Joseph Levy's  Instablog

April 22, 2010

Pixelworks, Inc (PXLW) is an innovative designer, developer and marketer of video and pixel processing semiconductors and software for high-end digital video applications and hold 119 patents related to the visual display of digital image data. Their solutions enable manufacturers of digital display and projection devices, such as large-screen flat panel displays and digital front projectors, to differentiate their products with a consistently high level of video quality, regardless of the content’s source or format. Their core technology leverages unique proprietary techniques for intelligently processing video signals from a variety of sources to ensure that all resulting images are optimized.

In my opinion the key to evaluating PXLW are the management changes that have occurred in the last few years .

The Company reported strong sales growth in years from 1998 (Sales just under $1 million) until reaching peak sales of $176 million in 2004. Throughout this period the Company reported losses in each year except 2004, when they reported net income of $21.8million or $1.26 per share and the stock price peaked at $62.22 adjusted for a 1:3 reverse stock split on June 4, 2008.  After 2004, sales declined sequentially in each year until bottoming out at $61 million in 2009. Large losses were reported in the years 2005-2007, including the write-off of intangible assets and restructuring charges totaling $148.9 million in 2006, which contributed materially to the total 2006 net loss of  $201.2 million or $(12.50) per share.

Recognizing that the Company was on a financial path to self-destruction, PXLW implemented significant executive management changes including: the VP & CFO in July 2007; the President & CEO in January 2008; the Executive VP – Sales & Marketing in June 2008; the Senior VP- Engineering in January 2009 and the VP of Operations in February 2009.  The new management team recognized the importance of putting the Company on a sound financial footing before pursuing any aggressive expansion of their business. Below is a table, which highlights some of their accomplishments in the period from 2007 through March 31, 2010.

Note: $ Amounts (except EPS data) and Shares Outstanding in Thousands. Also, Net Income amounts in periods after 2007 were favorably impacted by repurchases of debt and tax benefits.

Management was able to increase profitability in 2008 - 2009 despite the significant decline in sales from $106 million in 2007 to just $61 million in 2009.  Besides reigning in their expenses, PXLW reported large gains from the repurchase of their convertible subordinated debentures at substantial discounts, which resulted in their long-term debt declining from approximately $147 million at 12-31-06 to about $16 million as of 03-31-10.

It can be seen from the above table that on 12-31-07  total liabilities ($170 million) exceeded  total cash and marketable securities ($119 million) by approximately $51 million. By March 31, 2010 Pixelworks’s total liabilities ($35.9 million) exceeded their cash and marketable securities ($32.7 million) by just $3.2 million, which was an improvement of about $47.7 million from 12-31-06 to 03-31-10. Additionally, the Company reduced the dilutive impact on share count by repurchasing their convertible debentures. The BOD wisely elected to purchase back common shares at depressed prices, which further reduced the weighted average diluted shares outstanding from 16.1 million shares on 12-31-07 to 14.2 million shares on 03-31-10.

We would not have purchased shares of Pixelworks solely for their ability to repair and restructure their Balance Sheet. We try to find both value, as well as, the potential for future growth in sales, operating income and operating cash flow, when committing to an investment.  After quarterly sales bottomed out at $10.8 million in Q-1 2009 (low point of the recession) there was steady sequential growth in sales during the remaining three quarters in 2009 (Q-2 sales $14.2 million, Q-3 sales 16.7 million and Q-4 sales $19.4million) with accompanying improvements in operating margins. The first quarter each year is a seasonably slow period for PXLW and Q-1 2010 sales ($18.7 million)  were below Q-4 2009 sales ($19.4 million), but up +73% over  Q-1 2009 sales ($10.8 million).

Management appears committed to growing the Company on a sound basis and on their Q-1 2010 conference call expressed optimism over the exciting potential within the markets served by Pixelworks.  A quote from their Q-1 press release sums this up as follows:

“Our ongoing investment in innovation is resulting in a continuous stream of new products that are reestablishing Pixelworks’ leadership in video,” said Bruce Walicek, President and CEO of Pixelworks. “Products such as our new PA130 with n2m® and 3D-ready technology are well positioned to address the growing need for video quality driven by explosive trends such as 3D and Internet video. Delivering our new products to our customers is our number one focus for 2010.”

During 2009 the stock price began mirroring the improvements recorded by the Company. In 2009 the prices ranged from a high of $4.23 to a low of $0.36 (of course in March 2009) and closed the year at $3.04. In the first quarter of 2010 it traded in a range $5.98 - $2.88 and closed at $5.75 on March 31, 2010. At the end of the regular session on April 22, 2010 the stock closed at $5.62 but then sold off to $4.85 in the After Market. While there appears to be resistance in the area of $5.50 to $5.85 we believe the stock price will move higher if Management is able to successfully execute their Business Plan.

A copy of our report on PXLW is available by emailing me at:  resgroweq@yahoo.com.

Joseph Levy, General Partner

LLG Equities, LP

Allendale, NJ 07401

Books-A-Million Inc. operates superstores and traditional bookstores that offer a selection of hardcover and paperback books, magazines, and newspapers. It also offers other merchandise, including gifts, cards, collectibles, magazines, music, and DVDs, as well as coffee, tea, and other edible products. The company also offers its products over the Internet at Booksamillion.com.

 
When searching out a potential investment we look for two things:

1. Value based on Current Price & Capitalization

2. Future Growth or other Catalysts that will result in Price Appreciation

We look at historical data to provide “clues” for the above. Naturally, since historical data is yesterday’s news its’ significance is not as important as future developments. However, garnering good “clues” can result in making sound investment decisions for the timing of when to buy a stock.  Many "good" companies that are overpriced make "poor" investments because they were purchased at the wrong time. We prepare a comprehensive Excel report whenever researching a company.  Anyone interested in our report just email me at resgroweq@yahoo.com and we will send it to you.

Below is some historical info on BAMM: 

The closing price of BAMM on April 20, 2010 was $7.60 giving it a market cap of approximately $120 million (.24 X annual sales); a PE ratio of 8.6 X diluted EPS of $0.88 in the fiscal year end 01-30-10; and a dividend yield of 3.95% (based on a $0.30 per share declared dividend). Despite sales declining by -1.3% in the FYE 01-30-10 vs. 01-31-09, full taxed EPS increased by just over +30%. I really like the company's history of generating strong operating cash flow each year, which has averaged over $2.00+ per share in all fiscal years ending from 2004 through 2010, except for 2007 ( $1.27 per share).

The company has been using the cash generated in ways that should benefit the share price in the future. Besides regular quarterly dividends and certain special dividends (including a $3.00 per share dividend in June 2007) they have been buying back shares and opening new stores.  The weighted average diluted shares outstanding were reduced by just over 1 million shares since 01-31-2004 (15.7 million shares 01-30-10 versus 16.8 million shares 01-31-04). Additionally, “On March 11, 2010, the Board of Directors (the “Board”) also authorized a new common stock repurchase program (the “March 2010 Program”) of $5.0 million to repurchase our common stock through April 30, 2011”. 

 From the fiscal year ended 01-29-05 through the fiscal year ended 02-02-08 the total number of stores open remained fairly constant in a narrow range (205 to 208 stores).  After 02-02-08 management became more aggressive in opening new stores and at 01-30-2010 the total stores open increased to 223. Additionally new stores have been opened in Pennsylvania and New Jersey during the current fiscal year. As of 01-31-04 the stores open included 163 superstores and 39 traditional stores and at 01-30-10 there were 201 superstores and 22 traditional stores  reflecting a change towards having more superstores.

The company’s ability to generate strong operating cash flow has allowed them to make an investment in Yogurt Mountain Holding, LLC described in the most recent Form 10K as follows:

“On March 24, 2010, the Company entered into a Limited Liability Company Agreement (the “Agreement”) to purchase a 40% equity interest in Yogurt Mountain Holding, LLC (“Yogurt Mountain”).  As part of the Agreement, the Company contributed $3.0 million in cash.  Yogurt Mountain was formed for the purpose of developing and operating retail yogurt stores and franchising retail yogurt stores to third party franchisees. The retail stores offer tart yogurts that cater to the growing trend in healthy foods.  Yogurt Mountain currently operates two retail yogurt stores in Alabama.

In connection with the Agreement, the Company entered a Line of Credit Agreement (the “Agreement”) with Yogurt Mountain pursuant to which the Company has committed to provide up to $1.5 million to Yogurt Mountain under a non-revolving line of credit through March 2015.  The proceeds from the Agreement shall be used by Yogurt Mountain for the purpose of new store growth capital requirements”.    

When looking at a chart on BAMM, it appears that the stock has bottomed out in the $6 to $7+ area and could head higher in the future. Based on all the info mentioned above, I believe BAMM has the potential for good upside price appreciation and has more limited downside risk. I have not seen an analysts with published future consensus Revenue and EPS figures for BAMM.

Joseph Levy, General Partner
LLG Equities, LP

KMG Chemicals, Inc. (KMGB) is a manufacturer of specialty chemicals with an impressive record of growth in sales, earnings and cash flow for more than five years as shown in the following table:

                                ($ amounts in 000’s except per share data)

FYE                          Sales      Net Income    EPS   Opt Cash Flow

07-31-04                 $43,610     $1,763        $0.23    $3,735

07-31-05                   59,168       3,052          0.37      7,563

07-31-06                   67,200       5,935          0.63      7,055

07-31-07                    86,171      9,162          0.83      8,968

07-31-08                  154,394      5,657          0.50    15,668     

07-31-09                  190,720    10,236          0.91    26,502

Trailing 12 Months

Ended 01-31-10       188,828    16,296          1.44    32,042

Based on the 03-12-10 closing price of $15.15 and 11.4 million diluted shares outstanding, KMGB is valued at just 10.5 times earnings for the 12 months ended 01-31-10 and has a market cap of $173 million, which is just under one times annual sales.

The source of the Company’s growth has been both organic and from strategic acquisitions. In February 2006 they purchased certain assets of an animal health pesticides business for $8.9 million. On December 31, 2007 KMGB acquired the high-purity wet process chemicals business of Air Products and Chemicals, Inc. for $75.7 million, which included $25.8 million of net working capital, a 215,000 square foot facility in Colorado, as well as a manufacturing facility and additional warehouse in Italy.

On February 25, 2010 they entered into an agreement to buy certain assets of General Chemical Performance Products, LLC for approximately $25.5 million, which includes a 48,000 square foot manufacturing facility in Hollister, California and the transaction is expected to close by the end of March 2010. The acquired business generated revenues of approximately $43 million in 2009. Because of KMG's strong generation of cash flow from operations it expects to fund the acquisition with available cash and borrowing from the Company’s revolving credit facility. Despite anticipating some dilution to earnings in the second half of the current fiscal year because of the closing and integration costs from this acquisition, the company still expects “solid results for the last two quarters, and another year of record earnings in 2010 for KMG.” Commenting on the future and after the integration, KMG does “anticipate this acquisition will contribute substantially to earnings.”

The stock price hit an all time high of $28.25 in July 2007 and thereafter dropped to as low as $2.25 in November 2008. Since then the stock price has generally been rising along with a nice increase in average daily trading volume but still averages just over 100,000 shares a day. After getting as high as $19.15 in December 2009 the stock price pulled back finding strong support in the $12-13 range and now appears ready for upside movement in the future.

Based on the impressive record of historical growth, the anticipated benefits from the recently announced acquisition, and the company’s objective to make similar strategic acquisitions in the future, I believe that the shares of KMGB are currently undervalued.