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This company never ceases to amaze me. If you were to ask me a week ago (as some clients did) I'd have said that I thought that COLM would smoke the quarter by a factor of 2x, but that SG&A and capex would numb the impact of a weak backlog and an FX headwind for the reminder of the year.  Net/net, not a big bull event, but be weary of following the herd onto the short side.  That was in the low $30s. Though the stock has since rallied to $37, I think that my original statement will prove to be flat-out wrong.


The consensus is going to end up shaking out in the $1.50-$1.75 range. There's no way this stock could maintain a 3-handle with that earnings base.  To be clear, I think that they are absolutely sandbagging, and will come in between $2.00 and $2.25.  Let's watch this one real close. If estimates come in closer to that $1.50 line and the stock gets obliterated, it's definitely worth a look-see.


As always, there's a ton of moving parts around the fundamentals here. What's the biggest positive that jumped out at me? The core Outerwear business performed quite well - up 10% yy. Not only is this the highest margin product for COLM, but it is the best authenticator and halo for the brand. On the flip side, just about everything else was flat-out embarrassing. This company simply can't gain traction in any of its non-outerwear businesses.


As noted above, I was in the camp that cutting costs and capex could be a buffer here for '09 and '10. In fact, I was about to beat the company up for taking capex UP in '09 by 10%. But pondering about how little traction these non-core products and brands have, I'm in the camp that COLM needs to invest more rather than cut - or simply close down what's not working (which management will not do).


The other option would be to sell the company, which is plausible if the right partner is willing to buy it and 'leave it alone' (i.e. VFC). That's probably closer to reality now than it was a month ago.


In the end, every story has its price. Let's see where numbers shake out. If this is oversold into sandbagged expectations, it may be a trade. For longer-term investors, there are clearly deep deep issues worth researching. We're on the case.


COLM: CAN'T GET OUT OF ITS OWN WAY. - 4 24 2009 7 37 08 AM


The Nevada Gaming Commission is considering an amendment to allow an institutional investor to own up to 25% of the voting stock of a gaming company without getting licensed, up from the current 15%.  Las Vegas Attorney Frank Schreck proposed the amendment and we doubt he's doing it on his own.  Someone is funding the cause.


In our 4/20 post, "GAMING REGIONALS: THE FALLACY OF EV/EBITDA", we "normalized" PENN's underleveraged free cash flow.  We assumed PENN would make an acquisition at 6.5x EBITDA and generate a 5% net free cash flow return.  PENN outlined their return metrics in the Q1 earnings call this morning and, low and behold, our projections were confirmed:  5% is the number.


The following is our calculation of a hypothetical $1.25 billion acquisition (presumably a Strip property).  We chose 1.25 billion because it essentially levers the company up one turn to about 3.5x, still under the 4x target.  With PENN on the record, we can "YouTube" management when they announce their next acquisition.  We believe this return focused management team will not sway from their discipline.



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Brazilian Shorts Get Waxed

The Client is back and the cash register is ringing...


A core theme of our work on the Chinese Stimulus program is that as the Ox starts waking up he will be craving the basic materials that countries like Australia and Brazil provide. In the case of Brazil, data has arrived demonstrating that in the form of increasing shipments of iron ore. Total Chinese ore imports totaled over 52 million metric tons for March, with more than 22 million tons worth coming from Brazil. 


Without a doubt this data is a huge shot in the arm for Brazilian exports which are concentrated so heavily on commodities and certainly explains why the Bovespa is trading up again today.  Although anecdotal reports put Chinese ore stockpiles at about 1.5 months worth of imports and growing -an uptick that could signify speculative purchasing, all signs point to continued strength so far this month with expectations that it will continue.


We are long the Brazilian equity market via EWZ and remain bullish on prospects there as Chinese demand works through the global chain. In the coming days will be delving into the other half of the export equation for that nation -Agricultural commodities, as well as  drivers for domestic demand, but for now the Client is the most important part of the story.


PS:  Anyone out there short shipping stocks?  


Andrew Barber


Brazilian Shorts Get Waxed - braz1


Brazilian Shorts Get Waxed - braz2



Fiscal 2010 top line won't grow by 10% - without providing details, management indicated that revenue growth would be similar to fiscal 2009. WMS has executed - no question.  We just question their forward guidance.  The bar looks like it might be set too high, and investors are trading the stock as if the guidance was conservative. 


Here are our concerns:

  • North American new and expansion units will fall 47% in the 4Qs ended June 30th, 2010 - Management touted that only a 1/3rd of their business is North American box sales. That's still a lot of exposure to a business that will experience a huge decline in 2010.


  • Financing may have pulled sales forward - WMS ramped up its financing efforts to secure sales. We fear that this aggressive approach may have pulled sales forward and artificially inflated market share at higher prices. The company added $37 million in receivables in the quarter. We are not against using the balance sheet to fund sales. IGT and BYI do it. We are just point out that market share gains in the quarter may not be sustainable.


  • No free cash flow - Despite a strong quarter, the company's free cash flow was negative in the quarter. Obviously, the aggressive financing will push out free cash flow generation. We project only $0.80 to $0.85 in free cash flow per share in fiscal 2010.


  • No visibility on fiscal 2010 - WMS is no longer providing backlog for "competitive reasons" and because they believe the lead time has shortened so much that comparisons are not useful. They also indicated that the current backlog is within the normal range of the last 16 quarters - that's a big range.


  • Hit driven business - More than the other slot companies, WMS's business is more reliant on generating "hit" games. Their strategy is narrowly focused on fewer game launches. Their superb execution has generated by far the highest success rate. The problem is that with their guidance, WMS is projecting success at an even higher level going forward.


  • WMS doesn't have the breadth of product to permanently increase market share - Since WMS is more targeted, they don't offer the breadth of product of an IGT or BYI which makes them more reliant on hits but also could cap their market share in the mid 20s%.


  • Valuation - We believe 2010 will be flat in terms of EPS growth putting the forward multiple at about 21x our $1.50. Even on the Street's aggressive $1.75 estimate, the multiple still looks full at 18x.

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