HQS: Reading Between the Lines (Part 1)
August 16, 2010
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RELATED TICKERS: HQSM
I really must be a glutton for punishment to speak ill of a position I currently own but... well, luckily, I'm still young enough to ride out most of the storms that others wouldn't have the stomach to. I'm still holding on to my HQS stock for reasons I'll maybe go into some other time, but why mention them now when this stock has turned into such a mess in just the past couple of weeks. Anyway, on the menu today is Management.
First off, some background: I was a math whiz, turned Psych. Major, turned Theatre professional, and strangely, these have all helped me along my modest way. So I can crunch numbers, find sentiment, and spot bad or convoluted dialogue a mile away. If Buffet goes straight for the numbers, I go straight to the conference call audio (Of course, the numbers follow).
If there's any moral to this story, it's: Listen to the calls! You'll find a wealth of information that won't be on SEC filings or company prospectuses. And more often than not, you'll find it not in 'what' is said, but 'how' it's said.
Anyway, won't bore you too much with all that, so let's get to it if you're thinking of investing in HQS (really, I have to write this as an amendment to all the praise I've thrown this company's way).
On Receivables:
Let's go to the call (and keep in mind the notice on forward-looking statements).
Caller: On your account's receivable, I see that you've reduced them by about 6.6 [can't make this out---'million'?] which is good… Where can I model in the future? Where do you think they will settle out in the future? So I can update my business models on it.
G.H.: Daniel, hi, it's Gene Hill.
Caller: Hi.
G.H.: Um… you know I think the way to model that is that… you know, going forward, we're…we're trying to bring back in the… um…so that the D.S.O. would be somewhere between 180 days to 220 days.
Caller: O.k.
G.H.: That's kind of how I would back into it.
Caller: Just doing…just doing--using your quarterly figures annualized, I'm coming up with about 224 days for D.S.O.'s. So is this about the level you guys are looking at now?
G.H.: Um… I think we're going to try to push it as much as we can down to the 180, but given the seasonality of businesses, I think that range will be in that 180 to---you know---240- 230-ish.
Alright... first off, if you mention HQS to any investor that knows anything about the company, the first question that comes to mind is receivables. How on earth could management not have prepared what to say on this matter? Sure, we all probably say 'um' a lot, but it's like management is coming across this question for the first time. And nice trip-up by the caller! HQS is looking to improve but according to current figures that could just mean an improvement of 4 days. And then, why give an estimate then raise that estimate two sentences later? Red flag.
But anyway... there's your rough number: 180-220...er...240 days. Use this to decide yourself if that kind of wait for payment is reasonable in this line of business. As for me, I'm still on the fence on this, but management has to do a better job of helping us understand this kind of risk. Why? Well, we'll get into this later, but I'm slowly coming to the realization that as well as this management knows their business, I truly have to question whether they understand how the stock market works.
And to hurt myself more, let's keep on with the receivables and what not to do as a manager of a publicly traded company:
Caller: What's causing those receivables to age more than they had in the past?
N.S.: Generally speaking, the economy…uh…is down. People are…uh…uh…squeezing everywhere. We deal a lot with various retail chains and…uh…the…uh…uh…the…uh…expression of the reduced economy is felt by producers, manufacturers such as ourselves… uh… in people taking more time to pay. We have no doubt that we will collect. Unfortunately, the economic situation allows them to use that excuse too… to drag it out… to drag out payments.
Now, the only statement there said with any conviction is that "We have no doubt that we will collect." Why not focus on that? But the telling word there is the use of 'excuse' on the part of their customers. Actually, everyone should probably listen to the call themselves. You'll find this exchange at around the 47:36 mark. And a transcription does no justice to 'how' these things are said. But oh boy, "drag it out"?!
Alright... well, I think I've lost enough money for myself today. But I wouldn't do it if I didn't really believe in what this company could do. And I'm sick of the fact that no real news agency is following this company and the only information an investor can get is from company statements on marketwire. So maybe this Fool community can start a nice dialogue and share what they got. Then, instead, of investors writing the company personally, HQS can get a feel for the sentiment surrounding all these moves they're making. Dilution, in particular. And that will be on the menu for next time---Jiahua and that sad attempt at selling us something we've apparently already bought.
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