one dollar above expectations, the Market suddenly sees an additional $20 of upside (at a 20 times multiple) and, amazingly, awarded this amount today.

What's the fair value now? In our most recent WTW discussion, Just Like Clockwork, we pegged Weight Watchers' fair value in the $40-50 range, unaware that we would see such tremendous operating leverage in 2011. If earnings power is now $3.68 (midpoint of range), 20-times this figure brings us to a fair value of $74 (*based only on a P/E valuation; overall, we prefer a composite valuation approach). Of course, in four to five months' time, the Market will begin looking to 2012. We've not had time to review our model, yet if fundamentals remain solid this year, 2012 estimates might reasonably be $4.00 per share, implying an $80 fair value at a 20 P/E (still below historic multiples awarded to the company).

Wow. What a stunning revaluation on the back of solid execution and results by Weight Watchers. Now, those who were negative or cautious on the name will likely now change their tune. Yet, although we see incremental upside and potential for dividend hikes over the medium-term -- to risk stating the obvious -- the best time to buy WTW was long before today's feeding frenzy.

We can reiterate a recurring theme shared in our January "Clockwork" post: history indicates that the greatest returns are generated by swimming against the tide and accumulating ownership stakes when everyone else is running scared. Of course, normal human psychology makes the mental decisions to purchase out-of-favor companies inherently difficult.

How best to beat demons of the mind during those periods and increase the odds of handsomely outperforming the Market over time? Remove emotion from the process through a disciplined, rational research and valuation framework.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long BIDZ, WTW.
© 2011 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer