LinkedIn valuation

LinkedIn (Nasdaq: LNKD) went public on Thursday and many people became very rich, especially as it traded over twice as much as its initial offering price of $45/share. You can be sure those insiders are just dying for the holding period to expire before they start dumping their shares into the marketplace.

Looking at their financials reveals a company that has about 95 million shares outstanding after this offering, plus another 16 million options that are deeply in the money gives a diluted share count of about 111 million shares. Multiply that by Friday’s closing price of $93/share gives a company with a capitalization of $10 billion. This puts it on line with technology companies such as Sandisk (SNDK) and Checkpoint Software (CHKP).

The company has increased revenues dramatically from its inception ($120M in 2009 to $243M in 2010) but the company has also increased expenses to obtain those revenues – as such it is marginally profitable. It can be expected to make money in the future, but how far can it scale up before they hit the law of large numbers and their revenue growth starts to taper?

It is interesting to note that the original site on the internet for jobs, TMP Worldwide, now known as Monster (NYSE: MWW) has a capitalization of $1.85 billion, expected 2011 revenues of $1.1 billion and expected 2011 profitability of $52 million.

Obviously the media will portray this IPO as the rise of social networking sites (just as how the Netscape IPO started the rise of the internet boom), but as history as shown, whether these companies will be able to justify their lofty valuations or not remains to be seen. I don’t have any other comment than that I will be looking elsewhere to deploy my capital – the insiders in LinkedIn (even the ones getting in as late as April 2011 got their options at an exercise price of $22.59/share!) will be the ones making the money, not the public.

Parking Canadian Cash

Retail Canadian investors these days don’t have much option for their cash, assuming they want it available at a moment’s notice – one optimal route is putting it in Ally and getting your 2% on a perfectly liquid balance. There are also other competing services that are CDIC insured that give similar returns.

Anything more and you have to work your way up the risk and term spectrum. In terms of term, you can get GICs that give larger rates, but it is at the cost of yield in case if you want your cash to be liquid (e.g. a 5-year term deposit has a break penalty becomes progressively more expensive as you approach maturity).

When you increase risk, the corporate debt market is the next logical step up – there are some short term maturities out there of companies that are virtually guaranteed to pay off their debt giving out yields that are about 300 basis points better than what you can get with Ally. The cost is the “virtual” part in terms of the guarantee of repayment and also liquidity risk dealing with the term – you generally want to wait until maturity or you will have to pay the bid-ask spread.

Investors generally get trapped aiming for yield, but I am finding it difficult to not tweak the portfolio to shift idle cash balances into something earning a bit more, with nearly equivalent safety. I do not think this will burn me and is a suitable way of earning a little more on cash until I can decide what to invest it in. When I think of how many pizzas this can purchase at the end of the day, it becomes a little more meaningful.

CN Rail vs. CP Rail

This chart or post is not a value judgement on the respective companies, but it looks like that somebody playing the two-stock Canadian railroad industry should be shorting CN and longing CP:

CP Rail’s market cap at present is about CAD$10.1 billion, while CN Rail is at CAD$33.6 billion. In terms of profitability metrics, for the year ended 2010, CP had $651 million income, while CN had $2.1 billion income. Strictly in terms of backward looking P/E, they both scale equivalently which could justify the upper end of the price differential seen by both companies historically.

Weakness in commodities

I have been doing some further analysis on micro-cap Canadian stocks, but I notice on the side that the weakness in commodity markets must be getting a lot of asset players concerned – leveraging on the way up made people look like geniuses, but did too many people join the bandwagon on the long trade?

Commodity markets have always been prone to huge booms and busts, and this one is not going to be too different – whether the “bust” will be the existing 15% correction we have seen, or whether it will be something more deep remains to be seen. The more people that had or have conviction that the present correction is simply an aberration on a longer trend, the more likely it is that the markets will continue to take these people into loss positions. The market might not be tasting blood quite yet, but a whiff of it is in the air.

My portfolio positioning continues to be extremely defensive and with little linkage with the performance of oil and gold. This exposure might increase if the market is tasting blood, but this is not going to happen until I start seeing different psychology than what is out there today with commodities.

The lowest risk commodity appears to be natural gas, simply by the virtue of not having had a run-up like the others.

Petrobakken – Watch for a dividend cut

I wrote earlier about how Petrobakken (TSX: PBN) was a value trap. After PBN reported their first quarter results, my assessment has not changed that much.

Serious investors will just look at their financials, but you can also look at their press release.

The most salient point (and note that this analysis is not exhaustive by any stretch of the imagination – I will leave it to the reader to punch holes in this summary assessment) is that the company has maintained their production at around 41,500 barrels of oil equivalent per day. However, in order to maintain this production they needed to spend about $300 million in the quarter in capital expenditures. Operationally, the company did roughly $140 million in cash, so when you subtract another $45 million out in dividends, you are left with a negative $200 million cash flow quarter.

The company is expecting to spend another $600 million in capital expenditures this year. Doing some paper napkin calculations, if you assume for the rest of the year the company will be able to maintain a rough $150M/quarter operating cash flow, a $45M/quarter dividend rate, and $200M/quarter capital expenditure rate, you are still net negative $315M cash. Their bank facility has about $240M room left. The difference in cash is a $75M gap.

If they get lucky, they can bridge this gap with increases in revenues from increased crude and gas prices or an increase in production (via drilling new wells), but their margin of error is tight. The only other realistic option that management has (since I do not foresee them doing another debt financing) is cutting their dividend.

Anybody investing in PBN for yield is going to receive a nasty shock if this occurs. Petrobakken shares do have value, but I believe they are still trading above their fair value.