BTW, I would agree that about 50% of collection is almost certain, as it appears almost 50% of the companies revenues come from departments within the state of California. California just signed a new size-able budget and isn't having the same budget shortfalls as tech companies thrive and general business conditions are accommodating.
As far as I understand it, EBITDA shouldn't be the main metric to value the company, net income seems to do a pretty good job reconciling real costs and expenses incurred in the acquisition process, both cash and non-cash. The other important metric is free cash flow which has been anemic as receivables, both billed and un-billed, are increasing. Moreover, recognized revenue on the un-billed receivables in the businesses NVEE operates in are likely to underestimate costs if projects aren't completed in time or the cilent determines the project didn't meet expectations and requires follow-up work.
To price the company north of $20.00 seems to ignore these risks. But at least for now, the price-action is quite favorable and may remain so should the company fulfill their long term version and push net income/share to over $2.00 a share in 2-3 years.
There are a lot of moving parts, but the most reliable numbers, imo, are the Earnings Per Share and the y/y comparisons when comparing all current businesses currently under NVEE's umbrella y/y in order to ascertain real growth.
Working capital adjustments aren't to be expected if the acquiring and the acquired are communcating properly. To date, the company has not delivered over $4M+ in free cash flow, although they certainly should reach that number this year. I'm not sure where you see Days Sales Outstanding data, as I haven't seen anything in the latest filings, but as long as receivables are paid in timely fashion as you seem to imply is merely a formality, then the company isn't in any serious danger.
However, what I have yet heard you address is the fact that the company has shown negative earnings growth comparing 1st Q 2014 to 1st Q 2015 on a proforma basis. Time must pass before there is proof that the less hands-on flat management structure across many the five verticals will end up generating as much cost savings as anticipated so that these companies aren't collectively contracting.
Certainly not, you asked me to provide one financial metric that could merit a $12.00 price tag.
I believe that you are an intelligent investor and know what you are doing, but correct me if I'm wrong...
Trailing Twelve Months Free Cash Flow is $0.02, if the historic data I have is correct. Although that should certainly improve dramatically, Wouldn't the current Trailing FCF be .008%?
The balance sheet may show low leverage, but does that mean any company that has low leverage is worth buying at any price? Currently they have a 2:1 current ratio, but why is that something to get excited about? Additionally, hey are able to maintain low leverage because they dilute with each purchase to offset additional leverage while having sold stock much cheaper than current prices to generate cash.
At this moment, EBITDA is not $15M, and the number is a bit deceptive considering how much of the company is built on buying growth; so amortization, newly issued shares, stock based compensation and future payments are not stripped out - which constitute a pretty hefty chunk of EBITDA, which exclude those earnings minimizing line items.
OK, but what in particular looks strong about the cash flow statement? Other than backlog; which appears to be slightly at odds with 2015 guidance, because 2015 guidance includes Mendoza and backlog does not; what are the numbers particular inspiring in the balance sheet and the cash flow statement which should merit these valuations?
The reason I think $12.00 is more realistic is the company's own guidance shows basically no organic growth in 2015 on the revenue side. On the earnings side, it is hard to tell without seeing the financials of Mendoza.
I'm not sure if hoping margins climb while corporate profit margins in general are unusually high is a good strategy.
A PEG of 1 considering an optimistic 11% organic growth rate = $12.00
However, I'd agree that would be on the low end. High end = $18.00
My main point is that as of the moment, with all currently held companies under NVEE's flag demonstrating...
-7.1% margin growth
-2% earnings growth
-1% revenue growth
...the company appears to be in the process of an attempt to buy earnings and have yet to prove they can grow the underlying businesses and recognize synergies.
Are you joking?
The results were categorically negative. If NVEE was still priced around $12 per share, I'd say they are inline. Priced at $23, numbers are a major fail.
The guidance did not come OVER consensus, unless you use the most optimistic numbers given. The guidance for 2015 EPS midpoint is below the consensus by $0.02 at $1.10. Typically a business like NVEE growing steadily would get a P/E multiple of about 15 during bullish market conditions. But I'd argue that would be far too optimistic because of multiple indications showing adjusted organic growth, if acquired companies were included retroactively, in regards to earnings and future revenue estimates is negative.
Moreover, last year demonstrated negative adjusted organic growth to the tune of 2% as measured by net income (see the 10-Q, note 4, page 14) and after unrounding the numbers given which appear to be $0.19 vs $0.19. In the statement, it appears that there was 0% organic earnings growth when acquisitions are included, but it is a bit worse than that because the properly rounded number is $0.20. The 2014 numbers if properly rounded would have been $0.20 in 2014 compared to $0.19 in 2015, making it clear they are buying businesses with slipping margins. With revenues growing 5.6% across all current NVEE businesses vs. last year, it appears margins shrank by 7.1%. Can NVEE resurrect those margins? That's a big question mark.
With NVEE stock priced to perfection at the moment, those are less than exciting numbers.
I'm also looking at the company's revenue numbers from 2014 and adding 2014 earnings from JLA, BURIC, and MENDOZA acquistions as stated in the press releases (of just under $10 and $15 million respectively).
2014 recorded earnings = $108M
2015 estimate = $132M midpoint
At first glance, this looks like a 21% growth in revenues.
108M+9M+14M+2M or about $133M
Based on the midpoint revenue numbers, revenues drop by 1%.
Congratulations on a fantastic trade. Over 100% in less than half a year, and more than is possible to make on the short side unless constantly rebalancing, which is hyper-risky. Anyways, Awesome trade.
Regardless, you clearly know what you are doing and have your own reasons, which I respect. I will eat my ample serving of medium-rare crow if this is still over $20 one to two years from now.
I'm used to being wrong on my hunches in the short term. Right now the bubble is worst is small-mid caps as the Russell 5000 is valued at 75x P/E when including companies with negative earnings. Even if you filter out companies with negative earnings, the Russell 2000 is valued at 23.3x earnings and with GDP basically flat, the PEG of the Russell 2000 is optimistically about 2.3. Fair value would be between 1.0-1.5. Clearly, we have a historic bubble in small-cap stocks.
Also, the recent price rise seems to be mostly algorithmic software trading. For example, the stock rose in the aftermarket Friday immediately after Form 4's were filed which probably tricked algos into thinking they were purchases. However, they were gifted restricted share units and further dilution to current shareholders representing future dilution of just under 1%. The stock should have gone down slightly, imo.
At this point, I think NVEE represents a pretty obvious shorting opportunity for those willing to be patient. Current fees at IB are about 1.6% to borrow, so that makes it a little less attractive, but probably worth it for a hedged portfolio willing to take on some risk.
A roll-up strategy is inherently risky and built upon leverage. It can be a great idea when cyclical corporate profit margins are at the low end of the oscillating curvature, but with corporate profit margins at least 70% above historical norms it is hard to justify pricing NVEE to perfection.
With operating cash flows a combined 8.8 million for the last 4 years, you could double that rate over the next 4 years and only be generating 4.4m in cash flow per year. I don't see how that justifies a price of more than $9.00. At this point with accounts receivable growing considerably faster than revenues, the company has to prove they are buying stable companies with predictable cash flows. At this point, what have they done to that end? What in their financial statements proves their ability to create the cash flow to justify the price levels. Sooner rather than later, cash collections must improve, or the stock is well over 100% overvalued from a fair value perspective.
Unless operating cash flow climbs 350% in the next few years, I don't see the how current price is justifiable. I think the company has a lot more to prove over the next few years before justifying the current valuation.
What was the purchase price of Mendoza? Where did you find it disclosed? However, since the purchase is funded through cash and notes and the price was not disclosed (to the best of my knowledge), it may not actually be as accretive to earnings as you might think.
If it was this easy to grow a business, everybody would just buy companies with lower P/E ratios constantly. Usually companies with lower P/E ratios have a reason for trading at the price they do.
If I'm not mistaken, the press release related to the most recent acquisition never disclosed the purchase price or the level of dilution NVEE shareholders will have to absord.
With corporate margins at cyclical highs, and NVEE buying companies at a rapid pace that nobody else is interested in purchasing, an aging management team that appears to be buying earnings in order to set up retirement - I wouldn't touch this at any price.
The last two acquisitions won't likely be incremental to per share revs and per share income levels. The companies that are selling aren't giving themselves away for free. When cash/borrowings/options are fully priced, I'm not sure that over the long run this company deserves any of the PPS rise it has been rewarded with for buying companies in a sector with cutthroat, limited margins.
My "rhetoric" goes against my very self-interest. I've had a position in this company for 7 years.
On the other, hand, defending these clearly manipulative practices seems very close to your heart.
On the bright side, the stock has successfully been buried so that the company was able to buy their shares at a fraction of fair value. I think they want the stock to go up now.
But pray tell... where did Mr Yan get these newly printed millions?
Clearly you haven't been paying attention to the way US-Listed Chinese shares have been behaving and how executives in this niche have brazenly stolen from long-term investors by pumping their companies and then going quiet only to reappear by buying back their shares for pennies on the dollar.
Look, I don't want to accuse you of purposefully misleading, as you may be one of those innocently misled. However, at this point, you have to lack any understanding of corporate actions or be intentionally lying to oneself to not be able to easily deduce that many US-Listed Chinese companies want there share prices down.
The main reason why this is the case is because the US has not only LESS authority over these foreign-listed firms, but also less restrictions regarding issuance of new shares. The fact that foreigners pay NO tax on investments profits and have unique protections like Regulation S, which they don't only benefit via loosened restrictions therefrom, but also benefit from the inability of US authorities to pursue them after explicitily breaking securities laws or bending them as far as possible against the intention of the original laws to their benefit.
Reminds me of a an announcement from a few years back. Executive comments echo the same nonsense in response to the buyback in 2010, clearly written by the same English speaking PR people. Clearly the company itself didn't polish the management's comments which can easily be deduced by comparing their comments to the press release in Chinese where their English-language graphic attests "E-FUTURE CLOSED OF PRIVATE PLACEMENT". That said Chinese version left everything in place in the recent press release except for mentioning the about "seeking out to maximize the company's value". I would have recommended adding... "to current investors".
eFuture Announces Share Purchase Agreement
BEIJING, Sept. 27, 2010 (GLOBE NEWSWIRE)
Regarding that executive purchase of newly minted shares, Adam paid $819,500, or ¥5,482,455, out of pocket, as the USDCNY exchange rate was 6.69.
Adam somehow had access to ¥5,482,455, while his annual salary+bonus was only $72,600 dollars while paying between 20%-25% in income tax if you compare against graduated chinese income tax table from 2010. At about $51,000 take home pay, it was unclear where he got the funds to make this purchase, especially considering he was spending all his time building up E-Future and apparently had very little time to communicate with investors. When I pressed them, the company claimed that he sold his large family home and downsized in order to free up the $819,500 dollars to buy new issued shares amounting to about about 5% (at the time) of the company.
The company conveniently leaves out the breakdown of who bought how much of the private placement this time, which tells me they know it would merit questions regarding where the money to purchase the private placement came from.
Check out Adam's Salary...
2013 Salary = ¥ 813,965 ¥ 121,883
2012 Salary = ¥ 540,000 ¥ 81,179
2011 Salary = ¥ 455,689 ¥ 123,368
3 Year USD salary = $344,520 BEFORE TAX.
All of a sudden he's the lead of $3.2M investment?