CPNE finally got their Q2 numbers filed late yesterday, at the absolute deadline. I spent this morning going through the numbers, and dug up the alarming trend that has investors concerned.The top line was about $11 million- pretty darn good for a company trading at a market value of $35 million.The company managed a $2 million pretax profit, $1 million post tax- which translates to $.02 per share. This means annual EPS are somewhere in the $.08 range as the company operates today after paying taxes-meaning the stock is trading at a forward looking PE of about 8. Pretty darn cheap for a company with these kinds of margins.
On the plus side, their upsell and lead generation divisions are showing quite nice gains despite only being about 20% of their sales.
Here’s the Rub- the big negative the market hates- chargebacks and complaints. It appears their Q4 ’06 and Q1 ’07 marketing partners got them into trouble. There is mention of the “Quality” of subscribers many places throughout the document. In short, they hired marketing companies to find them paying subscribers. These partners slammed unsuspecting consumers into the program, who apparently didn’t understand what they were doing, and there were a lot of complaints.
As a result, the processing banks are taking a much dimmer view of the company, and setting more money aside in reserve that CPNE can’t get for six months. Here’s a quote directly out of the 10Q:
The higher chargeback volume as a percentage of gross transaction volume has been viewed as a potential credit risk by our merchant processing banks. The unfavorable credit risk assessment resulted in increased transactional fees and penalties, and higher reserve requirements during the three month period ended June 30, 2007. The reduction in chargebacks that we have experienced during the period has improved our risk assessment and allowed us to pursue more favorable relationships with our merchant processing banks. We expect that chargeback volumes will continue to decline and return to nominal levels because of the actions we have taken however, if chargeback volumes return to a high rate as compared to gross transaction volume, our merchant processing banks may determine that we are too high a credit risk and decline to continue to provide payment processing services which would impact our ability to bill and collect payment from our membership customers.
There’s the problem, and that’s what has the market pricing the company at such an absurdly low valuation.
Here’s the hard numbers: In Q1 the banks set aside $3.5 million in reserves. It shows on the balance sheet, net of historical default rates. In Q2 the banks raised that number to $4.9 million- a huge increase.
So, this is the problem the market is freaked out about, and perhaps rightly so.
In addition, the trend to lower margins is also alarming the market. Ultimately, the prospect of the banks cutting them off is the real big enchilada.
Consider the following- according to their disclosure, the problem is getting better- not worse. However, the market appears to be unwilling to accept that fact.
Here’s what the company needs to do, and until they do or until we get through another quarter, this stock will continue to trade poorly:
The company needs to hold a conference call right now and publicly answer questions about the state of its business. This head in the sand mentality is clearly not working. Look at the price. Perhaps the management would care to explain why they were out pumping themselves as they were dumping big quantities of stock at $1.90 to a fund manager who has gotten killed. According to their disclosure, they knew the chargebacks were happening.
Secondly, the company needs to publish performance guidance for Q3- they already know how they are doing as August is nearly at an end, and August revenues are July sign ups, and September should be easy to predict.
All in all, if the company continues to perform at current levels, the stock is worth far more than where it is trading. However, the management team has proven they have no idea how to manage the information flow through a troubling time.
I’m looking for the door on this one. I have better places for the money. I made a mistake hanging in there this long. It’s not the first time, and it surely won’t be the last. A move to more public disclosure could turn me around. That’s my biggest problem with these guys
Comments and questions are welcome.
“Perhaps the management would care to explain why they were out pumping themselves as they were dumping big quantities of stock at $1.90 to a fund manager who has gotten killed. According to their disclosure, they knew the chargebacks were happening.”
IMHO, a huge lawsuit is just a few preparation weeks away. Snookering funds is a sure path to financial ruin, the funds don’t take kindly to those kinds of haircuts when the knowledge of the charge backs was clearly there. That’s the key part, knowledge withheld. I would say the management is bordering on venal and crooked and we should all dump them and stay far, far away. It isn’t just incompetence in lack of transparancy, I’d bet it’s the plan.
BD
Editor: Wouldn’t be surprised.
Why bother dumping now? If there biggest problem has been their main focus, with immediate improvement, wouldn’t that be just the reason to add to current positions despite the awful job management is doing in keeping us informed?
Editor: It is my view you never find out much about the character and judgement of people until things go poorly. In my view, this management team is now demonstrating they have no character, and no judgement. They should be communicating. They should be taking the millions they took off the table at $1.90, and buying stock back. They should be using some of the cash to buy back shares- if they believe. Once I can’t trust the management, it is over for me, even if I end up selling at the bottom. However, as I stated. If they start doing some of this stuff, it would change my view.
ouch! this has been a wake up call for me. i bought CPNE over a year ago at $.56, then watched move over 500%, held, held, held, thinking it couldn’t go any lower, now it’s almost back to where i bought and i will be forced to sell… moral of the story-TAKE YOUR PROFITS while they are still there! looks like there may be light at the end of the tunnel, but i’m not sure if i can take any more of what CPNE is dishing out (or not dishing out, as the case may be)
what a bummer, would have paid off two cars and a credit card costing me combined amount of about $1000/mo, had i sold it at $3.50.
i too will be looking for the door, unless there is a drastic change in information flow, give it another shot with NCNC, NIHK!!
DF
Editor: It happens. I should have called it earlier. In the future, perhaps a better strategy would be to take partial profits on those kinds of situations, and keep some in case it goes on to be a dream situation. I have a now idea coming for you in September that you will love. Keep your powder dry for then.
The sale by insiders at $1.90 was always very suspect to me. Everything about it seemed wrong. This is obviously pure speculation but, I always wondered if the “fund” that bought the stock immediately went short against the box, albiet in a round-about way. For the creative it is still posible to short shares that are technically not-registered to trade.
Regardless, thanks for the tip on this stock! I did very, very well in it and then rolled it all into EFSF.
Thanks again,
soes
Editor: My next and my favorite idea of all time is coming in mid September. Perhaps we can duplicate the good side of CPNE.
Investigations are starting on the commerce planet side
Editor: This will be an exercise in futility. What they are saying is that they believe their stock is being illegally naked shorted from offshore. I’ve heard this complaint for years, and nothing ever happens. By your own stock in the open market, tell investors what is going on, and run your company. That’s what they have to do.
Have to love the news this morning that they the board is finally being proactive in protecting and providing value to those who own the company, thumbs up, finally
Editor: On the surface, this seems positive. However, I have seen many companies complain about manipulation and illegal naked short selling for years. Nothing ever comes of it. Buy your own stock in the open market, buy back some of the stock you sold at $1.90. Tell investors how the quarter looks. Have a conference call with an open question and answer session for anyone, and then run the company really well and let nature run its course. That’s how you fix the problem.
As I stated before the product and sales are the problem. Chargebacks have been catastrophic for over 1 year and finally caught up to them. This is not related to anything but disatisfied customers and poor customer service.
Editor: That’s one of the key issues. So- do you believe the worst is behind them? So would you say it’s a buy? Or do you believe the problem is going to get worse and it’s all over?
How do you see that news from today:
“The Company has formed a special committee to hire and oversee special counsel that is tasked with investigating international exchange listings and taking measures to de-list from all foreign exchanges.”
[Link to Market watch article]
Now the ‘bad foreign investors” are responsible for the poor performance or what?
These guys are so poor in their mind, it is incredible…
I think we all have to write off our investments in CPNE as they might disappear within 6 month of time if they continue like that… down another 8% today…crazy
Editor: Here’s how I see this kind of stuff. They are saying they believe their stock is being illegally shorted from overseas. Over the years, I have heard many companies complain about this, and nothing ever comes of it. Here’s how they solve the problem- buy back their shares in the open market- take some of the millions the insiders took off the table at $1.90 and buy back the stock. Hold an open forum conference call and answer questions from investors. Provide a Q3 forecast. Then, let nature run its course. Barring that, the stock will continue to perform poorly. That’s my view.
Hi,
I don’t understand how foreign short selling has to do with “…investigating international exchange listings and taking measures to de-list from all foreign exchanges.”
First off, how can their stock be listed on a foreign exchange without their knowledge? That sounds hard to believe. Secondly, the correlation between short selling and listing a stock on an exchange makes no sense.
Please explain.
TIA.
Editor: Many small stocks get listed on exchanges over in Germany without the company’s knowledge or consent. There are those who believe the exchanges are doing it to accomodate funds who want to short sell, while avoiding the short selling regulations in the US. Thanks to the DTC’s lax enforcement of the “open fail to delivers”, many people believe this is possible. I have no knowledge of any instance where it has been proven, but this is where some companies point when their stocks are getting killed. As far as I am concerned, tell me how the banks are treating your chargebacks and how you are doing this quarter. In my view, the rest of it is all BS.
This problem will continue to worsen. Charge backs will increase. No bank will take their business. This stock will continue to drop.
Editor: It appears that way for now. I hope you are wrong for all the shareholders, but evidence points to an accurate prediction.
It would be interesting to hear Feinberg’s thinking on it. After all he is known for his due dilligence and heavy interogation ofmanagement at companies he invests in.
Editor: I actually met with an analyst who used to work for him earlier this week. He told me he was up 70% on $500 million in 2006. The guy has a quick trigger finger when stocks go the wrong way, so I am willing to bet he is completely out and pissed.
This situation is really very, very frustrating; it’s seems the bottom doesn’t exist for this stock. Now it’s losing 10% again, we are at 0.63$!!!!!! UNBELEIVEIBLE.
Read again and again last press realeses, included the 10Q; what makes me nervous is that from their statement and their numbers, seems the fundamental of the co. are still ok, maybe more than ok,….so what????
Is this the opportunity of the life time, or something is going wrong behind??….
Apart from the problem about their communication maybe you know something that we don’t, are your information the same we have…??
And, in the truth the only thing that disappointed me in the last q. was the tax rate, very very high.
What you think about that?
Editor: It’s not the tax rate- it’s the chargebacks from the banks. Investors think they are going to get caught off from collecting on credit card charges, and the company is doing absolutely nothing to allay investor fears. They state the problem is getting better, but need to deliver much harder facts. As I have said, until they start communicating with investors about the real state of this business, the stock will probably continue to trade poorly. Perhaps they will get off their asses and give out some real information next week.
good news today 8/20 but the stock still go’s down
Editor: This stock will continue to trade poorly until they take the steps I have been spelling out. If they don’t take those steps, it’s an indication to me this company will continue to head in the wrong direction. Will they do what needs to be done? I don’t know.
More psychobabbel signifying nothing:
GOLETA, Calif.–(BUSINESS WIRE)–Commerce Planet, Inc. (OTCBB:CPNE – News) today announced plans for its next phase of growth within its existing consumer direct membership loyalty business and the expansion of its software development and proprietary technology platforms focused on intelligent media enhancement tools for B2B clientele.
This is the sorriest excuse for management I’ve seen in a long time.
BD
Editor: I have always maintained you don’t find out anything about character until things go wrong. In the midst of what is a terrible time for shareholders, so far the management has not demonstrated they have the skills or the will to manage this problematic period. Therefore, I don’t see this as a long term hold anymore. I should have seen this coming some time ago. Another expensive lesson.
good call on this one. They need more visibility going forward. On that point, have you checked out your old fav BPTR, they have now made 3 cents (almost) in the past two quarters, but the stock is stuck at .08. The company has followed many of your sage suggestions, cutting the expansion efforts and focusing on the core business and dumping Cataldo, but the company has gone quiet. Have you heard anything in your travels? thanks again for your timely insights.
Editor: My guess would be they are positioning the company for a sale to someone so they can get out of being public. Could end up being an LBO or just take the company private. If they aren’t doing anything to get the word out, they either continue to be idiots or their plan is to get taken out somehow.
You may not like conspiracy theories but I have this scary thought that someone keeps naked shorting this stock so that some affiliated fund makes a buyout offer at a modest premium to the prevailing price and the parties involved make a bundle on the short position and get CPNE at a single-digit multiple all in one gulp.
Editor: Anything’s possible. At this point, I would love to see it happen sooner or later.
I believe the management has shown plain decit as well as lack of ability. They may sell/ take the company private in a fire sale just to get out of it. This one of few times I feel sorry for the Venture Capitalist.
Editor: If you are referring to Feinberg’s fund that bought millions of shares at $1.90- don’t worry too much. A guy I know who used work for him tells me he made 70% on $300 million in 2006. He can handle it.
up 18% mid-day, any idea why?
Editor: Investors are encouraged by Friday’s announcement that they will be holding a conference call on September 4- this is what I have been saying all along they need to do. They haven’t disclosed any details, but I believe they should open it up to questions from anybody, and provide a forecast for Q3. They already know where they stand. The market is assuming they are going to have something positive to say. Could be a “buy on mystery, sell on history” opportunity. The strategy would be to buy now, and sell just before the conference call on the assumption they will say nothing meaningful and the stock will go down. I continue slowly reducing my exposure on this one, hoping it will turn up even stronger.
Any thoughts on today’s price jump?
Editor: Investors are encouraged by Friday’s announcement that they will be holding a conference call on September 4- this is what I have been saying all along they need to do. They haven’t disclosed any details, but I believe they should open it up to questions from anybody, and provide a forecast for Q3. They already know where they stand. The market is assuming they are going to have something positive to say. Could be a “buy on mystery, sell on history” opportunity. The strategy would be to buy now, and sell just before the conference call on the assumption they will say nothing meaningful and the stock will go down. I continue slowly reducing my exposure on this one, hoping it will turn up even stronger.
Any thoughts as to what’s going on today? Close to a 20% increase in price at the time of writing.
Thanks
Editor: Investors are encouraged by Friday’s announcement that they will be holding a conference call on September 4- this is what I have been saying all along they need to do. They haven’t disclosed any details, but I believe they should open it up to questions from anybody, and provide a forecast for Q3. They already know where they stand. The market is assuming they are going to have something positive to say. Could be a “buy on mystery, sell on history” opportunity. The strategy would be to buy now, and sell just before the conference call on the assumption they will say nothing meaningful and the stock will go down. I continue slowly reducing my exposure on this one, hoping it will turn up even stronger.
Nice move +19% today heavy trading over 1 million shares. Is there any positive news?
Editor: Investors are encouraged by Friday’s announcement that they will be holding a conference call on September 4- this is what I have been saying all along they need to do. They haven’t disclosed any details, but I believe they should open it up to questions from anybody, and provide a forecast for Q3. They already know where they stand. The market is assuming they are going to have something positive to say. Could be a “buy on mystery, sell on history” opportunity. The strategy would be to buy now, and sell just before the conference call on the assumption they will say nothing meaningful and the stock will go down. I continue slowly reducing my exposure on this one, hoping it will turn up even stronger.
Well it was nice to see on Friday that at least CPNE has a pulse.
Editor: Investors are encouraged by Friday’s announcement that they will be holding a conference call on September 4- this is what I have been saying all along they need to do. They haven’t disclosed any details, but I believe they should open it up to questions from anybody, and provide a forecast for Q3. They already know where they stand. The market is assuming they are going to have something positive to say. Could be a “buy on mystery, sell on history” opportunity. The strategy would be to buy now, and sell just before the conference call on the assumption they will say nothing meaningful and the stock will go down. I continue slowly reducing my exposure on this one, hoping it will turn up even stronger.
TAKEN FROM MARKETWATCH.COM
Last Update: 4:50 PM ET Aug 24, 2007Print E-mail Subscribe to RSS Disable Live Quotes (EDGAR Online via COMTEX) — ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS.
YOUR THOUGHTS PLEASE ON THIS RELEASE DATED 8/24.
THANKS
Editor: You are asking this question on the BLOG that covers my view on the Q2 numbers. Very disturbing revelations concerning their banking relationships and chargebacks. Read the content in this BLOG.
Still following this company and your comments. Always glad to get your view. I am encouraged by the meeting announcement. BTW, a lot of talk on the THK board about why they think cpne should be bought by them -see link off of ragin bull also;
http://ragingbull.quote.com/mboard/boards.cgi?board=CPNE&read=3401
Interested to know you’re thoughts on this chatter.
V
Editor: I had heard some potential take out rumors, but I am always reluctant to share these kinds of rumors. If someone like a THK comes along and wants to buy them, then great. However, unless you like the company on a stand alone basis, I wouldn’t buy it on the hope THK buys them out. That company has its own problems.