Why do we here at BuyersStrike! HQ think so poorly of sell-side analysts? Those sober-looking investment bank employees whose job is to, supposedly, give out insightful investment advice?
Because that is not really their job. Their job is to sell you, the investing public, something. That is why smart professionals ignore them, and call them by another name, “banking whores”.
Care for an example? Let’s deconstruct just the beginning bits of the dreadful Galena Biopharma (GALE) missive from Needham’s Chad Messer.
(Why Chad? Because we love The Chappelle Show here at HQ, and especially the Mad Real World skit, watch it again and again here, it sort of sums up Chad perfectly.)
Chad opens with a whopper:
Fundamentals Are Strong Despite Stock Promotion Overhang; Maintain BUY Rating
To which fundamentals could Chad possibly be referring? Galena has only one shipping product, the me-too fentanyl product Abstral. The consensus net revenue estimate for Q4 was $1.825mm. GALE reported net revenues of only $1.317mm, a miss of 27.84%. Only in the world of banking whores can a miss of almost 30% be considered a strong showing.
Revenues are not the only fundamental metric of course, there is also profitability. The mean estimate for Q4 EPS was a loss of 9c. GALE came through with a loss of 46c, a 400% miss to the downside. Maybe Chad doesn’t understand negative numbers? Moving on…
INVESTMENT HIGHLIGHTS: Galena currently holds $55.3 million in cash and expects ~$8 million/quarter in operating burn during 2014, leaving the company well capitalized.
Instead of going off of the audited financials in the 10K, Chad is hanging his hat on an odd figure that GALE trumpeted in the press release, mid-March cash of $55.3mm, Looking just at a single line item, unaudited cash, without examining the rest of the balance sheet is irresponsible.
A more fair, but still simplified, assessment would be as follows:
Audited cash of $47.8mm – debt of $9.9mm (ST + LT) = Net cash as of 12/31/13 $37.9mm. Given their stated burn of $8mm a quarter that gives the company just about 5 quarters of life left. In what fever-dream is that well-capitalized? Even that is a very brief, and irrationally optimistic, look at the balance sheet which skips over some glaring red flags which we will examine further.
One would like to think an analyst at a Wall Street bank would know how to read financial statements, and certainly could spot red flags. Here’s one a first semester accounting student could spot: Galena has Accounts Receivable (AR) of $3.7mm on only $1.3mm in sales, which gives a Days Sales Outstanding (DSO) calculation of a whopping 256 days. Lesson for you Chad, DSOs < 90 are good, > 90 are bad. C’mon, didn’t George teach you this?
Chad also fails to mention this red flag line item from the 10K:
Fair value of warrants potentially settleable in cash: $48,965mm
A warrant liability greater than Galena’s audited cash balance, one which is potentially settleable in cash, and not a mention. Should the worst happen, settling this debt would leave Galena destitute. Still well-capitalized?
Nor does he mention the $5mm deferred tax liability, nor the contingent purchase price consideration liability of $6.8mm.
Chad is awfully silent about the Stockholder’s Equity line which dropped precipitously from $27.7mm at the end of 2012 all the way down to $5.9mm at the end of 2013.
Does anyone still think Galena is “well capitalized”?
More on Chad Messer’s intellectual musings next time, including his thoughts on Abstral, NeuVax, and his bizarre claim that “management has executed well”.