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  • Keyw: Cyber Security Inferiority And Looming Dilutive Equity Raise, Reiterate Strong Sell [View article]
    A quick observation on the press release: Maybe I need to go back and read it for a third time, but based on how vague it is written I believe IT IS POSSIBLE that KEYW has not even received any revenue from this agency, as it could just be some kind of free trial. Also, the Sun Trust Robinson Humphrey note this morning is comical given how much he extrapolates and exaggerates from this little press about whoring out your research for banking business, this guy might take the cake.
    Disclosure: We continue to be short KEYW in our fund.
    Jun 12, 2014. 10:41 AM | 5 Likes Like |Link to Comment
  • Risks Continue To Outweigh The Potential Reward In KEYW Holding [View article]
    FLD had been flying six planes in Afghanistan and was being paid roughly $8M per plane, or $48M per year. Our research indicates this is a high margin business with roughly 40% GMs, hence the $19M of EBITDA. Management has publicly stated that the new contract is at a lower price, I believe it was a high single digits percentage decline in revenue. It is hard to say what this does to margins now that the planes are in the States. The real issue is what happens with the planes next year? Clearly the previous owner of FLD did not think the historical level of business was sustainable. Otherwise why would they sell roughly $19M of annual EBITDA for $30M?

    I enjoyed both of your articles. (Kudos for incorporating "The Bobs" from Office Space.) We have a very similar view, but I don’t think bankruptcy is on the table in the near future. I think a secondary is very likely and the longer the company waits the worse it could be. I’m not sure why any large buyer would step in before the deal to buy and as the stock declines it means the dilution from a deal will be higher to current shareholders. The S-3 is now effective so KEYW can sell stock at anytime. They should be running to get a deal done. In trying to psychoanalyze Moodispaw, we are wondering if his ego will let him issue stock following these "short seller articles" or if he will stubbornly wait, not wanting to give critics the satisfaction. However, with longs and shorts both knowing he needs to issue stock, he would probably be better off just getting it over with.
    May 16, 2014. 03:50 PM | 2 Likes Like |Link to Comment
  • Weight Watchers: Free App Fad Will Soon Dissipate [View article]
    I think the fad of paying about $19 per month for WTW's online app will end first!!! That is $227 per year once you get out of the promotion period. ITG credit card data indicates that a large percentage of the shrinking number of people who do sign up are signing up for the short term offer so churn will continue to be an issue. In the risks section you forgot to say that a continuation of current trends will lead to the company being 7.1x levered (net debt/EBITDA) at the end of this year and 8.4x at the end of 2015, which is what our model is showing. WTW just completely missed the new sign up season that just ended (company says that 60% of new sign ups typically come during new year's resolution season) and churn is not getting better so they just lost this year and next year depends on them coming up with something prior to January 1 (besides discounting because we have empirical evidence that does not really work and the company admitted that at November analyst day). You value it on historical numbers! That makes no sense when we have seen such a huge sea change. Also, the free apps are building based on word of mouth and the Apple app store and other data points confirm this so i do know where you are coming from. Finally, thank you for putting in the chart on smartphone adoption because it helps prove another part of where you are wrong: You show that we are just now getting to the "late majority" and "laggards". I call that cohort "my mom's demographic" which is women 50 and older, these are women who were 30 to 45 during the glory days of WTW's brick and mortar business and they are the one group that I think WTW has sort of done a good job hanging onto until very recently. However, it will only get worse. This cohort is now increasingly getting smartphones and with each passing year will get more comfortable with apps and downloading the free apps. The ones who are way over 50 years old are far less likely to be using smartphones relative to women 50-55, but this older cohort does not matter so much and are obviously closer in time to the point where they will not be let out of the long-term care facility to go to the WTW meetings. This is a classic value trap with heavy leverage that only gets larger relative to EBITDA each quarter (again this year is already locked in due to new sign ups missing by a country mile, read the last transcript). This stock will no longer even remotely screen cheaply on backward looking screens in two to three quarters. Management rolled out Simple Fit and it appears that it was mostly existing customers that signed up so there was very little incremental revenue to show for the precious marketing dollars. That reminds me: if marketing dollars do not go up as a % of revenue on this shrinking revenue base than the company will be just become irrelevant faster but if marketing dollars go up too much as a % of revenue than EBITDA declines even faster. In most shorts I do not feel bad for management, but in this one I sort of do as there is literally nothing they can do. Full disclosure: the fund I manage has been short since last August or September, shorted more in January when it was clear they missed the New year's season sign up window and shorted more in after hours that day when they announced the fourth quarter and confirmed that the die has been cast.
    Mar 13, 2014. 04:02 PM | 2 Likes Like |Link to Comment
  • Enphase: Anemic Revenue Growth With Alarming Warranty Obligation Growth [View article]
    Thanks for all of the comments. It’s always good to get additional data points. I am busy running a fund and cannot reply to all comments, but I think we should make sure that people are not missing the forest for the trees. Clearly many installers still like to use Enphase and at our firm we have talked to some small installers that give us positive feedback on the product. Be that as it may, the company is selling over $60 million in product per quarter but they are definitely losing some larger installers that once favored using the Enphase product, based on the objective numbers. Again, the whole point of the article is to point out two concerning trends: the lack of revenue growth when the company’s primary end market is having a massive growth year, and a very large increase in the warranty obligation. The first can only be explained by lost market share in the US residential market. They may be doing well in certain geographies but they must be losing share overall. Second, the warranty obligation growth should be very alarming to any investor. This threatens the economic viability of the company and calls into question the true profit margin per inverter sold. I don’t believe the company will be able to accurately forecast this number until they are at least half way through the warranty period of an inverter. Lastly, the Gen 3 inverters have been in the market for slightly over 2 years. The next 18-24 months will be very interesting. If ENPH has an issue with Gen 3 that is anywhere similar to Gen 2 it will almost guarantee the company will never be economically viable. Side note: It is scary that the company is selling inverters at prices that do not allow it to be profitable (with or without appropriately larger warranty reserves) and that despite these low prices, it is still losing market share! Finally, MotoMike, you said I would have been smarter to be shorting it at $8 and $9. Indeed, I was. The point I made yesterday, and only after I was asked about it, was that I was having to add to my short position (yesterday I was shorting after article was published by the way) yesterday because with the stock falling from the $8s to the $5s while the NAV of my fund has been increasing (partly due to ENPH) meant that ENPH was a much smaller percentage of my total equity. You ask, how I will cover. I am patient. Like many of my other short positions, ENPH does not become better with time in terms of the deteriorating balance sheet (ongoing reported operating losses plus growing warranty obligations). (And the longer I wait to cover the longer I defer capital gains taxes for myself and my investors.) If I was the company, I would raise equity as soon as I could to make sure that I remain viable. RSOL and other companies with little-to-no EBITDA and low liquidity on the balance sheet have had to issue equity at big discounts (sometimes with warrants). If ENPH did that, I could chose to take some chips off the table and maybe get some free warrants to hedge out my remaining short position. Also, the VCs in this company are trapped in it, so if I ever had a change of heart and wanted to cover in a block trade, I could contact the one that has been selling earlier this year (or others). But at the end of the day, I could just wait for the fundamentals as I see them (again the main points of my original article) to play out. If that happens, and I wish none of you any ill will, I may be buying from some of you at $1.50. So good luck to all and it will be interesting to see where this stock is in 24 months, but I will sleep well at night knowing that I have pointed out to you the simple facts from the SEC filings.
    Dec 11, 2013. 12:26 PM | 2 Likes Like |Link to Comment
  • Enphase: Anemic Revenue Growth With Alarming Warranty Obligation Growth [View article]
    MotoMike, I’m not sure how unit shipments being down year-over-year in Q3 is an acceleration of any kind. Also, I’m not saying installers are switching to another microinverter, I think they are losing to central/string inverters and DC optimizers. For some reason U.S. residential installations are having a huge growth year and Enphase is not. The only explanation is that they are losing market share overall.
    Dec 10, 2013. 06:18 PM | Likes Like |Link to Comment
  • Enphase: Anemic Revenue Growth With Alarming Warranty Obligation Growth [View article]
    Senlac, the numbers are specifically for the second generation, which is the $15.9 million from the first 9 months of this year plus $7.6 million from 2012. The $7.6 million can be found in the 10-K. So it is $23.5 million for the second generation inverters, and that is only the adjustment to the original accrual. I addressed the benefit they took in Q3 on the third generation accrual in the original article. This seems aggressive to me due to the low amount of time in the market and their inability to accurately forecast the real warranty expense on the second generation product. Also, I don’t see anything in the company’s filings that say whatever the issue is with the second generation has been fixed on subsequent generations. Thanks for the comment.
    Dec 10, 2013. 06:11 PM | Likes Like |Link to Comment
  • Enphase: Anemic Revenue Growth With Alarming Warranty Obligation Growth [View article]
    Senlac, thank you for continuing the dialogue. Let me respond to your most recent comment first as it is quick and easy: You mention the record solar installations. These were covered in my article above. As I noted, despite an expected industry increase for residential solar installations of 59% this year, ENPH's micro inverter units were down in Q3 and revenue is only expected to be up about 6% for the full year. As I said in the article, it seems that, for various reasons (including the failure rate) that this company is losing plenty of market share and despite the huge industry growth it continues to lose money and erode its balance sheet. Now, let me respond to the first comment you posted: You said, "What is important is the overall failure is interesting how you have failed to put this into context." In terms of context, you indeed might be missing the main context of my whole article: Regardless of what you or I guestimate the overall failure rate is, what we know for a fact is that warranty obligation is growing very fast and this will require actual cash expenditures to make good on the warranty in the future. At the same time this company continues to lose money. Since this is a future cash obligation, I have put forth that (again no matter what the overall failure rate is) that investors should look at this as debt. So we have a company with net debt that continues to have negative cash flow....not a good combination. I really do not think the overall failure rate is the important context here, but at risk of getting dragged into a debate that does not really matter, I will humor you. First, these are not my numbers, they are the numbers provided by the company in their SEC filings. Second, the company is telling us they expect a high failure rate of second generation inverters over the life of the warranty. In 2012 and in the first 9 months of this year they have increased the warranty obligation by $23.5 million. That is in addition to the original accrual when those products were sold. Now these are my numbers: let’s assume a replacement inverter costs $120, then the $23.5 million alone means the company expects to replace 195,833 second generation inverters. Again, this is not counting the original accrual. So if the company shipped 1 million second generation inverters then they expect to replace over 20% of them. Call some of the large installers and ask about failure rates. Call Solar City and ask if they use Enphase and then ask them why they don’t. And finally, my position does not really matter for this discussion, but since you brought it up here is what I am up to in my portfolio: A number of of our short positions in the fund I manage, including ENPH, have declined significantly in price recently and so we are in need of more overall short exposure, and so I actually shorted more ENPH this morning. (Some of these positions have comments from me on SA.) This debate is what makes a market. Good luck and I appreciate any substantive feedback.
    Dec 10, 2013. 01:41 PM | Likes Like |Link to Comment
  • Xyratex: Baker Street Bets Half The Fund, Imminent Catalyst For 70% Upside [View article]
    Nice article, well laid out. In this crazy market with thematic driven stories at such huge multiples, I continue to wonder where the ClusterStor business would trade it it were its own standalone, publicly-traded company. I know CRAY has had a huge move this year even though it still has a non-sexy legacy business. And we have seen businesses with products and profitability metrics that are arguably very inferior to ClusterStor trade a large revenue multiples, yet this trades at very low multiples to EBITDA looking out to next year and a high FCF yield (adding back the cash). If the company is not selling off one of the divisions or putting itself entirely up for sale, I think it should repurchase shares. (Full disclosure: the fund I manage has been long XRTX for over a year.)
    Sep 23, 2013. 03:08 PM | Likes Like |Link to Comment
  • Jamba Juice: Why Q2 (Company Store) Sales Don't Really Matter [View article]
    Heads up, minimum wage increase potentially coming for California, but I will come back to that below. In terms of this article, I think JMBA same store sales for company owned stores (and franchise stores) absolutely matter. The company has been talking about all these other initiatives like consumer packaged goods for years and all adds up to immaterial EBITDA contribution so far. I do not have the numbers in front of me but when JMBA presented at the ICR conference this past January I did some calculations and, based on the implied profit contribution to JMBA per location, JambaGo would need to be in something like 15k or 20k schools before it ever became remotely material to overall EBITDA and at the ICR conference the CEO acknowledged that yes they would have to be in something close to that range of locations before this was meaningful. (I can't find the number in my notes at the moment but someone else on this board might have the profit per location that actually flows back to the company when you combine licensing royalties and profits form ingredient sales to the partners.) The company said on the last conference call that they have 636 locations with a goal of 1,500 locations by the end of this year so they are a long ways from 15,000 locations. So I think company-owned same-store sales an profitability will mater immensely to this company for the foreseeable future. On that note, with the vast majority of company owned locations in the state of California, the fact that the Golden State is looking to increase the minimum wage to $10/hour cannot be good for JMBA:
    Granted, many JMBA store employees might be making more than $9 or $10 right now, but in the past numerous restaurant industry executives have said that when the minimum wage is increased it also puts meaningful upward pressure on wages that are set moderately above the new official minimum. (Full disclosure: the fund I manage is short JMBA.)
    Sep 12, 2013. 08:20 PM | Likes Like |Link to Comment
  • Nuverra Environmental: A Sinking Ship With Default Risk [View article]
    MBA Value Investor, this is a great article. Full disclosure, the fund I manage has been short this stock since prior to the article. I still cannot believe that both retail and mutual fund managers do not realize that this company is not an environmental services company but mainly a commoditized oilfield services company with no barriers to entry. I spoke with a sell side analyst who only covers oilfield services companies. He told me that Dick Heckmann told him that Heckmann did not want him to cover his company since he is an oilfield services analyst and it would, therefore, make people more likely to the think of the company as an oilfield services company. (Yes, I realize that there are some other oilfield services analysts that right on the stock, but I believe they are biased by investment banking opportunities.) It is astonishing that these tactics still work on the marginal buyer of this stock. It is also surprising that people do not do the work around what the organic "growth" rate is for EBITDA when you pro forma the Power Fuels acquisition. (This was central to our short thesis at my firm and I think it is one of the most important things this article pointed out.) On the insider buy by the CEO, I believe that the company sees one potential way out of its issue with declining EBITDA and growing debt/EBITDA ratio: Do an acquisition for stock that will therefore bring in at least some EBITDA (the denominator) without adding to net debt. However, to do that the CEO needs to keep up his stock price and make acquisition targets comfortable enough to at least take a significant portion of the purchase price in stock, so buying stock on the open market allows him to say hey "I am married to this stock already and I bought more." However, that is sort of the point, he is trapped in it, so buying a little more shares is likely a strategy to help him try to work out of many more shares over the long-term while avoiding a distressed debt cram down or having to issue shares at something south of say $1.50 per share. Again, great article. I will start following you on seeking alpha going forward.
    Sep 11, 2013. 01:58 PM | 1 Like Like |Link to Comment
  • John B Sanfilippo & Son: An Undervalued Snack Company [View article]
    I agree that a regular dividend would really help the valuation. In terms of the comment above, a dividend would help people like that guy get comfortable that the family is not screwing public shareholders. So far mgmt seems pretty intent on taking advantage of Diamond's problems to gain share and continue to build a pretty nice business. Our model shows that they can pay a decent regular dividend and continue to grow. (Disclosure: the fund I manage has a long position in JBSS.)
    Sep 3, 2013. 03:20 PM | Likes Like |Link to Comment
  • 7 Reasons Why Zillow Is Extremely Overpriced [View article]
    Here is my favorite line from the earnings press release:
    "Adjusted EBITDA was $5.3 million, or 11% of revenue, compared to $5.3 million in the second quarter of 2012, or 19% of revenue, due primarily to an exceptionally strong quarter for Display Revenue, better than anticipated Marketplace Revenue, and high operating leverage in our model."
    I get that they are investing for future growth and apparently trying to outspend TRLA on sales and marketing. However, in the same sentence that they mention that adjusted EBITDA margins went from 19% to 11% YoY, the company states that it has "high operating leverage" in its model. Again, I get that it might be positioning to have better (or at least some) operating leverage in the future, but that quote above makes no sense. Between statements like that, constant self-promoting tweets from the CEO, insiders sales and all the other points mentioned in the article above (chiefly that Z does not own the whole space and so has to keep investing heavily, which is directly related to the lack of operating leverage), I cannot see how anyone would be long this stock. (Full disclosure, I currently have a small short position.)
    Aug 7, 2013. 08:52 AM | 3 Likes Like |Link to Comment
  • InterOil: The Stars Are Aligned For A Takeover Battle To Ensue In The Coming Weeks [View article]
    If Shell was really interested in the Gulf LNG project, why did it not reach a partnership agreement with IOC to build it?? IOC has been shopping that deal for several years. Earlier this year, IOC said it had "several" bids but shortly after that it came out and said it was only negotiating with Exxon on gas supply agreement (in which case IOC has very little negotiating leverage with Exxon). So it would appear that there were no credible bids to build the Gulf LNG facility, so if Shell really wanted a major piece of that project it should have been able to negotiate a fair price. To me, your article seems completely baseless unless you can explain this inconsistency. Thanks.
    Aug 6, 2013. 08:46 AM | Likes Like |Link to Comment
  • Coldwater Creek: A Potential Lotto Ticket In The Retail Sector [View article]
    Anybody thinking about going long CWTR should go into their stores and see that there is still just as much inventory deeply discounted or arguably more inventory deeply discounted then past seasons. (When you go the store, check the clearance section, merchandise has again lately been an additional 40% off the lowest marked price for cumulative discounts in the 75% range and some stores have expanded their clearance sections.) I am short the stock and will remain so until I see evidence that gross margin can lift and I see none of it yet. The company has lost many of its core customers and ones that remain have been trained to wait until an item goes on a significant discount until purchasing. (The article above mentioned the growth in loyalty club members but it appears to be that loyalty club members are receiving profit-destroying discounts layered on top of already significant discounts available to the general public in the stores every day.) Despite store closures and working capital reductions and downsizing the average square footage of the stores, the company continues to burn cash. These initiatives were partially in place in Q1 and look at the results. Based on the discounting I not believe there has been a significant change in the trend in same-store sales and gross margin. Therefore, I expect the company will have to raise more capital. The PE firm Golden Gate already holds a huge portion of the upside on a fully diluted basis and this share of the pie will only increase upon the next capital raise. Alternatively, Golden Gate, could choose not to put in more capital, in which case CWTR common shares have a decent shot at going to zero. I have made a living in part going long real retail turnarounds but this appears to have none of the makings as at some point cost cuts only go so far and you need to stem the Y-o-Y decrease in actual gross profit dollars otherwise you eventually close so many stores that you lose economies of scale with your sourcing vendors and within your buying and distribution overhead.
    Jul 17, 2013. 05:45 PM | Likes Like |Link to Comment