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Sandridge Energy (SD) – Free Report, for Ask Matt Readers, Highlighting a Major Red Flag in the Footnotes

Thursday, August 19th, 2010

Here is our free report on Sandridge Energy for Ask Matt readers.

Sandridge gets a Dangerous Rating mainly because management’s track record for value creation is very poor. Our analysis of the Financial Footnotes reveals a major RED FLAG: the company has written off over $3.4bn in assets in just the last two years. That is a big number compared to the company’s market cap of roughly $950mm and it Total Assets of about $2.8bn. Such a high level of disposal of company assets does not indicate that management is good at creating value or profits from the company’s investments. Indeed, management has written off nearly $1.30 for every $1.00 of net assets on the books. I call that moving the business in the “wrong” direction as management’s overriding imperative is to create future cash flows from of an asset that exceed the cost of the asset…that is how value is created. This management team, on the other hand, has been destroying the value of the assets it acquires.

All the details are in our report on SD. For the asset write-offs and their impact on economic earnings see Appendix 3 in our report. Our Risk/Reward rating is on page 1.

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3 Comments

  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

  2. David says:

    But Angie’s $90 per user acquisition cost is going to go away. That’s what their approach probably is. How would their outlook be if that $90 cost dropped down to a total cost of $3 per user?

  3. David:

    That would be great, but cost per user acquisition is not something that’s very easy for a company to fix. ANGI can slash their marketing budget to the bone, but then they would stop acquiring new members. They would probably lose members in fact, as their membership renewal rate is at ~75% and declining. If they cut marketing expense by ~95% as you seem to be suggesting, ANGI might be able to eke out 1 year of slight profits, but they would start shedding members and losing money very quickly. ANGI’s only hope is to keep its marketing budget high and hope it can reach the scale and brand awareness to be able to sustain its business while scaling back marketing costs enough to turn a profit. The fact that ANGI’s revenue growth is slowing down even as its marketing costs keep increasing makes it very unlikely it will achieve that goal.

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