Mark Krieger's  Instablog

 I admit I have been short too long on this one, It feels like getting run over by a freight train each and every day the stock runs up and squeezes me that much more. I am ready to throw in the towel and cover, but I am afraid that it will be at the absolute top, and the minute I close out my position, the shares will quickly plummet. It seems that I am more worried about missing an opportunity to get my money back than losing  even more money (sound familiar?) At this point, it appears that I am grasping at straws  to justify remaining short but here are my bearish thoughts; (1)PCLN’s multiple is based on pro forma earnings not GAAP, otherwise its earnings would be 30% less if you deduct the cost of employee stock option compensation (2) there are few barriers to entry in this sector- a new competitor could easily pop up-eroding PCLN’s market share (3) an impending supreme court ruling could invalidate many  technology software patents ,such as the company’s “name your own price” model. (4) In the last week, PCLN insiders have been selling at will, liquidating over 76,000 shares (5) sentiment is extremely bullish-usually the case at just before price implosions (6)Shares are overbought after quadrupling- a price correction due to profit taking is probably in the cards. (7) The stock is selling at nearly eight times shareholder’s equity.

 To be fair, I must admit, PCLN’s forward multiple of about 20 times  2010 earnings estimates seems more than reasonable, but I am skeptical that it will be able to meet is ever increasing expectations. Its price seems to reflect perfect future execution and sooner than later, the company is bound to make a mistake.  Those in the bullish camp would probably characterize these “so called” negative items I have outlined, as a desperate short’s last gasp “spinning” attempt-maybe so, but if you are destined to go down, you might as well go out fighting!

 

Since my last update the shares are up over $60. My take on the matter is: if I thought the stock was expensive at $150, then I think it is even more overvalued at $207,and a better shorting candidate. The market has ratcheted up its earnings expectations substantially since then, expecting 23% growth from 2009 earnings of $8.10 to 2010 earnings of $9.99—the bar is getting higher and higher and making it a stronger possibility the company could get tripped up.

Market Cap is unrealistic. With a market cap of over $9 billion, PCLN's share value is worth more than JBLU, UAUA and DAL combined. The funny thing is, these airlines are expected  to produce over $50 billion in revenues and $900 million in earnings in 2010 or 18 times PCLN’s sales and twice its earnings.

Credit Suisse sours: Credit Suisse downgraded the shares from outperform to neutral on valuation purposes. The shares are very close to the Analyst's  one year  mean target price of $219.This leads me to believe we are at the upper limits of PCLN’s trading range.

 

Short interest is dropping: During the latest period,PCLN’s short interest dropped 7% from 7.2 million shares to 6.7 million shares meaning there will be less short fuel available to propel the shares.

Bottom line: this one is definitely a  Vegas style casino stock  and although the momentum is clearly up, one piece of unfavorable news could crash the shares ,as fear has a more powerful effect  on the downside, than elation has to the upside. Translation: the stock will drop at twice the rate it ascended if the market suddenly sours on it. I think this scenario will occur, but the question is, will I run out of money before it does?

 

Disclosure:   stubbornly short

Anybody who had purchased BRID in the last seven years is ahead of the game, but just eight short months ago,  all those who   had acquired shares during the last twenty two years were under water when the shares hit an “insane”  all time low of $2.53  in March. What a difference eight months makes- now that the shares have nearly quadrupled ,along with the announcement of its first cash dividend in nearly six years. The moral of the story: patience sometimes pays off in a very big way!

 

Cash Dividend planned:  BRID announced it intends to pay a special onetime ten cent cash dividend for shareholders of record on 12/8/09. Although this is less than the company’s previous annual 28 cent dividend, it is certainly a step in the right direction and a confidence builder. This action, in a sense, is management paying themselves a bonus for a job well done, as they will receive $770,000 of the $940,000 paid out, with the remainder being distributed among outside shareholders.

 

Things are looking up: The company is on a roll and is on pace to deliver one of its best years ever. In fact ,just a decade ago, when BRID shares reached an all time high of $24, it earned almost $10 million on revenues of $156 million.

Ten years later, BRID is not too far from reaching those levels once again- when BRID reports its fourth  quarter  earnings  in early January  (expected revenues of $37 million and earnings of 21 cents, during a longer 16 week period) the company’s annual results should reach $4.5 million in earnings ( .59 per share) and $120 million in sales resulting in a very reasonable trailing multiple of 15.

 

What’s next: After a huge run-up, the shares are no longer a steal, but appreciation prospects are still intact. The company’s gross profit margin of 42.6% has improved 1000 basis points ( thanks to lower input costs) and its cost cutting efforts continue to gain ground as its SG&A costs of 35.3%, were trimmed 310 basis points in its latest quarter..The company still has nearly 500,000 shares available under its stock repurchase plan and with less than 1.75 million shares owned by non insiders, it could be argued it would be logical the Bridgford family could tender for the balance of the shares they do not already own, taking the company private.

 

Bottom line: This one could go higher, as a trend in motion will stay in motion until some outside force knocks it off course. The point is, BRID has been on a steady course of improvement  the last nine months and it makes sense to stay with the trend. Although the bulk of the stocks appreciation is in the past, there is no reason the shares cannot double from its current levels in the next twelve months making the next batch of buyers “victors” too.

 


disclosure: long

 

Investors have a short memory. They tend to follow the herd into the flavor of the month club and AMZN proves to be no exception. Some could argue its valuation is approaching bubble status when calculated at 52 times 2010 earnings estimates of $2.53 and 16 times book value. Looking at this deeper, the $2.53 earnings figure, which represents impressive growth of 35% could be too low-if they earn $3.00 for a 60% improvement, the forward multiple falls to a more reasonable 40 times earnings, after all, stock’s with higher growth are rewarded with higher multiples. This is a compelling argument  to  why Wall Street is hanging its hat on the premise AMZN’s current estimates are indeed too low.

 

 Potential dangers: The market seems to be putting its head in the sand regarding potential AMZN landmines. The threat of an   impending internet sales tax, Walmart’s  pledge to start an all out price war and the slew of competitors getting into the EBook reader business has  swayed most analysts not to show caution. Everybody seems to be bullish on this one,  and when market sentiment is this one-sided, tops are usually imminent.

 

Short position abating: AMZN’s short interest dropped 10% to 17 million shares ( about 3.9% of outstanding shares) in the last period, so there will be less short fuel available to keep the upside momentum intact. I would think these very  overbought shares could be susceptible to a correction through profit taking and fall as much as 10% before buying support reemerges. The fact is the stock has gone up too far in too short of a time frame and needs to at the very least, pause to refresh.

 

Analyst take: Since October, all four analyst actions have been positive ,yet AMZN’s share price is still  4%  higher  than the analysts one year median  price target of $125. This  fact alone, should set off some warning bells  to stay clear of this one. Who knows when the music will stop and everyone tries to hit the exit doors at the same time. The risk certainly outweighs the reward at this price level.

 

My take: I admit my track record on this one has been horrendous, but every dog has his day and eventually AMZN will disappoint,  and when it does, the shares will literally implode. That is the time when you want to be short. Easier said than done.

Believe it or not, BIDU’s market cap of $15 billion is quickly approaching YHOO’s stock value of $23 billion. YHOO is  currently being priced at the market at only 1.5 times that of BIDU, yet in an “apples to apples” comparison, blatant discrepancies stand out, such as: YHOO is expected to generate $5 billion in sales and $700 million in earnings, while BIDU is forecasted to produce a top line of $900 million and earnings of $309 million (assumes a staggering 44% growth rate) The point is YHOO’s sales are almost six times higher, while their earnings are triple that of BIDU, therefore it is reasonable to deduce that YHOO’s market cap should be three times that of BIDU, not one and half. There are inefficiencies between these two equities that should be exploited before the market eventually recognizes this abnormilty and prices them accordingly.

 

 Shareholder’s equity: YHOO is selling at only two times book ( if you add in the market value of its Asian equity interests- it is probably selling closer to actual book) while BIDU is selling at more than four times its book value.

Bar set too high: BIDU is expected to achieve 44% earnings growth in 2010 versus only 10% for YHOO creating a very high bar for BIDU and a very low one for YHOO. It will be much easier for YHOO to clear its bar than BIDU hurdling it’s. BIDU is certainly the higher risk choice. That is probably why analysts have set YHOO’s one year high  target price, at a 44% premium to today’s share price versus a 10% premium for BIDU’s.

 YHOO has transparency: When YHOO insiders sell their shares they have to report the activity to the SEC, BIDU does not. This lower reporting standard gives them more flexibility to hide unfavorable events and ponder accounting shenanigans.

Analysts  getting bullish: Since June, seven out of eight YHOO analyst actions have been positive ( six upgrades, one initiation of coverage with a buy and initiation of coverage at neutral) while BIDU has seen three out of four analysts turn negative ( two downgrades, initiation of coverage at underperform and one upgrade).

 

Bottom line: Although YHOO’s earnings growth is in the tank, it’s potential to fix its operational problems are enormous. It has minimal risk and huge opportunity for gain. BIDU on the other hand, has already quadrupled from its 52 week lows ( YHOO has doubled) and is selling at perfection and then some. BIDU’s upside is about 10% while its downside is nearly 50%. YHOO’s upside is 100% while its downside is 30%. By going long YHOO at these levels, your risk reward ratio is 2, meaning a buyer expects to earn double the amount he is risking. Purchasing BIDU at these orbital levels gives the holder a .20 ratio or the chance to earn 20 cents for every dollar invested, making BIDU something you shouldn’t touch with a ten foot pole.

 

Despite the constant threat of legal issues facing Imperial, things are starting to look up for the largest publicly held US sugar producer. The company has completed the total rebuild of its Port Wentworth Refinery into a modern “state of the art” facility. The plant, which is expected to be fully operational by the end of the month will enable Imperial to refine and package sugar  safer and  more efficiently than the old plant.

 

The perfect storm:  Sugar has recently climbed to historically high levels on the commodity markets .The spread between the cost of raw sugar and refined sugar  has never been greater, enabling the company to hit the  “sweet spot”, Although the company’s cost of raw sugar rises, the refined sugar segment rises at an even greater percentage, enabling them to  significantly fatten up their gross profit margin potential. To make matters even better, the cost of natural gas has plummeted nearly 50% in the past four months (the company uses tremendous amounts in the refining process). The combination of low input costs, elevated selling prices and a higher efficiency plant sets up IPSU for a golden opportunity that probably comes around "once" every ten years.

 

Fourth Quarter results: IPSU is set to report fourth quarter results next month. IPSU’s lone analyst (BWS Financial) has forecasted the company to report a loss of 45 cents a share on revenues of $161 million. This could be on the light side, as the analyst, Hamed Khorsand ,has historically been on the “side of caution”  when modeling his forecasts, so I wouldn’t be surprised at all if IPSU pleasantly surprised the “Street”.

A web site specializing in investment ideas, named “pleaseactaccordingly.com” has taken a special interest in IPSU and has written several compelling pieces about its investment merits. The firm has established a one year $20-25 price target , and  “top pick” status.

 

Lawsuit jitters: let’s face it, the reason the stock price is so cheap is the threat that IPSU’s insurance won’t cover all the lawsuits the company is facing from its Port Wentworth disaster. If this lawsuit cloud was cleared, the shares would likely be trading at twice their current price. The fact is, this scenario is creating inefficiencies in a efficient market that prudent traders should exploit at will. The company had a $100 million general liability policy, as well as  workers compensation liability coverage in effect at the time of the accident, so there appears to be adequate coverage to handle the forty or so  lawsuits in the pipeline.

 

Bottom line: IPSU should report better than expected fourth quarter earnings. If current trends continue, sales could top the  $1 billion mark and earnings reach north of $3.00 in fiscal 2010- equating to a forward multiple of only four times earnings estimates, certainly a compelling value and quite a feat for a company with a tiny market cap of only $165 million. Add in the possibility of some scared shorts running for cover, and you have the recipe for a good old fashioned short squeeze- IPSU’s short interest  has rocketed 14% in the last period to 424,000 shares ,or 4% of  its outstanding shares. A run to the $30 mark is certainly a strong possibility, but that will only occur if the lawsuits are settled favorably. I think they will be.

 

Since WINN emerged from chapter 11 nearly three years ago, the company has shown some significant turnaround momentum. They have nearly generated $500 million of EBITDA earnings and remodeled over 170 of its stores. The striking thing about the remodel program is they have been able to achieve one third of their entire store base using nothing but their own cash flow (the company is debt free) yet shareholder's have been left holding the bag. The truth is, the share price is near the same levels as the IPO price in Nov  of 2006. All this progress and patience  results in a big fat “zero return” for the original shareholders. What’s up with that?

Wall Street overreacted on  first quarter results: First quarter results were bad, but they were not that bad. In fact the company was able to still improve its gross profit margin from 27.9% to 28.2% despite a 2% loss in the top line. The company also  saw its transaction counts stabilize, though its basket size shrunk due to deflationary headwinds and  consumers lack of  overall confidence especially due to continued pressure on the job market. WINN’s CEO, expects the second half of fiscal 2010 will show deflation transform into moderate  inflation,  while  employment  and  the overall economy gain additional traction.

The company reduced its  EBITDA guidance range to $140 -$160 million from $170-180 million and declined to offer assistance on revenue projections. Hopefully management this time, was clever enough to sandbag expectations ( under promise) enough, to enable them to surely over deliver when it is time to report second quarter results.

 

More cannon fodder for the critics: It was revealed on the conference call that WINN’s $3.5 million impairment charge was related to a write down on two recently remodeled stores.   Write offs this soon are certainly disheartening and should not occur. WINN’s EBITDA of about 2% of sales is 300 basis points lower than its peer average of 5%. If there is a silver lining,  WINN has ample opportunity for huge improvement. Its competitors on average are producing  EBITDA at 2.5 times what WINN is delivering and if WINN is able to just improve by 100 basis points, its EBITDA would rise a staggering 50%.

 

Analyst question: As I listened to the conference call, the usual esoteric ,hypothetical and elaborate questions evolved from the slew of analysts participating , until the line of final questioning came up. The analyst, George Schultze of Schultze Asset Management, asked what we all wanted to hear.  (1)Why are the other supermarket operaters offering an improved outlook and WINN is not? (2) Wouldn’t it be a better use of corporate funds to reduce the remodel activity and use those funds to purchase back common shares in the open market? (3) Why are impairment charges being incurred against remodeled properties? (4) What G&A amount do you expect to reduce in 2010? (First quarter saw a 70 basis point spike from 27.9% to 28.6%). The CEO attempted to deal  with these questions, and did a pretty good job, but in reality, it is really hard to pull a rabbit out of a hat. The bottom line is the CEO’s responses were not what the stake owners wanted to hear.

 

Bottom line: with a market cap of only $618 million and a total of 515 stores, the market is valuing each store at a paltry $1.2 million each.  This fact is even more outrageous when you consider the company is spending up to $2 million on a single remodel project. This low valuation is certainly not warranted and appears to be a classic case of inefficiency in an efficient market. Translation: The market is wrong again and eventually the shares will be priced at much higher levels when the “market” comes back to its senses.  Adding more persuasion to the long side, the company is   certainly vulnerable as an acquisition target from a larger national operator, such as KR, SWY or SVU. 

 disclosure: Long