Beware the Used-Car Salesman
fool.com
By Seth Jayson (TMF Bent)
10/18/2006
Let's make a deal.
Pop quiz: Someone approaches you with a business to sell. The operation owns a handful of car lots, along with a related financing firm that specializes in selling cars to people who have a history of not paying their bills. The company paid $75 million for this biz.
What should this company be worth? How much would you pay for it?
If you guessed "$75 million," I'd say you're far too generous but possibly in the ballpark. But in one peculiar case, the market would say you're way off.
Mr. Market, for some reason, considers this company, Manchester (OTC BB: MNCS.OB), to be worth far more. It was recently valued at a market cap of $200 million, and it remains at nearly $150 million following a four-day roller coaster ride.
That's kooky talk!
Normally, we don't talk that much about bulletin-board stocks here at the Fool, but in the case of Manchester, which has been zipping up the charts for months, I believe we need to make an exception. Someone needs to make sure the word gets out.
I don't think Manchester is worth anything close to $150 million, or even $75 million. In fact, I think this is a stock investors need to avoid at all costs.
The pitch
Here's the brief version of the Manchester story. I'll let the company tell it in its own words.
Manchester, Inc., headquartered in Dallas, Texas, seeks to create the preeminent company in the Buy-Here/Pay-Here auto business, selling and financing used vehicles to credit-impaired borrowers. The Company intends to sell acquired and newly generated portfolios through a securitization process, thereby permitting the Company to continue its growth, and pay down its revolving credit facilities before the customers pay off their loans.
So, we have sub-prime auto sales, and securitization of these loans for sale to others. Yeah, I think the odds are exactly zero that we're looking at the next CarMax(NYSE: KMX) here.
Be afraid
In fact, to me, this looks like a classic billboard pump-and-dump in the making. And I'm not the only one with that opinion. Long-time penny-stock investigator David Baines of the Vancouver Sun wrote about Manchester on Oct. 7. He traced the firm's inception to the heart of Canada's penny-stock capital, and he tells a harrowing tale of unwitting citizens allegedly named as shareholders, in an attempt to meet distribution requirements, and of an office that corresponded to a law office with a history in the Vancouver shell game. If all of this is true, and I've got no reason to believe otherwise, then I have to agree with Baines' conclusion:
[T]his is yet another OTCBB shell company that was manufactured in Vancouver and then exported to the United States, where it is now serving as the vehicle for yet another outrageous stock promotion.
Tangled web
Not that this opinion should surprise anyone. Let's get this straight from the start: Manchester was, until 2004, a Nevada-incorporated mining outfit. I can count on one finger the number of companies I've found that successfully made the jump from Nevada "miner" to real business.
When the whole mining thing didn't work out, Manchester became a Nevada-incorporated player in "Buy-Here Pay-Here" used-car dealerships. Or at least it aspired to that dubious distinction. According to its filings, it misfired on this plan way back in 2004.
Until this fall, it had not managed to actually get into the car biz. That changed only recently. To date, Manchester has consummated only one buyout -- a Georgia and Tennessee car dealership, and related acceptance corporation, called Nice Cars. For this, Manchester paid $25 million cash and 6.25 million shares worth some $50 million on Oct. 4.
PR-a-thon
Most worrisome at Manchester is the PR pattern. Management seems awfully desperate to keep the company's name in the news. How else would you explain its habit of releasing PR devoted to non-items such as the announcement of obtaining "directors and officers insurance," or comments on its stock-price action?
What kind of company issues PR solely to comment on a big drop in its stock price? Worse yet, what kind of outfit engages in this kind of wink-wink-nudge-nudge stuff? "Manchester is actively exploring additional acquisitions. The Company expects to make additional announcements shortly."
Finally, what kind of company doesn't include a phone number or email address in its press releases? (More on that below.) In my experience, it's companies that are more interested in hyping their stock than they are running a cash-generating business.
Monday was a banner day, in which we saw a confusing release on third-quarter sales, followed by a PR claming Manchester is the victim of a "short attack," followed by a clarification on the sales release, and, as of today, yet another clarification of the clarification.
That middle "short attack" theory came from an outfit called Market News First, which operates a website that is, as near as I can tell, the partially obscured face of a rent-an-analyst biz with a few teasers: football news, Mark Foley discussions, etc. The real product seems to be "research reports" on such gems as GeneThera, DC Brands, and Homeland Safety International (formerly Sniffex) -- bulletin-board and Pink Sheets stocks whose combined share price wouldn't crack a buck ... not even 50 cents.
Here's how Market News First works: Penny stock companies typically pay $25,000 for research coverage. (Manchester got its report for only $20,000.) This payment reportedly "eliminates pecuniary interests and insures [sic] independence."
Ha! Here's the intro to the "independent" report on Manchester: "Either You Believe It, or You Don't Understand." What follows is a very amusing exercise in hype and fuzzy math. Manchester "insured" some pretty interesting "independence" for that $20,000.
Don't believe the hype
Even if we assume, for the sake of argument, that Manchester is not just a stock promotion, there's no way the valuation is anywhere near the realm of reality.
Look back at that sales release for a second. Manchester claims that for the first three quarters, it will earn net income of "approximately $7,755,000," on sales of "approximately $72,562,000." That would work out to a net margin of 10.7%. Amazing. Utterly. America's Car-Mart(Nasdaq: CRMT) shows net margins around 6.5% -- and falling fast. CarMax sports a net margin of about 2.5%. AutoNation(NYSE: AN) has net margins around 2%. United Auto Group's (NYSE: UAG) net is around 1.2%. In fact, the entire car-dealership industry has average operating margins in the 3.8% range.
That's a long way of saying that I don't believe Manchester can achieve margins anywhere near those implied in the latest release.
And even if I could believe it, I still couldn't make the current valuation work. With its current $75 million in debt, Manchester's enterprise value (EV) is about $225 million. That's 2.2 times its predicted $110 million in revenues for the entire year -- this in a business where the cream of the crop commands maybe a 1:1 ratio of EV to sales.
Company
EV/Revenues
United Auto Group
0.39
AutoNation
0.43
CarMax
0.69
America's Car-Mart
1.03
So let's put a thumbnail value on the stock, then, shall we? If (and only if) you believe that Manchester deserves to trade at an EV/revenue multiple equal to the priciest of its peers, you set its EV at $110 million. Take out $75 million in debt, and you're left with $35 million for the market capitalization of Manchester's stock. That suggests that a haircut of some 75% could be in order, or more if you believe -- as I do -- that a hefty discount is required for an unsuccessful former Nevada/Vancouver miner that's long on press and short on important details.
Nobody home
To me, the strangest thing about Manchester is the lack of contact information. I've searched through Dallas phone records and Texas business records, and I have not yet been able to find a working phone number for Manchester. (I did manage to reach a former director, who says he has nothing to do with the company anymore.) Calls to one "Financial Relations Board," which claims to be Manchester's investor-relations firm, have yielded nothing. The receptionist could not provide me with a working phone number, nor has anyone else bothered to return my calls.
But Manchester isn't the only outfit here that's hard to reach. The company bankrolling the buyouts, alternatively named as "Palm Beach Multi-Strategy" or "Palm Beach Links Capital" in Manchester filings, is another business that somehow seems to exist beyond the reach of information technology. No phone numbers. No records in the Florida Department of State database (where I would expect Palm Beach to be). And, once more, Financial Relations Board had no information to offer.
Who's calling the shots?
Why should you care? Because this lender holds Manchester on a very short leash. According to the filings, "each Acquisition shall be subject to the Lender's approval." And how about that interest rate? The filing on the Nice Cars acquisition shows that it will be either 17%, or whatever the applicable usury rate is. News flash: 17% is a horrible interest rate, unless you're the one collecting it.
But that sky-high rate is, apparently, not enough for "Palm Beach." It also gets up to $6 million in upfront fees, plus warrants for up to 3 million shares at a strike of $3 per share, and it "has agreed to act as the exclusive arranger for any asset-backed securitization, sale, or other disposition of any Receivables undertaken by the Company." In the Nice Cars deal, the lender will do this for 3%. Given the $100 million in receivables reported as part of the acquisition, this is another potential $3 million going into the pockets of the mysterious "Palm Beach."
Read the filings and you'll see that things are disturbingly cozy. So you bet I'm interested in just who's who at "Palm Beach." I'll keep you posted on whether or when we figure out who's behind this financing.
Foolish final word
Unfortunately, I think Manchester's engagement with penny-stock promoters like Market News First virtually guarantees that discussion of the company will center on ancillary -- and, in all likelihood, bogus -- charges like those of "short attacks." In fact, I'm going to go out on a limb and predict we'll hear the usual cry of "naked shorting" soon enough. Using this kind of verbiage is like tossing raw meat into a piranha tank. It appeals to a great many naive conspiracy theorists -- the kind of "investors" who can least afford it.
Invest accordingly, Fools, which is to say: Regard Manchester with the same care you would any other salesman on a used-car lot. What you see is what you get here.
At the time of publication, Seth Jayson had no positions in any company mentioned here. View his stock holdings and Fool profile here. See what he's Digging these days. CarMax is aMotley Fool Inside Valuerecommendation. Fool rules are here.
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