04 November 2005

What a Pig Sty!

I noticed a stench over on the WershovenistPig Stock Watch List. Some of the stocks have really started to stink things up, with missed earnings targets and debt ratings cuts. It's time to see which stocks can be salvaged, like slicing off the moldy part of a cheese, versus those stocks which are completely rotten.

The stinkers are MRH, SNAK, CUB, and DWRI.

The news from MRH is particularly depressing. This morning on MarketWatch, Fitch cut MRH's financial strength rating to BBB from A-, and its debt rating to BB from BBB-. I believe that puts MRH's financial strength at Fitch's lowest investment grade, and its debt into junk status.

The size of the company's catastrophe losses -- at more than $1 billion -- suggest the risks it assumed were too concentrated for a reinsurer rated A-. The losses also undermine confidence in the underwriting abilities of the company and raise significant uncertainty about its performance in the face of future catastrophes, Fitch said.

This comes after Reuters reported that MRH lost almost $900M in the last quarter:

NEW YORK, Nov 2 (Reuters) - Montpelier Re Holdings Ltd. (MRH.N: Quote, Profile, Research)
said on Wednesday it posted a wider-than-expected quarterly loss of
$875.1 million, after suffering big losses from hurricanes.
Reinsurers, who provide extra coverage for regular carriers who
want to limit their risk, have lost of billions of dollars from
Hurricanes Katrina and Rita.
Montpelier Re estimates it paid out $972 million from
catastrophes in the third quarter, including $809 million from
Hurricane Katrina and $141 million from Rita.
For the third quarter the company had a loss of $12.16 a share,
compared with a loss of $78.2 million, or $1.26 a share in the same
quarter last year.
Operating losses before taxes were $891.4 million in the
quarter, or $12.39 a share, wider than the company's year ago
operating loss of $81.2 million, or $1.31 a share.
Analysts expected the company to post a loss of $8.40 a share,
according to Reuters Estimates.
The company's total shareholder equity fell to $1.1 billion in
the quarter ended Sept. 30 from $1.8 billion at the end of last

I learned of MRH through Cramer on Mad Money and Real Money. He touted it as an interesting small player with a nice dividend. At the time, the stock had taken a hit, going from trading in the mid-$30's to the mid-$20's. Now, the stock is trading around $18, giving it a dividend yield of almost 9%, that is, if the current dividend can be maintained, considering MRH's cash issues. To give Cramer some credit, he quickly turned bearish on the stock after it dropped only a couple of dollars.

The third-quarter losses were 50% higher than analysts expected. Ooof.

SNAK is tasting a bit rancid, too:

Poore Brothers Reports Third-Quarter Loss of $0.02 Per Share

GOODYEAR, Ariz., Oct 27, 2005 (BUSINESS WIRE) -- Poore Brothers, Inc. (SNAK ) today reported financial results for the third quarter (fourteen weeks) and nine months ended October 1, 2005.

Net revenues for the third quarter of fiscal 2005 were $18.5 million, 8% above last year's third quarter net revenues of $17.2 million. The net loss of $(0.4) million, or $(0.02) per share, this year compared to net income of $1.0 million, or $0.05 per basic and diluted share last year. The reduced profitability was the result of $2.5 million in trade spending programs initiated to aggressively drive revenue growth in T.G.I. Friday's(R), Boulder Canyon Natural Foods(TM) and Cinnabon(R) brands. The Company's third-quarter gross revenue shipments, before deductions for trade spending, grew 24% versus last year.

Mr. Thomas W. Freeze, President and Chief Executive Officer, commented, "We are encouraged by our shipment growth, but not satisfied with our financial performance this past quarter. We invested significantly in the Cinnabon(R) brand market test and in a big promotional event for the re-launch of the Boulder Canyon Natural Foods(TM) brand potato chips. We simultaneously experienced lower than expected results from our trade spending programs for the T.G.I. Friday's(R) brand across several channels. While the programs generated higher revenue, the additional volume was not sufficient to offset their costs. Despite recent financial performance, we remain excited about the future for all of our licensed brands. In addition, we separately have announced the signing of a nonbinding letter of intent to acquire the Mrs. Fields(R) brand licenses from Shadewell Grove to produce and sell ready-to-eat cookies, baking chips, brownies and toppings into many of the same distribution channels we presently sell."

In the third quarter T.G.I. Friday's(R) brand salted snacks net revenue grew 1% to $12.4 million as the previously mentioned higher trade spending programs in grocery, convenience store and mass merchandiser channels offset the 12% gross revenue growth, but did not generate sufficient volume to offset their costs. Overall, the T.G.I. Friday's(R) brand represented 67% of total net revenue in the third quarter. The Cinnabon(R) brand cookie market test continued in the third quarter and generated $1.3 million in gross revenue from a variety of new customers in the grocery and convenience store channels. The Company overestimated sell through consumption in connection with the large initial promotional order from a mass merchandiser which resulted in a charge of $0.7 million to mark-down and dispose of estimated excess inventory. The Company remains committed to the Cinnabon(R) brand's success and to developing and testing new products and promotional strategies. The Company's potato chip brands' net revenues grew 13% due to strong promotional activity, particularly on the Boulder Canyon Natural Foods(TM) brand. Distributed products net revenue also grew 73% over the prior year due to increased product lines.
Mr. Richard M. Finkbeiner, Senior Vice President and Chief Financial Officer, added, "As a result of our third quarter performance, we believe that we will be nearer the lower end of our previously provided guidance for the full year of $75-$85 million in net revenue, but we will not meet our earnings per share target of $0.18-$0.23 per share. We now feel that our earnings per share for the full year will be between $0.08-$0.10 per share."

Mr. Freeze concluded, "While we are disappointed about our short-term financial performance, we are optimistic that our broad array of growth initiatives, including (i) Cinnabon(R) cookies and other items, (ii) Boulder Canyon Natural Foods(TM) new products, such as organic tortilla chips, soy crisps, and soy tortilla chips, (iii) acquisitions, (iv) Panda Express(R) snack concepts, and (v) other licensing opportunities, provides a broad platform upon which to reach our long-term goal of building a $200 million profitable food company. Our innovation capability with brands and products, while not always successful in the marketplace, remains the cornerstone to our future success."

SNAK, a volatile small-cap stock, has been trading between $4.50 and $6.50 over the last few months. Apparently, Poore Brothers spent too much money getting people to try out their chips. Executives lowered earnings guidance by half. The stock has slumped to the $3.50 range.

MarketWatch recently reported Cubic's big big news:

U.S. Navy Chooses Cubic Team for Opportunity to Bid on Computer Simulations for Ship Systems

SAN DIEGO, Nov 01, 2005 (BUSINESS WIRE) -- Cubic Defense Applications, the defense segment of Cubic Corporation (CUB), has received a contract for the U.S. Navy's Generic Reconfigurable Training Systems (GRTS) Lot II program. The indefinite delivery, indefinite quantity (ID/IQ) contract has a ceiling value of $15 million, and covers computer simulations for training crews in how to operate the hull, mechanical and electrical systems of Navy ships.

Cubic's Orlando, Fla.-based Simulation Systems Division is among several contractors that will have an opportunity to bid on up to $15 million in ship systems simulator business over the next five years. The companies will compete for contracts to develop modeling and simulation software to train crews to operate a ship's basic systems, including diesel and turbine engines, propulsion systems, generator systems, and damage control and related systems. These simulation models will run in a standardized Navy electronic classroom environment and offer a "whole-ship" environment for simultaneous training on multiple duty stations.

Wow! CUB's touting in a press release an opportunity to bid, not the award of a contract. And it's a contract for up to $15M, meaning, anywhere from bupkus to the full $15M. Over the next five, count 'em, five years.

This is a stock I read about in the New York Times in an article on subway security. Cramer read the same article and talked up the stock on his show. Again, he covered his ass by warning viewers that he was not a fan of the company's performance. Looking at CUB's free cash flow numbers at Morningstar, they have declined from $34.1M in '00 to $4.5M in '02, to -$35.1M in '04. That and its sad example of a press release, and it's no wonder the stock is trading near its 52-week low, the only uptick coming from the "Cramer effect" of people buying the stock just as he mentions it on the show.

I'm not going to pick on DWRI much, since it's announcing its third-quarter results on the 10th. However, DWRI is trading at around $8 a share, near its 52-week low, and at around 60% off its peak. I'm not one for chart analysis, but this stock is on a straight downward decline. Free cash flow, from Morningstar, was -$6.0M in '03 and -$4.3M in '04. In the trailing twelve months, DWRI has crapped out a whopping -$12.6M in free cash flow. I think someone piddled on the stylish cashmere rug over at DWRI.

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