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Back in September when Matt did his analysis, he used a structural cash flow figure of $12.1 mil. I'm assuming that he used the cash flows from Q2-2003, Q3-2003, Q4-2003 and Q1-2004 to get to this figure. By the way, Q1-2004 was not a very good qtr for CNS in terms of free cash flow. Since then, we've gotten the cash flow figures for Q2-2004, and they were not great either. Today, a valuation based on free cash flow for the last four qtrs would show that the CNS is significantly more expensive now than back in September. However; in the January issue, Tom claims "cash flow north of 14 million" and growth rates of 13% per annum. No mention of the free cash flow situation. What's up with that? Anything close to 14 million is probably unlikely in fiscal 2004. And who knows in 2005.
I guess, more than the 14 mill figure, what concerns me is the variability in the free cash flow numbers for the last few qtrs. Particularly, if the valuation is based on free cash flow, it is hard to value the company when free cash flow varies so much. I think, this is due to the wide variation in accounts receivable. To the extent that I can apply the flowie here (careful, it's a small cap!!), I can see that it has changed from about 2.17 down to 1.23 and back up again to 1.95, roughly. This seems to indicate that CNS has difficulty managing their cash.

Anybody has any comments on this?

Akilles
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Shame on me, I haven't looked at the numbers since taking a small CNS position after the HG issue.

One factor does spring to mind for me, though, which is that *maybe* some of that big variation in cash flow can be explained by a couple of factors I remember from the last conference call.

Seems to me they spoke about seasonality (spring and summer, I believe, not being so hot) along with the need to step up some expensive advertising at certain times of year. If you combine expensive ads with the slow sale quarter, you might get some seesawing.

Just guessing here.
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Akilles wrote in part:
I guess, more than the 14 mill figure, what concerns me is the variability in the free cash flow numbers for the last few qtrs. Particularly, if the valuation is based on free cash flow, it is hard to value the company when free cash flow varies so much. I think, this is due to the wide variation in accounts receivable. To the extent that I can apply the flowie here (careful, it's a small cap!!), I can see that it has changed from about 2.17 down to 1.23 and back up again to 1.95, roughly. This seems to indicate that CNS has difficulty managing their cash.

Baccigator replied in part:
...some of that big variation in cash flow can be explained by a couple of factors I remember from the last conference call.

Seems to me they spoke about seasonality (spring and summer, I believe, not being so hot) along with the need to step up some expensive advertising at certain times of year. If you combine expensive ads with the slow sale quarter, you might get some seesawing.


I think you are right on, baccigator, and I'd like to add my observations:
First, as bascigator implied, don't compare this quarter to last quarter because the business is seasonal; compare this quarter to one year ago quarter. Doing this you still see some variability, but at least you rule out the seasonal fluctuations.

Compared to a year ago they are holding less cash (-22%) and more receivables (+25%), but this does not necessarily concern me in and of itself. As I look at the receivables turnover ratio, I see it is actually improving slightly, going from 6.7 to 6.8. This means they have more credit sales than they used to, but that there is no problem collecting receivables; they are in fact collected 2 or 3 days faster than a year ago, on average.

Total assets are growing faster than liabilities, the current ratio has improved from 3.2 to 3.8, the quick ratio has improved from 2.8 to 3.2. This tells me they have no problem managing their cash.

Gross profit has increased 22%, Net income has increased 20%. Cash flows may be variable, but the trend is good. They are not improving their ratios with accounting tricks, they are doing it by increasing net income.

While inventory is increasing in dollar amounts, the number of days of goods in inventory has decreased from 72 to 66. So I would say they are managing inventory well, even though it ties up some cash.

Mr Market seems to agree with my analysis (all to often he does not), as the stock price has been climbing erratically but steadily, to a 52 week high of 14.00 as I write this. I've been long on the stock since Matt recommended it, and am happy to continue holding it for now. I am looking forward to the next earnings report, and it would take some pretty poor results to change my outlook.

Hope this helps put things in perspective. Thanks for raising the question because you got me to look hard at it for the first time in a while.

–Bill
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