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October 2010



Brookdale Senior Living - Thoughts on Providence

October 24, 2010 – Comments (0) | RELATED TICKERS: BKD , ESC.DL , VTR

It was the industry with a gain of more than 10% in a single day, the industry with 13 publicly traded companies, the industry each of us has the potential to become apart of someday, the industry that seemed to ignite based on a single news event. It was the Long-Term Care Facilities Industry.

So why all the hubbub? It seems that Ventas, Inc. (NYSE: VTR) announced that is was going buy assisted living company Atria Senior Living Group, for $1.5 billion in cash and stock, as well as the assumption of $1.6 billion in debt.

At the end of the day companies that owned five clean bandages and six rolls of medical tape had become fair game for a takeover.

Yep, once again, investors that owned shares of stock in that industry or could spell Long-Term, or that simply knew somebody that lived next to a road that lead to a road that lead to a long-term facility, were all gonna be on easy street.

The company in that industry with the largest daily gain, gaining almost 19% on the day, was Brookdale Senior Living, Inc. (NYSE: BKD), followed by Emeritus Corporation (NYSE: ESC) with a one day gain of slightly more than 13.5%.

While both of these companies are on our watch list, we decided that since Brookdale had won the day by virtue of having the largest gain, we would look under a few of their beds, just to see what was what. 


Financial information presented in this report for Brookdale Senior Living, Inc. 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 26, 2010. 

What They Do 

The company claims to be the largest operator of senior living communities in the United States based on total capacity as of December 31, 2009. Operating 565 communities in 35 states, the company has the ability to serve approximately 53,600 residents.

The company operates in four business segments: retirement centers, assisted living, continuing care retirement communities, and management services.

The company operates 80 retirement center communities with 14,867 units/beds, 430 assisted living communities with 22,954 units/beds, 36 continuing care retirement communities with 12,017 units/beds, and 19 communities with 3,788 units/beds where they provide management services for third parties.

The majority of the company's units/beds are located in campus settings or communities containing multiple services, including continuing care retirement communities, and as of December 31, 2009, the company's owned/leased communities were 88.9% occupied.

The company generates approximately 83.0% of its revenues from private pay customers, with 40.0% of revenues generated from owned communities, 59.7% from leased communities, and 0.3% from management fees from communities operated on behalf of third parties. 

Short-Term Investment 

The stock closed recently at $19.77 with resistance at $22.21, a 12% increase from a recent close, and support at $17.28, a 13% decline from a recent close.

The stock has been in an uptrend since the middle of September, and it appears to our untrained short-term eye, that the stock price will continue in that general direction, after a brief sell off.

Since the stock price was up over $3.00 on Friday for no definitive reason, a pullback to more modest levels is probably in the offing as investors realize that Friday’s rumors are now Monday’s news and dump the stock in search of fresher prey. 

Long-Term (5 Year Hold) Investment 

The company has several financial metrics that are simply worse than terrible. Their Current Ratio at 0.46, Quick Ratio at 0.22, and Cash Ratio at 0.10, makes us wonder if the company can stay in business.

Add to these abysmal numbers, the company’s debt at almost nine times EBITDA, and Return on Invested Capital at less than 5%, and we have to wonder why anyone other than an institutional investor, would think this company was a viable long-term investment.

The one metric we did find that renewed our hope for the company was its Free Cash Flow at $1.90 per share.

Other than that, we found nothing in the company’s financials that would be considered investment quality. 


Based on our review of the company’s latest annual financial information, our Reasonable Value Estimate for the stock assuming a 5-Year hold is $21, with a Buy Target of $13, a First Sell Target of $25, and a Close Target of $26.

The stock is currently trading at 22 times FY09 earnings, and 3 times Tangible Book Value. At current levels the price has an Enterprise Value of $41 per share, but when the debt is backed out the Equity Value drops to ($1.00) per share.

With EBITDA at 2.4% of sales, and Enterprise Value at $41 per share, the Merger and Acquisition return period works out to roughly 17 years, assuming EBITDA stays at current levels.

And given the uncertainty of the real estate market in general, along with learning that yes Elizabeth there really is such a thing as negative appreciation, waiting 17 years for an M&A opportunity to pay for itself, may not seem very attractive to a potential suitor.

Final Thoughts 

As we said, the idea was to look under a few beds to see if we could determine why the stock price for this particular company increased almost 19% in a single day.

To say that we were not impressed is an understatement. The company simply has too much debt, and at the moment, it takes about $0.46 out of every EBITDA dollar to pay the interest on that debt.

Where are investors going to be when interest rates start to increase, or the company simply cannot return to the hog trough for more money? Then what? Certainly investors cannot think that the value of the property will make them whole, can they?

The company may one day, be the greatest investment in the history of moth resistant wool, or eatable wallpaper paste, we have no idea.

But we do know, based on what we saw, investors would be better served sending their investment dollars to Reverend Ike instead of spending it on Brookdale stock.

At least that way divine providence would be on their side, which we believe is the only way an investment in this company is every going to pay off. 

Wax  [more]



Google, Inc. - Thoughts on Arithms

October 17, 2010 – Comments (10) | RELATED TICKERS: GOOGL , MSFT , YHOO

They announced earnings and investors went goofier than they already are, driving the price of the stock up above the $600 mark.

That someone, anyone, would be willing to pay $600 to own a stock amazes us, much less a stock that has gone up in price almost 25% since mid August.

But such is the life of the Queen of Search, Google, Inc. (Nasdaq: GOOG), who announced earnings last week and then watched their stock price move higher by more than $60 a share.

As the single, most dominate search engine of the internet, we think the algorithm that Google as developed and continues to develop, an algorithm we call the Googarithm, is simply the best of the best.

Certainly the Googarithm has its competitors. Microsoft Corporation (Nasdaq: MSFT) has deployed Bing, which we think is simply a stupid name. Bing?

Not only does the Bingarithm not work as well as the Googarithm, but because Google controls so much of the advertising associated with search, the Googarithm can simply direct queries to sites that support Google with advertising dollars.

What is it that Bing does? Sing “White Christmas”?

Then there is Yahoo!, Inc. (Nasdaq: YHOO). The Yahooarithm is, well it’s just odd. What we have often wondered is with all of the advertising revenue that Yahoo! has at its disposal, why its search engine doesn’t seem to capture the Yahoo advertisers.

Okay we admit that Wax Ink is “arithmless”. But still, as strange as this may seem, we are able to think beyond the front or pants!

And in doing so, we came to the conclusion, admittedly without much thought, that we should support companies that support us before we support companies that don’t. That does stand to reason, right? 


Financial information presented in this report for Google, Inc. 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 12, 2010. 

What They Do 

Google, Inc. is a global technology leader, focused on improving the ways people connect with information.  [more]



General Electric - Thoughts From 10th and Main

October 11, 2010 – Comments (2) | RELATED TICKERS: GE

We maintain a fairly large watch list, which at last count contained the names of 2559 companies, 67 of them foreign companies.

Because we have such a large watch list, it becomes very difficult to decide which worksheets for which companies, we should update.

Years ago when we first assembled our watch list, we decided to follow the outline on Yahoo. There was no particular rhyme or reason why, we just believed that while slightly different than the rest of the business world, Yahoo’s business structure would be around for many years to come.

To remedy which companies to update everyday, we go to the Business Section of Yahoo, and see which sector had the largest gain for the day.

Within that sector are numerous industries, and once we know which sector had the largest one-day gain, we drill down in that sector to determine which industry had the largest one-day gain.

From there we are able to see which companies in that industry had the largest one-day gain. Generally we will update three or four companies in the industry with the largest one-day gain.

Updating our watch list in this manner keeps things dynamic and allows a reasonable blend of updated worksheets, since it is simply impossible to update every company on our watch list.

Recently, the sector with the largest single day gain was the Conglomerate Sector, gaining 2.72% for the day.

The Conglomerate Sector is unique because it contains only one industry, the Conglomerate Industry, which is comprised of 34 companies.

Of those 34 companies, 11 are publicly traded. Of those 11 publicly traded companies, nine are on our watch list, and of the nine on our watch list, only one is within our Buy range.

So this week, the company that we think investors may want to consider, is General Electric Company (NYSE: GE). 


Financial information presented in this report for Frequency Electronics, Inc. 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 29, 2010. 

What They Do 

General Electric Company is one of the largest and most diversified technology, media, and financial services corporation in the world.

The company offers products and services ranging from aircraft engines, power generation, water processing, and household appliances to medical imaging, business and consumer financing, media content, and industrial products, and serves customers in more than 100 countries while employing more than 300,000 people worldwide.

The company was incorporated in 1892 and is headquarted in Fairfield, Connecticut. 

Short-Term Investment 

The stock closed recently at $17.12, with resistance at $19.70, a 15% increase from a recent close, and support at $16.43, a 4% decline from a recent close.

The stock price had been in a general declining pattern since mid May, but in more recent days has reversed course somewhat with the Stochastic now moving well into overbought territory.

Additionally, the MACD seems to be settling with a very gradual move to the upside, which should keep the stock price trending upward over the next several sessions. 

Long-Term (5 year Hold) Investment 

On the positive side, the company’s Current Ratio, Quick Ratio, Cash Ratio, and Free Cash Flow, are all what we consider investment quality.

On the negative side, the company simply has too much debt. Considering the size of GE, having lots of debt may not seem like a big deal, and certainly the company is able to service the debt it has, but to us, $472 billion is a lot of debt.

The company did manage to reduce its long-term debt during FY09 by almost $111 billion, which we applaud, but note that almost $0.12 out of every gross sales dollar was spent on interest payments.

And while that may not seem like a great deal to many investors, to us, especially in today’s highly competitive business environment where company’s are looking for any advantage they can garner, spending $19 billion on interest payments just seems a bit excessive to us. 


Based on our review of the company’s most recent annual financial information, our Reasonable Value Estimate for the stock based on a 5-year hold is $32, with a Buy Target set at $19, a First Sell Target set at $38, and Close Target set at $40.

Coupling the financial metrics we consider important as our hedge against risk, with the amount of debt the company has, we think a more conservative Buy Target of $14 is appropriate. 

Final Thoughts 

The company has evolved from bringing good things to life to Imagineering, and in the years to come will no doubt move into many different facets of business with new and innovate products.

Over the next 5 years, there is simply no telling what demands the world will place on the company and what products the company will introduce to meet those demands.

Certainly replacing the standard electric light bulb with light emitting diodes (LEDs) will add to the company’s lighting market share, and the world’s need for conventional, nuclear, and green power will keep the company moving toward innovation on that economic front, which is certainly good news for investors.

But in the end, at least to us, none of that matters, since in the end it comes down to our own personal economy, and one very simple question. Is the stock worth today’s $19 price tag?

Since we believe price determines return, we think now is the time to start a position, while we still have a few dollars the government has yet to tax us out of. 

Wax  [more]



Frequency Electronics - Synchronizing Time

October 03, 2010 – Comments (0) | RELATED TICKERS: FEIM , NOC , MSI

A research client of ours is a member of the American Association of Individual Investors, an organization that we have been associated with off and on as individual investors, since the mid 1990s.

Several days ago we received an e-mail from our client asking us for a Raw Value worksheet for Frequency Electronics, Inc., (Nasdaq: FEIM). In the e-mail, they explained that they had run across the company using a screen on the AAII site.

We did some checking, and while we did have the company on our watch list, we had never taken the time to create a valuation worksheet.

As we have said on many occasions, we like companies that make stuff, that companies that make stuff, need, picks and shovels companies we like to call them.

The only companies we like better than picks and shovels companies, are picks and shovels companies that have the government as one of their customers, or whose customers have the government as one of their customers.

And considering a recent article we saw on the Yahoo Finance site, we think companies that do business with the government, may just come back into vogue.

The questions we took away from the Yahoo article were several. The first thing we wondered was will the Dow actually fall to 4200 over the next 9 months? That is an extremely precipitous plunge.

The next thing we wondered was will the real unemployment rate (U6) really hit 24%, and finally will housing prices indeed fall an additional 20%?

Not that there is any real basis for these prognostications, but we had to wonder, what if? 


Financial information presented in this report for Frequency Electronics, Inc. is based on the company’s most recent SEC Form 10-K filing for year ending April 20, 2010, as filed with the Securities and Exchange Commission on July 29, 2010. 

What They Do 

Frequency Electronics, Inc. was founded in 1961 as a research and development time and frequency control company and was incorporated in Delaware in 1968.

In the mid-1990’s, the company changed its business model from primarily a defense contract manufacturer into a high-tech provider of precision time and frequency products for commercial applications found in both ground-based communication stations and on-board satellites, with supporting services to the United States government for defense and space application products.

The company has become a world leader in the design, development and manufacture of high-technology frequency, timing and synchronization products for satellite and terrestrial voice, video and data telecommunications.

Their technologies provide solutions that are essential building blocks for the next generations of broadband wireless and for the ongoing expansion of existing wireless and wireline networks.

The company has stated that their mission is to provide the most advanced control of frequency and time, which are essential factors for synchronizing communication networks and for providing reference frequencies for certain military, commercial and scientific, terrestrial and space applications. 

Short-Term Investment 

The stock closed recently at $6.06, with Resistance at $6.68, a 10% increase from a recent close, and Support at $5.38, an 11% decline from a recent close.

The stock has been in a downtrend which started in early May, with the stock price literally drawing a straight line since about the later part of May and continuing through a recent close.

Obviously we are not the greatest readers of the tea leaves, but it just seems to us that short-term investors may want to pass on this stock, at least until the cow jumps over the moon. 

Long-Term (5 Year Hold) Investment 

Based on our review of the company’s FY10 financial information, we found the Current Ratio, the Quick Ratio, and the Cash Ratio, all far in excess of what we consider investment quality. We also found the company’s debt at $0.07 per share, to be acceptable.

What we did not find to our liking was the company’s Return on Invested Capital at about 8%, and the company’s Cash Conversion Cycle at 387 days, meaning it takes the company 387 days to produce a product from its inventory and then collect the money for the product it made.

We also were not fans of the interest free loans the company appears to be providing to its suppliers, which is what happens when suppliers are paid on average every 21 days, but the company is paid on average every 78 days.

Certainly we recognize that with Northrop Grumman Corporation (NYSE: NOC), Lockheed Martin Corporation (NYSE: LMT), Motorola Corporation (NYSE: MOT), and Boeing Corporation (NYSE: BA) being the company’s major customers, collecting Accounts Receivables may take a bit longer than collecting from lesser companies.

But we believe that the role of management is to be proactive and as such, they should put in place policies and procedures that would improve the company’s collection process. 


Based on our review of the FY10 financial information for Frequency Electronics, our Reasonable Value Estimate for the stock is $27, with a Buy Target of $16.50, a First Sell Target of $32, and a Close Target of $34. 

Final Thoughts 

Like the article we read, we believe there is a tremendous amount of economic uncertainty, not only in the American economy, but in the world economy as well.

The Obama Administration has spent vast sums attempting to keep the markets artificially propped up, and while investor optimism continues to contribute to what we feel are extremely high valuations, we also believe that investors are starting to see that the end of the current market run is at hand.

Unemployment continues to linger at near 10%, corporate profits, while beating reduced expectations are simply not as good as analysts would have investors believe, and little seems to be improving when it comes to corporate sales.

To us, there is simply nothing tangible that bodes well for adding equities to ones portfolio at the present time. That is unless they can be added at a sizable discount to their fair value.

But most investors are simply not willing to take the time required to determine what to them is a fair value for a stock, taking the mindless recommendations of the analysts instead.

At Wax Ink, we continue to believe that the house of cards that has become Wall Street is near collapse, and that a great number of individual investors will once again be left with nothing more than memories.

Wax  [more]

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