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Arris Group - The Siphonic Flush of Management

Recs

11

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).

Basis
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%.

Considering that interested rates are reasonably low at present, we have to wonder why management would allow the company to spend more than $2 million on stock repurchases instead of applying those dollars to debt reduction, something would benefit shareholders much more over the longer term.

Final Thoughts
We think the stock has long-term appreciation potential in the $25 to $27 range. But as we noted, at this point we aren't real big fans of management, believing they simply have no clue about the day to day operation of the company they are charged with managing. This of course makes us wonder about an investment in the stock.

Normally we would require at least a 50% discount to our reasonable value estimate before we would consider investing in a stock, which would place our placing our normal entry target for this stock in the $12.50 to $13.50 range.

But because we don't have that warm fuzzy feeling about management, we think a larger discount is required and so have reduced our normal entry target to $10.

In the end, a company may have the greatest products in the world and a market share that is the envy of an industry. Yet, if its management can't find its way off of the executive crapper long enough to notice the simple things going on with the business it is managing, perhaps its time for the company's investors to flush and start over with clean water.

Wax

For the Wax Ink Arris Group Raw Value worksheet, please click here.

6 Comments – Post Your Own

#1) On March 06, 2010 at 10:29 AM, Teacherman1 (58.07) wrote:

Great blog WAX. Just a question though, when I clicked on the link you provided, my Security program immediately popped up and said the site was unsafe. Is that your site, or someone elses that you linked to?

Thanks for the post.

Have a good day. 

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#2) On March 06, 2010 at 10:49 AM, wax (97.08) wrote:

Teacherman;

Thank you for your courtesy.

As to the security issue, I'm not sure which link you are referring to, since there are links to YouTube, the SEC, Box.net, the Wax Ink blogsite, Wikipedia, and even CAPS.

However, from right here in Fooldom, I clicked on each link and never had a problem.

It may be that the security settings you have for your browser such as allowing 3 party cookies or something is not set, I simply don't know.

I use Firefox for my browser, so I know my security certficates with Box.net for example, are always up to date, something that may not be the case with MS Internet Explorer.

But I can assure you that to the best of my knowledge, and I have been visiting these sites a very very long time, none of them should be a security threat to your system.

Thanx again for you kind words.

Wax

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#3) On March 06, 2010 at 11:33 AM, dragonLZ (99.55) wrote:

Funny you say your entry target is $10 as that's exactly the price at which I picked ARRS to outperfrom. I don't think you'll see ARRS at $10 any time soon (now at $11.43). Or, if you do (which, once again, I doubt), it'll bounce back up right away. Just my opinion.

Also, so far, I only commented on one of your blogs. The one about Ruby Tuesdays (RT).

Do you remember I told you my 6-month target for RT was $9. That was 2 months ago and RT is at $8.92. :)

Good Luck!

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#4) On March 06, 2010 at 11:41 AM, Teacherman1 (58.07) wrote:

Thanks for the reply. I too use FireFox and my Security system is Zone Alarm. I was refering to the link above at the bottom of your post.  Will try again and see if it gives me any more information.

It said it was a known site for downloading spyware, and warned against downloading anything from it. It identified it as Box Net. 

Maybe it is just my system being over protective. 

Maybe someone else will try and post. I am not trying to scare anyone away and am sure there is nothing wrong with it. 

Again, Thanks.

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#5) On March 06, 2010 at 12:38 PM, wax (97.08) wrote:

DragonZ;

As noted, the original entry point is in the $12-13 range, which is where the stock is currently trading. But because we simply don't think management has their collective eye on the ball, we reduced our entry point to the $10 range, just as an added measure of safety.

This reduction is based on our initial evaluation of management and is certainly not indicitive of what all investors would find important.

While we may indeed not see the $10 range for a while, that's simply okay with us since there are many other stocks out there for us to research.

Just as we are firm believers that price determines return, we realize that we must be patient investors as well. Something we believe our $10 entry point will capture.

As to RT, again our original entry target was about $13, but because we simply don't see earnings growth happening in the nearer term, we reduced it to something we felt was more appropriate for our risk tolerance.

Personally, I hope you make a ton with it especially if you are happy with the risk taken to receive the gain you are seeking.

Wax

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#6) On March 06, 2010 at 12:49 PM, wax (97.08) wrote:

Teacherman;

I'm still not sure why you are having the issue? To be honest, your comment about the security of box.net is the only one we have ever heard about, and some of our worksheets have been download literally hundreds of times.

Hornbeck Offshore and Mirage for example of each been downloaded more than 150 times and we have never been notified of a security issue.

When you click on the link you should be taken to a secure site and allowed to preview or download a PDF file.

I'm sorry for any problems you may be experiencing as we spent several months researching host sites for our worksheets that were secure as well as virus and spyware free.

Wax

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