I think we'll be close to even by day's end. The news today was mixed, and there is a good reason for the bad news.
That is important because the shorts said just reporting delinquencies doesn't give the full picture. Now we have the full picture, and it's what we hoped. Re-agings were up 0.4% since last fall, a little, but much less than delinquencies are down. The overall picture is improving, and the improvement is accelerating.
Talk about a mixed earnings report! I don't know what to think. I guess we should be happy that earnings before the inventory write down were strong. The big write down appears due to the rapid decline in crude oil prices, Trinseo's main raw material.
A new CEO will help but there are too many negatives. Margins will be cut in half on their laminates. Sales will drop. Lawsuits will pile up. This is at best a $15 stock.
Did you even bother to look how sharply their sales fell off in the fourth quarter? They were only up 4% from the prior year quarter. The prior quarter was up over 20%. Everything has changed. Management cut its guidance for 2015 in half. A stock price is a combination of earnings and a multiple (PE ratio) to account for future earnings growth. Now that growth has been cut in half, a 10% drop is just not sufficient.
Any way you look at it growth has reeeeally slowed. This stock no longer deserves a hyper growth premium of 40. Yes it could be more than 9%. But things have changed so fast that management is stabbing in the dark at a number. It also can be a lot less.
Doesn't it bother you that earnings growth went from 29.2% in 2014 to 9.1% in 2015, which is management's midpoint of their guidance. I would call that a screeching and sudden slowdown. What makes you think the slowdown is over? This slowdown has happened so fast that there could be a lot more to unravel.
SAM has hit three home runs with Twisted Tea, Angry Orchard and Sam Adams. But coming out with new blockbuster products is tough, just ask Coke, Pepsi, Coors, Annheuser InBev, SAB Miller etc. They will need to do that to get their growth back up. The current crop of new products is unlikely to get it done. Without a new blockbuster their growth will slow even more.
So I'll ask again, what is a company with 9% EPS growth worth? 20 times earnings? 25 times? That's about where the market is right now which would put SAM's value at $140 to $180. And that assumes growth doesn't drop more.
Being the dominate national player is a negative, not a positive in this category. They have the market share all these new micro brews hope to get a piece of. The competition caused the growth to slow and it will only get more intense. Stock buybacks are a bad idea for a stock with a PE of 40. You weaken your balance sheet for very little in return.
I didn't know a trader from Fast Money could move markets that much. He came out with a strong buy recommendation at 12:24 pm. The stock immediately shot up $20. His rationale was the stock has dipped before and that was always a buying opportunity. He is wrong, it's different this time. SAM's growth has just been cut in half and management has no answers. They blame competition which is only heating up. Craft brew shops are popping up everywhere. In a town of 10,000 near me, there were no craft brew stores a year ago. Now there are three opened or planned. There is nothing SAM can do about the increased competition. This reminds me of Pandora, which was an stock market darling until competition broke out all over.
Perhaps you missed their slashed guidance. They expect earnings to only increase about 8% in 2015. You don't pay 40 times earnings for a stock only growing 8%. What's more, management has no real plan to reignite growth. They blame the slowdown on increased competition. In other words, it's out of their control.
Why would you buy a stock with a growth rate of 4% trading at a PE ratio of 40? The play here is short SAM to $150.
I'm also a little put off by the level of expenses. Last time revenues reached this level NTWK was solidly profitable. Part of the higher expenses is higher amortization of development costs of the new Ascent product. A bigger part is higher labor costs. Management has consistently said that higher revenues are coming and they need more staff to support the higher revenues. They have been proved right on the revenues. So their comments about the need for still more staff due to expected more growth in revenues is credible. Also some of the labor is needed for start up costs of new contracts which should recede in time. I expect the company to be profitable in the second quarter of 2015.
It's a buy at anything under $5 tomorrow. I personally hope we open in the 4s so I can top off the tank.
The short ratio is currently 7 days. However, this is misleading due to the high recent volume in the stock. With normal volume it is probably closer to 20 days. Shares short are currently 75% of the float, a very high amount.
So this is what a short squeeze looks like? There is a ways to go, this is a $40 stock with normal 60 day delinquencies of around 8%. I think we can get back there by this summer due to the short term of their loans.