Gentex (Nasdaq: GNTX) is a supplier of dimmable mirrors for the auto and airline industry. Its products are commoditized and require nothing more than plastic moldings, mirrors, chemicals, printed circuit boards, and other inputs such as compasses. Its financials suggest it to be a wildly profitable company, yet our forensic analysis uncovers numerous red flags to suggest otherwise.
Gentex’s IPO in the early 1980s is littered with red flags. Its dimmable mirror was a carrot to bail out its struggling smoke detector business, and its management put no capital at risk. Gentex’s success has defied all the odds: it now commands a $5bn market cap and claims >90% market share. Its lead IPO underwriter and banker, OTC Net founded by Juan Carlos Schidlowski, was a notorious penny stock promoter who was later charged by the SEC and fled the country.
Gentex’s 40% gross margins are vastly superior to all global auto suppliers and are likely overstated by 2x. We believe it’s aggressively leaving costs in inventory (inventory growth is 3x revenue growth) while inflating capex through nonsensical projects (e.g. its North Riley Campus is 90% over initial budget). We commissioned a product tear down by IHS, an automotive expert, to examine its components. In our view, Gentex’s rhetoric pertaining to its mirror’s level of proprietary components and vertical integration is likely exaggerated. We also have documented proof of capex misstatement.
Despite margins and profitably that dwarfs auto supply peers, Gentex policies that are touted as shareholder friendly are not what they appear. Its dividend growth has been well below the rate of its reported free cash flow growth, which is likely overstated, and its share repurchases are mostly to offset dilution. Gentex has amassed an abnormal amount of cash on its balance sheet, and has irregular Level I and II classifications. We believe Gentex has shunned M&A to avoid outside scrutiny. The only acquisition of note in its history was of HomeLink, a related-party deal where we find issues.
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Spruce Point is pleased to release its updated report on iRobot Corp (Nasdaq: IRBT)
With iRobot’s share price up 300% since 2016, investors are cheering the re-acceleration of sales and earnings growth following years of disappointment, and ascribing a peak valuation to plateauing earnings. Spruce Point believes the financial improvement reflects temporary factors and may not be sustainable. We expect new competition to storm the market, and challenge iRobot’s US market share dominance.
iRobot’s recent financial performance reflects restocking of its supply chain after years of false starts, the removal of the struggling military business, and the acquisition boost from its Japanese distributor. We believe these factors will create very difficult comparisons for iRobot to lap in the future, and create headwinds for future share price appreciation. Furthermore, we believe recent gains are a result of lowering the price of its Roomba to move down market, which we believe is a long-term negative on margins for a technology hardware company with a narrow product focus
Investors are overlooking financial control issues tied to iRobot’s recent acquisition of its Japanese distributor. The Company suspiciously retracted certain statements made about Japanese sales growth (reversing big gains to declines), and made revenue and earnings revisions which don’t add up. Spruce Point has previously pointed out early warning signs at Sabre and Caesarstone, both which made related-party distributor acquisitions ahead of extreme financial revisions. Market observers will note that Valeant’s attempt to buy Philidor was another canary in the coal mine. Download the report to read more.
RADIANT LOGISTICS INC. (“RLGT” or “the Company”) is a company that specializes in transporting unique or difficult shipments.
Radiant’s CEO Bohn Crain and first General Counsel Cohen were executives at Stonepath Group (AMEX: SRG / OTCBB SGRZ), whichcrumbled when it admitted financial and accounting irregularities tied to revenue overstatement / expense understatement. An SEC inquiry commenced, allegations of fraud were made, and Stonepath was delisted, and faded to the pink sheets and insolvency
The SEC has already questioned Radiant’s accounting, and it has made the scary disclosure that its margin method, “Generally results in recognition of revenues and purchased transportation costs earlier than the preferred methods under GAAP which does not recognize revenue until a proof of delivery is received or which recognizes revenue as progress on the transit is made.”
Don’t expect Radiant’s minor league auditor named Peterson Sullivan to spot problems, Radiant pays them minuscule audit fees and three Peterson employees (2 partners) have been cited in less than two years for professional misconduct by the PCAOB and SEC
WIX.com (Nasdaq: WIX or “the Company) is an Israeli based technology service provider offering a free website solution that depends on upselling customers on additional features. With WIX’s share price up approximately 300% in the last twelve months, we believe investors are overlooking many issues that could cause a substantial price correction:
WIX’s “unicorn” model appears too good to be true and there are emerging cracks beginning to appear in its financial statements including subtle revenue and tax restatements, and anomalies in its cost structure. WIX portrays itself as a well oiled machine with world record gross margins at 85% and that it will have spent ~$30m on capex from 2010 – 2017 to accumulate >100m registered users, engineer a negative churn business that produces $400m of revenues, $1.4 billion of collections, and is worthy of a $4bn market cap. Based on our analysis, these results merit scrutiny (e.g. try finding another negative churn business or capex efficient model). The SEC recently issued comment letters to WIX questioning its aggressive Adj. EBITDA presentation and its pace of revenue recognition and expense deferral. After two EBITDA revisions already, investors should be suspicious, but we believe more revisions may come. WIX is dropping subtle hints in its 20-F that because it is no longer an “emerging growth company” under Section 404 of Sarbanes Oxley, it will face stricter financial control.
WIX insiders have incentives to heavily promote its shares and left clues to suggest it intends to dilute with 2-3 million new shares We estimate its two founders are sitting on $225m of option gains needing to be monetized. Options under the 2013 plan start becoming fully vested in 2017. Early venture backers (Benchmark, Insight, Bessemer) have exited and only one initial backer remains. None of WIX’s top shareholders are Israeli funds. WIX has lured in retail investors and US funds through repeated Cramer Mad Money episodes. Now that WIX Is claiming it has reached a cash flow positive inflection point, and has ample cash on the balance sheet, we find evidence of pending dilution
PTC’s Conversion Story From Perpetual Licenses To Subscription Model Is Late To The Game, And An Excuse For Management To Explain Away Poor Results And Deteriorating Economics. Its Conversion Uses Gimmicks And A Questionable Value Proposition To Compel Users To Subscribe.
Investors Are Ignoring PTC’s Weak Financial Results In Favor of Dubious Metrics Such As “Bookings”, “ACV” and “Unbilled Deferred Revenue” – Read The Fine Print, They Have No Correlation To Future Revenues. We Even Spoke With PTC’s Former EVP of Sales To Ask His Opinion What These Metrics Mean, And He Couldn’t Explain Them. We Can’t Even Find Evidence That PTC’s $20M Mega Deal With The Air Force (It Booked And Said Closed In Q4’16) Even Exists With PTC As The Prime.
PTC’s 5 Yr. Recurring Restructuring Odyssey Appears To Be An Elaborate Accounting Scheme To Sell Investors On Meaningless Non-GAAP Figures. We’ve Done A Deep Dive Analysis And Are Shocked By PTC’s Overstatement Of Office Locations, And Irreconcilable Employee Headcounts. Are They Just Firing And Re-Hiring People To Expunge Expenses? We Believe Its Restructuring Directly Violates SEC Guidelines Given Its Inability To Make Reliable Estimate. PTC’s CFO Was Chief Accounting Officer At Autodesk During A Period It Had an SEC Investigation And Said Its Financials Could No Longer Be Relied Upon.
While All Analysts Say “Buy” Six Insiders Have Stock Sale Programs, And They Only Own 1% Of The Company. Analysts’ See Upside To $60 (+12%), But We See 50% – 60% Downside As Our Long-Run View. This Represents A Terrible Risk/Reward For Owning PTC’s Shares. PTC Is Trading At Peak Valuation With Little Covenant Cushion; Careful Investing To All…
Spruce Point is short CECO Environmental (Nasdaq: CECE, “CECO” or “the Company”), a poorly constructed roll-up serving the environmental, energy, fluid handling and filtration industrial segments. Based on our forensic financial analysis, insider behavior, and anticipated changes in the regulatory environment driving its business, we believe CECO is at high risk of a covenant breach in 2017.
CECO has been touting to investors that it has been successful in delevering its balance sheet post-PMFG acquisition, and that its current Net Debt to EBITDA ratio is down from 3.6x to 1.6x as of 9/30/16. On the surface, this appears impressive, but the picture is not so simple. CECO should be pointing investors to is “Leverage Ratio” covenant per its credit agreement which looks at gross leverage (not net of cash) and includes significantly more debt obligations beyond just its term loan…
MGP Ingredients (“MGPI” or “the Company”) Is A Commodity Ingredient and Alcohol Producer Now Being Spun As A Sexy Transformation Story Into A Premium Producer of Branded Whiskey and Bourbon. MGPI is a simple story to understand. It operates two businesses: an ingredients business run from Kansas and an alcohol distillery in Indiana. Both of these facilities are old assets and prone to substantial operational hazards. Most recently, MGPI has experienced fires, work outages, and chemical disasters requiring the hospitalization of innocent people.
MGPI’s shares have appreciated 1,000% since 2014 as investors have cheered the Company’s decision to hire new management, reprioritize its businesses away from commodity ingredients, and focus on “higher margin” premium alcohol beverages. MGPI has also recently benefited from a temporary, yet unsustainable, increase in earnings from its 30% joint venture with Seacor (NYSE: CKH) called Illinois Corn Processing (ICP).
On the surface, the Company’s transformation strategy appears wildly successful. Its EPS has risen from a loss of ($0.29) in 2013 to positive earnings of $1.50 per share in the LTM 9/30/16 period. Over the same period, sales have essentially been flat, but gross margins have expanded from 6.4% to 18.1%
Spruce Point Believes Investors Should Be Cautioned Not To Extrapolate Recent Earnings Performance. We Believe There Are Numerous Business Risks And Cracks In The Growth Story That Are Not Being Adequately Discounted…
Our interest in Ultimate Software (“ULTI” or “the Company”) was initially peaked when a little-known firm called Soapbox Research published a skeptical report highlighting aggressive software development cost capitalization, potential revenue exaggeration, bloated stock compensation expense, and corporate governance concerns.
One of our most successful shorts in the past few years was Caesarstone (“CSTE”), an Israeli quartz counter top manufacturer. We noted that its margins were suspiciously higher than its peers, and raised concerns about the potential for cost capitalization related to its U.S. plant expansion. We also worried about the governance structure, and influence of the Kibbutz (a communal / family-like structure). To support our short thesis, we conducted deep fundamental analysis and received the Company’s quartz supply contract (through a Freedom of Information request) to illustrate why we believed its margins were unsustainable. The parallels between Caesarstone and Ultimate Software are striking:
Burlington (“BURL” or “the Company”) Is An Old School Retailer Now Being Spun As A Sexy New Growth Story Amidst An Intensifying and Ultra Competitive Retailing Environment.
Burlington Stores (formerly Burlington Coat Factory) is an “off-price” discount retailer based in Burlington, NJ that sells men’s and women’s clothing, home furnishings, and accessories. It competes with the likes of TJX Companies (T.J. Maxx, Marshalls), Ross Stores, and countless other retailers offering shoppers a discount to the M.S.R.P.
Burlington Has Been Touting impressive Comparable Store Sales (“CSS”), Gross Margin, and EPS Gains, While Shrinking Same Store Inventory. We Don’t Think It Can Last. Spruce Point Has Identified Numerous Financial Presentation, Accounting, And Business Issues That Could Be Signaling A Slowdown In Future Financial Results.
Echo Global Logistics (“ECHO” or “the Company”) was founded in 2005 to roll-up the transportation logistics / brokerage sector. Founded by the same people behind Groupon, and another public company noted originally by Barron’s in 2007, Echo has yet to be fully exposed until now. Led by Eric Lefkofsky and his partner Brad Keywell, these inter-related, yet distinct publicly traded businesses share the same founders, business address, auditors, and same modus operandi of hyping “proprietary” and “disruptive” technologies capable of earning “massive” profits in large, fragmented markets. In our opinion, time and results have shown these predictions have failed to live up to initial expectations, and have lead to large shareholder losses to post IPO investors, but enriched its founders and early backers who quickly dumped stock.
AECOM (“ACM” or “the Company”) is a global engineering and construction firm based in Los Angeles, and is an enormous roll-up that came public in 2007. Bowing to pressure from an activist to maximize shareholder value, URS Corp (URS) sold itself in October 2014 to AECOM (for approx. $5bn –a cash/stock deal which included the assumption of $1bn in URS debt). The URS deal is the largest in AECOM’s history.
The URS deal was touted as giving AECOM “heft” in the oil and gas market, at exactly the wrong time! As shown by the investor presentation, URS also added exposure to the mining and industrial sectors –other areas that have shown persistent weakness since 2014.
Spruce Point has been following AECOM, and has generally viewed its post-deal financial results with skepticism. Our view was fortified when on Aug 10, 2016 after reporting Q3’16 results, AECOM filed an amended 10-K/A.
Sabre Corp. (Nasdaq: SABR) is a travel tech company with a core business of operating a Global Distribution System (“GDS”), a platform that facilitates travel by bringing together content such as inventory, prices, and availability from a broad array of travel suppliers for a range of travel buyers such as online/physical travel agents and corporate travel departments. As a middleman between buyers and suppliers, Sabre’s biggest risk is disintermediation, whereby its consumers bypass its network, through emerging threats from Google, or even worse, suppliers imposing fees to customers for using it (e.g. Lufthansa).
As a result of underlying business pressures, we believe insiders were likely aware that revenue and earnings estimates would not be met in 2015… Download our report to learn more.
Questionable Business Strategy with Unachievable Revenue Goals: The fitness industry is intensely competitive, subjecting Planet to the whim of changing consumer preferences (yoga, boot camp, barre burn, adventure courses), potential technology disruption from wearables, and rife with examples of chains that over-expanded and failed (e.g. Bally Total Fitness, Curves, Town Sports). Planet Fitness (“Planet” or “PLNT”) tries to differentiate itself with a “no judgment” model for the casual fitness user that doesn’t want to be “gymtimidated,” at no-commitment, and a low entry price of $10/month (plus initiation fees). On average, its clubs have 6,500 members, and it needs both densely populated markets and members who won’t use its gyms to make its financial model work! Furthermore, we believe Planet’s revenue targets and growth rate are unrealistic and likely to disappoint current expectations. Download our research report to learn more…
In our opinion, Tower is a collection of old semi foundries cobbled together from acquisitions, which produce significantly below industry average GAAP gross margins (from 2012-2014 Tower 9% vs. 23% peer average). Having gone through numerous financial restructurings in the past, Tower promotes large revenue goals reaching $1bn, and a large Non-GAAP EPS headline of questionable merit, but has amassed ($695m) of negative cumulative free cash flow since 2004! Not having the capital support or free cash flows to fund the large capex requirements to compete in the semiconductor manufacturing industry, Tower spends just 15% of sales on capex vs. peers at 40% of sales. Download our research report to learn more…
Formed from Canadian shell companies, Intertain has completed four acquisitions, each of which has gotten larger and fed Intertain’s ‘growth at any cost’ mentality which is likely to end in disaster. Intertain’s initial transaction was with Amaya Inc (a 2.7% owner), whom is currently being investigated (by FINRA) for insider trading (the largest investigation ever in Canadian history). Intertain acquired Amaya’s InterCasino brands for C$70m. Amaya acquired these assets through its acquisition of Cryptologic (where Intertain’s CEO was General Counsel). Our diligence suggests Cryptologic paid a ‘nominal amount’ for the Malta’s InterCasino gaming license. Our research closely explores Intertain’s acquisitions and finds significant issues for a majority of the deals, notably the Gamesys acquisition.
Spruce Point is pleased to release its latest report on IRSA Inversiones y Representaciones S.A.(NYSE: IRS), Cresud S.A.C.I.F. y A. (Nasdaq: CRESY), and IDB Development (Tel Aviv: IDBD). IRSA is a Latin American real estate company. IRSA recently invested $300m+ in IDB Development Corp. (TLV: IDBD), an Israeli holding company with interests in real estate, communications, agricultural products, insurance and technology. IDBD is burdened with $6.7 billion of net debt, going through a restructuring process, and has a “going concern” warning from its auditor. It is dependent on further capital injection commitments from IRSA of approximately $185m through 2016…
Since Spruce Point’s initial report on Caesarstone (Nasdaq: CSTE or “the Company”), which highlighted many fundamental issues facing the Company, along with potential accounting irregularities. In our opinion, many of the open questions remain inadequately addressed, or completely ignored, by the Company and its group of supporting analysts. Spruce Point’s follow-up report reiterates open questions and delves deeper into the issues we believe are facing Caesarstone.
This report will highlight additional potential accounting issues which are related to capital expenditures.
Spruce Point is pleased to release its latest report on CAESARSTONE SDOT-YAM LTD. (NASDAQ: CSTE). Caesarstone’s (CSTE) price recently corrected after Q2’15 earnings beat Wall St. estimates, but it cut its sales guidance from $515-$525m to $495-$505m, while maintaining its EBITDA guidance. We believe this is the canary in the coal mine, and CSTE is at continued risk of missing its goals in light of flat import tonnage growth and rising competition. CSTE trades at 3.4x and 13.5x 2015 Sales and EBITDA, respectively, a substantial premium to building products peers at 1.3x and 12.0x on the premise it can maintain share and grow sales 15% p.a. We believe CSTE should trade at a discount to peers of 8x – 10x EBITDA given our concerns about product and earnings quality, its shares would be worth $11 – $29 (~40% – 75% downside) on a normalized 10-20% EBITDA margin range. Since its 2012 IPO, its controlling shareholder has reduced its ownership from 79.0% down to 32.6%; we expect continued stock liquidations by its majority owner
Spruce Point is pleased to an updated report on NCR Corp.(NYSE: NCR). In our follow-up report, we will profile a blatant example of poor judgment and capital allocation to support our opinion that NCR’s shareholders should demand immediate change at the executive level. But first, let’s review NCR’s recent quarter and further dispel any notion that value enhancing alternatives are imminent and that NCR had a stellar quarter where it “Beat” street estimates.
Spruce Point is pleased to release its latest report on GREIF INC (NYSE: GEF/GEF.B). Greif (GEF) is in the business of industrial packaging products and services. Its businesses appear largely commoditized, are capex intensive, and under severe pressure from FX headwinds ( Venezuela, Brazil, Russia, Europe) and slackening demand tied to pressures in various end markets ( e.g. energy ). Overall, the company is experiencing deflationary-like pricing power and very low single digit / declining volumes.
Spruce Point is pleased to release its latest report on AMETEK Corp (NYSE: AME). With Limited Organic Growth, Ametek is Under Pressure as its Strategy Appears to be Hitting a Brick Wall. It Underinvests in R&D and Buys What it Cannot Develop. This Strategy Inherently Benefits its Margins and EPS, Which We Have Evidence that Suggests Are Overstated By Up to 600bps.
Spruce Point is pleased to release its latest report on iRobot Corp (Nasdaq: IRBT). Media Hype of a Robotics Revolution (Similar To 3D Printing Craze) Is Overblown. IRBT Is Hyping Its IP Portfolio, But Lacks A Monetization Strategy. The Hype Is To Divert Attention From Its Core Problems
Prescience Point is pleased to release its latest report on LKQ Corp (Nasdaq: LKQ). The 122 page report outlines extensive research into the companies financial reports and we believe the following: LKQ is an ineffective roll-up, they are caught in a massive margin squeeze, problems with their new growth story, dramatic overvaluation, and previous fraud and failures.
We believe shares of Fleetmatics Group PLC (“the company”, or “FLTX”) are grossly overvalued, reflecting few, if any, of the serious risks that warrant questioning the credibility of the company’s financial statements.
Just Energy (NYSE: JE / TSX: JE) is a company that U.S. consumers and investors are quickly realizing has become toxic to their wallets through deceptive energy marketing practices, and harmful to their brokerage accounts.
We believe shares of InnerWorkings, Inc. (Nasdaq: INWK or “IW”) are grossly overvalued and poised to collapse by as much as 55%. We believe the company is inflating its revenues in violation of GAAP principles by misapplying gross revenue accounting, placing it in violation of its credit agreement.
Prescience Point follow-up report on Boulder Brands’ (Nasdaq: BDBD), consisting of a deep-dive look at the company’s Q4’2012 results and management’s 2013 guidance. In short, the story does not add up and we expose the red flag components of its missing pieces.
Amidst a storm of investor distaste for U.S.-listed Chinese equities, and with its shares trading at a fresh 5-year low earlier this year, AsiaInfo-Linkage, Inc. (ASIA) followed the precedent of numerous other Chinese companies in announcing it had received a “Go-Private” proposal on January 20, 2012.
In this report, we explore United States Antimony Corp (Amex: UAMY) which made its graduation from the bulletin board to the AMEX on May 21st at approximately $4.00 share, giving the company a $275 million valuation.
On February 23rd, Bazaarvoice (Nasdaq: BV) raised $114 million at its initial public offering by selling 9.5 million shares at $12 per share. The expected pricing range was $8.00 – $10.00 per share, and the shares ultimately closed at $16.50 on the first day of trading. At today’s price of $17.00, the company’s fully diluted enterprise value is approximately $1.1 billion.
LQMT is a highly promoted penny stock with a market cap that exceeds $125 million, and highly speculative business prospects. However, a little due diligence reveals a company with a troubled past, as highlighted in an earlier article written by StreetSweeper in 2010, a convoluted capital structure, and a virtually insolvent business.
Global Sources Ltd. (Nasdaq: GSOL) is perhaps the original and oldest existing China RTO Company in the US stock market. In March 2000, Global Sources exchanged 100% of its shares for a 95% stake in Fairchild (Bermuda) Ltd., a subsidiary spun‐off from the now bankrupt Fairchild Corp. Through this deal, Global Sources obtained a public listing on the Nasdaq in order to provide liquidity to shareholders and a venue for raising additional source of funds for expansion.
A closer look into Camelot Information Systems (“CIS”) and their position in the Chinese Information Technology industry reveals numerous question marks investors should consider.
All around the world, biodiesel is a challenging business with high capital costs, cyclical gross margins and returns on capital. There are limited barriers to entry as production processes to make biodiesel are well understood and can be accomplished by specialty chemical plants of all sizes.
ZST Digital Networks (OTCPK:ZSTN) came public in October 2009 and raised $25 million by offering 3.1m shares at $8 per share. The offering was led by Rodman & Renshaw and Westpark Capital, two ubiquitous underwriters in the market for bringing Chinese companies public in the U.S. through reverse takeovers (RTOs).