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  • Nautilus: Robust Early-Stage Cash Growth, New Products, And Secular Trends Fuel Strong Gains [View article]
    Since the publication of this report on July 1, NLS shares rose ~57% to a pre-market high of ~$17 per share as of this morning. Today, the company announced that its Q4 revenue increased 23% and its FY 2014 revenue gained 25% YoY from 2013. These results follow a string of financial results that soundly trounced the expectations of most Wall Street analysts.

    Importantly, Nautilus claimed in its press release this morning that it now has around $72 million worth of cash and STI as of the end of FY 2014, which is around a 76% higher balance than the $41 million it closed FY 2013 with a year ago. This aligns almost precisely with the cash growth estimates and analysis provided by Bishop Research and Analytics in this report. Notably, the FCF Valuation Model calls for $24 million of FCF in FY 2014 with a target share price of $19.09 within 18-24 months.

    With the investment thesis detailed in this report solidly unfolding according to estimates, NLS shares continue to remain poised to deliver further exceptional results on their path to $19 per share.

    Thank you for reading and have a very successful 2015.
    Jan 12, 2015. 09:38 AM | Likes Like |Link to Comment
  • Lands' End: Growth Strategies, Free Cash Flow, And Short Interest Driving Shares Higher [View article]
    Since the publication of this article on June 19 when the stock was trading at $32.50 per share in the preceding session, LE has risen as high as ~$51 per share prior to last Wednesday's Q3 earnings report. My analysis, based mostly on discounted FCF, the company's stated growth strategies, and the unusually large short interest with such a small public float, called for a price target of $55.93 per share within 24 to 36 months. With the stock currently trading around ~$47 per share only six months after the publication of this report, LE is on pace to fulfill this Top Idea's price target in less than half the estimated time.

    The Q3 earnings report was notable for several reasons. First, revenue actually fell YoY by around $10 million for the comparable quarter, yet Lands' End generated EPS of 56 cents per share for Q3 2014 compared to 45 cents in Q3 2013. What makes this remarkable is that despite the newly added $6.194 million in interest expense, the company still actually paid ~$2.4 million more in taxes during the quarter on less revenue as a result of lower depreciation and amortization, lower SG&A, and lower COGS. This indicates a high level of efficiency in operations that is empowering Lands' End to execute on the lean model. These are very encouraging developments that are worth paying close attention to in coming quarters as Lands' End begins to implement more of its stated growth strategies.

    Lands' End reported $85.558 million in cash flow from operations as of October 31, 2014 with $11.1 million in capital expenditures during that time. My discounted FCF model calls for $98.5 million of FCF for FY 2014, which translates into Lands' End posting ~$24 million of FCF in Q4 2014 to fulfill that estimate. This does seem reasonable and attainable, depending on capital expenditures, if the holiday quarter continues LE's trend YTD in 2014.

    With LE shares reaching ~$51 per share pre-earnings, this Top Idea is closing in on the $55.93 price target in only six months. We will discover over the coming weeks and months how quickly that price target can be reached. Notably, another LE director purchased shares on Friday, December 12 at ~$47 per share, indicating that at least one insider certainly sees the value in LE shares at their current price.

    Thanks for reading. Have a very successful week.
    Dec 14, 2014. 09:29 PM | Likes Like |Link to Comment
  • CBOE Holdings: Strong Growth, Large Moat, And A Call Option On Volatility [View article]
    In a little over a year since recommending CBOE as a Top Idea in mid-October 2013, shares of CBOE rose nearly 35 percent from $47.05 per share when this report was written. There was some turbulence along the way as shares took a big dip in the April through early July period of 2014 before beginning a powerful rally to their current ~$62 per share level. During that time, CBOE unveiled several new offerings and extended trading initiatives across its core product categories that are fueling its strong monthly reports showing YoY comps and sequential monthly growth in ADV. Accordingly, CBOE is booking impressive financial results and making prudent capital allocation decisions on behalf of its shareholders.

    While some continue to suggest that the company is overvalued at current levels, it is worth considering that CBOE is likely to carry a substantial premium in its valuation as long as it remains an independent publicly-traded company. This premium is implied in the potential for CBOE as a takeover candidate, notably a topic that has receded from headlines compared to the hot and heavy speculation that accompanied the company several years ago, yet whether or not the home of the VIX is ever actually put into play is almost an afterthought to those investors who regard an eventual buyout as a forgone conclusion. Nevertheless, as long as CBOE continues to perform as it has in 2014, shares are likely to reflect such a takeover premium and a reward for the company's structural competitive advantages. Currently, CBOE is underperforming our EPS models, yet on trend to fulfill or surpass our two most aggressive YE 2014 share valuation models that estimate $66.75 to $73.83 per share when the company reports FY earnings in January. It is entirely possible CBOE might be trading at $100+ per share at this time in 2015 if current trends accelerate in the coming year. One important development to watch in 2015 is the impact of C5 policies and shifts in market perception to global monetary policy as it unfolds throughout the year. CBOE is poised to be the beneficiary of a substantial portion of global volume as it relates to hedging strategies and reallocation of capital in response to C5 policies or the perception of future policy actions.
    Nov 9, 2014. 11:51 PM | 1 Like Like |Link to Comment
  • Discover Financial Services: Set For Growth With New Strategies And Network Partnerships [View article]
    In the 16 months since this article was published, shares of Discover Financial Services rose from $49.64 per share when the article was written to the current 52-week high of a little over $66 per share at the end of the first week of November 2014. While these gains are an impressive 33 percent in 16 months, they were also achieved with a nice, steady price appreciation trend that didn't generate a great deal of volatility or drawdowns on the path to this performance. Indeed, Discover is an excellent investment for those who are looking to balance their portfolio with a company that has strong growth potential and also rewards shareholders with capital allocations in the form of robust share repurchases and generous dividends.

    In early 2015, I intend to publish a follow-up to this DFS research that will provide investors with further analysis of Discover and an update on EPS and valuation models. Until then, it is worth noting that DFS shares remain undervalued in early November 2014 as a function of the investment thesis presented in this Top Idea article. Importantly, this report determined that DFS shares were trading at a material discount to Discover's peers when DFS shares were trading at a 10X earnings multiple in July 2013. Since that time, shares have risen to reflect a 12.5X multiple on TTM earnings, yet still remain stuck around 10X on a 2015 basis.

    Consider the following to motivate your intuition about valuing DFS shares in 2015: on average, community and regional banks with nowhere near the earnings growth and capital ratio strength of Discover trade at approximately the same earnings multiples as DFS shares. When you consider the fact that Discover has the - as of yet still untapped - growth potential in its Payment Services business, and is essentially one of four giants in the payments oligopoly with Amex, MasterCard, and Visa, it becomes clear that 12.5X trailing and 10X forward multiples are still very much on the low end of the valuation scale. Realistically, if and when Discover shows investors more aggressive capital allocation strategies and/or lives up to potential in its Payment Services business, DFS shares might finally experience this multiple expansion and could easily trade in the $85 to $100+ range in 2015.
    Nov 9, 2014. 11:18 PM | Likes Like |Link to Comment
  • A High Conviction Idea With 150% Upside [View article]
    The drop in Google Trends, combined with the YoY increase in Q2 revenue, tells me that Overstock has developed a large installed base of users who likely are going directly to the website through bookmarks in their browser or the app for their mobile device.

    As mentioned in my earlier comment, one of the attractive aspects of this company is that Patrick Byrne has found a way to cater to a very loyal and desirable base of relatively affluent consumers. The truly informative datapoint would be to determine how many of the people using Google to find Overstock end up becoming loyal customers or Club O members that link directly to the site after that initial search picked up by Google Trends. Customer development might be a more meaningful metric than customer acquisition and more efficient for the company for marketing costs in the future.
    Aug 21, 2014. 06:05 PM | 4 Likes Like |Link to Comment
  • A High Conviction Idea With 150% Upside [View article]
    Excellent analysis Mike, as with all your work. Agree completely about OSTK and see this one going to ~$32 in the short-term. A strong Q4 season might push it much higher. Performed an in-depth analysis ahead of Q2 earnings and arrived at many of the same conclusions you thoughtfully highlighted in this superb article.

    Although it may sound qualitative in value, your point about tech expenses/investments is very important. I urge everyone reading your article to go to and experience the interface for themselves. It is substantially more elegant and advanced than the old website, yet, importantly, is a much more intuitive and refined shopping experience than any of its competitors. Patrick Byrne is a visionary at crafting a value proposition and appeal that attracts a fusion of relatively affluent, mid-six-digit income households, 75 percent female, and, most importantly, exceptionally loyal core customers. Insurance, Supplier Oasis, and the software development business will contribute to higher margins. In particular, once the market understands the scalability of commercializing its enterprise software business in coming years, OSTK has the potential to be a multi-billion dollar market cap.
    Aug 7, 2014. 04:43 PM | 3 Likes Like |Link to Comment
  • Lands' End: Growth Strategies, Free Cash Flow, And Short Interest Driving Shares Higher [View article]
    After only about a month, LE shares have performed exceptionally well, rising from around $32.50 when the article was written to over $37 today. They actually reached nearly $38 per share last week. With the merits of the company becoming more apparent, it is likely only a matter of time before that level is surpassed and shares reflect prices more aligned with the valuation contained in the article. One of the interesting features about this rally is that there has been little-to-no news or additional information since this article was published, which indicates that investors are discovering this opportunity and acting accordingly. Notably, Janus Funds disclosed that they have taken a sizable position. In coming weeks and months, one development to watch for is the participation of funds in acquiring LE shares. Since SHLD is not widely held by many funds and LE shares were distributed directly to shareholders, the only way for most investment funds to acquire LE shares to show they have them in their portfolios is to do so in the open market.

    Finally, another interesting development that should offer encouragement to anyone still thinking about investing in LE is the fact that there are still ~3.4 million shares of short interest according to the latest published dissemination period on June 30. While that dropped around 600K shares from the short interest reported in this article, that still indicates ~3.4 shares short out of ~4.6 million shares in the effective free-float. That continues to be a staggering two-thirds of the float held short. The next report will be published on July 24 for the period ending July 15. It appears that the shorts are being unwound slowly rather than a big announcement by the company blowing everyone out of their positions. In closing, the main catalysts to look for in the coming months are announcements about third-party wholesale deals in overseas markets, talk of small acquisitions, and website launches in new markets.

    Thanks for reading. Have a successful week.
    Jul 22, 2014. 04:27 PM | Likes Like |Link to Comment
  • Lands' End: Growth Strategies, Free Cash Flow, And Short Interest Driving Shares Higher [View article]
    Hi Shaun,

    First, much respect for all your work and I recommend everyone follow you so they can get real-time alerts when you publish new articles. Thank you very much for your compliment. Yes, it is great for investors to base their investments on information from both sides of a thesis. That's what makes a market.

    To your questions:
    1. Yes, it is specifically labeled "PV of Firm" on the table. We have to use FCFF on this because the leverage is likely to change as the company maximizes growth in the next 2-3 years. It's not static, low-entropy leverage and I expect it will look much different even a year from now, particularly if they go to the credit markets to fund a growth initiative or bigger-than-expected acquisition. That's why it doesn't say equity, nor even mention equity, it's not FCFE. It is a per share estimate of firm value based on free cash flow. I don't use EV/EBITDA and don't view this investment as a value-oriented balance sheet play. I look at it as a growth play on FCF derived from the statement of sources and uses of cash. The annual expenses of debt maintenance already flow through the income statement and are on the top line of the cash flow statement in net income. As you suggest, if investors would like to quickly derive an FCFE estimate, then all they have to do is net out debt-cash. The debt is not due in one lump sum, therefore I didn't include any balance sheet cash, debt, or equity-related items. The valuation is an estimate on a per share basis of firm value based on FCF, essentially flows instead of stocks.

    2. The IT initiatives are almost entirely geared toward global expansion and marketing in new markets. As mentioned in the article, Sears has no reach into these markets and little to offer as a result, which is why Lands' End is making those investments in digital. To directly answer your question about building out retail, Lands' End has a lot of options. It depends on how aggressive they decide to be. They could do it via acquisition all at once or they could do it organically. Either way, I would expect them to expand their balance sheet to accomplish this and estimate that revenues would rise to finance this growth. I definitely expect SG&A to increase. They're going to be growing. Eddie Lampert told Women's Wear Daily that he intends for Lands' End to be a $5 billion global brand by the end of the decade. They intend to use the Tommy Hilfiger model to grow the brand worldwide. The cost structure and revenues will all increase to accomplish this. Sears will be in the rear-view mirror for LE in less than 5 years. We also do not know the extent to which the shops in Sears are currently cannibalizing direct online sales.
    3. This depends entirely on two variables. First, how quickly and aggressively they move on their stated growth initiatives. Second, as mentioned in the article, execution in Q4 is vital and where this company generates nearly all of its annual FCF.

    The $25 million in capex is the company's estimates. Since they can control capex and costs, I have to take that figure and, if anything, they might be erring on the side of being conservative since it was in a regulatory filing. I can't reasonably assign an additional $10 million more in capex - 40% higher than the stated $25 million - until I hear from the company what they would be investing it in. If we adjust for the debt on the balance sheet, then we're back to question 1 again and valuing equity through the lens of the balance sheet instead of my method of cash flow, sources and uses, and flows instead of stocks. It is simply a different methodology that you use to value companies, which I totally respect. You use EV/EBITDA, which is quite common these days. I'm old school. Sears would not be valued this way, it is a balance sheet play, stocks instead of flows. The reason the company didn't hold a conference call is because they have no analyst coverage yet and, as shown in the article, over 80% of the stock is held by a handful of insiders and investment funds that don't need a P.R. call to tell them what the company is doing. If management doesn't take the route they outlined in their filings, then I expect them to start buying back stock with free cash flow. I think management is fairly clear about their intentions in the company's filings, although I totally respect and understand your view. Yes, short interest is irrational and the volume the past week indicates that the unwinding is only in the very early innings. If the stock crosses $34.65 that may start to trigger margin calls or brokerage buy-ins as those short from the distribution date cross the 5% threshold.

    By the way: Two LE directors personally purchased stock and filed their SEC forms within the last 48 hours.

    I appreciate your comment Shaun. You're a true pro and a class act. We may not agree on this stock, but over the past year we are about 90% on other companies. Take care.
    Jun 19, 2014. 05:59 PM | 1 Like Like |Link to Comment
  • Sears Holdings' Valuation: Between Berkshire Hathaway And Bankruptcy [View article]
    Thanks Mark,

    That is another important development. Keep them coming. When does Fine Capital file a new 13F?
    Feb 14, 2014. 04:11 AM | Likes Like |Link to Comment
  • Sears Holdings' Valuation: Between Berkshire Hathaway And Bankruptcy [View article]
    Thanks Mark,

    Looks like the pros are loading up!! ESL might be too. We will know soon.
    Feb 12, 2014. 07:31 PM | Likes Like |Link to Comment
  • Sears Holdings' Valuation: Between Berkshire Hathaway And Bankruptcy [View article]
    With all due respect idkmybffjill, you are wrong about the Sears Canada dividend. ESL received around $140 million from the special dividend because the hedge fund owns 28 percent of Sears Canada.

    The special dividend of $5 per share was for Sears Canada SHAREHOLDERS OF RECORD, not simply Sears Holdings. That made ESL's shares in Sears Canada eligible. As it turns out, Sears Holdings also received around $250 million from the special dividend as the 51 percent owner of Sears Canada.

    Thanks for the clarification about the quiet period. That is helpful.

    The more I thought about your original question solely in the context of Eddie Lampert's personal accounts, separate from ESL, the answer to your question became apparent. I recall researching this several months ago, so I would have to go back and check on the specifics, but I believe Eddie Lampert's annual compensation is entirely in Sears Holdings stock. I also recall something about him receiving this first tranche of stock on his one year anniversary of employment, which would be right about now, give or take a few weeks.

    There was also something about there being a period in which the basis for the calculation for the entire year's stock awards for him would be determined. My understanding of this was that the number of shares he would end up receiving would be based on how many shares could be purchased for an average price during the period. I will have to go back and read the fine print on this, but it seems like that basis period was either in early February or early March. It is in the notes to last year's annual report. They include Edde Lampert's entire comp plan as CEO.
    Feb 5, 2014. 02:14 AM | 3 Likes Like |Link to Comment
  • Sears Holdings' Valuation: Between Berkshire Hathaway And Bankruptcy [View article]
    Why would Lampert want to front-run ESL purchases with his own when the minute the regulatory filing hits the stock will bounce higher?

    Wouldn't he prefer to use ESL's Sears Canada dividend proceeds to accumulate all the shares he wants and THEN buy his own and file his disclosure forms?

    Seems like timing is very important when you are trying to buy the amount of shares required to restore ESL's stake back to its former levels. ESL would essentially be making a market for short-sellers looking to take their new positions down here as they read all these stories in the financial media about how Sears is in the "death spiral" and going out of business in the next 12 months.
    Feb 4, 2014. 08:37 PM | 2 Likes Like |Link to Comment
  • Sears Holdings' Valuation: Between Berkshire Hathaway And Bankruptcy [View article]
    Since the stake he gave up was held by ESL instead of his own account, it does stand to reason that he might prefer to raise the number of shares to the hedge fund's account first. You are right about his personal account, although does it really matter whether it is ESL or Lampert buying?

    One possible reason Lampert would prefer that ESL buy shares is because the hedge fund just received a load of $$$$ from the Sears Canada dividend last month. Why not use those funds to replenish the ESL stake at these levels first rather than his own personal capital?

    He could also be waiting until after earnings at the end of the month. Since you know a lot about the regulatory issues for corporate insiders, maybe you can elaborate on the rules for insider purchases or sales during the quiet period?
    Feb 4, 2014. 08:31 PM | 2 Likes Like |Link to Comment
  • Sears Holdings' Valuation: Between Berkshire Hathaway And Bankruptcy [View article]
    I stated that in this exact article last June:

    "Monetizing Retail Commercial Property Space

    Over the past few years, the company continues to rent space within its Sears stores to Whole Foods Market Inc. (WFM) for roughly 25 to 30 percent of the total retail square footage of the stores involved. In 2010, Sears began renting space to Forever 21, Inc. in its South Coast Plaza location in affluent Orange County, California. The move had the dual purpose of attracting younger customers into the Sears store and monetizing under-utilized retail space. Sears even leased 3.7 acres of its shopping mall parking lot to a company that built a 40,000 square foot bowling alley and bocce ball entertainment/dining establishment called Pinstripes at the Oak Brook Center in the western suburbs of Chicago."

    Read the article above that you are commenting on, this is hardly recent news.

    Also, Sears Re was not what Sandeep Mathrani was referring to in the quote in the conference call. Sears Re has nothing whatsoever to do with GGP or any REIT. Read the article above again. It details what Sears Re is and what type of properties are contained in the REMIC.
    Feb 4, 2014. 08:06 PM | Likes Like |Link to Comment
  • Sears Holdings' Valuation: Between Berkshire Hathaway And Bankruptcy [View article]

    How do you know Lampert isn't buying stock at these levels? They don't issue press releases to declare he is buying until way after he has already accumulated all his new shares. We only find out that he was buying when he and ESL file 13-Ds with the SEC. That won't happen again until sometime in March. Maybe he is buying here and maybe he isn't.

    It is interesting that he was able to cash out the former ESL investors who wanted out in the window late last year by giving them the equivalent stock amount when SHLD was in the high $50s to $60 range. The 13-D gets filed much later, then the stock tanks in December in response. Next, pre-release bad Q4 in early January, the stock tanks more. How often does this company pre-release anything? Shorts smell blood in the water and start piling on. Sears stays mostly silent. Not much in the way of any good news in company press releases to put a bid under the stock price for the last few weeks. No updates on Lands' End. Shorts feel emboldened and pile on more, creating a very crowded trade. We have seen this story before in early 2012. Could it be that the best time to buy is when all the momentum is to the downside and that Sears waits to release positive information and go public with deals until the shorts are all-in and caught flatfooted? There's a certain rhythm to this and the news cycle. Then they stoke the upward price pressure with updates and press releases while the momentum is putting tailwinds at their back and the shorts get blown out with margin calls and can't regain their traction. Maybe, "this time it's different?"
    Feb 4, 2014. 07:53 PM | 2 Likes Like |Link to Comment