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Jonathan Booth

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  • Sell Weight Watchers Now, It's A Value Trap [View article]
    I have spoken to pushers of Plexus and the like. They see those things as a supplement to WTW because you still need to modify your eating habits. Herbalife product is not a panacea, which is why they have the highly effective group meetings at Herbalife similar to WTW.
    Apr 10 09:58 AM | Likes Like |Link to Comment
  • Sell Weight Watchers Now, It's A Value Trap [View article]
    Brands are not nearly as valuable as people want to believe. Few people actually have brand loyalty. There is a great book called Brand Bubble with facts to support this.

    Companies like Coke do rely on brand more than most because they do not necessarily have a superior product - differentiated but not superior (a matter of taste). Meanwhile, WTW actually has a clinically proven superior product, and that is what I am investing based on, not the brand.

    Currently, WTW is not close to being in a financially precarious position. Why? Because the vast majority of their debt is not due for 6+ years. If it was due tomorrow, that would be a different story. Investors often fail to take the maturity dates into consideration when considering debt. The risk of actual default is very low, and banks and bond holders are very reluctant to put a cash flow positive company into bankruptcy because that is the most expensive option to the bank or bondholder.
    Apr 9 05:01 PM | 2 Likes Like |Link to Comment
  • Sell Weight Watchers Now, It's A Value Trap [View article]
    I have a policy to always beware of anecdotal evidence. If a self-insured company can reduce its total medical costs by utilizing WTW's program for preventive care, they will do so. Many already do, hence the growth from a standing start to $75M in revenue in just a few years. If they get approved by Medicare and insurance providers as they currently are, that will serve as a catalyst for this segment. Preventive health is a growing trend.

    The debt is an obstacle, no doubt. But as long as they continue making their payments and can roll forward the remaining debt when it is due in 6+ years, then the debt is not a major concern. As long as they continue to service their niche target customer - that 3-5M people in this country alone that are mostly older, above average income females in need of group support, they will continue to make money hand over fist.
    Apr 9 03:21 PM | 3 Likes Like |Link to Comment
  • Sell Weight Watchers Now, It's A Value Trap [View article]
    You omit the true growth opportunity, which is not online. It is the preventive healthcare opportunity. WTW has seen many, many innovations in weight loss the last 50 years. If there is one thing that humans have endeavored to find, it is an effortless way to lose weight. Unfortunately, it just isn't possible. A lot of these "innovations" give an implied promise of losing weight without effort - just wear this armband to track your stats and you will somehow lose weight. Unfortunately, the individual still has to put forth the effort, and if they had the self-discipline to do that, they are not WTW candidates to begin with.

    The individual you showed the before and after picture of is clearly not a WTW candidate. I have attended a WTW meeting, which was packed. Not a single person looked like the "Before" picture. There are still plenty of 40+ year old, above average income people who need to lose weight, and that is a source of customer that will last for at least the next decade plus. Also, as people age, community becomes more important, making it more likely for younger people today to be more comfortable with group meetings when they are older.

    Further, if WTW had 50% market share, I would be inclined to agree that the "innovations" could pick off the fringes. However, of the 100M+ in the U.S. alone that have expressed an interest in losing weight, only about 5% even use a weight loss program like WTW, most whom do choose WTW. What WTW has lost to the "free" apps and wearable technology are the people who would give WTW a trial. Once in the WTW program, the average retention has remained consistent at 8-9 months for at least the last few years. WTW is trying to get the trial members back because they know the strength of the program.

    By my estimation, WTW could see its free cash flow decline permanently by 50% and still be worth the current stock price. The likelihood of such a permanent decline actually occurring is sufficiently low for me. Luckily, I did not come across the WTW opportunity until it dropped another 30+% in one day a month or so ago and hit around $21. At this price, I think the reward to risk ratio is quite favorable.
    Apr 9 02:31 PM | 5 Likes Like |Link to Comment
  • Vocus Management Discusses Q3 2013 Results - Earnings Call Transcript [View article]
    I am not sure where you are getting your $8M from. Simply looking at the cash flow statement will break down the movement in cash and shows a beginning of the year cash balance of $32.1M and a 9/30/13 balance of $35.9. I am not sure why you are starting with a 3-31-13 balance to try and tie to the cash flow statement because the cash flow statement starts at the end of the previous year. Cash went up $8M in Q1 and then declined the following 2 quarters primarily because of a contingent payment in Q2 of $4.6M for an acquisition made previously - an earn-out payment based on the performance of the acquired company - and higher capital expenditures. The cash flow statement has to flow to the balance sheet, so it is not possible for a company to claim one figure on one set of financials and a different figure on a different set of financials. I think you misread it.
    Nov 2 02:05 PM | Likes Like |Link to Comment
  • Vocus Management Discusses Q3 2013 Results - Earnings Call Transcript [View article]
    The "loss" on the income statement is due to non-cash expenses. If you look at the cash flow statement, Vocus has generated positive cash flow every year since 2006.
    Nov 1 11:14 AM | Likes Like |Link to Comment
  • America's Car-Mart Is 23% Overvalued [View article]
    I enjoyed your comment as well. CRMT is an easy company to misunderstand, which is why we were fortunate enough to first buy in when it was only $24.
    Nov 1 10:11 AM | Likes Like |Link to Comment
  • America's Car-Mart Is 23% Overvalued [View article]
    There are quite a few flaws in your thesis. You probably just read the latest annual report because it appears you do not truly understand CRMT and its advantages or the sub-prime lending industry. I will address point by point.

    1. Industry is peaking and risks are emerging

    You point to a possibly weakening economy as being bad for business. This is the opposite of the truth. A bad economy is CRMT's best friend because other credit alternatives dry up. Also, CRMT has an exceptionally strong balance sheet and debt would be substantially lower if not for buying back over 20% of outstanding stock in the last few years. They have no problem getting financing to fund their portfolio, which is actually only funded about 30% by financing.

    2. Regulatory risk from the Consumer Financial Protection Bureau ("CFPB")

    The market rate for sub-prime auto loans is int he 20's. CACC and NICK that you mention charge even higher. CRMT charges 15% for every single loan it underwrites at all 129 locations. If there is a crack down, CRMT is by far the best equipped to handle it and will only benefit - most of their competition (small time dealers with 1 to a handful of lots) will not have the resources to quickly adapt to the new regulations, another benefit for CRMT. They have shown to be very profitable charging just 15% for each loan because they work so hard to keep their borrowers on top of the loan. They purposefully keep the contract term down to ensure the customer is paying down a good bit of principle each month. CACC and NICK have contract terms over 50% as long. CRMT has had to increase it's term slightly in recent quarters to better compete, but I will address this in the section you addressed it. Because of its fair practices, CRMT has a default rate of 22%, well below the industry average of 30% for this type of loan. Further, 50% of their business at older stores is repeat business and 15% is from referrals. That does not sound like a company taking advantage of its customers.

    3. Competition is increasing and profit margins are decreasing

    Competition is definitely increasing. I will give you that. Here is what you miss, however. Subprime lending is a niche area of financing that requires special expertise, something totally lacking by all of the lenders suddenly reaching to the sub-prime market in search of yield. This happens every few years. The new borrowers lose a lot of money because they completely misunderstood the risk, capacity suddenly leaves the market, and CRMT benefits from the vacuum. I cannot tell you the timing and CRMT is likely to be impacted for a little while longer, but long-term minded investors will be very happy in the long-run. It is the same as specialty and surplus lines of insurance. When rates in the standard insurance market become too low and insurers have a lot of capacity, they begin reaching into the higher premiums found in specialty and surplus lines, only to discover to their detriment that they lacked the expertise to properly underwrite these loans to be profitable, they lose money, and they withdraw from that market.

    4. Geographic landscape will limit future growth

    You clearly have not seen a management presentation or spoken to management if you think they have any interest whatsoever in expanding outside of the Southeast part of the U.S. First of all, the Federal Reserve reports that the Southeast has the highest concentration of the unbanked and the underbanked, the exact customer CRMT is looking for. Second, CRMT's strategy is to find small towns with a population of 20,000 - 50,000 because the costs are cheaper for land and staff and they can become an intricate part of the community, allowing them to better assess the risk of their potential customers and to more easily collect on the loans. There are still plenty of cities in the Southeast meeting this criteria, and you will notice per your map that Louisiana is totally untouched. That is due entirely to car repossession laws in Louisiana that might be changed. And you think CRMT competes with Carmax? No, totally different customer base.

    5. Insider selling and veteran COO retiring

    The adage is that insiders can sell for many reasons but bUy for one reason. Is the stock deeply undervalued? No. So I cannot blame management for not buying. The CEO has sold 10% of his holdings this year and the retiring COO has sold 6% of his holdings. Is that indicative of them believing the company is overvalued? Well they both sold at prices below the current stock price and the stock has been 15% higher before they sold than the prices they sold at. This one data point by itself is not very helpful. And the COO retiring at age 50 after helping to build the company for 30 years is interpreted to mean he is throwing in the towel because he thinks the next year will be too difficult? This is one of the most ridiculous statements I have heard. 30 years is a long time at one place. There are a million reasons why he would want to try something else. It would be different if he abruptly quit, but last time I checked 2 months is a fair bit longer than the normal 2 week notice. This is the weakest point of all that you made.

    6. Overvalued when compared to peers on a P/E basis

    CRMT does not have any true publicly-traded peers. Carmax is not a sub-prime lender or retailer, so this is a completely meaningless comparison. NICK and CACC are just sub-prime lenders - at much higher rates at much higher terms and at much higher default rates. They do not also have a dealership operation that, despite your beliefs, does make the company money. The sales price is higher than the purchase price by a fair margin and then they finance the loan on top of that. So to compare to a company like NICK or CACC, that just finances the loan at totally different terms, is also not very helpful. Further, basing a value of one company on the multiple of another never made any sense to me. It implies that the company being compared to is fairly valued and that both companies are identical in prospects, risk profile, margins, management competence, etc. If you were to buy CRMT outright, you would not care one iota what its multiple was compared to unrelated peers. All that would matter is your future income generated from the company, discounted to present value, compared to what you paid for it. On that basis, I value CRMT around $50-55 even with the greater competition.

    7. Questionable loan accounting and deteriorating loan metrics

    First of all, you mention that used car prices are very high and not likely to come down. If you look at CRMT's average selling price, it has not changed much. They try to keep average increases to a minimum. The only reason that the average term is increasing is due to competition offering terms of 45 months, allowing the customer to have lower monthly payments but greatly increases their risk of defaulting. CRMT has to compete with the lower monthly payment offered by new competitors that do not understand the customer base. Once these newcomers start losing money, they will exit this space. Further, since CRMT tries to keep the term down to keep customer defaults lower, that results in more repeat business - hence the 50% of revenue from repeat customers at older lots.

    Claiming questionable loan accounting is pretty bold, especially based on such flimsy evidence. Where is the statistical comparison of the loan loss provision to actual defaults that shows management chronically under-reserving for losses? You simply point to management working with customers on their loans, which is just good business. They have quite a bit of experience and best-in-class practices dealing with sub-prime borrowers to keep defaults down. They took a hard look at themselves in 2007 after the default rate spiked to 27% and changed a number of policies to prevent that from happening again (including making lot managers' pay tied to the default rate). You see the benefit of those policies with the 20-22% after default rate over the ensuing 5 years. Growth in new loans versus growth in collections is a ridiculous comparison. New loans is not a non-cumulative number while collections is a cumulative number.

    Might there be some additional margin compression in the next couple of quarters due entirely to competition? Quite possibly. Does that change the fundamentals of the company or the long-term valuation of the company? Absolutely not. I rarely care about quarterly results and am happy to take advantage of the opportunity when a bad quarter makes people like you extrapolate those results indefinitely into the future. We are currently long CRMT, have been since April 2011, and will happily add if the stock drops the 23% you think it is overvalued. In hindsight, I should not have even written this retort for hopes that you might actually panic some investors with this article and give me another buying opportunity. Oh well, I already wrote, so I might as well share it.
    Oct 30 10:28 AM | 5 Likes Like |Link to Comment
  • Apple's iPhone 5C Is Not Cheap Enough [View article]
    I did not realize Nokia was the gold standard for cell phone strategy now. Nokia must be killing it!

    Also, I am sure Maserati would continue to carry the same clout if it was available to the masses.
    Sep 11 10:19 AM | 3 Likes Like |Link to Comment
  • Social Security Assumptions Are Not Sustainable [View article]
    There is a simple solution - phase out social security entirely. I do not know one person under the age of 35 who seriously plans on relying on social security for retirement. I am perfectly capable of managing my own retirement. I do not need the government take 6.2% of my paycheck to mismanage it for me. The very idea of it is insulting because it implies I am incapable of managing my own retirement.
    Apr 13 11:03 AM | 2 Likes Like |Link to Comment
  • Leggett And Platt: The Profitable Transformation [View article]
    My analysis is very similar, including my assumptions for valuing the company. LEG is a great organization that finally came to the same conclusion in 2007 that McDonald's did in 2003, which is to say "Quality, not just quantity." Growth for growth's sake is never a good idea and LEG fell prey to its lure for about 15 years. Luckily they have always had a quality culture and management and now they have the right strategy.

    I love the fact that they develop all of their talent internally, helping to instill the culture for the next generation. The senior VP's have been with the company for 30 years on average while the regular VP's have been with the company for 13.5 years on average. Rarely is someone hired directly into a high-level position, which is always preferable when a company clearly has a great culture.

    This is one of those companies that you can not look at for five years and know the investment will be fine. Looking ahead five years and assuming an improved economy, LEG's sales and cash flows will be materially higher. They have plenty of room to expand without needing additional capex since the recession left some facilities at very low utilization rates.
    Feb 29 03:33 PM | 3 Likes Like |Link to Comment
  • Durable Competitive Advantage Series: Differentiated Manufacturing [View article]
    Thank you for the kind words. I actually nearly added ROIC as one of my high-level rules. You can see I mentioned it for SHW. In the end, I ultimately decided that management's capital allocation and purchase price decisions are separate from a company's DCA, and management can take on too much debt or issue too many shares to pay too much for an acquisition, resulting in a low ROIC while the company has a DCA. So I probably should have said that a high ROIC is often a strong indicator of a DCA but a low ROIC does not necessarily mean the company does not have a DCA. Thank you for the feedback.
    Jan 10 10:34 AM | Likes Like |Link to Comment
  • Gentiva In Better Health Than The Stock Price Implies [View article]
    Great article. I came to the same conclusion last night and bought some GTIV this morning right after the market opened. The risk of the lenders not amending the debt covenants is virtually non-existent. GTIV can clearly make their payments, and there are no major principal payments due until 2015 regardless. In addition, GTIV clearly has a good relationship with their lenders as evidenced by the refinancing to more favorable terms earlier this year. I could not agree more about your views on Medicare and the risk of severe rate cuts. I also valued the company at about $9.00, oddly enough.
    Nov 9 11:48 AM | Likes Like |Link to Comment
  • Huntington Ingalls Industries: Certainly Worth A Look At Current Levels [View article]
    I really enjoyed your analysis, Eric. I first looked into HII before it was spun-off and ultimately passed when the price ended up being so high at $40+. After the recent drop, I looked into it again. My biggest concern is this: the Navy gets about $15B a year to build ships and has told shipbuilders that number is not likely to grow, so they need to figure out how to keep costs low. However, the CBO has declared that the costs for ships called for under the Navy's latest 30-year plan will end up costing $19B a year. I have no way of predicting if HII will be impacted by that, nor do I think anyone else, including HII, can predict it.

    Further, I am usually conservative when predicting the success of cost-cutting measures, and I do not have those measures impacting the company until 2013 at the earliest anyway because Avondale will remain open until then. So I value the company around $40 even assuming no further cuts to the shipbuilding budget from the Super Committee. At the current price, the upside is just not sufficient given the risk of further budget cuts. I will wait for the stock to go below $20.
    Sep 12 03:47 PM | 2 Likes Like |Link to Comment
  • Collective Brands: Opportunity Afforded by Myopic Market [View article]
    Since the CEO resigned abruptly last week, I reconsidered my analysis and decided to trim my position. Check out my thoughts on the matter on my Instablog.
    Jun 24 01:11 PM | 1 Like Like |Link to Comment