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September 2010



Horizon Lines, Inc. - Container Thoughts

September 26, 2010 – Comments (2) | RELATED TICKERS: HRZ.DL , SATCQ

We visit quite a few websites in the course of any given week, and without exception, all of them have at least two to three articles explaining why this stock or that stock is THE stock that investors should be buying.

At Wax Ink, we decided a very long time ago not to use interim financial information when we perform our due diligence for a company, and in every article we write, we do our best to let readers know that our information is based on fiscal year XYZ data.

A case in point is a recent article from the AOL Daily Finance site titled Under the Radar: A Possible Ten-Bagger Stock. The article and the associated video, extol the reasons why investors should own Satcon Technology Corporation (Nasdaq: SATC). Never mind that annual Net Income has been negative since 1995!

The other stock mentioned was Horizon Lines, Inc. (NYSE: HRZ). What struck as strange here was that the company was "back to profitability", yet for FY09, the company reported a Net Loss of ($1.03) per share. Did FY10 end early?

This seeming discrepancy tells us that the Wizards of Wall Street are using unaudited quarterly financial data to sell a product, while the reality is, in our opinion, the only thing these folks care about is lining their own pockets.

But as we have learned over the years, even a ship adrift can sometimes be spotted from the air, and to us, such may be the case with Horizon Lines.


Financial information presented in this report for Horizon Lines, Inc. is based on the company's most recent SEC Form 10-K filing for year ending December 20, 2009, as filed with the Security and Exchange Commission on February 4, 20101.

What They Do

The company believes that they are the nation’s leading Jones Act container shipping and integrated logistics company, accounting for about 37% of the total U.S. maritime container shipments from the continental United States to Alaska, Puerto Rico, Hawaii, as well as to Guam, the U.S. Virgin Islands, and Micronesia.

Short-Term Investment

The stock closed recently at $4.00, with Resistance at $4.11, a 3% increase from its recent close, and support at $3.65, a 9% decrease from a recent close.

With the trend line falling, Stochastic not yet reaching oversold, the MACD flat, and Daily Volume seeming to stabilize in the 300,000 share a day range, there simply doesn’t seem like much for short-term investors to get to excited about.

Long-Term (5 Year Hold) Investment 

There is simply no easy way to say this, but at almost $17 per share the company has an extreme amount of debt.

What we found strange was that the company’s lenders know this. How do they know? Well with Total Debt exceeding Net Fixed Assets by more than 2.5 times, the company’s lenders charged the company an annual interest rate for FY09 of almost 8%. Something they would not have done had the company had a stronger balance sheet.

Another balance sheet related item that caught our attention was that Goodwill and Intangibles make up almost 52% of Total Assets, meaning that the company has little to offer in the way of collateral.

We also have to wonder if management is even aware of this seemingly high interest rate? We bring this up because it appears to us that management is pretty much asleep in the wheelhouse.

Why else would management allow Accounts Payables to be paid every 17 days, while allowing Accounts Receivable to be collected every 39 days, thus providing their vendors an interest free 22 day loan.

One bright spot was the company’s Free Cash Flow, which while reduced year over year, was still a respectable $3.40 for FY09.

The company also faces numerous legal challenges. This came as no surprise to us, as it simply the nature of the business. We had anticipated that most of the legal issues would be either related to price fixing, or monopolistic business practices, or would be labor related. And with the exception of one case, that is pretty much what we found.

However in April 2008 the company received a grand jury subpoena and search warrant for the Antitrust Division of the Department of Justice (DOJ) regarding antitrust violations related to the domestic ocean shipping business.

The subpoena was serious enough that the company has entered into a conditional amnesty agreement with the DOJ under its Corporate Leniency Policy. The amnesty agreement pertains to a single contract, and by signing it, the DOJ has agreed not to bring any criminal prosecution as long as the company cooperates with the government regarding this investigation. 


Based on our review of the FY09 financial information for Horizon Lines, our Reasonable Value Estimate for the stock is $20-$21, with a Buy Target of $12, a First Sell Target of $24, and a Close Target of $25-$26.

Because many of the financial metrics that we believe are important when valuing a company were simply not investment quality, we reduced our Buy Target from $12 to $6.

Final Thoughts

Over the years, the decision to take a more conservative approach when it comes to determining a reasonable value estimate for a stock, has cost us readers as well as the loss of research clients. Certainly that has been, and continues to be unfortunate for us.

But be that as it may, we believed then and we believe today, basing investment decisions on interim (quarterly) financial information is nothing more than divination, and over the course of a lifetime of saving and investing, the practice will cost the vast majority of investors dearly, especially once the government realizes they cannot buy America's way to an economic recovery.

Wax  [more]



OpenTable, Inc. - Pants Down Dining

September 18, 2010 – Comments (3) | RELATED TICKERS: OPEN.DL

Stunned! Floored! Amazed! We simply don't know any other way to express how dumbfounded we are, especially since the company is one that we had never heard of.  [more]



Take-Two Interactive - Thoughts From Fifth and Dover

September 12, 2010 – Comments (2) | RELATED TICKERS: TTWO , ATVI , EA

Because we are simple working people without three-piece suits or graduate degrees in finance, and because we also think that pre-popped freeze dried popcorn would be a poor idea, we get quite a bit of e-mail during the course of any given week asking us our thoughts on specific companies.

The overwhelming requests are from clients that read something positive about a company on an investing website. This week was no exception.

It seems that a website recommended buying game manufacturer Take-Two Interactive Software, Inc. (Nasdaq: TTWO). This recommendation prompted a number of e-mails to us all wanting to know if investments in Activision Blizzard, Inc. (Nasdaq: ATVI) or Electronic Arts, Inc. (Nasdaq: ERTS) should be sold.

Alas, we simply do not recommend the buying or selling of securities, mainly because we are not qualified to peform that sort of investment function but more importantly because that is simply not the business we engage in.

What we do suggest and have always suggested, is that before an investment is undertaken the reason for the investment is fully considered.

Several of the questions we suggest investors asked themselves before they invest are:  [more]



Panera Bread - Thoughts From the Corner Booth

September 04, 2010 – Comments (6) | RELATED TICKERS: PNRA.DL , SBUX , WFM

One of our investment management clients sent us an e-mail several days ago inquiring about our thoughts on Panera Bread Company (Nasdaq: PNRA).

We need to say at this point that investment in the retail sector is simply not our cup of tea. Certainly there may be great buying opportunities in that sector of the market, but we are picks and shovels investors, and as such, are simply not interested in the whims of the consumer when it comes to investment growth.

If Panera had a more captive audience, for instance like a Starbux, Inc. (Nasdaq: SBUX) we may have a different outlook. That's not to say that for us, Starbux is a company we would invest in, it isn't, but that is simply because the company, like Whole Foods Market, Inc. (Nasdaq: WFMI) and others, is a one trick pony and prospers only because of the discretionary generosity of the consumer. Thanks but no thanks.

Financial information related to Panera Bread Company, Inc. contained in this report, is based on the company's most recent SEC Form 10-K filing for year ending December 29, 2009, as filed with the Securities and Exchange Commission on February 26, 2010.

What They Do
Panera Bread Company along with its subsidiaries is a national bakery-cafe concept with 1,380 company-owned and franchise-operated bakery-cafe locations in 40 states and in Ontario, Canada, operating under the Panera Bread, Saint Louis Bread Company. and Paradise Bakery and Café trademark names.

The company operates in three business segments: company bakery-cafe operations, franchise operations, and fresh dough operations. For FY09 the company's bakery-cafe operations segment consisted of 585 company-owned bakery-cafes, all located in the United States, and its franchise operations segment consisted of 795 franchise-operated bakery-cafes, located throughout the United States and in Ontario, Canada.

Also for FY09, the company's fresh dough operations segment, which supplies fresh dough items daily to company-owned and franchise-operated bakery-cafes, consisted of 23 fresh dough facilities of which 21 were company-owned and two were franchise-operated.

Short-Term Investment
The company closed recently at $85.02, with Resistance at $88.68, a 4% increase from a recent close and Support at $77.53, a 9% decline from a recent close.

The stock price is currently trending upward, with the Stochastic recently becoming overbought. Clearly the better short-term buying opportunity was back in July.

Considering the current trend, and the tight spread between Resistance and Support, we have no short-term investment interest at this time.

Long-Term (5 Year Hold) Investment
It’s hard to ignore a company that for FY09 had Free Cash Flow of $5.30 a share, a 13% year over year increase.

Coupling Free Cash Flow with Return on Invested Capital of 45%, a 9% year over year increase, a Debt to Equity Ratio of 0.04, a Current Ratio of 2.26, a Quick Ratio of 1.93, and Cash Ratio of 1.73, it’s very easy to see why the company is #99 on the Fortune list of The 100 Fastest Growing Companies.

Management has done an outstanding job keeping the company’s debt burden low. Like many companies, Panera does have a credit line available to them, but cudos to management for ending FY09 just like they ended FY08, with no outstanding debt.

Based on our preliminary review of the company’s FY09 annual financial information, we think a Reasonable Value Estimate for the stock based on a 5-year hold is in the $54-$56 range.

We note that the company is currently trading at 16 times Free Cash Flow, at 4.5 times Book Value, and 5.5 times Tangible Book Value, making investment in the company expensive.

Final Thoughts
Getting a great loaf a bread and nice cup of fresh soup is certainly something that has intrigued a great number of folks, especially of late with so much in the news about eating healthy.

While we would prefer a rare rib-eye steak with fries and a cold dark beer, there may be a pretty fair chance that we are in the minority here, especially as the start of our particular generation turns 65 this year.

Blue hair aside, we simply don’t find a bread store that sells soup and green tea, a compelling investment, and hope those so inclined to invest pay close attention to the lunch menu and the financial menu, both of which are which is subject to change without notice.


To download the free Wax Ink Raw Value Worksheet for Panera Bread, please click here.   [more]

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