If I thought they were going to do $0.70 this year, I would be putting every cent I have into this. For now, I have a tiny position to force me to watch it. When I see a good short term trading opportunity, I will size it up. I think that is coming next week but will have a $4 handle on it. Here is the math as I see it on 2013 earnings and would welcome any comments.
Revenue going to be down 30% in Q1 and CFO said the rate of growth will be negative each qtr after that but at a decreasing y/y rate. So let's assume for the full year, revenue ends up being down 20%. That gets you roughly $240M of revenue. Then he said that gross margin in Q1 was going to be similar to Q4, which was 44% and change and then would improve slightly over the course of the year, so let's just say that it's 45% for the full year. That gets you gross profit of $108M (240*0.45). I wasn't entirely clear about what he was saying about SG&A, which for SKUL includes R&D as well, but his exact words were "As you think about SG&A, it will increase through the rest of the year on a dollar basis, but not nearly at the rate it did in Q1". To me this sounds like at best it is flat y/y so let's call that $99M. That gives you operating income of $9M (108-99). He said the tax rate for 2013 would be 100bps less than the 2012 rate of 36%, so let's call it 35%. Interest income and interest expense are de minimis so that gives us net income of $5.85M (9*(1-.35)). With about 28M shares outstanding, I get $0.21 GAAP EPS. I haven't seen where the street went to, but if they are around $0.20, then that means #s don't have to come down yet again and the bad news will be close to priced in. To be clear, I don't think you are supposed to value SKUL on 2013 earnings since it is a reset year. The question becomes, what do earnings look like on a normalized basis going forward? I will take a stab at that in my next post
checkoutking2000 you have done some great analysis. On SG & A, my read of the CFO's comments
is that he said it (SG &A) "wil increase through the rest of the year on a dollar basis but not nearly at the rate it did in Q1. In Q1 of last year, SG & A increased 70% from $14,3 million to $24.5 million.
In the S-1 the Company said they had 200 employees at March 31, 2011. By December 31, 2011, they had 290 employees. In the Conference Call prepared remarks, the CFO said they had 335 employees at December 31, 2012. Since they have been adding employees the SG& A of $27.5 million of Q4 is probably the baseline to use going forward. They still probaly gave out some pay increases so it would seem that SG & A in 2013 could be at least $110 million. (4th Qtr level of $27.5 million X 4). It may be even higher than that if some of the 2012 hires only worked a partial quarter in 4Q.
Perhaps the analysts are using a higher SG & A in 2013 and 2014 than you are and that is why they are coming up wiith a lower target price.
Does anyone know if it is possible to purchase a research report on SKUL from B of A Merrill Lynch, Morgan Stanley, Piper jaffray or Keybanc?
Those are Investment Banks that were involved in the IPO
Your 2013 sales and net income estimates are dead on with what the analysts are projecting for 2013 in Yahoo. Your 2014 net income is double the analyst amounts, hence the 4.50 valuation versus your 9.0 valuation..
So what will SKUL earn in 2014? I will start out by saying that the likely range is very wide, but here is my best guess. For revenue, I think it is not unreasonable to assume that they can reclaim 2012 levels of about $300M. The gaming business is still relatively small, but growing nicely as is International. I also think there is a high likelihood that they add Wal-Mart next year as a retail partner in the US. If all of this together can't get them back to $300M, then they have bigger problems. I don't see huge improvement in gross margin because the market is moving toward higher priced, lower margin SKUs. That said, presumably they will have gotten their inventory under control by this time next year, so there should be less discounting. So I will use 46% as my estimate. That gives me $138M of gross profit. With regard to SG&A, CEO was pretty clear that they have already funded most of the key R&D projects and have to use his words "stuck a fork" in a lot of product initiatives that were unlikely to bear fruit. I think spending could end up being flat to down from 2012 levels, but I will assume flat to be conservative, so $99M. That gives me $39M in operating income. I assume tax rate falls another 100bps (this is because international carries a lower tax rate so as those sales increase share of total, the blended tax rate falls). So using 34% rax rate, I get net operating income of $25.74M, or GAAP EPS of $0.90 assuming shares outstanding rises slightly to 28.5M. Maybe they can grow that earnings number 5-10% a year after that. In that case, it is hard to argue that the stock should trade at much less than 10x forward earnings, which would yield a 2013 year end price target of $9. The market is currently pricing in a much more draconian assumptions. Perhaps the market will be right, but my sense is that as it usually does, it is overshooting. I still think the stock breaks $5 next week, but somewhere south of that, I will look to buy for a trading bounce.
Good analysis and it makes sense. I would like to think this is worst case scenario for the general going concern of the company. They can't take a bigger hit to sales and maintain relevancy. I get that channels are backlogged with inventory and sales will be lower this year, but not 60 mil of backlog. Such a large drop (considering gaming and international expansion) in sales tells me that domestically they are losing serious market share.
Sure, that would be huge and is very optimistic considering that includes a 25 cent loss in Q1. That would be a very quick reset of the company.
I'd be thrilled with breakeven for Q2 and 50-60 cents EPS for the last 6 months. If this occurred (big if), Skul would get some love and see the share price jump on the turnaround, especially if margins got back in high 40's.
The analysts got their first hints of problems based on shelf space. So I guess we should watch this trend in the future to better understand how they're selling.
I know I was criticized for all my channel checks, and I should have seen this sooner. Andrus had me convinced that Beats "was not a problem". I kept on convincing myself that the extreme drop in shelf space by SKUL at Best Buy was just high end. I was wrong and frankly sick to my stomach I didn't see the light earlier.
They are not dead... Just not the dominant player thy once were (even last summer). They got #$%$ slapped by some poor marketing and packaging and bowing out of the high end space (which again Andrus convinced us was not the "sweet spot"). Instead they went after the cheap end, made their packaging plain and it was a bad move.
Alden will change the course.... Hope it is not to late