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The Unintelligible Investor

 
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  • Primo Water Sell-Off Is Seriously Overdone: Original Story Remains Intact [View article]
    Again, breakeven from a cash perspective is not particularly exciting. Where does the cash come from to continue growth? Consider this: if we include the ~$74 mil purchase of Culligan, PRMW has spent $105 mil on capex (PP&E, purchases of bottles, and business acquisitions) over the past 3.5 years. That's to reach ~15,000 locations.

    With a cash burn of $8 mil/year and only $10 mil of cash on the balance sheet, that leaves just $2 mil cash on-hand to grow to 25,000 locations. well, if 15,000 locations cost $105 mil, then the next 10,000 will probably cost 2/3rds of that ... but perhaps there is less investment required this time around so call it 1/3rd or $34 mil. They will have to raise $32 mil in capital through the equity market and dilute existing shareholders by 1/3rd. SO they may have a cash flow machine by the time they get to 50,000, but you may be so diluted by then it won't matter.

    You can't double the revenue of a business in a year without a tonne of capital, especially not one this size.

    It is also a bit contradictory that you are putting all this faith in management's 2012 guidance when they just missed their quarterly guidance. and my quick read of the press release had them guiding down for the rest of the year.
    Aug 24 07:23 PM | Likes Like |Link to Comment
  • Primo Water Sell-Off Is Seriously Overdone: Original Story Remains Intact [View article]
    I wouldn't say this business is "essentially breakeven". They've been narrowing the loss, for sure, but they can't go on losing $4 mil every half year without raising more equity.

    What is interesting is that their gross margin has been steadily improving over the past 5 years. Where exactly breakeven is is hard to determine. If they double sales from here, will that be enough to get them in the black? And if they are only breakeven, will there be enough operating cash flow to fund their growth strategy? they will have to raise equity again ... will they be able to complete another secondary offering whilst being sued for the previous one?

    If you are valuing this company I would suggest increasing the # of shares outstanding given the likelihood of an additional equity raise. VERY intriguing opportunity but the economics of the business strike me as a bit questionable.
    Aug 24 03:13 PM | 1 Like Like |Link to Comment
  • ATP Oil and Gas Earnings a Mixed Bag, But Not the Cause of Volatile Price Changes [View article]
    that has been my strategy thus far ... but im not convinced oil prices are due for a quick rebound this time around
    Aug 18 03:18 PM | Likes Like |Link to Comment
  • Chart of the Day: The Great Earnings-Yield Divergence [View article]
    in order:

    2) growth prospects in the near-term are dampened, but given the long-time horizon of stocks, growth prospects in general have not changed much at all

    3) this is an excellent point

    5) there a number of shareholders in very large, non-dvidend paying companies that would disagree; besides, dividend yields are also very high in comparison to previous years
    Aug 15 02:06 PM | Likes Like |Link to Comment
  • Chart of the Day: The Great Earnings-Yield Divergence [View article]
    actually ... the cost of carry for the investment in gold will increase along with interest rates ... so gold falls in A and B
    Aug 15 02:00 PM | Likes Like |Link to Comment
  • Pricing a Collapse That Isn't There [View article]
    you are correct that markets are "supposed" to be look ahead 6 months. but as you can see from the jobs chart, stock markets and payroll loses fell in lock-step, meaning the stock market wasn't particularly forward looking at all.

    the market is not a perfect prognosticator. if fact, MOST of the time the market is wrong on what its actual price should be.
    Aug 10 01:43 PM | 1 Like Like |Link to Comment
  • Overvalued Netflix: Too Many Great Expectations [View article]
    you make a great point ... NFLX certainly could expand their product offering to all kinds of things ... I think that's actually somewhat baked in to my assumption that ARPU increases from $11 to $24 over that time. the thing with something as uncertain as what you suggest is that its impossible to know ... making NFLX very hard to value and much more of a gamble than an investment
    Jul 29 08:16 PM | Likes Like |Link to Comment
  • Overvalued Netflix: Too Many Great Expectations [View article]
    agreed ... competition is lining up to steal market share from NFLX
    Jul 29 02:38 PM | Likes Like |Link to Comment
  • Overvalued Netflix: Too Many Great Expectations [View article]
    actually ... i did not miss that crucial step. i included a terminal value portion that assumed 3% growth from 2026 to the everafter and discounted it at 12%.

    Note that future free cash flow is substantially lower than income becuz acquisition costs of future content will be much greater than amortization of prior content. Income should not be used in a DCF. Also, your ~13x P/E ratio assumes a much greater amount of growth than a 3% terminal rate would call for.

    Also, your assumption of a 5% discount rate is way too aggressive. given the high unlikelihood of this scenario occuring, a 12% discount rate is properly too aggressive.

    I agree with your statement that you are obviously not an accountant ;)
    Jul 29 02:37 PM | Likes Like |Link to Comment
  • Overvalued Netflix: Too Many Great Expectations [View article]
    and your assumption that NFLX can grow earnings 50% per year for the next 3 years is VERY aggressive. My model predicts ~25% growth in years 2 and 3. Even at that pace, NFLX must double their subscriber base in the US.

    To achieve 50% per year, the international base would have to grow to some 10 million subscribers. I'm all ears as to how this will be accomplished.
    Jul 28 06:09 PM | Likes Like |Link to Comment
  • Overvalued Netflix: Too Many Great Expectations [View article]
    Excellent point. i should have also mentioned that, in the model, the # of people per household declines over time as per very clear demographic trends. In the US, the number declines from 2.6 to 2.2 from 2011 to 2026.

    Internationally, the number declines from 4 to 3 ... hence why I used 3.

    12% discount rate. i can email you the spreadsheet if you'd like to poke around.
    Jul 28 06:03 PM | Likes Like |Link to Comment
  • Overvalued Netflix: Too Many Great Expectations [View article]
    Yes ... but as you say, the "PRICE WOULD REMAIN UNCHANGED". I prefer investments where the price increases. Obviously NFLX has had a spectacular, and mostly deserved run, but the good times are over.
    Jul 28 05:57 PM | Likes Like |Link to Comment
  • Overvalued Netflix: Too Many Great Expectations [View article]
    actually, that's exactly what I wrote
    Jul 28 03:21 AM | Likes Like |Link to Comment
  • Overvalued Netflix: Too Many Great Expectations [View article]
    excellent point. a single subscription can be used in more than 1 household ... even worse for NFLX.
    Jul 27 01:41 PM | Likes Like |Link to Comment
  • Overvalued Netflix: Too Many Great Expectations [View article]
    I agree completely about the ARPU estimates being too aggressive. Further reason to believe the current valuation can't be satisfied by future earnings.
    Jul 27 12:25 PM | Likes Like |Link to Comment
COMMENTS STATS
178 Comments
185 Likes