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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.

Reader Email: The Botox Boom

2006-06-25T21:26:00.000-04:00

You Ask My wife recently got her first Botox treatment -- What's your take on Allergan?

We Reply We don't officially cover Allergan (AGN), the company grabbing the lion's share of the aesthetic reconstruction market, but on a first look, we like what we see. Not only do 35% of revenues come from Botox procedures, last year they were prescient enough to foresee the surging demand in breast augmentation procedures by snapping up Inamed, a leader in obesity and breast shape enhancements. From a shareholder's viewpoint, the deal is a layup as there are myriad synergies the deal should capture.

We also like the "rinse + repeat" Botox business model: Botox, a nueromodulator, is immensely profitable because it forces the patient to come back in and re-inject. This means fat recurring revenue streams. High growth, high margin areas have translated into 19% sales growth over the last 5 years for Allergan, a trend we think will continue in the near term. The company has recently struggled with merger distractions, but we see this risk offset by a robust pipeline and deep focus on R&D (which accounts for 17% of sales). All that said, we'd be wary of a 6.2 x price to sales multiple, as well as a negative return-on-equity ratio, pitifully low insider ownership (<2% of shares outstanding), and feirce competition coming from generics. This last threat could decelerate Allergan's sales growth and accelerate margin compression. In sum, don't chase the stock -- wait for a pullback under $100.

Got some question you're dying to ask us, some stock you'd like to see us dissect? Email us at feedback@catablast.com. 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.

Screw Cheerios: We Talk Banks for Breakfast

2006-06-24T06:11:00.000-04:00

We've been fans of California regional bank First Community Bank (FCBP) since it was trading at $28 (initiated coverage on May 12, 2003). When the stock was featured in an Investor's Business Daily article early Friday morning, we suddenly found ourselves in a middle of a fervid Blackberry exchange with a colleague. Excerpts from that email (and later, phone) exchange follow.

8: 13 AM Wall Street buddy [WS]: Dude, did you see page 8 of IBD? It's your bank...FCBP got a plug. Stock should pop at the open...

8:16 AM Catablast.com editor [CC]: Yeah, we saw it alright. Don't know if the stock will "pop" but we won't bitch if it does.

8:17 AM WS Are you still pumping that takeover idea you're always yapping about?

8:19 AM CC F**k yeah we are; the FCBP game plan is set in stone, dude: roll up more babies and then sell daddy to a behemoth like BAC (Bank of America) or WB (Wachovia); you know they're hungry. Consolidation is the future of commercial banking...Hey, look at Regions Bank (RF) when you get to work -- I wouldn't be surprised to see an 800 pound gorilla snap it up just so it can gain that southeast footprint...the Florida banking area is red hot; if CITI opts for a bank, it'll be either RF or STI (Suntrust Bank)... Buffett owns a ton of STI shares...

8: 20 AM WS Buffett?

8: 21 AM CC Yup -- he like likes the bank for deposit growth + consolidation appeal. Still, our baby is FCBP -- the merchant bank Castle Creek Capital runs the show there and trust us, they're after a fat payout -- that's what they (Castle Creek) do -- roll up smaller banks in geographically attractive regions, then sell 3-4 years out. It's a layup....Buy Buy Buy...

For a more formal take on FCBP, make sure to check out the official report we published earlier this year.

Reader Email: Why Higher Rates Hammer Stocks

2006-06-22T22:02:00.000-04:00

You Ask Why do stocks take a beating when interest rates rise?

We Reply For the love of God, what are you trying to get us to do: re-write War and Peace? There's plenty of stuff available on the web to answer your question, so we'll just leave you with a couple of bite size nuggets to take home. Armed with this rudimentary information, you should be ready to talk dirt with your Econ professor in no time.

1. When interest rates go up, the Fed "tightens" money supply by selling bonds on the open market. This pulls money out of circulation (buyers of bonds get a piece of paper; government gets your cash) and yields on bonds/"safe" investment classes go up. This makes stocks look less attractive b/c the average investor can take in 5-6% on this more conservative asset class and bypass the risk associated with equity investing.

2. Higher rates cripple consumers + corporations alike: consumers get body slammed since higher rates = higher borrowing costs (this is important). This country was built on cheeseburgers and credit, so higher rates are not to be taken lightly. Higher rates mean less people buying homes and borrowing capital to augment their standards of living, for one thing. Higher rates, likewise, hurt corporations because it makes their financing activities more expensive. Capital expenditures get pushed back, investors take notice, and stocks take a beating.

3. Investor sentiment is drastically impacted by higher rates: once rates climb past a certain threshold, safer investments like bonds begin to look more attractive simply because the yield is higher and closer to that of stocks, without the risk associated with the latter, of course. If a bond can give you 6%, you're only 400 basis points [bps] away from the historical rate of return stocks are supposed to reward you with (about 10.3%) over the long term. Bonds don't keep pace with inflation the same way stocks do, but sometimes people just want a steady income without the ulcer. If you want the sex, though, only stocks will deliver.

4. Rates affect the way banks make money. Banks have a killer business model, we think: commercial banks make money off a spread called net interest income. All it means is this: Banks pay you a paltry rate of return (the "short term" rate) on your deposits but ring the register with the interest payments they receive for the loans they facilitate for their customers (at the "long term" rate). The closer the spread between the rates, the less mula your friendly local bank collects. On the other hand, banks are not stupid: most of them are taking in piles of revenue from non-interest related activities, such as investment advice fees.

Got some question you're dying to ask us, some stock you'd like to see us dissect? Email us anytime at feedback@catablast.com. 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.

Univision Receives Buyout Offer Late Wednesday

2006-06-21T22:19:00.000-04:00

A private investor group is offering about $10.7 billion to acquire Univision Communications (UVN), the nation's second largest Spanish broadcaster.

The bid of about $35 per share came from a motley crew of private equity big names: Madison Dearborn Partners, Thomas H. Lee Partners, Providence Equity Partners, Texas Pacific Group, and media millionaire Haim Saban all got a piece of the action.

Regrettably, shares of Los Angeles-based Univision tumbled more than 4 percent Wednesday on news of the offer, most likely because this news has been factored into the stock for months and because the price tag was truly pathetic -- $35 a share? Where's the shareholder value in that? We think these fat cat buyers should cough up at least $42 smackers for UVN. Univision's flagship station is the 5th largest TV network in the US and controls a young adult audience 3 x the one controlled by MTV. Univision is also your pure play on the telenovela (Spanish soap opera) boom: 2/3 of all US Mexicans watch at least one telenovela per day. UVN's ruthless management and wide moat business have transformed it into a media leviathan. Long term investors deserve to be amply rewarded.

There's no need for us to iterate the reasons why we like Univision, namely because we already did in a positive report we published back in March. As we argued then, Univision is a compelling proxy on a mushrooming demographic that's ready to spend its newfound wealth.

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.

Respironics' Attractive Niche Merits Attention

2006-06-20T17:46:00.000-04:00

If you're making money in these utterly adverse, bear market conditions, we salute you. One stock that held up quite well during last week's bloodbath (if you think this rally has legs, you're deadly mistaken; the oil and inflation-induced panic will be with us until the end of June, at least) was medical device maker Respironics (RESP), a $2.6 billion dollar company coughing up $1B in sales through 3,900 employees. Here's our first take on the stock, which was upgraded by Harris Nesbitt just last week.

Description Respironics develops and manufactures medical devices for respiratory ailments. The firm generates about half of its sales from equipment and masks that treat sleep apnea. Ventilation systems, particularly noninvasive tools, represent its second largest segment. Two others -- children's medical ventures and respiratory drug delivery -- remain nascent, high growth opportunities that complement the firm's home oxygen product acuity and hospital-targeting therapeutic devices.

Positive Considerations We view RESP as a terrific play on a medical device niche characterized by healthy price points, towering barriers to entry, and high switching costs. RESP's product/service portfolio is centered on sleep apnea and ventilation products.

Sleep apnea is temporary suspension of breathing occurring repeatedly during sleep that often affects overweight people or those having an obstruction in the breathing tract, an abnormally small throat opening, or a neurological disorder. Approximately 6–7% of the population of the United States, or 18 million Americans, are thought to have sleep apnea, but only 10 million have symptoms, and only 0.6 million have yet been diagnosed. In Americans aged 30–60 years, obstructive sleep apnea affects nearly one in four men and one in 10 women; men are twice as likely to have sleep apnea. Although sleep apnea has been more widely diagnosed in the past decade, experts estimate that at least 90–95% of cases remain undiagnosed. Reasons for this include nebulous developing symptoms, limited knowledge of the disease, and expensive testing protocols needed for better diagnoses. Sleep apnea is difficult to diagnose without expensive testing, can aggravate or cause heart and lung problems, often damages quality of life, and could require invasive surgical procedures. As such, we think the medical community will continue to embrace and study the prevention of obstructive sleep apnea over the next several years.

RESP's airflow technology piledrives its rivals' technology straight into the ground: we think that if the firm can sustain a moat around its business, shareholders will be amply rewarded, particularly because this is not a widely followed stock. We like how insiders have been with the company for a long time and how there are no analyst sell recommendations on the Street. Respironics, which has grown sales mostly through acquisition (stock-based), should enjoy economies of scale as it gets bigger and begins to reap the fruit of operating leverage. A quick look at the balance sheet reveals that Respironics' $265M cash horde is 6 x the amount of debt that the firm carries on its books. Not only does this capital structure appeal to us, it suggests RESP will continue buying its competitors as it fleshes out its top line story and magnifies its product reach.

Risks We're sure you've been told a million times: "Careful with medical device stocks -- abrupt reimbursement rate changes can hammer the stock and leave you looking for a bottle of Jack." Well, RESP is no exception. The problem with medical device companies is, we think, twofold: firms needs to restlessly innovate (or else lose market share to superior rival technology) as they deal tirelessly with the vagaries of 3rd party payers. Simply stated, if RESP falls behind the innovation curve and/or customers begin paying more out of their own pocket, shares will take it on the chin. Unfortunately, RESP fails to pass our "5-10% insider holdings test": insiders own less than 2% of the stock, which heightens the risk/reward slightly.

Valuation Analysts are of the opinion that Respironics will earn $1.66 EPS in 2007, representing approximately a 23% jump from 2006 EPS estimates. Today, RESP trades for 21.6 X forward earnings, indicating to us that there is room for upside if our thesis pans out. In addition, RESP sells at a large discount to rival Resmed (RMD) on both a price/sales basis (43% discount) and a trailing 12 month price/earnings basis (68%). We'd gladly pick up shares on weakness.

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.

Announcement Regarding Website's Future

2006-06-17T06:06:00.000-04:00

In August of 2006, the founder of Catablast.com will begin a rigorous 2 year MBA/CFA program at the Kelley School of Business. This means that our free web service, as well as our paid subscription service, will come to a screeching halt effective this August. Subscribers will be reimbursed for any unused portions of their subscription; daily visitors to the "free" section of this site can rest assured knowing that our founder is back in academia doing what he's been doing everyday for the last three years: following, studying, picking, trading, and reading about stocks.

In the meantime, we expect that our readers and/or subscribers will continue to enjoy our no-nonsense research, whether it be here or at SeekingAlpha.com (until August 3rd), the leader in grassroots-based financial journalism on the Internet and today the first place many buy-siders go for original stock ideas. We are truly grateful for having been invited to write for the site back in January this year; kudos to David Jackson and his hard-working staff at SeekingAlpha for toiling at all hours to create/aggregate value-added stock research that trumps, we think, most of the ad-replete journalism currently on the web. For a look at what our material looks like once it's been uploaded to SeekingAlpha, click here.

If you'd like to contact our founder about possible internship (for Summer 2007) and/or permanent placement opportunities (buy side/sell side equity analyst positions), you can reach him at djacome@indiana.edu (serious inquiries only, please). He hopes to interview with as many Wall Street firms (regional + global) as possible throughout the next 10 months and would relish the opportunity to speak with someone who's familiarized him/herself with this website. For those interested, a quick panorama of our output is available through the archive link found at the bottom of this page. To learn more about the Kelley School of Business (a top 20 MBA program & a top 10 undergraduate program), please go here. Thank you all for an incredible ride -- we'll see you on Monday.

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Reader Emails: L-3 Communications Hldgs.

2006-06-16T20:09:00.000-04:00

You Ask What's your take on L-3 Communications (LLL)?

We Reply L-3 is another bonafide play on the defense spending boom, which began after 9/11 spurred our government to push aggressively into better systems and technologies to protect citizenry. While Boeing (BA) is our favorite in the group [because it hedges any slowdown in military spending with growth in its commercial airline category], we really like L-3 because it focuses on several attractive defense niches, including surveillance + reconnaissance systems. The firm is in modest shape and carries roughly $1.50 in cash per share. At 17 x current EPS, 2 x book value, and .89 x sales (all at a discount to its peers), a value story looks to be in place. Moreover, L-3 pays a modest dividend and posts ROE that's roughly in line with the industry average; technical support @ $75 level and dearth of sell recommendations on the Street (1 vs. 12 buy/hold) makes us comfortable with the risk/reward.

As a pioneering mezzanine defense contractor, L-3 delivers multifaceted, value-added products and services to a plethora of different constituencies (airports, the military, and marine ports), in effect mitigating its exposure to the industry-wide risk of contract cancellations and/or unpredictable government orders, which subsequently jolt earnings and revenue streams. L-3 has plenty of debt on its books (debt/equity of .99 = 4 x industry median of .23), but since operating cash flow covers debt obligations by at least 4 x, we're hesitant to raise our discount rate above 11.5%. We think that going forward, it would be in shareholder's best interest for L-3's board to move as fast as possible in finding a permanent CEO replacement for Frank Lanza, the visionary founder who abruptly passed away last week after a long bout with esophageal cancer.

Any slowdown in defense spending -- or more pessimistic findings related to L-3's rapid-fire acquisitive growth from 1997 to 2006, in which sales ballooned 900% to over $10 billion -- could adversely impact the firm's equity value and lower returns for short-sighted investors aiming to arbitrage the possible sale of the firm.

Got some question you're dying to ask us, some stock you'd like to see us dissect, carve, or spit on? Email us anytime at feedback@catablast.com. While we can't promise an instant reply to your query, we do read everything! 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.

First Marblehead's Insiders Unload Stock

2006-06-15T05:43:00.000-04:00

Boston-based First Marblehead (FMD) is one of the most complex companies we've ever encountered. First Marblehead focuses on the private student loan market, swapping its loan-processing services in return for the right to securitize clients' student loans.

The firm ostensibly makes money by securitizing student loans for its customers, who outsource their processing and administrative duties to the small cap company. After securitizing the loans, FMD captures the spread between the dollar value of the securities and the dollar value of the loans backing those securities. First Marblehead keeps a small percentage of the difference, generating EBITDA in the process.

FMD's business model gets more complicated, so we'll spare you the details. A few things you should know, though:

1. FMD faces stiff competition from giants like Sallie Mae (SLM) and Student Loan (STU), whose size and business model transparency we find more attractive. Sallie Mae, which coughed up $3B in revenues last year, recently made a terrific acquisition, we think, in buying 529 planner Upromise. This deal should enable the firm to capture and capitalize on families aiming to both save + borrow for their kid's college education. Equally, it bestows SLM with a competive advantage other firms would love to have: your name all over McDonald's bags (Upromise's logo is part of every Happy Meal you buy).

2. Second, FMD's customer list is highly concentrated. Last time we checked, JP Morgan was responsible for 30% of FMD's sales. Bank of America is also a big client. Although FMD has slowly de-concentrated its revenue sources over the last 3 years, we still deem the risk/reward mildly unattractive; valuation of 5.8 x sales does not help the bull case.

3. FMD's revenue recognition policy screams for attention, as well, since the company books the present value of any future cash flows as revenue -- if loans underperform, the stock could fall out of bed. While this is common to all loan players, investors should augment whatever discount rate (WACC) they're using to value FMD shares because FMD has less experience, employees, and cash flow generation.

4. In addition, 2 major insiders quit last year after it was discovered that they were swapping gifts in order to land contract deals. They've brought in new management, but it looks like they're all overpaid given the whacking FMD's stock price took in the last 6 months. Lest we forget, insiders have been unloading the stock like madmen; Board Director Stephen Anbinder pulled in a million just 2 days ago, which comes after the million he raked in on May 25th; VP of Capital Markets John Hupalo has also developed an allergy to the stock.

5. As if that wasn't enough: While many analysts may have a hard time figuring out exactly how FMD makes money, they should have no difficulty determining how FMD's friends and family pay the bills. The amount forked over was not eye-popping, but news like this forces us to reconsider management's priorities. From FMD's latest 10-K:

At March 31, 2006, the Company had invested approximately $98,064 of cash and cash equivalents in a money market fund. The investment adviser for this fund is Milestone Capital Management, LLC (MCM), an institutional money management firm. In addition, approximately $24,955 of cash equivalents was invested by MCM on behalf of the Company under an investment management agreement. MCM receives a fee for services it performs under this agreement. MCM is a wholly owned subsidiary of Milestone Group Partners. Members of the immediate family of one of the Company's directors own approximately 65% of Milestone Group Partners.

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.

Reader Emails: Google + Innovation

2006-06-14T06:00:00.000-04:00

A Reader Asks "You guys said Microsoft (MSFT) was going to $32 and Google was going to $650 -- what happened? "

We Reply How about a bloodbath? The market's erased all of its gains for the year, the Dow being down 11% YTD. 30% of a stock's movement (some experts think it's closer to 40%) is directly correlated to the market's overall condition, so keep that in mind.

But, we admit it: we were wrong -- in the short term. In the long term, these 2 stocks should see better days. Microsoft at 17 x is a bargain, hands down. Google, meanwhile, projects robust EPS growth through 2008 and analysts have kept their buy ratings. A few ideas related to the Google/Microsoft duel.

1. If Google cuts into MSFT's business, then Google will profit, but only in the short term. Google got where it was vis-a-vis new market disruption, a term coined by Harvard professor Clayton Christensen. New market disruption relates to firms who create business opportunities where none existed, enabling consumers to do something previously imaginable and needed, but untried. In Google's case, the need for an alternative, algorithm-based search vehicle spelled billions of dollars in sales in just 7 years.

2. By usurping or mimicking already defined technologies (spaces well defined by Softee), Google is only setting itself to fail, as me-too strategies rarely work and more often than not dilute brand personality while cannibalizing assets. Google's senior managers could learn a lot from Intel founder Andy Grove: remain paranoid and find your inflection point!

3. The Street underestimates how much Google is spending on brainpower. We wonder what kind of hours Google's HR personnel is putting in: world class engineers and seasoned execs are literally being interviewed all the time. Businesses are about the people who operate them and Google sure knows this. Intangibles like this are not reflected in Google's stock price, we believe.

4. Disruptive markets and threats require disruptive channels. Google has to find new ways to get to the end user. Acquiring neat web toys -- which they're hardly monetizing -- will only get Google so far. We understand Brin + Page are building a brand, but puh-leeeze: How much free lunch do the Palo Alto boys plan to give away? Given the fact that a whopping majority of Google's sales come from one category (adsense/advertising), the time for innovation is now.

5. Birth of a search engine: the search explosion was a prototypical disruptive force. The winner of the MSFT/GOOG feud will define growth trajectories (rather than "piggyback" on them), grab the lion's share of an early adopter category, and translate it all into mass/mainstream success. The loser will cram slightly improved technologies into existing markets, a recipe for a black eye. Just ask RCA.

In the late 50s, Sony unveiled the portable black & white TV, a truly disruptive technology. RCA, whose distribution channel/value network was in no way prepared for this new product, responded to the entrant by selling TVs that were equal or barely better than the Sony's (at appliance stores, which was not the venue of choice; people were buying TVs at discount retailers). Guess who won that one? It is very difficult for an incumbent to [re]claim territory seized by a first mover. You have to melt a customer's face (to quote comedian Jack Black) if you want to get them to move. Perchance Google is the next Sony, whose innovation run from 1955 to 1959 was truly phenomenal. Is Microsoft this decade's RCA?

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Hershey's Faces Cost Pressures, Shares Jump

2006-06-13T06:15:00.000-04:00

Shares of Hershey's (HSY) are up 6% in the 4 months that have elapsed since we told investors to pass on the confection giant (see here). Shares have run up because of the recent inflation scare, which has sent a pile of cash into "safe" stocks, like cereal and beverage plays. What's striking is that Hershey's is by no means a safe or defensive stock, at least not in the traditional sense.

Because HSY essentially makes candy, people assume that not even a bloody recession'll hurt the stock; if your unemployed, you'll probably still shave, buy Kleenex, and munch on Kit Kat bars -- or the thinking goes. The problem as we see it is that Hershey's is deeply levered to commodity + raw material costs, such as the price of sugar and cocoa, resulting in a fractured bottom line.

The current valuation isn't doing much for us, either: At 27 x trailing 12 month EPS, Hershey is swapping hands at a premium to its historical 5 and 10 year P/E averages. On top of this, sales are growing less than 1% (market saturation; only 11% of sales are outside the US) and cost pressures have turned off a large portion of investors. Insiders are telling analysts that 2006 EPS will jump 9%, but at the current multiple as well as the volatile raw material environment, we're simply not convinced that shares represent an attractive risk/reward.

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.

Cold Stone Creamery: IPO in the Making?

2006-06-12T05:32:00.000-04:00

The hardest part about being obsessively in love with business and stocks is having to deal with privately held companies. By that we mean this: you visit a business. You like what you see. You feel good inside. Now you want to find out how the firm is doing in a strictly economical sense -- does the company make money? How much in annual sales? Does it throw off cash? Does it grow organically or does it buy sales? Who runs the show, some freshly minted MBA or a seasoned vet? Are they operating in Montana or Mumbai?

Alas, you arrive home to your 6 monitors and ThompsonONE/Bloomberg setup, only to discover that your new obsession is privately owned. Having encountered a dearth of information, you catch a case of the business blues.

Case in point: Cold Stone Creamery. The ice cream shop was founded in 1988 by the Sutherland family. The company now owns 1,000 different stores in 47 states. Each Cold Stone Creamery is privately owned, with each owner setting his/her own catering policy. The concept is unique, we think: Cold Stone is all about ice cream that is “smooth and creamy”, rather than the traditional hard-packed or soft-serve varieties. Using only the finest ingredients, Cold Stone produces the high quality ice cream, made fresh each day in their store. Every ice cream creation is then made to order for each customer by blending in mix-ins on a frozen granite stone (hence the Cold Stone), and served in a fresh-baked waffle cone. In 1995, the first franchise store opened in Tucson, Arizona, followed by the first out-of-state store in Camarillo, California. As of May 2006, the company planned to open another 1,000 stores.

This is big, since it raises the possibility that Cold Stone's looking to sell stock in the open market to raise capital. If Wall Street's not an option, either Cold Stone boasts some terrific organic growth (cash flow pre-cap ex) or it's found a generous regional bank to help it out (line of credit, etc). Either way, this company has our attention, just like Chipotle (CMG) did years ago.

Our prediction: Cold Stone goes public within the next 24 months or it gets acquired by a name like Unilever (UL), the European food giant that snapped up Ben + Jerry's a couple of years ago (although Cold Stone's business model may not be as pliable and amenable to mass market customization). Let the bankers suit and court this Arizona gem. In the meantime, go find your Cold Stone Creamery. We know you'll be impressed.

Our team has been known to get kicked out of restaurants and factories for trying to unearth and extract information from customers or employees. If you know more about Cold Stone's capital structure, financing history, or future plans, please email us feedback@catablast.com.

ShuffleMaster: Master of Its Domain?

2006-06-11T07:04:00.000-04:00

Shares of gaming supply company Shufflemaster (SHFL) took a haircut on Friday after the firm reported a loss of $12.7 million due to acquisition-related and R&D charges that the top line could not cover. Excluding one time items, the company would have earned 18 cents per share, missing Wall Street's consensus estimate of 22 cents per share. Note that quarterly revenue was up 60 percent at $44 million. The Street, often myopically short term, brutalized the stock. On any more weakness, we'd take a closer look at the stock -- here's why.

Description SHFL specializes in providing its casino and other gaming customers with automatic card shufflers and chip sorting devices to improve their profitability, productivity and security, as well as entertainment products, including poker, blackjack, baccarat and pai gow poker-based table games. The company, whose 320 employees were responsible for $120M in sales last year, owns roughly 20,000 shufflers and 4,000 table games.

Positive Considerations ShuffleMaster is an unequivocal play on the Macau casino boom. Anything casino-related is enjoying massive penetration rates there because of the explosive demand for a wide array of services (Macau is the fastest growing casino market in the world). With 90% market share, enviable intellectual property, a stellar portfolio of gaming titles, and first mover advantage (SHFL has done business in Macau for over 10 years), Shufflemaster presents a compelling play on casino growth abroad. For years, table games' share of the U.S. casino market contracted, giving way to more space for slot machines. Today, we're seeing the reverse: tables are making a comeback, especially overseas, where tables hold more weight than slot machines. Fortunately for SHFL, this is particularly the case in Macau. Hence, SHFL is in the right place at the right time.

The company developed the first automatic card shuffler in 1991 and now owns 90% of the worldwide market. More than 20% of the company's revenue comes from outside the United States, which we like, because the US space is arguably saturated. Gross margins are white hot (75%+) while cap ex is perennially low. Shuffle Master is a small firm in a large category, but its market dominance is impressive. Besides International Gaming Tech (IGT), we can't think of a better way to bet on the internationally-driven gaming explosion. SHFL's revenue has climbed at a 24% CAGR over the past five years and we think replacement demand should keep the stock afloat for the forseeable future, although a couple of more analyst downgrades could be on their way (see the risks section below).

Risks International markets lead to a whole array of legal, currency, and regulatory risks. Additionally, although SHFL is a first mover, a better-capitalized player could decide to enter the card shuffler category anytime and effectively take Shufflemaster for a wild ride. That said, it's unlikely a behemoth will be able to serve customers with the same level of drive and zeal that Shufflemaster has. SHFL, which now holds a $1.2B market cap, has made a fair number of acquisitions, too. Analysts think a few of those targets were taken out at inflated prices, resulting in a questionable balance sheet, in which we see that intangibles account for roughly 1/4 of assets. Serial acquirers who miss quarters get beat up hard, so know what you're getting yourself into. With a 19% short interest, a great deal of pessimism has been priced into the stock.

Valuation We think the stock has to come down a bit more before investors pull the trigger. On a trailing 12 month basis, SHFL still trades at 40 x EPS, which is twice the amount the industry changes hands for; on a price/sales basis, the stock is going for 10 x revenues, which should make anyone hesitant, especially in today's violent market. Our current rating is HOLD, but that could change relatively soon (for better or worse) depending on the next few quarters, which we'll be watching like a hawk.

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.

Ask Sallie Mae What "Synergy" Means

2006-06-08T05:33:00.000-04:00

Companies merge for a wide range of reasons, but the most cited one is synergy. We define synergy the same way your business school professor probably did: synergy relates to 2 entities sharing resources for different products & services. If we were to write a term paper on the subject, we'd have to talk about Sallie Mae.

Last week, Sallie Mae (SLM), the largest student loan lender in the United States, snapped up Upromise, the largest administrator of direct-to-consumer 529 college savings plans, for an undisclosed sum.

Upromise, which also administers a rewards program that provides cash rebates toward college savings on consumers' everyday purchases at places like supermarkets and gas stations, gathered a cool $10B in assets, 1M savings plans, and 7 million customers in just five years -- an amazing feat by all means. The deal should enable Sallie to more directly attack the consumer by complimenting its student loan operations with UPromise's widely marketed savings platform.

The decision to buy UPromise stemmed from the acquirer's desire to offer customers an integrated, augmented value proposition: the deal will enable Sallie Mae to help parents/students borrow and save money for college without them having to go to 2 different providers, effectively saving them (parents) both time and money. As far as we're concerned, this deal's a layup and we pity the fools who didn't think of eating Upromise earlier.

In short, the US' leading finance company will now have a competitive advantage with which to whoop stand alone loan providers. As Tim Fitzpatrick, Sallie Mae's CEO stated: "We are truly excited about this new acquisition. The opportunities to expand college savings through our customer relationships are extraordinary. In partnering with Upromise, we will be able to help families get a jumpstart on saving for college." Tom Anderson, Upromise's CEO, was equally ecstatic: "...it will also allow Upromise to extend our relationship with families through college and beyond. Sallie Mae's work with 6,000 colleges and universities, as well as America's leading scholarship organizations, creates partnership opportunities that Upromise could never achieve on its own."

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.

Summer Stock Ideas: Four Seasons

2006-06-07T05:55:00.000-04:00

Shares of Four Seasons (FS) are up 10% since we initiated coverage on the hotel powerhouse with a positive rating (on May 4th). We remain bullish on the hotel industry and look forward to a summer replete with high occupancy levels and expensive room service. Here is a "bite size" version of our feeling on the stock:

Positive Considerations Four Seasons manages and invests in hotel, resort and interval, fictional and whole ownership residential properties throughout the world. It operates in two segments: Management operations and Ownership operations. The Management operations supervises all aspects of hotel operations on behalf of the hotel owners. This segment also includes the licensing and managing of residential projects and clubs. The Group has 70 hotels in 31 countries and more than 27 properties under development. It operates in Canada, the US, Europe, Asia, and the Middle East.

The most attractive aspect of this company/stock is its historical 45% operating margins. We believe this is due to the firm's success in the luxury niche and refusal to compromise its brand strengths during economic downturns. The company currently has a strong pipeline that includes new hotels in Macau and Taipei. The Macau project should compliment the rapid ascent of casinos and gaming facilities in the region. Rival hotel operators appear too "mass-market oriented" for our liking; these competitors are debt-laden whereas Four Season's balance sheet holds plenty of cash and no debt. With several growth opportunities on the horizon (4 Seasons should add 8 hotels per annum), some of the best management in the hotel industry, and unmistakable brand equity, we see plenty of reasons to like Four Seasons.

Risks Hotels are a cyclical business in general. Occupancy rates tend to plummet when the economy suffers. However, because 4 Seasons has its hotels run by outside owners (who sign contracts spanning as long as 60 years, eons ahead of the industry standard), it doesn't have to pay the heavy fixed costs that are a hallmark of the industry. And the sheer fact that 4 Season's market share grew after September 11 tells us that the firm has its clientele on lock and that it can weather storms other hotels drown under.

Valuation With shares recently hitting our price/sales multiple objective (3 x peer group), a pullback is in order. Rating: HOLD; BUY at $52-$55 price range with moderate downside.

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.

Nonsense on Stilts: Vonage

2006-06-05T06:00:00.000-04:00

Internet phone service provider Vonage (VG) is now at the center of a class action lawsuit that claims the company bamboozled customers toward investing in its Herculean $530 million IPO.

The company, which should've set off all types of red flags and alarms when it set aside 4.2 million IPO shares priced at $17 for customers (anyone who has worked in an I-bank knows that any deal you can get a piece of is a dog), has been told by some customers that they'll renege on shares; Vonage says it'll get the money no matter what.

The suit, filed Friday in U.S. District Court in New Jersey, claims Vonage tried to compensate for a lack of interest among institutional traders who usually dominate IPOs by selling shares to consumers. The suit contends that Vonage and its underwriters violated a securities law that "requires that a company recommending the purchase or sale of its securities to a customer must have a reasonable basis for believing that the recommendation is suitable for the customer." Vonage, the statement charges, "had no such reasonable basis in this case and improperly crammed investors into the Vonage IPO regardless of their suitability."

To some, this may come as a shock; to others, this may all seem uncanny, since the disastrous Vonage IPO echoes founder Jeff Citron's checkered history. Anyone who's read the Vonage prospectus will recall this telling passage:

The past background of our founder, Jeffrey A. Citron, may adversely affect our ability to enter into business relationships and my have other adverse effects on our business. Prior to joining Vonage, Mr. Citron was associated with Datek Securities Corporation and Datek Online Holdings Corp. During a portion of the time Mr. Citron was associated with Datek Securities, the SEC alleged that Datek Securities, Mr. Citron and other individuals participated in an extensive fraudulent scheme involving improper use of the Nasdaq Stock Market's Small Order Execution System, or SOES. There is a risk that some third parties will not do business with us, that some prospective investors will not purchase our securities or that some customers may be wary of signing up for service with us as a result of allegations against Mr. Citron and his past SEC and NASD settlements. We believe that some financial institutions and accounting firms have declined to enter into business relationships with us in the past, at least in part because of these matters. Other institutions and potential business associates may not be able to do business with us because of internal policies that restrict associations with individuals who have entered into SEC and NASD settlements. While we believe that these matters have not had a material impact on our business, they may have a greater impact on us when we become a public company....

Once a thief, always a thief: the Vonage IPO was an excuse for Citron and his cronies to cash out on what was a deeply flawed company, one that couldn't be sold without the help of unwary investors and rapacious bankers out to capture that coveted 7% underwriting fee. Or as Jeremy Bentham might say, it was a bunch of "nonsense on stilts."

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.

It's OK to Exploit + Profit Off Your Baby's Needs

2006-06-02T06:01:00.000-04:00

One very discerning reader reminded us late Thursday night that children's apparel player Gymboree (GYMB) has surged 36% since we recommended the stock as a play on the Baby Boom. In case you missed this report, here's a quick synopsis.

1. According to the US Census Bureau, the number of children age 5 and younger is expected to grow 10% over the next decade. Babies need a lot of things, but for the sake of brevity, we came up with three essentials: clothes, diapers, and toys. Gymboree was our clothing pick.

2. Gymboree, a specialty retailer that operates stores selling apparel and accessories for children and women under the Gymboree, Janie & Jack, and Janeville brands, was our top pick of the group. Same store sales ("comps") had been on fire, which we found astonishing given the fact that that Gymboree faces stiff competition from department stores and mass merchandisers alike. Target has been pummelling GYMB's rivals to the pavement; GYMB, in the meantime, was blowing away analyst estimates. That's the sort of risk/reward that gets us out of bed in the morning.

3. We labeled the risks of investing in the stock, as we typically do: "Because children’s apparel is no-moat business (low switching costs/volatile pricing environment), investing in Gymboree is somewhat risky. The fight for market share means inconsistent revenue patterns and meandering value propositions."

4. We closed our pitch with the following sinker: "...we like how Janie & Jack has captured the high end portion of Gymboree’s target market. The boutique-style operation is expected to have 80 outlets up and running by 07. With better inventory control, Gymboree could be a strong contender. We await a more predictable operating margin picture from Gymboree, which is debt free."

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.

Bancolombia: Attractive at Current P/E

2006-06-01T06:30:00.000-04:00

Over the weekend, Álvaro Uribe was re-elected as Colombia’s president with 62% of the vote. We're not the least bit surprised: under Uribe's tutelage, Colombia has pulled itself up out of the cacaphony of violence and political subterfuge it once was. Today, the warzones are less intense, foreign investment's picking up, and the economy's improving, thanks to gravity-defying commodity prices and Venezuela's homerun economy.

This could be a great time to pick up some Bancolombia (CIB). Bancolombia is the largest bank in Colombia in terms of assets and market share and it's the only Colombian company listed on the Big Board.

The stock has gotten hammerred recently because of interest rate sensitivity. Loan growth at the bank, however, remains robust at 15% and net interest margins are far from ugly at roughly 8%. Lastly, the bank's operating structure is lean, which means sizable returns on equity (40% for trailing 12 months). There's even talk that Bancolombia is being too conserviative with its books (meaning its loan loss provisions are too high). If any of you remember Wells Fargo (WFC) in the 90s, you'll know that a bank's stock price can zoom once the Street wakes up to a company's "true" condition. At less than 12 x current earnings, Bancolombia is worth looking into.

If you decide to pick up shares, make sure you know what you're getting yourself into: CIB is not for the faint of heart. Bancolombia is controlled by a conglomerate, Grupo Empresarial Antioqueno, which snaps up banks voraciously. We tend to be wary of trigger-happy, acquisitve growth. Also, Bancolombia's loans all originate in Colombia, so if the economy there tailspins, Bancolombia could go down with it. As with any bank, further rate hikes may impinge negatively on shares.

If you can stomach the inflationary risks and a slower 2006 GDP forecast for the land of flowers and coffee, Bancolombia may be for you.

Disclosure: The author is Colombian and drinks Colombian coffee everyday. 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.

Applying Porter's 5 Forces to MasterCard

2006-05-31T05:57:00.000-04:00

The success of the Mastercard(MA) IPO has been well-documented. What hasn't been covered, though, are the seismic, industry-specific risks the company faces over the long term. We hope you brought your notebooks and pencils: it's class time.

Besides the piles and piles of lawsuits that await the credit card behemoth, there is another risk to Mastercard's growth outlook over the long term: its own customers, namely banks and financial institutions (for the sake of discussion, Mastercard's "buyers"). They've been consolidating at breakneck speed and will continue to consolidate. When buyers merge, someone's bound to screwed.

It's Michael Porter all over again: In his seminal book Competitive Strategy, Porter clearly states that as firms join hands and get bigger, they begin to wield more muscle against others in the value chain. Buyers have higher bargaining power when a market is characterized by a few large buyers and many suppliers. Buyers also wield power through what's called the backward integration threat, which is the threat that a buyer will swallow a producing agent. Citigroup (C) can snap up a credit card company in one second; it's highly unlikely, however, for a credit card company to eat a bank.

As more buyers concentrate to gain market share, the worse off Mastercard will be. Certainly, Mastercard enjoys a wide moat and there are not many credit card companies it competes against, but the possibility of banks "setting the price" and killing the margins of credit card issuers remains. What this means for Mastercard is that its margins will compress as more and more financial institutions decide to tie the knot. Banks will use their size to seek the best deal, all to the detriment of Mastercard's business model.

Don't get us wrong, though. Mastercard over the next 6 months is a compelling buy. There are still dozens of funds waiting in line to buy the stock, as well as throngs of analysts waiting to initiate coverage. Long term, however, we think you're better off spending your money on that coveted Angelina Jolie nudie photo you saw on eBay.

Disclosure: At the time of publication, the author held a long position in Citigroup (C). 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.

Body Armor Purveyor Gets Smoked

2006-05-30T14:00:00.000-04:00

Shares of DHB Industries (DHB) are down nearly 70% since we urged investors to dump shares of the body armor manufacturer.

The company's Point Blank division sells protective vests to governmental entities, whose need to protect our soldiers in Iraq is obvious. The stock hit a high of $22.53 in December 2004, but it's been all downhill ever since.

The company recently got a Wells notice (given out for securities violations). The company lied about its net income numbers (accounting chicanery) and it got whacked off the AMEX because it didn't have enough independent directors on its Board (e.g. DHB doesn't give a rat's ass about shareholders). The company has also been charged with insider trading and its last CFO left after just 21 days on the $400,000+ a year job (we wonder what he saw scribbled on the bathroom walls).

In a word, you have all the elements of a stock begging for a haircut. Is there any hope for DHB? Surprisingly, yes. The firm says it has a backlog of $226 million dollars worth of orders. Keyword: says.

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.

Freddie Mac's Accounting Maze

2006-05-30T06:07:00.000-04:00

Freddie Mac (FRE) is a shareholder-owned, government-sponsored enterprise that provides stability in the 2ndary market for residential mortgages. It purchases and securitizes conventional residential mortgages from mortgage-lending institutions. Freddie Mac is one of 3 major sources of secondary-market funding for conventional mortgages and has financed one out of every six homes in the United States.

The stock will drop numbers (for 2005, that is) a little later today. In a word, the stock's not for us, at least not now anyways.

Accounting and internal control issues continue to weigh on the firm, even as the underlying economics of the mortgage category remain appealing. Mortgage debt outstanding has grown steadily as 40-year-low interest rates increased borrowing and contributed to higher home prices. This macro milieu has created a sizable demand for Freddie Mac's services, whose wide moat 'tis the stuff dreams are made of.

Too bad for all the political and regulatory turbulence -- we'd like to get to know this stock better. Turnaround situations (Tyco, for instance) can be real sweet moneymakers on Wall Street. And Freddie's new management has already started making moves, cleaning up shop and sending investors a vote of confidence in its own future by hiking its dividend even as analysts scramble to understand a balance sheet that resembles Minotaur's labyrinth.

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.

GoodYear Tires: Don't Count on a Recovery

2006-05-29T07:27:00.000-04:00

Sure, GoodYear (GT) may have a blimp as its marketing prop, but don't mistake that a sign that its stock is flying high. On the contrary: Good Year is so burdened with debt, the company may be celebrating this Christmas in a funeral home. That is, unless, either private equity comes to the rescue or the company does a secondary offering, raises some much-needed mula, and pays off hungry creditors. Let's review Good Year's dire predicament:

Description Good Year is a global manufacturer of tires and rubber products. It markets several lines of power transmission belts, hoses and other rubber products for the transportation industry and various industrial and chemical markets, and operates commercial truck service, tire retreading, and auto service center outlets where it offers products for retail sale. Good Year has 80,000 employees, posted $20 billion in sales last year, and currently supports a $2.3 billion market cap.

Thesis Goodyear finds itself in the middle of a "must restructure or die" scenario. Without sufficient cash flows from US operations, Good Year could end going under because of its high debt levels (debt/total capitalization ratio is 70%, way above our 50% preference threshold). Having mutilated its brand, the company is now attempting to turn things around in the US, its largest and worst-performing segment. Management plans to do this by selling noncore business assets, instigating new product launches, tightening distribution, and marketing more effectively. So far, sales have picked up, although a large chunk of that has come from one time gains. Tires is a low margin, cutthroat business (GT's net margins at a 700 bps discount to S&P's); besides the abrasive competitive milieu, Good Year must also deal with the bane of looming pension payouts. Goodyear claims 40% of the market for original equipment tires, but because rivalry is thick, price wars ensue among tire companies, leaving customers with high buying power. Lastly, Good Year is currently fighting some legal messes whose outcomes remain unknown.

Risks The possibility that Good Year will have trouble covering interest expenses over the next year is likely; additionally, a secondary offering (whose proceeds will presumably be used to retire debt) will dilute current shareholders and make any future earnings streams less meaningful. Moreover, we're vexed by how little stock insiders at Good Year own, less than 1% of the 177M shares outstanding. Without stock-based motivation, a successful restructuring appears less likely and the risk/reward becomes far less attractive. Others agree: the short interest ratio on GT shares is 12%, an increase from the previous month.

Valuation Because of its debt load, tarnished brand image, and questionable management motivation levels, Good Year stock is trading at a basement level valuation. On a price/sales ratio, Good Year trades at a discount to both its industry and the S&P; on a forward PEG basis, GT trades at a 55% discount to its estimated 16% EPS growth for 2007 (9.2 forward multiple/16). Nonetheless, investors must take into consideration the firm’s highly leveraged capital structure. Our back-of-the-envelope DCF valuation model (using an aggressive 13% cost of capital) yields a price target of $11, representing a 15% haircut from Friday's closing price. We think holding onto this stock is like lighting a cigarette in a dynamite factory -- you might live, but you're still an idiot.

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.

Cogent Pummelled -- Worth Looking At?

2006-05-28T05:41:00.000-04:00

Shares of biometric play Cogent (COGT) have been smacked hard -- really hard -- over the last few months. The provider of fingerprint ID technology for governments, law enforcement agencies, and corporations was once the talk of the town. The boom in identity theft, coupled with a heightened concern over national security, sent identity verification stocks straight to the moon.

Now, the Street is painting the town red with Cogent's blood. And with good reason: Cogent's last quarter sucked real bad. Revenue dropped 36% to $22.7 million while EBIT tanked 50% to $7.2 million. Apparently, Cogent's customers aren't as concerned about catching hackers and terrorists as they used to be; to top it off, Cogent is having some serious issues controlling expenses.

Although pariah, a few analysts stuck to their buy ratings. Maybe they're thinking what we're thinking: If COGT's top line/bottom line story continues to worsen, we don't see why a potential acquirer wouldn't be interested in Cogent's 42% net margins and clean balance sheet; the company holds $340M in cash and no debt, quite a war chest for such a small firm (< $1.5B market cap and just 164 employees). Because of its advanced technology (patented image reconstruction and highly accurate fingerprint matching algorithm), Cogent controls an attractive niche a larger player might want to look closely at. We're still getting to know this stock, but let's just hope Cogent's next quarter isn't as depressing as this last one.

Don't forget that all of our work can be found at SeekingAlpha.com, a must read according to BusinessWeek, Barrons, and Forbes.

WebSideStory is Still a Good Story

2006-05-28T05:10:00.000-04:00

Shares of Web Side Story (WSSI) are down about 9% since we initiated coverage on the stock at $15.74. We got an email the other day asking us if we were still fans of the name. The answer remains yes: the WebSideStory will end on a happy note. In case you missed that report from 3 weeks ago, here's a quick recap.

What They Do WebSideStory is a leading provider of on-demand digital marketing applications and on-demand web analytics solutions for over 1,100 customers in the US. These web analytics solutions enable organizations to understand how Internet users respond to website design and content, online marketing campaigns and e-commerce offerings.

What We Like We think WebSide's web site tracking services compliment the boom in industry white papers and reports on Internet trends. WSSI's top line is on steroids: sales jumped nearly 100% to $40M in 2005. Four weeks ago, the firm's key product, HBX Analytics, won a major industry award for its excellent reporting, e-commerce capabilities, technical support and project management. Six weeks ago, WSSI unveiled Search 4.0, the first site search solution to integrate site search and behavioral data. While the market for e-commerce performance gauging is still in its nascency, there is no doubt that the internet's astronomical rise and global household penetration means that companies are more and more interested in pin-pointing the efficacy of online marketing campaigns. The demand for the type of service WebSide proffers is unmistakably there. If WSSI can't execute, the company will surely be snapped up: from a competitor's vantage point, WebSide's customer base is a market-share-grabbin' layup.

Valuation Story Analysts expect a 35% jump in earnings from 2006 to 2007. Right now, shares are going for less than that -- 19.4 x 2007 numbers. Given the intense competition in the Web analytics space (there are several smaller, private players on the field), we understand investor's concerns. But WSSI weathered the tech bubble burst better than most of its peers (ahem, it survived) and the company is coughing up 25% gross margins, a debt free balance sheet, and heavy insider ownership. Most importantly, WSSI's rivals have less access to capital. With just 7M shares in flotation, WebSide story is not without its risks, so make sure you kick the tires once or twice before putting the stock in your retirement account.

Don't forget that all of our work can be found at SeekingAlpha.com, a must read according to BusinessWeek, Barrons, and Forbes.

Wake Up, Sleepyhead: Sepracor is Buyout Bait

2006-05-26T06:00:00.000-04:00

Ever since the FDA shot down Neurocrine Biosciences' (NBIX) Indiplon tablets, rumors concerning a possible Pfizer (PFE) and Sepracor (SEPR) partnership/merger have been flying left and right on Wall Street. Sepracor's call option volume of 42,447 contracts heavily outweighs the put volume of 5,132 contracts. The sudden rush of money into the June 60 calls, for example, suggests that speculators are positioning for a large upside event occurring over the next month.

Sepracor, which makes the insomnia drug Lunesta, has seen its top line explode over the last 12 months as a result of this new drug. Lunesta's advantages over competing products could put the drug's sales in the $1B range within the next 36 months, we think. There is plenty of upside left, too: SEPR trades at a discount to rivals on trailing P/E basis and because no analyst on the Street really knows how much Sepracor will earn in 2007, the potential for an earnings surprise should not be overlooked.

Early last year, Bloomberg reported that Sepracor hired Morgan Stanley (MS) to explore a sale, but nothing ever came of it. The writing is on the wall: Sooner or later, Sepracor won't be Sepracor -- it'll be a division of either Pfizer or Johnson and Johnson (JNJ). And hence the buzz in the options arena.

Disclosure: At the time of publication, author was long JNJ and PFE.

Merrill Lynch: Optimistic Outlook for GM

2006-05-25T05:53:00.000-04:00

Shares of GM popped on Wednesday morning after brokerage giant Merrill Lynch issued a rosy report on GM's 2007 EPS picture, which Merrill believes will be positively impacted by the auto maker's gargantuan restructuring effort. Key takeaways/excerpts from the report:

1. "We are raising our rating to Buy...due to our expectation of a significant take rate on GMÂs current buyout program...and establishing a price objective of $37, which is based on 9X our 2007 EPS estimate of $4.10...Based on comments by the UAW that as of May 3rd 12,400 GM workers had asked to take buyouts, our discussions with industry sources, and the assumption the take rate will accelerate into the June 23rd deadline, we estimate that there will be about 30,000 buyouts. This would represent a significant acceleration in GMÂs current restructuring plan...."

2. "It should be noted that we are also adjusting for the portion of GMAC earnings that will be sold in late 2006/early 2007. As we outlined in our previous upgrade note, we thought there would be substantial savings from GMÂs buyout program. However at that time, there was no clarity on the take rate, which is a key driver of incremental cost savings. Since then, the UAW has itself indicated that as of May 3rd, 12,400 GM workers had already asked to take the buyouts, which is an encouraging sign. In addition, through our discussions with numerous industry sources, we believe the number of takers will be materially higher when the progris scheduledled to end on June 23rd."

3. "We now estimate that GM will be successful in pulling forward its planned headcount reduction of 30,000 workers by the end of 2008 to present day, which would represent a significant acceleration of its restructuring plan announced in November 2005...."

Vonage IPO Goes Off Without a Bang

2006-05-24T12:00:00.000-04:00

The fat lady stopped singing before she even got on stage.

Shares of internet phone service provider Vonage (VG) sank like a stone in their trading debut Wednesday after pricing late Tuesday at $17 a share. This is no surprise, considering that the last few weeks have been nothing but a bad press fest for Vonage. In fact, there were several sell ratings on the stock before shares began trading; you don't see this often, although in an ideal world we would.

The meat and potatoes: Vonage lost $261 million in 2005 on revenue of $269 million. Vonage's sales have been falling, but costs per subscriber have been on the rise. It is a business rife with competition: Cable companies are signing up their customers to VoIP as part of their triple-play platform (data, cable, voice). VoiP rival Skype has already introduced steeply lower prices. Even Google entered the business. If Microsoft couldn't beat Google, do you think Vonage will?

But let's not pin everything on Vonage: The investment bankers really screwed up here -- they should've priced the IPO lower, maybe at $10 or $12 -- this would've lowered the amount they netted in fees, but the stock would've looked better. For all the talk we hear about bankers manipulating stocks, this is one they let get away.

Don't forget that all of our work can be found at SeekingAlpha.com, a must read according to BusinessWeek, Barrons, and Forbes.

Advance Auto Misses 1Q, Creates Opportunity

2006-05-23T06:04:00.000-04:00

Shares of Advance Auto Parts (AAP) caught our attention last week after the stock lost gas due to a lower-than-expected earnings report. Shares are currently trading 20% below their 52 week high of $47.73. Earnings surprises can turn into great buying opportunities, if you've done your homework. Here's a quick peek under the hood of this maligned wonder.

Description Advance Auto is the second largest automotive products retailer. Products include replacement parts, accessories, maintenance items, batteries and automotive fluids for cars and light trucks (pickup trucks, vans, mini vans and sport utility vehicles). Advance also serves the professional installer market, which represents about 22% of sales. AAP operates close to 2900 stores in the US, PR, and the Virgin Islands. Of the 16 analysts who cover the stock, none have yet to push the sell button.

Positive Considerations Advance Auto Parts announced disappointing 1Q EPS of 68 cents per share, which the company said reflected higher energy prices and mild winter weather. Total sales at the replacement car parts retailer increased 11% to $1.39 billion from $1.26 billion, at the low end of the company's 1Q guidance. RBC Capital Markets noted that Advance Auto Parts spent heavily on its store growth (as many as 200 units expected to open in 06), explaining why operating expenses were higher-than-expected. But then RBC went ahead and maintained their buy rating and $50 price target on the stock.

Advance Auto is a stable, growth story. The Automotive Aftermarket Industry Association (AAIA) thinks the demand for auto repair will grow in the mid single digits for next few years. Advance Auto has been using this period of calm to revitalize in store formats in order to drive top line narrative and lift profitability. Although the last quarter may have been bumpy, management insists it'll hit these goals through creative inventory mix, brand enhancement. and higher same stores sales. In a world where #2's rarely win, AdvanceAuto finds itself well capitalized and strong enough to capture customers the industry leader is unable to serve, whether it be for geographic, qualitative, or quantitative (price driven) reasons.

Risks A pop in fuel prices could hurt shares of AAP, as could developments and greater earnings visibility from rival Autozone (AZO), which remains the undisputed leader in this space. Autozone also plans to expand and augment cusotmer mix, which could portend possible product overlap between both entities. Such scenario would adversely impact shares of Advance Auto, whose margins could further compress (as the runner-up, AAP will be forced to boost SG&A). Lastly, insiders have quit eating the cooking: Chairman Lawrence Castellani sold over $50M dollars worth of stock last May; more insider selling in 2006 would exacerbate uncertainty within the investment community and possibly trigger further price depreciation.

Valuation Analysts expect AAP's 2007 EPS to jump 19% to $2.85, leading us to believe that shares look reasonably valued at current P/E level. However, we think the market is overlooking the fact that Advance Auto has boosted its ROE more than 200% in the last 5 years while cutting debt by 50% to $477 million. AAP trades at a discount to its peer group on both a PEG and price/cash flow basis; given robust store expansion plans and upcoming summer season, we see further upside and leave price target at $48, representing a 25% premium to yesterday's closing price.

Don't forget that all of our work can be found at SeekingAlpha.com, a must read according to BusinessWeek, Barrons, and Forbes.

The $18 Million Dollar Payday

2006-05-22T06:13:00.000-04:00

On May 17, Empire Resources (ERS) CEO Nathan Kahn found himself $18M dollars richer after the aluminum company's top man dumped 750,000 shares of his company's hi-flying stock onto the open market.

Never heard of Empire Resources before? Neither have we. Empire Resources distributes value-added, semi-finished aluminum products including sheet, foil, wire, cast products, and aluminum powder and paste. The stock has gone absolutely parabolic in the last 52 weeks: shares have shot up from $6 to $65 for a 960% return. They've since come down to earth, and that's probably why Khan figured it was time to cash in before the market cooled off some more.

Although we don't consider ourselves "traders," we think the stock's stratospheric rise illustrates several important lessons on (short term) trading strategies, profit-locking, and risk awareness.

1. If you're buying a stock that's followed by a gazillion analysts (and held by household name mutual funds), good luck trying to make money. The biggest pops in the stock market come from obscure names, typically small caps with less than 3-4 analysts providing coverage. The less coverage a stock has, the easier it is for the investment community to misprice it, the reason being obvious: there isn't enough information out there. Two different analysts may have entirely different earnings projections for a stock, leaving the average investor in a musical chairs-guessing game predicament. You could win the lotto or take a bath.

2. If you're an investor, the trend is your friend, but if you're an insider of a company that was once classified as a penny stock, the trend is more important than your mother. Empire Resources was once a sleepy shell company doing less than $200,000 in annual sales (we're not making this up). Today, ERS generates $350M in sales and is compared to industry stalwarts such as Alcoa and Alcan. Talk about a mega-makeover. ERS's valued added services had investors glued in 2005 after the metals, mining, and commodities category took off. A rising tide lifts all boats, as the adage goes.

3. Hi-fliers spell R-I-S-K (and vice versa). ERS may have enabled you to retire at 35, but don't forget about the enormous risk you took to get there. Empire Resources could be a ticking time bomb: although sales have mushroomed nicely, Empire holds a 3.6 debt to equity ratio and has only 5 million shares in the float, 25% of which are held in short accounts (those betting that the stock will fall). Lastly, insiders still hold 54% of the stock. To some, this may look attractive, but to others it may say only one thing: the ball's not in your court, stupid.

Readers/subscribers looking for older reports and articles can now do so through our archive (yes, it's back) -- just follow the link provided at the foot of this page. If you have any questions, please let us know at feedback@catablast.com. Update: The call was dead-on: shares of ERS tumbled 11% hours after our report was published and insders at the company dumped another 50,000 shares.

No Toyin' Around: S+P Cuts Leapfrog

2006-05-21T08:02:00.000-04:00

Standard & Poors cut shares of Leapfrog (LF) to a hold recently after the CA-based maker of educational toys spit out some shoddy 1Q numbers. Shares of Leapfrog are down 2% since we told investors to approach Leapfrog with caution in our Capitalize on Those Cry Babies report. First S+P, then us:

Standard and Poors "First quarter loss of 38 cents vs. 32 cents loss is wider than our 26 cents loss forecast. Sales fell 7%, as sharp declines in the International and Education & Training segments more than offset a 6% rise in U.S. Consumer. While we think LeapFrog Enterprises has initiatives in place to restore growth and profitability over long term, we do not see a near-term catalyst. Plus, we are concerned about lack of visibility in Education & Training and sales weakness in International, both higher-margin segments. We are lowering our target price to $12 from $15, a price to sales ratio of 1.1 times, as we no longer think premium is warranted." published May 6

Catablast! Media Group "Leapfrog makes toys for children in the 6 month to preteen segment. Toys are an unattractive industry if you’re looking for a steady stream of earnings: what could be more volatile than that hottest gizmo your kid is pining day and night for? One day it’s Pokemon, the next day it’s Teletubbies. Leapfrog had a terrific 3 year run (sales mushroomed fivefold from 2000 to 2003, thanks to the Leappad), but since then, it’s been struggling to regain customer attention by aggressively marketing its core educational product niche. It’s latest gadget is the FLY pentop computer, which most analysts predicted would stumble. They were right — the pentop has yet to grab critical mass, so it look’s like Leapfrog’s time is running out. Since over 60% of Leapfrog’s sales come from the Walmart/Target channel, a sudden dearth of product innovation could spell lower shelf space, which would in turn spell disaster. Although LF has a clean balance sheet and $95M in cash to deploy on new projects, overall you have an unpredictable company operating in a fragmented industry — approach this one with caution." published April 24

Analysts Weigh in On Satellite Radio -- Again

2006-05-20T08:00:00.000-04:00

The debate over whether or not satellite radio's a viable and profitable alternative to terrestial radio remains widely contested. This week was no exception, with several analysts firing away once more.

Morgan Stanley Research "...We believe that at current price points, XM is trading on the value of its subscriber base projected for 2010. Profitable subscription growth beyond 2010, we believe, is not reflected in the current share price. We base our $31 price target on a bullish long-term view that the industry can reach 25% penetration of registered vehicles ultimately (i.e., our terminal year) and that terrestrial-based networks will remain inferior for robust entertainment delivery to the car....We continue to believe that the satellite radio platform and the duopoly structure of the industry should lead to superior long-term growth and returns. We estimate churn would have to grow to 4.5% monthly for cumulative subscriber cash flows to fall below cost per gross addition. We believe that the industry will move from heavily free-cash-flow negative to free-cash-flow positive in 2008 for XM. Both XM and Sirius are well capitalized and fully funded to reach free-cash-flow positive..."

Douglas McIntyre/SeekingAlpha Research "...the Sirius story is still seriously flawed. Revenue for the quarter ending March 31 was $126.7 million, up from $43.2 million a year ago. But losses from operations rose to $446.2 million from $190.3 million. The company’s long-term debt is still over $1 billion...Average subscriber growth for the last four quarters was 29.8 percent for Sirius, but, in the most recent reported quarter growth slowed to 22%. Average monthly churn has risen to 1.8%...Sirius now has $2.6 billion in total obligations. When Sirius started in the satellite radio business, there were no iPods, or MP-3 players of any sort. Radio stations were not streaming their content over the internet. The record companies had not become determined to find models for internet distribution. Sirius now has a very large number of competitors, a huge amount of debt, and a business model that still needs to demonstrate that it can generate iPod-like usage levels. Subscriber numbers in the low tens of millions are still a long way off, as is the likelihood that the stock will rise soon..."

Does Loft Deserve a Loftier Multiple?

2006-05-19T06:20:00.000-04:00

[For a PDF version of this report, click here.] Retailing queen Ann Taylor (ANN) will report numbers later today. Here's a quick look at what she's got in store for investors in 2006.

Description Ann Taylor sells women's apparel, shoes and accessories. The retail stores offer career and casual separates, dresses, tops, weekend wear, shoes and accessories coordinated as part of a total wardrobe strategy. It sells its products through traditional retail stores (through 824 AnnTaylor or Loft stores) and over the internet. The company, which has a $2.7B market cap, generated $2B in sales last year.

Positive Considerations We were happy with Ann Taylor's April same-store sales results. Both the Loft division and the Ann Taylor brand impressed, with Loft's same-store sales increasing by 13.4% and Ann Taylor's same-store sales up 7.6%. Despite a very competitive retail environment, Ann finds itself in a good position, targeting high margin shoppers looking for that impeccable boardroom outfit. While it used to be that shoppers could barely detect the difference between Loft and Ann Taylor merchandise, we're now getting positive feedback from shoppers who say that the 2 brands are gradually becoming distinguishable. The Street is closely watching Loft, whose lower price points could capture a sizable part of the casual apparel space. Loft should open anywhere between 40 and 50 stores on average for the next 3-5 years, according to our forecasts.

Valuation We'd love a pullback here. Analysts expect EPS to jump 33% in 2007. The market has clearly priced this information into shares, which go for 33 X next year's forecast. Because we think Ann is expanding at the right pace -- not too fast, not too slow -- and the company is operating debt free with over $5 a share in cash, we believe the stock will ultimately trade at 1.3 to 1.5 x growth. A higher multiple would reflect Loft's growth prospects as well as the possibility that ANN's competitors (ahem, Banana Republic [GPS]) may stumble, get stuck with inventory, and lose brand cachet. Although the current inflationary setting does not bode well for retailers, ANN is less susceptible to compressed consumer spending because its target customer is typically affluent. In short, it's the Walmart (WMT) crowd who catches a beating when gas creeps above $3.

Risks Management's has to 1) ensure investors that it'll continue to find ways to differentiate the Loft and Ann brands in the consumer's psyche and 2) reassure analysts that it can grow its top line by 10% and sustain at least 8% operating margins. The female apparel space is getting more crowded by the minute and any missteps could impinge heavily on shares.

The Bottom Line Ann envisions itself as a one-stop shop for Blackberry-toting, career-driven women. The problem is: so does everyone else. If Ann can maintain a good operating margin story (we'd have to sell if they fell below 7%) and leverage its brand name to boost same store sales at Loft, the stock could finally get the higher multiple it's been waiting for.

SeekingAlpha.com is growing incredibly fast. Beginning today, readers will be able to view charts, as well as the regular mix of in-depth articles and conference call transcripts. It is there that you'll also find an archive of our best work!

The Small Drug Maker That Could

2006-05-18T06:00:00.000-04:00

The bears came out to party Wednesday and it was a miracle if any stocks walked away unscathed. We spent the day out and about prowling for buying opportunities. One stock that caught our attention was Pharmion (PHRM), whose shares somehow defied yesterday's massacre. We are just beginning to get acquainted with this lightly followed stock, but so far we like what we see.

Pharmion acquires, develops, and commercializes innovative products for the treatment of hematology and oncology patients in US, Europe, and Asia. The Colorado-based biotech, which maintains a $590M market cap, generated $220M in sales last year. Net income was about $2.3M, the company's first time in the black. In the last 12 months, shares (now at $19.67) have gone as high as $30. We think the stock is down because the company recently announced R&D costs were going to take a bigger bite out of its wallet in 06.

Because large pharmaceutical companies stay away from making drugs that treat small patient populations, specialty drug makers like Pharmion get left behind to seize on underserved markets where the risks may be high, but the rewards immense. Pharmion has enjoyed great success with its product pipeline, led by Innohep. Innohep is used to treat deep-vein thrombosis (blockage of a vein due to a blood clot). Pharmion also markets Refluda, a treatment for heparin-induced thrombocytopenia type II and thromboembolic disease in adults mandating parenteral antithrombin therapy — an infrequent but potentially life-threatening response to heparin therapy.

As you can see, Pharmion isn't making the next Viagra, Avastin, or Prozac, but that shouldn't turn you off. The firm's top line story is all fireworks: sales went from $25M in 2003 to over $220M in 2005, a 780% gain! While profitability doesn't seem to be this outfit's middle name, it does hold 40% of its market cap in cash. Additionally, Pharmion goes for less than 3 x sales, a discount to the price/sales valuations of most unprofitable, niche-driven biotechs. We just met Pharmion yesterday, but we're already thinking of taking her home.

Cintas: The Boring Piggy Bank

2006-05-17T13:30:00.000-04:00

Hedge fund manager Eddy Elfenbein makes the case for uniform provider Cintas, which he thinks the Street is overlooking. Elfenbein argues:

"Cintas (CTAS) is one of the largest companies that no one knows. The company makes business uniforms and other pieces of flair. The stock did very well through the 1990's, but this decade has been rough. The business is still doing very well, but its valuation has crumbled. The P/E ratio has plunged from about 60 at the beginning of 1999 to just 22 today. This isn't a fast-growing business, but it's a solid, well-run company that has consistently delivered earnings. For this year, Cintas said its expects earnings of $1.92 to $1.96 a share compared with $1.74 last year."

Readers will recall that we pounded the table on CTAS back in April.

Intuit: An Accounting Software Goliath

2006-05-17T06:08:00.000-04:00

Personal accounting software giant Intuit (INTU) reports 3Q results later today. Intuit is expected to report a higher profit on a 13% climb in revenue thanks to robust demand for its TurboTax software, which is used by customers to file tax returns. Analysts are looking for the company to report EPS of $1.76, up from $1.53 a year ago. If Intuit's not in your portfolio yet, we think it should be. Here's a quick look at what the stock has to offer investors.

Description Intuit provides business and financial management solutions for small businesses, accounting professionals and consumers. The company offers products and services in five business segments. It also offers financial supplies, such as paper checks, envelopes, invoices, deposit slips, stationery and business cards designed for small businesses and individuals, mainly in the US. Intuit generated over $2B in sales last year.

Positive Considerations Intuit's software products have become household names: Quicken for managing personal finances, TurboTax for preparing tax returns, and QuickBooks for small-business accounting. Years ago, Microsoft tried to buy the firm, but it was blocked for antitrust purposes. Too bad for Microsoft. Intuit dominates its core markets and rewards shareholders through generous stock buybacks. Right now, Intuit is branching out into the small-business market and credit card processing space while still enjoying the benefits of high switching costs. With Intuit's base of users so wide, we find it highly unlikely for a challenger to step in and usurp Intuit's niche. Intuit generates a ton of cash, holds little debt, and still remains run by visionary founder Steve Cook.

Valuation Analysts expect EPS to jump 16% in 2006 and 13% in 2007. At 23 x trailing 12 month earnings and 16 x forward earnings, INTU looks fairly priced to us. We'd await a pullback and one or two quarterly updates regarding Intuit's success (or lack thereof) in the crowded payroll-processing segment before picking up shares.

Risks Intuit's best days are probably behind them, but the name should grab your attention on a pullback. Intuit is a classic growth story whose success is driven by an impressive competitive advantage that stymies imitators while piling up value for long-term shareholders. That said, we're not terribly excited about INTU's foray into the payroll processing segment, which is highly competitive and spotted with formidable contenders, like Paychex (PAYX). Paychex enjoys 38% operating margins and a clean balance sheet. Rival H&R Block (HRB), albeit more leveraged than INTU, could rack up share in the small business segment faster than most people think. We'd follow both rivals like a hawk.

The Bottom Line Intuit holds at least 70% market share in all 3 of its core markets. By pursuing new growth opportunities while defending its key segments, Intuit should continue to grow sales at a high single digit pace and reward investors with stock repurchases and dividend hikes. It is highly likely that Intuit will also use excess cash to make some smaller acquisitions in the near future (several people on the Street have already labeled Checkfree [CKFR], which does online billing processing, "acquisition meat.") In a word, if you can find us a company that'll replace Intuit in the next 5 years, please let us know. Until then, this company has all our respect.

Analysts Respond to Nuerocrine Debacle

2006-05-16T14:30:00.000-04:00

Well, now you know why investing in biotechs is equivalent to buying a lottery ticket. Shares of Nuerocrine Biosciences (NBIX) are down 60% today after the FDA rejected an extended release version of its insomnia drug, Indiplon. Below are some key takeaways from today's bloodbath, brought to you by some of the best analysts on the Street:

Bear Stearns' Akhtar Samad downgraded Neurocrine to "underperform" and wrote a note to clients, "We viewed the 15-milligram dose as key to differentiating Indiplon from other insomnia drugs, and therefore view a potential label for Indiplon as less competitive."

Standard & Poor's Equity Research reiterated a "hold" and pounded the table on Sepracor (who we isolated as a takeover target 3 months ago): "We think this bodes well for Lunesta....[whose] sales will rise 50% in 2006 to more than $650 million."

ThinkEquity Partners reiterated a "buy" rating and $4 price target on Questcor Pharmaceuticals, a smaller player in the insomnia category. ThinkEquity opined: "With Indiplon being kept off the shelves, we believe Questcor's ability to successfully market Doral (quazepam) to neurologists increases significantly...Doral, a long-acting benzodiazepine for insomnia, will be the only marketed agent in its class when Questcor begins detailing the product in the third quarter of this year."

Briefing.com "Officials of the San Diego-based company told analysts on a conference call this morning that the company will move quickly to answer the FDA's outstanding questions regarding its applications. They said they're not sure what impact the FDA's decision may have on the company's financial guidance for the year. The company recently said it expected to break even during 2006 with revenue between $165 million and $175 million excluding royalty revenues."

Morningstar.com We're placing Neurocrine's fair value estimate under review as we revisit indiplon's sales potential in the absence of a 2006 launch. We're also placing our fair value estimate for DOV Pharmaceutical (DOVP), a company entitled to a 3.5% royalty on indiplon sales, under review. Indiplon will have a tough time competing against a similar, controlled-release version of category-leading Ambien. Further, the delay of the other sizes means indiplon will have less time on the market before it has to compete with cheap, generic Ambien substitutes in 2009. Some version of indiplon is likely salvageable, but after Tuesday's announcement, the blockbuster sales scenario looks remote. Pfizer, Neurocrine's designated marketing partner for indiplon, could suffer to a smaller extent. The announcement is good news for firms with existing sleeping pill offerings, like Sanofi-Aventis (SNY) and Sepracor (SEPR). Sepracor, in particular, is breathing a sigh of relief as about half of its sales come from the insomnia aid Lunesta.

Investors Throw PETS in the Doghouse

2006-05-15T15:49:00.000-04:00

Shares of PetMed Express (PETS) were trading sharply lower Monday afternoon after the company, America's largest pet pharmacy, reported strong quarterly results.

The tape isn't showing any conviction today, so PETS is down. Throw us a bone, people: PETS' quarter was unquestionably hot, if you ask us. If PETs had reported 2 weeks ago, when the bulls were out in full force, the stock would be up 10%. Today, the market's putting it on sale.

For 2005, PetMed Express saw a 51% increase in net income to $12.1 million on a 27% increase in net sales of $138M. The company acquired 624,000 new customers compared to 510,000 in the prior fiscal year; meanwhile, retail reorder sales increased 29% to $88.4 million, which indicates existing customer loyalty. The quarterly results from PetMed Express also reflected its status as a growth company. Its profit of $3.1M in a seasonally slow period was 30% higher than last year's levels. For the quarter, the company acquired approximately 94,000 new customers versus 80,000 new customers last year. And you have the audacity to ask why the number of funds that own this stock has more than tripled in the last 12 months?

Readers should recall how aggressively we promoted pet stocks just a month ago. We see today's selloff as a good buying opportunity to load up on a company that should continue to capitalize on the Pet Boom. Even with the stock up over 200% for the year, we're interested. Look at the valuation: at 30 x trailing 12 month EPS of .47 cents, PETS is trading at a 27% discount to its 52 week high of $20 and a 36% discount to our $22 price target. We wouldn't be surprised to see an analyst upgrade the stock tomorrow morning.

Don't forget that you can read most of our scintillating research at SeekingAlpha.com, a must-read according to Barrons, The Wall Street Journal, and Business Week.

Mr. Market Plays the Dunce

2006-05-15T06:30:00.000-04:00

We've always had a thing for wallflowers.

Travel back in time with us: Microsoft (MSFT) is half the price it was before the bubble popped. Like Dell (DELL), Microsoft has generated more cash, increased its revenues, and grown earnings dramatically over the last 5 years. How has the market reacted to both these stocks? It's beaten them down to a pulp -- and we mean pulp, like that cop's face half-way Tarantino's Reservoir Dogs. Dell and MSFT are at levels too embarrassing to quote; the carnage leaves us queasy.

What are we missing here? Are we fools? Paramours of yesterday's darlings? Does anyone else think that things are so out of whack in technology right now? Intel (INTC) at 14 X earnings and AMD (AMD) at 30 x? AMD nibbles 100 bps market share and the bears come out to pound Intel?

Get real. AMD's history of free cash flow is choppier than Nick Lachey's career. Intel is the girl you want to dance with: She generates tons of cash, has a cleaner balance sheet, and spends more on R&D, critical in the semiconductor space, where product cycles are short lived. A quick look at recent option activity on Intel shares will demonstrate that option players, at least, think the stock will shoot higher in the back half of 06. They're not to blame: on fundamentals alone, Intel is worth $30. Analysts expect earnings to jump as high as 27% next year. We think that the PC category will remain sluggish throughout 2006. 2007, on the other hand, could be a banner year. We also believe that Intel, at less than 16 x forward earnings, sells at an attractive price. In case you're not convinced yet, let us add that Intel turns over its inventory faster than AMD (in 05, inv t/o for INTC was 13.5 x whereas AMD's was 9.3 x), coughs out a modest 2% yield, and ranks as one of the most widely held stocks within mutual funds (over 1,100 mutual funds hold INTC; as of 12/31/05, less than 400 were buyers of AMD).

We can sing this song all night long, baby. We could come up with myriad reasons why Dell, Intel, and Softee are all strong buys here. Sadly, no one will listen to us. This market is on idiot mode and the omnipotent pattern seems to be that fundamentals don't mean shit. Neither do technicals, weather patterns, orange juice prices, shoe shine boy tips, or anything else you think drives the markets. The market's hyped up to be the engine of capitalism, the paradigmatic opportunity to invest in this nation's growth. Hey, why not? Stocks beat T-bills, right?

We laugh.

The market was never a product of the companies that made up the major indexes. It's been -- and remains to be -- a product of the people who hit bid and ask orders all day. The metaphor of market as casino is more apt than you think. And to interpolate Bob Dylan: the bets, they are a changing. In 2000, investors were more than happy to pay 86 x earnings for a share of Dell. Dell's earnings in 2000 were .68 cents. Last year, Dell cranked out $1.29, a 89% jump in profit growth. Likewise, in 2000, investors were quick to pay 62 x earnings for Microsoft's .85 cents in earnings power. In 2005, Softee's EPS was $1.16 but the stock was lucky if it ever saw itself go for 20 x earnings. That same year, Microsoft announced that it was on the verge of releasing its strongest product lineup since the first Windows. The market barely sneezed.

The problem is this: we don't understand the market. We can't. We won't. Only one thing is for certain: the market understands us. Alas, it understands us too well.

Don't forget that we are frequently featured on SeekingAlpha.com, a "must-read" according to BusinessWeek and The New York Times. It is there that you will also find an archive of some our best work.

Greenhill and Co's Valuation Out of Whack

2006-05-14T07:02:00.000-04:00

This week's short candidate is Greenhill and Company (GHL), a M&A advisory bank run by founder Robert Greenhill. Its stock, fueled by a surge in global M/A activity, has exploded over 100% in the last 52 weeks.

Greenhill and Co did a secondary offering this week, issuing 4M more shares and raising north of $220M dollars. Unfortunately, none of the profits of the sale will be going to the firm. That got us thinking.

Understand: Bob Greenhill cut his teeth at Morgan Stanley (MS) and eventually went on to head their killer dog investment banking division. He takes no prisoners and if anyone can run a merchant bank, its him. So in 1996, he did what any good capitalist would do -- he founded his own bait and tackle shop and quickly started pursuing the hottest deals on the Street.

All that said, there are a couple of reasons why at $70, shares of his eponymous outfit could be in a bloody correction.

This stock is fairly valued at $32-$36 dollars on our DCF/comparable analysis assumptions. What it is doing up here at 30 X EPS (more than twice the industry average) and 15 x book (most banks go for 2.5 x book value) is of great concern -- clearly it is a result of pent up demand coupled with a razor thin float (14M shares). Additionally, short interest is already high -- over 14% of the float, in fact. Eventually, the shorts will bring this stock down to a more realistic valuation. Lastly, the competitive environment GHL operates in is unattractive; GHL competes directly with Morgan Stanley and Goldman Sachs (GS). Goldman Sachs is the world's largest M/A advisor and netted $6B in profits last year. Analysts expect Goldman to earn as much as $16 a share in 06, a 38% jump from 2005's EPS. Clearly, Goldman is not the sort of heavyweight you want to step in the ring with.

The writing is on the wall: If you own GHL, it's time to take profits.

Why Krispy Kreme Could Kill You

2006-05-13T06:00:00.000-04:00

Shares of beleaguered confectionery specialist Krispy Kreme Donoughts (KKD) have soared as much as 30% to $12 ever since the firm released its 10K for F2005 on April 28th.

We just have one question: who the hell is buying this stock? All we see is stale goods.

1. Krispy Kreme has the following on its docket for 2006: lawsuits, SEC investigations, more store closures, and franchisee bankruptcies. Even if management returns this bleeding business to profitability, we have a hard time visualizing how it'll drive the top line story back to its halcyon days.

2. Investors have yet to see the 10Qs for subsequent quarters. In other words, we have no idea how the company is doing. KKD could easily wipe out over-enthusiastic shareholders and leave' em for dead.

3. It is hard for companies to rebound from cannibalized sales. In 2004, KKD sealed its fate when it announced its first profit miss. Management's decision to shelve its branded goods in gas stations and grocery shops backfired and the stock began its long downward journey. KKD buried its image and now it wants to dig it up, wipe off the worms, and pretend nothing happened.

4. KKD remains highly leveraged. Amid slowing same store sales, Krispy Kreme has just $21M in cash but $122M in debt. Morningstar thinks KKD may even be liable for almost $40M worth of more debt stemming from some blown up joint-ventures (JVs). Thanks, but no thanks.

5. Funds are avoiding it: A little over a year ago,77 mutual funds owned KKD for their accounts. Today, that number is 44. Ideally, you want to see stocks gain institutional ownership, not lose it. If anyone wins here, it'll be the day traders.

The Bottom Line Hey, don't get us wrong. We've read our Whitman front and back; we know America's the land of self-reinvention. But Krispy Kreme looks more Dead Man Walking than it does legitimate turnaround story. You can keep the shrapnel -- Krispy Kreme is not for us.

Expedia: How Low Will She Go?

2006-05-12T14:16:00.000-04:00

What goes down the fastest?

A) Expedia after an earnings report.
B) A $10 hooker on a $50 tip.
C) Bush's approval rating.

Shares of Expedia are getting hammered today after the travel services behemoth missed earnings by a mile. The company's margins compressed after it had to boost SG&A. Expedia (EXPE), which negotiates room discounts from hotels and then sells them at a markup to consumers, also noted that the competitive landscape was worsening.

Not all is lost, we think.

Deferred bookings were almost double those posted 1Q05 ($850M). That could imply future quarters will be much better than this abysmal one. Also, revenue was off, but only by 10%. We believe that 6 months out, Expedia could be a decent story. As always, there are risks, some of which we laid out in our Expedia report 2 days ago (see below). We'd like to add one more: Legg Mason's (LM) Bill Miller still owns a chunk of Expedia's shares for one of his funds -- if Miller decides to pull the sell trigger, Expedia will surely catch another black eye.

Hollywood Media Must Unlock Value

2006-05-11T16:05:00.000-04:00

If you're Hollywood Media (HOLL), here's what a $146M market cap will get you: Movietickets.com, Broadway.com, Hollywood.com, and a heap of other online-based info-entertainment solutions.

Hollywood Media operates consumer-driven entertainment properties. Too many, we think. No one seems to understand this company (only 2 analysts follow the stock, both of them just as clueless as the rest of the Street).

Our interest is in Movietickets.com. Here is how the company describes itself: "Formed in spring 2000, MovieTickets.com is a joint venture between AMC Entertainment, Hollywood Media Corp, National Amusements, Famous Players, Marcus Theatres, Viacom, and America Online, and leverages the collective exhibitor expertise to deliver consumers a premium movie ticketing experience." Those are some big names. So why, even as Movieticket.com's theater base jumped 130% to 70 chains in 2005, is Hollywood Media's stock in the toilet?

Is it because Hollywood Media has developed a knack for building assets (machine gun acquisition style), but can't manage expenses? Movietickets.com, for example, is losing millions. Huh? There are only 2 major players in this space (the other one being FanDango) and they still can't generate cash? Movietickets.com has AOL, Yahoo, MSN, the New York Times, and Google in the dugout and it can't even hit a single?

Maybe the stock is in the gutter because management is uncooperative: HOLL's management is opaque on the conference calls (they refuse to spell out EBITDA for certain business segments). Or perhaps the stock's in trouble because no one can value it. It's too big. Too complex. Some services are monetized; others are not.

Whatever the case may be, shareholders must be tired of management giving them the "here's vaseline, bend over" treatment. That said, here's our-not-so modest proposal.

1. Poorly managed and gravely misunderstood, Hollywood Media has all the trappings of a merger/spinoff. Right now, Movietickets.com is a hot asset that generates $0 income for its parent -- it's time to monetize it.

2. Movietickets.com merges with FanDango. According to SeekingAlpha.com founder David Jackson, it'd make little sense for these two companies to continue competing head to head for moviegoer's dollars. After Movietickets won Yahoo as a client, Jackson postulated:

"...the deal should also increase the pressure on Fandango to merge with MovieTickets.com. Fandango's distribution now looks anemic compared to that of MovieTickets.com. But each company has exclusive online ticketing relationships with roughly half the movie theaters in the US. That means that as portals and search engines partner with either Fandango or MovieTickets.com, they offer online ticketing to only half the available US movie theaters. A merger would create a company able to offer online ticketing to the vast majority of US movie theaters with a cost structure roughly the size of one of the two companies today."

3. After Fandango and Movietickets.com merge, the parents spin off their new child and create a pure play on the movie ticketing category. We all know we need one. Even your friends who don't know jack about the market ask you questions about these companies when you're both waiting for the previews to start.

4. Post merger-cum-spinoff and now with access to capital, the new FanDango/Movietickets.com revamps its sites (Hollywood.com's new site is already drawing in more traffic), expands internationally, and rolls out a plethora of complimentary services. Think data mining and Amazon-like customer captivity.

The Bottom Line Hollywood Media's stock has been absolute flatline for the last 18 months. The jury is out -- take it private. Break it up. Spin it off. Just do something. At $4 and change, the stock has our rifle-specific attention. The easiest way to make money on Wall Street is to find a story no one understands.

Disclosure: At the time of publication, the author was awaiting a fill on a small market order. Don't forget that you can read our research at SeekingAlpha.com, a must read according to Barrons and Business Week.

Expedia Looks Abroad to Boost Growth

2006-05-11T05:56:00.000-04:00

Travel services giant Expedia (EXPE) will report earnings after the close today. Here's a quick peek at what the stock brings to the table.

Overview Expedia provides travel products and services to leisure and corporate travelers in the US and other countries. Its diversified portfolio of travel brands and businesses includes Expedia.com, Hotels.com, Hotwire.com, and TripAdvisor. As the world's largest online travel agency, the firm generated over $15 billion worth of gross bookings last year. Expedia was spun off from parent InterActiveCorp (IACI) in August 2005.

Right now, the firm is looking to increase its international operations to at least 40% of sales. Currently, non-US bookings account for just over 20% of revenues. If Expedia succeeds here, we see the stock enjoying significant price appreciation. Expedia has already proven to us that it can make a killing through the mushrooming relationships it has with several hotels -- large or regional. When the hotel industry is in a funk, Expedia cashes in. That is because when hotels get desperate and occupancy rates plummet, they're more than glad to unload inventory on Expedia, who in turn sells it a deep discount. Isn't this a great business model? We think so. Counter-cyclical in nature, it has already given EXPE 40% market share. Going forward, we think EXPE will ramp up marketing to get more traffic to its website. This in turn will pique the interests of hotels, who'd love to get a piece of the action. Customers, suppliers, and Expedia shareholders all go home happy.

Risks Expedia faces competition from various search engines as well as a bevy of online travel agents. More importantly, some of EXPE's customers recently went M.I.A. and decided they'd go after customers without Expedia's help. If this continues on a large scale, Expedia's top line story could take a hit. On the other hand, many of the hotels who backed off were large, name-brand hotels, which make up a small part of EXPE's sales. Expedia's bread and butter are regionals, who depend on Expedia to bring in the guests. As independent hotels, these players lack the brand visibility to operate without Expedia holding their hand.

Valuation Analysts expect earnings to jump 18% in 2007. Right now, EXPE is trading at a 18 x forward multiple, so the stock looks fairly priced to us. Or does it? Expedia may not be growing a gazillion times faster than its industry, but it is run by Chairman Barry Diller. For this reason, we'd like to see EXPE go for at least 1.5 x growth. If it makes progress on its European and Asian plans over the next few quarters, we expect EXPE to trade anywhere from 24 to 27 x our $1.30 2007 EPS estimate. At that valuation, the stock would be priced at $32, our fair value estimate for the stock.

The Bottom Line We like Expedia and we find the stock to be grossly undervalued by the market at large. We believe this is due to the firm's management composition, which is beginning to resemble a revolving door. Nevertheless, given Expedia's size/scale, we think it'll continue to capture market share and improve on supplier relations while rolling out its international expansion plan. Expedia should capture more hotel room inventory as its endures higher marketing expenses. This will crimp margins, of course, but we think it is the right move for the firm: Expedia is trying to differentiate its services in what is a terribly commodified space. At today's price, we're definitely interested.

Update: We screwed up royally -- EXPE tanked 16% in AH trading after the firm missed estimates by a mile (margins compressed and net income was dog shit). After today's bloodbath, we are putting the stock under review.

Is Parlux About to be Swallowed?

2006-05-10T13:55:00.000-04:00

In case you didn't hear, Paris Hilton now moves markets.

Wedbush Morgan raised Parlux Fragrances (PARL) to a strong buy this morning. The international designer of prestige beauty products and license holder for Paris Hilton perfume said on Tuesday that it expects full year 2006 earnings per share to be more than double prior-year levels on strong sales of its Perry Ellis and Paris Hilton fragrances. Wedbush reiterated its $43 price target on Parlux, which popped more than 7% in brisk afternoon trade.

Here is why you should be buying PARL hand over fist: The Moby Dick of hedge funds, SAC Capital (run by "I-make-fuck you money" Steve Cohen) owns a ton of this stock. He is buying more but no one knows why. We think we do.

Our not-so-reliable sources tell us that Parlux may be in talks with Avon (AVP). PARL's market cap is $258M. Avon, which has over $1.2B in cash sitting on the books, could snap up Parlux and never break a sweat. Add to this the fact that 63% of PARL's miniscule 7M float is being shorted and you have a stock just asking to double overnight.

Okay, okay. We know what you're saying: PARL's CEO dumped over $11M worth of stock in February. To which we say: Who cares? Stevie makes $11M a day! We'll see you at $45, our 6 month price target for PARL. See, Paris: all those green-and-white hotel trysts paid off after all.

Got news tips or inside information? Don't forget that beginning today, you can AIM your anonymous info to screen name "catablastmedia." Tips, dirt, and smoking gun documents can also be emailed to feedback@catablast.com.

WebSideStory: A Promising Business Narrative?

2006-05-10T06:10:00.000-04:00

WebSideStory (WSSI), a leading provider of on-demand digital marketing applications, will report earnings before the open today. We're still familiarizing ourselves with the company, but here's a brief look at what we've dug up thus far.

Overview WSSI provides on-demand web analytics solutions for over 1,100 customers in the US. These web analytics solutions enable organizations to understand how Internet users respond to website design and content, online marketing campaigns and e-commerce offerings. We think WebSide's web site tracking services compliment the boom in industry white papers and reports on Internet trends. WSSI's top line is on steroids: sales jumped nearly 100% to $40M in 2005. Last week, the firm's key product, HBX Analytics, won a major industry award for its excellent reporting, e-commerce capabilities, technical support and project management. Just a week before that, WSSI unveiled Search 4.0, the first site search solution to integrate site search and behavioral data. So far, we like what we see. On a pullback, we'd definitely like to get to know the stock better.

Risks and Valuation Analysts expect a 35% jump in earnings from 2006 to 2007. Right now, shares are going for less than that -- 22 x 2007 numbers. Given the intense competition in the Web analytics space (there are several smaller, private players on the field), we understand investor's concerns. However, we must note that that WSSI weathered the tech bubble burst better than most (ahem, it survived) and the company is coughing up 25% gross margins, a debt free balance sheet, and heavy insider ownership. Most importantly, WSSI's rivals have less access to capital. Two things to watch out for: several directors dumped stock in late January and there are currently less than 7M shares in the float. In other words, we'd refrain from putting WSSI in your kid's 529 plan.

The Bottom Line The market for e-commerce performance gauging is still in its nascency. Google's astronomical rise and penetration into the global household means that companies are more and more interested in pin-pointing the efficacy of online marketing campaigns. WSSI is well positioned to woo new customers and better yet, attract attention from larger players looking to capitalize on (translation: acquire) WSSI's niche. WSSI shareholders already enjoyed a 45% gain in 2005. Don't fret -- we believe this success story is just beginning.

Big Waistlines = Bigger Profits: WTW

2006-05-09T05:50:00.000-04:00

As many as 300,000 to 400,000 Americans die from obesity related causes yearly, giving plenty of opportunity to companies like Weight Watchers (WTW), which has made a fortune providing weight loss products, to service individuals looking to enhance their lifestyles, build self-confidence, and get in shape. Weight Watchers reports earnings later today and we just had to ask ourselves: how healthy is the stock?

Overview Weight Watchers is the leading provider of weight-loss services. It operates in 30 countries, where the firm conducts weekly meetings that provide customers with advice and support. It also sells a range of food products, receives royalty revenue from its franchisees, and licenses its unmistakable brand. Weight Watchers' online platform is doing much better than we expected. Online membership increased in 2005; as high margin area for WTW, customer segmentation via the internet channel will be a critical growth area for the company. Lastly, Weight Watchers recently announced the initiation of a quarterly cash dividend. Now, investors can get paid to wait as the company improves its overseas operations and beefs up its online services.

Valuation WTW puts up some great numbers: operating margins, returns on capital, and free cash flow-to-sales over the last 5 years have averaged 30%, 31%, and 19%, respectively. Thus, we think WTW deserves to trade at a premium to its peers. Currently, analysts think the firm can grow its earnings 18% from 2006 to 2007. However, the stock only trades at 18.5 x next year's numbers -- we think WTW should trade for at least 1.5 x growth, or a 27 forward multiple. At 27 x our aggressive 2007 EPS estimate of $2.50, we arrive at a $67 price target, well above where the stock is currently trading.

Risks After an unsuccessful diet innovation plan in the UK market, WTW said that international attendance growth was flat in 2005. Insiders (who don't own very much of the stock, unfortunately) have called this fallout a temporary problem, but we'd dig deeper into the company's strategy before picking up shares. Weight Watchers' programs take Steven Seagal like discipline, so it is not uncommon to see members pump themselves up on another fad diet promising overnight results only to quit a week later. This sort of aberrant customer behavior is always a risk to keep vigil over. Lastly, WTW faces competition from meal-replacement products, dietary supplements/drugs, and simple surgical procedures. Commercial weight-loss program Nutri/System (NTRI), whose stock ripped the major averages in half last year, is a perpetual thorn in the side. Nutrisystem is debt free, spits out 20% operating margins, and should grow its earnings 40% in 2007, according to our estimates. Although insiders have been selling, we see shares of NTRI hitting $80 inside the next 90 days.

The Bottom Line The population of overweight/obese people is increasing in leaps and bounds. As a result, demand for weight-loss solutions has exploded, making the weight-loss industry a virtual gold mine for investors. In the US alone, two thirds of the population is considered overweight, while about one third is considered obese. The current weight-loss market in the United States to be $40 billion and WTW is sitting right in the middle of it. The firm has a proven system and brand visibility its rivals could only dream of. Improving trends in Weight Watchers' critical North American market, which encompasses more than half of total attendance, should continue to drive the top line story. We expect that the heavier weight trends among the population and the company's dual decision to stick to its core business model while ramping up newer payment methods (to improve user retention) will serve the company well. At current levels, we're incredibly tempted to pull the trigger.

How many times do we have to bash it in your head? Catablast! Media is part of the SeekingAlpha Network, the most dynamic force on Wall Street today, hands down. SeekingAlpha has been recommended by Barrons, New York Times, Wall Street Journal, Forbes, and Financial Times, to name a few.

A Real Blood Bank: Lions Gate Films

2006-05-08T06:00:00.000-04:00

Lions Gate Films (LGF), the independent filmed entertainment studio, is on a roll. Now, due mainly to another October gorefest, it looks like the remainder of 2006 will be just as promising. Here's a quick look at what Lions Gate has to offer both movie buffs and investors.

Overview LGF owns a prolific library of more than 5,000 titles, an invaluable treasure trove and source of recurring revenue. Today, the Lionsgate brand stands for original and starkly daring entertainment. According to Travis Johnson, Lions Gate proffers a "a very diversified product offering" along with a "new kind of thinking." Its "creative use of excellent stories" makes Lionsgate a special company, one that is "willing to exploit any niche." These niches "all have ready-made audiences who can be relied upon to pay to see the movie, and they are generally cheap to make."

Thanks in part to Lionsgate, moviegoers around the world have once again fallen in love with blood and gore. Hostel, which was just released on DVD, was hailed by many as "the scariest horror movie of 2005." Blending extreme violence, transgressive sex, and cinematic panache, Hostel is a must-see for aficionados of the genre. Best of all, LGF just announced that Saw 3, the next chapter in the uber-disturbing horror franchise, will begin filming on May 8th in Toronto. The film is scheduled for a Halloween 2006 release. If you haven't seen Saw or Saw 2, be warned: the movies are quite visceral -- and explosively profitable.

The Saw franchise is emerging as one of the most inventive and popular franchises in the horror genre, coughing up worldwide box office grosses of over $250 million and DVD sales approaching 10 million units. Saw 2 set a Lionsgate record with a three-day opening weekend of $32 million last Halloween, becoming the widest release in Lionsgate history and achieving one of the best opening weekends ever for a horror sequel. With a domestic box office of over $87 million and more than $152 million in worldwide theatrical box office, Saw 2 quickly surpassed the $55 million domestic box office total of the original Saw.

We believe that Saw 3 will be a screaming #1 weekend smash -- investors looking for a short term play on the resurgence of the horror genre should pick up shares of Lions Gate Films, which will meet with analysts on May 10. Management has already cut 2006 guidance several times, so if any of their upcoming 2006 releases surprise, the stock could easily cruise back to its 52 week high. In sum, it appears that the worst has already been priced into the stock.

Risks The media business is notorious for generous cash flows. However, the film & entertainment segment is our least favorite way to play media stocks, primarily because its fortunes are tied to hits or flops. Additionally, an excessive amount of the profits generated lands in the hands of movie stars, who demand bloated payments for their services. LGF has 8 times as much debt as it has cash and operating margins are abysmal. Short interest on the stock seems to be increasing. Depending on how you view shorts (we read them as contrarian indicators), this could signify that the odds are heavily stacked against LGF. Lastly, we're turned off by management's reluctance to cozy up with analysts -- though there are legitimate reasons for insiders to shun aggressive, short-attention-spanned analysts, nine times out of ten we prefer as much transparency as we can get.

Valuation LGF is still losing money, so valuing the stock on a multiple basis is problematic. On a price/cash flow basis, then, LGF trades below its peer group. We like how LGF has boosted its top line immensely over the last few years (revenues more than doubled to $842M in 2005), but we look forward to the day when the firm can show the Street sustainable bottom line growth. As long as LGF can continue to balance its home release-driven revenues with those coming from its theatrical releases, we'd feel comfortable picking up shares.

The Bottom Line LGF took home the Oscar for Crash, a cornucopia of race-inflected vignettes and a grimly realistic tale of human relations. If this entertainment company bombs with Saw 3, the only thing crashing will be the stock. On the flip side, a revenue beast like Lions Gate could easily become an acquisition candidate if profitability continues to evade the company. However, betting on a buyout isn't always as good as it sounds: a robust box office schedule throughout 2006 should be enough to motivate one to pick up shares, which we think could hit $13 by Labor Day.

Finding Reasons to Buy Four Seasons: FS

2006-05-05T02:30:00.000-04:00

Hotel giant Four Seasons (FS) will report earnings before the open today -- here's a quick look at the stock's strengths and weaknesses. Overall, we are moderately bullish on shares of the Canada-based company.

Overview Four Seasons manages and invests in hotel, resort and interval, fractional and whole ownership residential properties throughout the world. It operates in two segments: Management operations and Ownership operations. The Management operations supervises all aspects of hotel operations on behalf of the hotel owners. This segment also includes the licensing and managing of residential projects and clubs. The Group has 70 hotels in 31 countries and more than 27 properties under development. It operates in Canada, the US, Europe, Asia, and the Middle East.

The most attractive aspect of this company/stock is its historical 45% operating margins. We believe this is due to the firm's success in the luxury niche and refusal to compromise its brand strengths during economic downturns. The company currently has a strong pipeline that includes new hotels in Macau and Taipei. The Macau project should compliment the rapid ascent of casinos and gaming facilities in the region. Although 4 Seasons posted losses in 2005 (the firm was busy writing off 3 hotels it no longer wanted to own), it said that average room revenue per available room (REVpar, a widely used metric in the lodging industry) rose over 7 percent worldwide to $224 and increased 11.5 percent in the US to $276.

Valuation At 8 x sales, Four Seasons has little room for error. Other hotel operators -- although too "mass-market oriented" catch our attention -- trade at both lower price/sales and price/earnings ratios. On the other hand, most of these competitors carry plenty of debt whereas Four Season's balance sheet is clean. The company also has $242M cash on the books. At 30 x 2007 results, we'd wait for a pullback, especially for a name that lost money in 05 and has little operating leverage to cheer about.

Risks Hotels are a cyclical business in general. Occupancy rates tend to plummet when the economy suffers. However, because 4 Seasons has its hotels run by outside owners (who sign contracts spanning as long as 60 years, eons ahead of the industry standard), it doesn't have to pay the heavy fixed costs that are a hallmark of the industry. And the sheer fact that 4 Season's market share grew after September 11 tells us that the firm has its clientele on lock and that it can weather storms other hotels drown under.

The Bottom Line With several growth opportunities on the horizon (4 Seasons should add 8 hotels per annum), some of the best management in the hotel industry, and an impenetrable brand customers unmistakably return to, Four Seasons is a hotel we'd gladly invest in. At the current price, however, we'd wait until Four Seasons got its earnings picture back in order before amassing a large position. For now, it wouldn't hurt to nibble at the stock and await what the rest of 2006 brings us.

Update: Shares popped 17% in Friday trade after FS doubled profit from a year ago, smashing analyst estimates.

Citadel Broadcasting's Ugly Tune

2006-05-04T06:31:00.000-04:00

Citadel Broadcasting will report earnings later today -- here's a quick look at this stock's strengths and weaknesses.

Overview Citadel owns and operates radio stations through a portfolio that is diversified by programming formats, geographic regions, audience demographics and advertising clients. Right now, Citadel owns and operates more than 200 (163 FM and 58 AM) radio stations in 49 markets located in 24 states across the US. Its size is surely a marvel.

So why is the stock at a 52 week low?

In our view, Citadel is confronted with a plethora of competitive threats: local cable TV, the boom in digital music portable players, and the rapid ascent of satellite radio providers like Sirius and XM all attest to Citadel's fragile position. As these new threats siphon away Citadel's ad dollars, shares of Citadel could see further price depreciation in the months ahead.

Citadel has fueled its growth with acquisitions, which can be a great use of shareholder capital if and when acquirers pay a decent price. That cannot be said of Citadel, which has arguably overpaid for its buys. Other Citadel attributes we frown at: Citadel is laden with debt and shareholders have little say in the company. One other oddity: CDL's dividend is higher than its earnings!

Risks Citadel carries a pile of debt and our earnings outlook for he company is bleak. We are far from impressed by the 4% earnings growth analysts are predicting for the next 12 months. In addition, Citadel's operating income barely covers its interest expenses (2.5 interest coverage ratio) -- we tend to look for companies that can cover interest obligations at least 4 x over. A firm with large debt obligations can't afford turbulence. Because the skies for Citadel over the next year look anything but clear, we view the stock as high risk.

Valuation With earnings expected to grow just 4% from 2006 to 2007, we view Citadel -- which trades at 18 x next year's results -- as overvalued. With less than 4 cents in cash per share on the books, we refuse to pay more than 4 x growth for Citadel.

The Bottom Line A bad company + a fat dividend yield (CDL pays a 7.5% yield, probably the only thing propping up the stock) does NOT equal a "good investment idea." That's our take on Citadel, a company with weak management, handcuffed shareholders, and negative net tangible assets. We'd wait until the stock hits $7 before picking up shares -- and even then, you'd have to put a gun to our head for us to buy.

Don't forget that you can enjoy our research at SeekingAlpha.com, which just refurbished its user interface. SeekingAlpha is a "must read" according to the big cats at Barrons and The Wall Street Journal. So what are you waiting for? Go check it out -- unless, of course, you're the type who likes to get his/her stock ideas from Yahoo! Finance.

WorkStream Will Very Likely Be Acquired

2006-05-02T05:59:00.000-04:00

This is a good story, so pay attention.

We spoke yesterday about Kenexa (KNXA), a human capital management solutions provider which went public last year and then quickly captured the hearts of analysts across the Street.

The Industry We like Kenexa because although it is losing money, it operates in a fast growing space: According to the Bureau of Economic Analysis, more than half of US GDP is spent on human capital. The human capital management market is expected to grow rapidly for the next few years as older, technologically obsolete modules & systems are replaced by up-to-date, automated hiring process platforms. We're in the middle of a paradigm shift in which employees are no longer just seen as a cost, but as rather as a significant value driver. HR departments will need talent acquisition solutions and they'll need them fast. On demand software providers such as Kenexa are already capitalizing on this opportunity, as are myriad smaller players that we think will be snapped up.

The Takeover Play Meet Workstream (WSTM), another HCM provider, one we're assuming you have never heard of. At just over $1 a share, its the "cheapest" stock we've ever taken a position in. And we're buying it strictly on takeover speculation.

Workstream provides enterprise workforce management solutions and services that help companies manage the entire employee lifecycle - from recruitment to retirement. It's solutions are offered on a monthly subscription basis, under a Software as a Service (SaaS) model that help companies cost-effectively maximize workforce productivity, engagement, and satisfaction by applying business discipline to key people processes. Hmmm, sounds like Kenexa's business model, right? That's the point.

Workstream has a star-studded customer list, which includes Chevron, Eli Lilly Canada, The Gap, Home Depot, Kaiser Permanente, Motorola, Nordstrom, Samsung, Sony Music Canada, VISA, and Wells Fargo as clients. Insiders own 16% of the company. The company has negligible debt on its books and only 3 analysts follow the stock. Last September, only 3 analysts followed Kenexa. Now 11 do. We believe Workstream could be a mirror image -- we expect analysts to pile on top of this stock the same way they did on Kenexa. Speaking of analysts....

Meet Mr. Michael Nemeroff The whole key to this situation may be an analyst you've never heard of, namely, Michael Nemeroff. Nemeroff was one of the first analysts to initiate coverage on Kenexa, back when he was the chief software analyst at The Maxim Group. He recommended it at $15 back in September of 2005 -- the stock soon went on a tear and now sits pretty at $34. In other words, it looks like Nemeroff knows his stuff. Nemeroff has since left Maxim Group to join Wedbush Morgan Securities, probably because he caught a double on Kenexa in less than 6 months. Now Nemeroff is the strongest bull behind Workstream. He thinks shares could hit $3 very soon. The stock has gone as high as $4.67 over the last year and is priced where it is today because the company missed earnings by a penny on March 30.

Enter William Blair The same day it reported earnings, Workstream also announced that it had hired William Blair as its strategic advisor to assist the firm in exploring various strategic alternatives to maximize shareholder value. Nemeroff immediately issued this note: "While we are disappointed in the company's sales performance in the third quarter, we remain positive about the growth potential of the human capital management software sector in which WSTM competes, as well as management's retaining a financial adviser to explore strategic alternatives to maximize shareholder value, which could include a potential sale of the company."

Conclusion We think Kenexa buys Workstream inside the next 6 months. This is mostly conjectural, but well worth the risk, we think. Workstream's revenues are growing and the choice to "pursue strategic alternatives" is clearly a sign that management has decided to pursue an exit strategy rather than post negative cash flow and give shareholders a rollercoaster ride for several more years. When Workstream CEO Michael Mullarkey came on board in 2001, WSTM stock was trading at $1.50. It's been 5 years and the stock is now trading for less than what it was trading for when he took the corner office. It's time to move on and sell the company to a player who has done its homework better than Workstream has. In the end, we think Workstream is a pitiful company with sorry management. But it has some enviable clients and it did grow its sales more than 50% in 2005. We are still trying to come up with a fair value for a WSTM buyout, but if we assume that it goes for 8 x trailing 12 month revenues ($27M), that'd value Workstream at more than $4 a share ($215M market cap/50M shares outstanding = $4.30 per share). However, paying 8 x revenues for a company with no earnings may be a bit too optimistic on our part. Worst case scenario, WSTM goes for 2 x book or 3 x sales -- that'd still give investors a double. If you can stomach the risk, we'd suggest buying shares now as we feel that the worst has already been priced into the stock. We know we are.

Disclosure: At the time of publication, the author held a long position in the stock. Don't forget that you can also enjoy most of our research at SeekingAlpha.com, which just refurbished its user interface into something truly extraordinairy.

Earnings Preview for Monday: KNXA

2006-05-01T05:00:00.000-04:00

Kenexa (KNXA) reports earnings later today. What follows is a quick recap of the stock's strengths and weaknesses.

What They Do Employee recruitment and management is key to a business's survival -- just ask Kenexa. The human capital management solutions provider just went public last year and is quickly capturing the hearts of savvy investors and analysts alike. Kenexa enables enterprises to optimize employee recruitment & retention via its on demand software. The firm has approximately 2,000 customers (to which KNXA sells directly) and almost 1/5 of the Fortune 500 is already using KNXA's productivity-enhancing tools. This is a market that'll continue to grow in leaps and bounds: according to the Bureau of Economic Analysis, more than half of US GDP is spent on human capital. The human capital management market is expected to grow rapidly for the next few years as older, technologically obsolete modules & systems are replaced by up-to-date, automated hiring process platforms. IDC thinks this category could grow at a CAGR of 25% over the next 5 years.

What We Like Kenexa's subscription-based (sales as service, or SAS) business model has enjoyed a 90% retention rate. Kenexa's rapid response approach to its customer's personnel-related quandaries and we think they're poised for further growth ahead. Only 1/4 of KNXA's top 100 customers use more than one or two of its products, which means there's plenty of room for upselling. Another growth opportunity lies on the international front: because most of Kenexa's sales are here in the US, international expansion will be key to their growth strategy. Right now, Kenexa is fleshing out operations in India and London, as well as hiring more salespeople. With $43M in cash (or $2.50 a share) and negligible debt, Kenexa has the resources to grow.

What We Don't Like Application software vendors like to trade at 28x earnings -- at 40x next year's forecasted earnings, shares of KNXA look pricey. The biggest risk to our thesis is that the competition KNXA faces is fierce. There are much larger players on the field (Oracle and SAP, to name a few) that could easily step all over KNXA if they suddenly decided to hone in on the HCM niche. Other risks include: subscriber attrition; a slowdown in the IT spending cycle; and share price volatility (KNXA's tiny 12 million float is not for the faint of heart).

Summary We're in the middle of a paradigm shift in which employees are no longer just seen as a cost, but as rather as a significant value driver. HR departments will need talent acquisition solutions and they'll need them fast. On demand software providers such as Kenexa are already capitalizing on this opportunity. We see shares hitting $40 by the end of the year, a 21% premium to where they are currently trading.

It's Time to Buy the Chicken Processors

2006-04-30T03:58:00.000-04:00

Courtesy of SeekingAlpha:

"Flu season is over, and bird flu hasn’t materialized as a major problem. The air is being let out of Gilead Sciences and several chicken stocks are experiencing the unwinding of their shorts (always a pleasant sensation).

Probably the most stable and productive of these companies, on a long-term basis, is Sanderson Farms (SAFM). SAFM has a short ratio in excess of seven days to cover and probably has room to run from here -- it has a ways to go to get to where it was a year ago. Other producers of interest include Tyson (TSN), Pilgrim’s Pride (PPC), and the Mexican producer Industrias Bachoco (IBA)."

Oddly enough, we were one of those who bashed on Tyson Foods, and with good reason. Tyson got hammered after we scolded it.

Speaking of chickens, check out the analysts on Sanderson -- only 4 follow the stock and the consensus for 2006 EPS is that there isn't one. Analysts think Sanderson could lose up to $2.40 a share or earn a profit as high as $1.50. Ummm, thanks. That helps.

Someone Please Give Avon a Makeover

2006-04-28T00:59:00.000-04:00

Anyone realize how many blemishes this cosmetic powerhouse hides from our sight? Here's a couple of notes concerning Avon Products (AVP), which reports earnings later today.

Overview Avon manufactures and markets beauty-related products globally. The firm has three segments ranging from cosmetics and skincare to apparel, accessories, and decorative gifts. Avon operates in 60 countries and pulls in over $8B in annual sales through its 5M employees.

The Bear Case Avon's calling, but we're not listening. Margins are falling. Sales are flat. Headcount (# of Avon sales reps, who are being lured away by rivals) is declining faster than Mary Olsen's weight. Analysts are swearing EPS in 2006 will crumble from 2005 numbers. Sephora just hooked up with JC Penny -- the cosmetic retailing space is consolidating; what this will mean for Avon is still up in the air. Insiders own less than 1% of the stock -- we think they need to eat more of their own cooking before anyone takes them seriously. CEO Andrea Jung sold most of her stock in 2004 (check out the rockstar-esque summer Jung had 2 years ago), so the motivation to do the house cleaning may not be entirely there. Finally, because 65% of AVP's sales come from abroad, the firm is inherently susceptible to wild currency swings.

The Bull Case Avon was recently approved by the Chinese government to continue direct selling in China. The Chinese market for Avon is huge, especially because its US market is going nowhere fast. As a result, last November, Avon announced a major reorganization plan to trim down supply chain inefficiencies and hopefully rake in as much as $500M in pre-tax savings. Finally, we have to admit that Avon's low startup cost business model is attractive as it enables reps to hit the ground running without the firm selling the farm to fund Ms. Avon's first pitch.

Our Case You can't out a band aid on a ten inch wound. We're pessimistic about Avon's growth opportunities and with the competitive landscape so threatening, we'd need a massive discount to fair value before powdering our noses with this stock. Avon is a play on the China boom, right? C'mon -- who isn't in China? If you'd like to put your money to sleep for 18 months, invest in Avon. But if you want to make some dough in this white hot market, invest elsewhere. Hint, hint: look at Parlux Fragrances (PARL) - - the junkies we speak to down in Battery Park swear Avon'll snap them up inside a quarter.

Dial P for Pain: 1-800-Flowers

2006-04-27T00:47:00.000-04:00

The floral business is one tough cookie. Dot-com remnant 1-800-Flowers (FLWS) will report earnings later today, so we thought we'd take a quick look under the hood of this capital-intensive company.

1-800-Flowers (FLWS) 1-800-Flowers markets gifts such as flowers, plants, gourmet foods, candies and gift baskets via the Internet, telephone, catalogs and retail stores. Through its subsidiaries, it also markets home decor and garden merchandise, popcorn, specialty food gifts and children's toys and games.

The company miraculously made its way out of the tech boom detritus and tasted profitability in 2003 after 3 straight years of losses. For the most part, its stock has been dead money for the last 2 years. The most exciting treat shareholders have gotten is the 3 acquisitions the company's made inside the last 18 months. Don't get us wrong, market share is great -- but it can generate redundancy for companies like 1-800-Flowers, who've bought their sales at the cost of adding services they already provided beforehand. How many different types of chocolates does your customer need anyway? Silly us, all this time we thought the whole raison d'etre of M&A was to axe overlap.

Margins in the flower business are ugly, not a surprise considering that a flower is the commodity par excellence. In order to de-commoditize its goods, flower companies have to spend a boatload on SG&A, which crushes margins and profitability. We view the lack of differentiation in the floral business as a dangerous detriment to shareholder value. For a young company, it can mean years of tears until investors see returns that supersede the company's cost of capital.

Just to be fair, we like how 1-800-Flowers has increased customer count as well as its repeat order rate. Furthermore, the business has been doing a decent job cross-selling goods to its customers. Insiders own a truckload of stock, which is always nice to see (as long as execs don't treat a company like their personal piggy bank). Lastly, FLWS still has about $60M in cash on the books (roughly $1 a share), so if the firm sees a specialized rival it'd like to snap up, it probably will.

Valuation FLWS looks priced for perfection -- or an atom bomb, depending on how you like your migraines. Analysts are looking for a 93% jump in 1800Flowers' 06 to 07 EPS. Right now, FLWS trades at 25 x 07 EPS. Sweet deal, right? Wrong. Close rival FTD Group, although it's only going to grow its bottom line by 12%, trades at 13 x 2007 estimates. Here's the monkey wrench: FTD cranks out 2 x the EBITDA (proxy for cash flow from operations) 1800Flowers does. On top of that, FTD's free cash flow/share is 7 x that of 1800Flowers. In other words, paying up for FLWS takes a good amount of guts. Unfortunately, we don't have them.

The Bottom Line FLWS has generated some substantial top line growth since the bubble went pop, but we're not happy campers unless a company can attain profitability alongside augmented sales. The intensive nature of the floral business does a great job at dissuading investors like us from touching the stock. Until FLWS gets big enough to enjoy some operating leverage -- or megastores, supermarkets, and e-retailers stop pushing flowers (ummm, like that's gonna happen) -- this is a stock we'll gladly say "next" on. For those with a bit more risk tolerance, the best flower play is ultimately FTD Group (FTD), which has 9% margins, enough surplus cash to buy back its stock, and higher brand awareness in the marketplace.

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Market Puts Coach On Sale

2006-04-26T05:21:00.000-04:00

Shares of Coach (COH), the undisputed leader in accessible accessories, got hammered Tuesday after the company beat earnings but missed expectations.

As you know, reality never had a home on Wall Street. The reality is that Coach is still -- in our opinion -- hitting all cylinders. Its niche of aspiration-driven handbags and accessories has transformed the company into a cash cow and global brand with a business we believe is sustainable over the long term. We believe Coach's growth strategy is sound and if anyone can carry it out to a T, it's Coach's "A game" management.

What's on tap for the remainder of 2006? Coach is blowing up in Japan (the Japanese consumer feels no qualms paying premium prices for top bags) and increasing store square footage in its US spots. The former should enable Coach to segue into the China market and the latter should give it more operating leverage by enabling Coach to control its pricing policies. With 33% operating margins, close to $2 a share in cash, and negligible debt, Coach looks like a steal.

In the last 12 months, Coach has converted roughly 20% of its sales into free cash flow, which means this is one retailer that'll probably never go back to the capital markets to fund itself. And you know what retailers do with excess cash, right? Expand, expand, expand. Here's the bottom line: Coach said Tuesday that it expects 2007 EPS to come in at $1.50 -- that's a 20% jump from 2006 EPS. Right now, Coach is trading at 22 x next year's projected numbers, or 1.1 x growth. Did we just say 1.1 x growth? Yup -- get your shopping bags, kids: Coach is on sale and mommy's in the mood to buy.

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Boring Business = Great Stock: Cintas

2006-04-25T04:41:00.000-04:00

Ask Warren Buffett, kids: boring business will make some of the best investments you'll make in your lifetime. Case in point -- Cintas (CTAS), a solid company that demolishes its peers in what it is an utterly basic business.

Overview Cintas rents and sells corporate identity uniforms to some of the biggest players in our economy. Cintas also provides rentals and sales of restroom, cleaning and first aid supplies. As you can see, there is nothing sexy about this. However, Cintas has spent the last 35 years growing and building real shareholder value -- that elusive type you get when you mix top management with operating leverage. Cintas' senior execs have been with the company for over 15 years and the company has capitalized on scale economies to drive the bottom line to industry-leading numbers. Today, 5M people wear Cintas-made uniforms during the workweek.

Even with higher energy costs cutting into its figures, Cintas still spits out profit margins approximately 4 percentage points above those of its closest peers. Simply due to its size, CTAS can negotiate volume discounts with its customers -- evidence, of course, of a wide moat company. Besides this competitive advantage, we also admire CTAS's track record in the acquisitions department. CTAS decided early on that it wanted to be a national player (vs. a regional one), a bet we believe has paid off. With a 17% debt/total capitalization ratio, Cintas looks to be in decent financial health. We like that founder Scott Farmer is still with the company and owns a reasonable chunk of the stock. As long as Farmer is at the helm, we think CTAS will grow by leaps and bounds as it fortifies and cross-sells its impressive customer base.

Valuation/Summary At 22.5 x 2006 EPS consensus and 21 x forward earnings, CTAS looks fairly priced. Analysts are expecting EPS to jump 13% from F06 to F07, which makes CTAS a tad expensive on a forward PEG basis. On the other hand, we'd expect investors to pay a premium for an industry leader, especially one that can still grow revenues at a 10% clip. Rival Aramark (RMK) trades a much lower multiple (17 x 2006 EPS), but is much more leveraged (showing $48M cash and $2B in debt on its balance sheet). Ultimately, we hope CTAS stock sells off sharply sometime in the next 6 months. Rest assured that when it does, we'll be all over it like a bad rash. After the current oil shock dies down, we see shares of Cintas climbing back to their 52 week high. Our near term price target is $47.50.

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Earnings Preview: Netflix

2006-04-23T18:39:00.000-04:00

Online movie rental provider Netflix (NFLX) reports tomorrow after the close. Analysts expect EPS of 6 cents vs. a loss of 9 cents same period year ago. Our bullish sentiment on Netflix remains intact. Below are some reasons we think shares of Netflix could reward the more patient breed of investor.

1. Netflix has less than 5 million subscribers, so we think the room for growth is enormous.

2. NFLX's customer base is remarkably loyal and the more users it books, the higher the switching costs for Netflix users. Studies show that it's harder to drop a service when all your friends are also users. Like begets like.

3. Netflix grew its subscriber base over 60% last year, amidst a less than favorable milieu. Netflix's rivals have ramped up promotional efforts in order to steal Netflix's customers, who haven't fallen for lower price points. That attests to Netflix's brand power.

4. Netflix's business model (no late fees, no standing in line, and no walking out of the store with a film you don't really want to see) creates what we think is a compelling value proposition. Furthermore, Netflix specializes in catering to minority tastes and leverages its capacity to operate shelf-free. Because specialized markets are more predictable, the risk of failure is much lower, and so small-to-mid-budget movies can be very profitable. Taking all this into account, we foresee accelerated subscriber growth for Netflix in F2006 & F2007.

5. Over 30% of the stock is held by insiders and the company is debt free. With the founder still on board, we believe it is in the best interest of CEO Reed Hastings to see the firm prosper and ultimately hit critical mass.

6. Competitor Blockbuster Video (BBI) is begging for life: It can barely eke out operating cash flow (CFO) from its $6B in annual sales and it's drowning under a pile of debt. Unsurprisingly, the stock is at an ugly 52 week low and most likely on its way to $3.

Valuation Based on what we estimate could be a 50% jump in 2006 to 2007 earnings, we think shares of Netflix could technically trade up to $50-55 dollars. Our boldest assumption pegs NFLX earning roughly $1 in earnings in 07 -- at a 50x forward multiple, that'd put shares at $50. Note that we find it incredibly difficult to "value" NFLX because the competitive landscape is literally up for grabs. Because NFLX is still a young company, we think most of the Street decided long ago that Netflix had lost the war. We are a bit more sanguine -- Netflix has faltered before, and management quickly brought the firm back to its feet. Investors who are buying Netflix at today's price are essentially betting on Reed Hasting's vision and execution history. Our 2006 price target is $40. On a risk basis, we rate Netflix "speculative, " especially now that shares have already tripled over the last year. Netflix's beta (a measure of volatility vis-a-vis the broad market) is 2.5, whereas AMZN and BBI hold a beta of 1.7 and .5, respectively.

Risks After years of shrugging these threats, Blockbuster has launched a series of programs to try to counteract Netflix's strategy. Last August the company began promoting an online program similar to Netflix'sÂbut offering lower prices, as well as two coupons each month for free in-store rentals. And for movie buffs who like Netflix's pricing concept (in which customers pay a flat monthly fee for unlimited rentals) but prefer renting from a brick-and-mortar store, Blockbuster now runs a flat-price Movie Pass program. In addition, Netflix has come under fire lately for discriminating against current customers (so it can get movies out faster to new users), as well for keeping subscribers on its books even when those subscribers have put their accounts on hold. Further allegations/investigations could adversely impact NFLX's stock price, which is currently flirting with a new 52 week high. Note that Blockbuster (BBI) is also receiving a slap on the wrist, this time for misleading customers with its "no late fee" policy (keep the video for more than a week, Blockbuster will automatically assume you're buying it). Lastly, we'd be amiss not to tell you that insiders exercised plenty of stock options throughout April -- in fact, Netflix's CFO pocketed close to $2M. Yummy.

Summary With the Walmart/Amazon threat waning (Walmart will likely stick to selling DVDs while Amazon would be foolish to penetrate a price sensitive domain that their distribution network isn't necessarily prepared for), Netflix could see more upside. We suggest investors wait for a pullback before picking up shares. There's no question that Netflix's top line story looks attractive -- now let's wait and see if the company can deliver a decent margin outlook (operating margins are currently under 2%). After the close tomorrow, investors will have a better feel for how the firm is doing on this front. We're barely in the third inning, here -- as to what Netflix will look like 5 years from now, that's anybody's guess.

For a PDF version of this report, please point your browser here. Monday update: Our bull call was dead-on: late Monday, NFLX shares popped 6% after smashing earnings, raising guidance, and reporting lower subscriber churn from a year ago period.

Dell Slaughtered on Downgrade: Huh?

2006-04-22T05:19:00.000-04:00

Dell's gross margins could rapidly deteriorate if Dell (DELL) slashes prices in order to gain market share, went the tune on Friday.

Citigroup analyst Richard Gardner axed his rating on the stock to sell and said that as the company's cost advantage over competitors erodes, Dell could be forced to "reset" margins to gain share.

"The slow, steady erosion of Dell's cost advantage combined with the company's heavy exposure to saturated portions of the global market explain the recent collapse in Dell's unit growth premium versus the global PC market. We believe that the days of Dell growing at two- to three- times the rate of the market while maintaining a 500 to 1000 basis point operating margin premium versus competitors are gone forever," wrote Gardner.

Nevertheless, at 14 times next year's earnings, shares of Dell look tempting.

As long as founder Michael Dell stays with the company, we think DELL is great business to own. As the low cost leader in a commoditized business, Dell is the surest route to travel. Given Dell’s past history — and current cash balance ($10B large ones sitting on the books) — we believe Dell will cut through this cyclical fog faster than anyone on the Street thinks it will.

The Shorts Are Drowning in Coldwater Creek

2006-04-21T00:46:00.000-04:00

Retail is a tough, fickle business in which there is rarely -- if ever -- just one game in town. Without a niche, cost advantage, or highly differentiated product line (to jack up margins), you're as good as yesterday's newspaper. Just ask Coldwater Creek (CWTR). The specialty retailer's unique merchandise mix has resulted in a phenomenal top line and operating income growth story. It should come as no surprise, then, that CWTR's stock price is at a 52 week high.

Overview Coldwater sells apparel, accessories, and jewelry to women between the ages of 35 and 65 -- a profitable customer segment indeed. This target demographic (essentially part of the Baby Boomer generation) pulls in approximately $75,000 a year in income and Coldwater's been preparing heavily to start vacuuming their dollar bills. Store expansion, managerial improvements, and improved product branding have taken Coldwater from Wall Street to Main Street. It's about time -- 2006 will be the first year CWTR hits a $1B in sales.

Today, CWTR is using all free cash flow (FCF) to build new stores. We view this as the appropriate strategy (it's the same one Home Depot and Starbuck's used before they became giants) for the firm. To supplement this new store rollout, CWTR has started "direct sourcing" the production of its merchandise in order to create cost savings. The operating margin picture is already improving and should continue to improve as CWTR weeds out the middleman from its production process.

Don't forget that Mother's Day is approaching us -- Coldwater's revamped ad efforts could result in a seasonal boost for sales. This may explain why the shorts on this stock (15% of the float) have gotten their heads chopped off as of late. Their skepticism is warranted, but if CWTR sends out any more positive surprises, further short squeezes could lift the stock well towards the $40 range. The fact that insiders own 40% of the stock and the company's debt free with $131M in cash mitigates some of worries we have about the retailer.

Risks CWTR competes with a plethora of other high-end retailers, such as Talbots and Chicos. These names are already entrenched in the consumer psyche and it'll take some miraculous advertising for Coldwater to scoop up market share. Catalog sales, which have accounted for most of Coldwater's past sales, are slowing down. With the Internet becoming the channel of choice, Coldwater's need to optimize customer service and product offerings for its bandwidth-oriented shoppers is integral to its overall growth story. Lastly, CEO Dennis Pence has been selling stock hand over fist lately, something that naturally unnerves us.

Summary We believe Coldwater will continue to expand and capture market share over the next few years. CWTR's affluent customer segment is an attractive one and we think the company's positioning efforts are rapidly capturing the minds of its shoppers. As a result, CWTR is a business we'd like to own and we see the stock hitting $35 as early as next week. Because CWTR competes with a plethora of other high-end retailers, we'd prefer a 15-20% margin of safety before picking up shares, but we understand that waiting for a pullback could do more harm than good. With its ad spending projected to grow over 50% from last year levels, Coldwater's a name we'll definitely be seeing more of. At 60x earnings (above industry average, to be sure), shares of CWTR look expensive -- for the reasons mentioned above, however, this is a creek we're willing to jump into anyways.

We'd like to thank Bryan Brokmeier, an equity anlayst at the Kelley School of Business at Indiana University, for sharing his insights on Coldwater Creek with us recently.

IGT Pops on Earnings Report

2006-04-20T22:53:00.000-04:00

Shares of slot machine maker International Gaming Tech (IGT) popped 10% on Thursday after the firm said 2Q revenues were up 17% from a year ago period. Revenue rose to $644.4 million from last year's $551.1 million, with product sales revenue spiking 32%, gaming operations revenue up 4% and non-machine revenue rising 16%.

You'll recall that on March 8, we spit out this compelling report, in which we said IGT had a stronger hand than anyone on the Street was giving it credit for.

On Wall Street, strong suits like to hide. Our job is to find them for you.

How To Play the Employee Management Boom

2006-04-20T00:18:00.000-04:00

It doesn't matter what business you're in -- if you can't manage the people who work for you, you won't stay in business for long. Employee recruitment and management is key to a business's survival -- just ask Kenexa (KNXA). The human capital management solutions provider just went public last year and is quickly capturing the hearts of savvy investors and analysts alike.

Overview Briefly, Kenexa enables enterprises to optimize employee recruitment & retention via its on demand software. The firm has approximately 2,000 customers (to which KNXA sells directly) and almost 1/5 of the Fortune 500 is already using KNXA's productivity-enhancing tools. This is a market ready to blast off: according to the Bureau of Economic Analysis, more than half of US GDP is spent on human capital. The human capital management market is expected to grow rapidly for the next few years as older, technologically obsolete modules & systems are replaced by up-to-date, automated hiring process platforms. IDC thinks this category could grow at a CAGR of 25% over the next 5 years -- we're thrilled, as are Kenexa's shareholders: shares have more than doubled from $14 in just a matter of months.

Kenexa's subscription-based (sales as service, or SAS) business model has enjoyed a 90% retention rate. IDC's figures are once again revealing: they think the SAS market could hit over $10 billion by 2008. Kenexa's rapid response approach to its customer's personnel-related quandaries has thus far served the firm very well (sales hit $65M in 2005, a 50% jump from 2004 revenues) -- and we think they're poised for further growth ahead. Only 1/4 of KNXA's top 100 customers use more than one or two of its products, which means there's plenty of room for upselling. Another growth opportunity lies on the international front: because most of Kenexa's sales are here in the US, international expansion will be key to their growth strategy. Right now, Kenexa is fleshing out operations in India and London, as well as hiring more salespeople. With $43M in cash (or $2.50 a share) and negligible debt, Kenexa has the resources to grow.

Valuation We'd love to pick up shares of Kenexa now, but we think we'll wait -- application software vendors like to trade at 28x earnings and at 40x next year's forecasted earnings, shares of KNXA look pricey. Because we believe Kenexa is a budding business and a stock Wall Street hasn't really woken up to, we eagerly await a pullback. As Kenexa's revenues grow, so will the number of analysts that cover the stock. Last September, only 4 analysts followed it; today, there are 11 analysts serenading Kenexa's management.

Risks The biggest risk to our thesis is that the competition KNXA faces is fierce. There are much larger players on the field (Oracle and SAP, to name a few) that could easily step all over KNXA if they suddenly decided to hone in on the HCM niche. On the flip side, the sheer size of these rivals could retard them from moving in on customers with the quickness that nimbler players like KNXA can exploit. Other risks include: subscriber attrition; a slowdown in the IT spending cycle; and share price volatility (KNXA's tiny 12 million float is not for the faint of heart). It doesn't help that insiders have been doing some unloading lately, either. Since Kenexa is a newly publicly traded company, we're not pushing the panic button just yet. Insiders have mortgages, too.

Summary Wake up and smell your co-worker, Mr. Manager. We're in the middle of a paradigm shift in which employees are no longer just seen as a cost, but as rather as a significant value driver. HR departments will need talent acquisition solutions and they'll need them fast. On demand software providers such as Kenexa are already capitalizing on this opportunity and ballooning the size of their operations. For investors, a renewed focus on employees could mean a very rewarding summer for your portfolio. Our advice: pick up Kenexa before more analysts do. We know we will.

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Cemex Zooms Past Our Price Target

2006-04-19T05:46:00.000-04:00

On March 13th, we urged readers/subscribers to load the boat with cement maker Cemex (CX). As of today, shares are up 13% and the stock has zipped by our $66 price target.

With the stock now at $68 and change, we recommend investors take some money off the table, but still maintain a position. With Cemex's growth story remaining intact, we are raising our Cemex price target to $72.

To revisit the March report, make sure you read this.

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Digital Insight Capitalizes on e-Banking

2006-04-18T05:17:00.000-04:00

Shares of Digital Insight (DGIN) are up 10% since we first brought the stock to your attention on 2/24. Part of the price appreciation stems from the fact that Jim Cramer (of CNBC's Mad Money) recently recommended the stock. Although the name has suffered from some insider selling (insiders still own 11% of the stock), our overall tone on the company remains intact.

Thesis/Risks Founded in 1996, the banking solutions outsourcer runs Internet services for close to 2000 banks and 6 million customers. Digital targets an attractive niche: smaller institutions that lack the proprietary wherewithal and resources to handle their client's online needs. Without the financial muscle to carve out their own technological infrastructure, smaller outfits have no choice but to sign up with Digital Insight. We think the business has ample room to grow, even though competition's been heating up. Analysts are already slashing their top line projections, and unforeseen risks -- such as security breaches -- are creeping into play.

Still, as a service enabler, DGIN presents a compelling play on the escalating adoption of e-banking, which we reasonably suspect will continue to grow by leaps and bounds. 39 million households will bank online this year, according to Jupiter Research. That number is expected to hit 57 million by 2009. We believe Digital Insight is well-positioned to capitalize on this growth.

But trends in and of themselves do not guarantee success or long term sustainability. Digital Insight needs to hone in on its cross-promotional endeavors, as well as develop a competitive advantage that will keep rivals -- core processors, in industry jargon-- at arm's length. We forecast a modest drop in revenue growth as rivals storm the castle with lower priced platforms. With negligible debt and $115M in cash stored for a rainy day, Digital Insight's ability to scale and retaliate should not be discounted.

The Bottom Line As the online banking boom rages on, Digital Insight should continue to ring the register. With the stock trading at half of what its peer group trades at (on a price/cash flow basis), we'd have no problem picking up shares at today's price. We find solace in the fact that of the 12 analysts that track the stock, not one has a sell rating. Basing our assumptions on a relative value comparison, we see the stock hitting $42 before the 4th of July.

Disclosure: Jim Cramer is the founder and largest shareholder of TheStreet.com (NASDAQ: TSCM), which recommended this website back in March. The Catablast! Media Group is an independent research service and is in no way affiliated with CNBC, Jim Cramer, or TheStreet.com. For a PDF version of this report, please click here.

Timberland and Nike Squash the Competition

2006-04-17T06:58:00.000-04:00

Face it: The domestic footwear market is saturated beyond belief. It's a miracle firms still print money in such adverse conditions. It doesn't take a MBA to figure out that to survive, a footwear-driven firm needs a highly differentiated product and/or image to capture customers and hit critical mass. If we had to pick just two to invest in, we'd nominate Nike and Timberland.

Nike (NKE) With an international expansion agenda we like -- and a belittled 15x P/E multiple to go along with it -- we rate NKE a strong buy and see the stock hitting par before Labor Day. Nike virtually invented the game -- no one knows marketing better and no one in the footwear/outerwear category carries as much financial muscle ($2B cash on the books) as Nike. Global reach? Yup, Nike owns that, too. The Air Max 360s are white hot; the World Cup this summer should pump up overall sales; and lower-priced sneaker penetration into Walmart all lead us to believe investors are underestimating Nike's potential. A new CEO is in place (Mike Parker, who cut his teeth at Nike and knows the business like the back of his hand) and the company even got those labor abuse protestors off its back. We suspect that Nike will deploy some of its excess cash on acquisitions (the name already has top brands like Converse and Cole Hann under its wing) or higher dividend payouts -- hopefully both. On a pullback, we'd be all over this stock like a bad rash.

Timberland (TBL) In our opinion, this boot maker steps all over the competition. They should teach Timberland 101 in business schools around the world because this company's mastered the art of targeted marketing and/or psychographic profiling (remember the mid 90's, anyone?) While growth has slowed down lately, we respect management's refusal to bow down like suckers and mimic seasonal, come-and-go trends. As a result, we feel TBL's core image/formula (rugged meets premium = smoking concept) remains intact. As long as international sales remain robust, we expect TBL to stick around as a dominant player in a typically low moat business. The math looks pretty as well: TBL currently sells at 14x earnings (rival Wolverine Worldwide [WWW] goes for almost 17x EPS) and 12x cash flow. Operating margins are coming in at 15%. Finally, Timberland is debt-free and has $213 million in cash it can use to stomp out whatever upstarts foolishly decide to get in its way.

Briefly, we feel both these names are branding geniuses with impressive balance sheets. Their leadership positions attest to their wide moats and at their current valuations, we'd wholeheartedly scoop up shares to add to a portfolio.

Congratulations to our colleagues at SeekingAlpha.com for yet another mention in this past weekend's Barrons. In case you haven't noticed, the site's growing at a monster clip and we feel blessed to be a small part of it. If you're smart, you'll make SeekingAlpha.com your homepage right this instant. Monkeys throw darts -- champions wake up to double expressos and SeekingAlpha. Take your pick. For a ready-to-print PDF version of this report, tell your mouse to go here .

Talkin' Smack: 3 Stocks That Make Us Nervous

2006-04-14T01:50:00.000-04:00

Wall Street'd be a pretty boring place if investors never mispriced securities or hyped up stocks like there was no tomorrow. You can't blame the Street for acting like a manic cheerleader sometimes -- growth is Wall Street's version of crack, and investors will take it wherever they can get it.

Growth sells the same way sex does. Here are three stocks with sexy stories, but futures so uncertain we actually toss and turn at night wondering what to make of them.

Aquantive (AQNT) This is an online advertising company that's grown mainly through acquisition -- that's one red flag. We don't look too lightly upon management's generous use of options, nor do we like how Aquantive's main revenue driver -- a technology unit that helps customers track the efficacy of ad campaigns -- lacks patent protection. The shift to ad spending on the internet is obviously a plus for AQNT, but what's good can also be onerous: unfortunately, Aquantive's business is marked by low switching costs. Aquantive's sales are lumpy, and although they've picked up some traction over the last few years, we'd wait until Aquantive creates a moat around its business before loading the boat with shares. Today, AQNT fetches for 50x current earnings and 6x book value.

Hologic Inc (HOLX) Hologic is spearheading the shift to digital mammography machines. While the market potential is huge, Hologic is up against GE, perhaps the most powerful company on the planet (sorry, Exxon). While demand for tomosynthetical machines -- they reduce breast cancer mortality by as much as 30% -- should increase rapidly, there's no guarantee that rivals, with much deeper pockets, will let Hologic operate as is. The valuation for Hologic is a bit nauseating, we think: HOLX is exchanging hands for 77x current earnings, 8x sales, and 44x trailing 12 month EBITDA. With valuation like that, investors will drop Hologic like a hot potato on even the faintest of bad news. Massachusetts-based Hologic, which is followed by only 5 analysts, reports on April 25th. If Hologic smokes estimates, the company could become a potential acquisition candidate, if it isn't already.

Martek Biosciences (MATK) Market makes microalgae-based nutritional oils for the infant formula market. Our primary concern is that Martek only sells one product in one category. The valuation buttressing the stock means investors are quite confident in the name's ability to penetrate new markets, such as the food and beverage category (which Martek is already poking its stick in). The main risk is that Martek won't find ancillary markets to support the niche it already controls and/or that its key products will lose patent.

The name of the game is Cross or Die: To survive, Martek will have to become the biggest fish in a small pond. We believe it can do this through the bowling pin effect, which is what happens when first movers facilitate entry into adjacent niches. Martek can't afford to wait for the market to adopt its products -- on the contrary, it must organize the same market it looks to penetrate and create barriers to entry so that competitors view the oil-for-formulas market in unattractive terms.

The company has also experienced some painful supply chain issues lately, so investors will also want to keep that under close watch. Lastly, Martek's CEO is retiring later this year. Let's hope his replacement can fatten up this fatty-acid-purveyor's top line. MATK trades at 31 times next year EPS, 4.5x sales, and 26x operating cash flow. With a tight float of 30 million shares, Martek is incredibly vulnerable to dizzying price swings.

Analyst Summary All three of the aforementioned names are characterized by tremendous growth opportunities but questionable valuations. Depending on one's risk tolerance, one may or may not want to jump on board these ships today. The seas they navigate will be anything but calm over the next 12 months.

We'd like to wish all our readers, subscribers, and first-time visitors a happy holiday -- we'll be back on Monday with a look at the sportswear group. Premium content subscribers will receive their weekly PDFs as expected. If you'd like to become a subscriber, shoot us an email at subscribe@catablast.com.

The Bull Case for Cerner

2006-04-13T07:53:00.000-04:00

Medical errors are unfortunately still running rampant in America, so the need for clinical/administrative data automation in the health care industry is greater than ever.

According to IDC, hospital-related IT spending is expected to rise considerably within the next 3-5 years as health care providers look to implement safety metrics across the board. The Center for Information Technology Leadership (CITL) says the health-care system could save more than $100 billion annually if there were sufficient IT to save & retrieve data.

Enter Cerner (CERN), purveyor of medical software. Cerner's revenue streams come from software sales and the ancillary/follow up services it provides for its clients. Clients include large hospitals, but Cerner has recently penetrated the tighter, smaller private physician space in order to diversify it client base and augment its long term contractual agreements. Currently, Cerner lacks the scale its rivals enjoy, and as a result, Cerner has to spend more in order to develop content solutions and haul clients through the door.

Nevertheless, Cerner has done an exceptional job turning the orders it has received into recurring revenues. In addition, Cerner's brand visibility is a competitive advantage we think the firm should capitalize on in the near future. Should hospital budgets loosen up -- and the firm carve out an impenetrable niche in this terribly fragmented category -- we think Cerner could see great upside.

RISKS Cerner's balance sheet is far from perfect, and the company has already announced much higher R & D
expenses going forward as it shrugs off increasing competition from formidable stalwarts like IBM (IBM) and Accenture (ACN), who could arguably blow Cerner out the water if they decided to leverage their name and deploy cash on acquisitions. Record-keeping software maker Quality Systems (QSII) should also be watched closely. A small but powerful player, Quality Systems is cash flow positive and growing at a torrid pace.

SUMMARY Will Danoff, who manages $65 billion for Fidelity Contrafund, is arguably one of the best stock pickers of his time -- Danoff was recently caught adding Cerner to his holdings. We believe Cerner is an up-and-coming star in a white hot category. Although the competitive landscape and valuation picture (CERN trades at 27x next year EPS, 3x sales, and 13x EBITDA) aren't exactly screaming "buy," we'd easily shoulder the risk of adding Cerner to our portfolio, as long as the firm's long term prospects remained sound. Our price target is $52.

Parts of this report appeared in this research report published on 2/24, when CERN was trading at $41. The stock is up 10% since then -- we believe now is still a good time to initiate a position.

Harley Loses Gas: We're Still Sellers

2006-04-12T14:43:00.000-04:00

Harley-Davidson (HDI) shares tanked 6% on Wednesday after the motorcycle giant posted higher 1Q earnings but gave an outlook for bike sales that had bears crying across the Street.

The Milwaukee company reported a 1Q profit of $234.6 million, or 86 cents a share, up from a year-ago profit of $227.2 million, or 77 cents a share. Revenue rose 4% in the latest three months to $1.29 billion from $1.24 billion in the same period a year earlier.

Goldman Sachs analyst Julia Crowell pointed to the shipment target as the likely catalyst for the selling, citing "We believe the only negative was the company's low 2Q shipment guidance of just 78,000 bikes, which is below our estimate."

Felicia Kantor Hendrix of Lehman Bros reiterating her underweight rating on the stock, said investors will likely focus on this 2Q forecast, which she says sets the company up for a no man's land come 3Q/4Q.

As for us? Well, we beat everyone to the punch. Here's the short research report we shot out to clients way back on March 1st.

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Fido's Day: Assessing the Pet Need Specialists

2006-04-12T00:22:00.000-04:00

Americans are pampering their pets more than ever before -- fact.

Currently, over 60% of American households possess a pet -- that's over 350M cats, dogs, and hamsters. Analysts have the pet supply industry pegged at $36 billion dollars and we think that with the explosion of young professionals and retiring baby boomers (who've finally got the kids out of the house) providing most of the gas, pet ownership will continue to grow at an impressive pace.

Here's a quick look at the three largest players in the pet needs category:

PetSmart (PETM) Petsmart sells pet food, supplies, and related services. Petsmart just posted a great 4Q with same store sales up nearly 5%. Because it's getting bigger, Petsmart is finding more leeway with its suppliers -- a sign of improving profitability. Right now, PETM is reformatting stores and introducing new services. As a veritable superstore, PETM stocks roughly 13,000 items, eons more than what any private mom and pop could ever inventorize. PETM's sales-per-square foot are higher than Petco's (as are operating margins) and new store additions in less-represented territories should push shares higher over the next 12 months.

PetCo (PETC) Meet Petco, Petsmart's arch nemesis. We like how Petco possesses better, more convenient store locations and leverages its P.A.L.S. loyalty program. However, there are some things we have to bark at: Insiders do more selling than they do buying and Petco's smaller store format could leave it at a disadvantage to Petsmart. Additionally, with $150m in debt, PetCo's financial health could use some spring cleaning. Although it's not a dog (insiders still own a large chunk of the stock), Petco's our least favorite name in the group.

PetMed Express (PETS) Woofie got a cough? Enter PetMed Express, the leader in online pet medicines and related products. We like how PETS pushes drugs out the door in 2 days or less, as well as the fact that the segment/niche this name controls is expected to grow 15% in F2006. The greatest growth opportunity is in this stock, we think, since revenues are expanding at a brisk pace. The firm is spending somewhat heavily on ads to boost its customer acquisition/retention rate, so we'll have to see how quickly PETS can monetize these efforts. The stock's had a great run thus far, proof that investors are minimally concerned with the brick-and-mortar threat to an internet-contingent company like PETS. Insiders own 14% of the shares outstanding and the company holds no debt.

Analyst Summary

Favorable demographic trends should fuel further pet stock price increases. Given the moderate risk (mostly gas price and interest rate-driven) surrounding these names, we'd gladly pick up shares of all three if the market ever provided a rare buying opportunity.

Our favorite name in the group -- also the riskiest bet -- is PETS. Take a look at this provocative chart comparison so that you can see how much damage this puppy's already done. If you'd like a print-ready version of this report, take a look at this. This PDF is similar to what paid subscribers receive weekly, weeks before it appears on this site, along with extra coverage and/or industry news, trends, and surveys.

Baush Bombs Again: Ummm, We Called It....

2006-04-11T11:51:00.000-04:00

Bausch & Lomb (BOL) got another whooping in after-hours action Monday after it agreed to stop shipping its ReNu MoistureLoc brand contact lens solution because myriad users have reported getting an eye infection.

The FDA said over 100 preliminary reports of a fungal infection had been reported to 17 different CDC Prevention units. Although the FDA said it was not aware of a direct link between the Fusarium fungus and any specific product, in 26 cases thus far, patients used Bausch & Lomb's ReNu MoistureLoc solution.

The pause in shipments was another low blow for Bausch & Lomb, which said last month it was delaying issuing its 2005 annual report amid some accounting mishaps. When a company can't crank out its numbers in a timely fashion -- stay away.

The company's shares tapped a new 52-week low on Monday, even after a bullish story on the firm popped up in this past weekend's Barron's. Barron's was right in thinking that investors may be over-reacting to BOL's fungus-related woes, but they forgot to mention that the overall growth picture at BOL looks bleak.

Apparently Barron's doesn't pay attention to this site, because on March 1st -- with BOL trading at $69 -- we initiated coverage on the stock with a sell recommendation.

Shares are down over 30% since we first wrote pessimistically about the stock.

Editor's update: Reinforcing our long held belief that most analysts either don't know what they're doing or too reluctant to pull the trigger when it counts, BOL was downgraded by five different firms on Tuesday. Our bearish call 5 weeks ago would not be the first time we've blown a major analyst recommendation out of the water. Similarly, this wouldn't be the first time we've shown readers a 30% return in less than 6 weeks (our typical holding/shorting period). If you'd like to become part of our exclusive client list, you'd be nuts not to read this.

Caterpillars, Missles, and More: Preview

2006-04-11T00:36:00.000-04:00

Later this week, we'll look at 4 or 5 construction equipment plays, as well as survey the defense contractors, many of which are riding the seismic defense spending wave. Stick around -- we're about to get grimey.

Give Mr. Wall Street a Black Eye: Subscribe!

2006-04-06T02:04:00.000-04:00

If all it took to make money in the stock market was a PhD in mathematics, you'd have a lot more rich mathematicians. Last time we checked, most of them were still fighting and clawing for tenure.

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Stars and Dogs In the Job Category

2006-04-05T00:28:00.000-04:00

Improving labor conditions should bode well for job enabling firms as well as recruiting/staffing services. Below is a quick look at some of the more prominent names in this competitive, fragmented category.

Adecco (ADO) As a veritable leader among temp staffers, Adecco has most Fortune 100 companies as clients -- its size mustn't be overlooked. But its recent focus on profitability/margin expansion could leave revenue numbers gasping for air. Growth will depend on new markets, which won't be easy precisely because Adecco's footprint can already be found just about everywhere. Right now, debt accounts for nearly 40% of total capitalization, something we feel could be improved. We don't see any near term catalysts, and neither does the Street -- there is only one buy rating among analysts.

Robert Half (RHI ) We believe Robert Half has an unassailable reputation in the professional staffing category. It focuses on higher end segments like finance, accounting, and information technology, all of which are in desperate need of temporary workers. We believe Robert Half has a sharp eye for acquisition targets, using the new businesses it buys to widen its purview and extend its brand. Half has one of the best operating margins stories in the industry, as well as a rock solid balance sheet. Free cash flow accounts for over 5% of sales, which we always like to see.

Monster (MNST) Monster.com is the leader in the online job recruiting space. Heavy marketing has created a profitable business centered around a strong brand and the network effects principle (more users = greater utility). Because online recruiting is expected to grow at an annual 20% clip until 2008, Monster may be in the sweet spot. The firm's already posted some terrific ROIC numbers amid heavy competition from newspapers and rival job search engines like Careerbuilder.com. If Monster continues to scale, we don't see its competitive advantage eroding anytime soon. Insiders own 15% of the stock and the balance sheet is squeaky clean. If there was one thing we had to disapprove of, it'd be Monster's refusal to expense stock options. Other than that, Monster's a business we'd like to own should shares ever tumble without cause.

Labor Ready (LRW) Need some day labor ASAP? Look no further than Labor Ready, a differentiated service provider in the temporary services market. Labor ready gets workers on short notices and targets smaller cities where it can service customers looking for unskilled manual labor to suit commercial construction needs. Because Labor Ready is levered to the housing sector, interest rates could adversely impact its revenue story. Nevertheless, we think Labor Ready controls a profitable niche and we applaud its debt-free capital structure. With the stock currently trading at 20x earnings (the industry trades at 30x), now might be a good time to pick up shares. 9 analysts follow the stock; none of them have a sell.

Kelly Services (KELYA) We saved the worst for last. Declining EBITDA and negative free cash flow make this name a sell candidate. Kelly has low pricing power, if any, as well as shoddy operating margins. Management owns 92% of the stock, so if you're a shareholder, don't bother trying to get your voice heard. Management doesn't even let analysts ask questions on conference calls -- what kind of company is this? We view Kelly as a "worst of breed" stock, so it'd have to fall heavily for us to take a second look.

In sum, the more and more people get off the couch, the better these firms may do. This is a preliminary outlook, and as always, we suggest readers do more due diligence before investing. Job stocks are inherently cyclical and a recession could leave all of the aforementioned names coughing in the dust.

Don't forget that there are three ways to read our research: Here, at SeekingAlpha (growing incredibly fast and now read by just about everyone on Wall Street), and lastly, via PDF (emailed directly to you prior to market open) if you're a client. If you'd like to become a client, here is how. At the time of publication, the author did not hold a position in any of the stocks mentioned in this report.

Baby Boom Could Make You Some Coin

2006-04-04T05:18:00.000-04:00

According to the US Census Bureau, the number of children age 5 and younger is expected to grow 10% over the next decade. That means there's going to be a ton of babies that need to be clothed, entertained, and diapered. Here are 3 firms we think may benefit from this exciting demographic trend.

Gymboree (GYMB) Specialty retailer operates stores selling apparel and accessories for children and women under the Gymboree, Janie & Jack, and Janeville brands. Same store sales have been very impressive lately, remarkable considering that Gymboree faces stiff competition from department stores and mass merchandisers. Because children's apparel is no-moat business (low switching costs/jumpy pricing environment), investing in Gymboree is somewhat risky. The fight for market share means inconsistent revenue patterns and meandering value propositions. All that said, we like how Janie & Jack has captured the high end portion of Gymboree's target market. The boutique-style operation is expected to have 80 outlets up and running by 07. With better inventory control, Gymboree could be a strong contender. We await a more predictable operating margin picture from Gymboree, which is debt free.

Kimberly Clark (KMB) Kim, which manufactures a plethora of paper, health, & hygiene products, remains the diaper king. Because newborns love to poop, parents will need to load up on Huggies, the #1 diaper brand in the world. Smooth behinds are not the only thing behind this stock -- Kimberly Clark is currently carving out some new strategic paths to see what fits best; last July the firm announced a $775M restructuring plan. We like how management has executed on the cost savings side. Now, all we'd like to see them do is pass those high raw material inputs onto the consumer, as well as strike out with some new innovative, market penetrating add-ons. Kimberly's revenues have grown in the middle single digits over the last 5 years, clearly not eye-popping numbers (Kim has positioned itself as a value-provider), but we admire the name's generous cash flows and solid financial health.

Leapfrog (LF) The riskiest bet of the group, we think. Leapfrog makes toys for children in the 6 month to preteen segment. Toys are an unattractive industry if you're looking for a steady stream of earnings: what could be more volatile than that hottest gizmo your kid is pining day and night for? One day it's Pokemon, the next day it's teletubbies. Leapfrog had a terrific 3 year run (sales mushroomed fivefold from 2000 to 2003, thanks to the Leappad), but since then, it's been struggling to regain customer attention by aggressively marketing its core educational product niche. It's latest gadget is the FLY pentop computer, which most analysts predicted would stumble. They were right -- the pentop has yet to grab critical mass, so it look's like Leapfrog's time is running out. Since over 60% of Leapfrog's sales come from the Walmart/Target channel, a sudden dearth of product innovation could spell lower shelf space, which would in turn spell disaster. Although LF has a clean balance sheet and $95M in cash to deploy on new projects, overall you have an unpredictable company operating in a fragmented industry -- approach this one with caution.

In conclusion, although they are accompanied by mildly uninspiring risk/rewards, we believe these names are at the center of what could very well be an explosive demographical shift.

Don't forget that our research also shows up at SeekingAlpha. Clients received a longer version of this report last week. At the time of publication, the author and/or his family held a position in one or more of the stocks featured in this article.

Smash the Market: Become a Member

2006-04-03T10:59:00.000-04:00

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Spirits Leaders Look Compelling

2006-03-30T01:19:00.000-05:00

Visit any college campus and see for yourself: Beer's out and premium branded spirits/wine are in. Here's a quick look at three of our favorite pure alcohol beverage plays. On deep pullbacks, we'd easily add these names to our portfolio.

Brown Forman (BF.B) The guys behind Jose Cuervo have been at it over for 130 years, so they're obviously doing something right. We admire the way the firm that's been peeling off its non-liquor related businesses to boost sales of premium spirits. Volume figures for Jack Daniels were off the chart in 05, a clear sign of the paradigm shift we're seeing in the alcohol space in which consumers are willingly "trading up" to deftly-marketed goods. Brown rewards shareholders with buybacks and dividends, shareholder-fueled activities we think will continue even as the name continues its acquisition behavior. Insiders own most of the stock (the float is only 37M shares vs. 122M shares outstanding) and Brown's balance sheet gets a passing grade -- debt accounts for approximately 30% of its total capitalization.

Constellation Brands (STZ) Constellation is the largest winemaker in the world. Half of its sales come from that category, the other half coming from spirits and beers (like Corona). Although this is another firm where the founding family has virtually made it impossible for outside ownership to manifest, we like how Constellation has rapaciously acquired leading brands (like wine juggernaut Mondavi in 05) and broadened its portfolio holdings in order to make itself more marketable to suppliers. Analysts think the distribution networks in this space could shrink, so a variegated product company like Constellation could enjoy a competitive advantage. We only wish the firm was less leveraged -- the firm has $3B in debt but just $30M in cash.

Diageo (DEO) This is the top pick of the three, we think. Diageo is the child of a massive merger between Grand Metropolitan and Guinness and it now holds almost half of the top 20 spirits brands in the world (top brands include Tanqueray, Smirnoff, Bailey's and Johnnie Walker). Besides such impressive market visibility, Diageo has been expanding in places like Brazil, India, and China while maximizing value from its established core markets. Diageo uses its free cash flow to axe debt and we're confident this name could be an overlooked play on the ever popular emerging markets motif. We'd be amiss in not warning readers how vulnerable Diageo's products are to taxation surprises, so be on the lookout for those. Diageo over $8M in debt that it must pare down and we'd feel more comfortable if insiders owned more of the stock. All that said, with 27% operating margins, Diageo is a business we'd like to own should the stock ever suffer a violent selloff.

Don't forget that you can also read most of our research over at SeekingAlpha and if you're a paying client, via PDF weeks before it appears on this site.

Ruby Beats Earnings (Ummm, We Told You So)

2006-03-30T00:30:00.000-05:00

Restaurant operator Ruby Tuesday (RI) is officially back from the dead. On Wednesday, the company posted some dynamite numbers.

Earnings rose 10% in 3Q, led by higher revs. The company earned $30M vs. $27.5M a year ago. 3Q revenue rose 17% from a year ago to $338.6 million, surpassing Wall Street's forecast of $334.2 million. Same-restaurant sales at company-owned restaurants rose 4.7% in the quarter, while sales at domestic franchise restaurants rose 5.4%.

Ruby bumped up its 4Q outlook, predicting EPS growth in the 25% to 30% range. Looking forward to fiscal 2007, the company expects EPS growth at the lower end of its long-term goal of 12.5% to 15% and it still plans to open about 40 franchises in the year.

As you can see, Ruby didn't really smoke estimates -- it just beat them. When you have a stock that's fighting with a black eye, rarely talked about, and buried under low expectations, an earnings surprise like this is all it takes to put the stock back on Wall Street's radar.

This is something we tried to convey to site visitors/paying subscribers on 2/2, when we published this story and went bullish on Ruby Tuesday when no one else on the Street would.

At the time that report was published, the stock was trading at $28. It's now swapping fingers at $33 and our team is confident higher marketing expenditures will further augment brand awareness and give the stock at least one more oompth.

Didn't someone tell you restaurants are en fuego once again?