Chris,
First I'd like to point out that a press release is not a balance sheet. In the last 10Q, the cash flow statement shows line of credit borrowings of $5 million. If they've paid that down by $4 million since the 10Q was filed, it's a step in the right direction, but hardly impressive.
I'm not trying to be offensive, and I'll probably get flamed for saying it anyway, but I'm pretty much of the opinion that anyone who doesn't understand "Generally Accepted Accounting Principals" (GAAP) should probably avoid value investing, small caps, and probably the stock market as a whole altogether. Pick out a professionally managed mutual fund, let someone who understands the rules manage your investments, and hope the performance is better than most funds saw last year. There are just plain too many places private investors can get burned for no other reason than that they didn't understand the rules. I'm not trying to offend anyone who likes MOVI, but the company has a pure ugly balance sheet and there just isn't any nicer way to put it. I'm not saying the stock can't go up, but if it does it will be a hype run not backed by fundamentals. I personally couldn't sleep well holding that kind of issue over night, but the bottom line is it's your money and you can do anything you want with it.
I learned GAAP the way babies learn to speak English, by spending literally thousands of hours reading and analyzing SEC filings. A college student with a four year degree in accounting almost certainly knows far more about specific rules and the finer points than I do. You could probably go to your local library and pick out a few books that would give you the basics in a couple weeks of casual reading. I'm sure we're having this discussion because it doesn't make sense that Company A can report $1.50 in earnings with $10 in assets and be a solid investment and Company B can report the same numbers and be a bad joke. I'd have to agree with anyone who doesn't think it makes sense because it doesn't. Unfortunately that doesn't change the fact that it's true. The rules are different.
I also think it takes a certain amount of analysis on how a business operates. In the case of a video rental company, the demand is highest for new releases. New releases also command the highest prices for new inventory from the distributor. Since customers expect to find the movie in stock when they visit the store, the company has to meet peak demand in their inventory for those movies at top dollar. To get the best bang for their buck, the customer plays the movie over and over before they have to take it back until they are sick of it and all their friends have seen it. At that point they'll wait for it to come on TV before they'll watch it again in a year or so. In the mean time, the company now has a huge inventory of used movies with very little demand. At least nowhere near what would justify having 20 copies in stock. They can rent a building, put up some shelves, and distribute some of the inventory that way. They can also sell some of the used movies at a lower price than new, since they've recouped a lot of their costs in rentals. The problem for investors is that the original costs of the large inventory at top dollar is "capitalized" as an asset. Part of it shows up in earnings as "amortization", but the full impact of the cost of doing business isn't hitting the bottom line. The only sure acid test for this kind of business model I know of it to check debt levels and cash. If cash is approaching zero per share and debt levels are high, that means it costs the business more to run their operations than they take in no matter how much they report in earnings. The PR sounds wonderful, is fantastically deceptive, and all perfectly legal.
You've probably guessed by now that I don't like this kind of business model at any price. The reason being that I consider the downside risk to be total. That doesn't mean these kind of businesses can't bounce around for years without any obvious problems, but they are so unstable that it doesn't take much for them to topple, and when that happens it goes so fast there isn't any time for damage control. If you want a real education in capitalized expenses, take a look at seismic and oil drillers. They do things to the books companies like MOVI only dream about.
I know it's a little hard to get down to specifics without discussing a particular issue, but at the same time I'd rather not upset anyone by kicking their favorite dog. It might be better to keep general discussions a bit more general. I've enjoyed some of the recent discussions on cash flow and net nets. Obviously opinions vary on what to look for or avoid while screening for value but once you throw everything into the pot, the consensus isn't too far away from practical application. |
