Wex orders from SC are approximately 14M in 05.
New orders from new customers, & hopefully ongoing customers, is 6.3M or 45% of SC 05 business. This means that, on a sales basis, Wex can lose 45% of SC business & still come out flat for 06, if their new business does nothing more than reorder at their past levels.
New business was obtained in Sept 05, to run out by May of 06, 8-9 months. If they can get 3-4 months additional business from these new customers, that will produce a higher yearly sales level.
The last order from SC, Sept or early Oct. 05, was for 5.8M and it appears that SC commits to reorders every 4-5 months, Dec 04, 4.7M, April 05, 4.5M, Sept 05, 5.8M.
Apparently SC's orders are increasing in size, as they grow, & maintaing 50-55% of their business, will show an increase in total yearly sales for Wex, given the above scenario.
Guidance on what % of SC business they are going to get, is the answer everyone is waiting for & with a 4-5 month lag between orders, we should get word in Dec 05 or Jan 06 on at least the size of the next order, as they are still the only supplier to SC, through July 06.
Worst case scenario, if above is correct: Flat sales, margins smaller, gross earnings down, but company still profitable.
Intermediate scenario, if above is correct: Sales increase slightly, margins smaller, gross earnings flat.
Optimum scenario: Maintain 55% or more of SC business, at a higher total demand for product by SC. SC potential needs in 06,16M+, based on their 15-20% growth. Additonal sales from new customers obtained in 05, 6.3M+. Proprietary product flat to up. Total sales, up, Margins smaller, gross earnings up.
EPS growth will be affected by continued rise in # of shares outstanding & this is why there is no insider buying. The continued rise in outstanding shares are for options, going to the insiders. This is not showing up everywhere. http://finance.yahoo.com/q/pr?s=WEX
One other point. If Wex issues more shares to purchase another company, the whole game changes. No excess cash, no treasury stock, open 12M line of credit, makes this a possibility.
Select Comfort Corp. Narrows FY 2005 EPS Guidance To a Range Above Analysts' Estimates; Issues FY 2006 EPS Guidance
October 25, 2005 Select Comfort Corp. reiterated its expectations to sustain long-term sales growth rates of at least 15% to 20%, with same-store growth between 7% and 12%, leveraging the business model with long-term earnings growth rates of at least 20% to 25%. The Company believes that in 2005 it will exceed its long-term target ranges for same-store growth, total sales and earnings growth rate targets. Accordingly, the Company is updating its earnings per share guidance for full-year 2005 to a range of $1.05 to $1.08 from $1.00 to $1.08. The Company announced that its outlook for 2006 is to sustain earnings growth in line with its long-term expectations of at least 20% to 25%. Earnings growth expectations are exclusive of the impact of new accounting regulations requiring the expensing of stock options. According to Reuters Estimates, analysts on average were expecting the Company to report full year 2005 earnings per share of $1.04 and full year 2006 earnings per share of $1.29.
(continued from previous)
Two additional contracts have been announced in the last 3 months which are worth commenting on.
Cardiac Science Contract. Initial order was $1.8m under a 2 year contract. Of this 600k was shipped at the date of the announcement of 25th August. This will continue to be included in sales reported for the final quarter '05 and the first and maybe second quarter '06. The filings of Cardiac Science ("DFIB") are interesting. It's Annual report for 2004 indicates that it partnered much of its manufacturing with GE Healthcare. Financially the company was in trouble pending the completion of a merger with Quinton. The merger was completed on and then announced on 1 September 2005. The new company ("CSCX") seems to have a strong position in its industry, but time will tell whether the merger has saved it financially. The extent to which Winland will supplant GE Healthcare as an OEM (if it does) will be interesting to watch. It appears that the nature of manufacturing is specialized and certainly would require CSCX to impose the most stringent standards on any supplier. Equipment failure when the equipment is used in a life threatening situation would lead to death and lawsuits!
Further agreement. A further agreement announced on September 13th indicates sales of $4.5m from the third quarter '05 through the second quarter '06. The customer is not identified, and the nature of the production is unclear. It is not possible to determine the profitability of the business. It does appear from the press release that there is an element of uniqueness involved in the product which gives a little security to Winland. There is also an implication of ongoing business.
What can one conclude from the foregoing?
1. It is unclear whether the issue with Select Comfort has been brewing for several years, but, it seems that from 2003 the management of Winland has been determined to diversify its client base and insulate itself against the possible loss of Select Comfort.
2. It appears that they have succeeded in this goal from the end of 2003. The business exclusive of Select Comfort has been growing significantly.
3. The gross profit for the 9 months to September 2005 increased to 24.5% of net sales compared to 22.3% of net sales for the 9 months to September 2004. I don't know enough about the sales breakup to draw a definitive conclusion, but it is possible to argue that the Select Comfort sales prices would be static therefore the increase in margin is reasonably attributable to the incremental sales of other business.
4. Select Comfort will continue to make a contribution to the business and profitability of Winland. However, provided that Winland can succeed in diversifying and ensure that the new business is equally if not more profitable, they will be in a position to make a choice whether they want to be dictated to by Select Comfort.
As I said in my earlier posting, if management is able to negotiate their way through this and land some good alternative ongoing contracts this will be a cheap company at the current price. At this time there is not enough information available to draw a more definitive position, and it may take time for all the pieces to fall into place. It may take longer than many investors would like, but Rome wasn't built in a day. I have speculated that the management is good enough to do the job and hold a modest long position. If this stock falls lower, I will add modestly to average down. Time will tell whether it will be worth the wait.
Good luck to all.
Excellent post. Thanks for going through the numbers. I had not calculated the non-SCSS revenue numbers and it is useful information to lay it out as you have.
One concern I have, which I believe is shared by others and is part of the cause for the price drop, is that the 3rd quarter gp decreased to 23%. This was both less than the prior year 3rd quarter and the first 6 months. I had anticipated the margins to widen as revenues increased but with a small company it's sometimes tough to predict. Nonetheless, I am uncomfortable with assuming that the margins will be higher going forward. Also, assuming they keep some SCSS business beyond the first half of 2006, the renegotiated contract will likely put more pressure on the margins. Also, if they have less SCSS business my assumption is that it will be a few years (3-4 seems a reasonable guess) before they can fully replace this revenue even if they keep up the recent growth you have illustrated. During this time, WEX will have less revenue to cover overhead costs and this too, will put pressure on the margins.
Best case - WEX retains SCSS business of at least 80% of current level and growth elsewhere more than offsets modest loss of SCSS business. Margins stay healthy as overhead costs are more easily absorbed by increased revenue base. Other costs are lower, like sarbanes oxley. GP margin holds steady or expands... investors regain confidence as the SCSS cloud of uncertainty dissipates... the pe awarded to WEX expands to a more normal level (say 10 - 12) and the stock price easily moves above $6 and continues towards double-digit heaven over a couple of years with continued growth and profits.
Worst case... they lose the SCSS business altogether and it takes years to replace with new customers. During the first year or two after the loss of SCSS WEX bleeds red as it doesn't have enough revenue to cover overhead or has to restructure to adjust for the smaller size and takes substantial one-time hits. Note that I disagree with someone who previously posted who adjusted profits just based on the % of SCSS revenue. I think if you lose all of the SCSS revenue, you break the streak of profitable quarters that Lorin is rightly proud about.
I'm still long. I sold half my holdings at $6.20 and bought back prematurely at $5.10. I am tempted to average down at this point, but there are significant risks and I don't see the clouds of uncertainly clearing before March or April at the soonest. Would be nice to see another PR illustrating more new growth from outside SCSS.
Luck to all. Thanks again to Monty for the quality post.
Thank you for your posting. I think however that I take a slightly different view in assessing the position. I have previously posted my overall comments. As previously indicated, I would prefer to forget the Select Comfort business in the forward business planning. Of course any ongoing business from Select comfort would be welcome but for the reasons previously expressed, I would be more intent at looking at the underlying business and diversify more. I suspect that management has already begun to do that however, there is nothing better than considering the actual figures. Consequently I decided to look into the net sales figures a little further.
First looking at the annual returns the following are the net sales of Winland over the last 4 years.
The following are the disclosed percentages of business going to Select Comfort.
This means that the Select Comfort sales were as follows:
Therefore if you deduct the sales to Select Comfort from the net sales the following are the net sales exclusive of Select Comfort.
Therefore one can conclude that over the last 4 years apart from the Select Comfort business, the rest of the business has struggled to remain static. It contracted until 2003 and then grew in the 2004 year by 14%.
Looking at the 3rd quarter 2005 10Q reveals that 55% of the 9 months sales of $21,542,650 went to Select Comfort. Therefore the sales for the 9 months net of Select Comfort were $9,694,193.
On a comparative basis, for the 9 months of 2004 the Select Comfort sales were 59% on sales of $17,625,148. Thus net of Select Comfort, the first 9 months of 2004 generated net sales of $7,226,311.
In other words the business net of Select Comfort on a comparative basis has grown by ($9,694,193 � 7,226,311)/7,226,311 or 34% over the first 9 months of 2005.
One can therefore draw a conclusion that from 2003 the rate of sales for the underlying business has accelerated to the end of the 3rd quarter 2005. This indicates that for some time the company has been generating additional business at a healthy rate.
It is also instructive to look at the notes to the accounts of the 3rd quarter 10Qs, comparing the 9 months of 2004 to the 9 months of 2005. In 2005 at September the company reported that it had orders of $17.5m of which $5.5 was from Select Comfort to be delivered in the following 6 months. For the same period for 2004, the total forward orders for Winland were $11.4m. So for the current year, if one deducts the Select Comfort forward orders of $5.5m from the total forward orders, that leaves $12m which is more than the total forward orders of the previous year for the same period. Again this indicates that the underlying business net of Select Comfort has been growing.
(to be continued)