Fly on WallStreet

Good morning chaps, I as previously advertised have been employed at the aforementioned historical minimum wage once reserved for galley slaves, that is, consider yourself lucky not to be fed to the sharks.

The title should alert you to the fact that we will start this weekend briefly examining the previously floated investment theme from Mr Fly; "Be long the adipose challenged consumer"

We are of course going to briefly discuss why this could in point of fact be a stroke of genius [no pun intended] and why it might save an otherwise go-go stock, I refer of course to BWLD

First, obesity is a disease, that is hallmarked by addiction, depression, poor self worth and esteem that finds solace in eating, thus chemically inducing the pleasure areas of the brain. [Limbic hippocampal region]

Thus, any product that provides the desired pleasure, will in all likelihood gain great loyalty from the consumer base.
A second and as important factor is the cult of cool. Is this product a product that invokes the correct responses from your [the consumer] peer group.

Having never heard of BWLD, never mind eaten them these are questions that I cannot answer. It is important for any individual investor to have, or gain a viewpoint, as this could prove quite vital to the ultimate success of the investment.

Moving swiftly on to the Industry.
The Industry is Restaurants
P/E....................................19.6
P/B....................................4.8
Net Profit margin...............8.0
ROE...................................20.2
Debt/Equity.......................11.8
Dividend Yield....................1.8%

Some of these metrics are relevant to BWLD and some are not. Be warned in advance BWLD is a growth or go-go stock, it has very aggressive accounting. The success or failure in the accounting will have a large impact within the final outcome in market price.

The Debt/Equity ratio within the industry is high. Compared to BWLD it is massively high. In 2003 BWLD retired a tranche of debt via an equity placing. Why did this occur?

The cost of capital in 2003 at the tailend of the recession was almost free money, the Fed discount rate was at circa 1.0% and corporate debt would have been around 3.0%, why in that environment deleverage and take expensive equity capital?

The answer is that the company holds an extraordinary level of cash, some $64.6million, while the working capital requirements are a fraction of that. We are talking say $5million in cash would just about squeeze by.

The reason is that there is an interest income that flows directly to the bottom line, boosting Net Profits. Further, the small amount of long term debt held by the company at $9.5million, the interest payments are capitalized. Not really for any other reason other than again boosting the bottom line. It is not illegal, but it is aggressive.

The industry pays a dividend, BWLD does not. Again, growth of Net Profits is key. They must continue to grow, and thus higher multiples will be awarded to the stock. Net Profits have grown, +40% annualised but this is a high hurdle to keep clearing

Depreciation is being accelerated for tax purposes, but not being disclosed in a forthright manner in the Income Statement, again aggressive.

A number of Operating costs are being capitalised, costs from Selling,General & Administration, again, aggressive, borderline legality issues with growth in Revenues [+24.5%] on an annulised basis far higher than SG&A [+17.1%]

The very high Capital Expenditures in relation to Depreciation charges will tend to overstate the cash generating ability of the business. [1.63]

Therefore we return to the necessity of loyal customers. In any economic downturn that might crimp Revenues, it is vital for a go-go stock to maintain earnings growth, without which the market might re-value the shares in short order.

Last point, the "Insiders" have been heavily selling stock, unloading circa $3million in stock, worth thinking about.


jog on chaps