This is an interesting little company. It operates like an insurance company for legal services. They charge membership fees which average about $300 per year and people purchase legal fees that are needed. Actually the street doesnt really understand the company well and doesnt want to dig around to understand it.
Most of the customers dont need to use the service in any given year. However, much like a cell phone plan rolls over its minutes PPD rolls over its services. For instance, if you get sued PPD pays for up to 75 hours of legal assistance. However if you dont use it and you roll over your hours then in year 2 if you get sued then you get 140 hours and in year 3 you get 205 hours, and in year 4 270 etc. etc.....
Anyway, to make a long story short, the retention rate of its customers is pretty good and new customers help. The customer base isnt as flighty and short sighted as some short sellers might hope. People have good reasons to renew their memberships and they include holding onto the billable hours of lawyer time which they have purchased.
PPD is a fee for services business and many if not most customers wont need to use it. However, my lawyer charges $500 per hour and at those rates a PPD plan looks pretty good.
The balance sheet looks sort of like an insurance firm with much of the liabilities existing not as debts but as expected costs of providing future service for those that need the legal services that they are prepaying. Some of the assets are actually fees that have been invested and are earning interest while the company holds onto the money until the customer requires the service for which hes prepaid. I wouldnt recommend this to widows and orphans as the balance sheet can be a bit dodgy. A hurricane can change the fortunes of an insurance firm in a hurry and a wave of needed legal representation would materially impact this company. IMO, the majority of the people who purchase these plans do so with the idea of having a safety net rather than expectations of really needing to use it. Some people make out a will and some will fight a traffic ticket but most of the customers probably wont be sued, get audited by the IRS, or end up with a major lawyer event. If it does happen however, PPD is there for you.
Anyway, IMO, the best way to evaluate the company is through membership growth. The balance sheet is subject to change and earnings revolve around memberships and revenue income so tracking membership growth is the way to evaluate this company.
PPD released on October 5th the membership numbers for the quarter just ended. They can be accessed here:
http://biz.yahoo.com/prnews/041004/dam052_1.html
As you can see you have about a 7% increase in membership fees which is basically your revenue growth. Earnings growth should be a little higher because last quarter PPD bought 1 million shares of its own stock.
Ok, revenue and earnings growth is modest but the point is that the company isnt falling apart. They are holding steady and growing a bit.
The interesting thing is the stunning short percentage of the company. Look at the key statistics on the Yahoo page.
http://finance.yahoo.com/q/ks?s=PPD
Mind you these were stats posted before the 1 million repurchase. Insiders own 32.07% of the company and Institutions own 75.83% of the company. Now I could be wrong but if you add 32.07 and 75.83 then you come up with almost 109% of the company being owned by cash investors. Mind you these numbers are a month old and the short position has dropped to around 7 million shares but its still huge. The few small investors like me who bought on margin had their stock borrowed and sold and then most likely borrowed and sold again and perhaps for a third or 4th time.
Ok, earnings will be out after the close on Monday and S & P has projected them to be .60 cents per share. With the membership numbers previously announced I think this is a fair number.
Honestly, I can show you companies with better earnings growth and also companies with a better balance sheet.
The story here is the short position. This company is for aggressive investors who can handle some risk and not for widows and orphans. IMO, its a decent company with a unique market niche. Its not going to fall apart. If it doesnt fall apart and / or it starts to move up then you are going to see a short squeeze of substantial proportions. Anything could trigger it. If the company were to announce another 1 million share buyback it would climb like a rocket. If a mutual fund decided to buy 1 million shares in cash it would climb like a rocket. If it starts moving up and breaks into new highs then it climbs like a rocket.
I imagine the mutual funds and market makers might not be against a little manipulation and scare tactic buying to shake out the shorts and when that happens it will pop fast.
The shorts were counting on the company losing lawsuits and that didnt happen. Then they counted on a shaky balance sheet but its honestly not bad. Their last hope is that earnings will disappoint but if you track membership growth the company should see earnings hold steady and grow a bit based on the share repurchase. If the company doesnt disappoint and go down then its going to go up with lots of shorts becoming dedicated buyers and the supply of stock available to buy being almost rare and non-existant.
Cash buyers own 109% of this company and somebody sold stock that doesnt exist and its going to get ugly for them when it comes time to repurchase phantom stock.
But hey thats just one mans opinion. This stock aint for widows and orphans and each of you should study it before investing your hard earned money.
Earnings come out on Monday after the close. Anything above 50 cents should hold the stock up nicely. If it hits the 60 cents that S & P is predicting then its off to the races.
S & P numbers showcase a listing in the SP small cap 600 and also on the NYSE and include .60 cents of estimated earnings against 54 in 03. 03 revenues of $90 million with Q2(04)numbers of $95.4 mill and rising. Cash flow was $2.79 per share in 03 and should approach $3 per share in 04. SP rates PPD a hold (3 stars of 5) with a $24 target price based on fundamentals. SP ranks earnings as a B+ (out of a D to A+ scale and which equals average on their scale) and IQ (investment quotient) as 130 (out of 250) which rates as higher than 88% of the companies they follow in their various universes. IQ is the desirability of an investment and by SP standards 88% is pretty good. Still, they rate it a hold.
To sum up. IMO this is an ok company that deserves the valuation that it currently has and that should at the very least hold up in the mid $20 price range. There is a huge short position and a high likelihood of an immense squeeze. Id rate the company as a C based on fundamentals and worthy of a look based on the idea that a short squeeze might happen.
Ive done more work for you than I care to admit. Each of you should take what I say with a grain of salt. Sometimes, Im wrong. Still earnings come out after market close on monday night and perhaps there is some potential here.
The one thing that I just cant ignore is that 109% of the company has been sold to cash buyers. Until they throw in the towel and start selling the momentum is guaranteed to eventually rise. The shorts have sold stock 3-4 times over that doesnt exist. Someday they are going to have to buy it back. Unless the company disappoints in a huge way which will change the minds of the longs then its not going to be pretty for the shorts. Insiders believe in the company and they just repurchased 1 million shares. Institutions dont look to be selling as low volumes would suggest so shorts are going to be scrambling to find stock to buy when its time to cover. The whole story of this stock can be summed up in the idea of a major league short squeeze and whether or not it happens.
Good Luck
Happy Motoring All,
Bugshu
