3SOF

I can't apply my new valuation model on MSI, due to the lack of financial details regarding Frederick's of Hollywood, its merger partner.

Probably this explains why I'm losing 21.8% on this position (even though I made a 58% profitable trade on MSI in the recent past, so, still making good money on balance in this stock).

In this thread we can find valuable information that tell us this stock is undervalued, but we don't have the financial statements to prove it. We'll have to keep waiting for them to be made public.

I'll patiently keep holding MSI, mainly because I enjoy www.fredericks.com business and the clues I get from qualitative information on MSI and FOH.

http://www.sec.gov/Archives/edgar/data/93631/000095013607002459/0000950136-07-002459-index.htm

The rich get richer at shareholder expense.

QuoteThe rich get richer at shareholder expense.

I agree with you buddjas1, I dislike this idea of issuing shares for employee compensation and to pay for consulting services:



Buffet has been talking about this issue over the last few years, saying many times management has no respect for shareholders. I'm not against employees receiving shares as a performance bonus, but the company should buy these shares at the open market and then give them to employees. It shouldn't dilute shareholder's value to increase employees pay, that's a shame.

Well, at least on the shareholder's perspective

Management might think "we create all the value, investors holding shares not bought at the IPO are just speculating the share price will rise, not really benefiting the company's operations". Damn communists

I count 475,000 newly issued shares to Mr. Cole alone, which would be, let me see, about a 1% stake on the combined company. I hope we don't get many more "option compensation plans", and "shares as compensation for services" and stuff like that, or the dilution factor will be really high. This isn't a good start to the merging process.

Anyway, the stock probably won't go down from current levels, and I expect decent upside when FOH's financial details are revealed, I'll keep on holding MSI. 

There wasn't any new fundamental information for MSI yesterday and the stock went down 6.15%. It is possible that the stock and the 200 days simple moving average meet in the future, and that would have to be considered "normal" from a technical standpoint.

As for fundamentals, it's hard to know, because there's no fundamental data for FOH. We'll probably know more financial facts of FOH over the next couple of months.

Anyway, at the current market price, FOH is valued by the market at 23.7 million*$2.29 = $54.3 M, and the company was taken private 10 years ago for $70 M. I have no doubts that FOH is worth a lot more today than what it was worth in 1997, so I'll patiently keep on holding MSI.

However, it is funny or relevant to see that MSI is the only stock in the Main Portfolio where I can't apply my new valuation model, and it is the only loser of the Portfolio. In the future I'll avoid any stocks where I don't have sufficient information to apply the valuation model.

MSI touched the $2.17 support near the end of the session and quickly rebounded towards a close at $2.28. There's no new fundamental information about MSI or FOH. Let's just check how www.fredericks.com is doing. It's doing ok.

I'll patiently keep on holding MSI, since I believe the stock is way undervalued at current market prices.

I read this thread all over again and made an effort to get some estimates on the table so we can build the valuation model for MSI, knowing that reality can be a lot different from what I'm estimating here:



Let me explain how I got to each line of the model:

1) Initial Share Price = $2.25, no doubts here;

2) Initial Share Count (M) = 49.09

Here we have 16.5 million MSI shares, 23.7 million shares attributable to FOH's shareholders and a $20 M rights offering that at $2.25 represents 8,888,888 shares. So 16.5 + 23.7 + 8.8888888 = 49,088,888 shares issued and outstanding after MSI+FOH merger.

3) Dilution factor = 1.03

When I don't have much information I throw in 3% at this, which seems to be the average dilution rate of the companies I've been studying.

4) Final Share Count (M) = 53.64

It's just the result of 49.09*(Dilution Factor^3) = 49.09*(1.03^3) = 53.64

5) Initial Revenue (M) = 200

We get this number from recent press releases, that the combined company has $200 M in revenues now.

6) Revenue CAGR = 1.15

I read in an article published on this thread that FOH's sales are growing 15% a year. Perhaps I'm being optimistic in expecting revenue growth of 15% for the combined company going forward.

7) Final revenue = 304.2

Final revenue = initial revenue*(1.15^3) = 304.2

Initial net profit margin estimate = 5

5% is my best estimate, again, perhaps I'm being optimistic here, maybe FOH isn't profitable. We don't know.

9) Final Net Profit Margin = 5

I kept it at 5% because the initial estimate is optimistic.

10) Final net income estimate (M) = 15.21

This is just final net profit margin estimate*final revenue = 0.05*304.2 = 15.21

11) EPS Estimate ($) = 0.28

EPS estimate = Final net income estimate/Final share count = 15.21/53.64 = 0.28

12) EPS multiple estimate = 21.13

21.13 is the Textile - Apparel Clothing industry average earnings multiple.

13) Final estimated share price ($) = 5.99

This is the EPS multiple estimate*EPS multiple estimate = 0.28*21.13 = 5.99

14) Share price CAGR (%) = 38.60%

Share price CAGR = (Final estimated share price/Initial share price)^(1/3) -1
= (5.99/2.25)^(1/3) - 1 = 38.60

15) Optimal selling price ($) = 3.84

Optimal selling price = Final estimated share price/(1.16^3) = 3.84

I was expecting more from MSI, but I feel I can't push estimates even more upward, in fact maybe I was overly optimistic here, we'll have to wait for FOH's numbers to find out.

I always said MSI + FOH was worth something between $6 - $8, but using my new valuation model the stock should be sold at $3.84, given my optimistic estimates. So, probably if I can get out of MSI not losing much I'll be happy.

I'll keep holding MSI for now, hopefully when FOH's details are revealed the stock will get a nice boost.

MSI's volume is drying completely, just 7,700 shares traded today. Better not to trade than to go down as we expect FOH's news. But this was clearly a trading mistake, similar to DIET's, never again I should buy a stock based on a future catalyst before that catalyst actually happens!

I'll keep holding MSI, because my trade is based on FOH's numbers being better than the market is discounting, and I expect to make money/not lose as much as I'm losing now when the news comes out.

I think breaking even with MSI is a good goal.  That's 3.15 for me.  Will we get there?

Quote from: buddjas1 on April 20, 2007, 10:02:09 AM
I think breaking even with MSI is a good goal.  That's 3.15 for me.  Will we get there?

I think so buddjas1, when FOH's financial details are revealed and the merger agreement is finally closed, I believe MSI will be worth at least $148.5 M, which is what $3.15 a share means.

My valuation model says $3.84 is the optimal selling price, but perhaps I'm being too optimistic when calling for 15% revenue CAGR and a 5% net profit margin for the combined company.

We'll have to wait for the news to find out what the reality is, but the clues I'm getting from reading articles about FOH is that the company is in good shape now.

I'll keep holding MSI.

MSI seems to be trending down bouncing off its 9EMA. The only reason we are holding the stock is the hope of good financials of FOH, isn't it? For instance, I see both CIMT and MSI are trading at low volums, but whereas with CIMT we have a good fundamental pictures, with MSI we can have a panic sell off if the FOH numbers disappoint one or two primary investors...

Quote from: berloga on April 23, 2007, 10:59:47 AM
MSI seems to be trending down bouncing off its 9EMA. The only reason we are holding the stock is the hope of good financials of FOH, isn't it? For instance, I see both CIMT and MSI are trading at low volums, but whereas with CIMT we have a good fundamental pictures, with MSI we can have a panic sell off if the FOH numbers disappoint one or two primary investors...

Really big investors probably already know most of FOH's financial details and this is why technical analysis can sometimes be useful. My current take is Movie Star and Frederick's of Hollywood aren't terrific businesses (selling lingerie and general women clothes), but they're not worth just $110 M either, which is what $2.25  a share implies. 

My first shot would be a $200 M valuation, since this would mean a revenue multiple of 1, which is the long term general market average. But just common sense tells me FOH needs to be worth a good deal more today than when it was taken private in 1997 for $70 M, all articles in this thread point to that.

I also enjoy www.fredericks.com and the value and recognition of the Frederick's of Hollywood trademark.

The stock may jump around all it wants, with high or low volume, but nothing will get me out of this idea that the combined company is worth more than $110 M, perhaps it is worth double of that amount. If I wait a couple of more months maybe I'll be able to get out of this position still with a nice profit (I would prefer to hold it for the long term, we'll see if fundamentals justify that when we know them more deeply), and, what is the risk from this point?

Not more than 10%, I would say.

I'll keep holding MSI, perhaps today was the final shake out day and the stock will start trending higher from this point.

MSI closed just a touch below the $2.17 support level, on insignificant volume of 17,200 shares. No news out.

I'll keep waiting for the news with FOH's financial details, MSI looks undervalued to me. I'll hold MSI.

Hello David, did you eliminate the -30% rule in your strategy?

A video clip regarding LTD brands and Victoria Secret that might have some bearing on what can happen to MSI stock price based on the FOH merger:

http://cosmos.bcst.yahoo.com/up/finance?ch=1316259&cl=2500477&lang=en

Quote from: Terliso on April 25, 2007, 07:22:02 PM
Hello David, did you eliminate the -30% rule in your strategy?

It's more like 33%. No, didn't eliminate, but no automatic stop losses either. Let's just say that when at a 30% plus loss I'll be more inclined to admit I was wrong when buying that stock and will probably assume the mistake by taking the loss.

But, my initial buy of MSI was $1.93, I'm still ahead on this stock.

Quote from: tokyopua on April 26, 2007, 12:03:24 AM
A video clip regarding LTD brands and Victoria Secret that might have some bearing on what can happen to MSI stock price based on the FOH merger:

http://cosmos.bcst.yahoo.com/up/finance?ch=1316259&cl=2500477&lang=en

Thanks for the video clip tokyopua. We don't know if Victoria's Secret sales are going down because of competition or because of a general market slowdown. I'm more focused on the specifics of each company than the sector they're in.

Technically there was nothing new yesterday. No news out either. I'll continue holding MSI.