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.
"We used to get drunk at Chuck E Cheese, sometimes Bill would get stoned and Jason was always high."
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)
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.
Just an observation.
Saturday, June 25, 2011
Re-evaluating CPI Aerostructures (CVU)
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.
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.
As a result, we strengthened our financial position in preparation for continued growth and enhanced the potential liquidity of our stock.”
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.
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.
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
I'm still trying to make a decision.
Wednesday, June 22, 2011
Ideally, Berkshire Hathaway would fall to something like $75K per A share.
NICK 10-K (continued yet again)
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.
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:
|30 – 59 days||60 – 89 days||90 + days||Total|
March 31, 2011
vs Q3 which was
|30 – 59 days||60 – 89 days||90 + days||Total|
December 31, 2010
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
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)
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
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.
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)
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
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
Buckeye Technologies (BKI)
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.