I Just sold 200 of the FEB $6 puts for $0.10. I think it is unlikely that the stock breaks $6 before earnings (Feb expiry is the friday before earnings). If that is the case, I will collect a 1.7% return in 2 weeks (over 40% annualized). If it falls, I will own 20k shares of the stock at $5.90 effectively, which I would be more than happy to do. Stock was $6.49 when I placed the trade and now the options are 5c by 15c, but if it ticks down again, the 10c bid should come back so one could get another shot at them. I would like to ultimately build a larger position in SKUL, but I am going to wait until after the earnings report in case there is one more leg down (I don't have any idea either way if that will happen, just playing it safe). The recent amendment allowing them to buy back up to $28mm in stock is meaningful as that would represent over 15% of the outstanding shares, and over 25% of the free float at current prices. With 35% of the float held short, that represents 60% of the float in potential buying pressure. I'm no math genius but that is a lot. I believe they are probably in a quiet period ahead of earnings so I wouldn't expect them to be in the market until a couple days after the earnings report. Also, I think that the board of directors has to first vote on the buy back before it can actually be implemented. I would guess that will be done in the coming week or two and will be announced concurrent with earnings. This is pure conjecture but they might be doing it as a palliative to cushion the blow of either a bad quarter or guidance for 2013 that is below the street. If the stock got hit on that though, I think you would want to back up the truck for a few reasons: 1) No company likes to miss too many times in a row, so I would guess that wherever they set the bar, it's at a level they think they can hit in their sleep, 2) Assuming the first point is correct, they will be aggressive in buying back stock at these levels because it will be very accretive to earnings, and 3) They are holding an analyst day in March (I think they mentioned that either on the last earnings call or at the ICR presentation) so that could be a catalyst. One last thought: it would be very interesting to know the date when they issue performance based stock options for the year. It is obviously in management's interest to do it when the stock is at a low. I looked through their last 10-K, but couldn't find the answer, but I would guess it's sometime in the early part of the year. They might be engineering a situation where the grant occurs and then they use the buyback to ramp the stock throughout the year. Might seem a bit like a conspiracy theory but having lived through the options backdating scandal of last decade, it really isn't that big of a stretch.
Good luck to all..
I considered selling some jan '14 puts at 5$ for 1$ premium or 20%, but then i figured the upside is higher than 20% if i just buy long and sell covered calls at 10$ all day, although those put premiums are just ridiculiusly overvalued right now
Well written post. I think the bar has been set pretty low for Q4 and 2013 via EPS estimates and its current share price. I think the 10k indicates that the weighted average price of the performance stock options is around 12-14, so mostly out of the money right now.
This stock is certainly out of favor, and maybe for good reasons we don't know about. As a finance guy, I'm struggling how analysts are projecting a $105 mil increase in sales with only a corresponding $2 mil increase to net income for years 2011 to 2013. That transalates into some serious margin erosion and high expenses.
I agree with your buyback comments. Insiders have alot at stake with all their shares currently owned plus the potential from options. They need to get that stock price back up.
Thanks for your comments. Unfortunately I don't have access to the sell side models for SKUL either but perhaps I can try to reverse engineer it based on what I do know. My first observation is that the revenue/net income disparity you highlighted is not actually as glaring as you think because your assumption about the change in net income assumes the same share count for 2011 as for 2013. Correct me if I am wrong, but I believe that you are getting that $2mm increase in net income by multiplying the 8c increase in EPS from 2011 to 2013E ($1.00 to $1.08 as per yahoo finance) by the share count of 27.54mm (also from yahoo finance). The problem with that analysis is that it is not apples-to-apples because the share count in 2011 was significantly lower and then grew post-IPO (23.6mm fully diluted for 2011 vs. 28.13mm as of the most recent quarter). Actual net income in 2011 was $18.6mm (source: 10-K filed 3/22/12). If we use the fully diluted share count for the most recent quarter which is 28.13mm and multiply it by the consensus 2013 EPS estimate of $1.08, we get $30.4mm in net income. There is one issue here though which requires a further adjustment. I believe that the EPS estimates represented on Yahoo finance are Pro-forma rather than GAAP and thus exclude non-cash items such as stock based compensation and intangibles related to acquisitions. That $18.6mm net income number for 2011 relates to $0.79 in EPS so I have to assume that is the GAAP EPS. To make it comparable to the $30.4mm number I derived above, I need to Pro-forma it. The quickest way to do this is just to gross up the $18.6mm by 26.6% (which is the delta between the $0.79 GAAP EPS # and the $1.00 Pro Forma EPS #). This gives us $23.54mm in Pro-Forma Net Income for 2011. So on the $105mm increase in revenue, they are actually generating incremental net income of $6.86mm, not the $2mm number you cited. So revenue in 2013 is expected to grow 45% vs. 2011 levels and net income is expected to grow 29% which means the street is baking in some margin compression but it is not nearly as dramatic as you thought. My guess is that part of the issue is on the gross margin front. I know that they mentioned on the last call that increased discounting at their retail partners has driven sales away from SKUL's own website. Those first party sales carry by far the highest margin because there is no revenue split so their decline is hurting the blended company-wide gross margin. Increased competition from the likes of Beats by Dr. Dre is also probably hurting pricing. Also, it seems like they have added a lot of celebrity "brand ambassadors" since 2011 and that is probably driving higher marketing costs. I apologize for the back-of-the-envelope nature of my calculations, and I certainly welcome any critiques.