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Sunday, June 26, 2011

Chuck E Cheese (CEC)

It's been more than 10 years since I've scoped the place out ("kids are grown" syndrome) or looked at it seriously as an investment.  Unlike Hot Topic, I don't have anyone in the target market to rely on.

CEC (sec)

Smokey on board.

Looking at the 10-K.

544 stores, including 14 in Canada.  Franchisees run 47 stores in various states and some countries (Guatamala, Chile, Saudi Arabia, UAE).

A lot of re-investment is required to keep the stores up to date: game enhancements, remodels, expansions.  Requires about $150K per store.  They're doing around 150 stores this year.  Assume $25 million routine capex needed for this.  They did 15 remodels last year and expect 15-20 this year at a cost of $600K per store.  Add another $12 million.  They did 28 store expansions last year and expect 30 to 35 this year.  Cost is about $1 million per store.  So there's another $35 million of capex.  It's really interesting (and somewhat re-assuring) to see the same issues with the business model all these years later.

5 new stores opening this year, 2 relocations.  I personally saw a relocation many years ago (actually 2 relocations of the same store over about a 10 year period) and it made a lot of sense.  The new location was far better, the new store was better, the layout was better, and it was certainly more crowded.  But it's expensive, and that's the problem with CEC.

New stores generate about $2 million in revenue per year.  It costs about $2.8 million to open a new store.

They have a plan to expand into Latin America.  International franchisees opened stores in Guam, Chile, and Saudi Arabia in 2010, so they seem to be serious about it.  They expect four more in 2011.

It's interesting to watch the impact of the "computer-controlled robotic characters" on the kids as they grow older: from awe, to amusement, to disillusionment, to ridicule.  And then they move on to Hot Topic and get lip piercings etc.

About half the revenues is from food/drinks, including pitchers of beer, from what I recall.
"We used to get drunk at Chuck E Cheese, sometimes Bill would get stoned and Jason was always high."
Oh what a world, what a world.

They mention the tickets.  I totally forgot about that part.  That's actually a great business model: selling cheap trinkets for huge numbers of tokens (aka quarters).

17K employees, no unions.

I really like it when companies present financial data for several years and make it easy to read.

Revenues have been slowly increasing.  I would have expected more increases given the new stores, but the flat part is basically 2009 and 2010 when the economy sucked. (still does).  Of course the costs have been going up regardless as they expand and add stores.

So operating income has been flat-to-falling since 2006.  They've been making about $2.50 per share in earnings with an odd dip in 2007 that seems to have been brought back up due to share repurchse, which seems to be continuing each year.  They've been earning about $55 million per year total.

I'd guess that the comps have been slightly negative for several years.   And I'd be correct.

They've been closing 2 stores per year.

12.8% operating margin, down from 13.6% and 13.3%.  11.4% net margins.

NOTE: Inflation could be a problem for them.  I recall when cheese prices went up and it killed their margins.

In previous years, the capex for game enhancements, major remodels, and expansions was $160 million. I've got to see the cash flow statement.

Toilette & Douche auditors.  Non-qualified opinion.

As expected, assets are almost all PP&E.  A lot of debt.  They should be paying off a lot of that debt instead of doing so many share repurchases.

Huge number of stock options, especially considering the lousy performance numbers.

Ok, cash flow from operations has been around $150 million.  Capex was around $100 million during the year, but was around $80 million in earlier years.  They've got the revolver revolving and the treasury stock repurchases, and that's about it for the cash flow statement.  Wow, they've gone wild with the share repurchase; so much so that it may distort things.

They seem to spin off about $70 million a year in cash flow.  Let's take a look at a realistic share count.

About 600K RSUs.  Stock options are winding down to zero.  I'd add a million to the share count, make it 2 million.  22 million shares.  So we get about $3.18 in what might be free cash flow.  I would expect that number to grow as the economy slowly improves.  Give it a P/E of 15 and you get a $47 share value.  It's around $40 now, which is definitely reasonable.

It would be useful to estimate where this will go in the long term and look closer at the real annual capex requirements per dollar of earnings.

Update same day:
A quick look at Q1
Balance looks about the same.
Revenues up slightly.
Net income up slightly.
Share count keeps dropping, I think they're obsessed with it.  Pay down the debt, people.
Cash flow is a bit weaker, but it looks like it's due to timing of things.  $40 million more debt paid off, that's good.

Comps were up 1.1%.  Here's a good thing: menu prices increased 2.1%.  It's important for them to be able to increase the prices without losing much of the business, given the strong possibility of inflation.

Operating margin dropped to 22.8% from 23.2%.

Cost of food and drink increased 0.6%.  Cheese prices went up 21%!  Produce was up 15%!  This was offset by drink cost decreases (odd!).

Revisiting Hot Topic (HOTT)

Comparing the 10-K for the year ending Jan 29, 2011 with the year ending Feb 1, 2002.

44.6 million shares now.
31.5 million shares then.  Dilution was a problem for them.

ShockHound is a new business for them.  Selling MP3s.  Why buy the cow if the Internet is drowning in free milk?  I wrote that before reading further down that they're discontinuing ShockHound.  Wow, I'm a fricken genius! :-/

I have contact with a number of young quasi anti-hipster counterculture types that are in the age range of Hot Topic.  The store is at least relevant and valid.  In fact, it seems to have swung in that direction a few years ago.

The product mix has gone from mostly apparel with acessories and some gifts mixed in to what is now mostly an even mix of accessories, Music, and "License" (what the hell is "License"?).  Torrid, which had just started in 2002, is mostly apparel.

I'm not sure I like the fact that they have a "Trend Director".  They do still have mostly the same direct channels for getting trends, and the same game-plan.

Now: 657 Hot Topic stores
Then: 352 Hot Topic stores (even then there were signs of some saturation).
They peaked in 2007 with 694 stores!

Now: 153 Torrid stores.

Now: Ave sales per HT store is $800K.  $426 per sq foot.
Then: Ave sales per HT store was $1 million.  $642 per sq foot.

Now: they're closing some stores
Then: they rarely closed a store (typically it was a relocation within the same mall)

Now: $188K to open a new store.
Then: didn't find it, but I recall it might have been less.

Looking at the list of officers, I see a lot of new names.  Interestingly, it's the squares who are still around: Gerald Cook, Jim McGinty, George Wehlitz.  Betsy is gone, she left within the past year or so.

New CEO is Lisa Harper from, gasp, Gymboree!

On to the numbers.  Revenues have been stagnant or falling since 2006.  33% gross margins, yuck.  SG&A then eats up the rest.

Comps have essentially been dropping since 2006.

E&Y auditors.  Nonqualified opinion.

PP&E dominates the assets, plus a lot of inventory.  To their credit, they don't have any debt: they could almost pay off all of their liabilities with cash and short term investments.

Operating cash flow is pretty good.  Earnings are killed by depreciation, which is bad; either all those leasehold improvements etc. start getting old or else they need to be replaced.  Given changing trends, I think I can guess which one it is.  As expected, big capex.

Oddly, they paid cash dividends in 2010; apparently the cash was piling up.  Which may indicate that the business is still quite viable, but they've oversaturated the market and killed their financials.  Perhaps it's time to accept a reasonable low-growth cash cow instead of a fast-growth home run.

If they clean up their act, what will the outcome be?  They should be able to get back to something like 38% gross margins (the fast turnaround nature of the business won't support 50%).  SG&A should come down to something like 24% of revenue, maybe even less if they're clever.  You figure 5.4% taxes and you get a net margin of maybe 8%.  Let's cut their revenue down to $600 million.  We then get earnings of $48 million and a value of around $700 million.  Let's watch out for stock option dilution so we'll add the full 7 million outstanding options onto the 45 million share count to get 52 million shares.  So if they were to turn this around, the end value might be $13 a share.  The shares are currently selling for $7.28, which seems like a fair price given the uncertainty of a turnaround.  

I think the basic business of Hot Topic has a lot of value (maybe $700 million) that could be saved.  If I knew that were going to happen, I'd be likely to double my money on this.  I need to think about this a bit more and watch them to see whether they seem like they'll save it or kill the goose that lays golden eggs.

This could be great in the event of a major stock market meltdown because it would look like crap during the meltdown, but the balance sheet and basic cash flows are essentially solid.

Interesting trend

Ever since the late 1990s, I've been casually watching the ads on websites... importantly it's watching the same websites over time.  I haven't been dilligent about it, so it's just an observation of big overall trends. Mainly I keep a rough mental tab of the types of companies placing ads. At first it was other Internet companies, then there was the .com crash and by 2002, it was mostly junk companies selling wireless webcams and other obscure junk.  Then around 2004, maybe 2005, major companies started advertising on the Internet.  But around 2008 or 2009, they disappeared, and it seemed like a lot of mid-range ads dominated the pages.  Now, I'm starting to see major companies return in a big way.  Lexus, Jeep, Motorola, Toyota, etc.

Just an observation.

Saturday, June 25, 2011

Re-evaluating CPI Aerostructures (CVU)

CVU (sec)

I've followed CVU for about 7 years and I've owned it about that long.  As I've written before, I think my initial purchase was a mistake, but that it's been worth owning after the first two years.

Let's look at recent disclosures.

Amended credit agreement with Soverign Bank, May 11, 2011.  5th agreement, increasing revolver from $4 million to $10 million.  No longer a min rate of 3.75%.

Conference call on May 4, 2011 (with transcript).
We are [a] prime contractor to the U.S. Department of Defense and during the last few years we have substantially grown our business to become a subcontractor to some of the largest U.S. aerospace and defense contractors such as Northrop Grumman, Boeing, Sikorsky, Spirit AeroSystems, Lockheed Martin and Bell Helicopter.
and also this
We have carved out for ourselves a niche within the aerospace market and have become one of the country’s leading suppliers of structural spares of vintage and out-of-production aircraft and, now, assemblies for new production planes.
Financial statement details:

Revenues increased 45%.  Gross margins dropped to 24% (from 25%).  Net income increased to 19 cents per diluted share.  However, this has varied a lot over the years.  I've waited a long time for the anticipated big growth in revenues.

The award growth is driven in part by expected follow-on releases of E-2D and G650 programs.  They claim there is also "real business potential" from the approx $0.5 billion of un-awarded solicitations outstanding once the programs are funde and/or awarded.

They talk about the increasing relationships with additional prime mfgers (helicopter, private jet).

They're projecting 2011 revenue of $78 to $81 million and net income in the $9.2 million to $9.5 million range.  2012 should be in the range of $88 to $91 million revenue and $11 to $12 million net income.  They've been pretty accurate with their predictions in the past.  Let's take the worst case prediction of 2012 and figure out diluted earnings per share.  Let's assume 8 million totally diluted shares.  Give it a P/E of 15 and you end up with a stock price of $20.  That might be a bit high to assume, given the business they're in, and it's 1.5 years into the future, so maybe give it a present value of $18, assuming their predictions are accurate.  That represents a 37% gain going forward.  Is that sufficient to hold onto it right now?

If the nature of the business is that they must hunt down every scrap of revenue without any follow-on or established reputation, then it would be good to assume a lower P/E.  There's a good argument that this isn't the case for them and I've been viewing them as establishing a solid reputation to secure repeat business easily (at least far easier than someone new).  I think that's really the key to the investment thesis for CVU.

Let's continue with the conference call, ですね?

The company had a share offering of 500K shares in April 2010.  They only got $7.80 per share.
As a result, we strengthened our financial position in preparation for continued growth and enhanced the potential liquidity of our stock.”
The point about liquidity is pure BS.  They needed the cash and diluted the stock.

When you figure the value is only perhaps 37% higher than the current price, the uncertainty, the long time it has taken so far to get not-very-far, the share placement, etc.  Maybe it's worth looking for another investment, but I'll continue to see if I change my mind.

New orders were $46.8 million vs $8.1 million last year.  The large amount this year is due to the expected follow-thru from two big subcontracting programs (E-2D, G650).  However, he says G650 was only for $8 million.

He claims their reputation has been elevated in the industry.  They trying to establish relationships with other primes, including other helecopter and private jet companies.

They expect the margins to bounce back to the projected level by end of year.

Right Said Fred said that back in the old days (2005ish), they would bid on everything and end up with like 300 contracts, but now they're a lot more selective with around 80.
Also, as I’ve stated a gazillion times, a lot of those government contracts have dried off for the time being, at some point they will come back, but we will approach it the same way. Given the size of our company now, we will absolutely be more selective. That said, I think the difference in what we bid on today versus what we used to bid on is that because of our standing now in the aerospace industry, we are getting the opportunity to bid on things that are routinely more than $10 million and are not – is not, I’ll call a contract but more a program; meaning, in the old days, we had a contract to build 28 of this part number, period, end of story.
This is interesting, both points.  My big question here is how the business will change going forward.  Will it grow like they say or just continue to spin at the same level?
Difference is we’re now getting ourselves involved in programs versus contracts which is a much, much better thing for us. It’s what given us that visibility over these years to be able to project out three years on revenue and net income. And as we’ve been successful with one set of customers, it’s opened the door to a whole new set of potential customers, people who have actually searched us out now.
In the old days, sales had to go on the road constantly chasing down business.  Now they do RFQs

The half-billion-dollar pipeline has about 30% new customers in it.

Ed Fred said something interesting.  They got a small order will Bell Helicopter in Q1.  It's not a prototype, but it gives them a chance to show what they've got.  Bell came to them (usually companies their size, they have to chase people like Bell) and invited them to their chalet in Paris.  There's very little business in the pipeline from Bell, so any business they get will add to the number.

In terms of the traditional gov business, they haven't seen a thing since 2005...
Quite honestly. I mean, it’s just – it’s not there. Yet. It’s not that we are not winning it, it’s not that we’re not bidding on it, it’s not even being put out for bid. The money is not there and obviously in a shrinking defense budget
Before it went away we were the number two supplier of all cargo structure behind only Lockheed Martin. It was generating $30 million a year for us. In my projections I don’t include a blessed thing. So that if at some point this does come back, you know, we are looking to regain some of that market. But as of right now, the only thing we’ve seen is a little bit of C-5 work
This is interesting.  The main thesis for investing in the stock was the C-5 work plus the normal ongoing gov work.  Here we are, 6 years later and it's still stuck in the pipeline.  Just minor dribs and drabs.  The planes need the work, what's going on?  Are they doing it in Iraq and Afghanistan?

If this stuff frees up, I'd expect something like 40 or more million in revenue per year added to the top line.  That would nearly double their revenue and do wonders for the bottom line.  That's the jackpot here.


Looking at the 10-Q for Mar 31, 2011.
Net PP&E increased by $300K
Contracts in the current assets increased to $55 million from $47 million.
Otherwise, it's about what I expected.
Earned 20 cents per diluted share.

Cash flow is bad due to new orders.  I worry about inflation with this company, given the cash flow nature of it (expenses up-front, operating cash flow comes in later).

They're highly dependent on a few key customers.

I need to put some more thought into CVU.  It's really a question of whether the gov business will return.  It's been far longer than I expected.  In the meantime, CVU has done a fabulous job of securing new business in the commercial sector which, I believe, proves their point about them having respect in the industry (or at least provides a strong indication of that),

Over the years, I've seen that good management makes a big difference, but the thing is that even good management can't rescue a bad business model.  The gov business turned out to be a bad business model (at least for now) and CVU can't do anything about it.  But they've opened up a new area that not only keeps them going, but actually provides reasonable earnings.

Again, the question is: will the government business return?  From what I can tell, the only reasons it wouldn't return is either 1) the gov shrinks the military significantly, 2) the business goes to someone entirely different.  And even if the military shrinks a lot, a good portion of the work would still remain.

I'm still trying to make a decision.

Wednesday, June 22, 2011


What I intend to look for over the next few months will be solid companies that might be slightly cheap right now, hoping they get a lot cheaper in the not-too-distant-future.  It's possible that there will be a major problem with bank stocks; I went through a lot of community banks back in 2005 and have some ideas along those lines.

Ideally, Berkshire Hathaway would fall to something like $75K per A share.

NICK 10-K (continued yet again)

Stock option plans

1998 plan: total of 1.55 million shares available (replaced by 2006 plan)
2006 plan: total of 1.07 million shares available

Currently there are 661K options outstanding.  28K were granted during the year at ave $9.51.
2010: 92K granted
2009: 133K granted

again, small potatoes

55K RSUs granted in 2011.

Leases and other contingengies:
2012: $1.5 million
2013: $1.07 million
falls off a cliff from there.  Looks reasonable.

Quarterly Results:
Earnings per share:
Q1 2010: 20 cents
Q2 2010: 21 cents
Q3 2010: 25 cents
Q4 2010: 28 cents
Q1 2011: 30 cents
Q2 2011: 34 cents
Q3 2011: 38 cents
Q4 2011: 40 cents
This matches what I've been seeing with the quarterly results, steady improvement across the board.  I didn't realize it was so even through all the quarters.

In subsequent news, the Sr VP of Branch Operations is resigning to join a company outside this industry.  Red flag, but it could be nothing.

If you look at the year-end press release, the delinquencies numbers are continuing to improve:

  Gross Balance
  30 – 59 days60 – 89 days90 + daysTotal
March 31, 2011
  $368,099,418    $6,106,211  $1,468,079  $549,518  $8,123,808  

vs Q3 which was

  Gross Balance
  30 – 59 days60 – 89 days90 + daysTotal
December 31, 2010
  $353,963,564    $10,065,353  $2,807,904  $935,688  $13,808,945  

This was for purchased contracts.

A while back I had looked into the possibility of NICK using a growing portfolio in order to make the numbers appear to be improving.  I was convinced that the absolute increase in portfolio size was not enough to fake it, although I'm not an expert in such things.


I also walked through the proxy statement and everything there looks good.  Compensation levels are fine, incentives are good, nothing bad jumped out.

Tuesday, June 21, 2011

uranium opinion

It's interesting that when I was evaluating uranium investments, I considered the possibility of a nuclear reactor accident.  I figured that it would scare the US (and maybe Europe as well), but Asia and the rest of the world would continue just the same.  The sad thing is that new reactors are far, far safer than the old ones.  The extreme example are the pebble bed reactors that are essentially unattended batteries.

Apparently, Aomori Prefecture 青森県 (literally Blue Forest) in Japan voted resoundingly for a pro-nuclear governor and they're not far from Fukushima.

Everything in the uranium industry is going as expected, although much slower.  It's easier to know what will happen than when.

However, the spot price is dropping.

NICK 10-K (continued again)

Going back to the income statement, let's take a quick look at the expenses. In the past 2 years, revenues have gone up about 18%. Salaries and employee benefits were up 23%, with an increase of about $3 million. Worth noting.

The real story on expenses during the past two years has been a steady drop in provision for credit losses as things stabilize. And the fair value of interest rate swaps swung wildly; in theory it should have cancelled out interest expenses that would have also swung wildly, although I'm not sure about the timing. Haven't thought about it.

Equity statement. Stock options issued have been reasonable.

Cash flows. As I noted before, the last three years had $21 million in cash flows from operations. It's about exactly $21 million per year after subtracting off capex. Let's assume about 12.5 million totally diluted shares and the business is producing about something like $1.68 per share per year in free cash flow during a bad economic downturn. Now the reality is that they invested $24 million in 2009, $27 million in 2010, and $32 million in 2011 above the received principal payments, so we would actually expect increasing cash flows over time. The difference was made up in normal financing.

Interesting observation: My MacBook Air weighs less than my Wiley GAAP reference book.  The rules grew while computers shrank.


It's fairly mind boggling the amount of finance receivables that are unearned interest, discounts, and allowance for credit losses: $142 million vs $230 million net receivables.  The interest rates people pay is around 24%, which could be like a lightning rod for some politician looking to score points.  Page 37 shows the details better.

I've been reading the note about how they account for dealer discounts, which I've known about for many years.  Ok, so the entire discount is part of the credit loss reserve.  Contracts go into static pools (see previous posts).  As conditions change, they alter the level of provisioning and/or allowance.

Let me look at 2011 in detail back on page 23.  The year started with $30.4 million allowance for credit losses.  They bought new contracts with a total discount of $12.9 million.  They provisioned an additional $4.5 million.  They absorbed $14.0 million in net losses, but repo men got back $2.3 million in action packed recoveries.  $0.1 million of the discount accreted during the year (brain overload).  My understanding was that when the loan matured or was paid off, the discount dumped back into earnings, but I guess it must accrete in order to match it with the correct time period.  So the year ended with $35,9 million allowance.  This is only for purchased loans; a much smaller (and less ugly) version exists for direct loans.

Back to the notes.

NICK is being audited by the IRS for 2010.

Interest accrual ends when a contract is deliquent for 60 days or repo.

Diluted earnings per share numbers include 286K shares but don't include 331K antidilutive shares.  12 million is a good number for diluted shares in my opinion, 12.5 is even better.

Black-Scholes pricing for options.  risk-free rate is US Treasury bond/note/bill with the same duration.  Etc.

Charge-offs occur after 120 days delinquent or repo.

I analyze the delinquency rates routinely, I won't write anything here.

Jan 2010, NICK executed a new LOC agreement with a consortium of lenders.  LOC expanded to $140 million from $115 million (which says something given the time period).  30-day LIBOR plus 3%, currently it's 4% (the floor value).  All NICK assets are collateral.  LOC expires Nov 2011.  Various covenants, dividends require written permission.  Currently in compliance with all covenants.

Interest rate swaps convert floating debt to fixed rate to match the receivables.  All swaps have matured at this point.

continue on page 41
in the good old days, I would have blasted through the whole 10-K in one sitting.

Monday, June 20, 2011

Berkshire Hathaway

 Not exactly a pink sheet stock.

So what does $113,000 buy for one share of stock?

I spent some time poring over the financial statements of Berkshire trying to get a gut sense of an answer as the stock price has been dropping.

There's a large amount of excess cash and easily-liquified assets standing across the balance sheet from the insurance liabilities.  The net might be something like $30,000 if I understand correctly, but I haven't done a detailed calculation recently.  The total cash and investment assets in the insurance segment are staggering, around $90,000 per share.

All sorts of methods have been tried when attempting to value Berkshire stock.  For a long time, Buffett was advocating look-through earnings in the holdings, which makes a lot of sense as long as you correctly avoid double counting or under counting anything.

Interest, dividend, and other investment income in the insurance segment is only about $3,180 per share.  So you can pull that out of the earnings, and then treat the cash/investments/etc. as partially restricted assets (somewhere between $30,000 and $90,000 is unrestricted, probably closer to $30,000).  Of course, you can still keep the gains on the full amount, assuming you have gains and not losses beyond the point where you'd need to cough up more assets to meet insurance obligations.

all of these include interest, dividend, and other investment income
2009: $3,224 per share
2010: $5,193 per share
2011: $7,928 per share

But then there's this: cash flow from operations minus capex
2009: $5,114 per share
2010: $10,909 per share
2011: $11,915 per share

This is during a housing-bust based economic downturn and a lot of these companies are selling carpets, jewelry, modular housing, furniture, etc.

The comprehensive income includes unrealized investment gains, foreign currency gains/losses, and some other unusual stuff.  2008 killed them on unrealized investment losses that took two more years to overcome.

I believe it's a good deal at $113,000 per A share (you'd be silly to buy A shares even if you were buying $113,000 worth of stock in one account because you'd have to break it up into B shares to sell just part of it later on and the A shares are traditionally worth more due to the increased voting rights... if that's still in place after they did the B share split).  I'm waiting for it to cross below $100K, which might not ever happen again.  Who knows?

If I recall correctly, Buffett is advocating looking at changes in book value per share to get a sense for how they're doing.  From the annual report, here are changes in book value, changes in S&P 500 including dividends, and the relative results.
                                                           Berk  S&P      relative
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5   (9.1)    15.6
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . (6.2) (11.9)   5.7
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.0  (22.1)   32.1
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.0  28.7     (7.7)
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5  10.9     (.4)
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4   4.9      1.5
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.4  15.8     2.6
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.0  5.5      5.5
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . (9.6) (37.0)   27.4
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.8  26.5     (6.7)
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.0  15.1     (2.1)
So Buffett, I mean Berkshire, has been averaging 8.74% per year gains in value going back to 2000 beating the crap out of the S&P 500 which has gone pretty much nowhere during the same time.

Of course if you had bought the stock back in March 2000 for around $40,000....

NICK 10-k (continued)

picking up on page 22, Fiscal 2011 vs 2010

Finance interest received was up 11%, receivables were up 12%, due to portfolio increase.  Gross portfolio yield % was actually down slightly.  But the net yield was way up to 20.92% from 17.86% due to a decrease in provisions for credit losses.

SG&A up 10% due to additional staffing at existing branches.  But as a % of finance RXables it was down slightly to 10.15%.

Ave cost of borrowed funds up to 4.92% from 4.83%, mainly offset by the interest rate swap that's always screwing up the GAAP earnings numbers slightly.

Jan 2010 new LOC terms were 30 day LIBOR plus 300 bp, up from 162.5 bp!  This hurts the cost of money now and in the future.

Interest rate swap notional amount is lower.

I see that the losses absorbed less recoveries this year is pretty much the same as the discount they're getting on buying loans.  Was worse last year, which is not surprising.

It seems to me that by now, it's clear that they've been running the business well.  Things held up very well during the downturn.  The numbers are improving and earnings along with them.

Almost 18% recoveries, up from 12%.  No idea why.

They say that the delinqency number improvement is due to NICK putting more resources on collection as well as better discipline on underwriting.  They talk about static pools, which I know they watch very carefully.

Economic conditions are still bad, so don't expect results to continue to improve.

38.51% effective tax rate.  Tack on capital gains and it's a huge amount going to taxes.

2009 was brutal and they had to provision $15.68 million, but that's old history.

Wow, looking at 2009, 2010, and 2011, it's amazing how consistent the cash flows from operations were: between $21.3 million and $21.7 million.

No unexpected contractual obligations.

Dixon Hughes Goodman LLP auditors.  Non-qualified opinion.

I'd use 20 million shares to represent dilution fully.  Considering that, the company has been pulling in $20 million in cash from operations consistently during the worst downturn in a very long time, while operating primarily in Florida, fer cryin out loud.  And capex is down in the noise.


Assets are almost entirely finance receivables, which is good.  Liabilities are almost entire the LOC.  LOC divided by finance receivables is around 51%, which seems like a reasonable ratio.  The rest being equity (dominated by a big pile of retained earnings).

2009: $53 million
2010: $56 million
2011: $63 million

The biggest expense is salaries, 26% of revenues.
43% operating margins.
26% net margin.
$1.41 per diluted share

(continue on page 32)

Sunday, June 19, 2011


Nickolas Financial (NICK) released their 10-K recently.
Year ending Mar 31, 2011.
11.8 million shares on June 9, 2011.

4 new branches were opened this year (two are in new states).  No branches closed.  No plans for closing in 2012.  The economic downturn really killed the direct loan part of the business, which is very small.  Direct loans will probably not grow going forward.

In making decisions regarding the purchase of a particular Contract the Company considers the following factors related to the borrower: place and length of residence; current and prior job status; history in making installment payments for automobiles; current income; and credit history. In addition, the Company examines its prior experience with Contracts purchased from the dealer from which the Company is purchasing the Contract, and the value of the automobile in relation to the purchase price and the term of the Contract.

Currently 14 states, 56 branches.  Florida, Ohio, NC, GA, KY, IN, AL, TN, Mich, Virginia, Maryland, SC, ILL, MO.  Non-exclusive agreements with 4,000 dealers, 1,700 active (meaning activity in the last 6 months).

Typical 5-20 percent down payment.  12 to 72 month financing.  Various insurance, including health, life.  $500 max deductible.

NICK buys loans at a discount (1% to 15%) based on the car and borrower.  Some markets are competitive and require less of a discount.  Also $75 processing fee paid by dealer.

This past year 1/3 of the loans were in Florida, about the same as last year.  Every state increased.  15,009 contracts this year vs 12,907 last year (12,134 the year before).  23.57% weighted APR! which is about the same as last year.  Ave discount is actually lower at 8.78% from 9.11% last year.  I had expected this to go up after the downturn due to failed competitors.  Weighted ave term is 49 months, up from 48.  Ave loan is $9,800 which is up from $9,422.

Direct loans are in Florida and NC.  The terms are better for the company and these loans consistently do better than the purchased contracts, but the total business is small, so I'll skip this part.
The Company’s typical customer has a credit history that fails to meet the lending standards of most banks and credit unions. Among the credit problems experienced by the Company’s customers that resulted in a poor credit history are: unpaid revolving credit card obligations; unpaid medical bills; unpaid student loans; prior bankruptcy; and evictions for nonpayment of rent. The Company believes that its customer profile is similar to that of its direct competitors.
NICK actually interviews borrowers by phone.  NICK audits dealers on a schedule based on various factors.  Audit function is separate from sales.

Lots of good info in the Monitoring and Enforcement of Contracts section.

288 employees in NICK Financial.  No unions.

NOTE: The LOC matures on Nov 30.  $118 million outstanding, $22 million more available.

Dodd-Frank Act establishes the CFPB which becomes operational on July 21, 2011.  Given the anti-business and arbitrary nature of the current Federal administration, and government in general from both parties, I worry about this.  This act can deem behaviors as "unfair" or "deceptive" or "abusive".

CEO owns 14% of the stock.

661K options.  Can authorize 291K more.  Small potatoes.

The long-term results in the table on page 19 shows the key things about this company. Kickass results consistently through the downturn.  Sure does look like a $20 stock to me, so long as everything continues to check out and Dodd-Frank doesn't do too much damage.

Results were helped by the Cash for Clunkers program (boy, was that a silly waste of money!)

In 2009, NICK tightened up the credit criteria.

Static pools are established per branch, per quarter.  100% of the discount paid for loans goes into the allowance for loss.  Traditionally, much of this feeds back into the earnings when the loans get paid off.

(Continue on page 22, Fiscal 2011 compared to Fiscal 2010)

Friday, June 17, 2011


While the market isn't wildly overpriced, I don't think it's cheap at all.  I've been looking for investments and not finding cheap stuff.  Interest rates are near-zero for no good reason, forcing money out of hiding.  There's massive amounts of money sloshing around and I'd bet there's a lot of what will look like stupid behavior in hindsight going on.  I'm fairly heavy in cash right now and I want that cash parked where it gets the lowest possible return.  Right now, getting a 1% return might be riskier than getting a 5% long term return in the market or a zero percent return in actual cash and facing the inflation headwind.

Buckeye Technologies (BKI)

BKI (sec)

Makes cellulose based specialty products: 1) fibers (chemical cellulose, custom fibers, fluff pulp), 2) nonwoven materials.  Disposable diapers, pers hygene products, air/oil filters, etc.  #1 is much bigger and more profitable business.

Direct sales force, sales agents.  Founded 1992 technically, but go back 85 years via P&G.  Memphis.

10-Q ending March 2011.
40 million shares.
fair gross margins.  roughly 18% oper margins, 12% net margins.
Earned 70 cents for the Q.  5 cent dividends.

Balance sheet very (half depreciated) PP&E heavy, but overall not all that asset heavy.  Some debt.  PENSION PLAN.

Net income is fairly close to free cash flow.  Paying off debt.

They get some sort of "alternative fuel mixture credits", but it's down in the noise.

Medium capex was and is needed for wastewater treatment. $50 million over 5 years.

Big air quality EPA unknown capex in the future.

Manufacturing in US, Canada, Germany, Brazil.

Seems like good financial condition.

Repurchased 5.4 million shares a while back.

Looking at 14 A
Seems OK.  Big audit fees of over $1 million.
Insiders hold some stock, but not a lot.

Compensation levels are high, but comp ok. CEO=$1.6 million

Sales volumes have dropped 2008-2010.
There are relatively few specialty fibers producers when compared with the much larger commodity paper pulp markets.  The technical demands and unique requirements of the high-purity chemical cellulose or customized fiber pulp user tend to differentiate suppliers on the basis of their ability to meet the customer’s particular set of needs, rather than focusing only on pricing.  The high-purity chemical cellulose and customized fiber markets are less subject to price variation than commodity paper pulp markets.  Major competitors include Rayonier Inc., Borregaard, Sateri International Group (”Sateri”), Neucel Specialty Cellulose Ltd., Sappi Saiccor, Tembec Inc., and Archer Daniels Midland Company.
Big loss in 2009: impairment, restructuring.

Continuing on 10-k
Rough guess is a $20 stock, which is around the current price.

They spent a lot of time in the toilet back in 2002-2004 losing money.  I need to find a company that's in the toilet now (looks bad now but will snap out of it)

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