Congress Sale: Part IV.
ADVISORY: This is going to get very technical and probably long. I recommend you read Congress Sale Part II (I recently re-posted it for your viewing pleasure)first. Additionally, my analysis of the deal is in direct conflict of Mr. Crawford (surprise, surprise), so I expect to get hammered from him. Don't worry, I can handle it. I have nothing against Crawford, it's just that he does not understand the theory of the discounted time value of money. No big deal. Personally, I think he should learn about it as it may help him in the long run. Again Craig, I am not critical of you -- you bring up some good points and provide somewhat of a different opinion. That is needed here. I am critical, though, of you throwing numbers out that make no sense at all.
And I begin:
The first point I will refute is that the Congress Deal actually lowers the book value per share of GIFS. I think we all know who made this claim. I know very few people believe this statement, but let me elaborate. The only way book value can be lowered is by 1. having losses, 2. giving shareholders a dividend or 3. increasing the number of shares via options, grants, etc. There is no way in the world you can dilute book value by selling a sub for its book value plus some. Crain seems to really adhere to this point, so I offer a simple challenge: Craig and I obviously differ on our perception of the deal from this perspective. I am willing to bet Craig can not get 5 competent CPA's to agree with his point of view. By competent, I am talking Big Six auditors, etc. If Craig can find 5 CPA's who will state that the deal lowers book value per share, I will send him a check so he and some of his friends can have dinner on me. Point being: IT DOES NOT LOWER BOOK VALUE. THE DEAL BUILDS WEALTH. Even if there were no interest or consulting agreements, book value would remaine the same. Please note that I am only asking Craig to find 5 qualified CPA's who agree with him. That is Five in the entire country. I've discussed this entire situation with many people I work with (all Big Six CPA's --many of whom have invested based on the same logic I present on the thread) and ALL of them agree that this deal builds wealth. I don't know what Craig's background or understanding of the whole sale is, but I feel it is incomplete and inaccurate. I would respectfully ask him to refrain from posting things that are blatantly, and I mean blatantly, wrong. Close doesn't count in this game: you are right or you are wrong.
Craig can bash the deal all he wants and that is fine. Absolutely fine. And he may be right, the price may not immediately move. But if you are going to bash, bash. If you are going to use fundamental financial analysis, use it correctly. Thanks. I've let a few other CPA's read your posts and beliefs regarding technical analysis of the sale and you know what they do: THEY LAUGH and make comments like "where did he think of that," "that is just wrong," and my favorite "I hope he isn't a CPA."
Let's move on . . .
Craig seems to hammer on the point that the sub sold for $117 million and we have to wait 10 years to get the money. Again, and I try to get this through to him, he does not understand that the present value value of the cash flows that GIFS will receive equate to the $117 million. Because interest is in addition to the $117 million and the $1 million a month only represents essentially the principal payments for 10 years, Craig's distorted logic says: this is a ripoff and makes no sense for the company to do it. Well, I am going to appoint myself IR director of GIFS and release a special press release that Craig may understand : CONGRESS SELLS FOR $182,000,000 (INCLUDING INTEREST). Assuming 9% interest on the installment plan, GIFS will receive over $180 million over the next ten years for Congress. Let's see -- on the books for $100 million, getting over $180 million out of it over ten years. Definitely no value created here (cynically stated, of course). And that precludes the income received from the consulting contracts linked with the deal.
Next point.
Craig actually makes sense here -- the CD is an asset that really didn't produce any income (other than serving as a security interest) and really didn't increase in value. GIFS could basically sell the CD and put it into an interest bearing security and get close to the above return for the next decade. Craig doesn't like that the deal was financed and I am sure all of us would have preferred $117 million up front instead of $180 mill over ten years, but in present value terms, there is no theoretical difference. $117 million today has the exact same present value as $180 million spread out over ten years.
And I'm on a roll . . .
Craig seems to think selling the "business" CRIC for $17 million didn't make sense and was undervalued. After all, according to his accounting school of thought, if CRIC was making $3 million a year for the next ten years, that is a minimum of $30 million. Why sell for $17 million when you can get $30 million by holding on for ten years? The answer, you guessed it -- the present value of money. Guess what Craig - selling Congress for a PV of $18 million (117-99 for the CD)leaves the company in the exact same position in present value discounted cash flow terms as if they would have kept the subs. Run the numbers yourself - $3 million cash flow, n=10 years, i/r @9.5%, and click present value on your calculator. The present value of keeping the sub is $18.5 million -- thus, they basically are receiving, in present value terms, the equivalent of the $3 million per year for the next decade.
Thus, what we see is that the deal builds wealth basically by financing the deal, getting the consulting contracts, and collecting interest on the sale. Personally, as long as book value is increased and the company makes money, I don't care if it is from interest, consulting, or selling dirt. Incidentally, I just bought into an excavating business -- trust me, big $$$$ in the excavating business.
Craig is correct in that the majority of the income from the deal to hit the bottom line comes from interest which could have been gnerated if the CD was converted into another form of security. However, I think what many people fail to understand is that GIFs sold this to finance some of their other deals. Last I knew, you don't get rid of profitable subs to lose money on other deals. Call me niave, but I bet they did this deal to make a little money, which they did, but probably to free up capital for their next ventures. Normally they get their companies via stock swaps. Perhaps they need some venture capital this time and don't want to take on any debt. Easiest way to do it -- liquidate some assets. Obviously, they need a lot of $ or else they would have sold some smaller subs.
What does this mean to the fundamental valuation of gIFS?
This gets interesting. Normally, we value companies on the present value of their earnings. Everyone does this via the P/E ratio route. However, in the case of GIFS, they will have a cash flow per share much higher than their EPS. If I presume no interest at all on the CRIC deal, GIFS has 60 cents a share coming in for the next ten years. Put a P/E of 5 on it and we have $3 per share. Assuming the interest is added on, and we have about 85 cents per share of cash hitting GIFs; put a P/E of 5 on that and we get $4.25 per share. Obviously, higher multiples yield higher results. And income from the other subs exponentially increases the present value of the discounted cash flows to arrive at a price substantially higher than its current position. Of coure, that is all contingent upon a finalized deal and a clean audit of the financial statements.
The above analysis is why I own the stock. The reason you get the strange distortion is that the stock sells at such a low ratio to its alleged book value. As you can see, if things start to calm down and the remaining assets are validated, it is only a matter of time before the stock price escalates. The efficient market hypothesis dictates as much. Trust me, once GIFS shows that they are indeed going to get $1.5 million a month (with interest, but excluding the consulting contracts), someone will notice. It may take some time, but time I have. People like Craig and a few others would perceive it to be a bad deal, but I can assure you they are in the minority.
The above has nothing to do with rumors, speculation or hyping the stock. I am merely stating facts. Cold, hard, unimpassioned facts. I am long on GIFS, as many of you know, based primarily on the above fundamental assesment. If anyone has any questions, feel free to e-mail me or post them.
Again, the above is completed based on my experience and what I have been able to put together from publicly known information. In no way do I recommend anyone either buy or Sell GIFS. You may lose all your money. Trust me, I know this first hand being in on some of my shares over $3. Do your own research. And invest based on facts.
Well - I am going to get back to work. Craig, I hope you take my response to you in a civil manner. I am not personally attacking you, only your methodology.
Regards and let's hope we have a better week.
MTM |
