Friday, November 25, 2005

Zapata Corp
Ticker: ZAP
Market Cap:$116 million
Avg Volume: 7500

When we last reported on Zapata Corp, the company had announced the sale of its interest in Safety Components (Ticker:SAFY) for $51.2 million, or $12.30 per share. While we were disappointed with the sale price (SAFY trades in the $15.00 range), we understood the reasons for the lower sale price: SAFY does not have much liquidity, and Zapata's large stake in the company necessitates a discount.

In any event, we now have more details about the sale, and specifically of tax consequences to Zapata. The original purchase price of the Safety shares was $47.8 million. According to Zapata, after adjusting for transaction costs and tax basis changes, this will result in a taxable gain of just $292,000. Good news for Zapata shareholders (not that there has been much good news lately, as reflected by the sliding stock price).

Current Analysis
As of 9/30/05, and not reflecting the Safety Components sale, Zapata had $38.1 million in cash, and $14.7 million in long term debt. After recognizing the sale, Zapata should have approximately $85.4 million in cash.

Current cash (9/30/05): $38.1
Safety Sale: $47.8
Taxes on sale: $ .3

Approximate Cash: $85.4

If you have followed the Zapata story, you'll recall that their major asset is a 58 percent stake in Omega protein (ticker:OME), the leading provider of fish oil. Omega, currently trading at $6.00 per share (mkt cap $150 million), has been sliding as a result of damage to their processing facilities in the Gulf region, due to hurricane Katrina. Omega reported poor results for the third quarter (a 6.1 million loss, versus $1.8 million in income for the same period last year), and faces disruption to its operations well into this year. The company claims that insurance will cover damages to their facilities, but it is unclear how long this will eat into their top and bottom line.

Sum of the parts valuation
The following is a sum of the parts valuation for Zapata, considering Zapata's net cash (cash minus debt, and its stake in Omega.) We completely discount any remaining Zapata assets in this valuation. First, since Omega Protein is consolidated into Zapata's financials, we need to back out Omega's cash, represented on Zapata's balance sheet:

Zapata's Cash: $85.4
less Omega's cash: $10.5
less Zapata LT debt: $14.7

Net Cash: $60.2 million, or $3.15/share

Stake in Omega: $87 (150*58%) or $4.55/share

Total: $7.70/share

Of course, a discount might also apply in the Omega stake. Applying a 20 percent discount, for instance, reduces the valuation to $6.79/share.

Your editor has been disappointed in Zapata. While still holding shares, and believing it is worth more than the current price, problems at Omega are having an effect on the stock. If Omega were to emerge from recent issues, and traded at $10 per share, for example, the effect on Zapata's value is considerable. Wishful thinking? You bet. We value investors employ a lot of that....sometimes to our detriment.

*The author has a position in Zapata. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Saturday, November 19, 2005

Blair Corp- Update
Ticker: BL
Shares Out: 3.94 million
Market Cap: $162 million
Price: $41.2
Avg Volume: 30,000
P/E: 22
Dvd Yield: 1.5%

We thought it was time for a brief update on Blair Corp, the small Warren, PA based catalog and internet clothing retailer. Blair was another of the companies on your editor's list of below NCAV companies in a 2002 article published in a major personal finance magazine. While Blair is not currently trading below its NCAV it still was when we started this site in 2003, and was one of our first Cheap Stocks posts.

Since then, shares of Blair are up about 90%, not including dividends. What really caught our attention was the fact that the company recently bought back more than half of its outstanding shares. What does that tell you?

The Fundamentals
2004 fiscal year sales were $540.8 million, down from 2003’s $625.5 million, however, the decrease was primarily due to a divestiture. Net income was $14.9 million in 2004, for a net profit margin of 2.7 percent, versus income of $14.5 million in 2003, and a 2.3 percent net margin.

For the third quarter of 2005, Blair reported sales of $98.1 million, and net income of $1.4 million, down from $107.1 million and $2.9 million for the same quarter last year. The company attributed the decline to the sale of its Crossing Pointe catalog, weaker than expected response to its letter mailings, asset sales, and tender offer related expenses (the company bought back 4.4 million shares @ $42 per share).

After the stock buyback, the company has just 3.94 million shares outstanding, so these shares are getting tougher to come by. The balance sheet is not as strong as it once was. The company spent much of its cash hoard ($50.5 million at year end 2004), and took on debt ($143 million at end of third quarter, listed as short term notes payable)in order to finance its tender offer.

Going Private?
The tender offer, announced last May, and completed in August, has us thinking that this profitable company might ultimately go private. Rigorous regulatory issues, such as Sarbanes Oxley, can weigh heavily on small companies such as Blair. The following is the company's explanation of the tender offer, from a May, 2005 press release:

As a result of this tender offer, two of Blair’s major shareholder groups, Loeb Partners Corporation and Santa Monica Opportunity Fund L.P., have each separately agreed to enter into “standstill” agreements with Blair and tender all of their shares. As part of the standstill agreements, the two groups have agreed they will not attempt to exercise any control over management of Blair, they will vote in accordance with the board and management of Blair, and they will not acquire any additional shares of Blair for a period of five years.

“Blair will not accept Loeb’s recent offer to acquire the company,” said John Zawacki, president and CEO, Blair Corporation, “but will instead go forward with the repurchase of more than half of our shares. We believe the interests of our shareholders, a fundamental priority of the Board, are best served by this stock tender buyback and the entrance into standstill agreements with two of our institutional investors. We are very pleased to reward our long standing investors and are convinced that Blair’s dedication to our core customers and our independence as a Warren- based company will maximize shareholder value for many years to come.”

From the company's perspective, this move seems like a takeover defense, or effort to retain control of the company. That's probably true, but Blair might still be on the way to going private. The question is, can you make any money if that happens? We'll leave that question open.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Saturday, November 12, 2005

A Growth Stock? Out of my element…Lessons learned..and more

Jones Soda Co
Ticker: JSDA
Price: $4.88
Market Cap: $105 million
Shares Out: 21.4 million
P/E Ratio: you don’t want to know
2004 Revenue: $27.54 million
2004 Net Income: $1.33million

This is not the typical company we research here at Cheap Stocks. We are not oriented toward growth stocks; we wish were, but we just are not wired that way. We gravitate toward deep value plays, and Jones is far from deep value. So why dedicate valuable Cheap Stocks real estate toward a company trading at more than 100X earnings? Because this company reminds us our greatest investing mistake, Hansen(Ticker: HANS, $67.39).

You may have seen our March 7, 2005 column regarding our Hansen adventure (click on Hansen to see). The short version is that your editor purchased shares in the $3.5 range a few years back, watched the company trade sideways, and below, saw it ultimately hit $10, and sold. Nice gain, right? Fast forward, the now trades at more than $67, and that’s after a 2 for 1 split. Effectively, your not-so-bright Cheap Stocks Editor left more than $60000 on the table, by not holding onto the original 500 shares of Hansen. I know, I know, you should never look back after a gain, but it’s difficult not to. Truth be told, it’s a wonder I held the stock until it hit $10, it’s doubtful I would have ever held it to the current level.

Back to Jones…..
Jones Soda Co sells it sodas (under the Jones Soda Co. and Jones Naturals labels), teas and energy drinks in 41 states, and Canada. You may have seen there distinctive looking bottles sold in supermarkets, at premium prices (in my eyes, anyway) and other stores, these feature interesting flavors, and ever changing labels, submitted by consumers. The company has also made a name for itself at Thanksgiving, selling a soda assortment that includes such flavors as turkey and gravy, and mashed potato (no joke, check it out on their website). I’ve also noticed a growing presence in Target Stores, where Jones sells 12 packs at somewhat inexpensive prices. Inroads into a major chain such as Target make this an intriguing story.

The Fundamentals
It ain’t cheap. There’s no other way to say it. At about 140 times trailing 12 month EPS, 2.8 times sales, and 19 times book value, this company should not be within 10 feet of the words “Cheap Stocks”. But, however, we at Cheap Stocks are warming up to the idea of paying up for rapid growth in certain cases, and this company may fit the bill…..We have to at least be open to the possibility.

Jones 2004 fiscal year sales were $27.45 million, up nearly 37 percent from 2003’s $20.1 million. Net income was $1.33 million in 2004, for a net profit margin of 4.8 percent, up from 2003’s $324 thousand, and 1.6 percent. Through the third quarter of 2005, net sales are $32.4 million, up sharply from $21.1 million for the same period last year. Earnings, however, are down, $720,000 for the first three quarters of 2005, versus $1.245 million for the same period in 2004.

The company does not have much to speak of in the way of assets ($9.7 million in total assets, $303 thousand in cash) nor does it carry much debt either ($116 thousand in LT debt). This explains the high price to book ratio, but also the company’s very high returns on capital and equity (more than 60% for each).

The Risks
Trading at such high multiples (to nearly everything imaginable) it appears that there is a great deal of growth priced into the stock. Still, trading below $5, the stock well off it’s high of about $8. While we are impressed by the company’s exposure in Target, we believe that the agreement expires in 2006, and are not aware of renewal prospects. Finally, the beverage market is extremely competitive, shelf space is difficult to secure, and margins are typically low.

While we don’t currently own Jones, we’ll be following the story, and perhaps looking for an entry point. A continued presence in Target, continued innovation in flavors and packaging, and growing brand recognition would all be pluses for this company. We’d imagine a great deal of price volatility moving forward. Finally, it is conceivable that ultimately, a bigger player takes Jones out.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Wednesday, November 02, 2005

Trading Below Net Current Asset Value:
Trans World Entertainment Corp
Ticker: TWMC
Price: $6.45
Current P/E: 11
Shares Out: 31.9 million
Market Cap: $208 million
Net Current Asset Value: $215.4 million
Average daily volume: 115,000
*All Data as of market close 11/1/05

Trans World entertainment is an Albany, New York based specialty retailer, operating a chain of 810 stores, selling music, video, video home system products and games in 46 states. 249 stores are free standing, operating under the“Coconuts Music and Movies”, “Wherehouse Music and Movies”, “CD World”, “Streetside Records”, “Spec’s Music”, and “Second Spin” brands, while 560 are mall based, operating under the “FYE, For Your Entertainment” brand. The company also operates one Planet Music store. Music (CD’s, mainly) accounted for 55 percent of 2005 sales, Video products represented 29.2 percent, while Games and other represented 15.8 percent. (Before we go any further with this report, this company is not a potential real estate play, as 809 of the stores are under operating leases)

We recently identified this as a profitable company trading below NCAV. (Finding a company trading below NCAV that isn’t profitable is relatively easy. Those that are simultaneously generating a profit are few and far between.)

We are not typically crazy about retailers here at Cheap Stocks, especially those in highly competitive spaces, such as Trans World. However, discovering a retailer trading below NCAV is quite rare. One of our first postings when we started this site focused on Circuit City, at the time, cash rich, and trading below its NCAV, also in a highly competitive retail segment. Circuit City subsequently had a nice run-up. We are not making a comparison between the two companies, however.

The numbers
Fiscal year 2005 sales were $1.365 billion, up slightly from 2004’s $1.33 billion. Net income was $41.8 million in 2005, versus income of $23 million in 2004. Net profit margins were 2.8 percent in 2005, up sharply from 2004’s 1.4 percent.

…..And Now For The Bad News….
Companies often make the NCAV list because their price, and hence market cap fall, sometimes dramatically. It’s not typically a case of net current assets rising. In Trans World’s case, the company has taken a hit recently, falling from the $15 range this past spring, to the current $6 level. Why the drubbing? The company has been lowering earnings guidance significantly. Back in May, the company announced earnings expectations of $.85-$.90 per share for the year (ending 1/06). By July, their expectations fell to $.80-$.85. In August, the company lowered guidance again, to $.65-$.70. Last month, the company lowered guidance yet again, all the way down to $.25-$.30. Trans World attributed the latest news to weakness in music and DVD sales, and the lack of any strong new releases. Can it get any worse? It certainly could, given this company’s recent pre-announcement record.

The balance sheet
As of 7/30/05, the company had $50.9 million in cash and $20.9 million in long-term debt (including capital leases). Current ratio stood at 2.22, while quick ratio was .38. All in all, a decent, but not great, balance sheet. (If you’ve read our NCAV reports in the past, you know how much we here at Cheap Stocks love cash, and dislike debt in our NCAV companies)

The NCAV Calculation (in millions)
Current Market Cap: $208
Current Assets: $484
Current Liabilities: $218
Long Term Liabilities (primarily LT debt) $40
Net Current Asset Value: $215
NCAV/Market Cap: 1.03

Institutional ownership (greater than 2 percent)
Morgan Stanley: 10.3 %
Dimensional Fund Advisors: 9.2 %
Barclays Global Investors: 4.8 %
LSV Asset Management: 3.5 %
American Century Investment Management: 2.1 %
AX Rosenberg Investment Management: 2%

We are not crazy about the highly competitive business in which Trans World operates. While the current assets are highly concentrated in inventory- which must be moved in order to realize sales/profits- that is par for the course with a retailer. Otherwise, the balance sheet is decent, with net cash of $30 million, or about $1 per share. The company’s constant negative earnings guidance announcements are troublesome. The question is whether all the bad news, and none of the positives, are currently reflected in what appears to be a cheap current price. Only time will tell, but this is one worth watching.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.