Reader's MicroCap Pick: Littlefield Corp (LTFD)

| About: Littlefield Corp. (LTFD)

The Microcap Speculator submits: About a week ago, a reader who goes by the moniker of Twilight Speculator introduced me to Littlefield Corp. (ticker: LTFD.ob), a microcap stock which was today featured in Knobias' Spot Report. Below are the higlights from Knobias followed by my comments:

Will Littlefield Investors Shout 'BINGO!' in '06?

Littlefield Corp (otcbb: LTFD) develops, owns and operates charitable bingo halls, party and tent rental companies and catering services through two distinct business segments: 1) Littlefield Entertainment [61% of revenues] owns, operates and manages 30 charitable bingo halls in Texas (16), Alabama (3), and South Carolina (11); 2) Littlefield Hospitality [61% of revenues] based in Austin, TX, consist of "Premiere Events and Rental", a party and tent rental company, and "Word of Mouth Catering", a custom catering company.

The BULLS Say...

Battles or Bingo? The story behind this 'little' bingo company typifies the SPOT feature's mission. Seek the obscure; Peel the layers; Concisely spin the undiscovered story. The LTFD stock chart since 1997 tells part of the story. Since trading above $10/shr in 1997, LTFD has been riddled with lawsuits, management changes, 9/11, and general chaos. In his 7th year, CEO Jeffrey Minch may have his first opportunity to get back to business instead of fighting the legal battles he inherited in 1999. In 2005, LTFD remained embroiled in 14+ legal matters and spent nearly 19% of its revenues on legal expense and debt reduction. Not so, in 2006. A majority of legal matters are now resolved and 'damage' relating to the 3 remaining issues is somewhat quantified.

Undervalued Despite Uncommon Expense?
Amidst legal battles in 2005, LTFD's core businesses managed to show 'proof of life'. After declines in '03 and complete flatness in '04, revenues for '05 jumped +14%. For the first time in years, every business unit reported positive EBITDA and contributed to cash flow. Net income improved by +$2M vs 2004 (ex $1M ex. gain). Including a $1M gain from the Q3 sale of a shopping center, LTFD moved from a (13c) loss per share to a 23c profit. Excluding the gain, LTFD should report 2005 EPS of $0.11. From a valuation standpoint, LTFD now trades at a mere 3.4x earnings and 2.2x EBITDA (incl gain). Excluding the $1M gain, LTFD trades at 7.0x earnings and 3.2x EBITDA.

So What About 2006? 19% of 2005 revs were spent on legal fees and debt reduction. LTFD expects those profit-eating expenses to decrease by more than -70% in 2006 (not counting interest expense reduction). LTFD has 3 remaining legal issues of consequence with 2 on appeal, 1 headed to trial. For this, LFTD has reserved $3.2M (equal to judgments waiting appeal). In 2006, management expects only $250K in legal expense vs $950K. Last year, LTFD paid off $1.2M in debt leaving $3M, only $812K of which is non-real estate debt. In 2006, management expects only $402K in debt service. Considering a 14% revenue growth repeat, $600K less in legal, $800K less in debt service and no extraordinary items, LTFD could very well report 2006 EPS of 28c/shr or better. That's a near triple from 2005 adjusted numbers. So why is LTFD a 76c stock with a mere $6.5M marketcap?

What To Watch: 1) FY-05 results. Confirm 14% rev growth, $0.23 EPS, $1M extra gain; 2) The 'Collins Case' final appeal. LTFD has paid $157K in actual damages, but is on the hook for $1.57M in punitive damages. Liability is priced in. Any decrease would be big; 3) The 'Furtney Case' first appeal. LTFD is on the hook for $1.28M and has obtained a loan to underpin its supersedeas bond. Liability is priced in. Any decrease would be big; 4) FY-06 numbers. Shooting for increased growth rates and the promised decline in debt and legal expense; 5) Focus. With minimal defendant duties and damage visibility, look for LTFD management to focus more on business and growth opportunities such as, new bingo hall plans/acquisitions and market awareness.

The BEARS Say...

Time to Pay the Piper: Last week's earnings release created an 'electric shock' and the biggest volume day in a year. It did not take long, however, for the stock to calm down and remember legal realities. Unless LTFD gets a couple of unexpected wins in court, it stills owes at least $3.2M in damages. Appeal losses may be a tough pill to swallow for a company that has only $1.4M in cash. Judgment payments will most likely come from new debt or equity financing...and at what price? In the meantime, the stock seems much more sensitive to legal issues than 'great reports' regarding the actual business.

Oh Yeah, Did I Mention? After being very THINLY traded in the 60c range for 4 months, LTFD spiked as high as $0.875 on 01/27/06 after its earnings release (not seen since 2000). Unless LTFD pulls a legal ''rabbit from the hat' or really 'blows out earnings' expect there to be more sellers than buyers at any elevated level.

My take: Littlefield is an intriguing story. I love to enter microcaps after the first better-than-expected earnings report. More often than not, these are the start of a trend. Plus, the company announced funding last week to cover the payout of one of the judgments raised by the Knobias bears. One last point...can you think of a better play on aging demographics than a bingo hall operator? I bought shares this morning.

DISCLOSURE: I am long LTFD.OB. Not a recommendation to buy or sell any security. For informational and educational purposes only.

LTFD 1-Yr Price Performance: