I have been following the recent comments on VTCH with great interest and will throw my two cents into the discussion. As a bit of preamble, I can tell you that I am entirely empathetic to short selling; I believe it is an extremely good discipline for any investor, and an important and healthy influence on the pricing role of markets. Indeed, the investment funds I manage are currently far more short than long and include some of the short ideas recommended in this very forum. (To date I have chosen not to share my thoughts on these other companies, because the last time I expressed a negative opinion on a stock through this kind of medium, the company sued me. Some of you may be familiar with the Solv-Ex saga in which the most recent chapter was 11, but that's another story.)
The first thing I must say about VTCH is that I am long the stock, and, yes, somewhat wary. My wariness comes from the recently heightened Brazilian instability issues. I will also acknowledge that I have recently sold shares partially due to these concerns. And if one is convinced that the Brazilian economy is going to blow up, it will certainly negatively impact VTCH. While there are probably far better ways to play it, there should be a short trade in the stock if we continue to have a major sell off in Brazil.
Making a bet on an emerging economy like Brazil has big rewards and big risks. If you can't handle high octane, it's not a good place to invest. I think most of us can concur on this. However, some recent posts on VTCH, like the Barron's article this summer, raise issues beyond the macro risks and criticize management integrity.
I will state emphatically that these guys are not trying to pull off a stock scam. I've known Will St. Laurent since I was fourteen. He has high integrity. I was down in Brazil last month both in Sao Paulo and in Bahia visiting their plants, their marketing operation, their credit people, and their customers. This is no scam, folks.
Anyone who knows anything about Brazil knows that most business down there is done on terms. Whether you're IBM, or Sears, or Vi-Tech, and you want to be in business in Brazil you allow for credit. It's a fact of life and if well managed and conservatively reserved, it can generate a handsome interest margin. These receivables are liquid assets with a secondary market and a history of collections that exceed the allowed bad debt reserves. Like any foreign asset, the value of these receivables will fluctuate up or down with currencies, default rates, interest rates, etc. Understanding these assets is important in valuing VTCH, but to imply that there is something sinister in this company generating AR as they grow their business is a function of ignorance, not good research.
In light of the company's growth rate and business plan, there is currently negative cash flow. Even with perfect 100% collections, a company growing sales at 50 plus percent annually will almost certainly fail to generate free cash. As the company matures and their growth moderates, VTCH should turn cash flow positive.
In the meantime, the company has raised funds through a variety of sources, everything from local Brazilian loans, to selling receivables, to "Daddy," to public stock offerings, to private convertible debt placements. I have participated in funding the company on a number of occasions and probably will again. Not every source of funding has been conventional in the eyes of Wall St., but then again VTCH doesn't claim to be conventional, and Wall St. hasn't always proved to be reliable.
Frankly, "Daddy" loaned money to VTCH when Wall St. was kicking tires and jerking them off. There was no sweet heart deal for the old man. He knew the company, the management (his two sons), the risks, and stepped up when others didn't. The interest rate was on the low end of the company average at the time and when the company recently raised cheaper funds, they redeemed him. As a shareholder, I am damn glad that Daddy-O was there when he was.
As to the latest private placement and questions as to the quality of the participants, the S-3 should be filed in the next week or so and you can judge for yourselves. I know a number of the buyers, including funds I manage, and suspect none are looking to convert and sell upon registration of the shares. Indeed, this was not marketed like the discounted Reg-S deals that plague seedy stocks that I normally short.
I believe that this and the other financings have been done in the best interests of the shareholders. And why not? George and Will are by far the largest shareholders who, along with "Daddy" (who has bought significantly more shares in the open market), own over three quarters of the equity.
Again, I think there is a risk that VTCH could falter or fail. Whether a Brazil blow up, or management miscalculation, or major supply problem, there are, of course, risks. But one thing that doesn't concern me is the idea that these guys are trying to swindle the shareholders. I know these boys very well (far better than anyone participating on this thread). I've spent time in Brazil with them at the physical plant. The upside potential for this business is real exciting and management is doing their damnest to reach it.
I am sure that there will remain many here unconvinced by my comments. And if you want to short the stock, that's fine by me. In fact, you're welcome to borrow my shares; they're housed at Montgomery. Just make sure you're there for the right reasons and do your homework. If anyone wishes to contact me, I can be reached at Quilcap@aol.com or phoned at 212-521-5020. Cheers.
-Parker L. Quillen |
