Pink Sheets

ValueClick (VCLK) update

2011-10-16T15:38:00.001-04:00

Whenever you buy Halloween candy for the kids, if you get the mixed bag that has 20% really good stuff, it always gets eaten up before Halloween. Kids get the leftovers. Life's tough.

Completed acquisition of Dotomi on Aug 31. $264 million in cash and stock, plus assumption of some unvested options. Dotomi CEO elected to ValueClick board and gets cash, stock (1 yr lockup).

VCLK also repurchasing some stock.

New revolver. Expires 2016, $150 million, secured by all assets. Also $50 million term loan.

New 10-Q for period ending June 30, 2011.

79 million shares on Aug 1, 2011 (adding in the 7.6 million shares issued in the Dotomi acquisition, plus another 1 million in employee options at a $2 strike!)

Comparing to Dec 2010.

Balance sheet is still rock-solid, but goodwill keeps climbing. But the balance sheet is still solid even if you back out the goodwill.

After all these years, they've almost, ALMOST, earned a profit for the original investors. And when I first bought them back in 2002, they had just reached breakeven. Moral of the story: startups burn money.

Revenues are up about 25% from December. Looking back at March, (78 million shares),

Let me go back to the balance sheet. Cash dropped by about $58 million. What happened? Equity increased by $18 million, assets increased by $21 million. Liabilities INCREASED by a few million. I found it: it's down there in goodwill. I hope they know what they're acquiring!

Back to revenue: Q2 was good both yoy and qoq.

70% gross margins vs 72% in Q1.

22% operating margins vs 23% in Q1.

14% net margin (38% tax) vs 14% in Q1 (looks like similar tax rate)

Earned 21 cents diluted, same as Q1.

Equity statement looks good. 271K shares issues in stock options, 2.2 million repurchased.

Cash flow:

Q1: Cash flow from operations was nearly double net income due to changes in assets/liabilities and depreciation. Only 1/3 of the depreciation amount was sunk into capex. Can't tell if that means anything here.

Q2: Cash flow from operations for H1 was 50% higher than net income. So Q2 it was the same. Capex was much bigger in Q2, blah blah. It all works out.

Cash flow statement overall is very simple, clean, and wonderful, except for the $69 million acquisition of Greystripe. It all hinges on whether they're making good acquisitions.

They claim Greystripe contributes to the U.S. mobile advertising market and this justified paying above book value. They have the intangible assets depreciating over time at what seems like a reasonable schedule. Not sure if they plan to depreciate goodwill.

Acquired Investopedia.com in Aug 2010. Their reasons for paying more than book value here look iffy.

VCLK disposed of a lead generation business in Feb 2010 for $45 million. This had a pre-tax $1.1 million gain, but also $8.9 million tax benefit due to tax deductable goodwill realized on the sale. If I follow this correctly, the subsidiary lost a bunch of money while VCLK owned them, but VCLK was able to sell them at a high price than they paid for it. OK, fine.

There's a long-running spam email lawsuit that they sorta won, but then it got reversed on appeal and now it's back in play. Trial in April 2012.

Their tax situation is uncertain right now, both state and federal. They're being audit by the IRS for 2007.

Segment Info:

All segments increased revenues and income (but some of this is due to acquisitions, but none of it hid downturns). All the segments have good margins.

CONCLUSION

Back in July, I had said that VCLK stock was worth around $30, but admitted that this is a fairly high price and assumes a lot of good things that I see in the company will continue. I think $20 is a much safer valuation. The fact that these numbers are so far apart says that it's not easy to value. The stock is currently selling for around $17, still too high to consider.

I'm currently asking myself if I've been holding out too much for a serious downturn. Should I have bought the stuff I'm looking at back in August?

I don't think so and here's why: My strategy is based on something that may take a long time to play out. It might be years before I actually jump back in. I'll end up wrong if the global economy jumps into high gear and continues that way for years. At that point, the global problems will be saved by big increases in revenues. If people don't learn their lesson about debt and spending, it might take a decade more before a day of reckoning occurs. But the stock market prices of 2011 and maybe even 2012 won't have anything to do with how that plays out.

I'll probably stay heavily in cash, but move investments around based on the valuations of various stocks.

Closed out CVU

2011-10-03T18:21:00.000-04:00

I sold the last of my CPI Aerostructures (CVU) stock today. After looking at the ratio of current market price to full value and comparing it to what else is out there, it was an easy decision to make (in other words, oddly enough the stock price didn't fall enough and I sold it).

Looking at the market right now, I thought it was crazy when the 10 year US Treasury bond was yielding under 2.5%. Now it's at 1.79%. 30 year mortgages are at 4%. The powers-that-be are doing everything possible to push money out of hiding and lift the prices of everything.

I'm watching for opportunities.

Berkshire Hathaway stock says Buy Me

2011-09-27T22:56:00.001-04:00

I can't even express how difficult it is to stop myself from buying Berkshire stock when the "A" shares dipped below $100K and then Buffett starts buying back shares. Note that unless you're investing millions, I think it's a mistake to buy the "A" shares, even if you can.

Buffett makes his thinking very clear in the everything he writes. It's extremely straight forward and rational. He's buying back shares because it's the best allocation of excess captial that he can find, given the limited opportunities available when dealing in billions. He's saying Berkshire stock is cheap, and he's probably the best or 2nd best person to make that judgment call (Charlie Munger is the other one).

I hope that I'm making the right call by holding out and keeping a high percentage of cash. I consider Berkshire to be a very easy 50% gain at this point. It feels crazy not to buy it.

I've found that things very often feel wrong when they're the right decision.

Senior IMF Economist Expects Hard Default For Greece. Soon.

2011-09-05T07:09:00.002-04:00

An unidentified senior IMF economist expects a hard default soon from Greece.

This is what I've been expecting for some time. The first domino.

I expect a hard default definitely before March, maybe this year, and it could come with this program review,” said a senior IMF economist who is keeping close tabs on the situation. “The chances for a second program are slim.

First Greece defaults, then all the banks that are using Greek bonds as collateral show up as being in serious trouble. Then it continues to spread. The global economy nosedives, causing more of the PIIGS countries to default. Then we start to see who has been responsible and who has been reckless globally.

Things could get surprisingly ugly.

UPDATE Tues Sept 9, 2011:
Josef Ackermann just gave a "terrifying speech" at a conference in Frankfurt.

It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels....

In recent weeks, the distrust of the financial markets has spread to the banks because they are now suffering from the debt crisis in Europe and have a lot of exposure to, for example, Greek bonds.

Let me translate that into English: Everyone knows that if European banks had to accept a lower value of the bonds from shaky goverments that they own, it would wipe out those banks. Unstated is the following: European countries have been scrambling like crazy to do anything possible to avoid having to acknowledge a lower value for those bonds from shaky governments.

When he says, "for example" I think it's fairly clear he means that it's not limited to Greek bonds.

Goodyear Tire and Rubber (GT)

2011-08-13T15:00:00.003-04:00

Goodyear (sec)

I stumbled into Cooper Tire and Rubber (sec) when scanning for stocks. That brings back very old memories from before I was ever an investor. That leads to GT as well as Bridgestone and Michelin.

Goodyear Tire and Rubber

Looking at the very long term chart is a strange thing. It goes back to around 1970. The stock has see-sawed wildly between then and now but has essentially gone nowhere. Considering that 1970s dollars were worth a whole lot more than today's dollars, the stock is seriously lower than it was back then. Japanese tires and probably Chinese tires lately. I remember reading Les Schwab's autobiography which covered the shift from Bridgestone to Toyo tires.

My interest in GT is to see if it's a stable company in order to take advantage of the wild swings in price that line up with economic downturns. I'm not looking for excellence, I'm looking for survivability.

10-K

243 million shares.
They operate all over the world. 56 manufacturing plants in 22 countries.
Also rubber related chemicals.

In 2010, Titan Tire bought the rights to sell Goodyear brand farm tires in Europe, Latin America, and the US.
Expect a $270 million charge from closing the Union City, TN plant. Was making 12 million tires per year.

Started closing a plant in France in 2009. $107 million estimated cost. High cost capacity. Was making 6 million tires per year.

Goodyear, Dunlop, Kelly, Fulda,Debica, and Sava brands. Also various house brands.
Cars, trucks, buses, aircraft, motorcycles, farm equipment, earthmoving, mining, industrial, etc.
Also retreads for trucks and aircraft and other stuff.
Mud flaps (presumably with sillouettes of reclining girls)
84% of sales are new tires. Mostly replacement tires.

Most of the revenues are in the US and Europe. 21% Asia.

Competitors are mainly Bridgestone (日本) and Michelin (Vive la France!).
Global alliance (75%) with Sumitomo 住友 Rubber Industries (25%) for selling tires in Japan.

I notice that Asia sales are fairly flat. Someone else must be winning there. Bridgestone? Michelin?

Raw material costs went up 12% in 2010, not surprising. They expect it to increase 25% to 30% in Q1 2011. Ouch.

2,400 patents in the US. 3,700 in other countries. License agreements. Zillions of patents among a small number of companies tends to lock them in as an oligarchy, which is fairly good for long term business. 1,700 trademarks.

72,000 employees. 39,000 in unions.

14 million stock options. $15.11 ave strike.

Revenues: (billions of dollars)
2006: $18
2007: $20
2008: $20
2009: $16
2010: $18
Makes sense.

Hey wait a minute! They lose money just about every year. The only year they made money was 2007 and that was because they sold a business.

Operating incomes in 2008, 2009, 2010 were 17.6%, 16.6%, 15.3%.

Balance sheet is weak. Equity is almost gone. Lots of debt.
Cash flow looks weak. Capex burns up all the operating cash flow.

This company looks bad. I wonder if Bridgestone is any better?

Cooper Tire and Rubber

Quick look at Cooper Tire and Rubber:
Latest 10-Q
Balance sheet is way better.
Basically earned 50 cents for 6 months (not counting discontinued operations)
They actually pay a dividend.

Latest 10-K
62 million shares.
North America, UK, and PRC JV.

Revenues (billions of dollars), Earnings per diluted share
2006: $2.6, ($1.21)
2007: $2.9, $1.46
2008: $2.9, ($3.88), cost of goods sold issue (oil prices)
2009: $2.8, $1.54
2010: $3.4, $1.86

Cumulative earnings per diluted share: a 23 cent loss
International revenues are climbing substantially (1.9% in 2009, 28% in 2010), they're now half of the North American revenues.

Cash flow looks ok. Looks like earnings match free cash flow over a three year period without anything too ridiculous.

So is CTB worth $20? Needs more work.

Thoughts

2011-08-08T23:13:00.000-04:00

While explaining the complexities involved in pondering "where did all that money go?" to someone today, I realized that there's more to it than I had thought. The obvious answer is that it doesn't go anywhere. The value is either there or it's not there. Another answer is that it's like a parimutuel betting horse track. The money comes into the markets, the brokers skim off some, and the same money walks out 3 days later when the trades all clear. A third answer is much more ominous.

Let's say someone puts their stock up as collateral for a loan. And let's say at first, the stock prices go way up. So they can borrow more against it. It's the same thing as the home equity ATM machine syndrome. When stocks drop, the ATM machine goes in reverse and it's looking for deposits, not withdrawals.

When you apply a lot of financial leverage, then money really does appear and disappear.

When you have a stock market bubble or housing market bubble or a tulip bubble, from what I've read, it needs large amounts of debt or it won't really have enough fuel to reach bubble status.

It's bad enough when you have a stock market bubble and you get a false wealth effect. It's much worse when you have a housing bubble because the dollar amounts are much bigger and the impact on lives is very direct. But what happens if you have a bubble where governments get very big and borrow massive amounts of money to keep running? It's the large banks that get hit. But I suspect there's a lot of collateral damage, so to speak.

Question

2011-08-05T07:56:00.003-04:00

Why would any sane person today loan out money for 10 years at an interest rate of less than 2.5% given the massive inflation looming and given that the borrower has the means, motive, and opportunity to cause massive inflation?

It's not a question of whether the government will default. It's a question of whether the money you get back will be worth anything close to what you loaned out. And you should be expecting more back, not less, given that the money is on the sidelines for 10 years.

It makes no difference whether you can sell the 10-year note in less than ten years. The risk is still there and it seems to me that the market is seriously mispricing this stuff.

It makes no difference whether there's nothing better out there right now. Something tells me that will change long before the 10 years are up.

UPDATE Aug 6, 2011:
I wrote that less than 24 hours before S&P lowered the US Gov rating to AA+. Lucky timing.

Interesting Day

2011-08-04T18:11:00.001-04:00

My 2nd largest investment right now is cash. And it's not far behind my largest investment, NICK. Today was a bloodbath in the markets. Good time to own cash.

Let's see the damage:

Berkshire Hathaway is getting close to my "good deal" threshold. If it hits that point and I don't see anything else, I might start buying more.

ValueClick is $15.42. Was $18.78 when I last looked at it. Will it go to $13?

POSCO is still at $102. Not interested.

Korea Fund is at $46.55. Getting a bit interesting. Will it go to $40?

Container leasing companies:
CAP is $15.61, this might be cheap now.
TGH is $22.79, will it go to $16? Not a bad deal now.
BOX is $13.27, no opinion
TAL is $27.09, will it go to $25?

ACY is $13.90, this needs to get real cheap before I'm particularly interested. Wake me when it hits $5.

AAON is $18.41, not a bad deal. But will it fall below $15?

FLL is $2.81, but I just don't know about this one.

Forget CCLAY. I'd rather own the real thing, KO, which is at $65.82. $40 would be good.

It's always tough to know what's cheap enough. I remember back in 2002, when I could pass over things that were cheap in favor of things insanely cheap. I remember thinking that McDonald's at $15 is probably really, really cheap. It was! $84 today.

Chuck E Cheese reported results today. The stock is $35.73. Comps are up slightly. Food costs are up somewhat. Operating margin is down to 7.0% from 8.1% a year earlier. Etc. I'm not too concerned about their quarterly results. In fact, I'd prefer to see a real downturn in their earnings to scare investors away. Will it hit $23 a share?

Hot Topic is at... no one really knows where they're at. $7.20. I figured they might be worth $13 a share if they turn the business around. I'd want a price like $4 before I'd think about it.

Buckeye Technologies BKI is at $24. Bzzzzt!

It's a start.

Coca Cola Amatil (CCLAY)

2011-07-31T16:00:00.001-04:00

I looked at them back in March 2006. It's a good summary of Amatil's long history (essentially back to 1904). They manufacture, market, and distribute Coca Cola products and local brands in Australia and other nearby markets.

They started moving into bulk water, commercial refrigerators, Crusta Fruit Juices, Grinders Coffee, packaged fruits, veggies, etc. I think I like that shotgun approach.

The company was earning around 30 cents. Operating margins were around 14%. Weak cash flow.

Note that this is an ADR which back then consisted of 2 shares of Amatil stock for each share of CCLAY. That's what OTC Markets is saying about the ADR now.

The stock (ADR) was selling for $10.30 and I figured it was worth at least $6, but maybe up to $16.

And of course, the annual report had photos of hot Australian women.

Based on experience, that photo will generate about 4 visits a day for the next 5 years.

Today the stock/ADR is at US$24.81.

Yahoo, corporate website, OTC markets

Looking at the "factbook" that the company puts out:

Earnings, ROI, and dividends have improved consistently since I last looked at CCLAY.

Production is in Indonesia (485K customers), Australia (116K customers), Papua New Guinea (8.6K customers), Fiji (3.5Kcustomers), NZ (17K customers).

In AU, they have 56% market share for carbonated drinks (most of the business). 25% bottled water. 45% sports drinks.

In NZ, they have 73% carbonated drink market share and reasonable share in the other areas.

WOW! In Indonesia they have 90% market share for carbonated drinks, which is around 2/3 of what they sell there.

Looking at the annual report for 2010 (ending Dec):

Their "Pacific Beverage" JV now has 5 of the top 20 beers in AU.

Cost of goods sold went up 3.3%, but they recovered all of it. In Indonesia, local currency COGS went up 15%.

Lots of disclosure in plain language. Very, very detailed incentive plan that seems quite good.

They encourage and track executive ownership of the stock.

Earnings growth has been steady (too steady?) from 2001 to 2010.

15% operating margin. 11% net margin.

AU$66 cents per share (AU$1.32 or US$1.20 per ADR) in earnings for 2010. Not much else in comprehensive income.

Current assets are mostly AR and inventories plus some cash.
Noncurrent assets are PP&E, investments in bottlers' agreements, and intangibles.
Current liabilities are AP, accrued charges, and some debt.
Noncurrent liabilities are debt. Debt to equity is fairly close to 1.

Note that they're sitting on accumulated losses.

Cash flow from operations is a bit above earnings, but capex is very large. Not sure if this is expansion or not. 2010 and 2009 saw weak operating cash flow [minus capex]. This explains their growth rate.

They borrowed a bunch of money in 2009, paid a bunch back in 2010.

Equity statement looks ok. [Is that a flare up of Meneire's disease coming on?]

Intangibles are customer lists (depreciate in 5 years) and brand names (depreciate in 40-50 years).

Most of the revenues come from Australia Beverages. None of the smaller ones are growing fast.

Coca Cola owns a bit under 30% of the stock.

CONCLUSION

The top line hasn't really grown since 2006. For comparison, when you look at the container leasing companies, you see a powerful tilt upwards over time that's only very temporarily overcome by the economic downturn. When you look at this company, it's basically flat. They've pulled earnings up, but that's not sustainable without revenue growth: either stealing market share (difficult to maintain) or having a growing total (reasonably) available market.

The ADR needs to drop well below $15 before I'd even look at it. It's probably worth $18. Am I missing something with the revenue growth?

World Cargo News

2011-07-24T14:37:00.001-04:00

The parent company of Hainan Airlines is bidding to buy GE SeaCo container leasing company. They're vying against Kelso & Co. Ge SeaCo has 900K TEU. Rumor was that Textainer put in an offer. When looking at companies, I'm generally looking at long term things and not rumors of takeovers/acquisitions.

China shipping volume is up 13% Jan-May. China is also dredging the Yangtze at 12.5m all the way to Nanjing (name means south capital).

ValueClick (VCLK)

2011-07-22T16:51:00.001-04:00

Ah, ValueClick. That brings back memories. Bought it for something like $2.20 back around 2002 or maybe 2003. Sold it for a little over $4. When I sold it, I was saying that I had a hunch that the price was going to keep on going up, but I can't rely on hunches. It went up to around $30.

Today, it's selling around $18.75. I'm curious how they've been doing. If they're quietly growing at a moderate rate or more, then I might be interested.

ANNUAL REPORT

10-K

Revenues
2006: $257 million
2007: $376 million
2008: $455 milion
2009: $423 million (I'm actually kinda glad to see this)
2010: $431 million (and this)

Net income
2006: $63 million
2007: $70 million (so far, so good)
2008: ($214 million) This was a $270 million writedown of goodwill
2009: $69 million
2010: $91 million

Diluted share count:
2006: 102 million shares
2007: 1001 million
2008: 92 million
2009: 87 million
2010: 82 million

Balance sheet is very solid. They can pay off all liabilities with cash on hand. Cash flow looks quite good.

Just right off the bat, I like the disclosures that I'm seeing in the 10-K. This is definitely worth looking into. Time to dive in....

81 million shares on Feb 18, 2011

Targeted and measurable online advertising. Generate customer leads, online sales, and brand recognition. Personally, my opinion on this is that nothing beats giving customers what they want. Being annoying, being deceptive, etc. is never the optimum approach.

VCLK's customers are direct marketers, brand advertisers, ad agencies. VCLK has performance based campaigns and programs. VCLK works with 3rd party websites, online publishers, search engines (probably not Google, I would imagine).

VCLK aggregates publisher spots into networks and optimizes them for specific goals. They own some comparison shopping websites, coupon stuff, etc. which seems fairly worthless.

Diret sales teams in US and Europe. NOTE: Why are they not in Asia???? One out of every three people in the world is in China or India and sooner or later these people will get online, and will be using their own languages like Telugu, Kanneda, and Simplified Chinese. If VCLK isn't involved early, they'll probably get locked out.

Four segments:
1) Affiliate marketing
2) Media
3) Owned and operated websites
4) Technology

Affiliate Marketing Segment

Wholely owned subsidiary: Commision Junction. Large scale pay-for-performance model using proprietary technology, marketing, and advertising.

We believe we are the largest provider of affiliate marketing services.

The publisher gets a commission from the advertiser when the visitor takes an agreed-upon action.

Advertisers upload their offers to the "CJ Marketplace" making them available for placement by publishers who apply to join the advertiser's program. CJ Marketplace serves and tracks the links.

Advertisers get a lot of real-time info.

This type of advertising seems extremely valuable to advertisers and consumers, plus it destroys the monopoly that newspapers, TV, radio have over access to consumers. The real question is whether VCLK has any sort of sustainable edge over competitors.

VCLK also has a full-service fixed-fee model where they handle everything for an advertiser. That might provide a sustainable edge, I don't know.

Media Segment

This looks similar to the other segment, but is for a larger scale. They can do all the usual targeting based on all the information that comes in via the browser (it's insane how much they know about you right on the first click).

10,000 active online publishers in the US. 15,000 worldwide. 168 million unique visitors in 2010, 79% of the US internet audience. Wow!

They divested a lead generation marketing business in Feb 2010, and an e-commerce business in 2008.

Owned and Operated Websites Segment

Pricerunner, Smarter.com, Couponmountain.com, Investopedia. I'm hoping this is a small percentage of their revenues.... It's fairly big, matching Affiliate Marketing and Media segments. However, it's been shrinking (not surprising). It turns out, that's due to a single issue with Yahoo.

Technology Segment

Wholely owned subsid Mediaplex, Inc. This is the only small segment.

End Segments

Intense competition. The factors that help them compete are:

Ability to aggregate arge networks of publishers. That could be destroyed in just a few years.
Timing and market acceptance of new solutions and enhancements. They need to run fast just to stand still.
Customer service and support.
Sales and marketing efforts. Can be duplicated.
Ease of use, performance, price, reliability. Their size may help then here quite a bit.
They've been able to remain price competitive while maintaining operating margins. We'll see.

655 US employees, 407 international employees. No unions. Entered Japan and China in 2007. Korea 2010.

2008 spamming lawsuit being appealed by Hypertouch. Sent back down to the lower count (L.A.) Seems pretty minor now.

Let's look at the operating margins for each of the main segments to look for what's going on:

Affiliate Marketing Segment: Gross margin = 86%!, Operating margin = 56%. Back in 2008 the numbers were 84%, 48%. Ok, they've got market power

Media Segment: Gross margin = 46% (healthy, but far lower than Affiliate Marketing), Operating margin = 25%. Back in 2008 the numbers were 45%, 19%, at least it's improving.
Websites Segment: Gross margin = 82% (I like being proven wrong here). Operating margin = 20%. Back in 2008 the numbers were 73%, 23%.
Technology Segment looks reasonable (roughtly 50% operating margin), it's a small segment.

Website segment had some issue with Yahoo in 2009. Revenue dropped.

Technology segment has a single major customer.

Overall G&A decreased due to legal fees in prior year.

PricewaterhouseCoopers auditors No qualifications to statement.

I already noted the balance sheet is insanely solid. $50 million in NET CASH. [That reminds me: When I bought the stock in 2002-2003, I paid LESS THAN NET CASH for it and they were just crossing above the breakeven point on profitability! Even if they had shut down the business I would have made a profit!]

They've been buying back a lot of stock.

Cash flows look good. Very low capex. However, there's an odd trend during the past 3 years. Net income has been rising, but cash flow from operations has been dropping. Let's see why...

It's partly due to a decrease in depreciation, which is a good thing? Overall, it's good for this to be decreasing. Ok, this is making my head hurt: Earnings go up, cash flow decreases, depreciation decreases. That means earnings increases really were worse than they appear. But the amount is about $10 million, not that much really.
Stock option compensation accounts for some. This means it's making earnings increases look better.
Asset/Liability changes seem to account for some

Investing cash flows are basically acquisitions of businesses, aside from capex.

Financing is basically all stock buybacks and cash from stock options.

Google accounted for 15% of revenue. Looks like I was wrong again. In 2009, Yahoo was 17% and Google was 10.6%.

Oh crap, they own a student loan backed security. Could this be essentially stolen by government fiat? Also a bunch of other munis.

They tend to buy and also discontinue businesses. Not an efficient sort of activity in most cases.

They sold the Web Clients business for $32.8 million. They got a $45 million (face value) note paying 5% interest over ten years, with a balloon payment at 5th year. Secured by assets.

2 million stock options outstanding total. They haven't been granting any lately.

CONCLUSION

So far this looks like what I had seen before. The fact that it still looks good after about 8 years or so is a good sign. If I had to guess a value for it, I'd say it might be worth $30, but that's kind of a high number and it's assuming continued growth. At $18.78 I'm thinking about it.

Note that Google owns Doubleclick (formerly DCLK). That's something to worry about.

Full House Resorts (FLL)

2011-07-17T17:56:00.002-04:00

Full House Resorts (sec)

Stock is $3.33

First thing I want to see is the long term trends of revenues, earnings, margins. leverage.

2010 10-K
18 million shares

They basically own casinos. Casinos tend to be associated with bad stuff. They obviously make a lot of money. The long term trend (50 years) has been growth in the industry. I'm always expecting that to change, but it never does. I'm also always expecting people to get tired of casinos and try to get them shut down, which is probably difficult to do.

Two fears: Corruption, competition from too many other casinos.
The corruption is hard to see. The competition shows up as low margins.

Started in 1987. 1994 got involved in several projects in Battle Creek, MI (tribal), 50% owner of a Harrington, Delaware raceway and casino ("racino"). Own a casino in Fallon, NV. And acquiring the assets of something in Rising Sun, Indiana. Should be closed already.

They've got some projects in the works and some discontinued projects. Got cut off by the Nambe Pueblo tribe in Santa Fe. A project in Decker, Montana is cancelled due to economic conditions.

Balance sheet is very solid.

Revenues (million $), net margins, notes
2010: $33, 23%, mostly management fees, $5 million equity in net income of unconsolidated JV and guaranteed payments
2009: $19, 25%, yeah lots of unconsolidated JV stuff going on (could be crap)
2008: $9.7, 16%, balance sheet got cleaned up here
2007: $9.6, 9.9%, balance sheet was far worse back in 2007

Ok, so how about this year? Q1
They're doing a major acquisition of Grand Victoria ($42 million) which nearly doubled assets and put a similar jump in LT liabilities. Debt to equity is around 1/2, not too bad, assuming this isn't a bad acquisition.

Revenues are flat yoy. Net income is down 20%! due to project development costs and interest expense.

No breakdown of cash flow from operating activities.
Cash flow: $20 million sunk into acquisition. $15 million borrowed. $2.4 million distributed to non-controlling interests in JV.

Entered into lease with a landlord to operate Grand Lodge Casino in Incline Village. Tahoe. I think I stayed there once years ago. 5 years of conducting all gaming in the casino. Early termination rights for both parties. Option to extend. Wow, $125K monthly rent.

Anywayz, earned 43 cents in 2010, 26 cents in 2009. Earned 9 cents in Q1 of this year.

CONCLUSION

I'd guess the stock should be selling for about $4 a share, which is not far from the current $3.33. This one would be a lot more trouble than other companies, trying to figure out the unconsolidated stuff, trying to figure out if there's any shady stuff, and the possibility of "too many casinos" market saturation.

For now this goes on the "too difficult" pile.

Posco (PKX) and Korean stocks

2011-07-16T17:12:00.003-04:00

A quick look at Posco (sec). Basically, I'm looking at the Korea Fund as a possible investment. I don't have any easy way to get into the Korean market other than a few high profile stocks like Posco, so this is not a bad alternative. I've looked at the Korea Fund's holdings and they make sense. The various Samsung companies, Hyundai, Lucky Goldstar (now known as LG), Posco, and others.

I've looked at this company (POSCO) long ago when Buffett took a stake in it. I want to get a sense for the P/E ratio of the stock right now. 77 million shares at the end of 2010.

Revenues: (in trillions of Won)
2006: 26
2007: 32
2008: 42
2009: 37(downturn)
2010: 61 (wow!) This is US$53 billion

Earnings have followed along with revenues almost. 2006 had 13% net margin. 2010 had 7.2%.

Debt to equity ratio has been rising over the years.

In 2010, they earned US$49.47 per share. The stock is selling for $109. So the P/E is roughly around 2. This is probably misleading because the steel industry is very volatile. But still, it's priced for a major drop in the steel industry. Everyone knows China has been overbuilding. Are they still overbuilding?

Korea Electric Power Corporation
(sec)

20-F for 2010
Oops, they've been losing money for 3 years. Just looking at the revenues and income going back to 2006, I'd guess a reasonable stock price would be ten dollars. It's selling for $12.91. I didn't cheat, really!

So that stock isn't selling cheap.

KF

The Korea fund claims the forward (ok, if you have a time machine, why don't you just tell us the future stock prices... actually just tell me) P/E ratio for the fund is 10.43 as of June 30 (it closed at $49.27 and the current price is $50). That's twice the price that Yahoo is showing.

It's not a bad investment at this price, but I'd rather find something cheaper if possible.

SeaCube Container Leasing (BOX)

2011-07-10T15:38:00.002-04:00

Continuing again with container leasing companies, SeaCube Container Leasing (sec)

Quarter Ending March 31, 2011

BOX 10-Q

Bermuda corporation.

$500 million (net) leasing equipment, a 47% increase from last year. All the leasing companies have grown. A lot. This is ominous, although it may be OK after the downturn, making up for lost time. I worry that margins could drop if this turns into a slugfest. However, given where margins have been historically, the industry seems far from airlines-level of competitiveness.

PAUSE
Looking at net margins over the years,
TAL's has been 14%, 11%, 8%, 20%, 16%, med loss, small loss, 6%, and earlier lackluster results.
CAI's net margins: 36%, 21%, negative 32% (big loss), 29%, 26%
TGH net margins: 44%, 46%, 33%, 34%, 35%
SeaCube's net margins: 22%, negative 11% (big loss due to derivatives), 12%, 15%, 3%

Here's a question: Does it make sense to value the top two container companies at roughly 4x projected revenues?
RESUME

So in addition to the leasing equipment, they also have another half billion dollars in "Net investment in direct finance leases", which actually shrank a bit. So the growth rate isn't as high as it looked.

Leasing equipment was nearly 30% depreciated last year.

Very highly leveraged. Debt-to-equity ratio of around 4.6.

Interest expense is approaching 1/3 of revenues.

25% net margin this quarter. Earned 45 cents per diluted share. Shares are selling for $16.65. (37x this quarter's earnings vs TAL=34, CAI=32, TGH=40).

BOX does both leasing and financing of presumably containers, plus some small misc income.

Cash Flow:
Same hefty depreciation level, purchasing of leasing equipment, and finance churn.

Company went IPO in Oct 2010.

Value-wise, they have more reefer equipment than dry containers.

553K containers. 871K TEUs including generators for reefers.

98.5% utilization.

As of April 2011, they've ordered $316 million in new equipment for delivery through June. 85% is already committed to long-term leases.

(Need to continue with 10-K)

Textainer Group Holdings (TGH)

2011-07-09T16:10:00.002-04:00

Continuing with container leasing companies, I'm looking at Textainer Group (TGH) (sec) next. This is a foreign issuer based in Bermuda.

Raised $400 million in fixed rate asset backed notes. Not registered. Cash to be used to pay off some debt plus unspecified "corporate purposes".

CEO is retiring.

Quarter ending March 31, 2011

6K form

First thing I notice is that while CAI's rental equipment assets are about 90% of total assets, TGH's rental equipment is only 80% of total assets. Leverage looks about the same.

TGH's container assets grew 8% yoy.

Most of revenues is from lease rental with some mgmt fees and gain on sale of containers.

Revenue is $91 million, which is less than TAL's $125 million. I'm surprised since TGH has the largest fleet size. TGH revenues are 5.8% of net container assets compared to 5.1% for TAL and 4.2% for CAI. (Note: this is for the quarter and only useful in comparing with other companies for the same seasonal quarter).

Gain on sale of containers was 7% of revenues, in between CAI and TAL.

TGH had a loss on interest rate swaps. TAL had a gain. Different sides.

58% operating margins. Higher than TAL, lower than CAI.
46% net margin. Fairly close to CAI (TAL was only 26%).

Watch out: A non-controlling interest owns part of the company, so converting between per-share numbers and overall numbers is not straight forward.

Shares are selling for about 40 times Q1 earnings (TAL and CAI are selling for less: what's the reason?)

Cash Flow:
Obviously expanding faster than depreciation. Financing the cost with secured debt.
Like CAI, depreciation is big.

1.5 million containers. 2.4 million TEU.

98.2%utilization vs 90.1% a year ago.

2010 Year

20-F statement

Revnues: (millions of $)
2006: 226
2007: 266
2008: 281
2009: 238
2010: 303

Wow, their 2010 was a big jump. Did they grab market share during the downturn? If so, it would indicate a solid business and mgmt.

Net income (overall, including minority interest):
2006: 80
2007: 91
2008: 93
2009: 109
2010: 138

Solid, compared to TAL and CAI. Earned $2.43 per diluted share for the year.

CONCLUSION

Definitely needs more work, but this might be a better company than TAL and CAI.

Container Leasing: TAL vs CAI

2011-07-04T15:53:00.003-04:00

"Despite what they say, I see they handle reefers."

Looking at two container companies. I've followed the container industry due to CFRI. World Cargo News is the source of info in the industry. I've learned a lot just by reading the headlines for the last 4 years or so.

TAL International Group (sec)

CAI International (sec)

Quarter Ending March 31, 2011

CAI 10-Q

TAL 10-Q

CAI has $647 million net container rental equipment, which grew 22% from last year, about 12% depreciated

TAL has $2.4 billion, which grew about 10% from last year, roughly 20% depreciated

CAI has $212 million in equity

TAL has $448 million in equity (twice as leveraged, equity / rental assets)

Nearly all of CAI's revenue comes from container rentals, with some management fees and some gain on sale.

TAL is also mostly container rentals, but also some equipment trading revenue.

CAI: $27.7 million in revenue, 4.2% of net rental assets

TAL: $125 million in revenue, 5.1% of net rental assets

This makes some sense considering TAL's equipment is more depreciated.

Both had significant gain on sale from assets (6.3% of revenues for TAL, 13% for CAI)

TAL had a large gain on interest rate swaps. It's difficult to know whether to back this out for comparison reasons (might be offsetting a hidden loss somewhere else).

TAL: 53% operating margin (46% without gain-on-sale)

CAI: 67% operating margin (54% without gain-on-sale)

Wow, the container business is good, at least this particular quarter. Based on World Cargo News, I didn't think that was all THAT great of a quarter for container leasing companies. It was certainly bad in 2010 and 2009.

TAL: 26% net margin (interest is about 19% of revenues, tax about 14%)

CAI: 47% net margin!!! (tax and interest are each about 11% of revenues)

I'll need to go back and look at the really bad quarters to see how each company survived.

TAL is currently selling for about 34 times this quarter's earnings

CAI is currently selling for about 32 times this quarter's earnings

I imagine the business is somewhat seasonal, so trying to guess a P/E is tough.

Cash Flow:

Can't really read much into TAL's operating cash flows. There's a lot going on. Depreciation was the same amount as net income! This is a capital intensive business. They bought almost 4 times as much leasing equipment as was depreciated, which matches the growth I saw in assets. Lots of finance churn.

For CAI, depreciation was only half of net income (need to think about this). CAI is also buying up a lot of containers (an even larger percentage).

CAI: founded 1989. Focuses on dry freight standard containers. Went public in 2007. International leasing goes through a Barbados subsidiary they created in 2008. Despite what they say, I see they handle reefers.

TAL also focuses on dry freight, with some reefers and other containers tossed in.

CAI's CEO and CFO are retiring. New ones have been appointed.

TAL has 1.44 million TEUs owned and managed. (Twenty-foot Equivalent Units = TEU)

CAI has 0.863 million TEUs owned and managed (much higher ratio being managed)

2010 Year

CAI 10-K

TAL 10-K

Revenues: TAL, CAI (in millions of dollars)

2006: 273, 34.6

2007: 286, 38.1

2008: 319, 56.4

2009: 309, 53.7 (that wasn't so bad)

2010: 329, 64.9

Net income: TAL, CAI (in millions of dollars)

2006: 42.1, 15.7

2007: 38.8, 19.0

2008: 35.8, (27.1) CAI massive impairment of goodwill (tide goes out, see who's swimming naked)

2009: 71.6, 13.6

2010: 57.7, 28.2 what's the story with CAI here?

The big story here is the long term intermodal growth that I've clearly seen watching World Cargo News headlines.

Ok, so what happened with TAL, first. Why were earnings falling in 2006-2008 while revenues were climbing so fast? Equipment trading expenses seems like the answer. Admin expenses went up a lot, but about what I'd expect. If it wasn't for the climb in net gain on sale of leasing equipment, it would've been worse. Also there's a big loss on interest rate swap, but that shouldn't have stood out if it was just a hedge (that't the whole point with hedging).

CONCLUSION

It's possible that TAL is worth something like $50 a share, given my expectations of long-term global growth and assuming TAL isn't doing anything stupid. For CAI, maybe it would be $35, that's without looking at more details.

Needs more work.

UPDATE July 8, 2011: World Cargo News has an article about the boom for container lessors.

Textainer Group Holdings, the world’s largest container lessor by fleet size, reported total revenue for the first quarter ended March 31, 2011 of US$91.2M, an increase of US$21.6M, or 31%, over the 1Q 2010 figure.

I should scan through Textainer Group's financial statements (sec), a Bermuda company.

Also SeaCube Container Leasing Ltd. (sec), they focus heavily on reefers (about half of book value of containers, they're the largest lessor). Their revenues seem to have gotten a lot more clobbered by the downturn.

AeroCentury Corp (ACY)

2011-07-03T16:35:00.001-04:00

"that's a lot of Fokkers, but they're cheap Fokkers"

I've followed ACY for many years. Looking at their latest numbers for Q ending March 31, 2011. 10-Q

Revenues are way, way down. $4.9 million vs $8.8 million prior year Q. Net loss of $2.3 million ($1.48 per share!). Last year they earned $1.20 per diluted share. More planes are off-lease, plus they had to lease stuff out in 2010 at a lower rate. Also uncertainty about collecting some receivables. All this is partly offset by an increase in revenue from planes that are now on-lease vs last year.

Expenses went up by $2.4 million due to planes returned. Most of this is funded by reserves previously collected.

The question is whether this represents some large bad trend. I doubt it, but it could be.

Need to go through the 10-Q. The subsequent events: they forfeited $100K to avoid buying a Dash-8-Q400. They extended a lease of a Dash-8-300 that was going to expire in May (good). They should be gaining $1 million by selling two DHC-6 planes above carrying value (I recall that happens a lot with ACY). A Fokker 50 went to someone in Asia on lease. The credit facility was amended to change some provisions of a debt coverage ratio "to more accurately reflect the purpose of the covenant." Also changing the max leverage ratio (up? down?). Signed 5 leases with company in Estonia for 5-year leases on 3 Fokker 100 planes returned in 2010.

Sounds like the sky is not falling.

Ok more details: $1.2 million drop in revenue from off-lease planes. $1 million drop due to re-leasing at a lower rate (ominous). $294K increase due to a new lease of an off-leased plane. $239K reduction due to possibly uncollectable RXables.

$2.8 million increase in maintainence expense. Seems like a timing issue. $597K drop in depreciation due to changing estimated residual values (hmmm).

In 2010, two customers, one that leased two Fokker 50 and one that leased three Fokker 100 aircraft, experienced severe financial difficulties, and the five aircraft were returned to the Company. The Fokker 100 lessee was a significant customer based on 2010 lease revenue. The Company retained the entire $12,752,500 of non-refundable maintenance reserves from both lessees that were previously recorded as maintenance reserves revenue. The Company has incurred and will continue to incur significant maintenance costs in order to prepare the five aircraft for lease to new customers. Approximately $4,173,000 and $3,900,000 of such costs was incurred during the year ended December 31, 2010 and the first quarter of 2011, respectively.

Tough times for small regional airlines?

These two customers caused about a million dollar writeoff of RXables.

In 2010, they replaced the old $80 million credit facility with a $90 million one. None was borrowed or repaid in this quarter. $63 million due. Secured by all assets (planes and engines). Interest rate went up.

Here are the planes currently off-lease:
3 Fokker 50s (lease expiration in 2010, one will be re-leased for 4 years)
3 Fokker 100s (returned in 2010, mentioned above, all these should get re-leased in Q2 to an Estonian airlines)
1 Dash-8-Q400 (purchased in Dec 2010, which is good, this is getting leased out to an African carrier for 4 years in Q2)
1 Saab 340-B (returned at lease expiration in March, nothing going on with it yet)

So 5 of these 8 have new leases signed. That's a good sign.

Largest Customers:
21% in Antigua
16% in Germany
15% in Norway

Asset concentration:
7 Fokker 100 regional jets (30% of book)
8 Dash-8-300 (24% of book)
14 Fokker 50 (that's a lot of Fokkers, but they're cheap Fokkers at only 19% of total book value)

Warrants for 81K shares. Seems like small potatoes.

The management structure is very weird, going through JMC. I checked this out in more detail back around 2002.

Interest rate risk seems real and could be trouble in the future. Also currency fluctuations could kill customers.

OUTLOOK:
2011 looks bad due to the lingering downturn. Lower on-lease percentages, longer lead times, lower rental prices. Also possible lease defaults due to airline failures.

The high maintenance expense will continue in 2011, another $1.8 million in Q2,Q3. Could end up exceeding the retained reserves.

Three leases set to expire in Q3.
Four leases set to expire in Q4.
Three customers leasing 5 of these 7 assets previously extended the lease. It's likely these will get extended again.

So far, it doesn't look like there's a covenant risk, but they admit the cushion is getting eaten up. Customer financial conditions seem to be weakening.

The Company has seen indications of a weakening in both the financial condition and operating results of the majority of its customers.

CONCLUSION

If the sh*t hits the propeller, things could get very ugly for ACY. This is definitely worth watching in the event of some global financial meltdown. The stock could get irrationally cheap.

I'm glad to see that they've been buying regional jets. My concern around 2002 was that they could get in trouble if regional jets seriously replaced turboprops worldwide.

Unrelated Note: I went overboard a while back and bought a MacBook Air (13" screen) for doing this investment work. I spent some time evaluating the alternatives and figured that the cost was "down in the noise" compared to glorious investment mistakes that can easily burn up ten times as much. So I might as well have the computer I want. Less than three pounds and still has a 1440x900 screen resolution. So far it's working out very well. Oops, it's starting to rain....

QTCQX stocks

2011-07-03T14:13:00.002-04:00

Scanning through the QTCQX stocks in the pink sheets (aka otcmarkets). Forget the mining companies.

Aldila, Inc
Golf club shafts. Losing money.

China Education Resources CHNUF
This is the same company I was following on this blog for a long time (CEDA).
Q1 2011 Results
Weak balance sheet.
Earned about a penny a share.
Cash flow statement was horrible.

Ok, let's go back to the annual report.
Auditors are Chang Lee. Who? Running through the google list, it's not Chang Lee's Tae Kwon Do of Mesquite, TX. Not the Chang W. Lee of the NYT. Not the Chang Lee from Doctor Who. Not Ron Chang Lee. Oh, here they are, all three of them.

Doubts about the company as a going concern. Well, that about wraps it up.... but let me just take a peek:

Balance sheet is horrifying. Income statement... how do you spell hemorrhage?

Equity statement shows lots of share printing for acquisitions etc.

Operations actually generated cash flow. Why did they make a gigantic advance to related parties???

"NEXT!!!!"

I think I'll skip China Health Labs & Diagnostics Ltd.

Competitive Technologies
They help commercialize technologies coming from universities and other sources. That's certainly a better business than actually trying to guess which ones will succeed. Sort of like selling restaurant equipment instead of starting a restaurant.

10-Q March 2011. "Unlocking the potential of innovation" (I'd rather it be "Picking the pockets of mousetrap builders")

Holy cow, where are your assets? only 10% of them are remaining... and total current liabilities are bigger than total assets. Tiny sliver of equity.

Wow, revenues have gone way up. 50% gross margins. Actual net income! although not much.

Cash flow is terrible: receivables are climbing.

They have a slight customer concentration: 94% of revenues are from Calmare(R) pain therapy.

"NEXT!!!"

I've got to toss in a note about Pandora. I rely on them for what was once called "FM radio" (and later satellite radio). I signed up for the $3 per month premium service to get rid of advertisements. For investing work, I find the "Squirrel Nut Zippers" station is perfect. It's like going back in time to 1911 when children in the US worked in factories and sent text messages on what must have been very primitive mobile phones. Hehe.

AAON Inc (AAON)

2011-07-02T17:13:00.007-04:00

AAON (sec)

I owned stock in this company back around 2000 to 2002, and revisited back in 2006. Very solid air conditioner company. If I recall, Wal*Mart used them because they were very cost effective over their lifetime, although the initial price was fairly high.

Looking at the stock chart, this was definitely a good investment at that time. 4-bagger plus when the market went nowhere. Back in 2006, I said that I had correctly sold them at full value in 2002.

If these guys get slammed by a downturn with skyrocketing commodity prices, it might be worth looking at again.

[rubbing hands together] And here we are!

The problem is that they seem like they're selling at full price right now. Perhaps that will change.

Looking at the 10-K.

16.5 million shares. Two companies: AAON, Inc (Oklahoma!) and AAON Coil Products, Inc (Texas).

Same businesss that I remember: rooftop air conditioners, chillers, heat recovery units, condensing units, etc. Almost all domestic US. Half the business is replacement units.

Business is cyclical, lags housing starts by about 6-18 months. 14% estimated rooftop share. 1% coil market share. No more major customers (aka Wal*Mart), which is good. No major vendors, also good.

They negotiate terms for raw materials and purchased components 6months to 1 year ahead. Small sales staff. They focus on higher quality and have higher initial cost. I'm guessing that with high or unpredictable energy costs, this is now an easier selling point.

March 2011 Backlog is somewhat higher than last year.

Competitors: Lennox International, Ingersoll Rand, Johnson Controls, United Technologies. All of them are bigger than AAON.

No unions.

Business is down now due to the down economy.

Semi-annual varying dividends since 2006. Stock buyback in 2010 (up to 5%).

Revenues, diluted earnings per share
2006: $231 million, $0.90
2007: $262 million, $1.22
2008: $279 million, $1.60
2009: $245 million, $1.60
2010: $244 million, $1.30

Current stock price is $22.17

Stock count steadily dropped during that time from 19 million to 17 million.

Wow, total debt during this time started at near-zero, climbed to $3 million in 2008 and then declined back to zero. Good show.

Commodity prices are all over the map. Steel dropped 34%, aluminum up 155%, copper up 210% (this is particular tough for them) from 2008 to end of 2010. They bought a derivative to hedge against copper in 2009, settled Dec 2010.

Gross margin, operating margin, net margin
2008: 24%, 15.5%, 10.2%
2009: 27%, 17.8%, 11.3%
2010: 22%, 13.4%, 9.0% (not too shabby, given the situation)

Grant Thornton auditors (sounds familiar), non-qualified opinion.

Good balance sheet, but low on cash. PP&E half depreciated. Not much on the liabilities side. $33 million inventories out of $160 million total assets (depreciated).

They use the revolver a lot. Bank of Oklahoma, $15.2 million LIBOR + 2.5% (4.0% end of 2010). Expect to renew July 2011.

Stock options seems reasonable. Less than 1/2 million total outstanding. Assume 17 million totally diluted shares. Re-invested cash tends to buy down the share count, but let's not double-count that.

Cash flow looks good, but there's a fairly large capex in 2010.

Provisioning looks ok.

Looking at Q1:
Share count down slightly.
AR and inventory up a bit.
PP&E up $7 million, mostly machinery
Pulled $7 million out of the revolver

Earned 22 cents per share vs 30 cents (business is seasonal)

Gross margins down to 19.4% from 26.4% due to snowstorm (see below) and subsequent inability to heat the building. Also rising raw material costs "that we were unable to pass on to our customers" and increase in mfg supplies related to increased sales(?).
Operating margins down to 10.1% from 16.6% (included additional trade show expense)
Net margin down to 6.1% from 10.45

Cash flow sucked vs last year. Inventory increase (all raw materials) and liabilities. Big capex $10 million.

Still expect to renew the revolver.

Expect to spend a total of around $30 million on Tulsa expansion. Shouldn't require any debt.
Big snowstorm that they said wasn't a big deal in the 10-K (subsequent events) turned out to be a bit more. Lost production for 8.5 days.

Released new production, set up new mfg lines in Tulsa (building addition).

Revenues up 22% due to "the favorable reception to our new products."

CONCLUSION

I viewed this as a good business each time I looked at it, and this time is no different. If things get crazy and the stock gets clobbered because of it, I would expect to jump in and buy some. I think the current price is about right, maybe even a bit low.

I figure it's worth around $25.

(NOTE: I also was looking at GWR back in 2006)

Chuck E Cheese (CEC)

2011-06-26T14:21:00.010-04:00

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)

2011-06-26T11:40:00.001-04:00

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

2011-06-26T10:37:00.000-04:00

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.

Re-evaluating CPI Aerostructures (CVU)

2011-06-25T13:59:00.001-04:00

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

and

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.

END OF CONF CALL

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.

END OF 10-Q

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.

strategy

2011-06-22T21:30:00.000-04:00

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)

2011-06-22T20:59:00.006-04:00

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:

Delinquencies

Contracts

Gross Balance
Outstanding

30 – 59 days

60 – 89 days

90 + days

Total

March 31, 2011

368,099,418

6,106,211

1,468,079

549,518

8,123,808

1.66

0.40

0.15

2.21

vs Q3 which was

Delinquencies

Contracts

Gross Balance
Outstanding

30 – 59 days

60 – 89 days

90 + days

Total

December 31, 2010

353,963,564

10,065,353

2,807,904

935,688

13,808,945

2.84

0.79

0.26

3.89

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.

THE END

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

uranium opinion

2011-06-21T21:57:00.000-04:00

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)

2011-06-21T21:46:00.000-04:00

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.

NOTES

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.

Berkshire Hathaway

2011-06-20T20:43:00.003-04:00

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
Earnings:
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)

2011-06-20T19:11:00.001-04:00

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.

FINANCIAL STATEMENTS

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).

Revenues:
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)

NICK 10-K

2011-06-19T15:59:00.000-04:00

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)

status

2011-06-17T20:28:00.000-04:00

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)

2011-06-17T20:08:00.001-04:00

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

10-K

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)

NICK!

2011-01-11T19:24:00.000-05:00

Someone made an unsolicited, non-binding indication of interest to buy NICK. So they retained Hyde Park Capital Advisors, LLC to figure out their options. Sell all? sell part? buy someone? etc. etc. [are these other options just blowing smoke?]

Our investment banking firm typically works with companies on sellside and buyside engagements in transactions that range in size from $10 million to $500 million or more. Our private placements range in size from a minimum of $10 million to over $100 million.

Here's a list of their recent transactions

So NICK stock went up 18% today in response to the news. Closed at $11.93. I still think they're worth at least $18, probably more. I'd happily dump it at $18. I probably wouldn't be all that happy if they sold the business for less than $15.

inflation

2011-01-06T07:15:00.000-05:00

CPI jumps are not inflation, they are a reaction to inflation.

I wanted to capture a link to this so I wouldn't forget it. I've been arguing for a long time that essentially all the world's currencies are being inflated.

The Year 2010

2010-12-30T15:42:00.003-05:00

There's slightly more than 1 trading day before the end of 2010. It was a very memorable year: the best of years, the worst of years. A lot of good things happened and a lot of bad things happened.

It seems like the only thing that hasn't changed dramatically are the stocks that I've been holding onto. But their prices have changed dramatically.

NICK: from $7 to $10
CVU: from $6 to $14 (it's not all that far from full value, from what I can tell)
CCJ: from $32 to $20 to $40
Strathmore: from 65 cents to $1.20
Fission Energy: from 20 cents to 80 cents
Berkshire Hathaway: from $66 to $80
and there's the latest firecracker, CFRI: from 10 cents to 60 cents
It was only half that price around Thanksgiving.

Unfortunately, I had sold a lot of CFRI when it looked like they might not survive (hell, it's probably still a crap shoot). Luckily I had trouble even finding buyers, so I was stuck with quite a bit. I sold some of that today.

The uranium stocks are difficult to gauge in terms of value. The spot price of uranium is finally climbing back again. A lot of factors point to a much higher value: the overprinting of just about all paper money, the acceleration of nuclear reactor building (esp in China), and the painfully slow unfolding of the demand/supply situation. I think Fission in under everyone's radar. I bought more a while back, but I know I'll regret not buying enough. I might bail out of Cameco at $45 and put maybe 1/4 of that into somewhere else in uranium, like Fission.

Something's definitely going on with CFRI.

This makes two years in a row of outrageously high returns. But even then, I still haven't gotten back up to the high water mark of early 2007. 2008 was that bad.

I have a vague sense of dread for 2011 and I'm thinking about increasing my cash percentage by some. But even cash isn't safe. Nowhere to run. Nowhere to hide.

UPDATE Dec 31, 2010:
Let's just take a quick comparison look at Hathor Exploration vs Fission Energy.
Hathor market cap: about US$350 million
Fission market cap: about US$93 million
I haven't done a detailed comparison of Hathor's roughrider uranium project vs Fission's Waterbury Lake project, but they're both massive (extremely high concentrations at reasonably shallow depth). Hathor's is probably more valuable and further along. So the two stock prices might be rational between each other. I worry about the Cigar Lake possibilities.

Weyerhaeser Company (WY)

2010-12-28T12:05:00.000-05:00

Yep, the tree harvesting company. They manage about 6.6 million acres of private commercial forest and have long-term licenses on 15.2 million acres of forest.

Company slideshow
They're adopting a RIET structure for 2010 with what looks like all the "other" stuff in the trust.
Expect to pay 60 cents in dividends in 2011, target of 75% of Funds Available for Distribution, but it may turn out to be 100%, given the outlook of things now.

Stock price is $18.71.

Latest 10-K

Obviously, things were a lot better during the housing boom. The big question for this stock is what does the long-term wood products demand look like? There are all sorts of other issues, but I think it really boils down to macro-economics. We're not going to close down civilization. We're not going to find a fabulous cheap substitute for the massive amount of lumber needed (if you consider the amounts involved and where the material would need to come from... mining).

The company had big losses in 2007, 2008, and 2009. For the first three quarters of 2010, they've been making some money (mostly in Q3), but it's less than it appears due to a tax benefit.

Back of the envelope calculations show that the stock is selling for a reasonable price based on what's going on right now. That would seem pessimistic, but I'm only skimming the surface right now.

This stock is worth a closer look, but seeing how everyone is looking for a good commodity investment, it seems unlikely to be cheap.

Community Bank Shares of Indiana (CBIN)

2010-12-26T13:50:00.001-05:00

Your Community Bank and Scott County State Bank

Louisville, KY standard metro statistical area.

Stock is selling for $9.24. Yahoo claims they're earning $1.68.

The Company's current business strategy is to operate well-capitalized, profitable and independent community banks that have a significant presence in their primary market areas. The Company’s growth strategy is focused on expansion through organic growth within its market areas.

Let's check the SEC statements:

Quarter ending Sept 30, 2010
3.3 million shares on Nov 12, 2010.
$6.2 million net interest income after provision for losses
$1.6 million non-interest income
$5.6 million non-interest expenses (mostly service charges on deposit accounts, $2.7 million from insufficient funds type charges). This will decrease with new regulations.
net income of $1.4 million or 42 cent diluted for the Q. $1.35 for 9 months.

Let's go to the 10-K
3.3 million shares on Mar 22, 2010

Long term performance deteriorated starting in 2008 or even 2007. They took a big loss in 2009 due to a giant provision for loan losses, and some sort of massive non-interest expense. Shareholder equity fell back to 2005 levels and they lost nearly $7 a share!

The net loss available to common shareholders in 2009 was primarily due to a goodwill and other intangible asset impairment charge of $16.2 million and provision for loan losses of $15.9 million.

Net interest margins historically were just above 3% (nothing like NICK!), return on assets have been about half a percent, return on equity mid-to-high single digits. Efficiency ratio was historically in the mid 70s. The capitalization ratios on the 10-K look good, but FDIC will show more.

Sold off some real estate loans to increase liquidity. But also foreclosures and lower loan demand. Big chargeoffs in construction loans (no surprise there). Lower mortgage servicing rights.

	As of December 31,
(Dollars in thousands)	2009		2008		2007		2006		2005

Real estate:
Residential	$	134,969	$	177,230	$	186,831	$	187,080	$	111,969
Commercial		193,577		206,973		191,774		179,405		186,644
Construction		51,592		73,936		87,364		83,944		61,031
Commercial		94,168		95,365		88,353		80,132		92,640
Home equity		54,434		60,539		60,380		62,720		58,060
Consumer		13,676		17,296		20,024		19,549		7,295
Loans secured by deposit accounts		1,003		1,242		1,322		756		729
Total loans	$	543,419	$	632,581	$	636,048	$	613,586	$	518,368

I hate to dump a lot of tables in here, but this one seems fairly important:

(Dollars in thousands)	2009			2008			2007			2006			2005
Allowance for loan losses at beginning of year	$	9,478		$	6,316		$	5,654		$	5,920		$	4,523
Acquired allowance of SCSB, July 1,2006		-			-			-			754			-
Charge-offs:
Residential real estate		(474	)		(239	)		(173	)		(35	)		(83	)
Commercial real estate		(411	)		(720	)		(44	)		(193	)		-
Construction		(5,742	)		(780	)		-			(600	)		-
Commercial business		(2,122	)		(1,080	)		(207	)		(138	)		(194	)
Home equity		(975	)		(491	)		(187	)		(26	)		(198	)
Consumer		(661	)		(503	)		(190	)		(362	)		(64	)
Total		(10,385	)		(3,813	)		(801	)		(1,354	)		(539	)
Recoveries:
Residential real estate		36			1			14			-			-
Commercial real estate		14			4			9			9			7
Construction		-			2			-			-			-
Commercial business		52			7			92			26			34
Home equity		4			4			2			-			3
Consumer		112			100			50			37			142
Total		218			118			167			72			186
Net loan charge-offs		(10,167	)		(3,695	)		(634	)		(1,282	)		(353	)
Provision for loan losses		15,925			6,857			1,296			262			1,750
Allowance for loan losses at end of year	$	15,236		$	9,478		$	6,316		$	5,654		$	5,920

Ok, the story here is that in 2005, 2006, and 2007, things were humming right along. They picked up some allowance in 2006 with an acquisition. Looks like they saw bad news on the horizon in 2007 and provisioned accordingly. They got clobbered in 2008 and had to set aside five times as much. 2009 was far worse and they set aside twice as much as 2008. Now the allowance is three times as high going into 2010.

Let's go back to the Sept 2010 quarter.

(Note: they've got about $1 million in state and municipal bonds with maturities of more than a year. Total is $4 million at fair value.)

Ok, so the last 9 months, they tossed in another $2.9 million and ended with an allowance of $12.7 million. Ok, so things look slightly better now.

Money market accounts are up, savings are up slightly, CDs are down. Total deposits are up this year.

Impaired loans are down from the end of 2009.

GOODWILL IMPAIRMENT

Note 5 in the 10-K explains the Goodwill impairment. June 2009, the stock traded below book value triggering an evaluation. They brought in a 3rd party to assist. The 10-K explains the process and they determined that the value of goodwill was $15.3 million below the carrying value.

One of Berkshire Hathaway's annual report discussions by Warren Buffett from long ago had a great discussion about goodwill which more or less turned into the current accounting rules. In the old days, companies would depreciate their goodwill, which often made no sense.

FDIC CHECK

"Your Community Bank" #28915 is about 5 times bigger than "Scott County State Bank" #10485.

Start out looking at the holding company #2356073. Let's compare CBIN with 13 banks with $500 million to $1 billion assets in Kentucky, same time period of Sept 2010.

CBIN has a higher cash to assets ratio.
More commercial real estate loans
Less farmland (not surprising)
More commercial and industrial loans
Slightly more home equity loans
Way less adjustable rate residential loans

Residential loans have longer duration
Other loans have longer duration

Much less Goodwill (not surprising after the writedown)
Higher net income vs assets
Higher total bank equity capital vs assets

Much higher unused commitments: revovers, commercial real estate, other.
No derivatives

0.95% of assets are 30-89 days overdue vs 0.61% for other banks, mostly due to construction loans (which the bank mentioned)

No assets are 90+ days overdue.
1.84% assets are in non-accrual (1.02% is construction) vs 2.15% for the other banks (1.05% is construction)

3.49% net interest income vs 3.28% for the other banks
0.47% provision vs 0.61%
0.75% non-interest income vs 0.91%
2.66% non-interest expense vs 2.96%
1.10% pre-tax net operating income vs 0.62%
0.98% net income vs 0.76%
0.89% net charge-offs vs 0.46%

4.97% yield on earning assets vs 5.18%
1.06% cost of funding earning assets vs 1.57%
3.91% net interest margin vs 3.61%
0.84% non-interest income vs 1.00%
2.98% non-interest expense vs 3.25%
0.99% ROA vs 0.76%

1.78% earnings coverage of net loan charge-offs vs 2.68%
62% efficiency vs 70%
$6.6 million in assets per employee vs $3.8

2.46% loss allowance /loans vs 1.81%
83% loss allowance /noncurrent loans vs 53%

9.98% equity capital to assets vs 9.45%
9.51% core capital ratio vs 8.41%
13.62% tier 1 risk-based capital ratio vs 12.33%
14.88% total risk-based capital ratio vs 13.59%

Now let me take a quick look at Scott County State Bank to see if there's any garbage hidden in these numbers.

Yep, 1.98% of assets are 30-89 days past due.
Only .68% of assets in non-accrual status.
Performance ratios look better.

I've been considering the macroeconomic forces at work in the world and their impact on CBIN. Obviously the housing market problems are the most obvious. I've been following one local housing market for about 2 years on both Zillow and MLS and what I've seen matches Zillow's overall price indicator. I recall that Louisville has traditionally been one of the lowest priced metro housing markets in the US.

Looking at Zillow, it looks like the Louisville residential housing market has been remarkably stable since 2006. Looking at the recent entries in the market, a large number of them look distressed. $19K, $24K, $15K, $6K. There's a rental-property house for sale at $6.4K that sold in 2006 for $10K. Jumping out to the suburbs, prices in Sellersburg have been stable.

OTHER STUFF

Looking for news articles...
fraud scheme uncovered where Eastern Livestock Company cycled fake checks through several banks and was based out of Your Community Bank. A different bank identified the fraud. Fifth Third Bank is seeking a judgement of $32.5 million plus $13 million against presumably Eastern Livestock.

Oh you bastards! Seeking Alpha briefly covered CBIN just about a week ago! And I mean that with the utmost respect.

Director Norman E Pfau Jr acquired 91,820 shares of this bank holding company, paying $8.52 per share for a total amount of $782,306.

This was an indirect purchase through Cake Holdings. Mr Pfau owns 80% of Cake Holdings. This Indiana based bank holding company for Your Community Bank and The Scott County State Bank reported earnings of $1.4 million or 42 cents in the third quarter, up 100% from Q3 2009. With a P/E of 5 and a Price/Book ratio of 0.6, this small bank holding company looks very attractively valued. The troubled asset ratio (TAR) for Scott County State Bank is 19.9 while the (TAR) for Your Community Bank is 24.40.

River Ridge Development Authority amended an $8.5 million bond resolution to defer principal payments (oh jeez!), and part of that is through STIMULUS funding This allowed them to secure a loan from Your Community Bank, including a 45% rebate on the interest rate

This site claims that Your Community Bank and Scott County State Bank are "weak". It was posted back in August 2010.

Scott County State Bank Scottsburg IN $133,930 D
Your Community Bank New Albany IN $691,320 D+

I picked a bank that the FDIC closed down about a week ago (First Southern Bank, Batesville, AR #58052). Performance ratios look outstanding. Almost no accounts were past due.

Well, that pretty much kills CBIN as an investment.

UPDATE Dec 28, 2010:

An email raises the point that the First Southern Bank that I looked at may have been an odd case. It seems they bought $22 million in fake bonds which wiped out their equity. I'll look at some other failed banks to try to get a sense of whether this is a severe outlier or not.

Harbin Electric (HRBN)

2010-12-25T10:48:00.001-05:00

Wow, it's been a long time since I looked at this one. Currently trading at $17.62.

Latest 10-Q
Nevada Corporation, but operating in Harbin (ha1 er3 bin1) 哈尔滨, China.
Period ending Sept 30, 2010
31.2 million shares on Nov 5, 2010

Current assets are mostly AR, inventories, and cash.
Large goodwill and intangibles. Advance on non-current assets.

Solid balance sheet

31% gross margin
20% operating margin
16% net margin

Some gains from currency translation.
Earned 57 cents per share diluted for the q, share count has been increasing, issued massive amount of stock at $16 last year, pretty much doubled the equity.

Operating cash flow looks pretty good (last year looks a bit odd)

Big capex

Acquired Xi'an Tech Full Simo Motor Co (est 1955, state-owned) in Oct 2009. They've got a bunch of subsidiaries in China, 1.5 in 上海.

STOP ON PAGE 7

Let's back up to the 10-K:

Calendar 2009

	Year ended December 31,
	2009(a)(b)(c)			2008(b)			2007(d)			2006(e)			2005
Revenue	$	223,234,394		$	120,820,302		$	65,402,864		$	40,415,777		$	23,643,664
Cost of revenue		(146,622,220	)		(73,343,521	)		(32,967,887	)		(20,754,282	)		(12,083,957	)

Gross profit		76,612,174			47,476,781			32,434,977			19,661,495			11,559,707
Selling, R&D general and administrative expenses		(20,764,873	)		(13,083,604	)		(8,723,685	)		(5,667,260	)		(1,595,443	)

Income (loss) from operations		55,847,301			34,393,177			23,711,292			13,994,235			9,964,264

Net Income attributable to controlling interest	$	19,646,781		$	25,378,699		$	16,902,684		$	18,438,512		$	10,000,158

Basic earnings per share attributable to controlling interest	$	0.77		$	1.25		$	0.99		$	1.11		$	0.67

Diluted earnings per share attributable to controlling interest	$	0.77		$	1.19		$	0.91		$	1.01		$	0.66

Dividends declared per share		—			—			—			—			—

Weighted average number of shares outstanding

Basic		25,568,936			20,235,877			17,082,300			16,600,451			14,934,667

Diluted		25,672,420			21,323,660			18,634,739			18,306,569			15,143,891

What's the story on the SG&A? Also the capital structure.

The big drop in net income is due to 1) a big interest expense, 2) loss on a currency hedge, 3) change in fair value of warrant.

They started paying taxes in 2008.

Issued a bunch of stock in 2008 for $14.13 per share and again in 2009 for $16. Share count has been fairly stable since.

A lot of this is tricky due to a minority interest in what looks like one of their subsidiaries.

Cash flow shows a gigantic "payment to original shareholders for acquisition" and the huge cash inflow from selling stock.

The stock is selling for over $17, so I don't see any reason to continue with this.

Conforce (CFRI) lands a customer

2010-12-22T08:40:00.000-05:00

World Cargo News reports that...

CMA CGM looks set to become the first volume customer for Toronto-based Conforce International’s Eko-Flor cs-4 composite container flooring material.

The French operator is conducting a six month trial of a number of 40ft high cube containers fitted with the Eko-Flor in association with Swedish furniture company IKEA and, subject to a successful outcome, anticipates building up to 1,000 units next year....

This isn't a big volume, but it's a start for Conforce International (CFRI). So far, the company itself hasn't announced anything on the wire.

New Investments?

2010-12-17T15:26:00.000-05:00

For the first time in a very long time, it looks like I'm going to need to look for new investments. CVU, NICK, CCJ, these stocks are starting to get in the range of full value, although I may hold onto CCJ as a way of staying somewhat disconnected from the dollar. I'm thinking of hiring some more Cantonese laborers. That means defining a search process and all that stuff.

Foreign Exchange

2010-09-17T21:42:00.000-04:00

I looked through the forex fraud blog a bit and it seems interesting. Warren Buffett did a big currency bet a while back. Lots of people are worried about the future of the dollar. It's difficult to know whether dollar inflation or deflation will win over: maybe some combination of both. I haven't made any direct attempts to diversify outside of the dollar. I noticed gold hit a new high today, which is worrisome to me for all those people piling into gold. It's humorous to watch the TV commercial about gold, "the investment that goes up! not down!" Yeah, right. In the late 1970s gold went way up... and then went way down.

Anyway, that seems like an interesting foreign exchange website.

Even in the midst of Apocalypse, things will get better

2010-08-27T18:28:00.005-04:00

An outstanding analysis of hyperinflaction from on the ground

I’m not repeating this insight as an empty comfort to my readers—I’m saying it as a trading strategy. When things are at their crazy worst, when everyone believes the Apocalypse is well nigh here, that’s when things are about to turn for the better.

We're not there yet, not even close, but we might be before long.

The Economy

2010-08-19T20:50:00.000-04:00

Back in the 1970s, the economy was stagnant. The velocity of money slowed. From what I've read, the government had this big idea that inflation would cause people to spend their money, for fear of having it inflated away. I also heard that inflation was associated with economic boom times. So if you cause a lot of inflation, the economy should start growing again, no?

The result was that people had to invent a new word for the situation because apparently no one had intentionally tried such a dumb idea before.

There is a flaw in the human mind which insists that the future will look like the past, despite hundreds of years of evidence showing that to be false. Even worse is the view that the future will simply be an extension of the near past.

In the 1990s, the Fed was pouring money into the economy and observing very low inflation. The problem was that they were measuring it wrong. Stocks were inflating. When the stock market bubble burst, they continued to pump money into the economy and continued to allow the government to assume the risks while private investors reaped the profits from bundling up mortgages and selling them, backed implicitly by the US Government. This allowed massive amounts of money to be loaned out at low interest rates to people with bad credit. Housing prices went up, then the bubble burst. I remember people telling me years ago that housing prices never go down by much.

Ordinary people are getting three-point-something percent 15 year loans backed by real estate whose value is still not entirely clear. There's something going on. The cost of money is far, far too low right now and it's holding up the prices of things that are purchased with money, especially borrowed money, way too much. It's propping up the stock market so that the risk premium is way too low. I worry that it's propping up the housing market, as well.

Now, the government continues to pump money into the economy in the form of "stimulus" and big government spending. Inflation still appears to be low. But there's some sort of bubble inflating somewhere. It's just a matter of time before we find out where. Probably somewhere within the government or its politically connected cronies. Glenn Reynolds argues that there's a higher education bubble.

I don't recall any time, and I've never read about any time in US history, when the government and associated politically connected people were so far disconnected from the views of ordinary citizens as they are today. People are holding up 1994 as the measure of what will happen in November. They'll have to invent a new measure when it's all done.

Fortunately in the US, we can have a hostile takeover of the government without the horrors of war and revolution.

I have no idea where the stock market will go, but it may depend on what happens in November, or what looks like it will happen.

CVU Q2 results

2010-08-10T09:22:00.000-04:00

CPI Aerostructures just announced Q2 results. Comparing to Q1.

Revenue continues to climb to record levels. Up to $12.5 million from $11.0 million. Gross margins continue climbing to 26.7% from 25%. Net income increased to $1.2 million (18 cents) from $860K (14 cents). GAAP diluted share count increased 8.7% since last year.

Government prime work is down to only 24% of revenue.

They expect gross margins to be 24% to 26% for the year.

Mr. Fred noted, “Based on results for the first half of the year and expectations for a strong second half, we are confident that we will reach our 2010 guidance which calls for revenue to be in the range of $48 million to $51 million, with resulting net income in the range of $4.3 million to $4.8 million.”

Total contract awards for 1st half were $31.1 million, up from only $4.9 million in the 1st half of last year.

They get another $1.5 million on the extremely long awaited C-5 TOP contract.

Mr. Fred added, “We are again reaffirming our long-term guidance which is based on our expectation that our three major long-term production programs (A-10, E-2D and G650) will be in full scale production and producing consistent significant revenue during 2011. For 2011 we expect that revenue will be in the range of $78 million to $81 million, with resulting net income in the range of $8.9 million to $9.5 million. Using 2008 as the baseline, we expect a three-year compound annual growth rate for revenue in the range of 30% to 35%, with a resulting compound annual growth rate for net income in the range of 50% to 60%.”

They sold 500K shares to raise $3.5 million ($7 per share).

I'll look at the balance sheet later....

NICK Q1 results

2010-07-29T18:45:00.000-04:00

Nicholas Financial announced their Q4 results today.

I'll be comparing it to the Q4 results of the previous post.

Weighted diluted shares is largely unchanged.

According to Peter L. Vosotas, Chairman and CEO, "We are pleased to report record 1st quarter revenue and earnings. Our results were primarily impacted by an increase in revenues, a reduction in the net charge-off rate and an increase in the cost of borrowed funds. During the first quarter we have added four branch offices to our 12 state branch network, bringing the total to 54 locations. The Company continues to evaluate additional markets for future branch locations and subject to market conditions, could open additional branch locations during the year. The Company remains open to acquisitions should an opportunity present itself."

Revenue is up slightly. Expenses are up a bit. Provision for losses continues to drop down to $1.6 million from $1.7 million. Interest expense is essentially the same.

Net income is $3.6 million, up from $3.3 million. It's now up to 30 cents a share, up from 28 cents (25 cents in Q3).

Ave finance receivables is up slightly. Gross portfolio yield is up slightly. Ave cost of borrowed funds is up slightly. Provision is down to 2.68% of net rxables from 3.01%.

Net portfolio yield: 19.82%! up from 19.15%. Expenses as a % of net rxables increased from 10.12% to 10.26%. Pre-tax yield: 9.43%, up from 8.89%.

Writeoffs and chargeoffs are down.

For contract purchases (direct loans are too minor to have much impact)
30-59 days late: UP TO $9.4 million FROM $7.6 million
60-89 days late: $2.7 million, up from $1.8 million
90 days late: 755K, down from 779K.

They're purchasing loans with an average discount of 8.91%, down from 9.22%. I would have expected to see this going up if the competition is getting knocked out.

CONCLUSION

It's hard to say, but it looks like the customer base is deteriorating again, but slightly. Of course it first shows up in the 30-59 days late column, with maybe an uptick in the 60-89 days column.

Looks like a double-dip recession? NICK looks very solid and they should be fine if there's a continued downturn.

NICK Q4 results

2010-05-04T18:58:00.010-04:00

Nicholas Financial announced their Q4 results today.

I'd like to compare it to the Q3 results, since their business isn't very seasonal.

Weighted average shares with assumed dilution: 11.8 million shares (11.7 in Q3).
The actual shares in Q3 was 11.7 on Jan 31, 2010.

I'm glad to see them report earnings before accounting for the wild interest rate swap swings, even when it makes earnings look worse (which was the case this time).

According to Peter L. Vosotas, Chairman and CEO, “Our positive results for the fourth quarter and year were favorably impacted by a solid increase in revenues and a reduction in the net charge-off percentage of 41% and 26% for the three and twelve months ended March 31, 2010, respectively. We plan to open three to five new branch locations this year and will continue to evaluate additional markets for future branch locations.”

It should be noted that Peter Vosotas has been known to correct false information on the Yahoo investment message board for NICK, as well as offer appropriate opinions on the company. Of course, my favorite was in a discussion about whether the company had a "50% chance bankrupt in 2009", where someone said, "Say it aint so Peter!!", to which he responded It is not so, and the company most certainly didn't go bankrupt. I suppose the original poster just thought NICK got lucky.

The business hasn't gone haywire during the financial crisis due to the careful management that, in my opinion, was evident beforehand.

Total earnings without the interest rate swap change were $3.1 million for the quarter vs $2.9 in the prior quarter. By GAAP it's even higher. It works out to about 26 cents a share without the fair value tailwind.

Operating expenses were $5.9 million (42% of total revenue) vs vs $5.4 million (41% of total revenue) yoy.

They dropped the provision for credit losses down to $1.7 million from $3.0 million qoq and $3.3 million yoy. The actual net finance receivables increased by $5 million.

Weighted average contract interest rate increased slightly to 23.76% from 23.41%. Yeah, these are people with seriously bad credit; see previous posts for how they carefully manage these using very detailed static pools.

Ave cost of borrowed money was 5.62% vs 3.92% qoq (5.03% yoy). Gross portfolio yield was 24.82% vs 25.37% qoq (25.25% yoy). Net portfolio yield was 19.15% vs 18.12% qoq (16.55% yoy).

Provision for credit losses was 3.01% of ave finance receivables vs 5.34% qoq (6.26% yoy). Seems to be dropping, but we'll see in time. Write-off to liquidation 6.66% vs 11.27%! qoq (10.91% yoy). Net charge-off down also about the same amount to 5.23%.

Now the delinquencies. I'll cover the contracts and not the direct loans (which are very small and have better results). I'm only looking at qoq, except where noted.
Gross outstanding balance increased to $321 million from $311 million. With a small net change, I'm only going to cover the delinquencies as a percentage of gross outstanding balance

30-59 days: 2.37% vs 3.68% (3.00% yoy)
60-89 days: 0.55% vs 1.23% (0.92% yoy)
90+ days: .24% vs .59% (0.29% yoy)

They purchased $34 million in new contracts (weighted APR 23.7%) at an ave discount of 9.22% (vs purchasing $26 million at 23.27% and 9.08% discount prior quarter). Average loan slightly smaller, same duration.

CONCLUSION

Oh hell yes, I'll keep holding the stock. It's my largest holding. They seem to be doing very well during a very difficult economic time. I believe that when things eventually recover, they will end up in better shape than before the crisis as they continue slowly expanding. I'd sell it all for $22 a share.

Berkshire loses AAA rating from S&P

2010-02-04T22:02:00.002-05:00

I don't view this as bad news. I view it as an opinion about opportunities for investing excess cash.

“The [Burlington Northern] railroad acquisition will reduce what historically has been extremely strong capital adequacy and liquidity,” S.&P. said. “Risk tolerances appear to have increased.”

So Buffett is willing to take on more risk now.

The universe of investments available to Berkshire are very limited and I'm surprised that they weren't hell-bent on losing their AAA rating a year ago. Maybe things really did look that scary back then.

Status

2010-02-02T22:39:00.003-05:00

Well, it seems Fission Energy dug up some serious uranium. NICK announced reasonably good 3rd quarter results and the stock continues its slow gains. Not only was Strathmore able to sell a major property and raise money, but they got a better counter-offer. And someone is paying high prices for CFRI stock (some of which I unloaded). CVU is hanging in there, but orders haven't been increasing. And then there's Berkshire Hathaway, which I've been buying as new money comes in, although I'm keeping about half of it [the new cash inflows] in cash despite the general concensus of raging inflation at some point in time. It's an odd situation in the global economy.

I'm tempted to bail on everything, but I probably won't because I can't time the market. If I had to make a prediction, I'd say that we'll continue to see stock market gains for a while. But there's going to be a very serious headwind before long. Interest rates are unsustainably low, government borrowing is unsustainably high, and inevitable demographics are going to cause enormous damage to the status quo in the US, Europe, and Japan. It's not entirely clear what to invest in if all hell breaks loose, but I suspect Buffett has a fairly good idea: well established brands with pricing power, companies with solid moats.

注意

Strathmore raises cash

2009-08-24T18:13:00.002-04:00

They're selling the Wyoming Pine Tree-Reno Creek property for $30 million, or over 40 cents per share. That's roughly what the stock has been trading for. This changes their situation fairly dramatically on the other properties like Roca Honda. If the stock doesn't jump on Tuesday, I'd be surprised.

Two stocks I looked at before

2009-08-18T06:52:00.006-04:00

Stumbled into these two stocks while scanning the market...

China Education Alliance (CEU, chart)
It seems they made it to the NYSE. But then again, so did ACLN.
I dumped it all in Oct 2007 at $1.15 for fear of a fraud. It was the right thing to do. CXTI turned out to be a fraud. I'm happy to see they're still going and selling for $4.55.

So CEU announced Q2 results recently.
They're reporting 13 cents diluted vs 7 cents last year. Reporting revenue increases of 82%.

Conference call on their website. Maybe I'll look at it again up close, but there's a lot of stuff closer that's selling cheap.

Table Trac (TBTC) Here's a summary. It was 70 cents when I looked at it back in 2005. It's $1.75 now (they were over $4). They're late with the latest 10-Q. They have net cash, 36% net margins, looks like weak cash flow, very high customer concentration that varies year to year. Made a big loan to a customer. Based on a quick look at the 10-K also, I think I was right about this one.

American River Bankshares

2009-08-17T19:26:00.003-04:00

American River Bankshares (AMRB)
FDIC #24655

summary

FDIC doesn't have Q2 up yet. Mar 31, 2009
比較 all US bank holding companies $500M to $1B
Heavily into commercial real estate (probably bad right now)
All past due looks pretty good
5.57% interest income vs 5.15%
1.01% interest exp vs 1.86%
net int income 4.56% vs 3.29%
slightly higher provision
low non-interest income
0.93% income vs 0.32% (of total assets)
higher chargeoffs
5.05% net interest margin (vs 3.60%)
0.93% ROA (vs 0.32%)
9.08% ROE
50.76% efficiency
Core capital: 8.36% vs 8.96%
Tier 1 captial: 10.55% vs 11.51%
Total risk-based capital: 11.80% vs 12.78%
$558 million ave assets

Set the wayback machine to June 2005
Seems pretty sane vs peer group

10-Q for 6/30/09
5.8 million shares on Aug 12, 2009
Lost 12 cents/sh, kept 14 cent dividend
Gained 10 cents for 6 months.
382K options outstanding ($17.19 strike, 7y)
$81 million commitments
Wow, 5.16% of total loans are non-accruing and/or 90 days late
The amount of non-performing loans jumped from 6.2 million in Dec to $21 million in June. 12 additional loans and leases.
Recoveries have been negligible.
Deposits increased by $12.6 million.
Off balance sheet stuff: credit commitments, letters of credit only. No derivatives. $72 million down from $80 million
+200basis points increase in rates would supposedly cause $323K hit.

I'd guess it's worth $15.

The big things are often...

2009-07-21T19:30:00.002-04:00

...the little things.

As I stated in a comment in the previous entry, I still own the same stocks and I'm still watching them. I still worry about CFRI's survival. They have been quiet for quite a while. Cameco has done well since I bought it, but then so has Strathmore, so at this point, there wasn't much difference in whether I had switched or not (I still own some Strathmore and Fission). NICK is doing well. So is CVU.

Getting back to the title above, I've been pretty clear for a long time that I saw trouble coming, but I had no idea how bad it would be. I bet against Fannie Mae, but three years too soon. In hindsight, we had a stock market bubble that peaked somewhere between 1998 and 2000 depending on what stocks you cared about. Starting in the late 1990s, everyone was amazed at how the Fed was able to dump enormous amounts of dollars into the global system without causing inflation. They could throttle the economy without any negative consequences, no? When the stock market bubble burst, they pumped dollars into the system to soften the blow and we got a housing bubble that slowly started to burst in 2005. Now, to fix that problem, they've been dumping an insane amount of dollars into the system. This won't end well.

Over the decades, I've seen lots of fear mongering over the levels of debt and I never really took them very seriously. The numbers now are bad, even the optimistic numbers. Not only is the US Government needing to borrow a massive amount of money, but it is taking a vast array of actions that have the effect of dampening the economy's future growth, killing it's ability to pay off the borrowing later. The dumb farmer eats his seed corn. The insane farmer also uses salt as fertilizer.

A while back I noticed the ominous sign of China warning the US against fiscal irresponsibility. China is currently our nation's banker. We also have a gigantic Social Security trust fund which, instead of money, has a big pile of IOUs, sort of like the suitcase in the movie Dumb and Dumber for pretty much the same reason. China has been slowly stepping up its rhetoric and their actions. They are not just making noise.

Today we see that they're planning to dump their dollar denominated IOUs and start buying big chunks of the US. They'd be crazy to just sit around and wait for the US to inflate its way out of debt. So I guess they're going to start the ball rolling.

That particular news item, just like the earlier shot across the bow, didn't get a whole lot of attention. The really big things are often like that. People don't realize how big they are until they look back after the fact and convince themselves they knew it was important. Go back and read the New York Times' account of the first Wright Brothers flight at Kitty Hawk. It was a below-the-fold minor story.

In the 1970s, people made up a new word, stagflation, to represent a phenomenon they had never seen before. Today they talk about a return of stagflation. I doubt it. The conditions today are like nothing we've ever seen before. The result will be the same, although I had no idea how it will turn out.

In the meantime, I continue to own the same stocks. I'm taking whatever actions I can to try to prepare for the future, but it's basically nothing fancy, just common sense.

Status Update

2009-01-03T08:11:00.005-05:00

Looking back at 2008, even Warren Buffett said he'd never seen anything like what he was seeing in his entire adult life. I think we're basically looking at a hundred year event right now and I don't think anyone can predict the outcome with any precision. I seem to recall Nassim Nicholas Taleb, author of The Black Swan, saying that this was not a Black Swan event, that it's a normal, infrequent type of occurance. A lot of people have been predicting something like this for many years. After a while, they just blended in with the other perpetual bears. I had expected the subprime garbage to cause a certain amount of limited damage; I mentioned it several times on this blog over the years regarding investing in NICK. But I had absolutely no idea things would get as bad as what appears will happen.

First it was the large bank bailouts, but now it appears lots of big entities are in bad financial condition, including government entities at all levels (local, state, federal), pension plans look horrendously underfunded. Some of that is the flip side of how they looked great when the market was happy. We have the possibility of an anti-business government biting the hand that feeds it (and feeds everyone else) just like in the 1930s. This seems like a longshot, but who knows? I think if stocks go up this year, it will be unlikely, as people will be worried about the government harming their re-growing 401Ks. And I think Obama is good at measuring sentiment rather than crusading for some fixed ideology.

It makes sense to see Buffett bullish on US stocks now, but you'll notice that he was still waiting for the market to get/stay worse before jumping in with both feet with his personal money. There's a lot of stuff cheap out there, but there's also a lot of stuff that's going to fail in this climate. I think the big gainers going forward are going to be the solid companies that have been tossed into the garbage pile. Behind that will be the solid companies that have not been tossed into the garbage pile.

But I think there's a lot of bad stuff that needs to play out in the future. I tend to think we're going to see big parts of the economy look like the Titanic. Things that seemed rock solid are going to sink. But it won't be everything. The US economy and big parts of the global economy are very powerful, productive engines that are flexible (especially in the US as long as we don't regulate ourselves into being like Europe) and better than they've ever been in history. The economy can handle enormous amounts of stupidity and waste and still plow ahead. Regardless of bailouts, the garbage is going to eventually flop.

It's funny that everyone is horrified that consumer spending is dropping when the big fear of the past was that people were overspending and not saving. Consumer spending should drop. That's a good thing.

I've been putting as much cash into the market as I can, but like most other people, I need to keep a significant amount aside due to the uncertainties of things now. It's clear to me that things I've personally done "right" are now extremely beneficial: having almost no debt [and having high credit ratings], keeping a solid cash flow, living a cheap lifestyle, not getting caught up in the real estate frenzy whatsoever, and focusing over the decades on solidly marketable skills. In areas where I've been "out on a limb", I've gotten hit badly: owning some stocks that relied too heavily on things going right in the future instead of cash flow now. A lot of that was chasing after high returns in a time when too many things were overpriced. Once again, Buffett was right.

I've sold most of my Strathmore Minerals and Fission Energy stock and shifted what's left of the money into Cameco. There's no question that Cameco will not have the sorts of gains that Strathmore and Fission might have going forward, so it spells a huge permanent loss. Strathmore needs to raise a lot of money going forward and in this climate it's not clear if they can do it, although Hathor and another junior have been able to raise cash. In hindsight I would have been better off waiting until yesterday to bail, but I can't predict the market in the short term.

My view on uranium in the long term hasn't changed. Everything that David Miller at Strathmore has been saying over the years has been happening: demand continues to grow (for a variety of reasons all over the world), established miners have had constant problems getting uranium out of the ground due to 20+ years of neglect, and the hundreds of uranium companies that sprouted up are falling by the wayside.

I believe that the current economic situation favors the big established players in the uranium industry. [It's not clear to me whether Strathmore can pull itself into that category.]

I've also been slowly selling shares of Conforce International (CFRI). One reason for not posting anything here for a long time is that I wanted to give myself time to slowly unload CFRI and I'll probably keep selling more. At this point, I think their success is a crapshoot. At least they have a source of cash flow.

I've been looking at several companies that I had looked at over the years (but not posting anything here). I seriously considered investing in POSCO when they dropped down below $50, I even considered Berkshire Hathaway when they dropped a lot for a while there (the "A" shares were below $80,000). I consider the price of Berkshire to be a reasonable measure of the sanity of the market. When Berkshire drops a lot, it's a reasonable indicator that the market is not sane. In this climate, Berkshire's value goes up, not down, especially with Buffett in charge.

Given how bad the market performed last year, it wouldn't surprise me to see a big gain this year. It also wouldn't surprise me to see a big drop. Who knows?

Conforce International (CFRI)

2008-09-19T19:31:00.002-04:00

Investor shows up at the front door of Conforce. Warren Buffett did this at GEICO when he was a kid.

UPDATE Jan 29, 2008:
It's great to see that Conforce finally got an actual order for $1 million, possibly extending to $4 million. That's huge.

uranium miner stock prices drop

2008-09-10T06:22:00.005-04:00

Yesterday the price of just about every uranium stock dropped like a rock. Lots and lots of double digit percentages. The only relevant news would be the potential Western Australia win by the Liberal (which in the US would be considered conservative) party which prefers to lift the ban on uranium mining. I don't see this impacting the short term, obviously, and I don't think has that much impact on the long term, especially given how low the market caps of the solid uranium miners are at this point. Long term demand is increasing fast and shows every sign of even accelerating beyond that, over time. A lot of babies are being tossed out with the bathwater.

As much as I don't agree with charting people, they do keep good records of what happened. Merv's Daily Commentary has the gory details.

The Merv’s Daily Uranium Index closed lower by 19.24 points or 9.85%. The AVERAGE decline of an Index component stock was 10.54%. There were a few winners, 3 of them. Losers were running wild and numbered 44 for the most that I can remember since starting this commentary. Three stocks went nowhere but in this market one might call them winners. The best winner of the three was Uranium Power with a gain of 3.0% while the worst of the losers was Tournigan Energy with a loss of 36.4%, that’s in one day. Another not so nice statistic is the fact that 50% of the Index component stocks were double digit losers.

I've been buying more Strathmore Minerals lately and I expect to buy more if the price continues down.

I've been forwarding articles about the industry and Strathmore in particular to someone understandably nervous about the price of the stock. Basically, if you go back and look, everything that has played out in the industry and with Strathmore in particular has been exactly as Strathmore has predicted. Nothing has gone otherwise. A year ago, they were saying that nearly all of these uranium companies which sprung up like mushrooms (I don't think they used that term) are going to disappear. I think the market sees this now and it's abandoning all uranium stocks.

Meanwhile the price of uranium has been remarkably stable in the mid sixties price range ($80 long term). Having a higher long term price demonstrates, as one uranium insider said somewhere, that utilities are willing to pay more for long term supply because they believe prices will/may be going up. That's a 24% premium.

Conforce International (CFRI) June 2008 results

2008-08-27T18:37:00.004-04:00

Jackfree notes in the comments of the previous Conforce posting that Conforce International (collected entries) issued their results for the quarter ended June 30, 2008.

Here's my take on it:

No cash. It's now tied up in accounts receivable. It appears shareholders continued to loan money to the company to pay some of the bills (although I don't know how much in this quarter). No interest, no terms.

Sharecount is unchanged, although that could change suddenly without warning given their balance sheet. They claim they can finance the EKO FLOR expansion from operations, but that seems fairly impossible unless they expect the field trial results to impress the customers so much that they'll front the costs of manufacturing. Personally I expect a fair amount of dilution.

All revenue so far has been from the terminal operations. Any revenues from the field trials will occur after the trials. Revenue for the quarter was $712K with $315K gross profit. $17K net loss.

Salaries dropped from last year from $120K to $102K. Commissions are up. Garbage disposal costs were $408 for the quarter.

It all depends on the results of the field trials.

I continue to own the stock.

Note that they claimed that they'd follow up by August 19 on the U.S. Military contractor deal but they never did [UPDATE: except via email].

Cameco has uranium problems

2008-08-12T23:26:00.003-04:00

Well, word had it that old timers had predicted there would continue to be trouble with the Cigar Lake mine that Cameco is developing and sure enough, the dewatering isn't working so well.

This is a massive mine that utilities are counting on for future supply. If this continues to be delayed, I suspect it's going to have a significant impact on the future price of uranium and how much money the other miners make, especially the ones who are going to have mines ongoing or coming online in the upcoming years.

Tonight, Cameco reported that they're having significant unexpected problems trying to get the water out of the mine [from the last time it flooded... what is this, the third time?]. It keeps filling up too fast for them to drain: they're only licensed to pump out 550 cubic meters per hour [sustained] and it's filling at over 600.

No. 1 Shaft had been pumped down to 430 metres below surface when the increase was reported early Tuesday morning. Work in the shaft was suspended a few hours later. During the day, the inflow rate increased steadily to approximately 600 cubic metres per hour (m3/hr), which is beyond the range that can be managed while sustaining work in the shaft. The mine has a total depth of 500 metres and the mine underground workings are at the 480-metre level.

They got the water level down almost to the bottom of the mine, but at that point, the inflow rate was too high. The plan is to take some measurements while it fills up and they'll let it fill all the way up.

This information will be analyzed to determine next steps. After this is complete, the water will be allowed to return to the natural equilibrium level.

They can pump out water at up to 1,000 cubic meters per hour for a limited time and fill up a storage pond, but they can only sustain 550.

Not only does this probably add delay to the mine timetable, but the continued problems only help to confirm the opinions some had about the mine.

Needless to say, I consider this to be good news. Note that no miners were harmed, and in fact they're probably earning lots of overtime.

Conforce International (CFRI) says nothing

2008-07-31T18:46:00.003-04:00

Conforce International (combined links) took time out of their busy day to say pretty much nothing. But to give them credit, they did provide a date by when they will tell us whatever they know by that time, likely nothing again I suspect. But at least they haven't skipped town.

This press release today says nothing about the military Letter of Intent with a supplier to the US Military.

According to the company's US Military contractor, the awarding of the contract has been delayed pending administrative clarifications.... In the event that the agreement has not been executed by August 19, 2008, the Company will provide shareholders and interested parties with an update as to the status of the negotiations.

You may now return to whatever you were doing.

cat found

Nicholas Financial (NICK) Q1 Results

2008-07-31T18:16:00.003-04:00

Nicholas Financial (NICK, sec) issued a press release with results for Q1 today.

Period ending June 30, 2008
Once again, I'm going to compare it to the previous quarter, Q4.

Revenue increased 3%.
Operating expenses increased 7%
Provision for credit losses was increased to $3.4 million from $2.5 million.
Taxes dropped to $0.9 million from $1.3 million
Net income dropped to 15 cents per diluted share from 20 cents per diluted share.
Share count increased about 1%.

The balance sheet is fairly similar.

Weighted ave contract rate decreased slightly to 24.28% from 24.50%
Provision for credit losses was 6.76% of ave finance receivables vs 5.20% (net of unearned interest)
Net portfolio yield was 16.25% vs 17.83%

Delinquencies:
Most of the categories increased somewhat, both in absolute terms and in percentages of receivables.
With $203 million ave finance receivables on the books:

Contracts
30 to 59 day delinquencies increased by $319K
60 to 89 day delinquencies increased by $936K
90+ day delinquencies increased by $275K
Total as a percentage of receivables is now 3.86%.

Direct Loans
30 to 59 day delinquencies decreased by $58K
60 to 89 day delinquencies increased by about $10K
90+ day delinquencies decreased by about $14K
Total as a percentage of receivables is now 2.47%

This quarter vs last quarter:
Purchases: $33 million vs $35 million
Weighted ave APR: 24.19% vs 24.47%
Ave discount: 8.87% vs 8.66%
Ave term (months): 49 vs 48
3,488 contracts vs 3,813 contracts

CONCLUSION

Overall, I'm quite happy with these results. I continue to own the stock.

Strathmore Minerals pummelled

2008-07-29T17:18:00.003-04:00

Since Friday, Strathmore Minerals (STM.V, STHJF) has dropped from around C$1.30 to C$0.92. There's no news. Other uranium juniors have done far better. The Strathmore spinoff company, Fission Energy (FIS.V, FSSIF) jumped from around C$0.65 to around C$0.80 on heavy volume on Friday and then fell down to C$0.61 today. Friday afternoon, Tuesday morning, and Tuesday afternoon a lot of shares were dumped. I have no idea why. These things happen.

The spot price of uranium has been slowly climbing these past weeks. Things are looking good for Strathmore, Fission Energy, and the uranium mining industry in general. It's tempting to think this is a reaction to the sale of the Chord property at a low price, but that was 3 weeks ago. And it's worth pointing out that, not being an operations company, Strathmore will always end up giving up about half its interests in each property in joint ventures, so the price was better than it appeared.

I also looked back over the July 21 press release and nothing in it is surprising. Maybe it's the troubles of Yellowcake Mining, one of the joint venture companies. Cash is evaporating all over the financial world nowadays. I'm glad that the Roca Honda joint venture is with the large company Sumitomo (住友).

If you own the stock and you'd like to hear some details, the Strathmore website still has the May 2008 presentation. It's definitely worth listening to (about 20 minutes).

I continue to hold the stock (and Fission Energy as well).

Also, it seems likely that NICK will announce their results on Thursday.

Status

2008-07-17T19:56:00.007-04:00

Yes, I'm still here and still watching things fairly closely.

NICK

I've been buying NICK with spare money that I stumble into. They should be releasing the next quarter's results on July 28. I'm hoping that the trend continues and the amount of bad loans continues to shrink, but that might not be the case. I'm buying it for what I believe will happen after the sub-prime smoke clears.

I looked at the details of Wells Fargo's (WFC) latest results, especially to look for how much things continue to deteriorate. Things don't look very bad for them, even when you take into account their changes to categories of non-performing loans. From what I've read, they've steered clear of a lot of the garbage going on.

Year-to-date total net interest income, for example, was up $1.8 billion from the first half of 2007, roughly equal to the increase in net charge-offs for the same period, even after adjusting charge-offs for the impact of our National Home Equity Group’s new charge-off policy. Few other large financial institutions have had the capacity to realize the opportunities generated by the credit crisis, and if opportunities to add attractive assets, add new customers and gain market share and wallet share continue, the long-term benefits could very well last beyond the peak in credit costs.”

This is the sort of thing I hope to see from NICK, but I doubt it. I took a quick look at CACC and ACF and both seem to be weathering things well [so far], although I didn't look too closely at the details.

For years I've been saying that NICK won't reach full value until after the whole sub-prime issue hits and passes over.

Strathmore Minerals and Uranium

The interesting thing about Strathmore and uranium in general is how things are playing out pretty much as expected, yet with the changes in stock prices and uranium prices, it can be difficult to see that. The long term price of uranium dropped somewhat, which was worth noting, but what I worry about is some big change to the fundamentals of uranium being a good long-term investment: Strathmore Minerals in particular. I see nothing different than what I saw when I first started buying Strathmore 3 years ago. Demand is going up, supply is not matching it, there are issues limiting supply. The US quietly moved a million pounds of yellowcake out of Iraq and gave/sold it to Cameco, but India is severely running out of uranium (they need millions of pounds). If they strike a deal with someone and are able to buy all that uranium, it's likely to impact the near-term balance of supply and demand.

What I didn't like from Strathmore was them selling their Chord property for what seems like a cheap price. The property had about 2 pounds per ton of uranium in what seems like a farily decent depth and surroundings. It sold for a little over a dollar a pound in the ground. Based on Strathmore's financials, they didn't seem to need the cash. Also there was the issue of terminating the agreements with Yellowcake Mining on the Sky, Jeep, Conoco Files projects. They're still doing Juniper Ridge.

Fission Energy is still working on the drilling near Hathor's "roughrider" zone. Hathor found some more uranium at what seems like serious concentrations, but don't yet know exactly how much.

CFRI, CVU

No news from CFRI. When something happens, they'll definitely trumpet it. How long success for them takes is far less important to me than whether things are successful. I follow the World Cargo News headlines looking for anything that might change the picture. Everything looks fine so far in terms of not seeing anything unexpected that might ruin the CFRI's success.

CVU has been quietly winning business. However, they had a revision to the big Spirit AeroSystems MOU (they're doing the leading edges, not trailing edges) which doesn't impact the short term, but probably cuts down on the long term. CVU won't go anywhere until/unless they get a huge jump in orders based on planes coming back from the Middle East and a clear indication of a sustained increase in business. Iraq may start winding down soon, although there's likely to be some increase in activity in Afghanistan.

Overall

I spent some time looking through the FDIC database to see the financial state of banks overall and in key places like Florida. Local banks in Florida are doing badly. If I recall, only 40% of the are currently profitable. As a whole, they're making essentially no money right now and there's a lot of non-performing loans. Overall in the US, however, the banking system seems to be doing reasonably well, especially considering all the negative hype.

The fact that Berkshire Hathaway's price has gone down rather than up, tells me that the market is just depressed. In my opinion, the value of Berkshire increases as the overall stock market deteriorates due to having more opportunities for Buffett to find something good. The guy is seriously at the peak of his investing ability right now.

I'm happy with all my investments.

UPDATE next day:
Unlike Wells Fargo, CitiGroup is a whole 'nother story, with a big loss rather than merely lower profits. Their customers are obviously very different from NICK, but this caught my eye:

Results improved substantially versus first quarter 2008 due to lower write-downs and good performance in the core franchise.

Interesting, the surprises continue to be good ones.