There We Go Again

There You Go Again

That is one of the great quotes from a Ronald Reagan presidential debate (against Jimmy Carter I think). And there I go again. HW had disappointing earnings and was down sharply on the day. It feels like a sharp punch in the stomach. I did note the other day that my new MFI stock, WH is the reverse of HW. Maybe it’ll go higher since HW went lower…

The One Big Question

The big assumption that the MFI approach makes (and which is clearly not working for me and some others) is that the income from the previous 12 months is a good proxy for estimating earnings for the next 12 months. I could make a list of stocks I have bought and their actual trailing twelve month earnings when I bought them and then their actual 12 month earnings and I can assure you that the stocks that flopped were the ones that didn’t meet that assumption. So to me, clearly the one big question you should ask yourself before buying an MFI stock is, “do I think the company has a very good chance of matching or beating the earnings from the past 12 months?” In a quasi recession, that is no slam dunk. And it is arguably more difficult for smaller companies than larger companies during a downturn as their revenues tend to be more concentrated (certainly a lesson I’ll remember next recession). We are not stock market geniuses, but it is a question I need to get a better answer to before buying the next MFI stock.

One MFI Stock + One MFI Stock = ?

What happens when one MFI stock (UNTD) buys another MFI stock (FTD)? Is the combined entity an MFI stock? We’ll find out, I guess. UNTD announced today they are buying FTD for $15.08 a share. Oddly (unless the math is wrong) FTD is only up to $13.80. That doesn’t make much sense to me. I guess it is because UNTD is down 9% and the deal must be partially financed by stock. Not a very attractive deal to stockholders when both stocks drop.

Late to the Unhappy Party

I love it when an analyst is late to the party. Baird downgraded HSII a day after their 13% plunge yesterday. Of course HSII is down another 7% today, so perhaps they’re on to something.

WNR Turns on the Spigot

It what has to be good news for my beleaguered WNR (down an astonishing 80% for me) is they fired up production at their Yorktown plant. They estimate that will create $2 to $2.5 million of income per month. They need it. I guesstimate that would be about 35 cents per share. Not a bad increment for a $10 stock. I did read the VLO earnings release to get some idea of where my three refiners (HOC, FTO and WNR) will be going. It was pretty bad. They had almost $28 billion (with a “B”) in revenues, yet managed to scratch out a net income of $472 million (with an “M”). Doing a little quick math, that means they made about 1.7 cents in income on the dollar of revenues. Recall FTO was around 9 cents last quarter, while HOC and WNR were more in the 1 to 2 cent range. I should not say this, but I am foolishly optimistic that WNR is going to start turning things around. Recall last quarter they had all sorts of glitches, which should be fixed by now. Also, I gotta believe they benefited from the ALJ fire. I am not so optimistic about HOC. They had a plan to go from 5,000 bpd of heavy crude to 50,000 bpd. I suspect that is stuck in neutral. Stay tuned.

Market Irrationality

I saw where a poster placing a comment on my blog yesterday said he was tossing in the towel. Hard to blame him. I have been tempted myself. I think if I wasn't writing this blog, I might have quietly snuck into the shadows already. I suppose that makes this an expensive blog.

One reason I haven't quit is I know that as soon as I quit, the method will start working again. John Maynard Keynes is attributed with the quote, "markets can stay irrational longer than you can stay solvent."

I have not decided whether

1. the method doesn't work,
2. needs more time or
3. needs to be tweaked.
   

I have decided that the method is riskier than advertised. I suppose that should not come as a surprise. If it really does ultimately get higher returns, one should expect higher risk.

Dreading Earnings Day

Remember my analogy to Pavlov and his dog drooling at the ringing of the bell and my aversion to earnings announcements? Well this morning was a classic case in point. I batted .250 (as long as we’re all comfortable with analogies… though perhaps the apropos analogy is I struck out on 4 pitches).

TRID – this chip manufacturer for high-end televisions had nothing but doom and gloom in their transcript (Trident Microsystems, Inc. Q3 2008 Earnings Call Transcript). They did make a little money and have added to their cash position, but they are losing ground with one (Samsung) of their three major customers. They clearly have some work to do. The only thing that kept the stock getting blown out of the water was their significant cash position. They did get a little squirrelly about their plans for all the cash. No mention of dividends or stock buybacks. End results? Down 9%. Strike One.

ODP – Expectations were set so low last quarter, that their 25 cents per share (Office Depot rallies as investors focus on signs of improvement) was a relief. It looks like tough sledding, but appears to be priced in the stock, which popped up about 10% today to over $13. Remember, I bought ODP in January as I saw JG was buying it and they were a borderline MFI stock. He apparently bought it too soon (around $17) as did I ($14.40). I did like The Street Dot Com’s headline: “Marginal Sequential Improvement from ODP”. They must have been in a foul mood at TSCM as their stock was off 15% today… hey other people’s bad news makes me feel better. Ball One.

HSII – I was hopeful for HSII. The stock had risen from $32.50 to $37, in anticipation of good earnings. Well they disappointed the street (Heidrick & Struggles International, Inc. Q1 2008 Earnings Call Transcript). I wasn’t really sure the numbers and outlook were all that bad. I mean the stock had already dropped from $55 to $37 in the past year. The market didn’t agree with me… today. Result: down 11% and Strike two.

LCAV – deep down, I was worried about my laser vision company. Laser surgery has been getting negative press of late. And it certainly is a discretionary surgery for most people. Frankly, I am not sure I would do it, and I hate wearing glasses. I haven’t had a chance yet to peruse their results (LCA-Vision shares hit new low as 1Q profit drops), but they must have been poor as the stock sold off over 20% before I had taken the first sip of my Vanilla Latte. Result: down 19%... Strike 3!

I obviously need to get an earnings calendar put together so I can throw up before I read the earnings… it’ll save time and worry. I did find it interesting that my only “good” earnings call was the stock I bought based upon a guru. That is an approach I am going to start following more and more.

SIMG has been one of the few bright spots in my portfolio and was up another 6% today… now up over 30% in total. I was really tempted to sell them after they were up 10 or 15%... a stock in the green has been a rarity, I wanted to catch it and keep the profit forever. But I resisted and have watched it rise another 15% since then to about $5.80 a share. And the best news? They don’t have another earnings call until late July.

OT – I did see where TGIS had their call today as well. I had bailed on them after their last call caused the stock price to drop about 50% immediately. (one reason I am so far behind the benchmark). I sold them around $3.11 and I see today they are down 9% to $2.46. I am not sure they can fall much further as they are pretty close to liquidation value. I am sorry for anyone that played by the rules and held TGIS post those last earnings, where all bets were cleared off the table. It was Green 00 on the roulette wheel.

TRA – I am starting to watch this stock. They are off about 7% today to around $38. They sell fertilizer and nitrate material, think agriculture. That is one area now down in the current economy. They had a terrific earnings call last week and are ranked well on the MFI lists. Now I just need some guru to buy them and I am on my way.

I just checked. HW has earnings tomorrow. I'll get my barf bag ready, though I will go on the record about being optimistic about them.

Alternative Benchmark

Several people have asked why I use the Russell 3000 index as a benchmark as opposed to a pure value benchmark. The answer for me is that I am not trying to compare how I am doing with one value approach vs a benchmark value approach, but rather how am I doing against the broad market.

Just for yucks though, I did compare my performance against the Russell 2000 Value index. While I trail the Russell 3000 by a whopping 20%, I would trail the value index by a mere 10%... do I feel better? Heck no! I do wonder why I am doing worse than the indices and worse than my general tracking portfolios, which might be behind overall by about 5%. It is easy to think that I am just a poor stock-picker. And that very well may be the answer. Though I have had modest success (and continue to do so) outside of MFI.

It is getting harder (given the chasm) to catch the benchmark. When the market goes up and both portfolios go up by the same %, I lose ground as the benchmark percentage is on a bigger number.

I did add WH to my portfolio last week. It would easily qualify as an MFI stock if they has all the detailed elements on their balance sheet listed for the most recent quarter. WSTG and KSW are both about to hit their one year anniversary. Both are down, WSTG is down 31%. I will likely sell WSTG, but renew KSW for a 2nd year (I think it is still on the list!). Hmm, it is not, but clearly should be as I show below. BTW, if you are trying to maximize your returns by doing the opposite of me, then I suggest (or don't suggest) WSTG.

	ksw
Operating Income After Depreciation	6.07
Minority Interest - Income Account	-
Income for Calculation	6.07
Market Cap Yahoo	35,000
Share Price	5.70
Market Cap Calc	35.00
Preferred Capital	-
Debt in Current Liabilities	-
Long-Term Debt	-
Cash and Short-Term Investments	18.12
Excess Cash	16.83
Enterprise Value	18.17
Property Plant and Equipment - Net	0.25
Receivables	20.78
Inventories	1.11
Other Current Assests	0.36
Working Cash	1.30
Accounts Payable	17.82
Current Liabilities - Other	5.73
Invested Capital	0.25
Earnings Yield	33%
ROIC	2389%

Select Discomfort

I see where SCSS has dialed their sleep number down to 2.79 from over 18 this past summer. SCSS was on the list in the summer and this shows that MFI doesn't always give you the "Good Companies at a Cheap Price" mantra. I don't own SCSS, but I am sure some readers do. They did say they're going to start closing some shops and stuff, perhaps that'll be good for my TPX.

I was right about BBSI crashing post-earnings. Down about 18%. Now down 40% for me since last September. It is frustrating. I am getting a Pavlovian reaction of dread when my companies ring their earning bells.

FTO had a very positive piece in Barrons. They commented that these are tough times for refiners, but FTO is the best positioned company. Here is a small excerpt:

However, many of the company's woes aren't likely to dog the stock. That makes Frontier, one of the industry's most profitable independent refiners, an attractive opportunity for value investors.

Despite its recent woes, the company boasts some of the highest returns among independent refiners. Its return on capital of 42% is more than twice that of Valero Energy (17.4%), Sunoco (20.2%) and Tesoro (13.5%).

Pretty consistant with what I wrote a couple weeks ago comparing WNR, HOC and FTO.

The NY Times had a very negative piece on laser surgery this week. I don't know how much of it is media hype, but they profiled people who actually lost vision in an eye or had their poor vision return post-surgery. The article made me wonder if I really mind wearing glasses?

WSTG had an earnings announcement on Thursday evening (no, no, please say they don't!). Yes they did. And they were poor. The stock was down about 10% on Friday, making them down over 30% for me as they approach their one year anniversary. The management write-up was quite downbeat:

"net sales for the first quarter of 2008 decreased 14% or $6.4 million to $40.5 million compared to $46.9 million for the same period in 2007. These results are entirely attributable to a continuation of the reduction of sales for our largest vendor because of intense competition and extremely low margins."

For me, I am having select discomfort with the MFI approach of late. Please, no more earnings announcements.

MFI Stock Not Listed

I subscribe to Vivian Lewis' excellent global investing newsletter. She just got back from a fact-finding trip to China. From that trip she had a new idea that she added to her buy list: WH. I generally run her ideas through an MFI screen, just to see where they stand. WH was quite interesting. It did not work in the standard formula as for the most recent quarter some balance sheet items were not detailed. But I did my best, given the prior month balance sheet to parse out the items.

When I did, I got a return on capital of about 64% and an earning yield of 32%! That would likely place it in top 50 list. They are in an interesting sector: Oil and gas supplies/pipelines. Basically like a Chinese Tenaris (TS) or NSS (an early MFI stock for me). Vivian Lewis liked them as they are cheap (went public last year at over $9 and now at $6.23), and they have invested in a new facility that will really allow them to ramp production. I expect when they get the details behind the financials filed with Compustat they will appear on the list. I did buy them today as a double match of a Vivian Lewis recommendation and MFI ratios was impossible to resist. I don't think I'll count them in my portfolio, unless they hit the big time.

BVF, which has not exactly been on fire for moi, had some good news after the bell (US FDA approves Biovail drug for depression). They were up 10% during drive-time.

SIMG had decent earnings yesterday (Silicon Image Reports First Quarter 2008 Financial Results) and went up 4.7%. They really are not making much money, but the stock had dropped so far that it is now going up.

BBSI announced earnings this evening (Barrett Business misses by $0.08, misses on revs; guides Q2 EPS below consensus, revs below consensus). While headlines can be deceiving, that one pretty much says it all. It was a bleak quarter. Fasten your seatbelts tomorrow. This will be another Magic Diligence stock for me (along with JTX) to take a serious dive.

HBMFF did have a 6% pop. About time as all the other commodity firms had been on a nice run. Don't people need Zinc too? I'll start an ad campaign... Got Zinc?

Thoughts

I read the TPX conference call transcript (Tempur-Pedic International Inc. Q1 2008 Earnings Call Transcript). I was really impressed with the management team. They are taking steps to manage inventory and expenses as times get a bit tougher. Then they have a new line of products coming out in July. I suspect these are the reasons private equity has been snapping the stock up (Buyers Put Money in Mattress Maker). Note they went up 13% post the earnings announcement.

With the burst in the markets this week, I now have a few more stocks in the green. Not enough to get excited about, but still it is nice. ACN, HW, KFY, MRX, MSTR, SIMG, TPX and VALU. Even UG stuck its head into the green briefly.

Contest Update

The stock contest I started last July is almost 10 months mature. The stocks are making a minor comeback. The average portfolio is down 14.5%. The benchmark Viper portfolio is down 5%. We do have 4 people in the black, an impressive achievement.

Ronrego	TGIS	877	-78%	2,236
Ronrego	tbi	426	-46%	5,423
Ronrego	PCU	100	24%	12,430
Ronrego	EGY	2,036	34%	13,377
Ronrego	BEBE	602	-36%	6,405
Ronrego	PBT	747	113%	21,354
Ronrego	CHKE	270	-17%	8,424
Ronrego	ALOY	1,000	-30%	7,000
Ronrego	AVCI	1,335	-3%	9,639
Ronrego	FDG	305	96%	19,552
Ronrego	GYMB	254	6%	10,500
Ronrego	NOOF	1,147	-36%	6,417
Ronrego	GNI	86	9%	10,864
Ronrego	DPZ	548	-28%	7,151
Ronrego	FCGI	1,053	37%	13,678
Ronrego	Totals			154,779

TedW	TCK	223	7%	10,733
TedW	vphm	684	-35%	6,484
TedW	EPIQ	597	-1%	9,851
TedW	FCX	113	30%	13,039
TedW	DPZ	531	-31%	6,930
TedW	MRO	157	-22%	7,773
TedW	PBT	742	112%	21,212
TedW	IVAC	447	-22%	7,778
TedW	BPT	133	43%	14,215
TedW	AXCA	522	22%	12,183
TedW	PTEN	392	17%	11,729
TedW	FTO	215	-42%	5,779
TedW	RAIL	198	-25%	7,506
TedW	KG	479	-57%	4,321
TedW	EGY	2,008	32%	13,193
TedW	Totals			153,974

traehnam	PCU	103	25%	12,803
traehnam	JAKK	347	1%	10,025
traehnam	HOC	131	-39%	6,090
traehnam	AXCA	527	21%	12,300
traehnam	ASPV	548	45%	14,237
traehnam	WNR	166	-79%	2,050
traehnam	XOM	117	11%	11,121
traehnam	EPIQ	605	0%	9,983
traehnam	BBSI	380	-31%	6,848
traehnam	BPT	135	44%	14,428
traehnam	CHKE	272	-15%	8,486
traehnam	FDG	289	85%	18,526
traehnam	HAS	311	0%	9,961
traehnam	ABC	199	-15%	8,431
traehnam	FTO	216	-42%	5,806
traehnam	Totals			151,427

AK	WDC	460	39%	13,478
AK	TCK	200	8%	9,626
AK	THE	200	-1%	9,710
AK	GW	1,200	-6%	9,120
AK	BPT	130	42%	13,894
AK	BJS	350	16%	11,676
AK	LUFK	150	15%	11,714
AK	LRCX	200	-17%	8,570
AK	PTEN	400	17%	11,968
AK	AEO	400	-36%	6,796
AK	TSO	180	-52%	5,094
AK	XRTX	450	-9%	9,446
AK	Totals		#DIV/0!	150,898

If anyone cares, here is my portfolio:

marshgerda	PMTI	273	-64%	3,582
marshgerda	valu	222	1%	10,234
marshgerda	IVAC	451	-22%	7,847
marshgerda	AEO	389	-34%	6,609
marshgerda	MOCO	869	-8%	9,177
marshgerda	RAIL	203	-25%	7,696
marshgerda	SHOO	307	-46%	5,376
marshgerda	HLF	248	23%	12,303
marshgerda	LXK	201	-30%	6,975
marshgerda	ASPV	569	46%	14,783
marshgerda	PACR	420	-17%	8,287
marshgerda	UG	785	-6%	9,444
marshgerda	PBT	769	120%	21,983
marshgerda	USHS	1,078	-63%	3,665
marshgerda	ICFI	482	-9%	9,163

marshgerda	Totals		#DIV/0!	136,534

marshgerda	Totals		#DIV/0!	136,534

Laying Down

I almost had a moment of weakness this morning. I saw that TPX was going to announce their earnings after the bell this evening. I have had so, so many stocks gets crushed recently post earnings, who could blame me for being gun shy? In addition, they do have that four letter word: debt.

But I did a little reassuring research. Of course it is easy to bias your research and focus on that which agrees with you. The first point was that S&P had recently (in March) downgraded them to stable. Now stable isn't the best (I think positive is) but it does mean S&P had kicked the tires (pretty hard, as I know from experience) and at least thought things weren't terrible (S&P Moves Tempur-Pedic Outlook to Stable).

The other comforting thought was that two hedge funds recently took major positions in TPX and they were funds that knew the company and management well... so I assume they were "informed" buyers. After that, I decided to stand pat.

And it appears to be a good move (Tempur-Pedic Reports First Quarter Earnings). While TPX did not exactly have a "Google" moment, expectations were so low that the stock moved up 10% in happy hour trading (granted not the most reliable market). They said they expect to earn $1.20 to $1.45 next year... that is not a disaster in a down market for a $12 stock.

Tomorrow may be interesting. 35% of the stock is short. It wasn't a blow out, but it isn't a blow-up... I don't think I'd want to be short.

Not much other news. In the past two days PRLS has gone from a low of $1.95 to $2.15. I do think they'll start moving towards $2.85, which is my back of the envelope value. Being a WiNeR about WNR yesterday seemed to have worked... the stock was up 3.25%.

That is a wrap. Go out tonight and buy a comfortable Tempur-Pedic mattress., and tell a friend as well. I know firsthand that they are super-duper.

LSR

My MFI investing world is littered with stocks that have imploded. One of note is WNR, which clearly does not stand for "winner". I bought them last August when the long painful slide started around $52. Today they closed under $12. They are no longer on the MFI lists, but I thought it'd be interesting (in a hypothetical way) to see what happened.

I first noticed WNR (Western Refining) in October of 2006 when it was trading under $19 a share and had a lot of insider buying. The stock was in many of my tracking portfolios and virtually tripled by the summer of 2007 to over $60. It was still on the lists when it dropped in August around $50, so I bought it... sigh.

I don't know exactly where they went wrong, but I suspect it was the purchase of Giant Industries (GI). This was another refiner, and WNR bought them when refining was a bit out-of-favor, so I was thinking it might have been a cheap price.

Of course, with the purchase came debt, a four letter word in today's world if there ever was one. About $1.5b in round numbers. Right now, that debt is costing WNR about $100m a year in interest. That seems pretty "cheap", I haven't done any research to see if that was a "teaser" rate.

The problem is that so far they haven't had a whole heck of a lot to show for that debt. Their run rate of revenues pre-merger was around $4b a year. Now it has more than doubled, to say $9b. But the margins have been squeezed. In 2006 they were making about 7 or 8 cents for every dollar of revenues. In the 3rd quarter of 2007 it had dropped to a mere 4 cents and then in the 4th quarter it was under a penny! Think about that, $2.4b of revenues and they made $17m in operating income before depreciation. It doesn't take a rocket scientist to figure out that $17m isn't even going to cover the $25m of quarterly interest expense.

Now I have to believe this is a temporary problem. Other refiners don't have such a tight margin. HOC made over a nickel per $1 of revenues in the 4th quarter, FTO made over 9 cents (wow!) and TSO made just a penny... so it is clearly a function of what kind of oil you're refining and your location.

It is important to note there is seasonality in refining margins, the two upcoming quarters are typically the best. I don't think WNR is not going to be able to service their debt over the year. But it was telling today when HOC and FTO were up over 4% each today for me and WNR was down 1.6%.

Let us look at what they said last quarter:

“We have taken a number of actions to improve the Yorktown and Gallup refineries so that the safety and reliability at those facilities are more consistent with our El Paso refinery. We have also implemented numerous operational changes at the former Giant refineries that will lead to improved performance.”

Actions taken to improve performance at these facilities include:

• Improved Coker operations at Yorktown to 21,000 barrels per day, an increase of about 17% over historical operations. Improving the utilization of the coker will allow for additional processing of heavier crudes;
• Renegotiated and/or terminated higher-cost feedstock agreements. For example, in early 2007, Giant entered into a fixed price ethanol supply agreement for all three of its refineries. This contract was recently terminated and we estimate, based upon ethanol spot market prices in the fourth quarter, that we will reduce ethanol costs by approximately $7.0 million per year at these facilities;
• Hired new refinery managers for both Yorktown and Gallup; and
• Transferred maintenance and engineering personnel to Yorktown and Gallup from the El Paso facility.

Reading between the lines, it seems that things were not going smoothly at Gallup & Yorktown. What to expect for the 1st quarter? I think things will be better, but not stellar. The refining Margin website I track showed mid-co, gulf coast refining margins up 20 to 30% in the 1st quarter. If we assume that WNR can get to 2 cents per dollar that would at least allow WNR to service the debt. I think the other wild card is S&P. They have placed WNR on negative credit watch. I don't know what the covenants of their loan are, but in some loans the creditors can make things unpleasant for you if your rating drops below a certain point. And I don't think I need to tell anyone that this is not the best credit market to be out with hat in hand. I wonder if they have anything that can be sold?

If they can ride out the poor quarters, the 2nd quarter looks much more promising as margins are up at least 50%. Stay tuned.

Addendum: I did skim their 10K. A downgrade by S&P could really hurt. They have a revolving credit facility to buy the oil which they in turn refine. A downgrade could cause that to be more expensive. And they also have covenants on their 1.5b loan. Not meeting certain financial ratios could cause the maturity of the loan to be shortened. I don't think that would be very positive (understatement)

Does MFI Still Work?

I think it is a fair question. I know JG told us to give it 3 to 5 years, but I am getting so far behind that I am not convinced that I'll be ahead in 3 to 5 years. I know the mantra, "buying good companies that are cheap." But I am here to tell you that some of these companies have not been good nor in hindsight, cheap.

CROX was the latest value trap. I did not buy them as I felt they were a fad. But they appeared on the list in early March by my reckoning. Today they dropped a mere 43%. NVTL, another recent top stock dropped 22% today. Last month there was JTX and TGIS. The month before IAR. It gets a little disheartening to continuously see MFI stocks in the worst 20 performers of the day. Picking from the list is starting to feel like running through a TNT factory with a match.

Of the monthly tracking portfolios I started keeping in January 2006, the MFI portfolios have been steady losers thus far. I think MFI won the first 9 of 10. But is losing or has lost the past 20. And not to twist the knife, but MFI has had the "advantage" of excluding financials which have most likely been the worst performer in any index over the past 9 months.

I am not "giving up" and I sincerely hope to be proven wrong. But I think the question has to be asked. What does the peanut gallery think?

Correction

I did underwtate how the magic diligence picks have performed. I had BBBY down 10%, when they are actually up slightly.

Symbol	Shrs	Price Paid	Trade	Gain/Loss
-	27-Mar-08	33.86	29.53	1,124.21$1,124.21	ACN	29.53	33.86	38.07	124.32 $124.32	12.43%
-	27-Mar-08	17.62	56.75	1,145.21$1,145.21	AMAT	56.75	17.62	20.18	145.28 $145.28	14.53%
-	27-Mar-08	46.77	21.38	940.29$940.29	AMGN	21.38	46.77	43.98	-59.65 $59.65	5.97%
-	27-Mar-08	29.15	34.31	1,017.98$1,017.98	BBBY	34.31	29.15	29.67	17.84 $17.84	1.78%
-	27-Mar-08	18.01	55.52	978.26$978.26	BBSI	55.52	18.01	17.62	-21.65 $21.65	2.17%
-	27-Mar-08	40.84	24.49	1,030.78$1,030.78	BBY	24.49	40.84	42.09	30.61 $30.61	3.06%
-	27-Mar-08	12.76	78.37	866.77$866.77	BVF	78.37	12.76	11.06	-133.23 $133.23	13.32%
-	27-Mar-08	20.56	48.64	912.97$912.97	DELL	48.64	20.56	18.77	-87.07 $87.07	8.71%
-	27-Mar-08	17.27	57.9	1,052.04$1,052.04	EPAX	57.9	17.27	18.17	52.11 $52.11	5.21%
-	27-Mar-08	34.91	28.64	1,081.73$1,081.73	GGG	28.64	34.91	37.77	81.91 $81.91	8.19%
-	28-Mar-08	28.20	35.46	1,077.63$1,077.63	HAS	35.46	28.20	30.39	77.66 $77.66	7.77%
-	27-Mar-08	36.73	27.23	1,263.20$1,263.20	HURC	27.23	36.73	46.39	263.04 $263.04	26.30%
-	27-Mar-08	22.13	45.18	599.09$599.09	JTX	45.18	22.13	13.26	-400.75 $400.75	40.08%
-	27-Mar-08	16.44	60.83	1,113.80$1,113.80	RECN	60.83	16.44	18.31	113.75 $113.75	11.37%
-	-	-	0.03	$0.030.03	$$CASH	0.03	-	-
				14,204.00$14,204.00	Total				204.18 $204.18	1.46%

Peerless Revised Formula

First the Peerless part of this blog. Peerless (PRLS) reported their earnings this evening (Peerless Systems Announces Fiscal 2008 Fourth Quarter and Full-Year Results). I thought the numbers were strong, and I see where they're up 6% in after hour trading (pass me a gin and tonic while I buy some PRLS!). More importantly, they announced that shareholders will be voting on the sale of a chunk of the company to Kyocera-mita. This deal would net PRLS about $40m (pre-tax). They have $23m in cash right now, so you gotta believe they'll have north of $50m post the sale. Yet their market cap is under $40m. A real head-scratcher. I guess the market doesn't have confidence that they'll use the money wisely (let's party!) or I am missing something.

Now the Revision Part.

Improvements to the “Formula”.

Not sure if it’ll help us get better results, but we should come closer to matching the website. KD on the Yahoo! Boards had taken the formulas I had posted (which I had pretty much copied from Tony Brake) and made a few slight tweaks to get much closer to the website. The big change has to do with cash. I had toyed around with a very similar change as I was concerned that at time invested capital could get very close to zero, which didn’t make any sense.

The key is to split cash into two components, which I’ll call working cash (which will be part of invested capital) and excess cash (which will be part of the calculation of enterprise value.

The calculation for working cash = (accounts payable + other current liabilities) – (receivables + inventories + other current assets) subject to a minimum of $0.

If you stop and think about it, it makes sense. If you don’t have enough current liquid assets to meet your current liabilities you have to supplement with “working” cash. Of course the beauty of this change (if you think about the math briefly) is that invested capital can now never be less than Property, Plants and Equipment, which seems sensible. Before this change, I defaulted invested capital to PPE when less than zero, but this makes more sense.

KD also had several other smaller changes. He gets his market cap from another source (I use Yahoo). I have had trouble tying to the market caps in the website so I’ll keep using Yahoo until convinced otherwise. His final comment was that he matched better not adjusting for minority interest – income account. This doesn’t come up very often. But as that income is not available to the stockholders, I’d rather keep pulling it out (unless somehow in his market cap he increases for minority interest). Anyway, in total I feel we’re closer than ever.

So here is the new and improved formula:

		hsii
+	Operating Income After Depreciation	71.83
-	Minority Interest - Income Account	-
=	Income for Calculation	71.83
	Market Cap Yahoo	572,390
	Share Price	33.13
+	Market Cap Calc	572.39
+	Preferred Capital	-
+	Short-Term Borrowings	-
+	Long-Term Debt	-
	Cash and Short-Term Investments	218.24
-	Excess Cash	164.19
=	Enterprise Value	408.20
+	Property Plant and Equipment - Net	18.12
+	Receivables	131.49
+	Inventories	-
+	Other Current Assests	31.57
+	Working Cash	54.06
-	Accounts Payable	7.09
-	Current Liabilities - Other	210.03
=	Invested Capital	18.12
	Earnings Yield	18%
	ROIC	396%
	note: working cash = Current liabilities - Current Assets (x PPE), subject to a min of $0