John Appel

Jamba's New CEO Providing a Boost

Somebody asked me if my price targets reflect my view of the company’s “fundamental” or M&A value. The answer is a definite “no.” In an M&A transaction, I would think the company would fetch closer to 4x store-level cash flow, or 7x contribution margin, each of which implies about $3.00 per share today (and hopefully a lot more in a few years).

XL Capital: Short Interest Poised to Drop, Will the Stock Pop?

I have been asked if I expect a short squeeze. The short answer (pun intended) is no. In general, if a short sale is a hedge of a future purchase of new issue shares, covering the short is unlikely to move the stock price because the short can be covered by new shares rather than market purchases. In the case of XL, it is hard to know what amount of short interest is related to hedges, and if the unwind of hedges will result in a need to cover short sales that is less than, equal to, or greater than the 11.46 million new shares to be issued.

The more important thing fundamentally is that the 7% units increase the company's equity capital by $745 million, which is good (although book value per share increases only slightly because of the increase in shares). If the related notes are remarketed successfully, total capital increases by $745 million as well, which is even better.

Jamba Juice Should Bear Fruit by Mid-2009

The suspension of the Nestle licensing deal does not affect my analysis. The forecasts did not include any material revenue from the Nestle relationship. -JA




On Dec 19 09:50 AM spincus614 wrote:

> Mr. Appel- I don't see how you can be right, especially now that
> the Nestle deal is (at least temporarily) kaput. Did you know about
> the production problems and shutdown when you wrote your this posting?
> If not, how does the suspension of the Nestle program affect your
> analysis?

Reinsurer Stocks: A Fear-Driven Market Creates Opportunity

InsuranceDude, I agree that ORH has a very conservative fixed income portfolio, but the “target” price is driven more by its growth prospects. The figures for ORH are pro forma for $150 million of additional share buybacks. The “target” price is 0.9x est. pro forma book value of $42/shr. The P/B multiple is driven mainly by the headwinds ORH faces to both top-line and bottom-line growth. Casualty insurance is a large part of the business today (51% in Q3). The general casualty market is soft/competitive and is expected to remain so (expectations for a hard market are mainly for property cat, professional liability, and certain specialty lines). ORH’s casualty business has been shrinking for several years, leading growth in total GPW to be negative since 2004. Management has identified professional and specialty lines as a priority for growth, but ORH is not a big player in those segments yet. Meanwhile, earnings continue to be impacted by adverse prior year development. ORH has revised reserves for losses and LAE upward every year for the last 9 years (see 10-K page 21). This contributes to combined ratios that are the worst of the group. In ’07 and YTD ’08 this was offset by gains recognized on total return swaps and credit default swaps. However, the total return swaps were taken off in October. Given these impediments to earnings growth, it is hard to justify a higher valuation. A few quarters of premium growth and mid-90s combined ratios would change my view considerably.


On Nov 26 08:42 AM InsuranceDude wrote:

> I forgot one other thing--a massive share buyback program that is
> gathering up shares at a large discount to book. It's all about increasing
> shareholder value!

Reinsurer Stocks: A Fear-Driven Market Creates Opportunity

CORRECTION - The article states incorrectly that ACE's combined ratio does not include its reinsurance business. The ratio does include the Global Reinsurance segment. It is the Life Insurance and Reinsurance segment that is excluded. -JA

JDA's Retrade Is Justified

Supporter - I should have said, “I would not pay” instead of “no acquirer would pay.” I consider book/tax differences in the context of the transaction as a whole, and usually have found that favorable differences are offset by other, unfavorable, differences resulting from the acquisition. As for NOLs, since IRC sect. 382 limits annual use to the product of the company value and the long-term muni bond rate, the PV is very small. If the NOLs arose from previous acquisitions, they may already be subject to separate sect. 382 limits. It is worth noting that in its latest 10-Q, ITWO states, “We have open tax years for the U.S. federal return back to 1992 with respect to our net operating loss (“NOL”) carryforwards, where the IRS may not raise tax for these years, but can reduce NOLs.” One might also consider that ITWO’s Strategic Review Committee mentioned in its 5/7/08 call that, “Under most stand-alone scenarios, it is expected that the company would not begin to utilize the NOLs until at least 2012, though we must point out that this depends entirely on the company’s ability to generate additional U.S.-based taxable income. Under these scenarios, the net present value of the cash savings attributable to NOLs could be significantly less than the perceived nominal value. So while the SRC believes that the NOLs are important and have value going forward, the ultimate realizable value is most likely less than many people might believe.” After factoring in uncertainties re timing and likelihood of realization, I generally consider the probability-adjusted PV of NOL carryforwards to be negligible, and better viewed as a potential cushion to offset downside risks than as an asset worthy of additional cash consideration. I applied this logic to the JDAS-ITWO deal and stand by it.


On Nov 10 08:13 PM supporter wrote:

> The book/tax differences do have value to an acquiror because there
> are no limitations on those assets under a change in control. ITWO's
> strategic review committee called this fact out on their May 2008
> update call. The NOL usage has an annual limitation of the Treasury
> rate multiplied by the purchase price of the company. So in this
> case, if JDAS purchased ITWO for $345m and the treasury rate is 5%,
> then it could use $17m a year, which would save JDAS about $6m in
> cash taxes per year. The JDAS CFO even called the annual cash value
> of the NOL's on the acquistion cal. So if you are going to continue
> publishing valuation cases on the internet, please get your facts
> straight before doing so.

JDA's Retrade Is Justified

- No acquirer would pay for book/tax differences or NOLs because they can't use them post-acquisition in a stock purchase deal.
- The market values each of ITWO and JDAS at about 4x EBITDA. IF JDAS were willing to pay $11.50/shr for ITWO, it would be a significant premium to what ITWO is worth today. I have no idea if JDAS still wants to do the deal, or what price they would pay.
-The 4x EBITDA for ITWO is probably understated because it is based on results for the 12 mos ended 6/30. As of that time, sales and earnings were trending down, so it would not be surprising if Q3 is more of the same. Surely JDAS knows what ITWO's Q3 looks like. The recent downward revision of the minimum EBITDA covenant on the acquisition debt is probably a directional indication. Since JDAS had a great Q3 and also reaffirmed its guidance for the full year, it seems unlikely that it was the JDAS side of the pro forma EBITDA that triggered the need to revise the covenant....


On Nov 10 11:43 AM supporter wrote:

> I agree with contrahour. Pro forma for at least $15m in synergies
> that JDAS would achieve, ITWO's ebitda would have been $60m. Also,
> ITWO has a significant book/tax difference asset that amounts to
> approximately $170m and a $1.8B NOL. Together, these tax assets
> probably have a NPV of about $100m. So, adjusting ITWO's purchase
> price of $345m for the $100m of value in the tax assets and dividing
> the new number of $240m by $60m of PF EBITDA, then JDAS really only
> paid 4.0x for ITWO. If people think $11.50 is a reasonable price
> for ITWO, then that multiple works out to be 2.7x.... which is obviously
> ridiculous.

JDA's Retrade Is Justified

The SAP payment is included in the enterprise value calculation for ITWO as part of the $222 in cash. The article has a link to the calculations at johnappel.wordpress.co.../
ITWO has $143MM of unrestricted cash on its balance sheet as of 6/30. Add $79MM and you get $222. This is the same figure JDAS has used in its presentations.


On Nov 10 08:38 AM Contrahour wrote:

> Your analyis gives ITWO no credit for the $80 million payment ITWO
> will recieve from SAP in regards to its out of court settlement.
> ITWO should receive this payment in the current quarter.
>
> If you include this amount, it seems JDAS is clearly trying to steal
> ITWO. The original deal was already at the low end of the valuation
> range and to lower it any more would not be acceptable. If JDAS
> wants to lower the price, ITWO should take the $20 million and move
> on. It can survive just fine without JDAS.