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February 2010



Total Systems Services - The Sweet Smell of Plastic

February 26, 2010 – Comments (5) | RELATED TICKERS: TSS

We came across this company quite by accident several days ago at a blog site. Normally we would pass on companies in the financial industry since we simply don't trust their management, believing them for the most part to be liars, cheats, and thieves.

At least that's our opinion of them given the events of the past year or so.

Still, we found ourselves more than a bit intrigued once we came to the conclusion that this company was, in the simplest of terms, just a middleman for the electronic transfer of payments between different types of businesses, meaning they get paid first from by the merchant for receiving the transaction, and then again by the financial institution for sending the transaction.

This sounded like a pretty sweet deal to us, so we invested a bit of our time in hopes that some small understanding of Total Sytems Services, Inc. (NYSE: TSS) might be a pretty sweet deal for us too.

Financial information related to Total Systems Services, contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending December 31, 2008 as filed with the with the Securities and Exchange Commission on February 26, 2009.

What They Do
The company provides electronic payment processing and related services to financial and non financial institutions, generally under long-term processing contracts.

Services are provided primarily through the company’s cardholder systems, TS2 and TS1, to financial institutions and other organizations throughout the United States and internationally.

The company offers merchant acquiring services to financial institutions and other organizations mainly through its majority owned subsidiary, GP Network Corporation (GP Net), and its wholly owned subsidiary, TSYS Acquiring Solutions, L.L.C. (TSYS Acquiring).

Due to the somewhat seasonal nature of the credit card industry the company's revenues and results of operations generally increase in the fourth quarter of each year because of increased transaction and authorization volumes during the traditional holiday shopping season.

Growth or declines in card portfolios of existing clients, the conversion of cardholder accounts of new clients to the company’s processing platforms and the loss of cardholder accounts either through purges or deconversions impact the results of operations from period to period.

A significant amount of the company’s revenues are derived from long-term contracts with large clients, including certain major customers. Processing contracts with large clients, representing a significant portion of the company’s total revenues, generally provide for discounts on certain services based on the size and activity of clients’ portfolios.

As a result, electronic payment processing revenues and the related margins are influenced by the client mix relative to the size of client card portfolios, as well as the number and activity of
individual cardholder accounts processed for each client.

According to information we found, the company believes that in fiscal 2008, 42% of the U.S. consumer credit card market was processed on a TSYS system, and that it held an 85% share of the Visa and MasterCard U.S. commercial card processing market in 2008.

The company also believes that TSYS Acquiring is the second-largest processor of merchant accounts and processes transactions for an approximate 27% market share of all bankcard accepting merchant locations in the United States.

Short-Term Investment
The stock is currently in a downtrend, moving toward on overbought condition. Based on a recent close of $14.24 with first resistance at $15.33, an 8% gain from its recent close, and first support at $11.33, a 20% decline from its recent close.

In our opinion, it appears that the stock might be setting up for a short-term rally here, since it appears that the stock could have enough momentum to move past the $15.86 second resistance mark, an 11% move from its recent close, before it finally starts to retrace back toward its recent close.

Long-Term (5 Year Hold) Investment
As we said at the start, we generally are not interested in companies in the financial industry, however we think this stock could be the exception.

While we did not like that goodwill and intangibles made up almost 34% of total assets, we think the rest of the companies financials were impressive.

The company's current ratio, acid test (quick) ratio, and cash ratio were in excess of what we consider investment quality. In addition, the company's free cash flow at $2.05, was also above what we look for in an investment, and the company's return on invested capital number of 50% far exceeds many of the other company's we have reviewed over the past year, another positive investment sign we tend to focus on.

Lastly, we noticed that the company currently has an earnings growth rate of approximately 3%, but believe going forward, this number should increase to something closer to 8%.

Final Thoughts
Our reasonable value estimate for the stock is in the $40-$42 range and based on the company's financial we would be willing to take a position in the stock at current pricing levels, adding to that position on pricing pullbacks.

Considering that the stock pays an annual dividend of $0.28, we think a position in this company will fit very nicely into our portfolio over the longer term.


For the Wax Ink Total System Services Raw Value worksheet, please click here.  [more]



Dynamic Materials - Remembering Fresh Roadkill

February 20, 2010 – Comments (2) | RELATED TICKERS: BOOM

One of the things we are always looking for when we drift around the web, is something eye catching. Certainly the web is full of the things intended to catch your eye, but in our case, we are trying to find things that catch our investment eye.

Some of our favorite types of companies, are quiet companies that make loud noises. Maybe because we still have a bit of childhood wonder left in us, or perhaps it is our natural sense of curiosity, whatever the reason, we are simply fascinated with these sorts of companies.

So imagine our surprise when we were sent a link to a company that makes loud noises, literally, and, be still our hearts, the company even had its very own video!

The company that had us reliving our childhood was Dynamic Materials Corporation (Nasdaq: BOOM), and yep, we thought their video was kinda cool.

Financial information related to Dynamic Materials Corporation, contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending December 31, 2008 as filed with the with the Securities and Exchange Commission on March 13, 2009.

What They Do
Dynamic Materials Corporation is the world’s leading provider of explosion-welded clad metal plates.

Its products, which are typically used in industrial capital projects, include explosion-welded clad metal plates and other metal fabrications for use in a variety of industries, including oil and gas, petrochemicals, alternative energy, hydrometallurgy, aluminum production, shipbuilding, power generation, industrial refrigeration and similar industries.

The company is based in Boulder, Colorado, and operates three business segments: Explosive Metalworking, which uses proprietary explosive processes to fuse different metals and alloys; Oilfield Products, which manufactures, markets and sells specialized explosive components and systems used to perforate oil and gas wells; and AMK Welding, which utilizes various technologies to weld components for use in power-generation turbines, as well as commercial and military jet engines.

Short-Term Investment
The stock price was range bound from about mid July through the middle of January. Since that time, the stock has moved from over bought to oversold and back to overbought.

In our opinion, the time to take a position in this stock was the last week in January, not the third week in February.

Our decision that now is not the time to take a short-term position is supported by looking at the stock's first resistance and first support prices and comparing those to a recent close.

First resistance for the stock is currently $19.12, and first support is currently $18.58. Comparing those prices to a recent close of $18.80, we simply don't believe that a potential 2% return outweighs the potential of a 1% loss.

Long-Term (5 Year Hold) Investment
While we may indeed like quiet stocks that make loud noises, we were not overly impressed with the company's fiscal 2008 financials.

As we have said many times, companies whose goodwill and intangibles exceed 15% of total assets send up red flags. In the case of Dynamic Materials, goodwill and intangibles account for more than 41% of total assets. To many investors this may seem like much ado about nothing, but to investors interested in mitigating investment risk, this has big deal potential.

In the case of Dynamic Materials, the reason is simple; the company has debt. Ending fiscal 2008 with total debt of $4.77 per share, the company paid an average interest rate of 9%.

Reducing total assets by 41%, something almost any lender would do, means the company's ability to collateralize it's debt is reduced by 41%, meaning borrowing capacity is reduced by 41%.

Lenders in turn, interpret this inability to collateralize debt as increased risk, which increases borrowing costs for the company through higher interest rates.

Certainly we have oversimplified the mechanics of debt and collateral, and in the case of Dynamic Materials, we have no inside understanding of the company's borrowing relationships.

But we do have our own understanding of risk mitigation, and since it's money we actually worked hard to earn, we happen to like the way we view this part of investment risk.

Based on a minimum five year hold, we think a reasonable value estimate for the company is in the $48-$52 range, and considering our review of the company's financial information, along with our assessment of management, we would set a buy target in the $16 to $18 range, adding to our position on pricing pullbacks, until the stock occupied a 1% position in our portfolio.

Final Thoughts
We think starting a position in Dynamic Materials at current pricing levels, would only yield childhood results, you seemed like a good idea at the time.

Good ideas at the time remind us of the day we hid fresh roadkill in Mr. Di Adillo's garage.  [more]



GameStop - Tadpoles in the Stew?

February 13, 2010 – Comments (12) | RELATED TICKERS: GME

We noticed that shares of GameStop Corporation (NYSE: GME) were hammered on Tuesday, down almost 4.5% from the previous day, on volume that was almost 2.5 times the norm.

While we don't have a position in GameStop, we think it is a fairly well managed company with reasonable financial metrics. So the price change and the volume increase certainly got our attention and made us wonder just what was going on.

Financial information related to GameStop Corporation, contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending January 31, 2009 as filed with the with the Securities and Exchange Commission on April 02, 2009.

What We Found
At the outset, the only reason we could find for the increase in volume and large price fluctuation was a single news article titled Critical Alerts for Yahoo!, DIRECTV, CIT, Toyota, and Gamestop released by Seven Summits Research.

Having seen things like this many times over the years, we decided to see what Seven Summits Research actually did.

As it turned out, Seven Summits Research is Seven Summits Strategic Investments, a company that according to Securities and Exchange Commission filings, employs NO registered representatives of a broker-dealer, and has NO assets under management.

The company is run by a Mr. Victor H. Schiller, who posts at a stock blog site and describes himself as an analyst with an attitude. Mr. Schiller also writes for Investors Observer, a site owned by Fresh Brewed Media.

While Mr. Schiller may indeed have an attitude, one thing he apparently is not is a CFA Charter holder, making him, in our opinion, just another web wannabe instead of the analyst he likes to call himself.

We did search the web in an attempt to learn a bit about Mr. Schiller and came across an interesting discovery. Mr. Schiller may be a patent holder.

According to information we found, a patent was apparently granted for:

"A method for generating natural language news-based stories directed to financial instruments named in a portfolio, the method comprising the steps of:selecting a portfolio of financial instruments using a computer interface; and offering a choice on the computer interface between creating a strategies page or a news stories page produced from each of the financial instruments in the portfolio,wherein the news stories page comprises a plurality of natural language news stories, each including a date of publication, a story rewritten in natural language using a template from a news brief, and a source of origin for the news brief."

We have no idea if Mr. Schiller of Seven Summits is the patent holder, hell we have no idea if Mr. Schiller is a real person, we just found it interesting that there is a patent for news articles directed to financial information, that Mr. Schiller's company issued a Critical Alert about a company we have on our watch list, and the daily trading volume for the stock of that company increased by 250% and the price fell almost 4.5%, on the very day the Critical Alert was released.

We also have no information, nor did we attempt to find any information, stating that Mr. Schiller, any of his companies, or anyone, or any entity that is currently or has ever existed in the solar system of which planet Earth may or may not be apart, derived any benefit, financial or otherwise, from the changes in price of any of the stocks mentioned in the Critical Alert.

In an attempt to keep from getting sued, we did continue to search the web for other possible reasons for the Gamestop volatility and final found several other articles posted, including a downgrade from Credit Suisse which may have contributed to the volatility in the stock price and the increase in trading volume on that day.

In The End

Having considered the information we found, not about GameStop but around news events surrounding Gamestop, we have to wonder if the common investor really did take it in the end?

Certainly we have no idea this happened, nor are we even remotely qualified or smart enough, to answer that question.

Instead, what we would like to highlight is that when it comes to individual equities, investors need to have a time horizon larger than a nanosecond. They need to ask themselves what they expect an investment in a specific company to do for them, and they need to be realistic in the length of time they are willing to allow an investment to work in order to achieve expectations.

Short-Term Investment
According to the trend line, the stock is in a clear downward trend, having moved recently from an over bought position to an almost over sold position, and based on the current MACD, this trend could continue for the next several weeks.

The stock closed recently at $19.17, with first resistance at $21.16, a 10% upward move from its recent close, and first support at $18.27, a 5% decline from its recent close, we simply don't think the 5% spread is enough to consider a short-term investment at this time.

Long-Term (5 Year Hold) Investment
We happen to think that a Reasonable Value Estimate for GameStop is in the $50-$55 range, and think the time to start a position in the stock will be right after the company announces fiscal 2010 earnings, which we believe will be closer to fiscal 2008 earnings.

While there is certainly room for improvement with some of the financial metrics we like to focus on, debt per share of $3.25 being the main metric that needs improvement, we do like the company's free cash flow, which for fiscal 2009 was close to $3.30 per share.

Assuming we are correct in our thinking, the price should drop a bit once fiscal 2010 earnings are announced, providing investors an opportunity to buy shares in a pretty good company at a price well reduced relative to our reasonable value estimate.


For the Wax Ink GameStop Raw Value worksheet, please click here.  [more]



Xenoport - A Shaking Ham Hock

February 07, 2010 – Comments (1) | RELATED TICKERS: XNPT.DL

We noticed an article last week about Xenoport, Inc. (Nasdaq: XNPT) , a company in the Biotechnology Industry.

As is typical for us, we simply are not interested in biotechnology companies since they almost never have earnings, and are normally majority owned by large pharmaceutical firms.

The article we read said that Xenoport had submitted an application to the FDA for approval of a new drug that helps with restless leg syndrome. As we learned it was GSK (GlaxoSmithKline), one of Xenoport's collaborators, that submitted the new drug application.

What pushed us to look into the company was that we know folks that have restless leg syndrome, and they treat it by putting a bar of Palmolive soap near their feet at bedtime. Problem solved.

So assuming the worst that could happen is we would end up with a few extra bars of soap, we attempted once again, to follow the many twists and turns of yet another biotech company.


Financial information contained in this report is based on the company's most recent Form 10-K filing for fiscal year ending December 31, 2008 as filed with the with the Securities and Exchange Commission on February 26, 2009.

What They Do
XenoPort, Inc. is a biopharmaceutical company focused on developing a portfolio of internally discovered product candidates that utilize the body's natural nutrient transport mechanisms to improve the therapeutic benefits of existing drugs.

The company is developing its lead product candidate known as XP13512 in partnership with Astellas Pharma Inc. and GlaxoSmithKline, for use in the treatment of moderate-to-severe primary restless legs syndrome.

GlaxoSmithKline has filed with the U.S. Food and Drug Administration a new drug application for this product candidate.

The company recently announced that if approved by the FDA, the new drug would be known in the United States as Horizant, and that the goal date for approval of the New Drug Application (NDA) was February 9, 2010.

In addition, the company's product candidates are also being studied in conjunction with the company's partners for the potential treatment of gastroesophageal reflux disease, migraine headaches, neuropathic pain, RLS (in Japan), spasticity related to spinal chord injury, acute back spasms and Parkinson's disease.

Short-Term Investment
The stock closed recently at $28.33, with overhead resistance at $28.33, a 49% increase from its recent close, and first support at $18.90, a 1% decline from its recent close. So on the surface, it would appear that a short-term investment would be the order of the day.

While we realize that most traders are not strangers when it comes to risk, and the upside reward potential seems almost to good to pass up at 49%, we hope short-term traders will pay attention to the fundamental trend indicators as well as the FDA approval date, when considering a short-term investment in this stock.

Long-Term (5 Year Hold) Investment
Simply put, we have about as much interest in this stock as hog has in the hereafter.

We have long held that the vast majority of biotechnology companies simply make poor investments. Massive amounts of capital are needed to fund the research required to develop a new drug, and even more capital is required to push these new drugs through all of the stages of clinical trials in order to gain new drug approval from the FDA.

Hence the need for large, well established pharmaceutical companies to collaborate in the development of these new drugs. Xenoport certainly fits the mold in this regard.

The company has several potential drug candidates in the development stage targeting such maladies as migraine headaches, acute back spasms, and acid reflux. But the candidate that investors seem to be willing to bet the farm on, at least at the moment is Horizant, the restless leg syndrome drug.

Final Thoughts
Regardless of whether Horizant is approved as a new drug, we simply don't believe that investors will be as rewarded as they may be anticipating. The company has said in its SEC filings that, if approved, the new drug would compete with generic gabapentin.

The company has also said they believe that it is unlikely that a health care provider would require the use of gabapentin in preference to Horizant since Horizant is approved and gabapentin is not approved.

How ignorant. What the company should be saying is we have developed a new drug that will keep a person's ham hock from shaking when they sleep and we think it will be a huge money maker for us because the drug insurance companies should pay for it.

In the end (pun intended) we think pharmacies will continue to offer gabapentin as an alternative, leaving investors to kick their collective posteriors as they realize that once again they have overpaid for a biotech company, a biotech company we think would be fairly valued in the $3-$5 range.


For the Wax Ink Xenoport Raw Value worksheet, please click here.  [more]

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