10/22/2017

Popular bear thesis creates probabilistic opportunity, Francesca's (FRAN)

Francesca's holdings (FRAN)  is a specialty retailer with 671 boutiques in 48 states. E-commerce reports 7% of sales. Revenue by product broken down as follows; Apparel 49%, Jewelry 23%, accessories 15% and Gifts 13%. More specific, Apparel 49% (Dresses, Fashion Tops, Sweaters, Cardigans and Wraps, Bottoms, Outerwear and Jackets, Tees and Tanks, Intimates): Jewelry 23% (Necklaces, Earrings, Bracelets, Rings): Accessories 15% (Handbags, Clutches, Wallets, Shoes, Belts, Hats, Scarves, Sunglasses, Watches, Hair Accessories): Gifts 13%(Fragrance, Candles, Bath and Body, Home Accessories, Books, Wall Art, Nail Polish, Miscellaneous Items).







I view Francesca's Holding (FRAN) as low to medium risk. Today's price below $7.00 per share offers a  potential one to two year high double-digit stock return. Francesca's Holdings risk is not in the financial statements but instead, its niche strategy that's contingent on successful implementation of its merchandise.  The boutiques designed without deep low-cost inventory and instead try to offer a treasure hunt experience. The shallow inventory creates a must buy now experience for its core 18 to 35 female demographic. That being said, FRAN has enviable financial results compared to their industry competitors, historical valuations, and its intrinsic value. So, with the A+ financial strength, a few quarters of missed results is unlikely to have a large negative impact on the stock price. But their long-term success is 100% contingent on recreating their treasure hunt moat.

This post is not on its inventory strategy or qualitative analysis. But instead share the financial discounts that creates a margin of safety and offers a value trading opportunity.

Risks:
New CEO Steve Lawrence inability to recreate its treasure hunt moat. This uncertain merchandise strategy required to revert at or near its 52 week high of $22.39.

Hurricane Harvey's direct hit in Houston. FRAN's corporate headquarters, e-commerce fulfillment, distribution center, 40 boutiques and employees in or around Houston. The storms full impact not quantified. Irma affected the Florida locations. This quarter presents challenges. But the current stock price likely factors these events.

Negative same-store comparisons, the revolving senior management team that has been struggling  for several years. They must fix the treasure hunt moat.They can't continue to buy back shares.

Shares short was 6.28M or 19.57% of float on 08/31/17, 4.68M on 09/29/17. A high short position coupled with recent negative brokerage sentiment continues to weigh on the stock price trading near its 52-week low.

Opportunities:
FRAN's  return is  -57.80% over the TTM, 3 years annualized -18.28%, 5 years annualized is -25.02%. The sickly stock returns are in direct contrast with the strong financial position, zero debt, consistent growing double-digit sales, deep historical and relative valuation discount. The discounted stable FCF indicates an intrinsic value greater than the current price.




Historical Valuation Deep Discount:



Income Statement

Revenue,Gross Profit:


























Operating Inome, EBIT, EBITDA:
































Balance Sheet





























Cash Flow












ROIC


















Relative Valuation Deep Discount:




































Intrinsic Value:

There were only 4 other Apparel Industry peers that had an enterprise value less than the discounted FCF. I took the annual prior 5 year average FCF. Then discounted that average annual FCF using an 8% rate for 10 years. Francesca's Holdings (FRAN) and 4 more passed this simple discount to intrinsic value test. The other 4 were CATO, EXPR, BKE and CHS.



Catalyst: Continued profitable growth above the cost of capital with share buybacks. Stable same store sales comparisons, steady margins, and investor confidence in new leadership. Financial evidence of an improved merchandise strategy.



 Long: FRAN

9/04/2017

Micro Cap Value with Insider Buying for One Week Period Ending 09/01/17



Click for quotes on the stock below




























































Additional details on above table of stocks. 

Build-A-Bear Workshop (BBW) is a specialty retailer which offers "make your own stuffed animal" interactive entertainment experience.

Historical Insider Activity BBW






























Possible BBW mean reverting attributes,
Market cap is down - 133.33% form 2014 (349.74M) to 149.92M (09/01/17). Enterprise value is down - 107.03% form 2014 (284.35M) to 137.35M (09/01/17). Favorable EV/EBITDA = 5.56, historical cheap EV/Rev = .38, EV/GP = 1.30.P/TB = 1.47. Capital structure improved with share count reduction of 17.40M (2014) to 16.03 (MRQ) coupled with total liabilities drop from 114.43M (2014) to 79.28M (MRQ).



Plug and play the symbol, date, trans type, insider title.


8/27/2017

Wesco Aircraft, Discarded Value in a Market of Increasing Risk and Uncertainty


Wesco Aircraft (WAIR) sparked my interest after ranking value attributes for a basket of over 3,000 companies. At first it was the large debt reduction since 2014.  Then the aggressive and historical outsized insider buying over the past two months, mean reverting stock performance with a -44% 52-week price change near 52 week low. Enterprise value decline of 50% from the first fiscal quarter ending March 2014 (3,190.560M) to 08/24/17 (1,605.856M). Further, a renewed interest by patient value institutions reporting additional buying for the quarter reported 06/30/17. These and other attributes warranted a closer examination into Wesco Aircraft Holdings (WAIR).

Wesco Aircraft is one of the largest international distributor and provider of supply chain management services to the aerospace industry. The company offers aerospace products, including hardware, chemical, and electrical with over 565,000 active SKU. Founded in 1953 with 50 locations and 1.50Billion in 2016 sales. The Company's Services include Quality Assurance, Kitting and JIT Supply Chain Management.Industries served are commercial aerospace, aviation, defense, energy, pharmaceutical and electronics.


It's been several years of an endless string of self-made failures that destroyed large amounts of shareholder value.

The Carlyle Group acquired Wesco back in 2006 and took it public in 2011. Since the IPO it's been a slow steady market and intrinsic value destroying decline. Recent goodwill write-offs are from poor acquisition. This helped drive selling. Wesco purchased Interfast during 2012 for CDN$134 million cash. Interfast offers fastener-based solutions for a wide range of applications globally. Then, Haas group bought in 2014 for 550M cash. The Haas Group reported 573.5 million in 2012 revenues as a global provider of chemical supply chain management solutions to the commercial aerospace, airline, military, energy, and other markets. Additionally, margins dropped from the low 20% to current high single digits.

During Q3 2017 earning call management presented slides to explain the current issues and go forward plan. But, analysts on the call were tired of excuses. Scathing comments such as "Haas (acquisition) has been a disaster", "has the board hired a banker and is reviewing the present value of what one can achieve today - or the value achieved today versus the present value of your operating plan that you're developing". Additional comment made, "how spectacular this thing went off the rails from when the company first went public, it's remarkable."

Management's responded to analysts concerns with the following comments. The "entire board is committed to doing what's best for the shareholders, and that includes evaluating any alternative strategies to maximize that long-term shareholder value". "No. We have not hired a banker yet. And again, my focus is on turning this thing around." "Our job right now and our focus and our priority is to turn this around". "I know that the entire board is committed to doing what's best for the shareholders, and that includes evaluating any alternative strategies to maximize that long-term shareholder value." "It's fixable. As I said at the beginning and a couple of times through my prepared remarks, a lot of this is self-inflicted."


Tangible measures* listed below may hint WAIR is near a market bottom.

Below are favorable summary attributes* with supporting tables.

*Tangible net assets grew from 03/2014 negative -104.230M to the MRQ balance of positive 239.121M or an increase of 343.351M. The main driver of this improvement is the 395.592M debt reduction. In contrast, total equity dropped during the same 2014 to MRQ period from 992.290M to 687.810M or a decline of 304.480M. This in comparison to a net tangible increase of 343.351M. The main driver for the equity decline is the intangible/goodwill write-off of 647.831M

*Market over reaction to the downside with a 50% drop in enterprise value from the first fiscal quarter ending March 2014 (3,190.560M) to 08/24/17 (1,605.856M). A mean reverting -44% 52-week price change. Now trades near its 52 week low of $6.95 off 52 week high of $15.77.























* Consistent positive operating and free cash flow going back to 2012. The non-cash charges are the primary drivers impacting reported negative net income.

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*Recent material outsized positive insider buying versus historical activity signals conviction coupled with some 2017 activity purchased above the current price.





















































*In a market of increasing risk, and future value skepticism these value style institutions added shares to their existing WAIR position. David Dreman, founder of Dreman Value Management added shares at $10.26. Barrow Hanley known for their strict adherence to traditional value disciplines added 296,293 shares to its existing position of 464,638 shares at an average price per share of $11.33. Chuck Royce added more share to its existing 2,790,423 share position at the average holding price of $13.87. CARLYLE GROUP holds 23.19% of the total shares outstanding. MAKAIRA PARTNERS owns 9.69% of TSO and added 1,474,630 additional shares during August 2017. MSD CAPITAL  (Michael Dell) 5,045,304 shares held or 5.01% of TSO.






























*Historical tangible book and revenue valuations improvement.








*The trailing 6 month (03/16 to 06/17) total for gross profit is 517.50M and 367.50 for SGA. This compares favorably to the preceding 6 month rolling period (09/14 to 12/15).See below

Below are the month ending Results:


















Wesco Aircraft Holdings (WAIR) has a large diversified customer base operating an asset light business. The TTM revenue of 1,433M is up 37% from 2013 annual revenue of 902M based on 2 acquistions. Gross profit over the same period increased 15% or 52M. Valuation for EV/GP was 6.25 for 2013 versus a more favorable 2.13 for the TTM. Poor integration of two acquisitions mentioned above accelerated SGA far faster than the increase in GP. Hence, negatively impacting operating income. Management committed to improving expense control.


The main risk is further EBITDA decline and then the inevitable violation of loan covenants that use a EBITDA to debt ratio. But, I believe the stock has favorable probabilty for a one year or less value trade or the longer holding period to realize potential larger gains with a full turn around and company sale. I initiated a place holder position looking to add shares if  the stock moves lower.


Long: WAIR

8/13/2017

Deep Value Micro Caps with Strong Historical and Recent Insider Buying



Below are 6 ideas found using insider buying activity for the week ending 08/11/17.

Update after post, Monday (08/14/17) Director of CTHR purchased 25,681 shares for $22,837 at $.89 per share. Monday (08/14/17) CEO of PRSS purchased 19,901 shares for $36,219 at $1.82 per share


Nano Cap = TURN, PRSS,CTHR:  Micro Cap = FRSH,FRGI: Small Cap = REV

click for quotes on all 6 stocks

180 Degree Capital (TURN): is a publicly traded registered closed-end fund. It focuses on undervalued small, publicly traded companies with significant turnaround potential. Further, 180 Degree provides value-added through constructive activism pushing a positive price reversal.

Implementation of their new strategy continues with overhead expense reductions, conversion of private holdings to public companies, and investments in public deep value micro cap public companies. The NAV = $2.43 versus the current stock price of $1.51. NAV increased two consecutive quarters. This realized sequential improvement is the first time in over five years.

CEO’s recent comment. “This is a marathon, not a sprint. While we are pleased with our start, our work is just beginning. As I have said before, my primary goal as CEO of 180 is to substantially increase our share price. We aren’t there yet, but we are on our way.”


CEO Kevin Rendino purchased 19,170 shares for $31,858 or an average price of $1.66 from 08/03/17 to 08/09/17. YTD 2017 139,932 shares purchased for $209,292 or average per share price of $1.49.  During 2016 233,735 shares purchased for $363,871 or an average price of $1.56.


My latest post on 180 Degree Capital (TURN) was on 04/02/17 provides additional thoughts. “Unique Opportunity Knocks with 180 Degree Capital (TURN)











CafePress (PRSS) is an online retailer selling a variety of customized and personalized products.
Year to date PRSS is down -38%. The Market Cap is 30.05M, Enterprise Value = .60M, Cash per share = 1.86, P/S =  .30, PB = .79 with no debt. Current price is $1.83.The price and enterprise value at historical low along with EV/Revenue, Price/TB,decling shares outstanding since 2013 and total liablities.


Cash Rich, Market Ignored Restructuring Opportunity, CafePress (PRSS) is my latest (04/17/17) blog post on PRSS.

YTD 2017 the CEO purchased 132,915 shares for $274,063 at an average price of $2.06. Famed micro-cap value investor Lloyd Miller 209,397 shares for $542,444 at an average price of $2.59.

During 2016 CEO purchased 82,885 shares for $251,349 or $3.03 per share. Lloyd Miller acquired 252,423 shares for $767,746 or 3.03 per share. 

Throughout 2105 Lloyd acquired 193,195 shares for $765,252 or $3.96 per share along with additional buying from the CEO and CMO.


















































Charles Colvard (CTHR): manfacture, markets and distributes moissanite jewels, finished jewelry for sale in the international jewelry market.
Price near 5 year low, P/B near 8 year low, shares outstanding stable over ten years.

Overlooked and Ignored Deep Value Nano Cap; Charles and Colvard (CTHR) is my latest (02/01/17) blog post on CTHR.
































Papa Murphy's Holdings (FRSH)
Renowned value investors Michael Price purchased 492,398 shares for $2,031,652 at an average price of $4.13 during 2017. Price is near 5 year low, EV/Revenue near all time low.





























Fiesta Restaurant (FRGI)

Fiesta Restaurant owns, operates, and franchises fast-casual restaurants. It operates its fast-casual restaurants under the Pollo Tropical and Taco Cabana names.

Price, enterprise value,EV/Revenue and P/TB near or at 5 year low.












































Revlon (REV):

Revlon is a cosmetics company.It manufactures and sells cosmetics, hair color, beauty tools, fragrances, skincare, deodorants and personal care products.

Revlon is not a micro cap but the unusual and aggressive insider buying by major shareholder Ron Perlman deserves a closer look.
Ron Perlman is Revlon’s majority shareholder and continues to buy large blocks of shares as the stock declines in price and financial strength. Perlman has been adding to his stake for several years but more pronounced during 2017.  Perlman purchased 3,259,515 shares for $65,622,416 at an average price per share of $20.13 during 2017. Revlon continues issuing debt, coupled with a negative Sloan ratio that indicates aggressive accrual accounting with poor interest coverage. Current market price is $18.30 versus a 52-week price range of $15.60 – $37.96. Aggressive buying by Perlman ($65,622,416 during 2017) may be a signal the company goes private, sold or deep undervaluation. The growing debt per share is less worrisome with Perlman’s estimated wealth of $12.2 billion. Perlman can easily step in and with that knowledge understands the stock is worth more than the current price. Interested investors need to wait as shares short continues to rise as operation fixes take time.

Ron Perelman owns around 80% of the stock leaving 20% in the public float. Additionally, concentrated value investor Chris Mittleman added 22,111 shares for the quarter ending 06/30/17 to increase his position to 2,304,282 shares or 4.38% of TSO.
























7/31/2017

Volt, Deeply Ignored Staffing Company with a Tremendous Turn Around Opportunity



Volt Information Sciences (VISI) provides staffing, outsourcing, and IT services. The company's business segments are staffing services (North American, International, Technology Outsourcing) and Corporate/Other.Founded in 1950 by the Shaw family, currently own ~20% of shares outstanding. Volt is the first public staffing company.

This potential outsized opportunity is based on multiple evolving factors.

Opportunties:

 * The 21 trailing month market value dropped -55.92%. This contrasts with a period of multiple operational and financial improvements. These contrasting attributes only strengthen Volt's (VISI) case for short and long term mean reversion. The current market price is $3.65 per share or 76.39M.

During the trailing 21-month period, these are a few specific improvements. The sale of non-core businesses, management's focus and realization of higher margins. Material investment in information technology to improve competitive position, operations and reduce costs. System implementation completed this quarter. Twenty months ago a new turnaround specialist and CEO (Michael Dean ) recruited with Board level changes forced by activist investors. Additionally, this quarter received a long awaited tax refund payment used to pay down debt. VISI sits on  146M federal NOL and 55M in other federal tax credits.

 * Positive macro industry trends exist for temporary staffing. Further, the industry's fragmented attributes offer future MA activity for potential company sale of company or growth after a fully realized turnaround. Note today (07/31/17) staffing company CDI received a go private deal, up 33% today on news. Also, an engineering'sindustry study reported 2% of the workforce is temp. But, the current 2% workforce is a fraction of future years estimates of 10% based on macroeconomics and political trends. The trend higher for a fractionalized work force is inevitable.
Volt's temporary staffing business is healthy and majority of total revenues. Technology and Engineering's permanent staffing business drags on its profitable progress. Additionally, opportunities exist if they focus exclusively on temp staffing and sell permanent placement business.

* The current market price of $3.65 or 76 million market capitalization / 147M enterprise value does not fairly handicap management's value unlocking activities, low business risk profile, capital light requirements and the higher probabilistic future value. Also, VISI is historical and relative valuation cheap. (more on this covered below).

* Management sits on an exceptional company requiring only modest improvements to grow its free cash flow with existing large revenue base. A small 1% improvement in operational margins is reachable. That change will indeed impact free cash flow and its tiny 76M market value with just 14.19M shares in the public float.

* Additional positive factors to consider, ~ 30% held by insiders with founding family at ~20% coupled with proactive/activist shareholders (Glacier Peak Capital as one example). This ownership structure will continue pushing market value enhancements. Moreover, the lack of analyst coverage is not helping the stock price. VISI TTM revenue of 1.289 Billion, 61.70 revenue per share deserves and should see future coverage. Lastly, positive 2016 and 2015 insider activity with neutral 2017.





Notable enhancing historical valuation attributes:
Strong and improving capital structure with a stable share count and debt reduction. Gross margin improvements and a stock that now trades at a 75% of the TTM gross profit. Another interesting ratio is EV/MC. My guess this should stay stable. But the market value dropped more than enterprise value may signal market overreaction.  Lastly, improving F score, asset turnover, and deep valuation discounts for EV/GP and EV/Revenue.
 












Relative Valuation

Click for quotes on the 18 industry competitors included in the table below (ZPIN,MHH,KFY,TBI,KELYA,BBSI,HSII,KELYB,DLHC,BGSF,JOB,EGL,CCRN,KFRC,RECN,CDI,HSON,VISI,STAF,DHX,)

Volt ranks at or near the lowest for the following. Percentage above 52 low, EV/Sales, shares short as percentage of float, market and enterprise value drop. High F score of 6, insider ownership, percentage off 52 high, financial strength. These metrics support the large discount thesis to the 18 industry staffing peers.






























Long term activist shareholders with incentivzed insider ownership to turn around the company.

























Risks: 

* Many uncertainties exist such as continued falling revenues, declining operational margins, growing losses. These negatives will impact liquidity and flexibility to buy back shares if operations don't stabilize over the next few quarters. In addition, the longer time to realize profitability and stability significantly reduces the present value of VISI and confidence of shareholders.






 Long: VISI

7/16/2017

Patriot Transportation is a Forgotten Undervalued Spin-off




Patriot Transportation (PATI) is a top tier regional tank truck hauler servicing the southeastern United States. FRP Holdings spun-off Patriot Transportation during January 2015 and began trading under the symbol PATI. However, they began as a premier bulk tank carrier in 1962 under the name Florida Rock and Tank Lines. Florida Rock and Tank Lines continues its growth as an industry leader in the southeastern United States, transporting petroleum and other liquid and dry bulk commodities in tank trucks.










Patriot Transportation (PATI) operates under their one subsidiary, Florida Rock and Tank Line. They specialize in hauling petroleum (82% of revenue), dry bulk and other liquid commodities(18% of revenue).








The tank lines transportation business is highly fragmented. This attribute offers PATI exciting growth opportunities with its strong balance sheet, free cash flow, clean capital structure and committed bank financing to benefit from industry consolidation. Ranked #12 in US by revenue per the 2013 Bulk Transporter's Gross Revenue Report. Number one of the top 3 tank truck haulers in the markets they generate 66% of their revenues.
 
   Current Valuation:

















Patriot Transportation is a value outlier based on asset reproduction and earnings power. They have 21 terminals, 9 satellite locations,488 Tractors and 563 Trailers located in Florida, Georgia, North Carolina, South Carolina, Alabama, and Tennessee. Terminals owned in Florida (Jacksonville, Panama City, Pensacola, Tampa, White Springs) Georgia (Albany, Augusta, Bainbridge, Columbus, Doraville, Macon) and Tennessee (Chattanooga, Knoxville). Additionally, the company owns 468 tractors and 561 tank trailers. During fiscal 2016, the Company purchased 78 new tractors and 24 trailers. Further, its current financial position reports 6.87M cash, 6.44M current account receivables, for a total current asset value of 17.95M. Gross PPE of 102.19M or net value of 41. 38M.The total equity value is 45.82M or $13.89 per share with no debt. 

Insider buying from original founders of Florida Rock / Patriot Transportation, John Baker. The Baker family owns 37% of PATI. Edward L. Baker 5.14%, John D. Baker (Chairman) 13.39%, Thompson S. Baker (President and CEO)5.69%, Edward L Baker (Chairman Emeritus) 1.227%.
John D. Baker (Chairman) purchased 10,000 shares during June 2017 for $179,662 or 17.97 per share. During 2016 John D Baker purchased 6,233 shares for $121,712 or 19.53 per share.


Value institutions holding shares at higher prices are Royce Associates, PVAM Perlus Microcap Fund, T. Rowe Price Associates, Hyman Charles D, Willis Investment Counsel, Rutabaga Capital, Cove Street, and Teton Advisors. 

Nine of their top 10 largest volume customers serviced over 10 consecutive years. During the past five years' annual revenues grew 54.60% with these loyal customers. This supported by consistent double digit return on capital, TTM ROIC is 12.17%. Trading near tangible book value recorded below fair market value, EV/EBIT = 7.18, and EV/revenue of .45.



Historical Value Improvements















The stock is down -18% over the past 52 weeks. Off its 52 high of $27.32 versus the $17.95 closing price on 07/14/17. Revenues decreased slightly year over year. But, profits reported with growing net cash, equity and reduction of liabilities and enterprise value to revenue and EBITDA.




Trucking Industry Comparisons (18 Companies)






I ran a screen for companies in the trucking industry and excluded OTC listed. My final but not perfect industry peer group is 18 companies. Many competitors are smaller private and not reviewed.

After doing the industry comparisons, Patriot Transportation is a strong value outlier with the these attributes. Ranked highest for financial strength, lowest for EV/EBITDA at 3. Percentage above historical low, P/Book, EV/Sales, EV/EBITDA ranked lowest. PATI has the smallest market capitalization, enterprise value, and short as a percentage of the float. The negative 18% stock return ranked 3rd lowest in the group.



Risks:

Thinly traded with no Wall Street Coverage

Loss of major customers from under biding by a larger competitor or bankruptcy.

Lack of Wall Street Coverage.

A continued labor shortage of available qualified drivers.

The increasing costs of worker's health care, fuel prices, insurance, equipment, taxes, tolls and regulations.

Reduced demand for hauling petroleum products from overcapacity or industry / economic trends.

Liabilities from environmental costs related to the hazardous materials delivered.




Opportunties:

Future acquisitions coupled with Wall Street coverage and continued profitable growth. 



Long: PATI