MPAA called the earnings right reaction wrong

Turns out I called the eps of .18 on the button or almost on the button given I said .17-.18. Unfortunately I failed to call a "so what" reaction from the market. It sure looked pretty solid to me with operating cash flow of over 1.00/share.

I guess everyone else was expecting more in a seasonally weak quarter.

MPAA earnings out Monday

One thing about blogging on investments is it lays out your successes or failures for everyone to see. That said I'll lay out my case here for MPAA which reports Monday morning. I really liked this at 5. I also think its a decent bet at 5.80

MPAA's business is to buy broken starters and alternators then mix and match the parts to rebuild them into working refurbished units. These are then sold primarily into the big auto parts stores like Autozone. The leftover pieces are sold as scrap. I like where the company is situated for both their competitive position and the macro factors in the business. I also think the price is quite reasonable and has pretty good upside with modest downside risk.

First discussing the competitive position here I believe there are meaningful barriers to entry for competitors. In order to supply their customers they need to keep large inventories consisting of virtually every startor motor and alternator imaginable. This leaves them with alot of inventory on the balance sheets about 65 million to be specific which is a huge amount of money tied up in inventory but it also serves as a barrier to new competition. That has left them in the position of being able to sew up long term contracts with the large auto supply stores. Given the exclusive nature of some of those contracts and the costs involved in building up inventories it will be difficult for new competitors to pop up on a similar scale.

Second the macro picture favors the company in a couple of areas. First the company benefits from 2 trends. The slowly improving economy is resulting in more miles being driven . That results in more part replacements. Second the vehicle fleet is aging as consumers drive their cars longer. Both of those should be beneficial for MPAA. The other larger trend to note is a general improvement in scrap prices. Scrap prices fell apart in 2008 but have been consistently strengthening. See the chart below from www.scrap.net.

This should be a beneficial trend for their gross margins which cratered down to 20.1% in the March 09 quarter but have since recovered back to 27.4% in their most recent quarter.

In terms of earnings the company earned .28 last quarter helped in part by currency gains and a 1 time item. I get normalized EPS of .17 last quarter. Going forward the company has several things that could improve growth outside of the general trends. They completed an acquisition last quarter that was not fully felt on the income statement and should improve eps going forward. They also have some initiatives to move into the heavy equipment market. That seems to be an obvious complementary business that should offer opportunity for growth.

The current quarter is normally a bit weaker due to seasonality but I think the impact from the acquisition may bring revenues close to inline with last quarter. I am also looking for eps of .17-.18. If they make that number or better I think you should see some additional appreciation. My targets are modest but I am looking to see the stock move to the 8.00 range with a solid report.

Lets see if this turns out to be right.

HKFI sleeper earnings

Bought some hkfi today on what appears to be an unrecognized quarter. Shares are at 3.25 right now. Per their 8k filed monday it appears to me they earned about .30/share for calendar Q4

This could be an opportunity for a quick profit on a good earnings report. Seasonality exists in this so if they put out a good number and get a pop it might be good to exit

wstl conference call

So far this call sounds underwhelming. They did say the company would be profitable next Q but thats all. Striking me now as more of an interesting stock to research rather than something to make some trading nickels on.

WSTL seems like a good trade this morning

Earnings after hours of .04. Closed at 1.33 yesterday and has a cash hoard of .85/share. A 1.40 price in the pre-market looks good although the ultimate direction is going to depend on what is said in the CC this morning. I don't have any real fundamental knowledge here but on a good market day this should be a decent scalp.

SSVE a tiny growth play on economic recovery

SSVE runs a relatively simple and easy to understand business that is experiencing tremendous growth while offering a modest PE in a business that should be well aligned for a cautious business environment in the midst of a tentative recovery.

SSVE's business is pretty simple. They offer business process outsourcing services primarily customer service functions for mid-size and small companies in a variety of industries. These services are provided from a leased facility in the Philippines with rates for contracts running at $5/hour plus. Ballpark wage figures for customer service representatives in the Philippines are $1.50/hr. In a nutshell the business is one of providing skilled educated labor at a margin of roughly 70% along with the other costs associated with running a call center such as rent, utilities, technology services etc. while keeping admin costs low and end customers satisfied. So far SupportSave seems to be meeting this challenge exceptionally well for a tiny company.

What caught my attention was the company’s most recent quarter which shows the potential operating leverage built into their business. Sequentially the company increased revenues 597,000 to $954,000 or roughly 60%. Most of that revenue increase flowed to operating earnings partially due to reduced SGA expenditures. The result was sequential EPS increasing from .01/share to .025/share. I believe this signifies an inflection point in the business where they will start to flow large parts of increased revenues to the bottom line. Some of these increases should be seen next quarter as the company announced an expansion of 70 additional representatives for existing clients which should result in about 175k in incremental quarterly revenue. They have also announced a move to a larger facility to accommodate expansion of the business. It is worthy to note that the company guided for 5 million in revenue for this fiscal year back in 2009. This would imply revenues of 3.4 million over the next 6 months. I am skeptical that this goal will be hit and an email exchange with the companies CEO suggests this is going to be a challenging target to hit however anything remotely close to their guidance number would suggest a huge ramp up in earnings. Revenue looks to be on target for another year of 100% growth whether that target is hit or not.

Shareholder friendly management is a big personal issue for me. I give the company credit for its very modest compensation levels for management. At $30k a year their CEO makes less than a customer service representative in the US which is an interesting bit of irony. They have also refrained from issuing themselves options over the past year which is another area I find important.

Finally I would argue that BPO in general should see a good year in 2010 as companies tentatively dip their toe into expansion. An easy way to do that is to hire BPO firms where head count can easily be ramped up and down unlike hired employees where labor levels are harder to adjust. This is consistent with the industry as whole which saw a terrible 2009 but saw a strong uptick at the end of the year with total contract value more than doubling in Q4 from Q3. According to Nelson-Hall BPO is expected to see 20% growth in 2010 which should be a revenue tail wind. One note of caution which is of no great surprise is that they are expecting margin pressure in the industry. It’s not clear to me given their low cost structure and base of smaller clients that this will be a short term problem for SSVE although long term it’s something to be aware of. Huge margins do not last forever in commodity businesses. Finally it should be noted that this is a very tiny company with all the risks and potential rewards that go with that. My view is that given the growth and relative valuations that the stock is a bargain at its current price of a bit over 1.00/share and I think it’s likely it will see prices between 1.50 and 2.50 in the next 6-12 months assuming management executes.

cssv trade for today

Added some of this O&G servicer in the caspian sea today at .48. This is played one of 2 ways. Its either a trade on announced eps of .13 for Q4 per today's 10k filing or its a value play based on book value of about 1.00 a share and trailing 12 month eps of .08.

The .13 is a seasonal number so its not that meaningful in and of itself. The .08 is however they had a large contract for the year which may or may not be replaced in 2010. Either way with .50/share in cash on the balance sheet its hard to think its not worth more than .50 a share.

Also bought some MPAA recently at 5. That one is a potential value play seeking a 50%-60% gain if all goes well with some risks due to customer concentration. More on that later.