The Appalachian Small Business Series: Mountain Finance

In the second installment of our Appalachian Small Business Series, we discuss economics and financing opportunities in the region.

We decided to focus on the availability of capital and related economic topics early in this newsletter series because they're critical elements for revitalizing Appalachia. Access to small business financing is necessary for entrepreneurial activity, and without cash, firms can't survive long enough to implement our other ideas. With a strong financial foundation, though, companies can focus on 21st century growth strategies.

Before diving into our small business recommendations, let's take a look at the state of small business financing in Appalachia. Perhaps not surprisingly, there's limited data on this subject as more researchers focus on rural economics in developing nations than on Appalachia. Anyway, some of the only available research on our topic comes from a National Community Reinvestment Coalition (2007) report. The study offers these important points:

  1. Small and mid-sized banks in Appalachia are especially small business-friendly. Branches of large banks tend to be less devoted to small business.
  2. The most economically-distressed counties in Appalachia suffer from insufficient access to business capital, especially for companies early in their development.
  3. An overall lack of non-bank financing opportunities restrains small businesses across Appalachia.
  4. Entrepreneurs in Appalachia need additional financial guidance and training to succeed.

How should small businesses in Appalachia respond to these facts?

Just because many counties in Appalachia have limited ties to the banking sector doesn't imply that small businesses should ignore this traditional source of capital. In fact, the fewer the banks in a community, the more important it is to be well-prepared for an application for a loan. (You can't afford to fail!) It's absolutely essential to create a detailed business plan for new ventures, including realistic financial forecasts. Banks won't lend money to entrepreneurs without a clear understanding of the business. Existing firms seeking additional financing will need revenue, profit and cash flow predictions, too. The SBA and SCORE are two sources of guidance for business plans and small business forecasting. Contact them for free advice! Forward View, of course, can also create the financial analyses required for loans and other forms of start-up financing.

One new source of business financing that's underappreciated in Appalachia is crowd-funding. No, we're not talking about some type of charity fundraiser; we're talking about a 21st century alternative to banks, private equity and venture capital firms. EquityNet, Crowdfunder and MicroVentures are just a few of the companies that help connect entrepreneurs directly to investors. Crowd-funding bypasses lending institutions and serves as a new route for businesses in Appalachia (and elsewhere) to receive capital from across the nation. We believe that crowd-funding can absolutely help to bridge Appalachia's financing gap.

In the next issue of this newsletter series, we'll discuss industry and tourism in Appalachia and its relationship to small business. We look forward to presenting our research and ideas. Stay tuned!

Reference: National Community Reinvestment Coalition. (2007). Access to Capital and Credit For Small Businesses in Appalachia. Retrieved from the Appalachian Regional Commission:

Appalachian Small Business Series

This post from our newsletter kicks off our six-part series focusing on ideas and tips specifically designed for small businesses in Appalachia.

Here at Forward View, we consider ourselves to be problem-solvers. As a small business based in the Appalachian town of Clintwood, Virginia, we're very familiar with the local commercial environment: Overall, it's difficult to succeed as a small business in Appalachia. Although some areas of the region are much more economically developed than others, it's certainly true that Appalachia isn't a center of 21st century entrepreneurship. We'd like to change that.

In order to start a conversation about small business success in Appalachia, we're sending this newsletter to Chambers of Commerce in as many of the economically distressed counties as possible, in addition to the at-risk counties in Virginia. (For the record, some Chambers of Commerce don't have a website or email address. They're digitally invisible. This lack of an online presence is terrible! Please contact your Chamber if they don't have a website.)

This newsletter series will focus on these topics:

  • Economic challenges and capital access (September)
  • Tourism, industry and agriculture (October)
  • Business community collaboration and events (November)
  • Limited digital usage in Appalachia (December)
  • Reputation management (January)

We welcome questions or suggestions for specific needs that Forward View should address in this series. Unlike typical, and stereotypical, articles about Appalachia, we'll be offering solutions for the challenges in our communities. Our solutions, however, will not be centered on government or politics. We'll be speaking directly to small businesses across the region. We look forward to your feedback!

July News

Forward View enjoyed a truly exciting July. First of all, we completed the Ralph Stanley Museum website! (Click here to see it.) We believe that it's one of our finest website designs, and we thoroughly enjoyed the entire museum project. We've already begun our next website development job, too.

Our founder was quoted in a U.S. News & World Report article on analyzing corporate earnings reports. (Click here to read.) He was also interviewed by Harvest about Forward View's research methodology and our coverage universe. (Click here for the interview.)

In July, Forward View research analyst Michael Williams initiated formal coverage of Callaway Golf (ELY). Our Director of Research, Nathan Yates, and Forward View research analyst David Wilson initiated formal coverage of West Marine (WMAR), too. As our Sporting Goods Monitor research service continues to expand, we invite you to review these free research samples: Cabela's 2Q Earnings AnalysisMarineMax Fiscal 3Q Earnings AnalysisWest Marine 2Q Earnings Analysis. Please contact us to start your free trial of our equity research service.

June Update

Forward View enjoyed a June filled with opportunities to continue our growth. We also received recognition of our efforts to create a pleasantly different type of consulting and research firm. On June 27th, Forward View won the Dickenson County Chamber of Commerce's New Business Award for 2016. (Businesses open for less than three years were eligible.) We are truly pleased to have been so honored by our fellow Chamber members. The entire Forward View team has worked tirelessly to offer quality consulting and research services, and we believe that our best days are still ahead of us. As a matter of fact, the Chamber award has already increased interest in our business. We look forward to enlarging the Forward View clientele.

The Ralph Stanley Museum website project is nearly finished, so look for an announcement of the site's public availability soon. (Follow us on social media for the latest updates!) Sign up today to our Sporting Goods Monitor research service receive immediate access to our fresh analyses and trading recommendations. We'll soon be publishing a Callaway Golf initiation report exclusively for our clients that you won't want to miss.

May News

May was an exciting month for Forward View with three new stocks added to our coverage list: Sportsman's Warehouse, Hibbett Sports and MarineMax. The initiation reports are available exclusively through StockViews. (Please contact us if you're interested in a StockViews research service trial.) In June, our coverage list will be expanding again with the addition of Callaway Golf. This special coverage will be provided by new Forward View research analyst Michael Williams. He's a golf industry expert with experience in auditing, planning and business analysis. Forward View will be pleased to share Michael's financial modeling, forecasts and field research with our institutional clientele.

Michael earned a Bachelor's degree in Economics and Finance from Southern New Hampshire University, where he graduated with multiple honors and is now a Master's in Finance candidate. He has also completed additional studies in Econophysics and speaks conversational German. Michael is a great addition to the research team!

Forward View was also in the news once again in May. Our mutual fund research was cited by U.S. News & World Report in this article. The Springfield News-Leaderalso discussed our analysis of the potential for a Bass Pro and Cabela's combination in this article.

On the design and consulting side of Forward View, we continue to develop the Ralph Stanley Museum website, and we've also been busy with website updates and marketing projects. We're especially happy that multiple clients decided to deepen relationships with us and request additional services. Each opportunity is most appreciated!

Have a great June! 

Energy & Elections

We don't intend to dive into politics or political forecasting, but we can say that the election of a potential Republican administration would likely benefit the coal industry, and Westmoreland Coal WLB in particular, by slowing/stopping EPA clean air and climate change-related rules. (We have a Buy rating on WLB.) Any improvement in the regulatory environment will immediately affect the power generation sector, and Westmoreland would enjoy secondary benefits. If utility companies have more flexibility in carbon emissions, they'll slow or even stop the closure of coal-fired power plants. For Westmoreland, the ideal situation would be a federal offer to support investment in emission-scrubbing technology that reduces carbon output and extends the life of existing coal-fired plants. That would be a win-win opportunity for coal companies and green activists, something we rarely see. Westmoreland would obviously be poised for success if the problem of carbon emissions was mitigated by federal government efforts. Clean coal technology, and its widespread acceptance, is the Holy Grail of the industry.

On the other hand, Westmoreland is unlikely to enjoy support from either a Clinton or Sanders administration. Secretary Clinton has made it clear that she'd like to bankrupt the remaining coal companies, but we wonder one question: Is she willing to accept rolling blackouts to get her wish? Again, we're not trying to be political here. It's just a fact of economics that replacing base-load coal-fired power generation in America would be exceedingly expensive and would take years to accomplish. If coal usage was eliminated before the replacement of coal-fired power plants with other sources of energy, this nation's lights wouldn't stay on 24/7. Still, a President Clinton could pressure Westmoreland's top and bottom lines without bankrupting the corporation. That is indeed a political/macro risk. Either she or Senator Sanders would almost certainly continue Obama policies that have weighed on the coal sector. Investments in subsidized wind and solar energy directly undercut the demand for coal. Right now, coal is burned because it's affordable and efficient. Subsidized wind and solar power generation wouldn't cost consumers directly, and windmills and solar panels are seen as the "clean" options. Thus, given a choice between coal and wind/solar power for the same price, consumers would choose the latter. The only common complaint about windmills and solar panels is the Not-In-My-Back-Yard (NIMBY) issue. Almost nobody wants to look at a wind/solar farm from his/her home! Finding suitable environmentally-practical and publicly-acceptable locations for clean energy developments can thus be difficult. By contrast, coal-fired power plants have already been constructed. NIMBY aside, a Democratic administration wouldn't be good news for Westmoreland.

Lumps of coal

We believe that Westmoreland Coal shares remain unnecessarily undervalued because of the company's name: It includes the word "Coal." These days, those four letters represent a burden for a coal business all by themselves. From a financial viewpoint, Westmoreland is also somewhat risky. The company's deleveraging cycle is just beginning, and the coal industry is obviously not the best sector for growth. We think that Westmoreland would be the last major coal company to survive any future political campaign against coal. The firm's sales to base-load power producers offer a degree of security not enjoyed by competitors. In addition, Westmoreland's mine-mouth operations can't be beaten on price. For investors and portfolio managers, Westmoreland's stock represents a solid value/contrarian opportunity. 
It's important to understand that the major bankrupt U.S. coal mining businesses (Alpha Natural Resources, Arch Coal, James River Coal, Peabody Energy and Walter Energy) shared two key similarities but are unlike Westmoreland Coal:

  1. Failed mergers/acquisitions. We'll use Alpha Natural Resources as an example. Alpha Natural Resources purchased Massey Energy in 2011 for $7.1B in cash and stock. At the time, Massey was hemorrhaging cash in the middle of the last great coal boom, a period when losing money in coal was a very difficult feat to "accomplish." Some of Massey's losses can be attributed to the company's expenditures related to the Upper Big Branch mine disaster, but the business was also poorly-managed. We'd call Massey a generally backward company headed toward bankruptcy by the end of 2010. In bankruptcy, Alpha Natural Resources could have acquired the best Massey mines for almost nothing without assuming Massey's debts and legal liabilities. Instead, Alpha paid $7.1B for the pleasure of being sucked under due to a terrible acquisition. By the time of Alpha's own 2015 bankruptcy, most of the ex-Massey mines were closed. Operational inefficiencies and further safety concerns ensured that the Massey deal would be a failure.
  2. Market-based contracts. All of the bankrupt coal companies cited above utilized market-based pricing. Contracts were typically short-term, and much of the coal was sold on the spot market. This business model is very profitable during periods of rising coal prices, but losses will be magnified during times of low coal prices. The only way to succeed long-term with this risky sales and pricing strategy is to have absolutely no debt and unusually flexible operations. Unfortunately for the companies cited above, neither of these conditions applied. They were all inflexible, debt-laden businesses doomed to bankruptcy as soon as their boards signed off on the unwise M&A deals.

By contrast, 90% of Westmoreland Coal's tonnage is sold under cost-protected contracts. Most of these customers' contracts don't expire for years, and the other customers are being contacted to discuss fresh deals. A few of the power generation units currently supplied by Westmoreland will be closed in the next couple of years, but Westmoreland has time to find new buyers for that coal or to slightly reduce production capacity. The 13.8M tons of coal that Westmoreland sold in 1Q16 represents neither the bare minimum tonnage necessary to support the business nor the maximum available capacity. Unlike many coal companies, Westmoreland has some flexibility to adjust production without closing mines or heavily increasing capital expenditures. The mine-mouth surface operations preferred by Westmoreland executives are easier to adapt than traditional underground mines.

In summary, Westmoreland faces many obstacles in the future. Some of these obstacles represent legitimate business threats, including additional increases in burdensome power plant emission regulations that directly affect the demand for coal. Other obstacles for Westmoreland are based in market psychology and the tendency for investors to punish every company in a sector for the financial sins of the majority. Westmoreland isn't similar to most other coal companies, but the firm will face intense scrutiny because it's in a terrible sector of the market. Market psychology has evolved to see coal as yesterday's energy source, and traders treat coal companies as businesses unworthy of investment. Unlike buggy whip manufacturers, though, there remains significant demand for coal. The U.S. is likely to generate at least 30% of the country's electricity supply for the foreseeable future. In addition, new steel production still requires metallurgical coal in most situations. Thus, the need for coal isn't going away. Companies like Westmoreland that have stable cash flows and generally efficient operations are much better prepared to succeed in the contemporary environment than massive, highly-leveraged businesses like pre-bankruptcy Arch Coal and Alpha Natural Resources. The company's future profits also hinge on the political situation in Washington D.C. We have no idea which presidential candidate would be the best or the worst for the coal industry, but we do believe that another Democratic administration would be a negative for Westmoreland's stock price. On the contrary, the election of a Republican administration would be a good sign for Westmoreland and other coal companies. Time will tell who wins the White House but until then, we suggest cautiously buying Westmoreland's shares.

Why We Don't Guess

Here at Forward View, we love data and quantitative models. (Our founder's wonderful math teacher is hopefully smiling right now.) Why are we so attached to numbers? We don't guess. Our work is based on detailed and repeatable methodologies, especially on the research side of the firm. By creating formalized, data-driven procedures, your business can also develop a structure for growth. Let's explain with a couple of examples.

Recently, we presented a valuation of Big 5 Sporting Goods in our initiation report on the stock. As a part of the rigorous mathematical analysis, we calculated the company's value and its cost of financial capital. See below.

Modeling technology courtesy of

Immediately after we published the research, somebody complained, "That WACC [weighted average cost of capital] is quite whack." We asked what type of calculations the complainer would use to determine the cost of capital. The response: "Probably a standard 8, 10, or 12 depending on the firm's risk profile." In essence, he would guess and assume that every company is paying 8%, 10% or 12% for its financing. Assuming that he's correct, Big 5 Sporting Goods, a profitable retailer with 438 stores, would have a negative value. In essence, the business would be bankrupt. We know that's absolutely absurd. When you guess, though, everything goes awry.

One other point worth making is that we would use the same financial modeling process to compute the value of a family-owned restaurant as we would to perform a $100 billion corporate valuation. Other than adjustments for accounting policies and the number of business units in a major corporation, the restaurant and corporate spreadsheets would look alike. We believe that an academically-justified and real-world-tested financial model should be applicable to any company.

By developing flexible, yet defined, business procedures, you can save yourself an incredible amount of time! If, on the other hand, a new process must be created for every budget, forecast, investment or decision, you'll never be able to grow. New employees must enter an organization with a culture of success and proven methods for achieving goals. Creating useful business processes and supporting databases/documents will take time. They should also be refined as your firm changes. Still, there's no excuse for guessing in business!

News from April

We're very happy to have finished the new Town of Clintwood website in April. Click here to see it. Forward View appreciates Mayor Donald Baker and the Town Council for entrusting us with this project. The Clintwood website is so popular that we've been asked to develop a fresh digital presence for another town landmark... the Ralph Stanley Museum! Our team has already begun the museum website planning process, and we're looking forward to presenting a successful design to the public. If you're interested in having Forward View develop your organization's website this summer, please contact us now before our project pipeline is filled. We have room left on the calendar for a few logo design jobs, too.

The Forward View research team initiated formal coverage of Dick's Sporting Goods in April, and we'll initiate on three more companies in May. Look for reports on Sportsman's Warehouse, Hibbett Sports and one other sporting goods firm this month. (We'll keep the third company a secret for now.) We have decided to publicly share the Dick's Sporting Goods initiation report as a way to demonstrate the value of our Sporting Goods Monitor research product.

In May, our equity research clients will be receiving 1Q16 earnings analyses as well as other updates and investment ideas. 68% of our trading calls have generated profits for our clients and readers, so you can trust the quality of Forward View research. One recommendation would have earned you 54.4% this year alone.

Look for us in the news and online in May! Remember that Small Business Week is May 1–7! We'll be engaged with small biz facts, tips and offers all week, so follow us on social media...