Re: the debt, which is now creeping above
equity, I believe BMC is being judicious about
it. I absolutely love debt if it is used wisely.
As of March 31, the company had bought
back 1 million shares of the company stock
at an average price of about 16 5/8. The
rise in LT debt was primarily a function o
this buyback. As long as management has
a solid grasp of their environment - and we
must rely on mangement in any leveraged
company - this makes sense. The cost of
equity is higher than the cost of borrowing
currently. It's a good environment to be
a borrower. Evidently, management has
confidence that after this year of relatively
high capital expense, cash flows will jump
due to two facilities coming on line and
decreased start-up costs.
So with cash flows currently negative and
the stock in the dumper, management went
out and spent over half its equity acquiring
this $34 M sales business for $100 M in
debt. Again, it's a good environment to be
a borrower, so I don't mind. But it does
require a leap of faith in management's
bet on some sort of synergy or market
opportunity arising from such a buy.
I am comforted on this count by BMC's
strong historic top and bottom line growth.
I am also comforted that this is an unglamorous
business with an unglamorous name and
unglamorous executives. And of course,
the executives aren't selling into this buyback,
but buying back shares along with it, which
is a good sign. A form 4 was just filed by
a Director. I just discovered this today, but
it looks options-related. I'll investigate it
soon anyway.
Neuberger and Berman - a value-oriented
firm with a good record - went out and
purchased over 8% of the company in February.
American Century and another firm also
bought about 5% each at the same time. So
with the buyback and the institutional buying,
we have the reason for the rally of the last
few months.
The entire fall from the 20's has been on low
volume and has all the technical characteristics
of a double bottom due to weak sellers and
a lack of buyers. The fundamental picture
bears out the technical one, so I found it
hard to resist. My order went off at 16 1/4
this am, and now it's in the 15's. 15 5/8 was
its last bottom. I expect this one to take a while
to pan out.
Good Investing,
Mike |
