|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||46||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
|Subject||It appears cash flow is less t|
|Entry||06/09/2003 10:45 AM|
|Thanks for posting this. Wish you had told us about it two years ago before it went from $2 to $10. |
It appears to me that this is not trading for the free cash flow multiple you outlined in the post.
For the trailing 4 quarters,
It looks to me like 7.4 million
and capex looks like .9 million
so free cash was 6.5 million
On a 45 million dollar market cap that is a 6.9 free cash flow multiple
If we subtract 11 million in net cash on the balance sheet from the 45 million dollar market cap we get 34 million dollar enterprise value
So Enterprise value / Free cash is 5.2 times.
Please help me understand how you came up with your 4.85 times free cash number for this
|Subject||Re: cash flow|
|Entry||06/09/2003 11:01 AM|
|Charlie, I think this is a fantastic idea. |
Ben, in regard to cash flow figures, if you look back over the past three years, you'll get an average FCF (CFF0 - PPE) = $9.8MM.
If you take an EV of about $37MM now, I get a EV/FCF of 3.78.
If the top line continues to grow a bit and they keep wacking away at the expense side, cash flow will continue to grow at a healthy rate. This is a very good story.
Charlie, I also really liked your QUIPS write-up and your legal analysis was 100% correct...it is a shame that big money sometimes tramples over the little money in this world, leaving the little guy with no leverage whatsoever.
|Subject||Comments on insider sales?|
|Entry||06/09/2003 11:23 AM|
|Wondering if you have any thoughts on recent insider sales by Shiel and Paletz. I realize that the sales aren't large in relation to their overall holdings, but find it interesting that they are sellers for the first time in nearly a year. It seems as if their sales have historically been good short term indicators of near-term stock price performance.|
|Subject||ben111 Free cash flow|
|Entry||06/09/2003 12:48 PM|
|I've been measuring free cash flow over calendar year periods so that may produce our difference in calculations.|
For the last 3 years, I have:
Year OCF - Capex = FCF
2002 9.2 - 0.9 = 8.3
2001 13.0 - 0.5 = 12.5
2000 10.2 - 1.5 = 8.7
I chose to use the 2002 $8.3 mil for free cash flow in my calculation. For enterprise value, I get $40.3 mil ($46.3 mil market cap plus $4.9 mil for options minus $10.9 mil of cash at 3/31/03). This gives me a EV/FCF multiple of 4.85x.
I suppose it doesn't matter much whether multiple is 4.85x or 5.2x. It's pretty cheap either way. There are few companies with free cash flow yields of around 20%.
>Thanks for posting this. Wish you had told us about it two years ago before it went from $2 to $10.
I'll post it earlier next time :) But, hey, I wish someone would have told me about Berkshire Hathaway decades ago.
I try not to look at the historical charts too much. They should be irrelevant to investment decisions today. I've found that staring at the charts sometimes leads to irrational (and sometimes harmful) buy/sell decisions.
|Entry||06/09/2003 01:12 PM|
|Thank you for your comments on SGDE and the QUIPs.|
Regarding the QUIPs, it does seem that justice has failed the little guy this time. I'm saving my comments until after the bankruptcy case and hope to post a follow up. My main regret is that I should have posted the MCI Bonds idea intead of the QUIPs and I feel terrible that VICers may have lost money on the trade. Hopefully VICers will make some money on SGDE or the 3 other ideas I have posted on VIC.
|Subject||zzz007 Insider sales|
|Entry||06/09/2003 01:23 PM|
|I don't typically look at insider sales because it's as critical to me as the quality of the business and other factors. It is an interesting fact that you point out, though. I believe Paletz is retired and draws no salary from the company (the other co-founder is still an employee) so he may be selling shares to provide for some retirement expenses. |
Shiel had plans to retire this year from the board of directors. I suspect that his selling is related to his retirement as well.
|Subject||Charlie, It looks as though|
|Entry||06/09/2003 03:12 PM|
It looks as though a significant portion of FCF generation over the last couple of years has been accomplished through working capital reductions and a positive D&A - CapEx spread. When do you think their NWC becomes optimal and starts to approcximate net income? Is it this year? Seems likely as their NWC ex-cash looks close to zero.
Also, do you have any sense from the company as to what the eventual split of internet vs. catalog sales may be?
|Entry||06/10/2003 09:23 AM|
I am trying rationalize the 10% share repurchase when this is trading at 2.3X book value. That seems like an expensive use of cash. Given the new tax laws, declaring a dividend might be a more attractive use of that cash. Any idea of whether management would consider a dividend?
|Subject||Am I being resonable?|
|Entry||06/10/2003 10:32 AM|
|Assuming $.90/share in '03, 10% eps growth for 5 years, and a terminal multiple of 11.5 x eps. Discount rate of 13%....|
Then the operations are worth about $13.31, the cash another $2.xx/share or so, the whole monster $15.50...
As you pointed out CF is far exceeding eps. How long can that continue? Is this an amazon.com? (which is eps negative but all is over stocked with ppe, so FCF is far sweeter than earnings and will stay that way for some time?)
Another poster asked if it was wise to repurchase shares at $10. If you think this one is cheap, then you should be pro stock buyback. If my $16 is anywhere near right (again i only spent all of 5 minutes on this model), the repurchases are about a 1.66 CVA, discounted at 13% (my estimate of cost of equity capital). I use CVA = $13/8; where $13 is the 13% discounted value of the eps stream, and 8 is the current price the market places on the eps stream. Or in undiscounted terms, its an IRR of 29%!
For this thing to be fairly priced it must either:
Grow eps at 10% for 5 years (then an 11.5x eps term mult) and be discounted at 29%.
Or never growth eps after $.90/share for 5 years, have a 10x terminal multiple and be discounted at 13%.
Looks like the current shareprice doesn't price in any growth, and that the current cashflow or eps justifies the current shareprice (my definition of a solvent deal). The growth would just be gravy.
|Subject||Net working capital|
|Entry||06/10/2003 10:40 AM|
|Yes, free cash flow has benefitted from working capital reductions and a positive D&A - Capex spread.|
I believe much of the working capital reduction is due to a permanent improvement in the underlying business rather than a temporary fluctuation in the WC. For example, deferred revenue has been increasing because of the Buyer's Club program which began in earnest in Fall 2000. The subscription payments received by the company are not recognized in the income statement until members buy items and utilize the member discount. If members don't utilize it then the excess is not recognized until the end of the subscription period. I believe the income statement plus the change in the deferred revenues better approximates the current earnings power for this company; GAAP income stmt currently understates it.
The company has also been moving inventory levels downward. Part of this is a one-time benefit from the elevated inventory levels in 1999 when management pursued a "strategic initiative" to expand SKUs and increase categories into better margin products. But the other reason inventory levels are falling is that inventory turns are increasing because of the new web channel of sales. The amount of time between the purchase of a product by the company to the time the product is listed for sale is shorter for the web than for a catalog. There's no time needed for printing up the catalog and mailing it and then waiting for the customer to mail back their order.
I don't know when these improvements will stop but I'm not sure I would assume that a zero net working capital level means improvements are over. While this company is no Amazon (thankfully), it's useful to look at that pure web retailer's economics to get a sense for the potential WC possibilities. AMZN has a negative NWC level of $750 mil so it's possible SGDE's WC could be very negative. Not only that, but the deficit seems to increase as sales increase because payments come in faster than payments to suppliers.
I think the D&A / capex discrepancy can be sustained for a while longer. Up until the launch of the web site in 98/99 the company had been investing in its web site, computer servers and warehouse enhancements. If these investments don't need to be repeated then the current capex level is a reasonable approximation of maintenance levels.
|Subject||david101 repurchase versus div|
|Entry||06/10/2003 10:55 AM|
|I hadn't thought to ask management about a dividend. You raise an interesting topic, though, about the relative attractiveness of the share repurchase versus the dividend. |
I had been happy that management was returning cash to shareholders via a buyback. Since I believe the shares are underpriced relative to the PV of the future FCF, a dollar of repurchase would generate more than a dollar dividended out. And as long as we're all long term holders then isn't the marginal tax rate the same regardless of whether the dollar gained is in dividend form or capital gains form?
I may be missing something here because I think you suggested in your question it may be more efficient to do a dividend. Can you elaborate? Thanks.
|Entry||06/10/2003 11:11 AM|
|I didn't go through the calculations you did but I share the same general thought process on this one. I assume the long term growth rate of FCF is zero (for most companies, this is not necessarily a conservative assumption) and so I'm typically looking for the free cash flow yield to justify the necessary return. Any growth I get on top of that is just gravy. Now and then I find one where I have some confidence that the long term FCF growth is greater than zero so I compare the FCF yield plus growth to my hurdle rate. Whatever the assumption for g, though, I think the returns in SGDE should be more than adequate.|
|Entry||06/10/2003 01:18 PM|
I would not say that dividends are any more efficient, but they are more attractive. Let's look at the possibilities. The company has committed to buying back 10% of their stock, which is about 476,000 shares. At $10.32/share, that's $4.9 million that they are spending on buybacks. Or they could use that same money and declare a special dividend of $1. Or they could institute regular dividends of $0.50 per share per year, for a 4.8% yield, which would represent about 55% of earnings. Given the low investment yields in today's market place, a 4.8% dividend yield that has the potential to grow will look very attractive to the equity income crowd.
It is pretty easy to understand when a company buys back its stock when its trading at a significant discount to book value. I can almost rationalize your argument that buy backs below your intrinsic value are okay, but your value is really dependent upon steady cash flow. That's not necessarily bad, just subject to more flucuations, and hence more risk.
Consider for a moment CI. They spent something like $4-5 billion on buybacks in the last 5 years and the purchases were all made well above book value. When they ran into problems last year, the stock got crushed and obliterated any benefit from the buybacks. I am not saying that will happen to SGDE, but it does highlight the risk. The benefits of buy backs above book are dependent upon a steady earnings stream.
That said, I really do like this idea. Thanks.
|Entry||06/17/2003 09:53 PM|
|pardon my ignorance, but some basic questions?|
- you at all concerned about the option grants, 250k the last 2 years on a 10m share base? Seems more than a little excessive on the face of it
- what happened in 2000? Start-up costs? what is that severance committments they talk about? equity placement?
- since book value is essentially inventory, what assurance do we have that the inventory is worth what they say it is worth?
- if this company has produced this much free cash flow, why do they only have 20m in book value at this point?
- could you speak to the proxy? Esp. trends over the past few years? The CEO's latest pay - 219k base, 394k bonus, 50,000 options looks pretty fat for a company this size
- what is your estimate, guess as to the long-term growth prospects from here?
Thanks for posting this idea...
|Entry||06/20/2003 02:13 PM|
|250k on a 5m share base, I mean...|
|Entry||06/21/2003 11:39 AM|
|I have to agree with Paul118; the options grants are pretty hefty for a company like this. There are 2.5mm options out (including the warrants), or roughly 50% of primary shares. Average strike include the warrants is $7/shr. So, dilution is accelerating rapidly as the stock climbs here.|
|Entry||06/21/2003 12:48 PM|
|Sorry, my last post was way off the mark. 1.15mm options + warrants @ $5.35/shr average; not nearly as bad. Punched in the wrong number on the warrants when I was calculating the average.|
|Entry||06/27/2003 04:48 PM|
|I'm never a fan of options grants. The only semi-comforting thing I can say is that in 2000 it was only 50k.|
In 2000, earnings were hurt by the closure of a retail store, and an equity placement that never materialized. They had also been expanding the warehouse and building out the internet fulfilment capability. Some of these latter items were capitalized in 99 but didn't fully start hitting the income statement until 2000.
I believe the inventory is fairly clean. We're not dealing with a serial one-time expenser in SGDE. If you look through the last 9 or 10 years' worth of financial results, you'll see there aren't any inventory writedowns or extraordinary adjustment items. Also, inventory has actually shrunk from $37,403 at 12/31/98 to $20,593 at 12/31/02. So the company has been able to liquidate the inventory at carrying value (more, actually) over the last 4 years. Inventory should be in much better shape now than it has been in the past.
Shareholders' equity was $3.3 mil in 1994 so it has grown to $20 mil last year. To be honest, though, I don't focus much on book value. It's inversely proportional to the attractiveness of the business in my view.
The $394k bonus was pretty big in 2002. I'm hoping all the VICers on this board will call and scold the ceo for that :) In 2000, though, note that the top 3 guys didn't get any bonuses. My impression is that they will not reward if the results don't warrant it.
I haven't been trying to estimate the long-term growth prospects for the business. This stock is more of a play on the conversion of the existing business over to a more efficient model that requires fewer expenditures on catalogs. I think even if the overall business does not grow much, you can have a decent return solely from this conversion.
|Subject||thanks for your response|
|Entry||06/28/2003 10:30 PM|
|You said, "To be honest, though, I don't focus much on book value. It's inversely proportional to the attractiveness of the business in my view."|
Fwiw, I find myself paying attention to book value growth a lot more than I used to, if only to put in even greater perspective the bonehead capital allocation moves by management teams over the years. Sure, you can fudge any number it seems these days, but at least cash still seems to be real enough. And it can be a quick and dirty way to look at an unknown company's progress over a longer period of time. Simplistic, but I've found it useful...
|Subject||The Sportsman's Guide Updates|
|Entry||07/10/2003 06:12 PM|
|The company issued a press release stating that 2Q sales and earnings will be higher than estimates.|
Gregory R. Binkley, President and Chief Executive Officer of the Company, stated, "We expect to report a much stronger than anticipated second quarter. We are especially pleased to note that Internet-related sales as percentage of total sales reached 36.5 percent, an all time record high, compared to just under 30 percent for the same period one year ago."
|Entry||08/21/2003 02:24 PM|
Thanks for a great idea.
Just so I understand, in their press release, they do go on to say that "total catalog circulation for the quarter was 9.2 million compared to 8.8 million for the same period in 2002" - are they including email solicitations in that number? Was just struck that it grew year on year given your thesis on their lowering catalog distribution costs.
Also, was wondering if they have buying agents in Asia and other low-cost areas. Maybe thats not their game but seems like if you had the contacts you could find quite a bit of overstock type items and would be a way to expand margins.
|Entry||09/22/2003 01:09 PM|
|The circulation number in their press release does not include email solicitations. Circulation increased to 9.2 mil from 8.8 mil. I wouldn't focus too much on the quarterly circulation because it tends to fluctuate as catalogs shift back and forth into adjoining quarters. In this quarter, the company shipped the same number of catalogs (7) this year and last. Their mailing list is growing and that is why circulation was up this quarter despite the same number of catalogs produced.|
I believe the longer term trend is still towards fewer catalogs, and less expense per dollar of sales as a result. For example, the company mailed 16 catalogs in the first half of this year versus 18 last year. Sales still managed to increase because of more recipients per catalog and also because of rising internet sales. Internet sales rose to 36.5% of total sales in the 2Q. Ad expense and SG&A as a % of sales fell as a result.
My understanding is that most (if not all) of their buyers are located in the US. They regularly troll for discontinued/overstocked items from a large number of manufacturers, wholesalers, etc. But I do not know how many of these suppliers are from Asia.
|Subject||SGDE updates 3Q guidance|
|Entry||10/09/2003 10:39 AM|
|SOUTH ST. PAUL, Minn., Oct. 9 /PRNewswire-FirstCall/ -- The Sportsman's Guide, Inc. (Nasdaq: SGDE) today announced that the Company expects to report total sales of approximately $41.0 million and earnings per share of $0.12 to $0.13 for its third quarter ended September 30, 2003. This would compare to third quarter 2002 results of $36.7 million in sales and earnings of $0.05 per share. Earnings will be above the consensus First Call(R) estimate, which is $0.09 per share. The Company plans to report its final quarterly results at 5:00 pm CDT on Tuesday, October 28, 2003. |
Gregory R. Binkley, President and Chief Executive Officer of the Company, stated, "Our trend of reporting stronger than anticipated results continues with our third quarter. Internet-related sales as a percentage of total sales will
once again exceed 36 percent, compared to 30 percent for the same period one year ago."
|Subject||charlie, any update?|
|Entry||04/28/2004 10:17 PM|
|Charlie, thanks for the great idea. The company continues to execute and is doing very good business. Any updates?|
|Entry||04/29/2004 01:28 PM|
|Hi, I didn't think anyone was still reading the Sgde board. I don't really have anything new to add to the analysis but there was a conference call today that you may want to check out if you missed it.|
|Entry||04/30/2004 09:55 AM|
|I listened to the conference call yesterday and was shaken by how evasive and uninformed management seemed to be. They really didn't seem to have a handle on many basic metrics. This was the first CC of their I listened to; does anyone have a feel for whether this is SOP for them or a change?|
|Entry||05/12/2005 01:11 PM|
|You've caught me. I have not posted anything in a long time. I don't get many good ideas and sometimes there are long stretches of nothing. As far as I know, the two ideas per year requirement is still in effect. I had been hoping that I'd slip through the cracks in the system. I promise that if I find something worthwhile I will post it.|
|Entry||05/13/2005 10:00 AM|
|Charlie, take it as a compliment (which it is). I'm looking forward to your next writeup. Enjoy the weekend. Warm regards,|
|Entry||05/13/2005 11:45 AM|
|Sounds more like a tattletale to me. When my kids do that, I give them a firm spanking.|
|Entry||05/14/2005 09:05 AM|
|Wasn't a joke. I don't think it's any board member's business whether another member has fulfilled his requirements. That's up to the webmaster. If somebody wants to be an enforcer they should set up their own site, not cling onto somebody else's coattails.|