ValueVision Media Inc fka VVTV

[makesumgravy]

4 Risks Related to Uncertainty in ValueVision
by: Jae Jun December 19, 2008 | about stocks: VVTV
Jae Jun
This This post is an update to ValueVision Inc (VVTV) according to the latest 10-Q filing on Dec 11, 2008.

Click here to read the first post on VVTV to get the background information and valuation numbers as I will be skipping some sections that I feel have not changed.

Business Developments
As hoped, VVTV is now planning to sell itself as one of its strategic options. Considering the business, competition, environment and management including the board, this is a good move. There hasn’t been any further news relating to this sale, but it seems like there are interested buyers out there.

Growth Strategy
As I stated in the previous post, my reason for looking into ValueVision is based on the assumption that the company is sold off or liquidated. I am therefore assuming the entire retail business will provide 0% growth for the business, however, I am not implying they won’t be making any money off retail. The cash from retail should just cover their high fixed operating costs.

The growth strategy and my thoughts remain the same as the previous post.

Risks
Although the current price has probably factored in most of the information, a downside risk still remains. The risk related to uncertainty aspects includes:

High management turnover and lack of leadership
GE Equity redeemable preferred stock redemption date of March 8, 2009
Failure to sell itself to potential buyers
Renegotiation of cable contracts which is due to expire on Dec 31, 2008
Financial Statement Updated Numbers
The 3rd quarter numbers are compared to the previous quarter rather than a year ago, as a one year comparison does not provide a good indication of the business at the moment.

My perspective is that the balance sheet is clean, but the future is bleak and uncertain.

Numbers compared to the previous quarter:

Balance Sheet

Cash & Equivalents up 15.6%
Short term investments down 54.3%
Accounts receivables down 22.5%
Inventories up 26.7%
Accounts payable up 59.8%
Total current liabilities up 29.7%
increase due to accounts payable
Income Statement

Net sales down 12%
Cost of Sales down 13%
Sales and COGS are both down the same amount which is a good thing from an accounting point of view. If sales goes down but COGS goes up, that is a big warning sign for accounting manipulation.
CEO transition cost of $1.8 million. Statements mention it is a one off charge, but it seems like this line is often added as CEO turnover rate is very high. If management stabilizes, about $0.06 per share should be added back to net income.
Other expenses came up as $969,000, which is due to selling securities at a loss. No cash taken out of the back to pay for this expense.
Statement of Cash Flows

Collection of accounts receivables up 23%
Cash used for inventory up 62% but still positive
Cash from operations up 66%
Cash increase of 16%
Valuation
With the numbers from the 3rd quarter statement, valuation numbers have been updated from the previous post.

Sales from Full Time Equivalent households (FTE; households receiving 24hr programming)
Net Net Working Capital and tangible assets
Sales Per FTE

A quick way to look at VVTV is by their net sales per FTE. VVTV reaches 72 million households with the average net sales being $6.92 per household, down from $7.92 in the previous quarter. But we took this into consideration last time by assuming a drastic consumer contraction and took a low, yet possible number of $4 net sales per household. This still yields a value of $288 million (4×72=288) to the network, which is now 21 times more than its current $13.46 million market cap.

Net Net Working Capital and Tangible Assets

Net Net Working Capital = Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) - total liabilities

(Value in millions except share price) 7-Nov 17-Dec
Cash and short term equivalents $59.72 $56.44
75% of Accounts receivable $41.98 $32.38
50% of Inventory $27.82 $35.26
Total Liabilities $73.97 $93.17
NNWC $55.55 mil /$1.65 per share
$30.92 mil /$0.92 per share

(Valuable assets)
FCC (Boston TV station) $31.94 $31.94
NBC License Agreement $8.99 $8.19
Property $20.00 $20.00
Assets + NNWC $116.48 mil /$3.47 per share $91.05 mil /$2.71 per share
Diluted shares outstanding 33.57 33.59
Market Cap $17.80 $13.46
Share price $0.53 $0.40

ValueVision is currently being sold for 43% of its NNWC value compared to 32% for last quarter. The NNWC per share value is now $0.92 compared to the stock price of $0.40.

However, the NNWC does not include ValueVision’s main assets which is its FCC license, NBC license and its owned property.

Let’s assume the property of ValueVision was affected by the housing crisis by 20%, with the reason given in the first post. The office real estate in Minnesota is then given a value of $20 million. Add in the FCC, NBC license and property to NNWC to get a value of $2.71 per share. The current price is still 15% to its NNWC and asset value.

However, one thing we should consider is that this price only applies if the company is sold this instant. Cash, inventory, receivables and liabilities are variable which can either increase the NNWC or reduce it.

Therefore, if we look at a value that is independent of these liquid assets by only considering its licenses and buildings, a hard conservative value is $60.13 million which is still 4.4x more than its current market price.

Conclusion
The NNWC value has decreased, but the underlying assets still remain the same. There are no alarming indicators in the statements and the 66% margin of safety I applied before purchasing has cushioned the recent price decline but still allows for a very good potential reward.

However, before making a purchase, consider the additional risks outlined above.

Disclosure: I hold positions of VVTV at the time of writing