UnThreaded | Threaded | Whole Thread (10) | Ignore Thread Prev Thread | Next Thread
Author: StevnFool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1933  
Subject: INFO - a NET-NET Date: 1/13/2005 1:14 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1

Hi,

I just thought I'd let you know that I bought INFO today at 1.41 as a NET-NET stock. It is the first NET-NET type of stock that I have bought in many months.

Note that mostly these companies are ones you wouldn't touch as a long term investment so normal valuation methods are not terribly relevant. They are typically badly run companies selling for less than their cash value. As I have mentioned before, my experience with this type of stock has generally been positive.

Valuation calculated from the Sept 30th 2004 Balance Sheet from

http://yahoo.investor.reuters.com/IS.aspx?ticker=INFO.O&target=%2fstocks%2ffinancialinfo%2fstatements%2fbalancesheet%2fquarterly

It has had negative earnings for about the last 2 years, but the cash flow situation doesn't look too bad and the NET-NET value does not seem to be deteriorating too rapidly.

Total Current Assets = 87.6 Million (a big portion of this is cash and cash equivalents)

Total Liabilities = 21.3 Million.

NET-NET Value = 87.6 - 21.3 = 66.3 Million.

NET-NET Value per Share = 66.3/24.90 = 2.66

Applying a 2/3 factor for a margin of safety gives a buy price of 1.78.

Current Price is 1.41.

StevnFool
Print the post Back To Top
Author: TheFeaz Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1850 of 1933
Subject: Re: INFO - a NET-NET Date: 1/13/2005 11:56 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 2
Hello StevnF,

I was excited to see your post since I'd like to take advantage of the type of situation you describe, however, I have to be more conservative since I've not experienced a real-world situation like this one before:

1) This data is three+ months old - no telling the status of cash reserves for a company performing so poorly over such an extended period, but cash has grown a bit each quarter, so I'll count 100% from Sept 30.
2) A/R has been dropping steadily for 4 straight quarters. I think there's a good chance much of this is bad debt and if/when this company goes belly-up most of this would become bad debt. I exclude 50% from assets.
3) These guys are burning cash – A/R dropped by 6.9M from 6/04 to 9/04, w/ no debt payments (there isn't any debt), yet cash only increased by 1.6M. 2.5M went to pre-paid expenses. The other 2.8M went to operating expenses or SG&A. I further reduce A/R by the “burn” ratio – 2.8/6.9 = 40%
4) I can't imagine the firm being able to lay claim to all of the pre-paid expenses in a bankruptcy. Now, the bankruptcy is not guaranteed, but likely. I also have to ask why the management is paying expenses forward when the future looks so bleak. I exclude 50% from assets.
5) I'm dubious about the 'other current assets' but since I haven't read the 10-K I'll leave it all in.

Assets
Cash: 55.9 x 1.00 = 55.9
A/R: 18.2 x 0.50 x 0.60 = 5.5
Prepaid Exp: 8.5 x 0.50 = 4.25
Other Current = 4.9
TOTAL CURRENT ASSETS = 70.6
TOTAL LIABILITIES = 21.3

NET-NET Value = 70.6 – 21.3 = 49.3
NET-NET Value/Share = 49.3/24.9 = 1.98

I typically require 25-30% margin of safety on my value investments…I'll use 30% here in this high-risk situation.

Buy Below: 1.98 x .70 = 1.39
Current Share Price = 1.41


Some may think I'm “double dipping” on the margin of safety, but I don't think I am. When evaluating a 'value investment' I calculate the intrinsic value using a DCF after applying my judgment vs growth forecasts from several sources; I equate this to my 5 points on the balance sheet. Once I calculate the intrinsic value/share I require the margin of safety.

Perhaps it's simply a matter of how conservative I am, but I can't take a chance on this one, but I will be watching the stock performance to see what happens.

Cheers,
Feaz

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: StevnFool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1851 of 1933
Subject: Re: INFO - a NET-NET Date: 1/14/2005 8:29 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0

TheFeaz,

I sometimes do what you do, but if I take that approach, I add in some value for the non-current assets (maybe at 10% - 15% of the value shown on the balance sheet).

This comes from Ben Graham. I don't have the references to hand, but I have read both the 1940 Ed of Secutity Analysis and the Edition of the Intelligent Investor that came out in the early 1970's.

I think it is in Security Analysis that Graham applies a liquidation rate or percentage to all of the assets (Current and non current) and then subtracts all liabilities to come up with the Liquidation Value.

I'm not sure if it is Security Analysis or the Intelligent Investor (I think it is SA), but somewhere he proposes the thesis that if you assign zero value to the non-current assets, it usually makes up for any short-fall in the current assets.

If you check out the Intelligent Investor again, I think you will find that the method generally used by Graham was to give full value for the current assets and zero for the non-current assets.

This is the method I usually use, but if I think the Inventory or Receivables are a bit large, I then calculate it both ways and use the smaller value. I typically rate them as follows:

Inventory: 50%
Receivables: 80%
Other Current Assets: 100%

Plant, Property and Equipment: 15%
Other non-current assets: 0%.

StevnFool

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: TheFeaz Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1853 of 1933
Subject: Re: INFO - a NET-NET Date: 1/14/2005 9:34 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Thanks StevnFool. I'll review both works in detail w/ an eye towards valuing this type of situation. I trust BG's analysis more than my own at this point in my investing career.

BTW - how did you locate INFO? The screening tool my broker offers only works on price, market cap, and earnings (along w/ a bunch of technical variables), it won't look at the balance sheet.

Feaz

Print the post Back To Top
Author: StevnFool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1854 of 1933
Subject: Re: INFO - a NET-NET Date: 1/14/2005 12:56 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
BTW - how did you locate INFO? The screening tool my broker offers only works on price, market cap, and earnings (along w/ a bunch of technical variables), it won't look at the balance sheet.

This is the best free screener that I am aware of. It takes a bit of work to set up screens, but you can save screens once developed.

http://www.investor.reuters.com/nscreen/builder.asp

StevnFool

Print the post Back To Top
Author: woodstove Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1855 of 1933
Subject: Re: INFO - a NET-NET Date: 1/23/2005 10:17 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 2
Hi Steven and Feaz,

Thanks for the heads up and good discussion of INFO (Metro One). I took a quick look at the Sept/04 10-Q, Dec/03 10-K, and latest DEF14A. Also of potential interest are recent press releases, eg Jan 19/05 re award of a patent on dynamic routing of information assistance calls among call centres. In the right hands that may be a valuable off balance sheet asset.

My guess is these people are the type to stay and fight for a market, eg based upon new services direct-to-consumer, and/or via new intermediary organizations, possibly with their proprietary technology as bargaining chip. Perhaps their technology given low stock price is cheap enough to interest an acquirer or co-venturer, though that may be water under the bridge (the Sonera participation) and no longer an opportunity.

That means, if they do fight and lose, there will be no residual cash. So Metro One is not necessarily a net-net potential liquidation, though it is presently at a net-net price. As the quarters go by, net-net may continue to decline.

I would expect their A/R to be pretty sound, however. $18M at Sept/04 is only 60 pct of Q3/04 sales of $30M, and I imagine they can collect what is due to them. But sales may continue to decline faster than they can adapt to conserve cash burn rate while getting new business lines going.

So I consider this an attractively priced technology speculation, with a group of people who have done good work in the past and have (from their filings) the ability to do so in future.

The main uncertainties, areas to gather industry / company scuttlebutt, might be...

- What is the story with alternative / replacement technologies? Maybe the trade press has some relevant articles.

- Who are the potential customers? Trade press and message board chat may help.

- How are the second tier people in the company feeling about their situation, the chance that some of them may be laid off, vs opportunity to work on new projects? Again message board chat may be a source.

I'm not interested personally, but if Metro One survives or is bought out then $1.40-ish might prove to be an attactive entry price. Though, frankly, I rather think it more probable than not that the price may drop even further in Q1/05 after the earnings data for Q4/04 gets published. Besides reduced revenue, the auditors will probably require some writedown of software and other fixed asset costs which have been capitalized on the balance sheet, and that will hit earnings very hard though it will not have a cash impact.

Good luck! The people sound like a good team and I wish them and you well.

Woodstove

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: StevnFool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1863 of 1933
Subject: Re: INFO - a NET-NET Date: 3/3/2005 6:48 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
TheFeaz,

I sometimes do what you do, but if I take that approach, I add in some value for the non-current assets (maybe at 10% - 15% of the value shown on the balance sheet).

This comes from Ben Graham. I don't have the references to hand, but I have read both the 1940 Ed of Secutity Analysis and the Edition of the Intelligent Investor that came out in the early 1970's.

I think it is in Security Analysis that Graham applies a liquidation rate or percentage to all of the assets (Current and non current) and then subtracts all liabilities to come up with the Liquidation Value.

I'm not sure if it is Security Analysis or the Intelligent Investor (I think it is SA), but somewhere he proposes the thesis that if you assign zero value to the non-current assets, it usually makes up for any short-fall in the current assets.

If you check out the Intelligent Investor again, I think you will find that the method generally used by Graham was to give full value for the current assets and zero for the non-current assets.

This is the method I usually use, but if I think the Inventory or Receivables are a bit large, I then calculate it both ways and use the smaller value. I typically rate them as follows:

Inventory: 50%
Receivables: 80%
Other Current Assets: 100%

Plant, Property and Equipment: 15%
Other non-current assets: 0%.

StevnFool


Is it sad replying to your own message a couple of months later? Anyway, in a thread over on the BI board we somehow got talking about NET-NET's.

You might be interested in this post.

http://boards.fool.com/Message.asp?mid=22153485

Where I quoted some relevant sections from the two Ben Graham books "Security Analysis" and "The Intelligent Investor".

StevnFool

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: dardashti Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1879 of 1933
Subject: Re: INFO - a NET-NET Date: 3/18/2005 12:10 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
In the past 5 days the price went from the $1.40 levels to the recent close at $1.26

Any thoughts on the margin-of-safety, based on the current entry levels?

Print the post Back To Top
Author: dardashti Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1880 of 1933
Subject: Re: INFO - a NET-NET Date: 3/18/2005 12:13 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Any thoughts on:
http://finance.messages.yahoo.com/bbs?.mm=FN&board=7083013&tid=mton&sid=7083013&action=m&mid=12962

Print the post Back To Top
Author: StevnFool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1881 of 1933
Subject: Re: INFO - a NET-NET Date: 3/18/2005 5:13 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
In the past 5 days the price went from the $1.40 levels to the recent close at $1.26

Any thoughts on the margin-of-safety, based on the current entry levels?


The answer depends on how much due dilligence you want to employ.

If you take the simple MI approach and use DrBob2's formula for NET-NET as Total Current Assets - Total Current Liabilities - LTD, then you get a current NET-NET per share of 2.46. A price of 1.26 - 1.28 is approx 50% of this.

If you subtract all liabilities instead of just current liabilities and LTD, then you would get a NET-NET per share of 2.30.

I also like to look and cash burn by seeing how much the NET-NET per share dropped in the previous 12 months and then project this 12 months ahead. Subtracting all liabilities a year ago, the NET-NET per share was 3.02. The cash burn in 12 months means that 0.72 was removed from the NET-NET per share. If this were to continue for the next 12 months, the NET-NET per share would be 1.58. If you are looking for a 2/3 margin of safety, you would want to buy below 1.05 and sell at 1.58.

I don't know if you saw this post http://boards.fool.com/Message.asp?mid=22153485

I also like to look at the liquidation value mentioned in it. For INFO, the main difference would be to remove 20% of the stated value of the receivables and add 15% of the stated value of Property plant and equipment. A year ago, this would have added approx 0.12 per share to the valuation. Now it reduces it by 0.06. By this valuation, the cash burn was 0.18 higher meaning that the projected NET-NET per share in 12 months time would be 0.24 lower. (i.e. 1.34 with a 2/3 buy price of 0.89.

I had not accounted for the off balance sheet lease obligations. Since I am using a 1 year forcast NET-NET per share, the value of off balance sheet obligations that concern me are the ones further out than 1 year. These total 14.3 million or 0.57 per share. This would bring the minimum NET-NET per share value down to 0.77. with 2/3 times that giving a buy price of 0.51.

The bottom line. I wouldn't buy this now, but since I already own it and it is priced above 0.77, I have to think about whether this is the time to sell or not :-(

StevnFool

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
UnThreaded | Threaded | Whole Thread (10) | Ignore Thread Prev Thread | Next Thread
Advertisement