DEFERRED OR DESTROYED
MRGE
MRGE fell by $5.0 this morning, good for almost 20%, because a piece of announcement where revenues from a couple of large contracts have been deferred, and it has delayed its release of its Q4 and 05 results. Obvious the market is extremely nervous, particularly with respect to accounting issues. The question is: does this revenue recognition issue warrant a 20% haircut? The company reiterates that there are no fundamental changes of its business, strategically or operationally, cash from the deferred revenues is collected, and deferred revenues will be recognized in subsequent quarters. The company maintains its long term growth targets.
I opened a small position on MRGE ($19.75) because it appears to me that there is a lot of "shoot first, ask question later" types this morning. I also suspect that a lot of institutions belong to the group of "accounting irregularities, run" category. There might also be some wondering of "the theory of cockroaches". The haircut makes the valuation compelling here. At $20, it is traded at 11X of its 2006 EPS, granted, the $1.8/share number will likely be reduced. More important question is that: is there another shoe to drop? Is this a honest mistake or a real accounting shenanigan? I am giving the management the benefit of doubt here. This definitely is a much more speculative purchase, and I have to keep an eye on it.
Exit Strategy: there are two here, one is to sell it anywhere above $20 level, alternatively, to sell some calls when it recovers somewhat. If writing cover call is elected, I believe I would prefer the short tenue ones (no later than June).
MRGE fell by $5.0 this morning, good for almost 20%, because a piece of announcement where revenues from a couple of large contracts have been deferred, and it has delayed its release of its Q4 and 05 results. Obvious the market is extremely nervous, particularly with respect to accounting issues. The question is: does this revenue recognition issue warrant a 20% haircut? The company reiterates that there are no fundamental changes of its business, strategically or operationally, cash from the deferred revenues is collected, and deferred revenues will be recognized in subsequent quarters. The company maintains its long term growth targets.
I opened a small position on MRGE ($19.75) because it appears to me that there is a lot of "shoot first, ask question later" types this morning. I also suspect that a lot of institutions belong to the group of "accounting irregularities, run" category. There might also be some wondering of "the theory of cockroaches". The haircut makes the valuation compelling here. At $20, it is traded at 11X of its 2006 EPS, granted, the $1.8/share number will likely be reduced. More important question is that: is there another shoe to drop? Is this a honest mistake or a real accounting shenanigan? I am giving the management the benefit of doubt here. This definitely is a much more speculative purchase, and I have to keep an eye on it.
Exit Strategy: there are two here, one is to sell it anywhere above $20 level, alternatively, to sell some calls when it recovers somewhat. If writing cover call is elected, I believe I would prefer the short tenue ones (no later than June).
posted by ZIGZAG at 2/24/2006 11:02:00 AM
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