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ADGO EXX.a earnings, Hot list ratings

11/15/2004

ADGO

Excellent earnings

ADGO reported excellent 2004 Q3 earnings. Revenue was up 13.7% year over year. Q3 Net income turned from net loss into positive profit compared to last year.  Balance sheet cash position was up 6.5 million over last year.

Over past years Adams Golf gained market shares while industry leader Callaway lost market shares. ADGO achieved outstanding business performance by innovative product offering, and marketing expense cut and higher R&D activities. Adams Golf was first to offer popular 466 maximum-sized club while Callaway completely missed this large-head category.  ADGO marketing expense has decreased dramatically too over past few years to increase profitability.  ADGO increased R&D spending over past few years and its R&D team performed extremely well, which created a series of successful product over past few years.

New product offering

New product is engine of revenue growth. Here is the list of new product released recently or in the agenda in the near future:

1. Released recently:  Redline RPM driver -  a upgrade of the old Redline driver.
2. Soon to release: Ovation driver - another price point coupled with popular ovation fairways
   
3. 2005 Q1: GT2 series of drivers, fairways. GT2 series are cheaper products targeting discount department stores such as Wal-mart, Target.

EXX.a and Exx.b

Decent earning

Exx, Inc reported decent but not great earning recently. 2004 Q3 revenue was up 2.3% year over year. Earning declined -58% year over year. The Company 10Q report mentioned vaguely declining sale for heavy duty truck as the reason of sharp earning decline.

Although the company did not specify the exact reason for the profit margin shrinking, I can guess the following items as part of the reasons:

1. Higher steel price or commodity price. Auto parts use lots of steel and steel price rose dramatically recently.
2. Weak auto sales, which caused more competition in auto parts business.

One bright spot of the earning report is that the revenue actually is pretty stable year over year. This indicates that although EXX was unable to raise price quickly or raise sale quickly, it did not have dramatic price cut or sale loss either.

Currently auto parts business is still in bad economics. In fact, Exx Newcor subsidy has been out of bankruptcy for less than 2 years.  It takes time for the management to cut cost. Recent strike is first sign of management effort for renegotiating labor contract and cutting cost. The turnaround success will largely depend on the management capability to cut operating cost in order to survive the current down turn.

As US economy picks up in the future, I continue to be optimistic about the turnaround of this company.

Today's insider buying

In today's SEC filling, Exx SEC and chairman David Segal purchased 42,600 shares of Exx.a stock between $1.40 to $1.50 price for past 5 days after the earning report.

This is very bullish sign from insiders. There are many reasons for insiders to sell stock, there is only one reason for insiders to buy stock with their own money:  The current share price is very under-priced.

With this new information, any Exx.a stock price below $1.50 is safe price to accumulate for the long run. 

Subscriber Question on Hot list risk/reward ratio

Question: 

In hot list,  "CHK NRG USG  WLL"  have best risk/reward ratio. Their price was up a lot while "HRB/Exx.a" price lagged.  Do you still think their  potential is still better than HRB/EXX.A?

My answer:

For passive investors, you do not have to read below long explanation of hot list ris/reward ratios.  For agressive investrs, the below explanation might help you to understand the detail of this risk/reward ratio rating in hot list.

"CHK WLL NRG USG" still have best risk/reward ratio among all my current picks in the model portfolio in my opinion.

This rating of "Risk/Reward ratio" is subjective rating by my own risk reward assessment.  "potential" comparison is really only about "reward" part. Another side of story is "risk" part. Because my investment philosophy is value investing, risk control is more important than the "reward" or potential. If you read Warren Buffett or Ben Graham books, you will find that they believe the top priority in investing is to maintain margin of safety, so do I.  Therefore, this rating is geared more toward LESS RISK rather than MORE POTENTIAL. To obtain high performance in the long run,  RISK CONTROL is much more important than the promise of higher reward. In value investing, risk control is mainly achieved by low valuation, thorough understanding of business, due diligence of management integrity and accounting books, and finally diversification of investment.

Purely from "reward or Potential" point of views, NTES/SOHU has very high potential or maybe even close to highest among all the picks. However, I put their risk/reward rating  low among all the picks because their risk is very high too. To name a few of SOHU/NTES risk:  Chinese politics, high PE ,etc.

Exx.a valuation is pretty low too and its potential is very high. But this stock has relative higher risk profile, which I already laid out in Oct 6 trade alert article. To name a few of the risks: high CEO salary, stock price at or above liquidation value, declining earnings. I will not change EXX.a risk/reward rating until its price drops further into extremely lower level or its business changes fundamentally.  

HRB stock price has lagged but its PE (14) and earning growth is not as good as that of  WLL or CHK.

WLL CHK at current price still has very low true PE. By the way, the reported earning of them are not reflecting their true profit. Their true business profit is much larger. WLL true profit is close to $6 per share, CHK true profit is close to $3 per share.  Their true PE is close to 5.  Which one is better? A stock with PE= 5 and fast growth (WLL CHK), or a stock with higher PE = 14 (HRB) ?  My answer is to go with WLL and CHK in this case because lower PE means safer in risk control. 

Similar argument goes with USG or NRG too.

In my risk/reward rating, past stock price history is not part of risk/reward rating evaluation. It does not matter how much a stock price jumped recently. All that matter is the valuation multiple level of current stock price to its true business profit (true PE) and future earning growth as well as the company current status in its global business cycle over past 5 - 10 years.  A stock jumped a lot recently can continue to jumper much higher. A stock lagged could continue to lag or even drop more.

In value investing world, a better stock pick is the one with lower true PE and higher earning growth prospect.
The best stock pick is at bargain price below liquidation value plus reasonable good business prospect, such as my last year picks  MLT (MUSA) or ADGO.

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