Commentary

On Friday, October 17, Kerrisdale released a report highlighting the many shortcomings of the materials that Globalstar has so far released about its proposed Terrestrial Low Power Service (TLPS). On Monday, October 2oth, we conducted a public conference call briefly summarizing that report and addressing inbound questions. Shortly thereafter, Globalstar responded, but once again skirted the key issues. Like Globalstar, we too would like to reiterate the value of the spectrum assets in the hands of its equity holders: zero. TLPS is a non-solution to a non-problem, and Globalstar is a highly indebted and insolvent firm shored up by hype…

[Globalstar’s] “test” is ludicrous, non-realistic, non-professional, and would be laughed at by 100 out of 100 wireless professionals.

—seasoned wireless engineer overseeing a large-scale university network

Since we released our initial report and presentation on Globalstar (GSAT), the financial community has begun to question the value of the company’s proposed Terrestrial Low Power Service (TLPS), even assuming FCC approval and even taking at face value the materials that GSAT has previously put into the public domain. Here we shed light on two new topics…

On Friday, October 10th, we submitted an ex parte letter to the FCC discussing Globalstar’s planned TLPS. To view the full comment, please click here.

First, we acknowledge that we inadvertently misattributed a quotation in our report and presentation. The discussion of “that sinking feeling set[ting] in” when Globalstar management first read the FCC’s NPRM was L. Barbee Ponder’s, not Jay Monroe’s. We apologize for the error and will correct our materials accordingly.

Turning to the fundamentals of TLPS, we will have more to say but would initially like to contrast certain airy assertions made by Globalstar and Jarvinian with some concrete, real-world data. We noted a distinct lack of actual data in the presentation; an array of colorful diagrams papered over the absence of substance. (We are still uncertain what relationship Jarvinian has with Globalstar, so we will speak simply of Globalstar in what follows.)…

On Monday, October 6th at 11:30am ET, Sahm Adrangi, Chief Investment Officer of Kerrisdale Capital, will host a live presentation on a multibillion-dollar company that we're short.

This is the best short idea Mr. Adrangi has come across during his time running Kerrisdale. The equity is fundamentally worth zero and we believe that we clearly and irrefutably demonstrate that the business is insolvent.

We've created a fun video to market the event…

Introduction

Over the past several weeks, we have written a multi-part series about the perils of investing in specialty retailers, particularly those in undifferentiated formats. We strongly encourage readers to review our first three articles on Five Below (FIVE), each highlighting a different aspect about the risks of the specialty retail sector.

• Part 1: Five Below, Inc.: 50x P/E Too Rich For Xmas-Driven Discount Retailer highlights competitive risks in specialty retail
• Part 2: Five Below, Inc.: The Many Parallels With Other Overhyped Emerging Retailers That Have Disappointed Investors highlights how the specialty retail sector, as a whole, consistently disappoints investors due to unforeseen competition. In this article, we specifically highlight TCS and PBPB as specialty retail disappointments…

Summary

• FIVE’s valuation multiples are higher than historical multiples of other successful concepts in their growth phases. We compare FIVE’s multiples to those of several brands highlighted by a sellside analyst
• Morgan Stanley’s initiating coverage report last week is relatively bearish. Given lack of secular growth drivers and valuation above high-growth peers, MS does not believe FIVE’s current valuation is compelling
• Teen retail faces numerous headwinds, with too many specialty retailers competing for teen discretionary spending. Many teen retailers are closing stores and trying to recover from SSS declines in 2013
• FIVE will face increasing threats from e-commerce. It has mistimed its plans to build a national brick-and-mortar business as the industry experiences a paradigm shift towards consumers shopping more online…

As we described in our last article, Five Below (FIVE) trades at too high of a valuation for a discount retailer with mediocre same-store sales growth, average margins, and an insufficiently differentiated business model. The company’s current valuation of $2.0 billion is far too high for a retailer that generated only $76m of adjusted EBITDA over the last twelve months. We think it’s highly improbable that FIVE can meet the very lofty expectations that are built into the company’s sky-high 50x LTM P/E multiple…

We believe that Five Below (FIVE) is highly overvalued. FIVE is a specialty value retailer that offers merchandise targeted to teens, pre-teens and their parents in a concept that we view as a glorified dollar / toy store. Its valuation multiples of 3x+ LTM revenue and 25x LTM EBITDA are far too high for a company with mediocre same-store sales growth operating in the brutally competitive discount segment of the retail industry. Same-store sales growth (SSSG) has declined dramatically over the past three years, with SSSG for Q4 2013 falling to an anemic 0.4% and overall forward year guidance projected to be a modest 4%. Additionally, we expect the company’s long-term margins to be pressured by the wave of competition flooding the discount retail sector, whether it be due to the 5% to 7% annual unit expansion of Dollar General, Dollar Tree or Family Dollar, or the 2,000+ Walmart Express small-format stores expected to open over the next five years; additionally, discount retailers rarely boast impressive profit margins due to their lack of brand name products. Finally, FIVE’s catalogue is biased towards trendy/fad items that are targeted for a fickle teenage demographic and its sales are disproportionately weighted towards the holiday season, factors which both translate to increased volatility in year-to-year results…

Summary

• BOFI’s recently announced, widely expected acquisition of H&R Block’s bank deposits boosts its earnings but does not address the long-term pressures that will drive down the company’s currently inflated profitability. At almost 4x book value, as we have previously argued, BOFI’s super-premium valuation remains unwarranted.

• At least five serious bidders besides BOFI vetted the H&R Block transaction, yet BOFI emerged as the winner despite a complete lack of cost synergies. We question how valuable an asset the H&R Block business can be when no one was willing to pay a single dollar for it.

• One of BOFI’s responsibilities under the new agreement is to serve as the issuing bank for H&R Block’s prepaid debit card. Looking at the two major issuing banks already operating in this space supports our concerns about BOFI’s high valuation and unsustainable earnings: they trade at half of BOFI’s price-to-tangible-book-value multiple, generate 35% lower net interest margins, and earn almost 50% lower returns on equity. In a highly competitive market in which BOFI has little experience, its returns should be weaker than those of the leading players. This peer comparison again highlights the fact that BOFI is over-earning and will suffer long-term deterioration in its NIM and ROE…

It’s been a sensational year for investors in Plug Power (PLUG), with shares rising from pennies to more than $10. But now, it appears the party has ended, as investors are starting to cut through the promotional hype that has enveloped the company to rediscover the business’s less than promising fundamental outlook. We expect shares to continue declining sharply in coming weeks. In particular, it’s hard to imagine a company that no one wanted to buy at 15 cents a share last year is now worth $7.50. Plug Power, contrary to the bullish hype, faces severe competition, has a weak and unproven business model, and likely lacks in the research capability to innovate its way out of its current precarious financial situation…

As we have written in prior articles, we believe that Unilife (UNIS) does not have a viable business model, will never generate meaningful revenue, and is highly overvalued at what is now a $580m market capitalization.

Over the past week, two new developments reinforced our thesis. First, its Chief Financial Officer resigned, most likely because he wants to monetize his shares while they still have value and to sever ties with Unilife before its product claims are shown to be overhyped. Second, the company entered into a debt financing agreement last week that not only provides additional support for the company’s bleak business prospects, but also saddles the company with onerous debt that will accelerate the Unilife’s demise…