Sunday, August 29, 2010

Management and Fundamentals colliding

Another company I like is Universal Travel Agency (UTA). As of late though, there have been some....interesting...things materializing which makes it very hard to make a decision with regards to buying in or not, especially on this huge dip it's taken. Taking a look at management first, there are a lot of negatives lately in terms of decisions.

First, they issued more shares at $7ish in order to help pay for aquisitions. There reason I see this as a bad decision is two fold. First, because they were in the middle of a quarter in which they made $0.33/share. That puts them easily over a dollar EPS this year which means the stock should fall somewhere between 10 and 15 dollars per share depending on the P/E ratio. Possibly more if this growth rate gives a higher P/E which it may. Well, if that is the case they are effectively aquiring a company but paying double what they should by using cash raised from shares that are worth half of the company's intrinsic value.  The second reason is why dilute shares when you have $43.5 million in cash? Just use the cash you have on hand for the aquisitions and do a buyback, thus increasing the price of your stock closer to fair value. And why is there no insider buying if this is potentially a triple based on forward EPS? The way they are handling these aquisitions worries me because they are doing pretty much everything Buffett says management should not do if managment cares about the stock price.

There is also some discrepancy about reported earnings, along with the fact that they had to ammend their 10Q because of an expense being put under the wrong business segment. This mistake didn't effect overall earnings, but I don't blame people for wondering if there are other mistakes.

Now on to the positives. Fundamentals are great, huge EPS, and clearly a growing company. Also, despite the offering of more shares, float is still very low around 20 million. Management are obviously looking to expand and the kiosks for booking trips are a great option in China, where personal computers aren't as prevelant. They also have a recent partnership with Agoda, a subsidiary of Priceline, which allows UTA to access their hotel network. This in turn, will allow Agoda to increase exposure in China.

UTA still has 16% margins for the MRQ, despite the fact that they included the numbers of two aquired companies in their 10Q that have the lowest margins of the 4 aquisitions they are planning on closing. A P/B < 1 doesn't look too shabby either. Finally, subtracting out their 43.5 million in cash from their current market cap gives them an enterprise value of around 56 million or an effective P/E of 2.8.

UTA definitely has potential to show big jumps in PPS, but not without management showing more concern for the share price. They may be forced to do this, however, if they plan on paying for aquisitions with stock. That said, I am not buying more until I see how management handles the remaining 2 aquisitions, but I am not selling because I see upside potential. That is my stance, as of now.

These posts are not meant to be taken as investment advice. Everything written is solely the opinion of the poster.


  1. UTA's revenue growth has been great compared to the industry average (UTA: 113.8; industry avg: 11.9. However, their P/E TTM is 4.3 compared to the industry average of 49.5, and their Price/Book is .9 compared to an industry average of 5.8. I agree that caution is in order.

  2. "However, their P/E TTM is 4.3 compared to the industry average of 49.5, and their Price/Book is .9 compared to an industry average of 5.8"

    And why is this a bad thing? The lower numbers in both these categories show an undervalued company.

  3. Oh, you're right. Sorry about that;-)