I want to start by saying that this is a "Buy" opportunity for Centerplate Inc. (CVP).
Most of you have probably seen the Associated Press release that came out this morning. I held this Alert until I had the opportunity to speak to Centerplate's CFO, because I wanted to get the whole story directly from the company.
In its article, AP reported that Centerplate may have to stop paying dividends as early as June. Further it said that Centerplate blamed the tightening credit markets, saying it has been difficult to get amendments "on favorable terms if at all."
Finally, AP said that CVP thinks it may be "more prudent" to change its dividend policy and preserve capital to reinvest in the business.
From my conversation with Centerplate's CFO, I came away learning that, despite the language in the press release stating the possible deferment of interest on its subordinated notes, the company would continue to service that portion of the dividend, which is exactly one-half of the $1.56 annual payment, or 78 cents per share.
If, in fact, the company intends to maintain that 78-cents-per-share dividend, then the stock is currently trading with a 19.5% dividend yield. Instead of borrowing $17 million per quarter to pay the common stock dividend portion of the total distribution, CVP's lender -- namely GE Capital -- is forcing CVP's hand to use its $200-million credit facility to capitalize the $110 million in new contracts the company has won in the past few months.
Assuming Centerplate does keep the debenture-related portion of the dividend intact, and uses the capital from the common stock dividend portion to generate a higher earnings stream, then the stock is being unfairly discounted and should rebound back to at least the $7 to $8 range, in time.
That said, if you believe in the long-term prospects of this business -- and I do -- then averaging your cost basis at this level might be a smart move. Most of us own the stock between $11 and $12, based on when my "Buy" recommendation went out.
Dollar cost averaging here gives us a new cost basis of $7.50 to $8.00 or about where I'm predicting the stock is likely to recover to -- and at that level, the dividend yield is right at 10%.
From there it becomes more of an earnings-driven story, and man do they ever need to deliver on that after dropping this kind of news on their shareholder base of people like you and me, who are predominantly income investors.
It's the tight credit markets that put the squeeze on CVP's lenders and who, in turn, put the squeeze on CVP. But at these sell-first-ask-questions-later levels, I think we have several opportunities for Centerplate, depending on your tolerance.
If you own Centerplate I recommend you keep your shares. At $4 this is also an opportunity to intiate a position. Finally, if you agree with me and my analysis, this is a good opportunity to average down your position in Centerplate.
I will certainly keep you posted as this story unfolds and, barring any more immediate surprises, I'll address Centerplate further on Friday in the Weekly Update.
Bryan Perry
Editor The 25% Cash Machine