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   Market Commentary
Jeff Bishop
Editor, Beacon Equity Research
Orbit Drop - How Much is a Good Idea Worth?

For those of you that actively follow the murky realm of "pink sheet" companies, you are undoubtedly familiar with recent high-flyer, Orbit Drop (PK: OBDP). Orbit Drop has the clever idea of franchising retail stores where people can simply drop of their unwanted items and the company will sell them on EBay (Nasdaq: EBAY). The thinking goes, everyone has unwanted items laying around the house but are simply too lazy to sell them on EBay themselves, so Orbit Drop does the leg work for you - all you need to do is actually get the item down to the store (which I suspect is still probably too much effort for most people). For this service Orbit Drop charges a modest fee of less than 35% of the item's sale price, which covers all the EBay fees and the company's overhead.

Sounds like a good business to be in, right? No inventory costs (customers provide all of the inventory to sell) and quick cash transactions (most EBay auctions end in less than a week) sound good at first glance I think.

So what is this idea worth? $1 million? $5 million? $50 million? Would you believe the company is currently valued at more than $100 million?! Investors are only paying 60 cents for the stock, but realize that according to the company's latest filing, there are over 202 million shares out there. That looks like a $120 million company to me.

Mention this to the fervent shareholders and they will quickly point to the incredible future earnings that are just around the corner. Okay, let's just take a look at the end-of-year financial statement issued this month…looks like they managed to bring in a whopping $28,000 in sales - of course they had to spend $89,000 to make that much so the company really lost about $60,000 last year. (My personal favorite on the income statement is a line item for "entertainment, $18,600" which represented 66% of the firm's revenues last year-sounds like they had fun doing whatever they did.)

Granted, the Orbit Drop merger was only completed in December, so looking at the whole year may not be a fair comparison. Maybe they are really raking it in this year. I mean with a market value like that, there must be some incredible revenues. Unfortunately I am not privy to the actual sales numbers of the company, but I can look at the company's information on EBay. Here you can see how many items people have left feedback for on items they have purchased. Surely the company has made thousands of sales this year as people have rushed to drop off their wares for Orbit Drop to peddle? I was disappointed to find only 238 people have left feedback for the entire life of the company, suggesting there have been about that many sales. Are there more items in the pipeline you may ask? Looking at the company's online store there are less than 80 items for sale at each of Orbit Drop's (count them) 2 locations (Dallas and Houston). I don't think there is a promising revenue surprise coming either, since most of the items are currently fetching less than $50.

So, who stands to make the most money from Orbit Drop? Like most pink sheet companies it is the CEO who really makes out like a bandit. Orbit Drop's CEO, Cain McKnight, reported owning 75%, or 152 million shares in the company, or just over $90 million worth. Not too bad for a company that was trading under $.05 less than three months ago. That is capitalism at its finest; he deserves applause for orchestrating one of the shrewdest deals of the year, trading 4 million shares of his company (or about $100,000) to acquire Orbit Drop in December, which vaulted the value of his company up over 2000% shortly thereafter. I didn't make $90 million this year, so he's smarter than me I guess - hats off to him.

So what will it take for Orbit Drop to be fairly valued at this price? Well, I would say 50 times earnings sounds like a pretty generous place to start. That would mean the company would have to make about $2.4 million this year in net income. Ok, how does Orbit Drop do that? Well, assuming a very generous 20% net profit margin, that would mean the company needs to sell $12 million worth of stuff. How likely is this? Not very. Assuming a sale price of $50 per item and Orbit Drop taking 30% of this, they make $15 on each sale. To get $12 million in revenue, they therefore need sell 800,000 items this year. If they can manage that, I'm a big buyer of the stock. But it doesn't appear I'll be buying any of Mr. McKnight's overpriced shares in the near future. I'll be keeping track on the progress, however…only about 799,700 more items to go.

Full Disclosure: Mr. Bishop does not have any position in OBDP
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Copyright 2005, Beacon Equity Research Partners, LLC