SPECIAL REPORT: STOCKS BELOW CASH
Largest Discount to Net Cash
Ticker Company Close Oct. 31 $0.30 $0.45 $0.24 $0.31 $0.77 $0.60 $1.33 $0.67 $0.27 $0.82 $1.81 $0.44 $0.94 $0.70 $0.14 $0.18 $0.90 $1.51 $1.09 $1.89 $0.82 $0.38 $3.30 $0.42 $0.56 $0.63 $0.73 $1.90 $0.27 $0.57 $2.05 $51.37 Net Cash (Mil) $63.1 $13.7 $57.2 $70.1 $30.0 $56.3 $89.3 $49.6 $9.7 $48.7 $240.0 $22.8 $105.9 $27.3 $22.1 $18.2 $34.4 $70.8 $38.6 $55.1 $24.6 $11.8 $44.1 $47.0 $7.5 $37.7 $48.7 $89.6 $10.4 $21.5 $18.2 $3,530.0 Net Cash/ Share $1.59 $2.08 $1.08 $1.31 $2.22 $1.65 $3.45 $1.69 $0.65 $1.86 $3.85 $0.81 $1.70 $1.24 $0.24 $0.31 $1.48 $2.48 $1.77 $2.99 $1.29 $0.58 $4.79 $0.59 $0.78 $0.86 $0.93 $2.37 $0.34 $0.70 $2.49 $64.53 Discount
Special Report
We take a comprehensive look at California-based companies following the severe market drop in October. From a sheer value perspective, over the next three pages we look at the companies that currently trade at 1) largest discount to net cash, 2) largest discount to book value, and 3) lowest multiple of market capitalization to revenue. Conversely, we look on Page 19 at potentially the most vulnerable stocks based on the largest debt to equity ratio’s of company’s with $100 million or more of total debt. For complete tables, please visit www.californiastocks.com. The table at left shows the largest discount to net cash as measured by total cash minus total debt in relation to the current share price. Theoretically, if you liquidated Dynavax at the top of this list at left you would pay $0.30 per share and net $1.29 in cash. It should come as little surprise that of the 48 California-based companies that were trading below cash as of October 31, 2008 the vast majority are cash burning biotechs. Of the list here only Trident Micro, Peerless Systems and Mercury General are profitable, however, Trident is now forecasting losses and uncertainty grows over the potential writedowns ahead for insurers like Mercury. We believe the most interesting companies listed at left are San Francisco-based investment banking firm Merriman, cell phone voice quality equipment maker Ditech, LCD chipmaker Trident Micro and telecom RF transmission company Endwave. Among non biotechs with heavy losses, the survivability of former highflyer SiRF Technology, a maker of GPS chips used in gadgets such as portable navigation systems, is questionable. Developmental heart stent maker Xtent is expected to try to tap the capital markets over the next few months due to a heavy cash burn. We don’t expect data storage company Overland Storage to survive and the former executives of Western Water who are now running Basin Water have highly checkered pasts.
DVAX THLD TELK NUVO MERR AVGN NOVC LDIS OVRL DITC TRID NLST SIRF BWTR ANX TTP XTNT IKAN CALL PRLS DRAD WPTE ENWV AVNR LGVN VRAZ ANSV ACAD EGR APPA TGAL MCY
Dynavax Tech. Threshold Pharm. Telik Nuvelo Merriman Group Avigen Novacea Leadis Technology Overland Storage Ditech Comm. Trident Micro. Netlist SiRF Technology Basin Water Adventrx Pharm. Titan Pharm. Xtent Ikanos Comm. CallWave Peerless Systems Digirad WPT Enterprises Endwave Avanir Pharm. LogicVision Veraz Networks Anesiva Acadia Pharm. Commerce Energy AP Pharma Tegal Mercury General
81.1% 78.4% 77.7% 76.3% 65.3% 63.7% 61.4% 60.4% 58.4% 55.9% 53.0% 46.0% 44.6% 43.6% 42.8% 42.3% 39.3% 39.2% 38.5% 36.9% 36.5% 34.0% 31.2% 29.4% 28.3% 26.6% 21.8% 19.9% 19.8% 18.1% 17.8% 16.8%
Page 4 · California Stock Report · November 2008
SPECIAL REPORT: STOCKS BELOW BOOK
The list at right measures Californiabased companies trading with the highest discount to book value. In some cases, particularly banks, reported book value’s can be met with a high degree of skepticism as bad loans pile up requiring additional write-downs. These book value’s listed may also contain intangibles such as goodwill. Topping the list is Building Materials, an overleveraged supplier of home construction materials experiencing heavy losses but whose book value is significantly higher than it share price. Such is true of leading zero amortization lender Downey Financial. With 20% of its total assets non-performing we wonder how much of its $26.54 in book value will need to be written down. Flash memory maker Spansion, a spin-off from Advanced Micro and Fujitsu, has fallen on hard times with heavy losses on the plunge in computer memory pricing. The company’s high book value is offset by a heavy debt burden. Struggling retailer Gottschalks is a feared bankruptcy. Among other financials, Beverly Hills Bancorp is a tiny bank that is being hit hard by the downturn in residential construction. Small mortgage insurer PMI is hanging on by a thread. ITLA Capital is a troubled San Diego-based thrift that will not likely survive. Small homebuilder California Coastal is focused only on Southern California. And United PanAm Financial is an auto finance company that purchases securitized loans. We would be wary of these companies despite share prices trading significantly below book value. Among cheap, interesting asset plays, Salem Communications is a leading broadcaster of Christian content through 96 radio stations across the U.S. that has been plagued by a downturn in ad spending. ACME Communications is trying to liquate the remaining seven TV stations it owns and that are likely worth significantly more than its $0.50 share price would reflect. Meade is a leading name in telescopes saddled with poor leadership. And we wonder what if anything will eventually come of ethanol producer Pacific Ethanol.
Largest Discount to Book Value
Ticker Company Close Oct. 31 $0.24 $1.60 $0.62 $0.70 $0.73 $2.49 $1.05 $0.37 $5.16 $0.27 $0.33 $1.27 $1.22 $0.16 $0.50 $1.74 $0.90 $0.42 $1.09 $0.27 $0.24 $2.30 $0.43 $2.84 $0.70 $0.98 $0.44 $1.70 $0.89 $4.68 $8.95 $0.45 Total Equity (Mil) $187.3 $772.3 $1,443.1 $102.7 $147.6 $2,017.2 $243.2 $29.7 $224.6 $60.6 $22.7 $98.1 $158.4 $24.3 $50.6 $164.9 $313.8 $34.4 $116.8 $18.3 $66.5 $129.3 $12.9 $1,015.4 $75.0 $416.7 $42.0 $179.9 $122.6 $8.2 $551.6 $12.5 Book Value/ Share $6.35 $26.54 $8.98 $7.72 $7.85 $24.72 $10.26 $3.53 $44.92 $1.96 $2.39 $9.00 $8.47 $1.04 $3.14 $10.50 $5.42 $2.31 $5.93 $1.43 $1.25 $11.97 $2.15 $13.91 $3.41 $4.73 $2.11 $8.14 $4.17 $21.57 $40.26 $2.01 Discount To Book Value 96.2% 94.0% 93.1% 90.9% 90.7% 89.9% 89.8% 89.5% 88.5% 86.2% 86.2% 85.9% 85.6% 84.6% 84.1% 83.4% 83.4% 81.8% 81.6% 81.1% 80.8% 80.8% 80.0% 79.6% 79.5% 79.3% 79.2% 79.1% 78.7% 78.3% 77.8% 77.6%
BLGM DSL SPSN GOT BHBC PMI SALM PXG IMP EGR CHNL CALC NANO MEAD ACME UPFC PEIX IFON CPSS OVRL TELK CCOW NICH SPF BWTR MMPI NLST
Building Materials Downey Financial Spansion Gottschalks Beverly Hills Bncp PMI Group Salem Comm. Phoenix Footwear ITLA Capital Commerce Energy Channell Comm. California Coastal Nanometrics Meade Instruments ACME Comm. United PanAm Fncl. Pacific Ethanol Infosonics Consumer Portfolio Overland Storage Telik Capital Corp. West Nitches Standard Pacific Basin Water Meruelo Maddux Netlist
CPWM Cost Plus GLUU CAA FED THLD Glu Mobile Eastern Light Cap. FirstFed Financial Threshold Pharm.
Page 5 · California Stock Report · November 2008
SPECIAL REPORT: LOW PRICE TO SALES
Lowest Price to Sales
Ticker Company Close Oct. 31 $4.48 $13.33 $15.43 $12.88 $3.07 $3.20 $3.38 $6.28 $3.42 $3.02 $11.29 $22.27 $21.27 $6.33 $8.45 $25.04 $8.28 $3.10 $16.33 $7.01 $4.60 $4.38 $8.99 $20.41 $30.16 $18.03 $11.48 $3.55 $4.45 $8.49 $12.57 $6.55 Annual Revenue (Mil) $1,360.0 $35,690.0 $7,640.0 $14,900.0 $2,000.0 $235.6 $1,690.0 $885.3 $1,450.0 $348.0 $2,060.0 $2,980.0 $43,640.0 $646.6 $806.9 $8,280.0 $3,870.0 $208.1 $3,550.0 $5,880.0 $13,880.0 $173.0 $1,190.0 $7,250.0 $17,100.0 $1,170.0 $1,810.0 $598.4 $238.7 $1,510.0 $2,000.0 $1,090.0 Market Market Cap Cap/ (Mil) Revenue $60.0 $2,211.4 $498.4 $1,382.0 $253.0 $30.4 $240.3 $135.6 $224.7 $65.8 $394.0 $610.2 $9,118.4 $139.3 $176.6 $1,832.9 $874.4 $47.4 $829.6 $1,418.8 $3,463.8 $43.8 $303.0 $1,890.0 $4,563.2 $315.5 $498.2 $170.0 $70.3 $446.6 $617.2 $337.3 0.04 0.06 0.07 0.09 0.13 0.13 0.14 0.15 0.15 0.19 0.19 0.20 0.21 0.22 0.22 0.22 0.23 0.23 0.23 0.24 0.25 0.25 0.25 0.26 0.27 0.27 0.28 0.28 0.29 0.30 0.31 0.31 We take a look at California companies whose market capitalization is a fraction of annual revenue (Price to Sales, or P/S) with a share price above $3.00. Consumer driven stocks, particularly retailers, dominate the list. The top three companies are value-added resellers which typically resell computer equipment and software directly to businesses. With high volume and razor thin gross margins these companies typically trade at small fractions of total revenue. Managed healthcare provider Health Net is struggling with higher health care costs and lower commercial enrollments. Normalized P/S for the company is approximately 0.30x. Debt laden newspaper McClatchy, owner of the Sacramento Bee, remains a question mark as its P/S is a far fraction of its historic multiple. Whether newspapers can monetize their shift to the Internet remains the center of inquiry though the market appears to be indicating an emphatic “No.” Retailers have fallen to fractions of P/S rarely seen before. Typically trading at P/S multiples of 1.0x, retailers Walking Company, Central Garden & Pet, Big 5 Sporting Goods, Pacific Sunwear, West Marine, Charlotte Russe and Williams-Sonoma are all trading at ultra depressed levels. Investors continue to worry about the longterm health of the consumer following the plunge in home values. It should then come as no surprise that restaurants have been feeling the consumer pinch as well with Rubio’s, DineEquity and CKE Restaurants, owner of Carl’s Jr., at historic valuation lows. DineEquity is particularly burdened with heavy debt after the owner of IHOP completed a controversial takeover of Applebee’s. REITs are climbing the list with debt heavy Maquire Properties trying desperately to shed assets and Sunstone Hotel seeing slower occupancy. Among stocks to watch for a turnaround, Safeway should prosper in a tough economy, Sun Micro is profitable and has approached all time lows, and Century Aluminum should find a bottom with its P/S at historic lows.
MALL IM SNX HNT MNI WALK CENT BGFV PSUN UCTT PACR MOH SWY
PC Mall Ingram Micro Synnex Health Net McClatchy Walking Company Central Garden Big 5 Sporting Pacific Sunwear Ultra Clean Hold. Pacer Intl. Molina Healthcare Safeway
WMAR West Marine CHIC RS WSM AVNX ABM CBG JAVA RUBO AHS FAF CSC DIN SUNH MPG OFI CKR CENX SHO Charlotte Russe Reliance Steel Williams-Sonoma Avanex ABM Industries CB Richard Ellis Sun Microsystems Rubio's Rest. AMN Healthcare First American Computer Sciences DineEquity Sun Healthcare Maguire Properties Overhill Farms CKE Restaurants Century Alum. Sunstone Hotel
Page 6 · California Stock Report · November 2008
SPECIAL REPORT: HIGH DEBT TO EQUITY
California stocks that carry a high debt burden should come as a concern to investors trying to navigate through the ongoing credit crunch. Companies carrying high debt and that are generating larges losses should be of particular concern in the current market. Our list at right measures the companies that have the largest debt levels versus shareholder equity. The first several companies on the list actually have negative net worth thus their debt/ equity (D/E) ratio is a negative number. Heavily indebted, money losing biotechnology companies tend to be a red flag to investors and our first four companies come from this sector. Several other biotech’s fill the list including GenCorp, Exelixis, Protein Design Labs and Cell Genesys. Financials dominate the list as heavy write-offs over the last year have shrunk equity levels thus increasing D/ E spreads. As we have already pointed out, the book value of many banks and financials are questionable given the potential for sizable future writedowns. Mortgage investor IMPAC is still trading with $11.5 billion in debt and an eye-popping D/E of 473.9. Troubled subprime lender Vineyard National is a couple of write-downs away from futility. Maguire Properties is an overleveraged office REIT with major tenant exposure to AIG, Washington Mutual and defunct Accredited Home Lenders. Others financials such as Consumer Portfolio, KKR Financial, ITLA Capital and United PanAm are stocks to avoid. Chip stocks also dot the list including broadband chipmaker Conexant, and large broad-line chipmakers Linear Technology and National Semiconductor. PDA maker Palm also makes the list as its Treo handheld is far overshadowed by BlackBerry. Among other stocks, hot cosmetic company Bare Escentuals has been battered by the tough consumer market and carries $280 million in debt. Clorox conducts large buybacks effectively turning its net worth negative. And McClatchy is hanging on with $2.1 billion in debt after purchasing rival Knight Ridder in 2006.
Largest Total Debt to Equity
Ticker Company Close Oct. 31 $6.78 $9.33 $14.73 $2.98 $1.55 $22.68 $4.18 $60.81 $4.90 $0.23 $0.78 $0.18 $8.15 $3.55 $3.44 $9.75 $1.09 $18.03 $15.24 $5.86 $13.17 $4.60 $3.86 $12.66 $0.23 $5.16 $3.07 $10.49 $8.95 $1.74 $3.99 $29.42 Total Debt (Mil) $173.0 $346.5 $170.0 $119.8 $548.6 $1,700.0 $247.9 $3,480.0 $440.7 $258.6 $323.8 $11,540.0 $652.9 $5,060.0 $127.9 $537.8 $1,980.0 $2,460.0 $7,270.0 $5,010.0 $1,460.0 $534.1 $12,330.0 $2,740.0 $192.5 $1,270.0 $2,100.0 $191.6 $2,720.0 $796.6 $397.0 $5,980.0 Total Equity (Mil) ($111.9) ($207.1) ($81.4) ($35.7) ($132.7) ($378.6) ($49.4) ($370.1) ($31.7) ($15.0) ($2.2) $24.4 $16.3 $188.2 $6.3 $27.5 $116.8 $162.8 $571.2 $567.1 $202.0 $74.3 $1,917.9 $434.8 $31.8 $224.6 $382.3 $34.9 $551.6 $164.9 $86.7 $1,383.8 Debt/ Equity (1.5) (1.7) (2.1) (3.4) (4.1) (4.5) (5.0) (9.4) (13.9) (17.2) (144.3) 473.9 40.0 26.9 20.2 19.6 16.9 15.1 12.7 8.8 7.2 7.2 6.4 6.3 6.1 5.7 5.5 5.5 4.9 4.8 4.6 4.3
THRX CVTX ITMN JAZZ CNXT LLTC BARE CLX GY DEIX VNBC IMH AIQ MPG EXEL PDLI CPSS DIN RWT ANH NSM BOFI KFN CVBF CEGE IMP MNI TAMB FED UPFC PALM MAC
Theravance CV Therapeutics InterMune Jazz Pharma Conexant Systems Linear Technology Bare Escentuals Clorox GenCorp Directed Electronics Vineyard Ntl. Bncp. IMPAC Mortgage Alliance Imaging Maguire Properties Exelixis Protein Design Labs Consumer Portfolio DineEquity Redwood Trust Anworth Mortgage National Semi. BofI Holdings KKR Financial CVB Financial Cell Genesys ITLA Capital McClatchy Tamapais Bancorp FirstFed Financial United PanAm Fncl. Palm Macerich
Page 7 · California Stock Report · November 2008