Kaya803 - (Q from another board) - For some reason Yahoo kept deleting my posts, so I tried later in the day. My Canopy concerns I wrote about still exist. I am long Canopy, and have no current plans to change that. Yet, if I did need to sell it, I would do it as quick and quietly as possible. I follow the industry fairly closely, and at this point have found no long candidates in the sector. I am most concerned with US code section 280E. Most of the US pot stocks are insolvent, burning cash like crazy, or a mixture of both. I include TRTC in that statement as well
I brought this up extensively on the conference call. I think it is out in the open now, and if an issue, the auditors and Canopy will make sure it is corrected for the fiscal year end March 31, 2016 (assuming only 4 quarters this fiscal year.
I am pleased with the revenue growth, and progression of Canopy Growth Corp. Our thesis remains intact. Yet, I have concerns on their reporting of inventory as described below.
Something unusual could be going on with TWMJF reporting. You can't carry cannabis at $6 a gram, sell it for a little over $7, and claim a 70% to 79% gross profit. I know that is what they said on the call, presented in the statements and so forth. Yet, it just doesn't add up. Plus inventory even under IFRS is to be basically reported at cost (unless net realizable value is less than cost). Yet, TWMJF is marking up inventory to fair value, by using Biological Assets as a conduit. Unlike inventory, biological assets are marked to fair value under IFRS.
Inventory is clearly supposed to be historical cost (in most cases). Hence, inventory without biological assets would be a lot less than $6 per gram. Yet, what Tweed appears to be doing is properly marking biological assets to fair value, just like they disclosed in their financials. The concern I have is they are then releasing the biological assets, which are already at fair value, to inventory, and then claiming inventory is at cost. Just seems like an odd way to do it, and certainly a way you can step up inventory to closer to fair value. The question becomes, "Is this permissible under IFRS?"
I am concerned with the size of their inventory, which is currently CAD $22M, with MRQ sales at CAD$3.5M. Canopy claims oils will extend perishable life. Yet, I suspect it will turn out that Canopy will at some point discuss an "unplanned" inventory issue.
I do not think there presentation is illegal in any manner whatsoever. I think the reporting could possibly be aggressive or incorrect. Or, at worst, I would think these are growing pains. At best, I would think I am incorrect in my assessment of inventory in this situation.
I spent a bit of time researching ROX today. This is a total speculative high risk investment. They are burning a great deal of cash, and at the same time increasing revenues and productions materially. The brands and quick concept look interesting. Question becomes once again, "Can they survive until an eventual profit?"
If funding ceases or an adverse event occurs, ROX could be toast. If we wait for profits, then share price might no longer be $0.89, and could be substantially higher.
Institutional ownership is not telling. One firm has 0.40% of assets in ROX, and that is the largest allocation I have seen.
Institutional ownership is listed as 6.85%. Should they survive and should institutions start looking at it, it could escalate in price. Lots of “ifs.”
The 5 year chart has been impressive. The 10 year chart is ugly.
In June 2008, the price was $0.20. I think it came public in April 2006 for $9.00.
Philip Frost owns 33% of the common shares.
Shareholders’ equity is $23M, of which $7.9M is intangible.
Shares outstanding as of November 6, 2015 is 160M.
Auditors are Eisner Amper.
Officer salary is not excessive for a public company, as COO made $438K in 2015, SVP made $354,401, CFO made $300,808 and SVP of Marketing made $229,976. This isn’t cheap relative to revenues, but reasonable in my opinion.
Directors get fees of $9,800 to $20,000 in cash, and another $12K to $82K in options. This is totally excessive in my opinion. Yet, the amount is not material enough to cause a non-investment.
51 full-time employees, 32 of which were in sales and marketing and 19 of which were in management, finance and administration.
As of June 12, 2015 officers, directors and principal shareholders owned 44% of the common stock.
4800 Square foot lease in NYC expires in April 2016.
Surprisingly, an unqualified audit opinion was issued.
Debt has increased substantially since on or before March 31, 2014.
I tried posting a link, but Yahoo doesn't seem to allow. If you look at form4oracledotcom website, and look for Frost. Seems to have plenty of losers. Not saying ROX will be a loser, but seems he has lost before. ROX cash drain is huge. I have been looking at, but survival seems difficult. Revenues increasing rapidly, yet cash is burning rapidly too.
I have been incorrect on BAM forever. Yet, I have a hunch, without a great deal of research, that they will fall apart over a mountain of debt and credit downgrades.
BAM does have a heavy debt load, and yes, much of the debt is non-recourse. Yet, I suspect the related companies are so intertwined, that if a major debt became troubled, even if unsecured, could become troublesome for BAM.
I would be less concerned of high interest rates to BAM, than I would be about refinancing, what rates would be paid, and will credit be available when necessary. Yes, so far so good on that end over history.
Standard and Poor's rates BAM credit 'A-.' That is upper medium grade, and the best of the grades given by the ratings agencies.
Moody's rates BAM credit 'Baa2.' That is two rungs above non-investment grade (Junk). It is the middle rung of lower medium grade.
Fitch rates BAM credit 'BBB-.' That is one rung above non-investment grade (Junk). It is the lowest rung of investment grade.
Total Assets $135B
Total Liab $ 82B
Non-Recourse Debt $55B
Total Debt $67B
Total Equity $53B
No one talks a better game then them, and again, I have been wrong for a decade on this one.
Why does Fitch and Moody's give them such a low credit rating? That is the question.
One poster on the Fool Berkshire board, answered this on Fitch rating:
"Fitch's primary concern is the credit risk borne from the investees providing the cash flow that sustain the dividend within the property arm (BPY). Probably the reason why BPY is so quantitatively cheap.
One cannot help but wonder if rating agencies now err on the side of caution anytime they see situations involving real estate, debt, and lots of moving parts in a post-financial crisis world where they previously played the role of patsy at the poker table."
Sentiment: Strong Sell
I think one must add the uncertainty of the Brazil legal situation to the bearish scenario. If that was remedied, at these prices, I would own a boatload.
The 10 year bonds were yielding 11% last week, and have been yielding near 10% for some time now. Baupost reported 2/13/16 that they reduced share ownership by 20% as of 12/31/15.
My post was not intended as a reincarnation of a thesis, but merely sharing my thesis, which remains unchanged as of today, but I wrote it in November 2015.
I could be incorrect on the VZ purchase being more accretive to cash flow. That is not a material part of my thesis, and we will hopefully find out integration and cash flows in a few quarters.
IIRC, from the last earning release, FTR projected free cash flow in the range of $825 million to $865 million for 2015, up from the previous estimate of $785M to $825M. IIRC, they forecasted capital expenditure from business operations between $700M and $750M, up from the prior estimate of $650M to $700M.
Thesis continues to be one of an extremely high risk company, yet integration seems to be on track, with the addition of the Verizon wireline assets, could make this company a cash cow.
Our thesis is based on free cash flow greater than earnings, and a FCF yield of 18%. Dividend is expected to be sustainable at $0.42 per share. We expect positive integration from the Verizon and AT&T purchases. Due to the credit quality this is a risky investment, and allocations show such.
No direct insider selling as of today for 2015.
Morningstar credit rating is a low ‘BB-,’ with debt/assets of 44.80%. During November 2014 Morningstar credit rating was a low ‘BB,’ with debt/assets of 53.56%.
10 year bonds are yielding ~10%.
Verizon wireline purchase should be more accretive to cash flow than originally expected.
Projected eps for 2015 is ($0.05), and F2016 ($0.47).
Frontier reiterated 2015 leveraged free cash flow ($825m - $865m) and capex ($700m - $750m) guidance, but lowered cash tax guidance to $40m - $50m (from $95m - $110m).
Sentiment: Strong Buy
Of course FTR is rated low on its credit. The 10 year bonds were yielding 11% last week, and have been yielding near 10% for some time now. Baupost reported yesterday that they reduced share ownership by 20% as of 12/31/15. Any FTR investor must realize the solvency risk. And then there is Verizon issue. I am under the impression that is a near definitie closing.
Sentiment: Strong Buy