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Strategies & Market Trends : Bill Wexler's Profits of DOOM -- Ignore unavailable to you. Want to Upgrade?

To: lindend who wrote (3484)	10/15/1998 2:17:00 PM
From: CMason	Respond to of 4634

Linden -- Regarding GBUR, I suppose the good news for longs is that they're in the black, even if it's only by 2 cents a share for the quarter (I think the consensus estimate was 1 cent). For shorts, the good news is that a doubling in sales over year ago netted down to less than a million dollars difference on the net earnings line. In addition, the company has taken on the $15.4 million short term note you mentioned, plus a $15 million convertible (not floorless) issue. With only $3 million in cash as of 9/30, they're not likely to be able to make much of a dent in the short term loan. I think the important questions are going to be: -- Can they sustain sales momentum going into the seasonally slower fall and winter months (last year Q4 sales were ahead of Q3, but I think this may have had more to do with channel conditions than actual consumer takeaway). This is particularly an issue since their leverage off sales and marketing spend is not particularly impressive (an 86% spending increase in the third quarter yielded only a 103% sales increase, which might be ok in the pharma industry, but not when you're dealing with 50% gross margins). -- What will be the impact of starting up their new Utah plant? The company notes that gross margins are up sequentially, but down versus last year. Unless they can substantially improve margins, I would think they're going to have problems funding their marketing programs next year. -- At what point will the analyst community start applying traditional valuation measures to GBUR? By my calculations, they're currently trading at around 10x book value, which is pretty expensive for a food company with no strong proprietary position. Consensus earnings estimate for 1999 looks like 42 cents, so they're currently over thirty times next year's expected earnings, which seems grossly out of line (look at CAG at 22x trailing earnings, or HRL at 16x). -- As you asked, what are the terms of the short term note? Their current ratio is down substantially from the end of last year, and they don't have the cash to repay the note at this point. There's a chance, depending on the loan terms, that they might find themselves in at least technical default. That might trigger an increase in interest rates, issuance of warrants, or some other action which could hurt the stock price (I had a short position in KMAG earlier this year which greatly benefited from a technical default, even though the company was still current on its accounts). I suspect we'll find out more from the 10-Q. -- Does the Q3 sales increase reflect just a doubling in consumer takeaway, or is there an element of pipeline filling as well, which might hurt future sales? The PR release mentions the "continued introduction of five new products into the grocery channel." It's also worthwhile noting that only $3 million of the $14.5 million in sales and marketing spending during the quarter went for television (e.g., brand-building activity). I assume the rest went for sales commissions and price promotions, which don't do a lot to build longterm brand equity. We'll know more when we see the 10-Q. For the moment, however, I'd consider adding to short positions in GBUR, as I'm not convinced that two cents a share in one quarter is the prelude to a lasting trend toward profitability. Regards, CMason