Sunday, May 31, 2009


GM bondholders to fare much better than originally thought, after standing up for the rule of law.

New-age mad men.

Valley after the rally?

Kudlow on little green cars

Tech sector hand-wringing.

LaMonica warns on market-timing

Saturday, May 30, 2009


Banks finding it difficult to take advantage of the friendly yield curve:
"I'd highlight Goldman Sachs' (GS) $1.0 billion reopening of its 10-year bond at 337.5 bps over the 10-year - or 7.50%. To these eyes, this is arguably a far worse reverse carry trade; borrow long at high spreads and do what with it profitably without taking either extreme credit or market risk?" - Minyan Peter

Trouble ahead for the Sun Belt

MUST READ - Not a fan of short-selling? You might be unwittingly helping supply shares to the bears...

The new "run-rate" for US annual car sales is permanently impaired...

California is about to look a lot different

Bad news bonds

Skeptical of diversification

Friday, May 29, 2009

Pre-Weekend reading.....

Peter Schiff - Obama should tell CA to "Drop Dead"

Barton Biggs likes Chinese equities...

Kass on Bull/Bear traps

From a few days ago - mega themes to keep in mind

Ten reasons we're going higher from here....

What's GM worth?

Happy weekend.

S&P500 Valuation snapshot

AlphaNinja - So after the S&P500 has bounced 34% from its March lows, I'm trading with a cautious outlook. I think the index is cheap on a long-term basis, but is due for a near-term pullback. That said, lets look at the index's valuation.

About 10% upside to the analysts' average stock price target. I expect that the negativity has overshot to the downside just as people were previously too giddy on the way up....

Price-to-sales (which I like to use because it doesn't fluctuate as wildly as price-to-earnings) is about 1, well off the 10 year average of 1.8.....

And PE ratio's are WAY off their historical averages, which to me is more an example of how out of whack things were for most of this decade, rather than an example of how cheap they are now. Still, the low single-digit trailing and forward PE's auger for pretty good returns going forward....

(Disclosure - I'm about neutral in terms of exposure, and am short the SP500 by way of the SDS)

Target versus Ackman......VERY interesting activist situation

AlphaNinja - Great debate here about a company's focus - monetize assets or not? Let an activist shareholder gain board representation or not? Is said activist's ownership stake sturdy enough to warrant such representation?

It's been an ongoing battle here. William Ackman, through his Pershing Square hedge fund, has been agitating for change at Target (TGT) for quite some time. His aggressive use of derivatives instead of strictly owning common stock (he does own both) has CRUSHED him and his investors, while at the same time giving management an argument that he is not "in it" for the long haul, since much of his ownership stake expires within 18months.

Ackman's main argument is that Target has significant, unrecognized real estate value that can be unlocked through sale-leaseback transactions. Secondarily, he believes the company needs a better food product strategy to combat category leader Walmart. AlphaNinja agrees with him on both counts, but in this case we think his aggressive stance is unwarranted, as Target has performed admirably in a tough industry.

Target's stock performance vs. Walmart:

The final verdict in this debate is the market, so what is it saying? TGT yields 1.2%. NOT CHEAP. Target trades at a PE of 12 - cheap, but it's a retailer in a recession competing against Walmart and the rest of the world. Free Cash Flow is CLOBBERED by huge capital expenditures, so they don't have that going for them ( that is the best argument going for Ackman - the real estate transaction would free up much cash to pay for expansion). The point is, Target is pretty well received and valued by the market - especially back at the $60 level, when Ackman was making the same argument.

Whether or not Target raises cash in a real estate transaction, the company must continue to invest heavily, to the detriment of free cash flow. Ackman's push is a "recapitalization" of sorts - an attempt to monetize something he sees as unrecognized by the market. I bring up this example because the market is not stupid - investors add value to a stock price for under priced real estate, the same as you would with a sizable cash balance. Tinkering with the capital structure usually creates less stockholder value than one would by increasing earnings, but in this case it might not be so. The market doesn't value Target on a book value basis, so why not monetize some of that real estate and do something with the cash? Both sides in this case have good arguments:

"There are few proxy battles actually won by the outside activist, and Target exhibited few characteristics of a poorly managed company despite current performance," says Neil Stern, senior partner at retail consultancy McMillan Doolittle. However, Stern added that "Ackman's push for a more skilled board was not all wrong."

Today we see that Target shareholders have rejected Ackman's nominees to the board. The best outcome here would be a compromise - Ackman should back off, and Target should monetize (depending on market conditions) some of its real estate portfolio.

Some of Ackman's TGT holdings, as well as other positions:

Morning Reading.....

Government bonds entering the Danger Zone?

Stand up for your legal rights as a creditor and you're a......vigilante?? ....

Well the bondholders persistence has paid off.

Huge rally in commodities. Should bode well well for US "stuff" makers. (cranes, mines)

Starbucks, lowering its occupancy costs.

Gross suggests changes may be needed at the big endowments.

Thursday, May 28, 2009

Dell earnings and conference call

AlphaNinja - Dell (DELL) beat by a penny on light revenue this afternoon, and the street wasn't expecting much out of this quarter.

The BAD:

-Unit sales down 17% and total sales down 23% year over year.

-Operating Income down 54% from last year's Q1

-Earnings per share down 61%

-The company's macro outlook is not improved from February


-With revenue and average selling price down so much, gross margin held up well, down just .8%

-Dell sees the potential for a powerful upgrade cycle, as many companies have completely skipped the Vista platform, and the installed base is getting very old.

Dell has over $10billion in cash and ST securities - 2010 (ending Jan2011)FreeCashFlow could equal 17% or higher of the company's "net of cash" purchase price. The stock is a big-time BUY, and could be a double within the next year.

(Disclosure - long DELL)

Einhorn on the "Curse of the AAA"

AlphaNinja - While I'm sure this speech can be found at 1,000 finance sites today, its a must read, whether or not you agree with me that the ratings agencies are worthless. Earlier I linked to brief summary, the link above is the speech in full.

notable quotes:

"If your product is a stamp of approval where your highest rating is a curse to those that receive it, and is shunned by those who are supposed to use it, you have problems."

"The truth is that nobody I know buys or uses Moody's credit ratings because they believe in the brand. They use it because it is part of a government created oligopoly and, often, because they are required to by law. As a classic oligopolist, Moody's earns exceedingly high margins while paying only the needed lip service to product quality. The real value of Moody's lies in its ability to cow the authorities into preserving its status."

Alphaninja - I remember late 2007, discussing the ratings agencies with a contact who was putting together some of the very most toxic mortgage-backed-securities for a large bank. He said that "they (Moody's, S&P) come into the office and ask 'what do you want this to be rated'?" Then through insuring different tranches, etc., complete garbage can be turned into a AAA-rated security. People then trust this rating, and you end up with Norwegian fishing villages owning what they think is a risk-free investment that turns out to be horribly impaired.

More insight on the subject from a Hayden Capital letter from Summer 2007:

AlphaNinja - A VERY smart investor suggested I buy Moody's in the fall of 2007. He liked Moody's huge margins and protected business model. During our discussion I pointed out how useless their ratings had turned out to be. His response was "but SOMEONE has to rate these securities." Well I agree, and firms such as Egan Jones have stepped in with much better ratings. And at the end of the day a thorough analysis of earnings volatility, times-interest-earned, and other debt ratios can lead to a fairly reasonable assessment of creditworthiness for many debt securities. For exotic securities more work is needed, but the failure of the big 3 ratings agencies to do even a halfway competent analysis over the last few years should be a reason to strip them of their privileged, government-mandated book of business.

Perusing the filings 05/28/09 (RUS, WDC, REV)

AlphaNinja - Well....there should be a filing shortly for this.

Russ Berrie and Company, Inc. Announces Exploration of Strategic Alternatives to Enhance Value:

"Russ Berrie and Company, Inc. (RUS) announced today that it has begun to explore a full spectrum of strategic alternatives to enhance shareholder value, a process it began as a result of several inquiries regarding potential transactions the Company received following the divestiture of its gift segment in December. While the Company's principal focus will continue to be the execution of various growth strategies for its infant and juvenile business, it will also evaluate a possible merger, acquisition, strategic partnership or sale of the Company.

Bruce Crain, President and Chief Executive Officer of the Company, commented, "The sale of our gift segment transformed our business and focused our efforts on the attractive infant and juvenile industry. Our objective now is to establish an even greater presence in the industry by building upon our market leadership. Based on the inquiries we have received, we have decided to examine a full range of alternatives that may enhance our long-term potential."

Mr. Crain continued, "In addition to considering our external strategic alternatives, we remain committed to our internal growth strategies to create shareholder value. Accordingly, we are focused on the following: first, to win market share by creating design-differentiated, branded products; second, to expand our product offerings into complementary categories; third, to grow and diversify our distribution channels; fourth, to drive sales and marketing collaboration across our businesses; and fifth, to capture operational synergies that yield cost savings throughout our organization."

AlphaNinja - Here's a case where you'd wish management had more skin in the game. Insiders own less than 1% of the stock, so they may not be as interested in resurrecting the share price as would management that were more invested. But I'll hope for the best....


AlphaNinja - Western Digital (WDC), an AlphaNinja favorite thanks to its lavish Free Cash Flow generation, provides upside earnings guidance ahead of investor meetings....

from the 8k:

At meetings with investors and analysts this week and next, executives of Western Digital Corporation (the “Company”) will provide an update regarding current Company and hard drive industry dynamics.

Specifically, the Company expects to discuss, among other things, the following:

•Demand for the Company’s fourth fiscal quarter ending on July 3, 2009, is tracking ahead of the expectations which the Company outlined in its last earnings call on April 23, 2009.

At this point in the quarter:

-Company shipping linearity is ahead of plan.

-Industry and Company weeks of inventory remain at historically low levels.

-Price declines have been at the lower end of the anticipated range for desktop and notebook products and within the expected range for branded, consumer electronics and enterprise products.

-Actual industry demand, competitive conditions and Company execution in the month of June will determine the final outcome for the current quarter.


AlphaNinja - Revlon(REV) guides down significantly, announces restructuring:

Revlon Implements Worldwide Organizational Restructuring
Improved Processes and Workflows Enable Significant Cost Reductions
Second Quarter 2009 Outlook Significantly Below Second Quarter 2008

NEW YORK--(BUSINESS WIRE)--May 28, 2009--Revlon, Inc. (NYSE: REV) today announced a worldwide organizational restructuring, rightsizing the organization to reflect the more efficient workflows and processes that the Company has implemented over the last two years. In addition, given the ongoing uncertain economic environment and the potential effect that it could have on net sales, this action will also provide the Company with additional flexibility.

Revlon President and Chief Executive Officer, Alan T. Ennis, stated, “Today’s announcement represents an important, necessary, and logical next step forward for Revlon. Over the past two years, we have built improved and more efficient processes and workflows, which now allow us to take this step to reduce annualized costs by approximately $30 million. This action, which we are implementing immediately, will enable us to become a stronger, more financially sound organization while staying true to our vision of providing glamour, excitement and innovation to consumers through high-quality products at affordable prices. Revlon has incredible talent and capabilities, broad geographic reach, and strong global brands. We will continue the execution of our successful business strategy, namely (i) building and leveraging our strong brands; (ii) improving the execution of our strategies and plans, and providing for continued improvement in our organizational capability through enabling and developing our employees; (iii) continuing to strengthen our international business; (iv) improving our operating profit margins and cash flow; and (v) improving our capital structure.”

Organizational Restructuring
The primary components of the organizational restructuring involve consolidating certain functions; reducing layers of management, where appropriate, to increase accountability and effectiveness; streamlining support functions to reflect the new organizational structure; and further consolidating the Company’s office facilities in New Jersey. The organizational restructuring will result in the elimination of approximately 400 positions worldwide, including approximately 325 current employees and approximately 75 open positions.
Annualized cost reductions from this organizational restructuring are expected to be approximately $30 million, of which approximately $15 million will benefit 2009 results. Restructuring and related charges are expected to be $20 million comprised of $17 million of employee-related costs, including severance and other termination benefits, and $3 million related to the consolidation of the Company’s office facilities in New Jersey. Approximately $17 million of the charges are expected to be recognized in the second quarter of 2009 with the remaining $3 million expected to be recognized in the second half of 2009. All of the charges are expected to be paid out over the 2009 to 2012 period, including $11 million in 2009, $6 million in 2010, and the balance of $3 million to be paid thereafter.

Second Quarter 2009 Outlook
Commenting on the outlook for the second quarter 2009, Mr. Ennis continued “While the mass color cosmetics category in the U.S., according to ACNielsen, continues to grow, the rate of growth has started to slow, and retailers are carefully examining and optimizing inventory levels. Additionally, as communicated in our first quarter earnings release call, first quarter 2009 net sales benefited from higher pipeline shipments of new color cosmetics products, as a result of the timing of shipments and our more extensive new product lineup. As a result of these factors, combined with the unfavorable impact of foreign currency fluctuations and pension expense, not including charges related to our organizational restructuring actions, we anticipate significant negative impact on net sales and profitability in our second quarter 2009 results as compared to the second quarter 2008.”

Analyst actions 05/28/09


"BMO Capital Markets initiates Gap (GPS 17.27) with an Outperform and sets a $21 tgt, based on inventories that are now very tight and positioned to grow with improvements in traffic. Costs have been trimmed significantly, as well, leaving the expense structure lean and poised to leverage faster when sales rebound...

AlphaNinja - I like the Gap, think it's worth $24-25, but in this range-bound market I will wait for a possible pullback. As a wise investor once said, "opportunities are made up easier than losses."

Also from

"BMO Capital Markets initiates Aeropostale (ARO 34.34) with an Outperform and sets a $50 tgt, based on stronger sell throughs as evidenced by the BMO Sale Rack Index and higher average unit retails, which they expect to result in substantial operating leverage, opportunity for continued competitive market shares gains, driven by a fashion merchandise assortment with pre-planned promotions relative to peers struggling to get the value/fashion equation right, and opportunity for further operating margin expansion by way of systems improvements..."

The stock is inexpensive, but watch out for technicals and profit-taking on this one....


AlphaNinja - Caterpillar(CAT) downgraded to sell by UBS(along with PH and ETN). Earnings coming in at 1.17 and 1.50 the next two years, down from 5.66 in 2008. The huge reduction is largely b/c CAT can't (and shouldn't) slash costs as quickly as sales are diving. But the company's "normalized" earnings are not going back up to the $5 range anytime soon. And they have $34billion in debt with a $20billion market cap. Lot's of downside here. summary:

"Machinery stocks downgrade details
UBS says they believe the risk/reward profile for Machinery stocks has deteriorated. The firm sees risks from continued weakness in key end markets, given a customer base that is feeling the impact of the credit crunch, limited pricing power from recent industry capacity expansions and increased availability of used equipment, share prices above historic valuation parameters and unfavorable seasonality for machinery stocks. The firm downgraded Caterpillar (CAT), Parker Hannifin (PH) and Eaton (ETN) to Sell from Neutral, and Illinois Tool (ITW) to Neutral from Buy. They are placing Terex (TEX) under review. They continue to favor Joy Global (JOYG) given its strong market position (essentially in a duopoly) and potentially more stable aftermarket exposure (60% of revenues). Additionally, they continue to rate CMI, HEES and URI as Buys."

Morning Reads 5/28/09

Einhorn shares AlphaNinja's opinion that the ratings agencies are nearly worthless.

More debate over Facebook's implied value is a healthy thing.

A challenge to the Kindle?

The global bond vigilantes are back, and their vote counts.

Daddy's taking the muscle-car culture away.

Brothers don't shake hands, brothers gotta hug!

Good news on the manufacturing front!

Trust the commies? On economic decisions, maybe I will.

F.A.O. Schwarz bought by Toys 'R' Us.

Wednesday, May 27, 2009

Late Day Reading 05/27/09

Karl Denninger, with some gloomy predictions. Something's amiss when the 30year mortgage rate jumps nearly a THIRD in one day, to 6.5%.

Also from Karl, the BLO (Brazen Looting Operation)
And the WSJ weighs in on the yield curve hitting its highest level EVER

NYPost discusses the upcoming $1.4trillion in commercial real estate debt that must be refinanced.


AlphaNinja - IBD gathers some experts' thoughts on opportunities in the corporate bond market. While yields are not what they were in December, there are many opportunities to own 10% yields while sitting higher up the capital structure than one would with equities.

That said, bear in mind a big caveat - "there is always some danger in attractive yields. Bond prices move inversely to interest rates. So investors who do not intend to hold bonds to maturity would be hurt by a general rise in interest rates.

"That's one of the risks," allowed Pimco's Kiesel."

Pequot to wind down operations...

Pequot Capital (recent holdings) shutting its doors, as the SEC continues to hound them. Where there's smoke....

Lululemon (LULU) and the trouble with price targets.

AlphaNinja - I constantly refer to the valuation metric FCFY, or Free Cash Flow Yield(as a % of market valuation). One of the main reasons I do so is because the last few years have been brutal to stockpickers who've relied on picking the right PE ratio, or the proper cost of capital in a DCF model. In many instances the earnings and cash flow projections have been reasonably accurate, but the other variables that go into the stock target have proved to be largely arbitrary. So here's Lululemon as an example of a stock people wanted to own, and struggled to value reasonably.

LULU is a women's athletic retailer, selling pricy but high-quality athletic apparell at 113 stores in the USA and Canada. As Weisel put it in September 2007, "the brand has rapidly developed a cult-like following among fashionable, fitness oriented women due primarily to its superior product. The firm believes the co can grow to 300 locations in North America eventually. The brand is still young in the U.S. but they believe awareness will increase significantly over the coming years."

Or as Cramer said, in his understated manner, "he believes lululemon (LULU) has growth potential as a woman's apparel retailer. Therefore, its addressable market is 50% of the population."

LULU went public July 27th 2007 at $18 per share, and by the fall had traded to almost $60. The main "story" with this stock was a potential North American presence of 350 stores, with an operating margin of 19-20%. At maybe $4.5million annually per store, that's $1.4billion in revenue and about $175million in net income.

The only way the $40-and-up price targets could be even close to justified was by citing the company's huge growth plans, which at the time were 25-35 stores annually.

Below is Goldman's September 2007 initiation on LULU - the price target is absurd, and is clearly a case of "backing into" the target, or picking a target then justifying it somehow. The "somehow" in Goldman's analysis was to downplay the piddly $14 DCF target to a weight of 15%of the blended target, so the stock could be valued using a "pemium" multiple:

For the most part, Goldman's earnings estimates were much more rational than the target PE multiples they applied to the stock. But in the below section, their "worst case" earnings scenarios are based on an assumed "normal" expectation of explosive growth:

Today, management still plans on getting to 300 stores, and based on what they've shown so far I think their 19-20% operating margin is attainable also. But they're growing the store base 6% this year, with comps(sales at stores open at least one year) running negative double digits. That 300 stores and $1.4 billion or so in sales is way, way off in the future, as are free cash flows of any significance.

The main point here is that modeling the downside of growth estimates is equally, or more important, than the chance of upside surprises. If the economy gets going even a little, LULU's 2011 estimates might quickly head to over 1.00 in EPS, sending the stock to $20. However as a free-cash-flow investor, I'll stay on the sidelines for now.

Monsanto (MON) down 4% on weaker Roundup sales.

AlphaNinja - The market is reacting kindly to this earnings guide-down from a very expensive company. While results will show continued growth in the seeds and traits business, Monsanto's Roundup and similar businesses will bring in $2billion in gross profit, down from previous expectations of $2.4billion. The earnings revision may have been worse had the company not also responded by cutting marketing and administrative costs. Certainly not a disaster, but this company enjoys a very pricey valuation that it must continue to validate.

Weather-related delays in Roundup sales might indicate that those sales were postponed rather than lost, but Monsanto's press release mentions share loss to generics, as Monsanto attempted to "protect the brand" with higher prices....

"Cooler, wetter weather in some parts of the U.S. Corn Belt has delayed the application timing of Roundup and other glyphosate-based herbicides over the top of Roundup Ready crops this spring. At the same time, generic and other branded competitors continue to aggressively move larger-than-expected volumes of lower-priced material into the marketplace. While Monsanto's supply of Roundup in the distribution channel is within its historical range, the application of the product is half that compared with product use at the end of May 2008.

Supply of glyphosate is now exceeding demand globally. In the United States, Monsanto has chosen to focus on protecting the premium of its high-performance products, which is having the effect of reducing volumes. The company now anticipates total volumes sales of approximately 200 million gallons, with a net average selling price for its approximately 110 million gallons of branded Roundup globally of more than $20 per gallon."

Monsanto predicts 2009 free cash flow of $1.4billion, a paltry 3.3% of its market valuation. Adjusting for near-term working capital burdens, the next few years should see basic free cash flow around $2.5billion, still only 6% of Monsanto's market value. Pretty expensive, regardless of how well this company's future looks.

USA vs. other AAA-rated entities

AlphaNinja - There was much debate this week about the possibility of the United States losing its coveted AAA rating, after S&P downgraded the UK. As I wrote at the time, we need to take these ratings with a grain of salt, as the performance of the ratings agencies has been awful to the point of being a contrary indicator.

After PIMCO's Bill Gross suggested the USA could also be downgraded, a slew of people came out to call that a longshot. But why shouldn't our credit rating be downgraded? Here is how the USA stacks up against a few other "bulletproof" AAA-rated names:

Uncle Sam's annual interest expense, as a % of revenue, is 100times that of ExxonMobil, yet they have the same credit rating. There's obviously "concentration" risk by owning XOM debt versus the vast, diversified USA revenue base, but the numbers still speak loudly. In under a decade we're going from Debt/GDP of 50% to 100% or worse, and expect that not to dent our credit rating. It's like assuming your FICO score doesn't budge after you take a 10% wage cut and take out a mortgage.

This Drudge screenshot exemplifies the double standard between the US and the "little guy":

The UK's debt to GDP is over 300%, while ours is around 80% - so I'm not worried that we're about to lose our status as the best place to safely "park" money. But to think that our massive borrowing and spending should have no impact on our creditworthiness is absurd.

Last point - USAToday reports today that:

"Federal tax revenue plunged $138 billion, or 34%, in April vs. a year ago — the biggest April drop since 1981, a study released Tuesday by the American Institute for Economic Research says."

Numbers like that mean that we may not have a stable enough "revenue" base to support the borrowing we're attempting.

Minyanville's Mr. Practical, with sobering but critically important warnings:

"Of course we have stabilized. The government has bankrupted our future to do it. The government(s) control the LIBOR market, the swaps market, the bond markets with all the “money” they are printing. They are feeding “money” to banks under the table at an alarming rate.

Those declaring the economy is now recovering do not understand (still) the problem: we are stuck with too much debt. The government’s solutions are to create more debt, as their next to be announced PPIP does. But an economy grows from production, not lending at the wrong price. This is a long term problem; the government has only addressed the short run symptoms.Let me give you an example. Sixty to 70% of our economic growth depends on consumption. In order to “reflate” an economy (still the wrong way to do it but I will give the bulls the fact that you can drive up nominal asset prices by devaluing a currency), you need people to borrow money and spend it. In 2002 consumer debt as a percentage of disposable income was an all-time high of 90%.

Apparently that was still low enough to spur consumers into borrowing money against their houses and spend it. This drove the ratio up to 135%! By the first quarter of 2009 the ratio dropped to about 130%. Just look at what damage that did as consumers tried to get out of some debt. The ratio is still at least 125% (we will know for sure in at the end of June as the numbers are quarterly). There's no way to know for sure, but logic says to reflate from that high level of debt is going to be virtually impossible.

The government is going all out socializing markets and the economy. This is the exact opposite approach I would take. We need lower debt, not more. We need production, not lending. Unfortunately I offer no solutions other than let an economy grow from the bottom up, by savers finding a good investment and lending to entrepreneurs. When the government provides capital (printing) money, it crowds out production.Risk is very high."

Early Reads for 5/27/09

A main street GM bondholder speaks out.

Polaroid revival?

Kass tee's off on "perma-bears" with no skin in the game.

NYTimes skeptical of the valuation Facebook's recent financing implied. So is AlphaNinja.

Funds returning money they'd pulled from Madoff.

Hotel operators versus owners, things getting nasty during this recession.

Tuesday, May 26, 2009

Analyst actions 05/26/09

AlphaNinja - Joy Global (JOYG) and Bucyrus (BUCY) upped to buy at KeyBanc, based on a gradual economic recovery and rebounding commodity prices.

After a 10% jump today, Joy Global would offer 50% upside to Keybanc's $48 target. FCFY (Free cash flow yield) is 10% based on a rough $320million this year- a nice yield at this level but a stretch should the stock trade in the 40's.

Bucyrus has an approximate FCFY of 8%, and 54% upside to Keybanc's $40 target.

Both stocks have rebounded smartly off their lows, but could still prove to be valuation bargains if it (likely) turns out that estimates have overshot on the way down.


Blockbuster (BBI) raised to buy at Roth, see's 400% upside, as long as they remain solvent. Ah.


Blockbuster tgt lowered to $3.50 Roth; lowers EPS ests below consensus; still sees co as solvent in 2009, margins stable (0.66 ) : Roth is lowering their tgt to $3.50 from $5, their FY09 est to $0.18 from $0.24 and their FY10 est to $0.19 from $0.22 (consensus $0.21 and $0.22) following terms of the recently restructured debt and continued competitive pressures. They note game rentals and sales face tough comps in '09, but likely to remain stable. They note better content control and cost cuts are likely to offset weakness in rev; de-leveraging to largely offset higher rates. They believe BBI will remain solvent in '09 and margins appear to be stable, which will likely spur investor confidence between now and year-end.

UAW's sweet sweet terms...

AlphaNinja - I've long been of the opinion that GM can be one of two things - green or profitable. They were forced to sell small cars at a loss in order to comply with CAFE (corporate-average fuel economy) standards. Had GM been exclusively selling its profitable SUV's, while the Japanese satisfied the demand for smaller cars, they would be sitting on tens of billions more cash, and probably wouldn't need government assistance...

That's all out the door. The GM situation might make the Chrysler ripoff look tame. Now the company can sell whatever they want, maybe even $60,000 hybrids, because the government will subsidize half the cost. A truly remarkable trainwreck.

Of $20billion owed to the UAW, they appear to be getting back $19billion, or 95% of their money, while other creditors no lower on the capital structure will receive closer to 10% of theirs. This is CRIMINAL.

From the WSJ:

"Under the deal with GM, which was agreed to last week and is set for a UAW vote in coming days, GM will place $10 billion of assets into a retiree health-care fund on Jan. 1, 2010. The UAW also receive a new note, payable in cash, for $2.5 billion. That note will be paid out in three installments taking place in 2013, 2015, and 2017.

The UAW health-care trust had been owed $20 billion by GM, but the union—responding to Treasury Department demands—has agreed to cut the cash obligation and receive a significant amount of what it is owed in stock or notes.

In addition, the UAW will be given $6.5 billion in preferred stock in a reorganized GM. That stock includes a 9% cash dividend, under which the union's trust fund will receive $585 million annually for as long as the UAW holds the stock. The preferred stock is in addition to 17.5% of the company's common stock that is being promised by GM to the trust.

The union gathering came hours ahead of the deadline for GM's bondholders to decide whether to turn in up to $27 billion in debt for a collective 10% stake in a restructured GM"

And the bondholders, as is their fiduciary duty to their clients, flatly rejected this proposal. How are they treated in the press? Below is a screenshot from YahooFinance. Gotta love that unbiased journalism....
Recalcitrant, from the online dictionary:

1: obstinately defiant of authority or restraint
2 a: difficult to manage or operate b: not responsive to treatment c: resistant

Notable financing (Facebook)

AlphaNinja - Facebook received $200million from a Russian investment firm in exchange for 1.96% of the company's shares - most sold by existing shareholders. Clear winners here are the sellers, as this values the company at $10billion, only down 1/3 from the price Microsoft bought shares at.

Comments from CEO Zuckerberg, who is quite happy he rebuffed Yahoo's offer to buy Facebook for $1billion a few years back:

"This investment demonstrates Facebook's ongoing success at creating a global network for people to share and connect," said Facebook CEO Mark Zuckerberg. "We've worked hard to bring more than 200 million people - 70 percent outside of the U.S. - onto Facebook to share with friends, family and co-workers. A number of firms approached us, but DST stood out because of the global perspective they bring - backed up by the impressive growth and financial achievements of their internet investments. We're looking forward to working with the DST team."

info on the investors:

Based in London and Moscow, DST is a well-respected investor in a number of successful internet companies, holding significant interests in Russia and Eastern Europe, such as, Forticom and vKontakte. DST's main assets account for over 70 percent of all page views in the Russian-speaking internet and its social networks are the market leaders in more than 13 countries, addressing a combined population of more than 350 million.

DST is run by its three partners who have complementary backgrounds in operations, investments and finance: Yuri Milner, previously CEO of, the #1 Russian language website; Gregory Finger, previously head of the Moscow office of NCH, a multi-billion dollar hedge fund; and Alexander Tamas, previously co-head of internet and software coverage in EMEA for the Investment Banking Division of Goldman Sachs. With its advanced understanding of opportunities in technology and social media, DST is a good fit for Facebook and an insightful partner that can help unlock additional growth opportunities.

....And yet more on Opentable's IPO

AlphaNinja - At the risk of sounding repetitive, there's a REASON these folks are selling. AlphaNinja recoiled at the first-day valuation accorded this stock, and others have started to notice as well. Remember, this company sports a market valuation around $600million, nearly 4times the company's total addressable market (TAM, if you're fancy).

Chart courtesy of Bespoke:

NYTimes quoting Scott Sweet of I.P.O. Boutique:

The I.P.O. market “has not and should not see a pricing” like OpenTable’s, which reminded him of the dot-com bubble, he said. “People don’t truly know the story here about this company. It’s a one-trick pony company,” he said.

OpenTable has lots of room to grow in the near term and revenue is now growing about 20 percent a year. But that growth will reach a cap, Mr. Sweet said. The company makes money selling its software to restaurants and charging them $1 for each diner seated. They have 10,000 restaurants on the system and estimate that there are 30,000 restaurants that take reservations in North America. Even if they signed up all the restaurants, revenue, now $56 million, would top out at about $160 million.

Furthermore, as the company acknowledged in its filing with the Securities and Exchange Commission, restaurant reservations are dropping. “Pricier restaurants in San Francisco, Tampa, New York are not that hard to get in right now. In fact, one can do it themselves if they choose, with 15 minutes notice,” Mr. Sweet said.

Today's Reads 5/26/09

John Maudlin worries that the global bond market cannot digest what will be thrown at it....

A new "normal" unemployment rate of 8%???? Then the Fed projections are a joke.

"Trough" earnings should not have "trough" Price/Earnings multiples. (that said, there's no need for this author's snooty rear-view-mirror tone).

Whitney Tilson video on housing.

The next injustice - responsible states bailing out irresponsible states.

"Soaking the rich" fails in Maryland.

Stocks versus bonds, the "Fed model"

Porsche-VW, there will be books written about this farce.

Hedge Funds' as further fuel for this rally?

European response to the auto-meltdown.

Saturday, May 23, 2009

Saturday reading 5/23/09

Memorial Day Weekend market thoughts from Barrons' Santoli

AlphaNinja - I'm a fan of Santoli, and he has a great track record from what I can tell. But how he gets to a DJIA trailing PE of 40 is a mystery to me. Using current weightings and trailing 12month earnings gets me closer to a 12.6 PE....

Target is operating pretty well, maybe Ackman should fight elsewhere.
(AlphaNinja - Target makes a good point against this activist investor, especially seeing as the bulk of his stake is in options due to expire in the next two years)

Interesting - what if Ahhnold had listened to voters initially?

The real-world way to fight "climate change"

California break-up?

Government motors indeed. GM says it needs $4billion, not $2.6billion - an increase of $1.4billion, to see it through the next NINE DAYS.

Friday, May 22, 2009

Analyst actions 05/22/09

AlphaNinja - Chico's FAS (CHS) upped to a buy at Suntrust. While a one-year look at the chart may indicate it's over-bought, backing it out a few years show how far down this is from it's heydays. Much to correct at this company, but turnarounds do happen...

The most they ever earned was a little over $1 a share, which is why CHS was a favorite of the shorts in the $40's. To get back to that, let along an earnings level that would justify the stock to top 20, would require the incredible sales-per-square-foot numbers the company achieved then.


AlphaNinja - Hasbro (HAS) upped to buy from hold at Morgan Joseph. They downgraded it in April at $27, so this is a valuation call.

On a positive note, the COO purchased 10k shares earlier this week.

Free Cash Flow could be $330-370m the next few years, a nice yield on the company's market cap. AlphaNinja purchased shares this morning looking for a near-term move back to the high 20's.

Playboy for sale??

NYPost is reporting that Playboy Enterprises my be for sale. The stock is up 13% on the news.

"PLAYBOY Enterprises, the far-flung empire founded by Hugh Heffner in 1953, is quietly being shopped around for $300 million, sources tell Media Ink.
But so far, well-heeled suitors that have been approached, like Apollo Capital Partners and Providence Equity Partners, haven't stepped up.

The battered company's market capitalization is now around $100 million and nobody has been willing to pay the substantial premium that it would take to persuade Hef to sell."

Hefner, now 83 years old, said recently that one of his biggest regrets was taking Playboy public.
He still controls about 70 percent of the voting stock, and as of March 31, the second-biggest shareholder was Wells Capital, which held a 10 percent stake. Fidelity is third at 7 percent."

AlphaNinja - "Hefner, now 83 years old, said recently that one of his biggest regrets was taking Playboy public." Cry us a river, Hef! It never ceases to amaze me when people who cashed in by cashing out (IPO) lament the loss of control of their business. Honestly, if Hef didn't control the voting shares, his stake would probably be much more valuable right now.

Here, for something truly inappropriate and vulgar, is Playboy's recent 10Q.

More on Opentable

Blodget agrees with AlphaNinja (yesterday's post) that OPEN stock is quickly overvalued.

"Everyone justifiably cheered when OpenTable (OPEN) went public yesterday. In a horrific economy, with wreckage as far as the eye can see, the debut of a real business with a 60% stock pop brought back memories of a happier era.

Unfortunately, those memories included companies that were overvalued by the end of their first day's trading, sometimes wildly so (don't I know it). And at yesterday's closing price, OpenTable has joined that club.

OpenTable is a real business: A steady grower with a clear value proposition, a profitable US business, and plenty of room for growth. It's growing 20%+ in a crappy economy, which bodes well for a cyclical recovery. But unfortunately the stock is already trading at 50X+ 2010 earnings, which leaves little room for disappointment or error.

ThinkEquity, one of the underwriters, is reportedly estimating OpenTable EPS of about 25 cents in 2010. Let's assume that estimate is wildly conservative (underwriter analysts usually set the bar low, so IPO companies can "surprise" on the upside). Let's assume that, in fact, OpenTable will earn at least 50 cents a share in 2010. Then it's trading at 65X 2010 earnings."

Notable financing (CROX)

CROCS(CROX) registration to sell a slew of "stuff." These guys are a trainwreck, but I'd love to see some improvement.....


Debt Securities
Preferred Stock
Common Stock
Stock Purchase Contracts
Securities Warrants

Unless otherwise specified in a prospectus supplement accompanying this prospectus, the net proceeds from the sale of the securities to which this prospectus relates will be used for general corporate purposes. General corporate purposes may include repayment of debt, acquisitions, investments, additions to working capital, capital expenditures and advances to or investments in our subsidiaries. Net proceeds may be temporarily invested prior to use. We will have significant discretion in the use of any net proceeds."

Update on the Gap

AlphaNinja shared some some upbeat thoughts on the Gap (GPS) yesterday afternoon, after the company reported decent numbers. The street agrees, as the consensus earnings numbers are being increased to where AlphaNinja sees them.

from breifing:

"FBR Capital notes last night GPS reported 1Q09 EPS of $0.31, vs their est of $0.31 and consensus at $0.30. Recall that on May 8, the co guided 1Q09 to range of $0.29 to $0.30 on a GAAP basis. Additionally, the co's guidance implied a 2Q09 EPS above the Street consensus of $0.25. On the call, mgmt noted that Old Navy's turn is progressing, and that it expects to see improvement at Gap in 2H09. FBR continues to commend mgmt for its ability to cut costs and believe the results are apparent. FBR believes that Old Navy has shown signs of improvement, but they continue to look for the evidence that the turn is underway at Gap, and they remain concerned about sluggish trends at the Banana Republic division. FBR expects comps to remain negative in FY09. Firm is raising their FY09 est to $1.24 from $1.17, vs consensus of $1.18, and their FY10 est goes to $1.31 from $1.20, vs the Street at $1.26... Jefferies notes two major positives from the qtr: 1) Old Navy is turning, and 2) cost savings continue. These themes will keep an upward bias to EPS. They believe management is taking the necessary steps in product and marketing direction at Gap and Banana to help stem the bleeding and look for some traction from strategies later this year. Coupled with a war chest of cash and strong cash flow, firm still sees significant appreciation left in GPS shares. Their tgt moves to $21 from $20 giving ~30% upside from current levels."

Quick hit. Gross on the USA losing its AAA rating....

"PIMCO's Gross: U.S. at risk of losing top AAA rating - Reuters
Reuters reports Bill Gross warned on Thursday the U.S. will eventually lose its top AAA credit rating, a fear that had already spooked financial markets on Thursday and could keep the dollar, stocks and bonds under heavy selling pressure. The United States will face a downgrade in "at least three to four years, if that, but the market will recognize the problems before the rating services -- just like it did today," Gross told Reuters. Gross earlier had told Reuters via email that market declines on Thursday were due to investor fears that the United States is "going the way of the UK -- losing AAA rating which affects all financial assets and the dollar." S&P on Thursday lowered its outlook on Britain to "negative" from "stable," threatening the nation's top AAA rating. Britain faces a one in three chance of a ratings cut as debt approaches 100% of gross domestic product."

AlphaNinja - It's not complicated. When you massively expand government, mostly with borrowed (foreign) money, you'd better be able to service that debt. Instead our leaders are demonizing wealth creation - or in other words, tax creation. Add Cap and Trade legislation, and you're crippling the economy that you depend on to pay for government spending.

I'm not so worried about the credit agencies downgrading the US. They've proven themselves to be near worthless and almost contrary indicators, based on the timing of their downgrades. Our debt will be purchased - BUT only if it remains the best option out there. If the USA becomes over-taxed and under-competitive, we will no longer be the best place for parking money.

A chart courtesy of Bespoke, illustrating the "contrary indicator" timing ability of the credit agencies. Default risk drops 50% from its highs to the point at which the S&P downgrades the UK:

Morning Reads 5/22/09

Quote of the CENTURY

Revenge of the Longs?

Well to be fair, it IS a "war on capital"

Wine buying for those of us with a value investing style

TARP warrants may be a bank windfall

Upcoming reversal?

Recession turning malls into ghost towns

Unless they're owned by the government sir, it's NOT YOUR BUSINESS.

Terminator Salvation, AlphaNinja agrees, is an instant classic

Thursday, May 21, 2009

Humming along at the Gap

AlphaNinja - The Gap (GPS) beat by a penny this afternoon. They continue to operate well through this horrible retail environment. Comp-store sales continue to decline, but less discounting has paid off.

Balance sheet is immaculate with nearly $2billion in cash, and the company continues to reduce shares outstanding.

On the conference call we learned that merchandise margin was up 1 percent, and the reason cited was "average unit costing." Using fewer vendors, e-sourcing, counter-sourcing, have helped the company keep costs of goods down.

Below is AlphaNinja's earnings and cash flow projections, and how I arrive at a target price of about $24. The stock is attractive here with a FCFY (free cash flow yield) of 12% , and will be more attractive if it falls to the low teens.

Disclosure - (long GPS)

Notable financing

Hewlett-Packard raises some cheap capital.
"NEW YORK, May 21 (Reuters) - Hewlett-Packard on Thursday (HPQ.N) launched a $2 billion three-part note sale, said IFR, a Thomson Reuters service.

The offering includes $750 million in two-year floating-rate notes and is expected to have a coupon rate of 105 basis points over the three-month London Interbank Offered Rate.

It also includes $1 billion in two-year fixed-rate notes expected to yield 140 basis points over comparable U.S. Treasuries and $250 million in three-year fixed-rate notes expected to yield 160 basis points over Treasuries."

AlphaNinja - 140 to 160 basis points above the comparable treasuries. Cost of capital is UNDER 5%. The company's FCFY (Free Cash flow yield as a % of net Market Value) is 10%. Simple math makes this stock a buy, but I've got to wait for a pullback.

Analyst actions 05/21/09

Chicago Bridge & Iron(CBI) upgraded at Stifel - sees 80% upside.

from briefing:
"Stifel Nicolaus upgrades CBI to Buy from Hold and sets target price at $20 saying they expect a lot of raised eyebrows, but their view is that the "turn-around" stories in E&C, which are CBI and Foster Wheeler (FWLT) have led off the bottom, while the "Blue Chip" E&C firms they rate hold, which are Fluor (FLR) and Jacobs (JEC) have been near market performers off the lows. The firm says their view is that of all the speculative blunders, there are few greater than trying to average a losing game; always deemphasize what shows you a relative price loss and keep what shows you a relative profit. Their cash flow analysis projects that CBI can end 2009 with $90 mln in cash after only a $124 mln revolver draw. Profitable execution of backlog in 2009 and more awards for 2010 are key, but they say their analysis also projects further oil price gains as the U.S. dollar declines, which usually lifts orders."

AlphaNinja - The consensus earnings estimates for 2009/10 get CBI to free cash flow in the $150million neighborhood, which is 15%(ish) of what you could buy the company for. If the company eventually returns to their previous % level of gross margin, earnings could explode. Adding CBI to our watch list here.


Safeway (SWY) upped to buy at Credit Suisse. From Barrons:
Love Supermarkets When The Haters Rule
Posted by Bob O'Brien
The time to buy stocks of supermarkets is when the consensus among investors is to avoid them the way you would dented cans and half-priced products in the seafood department.
That would be now.
As we pointed out earlier this week on investors have fallen out of love with shares of Safeway
(SWY) (see our take). Shares trade at trough multiples - about 9 times earnings - and have sold off even more aggressively than the rest of the group.
Credit Suisse took its outlook on the stock higher Thursday, boosting the rating on Safeway to outperform, and taking its rating on Kroger
(KR)higher, as well. Both have responded affirmatively, trading up 2% and 3% higher on the session, respectively.
Still, the gains haven’t done much to erase the selloff that’s taken place this year. Each has declined about 18% year-to-date.
Investors fretted about the slowing consumer spending and the worry about disinflation. Credit Suisse said it understood the worries: discretionary spending, even at the supermarket, is a legitimate concern. Disinflation may be overstated, it said. Either way, problems are well understood, baked into the stock, and could pass later this year. It said it didn’t think sales comps are going to decline as much as management of Kroger suggested. Either way, the issues are cyclical, not structural.

Opentable's IPO prices above range. $540million market cap. REALLY?

SAN FRANCISCO--(BUSINESS WIRE)--OpenTable, Inc., a leading provider of free online reservations for diners and guest management systems for restaurants, today announced the pricing of its initial public offering of 3,000,000 shares of common stock at a price of $20.00 per share. A total of 1,572,684 shares are being offered by OpenTable, Inc., and a total of 1,427,316 shares are being offered by selling stockholders.

AlphaNinja - First off, thanks to OpenTable for a such a detailed, transparent S-1 (seriously, not being sarcastic). A worry here is that fully HALF of the offering is by selling stockholders, meaning they're cashing out and none of that money goes to Opentable.

Anyway. After the offering, Opentable has 20million shares outstanding, valuing the company at $540million. That is ten times sales. Ridiculous.

S&P warning on UK Debt rating

AlphaNinja - Worth a read. UK debt will approach 100% of GDP, a level "incompatible" with a triple-A rating. The USA could be at levels near that in 2015(ish).,1,1,3,1204846854464.html

LONDON (Standard & Poor's) May 21, 2009—Standard & Poor's Ratings Services today said it had revised its outlook on the United Kingdom (U.K.) to negative from stable. At the same time, the 'AAA' long-term and 'A-1+' short-term sovereign credit ratings were affirmed. The Transfer & Convertibility (T&C) assessment for the United Kingdom is 'AAA'. Rating outlooks assess the potential direction of a rating, typically over a period of up to two years. An outlook does not necessarily precede a rating change.

"We have revised the outlook on the U.K. to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100% of GDP and remain near that level in the medium term," Standard & Poor's credit analyst David Beers said. "We base our opinion on our updated projections of general government deficits in 2009-2013. These projections reflect our more cautious view of how quickly the erosion in the government's revenue base may be repaired, the extent to which the growth in government spending can be curtailed, and consequently the pace at which historically high fiscal deficits are likely to narrow."

Our projections also incorporate updated estimates of the cumulative potential gross fiscal cost of government support to the banking system, which we now estimate to be in the range of £100 billion-£145 billion, or 7%–10% of 2009 estimated GDP. Taken together, these factors could, in our opinion, result in a doubling of the general government debt burden to nearly 100% of GDP by 2013. A government debt burden of that level, if sustained, would in Standard & Poor's view be incompatible with a 'AAA' rating.

We believe that the ratings on the U.K. continue to be supported by its wealthy, diversified economy; a high degree of fiscal and monetary policy flexibility; and its relatively flexible product and labor markets. However, last month's budget announcements underscored that U.K. public finances are deteriorating rapidly--at a faster rate than Standard & Poor's had previously assumed. In January 2009, for example, when we last affirmed the ratings on the U.K., we assumed that the U.K. net general government debt burden would rise from about 49% of GDP in 2008 to 83% in 2013.

We note that there is support across the political spectrum for additional fiscal tightening. However, the parties' intentions will likely remain unclear until the next administration is formed after the general election, due by mid-2010. How quickly the government can stabilize and then reduce the government debt burden will also depend on the timing and shape of the economic recovery and whether the cost of government support of the banking system is higher than we currently assume, areas where we also see continued downside risks.

The negative outlook reflects Standard & Poor's view that, in light of the challenges to strengthen the tax base and contain public expenditures, the U.K. government debt burden could approach 100% of GDP by 2013 and remain near that level thereafter.

"The rating could be lowered if we conclude that, following the election, the next government's fiscal consolidation plans are unlikely to put the U.K. debt burden on a secure downward trajectory over the medium term," Mr. Beers said. "Conversely, the outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a sustainable footing, or if fiscal outturns are more benign than we currently anticipate."