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Archive for April, 2007

Investing in Alternative Energy

April 30th, 2007 by Yehuda Fruchter   |   2 Comments

With continued high oil prices, there’s been a lot of investment interest in the alternative energy sector. However, because of the hype, it’s not always easy to find reasonably priced stocks with exposure to the industry. Magnetek (MAG, $4.56), though, is one stock that we found that appears to be a decent way to play this hot investing trend.

Major Restructuring Completed
A restructuring late last year, initiated by the divestiture of a major operation, allowed Magnetek to pay down all its debt, fund a significant pension liability, and still maintain a nice cash position to fund future growth from its remaining subsidiaries under the guidance of a reconstituted executive management team.

Exposure to the Wind Energy Industry
The smallest and fastest growing part of MAG’s current business is its Energy Delivery segment. This segment accounts for approximately 10% of sales and makes inverters that convert the dc power generated by fuel cells, wind turbines and solar arrays to ac power that can be used on a utility power grid. You can read more about it at MAG’s website: http://www.magnetek.com/

What is notable is that in December 2006, the company announced that that it had received an initial production order for calendar 2007 delivery of 60 wind power inverters valued at more than $7.0 million. In addition, MAG stated that, “Under a separate supply agreement, Magnetek will provide inverters for an initial period of one-year with customer options to extend the agreement in subsequent years. If exercised, the options could produce incremental revenues of more than $60 million for Magnetek through 2011.”

Solid Base of Additional Businesses Limit Risk Profile
Importantly, even considering the significant opportunities available to the company via its alternative energy segment, an investment in the company is not simply a bet on the growth of the alternative energy sector. Magnetek also operates in several other businesses, such as motion-control subsystems for elevators and power control and delivery systems for the material handling industry. Combined all of the company’s businesses are expected to post revenues of a little over $100 million in 2007. We believe that these additional, more mature businesses, provide a nice degree of downside protection for investors considering MAG shares.

Reasonable Valuation
The company’s valuation is also reasonable. On a very simplistic level, with about $30 million in cash and no debt, the company’s enterprise value to sales ratio is currently only slightly above 1, a seemingly fair valuation considering the growth opportunities available to the company in the years ahead from higher margin product lines in the alternative energy sector. In addition, with it’s now vastly improved capital structure, and the divestiture of non-profitable businesses, MAG is set to return to positive earnings this year. In fact, analysts expect the company to report breakeven results in the coming quarter and become EPS positive in the next. For fiscal 2008, analysts estimate EPS of between $0.30 to $0.40 per share.

Risk/Reward Seems Favorable
All in all, we think that the highly favorable year-over-year earnings comparisons and a growing investor awareness of this company’s role in the alternative energy sector, could increase MAG’s share price in the year ahead. At the same time, a stable set of additional, “non-sexy”, businesses, should limit downside risk, in the event that the alternative energy sector does not grow as expected.

Disclaimer:

This site may include market analysis and we may own shares in the stocks mentioned in our reports. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Bear, Stearns Initiates Coverage of T-3 Energy (TTES)

April 30th, 2007 by Yehuda Fruchter   |   No Comments

As we predicted here earlier this month, in our piece, Will TTES’s Secondary Unlock Value, Wall Street research firms are finally beginning to market this fast-growing oil services company, following the recent completion of the sale of all of First Reserve’s shares to institutional investors. This morning Bear, Stearns, initiated coverage of TTES with an outperform rating and a $32 price target.

In the report, Bear Stearns call attention to:

  • In a relatively short time span, T-3 has established itself as a respected competitor in the design, manufacture, repair, and servicing of blow-out preventers (BOP) used in oil and gas drilling.
  • T-3 has successfully moved from aftermarket service provider to original equipment manufacturer in the pressure control business, and it is now trying to replicate that approach in the wellhead equipment and pipeline valve businesses.
  • T-3′s backlog stood at approximately $69 million on March 31, 2007, and has increased for nine successive quarters as a result of strong demand for blow-out preventers and well-timed investments in new production capacity.
  • T-3′s low valuation compared to its larger rivals (National Oilwell Varco, Cameron International, and Hydril) is the basis for our Outperform rating.

Bear, Stearns earnings estimates for TTES are $2.20 EPS for 2007, and $2.65 EPS for 2008. Interestingly, TTES’s main comps, as we mentioned here in the past, are CAM and HYDL, with HYDL still being the best comp in our opinion. As discussed, HYDL was recently bought out by Tenaris, with a valuation of 19X 2007 estimates, suggesting upside for TTES of nearly $40. While the analyst at Bear, Stearns is valuing TTES at a discount to its much larger peers, we think the valuation discount is unwarranted considering TTES’s much larger growth potential at this point in time. Notably, T-3 is still only a small player in the BOP market with a mere 10% share, as compared to a combined 85% share of the market by much larger competitors Varco, Cameron International, and Hydril. As such, continued small market share gains alone should be enough to maintain the company’s recent high earnings growth rate.

Disclaimer:

We own shares in TTES and first initiated coverage of the company in October 2005. This site may include market analysis and we may own shares in the stocks mentioned in our reports. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Extreme Networks Disappoints, But We’re Still Bullish

April 28th, 2007 by Yehuda Fruchter   |   No Comments

Last week, Extreme Network’s (EXTR) announced disappointing financial results, which prompted significant selling in the stock. Despite generating nearly $10 million in cash during the quarter, the company’s top-line remained under pressure.

However, we still believe that the new management team at Extreme is taking the right steps to turn the company around. Importantly, years of bad management, cannot be rectified in just two quarters.

We also still think our investment in Extreme has low risk, with the potential for substantial upside, given the company’s very depressed valuation and solid balance sheet (i.e. EV/Sales of 0.8X and $214 million in cash and no debt). In fact, at current prices, we are surprised that the company has not yet become an acquisition target.

Interestingly, Foundry (FDRY), a company often used as the best comp for Extreme, hit a new high recently on improving results. FDRY is trading at a little over 2X EV/Sales and is sitting on nearly $900 million in cash. Perhaps Extreme (EXTR) should consider a combination with Foundry (FDRY)? Might deal activity for either of these companies accelerate once the two companies finally finish their accounting restatements?

In any case, “The Market” still remains pessimistic on EXTR, because investors believe there is no hope for EXTR against formidable competitors, like CSCO and a revived FDRY. However, we think that given the size of the end market, this line of thinking is simply way too pessimistic, and more importantly is already well reflected in the current valuation.

With a very strong cash position, exceptional technology, a solid customer base, and extensive channel partnerships, time is on the side of EXTR. Notably, share prices for depressed companies, like Extreme, can turn on a dime, once the positive personnel and strategic changes begin to show up in the financials. EXTR’s stock could also get a nice boost when the company finalizes its accounting restatements and refiles with the SEC in the coming months.

Our upside scenario for EXTR remains $8 to $10, or about 2.5 EV/Depressed Sales. With think this valuation is reasonable given the growth opportunity here and the company’s 50%+ gross margins. On the downside, we don’t see the stock going beneath $4, even under a worst-case scenario of continued lackluster growth. With 5% Downside and the Potential for 100% Upside, we think this stock remains an attractive investment gamble, even if one assigns a greater probability to the downside scenario because of the CSCO factor. The next few quarters will either vindicate or disprove our thesis.

Please Note: We first recommended Extreme Networks (EXTR) at $4.22, and still hold a position in the stock. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Can SGIC Be Revived?

April 11th, 2007 by Yehuda Fruchter   |   No Comments

A post-bankrupt company, with a strong brand, incomprensible financial statements, and no analyst coverage. What’s not to like?

The above succintly describes why we are bullish on Silicon Graphics (Nasdaq: SGIC), and we think you may want to take a closer look at the stock.

Business Background and Recent Changes

If you’ve followed technology long enough, we’re sure you’re familiar with Silicon Graphics, and so we’ll spare you all the details here. What you may not know is that SGIC emerged from a bankruptcy about six months ago, and is now valued, on an enterprise basis, at about $300 million. Quite a markdown from the days when the company was a tech darling and was fetching over $7 billion.

Of course, much has changed at SGIC over the years, and the company is now quite different than it once was. As such, we encourage you to read thru the links below to get a good understanding of the past problems and the current revival:
http://www.hpcwire.com/hpc/655167.html

http://www.businessreviewonline.com/blog/archives/2006/07/will_sgi_become.html

http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=9000369

Finally, just two days ago the company announced that it hired Robert Ewald as the new CEO. For a good appreciation of Mr. Ewald, we provide you with this link:

http://www.taborcommunications.com/hpcwire/features/people05/

Quick quote from the article above:

“In basic terms, we keep an eye on Bo because we’ve been watching him for so long; he’s an industry legend. As a user, he was one of the original Cray-ons — way back in the 1970s — and he’s been a key mover at both Cray Research Inc. and SGI. Aside from being a motivational leader, Bo brings a wealth of insider knowledge to up-and-coming LN. “

    While we saw nothing wrong with SGIC’s most recent CEO who navigated the company thru bankruptcy, clearly the board, wanted an industry and former company insider to help drive SGIC into a new growth era. As the Chairman said,

    “Bo’s leadership skills and extensive experience in a range of high-performance computing and storage markets make him the right CEO to lead SGI to success, not only in the traditional technical and scientific HPC market, but also in new enterprise HPC segments where SGI’s technologies have significant potential.”

    Low Downside Risk
    As is the case with all our tech stock picks, we like SGIC because the company’s stock price is at historically depressed levels, and yet the company is undergoing some significant and positive changes. From our perspective, the downside appears very limited at current prices, while the upside potential could be substantial, i.e. 100%+, over the next year or two.

    Briefly, your downside is protected by:

    • Strong Balance Sheet. The company’s financial condition is currently solid, with the company sporting a net cash position for the first time in many years.
    • Large and Recurring Base Business. The company has a large customer base (see articles above) that generates a substantial service revenue stream of over $200 million. The revenue stream is, in theory, a cash-cow, especially in the hands of a potential competitor or private equity shop, who would not need to use the cash coming in for growth investments.
    • Strong Brand. Despite the bankruptcy, SGIC’s brand remains strong in the tech community.
    • Low Valuation. The company’s valuation is quite low, with an Enterprise Value to Sales ratio, well beneath 1, and a normalized EV/EBITDA ratio of about 5, in our estimation. In other words, the stock price already reflects alot of pessimism or should we say skepticism about a true revival at SGIC.
    • M&A Potential. Depending how you look at it, M&A potential either protects your downside or provides the upside. In the case of SGIC, we think the company will prove valuable to many companies, especially if SGIC is able to start penetrating the enterprise market. Furthermore, the company could be cheaper to acquire than fight in court (see below about patent lawsuits).

    Upside and Hype Potential

    Because the SGI story has been rehashed so many times, it’s difficult, at first, to see what Wall Street can potentially use this time around to sell the SGIC story to investors. However, we’ve come up with a few positives.

    • New Sustainable Growth. Hidden from most investors is that under a completely new management team, SGIC’s backlog is finally growing again, the business has turned cash-flow positive, and several new products will be introduced in the coming year that could have an ongoing positive impact on the top and bottom line. A couple of clean quarters of growth and some traction with new products, should get a few funds excited about this name again. It’s important to remember that given SGIC’s large customer base, the potential for successfully upselling new solutions in quite large. It shouldn’t require more than a good product and of course excellent marketing.
    • Patent Profits. In addition, as a former tech leader, SGIC has an extremely strong patent portfolio and potential settlements+royalties on these patents could send the stock soaring. One notable patent lawsuit can be read about here. Interestingly, Nvidia supposedly licensed this same patent for over $50 million+ over 8 years ago, when NVDA was a relatively small company and the graphics card industry was still developing. The implication is that this patent is substantially more valuable today given the growth in the industry since the original NVDA license. Besides, this one there are other far-reaching patents that SGIC is supposedly looking to license.
    • Analyst Coverage. No analysts cover the company yet. However, we expect that once SGIC’s financials become a bit more comprehensible (i.e. there are still alot of accounting adjustments in the financials due to the recent emergence from bankruptcy) later this year and next, that Wall Street will begin covering the company again. With the increased exposure given by Wall Street research, the stock should rise.In fact, our research indicates that the company could be worth between $60 to $90 based on comp. multiples.

    Back-of-the-Envelope Valuation

    A valuation of SGIC is extremely difficult because the financials are somewhat incomprehensible due to GAAP Fresh Start accounting, and it’s next to impossible to value the company’s intangible assets, such as patents.

    However, if you use management’s “adjusted” numbers, you get $536 million in Revenue for 2007, which pretty much matches the $550 million the company was projecting in its bankruptcy report. The problem, though, is that some of that revenue is from legacy business, which are next to worthless.

    In any case, revenue multiples in the industry are from 1X to 1.5x, which seems fair and, in truth, the entire industry seems quite cheap when compared to other areas in tech. EV/EBITDA ratios for SGIC’s comps. are in 10X to 12X range.

    SGIC has about 11 million shares out, so we have about a $330 million market cap. Taking out net cash, gives a $300 million value for an EV/Sales of 0.57, which is clearly cheap given the recurring nature of a large portion of revenues in combination with the gross margin situation. SGIC’s internal forecasts call for 2008 revenue of $600 million, implying a forward EV/Sales ratio of 0.5X. Upside at 1X sales is therefore $55 to $60, or about a double.

    Valuing the company on the EBITDA front is a bit trickier, since the company’s EBITDA margins are currently quite depressed for a wide variety of reasons. For instance, the company’s internal estimates given during bankrupty proceedings call for called for EBITDA of $40 million next year, which implies a price of $40 to $45. But it’s possible that the EBITDA figures here are way off. EMC has nearly 20% EBITDA margins and others are at 8% to 10%. So it seems possible to do 10% EBITDA margins here, for EBITDA of $55 to $60 million, which again implies a stock price of $55 to $60.

    Additional Considerations and Risks

    • Strong Government Focus

    As the company states:

    “A significant portion of our revenue is derived from sales to the U.S. government, either directly by us or through system integrators and other resellers. Sales to the government present risks in addition to those involved in sales to commercial customers, including potential disruptions due to changes in appropriation and spending patterns. Our U.S. government business is also highly sensitive to changes in the U.S. government’s national and international priorities and budgeting”.

    • Declining Legacy Business

    As the company states:

    “Future revenue growth from our newer product families is especially important because revenues from our traditional MIPS and IRIX products and maintenance business are expected to continue to decline. Our ability to achieve future revenue growth will depend significantly on the market success of these newer product families in servers and storage as well as our ability to generate sales to match or replace revenues generated from large sales transactions in prior periods. If one or more of the product lines were to fail in the market, it could have an adverse effect on our business and liquidity. “

    Disclaimer:

    We own shares in SGIC. This site may include market analysis and we may own shares in the stocks mentioned in our reports. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Will TTES’s Secondary Unlock Value?

April 11th, 2007 by Yehuda Fruchter   |   2 Comments

If you’ve been a regular reader of this blog, you’ll know that one of the oilfield services stocks we’ve liked for quite some time is TTES. You can read our past analyses, by clicking here.

Our last post on the stock, was nearly a year ago, and we think it’s finally time for an update, since bullish speculation in the shares could heat up in the coming months.

Why is that? Well TTES is back in the secondary game at a very opportune time. Read the press release here.

Previously, we became bearish on the company whenever they attempted this type of secondary. But this time, the situation is quite different, primarily because one of TTES’s larger competitors, HYDL recently received a buyout offer by Tenaris at a huge premium. The purchase price for HYDL was nearly 14X EV/ 2006 EBTIDA and 25X 2006 EPS.

TTES is currently trading at about $24, giving it a valuation of about 8X EV/2006 EBITDA and 16X 2006 fully diluted EPS. TTES’s valuation has historically been depressed due to the huge ownership position by First Reserve Fund. However, with the HYDL takeover, it seems to us that TTES will have no trouble placing the secondary this time around and completely eliminating the First Reserve position in the stock.

Once First Reserve is gone and the shareholder base is more diverse, it seems to us that TTES will get a valuation on par with current industry multiples, such as given to HYDL in the recent takeover. The trigger for a higher price, could be coverage by Wall Street. Not one Wall Street analyst follows TTES right now, but that could change soon. Bear Stearns is the lead underwriter for the current secondary. We think Wall Street analysts could easily justify a $40 stock price for TTES, based on the current outlook.

As for downside risk, we think it’s limited here given the M&A in TTES’s sector and given the company’s strong business outlook. Of course, there is always the proverbial oil commodity risk, but are lower oil prices really a risk at this point with summer driving season just a few months away? The stock may prove volatile until the secondary is placed, but thereafter it should begin to trade normally and the valuation could rise substantially.

Disclaimer:

We own shares in TTES. This site may include market analysis and we may own shares in the stocks mentioned in our reports. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Selling BSML

April 10th, 2007 by Yehuda Fruchter   |   No Comments

We are sure not smiling about our BSML investment, which started out well and turned out to be our worst investment in over five years. The bottom-line is that we’ve been completely wrong on this stock thus far, and given the company’s actions over the last few days we feel compelled to take our losses here and move on. Surely, we are selling into weakness, a cardinal investment error, but in this case, we really have no choice.

But wait, you may wonder, isn’t this stock undervalued, based on what was written up in the past? Well, yes it most definately is undervalued. And it’s sure been difficult to sell at these cheap prices. However, in order for the value to be realized you need a management team in place that wants and knows how to enhance shareholder value. Over the last few days, though, we have come to the conclusion that BSML management has no idea what they are doing or they have no intention of enhancing shareholder value.

Why the sudden change? Quite simply we were shocked at how sloppy the company’s financials were in the 10-K, to the extent that it now appears is if the company will be restating results to show a loss in the 4th quarter, versus what appeared to be a nice profit. Additionally, yesterday the company suddenly announced quite matter of factly that its shares will be delisted by next week, unless they raise some additional equity. We see absolutely no way the company will be able to raise equity at current prices, and as such do not see the company maintaining its Nasdaq listing. As, we have no intention of holding onto an illiquid stock on the pink sheets, we are compelled to sell.

Can BSML bounce back? We’re sure it can. It has done so in the past. But, for now we’re moving on.

Will A Host of New Licenses Spur a Revival for Corgi?

April 9th, 2007 by Yehuda Fruchter   |   No Comments

Ever since we made our first big investment score with 4Kids Entertainment (KDE) many years ago, we’ve been on the lookout for other small, undiscovered companies that could profit significantly from hot entertainment properties. We were therefore excited when stumbled upon Corgi (CRGI), one of the most famous brands in the collectible toy industry.

While Corgi’s business has surely stumbled in recent years due to past management neglect, we think that this solid brand is due for a major revival in the coming year on the heels of a significant business restructuring completed late in 2006. With absolutely no analyst coverage, Corgi’s stock could become a hot commodity once more investors recognize the company’s renewed potential, especially in light of the growing Harry Potter mania.

The Changes: Major Recapitalization and New Acquisitions

Prior to November 2006, Corgi, based in Hong Kong and maintaining offices in Leicester, England and Chicago, Illinois, was one of the oldest marketers of collectible die-cast models of trucks, buses, cars and airplanes in the world. Revenues from this business have been between $75 million and $90 million a year since 2002, and profits for one reason or another have been elusive.

In December 2006, the company completed a major recapitalization, which included an extinguishment of all debt, a private financing, a reverse stock split, the acquisition of two private companies (one of which is profitable), and a completely new management team. There are enough changes here to make your head spin and the situation clearly demands a closer look. The full details of the recapitalization can be found in a 11/20/2006 filing with the SEC or in this press release:

http://biz.yahoo.com/bw/061220/20061220005983.html?.v=1.

Recent Acquisitions Add Premium Licenses

The recent acquisitions interest us, because thru these purchases, Corgi acquired license rights to some major entertainment properties. Among the exciting properties are: Harry Potter Master Toy License for Europe (note: A new Harry Potter movie is also slated for release in 2007), LucasFilm (Star Wars, note that there is a 30th Anniversary Celebration for Star Wars in 2007), and the much anticipated The Golden Compass Trilogy, also to be released in 2007.

Additional acquired properties include: Pirates of the Caribbean (also slated for a movie in 2007), Narnia, New Line (Lord of the Rings), and Marvel (Classics, Spider Man, Ghost Rider, Fantastic Four, X-Men).

You can see the list of licenses at: http://www.cardsinc.com/ and www.MasterReplicas.com.

New Management Seems Solid

With regard to the other recent changes, it is important to note that Corgi’s new CEO is highly experienced toy executive Michael Cookson. Mr. Cookson’s claim to fame is having been the turnaround CEO for Wham-O, the toy brand for a slew of fun products ranging from Hula Hoops to Hacky Sacks to Boogie Boards. Under his leadership, sales shot from $20 million to $65 million.

Mr. Cookson is now the CEO of Master Replicas, Inc., one of the companies that Corgi acquired in December. Under Mr. Cookson’s leadership, Master Replicas has grown from $0 in revenues to over $45 million in 2005. Master is also profitable with $4 million in net income reported in 2005.

You can read an interesting article about Mr. Cookson at: http://www.pomona.edu/Magazine/PCMWin04/OOcookson.shtml. Mr. Cookson currently holds 1.3 million shares of Corgi stock, which represents about 11.5% of the shares outstanding.

Capital Structure is Clean and Valuation Seems Low

In terms of the current capital structure, our numbers suggest about 12 million shares on a fully diluted basis. The balance sheet also appears clean with the recent financing and the conversion of convertible debt into stock. Finally, according to the recent press release:

“For the 12 month period ending March 31, 2008, Corgi expects revenues to range from $110 million to $115 million, which represents more than a 20 percent increase when compared with the combined revenues of the three predecessor companies during the prior year. We target operating margins in the double digit range as a percentage of revenues and net margins after taxes in the high single digit range.”

Using the above numbers and the current stock price of $5.00 we arrive at a market value for Corgi of about $60 million, and an EV/Sales of about 0.55. For reference, of the major publicly-traded toy companies, which we currently think are the best comps for Corgi, Hasbro (HAS) trades at an EV/TTM Sales of 1.5 and Mattel (MAT) at an EV/TTM Sales of 2. Both have similar operating margin profiles as Corgi is expected to have. Interestingly, apparently Mattel owned Corgi at one point. Could they be a buyer again if this turnaround materializes? Finally, in terms of an additional valuation point, the recent financing of Corgi in late 2006 of 2.7 million shares for $17.6 million implied a valuation for Corgi of about $6.50 per share.

Risks

On the one hand Corgi faces substantial risks given that it operates in an unpredictable, fickle and faddish industry. The company’s ultimate success will depend upon the success of its entertainment properties. Yet, even if these properties are successful there is no guarantee that they will generate collectible and/or toy sales.

In addition, and perhaps more importantly, the company is fully dependent on licenses from larger companies. These licenses could be revoked at any time. Specifically, as Corgi says in its SEC filing:

“Master Replicas’ business has historically relied heavily on sales of its Star Wars products, and if Lucas Films fails to renew its agreement, or the popularity of Star Wars replicas declines, Master Replicas’ revenues could decline substantially. Revenues from the sales of Star Wars products accounted for over 93% of Master Replicas’ revenues in 2005. In light of the popularity of Star Wars among consumers and collectors of replica products, Master Replicas believes that a sales of Star Wars products may continue to account for a significant portion of Master Replicas’ revenues for the foreseeable future. A failure to renew the license agreement with Lucas Films or a reduction in the popularity of the Star Wars replicas, would harm our business.”

The Upside Potential

However, even taking the above risks into consideration, we think it is important to note that Corgi’s current properties are hardly “fad” properties. Their customer base is primarily composed of hard-core collectors who are almost fanatical about their devotion to these entertainment properties, such as Star Wars. So this is not your typical faddish toy business. So, as long as Corgi is able to retain these licenses, and we see no reason why they should not be able to do so, given their proven ability to generate income for the licensors, these properties should provide good income and growth for quite some time.

At the same time, the company is projecting about $110 million in sales in the coming year with potential earnings, based on management guidance, of about $1.00 per share. The current valuation of Corgi therefore seems to already discount the above risks, at least as it pertains to the coming twelve months. We also don’t see much risk in buying at a valuation that is lower than that given to the company by insiders in the recent financing.

On the upside, we suspect that the company’s estimates for the next year are very doable. Interestingly, out of the top 10 movies predicted in 2007, Corgi now has licenses for half of them, including the new Harry Potter movie. If any one of the handful of Corgi’s properties hits big, the sales numbers could easily be revised sharply upwards.

All in all, with recent financial guidance implying minimal downside risk over the next year, and new product launches potentially leading to substantial upside, we think that Corgi looks like a solid investment gamble at current prices.

For additional research, we suggest you listen to Corgi’s analyst presentation, given by the CEO on February 20th.

Note: Affliates of Envoy Global Research hold shares in CRGI. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Fibernet Telecom (FTGX) Earnings

April 5th, 2007 by Yehuda Fruchter   |   No Comments

Several subscribers have asked about our thoughts on FTGX’s latest earnings report. In short, the report almost exactly matched our forecasts for the company. Our estimates for 20%+ top-line growth and the potential for nearly 50%+ EBITDA growth in 2008 remain intact. In other words, FTGX’s business fundamentals are extremely strong and the company continues to benefit from a robust industry environment.

The issue, of course, for investors is whether the stock price already reflects these improving results. As always, it’s difficult to answer that question, which is why “The Market” is so difficult to forecast. What is clear is that the stock is nowhere near as cheap as it was when we first recommended it. However, it is also true that the company is still valued at a substantial discount to its peers. Relative valuation, though, is always tricky, because you need to consider the option that the comps (i.e. EQIX, SDXC etc.) themselves are significantly overvalued.

In sum, our best guess is that at the current price levels, FTGX’s risk/reward seems about even based on a strictly rational analysis. However, there is always more to a stock price than just fundamentals. In the case of FTGX, since only one analyst on Wall Street currently covers the company, we still believe the stock is somewhat undiscovered and the supply/demand for the shares is still very favorable. Furthermore, it’s conceivable that analysts could justify a much higher EBITDA multiple on the stock given the company’s growth relative to peers, thereby greatly increasing the target price on the stock. And while we do not recommend betting your money on the potential for hyped-up price targets, the prospect of such an outcome here has us holding onto our shares for now, especially considering our continued belief that the downside here is somewhat limited given FTGX’s takeover potential.

Note: We own shares in FTGX, and first recommended them to paid subscribers at $4.30 per share. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. Furthermore, we maintain no responsibility to update our report on FTGX or inform you of our position in the stock at any time in the future.