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Sunday, October 16, 2011

ValueClick (VCLK) update

Whenever you buy Halloween candy for the kids, if you get the mixed bag that has 20% really good stuff, it always gets eaten up before Halloween.  Kids get the leftovers.  Life's tough.

Completed acquisition of Dotomi on Aug 31.  $264 million in cash and stock, plus assumption of some unvested options.  Dotomi CEO elected to ValueClick board and gets cash, stock (1 yr lockup).

VCLK also repurchasing some stock.

New revolver. Expires 2016, $150 million, secured by all assets.  Also $50 million term loan.

New 10-Q for period ending June 30, 2011.
79 million shares on Aug 1, 2011 (adding in the 7.6 million shares issued in the Dotomi acquisition, plus another 1 million in employee options at a $2 strike!)

Comparing to Dec 2010.

Balance sheet is still rock-solid, but goodwill keeps climbing.  But the balance sheet is still solid even if you back out the goodwill.

After all these years, they've almost, ALMOST, earned a profit for the original investors.  And when I first bought them back in 2002, they had just reached breakeven.  Moral of the story: startups burn money.

Revenues are up about 25% from December.  Looking back at March, (78 million shares), 

Let me go back to the balance sheet.  Cash dropped by about $58 million.  What happened?  Equity increased by $18 million, assets increased by $21 million.  Liabilities INCREASED by a few million.  I found it: it's down there in goodwill.  I hope they know what they're acquiring!

Back to revenue:  Q2 was good both yoy and qoq.
70% gross margins vs 72% in Q1.
22% operating margins vs 23% in Q1.
14% net margin (38% tax) vs 14% in Q1 (looks like similar tax rate)

Earned 21 cents diluted, same as Q1.

Equity statement looks good.  271K shares issues in stock options, 2.2 million repurchased.

Cash flow:

Q1: Cash flow from operations was nearly double net income due to changes in assets/liabilities and depreciation.  Only 1/3 of the depreciation amount was sunk into capex.  Can't tell if that means anything here.

Q2: Cash flow from operations for H1 was 50% higher than net income.  So Q2 it was the same.  Capex was much bigger in Q2, blah blah.  It all works out.

Cash flow statement overall is very simple, clean, and wonderful, except for the $69 million acquisition of Greystripe. It all hinges on whether they're making good acquisitions.
They claim Greystripe contributes to the U.S. mobile advertising market and this justified paying above book value.  They have the intangible assets depreciating over time at what seems like a reasonable schedule.  Not sure if they plan to depreciate goodwill.

Acquired Investopedia.com in Aug 2010.  Their reasons for paying more than book value here look iffy.

VCLK disposed of a lead generation business in Feb 2010 for $45 million.  This had a pre-tax $1.1 million gain, but also $8.9 million tax benefit due to tax deductable goodwill realized on the sale.  If I follow this correctly, the subsidiary lost a bunch of money while VCLK owned them, but VCLK was able to sell them at a high price than they paid for it.  OK, fine.

There's a long-running spam email lawsuit that they sorta won, but then it got reversed on appeal and now it's back in play.  Trial in April 2012.

Their tax situation is uncertain right now, both state and federal.  They're being audit by the IRS for 2007.

Segment Info:
All segments increased revenues and income (but some of this is due to acquisitions, but none of it hid downturns).  All the segments have good margins.


Back in July, I had said that VCLK stock was worth around $30, but admitted that this is a fairly high price and assumes a lot of good things that I see in the company will continue.  I think $20 is a much safer valuation.  The fact that these numbers are so far apart says that it's not easy to value.  The stock is currently selling for around $17, still too high to consider.

I'm currently asking myself if I've been holding out too much for a serious downturn.  Should I have bought the stuff I'm looking at back in August?

I don't think so and here's why: My strategy is based on something that may take a long time to play out. It might be years before I actually jump back in.  I'll end up wrong if the global economy jumps into high gear and continues that way for years.  At that point, the global problems will be saved by big increases in revenues.  If people don't learn their lesson about debt and spending, it might take a decade more before a day of reckoning occurs.  But the stock market prices of 2011 and maybe even 2012 won't have anything to do with how that plays out.

I'll probably stay heavily in cash, but move investments around based on the valuations of various stocks.

Monday, October 03, 2011

Closed out CVU

I sold the last of my CPI Aerostructures (CVU) stock today.  After looking at the ratio of current market price to full value and comparing it to what else is out there, it was an easy decision to make (in other words, oddly enough the stock price didn't fall enough and I sold it).

Looking at the market right now, I thought it was crazy when the 10 year US Treasury bond was yielding under 2.5%.  Now it's at 1.79%.  30 year mortgages are at 4%.  The powers-that-be are doing everything possible to push money out of hiding and lift the prices of everything.

I'm watching for opportunities.

Tuesday, September 27, 2011

Berkshire Hathaway stock says Buy Me

I can't even express how difficult it is to stop myself from buying Berkshire stock when the "A" shares dipped below $100K and then Buffett starts buying back shares.  Note that unless you're investing millions, I think it's a mistake to buy the "A" shares, even if you can.

Buffett makes his thinking very clear in the everything he writes.  It's extremely straight forward and rational.  He's buying back shares because it's the best allocation of excess captial that he can find, given the limited opportunities available when dealing in billions.  He's saying Berkshire stock is cheap, and he's probably the best or 2nd best person to make that judgment call (Charlie Munger is the other one).

I hope that I'm making the right call by holding out and keeping a high percentage of cash.  I consider Berkshire to be a very easy 50% gain at this point.  It feels crazy not to buy it.

I've found that things very often feel wrong when they're the right decision.

Monday, September 05, 2011

Senior IMF Economist Expects Hard Default For Greece. Soon.

An unidentified senior IMF economist expects a hard default soon from Greece.

This is what I've been expecting for some time.  The first domino.
I expect a hard default definitely before March, maybe this year, and it could come with this program review,” said a senior IMF economist who is keeping close tabs on the situation. “The chances for a second program are slim.
First Greece defaults, then all the banks that are using Greek bonds as collateral show up as being in serious trouble.  Then it continues to spread.  The global economy nosedives, causing more of the PIIGS countries to default.  Then we start to see who has been responsible and who has been reckless globally.

Things could get surprisingly ugly.

UPDATE Tues Sept 9, 2011:
Josef Ackermann just gave a "terrifying speech" at a conference in Frankfurt.
It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels....
In recent weeks, the distrust of the financial markets has spread to the banks because they are now suffering from the debt crisis in Europe and have a lot of exposure to, for example, Greek bonds.
Let me translate that into English: Everyone knows that if European banks had to accept a lower value of the bonds from shaky goverments that they own, it would wipe out those banks.  Unstated is the following: European countries have been scrambling like crazy to do anything possible to avoid having to acknowledge a lower value for those bonds from shaky governments.

When he says, "for example" I think it's fairly clear he means that it's not limited to Greek bonds.

Saturday, August 13, 2011

Goodyear Tire and Rubber (GT)

Goodyear (sec)

I stumbled into Cooper Tire and Rubber (sec) when scanning for stocks.  That brings back very old memories from before I was ever an investor.  That leads to GT as well as Bridgestone and Michelin.

Goodyear Tire and Rubber

Looking at the very long term chart is a strange thing.  It goes back to around 1970.  The stock has see-sawed wildly between then and now but has essentially gone nowhere.  Considering that 1970s dollars were worth a whole lot more than today's dollars, the stock is seriously lower than it was back then.  Japanese tires and probably Chinese tires lately.  I remember reading Les Schwab's autobiography which covered the shift from Bridgestone to Toyo tires.

My interest in GT is to see if it's a stable company in order to take advantage of the wild swings in price that line up with economic downturns.  I'm not looking for excellence, I'm looking for survivability.


243 million shares.
They operate all over the world. 56 manufacturing plants in 22 countries.
Also rubber related chemicals.

In 2010, Titan Tire bought the rights to sell Goodyear brand farm tires in Europe, Latin America, and the US.
Expect a $270 million charge from closing the Union City, TN plant.  Was making 12 million tires per year.

Started closing a plant in France in 2009.  $107 million estimated cost.  High cost capacity.  Was making 6 million tires per year.

Goodyear, Dunlop, Kelly, Fulda,Debica, and Sava brands.  Also various house brands.
Cars, trucks, buses, aircraft, motorcycles, farm equipment, earthmoving, mining, industrial, etc.
Also retreads for trucks and aircraft and other stuff.
Mud flaps (presumably with sillouettes of reclining girls)
84% of sales are new tires.  Mostly replacement tires.

Most of the revenues are in the US and Europe.  21% Asia.

Competitors are mainly Bridgestone (日本) and Michelin (Vive la France!).
Global alliance (75%) with Sumitomo 住友 Rubber Industries (25%) for selling tires in Japan.

I notice that Asia sales are fairly flat. Someone else must be winning there.  Bridgestone?  Michelin?

Raw material costs went up 12% in 2010, not surprising.  They expect it to increase 25% to 30% in Q1 2011.  Ouch.

2,400 patents in the US.  3,700 in other countries.  License agreements.  Zillions of patents among a small number of companies tends to lock them in as an oligarchy, which is fairly good for long term business. 1,700 trademarks.

72,000 employees.  39,000 in unions.

14 million stock options.  $15.11 ave strike.

Revenues: (billions of dollars)
2006: $18
2007: $20
2008: $20
2009: $16
2010: $18
Makes sense.

Hey wait a minute!  They lose money just about every year.  The only year they made money was 2007 and that was because they sold a business.

Operating incomes in 2008, 2009, 2010 were 17.6%, 16.6%, 15.3%.

Balance sheet is weak.  Equity is almost gone. Lots of debt.
Cash flow looks weak.  Capex burns up all the operating cash flow.

This company looks bad.  I wonder if Bridgestone is any better?

Cooper Tire and Rubber

Quick look at Cooper Tire and Rubber:
Latest 10-Q
Balance sheet is way better.
Basically earned 50 cents for 6 months (not counting discontinued operations)
They actually pay a dividend.

Latest 10-K
62 million shares.
North America, UK, and PRC JV.

Revenues (billions of dollars), Earnings per diluted share
2006: $2.6, ($1.21)
2007: $2.9, $1.46
2008: $2.9, ($3.88), cost of goods sold issue (oil prices)
2009: $2.8, $1.54
2010: $3.4, $1.86

Cumulative earnings per diluted share: a 23 cent loss
International revenues are climbing substantially (1.9% in 2009, 28% in 2010), they're now half of the North American revenues.

Cash flow looks ok.  Looks like earnings match free cash flow over a three year period without anything too ridiculous.

So is CTB worth $20?  Needs more work.

Monday, August 08, 2011


While explaining the complexities involved in pondering "where did all that money go?" to someone today, I realized that there's more to it than I had thought.  The obvious answer is that it doesn't go anywhere.  The value is either there or it's not there.  Another answer is that it's like a parimutuel betting horse track.  The money comes into the markets, the brokers skim off some, and the same money walks out 3 days later when the trades all clear.  A third answer is much more ominous.

Let's say someone puts their stock up as collateral for a loan.  And let's say at first, the stock prices go way up.  So they can borrow more against it.  It's the same thing as the home equity ATM machine syndrome.  When stocks drop, the ATM machine goes in reverse and it's looking for deposits, not withdrawals.

When you apply a lot of financial leverage, then money really does appear and disappear.

When  you have a stock market bubble or housing market bubble or a tulip bubble, from what I've read, it needs large amounts of debt or it won't really have enough fuel to reach bubble status.

It's bad enough when you have a stock market bubble and you get a false wealth effect.  It's much worse when you have a housing bubble because the dollar amounts are much bigger and the impact on lives is very direct.  But what happens if you have a bubble where governments get very big and borrow massive amounts of money to keep running?  It's the large banks that get hit.  But I suspect there's a lot of collateral damage, so to speak.

Friday, August 05, 2011


Why would any sane person today loan out money for 10 years at an interest rate of less than 2.5% given the massive inflation looming and given that the borrower has the means, motive, and opportunity to cause massive inflation?

It's not a question of whether the government will default.  It's a question of whether the money you get back will be worth anything close to what you loaned out.  And you should be expecting more back, not less, given that the money is on the sidelines for 10 years.

It makes no difference whether you can sell the 10-year note in less than ten years.  The risk is still there and it seems to me that the market is seriously mispricing this stuff.

It makes no difference whether there's nothing better out there right now.  Something tells me that will change long before the 10 years are up.

UPDATE Aug 6, 2011:
I wrote that less than 24 hours before S&P lowered the US Gov rating to AA+. Lucky timing.

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