zibeaster's Stock Blog
Saturday, January 13, 2007
MSI - A Possible Double
MSI's share price has tripled in the past two months. It closed at $2.70 on Jan 12. I believe it is still cheap.
MSI is going to be reverse merged with Fredericks of Hollywood in Q2 of 2007. Fredericks of Hollywood is a major brand and the big player in town before Victoria's Secrets took the lead. It went into bankcruptcy in 1997. Came out of bankcruptcy few years later.
Since there is little information about the financial status of Frederick's. There is no solid way to figure out the valuation of the merged company. So what I do is to speculate on few things and if they are true, I believe the current MSI price is cheap.
1) Frederick's online revenue is $80-$90 million. This is based on 2 method of estimation. In general, e-commerce has been growing at 25% to 30% a year (http://home.earthlink.net/~lindberg_b/GECGrwth.htm). http://www.fredericks.com/ has 20 million rev in 2000. If it grows at the average rate, it puts it in $80 to $90 million range. In its CEO's presentation in 2005 (http://www.tei.net/presidentsforum/2005/0223/LindaLoRe.asp), she mentioned the fredericks.com received 22 million unique visitors in 2004. In this link from 2000(http://www.allbusiness.com/technology/technology-services/686721-1.html), it mentioned it has 16,000 unique visitors a day. This translates to 5.7 million a year. If we assume unique visitors in those years have the same proportion to sales, we get $77 million sales in 2004. So in 2006, $80 to $90 million is not too far fetched. Even though they have 175 stores, I think most of them are small stores that generates less than 300k sales per year. I checked two of their stores, one only has about 400 sqft. the other has about 800sqft. So at this point, majority of their revenue is from online business. This gave them a much better margin.
2) Fredericks is profitable. The CEO has mentioned the online business is very profitable and is 70% of the direct sales (I assume direct sales mean catalog and internet combined). Their stores are boutique stores that doesn't need too much sales to be profitable. They have 10 years to close/shrink money losing stores. By now most of them should be in good shape.
3) Fredericks debt is manageable. Total guess here. They had $67million debt going into the bankruptcy. Assuming they have the same debt now (they should have less), it is not a big number if they use the merger money to pay down the debt (they did mention they will seek to refinance their term debt after the merger). Since they have stated they will use the money to open 50 new stores, it means they are not too worried about the debt.
4) The downside is limited. FOH was bought by Knightsbridge Capital for $70 million in 1997. After many years’ operation and improvement, it should at least fetch $100 million (this is the worst number imo). MSI was at $12.6 million before the merger news. This will put the combined company at $112.6 million. This translates to a price of $2.40 to $2.50. So right now, MSI is at a very good risk/reward ratio.
These are just guesses and are not based on any solid facts. But this is what I have to do to buy this possible steal. On the other hand, if all the information is known, it would be too late to buy. If we discount 130 stores. how much would a profitable online retailer like http://www.fredericks.com/ worth? I would say $100 to $300 million depending on the financials. With 130 stores, It should worth more. I think MSI is a potential double in a few months.
This post is for informational purpose only. Under no circumstances does the information in this post represent a recommendation to buy or sell stocks. ¶ 1:19 AM 2 comments
MSI is going to be reverse merged with Fredericks of Hollywood in Q2 of 2007. Fredericks of Hollywood is a major brand and the big player in town before Victoria's Secrets took the lead. It went into bankcruptcy in 1997. Came out of bankcruptcy few years later.
Since there is little information about the financial status of Frederick's. There is no solid way to figure out the valuation of the merged company. So what I do is to speculate on few things and if they are true, I believe the current MSI price is cheap.
1) Frederick's online revenue is $80-$90 million. This is based on 2 method of estimation. In general, e-commerce has been growing at 25% to 30% a year (http://home.earthlink.net/~lindberg_b/GECGrwth.htm). http://www.fredericks.com/ has 20 million rev in 2000. If it grows at the average rate, it puts it in $80 to $90 million range. In its CEO's presentation in 2005 (http://www.tei.net/presidentsforum/2005/0223/LindaLoRe.asp), she mentioned the fredericks.com received 22 million unique visitors in 2004. In this link from 2000(http://www.allbusiness.com/technology/technology-services/686721-1.html), it mentioned it has 16,000 unique visitors a day. This translates to 5.7 million a year. If we assume unique visitors in those years have the same proportion to sales, we get $77 million sales in 2004. So in 2006, $80 to $90 million is not too far fetched. Even though they have 175 stores, I think most of them are small stores that generates less than 300k sales per year. I checked two of their stores, one only has about 400 sqft. the other has about 800sqft. So at this point, majority of their revenue is from online business. This gave them a much better margin.
2) Fredericks is profitable. The CEO has mentioned the online business is very profitable and is 70% of the direct sales (I assume direct sales mean catalog and internet combined). Their stores are boutique stores that doesn't need too much sales to be profitable. They have 10 years to close/shrink money losing stores. By now most of them should be in good shape.
3) Fredericks debt is manageable. Total guess here. They had $67million debt going into the bankruptcy. Assuming they have the same debt now (they should have less), it is not a big number if they use the merger money to pay down the debt (they did mention they will seek to refinance their term debt after the merger). Since they have stated they will use the money to open 50 new stores, it means they are not too worried about the debt.
4) The downside is limited. FOH was bought by Knightsbridge Capital for $70 million in 1997. After many years’ operation and improvement, it should at least fetch $100 million (this is the worst number imo). MSI was at $12.6 million before the merger news. This will put the combined company at $112.6 million. This translates to a price of $2.40 to $2.50. So right now, MSI is at a very good risk/reward ratio.
These are just guesses and are not based on any solid facts. But this is what I have to do to buy this possible steal. On the other hand, if all the information is known, it would be too late to buy. If we discount 130 stores. how much would a profitable online retailer like http://www.fredericks.com/ worth? I would say $100 to $300 million depending on the financials. With 130 stores, It should worth more. I think MSI is a potential double in a few months.
This post is for informational purpose only. Under no circumstances does the information in this post represent a recommendation to buy or sell stocks. ¶ 1:19 AM 2 comments
