- In our opinion, Aerojet Rocketdyne (NYSE: AJRD) – formerly Gencorp (NYSE: GY) – is facing fundamental pressures, masked by complicated and aggressive accounting, which gives investors a potentially misleading impression of stability and growth. While holding no conference calls, and having only four analysts cover the stock, we believe the market is fundamentally ignoring ~$900M of liabilities associated with the business, making the Company 5x more levered than it appears and its valuation “cheap”. Furthermore, analysts blindly pencil in 4% revenue growth in the next two years, despite hundreds of millions of dollars in revenue programs that are disappearing. We see 40% – 60% downside once investors piece the puzzle together.
- Aerojet’s primary rocket propulsion business has historically benefited from high barriers to entry, oligopolistic pricing and favorable cost-reimbursable contracts. In our opinion, these dynamics appear to have enabled the Company to win business and protect margins, despite many claims it lacks a culture of innovation
- These dynamics have shifted in recent years with the emergence of disruptive low-cost competitors driven by lionized CEOs (Blue Origin / Bezos and SpaceX / Musk ), and the impact of the Northrop’s Orbital ATK acquisition on AJRD’s missile business
- The winding down of various platforms (AJ-60 + RS-J8) and failure of AR1 to low cost competitor Blue Origin’s BE-4 engine for the Vulcan Rocket. We believe the loss to Blue Origin was the death blow to Aerojet by losing ULA, its only customer in space launch. ULA, a material 17% customer, is expecting to coming under pressure: earnings are forecasted to be down 47% in 2019. Spruce Point estimates these losses eliminate $300m of expected revenues in the near and long-term
- Revenues from RS-25 for the SLS program (14% of 2018 revenues), are set to decline from the Sept 2018 completion of a $2.0bn contract, and the run-off from the 2015 $1.5bn contract to be completed by 2023. Longer-term challenges remain with NASA’s over-budget Space Launch Systems (SLS) program dubbed the “rocket to nowhere”, and a recent change of tone at NASA suggest it is taking steps to find cheaper commercial alternatives to the RS-25.
- In 2018, Aerojet benefitted from boosts in missile orders from key programs which are set to decline by 5% and 11% in 2019/2020, respectively, according to the recent March 2019 DoD budget request. We estimate that Aerojet’s revenues increased $117m in 2018 from the growth in just two key programs: Standard Missile and THAAD. These two key programs are budgeted to decline by 2% and 35% in 2019 and 2020, respectively
- Management And The Board Have Little At Risk Owning Just 3.0% Of The Company (1.9% ex: Chairman Lichtenstein’s Ownership). Years Ago, The Employee Savings Plan Was A Material Owner >10%, Now It’s Effectively 0%. Short-Term Incentive Bonus Definitions Becoming Much More Subjective, Conveniently Allowing The Board To Lavish Management With Credit For Maximum Cash Compensation
- Upon Hiring, The CFO’s Bio Claimed He Was A CPA, Yet His Bio Now States He “Completed Exam Requirements”. General McPeak was the Lead Director at Miller Energy Resources (NYSE: MILL), a bona-fide accounting fraud that went to zero. The SEC charged management with securities violations and even fined the auditor. Perry was CFO and Treasurer of United Industrial Corp during a period the SEC blasted it for fraud concerning foreign corruption and stated the Company “lacked meaningful controls to prevent illicit payments.
- By applying a discounted multiple range to our adjusted enterprise value and financial results, we derive a price target of $13.00 – $20.00 (40% – 60% downside) including entitled land value. Follow the money: Many long-term owners are consistently selling stock and reducing ownership. Aside from passive investor Vanguard, Aerojet has attracted only one new fundamental investor of size in recent years
- Dexcom, Inc. (“Dexcom,” “DXCM,” or “the Company”) manufactures continuous glucose monitoring systems (“CGMs”) for diabetic patients. It competes with Abbott’s FreeStyle Libre in the stand-alone CGM space. Dexcom’s G-Series has until now been considered the gold standard, with the Libre a cheaper, user-friendly alternative. However, Abbott is set to release the Libre 2 in the U.S. imminently – in a matter of weeks or months, we believe – and will close most, if not all, of the technological gaps which separate it from Dexcom’s G-Series. CGM commoditization will promote heavy price competition – and Abbott, as the low-cost manufacturer by a factor of 4, can put heavy pressure on Dexcom profits with little downside to its own margins. The Street believes that the down-market Libre is not a serious threat to Dexcom’s market, but the Libre has taken >70% incremental share of the U.S. Type 1 (“T1”) market and >95% incremental share of the U.S. Type 2 (“T2”) market since first being released in the U.S. – even before the release of the more advanced Libre 2. We believe that the G6’s target U.S. T1 market offers just 1-2 years of remaining patient growth, severely restricting Dexcom’s patient base until the release of the T2-oriented G7 in late 2020-21 at earliest. Importantly, we also find evidence that Dexcom’s recent sales growth acceleration was driven by an effective price increase and stockpiling of cheaper legacy G-Series models – and is not an indication of recent patient growth (which management conveniently stopped disclosing).
- Abbott Set To Close Technological Gap Between Libre And Dexcom G-Series: Until now, Dexcom’s alarm-equipped, accurate G-Series has been considered the gold standard of stand-alone CGMs, with Abbott’s Libre (new in the U.S. as of 2018) a low-cost, easy-to-use alternative. Abbott, however, is set to release the Libre 2, which includes a similar high/low glucose alarm and is sufficiently accurate to serve the needs of most, if not all, diabetics. Priced at an ~80% discount to the G6, the Libre is the far more sensible option for T2 diabetics, and even T1 diabetics – a surprisingly price-sensitive population, per our proprietary survey – will be drawn to the cheap yet advanced Libre 2. Whereas Dexcom was once a technologically-superior first mover, it is now fighting with near-equals for mass-market adoption.
- Dexcom Has Few Avenues To Near-Term Patient Growth: U.S. T2 patients did not adopt CGMs in material size until the release of the far cheaper Libre 1. Abbott is now taking >95% incremental share of U.S. T2 patients, suggesting that T2 patients may have never been part of the G-Series TAM. Dexcom will effectively be locked out of the T2 market until it releases a cheaper, down-market CGM similar to the Libre (late 2020-21 at earliest, per management, after having failed to meet its initial target of 2018). Libre is also taking >70% incremental share of U.S. T1 patients, even before the technologically-comparable Libre 2 hits the market. With the U.S. T1 market already ~50% penetrated (with a likely ceiling of 70-80%), Dexcom has limited room for patient growth through the next 1-3 years as T1 patient adoption decelerates, as it competes against the cheap yet technologically-comparable Libre 2 in its core T1 market, and as it fails to make significant headway in the T2 market – by far the largest source of CGM patient growth through FY19-21 and beyond.
- Abbott’s Economies Of Scale As A Large Medical Device Player Could Overwhelm Dexcom Amidst Industry Pricing Pressure: The leveling of the technological playing field between Abbott’s and Dexcom’s CGMs will likely bring downward price pressure to the space, particularly given the Libre’s current ~80% discount to the G6. Abbott is the low-cost CGM manufacturer by a factor of 4, and could overwhelm the one-product Dexcom in an aggressive price war. If Dexcom is forced to price its current CGM lineup on par with the Libre, Abbott could wipe out Dexcom’s gross profit in its entirety given Dexcom’s while taking only a 100 bps hit to its own gross margin, per our estimates. Dexcom’s vast scale disadvantage could also potentially prevent it from ever producing a cheaper T2-targeted CGM profitably.
- Investors Misinterpreting Recent Growth Acceleration As Growth In Patient Base: Bulls believe that recent sales growth acceleration to >50% yoy has been driven largely by patient base expansion. However, the decoupling of transmitter sales growth from sensor sales growth suggests that the growth acceleration is a consequence of A) recent effective sensor price hikes and B) stockpiling of cheaper legacy G-Series sensors ahead of the release of the more expensive G6. Management no longer discloses patient base growth as of February 2019, hiding any recent slowdowns in patient base growth from investors’ view.
- A Risky One-Product Company Valued As A Growth Story: DXCM is valued at a 57% premium to peers on its seemingly exciting growth story despite exposure to competition / TAM saturation. Even bullish sell-side analysts see only ~5% upside, and smart money seems to be wary of DXCM’s growth prospects. We see 45-60% near-term downside in DXCM shares on disappointing sales growth and a multiple rerating, and even more potential future downside on longer-term price pressure.
- Spruce Point has discovered new evidence that SharkNinja (“Shark”) – a major competitor of iRobot (IRBT or “the Company”) – is primed to release a new, high-end, smart, and home connected robot vacuum cleaner (RVC) priced at a 25% discount to the comparable Roomba i7. Another competitor has already begun selling a comparable product at close to half the price of the i7. Whereas Shark and other competitors have until now taken share primarily at the lower and middle tiers of the robot vacuum market, they now will compete at the premium tier. The consensus among bulls is that Roomba is a technologically superior product and the market leader at the premium tier, affording it some protection from pricing pressure. We believe that this narrative is no longer valid: iRobot will now face legitimate competition at the high end of the market.
- Management has attempted to drum up investor confidence by pitching the potential of its non-Roomba products – specifically, its robot mop (Braava) and forthcoming robo-lawnmower (Terra) – but we believe that guidance is aggressive on the former (by management’s own admission), and we are skeptical that the latter will meet with commercial success in the U.S. Investors should brace for significant disappointment.
- Release Of High-End RV950 Shark Robot Vacuum Appears Imminent: Spruce Point recently discovered that Shark is prepared to release the RV950 – a high-end robot vacuum with features comparable to those of the Roomba i7, but priced at a 25% discount. Product listings for the vacuum have already been prepared on Wayfair and Walmart’s online stores. Shark’s entry into the lower and middle tiers of the market in 2017 represented one of the first non-Roomba robot vacuum product launches by a recognizable and respected home appliance brand, and Shark has since competed aggressively with iRobot’s mid-tier vacuums and has successfully taken market share. We believe that Shark will apply similar competitive pressure to the higher end of the robot vacuum market with the launch of the RV950.
- RV950 Representative Of Trend Of Heightened Competition At Top Tier Of The RVC Market: We see the impending release of the RV950, and other recent product launches, as evidence that iRobot competitors – once considered “off-brand” or “no-name” products occupying the lower end of the market – are rapidly closing the technological gap between themselves and Roomba, and that robovacs are thus becoming increasingly commoditized. Formerly-unknown brands are quickly gaining respect from the tech world and are seen as legitimate Roomba alternatives. Even then, competing products continue to be priced at a material discount to comparable Roombas. We estimate that pricing pressure at the high end of the market could cost iRobot ~12 points of gross margin on its Roomba segment.
- Aggressive Braava Projections Unlikely To Come To Fruition: Management is aiming for Braava to contribute 10% of FY19 total sales. Given iRobot’s FY19 sales guidance, this implies that management expects Braava sales to grow by over 50% in FY19. This would be entirely out of line with historical growth rates and with Braava’s recent performance in markets in which it has achieved some level of popularity – namely Japan. We believe that Braava sales will grow by no more than 20-25% in FY19 at the high end. Management’s Braava guidance also implies that it expects Roomba sales to grow by just 14-17% in FY19, a meaningful step down from recent growth rates.
- Terra A Poor Fit For The U.S. Market: After nearly a decade of development, iRobot finally announced the launch of its robot lawnmower on the Q4 FY18 call. iRobot has a tremendously poor record of developing and selling products outside of its core Roomba line – particularly products meant for outdoor use. We believe that the Terra is a poor fit for the U.S., where lawns are large and difficult to navigate by global standards. In Europe, where the robot mower market is already developed, iRobot will compete with established, respected brands with technologically-advanced mowers, yet with sufficiently deep pockets to weather a price war. This stands in contrast to the conditions which led to Roomba’s success in the U.S., where it came to dominate the market by establishing itself as a first mover and a relatively premium product.
- Valuation Makes Little Sense: IRBT shares have run up from $75 to as high as $130 through the recent bull market on little more than sporadic optimism regarding U.S.-China trade talks. We find it puzzling that IRBT shares reacted so positively to what was at best a mixed Q4 earnings call. We believe that increasing competition and downward pricing pressure will continue to weigh on top-line growth and margins, and that multiples are tremendously overextended – how else could every single sell-side price target be below current share prices? A potential tariff hike to 25% remains a material risk for iRobot, and could drive another ~15% downside to IRBT shares.
- Spruce Point believes that the recent terrible financial results reported by Carvana continue to validate our concern about its uneconomic business model that isn’t scaling, is capital destructive, and favors insider enrichment over shareholder wealth creation. Our revised price target is $7.50 – $19.60 (56% to 83%).
- Q4’18 Results Disappoint By A Mile..Retail Units: 27,750 (vs Bloomberg cons 29,200, vs guidance 27,500 – 30,000)
- Reported Revenue: $535m v $605m expected (original guidance: $570m – $630m)
- At The Current Burn Rate of $1.1m/Day, Carvana Had Just 70 Days of Operating Cash On Hand At Yr End
- We estimate just $12.8m of unrestricted cash on hand by March 1st
- 100% Gross Margin Finance Revenue Driving GPU: Carvana generates an outsized share (~50%) of GPU from 100% gross margin finance and insurance (F&I) sales, vs. <20% for KMX. Underlying GPU on car sales alone are >10% below industry average and less than half that of KMX
- In Spruce Point’s opinion, Carvana will require more equity capital to continue operations, and has limited flexibility to incur more debt given its deep junk CCC rating. Yet, despite the accelerating cash burn, management received a 100% increase in cash compensation at the approval of an “independent” Board, further compounding the pain to investors.
- Other liquidity alternatives include going further into debt by tapping the floor plan facility and/or sale leaseback agreements with $331m of capacity. However, this could be incrementally negative from a credit perspective
- We caution investors that Carvana’s stated belief that it won’t need to raise additional debt or equity appears aggressive. Importantly, management has a poor track record of hitting its stated financial targets.
- “The Board also approved annual base salary increases for the Company’s executive officers as part of its annual performance review, including Ernie Garcia III, the Company’s Chief Executive Officer, whose annual base salary was increased from $400,000 to $885,000, Mark Jenkins, the Company’s Chief Financial Officer, whose annual base salary was increased from $375,000 to $735,000, and Benjamin Huston, the Company’s Chief Operating Officer, whose annual base salary was increased from $375,000 to $735,000. The salary increase were approved retroactively to January 1, 2019, consistent with the Company’s practices for annual merit increases.”
- By reporting on Feb 27th, Carvana is already 2/3rds through the quarter and should be able to provide investors visibility into expected results
- Amdocs (DOX or “the Company”) is a cryptic entity based in the tax-dodge haven of Guernsey that provides revenue management, BPO and IT services primarily to telecoms. Industry forces have dragged on sales growth to the point that Amdocs appears to be in organic decline. We believe that DOX has engineered superficial top and bottom-line growth alongside unusually stable margins through opaque M&A, aggressive percentage-of-completion accounting, software cost capitalization, and repeated one-off net tax benefits. Challenged FCF growth, self-imposed minimum cash balances, and likely leverage limits will constrain DOX’s ability to pursue growth via M&A going forward. We are also concerned that DOX is accelerating its earnings-inflating cost capitalization scheme by constructing a new Israeli campus. An obscured JV loan, receivable factoring, and capex statements which hide asset sales all point to slowed underlying FCF growth. With insider ownership at an all-time low, evidence that management is milking DOX’s cash through aggressive option comp schemes, and Board members tied to allegations of option back-dating and software cost capitalization, we believe that shareholders should keep a vigilant eye on management’s accounting practices and compensation decisions.
- Suspiciously Steady Margins: Amdocs shows remarkably steady margins for a firm which frequently absorbs acquisitions ($1.6B since 2012), which should have some degree of operating leverage, and whose business has come under pressure from its largest customer (AT&T). Peers and telcos show much more natural margin variability. Unusually steady margins support our suspicion that Amdocs engages in aggressive percentage-of-completion accounting.
- Growing Divergence Between Adjusted And GAAP Metrics: Amdocs’ proprietary Adjusted EPS measure has grown steadily through the last 5 years, while GAAP EPS and cash flow have been flat to down over the same period despite the Company’s M&A-fueled growth. Spruce Point has observed both of these patterns among numerous companies on which it has published research, and feels that they are strong indicators of impending financial strain.
- Questionable One-Off Tax Items: DOX claims up to $60M of one-off net tax benefits on a yearly basis, with the specific sources of these benefits changing almost every year (it claimed $28M in benefits related to its spending on its new campus in FY 2018). We do not believe that these benefits – worth 10% of EBT in FY 2018 – are a sustainable source of earnings. Excluding these items, Amdocs’ tax rate looks much closer to that of most companies.
- Struggles Generating Cash: In Dec ‘18, DOX began to disclose that it factors accounts receivable (on non-transparent terms). It also obscured a loan issued via a recently-formed JV to finance its new HQ, despite saying previously that it could finance the project internally without material impact to results.
- Who Signs DOX’s 20-F And Credit Agreement: We observe that DOX’s Head of IR/Secretary signs its 20-F and Credit Agreement. Our research shows that this is a highly unusual practice: the CEO generally signs the 20-F, while the CFO and/or Treasurer normally signs Credit Agreements.
- Closely Tied To A Low-Growth Industry: As IT support for major telcos, Amdocs’ organic growth is ultimately tied to a stagnant industry – AT&T in particular (~30% of sales). Management attempts to describe industry trends such as consolidation as a tailwind for the Company, but, in reality, slow growth among telcos translates into slow organic growth for Amdocs – particularly as elements of revenue management software become less complex.
- Management Engages In Frequent M&A To Grow Sales: Amdocs has purchased a jumble of IT and media businesses through the past decade to support growth where it can’t generate its own. Many of these businesses appear to be only tangentially relevant to Amdocs’ core services, and are only partially integrated into Amdocs once acquired. Without these acquisitions, we estimate that Amdocs generates zero to negative organic growth.
- Management Not Transparent About Inorganic Sales Contributions: Management is frequently asked on earnings calls about the contribution of acquired businesses to total revenue. It often writes them off as “small” even when the announced purchase price is relatively sizable – and, when it does give more granular details, it appears to understate their likely contribution, thus inflating implied organic revenue growth.
- Spruce Point has released a number of reports on iRobot (IRBT or “the Company”) highlighting impending competitive pressures and defensive distributor acquisitions designed to forestall revenue growth contraction and margin compression. We have evidence that the competitive forces which we foresaw are materializing, resulting in significant ASP declines, market share losses, and cash flow contraction. With the uplift benefit from distributor acquisitions set to lapse, and with punitive Chinese tariffs set to expand from 10% to 25% in 2019, we believe that iRobot’s is set up for significant revenue growth deceleration, margin contraction, and earnings headwinds next year. As a result, we see 70-80% downside risk.
- Technological Advantages Dwindling: As the first mover in the robot vacuum space, iRobot has until now enjoyed perceived technological dominance over other brands. That advantage has narrowed materially: more established consumer technology brands have entered the market, and consumers have taken notice that competitors meet or exceed Roomba’s technological capabilities.
- Amazon Enabling And Promoting Aggressive Competition: Amazon is becoming an increasingly important sales channel for iRobot: it was responsible for ~25% of iRobot sales in Q3, up from just ~10% in Q3 of the prior year. iRobot products generally do not receive preferential placement on Amazon search pages, due to both its high price tag and aggressive promotional activity among peers. Amazon also has less incentive to promote brands with high name recognition than do brick-and-mortar stores. Amazon enables a level of competition which undermines the importance of iRobot’s recognizable brand.
- Industry Competition Dragging On Sales Prices: Robot vacuums are classic deflationary pieces of technology: commoditized products which experience rapid industry catch-up with each incremental technological development, and which have little room for substantive differentiation (but which require consistent R&D spend nonetheless). iRobot has not been able to raise product prices materially for years, and is pushing sales by offering a wider range of products priced below its top-line vacuum. This strategy will drag on margins over time.
- Worrisome Cash Flow Developments: iRobot’s net spending on working capital has ballooned in the wake of its distributor acquisitions – a concerning development resulting in YTD operating cash flow contracting by 21% YoY. We believe the financial strain was telegraphed in July when iRobot unexpectedly doubled its line of credit from $75 to $150m for no obvious reason, given that it has $126m of cash on hand, and that it was on pace for $50m+ of operating cash flow. Rising DSOs may be a signal of channel-stuffing at its own distributors. Massive inventory growth and record DIOs may also be both a signal of slowing sales growth ahead and a result of management accumulating lower-cost inventory in anticipation of tariffs.
- Tariffs Potentially A Highly Significant Drag On Earnings: Management has been dodgy about the potential impact of tariffs when asked about it on calls. Investors now have a better sense of the impact of a 10% tariff following the Q3 call, but management continues to avoid discussing the potential impact of the impending 25% tariff – perhaps in hopes that the tariffs are cancelled before it would have to do so. We expect iRobot to take a massive 70% hit to FY 2019 EPS should the 25% tariff to be instituted on Jan 1 remain in place through the year (barring the passing-on of tariffs cost increases to customers, which we feel iRobot has limited ability to do). Sell-side analysts are either ignoring tariff risks or entirely off on the potential magnitude of the impact.
- Insider Selling Is Exploding Out Of Control: In our first report on iRobot, we noted that insiders were selling the stock aggressively: insider ownership fell from ~60% in 2005 to ~12% in 2013 – and then to 5% only a year later. Insiders have continued to be sellers through the last several years, and insider ownership is now at an all-time low of 3.5%. While iRobot appears desperate to dangle carrots to the press – in particular, partnerships with big name technology companies – its insiders have enacted a record amount of 10b5-1 stock sale programs. For example, in Feb 2017, only CEO Colin Angle had a 10b5-1 stock sale program in place, but by May 2018 a total of six directors and executives were unloading shares under similar stock sale programs.
- Share Price Above Even Lofty Sell-Side Targets: IRBT shares have soared from ~$60 in mid-2018 to close to $100 today, and reached as high as ~$115 ahead of CEO Angle’s much-anticipated presentation at the Disrupt SF conference – where, yet again, after years of hyping the Company’s potential in other home robotics categories, he failed to deliver anything new beyond the stagnant Roomba product. All sell-side analysts remain perennially bullish on the Company’s growth story, but the rapid rise in IRBT shares forced some analysts to issue downgrades on the basis of valuation alone. Long-term institutional shareholders continue to sell, while those buying classify IRBT under “consumer discretionary” and “homebuilding” and not technology!
- High Valuation, Slowing Growth, Changing Distribution Model And Tariff Threat All Pose Risks To IRBT Shares: We see up to ~50% downside in IRBT shares on valuation alone, even when taking consensus earnings estimates for granted. The prospect of slowing sales growth and margin compression would imply even more significant downside, and 25% tariffs would wipe out a large chunk of earnings for however long they remain in place. We can envision a scenario in which business deterioration and 25% tariffs wipe out all 2019 EPS. Given the fundamental threats to the business, current trading multiples, and the possibility that iRobot must bear 25% tariffs for an extended period of time, we value IRBT shares at $20 – $30/sh, 70%-80% below current levels.
- Spruce Point finds evidence to suggest that Mercury Systems (Nasdaq: MRCY) could be one of the companies affected by the alleged Super Micro Computer, Inc. (Supermicro) hack, and can demonstrate recent actions taken by management to obscure the relationship. We believe the Street is structurally misunderstanding the magnitude of the revenue delays and cyber compliance costs that Mercury – a company presently without a Chief Information Security Officer (“CISO”) – will face going forward. Based on our expert calls, we expect that cybersecurity-related costs could mount to 10% of revenues. Given that management felt it necessary to hide its relationship with Supermicro, we believe that Mercury needs to disclose to investors the materiality of its exposure to Supermicro components, the financial impact of any product changes/recalls/replacements, and its plans to ensure the “security” of its mission-critical products on a go-forward basis.
Exposure Emanating From “Technology Partner” Supermicro
- On October 4th, Bloomberg published an in-depth article highlighting how China infiltrated 30 U.S. companies by inserting a tiny chip into Supermicro motherboards. Navy systems were mentioned specifically as an affected target. Mercury Systems and two of its recent acquisitions – Themis Computers ($175 million / Feb 2018) and Germane Systems ($45 million / July 2018) – each sells servers and other related IT equipment containing Supermicro motherboards to the Navy and other military branches.
- Providing secure and resilient solutions to prime and government customers is the essence of Mercury’s business. Mercury mentions the words “secure” and “security” over 100 times in its annual report.
- Mercury, Themis, and Germane all listed Supermicro as a “technology partner” on their respective websites until last week, when nearly all references to the relationship were abruptly and surreptitiously removed between October 8-9 without explanation.
- The existence of Supermicro motherboards in Mercury’s rugged servers presents difficult-to-quantify tail risks, but could force product recalls and expensive supply chain adjustments, among other costly actions. As a precedent example, the Navy placed restrictions on IBM’s BladeCenter server line in 2015 over supply chain security concerns, less than a year after Chinese IT hardware manufacturer Lenovo acquired IBM’s server business. (USNI Article)
- A recent GAO report entitled “DOD Just Beginning to Grapple with Scale of Vulnerabilities” highlighted how testers playing the role of adversary were able to take control of systems relatively easily and operate largely undetected. Based on conversations with industry experts, we believe that the requirements for winning government business will be (and are being) rewritten with an emphasis on cyber resilience and a much higher cybersecurity standard. We suspect that new contracts awards are likely to be delayed as a result
- Based on our research, Mercury appears ill-prepared to address these new requirements given its relative shortage of cybersecurity personnel, and the fact that both its long-time CIO and long-time CISO recently departed in August 2018. We estimate that Mercury could have to spend up to 10% of revenue on cyber-related costs going forward, or otherwise make a costly acquisition to comply with these new customer expectations.
- Mercury has quietly hinted at some of these concerns through subtle changes to its 10-K risk factors and safe harbor provisions, and through recent job postings in supply chain procurement and quality control.
- Spruce Point has a Strong Buy opinion on Henry Schein (HSIC) and sees 30% to 50% upside potential
- We believe the upcoming spin-off of HSIC’s animal health distribution business will unlock substantial value for shareholders. Currently, investors are somewhat negative on HSIC’s dental business, and pricing and margin challenges are already widely known. HSIC currently has an 11% short interest that reflect this concern.
- However, we believe investors are overlooking HSIC’s fast growing animal health business, that stands to benefit once it spins and merges with the privately held Vets First Choice (VFC). HSIC brings strong relationships with vets worldwide, and VFC brings a high margin tech platform and pharmacy solution to help vets sell more to clients, while improving health outcomes for its client’s pets.
- We have done unique due diligence on VFC, and believe it is growing materially faster than the numbers that were presented to Wall Street analysts/investors in April 2018. We’ve built an algorithm that runs US zip codes through VFC’s vet finder and believe they are on pace for on-boarding 9,000 vets vs. the 5,100 last disclosed à significant upside. We have also conducted ~100 surveys to determine customer satisfaction and revenue uplift potential from this synergistic merger. The feedback has been overwhelmingly positive.
- The market env’t for animal health stocks is very strong: Eli Lilly just spun and IPO’ed Elanco last week, which was very well received. We believe that HSIC/VFC will be the fastest sales and EBITDA growth story in the industry, which should position it for significant multiple expansion. We like this situation because spin-offs tend to outperform the market once the new management team can have a greater alignment and incentive structure (we do believe that legacy VHC owners have a lot of skin in the game). VFC is run by the Shaw family which created billions of dollars of value at Idexx. We expect a significantly expanded shareholder base that can own VFC/HSIC and more analysts to assume coverage to say “buy” once the spin is completed. Our base case is ~30% upside to approximately $106 per share with up to 50% or $126 per share in a bull case scenario.
- Poorly positioned regional supermarket in the hypercompetitive Northeast region that is a step behind in the megatrends pressuring the supermarket industry. Despite cutting prices, Weis is still not competitive across a basket of staple food products at price points 15% to 20% higher than peers
- Credit card data and consumer insights from Earnest Research on 42,000 Weis customers shows that over the past three quarters, unique shoppers, average transactions per shopper and total transactions have declined YoY. Weis has mitigated these negative trends with an increase in average ticket price per shopper. However, in 2Q18 it posted the lowest YoY growth in recent quarters (3.5%). Tangible evidence that ultra low cost grocers, Aldi and Lidl, continue to gain Weis customers
- Numerous violations by the Pennsylvania Bureau of Food Safety and the FDA for sanitary problems, including food contamination and pest control concerns
- Recent financial results and stock performance being driven by aggressive accounting changes to cash flow, and a few one-time issues that made comparisons look easy in early 2018. These will become material headwinds in the coming quarters
- Unreliable comparable store sales metrics as a result of vastly reduced disclosures, followed by three auditors since 2014. Recent Q2’18 metrics being qualified and bolstered by inclusion of estimated sales from July 4th. Underlying organic growth conservatively estimated to be down 2% and can no longer be masked by acquisitions from 2016
- Negative unit store growth in 2018, including three undisclosed store closures. $101m capital spending plan announced in April 2018 necessary to drive maintenance and refurbishment to forestall market share loss and remain competitive
- Poor governance and investor communications include no conference calls, deficient SEC disclosures in our opinion, no alignment of employees with shareholders, and beholden to the Weis family to act for the public shareholders’ best interest
- Inflated valuation making Weis the most expensive supermarket in the United States for no obvious reason. Declining organic growth, gross margins, and poor returns on capital make Weis an unattractive target. It currently trades beyond any reasonable valuation multiple an acquirer would pay for the stock
- Price target of $17.60 to $26.40, or 45% to 65% downside, on forecasted earnings of $1.47 per share, down 19% due to negative operating leverage, and a multiple range of 12x to 18x consistent with peer trading valuations and takeover multiples in the supermarket industry
- 2U, Inc. is a money-losing education technology provider that partners with universities to market and manage online graduate degree and short course programs. Its one size fits all model is being disrupted by fee-for-service players with lower take-rates. Our Freedom of Information Act (“FOIA”) documents offer compelling evidence that 2U’s long term guidance will disappoint investors.
- Significant Number of Programs Are Underperforming: The Street is neglecting to understand the range of outcomes for both existing and future graduate programs. We have assembled a proprietary historical revenue model that estimates revenues for each individual graduate program using a combination of FOIA requests, conversations with industry participants, company filings, transcripts, publicly available enrollment data, and tuition costs. This proprietary model reveals a wide range of outcomes between programs that are successful and those that we would classify as failures. Most importantly, we have found that eight of the 14 programs launched between 2013 and 2015 are underperforming 2U’s steady state program expectations. Further, based on our findings, we believe that four of the top seven programs have peaked and/or seen enrollment declines. Our FOIA request for new student enrollments for MBA@UNC reveals that the 2U enabled MBA@UNC is now in decline as the last four starts have all seen YoY declines. We believe the Street is dangerously extrapolating 2U’s guided steady state program performance to model 2U’s new and future programs.
- GetSmarter Acquisition Likely A Diversion For Slowing U.S. Growth: At Spruce Point, we’ve successfully shorted numerous companies where we spotted early underlying business challenges being deflected by acquisitions. In the case of 2U, we find that it made its first acquisition of GetSmarter in May 2017, allowing it also to diversify internationally. We believe this validates our view that domestic growth is slowing. GetSmarter also exposes 2U to short courses, which is a lower quality business, with shorter duration revenue visibility, and fewer barriers to entry.
- Recent Equity Raise of +$330m Raises Questions: Alongside the COO appointment, 2U did a secondary stock issuance and raised $330m at $90/share (a 5.8% discount to the closing price of $95.53). The language in its capital raise differs from its capital raise just eight months prior (September 2017). The use of proceeds has now been expanded to include acquisitions, despite it having recently acquired GetSmarter, and not proven its ability to make good on its deal promises. Previous to this recent capital raise, 2U had $182m of cash on its balance sheet and has been talking to investors about its ability to become cash flow positive. Spruce Point believes 2U’s most likely motivation for issuing stock was to grab the money while investors aren’t attuned to its growing program failures and rising competitive threats. Otherwise, it is likely 2U is signaling a deferral of its time line to reach positive free cash flow.
- A Terrible Risk/Reward Owning 2U With Analysts Seeing Just 6% Upside, We See 30% – 50% Downside Risk:Insiders have made out like bandits, selling $148m of stock, despite 2U burning $225m of negative free cash flow since 2011. Approximately 25% of sales have been the CEO, who just adopted a new 10b5-1 program in March 2018 ahead of its recent capital raise, and can start selling again next week post lock-up. Analysts have relentlessly said “Buy” but at the current time analysts have an average price target of $99/sh, which represents just 7% upside, a poor risk/reward. Analysts fail to appreciate the change in competitive dynamics, and extrapolate 2U’s current performance into the future without having done the exhaustive FOIA and program analysis we’ve undertaken. Once reality sets in that 2U’s best days are behind it, and it begins disappointing unrealistic Street expectations, we expect significant valuation compression risk given its shares trade at 9.5x and 180x 2019E sales and Adj EBITDA, respectively.
- Spruce Point and its China-based investigator has spent months doing primary forensic research into Momo, Inc. (Nasdaq: MOMO or “the Company”) and sees $23 to $32/sh, 30% to 50% downside risk. Momo’s investor base is compromised of two distinct cohorts, fundamental investors taking management’s word at face value and momentum/swing traders trying to play the stock’s trend. Both of these groups are oblivious to the serious risks underpinning a Momo investment.
- Momo’s current investor base is primarily comprised of U.S. retail investors and a select number of institutions, almost exclusively in small position sizes, looking to play the recently white hot China live streaming space through one of a handful of US listed companies
- If Momo were simply a North American based company selling a new technology (e.g., VR, AI), investors could conduct significant English based market research, evaluate the product, understand the regulatory environment and make an educated assessment as to whether this is a fad or the next big thing. However, given the newness of the product space and the evolving nature of the competitive landscape it would still remain a speculative investment
- Additionally, if Momo were a North American based company, investors could take confidence in the fact its activities are likely to be transparently disclosed, fairly presented, legal and that management is acting in the best interest of shareholders.
- Unfortunately, Momo isn’t a North American based company and this compounds the risk of an investment substantially. Momo is a China based media company, offering a Mandarin based product to Chinese consumers and conducting business under the oversight of the MOC and SARFT. In order to credibly understand trends in this foreign market, an investor must conduct the same level of company, industry and regulatory diligence in Mandarin that one would conduct in English. Anything short of this is simply a gamble
- When making a Chinese based VIE investment, the emphasis placed on performing forensic research into governance, ownership, the legality of operations and related party transactions takes on much greater importance than a comparable North American investment given different corporate governance practices in China. Spruce Point doesn’t believe that an appreciation for the risks of a Chinese VIE based investment can be achieved without thorough diligence of the VIE structure and its subsidiaries.
- HTA’s Chief Executive Officer Has A History of Failure And Non-Shareholder Friendly Outcomes: At Spruce Point, we like to follow executives who have destroyed shareholder value in the past as this pattern often repeats itself. HTA’s CEO and Chairman Scott Peters has been linked to multiple bankruptcies and liquidations (Grub & Ellis, NNN Realty Advisors, G REIT, T REIT, and Golf Trust of America). Furthermore, we highlight a corporate and personal web of inter-relationships that links both HTA and CEO Peters to multiple bad players in the REIT industry, including Tony Thompson who was barred by FINRA and Nick Schorsch, Former Chairman of American Realty Capital Partners (ARCP, now VEREIT (NYSE: VER)), whose firm manipulated non-GAAP results and had its CFO convicted of fraud.
- HTA’s Existence Began As A Non-Traded REIT Prior To A Direct Listing On The NYSE: Spruce Point has had many successes shorting companies that have taken back-door or non-traditional listing channels to come public, most notably the early China scams. Within real estate, the Non-traded REIT (NTR) industry is known to be a conflict-ridden business. NTRs are sold to retail investors through broker-dealers who earn egregious commissions (upwards of 10%). In general, for every $10 share purchase, about $1.50 is spent on up-front fees and acquisition expenses, leaving only $8.50 to be invested. After Scott Peters (and his executive team) scraped fees from raising $2.2bn under the NTR umbrella, management listed the Company on the NYSE in 2012 without raising capital via a traditional IPO. In doing so, we believe public investors may not have received the benefits from a rigorous underwriting and due diligence IPO process.
- In Our Opinion, HTA Is Likely Manipulating Its Quarterly Same-Property Cash Net Operating Income (SPNOI) Results: We have conducted a statistical analysis of quarterly SPNOI performance, and believe it is highly likely that this measure is being managed in a manner to show consistent results. In our analysis, we compared HTA’s quarterly SPNOI results with its Medical Office Building (MOB) peers. HTA demonstrates the least volatility (i.e. lowest standard deviation) by a significant margin. We point to potential accounting maneuvers and culprits of how the comparisons have remained so consistent throughout its public history, and share scary similarities of reported results with the Brixmor accounting scandal.
- We Can’t Reconcile HTA’s Same-Property NOI Margin Profile: Same-property revenues have grown on avg. by 1.9% and same-property expenses are down by 1.1% since 2013, yet, there is no commensurate SPNOI margin expansion. We provide an illustration of how we believe HTA’s margin profile should be expanding according to its reporting, and illustrate why the math doesn’t appear to work. HTA may be achieving its consistent SPNOI results though uneconomic means: e.g. entering into expensive long-term fixed-price contracts, and/or selling properties at unattractive prices.
- Serious Concerns With The CFO And Accounting Function: Despite CFO Robert A. Milligan claiming to have worked for Bank of America/ML from July 2007 – Jan 2012 as a VP in corporate banking advisory, there is no FINRA record to evidence his employment. Milligan’s public profile also says he is CFO/Treasurer/Secretary, yet he also signs HTA’s SEC filings as Principal Accounting Officer (he is an MBA, not a CPA). HTA has a named Chief Accounting Officer, David Gershenson, as part of its executive team. SEC rules state that the Chief Accounting Officer must sign the 10-K filing; why hasn’t he done so? HTA’s accounting function appears in disarray with a majority of the staff sitting in South Carolina, two thousand miles away from its executive office in Scottsdale, Arizona. Our analysis shows that a majority of HTA’s accounting team has been in place less than one year, suggesting significant internal turnover and an inexperienced team overseeing the numbers.Download the report to read more…
- Previous Failure: U.S. Concrete filed for bankruptcy after the financial crisis: The industry is difficult given the commodity nature of the products, intense competition, and need to be close to the customer because shipping costs are material
- Becoming More Dependent on Shady Acquisitions: USCR has acquired over 20 companies since 2012. It recently outbid industrial giant Vulcan Materials for Canadian small cap Polaris Materials and also purchased firms with alleged historical ties to organized crime
- GAAP vs. Non-GAAP Strains: In 2017 there were a record number of adjustments to results, and yet Adjusted EPS grew by just 4%
- USCR Claims Mid To High Single Digit Organic Growth: Evidence suggests organic growth is overstated, and mostly a function of pass through commodity price increases. We note realized prices by USCR hit a 5yr low in 2017, and have continued lower in Q1’18
- USCR Makes Organic Growth Difficult To Calculate: USCR selectively discloses figures in periods when good, not bad. The Company has generally done a poor job of breaking out acquisition contributions in SEC filings
- CEO Concerns and Rapid CFO Turnover: A routine background check of the CEO reveals an undisclosed DWI arrest for reckless driving, calling into question his judgement. USCR is on its fourth CFO since 2012. Recent CFO John Tusa, Jr. resigned after serving a little more than one year
- Two Ways To Value USCR Point To 60% – 90% Downside Risk: Given our analysis that shows distortions in USCR’s Non-GAAP figures, we believe the best way to value the Company is on Free Cash Flow. We expect further deterioration which began three years ago, and apply a 20x – 25x multiple to reflect a discount to the peer average for its above average exposure to ready-mix, poor roll-up economics, and growing liquidity risk. Secondly, we adjust USCR’s book value for an estimated $60 – $85 million of overcapitalized costs to its vehicle property accounts and apply a 1.0x – 1.5x multiple range. These valuation perspectives indicate 60% to 90% downside or approximately $6.00 to $25.00 per share
- Mercury’s Adj. EBITDA margins of 23.4% are extremely high for a government subcontractor, and have grown 450bps in the last three fiscal years, allowing Adj. EBITDA to balloon 112% while its free cash flow grew zero over the same period. Free cash flow is now trending down over the last 12 months. Days inventory and its cash collection cycle are near all-time highs; accounts receivables recently started to exceed sales
- Historically, radar systems is Mercury’s largest business, but now appears to be declining, while “Other Revenues” is the fastest growing segment. Mercury changed its financial presentation to bolster gross margins, while guidance for gross margins has quietly been talked down. For the first time in Q2’18, Mercury missed its gross margin (and EPS) target
- Mercury sells itself as growing revenues organically 9.5% (double its end markets), yet we find evidence these results are not sustainable and growth may slow to 6.5% in CY 2018. Mercury announced the purchase of Themis Computer on Dec 21, 2017 (four days ahead of Christmas). It paid a rich 13.7x EBITDA multiple, and borrowed $189m on its line of credit. In our opinion, the deal appears motivated to avoid missing Wall Street’s expectations. Consistent with prior practice, we expect Mercury to issue stock to pay down its line of credit, which at the current share price, amounts to 4m new shares
- Mercury added one sentence to its latest 10-K to disclose it expects to lose its Small Business status in FY 2018, a factor that will cause a Material Adverse Effect by disqualifying it from certain business opportunities and increasing costs of compliance
Echo Global Logistics (“ECHO” or “the Company”) was founded in 2005 to roll-up the transportation logistics / brokerage sector.Our Initial Concerns About ECHO From September 2016 Proved Prescient: In our initial report entitled “Logistical Nightmare”, we warned about ECHO’s terrible management, failed roll-up strategy in the transportation logistics sector, aggressive use of Non-GAAP results, and its inability to maintain its competitive position in an increasingly technology-centric environment, would all lead to severe disappointment. ECHO’s analysts were calling for a $29 price target at the time, but with shares at $27, we argued the risk/reward was skewed towards 50% – 60% downside. With successive earnings disappointments, and mounting evidence that ECHO’s acquisition of Command Transportation in 2015 was a bust, ECHO suspended long-term guidance and its acquisition strategy in July 2017. ECHO’s share price reached a low of $13.00, hitting our long-term price target range. Command Deal Increasingly Looks Like A Bust: Our initial report warned that ECHO significantly overpaid for Command Transportation, and encumbered its assets with $230m of debt for a people-intensive asset light business. ECHO hyped $200 – $300m of revenue synergies, and an integrated technology platform that would provide significant earnings leverage. After millions spent on integration costs, capital expenditures and even a fancy new headquarters, ECHO has failed to come even close to its revenue synergy target.
- Shark entered the robotic vacuum market as we predicted in June, a major negative!
- We believe SharkNinja strives to be the #1 or #2 leader in markets it enters. Based on its track record in traditional vacuums and blenders, we believe SharkNinja is a credible threat to iRobot
- SharkNinja’s displacement of Dyson in vacuums was a result of a laser-like focus on the consumer, and its ability to engineer a superior product at a value price point. As an organization, Linkedin data shows that SharkNinja employs more engineers than sales or marketing people
- We believe Dyson failed to gain traction with its robotic vacuum because its price point of >$1,000 was simply too high, and it did not deliver meaningful performance advantage to the customer. Simply stated, Dyson could not offer a compelling value proposition while SharkNinja appears well positioned to do so
- Given SharkNinja’s marketing prowess stated to be $130m annually (2014 figures), we wouldn’t be surprised to see it spend at least 10% or more of this annual budget to ensure the success of its debut robotic vacuum series
Spruce Point is pleased to release its report on TSO3 Inc. (TSX: TOS and OTC: TSTIF)TSO3 Is Just Another Canadian Healthcare Promotion: The Canadian markets are littered with recent examples of healthcare stocks in need of urgent medical attention, wounded from over-promotion, questionable practices, and poor performance. Short sellers made early warning calls on many names down >80%: Valeant, Concordia, Nobilis, CRH Medical Disclosure Issues & Obfuscating Its Actual End Market Sales: TSO3 is not disclosing its installed base and the reason is obvious – if it did, investors might see just how poor its product’s end market acceptance actually is. In Q3’16, TSO3 suggested it would provide clarity on its installed base in early 2017 – investors are still waiting…. TSO3 even stopped disclosing consumables sales in Q2’16. It currently recognizes as revenues shipments to Getinge, its 3rd party distributor (183 units since Q1’16). However, our math and field checks suggest at best 10 units are actually installed at end customers (95% difference to shipments). TSO3 Using the “Partnership” Playbook To Hype Its Potential: Déjà vu, TSO3 is repeating a twice failed playbook. Recently from 2009-2013, alongside of 3M: TSO3’s single product cycle ended with no material sales, termination of their partnership, and a legal settlement in favor of 3M. TSO3’s prior two generations of this product also failed (the current 3rd generation VP4 appears eerily similar to the 2nd generation – not surprising given the low R&D spend). TSO3 Overstating Its Total Addressable Market (TAM): All good promotions involve baiting investors with big addressable market opportunities. TSO3 appears to have overstated its true market potential by >30% units and C$170m. We provide evidence of the Company playing fast and loose with its numbers. Download the report to read more.
Spruce Point is pleased to release its updated report on iRobot Corp (Nasdaq: IRBT)New research into iRobot’s recent distributor acquisitions further calls into question the reliability and accuracy of the Company’s financial guidance. If iRobot cannot give further clarity, we believe its guidance should be suspended. Distributor acquisitions need to be heavily scrutinized given the related-party nature of the transactions. Its Japanese and European distributors act as exclusive agents for iRobot with nearly 100% of revenues from iRobot products. •The 2017E sales implied from Robopolis from iRobot’s incremental margin contribution forecast doesn’t make sense Further evidence of issues with the Japanese distributor acquisition emerge from our research. Download the report to read more.
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. Download the report to read more.
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
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.
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.
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.
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.
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).