Friday, July 31, 2009
Humor aside, Gross' August commentary touches on a topic I plan to discuss in more detail soon -->> the new "run rates" in everything from annual domestic auto sales, to GDP growth, to long-term unemployment rates.
While he doesn't explicitly give an endorsement of this policy, it is what he's been lobbying the government to do for years:
"Reflating nominal GDP by inflating asset prices is the fundamental, yet infrequently acknowledged, goal of policymakers. If they can do that, then employment and economic stability may ultimately follow."
Gross freely admits that we will see long-term unemployment of over 10% unless we borrow our way to economic growth. It'll work for awhile, until other options become available for foreign funds (instead of our treasuries).
"Now, however, things have changed, and it is apparent that there is massive overcapacity in the U.S. and indeed the global economy. As reflexive delevering has unveiled the ugly stepsister of the “great 5% moderation,” nominal GDP has not only sunk below 5%, but turned at least temporarily negative. If allowed to continue – and this is my critical point – a portion of the U.S. production capacity and labor market will have to be permanently laid off. Nominal GDP has to grow close to 5% in order for the economy’s long-term balance to be maintained. Otherwise, employment levels become unsustainable, retail shopping centers unserviceable, automobile production facilities unprofitable, and the economy itself heads towards a new normal where unemployment averages 8 instead of 5%, housing starts total 1.5 instead of 2 million, and domestic auto sales 12, instead of 16 million annual units. Critically in the readjustment process, debts are haircutted via corporate defaults and home foreclosures, and equity P/Es are cut based upon increased risk and substantially lower growth expectations. A virtuous circle of expansion turns into a vicious cycle of recession or low-growth stagnation. Label it what you will, but a modern capitalistic economy based on levered financing and asset appreciation cannot thrive if its “return on capital” or nominal GDP suffers such a significant shock."
Cash For Clunkers, also called CARS (Car Allowance Rebate System) might be the most outrageous use of taxpayer funds ever.
The most important detail:
-->>"Qualified consumers will receive a credit of $3,500 or $4,500 for an eligible trade-in toward the purchase or lease of an approved vehicle under CARS Program."
And then the incredible part. If you are buying a "category 2" truck, you bank $ for an increase of ONE mile-per-gallon.
Is it even good for the environment? NO WAY. We're subsidizing the environmentally "unfriendly" creation of a new automobile, instead of the purchase of a used one. All for an increase of one mile per gallon.
ARE YOU KIDDING? While I'm impressed with Colorado's investment returns, this is simply paying 10cents (the guy's new salary) for a dollar...
"When the endowment chief of the University of Colorado joined boutique Wall Street firm Perella Weinberg Partners earlier this month, he didn't show up empty-handed: The school's entire $825 million endowment came with him.
The transfer is unusual for two reasons, say money-management experts. The foundation that runs the endowment didn't seek competing bids. And few endowments of its size have outsourced 100% of their assets."
WSJ on cost-cutting measures that drive earnings beats these days...
White roofs, to help the environment and save on electricity bills.
IPO's making a comeback. In India
The unfortunate real estate that remains after an auto plant closure.
"Cash for clunkers" is not performing as well as expected
Walmart and Staples plan to sell a massive amount of cheap netbooks and notebooks this back-to-school season
NYTimes on Wall Street compensation and congress
Thursday, July 30, 2009
Accounting for 81% of revenue, wholesale sales were up 11%. Retail (company-owned stores) declined slightly, due to the closure of two locations and a drop in same-store-sales of 5.4%.
SHOO guided earnings for the full year to about $2.07 per share, well above the current consensus of 1.89 and still above the street-high 1.93.
Details from the conference call:
-Average unit retail was down 9%
-The company expects to open 1 new store during the remainder of this year while closing 2.
-Licensing income doubled, thanks to Candies' performance at Kohls and l.e.i at Walmart
-The improvement in gross margin was due to a 200basis point (2%) improvement in the wholesale division.
-As for how to deploy the company's $111million in cash and securities, they're "actively" looking at 3 acquisition targets, but nothing is imminent.
-Looking forward they see continued year-over-year improvement in wholesale gross margin, yet continued weakness at retail.
-As for how to improve retail performance, the two main factors are the closure of underporfming locations, and an improving retail environment. -->> The NYC locations, while expected to be terrific performers over the long term, are a huge short-term drag on costs.
I've been familiar with CEO Ed Rosenfeld for 5/6 years -->> before he was CEO he was effectively running the finances, while upper management slept. Maybe his best attribute is picking up acquisitions for fantastic prices, such as paying about $1million for $10million of revenue recently...
Netting out $6 per share in cash, the stock trades at a PE multiple of 13times the new EPS guidance. The possibility of more positive earnings surprises is likely, given this company's history.
Wedbush upped their target to $38 today, and took fiscal 2010 estimates to $2.34, as they see the brand gaining market share.
US stocks partying, like the ever-inspirational Carlton...
Winners up more than losers down -->> most earnings beats are due more to cost containment than revenue surprises, but impressive nonetheless...
Aaron Task has a great interview with James Cordier of Liberty Trading, who is making bearish (negative) bets on near-term oil prices, as well as longer-term negative bets on natural gas.
As I've written about before, oil prices fluctuate wildly, but the underlying demand/supply equation is much more easy to decipher. I wrote in early June:
"A fair price for oil is probably $40-$60, and that's only a best guess. In 1998, with oil at $10, the world used about 74million barrels per day. We now use about 84million barrels, an increase of 14%. Yet the per-barrel price is up 480% - 34 times as much as the underlying consumption."
And for more interesting insights, here is Exxon's earnings report. Rough times...
News Release Earnings2q09
Which auto companies will thrive when the industry makes a comeback?
Near and dear to my heart - the lasting impact of the 80's
Return to glory for the once-bestselling Taurus?
Deal with Yahoo may signal a tide shift at Microsoft. In a good way.
Yesterday's treasury debt sale saw weak demand, not a good sign.
NYTimes speculates on the next steps for Yahoo and Microsoft
California-based Vizio leads the charge for bigger, better and cheaper LCD TV's
Wednesday, July 29, 2009
A comparison of of Dollar General's April quarters pre and post LBO. Operating results are vastly improved-->>they sure as hell better be, as the massive debt incurred in the LBO requires upwards of $80million per quarter in interest payments....
Ours isn't the only car industry suffering, as Russian giant Avtovaz will lay off 27,000
US durable goods orders +1.1% - better than expected...excluding cars and planes.
Op-ed fretting about the dangers of high frequency trading:
"Buying stocks used to be about long-term value, doing your research and finding the company that you thought had good prospects. Maybe it had a product that you liked the look of, or perhaps a solid management team. Increasingly such real value is becoming irrelevant. The contest is now between the machines — and they’re playing games with real businesses and real people. "
After the recent $1billion revenue miss, Microsoft embraces frugality
At least a homebuilding stock is soaring somewhere...(China)
In an interview, Madoff claims the SEC was asleep at the wheel, and at one point thought "they got me"....
...Madoff wasn't even aware that he was being served up on a silver platter, yet still the SEC was too inept to act:
Madoff Whistle Blower
Tuesday, July 28, 2009
AlphaNinja - Thanks to strict cost controls, healthcare distributor McKesson (MCK) beat earnings this afternoon, reporting profits of $1.06 per share, versus expectations of 83cents.
Details from the release:
"In the first quarter, Distribution Solutions gross profit of $954 million improved 2% compared to the first quarter a year ago. The increase in gross profit for the quarter was due primarily to the impact of our agreements with branded pharmaceutical manufacturers and an improved mix of higher-margin products and services, including sales of OneStop Generics, which were up 19% in the quarter, partially offset by lower sell margin in our U.S. pharmaceutical business.
Distribution Solutions operating profit of $430 million was up 12% for the quarter and operating margin was 1.66% compared to 1.48% a year ago.
“Distribution Solutions had a very strong performance in the first quarter. Margin improvements were attributable to several factors, including solid levels of compensation from our agreements with branded pharmaceutical manufacturers, above-market growth for our OneStop Generics program, increased demand related to the H1N1 virus and, most importantly, a more disciplined approach to expense management across all of the businesses in this segment,” said Hammergren."
Full year guidance was raised to $4.15-4.30 per share, the midpoint of which assumes that we don't see the same kind of earnings beats in the quarters ahead -->>McKesson might be conservative in its estimates.
Using the midpoint of earnings guidance for 2010 implies Free Cash Flow in the $1.2billion range, which is a 12% FCFY on the company's net-of-cash market value. A very nice yield for this company's shares.
-->> $50 a share times 19.4million diluted shares outstanding is $970million. Subtract out the $311million in cash and that's $659million. With expected Free Cash Flow of $63million in the next couple years, IBM is paying a 10% FCFY(Free Cash Flow Yield) -->> fair for both sides.
Nice deal, despite the "murkiness" of the $1.2billion cited above. SPSS' recent 10Q:
Merle Hazard, the country singer slash anti-bailout crusader...
A lot to discuss between China and the USA on trade surpluses and treasury holdings...
NYTimes suggests a "primer" for new holders of Citigroup stock - US taxpayers.
General Electric claims that GE Finance will not need a capital injection...
As hedge fund Steel Partners distributes shares to clients who need to sell, the price effect can be huge on some of the more illiuid stocks - opportunity?
Newly acceptable in Japan - "hostessing"
Jeremy Grantham says "blue chip" stocks hold the best value right now, in his quarterly letter to investors below:
Monday, July 27, 2009
Reduced shell egg pricing was partially offset by lower feed costs, but not enough to prevent a huge decline in gross margin, operating income, etc:
If you took this quarter's earnings as the "run-rate" for the year you'd arrive at 1.72 in earnings, and maybe $45mil in Free Cash Flow, for an FCFY (Free Cash Flow Yield) of 6.5% -->> FAR too low for a company with such volatile earnings. That's a dire view, but worth considering.
That volatility in earnings estimates is why I stayed away from shares when writing about the stock in May - not because I didn't like the company, but because I wanted a higher yield to compensate for big risks to earnings. That said, the stock is still up 25% from those levels.
I'll update again after talking to management (great management by the way), but am not interested in CALM unless it falls back near $20.
In the release:
"The company has cancelled its previously announced investor conference call to review its third quarter results that was scheduled for Wednesday, July 29, 2009, at 2:00 p.m. Pacific time."
The call was canceled, and the earnings of little importance, because five minutes later the company announced they were being acquired by Agilent (A) for $52 in cash per share, a 35% premium to Friday's close. The stock is up 29% to 50.80, just a bit below the offer.
"“After thorough review together with our independent advisors, our Board of Directors determined that this transaction delivers excellent value for our shareholders,” said Garry Rogerson, chairman and chief executive officer of Varian, Inc. “We also anticipate that the combination will yield strong benefits for our customers and employees. Like Agilent, Varian has a long history as a technology leader. We each bring expertise and experience across a different but complementary set of markets and applications. For instance, while Agilent is a leader in food safety, Varian is well established in the energy industry, and has a broad spectrum of products for environmental analysis. Together, the combined company will be able to provide customers with the most comprehensive set of solutions across a wider range of industries.”
What Agilent(A) paid:
-->> About 1.24 times sales, versus its own valuation of 1.48times.
-->> About 20times earnings, compared to their valuation of 18.5 times earnings.
-->> Purchase price leads to a FCFY of 5% yield on the Varian purchase, definitely a positive for VARI shareholders to be paid so nicely...Agilent's FCFY on 2010 earnings estimates is 12% (after netting cash out of the market value).
Both boards agreed to the deal, and Agilent is paying a healthy price for the business. Agilent noted that it may take up to 5 years to hit their required 20% ROIC (return on invested capital) on this deal, which makes sense seeing as the FCFY they're paying is 5%. The market likes the deal so far, sending Agilent shares up 1.5% during a down day for the major indexes.
Friday, July 24, 2009
CDS, or Credit Default Swaps, allow a holder of a company's debt to hedge against the possibility of the company defaulting on that debt.
Here's a peek at today's movers in that market, courtesy of CMA Datavision. Basically, if you own $10million of Con-way (CNW) debt, you must pay 148basis points, or $148,000 per year to insure against that default. You can see below that the Conway CDS have dropped in price by 52basis points, and that is because the company had a fabulous earnings report this morning, obviously reducing the chance of default -->> thus, the cost to insure goes down. If you owned the CDS, they'd be losing money today.
What congress is concerned about (and frankly I agree), is that people are allowed to buy CDS "naked," meaning they are betting on insolvency when they DON'T own the bonds. Critics of this tactic say that this drives up the CDS price, implying a higher chance of default that in turn becomes a self-fulfilling prophecy (in the case of Lehman Brothers, people bid up the CDS prices, which spooked Lehman's clients, who pulled their accounts, etc etc etc). Defenders of the practice say that these speculators add "liquidity" to the market, and actually HELP the company because people are able to effectively hedge their debt.
The debate could go on forever....
Standpoint Research initiates BAC with a Hold and price target of $18 saying although there is still some uncertainty surrounding this stock, at 1X tangible book value, the market seems to have discounted a worst-case scenario with regards to commercial real estate exposure and other well-known and documented issues. The firm says financials will have difficulty out-performing the market going forward as they de-leverage and ROE drops from double-digit rates to the new norm. In the coming years, these stocks will probably trade as utilities do, based on dividends, low growth and low multiples on earnings. Firm said they recently ran 840 stocks through our 155-variable computer model and BAC ranked a dismal # 727 out of 840. "There are probably better places to invest."
Ummm.... Your price target is 44% above the current stock price. The market has rallied massively, and many people are looking for a short-term pullback, yet there are "better places to invest" than earning 44%???? Nothing at all wrong with Standpoint's research, but typically when your target is 44% higher than the stock, you would rate that a BUY.
Deutcshe Bank -->> Almost every business unit missed revenue expectations. "A pause in PC purchases in front of the new OS(operating system) cycle as well as some channel inventory reductions contributed to the results." They believe Windows 7 will be a positive once it launches in October as pent-up demand, opportunities for software upgrades and the positive impact on netbook OS ASPs (average selling prices).
FBR Capital -->> The results were bad enough for FBR to downgrade the shares, although they see a pickup in the 2nd half of 2009...
Credit Suisse searches for the positives -->> They think that given Intel's great results, Microsoft will benefit from a "catch-up" in Windows license sales later this year. They believe the company's operating model should show significant leverage once the economy recovers.
With the stock off nearly 10% today, Microsoft has a market value of $206billion. Net out the $30billion in cash and that goes to $176billion. 2010 Free Cash Flow looks to be about $17billion, a FCFY of 10%. That's a handsome yield, and it compensates investors for the risks with owning the shares.
It's a summer (low-volume) Friday, after 12 up days in a row for the Nasdaq. With the Microsoft news, I'd be surprised if people don't do a bit of selling today...
After rebuffing a Warren Buffet lowball bid to purchase parts of CIT, the company may be headed towards bankruptcy.
A diamond is forever...But DeBeers saw sales of rough diamonds fall 57% in the first half of the year.
As municipalities face weak tax receipts, their debt downgrades have picked up...
Liverpudlians furious at the ownership, who is having trouble renewing credit lines.
Yes, this really is the title - "California Pension Fund Hopes Riskier Bets Will Restore Its Health"
Another absurd title - "Britain’s Economy Shrinks More Than Expected but at Slower Pace "
Thursday, July 23, 2009
Back on April 30th, the weighted DJIA Price to Earnings was 12.2, yet after this 40% run in the index the P/E has only crept up to 12.85 (based on 2010 earnings). The shifting weightings and help from Cisco and Travelers (added when GM and Citi were kicked out) are part of it, but so too are increased earnings estimates.
The average DJIA stock's eps(earnings per share) estimate has crept up .6% since 4/30/09, but exclude the bottom four stocks (BAC, PFE, GE, AA) that only account for 4% of the index and the estimates have risen 2%. Not huge, but important. When earnings estimates stop being revised down and turn higher, the PE multiple investors will pay for a stock often rises.
My favorite metric, FCFY (Free Cash Flow Yield), is an estimated 8.5% for the average DJIA stock, down from 10% or so a few months back. Most of these companies can access debt for much cheaper than 8.5%, so I see room for this yield to be lower -->> meaning the shares can trade higher.
The dividend yield is a healthy 3% for the DJIA - although down from 3.5% a few months ago, because dividends are not at volatile as earnings estimates.
Some of the DJIA stocks have extremely depressed earnings estimates, which could rebound sharply. Cost cutting during this recession could also lead to higher margins (yet lower employment) as we exit it. I definitely have a negative view of the economy going forward, but the DJIA could add another 1500 points and still offer a nice Free Cash Flow Yield.
Saks has had a rough go of it, with profits decimated from previous years' levels
The Dow Jones Industrial Avergae is above 9,000 this morning, after bottoming (not sayin' that was THE bottom...) at 6500ish in March. As I'll detail later today, even after this big run the index is not very expensive.
Thanks to Bristol-Myers' shall we say "aggresive" (I think a 90% premium to the previous close indicates they want to avoid a bidding war...) bid for Medarex (MEDX), top 10 gainers are beating losers by 42% -->>I've never seen such a disparity.
Wednesday, July 22, 2009
Yahoo - seriously, I think I'm right, and these (admittedly murky) guidance was not as bad as people thought. It's up 3.2% right now, 7% off it's morning low.
-->> Deutsche raises target to $15. They're lukewarm on the shares in the near term, but see the firm's re-investment plan paying off over the next year and a half
He doesn't take too political of a position, partly because he himself doesn't have the answers to many of the health care issues we face. But he cites some really interesting RAND research about preventative health care and the costs of living longer...
If anything, it's a reminder that despite what we or our politicians think, our ability to "control" outcomes is still limited.
The Reaper Is Cheaper
Preventing disease is praiseworthy, but it may not reduce health-care costs.
"William Osler, a renowned nineteenth-century doctor and the first physician-in-chief at Johns Hopkins Hospital, once remarked, “Pneumonia may well be called the friend of the aged. Taken off by it in an acute, short, not often painful illness, the old man escapes the ‘cold gradations of decay,’ so distressing to himself and to his friends.” If Osler were alive today, he might call pneumonia the friend of Medicare accountants, since it kills victims quickly, in contrast with the lingering and expensive chronic illnesses that account for about three-quarters of all Medicare spending."
The Reaper is Cheaper
Among the winners and losers, some of the stock reactions are more due to the stock performance leading up to the earnings rather then the earnings themselves...
Greenbrier (GBX) CEO William Furman bought shares last week, giving a significant boost to the stock.
On July 7th the railcar builder reported dismal earnings for the Fiscal 3rd quarter. One can understand that times are very tough in this freight-dependant sector, but the company's results are simply horrendous. Case in point - the manufacturing segment's 4.8% gross margin was an IMPROVEMENT over last year:
Not helping matters is a contract dispute with a slightly important customer, GE :
"Earlier this year, General Electric Railcar Services Corporation ("GE") advised us of their desire to substantially reduce, delay or otherwise cancel deliveries under a multi-year contract to build 11,900 tank cars and covered hopper cars over an eight-year period, with a current value of $1.0 billion. We are currently in discussions with GE. We believe GE is in breach of its obligations under our contract. GE has recently instructed us to slow our production of railcars to a rate of production less than that required under our agreement and does not allow for efficient operations of our manufacturing facility, also as required under our agreement. GE has also unilaterally begun reducing the number of railcars they are willing to accept for delivery despite the fact they have inspected and approved the railcars as conforming to the specifications."
Greenbrier received a capital "injection" of $75million from WL Ross a while back, helping its financial position through this downturn. Actually a pretty interesting financing, the loan has no debt covenants, though WL Ross gets 3.4million warrants....pretty hefty dilution.
"The new secured term loan provided by WL Ross contains a feature by which Greenbrier and WL Ross may jointly agree on conditions to increase the loan to $150 million. The initial $75 million investment is in the form of a three-year, non-amortizing, term loan with no financial covenants and a favorable interest rate of LIBOR plus 350 basis points. In connection with the loan, Greenbrier has issued warrants to purchase approximately 3.378 million of Greenbrier's common shares, representing 16.5 percent of Greenbrier's common shares on a proforma basis, at $6.00 per share. WL Ross also plans to purchase, at a minimum, $1.5 million of Greenbrier common stock in the open market and will be subject to certain transfer and hedging restrictions associated with the warrants. The Company's Stockholder Rights Agreement has been amended to allow WL Ross and its affiliates to acquire the warrants and purchase shares, provided that if their ownership exceeds 19.9% of the Company's voting stock, the additional shares will be subject to a voting agreement."
Tier Technologies (TIER) CEO bought 20,000 shares on the 14th of this month. The Virginia based electronic payment systems company has been restructuring lately, and hopefully this positive buying signal from management is on target.
Revenues were up in the most recent quarter, but they're still producing operating losses...