My Own Analyst

STJ

I had shared some potentially negative info on Friday as the Med Device industry was pounded in the afternoon.  The original "news" was a bit off - it's 1 state rather than 11 so far (according to the analyst, Wells Fargo, who made the call).  Wells Fargo itself as well as every analyst who commented said that it was an extreme overreaction.  I wish that they had waited given we are adding a small amount to Top 20 today, but the stock was 39 just two days ago, so it's still likely a bargain.  I had projected that the worst-case was probably a potential 5% cut to earnings, but I think I was conservative.  The fact is that the ICD (fancy pacemaker) market has been under scrutiny (as have many segments of Healthcare) for quite some time. 

In some additional news on the name, the FDA is having a panel discussion regarding CardioMEMS new monitoring device this week.  There was a headline out there that the Executive Summary reads a little negative (it's on my screen, but I haven't read it and am not sure it would be conclusive).  They are apparently focused on the signficance of the potential benefits (does it save enough lives relative to the additional cost?).  STJ has an investment in CardioMEMS and an option to buy it if the product is approved.

SVNT

JMP Securities downgraded SVNT to a sell with a 1.50 target today based upon their view that guidelines for gout treatment could be changing.  They see limited opportunity for KRYSTEXXA.  Ardea Biosciences has a drug that could be approved in 2014 that JMP thinks is likely better.  It is looking like the potential for a graceful exit is rapidly disappearing.

TECUA - A Look Before the Call

TECUA sales were guided to a flattish $210mm but came in at $224mm, continuing a trend of upside surprises.  The company also guided for 5-10% top-line next year.

Profitability remains elusive.  Cash generation is key to me, but I know that people focus on the operating margin. The difference is the huge depreciation - it runs about $11mm per quarter.  For the year, the company spent only $9mm on CapEx and expect to spend $20-25mm per year going forward.  This gives them a cushion of $15-20mm a year in terms of hitting cash (assuming no restructuring).

For the quarter, the operating margin was slightly negative, essentially in line with what management had forecast, which was disappointing given the strong sales.

The key metric I focus on is tangible book value, which got hit early in the year when they reverted their pension plan but increased nicely this quarter to 23.50.  The composition of the balance sheet changed for the worse during the year in some ways, as the higher sales resulted in cash being tied up in working capital.  Still, the company has $66mm in cash, similar to its debt levels.  LT debt is just $13mm.  Due to the depreciation, net property, plant and equipment dropped by $25mm to $235mm (over 1/2 the equity). 

A small issue is the Brazilian tax refund, which is a bit disappointing too but not detrimental.  The company has had to push out the expectations of receipt, though some came in in Q1 already with more expected. 

The key areas of concern will be new product ramps, margin improvements, currency and material cost swings and the management change.

My view is that this report is better than I would have expected given the sudden CEO announcement last week, but there is a lot of work to be done at this turnaround.  As it trades at less than 50% of tangible book value ( an amount that doens't include the massive NOLs, which make it even more valuable), I think that ultimately, patience will be rewarded.

SYNO Beats

Synovis Life Technologies reported a slight sales beat that produced a strong EPS beat.  Sales rose 19% from a year ago, again driven by high-margin product Veritas.  EPS of .11 were ahead of the .08 consensus though down from a year ago due to the costs of the Pegasus aquisition as well as an increased investment in sales.

Veritas grew 93% from a year ago and 35% from last quarter - it's now 23% of sales.  PSD continues to suffer from competition, declining 7% (growing slightly sequentially).  Tissue-Guard grew 4%, a bit faster than last quarter's 1% growth.  Microsurgery grew 27% on the back of a new product, though this was a bit slower than last quarter.  The new OWC products (Pegasus) totaled about 500K - it will be interesting to see what they say about H2, which is when they were expecting more meaningful contribution. 

Growing sales organically by 16% is quite exciting.  The fact that expenses grew by 39% is hiding the story here, but I expect that it will become more recognized over the next few months.  Cash grew from $56mm to $59mm - the market cap at 13.65 is just $156mm.  As OWC sales kick in and the core business grows, sales growth could be 30% or more next year.  Expenses should grow much slower, producing EPS growth (off of low comparisons) of over 100% in the October and January quarters.  Next fiscal year (10/11) is currently estimated to be 65% higher than this year, but I think it is too low at .67.   If we go with that number though, apply a 25 PE (reasonable for a high-growth company like this) and then add back the $5 a share in cash, we get almost $22 a share (this is a five-month target).  My one-year target was 25 and may go up slightly.

Teamsters Tell ABFS to Take a Hike

I believe that the Teamster rejection of the ABFS proposal is likely to be a short-term negative for the stock, as the deal would have instantly turned the company profitable (at a cost of less upside).  The good news is that the environment is improving rapidly.  The analysts had to beat it out of the company on the call earlier this month, as the company had a vested interest in making things sound bad, but April was off-the-charts.  While it may seem like a loss, I believe that shareholders actually win by preserving more of the upside in a rally.  Taking it a step further, ABFS can now legitimately take some anti-union steps in retaliation in order to lower costs without giving up future profits.  As CEO McReynolds said:  "Going forward, we will evaluate our various options in dealing with our cost structure and the other issues we face during this challenging freight environment."  Translation:  We are going to fire more union workers.

It's very hard to tell what's in the stock.  I do see support back at 23-24.  Also, don't forget that they are pursuing pension fund relief from Congress, though that is uncertain as well. 

BKE Beats

Buckle (BKE) produced a slight sales beat due to the surge in online sales (+24%) which aren't included in the monthly same-store-sales figures.  Overall, sales grew 7.5% and EPS grew 11%.  The heavily shorted stock sure is cheap - 11-12 PE before consideration of their very large hoard of cash that isn't paying interest.  While it's not as cheap as when we first bought it for the Top 20 and the Conservative Growth/Balanced model portfolios, it's priced for failure.  With huge inside ownership, geographical expansion opportunities and a record of execution, I think that the shorts will pay dearly.  I smell 37.50!

Hormel Executes Well

HRL, one of our bigger positions in the Conservative Growth/Balanced Model Portfolio, reported sales and earnings well above expectations.  They also raised their guidance for 2010 and pointed to a good 2011 on the conference call when asked.  I continue to target 50, but that's pretty conservative.  I am using 16PE, but note that the company has net cash now - quite rare for a food manufacturer.  Look for another dividend hike in November...

DAKT wins Marlins Stadium

While the Redskins was a retrofit, this one is a new build...  It looks like that biz hasn't totally disappeared...

EZPW CFO Quits

Brad Wolfe, who had only recently joined the company, has resigned.  These things aren't always bad, but they are never good.  It worries me because the company has so many things going on (Canada, Mexico, new products, new CEO soon).  I actually was very impressed with Brad on the call - he answered my question very well (about the accounting on auto title loans and installment loans) and seemed quite at ease after just a few months on the job.  I will be on the lookout for the required SEC 8-K filing in the next few days, but it's likely we won't learn anything other than what the press release said (basically nothing).  Bottom-line:  Be prepared for a little pressure on the stock

HAYN and MFLX Report

MFLX had a disappointing quarter on the sales front, but EPS still came in better than expected due to favorable taxes as well as cost-cutting (except R&D).  The call went well.  I like this CEO a lot, and the stock is very cheap at 23 (1.6X TBV and <12PE, no debt). 

HAYN, on the other hand, was a complete blowout.  That call is tomorrow.  I am disappointed that the stock has sold off with the market, but there is some good stuff going on there.  The beat was substantial, and the tone of the press release was quite positive.