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Saturday, October 21, 2006

Results 2

Previous Results:
5/28/2006 Checking back with Mr. Market: 1

5/29/2006 Checking back with Mr. Market: 2

10/13/2006 Results 1
BFTC, BKBO, LVWD, LCLG, BRSI, BSPA, BSOG, BOJF, BAYN (Oops, I already did these!)

New Results:
ADY (stock sec)
I had viewed this as a potentially good investment, but I had a problem with the CEO's controlling interest. The stock price has been increasing.

Their latest quarter 10-Q is here. Period ending June 30, 2006. 15 million shares. 2.4 million warrants. I had assumed 25 million totally diluted (seems way high, why?). Balance sheet looks fine. Revenues are way up. Gross profit has nearly doubled. No income tax. Earned $10 million for the first half. Cash flow from operations is very low due to deferred income. Capex is high (not too surprising, new construction projects). Some net borrowing. Big advertising costs, but they're coming down. Overall sales quantity increased 53% quarter-over-quarter. ASP increased 13% from prior year. Boy, I'm regretting not investing in this company.

I looked at the 10-K here.

ADY raised $18.2 million by issuing [apparently non-toxic] convertible notes (convert at $14.50 per share, also warrants for 251K shares at $14.50). Details. Seems like the totally diluted share could might be closer to 20 million shares. But I'd need to look closer before ever investing in it.

Current stock price is around $14. It was a bit lower when I looked at the 10-K. It was embarrassingly cheap when I looked at it August, 1 2005 and in July and here. With these Chinese reverse mergers, it's so important to try to err on the side of caution rather than risk taking. That's what I did, so I can't give myself a flunking grade here.
Grade: C

BABB (stock, sec)
Stock is mostly unchanged at around a dollar, which is about what I figured it was worth. 10-Q for Aug 31, 2006. They're down to 1 company owned store (from 4) and 140 franchisees (from 178). Net income is up to $236K for the quarter (from $147K prior year). Revenues are way down and have been declining for two years (at least based on Q3).
Stop following
Grade: A

BACL (now BBAL sec)
First looked at it here. Stock is down to 25 cents from around a dollar.
Grade: B

CACC (stock, sec)
First looked at it here. Same business as NICK. Stock was selling for $13 and free cash flow seemed like $1 per share (earnings more like 60 cents). I didn't really like the business model. The stock is now above $33.

The company addressed some issues a shareholder had about a Dutch auction where they bought 20.6 million shares at $28 to $31.50. The Chairman sold 3.3 million shares. It's weird that they paid for it using the revolver. 30 million shares outstanding afterward.

The most recently filed 10-Q for the period ending June 30, 2006. Revenues up about 10%. Expenses up about 20%. Operating income only up about 2%. Diluted 50 cents per share vs 44 cents. That's for the quarter. Apparently, I was way off in terms of earnings.

Investment cash flow contains huge amounts from principal collected on loans and advances to dealers (and accelerated payments of dealer holdback). There are huge cash flows that could potentially have anything in them (as far as I can tell). Pretty much all of the cash which arrives from customer payments goes back out to new loans. Write-offs and recoveries are fairly low. Allowance and provisions seem fairly solid. They have a good amount of data on spreads per year that loans are originated. Spreads are similar to NICK in the mid twenties percentage range.

I recall that CACC directly finances car loans and sends an advance and the down payment to the dealers. The customer loan payments go to pay the advance at first. Then 80% of the rest of the payments go to the dealer and 20% goes to CACC (plus there are some fees and stuff that adds to the 20%). Dealers have to pay around $10K to join the CACC program. Each loan has a sort of capital structure where CACC is at the top of the stack and the dealers are at the bottom (to presumably keep dealers from submitting garbage loans). However, this is after CACC has already paid the dealer an advance.

I looked at more details here and concluded that business was likely to deteriorate due to competition. CACC had all sorts of accounting troubles and things looked bad when I looked at them last year.

I had asked in bold font, "Why is this stock still trading at $13.50?!?! These people have no fear." I concluded that it was a good company, their collection forecasts were accurate, the accounting was royally messed up. And they were in violation of covenants.

I was expecting some sort of interest rate hell in the future and it never happened. The company cleaned up the mess and the stock went up to $33. I was really wrong about this one and I think the root cause of being wrong was not putting enough weight on my view of the company and the overall business model (which I had learned about from NICK).
Grade: D (not an F because those problems were very real and I erred on the side of caution)

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