Sickening

I finally returned to the office yesterday, in part because I needed to show that I was actually working while laid up, and in part because Mrs. 2outof4 was tired of me doing nothing to help around the house!

But that's not what makes me sick. I am sickened by what I heard our President say on television today about Chrysler's bankruptcy. If you read the Washington Post synopsis and the letter from the "Non-Tarp" lenders, which I will provide below, and do not consider it ludicrous, I do not know what to say.

http://www.washingtonpost.com/wp-dyn/content/article/2009/04/30/AR2009043001639.html?hpid=topnews&sid=ST2009043001828

Essentially, the President blames the "holdouts" for not accepting 33 cents on the dollar , the same as the minority (TARP receiving) debt holders, as the reason for Chrysler's bankruptcy. Really!?! Are you sure Mr. President that Chrysler's bankruptcy is not to do with the fact that no one wanted to buy its vehicles and its cost structure was impossible to overcome due to the unions?

The hedge funds that hold the $1 billion out of $6.9 billion outstanding of Chrysler's debt have constituents that make up many people, but include average Joe's through Pension Fund investments, etc. The funds have a fiduciary duty to get as much money for their investors as possible. If that means not taking 33 cents and holding out for 60 cents, or whatever, from the bankruptcy because they are first in line, then they darn well better do it! It is unconscionable that our President would step in and try to frame these funds as trying to do anything but the best for their clients.

And the sob sorry about Chrysler being a national icon and one of our leading manufacturers is laughable for anyone under 50. The clowns at Chrysler have been uninventive, poor fiscal managers and professional lobbyists for the last umpteen years. What they should have been focused on is inventing, cutting costs, and making money - something that the bad guy hedge funds are attempting to do for their clients.

Reading the letter below reeks of Big Government run amok and a select few (TARP receiving) banks being favored over others. It is honestly like reading a John Grisham book:

http://media.washingtonpost.com/wp-srv/business/documents/chrysler/April30Statement.pdf?sid=ST2009043001828

What if I started 2outof4's Cola and all of a sudden people the world over decided that Coke and Pepsi were no good compared to 2outof4. Furthermore, people just stopped drinking Coke and Pepsi. The two companies were being pushed to bankruptcy by 2outof4 Cola just being so tasty and taking all of the others' sales. Would you right now, without the spin of the administration or media, say that the US taxpayer should come to the aid of Coke and Pepsi - by forgiving their debt or giving them more money? I hope the answer is No! That is called Collectivism, Communism, Socialism or whatever other hell you may choose to describe it.

Big Government went too far on this one. Chrysler is a bunch of incompetents run by greedy unions, and now YOU! Before the President criticizes any hedge funds, how about he criticizes the Unions? I do not have to read the post-mortem on that one to draw my own conclusion...

-2outof4

We'll Have to Deal with This

Inflation is something that we are going to need to be aware of in the future, and understand some of the ways we can protect our assets - e.g. TIPS, debt, etc.

This is a pretty good read - and by good I mean reasonably understandable:

http://www.ft.com/cms/s/0/ae436dbc-2d09-11de-8710-00144feabdc0.html

-2outof4

Stock Interest List Update

There were a lot of earnings reports out today.

SHOO - reported 1Q09 preliminary sales and EPS figures as well as some guidance for FY09. Expected sales for 1Q09 of $106.5 million were 10.9% above consensus and expected EPS of $0.36 was 50% above consensus. Similarly, the stated FY09 EPS guidance of $1.90 was 28.4% above prior guidance of $1.40 - $1.55, and 29.3% above consensus. A truly big surprise.

With this surprise, SHOO has gone well through my price target. Although the stock does not look unreasonably expensive, the margin of safety to the downside is no longer in place. While SHOO returned 45.94% in the time since it was placed on the interest list, the S&P 500 returned (1.92%). I am removing SHOO from the interest list.

TSCO - reported 1Q09 results by no means as stunning as SHOO's. Same store sales of +2.6% and store growth of 28 stores. The Company confirmed prior sales and earnings targets for FY09. The negatives included the Company saying April had gotten off to a slow start for seasonal merchandise due to cold weather, as well as, lower selling prices year-over-year due to the inflation see last year. TSCO also mentioned margins may be pressured as a result.

TSCO maintained its guidance, saying that April was just due to weather. It also increased its store count target. As the stock does not look overly expensive, there is still clear growth potential, and it has not reached my price target, it will remain on the Long Interest List.

-2outof4

Risk Taking Good

In between salty and sweet snacks last week on the couch, a friend sent me this article:
http://online.wsj.com/article/SB123993363356527967.html

I would suggest that Mr. Summers argument is the more palatable and that women are just great at science, thank you very much!

Maybe the thought of Mr. Krugman's argument is what made Texas Governor, Rick Perry, mention secession last week.

http://www.nbcwashington.com/news/us_world/NATLDemocrats-Think-Rick-Perry-Should-Zip-It-On-Secession-Talk.html

Maybe my grandfather-in-law has been on to something all along!

-2outof4

Stock Interest List Update

Hello All! I am returning to the World Wide Web for better or worse and having had ACL surgery last week. I am still waiting on the post op follow-up, so hard to know how things really went. At least I can say I don't need painkillers anymore.

The following stock idea is one I have done a little work on and believe I know why it is currently screening as a value idea. There will be plenty who think this Company is a Short, but the work below describes why I think it should be on the Long Interest List.

UNTD - could be a great Long because the reasons that the stock is beaten up are either in the past or misunderstood by Wall Street. If you assume some base level of earnings and cash flow, then UNTD appears significantly undervalued.

There are two main reasons that UNTD’s stock has taken such a hit during the past 12 months. First, UNTD bought FTD (the flower delivery service) in late August and then in December wrote down a large amount of intangible assets and goodwill related to the acquisition. Second, one of its divisions is made up of Internet dial up properties, NetZero and Juno.

To the first point, UNTD had agreed upon the terms of the FTD deal in April 2008. Based on FY07 FTD figures, UNTD paid 8.0x EBITDA all in (not a steal). In my view bad timing happens. The equity markets were crushed in the latter part of FY08 and with such a high proportion of goodwill and intangibles in the deal, the write down had to happen. However, what a large portion of investors probably do not realize (UNTD is only covered by four smaller Street firms) is that the current President of FTD was on the Board of FTD when it was public and majority owned by Leonard Green (http://www.leonardgreen.com/). The current President of FTD and the current CEO (Mark Goldston) of UNTD had worked together in the past and came together randomly – eventually talking about what could be done to improve things at FTD. They are both from a consumer product and branding background, and supposedly the way LG runs portfolio investments is just for EBITDA. There is no focus on growth, ROIC or margin. So there seems to be a lot of low hanging fruit for UNTD to take advantage of with FTD, which was shown with relative outperformance versus FLWS in 4Q08.

To the second point, clearly NetZero and Juno are mature businesses in a state of being bled for cash. Neither I nor the Company would argue that. However, there is a base line of business to rural residents, who cannot afford satellite, and people who just want to save money (doing decent trade down business and marketing around that currently). These dial-up connections can be used as back-ups on business trips, etc. but that is not a major business. There is also a non-advertised “save” business, where UNTD offers a third party DSL on behalf of Verizon to certain customers, who are trying to cancel dial-up. The margin is not as good, but Verizon doesn’t have full US coverage, so have cut a deal with UNTD. There is no guided rate of decline, but it has been around 20% and in 4Q08 it was 17%. The margins have deteriorated much slower than revenues. The Company has essentially told the Street this business is being run for cash, but will not “double down”, although they will invest in certain areas. The catch is that the Street has overestimated the rate of decline. UNTD is able to see clients browsing for broadband options and can offer them a compromise deal as one way to stem the tide. Meanwhile, analysts have been calling for the death of dial-up since 2004.

Besides the FTD and Communications businesses, UNTD also has a social networking business called Classmates and a customer loyalty business called MyPoints. Classmates was purchased with a declining number of accounts and UNTD has turned that around by offering a number of new features and ways to get people to subscribe (and pay). UNTD also made a profitable International acquisition in the same space. The acquisition has supposedly brought a number of good ideas to the table. The Classmates business has a two year CAGR on revenue of 28.5% and a two year CAGR on income from operations of 54.2%. During FY08 Classmates Media income from operations before unusual items was 31% of the total (FTD was only consolidated for a quarter and a half during FY08). MyPoints is a nice little business, but does not have scale yet. There are numerous cross-selling opportunities between FTD, MyPoints and Classmates.

Just briefly on management, the CEO is Mark Goldston. He is essentially a consumer product guy, who cut his teeth as President of Faberge at age 31. He was then head of marketing at Reebok and has a patent on the Pump. He then went to LA Gear and has patented the lights in those kids’ shoes. After those successes he went to Odyssey Partners in NY and was called onto the scene in consumer turnaround situations. In fact, he wrote a book on turnarounds (http://www.amazon.com/Turnaround-Prescription-Mark-Goldston/dp/002912395X). After Odyssey, he started a turnaround firm. The President of FTD, Robert Taragan, was the CEO of Rand McNally where he sat on the Board of FTD. Both Rand and FTD were LG companies. Both Rob and Goldston worked at Reebok and reconnected to discuss Rob’s thoughts around FTD and how much better it could be made as an operation, given that it was an LG company beforehand (just like Rand). The management sees a lot of “turnaround” potential in FTD because of the ability to upgrade the marketing and branding and just based on how they know FTD was run in the past.

Supposedly, the people that came over to UNTD from FTD are ecstatic to be under new management and running the Company for the long-term rather than just EBITDA. Revenue performance ex FX was down a little for FTD in 4Q08 and volumes will be down again YoY, in part due to Valentine’s Day being on a Saturday this year. FTD is trying to get into the supermarket channel, but have not done anything major here yet. Most of the implemented strategies have only been in effect for a couple of months.

I consider my valuation analysis very conservative, yet still get some 15% upside to today’s share price. Similarly, when I flat line FY08’s EBITDA of $190 million (again, note that there are only five months of FTD), then on an EV/EBITDA basis, UNTD is trading on 3.7x, compared to FLWS at 7.0x. It does not make sense to me.

In conclusion, UNTD is a Company whose share price has been pummeled for understandable reasons. However, those reasons have either past (FTD valuation) or are inaccurate (Communications), and there is a baseline run-rate of business and FCF. There is also a management in place familiar with the businesses and that thinks there can be a lot gained from managing FTD better. To me, these are some of the key hallmarks of a value story. UNTD does have hair and is in a bad climate, but I think there is margin of error to the downside, and deserves to be on the Long Interest List with potential upside of 50%.

-2outof4

Stock Interest List Update

HBI - to my knowledge, there were no new data points on this Company since it was posted on the Interest List on 3/22. The only thing that I can point to regarding its 41% run is the general bounce in the market, and specifically retail. Although, my price target for HBI's stock was based on a very conservative valuation methodology, it has indeed reached that target.

Although the stock does not look particularly expensive on most metrics, the margin of safety to the downside is no longer in place. While HBI returned 41.80% in the time since it was placed on the interest list, the S&P 500 returned 11.45%. I am removing it from the interest list.

-2outof4

A Ph.D. Makes It Sound More Offical

As I was sitting in the ortho office yesterday, my Doc, who knows what I do, asked what the market was going to do the rest of the year and how he could make money. First, I said he should not have gone to school for so long, then I said he should find a good active manager to take care of him.

He laughed, but I could tell this man wanted answers. So I told him I had no idea over the next six months or twelve months. Things feel like they want to rally today on all the government support and things "not being as bad as feared", but I am not naive enough to say that euphoria could not end in a week.

That is pretty much what Dr. John P. Hussman says below in his recent market commentary. I do not agree with a lot of his economic fixes but his criticisms are easy to agree with:

http://www.hussmanfunds.com/wmc/wmc090406.htm

Lion Bribe

A friend told me he would only add his comments to the mark-to-market discussion if I posted something funny or nice.

This is what he sent me:

http://www.youtube.com/watch?v=HjWtRYaxmWM

I keeping getting that "dry" criticism...

-2outof4

Scary View

This guy must get less sleep than me. Then again, he's got nine more years in than I do.

http://online.wsj.com/article/SB123879833094588163.html

Anyone able to put a positive spin on his underlying comments without just pointing out his employer?

-2outof4

Mark to Market Kerfuffle

One of the big controversies of the last week was the Federal Accounting Standards Board (FASB) changes to so called "mark-to-market" (M2M) accounting guidelines.

My understanding is that the FASB wanted to provide new guidelines to figure out fair values (of assets on Companies' balance sheets) when there is no active market or where the price inputs represent distressed sales - which we see a lot of today.

FASB seems to want asset prices on the books to represent what an asset could be sold for in today's markets in an "orderly transaction". The FASB put the onus on the reporting Companies to determine whether the observed prices or broker quotes represent "distressed transactions", and then report the price of their assets estimating the "orderly" selling price of the assets in the current market. To prove this, the FASB is requiring additional disclosure, but it seems very difficult to me to prove what "orderly" is. Kind of like knowing what is is.

Furthermore, there was another FASB proposal to deal with other-than-temporary impairment (OTTI). The new proposal the Board voted through indicates that no impairment charge is required if there is both no current intention to sell and, more likely than not, no requirement to sell prior to recovery, unless management expects at the balance sheet date that all of the cash flows won't be 100% collected. The proposal changes the presentation of the impairment charge, splitting it up into two pieces. First, the amount of the impairment related to adjust the credit losses will be reflected in earnings. Second, the amount of the impairment related to all other factors will be shown in other comprehensive income in the equity section of the balance sheet. There will be a "gross" presentation of this on the income statement, where one will be able to see the total fair value change, and then the amount offsetting it being applied to other comprehensive income. Tangible Common Equity should be relatively unaffected by this proposal, though earnings, other comprehensive income and retained earnings would be impacted.

Finally, the FASB voted that fair value disclosures should be required on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. It used to just be annual disclosure.

The sum of all these changes appear to give the Companies more discretion in determining asset prices rather than just marking them directly to market, which in many recent cases has had the effect of completely impairing many assets. In my mind the market for an asset is the one that exists today. Although well intentioned, I'm not sure these rule changes do anything more than put off the pain of an asset write down. If a market is distressed, that is the market one has to sell his or her assets into.

However, the rule changes are meant to help the bank or other institution where it is likely the cash does come in the door over the course of that asset's life, but because it cannot be sold today, the bank or other institution has to take an impairment today. In this instance, the rule changes do promote the idea of recording revenues and expenses in the period they occur.

Again, it all comes down to the integrity of the institutions abiding by the rules as to whether their assets are impaired or not. If one has an asset backed security containing subprime mortgages originated in Las Vegas, he or she faces both a disorderly selling market and a diminished likelihood that those mortgages payment continue to be collected. As long as some of those mortgages are performing, then it does seem reasonable that the asset should not be written down to five cents on the dollar, probably close to what someone would pay for it in today's market, and that just the credit losses should be recorded.

I was more fired up about this when I originally read about it last week. But my takeaway is that on a case by case basis you really need to understand the assets of a company you are investing in because with the new rules there is leeway to "stretch" the value of a Company's assets depending on one's definition of "orderly". Understanding if a Company has mispriced assets could give you an investment edge. And in many cases, the Companies that, under the old rules, had to write a number of assets down to zero, may be mispriced as some of those assets are surely worth more than zero.

As usual, companies with assets valued higher on balance sheet than what they are really worth, will face pressure in the stock market. I do not see the rule changes as stopping the inevitable, maybe just slowing it down a bit in some cases.

On another note, I promise not to mention the FASB for at least another two weeks. Man, that stuff is dry!

-2outof4

Capitol Hill Yoga Grand Opening!

Financial markets , the economy and politicians got you down? Are your mind and body tight?

Drop by and check out Capitol Hill's newest addition, Capitol Hill Yoga studio and unwind both!

http://www.capitolhillyoga.com/

The owners have been working diligently getting things ready and would love to show you around and share the class schedule.

April 6th marks the grand opening and beginning of the full class load!

The location and demographic pool should allow for CHY to help a lot of people to relax a bit.

-2outof4

Can't Have One Without the Other

We cannot have a recession without major job loss. Friday's March job loss number only confirmed this:

http://online.wsj.com/article/SB123876121625986405.html#mod=testMod

With the jobless rate at 8.5% and the broader disenfranchised or under employed figure at 15.6%, it looks more and more likely that the jobless rate will reach 10%. The experts seem to point to this figure peaking in early 2010. Although, I do not know how they could determine this, the potential peaking of joblessness is good for one thing - the stock market!

My employer recently did a fairly definitive study, showing that in all the recessions/depressions of the modern era, the stock market turned northward between five and six months before unemployment peaked. Unfortunately, I cannot reproduce the study on 2outof4.

I am of the believe that in this Internet age things happen much faster. So, to look at the recent stock market rally and suggest that it is the beginning of a further rally ahead of peak unemployment, does not seem crazy to me. The question becomes, taking the stimuli into account, does unemployment really peak in the beginning of 2010?

If 2outof4 knew the answer, you would already be receiving quarterly account statements from me, rather than reading this rambling Blog!

-2outof4

Ortho Update

Well, after one Doc in Colorado said he didn't think I had severe ligament damage to my knee, a trainer friend agreed, and another Doc's resident chimed in with the same opinion, the final word from a local specialist is that I did in fact tear my ACL on that ski jump (I guess it is not surprising if you scroll down and view the video). The MRI Tuesday will confirm it, but this Doc seemed very confidant.

So, I do feel old. But having past the marking of another annum on Earth yesterday, I still have that steely determination to not act old. You are only as old as you act! By that count, I am ahead.

Get out and enjoy the sunshine!

-2outof4

Americans Not on Board?

For the readers of 2outof4 who do not prefer to read the WSJ, don't worry, the irony of the author of this article is not lost on me!

http://online.wsj.com/article/SB123862834153780427.html

Assuming the op ed is factually correct though, it is an interesting commentary on the direction the country is heading and softening support.

-2outof4