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Strategies & Market Trends : Fundamental Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Madharry who wrote (1181)	8/21/2010 7:18:16 AM
From: bruwin	1 Recommendation Respond to of 4719

MHR(again) Madharry, I read, with interest, your exchange with Paul Senior regarding his opinion about MHR, i.e. .... Message 26768483 I assume the *”One guy”* he refers to in the following sentence is myself, as per my post .... Message 26759467 ”One guy on SI who made a decent effort to analyze the financials got it wrong, imo, by focusing on the earnings statement rather than the balance sheet.” “imo” It’s easy to state that someone has got something “wrong” and, no doubt, he’s entitled to his opinion. But wouldn’t it add more weight and credence to that opinion if he came up with sound reasons as to why he thought that someone had got it wrong. To only say, "focusing on the earnings statement rather than the balance sheet" is not a very comprehensive argument, IMO. Anyway ... The way I see it any company listed on a stock exchange is out to make a profit on behalf of its shareholders. And it does that, I’d say, primarily from its assets, be they manufactured assets, intellectual assets, assets in the ground, etc.. etc.. But to buy a stock purely because its NAV/share is greater than its current share price seems to me to be more in line with a shareholder looking for liquidated value rather than for a company’s ability to make ongoing profits. For example, a company can have an inventory of various brand new motor car components, such as engine blocks, chassis, gear boxes, etc.., that could be put together to make vehicles. And those individual items may have an asset value greater than the current share price of that company. But when it comes to the cost of running that company, putting those components together, marketing the vehicles, distributing them, etc.. etc.., then that company may not end up doing so well financially. In the case of MHR, we are told that it has these in-the-ground oil and shale reserves worth X-amount. Well ... that’s fine. But now we have to look at what MHR has been doing with those assets in terms of making a Bottom Line profit out of that Asset. When we study its Financial Results we see that they have been reporting since about 2005. At the end of 2006 they reported a Revenue of $0.2mil. In the following 3 years we saw the following Revenues, $6.9mi., $14.5mil. and $10.3mil. Now I’d say that indicates that MHR are in business and producing at an increasing rate. In the last two Quarters MHR reported Revenues of $7.3mil. and $9.8mil. If we add those two together and double it we could expect their next Annual Revenue to be of the order of at least $30mil., which is way past their previous $10.3mil. Once again, this indicates that MHR are actively engaged in their business and producing at an increasing rate. However, concurrent with this ongoing increase in top line Revenue is an ongoing Bottom Line LOSS, as I stated in my post referred to above. So maybe MHR’s NAV/share is greater than its share price, BUT at the moment, the indisputable FACT is that this company is LOSING money DOING ITS BUSINESS and that’s probably why its share price performance is going nowhere. Now that’s not to say that there may not be a reversal of the company’s financial performance in the future, especially if they have a good management team. But, in my view, why put your money in a stock where it is not, currently, getting much in the way of Capital Gain (and zero dividend), instead of getting a far better return elsewhere. By all means, once the relevant numbers in MHR’s future Income Statements start showing us that they are on the road to Bottom Line profitability then invest in the company. Surely, at that stage, one has less of a risk than at present.