ESWW: Financial information to follow up my prior post

I previously wrote about Environmental Services Worldwide. To summarize the attributes that make it appropriate for a patient investor ... 

very small share count, just 125,000 shares outstanding 

very small market cap, less than $10M depending on bid / ask 

strong balance sheet, about 1/3rd of the market cap is net cash 

low valuation, less 1x EV / EBITDA

growing sales / EBITDA / margins 

a real industrial business, manufacturing diesel particulate filters with verification from California Air Resources Board 

shareholders and board dominated by sophisticated institutional investors from Apollo Group (the PE) and Apollo Investment Management (the BDC)

I don't want to overlook the real risk of dilution here; the company's outstanding debt plus recent subscription rights plan can convert to an additional 153,000 shares of stock valued at up to $80 / share when it comes due in 2018. This would essentially double the share count. But even assuming full dilution, and the resulting doubling of valuation, it still remains attractive. Furthermore, since the conversion price maxes out at $80 / share, buying below that aligns shareholders with debtholders interests. 

Here are the company's quarterly financials, courtesy of FactSet: 

my urge to vomit when i watch CNBC

listen to any radio station and every 10-15 minutes you'll hear "the market/S&P/Dow/futures are up/down/flat today." watch TV and the so called '"business news" will report the same. CNBC and Bloomberg were created to track every moment of the market day.

But reporting every 15 minutes on the Dow is as useful for understanding the economy as reporting net deaths and births every 15 minutes is useful for its picture of our population. it's just a lot of noise.

how is it that the direction of an arbitrary and curated market index like the dow or S&P has become such an overwhelming part of our daily conversation?

how is it that this has all become so pervasive yet remains so meaningless? i understand the media's need for soundbites, but so many datapoints can be packaged that are more relevant indicators to the economy ...

- weekly gasoline supplied
- monthly vehicle miles traveled
- average weekly price per click
- weekly rail traffic
- volume or breadth of the market
- number or percentage of stocks hitting new 52-week highs / lows

... the list can be quite creative and endless.

from the media's perspective "the market" is a great way to engage our fear or elation, which sells ads, but there's a harm with equating the market with the economy. people actually mistake one with the other.

when daily changes in the dow or S&P are equated with the economy people can never appreciate the important and occasionally complex issues that impact their jobs, their companies and their household budgets.

as a patient investor, my concern with the market is only relevant for the opportunities it creates to acquire portions of business at a discount to their underlying values. but it should worry everyone with an interest in the long term health of the country that we perpetuate ignorance every 15 minutes of the day.

ESWW: A $7M Mkt Co Trading at 1x EBITDA Substantially Growing Revs and EBITDA

On a dreary overcast day in NY, there's nothing like a new stock idea to get me excited. Found this company ...

http://finance.yahoo.com/q?s=esww

... while running a screen for small cap companies growing revenues and margins and with net cash representing a significant portion of MktCap.

Environmental Solutions Worldwide (ticker ESWW) makes emissions control retrofits for medium and heavy duty diesel (MHDD) trucks, both on and off-road.

The overall market for on/off road trucks benefits from increased pollution control regulations by state and federal EPA. The trend towards increased pollution control regulations are well documented here ...

http://www.arb.ca.gov/msprog/mailouts/msc1325/msc1325.pdf
http://www.dieselnet.com/news/2013/08meca.php
http://www.dieselnet.com/standards/us/ld_t3.php

The company has a market cap of roughly $7M.
In 2013 it did $17.5M in sales and was breakeven.
In 1Q14 it did $7M in sales and $1.9M in EBITDA.

It trades at 0.3x annual sales, 1x EBITDA and has a pedigreed board of directors including what appears to be two of Leon Black's kids. Unless he's Cronos-like who ate his children, why would he saddle his kids with a crappy company?

The Apollo connection isn't just in the board of directors but how the company operates. Much of the growth in sales corresponds to its "stalking horse" acquisition of Cleaire out of bankruptcy auction in 2013 for $1.4M.

There are only 125,000 shares outstanding (yes, thousand) and the company is authorized to issue up to 250M, which simply reflects the recent 1:2,000 reverse stock split and re-listing without terminating shares.

Also, the bulk of the $2.5M in l/t debt is in the form of convertible notes that would be dilutive. But the opportunities I see in buying a profitable cash flow positive company in a regulated growth market offsets my fears of dilution to shareholders, especially since it seems at least that everyone's goals are aligned towards long term growth and profitability.

I haven't nearly done as much work on this as a normally do and I will write more on this later, but the world cup is starting and I need to prepare dinner for my staving kids. Such are the travails of the outofworkanalyst.

Disclosure: I own 200 shares that I acquired today.

URS and the Phillies: Lessons in Delusion

I'm thinking about the difference between hope and delusion while while reading an article from the Phillies spring training camp. 

The GM Ruben Amarao Jr who signed Ryan Howard to a five year $125M contract in 2010 believes Howard - 34, injured and under performing since - is ready to prove his worth. In the last TWO seasons, Howard has played in only 151 games, hitting .244, with 25 home runs and 99 RBIs Howard, incidentally, agrees that he's turned the corner. 

I love spring training and since it starts in winter, I'm sure its name refers to the eternal springing of hope that an injured veteran or 37 year old pitcher can "return to form". 

LIke most investors, I love hope but I hate delusional thinking. I especially hate that Amaro who has laden the Phillies with awful contracts still has a job giving out awful contracts. This is just sports though. I have an emotional attachment to my childhood team but nothing more at stake. 

In the business world however, the difference b/t hope and delusion can be expensive. Every deal requires a bit of hope but a company that consistently overpays for acquisitions often at market peaks and with little reflection on outcomes suffers from delusional thinking. Price, timing and intellectual honesty separates the two. 

And that gets me thinking about URS Corp. 

URS is an engineering & construction services company, one of about 8 large US companies that offers diversified global industrial and E&C services, similar to but smaller than FLR, KBR and JEC. It typically trades at a discount to its peer group, due to its limited energy exposure, over exposure to federal funded projects and partially to its penchant for destructive acquisitions. 

I was once a sell-side analyst covering the E&C industry and I attended an analyst meeting at URS' offices in the TransAmerica building to discuss its "transformative acquisition" of Flint Energy Svcs, a $1.3B deal meant to redress both its limited energy exposure and penchant for destructive acquisitions. At the time of the deal, URS had a $3.1B market cap and $450M in net debt. 

The meeting was hosted by its brilliant, gracious but quixotic CEO of the last 25-years, Martin Koffel, who in my memory made more "transformative acquisitions" in the E&C industry than any other company. 

Toward the end of the meeting, Koffel solicted questions; "anything you've ever wanted to ask". So I asked what he had learned from the mistakes of the 2007 acquisition of Washington Group. That "transformative acquisition" for $3.1B in cash and stock moved URS into the construction services and nuclear power markets. At the time of the deal, URS had a $3B market cap company with little debt. 

Koffel wanted to know what mistakes I referred to. I rattled off a few about its destruction of shareholder value. He pointed to the opportunities for growth enabled by the acquisition. (Imagine - he'd asked - where the company would be if they hadn't made the acquisition.) 

I'd made a point that these acquisitions were not accretive to shareholders. The most respected analyst in the space (the "II ranked" one) and an exceptionally nice person as well, thanked me for asking tough questions. It made them all look better, he said, though added that I clearly did not belong on the sell side. 

And now today, I'm no longer on the sell side, investing on my own, and URS has a $3.25B market cap (+1% CAGR from the pre WGI deal) and $1.7B in net debt according to Yahoo!. The stock materially sold off last week after pre-announcing earnings citing execution issues in the Flint Energy Services business. Flint's old CEO is fired and the company is reorganizing the division. The stock has vastly underperformed the S&P over the last 52 weeks, by 20% pts. 

That's a pretty severe cost of delusion. 

I'm sure someone will step in and buy the stock on the 12% free cash flow yield, but it's been cheaper. As a long-term investor I look for great management and while the company is a free cash flow generator, as long as its squandered on delusion it has no value for me. 

My Neighbor's House is for Sale

My neighbor's house is for sale. They are asking $1.425M for it ...

... I'm told they bought it in 1998 for $98,000. That's an implied 19.4% CAGR over the last 15 years. My neighbor, two Polish sisters, have handily outperformed the stock market and have roughly matched Warren Buffett over that time period. Pretty impressive though I don't expect anyone will write any books about them.

If that current rate of growth continues, in 2028, the house will be "worth" $20M.

It's almost inconceivable to imagine this: What would have to happen over the next 15-years for the value of the house to rise that much? Concurrently, if asked that question in 1998, what would the answer have been?

The rapid growth in real estate prices around NYC and - generally speaking - in many major global cities over the last 20 years has several ramifications. The obvious wealth effect benefits the few who were lucky enough to buy and retain real estate before the bubble.

As far as negative consequences, I view it as part of the larger recurring transfer of wealth in this country from the young to the old. Concurrent with other costs that absorb incremental income for young people (healthcare, older people's pension liability and student loan debt), I'm struck by the imbalance. It's a pet peeve of mine, this generational wealth transfer from young to old. It's the inverse of historical norms and incongruent with a country's long term growth and sustainability.

I don't have a crystal ball on future real estate prices and everyone knows trees don't grow to the sky, but history is rife with sustained disbelief, so the current situation can persist until it doesn't anymore. I suspect that eventually as recent progress in education and crime slips, so will demographics and pricing.

Regardless, from a non-financial perspective, I hope we get a good neighbor, so we can cut the fence between our yards and make a big space for the kids to run around. That would make a rare and unusual property. I like rare and unusual things most of all, as they tend to grow in value over time.

Amaro Leading the Phillies as Fast Food Franchise

Welcome back Marlon!

An article by David Murphy in today's Philadelphia Daily News about the Phillies GM Reuben Amaro considers a range of errors in decision making related to the $16M 2-yr contract to 37 year old Marlon Byrd.

He observes that the signing reflects a misuse of data by the GM for taking opinions from his scouts and acting on them without weighing, considering, waiting, questioning, analyzing or assessing. An error that pertains to investors and other in the world of information analysis.

Taking input without assessing it is ideal in the fast food world (do you want fries with that?), but in a decision making industry its a recipe for another losing season.    

The writer says context and opportunity cost analysis are lacking in the decision making process. "[The GM is] responsible for placing that evidence [from the scouts] into the context of all of the other evidence available to a major league front office in the year 2013".

Regarding the Byrd signing he says, the problem "lies not in the justifiability of the signing, but in the method of justification that Amaro says he employed.

Quoting Amaro: "We talked to our scouts about how his swing path and approach changed. He's worked on it. I have to trust my scouts on it." 

The writer's point is that in today's world, managers take in information and then weigh, assess and decide, not simply do what the scouts recommend. It's like a portfolio manager's actual job. 

Most everyone agrees $16M seems like a lot of money for an aging and deteriorating ball player, that the Phillies recent history is rife with examples of large contracts to old free agents and they are not sufficiently developing their farm system. In short, that their leadership is making lousy choices. 

Why - and how it's become this way - reflects a Phillies management team in disarray since Pat Gillick left, but who himself inherited the legacy of Ed Wade, in whose tenure from '98-'05 Pat Burrell (1998), Chase Utley (2000) and Ryan Howard (2001) were drafted and a new stadium built. The World Series was won around that core. Under Amaro, a loyal serf to the multi-partnered ownership family, the choices have been abysmal.  

This will continue, the writer says - and I paraphrase here - until the GM makes better decisions, interprets and utilizes probabilities at least as much as he interprets a player's ability. 

"Everyone sees the same numbers, the same games, the same video," the author writes. 

In that regard, Amaro is a lot like every other investor. He just happens to be a really bad one. 

Full article here: http://www.philly.com/philly/sports/phillies/20131115_Phillies_following_wrong_swing_path.html

... it's the liberty bell!

The growth of US economy is virtually guaranteed for the initial years of our oil renaissance. But let's not confuse good timing and the fortune of real estate (above and below ground) with our best and most enduring asset. GDP growth is cyclical but the Liberty Bell endures.

Putting aside for a moment its unfortunate location in Philadelphia (where fans would boo a strong currency simply b/c it could beat the Eagles), the Liberty Bell - and the freedom it represents - is this country's truly unique assets.

The mall, Hollywood, and Wall Street have all been replicated elsewhere in the world but FREEDOM is the only idea of America that hasn't been commoditized and copied. That is special. It's our competitive advantage. It's why people want to come here.

So why is Congress trampling our liberty and making what is most attractive - the freedom to come and work here - into a liability? Someone should remind them we must lead with your strengths and promote, not suppress, our great experiment and our greatest assets.