Financial Uproar

Transworld Entertainment Corporation operates a chain of retail stores selling CDs, DVDs, video games and the like. As of January 2010, the company operates over 550 stores (mostly located in malls) totaling over 3.75 million square feet of retail space. The company acquired it’s biggest competitor Musicland in 2006, spending most of the next 4 years closing poorly performing stores and not making any money. Why would I even be looking at this company, considering it’s in a dying business and isn’t making money? We’ll get to that.

Why Is It Cheap?

I barely know even where to begin. As mentioned above, the specialty CD store is a a dying industry. They’re fighting a losing battle against 3 opponents- Amazon, Walmart and downloading (both legal and illegal). The company responded to this change by diversifying into DVDs and video games, with some degree of success, but the company still is bleeding cash. The company has been doing the right thing by closing poorly performing stores, yet every store closure means less revenue.

Industry Outlook

Uhh, were you paying attention above? If you weren’t, let me summarize: crap.

The industry outlook is tricky. Obviously it isn’t that good. Saying that, is there a bottom somewhere? Do CDs eventually go away forever? When is a realistic timetable for that happening? I know people who are in their 20s who still buy CDs and don’t have an Ipod. Sure, those people are in the minority, but there is still a market for CDs. It’s just a matter of figuring out where the bottom is in that market.

Dividend

Non existent. This company is either a turnaround or takeover play, therefore no dividend is expected at any point in the future.

Balance Sheet

Basically the pristine balance sheet is the only reason why the company is being discussed on this blog. The company has a market cap of a hair over 58 million, while the book value checks in at 193 million. That means the company is trading at 30% of book value. The company qualifies as one of Benjamin Graham’s Net-Nets, since current assets minus total liabilities is more than book value.

Considering how anemic earnings have been over the last few years, debt is basically non-existent. Actual debt is just around 2 million, as well as some lease obligations, which is to be expected considering the industry they’re in.

Earnings

2010- (1.28)

2009- (1.89)

2008- (2.56)

2007- 0.03

Yikes. That’s ugly. At least the trend is in the right direction.

According to Yahoo, there are no analysts that cover the stock. My extensive research (read: a 2 minutes Google search) couldn’t find any credible earnings estimates for fiscal 2011.

Insider Activity

I’ve decided to add a new category, focusing on insider buying and selling. For Transworld, the CEO has been buying, however other directors have been selling.

Price Appreciation

Check out this chart from the last 10 years:

As you can see, the company is trading at some pretty low levels. If the company finds a way to turn things around, a recovery to $5-$7 is quite obtainable. I’d set a target price of $6.

Summary

Transworld is an interesting company with a pristine balance sheet that needs a turnaround. While I’m attracted to the balance sheet, I’m not sure how the company is going to improve things. I think the chance of the company getting bought out is virtually none. While I’d put the chances of the company being taken private higher, that’s the only potential catalyst I can see that can really improve the price. I’m going to keep researching this one, but will probably take a pass.

While watching Mad Money today, everybody’s favorite loudmouth took a call on Nokia. The question was about whether Nokia was an “accidental dividend stock” because it had sold off so much. Jimmy Creamer didn’t like it much, mostly because it had just cut it’s dividend. (More on that later) When CNBC put up the chart, I was absolutely shocked at how cheap Nokia had gotten. Check out this 5 year chart:

The stock is flirting with the lows of 2009. Is it a buy at these levels?

Why Is It Cheap?

Operations have been tough over the past year. Earnings for fiscal 2009 dropped to a fraction of what they were in past years. The market for handsets was weak, upgrading their cell phone is one thing people can wait to do most of the time. They are also getting their butts kicked in the smartphone market in North America by RIM and Apple, among others.

Industry Outlook

Wireless is hardly going away, with the industry returning to an annualized growth rate of 10% by the end of 2009. Nokia led the way with a market share of 39.1%, down a bit from their usual spot at 40-41%. That decline can be attested to the lack of smartphone sales.

Dividend

This is the reason why I hate Jim Cramer. Dividends get treated a little differently in Finland as they do in North America. What Nokia’s board does is looks at results for the year, then declares an annual dividend. They pay once a year, unlike most North American companies. 2009′s dividend was 0.40 Euros.

Balance Sheet

Market cap checks in at a hair over 37 billion. Nokia’s book value is $3.77 per share, which means the company trades for 2.63 times book value. The average for the sector is 1.63, however this includes all sorts of other communications stocks. From a quick glance at their direct competitor’s balance sheets, (excluding Apple)  Nokia does trade at a discount to its peers.

Debt is a bit of an issue for Nokia, currently it sits at a hair above 4 billion. Most of the debt was taken on to finance the acquisition of Siemens last year. Debt is hardly excessive for a company this size.

Earnings (in Euros)

2006-1.05

2007-1.83

2008-1.05

2009-0.24

Earnings are not heading in a positive direction. Analysts are expecting earnings of around 90 cents for 2010, putting the company at 11 times forward earnings.

Price Appreciation

As mentioned earlier, the stock is close to levels last seen during the market collapse of 2009. This is easily a 10 year low. An increase in price to the low 20s wouldn’t be out of the question, considering the stock spent considerable time at that level over the 2005-08 period, before shooting up to a high of around $40. Upside is a little more than 100%.

Summary

Nokia is a dominant player in the global handset market, especially in the fast growing areas of China and India. They are a world class company that stumbled as the handset market slowed. They are getting hammered in the smartphone market by competitors who do an awful good job of making good phones. If they come out with a smartphone that actually catches on in North America, this stock could end up looking like a fantastic bargain at these levels. I put the chances of that pretty low though.

If you’re a believer in the Euro continuing to sell off, this will act as an additional lift on the company’s bottom line. Every cent the Euro falls against the other currencies, the better it is for Nokia’s bottom line. I’m not smart enough to make that call, perhaps you’d like to make a prediction for me.

Nokia may be added to the Uproar Fund when it launches in a couple of weeks. Or it may not. Stay tuned.