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Adam Muller
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Adam Muller is a partner at Chester Hill Capital Management in Brooklyn, New York.
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  • Apple: Earnings “Miss” Is a Buying Opportunity in front of Massive iPhone 4S Demand and an Exciting Product Pipeline

    Apple announced its fiscal fourth quarter earnings on October 18.  The market is disappointed in the result and the stock is trading down ~5% to the $400 per share level.

    Before earnings I wrote an article suggesting that investors should be focused more on the color for the coming holiday quarter, versus the actual Q4 results.

    First, let’s look at the results.

    Fiscal Q4 Results vs Company Guidance and Wall Street Analyst Consensus Estimates


    Q4 Results

    Company Guidance

    Wall Street Consensus










    In summary, Apple beat their own guidance easily, but did not meet the expectation of the collective group of Wall Street analyst.

    Second, let’s consider the current valuation at $400 per share.

    At $400 per share Apple’s market capitalization is $396 billion.  The company now has $81.6 billion of cash on its balance sheet equal to over $86.50 per share.  Consensus EPS for fiscal 2012 is $34.185 per share, but this number is likely to be revised upwards as analyst consider the shift of iPhone sales out of the quarter just ended and into 2012.   However, using this number Apple is trading at 11.7x 2012 earnings, and only 9.3x if you take out the cash (once analysts post revised numbers these multiples will be even lower).  While Q4 results missed the consensus estimate, revenue still increased 39% year over year and EPS increased 52%.  52% EPS growth is not usually associated with a company trading at a 10x earnings multiple.  

    Third, let’s look at what was said in the conference call about the future of the company.  

    Regarding the launch of the iPhone 4S:

    “We've gotten off to a great start with the 4S. We've sold over four million in just three days after launch. We're thrilled with the start that we have.” - Tim Cook

     “We are very confident that we will set an all-time record in the December quarter for iPhone sales. We – in our wildest dreams we couldn't have gotten off to a start as great as we have on the 4S.” - Tim Cook

    “We would expect to establish new company records for both the iPhone and the iPad in the December quarter. These are fantastic products and the momentum here is tremendous. And for Macs we would expect to outgrow the market on a year-over-year basis and report to you our 23rd consecutive quarter of outgrowing the market.” – Peter Oppenheimer

    Regarding the product pipeline:

     “As we look forward we are going to just continue to offer the very best products to customers that we can. We are going to be extremely innovative. We're very confident, excited about what's in the product pipeline.” – Peter Oppenheimer


    “We've had a series of unbelievable products, we believe the best products in the world, and our customers tell us that, which is more importantly than us saying it. And we've got a pipeline that's unbelievable.” – Tim Cook


    “We see the tablet market as a huge market. And we could not be happier with our position in it, and we've got some fantastic things in the pipeline. And after selling 40 million in the first 18 months, which is more than our wildest dreams were and selling three out of every four, I think we've got a fairly good handle on what to do next.” – Tim Cook


    These final few quotes beg the question as to what is in the product pipeline.  iPad 3 springs to mind as does an iPhone 5.  What about a TV product or other ideas that we cannot predict?


    My take-aways from the September quarterly results are the following:


    ·         Growth remained strong even with iPhone sales slowing in the last few weeks of the quarter as the “new” iPhone release grew near and consumer delayed purchases

    ·         Despite the rumors, when the price of the iPhone 4 was reduced to $99, they sold almost 3mm to-date in the first quarter suggesting that the new price points will drive more sales to consumers who previously looked to cheaper Andriod handsets

    ·         Increases in Mac sales to record levels suggest the ecosystem concept works and with iCloud up and running consumers with iPhones and/or iPads who do not have Macs could drive further Mac growth. 

    ·         iPad sales, while disappointing based on extremely lofty expectations were still a record and the iPad is clearly entering the enterprise space, which will fuel growth

    ·         The December quarter (fiscal Q1 2012) should be a blow-out quarter, with iPhone 4S sales eclipsing management expectations.  Note that management guidance for Q1 2012 surpassed consensus guidance, which is extremely rare.


    Buying Apple on this pull-back should pay off handsomely when Apple reports its Q1 2012 earnings in January 2012.

    Disclosure: I am long AAPL.
    Tags: AAPL
    Oct 19 10:47 AM | Link | Comment!
  • Joe’s Jeans (JOEZ): At Current Levels Joe’s is Worth Taking a Long Look
    Since the beginning of May the S&P 500 is down 6.7% and remains up only 1.1% for the year. 5.5% of the decline has been in the first nine trading days of June, during which the S&P 500 has only had two positive days.
    Small cap stocks, as measured by the Russell 2000 index, have seen an even larger slide falling 10.2% since May. The Russell 2000 is now down 0.8% on the year. Of the Russell’s recent slide 8.4% has taken place in June, and the Russell 2000 has also had only 2 up days in June thus far.
    In sell-offs of this type certain small cap stocks fall disproportionately. I believe Joe’s Jeans (NASDAQ:JOEZ) is a victim of the sell-off, rather than having had a material change in its business prospects. Since May Joe’s stock has declined 32.9%. 21.7% of this decline has been in the recent June slide.
    The decline in Joe’s stock to $0.66 per share means that the company now has a market capitalization of only $42.5mm and an enterprise value of $40.5mm.   From a valuation perspective Joe’s is trading at 0.7x book value, 0.4x sales, and 6x trailing EBITDA.
    There is no question that Joe’s stumbled in 2010/11 when the company overshot on the Jeggings trend and didn’t capitalize on the non-denim trends that impacted women’s fashion. Further, given their nascent retail strategy they were hurt by the slow-down in the women’s wholesale business. These types of fashion “misses” are going to happen from time to time, but what’s important is how management reacts. For a small company like Joe’s the impact of these issues can change the perceived trajectory of the entire company. This can add significant volatility to the stock, which as a small cap has material retail ownership adding even more volatility.
    Any double-dip recession scenario, further deterioration on the job creation front, prolonged high gas prices, etc. will impact consumer spend – and Joe’s is obviously dependent on consumer spending. One positive is that Joe’s international business is relatively small and their near-term growth story is not depending on Europe removing a potential roadblock. 
    However, baring significant economic deterioration of the US economy, Joe’s fall line will show whether or not management has successfully reacted to fashion trends. Having seen the catalogues I believe they will be successful. Also, remember that Joe’s is a relatively high-end product, which will prove more resilient in a down turn and gives them greater ability to pass-through input costs. 
    A strong argument can be made that current levels are a great entry point into Joe’s. I would encourage anyone who follows the company and is thinking about whether or not to invest to head to the story to see, feel, touch, and try on the merchandise. I would expect the fall lines to be in stores in the next 3-4 weeks. If the economy is in a “soft-patch” and growth picks back up in the second half as many economists are predicting an investment in Joe’s will have been well worth the time in the dressing room.

    Disclosure: I am long JOEZ.
    Tags: JOEZ
    Jun 13 9:46 PM | Link | 1 Comment
  • Automodular (AM.TO): A Micro Cap Way to Play the North American Auto Industry Recovery
    On May 17th A.T. Kearney published its 15th annual automotive study on U.S. auto sales volumes. (Link to A.T. Kearney study summary: In the study A.T. Kearney forecasts that 13.2 million new autos will be sold in the U.S. this year rising to 16 million units by 2013.
    Much has been written about the collapse of the U.S. auto industry during the financial crisis of 2008. As an investor if you believe in the revitalization of the North American auto industry there are multiple ways to participate including investing in the OEMs like Ford (NYSE:F) and General Motors (NYSE:GM), investing in auto suppliers like Lear (F) or Johnson Controls (NYSE:JCI), etc.
    For an investor with a mandate that allows investing in small and micro cap companies and the intestinal fortitude to withstand the volatility of the micro cap space there is an auto supplier opportunity that while risky has the potential to offer a return compensatory with the risk.
    Company Overview
    Automodular (AM.TO) is an auto supplier based in Canada that trades on the Toronto Stock Exchange. Automodular provides the sequencing and sub-assembly of modules that are installed in vehicles assembled by Ford Motor Company (F) in its Oakville, Ontario assembly plant. The company’s current contracts are for the Ford Edge, the Lincoln MKX, the Ford Flex, and the Lincoln MKT models.
    The company delivers sub-assembled modules (such as an instrument panel or a powerpack) to the assembly plant in the final installation sequence at precisely the time they are to be installed. Automodular receives orders every thirty seconds and ships completed assemblies typically within several hours of receiving the order.  Automodular’s plant is located near the final assembly plant to facilitate the real-time delivery of the modules. 
    Prior to the downturn the company had more expansive operations. Over the course of the past few years Automodular exited its U.S. operations in 2010, and had a contract terminated by General Motors. This contact termination resulted in $7.5mm CAD of costs to Automodular. Also in 2010 the company signed a multi-year agreement with Ford that runs through July 2012. The company also paid down its term credit facility and executed a $5mm CAD share buyback through a Dutch Auction.
    Sales in 2010 increased 17% over 2009 due to the increased activity with Ford.   2010 EBITDA of $17.2mm CAD grew 58% versus 2009. The closure of the U.S. operations and the termination of the GM contract resulted in one-time charges, which have now worked their way through the financials.
    As of market close on May 18 the stock price was $1.32 CAD per share representing a market capitalization of $29.9mm CAD. As of December 31, 2010 the company had cash and equivalents of $10.3mm CAD and $0.4mm CAD of debt. The enterprise value is approximately $17mm CAD and the company has shareholders’ equity of $33.2mm CAD.
    For additional detail see the 2010 annual report (link:
    Current Valuation
    Based on its trading multiples Automodular appears very cheap and would come up on a value screen that includes micro cap companies. The company trades at 0.2x sales, 0.7x 2010 EBITDA, 2.2x 2010 earnings, and 0.6x book value.
    Investment Thesis
    The investment thesis for Automodular is quite simple. As long as the economy continues to improve and demand for the autos increases Automodular will continue to benefit from strong demand and production levels at their Oakville facility. This will lead to strong cash flow generation, which will result in continued special dividends and/or share buybacks. In the past year Management has returned capital to shareholders in the form of two special dividends totally $0.45 per share and repurchased $5mm CAD of share, which at the time represented approximately 20% of the shares outstanding. At $1.32 per share the dividend equates to a 34% dividend yield (and it only represents 2 quarters). While both dividends were special dividends and there is no certainty that they will continue on a quarterly basis management’s commitment to returning capital to shareholders is very clear.
    First Quarter 2011 Results
    On May 12th the company announced its results for the first quarter of 2011. The company earned
    $3.5 million or $0.18 per share for the quarter versus a net loss of $(0.2) million or $(0.01) per share in the first quarter of 2010.
    The results for Q1 2011 include a $1.0 million (pre-tax) charge related to obligations on an idled facility. The Q1 2010 results included a $5.0 million (pre-tax) charge on account of exit costs and a plant and equipment impairment charge the majority of which was related to GM's termination of Automodular's remaining Oshawa-area contracts
    The earnings release also announced the special dividend of $0.25 CAD per share payable June 20 to shareholders of record June 6. The stock will trade ex dividend on June 2.
    The stock traded up to $1.39 from $0.92 post the earnings release. (Link to Q1 2011 results press release:
    Investment Risks
    ·         The customary risks involved in investing in a micro cap company exist such as a lack of liquidity and the associated volatility. 
    ·         Exposure to the auto market, which could be negatively impacted if the economy stopped growing.
    ·         Automodular’s business is now based on supplying only one OEM in Ford. Therefore if Ford has issues, decides to discontinue the models that Automodular supplies, or alters their manufacturing footprint in a way that impacts Oakville, it could materially impact Automodular.

    Disclosure: I am long OTCPK:AMZKF.
    Tags: AMZKF, F, GM, LEA, JCI
    May 19 3:17 PM | Link | 2 Comments
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