In Monday’s Fast Money Web Extra, what M&A pair did the FM traders discuss?
In Monday’s Web Extra, Pete Najarian reveals which chip maker he thinks is a buy. Also the latest play on the XM / Sirius merger.
Disclosure: At time of publication, William Trent has no financial positions in XM Satellite Radio (XMSR) or Sirius Satellite Radio (SIRI).
Mark Travis said he likes “redneck stocks.” On April 24, The CIO of Intrepid Capital Funds recommended:
My RealMoney article from December 7, 2007:
CSG Systems (CSGS) is a leading provider of customer care and billing services for cable operators, including Comcast (CMCSA), Echostar (DISH - Annual Report), and Time Warner Cable (TWC). Since July, when the company announced in a shortfall in cash flow from operations, the shares are down more than a third. The current price may be a good opportunity for investors to buy a stable cash flow generator.
The cash flow shortfall in the second quarter was “due to unexpected changes in certain operating assets and liabilities at quarter end” as was largely made up in the third quarter. But don’t get me wrong - there are plenty of good reasons to explain the recent share price decline.
Let’s start with customers - the relationship with Comcast has been touchy at times, stemming from lawsuits related to Comcast’s 2002 acquisition of AT&T (AT&T’s former cable assets). That relationship seems stable now, but things could always get dicey again.
Then there is all the talk about Echostar being taken over. A merger with a company like AT&T (T - Annual Report) that does not use CSG’s services could mean CSG loses its number two client.
Next, even without any mergers and acquisitions activity going on CSG stands to lose when its customers have fewer bills to send out. Increased competition from telephone companies like AT&T and Verizon (VZ - Annual Report), along with trouble related to the housing market, have led both Echostar and Comcast to cut customer growth estimates recently.
So, suffice to say there are plenty of reasons to be concerned about CSG’s prospects in the near term. Now we have to figure out whether today’s one-third-off sale fully reflects those potential concerns. I think it does.
The Positive Side
If there is one thing to like about CSG Systems, it is that the earnings are predictable. Consider the last 12 quarters, which I charted below.
Source: Zacks Research Wizard
The knock against predictability, of course, is that the earnings are going nowhere. They have been stuck in neutral at $14-$16 million per quarter for much of the last three years. On the other hand, the company generates tons of cash - $105 million worth of free cash flow (cash from operations less capital expenditures) over the last 12 months.
And it uses most of that cash flow to buy back stock. In the third quarter of 2007 there were 17.5% fewer shares than there were in the same quarter last year. As a result, the earnings per share are far from stagnant. In fact, the last 12 months of EPS were 16.1% higher than the preceding 12 months.
Now that the share price has come down, the buybacks are having a bigger impact than ever. At the current pace, the company could take itself private within six years.
Free Cash Flow Yield
With $95 million in free cash flow and a current enterprise value of $638 million, CSG is sporting a free cash flow yield of more than 16%. Even if the $65 million they spent on acquisitions this year is deducted, the free cash flow yield would still be a healthy 6.2%, offering a solid risk premium over Treasuries.
With that kind of risk premium, investors look to be well compensated for the risks I outlined.
Zacks Investment Research has provided Stock Market Beat with a complimentary trial subscription to Research Wizard.
With the end of the first quarter approaching, it is time to adjust the names in my Watch Lists. I will price all the new lists as of the close on Friday, June 29.
Today I present my planned updates to the Small Cap Watch List. There was a fairly high level of turnover to the list. 12 of the 24 names from the previous run made it to the current list, which was also 24 names. Performance-wise, the list created in March has returned an unweighted average return of 2.6% through June 28, with 80% of the stocks in positive territory. All of the money-losers from the previous list fell out of consideration.
So without further ado, the names on the chopping block from the previous list are: PW Eagle (PWEI), Insteel Industries (IIIN), Allied Defense (ADG - Annual Report), Hartmarx (HMX), Parlux (PARL), Hansen Natural (HANS), FirstFed Financial (FED), Young Innovations (YDNT), ITT Educational (ESI), Rent-a-Center (RCII), Valassis (VCI), and Travelzoo (TZOO). The castaways include four of the five money losers from the previous portfolio (HMX, PARL, YDNT and TZOO) as well as the biggest gainer (ESI).
The new list is:
I will continue to track both lists on StockPickr.
I am proud to host this edition of the Festival of Stocks. Since you are here for some stock picks, let’s get to them!
Rock Your Stock rang in first with Callaway (ELY) is Hot. He says the stock is on a tear and has the fundamentals to back it up.
Rick Casterline at Once More Unto the Breach figures he can sleep when he dies. No way is he going to do it during day 3 of the Berkshire Hathaway Annual Meeting.
Average Joe at Investment Jungle weighs in with a review of Small Cap Watch List (Track at Marketocracy) member First Regional Bancorp (FRGB). Joe and I have frequently been on the same investment page.
Project Stocks submitted Beat the Market With Only 15 Minutes of Work Each Year. The idea is to buy each year’s top performing fund and hold it for a year. Seems simplistic, but it actually has some support from recent academic research.
Neural Market Trends wonders about the effect of financial asteroids on market trends.
Fiscal Times tells us the stocks Business Week ranks as most innovative tend to perform better.
Big Cajun Man has found a real lu-lu.
TJP at Investor Trip explains what he missed when he first got Sirius (SIRI).
Trader’s Narrative is calling a bubble… in China.
Self Investors outlines a successful day trade in Force Protection (FRPT).
Silicon Valley Blogger offers 5 tips for evaluating your portfolio.
George at Fat Pitch Financials presents his five favorite ways to hack into the web’s resources for investors. I downloaded the Excel add-in and am looking forward to trying it out.
Sox First outlines what went wrong with the planned private equity takeover of Qantas.
And what the heck? I’ll toot my own horn by presenting my take on United Industrial Corp. (UIC).
The topic of a la carte cable service (consumers being able to choose and pay for specific channels they want, and no “basic” tier) has been a big topic of discussion from time to time. Today it gained new attention due to comments by FCC Chairman Kevin Martin (via Reuters):
“An a la carte regime would enable viewers to buy their television channels individually, in smaller bundles, or in the large bundles currently offered,”
The way cable rates are set has little to do with the consumers of entertainment content, which is why we seem to have progressed from 57 channels to several hundred… and still nuthin’ on. We each pay for a package of channels that includes one or two we’d like to have and dozens we don’t care about. Meanwhile, some of these programmers pay the cable company for distribution while others get paid by the cable company for the right to distribute the content.
According to the Reuters article, “cable operators have been reluctant to allow customers to choose their own program bundles, claiming that it would raise prices for consumers.” So what? Consumers frequently trade higher prices for things they want more. The real issue is whether the cable companies would continue to get the kickbacks for certain channels, or whether the consumer would buy any channels at all if they found out the one they wanted was the only one in the 20 they were actually paying for. The article concludes:
Kyle McSlarrow, chief executive of the National Cable and Telecommunications Association, said at a press conference afterward that the industry should not be forced by government to offer networks on an a la carte basis.
Which is the real problem. Who do you trust more: the government or the cable operators. The chances are it is neither, and that is why Joost, YouTube and other options are the real threat to content providers and distributors.
SIRIUS (SIRI) reported earnings:
SIRIUS ended first quarter of 2007 with 6,581,045 subscribers, up 61% from 4,077,747 subscribers at the end of the year-ago quarter. During first quarter of 2007, SIRIUS added 556,490 net subscribers consisting of 192,978 from the retail channel and 364,674 from the OEM channel. In first quarter of 2007, SIRIUS captured 66% of satellite radio segment share, marking the sixth consecutive quarter for leadership.
Total revenue for the first quarter of 2007 increased to $204.0 million, up 61% from $126.7 million for the year-ago quarter. Advertising revenue was $6.7 million during first quarter 2007 and average monthly revenue per subscriber (or “ARPU”) was $10.46. Average monthly subscriber churn was 2.3%, and was consistent with previously provided 2007 churn guidance. SAC per gross subscriber addition was $104 for the first quarter of 2007.
SIRIUS reported a net loss of ($144.7) million, or ($0.10) per share for the first quarter of 2007, a 68% improvement from a net loss of ($458.5) million, or ($0.33) per share for the first quarter of 2006. The adjusted net loss for first quarter 2007 (adjusted to exclude stock-based compensation) improved to ($120.5) million, or ($0.08) per share, a 31% improvement from the adjusted net loss for first quarter 2006 of ($174.0) million, or ($0.13) per share. 2007
OUTLOOK SIRIUS today reiterated the following guidance for the full year 2007:
– Total revenue approaching $1 billion
– More than 8 million subscribers at year-end
– Average monthly subscriber churn of approximately 2.2 - 2.4%
– SAC per gross subscriber addition of approximately $95
Analysts were expecting the company to earn ($0.11) on $212 million in sales. For the full year, they expect $975 million in sales, whcih sounds like “approaching $1 billion” to us.
Key for the company is completing the planned merger with rival XM Satellite radio. The two have been competing for unique content as well as for customers. After the merger is complete, these costs should be more tightly managed and perhaps allow the combined company to actually turn a profit.
A couple of months ago, we addressed the prospects of slowing consumer spending by saying, “Slowdown? Maybe. But if you have the right merchandise consumers will still spend more than they earn.” Now we get a similar assessment from CNNMoney:
Moreover, since consumer purchases fuel two-thirds of the economy, these two months provide a vital temperature-taking of the overall health of the nation’s economy.Any significant slowdown in consumer spending immediately raises concerns that the economy as a whole will likely follow.
So how do things look so far? Despite the retail picture being a little muddy this year, analysts for the most part seem to agree that consumers are not yet shying away from shopping.
They’re just becoming more cautious and more picky about where they shop.
Betting against the consumer is always a long shot. Sometimes they come in, but usually they don’t. Given the housing weakness, this may be the year for it. However, it’s not something we’ll put a lot of money on.
It has been said that cable’s major advantage over telcos and satellite tv is its ability to offer the “triple play” of video, voice and data over a single line. The ability to leverage its existing service to capture additional revenue streams gives it a unique edge that has been behind the telco’s own fiber roll-out.
At the same time, the telcos have enjoyed the advantage of wireless spectrum and services, which are largely replacing land-lines for voice service anyway. This gave the telcos a different triple-play: voice, data and wireless.
Thus the race was on to be the first to offer a quadruple play that included all four services. The telcos partnered with satellite companies, the cable companies partnered with independent wireless player Sprint-Nextel, and the telcos started their fiber expansion. But these interim partnerships appeared to us to be of limited value. There is no cost savings to the bells company from reselling satellite video - unlike video and data over the same pipe satellite was a different pipe, and one they didn’t own. Likewise for the cable companies offering wireless service. Until now. More »
Kiplinger’s shows some love to Adobe (ADBE) and UPS (UPS). RBC raised their rating on Adobe (ADBE).
Meanwhile, Forbes notes Bear Stearns’ opinion that Symantec (SYMC) is trading at a meaningful premium to fair value. That won’t make the buyers at $23 happy. But at least the company fixed the bug in its antivirus software.
Ceradyne received orders totalling $18.1 million for completion later this year. It doesn’t help their plateu problem but gives them another 5 percentage points of revenue growth compared to 2005.
Ceradyne, which makes ceramic products used in military and automotive sectors, said it received three orders for ceramic body armor from the Marines. Shipments are expected to start in the third quarter and be done by year-end.
The Humvee contract, from AM General Corp., is for armor components used to outfit the M1152 HMMWV, a four-wheel drive vehicle that serves as the Army’s main tactical truck. Armor shipments are expected to start in June and be done in October.
XM Satellite Radio (XMSR) has to stop selling some radios whose signal is too strong.
Free Annual Reports
