Sunday, October 31, 2010
Saturday, October 30, 2010
Here, we see someone selling just under $7K in ITEX dollars for $3K.
For a company that attempts to market their barter currency as on par with the US Dollar, this is either an exception to the rule, or a really good counter argument for their case... Personally, I have always thought that their currency should realistically be worth some amount less than the USD, simply because it isn't as readily liquid as US Dollars... what that exact amount is, I don't know, though.
I have always wondered what would happen in the ITEX and broader barter communities if there was a round of hyper inflation in the US. Certainly, people would barter more than before, however, I do have my doubts that ITEX dollars would depreciate in value as quickly as the USD.
Please, if anyone knows of any good articles related to this, send them my way for posting... Here is one that I have always found thought provoking.
Disclosure: None. This is not advice. Always do your own research before doing anything that I say, think, or write about.
Friday, October 29, 2010
Thursday, October 28, 2010
Monday, October 25, 2010
This is one of the most ironic and game theory ridden things that I have ever read. (Thanks to Cody for the link.)
"When I am in my painting, I'm not aware of what I'm doing." -Jackson Pollock.
Apparently, that was truly the case, but, not for the reasons that he said it... Don't get me wrong, I love Jackson Pollock, though. Even if his logic was apparently flawed.
I think that is thought provoking that this is not the sort of thing that was ever mentioned when I was taking classes that discussed modern art; and I took more than a few...
at 10:53 AM
Sunday, October 24, 2010
ITEX just issued their proxy statement.
I must say, this takes on a different tone than the last time that something with the company went down.
ITEX put forth a timeline about the events that preceded this contest.
Here are some highlights:
On October 4, 2008, Mr. Polonitza phoned Steven White and stated he had an interest in participating in an ITEX “going private” transaction. He informed Mr. White that he had a “couple hundred grand” and would like to receive 8-10% preferred stock plus warrant coverage. Mr. White communicated that going private was not part of the Board’s current strategic plan.
On December 12, 2008, Mr. Polonitza attended the ITEX stockholder meeting. Alnesh Mohan and Sanjeev Parsad of Vancouver, B.C. were also in attendance. Mr. Polonitza joined Mr. White and Mr. Zimmelman for dinner after the stockholder meeting, and the three had general discussions about the Company. Mr. Polonitza voiced his feelings that Mr. White was operating the Company efficiently and was complimentary about the performance during the past year. Mr. Polonitza strongly advised Mr. White and Mr. Zimmelman not to trust Alnesh Mohan and Sanjeev Parsad.
On January 22, 2009, Rahul Pagidipati sent an unsolicited email to the Board of Directors of ITEX to see if they would be interested in exploring a PIPE investment or other type of recapitalization from the Pagidipati family. Mr. Pagidipati referenced the tender offer from Sardar Biglari of Western Sizzlin Corporation, and stated “but I think we make a much better partner.” The email stated “We could invest between $1M+ as a PIPE or we are also interested in a buyout of the firm based on the terms/valuation. For example if the existing management team is interested in doing an LBO, we could help with the financing and get involved as a partner.” The Board did not respond to Rahul Pagidipati.
On December 11, 2009, Alnesh Mohan and Sanjeev Parsad attended the ITEX shareholder meeting. Mr. Parsad asked whether the Board had considered a capital allocation strategy utilizing a holding company. He recommended a holding company structure which would allow surplus cash generated by ITEX to be channeled to the parent for reallocation and deployment in pursuit of attaining a higher return on investment. Mr. White responded that removing cash to a holding company was not part of the Board’s strategic plan.
On March 23, 2010, a letter was sent by the group to the Board of Directors of ITEX applauding management for adopting some of its initiatives and seeking additional changes. Issues raised by the group included increasing franchise locations and improving franchise profitability, improving corporate governance, providing additional services to members, managing the SuperMedia relationship, managing cash flow differently, separating the CEO and CFO positions, and improving member retention rates.
On April 1, 2010, Mr. White sent a letter to the group to correct the record and respond to several inaccurate statements. Mr. White reminded the group that ITEX had adopted its corporate initiatives as a result of the Board’s strategic plan and not in response to their group suggestions. Mr. White noted that the suggestions of the group did not offer any clear execution plan.
Then there was this, which, BY FAR, was my favorite:
As noted above under “Background of the Solicitation,” we fundamentally disagree with the capital allocation strategy advocated by certain members of the Pagidipati Group of utilizing a holding company structure to allow cash generated by ITEX to be channeled to a parent for reallocation and deployment in pursuit of attaining a higher return on investment. This was the same strategy previously advocated by Western Sizzlin and Sadar Biglari when an exchange offer for all outstanding shares of ITEX was commenced in December 2007 ─ an offer that was rejected by over 95% of ITEX stockholders. It was Mr. Biglari’s intention to use his own holding company to operate ITEX as one of several subsidiaries engaged in a number of diverse business activities. Mr. Parsad, a member of the Pagidipati Group, was a stockholder in three of Biglari’s companies, Western Sizzlin, Steak'n Shake and Biglari Holdings, and operates an investment community board whose members study and advocate this investment philosophy. (Bold and Italics mine.)
I understand where ITEX management is coming from in regards to the relationship of the CEO to the franchisees, I also understand that he has a great amount of experience in the barter industry. However, it does seem that the dissident shareholders have made a good case, and, frankly, could replace management with no problem... The statement though, just seems absurd.
Normally, I would question the investment acumen of a management team that truly doesn't understand why you would want to earn high returns on invested capital; I am gonna give Steve White the benefit of the doubt on this one... I don't think that he is stupid, and, I am guessing by what seem to be obvious and huge fallacies in his stated logic, probably hopes that shareholders are. It seems as if he is trying to get a lot of the return on their investment in the company in the form of a salary and share price appreciation, rather than only on the later. Even if he gets canned after the contest, I won't feel too bad for him, as, he has a nice departure package lined up.
Certainly, I would imagine that the dissenters would be happy with dividend payments and share repurchases in lieu of a holding company. I find it unfortunate that, when rejecting the idea of a holding company, ITEX mentions that it is the same philosophy espoused by Sardar Biglari... as if the whole concept if evil, simply because they feel that a value investor low balled them for the company. After all, that is kind of the idea behind value investing.
Furthermore, on a personal note, I don't know why anybody would want to take such a great franchise model, which is pretty low risk, and then try to make it capital intensive, as has been the case with ITEX... Not all businesses are meant to become empires. Presently, ITEX seems to be dragging shareholders along for a historically capital destroying journey to build a revenue generating empire, while giving no real evidence that they can raise earnings in step.
Disclosure: I am long Biglari Holdings. This is not advice. Always do your own research in when thinking about doing anything that I talk, think or write about.
at 10:01 AM
Wednesday, October 20, 2010
When in the process of growing up, people buy houses. As this is the case, 2 of my friends, who are happily married, decided that it was the time to take the plunge and buy a house. Since that is the sort of thing that I have done more than a few times (buy a house), I had various conversations with them about the whole process. They ended up with a really nice, newer, 3BR 2BA ranch house, which sits on just under an acre of land. Not only did they get a pretty good deal, but, they also got my envy, as, I wouldn't mind living there myself!
When our conversations went to financing, the loan package that they described basically amounted to 100% of the sale price, with a 30 year amortization, at an interest rate that was less than 4.5%, which was to be provided by the US Department of Agriculture. I think that this is a GREAT financing package for my friends to take advantage of; if I could borrow money on terms like that, I would borrow, quite literally, as much as I could. I am pretty sure that I can grow just about any amount of money at 2% more than what has historically been about our inflation rate...
The situation got me to thinking though. Where is this money coming from? The government. Is this a good deal for tax payers? NO.
Lets assume that for simplicities sake, that it is coming directly from debt that the government is issuing. A 30 year treasury (the same as the term of their loan), on the rough date of their offer, was a whopping 3.75%.
Put another way... the spread on this loan, if it cost no money to service, originate, or administer (i.e. 100% efficient, with no costs) is UNDER 75 BASIS POINTS.
A bank (which, by definition, needs to earn money), on the other hand, is buying money for ~2.5% and lending it out at over 6% to investors, IF they will actually lend it out. This is a spread of well more than 3x that of the governments...
Additionally, the government is losing tax revenue from my friends and their former landlord. This is because they will be able to deduct their mortgage interest from their income taxes, and, had they not bought the house, they would have been paying rent and their landlord, who would have more of a tax liability.
In light of this, I have to ask: "is the government really that much more efficient than a bank? Are they that much better at assessing the risk of loan impairment? Can they predict the price fluctuations of the real estate market? Are they really looking to keep tax payers off the hook for a bad mortgage?"
The only answer that I can come up with, is a resounding "NO."
Lastly, it seems pretty obvious to me that the FDIC would shut down a bank that had the lending practices of the US Department of Agriculture- and really, the greater federal government.
Disclosure: None. Always do your own research. This is not advice in any way shape or form.
In one of the more interesting activist campaigns as of late, The Committee to Enhance ITEX has basically told ITEX management "We don't need you."
This is an interesting situation that has arisen. When I first saw that The Polonitza Group was launching a proxy fight for not a fraction of, but all of the board seats, my initial question was "Well, they are right in most all of their criticisms of the company, but, what if they win? Will Steve White leave with his tail between his legs? If so, what will they do?"
Certainly, in the event that a CEO is ousted from the board, it will create a lot of distention in the company. Furthermore, what would the franchisees think? This is the sort of press release that was needed, as I am sure that a lot of people involved in the company had the same question that I did.
Now, it seems that the hard part here, is convincing people that they can make ITEX significantly better. In this case, you have a company that is doing well, but can do so much more. With a company like Steak 'n Shake (now, Biglari Holdings), the case was obvious, as it was on the verge of bankruptcy... ITEX has a great business model, is has a super nice balance sheet, and quite frankly, is a company that about anyone would want to own outright.
As has almost always been the case in the past, I am quite sympathetic to the cause of these activists and sincerely wish them the best of luck in their endeavors. Really, the whole slate of candidates seem pretty darned impressive.
I look forward to seeing more press releases. I look forward to seeing if things get as nasty (and interesting) as it did a few years ago when Sardar Biglari tried to buy the whole company. I look forward to seeing who wins and, more importantly, what happens to the price of the company!
Disclosure: Long Biglari Holdings. This is not investment advice. Always do your own research when thinking about doing anything that I think, talk, or write about.
Tuesday, October 19, 2010
"You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?" - W.E.B.
While I still want to back our currency with a combination of raw materials (including gold), this is a great way to examine the intrinsic value of metal.
at 9:12 PM
Monday, October 18, 2010
Tuesday, October 12, 2010
Here is a link to the latest letter from Biglari to the board of Fremont.
Biglari to FMMH: screw you.
Disclosure: Long BH. This is not investment advice, always do you own research... especially if it is something I talk, write, or think about.
Monday, October 11, 2010
One of the things that I have noticed, is that when researching a security, there is a strong temptation to only do a skimming bit of financial research. By this, I mean, scanning over the financial statements, then, if they meet your criteria, then examining the SEC filings for a corporation. Finally, if this proves worthy, then you might Google items on said company, talk to management, etc. Often times, just looking at financial statements will give you a great company that is obviously cheap, such as International Baler (IBAL), but other times, looking at more interesting, complex investment ideas will give you other, potentially rewarding ideas.
Here is an example from my own portfolio, that I am glad I didn't look at the financials of, then take a pass: Nevada Gold (UWN).
Looking at the previous financial statements, is not enough with this company. Frankly the last 3 years of financial statements look horrendous, but, there is a lot more to the company than some bad results... They are in the midst of a turnaround, that, really is more like the late stages of a restructuring. Here are some videos where Robert Sturges talks about it: 1, 2, and 3.
One of the most important parts of my thesis on the company comes from having listened to management in the 2 most recent conference calls on their website. (1 & 2) Here are some snippets:
"We are not done with acquisitions... We are going to remain disciplined on purchase prices..."
"The acquisition environment does remain robust."
"Other than the North east, I wouldn't preclude getting involved in any area of the US and even beyond."
"Where we think we have a real opportunity to lever our operating expertise... We are not buying as a well oiled machine, but rather, a machine that needs to be fixed."
Many times, I believe that expansion, using debt, is a dangerous strategy, however, it seems that from looking at their past performance, and the changes they are making at the newly acquired casinos, that they will do a good job at fixing whatever comes their way. A reputation for fixing problems in casinos will also go a long way in landing management contracts in the future. When looking at capital allocators that make a living of fixing problems, you can do quite well.
When looking towards acquisitions, they will go up to the $20 million EBITDA range, with the help of the company's senior lender. The lender has indicated that under the right circumstances they would step up to the plate for the company. Sturges notes that the company's debt to the lender went from $55 million, down to $6 million and that the lender is happy about that. This should be very true, when so many companies have recently defaulted on their debt.
To put this in perspective, if the company is able to buy a huge place, at nearly 2x what they have been paying, their acquisition is gonna be for $120 million; while there are a lot of factors when converting EBITDA to owner earnings, there are many ways of going about it, however, I am not worried about them covering their interest charges, check out the following numbers
All numbers are based on EBITDA of $20 million for a potentially acquired entity.
6% = $3.6M
8% = $4.8M
10% = $6M
15% = $9M
Acquisition price$80 Million
Interest Rate/Expense6% = $4.8M
8% = $6.4M
10% = $8M
15% = $12M
6% = $6M
8% = $8M
10% = $10M
15% = $15M
Now, even if they screw up on the acquiring front, lever the company to the hilt, interest rates soar, AND they can't make the acquired entity more efficient, they will still roughly double what looks to be the coming year's EBIDTA, even when you account for interest. Put that in comparison to their market cap, and we see that their EBTDA (remember, we accounted for interest) is roughly their present market cap... To me this represents one of the worst possible scenarios for the company; and it isn't terrible. If and when an acquisition does happen, I am not to worried about it being a terrible one, as, the Wynnefield Partners are involved in the company, and UWN already has an established track record with the last 2 acquisitions.
One concern that may be out there in the investment community, is that of the company being able to repay the recent debt that was taken on to buy all of the Washington mini-casinos. If you take a look at this presentation, page 25 shows that there shouldn't be any real concern about the company covering said debts, the cash flows from operations and cash on hand, without any of the company's proven initiatives, will cover all of the debt, which is already bearing a high interest rate (over 2/3 is @ 11%). I think that this will also do well when going to bankers to justify a transaction; if the bankers see that they can cover interest and principle at 11%, it should put them at ease for funding a new transaction...
Another item that came up in the conference call, is that there is still a chance that there will be a new management contract, as well as equity share, which may happen by years end. Furthermore, there are a lot of strategies and synergies that are not reflected in the company's results for the newly acquired casinos.
The development of the Las Vegas Speedway is getting ready to go to the capital markets; it's a pretty big project, which has a ton of potential for UWN.
The bottom line with this company is that there are a ton of things that can go right for it... any of which, will be big news for the stock. While I don't know exactly what the company will be earning in a year's time, I am sure, provided there isn't an interest rate shock or a bunch of horrendous legislation passed, they will be in business and earning money for a substantial amount of time (even without any more acquisitions). Given the leverage that this company is taking on, I view this as a classic Pabrai "Heads, I win a ton, tails, I probably won't lose much."
Disclosure: I am long UWN and IBAL. This is not investment advice. Do your own research before doing anything that I so much as write, talk, or even so much as think about.