Over the weekend we noticed and article on a blog site that called Goldman Sachs a "great vampire squid that was relentlessly jamming its blood funnel into anything that smells like money."
This sounded a bit crass to us, that is until we thought about companies like Genzyme Corporation (Nasdaq: GENZ), and Quest Diagnostics, Inc. (NYSE: DGX). Taking a few minutes to contemplate those companies, we realized they do the exact same thing as Goldman Sachs.
Not only are they constantly trying to stick their collective blood funnels into anything that smells like money, they also get paid extra to analyze any blood they may have actually drawn in their quest for cash.
And that made us wonder. If we were going to invest in a vampire company, which one would it be? Certainly there are a number to choose from and indeed in June 2009, we were contracted to produce a Raw Value Report on Quest Diagnostics, Inc., which we subsequently posted on our blog site.
After a bit of contemplation, we remembered seeing a paragraph on the Magic Diligence site about Genoptix, Inc. (Nasdaq: GXDX), which if memory served, was a true vampire company.
So with a necklace of garlic around or necks and carrying a stake and a hammer, off we went to determine if Genoptix was truly an investable vampire.
Financial information related to Gneoptix, Inc. contained in this report, is based on the company’s most recent SEC Form 10-K filing for year ending December 31, 2009, as filed with the Securities and Exchange Commission on February 25, 2010.
What They Do
The company is a specialized laboratory service provider focused on delivering personalized and comprehensive diagnostic services to community-based hematologists and oncologists utilizing sophisticated diagnostic technologies to provide a differentiated, specialized and integrated assessment of a patient’s condition, aiding hematologists and oncologists in making vital decisions concerning the treatment of malignancies of the blood and bone marrow, as well as other forms of cancer.
The company's key service offerings, COMPASSSM and CHART®, are designed to meet the specific needs of community-based hematologists and oncologists.
The company's COMPASS service offering includes the determination by company hempaths of the appropriate diagnostic tests to be conducted and the performance of these tests. The results are then synthesized and summarized into an easy to read comprehensive report.
The company's CHART® service offering combines multiple COMPASS assessments and analyses of disease progression after intervening clinical action, providing hematologists and oncologists with a valuable diagnostic tool to track both a patient’s disease and as well as response to the hematologists and oncologists prescribed treatment regimen over time.
The company's revenue growth rate reflects the value of its differentiated service offerings to these community-based hematologists and oncologists, with a revenues increase of 59% for FY09, and an income increase over the same period of 102%.
The company was incorporated in Delaware in January 1999, with principal executive offices currently in Carlsbad, California.
The stock closed recently at $17.52 with Resistance at $21.03, a 20% increase from its recent close, and Support at $15.50, a 12% decline from its recent close. Normally an 8% delta would not get our attention when it comes to a short-term investment, but the stock is currently in a down trend, and a appears to be coming off a bottom, with the Stochastic setting up for near term sideways movement.
Clearly, we missed our entry point back in early July, which would have allowed us to take a short-term position and then roll that position into a long-term position. But hindsight is 20/20 and unfortunately we have to play the hand we are dealt, assuming we want to play.
Accordingly, we think a better time to take a short-term position will be after the trend has turned positive, something that could happen over the course of the next couple of weeks.
Long-Term (5 Year Hold) Investment
We last looked at the Genoptix in December 2009, and at the time we were pleasantly impressed with the company's financials. According to a few of the napkin notes we made at the time, we believed that the stock price had gotten a bit ahead of itself, trading in the mid $30s at that time.
We noted then that Free Cash Flow could be better, but Return on Invested Capital was adequate.
Seven months later, we note that while Free Cash Flow improved to $1.76 per share, Return on Invested Capital fell from 30% to 20%. Granted the company is experiencing steady growth with Revenues increasing 59% year over year.
But the thing that has us puzzled is the company's 10-K note that Income increased 102% year over year. While this is indeed true, we note that earnings, which is what we are paying for, increased only 12% year over year. And while that may seem like a nice gain, consider that the company is a small cap company, so large increases in earnings are just not that uncommon.
Still, of the 17 metrics we like to focus on, 78% of them were what we consider investment quality for FY09, while only 66% were investment quality for FY09. This tells us that management's collective head is in the game and that they are paying attention not only to the company's customers, but to current economic conditions as well.
Based on review of the company's FY09 financials, we believe a Reasonable Value Estimate for the stock is around $41, which would put our Buy Target around $24. Factoring in our Risk Adjustment reduces our Buy Target to around $19, which based on the stock's recent $17.52 close, makes this one a buy.
The wind howls, the thunder lights the summer sky, and the rain obscures the vision of all but the luckiest of travelers. Indeed there are many vampires in the investing world whose single goal is to separate unwary individual investors from the their hard earned money, to take from them and from their families, their life blood.
For decades, these bloodsuckers have been successful in their quest. But as time passes and individual investors become better and better skilled at seeing value, and then taking their time to evaluate the value they have found, the influence of these leeches will diminish, until one day, the parasites will simply be no more.
To download the Genoptix, Inc. Raw Value Worksheet, please click here.
We noticed an article about nine CEOs that need to be fired. The reasons cited in the article as to why these people should be sacked were all fiduciary in nature.
Some of course would disagree with that assessment. They would argue for instance that Dan Hesse at Srint Nextel Corporation (NYSE: S) is doing a good job, that everywhere you look you see a Sprint ad, and that in time, those ads are going to pay dividends for the shareholders. Ye the stock price is 65% lower now than when Mr. Hesse started.
Another of the CEOs mentioned in the article is Michael Dell, CEO of Dell, Inc. (Nasdaq: DELL), whose recent tenure includes a 65% decline in share price, accounting troubles, charges of fraud, and allegedly that the company knowingly shipped millions of flawed computers.
About an hour after we read the article, we received a client request for a worksheet for Plantronics, Inc. (NYSE: PLT), a company we have heard of but had never taken the time to actually research.
So with thoughts of corporate shenanigans and CEO silliness fresh in our minds, off we went to do the clients bidding.
Financial information related to Plantronics, Inc., contained in this report, is based on the company’s most recent SEC Form 10-K filing, for year ending March 30, 2010, as filed with the Securities and Exchange Commission on June 1, 2010.
What They Do
The company is a designer, manufacturer, and marketer of lightweight communications headsets, telephone headset systems, and accessories for the business and consumer markets under the Plantronics brand.
In addition, the company manufactures and markets, under its Clarity brand, specialty telephone products, such as telephones for the hearing impaired, and other related products for people with special communication needs.
The company's headsets are used in offices and contact centers, with mobile and cordless phones, and with computers and gaming consoles, allowing the user the freedom to use their hands while staying connected to their communication or entertainment device.
The company's headsets are widely used with cell phones, in contact centers, in the office, in the home, for applications such as Unified Communications, with Voice over Internet Protocol, for gaming, and for other specialty applications.
The company ships its products to 70 countries through a worldwide network of distributors, retailers, wireless carriers, original equipment manufacturers, and telephony service providers, and was founded in 1961.
The stock has first resistance at $30.56, a 1% increase for its recent close of $30.27, and first support at $28.44, a 6% decline from its recent close.
Coupling first resistance with the current downward trend line, we realize this is point that many at which many active traders may want to start a position.
Based on the current Stochastic indicator, we think the stock price will decline from its recent close, which sets the stock up as good short.
Long-Term (5 Year Hold) Investment
One of the investment metrics we like to use is a comparison of the Earnings Yield to the Yield for a Corporate AAA rated bond. With an earnings yield of 5.98% and a AAA rated corporate yield at 2.23%, the earnings yield surpasses the bond yield by slightly more than 2.5 times.
Additionally, the company ended FY10 with no Debt, Current, Quick, and Cash Ratios that were simply outstanding, Return on Invested Capital of almost 43%, and Simple Free Cash Flow of almost $2.00 per share.
Certainly these ratios are outstanding. But all is not perfect with the company's financials.
For instance, Accounts Receivable are outstanding an average of 53 days, while Accounts Payable are outstanding an average of 30 days. While we salute the benevolence of management in providing its suppliers a 23 day interest free loan, we wonder why senior management would allow this practice to continue?
We also note, that year over year Sales have been declining with an 11% decline between FY08 and FY09, and a 20% decline between FY09 and FY10.
Finally, we wonder why management would spend $1.01 per share buying back company stock and yet spend only$0.20 per share on its shareholders in the form of Dividends?
Based on our review of the company's FY10 financials we believe a Reasonable Value Estimate for the stock is in the $48 range. Normally we would be buyers of the stock in the $24 range, but because we think the stock carries additional risk brought on by management, we think a more prudent buy point would be in the $19-20 range.
On the surface, it appears to us that management is simply not paying attention to the company's shareholders, even asking them to increase the number of shares available for the company's stock plan by 1.2 million, and event that admittedly has always and will always, leave an extremely bitter taste in our mouths because it only serves to dilute the value of the stock.
With what seems on the surface, a lack of fiduciary concern for the company's shareholders, we have to wonder if perhaps the CEO, Ken Kannappan shouldn't be on the list of CEOs to be sacked.
We understand the issue with such a grand statement, who would guide the company going forward? But in the grand scheme of things, Mr. Kannappan came to Plantronics from Kidder, Peabody and Company where he was an investment banker, making us wonder if the current investment strategy isn't "me first" instead of shareholders first.
To download the Plantronics, Inc. Raw Value Worksheet, please click here.
During 2008, in the middle of economic good times, when 401(k) values were high and credit was easy, we began to ask ourselves how long the good times might last. About the middle of the year, we decided that the good times were in deed coming to an end, and wondered just what was going to happen not only to the economy, but also to our investments.
While we had no idea of the scope of the economic uncertainty that was descending on the economies of the world, we believed it was going to be long-lived, and the government would be required to do more than keep interest rates low if a recovery were ever to happen.
Accordingly, we increased the amount of cash in our portfolio by selling investments that were simply not performing as we had anticipated. While we were a bit reticent to take this course, we finally decided, after considerable discussion, that it was the wisest thing to do.
In past times of economic upheaval, one of the things the government seemed to do, aside from press for lower interest rates, was spend additional money, thus increasing the deficit and the national debt.
At that time in 2008, we believed that history would repeat itself and the government would once again attempt to stimulate the economy by spending money.
To that end, we investigated a number of companies, and ended up buying several companies that had contracts with the federal government. In the end, we added SAIC, Inc. (NYSE: SAI), Ducommun, Inc. (NYSE: DCO), SRA International, Inc. (NYSE: SRX), and Kaman Corporation (Nasdaq: KAMN) to our portfolio.
Once again, we believe that economic woe could be just ahead, as we simply do not believe the numbers about unemployment and housing the government is issuing. Nor do we believe that a sustainable economic recovery is at hand.
It is our opinion that the U.S. economy, like the economies of the rest of the world, are in far worse shape than is currently known. Accordingly, we are once again looking at companies that have contracts with the government, as a place to keep our investment dollars working.
One of the companies we looked at a couple of years ago was URS Corporation, (NYSE: URS), deciding at the time that we thought an investment in URS would be of little benefit.
But what about now, could an investment in URS be a benefit today?
Financial information related to URS Corporation, contained in this report, is based on the company’s most recent SEC Form 10-K filing, for year ending December 31, 2009, as filed with the Securities and Exchange Commission on March 2, 2010.
What They Do
The company is an international provider of engineering, construction and technical services, offering a broad range of program management, planning, design, engineering, construction and construction management, operations and maintenance, and decommissioning and closure services to public agencies and private sector clients around the world.
The company is also a major United States federal government contractor in the areas of systems engineering and technical assistance, and operations and maintenance.
The company operates through three businesses: Infrastructure and Environment, Federal Services, and Energy and Construction.
The Infrastructure and Environment business provides a wide range of program management, planning, design, engineering, construction and construction management, and operations and maintenance services to a variety of U.S. and international government agencies and departments, as well as to private sector clients.
The company's Federal Services business provides program management, planning, systems engineering and technical assistance, construction and construction management, operations and maintenance, and decommissioning and closure services to U.S. federal government agencies, primarily the Departments of Defense and Homeland Security.
The company's Energy and Construction business provides program management, planning, design, engineering, construction and construction management, operations and maintenance, and decommissioning and closure services to U.S. and international government agencies and departments, as well as to private sector clients.
The company has approximately 45,000 employees in a global network of offices and contract-specific job sites in more than 30 countries.
The stock is has been in a downtrend since early May, but is heading back to an overbought condition. Ideally, we would like to see the stock price in an oversold condition, with the MACD trending upward before we would consider a position.
However, we note that a recent close for the stock of $39.70 puts the price within 6% of support, and with first resistance at $44.12, there is an 11% increase potential from the recent close.
While we would be very tempted to start a position at current levels, recognizing of course, that the trend is your friend, we think the stock price may trend slightly lower from this point.
Long-Term (5 Year Hold) Investment
We have a number of metrics that we like to focus on when investigating a company for investment. No single metric stands alone, and none has more weight than another.
We note then, that the company’s Current Ratio at 1.88, and Cash Ratio at 0.49 are both what we consider to be less than investment quality, while the company’s Quick Ratio at 1.73 and Debt to Equity Ratio at 0.21 are above investment quality.
While we of course like that Free Cash Flow increased year over year, ending FY09 at $4.68 per share, we were simply not impressed that Goodwill and Intangibles once again made up more than 50% of Total Assets.
We were also not impressed that the company ended FY09 with debt in excess of $9.50 per share, which think is far too high. While the average interest rate the company paid was about 2% lower in FY09 than FY08, and the company did reduce its debt by almost $318 million during the year, we simply believe that the company needs to reduce its debt to something below $3.75 a share, if hopes to remain competitive over the longer-term.
Based on our preliminary review of the company’s FY09 financial information, we think a Reasonable Value Estimate for the stock is in the $70 to $75 per share range.
Accordingly, we think starting a position at current levels may be prudent, assuming investors are willing to add to that position on pullbacks in the price.
With the lone exception of spending money it doesn’t have, we believe the United States government is generally inept.
It is our opinion that the U.S. economy is in for another huge shock, and believe in typical government fashion, the current administration will simply try and spend its way into economic recovery.
The difference this time, as opposed to two years ago, is that this time we think the government will attempt to spend it’s way to prosperity by actually putting ordinary Americans to work, instead of bailing out all of their friends in the banking and financial services industry.
We believe putting ordinary Americans to work will be a good thing, just as we think taking advantage of the ineptitude of the people we elect by investing in companies that earn their money from the folly that has become American politics, will serve to lessen the pain when inflation eventually starts to consume our retirement dollars.
To download the URS Corporation Raw Value Worksheet, please click here.
Last fall, we were asked what we thought of for-profit university and trade school companies as investment vehicles. Our reply at the time was that we had not found one that was not extremely over priced.
We cited an article we had written about Stayer Education, Inc. (Nasdaq: STRA) last year. In the article we noted that in our opinion, the stock was extremely over valued and that new investors saving for retirement, may simply be too late to the party to use this stock as a means to help them reach their retirement goals.
So we were a bit amused when we received a request a few days ago from someone that had read our prior article, but wanted to know what we thought of Apollo Group, Inc. (Nasdaq: APOL), as an avenue for retirement investment.
Our short answer is...forget it.
According to the College Board, the average cost, per year, at a for-profit school is about $14,000, while the average cost per year for a public university, including room and board, is about $15,500. Take out the room and board, and the price drops by about half.
The problem, at least to us is since most students don't have that kind of money in their sock drawer, where does this tuition money come from? According to a report we read on the Bloomberg site, it comes from you and I...at least for now.
Financial information related to Apollo Group, Inc., contained in this report, is based on the company’s most recent SEC Form 10-K filing, for year ending August 31, 2009, as filed with the Securities and Exchange Commission on October 27, 2009.
What They Do
The company is one of the world’s largest private education providers and has been in the education business for more than 35 year, offering educational programs and services both online and on-campus at the undergraduate, graduate and doctoral levels through wholly-owned subsidiaries which include The University of Phoenix, Inc., Western International University, Inc., Institute for Professional Development, The College for Financial Planning Institutes Corporation, and Meritus University, Inc.
In addition to the those wholly-owned subsidiaries, the company formed a joint venture with The Carlyle Group called Apollo Global, Inc., to pursue investments primarily in the international education services industry.
Formed in October 2007, the company currently owns 86.1% of Apollo Global, with Carlyle owning the remaining 13.9%. As of August 31, 2009, total cash contributions made to Apollo Global were approximately $511.8 million, $440.5 million of which had been contributed by the company.
To date Apollo Global joint venture has completed the acquisitions of BPP Holdings plc in the United Kingdom, Universidad de Artes, Ciencias y Comunicación in Chile, and Universidad Latinoamericana in Mexico.
The stock price continues to trend down, and has been in an oversold condition for about month, a condition we don’t see reversing in the short-term.
The stock closed recently at $41.86, slightly less than 1% from support, which is currently $41.45. There is a 25% spread between a recent close and first resistance, currently at $52.29, which short-term traders will surely attempt to exploit.
The question in our mind is when will that happen. If things go as they have in the past, computerized trading will start the ball rolling, probably about the time the cow decides to jump over the moon.
Short-term investors may simply want to take a position now and hope for the best, instead of waiting for confirmation that the dish has indeed run away with the spoon.
Long-Term (5 Year Hold) Investment
We have long held that the tangible results of a company are the intangible achievements of management.
In other words, if a company has consistently produced strong financial statements, regardless of whether earnings are positive or not, then to us management is actively engaged in running the company, and over the longer term, we will be well served with an investment in a company managed in such a manner.
We simply do not see such an entrepreneurial management style from Apollo Group.
The company’s Current Ratio, Quick Ratio, and Cash Ratio, are all woefully below what we consider investment quality.
Additionally, the company has a Tangible Book value of $2.71, Goodwill and Intangibles make up more than 22% of the company’s Total Assets, and the company simply has too much debt, which for FY09 equaled $3.69 per share.
We were impressed with Return on Invested Capital at almost 63%, and with Free Cash Flow at $4.68, and believe these metrics will remain consistent over the next year.
But otherwise, we were not overly impressed.
Based on our review of the company’s FY09 financial information, we think that a Reasonable Value Estimate for the stock is in the $37 to $44 per share range.
Considering the current trading range, we believe the stock is fairly valued at this time.
Americans are being sold a bill of goods by for-profit trade schools and universities. Certainly over a working lifetime, the worker with the greater education should expect to reap the greater economic reward.
Our question of course, is what is the cost for that potential increase in personal economy?
It is our opinion that potential students are starting to realize that the true cost associated with for-profit trade schools and universities is something not determinable until the final check is written, years after the sheepskin ink has finally dried.
To download the Apollo Group Raw Value worksheet, please click here. [more]