Solar is in a nasty nasty downturn ...

Things are getting worse for Solar going into 2017. Perhaps the stocks will bottom but right now, fundamentals are getting worse. Some highlights from First Solar's Guidance Call:

http://investor.firstsolar.com/common/download/download.cfm?companyid=FSLR&fileid=917842&filekey=489D8E60-F80E-430E-84D2-81CD87211CA4&filename=2017_Guidance_Call_Presentation_Final.pdf

"From the demand side, there are several dynamics impacting our current competitive situation
• The lower demand in China in H2 2016 has been one of the key catalysts of the recent module pricing decline
• With the feed-in tariff structure that stepped down after June 30, there was a tremendous rush to shift modules in H1
• The spillover effect of this has rippled through the international markets over the past several months and has resulted in tremendous downward pressure on ASPs

Global Demand
• Looking forward, there may be additional pressure on global demand, resulting from the Chinese National Energy Administration’s proposal to lower the cumulative installed 2020 solar target from 150 gigawatts to 110 gigawatts
• Effectively, this potential reduces annual China demand through 2020 from 20 gigawatts to 9 gigawatts a year

Pricing
• On the supply side of the equation, decisions by competitors to maintain or increase production levels in the face
of demand headwinds has only added to the pricing pressures
• Over the course of 2016, we have seen over a 20 gigawatts of capacity additions by module manufactures
• With cell and module capacity ramping outside of China this year, the declines in the U.S. ASP have been more
rapid than in international markets, as module manufacturers have sought ways to circumvent existing tariffs and
duty structures

PPA
• And recently, there have been signs of some stabilization, however, it’s unclear if this will persist or it’s only
temporary pause before further price declines
• Pricing pressure has not only been on modules, we continue to see PPA pricing reach new lows, particularly in
international markets, based on bids by developers that may prove to be uneconomical
• How long such behavior may persist is unclear"

Right now, you're stepping into a cyclical industry experiencing a downturn. Perhaps things get better from here. But there isn't a lot of evidence of that right now...

Live Ventures is overlevered and overvalued

One promotional company here...I think its due for a fall!  Have you come across this?
Bottom line: Based on the very limited information released by this shady company,  it is expensive and over-levered. By my calculations, Live Ventures is currently trading at 30X 2017E EPS.  It carries a Debt/EBITDA ratio of over 6X.  The overly promotional management team is pumping this stock to the sky, which has led to an extraordinary increase in market cap.  Short the stock!

First the business description:
"Live Ventures Incorporated, formerly LiveDeal, Inc., is a holding company. The Company offers LiveDeal.com, a real-time deal engine that connects restaurants across the United States and consumers via a platform. The Company operates in three segments: legacy merchant's services; online marketplace platform, and manufacturing. The legacy merchants' services segment consists of local exchange carrier (LEC) and Velocity Local. The online marketplace platform segment consists of LiveDeal.com and various consumer products entities. The manufacturing segment includes the operations of Marquis Industries, Inc. (Marquis Industries). Marquis Industries is a carpet manufacturer and a manufacturer of yarn products, as well as a reseller of hard surface flooring products. LiveDeal.com provides marketing solutions to restaurants to boost customer awareness and merchant visibility on the Internet."
Okay, so that's the Google Finance description.  Here is their description from their IR website:
/"Live Ventures is a Diversified Growth Holding Company with a strategic focus on acquiring United States based middle market growth manufacturing and value-add distribution companies."
So they have changed their business to a value investment firm.  That should raise eyebrows already, but if it doesn't, then there's more color they would like to provide you.
More:

"Live Ventures Incorporated is a NASDAQ publicly traded company formerly known as LiveDeal, Inc.   In the fourth quarter of 2011 the company was saved from delisting by activist investor Jon Isaac after he took action to shore up the balance sheet with an investment. Jon Isaac became the CEO of the company in 2012, with the goal to restructure and rebuild the company. Live Ventures Incorporated was founded in 2015 with a sole mission to deliver shareholder value through the acquisition of profitable and growing companies only. We invest in value.  Live Ventures distinguishes itself from competitors by its rigorous business model, extensive deal sourcing process and disciplined investment criteria."
Their website lists their criteria for making acquisitions (this is pretty funny now):
"Investment Criteria ·
We seek to make control only investments in mature companies in growing industries. We look for a solid history of profitability and a proven management team. Our target company has $40 million to $250 million in sales and $5 million to $15 million in cash flow. This particular segment of the market gives us a competitive advantage in terms of valuations. Our current strategic focus is on the manufacturing and value-add distribution space. We are sector agnostic and look to diversify our portfolio of subsidiaries. We buy companies with outstanding management teams who have a track record of realizing value and consistent cash-flows year in and year out. Since we are not a traditional Private Equity Fund we do not "flip" companies to another buyer in 3-5 years; instead we hold value indefinitely and help our companies grow organically and or through acquisitions. Live Ventures targets a minimum of 25% yearly IRR."
Here is a snapshot of their website, where you can fill out of a form if you want to sell your company!!!  This is pretty comical!!

The stock has gone bananas recently due to an acquisition and some very promotional and incomplete press releases by the company. 

The press releases are comical.  They are excessively promotional and I would not be surprised if the SEC came in to censure these guys. 

The press releases are for public viewing.  But there are so many questions on their recent acquisition.  What are the terms of the acquisition?  What is the cost of funding?  What are the financials of the acquired business and what are the growth prospects?  None of that information is available.  

Here is the press release from this morning:

http://ir.live-ventures.com/press-releases/detail/1535/live-ventures-announces-biggest-year-in-company-history

"Reporting its most successful year in the Company’s history, Live Ventures reported a record $79M in revenues, an increase of 136 percent over the previous year, and net profit of approximately $17.82M, representing earnings per share (EPS) of $8.92."

That $8.92 EPS includes a huge tax benefit which they failed to mention in that press release.  Here is what they said in their press release:

"Outlook for 2017:  The Company expects multiple factors to impact growth 2017.  Management anticipates revenues to increase by well over 50 percent, easily surpassing $120M, and stockholders’ equity to grow at a high double-digit rate.  In addition, since the acquisition of Vintage Stock closed several weeks after our fiscal year end, none of the results from Vintage Stock is included in this financial report, all of which will figure prominently into the Company’s upcoming 10Q filing and future financial results."

Okay, so here is what we know about 2017.

1) Revenues will surpass $120MM

2) Live Ventures will have debt somewhere in the region of $80MM.  I calculate this based on a debt balance of $20.75 at the end of Q3 2016, plus the all cash acquisition of Vintage stock for $60MM.  (http://www.streetinsider.com/Corporate+News/Live+Ventures+%28LIVE%29+Closes+%2460M+Acquisition+of+Vintage+Stock/12213934.html)

3) Live Ventures provided us with the following profitability information:

"As a result of this highly accretive acquisition, management expects Live Ventures' assets to increase to over $100M, annual sales to increase to $160M and net income to increase to $20M ($1.21 per share)."

4) Current market cap is $88.6MM

Leverage: Based on what we know, the EV of Live Ventures is hitting close to $160MM.  It is hard to say what EBITDA will be, but assuming 10% EBITDA margins (Gamestop has around 9%), we have EBITDA hitting around $12MM.  So EV/EBITDA is clocking in around 13X.   Debt/EBITDA comes in (optimistically) around 6X, which is really high.

Valuation: Debt will clock in around $80MM for these guys. At 5%, their interest expense will be around $4MM. So if Revenues clock in at $120MM for 2017, EBITDA margins hit around 10%, we have $12MM EBITDA. Assuming 5% depreciation on their $100MM of assets (20 year straight line), we have roughly $5MM of D&A charges. So net income could be around $12MM less $5MM less $4MM, so net income in 2017 could come in around $3MM. S/O at 3.2MM, stock price $27.68, Market Cap stands around $88.6MM. So 2017 P/E stands around 30X. That's expensive, esp. given that Vintage Stock is an entertainment retailer that no one would buy at 30X!!

Of course, we have no idea what margins or growth prospects are for this business.  I am skeptical that the financing for this was cheap.  I am also skeptical that they paid a good price for it, given the low quality nature of the business and high CAPEX needs.  I could be wrong, but I think this makes for a good short (either now or sometime in the future if the market takes it higher).  As a longer term consideration, it is not easy to create value in public markets through acquisitions.  I think Live Ventures will show this to be the case, as many

UPDATE: 

So my original analysis was broadly right.  I calculated their net income for 2016 at $3MM.  At $30 Stock Price, their market cap was $100MM, which put their P/E at over 30X.  

When I revise my numbers based on their latest 10K, I get a 2016 net income number of $3.9MM.  Which means at $30, their P/E was 26X, still expensive.

But I am wrong about being short this stock.  The reason is because one of their segments (Marketplace) showed an operating loss of $5.1MM.  They are shutting this down, which means their net income could jump to close to $9MM.  In that case, the stock is somewhat fairly valued at $30. 

DETAILED CALCULATIONS OF 2016 EARNINGS

Here are my calculations based on their newly released 10K:

- Vintage Stock Inc. did $12.2MM net income in 2015.

- Manufacturing + Services did $7.5MM in operating income in 2016, which is a full year of operations since they acquired Marquis.  Depreciation expense in their manufacturing business ran at around $2.84MM.  Not sure how actual compares to this number, but let's take that at face value.

- Marketplace platform showed $5.1MM of operating losses in 2016.

- Interest expense on their Vintage acquisition loans comes to around $6.75MM per year.  Let's assume interest expense on their current $15.9MM clocks in around 7.7% (based on their debt table in the 10K), so about $1.2MM.  This is way lower than their actual 2016 interest expense of $4MM, but let's not try to reconcile for now. 

Bottom line net income 2016 = $12.2 + $7.5 - $5.1 - $6.75 - $1.2 - $2.8 = $3.9MM.

Bottom line net income 2016 (ex. Marketplace) = $12.2 + $7.5 - $6.75 - $1.2 - $2.8 = $9MM.

S/O around 3.3MM, so market cap at $23.92 stands around $79MM.  So forward P/E stands around 9X if you exclude Marketplace losses, which I believe they are in the process of shutting down. 

Domino's is a fantastic business...

Domino's is not a company that needs an introduction.  But let's start there:

"Domino's Pizza, Inc. is a pizza restaurant chain. The Company operates pizza stores at 12,500 locations in over 80 markets. It operates through three segments: domestic stores, international franchise and supply chain. Its Domestic Stores segment consists primarily of its franchise operations, through which it operates network of over 4,820 franchised stores located in the United States. Its International Franchise segment consists of a network of franchised stores in approximately 80 international markets. Its supply chain segment operates approximately 20 regional dough manufacturing and food supply chain centers in the United States; a thin crust manufacturing center; a vegetable processing center, and a center providing equipment and supplies to certain of its domestic and international stores. Its basic menu features pizza products in various sizes and crust types. Its stores also offer oven-baked sandwiches, pasta, bread side items, desserts and soft drink products."

There are many behavioral aspects of investing that deserve attention and Domino's brings forward a particularly serious one.  It is stock that has gone from a market cap of $260M to $7.8b currently in eight years,  that's a compounded return of 53% annualized, excluding dividends.  That's a cumulative 3000%!  While it is unrealistic to expect someone to have invested at the low point of valuation 2008/09, it does beg the question: why didn't so many people buy it during its monster run up? 

I believe the answer is that many people were a) busy trying to time the market b) thought the stock had gone up too much c) didn't pay attention to the operating results the business was producing (and continues to produce).

Any serious investor should read Domino's earnings release.  It is a thing of beauty and should leave you absolutely speechless.  If you still focus on the valuation of the stock (and say it is too expensive because it has a high P/E, I do not know what to say to you). 

Here's a link:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzU1MDU2fENoaWxkSUQ9LTF8VHlwZT0z&t=1&cb=636123908210285394

There are a few things that you should immediately note. 

SSS are fabulous.  That doesn't need any explanation.  13% SSS growth in the U.S. 6.6% internationally. Fantastic result.  Plus they are expanding viciously internationally (I think they opened their first store in Sweden) and opened 300 in the quarter.  The stock is growing top line at a fantastic rate.

But is the growth profitable?  All this growth must require huge CAPEX, right?

Yes, in most cases, but not in Domino's case.  Have a look at their income statement and you will notice four sources of revenues.

1) Domestic Company-owned stores
2) Domestic franchise
3) Supply chain
4) International franchise

So what's happening here?  Domino's runs a franchise - franchisee model.  The following page gives interested franchisees good details of the what it takes to join to Domino's family. 

http://www.franchisedirect.com/foodfranchises/dominos-pizza-franchise-07460/ufoc/

The biggest source of their revenues are Supply Chain.  The 10K explains what this line items captures:

"Our supply chain segment operates 18 regional dough manufacturing and food supply chain centers in the U.S., one thin crust manufacturing center, one vegetable processing center and one center providing equipment and supplies to certain of our domestic and international stores. We also operate five dough manufacturing and food supply chain centers in Canada. Our supply chain segment leases a fleet of more than 500 tractors and trailers. During 2015, our supply chain segment accounted for $1.38 billion, or 62% of our consolidated revenues.

Our centers produce fresh dough and purchase, receive, store and deliver quality food and other complementary items to over 99% of our U.S. and Canadian franchised stores and all of our Company-owned stores. We regularly supply over 5,600 stores with various food and supplies. Our supply chain segment made approximately 581,000 full-service deliveries in 2015 or approximately two deliveries per store per week, and we produced over 415 million pounds of dough during 2015.

We believe our franchisees voluntarily choose to obtain food, supplies and equipment from us because we offer the most efficient, convenient and cost effective alternative, while also offering both quality and consistency. Our supply chain segment offers profit-sharing arrangements to franchisees who purchase all of their food for their stores from our centers. These profit-sharing arrangements generally offer participating franchisees and Company-owned stores with 50% (or a higher percentage in the case of Company-owned stores and certain franchisees who operate a larger number of stores) of their regional supply chain center’s pre-tax profits. We believe these arrangements strengthen our ties and provide aligned benefits with franchisees."

These supply chains have a mark up.  Based on Q3 numbers, the mark up is 11%.  This is pretty consistent with 2015 figures (which come up slightly lower at 10.7%).  But then Domino's also collects royalties on revenues of around 5.5% from stores, so that's where the Domestic and International Franchise revenues come in.  Overall, before corporate expenses, operating margins are 31% of sales.  That is absolutely fantastic in terms of store economics from the perspective of Domino's Pizza.  The ROIC is through the roof here. 

After taking into account corporate expenses (termed "General and Administrative"), operating margins clock in around 17.8%.  Show me another restaurant company growing at a vicious pace with those kind of operating margins.  It is truly impressive.

The secret to the franchisee model is of course that there is no CAPEX spend for Domino's when it comes to new store opening.  Here is the punchline for franchisees interested in joining the family:

"Financial Assistance: No direct or indirect financing is offered to the franchisee. The franchisor does not guarantee the franchisee’s note lease or obligation. Franchisees of the Domino's Pizza system are eligible for expedited and streamlined SBA loan processing through the SBA's Franchise Registry Program."

This company produces gobs of free cash flow due to the low CAPEX needs emanating from the business model.  Last quarter, FCF was $124MM and of course they have a dividend and share buy back program in place.

Still think 32X NTM EPS is expensive?  I think the Domino's story remains strong.  The international opportunity remains and with a proven business model, Domino's could continue to surprise the Street.  Stay bullish...

Cal-maine has a skewed risk/reward trade off

"Cal-Maine Foods, Inc. is a producer and marketer of shell eggs in the United States. The Company operates through the segment of production, grading, packaging, marketing and distribution of shell eggs. It offers shell eggs, including specialty and non-specialty eggs. It classifies cage free, organic and brown eggs as specialty products. It classifies all other shell eggs as non-specialty products. The Company markets its specialty shell eggs under the brands, including Egg-Land's Best, Land O' Lakes, Farmhouse and 4-Grain. The Company, through Egg-Land's Best, Inc. (EB), produces, markets and distributes Egg-Land's Best and Land O' Lakes branded eggs. It markets cage-free eggs under its Farmhouse brand and distributes them throughout southeast and southwest regions of the United States. It markets organic, wholesome, cage-free, vegetarian and omega-3 eggs under its 4-Grain brand. It also produces, markets and distributes private label specialty shell eggs to customers."

New reports of Avian flu...it's worth going long here IMO.

CALM has huge operating leverage on rising shell egg prices.   I have no clue if the sharp rise in egg prices is sustainable, but it's worth taking a position here on the off chance that it is. Operating leverage means that Cal-Maine could go up 50% in short order if it is.  2015 they clocked close to $7 a share in EPS, with fat high teens margins and huge cash flows. 

On the downside risk, I think it is fairly limited here given the dominant position.  If we see some incremental revenue growth, that will accrue to the bottom line in a big way (all else being equal). Of course, egg prices might not stay up here, in which case, you want to get out of the position.

Weight watchers is turning...

"Weight Watchers International, Inc. is a provider of weight management services. The Company operates globally through a network of Company-owned and franchise operations. The Company's branded products and services include meetings conducted by its franchisees, digital weight management products provided through its Websites, mobile sites and applications, products sold at meetings, licensed products sold in retail channels and magazine subscriptions and other publications. It operates through four segments: North America, United Kingdom, Continental Europe (CE) and Other. It sells a range of products, including bars, snacks, cookbooks, food and restaurant guides with SmartPoints values, Weight Watchers magazines, SmartPoints calculators and fitness kits, and certain third-party products, such as activity-tracking monitors. It sells its products through its meetings business, online and to its franchisees."

The business seems to be turning here based on the Q2 operating figures.  Across the board metrics have improved YoY.  Now this could just be a quick bump thanks to Oprah's publicity, but given the leverage (read:debt), plus scope for fat margins, the upside could be very substantial if the business improves.  Successful turnarounds are rare, but when they do materialize, believers are handsomely rewarded.

The short squeeze thesis is also interesting, but the turnaround itself seems to be happening here. So there could be upside here just based on operating metrics improving across the board and across all regions. The heavy debt load and huge potential for cash flow generation means this could turn into a multi bagger turnaround situation. Definitely worth a position!

Intermap is embarking on a turnaround

Some excitement since they have a new CEO and they are embarking on a turnaround. 

First a company description:

"Internap Corporation, formerly InterNAP Network Services Corporation, provides Internet infrastructure services. The Company operates through two segments: Data Center Services segment and Internet Protocol Services segment. It offers hybrid Internet infrastructure services, which enables customers to mix and match cloud, hosting and colocation for the combination of services. It also offers availability across a global network of data centers, and services backed by service level agreements (SLAs). The Company serves approximately 11,000 customers in various industries, including software and Internet; media and entertainment; business services; healthcare technology infrastructure, and telecommunications. Its Data Center Services segment includes colocation, hosting and cloud services. IP Services segment includes its performance IP service, content delivery network (CDN) services, IP routing hardware and software platform, and Managed Internet Route Optimizer Controller."

From the 10-K:

"The market for Internet infrastructure services is intensely competitive, remains highly fragmented and is characterized by rapid innovation, steady price erosion and consolidation. We believe that the principal factors of competition for service providers in our target markets include breadth of product offering, product features and performance, level of customer service and technical support, price and brand recognition. We believe that we can compete on the basis of these factors to varying degrees. Our current and potential competition primarily consists of: 
  ● colocation, hosting and cloud providers, including Amazon Web Services; CenturyLink, Inc.; CyrusOne Inc.; Digital Realty Trust, Inc.; Equinix, Inc.; Microsoft Azure; Rackspace Hosting, Inc.; Softlayer (IBM); and QTS Realty Trust, Inc.; and ● ISPs that provide connectivity services and storage solutions, including AT&T Inc.; Akamai Technologies, Inc.; Cogent Communications Holdings, Inc.; Level 3 Communications, Inc.; Verizon Communications Inc. and Zayo Group, LLC."

So this turnaround is not going to be easy.  The debt load stands at around $327MM (excluding Capital Leases) and is expensive at LIBOR + 600bps.  2017 guided EBITDA stands at $85MM (which includes some mysterious cost cutting initiatives).  Now since this is a capital intensive levered fixed asset business, EBITDA is not a good measure of value.  Interest expense runs at $30MM annually and Depreciation ran at around $89MM in 2015.  So we have red income on the bottom line, which is ugly. 

I want to see tangible signs of customers increasing their adoption of their systems before getting bullish.  A capital raise is forthcoming and there's a lot of customer churn apparently that creates issues in this industry.

StoneMor is not a high quality business...

StoneMor is an interesting business.  Here is the company description:

"StoneMor Partners L.P. owns and operates cemeteries and funeral homes. The Company operates through two segments: Cemetery Operations and Funeral Homes. Its Cemetery Operations segment sells interment rights, caskets, burial vaults, cremation niches, markers and other cemetery related merchandise. Its Funeral Homes segment offers a range of services, including family consultation, final expense insurance products, the removal and preparation of remains, provision of caskets and related funeral merchandise, the use of funeral home facilities for visitation, worship and performance of funeral services, and transportation services. It sells cemetery products and services both at the time of death, which it refers to as at-need, and prior to the time of death, which it refers to as pre-need. It operates approximately 310 cemeteries in over 30 states and Puerto Rico, and approximately 100 funeral homes in over 20 states and Puerto Rico."

When you first read this description, there's a lot about the industry you should like.  In fact, running cemeteries could be quite profitable.  Deathcare isn't exactly an exciting business, it is hugely fragmented, people will always die, you can develop local monopolies, regulations mean barriers to entry.  All of this is true, yet somehow, StonMor is a high yield bond issuer, highly levered, with severely opaque accounts.  Recently the stock has collapsed. 

There are three segments here: At-need, pre-need and investment trusts.  At-need and investment trusts are easy to understand.  At-need services basically cover the cost of the burial and funeral and average aroun $1,700 per burial.  The investment trusts throw off investment income (from dividends and coupons) to shareholders. 

The segment that is messy is pre-need.  This is where the company sells merchandise and services to a person or family before they die.  The average contract for this is $3,200 (vs. $1,700 for at-need).  That's almost twice the price.

Here is where it gets complicated.  First, 70% of the proceeds from a pre-need contract must be placed in the merchandise trust and only released on the service has been provided.  This is a reserve of sorts for when the funds will be needed.  What StoneMor has developed a practice of doing is building the vaults for the burial, so they can release the funds from the Merchandise Trust and recognize them as revenue and margins.  There are more than a few people who believe this is not right.  But StoneMor has been doing this and paying out a fat fat dividend of $2.64 per unit per year.  They had this open ended opportunity of acquiring cemeteries across the U.S. and selling tons of pre-need cemetery and funeral services.  Growing via equity issuance, the growth opportunity is somewhat open ended since the industry is incredibly fragmented.  The financial statements are impossible to figure out, since the IS, BS and CF statement are all non-sensical on a GAAP basis.  The company provides non-GAAP operating numbers, which make sense to me. 

However, the big issue here is that results have tanked recently due to a very specific problem associated with the sales force.  An attempt to improve productivity back fired, and the sales force shrunk dramatically.  The result was a sharp drop in pre-need sales volumes.  This makes sense because at-need sales hardly need a sales person.  Fewer sales people resulted in a drop in the highest margin product, which led to a sharp decline in profitability and since a lot of cash flow came from front loading revenue recognition from pre-need sales, cash flow plummeted.  We got a massive dividend cut.  The market still doesn't believe the current dividend level is sustainable (current yields are 16%) and management has proposed rehiring the old sales force will work.  That remains to be seen.  One analyst thinks the problem is market saturation and that all the pre-need sales have been done and now we're seeing a big drop due to that effect.  That could be true. 

If you set aside their business model and huge amount of complexity around revenue recognition / deferment, they are not lying about the fall in pre-need contract sales being the cause of the drop in revenues.

In their Q3 results, they sold 27.4K cemetery contracts of which 14.6K were at-need and 12.8K were pre-need. The at-need contracts sell for an average of $1.7K while the pre-need sell for $3.2K (according to their reported billing number). The pre-need contract number fell by 1K YoY. So basically, from a revenue perspective, that's $1.7MM of revenues (1.7K times 1K).

Their explanation of why revenues fell makes sense. One analyst on the investor day seemed to claim that they have saturated the market for pre-need contracts. That could be happening, although we need more analysis on that front. The management team is claiming that they need to re-hire the sales force that left due to changes in their compensation structure and sales will shoot back up on pre-need contracts. But they are also saying that getting those sales back will take time since only a small number of sales people stay on longer term after sales trainings.

The risk here is that the debt (which is high yield) and the lack of cash flow due to the deferment of revenues leads to a liquidity crisis. That's why the stock has collapsed. I have reservations about this business of installing vaults from pre-need sales to release revenues since it could lead to income being front-loaded, but it does lead to a release of cash, which can be used to fund the dividend. The trick here is that if they do restore pre-need contract sales, they might be able to raise the dividend again, so the stock could shoot up. On the flip side, the pre-need sales are a big of a boiler room operation, since they involve cold calling, door knocking, installation payments with high interest rates and upfront recognition of revenues for services that haven't been delivered yet.

One question I do have is on the maintenance CAPEX side. Are they able to use principal from the Perpetual Care trust to fund maintenance CAPEX on their cemeteries? I did read that they can use interest and dividends, in which case, it seems like they are responsible for maintenance CAPEX with no benefit from the Perpetual Care Trust.

As far as the business model is concerned, this is very difficult to model. The MLP model works, but it will always be subject to criticisms due to the huge revenue recognition issues and complicated balance sheet.

CPI Cards - Another great story, but business hasn't delivered...

CPI cards group is an interesting company and worth keeping an eye on.  Business is not going great.  But perhaps there is hope.  Let's start with an overview of the company:

"CPI Card Group Inc., formerly CPI Holdings I, Inc., provides Financial Payment Card solutions in North America. The Company is engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards, which it defines as credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands in the United States, Europe and Canada. It is also engaged in the design, production, data personalization, packaging and fulfillment of retail gift and loyalty cards. Its segments include U.S. Debit and Credit, which produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States; U.S. Prepaid Debit, which provides integrated card services to Prepaid Debit Card issuers in the United States; U.K. Limited, which produces retail cards for customers in the United Kingdom and continental Europe, and Other, which has operations in Ontario, Canada and Petersfield, United Kingdom"

Revenues in their Debit and Credit card segment have fallen sharply since 2015.  It seems like 2015 was a blockbuster year, which led to overstocking of cards by many major banks.  That is the narrative.  I am not sure what to make of it.  But PMTS carries significant debt ($300MM+) so sharp changes in forecasted profitability lead to large drops in market capitalization.  This entity is levered and its a manufacturing company (albeit with a sizeable service segment).  It is, however, a nice easy business to understand.  So we can easily analyze the business. 

Here are some key points from the press release:

“Our third quarter results were below expectations, primarily due to continued softness in demand for EMV^® chip cards and unfavorable foreign currency exchange rates. Partially offsetting the lower EMV demand in the third quarter was a sequential improvement in our EMV card average selling prices resulting from customer mix,” said Steve Montross, president and chief executive officer of CPI Card Group. “As we look to the fourth quarter, we do not see EMV card shipments materializing at the improved rates we assumed in our prior guidance and, as a result, we are reducing the 2016 full year guidance range, primarily to reflect this softness.”

Now 2017 might be the year business starts to pick up.  But overall, they are expecting 10-15% top line growth for 2017, which isn't that exciting given the huge drops they have seen since 2015.  Valuation looks like it is on the cheap side (8X depressed 2017E consensus earnings) but since the business isn't doing great, I am not that excited.  Let's see how their core business develops here.  It is a commodity product (they actually show ASPs) and a manufacturing company, so not that exciting from a long term perspective.

"U.S. Debit and Credit:

Another comment:

Net sales for U.S. Debit and Credit for the three months ended September 30, 2016 decreased $23.6 million, or 32.5%, $49.2 million compared to $72.8 million for the three months ended September 30, 2015. The decrease in net sales was primarily due to a $17.0 million decrease in EMV related revenue and a $10.9 million decrease in magnetic stripe card and other sales due to the ongoing shift of card issuing bank customers from magnetic stripe cards to EMV cards, partially offset by an increase of $4.3 million from growth in card personalization and fulfillment.    The decrease in EMV revenue is due to a reduction of EMV card purchases from large issuers and processors, reflecting the carryover impact of overstocked EMV card inventories purchased in 2015.  For the three months ended September 30, 2016, we sold 22.6 million EMV cards at an average selling price (“ASP”) of $0.96 compared to 41.2 million EMV cards at an ASP of $0.94 for the three months ended September 30, 2015.   The increase in ASP for EMV cards during the three months ended September 30, 2016 compared to September 30, 2015 is primarily due to customer mix."
I guess maybe sales of EMV cards will rebound and 2016 was just a slump after a bumper 2015.  Time will tell.  Hard to get too excited by a manufacturing business, but the operating and financial leverage make this a big potential mover.  Could be above $10 again if EMV sales rebound.  I'll wait for evidence. 
Also, long term trend isn't in their favor, so not worth getting too enthusiastic here.

NantHealth Inc.

NantHealth is a new Healthcare Information Services company based in Culver City, California.  The Founder is a guy named Patrick Soon-Shiong.  The first thing to do is to read about his guy:

https://en.wikipedia.org/wiki/Patrick_Soon-Shiong

Here is an excerpt:

"In 1991, Soon-Shiong left UCLA to start a diabetes and cancer biotechnology firm. This led to the founding in 1997 of APP Pharmaceuticals (APP), which he held 80% of outstanding stock and sold to Fresenius SE for $4.6 billion in July 2008.^{[13][dead link]} Soon-Shiong later founded Abraxis BioScience (maker of the drug Abraxane he co-discovered),^[14] a company he sold to Celgene in 2010 in cash-and-stock deal, valued at over $3 billion."

Here is a description of the company:

"We are a leading next-generation, evidence-based, personalized healthcare company focused on enabling our clients to fundamentally change the diagnosis, treatment and pharmacoeconomics of cancer and other critical illnesses. We believe a molecular-driven, systems-based approach to making clinical treatment decisions based on large-scale, real time biometric and phenotypical data will become the standard of care initially for patients with cancer and, ultimately, other critical illnesses. We derive revenue from selling GPS Cancer (our Genomic Proteomic Spectrometry Cancer test, a unique, comprehensive molecular test and decision support solution that measures the proteins present in the patient's tumor tissue, combined with whole genomic and transcriptomic sequencing of tumor & normal samples), to which we obtained exclusive access from an affiliate, and NantOS and NantOS apps to healthcare providers and payors, self-insured employers and biopharmaceutical companies. NantOS and NantOS apps include proprietary methods and algorithms for enabling healthcare providers to make better treatment decisions to improve patient outcomes and lower the cost of care, and allow healthcare payors to ensure that their dependents receive high quality care in a cost effective manner. We believe that as healthcare providers and payors migrate to value-based reimbursement models and implement advances in precision medicine, our offerings position us at the forefront of multiple significant market opportunities."

Hertz: Attractive at $2b market cap

Before launching into an analysis of Hertz, it is important to understand the nature of Hertz's business. Largely, Hertz does not have a product but is rather a financing company. It borrows money (quite cheaply using ABS vehicles that are non-recourse to the parent) and acquires vehicles from OEMs like GM, Ford, Chrysler etc. It then leases out those vehicles at airport and non-airport locations. The goal is to earn a spread over its financing costs, which it terms profit.

This business is hugely affected by macro economic conditions and now by ride sharing services like Uber. So, as an investor, you are investing hoping interest rates, economic conditions, tourism and travel hold up.

Management does have control over the FLEET. This is a consolidated industry with only two major players left in the U.S. market. So it is unlikely management will go nuts trying to get market share by undercutting competition on price.

The operational side of the business is measured in terms of a few metrics: Revenues, Direct vehicle expenses, Depreciation, Transaction days, Revenue per transaction day, average vehicles, size of fleet, program vehicles vs. non-program vehicles.

To get a sense of the business all these things matter. So you can't control macro (economy, interest rates, technology) but the core business performance can be measured. Let's look at Q3 results, which resulted in a huge sell off. The main culprit here was an increase to depreciation expense, due to falling used car prices. As an investor, you can not do anything about this. But it hits Hertz since most of the vehicles in the fleet are non-program cars (92% according to the latest report, down sharply from 28% a year ago) and this comes straight out of profits. The important thing to remember is that used car prices will fluctuate and ultimately come back up if they fall too much. But that's not a good game to play - too macro and unpredictable.

The operating metrics for the quarter aren't bad per say. The fleet size has not shrunk but it isn't growing rapidly either, transaction days are up so demand is still there, RPD is down but only so slightly. Vehicle utilization rates are hovering near 80%, which is decent.

Given how much the stock has fallen, one thing is clear. The net profitability of this business is hugely variable and almost all the variables are correlated. In other words, the 80% drop in stock price shouldn't surprise you, nor would a 5X rise from here in a few short months.

Cutting fleet size to reduce expenses will hit revenues assuming it also results in lower transaction days. It might result in lower net income, but if the reduction in fleet size is accompanied by rising rental rates, it might actually INCREASE net income. So the business would become MORE valuable on lower revenues.

Looking carefully at the quarterly results.

1) International segment is doing fine. Total revenues of $683MM. Adjusted Corporate EBITDA of $151MM. Very decent 22% Adjusted Corporate EBITDA Margin. Revenue per available car day was flat. Average vehicles remains constant. Net depreciation per unit is low at $188. Good stuff.

2) The U.S. segment is NOT doing well. Revenues are flat, so that is a good sign in terms of demand. However, depreciation on cars has shot 14% higher compared to this time last year. This has practically decimated Adjusted Corporate EBITDA Margins. $63MM additional depreciation charges over the quarter on total revenues of $1,707MM equate to about 3.7% decrease in margins. Adjusted Corporate EBITDA margins fell 4.7% so that accounts for the bulk of the change. So the first question here is: Is this the new level of depreciation charge going forward? The rest of the $85MM decline in margins is from lower top line revenues, although since costs are 75/25 variable/fixed, the full impact of lower top line revenues was muted by $10MM. (Revenues fell about $32MM on the top line, but the impact on Corporate EBITDA margins was only $25MM.)
On depreciation charges, the company blamed 3 factors. 1) Lower than expected residual values 2) higher mix of non-program vehicles 3) higher vehicle acquisition costs YoY.

3) Other operations from Donlen showed steady performance both from a revenue and Adjusted Corporate EBITDA perspective.

A couple of things also to remember. Non-vehicle capital expenditures is likely to go up next year to $150-200MM vs. $75-85MM in 2016 as Hertz is planning to make investments in subsidiaries. So the FCF guidance next year is likely to be lower.

The other obvious comparison is to Avis. Avis has Adjusted Corporate EBITDA margins in the U.S. of 16.8% in Q3 2016. It is in fact smaller than Hertz in the U.S. since it only has 422K vehicles vs. 505K for Hertz. The international segment is very similar in size and margins. Both Avis and Hertz have 22K vehicles and operate in the 20% Corporate Margin range.

The big question is why Hertz in the U.S. is operating under 12% Adjusted Corporate EBITDA margins vs. 17% for Avis? 5% is a lot of money when you have nearly $9 billion of sales. That is $450MM of cash money. You can bet Carl Icahn is having a word with Hertz management. My feeling is that heads will roll soon...

Well, the previous CEO wasn't able to quite deliver. Avis is massively outperforming Hertz. 2016E Adj. Corporate EBITDA is $600MM for HTZ vs. $875MM for CAR. This is despite the fact that Hertz has a much bigger fleet. In the U.S. alone, it has 505K cars vs. 422K for Avis.

If we go back to the Q1 2016 call, HTZ showed that RAC had produced an Adj. Corporate EBITDA of $883MM in 2015. So if we can get back to those levels (primarily due to the U.S. RAC business) the stock could fly.

New CEO in the house

How much can Ms. Marinello really do here? She can hardly change the dynamics of the used car market. She is either stepping into a company going bankrupt, or the macro environment turns and she makes millions with no exceptional effort on her part. Nice free option of sorts.
The situation at Hertz is looking quite desperate. During the conference call, when discussing potential covenant restrictions on the senior revolving credit facility, Tom Kennedy said that since the EBITDA included potential cost savings over the next year, they could simply model more cost savings to stay within their covenant restrictions!!!! What! That's such a red flag.
Anyhow, business is not going well and I don't want to be in this unless we see signs of improvement. The business could implode if 2017 sees another step down in depreciation rates and the economy and global travel slows. On the upside, if residuals recover or if they can push through the cost of fleet through in pricings, the upside could be material.

Keep an eye on this...