Knobias ClipReport (8-2-2007)

Submitted from Knobias ClipReport

Bulls and Bears seemed to be on a see-saw during the day with both animals weighing the same. The markets were up and down all throughout the day in what would perfectly be described as volatile. Investors panicked at the bell before stabilizing while trying to move past the latest knock to the credit market and in the face of rising oil prices.

What some are characterizing as a credit crunch, have many investors weary and could keep the market in a very volatile situation. Beazer Homes saw its name in rumors which caused shares to grow legs and run down over 40%. The company dismissed the rumor though still lost some 20% on the speculation the name could file bankruptcy.

The market did see a lift following news that the National Association of Realtors reported a 5% increase in contract signings but the news was neutralized with the Institute for Supply Management report that a key gauge for US factory strength moderated in July.

The question now is where do we go from here? But the consensus seems to be that nobody knows. Thursday’s session is a flip of the coin but with the way the market is acting now, that coin may land on its edge.

With market sentiment so uneasy and volatility at very high levels, option trading was what many investors were applying. Earnings season was also still in full bloom but depending on what the market focused on determined if the day was green or red. With earnings and internals being the target, green was seen but if credit and oil was the focus, the day was met with bears and negativity.

One name that did release some very positive earnings and might have been overlooked throughout the day was Appliance Recycling Centers of America (ARCI).

The Company is one of the nation's largest recyclers of major household appliances for the energy conservation programs of electric utilities. Through its ApplianceSmart operation, ARCI also is one of the nation's leading retailers of special-buy household appliances, primarily those manufactured by Maytag, GE, Frigidaire and Whirlpool.

The Company reported sales of $22,582,000 which was an increase of 18% from $19,161,000 in the year-earlier period. The Company also reported net income of $836,000 or $0.19 per diluted share for the period which was a significant improvement from the net loss of $461,000 or $0.11 per diluted share in the second quarter of 2006.

The Company noted that the opening of two additional outlets in the Atlanta market along with the 3% same store sales growth were some of the causes for the increased numbers especially in the light of the continuation of high gasoline prices and weakness in the housing industry.

But the weakness in the housing market may actually be one of the main drivers. New home construction will never cease to exist. There will always be builders building homes and buyers contracting builders to construct proprietary houses.

The fact that builders look for ways to trim their costs to improve margins could actually be contributory for the improved sales. The Company’s factory outlets provide builders a cheaper way to outfit homes with appliances at discount prices. With weakness in prices of new homes and energy prices rising, the price of actually building the homes will remain on a small slope. The only way to make a profit would be to cut costs larger than the discount the homes are commanding to be sold.

The Company also greatly benefited from the expansion of their contract with the Southern California Public Power Authority (SCPPA) to include the Los Angeles Department of Water and Power. Under this expanded initiative, ARCI expects to replace and recycle 50,000 old, inefficient refrigerators owned by low-income residents in Los Angeles. The program which began April 30 and runs through December 2008 is expected to generate total revenues of approximately $25 million. Their subsidiary also was awarded a contract from the Ontario Power Authority (OPA) which is expected to generate revenues of up to $40 million over the three-year life of the program. It was noted that if the year's recycling targets for SCPPA and OPA were met, both programs would generate revenues of $3 to $4 million over the balance of 2007.

With the continuation of a slowdown in the housing market, the Company could be one in the industry that actually holds its value better than others and with large contracts from Los Angeles and Ontario, the Company should continue to see growth throughout the lives of those contracts. Investors would be wise to watch.


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