Stocklemon Reports on Home Solutions of America
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Is Home Solutions a Natural Disaster Waiting to Happen? Stocklemon Reports on (Amex:HOM)
What is Home Solutions?
Home Solutions was a dormant company and had no operations during most of 2002. Between then and the present, they have spent $50 million in cheap stock and expensive debt to acquire 5 small building services companies – $1.5 to $16 million apiece. These 5 companies comprise 100% of the present day HOM, which, in an astounding feat of new math, is now conferred a fully diluted market cap of over $440 million!
Over the past year, the stock has made a major move as investors flocked to it as a potential benefactor of the Hurricane Katrina clean-up. Yet, Stocklemon cautions investors, that they not worry about the potential for another hurricane but rather they should be concerned about a tsunami of insider selling and a business model that has an ominous sense of déjà vu’.
Lets Get To the Nitty Gritty
While the stock is up from $2 in a year, let us see if the business has improved equally as well.
In June of 2005, the quarterly revenue was $16 mil and the stock was $1.36. In March of 2006, a scant 9 months later, the revenue was $19 mil and the stock has visited $14 and is now $11.
But it gets better
In just under 15 months, the shares outstanding have gone from 16 million to north of 40 million. Therefore, during that same 15-month period, the market cap is up from $27 million to $440 million, a 1600% increase!
Stocklemon notes that during the last 4 reporting periods, a problem with accounts receivable is emerging. Consider the following table:
|
Mar-06 |
Dec-05 |
Sep-05 |
Jun-05 |
|
| Revenues |
19,280,000 |
22,342,000 |
20,376,000 |
16,055,000 |
| Receivables |
20,857,000 |
20,585,000 |
16,742,000 |
9,501,000 |
| Days sales in Receivables |
97.4 |
82.9 |
73.9 |
53.3 |
Receivables compared to sales has marched steadily higher – one common measure, days sales in receivables, is up over 97 from a too-high 53 in the most recent quarter. That’s over a full quarter’s revenue. The company commented in its 10-K (period ending December) that 52% of that receivable came from one (unidentified) customer. There was no further comment in the March quarter, but any exposure buried in that receivable number could negatively impact reported earnings.Receivables compared to sales has marched steadily higher – one common measure, days sales in receivables, is up over 97 from a too-high 53 in the most recent quarter. That’s over a full quarter’s revenue. The company commented in its 10-K (period ending December) that 52% of that receivable came from one (unidentified) customer. There was no further comment in the March quarter, but any exposure buried in that receivable number could negatively impact reported earnings.Additionally, the profits reported in the last quarter are “cashless” – that is, the cash flow statement ate up 80% of the net income. If that receivables ratio doesn’t clean up, and quickly, some serious questions are going to be asked about whether HOM is in fact truly profitable or not.
Receivables compared to sales has marched steadily higher – one common measure, days sales in receivables, is up over 97 from a too-high 53 in the most recent quarter. That’s over a full quarter’s revenue. The company commented in its 10-K (period ending December) that 52% of that receivable came from one (unidentified) customer. There was no further comment in the March quarter, but any exposure buried in that receivable number could negatively impact reported earnings.Additionally, the profits reported in the last quarter are “cashless” – that is, the cash flow statement ate up 80% of the net income. If that receivables ratio doesn’t clean up, and quickly, some serious questions are going to be asked about whether HOM is in fact truly profitable or not.
On Balance
HOM’s balance sheet looks more like a $40 million company than a $440 million one. Absent the goodwill and intangibles, there’s about $40 million in assets and $10 million liabilities.
With competition from other vendors both larger and smaller, the company’s success depends entirely on dramatically expanding both revenues and margins in a market space that by its nature is low-margin and highly competitive. Barriers to entry, anyone?
This is Our Favorite
On May 15, 2006 HOM stated that their 2006 revenue guidance is $160-$165 million. http://biz.yahoo.com/ap/060515/earns_home_solutions_of_america.html?.v=1
To meet the guidance that the company just issued, they are going to have to average $46.6 million for the next 3 quarters. Meeting that guidance requires each of the next three quarters to rake in revenues more than double the highest revenue quarter in the company’s history.
Then, just two weeks after this “lofty” guidance comes out, the CEO “sold” (or should we say dumped) over $6 million worth of stock, the President of the company sold $5.3 million, and the President of one of their largest subsidiaries filed to sell 200,000 shares as well.
http://finance.yahoo.com/q/it?s=HOM
Home Solutions CEO is Frank Fradella
Prior to being the CEO of Home Solutions Mr. Fradella was the Chairman/CEO and COO of American Eco-Corp.
http://www.homcorp.com/index.php/investor/details/frank_fradella
American Eco was also a roll up in the outsourcing of services to construction management industries.. They built the company through acquisitions as well.
http://www.findarticles.com/p/articles/mi_m0EIN/is_1996_March_14/ai_18092447
American Eco was a rollup just like Home Solutions
American Eco also put out lofty revenue targets and announcements about big revenue deals
American Eco is now Bankrupt and trades at $.0001
http://finance.yahoo.com/q?s=ECGOQ.PK
CEOCast
The main “promoter” behind HOM seems to be CEOCast who touts the stock in a series of emails that it sends to its subscribers. For its investor relations emails, CEOCast receives $7500 a month plus 50,000 shares of stock. Stocklemon first introduced our readers to CEOCast as they touted World Information Technolgy as their special situations alert.
http://www.stocklemon.com/articles/02_04_04.html
The following month that stock was halted by the SEC.
The spokesman for CEOCast is Michael Wachs. His actual role in the company is understandably a topic of debate — Mr. Wachs has pleaded guilty to bank fraud in the past and served 11 months at Club Fed. He has reinvented himself as an IR Guru — with 50,000 shares plus $7.500 a month, he is obviously doing something right. http://www.federalreserve.gov/BoardDocs/Press/enforcement/1998/19980206/Attachment.pdf
Conclusion
At the very least, the insider’s run to the bank with mountains of cheap stock seems premature. If the company is truly just now perfectly positioned to reap the benefits of massive hurricane-related remediation work, what’s their hurry? If, on the other hand, the business has been “groomed” for the appearance of growth – rolling up low margin companies into a huge ball of cashless profits, the worst case scenario is far more ominous.
Mania and hysteria are not sound reasons to buy a stock. Just because you believe that the word “hurricane”, “bird flu”, or “China” is attached to a stock, there is no substitute for good homework. Before running up the market cap of this company above half a billion dollars, investors should consider doing their own HOMework.
Cautious Investing To All.