MorningWord 11/10/14: Three Blind Mice – $TWTR, $DDD, $HLF

by Dan November 10, 2014 9:41 am • Commentary

This morning I am feeling a tad salty, so I decided to pick on a trio of managements that are quickly losing or have totally lost credibility with investors:

3D Systems (DDD):

Friday afternoon, I took a quick look at the set up in 3D Systems (DDD) prior to this morning’s Q3 earnings announcement.  The implied move in the options market at only about 7% seemed fairly tame, but the company’s pre-announcement on Oct 22nd, and the stock’s subsequent 20% plus decline took a little mystery out of the whole thing. For a stock that that is down 65% from the 2014 highs, with a management that has a bit of credibility problem, this morning’s forward guidance (REAFFIRMED) seems a bit preposterous for a company that has not met their prior guidance all year.  If I were running DDD, aside from doing my best to actually meet the supposed product demand, I would also look to manage investor expectations a bit better.  I would slash forward guidance to a point where it would be nearly impossible to miss and set the stage for a series of beats.  It’s just optics of course, but not that different than optically managing earnings per share by accelerated share buybacks.

Herbalife (HLF):

While we are on the topic of once hot stocks with managements that have NO credibility, Herbalife (HLF) shares lost nearly a third of their market value from Monday’s close to Friday’s close last week after the company issued their second consecutive earnings disappointment on Tuesday.  Here is a management that has not been shy about massaging earnings per share, as the company issued $1.15 billion in convertible debt this past February to buy back their shares in an accelerated share repurchase, likely at levels almost 100% higher than current levels.  In April, management doubled down by suspending their dividend to buy back shares.  Leverage on the balance sheet is par for the course in this market, with borrowing costs where they are.  However, for a company as polarizing as HLF, with short interest as high as it is with one billionaire investor conviced the company is a scam, they might want to be a tad more prudent about how they use their free cash flow.  Seems that in the near future the cash that they have not paid in dividends, but to buy back shares, will soon be used to ward off shareholder lawsuits.  Read more of my most recent rant here.

And lastly:

Twitter (TWTR):  

The company is hosting its first ever analyst meeting on Wednesday when I suspect their new CFO Anthony Noto will take center stage.  Every word out of CEO Dick Costolo will be highly scrutinized, and I suspect there is little that he can say that can win back investors, Wall Street analysts or the financial press/ tech blogosphere in the short-term.  Here is a pretty succinct compilation of the issues dogging Costolo from Business Insider, here.

I am by no means in the camp that Costolo has to go, and frankly I suspect it’s a tad premature, despite what seems like a revolving door of senior executives.  Let’s not lose sight of the fact that TWTR’s co-founder’s Jack Dorsey and Evan Williams chair and sit on the board, with a few massive venture capitalist who are all top shareholders.  I think it is safe to say that with the stock still up 50% from its IPO price a year ago, the board’s interests are clearly matched with investors.  This is not Dick Costolo’s board – it’s one comprised of the founders and largest shareholders.

Here is the problem though – Costolo has lost credibility with investors and some in the analyst community given his inability to clearly articulate a plan to re-accelerate user growth and engagement.  As regular readers know, we have a fairly bullish long term view for TWTR, as the current marekt cap does not reflect the scarcity value of such a unique social property. It is my view the world doesn’t get the immediate neccesity of TWTR’s product offereing, but they will.  I also suspect that Google or Microsoft will try to buy them at some point in the next couple years (more recent thoughts here and here).

In the meantime, TWTR’s stock seems to be holding on for dear life on psychologically important technical support at $40:

TWTR 1yr chart from Bloomberg
TWTR 1yr chart from Bloomberg

The options market is suggesting a weekly move of about 5.5% in either direction. The Nov 14th weekly 40 straddle (long the 40 strike call and the put) is offered at about $2.25, or about 5.5% of the underlying stock price.  If you bought that, you would need a move above $42.25 or below $37.75 by Friday’s close to make money.

As I said above, I am positively disposed to the story, but fear there is little that management can and will say at the moment that leads shares back up to the mid to high $40s in the very near term.  At some point with a 3 handle I would close my eyes and buy shares as I did back in July prior to TWTR’s Q2 results (read here).