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Matt Berry
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Follow me on Twitter: https://twitter.com/MattBerry01 I'll be publishing on my blog from now on. I usually send my reports through a newsletter first. Join the mailing list at http://www.3footcrowbar.com/ Interests: -- reading up on bounded rationality, behaviorism, and philosophy -- writing... More
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  • Why I Bought JAX (and KSW) 0 comments
    Nov 18, 2010 4:26 PM | about stocks: KSW, JAX
    Why KSW and JAX?   My entry into JAX follows pretty much the same strategy that I employed to get into KSW.

    At one point with KSW, liquid assets exceeded price. Low risk, but what was the potential return?  How much would KSW be worth with the return of their contracts?  It was fun to speculate, but it was really irrelevant at that time. KSW’s future prospects were on sale for free; they came along with the purchase of KSW's cash balance, dollar for dollar. (All of this assumes of course that I have not made a mistake in my calculations, that there is no mistake in reporting, that the management are not crooks, that the cash is really there ... etc.)

     By my estimates, just as KSW was sitting on cash, JAX was sitting on land value.  JAX was priced at liquidation.  Here is a valuation I made back in February. seekingalpha.com/instablog/582827-mattbe...

    But of course everyone should do their own D.D. Get a hold of the latest 10k. 1.) Calculate a reasonable value of the land after appreciation (it's carried on the books without appreciation), 2.) Add up other assets at liquidated values.  3.) Subtract debt. 4.) Subtract some "friction cost" for the liquidation process. Try, by your own calculations, to estimate how much you would get back if the company were liquidated.   In a later "thumbnail" sketch I judged the JAX in liquidation to be worth somewhere around $3.36.  (See http://seekingalpha.com/instablog/582827-mattberry/58325-will-j-alexander-s-corporation-bite-the-dust-or-has-it-already-jax -- this is a different post from the preceding). Supposing that that particular sketch was correct and that JAX in liquidation was worth at least $3.36.  What then was JAX worth as a going concern?  I've got my own ideas, but they are irrelevant. The going concern would be on sale for free at $3.36.  (If you go to the original blogs, you’ll see that the evaluations were made back in first quarter, 2010 when I was buying at $3.5. JAX closed today at $4.87.)

    If business should return to normal for JAX -- which is appartently the case now, the price of the company should adjust from that of a business in liquidation to that of a going concern.  That could be lots of fun.  Which brings us to our next point: EPS.  We still have that big red number from 2009. No doubt, it was a bad year. Same store sales were down. Bad. But how bad?  Last year's valuation allowance and an asset impairment of some restaurants took a toll on annual earnings as reported.  And those were responsible for most of what was subtracted from EPS. Not good, but it was mostly a paper loss and in large part due to management assumptions and accounting requirements. How will those assumptions and requirements play out going forward? My take:

    1.) Asset impairment last year has positive impact on EPS this year: lower depreciation against revenue ‒ and according to recent reports, the underperforming restaurants are improving.

    2.) I'm betting on a reversal of the valuation allowance, which is in large part dependent upon management's assumptions of the future and the ceo has already assumed a more favorable outlook in his last press release and 10q. (If I dismiss this as non-cash income, then to be parallel with my reasoning I would also have to say that a large part of the negative 2009 EPS was also non-cash -- either 2009 was not that bad and everyone has overreacted to an accounting requirement or it was a year in Hell and 2010 will be all sunshine and butterflies.  Regardless, EPS -- under this scenario -- goes up in the 2010 10k, as does book value.) 3.) It is last years 4th Q that subtracts -2.30 from a 12 month trailing EPS total, and  this was mostly due, as we said, to the valuation allowance and asset impairment.  That annual number sucks the life out of anyone looking at the PE ratio. Very few think it worthwhile to dig through the 10-Ks and Qs and estimate what the numbers might look like in 2011.  However, based upon management's stated outlook and the improving economy at large I am betting against another asset impairment and valuation allowance in the last quarter of this year.  Year-to-date quarters 1,2, and 3 already add up to .38 cents EPS.  The seasonally best two quarters of JAX are coming up, and if my bet plays out well even a mediocre 4th quarter should effectively flip 2009's negative number to the positive and the 1st quarter 2011 should kick it further up the hill. What will PE look like then?

    And not to forget, JAX is also an asset play. In good times it usually trades on par with book value. Today it closed at .61 price-to-book (based upon latest 10q).

    Disclosure: ksw, jax
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