Mossberg's Investor Digest

inContact (Nasdaq: SAAS) - Software as a Service provider well positioned to grow in excess of 30%

Dave Mossberg — Fri, 05 Feb 2010 16:10:00 GMT

Please find a profile of inContact (Nasdaq:SAAS) listed below. If you would like to see additional company profiles published recently in Mossberg’s investor Digest, click here to receive a complimentary issue

DESCRIPTION: Based in Salt Lake City, inContact provides software and services to call centers. As it’s stock ticker implies, the company’s software solutions are delivered as a services, which is also referred to as Software as a Service, SaaS, and “on-demand” software. The company also offers legacy telecom services (65% of revenue) such as long distance voice and data transport. Telecom services are offered separately and bundled as part of the company’s on demand contact center software solutions. The company has software deployed in over 650 small and medium sized call centers (20 to 400 seats), used by 60,000 agents in 32 countries.

KEY INVESTMENT CONSIDERATIONS:

Software as a Service will play a larger role in contact centers and presents a significant growth opportunity – Currently, only about 2% of contact center infrastructure uses software as a service. The company’s offering addresses 75% of the contact center market (a $3 billion addressable market), which leaves plenty of room for growth. Traditional contact center technology deployment involves significant premise equipment and software licensing that is expensive to implement and maintain. It also requires up-front capital expenditures and the increased risk of delays and cost overruns to implementing new technology. Interest in deploying call center technology “on demand” is growing among enterprises because it offers reduced costs, lower up-front capital expenditures, lower deployment risk, and can scale easily. Because the software is delivered over the Internet, SaaS can be easily deployed at any location, such as by at-home workers. This makes it a particularly attractive model for the contact center industry. IDC projects the “on demand” delivery of contact center technology will grow at 47% per year for the next three years. It appears that inContact’s software segment is well positioned to keep pace with this growth rate. During the first three quarters of 2009, inContact’s software segment revenue grew 52%.

SaaS revenue creates predictable and stable revenue streams – While there is lower initial revenue than in a traditional software licensing business model, SaaS recurring revenue model offers greater stability and predictability. inContact’s SaaS services contracts range from 12 to 36 months and enjoy 93% renewal rates.

Partnerships with the leading CRM (customer relationship management) integrators – The company’s sales model leverages partnerships with CRM providers and systems integrators, including major players in the CRM space, Salesforce.com and Microsoft Dynamics CRM. This is an efficient way to reach a large base of customers and the company has recently gained significant traction with its partners.

RISK: Competition is always a risk with any software story. SAAS competes with much larger premise vendors including Nortel, Avaya and other call center software providers.

VALUATION: The company trades at 1x revenue, which is a long way from the more mature SaaS players such as Salesforces.com (7x revenue) or LivePerson (4x revenue). As the company’s SaaS offering continues to grow as a portion of the overall revenue mix, multiples should expand. In addition, growth of higher margin SaaS revenue will drive improved and sustainable profitability, which should also support higher multiples.

(Nasdaq: SAAS)

Investment Data (as of 12/22/09)

Recent Price - $2.73

52-Week Range - 0.93-3.94

Fiscal Year End - December

Dividend - N/A

Yield - N/A

Shares Outstanding - 31 MM

Average Trading Volume (3 mos) - 50,000

Market Capitalization - 88 MM

Cash - 4 MM

Long Term Debt - 10 MM

Enterprise Value (EV) - 91 MM

LT Debt/ Equity - 1.3

BV/ Share - 0.25

TM Revenue - 84 MM

P/ Revenue - 1.0x

2010 EPS Estimate - 0.01

P/ EPS - NA

TTM EBITDA - 136,000

EV/ EBITDA - NA

Thank you for your interest in Mossberg’s Investor Digest. I welcome your feedback.

Dave Mossberg

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Abraxas Petroleum (Nasdaq: AXAS) - Off the radar screen Bakken Field play

Dave Mossberg — Mon, 28 Dec 2009 17:35:00 GMT

Please find a profile of Abraxas Petroleum (Nasdaq: AXAS) listed below. If you would like to see additional company profiles published recently in Mossberg’s investor Digest, click here to receive a complimentary issue

DESCRIPTION: Founded in 1977 and headquartered in San Antonio, Texas, Abraxas Petroleum is an independent natural gas and oil exploration and production company. When upstream Master Limited Partnerships (MLP) became a popular way to raise low cost capital in 2006 & 2007, many companies spun off producing assets in Master Limited Partnerships. In May of 2007, Abraxas formed a MLP and sold of 53% stake in a $100 million private placement. The company had a contractual commitment to take the MLP public and filed a registration statement with the SEC in July 2007. Several factors, including an acquisition of the company’s Bakken field assets, delayed the registration process. By the time the registration was cleared by the SEC, it was July of 2008 and the lead underwriter walked. The subsequent financial crisis made it impossible to complete the registration and the company subsequently decided to buy back the MLP. The transaction was completed in October. Now, the company has 1,811 (429 net) producing wells, with an average working interest of 24%. It’s primary operating areas are located in the Rocky Mountains, Mid-continent and Permian Basin/ Texas Gulf Coast Basin.

KEY INVESTMENT CONSIDERATIONS:

Substantial position in the Bakken field – AXAS has approximately 60,000 acres (30,000 net) in the Bakken field, which could be one of the largest oil fields ever developed in the lower 48 states. The giant oil field stretches across North Dakota, Montana and southwestern Saskatchewan. Until 2000, almost no oil and gas was extracted from this area because the deposits lay nearly 2 miles below the earth surface. However, with new technology, it is now affordable to drill for oil. The 30,000 acres that AXAS owns are all producing fields, which means there are no capital commitments to retain the acreage.

Predictable cash flows reduce credit risk – 85% of production is hedged through 2012 at an average oil price of $74/barrel and an average gas price of $6.20. With its hedge providing a predictable commodity price and a predictable production decline curve, AXAS has stable cash flow and can afford to carry levels of debt currently on its balance sheet.

Cash from asset sales will further reduce debt levels - The company intends to sell off some of its more mature producing assets, which were suitable for an MLP, but make less sense for a C-corporation to own.

Upside potential from proved undeveloped locations – The company has an inventory of 163 locations with proved reserves of 27.9 MMBoe ($167.3 Bcfe).

VALUATION: Two years in registration kept ABAX off the radar screen - Essentially Abraxas was in registration with the SEC for approximately 26 months and very restricted in what it could say to investors. In addition, the pending transaction made analysis of the company very complicated and likely turned investors away. With the transaction complete, management expects to spend more time increasing investor awareness and attracting sell side coverage. Added investor exposure should help shares trade in line with peers. According to the company’s analysis, applying the peer mean valuation multiple would yield a share price between approximately $4.00 and $8.00.

(Nasdaq: AXAS)

Investment Data (as of 12/24/09)

Recent Price - $1.80

52-Week Range - 0.62-2.55

Fiscal Year End - December

Shares Outstanding - 76 MM

Average Trading Volume (3 mos) - 500,000

Market Capitalization - 137 MM

Cash - 0.5 MM

Long Term Debt - 138 MM

Enterprise Value (EV) - 275 MM

TTM Revenue - 51 MM

P/ Revenue - 2.7x

TTM EPS – (-1.34)

P/ EPS - N/A

TTM EBITDA - 42 MM

EV/ EBITDA - 6.5x

Thank you for your interest in Mossberg’s Investor Digest. I welcome your feedback.

Dave Mossberg

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Disclosure: The Editor own shares in AXAS

Verisk Analytics (Nasdaq: VRSK): Recurring revenue with a large competitive moat

Dave Mossberg — Tue, 01 Dec 2009 02:00:00 GMT

Please find a profile of Verisk Analytics (Nasdaq: VRSK) listed below. If you would like to see additional company profiles published recently in Mossberg’s investor Digest, click here to receive a complimentary issue

DESCRIPTION: Headquartered in New Jersey, Verisk Analytics is the largest aggregator and provider of detailed actuarial and underwriting data pertaining to U.S. property and casualty (P&C) insurance. Its solutions allow U.S P&C insurance, healthcare and mortgage industries to detect fraud and predict and quantify potential losses such as those from natural catastrophes. VRSK’s largest P&C database includes over 14 billion records and, in each of the past three years, the company has updated the database with over 2 billion validated new records. The company’s unique data sets include over 600 million P&C insurance claims, historic natural catastrophe data covering more than 50 countries, data from more than 13 million applications for mortgage loans and over 312 million U.S. criminal records. In 2008, the company’s U.S. customers included all of the top 100 P&C insurance providers, four of the 10 largest Blue Cross Blue Shield plans, four of the six leading mortgage insurers, 14 of the top 20 mortgage lenders, and the 10 largest global reinsurers.

KEY INVESTMENT CONSIDERATIONS:

Prepaid and recurring revenue model with low capital intensity provides stability, predictability and high returns – 76% of the company’s services are sold through annual subscriptions or long-term contracts, which are typically pre-paid. The company’s return on investment has averaged 35% for the last five years.

Sticky Customers with 97% 5-year retention rate – The company’s solutions allow customers to generate more revenue, better manage costs and are critical to their operations. Customers actually embed VRSK’s solutions into their critical decision processes to asses risk and pricing. As such, 97% of the company’s top 100 customers in 2008 have been customers for each of the last five years.

Huge competitive moat – To recreate the size of the company’s proprietary data set and analytical horsepower would be very cost prohibitive, if it could even be done. Much of the information VRSK provides is not available from any other source.

Stable growth – For the five year period ending December 2008, revenue and income have grown at CAGR of 13% and 12% respectively. Going forward, management expects growth rates to be 10-12%.

Smart people with incentives to create continuous improvement – The company employs over 575 people with advanced degrees and certifications in the fields of actuarial science, data management, mathematics, statistics, etc. Employees are incentivized with pay for performance bonuses that include equity participation. 25% of the company is owned by employees.

VALUATION: Verisk came public in early October. The motivation of the offering appears to be to provide liquidity for its insurance industry holders, which include A.I.G, Hartford, Travelers, and others. Selling shareholders sold 85 million shares to the market at $22, raising $1.9 billion. Among the holders who did not sell, was Berkshire Hathaway, which owns 7.2 million shares. The company did not offer any new shares in the offering and therefore did not receive any proceeds. On a comparable basis, VRSK shares trade at 14x EV/EBITDA, which is in line with companies MSCI (NYSE:MXB) and IHS (NYSE:HIS), which trade at 16.4x and 15.4x, respectively. VRSK shares should trade at a premium to these comparables as it delivers greater returns and enjoys a very large competitive moat.

(Nasdaq: VRSK)

Investment Data (as of 11/30/09)

Recent Price - $26.91

52-Week Range - 26.10-30.00

Fiscal Year End - December

Shares Outstanding - 178 MM

Average Trading Volume (3 mos) - 2.6 MM

Market Capitalization - 4.8 B

Cash - 66 MM

Long Term Debt - 660 MM

Enterprise Value (EV) - 5.4 B

TTM Revenue - 993 MM

P/ Revenue – 4.8x

TTM EPS - 0.94

P/ EPS - 29x

TTM EBITDA - 398 MM

EV/ EBITDA – 13.6x

Thank you for your interest in Mossberg’s Investor Digest. I welcome your feedback.

Dave Mossberg

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Disclosure: The Editor does not own shares in VRSK

Measuring management effectiveness by decomposing returns

Dave Mossberg — Wed, 04 Nov 2009 05:53:00 GMT

Measuring management effectiveness by decomposing returns – I am a big fan of the Du Pont Identity Method or Decomposition Method and often use it to evaluate investments. Essentially the Du Pont method breaks down Return on Equity into three parts. 1) Net Margin 2) Asset Turnover, and 3) equity multiplier. The formula looks like this.

(NI/Sales) x (Sales/Assets) x (Assets/ Equity) = ROE

or,

(Net Income) x (Asset Turnover) x (Equity Multiplier) = ROE

If you cancel out sales and assets in the formula, you get back to the simple calculation, which is

NI/Equity = ROE

The way I think about this formula is that management has three levers that it can pull to deliver returns.

Lever 1: Net Income - Net Income is the common metric that management teams focus on it. Self explanatory.

Lever 2: Asset Turnover - This is an important metric and more management teams should focus on it. Essentially it gives us how much sales a company can produce with a given amount of assets. Even though a company may have a low net margin, if they can turn their assets several times a year/month, then they can drive good returns. Think of a car dealer....A dealer sells cars on thin margin, let's say it's 5%. After he pays for variable, fixed and borrowing costs, a dealer clears 1%. However, if the average car sits on his lot for less than 30 days, he can make 1% 12 times per year, which can be an attractive return.

Lever 3: Equity Multiplier - This is a measure of how much leverage management is using to drive returns. Getting terms from suppliers (accounts payable) is a good thing. Putting on too much bank debt can add more risk.

A few names profiled in the Digest that may offer high ROE are Dell (Nasdaq: DELL), Western Union (NYSE: WU), GameStop (NYSE: GME), and ABB Ltd. (NYSE: ABB).

If you’d like to see more detail on some of the ideas published in Mossberg’s investor Digest, click here to receive a complimentary issue.

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John B. Sanfilippo & Son (Nasdaq: JBSS): Improving Performance...Trading at a Discount to Tangile Book

Dave Mossberg — Thu, 15 Oct 2009 02:47:00 GMT

Please find a profile of John B. Sanfilippo & Son (Nasdaq: JBSS) listed below. If you would like to see additional company profiles published recently in Mossberg’s investor Digest, click here to receive a complimentary issue.

DESCRIPTION: John B. Sanfilippo & Son is one of the largest private label and branded processors of peanuts and tree nuts in the world. JBSS produces a variety of nuts including peanuts, almonds, Brazil nuts, pecans, pistachios, filberts, cashews, English walnuts, black walnuts, pine nuts and macadamia nuts. No single nut type makes up more than 22% of revenue. JBSS also markets and distributes other snack products including peanut butter, natural snacks, trail mixes, sunflower seeds, and sesame snack products. JBSS has 2.2 million square feet of processing, warehouse and office space (87% owned), including what JBSS says is the single largest nut processing facility in the world with over 1 million square feet.

KEY INVESTMENT CONSIDERATIONS:

Healthy food trends - For aging baby boomers and people who are health conscious, nuts offer a healthy snack alternative. Nuts are high in protein, beneficial fats, antioxidants, have no preservatives, and no, or reduced, transfats. According to the FDA, “Scientific evidence suggests that eating 1.5 ounces per day of most nuts as part of diet low in saturated fat and cholesterol, may reduce the risk of heart disease.”

Position as the leading private label nut producer should support revenue - In addition to healthier eating habits, customers are looking for lower priced private label products. JBSS’ position as the leading private label nut supplier should help support revenue during the economic downturn.

Improving operating performance – Over the past few years, JBSS has spent $120MM to consolidate 4 facilities into one giant one. By eliminated significant redundant costs, operating performance has improved significantly this past year and is poised for continued improvement. During the past 4 quarters, gross margin improved over 80 basis points. The new facility is currently operating at just 55% of capacity. As the top line grows, increasing utilization should allow the bottom line to grow even faster.

Fisher is a great heritage brand - With 74% brand recognition, Fisher is among the top three most recognized nut brands. After several years of under investing in the brand, JBSS has committed significant resources to launching new products and promoting the brand. In the past 13 weeks, these efforts have generated a 34% growth in Fisher versus flat comparisons for the category.

Improving cash flows – The new large facility is not only improving operating efficiencies, it is allowing for a significant reduction in inventory levels. In addition, JBSS has taken other measures to improve working capital efficiencies, including cutting the number of skus in half from 5,000 to 2,500. While the lower sku count has had a slightly negative impact on the top line, over the past four quarters, inventory levels fell $20MM. (turns improved from 3.7x to 4.5x). Combined with improved profitability, JBSS generated $37MM in free cash flow last year, which was used to pay down debt. With the large capital project recently behind them, there will be limited capex requirements over the next few years. While the pace of inventory reduction will likely slow, free cash flow generation should remain strong due to continued improvements in top line and operating performance.

VALUATION: Shares currently trade at a 19% discount to tangible book value. On an EV/ EBITDA basis shares trade at 7.8x. Longer term, as further efficiencies are gained, EBITDA margin should return to historic levels of 8% to 10%, 50% to 80% higher than the trailing twelve month performance. If multiples remain unchanged, that leaves significant upside for the stock. It is also important to note that there are just 10 million shares outstanding and a limited float. Any additional attention from Wall Street or analyst coverage could put upside pressure on the stock.

(Nasdaq: JBSS)

Investment Data (as of 10/14/09)

Recent Price - $12.66

52-Week Range – 4.01 to 12.99

Fiscal Year End – June

Shares Outstanding - 11 MM

Average Trading Volume (3 mos) - 20,000

Market Capitalization - 134 MM

Cash - 1 MM

Long Term Debt - 100 MM

Enterprise Value (EV) - 234 MM

LT Debt/ Equity - 0.6

BV/ Share - 15.58

TTM Revenue - 554 MM

P/ Revenue - 0.2x

TTM EPS - 0.65

P/ EPS - 20x

Adjusted TTM EBITDA - 30 MM

EV/ EBITDA - 7.8x

Thank you for your interest in Mossberg’s Investor Digest. I welcome your feedback.

Dave Mossberg

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Disclosure: The Editor does not own shares in JBSS

Adaptec (Nasdaq: ADPT) - Trading near cash value...offers attractive risk/reward

Dave Mossberg — Wed, 23 Sep 2009 19:31:00 GMT

Please find a profile of Adaptec (Nasdaq: ADPT) listed below. If you would like to see additional company profiles published recently in Mossberg’s investor Digest, click here to receive a complimentary issue.

DESCRIPTION: Headquartered in Milpitas, California, 28-year-old Adaptec provides data storage hardware and software. The company produces:

• RAID Controllers - These are standard components that manage the storage and retrieval of data on multiple disk drives, thereby creating redundancy, reducing the risk of data loss, and increasing read/write speeds.

• Host I/O products - Technology that manages the connections between the components inside computing devices and between computing devices and peripherals such as external storage.

• ASICs - customized processors for data storage.

Most of the company’s products are sold as components to Value Added Resellers and OEMs (56% of sales), such as Dell, HP, IBM and Intel. The company also provides software that is embedded in the hardware and helps manage the device, as well as storage management software that is sold independent of hardware.

KEY INVESTMENT CONSIDERATIONS:

Restructuring efforts saves costs, divest non-strategic businesses – The company sold its SNAP NAS systems business last year. The company was unsuccessful with SNAP, in part because this business provided a complete storage system, which requires a completely different business model than Adaptec’s traditional component/OEM model. Divesting this business removed a distraction from its core operations. Combined with other restructuring efforts, the company expects to reduce expenses by almost $16 million annually.

Revenue decline appears to have stabilized – The rate of decline in the company’s legacy business appears to be slowing. With a more stable base of revenue and reduced costs, the company should continue to generate results near break-even until the end market demand improves. The company actually generated $4 million in operating cash flow in the June quarter.

New technology could provide growth driver – During the latest quarter, the company launched its Series 5Z product family. This technology allows customers to eliminate the need for a battery backup to cache data in the event of a power failure. Not only is this a greener solution, it is also much more cost effective. Since it doesn’t use a battery, the 5Z technology eliminates the need for replacing the batteries, which can be labor intensive.

Stock buyback program could be accelerating – Since July 2008, ADPT has had an authorization to buy back $40 million of its stock (roughly 10% at current valuation). Through the end of the June quarter, ADPT had only repurchased $2.5 million. However, on the latest call, management commented they had repurchased 700,000 shares during the month of July, nearly equal to the amount of stock they have repurchased during the entire year.

VALUATION: Shares have likely been artificially under pressure due to ADPT’s largest shareholder, Steel Partners, decision to distribute approximately ½ of its shares (12+ million) to its investors. The fund is still ADPT’s largest shareholder. Steel Partners is an activist hedge fund, who’s co-founder, Jack Howard, joined the ADPT board in 2007. After nearly 14 years of delivering 22% annual performance, Steel Partners II Fund lost 39% during 2008. Instead of liquidating its portfolio, the fund will convert into a public company. Those investors who chose to redeem their investment in the Steel Partners Fund, received shares of the stocks held in the fund, such as ADPT, which has likely created temporary selling pressure. However, at current levels ADPT has an enterprise value of just $9 million, which means you could buy the whole company for $9 million. This is an extremely pessimistic valuation that basically assumes that ADPT, its large patent portfolio with over 400 patents, future cash flows, etc., are worth almost nothing and that the management team will be destroying value. At these levels, the stock offers an attractive risk/ reward ratio.

(Nasdaq: ADPT)

Investment Data (as of 9/22/09)

Recent Price - $3.30

52-Week Range - 2.20-4.00

Fiscal Year End - March

Shares Outstanding - 120 MM

Average Trading Volume (3 mos) - 887,000

Market Capitalization - 396 MM

Cash - 383 MM

Long Term Debt - N/A

Enterprise Value (EV) – 9 MM

LT Debt/ Equity - N/A

Tangible BV/ Share - 3.30

TTM Revenue - 105 MM

P/ Revenue - 3.8x

TTM EPS (non-GAAP) – (0.12)

P/ EPS - N/A

Thank you for your interest in Mossberg’s Investor Digest. I welcome your feedback.

Dave Mossberg

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Disclosure: The Editor owns shares of ADPT

CPI Corp. (NYSE: CPY) - Strong cash flows, attractive dividend yield

Dave Mossberg — Wed, 09 Sep 2009 12:49:00 GMT

Please find a profile of CPI Corp. listed below. If you would like to see additional company profiles published recently in Mossberg’s investor Digest, click here to receive a complimentary issue

DESCRIPTION: Headquartered in St. Louis, Missouri, CPI Corp. has 3,000 locations in the U.S., Canada and Mexico. With 45% market share in the mass retailer category (about 7% of the $6.8 billion professional portrait industry), CPI Corp. operates the largest number of portrait studios in North America. The company is the sole operator of portrait studios inside Sears…1,000 stores with the Sears Portrait Studio brand. During 2007, the company acquired the PictureMe business out of bankruptcy and became the sole operator of portrait studios inside Wal-Mart stores. (2,000 studios under the PictureMe Portrait Studio brand).

Cash flow generation and returns should improve significantly despite tough economic conditions – The portrait studio business normally requires limited working and fixed capital. Because of the cash or credit nature of the sale, the company typically receives cash on a sale before it is required to pay its vendors. In addition, there is limited inventory requirements…gross margin (excluding D&A) was 91% during 2009. In the past two years, the company has spent $83 million acquiring PictureMe and approximately $40 million upgrading its studios to digital technology. Going forward capex requirements should be at the $5 million mark for several years. The company also has a $17 million NOL, which should give it no cash tax outlays until the end of 2010. Based on first half’s improved profitability levels and assuming there is not another leg down in the economy, the company should be able to produce $25 million in free cash flow this year.

RISK: Obviously the biggest risk is the exposure the company has to Wal-Mart and Sears. In the case of Sears, the company has enjoyed a relationship for 50 years and in December 2008 renewed its license agreement through 2014. In the case of Wal-Mart, the company has lease agreements that are on two-year renewals in the U.S. and have various terms in Canada and Mexico.

The company recently had a proxy contest with a 23% shareholder, the result of which was in the company’s favor. Since the proxy vote in early July, the shareholder has sold a significant portion of their shares, which is creating excess supply of stock and most likely has contributed to the recent downward pressure on shares.

POTENTIAL CATALYSTS: The company has several growth initiatives designed to improve top line performance and increase utilization of its existing assets and productivity of its employees. The company is testing a mobile portrait initiative near its headquarters location in which studio personnel shoot photos at a customer’s home and/or an event. In addition, the company has indicated it may use excess manufacturing capacity to provide fulfillment services for smaller portrait studios, thus improving the utilization of its five central processing plants.

VALUATION: Shares trade at an attractive 3.7x EV/ EBITDA. While top line will likely continue to struggle this year, EBITDA levels should increase significantly, which should help drive valuation. In addition, improving cash flows should garner increased investor attention including the possibility of more sell side sponsorship (there is currently one analyst following the company). The company also pays an attractive 5.2% dividend yield, which appears very sustainable due to expected improvements in cash flows.

(NYSE: CPY)

Investment Data (as of 9/08/09)

Recent Price - $13.14

52-Week Range 1.00-22.20

Fiscal Year End - January

Dividend - 0.64

Yield 5.2%

Shares Outstanding - 7.0 MM

Average Trading Volume (3 mos) - 60,000

Market Capitalization - 92 MM

Cash - 15 MM

Long Term Debt - 88 MM

Enterprise Value (EV) - 165 MM

LT Debt/ Equity - N/A

BV/ Share - 0.11

TTM Revenue - 444 MM

P/ Revenue - 0.2x

TTM EPS (non-GAAP) -0.73

P/ EPS - N/A

TTM EBITDA - 45 MM

EV/ TTM EBITDA - 3.7x

Thank you for your interest in Mossberg’s Investor Digest. I welcome your feedback.

Dave Mossberg

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Disclosure: The Editor does not own shares of CPY

Virtus Investment Partners (Nasdaq: VRTS) - Under-valued/ Under-appreciated asset management business

Dave Mossberg — Tue, 01 Sep 2009 03:11:00 GMT

Please find a profile of Virtus Investment Partners listed below. If you would like to see additional company profiles published recently in Mossberg’s investor Digest, click here to receive a complimentary issue.

DESCRIPTION: Headquartered in Hartford Connecticut, Virtus Investment Partners is an investment management firm with approximately $21 billion under management. The company manages money for individuals and institutions through a group of affiliated and unaffiliated managers with multiple independent investment strategies. Virtus was spun out of The Phoenix Companies (NYSE: PNX) on December 31, 2008.

KEY INVESTMENT CONSIDERATION: Removal of corporate burden will aid in restoring margins to nominal industry levels – Because it was part of a larger corporation, Virtus’ corporate burden was excessive and not indicative of the profitability levels that can be produced based on its book of business. The company is in the process of right-sizing its operations and reducing the corporate burden it inherited from The Phoenix Companies. For example, the company has reduced its annual corporate office rent expense from $2.8 MM to $0.8 MM; human resources expense from $3.0 MM to $0.7 MM; and communications expenses from $1.3 MM to $0.4 MM.

Good business with great returns - With normalized industry EBITDA margins in the 20% to 40% range, the money management business is highly profitable, requires limited capital and delivers strong returns.

Opportunity for the best managers to take market share – Given the turmoil in capital markets investors are firing their long-time money managers and hiring new ones. Unlike the good times of a bull market, this means market share is up for grabs and those managers with the best records will take share. About a third of the funds managed by Virtus’ affiliates have Morningstar ratings of 4 and 5 stars and the majority of the funds are 3 stars.

Sizable deferred tax loss carry forward could be a hidden asset. – The company has a deferred tax asset of $115 million that represents Virtus’ share of the tax loss carry forward of its former parent. The company has recorded a valuation allowance of $108 million against the tax asset, because according to the accountants, the valuation has to be “objectively verified”. At the time of the spin out it was challenging to “objectively verify” the company’s future growth and profitability. If management is successful in restoring growth and profitability, it’s possible the valuation allowance could be removed. This means the company’s tax bill will be substantially reduced in the coming years.

VALUATION: Virtus was spun out of its former parent in a taxable transaction, which is fairly atypical and puts selling pressure on the stock for those shareholders who need to sell part or all of their shares to meet the tax obligation. Since the beginning of the year, more than 90% of the float has traded, which means it is likely that this tax affected selling is complete and there will be less artificial downward pressure on the shares. Before the company was spun out from The Phoenix Companies, Virtus sold a 23% equity stake for $45 million to Harris Bankcorp, which would imply a valuation over $30 per share. For Harris to complete a transaction in October of 2008 (one of the most uncertain times in the history of global financial markets) and pay a price that is more than 2x today’s levels implies a large vote of confidence from Harris. Longer term, Harris, which is owned by BMO Financial Group, is a likely acquirer of Virtus. Historically money management firms trade at a ratio of approximately 2.5% of enterprise value to assets under management. VRTS trades at just 0.6%. As the company right-sizes its operating expenses and proves its ability to deliver industry margin levels, a return to historical valuations equates to a valuation multiple of 4x current levels.

(Nasdaq: VRTS)

Investment Data (as of 8/31/09)

Recent Price - $15.62

52-Week Range - 3.78-16.70

Fiscal Year End - December

Shares Outstanding - 5.8 MM

Average Trading Volume (3 mos) - 60,000

Market Capitalization - 90 MM

Convertible Preferred Stock - 46 MM

Cash - 27 MM

Long Term Debt - 12 MM

Enterprise Value (EV) - 121 MM

LT Debt/ Equity - 0.5

TTM Revenue - 153 MM

P/ Revenue - 0.6x

Thank you for your interest in Mossberg’s Investor Digest. I welcome your feedback.

Dave Mossberg

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Disclosure: The Editor owns shares of VRTS

Novovax (Nasdaq: NVAX) Profile - Innovative vaccine technology for Swine Flu

Dave Mossberg — Mon, 10 Aug 2009 12:46:00 GMT

Please find a profile of Novovax listed below. If you would like to see additional company profiles published recently in Mossberg’s investor Digest, click here to receive a complimentary issue.

DESCRIPTION: Headquartered in Rockville, MD, Novavax is a clinical-stage (they don’t have meaningful revenue or earnings yet) biopharmaceutical company that focuses on making vaccines for seasonal flu, pandemic viruses (such as swine flu, avian flu), and other infectious diseases. The company’s two key technologies are 1) virus-like particle (VLP) which is more effective, reduces cost and speeds development of new vaccines, and 2) disposable manufacturing technology, which can be set up quickly and requires less capital investment than traditional manufacturing, both of which are of particular interest in developing nations looking to fight pandemic viruses.

KEY INVESTMENT CONSIDERATIONS:

What is VLP and why is it better?

In theory, there is no way you can get infected by a VLP vaccine – Traditional vaccines introduce a weakened or dead virus into the body, which stimulates the body to create antibodies and a memory record of the virus resulting in immunity. Sometimes the virus isn’t weak enough and can only be used in relatively healthily people (5 to 49). As its name implies, the virus-like particle is not a dead or weakened virus…it’s a particle that is coated with the same proteins that are on the outside of the virus. These proteins are what actually stimulate the body’s immune response. Because there is no risk of viral infection, NVAX vaccines could be applicable for pediatric and elderly populations. (Clinical testing in the elderly will begin this fall.)
Very short development times – Novavax can produce a new vaccine in 10 to 12 weeks versus 6 months using conventional technology. Last week, the company announed it has manufactured a vaccine candidate against the H1N1 pandemic influenza virus in only 11 weeks.
Forms a stronger immune response - Because they more closely match an individual viral strain, VLPs can trigger a more robust immune response.
VLPs do not need an adjuvant - In order to be effective, traditional vaccines use an adjuvant, which acts like a booster for the vaccine and stimulates the body’s immune response. Adjuvant can cause adverse reactions in patients and has been linked to autism, Gulf War Syndrome, etc.

Licensing deals with India & Spain validate the technology – NVAX has made licensing deals in Spain and India to develop seasonal and pandemic flu vaccines. The Spanish government and Rovi (the Spanish licensee) will invest $84 million to complete clinical testing for EU approval. In India, NVAX’s partner Cadila will invest $8 million over three years to complete clinical testing for Indian approval. Both Cadila and Rovi have invested in Novavax.

BIG players – NVAX has a long line of proven leaders, including…

Rahul Singhvi (CEO) – Joined the company in 2005….previously headed vaccine manufacturing operations at Merk.

Penny Heaton (Chief Medical Officer) – Joined the company in 2006…previously head of Virology at Merk.

Thomas Monath, Kleiner Perkins (Board Member) – One of the most respected VC firms involved with pandemic issues has a board seat and owns approximately 3.5 % of the company.

The 2nd phase II testing milestone could be a near term catalyst – Results of the 2nd human study are expected to be available during the third quarter of this year and phase II testing is expected to be completed by the end of 2009. Successful data from each of the next milestones could be catalysts for the stock.

VALUATION: With no revenue or earnings expected in the near term, valuing a biopharmaceutical company, such as NVAX is definitely challenging. It appears that NVAX has a unique solution and capable people that can make the company a significant player in the market for vaccines (the seasonal flu vaccine market alone is expected to be a $6 billion market in 4 years). If proven efficacious, VLP may change not only flu vaccine production, but the way all vaccines are produced. This would make Novavax a very valuable property, indeed.

(Nasdaq: NVAX)

Investment Data (as of 8/7/09)

Recent Price - $4.90

52-Week Range - $0.52 to $5.59

Fiscal Year End - December

Shares Outstanding - 87 MM

Average Trading Volume (3 mos) - 5.6 MM

Market Capitalization - $424 MM

Cash - $26 MM

Long Term Debt - N/A

Enterprise Value (EV) - 210 MM

LT Debt/ Equity - N/A

BV/ Share - 0.54

TTM Revenue <1 MM

TTM EPS (non-GAAP) -0.52

TTM EBITDA -34 MM

Thank you for your interest in Mossberg’s Investor Digest. I welcome your feedback.

Dave Mossberg

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Disclosure: The Editor owns shares of NVAX

7% of Nasdaq-listed companies are trading below $1 and could face delisting in the second half of the year

Dave Mossberg — Tue, 28 Jul 2009 02:49:00 GMT

For those Nasdaq-listed companies that are trading below $1 per share, Nasdaq gave them a few more weeks (August 3) to get their stock prices above $1, or face de-delisting. This latest reprieve is the third time the suspension of the minimum $1 bid price rule has been extended, since it was put in place on October 16, 2008. Nasdaq said that based on discussions with the SEC, it does not expect a further extension.

I ran a quick screen of Nasdaq companies trading below $1, which yielded 253 companies, or about 7% of the 3,800 Nasdaq-listed companies. By way of comparison, there were 64 Nasdaq-listed companies below $1 on September 30, 2007, and 344 on October 9, 2008.

The rule states that if the closing bid price falls below $1 for 30 consecutive business days, the company has six months to resolve the problem or face de-listing. Companies face three alternatives to remedy the situation. 1) Reverse stock split – This is likely the most attractive option for many companies. For example, a company could exchange 1 share of stock for each 10 shares of stock outstanding, effectively decreasing the amount of shares outstanding and increasing the share price by a factor of 10. (Instead of owning 100 shares of stock at $0.50, a stockholder would own 10 shares at $5.00 each.) 2) Proactive investor marketing – For those companies whose share prices may be 10% to 20% below the $1 mark and have decent near-term prospects for improved financial performance, a little promotion might help lift shares above the minimum level. 3) De-listing – Given the current market conditions, some companies may choose to let their stock be de-listed. While this alternative will save the company listing fees, it’s not a very attractive solution. Companies that choose this route may face forced selling by investors who are unable (by charter)/ unwilling to own non-listed securities, and will face more difficult standards to re-list on the exchange as economic conditions improve. For example, the current minimum bid price for initial listing on the Nasdaq is $4.

Thank you for your interest in Mossberg’s Investor Digest. I welcome your feedback.

Dave Mossberg

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Market Commentary - June 2009

Dave Mossberg — Tue, 30 Jun 2009 15:59:00 GMT

Economic recovery… Will it be shaped like a V, U, W or L? Most investors I’ve spoken with recently agree that the economic downturn appears to have reached bottom. However, the consensus calls for us to bounce along the bottom for a while before the economy recovers. Factors affecting consumption, which accounts for 70% of the U.S. economy, clearly support a prolong downturn.

Home prices have dropped significantly – According to the National Association of Realtors, median sale prices of existing family homes declined 16% in May. The Case-Shiller index was reported this morning and showed an 18% decline in April. As the largest asset of U.S. households, we’ll need to see a recovery in home prices before consumers will start spending again.

Unemployment Rates – Unemployment is at 9.6% - the highest level in 26 years.

Thrifty U.S. consumer – U.S. savings jumped to the highest level since 1959.

Availability of Credit – In addition to an already difficult credit market, congress is passing credit a card reform legislation that may make it more difficult for consumers to get credit. Advanta, the 11th-biggest U.S. credit-card issuer, ceased lending on June 10.

A few names profiled in the Digest that may offer some defense for an extended economic downturn are Express Scripts (Nasdaq: ESRX), Western Union (NYSE: WU), Carriage Services (NYSE: CVU), and Texas Pacific Land Trust (NYSE: TPL).

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Market Commentary - May 2009

Dave Mossberg — Sun, 31 May 2009 15:52:00 GMT

Next month will mark the first full year of Mossberg’s Investor Digest, so I thought I’d let readers know how the ideas have performed.

Since July of 2008, there have been 48 ideas published in the letter. On average the ideas are up 7%, a full ten percentage points better than the market. Nearly two thirds, or 7 out of the 11 issues, have outperformed.

The best idea performance was Carriage Services (NYSE: CSV), which has increased 142% since it was published on March 30, 2009. The worst performance was from Dry Ships (Nasdaq: DRYS), which was published on July 15, 2008 and underperformed the market by 65 percentage points.

Since the beginning of the year performance has been even better. Below is a table with the performance of the ideas compared to the broad market Russell 3000 index.

The thesis of the newsletter is that the best ideas of the smartest investors I know should outperform the market. So far…so good.

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