Sunday, January 28, 2007

Abatix Corp: Mold & Hurricanes--Good for Business?

Abatix (ABIX-$6.63) is principally engaged in distributing environmental, safety and construction equipment and supplies to contractors and manufacturing facilities in the western half and southeastern portion of the United States.

International Enviroguard Systems, Inc. (IESI), the Company’s wholly owned subsidiary, imports disposable protective clothing from China, and sells the clothing products through Abatix’s distribution channels.

At September 30, 2006, the Company sold about 30,0000 products to an account base of more than 3,500 customers from eight distribution centers strategically located in six states, including Jacksonville, Florida.

Financial Review

Consolidated net sales for the first nine months of 2006 fell 1.2% to $50.3 million from 2005. Management attributed the decrease in sales to the environmental market due to the lack of headwinds in 2006 comparable to 2005 (about $9.0 million in incremental sales from hurricanes), partially offset by increased sales volume to the construction and industrial markets.

Although no vendor accounted for more than 10 percent of the Company’s sales, three product classes (groupings of similar products) accounted for greater than 10 percent of sales for the first nine months of 2006 or 2005: plastic sheeting and bags, disposable clothing, and abatement and restoration equipment accounted for approximately 20 percent, 13 percent, and 8 percent of net sales in the first nine months of 2006, respectively.

During the nine months ended September 30, 2006 and 2005, no single customer accounted for more than 10 percent of net sales, although sales to Abatix’s top ten customers were approximately 17 percent and 20 percent of consolidated net sales in those periods, respectively. In addition, sales to environmental contractors were approximately 43 percent and 48 percent for the nine months ended September 30, 2006.

As a result of higher SG&A, interest expense, and effective tax rate, operating profit decreased 170 basis points to 3.5% of sales for 2006. Net earnings of $766,000 or share-net of 45 cents, fell about 50 percent compared with 2005.

On September 30, 2006, the Company's balance sheet included net working capital of $9.6 million; less inventories and prepaid expenses, however, and net working capital drops to $(2.1) million

[Ed. note. The Company’s equipment notes are comprised of term notes of 24 to 60 months in length. Certain of these term notes also have a call feature, and are therefore classified as current liabilities on the Consolidated Balance Sheets, which distorts net working capital and the quick acid ratio.]

To our new readers, the importance of reviewing debt ratios—while telling us little about the Company’s growth prospects—are as vital as a stethoscope is to a physician in gauging the [financial] health of the patient.

Abatix is a debt-leveraged company, which means two things of consequence: (i) limiting management’s growth plans through acquisitions/expansions—unless the Company intends to use its common stock as currency; and (ii) day of debt reckoning.

As of September 30, Abatix carried a debt load approximately 1.4 times as great as its $11.05 in total stockholders’ equity. Nonetheless, Abatix’s interest coverage ratio—a metric used to measure the ability of a company to meet its debt obligations—shows that Abatix’s coverage ratio of 3.4 times, is more than adequate to ensure debt holders remain satisfied.

Abatix’s borrowed funds have generated a return in excess of the cost of borrowing, for the trailing twelve-month ROE of 11.84% outpaced its weighted cost of capital of 7.65 percent. Management successfully traded on its equity.

Cash provided by operations during the first nine-months of 2006 of $3,034,000 increased when compared to cash used by operations during 2005 of $456,000, attributable to a decline in accounts receivable and inventories, partially offset by net repayments on notes payable. Reported free cash flow was 2.16 million.

Management believes that improvements made to inventory and purchasing procedures and Abatix’s cost structure should continue to positively impact cash flow from operations in upcoming quarters.

Business Outlook

We expect sales in the 4Q:06 and the 1H:07 to be adversely impacted by slowing demand in the industrial and construction markets (due to a sluggish real estate market), partially offset by restoration work (contractors that handle primarily fire, smoke and water damage).

Despite weather predictions to the contrary, hurricanes in the Gulf Coast region proved to be non-recurring in 2006. Consequently, when expected first-responder sales failed to materialize, momentum investors fled Abatix stock, and the shares fell 51.7% in value (52-week change).

In our view, two growth drivers could provide the Company with the ability to achieve a greater rev run rate than currently expected by apathetic investor: (i) further penetration of the industrial protective clothing market for industry, municipalities, and healthcare combined with first responders on the federal, state and local levels; and (ii) increased visibility in certain sub sectors of the restoration industry—(in addition to asbestos and lead abatement) think mold remediation.

Seeing an opportunity to leverage its current product lines with some additional lines, including consulting and training, the Company entered the Homeland Security market in August 2002.

Much of the Company’s activity in this industry to date has been with the public sector attempting to outfit the first responders. Because these activities are broad in scope and tend to be large dollar orders, the purchasing departments for these governmental entities solicit bids and generally select the lowest product price. Since Abatix’s business model was not cost effective in this environment, management restructured its costs in this market in 2004 and now believes the Company is able to be a cost effective supplier.

The Company is working, too, with the private sector businesses, which traditionally focus on the custom value Abatix provides, and less on the price of the product. As the economy continues to strengthen, companies may invest more dollars in Abatix’s products and services so their facilities and personnel are protected. However, management believes that unless there are regulations mandating security products or another attack similar to September 11th, the private sector may not be willing or will continue to be slow to invest significant dollars.

Any and all growth initiatives will require fresh acquisitions and the construction of strategically located new distribution locations—which will requires fresh working capital.

Valuation Analysis

Competitors in the industrial protective clothing market include Lakeland (LAKE-$14.80) and Alpha Pro Tech (APT-$2.84), selling at trailing twelve-month P/E multiples, Enterprise Value/Revenue and Enterprise Value/EBITDA multiples of 15.01x and 24.01x, 0.86x and2.08x, and, 9.38 and 14.9 times, respectively.

Abatix is priced cheap by comparison, with a trailing twelve-month P/E multiple, Enterprise Value/Revenue and Enterprise Value/EBITDA multiples of 8.59x, 0.26x, and 5.48 times, respectively.

Abatix has displayed an unimpressive technical chart—until now. After hitting $15.00 per share in January 2006, Abatix hit headwinds, trading in a downtrend channel ever since, but the stock has finally landed on solid ground these last three months, consolidating in the $6.00 –to- $7.00 support level—and possibly exhibiting a classic Inverse Head And Shoulders pattern.

In our view, there is no need to rush out to buy Abatix shares. Still we will be watching, looking for signs of a break out—and close—above the $7.00 neckline resistance point (on higher than average volume of 16,542 shares per day).

The catalyst for a sustainable upward move in share price will be renewed investor confidence that Abatix has finally turned the corner, and is seeing greater traction in all business segments.

From the King James Version of the Bible, Revelation chapter 6, verse one: “And I saw when the Lamb opened one of the seals, and I heard, as it were the noise of thunder, one of the four beasts saying, Come and see.” [Ed. note. Reference to The Four Horsemen of the Apocalypse: War, Famine, Pestilence, and Death.]

June is six months away, but adverse weather events could be the calculi that produce impressive trading gains in Abatix’s share price: The National Oceanic and Atmospheric Administration (NOAA) has already issued 2007 hurricane advisories, predicting that that there could be between thirteen and sixteen named storms. Of those storms, between 8 and 10 would reach hurricane strength and four to six would go on to become major hurricanes.

Spokesmen at the NOAA have said: “Be informed and be prepared.”

We believe that investors ought to heed similar advice.

Wednesday, January 24, 2007

Universal Technical Institute -- Failing Grade

In December 2006, Universal Technical Institute Inc. (UTI-$22.32), provider of post-secondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians, said its fiscal 2006 income from operations fell by about 27.1%—to $40.7 million—on a sharp increase in costs and expenses.

Management had previously believed the road to sequentially higher profits was—to paraphrase from the movie
Field of Dreams: “If you build it, [they] will come.”

At a
Bank of America 35th Annual Investment Conference in September 2005, management declared that a sound growth strategy was predicated on a customer-centric, “recruit to demand” approach. They predicted that the technical markets UTI serviced would produce NEW job openings of about 51,000 per annum, with aggregate market growth of 12% -to- 19% by 2012.

How best to meet this anticipated growth? New opportunities = NEW campuses + existing campus & industry driven curriculum expansions.

Seating capacity utilization for the fiscal year ended September 30, 2006 was 64.9% as compared to 69.9% during the same period a year ago.

“Numerous external and internal factors led to lower capacity utilization,” said UTI’s management. OOPS! Seating capacity build-out grew faster than student enrollment.

Operating margin for the year ended September 30, 2006 was 13.1% down from 18.0 percent. Lower than planned students, as well as higher operating costs including compensation related costs, advertising, depreciation and a reduction in force, lowered margins as compared with the year ended September 30, 2005.

Recognizing the need to cut costs [w/o admitting errors in their business model], management in September 2006
announced a headcount reduction in its workforce:

  • "These actions, while extremely difficult, are essential to UTI improving operational effectiveness and efficiencies. Numerous external and internal factors have led to lower capacity utilization resulting in the need to reduce our operating costs. This workforce reduction is one component of a broader corporate effort to create a more efficient organizational structure. When Company-wide initiatives focused on improving capacity utilization are fully realized, the Company can build on a more efficient operating structure," commented Kimberly McWaters, President and Chief Executive Officer.

One hundred dollars invested in UTI Common Stock on December 17, 2003, was worth $67.90 as of September 30, 2006. In comparison, $100 invested in the NYSE index earned a cumulative total return worth $136.90 in the same period.

In view of the Company’s inability to execute on its business plan—student enrollment issues—the 10Q Detective believes that UTI deserves a failing grade.

One passage in the Company’s vision statement reads: “We make decisions based on the organization’s purpose, the legitimate needs of our people, and the necessity of profit.”

Has UTI demonstrated integrity in all interactions—including governance—while earning the trust and respect of others?

John C. White has served as UTI’s Chairman of the Board since October 1, 2005. The Board saw fit to pay Messer. White almost $470,000 in salary and cash bonus last year, healthcare and other “fringe benefits” of $34,139, and $129,154 in restricted stock awards.

For a Company looking to reduce its operating costs, might such compensation be considered excessive? In awarding Mr. White his incentive compensation awards, the Committee
“considered Mr. White’s position within UTI and his contributions to the continuing success of the Company.”

Dubious compensation metrics—we are being rhetorical—given that the Chairman usually carries little or no real power in terms of policy or operating decision making.

If the Company gave a monkey a gavel and sat him in the Chairman’s seat at Board meetings, would the monkey have been deserving of $470,000 in salary/bonuses?

Since 1991, UTI has leased, too, some of its properties from entities controlled by John C. White or entities in which Mr. White’s family members have an interest. In FY ’06, total payments made by UTI to these entities totaled approximately $1.87 million.

Mr. White beneficially owns about 2.7 million shares, or 9.7%, of the common stock outstanding, worth an estimated $60.3 million.

Disgruntled shareholders and enrolled UTI students can learn one lesson — and an old one at that—by observing governance habits at UTI: “He who has the gold makes the rules!”

Valuation Analysis

UIT is selling for about 30.4 times September 2008 consensus EPS estimates of 74 cents, near the high end of its trailing four-year peak-trough.

In addition, competition from online and campus-based for-profit educators—e.g. Apollo Group (APOL), Career Education (CECO), and ITT Educational (ESI), coupled with industry perception problems –closer federal oversight (alleged fraudulent payment claims at some degree program schools) and complaints of non-qualified academic staffs--will probably pressure UTI’s operating and share price performance in the coming quarters.

Editor David J Phillips does not hold financial interests in any of the companies mentioned in this posting. The 10Q Detective has a Full Disclosure policy.

Friday, January 19, 2007

Energy Profits: Advantage Energy Income & Bronco Drilling

Light Sweet Crude for February delivery dropped about 3.4%, or $1.76 a barrel, on Thursday, sending the benchmark oil contract on the New York Mercantile Exchange to its weakest close in twenty months at $50.48/bbl, after the U.S. Energy Department reported that crude supplies jumped 6.8 million barrels to 321.5 million barrels for the week ended Jan. 12, the first increase in eight weeks..

Separately, the American Petroleum Institute said crude inventories were at 322.3 million barrels for last week, up 7.6 million.

Bloated inventories, recalcitrant OPEC members unwilling to reach an accord on production cuts, and uncertainty created by the
Canadian Government’s Tax Fairness Plan—all these factors continue to weigh on North American energy shares.

In our view, oil holding the $50 floor is no longer relevant, for the recent technical weakness in energy shares have opened valuation gaps that have begun to discount lower crude prices energy stocks.

Irrespective of short-term volatility in contract prices,
the cornerstone of our investment fundament remains that oil reserve depletion is a given and long term will provide the definitive catalyst to a turnaround in prices, refining margins, and oil drilling/rigging utilization.

The substructure to our argument reflects the political reality, too, that capacity gluts are still vulnerable to disruptions from material suppliers, such as Middle East, Venezuela, Russia, and the Niger Delta.

The promise of ‘maybe’ gains from over-extended tech stocks, or potential false rallies in resource stocks, we prefer to throw our lot in with the latter. Ignoring the bears, 10Q Detective recently added two new opportunistic positions to our resources weighted model-portfolio.

(1). Advantage Energy Income Fund (AAV-$10.90) is a Canadian oil and gas royalty trust based in Calgary, Alberta. Advantage’s oil and gas properties are spread geographically throughout the Western Canadian Sedimentary basin, with 87% of the Fund’s reserves located in Alberta, 5% in northeast Brirish Cxolumbia and 8% in southeast Saskatchewan. Advantage produces the equivalent of 30,000 barrels of oil per day: light or medium-gravity oil and natural gas account for 35%, 33% and 65%,67% of aggregate production and known reserves, respectively.

Responding to the cyclical downturn in energy prices and the uncertainty caused by the recent Canadian
government's decision to slap a new Distribution Tax on income trusts, the share price of Advantage has tumbled about 30% in the past quarter.

Typical of the “herd mentality,” from Bay Street to Wall Street, the result was a market over-reaction to the Ministry of Finance’s tax announcement. In our view, given Advantage’s trading metrics, the price looks attractive:

  • Given the current uncertainty and the need for future cap expenses, we forecast a downward adjustment of the monthly cash to $U.S. 0.12 per Unit from the recent cash distribution for the month of November of U.S. $0.16 per Unit. Nonetheless, the revised distribution represents an annualized yield of 13.2 percent.
  • The Company has a successful history of boosting reserves through (i) aggressive drilling and development of land positions adjacent to operating fields (via land sales, swaps, etc.); (ii) a three-year drilling inventory on 480,000 (net) undeveloped acres; (iii) swapping, selling, or farming out high risk exploration plays; and, (iv) acquisitions to complement and grow long life asset base (see recent Ketch Resources Trust deal). In the last five years, the reserve life index has increased from 7.2 years to approximately 11.3 years.
  • Advantage has an active go-forward hedging program in place to protect cash flow. [Summer 2007/ Natural gas & Crude Oil (WTI), $7.18/mcf – $9.26/mcf and $65.00/bbl – $90.00/bbl, respectively.]
  • Tangible book value is $8.94 per share. The trailing twelve-month leveraged free-cash flow generated was $52.3 million.

As of September 30, 2006, Advantage has an accumulated deficit of about $(387.1) million, the result of Advantage distributing three times as much in dividend distributions than accumulated income inflows. Lower oil prices and no changes in the Tax Fairness proposal might suggest that our estimated forward dividend payouts are too optimistic [albeit we see a dividend yield of at least 8% - 9% (US$) as a payout floor].

On February 6, Stephen Harper, leader of the Conservative Party was sworn in as the 22nd Prime Minister of Canada. Of investment interest, the Conservatives lead only by coalition, having won only 124 seats in the 308-member House of Commons.

In December 2005, Steven Harper issued
the following campaign promise (YouTube) when the Liberal government proposed new taxation on income trusts:

“Income trusts are popular with seniors because they provide regular payments that are used by many to cover the costs of groceries, heating bills and medicine…. The government continues to overtax Canadians and run multi-billion dollar surpluses, yet their first instinct is to attack an Investment vehicle that can make the difference between bare survival and a dignified retirement for millions of Canadians.”

Further, the Conservative federal election platform dated January 13, 2006 stated:

“A Conservative government will…Stop the Liberal attack on retirement savings and preserve income trusts by not imposing any new taxes on them.”

The Conservative government shows no sign yet of changing course, though some coalition lawmakers are having second thoughts.

However, income trusts were given a four-year tax holiday by Ottawa to make the adjustment to the new rules. And a lot can change in four years—especially if one finds their popularity poll numbers falling.

Some politicians stand firm, falling in the process—ask George Bush (no, not the 43rd President of the United States, but his dad, the 41st President).

“I'm the one who won't raise taxes. My opponent now says he'll raise them as a last resort, or a third resort. When a politician talks like that, you know that's one resort he'll be checking into. My opponent won't rule out raising taxes. But I will. The Congress will push me to raise taxes, and I'll say no, and they'll push, and I'll say no, and they'll push again, and I'll say to them,
“Read my lips: no new taxes.” – George Bush, Acceptance Speech, 1988 Republican National Convention, New Orleans, LA (play in browser (beta).

For those readers too young to remember, in the
1992 presidential election campaign, Pat Buchanan made extensive use of President Bush’s phrase in his strong challenge to Bush in the Republican primaries. In the election itself, Democratic nominee Bill Clinton running as a moderate, also pointed to the quotation as evidence of Bush's untrustworthiness, which contributed to Bush losing his bid for re-election.

CompanySymbolTrade DateQuantityPriceCost
Advantage Energy Income FundAAV01/18/2007300$10.93$3,291.93
Bronco DrillingBRNC01/16/2007300$15.01$4,515.96

(2). Contract gas driller Bronco Drilling Company (BRNC-$15.00) went public at an intial offer price of $17.00 per share on August 15, 2005. Bronco is a provider of contract land drilling services to oil and natural gas exploration and production companies. Bronco currently operates in Colorado, Oklahoma, Kansas, North Dakota, Texas, and Wyoming, with the majority of the wells drilled for its customers in search of natural gas reserves.

The Company owns a fleet of 64 land drilling rigs, with a deployment utilization rate of about 78 percent. The Company recently expanded the scope and scale of its operations with the acquisition of Eagle Well Services Company, which brings to Bronco accretive assets, including workover and well servicing rigs.

Bronco’s contract drilling revenues for nine-months ended September 30, 2006, skyrocketed to $203.3 million compared with $38.8 million for prior year. The Company generated net income of $43.5 million, or share-net of $1.77, compared with a net loss of $(1.71) million, or $(0.12) per share in 2005.

Average operating rigs in operation for the nine-months of 2006 grew to 43 from 17 for the previous year. The growth in rigs was due to the continued refurbishment and deployment of rigs from the Company's inventory. Revenue days for the year-to-date (2006) increased to 11,024 from 3,251 for the previous period. Utilization for the three quarters of 2006 remained stable at 94 percent.

In our view, Bronco is a well-managed star among small-cap oil-service companies. A market capitalization, a forward (2007) P/E multiple, and a book value per share of $382.0 million, 5.51 times, and $12.94, respectively—all these valuations position investors with a standout growth opportunity in the natural gas sector.

By comparison, key statistics for contract drilling competitors are:

  1. Nabors Industries (NBR-$29.48), market cap – $8.8 Billion; forward (2007) P/E – 6.7x; book value – $11.85.
  2. Patterson-UTI Energy (PTEN-$23.51), market cap – $3.74 Billion; forward (2007) P/E – 6.3x; book – $9.37.
  3. Helmerich & Payne (HP-$24.91), market cap. – $2.58 Billion; forward (2007) P/E – 6.3x; book – $13.30.

The Energy Information Administration (EIA) has estimated that U.S. consumption of natural gas exceeded domestic production by 21% in 2005 and forecasts that U.S. consumption of natural gas will exceed U.S. domestic production by 26% in 2010.

In addition, the National Petroleum Council has stated that average “initial production rates from new wells have been sustained through the use of advanced technology; however, production declines from these initial rates have increased significantly; and recoverable volume from new wells drilled in mature producing basins have declined over time.” The Council predicts that by 2013 about 80% of gas production “will be from wells yet to be drilled.”

The 10Q Detective believes that Bronco—through its strategic acquisitions—is well positioned to be more than just a ‘bit player’ in the contract-drilling sector. Pricing, rig availability, experience of its rig crews, and its offering of ancillary services—in terms of scope and scale, oil and natural gas exploration and production companies looking to increase drilling activity in the U.S., are finding Bronco to be a standout among the best operators.

Accelerating gas field depletion rates and healthy demand for natural gas, in our view, will continue to support activity and demand for land drilling A successful execution of Bronco’s business plan—to expand its rig fleet, geographic focus, and ancillary rigging/hauling services—by an experienced management team should result in higher rig day rates and rig utilization in the coming years.

Disciplined investors should be rewarded with attractive returns.

Editor David J Phillips holds financial interests in Bronco Drilling and several Canadian royalty income trusts, including Advantage Income Fund. The 10Q Detective has a Full Disclosure policy.

Tuesday, January 16, 2007

A Big Payday for Disney CEO Iger-- Who Cares?

Accounting fraud and executive peccadilloes aside, there are few business activities the news media—including us—delights in exposing as much as excessive executive compensation. Add Disney (DIS-$35.21) CEO Bob Iger’s just announced $24.9 million pay package for fiscal year ended September 2006 to that growing list.

According to its Proxy, filed late on Friday, the entertainment-media conglomerate revealed that Messer. Iger’s compensation included $2 million in salary, a $15 million cash bonus, and a $4.3 million payout from the vesting of performance options. Messer. Iger also received $666,000 expense reimbursements for auto benefits ($14,400), personal air travel ($67,879), and security ($578,656); and, $2.92 million in Disney stock options granted (exercise price – $24.87 per share) during the company's fiscal year, ended Sept. 30.

Prior to taking over from Mike Eisner in October 2005, Iger was Disney’s President and COO. He received $9.24 million in salary and cash bonus, $500,000 in restricted stock, 274,241 stock options, and other compensation of $1.02 million.

In setting the target bonus for Iger, the Compensation Committee heavily weighted his bonus to the Company’s actual performance against each of the performance goals established at the outset of the year. Performance goals for fiscal 2006 bonuses were based upon the following four corporate financial measures: operating income; free cash flow; economic profit (net operating profit after tax, minus a charge for capital employed in the business, based on the cost of capital); and, earnings per share.

Since taking over as CEO, Bob Iger has overseen a reinvigorated House of Mouse with the purchase of the Pixar animation studio, a deal with Apple, Inc.’s iTunes to make available content available for download, and a 33% and 50% rise in profits and share price, respectively.

Is Iger worth the $25 million payout? Academics, stakeholders, and policymakers will debate this question ad nauseam.

Ideally, what the 10Q Detective would like to find out is, with multi-million dollar paydays making headlines ad infinitum, does the press exposure make any difference—in influencing Boards to change their pay practices?

According to researchers at The Stanford Graduate School of Management (February 2006),
the answer is a resounding NO! The researchers concluded that there was little evidence that companies changed their compensation practices in response to harsh criticism by the press:

  • “Part of the reason that publication of negative articles about executive pay appears to have little effect may be that it actually satisfies two very different kinds of public demands. On the one hand, excessive compensation is known to be a sign of poor governance—clearly an important issue for shareholders, employees, suppliers, and society at large. At the same time, multimillion-dollar pay packages and the potential scandals surrounding the wealthy individuals who receive this kind of pay can be very entertaining. For example, there were repeated references in the press coverage of Tyco International CEO Dennis Kozlowski’s excessive pay to the $6,000 shower curtain he had purchased for his corporate apartment.”

A leading expert on corporate governance, Charles Elson, the Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, postulates a counterintuitive argument on public disclosure:

“There's one theory out there that disclosure may cause greater embarrassment and the greater the embarrassment the less likely it is that someone will overreach. That's based on the assumption that anyone who is a CEO and overreaches is capable of embarrassment. Frankly, anyone who demands those kinds of salaries is incapable of embarrassment.”

In terms of its impact on executive compensation, albeit better transparency is not sufficient in of itself to temper Board governance, in our view, when journalists report on annual pay packages, they need to do more digging—find the additional awards buried in the footnotes—to buttress—often inflammatory—headlines of excessive executive pay.

For example, are stakeholders aware that in ‘under-performing’ years, Mr. Iger is exempt from performance-linked target bonuses? Pursuant to his
Employment Agreement, dated as of October 2, 2005, Iger was not to receive a target cash bonus of no less than $7.25 million.

The Board insists the “minimum annual bonus and long-term incentive award opportunities do not guarantee Mr. Iger any minimum amount of compensation.”

Huh? Ignoring anemic share and financial performance in 2005, Iger still received a ‘non-guaranteed’ cash bonus of $7.7 million.

The value of unexercised in-the-money options that Iger holds, exercisable and unexercisable was valued at an additional $14.4 million and $7.1 million, respectively (as of 9/30/06).

Then there is the issue of ‘phantom pay’—awards granted but not yet earned. The Compensation Committee granted to Iger in 2006 an unrecorded ‘bonus’ of about $17.8 million [Since this stock does not vest until future years (September 2007 – September 2009), the aggregate 714,000 in long-term performance shares went unreported in the press. Prior to vesting, however, dividends distributed on these shares result in credits of additional performance-based restricted stock units that will be distributed when the related units vest].

At fiscal year ended 2006, Iger held—in aggregate—performance based (1,017,509) and bonus related (20,108) stock, valued at $36.5 million (equal to $35.21, the closing price on the NYSE on January 11, 2007).

On December 22, 2006, the SEC amended—simplified—
executive stock option disclosures. The new rule changes the way grants of stock options will be measured in the proxy’s summary table—raising protestations from share activists.

Under the old rule, if a company awarded an options grant valued at $20 million to an executive in 2007, the full amount of $20 million would show up in the summary compensation table.

The new rule, now in effect, says if the grants vest over five years, the amount reflected in the 2007 table would be $5.0 million, with the remaining part of the $20 million included in later years, as the executive qualifies to exercise the options.

“I can’t give you brains, but I can give you a diploma.” – The Wizard of Oz to the Scarecrow

Editor David J Phillips does not hold financial interests in any of the companies mentioned in this posting. The 10Q Detective has a Full Disclosure policy.

Saturday, January 13, 2007

Apple, DreamWorks, and Yahoo! One-Dollar A Year CEOs?

The following headline piqued our curiousity: $1 a year salary CEO: Good for Stocks? The author of the posting speculated that aligning pay practice in step with stock price performance provides a sufficient incentive to the CEO to execute the financial stewardship necessary for shareholder value creation.

In support of this argument, the author then went on to analyze “the returns of six of these ‘dollar a year stocks’ for 2006"; it turns out that they were all up, with the exception of Yahoo (YHOO), and, according to the blogger, "if you exclude Yahoo from the list, the average return for the group was up 14%, higher than the return for the NASDAQ at 8 percent and the S&P 500 at 12 percent."

Aside from the statistical problem inherent in making inferences about stock performance from a finite population of six CEOs,when the 10Q Detective did its Due Diligence, we found that the purported one-dollar a year CEO was more myth than reality:

  • Apple, Inc. (APPL)/ 13 percent/ CoFounder & CEO Steve Jobs. His current salary at Apple officially remains $1 per year, although he has traditionally been the recepient of a number of lucrative executive perquisites approved by the Board, including a $46 million Gulfstream jet in 2001 and just under 30 million shares of restricted stock in 2000-2002.

In 2003, Apple granted Messer. Jobs an additional 10 million shares (now fully vested). Oh, and remember that Gulfstream? In March 2002, the Company entered into a Reimbursement Agreement with Jobs for the reimbursement of expenses “incurred by Mr. Jobs in the operation of his private plane when used for Apple business.” During 2005, the Company recognized a total of $1,075,545 in expenses pursuant to this reimbursement agreement related to expenses incurred by Mr. Jobs (in 2005).

Steve Jobs also served as CEO of Pixar, the computer animation studio behind such animated feature films as Toy Story, Monster’s Inc., and Finding Nemo. On January 24, 2006, the House of Mouse agreed to purchase the studio, in an all-stock transaction worth $7.4 billion.

Accordingly, at the effective time of the merger, the 60.0 million share of Pixar common stock held by Mr. Jobs were converted into 138 million shares of Disney, making Jobs the largest individual shareholder, with approximately 6.3% of the outstanding shares.

Steve Jobs was ranked 49th on Forbes 400 Richest (2006), with a net worth in excess of $4.9 billion. [Ed. Note As the price of Apple shares have effectively doubled in value in the last year, Jobs’s estimated net worth is north of $5.4 billion.].

Job’s is well-compensated for someone whose salary at Apple officially remains one-dollar per year.

  • DreamWorks Animation SKG (DWA)/ 18 percent / CoFounder Jeff Katzenberg has served as CEO since October 2004. The animation studio, creator of hits like Madagascar, Shrek, and Shark Tale, revealed in its last Proxy Statement that Mr. Katzenberg’s annual salary is one-dollar per annum, although he did accept $17.7 million in performance (restricted) stock units and options in 2004 (which means he “earned” $5.9 million per annum, for 2003 – 2005, not $1.00 per year)!

Mr. Katzenenberg beneficially owns 36.4 million (of Class A & Class B) shares, worth an estimated $109.2 million. In addition, 618,571 shares of Class A restricted stock with performance-based vesting conditions granted to Mr. Katzenberg at the time of its October 2004 IPO will vest in the first quarter of 2009. As of January 12, 2007, these shares had a value of $18.53 million (based on $29.96 per share, the closing price of DreamWorks Animation’s Class A Stock on the NYSE on such date).

In December 2005, Messer. Katzenberg entered into an agreement at his initiative and request, which waived equity awards—in aggregate $13.0 million-- he would otherwise have been entitled to receive under his employment agreement, for the fiscal years ending December 31, 2006,2007, and 2006. Before our readers begin to believe that Messer. Katzenberg is a worthy hero right from central casting, sacrificing for the good of the many, read on:

In December 2005, DreamWorks was in financial trouble—year-over-year, sales, share-net, ROA, and the share-price had fallen 57.1%, 75.1%, 77.2%, and 33.3 percent, respectively,

Mr. Katzenberg serves on the boards of The Motion Picture and Television Fund, The Museum of Moving Image, Cedars-Sinai Medical Center, California Institute of the Arts and The Simon Wiesenthal Center. He is co-chairman of each of the Creative Rights Committee of the Directors Guild of America, and the Committee on the Professional Status of Writers of the Writers Guild of America. In addition, he helps with fundraising efforts on behalf of AIDS Project Los Angeles, which provides its clients with medical and social services.

Messer. Katzenberg had to choose, his social responsibilities or stewardship of DreamWorks. He chose the former.

Katzenberg ‘voluntarily’ disavowed his future compensation to accommodate the hiring and compensation of Lewis Coleman, former CFO of Bank of America, appointed President of DreamWorks Animation on December 5, 2005.

Pursuant to his three-year employment agreement, Mr. Coleman earns an annual salary of $1.25 million. He was also awarded an initial performance grant of 82,998 shares of restricted stock.

  • Kinder Morgan (KMI)/ 16 percent/ On October 7, 1999, the Board entered into an employment agreement with co-founder Rich Kinder, pursuant to which he became Chairman and Chief Executive Officer of this energy services company. Mr. Kinder, at his initiative, accepted a salary of $1 per year to “demonstrate his belief in the long term viability” of the Company. Mr. Kinder has periodically renewed this one-dollar per year pledge.

KMI owns the general partner interest of Kinder Morgan Energy Partners ((KMP), one of the largest publicly traded pipeline limited partnerships in the United States. This an energy storage and transportation company operates either for itself or on behalf of Kinder Morgan Energy Partners, L.P., approximately 43,000 miles of refined petroleum product pipelines and approximately 150 terminals. Combined, the companies have an enterprise value of more than $35 billion.

Although this poster boy for “prudent’ executive compensation pays himself only one-dollar a year, he did earn $85.0 million in corporate dividends last year.

Rich Kinder, 62, ranked #98 on Forbes 400 Richest Americans list (2006), with a net worth in excess of $2.8 billion, is leading an investor group in a $15 Billion Buyout Offer (107.50 a share in cash).

[Ed. note. Prior to the announced deal, KMI stock was trading at $83.00 per share, down $8.00, or 8.8% year-to date.]

  • Yahoo! (YHOO) / -(38) percent/ Given the precipitious decline in the share price of online service provider Yahoo! Chairman & CEO Terry Semel ‘voluntarily’ reduced his annual salary from $600,000 per annum to one-dollar. No word, however, if Messer. Semel is willing to forego any of the $19.2 million he received in long-term compensation (in 2005 and 2004 –stock options and performance stock units).

Do not be fooled by Semel’s seeming humility; for, including exercisable stock options, Semel beneficially owns about 18.4 million, or 1.3%, of Yahoo!’s stock, worth an estimated $541.9 million.

And, on May 31, 2006, as an “incentive” to sign this highly touted one-dollar employment agreement, the Board granted Mr. Semel a stock option to purchase 6 million shares of the Company's common stock at a per share exercise price of $31.59 (the closing trading price that day).

For each of 2006 through 2008, too, Mr. Semel will also be eligible to receive a discretionary annual bonus payable in the form of a fully vested non-qualified stock option for up to 1 million shares with an exercise price equal to the closing trading price of the Company's common stock on the date of the to-be issued grant(s).

“The big print giveth and the small print taketh away” – Tom Waits, American singer-songwriter

Editor David J Phillips does not hold financial interests in any of the companies mentioned in this posting. The 10Q Detective has a Full Disclosure policy.

Wednesday, January 10, 2007

Sirius Satellite: Reverse Stock Split in the Offing?

On Tuesday, digital radio programmer Sirius Satellite (SIRI-$3.71) said it had paid its on-air personality Howard Stern an $83 million stock-based performance bonus, which was tied to subscriber targets set when Stern signed a $500 million contract with the Company in October 2004.

Commenting on the shock jock’s earn-out, management said the bonus to Stern would not increase its diluted share count and that expenses related to the payment have been reflected in operating results throughout 2006. [Ed. note. SIRIUS recognized a non-cash expense associated with these shares of $224.8 million during the nine months ended September 30, 2006.]

For the nine-months ended September 30, 2006, Sirius recorded a net loss of $(859.3) million, or a share-net loss of 61 cents, on $443.8 million in revenue.

The Company’s remarks, however, betray the truth.

The similarity between 1924 Germany and present-day SIRIUS should be cause for concern to SIRIUS stockholders.

In 1922, the highest denomination in post-war Germany was 50,000 mark. By 1924 the denomination had increased more than 20,000-fold. [Forgive us for hyperbole] From 2000 to 2006, the number of shares of common stock outstanding of SIRIUS has increased 50-fold [balance on January 1, 2000, was 28.7 million shares].

Like the the Weimar Republic of Germany issuing fifty-million-mark banknotes and postage stamps with a face value of fifty billion mark, Sirius’ growth model is predicated on the calculus that to fund its OEM distribution channel and content library—to attract new subscribers—all the Company need do is issue more-and-more—in their case, the currency of choice is common stock and/or warrants.

Changing the way people listen to music, sports, news, and entertainment does not come cheap. SIRIUS is authorized to issue 2.5 BILLION shares of its common stock. As of September 30, 2006, the Company had about 1.4 billion shares outstanding (with total stockholder deficit of $200.3 million).

In addition, as of Dec 31, 2006, the Board is currently authorized to issue, without stockholder approval, up to approximately 620 million additional shares of common stock, reserved for issuance in connection with outstanding convertible debt, warrants, incentive stock plans and common stock (to be granted to third parties upon satisfaction of performance targets).

Editor David J Phillips is now posting one day a week at Investor-Advantage. Please stop by for a visit to read this article in its entirety.

Tuesday, January 09, 2007

Fording Canadian Coal: Post-Christmas Stocking Stuffer

Fording Canadian Coal Trust (FDG-$19.95) is a royalty trust. The Trust, through its subsidiaries, holds a 46 percent interest in Neptune Bulk Terminals (Canada) Ltd. and a 60% interest in the Elk Valley Coal Partnership, which currently operates six Canadian mines in British Columbia and Alberta.

Elk Valley Coal’s operations employ conventional
open pit mining techniques using primarily truck and shovel methods The majority of coal mined and processed at the Company’s operations is metallurgical hard coking coal for the global steel industry. Responsible for about one sixth of the global seaborne market supply, Elk Valley Coal is the second-largest supplier of its product in the world.

The Elk Valley Coal Partnership accounts for about 98 percent of the Trust's revenues.

Financial Highlights

For the nine-months ended September 30, 2006,
net income from operations increased 5 percent from 2005 to $535 million, due to higher coal sales prices. Revenue increased 6 percent to $1.4 billion as average US dollar coal prices were up 25%, offset to some degree by lower sales volumes and a stronger Canadian dollar.

Challenges in coming quarters for Fording include lower average coal prices, new mines coming online from competitors, and global markets being flooded with coal of lesser quality.
Elk Valley’s average 2006 coal year prices for the period April 1, 2006, to March 31, 2007, across all coal products is expected to be approximately US$107 per ton compared with US$122 per ton for the 2005 coal year.

Elk Valley has entered into the early stage of volume and price negotiations for the coal year commencing April 1, 2007. High prices for hard coking coal have resulted in integrated steel mills using less hard coking coal to the extent their processes permit. While global steel production is at high levels, demand for hard coking coal is being adversely affected by the historically wide premium that is being charged for hard coking coals over prices for coals of lesser quality. This premium is encouraging the substitution by some integrated steel mills of lower quality—lower priced—coals at the expense of hard coking coals (which management blames for the 8 percent year-over-year decline in sales volumes).

The fundamental driver of hard coking pricing remains the supply-demand balance. The weekly mining letter,
Creamer Media, says that the global integrated steel-mill production determines coking-coal demand. Global production of hot metal from blast furnaces is forecasted to grow from the current level of 700-million tons a year to 932-million tons a year by 2009, driven by Asian demand, with India and China the main contributors.


New sources of hard coking coal from competitors in Australia and Canada are coming on line, and will continue to do so over the next two or three years. While the projects are not large individually, they will add a significant amount of supply on a cumulative basis. Infrastructure constraints in Australia are being mitigated and additional capacity is being added to port and rail facilities.

Citigroup global commodity analyst Alan Heap says that the global supply and demand balance for coking coal is expected to see supply steadily rise to a peak in 2008 and fall back to a small surplus in 2009, with pricing easing to $100/ton next year.

Other commodity analysts suspect that future additional supply will pressure pricing further, with the current average price of $115 per ton drifting down to $75/ton by 2009.

Declining sales volumes + the
tax fairness plan announced Oct. 31 by Canadian Finance Minister Jim Flaherty + shared sympathy with thermal coal mining/commodity companies (weakening energy prices) — all these factors contributed to the 44 percent drop in the share price of Fording in the last year.

Valuation Analysis

A share price selling for just 8.3 times 2007 earnings of $2.42, which is below both the Company’s four-year average of 11.9 times and the coal industry P/E 2007 (est.) of 12.2 times; an Enterprise Value/EBITDA (TTM) at a 53.8% discount to peer comparables (diversified metallurgical/thermal producers), 4.2 times vs. 9.1 times, respectively; and, an estimated forward annual dividend yield of about 11.5% (assuming a payout ratio of 95 percent) — the current valuation of Fording is unjustified, and presents a compelling inflection point for purchase.

A recent Associated Press story trumpeted,
Warm Winter Weather Hurting Shares of Arch Coal and Other Coal Miners.” As previously mentioned, no more than two percent of the Company’s top-line growth is derived from thermal coal.

The 10Q Detective has used the protracted weakness (because of bearish sentiment for steam coal companies) to buy 300 shares of Fording stock for our Model Portfolio.

Editor David J Phillips holds financial interests in several Canadian royalty income trusts, including Fording Canadian Coal Trust. The 10Q Detective has a Full Disclosure policy.

Friday, January 05, 2007

10Q Detective Portfolio at a Glance: January 2007

Our objective is to see if an investment of $50,000 in the 10Q_Stock Portfolio at the start of 2007 can outpace (any) gains of total shareholder returns of most stock indices, including the venerable Standard & Poor's 500 Composite Stock Price Index at year-end through price appreciation and dividends reinvested.

PriceProceeds% Change
10009/07/06$31.55 3,167.9912/14/06$33.243,319.004.77%
300 Shares of Halliburton Co. (HAL)
TOTAL: $9,344.97$9,959.016.57%

Long Positions in 10Q Detective Portfolio, January 01, 2007:
% Total
STOCK(s) TOTAL: $35,941
Money MKT:$14,059
PDS 600$13,89627.79

The opinions expressed herein are subject to change without notice. Neither the information nor any opinion expressed herein constitutes a solicitation by us of the purchase or sale of any securities. Blue Sky Enterprises, LLC., its affiliates, and/or their officers and employers may from time to time acquire, hold, or sell a position in the securities mentioned herein. Upon receipt of queries, specific information in this regard will be furnished.

Copyright © 2007 Blue Sky Enterprises, LLC. No part of the material may be reproduced or transmitted by any process in whole or in part without prior permission in writing.

Wednesday, January 03, 2007

Hedge Fund Remodeling Griffin Corp?

Hedge Fund operator Clinton Group, which beneficially owns about 5.2% in Griffon Corp. (GFF-$25.50), recently delivered a letter to the maker of everything from garage doors to specialty plastic films used in baby diapers, adult incontinence, and other products, stating its belief that the “market price of the Shares failed to reflect the stand-alone value of the Company’s operating subsidiaries.” The letter also advised Griffon’s management that they should evaluate multiple strategic alternatives to enhance shareholder value, including, but not limited to, a tax-free spin-off, a sale of one or more subsidiaries, or a going-private transaction.

There is appeal to the Clinton Group’s argument, for Griffin might be too diversified in its manufacturing operations:
  1. Garage Doors—selling to the residential housing and commercial building markets;
  2. Installation Services—servicing the new residential housing market with an array of building related products, ranging from garage doors, manufactured fireplaces, floor coverings, and cabinetry;
  3. Specialty Plastic Films—the maker of plastic and film laminates for use in infant diapers, adult incontinence products, feminine hygiene products and disposable surgical and patient care products;
  4. Electronic Information and Communication Systems—selling airborne maritime surveillance and aircraft intercommunication management systems for defense and commercial markets.


Net sales for the year ended September 30, 2006 increased 17.1% to $1.64 billion. Net income was $51.8 million, or share-net of $1.65, compared with $48.8 million, or $1.55 per share, last year.

Garage Doors represent one out of every three dollars in sales and 38.9% of operating profits. The Company estimates that the majority of Garage Doors’ net sales are from sales of garage doors to the home remodeling segment of the residential housing market, with the balance from the new residential housing and commercial building markets. Driving growth in this $2.2 billion market is the shift from wood to steel doors.

[Ed. note. Griffin did not breakdown how much of this segment’s total revenues are generated through its aftermarket service operations—which of itself would provide the division with a stable revenue base during economic downturns.]

Over the past decade, an increasing number of garage doors have been sold through home center retail chains. The Company estimates that approximately 35% of its
garage doors are sold through this retail channel of distribution. The segment’s largest customers are The Home Depot, Inc. and Menards, Inc.

In FY ’06, Griffin invested approximately $22 million in equipment and plant expenditures to support future growth in this segment.

With respect to the overall outlook for garage doors, management is cautiously optimistic. Despite weaker housing markets, Griffin benefited from a shift in customer demand to more premium doors, a trend that should contribute to future revenue and margin growth.

The Installation Services segment provides installed specialty-building products primarily to residential builders. In a fragmented market, characterized by small operations offering a single type of building product in a single market, management believes it has the economies of scale and scope that small and national builders (alike) find convenient.

Sales by Installation Services have provided approximately 21 percent and 8.7% of the Company’s consolidated revenue and operating profit in 2006, respectively.

Management expects that fiscal 2007 sales will be below 2006 levels due to weaker housing markets and the loss of certain customers in the segment’s Las Vegas market, offset by attractive interest rates on home equity financing driving demand for retail remodeling projects.
Still, even in a hot construction market back in 2004, this segment contributed only 8.6% to operating profit. Might the Company be too diversified in trying to satisfy the scope of builders’ demands? Granted, this segment installs and services the Garage Door’s sales; nonetheless, find the lower-margin product lines and ditch them!

Specialty Plastic Films are primarily used as moisture barriers in disposable infant diapers, adult incontinence products and feminine hygiene products, as protective barriers in single-use surgical and industrial gowns, drapes and equipment covers, and as packaging for hygienic products.

The segment’s major customer is Procter & Gamble (59 percent of specialty film’s sales), with whom the company supplies products used primarily for its infant diapers, both domestically and internationally. Design changes by Procter & Gamble for its infant diaper products have resulted in a change in products produced by the company from laminates to narrower and thinner gauged printed film. As a result, the volume of film products sold by the segment for this customer has declined.

Looking to expand its market presence, in FY ’06, Griffin spent approximately $11 million in equipment, research (in new advanced products such as cloth-like, breathable, laminated, and printed products), and in manufacturing capacity (such as a new manufacturing facility near São Paulo, Brazil).

Resin price increases had an unfavorable impact on operating income of approximately $7 million for the year. According to management, resin prices have been weaker and they believe that fiscal 2007 prices will be flat to slightly favorable.

Sales by Specialty Plastic Films provided approximately 23 percent and 8.7% of the Company’s consolidated revenue and operating profit in 2006, respectively, from 30 percent and 8.7% in 2004, respectively.

In our view, the sale of this division would be welcomed by existing shareholders, for as management itself says, “There can be no assurance that the capital expansion program that we have implemented in the specialty plastic films segment will generate the revenue and profits anticipated.”

Electronic Information and Communication Systems are sold through its
Telephonics Corp. subsidiary. Telephonics is generally a first tier supplier to prime contractors in the defense industry, with Boeing and Lockheed Martin being significant customers.

This segment is growing, generating about 24 percent and 37.5% of Griffin’s net sales and operating profit in FY ’06, respectively, up from 14 percent and 16 percent, respectively, in 2004. This substantial growth was primarily attributable to the Warlock-Duke program with Syracuse Research Corp. to manufacture equipment that is designed to defeat roadside bomb threats.

The Clinton Group is targeting this segment for a possible spinoff (to unlock its intrinsic value).

Corporate Governance

Readers will note that an LBO would probably get the thumbs up signal from its CEO, Harvey R. Blau. Irrespective as to whether or not his employment is terminated upon a “Change-in-Control” at Griffin (defined as the acquisition of 35% of the voting power of the Company), he shall automatically be entitled to a lump sum payment of approximately $7.63 million (excluding the gains from stock currently held and/or restricted stock units).

In the year that a Change-in-Control occurs, Blau would also be entitled to an additional bonus (which would mirror the then current fiscal year before the Change in Control), based upon performance for that portion of the year. For example, if Griffin were bought on July 1, 2007, he would receive three-quarters of his FY ‘06 (ending September 30) bonus of $4.1 million, or approximately $3.08 million.

[Ed. note. Despite Return on Assets falling from 7.5% (2004) to 5.8% in 2006, the Board still felt that Blau had “earned” his $4.1 million and $4.09 million in cash bonuses paid out to him in 2005 and 2006, respectively. The Company’s Senior Management Incentive Plan provides for an annual bonus to Mr. Blau based upon company performance—defined as Griffin’s consolidated pretax earnings: For each fiscal year. Mr. Blau's annual bonus equals 4 percent of the first $5,000,000 of consolidated pretax earnings, plus 5% of the amount of consolidated pretax earnings in excess of $5,000,000.]

In addition, Griffin would provide Messer. Blau with a tax gross-up payment to cover any excise tax due on the $10.71 million!

Mr. Blau acquired 660,000 shares on exercise in FY ’06, with a realized value of $10.1 million. He also owns exercisable in-the-money stock options worth an estimated $25.4 million

In our view, it makes sense for Mr. Blau to vocally support a Change-in-Control, too, because the normal retirement age under Griffon Corporation’s Supplemental Executive Retirement Plan (GSERP) is 72. Mr. Blau will celebrate his 72nd birthday in 2007. As of November 30, 2006, Mr. Blau had 34 years of service, and has already maximized his GSERP annual benefit payment (30 years). Under the GSERP plan, Mr. Blau is entitled to receive annual benefits of $2.25 million (before the reduction of Social Security benefits).

Retirement benefits are payable for life, with a guarantee of 10 years of payments. In addition, the SERP provides a pre-retirement death benefit payable for 10 years to the participant's beneficiary. Ergo, if the Grim Reaper were to come a-calling, Mr. Blau’s beneficiary would receive $22.5 million (less already paid sums).

The new owners would also be obligated to provide Mr. Blau, 71, with lifetime medical benefits after his termination of service. After two years—in the event that these benefits would become subject to taxes (under Section 409A)--Blau would forego such future benefits and receive instead a lump sum payment equal to the foregone economic benefit.

Valuation Analysis

Shares of Griffin sell for 12.6 times FY ’07 analysts’ estimate of $2.02 per share, a three-year low.

Segment performance is driven by industry-specific factors—which complicates matters when trying to tag the aggregate with a valuation. Shares of Griffin sell for 0.58 times enterprise value-to-revenue valuation (EV/REV), compared with EV/REV valuations of 3.3x, 0.73x, 1.15x, and 1.05x for consumer products maker Procter & Gamble, kitchen cabinet maker American Woodmark, home improvement manufacturer Masco, and defense contractor Lockheed Martin, respectively.

The due diligence conducted by the Clinton Group suggests that the fair value for Griffon's stock would approximate $31-$35 per share (adjusted for certain adjustments, such as the full conversion of outstanding convertible notes). The per share value was calculated with trading multiples of 7x – 8x, 6x – 7x, 10x – 11x, and 7.0x – 8.0x (EBITDA) for the Garage Doors, Installation Services, Defense, and Specialty Plastic Films segments, respectively.

[Ed. note. Our due diligence suggests that these peer comparables are appropriate.]

If the Clinton Group is successful in its goal of unlocking shareholder value, buying at current prices could result in a 21.5% to- 37.2% gain for new investors.

At $33.00 per share, however, Griffin would be charting at 16.3 times ’07 earnings (near the top end of its historic three-year P/E multiple).

Editor David J Phillips does not hold financial interests in any of the companies mentioned in this posting. The 10Q Detective has a Full Disclosure policy.

Tuesday, January 02, 2007

Smiles & Frowns -- Bye! Bye! 2006

Business in 2006 had Wi-Fi+ ailing U.S. carmakers and Music Labels+ Google!+ merging lines between cable and television+ plummeting LCD TV prices+ soaring economy in China+ podcasting+ Ken Lay’s death+ midterm elections.

Here at the 10Q Detective, we had our own share of smiles and frowns:


BioCryst Pharmaceuticals (BCRX-$11.56) – 42.4%

January 10, 2006. "Biocryst's current valuation ($20.08) is approximately $531 million. Given the Company's limited history of discovery research, no developmental infrastructure to speak of, and an unknown advantage over a litany of other companies pursuing similar therapies, we do not find the current valuation compelling. One sneeze, and this stock could surprise investors with an ugly downside surprise."

Telestone Technologies Corp. (TSTC-$8.20) – 104.5%

January 25, 2006. "Even without the inclusion of revenue generated from the upcoming 3-G deployment in China, management still expects top-line growth and share-net EPS in the order of 20%-to-30% year-over-year. We do, however, expect a big impact on revenues and profitability, assuming a 2H:06 deployment of the 3G technologies in the PRC. Our early estimates call for Telestone to show top-line of approximately $55 million, throwing of share-net of $0.50 [assuming 10 million shares, fully-diluted]. For aggressive investors willing to assume the inherent risk of owning a small-cap company, we recommend dialing up your broker and buying some shares."

Spectrum Brands, Inc. (SPC-$10.90) – 48.7%

March 29, 2006. "The Company has consistently attributed a stagnant consumer-spending environment as an additional reason for poor product sales. The 10Q Detective believes that the core weakness facing Spectrum Brands is management itself. Sorry to disappoint, but doggie-doo-doo will not bring back profitability to Spectrum Brands. AVOID/SELL."

Lifetime Brands, Inc. (LCUT-$16.43) – 43.4%

May 08, 2006. "In our opinion, the goings on at Lifetime Brands makes a mockery of the Sarbanes-Oxley Act of 2002, which was passed to provide greater oversight and accountability of financial management. Aside from the fact that Wal-Mart is Lifetime Brands single largest customer, accounting for approximately 20% of net sales in 2005, 10Q Detective readers have been forewarned."


NBTY, Inc. (NTY-$41.57) – (91.4%)

February 20, 2006. "In our opinion, NBTY’s current top-line growth is just a blip on the radar—rather than a visible, direction-course change in consumer demand."

Force Protection (FRPT-$17.41) – (171.6%)

August 28, 2006. "In our opinion, Force Protection’s management does not have the know-how to be profitable as a ‘low-volume’ producer—with only two product lines, the Company is highly dependent on ramping up production for sustainable profitability. And management has yet to demonstrate its ability to leverage its core-competence by exporting its blast-resistant technology….

A turnaround at Force Protection is well underway, but lingering concerns on future contract wins will likely put a ceiling on further multiple expansion. A step-up in new product flow coupled with new contract wins—especially Humvee replacement orders—are the necessary positive catalysts for additional short-term trading gains in the price of the Common Stock….

Sales growth acceleration beyond FY 2008 is cloudier. However, industry consolidation trends bode well for shareholders….The 10Q Detective, however, prefers to stay on the sidelines—at least for now." [This is one stock story where we should have thrown caution to the wind—and done some buying! Woulda,’ Shoulda,’ Coulda.’]