Wednesday, September 30, 2009

You've got to raise money, to lose money (UAUA)

UAL, (UAUA) the current name of the parent of United Airlines while not currently in bankruptcy, is raising both debt and equity.

While they sure seem to be liquid, with $1.3billion in cash on the balance sheet, it's best to be safe and take advantage of investor enthusiasm while it lasts:

“United is joining the long conga line of airlines taking advantage of the improved market perceptions for airline fundamentals to raise additional liquidity for what is still likely to be a challenging winter,” said Douglas Runte, managing director for Piper Jaffray & Co. in New York. “United has little remaining in the way of attractive unencumbered aircraft or other hard assets to borrow against.”

Shares are down about 6% in the aftermarket, as people fret over how well these two capital raises will be received. A look at the company's financial data shows why bankers, lawyers, and temporary management are the only people who've ever made money(over the longer-term) in airline stocks.

CIT's fair value, closer nothing by the hour(CIT)

Earlier today, an analyst from Keefe Bruyette & Woods estimated book value of the common shares of CIT of $1.25-1.50 in the event that 30% of the debt is converted to equity. That's likely why the shares held up the way they did today, instead of plummeting to near zero. First of all this is only an estimate, as there is no concrete announcement as to how much debt will be exchanged.

This analyst is looking at a reduction in tangible equity from $2.9billion to about $511million. Look at CIT's balance sheet below - with net loans of $47billion, that $531 that common stockholders are fighting over is a rounding error. Stay away.

Iconix getting "Ripped" by stockholders today (ICON)

"Wind-Ripped" indeed (what?).

This morning, Iconix Brand Group (ICON) lowered guidance for the full year. How does a $1billion company (in terms of market value) have only 82 employees? It's because they're a licensing company. They own 17 consumer brands, including Rocawear, Mossimo, AlphaNinja-favorite Ocean Pacific, and multiple others. They license their brands to retailers and manufacturers, and support these clients with focused advertising and marketing. Today they note that one of their licensees ran into financial difficulty, and the transition to a new manufacturer will result in a hit to revenue and earnings.

From the release:

The Company expects to achieve an increase of approximately 25% in its 2009 non-GAAP net income to approximately $80-$83 million from adjusted non-GAAP net income of approximately $64.8 million in 2008. The Company is also revising its 2009 non-GAAP diluted EPS guidance to a range of $1.17-$1.22 from its previous range of $1.30-$1.35

The Company's 2009 EPS estimate reflects approximately $0.12 of dilution related to the Company's June equity offering in which the Company issued an additional 10.7 million shares, increasing the September 30, 2009 weighted average diluted share count from approximately 62.8 million to 73.5 million shares. Further, the Company anticipates an approximate $0.04 negative impact to its previous EPS guidance related to the transition of the Rocawear women's license to a new licensee.

This doesn't even add up, as the combined 16cents cited above is more than the midpoint reduction in guidance. Worse is that management RAISED guidance back on August 4th, acknowledging the impact of the stock offering that took place in June.

This stock is down 22% today due to management's ineptitude and confusing/misleading statements -->> down far more than if it were simply announcing a tough period ahead.

Back in black (CSCO, IBM, INTC, AXP, CIT)

As in, not in the red anymore. US stocks bounced hard off this morning's lows, and are just slightly positive. IBM, Cisco and Intel, with some help from American Express, are leading the Dow off its earlier drop. Impressive performance, considering the potential CIT shareholder wipeout, the weak PMI numbers and higher than expected job losses predicted by ADP.

Don't worry I found some bad news! David Levy, while not calling for armegeddon, does warn that this economic recovery will not not snap back as quickly as in other recessions.

Waxing nostaligic, over America Online (TWX, GOOG))

JP Morgan analyst Imran Khan estimates that Time Warner (TWX) subsidiary America Online is worth about $4.2billion, down 24% since January, when Google (GOOG) valued it at $5.5billion.

Another gorgeous chart from AlphaNinja:

Looking back on that original deal:

And the craziness of the time, exemplified by the CEO's in an interview with Jim Lehrer:

JIM LEHRER: Speaking of euphoria, let me read you the lead in today's Financial Times. It says, " Wall Street" - it's from a story about this - "Wall Street knocked $30 billion from the combined stock market value of America Online and Time Warner yesterday as Monday's euphoria over news of the world's biggest merger departed, leaving behind a notable hangover." No hangover with you?

GERALD LEVIN: Absolutely not. This is a question of understanding the way the markets operate. And you normally have some dislocation with a deal of this size, so that there is a shuffling of shareholders; there's what's called arbitrage activities; and there's a lot of trading activity. And I'll use the word "trading" because it's not fundamental. It's not fundamental. As a matter of fact, if you look at some of the - or listen to some of the analysis, you're basically hearing this is a good deal, it makes a lot of sense, and then you go through what I'll call financial pyrotechnics, and that's what's going to happen.

JIM LEHRER: But $30 billion is a lot of money, Mr. Case.

STEVE CASE: Well, sure it is, and we do believe we're on the path of building what may be the most valuable company and most respected company in the world someday, and we're going to continue to focus on making that happen. But we can't focus on what happens in the stock market one day or one week or one month, or even one year. We've really got to take a long-term view of this, and we certainly watched our valuation as an Internet company bounce all over the place. We've seen our valuation go up $100 billion in six months and then drop $100 billion. So you can't really focus on the stock market, which can get a little bit of a roller coaster.

Ameriprise practically STEALS Columbia Management (AMP, BAC)

Ameriprise investors should be doing the Carlton dance:

This is absurd, in a good way, depending on whether you own shares in Ameriprise or Bank of America. I'm awaiting call back from Ameriprise to get some extra detail, but in the meantime....
Ameriprise Financial (AMP) announced that they're buying the long-term piece of asset management business Columbia Management from Bank of America (BAC). Ameriprise share are up 12% on the news, and BAC shares are down 2%. Why?

Because Ameriprise essentially paid $1billion for about $300million in expected annual net income for this business -->> a Price-to-Earnings of less than 3.5! And that's based on the June09 quarter's number, which is likely headed higher thanks to improved equity market performance. What the HELL was BofA thinking??????

Ameriprise is picking up $165billion in assets under management($93m equity, $75m fixed income) for $1billion -->> they're paying 60basis points for this, which should be pleasing to them and SCARY to other asset management outfits, as it's a much lower % of assets than these sales often fetch. Importantly, Ameriprise is not buying the "cash management" business that BofA has had to sink billions into over the last couple years.

This deal will be massively accretive to Ameriprise earnings, even before they pull costs out of the business- a fine job done by management!

Details on Columbia, from BofA's most recent 10q:

They warned you.... (CIT)

CIT Group (CIT) shares are off 40% this morning, on news that the company will be saved! Similar to General Motors, a firm can be saved, but its common stock is often left worthless. CIT Group, to its credit, has repeatedly warned that it may need to restructure in bankruptcy court.

The WSJ reported earlier this morning that CIT is in talks with Barclays, Citigroup, and possibly others, to exchange 30-40% of CIT's debt in exchange for new equity. Existing shareholders would likely be left with nothing.

In addition to new equity, the debt exchange would result in new debt but with payback dates further down the line. It will be interesting to see how this deal works out, especially if creditors with different time horizons (some are not scheduled to be paid back for years, so may not be too keen on these other short-term debt holders rushing in and taking over the firm's new equity.)

Yesterday, CIT shares soared on erroneous reports that a deal with Indymac was in the works. With all the bailouts and government-arranged "marriages" we've seen, some people took a flyer on it, and are being crushed today.

PMI numbers send stocks quickly lower

Just sharin. You never know which economic number will be the one the market listens to. The just-released Chicago PMI (Purchasing Managers Index) was a reading of 46.1 versus the expected 52 -->> quite a disappointment, and anything under 50 represents negative growth. It may offer legitimacy to my skepticism about a Business Roundtable report yesterday. The Dow dropped at quick 85 (ish) points.

Wednesday Morning

Stocks opened up just a slight bit, after GDP decreased at a slower-than expected .7% for the second quarter. Economists had been expecting a drop of 1.2% On the downside, ADP estimates that September saw job losses of 254,000, worse than expected.

Pickup truck sales, once 15% of auto sales in the US, are down to 10% this year. NYTimes attempts to explain why. No mention of cash-for-clunkers, which steered drivers to smaller cars.
“The casual truck buyer is disappearing somewhat,” said George Pipas, the chief sales analyst at Ford. “Today people have to make choices between what they want and what they need. And the question is, Do they really need the capabilities of this type of product?” Ford, for example, sold 939,000 of its industry-leading F-Series pickup in 2004. This year, through August, the company had sold just 261,000.

While rumors of a "marriage" with Indymac fall to the wayside, CIT Group is considering offers of financing from Citigroup and Barclays.
CIT Group Inc., the commercial lender that has said it may be forced to file for bankruptcy, is considering an offer of financing from Citigroup Inc. and Barclays Capital, people familiar with the situation said. The 101-year-old company’s bondholders are also seeking to provide about $2 billion in loans as a restructuring deadline approaches tomorrow

Sugar is this year's crude oil, in terms of hedge-fund speculating.
After their infamous and massive bets on crude oil sent prices doubling and brought $5-a-gallon gasoline a year ago, hedge funds are now pouring their billions into raw sugar. Sugar prices have doubled since springtime, causing US officials to consider lifting tariff barriers so that more imported sugar can reach food and candy makers.

PIMCO's Bill Gross says with a higher savings rate and permanently lower consumer spending, people should expect a "new normal" return on equities of 5%. Worth the risk?
“Returns mimic nominal” gross domestic product, Gross, manager of the world’s biggest bond fund, said in an interview yesterday with Bloomberg Radio. “Nominal GDP is the growth rate of wealth on an annual basis. The new normal is 2 to 3 percent GDP and real growth of 1 to 2 percent.”

Carl Icahn to the rescue. He represented 30% of the new loans just made to Leon Black's Realogy, giving the entity some breathing room with it's debt load.
The company behind such big names as Century 21, Coldwell Banker and Corcoran Group, came thisclose to defaulting on its senior debt, but thanks to a deal struck with billionaire Carl Icahn, Realogy was able to pay down its senior loans and give itself some breathing room. Realogy this week said it raised $515 million in new loans, with Icahn representing 30 percent of that money. It plans to use $365 million of the proceeds to reduce senior debt.

Due to several factors, this year's big takeovers have been largely financed with company stock.
Some 36 percent of this year’s acquisitions involved at least some stock, the highest proportion in eight years, data compiled by Bloomberg show. Kraft Foods Inc. and Xerox Corp. are using their shares for proposed takeovers. Inc. and Marvel Entertainment Inc. demanded equity instead of cash when they sold themselves. In stock transactions, “selling shareholders get an option on an economic recovery,” said Cary Kochman, UBS AG’s Chicago- based co-head of Americas mergers and acquisitions. “It provides buyers with insurance against another downturn.”

Tuesday, September 29, 2009

State tax collections continue their slide

AlphaNinja - The US Census released second quarter 2009 tax data today. It's not pretty.

Overall, individual income taxes dropped the most, falling over 27% from the previous year. Sales taxes - less dependent on the volatile top earners than income taxes - were down 9%.

Politicians claiming that states cannot cut spending on "services," or that they must make "investments," are just not getting the picture.

Q2 State Tax Collections

How does this work out?

AlphaNinja - Hmmm.

According to a CEO survey by the Business Roundtable:

-->> 51% of respondents see sales increasing in the next six months

-->> 13% expect to increase work force

-->> 21% anticipate increased capital spending

-->> 30% expect to decrease their capital spending

-->> 40% expect to cut jobs within 6months

How can 51% expect an increase in sales, while only 21% percent expect to increase their own capital (investment) spending, and 30% expect to DECREASE their capital spending. I mean at some basic level, one firm's revenue is another's capital spending. If not then it's consumer-related, and an increase there flies in the face of expected layoff's running far higher than the 13% who expect to add positions. That math doesn't work.

Beware over-bullish headlines on housing

AlphaNinja - You read the following headline and it sounds awesome:

U.S. Economy: Home Prices Increase by Most Since 2005

While this Case/Shiller housing index July figure has risen 3% off the March lows, it is still down 13% from last July -->> and last July did not have the benefit of the first-time homebuyer's credit.

I'm not trying to be over-pessimistic. But a "decline-in-the-drop," in terms of year over year home sales, does not mean we're out of the woods. Especially when one period is aided by government credits and the previous is not.

The case/shiller numbers, in a (as usual, so artistic) alphaninja chart:

Quote of the day

AlphaNinja - Today's QOTD comes from Bart Chilton of the Commodities Futures Trading Commission (CFTC).

He is salivating at the possible $$$$ involved in maybe the world's greatest scam - the "cap & trade" system, where one company pukes up money to hand to another company (that lobbied for this legislation) to atone for the sin of pollution.

The environmental effect is tiny. The affect to American families, noted in a previously-secret Obama administration document, will be about $1761 annually. But it will be millions/billions in trading revenue for Wall Street.

“I’m estimating carbon markets could be worth $2 trillion in transaction value – money changing hands – within five years of trading (starting),” says Bart Chilton, a Commodity Futures Trading Commission (CFTC) commissioner, who's also chairman of its energy and environmental markets advisory committee. “That would make it the largest physically traded commodity in the US, surpassing even oil.”

“It’s very exciting, the opportunities are really unbounded,” he says. “We’re going to see innovation and really fast and furious growth. The potential for this market is truly impressive.”

FOIA Cap AndTrade 2009-09-11

155% upside = "Neutral"? (ISPH)

AlphaNinja - I just don't "get it" sometimes.

Inspire Pharmaceuticals (ISPH) dropped 10% back on the 23rd, after Wedbush Morgan analyst Liana Moussatos cut her rating to "Neutral" from "Outperform." It's the same as going from Buy to Hold.

She worried that there are risks to the company's glaucoma program, and that upside events for the stock are a long way off. The thing is, she maintains a price target for the shares of $15, or 155% above the current level. If that's her target for the shares, why on earth is the stock not to be bought here?

Intraday action (GCI, CIT, SQNM)

AlphaNinja - US stocks are at their lows for the day, off about a third of a percent.. While housing numbers (from July, so a bit dated) were "less bad" than people expected, the consumer confidence number was "more bad" than expected.

Among gainers, Gannet (GCI) surprised to the upside with positive comments on the current quarter's ad sales. Also up today is CIT Group (CIT), on speculation (some are calling it nonsense) that a deal with Indymac may be in the works. The good news on CIT is sending its CDS (Credit default swaps) down, so the cost to insure debt is now down to "very expensive" from "very very expensive"(from CMA Datavision):

Among losers is the wreck that is Sequenom (SQNM), down another 36% after dismissing its CEO, CFO, and head of R&D.

Heads be rollin' at Sequenom, price targets all over the place(SQNM)

AlphaNinja - After an independent board investigation, Sequenom (SQNM) has fired arguably the three most important people in a biotech outfit - its CEO, CFO, and head of Research & Development. At the bottom of this piece is a look at attempts to peg a fair value for these shares in the middle of a crisis - always a difficult endeavor considering the possibilites of legal action.

The review concluded that there was misconduct at multiple levels of the development of its prenatal diagnostic test Trisonomy 21, to be used for detection of Down syndrome:

"Based on the special committee's work and recommendations, the independent members of the company's board of directors have concluded that as a result of the company's attempted transition from researching potential molecular diagnostic tests to developing and commercializing those tests, the company failed to put in place adequate protocols and controls for the conduct of studies in the Trisomy 21 program at the company. Certain of the company's employees also failed to provide adequate supervision. In the absence of such protocols, controls and supervision, the test data and results in the company's Trisomy 21 program included inadequately substantiated claims, inconsistencies and errors. Due to deficiencies in the company's disclosure controls and procedures, in a number of instances such test data and results were reported to the public in the company's press releases and other public statements."

None of the fired employees admitted any wrongdoing. Worth noting is that back in April of this year, Sequenom announced a delay in in this program, due to "discovery by company officials of employee mishandling of R&D test data and results." The stock was promptly thrashed, falling 70% on 4/29 to $4.75 per share. Today's news is even worse, since the inappropriate behavior appears not to be limited to a small group of employees.

Just as important as this awful news is what to do with shares if you own them. The i-banks are out this morning advising clients on what the downside may be. It's always interesting, and incredibly difficult, to figure out the downside for a stock in "crisis mode." The headlines here are so bad that this could be a candidate for liquidation, in which case there does appear to be value on the balance sheet for shareholders:

That said, the company is FLYING through cash:

On to the price targets. The sell-side analysts were blindsided by the April announcement, so have been very cautious with targets and ratings since then. Still, this is pretty much a worse-case scenario.

-->> Hapoalim downgrades to Underperform from Neutral (give them credit for not rating it a Buy), and their target goes to $1.50. They see a long road to recovery.

-->> Caris & Co. lowers their target to 50cents from $3.00, as they see investors "in the dark," and were less than impressed with the detail of the explanation.

-->> Rodman & Renshaw sees the company's core business of genetic analysis worth $1.75, and the stock bottoming no lower than $2.00.

-->> Auriga already had a Sell rating on the stock, and keeps their price target at $3.00

-->> Leerink Swan says to hell with this, and drops coverage of the stock. Their last rating was a Neutral, with a target of $5-6.

Tuesday Morning

AlphaNinja - US Stocks opened higher, thanks to a better-than-expected rebound in July home sales. Consumer confidence numbers should be out in 30minutes, and people are expecting the biggest boost in that metric since 2003.

The WSJ points out that the Federal Housing Administration, tasked with the now-discredited goal of pushing people into homes they can't afford, is a wreck, leveraged 50-1.
At a 50 to 1 leverage ratio, the FHA will soon have a smaller capital cushion than did investment bank Bear Stearns on the eve of its crash. (See nearby table.) Its loan delinquency rate (more than 30 days late in payments) is now above 14%, or from two to three times higher than on conventional mortgages.

John Paulsen, who made $3billion personally betting against the housing market, has a suggestion for saving CIT (he owns part of Indymac, and CIT bonds, by the way):
Hedge-fund maestro John Paulson is tossing about a plan to save troubled lender CIT Group through a merger with IndyMac Federal Bank, according to people familiar with the situation

US firms are split over whether they should involve themselves with "climate change" legislation.
The chamber and the manufacturers’ association oppose President Barack Obama’s effort to win passage of a “cap-and- trade” system that would limit carbon emissions to curb global warming. The groups say the proposal amounts to a tax that would cripple the economy. The chamber says the science used to document global warming should be re-examined.

Technology to increase the percentage of dairy cow calfs that are female has come at the worst possible time, with dairy demand down and supply up. “It’s real simple,” said Tony De Groot, an early adopter of the new breeding technology, who milks 4,200 cows on a farm here in the heart of this state’s struggling dairy region. “We’ve just got too many cattle on hand and too many heifers on hand, and the supply just keeps on coming and coming.”

A little feud at a French private equity firm.
The revolt shows how private-equity executives are feuding over power, money and strategy after the credit crisis shut off the debt financing used to make acquisitions. LBO firms have announced about $50 billion of transactions this year, a 73 percent drop from the same period a year earlier, according to data compiled by Bloomberg.

Monday, September 28, 2009

Shareholders request cash dividend from EFII

AlphaNinja - After waiting patiently for the results of a stock buyback program, Blum Capital Partners is turning up the heat on management at Electronics for Imaging (EFII). There's some interesting rationale here, especially in terms of what benefits shareholders versus option holders.

In a 13d/A filing, Blum uses what I'd call "firm but fair" language to request that the company pay a one-time $2 dividend per share, as a way of returning some of the company's excess cash. They note that even after dispersing this $100million to shareholders, the company will still have a huge cash balance.
"even after using $15.5 million of cash from operations for the first six months of2009 during arguably the worst economic environment the company has ever faced, EFII still has approximately $279 million of cash and short-term investments and no debt. We believe the company will begin to generate cash from operations in the very near term as the economy stabilizes, and thus returning $100 million to shareholders via a special dividend would still leave the company with an ample balance of $179 million that would continue to grow in the future."

I often feel there is little value to be added by recapitalizations, share buybacks, special dividends, etc. -->> at least not nearly as much value as is added by competent management that allocates capital wisely on high ROI investments. Blum Capital may feel that they can re-allocate the $2 per share currently tied up with EFII to an investment with more upside.
A before and after look at a potential one-time dividend:

Why might management prefer to continue with stock buybacks rather than special dividends? Because, as Blum Capital points, out, dividends only help shareholders. They do not help holders of stock OPTIONS, including the roughly 5.5million stock options owned by employees and officers of EFII:

"we feel it is critical to state that in our own experience serving on corporate boards, the fiduciary obligation of directors is to shareholders, not option holders. EFII has various stakeholders who receive equity options as consideration for compensation, including, of course, company management and board members. While the benefits of a share repurchase program inure not only to shareholders but also to option holders, generally a special dividend benefits stockholders exclusively (unless option strike prices are provisioned to reset following a dividend payment). We understand and appreciate this potential conflict of interest, but remain firm in our belief that shareholders' interest supersede those of option holders, and expect all of our portfolio companies to act accordingly in their governance. We conclude by respectfully requesting that the company and its Board of Directors listen to its shareholders and distribute to them a $2 special dividend immediately."

American taxpayer to finance "green" sportscars selling for over $100k

AlphaNinja - Outrageous.

WASHINGTON -- A tiny car company backed by former Vice President Al Gore has just gotten a $529 million U.S. government loan to help build a hybrid sports car in Finland that will sell for about $89,000.
The award this week to California startup Fisker Automotive Inc. follows a $465 million government loan to Tesla Motors Inc., purveyors of a $109,000 British-built electric Roadster.

Completely ridiculous - the American taxpayer is subsidizing the production of automobiles that sell for (in the case of the $109k Tesla roadster) 2.5times the average (male) median income.

Leslie Paige of Citizens Against Government Waste says

"This is not for average Americans," said Leslie Paige, a spokeswoman for Citizens Against Government Waste, an anti-tax group in Washington. "This is for people to put something in their driveway that is a conversation piece. It's status symbol thing."

Ah but the companies will eventually offer a cheaper option, closer to just 100% of an average American's annual income, though the car "has yet to be designed":

Matt Rogers, who oversees the department's loan programs as a senior adviser to Energy Secretary Steven Chu, said Fisker was awarded the loan after a "detailed technical review" that concluded the company could eventually deliver a highly fuel-efficient hybrid car to a mass audience. Fisker said most of its DOE loan will be used to finance U.S. production of a $40,000 family sedan that has yet to be designed.
"It's the ability to drive significant change in fuel economy across a large market segment" that swayed the department to approve the Fisker loan, Mr. Rogers said. "We got quite excited."

Note that the Department of Energy -- headed by a man who said that Americans act like teenagers who don't know what's in their best interest -- "spent months working with Fisker on its application."

Intraday action

AlphaNinja - US stocks up pretty well today, over a percent for the indexes.

With so many stocks up today, the only loser that fit my screen (over $300million market value) is Xerox, whose purchase of ACS is the kindling for today's rally!

Xerox shares over-reacting to ACS deal (ACS, XRX)

AlphaNinja - (10:23am EDT) Iconic but lethargic printing and "services" firm Xerox (XRX) has agreed to purchase business process outsourcing (BPO) firm Affiliated Computer Systems (ACS) for $63 in cash and stock. The dual cash and stock nature of the deal is used to reduce the out-of-pocket cash expense for Xerox, and to incentivize ACS employees with a stake in their new firm. Xerox shares are off almost 17% on the news - a total overreaction, and I'm buying shares this morning.

The offer to ACS consists of $18.60 in cash and a 4.935shares of XRX for each ACS share they own -->> this amounted to $63 per share based on Friday's closing price for Xerox, but today the market is punishing Xerox, with shares trading all the way down to $7.55. Thanks to the stock nature of the deal, this reduces the offer to ACS shareholders to $55 from $63. Ouch.

Why is Xerox off so much? They're purchasing a company with double the profit margin, and for a pretty decent price. At the $64 offer price and considering ACS' cash balance, it looked to me that Xerox was paying a FCFY (Free Cash Flow Yield) of 11%. At this lower price based on where shares are now trading, it looks more like 13%. And this is before major cost-cutting (no I won't say "synergies"!) adds a point or more to that.
ACS' revenue and Free Cash Flow:

...And the combined entity's projected Free Cash Flow - big numbers:

I'd say the biggest reason Xerox shares are off is worries about the ability to finance the deal, which was not mentioned much in the presentation slides this morning, nor in the press release. Xerox has a massive debt load, but they also generate massive cash flow, leading to a FCFY of almost 20% based on the current stock market value. Xerox is looking at a drop of 16% in revenue this year, and is picking up a company that is growing revenues at 7%. There's execution risk here, financing risk, etc., but the Xerox stock drop more than reflects the worries. I'd say Xerox shares will head higher, and should be bought on this news.

Monday morning (XRX, ACS, ABT)

AlphaNinja - US stock futures are up this morning, driven by a couple of buyouts. Xerox (XRX) agreed to buy Affiliated Computer Systems (ACS) and Abbot Laboratories (ABT) will purchase Solvay SA's pharmaceutical unit. Stocks look to open up about half a percent. Oil is down below $66 per barrel, on worries about high inventories and weakened demand.

Kiplinger's editors share some of their best and worst investment experiences.

Enormous cash balances in investor accounts may enter the market, driving shares higher still.
Even after reducing money-market accounts by 11 percent this year, investors have cash equal to 73 percent of Standard & Poor’s 500 Index companies’ net assets, according to data compiled by the Investment Company Institute and Bloomberg. At the peak of the bull market in 2007, the measure of buying power was 62 percent.

The exorbitant spending at Conde Naste comes under scrutiny.
A three-month McKinsey & Company project advising the publisher how to reduce costs is drawing to a close, and several magazines have been told to cut about 25 percent from their budgets. But cost-cutting at Condé Nast is not quite like cost-cutting at other publishers. For example, on Oct. 13, the men’s magazine GQ will host a party in Washington to promote its list of powerful capital players, to appear in its November issue. The party is upscale: it will be held at the 701 Restaurant, known for its caviar and live piano music.
That is not the only expense involved. Several editorial employees will travel from New York for the evening. And they received an e-mail message recently reminding them to limit their expenses for the night — to $1,000 a person.

Yet another shot across out bow - World Bank President to warn that the dollar is at risk of losing its "reserve currency" status.
World Bank President Robert Zoellick is expected to hit a few nerves in Washington, DC, today with a speech warning the dollar is in danger of being booted as the world's go-to currency. "The United States would be mistaken to take for granted the dollar's place as the world's predominant reserve currency," "Looking forward, there will increasingly be other options to the dollar," he says, according to excerpts of the speech provided by the World Bank.

The unemployment rate for young Americans has exploded to nearly 52%.
The unemployment rate for young Americans has exploded to 52.2 percent -- a post-World War II high, according to the Labor Dept. -- meaning millions of Americans are staring at the likelihood that their lifetime earning potential will be diminished and, combined with the predicted slow economic recovery, their transition into productive members of society could be put on hold for an extended period of time. And worse, without a clear economic recovery plan aimed at creating entry-level jobs, the odds of many of these young adults -- aged 16 to 24, excluding students -- getting a job and moving out of their parents' houses are long. Young workers have been among the hardest hit during the current recession -- in which a total of 9.5 million jobs have been lost.

Friday, September 25, 2009

Shanda Games down on day 1 (GAME, ARI, CLNY)

AlphaNinja - I mentioned earlier today the possibility that "The more convoluted the ownership structure, the worse an investment is for shareholders?"

May be true.

Shanda Games (GAME), spun off from Shanghai-based Shanda Interactive, priced at the high end of estimates for its IPO today - $12.50. It's trading down almost 10% right now though, as they may have priced it too high. Seemed like great demand, as they boosted the offering.

For one thing, it might be well overpriced, and Citigroup says to sell the parent company's shares, which are down 10% today:
Citigroup Inc. recommended selling shares of Shanda Interactive, saying valuations are “inflated.”
“Shanda Interactive plus Shanda Games is now valued at $7.5 billion from $3.7 billion before, without any change to underlying revenue and earnings potential,” Citigroup analysts Alicia Yap and Jason Brueschke wrote in a report. “We find it hard to justify.”

Shanda Games org chart:

As for other IPO's this week that have fared poorly, here's "Apollo Commercial Real Estate," (ARI), down about 6% from its IPO offer price yesterday. Yep, another "org" chart.

Colony Financial (CLNY), another mortgage REIT, down only a couple percent.

Intraday action

AlphaNinja - Stocks are off about a third to two thirds of a percent. That weak durable goods number and RIMM's results are weighing on shares.

Oppenheimer issues a Blackstone "challenge" (BX)

AlphaNinja - Good lord. Owning shares in a company is not supposed to present a "challenge."

Oppenheimer initiated coverage of asset manager Blackstone (BX) with a Perform (basically a "neutral" rating, saying that it is "a premier company in its sector, but presents a good many challenges for investors." While they like the company and think it's among the best in the industry, they worry about the following:

-->> Lack of comparable publicly traded peers to value it against
-->> Financial results are "difficult to understand."
-->>GAAP results are distorted by ongoing non-cash charges for employee vesting of the shares
-->>"Economic Net Income" benchmark has been distorted by non-cash reversals of performance fees and compensation accruals

Kudos to Oppenheimer for at least not telling people to BUY shares in a company that even they (even after weeks of research before initiating coverage) have difficulty "understanding."

I think I might be onto something. The more convoluted the ownership structure, the worse an investment is for shareholders? From the 2007 S-1:

Interview with former Moody's managing director (MCO)

AlphaNinja - Next week congress will dig into (those sleuths in congress!) the corruption at the ratings agencies. A new "whistle blower" from Moody's will take center stage - Eric Kolchinsky.

In reference to the pay-for-ratings game:

"There's just no incentives, at the ratings agencies, to say no."

Durable goods details

AlphaNinja - Stocks are actually holding up well in the first 20minutes of trading, considering the VERY disappointing numbers in this mornings durable goods report. Especially weak were nondefense capital goods, down 7% and signalling that businesses are credit constrained, wary about a rebound, or both.

Friday morning premarket (RIMM)

AlphaNinja - US stocks futures are pointing downward, after a worse-than-expected durable goods report. New orders fell 2.4% after a big jump in July, and unlike the news reports, many of us are not "surprised." Blackberry maker Research In Motion (RIMM) is off over 15% this morning, after revenues came in light last night. Multiple street downgrades are pushing shares lower also.

Despite the lack of a business plan, the VC community is hyping Twitter's potential valuation.
Just a week after rumors surfaced that Twitter was getting $50 million in fresh cash from investors -- more than doubling its original startup pot -- sources spread another round of media reports yesterday that Twitter is getting double that in new cash: $100 million. Although no checks have traded hands yet, the sources insist that the money could arrive any day, adding that Twitter's market value of $1 billion could go as high as $2 billion.

NYTimes sees Verisk IPO as worth the risk.

Whey they always throw "unexpected" in there vexes me...
Orders for goods meant to least several years dropped 2.4 percent, the worst performance since January, the Commerce Department said today in Washington. Excluding transportation equipment, orders were little changed.

An old AlphaNinja favorite, Burlington Coat Factory (LBO'd years back) is looking at some bribery allegations.
Liberty Apparel, a New York-based pants manufacturer, charges that its reputation and business prospects have taken a hit because a Burlington executive this summer accused it of bribing one of the off-price retailer's merchants. James "Jim" Weinberg, an executive at Burlington's purchasing department, allegedly told other employees that he had fired a worker "for taking money from Liberty," according to a suit filed yesterday in New York County Supreme Court.

While expected to be re-elected, Germany's Angela Merkel may have trouble pushing her market-friendly agenda.
“A Merkel coalition with the FDP could really change things in Germany,” said Fredrik Erixon, director of the European Centre for International Political Economy in Brussels. “It would allow many reforms that the Social Democrats have blocked,” such as pruning the bureaucracy. “But it’s still a tight race.”

A $10million (potentially much more in government contracts) contest to remake the iconic 60-watt light bulb.
The L Prize has garnered significant attention in the lighting industry because 60-watt incandescent lamps represent 50 percent of all the lighting in the United States, with 425 million sold each year. The Energy Department says that if all those lamps were LED equivalents, enough power would be saved to light 17.4 million American households and cut carbon emissions by 5.6 million metric tons annually.

"Extreme exploration. " Norway's generous state spending, largely financed by oil revenue, is taking them to the "gates of hell" in search of oil.
“This is extreme exploration,” Bente Nyland, head of the Norwegian Petroleum Directorate, said in an interview on the island on Sept. 23. “You’re in an area where you have very little control, so you need to have a lot more knowledge before you can start any activity.” BP, Europe’s second-largest oil company, estimates the Arctic Ocean may hold around 200 billion barrels of oil equivalent, or 25 percent to 50 percent of the world’s undiscovered hydrocarbons. The U.S. Geological Survey last year estimated the area to hold 90 billion barrels of oil.

Thursday, September 24, 2009

Gold headed to $5,000?

AlphaNinja - Just sharin':

Schiff, who was quite right about much of the trouble we're seeing with the economy, sees gold headed to $5k an ounce . That said, he also see's a 90% drop in the DJIA, which is utter nonsense.

Nice pickup at Monro Muffler (MNRO)

AlphaNinjna - Monro Muffler(MNRO) shares have done well as of late, up 20% this year. Maybe that's why they're not up more on this morning's news.

The company announced this morning that earnings would come in near the high-end of previous estimates. More imporantly, they announced a couple of nicely accretive acquisitions (well at least one is accretive):

The total purchase price for Tire Warehouse, which consists of 40 tire stores and six tire franchise locations, is $34 million. The purchase price includes real estate assets for 12 store locations and a distribution center located in Swanzy, New Hampshire. Tire Warehouse, which focuses solely on tires and related services, generated annual net sales of approximately $53 million in 2008. Management expects the Tire Warehouse business to be slightly accretive in the first twelve months following the acquisition and $0.06 to $0.08 accretive in the second twelve months of Monro ownership. The transaction is expected to close in early October. Following the acquisition and initial integration of the business, the Company intends to further leverage the Tire Warehouse store presence and distribution facilities by converting 50 of its existing Monro service stores in these markets to its Black Gold format. Black Gold is a program designed to increase sales in Monro's service stores, particularly of tires and related services.

The total purchase price of the Midwest Tire business was $2 million. Midwest Tire consists of four tire locations in northwest Indiana that generated annual net sales of approximately $6 million in 2008. Management expects that Midwest Tire, which will be converted to the Mr. Tire brand name, will operate at a breakeven level in the first twelve months following the acquisition.

Monro paid .65 and .33 times sales for these businesses, far below its own valuation of 1.24times sales -->> NICE WORK! While I love those details, I calculate net income and free cash flow for next year of $36million, a 6% FCFY (Free Cash Flow Yield) -->> too low of a yield for me to chase.

Anyone's guess what A123 is worth (AONE)

AlphaNinja - Yesterday I mentioned some of this week's IPO's. While the mortgage IPO's are floundering today, lithium-ion battery maker A123 (AONE) is up 43% from it's offering price this morning of $13.50. Keep in mind that the offer price was initially going to be between $8-9.50, then $10-11.50, and finally boosted to $13.50 - and the amount of shares offered was boosted over 10%. Huge demand among investors for a piece of this action.

From the S-1, the company is nowhere near profitable - note that cost of goods sold exceeds GOODS SOLD!

The shares are currently trading at $19.85 -->> that means the valuation has increased nearly 130% since the earlier estimates of the offer price.

How much should this thing trade for, considering there's no profits? According to the filing, there's about 96million shares outstanding, pegging the company's value at $1.92billion, or 27times this year's $70million in expected sales (It's closer to $1.5billion if we exclude yet-to-be exercised options). Total insanity, unless you buy into management's estimates of future sales:

According to A.T. Kearney, the global lithium-ion battery market for automotive application in HEVs, PHEVs, and EVs is estimated to be $31.9 million in 2009. A.T. Kearney projects that this market will grow to approximately $21.8 billion by 2015 and $74.1 billion by 2020

If A123 takes 20% market share of the estimated $22billion in 2015 revenue, that could mean $4.4billion in sales for the firm. A price-to-sales of 2 (not warranted, but they'll get it due to investor mania over "green" anything) would lead to a market value of $9billion, or 373% higher than where we're at now.

And how does the company get there? By government-mandate of course!

"based on a moderate drive for change influenced by increasing governmental regulation, emerging powertrain technology, changing consumer demand and OEM product strategies toward more fuel efficient vehicles."

The projection from A.T. Kearney for an increase in the lithium-ion market of 68THOUSAND percent by 2015 is pretty ridiculous. Buyer beware.

Theoretical question

AlphaNinja - Bear with me...

If you ran a business, and you were facing a 20% revenue decline this year, what would you do? Cut costs? Pressure your suppliers for better prices? Evaluate how you're spending your marketing dollars? Maybe all of the above. The last thing you'd probably do is go and take out a huge personal loan, then use that money to hire new employees in the midst of a recession.

Sounds crazy, but we the taxpayers have just done that:

Fourteen of the top federal agencies responsible for spending under the American Recovery and Reinvestment Act say they've hired about 3,000 workers with stimulus money. That's helped fuel the continued growth of the federal government, which increased by more than 25,000 employees, or 1.3%, since December 2008, according to the latest quarterly report. During that time, the ranks of the nation's unemployed increased by nearly 4 million, Labor Department statistics show.

Intraday action (AM)

AlphaNinja - Stocks opened up but quickly gave back their gains. The DJIA is now 232 points lower than yesterday afternoon's post-FOMC bounce, also when Cramer top-ticked it and said we're headed higher.

Among gainers, American Greetings (AM) trounced earnings estimates. Personally I prefer someecards, for their absurd cards:

The active stocks today. Only a few stocks fitting my screen parameters (market value over $300m) made the gainers.

Revenue recognition rule change may boost earnings (AAPL, PALM)

AlphaNinja - Reuters is reporting that a rather odd (in my opinion) accounting rule may be changed in favor of certain tech companies.

The change relates to the way revenue is recognized for products -- such as smartphones -- that combine hardware and software. Previously, such devices were governed by accounting rules that applied to software. Under accounting guidelines for software, revenue is recorded over a product's expected life cycle, typically years. "If you had a product that had both a hardware element to it and a software element ... if the software was critical to it, then you had to follow the software rules," said Brian Minnihan, a partner in the technology practice of accounting firm BDO Seidman. The change takes effect for fiscal years beginning on or after June 15, 2010, but earlier application is permitted. Minnihan said some companies may choose adopt the new rule as early as the current quarter. Analysts say the accounting change will likely have the most impact on Apple, whose sales of the popular iPhone has not been fully reflected in its quarterly results.

This delayed (or smoothed over a period)revenue recognition usually does not apply to hardware - instead it is meant to prevent software companies from recognizing revenue (and the bump in the stock price) from a massive software installation that may be more costly/complicated/delayed to the seller than previously thought. So that's why it seems a little burdensome to apply it to iPhone sales, just because Apple(AAPL) may provide free software upgrades over the life of the product.

As Apple describes in their most recent 10q:

For both Apple TV and iPhone, the Company has indicated that from time-to-time it may provide future unspecified features and additional software products free of charge to customers. Therefore, sales of Apple TV and iPhone handsets are recognized under subscription accounting in accordance with SOP No. 97-2. The Company recognizes the associated revenue and cost of goods sold on a straight-line basis over the currently estimated 24-month economic lives of these products, with any loss recognized at the time of sale.
Of critical importance - this will give APPL a huge boost to GAAP(Generally Accepted Accounting Principles) earnings, but cash flow will not change. Apple provides a peek at non-GAAP earnings when they report results, so I wouldn't expect a huge change in investor sentiment over this rule change. Most astute investors know that due to this accounting, actual earnings have been understated, but it does show up in higher cash flow and non-GAAP earnings.

Thursday Morning

AlphaNinja - Markets opened up a little bit - we'll see if a reversal of yesterday afternoon's furious slide holds...Jobless claims came in lower than anticipated this morning, giving a boost to US indexes.

Amidst this recession, coupon-clipping has become even more widespread.
It may be the digital age, but when it comes to pinching pennies, most consumers are opting for a method that is well over a 100 years old: the paper coupon. Thanks to the miserable economy, coupons — like board games and family dinners around the kitchen table — have made a comeback. The recession has even made coupon clippers out of some groups that once avoided them, including well-to-do shoppers and young shoppers.

Of the 16,000 creditors clamoring for some $$$ in the Lehman bankruptcy, the largest is the bank's former landlord in London.
Lehman, Canary Wharf Group’s largest tenant, occupied more than 1 million square feet (93,000 square meters) of office space at 20-25 Bank Street in 2003 on a 30-year lease.

NYTimes notes the ridiculous extra fees that private equity firms charge the very firms they're repackaging to be IPO'd - at the expense of their investors.

Our pain is their gain. With multiple new fees and packed planes, airlines are making some money these days.
“Passengers just swallowed these fees with barely a whimper, and they’re not going away,” said Michael Boyd, president of aviation consulting firm Boyd Group in Evergreen, Colorado. “Why leave money on the table when people will pay you?”

More trouble for the Kraft-Cadbury deal - Kraft is not very far along in securing financing.
Kraft is only now asking banks for their best offers, said a person with direct knowledge of the situation. A second person confirmed Kraft went public with its proposal before coming to the market for financing.

In a race to replace reserves, the oil industry has had a successful 2009
“That’s the wonderful thing about price signals in a free market — it puts people in a better position to take more exploration risk,” said James T. Hackett, chairman and chief executive of Anadarko Petroleum.
More than 200 discoveries have been reported so far this year in dozens of countries, including northern Iraq’s Kurdish region, Australia, Israel, Iran, Brazil, Norway, Ghana and Russia. They have been made by international giants, like Exxon Mobil, but also by industry minnows, like Tullow Oil

Wednesday, September 23, 2009

No, a rash of IPO's is not bullish

AlphaNinja - I have heard about 1,000 talking heads imploring us that this week's potential banner IPO sales (they haven't happened yet as of Wednesday afternoon, FYI!!) mean the market rally is not only for real but will continue. Citing "investor demand," "renewed confidence," and a million other slogans to generate enthusiasm.

I'm not against a further stock rally, nor against these upcoming IPO's - but to suggest that they alone warrant a bullish stance on the market just defies reason. If that were the case then real estate giant Blackstone's IPO would have signalled good times ahead, instead of the absolute peak for the Dow:

If you had a slew of shares of your own private firm, when would you sell? When investors are freaked out and running from stocks, like in March? When you think the market is undervalued and not giving stocks the prices they deserve? HELL NO -->> you'd sell when investor sentiment is high, if not irrationally high. You want the highest price for your shares, just like people who own IPO shares.

With that said, here's a look ( page + my comments) at this week's supposed offerings:

Always something to look at is what percent of their shares are insiders cashing out. If it's their entire stake, run away - they're not going to be investing alongside you. Selling a quarter or a third of their stake is MORE than understandable, as they've been overworked and underpaid for years, so a payday is due them.

Among them is a123, wildly unprofitable:

The two facing the most trouble are probably the REITs Apollo and Colony. As Bloomberg notes, they're cutting their offerings in half, likely due to a lack of interest. What I wonder is, if they had kept the original share offering amounts, would they have had to cut the price, thus accept a lower valuation? Probably.

"Apollo Commercial Real Estate Finance Inc. and Colony Financial Inc. both halved the size of their initial public offerings, a sign that investors remain wary of plunging into commercial property debt. Apollo Commercial, a New York-based real estate investment trust set up by Leon Black’s Apollo Management LP, cut its stock sale to 10 million shares from 20 million, according to a U.S. Securities and Exchange Commission filing. Colony Financial, a Los Angeles REIT set up by Thomas Barrack’s Colony Capital LLC, reduced its offering to 12.5 million shares from 25 million, according to a separate filing. "

Also noteworthy is that the Chinese video game firm Shanda has increased its offering of shares from 63million to 83.5million - wow that must signal increased demand! Nope, seeing as they're leaving the price unchanged. If you want to make your head spin, have a peek at Shanda's ownership "organization" chart:

Well that was quick. Dow drops 169 points from its high

AlphaNinja - I wrote earlier this morning regarding the FOMC minutes:

"The FOMC decision on interest rates will be out in less than two hours, upon which the market will freak out for a minute or ten, then settle back."

And here's the market doing just that. I'm not suggesting I'm intelligent - rather that the initial reaction to these releases usually corrects itself before long.

FOMC statement - no surprise

AlphaNinja - In response to our debt-fueled national buying binge of the last decade, the FOMC will.....keep rates "exceptionally low," to fuel a further debt fueled national buying binge.

"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. "

The Dow is spiking up on the news, up maybe 60points since the announcement, as free money is good for profits.

Pressing for change at Texas Industries (TXI)

AlphaNinja - Activist investor Shamrock, in a 13d filing, is trying to get other shareholders of cement maker Texas Industries (TXI) to vote for its 3 proposed additions to the company's board. Shamrock cites various ways in which TXI has
-underperformed its peers
-overpaid executives
-been un-receptive to change

Whatever ones feeling are regarding "activist" investors (also called "corporate raiders" in the 80's), these guys/gals make a good point if this is true:

At each of the past two annual meetings, Texas Industries shareholders have sent a resounding message of concern and dissatisfaction. Yet the Texas Industries board has not meaningfully responded to the shareholders’ demand for change and, in our view, has become even more reluctant to consider views other than their own. Chairman Rogers even suggested during a recent meeting with us that if our nominees were elected to the Texas Industries board, the holdover incumbent directors would not work cooperatively with our duly elected nominees but instead would seek to isolate and marginalize them.

That's certainly not helpful. Shamrock's three suggested resolutions are very practical, and there's hardly a reasonable argument to say that they wouldn't improve shareholders' prospects:

the Shamrock Activist Value Fund, L.P. has proposed three shareholder resolutions, which request that the Texas Industries board of directors take the necessary actions to:

–declassify the board and require all directors to stand for election every year;

–institute majority voting in uncontested director elections and require that any incumbent who does not receive a majority of the votes cast resign from the board, effective immediately; and

–require shareholder approval of all “poison pill” rights plans.

In addition to large investor Southeastern Asset Management, Shamrock has the support of the company's largest shareholder, Nassef Sawiris:

In a letter to the Texas Industries board, Mr. Sawiris wrote: “I believe the [Shamrock Activist Value Fund, L.P.’s] director nominees and their three resolutions will be a catalyst for improving performance and governance at TXI and most importantly for increasing shareholder value.”

In management's defense, this is a DREADFUL time to be a cement maker. Even if they were able to get back to 2007 profitability of $4.00 per share - a truly herculean effort - the stock will not see $80 or a PE of 20 like it did...

...but that doesn't mean shareholders don't deserve a right to elect new directors if they desire a change at the top. Yay, capitalism!

Progress! Competition for the cow experts (MCO, MHP)

AlphaNinja - Bloomberg is reporting that Moody's (MCO) and cow-securitization-specialists Standard & Poors will face new competition when rating Commercial Mortgage Backed Securities:

"State insurance commissioners, seeking an alternative to rating firms Moody’s Investors Service and Standard & Poor’s, approved Realpoint LLC to evaluate commercial mortgage-backed securities in companies’ portfolios. The ruling by the National Association of Insurance Commissioners means state regulators can rely on Realpoint in determining how much capital must be held by insurers, Scott Holeman, spokesman for the group, said today. Realpoint provides analysis to bond buyers through subscription, while S&P and Moody’s are paid by companies that issue securities."

This is great news for taxpayers - still, it's unfortunate the level of incompetence among state treasurers and finance officials who outsource total evaluation of securities to outside ratings agencies that would do business with livestock:
S&P Official #1: Btw (by the way) that deal is ridiculous.
S&P Official #2: I know right...model def (definitely) does not capture half the risk.
S&P Official #1: We should not be rating it.
S&P Official #2: We rate every deal. It could be structured by cows and we would rate it: