CKCM

[Michael]

Another weekend another long story (so consider yourself warned!)

I kind of like companies that are doubling their revenue and EPS. Especially when they are in a hot industry and trade with a PE around 15 for 2005.

So I was ecstatic when I found ClickCommerce.

They have consistently increased revenue quarter over quarter:



and net income is increasing even faster:



So what is fueling this growth? You might have heard about RFID (Radio Frequency Identification). Basically RFID is a replacement of the good old barcodes. There are however a few advantages:

• You don't need to scan the barcode the product will automatically be registered
• You don't need to unpack the products (i.e. if you have 1000 products packed together they can all be scanned at once)
• You can automatically register a huge number of details like dates, serial numbers, product details etc.
• No failure in registrations

It is therefore hardly a surprise that customers who are handling huge numbers of packages are putting pressure on their suppliers to have products RFID marked. The value proposition for retailers is simply too attractive to be missed:



Retailers like Wal-mart, Supervalu and The Home Deport have simply mandated suppliers to use RFID and even the Department of Defence demand that their suppliers use RFID (so next time the missiles are flying you will know the serial number before it hits you!)

The push from the so-called channel managers means that a large number of companies are investing in RFID enabled systems. In a 500-company survey of spending plans from 2005 to 2007, AMR found that 69% plan to evaluate, pilot or implement RFID in 2005. But many say they are doing so only because they have to comply with customer requirements. Based on the survey data, customer mandates were the number one reason for deploying RFID over the next 12 months. A whopping 53% of process manufacturers cited it as the primary issue.

You can read more about RFID here: http://www.fool.com/news/commentary/2005/commentary05031501.htm

According to a number of research companies we have only seen the start of this trend. The Market for RFID is forecasted to explode in the coming years:



And the service and software market is expected to reach $10 billion in 2013



Looks good but what is CKCM's role in all this? (to be continued)

[Michael]

Click generates most of its business from selling and hosting business-to-business software applications. Its extranet solutions are used for supply-chain management, collaborative commerce and compliance automation.

As mentioned Wal-Mart has demanded that their suppliers start using RFID. But it is not only about registering sales in the supermarket. For Wal-Mart to take real advantage of RFID they whole supply chain needs to talk together. Basically suppliers, transport companies, retailers etc. need to synchronize their data.



CKCM ranks No. 2 in signing up Wal-Mart suppliers to the UCCnet, a nonprofit, uniform data synchronization pool. No. 1 is Sterling Commerce, a subsidiary of SBC Communications (here is the funny thing – SBC is a customer of CKCM

But Wal-Mart is not alone. CKCM is the exclusive service provider for data synchronization to another retail giant: Home Depot HD. SuperValu SVU, the grocery chain, also refers suppliers to Click Commerce. As this is a network business there is a lot of advantages if the whole supply chain use the same SW. It therefore seems like CKCM is building a de facto monopoly and the customers are coming in fast:



Now you might think that this is the little grocery around the corner that are signing up but you are wrong! CKCM's customer list includes some of the largest corporation in the world:

• Abbott Labs
• BAE Systems
• Cisco
• Citibank
• Dell
• Delphi
• Eastman Kodak
• FedEx
• Hewlett Packard
• Home Shopping Network
• Honda
• IBM
• Lockheed Martin
• Microsoft
• Ryder
• Samsung
• SBC Communications
• Tellabs
• Verizon
• Xerox,

No wonder why the revenue and profit is going up!

Well all good news but what about the share price? (to be continued!)

[stocky]

Again nice post Mike, applaud.

Whats your cost basis for this stock and DHB? I am amazed by your fundamental analysis. Keep up the good work.

[Michael]

Thanks Stocky!

Here is the real good news! CKCM is cheap:



To quote Motley Fool:

The market's reaction to collaborative commerce solutions provider Click Commerce's (Nasdaq: CKCM) second-quarter results was, in a word, baffling. Revenue increased 115% over the comparable quarter last year. Earnings increased 173%. Yet the stock cratered -- down 25% at midday.

I haven't found any reason what so ever to justify this fall. Even the management can't explain the drop:

Click CEO Michael Ferro said during a Webcast with financial analysts that the Chicago-based company's outlook is good for the rest of the year. "The numbers speak for themselves," Click CFO Mike Nelson told Managing Automation, in a follow-up interview, intimating that the company's 2005 pipeline remains solid.

Nelson declined to offer an explanation for the market reaction, saying only that it "seemed strange."

The fall has been fueled by a rapid increasing short interest:



I think the shorts will run into problem covering their short position. 16% of the shares are short and CKCM was added to the Naked short list on August 18. Regulation SHO requires all brokerage houses to execute buy-ins for naked shorts after 13 settlement days so we should start to see some serious buying interest up to September 6

You are probably surprised why anybody would short a stock like CKCM but I think I have found a reason or two:

Insider selling:



If I am right it is great news because this is NOT insider selling. You see CKCM has bought a number of companies over time and the so-called insiders are shareholders of acquired companies who were paid in CKCM stocks. It is natural that these shareholders are selling out and has nothing to do with the fundamentals of the company. Try to see their track record – insiders lost 114% by selling instead of holding the stock. Believe me real insiders very rarely have that kind of track records.

But there is another reason why people might consider to short the stock. You see the company posted a very nice profit in Q2 but the cash flow was negative. Sure you are thinking: I knew something was rotten!!!!

Well at least that was what I thought until I dug a bit deeper. You see the company has taken over a number of companies as already mentioned. When you take over a company you also take over their working capital. Account receivables, deferred income and accrued compensation therefore increased very significantly as you can see below:



The company would have had a very healthy cash flow without the acquistions.

If insider selling and negative cash flow is why there are 1.9 million shares short then the shorts are wrong and will run for cover when they find out and make you rich in the process!

So should I buy the stock? (to be continued!)

[basonista]

Michael, I have applauded you several times already but will do so again.   Fantastic work!

BTW, is there an explanation somewhere on the board on the html needed to post text between pictures as you are doing?

[Michael]

Thanks Basonista. I really appreciate it!. I will mail you the manual for posting images!

To answer Stocky's question: CKCM has been on my watch list for some time but yesterday I decided not to wait any longer. I therefore bought CKCM at 17.62. (sold NLG.TO at 2.99)

There are several reasons why I believe now is a good entry point.

As you can see on the chart below the stock is trading near MA200, which should offer a good support. The volume behind the drop after Q2 is drying up and I would expect a reversal in the trend the coming days. The reversal will be driven by the strong fundamentals and short covering as discussed.



I believe the company will continue to perform. Not only because of the explosive growth of RFID and their excellent product and services but also because of the company culture:



Here is a small summary of the investment case:



Have a continued nice weekend. I hope I haven't wasted your time

Mike

[KCScott]

Micheal,

Excellent post - I believe this company will make a nice rebound price wise.

I want to address some "facts" about RFID - Again we are taliking about the field in which I work - I am a Retail Loss Prevention & Security consultant.

Wal-Mart, HD & DOD (Among others) all have pilot programs going with RFID.
Right now, the bulk of the testing is supply chain based. That is to say that the tagging is at case and pallet level. The way that scenario is playing out now is the CPG is tagging at case level reading the tags and electronically transmitting the information to the various Distribution Centers. The DC is then reading the tags to verify what has been shipped. At this point none of the CPG (Consumer Product Manufacturers) see a value proposition for anything other than just adding the Tags as a mandate by the major retailers.

There are multiple factors in play for the future of this technology: First and foremost is the cost of the tag. An RFID tag consists of the RF circuit and the 64 or 128 bit chip. While both components are relatively inexpensive to manufacture, the cost is melding the two together. Right now cost is .35-.75 per tag. eventually the economies of scale are projected to push that number to .05 -.10 but when we talk about replacing a barcode that costs nothing, it is a substantial margin to add to a consumer product. There is also a problem with applying RF tags to metal. A can of soup can not be tagged because the metal will absorbs the RF signal used by the reader (a good analogy would be trying to listen to a radio inside a steel vault). Another technology issue is the development of anti collision capabilities. The RFID reader can only pick up individual numbers inside the chip - that means if 20 packages of razor blades are on a peg rack, all with the same RFID chip # -  the RFID reader only sees that as one unit. Unless you give every pack of razors it's own unique #,
this destroys the single biggest benefit of item level RFID tagging - the ability to sharply reduce the time it takes to do inventory or the ability to have a real time inventory.

I believe the UPC will be with us on item level products for a long time, as the issues I have mentioned are substantial for our industry.

[setravis]

Micheal,
Your an asset! It's great to have someone so awesome with the Fundamentals.
I always enjoy checking out your post.Keep up the great work.
I must applaud you again.

[Michael]

Hi KCScott

Nice to have the DD confirmed by an expert!

Micheal,

Excellent post - I believe this company will make a nice rebound price wise.

I want to address some "facts" about RFID - Again we are taliking about the field in which I work - I am a Retail Loss Prevention & Security consultant.

I agree that RFID will not be universally accepted before the price of the tags gets down but that is just a matter of time. This is however mainly an issue for the makers of readers and printers like Zebra and Sensormatic who have disappointed the market. It is less of an issue for CKCM as the companies are still investing in the software and services as long as some of the largest retailers demand it.

Did you read the USA Today's write up on RDIF? I think it gives an excellent overview so let me copy and paste:

'RFID' makes keeping track of inventory easy

If you've ever marveled at the number of products and companies that use bar codes, you get an idea of how popular RFID tags may be. RFID, short for radio frequency identification, is the next evolution of the bar code. These tags, which can be used in countless applications, allow businesses to monitor and track the presence of physical objects.

It's best explained with an example. RFID tags, for instance, would allow a shipping company to easily see how many containers are in the port waiting to be unloaded and how many are empty. These tags would allow retailers to count the number of boxes on a shelf and know where they are located in a store.

RFID is more exciting than regular bar codes, because the technology opens up many more applications. Bar codes require a printed label to be directly scanned by a reader. For instance, when you go to the grocery store, a clerk must pick up the product and carefully scan the printed bar code. How many times have you seen a clerk get frustrated when the reader isn't able to scan the bar code correctly when it is slid across?

RFID takes away these frustrations because the tags emit radio signals that can be passively picked up by a reader. Again, let's explain this with an example. Picture a stack of hundreds of cardboard boxes that have a bar code label and a RFID tag. And let's say, you want to count them using both the bar code and RFID tag. With the bar code, you'd have to grab the reader and climb up on a ladder, find the bar code and "scan" each label. However, it's completely different with RFID tags. Standing on the floor, you can point a reader at the stack, and the reader can hear all the radio signals being put out by the boxes in the stack and count them.

By now, you're probably understanding why RFID is potentially a very popular technology. In fact, Wal-Mart (WMT) has already said it plans to require its suppliers to use RFID technology. Certainly, if there are cost savings, it's possible for more retailers to follow suit.

As you can imagine, there are countless companies involved in RFID technology. And I'm not going to even attempt to list them all. IBM (IBM), for instance, is very involved in designing RFID networks, complete with point-of-sale terminals. Traditional bar-code companies like Zebra Technologies (ZBRA) and Symbol Technologies (SBL) also have units dedicated to researching this new area. And then there are smaller, pure RFID plays such as Digital Angel (DOC) and Click Commerce (CKCM).

[la-onda]

nice research Michael (applaud)

check the short interest:

CKCM: Short Interest UP 69.1% to 1.9M in Aug 2005
Wednesday, August 24, 2005 16:16 ET

According to new short interest data from NASDAQ, short interest for Click Commerce Incorporated (NasdaqNM: CKCM) INCREASED 69.1% to 1,906,121 shares for the month ended mid-August, 2005.

SYMBOL              JULY          AUGUST          CHANGE       %CHANGE  DAYS/COVER
--------   -------------   -------------   -------------  ------------  ----------
CKCM           1,127,139       1,906,121        +778,982       +69.11%           4

Based on CKCM's 20-day average daily share volume of 628,215, it would require approximately 4 day(s) of buying to cover this short interest.

[Michael]

Hi Oliver

Thanks for the applauds!

You are right that there is a large and increasing short position. I did actually comment on that (you are forgiven if you overlooked it - this story is way too looong):

I think the shorts will run into problem covering their short position. 16% of the shares are short and CKCM was added to the Naked short list on August 18. Regulation SHO requires all brokerage houses to execute buy-ins for naked shorts after 13 settlement days so we should start to see some serious buying interest up to September 6

If insider selling and negative cash flow is why there are 1.9 million shares short then the shorts are wrong and will run for cover when they find out and make you rich in the process!

I believe the shorts are dead wrong and then a large short position suddently becomes attractive. After all somebody has to buy 1.9 million shares and I don't think those share are available at this level.

Mike

[valueseeker]

Hi Michael,

I bought CKCM at $23 2 months ago and it ran up to $28.5 before earning. I thought was heading to $35.

3 days before earning it had its 1st analyst coverage with $0.33EPS estimate. The company delivered $0.27 GAPP and $0.33 EPS GAPP. Since the stock is heavily shorted by hedge fund, the news came out very negative and the stock tanked from $26 to under $20 (now under $18). I now seriously think the analyst was workong on hedge fund's behalf.

I sold at $20 the day after earning, after I listened to the CC, which didn't go well. The analysts response was lukewarm and the CEO sounded pretty arrogant. There was much debate if the growth is organic or through acquisition.

I haven't bought it back since but put it on my watch list. I think there is a chance the stock will dip below $15 as the short interests are high and the MM are in no rush to buy the stock at this point with the next earning being more than 2 months away and the news don't seem to drive up the stock price at this point.

I think it's a good fundmental play (EPS = $1 next year after they start to pay taxes). It's in a good growing field and it should be a $30+ stock in a year. Shot term, I personally will wait for the dust to settle more before considering buying again, considering I have just lost 15% on this.


-Louis

[valueseeker]

One of the reasons the company has large price fructuation was because the company has steadfastedly decline to give any price estimation, which contributed to large MM manipulation. The CEO himself is the largest shareholder (more than 20% I think). He hasn't sold a single share and probably won't. You are right the insider sellings are from the VCs and founders of the companies that CKCM acquired so I won't worry about it.

[Michael]

Hi Oliver,

Thanks for your comments. Don't we all know that feeling: you have a great share and it drops for no valid reason

I think it is important to understand why it dropped. That is why I used so much time to look into the insider activity, cash flow and the short position.

I agree my timing might be off and it could fall a bit further short term. I am however happy with my purchase price at 17.62. It will go in to the Q3 earning season at a much higher price than 17.62 (IMHO), so what happens in the meantime is just noise unless the fundamental changes.

The truth is that CKCM is a better investment today than when you bought it first at 23.2.

I am not sure when it will start to go up again but I have a feeling that it will happen during next week for the reasons I have already mentioned and I would hate to be out of the stock when it happen.

You are right that Ferro was a bit arrogant at the CC. I think he was euphoric about the result. Remember that he started the company and is still holding 25% of the stocks. Now that is the kind of insider I like!

[stocky]

Mike do you still hold DHB and if yes then whats your cost basis? Also what time frame do you see for DHB to turn around.

Do you use any insider activities subscription? or any recommendation on this aspect.

Too many questions but I know that I am asking the right person