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January 2014

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Rudolph Technologies – Hopeful Investing

January 26, 2014 – Comments (0) | RELATED TICKERS: RTEC

Texas (01/26/2014) - I have rated Rudolph Technologies (Nasdaq: RTEC) a Sell based on a recent price of $11.81 and a fair value estimate of $35-$40.

According to the company, they are a worldwide leader in the design, development, and manufacture of high-performance process control defect inspection, advanced packaging lithography, metrology, and process control software systems used by microelectronics device manufacturers.

I admit it took me almost a week to decide if my rating was reasonable. Normally when I have a company that has a price to value ratio of less than one, I rate the company a buy. But this one...

Going through the most recent annual financials, there was really nothing that caught my eye. All in all the financials seemed quite boring actually?

The liquidity ratios were all great, the profitability ratios were great, the debt ratios were great, and the free cash flow ratios were also very good.

The cash conversion cycle at 322 days didn't really excite me, nor did the AR days of 95, or the AP days 15, telling me that the company will pay its bills 6 times before it is paid for its services.

While that may be a commendable way to do business, management should consider putting a system in place that will allow funds owed to the company to be collected much sooner than 95 days or allow payables to be paid over a much longer period.

One thing I did uncover in my research was that the company has been in business 14 years. During that time, management has never split the company's shares. Nothing odd in that really.

But what I did find odd was that after 14 years in business, and as a claimed world leader in its industry, the stock is actually trading at a price that is 54% lower than when the company went public. I admit, I am not used to seeing that sort of anomaly without a stock split in the mix.

I also noticed that the days to cover number stood at 34. While this number is fairly meaningless to me, I added it to my worksheet as a measure of trading volatility.

In the world of short sales, the days to cover number is determined by dividing the number of shares being shorted, by the number of shares that trade in an average day. Normally, that number is a seven or an eight. As the volatility increases, the number falls, and as the volatility decreases, the numbers grows.

Seriously? 34 days? That's longer than the last ten seconds of an NBA game!

One of the other factors that finally influenced my rating decision was earnings, $1.61 for its current fiscal year. But, when I looked closer, I found that 27% of the company's net income came from a reduction in income taxes.

Backing the negative income tax amount out, earnings fell from $1.61 to $1.17. This adjustment also impacted year over year earnings growth which fell from 63% to 19%.

Several years ago I developed a metric that uses year over year earnings growth to determine what a current growth adjusted stock price should be. While the methodology is certainly not infallible, more times than not, it comes pretty close to the current trading price of the stock.

The current trading price number based on year over year earnings of $1.61 is $25.71. The current trading price number after adjusting for the tax refund is $13.97, fairly close to its recent close, and fairly close to analysts' mean target price of $13.

A company review, which is what this report actually is, would not be complete if I didn't at least scan through the latest 10-K SEC filing. It was here that I found a "you did what?!" item. It also sealed the deal when it came to a rating for this stock.

The 10-K revealed that the company has a contingent liability of between $25K and $31.6 million that came about because Rudolph management, in my opinion, was clueless.

It seems that in 2007 the company purchased another company and assumed certain liabilities of the purchased company, one of which was a pending patent infringement lawsuit.

Fast forward to 2011 when the company goes to trial over the patent infringement and looses. The wining company is awarded trebled damages plus all attorney's fees, all of which Rudolph has appealed, stating, "the company has a meritorious defense".

Raspberries to you management. You screwed up and you know it.

As one might imagine, there is much more to the story than I have mentioned here. But to me, as an individual investor, the bigger question is why would I want to invest my hard earned money in a company that has a management team as seemingly inept as the one Rudolph has?

Personally, I find it hard to believe that Rudolph's management team, prior to purchasing the company that was purchased, did not ask the company's attorney for a legal opinion on the merits and loss probabilities of the pending litigation. I mean it just seems such a basic thing to do.

The other thing that just seems beyond the pale is why Rudolph did not purchase some sort of insurance to cover the potential negative effects of this litigation.

At the very least the insurance company's legal team would have reviewed all pertinent information and conveyed their findings to the insurance company, whom, one can only assume, would have conveyed the information to Rudolph's management.

As I said, these steps on the part of management all seem so basic to me that I find it unbelievable, that management, seemingly, did not take them.

In fairness, I do not know that these things did not happen. But I do know that the company's latest 10-K doesn't make any mention of having insurance in place to cover this potential loss, at least that I could find.

Growing a company through acquisitions is a fair strategy. But for this strategy to succeed a strong, astute, and adaptable management team, able to understand the risks of an acquisition far better than the rewards, is required.

Unfortunately those are attributes that appear to be lacking in the management team of Rudolph Technologies.


Wax

If you would like to see or download a copy of the worksheet created for this company, please click on the company name in the opening sentence.

Disclosure:Wax Ink is a baseline equity research company not licensed or registered with any government agency and has no position in any stock mentioned in this report..
For use by Accredited Investors as defined under Title 17, CFR §230.500, Regulation D. - Copyright © 2014 Wax Ink  [more]

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Performance - Week Ending 01/24/2014

January 25, 2014 – Comments (0) | RELATED TICKERS: CBST , GE , GFF

Performance - Week Ending 01/24/2014
The Wax Ink Portfolio was down 2.7% for the week. By comparison, the Dow was down 3.5%, the Nasdaq was down 1.7%, the S&P 500 was down 2.6%, the Russell 2000 was down 2.1%, and the Volatility Index, commonly known as the VIX, increased by 45.8%.

Year to date, the Wax Ink portfolio is down 3.5%, the Dow is down 4.2%, the Nasdaq is down 1.2%, the S&P 500 is down 3.1%, the Russell 2000 is down 1.7%, and the VIX is higher by 32.2%.

The portfolio breakdown remains roughly 66% equities, 34% cash, and 0% bonds. There was no change in the total shares held.

This week's darlings of the portfolio were small tool maker The L.S. Starrett Company (NYSE: SCX), up 5%, after market auto parts maker Dorman Products (Nasdaq: DORM), up 2%, and pill maker Cubist Pharmaceuticals (Nasdaq: CBST), unchanged.

This week's portfolio stinkers were mega company General Electric (NYSE: GE), down 6%, rubbers king Goodyear Tire and Rubber (NYSE: GT), down 6%, and specialty chemicals company W.R> Grace (NYSE: GRA), down 5%.

This week’s straining to go stocks remain garage door and telephone headset maker Griffon Corporation (NYSE: GFF), down 22% since being added to the portfolio, and municipal/industrial construction company Layne Christensen (Nasdaq: LAYN), down 14% since being added to the portfolio.

Wax

Wax Ink is a baseline equity research company not licensed or registered with any government agency
Copyright © 2014 Wax Ink  [more]

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Smith and Wesson – Real Straight Shooters

January 20, 2014 – Comments (0) | RELATED TICKERS: SWHC

Texas (01/19/2014) - Wax Ink has rated Smith and Wesson Holding Corporation (Nasdaq: SWHC) a Buy, based on a recent price of $14.28 and a fair value estimate of $28-$33.  [more]

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Performance - Week Ending 01/17/2014

January 18, 2014 – Comments (0) | RELATED TICKERS: CBST , LAYN , DORM

The Wax Ink Portfolio was up 0.1% for the week. By comparison, the Dow was up 0.1%, the Nasdaq was up 0.5%, the S&P 500 was down 0.2%, the Russell 2000 was up 0.3%, and the Volatility Index, commonly known as the VIX, increased by 2.5%.

Year to date, the Wax Ink portfolio is down 0.6%, the Dow is down 0.7%, the Nasdaq is up 0.5%, the S&P 500 is down 0.5%, the Russell 2000 is up 0.4%, and the VIX is lower by 9.3%.

The portfolio breakdown remains roughly 67% equities, 33% cash, and 0% bonds.

This week's darlings of the portfolio were pill maker Cubist Pharmaceuticals (Nasdaq: CBST), up 6%, metals processor Worthington Industries (NYSE: WOR), up 4%, and agricultural chemicals company Agrium (NYSE:AGU), up 3%.

This week's portfolio stinkers were after market auto parts maker Dorman Products (Nasdaq: DORM), down 7%, rubbers king Goodyear Tire and Rubber (NYSE: GT), down 6%, and oil refiner Holly Frontier (NYSE: HFC), down 4%.

This week’s straining to go stocks remain garage door and telephone headset maker Griffon
Corporation
(NYSE: GFF), down 21% since being added to the portfolio, and municipal/industrial construction company Layne Christensen (Nasdaq: LAYN), down 9% since being added to the portfolio.

Wax  [more]

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Spectra Energy - Sour is the Smell

January 12, 2014 – Comments (2) | RELATED TICKERS: SE

Texas (01/12/2014) - Spectra Energy Corporation (NYSE: SE) – Sell based on a recent price of $35.19 and a fair value estimate of $23-$29.

The company, through its subsidiaries and equity affiliates owns and operates a portfolio of complementary natural gas-related energy assets that includes processing, transmission, storage and distribution of natural gas and liquids.

Additionally, the company has interests in 14172 miles of transmission pipeline across the United States and Canada with 12463 miles owned directly by the company and or its affiliates.

Perhaps the single thing that stood out to me as I reviewed the company's latest annual financials was the amount of debt the company has, totaling roughly $12.8 billion.

While much of the debt is underwritten via corporate bonds and debentures, what I found very strange was the average coupon rate for all of this debt was 6.015%.

In today's world of almost free money, it just seems incredible for a company the size of Spectra to pay an average interest rate that high. It also makes me wonder why the company would want to add debt. But add they did, increasing total debt y-o-y by 7.5%.

My issue with debt, a necessary evil, is regardless of the type, secured, unsecured, a bond, or a debenture, the borrowed money still must be returned and interest must be paid.

It is the interest part that admittedly I tend to focus on because the interest payment comes from company profits.

As I noted, the company increased its total debt y-o-y by 7.5%. What I found fascinating was that for increasing its debt by 7.5% the company received nothing, nada, zilch.

Year over year there was no increase in sales, no increase in profits, no increase in CAPEX, no increase in anything except debt.

Simply put, for an increase in risk, the company appears to have received no increase in potential reward. How odd.

As the matter of fact some of the company's other y-o-y points of interest were free cash flow growth of (-53%), operating cash flow margin of (-1.5%), reduction in cash on hand by 46%, a 5% sales decline, and a 4% decline in earnings.

Once again, just like the increase in debt was a negative, there were additional negatives from other parts of the financial statements. All of which are extremely disappointing.

I realize that the company, like so many other energy companies, is involved with its Master Limited Partnership. And I realize that over time, adjustments to company's financial statements, including debt adjustment may be required in order to balance the MLP holdings.

But considering year over year operations, a management KPI (Key Performance Indicator) of 39%, and a recently announced increase in the annual dividend, I think an investment in Spectra Energy at this time, will only end up smelling like the gas in the company's pipelines..sour.

Wax

Disclosure:Wax Ink is a baseline equity research company not licensed or registered with any government agency and has no position in any stock mentioned.
For use by Accredited Investors as defined under Title 17, CFR §230.500, Regulation D. - Copyright © 2014 Wax Ink  [more]

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EOG Resources - Shale We Play?

January 08, 2014 – Comments (0) | RELATED TICKERS: EOG

EOG Resources, Inc. - (Reviewed 01/08/2014)
EOG Resources, Inc. (NYSE: GME) – Sell based on a recent price of $164.02 and a fair value estimate of $70-$83.

The company is one of the largest independent (non-integrated) crude oil and natural gas companies in the United States with proved reserves in the United States, Canada, Trinidad, the United Kingdom and China.

I had an opportunity to buy shares of EOG back in 1999, just as the company was separating itself from mother Enron. But who wanted to own an oil company when we were all getting rich owning high tech?

With estimated net proved reserves of 1811 million barrels of oil equivalent, the company's admitted crap shoot is the mid $80 per barrel mark for WTI crude.

As long as the price remains at or above that level, the company has reasonable 2014 drilling plans in the Eagle Ford Shale Pay, the Bakken Shale pay, the Texas Delaware Basin and the Leonard Shale pay.

Management believes, as do many analysts, that when an oil company increases its proved reserves, as EOG did last year by roughly 35%, the company is well managed. I don't.

All that means to me is that the company has proved reserve increases that it obtained at a higher price.

As I noted, the crap shoot is that oil will stay at or above the mid WTI $80 mark, and the more holes that are poked in the ground, the easier it becomes for prices to fall below that magical number.

While the company did increase y-o-y debt by 25%, it also increased y-o-y cash on hand by 41%, and y-o-y free cash flow by 44%. With borrowing costs currently low, the company's effective interest rate last year was 3.4% compared to 4.12% the year before, I agree, borrow what you can and horde your cash.

What troubles me about this stock is simply the price, which based on the recent close is roughly 89% above the point where I would have removed all of my invested capital.

Look. I realize that I am a long-term value guy, and as such I am looking for a bargain in a stock that currently holds no bargain. I get that. But I am also about risk, and making a reasonable return on a reasonable investment, something that at current pricing levels I simply don't see happening with EOG.

But hey! What do I know? I used to own high tech.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Wax


Wax Ink is a baseline equity research company not licensed or registered with any government agency.  [more]

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Forum Energy Technologies - Leaning on the Lectern

January 05, 2014 – Comments (0) | RELATED TICKERS: FET

Forum Energy Technologies, Inc. - (Reviewed 01/05/2014)
Forum Energy Technologies (NYSE: FET) – Hold based on a recent price of $26.18 and a fair value estimate of $36-$42.

The company is an oilfield products company, serving the subsea, drilling, completion, production and process sectors of the oil and natural gas industry formed in the summer of 2010 in a five-way merger among Forum Oilfield Technologies, Triton Group, Subsea Services International, Global Flow Technologies and Allied Technology.

It appears that 2012 may have been a turning point for the company with a near 40% reduction of debt and a 37% y-o-y increase in free cash flow. At the end of fiscal 2012, the debt to net fixed asset ratio stood at 2.75, which I found more than respectable given that 50% of total assets consist of goodwill and intangibles.

Over the past year the stock price has increased roughly 6% while revenue increased 25% and earnings grew 43%. Add to this that short sale days to cover is running at 4.3, and it just makes me think that the markets don't quite know what to do with this stock at the moment.

Recent articles by noted web authors made the argument that the company may have an uphill battle since its surface market competes directly with Cameron International, the world leader in the surface field.

Wrong, wrong, wrong. Cameron is the world leader in desalter technology, a completely different animal. But hey, don't confuse us with the facts.

The company also recently completed a $100 million private placement bond offering intended to reduce borrowings from its revolving credit line, which will place the company in a good position to grow its various businesses in fiscal 2014.

Recent announcements regarding an upgrade of the company stock were I thought, initially promising. But then I realized the announcement was from FBR Capital, the same company that downgraded the stock in October of 2012, then upgraded it in February of 2013, highlighting, at least to me, how completely clueless the Wizards of Wall Street, truly are.

Wax


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Wax Ink is a baseline equity research company not licensed or registered with any government agency. Copyright © 2014 Wax Ink  [more]

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Performance - Week Ending 01/03/2014

January 04, 2014 – Comments (0) | RELATED TICKERS: LAYN , WOR , SCX

The Wax Ink Portfolio was down 0.6% for the week. By comparison, the Dow was down 0.1%, the Nasdaq was down 0.6%, the S&P 500 was down 0.5%, the Russell 2000 was down 0.4%, and the Volatility Index, commonly known as the VIX, was down 0.2%.   [more]

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Carnival Cruise Lines - Yogurt Anyone?

January 03, 2014 – Comments (0) | RELATED TICKERS: CCL

Carnival Corporation (NYSE: CCL) – Hold based on a recent price of $39.81 and a fair value estimate of $36-$42.

The company operates as a worldwide cruise and vacation company.  [more]

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2013 Portfolio Performance

January 01, 2014 – Comments (0)

The Wax Ink Portfolio closed up 48.5% for the year. By comparison, the Dow was up 26.5%, the Nasdaq was up 38.3%, the S&P 500 was up 29.6%, the Russell 2000 was up 37%, and the Volatility Index, commonly known as the VIX, was down 10%.  [more]

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