Investor Soup's  Instablog

With a title like this, you might think that Spartan Motors, Inc. (SPAR) is losing money...bleeding red ink, if you will.  That is not the case at all.  What was bleeding was Spartan Motor's market cap as the stock plunged.  The company was trading at a high of $11.06 in mid-July and their stock has plummeted to close at $5.47 on August 18th.

Spartan Motors, Inc. (www.spartanmotors.com) designs, engineers and manufactures custom chassis and vehicles for the recreational vehicle, fire truck, ambulance, emergency-rescue, military and specialty vehicle markets.

You can see from the chart just how precipitous the decline was:

The stock has a terrible response to earnings that were released om July 23rd.  I am reminded of the old axiom that certainly applied in Spartan's case:  "buy on rumour, sell on news".   The run up to earnings was impressive and the decline even more so.

Was the news that bad?  It honestly doesn't matter.  The market's reaction was telling.  Now, I believe, is the time to take another look at Spartan Motors.  From a chart perspective, the massive sell-off is over and volume has stabilized.  From a stochastics standpoint, the stock is oversold and starting to bounce off the bottom.  While not shown here, the stock is under accumulation again and the RSI indicates that the buyers are coming back into the stock.  While it is too early to tell, the MACD has made a slight upturn and is approaching the signal line.  Much has to happen before anyone could call this stock bullish, but the signs are pointing that way.

What about Spartan Motors itself?  I happen to be impressed with what they have done to reposition themselves in light of the current economic downturn.  What does a company do when one of its main lines of business (Recreational Vehicle Chassis) declines 92.3% year over year?  It focuses on other lines that are profitable and growing....emergency vehicles, special chassis and military vehicles.  The company has improved margins and remained profitable despite a near total meltdown in one of its key markets.  Spartan Motors still posted a quarterly profit in Q2 of .$5.4 million, roughly half of the profit for the same quarter last year but a profit nonetheless.

The balance sheet shows good strength:  Inventories are holding steady, liquidity and debt coverage is good and long-term debt is manageable.  In the July 23rd earnings release, John Sztykiel, president and CEO of Spartan Motors said

"This was a good quarter, particularly in light of the short-term challenges facing our markets.  Likewise, we're equally pleased with the consistent performance through the first six months of the year and believe our proven ability to flex the business and align costs with current business trends bode well for the future."

I couldn't agree more.  I believe that Spartan Motors is worth another look.

Disclosure:  No positions

I was doing research on another stock and looked up Exide Technologies (XIDE) as a "comp".  What I found was so interesting and compelling that I changed plans and decided to write about Exide instead.

Exide Technologies is a global manufacturer of lead acid batteries for transportation and industrial applications.  Operating in over 80 countries worldwide, Exide Technologies provides a comprehensive range of stored electrical energy products.  Here is the link to their website.

As you can see from the chart below, it has been on a very wild ride of late and that is what caught my attention.


Look at that "hockey stick"! Exide Technologies had dropped precipitously in the month of June bottoming out at $3.03 in late June.  A small rally in early July was wiped out in a few days and the stock dropped again, this time to $3.20.  Since then the stock has had very few down days on its march to topping out at $6.46 on August 7th.  The momentum has stalled and Exide Technologies stock has traded sideways in the past few days.

The chart indicates that the stock is "overheated" with both the RSI and Stochastics at or above key levels.  While the MACD is still bullish, the MACD histogram shows that the bullish trend is losing strength and momentum.  The volume has remained consistent over the past few days which is a good sign that the stock could rise from here.

The question that is begging to be asked is "what will happen to the stock....will it rise or fall?"

From a financial perspective, several conflicting storylines emerge.  The company has not posted an operating profit for the last two quarters.  Exide Technologies would have posted a small operating profit but for the approximately $70 million in restructuring charges, 

However, the balance sheet is relatively strong (a/o 6-30-09).  The company, which emerged from bankruptcy in 2004, seems to have avoided the debt trap that sunk Exide the first time around, but is still highly leveraged.  They had, until this past quarter, been aggressively paying down debt, but they still have over $650 million in L-T debt.  Cash and Equivalents are $121 million and the quick ratio is about 1:1.  A disturbing fact is that the company is subject to a great deal of interest rate risk.  Over half of their current debt structure is floating rather than fixed.

The best news (and the brightest hope for their future) comes out its alliance with Axion Power (AXPW), a development stage company that has patented the next generation of lead acid batteries called "lead-acid-carbon".  These batteries replace the toxic lead components of batteries and replace them with a carbon composite.  The new chemistry allows for less toxicity, lighter weight, greater power delivery rates and faster recharge rates.  It is Exide's intention to compete with Lithium-Ion and other storage technologies within its traditional markets and in the burgeoning "green" markets - industrial power, Military Power, Hybrid and Electric-powered vehicles.  As a further seal of approval, the joint venture between the two firms recently received stimulus money in the amount of $34.3 million to begin manufacture of this next generation battery. 

I am taking a "wait-and-see" attitude with Exide Technologies, The chart pattern has not declared itself yet.  It appears that all of the good news of late has been priced in to the stock.  If one is to trade this stock, it might be best to keep a very tight stop on it.  The stock appears to be at a "tipping point" and, if its past volatility is any indicator, it could go either way.

Disclosure:  No Positions

I always try to remain objective about the stocks that I write about and invest in.  I have experienced the pain of falling in love with a stock that blinds me to its warts and blemishes.  I must admit that I am very attracted to the stock that is the subject of this article....I am not in love yet, but if the stock recovers like I believe "Love" may be in the offing.

So much attention is being paid these days to "Green" technologies,  that one might expect we would be farther along towards energy independence.  Alas, we are not.  America and the World have had many "wakeup calls" over the years (OPEC embargoes, Shortages, high prices, Gas Crises,etc..).  It is only going to get worse with projections that global energy demand will increase by 45% between 2006 and 2030 — and that $26 trillion in power-supply investments will be necessary simply to meet those needs (International Energy Agency's (IEA) annual World Energy Outlook-2009).

That is the sad and scary truth, but the good news is that investment in alternative energy technologies (wind, solar, biofuels, hydrogen) have soared dramatically over the past few years.  Certainly green technology has a friend in the White House when President Obama campaigned on the promise to spend $150 billion over the next 10 years to support alternative energies, like wind and solar.

One company that believes that it has a viable alternative energy technologiy is Ocean Power Technologies, Inc (OPT).  The company is no flash in the pan.  They can trace their roots back to 1994 when Dr. George Taylor and the late Dr. Joseph R. Burns created a company whose vision was to extract the natural energy in the sea.  The company has pioneered the technology to create electricity from wave energy.

I do not need a degree in fluid dynamics or mechanical engineering to understand the power of the sea.  The kinetic energy present in wave motion of the sea is limitless and constant.  That is the fact that Ocean Power Tecnnologies is capitalzing on.  Ocean Power Technologies focuses on its proprietary PowerBuoy® technology, which captures wave energy using large floating buoys anchored to the sea bed and converts the energy into electricity.  A more complete understanding of Ocean Power Technologies can be gleaned by visiting its website:  www.oceanpowertechnologies.com

The challenges facing Ocean Power Technologies have less with "can you do it" , but rather "can you do it cost-effectively".  The major hurdles facing any sea energy project has been the cost per kW of the energy created and the amount of energy created.  Typical wind farms on the drawing boards currently usually run from between 200 and 300 Megawatts.  A typical OPT project might max out at 10 megawatts and currently is not cost effective when compared with wind or solar.  Experts indicate that it might be as much as 10 years before sea energy could be price compeititve with those other technologies.. 

While the future is unknown for OPT, there are several positive things that I gleaned during my study of the company, as follows:

**   The company appears to have the financial resources to bring their technology to commercialization with their first full-scale commercial project slated to be delivered in 2010.
     *** The company has over $41 million in cash and equivalents
     *** Quick ratio of 8.5:1
     *** The company has virtually NO LONG TERM DEBT
     *** At the current burn rate, the company has several years of cash in the bank
     *** The company has current revenues albeit operating at a loss
**   The company holds U.S. and International patents on the most crucial aspects of their technology
**   The company appears to be the technology leader in its field and has beta sites currently in operation.

While the chart is not OPT's friend right now, it could turn quickly.  The stock is  bearish with the MACD line well below the zero line and not indicating any strong upwards trend.  OPT is trading along the bottom of the Bollinger bands and appears to be rebounding from its oversold condition.

Ocean Power Technologies, Inc. is not the only answer to the World's energy problems, but it deserves a place in the pantheon of energy technologies that we hope will deliver the needed energy.  It has a number of significant hurdles to overcome before its future is secured.  As a short-term stock play, however, Ocean Power Technolgies, Inc. bears watching. 

Disclosure: No Positions

I was doing my nightly stock screens and I came across Electro Rent Corporation (NasdaqGS: ELRC).  The name jumped out at me because of, oddly enough, my brother.  He worked in sales for Electro Rent about 15 years ago and enjoyed the experience tremendously.  He has since moved on, but I have always remembered the name.

Electro Rent Corporation is one of the world's largest providers of test and measurement equipment under either rent or lease.  The company, founded in 1965, has developed a worldwide sales and service organization and a prominent place in the industry. 

As a dyed-in-the-wool chartist, I must admit that at present Electro Rent Corporation's chart does not look very appealing.  Many of the indicators (see below) indicate that the stock is in a bearish mode (MACD, Stochastics and RSI).  The stock is trading near the bottom of the Bollinger Bands and while the stock rallied slightly on Friday, the direction still seems down.



However, as a recovering CPA, their financials present a different story altogether.  I still cannot help but look at the financial statements of a company that I am analyzing.  The short-term trading that I practice (no holds over 3 months), where so much of a stock's movement is based on news or its chart, often overlooks fundamentals.  It was Electro Rent's fundamentals that convinced me that this stock is worth taking a look at.  Charts and trends can reverse quickly, but strong financials like Electro Rent's are the work of strong management.

The financial highlights:

• Cash and cash equivalents of $72 million (QUICK RATIO OF 1.7:1)
• Total shareholders' equity of 228.8 million (or $9.55 per share)
• NO LONG TERM DEBT
• Revenues of $144 million (only off 9.7% from previous year end)
• Net income of $11.8 million (44% drop from previous year end)

The drop in net income might be alarming in and of itself, but the company has instituted stringent cuts in expenses and compensation company-wide.  In this economic environment margin creep is inevitable, but as sales pick up, Electro Rent Corporation should benefit greatly from the drop in SG & A.

Electro Rent Corporation is a company whose chart is against it and, yet, I still think it is worthy to be put on any trader's "radar screen".   The company has demonstrated the ability to manage during difficult economic times (and turning in some very respectable numbers).  Once the sellers are out of the stock and the chart turns, it could deliver some strong gains.  Electro Rent Corporation is here for the long term and could be a strong gainer once the market becomes aware of it again.

Disclosure:  No postions

It is hard to argue with the assumption that companies like Advance Auto Parts are benefitting from the bad news in the auto industry.  With 3,423 stores, at last count, they are a likely destination for the do-it-yourselfer and small garage mechanic.  Just like Pep Boys (which I wrote about over a month ago), Advance Auto Parts has seen its stock climb significantly over the past 6 months making it onto several "hot stock" lists.

Several positive things stand out about Advance Auto Parts: 

• They are profitable both on a quarterly and annual basis.  In the first quarter of 2009 ended April 29th. revenues increased 10.3% over the prior year's quarter.  Earnings rose 14% to $94MM.  Earnings per share increased 13 cents to 98 cents over same period.
• Moody's recently lifted its debt rating on Advance Auto Parts.  They cited Advance's solid operating cash flow, which the ratings agency said should be more than sufficient to meet all working capital and capital expenditure requirements, with only minimal usage expected under a $750 million unsecured revolving credit line.
• Institutions own an amazing 98% of the shares in the company and sales have been minor.  That is, in an of itself, amazing.  So many instutiions have fire-saled shares of portolio companies for liquidity purposes, the lack of sales activity by institutions of Advance's shares seems to almost be an endorsement.

Some things to watch:

• The chart seems to indicate that Advance Auto Parts might be ready to "take a breather".  In the last few days, the stock has fallen off from its 52-week high on July 30th, 2009 of $47.41 to around $45.  The stock has increased over 40% in 2009 alone.
• The Stochastics and RSI are on the decline indicating distribution and, I would surmise, profit taking.
• The MACD has turned bearish with the signal line crossing over the MACD line.

The other concern that I have about Advance is its cash and liquidity.  Even though Moody's lifted the outlook on their debt and they have untapped borrowing capacity under their revolving line, I am concerned to see that they only have $51MM in cash.  Operating margins in Advanced's business are very tight (typically below 10%).  Any erosion in margins or slow turns on inventory could negatively affect their ability to cover debt service.  With a quick ratio of .09:1 (the books say a 1:1 is the optimal ratio) the company has very poor liquidity.
Advance Auto Parts is still a company that is a "Buy" to me.  They may continue to pull back in the near term, but the long-term prospects look posiitive.  The cash position has increased 4 quarters in a row and with the uplift in debt rating, Advance Auto Parts looks like a keeper.

Disclosure:  No positions

On July 10th of this year, Broadcom ended its efforts to purchase Emulex Corporation after Emulex's board rejected their final offer.  At  $11/share, the offer reprsented a small premium over its then asking price and obviously was not enough of an inducement for Emuliex to give up its independence

Perhaps Paul Folino, executive chairman of Emulex, said it best, in the formal statement turning down Broadcom,

"We unanimously believe Emulex will deliver significantly more value than Broadcom's revised offer through the company's rapidly developing converged networking business and solid execution in our host server and embedded storage markets."  

So, Emulex is still single and free.  Will Mr. Folino and the Emulex employees going to be able to deliver on that "promise' for its shareholders?  I tend to agree with Mr. Folino.  I actually believe that will be better for its shareholders in the long run.  To my mind, Broadcom was trying to bargain hunt with a company that didn't see itself as a bargain.  And, if you look at its financials you will see just what I mean.

For the third Q ended 3-29-09, Cash was $302MM and long term debt was ZERO.  The company has slimmed down inventories over the past few quarters and reported inventory turn of 12.8 for the 3rd Q (very strong in my opinion).  Emulex reported gross margins of 60% on a GAAP basis which means that they have mitigated margin creep in this difficult economy.  And althought the company posted a GAAP loss of $8.5MM, it increased cash by $17.5MM.

Emulex enjoys a strong position in its markets and, according to the company, is adding incrimental market share over its competitors.  Sales in the 3rd Q were down almost 39% over the previous year's quarter.  That would be worrisome if that wasn't the story for all of its customers and compeitors. 

To look at Emulex's chart, you will see that has built strong support in the $9 range and it is neither overbought or oversold according to the RSI and Stochastics.   The MACD line has turned bullish, but is still below the zero line and should be watched. 

The wildcard comes on Thursday, August 6th when Emulex issues its 4th Q financial results via a conference call scheduled for 5 p.m. EST.  To access the call go to the Emulex website or click on the following link:  http://investor.emulex.com. 

Will Emulex be able to deliver or exceed its enhanced guidance for the 4th Q and the year?  I do not have a crystal ball, but I am inclined to believe it.  The picture that I have tried to paint about Emulex is a company that has strong fundamentals, excellent market share and is poised to grow when the recession turns around.  Any earnings surprises or other good news will make this stock jump!

Disclosure:  No positions