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Press Release: Catablast! Media LLC Closes Its Doors

2007-02-17T19:36:00.000-05:00

ABOUT US /OUR HISTORY

We're the guys who read 10Ks in the jacuzzi and stare at squiggly lines all day.

The Catablast! Media Group is an independent provider of investment commentary and research. Originally founded by stock market zealots with unique perspectives on under-followed stocks, Catablast! Media closed its doors in late 2006 after its Founder & President chose to pursue his MBA/CFA at the Kelley School of Business at Indiana University.

Due to its alpha-maximizing idea flow (and wry sense of humor), small cap/mid cap equity research generated by Catablast! Media quickly developed a large following on Wall Street and within months, appeared on major media venues such as Google Finance, Yahoo! Finance, TheStreet.com (NASDAQ:TSCM), and SeekingAlpha.com

OUR INVESTING THEME & STRATEGY

Outperform the major benchmarks by implementing an opportunistic and "event-driven" long/short strategy that combines rigorous fundamental research and savvy trading/technical analysis to capture short-term gains. Our focus on short term gains, however, does not obscure our view of long-term superior returns.

OUR PERFORMANCE RECORD/RESEARCH ARCHIVE

We are glad to announce that an overwhelming majority of our 2006 recommendations have either been acquired or taken private (DGIN, SBL, YCC, FS, UVN, TBL, BGP). Similarly, some of our more momentum-driven ideas (COH, MWRK, IGT, KMX, FDS, GYMB, FLWS, LGF, MA, DLLR) have yielded returns between 45% and 105%, all within our target 6 month - 1Y time frame.

If you are looking for writing samples or research tied to any of the aforementioned securities, please see a collection of our most representative work by clicking here as well as here.

WHAT IS YOUR LATEST BUY RECOMMENDATION?

We understand some of you miss our research and would like to receive any ideas we may have even after we have shut down. That said, our latest report is on DJ Orthopedics (NASDAQ:DJO) and can be found by clicking here. On December 26th, we will publish a short report on Bed Bath & Beyond, on which we have a $47 price target.

CONTACT INFO

Recruiters, analysts, reporters/journalists, and portfolio/fund managers can contact our team by writing to feedback@catablast.com (serious inquiries only, please).

If you would like to read more about Kelley's top 20 MBA graduate program, you can go here, here, and here.

Our founder can be reached directly through this Kelley website. All spam and junk email will be furiously deleted and blocked.

MANY THANKS TO SEEKING ALPHA LLC

We'd like to extend a special thanks to SeekingAlpha and its founder David Jackson. David noticed our work early on and it has been a privilege contributing to his creation, today the #1 destination for internet-based equity research. Seeking Alpha, which helps independent equity research providers expand their content reach, is definitely worth your time.

Hunting for Value Stocks

2007-01-28T16:03:00.000-05:00

Have you ever screened the market for good values? Trust us -- it ain't easy and it takes a lot more than a low P/E multiple to get a stock thrown into a serious institutional portfolio.

So we decided to break it down for all our value investing homies'.

If you'd like to know what value investing is, where it happens, and what you should avoid, we urge you to click here.

Hit us with your comments at feedback@catablast.com.

Upcoming Reports: BBW, PBY, and AW

2007-01-27T08:33:00.000-05:00

Over the next few weeks, we will be initiating coverage on Build-A-Bear Workshop (NYSE:BBW), Allied Waste (NYSE:AW), and Pep Boys (NYSE:PBY).

Be on the loookout for those reports, as well as another one on Starbucks (NASDAQ:SBUX).

In February, we plan to initiate coverage on the IT Consulting/Computer Services space.

Hedge fund managers and investment professionals/recruiters can contact our team by writing to feedback@catablast.com.

Some of Our Best Picks: FS, COST, NDN, DLLR, and DIGE

2007-01-22T07:01:00.000-05:00

Granted the market has been totally en fuego over the last few months, but even we were surprised to see how well our stock picks continue to perform ever since we "officially" closed up shop last August.

For example, hotelier Four Seasons (NYSE:FS) was acquired a couple of months after we wrote about it here. Readers and subscribers would have netted 32% on this play.

Warehouse retailer Costco (NASDAQ:COST) is up about 8% since we first wrote about it here.

We hope you didn't forget about Digene (NASDAQ:DIGE) -- it's up 25% since we pounded the table on this cervical cancer test manufacturer. Look here.

Dollar Financial (NYSE:DLLR), similarly, has posted a 35% return. Here is a quick read on why the stock is a must-buy.

Lastly, 99CentsOnly (NYSE:NDN) has also cruised past our price objective -- to the tune of 25% Peep this.

Want to talk smack? Hit us up at feedback@catablast.com.

Latest Report is Out: Starbucks vs Panera

2007-01-22T06:36:00.000-05:00

Ever wonder what makes specialty coffee purveyor Starbucks
(NASDAQ:SBUX) so damn special?

Furthermore, do you ever wonder what makes Panera (NASDAQ:PNRA)look wimpy when pitted against the Seattle giant?

We do.

Check out our latest report on the mocha momma by clicking right here.

Wyndham Hotels is Buyout Bait, Kids

2007-01-04T07:48:00.000-05:00

Don't take our word for it -- take that of Lehman Brothers.

We caught the banking behemoth with its pants down yesterday, right as it was pushing a 2 million share block of Wyndham Hotels (NYSE: WYN).

After seeing shares move like that on no news, we did our homework and we think you'll like what we uncovered.

Find out why the smart money is all over WYN by clicking right here.

Comments? You know the deal: feedback@catablast.com.

Back on Yahoo!

2007-01-03T05:05:00.000-05:00

Thank you again to the hard-working team @ SeekingAlpha.com for getting us out on Yahoo! this morning.

Our cover stories on Potash (NYSE: POT) and the orthopedics industry were both picked up late Tuesday night.

You can view the stories here and here.

We will be back at the end of the week with a rather juicy report on the banking industry.

Questions? Hit us up during after-hours at feedback@catablast.com.

Latest BUY report is out: Potash Corp

2007-01-02T07:34:00.000-05:00

We've got POT for you, but it's not the type for your pipe, stupid. This one is for your portfolio.

Today, we initiate coverage on Potash Corp (NYSE: POT) with a HOLD recommendation.

The report can be obtained by clicking here.

As always, let us know if you'd like to reference it: feedback@catablast.com

Newest Report is Out: Orthopedics/Medical Devices

2006-12-31T07:16:00.000-05:00

As mentioned, we have reduced our focus and coverage universe to 5 sectors: Consumer, Healthcare, Financial, Hardware, and Telecom.

Today, we release our first industry report, titled Orthopedics Industry Takes Off Amid Aging Boomer Population: A Brief Anatomy.

It can be viewed right here.

Material is copyright protected and if you have any questions or would like to reference the material, please make us aware at feedback@catablast.com.

We Get Quoted in Yahoo! Finance

2006-12-26T09:12:00.000-05:00

We'd like to thank our publishers, SeekingAlpha.com, as well as Yahoo! and all our readers for continuing to make our service such a success, even after officially "shutting down" in August 2006.

This morning, we were quoted at Yahoo! Finance after shares of Bed Bath & Beyond -- on which we initiated coverage yesterday -- edged higher.

If you'd like to read our feature, please do so here.

Thanks again and happy trading!

Our Coverage Universe

2006-12-26T08:38:00.000-05:00

Please note that beginning today, we will narrow our focus to the Consumer, Financial, Health Care, Telecom, and Hardware sectors.

Specifically, we will only be covering these industries:

1. Retail, apparel, & accessories

2. Large cap banks/regional banks

3. Medical devices/supplies

4. Wireless/wireline

5. Semiconductors/semiconductor equipment

6. Pharmaceuticals & biotechnology (coming soon)

7. Leisure, Gaming, & Lodging

8. IT Consulting/Computer Services

This is a result of our trying to focus on the industries we know best in order to add more value to our operation. If you have any questions, please write to us at feedback@catablast.com.

Latest Report: BBBY

2006-12-25T20:06:00.000-05:00

Our newest report has hit the Street.

It is on Bed Bath and Beyond (NASDAQ: BBBY) and you can view it by clicking here.

Operating Uncertainty Hammers Pasta Player

2006-07-13T06:26:00.000-04:00

American Italian Pasta (PLB) is a mess of a stock if we've ever seen one.

American Italian Pasta is the largest maker of dry pasta in North America. Its customers include most major US grocers, foodservice behemoth SYSCO (SYY), and food processors like Kraft (KFT), which all put PLB pasta in their products. PLB has grown through acquisitions; the recent purchase of the Mueller's pasta brand from Bestfoods, for instance, immediately increased PLB's shelf space. PLB does roughly $400M in revs per annum and currently employs just under 600 people.

The stock's down 60% for the year. We remain incredibly pessimistic about PLB's future:

1) The horror story all begins with the 14% job cut declared in 2004. In 2005, PLB was nailed with an auditing investigation into the company's accounting practices and financial statement adjustments. And in 2006, the firm's decision to divest nonstrategic brands from its core portfolio created even more uncertainty, scaring off buyers and leading analysts to slash estimates and change price targets.

2) PLB recently told food distributor Sysco, which accounts for $43 million of its total sales, to take a hike. This decision could be a blessing in disguise, if and only if it enables PLB to work with all the distributors PLB could not work with when it was tethered to the Texas-based food beast. All we can say for certain is that the omission of SYY from PLB's client list removes a guaranteed stream of revenue from the largest food distributor in the country. Is that smart thinking or is PLB's management snorting puro in the boardroom?

3) PLB could face Chapter 11 if it doesn't get its act together. Having thrown SYY to the curb, it's clear that PLB thinks it can create more value by penetrating the residual 75% of the fragmented pasta market. But if PLB fails, investors could go home weeping. PLB is too leveraged to be of interest to us, in other words: PLB currently has less than $4M on its balance sheet, but over $270M in debt. Moreover, the firm's .20 interest coverage ratio (EBIT/debt payments) is disturbingly low when compared to the industry mean of 5 x interest obligations. Lastly, a debt/equity ratio of 77% turns PLB's balance sheet into a ticking time bomb.

4) PLB continues to post below-industry average numbers. PLB's margins (gross, pre-tax, and net), ROA, and inventory turns fall well below those posted by comparable firms; in addition, American Italian's ROIC (return on invested capital, which we calculated using the firm's 2004 NOPAT) comes in at 1.5%, approximately 550 bps less than what its peer group returns, on average, to shareholders. Added to this risk is a tight 18M float that can exacerbate volatility in the worst of times; 45% of PLB's shares outstanding, we should add, are short.

5) We also ran PLB's numbers (we had to rely on 2004 numbers because the firm has still not released data for 2005) against the EVA "economic profit" model and found similarly alarming figures. The EVA model takes into consideration a firm's EBIAT (operating profit before interest but after taxes), cost of capital (WACC), and total invested capital (total assets - cash - accounts payable) in order to determine how much wealth a firm either creates or destroys for its investors. The formula is deceptively simple, actually: EVA = EBIAT - (total invested capital x WACC).

As you can imagine, PLB took its shareholders to the cleaners. We used 2004 numbers and arrived at an EBIAT [EBIT x (1 - tax rate)] of $14.2M. We then multiplied PLB's invested capital of $708M [$748M - $4M-$36M = $708M) x our cost of capital of 11% and arrived at a "capital charge" of $77.8 M ($708M x .11). This figure is then subtracted from $14.2M, which yields a negative number. As you can see, PLB destroyed shareholder value, erasing over $63M ($14.2M - $77.8M) in investor wealth in 2004 alone. Note that the EVA model is highly sensitive to whatever WACC (or cost of equity if the firm you're studying is debt-free) investors decide to plug in (garbage in, garbage out), but we still think it's a sound way to study intrinsic value and set portfolio expectations.

6) Generally speaking, the pasta industry isn't what it used to be: pasta makers have seen their top lines impaired by the low-carb diet craze. Many firms have had to restructure, lay off workers, and apologize to their investors for decimating value. No wonder, then, that of the 5 analysts that cover PLB, not one has a buy rating.

7) With a current ratio (current assets/current liabilities) in excess of 2.0 x, PLB is by no means in a liquidity crisis. In fact, PLB remains a low cost leader with significant brands, in our opinion. However, we deem the risk/reward unquestionably unattractive and would only recommend shares to a speculator banking on a successful turnaround, which wouldn't materialize until 2007, if that.

Don't forget that you can also enjoy our work at SeekingAlpha.com, a must-read according to The New York Times, Barron's, Forbes, Reuters, CNET, and The Wall Street Journal.

Why We See More Upside for Starwood Hotels

2006-07-11T06:07:00.000-04:00

With the US hotel industry currently hitting on all cylinders (in 2005, it showed a healthy 8.8 % rise in total revenue and an impressive 15.5 % increase in profits, according to PKF Hospitality Research), it's no wonder that investors are adding hotel stocks to their holdings in the 1H of 2006. We think the hotel industry will continue to exceed expectations, thanks in part to the millions of Baby Boomers who're fervently looking for upscale experiences on which they can unload their disposable income.

However, if investors settle for a Hilton (HLT) or a Marriott (MAR), we think they'll only get the shell. If they want the oyster, we suggest they take a good, hard look at Starwood Hotels (HOT), a hotel and leisure company with approximately 850 properties in more than 95 countries.

Description Starwood operates two business segments: Hotel and Vacation. Hotel ops include a global hospitality network of full-service hotels. Vacation covers the operation of vacation ownership resorts, marketing and the financing to customers who purchase such interests. Starwood's brands include the St. Regis, The Luxury Collection, Sheraton, Westin, W, and Four Points. Starwood, which generated $6 billion in sales last year through more than 145,000 employees, currently holds a market cap north of $13.1B and is followed by 11 analysts, 11 of which have a strong buy on the stock.

Positive Considerations We believe Starwood's brands -- like the impeccable W Hotel chain -- are invaluable. The firm has done a 180 and is now focused on hotel management rather than ownership. By repositioning assets, Starwood has been able to weather hotel cyclicality; it has also cashed in on non-core properties through sales and raised occupancy rates through heavy renovation. We believe that going forward, Starwood will go light on the acquisition trigger and focus again on integrating its portfolio in order to deliver a valued-added experience to its end market. Additionally, we believe that Starwood will be a large buyer of its stock in the coming months: In 1Q06, Starwood bought $447M worth of its stock; management has approved, in total, $1B dollars worth of stock repurchases and it's possible that Starwood will have bought back 15-20% of its market cap when all is said and done.

Risks/Valuation 2005 marked the second consecutive year of double-digit profit growth for US hotels -- simply stated, we remain bullish, but note that 2 central risks remain at play. Terrorism fears, as well as eroding economic conditions, could adversely affect Starwood's prospects. With the stock already trading at a sharp premium to the S & P (32 x 06 EPS vs. broad market's 20 x; HOT also trades at 17 x cash flow/share vs. S & P's 14 x), investors would most likely take profits off the table should Starwood release negative news. We assign HOT a premium multiple due to the company's cash flow generation, management's renewed focus on brand reach, and its variegated, multi price point portfolio of hotels. Assuming a 11% WACC and a terminal value of 3%, we land at our DCF-based $70 price target. Forecasting HOT's cash flow is difficult, we think, because the company's labor costs, as well as the possibility of terrorist attacks, which would clearly depress consumer travel and impact shares to the downside, are unpredictable. We wouldn't say we are aggressive buyers of hotel stocks in general, but for the reasons listed above, Starwood has our attention. On a light volume pullback, we'd take great delight in amassing shares.

Don't forget that you can also catch our recognized work at SeekingAlpha.com, a must read according to the New York Times, Reuters, Forbes, CNET, Wall Street Journal, and Barron's.

Are We in a Soda Bubble?

2006-07-10T11:08:00.000-04:00

As far as sodas are concerned, the little guy is laughing all the way to the bank.

Non-traditional, boutique beverage purveyor Jones Soda (JSDA) -- which designs and distributes alternative beverages in five beverage brands, including WhoopAss, a citrus energy drink, and Jones Naturals, a non-carbonated juice and tea -- has seen its shares pop nearly 100% this year. JSDA's takeoff comes on the heels of another niche beverage player's success, that of Hansen (HANS). Hansen, which makes the Monster Energy drink, is the category leader, with privately-held Red Bull coming in second. We believe Hansen's success stems from its decision to offer twice the energy Red Bull offers (8 vs. 16 oz.), but at the same price point.

Now that Jones is offering its swigs at retail behemoths such as Barnes and Noble (BKS) and Target (TGT), things are getting interesting to say the least. JSDA's revenue rose 27% to $8.8 million in the latest quarter from $6.9 million in the year-ago period. Last week, JSDA did a private placement for $30 million. The surging demand for niche beverages leads us to believe that JSDA will either land bigger deals -- or better -- get acquired.

An acquisition wouldn't be a bad idea.

Jones Soda lacks scale and if it's smart, it'll capitalize on the uber-hip alternative drink category before more competitive entrants emerge (Pepsi and Coke have already crossed the 50 yard line). Furthermore, growing concern over the nutrition of these beverages could escalate and whack shares down; if you don't think concerned moms can crush a stock, think again. Lastly, the energy drink craze is just that -- a fad. It can end faster than NSync's career. We estimate that the energy drink segment has grown at a 80% clip over the last 7 years --- naturally, it will slow down from here on out, until it hits our terminal value of 5% growth. And guess what? 5% is for wimps.

So now is the time for Jones Soda to bust a move, in other words. Our channel checks revealed that 100% juices that offer vitamins and minerals have enjoyed very short shelf lives; demand remains robust and with the critical summer selling season well-underway, it is likely that more customers will test Jones Soda drinks. Similarly, this'll be the time the investment community at large "tests" Jones Soda. From what we can tell, only two analysts cover the stock. Management at JSDA swears its focused on domestic growth/expansion rather than volume per se. Any channel-enhancing deals, akin to the one just signed between Hansen and beer leviathan Anheuser-Busch (BUD) would certainly pique the interest of takeover-minded managers and analysts alike.

With consumers (Gen X'ers, mostly) currently having no qualms about plunking down between $2 and $4 USD for these New Age premium concoctions, now may be a good time for JSDA to link up with a distribution partner, even as "un-alternative" as that may seem. Could Hansen snap up Jones Soda? Possibly. Jones Soda could help Hansen beef up its natural soda product category, which Hansen had no choice but to downplay once its Monster brand took off like a Boeing jet; currently, energy drinks account for 77% of Hansen's sales. Hansen, meanwhile, could help Jones Soda target more than just the "skateboard/teahouse" crowd. Ultimately, we think a deal would enable the 2 firms to leverage their brand equity with customers while augmenting margins and expanding product reach. With nearly $100 million in the bank and barely any debt, Hansen's clearly in the financial position do whatever it please.

Don't forget that you can also catch our recognized work at SeekingAlpha.com, a must read according to the New York Times, Reuters, Forbes, CNET, Wall Street Journal, and Barron's.

3M Tumbles -- Now Attractively Valued

2006-07-09T13:19:00.000-04:00

When Wall Street pukes out quality stuff, we're there waiting with a catcher's mitt.

Shares of diversified manufacturer 3M (MMM), which makes adhesive, coating, electronic, and health-care products, crashed 9% (on 8 x average daily volume) last Friday after the Minnesota-based conglomerate said that 2Q performance was impaired by lower-than-expected sales and start-up costs from its optical systems division. MMM's optical lens are currently used to augment the quality of LCDs for its flat panel TV customers, like Samsung. 3M CEO George Buckley says the news coincided with "an increase in inventory levels" in LCD televisions due to overestimated demand surrounding the FIFA World Cup.

Although we don't see any major catalysts down the road, we are believers in MMM's valuation, as well as the firm's importance as a proxy of the global economy (3M operates in more than 200 countries and makes more than 55,000 products.) For your own edification, just a couple of reasons why we're backin' up the truck and aggressively buying 3M:

1) 3M has historically plowed about 7% of its revenues back into R&D and subsequently been able to attract creme de la creme engineers to run labs.

2) 3M has a mean penchant for finding new uses for basic technologies, and then leveraging them across myriad platforms. Did you know that the optical lens 3M sells to enhance LCD screens evolved from technology originally manufactured to make road signs clearer?

3) 3M protects its patents the way pit bulls protect their owners. As a result, this wide moat company has coughed 18% operating margins over the last 5 years. It's no miracle that competitors looking to undermine 3M's brand empire (can you imagine modern life without Post-Its or Scotch tape?) are frequently rebuffed and sent home crying.

4) 3M has a free cash flow yield (FCF/12 month sales) of more than 15% and covers its debt obligations without breaking a sweat. The debt/equity ratio for last 12 month's is .24 and the company's ROE remains in the 30% range. A quick look at industry comparables will tell you that 3M's numbers are attractive.

5) We believe MMM's crash was a result of bad timing (summer doldrums and 4 year bull market temporarily handicapped by inflation-phobic Fed) and investor panic over a one time event. At 17 x 06 EPS and 14.3 x 2007 projected results, MMM looks like a bargain. A quality name like 3M can't be this cheap -- that's like Derek Jeter playing ball for $30,000 a year. We estimate MMM will earn $5.12 in 2007. Applying a reasonable 18 x P/E multiple ("reasonable" because the industry trades at 19 x and 3M has traded as high as 35 x over the last 5 years, but never lower than 17 x), we arrive at our $92 twelve month price target on shares of 3M, a 24% premium from Friday's closing price.

Disclosure: The author is long shares of MMM. Don't forget that you can also catch our recognized work at SeekingAlpha.com, a must read according to the New York Times, Reuters, Forbes, CNET, Wall Street Journal, and Barron's.

Initiating Coverage on LifeCell with a Hold

2006-07-07T13:47:00.000-04:00

New Jersey-based LifeCell (LIFC) markets products made from human tissues that are used in surgical procedures, particularly the reconstructive, urogynecologic and orthopedic surgical spaces. Lifecell's patented technology produces a unique regenerative human tissue matrix that provides a complete template for the regeneration of normal human tissue. LifeCell's blockbuster product is called AlloDerm, a dermal matrix made from human skin that is used in grafts. The doctors we spoke to Thursday night have told us that Alloderm is a "hot product" whose "growth is bound to explode further."

Today's 8% selloff represents a terrific buying opportunity, we think. Below are some of the key drivers we believe will catapult the stock further, potentially into the mid to late $30's by Labor Day:

1) Lifecell's products are differentiated and spread out over a plethora of different clinical applications. Such diversification cushions the negative impact shares could experience after unsuccessful product tests, always a vertiginous risk in the medical technology space.

2) The potential for LifeCell to penetrate the breast augmentation category is huge. In 2005, approximately 290,000 breast implant procedures took place -- a $75 million market, at least. Lifecell's current penetration in the breast reconstruction space is 25%, leading us to believe that significant upside exists. Lifecell is currently running tests to study the degree to which Xenoderm/Alloderm can mitigate capsular contractions (namely, scar tissue) associated with breast implant surgery. Further data findings should bode well for the stock, as well as enable the firm to crack open international markets, where end market demand is high but depressed by contamination fears.

3) Only 6 analysts follow LifeCell. A deepening socio-cultural obsession with physical perfection and aging bodies should force more brokerage houses to start coverage on niche players such as Lifecell, which generated $105M in sales last year through its 269 employees. Lifecell's current market cap is less than $1B, making it impossible for some portfolio managers/analysts to buy or cover the stock. With a $1B+ market capitalization, LifeCell should definitely grab more attention from the investment community at large and possibly instigate a new buying wave.

4) LIFC is growing its EPS at a 50% clip. Our back of the envelope calcs show Lifecell earning $.65-$.68 EPS in 07 off $165-$170 million in revenues. Applying a conservative 40 x multiple (premium to industry mean multiple), we arrive at our $28 fair value for shares. We add $4 to our price target based on the stock's a) takeover appeal and b) enviable cash position ($43M in cash with zero debt). Our short term price target is $32 dollars and would consider pullbacks like today's especially enticing; we urge investors to HOLD onto this security.

Risks/Conclusion We are incredibly enthusiastic about Lifecell's prospects, but would warn readers to a tight 33M float and 16% short interest. We expect significant volatility as a more competitive milieu materializes and Lifecell unloads new data findings on the medical community. However, deeper penetration into the breast enhancement area and continued success in the hernia market should send the stock to fresh highs, as well as attract attention from rival firms aiming to grow horizontally, supplier firms interested in vertical growth, and an analyst community overwhelmed by LifeCell's high margin portfolio (22% operating margins and 13% net margins).

Don't forget that you can also catch our recognized work at SeekingAlpha.com, a must read according to the New York Times, Reuters, Forbes, CNET, and Barron's.

What a Dog: First Marblehead

2006-07-06T19:04:00.000-04:00

We don't issue that many SELL recommendations here at catablast.com, but when we do, we mean what we say. Like when we told you guys to dump Baush and Lomb (BOL) pre-blowup (look here). Stock tanked 33% in a matter of days.

Today, another one of our "you must sell this stock" ideas proved right: student loan outsourcing company First Marblehead (FMD) -- it tanked 16% today after Banc of America, one of its largest customers, awarded business to a competitor. Today, we found out that Bank of America had been outsourcing new private student loan products to EduCap, a nonprofit that Boston-based FMD competes against.

As we said weeks ago, FMD faces fierce competition and holds only a handful of customers -- that sort of client concentration makes us cringe. That's why we concluded our report by stating: "...we deem the risk/reward unattractive; valuation of 5.8 x sales does not help the bull case -- investors should augment whatever discount rate (WACC) they're using to value FMD because FMD has less experience, employees, and cash flow generation."

We'd love to publish the nasty emails we got for disparaging First Marblehead, but we'll have to spare you the details: this site is PG-13.

Got a question for us? We spend our days and nights drinking Red Bull, poring over 10Ks, and studying stock charts. Hit us with your best shot at feedback@catablast.com. Don't forget that you can also catch our recognized work at SeekingAlpha.com, a must read according to the New York Times and Barrons.

Knology Knows Broadband Inside Out

2006-07-05T19:07:00.000-04:00

Knology (KNOL) is a speculative play on broadband service in the Southeast.

In early June, Nielsen/NetRatings announced that nearly three-quarters of US active Web users connected at home via broadband in May, growing 15 percentage points over a year ago, when just 57 percent of active Web users relied on broadband connections at home. According to technology consulting firm IDC, the US broadband market is expected to grow at a 18.4% CAGR between 2004 and 2009. Broadband penetration is expected to exceed 52% of US households by 2009.

Research also indicates that broadband users are more likely to make better use of Internet functionalities and newer technologies, such as RSS feeds and blogging. "...the market for broadband Internet connection has not yet reached saturation," said Jon Gibs, senior director @ NetRatings. "We're past the point where decreasing prices and increasing availability will move the needle for providers; the remaining consumers will be pushed to broadband as the Internet continues to move beyond text-based information to a comprehensive source for video," he added.

Knology is a bundling giant, and leads the cable industry in voice and data penetration rates. Just ten years old, the company has grown primarily through serial acquisitions to become the 20th-largest cable provider in the US in terms of video subscriber count. We like how the enterprise value/subscriber metric is gaining traction, as well as how the firm's net debt/EBITDA multiple is expected to fall in 2H06 and FY07. Note that debt/total cap still remains > 70% and there is probably still some risk overhang related to the bankruptcy of Knology's predecessor. With a 19M float and 36% insider holdings, this one could easily pop on a blow-out quarter as more investors flock to obscure (pure) plays on broadband adoption (only 5 analysts cover the stock) and/or management decides it wants to eat more of its own cooking.

Overall, you're looking at a leveraged, money-bleeding firm (negative EPS, but EBITDA positive as of 1Q06) with the wind at its back -- as well as a titillating stock chart -- but you'd have to be an idiot to put this stock in your retirement account: Knology carries a debt/equity ratio of 6.3 and trades for almost 10 x book (shares are up nearly 400% YTD). We'd await further transparency on the firm's balance sheet enhancements before jumping in. For now, we rate this stock a HOLD and only for those with high risk tolerance.

Got a question for us? We spend 17 hours a day drinking Red Bull, poring over 10Ks, and studying stock charts. Hit us with your best shot at feedback@catablast.com. Don't forget that you can also catch our recognized work at SeekingAlpha.com, a must read according to the New York Times and Barrons.

Reader Email: Paccar Trucks

2006-07-05T06:11:00.000-04:00

You Ask You wrote favorably about Paccar (PCAR) on thebulltrader.com -- talk to me some more about the stock.

We Reply PACCAR makes medium-duty (class 6-7) and heavy-duty (class 8) trucks under the Peterbilt and Kenworth names in the US and the DAF and Foden names in Western Europe. Its class 8 market share is around 23% in the U.S. and 14% in Europe. It also has a financial segment that provides services such as financing arrangements and full-service leasing to dealers/customers.

We view PCAR as a diamond ring hiding in a landfill of garbage. It's a pure play on the truck manufacturing segment that goes for less than 12 x EPS, attractive when you look at how the firm has grown EPS 45% over the last 3 yrs [on an annualized basis]. Analysts are cheerleading for the stock (2 buy, 3 hold, 0 sell) and we take awe at gross margins (21%) that are almost 5 x what the industry pumps out; operating margins of 12% rip the cover off the ball and attest to the firm's efficient cost structure, which some have even compared to Dell's (DELL). Overall, this is a mispriced, quality name with a mean penchant for productivity-enhancing R&D. We see the stock shooting higher but would warn the less risk-tolerant that tighter emission controls in 2008-2010 could weigh negatively on shares. With $2B in cash, negligible debt, and a FCF yield (free cash flow/revenues) of about 5%, Paccar is a stock you want to pounce on now -- it will even pay you a buck twenty a share so that you don't cry or hit the road during downcycles. Our long term price target is $94, a 13% premium to Monday's closing price.

Got a question for us? We spend our days and nights drinking Red Bull, poring over 10Ks, and studying the stock market. Hit us with your best shot at feedback@catablast.com. Don't forget that you can also catch our recognized work at SeekingAlpha.com, a must read according to the New York Times and Barrons.

Happy 4th

2006-07-04T11:55:00.000-04:00

We'll be closed today, July 4th. Red Bull chuggin', stock picking monomaniacs must rest too, you know. We'll be back tomorrow with a report on Starwood Hotels (HOT), on which we initiate coverage with an aggressive buy.

Don't forget that you can also catch our recognized work at SeekingAlpha.com, a must read according to the New York Times and Barrons.

Reader Email: HBHC

2006-07-03T21:29:00.000-04:00

One Reader Asks I saw you spit venom at Hancock Holding Company (HBHC) on another stock research site. What gives?

We Answer Hancock is a Mississippi bank/holding company with 100 branches, 120 ATMs, and more than $6B in assets UM. We like the balance sheet but don't like that management thinks loan growth won't pick up until late '06. At 19 x, we're fans, but at 30 x trailing 12 EPS, we have 6 words for you: go easy on the buy trigger. Scale your purchases if you decide to get wet. If loan growth doesn't show a pulse until 1Q '07, the stock will take a nap in back half of 06 due to lower NIM (net interest margin). Don't let us keep you from putting this stock on your radar, though: ROE has improved after getting pounded in 03; insiders own over 27% of the shares outstanding; and the float is a miniscule 25 million. Chart-wise, we can't complain: it's prettier than Jessica Alba in a swimsuit.

Got a question for us? We spend our days and nights studying the stock market. Hit us with your best shot at feedback@catablast.com. Don't forget that you can also catch our recognized work at SeekingAlpha.com, a must read according to the New York Times and Barrons.

Ecolab: Hospitality Play In Hiding

2006-07-01T21:10:00.000-04:00

Introduction The hotel industry is back from the dead. Baby Boomers looking for novel, high end experiences on which to spend their disposable income have, for example, recently pushed shares of luxury hotel chain Starwood Hotels (HOT) to a 52 week high (to $63.64; stock is up 26% in last 12 months). As the demographics suggest, this is an attractive area in which to invest. Unfortunately, news of Baby Boomer wealth has already manifested across several mainstream media and priced itself into those stocks most benefiting from the aging population. One less conspicuous way investors can play the pickup in travel-related activities and higher hotel occupancy rates is by scooping up shares in companies who service hotel chains. Minnesota-based Ecolab (ECL) is one of those stocks. The $10B (market cap) provider of cleaning and sanitation services spit out over $4B in sales last year through its more than 22,000 employees. Here's our first take on the stock, on which we initiate coverage with a HOLD.

Description Ecolab produces and sells cleaning products and services to institutional, hospitality, and industrial customers. The company's key products include detergent and pest-elimination products, among others. Ecolab's major customers are restaurants, hotels, and hospitals. The firm has a strong international presence (conducts operations in 70+ countries), with approximately 50% of sales coming from overseas.

Positive Considerations In early March, Ecolab's most formidable rival, JohnsonDiversey, announced its exit from the domestic hospitality space, leaving Ecolab as the better known alternative for hoteliers and restaurant managers looking for that "one-stop" solution to all its cleaning/sanitizing quandaries. We think JD's departure should allow ECL to capture at least 50% of the available warewashing market. Should our optimistic scenario materialize, the boon to Ecolab's top line narrative could be great, indeed: once embedded in hotel kitchens, Ecolab's products tend to stay put: clients face high switching costs since those clients have to be trained to safely use ECL's product mix, on which Ecolab recoups a healthy double digit margin. We also like the firm's diminishing debt load, "sell or don't eat" salesforce mentality, and customer retention rate north of 85%. Lastly, we note that infection control remains a hot theme on the Street, something we think will prop up shares at least through 2006. The firm has already made several key moves in this area: it recently struck a deal with meat company Hormel (HRL) and introduced a safety-enhancing product for poultry-related goods called the Octa-Gone. On June 16th, Ecolab bought a UK firm ($19M in sales) that produces contamination control agents for hospital/medical device "clean rooms." We look favorably upon these small, nimble transactions since they extend Ecolab's product reach without exposing the firm to integration risk overhang.

Risks They are many, unfortunately. If the foodservice, hospitality, and travel industries bomb, Ecolab's top line will catch a black eye. Management has done a decent job paring down debt, but we add that Ecolab's debt load remains roughly 11 x what the firm holds in cash. Raw material costs, another cloud in ECL's horizon, could further dampen share appreciation. The light at the end of the tunnel? Ecolab's in a buying mood and using acquisitive growth to slowly exploit economies of scale, exercise cost control measures, and augment leverage among its suppliers.

Valuation At 6 x book, 32 x trailing earnings, and 24 x forward earnings, Ecolab is by no means cheap. Based on the 15% earnings growth we expect ECL to cough up in 2007, we conclude that Ecolab is fairly overvalued, but worth holding onto. Our target P/E range for the stock, based on public comparables, remains 25 x current year estimates. With that, we arrive at our $35 fair value estimate on Ecolab shares. Albeit slightly mispriced, we believe Ecolab – a large cap play on disease-related hysteria and a healthy hospitality market -- remains an attractive name. On any weakness, we'd easily add Ecolab to a secular growth, risk-tolerant portfolio.

Don't forget that you can also enjoy our work at SeekingAlpha.com, a must-read according to The New York Times, Barron's, and Forbes.

Advance Auto Wounded, But Not Mortally

2006-06-30T06:00:00.000-04:00

We stepped on a landmine Thursday after shares of auto parts purveyor Advance Auto Parts (the second-largest auto parts retailer in the US, operating approximately 3,000 stores in 40 states.) tumbled 17% on lower 2Q guidance and same store sales growth.

The company said it now expects EPS to fall in the 57-59 cent range, down from prior guidance in the 65-68 cent range. Additionally, Advance now expects same-store sales to increase 1% to 2%, versus prior guidance of 3%-5% increase. Management remains confident that the top line will gain traction after Labor Day.

Based on yesterday's selloff, it's clear that the market disagreed with the bullish report we published on May 24th. In addition to what's already been stated there, we urge readers to mull over the following considerations and risks.

1) One reason our thesis got murdered is because the low-income consumer is getting squeezed by higher prices at the pump. With gas prices so lofty, AAP's target market (both do-it-yourselfers and professional installers) is rapidly changing its driving [consumption] habits. Because Advance Auto is a stock that depends on heavy driving patterns, we admit that we should have been more concerned with pump prices. We have revised our price target to accommodate a more sober view on the macro picture.

2) One interesting piece of information the market has not priced in: summer weather. Advance Auto is a not-so-obvious play on unbearable, Dantean heat. Piper Jaffray has conducted a rigorous weather analysis spanning across 10 markets, concluding that an early onset of extreme heat summer would spur above-normal demand for auto repair and maintenance: "Extreme heat causes car parts to break down, while dry conditions are conducive for do-it-yourselfers to complete auto repair and maintenance." In other words, if this summer turns out to be a real steamer, shares of AAP could fathomably climb back to a less irrational valuation.

3) With 15% EPS growth projected for 2007 (our estimates), and the stock currently trading at 10.5 X forward earnings and less than 10 x cash flow, we conclude that Advance Auto's worst days are probably behind them. The market may also be overlooking the fact that Advance Auto has boosted its ROE more than 200% in the last 5 years and axed debt by 50% to $477 million. Given robust store expansion plans and upcoming summer season, we see sizable upside but still lower our price target from $48 to $40, representing a 33% premium to Thursday's closing price of $30. If Advance Auto can narrow the margin gap between itself and rival Autozone -- whose pre-tax and net margins surpass Advance Auto's by 600 basis points and 400 basis points, respectively -- patient investors in the underdog should be duly rewarded.

Don't forget that you can also enjoy our work at SeekingAlpha.com, a must-read according to The New York Times, Barron's, and Forbes.

We Capture 50% Downside on Take-Two

2006-06-28T06:27:00.000-04:00

Shares of video gamer Take-Two Interactive (TTWO) got smoked on Tuesday following a report that the firm had been subpoenaed by a New York grand jury investigating hidden sex scenes in its flagship game "Grand Theft Auto."

Down 16% to $10.85, Take Two is about 2 points away from our aggressive $8 price target, which we placed on the firm back on January 30th. At that time, Take Two was trading north of $16 per share. In that report, we argued that Take-Two was spoiled goods and void of credibility. True post-modernists, we quote ourselves: "Potentially cannibalized/sluggish sales, further management erosion, and a staid gaming environment all spell one thing for Take Two: a mess bloodier than its games."

Yup, we got that one right. Since we first lambasted TTWO on January 11th (private memo to clients), shares have fallen a total of 50%.

Citigroup dropped its price target on the stock to $9 from $12 on Tuesday, but we think they're still too optimistic: legal fees, eroding profits, and revolving door managerial exits will continue to hammer shares over the next quarter, we think.

The only thing going for Take Two at this point in time is a possible takeover bid. The company still holds some valuable gaming titles and the arrival of Sony's new console could serve as a short term catalyst, although we wouldn't bet on it. There is definitely the possibility that one day we will wake up and Take Two will be a small division of a much larger player. Today, though, that's a poor excuse for buying into this tall order of risk. Jump in Take Two's waters today and we guarantee you'll be spending your July 4th in a decrepit bar crying in your beer, talking to the wall, and wondering why your wife won't take your beligerent phone calls.

Don't forget that you can also enjoy our work at SeekingAlpha.com, a must-read according to The New York Times, Barron's, and Forbes.