Insider Stock Buying and VVTV


With all the attention ValueVision (VVTV) has been receiving lately, it’s been a while since I opined about VVTV.

Let’s discuss some points on VVTV regarding some interesting discussions I have had, recent news and what to expect.

Insider Buying

I’m sure you are aware of the insider stock purchases by the management team at VVTV, especially the CEO. Keith Stewart has been buying heavily in the open market for the past few months ranging from $0.28 all the way up to $1.83.

The CEO’s activity alone totals 1.22 million shares equating to $1.05 million of his own money.

These are not restricted stock options, these are the same shares that we as the public purchase so he is not receiving a better deal under the table.

The May DEF14A document which details executive compensation does state that the CEO has opted to receive stock options and grants for the first year instead of a salary but remember that it is all tied to performance. None of which they have been able to meet so far.

However, the important question is what does Keith Stewart see in VVTV for him to spend over $1million in cold hard cash from his own pocket on the stock of his company?

With 15 years of prior experience at QVC, I would prefer to bet that the CEO knows something about the value of the business.

This now brings me to a short discussion on the fair value of VVTV.

VVTV “Value” Discussion

I was involved in a few discussions about the intrinsic value of VVTV lately. The most interesting was with a person that previously worked at QVC.

The arguments he brought forth were:

  • VVTV is expensive and should be trading in the 80c range at best.
  • The company is not trading on fundamentals. Lots of hype and expectation.
  • VVTV still has a high cash burn rate and no reliable historical performance.
  • The company strategy is bound to fail if it just a copy of QVC and HSN.
  • VVTV was not profitable last quarter and will not be profitable the next.

Considering all 5 points, there is truth to it and I do see why people would think that VVTV is a speculation, but to me, all of the above points constitutes a rather short term 3 month type of Wall Street thinking and completely forgetting the fact that price is what you pay and value is what you get.

Price and value go together. If VVTV was at its current state and selling for $5, there would be no way that I would even touch it with a 10ft pole but at less than $1 or even $2, that is a different story altogether. Price plays the role in risk reward. Without taking this into consideration would be fiddling with the numbers on only one side of the equation.

When I first looked at VVTV, I was hoping for a short term play with a buyout in the $2 range. However, things have changed and when I now look at the business, I see a company that has restructured their debt giving them 3 years to improve the business, new carriage contracts to lower costs and improve margins, new management that is experienced and understand the business, previous Chairman (Buck) no longer in position, a business that is being sold for 1/2 book value, 0.12% of its sales, plenty of cash, exposure to 80+ million households and growing and good insider ownership. All being sold for less than $1 when I started loading up.

So my firm conviction is that VVTV is still cheap compared to its value. So far, people have directly emailed me that my views are far too optimistic. I’ve had some really good opinions and discussions but in the end it doesn’t matter. I have conviction with the cards I am playing with.

Business Strategy

In the last conference call, we were finally able to get a better understanding of how ValueVision expects to implement their new strategy. To sum it quickly, it is a copy of the QVC playbook.

My view is that copying QVC isn’t a bad choice. If VVTV has to copy its competitors to get back on track, let them. The first priority is to get profits. Top line and bottom line.

Once management has a handle on the margins and profits, then it may be time to differentiate and try new things but getting back to basics has never been a bad thing.

VVTV’s reliance on high end electronics and jewelry cost them dearly as the market turned and their new strategy of changing up the product mix to bring in more recurring sales is a wise one. Their online presence is increasing as well.

One of the golden rules of retail is that it is far easier to sell to a previous customer than to attract a new one. The direction they are going is a good one. Much better than trying to commodities in the upper end.

Recent Monetizing of Assets

On July 10, a press release stated that VVTV had “monetized its portfolio of auction rate securities for $19.4 million in cash”. I find the final sentence to be misleading, “The company stated it is pleased to have monetized these securities and strengthened its balance sheet.”

When I first read the headline, I was pleased that they would add to their cash balance but upon some brain scratching, it seemed like the company needed cash, but for what? I came to the conclusion that cash was needed to purchase inventory. From their last conference call, CEO announced they would be purchasing plenty of inventory now that they have abandoned drop shipping.

FYI I previously wrote: “They[VVTV] also mentioned that their current inventory levels are at their 6 year low so in the next quarter, they will be doubling the amount of inventory to keep up with sales and to transfer to the inventoried supply chain management technique. With their inventory turnover slightly above 7, VVTV is doing an excellent job of churning inventory.”

What to Expect with the Business

The worst of the market seems to be behind us, HSN will be announcing their quarterly results on Aug 5th  which will provide an indication of how VVTV may have performed.

I’m not expecting a surprise earnings or a sudden turnaround just yet. VVTV cash burn should remain on the high side and the new cable renegotiation effect won’t be visible until the next two quarters or so.

Profit and margins should slowly inch up, there should be an increase in customers, although at a lower price point.

The important point is to look at the business at least 1 yr ahead and decipher what you see rather than get stuck on the recent price movements.

Disclosure

I hold VVTV at the time of writing.

  • I guess I’m with the anonymous commentators–VVTV is overpriced, or at least, fairly priced at $3.

    You say VVTV is “a business that is being sold for 1/2 book value, 0.12% of its sales, plenty of cash, exposure to 80+ million households and growing and good insider ownership.”

    I like to keep it simple–FCF, FCF, FCF. Book value is nice, but what cash does it return? Sales are nice, but how profitable? Room for growth great, but how have the managed growth for returns in the past? Insider ownership aligns incentives, but have those incentives produced profitable results?

    I would be happy for you if things turned out as you expect. It sounds like your estimate of VVTV’s intrinsic value really hinges on future results being far better than anything yet achieved.
    .-= Wide Moat´s last blog ..Buffett’s Berkshire Letter for 1992 =-.

  • Based on FCF VVTV is way overvalued but one thing to consider is that had I continued to only focus on FCF, which I still regard the highest, I never would have found VVTV.

    What I found was a company beaten down due to high uncertainty but with assets to produce income and at the same time protect the downside.

    The tangible assets alone make the current valuation floating around fair value. Im really not being that optimistic. We have still yet to see what the improvements to the margins will be and how the new products will affect sales.

    But as the price continues up towards my fair value, I’ll be getting ready to sell and lock profits.

  • Jim

    I’m in the overvalued catagory as well. Even though they were able to renegotiate their off-balance sheet obligations, they are still their and create a huge problem for me. I salute everyone who has made a killing in this company lately, but I’m under the belief that it was allot more to do with luck than fundamentals.

  • Thanks for your opinions guys. Always taken into consideration.

  • The General

    Interesting discourse on FCF. That is exactly what should be the focus.

    The #1 challenge that VV has faced since 1998 is: generating enough sales to pay for the distribution (and other costs) with the balance for EBITDA and FCF. The problem was they signed up (thanks to their NBC buds) to long term ( and it turned out very expensive) distribution. That said, the company generated ‘fcf’ of almost $1B during these years to self-fund the carriage. During that same time frame the company generated sales of $5.9B. Distribution costs were 17% vs 8-10% for HSN and 5% or less for QVC. For every 1% decline in that cost the company would have earned FCF/EBITDA of $51M over that timeframe.

    Those distribution cost challenges resulted in various strategies all designed to hit revenue targets that would allow those distribution fees to be paid. VV’s CAGR sales growth during those years was 10% but CAGR for homes was 17.38%.

    History is history. 65% of those distribution agreements have been renegotiated with a 30% reduction and extended for 3 years. The DTV distribution agreement (expensive) expires in 2 years and will most likely be reduced by 30%. In 3 years it is likely there will be a further reduction in carriage costs reflecting the reality that there are far more channels in a digital TV world than in an analog world + the increasing use of the internet to deliver video (no carriage charge for that today)…think of distribution as real estate except in a digital world they can make more. (if you dig into the early years of Q and H you will see that they benefitted from sweetheart deals with the cableco’s in exchange for carriage…something that has not happened to date with VV)

    They also extended the GE pf by 5 years (not 3).

    Bringing us back to the present:
    1) Carriage costs have been and will continue to be reduced
    2) The current management team/consultant(s) have successful experience in the industry; that experience primarily comes from Q. Q is the KING of FCF in the retail/e-commerce world generating 10%+ FCF rates at their peak.
    3) Q almost went belly up in the early 90’s due to a merger….10 years later it was valued at $14B+(about 20x FCF at the time); it has seen its mcap evaporate to as low as $1.3B in the current market YET it will generate FCF of $600M+

    Other factors to consider:
    a) VV is currently distributed to 72M homes….and zero international. There are 25M additional homes they could grow into domestically which will equate to new sales growth at some point; they have suggested they will enter international markets in the future which will drive additional growth. Q and H are both mature in the US and have mature operations in a number of countries.
    b) If current managment were able to grow VV to 30% of Q’s growth leading to its 2003 valuation….VV would be valued at $4.5B on sales of $1.4B in 10 years……considering mgmt has stated they will double sales in 3-5 yrs…then double again over the next 5 yrs…and considering their track record/experience…it does not seem far fetched.
    c) Nobody ever talks about the strategic value of being in 72M homes via Cable/Satellite & Broadband…..to duplicate that is a VERY EXPENSIVE endeavor. It is the wild card that could turn up an Ace or a 2. We shall see….

  • All,

    As value investors we still have to look at what the company is capable of. To decide whether VVTV will remain as it is for an indefinite time OR whether markers have been placed to promote future growth.

    As the company stands today, everyone is right that it is fair or overpriced but what if there is a possibility that we are being too short sighted?

    All the good news from VVTV haven’t even trickled down to the results yet. In the end VVTV may not be able to execute which could lead it to skidding down again but I am taking the chance that things may improve slightly.

    Compare VVTV now to the past recessions. VVTV was no where near the doom and gloom it has been subjected to and they are still here to this day.

    As The General stated in point 3 above and what I described in my very first VVTV Asset Value Play article, they are in more than 80m homes. If each household is worth a measly $5 each, that distribution alone is worth $400m. That is a lot of money to duplicate.

    Don’t forget that although they have off balance sheet debt, they have backing from GE and NBCU who is unlikely to let VVTV go down when they have so much money riding on it.

    At face value VVTV is overpriced but once you consider all the other details, VVTV still has more to go.

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