I take no pleasure in saying this, but I wrote that this company seemed way over valued on September 28th and that was if they could hit the high estimates they had guided the analysts to make. Now two things have happened, the company is guiding to a lower number and the stock price has been hammered. I still think this stock is over valued. When looking at their growth estimates, you must analyze the growth from acquisitions vs. organic growth. They pay a hefty price for the acquisition growth (one could argue a higher price than the underlying cash stream they are acquiring is worth) so I am not sure that you can reward them for that. Their organic growth, as highlighted by several analysts on the call, is in the low teens (at best).
Before people start blasting me, take a look at the cold hard numbers. As I mentioned in September, generating a high amount of cash flow for common shareholders (the key factor in a higher stock price) will be difficult even if ORCC is able to generate high revenue and good margins. Between preferred dividends and onerus conversions, their capital structure results in a lot of mouths to feed.
I am perplexed by the praise for management being transparent. I am not sure how guiding people to unrealistic forecasts and then waiting until they absolutely must provide some guidance for 2008 to scale back their guidance is worthy of praise. The tone of the questions from the sell-side analysts on the call should give you an indication of how they felt about management's transparency. Management losing credibility with Wall Street is a terrible thing for a stock. This stock in particular seems to have a group of analysts that have largely ignored a management team that tries to sugar coat their financial results by excluding just about everything from their "underlying" or "core" net income (see my previous posts), but one thing that analysts will not forgive is being misled.
Take a look at ORCC's true earnings. How they continue to report earnings without a true tax rate is amazing and KPMG should be careful that they are not getting hoodwinked on this. Management tries to show an EPS with earnings included from an acquisition, but without the true impact of the cost of the acquisition. To hear their CEO make comments like "the Princeton deal would be accretive if you exclude the cost of the deal" are amazing. As I have said previously, I think people see what they want to see. I think investors and analysts are waking up to the fact that this company has been teetering on the edge for quite some time and is no going over.
Do you feel that this company will itself be acquired? Having listened to the conference call, I agree with your synopsis of the analyst reactions. What do you think the value is? I'm not happy about what you are saying, but it makes total sense. Thanks.
I keep going back and forth on this. Looking at the consolidation in this space (CheckFree buys Corillian, Intuit buys Digital Insight, Fiserv buys CheckFree, Open Solutions going private, etc.), I think the possibility of a purchase needs to be factored into any analysis of the stock. Each of those acquisitions involved pretty significant premiums. Additionally, the payments space seems to be the most valuable and quality assets in the space are becoming scarce.
On the other hand, I wonder who the logical acquirer might be. I could have seen Fiserv before the CheckFree acquisition or Digital Insight before the Intuit acquisition. Maybe Metavante as a consolidation play. At this price, maybe a sponsor would consider taking the company private. With the craziness in the credit markets, I am not sure that is as likely as it would have been last year at this time. Their capital structure makes any acquisition or buyout rather expensive. Another question I have is management's willingness to sell. I think Matt Lawlor has a reputation for having completely unrealistic views of ORCC's value. That may not be as much a factor now that they have a large shareholder with a board seat (Tennabaum) who may be eager to force a sale rather than sit on dead money. The stock is now at the same level it was in late 2003. In absolute terms, that is just terrible. When you discount the current price back to 2003, their current performance is completely unacceptable.
In the final analysis, I get nervous when I need to assign some value to a potential buyout to feel good about investing. At this point, I would probably not sell, but I am not a buyer either.