Seeking Alpha
Long only, fundamental value investing, special situations, stock analysis software
Profile| Send Message|
( followers)  

With all the attention ValueVision (NASDAQ:VVTV) has been receiving lately, it’s been a while since I opined about it.

Let’s discuss some points on VVTV regarding some interesting discussions I have had, recent news and what to expect.

Insider Buying

I’m sure you are aware of the insider stock purchases by the management team at VVTV, especially the CEO. Keith Stewart has been buying heavily in the open market for the past few months, ranging from $0.28 all the way up to $1.83.

The CEO’s activity alone totals 1.22 million shares equating to $1.05 million of his own money.

These are not restricted stock options, these are the same shares that we as the public purchase so he is not receiving a better deal under the table.

The May DEF14A document which details executive compensation does state that the CEO has opted to receive stock options and grants for the first year instead of a salary but remember that it is all tied to performance - none of which he has been able to meet so far.

However, the important question is, what does Keith Stewart see in VVTV for him to spend over $1million in cold hard cash from his own pocket on the stock of his company?

With 15 years of prior experience at QVC, I would prefer to bet that the CEO knows something about the value of the business.

This now brings me to a short discussion on the fair value of VVTV.

VVTV “Value” Discussion

I was involved in a few discussions about the intrinsic value of VVTV lately. The most interesting was with a person that previously worked at QVC.

The arguments he brought forth were:

  • VVTV is expensive and should be trading in the 80c range at best.
  • The company is not trading on fundamentals. Lots of hype and expectation.
  • VVTV still has a high cash burn rate and no reliable historical performance.
  • The company strategy is bound to fail if it's just a copy of QVC and HSN.
  • VVTV was not profitable last quarter and will not be profitable the next.

Considering all 5 points, I do see why people would think that VVTV is a speculation, but to me, all of the above points constitute a rather short-term (3 month) type of Wall Street thinking, completely forgetting the fact that price is what you pay and value is what you get.

Price and value go together. If VVTV was at its current state and selling for $5, there would be no way that I would even touch it with a 10ft. pole, but less than $1 or even $2 is a different story altogether. Price plays the role in risk reward. Without taking this into consideration would be fiddling with the numbers on only one side of the equation.

When I first looked at VVTV, I was hoping for a short term play with a buyout in the $2 range. However, things have changed and when I now look at the business, I see a company that has restructured their debt giving them 3 years to improve the business, new carriage contracts to lower costs and improve margins, new management that is experienced and understands the business, previous Chairman (Buck) no longer in position, a business that is being sold for 1/2 book value, 0.12% of its sales, plenty of cash, exposure to 80+ million households and growing and good insider ownership. All this was being sold for less than $1 when I started loading up.

So my firm conviction is that VVTV is still cheap compared to its value. So far, people have directly emailed me that my views are far too optimistic. I’ve had some really good opinions and discussions but in the end it doesn’t matter. I have conviction with the cards I am playing with.

Business Strategy

In the last conference call, we were finally able to get a better understanding of how ValueVision expects to implement their new strategy. To sum it quickly, it is a copy of the QVC playbook.

My view is that copying QVC isn’t a bad choice. If VVTV has to copy its competitors to get back on track, let them. The first priority is to get profits, top line and bottom line. Once management has a handle on the margins and profits, it may be time to differentiate and try new things but getting back to basics has never been a bad thing.

VVTV’s reliance on high end electronics and jewelry cost them dearly as the market turned and their new strategy of changing up the product mix to bring in more recurring sales is a wise one. Their online presence is increasing as well.

One of the golden rules of retail is that it is far easier to sell to a previous customer than to attract a new one. The direction they are going is a good one - much better than trying to sell commodities in the upper end.

Recent Monetizing of Assets

On July 10, a press release stated that VVTV had “monetized its portfolio of auction rate securities for $19.4 million in cash”. I find the final sentence to be misleading, “The company stated it is pleased to have monetized these securities and strengthened its balance sheet.”

When I first read the headline, I was pleased that they would add to their cash balance but upon some brain scratching, it seemed like the company needed cash - but for what? I came to the conclusion that cash was needed to purchase inventory. From their last conference call, the CEO announced they would be purchasing plenty of inventory now that they have abandoned drop shipping.

I previously wrote: “They [VVTV] also mentioned that their current inventory levels are at their 6 year low so in the next quarter, they will be doubling the amount of inventory to keep up with sales and to transfer to the inventoried supply chain management technique. With their inventory turnover slightly above 7, VVTV is doing an excellent job of churning inventory.”

What to Expect with the Business

The worst of the market seems to be behind us, HSN will be announcing their quarterly results on Aug 5th which will provide an indication of how VVTV may have performed. I’m not expecting a surprise earnings or a sudden turnaround just yet. VVTV cash burn should remain on the high side and the new cable renegotiation effect won’t be visible until the next two quarters or so.

Profit and margins should slowly inch up, there should be an increase in customers, although at a lower price point.

The important point is to look at the business at least 1 yr ahead and decipher what you see rather than get stuck on recent price movements.

Disclosure: I hold VVTV at the time of writing.

Source: ValueVision Still Looks Cheap for the Long Term