Here's a little writeup on GMTN, a company that I've spent a bit of time researching this past week...
GMTN's conference call for Q3 was pretty positive. However, I don't believe the company's shares are a bargain at current prices ($13.50).
The company has a number of items going it its favor:
* CEO Mark Baker was a key factor in the growth of Home Depot. He's presumably applying his knowhow to GMTN's growth. There's no question that the company is copying some of HD's strategies - going for larger store sizes, for example.
* The company's strategy seems to be working on a store-by-store basis, generating fairly quick profitability when new stores are opened.
* Thus far, competition from the other two big firms, Cabellas and Bass Pro, hasn't seemed to hurt GMTN's success. Baker says this is largely because GMTN's stores are no frills with great selection while competitors' are more "entertainment oriented." This may or may not be.
* The company's current balance sheet looks OK, with about $70M of net liquid assets (Current assets - All liabilities), for about $4.50 per diluted share. Book value is significantly higher at $10.50 per diluted share.
* The company generates significant free cash flow, especially if you add back in the costs associated with store pre-opening expenses (which should in the long run be one-time expenses). Net capital expenditures currently exceed maintenance capital expenditures by a significant margin because of the company's expansion plans (around 18 stores this year and next).
As good as the company looks, its growth strategy may prove perilous:
* The company is financing its growth with borrowing. Across the past 9 months, net liquid assets have declined from $88.5M to $67.5M as a result of spending on property, plant and equipment during expansion. Management has said this trend will continue next year, meaning that NLA will likely decline to the $30M region. This is a pretty small margin of safety.
* The company's debt is *FLOATING RATE*. This means that, should interest rates rise in the coming year or two, the company's interest expense will increase.
* At the same time, increasing rates may well depress consumer spending on non-necessities like sporting goods. This could represent a terrible double-whammy for the company, possibly even forcing it into bankruptcy.
My analysis is that the company has a decent chance of success with its growth strategy, but I think the growth-debt spiral is somewhat likely. If that happens, it's possible the company's shares could be picked up for a fraction of what they're currently trading at. At that point, it could be a true asset play, since it's unlikely that book value will actually turn negative. |
