19 December 2005

Tim Hortons Spinoff

You may recall in a recent post on Joel Greenblatt's old book, "You Can Be A Stock Market Genius", that spinoff companies' returns beat the S&P 500 by a considerable margin. You also may remember that the parent companies beat the S&P as well.

At the time, I was excited to read news of McDonald's spinning off its winning Mexican chain, Chipotle. While that spin-off is in the works, investors are still pressuring MCD to sell off its corporate-owned stores and become more like a REIT.

A few days ago, I read on Fark that Wendy's investors have successfully pressured my favorite fast-food establishment to spin off its own fast-growing chain, Tim Hortons.

Tim Hortons coffee chain in $600M IPO
Wendy's filing follows lobbying from hedge fund Pershing; burger chain retreats from '05 forecast.
December 2, 2005: 8:02 AM EST

NEW YORK (Reuters) - Wendy's International Inc. filed for a $600 million initial public offering of its Tim Hortons coffee shop chain Thursday and said it could not back its 2005 earnings forecast due to several one-time items, including a fourth-quarter charge for store closings.

Wendy's (Research), the No. 3 U.S. burger chain behind McDonald's Corp. (Research) and Burger King Corp., said it will take $79 million to $95 million in charges for closing some Wendy's, Baja Fresh and Tim Hortons restaurants as well as asset impairment.

The company is closing 40 to 45 Wendy's restaurants, five Tim Hortons and four Baja Fresh outlets.

A currency hedge is also expected to affect the company's fourth-quarter tax rate, and Wendy's said it was therefore unable to affirm its earnings outlook for the year.

Wendy's will record gains of $60 million to $70 million for selling about 200 of its hamburger restaurants to franchisees and third parties.

The company said in October it was expecting earnings of $2.12 to $2.15 per share.

Dublin, Ohio-based Wendy's has been struggling to reverse sluggish sales at its namesake restaurants for more than a year. In July, the company said it would spin off fast-growing Tim Hortons so it could focus on the battle of its flagship brand against a revitalized McDonald's.

The IPO move followed months of public lobbying by activist hedge fund Pershing Square Capital Management, which owns a stake in Wendy's exceeding 10 percent of its shares.

Bill Ackman, Pershing's principal, told Reuters he believed the Tim Hortons spinoff would do well.

"We're very impressed with the reported numbers for the business, we think it's a great company and we think there's going to be a glowing reception," he said at a seminar run by The Daily Deal newspaper in New York on Thursday.

He added that the Wendy's developments would be a boost to his campaign to have McDonald's spin off 65 percent of its company-owned restaurants in an IPO.

"This is a company that is not capitalized correctly," Ackman said, adding that McDonald's makes the lion's share of its money through real estate and franchising fees, not through food sales.

The expected price range and the number of shares to be offered in the Tim Hortons IPO have not been set. The offering will be underwritten by Goldman, Sachs & Co. and RBC Capital Markets, according to the filing with the Securities and Exchange Commission.

Tim Hortons intends to apply for New York and Toronto Stock Exchange listings under the symbol THI.

Tim Hortons is ubiquitous in Canada. The chain was founded by its namesake, the late Toronto Maple Leaf pictured to the left. Of the 2842 locations, 2564 are north of the border, with almost 1400 locations in Ontario alone. New Brunswick, a much smaller province, has 122 locations. Putting those numbers in perspective, there are 11.4M residents of Ontario and 730K residents of New Brunswick. So there is approximately one Tim Hortons in Ontario for every 8150 people. In New Brunswick, one location for every 6000 people.

There are almost twice as many Tim Hortons locations in Canada as there are McDonald's.

Growth in Canada? Hmm. I'm not lovin' it.

But how about right here in the United States? Out of the currrent 278 locations, 30 are in Rhode Island, while New York has 71 (though none in NYC) and 73 in Michigan. My calculations show that each Tim Hortons in RI serves 35K people, while in Michigan, it's one Tim Hortons per 135K people. New York, one for every 268K people. Now there is the opportunity for expansion.

Hints of the expansion plans are right there on the franchise section of the Tim Horton's website:

As of July 2005, there are over 260 Tim Hortons locations in the United States. These are situated in Michigan, Ohio, New York, West Virginia, Kentucky, Maine, Rhode Island, Connecticut, Massachusetts and Pennsylvania. Future expansion and opportunities will continue in these markets for the next several years.


Certain states regulate the offer and sale of franchises. We have not applied for registration (or exemption from registration) under the laws of Hawaii, Maryland, Nebraska, North Dakota, South Dakota, and Utah. If you are a resident of one of these states, we will not offer a franchise to you at this time.

We're looking at possible expansion in New England, parts of the Rust Belt, and into the South, while ignoring for now a bunch of thinly-populated states (save for Maryland).

I'm getting excited about maple-frosted donuts and coffee. And I may not have to wait 'til my next trip to Montreal to get some sweet satisfaction.

So should I wait for the THI offering, or buy into WEN right now? Or perhaps do both? Or should I continue to wait for the McDonald's spin-off of Chipotle?

Here are some quick comparison numbers from SmartMoney and Morningstar between WEN and MCD:

Net Profit: 1.40% vs. 11.80%
PEG: 2.10 vs. 2.04
Price/Sales: 1.70 vs. 2.20
Price/Cash Flow: 22.20 vs. 11.60
ROE: 2.90 vs. 16.60
ROA: 1.60 vs. 8.70
Morningstar Growth: B vs. B
Morningstar Profitability: B vs. B+
Morningstar Financial Health: A vs. A

WEN is near its 52-week high. The stock has done really well this year, even with its lagging fundamentals. I appreciate the hedge fund pressure to extract shareholder value. I cannot make a fundamental case for buying WEN. However, this activist-investor pressure, plus Greenblatt's point that parent companies beat market returns, is keeping me interested in WEN. I will keep abreast of the THI IPO as well.

I am also still very much interested in the McDonald's/Chipotle story. There could be some fast returns in fast food.

12 December 2005

Outsized Gains from a Value Investing Perspective - John Dorfman's Small Stocks

John Dorfman is a Bloomberg.com columnist with a value-investing perspective. He recently wrote a column on small stocks that fit his investing criteria. He says he likes small stocks because he has a better shot of finding a bargain amongs issues that are under the market cap necessary to get on Wall Street's radar.

A year earlier, he made seven picks that returned an average of 21 percent. Caught my attention right there. Dorfman backed up this claim with his list and results:

Here's the scorecard on last year's picks:

Gymboree Corp. (GYMB) was up 75 percent.

Perini Corp. (PCR) rose 57 percent.

Escala Group Inc. (ESCL), formerly Greg Manning Auctions Inc. (GMAI),
returned 50 percent.

United Fire & Casualty Co. (UFCS) gained 37 percent.

Metal Management Inc. (MTLM) inched up 5 percent.

America Service Group Inc. (ASGRE) dropped 24 percent.

Cal-Maine Foods Inc. (CALM) was the big loser, down 55 percent.

Quite a bit of volatility on that list. Six out of seven positions hit big or missed big.

This year's list are another seven companies with market caps below $1 billion. Here's Dorfman's picks with analysis. I will follow with my thoughts on his choices, plus some small-to-medium-sized alternatives.

We'll start with Deckers Outdoor Corp. (DECK) of Goleta, California.
The company designs and markets footwear, such as Teva sandals and Ugg

Deckers stock has fallen 48 percent this year. My firm sold the stock
short in late 2004 at about $46, betting that it would go down. We
covered our position in April at about $26.

Attractively Cheap

Now that Deckers is down to less than $25, I find it attractive. That
price works out to 11 times earnings, 1.9 times book value (assets
minus liabilities per share) and 1.2 times revenue.

Deckers has debt equal to only 8 percent of stockholders' equity, and
it earned a stellar return of 24 percent on equity last year.

Safety Insurance Group Inc. (SAFT) sells auto insurance and other
property-and-casualty insurance in Massachusetts. The Boston-based
company's stock has risen 37 percent this year, yet still appears
attractively cheap at eight times earnings and one times revenue.

Safety had a combined ratio (claims plus expenses, divided by premiums
collected) of 91 percent last year, which is considered very good in
the insurance industry.

Steel Bargain

Next up is Novamerican Steel Inc. (TONS), based in Dorval, Quebec. It
produces steel tubing and flat-rolled steel.

Like many U.S. steel stocks, Novamerican is cheap -- it sells for 8
times earnings, 1.5 times book value and 0.5 times revenue. Unlike
many U.S. steel stocks, Novamerican has a strong balance sheet, with
debt only about 19 percent of equity.

After posting big gains in 2003-2004, Novamerican stock is down 31
percent this year. I own call options on these shares for some of my
more venturesome clients.

Fourth, I recommend Gold Kist Inc. (GKIS), a chicken producer based in
Atlanta. Like other chicken stocks, it suffers from Avian flu fears.
The stock was down 12 percent in October and 7.4 percent in November.

Gold Kist has turned a profit in three of the past four years, and
seems cheap to me at six times earnings, 1.8 times book value and 0.3
times revenue.

Fifth, I suggest KHD Humboldt Wedag International Ltd. (KHDH) of Hong
Kong. Until Nov. 1, the company was known as MFC Bancorp Ltd., and was
based in Austria. I have recommended it from time to time and
currently own it for one client.

Metal, Telecom and Eggs

Previously a merchant bank, KHD now owns an aluminum rolling mill in
Germany, operates a cobalt refinery in Uganda, and has a metal-trading
operation, MFC Commodities GmbH. The stock sells for 10 times
earnings, 1.2 times book value and 0.4 times revenue.

Premier Global Services Inc. (PGI), out of Atlanta, provides
conference-call and other telecommunications services to companies.
The stock has fallen 26 percent this year, which looks to me like an
overreaction to a minor earnings shortfall in the third quarter.

Finally, I would like to try again with Cal-Maine Foods, the big loser
from last year's list. The Jackson, Mississippi, company owns about 22
million hens and produces about 13 percent of the eggs sold in the

Profitability has been spotty, with losses in four of the past 11
years. The shares peaked near $22 in December 2003, when the Atkins
diet was riding high. They have fallen all the way to $6.31.

Now that the shares have cracked, they sell for only six times
earnings, 1.3 times book value and 0.4 times revenue -- the sorts of
ultra-cheap multiples I like.

Dorfman's first pick, DECK, seems like the worst pick. As I've blogged before, I am willfully fashion-ignorant. So when I've heard of Ugg boots, and know that they're passe, they could be as far gone as flannel shirts. Or acid-washed jeans. Maybe even as outmoded as parachute pants. I know so little of fashion that I can't even come up with good examples of stuff out-of-fashion. And I don't trust Dorfman to know this.

However, there have been a couple of recent articles at fool.com looking into DECK's woes. Salim Haji tried to put a value on DECK, taking into account the passing fads of Uggs and DECK stock:

What is Deckers worth?
To answer my questions, I thought about Deckers' intrinsic value. The
company has three primary brands -- Ugg, Teva, and Simple. According
to its most recent press release, the company expects net sales for
2005 to be about $154 million for Ugg, $85 million for Teva, and $8
million for Simple. In my mind, the only brand that has any real,
sustainable long-term value is the Teva brand. I see Ugg as a passing
fad with minimal staying power. With less than $10 million in sales
and no growth, Simple is too small to matter. That leaves the real
value of the company in Teva, which outdoor enthusiasts recognize as a
premier brand.

According to the company's 2004 10-K, Teva generates about $25 million
in cash flow on $88 million of sales, which are essentially flat. This
is a stable, healthy business that spins off significant cash. Roughly
speaking, we can value that brand at eight times cash flow (a typical
multiple for this kind of business), or about $200 million. To me,
this is what the brand would be worth to a competitor like Timberland
(NYSE: TBL) or Reebok (NYSE: RBK), companies that could simply roll
the business into their existing infrastructure. That figure would
also be close to what the brand would be worth to a private equity
firm, which could run Teva as a standalone business with minimal
corporate overhead.

Ugg is the key
To unlock this value, the strategy would be to milk the Ugg brand. In
2004, Ugg generated about $32 million in cash flow on just more than
$115 million in sales. Going forward, I would very conservatively
expect the brand to be able to generate at least that much as sales
drop off over a couple of years.

According to its 10-K, Deckers today spends about $20 million in
corporate overhead, and it is not allocated to any product line. This
amount is probably for executive salaries, corporate accountants,
corporate advertising and promotion, and a host of other costs to
support the three product lines. Most, if not all, of these
expenditures would not be required if a competitor or a private equity
firm bought Deckers and ran it as the Teva brand. However, shutting
down these corporate offices would require a one-time cash outlay for
restructuring costs.

When would Deckers become attractive?
So at what point does Deckers become attractive as a takeover
candidate for the Teva assets? If we make the simple and conservative
assumption that the cash generated from Ugg would be adequate to cover
required restructuring costs, and we ignore Simple because it is too
small to matter, the value of the company is about $200 million. If I
were doing the deal, I would want a solid margin of safety -- I would
start to become interested at $150 million, and my interest would grow
from there as the price fell. With about 12.5 million shares
outstanding and essentially no debt on the balance sheet, Deckers has
an equity value of about $12 a share, given the $150 million figure.
At anything below $10 per share, this company becomes a prime takeover

Though the stock appears to have temporarily stabilized at around $18
per share, I'm watching this one closely. Three years ago, the stock
was trading below $5 per share. If it gets back down anywhere close to
that level, I may again take a position in Deckers. Mr. Market's
behavior opens up opportunities on both the long and short sides of a
stock. I've been successful with Deckers on the short side, and I'm
hoping an opportunity will soon arise on the long side.

DECK has risen quickly to near $30 a share since this piece appeared on November 18, 2005. That makes me sceptical of a buying opportunity here.

DECK also doesn't seem to gel with Dorfman's small-stock thesis. He says he is looking for stocks followed by fewer investors, but DECK is followed by plenty of analysts, sites like fool.com, and trades at significant volume on the NASDAQ.

Fashion is fickle by its nature. I think DECK's fundamental numbers reflect their pas success with Ugg.

SAFT seems an excellent small stock choice. According to its Morningstar Report, SAFT scores an A- for growth and an A for profitability. It's PEG is an enticing 0.5. SmartMoney says its net profit of 12.2% beats the competition, while its price/cash flow is a low 6.9, and its ROE an attractive 24.6%. Among competitors, only Mercury General (MCY) garnered higher Morningstar grades. MCY, with a market cap of $3.2B, would have been screened out under Dorfman's criteria. Either seem worth a further look.

TONS is definitely an under-the-radar pick that doesn't even warrant a mention in this series of recent fool.com articles on steel picks. The pieces focus on huge players, like Korea's largest manufacturer, POSCO (PKX) and the Netherlands' Mittal (MT). One smaller player they do like is Steel Dynamics (STLD). Morningstar likes it too, giving it a growth grade of A+, profitability grade of A, and financial health grade of B. Favorable numbers against the competition include a PEG of 0.64, price/cash flow of 4.5, 5-year earnings growth of 59.33%, and net profit of 10.3%. Again, STLD's market cap of $1.5B kept it just off of Dorfman's radar. All of these SmartMoney numbers surpass the available figures for TONS.

GKIS and CALM are two picks that fly in the face of avian flu fears. We've got both the chicken in GKIS, and the egg in CALM.

Lined up against its competition, GKIS makes top marks for net profit margin (4.80%), forward P/E (6.5), PEG (0.77), and ROE/ROA (32.10%/13.40%). So what's the problem here? GKIS laid an earnings egg last quarter:

GoldKist Gets the Kiss-Off

By Stephen D. Simpson, CFA
November 18, 2005

Having heard from the likes of Tyson Foods (NYSE: TSN) and Pilgrim's
Pride (NYSE: PPC), I think most investors already know the score in
the poultry world. Feed prices (a key cost input) are down, but
poultry pricing has fallen off as well. The latest pullet producer to
report, GoldKist (Nasdaq: GKIS), seems to have suffered a real clunker
of a quarter.

Sales were down 10% as reported, and even adjusting for the extra week
in the year-ago quarter renders a negative 3% result for this quarter.
While the company did manage to ship more pounds of poultry, the drop
in realized prices more than overwhelmed that. As you might suspect,
operating leverage cuts both ways, and profitability dropped along
with revenue. Operating margin worsened by a bit, and net income
dropped more than one-fourth from the year-ago level.

GoldKist management didn't seem to have a whole lot of new things to
say. Feed prices were lower, but forward contracts kept them from
realizing the full benefit. Poultry export demand is still very
strong, but more sluggish demand in the food-service chain hurt
domestic results. Remember, GoldKist has a good-sized private label
operation, selling to companies like Wal-Mart (NYSE: WMT), Albertsons
(NYSE: ABS), Wendy's (NYSE: WEN), and SYSCO (NYSE: SYY). If there's
really weakness in the demand channel, GoldKist definitely feels it.

What I don't understand is the apparent magnitude of the earnings miss
this quarter. According to what I see online and in print, the average
estimate for the quarter was $0.77, whereas the company reported
$0.49. Perhaps I'm missing something somewhere (like analysts using an
operating number instead of a net number), but boy, does that look
like an unusually large miss for this sort of business.

At the bottom line, this is another company with very little control
over its costs (feed and energy, for instance) or final pricing.
That's a tough foundation from which to build a sustainable
competitive advantage and long-term shareholder value. While the stock
looks pretty darn cheap on a P/E basis, I'd make certain that "E" part
won't get pecked away before putting any of my nest egg into this

CALM may have bottomed out. Dorfman picked it again after suffering a 55% drop, reflected in the F grade for growth by Morningstar. But the other grades aren't so bad; CALM gets a B- for profitability and an A for financial health. I think a contrarian play, against the bird-flu scare could be a profitable long-term play. And Dorfman seems genuinely excited about CALM's bargain-basement price. Can the price really get any worse...



We're left with KHDH and PGI.

KHDH has some SmartMoney numbers that make it stand out clearly from its competition: 5-year sales growth (51.00%), price/sales (0.30), price/cash flow (6.40), ROE/ROA (18.00%/7.80%). Seems very solid on this very cursory review.

PGI has some decent numbers among some less savory ones: price/sales (1.10), price/cash flow (6.50), ROE/ROA (19.10%/11.10%). Morningstar grades PGI a B for growth, a D for profitability, and a B- for financial health. Dorfman is not saying this is a wonderfully run company. In spite of missing earnings forecasts, PGI has grown sales and earnings very nicely since 2001, as well as upped its free cash flow from $18M in 2002 to $41M in 2003, from $58M in 2004 to $72M in the trailing twelve months.

Let's wrap up this never-ending post. I appreciate John Dorfman's picks, but I would make some changes, even going so far as to expand the criteria beyond the $1B limit. I'm going to keep tabs on a modified Dorfman small stock list that leaves off DECK, TONS, and GKIS.

The final list, with current price as I type this: SAFT ($43.70), MCY ($58.85), STLD ($34.94), KHDH ($21.75), PGI ($8.21), CALM ($6.80).

06 December 2005

What Was I Thinking?

Checking out another stock blog, uglychart.com, I did the unthinkable. I clicked on a Google ad, one that leered at me, offering a free newsletter of top 2006 stock picks. Curiousity got the best of me, so I used my spammy hotmail account to obtain a pdf file from NewsletterAdvisors.com.

I received a professionally-produced-seeming document featuring stock picks from a variety of subscriber-dependent stock newsletters. I had heard of the Gardners from Motley Fool, but the others were new to me.

The first pick, courtesy of Louis Navellier and his Blue Chip Growth Letter, is on the Pig Stock Watch List--Suncor Energy (SU).

Here is the second half of the report just for you, so you don't have to suffer the indignity of finding the report yourself:

Fundamentally, Suncor is probably the strongest oil company on my
current Buy List. It has incredibly healthy operating margins, and is
ready to handle the long-term energy boom.

It’s one of the largest producers of oil and natural gas in North

The company recovers bitumen—a very heavy oil—from the oil
sands and refines it into useable products.

Suncor is a fully integrated energy company with a long, successful
history in the oil and natural gas businesses. In the second quarter of
this year, net earnings were $112 million, and cash flow from operations
was $305 million. The company has increased shareholders’
wealth 16-times over in the last ten years.

During the quarter, Suncor made significant progress in rebuilding
portions of the oil sands plant damaged by a January fire, and they
expect to return to full production capacity in the third quarter. Major
repairs are complete, and the remainder of the reconstruction
effort is now focused on replacing piping and
electrical systems to support operations.

Planned maintenance, which had been originally scheduled
for September, was brought ahead and was near completion
at the time of its last earnings announcement. Once that is
done, Suncor expects to commission new expansion projects at the oil
sands plant and increase production capacity by the end of the year.
Tar sands companies like Canadian Natural Resources and Suncor are
sensitive to oil prices. However, the oil they get out of the tar sands is
sweet. They use natural gas to generate a lot of steam to get the oil
out of the tar sands, extra-expensive sweet crude that’s in high
demand. These tar sands companies will be doing very well for a long
time. Yes, the cost of natural gas has gone up, but the margins
to extract the crude are still very fat.

We’ve already made a lot of money with Suncor (up 139%) and I
expect to make a lot more. We're still in the early stages of this oilsands
boom. The company will boost daily capacity to a half-million
barrels by adding their third plant. And overall, they expect to boost
output 50% by 2008. Buy it under $66.

SU is a pure play on the Alberta oil sands, and yet I've been hesitant after looking at some fundamental numbers. Comparing SU with other independent oil and gas companies at SmartMoney.com, SU has a lagging net profit margin, a price/cash flow ratio two to four times higher, and a forward P/E of 40. Take the forward P/E; two companies involved in the Canadian oil sands, Imperial Oil (IMO) and Murphy Oil (MUR) have forward P/E ratios of 16 and 13.

I wonder if oil sands optimism is already priced into SU? Or do the past numbers fail to reflect the huge potential for SU in Alberta as the biggest individual player? Is the best investment Suncor's growth, or in a more conservatively priced IMO?

If SU is using so much natural gas, is Canadian natural gas company Encana (ECA) worth a look?

Navellier mentions (not in the above excerpt) Chinese demand, and throws out a Goldman threat of $105 oil before begging off. But these arguments favor investing in oil stocks in general, not specifically in SU.

Navellier says: "Fundamentally, Suncor is probably the strongest oil company on my current Buy List." The lawyer in me is suspicious. Parsing this sentence, "probably the strongest" is flimsy support. The reader gets no further information as to the other oil stocks on Navellier's buy list. And where are the numbers, the evidence of Suncor's strong fundamentals? He cites net earnings and cash flow in a vacuum, without context. Remaining numbers mentioned in the piece: SU's return to shareholders over the last ten years (16-times!), and Navellier's personal gains (139%!).

Fine, I'm analyzing an internet sales pitch for a fee-based newsletter. The Wizard of Oz springs to mind, where there's just an old man behind the curtain using a booming microphone and flashy lights to fool me into thinking he has the answers.

I'm not convinced. I still don't know which oil play to make.

SU - Pro: Pure oil sands play plus growth potential. Con: Growth priced into its outsized P/E.
IMO - Pro: Tremendous free cash flow and oil sands exposure. Con: High PEG.

Or maybe an indie oil and gas producer like XTO or Apache (APA) - Pro: PEG below 1.0, net profit margins and ROE significantly higher than SU and IMO. Con: No oil sands exposure.

Navellier's Blue Chip Growth Letter and its ilk, as well as top stock lists, can be informative, and spur ideas. Lately they've provided some nice blog fodder. But at least for me, this stuff raises more questions than provides investible answers.

02 December 2005

Is it time to gamble on WPTE?

Is it time to gamble on WPTE...and hedge that move with HET? Or should I forget poker tours entirely and invest in a true value and cash play, IGT?

Is WPTE priced as a value play? It's certainly near its nadir for several reasons that fool.com's Jeff Hwang discusses below:

WPT: Worth more than zero?
I tend to think of myself as being mostly indifferent with regard to WPT Enterprises (Nasdaq: WPTE), the company behind the World Poker Tour television show. But the stock has been in a freefall since Doyle Brunson's supposed takeover bid pushed the stock up to a high at $29.50 this past summer. And watching the stock hit a new low yesterday at $6.15, I just can't help but think that the stock has got to be worth more than zero.

It's Harrah's World Series of Poker vs. the World Poker Tour all the way around. But WPT is hardly alone in this battle -- its business partners have a stake in its success, as well. Really, it's Harrah's vs. everybody else on the casino front, including rival MGM Mirage, which hosts several WPT events at Borgata, The Mirage, and Bellagio. And on the slot machine front, it's International Game Technology's (NYSE: IGT) WPT slots vs. WMS' upcoming series of WSOP slot machines. On the video game poker front, it's Take-Two's WPT vs. Activision's WSOP-branded game.

In addition, WPT Online -- the company's new online gaming site and the key to the stock's upside -- now has IGT as a business partner, with the latter company's recent acquisition of WPT Online partner Wager Works.

And don't let WPT's past couple of quarterly earnings (or lack thereof) fool you: There's a legitimately profitable business here.

Last week, the company posted a wider-than-expected third-quarter loss of $1.6 million, or $0.08 per share, vs. the analyst expectation for a loss of $0.05 per share. The company also forecast light on fourth-quarter revenues, as its guidance of $4.5 million to $5 million in revenues was well short of the $8.5 million analyst estimate at the time.

WPT has taken a shot in the foot in a dispute over its Professional Poker Tour series with the Travel Channel (see WPT's PPT Saga ), which airs the WPT show. As we discussed back in September, WPT had already shot its first season of the PPT and recorded expenses for the episodes, but negotiations for the series broke down between the two parties. And apparently, WPT had a three-year deal in place with Disney's ESPN for the PPT. At that point, the Travel Channel stepped in and interfered with the deal by threatening a lawsuit. WPT countered by filing suit itself against the Travel Channel back in September.

But as a result, WPT now doesn't expect to derive domestic license revenues from the PPT in the fourth quarter. Instead, the PPT will air internationally and be used as advertising for WPT Online. Still, product licensing revenues were up 481% to $930,000 in the quarter. WPT Online generated $175,000 in revenues its debut quarter, and with marketing spending picking up, is expected to do $225,000 to $275,000 in revenues in the current fourth quarter.

And despite its shortcomings, analysts still expect the company to earn $0.39 per share next year.

While WPTE is an incredibly risky investment, I think the following problems are already priced into the stock:

Amateurish WPTE business moves driving the Professional Poker Tour from the TV to the courtroom.

The Doyle Brunson-rumored takeover fiasco over the summer that pushed the stock from $20 to $30, and back down to $20 and lower over the course of a few days.

The lull between WPT television seasons is in full swing as reruns of last season are rerun again. I have to get my tv poker fix by catching the competition, like the highlight-driven WSOP events on ESPN, or watching C-listers playing D-list quality poker on Bravo's Celebrity Poker Showdown. And then there's the poker programming on FSN, so commercial-heavy that it's unwatchable without using an ad-skipping DVR or TiVo.

A not-so-brief aside: As a viewer of the World Poker Tour, I've noticed that Travel Channel has been re-running old episodes for quite a while. Where are the new episodes? Upcoming season 4 has 16 tournaments, which means 16 episodes, 16 weeks of fresh poker. That leaves 36 weeks a year of replays as well as forcing me to suffer through some of the crap offerings on the Travel Channel. Food Network couldn't handle the piss and vinegar of Kitchen Confidential author Anthony Bourdain. Travel Channel runs his show, yet it has the Rachael Ray-patina of cheeze dripping all over, with Bourdain stretching to fill an hour program with his increasingly hammy schtick. Mark DeCarlo (I think he hosted Studs from way back in my high school days) has a crap-o-rama called Taste of America. In a Nashville segment, he mocked the Loveless Cafe owner with the tired old gag about Southerners having two first names. His host abruptly disappeared, dumping DeCarlo onto his African-American biscuit maker. Bad enough that DeCarlo sheepishly pointed out to the viewer that he was rude to his host. Things degraded further when he started talking biscuits. Sure enough, he started to ease the lilt of his voice to approximate a southern black patois.

Okay, so this train wreck was entertaining, if unintentionally so. The Travel Channel needs both WPT and PPT programming. The PPT whould fill in some of those 36 weeks of reruns, while providing higher-rated, and higher-quality entertainment than what is currently on offer.

Other issues I have with WPTE may not be priced in at $7+:

- WPT is facing fierce competition in the online poker area. WPT advertisers like FullTiltPoker.net, PokerStars, and PartyPoker are the players. WPT does not have much of an online presence in the States, and operates its internet gambling business in the UK, where it's legal. This may be a good thing, as I think various state AG's may start cracking down on internet gambling at off-shore poker sites.

- WPT established itself as the premier league/circuit for poker, likening it to a sports league like the NBA. But now it looks more like the ABA, or the NHL, after Harrah's bought the World Series of Poker. HET expanded the brand beyond a few tourneys at Binyon's Horseshoe. The WSOP now includes satellite and feeder tournaments. As everyone knows, it's aired (constantly) on ESPN, far from the digital cable ghetto where Travel Channel lies. Hwang has a point that it behooves HET's competitors to support the WPT, but do I want to invest in the dominant player, or an also-ran?

Is the poker business maturing to the point where there could be some consolidation? Could a stronger player, say one of the websites that advertises on WPT, decide to buy out the WPTE stock, not at the crazy Brunson premium, but at a premium to the current trading price? I don't want to buy a stock hoping for a takeover. Talk about a longshot gamble.

What about a safer bet? Pat Dorsey's short piece with the elegantly alliterative title, 5-Star Stocks that Spit Out Cash, cut through the stock picking bullshit in asking two questions: "Is it a decent business, and is it reasonably priced?" Among his picks, WershovenistPig Stock Watch List resident, IGT:

International Game Technology IGT
Cash Return: 6.2%
Price/Cash Flow Ratio: 12
Economic Moat: Wide
Business Risk: Average

From the Analyst Report: "We continue to believe that IGT has excellent long-term prospects. Investors willing to look beyond the near-term sluggishness will, in our view, find that the market's shortsightedness has created a compelling buying opportunity."