Owner-Oriented Investment Research and Commentary - Have a private comment or question? Email us at commonstocksense@gmail.com

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 Salesforce.com (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 Amazon.com (AMZN), Netflix (NFLX), and Priceline.com (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.com (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.com (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 Bidz.com'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 Bidz.com 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 Modnique.com 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 Bidz.com'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.com (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 WeightWatchers.com 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

Tuesday, February 15, 2011

Bidz.com (BIDZ): Finally Catching a Bid as Shares Go Boom Boom Pow! Who On Earth Wants to Own Bidz.com?

On the heals of Blue Nile's (NILE) better-than-expected sales results last week, shares of Bidz.com (BIDZ) are finally catching a bid on significant volume. Here's the five day chart from Google Finance:

AND, the one year chart from Yahoo Finance (we captured over the weekend, before Monday's jump -- didn't finish our post):

In our Happy New Year post, we mentioned that our position in the online jewelry/fashion retailer had not worked out to-date, but said that we'd been adding to our position because we still saw value from several different angles.

Why on Earth would anyone want to purchase [more] shares in Bidz.com?

We can think of at least ten reasons, starting at the top and counting down:

10) Most key Bidz overhangs removed. A summary from a management deck last spring:

9) Per our original Bidz long thesis, jewelry can be a very good business over time and, fortunately, industry fundamentals stabilizing. Of course, following a period of margin compression, Bidz.com needs to demonstrate an ability to drive sustainable mid-single digit (or better) operating margins.

For a view on fundamentals, this December Bloomberg article is worth a read:
Two points from the article:
  • U.S. consumer confidence reached a six-month high, an economic report showed last week. Consumer spending may rise an average 2.6 percent in 2011, compared with a 1.7 percent increase this year, according to the median estimate of 56 economists in the latest Bloomberg monthly survey.
  • Almost 4,000 U.S. jewelry retailers and suppliers went out of business between the start of 2009 and the end of November, or more than 10 percent, according to the Jewelers Board of Trade in Warwick, Rhode Island.
8) Favorable long-term secular trends, also noted in our initial thesis. People like to shop, especially for jewelry and other accessories. From our original post in August 2009:
  • People like to shop – while the average American consumer is struggling, we submit that Americans will always be consumers, with some arguably addicted to purchasing products from TV channels such as QVC.com (LINTA) and HSN.com (HSNI), as well as Web sites like Bidz.com. A growing middle class elsewhere in the world also brings more consumers.
  • More commerce will gravitate online over time – although e-commerce growth is lagging amidst the recession, sales are holding up better than offline retail sales. comScore reported 1Q09 online sales flat Y/Y versus overall retail sales down 5% Y/Y.
7) International business is greater than 41% of total revenue and growing at 11% Y/Y (9M10). From latest Form 10-Q (click to enlarge):

6) Meaningful relative discount - from Yahoo Finance (before Monday's jump):
  • Bidz delivers higher gross margins than Blue Nile but currently operates at a loss. Still, Blue Nile's ten times price-to-sales (P/S) premium appears rich, in our view, and the gap should narrow at some point. If Bidz garnered the same P/S multiple, shares would be at $16.
  • Another potential "comp" (not pictured above) might be online retailer Bluefly (BFLY), which has struggled to generate profits since formation and carries an accumulated deficit (the opposite of retained earnings) of $152 million (9/30/10). Bluefly trades at 0.93 times sales versus Bidz.com's 0.26 (prior to Monday). If Bidz garnered the same valuation, the stock would trade north of $5 per share.
5) Bidz.com's established brand, supply chain relationships, E-commerce know-how and scale are difficult to replicate (e.g. we couldn't do it). Bidz invested significant money to build its brand and develop an E-commerce platform that operates at scale. A $100 million plus annual revenue business is non-trivial. Also, major face lift to Bidz.com's Web site is coming soon -- beta version available now:

4) Embedded call option on growing Modnique.com fashion business. No value at all is being awarded to this start-up business entirely self-funded by Bidz.com's core business. We briefly discussed this business and competitive landscape in our post last August.

3) Significant insider ownership - greater than 60%. From last year's proxy (click to enlarge):
  • We know that management wants to generate wealth for themselves and for ALL shareholders since they own more than 60% of the business.
2) Historic track record of profitability (pre-crash) and protecting shareholder value (e.g. see retained earnings, through downturn) with NO DEBT and ample cash generation to fund growth. Shareholders' Equity from Yahoo Finance over the past twelve months (most recent 3Q10 quarter on left side - click to enlarge):
  • No accumulated deficit and fairly stable net tangible assets through tough operating conditions.
AND our number one reason:

1) Who doesn't like free stuff? Like our Parlux Fragrances (PARL) and FLY Leasing (FLY) (click for prior posts) purchases, the entire Bidz.com business including Modnique.com was being given away for less than free.

Until Monday's big move, Bidz.com was offered below net tangible book value (e.g. liquidation value). Given reasons (2) through (10) above, we thought this made no sense whatsoever, particularly for a self-funding company with no debt that was no nowhere near bankruptcy. Bidz was/is not a "cigar butt" as discussed in our initial Parlux post last fall.

We tweeted the discount back on February 3rd:
Hence, the Market gave us an excellent opportunity to purchase Bidz.com at approximately 0.80 times net tangible book value. We took advantage of the apparent disconnect and significantly reduced our average cost basis in the company.

While certain questions remain, we are pleased to see renewed Market interest in Bidz.com. As we've noted previously, when Market sentiment turns, it can turn on a dime. Borrowing from The Black Eyed Peas, we could say that things sometimes go Boom Boom Pow:

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.

Like Bidz.com, we are also looking for our 1-800-Flowers.com (FLWS) to go Boom Boom Pow! We just don't know exactly when the shift might occur. Near-term timing is unpredictable.

Happy investing,

Jeffrey Walkenhorst

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

Sunday, February 6, 2011

1-800-Flowers.com (FLWS): Is Fannie May Confections Gaining Market Share from Berkshire Hathaway's See's Candy?

On Thursday 1/27, we were pleased to see 1-800-Flowers.com (FLWS, $2.76) post better-than-expected results and regain at least some favor from Wall Street. For some time now, we've been highlighting the value inherent in the company's diversified portfolio of businesses and expecting Wall Street to again embrace the company.

In our Just Like Clockwork post early last month, we said:
Well, following the results, Goldman Sachs moved to a "Neutral" rating from a "Sell" rating, which is a step in the right direction. We've not seen the report, but presume the firm is happy that fundamentals are stabilizing and that the coast is seemingly more clear than previously.

Of course, we all remain aware of nagging economic concerns and that "Selfish" Discretionary Spending is outpacing "Gifting" Discretionary Activity. For these reasons, Goldman Sachs possibly held off moving all the way to "Buy" rating and may also want to see positive Y/Y growth for the company. Per our prior discussion, many analysts are afraid to stick their necks out until the coast is entirely clear.

However, let's revisit what Warren Buffett pointed out in his October 2008 NYTs Op-Ed, Buy American. I Am. - emphasis added in last sentence:
  • Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
We continue to believe this is true for 1-800-Flowers.com. By the time Wall Street fully embraces the company, the stock will already be meaningfully higher. Hence, the best time to acquire shares is when they are discarded in the waste bin.

Moreover, assuming a stable to better U.S. economy, we think 1-800-Flowers.com may begin to show positive Y/Y comparisons in the coming quarters. We can point to reasons from the company's earnings release:
  • The Company said the 1.3 percent [revenue] decline reflected reduced wholesale order volume in the mass market channel as well as the loss of approximately $1.4 million of high-margin revenues associated with a third-party marketing program which the Company ended in December of 2009.
Here's the good news: going forward, the company has now "lapped" both the third-party marketing program and particularly steep declines in its wholesale basket business. As a result, delivering Y/Y growth is now easier, especially as other, growing business segments such as chocolates and cookies become more significant contributors to the company's revenue mix.

This finally brings us to the main point of today's post: is 1-800-Flowers.com's chocolate business gaining market share from See's Candy? Last December, we shared 1-800-Flowers.com (FLWS): Is "Moat" Shallow, Shrinking, or Nonexistent? In that post, we referenced our Nestlé Kit Kat series, which alluded to the strength of 1-800-Flowers.com's growing chocolate business, Fannie May. We also shared this 11/27 AP article:
  • The Associated Press — CHICAGO — A half-dozen years ago iconic chocolatier Fannie May, loved by Chicago candy devotees who passed down their affections for mint meltaways, caramels and vanilla buttercreams from generation to generation, was all but finished.
A large part of our thesis is that the "Market" is ignoring hidden value in the company's portfolio of brands, particularly Fannie May Confections and Cheryl's Cookies. We see these higher margin, growing, branded businesses as durable, consumer packaged goods (CPG)-like operations. It's worth noting that the historical long-term stock performance of many CPG companies is very positive. For reference, please see Jeremy Siegel's books Stocks for the Long Run and The Future for Investors: Why the Tried and True Triumph Over the Bold and New.

Now, let's look briefly at Fannie May Confections (FM). The AP article included a number of interesting tidbits, particularly an updated annual sales figure for the business and production volume:
  • "a brand approaching $100 million in revenue annually"
  • "produces about 10 million pounds of chocolate a year"
We can take the sales figure and combine with our analysis:
  • 1-800-Flowers.com purchased FM in April 2006. At that time, the company's trailing twelve month sales were approximately $75 million.
  • Our understanding is that revenue was approximately $90 million two to three years ago.
  • According to the article, revenue is now approaching $100 million, which implies a five-year CAGR of 7% per year versus a flat to down North American chocolate market.
  • While the overall market probably grew along with the economy in 2010, here's backup data for the flat to down market from an LMC International presentation entitled the Outlook for Cocoa Demand (October 2010):
  • The overarching conclusion: if FM is growing revenue 7% per year, on average, in a flat to down market, FM is gaining market share!
  • Plus, the business has excess production capacity -- our understanding is that FM has current capacity in place to produce 15 million pounds of chocolate per year. Put another way, volume could increase by 50% with out incremental capital investment in physical plant and production equipment.
  • Also noteworthy is FM's stable, committed leadership: David Taiclet remains at 1-800-Flowers.com as head of FM. He was the head of Alpine Confections, which bought FM out of bankruptcy, successfully reincarnated the business, and later sold to 1-800-Flowers.com.
NOW, to address our lead question - is FM gaining share from Berkshire Hathaway's (BRK-A, BRK-B)?

Sorry to disappoint: the honest answer is that we don't know since -- to our knowledge -- the last reported financial figures for See's Candy were in Berkshire Hathaway's 2007 Annual Report:
  • 2007A revenue of $383 million with $82 million of pretax earnings (= 21% pre-tax margin).
To see whether or not See's is maintaining, gaining, or losing share, we need updated revenue figures. Admittedly, as a shareholder of both Berkshire Hathaway and 1-800-Flowers.com, we're rooting for both businesses. However, we do know this: a well-run chocolate company makes one for one heck of a business AND there aren't too many of them around.

One this point, Mr. Buffett has long praised See's as "a dream business" and included wonderful discussion in Berkshire Hathaway's 2007 Annual Report* (please click to enlarge):

*We are taking liberty by lifting this directly from the AR without express permission, yet suspect this is okay given the life-long propensity of Messrs. Buffett and Munger to educate and share key investment principles.
We recommend reading the text, as well as the balance of the shareholder letter. In a nutshell, this particular section makes very clear the benefits of owning "asset-light" businesses that possess pricing power and generate lots of excess cash flow. Also, Mr. Buffett notes that there simply aren't many "dream" businesses since most companies require significant capital expenditures to expand operations over time.

While Fannie May Confections is not as well-known or profitable as See's Candy, the businesses both specialize in old-fashioned, premium quality, gourmet chocolates. Fannie May actually pre-dates See's by one year -- founded in 1920 and 1921, respectively -- and established a wide following in the greater Chicago area. We know that FM's products are also excellent and, in some cases, very different and incredibly tasty. For example, Pixies and Mint Meltaways:

Based on our own experience and feedback from others, we're confident that the quality of FM's products and service is very high. Some people we know in Chicago even claim FM's chocolate is better than See's. We recommend trying them both and highly recommend FM's Pixies.

For sure, See's management team made deft operating decisions through the decades that enabled the company to grow into a business with (1) approximately four times the revenue and (2) potentially eight to ten times the pre-tax income by (3) selling only three times the annual volume of chocolate (measured in pounds). HENCE, the management teams of 1-800-Flowers.com and Fannie May have their work cut out for them. HOWEVER, we can safely say that by growing 7% per year in a flat to down market environment, management is clearly making some favorable decisions. Leveraging the "Flowers.com" significant Web traffic is no doubt a large part of the company's success over the past five years.

Here's where things get really interesting: with estimated contribution margins in the low teens (not reported), the private market value of Fannie May Confections could reasonably represent a significant component of 1-800-Flowers.com's current $177 million market capitalization and $217 million enterprise value (MC + net debt). Here's what we mean:
  • Assuming $100 million in annual FM revenue with a 9% pre-tax margin (estimate) produces $9 million of pre-tax income.
  • Assuming corporate taxes of 40% yields net income of $5.4 million (*if the company could somehow build an international business, taxes might be lower; chocolate consumption is growing rapidly in Latin America; however, such an expansion effort would involve capital investment, management time, and various risk factors).
  • Applying a 20 times earnings multiple (5% yield) for a difficult-to-replicate, growing franchise brings us to a $108 million valuation for the business.
  • Note: variable margin and multiple assumptions create wide valuation swings.
Add to this figure a reasonable private market value for the company's growing Cheryl & Co. cookie business, and the Market is awarding very limited value to the company's other businesses.

On this basis -- even amidst the weak discretionary environment -- we arrive at a meaningful margin of safety that should mitigate key risk factors such as competition, macroeconomic conditions, and a U.S.-centric revenue footprint. We believe shares could fairly trade at double current levels *today* and even higher assuming a stable to better economy that supports revenue growth and margin expansion.

Accordingly, we happily acquired shares on weakness in early 2010 and again late last summer into the fall as some investors threw in the towel. We believe those selling the stock, as well as those who remain on the sidelines today, are missing tangible hidden value inherent in the company's diversified, durable portfolio of businesses.

In particular, the notable success of Fannie May Confections through the downturn tells a very positive story and provides much on which to hang our hat. In this sense, the company's record of growth and share gains should enable the Market to see the forest through the trees.

But, alas, as Mr. Buffett writes, some prefer to "wait for the robins."

Happy investing,

Jeffrey Walkenhorst

Disclosure: long FLWS, BRK-B.
© 2011 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Sunday, January 30, 2011

FASCINATING SLIDE: The Power of Compounding - P&G's 54 Consecutive Years of Dividend Increases

Per our December post, 1-800-Flowers.com (FLWS): Is "Moat" Shallow, Shrinking, or Nonexistent?, we still owe readers follow-up commentary on the company's Fannie May Confections business. We hope to share something soon. Please stay tuned.

About one week ago, we shared a "fascinating slide" from Compania Cervecerias Unidas S.A. (CCU). Here, we share a striking slide related to our stocks versus bonds stance. The fact remains that numerous large, high quality, dividend-paying companies are offered at reasonable multiples of earnings. Moreover, rather than a static coupon payment from a bond, many companies consistently increase dividends to equity shareholders year in and year out.

Take Procter & Gamble (PG) for instance. Per the below slide from P&G's December Analyst Meeting, the company compounded dividends at an average growth rate of 9.5% for 54 consecutive fiscal years:

Not too shabby and evidence of a very durable franchise. SO, in addition to potential capital appreciation derived from a growing stream of earnings (assume constant P/E multiple but higher "P" and "E" over time; "E" grows through levers such as new product launches, market expansion, and pricing power), investors benefit handsomely from a growing stream of dividend income.

While we've no position in P&G, the company's incredible dividend track record neatly illustrates why we prefer equities to bonds for those investors with a long-term time horizon.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long FLWS, CCU.

© 2011 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Saturday, January 22, 2011

FASCINATING SLIDE: Per Capita Beverage Consumption in Chile, Argentina, Spain, USA and Australia, plus Chilean Trend

Every now and then, we may share what we think is a "Fascinating Slide." The below comes from a recent management deck of our Compania Cervecerias Unidas S.A. (CCU), which we briefly mentioned in our happy new year post. Here, we see beverage consumption per capita (in liters) for Chile versus a handful of other countries, including the United States (click to enlarge):

The difference among the countries is striking and worth pondering. The next obvious question is how fast is the gap closing? How fast are the countries/regions moving toward parity?

We can surmise that consumption in developed markets is relatively stable and answer the Chilean component of this question below by sharing one more relevant slide (click to enlarge):

Part of the company's organic growth plan is to ride the gradual increase in per capita beverage consumption in Chile and Argentina over time. Nothing is guaranteed, but the historical record suggests the favorable per capita trend may continue, assuming economic growth in Latin America remains on track. Of course, the macroeconomic and political environment, as well as currency fluctuations, are primary risk factors.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long CCU.

© 2011 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Wednesday, January 19, 2011

Reconciling Epoch's Sensible Investment Approach with Sir John Templeton's Advice

We previously shared content from Epoch Investment Partners (EPHC) in our 9/1/10 post, Epoch Investment Partners: "Ratio of equity free cash flow yields to bonds near 50 year highs" = More Value in Stocks than Bonds.

We mentioned then that Epoch's investment approach is fairly consistent with our primary investment approach: in a nutshell, focus on growing, franchise-type companies that generate meaningful excess cash flow and use the cash in shareholder friendly ways.

Below, we share a 12/31/10 video from Consuelo Mack WealthTrack featuring the CEO, Co-CIO & PM of Epoch, William Priest.
  • On this week's Consuelo Mack WealthTrack, Epoch Investment Partners William Priest has created a new paradigm for picking stocks, enabling him to beat markets and competitors with less risk. He'll explain how and where he is doing it (link to video).

His sensible key message: keep a global perspective and seek companies that generate consistent, significant excess cash flow with capable managers who allocate capital to the benefit of shareholders. Plus, while you're at it, emphasize less volatile holdings that maximize excess return per unit of risk across the portfolio.

We concur that his investment strategy makes common stock sense and works over time. Examples of our holdings that fit the billing include eBay (EBAY), Weight Watchers (WTW), j2 Global Communications (JCOM), and PriceSmart (PSMT). However, our investment strategy also includes caveats (detailed in CS$ Approach).

For example, recall the advice from the late Sir John Templeton (click for prior post) that we included in our 11/2/10 post, Parlux Fragrances (PARL): One Dollar of Value for Only 58 Cents - No Catch!:
  • "Never adopt permanently any type of asset or any selection method. Try to stay flexible, open-minded and skeptical. Long-term top results are achieved only by changing from popular to unpopular the types of securities you favor and your methods of selection." (Source: The Book of Investing Wisdom)
In the Parlux post, we continued, "So, while it's great to seek out consistent, high margin, high ROE, high-barrier-to-entry companies, sometimes other types of companies or investments offer equally favorable -- or better -- investment returns over time."

Keeping an open mind and considering different sources of value brought us to our off-the-run holdings such as Sonic Foundry (SOFO), Parlux Fragrances (PARL), and Market Leader (LEDR). All of these companies have yet to generate consistent excess cash flow, but met our investment requirements by offering tangible margins of safety through other measures.

Indeed, like William Priest at Epoch Investment Partners, we prefer all of our companies to generate sizable, growing, and consistent excess cash flow that is prudently allocated by capable management teams. But, in the vein of the late Sir John Templeton, sometimes deviations from this strategy can uncover diamonds in the rough.

While volatility may be higher for these types of holdings, risk-adjusted returns may be quite favorable over time and disciplined exposure can also increase portfolio diversification.

We believe both approaches make common stock sense.

Happy investing,

Jeffrey Walkenhorst

Disclosure: no investments in Epoch funds or EPHC shares; long EBAY, WTW, JCOM, PSMT, SOFO, PARL, LEDR.

© 2011 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Thursday, January 13, 2011

PS: Parlux Fragrances (PARL) Moves Higher as Perfumania (PERF) Credit Overhang Eliminated; Still Offered at Discount

As a brief follow-up to our Tuesday post, What's Moving Parlux Fragrances (PARL) and Market Leader (LEDR) Higher?, we wanted to point out one more important reason behind Parlux's recent upward move that we didn't see until Wednesday (our excuse: busy week, including some travel).

In addition to more details last week around the imminent launch of Rihanna's new perfume -- please see prior post or Rihanna to Launch Her First Fragrance, Reb’l Fleur (People StyleWatch), very favorable news was released Monday evening by Perfumania (PERF):
First, although same store sales for the month of December were down 7% Y/Y, Perfumania is surviving and -- this is the big news -- was able to secure a new credit facility:
  • Perfumania Holdings, Inc. announced today that the Company has entered into a new $225 million senior secured revolving credit facility with a syndicate of banks for whom Wells Fargo Bank, National Association acts as Administrative Agent, Collateral Agent and Swing Line Lender. The initial proceeds of the new facility were used to refinance the Company's existing senior credit facility, which was due to expire in August 2011. The new facility will be used for working capital and other general corporate purposes. It has a four year term, does not require amortization of principal and may be paid before maturity in whole or in part at the Company's option without penalty or premium. Bank of America, N.A. serves as Syndication Agent; Regions Bank and RBS Business Capital, a division of RBS Asset Finance, Inc., a subsidiary of RBS Citizens, NA, serve as Co-Documentation Agents; and Wells Fargo Capital Finance, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated serve as Joint Lead Arrangers and Joint Bookrunners.
  • Michael W. Katz, President and Chief Executive Officer, said, "the Senior Credit Facility will provide Perfumania with improved financial terms and greater flexibility. Most of the financial institutions in our bank group have been supporting us for many years, and we are very pleased to retain the continuity. We look forward to working with Wells Fargo and the entire bank group."
Why do we care? Perfumania is a significant customer of, and related party to, Parlux. We don't have time to share all details, but plenty of information can be found in Parlux's SEC filings. We will relay this from the latest Annual Report Form 10-K:
  • In the United States, we have our own fragrance sales and marketing staff, and utilize independent commissioned sales representatives for sales to domestic U.S. military bases and mail order distribution. We sell directly to retailers, primarily national and regional department stores, whom we believe will maintain the image of our products as prestige fragrances. Our products are sold in over 2,500 retail outlets in the United States.
  • Additionally, we sell a number of our products to Perfumania, Inc. (“Perfumania”), which is a specialty retailer of fragrances with approximately 370 retail outlets principally located in manufacturers’ outlet malls and regional malls in the U.S. and in Puerto Rico, and to Quality King Distributors, Inc. (“Quality King”). Perfumania is a wholly-owned subsidiary of Perfumania Holdings, Inc.
  • The majority shareholders of Perfumania Holdings, Inc. are also the owners of Quality King, a privately-held, wholesale distributor of pharmaceuticals and beauty care products. Perfumania is one of our Company’s largest customers, and transactions with Perfumania are closely monitored by management. Any unusual trends or issues with Perfumania are brought to the attention of our Company’s Audit Committee and Board of Directors. During fiscal year 2007, Perfumania Holdings, Inc.’s majority shareholders acquired an approximate 12.2% ownership interest in our Company at that time (10.1% at March 31, 2010), and accordingly, transactions with Perfumania and Quality King are included as related party sales in the accompanying Consolidated Statements of Operations.
  • Perfumania offers us the opportunity to sell our products in approximately 370 retail outlets and our terms with Perfumania take into consideration the relationship existing between the companies for almost 20 years. Pricing and terms with Perfumania reflect (a) the volume of Perfumania’s purchases, (b) a policy of no returns from Perfumania, (c) minimal spending for advertising and promotion, (d) exposure of our products provided in Perfumania’s store windows, and (e) minimal distribution costs to fulfill Perfumania orders shipped directly to their distribution center. During the three years ended March 31, 2010, our sales to Perfumania accounted for more than 10% of our sales. Our sales to Perfumania were as follows (click to enlarge):
  • While our invoice terms to Perfumania are stated as net ninety (90) days, for over fifteen years, management has granted longer payment terms taking into consideration the factors discussed above. We evaluate the credit risk involved, which is determined based on Perfumania’s reported results and comparable store sales performance. Management monitors the account activity to ensure compliance with their limits.
  • Net trade accounts receivable owed by Perfumania to us amounted to $10.5 million and $12.4 million at March 31, 2010, and 2009, respectively. Between April 1, 2010, and June 25, 2010, we received $6.7 million from Perfumania in payment of its outstanding balance. Trade accounts receivable from Perfumania are non-interest bearing, and are paid in accordance with the terms established by management. See “Liquidity and Capital Resources” for further discussion of this receivable.
  • We continue to evaluate our credit risk and assess the collectability of the Perfumania receivables. Perfumania’s reported financial information, as well as our payment history with Perfumania, indicates that, historically, their first quarter ending approximately April 30, is Perfumania’s most difficult operating quarter as is the case with most U.S. based retailers. We have, in the past, received significant payments from Perfumania during the last three months of the calendar year, and have no reason to believe that this will not continue. Based on our evaluation, no allowances have been recorded as of March 31, 2010, and 2009. We will continue to evaluate Perfumania’s financial condition on an ongoing basis and consider the possible alternatives and effects, if any, on our business.
SO, we do care about the performance and viability of Perfumania for the sake of Parlux. Some investors have avoided Parlux entirely and correctly highlighted risk to the company because of Perfumania's weak liquidity profile (debt burdens coupled with tough operating environment and already thin margins) and Parlux's customer concentration (Paris Hilton products represented 42% of fiscal 2010 sales). Indeed, these are risk factors that must be considered. However, per our initial Parlux post, celebrity brands such as Paris Hilton proved strikingly resilient over the last several years (through the downturn).

While Perfumania's new four-year credit facility doesn't change the company's operating fundamentals, it does mitigate concerns around liquidity. HENCE -- as the Market conveyed on Tuesday by moving Parlux 5% higher on above average trading volume -- we can happily report that the Perfumania credit overhang is now eliminated.

As shareholders, we are pleased to see renewed Market interest in the stock and stand by our original view for Parlux Fragrances:
  • [Rather than a broken, potentially bankrupt business], recent results and cash generation tell a different story, which implies that shares should trade at or above net tangible book value of just under $5.00 per share. Moreover, we can envision at least another $1-2 dollars of upside beyond the $5 for Parlux's going-concern value (celebrity relationships, licenses, etc.). Finally, if management executes and delivers margin expansion toward the company's former 10% target operating margin, we could see a fair value range meaningfully higher than current levels. But, this would be gravy. For now, we're focused on $5 as a starting point. This simply makes common stock sense.
Happy investing,

Jeffrey Walkenhorst

Disclosure: long PARL, LEDR.

© 2011 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Tuesday, January 11, 2011

What's Moving Parlux Fragrances (PARL) and Market Leader (LEDR) Higher? Hidden Value Now Coming into Plain Sight

Shares of Parlux and Market Leader are now garnering more attention from the "Market." Five-day view from Google Finance shows PARL up 14% and LEDR up 34% versus the NASDAQ up 1%:

For Parlux, product details, marketing messages, and images of Rihanna -- all of which have been in the works for some time and really should be no surprise -- are giving the Market assurance that Parlux is a viable business, a business which -- per our original view -- arguably should trade at least at net tangible book value of near $5 per share. Of course, seeing is believing for the Market and, now, it can almost smell Rihanna's new perfume.

We first mentioned Market Leader in our 1/1/11 Happy New Year post and hoped to share a bit more color before too long. Our brief thesis, previously shared with a handful of friends in 2010:
  • Illiquid microcap company trading below net cash value that happens to have a growing, subscription-based $15+ million run-rate (MRQ +40% Y/Y) real estate software-as-a-service (SaaS) solution business inside the company. All of this was/is certainly worth something, even with slight cash burn to build the business.
Consider this: venture capitalists strive to find and fund great, new business models and often award rich valuations early in a young company's life (even prior to the development of proven revenue models). YET, in Market Leader, here was an existing, growing operating business delivering a necessary service to real customers. Moreover, the company has a committed management team and excellent board sponsorship (insiders own ~20% of the company per latest proxy statement). To us, the valuation simply didn't make sense given the underlying business trends and franchise value. Thus, we were actively building our position in December by purchasing shares seemingly offered by an abundance of tax loss sellers.

Alas, before we found time to share more details here on CS$, a large deal announced on Monday made the Market realize that, HEY, maybe this company is worth something. We agree.

Although we believe predicting short-term share price direction is impossible and akin to gambling, sometimes "the trend can be your friend" once the Market "wakes up to a story."

Importantly, we continue to see margins of safety in both names.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long PARL, LEDR.

© 2011 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer