The Marley Group

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.