Equity – Page 86

USEC Inc. – Another company on the discard list

USEC Inc. (NYSE: USU) is going to undergo a pre-packaged recapitalization to refinance a convertible debt offering that is maturing in 2014 that the company has no chance of repaying. Existing equity holders will get 5% of the newly reorganized entity, which constructively means the common shares presently trading represent 1/20th of the current market capitalization.

There is much more to the actual operating business in terms of strategy – uranium refining is not exactly a wide-scale industry and proper analysis requires looking at more geopolitical and government considerations than most investors would probably want to swallow.

After they announced their pending pre-packaged bankruptcy filing, I put this on my research radar. The risk/reward seemed quite good at around $3.50/share, but unfortunately the market caught up in a very efficient manner and while I still believe the entity is somewhat undervalued at its present $6.30/share, the risk/reward metric is not favourable enough to take a position. The proposed recapitalization is still contingent on the approval of a couple strategic partners, but they are receiving a stake in the new entity which they should be accepting.

So I will put this equity in my discards pile – feel free to make what you wish out of this. I’m still rather miffed that low priced companies that I have been researching lately are ruthlessly taken to more efficient prices before I can even complete any reasonable amount of due diligence.

Former Blackberry CEO dumps stake

Michael Lazaridis sold enough shares to have a 4.99% ownership stake in Blackberry. Below 5% he is no longer required to file with the SEC if he wishes to dispose of any more equity.

The material part of his SEC filing is:

(c) On December 23, 2013, 1258701 sold 3,166,893 Shares at an average price per share of $7.55 and on December 24, 2013, 1258701 sold 333,107 Shares at an average price per share of $7.63, in each case through open market sales.

What a vote of confidence. He raised $26.45 million out of these transactions, which would have been a quarter billion had he done this three years ago!

Some research discards – PDII

PDI, Inc. (Nasdaq: PDII) is a contract pharmaceutical marketing corporation. They managed to make it past my initial screen and I did some subsequent research. On initial glance, it does appear to be relatively cheap from a valuation perspective (revenues in relation to enterprise value is quite inexpensive), but the corporation suffers from significant customer concentration and they are strategically diversifying into partnering with diagnostic companies which creates a different element of investment risk – and valuing these risks from an external investor perspective adds even further complexity.

I generally do not like customer concentration and will pass on this, but will leave this for more enterprising readers out there to figure out if there is value here – my hunch is that the computer traders out there are looking at the low enterprise value in relation to other valuation metrics ($24 million vs. $75 million market cap, and $150 million revenues over the past 12 months), but are not paying enough attention on tangible book ($2.27/share) which means the downside risk is a bit lower (clarification, added December 24, 2013: downside risk referring to a lower price floor) than one would intuitively think.

In other words, without projecting some future external factors out there that would lead to ‘big pharma’ engaging firms such as these, or any intuition that these investments in diagnostics will succeed (there is no way of knowing), PDII is a pass on my books.

Blackberry Q3-2014

It looks like sentiment reached its maximum in mid-December; also just after the earnings release the lowest trade after-hours was at $5.70/share. Clearly the market over-discounted the negative aspect of this quarterly result despite the fact the company’s revenues were well below consensus.

It still remains an interesting business case, whether their existing businesses are viable after shutting down their consumer end. I think their QNX segment has value, but how much is another question. I generally believe their BBM technology is over-hyped and is going to become a “me-too” type product even when ported to other consumer platforms (Android and iOS). It reminds me of what happened to OS/2 when they successfully were able to have Windows 3.1 applications run within the OS/2 operating system – why bother when you can just have Windows 3.1 and not have to mess around other operating systems?

Anyhow, no positions and I will not be taking one. Too many eyeballs are on Blackberry and a lot of those eyeballs are connected to brains a lot smarter than I am.

Timing Blackberry

Blackberry is going to be an interesting business case as they are clearly not going down without a fight.

They are going to report quarterly results on December 20, 2013. I would expect these results to be very sub-optimal simply because if there was some signs of revenue stabilization it is much more likely that they would have found partners in the proposed buyout at US$9/share. Since there were multiple parties out there that were looking at the internals of Blackberry during October and would have received full visibility in two of three months of the fiscal cycle, I very much believe that revenues will be well below the $1.58 billion consensus estimate that I see on Yahoo at the moment.

In addition, with the new CEO cleaning house at the upper management level, it is going to take at least three to six months for them to realign the company and apply resources to the appropriate strategic priorities the company needs to focus on to get back to a profitable setting. However, the fact that he is cleaning house is a positive signal even though you will not be seeing the results of such actions for at least half a year.

That said, with the expectations in the stock market, I would expect rock bottom to be hit at the end of the year. Not only will they likely produce a lower-than-low expectations quarter, but you will also have the avalanche of tax loss selling and portfolio window dressing – which portfolio manager out there except for Prem Watsa would want to see this dog in their portfolio at year-end?

The sentiment regarding this upcoming quarter is quite bad. The question is how much the market has already baked in an upcoming bad quarter. Have they over-discounted?

DISCLOSURE: A friend of mine who I consider to be quite tech savvy, who already owns a Samsung smartphone with one of those giant screens, recently bought a Blackberry Q10. He suffers from a “can’t type on a touchscreen if it could save my life” syndrome. I share the same syndrome and am actually in the market looking for a usable phone with an actual physical keyboard. Other than that, no positions.