You make an important point and I agree with you -- especially when the firms being acquired are technology firms. But in the this case, we are talking about an accounting/tax/employee services firm which is appending additional small operations onto itself. Those small acquisitions come with clients and consistent revenue. I understand the view point, and I especially understand that a lot of firms manipulate, so to speak, operation cash flow to suit their purposes (just like GAAP net income). However, CBIZ does not *need* the acquisitions to maintain its current level of operations. If it did, in my opinion, then it would have to be subtracted as you suggest. (For instance, Dell's free-cash-flow calc would need to take into account acquisitions, imho.)
I am trying to figure out the cash earning power of the corporation on the assumption that that is the best way to measure the value of the security. So I disagree with your last sentence, specifically the word 'must':
"Again, if the company must make acquisitions every year then those acquisitions should be treated as capex."
Because CBIZ does *need* to make the acquisitions, it just thinks doing so is good business. And it probably is given the artificial interest rate environment. Thanks for the comment Buffett Junior.
Anyone know if the PE 10 uses GAAP earnings? If so this analysis might have some serious difficulties given how accounting rules have changed overtime. (E.g., stock based compensation expense.) Also, the author doesn't take into account the manipulation of interest rates -- which, while artificial, makes stocks look a lot cheaper. Then again, the whole world is in a economic twilight zone because of global Keynesianism and Chinese economic policy (to name just two oddities of our time).
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We are assuming fishers quantity theory of money is correct, at least in terms of the mathematics used. That might be a problematic assumption. And I shouldn't say it, but economists cannot even agree on what counts as money (and if you can't count it, you can't put it into an equation -- garbage-in, garbage-out). So... making claims about reality *because* of a mathematical theory is a problematic approach. Human beings are not particles and therefore economics is not physics and must be treated with different methods.
If we were rational and always had all the relevant information, mathematics in economics, such as the quantity theory of money or the "equation of exchange," would be a way of describing economic phenomenon. As it is, mathematics has corrupted the entire discipline.
The credit agreement lowered interest rate on the term loan ($375mm par) by some 1.25% -- or cash interest expense will be lower by about $6.5mm annually.
It also has another 0.25% step down if the company can achieve a "Consolidated Funded Indebtedness to Consolidated Operating Cash Flow" ratio of less than or equal to 4.50 to 1.00.
Obviously, this is just about call options using AIQ but it seems that you didn't look at the balance sheet. You would see that a large portion of its assets are intangibles with definite lives and goodwill. When the goodwill was created (through acquisitions as you know) they assigned some of the goodwill to intangible assets (for instance, customer contacts), which they then decided to give a specific length of life to, and which they then, as we know, amortize. That is one reason company is running at a GAAP loss -- due to the amortization of their invented intangibles (which might very well describe some economic reality but might just as probably not describe any economic reality). Anyways, I would argue that they are not really running at a loss -- for example, FCF is more than the entire market capitalization of the company.
Anyways, I don't like being negative, but had you seen this you would realized that a lot of your data input is way off. Also, the CAPM pricing model is, frankly, a huge joke (besides, I think Sharpe has effectively disowned it -- at least in its original form). Also, sorry to say, price variance is not a measure of risk (as the greek letter beta is meant to imply).
Due to the above factors your valuation of the equity at about $70 million is highly improbable, particularly given you haven't really looked at the financial statements. $70 million is a steal -- this company is on a fire sale.
Anyways, I am writing a full article about this company, I'll append a link to it once its up. Thanks for paying attention to the company, but you should probably leave the CAPM pricing model in the class room since its basically a joke played on finance majors.
I agree with Packer -- the options and the shares are both below intrinsic value.
Variant view? That Hackett will loose whatever competitive advantage it has because of poor management and therefore will not earn as much in the future as it has in the past.
You ask: "But what has pushed this stock down and caused individuals to sell? There has to be risks to the company, which when overblown could send the stock tumbling as it has."
That is probably true but it is not necessarily true. As to your question, Hackett announced 3rd quarter guidance which was below analyst estimates on August 7th. Or, put as clearly as possible, some persons paid to follow Hackett Group decided that Hackett should have revenue of $62 million in the 3rd quarter of 2012 -- but Hackett announced that it thought it would have revenue of $54.0-$56.0 million. It later missed its own estimates and had revenue of only $52.3 million.
That is the gossip anyways but I don't put much stock in analyst forecasts myself: http://reut.rs/12rkxQF
Overtime you will not need to invest as much cash from from operations in the business. Basically, if capital expenditures are lower than depreciation overtime GAAP net income understates cash earnings. Also, the less assets you have, all else being equal, the greater return on capital employed in the business. Its a little counter intuitive, especially if you're into Graham style value investing (where tangible book value takes on increasing levels of importance). Message me if you'd like a more thorough explanation, I am more than willing to supply it.
This is a funny conference call. I like the CEO Zsolt -- and I particularly like this part:
“And so I looked at the last 10 years our [analyst] coverage, and other than occasional guys jumping in and jumping out and coverage doing an offering, we probably had about 5 or 6 companies that covered us. A couple of them dropped out primarily because they tried to understand our business and looked at the material aspect and looked at the kind of valuation that I was thinking, but the problem became that we're a one-off company and the amount of work it takes to do research on a company that's unique was too much trouble. And so to some -- couple of people that I talked that have the potential to represent our position, well, had to drop out.
Then, of course, we got some interesting stuff in the last 2 years, and I want to start off with early 2011, our stock jumped to about $16 a share. I think what ticked it off was that we looked like we had some real good potential business. And then we had one of our analysts, a guy by the name of Steve Dyer from Craig-Hallum, went on CNBC TV on a Squawk Box program. And I won't bore you with the funny episode that the whole thing was, but ultimately, was asked since he's covering our stock and signals to know about Zoltek, he essentially told the world that we make a carbon fiber, which is lightweight, and it prevents the wind turbines from tipping over. And so I asked him to drop the coverage for us, and he finally did in August. He went out in a flaming glory, downgraded our stock and put them out to us [ph] when 2 years included in [indiscernible] what the hell he was talking about.
So then, early 2012, we again recovered because a great first quarter earnings is unusually good, of course, and pipes up a guy from Needham, and he's been with us before and -- when he was at ThinkEquity. And Michael Lew, and he just knocked us for absolutely no reason, no knowledge, no anything except he just wanted to destroy our stock price, which he did. And it went from $14, and that's been a steady decline into the $6 range. And then he comes around for no apparent reason whatsoever, about a couple months ago came out with a report, go on about all of our other applications and everything, no -- again, no rationale, no facts, no nothing. But this time, he sends out a positive thing. But he believes, I guess, that he should or able to control the price. So when it goes down a little bit, he gives us a pat on the back; and if it goes up, then he knocks us down for no apparent reason.
So that leaves 3 companies that cover us. And I think they're doing the best that they can. But unfortunately, we're pigeonholed into the wind turbine business and the U.S. wind turbine business, and in general, all the wind turbine business, including glass blades, so probably misrepresenting our ability to grow and our future. And then we constantly get compared to Hexcel, which could not be any different, any more different than any company.”
Comic stuff. Not so sure how much I like Zoltek's reliance on Vestas (46.5% of fiscal 2012 revenue) however. Vestas is definitely suffering continued losses despite being a major playing in the SUBSIDIZED wind industry (its bad when you can't make money in a subsidized market, imho). As Buffett put it, "Windmills are cigar butts, believe me."
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Technically speaking, if it is illegal it will be shutdown -- and therefore it would be worth nothing, just like Ackman is hoping. Money would then also stop flowing up the pyramid... bond holders might be able to get some of their money back but shareholders would probably be stuck with a loss (there is $500 million in debt at 9/30/2012 and tangible book is $0).
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Thanks for the comments. I am wondering if you can elaborate and cite customers for us.
Specifically, comment on this: "This is a company that acquires customers who are struggling with their internal management and unstable resources. In other words, 'a mess,' and KTCC is able to win business by offering to build their products for pennies on the dollar, compared to some of their competitors."
I am not sure, we will see -- I am betting on it to a small extent. For instance, I am long WNR who (relatively speaking) gets the largest advantage from the persistence of the Brent-WTI spread (although WNR is getting crude at a discount to midland prices -- which are at a discount to Cushing prices).
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"Using a simplified discounted cash flow valuation, with a discount rate of 12%, a free cash flow growth rate of 10% for the next ten years and a terminal growth rate of 4%, I arrived at a target price of $22.11 for WBSN, reflecting a valuation potential upside of 34%."
TTM free-cash-flow is about $48 million on a market capitalization of $547 million -- making the company have a free-cash-flow yield of 8.7%, which is not so bad. Or even better FCF in 2011 was about $70 million --
The only problem I have is that FCF is on the decline. So I think that a metric like 10% FCF growth over the next ten years is way to optimistic. Revenue isn't even growing at that rate like that.
CBIZ: Stable Recurring 15+% Free-Cash-Flow Yield [View article]
I am trying to figure out the cash earning power of the corporation on the assumption that that is the best way to measure the value of the security. So I disagree with your last sentence, specifically the word 'must':
"Again, if the company must make acquisitions every year then those acquisitions should be treated as capex."
Because CBIZ does *need* to make the acquisitions, it just thinks doing so is good business. And it probably is given the artificial interest rate environment. Thanks for the comment Buffett Junior.
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If we were rational and always had all the relevant information, mathematics in economics, such as the quantity theory of money or the "equation of exchange," would be a way of describing economic phenomenon. As it is, mathematics has corrupted the entire discipline.
Just my two cents.
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The credit agreement lowered interest rate on the term loan ($375mm par) by some 1.25% -- or cash interest expense will be lower by about $6.5mm annually.
It also has another 0.25% step down if the company can achieve a "Consolidated Funded Indebtedness to Consolidated Operating Cash Flow" ratio of less than or equal to 4.50 to 1.00.
The revolving credit agreement didn't change.
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Anyways, I don't like being negative, but had you seen this you would realized that a lot of your data input is way off. Also, the CAPM pricing model is, frankly, a huge joke (besides, I think Sharpe has effectively disowned it -- at least in its original form). Also, sorry to say, price variance is not a measure of risk (as the greek letter beta is meant to imply).
Due to the above factors your valuation of the equity at about $70 million is highly improbable, particularly given you haven't really looked at the financial statements. $70 million is a steal -- this company is on a fire sale.
Anyways, I am writing a full article about this company, I'll append a link to it once its up. Thanks for paying attention to the company, but you should probably leave the CAPM pricing model in the class room since its basically a joke played on finance majors.
I agree with Packer -- the options and the shares are both below intrinsic value.
The Hackett Group: 15%+ Earnings Yield, 19%+ FCF Yield [View article]
You ask: "But what has pushed this stock down and caused individuals to sell? There has to be risks to the company, which when overblown could send the stock tumbling as it has."
That is probably true but it is not necessarily true. As to your question, Hackett announced 3rd quarter guidance which was below analyst estimates on August 7th. Or, put as clearly as possible, some persons paid to follow Hackett Group decided that Hackett should have revenue of $62 million in the 3rd quarter of 2012 -- but Hackett announced that it thought it would have revenue of $54.0-$56.0 million. It later missed its own estimates and had revenue of only $52.3 million.
That is the gossip anyways but I don't put much stock in analyst forecasts myself: http://reut.rs/12rkxQF
The Hackett Group: 15%+ Earnings Yield, 19%+ FCF Yield [View article]
Overtime you will not need to invest as much cash from from operations in the business. Basically, if capital expenditures are lower than depreciation overtime GAAP net income understates cash earnings. Also, the less assets you have, all else being equal, the greater return on capital employed in the business. Its a little counter intuitive, especially if you're into Graham style value investing (where tangible book value takes on increasing levels of importance). Message me if you'd like a more thorough explanation, I am more than willing to supply it.
The Hackett Group: 15%+ Earnings Yield, 19%+ FCF Yield [View article]
Zoltek Companies Management Discusses Q4 2012 Results - Earnings Call Transcript [View article]
“And so I looked at the last 10 years our [analyst] coverage, and other than occasional guys jumping in and jumping out and coverage doing an offering, we probably had about 5 or 6 companies that covered us. A couple of them dropped out primarily because they tried to understand our business and looked at the material aspect and looked at the kind of valuation that I was thinking, but the problem became that we're a one-off company and the amount of work it takes to do research on a company that's unique was too much trouble. And so to some -- couple of people that I talked that have the potential to represent our position, well, had to drop out.
Then, of course, we got some interesting stuff in the last 2 years, and I want to start off with early 2011, our stock jumped to about $16 a share. I think what ticked it off was that we looked like we had some real good potential business. And then we had one of our analysts, a guy by the name of Steve Dyer from Craig-Hallum, went on CNBC TV on a Squawk Box program. And I won't bore you with the funny episode that the whole thing was, but ultimately, was asked since he's covering our stock and signals to know about Zoltek, he essentially told the world that we make a carbon fiber, which is lightweight, and it prevents the wind turbines from tipping over. And so I asked him to drop the coverage for us, and he finally did in August. He went out in a flaming glory, downgraded our stock and put them out to us [ph] when 2 years included in [indiscernible] what the hell he was talking about.
So then, early 2012, we again recovered because a great first quarter earnings is unusually good, of course, and pipes up a guy from Needham, and he's been with us before and -- when he was at ThinkEquity. And Michael Lew, and he just knocked us for absolutely no reason, no knowledge, no anything except he just wanted to destroy our stock price, which he did. And it went from $14, and that's been a steady decline into the $6 range. And then he comes around for no apparent reason whatsoever, about a couple months ago came out with a report, go on about all of our other applications and everything, no -- again, no rationale, no facts, no nothing. But this time, he sends out a positive thing. But he believes, I guess, that he should or able to control the price. So when it goes down a little bit, he gives us a pat on the back; and if it goes up, then he knocks us down for no apparent reason.
So that leaves 3 companies that cover us. And I think they're doing the best that they can. But unfortunately, we're pigeonholed into the wind turbine business and the U.S. wind turbine business, and in general, all the wind turbine business, including glass blades, so probably misrepresenting our ability to grow and our future. And then we constantly get compared to Hexcel, which could not be any different, any more different than any company.”
Comic stuff. Not so sure how much I like Zoltek's reliance on Vestas (46.5% of fiscal 2012 revenue) however. Vestas is definitely suffering continued losses despite being a major playing in the SUBSIDIZED wind industry (its bad when you can't make money in a subsidized market, imho). As Buffett put it, "Windmills are cigar butts, believe me."
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Specifically, comment on this: "This is a company that acquires customers who are struggling with their internal management and unstable resources. In other words, 'a mess,' and KTCC is able to win business by offering to build their products for pennies on the dollar, compared to some of their competitors."
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TTM free-cash-flow is about $48 million on a market capitalization of $547 million -- making the company have a free-cash-flow yield of 8.7%, which is not so bad. Or even better FCF in 2011 was about $70 million --
The only problem I have is that FCF is on the decline. So I think that a metric like 10% FCF growth over the next ten years is way to optimistic. Revenue isn't even growing at that rate like that.