Wednesday, August 29, 2012

Stocks DD Cites: Ackman's continued pitch on JC Penney worth listening


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http://www.businessinsider.com/bill-ackman-jcpenney-2012-8

QUOTE
The JCP bears’ principal argument rests on additional dramatic declines in sales contributing to balance sheet deterioration at the company. In fact, JCP’s balance sheet is equipped to handle even a large decline in sales for several reasons. Unlike most other retailers for which rent is an enormous fixed cost, JCP’s real estate cost is very low because it owns 50% of its stores and leases the balance at low single-digit rents. The company also benefits from long-term, low-cost debt with limited expirations over the next several years, more than $800 million of cash at the last quarterly report, $1.5 billion of undrawn revolver capacity, and more than $600 million of non-core assets that it can sell. 


Retailing is a cash-flow seasonal business. Certain bearish investors have annualized the first quarter’s negative cash flow in modeling the company’s future cash flows. As with other retailers, most of JCP’s cash generation will occur in the fourth quarter of the year. At its last analyst presentation, the company estimated that it will generate approximately one billion of operating cash flow in 2012 which will be sufficient to fund its $800 million in capital expenditures for new shop development and other needs. Even if the company’s estimates prove optimistic, JCP’s significant liquidity and financial resources should enable it to weather all but the most catastrophic storms.

The company has executed successfully on $900 million of annual cost savings that will drop to the bottom line beginning over the next several quarters. Starting next year, the company’s quarterly sales will be compared with the first quarter’s 18.9% decline, and will benefit by the launch of several new branded shops each month and further improvements to the pricing message and strategy. In light of the large reduction in operating costs, even a modest increase in sales in 2013 should generate large cash flows and profits for shareholders. We look forward to the continued transformation.
       END QUOTE
      Also, what was most interesting was the 25% sales increase reported in the newly modeled Levis store.

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Saturday, August 11, 2012

Dr. Reddy's - secular growth story


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June 2012 IR Presentation -> Link


1. North America Generics - Increased number of launches for the next 2-3 years. Limited competition products growing (Revenue at $200m)
2. Russia - Growing very strong. Increasing OTC and new biosimilar opportunity
3. GSK partnership - growth in other emerging markets
4. Longer term - Merck-Sereno partnership for biosimilars in regulated markets


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Tuesday, August 7, 2012

Another great quarter at TARO


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I love TARO's low competition business. Sales increased 47% compared to last year. EBIDTA is $79.0 million.
So this year's EBIDTA will be around $320 million.  Yet TARO trades at EV/Est EBIDTA of ~5.

The Company recently received two approvals from the U.S. Food and Drug Administration (“FDA”) for its Abbreviated New Drug Applications (“ANDAs”) for Clobetasol Propionate Lotion, 0.05% and Escitalopram Oxalate Oral Solution, 5mg (base)/5mL. It one ANDA and one New Drug Application (“NDA”) with the FDA. With this, ANDAs representing fifteen products as well as two NDAs await FDA approval

Link

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Monday, August 6, 2012

Knight update- Big dilution


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400m capital infusion that gives new investors 70% of the company. - http://finance.yahoo.com/news/knight-capital-says-gets-400-113548603.html
So roughly, if this company continues(gets all of its prior clients on board) to make 200m pre-tax, then only 60m is available earnings to existing holders or the current shares on price/ebidta of 5(this was the trading multiple before tuesday) would be >$3. But this ignores there are no other fines, lawsuit costs, which may require further capital infusion and dilution
NYSE temporarily removes Knight as MM for 680 secs -> http://finance.yahoo.com/news/nyse-temporarily-removes-knight-capital-120750656.html

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Saturday, August 4, 2012

Knight equity is an interesting market situation


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While the investment is very risky, consider the following points:
1. They have identified the root cause that caused the one-time loss. CEO said "we put in a new bit of software the night before because we were getting ready to trade the NYSE's [Retail Liquidity] program," and that a "major bug" in the software "sent into the market a ton of orders, all erroneous"
2. They have identified $loss
3. They have convinced some of their clients  like TD ameritrade to come back. It appears this happened late friday. So as of friday, their market making volume was 2% vs their normal 20% in NYSE stocks. Of course not all clients are back.
4. Consider the fact that they have 17 years of almost glitch-free support to their clients. That IMO makes a strong case of goodwill for their remaining clients to get back. CEO appears to be a great crisis manager
5. $10 was market cap before err, $4.9(one time-time loss) . +v pre-tax earnings of >$2 per year
    Cash = $4. Net of one-time loss , Tangible book value = $7 
   One would think $2 capital injection should suffice to bring confidence
6. The future key here is what testing conditions/controls will they put that will 100% eliminate glitch causing an error of such magnitude. This is of course to bring confidence in all clients/counter-parties to come back and use Knight. I think they will likely assure all clients that until such a thing is done, no new s/w will be added to the current environment.
7. Will they cure this situation without significant hit to equity ?
     Likely IMHO. Commonsense would say
     1. Knight would  be prepared for crisis. Actions of CEO hiring Goldman and getting this in control in 2 days. Look in this video how cool this ceo is(or wants to portray) in the middle of this http://www.youtube.com/watch?v=sV_Eh9khrJ8
     2. So their crisis management would be prepared how to get capital
     3 Knight should understand capital markets and auctions all too well . They are in the business of market-making. While time is exactly not on their side(esp for confidence building), they should know how to get buyers in a table and start competitive bidding for getting capital.
     4. Co-founder says no white knight needed - http://www.cnbc.com/id/48489033 
8. KCG traded 121m shares or ~1.3 times it's outstanding shares and went up 56% on friday.
9. Major Direct Holders (Forms 3 & 4)
HolderSharesReported
JOYCE THOMAS M (CEO)467,788Jan 30, 2012
SOHOS GEORGE541,281Jan 30, 2012
SADOFF STEVEN J372,895Jan 30, 2012
BISGAY STEVEN139,177Jan 30, 2012
MAZZELLA JOSEPH102,872Jan 30, 2012
Co-founder came on cnbc and said he is buying shares and has significant 6-figure in number of shares. He also appreciated the current ceo's crisis management.

10. Converts traded up from 40 cents to 70 cents. Apparently there is language in the converts that they are protected and would be paid at par value in case of an acquisition.

Key Risks:
1. If they can't convince all their clients to come back (low probability considering their 17 year track record and considering they have identified the root cause)
2. Future liabilities like regulatory fines, costs for additional controls, if any, unknown
3. The future risk is what testing conditions and controls will they put that will 100% eliminate glitch causing an error of such $ magnitude. If they cannot do this, then they are always open to the risk of 2 hours of error eroding their business completely.

Knights June IR presentation- http://www.scribd.com/doc/102024549/Knight
Links:
Link
http://www.thestreet.com/story/11650083/1/some-value-left-in-knight-capital-analyst.html
http://in.reuters.com/article/2012/08/02/investing-knight-capital-idINL2E8J25KJ20120802
http://www.bloomberg.com/news/2012-08-03/knight-survives-another-day-with-short-term-financing.html?cmpid=yhoo

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