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Thursday, May 26, 2005

Navarre (NAVR) shows solid strength

I've been in Navarre ever since it fell to below $7 after announcing the FUNimation deal. I really like this story because it appears to be a case where the market got it completely wrong. In fact, I'm beginning to really enjoy when the short hoards crush companies because that's when I find really good values.
Navarre was beaten down because they did a game changing acquisition at the same time the market felt that they were/are overexposed to Anti-Virus software. Microsoft's announcement of free AV hit a lot of the players hard. To compound the problem, Navarre ended the quarter with $5K of cash in the bank, which was just a bad move optically. So, the market felt they had a hat-trick of badness in Navarre. But they were wrong.
First, the acquisition of FUNimation actually makes a lot of sense and will likely end up strengthening Navarre's position. Navarre has been a distribution company; they distribute video games and software to large retailers. The distribution business is a notoriously low-margin business model, so management acted to change it. They bought FUNimation, a company that licenses Anime content for the U.S. market. Anime is on a significant growth tear as it penetrates the mass U.S. market. Barnes & Nobles and other mass booksellers have installed Anime sections. It's clear that American youth are warming up to this asian cultural phenomenon with increased exposure -- it's new, fresh and different. Additionally, this business has much higher margins that Navarre's existing distribution business -- something along the lines of 35% v. 15%. If Navarre is able to get additional growth from the content and improve their operating margins, then the stock is extremely cheap.
Addittionally, the shorts did a lot of damage because when the company went to the equity markets to pay for the deal, their price no longer made it possible for them to complete it. It's clear that Navarre made a stupid mistake in committing to the deal before having the funding in place. The company then went to the convert markets and were shut out there as well. Most observers felt that they would have to unwind the deal. But, if one looked closely at their balance sheet and noticed the relationship with GE Capital, they should have realized that they still had another out. GE Capital does quite a bit of acquisition financing. I know some of the people they have in that organization and I deeply respect their skills and abilities. Therefore, when I saw that they financed the deal, I knew that this was a good one. GE does a lot of homework and was privy to a lot of documents and forecasts that we as investors are not. If they liked, I liked it. GE liked it so much they threw in additional dept capacity for general corporate purposes just to silence the liquidity critics.
I think this stock has a lot of upside as people begin to realize not only that the ocmpany is NOT in trouble with their Anti-Virus distribution, but also has significant growth ahead of it with the new Anime business as well. The next couple of earnings announcements should be a blast.

**Comments are appreciated. I'd love to hear supporting and disagreeing theories!**


At 11:35 AM, Anonymous Anonymous said...

nice post, yhank you

At 12:06 PM, Anonymous Anonymous said...

You hit the nail on the head
The Fun deal is just the beginning of more to come.


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