Saturday, April 09, 2005

Re-Interpreting Management's Written Statements (III)

Upon further review of Mobile Mini's 10-Ks, I come up with a revised interpretation of what management really is communicating about the appraisals of their lease fleet. The purpose of this post is to present what I see as the "most likely" set of circumstances behind management's statements, which unfortunately, as written, leave room for ambiguity.

Below, I quote from the 10-Ks the relevant sections relating to the appraisals:

2002:
"The most recent fair market appraisal, by an independent firm chosen by our lenders and completed in January 2002, appraised our fleet at a fair market value in excess of 120% of net book value. An appraisal of orderly-liquidation value was completed in September 2002." (p. 6)

2003:
"Our most recent fair market value appraisal, conducted in January 2002, appraised our fleet at a value in excess of net book value. An orderly liquidation value appraisal . . . was performed in March 2003, and the value was determined to be $314.1 million, which equates to 82.4% of the lease fleet's net book value, at December 31, 2003." (p. 2)

"Our most recent fair market value appraisal appraised our fleet at a value in excess of net book value. At December 31, 2003, the net book value of our fleet was approximately $382.8 million." (p. 7)

2004:
"Our most recent fair market value appraisal, conducted in March 2004, appraised our fleet at a value in excess of net book value. At December 31, 2004, the fair market value of our lease fleet was approximately 110.6% of our lease fleet net book value. An orderly liquidation value appraisal . . . was performed in March 2004. At December 31, 2004, the orderly liquidation value of our lease fleet is approximately $357.0 million, which equates to 79.0% of the lease fleet net book value." (p. 2)

"Our most recent fair market value appraisal appraised our fleet at a value in excess of net book value. At December 31, 2004, the net book value of our fleet was approximately $451.8 million." (p. 7)

Here is a summary of the appraisal information as reported:

Fair Market Value (FMV) Appraisals:
Jan-2002: In excess of 120% of net book value
Mar-2004: $500 mil. (which is equiv. to 110.6% of NBV at 31-Dec-2004)

Orderly Liquidation Value (OLV) Appraisals:
Sep-2002: Value undisclosed
Mar-2003: $314 mil. (which is equiv. to 82% of NBV at 31-Dec-2003)
Mar-2004: $357 mil. (which is equiv. to 79% of NBV at 31-Dec-2004)

I believe that, in reporting the results of the appraisals in the 10-Ks, the company unfortunately has slipped into making a confusing "apples vs. oranges" comparison--equating dollar amounts figured ON THE APPRAISAL DATES with percentages of NBV figured AT REPORTING YEAR-END. With the appraisal results stated this way, it appears that both FMV and OLV, expressed as percentages of NBV, have fallen over the past two years, as I remarked in my previous post.

Now for my re-interpretation: To make an "apples vs. apples" comparison, we need to equate dollar amounts with percentages of NBV--all figured consistently using amounts available on the appraisal dates. Referencing the most recent then-current NBV figures at the time of each appraisal (e.g., using NBV at 31-Dec-2003 (not 31-Dec-2004) to express results of the Mar-2004 appraisals), I arrive at the comparison below:

Fair Market Value (FMV) Appraisals:
Jan-2002: In excess of 120% of net book value
Mar-2004: $500 mil. (which is equiv. to 130% of NBV at 31-Dec-2003)

Orderly Liquidation Value (OLV) Appraisals:
Sep-2002: Value undisclosed
Mar-2003: $314 mil. (which is equiv. to 93% of NBV at 31-Dec-2002)
Mar-2004: $357 mil. (which is equiv. to 93% of NBV at 31-Dec-2003)

Net Book Value (NBV):
31-Dec-2001: $227.0 mil.
31-Dec-2002: $337.1 mil.
31-Dec-2003: $382.8 mil.
31-Dec-2004: $451.8 mil.

Based on this re-interpretation, I conclude that:

1. The appraisals consistently show that fair market value of the lease fleet is in excess of 120% of net book value (i.e., even better than the "apples vs. oranges" 110.6% reported in the 2004 10-K), and that orderly liquidation value is above 90% of net book value (i.e., even better than the as-reported numbers around 80%);

2. The valuation cushion (i.e., FMV above NBV, and OLV above total debt) appears to be quite stable; and

3. The appraisal information, as reported in the 10-Ks, does not provide grounds for construction of a lease fleet overvaluation argument.

(However, I do believe that the company can benefit from being more careful in preparing its writting remarks in the 10-Ks relating to the appraisals. Greater clarity should help prevent any misinterpretation of the numbers by the investment community.)

To summarize: At this point, "the preponderance of evidence" continues to support the opinion that Mobile Mini's lease fleet is not overvalued on its books, and that the company does not engage in a practice of inflating earnings by flagrantly capitalizing costs that it should be expensing. The rising stock price, from $10 to $40 in two-and-a-half years, indicates that most investors believe the company's earnings to be authentic. However, the stock's persistently high short ratio continues to show that one or more short-sellers, correctly or not (are they crazy or not?), still have more than "a reasonable doubt."

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