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John Leonard, CFA

 
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  • CCA Industries Is A Classic Value With A Catalyst Special Situation [View article]
    The negative reaction from the 2Q14 earnings release this morning (stock down 9%) does not alter my bullish stance for the reasons mentioned below. If anything, the pullback to the ~$3.5 breakout area provides an attractive entry point for new investors (or for existing investors to add to their position).

    First, the large net loss would be less concerning if investors read through the entire 10-Q rather than just skimmed it as only focusing on the headline numbers fails to provide the context necessary to gauge the impact on a go-forward basis.

    For example, the loss was due primarily to returns for the Gel Perfect color nail polish and Mega-T dietary supplement product lines. However, management said it is discontinuing the Gel Perfect line (effective the end of 2Q14) due to poor sales. As management has effectively “lanced the boil”, this line will no longer be a drag on performance. This decision to focus on the core/strongest brands and cut off the weakest again highlights the shareholder friendly decisions made by management (the first was the outsourcing decision). As a result, I would not be surprised to see management exit the Mega-T line within the next year if there are not signs of stabilization.

    Just to put the strength of the core business in context, excluding Gel Perfect and Mega-T, net sales actually increased 22% in 2Q14, driven primarily by the two core product lines (skin care and oral care), which accounted for 82% of “adjusted” net sales (excluding Mega-T).

    Second, the turnaround on the cost side is still track as CAW is about halfway through the workforce reduction (expected to be complete by October 2014) yet has already paid 83% of the estimated severance cost of ~$531,000, which was reduced by ~$17,000. SG&A decreased 16% primarily due to lower shipping costs (as part of logistics outsourcing to OHL) and personnel costs as a result of the previously mentioned workforce reduction.

    One area of concern is the ~50% decrease in working capital to $6.6 million and lower cash position (only $2 million). However, CAW is currently negotiating with a lender for a LOC. This, along with the outsourcing savings, continued strength in the core product lines and discontinuing of the Gel Perfect line should generate sufficient cash to fund operations.
    Jul 16 05:35 PM | Likes Like |Link to Comment
  • Fusion Telecommunications Is Not Given Enough Credit For Its Transition [View article]
    If anything, I see this as creating some short term pressure on the stock as this sale does not negate the transformation.
    Jul 14 01:36 PM | 1 Like Like |Link to Comment
  • The Good Times Should Get Even Better For Good Times Restaurants [View article]
    I am not that concerned as there is a huge difference between a proposal and an actual law that has been passed and survived legal challenges.
    Jul 14 08:14 AM | Likes Like |Link to Comment
  • CCA Industries Is A Classic Value With A Catalyst Special Situation [View article]
    Just wanted to provide a few follow up thoughts re the price action and recent resignation of Sardar Biglari and Philip Cooley from the board on 7/7/14.

    Re the former, although the stock came within 4% of my 44% return target on the first day, I am hesitant to count this as a “win”. With that being said, this price action highlights two takeaways. First, the large one day gain and pullback to strong technical support (20 DMA; low of day for breakout) provides another asymmetric opportunity as the investment thesis is still intact and as a result the stock should “return” to the original price target. Second, and related to the previous point, the breakout on heavy volume and pullback on light volume is textbook bullish action.

    Re the latter, the fact that their resignations “were not the result of any disagreements with the Company” (a direct quote from the 8-k) is encouraging. Again from a price action perspective, not only has the stock recovered the entire modest drop (from the close on 7/7 to the low on 7/10) following the announcement but the stock is now trading above the closing price from before the announcement. Moreover, on 7/11/14 the stock rose 3% on >2x the previous day's volume.

    This inability to fall on seemingly negative news is a significant “tell”. While we don’t know the specific reasons for the resignations, some investors may take this to mean they are less constructive on the company going forward and/or that Mr. Biglari will sell his stake. However, this threat (as far as the stock is concerned) is low for two reasons. First, as discussed in-depth in the article, it appears they are leaving “at the trough” given the expected turnaround. Second, if the market was truly worried about Mr. Biglari selling his stake, the stock would have sold off on heavy volume due to the threat of a large share overhang. However, the slight increase in the stock since then implies either no significant selling or that there are willing buyers (who believe in the turnaround) ready to step in to absorb any supply.
    Jul 12 09:03 PM | Likes Like |Link to Comment
  • Fusion Telecommunications Is Not Given Enough Credit For Its Transition [View article]
    I believe this is less of a concern on a go-forward basis and that the current growth rate should not be assumed to continue indefinitely for four reasons.

    First, the rate of increase should taper off as FSNN shifts from an acquisition-led growth strategy to one that relies more on organic growth (e.g. no “acquiring” a new cost center and no M&A expenses). Second, revenue growth should significantly outpace SG&A, which would result in it accounting for a lower percentage of revenue. Third, FSNN has not fully achieved the meaningful synergies from the Broadvox acquisition. Fourth, the low churn rate results in sustainably lower customer acquisition costs.
    Jul 12 07:23 PM | 1 Like Like |Link to Comment
  • The Good Times Should Get Even Better For Good Times Restaurants [View article]
    The slowdown in growth (from high double digit to low double digit) was expected and should represent a “floor” in terms of growth for the next several quarters (at a minimum) as the CEO noted that they are only halfway through remodeling older stores. However, GTIM is not being given enough credit for maintaining this strong pace for two years.

    The spike in commodity costs (which I discussed in a previous comment) is a concern however this risk is mitigated by the price increase and the fact that these costs should come down (every commodity in a strong uptrend seems like it will go to the moon until it doesn’t – see the recent drop in oil). As a result, the overall hit to gross margins should be minimal. Management projected operating margin expansion for 3Q and 4Q, which provides further encouragement.

    Re the stock price, in the short term (over the next few days) I see the stock rebounding after the bullish reversal yesterday. The longer term uptrend is still intact.
    Jul 10 07:37 AM | Likes Like |Link to Comment
  • Scott's Liquid Gold Trades At <4x EBITDA As Battle With Activist Masks Impressive Turnaround [View article]
    Thanks. I’ll just add/reiterate several points. First, the suggestions listed in your 13Ds were dead on. Providing the board with specific, actionable and reasonable steps to significantly increase value for shareholders (who by definition own the company) is the equivalent to a free treasure map (e.g. follow this route and you’ll make money).

    I agree CHD is the largest risk (that’s why I listed it first) although the low valuation already prices in a meaningful chance of this agreement being terminated.

    I agree an acquisition would be the equivalent of lighting (someone else’s) money on fire. This is why an HF/PE firm and/or larger peer in the CPG space needs to get involved ASAP. I cannot stress this point enough – the poison pill is more vulnerable than many people think (especially the board). The Delaware Court is fairly impartial (which a court should be) in that a “negative” decision (upholding the pill) was at least supported by several facts. The court does not look favorably upon unchecked and entrenched power. For all intents and purposes, setting a trigger threshold at 15% when the CEO owns 25% is no different than setting it at 5%.

    Re the core polish line, while there hasn’t been a meaningful increase in sales I believe the rate of brand erosion is declining and should begin to taper off, especially following the recent successful product launch.
    Jul 8 09:39 AM | Likes Like |Link to Comment
  • The Good Times Should Get Even Better For Good Times Restaurants [View article]
    From a macro standpoint there is always a concern of a share overhang however the threat will only go from theoretical to actual if the stock is unable to absorb the shares.

    I don't think it reflects on the confidence of management.
    Jul 4 12:07 PM | Likes Like |Link to Comment
  • The Good Times Should Get Even Better For Good Times Restaurants [View article]
    The success of GTIM should attract other franchisees. Also, GTIM plans to open its second location this month and a third by the end of the year.
    Jul 3 08:56 PM | Likes Like |Link to Comment
  • The Good Times Should Get Even Better For Good Times Restaurants [View article]
    I never give individual advice re buy/sell decisions. With that being said, there are two important points to keep in mind.

    First, the sharp rebound from the low today (stock only down $0.01) is encouraging - if this holds to the close today it will be a positive sign (e.g. if a stock doesn't go down under the threat of a 2m+ share overhang...). Second, and on a related note, two months ago (see link below to 8-K) there was concern that a private placement would pressure the stock. The filing was on 5/7/14 and the stock traded down to $3.03 before rebounding (~10% from low to close). However, from the close of that day to the close on 6/11/14, the stock rose 19%.

    http://1.usa.gov/1rowVgX
    Jul 3 10:58 AM | Likes Like |Link to Comment
  • The Good Times Should Get Even Better For Good Times Restaurants [View article]
    See the press release from June 2014 in the link below, specifically the third paragraph.

    http://bit.ly/Vc5R7b
    Jul 2 07:46 AM | Likes Like |Link to Comment
  • Xplore Technologies: The Other Tablet Manufacturer On The Verge Of Exponential Growth [View article]
    Growth thesis still on track after yesterday’s earnings release. Revenue rose 17% to a record $35.6 million, the gross margin expanded 160 bps to 35.7% and EBITDA was positive despite a 52% increase in OpEx to support new product introductions and sales/marketing efforts.
    Jun 26 07:21 AM | 3 Likes Like |Link to Comment
  • CCA Industries Is A Classic Value With A Catalyst Special Situation [View article]
    Any permanent decline has been arrested by the recent outsourcing deals, planned increase in advertising spending, new products and expanded distribution.

    Re the “3rd rate items that are each rounding errors in their customers' volumes”- granted not all of their products are number one in their categories but they don’t need to be (although some are like Bikini Zone) as retailers do not simply pull products with lower volumes otherwise they would severely limit their selection.
    Jun 25 07:47 AM | 1 Like Like |Link to Comment
  • Xplore Technologies: The Other Tablet Manufacturer On The Verge Of Exponential Growth [View article]
    XPLR introduces rugged Windows tablet - see research for positive implications.

    http://bit.ly/1rxE4IW
    Jun 25 07:06 AM | Likes Like |Link to Comment
  • CCA Industries Is A Classic Value With A Catalyst Special Situation [View article]
    I am not going to say this again. I did not buy the stock prior to or after publication. Period.

    I don’t know who was buying it nor did I share the idea with anyone prior to publication.
    Jun 24 11:06 PM | 2 Likes Like |Link to Comment
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