At Wax Ink, we decided a very long time ago not to use interim financial information when we perform our due diligence for a company, and in every article we write, we do our best to let readers know that our information is based on fiscal year XYZ data.
A case in point is a recent article from the AOL Daily Finance site titled Under the Radar: A Possible Ten-Bagger Stock. The article and the associated video, extol the reasons why investors should own Satcon Technology Corporation (Nasdaq: [url=http://www.nasdaq.com/aspx/infoquotes.aspx?symbol=SATC[www.nasdaq.com]]SATC[/url]). Never mind that annual Net Income has been negative since 1995!
The other stock mentioned was Horizon Lines, Inc. (NYSE: HRZ). What struck as strange here was that the company was "back to profitability", yet for FY09, the company reported a Net Loss of ($1.03) per share. Did FY10 end early?
This seeming discrepancy tells us that the Wizards of Wall Street are using unaudited quarterly financial data to sell a product, while the reality is, in our opinion, the only thing these folks care about is lining their own pockets.
But as we have learned over the years, even a ship adrift can sometimes be spotted from the air, and to us, such may be the case with Horizon Lines.
Financial information presented in this report for Horizon Lines, Inc. is based on the company's most recent SEC Form 10-K filing for year ending December 20, 2009, as filed with the Security and Exchange Commission on February 4, 20101.
What They Do
The company believes that they are the nation’s leading Jones Act container shipping and integrated logistics company, accounting for about 37% of the total U.S. maritime container shipments from the continental United States to Alaska, Puerto Rico, Hawaii, as well as to Guam, the U.S. Virgin Islands, and Micronesia.
The stock closed recently at $4.00, with Resistance at $4.11, a 3% increase from its recent close, and support at $3.65, a 9% decrease from a recent close.
With the trend line falling, Stochastic not yet reaching oversold, the MACD flat, and Daily Volume seeming to stabilize in the 300,000 share a day range, there simply doesn’t seem like much for short-term investors to get to excited about.
Long-Term (5 Year Hold) Investment
There is simply no easy way to say this, but at almost $17 per share the company has an extreme amount of debt.
What we found strange was that the company’s lenders know this. How do they know? Well with Total Debt exceeding Net Fixed Assets by more than 2.5 times, the company’s lenders charged the company an annual interest rate for FY09 of almost 8%. Something they would not have done had the company had a stronger balance sheet.
Another balance sheet related item that caught our attention was that Goodwill and Intangibles make up almost 52% of Total Assets, meaning that the company has little to offer in the way of collateral.
We also have to wonder if management is even aware of this seemingly high interest rate? We bring this up because it appears to us that management is pretty much asleep in the wheelhouse.
Why else would management allow Accounts Payables to be paid every 17 days, while allowing Accounts Receivable to be collected every 39 days, thus providing their vendors an interest free 22 day loan.
One bright spot was the company’s Free Cash Flow, which while reduced year over year, was still a respectable $3.40 for FY09.
The company also faces numerous legal challenges. This came as no surprise to us, as it simply the nature of the business. We had anticipated that most of the legal issues would be either related to price fixing, or monopolistic business practices, or would be labor related. And with the exception of one case, that is pretty much what we found.
However in April 2008 the company received a grand jury subpoena and search warrant for the Antitrust Division of the Department of Justice (DOJ) regarding antitrust violations related to the domestic ocean shipping business.
The subpoena was serious enough that the company has entered into a conditional amnesty agreement with the DOJ under its Corporate Leniency Policy. The amnesty agreement pertains to a single contract, and by signing it, the DOJ has agreed not to bring any criminal prosecution as long as the company cooperates with the government regarding this investigation.
Based on our review of the FY09 financial information for Horizon Lines, our Reasonable Value Estimate for the stock is $20-$21, with a Buy Target of $12, a First Sell Target of $24, and a Close Target of $25-$26.
Because many of the financial metrics that we believe are important when valuing a company were simply not investment quality, we reduced our Buy Target from $12 to $6.
Over the years, the decision to take a more conservative approach when it comes to determining a reasonable value estimate for a stock, has cost us readers as well as the loss of research clients. Certainly that has been, and continues to be unfortunate for us.
But be that as it may, we believed then and we believe today, basing investment decisions on interim (quarterly) financial information is nothing more than divination, and over the course of a lifetime of saving and investing, the practice will cost the vast majority of investors dearly, especially once the government realizes they cannot buy America's way to an economic recovery.