ARRS

[David Randolph]

As BigSully1 mentioned, concentration of revenues in a small and very important costumer base is one of the risk factors of an investment in ARRS:

«Our business has primarily come from several key customers. The loss of one of these customers or a significant reduction in sales to one of these customers would have a material adverse effect on our business.

Our four largest customers (including their affiliates, as applicable) are Comcast, Cox Communications, Liberty Media International, and Time Warner Cable. For the year ended December 31, 2006, sales to Comcast accounted for approximately 38.6%, sales to Cox Communications accounted for approximately 9.9%, sales to Liberty Media International accounted for approximately 10.0%, and sales to Time Warner Cable accounted for approximately 9.1% of our total revenue. The loss of any of these customers, or one of our other large customers, or a significant reduction in the products or services provided to any of them would have a material adverse impact on our business.

In addition, more so than historically, in recent years our customers have submitted their purchase orders less evenly over the course of each quarter and year and with shorter lead times. This has made it more difficult for us to forecast sales and plan accordingly.»

I can live with this risk and will keep holding ARRS, as the company is working to diversify its costumer base and geographic reach, with the opening of a research and development facility in China.

[David Randolph]

Analysts remain skeptical on ARRS, but the company has been beating estimates for the past few quarters:



It's nice to see the stock holding up well after the S&P index change news. I'll keep holding ARRS.

[David Randolph]

ARRS is a $1.52 B market cap company with $548 M in cash and marketable securities. In 2006 they received $11 M in interest for this cash hoard, but I guess they could find a better use for their money, through organic expansion or acquisitions. They tried Tandberg TV, but that one failed, because Ericsson wanted it too. But I'm sure there are other, perhaps less expensive, opportunities outthere. But, a lot of cash is always good in my opinion, it keeps possibilities open.

Technically the stock is holding up well, I think it is just a matter of time for it to go up to close the gap at $14.85 and breakout to new 7 year highs.

[David Randolph]

ARRS underperformed a bit today, rising just 0.64%, on nice volume of 2.6 million shares traded. ARRS is somewhat boring, isn't it? Its business is a bit hard to understand, they have some big costumers that account for significant chunks of their revenues, and they couldn't buy Tandberg TV.

If I had any better idea right now, probably I would let ARRS go, as my hands aren't as strong here as in other holdings. I prefer companies that sell to consumers, instead of selling to businesses. Anyway, I still believe it will outperform the general market over the long term, so I'll keep on holding ARRS.

[BigSully1]

If my data feed is correct,  ARRS had a huge surge in volume before the close today. I am showing 7.875M total traded today. Could this be a bullish sign for tommorrow?

[BigSully1]

If my data feed is correct,  ARRS had a huge surge in volume before the close today. I am showing 7.875M total traded today. Could this be a bullish sign for tommorrow?

Looks like it is correct. Yahoo now catching up. Volume surged by about 5M+ in last few minutes. INSTINET trade?

[kenmann]

ARRS was added to the S&P Small Cap 600 after the close of trading today.  Could that be the reason for the volume surge?

[BigSully1]

ARRS was added to the S&P Small Cap 600 after the close of trading today.  Could that be the reason for the volume surge?

You're right, I keep forgetting that. Guess I'm getting a bit overly excited.

[David Randolph]

ARRS was added to the S&P Small Cap 600 after the close of trading today.  Could that be the reason for the volume surge?

You're right, I keep forgetting that. Guess I'm getting a bit overly excited.

Yes, it was the S&P index change:

«S&P SmallCap 600 constituent NVR Inc. (Amex: NVR) will replace New Plan Excel Realty Trust Inc. (NYSE: NXL) in the S&P MidCap 400, Arris Group Inc. (Nasdaq: ARRS) will replace NVR Inc. in the S&P SmallCap 600, and One Liberty Properties Inc. (NYSE: OLP) will replace New Plan Excel Realty Trust in the S&P REIT Composite after the close of trading on Wednesday, April 4.»

Anyway, I don't think ARRS will go down after this, because the S&P SmallCap 600 tracker funds that bought ARRS won't be selling now. But even if it does, these are just short term phenomenons that have nothing to do with the final outcome of this trade.

I don't have time to do it now, but over the following updates I need to apply my new evaluation model to ARRS. I also need to find out why analysts are somewhat pessismistic about ARRS immediate future. Anyway, that pessimistic view is already priced in by the discount valuation the stock is trading when compared to its peers.

I'll keep holding ARRS. 

[David Randolph]

I don't have time to do it now, but over the following updates I need to apply my new valuation model to ARRS.

Yes, let's do that, starting by the share count evolution graph:



Oops, this isn't nice at all, ARRS has a pro-dilution past. The share count CAGR since 1997 is 10.6%. And that explains how the stock price is down over the last ten year period (ARRS closed 1997 at $15.63), even though the market cap rose 155%, from $614 M to the current $1.567 B.

Even though recently the share count isn't rising as much as it did in the past, this graph shows ARRS's management disregard for shareholder's interests. This means they won't hesitate in diluting shareholder's value at the first sign of trouble.

With this information I'm thinking of taking 1.07 as the dilution factor, considering the historical share count CAGR but also the lower dilution rate over more recent years. I'll also take a look into the balance sheet over the next update to refine this estimate some more.

But today's update got me worried about this holding. I'll keep holding ARRS, for now.

[David Randolph]

Yesterday we had some positive news for ARRS:

• J:COM Taps ARRIS FlexPath(TM) Wideband Technology to Deliver 160 Mbps Internet service
PR Newswire (Mon 10:30am)

I enjoy the markets ARRS is involved and its geographical reach. It helps sustain a high revenue CAGR estimate.

Yesterday I was worried about historical dilution, and I still am, but I hope the balance sheet can abate those worries a bit:



Well, long term debt jumped to $276 M in 2006, and the current ratio declined to 2.42, still comfortably above the 2 minimum threshold. Cash & equivalents levels are quite high, at $549.2 M.

The balance sheet doesn't look weak to me, but not extremely strong either. Now I'm thinking I should put the cash + marketable securities, the receivables and inventory levels as a percentage of sales or market cap, perhaps that could improve this study. I'll think some more days about this slight change.

From what I'm seeing I'll maintain that quite high dilution factor of 1.07, because this management didn't show respect for shareholder's in the past.

Tomorrow we'll study historical revenue trends and the expected revenue for the future, so we can derive the revenue CAGR, the second variable of the model. Hopefully the stock will continue to move up as I study it

I'll continue holding ARRS. 

[David Randolph]

Let's check ARRS's revenue trend:



The revenue CAGR since the low point of 2003 is 22.6%, but analysts are expecting growth of just 9.87% for 2008 and 7.19% for 2008. So I guess I shouldn't consider more than 15% revenue CAGR on my model, and probably that's optimistic. I'll use 12% or 1.12.

Gee, I'm getting worried about the quality of this pick, so let me check net profit margin right away:



The net profit margin in 2006 was about 16% but that was because of a one time tax benefit. Without it net profit margin would have been just 12%. Analysts expect about 9% net profit margin going forward and that's what I'll consider on my model too.

As for the EPS multiple estimate, the industry average is 24.6, so to be conservative I'll use 20.

Here are the results of the new valuation model:



Oops, as I feared, the model says the expected share price CAGR is just 12.3% and the optimal selling price today is $13.33.

Hey, what you know, the stock closed yesterday at $14.69, so I have the chance of selling above the optimal selling price, with a 6.6% profit.

The trading plan is:

SELL ARRS

[BigSully1]

Update

http://biz.yahoo.com/ap/070425/earns_arris_group.html?.v=1

http://stockcharts.com/h-sc/ui?s=ARRS&p=D&b=5&g=0&id=p03354588331

[David Randolph]

Hey, what you know, the stock closed yesterday at $14.69, so I have the chance of selling above the optimal selling price, with a 6.6% profit.

The trading plan is:

SELL ARRS

Looking back now I'm glad I sold ARRS at $14.7, since the stock closed at $5.5 on Friday, down 30% on the day after reporting disappointing results:

• ARRIS Announces Preliminary and Unaudited Fourth Quarter and Full Year 2007 Results
PR Newswire (Thu, Feb 14)

«GAAP net income in the fourth quarter 2007 was $0.08 per diluted share, as compared to the fourth quarter 2006 of $0.64 per diluted share, and as compared to the third quarter 2007 of $0.25 per diluted share.»

«"While we continue to see robust demand from the majority of our customer base, we anticipate that sales to our largest customer will be lower. As a result, we now project that revenues for the Company in the first quarter 2008 will be in the range of $270 to $285 million with non-GAAP net income per diluted share in the range of $0.08 to $0.12 and GAAP net income per diluted share, in the range of $0.00 to $0.04.»

Possibly $0 EPS in Q2 2008 isn't good. ARRS seems to be sinking into losses ... then it may become a turnaround play, but it seems there's still some time and some downside to go before that.

I'll keep watching.

[Chainthroer]

Anyone have any comments about ARRS.  Resistance seems to be around 8.10