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Howaya,

This is my first ever proper valuation attempt.

I copied this from the great Platoish who himself got it from: "Harry Domash's book “Fire Your Stock Analyst”. I like to use this one because it is straightforward and easy to understand. "

I think I must have made some wrong assumptions somewhere or else the stock is not realistically price.

It's p/e now is about 21, but management projects earnings growth of
10-15% over the next few years (11-16% next year though).

As Peter Lynch has told me many times (I stick his
'Beating the Street' audiobook on for a few minutes, when I'm making my breakfast) the p/e should losely reflect the growth rate, so if that's true, then plain and simple, it is overvalued.

Unless their recent purchase of a portfolio of domestic and international patents and patents pending related to the Fiberchoice brand for approximately $8m) from Onesta Nutrition can give growth a kick up the arse.

They're also hunting for a 3d consumer brand to compliment their 2 existing stong ones (Breathe Right and FibreChoice), so maybe that could help, too, although obviously they'll have to pay up to find one, unless they can get a great product for free like The Flaming Homer that Homer Simpson inadvertantly gave away.

Here's the valuation attempt, I'll also throw some notes from the conference call at the end, which might be useful. I'd love to be able to do one of those big long posts that Platoish does about Coference calls, but it's after midnight here in Ireland, and my back is sore)

---------------------------------------------------------------


1.) TTM Revenue = $112M

2.) Estimate 3 Yr. Revenue Growth = They guide 11-16% sales
growth next year and 10-15% there after. I'll select about 14%
which I think is realistically achievable

3.) TTM Revenue in 3 Yrs. = $112M * (1.14^3) = $166M

4.) Estimate Net Profit Margin = 15%
My basis for this is 15% profit margin for year just ended,
yahoo lists it at 15.3% for the 4 quarters up until christmas
time and fy 2005's profit margin was 14.6%

5.) Net Inc in 3 Yrs. = $166M * 0.15 = $25M


6.) Current Shares = 14.6M
The company repurchased 655,105 shares in fy2006, which
represents 4.4% of total shares.
Total stock based compensation expense for fy2006 (which wasn't
deducted from net income but will be next year i think, was
$0.09 per share. This is a dollar value of about $1.31m, which
would get you (given an average price of $24 a share) about
54,750 shares, which is kind of insignificant when compared to
the buyback, they expect a similar type of stock based
compensation expense next year too.
They have still 770,00 shares authorised to be repurchased


7.) Estimate dilution = -2% (is it ridiculous to factor in
negative dilution? i don't really know.)

8.) Shares in 3 Yrs. = 14.6M * (0.98^3) = 13.74M

9.) Estimate EPS in 3 Yrs. = $25M / 13.74 = $1.81


10.) Estimate P/E Ratio =17 (currently trading at P/E = 21, but

I'm not sure it can support this, MSN has a sketchy historical
range for it at
http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=TenYearSummary&Symbol=CNXS
I'm going to set it at 17)

11.) Estimated Price in 3 Yrs. = $1.81 * 17 = $30.77

This represents (on the current share price of $24.14) a
Compound annual growth rate (CAGR) of 8.43%, which is pretty
crap.

Unless I've got (a lot) of the numbers wrong, that ain't
going to beat your basted index fund, and carries a lot more
risk
-----------------------------------------

Here are some messy conference call notes, the major thing that interested me is the top note
(I bought my shares in January at $20.40):

*They repurchased 220,000 (I think that's the amount he said anyway) at an average price of just over $21 a share in last quarter of fy2006

*Gross margins up 1% to 70.5%
*Operating margins rose 15% but as a percentage of sales, they improved

*next year they're going to start expensing stock options in SG&A section. If expensed this year it would have knocke $0.09 off net income. Next year they think it'll knock between $0.08 and $0.10 off it.

*They now have $15.8m in cash up from 14.7m
*Breathe Right sales in U.S. were up 9%, but a healthy 32% internationally

*FibreChoice sales for fy2006 were up 70% compared to last year, but I think they were only launched last year, so lets not start dancing in the streets about growth rates like that.

*they expect 11-16% growth next year despite the fact that consumer healthcare (whatever the category their products are in - non drug, consumer drugstore purchases or something like that) are only up 1.5% year over year

*They expect a significant drop in products for next quarter (q1 fy2007) because they're going on an advertising binge

*Liam Burke, an analyst asked how they are getting on in Mexico, but they didn't say much and basically said they're concentrating much more on the UK and Japan, which has started buying off them again (they have some big inventory glut last year)


------------------------------------------------------

I might try a Discounted Cash Flow valuation over the weekend, hopefully that'll turn out better.

Cheerio for now,

Duncan


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