Thursday, December 31, 2009
Trucking firm YRC Worldwide (YRCW) completed a debt exchange in the nick of time. No seriously, they had $20million in lender interest and fees due today. Had the exchange not been completed, the company would be headed into bankruptcy. The interesting thing is that due to the conversion terms, this basically IS a bankruptcy, in that that debtholders are now equity holders in charge of the company.
After the exchange, existing common stockholders will own about 5% of the company. Based on the current stock price of 85cents, the company's current market value is about $51million. Divide that by .05 and it implies the entire company is valued at a little over $1billion. The question is, what is a recapitalized YRC worth? They're struggling to survive right now, and expected to continue losing money. A look back at previous years' results gives us an idea of what the market is pricing in. If they were to make 2006-type earnings of $270million, then yes the current stock price is dirt cheap at four times earnings. But that shouldn't be assumed, as this flirtation with bankruptcy has severely hurt YRC's reputation. While some companies can operate just fine with the threat of bankruptcy in the air, a company like YRC cannot. Customers would be rightly petrified of losing their cargo in YRC's vast transportation network in the event of a liquidation. Cost cuts likely won't be a magic bullet either, amounting to 15% of wages.
YRC had trouble convincing debt holders to agree to convert to equity for a number of reasons. Some holdouts believed (rightly) that they'd fare better in a liquidation than an exchange for equity. With 2023 convertible bonds trading as low as 30cents on the dollar in recent months, they were probably right:
The bonds now trade hands above 50cents on the dollar, as they will become the new owners of a much healthier capitalized YRC.
Among other reasons that bondholders agreed to the exchange might be fears from THUG TEAMSTERS, who planned to picket outside bondholders' offices simply because the firms were standing up for their legal rights:
Not to worry, this thuggish union continues to hold sway at YRC. The terms of the exchange add another possibility of 20% equity option dilution to be handed out to Teamster members:
So, invest in the common stock or not? I will choose not to, but there could be good upside. The debtholders cleared the way for a much healthier company going forward. Yes, they basically control the entire company now, but one can buy stock right now that discounts a lot of bad news. For speculative investors, this could be a five-bagger (+500%). This kind of position is interesting, as you could put in 1% of your portfolio, with downside of 1% and upside up 5% plus...I'll revisit this situation over the next few days.
Copyright 2009 AlphaNinja
Chesapeake's co-founder is Aubrey McClendon. Oh he's also Chairman of the Board, CEO, and maybe most importantly, "Chairman of Employee Benefits and Compensation Committee." Might explain his $78million in compensation in 2008 despite the 57% decline in the stock price the same year.
Many investors, myself included, take note when a CEO buys shares of his own company, as it's a usually a positive sign. McClendon used to buy shares of CHK hand over foot, consistently placing himself atop the insier buying lists. That came back to haunt him (and anyone piggybacking his moves) in October 2008, when he had to sell his entire 33million share stake in CHK due to margin calls. Maybe the worst "CEO trade" ever.
Anyway that's not the point. As I mentioned above, footnoted.org designated CHK as their most embarrassing footnote of the year, for having to point out that they purchased Mr. McClendon's historical map collection for $12million. Ridiculous cash handout to the CEO and Chairman? No way, because these maps are displayed at company headquarters and improve WORKPLACE CULTURE!" I love that the Company decided that it was appropriate to pay for these "cost-free loans of artwork."
"In December 2008, the Company purchased an extensive collection of historical maps of the American Southwest from Mr. McClendon for $12.1 million, which represented his cost. A dealer who had assisted Mr. McClendon in acquiring this collection over a period of six years advised the Company that the replacement value of the collection in December 2008 exceeded the purchase price by more than $8 million....These maps have been displayed throughout the Company’s headquarters for a number of years, complementing the interior design features of our campus buildings and contributing to our workplace culture...The Company was interested in continuing to have use of the map collection and believed it was not appropriate to continue to rely on cost-free loans of artwork from Mr. McClendon. "
Even though this transaction was awarded the top honor at Footnoted.org, if you keep reading the proxy further, the handouts become even more embarrassing. The next two entries are cash dealings with McCledon-owned businesses. In the first it's the company paying millions for advertising, tickets and suites at the McCledon-owned Oklahoma City Thunder, followed by payments to a McCledon-owned catering firm. In the case of the basketball team, they go to lengths to assure people that the company would patronize a sporting team even if it was not affiliated with McCledon, and in the case of the catering deal they come out and say it's outright inappropriate.
Oh and to top things off they pay the governor's kids six figure salaries,, which should curry favor pretty well:
"In 2008, the Company became a founding sponsor of the Oklahoma City Thunder, a National Basketball Association franchise owned and operated by The Professional Basketball Club, LLC (“PBC”). Mr. McClendon has a 19.2% equity interest in and is a non-management member of the PBC. The Company paid $3,495,525 in 2008 and $1,165,175 in 2009 pursuant to its sponsorship agreement for the Oklahoma City Thunder’s 2008-2009 season. As a founding sponsor, the Company received television and radio advertising for local broadcasts of Thunder games, arena advertising space, advertising in game-day programs and on the team website, team participation in a Company-sponsored community event, game tickets and use of an arena suite. In addition to the advertising and promotional activities related to its sponsorship of the Oklahoma City Thunder, the Company believes the sponsorship provides valuable support to the local community and contributes to employee morale.
Copyright 2009 AlphaNinja
Wednesday, December 30, 2009
Among gainers are OSI systems and KForce.
Among the losers is Tessera Technologies (TSRA), due to mixed news in a patent infringement case. Last night, the International Trade Commission ruled that while the company's patent claims had merit, they did not stand up well enough to constitute "infringement" against the DRAM memory manufacturers the suit is targeting:
“Once again, the ITC affirmed the validity of our asserted patents. We are disappointed, however, with the determinations regarding our infringement methodology and patent exhaustion,” said Henry R. Nothhaft, president and CEO of Tessera. “We will have an opportunity to appeal this ruling and are already reviewing other avenues open to us to ensure we are fully compensated for use of our technology. We continue to work closely with our licensed customers who are benefitting from their use of our patent portfolio, valuable know-how and trade secrets.”
Today ASEI has given back some of its gains, but OSI is up another 11% today as trading volume has exploded. Average daily volume this fall was about 97,000 shares per day, until this week. Monday and Tuesday saw nearly 800,000 shares traded each, and today the stock has exchanged hands 4.2million times with almost four hours or trading left. Volume will likely slow heading into the close, as much of the earlier trading was banks hedging options positions.
The January $30 calls (a bet that OSI stock will trade above $30.85 before January 15th) are trading at 85cents, up from just 10cents a couple days ago.
Those long OSI stock have an extra reason to cheer heading into the New Year's holiday. Depending on the size of the position, this huge move in OSI shares in the last couple days could boost fund performance by over a percent. On the other hand, those short the stock are slamming their heads on their desks.
Investor worries about Hershey (HSY) jumping into the bidding process may be why shares have significantly underperformed the market in recent months(GSPC=S&P500):
The proposed $16billion takeout price is TWICE Hershey's market value of $8.3billion, and would require a huge additional $10(ish)billion in borrowing to be added to Hershey's currently very management $1.8billion in debt.
The Hershey Trust controls the voting shares of HSY, and they're tasked with funding the Milton Hershey School. The Trust has been conservative in the past, so this bold (dare I say extremely risky?) move would seem to imperil the school. The NYPost however, points out that the school's assets of $7billion give it a very comfortable financial position.
I'll tell you one thing -->> it appears that Hershey bondholders do NOT think this deal is going forward, or else the bonds would not be trading at nosebleed prices implying such low risk. The 2021 notes are trading about 30% above par, to yield over 330basis points less than their coupon. They will be hit HARD if the company does indeed go forward with a big debt-financed offer for Cadbury.
Tuesday, December 29, 2009
Among the Department of the Interior's findings:
Reuters is calling it part "of a long-running dispute over how China deals with derivatives losses."
"How China deals with derivative losses" appears to be simply refusing to pay up, claiming that the contracts are too complicated to understand. I wonder if this works the other way when they're on the money-making side of the equation?
The above chart shows that the cost to insure against $10million in UPS bonds has risen from $34k annually to $37K annually - not the end of the world by any means. And no, the stocks are not reacting to this move, as they're mostly up on the day:
Monday, December 28, 2009
The magazine likes many aspects of the IBM story, but atop their list is the changing dynamics of the company's revenue mix. Below I've compared info from the 2000 10k and last years, to show the difference in segment contributions to the top line.
Barrons noted that at IBM, "About half its revenues and 60% of its pretax profits are annuity-like...And IBM gets nearly 65% of its revenue from outside the US."
The stability of IBM's cash flows are why Barron's and others argue the company's shares are underpriced at 12times 2010 earnings. As for me, I still like their Free Cash Flow Yield.
I noted back in September that IBM's cheap valuation was among my main reasons for being optimistic about the DJIA:
I still maintain that IBM is cheap. Netting out the company's balance sheet cash, their Free Cash Flow Yield is 7.8% using a backward-looking blend of estimates, and close to a 10% yield using 2011 numbers. That's too rich a yield (meaning the stock should be higher and the yield lower) for IBM, especially considering the firm's cheap cost of capital. Their 2017 bonds are priced WAY above par, to yield less than 5%.
Copyright 2009 AlphaNinja
After the failings on multiple levels of security, airline shares are taking a hit today as people speculate about tighter security, which would slow travel and hurt profitability.
Arline stocks are off about 5% today, while security firms American Science & Engineering (ASEI) and OSI Systems (OSIS) are up handily on the day.
In ASE's case, part of today's jump is due to a December 24th announcement by the US Army that they would be purchasing 37 Z-backscatter Xray trailers for use in Afghanistan. With an average price tag of $1million, this could guarantee ASE hits its 2010 fiscal year earnings targets. ASE and OSI also offer products that might have detected the explosives used in the failed bombing last week.
Copyright 2009 AlphaNinja
Boston-based AMICAS Inc (AMCS), a provider of radiology and medical image solutions, has agreed to acquired for $217million by Thomas Bravo LLC. The offer of $5.35 is a 21% premium to last week's close of 4.42 per share.
Under the terms of the agreement, AMICAS shareholders will receive $5.35 in cash for each share of AMICAS common stock they hold, representing a premium of approximately 24 percent over AMICAS' average closing share price during the 30 trading days ending December 24, 2009, and a 38 percent premium over AMICAS' average closing share price during the 90 trading days ending December 24, 2009.
"The agreement with Thoma Bravo provides an attractive all-cash valuation to our shareholders, and we look forward to completing the transaction under the terms of the agreement as expeditiously as possible," saidStephen Kahane MD, president, chief executive officer, and chairman of AMICAS.
Copyright 2009 AlphaNinja
Thursday, December 24, 2009
The Wall Street Journal is reporting that Venezuelan thug Hugo Chavez has threatened to exporpriate Toyota's plant if they do not hand over technical secrets to competitors.
Santa Barbara Bank & Trust was expected to make 75% of all company RAL's this year, but was told by its bank regulator to dump this business. What that means about RAL's going forward is anyone's guess, but based on company filings it will be a material hit to JTX's results. Financial product revenue, of which RAL's are a part, made up 24% of last year's revenue:
JTX shares are off 24% today. It being Christmas Eve, many analysts and investors are not even at their desks to sift through the earnings impact this will have, so in the absence of some feedback investors are dumping shares.
The whole release:
Wednesday, December 23, 2009
Crane said the deal would be slightly dilutive to earnings in 2010, but the huge depreciation charges embedded in Marrimac's numbers suggest that actual Free Cash Flow will be huge.
I estimate that Merrimac will do 2.00 per share in Free Cash Flow this year, for a Free Cash Flow Yield (FCFY) of about 12.5%. That's a nice use of cash for Crane, and the premium is a great windfall for Merrimac shareholders. I call the deal fair all around, because a company of Merrimac's tiny size and with their volatile results should not command a FCFY% much lower than this takeout price implies.
I'm not so much concerned
about the return on my money
as the return of my money.
- Will Rogers, 1933
Toothpicked, straw-hatted Will Rogers was a journalists’ dream, combining common sense with a sense of humor that could trump any newsman of his day, an era that was characterized more by its hopeless and helpless ennui, than its promise for a better tomorrow. During the Great Depression, just breaking even by stuffing your money in a mattress was considered to be a triumph of conservative investment. Likewise, during the past 18 months there have been similar “Will Rogers” moments. Perhaps remarkably, during the week surrounding the Lehman crisis in September of 2008, yours truly frantically called my wife Sue to empty our two local bank accounts into apparently safer Treasury bills. I was not the only PIMCO professional to do so. Preserving principal as opposed to making it grow was the priority of the day – digging a foxhole instead of charging enemy lines seemed paramount.
My how things have changed! With the global financial system apparently stabilized, returns “on” your money are back in vogue, and conservative investors who perhaps appropriately donned a Will Rogers mask nary a fortmonth ago are suddenly waking up to the opportunity cost of 0% cash versus appreciated assets at renewed double-digit annual rates. That 0% yield is not a joke. Almost all money market accounts – totaling over $4 trillion dollars, shown in Chart 1 – yield close to nothing, so close to nothing that I mistakenly did a double take when reviewing my monthly portfolio statement. “Yield on cash,” read the buried line on page 15 of the report, “.01%.”
Well now, I say to myself, this is very interesting from a number of different angles. If I was hoping to double my money, it would take approximately 6,932 years to get there at that rate! Somehow, that wouldn’t satisfy even Will Rogers, who might be choking on his toothpick or at least eating his straw hat in amazement. Secondly, being a savvy professional investor and all, I knew that money market funds actually earned 20 basis points or so on my money, but in this case were allocating a paltry one basis point to me. The words of the Beatles’ “Taxman” immediately popped into mind: “That’s one for you, nineteen for me – TAXMAN!” Ah yes, but in this case it was the Fed and Wall Street that were passing the collection plate. Whether it was really “God’s work,” as Goldman’s Lloyd Blankfein asserted, I wasn’t quite sure. If there was a “temple” in the vicinity I was thinking that God should be driving the moneychangers out as opposed to inviting them in for a pep talk.
Ah, but this is not a vindictive diatribe, although to me, money changers resemble Mammon more than archangels, and they all make too much money, including PIMCO. My point is to recognize, and to hope thatyou recognize, that an effective zero percent interest rate, as a price for hiding in a foxhole, is prohibitive. Like the American doughboys near France’s future Maginot line in WWI – slumping day after day in a muddy, rat-infested pit – when the battalion commander finally blew his whistle to charge the enemy lines, it probably was accompanied by some sense of relief; anything, anything but this! Anything but .01%!
Recently, approximately $20 billion a week has been exiting those payless, seemingly godless funds in search of a higher-yielding Nirvana. Yet, as Will Rogers knew, and Lehman Brothers demonstrated to another generation, the pain of the foxhole can immediately transition to the dodging of real bullets on the investment battlefield. Moving out on the risk asset spectrum has worked wonders since March of this year, but it comes with the risk of principal loss – failing to receive the return of your money. When viewed from 30,000 feet, there is even a systemic risk that new asset bubbles are in the formative stages – perhapsbecause of the .01%. Gold at $1,130 an ounce, global equity markets up 60-70% from their 2009 lows, a cascading dollar now 15% lower against a basket of global currencies just 12 months ago, oil at 80 bucks, mortgage rates at 4% thanks to a $1 trillion dollar credit card from the Fed; the list goes on. The legitimate question of the day is, “Is a 0% funds rate creating the next financial bubble, and if so, will the Fed and other central banks raise rates proactively – even in the face of double-digit unemployment?” As Chicago Fed President Charles Evans said in a recent speech, “This notion is often described as an imperative to ‘lean against a bubble,’ meaning that a central bank should act to lower asset prices that by historical standards seem unusually high.”
Yet even if the Fed and others are becoming sensitized to the dangers of up as opposed to exclusively downasset prices, it would seem that now is not the time to be affirming their bipolarity. Asset price rebounds (aside from the historic highs in gold) have followed even more dramatic slumps. A 60% rise in the stock market does not compensate for a 60% decline. Strangely enough, investors are still out 36% of their money once this down elevator/up elevator example plays out. And the simple analysis is that the private sector has still not taken the baton from government policymakers: There has been no public/private sector handoff. Bank lending is still contracting in the U.S. and weak in most other G-10 countries. Unemployment is still rising and approaching historic (ex-Depression) cyclical peaks.
Raise interest rates with 15 million jobless and 25 million part-time working Americans? All because gold is above $1,100? You must be joking or smoking – something. We will need another 12 months of 4-5% nominal GDP growth before Bernanke and company dare lift their heads out of the 0% foxhole – mini-bubbles or not. Instead, the heavy lifting or the charging of enemy lines in the case of this metaphor will likely be done by other central banks – already in Australia and Norway. In addition, and importantly, China may abandon its dollar peg within six months’ time and with it, its own easy monetary policy that has fostered more significant mini-bubbles of lending and asset appreciation on the Chinese mainland. With renewed upward appreciation of the yuan may come potentially volatile global asset price reactions to the downside – higher Treasury yields, and lower stock prices – which the Fed must surely be leery of before making any upward move, of its own, and before moving on, let me state the obvious, but often forgotten bold-face fact: The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks. Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until. To date that transition is incomplete, mainly because mortgage refinancing and the purchase of new homes is being thwarted by significant changes in down payment requirements. The Treasury as well, has a significant average life extension of its own debt to foist on investors before the Fed can raise short-term Fed Funds.
OK, so where does that leave you, the individual investor, the small saver who is paying the price of the .01%? Damned if you do, damned if you don’t. Do you buy the investment grade bond market with its average yield of 3.75% (less than 3% after upfront fees and annual expenses at most run-of-the-mill bond funds)? Do you buy high yield bonds at 8% and assume the risk of default bullets whizzing at you? Or 2% yielding stocks that have already appreciated 65% from the recent bottom, which according to some estimates are now well above their long-term PE average on a cyclically adjusted basis? Two suggestions. First, as emphasized in prior Investment Outlooks, the New Normal is likely to be a significantly lower-returning world. Diminished growth, deleveraging, and increased government involvement will temper profits and their eventual distribution to investors in the form of dividends and interest. As banks, auto companies and other corporate models become more regulated and therefore more like utilities and less like Boardwalk and Park Place, they will return less.
Which brings up the second point. If companies are going to move toward a utility model, why suffer the transformational revaluation risk of equities with such a low 2% dividend return? Granted, Warren Buffet went all-in with the Burlington Northern, but in doing so he admitted it was a 100-year bet with a modest potential return. Still, Warren had to do something with his money; the .01% was eating a hole in his pocket too. Let me tell you what I’m doing. I don’t have the long-term investment objectives of Berkshire Hathaway, so I’m sort of closer to an average investor in that regard. If that’s the case, I figure, why not just buy utilities if that’s what the future American capitalistic model is likely to resemble. Pricewise, they’re only halfway between their 2007 peaks and 2008 lows – 25% off the top, 25% from the bottom. Their growth in earnings should mimic the U.S. economy as they always have, and most importantly they yield 5-6% not .01%! In a low growth environment, it seems to me that a company’s stock should yield more than its less risky debt, and many utilities provide just that opportunity. Utilities and even quasi-utility telecommunication companies now yield between 5 and 6%, whereas their 10- and 30-year bonds yield less and at a higher tax rate to you the investor.
So come on you frustrated Will Rogers lookalikes. Join the wimp who pulled his money out of the bank just 14 months ago. Look at your monthly statement, zero in on that .01% yield and say to yourself, “I’m as mad as hell, and I’m just not going to take this anymore!” You can’t buy the Burlington Northern – Warren Buffett has scooped that up – and most other choices offer tempting returns, but potential bullets as well. Buy some utilities. It may not be as much fun as running a railroad, but at least you’ll know who to call if the lights go out.
William H. Gross
The merger terms cited the risk of legislation that would outlaw "fracturing," which is a process used to extract natural gas from shale-rock formations. The deal was a big bet by Exxon on not only the current low price of natural gas, but on America as a source of cheap, cleaner fossil fuels. XTO's expertise in fracturing as a way to get at natural gas reserves was a large part of the deal rationale. Per the merger agreement, legislation outlawing fracturing would be reason for the deal to fall apart, as it would constitute a "material adverse affect:"
Today another natural gas company - InterOil (IOC), announced a huge deal with the government of Paupa New Guinea to build a $5billion LNG facility:
"Following approval of the Project Agreement by the National Executive Council on December 10, the Minister for Petroleum Hon William Duma and acting Governor-General Dr Allan Marat signed the Agreement securing PNG's second LNG project. The signing was witnessed by the Prime Minister Sir Michael Somare. The Agreement sets fiscal terms for a twenty year period, which include a 30% company tax rate and certain exemptions applicable to large scale projects of this nature. It also provides for a 20.5% ownership stake to be held by the Government of Papua New Guinea's nominee, Petromin PNG Holdings Limited. A further 2% ownership stake will be taken by landowners directly affected by the plant.
Tuesday, December 22, 2009
From National Review:
The highest-profile Democratic hold-out on Obamacare, Nelson said last week, “My vote is not for sale.” He obviously meant that in the sense that he’d be righteously indignant at any suggestion that his vote could possibly be bought for anything less than the low nine digits.
Nelson got the feds to pick up forevermore 100 percent of the additional Medicaid spending that will be imposed on Nebraska by the bill.
This guy held out till the end, and in exchange for his vote the rest of the country will pick up the tab for Medicaid's expansion in Nebraska FOREVER. Stunning.
Even the ultra-liberal SF Chronicle is outraged. California will only have the Fed chip in 50% of its expanded spending on Medicaid, even thought its senators have been among the greatest supporters of healthcare reform. Instead, the biggest windfall was thrown to a last-minute holdout:
"Most outrageously, it seems that California is being punished for not playing political extortion on the issue. Its top leaders in Washington - House Speaker Nancy Pelosi and Sens. Dianne Feinstein and Barbara Boxer - have been adamant about getting health care reform all along. Gov. Arnold Schwarzenegger has spoken up in support of reform. Because California's votes - and voters - could be counted on to support health care reform, we've gotten far less than states with "moderates," who are able to bully Congress into handing over more and more treats for their constituents."