The Marley Group

After retaining their services for nearly a year, True Religion (TRLG) announced that they have concluded their review of strategic alternatives with Goldman Sachs, with this statement from the company’s CEO, Jeffrey Lubell…

“True Religion has been a fast growing young company, with a desire to build a global brand. We engaged Goldman Sachs to help us evaluate various strategic options for maximizing shareholder value. We have been presented with and have thoroughly explored a number of strategic opportunities over the past year and have come to the conclusion that focusing on our own current growth initiatives ultimately serves to best enhance the long-term value for all shareholders. With our visibility into the future of this year, which we have shared publicly, we believe our stock is undervalued. Our consumer direct segment is expected to grow significantly in the next three years, with our eight retail stores today growing to 14 stores by year-end. We anticipate that this segment will grow rapidly in 2008 and 2009, reaching at least 50 stores by the end of 2009, which we believe should expand our operating margin. We also expect to continue to grow our wholesale and licensing businesses in the U.S. and internationally.”

Mr. Lubell clearly stated that he feels True Religion stock is undervalued right now, and the decision to focus on continued growth rather than pursuing a sale of the company serves to further reinforce this sense of insider confidence at True Religion. This announcement was somewhat anticipated after hearing so little concerning the Goldman review for so long. It should be viewed as a net neutral event.

Disclosure: Joseph Urgo has a long position in True Religion Apparel.

After gaining nearly 15% on a heavy volume day yesterday, following an upgrade by Sterne Agee, True Religion (TRLG) closed up 6% on another high volume day. With 46% of the float short as last reported, it appears that a short squeeze may have been triggered, with shares breaking out of the range they have been bound in, closing well above their 200 day moving average, a metric they’ve closed a trading-day over only 12 times since mid-November of last year. With such a high percentage of the float currently short, shares could appreciate rapidly if traders whom are short True Religion start to feel the need to cover their positions quickly.

In addition to the aforementioned upgrade from Sterne Agee, True Religion has also been the beneficiary of some extra press, from both CNBC and the tabloid’s most recent victim, Alex Rodriguez, as he was wearing a pair of True Religion jeans in the recently highlighted photos. They also presented at Friedman, Billings, Ramsey & Co. 2007 Growth Conference yesterday, and will be making a similar presentation at the Piper Jaffray 27th Annual Consumer Conference, in taking steps to improve their visibility an sustainability as a company in the eye’s of Wall Street.

True Religion has made strides in their business in recent months as well, further building out their retail initiative with True Religion branded store openings in Northern Texas, Southern California, New Jersey, Chicago and New York in the past two months, which should add revenue and expand margins quickly after coming online. The company also recently announced signing a licensing deal with a leading high-end handbag designer and distributor, to create and sell True Religion branded handbags, with a line of bags debuting at a fashion show in August of this year. This deal adds to a number of licensing deals that True Religion has signed, which have yet to roll out. As products from these deals begin to come on line in the approaching half of 07 and early 08, both the top and the bottom lines will benefit. The company continues to execute their business plan nicely and looks to be positioning themselves for long term, sustainable growth and brand durability.

Disclosure: Joseph Urgo has a long position in True Religion Apparel.

Hold
12 Month Target $35.00

The Marley Group initiated coverage on Yahoo! (YHOO) nearly 6 months ago with a ‘Strong Buy’ rating and set a price target of $32.00. Shares of the company have since appreciated to our estimate, making this an appropriate time to offer an updated outlook on the company.

With vastly improved levels of investor sentiment driving a 36% appreciation in shares of Yahoo! since recommending purchasing them in October, the stock is trading at a valuation much closer to fair value. Contributing largely to the aforementioned improvement in investor sentiment surrounding Yahoo!, are reports that the roll out of the long awaited upgrade to their search marketing platform, Panama, has been going smoothly and has been receiving positive feedback from customers.

Given the positive response to Panama, we are sticking by our view of Yahoo! earning $0.72 per share for the year. With initial reactions being positive thus far, a good deal of investor concern has been lifted, reflected in Yahoo!’s strong advance these past few months. Taking this improved sentiment and lessened risk associated with the company after initial reports of a successful Panama launch into consideration, shares are positioned to further return to normalized valuation levels, causing us to raise our target price to $35.00 per share. While a realization of this estimate would represent a 9% gain from current levels, Yahoo! is no longer irrationally undervalued relative to their peers. Therefore, we are updating our view accordingly, reducing our rating on Yahoo! to a hold on valuation grounds.

Disclosure: Joseph Urgo does not have a position in Yahoo!.

True Religion (TRLG) shares closed the day at $16.24, up $1.28 on the day, representing a gain of nearly 9% on about 5 times average volume. Shares remain active after hours, up almost another 4%. While no official news has been released, the rumor behind this move calls for a management led buyout of the company, as reported by CNBC’s Mark Haines early this morning.

Though completely unconfirmed at this point, this is a rumor that looks to be a realistic possibility. Goldman Sachs was hired about 9 months ago by True Religion and has remained on board despite no news or updates regarding what exactly they are being compensated for. Normally, when an investment banker such as Goldman Sachs is brought on board to explore strategic alternatives, the company winds up being acquired or taking on an initiative such as a large buyback or dividend to boost shareholder value. Also helping to make this rumor appear viable, is the fact that management already owns about 46% of the shares outstanding, a very significant amount. Couple these facts with a very strong balance sheet and strong financial metrics that make this stock look very undervalued at current levels, and the possibility of a management led buyout of True Religion doesn’t appear to be too far fetched.

Disclosure: Joseph Urgo has a long position in True Religion Apparel.

Strong Buy
12 Month Target $20.00

Before heading into any analysis of Stamps.com’s (STMP) financials or business prospects, it is necessary to clear up any misconceptions that the .com portion of their name may create. This is not a typical internet company, nor should it be valued as one. As the seller of a boring product with limited growth potential, Stamps.com is better looked at as a retailer with modest but above average growth rates.

Through an agreement with the United States Postal Service, Stamps.com enables customers to directly purchase and print out approved postage right from their homes or offices. The majority of their revenues are derived from their PC Postage service, which allows customers to print out postage in the form of a bar-code, generating $16.9 million in sales in the most recent quarter, an increase of 15% over the prior year’s comparable period. PhotoStamps, a service patented by Stamps.com, accounted for the rest of the company’s revenue and is the faster growing segment, generating sales of $8 million in Q4 2006, an increase of 35% versus Q4 2005. As a whole, Stamps.com reported sales of $25 million and net income of $4.7 million or $0.20 per share in the 4th Quarter and earnings of $0.69 per share for the full year 2006.

Selling a boring product and nothing more, this is a rather boring company. That is not a bad thing. With boringness comes consistency. Unless we wake up to one day find mail obsolete in our country within the next few years, this is a company with a strong recurring customer base that should continue to expand as more and more individuals and businesses discover the ease at which they can purchase their postage without leaving their homes or offices. Competition would be hard pressed to find competitive advantages over the service Stamps.com offers, given the virtual absence of ability to undercut Stamps.com’s prices, as postage sells at a fixed rate determined by the United States Postal Service no matter who the reseller is. Given these facts, Stamps.com does not appear to be at risk of experiencing declining revenues or rapidly eroding gross margins in the foreseeable future.

The strength of Stamps.com balance sheet is extremely noteworthy. With a market cap of only $323 million, the $106 million of cash of their balance sheet represents an amount equal to over $4.65 per share and to nearly 1/3 of their current market value. The company is using this large cash position to benefit shareholders through a recently authorized $20 million share repurchase plan, on top of an already completed $32 million in share buybacks since 2005. Stamps.com is currently expecting 2007 revenues of $90 to $100 million and earnings per share between $0.70 and $0.80. Given the authorized buyback in place, they are positioning themselves to come in at the high end of that earnings range. As mentioned previously, this company is more appropriately valued as a retailer than an internet company, considering they operate in a very contained niche. Taking this into account, a P/E of 20 is justifiable for a retailer with above average growth rates, especially considering their web based business is less capital intensive allowing for greater retained earnings than a typical brick and mortar retailer. By using an earnings target in the middle of company released guidance, $0.75, and applying a multiple of 20, we arrive at a fair enterprise value of $15.00 per share. If their buyback enables them to hit the high end of their guided range, $0.80, an enterprise value of $16.00 is fair. Add in $4 per share in cash, and we arrive at a fair market value of $20.00 within the next 12 months.

Disclosure: Joseph Urgo does not have a position in Stamps.com.

A few minutes past 12:00 this afternoon, a block trade of over 3 million shares of Bronco Drilling Company (BRNC) occurred. This single transaction alone, accounted for volume over 5 times the daily average for the past three months and represented an exchange of more than 10% of Bronco Drilling’s current market cap. Anytime a trade of such magnitude occurs, it is necessary to look into.

To my knowledge, there exists only one shareholder who could have potentially executed such a large sale, Wexford Capital LLC. While an SEC Filing wont be made until Monday, it looks as if they have unloaded their remaining stake in Bronco. Under normal conditions, such extreme selling pressure would be a cause for concern, however this was an event that has been anticipated for months. Considering this knowledge, two positives can be drawn from today’s action. Firstly, the overhead resistance that Wexford’s planned unloading has caused has been lifted. Secondly, from a technical perspective, such extreme volume as was experienced today often represents a bottom in a stock’s movement. With Wexford finally out of the way, Bronco may be ready to run.

Disclosure: Joseph Urgo has a long position in Bronco Drilling Company.

Strong Buy
12 Month Target $25.00

Following yesterday’s closing bell, True Religion Apparel (TRLG) reported 4th Quarter and full year 2006 financial results. In the most recent quarter, the high-end fashion company achieved revenue of $29.8 million and diluted earnings per share of $0.21. These numbers were in line with expectations, displaying strong year over year growth in both sales and profitability. Following a disappointing 3rd Quarter which made many question the company’s direction and staying power, investors should breath a sigh of relief as True Religion’s business appears to be back on track following a few key senior management hirings and some strategic steps that should give the brand staying power. Among these strategic steps are a ramped up retail build-out, a more diversified product mix, and the signing of licensing deals for footwear and outerwear. All three of these initiatives will lead to greater brand recognition and move the company further away from the one trick pony they have been (with premium denim sales accounting for nearly all of True Religion’s up until this point in their existence).

Despite the fact that True Religion had only 4 retail stores in operation during the quarter, two of which opened just weeks before the end of the period, the opportunity for improved margins that they provide is already quite obvious. Gross margins expanded 300 basis points in the most recent quarter to 54.1%, with the retail platform being cited as the key driver. With gross margins of over 75% being achieved at their retail locations, further margin expansions will be realized as more company branded stores open their doors in 2007. A new Miami Beach location has already opened for business and four new leases for stores have been signed thus far this year.

Management is projecting full year 2007 earnings per share of $1.24-$1.27, on revenue growth of approximately 20%. The market is currently valuing the textile apparel industry at about 20 times earnings. Based on yesterday’s closing price, True Religion is trading at a forward P/E of 13.2. With significantly higher growth rates than the industry average, as well as rapidly expanding gross margins, it is reasonable to assume that True Religion should command a multiple at least equal to that of their peers, if not higher. Further supporting this thesis is the strength of their balance sheet, with over $2 per share in cash and zero debt. Seeing no reason for True Religion to be valued at a price to earnings ratio lower than the average for the industry, I foresee shares appreciating over the course of the next year and achieving fair valuation near $25.00.

Disclosure: Joseph Urgo has a long position in True Religion Apparel.

Strong Buy
12 Month Target $32.00

Last Thursday, Bronco Drilling (BRNC) reported 4th Quarter earnings per share of $0.72 excluding a non-recurring charge incurred during the quarter. We had expected Bronco to report earnings of $0.80 per share. The downside can be attributed to a drop in utilization rates to 91% in the period compared to 94% for the previous quarter and 97% in 4th Quarter 2005. Also, day rates decreased slightly from 3rd quarter levels. Despite earnings being below both internal and consensus estimates, they still displayed very strong year over year earnings and revenue growth rates in excess of 100%.

After reviewing the information provided by management in Bronco’s conference call, we now expect full year 2007 earnings per share of $2.68 and 1st Quarter 2007 earnings of $0.54. The downward revision can be attributed to management calling for a Q1 utilization rate in the low to mid 80s. Management is looking for utilization rates to stabilize in the 2nd Quarter and eventually return to previously attained levels. Supply of rigs has increased in recent quarters while demand has dropped slightly, both negatively effecting Bronco’s prospects in the short term. They have continued their refurbishment program and intend to do so until commencing it at the end of the 1st Quarter. By that time, Bronco should have 54 rigs in opertation, compared to an average of 50 operating rigs in Q4 2006.

Management placed much of the emphasis of the conference call on their newly acquired well services division. The well services industry is expected to grow at a faster rate than the well drilling industry, as the unusually high growth rate in operating drilling rigs experienced in the past few years will result in increased demand for services on these wells in the near future. Earnings in the divison are also less subject to swings caused by moves in the energy markets, the well services industry is less cyclical than the well drilling indurty. They are looking to further grow their presence in this field, possibly by acquisition with excess cash flows once the refurbishment program is suspended at the end of Q1. If no attractive acquisitions surface, the excess cash will be used to retire outstanding debt, shoring up the balance sheet.

While the conference call should be viewed as a net negative event, with management anticipating a sizable decline in utilization rates in the current quarter before eventually stabilizing and firming up later in the year, the positive commentary on their well services’ operations is encouraging. Also, I view Bronco’s decision to suspend their refurbishment program as a positive, as current industry conditions make growing their well services division by acquisition or cleaning up their balance sheet a more sensible way to invest capital provided by operations for the time being.

Given our new view of full year 2007 earnings per sare of $2.68, and maintaining our view of shares being worthy of carrying a P/E of 12, we our lowering our 12 month price target to $32.00. However, despite the lowered price target, I am maintaining my belief that shares of Bronco Drilling represent significant value at these values, therefore maintaining a strong buy rating on Bronco Drilling Company. In the short term, continued selling pressure may prevent shares from appreciating too much as Wexford Capital, former private owner of Bronco Drilling and now large shareholder who has been unloading shares for some time now, continues to sell off their stake in the company. Also, a now expected weak Quarter 1 may hold back shares in the short run as well. However, if rates stabilize and improve in the later part of the year, as management has siad they anticipate, Bronco will be well prepared with 54 operating rigs and a well services division. Even with a weak 1st Quarter expected, their comparable year over year growth rates should still be impressive with earnings per share gains of over 20%, deserving of a P/E multiple of at least 12. Currently trading at a trailing P/E of 6.3, Bronco remains attractively valued at current levels.

Disclosure: Joseph Urgo has a long position in Bronco Drilling Company.

A little more than a month ago, The Marley Group initiated coverage on Bronco Drilling Company (BRNC) with a strong buy rating. After initially rising following our recommendation, shares have since fallen to new all-time lows, closing today at $13.61.

The recent slump in shares is the result of irrational trading decisions in my opinion. There has been no major company related news, the only recent event was a small acquisition that was greeted as a non-event in the trading day following its announcement. Natural gas has come down since the time of our recommendation, however it has not dropped to levels that would warrant a 20% drop in market value over the course of a few weeks. Assuming the absence of some sort of catastrophic event that has been driving the trading of the past few weeks whilst unbeknown to the general public, this move can only be rationally viewed as an opportunity to accumulate at an even more favorable risk to reward ratio.

Bronco Drilling Company currently has a book value of $12.95 per share. This means that the market is currently valuing Bronco’s business operations at less than $0.67 per share, $0.10 less than they should earn in the current quarter alone. If shares of Bronco Drilling slide much further, the company will be selling for less than their rigs alone are valued at. If this happens, some one could theoretically acquire all of the outstanding shares of the company, disband all operations and sell the rigs, and record a sizable arbitrary capital gain. This makes the possibility of any further downside in Bronco shares very limited. I reiterate strong buy rating on Bronco Drilling Company and stand by my previous predictions. The fundamental picture remains very strong and in due time will drive a significant appreciation in the value of this company.

Disclosure: Joseph Urgo has a long position in Bronco Drilling Company.

Dear Mr. Semel,

I am not writing to question your leadership and management of the Yahoo! (YHOO) web properties, as there are already enough sources applying pressure there, but rather I am going to question the management of Yahoo!’s assets and balance sheet. Also, I will outline a few possible ways to address the problems that I highlight and share my views as to why these measures are in the best interest of shareholders.

Yahoo! has a sizable portfolio of equity investments as well as cash and cash equivalents. The asset of greatest interest is your 33.43% equity stake in Yahoo! Japan, worth about $8.3 billion based on yesterday’s closing price. Based on our research and analysis, we believe your company’s shares are currently undervalued by at least 20%. We view the lack of financial visibility created by your stake in Yahoo! Japan as a cause of your stock’s underperformance. There are two ways that this problem can be quickly corrected.

The first solution would be to unload your stake in Yahoo! Japan. There is no better way to improve your company’s financial visibility. It would add over $8 billion in cash to your balance sheet, bringing Yahoo!’s total cash on hand to over $10 billion. There are countless ways that such an amount of cash could be utilized. Most effective though, based on our view of your business being at least 20% undervalued, would be to greatly reduce the amount of outstanding shares of Yahoo! through a massive tender offer. Considering a modest 10% premium over the most recent closing price, about $29.00 per share, 25% of outstanding shares can be retired through such an offer. This will result in greatly improved financial ratios, which the market puts a great amount of emphasis on. Also, the reduction of assets and outstanding equity will result in significantly higher returns on both assets and equity.

Should you be adamant in maintaining a large position in Yahoo! Japan, we would like to see the stake upped to a level ranging between 51% and 54% of shares outstanding, preferably 54% to ensure that a majority stake is maintained even after share dilution stemming from future stock option grants. The cost of acquiring an additional 20.57% stake in Yahoo! Japan, the amount needed to give your company 54% ownership, would be $5.1 billion based on Yahoo! Japan’s most recently quoted market price. For the purposes of this letter though, we will assume a cost of $5.5 billion, as a premium to the current market value will most likely have to be paid to acquire such a sizable position. As a direct result of becoming the owner of a majority stake in Yahoo! Japan, your company would instantly gain greater financial transparency and benefit from your assets rather than hide shareholder value within them. As majority owners, you would be able to include the results of Yahoo! Japan’s operations with your own, a move that would be extremely accretitive to both the top and bottom line. In the past four quarters of operation, Yahoo! Japan has reported revenue of $1.68 billion, operating income of $812 million, and net income of $454 million. Including these figures with your own would boost your revenue by 17%, your operating income by 84%, and your net income by 62%. The impact this would have on your companies market value would be substantial. Based on all of the major valuation ratios, your companies shares should appreciate in value. As stated before though, such a deal would cost nearly $5.5 billion, which is much more than your available cash on hand. Given your $36 billion market cap, taking on a debt to equity ratio of just 0.1 would be enough to finance the remainder of the purchase.

While viewing the first proposed measure as the more favorable of the two, either of the two will result in greater visibility and greatly improved financial ratios, which will drive an appreciation in the value of Yahoo!’s shares. As CEO, it is your duty to generate returns for shareholders. Given this fact, both proposals should be immediately reviewed as they are in the interest of shareholders.

Sincerely,
Joseph Urgo