anablogging = analysis + blog

JMBA earnings: lots to drink to after the announcement

2007-06-12T01:25:00.000-04:00

Jamba Inc. (NASDAQ: JMBA) reported record fiscal first quarter net earnings of $11.9 million, or 20 cents a share, versus a year ago net loss of $81.5 million, or $3.88 a share. The fiscal first quarter ended May 1 included a pre-tax gain of $15.2 million, or 26 cents a share, related to the change in the fair value of derivative liabilities.

Revenue increased 22% to $89.4 million from a pro-forma $73.5 million in the prior-year period, while comparable store sales rose 4.2% for company-owned stores (compared to -3.5% in the prior year period) and 2.9% for franchise stores (compared to 1.4% in the prior year period). Continuing their strong store growth, 26 new stores were opened during the first quarter, 17 of which were company owned. During the quarter, the Company also acquired 10 franchise stores in California. The company ended 1Q 2007 with $66.6 million in cash and equivalents.

Analysts were expecting, on average, a per share loss of 9 cents on revenue of $68 million. After the announcement, JMBA shares were up 10% in after hours trading.

Also worth highlighting is the addition of Jamba Juice to the Russell 3000 after the market close. Companies added to the list on June 11 will officially join the index at the close of market on June 22. For the full list, please click on the following link: Russell 3000 additions.

Limelight Networks: shedding light on the CDN business

2007-06-08T12:07:00.000-04:00

I have long been a fan of internet infrastructure plays such as AKAM, and today I wanted to briefly look at NASDAQ's newest member, Limelight Networks, trading under symbol of LLNW. It is opening with a lot of positive press, raising the pricing range throughout the roadshow, and upsizing the deal by close to 2 million shares. Given the success of the roadshow, I can't help but wonder, have investors forgotten that there already is a much larger, more profitable company, that does the same thing, and trades on the NASDAQ? Many people saw the LLNW IPO as a potential threat to AKAM. Others view it as hopefully shedding more light into a relatively unknown business segment of the internet. Whatever the case may be, I believe it will be a positive for AKAM shares.

LLNW is nowhere near the size of AKAM, nor does it even rival AKAM’s strong market position. In fact, this IPO is intended to help the company grow, given that the use of proceeds is to fund capital expenditures. According to the S-1 filing, the company expects to make capital expenditures of approximately US$35 million to US$45 million in each of 2007 and 2008. The remainder of the proceeds will be intended to make complementary acquisitions. By comparison AKAM spent close to US$70 million in 2006 capex alone.

What else is of significance in LLNW’s filing? Under the risks section and throughout most of the document, Limelight mentions “the possibility that [they] could be permanently enjoined from offering CDN services as a result of the patent infringement lawsuit filed against [them] by Akamai and the Massachusetts Institute of Technology, which is similar to other lawsuits in which the same plaintiffs have been at least partially successful in the past.” Apparently, in June of last year, AKAM and MIT filed a lawsuit in the U.S. District Court for the District of Massachusetts alleging that LLNW is infringing two patents assigned to MIT and exclusively licensed by MIT to Akamai. In September 2006, Akamai and MIT expanded their claims to assert infringement of a third, recently issued patent. In addition to monetary relief, the consolidated complaint seeks an order permanently enjoining Limelight from conducting business in a manner that infringes the relevant patents. Needless to say, it’s a significant concern that is both costly and time consuming for LLNW’s management. The case is expected to go to trial in 2008.

Glancing at both companies, AKAM is clearly the blue chip in the sector; it has the infrastructure, the sales network, the customers, the relationships, the financial position, and it seems it even has the patents. Even if LLNW has a nice run in the near term, I believe that the smart money is and will continue to be with Akamai.

For your review, this is how both companies stack up against each other:

DLIA: Not in fashion to continue posting weak numbers

2007-05-31T16:14:00.000-04:00

Continued strength in denim, strong sales in dresses, and impressive sq. ft growth is no longer enough to keep me focused on the Delia’s story. The company posted results for the first quarter 2007 on May 30, and they were just unimpressive (much like 4Q 2006).

Based on the filing, revenue increased 11% to US$57.8 million from US$51.9 million last year, while same store sales were 9% for the quarter. Gross margin decreased to 36% of sales, SG&A expense was 42.1% vs 40.9%, for a net loss in the quarter of US$3.3 million versus US$1.2 million or a loss of US$0.11 versus US$0.05 for last year. The street was expecting a loss of US$0.07.

A decrease in margin from the retail segment reflects markdowns required to clear excess inventory. Also margins were hurt by what several one time items: CCS girl catalog test charge, and charges related to the moving of headquarters, relocations, severance, and recruiting.

In all honesty, after the call I was left with not much to look forward to. This is the second quarter in a row that I am disappointed by management and what I believe is their inability to execute. Sure, they say that they see strength in denim, dresses and the back to school assortment. But the reality is that denim is not as strong as it was 2 years back, and that their competitors seem to have lower prices. They spent a significant amount of money this quarter testing the CCS catalog when most of their direct segment sales are now coming from the internet (and are growing at a much faster pace). In short, their competitors are winning (significant in a sector where there are many substitutes), and they are banking on fashion trends that are losing steam.

The retail segment is starting to see some weakness in consumer spending, and no matter the prospects, Delia’s is too much of an immature company to weather any kind of downturn. There are better names in the space, and I would stay clear of DLIA until management proves they can for once and for all meet Wall Street’s, and their customers’ expectations.

DLIA vs. S&P 500 performance over the last 3 months

Case in point: ValueClick is next

2007-05-22T10:00:00.000-04:00

I do not want to overplay / overhype the issue, I just wanted to highlight some of the comments from a research piece published yesterday by ThinkEquity Partners saying that VCLK "should be next."

It is no secret that ValueClick is one of the last remaining public companies in the business. Stewart Barry (ThinkEquity analyst) pointed out that even Microsoft could show interest since ValueClick would be complementary to the aQuantive acquisition. Time Warner could also be in the fray, if anything, to prevent Microsoft from buying it.

How have some of the publicly listed companies traded over the last week and since the announcement of AQNT?

Redefining how we think about media and the internet (Part III)

2007-05-18T11:55:00.001-04:00

Continuing with some of the themes I lay forth in this blog, I wanted to highlight Microsoft’s latest move. Today it announced that it is purchasing aQuantive (NASDAQ: AQNT) for US$6 billion in cash, which represents an 85% premium. For those of you not familiar with the company, AQNT focuses on online advertising, and it operates in three segments: digital marketing services, digital marketing technologies, and digital performance media. Microsoft declared that the rationale for the acquisition was to expand the software company’s push into internet advertising.

The following are some of the latest acquisitions to make news:

Question is who will be the next target. These are some names that I believe are worth a look or could be of interest to the likes of Microsoft, Google, or Yahoo:

In the end they might never be bought, but one thing is for sure, the latest string of acquisitions is going to raise their profile and their value.

Not losing faith in AKAM

2007-05-16T11:33:00.000-04:00

I have spent the better part of my time lately trying to understand what exactly is wrong with Akamai (NASDAQ: AKAM). The fundamentals have not changed at all, in fact, management continues to reiterate their expectations of 400 bps of EBITDA margin expansion in 2007. The company also seems to be very active in signing costumers and differentiating themselves from the competition, as exemplified in their live streaming of Adobe Flash Player video format (AKAM has broadcast events like Nickelodeon’s Kid Choice Awards in this format). And on an industry basis, content owners are becoming more concerned than ever with the need to deliver their content to broader audiences faster, a trend that favors CDN vendors. In short, it just seems like investors have lost faith.

But, from everything I have read, AKAM is doing just fine. Strong market share, strong market fundamentals. Only a weak share price. Since their 1Q announcement on April 25, shares have fallen close to 22%, while the S&P 500 has gained approximately 1.4% in the same period. On a 2008 P/E basis, the shares went from trading close to 32.0x (prior to earnings) to 25.0x (today). How much cheaper will the shares get? Companies with comparable 2008 growth (for example Google) trade at approximately 25.0x 2008 EPS estimates. Will investors regain faith if shares trade any lower?

As a strong believer in AKAM and their business model, I continue to wait for a catalyst, or for a sign that 2Q will bring the surprise that 1Q did not. In the end, that is what everyone was looking for, to be surprised (unfortunately, growing revenues by 57% q-o-q, proved to not be enough). I have not lost faith though. I remain positive, and I believe that at current levels (25x 08 P/E), it is tough to find a similar low price / growth story that has the potential to deliver in the long term the way Akamai can.

AKAM indexed price since 1Q '07 earnings release

Redefining how we think about media and the internet (Part II)

2007-05-11T13:44:00.000-04:00

Looking at one of my favorite sources of information (SeekingAlpha), I stumbled upon two very interesting pieces that seem to support some of the arguments I made in Part I. I have included a link for your reading pleasure. Enjoy.

Another blow to newspapers: Facebook classifieds http://media.seekingalpha.com/article/35302
Do newspapers and public ownership not mix? http://media.seekingalpha.com/article/35215

Redefining how we think about media and the internet

2007-05-11T11:59:00.000-04:00

Once again I was inspired by Google. It was reported that Google is likely to accelerate the pace at which it makes acquisitions and will consider larger deals. The company currently has close to US$10 billion to spend, and it is estimated that it is buying one start-up company a week. The news comes on the heels of the DoubleClick acquisition, and the announcements linking up Microsoft and Yahoo.

So what exactly is taking place, what are the market forces driving all this activity, how are the people at Microsoft, Google, and Yahoo looking at the space? I believe that it can be narrowed down to the following three drivers:

Increasing relevance of internet advertising. Advertising has suffered such a steep decline in traditional media that many often overlook the future it will have on the internet. As broadband access becomes more widespread, so does internet usage, and the internet is fast becoming the next frontier in advertising. Currently, internet advertising as a % of total advertising stands in the single digits. Yet the internet is a marketers dream. It allows you to segment audiences and better target advertising. Tools such as Google Analytics were created for the purpose of improving efficiency in advertising, giving marketers the chance to better measure ROI, as well as measure traffic. More importantly, it gives advertisers the chance to better understand how to reach the consumer / target audience.
Focus on user generated content. Focus on user generated content is clearly becoming a priority. That is why Rupert Murdoch bought MySpace, and why Google wants to make acquisitions that play a larger role in this segment. The beauty of the internet is and will always be that it provides the user the ability to create his or her own content; it allows the user to interact and participate. You have the freedom to create a profile and add pictures, or to write (blog) your opinions and publish your thoughts. You can share videos, music, or even live in your own created World Wide Web universe (Second Life). I recently read a piece that stated: “the internet has virtually demolished the barriers to entry that exist in broadcast media and print publishing which require large upfront capital investment in equipment and technology.” Better yet, the internet is re-defining media everyday.
Evolution of the internet. The internet is fast becoming a place where at the touch of a keyboard we can shop, search for a job, search for a house, apply to schools, read the news, and do pretty much everything we need or want. And users are becoming more comfortable with the idea - something that was not so about 3 to 5 years ago.

These three factors play a significant role in my decision making when it comes to internet related stocks (or “new media” stocks). When looking at names such as AKAM, VCLK, GOOG, IACI, or KNOT, I ask myself what is their role or how is it impacted by these market forces.

Overall, I strongly believe that these drivers should be used as guidelines for how we think about the growing relationship between media and the internet. Who knows, they might even hold the key to Google’s next move.

Akorn Inc. - what the street is expecting for tomorrow

2007-05-06T15:29:00.000-04:00

Akorn Inc. (NASDAQ: AKRX) is scheduled to release earnings for the 1Q 07 on Monday May 7 at 4:00 pm (EST). The conference call is scheduled to begin at 5:00 pm. Below is a brief review of what the street is expecting for the first quarter:

Revenue of US$12.0 million, gross margin of 37.5%
Net income of US$(3.0) million
EPS of US$(0.04)

Much has changed since the first quarter of 2006, however, during the same period the company posted US$29.7 million in revenue and US$0.04 of EPS. The company is forecasted to post revenues of US$84.7 million and EPS of US$0.00 for 2007 versus revenues of US$71.3 million and EPS of US$(0.09) for 2006.

JetBlue, the airline sector, and why I remain on the sidelines

2007-05-02T17:00:00.000-04:00

Over the last couple of months my experience with airlines has consisted mainly of delays and cancellations. Through all this, JetBlue (NASDAQ: JBLU) has done everything in their power to keep me happy, from discounts, to credits, to apologies. But from an investment standpoint, should you be long or short?

The airline industry is weathering some difficulties: higher jet fuel prices are beginning to eat away at margins, and concerns over demand are keeping investors’ money away. Easter traveling occurred earlier this year, and JBLU expects relatively weak comps versus last year. Additionally, the carrier is experiencing softness in May and June bookings. Higher fuel prices are also a bit worrisome. With summer season ahead, increasing fuel prices will have an impact (and if not, it should) on the airline sector. I believe this bearishness will drive the price of JBLU shares to the low US$9s.

JetBlue will continue to expand its network in 2007 by launching new routes from its core airports (New York JFK, Boston, Fort Lauderdale, Long Beach, and Washington DC). This week they announced the addition of low-fare service between Boston, Bermuda and Charlotte. Management will also continue their efforts to increase aircraft utilization and reduce corporate overhead. The company is in the process of removing six seats on its A320s in order to legally reduce the number of flight attendants per flight.

But in an economic environment of low growth and high inflation, airlines have historically not fared too well.

I still believe in JBLU’s superior service. They truly offer a different flying experience, and it is because of their focus on service and customers (and the incredible ability by management to apologize for a winter storm that cost the company US$41 million) that I remain bullish. For now though I am short on its shares. Not because I don’t believe in the strength of their brand, but because I know the impact that fuel prices can have on the share price. If the shares trade anywhere around the low US$9s I will once again be a buyer, until then, I remain grounded, waiting for signs of a turnaround.

LTM Indexed Performance: JBLU vs. S&P 500

Source: FactSet

In case you missed it: the latest on JMBA

2007-04-30T15:37:00.000-04:00

Last week, Jamba Juice announced the acquisition of ten franchise stores in central California. The move seems to be very consistent with their stated strategic goals for 2007. Although the acquisition is relatively small, among the stores purchased is the original Jamba Juice location, opened in 1990 in San Luis Obispo, California. For the full press release: http://www.jambajuice.com/mediacenter/franchises0423.html

Also last week, Capital Growth Financial - one of the few analysts covering JMBA - reiterated their buy recommendation. In their latest report, CGF raised the revenue model but lowered their margin and EPS expectations, thus lowering their 12 month price target to US$13.50 from US$15. CGF also pointed out their concern that for the reported 12 week period JMBA lost US$0.17 per share, compared to a loss of US$0.12 when the company was private.

As of the most recent Bloomberg data, JMBA is covered by 4 institutions, and all have a buy rating on the shares. They are as follows: Capital Growth Financial - Buy (TP: $13.5); Oppenheimer - Buy (TP: $11.0); Wedbush Morgan - Buy (TP: $13.0); Rochdale Securities - Buy (TP: $16.0)

Midnight Monitor

2007-04-26T23:27:00.000-04:00

Reuters

The Nikkei slipped 0.40% in Friday morning trading. Investors shifted funds from stock futures and into bond futures after economic data raised doubts as to how soon the Bank of Japan will raise rates.

Bloomberg

Japan's consumer prices fell more than expected while industrial production dropped, reducing likelihood of a rise in interest rates. Core consumer prices declined 0.3% in March from a year earlier. Factory output declined 0.6%. The current benchmark interest rate stands at 0.5%.
In London electronic trading, Brent crude settled at $67.82 a barrel, up 17 cents. In New York, crude closed on Thursday at $65.44 a barrel, up 38 cents. Crude rose due to reports of a refinery fire and threats of a production strike in Europe.

The Times Online (UK)

ABN Amro held its annual meeting earlier today and faced infuriated shareholders angry over the proposed merger with Barclays. Shareholders accused ABN Amro's board of submitting Dutch employees to "Anglo-Saxon ways of working."

Midnight Monitor

2007-04-26T01:19:00.000-04:00

Reuters

Nikkei average rose 0.75% in morning trading on Thursday. Traders said overall gains were going to remain modest due to concern about earning estimates. The caution shown by most companies has disappointed most investors. Also worth noting, there is increasing concern that there is selling by both foreign and individual investors, i.e. there seems to be less demand for Japanese stocks.
ABN Amro, one of the more recent high-profile acquisition targets, announced that it will take a US$498 million provision for an ongoing investigation by the U.S. Department of Justice into its money transfer activities.

Akamai reports in line results...but don't be afraid to buy

2007-04-25T22:10:00.000-04:00

Akamai Techonologies (NASDAQ: AKAM), the leading global service provider for accelerating content over the web, published its first quarter 2007 results this afternoon. The following are a few of the highlights from their latest release:

Revenue was 53% higher than the same period last year, and 11% higher than last quarter
GAAP net income was US$0.11 per share, 67% over 1Q 06, while normalized net income increased 73% year-over-year, and 7% from 4Q 06
EBITDA margin for the first quarter was 42%, or 5% better than the same period last year
Gross margin of 76% in 1Q 07
The company ended March 2007 with approximately US$480 million in cash, cash equivalents and marketable securities, or US$43 million higher than the period ending December 31, 2006
AKAM also added 89 new customers during the period, for a total quarter-end number of customers of 2,481 (their customer list is already quite impressive and includes the likes of 1800 flowers, Amazon.com, Apple, CBS Sportsline, ESPN, MTV, MySpace, Yahoo, Reuters, WWE, and many more which I encourage you to take a look at on their website: http://www.akamai.com/html/customers/customer_list.html)
Management also reiterated that revenue growth for the year 2007 will be between 42 and 46%

AKAM shares fell 10% during trading hours, plus an additional 4% in extended trading. The stock was under a lot of pressure due to the very high expectations of Wall Street. The results came in line and now most investors expect that AKAM will be downgraded by pretty much everyone that follows it.

I don't think there is a more exciting space to be in than the content delivery segment, or what is sometimes referred to as internet infrastructure. If you watched March Madness on CBS, it was streamed by Akamai; you change your picture on MySpace and the content will most likely be carried by Akamai; you purchase the latest Harry Potter book through Amazon, and Akamai will assure you a seamless shopping experience. It is no secret that video streaming, online shopping, and any other delivery of media and software over the web is undergoing a boom. Keep in mind that Akamai has approximately 70% market share of this segment.

I am disappointed that results only came in line, I too, had higher expectations. On the other hand, am I willing to pay the price for upwards of 40% revenue growth, and steadily increasing margins? - Call me an optimist, but I welcome the sell off, it gives me a chance to remind people that companies like Akamai, are few and far between.

SRR: losing stride

2007-04-24T15:33:00.000-04:00

The following review is in response to a question regarding Stride Rite Corporation (NYSE: SRR). For those of you not familiar with the company, SRR designs and markets a number of footwear brands, including Saucony, Keds, Stride Rite, and Tommy Hilfiger.

The company has made quite an effort as of late to turn around some of its brands (Keds being a primary focus). The stock suffered a major set back in March due to 1Q 07 earnings below analyst expectations. Management also lowered its 2007 earnings estimates, with renewed 2007 expectations of US$1.10 per share vs. previous expectations of US$1.15 and sales growth between 5% to 8%. One interesting part of the announcement was that sales of Keds decreased 9% in the quarter, with management anticipating declining to moderate sales growth for the remainder of the year. This bit of news was rather surprising to Wall Street analysts given the strong consumer demand for the type of products SRR offers.

Overall, the bearishness in the stock is due in large part to the expectation that Keds and Tommy Hilfiger brands will continue to under-perform. Margins also seem to be relatively weak compared to 1Q 06, and if the consumer spending environment weakens at any point, it could put greater pressure on margin improvement.

I believe that the stock has seen most of the selling for the time being, however, I do not see any positive catalysts in the near term and would hold off until 2Q is announced in order to better gauge the turnaround of its brands. Then again, at these prices, the stock, much like the shoes the company sells, is getting to be quite a bargain.

JMBA: Initiation of coverage - summary

2007-04-19T15:39:00.000-04:00

Today, Oppenheimer initiated coverage of Jamba Juice (NASDAQ: JMBA). Below is a brief summary of the research report:

Oppenheimer initiates coverage with a Buy rating and an US$11 price target. They believe that "JMBA is one of the few opportunities today to offer sizable sq. foot growth, revenue and earnings growth, all with several years of visibility."

Only true nationally recognized smoothie brand. Potential exists for company to reach the 5,000 store mark.
Revenue and profit growth should be enhanced by existing franchise partnerships, and licensing agreements with mass retailers such as Safeway, Target, and Whole Foods. As well as with the launch of a ready serve product.
Company targeting EBITDA margins of more than 10%, and a significant improvement in operating margins over the next several years (current EBITDA margin is closer to 5%).
Revenue and margins expected to be enhanced with the expansion of in-store offerings, such as a wider variety of warm and cold food.
Strong global trend of adopting healthier lifestyles should support market penetration.
Price target assumes an EV/EBITDA multiple of 25x on 2008 estimates. On an EV/Sales basis JMBA trades at 1.7x 2007 estimates.

Almost unnoticed, UK currency breaks record

2007-04-18T23:23:00.000-04:00

The sterling has finally broken a 26 year old exchange record by briefly trading at a rate of £1 to $2.01. Interesting how it has really almost gone unnoticed.

Signs now point to the Bank of England raising rates when its policy committee meets next month. The strength of the pound bodes well for British tourists, but undoubtedly represents a threat for any British industry that relies on exports.

Most certainly the strength in the pound can be seen as a sign of investors faith in Europe's growth. At the same time, will the weakness in the dollar be the reawakening of exports?

Mosaic: a combination of diverse opportunities in a changing sector

2007-04-17T11:24:00.000-04:00

Mosaic Co. (NYSE: MOS) seems to stay true to its name. After careful research, the company truly appears to be a combination of many diverse opportunities: it is in the phosphates segment, where it operates mines and concentrates plants; the potash segment, where it operates mines and processes potash; the offshore segment, which consists of fertilizer blending and bagging facilities, port terminals and warehouses in Brazil, China, and Argentina; and the nitrogen segment, which focuses on the distribution and marketing of nitrogen products. Just earlier this week, none other than Mr. Cramer, even pinned MOS as a uranium play. His reasoning is that it has now become profitable to extract uranium from phosphate (Mosaic's primary focus), and most investors have not factored in the uranium angle into the price of the stock. I don't know if the likes of Citadel, Millenium, SAC, and Soros are invested in it for its uranium potential, I certainly hope that their investment in MOS was meant as a way to play the agriculture sector.

The company ended the year 2006 with US$5.3 billion in sales, US$718 million in EBITDA, US$0.22 of EPS and as of latest filing 3Q'07 (fiscal year end is in May), MOS had more than US$460 million in cash. Its multiples can be a bit confusing: EV/Sales of 3.0x, and EV/EBITDA of 22.0x for 2006, while most of their competitors trade in a range of 7.0x to 12.0x EV/EBITDA. At the same time, EPS growth estimates for 2007 and 2008 run close to 200%.

The catalyst I believe lies on the global under-estimation of the increasing significance of agriculture. In the U.S. we are starting to see the beginning, with the spotlight now shinning on corn/ethanol. The company argues that increased acreage due to an increase in demand for grains and oilseeds, will also mean higher fertilization application; higher prices will encourage farmers to use more fertilizer in order to maximize their yield. Eventually, this strong agricultural demand will be felt beyond our borders; for example in places like Brazil. Of course, MOS is already positioned there by owning a stake in the number one fertilizer player in the region. In short, Mosaic is an industry leader, in a segment that is about to undergo some fundamental changes. They are well positioned to take advantage of the shift in North America, and their ownership of assets in Asia and Latin America shows that management understands where the growth is.

Some investors will follow the "uranium" bidding, others will hopefully take the time to look at how strong the company is in the four segments it operates in. Although the company posted a disappointing 3Q, much has happened in the last couple of months, and I strongly believe most of the upside has not been fully reflected.

PPI required reading

2007-04-12T22:24:00.000-04:00

For anyone interested in better understanding the PPI report (beyond what is usually written in MarketWatch), you can go and take a look at the Bureau of Labor Statistics (http://www.bls.gov/ppi/)

or you can just click on the following to view the February release: http://www.bls.gov/news.release/pdf/ppi.pdf

Note that between the PPI and the core PPI, it is the latter that is more closely followed since it is considered a much better indicator of the underlying real trend.

Last March 15th, the PPI came in higher than expected and Wall Street was able to overcame this as it focused on takeover news. However, the report did play a significant role in dampening hope of a rate cut. Given the reaction to the FOMC minutes earlier this week, and an all but gone idea of a FED easing, it'll be interesting to see how traders will react.

Why EXP is worth a look

2007-04-10T16:37:00.000-04:00

Eagle Materials (NYSE: EXP), based in Dallas, Texas, manufactures and distributes gypsum wallboard, cement, recycled paperboards, and concrete and aggregates. Their products serve the construction business, and given the slowdown in the housing market they are likely to experience some hit to margins and earnings.

The company boasts that it is the nation's highest margin construction products company. It is a low cost producer, it has stable earnings and cash flow, it cares about its shareholders (as shown by the increase in dividend and the effort to repurchase shares), but more importantly, it is undertaking significant efforts to continue growing. The company is in the process of completing the construction of another wallboard plant, and it is beginning to modernize and expand three cement plants around the country.

The company reported US$860 mm in revenues in 2006 and it is projecting US$925 mm in 2007, or 8% growth y-o-y (note: company has a March 31 fiscal year). Operating margins were 31% and are projected to reach 34% in 2007. EPS was US$3.02, indicating an approximately 16x P/E, close to the average range of 15x - 17x. EBITDA margin came in at 30% (US$258 mm). The company only has US$200 mm in debt and more than US$60 mm in cash. All in all, EXP has solid financials and if your investment time frame goes beyond 2007, this is a company that is well positioned to benefit once the construction cycle turns.

But, EXP is worth a look today because it is in a rapidly consolidating industry. The wallboard, cement, aggregates and concrete industries are seeing larger deals announced more frequently.

Votorantim Cimentos, a division of the Brazilian conglomerate Votorantim Group has been rumored to be aggressively seeking to acquire suppliers of aggregates in the US. The aggregates business of EXP could spark the interest of Votorantim given the solid operating history and market share of its business units. Its operations could help complement Votorantim's acquired units in North America.

We are entering a time where foreign investors, often overlooked as potential buyers, now have the capacity to assume the role of acquirers; as can be seen in the cases of Cemex pursuing Rinker, and CVRD acquiring Inco. No longer should US companies be seen as the only consolidators, because they are slowly becoming the targets.

The calendar: light on news but not on expectations

2007-04-08T13:29:00.000-04:00

Even with the shorter week, trading was boosted last week by lower oil prices, somewhat more positive housing news, continuing buyout offers, and a strong employment number (including a revision to a weak February number). This allowed indexes to recover mildly, thus raising expectations for the second week of the new quarter. Finally, given Friday's nonfarm payrolls number (180,000 in March, above expectations of 142,000), one can expect traders will be more aware that a rate cut could indeed be further away than initially hoped.

The following is a brief overview of the economic calendar for the upcoming week:

April 11: (all times EST)

Crude inventories (10:30 am)
FOMC minutes (2:00 pm) - For March 21 meeting
Treasury budget (2:00 pm)

April 12:

Initial claims (8:30 am) - Market expects 320K versus 321K for the prior period

April 13:

PPI (8:30 am) - Market expects 0.7% for March compared to 1.3% for February
Core PPI (8:30 am) - Market expects 0.2% for March compared to 0.4% for February
Michigan Sentiment (10:00 am) - Market expects 87.5 compared to 88.4 for the prior period

DLIA: hoping for a repeat

2007-04-04T21:30:00.000-04:00

The teenage retailer is set to report earnings on April 5 at 8:30 am EST. There is little guidance as to whether the news will be positive or negative, but it doesn't seem to matter to DLIA investors. The stock has moved approximately 16% in the last 4 trading sessions, while volume has gone from a paltry 90K shares on March 30 to 577K on April 4; keeping in mind that average volume is just 245K.

But we've seen this before. An interesting comparison can be made with the 4 trading sessions prior to their earnings announcement in December 2006. During the period between 12/1/06 and 12/6/06, DLIA shares moved approximately 13%, with volume climbing from 284K to 892K.

Prior to March 30, the stock had returned approximately -16% from 12/7/06 to 3/29/07.

So what can be expected tomorrow? During the trading session following the announcement in December, volume shot up more than 150% from the prior session and the stock traded at its all time high of US$12...enough to keep me hoping for a repeat.

Drinking in JMBA's earnings...

2007-04-03T16:00:00.000-04:00

Jamba Inc. (NASDAQ: JMBA) reported its financial results for the fiscal year ended January 9, 2007. For being its first full year filing, JMBA published a somewhat complex report. Even on its conference call management agreed that it has not been easy to model the company given the acquisition, the change in fiscal year, and the lack of available information.

The filing has not made any type of analysis any clearer. However, it did accomplish in providing greater insight into its operations, and into what appears to be a very strong growth plan for 2007 and 2008. For ease of comparability, JMBA showed operating results for 28 week periods ending in 2007 and 2006. For the period ending January 9, 2007, revenue increased 12.4% to US$145 million, while a change in the fair value of derivative liabilities forced a net loss of US$59 million (or -US$2.41 per share). Growth in revenue was driven primarily by new stores (the company ended the period with 373 company stores and 222 franchise stores).

Comp store sales were -0.6% compared to 7.7% in the prior year. Management did mention that upcoming comps for Q1 and Q2 will be -1.8% and 5.9% respectively, indicating that investors can expect easier comps ahead. The company also ended the period with a strong balance sheet: approximately US$73 million in cash and no debt.

Even if the numbers don't seem to have much flavor, the key here is the growth strategy. Management does not shy away from admitting that operating margins are relatively low. It is all part of their plan to ramp up store growth and increase brand awareness. The company plans to open 90 company-owned stores, plus 50 franchised stores in 2007 (65% - 70% of those in 2H), and approximately 450 to 500 stores over the next 3 years. Their real estate pipeline is strong, and they are making headway in getting Jamba Juice inside Safeway and Target locations around the country. They even plan to join with Nike in sponsoring running events. All in all, they plan to grow revenues by 20% - 25% in 2007.

There may be little margin expansion this year, but I am comfortable with that. Once all pieces are in place, you can expect that top line growth will outpace G&A and the company will post impressive EBITDA margins in the 20%+ range. They believe in the growth potential and want to do all they can to control execution, thus, JMBA will continue buying franchises (hopefully for no more than the 6.0x - 6.5x cash flow they have been paying). Yes, there might be some upside in the short term, given that their earnings are so dependent on the warmer months of year. But I believe that with every investment made today, the long term upside becomes that much sweeter.

AKRX vs. FDA: deja vu?

2007-04-02T11:47:00.000-04:00

On March 29, Akorn Inc. (NASDAQ: AKRX), announced that it had received a warning letter from the FDA citing irregularities in manufacturing practices at its Decatur, Illinois plant (for the 8-K filing please see http://ir.10kwizard.com/files.php?source=1187)

Akorn has experience dealing with FDA warnings. The following is the company's mention on its latest 10-K of an October 2000 warning letter:

FDA Warning Letter. The FDA issued a Warning Letter to us in October 2000 following a routine inspection of our Decatur manufacturing facility. Since 2000, and in response to the violations cited by the FDA, we implemented a comprehensive systematic compliance plan at our Decatur manufacturing facility. We maintained regular communications with the FDA and provided periodic progress reports. During this time, the FDA initiated no enforcement action. On December 13, 2005, the FDA notified us that we had satisfactorily implemented corrective actions and the FDA had determined that our Decatur manufacturing facility was in substantial compliance with cGMP regulations. Consequently, the restrictions of the Warning Letter were removed and we became eligible for new product approvals for products manufactured at our Decatur manufacturing facility. Several such product approvals were received in 2006. While under the Warning Letter restrictions from 2000 to 2005, our inability to fully utilize the capabilities of the Decatur manufacturing facility had a material adverse effect on our business, financial condition and results of operations.

The company's 2001 10-K filing states that the letter in 2000 was focused on documentation issues. Even if AKRX is no stranger to FDA warning letters, the company has two manufacturing facilities (one in Decatur, Illinois, the other in Somerset, New Jersey), and its growth is dependent on the plants' ability to timely develop products. In short, an FDA warning letter can be considered somewhat of a setback.

In its statement, the company mentioned that the impact of such notice will be approximately US$2 million in 1H '07. For a company with estimated 2007 sales in the range of US$80 - 100 million, this represents an approximate 2% impact on sales.

Is this significant enough to worry? Well, it so happens that the FDA warning also mentions that it may withhold approval of pending new drug applications. As of December 31, 2006, Akorn had spent more than US$22 million in expanding the Decatur plant, to add capacity to provide lyophilization manufacturing services. The company mentions in its 10-K that it was working toward the development of an internal ANDA lyophilized product pipeline and expected manufacturing capabilities for these products to be in place by mid-2007. There is no doubt in my mind that management will be able to sort this out promptly and that it will be able to find a contract manufacturer for its products. What does worry me is that the letter cited "significant deviations from current Good Manufacturing Practice" and even if the company can work with the FDA to solve this issue within the mandated 15 days, any "significant deviation" on a US$22+ million investment could be material.

AKRX continues to have an attractive pipeline for 2007, and this will most likely put on hold some of the grand announcements the company had planned for the 1H. The time frame of my investment might have changed, but it does not detract from my view of the company. It certainly does brings to mind the many risks inherent with investing in this very volatile industry.