Gino Verza

CKGT 3rd Quarter: China warms up to Cactus

I have owned CKGT for a few months now. I plan to hold on to it.

Fundamental value is in excess of $7.00/share based on 9-months results and estimated FYE results. Even after allowing for the "China risk" factor there is sufficient cushion to support significant appreciation from the current stock price level.

Furthermore there are a number of initiatives that point to continued fast growth in Free Cash Flow going forward.

2 Israeli Smallcaps Languishing at Ridiculous Levels, Given Performance

Shlomi,

I read your article (and previous) with interest. Thank you.

A company in your portfolio but not mentioned in the article is ClickSoftware (CKSW).

ClickSoftware has many of the attributes discussed; fast growth, substantial cash holdings, good earnings visibility, client diversification, and current investment opportunity.

Strategically CKSW has positioned itself as the market leader in workforce and service management, a vast addressable market. A variety of strategic choices made by management over the last few years and most notably during 2009, along with a strong track record of financial performance, point to a very strong management team and promising investment returns.

Regards,

Disclosure: I hold CKSW common stock.

ClickSoftware at Inflection Point

Thank you for the comment.

The article focuses on the fundamentals that drive shareholder value.

Beyond regulatory requirements, the company's public disclosure addresses the objective of lowering the cost of capital by promoting factors such as broadening the investors' base, increasing stock liquidity, and lowering beta. The recent Investor Day presentation (available in the homepage) is just one example of the tactics used.

Regards,

On This Week today, Alan Greenspan played down the recent spat of weaker than expected data: "It is true, the last couple of weeks that some of the numbers that are coming in have been a little bit soft. But this is what a recovery looks like."

Someone should tell Alan to relax, walk his dog, have a coffee.

Whatever following he had in his earlier years lost steam after the financial meltdown. His explanations and excuses were too transparent to be credible.

Relax Alan, let it go, walk your dog. No need for public view.

Bank of America / SEC: Rakoff Throws Down the Gauntlet

I never understood the picture.

BAC misleads shareholders and the SEC is complicit in imposing a "negotiated penalty" to the detriment of the shareholders, the innocent bystanders who are required to pay again. Meanwhile the responsible perpetrators go uncovered and unpunished and their board of directors remain in silent agreement. Is this the true picture of governance and accountability?

Finally a voice of reason which calls a sham for what it really is.

All this suggests the tip of an iceberg --the SEC, management, and the board of directors, mutually supporting their own agendas at the detriment of the shareholders they are supposed to serve.

BofA Makes SEC Charges on False Statements Go Away in a Hurry

Let's see if I get the picture.

BofA screws up and shareholders lose. BofA pays penalty and the shareholders lose again.

The authors of the screw up; well, thank you very much.

Accountability is such a great thing.

Tata Motors, NetEase Look Poised for Big Growth

I agree on the significant upside in NTES from current levels. Similarly, FEED, another Chinese stock, has substantial upside.

The appreciation potential of these two compare quite favorably with many others I track.

Trading Under Book Value

Just a corporate finance perspective:

Oversimplifying ----stock prices are low because of the the expectation that the Present Value of the future free cash flows (discounted at the weighted average cost of capital) generated by the assets will be lower than the initial investment amount (book value).

In other words, a price with a discount to book (other things being equal) means that the expected return from existing assets (book value) will be lower than the firm's weighted average cost of capital.

Oversimplifying ---regardless of the activity of the firm involved, a company with the expectation of insufficient free cash flow will exhibit a price with a discount to book.

MSFT has a relatively high price to book, because of the combination of free cash flow plus surplus cash on the balance sheet.

ClickSoft: Underloved and Undervalued

Good article Steve B. Good comments Alphameister.

From this perspective; excellent quarterly and FYE performance.

CKSW is firing in all cylinders. The world needs to take notice of the unique strength of the business model that allows the company to build up cash while maintaining sustained revenue growth.

As soon as the analysts' reviews confirm what we already know, I expect a surge in the stock price.

I hope the company continues to do what is already working --operating within its own core competence; expanding market coverage through external channels at minimal marginal cost, adding to the product offering, and keeping an eye on headcount and costs.

My only concern is that the raising level of cash and abundance acquisition candidates at discounted market prices impel the company to rush into an acquisition for the wrong reason. While I realize the problem of a substantial asset generating returns that are below the cost of capital, a corporate acquisition would represent a major investment decision not supported by a known CKSW competence.

Diclosure: I am long on CKSW.

Steve Jobs Value - Per Apple Share

Just a clarification:

The $97/share results by adding about $24.5B in cash to the PV of the perpetuity and dividing the total by the number of shares.

Steve Jobs Value - Per Apple Share

Thank you for the article.

I share the view that that current performance support substantial greater value than the current price. My computations are as follows:

FCF for FYE9/08 is 4.11 (if we adjust for the "large" source from WC in FYE9/08 would make FCF smaller)
FCF = NOPAT - Uses in Operating Capital (Working Capital + CAPEX).

PV of the stock is about $97/share.
PV is the value of a perpetuity of 4.11, growing at 2%, discounted at 7% (the difference between 9% in WACC and 2% growth rate).
Increasing the growth rate (to a more realistic perpetual rate) would significantly increase PV.

These figures are subject to adjustment for a variety of risk factors such as market factor, credit conditions, the economic stimulus program, and the Jobs factor.

Regards.

Buying Altria? Profit While Awaiting Improved Market Conditions

Thank you for the question, Tellingson,.

Annual EBITDA for the pro forma financials, including UST and related debt, is estimated at $5.5 billion (before earnings contribution from SAB Miller). EBITDA is sufficient to cover the annual uses of funds estimated at $4.5 billion ---$2.6 billion in dividends, $1.3 billion in interest expenses, and $0.6 billion in debt principal repayments –and generate a $1.0 billion surplus. These uses of funds and others are discussed below.

Uses of Funds
(a) Dividends --$2.6 billion in dividends

(b) Interest Charges --$1.3 billion in interest payments for $13.0 billion in gross debt ($12.5 billion in tobacco debt and $0.5 billion in recourse lease portfolio debt) at an estimated overall average interest rate of 9.48% p.a. (see below).

Actual Debt Information:
Total debt amounting to $13.0 billion is made up by $7.0 billion medium/long term debt and $6.0 billion, short term. Breakdown is as follows:

Medium/Long Term Debt:
(i) $1.4 billion in 8.50% Notes due 2013
(ii) $3.1 billion in 9.70% Notes due 2018
(iii) $1.5 billion on 9.95% Notes due 2038
(iv) $1.0 billion in other medium/long term debt
Total Medium/Long Term Debt is $7.0 billion

Weighted average maturity is 12.8 years
Weighted average interest rate is 9.48%.
Average annual principal amortization is $0.6 billion,

(c) Principal Debt Amortization --$0.6 billion in the estimated annual amortization. This is based in the following:
(i) Medium/long term debt average maturity of 12.8 years
(ii) Short term debt (substantially supporting working capital assets) is rolled over.

(d) Net Operations Working Capital Use and Capital Expenditures –Historically the working capital requirement to support revenues is minimal, if not a source of funds. Following the recent UST acquisition prospective emphasis is on the integration of the acquisition into the existing tobacco business rather than on additional capital expenditures.

(e) Income Taxes –This is a tough one. The lease portfolio seems to be the predominant source of deferred taxes. The strategy to manage an orderly portfolio run-off will tend to reverse earlier deferrals, net of lease sale revenue (and lease residual gains). There is no evidence of problems with the underlying assets or the paying capacity of the lessees. From this perspective, some unfavorable choppy tax impact due to the run-off or to adverse tax rulings should not be surprising. See the caveats in the article.

Debt Servicing Factors
(a) The stability of tobacco EBITDA supports greater debt-carrying and debt-paying capacity than otherwise possible.
(b) The economic life of the assets acquired (UST) quite likely exceed the average maturity of medium/long term debt. In other words, the assets acquired will continue to generate cash flow well after acquisition debt is repaid.
(c) Lenders’ willingness to finance (extend or rollover) is principally based on the strength and stability of cash generation from the tobacco business. Quite likely, additional consideration is given to the financial flexibility related to the (potential cash flow from the) SAB Miller investment and the leveraged lease portfolio.
(d) Altria has proven adept in the operation of a tobacco business and in the management of cash flow (read debt management) under similar leveraged circumstances. (None of the synergistic improvements envisioned in the acquisition are built in the estimates).

Value Drivers
The article points to free cash flow generation as a driver in the value of the stock. Other drivers are the expected growth in free cash flow and the cost of capital.
Altria’s dividend paying-capacity derives from its capacity to generate cash flow ---to support operations (net operations working capital and taxes), expansion (capital expenditures), and to pay for financing sources (debt and dividends), as discussed above.

In the final balance, the view that the dividend is safe and price appreciation likely seems like a reasonable value proposition.

Please do your own due diligence.

Sincerely,

Gino Verza

Disclaimer: I hold a long position in Altria’s common stock.

Buying Altria? Profit While Awaiting Improved Market Conditions

Sorry for the confusion.

I am saying buy now and get a nice dividend while awaiting for better market conditions (I have submitted a clarification in the wording in the article). .

I hold a long position in Altria.

ClickSoftware Technologies: Smallcap Value Investment

Hello vo2macs,

Thank you for the message.

The growth rate (g) in the PV formula is the growth rate in free cash flow (FCF). The computations cover different assumptions in g and in WACC. This model focuses on FCF. It does not address accrual earnings.

PV is the value of perpetual stream of FCF growing at g and discounted by (WACC – g). Both, g and WACC, apply in perpetuity.

It could be argued that g should be higher than 8% in view of the historical rapid growth in revenues. This argument is supported by the recent reselling agreement with SAP and the likelihood of continuing (or accelerating) rapid revenue growth.
An opposing view would say that in real life rapid revenue growth does not happen either in a straight line or in perpetuity, and that revenue growth does not always result in increased FCF. In fact, revenue growth connotes investments in Operating Fixed Assets, which drain FCF.

One could also argue that WACC should be lower than 10%, given the cash surplus in CKSW’s balance sheet and low beta. Again, arguments can also be made in opposition to this view.

A more optimistic scenario than the three quantified in the article would represent a fourth alternative ---Compute the PV based on $3.2 million FCF, 9% growth, and 10% WACC (and other inputs remaining unchanged). This results in $13.09, stock value.

The set of four alternatives provides a context to consider the attractiveness of CKSW as an investment relative to the market price of the stock. The current stock price ($1.99) would entail a set of assumptions (accepted by the market) that are at the pessimistic end of our four alternatives. If we believe that the market assumptions (and stock price) are too pessimistic, then there is a basis for an investment decision.

Importantly, the article discussed the reasonable level of risk inherent in CKSW’s business model. Implicit in such view is durability and staying power. Both, value and risk are important in the evaluation.

Best wishes in 2009.

Disclosure: I hold a long position in CKSW

Gino Verza