IXYS - The beginning of an implosion?

An online acquaintance asked me to check this one out and there were things I found that I did not like.

First, from the Mar/07 financial information gross profit, or operating margin, declined from 31.6% the prior year to 24.1%. Consider that an implosion of sorts...

The next thing I didn't like was in the year prior the operating margin was $20.4 million yet they managed $30.3 million in earnings, or $0.85/share. That tells me something happened to grossly inflate the earnings with respect to the company's true earning potential. My limited experience tells me this kind of thing turns out very poorly for investors. All those investment tools investors use very wrong numbers compared to the reality of the company.

And yikes, out of the $17.9 million operating margin, only $755,000 made it to earnings, or 2c/share.

Next, there was a one time only $29.4 million gain in 2006. Without that the operating income would have been $20 million. Take off another $7.5 million for interest expense and adjusted taxes and you get $12.5 million of earnings. Just using ratios, without that extraordinary item eps would have been about 36c for the year, about 4% and a P/E of 25.

That latest 2c eps extrapolates forward to a shudder in your footsteps P/E of 113. Yuck.

Just to get a clearer picture of how this one is trending, the year before also had an extraordinary item which gave 42.8 million in extra expense or loss. So, before taxes without this item you'd have seen $25.8 million in operating income for the year before.

The year before there were no extraordinary items and the operating income was $25.6 million.

So, a three year picture, using my corrections for those extraordinary items would be the operating income for 2005 was 10.0% of the total revenue. For 2006 the $25.8 million operating income is 10.3%. For 2007 it is 7.0%, a huge decline, (10.3/7)-1 = 47%.

They have reported margins from 2003 that go 21.1%, 23.2%, 31.1%, 32.5% and this last year 29.5%.

The press release blames increase bad debt, which if you dig into the financial reports was $1.3 million. It also said they had more inventory write-offs, an additional $3 million.

Over the last five years the number of shares as increased by 13%. Not hugely excessive, but what did shareholders get for that dilution? If you read the press releases about share buy backs wouldn't you expect to see less shares? Actually, the share count in millions from 2003 went 30.9, 32.4, 35.1, 33.6, 34.8, so 3.4% increase in share count from 2006 to 2007 when they have a share buy back program happening?

Seriously, $18 million spent on a share buyback, that should be about 2 million shares less.

They add an extra 1 million shares per year to those available for options. That's in the range of 3%. Consider inflation to be 3%, that means earning need to increase by 3% per year to keep up with the time value of money. At 3% you essentially break even. Well, with 3% dilution per year you need to increase earnings by an additional 3% to break even, or essentially you need 6% earnings. Alternatively you could hope that they keep 1 million times the share price available for share buybacks every year to pay for the true cost of the options. At the current price that's 3.2% of last year's total sales, and 3.2/29.5= 11% of the operating margin or gross profit.

The financial reports show 35 million shares as of March 31, 2007 and 5 million available to grant for options and 4.5 million options granted outstanding. That's 32% of existing hidden dilution.

I'm looking back at some of their plans. They had a plan to offer $60 million of convertible senior notes and use part of the proceeds to buyback $20-30 million of its common stock. Help me to understand that this wasn't anything but a scam the retail investor plan to pump up the share price? I don't get how that adds value for investors in any way. You are buying shares on one hand and issuing them probably cheaper through convertible debt. Institutions usually want some kind of premium for their backing. It serves no purpose except to temporarily pump up the share price. I take that to mean someone is looking for a handsome, stick it to the retail investor, exit price.

And what else, oh yeah, the outlook is that sales should decline by 3-6%.

Guidance lowered

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Goldcorp: The Oxymoron of Fiat Creation

Goldcorp has taught me a lot about what can be hidden in a stock. When I look at the dynamics of what drives a gold stock, the gross irony of Goldcorp is that, from my point of view, it is the epiphany of investor fears that is driving the gold bull in the first place.

So, just what are investor fears driving the gold market? The answer I get is currency devaluation due to government just printing more money. As the money supply grows, there is an escalation of inflation. The U.S. national debt is so enormous, printing money to pay bills seems more likely, so this is a serious and valid concern. Governments printing money is the cause of hyper-inflation.

Gold is supposed to be protective against this. Gold should hold its value against other currencies. This makes a certain amount of sense, however, gold stocks are not gold. They represent business that mines gold. They do not mine the gold and just sell enough to cover expenses and then save the hard asset that is supposed to protect valuation; no, they tend to sell all that they mine, paralleling the gold bug complaint that the gold that used to back currency has been sold off.

Gold companies do not print money, however, they do print stocks. Stocks are to a business what currency is to a country. If a business is printing stock, or issuing new equity, it is very comparable to government printing more money.

Just How Many Shares Has Goldcorp Printed?

The graph below show just how frivolous Goldcorp is with issuing new equity, options and warrants. Options and warrants are included and must be included to get a true picture of a company.

If you owned say 1% of Goldcorp in 2003, well now you only own about 1/4 of one percent of the company.

Dilution is easily hidden. It can be found, but it really doesn't show up in a chart of the company's performance, like this one on Goldcorp's share price:


A chart of a company's share price completely and utterly hides dilution. To see a true picture of performance, you really need to look at a graph of fully diluted market cap. But where do you get that? As far as I can tell, it just doesn't exist, but it is probably one of the strongest pictures of how the market is valuing a stock.

There is no way that I can go back and figure out fully diluted share/warrant/option count on a daily basis and multiply it by the share price, but, I could do it for 10 points, say at the end of each year.
The dilution thoroughly hides the gross escalation of market cap. Seriously, this looks more like the Zimbabwe exchange than a real investment. The share price and market cap graphs look nothing alike.

There were events tied to issuing of new equity. Some was to pay back debt, much like how governments have printed currency to pay back loans. Other events were asset acquisition, such as the take over of Glamis.

The midas touch, $6 billion of fiat book value in a single deal

Glamis was a gold producing company with a good development property. Their book value in their Q3 financial report before the takeover was $2.2 billion dollars. When Goldcorp took over Glamis the cash and equity value of what they issued was $8.2 billion dollars, and Goldcorp now carries $8.2 billion dollars in assets on their books for the Glamis properties.

Essentially, Goldcorp has a hyper-inflation of asset valuation being carried on their books. As assets are mined from the ground, an appropriate allocation of book value for each mine is written off.

The hyper-inflated Glamis assets are currently mostly non-producing assets, so what is currently written down is tiny compared to the total asset picture of Goldcorp, and it is tiny compared to the relative book value that the company is carrying for all of its properties. Once these assets start producing the writing down of the fair allocation of book value of these hyper-inflated assets will implode earnings.

I find that Goldcorp is masterful at taking the focus from what ought to be the first priority for investors and and spinning impotent results into a good story. For example, look at the graph of revenue. It tells a stellar growth story, but merely looking back at the total share count suggests the revenue growth is inadequate compared to the equity growth.

Indeed, the revenue per share has actually declined.

Goldcorp also printed a pretty cash flow chart, again in total cash flow, and again, a pretty picture.

But again, the per share picture isn't so pretty, it is actually down 22%.



But not to be disuaded, I decided to look at the next "Go Goldcorp!" graph, which was earnings, and again, their presentation looks stellar.

When you use Goldcorp's numbers for individual shareholders, it actually does look like an improvement.

But I check calculations for myself I found $408 million in earnings when there were 703.5 million shares fully diluted did not "add" up to what they report. Practically none of the effects of share dilution and fiat book value from the Glamis merger show up in the financial reports. I took the earnings and the fully diluted share count at year end and re-plotted the data. This is ultimately what share holders are getting.

In 2003 with 52c eps Goldcorp was trading under $16.

Goldcorp also puts its spin on gold production based on ounces for the company as a whole.



But, what Goldcorp is producing per share is far more important. The graph below is actually per 1000 shares, and the 2007 point is projected production. Already for 2007 production has been down graded twice from 2.8 million ounces.


The 2006 figure has totally imploded. With about $24,000 US investment you can expect to see about 2.4 ounces of gold produced. It begs the question, how can anyone possibly think that this is reasonable? If they meet their targets for 2007, the gold production per share will return to the historical levels.

Even looking at Goldcorp's Q1 financial reports you can see how they steer investors from looking at what is important in terms of their individual share ownership and direct them to the big picture of a company that is under performing on a per share basis relative to prior years. Eps for Q1 this year compared to Q1 last year were way down, but they report stellar improvement.

All in all, Goldcorp belongs to the honor role for the frivolous cap of fiat creation.

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Keep track of dilution - Roca

I first mentioned Roca back in February when it was trading at $1.35 canadian and had a market cap around $80 million. For a stock expected to have earnings over $50 million for 2007, how could you go wrong?

On Friday Roca closed at $2.90 canadian and if you bought when I first mentioned it, you'd be up 115%.

You'd think the market cap would also be up 115%, to say around $175 million, but that is not the case.

Since I first mentioned Roca there have been stock options and warrants issued. Here's the list:

Date Issue type Number Exercise Price/Notes Feb 9, 2007 shares 3,171,429 Hold till June 10, 2007 same warrants 3,171,429 Exp Aug 9/08 @ $2.25 same warrants 18,750 Exp Aug 9/08 @ $2.25 Feb 19, 2007 Stock Options 2,600,000 @1.45/share for 5 years Mar 6, 2007 shares 7,142,857 Hold till July 7, 2007 same warrants 7,142,857 Exp Sept 6/08 @ $2.25 Mar 28, 2007 shares 1,212,121 Hold till July 29, 2007 same warrants 1,212,121 Exp Sept 28/08 @ $2.25 . Total 25,671,564 .

Additionally, with eventually 23,071,564 new shares directs are entitled to the issuance of another 2,307,156 stock options for a total dilution of 28 million shares.

Check the web site and as of March 9th it shows 91,745,986 shares fully diluted. The last funding was announced March 14th and closed March 28th. They are not included in that total. With them included there are 94.1 million shares, and remember, there is the 10% options that get issued at a later date.

So, with 94 million shares the fully diluted market cap is more like $273 million, an increase of 240% from when I first reported on Roca.

Mining 3 million pounds will make Roca $45-55 million, and that's their plan for 2007. This is about 16-20% of the fully diluted market cap for moly at $25-30/lb.

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