17 February 2006

A Batch of BNBNRBN Stocks

Tomorrow, I'm going to follow the progress of some potential BNBNRBN stocks. For now, I'm going to offer recaps of today's news, along with my musings on these stocks backed up by minutes and minutes of in-depth research.

And yes, my horrible acronym-of-sorts is back. I'm interested in a few stocks that the market eviscerated today, to see if any fell in price because of "Bad News But Not Really Bad News."

Here were today's losers, excerpted from MarketWatch.com's Movers and Shakers page:

Shares of Educate Inc. (EEEE :8.89, -3.01, -25.3% ) tumbled 25.3% after the Baltimore-based provider of education services posted a loss from continuing operations of $1.7 million, or 4 cents a share, down from a year-ago equivalent profit of $3.9 million, or 9 cents a share. The average estimate of analysts polled by Thomson First Call was for a profit of a nickel per share in the December period. Revenue totaled $76.6 million in the quarter, compared to Wall Street's consensus estimate of $77.4 million. "We were disappointed by our fourth quarter operating performance," said Chris Hoehn-Saric, the company's chairman and CEO. Looking ahead, the company said it expects its operating performance in the first half of 2006 to continue to be hurt by declines in enrollment in the fourth quarter, and the integration of acquired territory.

Espeed Inc. (ESPD : 8.37, -0.93, -10.0% ) shares fell 10% after the New York-based provider of electronic marketplace and trading technology posted an in-line adjusted profit of $900,000, or 2 cents a share, for the fourth quarter, but gave a disappointing forecast for fiscal 2006. The company said it sees an adjusted profit of 2 to 6 cents a share for the year on revenue of between $147 million and $150 million. The current average estimate of analysts polled by Thomson First Call is for earnings of 17 cents a share for 2006 on revenue of $165.4 million.

Expedia Inc. (EXPE :19.82, -4.43, -18.3% ) shares plummeted 18.3% after the company reported fourth-quarter earnings of $25.2 million, or 7 cents a share, down 43% from $44.1 million, or 13 cents a share, in the year-earlier period. Excluding certain items, earnings came in at 20 cents a share compared with 27 cents last year. Revenue at the Bellevue, Wash., travel-services company rose 13% to $494.7 million from $439 million. Analysts polled by Thomson First Call had forecast revenue of $505 million.

Shares of Navigant Consulting Inc. (NCI :19.83, -2.52, -11.3% ) dropped 11.3% after the Chicago-based consulting services provider said it's received an adverse order and an interim finding from an arbitrator related to its dispute with the City of Vernon, Calif. The order denies the company's right to recover unpaid fees and expenses previously billed to Vernon. For the fourth quarter, these fees and expenses totaled $1.4 million. The arbitrator also found that Vernon is entitled to recover certain amounts already paid to Navigant. In addition, the company reported fourth-quarter earnings of $11.6 million, or 22 cents a share, up slightly from a year-ago profit of $11.1 million, or 22 cents a share. The latest results include charges totaling $1.5 million, or 3 cents a share. Revenue rose 16% in the latest three months to $150.5 million from $129.3 million in the same period a year earlier. The average estimate of analysts polled by Thomson First Call was for a profit of 25 cents a share in the December period on revenue of $151.6 million.

Each of these stocks is highly rated by Morningstar, except for Navigant, which is not rated.

First off, Jonathan Schrader at Morningstar relayed the bad news at EEEE:

Educate reported fourth-quarter results Thursday that were much worse than we'd expected. The company actually posted a loss in the quarter, while consensus estimates were for a nickel per share. We've been somewhat concerned about weak demand for Sylvan's services brought about by declining consumer confidence, but it does not appear that this was an issue. Rather, the company blamed the shortfall on a declining conversion rate, meaning that a lower-than-usual percentage of the people that inquired about its tutoring services in the quarter actually enrolled. This declining conversion rate points to subpar execution by management, which is quite troubling from our perspective.

Educate admitted that it had done a poor job, suggesting that the significant number of acquisitions during 2006 distracted Sylvan's managers from their most important job: providing topnotch service to potential and current customers. In response, Educate moved its president and COO Peter Cohen back into his old post as president of Sylvan, while adding two new positions reporting directly to Cohen: vice president of company-owned centers and vice president of franchise services. Educate also replaced two of its five regional managers and hired a new director for its important contact center operation.

It appears that Educate has recognized its failure and has moved quickly to improve. Heads have rolled, but that doesn't mean that improvement will be immediate. Rather, we suspect that conversion and organic growth will gradually improve in the coming year. It should help that management has decided to turn off its acquisition machine until it rights the ship. No acquisitions, however, doesn't mean no growth. 2006 should still be a pretty good year thanks to acquisitions made in 2005, greenfield additions in Sylvan's territories--the firm has already added seven this year--and organic growth in Hooked on Phonics. We're forecasting 20% growth, at the low end of management's projection for 20%-25%.

Educate will have to spend some more money in order to make money, so we have increased our cost assumptions for 2006 and 2007. This reduced our near-term cash flow estimates--the most valuable in any discounted cash-flow model--and brought our fair value estimate down by a little more than 10%, to $15 per share. With the stock now trading near $9, we think it is an extremely compelling investment. The stock, however, is very volatile, and near-term results will likely be poor. If you don't like volatility in your investments, Educate is probably not the stock for you. But if you don't mind some volatility and have a two- to three-year window, Educate could be a good pick.

Morningstar missed this one. And the last paragraph definitely has some hedging of one's bets.

Cantor Fitzgerald's Espeed deals with bond market trading. All I really know about Cantor is that Lutnick pours a lot of cash into our alma mater. I knew Cantor as the name of Haverford's art gallery before I knew that it was a bond-trading powerhouse. Morningstar suggests that Espeed is run more for his and Cantor's interests, and not the other minority shareholders.

EXPE competes with Cendant's Orbitz, which is now part of the WershovenistPig Portfolio. And the competition between these two players and Travelocity is good for travelers, but does not seem to be a good deal for shareholders. And personally, I use SideStep.com for my flight, car, and hotel needs. But a compelling price is a compelling price.

Navigant provided litigation consulting services on an obscure bit of litigation I worked on for the past three years. From my perspective, if you want to talk about a growth industry, it's companies that help law firms deal with enormous document-intensive litigations. This price dip seems like a fine opportunity to me.

Such a slew of bad news for all of these stocks, and on an up day for the market, too. Out of these four, I am most interested in NCI and EXPE.

Do you agree?

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