Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: James Clarke who wrote (7251)	5/21/1999 1:01:00 AM
From: Michael Burry	1 Recommendation Read Replies (2) \| Respond to of 78476

Re: SVR, the net net calc isn't so easy. Very long post here. Some things to keep in mind - good bad and ugly. SVR is very interesting (as I say on the site) and has a lot of good characteristics, but DD is always necessary. I myself have not yet bought. I always wait a few days after a pick of the month is posted before buying, but I should clarify this time I still remain unconvinced that I want to buy it. In any case, I don't have the cash, and I'm not abouto sell anything else in the portfolio to buy it (yet). The company books as revenue the entire sales price of a VOI (avg $8,146 per) basically once it gets a 10% down payment. The remainder of the balance then goes into AR, which consists mainly of notes receivable from each customer with lengths from 7-10 years. As the company receives installment payments (which include principal + interest), the company books interest income. The company is getting just under 12% on its receivables in interest income. The company's interest expense is about 57% of its interest income, so it makes money on the spread. However, the company needs cash to fund development and marketing of VOIs and hence keep the sales coming. Last year the company borrowed 75 million at 10+%, the first time it did so. That helped goose sales last year to that 89% rise. Typically, the company also gets current cash out of its receivables by borrowing against the receivables at a fairly low rate of LIBOR + a few percent. Usually it borrows about 70% of receivables, but recently it increased that to 85%, which coincided with a fall in the interest rate charged. This also helped goose development, marketing, and sales last year and this past quarter. Re: allowances for uncollectable AR, the company has been steadily decreasing the amount that it is allowing as uncollectable, and is currently at about 10%. As far as I can tell, the company is decreasing this allowance based on experience of lower delinquent/default rates. The company is pushing the limit on how much more it can borrow to fund further development. As long as it can continue increasing AR then it can borrow more at 85% of the increase, but obviously this results in a necessary deceleration in sales growth. 85% is better than 70%, but it's not >100%. The company may also borrow a bit more senior debt. But that debt is more expensive, and would squeeze the (interest earned - cost of interest) spread. Currently, the company earns about $10 million/year run-rate on this spread. Now there's the inventories. The company's inventories are the VOI's it has either acquired, reacquired, or built but not yet sold. The inventories are on the books at the lower of cost or market price. The company did have a large amount of inventories acquired several years back at a low cost basis. It has depleted those, and is now selling out of inventory that it built at a higher cost. This is squeezing margins on VOI sales. Moreover, the company may have miscalculated a bit and is being forced into stepping up marketing efforts more than it planned in order to sell interests in certain slower markets. This further pressures margins on those sales, and is what spurred the CSFB analyst to downgrade the stock. So what happens when the company sells through its inventory and has maxed out its borrowing of 85% of ARs at some reasonable level? The company's sales will basically crash. You will be left with net interest income which is expiring over 10 years, and management fees, and a questionable real estate asset base. With SVR, I must admit I do not know about the quality of its real tangible assets. But where will this max out? Would the company pay back its market cap of about $90 mill before the business runs its course? Well, that's where one has to keep in mind that there are some significant liabilities here. That new senior debt facility of $75 million in addition to capital lease obligations, other notes payable, and a significant deferred tax liability all come to a grand total of over $180 million. Ok, that's a lot to think about. But before thinking this is a net net or applying some simple ratio, this is what has to be thought of. The chairman owns the majority of the shares. Silverleaf has a good concept (the drive-to econo class) with some good locations, and it does own portions of adjacent real estate at many of its locations. The stock is down horribly, as is the entire industry. This is a contrarian play, and a value play only if one convinces oneself that despite all the above, the company is worth significantly more than $90 mill and that the chairman will allow it to be unlocked if the appropriate better-capitalized suitor comes calling. A bigger company with better access to more and cheaper capital might find Silverleaf's franchise very attractive. So liquidation value, takeover value, going-concern value. This is what Security Analysis was written for. They all have to be looked at. I see the cheapest stock in a crushed industry with insider buying and what should be motivated management. Even if after due diligence once comes out bullish, probably not something to concentrate all one's assets in, IMO. Some on the Yahoo thread seem to be doing just that. I usually try to keep my Picks of the Month rather short and to the point to perk up interest/stimulate analysis, nothing more. The point has not been for me to put down my entire analysis and a recommendation. In the future, I will put down more analysis. And I will update the current Pick to include some of this post. Mike

To: James Clarke who wrote (7251)	5/21/1999 1:06:00 AM
From: Bob Rudd	Respond to of 78476

Jim: SVR Inventory appears to be variously considered as the resort buildings and the vacation intervals, which, of course, are the blocks of time SVR sells to customers. A room or suite might break up to 26 2-week vacation intervals. If they sell 10, they have 16 left in inventory. The balance sheet line item for land, buildings, and utilities would probably be the offices they work out of rather than inventory buildings. Very good point on the receivables...operating cashflow doesn't look nearly as good as net income. That might be partially why the market is giving it a low PE...quality of earnings concern. Nevertheless, with the CB having such a huge chunk of it, I'm still interested.