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  • Sports Supply(RBI) is a buy - Private Equity idea publically traded..Time to BUY

    Sports Supply Group – RBI

    Market Cap: $150m

    Price: $12.11

    Sales: $250 (0.57x sales)

    2008 EPS = $0.76,  2009 EPS = $0.86, 2010 guidance $0.91-$1.00

     

    We think a $1.5 to $2.5B market is about to be consolidated by either RBI. If not by RBI, then by a Private Equity Firm, buying RBI. That’s right Private Equity WILL BUY SPORTS SUPPLY GROUP.

     

    After integrating its largest competitor in 2006-2007, RBI has slowly (below the radar) built a world class group of field salesman and back end systems for order management. The company has streamlined its inventory and catalogue and is poised to grow in 2010 and 2011. We believe the street, only two analysts, are behind the curve in terms of revenue opportunities. The street has modeled 7% growth for 2010; the company has announced 3 acquisitions and 4 partnerships in the last 2 months that are worth $10-$15m in sales in our opinion, which we think should be accretive to the 7% number. We expect 8-10% growth.

     

    The company just paid off its convert in December 09, and now has full access to the $50m LOC which was restricted until 12/09. This is important as they now have access to capital at 2.5% vs. paying interest at 5.5%. We would also point out that over the last 2 years, the company has paid off $45m in debt. To put this greater perspective, in 2007 the stock was $12 per share, had 15m shares and $45m in debt. Today, at $12, the company has 12.5m share and roughly zero debt.  Companies talk about shareholder wealth creation, RBI does it. (We suggest you read that again, this is what companies are supposed to do). At some point, RBI will take off like a rocket.

     

    So why hasn’t this company been found and why will PE buy it? RBI sells sporting equipment through a field sales force, catalogue, and internet to schools (K-12), Universities, and Park & Rec. NOT SEXY at all.  What is sexy is that of the $1.5-$2.5b market, RBI does $250m, making it the largest player. Being the largest player allows RBI to invest in real back office systems, Oracle, etc, to streamline and grow. This means, RBI is the only company large enough to leverage off of. (Now start to see the PE relationship here). To be clear, Leonard Green purchased Varsity.com and they are the largest supplier of cheerleading equipment. This industry is ripe for the consolidation, and RBI is what PE would buy.

     

    In the mean time, why buy RBI.

    Competition: It’s mom and pop competitors are dying in the current environment. Yes we know lots of companies say this, but last quarter, 3 of RBI’s competitors, handed over their businesses, $2-$3m in sales each, to RBI for what we believe to be 2-3 year employment contract. (as they paid roughly ZERO for them, we are guessing here). So yes, it’s that bad for most competitors our there, and that good for RBI, and trusts us, there’s more to come.

    New contracts: RBI has, per the last seeking alpha contributor pointed out, been successful in winning a large government contract for K-12 to fight Obesity. While the contract is a win, the last provider only provided a small sampling of the total contract. In a few years time this should turn into a $15m contract, or more.

    Margins: The company has continued to increase both its GM’s and Operating margins y/y for the last 2.5 years. There is a cap to GM’s of course, but the company is still 2.5% to 3% away from its goal in direct sales, and 4-5% away from its goal on field sales.

    Not only will RBI grow revenues, but we can see a 10% Operating margin in 2-3 years on $300m in revenues.

     

    MOMENT of TRUTH:  “WHY SHOULD I BUY THIS TODAY”

    1.        RBI has met or exceeded guidance 5 quarters in a row. At some point this will matter.

    2.        FREE CASH FLOW. On a projected $1 in EPS, or $12.5m net income, RBI should generate roughly $15-$18m in Cash flow. That’s $1.20-$1.44 per share.

    3.        2-3 year outlook. We see this company as a $300m top line company with 10% Op margins. On a 40% tax rate that’s $1.45 per share in EPS and $1.75 in CASH EPS. (That’s also roughly $40m of cash added on to the balance sheet or $3.20 worth of cash or 26% of the current market cap.) At that rate, in 7.5 years, the cash will equal the market cap, and you’d get the company for FREE. This really is something to think about.

     

    RBI is well run (this is a Business to own not just a stock to rent), extremely cheap, poised to enter a growth phase, and has a Private Equity Bulls-Eye on its back to backstop the stock price.

     

    Risk: Very Low trading volume.

     

    Author is Long



    Disclosure: Author is LONG
    Feb 11 3:17 PM | Link | Comment!
  • Why Universal Display (PANL) is a SHORT !

    Why PANL is a SHORT .

     

    Due to false and misleading rumors about OLED being the technology that was to go into the new Apple iPad, Universal Display(NASDAQ:PANL) was up 40% over a 2 month period. We would take this opportunity to sell a long position or build a short position.

     

    Thesis:

    1. Why was the rumor false and misleading.
      1. First off, Apple introduced the iPad yesterday, and the iPad uses IPS, a variant of LCD, not OLED

     

      1. Second, and most importantly to anyone who does fundamental research, and who is not a wild speculator, is of course the truth. Channel checks indicated what the Managing Director of the OLED Association, Barry Young, told the press two weeks ago,

     

     “The problem with the recent rumor that Apple is hoarding 10-inch OLEDs, Young explained, is that "there's no real production of 10.1-inch panels" for anyone to hoard. If anyone were to produce a 10.1-inch panel, then it would have to be for a specific order. "I haven't seen any of the OLED suppliers commit to that yet," Young said of a hypothetical 10.1-inch panel production run.”

     

    http://arstechnica.com/apple/news/2010/01/january-launch-of-10-inch-amoled-apple-tablet-near-impossible.ars

     

    The rumor was a complete fabrication, and as we said above, a reason to sell PANL. 

     

    1. Valuation: - Now that we’ve put the rumors to bed, what’s this worth. Here’s where it gets interesting.

     

      1. There have been two comparable companies purchased. The first was Cambridge Technology (Symbol OLED). Cambridge was purchased in 2007 by Sumitomo Chemical for $285m. Cambridge’s license revenue was slightly greater in 2007, than PANL’s license revenue is NOW.

     

      1. But that was 2007, what about now….LUCKY US….Kodak just sold its OLED business to LG in December 2009. Kodak actually just disclosed the sale price today (1/28/10), so this is hot off the press. According to KODAK

     

                                                                   i.      “…agreed to sell assets of its OLED group to Global OLED Technology LLC, an entity established by LG Electronics, Inc., LG Display Co., Ltd. and LG Chem, Ltd…Fair value of the assets sold was estimated using other competitive bids received by the Company. Accordingly, $100 million of the proceeds was allocated to the asset sale” (Exhibit 99.2, 8k 1/28/10)

     

    So $100m is what the comparable business went for TODAY. Seems like the 2007 asset bubble was popped.

     

    PANL is trading at a valuation of $428m today. We think its at least 50% OVERVALUED.

     

    1. Patents and Partnerships and THE CATALYST
      1. Samsung is PANL’s largest customer and their contact ends THIS JUNE. For those of us who want a catalyst, watch for the end or restructuring of their contract with their largest customer.

                                                                   i.      “8.1     Term. Unless otherwise extended by mutual written agreement of the parties, the term of this Agreement (the “Term”) shall commence on the Effective Date and shall continue until June 30, 2010, or through the date on which this Agreement is terminated as permitted hereunder, whichever occurs sooner. Unless otherwise expressly agreed in writing by the parties, all licenses granted under this Agreement shall expire immediately at the end of the Term.”

     

    PANL has to renegotiate terms with their largest customer. While only a few million in license to show for it, and now a potential need to renegotiate that, we expect PANL’s numbers will get worse.

     

      1. Patents expiring: PANL’s first set of patents from MOT expire 2012:

     

    “In September 2000, we entered into a License Agreement with Motorola whereby Motorola granted us perpetual license rights to what are now 74 issued U.S. patents relating to Motorola’s OLED technologies, together with numerous foreign counterparts in various countries. These patents will start expiring in the U.S. in 2012”

     

    The second set expire in 2014:

     

    “We exclusively license the bulk of our patent rights, including our key PHOLED technology patents, under an Amended License Agreement we executed with the Trustees of Princeton University and USC in October 1997. Based on Dr. Forrest’s transfer to the University of Michigan, in January 2006 the University of Michigan was added as a party to this agreement.  As of December 31, 2008, the patent rights we license from these universities included 214 issued and pending patents in the U.S., together with numerous counterparts filed in various foreign countries. These patents will start expiring in the U.S. in 2014”

     

    The final set of PHOLED patents  expire in 2017:

     

     “…PHOLED technology patents licensed from these universities will not start expiring in the U.S. until 2017”

     

    With 2, 4, and 7 years left on their patents, we can’t see how any company would pay more than $100m for a money losing business, whose revenue and earnings will NEVER generate a rate of return to even cover the $100m.

     

    Risks: OLED’s will certainly grow in popularity, and the potential for PANL to earn license revenues has the possibility of increasing. Unfortunately, PANL is a small bit player in an industry that will be commoditized almost immediately. 

     

    Author is short PANL.

    Disclosure: Short PANL
    Tags: OLED
    Jan 28 12:53 PM | Link | 4 Comments
  • Why AEZ is not worth what the market is paying, the real math on Goliath

    It is extraordinarily difficult to figure out how much these Bakken plays are worth, given that many of them have at this early point in development only the acreage. They do not yet have reserves or production that allows their valuations to be compared with other resource companies targeting more mature fields. Luckily, American Oil and Gas (AEZ) announced a transaction yesterday that allows us to back into what they and their unnamed industry company think AEZs acreage is worth. According to the December 15, 2009 press release, the industry company will earn:

    25% of Americans working interest in working interest in approximately half of the 60,000 net acres at Goliath by funding 100% of American's interest in a one well drill-to-earn arrangement. American will be carried for and will retain 30% of its original interest in the well and the drill site spacing unit. The industry company will also pay up to an additional $1.1 million to American as part of the agreement.

    Got that? The first part is unambiguous. The industry company will receive 7,500 net acres of AEZs Goliath play (25% * * 60,000 net acres). The second part is a little ambiguous, since it is not clear if American was previously on the hook to pay 100% of the one-well drilling costs in their drill-to-earn arrangement, or only 30% of the drilling cost, in line with their original interest in the well. In any event, we can get a range of the funding commitment of the unnamed party. Since Bakken wells generally cost $5-8 million to drill, the industry party at the low end is going to fund $1.5 million of drilling expense (30% of $5 million) and at the high end $8 million (100% of $8 million). Add in the $1.1million additional upside (presumably based on a blowout success on the well, so not applicable on lower bound valuation) and the industry company is funding $1.5 million to $9.1 million in exchange for 7,500 net acres, or $200/acre to $1,213/acre. This implies that the value of AEZs remaining interest in the Goliath play is between $10.5 million and $63.7 million, or $0.20/basic share to $1.33/basic share. The company and an independent third party just told us that their crown jewel Goliath play is worth much less than the market thinks it is.

    Given that 46,000 acres of Goliath were purchased in 2009(less than 5 months ago) for roughly $3m this property is not worth and is not of the quality the stock is getting credit for.

    June 30, 2009 - 14,600 acres - Goliath - paid $900,000
    July 15th, 2009 - 11,600 acres
    October 2009 - 16,000 acres

    So 46,000 acres purchased in last 5 months in GOLIATH (this accounts for 55% of all their Bakken acres) and now that's worth $180m. Let's be clear, its not.

    Just ask their auditor. From the last 10Q (3Q10Q) "We estimate that the standardized measure of discounted cash flow relating to our share of proved undeveloped reserves approximates $0.9 million, net of our estimated $1.2 million share of drilling and completion costs."

    AEZ is worth $2.50 to $3 a share in the real world and will certainly be looking to sell stock soon.


    Disclosure: Why AEZ is worth much less than its current price.
    Tags: AOIX
    Dec 16 10:39 AM | Link | Comment!
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