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Hancock Fabrics
“We do not believe that HFK board members will declare a dividend increase unless the yellow highlights (expenditures) go down and the red highlights (after dividends free cash flow) go up. In fact, there is the very real threat of a dividend reduction if the Christmas season does (did) not go well.” Wish List 2005
The Christmas season did not ‘go well’ for Hancock. Rather, on January 6 the company reported that December same-store sales dipped by 1.7% and that year-to-date same-store sales dropped by 3.9%. The decline in business at Hancock was not mirrored by competitor Jo-Ann Stores which reported a 4.2% increase in December same-store sales, and 2.9% in year-to-date same-store sales.
Declining sales are unequivocally negative news. And although we have no delusions – poor performance has raised the odds of a dividend reduction in the near term – we continue to carry corporate expectations over the long-term. Specifically, we expect Hancock to remain a competitive fabric company in a recession resistant industry. We also expect the company to produce after dividends free cash flow in 2005. In short, we still believe that Hancock is a quality dividend investment.
Intrado
“Our concern about software development costs (SDCs) is that they are not like machinery, land, or a desk. Rather, where a desk may be worth close to what it is trading at on the books, should Intrado ever be in need of asset sales our speculation is that these software assets would be completely worthless. For a company with $65 million in tangible equity, $15.54 million in potentially worthless assets is notable.” Wish List 2005
Intrado raised its fourth quarter earnings guidance yesterday from 0.15 - $0.20 per diluted share to $0.19 - $0.24 per diluted. The company also raised its free cash flow projections for 4Q04 to between $9.0 million and $11.0 million, up from previous guidance of $3.4 million to $5.2 million. Ordinarily such a dramatic increase in expectations would be good news. However, the company also announced that it would record 52-74 cents in asset impairment charges in 4Q04.
The optimist could argue that the impairment charges are non-cash (which they are). However, the realist is right to be concerned that the charges could decrease shareholders’ equity by more than $13 million. The early 2004 takeover of bmd – which is responsible for most of the write-down – has not turned out as the company planned.
Keeping the run-up in the company’s stock price and the upgraded earnings outlook in mind, the proverbial cat may have little wiggle room left before it is completely out of the bag. In other words, TRDO – our ‘top turnaround stock’ in 2005 – could soon be done turning around. Quite frankly, we are more inclined to hold or sell shares at current prices rather than buy.
In our opinion, two topics worth paying attention to in the company’s upcoming conference call are S123R (expensed stock options) and Section 404 of the Sarbanes-Oxley Act. Although Intrado’s business operations are improving and 2005 should be a strong year, the company does not expense stock options and management has previously expressed cost uncertainties surrounding the implementation of S404. Non-cash charges are about to dent equity, are non-business related issues about to spawn accounting/expensed earnings uncertainties?
Caldwell Partners International Inc.
For the first quarter of 2005 (ended Nov 2004), Caldwell reported that operating revenues rose by 28.7%, and operating income rose by 296.3%. Sequentially, operating revenues increased by an impressive 43.4%. However, thanks to investment losses and a higher tax rate, net income was only $0.092 million, compared with $0.551 million in 1Q04.
The threat the rising Canadian dollar poses on the Canadian economy is worth monitoring. All indications from the company are that business is strong, and is expected to remain strong in 2005 “if the economy continues its upward trend”.
Caldwell declared a first quarter dividend of 2 cents, following last quarter’s 8 cent (year-end) dividend. We expect Caldwell to remain an industry leader in Canadian executive placement. We remain comfortable owning Caldwell at current prices in the near term, but would not be against taking profits above or around $2.00/share.
BWilett@fallstreet.com
TAlway@fallstreet.com
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