🐻The Bear Cave #25🐻
New Activist Reports, Stock to Watch: ACEL, Notable Resignations, Tweets of the Week, and More!
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New Activist Reports
Citron Research published a bullish report on Rosetta Stone (NYSE: RST — $658 million). Citron called the company “A Crown Jewel Asset within EdTech” and said, “we have strong conviction that a deal to sell RST will be announced in the next 60 days.” Rosetta stock is up 60% over the last month.
New activist Mariner Research published on Timbercreek Financial (TSE: TF — CAD$686 million) and argued, “the COVID-19 pandemic will accelerate the stresses already hidden in TF’s portfolio.”
Stock to Watch: Accel Entertainment
Four weeks ago, I profiled Accel Entertainment (NYSE: ACEL — $625 million), a 2019 SPAC merger that operates ~11,000 video game terminals in Illinois. ACEL reports Q2 earnings before the open on Thursday, August 6. I am extremely pessimistic.
I believe coronavirus will have an outsized effect on Accel’s business. Accel’s gaming/gambling machines are primarily located in restaurants and bars and its machines are cash-only. In my opinion, customers visiting restaurants and bars are unlikely to spend time indoors, and those that do will not want to sit at a gaming machine.
For a hint of how seriously coronavirus will affect Accel just look at its Q1 results. In Q1 2020, Accel reported approximately $9,425 of revenue per machine, down 23% from $12,278 reported in Q1 2019. Some of this decline may be due to Accel’s saturation of the Illinois gaming market in addition to a few weeks heavily affected by coronavirus. If a quarter with 2-3 weeks heavily affected by coronavirus leads to a down 23% quarter, what will a fully coronavirus-affected quarter, or year, look like?
(Above: A Screenshot from Accel’s Corporate Website)
Despite coronavirus, Accel currently trades at about 1.5x revenue and 28x 2019 “adjusted net income.” In my opinion, the effects of coronavirus on Accel will be long-lasting. Bars and restaurants will close permanently and those that do reopen may not install new gaming machines.
Accel has also faced scrutiny from ProPublica, which published an in-depth investigation into Accel and its CEO, Andrew Rubenstein:
“Rubenstein and his company took advantage of connections at the Illinois Gaming Board. They did so using an unusual degree of access to a key board attorney… the company obtained internal gaming board documents about its competitors and benefited from board decisions that made it more difficult for other operators to gain a foothold in Illinois’ video gambling market.”
In its 2019 10-K, Accel’s “Legal Proceedings” disclosure exceeds 1,000 words and covers multiple lawsuits.
Beyond coronavirus, alleged misconduct with the gaming board, and multiple legal proceeding, the company has had issues with its accounting.
The company “has identified three material weaknesses in its internal control over financial reporting” in its 2019 and 2018 annual financial statements:
“There is a material weakness in … the lack of formally documented accounting policies and procedures, as well as headcount necessary to support consistent, timely and accurate financial reporting in accordance with U.S. GAAP.”
“There is a material weakness in the design and implementation of the Company’s internal controls relating to business combination accounting and route and customer acquisition cost accounting due to the absence of formalized internal controls…”
“There is a material weakness in the Company’s general information technology controls…”
In its 2019 10-K, the company also noted, “Accel management is actively addressing the material weaknesses that have been identified and is developing a comprehensive plan of effective remediation.”
Accel currently has $167 million in cash and approximately $400 million in debt due within the next five years. However, in its risk factors Accel warns investors:
“Agreements governing Accel’s indebtedness impose certain restrictions that may affect the ability to operate its business. Failure to comply with any of these restrictions could result in the acceleration of the maturity of indebtedness and require Accel to make payments on indebtedness. Were this to occur, Accel would not have sufficient cash to pay accelerated indebtedness.”
Resignations and Departures
Notable executive departures disclosed last week include:
CFO of Jack in the Box (NASDAQ: JACK — $1.86 billion) after 2.5 years on the job.
CFO of Genworth (NYSE: GNW — $1.03 billion) after five years.
CFO of Gaming and Leisure Properties (NASDAQ: GLPI — $7.89 billion) after 1.5 years.
CFO of the REIT CyrusOne (NASDAQ: CONE — $9.61 billion) after five years.
CEO of Citizens Inc (NYSE: CIA — $307 million) after four years.
CEO of PG&E (NYSE: PCG — $18.2 billion) after less than a year.
CEO of AngloGold (NYSE: AU — $14.7 billion) after two years.
COO of Watsco (NYSE: WSO — $9.03 billion) after about a year.
In addition, board members from energy company Archrock Inc (NYSE: AROC — $1.02 billion), and bank Renasant Corp. (NASDAQ: RNST — $1.31 billion) resigned after less than one year on the job. A director at MVC Capital (NYSE: MVC — $115 million) resigned less than a month after joining the board.
Data for this section is provided by InsiderScore.com
What to Read
Bezos’s House Committee Opening Statement (Amazon)
“Let me close by saying that I believe Amazon should be scrutinized. We should scrutinize all large institutions, whether they’re companies, government agencies, or non-profits. Our responsibility is to make sure we pass such scrutiny with flying colors.”
“Corp Governance "Dark Arts": Part 5” (Non-GAAP Thoughts)
“Kodak double dipped director equity grants (January 2020 RSUs and May 2020 options), and granted executives options a day before announcing a $765 million government loan that would pop the stock from ~$2.50 to ~$33.”
“‘America, What a Country.’ Michael Dell on His Life and Business” (New York Times)
“When I took apart the IBM PC, one of the striking things was none of the parts was from IBM. They were selling it for $3,000 but it had, as far as I could tell, maybe $500 worth of parts. It seemed a bit like a criminal enterprise.”
Tweets of the Week
Until next week,
The Bear Cave