3/14/2013

Overlooked Value with Cannibals

Charlie Munger advised investors to pay close attention to cannibal companies. Cannibal companies are buying back huge amounts of their stock. This has always been on my list of items to review. The reasons are obvious. These companies are shareholder friendly, create value when the stock is below intrinsic value, reduce share count that will improve all ratios and reduce the supply of stock, just to name a few.

Tonight I will quickly start a list of value based ideas that are aggressively reducing their share count. I keep putting off these posts. Tomorrow I will post supporting details. But I still want to introduce some of the most ruthless cannibals. 
 
(ITEX): ITEX Corp is deep value idea engaged in the business of battering. For over 30 years ITEX has created a distribution channel for business to exchange services or goods with battering to preserve cash flow. Members utilize digital currency (ITEX dollars) to exchange goods and services rather than use cash.


The reported share count last year January 2012 was 3,636,000. The tender offer to purchase their stock for 4.20 per share along with share buybacks quickly and aggressively reduced the share count to 2,616,000. 28% of the share count was reduced!Then on February 26,2013 the board approved a 25% increase in the company’s quarterly dividend to a new quarterly dividend of .05 per share! If we apply that to the current price the dividend yield based on today’s closing price would be 5.41%!
Results were reported Thursday March 14.
  • Income from Operations increased 76% to $499,000 compared to $283,000
  • Earnings per share increased 17% to $0.14 compared to $0.12
  • Revenue decreased 6% to $3,960,000 compared to $4,229,000
  • SG&A expenses decreased 34% to $368,000 compared to $558,000
  • Cash increased 27% to $2,461,000 compared to $1,942,000 at fiscal year-end July 31
  • Paid a $0.04 per share cash dividend.
Thanks to the years of hard work by activist David Polonitza ITEX is moving in the right direction. Management, insiders, employees and shareholders are beginning to see the benefits of his work. I believe they are now positioned to focus on operations and the future of the company as all stakeholders should benefit.

ITEX reported quarterly operating income before depreciation of 360M,464M, 398M,564M or  1,786,000 for the TTM/ .6829 per share based recent reported share count of 2,615,000. Current EV per share is 3.50. The  stock is now trading at just over 5 times operating income less depreciation.

Market Cap: 9.68M, Enterprise Value: 7.39M
Price/Sales: 0.62, Price/Book: 0.87

ITEX was listed January 16 in the post "illiquid stocks for outsized returns?"

(JAKK) JAKKS Pacific... “JAKKS Pacific, Inc. designs, produces, and sells toys and consumer products in the United States and internationally. It provides traditional toys and electronics products.”

Market Cap: 245.98M, Enterprise Value: 214.17M

Price/Sales: 0.36, Price/Book: 1.16

Enterprise Value/Revenue: 0.32, Enterprise Value/EBITDA: 13.57 

52 Week Stock Return was negative, - 33. %

Aggressive share count reduction as the stock trades near or at historical lows based on sales and book to price.

Share count was 27.64M at the end of 2008. This was reduced by an impressive 21% to the current balance of 22.00M.

Note as the price dropped over the TTM from a 52 week high of 19.39 to yesterday’s opening price of 10.82,  management aggressively cannibalized their own company . Share count was reduced by 15% from the prior year count of 25.94M to 22.00M.


(KSS) KSS: Kohl's 

Kohls operates department stores in the USA. They have 1,146 store in 49 state along with the option to shopt in their online store. The company was founded in 1962.
KSS currently trades at attractive historical valuation based on P/B or P/S. They not only trade near their historical low on valuation but most optimistic valuation for their department store industry.
EV/EBIT is 9.68 and lowest in their industry. YOY the revenue increased by 5.5%. Enterprise / NTA less cash is at 1.35. KSS is near 52 week low and unjustly underperforming their industry peers based on the 52 week stock return excluding SHLD and JCP.
Management has wisely purchased back their stock at these cheap valuations.
October 2011 the shares outstanding were 264,000,000. February 2013 this balance was reduced by 8.5% to 241,500,000. The 2010 share count yearend balance of 305,000,000 was reduced by 15.50% to the current 241,500,000 share count.
Current dividend yield for this institutionally disliked mid cap value is 2.90%. Shorts as a percentage of the float is 7.90%.

Market Cap:11.20B, Enterprise Value:15.21B
Price/Sales:0.58 ,Price/Book:1.84
Enterprise Value/Revenue:0.79
Enterprise Value/EBITDA:5.59

7 comments:

Batman said...

Love this blog and post. Your quantitative screens are right up my alley and are a great starting point for investment ideas.

ShadowStock said...

Thanks.

I’ve been getting about 40 spam comments a day. Amazing amount of crap or malicious links they send. Oh well but when I saw it was Batman I had to post the comment:).

These “quantitative screens” are mixing and matching overlooked quantitative data in an effort to also uncover a company’s motivations, incentives and the market’s eventual reaction to these hidden improvements. I actually put a great deal of effort to create useful ideas supported by mountains of quantitative and qualitative data.

I make a point not to forecast, discuss price targets, industry trends but instead focus my efforts to review, analyze, model, and data mine massive often changing new and old sources of information to present unique market outperforming ideas.

Don’t expect a long thesis for the ideas posted. Do expect serious efforts before it’s posted. My goal is to provide as a group ideas that outperform. Create a watch list that can be used to consider purchases.
John

Silvio Dixon said...

Do you know why ITEX's revenue declined? I thought it was supposed to be a growing business, but instead it seems that their customer base has shrunk. Do you think this decline in overall number of small business customers will continue into the future?

Thanks,
Silvio

Silvio Dixon said...

I'm kind of concerned about ITEX losing small business customers, evidenced in their revenue decline, because I thought it was supposed to be a growing business/with a lot of growth potential. Other than hard times for small businesses, do you know why they have been losing customers? Also, do you think this will continue or is the bartering network system still an area with ample growth?

Thanks,
Silvio

ShadowStock said...

ITEX has a huge margin of safety. Massive share buybacks, 4.4% dividend yield that was just increased. I believe they had some recent board changes so that could help refocus on improving operations. I agree they have ignored operations by losing revenue. Any small positive change in the operations should quickly move the stock higher. It’s up to them as the leader in this market

Silvio Dixon said...

Sorry for the double comment...
Hmmm... ok. Yes, there are many important positive aspects... all contributing to its margin of safety. I understand.

Thanks for posting such high quality ideas, they are much appreciated

ShadowStock said...

Thanks for the complement. A great effort goes into introducing unique quality value based ideas. I rather do the work then mention some relevant but not all points I uncovered that warrant the introduction. I don’t spend much or any time on forecasting, industry analysis or rationale for past misses