About Me

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Avram Fisher, Founder & Portfolio Manager of Long Cast Advisers, is a former equity analyst at CSFB and BMO covering industrials and business services. He has prior experience in private equity; as a corporate governance analyst; as a writer; reporter and private investigator; and as a lifeguard and busboy (I still clear plates when my kids don't). This blog is an open book of ideas about patient investing and about starting up a small-cap focused RIA. It is part decision-diary, part investment observations and part general musings. Nothing on this blog is a solicitation for business nor a recommendation to buy or sell securities. It is simply a way to organize and share thoughts with an expanding audience of independent, patient and talented small cap investors. www.longcastadvisers.com

Tuesday, July 21, 2015

Revisiting $FHCO

I have a draft post I've long been working on about investing mistakes I've made in the past year and $FHCO is atop the list. I'll summarize it here and note that the 34% I lost on the investment (MY OWN MONEY) from Oct '14 to Mar '15 wasn't "the mistake" but the outcome of the mistakes I list below. There were five of them, by my count, all of which lead to important lessons for me and I will bury my nose in these mistakes so I don't make them again ...

1. the need to be "doing something". when i bought the shares in Oct, I had just made the decision to form my business and I felt the need to be "doing something" to "be busy". I realized on reflection that what's worked for me in the past is the patience to invest only when the time and opportunity were right, not on some arbitrary calendar. Wearing a professional's hat can't change that.

2. i was attracted by what other people were doing instead of what seemed right to me. a friend in the small cap space brought the stock to my attention and other folks I knew swore by him. I've subsequently learned that he and I are very different investors - he buys a few shares of everything while I'm a concentrated investor - so we have different thresholds on what makes a good investment.

The lesson with this (along my experience working at a hedge fund around the same time) is that investing is a deeply personal experience.  I can't stress that enough. All the stuff they teach in business school about finance and valuation or what you read from "the experts", that might get you 99% of the way there, but that last 1% makes all the difference. What someone else sees as value, might not appear that way to another, and vice versa. That's a beautiful thing and a very important lesson.

3. i didn't talk to experts. As a former PI I pride myself on this aspect of my due diligence but I bought shares before I'd reached out to sources in public health who subsequently (and unanimously) told me that the product is a joke in the US. I've since learned that the largest consumer users in the US are gay men but since the product is FDA approved only for vaginal and not anal intercourse, they can't market to them.

4. i didn't talk to mgmt. I bought it at $4.40 before my impressions with mgmt were fully formed and sold it at $2.90 after they were fully formed.

5. didn't fully understand the market. i was attracted to the nifty, quirky and seemingly cheap story without fully understanding the market, the buyers, and most importantly the growing competition from Cupid in India.

... and so with these mistakes, I got involved and lost money - my own money, not client money - but I've come away with valuable albeit expensive lessons.

Yet, here we are with the stock at $1.40 and I'm revisiting this company. Maybe it's insane. The stock is cheap at 4x EBITDA but whose to say it won't get cheaper? There are few hard assets and just $0.50 in working capital / share and another $0.50 in deferred tax assets that would benefit an acquirer.

But the CEO who recently wrought massive destruction in shareholder value via a "strategic initiative" just resigned - on the one-year anniversary of the announcement of said strategy - and positive changes MIGHT be afoot now that the owner / operator / founder OB Parrish who owns 4% of the company is resuming control.




$FHCO is the Female Health Company. The company manufactures the Female Health Condom under the brand FC2. It's a $40M market cap company with $24M in sales on 43M units sold (2014). The company will exceed both these figures in 2015. Yet, the stock is trading below where it traded in '08/'09 when it was doing less sales and lower margins with roughly the same share count as it has today.

By way of background, the female condom was invented by a Dutch physician, who patented it and sold the rights to the predecessor company, Wisconsin Pharmacal Company. Then, through a series of dispositions, around 1995 / 1996 Pharmacal was split into two companies, with rights to the female condom put into one entity that was eventually renamed Female Health Company and run by OB Parrish. The other company, after changing hands several times, still exists today and is now run once again by OB's former partner John Wundrock ...

http://www.pharmacalway.com/

... so it looks like both these entrepreneurs are back where they started 20 years later.

The original product was the FC1 and an improved product, the FC2 was introduced in 2007 with production consolidated in Malaysia in 2009, where it can currently produce 100M units / year. (The FC1 was discontinued).

For the last few years, the company has consistently sold the products for ~$0.55 / unit and with EBITDA of roughly $0.15 / unit. (The apparent decline in rev / unit in 2015 reflects a change in the way a 5% discount was accounted for, previously in COGS now a reduction in sales).

In the early days, the company intended to sell the product directly to US consumers and in that effort supported local TV advertising where, as the story goes, a UN employee saw the ad and that opened the door for a more global and institutional business.

As a result of the global sales, the bulk of the business today is to developing-world ministries of health and / or institutions that provide public health reproductive services in the US and overseas sold via partnerships with local distributors in public tenders. US revenues account for just 5%-10% of revenues in any given year.

Given the nature of these tenders, sales and shipments are lumpy but the company has been profitable and cash flow positive, with the exception of this year, when cash flow has been negatively impacted - according to the company - by a large receivable to the Brazilian gov't ("120-day pmt terms"). I presume lack of focus on working capital contributed to the prior CEO's "resignation".

But competition is bringing structural changes to the market and this makes things different than they were 5 yrs ago. The global market has seen new entrants from China and India (I think Cupid is the most serious competitor) ...

http://goo.gl/wreSpO

... while in the US, a variety of new designs are pending via among other things, a Gates Foundation grant ...

http://goo.gl/xZUCWk

... this competitive threat lead then CEO Karen King, to announce last year, July 2014: "... a series of strategic initiatives that we believe will ultimately generate greater value for our shareholders and other stakeholders.

In order to position the Company to pursue a growth strategy, the Board of Directors has elected to suspend the payment of quarterly dividends at the present time and devote cash flows towards these strategic initiatives that have the potential to accelerate the Company's long-term growth in revenue and earnings."

http://femalehealth.com/press-release/?releaseid=2048082

The initiative had two buckets ...

1. US consumer growth. First, they hired Susan Ostrowski - a sr. exec in pharma and chem sales and marketing - tasked with growing the US consumer market, and that they would spend more money on sales and marketing to do so.

2. Product diversification. They also announced "we will evaluate investments in new products, technologies and/or businesses that complement the core competencies and strengths of the Company ... we believe the risks associated with a single product offering, along with the significant volatility in purchasing patterns for FC2, can be mitigated by the presence of a more diversified portfolio of business activities."

... and here we are a year after cancelling the dividend and announcing the "strategy" and they

haven't acquired anything,
are no further along in articulating what they're going to acquire
are no further along in growing sales in the US market,
have a legacy sr pharma exec running a social media / marketing strategy
and that marketing strategy is costing incremental +$1M / year
meaning to break even on it, they'll need to sell an incremental 1-2M units to US consumers

A comment I heard on the lack of progress towards an acquisition was the fact that they're too small to field a dedicated M&A team to make an acquisition, which of course begs the question on why they went down the path to begin with.

And there are still a few other issues to mention  ...

the company has been operating at a cash flow deficit for the first time in my modeled history (going back to 2008) ... working capital has expanded ... DSO's are over 100 days ... and profitability / unit has shrunk b/c of the marketing spend to sell the product to a US consumer who won't buy.

... my guess is that along with the failed strategic change, the inability to manage cash flow lead to the CEO's resignation.

So here we are today and it's an awful mess. What was a $10 stock two years ago is now trading for $1.40 even though 2015 sales and units should approximate 2013 levels.

But in the convoluted world of investing, the bad news is an opportunity. With the stock hammered, trading at ~4x EBITDA (3x assuming a "normal" DSO), the CEO that lead the strategy now out, the company's founder OB Parrish is back in control.

Given the destruction in his net worth over the last year, I'm anticipating a finer pencil on the "strategic plan" implemented last year - may be a reversal or a change or an adjustment - so that the company can be run with a better eye on operations, leading to a resumption in cash flow generation and possibly a dividend and buybacks, or at the very least a better articulated strategy going forward with honest intellectual engagement on what's possible and probable.

In addition to Parrish the largest non-institutional shareholders Dearholt and Wenninger - and including the board members who are advising on next steps - have LONG been involved with the company ...

http://goo.gl/Iu2QdW
http://goo.gl/K1yMlz

... I don't know what the future holds but the company will host its F3Q15 conf call on July 30th and more details should be discussed then. They say you can't cross the same river twice but I've recently initiated a small position ahead of the call anticipating positive changes.

-- END --

All rights reserved and copyrighted by Long Cast Advisers, LLC. This is not a solicitation for business or a recommendation to buy or sell securities. I own shares of FHCO.

Thursday, July 16, 2015

$ARIS: Thoughts on DCi acquisition and the essential nature of the catalog business ($MAMS, $TRAK, $CDK, $AZO, $AAP)

ARIS announced on July 14th the acquisition of Direct Communications, Incorporated (DCi) an online automotive parts catalog and while there was no financial info disclosed in the press release they also filed an 8K with add'l details indicating they are paying ...

$3.75M cash
$2M debt (promissary note to the owner's trust)
Plus issuing another 160k shares ~ $500k equity
= $6.25M for DCi, which has forward revenues of $4M = 1.6x revenue multiple

... why an online parts catalog like DCi is essential to dealers even in this day and age of "free information", why this deal makes perfect sense for ARIS, and how the company can bridge the deep valuation discount b/t itself and its peers are discussed below.

But first the numbers:

ARIS is a $54M mkt cap company with 17M shares out, $38M in sales through 9MOS of 2015 (y/e July 31), average annual EBITDA margins of 15%,  trading at ~11x EBITDA. The peer group trades in the mid-teens. Pulling that below comp multiple forward against the $8M EBITDA forecast gets to $4.70 / share or 50% upside. My thesis for owning the company is that the catalog business while undifferentiated on its own, can be an attractive entree and sticky engine for additional dealer related services like digital marketing, lead generation and point of sale use.

My ambition is that with a full suite of services, the company becomes a larger part of the network within transaction processing. The business generates cash and the valuation seems attractive. It is not without warts; They are overly dilutive of equity capital having grown from 7M to 17M shares outstanding since 2010, but I could see the attraction through their eyes of more liquidity and share volume (this isn't my most "patient investment") and while mgmt hasn't been the greatest capital allocators, there is cash generation and opportunity to improve incremental returns on capital.

Better disclosure around subscribers would also definitely improve visibility for investors.

FORECAST: Here's back of the envelope what I think the business looks like in 2015 and 2016 ...











... ARIS is on track do the 2015 revs and EBITDA numbers listed above.

For 2016 I'm assuming +$4M in acq revs as indicated in the press release + 10% organic growth. EBITDA margin expansion comes from this catalog business; when the company was primarily catalogs before the 50 Below acq they regularly did high teen / low 20% margins.

I've adjusted the share count for the 5/7/15 share offering + the new shares from this deal.

Net debt at end of last quarter was $10M. The share offering raised ~$5M. This deal cost $6M, getting us to $11M net debt PF for year end.

For 2016 I'm looking at lower net debt b/c of FCF. Here's a look at earnings and FCF history ...



... they have always generated cash. I think they can safely dial in $2M-$3M in FCF which leaves a lot leftover for owners, If management showed more discipline, they can do better. The business is a cash flow machine.

But as capital allocators - and this is no small "but" - it's impatient to sell stock low to buy other companies high and issue add'l shares to do that.

They could make up for it if they would SHOW information, so investors can see if they will GROW the business organically. What I mean to say is they should disclose more information about subscribers.

1, SHOW.  TRAK and CDK REPORT subscriber #'s. MAMS discloses it in the conf calls. ARIS buries a proxy for subscribers - avg rev / dealer - in their investor handout. The figure hasn't changed since 1Q15. The SHOW part is 100% within mgmt's control. Please give us subscriber numbers?

I think the limited visibility due to disclosure explains some of the multiple discount relative to the competition (according to Yahoo! key statistics MAMS trades at 22x trailing EBITDA).

2. GROW. Growth in rev per subscriber would provide evidence that the acquisitions of TCS and TASCO are in fact adding more services that are selling through existing channels.

To date, they appear to have done a good job growing rev / dealer but again they don't disclose enough information to be certain. We only see a static annual figure for # of dealers - most recently at 23,500 at end of 2014 - and based on that they've seem to grow ARPD 18% y/y through F3Q15. But this is a rough guesstimate. Competitors provide details. (and unfortunately grown share count faster than ARPD).

In short, mgmt and the board should please follow 3-steps, two of which are fully with it's control ...

STOP the share count dilution
regularly SHOW your historical and quarter end subscribers like your peers do
continue to patiently GROW subscribers organically and via acquisitions

... and this will yield above market returns to investors.

DCi AND WHY THE CATALOG BUSINESS IS ESSENTIAL AND SCALEABLE BUT UNDIFFERENTIATED: DCi is a parts catalog business in the automotive aftermarket sector and is right in CEO Roy Olivier's wheelhouse. He grew up in the catalog business, starting a company in his basement that was sold too soon, and later gobbled up by ProQuest and then SnapOn (I earlier wrote about the CEO's background in the parts catalog / library business http://goo.gl/2yKHlI)

Parts catalogs are funny things; you'd think they're irrelevant in this day and age of free information but access to them is essential for dealers that want to develop a web presence. Let's start with Advance Auto Parts ($AAP), one of the largest distributors of aftermarket auto parts ...

http://shop.advanceautoparts.com/home

... looks like any shopping website. But there's a back end system that enables the company to provide parts information, photos, id numbers, etc. As a large dealer they likely have their own catalog or library relationship with manufacturers but maybe they outsource? I don't know (I put a call into IR). When you dig more deeply into their corporate site, there's information on their vendor reference center for the electronic parts catalog ...

http://goo.gl/NS3QJJ

... on that page you'll see that the PIES reference manual offers 33 pgs of technical specifications for contributing to their parts library and the top link, the AAIA imaging best practices document references the "best practices" of the automotive aftermarket working committee. Of the 30 names on the working committee, one is from DCi and another from ARI Partsmart.

None of this is at all material to the acquisition, valuation or financials, but it's relevant to the context of the business and establishes that DCi and ARIS are "players" in this market.

But it's definitely a crowded market. A quick search online found a free service to source a variety of parts through Timken ...

http://www.showmetheparts.com/timken/

... which is actually powered by another company called Vertical Development Inc, which not only compares to what DCi does but the dude on the home page looks startlingly like ARIS' CEO ...

http://www.verticaldev.com/index.html

... there's one example of a competitor. There are many many others.

HOW DOES ARIS STAND OUT IN A COMPETITIVE FIELD? Consider all the dealer websites in the world and where these parts catalogs come into play. I think of them as small but essential back-end processes that - for small- to mid-sized dealers - are administrative choke points. 99.9% of the world will never really stop and think "wow, how'd those pictures get there and how do they connect to the actual inventory mgmt system?"

The good news about catalogs is it's scaleable, sticky and cash flow generating. The bad news is there's no lack of competition and as a standalone business it's really not that differentiated.

Here's where the imagination comes in.

The idea for ARIS is that with the bigger product suite of services - a point of sale system, inventory mgmt, marketing all via the company's core business + TCS + TASCO = there's a one stop shop for small- to mid-sized dealers.

And I'll take it a step further. Imagine if through the service ARI could create a customer community with information on what's selling and what's not and what's preferred, then there's an opportunity for a network effect, which is where a true SaaS company becomes a flywheel that throws off cash.

Now we're not talking about an 11x multiple company scratching for its next meal. If it never achieves that, I don't mind owning at 11x EBITDA a cash flow generating company growing 20% / year half organic half acquired IF THEY WOULD ONLY STOP THE SHARE DILUTIONS. That alone would be enough to reward patient investors.

-- END --

All rights reserved and copyrighted by Long Cast Advisers, LLC. This is not a solicitation for business or a recommendation to buy or sell securities. I own shares of ARIS.


Saturday, July 11, 2015

$STRL: $59M project win, CFO transition and a new chief estimator ($TPC, $PRIM)

One of the WORST aspects of investing in heavy civil contractors is the influence of weather on quarterly results and the risk of a major blow up on a large project. These negatives can be offset over the long term with a wide portfolio of projects and good management. Most investors in the industry know that the time to buy a good contractor is when they are distressed and there is a pathway to a recovery, as I believe is the case here with $STRL.

One of the GREAT aspects of investing in heavy civil contractors is the visibility into project wins and project progress, and this provides visibility into both earnings and cash flow and a critical way to verify if mgmt is upfront with investors.

On the aspect of visibility and specific to STRL, two large state departments of transportation - TX-DOT and CalTrans - comprised ~50% of the company's backlog at year end 2014. Knowing this, it is not difficult to track low bid results or awards for the two customers that contribute half of the company's backlog.

Texas, July low bids >> http://goo.gl/Aky345
CalTrans Awards to Myers & Sons (STRL has a 50% ownership stake) >> http://goo.gl/70WqkG (search "Myers" or leave blank and you can find every award to every contractor over the last few years)

As the Texas link shows, last week STRL was the low bid on contract # 07153202, a $59M award to widen 39 miles of road from 4 to 6 lanes in Navarro County, TX. The project is expected to take 779 days. It hasn't been awarded yet - it still requires the county commissioner to sign off - and so the company won't press release it, but high quality low bidders are typically awarded the contract.

Another note to point out on this low bid is that STRL's bid was only 4.5% below the next bidder; there is no "winner's curse" here. And a final note, with the contract number in hand, we can follow progress on the project over the next two years. This is visibility. 

To add some add'l color on TX-DOT ... using Google's "advanced search" tool and searching the domain where TX-DOT hosts the low bid figures, we can search "Sterling Delaware" and see all the low bids they did not win >> https://goo.gl/IIvJN2 (download the top file).

This information is useful to see where they are bidding, who won, by how much, and how close they were. B/c there is a huge aspect to game theory in large project construction bidding you can learn a lot from the bids based on their distribution: who is hungry to win (an outlier below all the others), what the bidding environment looks like (everyone bidding below the estimate) and if there are new entrants for bids on large projects (the same 10 names show up most of the time). It's quite a fascinating process in my opinion and it's the front line to billions of dollars in public construction spending every year. There is money to be made mining this data far beyond our little process here.

What we learn from this "advanced search" is that in July 2015, STRL bid on but did NOT win two other large projects; an $89M estimated project on the same road, won be Webber at 19% below the estimate (!!), and a $28M project in Bexar just barely won by Sundt.

Webber is a subsidiary of the Spanish contractor Ferrovial. On $TPC's last conference call here's what CEO Ron Tutor said about competition ... "We find the Europeans are bidding everything of consequence. Let me be shared upon [sic] and say I don't believe they are doing very well here, I believe they will continue to do poorly because they don't operate like we or our U.S. peers do. This is a competitively bid hard money market where you have to work for a fixed price. And the Spanish have been the most aggressive for all the wrong reasons but they will continue to pay the price for that aggressiveness. We on the other hand do not operate by reducing our margins. I tend to think of major civil jobs as like buses, you miss one or two buses, there is always a third one behind it." Great analogy.

Moving onto the CalTrans link, we see that Myers has been awarded a handful of small sub-$5M contracts in 2015. Not much to write about there.

So on this survey of just two major clients, there's roughly $70M in low bids or new awards in 2015. Not shabby, particularly in an environment where they are prioritizing margins over revenues.

But even outside of the large DOT programs, the company is focusing efforts to expand city work (Houston, Dallas and San Antonio), port work (Port of Houston and elsewhere, with expected benefits from the Panama Canal expansion), Joint Ventures (where they are a sub on a large team) and finally, surety work, where they replace a contractor that defaults on a large project and are paid by the surety to complete projects typically at a high margin and low risk.

A lot to learn watching the bids.

On the CFO front, the company put out a press release a week or two back about a CFO transition. Normally a CFO transition is a red flag but this as a hugely positive opportunity for a solid upgrade. The prior CFO had very limited experience in construction accounting - most of his experience had been in the materials side - so he wasn't strong on the ins-and-outs of POC (percentage of completion) accounting, which is used by construction companies.

Nor was he a master of the two critical components of construction company working capital, billings in excess of costs (ie deferred revenues) and costs in excess of billings (ie unbilled receivables). A construction company CFO needs to be well versed in these things. I am quite sure the next one will be and that will add value to executives and investors as well.

On the final aspect of this note, it appears that the company has just hired away from James Construction (a subsidiary of $PRIM) a Sr. Estimator to be their new Chief Estimator >> https://goo.gl/bbV3v8. Good ones are hard to find. Am still trying to determine if this guy has his chops but his background at $GVA, $TPC and elsewhere speaks to a successful history in the business.

At end of 1Q15 STRL had ~$4.50 in asset value (PPE + working capital - net debt) vs a market cap at last check of $3.95. With positive changes happening at the company, I believe I'm scaling the learning curve on portfolio mgmt - not the CAPM one they teach in business school, nor the undifferentiated diversified strategy of buying an ETF with 1,400 companies in it - but the one where you put your money behind your best ideas.

-- END --

All rights reserved and copyrighted by Long Cast Advisers, LLC. This is not a solicitation for business or a recommendation to buy or sell securities. I own shares of STRL.

Friday, July 10, 2015

$ARIS: Wynnfield's selling responsible for 44% of total vol over last three mos.

As of May 2015, Wynnfield owned 1.25M shares ... http://goo.gl/CdbLJu
From end of April through June, they sold 420k shares ... http://goo.gl/wUSC7p
Over this period, they were responsible for 44% of ARIS total volume, which would be a big overhang on the stock ...

Date Wynn Tot Vol % of tot
4/28/2015 48,049 61,500 78%
4/29/2015 112,515 120,800 93%
5/7/2015 30,680 45,400 68%
5/8/2015 45,381 56,900 80%
5/11/2015 6,600 12,700 52%
5/12/2015 4,300 32,700 13%
5/13/2015 37,366 49,800 75%
5/14/2015 8,511 68,200 12%
5/15/2015 14,874 68,100 22%
5/18/2015 155 16,900 1%
5/21/2015 827 20600 4%
5/27/2015 711 11700 6%
5/28/2015 2,092 20,500 10%
5/29/2015 14,704 18,500 79%
6/1/2015 2,399 25,700 9%
6/2/2015 1,215 5,900 21%
6/5/2015 4,415 34,900 13%
6/8/2015 1,297 7,300 18%
6/9/2015 6,209 8,700 71%
6/10/2015 8,031 17,800 45%
6/11/2015 10,460 66,200 16%
6/12/2015 44,700 73,600 61%
6/15/2015 1183 19000 6%
6/16/2015 9,769 27,600 35%
6/18/2015 980 9200 11%
6/19/2015 516 5300 10%
6/22/2015 148 48300 0%
6/24/2015 293 5600 5%
SUM 418,380 959,400 44%

... they still own ~700,000 shares, which they may continue to sell.

What do they know that I don't? It's an important question given that one of their analysts is a former director at ARI and they also own shares in MAMS, a competitor to ARIS. But I've met Nelson Obus who runs Wynnfield - and while are both diehard Eagles fans - this might just be a simply situation where we disagree on a stock. For sure, the stock he's been accumulating based on his filings - GLYE - is one I have looked and see no interest in owning.

So even as ARIS floats around these levels and with overhang from selling there are questions and concerns for mgmt that still remain to answered ...
what is avg ticket / customer and how that's changing with the new products and services?
what's the avg rev / salesperson and how's that changing, etc.?
and what do they plan to do with the cash they raised selling shares below market value? that share sale should be extremely disappointing to all investors.