My longest post ever, so bear with me.
Good News/Bad News - After Reviewing the "Annual Report" and the latest 10-Q..
My reactions are mixed:
1. I was quite disappointed at the raw quality of the Annual Report document. Black and white, typos, grammar that needs improvement. An "increase" where there should have been a "decrease". Pretty serious errors. It gives the overall impression it was rushed out the door as soon as the auditor's findings became available, although it is still three months later than it needed to be. We should have gotten this in mid-February, at the latest.
2. Strategy: It appears that ETPI made some rookie errors last year. For instance:
a. Financing that was premised on the maintenance of a minimum stock price. Pretty foolish, when your stock is a penny stock, with pretty low actual public float, frequently manipulated by those who hold it.
b. Jumping into too many acquisitions, when their ability to acquire/digest had not been exercised or proven. It would have been better to make one acquisition, learn some lessons, assure that it performed financially, then embark on a second. "Bootstrap" themselves based on improved overall financial performance, decrease or eliminate the need for external funding to finance growth.
3. Financing: Good News, Bad News.
a. It appears that ETPI made tough decisions regarding fixed cost structure, and has reduced costs to levels that will support current operations. THIS IS EXTREMELY GOOD NEWS.
b. Although I re-read the report, I saw no specific mention of convertible-debt financing. Debt financing is mentioned, but the vehicle/method is left open. There are nearly 15 million previously- restricted shares that are now able to be traded. THIS IS NOT GOOD NEWS.
c. Interest expense seems manageable. Converting short-term debt to long term debt can improve cash flow to operations, although ultimately it merely delays the inevitable. Many debt-ridden individuals use the same trick - it's called a second mortgage, or a "debt consolidation" loan! I CONSIDER THIS TO BE GOOD NEWS. Smart money management. Find a way to pay the bills.
4. Results of Operations: About what we should have expected.
a. NiteLife/VisionQuest: Life blood of the company. Unknown growth potential. Stable due to AFNAF contract.
b. PS&L: Needs capital to grow. All profits being redirected back into the division, so no contribution to earnings (or losses).
c. Stargate: Extremely risky ventures. The paying public is quite capricious in its tastes, which can change overnight. Has not supported itself thus far. Requires substantial up-front investment to open new outlets. Survival is questionable, growth is not predictable due to the lack of committed financing.
d. RedFish Management/RedFish Island: Solid enterprise, seasonal. Just entering its strongest operating periods, should generate good cash flow throughout the summer. Some question regarding cash flow contributions in non-peak operating periods.
e. Corporate: I assume the waterpark is being managed directly by the corporate officers. This summer should be very exciting for the waterpark. It will be interesting to see how the traffic volume through the park changes after Labor Day, and how the weather during the summer affects cash flows. I'd like to hear from someone who's been to the waterpark as to whether there is any reason to go there on a rainy day.
5. My analysis, for what it's worth
a. It appears that ETPI got burned several times in 1998, and learned some hard lessons. While disappointing, Doug is still a smart man, however it is apparent he has yet more lessons to learn, particularly with ETPI's ineffective dealings with the shareholder public. He needs competent advice, perhaps several more quality board members from the financial community.
b. The company really is composed of two people, Butcher and Grasberger. No other insiders hold any significant amount of stock. Grasberger has a tight grasp on the NiteLife division, which is the key piece.
c. The Corporation's strategy for growth continues to be fragmented. Although each division is focused, there is no unifying concept for the Corporation, except as a holding company.
d. I do not see a strategy for removing seasonality from cash flow. Are there good restaurants that do well in the non-hot months? What about businesses related to fall/winter sports?
e. I believe that running the profits of PS&L back into that division is a mistake. I believe that all profits need to go to ETPI's bottom line to show earnings, even if it means delaying growth. Financing cannot be secured to enable growth until the share price rises, and that will not happen until sustainable earnings performance appears.
f. I believe that ETPI's asset base alone makes this company worth .40/share (7 million in stockholder's equity divided by 30 million shares outstanding.
g. Nitelife will continue to grow, perhaps slowly.
h. Stargate will continue to be a questionable enterprise. I would prefer they get out of this business.
i. PS&L holds the most promise for rapid, profitable, leveraged growth, but that growth will depend on financing and exposure.
j. RedFish Island seems to be an established venture, and as long as ETPI continues to maintain the property and franchise as a premium restaurant, it should do fine. I would like to see other ventures like this, focusing on other seasons of the year in order to create predictable financial performance.
k. If I was an investment counselor, (WHICH I AM NOT, NOR DO I CLAIM TO BE), I would say that nearly all the risk in this stock has been taken out at this price level. In fact, it would appear to be selling at 1/2 book value. However, it will be very difficult for investors to get the profits that they are hoping for. It would appear that there are a small group of relatively active investors who virtually dominate the trading, This creates a self-defeating environment of price volatility. There is one group of investors that are averaged in at much higher prices, waiting to get out in order to break-even; there is another group averaged in at around this level, who are also waiting to get out in order to take profit. In short, whenever the price rises above .40, there will be a lot of profit-taking, which will drive the price back down. I do not see this stock above .50 until the profit taking has subsided, the performance of Redfish Island and the waterpark has been verified, quarterly earnings appear on the bottom line, and financing has been secured. Should these things happen, I think we may be looking at a .60 to .70 stock, perhaps much higher. |
