BlastInvest
Blast Investor Real-time Plus           by Henry Lu

NRG ADGO Earning Result

03/31/2005

BIRTP beats SP500 7% 2005 YTD

The market has been pretty tough recently in the middle of Fed interest rate hikes. Still, BIRTP model portfolio is up 4.17% YTD, beating SP&500 by 6.8% so far in 2005.

NRG reported excellent 2004 Q4 earning

NRG energy (NRG) yesterday reported excellent 2004 Q4 earning result, beating its own estimate by large margin. I want to congratulate the excellent job that NRG management team has done since the 2003 bankruptcy re-organization.

Without repeating NRG earning report, I want to highlight several important issues in the latest earning report.

NRG is much stronger and more profitable than before

NRG was out of bankruptcy filing just more than one year ago due to bust of electricity sector and heavy debt problems. Compared to 1 year ago, NRG has much lower debt burden and larger cash size in the balance. Currently, NRG has nearly $12 per share cash!

By excluding 60 million market to market hedging gain, (which should be counted in 2005), NRG made about $9.2 per share pro forma  EBITDA and $4.7 per share pro forma free cash flow. NRG is trading only at 5.8x EV/EBITDA of its 2004 pro forma EBITDA, or 7.3x of its pro forma price to free cash flow ratio. That is very under-priced valuation.

Excellent 2005 earning estimate, worth $40 per share

This earning report also released 2005 earning estimate. By comparing its released 2005 EBITDA estimate number, we would need to add back 60 million hedging gain from 2004 to 2005. The hedging gain was included in 2004, but in reality, it should be counted as 2005 earning because the electricity sale will be realized in the 2005 1st quarter. Here is quick math:

NRG: stock price: $34.15
2005 EBITDA estimate (include 60 million): 620 million.
Market Cap: 3.42 billion
Debt: 3.26 billion
Cash: 1.2 billion
Enterprise Value(EV) = Market Cap + Debt - Cash =  5.48 Billion
EV/EBITDA ratio =  5.48 Billion / 0.62 Billion =  8.84

That is clearly under-priced. At 10x EV/EBITDA ratio, NRG is worth $41 dollar per share. NRG is expected to make around $2.7 per share pro forma free cash flow. Adding back its current 12 per share cash, NRG is worth $39 per share based on valuation model of 10x free cash flow plus cash.

I believe 2005 earning estimate is very conservative number. The 2005 estimate earning number is expected to be lower than 2004's number because of contract expiration and shut down of one California facility at NRG 50% joint venture West Coast Power (WCP). However, WCP earning contribution is expected to recover in 2006 due to California's higher energy demand and relative shortage of power facilities in southern California.

Furthermore, the 2005 estimate does not include the potential cost-cutting savings and potential gain in electricity and energy hedging. NRG earning is mostly a spread between coal transportation price and the electricity price. With coal railroad contract in effective for next 5 -10 years, any upside of electricity price will add hugely to NRG's earnings. Electricity price largely go up or down together with natural gas price, and I expect electricity rate to be very strong in the year ahead.

Conclusion on NRG

Based on its latest earning, my current minimum target for NRG is $40 per share in near term and roughly around $50 in long term. I would keep its "very favorable" Hot List risk/reward rating unchanged.

ADGO reported excellent 2004 earning result


Adams golf (ADGO) reported excellent earning result in its 10K annual filing recently. Because ADGO business is seasonal, any quarter over quarter comparison is meaningless and year over year comparison is more appropriate.

ADGO earning per share is up 50% year over year. Its cash position is up 6 million or 60% year over year.  A unique situation is that although ADGO only reported 3 million a year net earning, its free cash flow in 2004 was actually double that amount, or 6 million in 2004.  Another way to look at its economics is its book value increase. Comparing 2004 book value to 2003 book value, ADGO had increase of 4 million book instead of its earning 3 million a year.

ADGO is under-priced

Aldila (ALDA) is manufacturer of golf shafts. Callaway Golf is largest competitor of Adams Golf. Below table is latest valuation comparison among 3 stocks:

Current ADGO stock price: $1.45

ELY
ADGO ALDA
Mkt cap   977M 32.74 M 86.6M
PE negative
10.8
13.74
Enterprise Value / Revenue 1.04
 0.34 1.71
Enterprise Value / EBITDA 36.6
4.3
8.78

Because ELY is much larger company and has much higher valuation, I would only use ALDA valuation as basis of  comparative analysis. Both ADGO and ALDA are microcap stocks in golf sector.

If ADGO trades at ALDA's EV/EBITDA valuation of 8.8x, ADGO is worth around $2.34 per share.

if ADGO trades at ALDA's PE of 14,  ADGO is worth around $1.84 per share.

If ADGO trades at 10x to its free cash flow, ADGO is worth $3 a share. This valuation is a bit too aggressive and this should be the maximum target for this stock. If we compare their enterprise value to revenue ratio, the conclusion will be similar.

Based on above valuation metrics, ADGO is trading at 40% discount to ALDA.

ADGO is worth $2 a share

Currently, ADGO has about $0.7 cash per share. Therefore, ADGO is worth about $2.0 per share by adding back its cash to 10x PE valuation. As I discussed above, the actual ADGO free cash flow is significantly stronger than its net income so that pure earning per share based 10x PE valuation is already a very conservative valuation for this stock.

2005 new product

Adams Golf recently released Redline RPM driver product for higher end retail stores and GT2 product line for lower end department stores like Target. Adams Golf has delivered several successful new product over past 2 years and I continue to look forward to its growth from latest new product launch.

Risk of ADGO investment

Right now this stock is trading above its cash level and book value. This stock is no longer as safe as it was when I first invested into it 1.5 years ago. Further more, golf industry is still in horrible economics with fierce competition.

Outlook

With such strong strong balance sheet and low valuation, I continue to be bullish on  this stock's long term outlook. I still maintain current Hot List risk/reward rating of this stock unchanged.



Blast Investor Model Portfolio Update

(as of 03/31/2005)

Model Portfolio - Performance


Portfolio inception date
 12/31/2003
Portfolio inception value
 $89,000
Portfolio 12/31/04 value
 $141,981.00
2004 Portfolio Performance
 59.53%
2004 S&P500 Performance
 8.78%
2005 Portfolio YTD Performance
 4.17%
2005 SP&500 YTD Performance
 -2.59%


Model Portfolio - Open Positions
Symbol Last Shrs Value Paid Gain
ADGO.OB 1.45 9,000 $13,050.00 0.78 $6,020.00 +85.63%
CEI 16.34 1,500 $24,510.00 16.63 -$455.00 -1.82%
CHK 21.94 1,100 $24,134.00 13.90 $8,834.00 +57.74%
EXX-A 1.80 6,500 $11,700.00 1.638462 $1,030.00 +9.65%
GKIS 15.90 1,500 $23,850.00 15.68 $320.00 +1.36%
LIBHA.PK 5.00 1,200 $6,000.00 5.10 -$130.00 -2.12%
NRG 34.15 335 $11,440.25 23.05 $3,708.50 +47.96%
SOHU 17.58 700 $12,306.00 24.882857 -$5,132.00 -29.43%
USG 33.16 950 $31,502.00 18.425789 $13,977.50 +79.76%
WLL 40.78 600 $24,468.00 22.683333 $10,838.00 +79.52%
$$CASH -35,056.3 -$35,056.30 - - -
11 symbols Total(USD):
$147,903.95




Model Portfolio Transactions
Date  Type Symbol Shares Price Comm Amount Notes
Feb 28, 2005 Buy GKIS 1,500 15.68 10.00 23,530.00
-
Feb 28, 2005 Sell NTES 150 41.88 10.00 6,272.00 +14.22%
Feb 25, 2005 Buy CEI 500 16.39 10.00 8,205.00
-
Feb 25, 2005 Sell NRG 335 38.42 10.00 12,860.70 +66.57%
Jan 31, 2005 Buy CEI 1,000 16.75 10.00 16,760.00
-
Nov 24, 2004 Sell HRB 350 47.35 10.00 16,562.50 - 12.31%
Nov 4, 2004 Sell NTES 100 46.50 10.00 4,640.00 + 27.05%
Oct 19, 2004 Buy EXX-A 1,500 1.60 10.00 2,410.00
-
Oct 6, 2004 Buy EXX-A 5,000 1.65 10.00 8,260.00
-
Oct 6, 2004 Sell NEN 100 80.00 10.00 7,990.00 + 48.15%
Oct 5, 2004 Buy USG 250 18.75 10.00 4,697.50
-
Oct 5, 2004 Sell NTES 100 39.12 10.00 3,902.00 + 6.9%
Sep 30, 2004 Buy USG 700 18.31 10.00 12,827.00
-
Sep 29, 2004 Sell NEN 100 79.65 10.00 7,955.00 + 47.5%
Aug 5, 2004 Buy WLL 250 23.50 10.00 5,885.00
-
Aug 2, 2004 Sell NEN 100 69.95 10.00 6,985.00 + 29.5%
Jun 17, 2004 Sell HCA 250 40.30 10.00 10,065.00 - 4%
Jun 17, 2004 Buy NRG 670 23.05 10.00 15,453.50
-
May 24, 2004 Sell ADGO.OB 13,000 1.55 10.00 20,140.00 + 98.7%
May 10, 2004 Sell HCA 250 39.97 10.00 9,982.50 - 4.8%

Date  Type Symbol Shares Price Comm Amount Notes
May 10, 2004 Buy SOHU 200 15.59 10.00 3,128.00
-
Mar 5, 2004 Buy WLL 350 22.10 10.00 7,745.00
-
Jan 26, 2004 Sell WRP 700 17.40 10.00 12,170.00 - 5%
Dec 31, 2003 Buy CHK 1,100 13.90 10.00 15,300.00
-
Dec 31, 2003 Buy NEN 300 54.00 10.00 16,210.00
-
Dec 31, 2003 Buy HRB 350 54.00 10.00 18,910.00
-
Dec 31, 2003 Buy NTES 350 36.60 10.00 12,820.00
-
Dec 31, 2003 Buy SOHU 500 28.60 10.00 14,310.00
-
Dec 31, 2003 Buy LIBHA.PK 1,200 5.10 10.00 6,130.00
-
Dec 31, 2003 Buy ADGO.OB 22,000 0.78 10.00 17,170.00
-
Dec 31, 2003 Buy HCA 500 42.00 10.00 21,010.00
-
Dec 31, 2003 Buy WRP 700 18.30 10.00 12,820.00
-
Dec 31, 2003 Cash In -
-
-
-
 89,000.00 Inception