Vonage(VG)

May 8. 2008

New quarter data analysis:

Facts:

1. Gross subscriber line 281,329. Net subscriber line additions 30,133.

2. Total subscriber 2.61m. Previous period end is 2.58m.

3. Monthly customer churn: Jan 2008: 3.6%. Feb: 3.2%. Mar: 3.1%.

3. Marking expense 60.9m. Marketing costs per gross subscriber line addition $216.47

4. Share outstanding 156m

5. Net lose 8.96m. $0.06 pre share.

Analysis:

1. It lost (281,329-30,133) = 251,196 user during this quarter. 9.7% of 2.58m user.

2. Real earning should added the cost to acquire new customer 30133x216.47 = 6.5m. Even adding this number to their income. They still lost money.

3. Originally their marking expense is a big issue. Now the churn rate is the biggest. It doesn't make sense to acquire a number of new customers while lost 89% of the number of existing customers at the same period.

August 26, 2009

Luckily I have sold shares of VG after holding it close to 2 years for a little profit. When I bought it I have convinced myself for several reasons:

1. Their user line worth a lot of money. Based on 2.5m user line. If each line worth $500(with net profit close $100 per line), then they worth $1.5B. Even if they go bankruptcy, they still be able sold each line for at least $200. That is still $500m.

My mistake on this point is that I totally ignored the churn rate. With a churn rate around 3% a month, they could lost 36% of their users in one year. It cost a lot of money to replace them.

2. They are actually making money if they don't spend that much on marketing.

Again this is about the 3% churn rate. It is unacceptable. VOIP is generally good, but Vonage is not. With $25 a month it is still too expensive for most people who want to switch to VOIP. The only valuable service they provided probably is the unlimited international calling they given out recently. This might attract some immigrants.

3. Two year ago, they got big problem on lawsuit. But I think their legal issue is temporary.

Actually I am correct on this issue. However, I totally bypassed their $183m debt issue which is due at end of 2008.

It doesn't fit to any value standard which I follow latterly. So hopefully I will never get involved in the same type of stock again. But most valuable lesson I learned is: if I don't like the business, don't buy it. That is I should be more "business like".

LSI Industries (LYTS)

(Year End June 30th)

Apr. 21, 2009
(based on 2008 and Q3 2009 data)

Check list:

1.Major Business.

(1) Lighting Segment: 62% in 2008, 60% in 2007, 70% in 2006.


(2) Graphics Segment: 38% in 2008, 40% in 2007, 30% in 2006.
The two segments are related and is helpful for the business. Their business is kind of contract oriented, especially the graphic segment. The revenue may vary from year to year. This make it harder to trace its grows.
Major customer: BP, Chrysler, CVS Caremark and Burger King. Petroleum store sale: 28% in 2008, 26% in 2007, 24% in 2006.
Business are seasonal, generally Q3(end Mar. 31st) is lower affected by weather condition for outdoor operation.
Solid state lighting is one very interesting new product.

2.Price/Book ratio.

Shares: 21.8m. Current Price $5.55. Book value $5.87.

3.Current ratio. Debt/Current Asset ratio. Inventory level.

Current asset: $91.4m. Current liability $19.8m. Total Debt: $3.0m. Inventory: $44m. Less than $60m(revenue of Q2 2009).

4.P/E ratio.Deficit check.Revenue/price ratio.

Real 2008 earning around $0.63 per share. For past five years average earning $0.69 per share.
No deficit for past 10 years.


2008 Revenue $305m. Revenue/Price = 2.5.
First 3 quarter 2009 Revenue down 25%. Graphic segment down more than Lighting segment.

5.Dividend.

Has paid dividend since 1987. Average $0.44 for past five years. Up to 0.63 in 2008. Current dividend rate $0.20 per year. Dividend policy is to payout 50%-70% of net income.

6.Cash flow

Average FCF for past 5 years are around $14m($0.64/share). Average dividend payment around $9.6m for past 5 years.


7.Grows related.
Revenue grow from $240m to over $300 in last 5 years. But this includes acquisition of SACO.
Earning grow from $8m to $20m in 2007 and back to around $14m in 2008.

8.Management SG&A, Marketing, R&D

First 3 quart of 2009 SG&A decreased $6m compare to 2008. 2008 SG&A increase 3m over 2007. 2007 is 7m higher than 2006 after bough SACO.
Marketing 0.5m flat for 3 years.


R&D: 2008 $4.1m, 2007 $2.6m, 2006 $1.3m


9.Management compensation.
Options: 1.5m outstanding, average price $13.2
2008 issued no bonus.
2009 no increase on salary over 2008. Don't know how much options granted, but the price should around $8.0 based on Aug. 22th 2008 price.


2008 top 5 officer compensation: $3.4m.
2007 top 5 officer compensation: $3.8m

10.Industry comparison.

Hubbell Inc (HUBa.N) (HUBb.N), ???


ImagePoint: Private company. Direct competitor on graphic. more than 450 employees. Private company. Bankrupted and closed at Jan. 09, 2009.


Marketing Displays (MDI): Seems a private company. Graphic company, don't know what relationship with ImagePoint.


Acuity Brands (AYI): lighting company. 2b revenue. Seems doing OK.


Cooper Industries (CBE): 6b revenue. include lighting division.


Keyser Industries, Inc: Seems a private company. Graphic. Don't know how big it is.

11.Buy back, insider holding and trading info.

Top ten insider hold 2.8m shares. Around 12.5% of total shares. CEO hold 1m share. around 5% of total shares.
Fred D. Jalbout (President of LSI Saco) sold around 0.6m of his 1.4m share during last year. He is still holding 0.8m of common share.


No stock buy back right now.


12.Major events.
June 2006, bought SACO technologies in Montreal with $23m cash + 1.4m share.
Charged $29m goodwill in 2008 and $16.7m goodwill in Q2 2009.
Settled a lawsuit with Marketing Displays(MDI) with $3m at Q2 2009. $2.8m is recorded at Q4 2008 and $0.2m is recorded in Q2 2009.

13.Others
By end of 2008, it has 1460 full time and 140 temp employees. Average $200K revenue per employee.
Their conference calls are very detailed( more than 90 minutes).




Feb. 5, 2010
(Q4 2009, Q1&Q2 2010)
Failed to bought at $4.0 level. It climbed to over $8 and now price comes back around $5.7.


Check list:

1.Major Business.

(1) Lighting Segment:  69% in 2009, 62% in 2008, 60% in 2007, 70% in 2006.

(2) Graphics Segment: 26% in 2009, 38% in 2008, 40% in 2007, 30% in 2006.

Added two small segment in accounting: 

Technology Segment: 2% in 2009
Electronic Segment: 

All Other :                  3% in 2009

2.Price/Book ratio.

Shares: 24.3m. Current Price $5.56. Book value $4.91. The book value change is related to the goodwill increase in acquisition of ADL Technology.

3.Current ratio. Debt/Current Asset ratio. Inventory level.

Current asset: $93.5m. Current liability $17.1m. Total Debt: $1.1m. Inventory: $41.8m. Less than $69.4m(revenue of Q2 2010).

4.P/E ratio.Deficit check.Revenue/price ratio.

Real 2009 earning close to zero. Real 2008 earning around $0.63 per share. For past 6 years average earning $0.58 per share.

No deficit for past 10 years.

2009 Revenue $234m. Revenue/Price = 1.73.

First 2 quarter 2009 Revenue flat compare to first 2 quarter of 2008.

5.Dividend.

Has paid dividend since 1987. Average $0.44 for past five years. Up to 0.63 in 2008. Current dividend rate $0.20 per year. Dividend policy is to payout 50%-70% of net income.

6.Free Cash flow

2009: 13.5m
2008: 9m
2007: 34.8m
2006: -0.4m (Bought SACO $22m cash).
2005:
Average FCF for past 5 years are around $14m($0.64/share). Average dividend payment around $9.6m for past 5 years.

7.Grows related.

Revenue grow from $240m to over $300m from 2003-2008, 2009 go back to $240m level. 

Earning grow from $8m to $20m in 2007 and back to around $14m in 2008. Down to $0 at 2009.

8.Management SG&A, Marketing, R&D

SG&A:
2009:
First 3 quarter of 2009 SG&A decreased $6m compare to 2008. 2008 SG&A increase 3m over 2007. 2007 is 7m higher than 2006 after bough SACO.

Marketing 0.5m flat for 3 years.

R&D: 2009 $4.05m, 2008 $4.1m, 2007 $2.6m, 2006 $1.3m

9.Management compensation.

Options:
640k granted Q1+Q2 2010 from $5.93 to $8.40.


2.0m outstanding at Dec. 2009($10.54) 

2.1m outstanding at June 2009($13.07), 

1.5m outstanding at June 2008($13.20),

2008 issued no bonus.

2009 no increase on salary over 2008. Total 360k $8.98 options granted at Aug. 2008. Among of which 130k are to officers.
Aug. 2009:  245K options at $8.40 to officers.

2009 top 5 officers compensation: $2.8m. CEO $800K compare his 1m share ($6m-$7m in value)

2008 top 5 officers compensation: $3.4m.

2007 top 5 officers compensation: $3.8m

10.Industry comparison.

Hubbell Inc (HUBa.N) (HUBb.N), ???

ImagePoint: Private company. Direct competitor on graphic. more than 450 employees. Private company. Bankrupted and closed at Jan. 09, 2009.

Marketing Displays (MDI): Seems a private company. Graphic company, don't know what relationship with ImagePoint.

Acuity Brands (AYI): lighting company. 2b revenue. Seems doing OK.

Cooper Industries (CBE): 6b revenue. include lighting division.

Keyser Industries, Inc: Seems a private company. Graphic. Don't know how big it is.

11.Buy back, insider holding and trading info.

Top ten insider hold 2.8m shares. Around 12.5% of total shares. CEO hold 1m share. around 5% of total shares.

Fred D. Jalbout (President of LSI Saco) sold around 0.6m of his 1.4m share during last year. He is still holding 0.8m of common share.

No stock buy back right now.

12.Major events.

July 2009, bought ADL Technologies with $15.8m ($1.3m cash + 2.45m share). Record Goodwill $9m.  Actually intangible added around 14m.


June 2006, bought SACO technologies in Montreal with $23m cash + 1.4m share.

Charged $14.5m goodwill in 2009. $29m goodwill in 2008.

Settled a lawsuit with Marketing Displays(MDI) with $3m at Q2 2009. $2.8m is recorded at Q4 2008 and $0.2m is recorded in Q2 2009.

13.Others

By end of 2009, it has 1160 full time and  80  temp employees. Average $190K revenue per employee.
By end of 2008, it has 1460 full time and 140 temp employees. Average $200K revenue per employee.

June 01, 2010
Q3 2010


Recent price go down around $5.80.


1. Book value around $4.79.


2. Q3 lost $0.10 per share.


3. LED counts around 25% of revenue for first 3 quarters of 2010.




LED article:

http://seekingalpha.com/article/160929-expect-a-lot-of-acquisitions-in-lighting




Aug 19, 2010
Q4 2010
Bought at $4.84. Recent price $5.20.


1. Q4 revenue increased by 27%. Income 0.03 per share.


2. Whole 2010 revenue $254m. 9% higher compare to 2009. Income 0.12 per share.


3. State that made in U.S. instead of import from China.




Oct. 22, 2010
Q1 2011


Recent price $8.50
1. Q1 sales up 18% compare to last year. Profit more than doubled compare to same quarter last year.


2. Awarded 104k options at August 19, 2010. The price should be $5.21. (This is from the 8-k at Aug 24th 2010).


3. Previous owner of ADL David T. Feeney (371,913 shares); Kevin A. Kelly (998,882 shares); and Craig A. Miller (1,047,481 shares) are very likely to sell their shares.


Others:
The biggest concern is that the CEO owns quite a few shares 5% and he likes to dilute it.


Nov. 1 2011


Sold all shares of LYTS at $9.42.

On the upside, the stock have very good growing potential especially for the LED technologies. I won't be surprised if it goes up to $15 or $20. 

On the downside, 

1. Now it is fairly priced based on 15 times P/E of past 5 years average earning. 

2. The most important, I don't feel comfortable with the CEO. Historically he very generous of issuing new shares of the company to fuel acquisitions and he never increase his stake in the company. That's as the creator of the company, he now only owns 5% of shares of the company. I think he care more for how much he can make from the company than share holders' value. 

Delta Apparel, Inc.(DLA)

Delta Apparel, Inc.(DLA)

(Year end June. 30th.)

Apparel company including brand Soffe, JunkFood etc.

May, 6, 2008

Summery

Have bought some at $4.00 as it is a net net working capital. Now price is around $4.40.

Facts:

1.Total current assets: 190.6m. Total liabilities: 153.2m. (190.6-153.2) = 37.4. Even at current price it is close to the market cap of 37.8m. It is net net working capital.

2. Average earning for the past 4 years is above $1 pre year.

3. Book value: $11.76 pre share.

4. Share outstanding: 8.5m

Analysis:

1. Its active wear segment is doing pretty bad. The restructure cost them 0.91 pre share. I view this as temporary.

2. Found on yahoo finance, one insider officer HUMPHREYS ROBERT bought 32,178 shares early this year at a price over $8.

Updated: June 5, 2008

Q3 2008 Data

Summery

No the price around $3. More info as read more of their financial report of current 4 quarters.

Facts:

1. No deficit for past 8 years. But lost quite a lot of money in year 1999 and 1998.

Analysis

1. During the last several years (2004 and after). Their inventory level remain quite high. Almost half of their annual sales. Now their inventory reaches $136m. For a seasonal reason, it should be down a little bit in the coming quarter.

2. In past three quarters, they borrowed $24m and spent $12.5m in capital expenditure. Another 2.5m is expected in the coming quarter.

3. The restructuring cost is estimated at 0.75 pre share in last year's report. Real is 0.91 pre share.

4. Negative cash flow for past three quarter. Now the total receivable almost equal to total payable. So the 97m debt is solely depending to the $136m inventory. This is a 66% percent. Historically this number is less than 50%. So the next quarter is really important.

Jan. 30, 2009

Q2 2009 Data

Released Q2 2009 data today. Current price around $3.9.

1. Earning 0.07 pre share. Sales up 6.7% from previous year.

2. Inventory still high as $140m. Expect down to $125m at June 2009.

3. Debt still high as $91m. Expect to increase in next quarter and reduce to $88m by June 2009(Reduce $14 compare to Q4 2008).

Inventory and Debt data compare:

               Mar.         June           Sept.           Dec.

2007      78(132)      73(125)      84(130)      88(132) 

2008      97(136)     102(125)     90(128)      91(140)

2009                      88(125)e    

From the above table, they debt situation seems getting better than first half of 2008.

Arp. 02, 2009

Recent price around $4.60.

Check list:

1.Price/Book ratio.

Share 8.5m. Book value $9.67.

2.Current ratio. Debt/Current Asset ratio. Inventory level.

Current asset 184m. Current liability 56.6m. Total debt 91m. Inventory 140m.

3.P/E ratio.Deficit check.Revenue/price ratio.

Average earning around $1 for last five years. 2000 earning -2.0 pre share. 2001-2007 no deficit. 2008 deficit -0.06 include around -0.39 restructuring cost. 

Revenue 320m at 2008. Revenue/Price around 8:1.

4.Dividend.

Dividend increased from 0.13 to 0.20 at 2007, then suspended after Q1 2008.

5.Cash flow

                   2004   2005    2006   2007   2008   2009Q1  2009Q2

Operation     13.3    19.4    20.2    20.5   -12.1    16.4        15.6

Investing      -53.7    0       -35.6   -38.3   -16.6    -3.6        -4.6

FCF            -40.4    19.4   -15.4  -17.8    -28.7    12.8       11

For past five years(2004-2008) total FCF are around -83m while operation income are only 73m. Which means they spend more than double than what they earned.

However, In Q1 and Q2 of 2009, they generate 23m of FCF. Expected Q3 negative cash flow.

6.Grows related.

Revenue grow from 200m to 320m for the past 5 years. Earning grow to $1.73 pre share at 2006 and then declined to -0.06 at 2008. 2009 expected  around 0.60 -- 0.80 per share.

7.Management compensation.

year 2008 total compensation for top 5 officers are $2.65m including $0.78m in options.

year 2007 total compensation for top 4 officers are $3.53m including $1.33m in options.

8.Industry comparison.

Polo Ralph Lauren       2008 Revenue  $4.9b. 2005 $3.3b. Grows stock. Doing OK. P/E are pretty high. FCF just balanced for the past 4 years.

The Warnaco Group    2009 Revenue $2.0b. Seems doing OK. Latest quarter deficit, don't know the reason. Quite high FCF for the past 4 years.

True Religion Apparel  2008 Revenue $270m. Seems very good grows, balance sheet and cash flow. Only book value is low compare to price.

9.Buy back, insider holding and trading info.

Mar. 2009 one director bought $5000 around $4.00

From end of 2007 to early 2008 quite a lot insider buying around $8.00.

No insider selling so from 2008.

By fiscal year 2008, all current directors and executive officers(13 persons) owns 2.45m shares. It is around 28.8% of total shares.

10.Major events.
At Apr. 01, 2009, it bought Gekko Brands at $10m. No goodwill is recorded.

Dover Saddlery, Inc. (DOVR)

Dec. 13, 2007 

Summery

When I first find this company, I am quite excited because I thought I have found the kind of company I am keep looking for. This company is in a unique market. Targeting luxury customers. No strong competitors. Well grows strategies. However, after reading their financial report carefully, I found that their finance result is not very good. That's why they are very cheap now. Generally I like this company and would invest at a proper price. 

Analysis.

1. The historic average pre share earning is 25 cents. But this doesn't mean a lot since they are on the market for only 2 years.

2. Book value is only $0.87 pre share.

3. Their current year earning is pretty bad. The first three quarter earning together is -3 cents pre share. A important reason for this is they are involved in a litigation settlement which cost them 0.7m in the first quarter. That money means 14c pre share.

4. It is all about Selling G&A. When I exam this company, I found there is only one thing is really bothering me. In the last three quarter, their selling, G&A expense is lot of higher than in 2006. So I need to figure it out. Let's show the number first:

             Q1        Q2        Q3         Q4

2006     5.4m     5.5m      5.7m     7.3m

2007     7.1m     6.6m      6.2m        ?

You can see from Q4 2006, their Selling G&A expense is in a big hike from 5.7m to 7.3m. I found out the reason is they had opened a new store at Q3 2006. There are a lot expense related to this new store are gradually down during the last 4 quarter.  if we take Q3 2007 number as average number. Then this year, we can deduction ( 7.1-6.2)=0.9 for Q1. (6.6-6.2)=0.4 for Q2. So this well contribute 26 cents to their pre year earning.

They opened a new store at Q3 2007, which I can expect there will be another hike in their Q4 2007 expense. But it will not bother me.

5. I estimate their Q4 2007 pre share earning is at lest 10 cents base on historic data.

Risk

1. Their opening new store strategies doesn't go well. This is not very likely based on their last years new store and this years revenue increase.

Conclusion:

Added all 3, 4, 5 number, their current year real earning would be (-3+14+26+10) = 47 cents. This didn't count their future grows by opening new stores. Based on this calc. I would like to pay up to 0.47x15x60% = $4.23 for this stock. This is much higher than current market price. I will be hurry.

Updated: 

Jan. 7 2008

It turns out that I had made a mistake on this stock(DOVR). Luckily I was able to sell my holding with a speculating 7.7% gains. The reason is below:

1. Its book value is too low and they are working by very high debt level. According to Buffet theory, the price paid should not exceed 120% of a stock's book value. I think I'd better stick to it.

2. Its history on the market is too short( 2 years +) , they have deficit years and don't have any dividend.

The stocking might be a good one. But for sure it doesn't fit my list. I liked their business too much. That's why I neglected all these important stuff. Another reason is I haven't formed these rules when I first assessed it.

There is the same problem in VG(Vonage). However, VG belong to another category: special opportunity according the book. So these rules is not important to it. I think I will still hold VG. But probably will not buy the same stuff any more. 

Updated:

Mar. 25, 2008

Analysis of Q4 2007 data:

Facts:

1. Per share earning is 0.18. Better than my 0.10 estimation. New store sales contributed to it.

2. G&A of Q4 2007 is 7.3m, the same as 2006. As I have expected, it is much higher than previous quarter.

3. Share outstanding 5.2m.

4. Book value around $1.

Analysis:

1. Take a 6.7m as it is future average G&A number per quarter. Q4 2007 should add (7.3-6.7)/5.2 = 0.12 pre share.

2. If take the new 0.18 Q4 earning and add the 0.12 quarter G&A data. It is real earning in 2007 should be -0.3+0.14+0.26+0.18+0.12=0.67.

3. However, In the near future, they probably hard to achieve this earning since they are keep opening new stores. There will be more expense there.

4. The retail store strategy seems works because usually Q4 is their weak quarter, but it achieve 0.18 pre share earning in Q4 2007 with bad weather last year. ( Aug. 26th: This is wrong, actually Q4 is their strongest quarter because it is the holiday season. Q2 is second strong quarter. Q1 and Q3 are weak quarters).

Conclusion: I think it worthies much more than their current market price( around $4). However, I can't buy it because its book value is too low.

Updated: 

Aug. 25, 2008

Q1 and Q2 2008 data, recent price $2.80.

1. G&A data:

             Q1        Q2        Q3         Q4

2006     5.4m     5.5m      5.7m     7.3m

2007     7.1m     6.6m      6.2m     7.3m

2008     6.6m     6.3m

2. Book value $0.94

3. Refinanced 5m notes at 14% interest ant end of 2007. Used $8m of $18m line of credit.

4. Income Q1:  -0.07 pre share. Q2: 0.05 pre share. Revenue declined a little bit compared to last year. Catalog sales drop while retail sales up.

Updated

Nov. 12, 2008

Q3 2008 data, recent price $1.63.  Market cap now only 8.5m. While annual sales around 70-80m.

1. G&A data:

            Q1        Q2        Q3         Q4             Total

2006     5.4m     5.5m      5.7m     7.3m          24m

2007     7.1m     6.6m      6.2m     7.3m          27.3m

2008     6.6m     6.3m      6.3m

2. Opened a new store at Georgia at Oct. This might increase G&A expense for Q4.

3. Book value $0.97

4. Total debt 14.3m. Last quarter 12.8m. It is flat compare to last year. Historically, Q3 debt should be higher for seasonal reason.

5. Income 0.03 pre share. Revenue flat. But same store sale decreased by 5.8 percent.

6. Inventory 17.7m. Close to sales of one quarter.

Analysis:

About previous analysis on G&A data, actually it was wrong. For seasonal reason, their Q4 G&A data should always much higher. It is more accurate on a yearly bases. 2008 seems they can reduce the G&A expense by 1m compare to last year. Which seems caused by more store opening at 2007. However, the revenue will decline in 2008 as well.

It is closer to its book value. Glad I sold the stock. According to conference call, they are very optimistic about their business. I think they are doing OK. Wait for the price get close to book value.

Mar. 30, 2009

Q4 and full 2008 data. Current price $2.15.

1. G&A data:

            Q1        Q2        Q3         Q4             Total

2006     5.4m     5.5m      5.7m     7.3m          24m

2007     7.1m     6.6m      6.2m     7.3m          27.3m

2008     6.6m     6.3m      6.3m     7.1m          26.3m

2. Opened two new stores at Oct. 2008 and Feb. 2009. According to conference call, no more new stores in 2009.

3. Book value $1.08. Impaired $14.3m goodwill.

4. Totol debt 13.2m. compared to 11m last year.

5. Income 0.07 pre share. Revenue decreased by 6.8% to 21.4m.

6. Inventory 17.3m.

Advanta Corp.(ADVNA ADVNB)

Dec. 11, 2007

Summery

This company has only one pretty simple business: Credit Card. However, it is not very simple when around 4/5 of their credit card receivable were packaged and sold to other party. I spent quite a lot of time try to understand how this ABS is issued. Until now I can not understand it thoroughly. But I also found what I understood is enough to draw a conclusion.

This company is well running for many years. I found there is only one thing that should be figure out: how charge off rate will affect their earning?  The charge off is lost of credit card receivables when card holder failed to pay it. This rate is vary from year to year. A slight change in this rate will affect their earning significantly.

Facts:

1.Their average charge off rate is (2002 to 2007) (7.92%+7.42%+6.38%+5.37%+3.17%+3.19%)/6=5.58%

2. In their 2007 Q3 report, it mentioned that if current lost rate increased by 10%, it will decrease their net income by $5.91m.

3. The estimate current year earning is $1.90 pre share. Shares outstanding 41.1m.

4. The average earning pre share is $1.30 for the last 6 years(2002 to 2007).

5. Book value (591m -(218mx73%))/41.1 = $10.51 ( I charge off 73% on their subprime investment)

Analysis:

You can see the main reason the company has been doing quite well since 2002 is the charge off rate keep decreasing. Last year(2006) their lost rate is in the lowest. This year it keep increasing.  And it will be going higher next year as a result of current credit crisis.

Let's take the average charge off rate as their future lost rate:

Then it means their lost will increase by ( 5.58-3.19)/3.19 = 75%.

Their future lost will be 5.91x(75%/10%)=44.3m.

Pre share lost will be 44.3/41.1=$1.08.

Future pre share earning might be $1.90-$1.08=$0.82.

This number is much lower than their average pre share earning $1.30. The reason for this is during the past several years, their get quite a lot income from two discontinued operations and other stuff. I don't even bother to calc those stuff.

Risk:

1. Charge off rate increase, already included in above. In a long run, the rate should be medium number, not high as 2002 or low as 2006.

2. They have 4/5 of their receivables are packaged as ABS. In those ABS structure, they may have problem to issue the B, C, D class(lower credit). Which will make themselves to bear more charge off loses. This is very possible as current subprime crisis is getting worse. However, in a long run, it should not be a problem since the underlying product is good.

3. Fed rate increase or LIBOR rate increase. They benefit from rate cut while lose from rate increase. In a long run, it is not a problem.

Conclusion:

At price (0.82x15)x60% = 7.38. It s a bargain. Since they have two share class A & class B. Their weight is 1:2. Their price difference is around $0.78. So the bargain price for A share is 7.38-(0.78*2/3)=$6.86. B share is 7.38+(0.78*1/3)=$7.64. They are quite lower than their current market price. Let's wait to next year.

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Updated:
Mar. 04, 2008

The new Q4 2007 data has been released for a while. Finally got some time to take a look.

Facts:
1. Q4 earning is $0.17 per share. Including $0.39 charge off based on credit trend. $0.11 charge on litigation and $0.05 gain on selling master card share. Whole year earning $1.61 pre share.

2. New charge off rate for 2006 is 3.48%. New charge off rate for 2007 is 3.79%

3. By Q4 2007, when charge off rate increase by 10%. Lost will be 6.51m. For 2006, when charge off rate increase by 10%. Lost will be 4.23m.

4. Share outstanding 42.5m.

Analysis:
1. If take off all the extra items. Earning in 2007 is 1.61+0.39+0.11-0.05 = $2.06. It is 0.16 higher than previous estimation.

2. Q4 charge of rate 4.13%, Q3 charge of rate 3.87%. Based on my calc, the lost in Q4 caused by charge off should be 5.91x((4.13%-3.87%)/3.87/10%)/4 = 0.99 million. Around 2.5c pre share.

3. In my previous analysis, charge off rates of 2006 and 2007 are 3.17% and 3.19%.  These changes in rate will result one time write off of  ((3.48-3.17)/3.17/10%)x4.23 + ((3.79-3.19)/3.19)/10%)x6.51 = 4.14 +12.24 = 16.4m.

4. Now take a look at the 0.39 pre share charge off in Q4 2007. It is 0.39x42.5m = 16.6m. It is close to the 16.4m calculated in 3. Basically that is what this charge off come from.

5. New average charge off rate is (2002 to 2007):  (7.92%+7.42%+6.38%+5.37%+3.48%+3.79%)/6=5.73%

6. Take off the 12.24m charge off in 3. Real earning in 2007 is 2.06-(12.24/42.5) = $1.77.

7. Estimate future earning based on average charge off:  1.77 - (((5.73-3.79)/3.79/10%)x6.51)/42.5 = $0.99. It is 0.17 cents higher than previous estimation. If I use 1.90 instead of 2.06 in 6. I will get $0.83. Almost the same as previous estimation.

8. Need to figure out why there is 0.16 cents difference in 1.


Conclusion:

At the end of the analysis, I was trying to figure out how this 0.16 cents difference was created since they are not getting better. Then I realize it is a mistake to invest this company. Not because I found something bad about it. But I found I am not really understand their finance statement. I also found I might better keep away from any financial stock for now because my accounting knowledge is not enough for understanding them.

Will sell it in a appropriate time.

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Updated:

Apr. 08, 2008

After listen to its Q4 conference call and read its annual report more carefully. More information about the mis 0.16 cents:

Analysis:

1. Extra-odinary items in Q4:
    (1) Pretax charge of 10m( 0.14/share) for owned receivables.
    (2) Pretax charge of 17.2m (0.25/share) for securitized receivables.
    (3) Pretax charge of 7.8m(0.11/share) for litigation related with Visa.
    (4) Pretax gain of 3.3m( 0.05/share) for selling master card share.

2. Compare of Q4 2007 and Q3 2007 income
                                                   Q4           Q3

   Interest Income                         49.8m      50.0m

   Interchange Income                   69.3m      62.7m
   Securitization Income                10.4m      22.4m  (2)
   Servicing revenues                     25.3m      24.2m
   Other revenues                            9.9m       8.6m   (4)

   -----------------------------------------------------------------------

   Interest Expense                       22.2m      24.4m

   Provision for credit losses           21.6m     14.7m              (1)           
   Operating expenses                   81.0m     68.1m (72.3m)  (3)

   (1) Pretax charge of 10m( 0.14/share) for owned receivables should be included in "Provision for credit losses". However, the number seems not match.
   (2) Pretax charge of 17.2m (0.25/share) for securitized receivables is included in "Securitization Income". However, the number seems not match, they didn't provide detail information in it.
   (3) Pretax charge of 7.8m(0.11/share) for litigation related with Visa is included in "Operating expenses". In Q3 it is 4.2m, which shown in the adjusted 72.3m number.
   (4) Pretax gain of 3.3m( 0.05/share) for selling master card share is included in "Other revenues". In previous quarter it is 2.9m.

3. But it is not that hard to understand the where 0.16 come from now.  Increase in interchange income 6.6m plus 2.2m saved in interest expense should contributed to it. Seems just a seasonal stuff since there are more transaction in Q4, not really important.


Conclusion:

Its financial report is hard to  understand. Although I get better idea how their charge off is calculated, but still quite confusing. Need more time to figure it out.

Updated:

May. 02, 2008

Q1 2008 data has been released.

1. Charge off rate increased to 6.43%.  Real earning 16c pre share.

2. A quick calc using previous quarter's formula estimated yearly earning should be 1.77 - (((6.43-3.79)/3.79/10%)x6.51)/42.5 = $0.70. Not much different from 16c x 4.

3. The charge off rate has increased quite a lot. It is already above the average number 5.73%. I didn't expect it raising so fast. Neither did they.

4. From their conference, Florida and California's lost rate are 1.3 times of other area. Business of these two states are account 24% of total business. This is a important sign that Advanta's business is more connected to housing market than I previous expected.

5. If all other area's lost rate increase to the same lever as in these two states. Their charge off would be 6.43% + (6.43%x0.3x76%) = 7.9% which is the level of 2002. At that level. They will start to loss money. But I am afraid it might getting worse. At 9% lost rate, they will lost around 35c pre share yearly. At 10% lost rate, they will lose 75c pre  share yearly.

6. Taking their high book value, those number are not too bad even it did happen like that. Unless this crisis getting very bad and last for long time.

Conclusion:

Somehow I have sold this stock with 16% profit. For holding just four months, I can't complain at all.
1. At my current knowledge level, finance stock is not very suitable target since they are not easy to understand throughly
2. The reward of this stock potentially might be very high. However, it has much bigger risk than my other holdings. I am still quite new to the market. Better keep myself safe.


Nov. 23rd, 2009
I can't tell how lucky I was after the company filed for bankruptcy earlier this month and was delisted from NASDAQ now.  There was a time that the company was selling at 20c and I was tempted to buy it back. Fortunately I didn't do it because I missed the right price point I want. Over all, it is so important that I should not get into a business that I can't understand its operation.