Jos A Bank Clothiers: On Its Way to 70% Off?

Posted on January 27, 2013 4:01 pm by

How poetically sweet it is: Mens speciality retailer Jos. A Bank Clothiers (JOSB:NSDQ), known for its never-ending sale of huge markdowns (of course, having starting with even bigger markups), may find its current stock price has become heavily discounted, with ‘further reductions’ on the way.

This is a company that a lot of investors have disliked for a long time with its gimmicky sales, same-old stuff, and yet stubborn refusal to capitulate. This is evidenced in its 20% short interest for at least the last 2 months. That short interest number is sure to grow as the company pulled one of the all time worst ways to break bad news: slip it out late Friday just after all the extended trading sessions have closed. Psychologically,  it’s an admission that you had to make but one which you would have rather never have made and which you hope will be missed or forgotten over the weekend. Wrong. It just gives the longs more time to brood in trepidation, and the shorts more time to lay their plans come Monday morning. What gives?

In the all important Q4 for retailers, JOSB came up short on sales and coupled with higher marketing expenses and lower gross margins the company now sees full year earnings will be about 20% lower than in 2011. That will bring their 3 year string of increasing earnings to a grinding halt. According to my calculations that translates into eps of $2.80 vs. the $3.76 consensus number.  But it’s also the way the company dealt with its poor results which is likely to further wrangle investors. Instead of saying their merchandise was not resonating with consumers, the company put the blame principally on warmer weather which affected their warm weather clothing but also on Hurricane Sandy, the elections and the uncertainty of the fiscal cliff.

What’s worse is that the company did not address what it will do remedy its current difficulties, but only stressed the already known positives of remaining profitable, strong balance sheet and cash flows and other meaningless milestones. This unresponsiveness to adversity is usually a telltale sign of a company which will eventually get itself into much deeper water. With very little insider ownership (1%) and paradoxically very large institutional ownership (over 100%), if a few large institutions decide it’s time to throw in the towel on JOSB, there may not be much to hold this thing afloat.

The contrarian view, or at least a mitigating view, is that JOSB had one bad quarter which happens to all retailers. In fact in the Nov. 28th Q3 earnings release, the company already indicated there would be pressure on Q4 margins and that the quarter had started slow. In response to that news the company shed around 12%. Most of that has been retraced with shares closing on Fri. at $46.27. In addition, the company in their premlinary update claimed that “customers responded well to our suit promotions”.

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The Standard Has Been Raised

Posted on December 5, 2012 6:59 am by

Silver Standard Resources (NSDQ: SSRI), a silver mining company,  announced their updated feasibility study for the company’s 100% owned Pitarrilla Project in Mexico. The estimates put the total at 479 million ounces of Probable Mineral Reserves, 5.2 times larger than previously reported. The mine is seen as having a 32 year life with annual production of 15 million ounces during the first 18 years. The company presented an after-tax net present value of between $737 million to $1.7 billion depending on whether the lower base case metal prices or used or the higher spot prices. Obviously, there are also some large costs in getting the mine constructed and running, projected to be $741 million. The company believes it will be ready for a construction decision in 2013, while it engages in securing financing for the project.

To put things in perspective:  Before this announcement, total proven and probable silver reserves for all mines was 189 million ounces. The company is on track to produce about 8 million silver ounces this year.  So this development with 479 m ounces yielding 15 m ounces/year clearly ups the ante of potential for SSRI. A slight mitigating factor is that the grade of the silver at 83 g/t at the Pitarrilla mine is much lower than the +200 g/t of the Pirquitas mine, its one active producing mine.

Silver can be volatile, even more so than gold. After the huge run-up in 2010 and the first half of 2011 from about $20 to $50, silver has not done much in 2012 trading in a range of $27-35. Like any commodity company, the share price is somewhat linked to the price of the underlying commodity. Silver Standard has generally followed silver prices and its earnings have reflected that.

However there is one notable exception of late: that since Nov. when silver began an upswing in price, SSRI trended down. This divergence most probably has something to do with the company’s specific fortunes or misfortunes. Analyst sentiment has soured with a couple of downward revisions in the last 60 days for both this year and next years earnings estimates. In its most recent quarterly release the company did note that cash costs/share were higher than the previous quarter and the year/year quarter. This apparent reason may have helped pushed the shares below the $12.64 book value a couple of weeks ago before a modest recovery to yesterday’s close of $13.31.

Today’s development should do a good bit towards re-aligning Silver Standard share price with the recent upturn in silver prices. And if investors are willing to look beyond the long and costly road until financing and production is reached, to embrace this large upward production revision, then shares may diverge again from the price of silver –  but in the other direction.

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Galena Biopharma Inks Commercial Partneship with Teva in Israel

Posted on December 4, 2012 7:59 am by

Galena Biopharma has signed an agreement for the commercialization of NeuVax, its key breast cancer drug, in Israel with pharmaceutical giant Teva. Full press release below. Teva will cover the regulatory, financial support and will commercialize the product in the region. While no financial terms were given, the agreement allows for ‘significant royalty payments to Galena’s future sales” in Israel. The all important Phase III trial for NeuVax will take place in Israel.

Although this is only an agreement to trial the drug, the fact that Teva is stepping in surely speaks to the potential of this therapy. In addition, GALE has little down side at this point: The agreement is only for Israel. If it goes well, they not only make money for that region, but it is most likely opens a much easier pathway for the rest of the world which the company maintains all rights to. In addition, the thoughtful investor cannot hope but consider that if Teva is happy with the results that they just might scoop up GALE along the way. Everything still has to proven in the trials, but from a business standpoint this story is certainly a strong endorsement for Galena.

Galena has received 4 analyst buy recommendations since June of this year. Not surprising: If this novel therapy makes it all the way through trials then this is potentially a plus $1B market opportunity. See here: http://seekingalpha.com/article/1028791-novel-immunotherapy-and-delivery-systems-targeting-cancer-may-target-gains-for-investors?source=yahoo.

The contrarian perspective is that in certain situations biotech investors don’t like when a company cannot do everything on their own. They are looking for a ‘hail Mary’ play where their company stands to land the blockbuster drug without sharing with outside parties. In their minds, that would be preferable to something shared yet much smaller. If Teva does buy them out, they might get a premium but the upside ends there.

The stock moved up markedly in the first half of the year, but has traded mostly in between $1.50-$2.0 in the latter half.

http://finance.yahoo.com/news/galena-biopharma-announces-signature-commercialization-120500182.html

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Special Dividends: The Popcorn Effect

Posted on December 2, 2012 5:31 am by

Special Dividends (SD) are a one-time payout that are generally much larger than a company’s regular dividend. The recent impetus for companies to declare a SD  is ostensibly to avoid the perceived Fiscal Cliff whereby come the new year dividends may be subject to the plus 40% tax rates instead of the current 15%.

Just about every kid (and grown-up) enjoys making popcorn. At the beginning you get some early pops, and then the frequency increases, until you get the staccato popping when most of the kernels turn. And then you reach a plateau and the cessation. That just about describes Special Dividends in 2012.

Thus far this year about 100 Companies have already declared Special Dividends, but 59 have occurred from September to mid-November. However you want to define it the early popping has passed. The frequency has increased in the last 2 weeks with WYNN, MOV, TSN, COST, FIZZ, MHH, SMRT, TLAB, CFI, GEO just to name a few declaring SD’s.  Over the next 3 weeks or so, there exists the posibility of increased frequency or perhaps even some staccato popping as the year-end deadline appoaches. But after that, it’s all over as 2013 is ushered in.

Buy everything? Ignore the entire issue? That would be neither feasible nor wise. Special Dividends is a short-term though potentially lucrative opportunity to uncover even a few likely candidates before the dividend is declared and put down a few low risk bets.

Case in point: Late Friday, Alexander’s (NYSE: ALX) declared a whopping $122/shr SD. Later, we’ll look at why ALX was a prime candidate (nothing like hindsight!) But in order to make such crystal ball predictions we really need to understand the make-up of the most likely SD candidates.

Here are 7 guidelines to consider in looking for where the next big SD may come from:

1. Cash is king.  Although it is possible, a company with little cash on its books, is not going to declare a SD. You need to have generous amounts of cash/share. What makes the cash number even sweeter is where the cash/shr is a high percentage vs. the current share price.

2. Companies with low, or non-existent debt would be better candidates. If a company has a lot of debt it’s much less likely to declare a SD.

3. Companies with an already existing dividend policy are more likely to declare a SD.

4. Insider ownership. Since the insiders will be principal beneficiaries of a SD, it’s more likely that a company with a high percentage of insider ownership will declare.

5. US-based. Since the tax rules are a US issue, foreign companies or US companies that have a large international component would not be in the running.

6. Companies that generally need excess cash either because they are expanding rapidly or the nature of the their business, like insurance companies or banks, should also be excluded.

7. Companies whose business is generally going well are more likely to declare than a company whose business or stock price is trending down.

Let’s now look back at ALX  $122 SD. How much will that boost the company’s $443 share price on Monday is unknown, but it will not be insignificant. Here was a company with almost $100 cash/shr on the books with 59% of indsider ownership.  It does have more debt than cash and I’m sure for that reason alone I would have left it. Which goes to show that there’s no one magic formula that will uncover every SD payer. Having said that, one has to go with the best set-ups.

I am going to avoid the obvious and overcrowded choices of AAPL, GOOG, etc.  The list below are from varied  industries where the outright cash/shr on the books, or the percentage of that cash/shr compared to the current price were impressive. I also looked for a healthy percentage of insider ownership and low or non-existent debt. I’m sure I missed many and erred in some of my selections and will no doubt hear from you later on that.

But without further ado, here is my list of 10 speculative recommendations for Special Dividend candidates:

Company     Share Price     Cash/Shr     Insiders (%)     Debt level

OUTD             7.43                    2.33             52                         0

FORR             28                      10.26           40                          0

AGX                18.61                  13.57           36                         0

LTRE              5.53                     3.39           58                         0

USNA              41.28                 5.31            54                        small

VMW              90.95                 10.27          30                       very low

GBL                 49                       18.69        30                      less than 1/2 of cash

AVX                 10.20                5.25            72                         0

MORN             63.83               7.25             53                        0

SYK                   54.16               10.16           20                        1/2 of cash

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Week in Review

Posted on December 2, 2012 5:28 am by

BELFB: up 4%. Analyst upgrade comes in the day after our research where Needham upped Co. to Buy from Hold with a $19 price target

CFI: up 9%. Culp is trending higher.

ACAD: up 120%. Company has settled in at much higher ground after impressive Phase III trial results after overextending itself during the day of the story’s release - as considered in our research.

CNAM: up 1%. Company has not been able to hold the higher price where it was up over 10% levels following the news development.

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Boring Companies, Part II (Bel Fuse)

Posted on November 29, 2012 8:09 am by

Bel Fuse (NSDQ: BELFB), a manufacturer of magnetics, modules, circuit protection and interconnect devices for multiple industries, announced today a 4th acquisition in the last 5 months. The company has purchased the Transpower magnetics business from the much larger player TE Connectivity (NYSE: TEL).

Unlike the previous acquisitions, this one is different on two counts.  It’s bigger: the add-on business had trailing 12 month revenues of $75 million. This would be equal to a quarter of Bel’s projected $285 fiscal 2012 revenues. The other more important difference from an investor’s vantage is the price tag: Bel picked up the magnetics business for $22 million! You’re probably thinking well then, it’s probably in the red – well in fact, no. The company on the release stated “The transaction is expected to be immediately accretive to Bel’s earnings”.

What gives? This is a learning lesson: some of the best acquisitions are when giant companies need to spin-off non-core businesses. They’re happy to get rid of them and will be very negotiable on price. Sort of like a garage sale: you just want it out and don’t have the energy to haggle.

This would be a good story but it gets better.  Bel is currently not too far from its $14 year low, closing yesterday at $15.24. Yes, it’s had some restructuring costs. But the company has markedly increased its earnings in each succeeding quarter over the last year. It makes stuff that industries need and will continue to need. It’s just not getting a lot of respect.

But Bel is another one of the those boring companies ( like we wrote about yesterday with Culp)  that few people know or care about, but is slowly building its business with key, profitable add-ons that for the longer term investor will pay off well.  Thus, we think Bel Fuse is poised for a breakout year in 2o13, above the current analysis consensus of eps of 0.78/shr on $296M in revenues.

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Why to Like Boring Companies (Culp Inc.)

Posted on November 28, 2012 5:34 am by

Apple, Google, Facebook. Great companies. But companies do not have to be all bells and whistles to be well-run, and increasingly profitable to get the title great company. In fact, the more boring they are, the less well known, the less analyst coverage is sometimes the better. Culp, (NYSE:CFI) one of the world’s largest manufacturers of mattress fabrics for bedding and upholstery fabrics for furniture is one such gem.

As is befitting a boring company, Culp guides low and comes in high. For the third quarter in a row, the company easily surpassed its own sales and earnings targets and beat the one analyst that covers them in their Q2 results. They had guided for sales growth of 2-6% and came in at up 13%. Pre-tax earnings was guided to a mean of $3.35 M and came in at $4.5. EPS at 0.31/shr beat the 0.21/shr estimate. They did the same type of thing in the previous quarter, and to a lesser degree two quarters back.

This quarter the company is guiding for a y/y 4-9% sales increase and pre-tax income of between 4-4.5 million as opposed to 2.9 million a year ago. Those are pretty good numbers on their own.  But on top of that,  Culp indicated for the first time that while margins in the Mattress segment will be higher than a year ago, they are forecasting significantly higher margins in the Upholstery segment. Any bump in sales, (not unlikely given the company’s history), will thus make a pronounced impact on earnings.  Astute investors knowing the company’s low-balling guidance history are already smelling the roses.

As a kicker, Culp declared a special one time dividend of $0.50/shr (which is 4x the total annual dividend of 0.12). That alone should boost the share price by 2%. The company’s lean operations,  dominant industry position, together with a strengthening housing recovery make for a strong story here.

The only potential downside here is the price, trading at the year’s high at $13.09 and up 7% over the last month. However, that’s unlikely to stop investors from piling more into this boring name. P/E at 11 still seems reasonable. Certainly better than floor tile maker’s Interface’s  P/E of 374!

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