1) I really really don't like math so I use round numbers to make life easy. The source of most of my numbers is the latest (amended) 10q for the quarter ended october 2009.
2) This is not an idea from the Buffett schism of the church of value investing.
3) Hat tip to Jae Jun and Stockdocx99 for bringing this to my attention.
Current assets of 425m minus all liabilities of about 225m equals 200m. Mr. Market offers us the company for 100m. Not only are the fixed assets free, we get a huge discount on the current assets after paying all the debt. Barring some event destroying a lot of shareholder value, this company is worth twice the price.
The opportunity exists because
a) The consensus outlook for consumer spending is not good.
b) The trend of receivables, sales and inventory indicates poor management.
c) It is unclear if buyers can afford the items they purchased on credit.
a) The demise of Circuit City is a good thing for Conn's. In a bad general economy, the closure of Circuit City brings new customers into Conn's stores.
b) A classic red flag for a retailer; in this case it is a deliberate move by the management of the bank part of the business. Keep in mind:
- Conn's normally transfers (securitises) its receivables to an off-balance sheet qualifying special purpose entity (QSPE). The QSPE's funding has reached its limit; they are unable to sell more debt. Excess receivables are now reflected on the balance sheet. The problem can be solved by contraction of the retail operations or by expansion of the QSPE. The latter may or may not be possible in the near future. The point being that this trend is NOT an indication of poor management of the retail business.
- Conn's decided to accumulate receivables on its balance sheet in the first half of 2009. Securitisation of consumer debt just wasn't an option at the time.
- Business is seasonal; receivables max out in december; inventory before that.
c) More than half the companies sales are on credit. That is where the profits are and that is the core of its business model. The receivables on the balance sheet may be worth less than the securitised debt but there is no indication they are worthless. Either Conn's retail operations contract and the receivables work their way through to the bottom line in time or Conn's manages to securitise the excess receivables on decent terms and we have a growth story.
Assets are a good starting point to look for downside protection but a company will go bankrupt if it runs out of cash.
Conns has 125m of debt. With average EBIT of 50m and a record low EBIT 25m (my estimate) for calendar 2009; interest seems well covered under the worst of conditions for a retailer.
EBIT is not the same as cash though. The ability of Conn's to service its debt depends on its ability to collect from its customers. Interest income (cash) from the securitized receivables portfolio (150m) is 20m. This does not include:
- Any cash from the 150m of receivables on the balance sheet. Say 10m (conservative) going forward.
- Income from direct sales (not on credit); including cash commissions earned on insurance sold. No idea going forward; say 0m.
The CEO and the Chairman have been with the company since the nineties. The CFO joined in 2004. Total compensation for key executives as a group is ±5m.
The company has the risks of both a retailer and a bank.
- No moat
- Questionable assets
- Seasonal as well as cyclical
- the 20 000 other risks I have not thought of yet.
Upon analysis, the common stock of Conn's promises safety of principal and an adequate return.
Any and all questions welcome as usual.