|The Two Swisher
by Louis Corrigan
ATLANTA, GA, (May 14, 1997) -- Could the stock of a company that sells
toilet bowl deodorizers have been puffed up on hype surrounding a cigar
manufacturer? As unlikely as it seems, a group of Foolish short-sellers think
The academics tell us that stock prices reflect all the news outstanding
about a company. However, the efficient markets theory only holds true if
all market participants get accurate information. If investors are relying
on inaccurate information, even the economics professors would agree an
inefficiency might arise. Last week, an AOL poster using the screen name
"Short4more" discovered an unusual case in which leading providers of financial
information -- such as First Call, Zack's, Bloomberg, and Dow Jones News
-- have all been unknowingly dispensing inaccurate data. As a result, these
Foolish investors believe they've discovered a great short-selling opportunity.
At the root of the gaffe is a case of mistaken identity. For months now,
the news services have confused SWISHER INTERNATIONAL, INC. (Nasdaq: SWSH), a Charlotte-based franchiser of commercial hygiene services and products
with SWISHER INTERNATIONAL GROUP INC. (NYSE: SWR), the world's largest
manufacturer of cigars and a marketer of smokeless tobacco. With nearly identical
names, the case of the two Swishers is easy to understand. Even the companies
are now aware of the problem, as the cigar company issued a special press
release on April 21st clarifying its first quarter earnings. The company
said it "has learned that news organizations have failed to distinguish between
it and another public company... and, as a result, have incorrectly reported
earnings estimates for Swisher International Group Inc."
The cigar company earned $7.8 million for the quarter, or $0.23 per share,
ahead of year-ago numbers of $4.4 million, or $0.13 per share, exceeding
analyst estimates by 15%. Dow Jones erroneously reported that the company
had failed to meet consensus estimates of $0.32 per share, referencing First
Call. Dow Jones issued a correction to the original story, but the mistake
persisted in First Call's data. What seems to have happened is that First
Call mistakenly plugged two analysts' estimates for the cigar company into
an earnings sheet for the hygiene company, for which First Call actually
had no analysts' numbers.
If a First Call subscriber had looked up "Swisher International," an investor
would have found a company identified by the ticker SWSH, but erroneously
noted to be in the tobacco business. The price data applied to the hygiene
company, but the rest of the information pertained to the cigar manufacturer.
For example, analyst estimates called for $0.19 EPS in the January quarter,
$0.31 EPS for the April quarter, $1.10 EPS for fiscal 1997 ending in October,
and $1.40 EPS for fiscal 1998.
Short-sellers around Fooldom speculate that shares of SWSH may have benefited
from this data mix-up. Indeed, after trading as low as $4 1/2 in mid-November,
the hygiene company's shares have rocketed following news of the cigar company's
IPO, hitting an all-time high of $13 in mid-April before settling back to
its recent price around $10 1/2. Could investors have driven the stock up
thinking they were buying shares of the cigar company? Might investors have
seen those inaccurate estimates for $1.10 in FY97 and figured they had found
an astonishing value? Or can the company's prospects justify the current
While the company has shown steady growth in revenues, from $3.9 million
in 1992 to $10.7 million last year, earnings have actually gone down the
toilet during this period, dropping from $0.5 million, or $0.39 a share,
in fiscal 1992 to $0.49 million, or $0.26 a share, in fiscal 1996 taking
into account an acquisition made last July. Based on trailing earnings of
$456,000, or $0.23 a share, the stock has a PE of 46. With about 2.23 million
shares soon-to-be outstanding following a recently announced stock offering
of 349,000 shares, Swisher has a market capitalization of $23.4 million,
or 2.1 times sales of $11 million -- an awfully high multiple for a company
with a profit margin of less than 4%.
Though there are apparently no published analyst estimates for the toilet
bowel Swisher, some of the company's press releases have included comments
from Herbert Davidson, an analyst with Meyers, Pollock, Robbins Inc. (MPR),
a firm based in McLean, Virginia. In January, he said that Swisher "should
exceed analysts' projected first-quarter earnings" as a result of two deals
announced at the time. "I expect the Company to realize continued revenue
growth of 30-40 percent, and earnings growth of 60% or more," Davidson said,
according to the company's press release. That estimate would put fiscal
97 earnings at $0.32 per share, suggesting that Swisher International would
now be trading at a forward PE of about 33 -- rich but hardly excessive for
a company growing at 60% a year.
The shorts around Fooldom are skeptical, however. In a recent post, "MarkM10073"
ran some basic numbers on the first quarter results, which had been buoyed
by a one-time gain of $109,000 from the sale of a company-owned operation.
Backing out this gain, which amounted to $66,000 in net income after adjusting
for a 40% tax rate, the company would have earned just $97,000, or about
$0.046 per share, which is actually a bit shy of the results from the year-ago
period. As of January, the company also had rising receivables, which account
for $3.6 million of the company's $5.1 million in current assets. Swisher
executives don't seem to be convinced the shares are cheap right now as the
company filed an S-3 registration with the Securities and Exchange Commission
(SEC) last week to sell 349,000 to be sold on the open market by current
shareholders or investors with exercisable options or warrants.
All this selling by insiders comes at a time when Swisher in transition.
As a national franchisor of hygiene services and products, the company has
built its Swisher Hygiene business on selling mundane ware such as soap
dispensers and those plastic doohickeys in urinals. Chiefly through its more
than 100 franchises, the company services 40,000 locations in the U.S. and
Canada. In the last year, it has succeeded in selling "master licenses" in
the U.K., Ireland, and the Caribbean, getting licensees pony up an up-front
fee to develop franchises in their respective markets. Swisher benefits from
all of its franchising deals by pocketing the up-front licensing fees and
generating annuity revenues from the sale of hygiene products to the franchises
and quarterly royalty payments of 6% of the franchisees' gross revenues.
The new move overseas has unfortunately come as a matter of necessity, as
the U.S. market has been saturated. Swisher Hygiene is no longer the company's
chief vehicle for growth plus its far smaller Swisher Maids division has
stalled out as well. In an attempt to rejuvenate its growth, Swisher completed
the acquisition of Surface Doctor in January, a division that markets kitchen
and bath remodeling and resurfacing services throughout the world. The early
January signing of a Surface Doctor franchisee in Atlanta for $145,000 was
one of the deals mentioned by MPR analyst Davidson in his positive comments.
Swisher's latest 10-K filing indicates the company expects Surface Doctor
revenues to outstrip those of its other divisions.
It is hard to see how Joseph R. Lunsford, formerly the principal owner of
Surface Doctor as well as a former director of Swisher, could believe that
this is true since his shares were included in the recent SEC registration
statement. At the very least, it is hardly be a vote of confidence in Swisher's
new growth strategy. Add this to the current valuation of Swisher and you
have short-sellers who are betting that they've come upon another jaw-dropping
instance of market inefficiency and that shares of Swisher International
are headed down the drain. Whether this will prove true remains to be seen.
In any case, they've reminded us that our usually reliable sources sometimes