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Arris Group - The Siphonic Flush of Management

|Includes: ARRIS International plc (ARRS), CSCO, GOOG, HLIT
Believe it or not, we are simple blue collar investors that for the most part, still have our own teeth, and in some cases, almost all of our own hair. We haven't really wanted to be anything other than what we are, average folks just trying to save a few dollars for the day we may need a cane.

Since we are fairly simple minded investors, we have a fairly simple investment philosophy; determine a reasonable value estimate for a stock, buy the stock at a discount to our reasonable value estimate, sell some of the stock along the way, and close our position when the stock reaches our reasonable value estimate.

There are a great many investment philosophies floating around the internet, some that are simple and some that are, at least to us, very confusing. We came across a site last week that screens stocks based on something. What that something is we aren't quite sure. We knew it was based on something because when we hit the screen button, it returned a list of stocks. We thought that was pretty clever.

The site said the user should hit the screen button, then build a portfolio of 20 stocks from the list returned, and then sell them after one-year. Once sold, investors should repeat steps one through three. We assume by the time someone would get to step four they will be on easy street and no longer a subscriber to the website.

We followed the screen instructions and then randomly selected a company just to see if there was any validity at all to yet another investment philosophy. The company we selected wasArris Group, Inc. (Nasdaq: ARRS).

Financial information related to the Arris Group, that is contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending December 31, 2009 as filed with the Securities and Exchange Commission on February 26, 2010.

What They Do
The company is a global communications technology company, headquartered in Suwanee, Georgia that operates in three business segments, Broadband Communications Systems, Access, Transport and Supplies, and Media and Communications Systems.

The company specializes in integrated broadband network solutions that include products, systems and software for content and operations management (including video on demand, or VOD), and professional services.

They claim they are a leading developer, manufacturer and supplier of telephony, data, video, construction, rebuild and maintenance equipment for the broadband
communications industry.

In addition, they claim they are a leading supplier of infrastructure products used by cable system operators to build-out and maintain hybrid fiber-coaxial (“HFC”) networks.

Short-Term Investment
The stock closed recently at $11.43, and according to the trend line we found, has recently entered an uptrend and currently has an RS rating of 71, meaning that over the past 13 weeks the price of this stock is higher than 71% of the stocks trading on all exchanges.

In our opinion, short-term investors should have taken a position in this stock the last week in January when the stock was oversold, instead of over the past week, driving the stock to an overbought condition.

With first resistance at $11.62 a 2% increase from the stock's recent close, and first support at $10.67, a 7% decline from the stock's recent close, we think the time for a short-term trade is a thing of the past.

Long-Term (5 Year Hold) Investment
We have to admit, we were impressed with the company's current ration at 5, its quick ratio at 4+, and its cash ratio at 3+. To us, these ratios far exceed what we consider investment quality.

We were also impressed with the company's return on invested capital number at 38%, something we seldom see above 25% in today's economic environment.

As impressed as we were with some of the company's financials, there were several areas that reminded us that management needs to stop scratching its collective stones and become more involved.

For instance, the company ended fiscal 2009 with free cash flow of $1.33, which is lower than what we would consider investment quality.

We also noticed that other free cash flow
numbers we like to look at such as free cash flow to equity and free cash flow to the firm, had fairly significant year over year swings, something we don't like to see, and something we interpret as indecisiveness on the part of management.

We were equally unimpressed that the company's receivables were outstanding an average of 49 days and while the company's payables were outstanding an average 32 days. Hello management people!!! Can you spell FREE MONEY???

Lastly, we noticed that the company ended fiscal 2009 with total debt of $226 million on which they paid an average interest rate of almost 8%. Considering that interested rates are reasonably low at present, we have to wonder why management would allow the company to spend more than $2 million on stock repurchases instead of applying those dollars to debt reduction, something would benefit shareholders much more over the longer term.

Final Thoughts
We think the stock has long-term appreciation potential in the $25 to $27 range. But as we noted, at this point we aren't real big fans of management, believing they simply have no clue about the day to day operation of the company they are charged with managing. This of course makes us wonder about an investment in the stock.

Normally we would require at least a 50% discount to our reasonable value estimate before we would consider investing in a stock, which would place our placing our normal entry target for this stock in the $12.50 to $13.50 range.

But because we don't have that warm fuzzy feeling about management, we think a larger discount is required and so have reduced our
normal entry target to $10.

In the end, a company may have the greatest products in the world and a market share that is the envy of an industry. Yet, if its management can't find its way off of the executive crapper long enough to notice the simple things going on with the business it is managing, perhaps its time for the company's investors to flush and start over with clean water.


For the Wax Ink Arris Group Raw Value worksheet, please click here.

Disclosure: No Position