Edelheit versus Buster on PNDMF

Reader N.L. draws my attention to an exchange between Aaron Edelheit ("issambres839") and "buster736" on PNI Digital Media (formerly PhotoChannel; OTCBB: PNDMF.OB) on the Value Investors Club. Below are a few excerpts from this exchange.

Edelheit/issambres839:

I continue to view this as a mispriced growth stock. I can make a credible case that if they continue to grow organically, get Wal-Mart and some of their existing initiatives start to work, in 2011, this stock could easily earn $1 per share. I'm guessing the stock would be close to $15 or higher. The risk/reward in this situation seems very attractive.

P.S. 2010 numbers could be low.

buster736:

With all due respect, In your original write up about PNI in 2007 you had the company earning 1.09 in 2009. The company is going to be lucky to show a profit this year. Now you are saying that you believe they will do $1 in 2011. The company has gotten both Sam's club and costco as you originally postulated, yet earnings have been no where close to what you estimated in the past and your estimates have been pushed out at least two years. What has differed from your model to what the company has actually done (why haven't the earnings been there?) Have transactions been lighter? have you wat to low on your costs? What gives you confidence that this model even scales and you estiamtes will be anywhere close this time?

Edelheit:

You are absolutely correct that my estimates have been wide off the mark from my original report. A couple of things happened that ruined that estimate:

1)They bought a money losing operation in Pixology that they thought they could easily turn around. That was wrong, but it helped get them Costco.

2)They underestimated what it would take to get Costco up and running.

3)CVS uptake has been very slow and most uptake of online uploading versus walking into the store has not met my expectations.

4)The economy fell off a cliff last year and their core biz which was growing organically at 50% plus is now 15-20%.

Those are the main reasons, also my estimating of earnings was a bit high. I don't think looking back I did a good job estimating how expenses would ramp.

That said, I have been saying pretty consistently that I expect $0.25 a share in cash EPS for 2009. This has not changed for some time now. Remember that this excludes amortization.

Also, when I talk about over $1 a share in eps for 2011 or in the future, I try now to be much more cautious, and use words like "could." I mention that number only in the context of winning Wal-Mart.

I encourage you to do your own research and come up with your own estimates. I have made plenty of mistakes in the past year, that's for sure, but I think that I'm trying to my best to estimate a fast growing company that has gone through some growing pains.

I think there is still a tremendous amount of opportunity and the company is now profitable, EBITDA positive and cash flow positive and is growing despite one of the worst economies in decades.

I hope that helps.

Edelheit Agonistes

From the comment thread last month on his pick Hemisphere GPS (TSX: HEM.TO) on the Value Investors Club:

issambres839 (Aaron Edelheit):

How does a company that has no debt go from having a $250 million market cap to a $15 million market cap excluding net working capital?

While clearly $5 per share last May was too high in hindsight, is US$0.75 a little ridiculous?

Judging from the price action since then, apparently $0.75 was a "little ridiculous", but this one of the responses Edelheit got last month to his question:

oogum858:

Hi Issambres. . .I don't know anything about this company, but to your question of:

"How does a company that has no debt go from having a $250 million market cap to a $15 million market cap excluding net working capital?"

Obviously one potential answer is "Because the company is worth $15mm"

Given the desperate nature of your question I wanted to at least write down the most obvious response. I do this not to be a jerk, but because you seem to be insanely frustrated and at the very least it's good to try to think clearly about such things. Mr. Market revalues companies all the time and it can be really exasperating when you think he/it/whatever is totally wrong. But you have to make allowances for the divergent opinion. I'm sure you're thinking about this question all the time, so sorry if this seems condescending. . but i dunno... how else could an uninformed VIC member answer your question?

Some other interesting comments there, and some thoughtful responses from Edelheit. Worth reading.

Hemisphere GPS Reports

In its press release, Hemisphere GPS (TSX: HEM.TO) reports that its Q3 revenue grew 46% year-over-year, and its gross margins increased to 52%. Expenses increased 46% year-over-year as well (partly due to the acquisition of Beeline), and the company posted a loss of about $233,000 for the quarter (the loss would have been about twice that if it weren't for Hemisphere's foreign exchange gains).

On the Value Investors Club, Edelheit quotes these bullet points from Canaccord,

1) Revenues USD$13.2M up 46% yr/yr, Gross profit margins 51.6% and EPS (0.00) was better than consensus 12.6M GPM 48% EPS -0.01 (our forecasts 13.2M, GPM 50% /-0.01)
2) Company maintained FY guidance of revenue growth of greater than 45% (we believe mgnt will likely increase its FY guidance to better than 50% on the 11:00am CC)
3) Gross profit margins big positive surprise at 51.6% (slowest qtr of the yr) up 500 bps yr/yr, this should support current forward estimates if not cause some EPS estimates to increase in 2009 (street is 0.25-0.30 USD in FY2009)
4) FX trend of weakening cdn$ is positive for HEM margins (substantial cdn based operating costs), these margins were realized against a cdn$/USD$ spot of 1.06 (obviously we are at 1.18 now)
5) No signs of AG related slowdown
6) At C$1.70 share stock HEM has 20.5M in cash or 0.37/share, is trading at 4.4X 2009 EPS , growth rates in excess of 50% (and company now benefiting from favourably FX trends)
7) Company bought back 181,00 shares in Q3 @ 2.46/share

Edelheit then comments,

Why the heck is this at $1.70? Seriously, this is one of the most ridiculous malfunctions of the market that I`ve ever seen. 46% revenue growth, much better than expected margins and the stock is at 4.4X earnings?

Of course, Hemisphere isn't trading at 4.4x trailing earnings, but at 4.4x estimated 2009 earnings. If Hemisphere actually meets those earnings estimates, I'd expect it will trade at a higher multiple.

The photo above comes from the Hemisphere GPS website.

Edeleheit Updates Again on PhotoChannel

As Albert noted in the previous post's comment thread, Edelheit offered an update on PhotoChannel (OTCBB: PNWIF.OB). PhotoChannel's stock has gotten hammered recently (along with most other stocks, of course), but Edelheit is still bullish on the company's fundamentals. From the Value Investors Club:

They actually just presented at the Merriman conference and had a lot of positive things to say including:

1)They have launched Kodak China and Kmart Australia

2)They are working on a Facebook photo application

3)They haven`t seen any slowdown in orders

4)There is an opportunity to get Kodak India, which has 14,000 locations

Clearly there is a large seller out there and it is pressuring the stock, but in my opinion this has nothing to do with fundamentals.

[...]

there are many small caps and many Canadian small caps that are getting decimated. Photochannel is not alone.

Consider this. I estimate that on an EBITDA basis, PNWIF will earn $0.10 per share in the December quarter alone.

PhotoChannel Reports

PhotoChannel (OTCBB: PNWIF.OB), is one of three Aaron Edelheit picks I own, as I've mentioned in previous posts. Here is a link to PhotoChannel's press release via MarketWire: "PhotoChannel Reports Record Q3 Revenues for Fiscal Q3, 2008". And below is Aaron Edelheit's take on the quarter, via the Value Investors Club.

As expected, PNWIF put up some crazy growth numbers and had higher expenses as they integrated Costco and Sam`s club.

The key takeaways include:

1)They averaged over 21,000 transactions a day in the second quarter more than Shutterfly. And once Costco was on, they were averaging over 30,000 on the last day of June and as of yesterday they are now over 40,000 a day. Can you say growth?

2)They are finally cash flow positive.

3)There are 25,000 locations in Asia that Kodak has identified for Photochannel that they can use Photochannel`s help. This includes Kodak India, Kodak Australia, Kodak Japan, Kodak Taiwan and Kodak China. I don`t think that I have really describe the upside of this or the value of Photochannel`s technology if Kodak is relying on them so much.

4)While expenses were higher than I expected in the quarter it was not surprising considering the bumpiness and tardiness of the Costco launch. I actually expect expenses to slowly moderate over the coming quarters.

5)With 30% organic growth, and 247% growth with only two weeks of Costco, look out for how much the company will grow in its September and December quarters considering the seasonal benefit coming.

6)With Asia, a new CEO, and a small acquisition that should lead to new business, the future is just very, very bright for PNWIF.

The end of this year and next should be [good ones;] sit back and watch the company`s performance really take off.