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Saturday, November 17, 2007

Tootie Pie (TOOT)

Tootie Pie (TOOT)
They sell pies, mostly wholesale to Ben E. Keith Food Services and Sysco in San Antonio. The corporate customers buy pies for gifts, events, customer gifts, and personal use. They do have a store where they sell retail, but its not much. They also sell to area schools for fundraisers. Pies on the website run at about $32. Shipping costs seem about $20 to $40 for long distance.

I ordered one of their classic apple pies with 2-day shipping. It arrived just fine, packing was good, nothing fancy. The pie itself was very good, enormously big, and (importantly) it was normal: what you'd expect of an apple pie. It would make a very good gift.

TOOT is a recent startup and ramping up. They started the quarter (ending June 30) with:
And during the quarter added
Ben E. Keith was 41% of revenue.
Sysco was 20% of revenue.

Quarter ended Sept 30, 2007 (this is an update: I had looked at the prior quarter first, see below):
8.4 million shares on Nov 9, 2007

Cash is up $309K qoq.
Low AR (12 days)
Inventory is way up, but this is as expected just before the big season, now I'm thinking some of that cash is from financing.
No increase in gross PP&E
$37K of construction in progress (up from $22K prior quarter)
Net cash is $647K or about 5 cents per fully diluted share.
Additional paid-in capital is up by $600K (there's the financing).

Revenues doubled year over year, but are down quite a bit from prior quarter.
Gross margins are down to 35% from 43% in prior quarter but up from 20% in prior year.
SG&A is way up, but they're scaling the business up. Their explanation:
...principally due to managing growth in unit sales, market territories, foodshow fees and related marketing expenses, increases in customer support capabilities, hiring additional personnel in both the sales and administrative departments, and expenses incurred in the quarter ended September 30, 2007 related to being a public company.
Net loss of $154K. Assuming 40% gross margins, revenues would need to more than double to reach breakeven. Same for the 6 month results.

Operations burned $397K (with a $350K net loss) no-thanks to inventory and other current assets increasing. Very low capex, but $37K went into construction. $1 million was raised via stock.

So what's the dilution amount now? (unchanged, see below)

The stock option expense was only $3K for the quarter.
$300K NOLs.

Ben E. Keith was 31% of revenue
Sysco was 24% of revenue

As a percentage of total sales: retail increased slightly to 23%, wholesale decreased slightly to 70%, corporate was only 7%. If I understand this correctly, it means that the next quarter will be largely corporate and retail and that these parts of the business are extremely seasonal. The two big customers above are apparently not seasonal or perhaps even drop during the next quarter.

Apparently, they raised the $1 million by calling the Class A warrants. Subsequent to the quarter, they sold another $166K worth from the same call. 544K warrants total remain.

Prior quarter:
Period ending June 30, 2007. This is Q1.
Balance sheet has $444K of cash plus an assortment of equipment, inventory, and almost no AR. Also some intangibles (probably the Tootie name, recipes, etc). Fairly strong balance sheet.

Revenues were $204K in Q1 (vs $78K yoy), $105K in Q4, $340K in Q3 (their strongest seasonal quarter which includes Nov and Dec).
Only 43% gross margin, but "We expect the gross margin percentage to continue to fluctuate as we refine our manufacturing process."
SG&A killed them, being larger than revenue.
The increase from the prior year quarter was principally due to managing growth in unit sales, market territories, foodshow fees and related marketing expenses, increases in customer support capabilities, hiring additional personnel in both the sales and administrative departments, and expenses incurred in the quarter ended June 30, 2007 related to being a public company.
They sold stock to raise essentially all the cash sitting on the balance sheet. As you'd expect, they have lots of warrants outstanding.

The CEO had an interview with StockGuru.com: They're building a sales network. Trying to minimize the seasonal effects of the business (why? [update: obviously to fully utilize the PP&E etc. during the full year]) via wholesale. He said revenues were about 100% higher than last year (I didn't see Q2 2006 results broken down anywhere, but Q1+Q2 revenue was only$167K). They're in 10 states now. For the upcoming season, they're seeing interest from small chains of restaurants. They have some venture with Fox Home Entertainment about the movie The Waitress where Fox sent pies to retailers. In Nov the DVD rolls out, Fox will be part of it, distibuting pies to some other media outlets (CEO says not sure what that means) and some sort of press release. Basically, the CEO said that every time they've sent out a corporate pie, it's resulted in multiple additional pie sales. Tootie Pie paid $23K to get the interview done. Nobody ever compensates me for this blog. Where's my $23K? [note: I actually don't ask for or accept any compensation whatsoever]

7.6 million shares on July 31, 2007. Looks like 12 million shares fully diluted. Shares are trading around 94 cents, which I think is a reasonable value.

Let's look at the 10-K:
period ending Mar 31, 2007.
6.6 million shares on June 1, 2007. 13 million fully diluted.

Sept 2005, they purchased key assets from Ruby Lorraine "Tootie" Feagan: pie recipes, customer list, the rights to the "Tootie Pie" name, some equipment, and a building in Medina, TX. Tootie pies were already well established in parts of Texas. Tootie and some others were hired for training. At this time they also leased a 5K sq ft building.

TOOT focuses on the high end market. The pies are hand made (in my view, that's a negative; I'd rather have repeatable machines with good human QA).

Targeting three markets: retail, corporate, wholesale. Not currently in the grocery market.

The whole frozen pie market overall is $338 million. Mrs Smith's has $87 million. Edwards has $71 million. Marie Calendar's has $50 million. Sara Lee has $40 million. But these aren't the real high end sellers. TOOT currently has less than $1 million.

Arugably, there's an overall trend in deserts (and in all sorts of food markets) towards higher quality, especially for something that's typically a gift item. This is where moats are made and kept.

TOOT plans to expand. Their recent expansion has been:
Aug 2006: Ben E. Keith, Forth Worth
Sept 2006: Sysco, Austin
Feb 2007: Ben E. Keith, Oklahoma
Mar 2007: Sysco, Houston

On Mar 31, 2007, they had two full-time and two part-time sales and marketing people. Hank's Brokerage Company represents TOOT in wholesale markets.

Most of wholesale came locally from South Texas. The intent is to expand wholesale through restaurants, bakeries, etc.

Corporate has been local, regional, and even national (through the website).

Year ending Mar 31, 2006:
Retail: 65%
Corporate: 15%
Wholesale: 20%

Year ending Mar 31, 2007:
Retail: 31%
Corporate: 24%
Wholesale: 45%

So wholesale is the big grower. Corporate is also doing well.

Most of the ingredients come from Ben E. Keith in San Antonio. They have a non-binding contract with Ben E. Keith that has cost incentives when 80% of purchases are from Ben E. Keith.

Closest competitors:
Janie's Pies in San Antonio
Collin Street Bakery in Corsicana, TX
Royer's Pies in Round Top, TX
Sweet Street Desserts in Reading, PA
Lawler's Deserts in Humble, TX
Chef Pierre (Sara Lee) in Cincinnati, OH

Only 6 full-time and 18 part-time employees.

47% gross margin.

Class A warrants: strike price 50 cents. About 3 million.
Class B warrants: strike price 1 dollar. About 3 million.

Notable risk factors:
Auditors: Akin Doherty, Klein & Feuge, San Antonio. They're not on the largest auditors list.
Non-qualified opinion, except that the company changed how it accounts for stock-based compensation on April 1, 2006. Audit fees were $28K plus another $25K in fees to the same company.

I've looked at a more recent balance sheet above. Fairly strong. Not much depreciation of PP&E. Assets are roughly 1/3 cash, 1/3 PP&E, 1/3 intangibles. Significant net cash.

Income statement:
47% gross margins
At the same gross margins and SG&A, they need to triple their revenes to reach breakeven.

Equity statement going back more than one year:
Started off 2005 with 2 million shares.
Issued 600K shares to acquire recipes.
Private placement of 2 million more shares to raise $492K (about 25 cents per share).
Issued 271K shares for consulting/services
Another private placement of 915K shares to raise $296K (about 32 cents per share).
Issued 52K shares for services.
Currently have 5.96 shares outstanding.

Cash flow statement:
Operating cash flow was better than earnings (but still negative) thanks to stock based compensation, depreciation, amortization.
The story is this: operations burned up about $300K, there was $45K in capex, and they raised about $300K via stock. The result was a slight decrease in cash.


No allowance for doubtful accounts.
No obsolete inventories.
Recipe intangibles are being amortized over 7 years, straight line.
$29K advertising costs.
Shipping and handling charges of $80K are included in sales figures. Shipping costs of $69Kare in selling expenses.
The stock compensation expense was $35K.
About 500K stock options outstanding (29 cents strike)
About 6 million warrants outstanding (75 cents strike), callable if stock trades at 75+ cents.

CEO is from Merrill Lynch and then some sort of venture firm. 20 years experience consulting with companies in many fields. Degree in advertising.

CFO has 20+ years in public accounting. Was an auditor with Touche Ross (merged with Deloitte Haskins etc. in 1990). Founding partner and CFO of Guardian Food Service Systems (practially nothing googles, seems like a local San Antonio/Austin business). Was Sarbox team lead on a project for Baker Hughes (NYSE, sec) oil and gas company (would show up in the 2004 10-K).

CEO's father-in-law (Raymond G. Armstrong, M.D.) is on the board. He only owns 25K shares.

CEO owns about 14% (10% direct and outright). Directors and executives own about 30% including options.

Total compensation amounts are quite low. CEO's total compensation was only $87K.


The stock is selling for around 90 cents and it's been steady for a while. With 12 million diluted shares, the question to ask is whether this company will generate significantly more free cash than $720K per year. Right now, I don't think anyone serious is looking at this stock, so I worry about posting it and losing a future opportunity. But I don't feel like sitting on this for a long time.

I think the stock is probably reasonably priced right now. They might do very well, but there are always big risks. They need an enormous amount of growth just to break even. My gut sense is that all of that is priced in at 90 cents.
Why is it that great ideas so often come from outside the system?

Sunday, November 11, 2007

Conforce International (CFRI) conference call

CFRI had a conference call on Oct 25. Questions were sent in via email and selected ahead of time. I didn't submit any questions this time, but others asked good ones. Here's a rough transcript of the call.

CEO: Marino Kulas
VP Product Development: Joseph DeRose

Kulas states that they get a lot of feedback from shareholders. They know when shareholders are satisfied and when they're not. "Right now, we know you're impatient. We appreciate and understand." [I'm actually not that impatient right now, if anyone cares to know]

He then recaps what the company has accomplished: When they went public 2 years ago, EKO-FLOR was still a development stage idea [remember the days when you didn't go public until after you were successful?]. Last year, they passed three stages of testing to emerge with an independently certified product for use in the container industry worldwide. At the same time, they parallel tracked a development of the European trailer market. Dec 2006, they introduced EKO-FLOR at the InterModal Show in Hamburg, Germany. This year, they got feedback from customers and have "further enhanced the product to the point where they're able to receive trial orders from some of the largest shipping lines in the world. That is no small feat."

[I agree. Having spent about a quarter of a century in product development myself, nothing that's happened is surprising. The key thing is that all sorts of things go wrong that are unpredictable ahead of time. Success depends on being able to adapt and fix things, not on a lack of problems. But also very important is having a product that customers will buy, which I believe is not going to be a problem for EKO-FLOR.]

They also continued development of the trailer product to meet North American requirements. They've been in discussions with many of the top trailer participants in the industry. Between the two industries combined [presumably he means containers and trailers rather than European and North American trailers], they are either in discussions or in trials with 9 of the top 16 companies in the world in their respective markets.

They are well aware that it is not enough. They need to now fully commercialize the products. They need orders, revenues, and earnings. They have a strategy that they're executing on a daily basis. Kulas would clearly have preferred the pace to be 6-8 months ahead of where they are. There are always unforseen delays: manufacturing issues, customer cultivation issues, logistics issues. They are behind schedule. But they've dealt with every issue and have overcome all obstacles [I wouldn't make a claim like having overcome all obstacles until the cash from revenues is actually in the bank].

Kulas says it's a good time for Conforce, although you can't tell by tracking the stock price. They are confident about their success. However, shareholders want a higher stock price. They, too, are shareholders. [I'm really chopping this up a bit too much]. Shareholders expect better performance from their stock and it's their goal to deliver.


1) It's now been about 10 months since EKO-FLOR has been certified, can you explain why it's taken so long to get the company trials going?

After introducing EKO-FLOR at the trade show in Hamburg, Dec 2006, they got a lot of feedback from participants. The comments were around enhancing certain features to allow for broad scale adoption. They implemented these, but that led to difficulties in the manufacturing process. They worked with their Asian manufacturing partner [not this is not plural], but it took some time. They now have a new panel which is lighter and stronger and they're only now ready to fill the trial orders. [Translation: potential customers pointed out perhaps one or two big problems and Conforce had to go back to the drawing board. In the process, the manufacturer ended up not being able to do what they needed (see below). Thus, a very big delay.]

2) What is the status of the EKO-FLOR trials (both container and trailer)?

Regarding the container trials with Oceanex, Hamburg Sud, and others, they [I made this deliberately ambiguous] made a decision to hold off on the start of the trials until the enhancements were done. They're ready to start filling the orders in the next few weeks.

ATC Houthandel [I covered that here], based in the Netherlands, is very important to CFRI as a distributor of flooring to the European trailer market. "They remain very excited about EKO-FLOR. Starting today, they are displaying EKO-FLOR at their booth at the European Road Transport Show in Amsterdam." Contrary to rumors, booth babes will not be tap dancing on EKO-FLOR samples. [I just made that up.] This is the largest trade show for the European truck/trailer market and CFRI expects to get some excellent response from the exposure. [I'd hope for it, but I wouldn't expect it.]

The North American trailer market has some differences from Europe in terms of the design of the trailers. CFRI has confidence that several leading participants will place trial orders with Conforce shortly.

3) World Cargo News had an article about the IICL and its container flooring project, which was launched in Dec 2005. [I covered that here.] Was EKO-FLOR one of the designed selected?

That organization is a global association that represents virtually all of the major companies involved in the leasing of containers. They want to standardize materials and repair procedures.

"The project that they launched was to address what they described as a crisis facing the trailer leasing companies. The crisis stems from the declining availability of tropical hardwood plywood and the declining strength and long term durability of those plywoods. With the launch of EKO-FLOR occuring in December '06, their project was too far along in order to introduce a new material. Their project is only considering using variations using wood and steel and does not include any composite materials [I assume two things from this: the most important is that there's no killer competitor already out there and ahead of CFRI; two, I don't think they deliberately ruled out composites up front, it's just that none showed up as a contender]. We intend to join that project as soon as possible."

4) In a recent investor update, CFRI noted that there are several unnamed shipping companies involved in EKO-FLOR trials. If they later decide to sign a contract for a new product, will you then be able to PR them?

The trials now encompass 5 container carrying shipping lines, but with more discussions underway with others. Due to client confidentiality, CFRI can't provide details. CFRI would treat contracts as meaningful business disclosure and put out press releases when they happen.

5) When will CFRI release the results of the trials?

The trials will generate lots of short term information available within weeks in terms of product performance. Also longer term results. The timing will vary between different customers. CFRI will release both the short term and long term results as soon as they're available.

6) When does CFRI anticipate contracts for EKO-FLOR? Both trailer and container?

CFRI believes the contracts would be linked with successful trials in the marketplace. They're in discussions with certain customers to ensure that once the trials are completed, they will be able to transition to an order flow, having already discussed the particulars such as quantities, scheduling, delivery times, etc.

7) What is the status to the uplisting to the OTC BB?

They want to assure that a delay in uplisting is not due to a lack of interest on CFRI's part. CFRI believes the best timing is when they're able to provide a consistent flow of information. They acknowledge the importance of being in front of the right audience at the right time. CFRI made a business decision to delay the transition until they can announce EKO-FLOR contracts.

8) What company will manufacture EKO-FLOR? Is the prior agreement with the Royal Group still valid?

EKO-FLOR will be manufactured by selected partners in Asia an North America. Regarding Royal, through their development efforts, CFRI learned that the range of technologies available to Royal could not deliver on the structural needs of the flooring panels.

[I'm not surprised.]

9) What effect, if any, does the oil price have on EKO-FLOR production?

EKO-FLOR's dependence on petrolium based resins, which creating the matrix for the panel materials, account for 20% to 40% of raw material needs, depending on the formulation. Based on this relatively small proportion that the resin requires and taking advantage of longer term supply contracts, CFRI expects to offer more stable pricing than what's offered by plywood flooring.

[Oh boy, that sounds like extremely careful wording. Now I'm a little worried about this.]

10) Any details on the retail products mentioned by CFRI a while back?

They're expanding the offering to include three sectors: The industrial sector for containers and trailers, the commercial sector for industries such as cruise ships, and consumers via big-box stores for residential applications. The latter two are in development, but these won't be productized until the container and trailer markets are panning out.

11) What's the status of patent protection?

This is a complicated area [I can attest to that] that requires careful attention and there are various approaches to protection that they considered. They'll address patent portfolio quesetions in more detail in the near future.

12) Are the earnings estimates from March still valid even with the delays in getting the trials started?

The delays will push back revenues by one quarter, perhaps two [I'd guess two, maybe three].

13) COMMENT: More public communications on the website, please!

CFRI is in an interesting position right now. There are events unfolding that they'd like to share, but they're bound by customer confidentiality [couldn't they just say it, without mentioning which customer?]. "As the trials phase nears completion, I'm confident that we'll be able to provide a more consistent flow of information, not just via PR, but with the addition of media coverage that we believe will be newsworthy events."

14) How many factories exist that can make EKO-FLOR?

The Asian manufacturing partner [not plural] has three new factories available to supply the container flooring needs. The total output of these factories will reach over 300,000 20-foot container equivalents within one year. This comfortably exceeds the projected sales.

The long term plan is to have available enough production to supply half of the container flooring markets [think big, I guess] within three years.

15) How confident is CFRI that EKO-FLOR will pass the trials? How does this compare with getting the product certified? Are the trials more of a formality?

[hehe, this guy must not have ever been involved in new product development. If you create any significantly new product, you have to convince your customers that it meets their requirements and those requirements can often be things you hadn't even considered important such as the container floor color being too close to the color of the nails so you can't see them to pull them out, something like that.]

The certification tests focus on the main structural needs of the flooring. One test involves a forklift with a particular load that's well above what's expected in the field. Another test puts a double load in the container which is then lifted and checked for integrity. In the real world, the capacity will never reach twice the container capacity [however, I'm guessing that in the real world, containers get dropped, banged up, shaken by storms, and have weird loads to where you may effectively need that extra capability]

Having passed these test, CFRI is confident EKO-FLOR will pass the customers' structural tests. The customers will also choose a variety of other tests [that's what I worry about] including cleanability and ease of repairs.

"The Kulas family has over 35 years of experience related to containers and has repaired over 300,000 units. With this experience, we believe that EKO-FLOR will demonstrate many advantages relative to plywood during our customers' tests." Good quote!

16) Mr DeRose, how did you first learn about Conforce and what made you want to join them?

First introduced to Conforce late in 2005 when asked to comment on the suitability of a wood/plastic composite as a flooring material for containers. Conforce approached him because he has extensive experience with plastic and composite materials used to replace wood for residential deck applications for deck boards and guardrails. Worked amost exclusively with polymers and plastics with Chem Eng training and experience. Immediately attracted to Conforce's vision to replace tropical hardwood flooring. Conforce offered him to lead the development effort for EKO-FLOR.

17) In the next five years, what percentage of the container market do you think you can capture? How much revenue would this mean?

CFRI has only projected two years out. If this pans out, CFRI could get exponential growth in years 2-5 which could result in 15% to 20% market share. That's just in the container industry. This could translate into over $300 million in annual revenues. They believe they can achive similar market share in the highway trailer market as well.


The market cap right now is around $24 million (120 million shares as of June 30, 2007 times roughly 0.20 dollars).

I'm fairly happy with how things are going, but my sense is that these people are somewhat of newbies at productization. One of the quotes I use all the time is from the old SNES video game "Bubsy the Bobcat", who begins the game by optimistically saying, "What could possibly go wrong?" and ends the game a cynical, but competent veteran of all things gone wrong.

I figure these guys have gone through hectic periods of chaos followed now by agonizing periods of waiting for results. In the boredom, perhaps they now dream of EKO-FLOR on cruise ships and being sold at Home Depot... until those dreams are interrupted by the next hectic period of chaos when the results from field trials start coming back.

There's enough margin of safety here to handle all sorts of problems. But then again, what could possibly go wrong?

I continue to hold the stock
There are only 22 surviving veterans of WWI

Friday, November 09, 2007

Shengda Tech (SDTH) Q3 results

I first looked at them here. Bought it, then sold it at a 20% profit two weeks later. Then I bought it again when the price dropped.

Q3 results:

Wow, cash went up to $41 million from $28 million last quarter.
AR held steady. Inventory up a bit.
The $4.8 million receivable from related party is all but gone.

PP&E is up very slightly from Q2.
Total assets increased to $92 million from $82 million.

AP increased somewhat.
Current liabilities is up a bit.
Net cash is $28 million out of $92 million total assets. Power.
84% equity.

Revenues increased to $27 million from $22.7 million in Q2 and $18.8 million prior year, but this was largely due to the drop in the dollar. Volumes increased, but price per ton decreased for both chemical and nano-materials. The nano-materials margins were helped by the lower cost new Shaanxi facility.
35.5% gross margin vs only 29.7% prior year, 33.8% in Q2.
Operating margin is 31% vs 25.5% prior year, 29% in Q2.
Net margin is 28.7% vs 25.5% prior year, 26.6% in Q2.
14 cents per share diluted vs 9 cents prior year, 11 cents Q2

Cash flow from operations is a little above earnings, AP and AR roughly offset each other.
Capex was huge due to the expansion.
Not much on the financing front.
Net story: Operations generated $22 million, $16 million went into expansion, leaving an extra $6 million in cash on the balance sheet.

No post-delivery liabilities with products sold.
Shipping and handling costs and charges are included in COGS and revenue.

The PP&E breakdown makes sense.
Depreciation schedule:
building: 15-25 years
Plant, machinery, equipment: 10-17 years (a bit high?)
vehicles: 5-10 years (a bit high?)
office equipment: 3-5 years

30%+3% tax rate in China only. Tax holiday for two profitable years, then 50% rate for 3 years.

10 million preferred shares authorized, none issued.

Segment results:
chemical revenues: up 19%
nano-materials revenues: up 21% (this is the good stuff)

chemical operating margin: 23%
nano-material operating margin: 35%

Of the revenues, 52% is chemical, 48% is nano-material.
In Q2, it was roughly the same ratio.
Last year it was 71% chemical and only 29% nano-material.
We increased our annual manufacturing capacity of NPCC to 90,000 metric tons as of December 31, 2006 and 130,000 metric tons as of September 30, 2007. We plan to add an additional 60,000 metric tons of capacity in 2007.
For example, with respect to tire and PVC building materials, the pricing of NPCC products is principally affected by the cost saving benefit our customers realize by replacing some of the relatively expensive carbon black and PVC. With respect to paper, the pricing of NPCC is principally affected by comparable imports. In the next few years, we may reduce the selling price in order to compete with relatively small competitors. However, we still remain confident in retaining the current gross profit margin level because our unit costs of products are reduced by achieving economies of scale.
But our chemical factory is located in the residential district. With the strong China governmental security and environment protection standards, it is possible the government will order us to shut down the factory or move to another location. As of September 30, 2007, we haven’t received any such order or notice from the government.
They lowered sales commission from 5% to 3% and plan to hire more sales staff.

The tax holidays for two facilities have expired and are now taxed at 50% of full rate.


I continue to hold onto this, but it's a small position. I figure it's worth $10. Probably more.

I lost a damn good employee today in my day job. Adios.

Sunday, November 04, 2007

Berkshire Hathaway (BRKA, BRKB) quick look at Q3

Berkshire filed their Q3 report (I'm also looking at Q2 for comparison). I'm just making a single quick pass through the filing and taking notes. There are probably errors.

Cash is about the same. They have too much cash and need Buffett to find good investments for it.
Fixed maturity securities are up slightly. Not sure if it's a valuation increase or net additional investment.
Stocks and such are up to $77.9 billion from $73.6 billion, no doubt due to both valuation increases and net additional investment.
Goodwill increased slightly. Must have acquired something, I haven't been keeping track.
Some more utilities investments, which is no doubt good. Utilities/energy goodwill increased slightly, so there must have been a small acquisition in this area.

Notes payable in the utilities/energy area jumped up by $1 billion, which matches up with the above.
Finance area's derivative contract liabilities jumped up by $1.5 billion. Someone's making a big bet on something?

Book value increased to $119 billion from $115 billion.

INCOME STATEMENT (comparing year over year)
Except for a drop in insurance premiums, revenues are up pretty much across the board.

Net income is $4.55 billion vs $2.77 billion yoy and $3.12 billion qoq. Holy cow!
Net income per share for the quarter was $2,942!!

Take a simple experiment: annualize that amount, multiply it by a P/E of 15 and you get a stock price of $176K and that's not counting the $18K of excess cash in the company. However, that's a bad way to do a valuation, not only because of seasonal issues but because this is a sunny day earnings amount.

Net income for 9 months was $6,644 per share.

Operations generated $11.4 billion in cash vs $10.3 billion in earnings. However, Q3 only generated $3.9 billion in cash vs $4.6 billion in earnings. I wonder why?

There's a big investment in fixed maturity securities this quarter, almost $6 billion. Sub-prime? [nope]
$5 billion in equities investment this quarter. That railroad company is one of them.
$3.7 billion in stocks sold off this q.
$400 million in business acquisitions this q.

I don't worry too much about Berkshire's financing activities.
Stocks currently held increased by about $1 billion in value since the start of the year.
Net $4.6 billion in stock purchases this quarter. But the portfolio only increased by $4.3 billion. I wouldn't worry about it.

MidAmerican borrowed another billion dollars, looks like long term. A subsidiary borrowed some, too.

I'm skipping the litigation stuff.

SEGMENT REVENUES: This is all quarter-over-quarter (except where noted):
GEICO revenues increased again to $3 billion.
General Re was flat.
Other insurance was flat.
Finance was flat.
McLane was up a bit year-over-year, due to manufacturer price increases, passed directly through to customers. Gross margins are now only 5.77%, but Buffett has said that the low margins are fine.
MidAmerican was up 10% year-over-year
Shaw was down (housing)
Other businesses were roughly flat.

Big derivative gain, probably currency.

SEGMENT EARNINGS: this is all quarter over quarter (except where noted):
GEICO flat
Gen Re down
Berkshire Re down significantly, but still positive (this is probably very lumpy, haven't checked)
Finance flat
McLane flat year-over-year
MidAmerican up year-over-year
Shaw down year-over-year (housing, higher commodity prices)
Other businesses down

Investment and derivatives gains were $2 billion in Q3 vs $608 million in Q2.

A big chunk of the earnings is due to investments and derivatives.

GEICO combined ratio of 88.8% (holy cow, that's good!). But they're dropping prices to widen the moat. Looks like the business continues to expand. Policies in force expanded by about 9%.
General Re: Life/health expanded yoy (partly thanks to currency valuation changes) while property/casualty decreased, on purpose.

Mortgage backed securities actually decreased slightly qoq.

The foreign currency contracts had only a $26 million increase this quarter. I'm surprised, given the drop in the dollar during the quarter.

I might stop following Berkshire at this point. I haven't paid attention to things lately and soon enough I'm going to end up not knowing enough to keep up. I figured since it's on the pink sheets, I might as well... wait a minute!!! Berkshire's not on the pink sheeets! D'oh! The six-figure stock price was my first clue.



No doubt that it's tempting to rush off and buy the stock after seeing a blowout quarter like this, but like I said, it's a sunny day earnings statement. If you want to hold the stock for 10 years, fine. But Berkshire does have its bad days. You might buy the stock today and see a General Re type of disaster that drove the price down to $45,000 in 2000.

Thursday, November 01, 2007

Strathmore surges ahead

U3O8.biz published an interesting commentary about the recent developments from Uranium One and Cameco. More here.

Uranium one lowered its production forecasts by 16% for this year and by 38% for next year. Equipment problems and a lack of sulphuric acid in Kazakhstan. Production at the Honeymoon mine has been delayed by nearly a year.

Cameco still has trouble with the Cigar Lake mine flood. Rumors are that industry insiders think this mine will always have troubles. It's scheduled to reopen in 2011 at the earliest instead of the original 2008 which was delayed to 2009, then 2010, then just plain 2011. They'll keep trying since there's a whole lot of highly concentrated uranium down there.

This is an interesting opinion about how delays are worse than they appear. As an [non-mining] engineer myself for a couple of decades, I've definitely seen this ridiculous behavior.
The Planner starts with the Engineers.... In my experience these Engineers are fairly accurate in providing the basis for the plan. All well and good so far. The Planner then produces a plan, which for example, will take approximately 48 months to execute.

Enter the Project Manager, by nature a very optimistic person.... he proceeds to beat up the Engineers until the schedule is compressed in to a 36-month duration....

The Project Manager now meets with various Divisional Managers and Business Heads.... They eventually reach a compromise of 30 months to complete the project.

...the Chairman has given their word that it will be done in 24 months. You don’t believe me? Well if your organisation has a Project Control Department pay them a visit and ask them if this sort of thing goes on! Our bet is that you will be astonished with the anecdotal evidence that pours forth....
The various articles written a year ago (mostly over at StockInterview.com) made it seem that the insiders were extremely cynical about the Cigar Lake time estimates.

This Motley Fool article hits on an interesting point:
The statistic that best reveals Cameco's operational troubles is the pounds of uranium it produced. For the past nine months, Cameco mined 14.3 million pounds, down from 15.5 million pounds in the year-ago period.
Uranium miners were supposed to be increasing production, not decreasing. The old timers in the industry have been saying that the lack of any significant investment in the industry for 20 odd years will have a big [negative] impact on production going forward.

I've been writing for years about Strathmore Minerals. David Miller at Strathmore explained long ago what was going to happen in the industry and his predictions have been amazingly accurate.

UPDATE Nov 4, 2007:
An anonymous commenter pointed out this excellent interview with Dev Randhawa (also found here), the Chairman of Strathmore. Strathmore is going to be listed on AMEX very soon.

There's also this presentation from Oct 30, 2007.
79 million shares fully diluted.

TradeTech is now reporting a $90 spot price.

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