To OTC Journal Members:
 

What's Wrong With Commerce Planet (OTC BB: CPNE)? Part II

The last time I wrote an edition entitled what's wrong the Commerce Planet? the stock had just rebounded off a major drubbing down to the $1 level. It was the October 21st edition, and we subsequently made it back to $1.60.

Today's lackluster performance after what could only be consider a blockbuster quarterly performance is beyond puzzling. It is flat out a HUGE disappointment to me, as I'm sure it is to you as well. 

Today, just before the market opened, CPNE announced it netted just over $3 million on $9 million plus in revenues- equating to $.07 per share in EPS. All in all- an outstanding piece of news. One would think this news would send the stock flying up the charts. When I saw the numbers before the open this morning, I really thought we would trade north of $2 today.

Sometimes the market simply confuses and confounds all logic, and no matter how good your forecast, the market does not cooperate. This is one of those times. This is gut check time- time to ask yourself if you believe in the future of CPNE? - do you believe the price will ever really reflect corporate achievement? 

Let's have a look at the fundamental side first. Here's the table from last Thursday's edition with the Q3 numbers filled in the last column:
 

Column five is eye opening. Let's start with the top line- revenues- this year $4 million to $7 million to $9.7 million. Cash - $254k at the end of 2005- now nearly $3 million. Long term debt has gone from $3 million to zero. Profits- $535k to $1.4 million to $3.1 million. All in all, about as good as I have ever seen, and reflective of a stock that should be moving up.

There is one issue I found very confusing, and it took some digging in the 10Q to understand how this issue is being treated. If you look at CPNE's press release, they state the company generated $9.7 million in "Combined Revenues". If you look at the 10Q the company filed with the SEC, it states the company only delivered $7.62 million in revenues. Both show $3.1 million in profits- no discrepancy there. Why the top line difference?

The answer can be found buried in the 10Q on page 18 in the section entitled "Segment Results". This is one of those confusing accounting issues that leaves you scratching your head. It will bore you to death. Sorry.

CPNE has three distinct segments: The Consumer Loyalty Group which generated $6.7 million of the revenues, Legacy Media which was $1.6 million, and O.S. Imaging, which was $629k. OS and Legacy are separate subsidiaries that provide marketing and printing services to Consumer Loyalty. CPNE bought both of these companies instead of outsourcing the services. Consumer pays each of the subsidiaries for their services. Those payments become revenues to one division and expenses to another. In the "Combined Revenues" you see the top line for all them. In the consolidated numbers, the accountants simply drop the revenues paid to one, and drop the expenses by the other.

CPNE would be paying this money to an outside source had the not bought their service providers. About $2 million was described as "intersegment adjustments". There's the difference. 

So, is CPNE generating $7 million or $9 million quarterly? The answer- I don't know which way to look at it, but either way it is strong. Under either scenario the company still earning $3 million- that's the double bottom line, and they have it in the bank. The point- it doesn't really matter.

Now let's look at the technical picture, which became very murky today. The stock did not trade well off what I believed was a breathtaking earnings report. After several hours of contemplating the situation, I will put forward a theory. 

I believe the company used very poor judgment in the timing of their earnings release. Clearly, there were sellers lurking to sell into the earnings report. The earnings came out Monday, before the market opened, which was just about the worst time possible. No one but those looking to sell was watching.

The sellers were out in force right off the bat, and caused the stock to gap below Friday's close, which was all it took. When the stock opened lower it created doubt in investor's minds, and the stock was never able to get any legs.

That's just my theory for what it's worth. Right or wrong, the fact is the stock traded very poorly today in light of an earnings report that could easily argue for a $5 stock. I have seen this before. Stock trades well up to earnings, earnings come out, they are great, stock trades down. Happens all the time as short term investors looking to "trade the event" dump their shares.

So, given the facts, where to from here? I believe the next week is pivotal. The stock needs to start behaving better, or the future of the company will be called into question. I have been around long enough to know the market can predict a turn for the worse long before the company does, and for all I know that could be the case here.

Here's what I suggest- if the stock does start trading up from this $1.50 level this week, it will signal the sellers got out and bulls are taking over. A break above the October high of $1.80 would be very bullish, and make my $2 price target for this year a near certainty.

On the other hand, if the stock starts trading down this week, I believe the $1.35 level will prove a critical threshold. If the stock drops much below the $1.35 level, this thing could go back to $1 as it did earlier this month.

It will be a while before we see numbers again. It could be as far out as the end of March. They are on a calendar year, and as such will have to complete their 2006 audit before we seen the next earnings release. Perhaps that's just what we need- an extended period of time with low visibility.

Here is the complete text of the earnings release for your review:
 

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