Wednesday, May 21, 2008
Conforce International (CFRI) update
CFRI (combined links) announced an update on the field trials. From now until September, CFRI expects 900 twenty-foot equivalent containers to be released into circulation for final testing. Actually they said "will continue to be released". Not sure if that means 900 more or 900 total. I'd assume 900 total. Either way, I like the number.
I guess I'm surprised that they haven't needed to raise any additional cash yet. Perhaps there will be an announcement before too long. I just don't see how they can ramp up with so little cash and cash flow. I would expect significant dilution, although I'd be happy without it.
I've spent many years in new product development and I know that it takes forever to get from a viable prototype to significant revenue. The delays with CFRI don't surprise me in the least. There may be additional delays. Given CFRI's experience in the industry, I suspect a total outsider like BASF would experience even longer delays in fully understanding and meeting customer requirements.
Having 900 TEUs in field trials is a good sign. Customers are serious about the product.
The value of success with CFRI is big enough that waiting an extra year or two doesn't change things.
UPDATE Wed May 28, 2008:
CFRI just announced they got a letter of intent from a US supplier to the US military for a multi-year contract for a minimum of 10,000 special container floors. Definitive agreement expected in July. Deployment starts in Sept 2008.
If this goes through, I suspect it will help bring in other customers.
"The significant size of the trial orders we have received to-date has surpassed our initial expectations. We are extremely pleased to see the interest in our product at such high levels. We consider the opportunity to have EKO-FLOR evaluated by major shipping lines as a true validation of the product...."Ok, so the history now is that EKO-FLOR was introduced in Dec 2006, 2007 was spent fixing it based on customer feedback. It's now "EKO-FLOR cs", with a 10% weight advantage over plywood, not to mention the other advantages.
I guess I'm surprised that they haven't needed to raise any additional cash yet. Perhaps there will be an announcement before too long. I just don't see how they can ramp up with so little cash and cash flow. I would expect significant dilution, although I'd be happy without it.
...the Company has worked closely with numerous shipping lines and manufacturers in an effort to secure the above-mentioned trial orders followed by significant volume commitments for full-scale production in 2009.
CONCLUSION
I've spent many years in new product development and I know that it takes forever to get from a viable prototype to significant revenue. The delays with CFRI don't surprise me in the least. There may be additional delays. Given CFRI's experience in the industry, I suspect a total outsider like BASF would experience even longer delays in fully understanding and meeting customer requirements.
Having 900 TEUs in field trials is a good sign. Customers are serious about the product.
The value of success with CFRI is big enough that waiting an extra year or two doesn't change things.
UPDATE Wed May 28, 2008:
CFRI just announced they got a letter of intent from a US supplier to the US military for a multi-year contract for a minimum of 10,000 special container floors. Definitive agreement expected in July. Deployment starts in Sept 2008.
If this goes through, I suspect it will help bring in other customers.
Saturday, May 17, 2008
Shengda Tech (SDTH) big financing deal
Shengda Tech (combined links) announced a gargantuan amount of convertible senior notes. To put this into perspective, they're raising $100 million while their latest balance sheet shows TOTAL assets of $115 million. I don't recall any word about this in the past from the company. Doubling the size of a company's assets is a pretty big decision to make.
I have two problems with this decision. 1) It's too easy to hide bad things this way. When a company is floating on its own, being driven by its own cash flow engine, it's easy to see what's happening. But when you suddenly dump a massive amount of cash onto the balance sheet, it suddenly gets hard to detect what's going on. 2) It's just bad business to grow a company that fast.
I dumped the small amount of stock I owned after thinking about it for a while. My new mode of operation in not being too trigger happy paid off as the stock climbed while I thought about it. I ended up with a small gain.
I have two problems with this decision. 1) It's too easy to hide bad things this way. When a company is floating on its own, being driven by its own cash flow engine, it's easy to see what's happening. But when you suddenly dump a massive amount of cash onto the balance sheet, it suddenly gets hard to detect what's going on. 2) It's just bad business to grow a company that fast.
ShengdaTech currently expects to use approximately $56 million of the net proceeds from the offering of the notes to expand its NPCC production capacity. ShengdaTech plans to use the remaining proceeds for potential coal-based chemical acquisitions, strategic investments and to fund working capital requirements.The acquisitions are a bad idea. If I wanted to invest in Chinese coal-based chemical companies, I would buy them myself.
CONCLUSION
I dumped the small amount of stock I owned after thinking about it for a while. My new mode of operation in not being too trigger happy paid off as the stock climbed while I thought about it. I ended up with a small gain.
Uranium
The spot price of uranium has been dropping for a while and is now at $60 per pound. Even the long term price dropped to $90 from $95 recently.
The new [acting] CEO of Uranium One, Jean Nortier expects the price to remain flat to soft over the next 12 to 18 months.
Cameco believes the price will be strong going forward.
In hindsight, my own view is that the jump to $138 per pound was bad for investors. All it did was draw in more capital to the industry. It would have been better if the price had stayed low and uranium had remained "under the radar" for a few more years. However, I don't think much harm was done (except for people who bought into all the various poor quality uranium mining stocks).
This is a great example of applying a Peter Lynch principle. You buy a stock based on a certain explanation of why that stock is worth a lot more. I think Lynch called this a "story" but I don't like the idea of investing in stories. If the explanation of why the stock is worth a lot more is still valid, then you continue owning it. If that explanation is gone/wrong/invalid then sell it. If the explanation has changed significantly, then it's important to re-evaluate. [That last sentence is my own, not sure if Lynch would agree or not, probably yes].
Looking back at my original explanation of why Strathmore Minerals is worth a lot more, nothing has changed. The major forces at work are still there. The things that should have played out by now already have done so. Everything is going according to plan.
MY GUESS (and this is really just a speculative guess) is that the hedge funds drove the uranium price up but then loaned their uranium back out to utilities, causing the price to come back down. In a sense, the utilities would be shorting uranium: burning up uranium that they don't own, having borrowed it. If this is true, the uranium would still need to be purchased in the future and paid back to the hedge funds. Also if true, the hedge funds would have sent a price signal to the market of an impending shortage. If they're wrong, they lose. If they're right, they make money.
I continue to own Strathmore Minerals and Fission Energy.
UPDATE Tues May 20, 2008:
This article is interesting.
The new [acting] CEO of Uranium One, Jean Nortier expects the price to remain flat to soft over the next 12 to 18 months.
Cameco believes the price will be strong going forward.
Grandey suggested that utilities are willing to pay a premium for long-term uranium supplies for several reasons:I've read this before a while back. The utilities believe there's no reason for the price to be high at all other than speculation.
1) Concern uranium prices will rise over the long term
2) Some customers prefer price predictability for a portion of their long-term needs
3) Some customers are willing to pay a premium for long-term security of supply
Nevertheless, Grandey cautioned analysts that utility companies are well covered for the next few years by their contracts with uranium suppliers, and also currently possess a modest amount of inventory, leaving little demand by utilities in today's spot market. In fact, he suggested that utilities are avoiding discretionary purchases of uranium in the hope that the spot price will decline even further.
CONCLUSION
In hindsight, my own view is that the jump to $138 per pound was bad for investors. All it did was draw in more capital to the industry. It would have been better if the price had stayed low and uranium had remained "under the radar" for a few more years. However, I don't think much harm was done (except for people who bought into all the various poor quality uranium mining stocks).
This is a great example of applying a Peter Lynch principle. You buy a stock based on a certain explanation of why that stock is worth a lot more. I think Lynch called this a "story" but I don't like the idea of investing in stories. If the explanation of why the stock is worth a lot more is still valid, then you continue owning it. If that explanation is gone/wrong/invalid then sell it. If the explanation has changed significantly, then it's important to re-evaluate. [That last sentence is my own, not sure if Lynch would agree or not, probably yes].
Looking back at my original explanation of why Strathmore Minerals is worth a lot more, nothing has changed. The major forces at work are still there. The things that should have played out by now already have done so. Everything is going according to plan.
MY GUESS (and this is really just a speculative guess) is that the hedge funds drove the uranium price up but then loaned their uranium back out to utilities, causing the price to come back down. In a sense, the utilities would be shorting uranium: burning up uranium that they don't own, having borrowed it. If this is true, the uranium would still need to be purchased in the future and paid back to the hedge funds. Also if true, the hedge funds would have sent a price signal to the market of an impending shortage. If they're wrong, they lose. If they're right, they make money.
I continue to own Strathmore Minerals and Fission Energy.
UPDATE Tues May 20, 2008:
This article is interesting.
Nicholas Financial (NICK) Q4 results
Nicholas Financial (combined links) released their Q4 results for the period ending March 31, 2008. I found the results interesting. Since the business is not really seasonal, I'll also be comparing to Q3 results.
First off, NICK is in sub-prime auto lending so we would expect bad results, perhaps a lot of people might expect catastrophic results.
We can't put too much weight on net income since that's fairly easy to manipulate if NICK ever felt like doing so. But let's look at the income statement anyway.
Revenue increased slightly yoy and qoq.
Operating expenses increased 11% yoy and 8% qoq.
Provision for credit losses has been increasing (as we would expect, but is it enough?).
Provision for credit losses:
Q3 last year: $1.2 million
Q4 last year: $0.8 million
Q3 this year: $2.5 million
Q4 this year: $2.5+ million
Interest expense Q4 increased very slightly from last year.
Income tax expense:
Q3 last year: $1.7 million
Q4 last year: $1.8 million
Q3 this year: $1.3 million
Q4 this year: $1.3 million
Net income:
Q3 last year: $2.8 million
Q4 last year: $3.0 million
Q3 this year: $2.2 million
Q4 this year: $2.1 million
Net income per diluted share: 20 cents for this Q4.
Now let's look at the condensed balance sheet
Cash increased yoy to $2.3 million but decreased qoq from $4.7 million.
Finance receivables is at $179 million, up from $172 million qoq ($164 million yoy)
Nearly all of the assets are subprime auto loans.
Liabilities are nearly all a line of credit. The LOC is essentially unchanged from the prior quarter. It's slightly more drawn than a year ago.
Debt to equity is 1.27 this quarter. It was 1.36 last year. It was 1.30 last quarter.
Now let's get to the ratios and rates.
The weighted ave contract interest rate is 24.5%, up slightly from 24.1% qoq and same yoy.
Ave cost of borrowed funds was 5.87%, down from 6.51% qoq and 6.32% yoy.
Provision for credit losses as a % of finance receivables was 5.20% which was down from 5.13% qoq, but up from 1.84% yoy. You can see they cranked up the provisions during the past year.
Net charge-offs divided by liquidation was 9.96% which was DOWN from 10.35% qoq, but obviously up from 6.19% yoy. Are things improving?
Net charge-offs divided by total receivables beyond unearned interest was 8.98% which was DOWN from 9.51% qoq, but obviously up from 5.82% yoy.
Delinquencies:
If we look at the changes in the last 3 months, we see something interesting.
Changes in delinquencies (purchased contracts) from Dec 31, 2007 to Mar 31, 2008:
30 to 59 days: decreased by $2.16 million
60 to 89 days: decreased by $1.14 million
90+ days: decreased by $0.57 million
Every single category in both purchased contracts and direct loans shows the situation improving from Q3. A lot of people believe the consumer situation will get a lot worse (meaning that this would be just a temprary uptick), but I disagree. This is a big assumption, but it's one I believe is true and the evidence I've seen points more to improvement.
So if I believe this is the worst, then 20 cents per share earnings is as bad as it gets. With a non-seasonal business, this would translate to a value of perhaps $12 per share if things remain this bad. My own estimate is that NICK is worth about $20 or more per share. For years I've been saying that this stock won't reach full value until after the whole subprime issue plays out. Well, we may see that happen before too long.
I view these results as excellent news and I continue to own the stock.
First off, NICK is in sub-prime auto lending so we would expect bad results, perhaps a lot of people might expect catastrophic results.
We can't put too much weight on net income since that's fairly easy to manipulate if NICK ever felt like doing so. But let's look at the income statement anyway.
Revenue increased slightly yoy and qoq.
Operating expenses increased 11% yoy and 8% qoq.
Provision for credit losses has been increasing (as we would expect, but is it enough?).
Provision for credit losses:
Q3 last year: $1.2 million
Q4 last year: $0.8 million
Q3 this year: $2.5 million
Q4 this year: $2.5+ million
Interest expense Q4 increased very slightly from last year.
Income tax expense:
Q3 last year: $1.7 million
Q4 last year: $1.8 million
Q3 this year: $1.3 million
Q4 this year: $1.3 million
Net income:
Q3 last year: $2.8 million
Q4 last year: $3.0 million
Q3 this year: $2.2 million
Q4 this year: $2.1 million
Net income per diluted share: 20 cents for this Q4.
Now let's look at the condensed balance sheet
Cash increased yoy to $2.3 million but decreased qoq from $4.7 million.
Finance receivables is at $179 million, up from $172 million qoq ($164 million yoy)
Nearly all of the assets are subprime auto loans.
Liabilities are nearly all a line of credit. The LOC is essentially unchanged from the prior quarter. It's slightly more drawn than a year ago.
Debt to equity is 1.27 this quarter. It was 1.36 last year. It was 1.30 last quarter.
Now let's get to the ratios and rates.
The weighted ave contract interest rate is 24.5%, up slightly from 24.1% qoq and same yoy.
Ave cost of borrowed funds was 5.87%, down from 6.51% qoq and 6.32% yoy.
Provision for credit losses as a % of finance receivables was 5.20% which was down from 5.13% qoq, but up from 1.84% yoy. You can see they cranked up the provisions during the past year.
Net charge-offs divided by liquidation was 9.96% which was DOWN from 10.35% qoq, but obviously up from 6.19% yoy. Are things improving?
Net charge-offs divided by total receivables beyond unearned interest was 8.98% which was DOWN from 9.51% qoq, but obviously up from 5.82% yoy.
Delinquencies:
| March 31, | ||||||||||||
| 2008 | 2007 | |||||||||||
Contracts | ||||||||||||
Gross balance outstanding | $ | 269,985,960 | $ | 247,002,051 | ||||||||
Delinquencies | ||||||||||||
30 to 59 days | $ | 6,747,067 | 2.50 | % | $ | 4,072,821 | 1.65 | % | ||||
60 to 89 days | 1,798,287 | 0.66 | % | 921,097 | 0.37 | % | ||||||
90 + days | 831,647 | 0.31 | % | 506,433 | 0.21 | % | ||||||
Total delinquencies | $ | 9,377,001 | 3.47 | % | $ | 5,500,351 | 2.23 | % | ||||
Direct Loans | ||||||||||||
Gross balance outstanding | $ | 10,161,920 | $ | 9,990,060 | ||||||||
Delinquencies | ||||||||||||
30 to 59 days | $ | 181,244 | 1.79 | % | $ | 65,982 | 0.66 | % | ||||
60 to 89 days | 51,974 | 0.51 | % | 12,024 | 0.12 | % | ||||||
90 + days | 58,065 | 0.57 | % | 21,476 | 0.22 | % | ||||||
Total delinquencies | $ | 291,283 | 2.87 | % | $ | 99,482 | 1.00 | % | ||||
| December 31, 2007 | December 31, 2006 | |||||||||||
| Contracts | ||||||||||||
Gross balance outstanding | $ | 256,278,730 | $ | 233,992,372 | ||||||||
| Delinquencies | ||||||||||||
30 to 59 days | $ | 8,908,945 | 3.48 | % | $ | 4,942,628 | 2.11 | % | ||||
60 to 89 days | 2,933,134 | 1.14 | % | 1,682,993 | 0.72 | % | ||||||
90 + days | 1,402,143 | 0.55 | % | 691,092 | 0.30 | % | ||||||
Total delinquencies | $ | 13,244,222 | 5.17 | % | $ | 7,316,713 | 3.13 | % | ||||
| Direct Loans | ||||||||||||
Gross balance outstanding | $ | 10,989,625 | $ | 10,052,202 | ||||||||
| Delinquencies | ||||||||||||
30 to 59 days | $ | 212,084 | 1.93 | % | $ | 94,912 | 0.95 | % | ||||
60 to 89 days | 77,503 | 0.71 | % | 55,635 | 0.55 | % | ||||||
90 + days | 91,271 | 0.83 | % | 25,482 | 0.25 | % | ||||||
Total delinquencies | $ | 380,858 | 3.47 | % | $ | 176,029 | 1.75 | % | ||||
If we look at the changes in the last 3 months, we see something interesting.
Changes in delinquencies (purchased contracts) from Dec 31, 2007 to Mar 31, 2008:
30 to 59 days: decreased by $2.16 million
60 to 89 days: decreased by $1.14 million
90+ days: decreased by $0.57 million
Every single category in both purchased contracts and direct loans shows the situation improving from Q3. A lot of people believe the consumer situation will get a lot worse (meaning that this would be just a temprary uptick), but I disagree. This is a big assumption, but it's one I believe is true and the evidence I've seen points more to improvement.
So if I believe this is the worst, then 20 cents per share earnings is as bad as it gets. With a non-seasonal business, this would translate to a value of perhaps $12 per share if things remain this bad. My own estimate is that NICK is worth about $20 or more per share. For years I've been saying that this stock won't reach full value until after the whole subprime issue plays out. Well, we may see that happen before too long.
CONCLUSION
I view these results as excellent news and I continue to own the stock.
