This article has 7 comments:

Register or Login to rate comments »
•  
  • Stealthmouse
  • 11 Comments

  Nov 09 01:01 PM
  As of 8/31/08, they only had $990,000 of cash and were burning through much more than that in quarterly cash flow. It's pretty easy to see from that why it's trading at such a low level and for such low multiples. Without either turning cash flow positive or procuring additional debt or equity, this one could be dead in a matter of months.

  Reply | Link to Comment
•  
  • John Bradley
  • 3 Comments

  Nov 09 09:39 PM
  If you only looked at one quarter in isolation, your concern would be my concern too. They certainly had a dramatic increase in AR and inventory. Based on my review, this appears primarily due to a new tool roll-out. You would have to believe Home Depot & Lowes couldn't pay their bills before thinking the AR wouldn't reverse.
  
  You said "this one could be dead in a matter of months." They did clearly state in the 10-Q that they have sufficient working capital for the next 12 months. This does not mean they don't after 12 months, but is a standard comment to divulge if they were in an immediate danger of not being able to pay the bills.
  
  I think your conclusion based on minimal analysis is partly why this buying opportunity has presented itself. I agree with you that on the face of it, the cash appears to be a problem. That is a very keen observation, but I have looked into the situation enough that, in my opinion, it will not be an issue.
  
  
  On Nov 09 01:01 PM stealthmouse wrote:
  
  > As of 8/31/08, they only had $990,000 of cash and were burning through
  > much more than that in quarterly cash flow. It's pretty easy to
  > see from that why it's trading at such a low level and for such low
  > multiples. Without either turning cash flow positive or procuring
  > additional debt or equity, this one could be dead in a matter of
  > months.

  Reply | Link to Comment
•  
  • Stealthmouse
  • 11 Comments

  Nov 10 12:10 AM
  I hear your comment. But how will they reverse it? They went from $1.8m negative cash flow in the May quarter to -$7.7m in the August quarter. That's the trend, and it's an accelerating negative one. Do you really think things will improve for flooring companies during the next 12 months?
  
  I don't think it's wise to make sweeping assumptions that they will reverse the trend. Unless you have something to add that supports your case, I stand by my analysis. And you are absolutely correct, I did minimal analysis and believe this is dead money. It would usually take a lot more than that. So why don't you write about WHY AR and inventory will correct? Where there's smoke there's fire unless you've read the filings and have something interesting that others have missed. Lehman said it had plenty of cash one month before it imploded. I don't believe management, I believe numbers. Cash flow does not lie (unlike earnings that you refer to in your article).

  Reply | Link to Comment
•  
  • John Bradley
  • 3 Comments

  Nov 10 07:40 AM
  I appreciate the discussion. Again, my "sweeping assumptions" are not based on just reading the cash flow statement in isolation. Please review the quarterly and annual reports, not just the "cover sheets". You asked my WHY the AR and inventory will correct, and I already eluded to why in my prior response. This is from the latest 10-Q: "the Company used net cash of $13.0 million associated with the increase in receivables, inventory, trade payables and other accrued liabilities principally related to the initial rollout of the national specialty tile tools program, and for the upfront consideration paid related to that program." Also, "During the first six months of fiscal 2009 the Company borrowed an additional $10.2 million on its lines of credit primarily to finance the working capital requirements associated with the rollout of the national specialty tile tools program."
  
  Like I had said, they are rolling out a new program. Most companies have to put money up to rollout new products. This is not an increase related to normal operating problems. Like you said "Where there's smoke there's fire unless you've read the fillings...". Well, I read the fillings and you admit you didn't.
  

  Reply | Link to Comment
•  
  • John Bradley
  • 3 Comments

  Nov 10 09:24 AM
  P.S. Hopefully we both do well in our investments. We can disagree on this one, so I still wish you good luck. On this one, time will tell.

  Reply | Link to Comment
•  
  • Stealthmouse
  • 11 Comments

  Nov 10 10:03 PM
  Fair enough. If I were putting any money on this company I would read the filings and listen to the conference calls. Still not compelling to me as a long, but I can see what you like about it. My own projections about the depth of this residential and commercial real estate cycle are probably different from yours, so I wouldn't touch anything related to real estate until we have truly bottomed out in the market.
  
  Good luck to you as well.
  
  
  On Nov 10 07:40 AM John Bradley wrote:
  
  > I appreciate the discussion. Again, my "sweeping assumptions" are
  > not based on just reading the cash flow statement in isolation. Please
  > review the quarterly and annual reports, not just the "cover sheets".
  > You asked my WHY the AR and inventory will correct, and I already
  > eluded to why in my prior response. This is from the latest 10-Q:
  > "the Company used net cash of $13.0 million associated with the increase
  > in receivables, inventory, trade payables and other accrued liabilities
  > principally related to the initial rollout of the national specialty
  > tile tools program, and for the upfront consideration paid related
  > to that program." Also, "During the first six months of fiscal 2009
  > the Company borrowed an additional $10.2 million on its lines of
  > credit primarily to finance the working capital requirements associated
  > with the rollout of the national specialty tile tools program."
  >
  >
  > Like I had said, they are rolling out a new program. Most companies
  > have to put money up to rollout new products. This is not an increase
  > related to normal operating problems. Like you said "Where there's
  > smoke there's fire unless you've read the fillings...". Well, I read
  > the fillings and you admit you didn't.

  Reply | Link to Comment
•  
  • BCInvest
  • 1 Comment

  Nov 11 10:30 AM
  The negative cash flow was to support added working capital needs related to additional higher margin products being carried by the major home improvement retailers.
  
  I don't see the flooring market vastly improving over the next year, but I don't see a major decline. QEPC has had increasing sales even with the backdrop of dismal new home construction. The home improvement market has shown strength in the past when new home construction declines. People who would otherwise be buying an new one fix up their old one.
  
  "I don't think it's wise to make sweeping assumptions that they will reverse the trend."
  
  What trend? The arbitrary, self confirming, short term 2 quarter results you anointed a trend. The company has been cash flow positive for more than 10 years. I am not saying that it guarantees they will always be cash flow positive, only that there is no trend. You are seeing something that does not exist. Every change needs to be evaluated in the context of everything that is going on, not taken at some superficial level. Negative cash flow bad, positive cash flow good. A company increasing inventory in front of large sales increases being cash flow negative is different than a company watching customers struggle to pay and seeing receivables balloon
  
  "So why don't you write about WHY AR and inventory will correct?"
  
  Inventories are up about $7 million and A/R is up about $6 from the end of FY08. Over the same time sales have risen from $49 million to $61 million or an increase of $12 million. What you see on the balance sheet is a result of increased working capital needs for the added sales and probably some timing differences mixed in. The rise in working capital necessarily precedes any sales unless you can get your buyer to prepay. This will not happen in retail, a Home Depot or Lowes would laugh at those terms. QEPC is forced to lay out the cash and pay for the products before they can bill a customer.
  
  "I don't think it's wise to make sweeping assumptions that they will reverse the trend."
  
  I don't think it is wise to make sweeping assumptions that there is a trend. When you analyze the underlying mechanics of what has occurred it is much less concerning. That doesn't mean that the situation does not need to be closely monitored. New information could certainly cause the situation to take on radically different meaning. So far management has done a tremendous job increasing sales in a tough market. The housing market has not gotten any better in the fall months and the recession is no help. Management needs to closely monitor cash flow and maintain their tight cost controls. The drop in oil will help reduce material costs and shipping costs. The drop in LIBOR will soften interest expense. The rapid change in the economy is going to make it harder for many companies. It will take some time to sort the winners from the losers. A good management team with a proven track record is nice to have, but is certainly not a guarantee. I look forward with cautious optimism to continued solid results from QEPC.

  Reply | Link to Comment