MCSI INc. (MXB) is a recent spinoff from Morgan Stanley (MS). The company has been trading since November as its own unit but is still under the shadow of Morgan who holds 100 million shares of the company. As MXB released its quarterly report, there was a simultaneous announcement by Morgan Stanley that it will sell roughly half of its remaining shares. The news was met with frustration as current shareholders sold in front of the glut of supply that will hit the market in the form of Morgan Stanley’s shares.
The earnings report by itself was not a significantly negative piece. Revenue continues to grow albeit relatively slower due to a challenging equity environment. The majority of the company’s revenue is tied to MCSI’s indices which are licensed to ETFs as well as individual mutual funds. At this point assets within those ETFs continue to grow but the growth comes primarily from new capital being allocated to these ETFs and not to a large degree from actual capital gains within those funds. A global recession and an environment that is not at this point rewarding those who diversify will likely continue to be a headwind that will make growing capital under management quite a challenge.
Currently the stock is trading at a healthy multiple of a bit over 30 times this years expected earnings. The bull camp points to strong historical earnings growth and expects the trends to remain intact. The bear camp will likely look to the separation from Morgan Stanley as a weakness as the company will need to stand on its own legs without the benefit of the talented experienced management team at MS, not to mention the resources the company had at its disposal. Debt levels continue to weigh on the company as evidenced by its interest expense line item, and the fact that the parent company is selling such a large piece of its holdings is certainly not a ringing endorsement.
This site has mentioned many times how a declining economic environment will lead investors to take less risk and assign lower multiples even to growth stocks so I will spare readers the repetition. Suffice it to say that there is danger of lower earnings expectations combined with contraction in the overall multiple which could have a significant effect on the stock price. With its relatively short trading history and the huge amount of supply hitting the market, I would use caution in owning this stock.
FD: Author has a short position in MXB
MCSI Inc. (MXB) – Quarterly Report Leads to Selling
July 7th, 2008 at 10:12 am
Hi Zach,
would you consider taking a closer look at Activision?
they beat estimates by a huge margin. first quarter
2008 top line was $600 million vs. estimates of $400
million, despite no title releases. I know about the
oil/consumer recession but there might be more then meets
the eye. Also there is a complex merger with Vevendi
as V buys 68% of ATVI, which i dont get how this
adds extra value, but maybe it does! thanks, Boris.
July 9th, 2008 at 9:42 am
Hello Boris,
Activision falls a bit outside my field as they have been public longer than 5 years. However giving it a cursory overview, I’m impressed with their ability to grow sales quarter after quarter and the earnings stability for the last 4 quarters has been superb. Obviously the business is a bit cyclical with new gaming equipment driving demand for titles.
The multiple seems reasonable (and possibly even attractive) given the recent growth of the company. My largest concern is not with the company specifically as much as due to the overall market which will likely not stage a long-term uptrend for some time.
Just my opinion, thanks for the comment.
ZDS
July 9th, 2008 at 9:01 pm
impressed, superb,reasonable,attractive wow wow wow mr CFA!
July 10th, 2008 at 11:56 am
guess what activision raises guidance this morning. also the 5 year rather then 1 year growth curve is looking better. Managment says that Guitar Hero isnt meeting demand, the online music download of 3 tunes for $6 is lucrative like iTunes, Guitar hero margins are due to expand, Blizzard’s Online global success is one of a kind and is free from the console cycles, and that since Playstation 2 cycle has lasted a clean cut 7 years, its likely that the cycle on PS3 and XBOX360 will be even longer.