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March 2010



Layne Christensen - A Waiting Game?

March 28, 2010 – Comments (2) | RELATED TICKERS: LAYN

We noticed yesterday that Layne Christensen Company, Inc. (Nasdaq: LAYN) had scheduled their fiscal 2010 earnings call for March 30, 2010. While we hate to admit it, this is a great example of just what can happen when investors fail to believe their own research.

Several years ago, we were asked if we knew of a company that actually owned water rights. Admittedly we had never heard of such a thing, but were intrigued with the idea. In the end, we never found a company that actually owned water rights, but we did come across Layne Chistensen.

Curious, we ran some numbers, read a few SEC filings, and decided we would wait, since the stock seemed just a bit to expensive. We actually waited right through the recent market bottom in March 2008, when the stock was trading in the $14 range.

Today we are still waiting. The question is, should we be?

Financial information related to the Layne Christensen Company, Inc., 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 Securities and Exchange Commission on March 31, 2009.

What They Do
Layne Christensen provides drilling and construction services and sells related products, in two principal markets: water infrastructure and mineral exploration. The company also operates as a producer of unconventional natural gas for the energy market.

The company operates throughout North America, Africa, Australia, Europe, and Brazil, as well as through their affiliates in South America.

The company's customers include municipalities, investor-owned water utilities, industrial companies, global mining companies, consulting engineering firms, heavy civil construction contractors, oil and gas companies and, to a lesser extent, agri-businesses.

Short-Term Investment
The stock has resistance at $35.14, a 26% increase from a recent close of $27.96, and finds support at $27.47, a 2% decline from a recent close. Since the stock appears to us to be in an uptrend the spread between resistance and support makes sense.

But when we start to look at the trend line for the stock, we think upward momentum is starting to play out, and that the stock price could start to pull back.

So at the moment, with a current PEG Ratio of 1.9 and a quarterly PE ratio of 33, we happen to think that for short-term invstors, waiting is the right thing to do until after earnings are announced may be the right thing to do.

Long-Term (5 Year Hold) Investment
The stock is currently trading at 1.5 times FY09 tangible book value and at just over 8 times FY09 free cash flow, which, considering the industries the company serves, seems extremely reasonable to us.  [more]



Carnival Corporation - Ghost Ship Investing?

March 21, 2010 – Comments (14) | RELATED TICKERS: CCL , RCL , DIS

The wind blew with such ferocity the passengers believed any second they would be swept over the side of the mighty ship, followed soon thereafter by the ship itself.

The captain, eyes never leaving the horizon though there was nothing for them to see but God's wrath, told the helmsman to keep a steady hand that all would be well soon enough since the eye of the typhoon had passed them over near an hour before.

The first mate unknowingly began to pray aloud, telling his God he was not yet ready to visit Davy Jones' locker, while the ship's engineer, also unknowingly aloud, began cursing himself for not only allowing a woman into the wheelhouse, but one that whistled and carried a black sea bag.

Without warning the ship began to roll hard to port. The helmsman fought to keep the huge ship upright as the captain screamed for more speed.

But just as the ship's massive brass screws began to increase their revolutions there was a tearing of metal, followed by a muffled explosion deep within the bowels of the huge ship.

In that instant the captain knew his days of roaming the world's seas had come to an end, that another sunrise, he would never see.

With one final shudder, the starboard screw, in full revolution, broke through the waves, and without warning another ship became a permanent guest in the house that Neptune ruled.

Casting Off
On Tuesday, March 23, before the opening bell, Carnival Corporation (NYSE: CCL) will report earnings, expected by First Call to be $0.14 a share, $0.19 a share lower than a year ago.

What gives us pause is that the price of the stock is up almost 15% over the past 5 weeks yet analysts are predicting lowered earnings.

While we may not be square knot experts, we do know the difference between walking up a gangway and walking off a plank.

Financial information related to the Carnival Corporation, contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending November 30, 2009, as filed with the Securities and Exchange Commission on January 29, 2010.

What They Do
Carnival Corporation and Carnival and Carnival plc is a global cruise company and one of the largest vacation companies in the world. Their portfolio of cruise brands includes Carnival Cruise Lines, Holland America Line, Princess Cruises and Seabourn Cruise Line in North America; P&O Cruises, Cunard Line and Ocean Village in the United Kingdom; AIDA in Germany; Costa Cruises in southern Europe; Iberocruceros in Spain; and P&O Cruises in Australia.

These brands, which the company claims comprise the most recognized cruise brands in North America, the United Kingdom, Germany, Southern Europe and Spain, offer a wide range of holiday and vacation products to a customer base that is broadly varied in terms of cultures, languages and leisure-time preferences.

The company also owns two tour companies that complement its cruise operations, Holland America and Princess Tours in Alaska and the Canadian Yukon. The company also claims that combined, the company's vacation companies attract eight million guests annually.

Carnival Corporation is incorporated in Panama, and Carnival plc is incorporated in England and Wales and operate as a dual listed company (“DLC”), whereby the businesses of Carnival Corporation and Carnival plc are combined through a number of contracts and through provisions in Carnival Corporation’s Articles of Incorporation and By-Laws and Carnival plc’s Articles of Association.

The two companies operate as if they are a single economic enterprise, with a single executive management team and identical Boards of Directors, but each retains its separate legal identity.

The company competes with Royal Caribbean Cruises, Ltd. (NYSE: RCL), and Disney Cruise Line, a division of The Walt Disney Company (NYSE: DIS).

Short-Term Investment
The time to have taken a short-term position in this stock was back in late Novemeber2009, or in very late December 2009, or in the later part of January 2010.

At the moment, the stock is overbought, and basis the trend line we watch, it has been overbought since almost the middle of February 2010.

The stock closed recently at $37.62 and would require only a 2% gain to reach first resistance of $38.37, while first support would allow the stock price to fall 8% from its recent close.

Considering that the recent price is almost 2% above the stock's 13 day moving average and almost 7.5% above the stock's 50 day moving average, we think taking a short-term position at this time would be fool hardy.

If anything, we would think given the current short-term conditions, the stock makes a better short than short-term investment.

Long-Term (5 Year Hold) Investment
With the possible exception of the company's trailing twelve month PE ratio, of the investment metrics we like to focus on, there was not one that we consider investment quality.

Current liabilities exceed current assets by almost 2:1, debt exceeds EBITDA by almost 3:1, return on invested capital is less than 10%, and the debt to cash ratio is almost 19:1.

While the company does appear to pay a reasonable average interest rate of less 4% on its almost $8 billion dollars of debt, with net operating profit after taxes of less than 24%, and CAPEX consuming almost 6% of that, we wonder just how long it will take to reduce the company's debt to something far more manageable.

In addition, while free cash flow did improve from $0.59 in FY2008 to $1.04 in FY2009, we simply don't believe the improvement is sustainable.

The stock has an Enterprise Value (Market Cap less Cash plus debt) of $47, an Equity Value (Market Cap plus Cash less debt) of $28, and a Tangible Book Value of $17.

We think a Reasonable Value Estimate for the stock is in the in the $23 to $26 range, and note that at least to us, free cash flow at 36 times recent pricing makes the stock incredibly expensive.

Final Thoughts
The ship's captain told the helmsman to keep her steady, that he had sight of a large object dead ahead. He further instructed the helmsman to continue to follow the oil slick drifting with the current on the calm sea.

As the captain's ship approached the massive object, the captain shook his head, telling the first officer that what he was seeing was impossible.

Yet there on her side, her starboard screw spinning well above the surface of the sea, was the Fester, lost with all hands and all passengers more than 80 years ago.

Was this a ghost ship worthy of investment in her salvage wondered the captain, or merely an illusion made all the more real by the rumors surrounding her?


To download the Wax Ink Carnival Corporation Raw Value worksheet, please click here.  [more]



Chesapeak Energy - Natty or Nasty?

March 13, 2010 – Comments (6) | RELATED TICKERS: CHK

A couple of days ago, Chesapeake Energy Corporation  (NYSE: CHK)  came up during a discussion with some friends of ours.

Our thoughts were directed around the company as a long-term investment and were based on various articles we had read on the web, while their comments were based on their knowledge of the gas industry.

Since they are gas traders, having spent several years on the floor of the NYMEX, we of course yielded to their expertise.

So overnight last night, we received an e-mail from them that was a follow-up to our prior conversation, and knowing less about gas trading than a hog knows about the hereafter, we simply don't have the faintest idea what most of what was said in the e-mail actually means.

Okay, so we understand the last sentence; but the rest of it? Not a hint.

Here's what we received.

"It almost reads as fiction, but we dug around yesterday, trying to figure out how CHK hedged 60%+ of their 2010 natty at $8+. The results are nothing short of astounding.

It seems Aubrey and company has sold naked crude calls on the curve, converted the BTU’s and labeled them natty hedges, thus gaining roughly $3.50 on the hedge values. CHK, being 93% gas and only 7% oil, is basically speculating crude futures and calling it a gas hedge.

With crude now pushing higher #’s, CHK is clinging to the rim of a toilet that just flushed, one more push up in crude and they are likely toast."

Financial information related to the Chesapeake Energy Corporation, that is contained in this report, is based on the company's most recent Form 10-K filing  for fiscal year ending December 31, 2009 as filed with the Securities and Exchange Commission on March 01, 2010.

What They Do
The company claims to be the second-largest producer of natural gas in the nation and the most active driller of new wells in the United States. According to management, the company's goal from the outset has been to create value for investors by building one of the largest onshore natural gas resource bases in the United States.

Over the past 12 years, the company's strategy to accomplish management's stated goal has been to focus on developing unconventional plays onshore in the United States, where management believes the company can can generate the most attractive risk-adjusted returns.

The company also claims they have an industry-leading natural gas resource base which is integrated with an advanced drilling program coupled to an active property consolidation program, all of which is focused on small to medium-sized corporate and property acquisitions.

During the past three years the company has shifted its strategy from drilling inventory capture to drilling inventory conversion, and in doing so has de-emphasized acquisitions of proved properties while further emphasizing its drilling program and converting its backlog of drilling opportunities into proved developed producing reserves.

Short-Term Investment
The stock price is currently in a downtrend. Normally, since the stock has just started to emerge from an oversold condition, we start to pay close attention to company and industry news, looking for a favorable entry point, especially since the last trading day quote was below the 13 and 50 day moving averages.

But considering the spread  of 3% between a recent close of $25.64 and first resistance of $26.51, and then considering the 4% spread between a recent close and first support of $24.60, we think that the most prudent thing to do is leave a short-term trade to those that have grown a bigger pair than we have.

Long-Term (5 Year Hold) Investment
We looked at the company financials, and realized that while we are certainly not the most dynamic group of folks that ever bathed with Irish Spring,  we we are simply mystified.

What glazed our eyes over was the $11+ billion listed as special income charges, and, which was a new one on us, that selling and general administrative expenses exceeded the direct cost of sales by more than two to one. And while things like this may be quite normal, we have never seen such a phenomena before.

In addition, the company has 39 subsidiaries,  three of which are partnerships. While these sorts of business structures are not uncommon in the oil and gas industry, we simply aren't going to waste our time investigating all of these subsidiaries in order to determine if the company is investment worthy.

Final Thoughts
Our reasonable value estimate for the company is $25-$26, and should the price of the stock fall below $7, we may entertain the idea of risking a very very few dollars, admittedly more as a considered gamble than intelligent investment.

While we still have no idea what a 2010 natty is, it makes us think that perhaps investors should adjust the angle of their Charmin a bit before they attempt to smell their fingers.


To download the Wax Ink Chesapeak Energy Raw Value worksheet, please click here.



Chesapeak Energy - Some Assistance Please?

March 13, 2010 – Comments (0) | RELATED TICKERS: CHK

A couple of days ago, Chesapeake Energy Corporation (NYSE: CHK) came up during a discussion with a friend of mine.  [more]



Arris Group - The Siphonic Flush of Management

March 06, 2010 – Comments (6) | RELATED TICKERS: ARRS , CSCO , HLIT

Believe it or not, we are simple blue collar investors that for the most part, still have our own teeth, and in some cases, almost all of our own hair. We haven't really wanted to be anything other than what we are, average folks just trying to save a few dollars for the day we may need a cane.

Since we are fairly simple minded investors, we have a fairly simple investment philosophy; determine a reasonable value estimate for a stock, buy the stock at a discount to our reasonable value estimate, sell some of the stock along the way, and close our position when the stock reaches our reasonable value estimate.

There are a great many investment philosophies floating around the internet, some that are simple and some that are, at least to us, very confusing. We came across a site last week that screens stocks based on something. What that something is we aren't quite sure. We knew it was based on something because when we hit the screen button, it returned a list of stocks. We thought that was pretty clever.

The site said the user should hit the screen button, then build a portfolio of 20 stocks from the list returned, and then sell them after one-year. Once sold, investors should repeat steps one through three. We assume by the time someone would get get to step four they will be on easy street and no longer a subscriber to the website.

We followed the screen instructions and then randomly selected a company just to see if there was any validity at all to yet another investment philosophy. The company we selected was Arris Group, Inc. (Nasdaq: ARRS).

Financial information related to the Arris Group, that is contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending December 31, 2009 as filed with the Securities and Exchange Commission on February 26, 2010.

What They Do
The company is a global communications technology company, headquartered in Suwanee, Georgia that operates in three business segments, Broadband Communications Systems, Access, Transport and Supplies, and Media and Communications Systems.

The company specializes in integrated broadband network solutions that include products, systems and software for content and operations management (including video on demand, or VOD), and professional services.

They claim they are a leading developer, manufacturer and supplier of telephony, data, video, construction, rebuild and maintenance equipment for the broadband communications industry.

In addition, they claim they are a leading supplier of infrastructure products used by cable system operators to build-out and maintain hybrid fiber-coaxial (“HFC”) networks.

Short-Term Investment
The stock closed recently at $11.43, and according to the trend line we found, has recently entered an uptrend and currently has an RS rating of 71, meaning that over the past 13 weeks the price of this stock is higher than 71% of the stocks trading on all exchanges.

In our opinion, short-term investors should have taken a position in this stock the last week in January when the stock was oversold, instead of over the past week, driving the stock to an overbought condition.

With first resistance at $11.62 a 2% increase from the stock's recent close, and first support at $10.67, a 7% decline from the stock's recent close, we think the time for a short-term trade is a thing of the past.

Long-Term (5 Year Hold) Investment
We have to admit, we were impressed with the company's current ration at 5, its quick ratio at 4+, and its cash ratio at 3+. To us, these ratios far exceed what we consider investment quality.

We were also impressed with the company's return on invested capital number at 38%, something we seldom see above 25% in today's economic environment.

As impressed as we were with some of the company's financials, there were several areas that reminded us that management needs to stop scratching its collective stones and become more involved.

For instance, the company ended fiscal 2009 with free cash flow of $1.33, which is lower than what we would consider investment quality.

We also noticed that other free cash flow numbers we like to look at such as free cash flow to equity and free cash flow to the firm, had fairly significant year over year swings, something we don't like to see, and something we interpret as indecisiveness on the part of management.

We were equally unimpressed that the company's receivables were outstanding an average of 49 days and while the company's payables were outstanding an average 32 days. Hello management people!!! Can you spell FREE MONEY???

Lastly, we noticed that the company ended fiscal 2009 with total debt of $226 million on which they paid an average interest rate of almost 8%.   [more]



The Feste

March 05, 2010 – Comments (4)

It seems that I have been nominated for The Feste Award.  [more]

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