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Joseph Nicolay
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Regrettably, I can no longer publish analysis on companies because of my career affiliation. Thank you to everyone who contributed!
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  • The Double Jeopardy Effect of Options on Share Price
    I don’t prescribe to the Efficient Market Hypothesis, but the market does tend to value a company efficiently in the long-run. With that said, there are two points when the price of a stock can change related to equity dilution; the first is when information becomes available that more stock is bound to be issued, and the second time is when the stock is actually issued.
    Diluted earnings per share is commonly used to determine a firm’s price per share among other metrics. Warrants, options, and convertible bonds that are issued by a firm are accounted for in this number, and institutions in part take that information and use it to determine how much they are willing to pay per share shortly after it becomes available. A reduction in share price from information related to increased potential dilution, as reported in the quarterly report, is a demand driven price adjustment.
    Separate of the first adjustment to price is the actual act of introducing the new shares that are sold on the float. This causes an increase in supply and thereby finds a new equilibrium with demand at a lower price, independent of previous valuation adjustment. This is to say, that it works much like short-selling inasmuch as the act puts downward pressure on the stock price. The increase can be a very slow process -over the course of months for options, and up to 15 years for warrants- and may be negated by positive circumstances. It can also occur very quickly and destroy shareholder value.
    The rare case where dilution will not occur is when the company issues put options that they must settle with cash. In theory, such a transaction is supposed to have no effect on the price per share as the decrease in cash cancels out upward movement of price from decreased supply. Put options are rarely awarded to management as they incentivize poor performance.
    Singling out callable contracts issued by a company with stock as the underlying asset, related gains, losses, and liabilities are non-existent. The only “cost” that I factor into valuing a company’s stock is the two-part economic cost of dilution to shareholders. The bottom line is to watch the diluted EPS in the quarterly report, and understand that it’s the flash before the bang.
    Mar 07 6:22 PM | Link | Comment!
    1, Management starts talking exclusively about EBITDA while ignoring net income
    2, The CFO resigns (It’s happened twice and been bad both times)
    3, The firm is using LIFO through a recession with decreasing inventory purchases
    4, Management starts to grow through acquisitions while overall ROA decreases
    5. There is a disturbance in the force
    Jan 18 6:28 AM | Link | Comment!
    Coinstar, don’t leave; this involves you too.
    In Global Axcess’s (GAXC) most recent quarterly report the major risk factors included a decrease in interchange fees which represents 34% of the firms ATM revenues, third party reliance on the manufacturing of DVD kiosks, failure in branding, failure in third party maintenance, and failure in keeping the DVD inventory up-to-date. There is nothing written that acknowledges the likely risk of DVD technological obsolescence.
    As an investor, it concerns me that the company is working vigorously to acquire new DVD kiosk contracts and businesses on the cusp of change. Technology is moving away from physical media to streaming HD movies on demand. There are wireless routers, such as the Belkin N600 that can stream HD video to a game console or video box with a purchase price of under $100. Televisions are the ‘new’ computer monitor with HDMI ports standard on both the TV and PC. I haven’t visited a redbox since running Netflix through my Wii (although it only streams in 480i).
    The only short-run upside that DVD vending has is that you can rent new releases without the wait, but it is only a matter of time before we are given the option to pay a premium to stream new releases.
    DVD kiosk revenues comprise about 3% of total revenues for the last nine months, and about 6% for the last quarter as the company has expanded into the DVD vending business.
    The bulk of GAXC’s business is in ATM interchange fees and surcharges; this part of the business still seems viable. There will still be a demand for physical cash as long as there are transactions involving items purchased on craigslist, narcotics sold on the street, and services performed off of account for tax avoidance purposes, to name a few. I was surprised when asked to pay only in cash recently; one was for the light rail next to Seattle’s Space Needle, and the other was after eating at an old fashioned burger joint in Coeur d’Alene, Idaho. Some vendors do not trust checks and do not want to pay the fees associated with credit-card processing. Hopefully, the Treasury will continue to print fiat money in the form of paper and not pixels.
    I have a sliver of hope for GAXC, but management needs to adapt and innovate; perhaps, grabbing a piece of cyberspace and modeling Netflix would be a better endeavor. The company would able to cut out a portion of its capital and lease expenditures by going digital.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am long GAXC.
    Jan 14 10:58 AM | Link | 2 Comments
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