Sunday, November 27, 2005

GSI Commerce

An interesting article in Mike Santoli's "The Trader" discusses this controversial name. Superficially, the company, at least relative to its industry, does not appear terribly expensive, with market cap of $730 million and enterprise value of $690 million relative to TTM revenues of $403 million. But relative value will not buy you a retirement or a legacy. Let's look at the financial characteristics of this business.

Since 2000, the company has had negative free cash flow of over $100 million and appears to have had capex of over $80 million to the end of 2004. In the last twelve months alone, capex has exceeded $77 million. Return on invested capital remains negative through the last five years.

Operating income has been consistently negative for EACH quarter other than the 4th quarters of 2003 and 2004. Operating income remains negative through each reported quarter of this year.

Though it is interesting to note that significant holdings in GSIC are held by Liberty Media, Comcast, and Softbank, there has been significant net selling in the last twelve months by insiders of 3.7 million shares, roughly 9% of the outstanding.

Short sellers have noticed these trends as Santoli points out. The short position does represent about 14% of the float which is quite significant. There seems to be a high potential for a short squeeze in my opinion.

For those interested in the long side, there does not appear to be much of a margin of safety.


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