More on MEMC (WFR)

I wrote a few weeks ago that I was just as confused about MEMC's movement and earnings as everyone else. Their last earnings report was filled with special one-time charges and confusing setasides and pushforwards and, in the end, was a "miss" according to the Street consensus.

But since then, MEMC Electronic Materials (WFR) has been on a tear, returning to around $20 from it's earnings letdown price of around $17. Not bad, and I think more good things are coming.

As many folks have noted, extremely tight polysilicon supplies and high demand for wafers and silicon products from both semiconductor companies and the burgeoning solar power industry are both great growth trends for MEMC, and it seems as through the Street is coming around to accepting that the turnaround at MEMC after their past troubles is now well in place and they can be trusted to get a market multiple and, perhaps in the near future, a premium multiple comparable to their compatriots in the semiconductor sector.

Read a good SmartMoney article on MEMC today -- here's the salient quote:
"All told, analysts figure that MEMC will boost its earnings by 15% annually over the next five years. At about 15 times projected 2005 earnings, then, the stock carries a price/earning-to-growth, or PEG, ratio of 1.0. The average for semiconductor stocks is 1.5, roughly the broader market's average PEG. What are those who bought shares at the time of our last story to do with their now-pricier position? Nothing. With a still-clean balance sheet, improving fundamentals and forecasts for more of the same, this wafer maker offers thin reason for shareholders to sell."

I agree. I'm holding and see no reason to sell as long as chip production appears to still be on the upswing, though I expect the coming years to offer some significant volatility if WFR begins to trade more in step with the Semis. Should be interesting.

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CKCM Still Clicking

I'm very pleased with the performance of Click Commerce (CKCM get free real time quote from ADVFN) since I purchased my initial shares back in the Spring and added significantly to my holdings a few weeks ago. With an average cost of just over $16, I can't help feeling like I really got a bargain now that we look at their latest quarterly release.

The great news is that Click is still growing at an amazing rate -- their acquisitions have hurt cash flow a little bit, but they are also boosting earnings dramatically and they all seem very strategic and in the long term should be accretive to earnings ... though at growth rates like this it's hard to complain if it takes a while to integrate the new companies.

The stock has been incredibly volatile of late, due not only to it's small size and it's toehold in the "hot" sector of RFID services but also because it has apparently been a real darling of the momentum investors and it's pretty easy for them to exaggerate the swings in a company with such a small float. I've written about Click a couple times as I analyzed the company and decided to average down during the last dip, and I still believe in their potential (and think my guess of "at least a dollar" for next year's earnings was a real lowball estimate). For a company that's already profitable and growing quickly in an industry that sees frequent consolidation and should have strong overall long term growth, we're not being asked to pay too much of a premium with a forward PE of just 18 or so.

But that, of course, is the key -- CKCM's small size and the weight of its competitors make it very hard to judge exactly where they'll be in a few years. We have bumped up almost 20% today based on the solid "beat" of analyst's expectations, but I think the conference call this everning has the potential to move the stock as well when they discuss next year's outlook and any possible guidance they might provide. And who knows whether that will be up or down from the current price, but given the CEO's enthusiasm and talent for selling his vision I'd expect a lively and optimistic call.

The big news for me is that RFID tags continue to come down in price and the usage of the technology should continue to seep into mainstream inventory management systems as folks follow Wal Mart and Home Depot's lead. All indications are that it's working and that it's worth it -- at least for the retailers, if not yet for the suppliers.

There was a study by the University of Arkansas just recently that confirmed that the stores which were highly RFID-capable were able to be much more effective at keeping popular items in stock, which is obviously a key for all retailers. And they're moving forward pretty aggressively, expecting their top 600 suppliers to be RFID-compliant by January 2007.

So let's look forward to a great conference call this afternoon, but even without any immediate RFID bonanze for Click I think their core businesses of computer interoperability and data sharing will continue to grow. This seems to me to be a tiny company in a very sweet spot as they enable greater efficiencies for industries and operations of all kinds.

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Thought I Saw a Saw, too (LGF)

Well, Lion's Gate (LGF -- free real time quote from ADVFN) got a nice boost today -- I've been holding this one for quite a while but haven't written much about them, so I thought I should sit up and pay attention.

**UPDATE (11/1): Just saw a good article in Marketwatch that was published late yesterday after I posted this -- lots of good points there, including that one of LGF's real strengths is the fact that they run their own film distribution, as well as more on Lion's Gate as an acquisition target -- worth a read.**

I bought my shares of Lion's Gate Entertainment in a couple purchases over the last six months, with my average purchase price being $10.47. So as you can see, I am a bit under water with this one even after the Saw II-inspired jump. Long term, I'm still confident that the company will succeed and I'll be amply rewarded.

Lion's Gate occupies a very nice niche in film and tv production, and I think it's one that's destined to be a money maker for them. There are two things that make them stand out for me as a solid investment:

First, they develop and/or buy low budget but potentially profitable films that the huge studios wouldn't be interested in wasting their time on, and give them a chance to succeed -- either with critics for sleeper hits, or with niche audiences, especially horror, that have a chance to break through without star power or big budgets. In some cases, they're able to build these films into franchises that can develop a strong following and open, as has the gruesome looking Saw II, with great weekend box office numbers. LGF's boost today was due to the fact that Saw II broke the weekend opening record for the studio with about $30 Million in ticket sales ... not shocking for most movies, but pretty impressive for a film that had a budget of about four million dollars.

If you make enough movies with potential and don't spend that much on them, the successes can really flow -- but it's still the movie business, so for every Crash that's a critical hit and makes back it's nut many times over, you've got a Lord of War that disappoints. As long as you're not making $200 million special effects spectaculars, you don't need to have a blockbuster every time. The same goes for the TV business -- they're doing great with Weeds on Showtime right now, and they have that silly reality show with Tommy Hilfiger and lots of smaller profile projects including some ABC Family stuff ... the key is, they have a lot of irons in the fire that have the potential to be profitable.

And second, they own tons of content, which I continue to believe will be a great long-term driver for their earnings. In the days to come when movies are even more easily available either online or on demand on your TV, the owners of those movies have a chance to really capitalize on their libraries -- and Lion's Gate has one of the best libraries out there, with everything from the old episodes of Moonlighting to Dirty Dancing to the Halloween movies and, according to the company, more than 8,000 other titles, including lots of successful films, television shows, and kids' fare. There's an interesting Motley Fool article about their latest acquisition, and it is key to note that they do keep building this library both through purchases of other studios and libraries and through their own productions.

Now, the fact that LGF focuses on it's library and on releasing film and tv properties that are low cost generally means that their earnings shouldn't be as lumpy as the blockbuster-driven studios -- we shouldn't see feast or famine here. But that's not necessarily how it has worked in practice. Right now, with Yahoo Finance numbers, they're trading at a PE of 100+ and a forward PE of under 20 ... so you can see it's not all a steady climb up the earnings ladder. They carry a fairly large amount of debt -- more than $400 million, a lot for a $1 billion company, but their free cash flow could pay that off in a couple years if necessary.

The key for me is that this is a small company with some growing film and tv franchises and a very attractive library of entertainment properties. Management has proven that they're able to find low cost properties and libraries and leverage them into enough success to keep the company growing, and I fully expect that they will build on this as we move forward. Mark Cuban, among others, apparently agrees -- he's invested in Lion's Gate as part of his position in theater and entertainment properties, which include HDNet, Landmark Theatres, and others. Lion's Gate has been bandied about for a long time as a potential takeover candidate, too, thanks largely to the value of their library, but it looks to me as though they want to make a go of it on their own (depending, I'm sure, on the offer).

So this is a fun one for me to watch -- interesting films and tv products that really stand out and sometimes make a lot of money but rarely lose much, some real potential for leveraging the content of their library into new media, and always that little chance that the big boys might come along with a pile of money to buy you out.

So when might I sell? Hopefully never, but the things that would scare me would be any big changeovers in management or a change of focus. Finding artistic talent and producing films is a business that relies on judgement, especially when you're not dealing with star-driven effects films, and I like the judgement of the guys that run the show today ... If they started to get excited about their press releases and left their zone of competency to put together a mega-budget Saw III with Arnold Schwarzenegger and Renee Zellweger and groundbreaking special effects, I'd start looking for en exit.

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