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The stock is of long term interest. Lion Capital owns 7-year dilutive warrants for 20% of the float with a strike of $2.00. Company is an expert marketer and continued to expand during the Great Recession. Margins are a problem, but increased market share is an ok replacement if they can operate at break even.
Update for the monster drop: The real story today is that same store sales are down 10% since Q1 2009 which, for many companies, marked a low point. Instead it appears the company will be posting a record $0.25 loss for Q1 2010 which is not sustainable (see preliminary Q1 results). The numbers are partially a result of same store sales being down and also because of the immigration related layoff of 1,500 in late 2009 which lead to cost inefficiencies.
At a closing price of $1.63 the market cap is $116M. Lion Capital's warrants are not exercisable at this price, but if the company is in default then dilution might be inevitable anyway. To adjust for this, multiply $116M x 1.20 = $139M. According to the estimated statements shareholder equity stands at $144M, so at $1.63 the stock is trading just below equity. At $1.20, 2009's low, this number is $102M or 70% of equity. At $1.00/share the market cap is 59% of equity. Under $1 the market would be pricing in bankruptcy. These prices are a good risk/reward even assuming future dilution and problems. The company has a great brand and enough on the balance sheet that bankruptcy would be counterproductive and premature.
|Price||Mkt cap incl Lion Capital warrants / Equity||Comments|
|$1.63||97%||market assumes further balance sheet deterioration|
|$1.25||74%||market projects same store sales trend into future|
|$1.00||59%||$1 and below the market is pricing in bankruptcy or significant restructuring|