Datawatch’s Future Value


*)The turnaround for DWCH started quarter 4 2015. Near an average of 18% year over year quarterly revenue growth during the past two years. The accelerating growth was after costly strategic mistakes from 2013 to the end of 2015.

*)Intrinsic value is improving from the increasing percentage of recurring revenue now at 60% expected to grow to +70% next year.

*)The quarter 2 2018 acquisition of Agnoss completes Datawatch’s 
data analysis offering. This addition presents Datawatch with cross/up-sell opportunities for larger deals. Datawatch now offers data prep, discovery, visualization and predictive analysis. Data can be at rest or in motion, structured, unstructured or streaming. 

*) Non-GAAP revenue surging 42% versus prior year’s quarter (23% for GAAP revenue). License revenue improved 78% to the prior year's quarter. Subscription revenue increased 130% versus prior year quarterly results and 17% sequentially. Deferred revenue is 70% greater from the prior year’s quarter and 4% sequentially. Partner contribution grew 40% Q3 2018 versus Q3 2017 without Angoss.

*) The global data wrangling market projects a cumulative annual growth rate of 20%. Market value expected to reach 3.97 billion by 2024. Zion Market Research

*) Panopticon contributed two 6 figure deals in Quarter 3 2018. The market is now recognizing the need to analyze/visualize data in motion, streaming. Not just for investment banking but the internet of things.

*) Average deal size and the number of six-figure deals is growing. 

*) Automatic executive stock sale program every quarter stopped for this most recent quarter. It may be a stretch but no insider selling could indicate outside interest or other material events that prevented automatic sales.

*) Trades at a valuation discount to competitors

Why is the near-term double-digit accelerating growth preceded by two years of continuously failed quarters from around March 2014 to end of 2016? Investors watched in horror as DWCH stock destroyed quarter after lousy quarter. During this time DWCH hit $35 on Feb 24, 2014, only to drop in price $3.10 on 01/2016.

Let's briefly review the self-imposed dark years from 2014 to the end of 2016. What went wrong after a successful 53.60 million capital raise on January 2014 selling +2 million shares at $28.50 per share? The secondary was months after the acquisition of Swedish visualization software Panopticon on August 2013. After the Panopticon acquisition and the secondary Datawatch thought they could spend millions on advertising trying to compete against Tableau and other visualization software. This self-imposed mistake caused by marketing's leadership with no hands-on working knowledge of Panopticon. If they understood Panopticon software, the millions in advertising and strategic distraction nightmare would never occur. Further, during this time marketing management ignored their company's legacy strength/moat with data prep Monarch software. The marketing leadership rebranded Monarch and Panopticon. They ignored the tens of thousands of loyal companies using Monarch and the well-established brand recognition for two decades to rename Monarch to Modeler along with Gartner recognized real-time visualization Panopticon to Designer.

 "Gartner inquiries also suggest a level of dissatisfaction in the legacy Monarch installed base as Datawatch transitions it to the new integrated platform"  this from Gartner write up on Datawatch for the 2015 BI magic quadrant.

At the end of 2015 after wasting millions on an epic failed strategic plan Datawatch is forced to recognize their missteps. So with new marketing leadership, they changed Modeler back to the original name Monarch and refocused on their legacy strength. Additionally, Panopticon marketed as real-time fast visualization focused on the capital markets for now. To management's credit, they recruited back a talented hands-on technical leader from Panopticon, Peter Simpson. Peter Simpson is now the VP of Visualization strategy. I'm convinced Mr. Simpson in short time will have the team to support Panopticon as a must have application for IOT (internet of things) not just capital markets. Further, February 2016 a new CMO/COO Ken Tacelli hired. Mr. Tacelli is driving consistent growth and accelerating sales using specific industry case studies demonstrating real-world value. Tacelli is an important part of this exciting turnaround.  

Monarch has improved functionality after a product upgrade slip, specifically V11 at the beginning of 2013. Panopticon is no longer sold as general visualization to compete against Tableau but instead, as the only programming free product that works with data in motion (real-time streaming), that's critical to Wall Street and IOT(internet of things). The market recognizes the unique advantage of the Monarch and Panopticon. Now with predictive analytics from Agnoss, DWCH offer a best in class complete data solution.

A  deeper dive into Quarter 3 2018 highlights the improvements that will justify a higher multiple.

Datawatch continues to maximize revenue growth by deliberately running break even and investing efficiently. Non-GAAP quarter 3 2018 net income was 940,000 or .07 per share. The current closed quarter is the first full reporting period with Angoss. But, due to GAAP purchase accounting rules, a significant portion of the Angoss revenue due to contracts in place before the acquisition is not classified as revenue. The expenses associated with these transactions is recognized. At least cash from these transactions is collected and reported. The addition of Angoss predictive analytics completes the set of Datawatch's applications. Therefore, Datawatch offers a comprehensive set of data analytics and data science capabilities. The solution provided for data at rest or in motion in a structured, unstructured, or data streaming formats.

Twelve six-figure deals the highest in the company's history realized during Q3 2018. Six of those deals driven by Monarch/Swarm (data prep), two by Panopticon (real-time analytics/visualization) and four by Angoss (data science/predictive). The average deal size was $50,000 as compared to $39,000 in the prior years quarter. Notable wins were ADP and Black Knight for Monarch, Foxtel with Agnoss predictive analytics and global financial service firm Jefferies purchased Panopticon for real-time visualization.

On a non-GAAP basis, total revenue was $12.9 million (13.50 million total Bookings) versus prior year's period of $9.1 million, a 42% increase. Total GAAP revenue was $11.1 million up 23%. License revenue was $8.7 million versus $4.9 million a 78% increase from the prior year period. On both a GAAP and non-GAAP basis these are record high quarterly revenues for Datawatch. License subscription model continues to become more meaningful within overall results. Subscriptions contributed $2.5 million of the license revenue during the quarter representing 36% of our current quarter's license revenue. This improvement represents about 130% over the prior year's quarter and 17% sequentially. Cash position is strong with a balance of $13.6 million. Deferred revenues were $18.8 million at the end of quarter 3 FY 2018 the highest recorded and 70% from the prior year's third quarter and up 4% on a sequential basis. The partner contribution grew 40% versus the prior year period. Note, Angoss does not use partners but expected will start.

Improved future results are even more compelling given that they have yet to focus on Swarm and push the full potential of Panopticon. The current pipeline and proof of concept requests (Fortune 1000 type) have grown materially. There are now cross-selling, up-sell and complete package deals that offer higher deal size.


Datawatch is a small micro-cap recently growing at ~ 18% year over year the past two years with the revenue and gross profit at this time mainly generated by Monarch. But now with the addition of Agnoss, Swarm and renewed emphasis on Panopticon the growth rates should continue and improve. The company's shorter-term higher market value is from an acquisition. A larger software company that can roll Monarch/Swarm, Panopticon and Agnoss into their existing sales, research and administrative organization can realize a highly accretive acquisition. The other growing attribute is recurring revenue at 60% that will grow to +70% by next year even if no changes made. The company can materially accelerate growth but are focused on breakeven results at this time. Recurring software revenue historically valued at a higher valuation of around six times income. Also, Datawatch offers substantial valuable net operating loss carryforwards.

The recent Non-GAAP revenue makes DWCH a 50 million annual revenue company. This gives Datawatch a conservative valuation ~ (4)(50)= 200 million market cap versus the current 143 million or 40% higher from the current price.  Recent acquisition valuations, in February 2015, Hitachi Data Systems acquired open source business intelligence and analytics specialist Pentaho. The acquisition value not disclosed. But,  estimated between $500 and $600 million or 7 times Pentaho's annual revenue of 85M. HDS motivation is to gain market access to some of the data wrangling market as the much smaller Datawatch. Spring 2016, Qlik goes private by an equity firm for 3.40B with annual revenue of 3B, ~3.40 times sales. TIBCO goes private for approximately $4.3 billion or ~4 times sales. It's worth noting. Tibco uses Datawatch's panopticon for in-motion real-time analysis.

Relative:  note the current higher multiples (P/S) for near competitors

Historical growth. Amounts in millions

Current DWCH Valuation
Market Cap = 145.79M : Enterprise Value= 150.86M
Price/Sales (ttm)=  3.62 :  Price/Book (mrq) =  5.22 : Enterprise Value/Revenue =  3.74
Revenue (ttm) =  40.3 : Gross Profit (ttm)  =  35.88M
Revenue Per Share (ttm) 3.25 : Gross Profit Per Share = 2.82
Quarterly Revenue Growth (yoy) = 22.50%
Total Cash (mrq) =13.58M Total Cash Per Share (mrq) =  1.07
Total Debt (mrq)=  9.1M : Current Ratio (mrq) =   1.22
Book Value Per Share (mrq) =   2.19
52-Week Change =   6.28% : 52 Week High =  14.20 : 52 Week Low =  7.70
Shares Outstanding = 12.73M : Float = 10M
% Held by Insiders = 15.11% : % Held by Institutions =  39.06%
Short % of Float (Aug 30, 2018) =   0.65%

Limited resources that further risk overemphasizing Swarm than stay focused on Monarch with larger deal sizes to include Agnoss and Panopticon.

Need for additional capital if they decide to make the bet its better to put the foot on the gas now and gain greater market share. This could be a mistake especially if they think spending that money on Swarm because it will outsell Monarch for data prep.

Too many resources and time spent promoting Swam rather than focus on Monarch, Panopticon and Agnoss.

Dilution if they see the immediate need to raise the current 13 Million cash balance to grow faster in this fast-growing industry. I understand these growth rates will not last forever.

Near-term company sale with a motivated shareholder-friendly management and board at near 13% insider ownership. My guess they don't sell out for less than 250 million. Its reasonable and management expects to be a 100 million annual revenue company over the next few years.
See the above summary for additional opportunities.



Value with Material Growth Opportunities, Intevac (IVAC)

Intevac (IVAC) supports the electronic components industry with two business units, Thin-film equipment, and Photonics.

The Thin film equipment division designs, make, and services capital equipment that deposit surface thin films to produce magnetic disks. These magnetic disks are for hard drives and centralized cloud computing storage units. Additionally, other applications are key to material near-term growth. These are touch panels such as mobile phones, notebooks, smartwatch, tablets, automotive monitors. The solar power industry uses the thin film equipment division by maximizing solar cell efficiency/lower cost per watt.

The Photonics division offers digital night-vision products and services to the defense industry. Specific products include night vision cameras, soldier night vision, and integrated night vision.

Management presented the below slide forecasts at the 19th Annual B. Riley FBR Investor Conference on May 24th, 2018.

Quarter 1 reported on 05/01/2018 was within expectations, revenues of $18 million and a loss of $0.23 per share. The short-term outlook is disappointing. But, medium-term and longer the future is positive with new products supported by patents and a growing pipeline. The second half of the fiscal year management expects positive operating results. Buying IVAC shares at today's valuation offers a sound opportunity. I will add shares if the stock continues to weaken.

Two new Board Members are Kevin Barber and Mark Popovich. They both have deep experience in the cell phone and advanced packaging markets. Their key role will advise on the current pipeline and expected growth for mobile phones, touch panels, notebooks, smartwatch, tablets and automotive monitors.

Current Valuation for IVAC:

Value-Based low portfolio turnover institutions investing and invested in IVAC

Insider Buying YTD 2018 for IVAC

Relative Peer Valuation: The 14 peer companies taken from the 05/16/18 proxy were used to evaluate compensation were also used for my relative valuation.(ASYS,KOPN,ACLS,CLFD,IVAC,AXTI,NPTN,EMAN,XCRA,CYBE,PRCP,COHU,NANO,ESIO)
These 14 companies are in the Scientific / Technical Instruments, Electronic Components, and Semiconductor Equipment / Materials industries.

After an analysis of the 14 peer companies, I separated the financial metrics for both IVAC and ASYS. I purchased IVAC along with  ASYS as both are value outliers.


Mean reverting attributes such as -56.50% 12-month stock return for IVAC and -27.20% ASYS. IVAC enterprise value declined -45.65% from FY end 2016 to 07/02/18. ASYS increased +6.30% over the same period. Amtech Systems (ASYS) added 9.1 million in debt during FY 2016.

ASYS Median P/S is $12.10 versus the current price of $6.11. IVAC Median P/S is $7.62 versus a price of $4.85. EV/Sales and P/TB trade near historical lows. IVAC P/TB improved from 2016 ratio of 2.52 to its current value of 1.39, 44.84% improved valuation. ASYS P/TB was 1.26 for FY end 2016. This improved to 1.06 or 15.87 %. IVAC EV/Sales improved from 2016 balance of 1.68 to .73 or a 56.54% improved valuation. ASYS EV/Sales 1.26 for FY end 2016 improved to 1.06 or 47.36 %.

YTD IVAC material insider buying with no sales of $6,472,838 or 1,080,264 shares purchased at the average price of $5.99.

Value-based institution buying or holding IVAC shares such as activist Becker Drapkin Management, Royce, First Eagle, Simons, Tenton, and others.

A strong balance sheet with a P/NCAV = 1.83 for IVAC, P/Networking capital = 1.53, gross profit per share of 1.68, cash per share of 1.58, no long-term debt and trading near 52 Week low.

Strong growth opportunities with the current pipeline in new markets for display covers, SmartPhones, Tablets, Solar, and Night Vision technology.


The main risk is that the medium and long-term projection for display markets and night vision are not fully realized.



Idea Discovery as of 06/21/18

Preselected Filters:
Market Cap(Mil)= less than 2Billion, Sector = All, Less Shares Outstanding YOY = All, Lower Leverage YOY = All, Exchange = All, Tangible Book/TangibleBook2015 per share = grtr than 1, RevTTM/Rev2015 = grtr than .90, SOTTM/SO2015 less than 1.08, 12Mnth stock return = less than 5%.

Shape size is contingent on TTM revenue change and shape type represents the sector. 


Significant Balance Sheet Improvements Creates a Deep Value Opportunity with VOXX Intl’s

VOXX International (VOXX) is a manufacturer and distributor of electronic products. The company operates in three segments: Automotive, Premium Audio, and Consumer Accessories.

 "The Automotive segment designs, manufactures, distributes and markets rear-seat entertainment devices, satellite radio products, automotive security, remote start systems, digital TV tuners, mobile antennas, mobile multimedia devices, aftermarket/OE-styled radios, car-link smartphone telematics applications, collision avoidance systems and location-based services. The Premium Audio segment designs, manufactures, distributes and markets home theater systems, high-end loudspeakers, outdoor speakers, iPod/computer speakers, business music systems, cinema speakers, flat panel speakers, Bluetooth speakers, soundbars, headphones and DLNA (Digital Living Network Alliance) compatible devices. The Consumer Accessories segment designs, manufactures, markets and distributes remote controls; wireless and Bluetooth speakers; Singtrix karaoke products; 360 Fly® Action Cameras; EyeLock iris identification and security-related products; personal sound amplifiers; and A/V connectivity, portable/home charging, reception and digital consumer products."Source 10K

VOXX founded in 1960 as Audiovox by John Shalam the current Chairman and controlling shareholder.

Multiple deep value attributes make VOXX International a solid investment idea.Deep value qualities include but not limited.   

1) The market price of $4.70 is 87% of its NCAV of 5.36.

2) Year over year enterprise value 60% decline versus a market price drop of only 5% from 04/20/17 to 04/20/18. The sale of VOXX's Hirschmann subsidiary for 170M reported on 08/31/17 used to pay down VOXX debt and hence reduction of enterprise value ignored by the market. 

3) Hidden asset recorded on balance sheet below market value. A 50% ownership of profitable automotive distributor ASA. For the most recent 10k year ending 02/28/2017 equity in income reported for ASA was 6,797,000.The ASA investment is recorded on the balance sheet below market value at $21,926,000.VOXX owns 9 operating facilities or offices located in New York, Indiana, Florida, and Arkansas in the United States, as well as in Germany, Venezuela and Hungary. Investment securities on the book for 10,388,000.

4)Trailing twelve-month gross profit of 207.13M versus the current enterprise value of 90.54M or market value of 114.94M.

5)Stable outstanding share count of 24.43M as of 02/2014 versus the most recent quarter of 24.20M. 

6)Tangible book value per share was 5.62 as of Feb 2014 versus 04/20/18 value of 9.74 per share. Debt per share was 4.71 as of 04/2014 versus the most recent quarter value of .70 per share.

Below is historical data from the year ending 02/2014 to current

Reported on 01/09/18 quarterly results report a growing profitable company with a strong balance sheet and significant opportunities ahead. The operational plan for  2018 is to find accretive acquisitions and possibly monetize assets.

VOXX continues to innovate as shown above by its product listing taken from the 10k. EyeLock is a financial drain and rolls up into the consumer accessory segment. November 30, 2017 EyeLock lost $3.9 million compared to a net loss of $4.8 million in last year's third quarter. But, management forecasts a positive future for EyeLock. It offers an iris-based level of security. All options considered as it pertains to the EyeLock situation such as licensing or divesting. Lastly, an authorization plan is in place to purchase up to 1.4 million shares. Share repurchases must balance with the goal of acquiring longer-term investments.

Positive 2017 insider activity; 11,000 shares traded for $49,500 or $4.50 per share. Value Institutional holders include Kahn Brothers, Dimensional fund advisors, Chuck Royce and others.  

Risks: Poor acquisitions made with the available credit and cash.  Managment controls the board with class B shares. This closely held ownership reduces the influence of outside shareholders/activist. 



Datawatch’s 2018 Material Improvements Forecasts a Higher Price?

A quick update on this micro-cap data analytic software company. DWCH price on Friday's Close 04/06/18 = $8.35

Tangible YTD 2018 progress doesn't reconcile with a -27% stock price decline. Over that time DWCH reported Q4 2017 YOY revenue increase of 19% for total revenue of 10.20M. License revenue was 5.90M or +32% YOY. Quarter 1 2018, 16% YOY increase or 9.60M in revenue with 5.6M in license revenue (28% YOY increase). Further, the launch of Monarch Swarm platform offers an enterprise solution for team driven data preparation. It offers a centralized data marketplace with improved governance. Monarch Swarm expects revenue recognition in the 2nd half of FY 2018. 

January 31, 2018, Datawatch purchased Angoss Software for $24.5 Million. The Angoss acquisition adds predictive analytics software to its now complete enterprise offering for data intelligence; Swarm(team leverage), Monarch(data prep), Panopticon(real-time in motion data analysis).Immediate synergies exist for Datawatch purchase of Angoss. Datawatch shares many customers in the financial industry.

 "Angoss Software Corporation, a privately-held data science platform provider based in Toronto, Canada.  The acquisition will augment Datawatch's Monarch data intelligence offering with expanded capabilities that enable data scientists to perform predictive and prescriptive analytics in a wide variety of enterprise applications.  The transaction was completed today for US$24.5 million in an all-cash transaction, which was financed through a combination of Datawatch's cash on hand and funding from a new credit facility with Silicon Valley Bank."

Improved operations, double-digit top-line growth, near-term Swarm enterprise sales, and now Angoss offers strong upside synergies. Datawatch's Panopticon real time in motion data visualization used at major financial institution can integrate with Angoss predictive analytics. They both share customers in the financial services /asset management industry. 

The current corporate IT budget spend for the internet of things and real time is a fraction of the industry’s future. IOT is yet to be a factor for DWCH. But Panopticon and Angoss can become an important force. So now Datawatch offers a complete enterprise solution for an end-to-end solution for data preparation, predictive analytics, and machine learning. The initial stage of a more focused Datawatch is a real expectation for a company that’s made epic operational mistakes from 2012 to 2015. So, after the Angoss acquisition, Datawatch management published financial commentary. Based on the twelve-month results through December 31, 2017. The combined entity expects 48.20M in revenue and 2.3 Non GAAP net income of 2.3M.

Additional YTD news, Imagine Software incorporates Datawatch's Panopticon into its Real-Time Portfolio, Risk and Compliance Management Solutions. Baker Tilly forms a strategic partnership with Datawatch. They use Datawatch's Monarch preparation and automation in their Revenue Cycle Innovation Center. This is an end-to-end solution for healthcare organizations to maximize and manage revenues. Further, the average renewal maintenance spend per customer is up 5%.Partnership revenue is 15% for the recent quarter near an all-time high. The near-term future goal is 30%. On a fiscal year basis, the average license spent per customer, both perpetual and subscription is up around 10%. The operational goal of cash flow breakeven essentially realized 2 quarters ahead of internal forecast.

Consider the margin of safety not found in the financial statements. January 2018 Datawatch hired an adviser to handle acquisition approaches. There were several outside offers but nothing materialized. This news coupled with insiders owning ~15% of the company and a management team and board motivated and incentivized to sell the company at favorable prices.

Valuations and recent financial peformance. 

Relative valuations:

Datawatch closest public competitor is Alteryx. The table below compares both companies and highlights the large differences in valuation. 

Additional examples of relative acquisition value are below. It's not a perfect comparison but close. Examples are in the same data analytics software space.

February 2015, Hitachi Data Systems acquired open source business intelligence and analytics specialist Pentaho. The acquisition value was not disclosed. It’s estimated between $500 and $600 million or 7 times Pentaho’s annual revenue of 85M. HDS motivation is to gain same market access as the much smaller Datawatch. 

Spring 2016, Qlik goes private by a private equity firm for 3.40B with an annual revenue of 3B, ~3.40 times sales. Fall 2014, Open Text buys struggling Actuate for $330 Million or 2.6 times annual revenue. TIBCO goes private for approximately $4.3 billion or ~4 times sales. It's worth noting. Tibco uses Datawatch's panopticon for in motion real time analysis. Tibco white label's Panopticon and integrate into their software. 

The simplest and direct method to derive today's intrinsic value. Take DWCH's TTM gross profit of 33.72M and multiply by a conservative number of 4 to arrive at a value of 135.048M. This is ~ 45% greater than the current DWCH enterprise value. But if things keep improving and Swarm and Angoss perform as expected. DWCH valuation goes much higher.  


Risks to the company's financial future are real. The recent 24M Angoss acquisition uses 15M of the current 30M cash balance with the remaining in debt. Their prior acquisition of Panopticon was a disaster. Its destroyed shareholder value and a wasteful distraction from their core competency for several years. But, I believe the recent outside interest in the company provides a margin of safety. Datawatch is still a speculative micro-cap. I'm willing to take the risk.

Long: DWCH


Visual Discovery 03/28/18

Visualizing over 5,300 stocks using the Magic Formula within a scatter plot for companies less than 2 billion.

The X-Axis represents EV/EBIT as a measure of “cheap companies”. The Y-axis attempts to rank “good companies” using the average ROIC over the past 4 years. If your search is only cheap companies. Just focus on the X (EV/EBIT) and ignore or filter out the Y (ROIC) measure. 

The upper left quadrant clusters good companies (high ROIC) and cheap companies (low EV/EBIT) and with the same color. The lower left is cheap companies but not as “good” (high ROIC) as the upper left quad.

Plug and play to find companies reducing shares outstanding from 2015 to the MRQ (% Chg Shrs Outs 2015 vs MRQ) or total liabilities(Ttl LIAB MRQ % Chg vs 2015). Further, you can modify Industry, financial strength, revenue growth, exchange or market size.

Note the default filter is currently set where both EV/EBIT (Cheapness) and ROIC (Goodness)  greater than zero. Bubble size is determined by the % off its 52 week high. Updated (03/30/18) the tool tooltip too contain additional decision-making data. See the new measures by hovering over a bubble. Additional improvements to be added.  



Deep Value with Women's Apparel: Christopher & Banks Corp

Christopher and Banks Corp is a retailer that specializes in women's apparel and accessories. Founded in 1956, it operates 472 stores in 45 states. This includes 321 Missy, Petite, Women ("MPW") stores, 79 outlet stores, 37 Christopher and Banks ("CB") stores, and 35 C.J. Banks ("CJ") stores. Their online and retail stores allow customers to browse, buy, return or exchange their privately branded goods.

Changes Not Fully Realized In Current Price

Activist investor, Macellum Capital Management continues to push and realize important change starting in 2016. In fact, Macellum reached a settlement to install Macellum's CEO Duskin and three new directors to the seven-person CBK board. Macellum slow ownership acquisition from 5% in 2016 to the most recent 13D filed on 02/2017 for 4,189,957 shares or 11.10% of shares outstanding. Further, they added more shares after the most recent 13D with open market purchases by Macellum CEO and CBK board member Jonathan Duskin. He added 232,500 shares to bring the total Macellum ownership at 4,422,457.

Joel Waller former CEO is now the Interim President and Chief Executive Officer.  Additionally, he serves on the board and is an investor in Macellum Retail Opportunity Fund. Mr. Waller has 35 years of retail experience and is 77. So clearly Macellum controls the company's future and is incentivized to maximize shareholder value. Note that Macellum initial 5% 13D filing in 2016 was with shares purchased over $5 versus today price of $1.21.

Strong mean reverting attributes. As of January 2014, the enterprise value was 211.12M. Today its 28.30M down 87% from 01/2014. But, the company has a strong balance sheet, Z score of 3.11, cash per share of .47, book value per share of 1.56, current ratio = 1.47. CBK is oversold down 87% from January 2014 and is a strong unique candidate for a higher valuation.

Monetization of the corporate building (sale-leaseback) with an estimated value in the low to mid-teen million range. This compares favorably to the current enterprise value of 27.60M.

CBK trades below its replacement value. Stores trade for around 58.47K based on the current enterprise value of 27.60M with 472 stores. This valuation excludes the sale (leaseback real estate deal) of the corporate building of ~14M and 51.40M in current inventory and 50.374M in net store improvements, computers, and websites.Further, their target is a more retail loyal demographic, adult women. Brand loyalty created from word of mouth and decades serving exclusively the adult women demographic. These tangible and brand attributes are not easily duplicated.

Aggressive 2017 insider buying no selling

Discounted relative and historical valuation (See below)

The new shareholder-friendly board pushed by retail activist Macellum to realize CBK's fair value.

Clean capital structure with low institutional ownership. Current inventory balance reflects merchandise strategy for quicker inventory turns. The current quarter's 1.20M cap ex-compares favorably to last year's 2M. Capex requirements are lower for future online technology investments and store's capital requirements. Expected annual Capex requirements to be reduced by 7M. No outstanding borrowings under the current credit facility other than open letters of credit in the normal course of business.Further, management is guiding and on track to save 5 to 7 million in annualized SGA expenses.

Company Financial Snap Shot on 12/11/17

Current Q3 (10/28/17) results and turnaround progress.

Quarter 3 results were disappointing. Sales declined 7.7% on an average of 6.5% fewer stores compared to the same period last year. Comparable store sales declined 5% against a positive 4.5% increase last year. The unusual weather caused weakness in the warm weather category. This drop accounted for half of the negative comparison. On a positive note, once the weather normalized, performance improved. As expected,  a sequential improvement in gross margins over the second quarter.

I will ignore deeper details on Q3 and instead focus on forward expectations. Management satisfied with the progress of the turnaround. They saw significant business improvements late in October. And, for the fourth quarter-to-date, comparable sales are up mid-single digits signaling an increase in transactions and average dollar sales compared to the same period last year.

Note that comp sales increased in both outlets and e-commerce for the third quarter and have improved further in the fourth quarter-to-date. Management believes improved sales performance over the last several weeks is because of the progress made on strategic initiatives. Management confidently commented on the holiday season with refined inventory and marketing programs. For the fourth quarter to date, gains partially realized from the increased fashion assortment and reduced core basic offerings.

The second strategic focus is inventory productivity with the refined merchandise offering. The third target is the outlet business, which comps improved in the mid-single digits in the third quarter and is trending in the low teens so far this 4th quarter. The fourth priority is e-commerce. This category reported another quarter of strong performance with 8.5% growth in comp sales for the third quarter and is trending mid-teens thus far this quarter. Going into the holiday season they have both merchandise and appropriate inventory levels. Finally, management is pleased to have seen the recent inflection point in the business. Managment's strategic actions will improve both comp performance, gross margins and long-term sustainable growth.

Discounted Relative Valuation

Discounted Historial Valuation

Summary of positive attributes:
For now, the market ignores retail activist, board changes, historical and relative valuation discount, 87% enterprise value drop from 2014, strong financial position, insider buying, near-term material real estate monetization, operational turnaround, and a long historical legacy founded in 1957.

I'm long CBK and consider the stock a buy.But, recognize the risk with Mall based retail and the uncertainty of a full operational turnaround.

Long: CBK


Popular bear thesis creates probabilistic opportunity, Francesca's (FRAN)

Francesca's holdings (FRAN)  is a specialty retailer with 671 boutiques in 48 states. E-commerce reports 7% of sales. Revenue by product broken down as follows; Apparel 49%, Jewelry 23%, accessories 15% and Gifts 13%. More specific, Apparel 49% (Dresses, Fashion Tops, Sweaters, Cardigans and Wraps, Bottoms, Outerwear and Jackets, Tees and Tanks, Intimates): Jewelry 23% (Necklaces, Earrings, Bracelets, Rings): Accessories 15% (Handbags, Clutches, Wallets, Shoes, Belts, Hats, Scarves, Sunglasses, Watches, Hair Accessories): Gifts 13%(Fragrance, Candles, Bath and Body, Home Accessories, Books, Wall Art, Nail Polish, Miscellaneous Items).

I view Francesca's Holding (FRAN) as low to medium risk. Today's price below $7.00 per share offers a  potential one to two year high double-digit stock return. Francesca's Holdings risk is not in the financial statements but instead, its niche strategy that's contingent on successful implementation of its merchandise.  The boutiques designed without deep low-cost inventory and instead try to offer a treasure hunt experience. The shallow inventory creates a must buy now experience for its core 18 to 35 female demographic. That being said, FRAN has enviable financial results compared to their industry competitors, historical valuations, and its intrinsic value. So, with the A+ financial strength, a few quarters of missed results is unlikely to have a large negative impact on the stock price. But their long-term success is 100% contingent on recreating their treasure hunt moat.

This post is not on its inventory strategy or qualitative analysis. But instead share the financial discounts that creates a margin of safety and offers a value trading opportunity.

New CEO Steve Lawrence inability to recreate its treasure hunt moat. This uncertain merchandise strategy required to revert at or near its 52 week high of $22.39.

Hurricane Harvey's direct hit in Houston. FRAN's corporate headquarters, e-commerce fulfillment, distribution center, 40 boutiques and employees in or around Houston. The storms full impact not quantified. Irma affected the Florida locations. This quarter presents challenges. But the current stock price likely factors these events.

Negative same-store comparisons, the revolving senior management team that has been struggling  for several years. They must fix the treasure hunt moat.They can't continue to buy back shares.

Shares short was 6.28M or 19.57% of float on 08/31/17, 4.68M on 09/29/17. A high short position coupled with recent negative brokerage sentiment continues to weigh on the stock price trading near its 52-week low.

FRAN's  return is  -57.80% over the TTM, 3 years annualized -18.28%, 5 years annualized is -25.02%. The sickly stock returns are in direct contrast with the strong financial position, zero debt, consistent growing double-digit sales, deep historical and relative valuation discount. The discounted stable FCF indicates an intrinsic value greater than the current price.

Historical Valuation Deep Discount:

Income Statement

Revenue,Gross Profit:

Operating Inome, EBIT, EBITDA:

Balance Sheet

Cash Flow


Relative Valuation Deep Discount:

Intrinsic Value:

There were only 4 other Apparel Industry peers that had an enterprise value less than the discounted FCF. I took the annual prior 5 year average FCF. Then discounted that average annual FCF using an 8% rate for 10 years. Francesca's Holdings (FRAN) and 4 more passed this simple discount to intrinsic value test. The other 4 were CATO, EXPR, BKE and CHS.

Catalyst: Continued profitable growth above the cost of capital with share buybacks. Stable same store sales comparisons, steady margins, and investor confidence in new leadership. Financial evidence of an improved merchandise strategy.

 Long: FRAN


Micro Cap Value with Insider Buying for One Week Period Ending 09/01/17

Click for quotes on the stock below

Additional details on above table of stocks. 

Build-A-Bear Workshop (BBW) is a specialty retailer which offers "make your own stuffed animal" interactive entertainment experience.

Historical Insider Activity BBW

Possible BBW mean reverting attributes,
Market cap is down - 133.33% form 2014 (349.74M) to 149.92M (09/01/17). Enterprise value is down - 107.03% form 2014 (284.35M) to 137.35M (09/01/17). Favorable EV/EBITDA = 5.56, historical cheap EV/Rev = .38, EV/GP = 1.30.P/TB = 1.47. Capital structure improved with share count reduction of 17.40M (2014) to 16.03 (MRQ) coupled with total liabilities drop from 114.43M (2014) to 79.28M (MRQ).

Plug and play the symbol, date, trans type, insider title.


Wesco Aircraft, Discarded Value in a Market of Increasing Risk and Uncertainty

Post Date Price = $8.10

Wesco Aircraft (WAIR) sparked my interest after ranking value attributes for a basket of over 3,000 companies. At first it was the large debt reduction since 2014.  Then the aggressive and historical outsized insider buying over the past two months, mean reverting stock performance with a -44% 52-week price change near 52 week low. Enterprise value decline of 50% from the first fiscal quarter ending March 2014 (3,190.560M) to 08/24/17 (1,605.856M). Further, a renewed interest by patient value institutions reporting additional buying for the quarter reported 06/30/17. These and other attributes warranted a closer examination into Wesco Aircraft Holdings (WAIR).

Wesco Aircraft is one of the largest international distributor and provider of supply chain management services to the aerospace industry. The company offers aerospace products, including hardware, chemical, and electrical with over 565,000 active SKU. Founded in 1953 with 50 locations and 1.50Billion in 2016 sales. The Company's Services include Quality Assurance, Kitting and JIT Supply Chain Management.Industries served are commercial aerospace, aviation, defense, energy, pharmaceutical and electronics.

It's been several years of an endless string of self-made failures that destroyed large amounts of shareholder value.

The Carlyle Group acquired Wesco back in 2006 and took it public in 2011. Since the IPO it's been a slow steady market and intrinsic value destroying decline. Recent goodwill write-offs are from poor acquisition. This helped drive selling. Wesco purchased Interfast during 2012 for CDN$134 million cash. Interfast offers fastener-based solutions for a wide range of applications globally. Then, Haas group bought in 2014 for 550M cash. The Haas Group reported 573.5 million in 2012 revenues as a global provider of chemical supply chain management solutions to the commercial aerospace, airline, military, energy, and other markets. Additionally, margins dropped from the low 20% to current high single digits.

During Q3 2017 earning call management presented slides to explain the current issues and go forward plan. But, analysts on the call were tired of excuses. Scathing comments such as "Haas (acquisition) has been a disaster", "has the board hired a banker and is reviewing the present value of what one can achieve today - or the value achieved today versus the present value of your operating plan that you're developing". Additional comment made, "how spectacular this thing went off the rails from when the company first went public, it's remarkable."

Management's responded to analysts concerns with the following comments. The "entire board is committed to doing what's best for the shareholders, and that includes evaluating any alternative strategies to maximize that long-term shareholder value". "No. We have not hired a banker yet. And again, my focus is on turning this thing around." "Our job right now and our focus and our priority is to turn this around". "I know that the entire board is committed to doing what's best for the shareholders, and that includes evaluating any alternative strategies to maximize that long-term shareholder value." "It's fixable. As I said at the beginning and a couple of times through my prepared remarks, a lot of this is self-inflicted."

Tangible measures* listed below may hint WAIR is near a market bottom.

Below are favorable summary attributes* with supporting tables.

*Tangible net assets grew from 03/2014 negative -104.230M to the MRQ balance of positive 239.121M or an increase of 343.351M. The main driver of this improvement is the 395.592M debt reduction. In contrast, total equity dropped during the same 2014 to MRQ period from 992.290M to 687.810M or a decline of 304.480M. This in comparison to a net tangible increase of 343.351M. The main driver for the equity decline is the intangible/goodwill write-off of 647.831M

*Market over reaction to the downside with a 50% drop in enterprise value from the first fiscal quarter ending March 2014 (3,190.560M) to 08/24/17 (1,605.856M). A mean reverting -44% 52-week price change. Now trades near its 52 week low of $6.95 off 52 week high of $15.77.

* Consistent positive operating and free cash flow going back to 2012. The non-cash charges are the primary drivers impacting reported negative net income.


*Recent material outsized positive insider buying versus historical activity signals conviction coupled with some 2017 activity purchased above the current price.

*In a market of increasing risk, and future value skepticism these value style institutions added shares to their existing WAIR position. David Dreman, founder of Dreman Value Management added shares at $10.26. Barrow Hanley known for their strict adherence to traditional value disciplines added 296,293 shares to its existing position of 464,638 shares at an average price per share of $11.33. Chuck Royce added more share to its existing 2,790,423 share position at the average holding price of $13.87. CARLYLE GROUP holds 23.19% of the total shares outstanding. MAKAIRA PARTNERS owns 9.69% of TSO and added 1,474,630 additional shares during August 2017. MSD CAPITAL  (Michael Dell) 5,045,304 shares held or 5.01% of TSO.

*Historical tangible book and revenue valuations improvement.

*The trailing 6 month (03/16 to 06/17) total for gross profit is 517.50M and 367.50 for SGA. This compares favorably to the preceding 6 month rolling period (09/14 to 12/15).See below

Below are the month ending Results:

Wesco Aircraft Holdings (WAIR) has a large diversified customer base operating an asset light business. The TTM revenue of 1,433M is up 37% from 2013 annual revenue of 902M based on 2 acquistions. Gross profit over the same period increased 15% or 52M. Valuation for EV/GP was 6.25 for 2013 versus a more favorable 2.13 for the TTM. Poor integration of two acquisitions mentioned above accelerated SGA far faster than the increase in GP. Hence, negatively impacting operating income. Management committed to improving expense control.

The main risk is further EBITDA decline and then the inevitable violation of loan covenants that use a EBITDA to debt ratio. But, I believe the stock has favorable probabilty for a one year or less value trade or the longer holding period to realize potential larger gains with a full turn around and company sale. I initiated a place holder position looking to add shares if  the stock moves lower.

Long: WAIR