Saturday, February 27, 2010

Some heartwarming pics of sports buddies....

Boys will be boys!

Copyright 2010 AlphaNinja

Friday, February 26, 2010

Fannie Mae, our national "housing public utility" politely requests another $15billion....

...of your tax dollars, to give people low down payment loans on houses they can't afford.


To be fair, the housing "public utility" reference is not mine, but rather Barney Frank's:

Friday action (CKR, CROX)

Stocks are slightly positive with a couple of hours left in the trading week.

Among gainers is CKE Restaurants (CKR), owner of Carl's Jr. and Hardee's, up 25% on news that they'll be LBO'd by Thomas H. Lee Partners.

THL is offering $11.50 per share, a 24% premium to yesterday's close. Embarrassing for CKR is the fact that they're selling the company for about .34 times sales, while Burger King, Jack-in-the-Box, and McDonalds' enjoy P/S of .96, .47, and 3.05 respectively. That cheap valuation is likely why the ambulance chasing securities lawyers have whipped out their robo-lawsuit machine, which spits out lawsuit invitations within minutes of every single buyout announced, with the laughable due diligence work of quoting a higher analyst price target. To be fair, the company likely DID sell far too low...but that's the risk you run with a high insider concentration of illiquid stock.

A look at CKR's income statement shows a lot of costs that can be cut to make this an attractive buyout:


Among losers, Crocs' (CROX) CEO departure is hitting shares today, sending them down 14%. Investors were stunned by the announcement, as CEO JOhn Duerden has been on the job only a year.

Copyright 2010 AlphaNinja

Worth sharing....

why not.

Faction team rider: Mike Mertion from Peter M on Vimeo.

The Gap up nicely, as 2010 guidance impresses (GPS)

Shares of The Gap (GPS) are +5.5% this Friday morning, after reporting a q4 2009 earnings beat and offering upside 2010 earnings guidance last night. The company announced additional share repurchase plans, and a boost in the dividend gives the stock nearly a 2% dividend yield.

I've liked this stock since last May, for two main reasons.

1. CEO Glenn Murphy is a fantastic operator who is widely under-appreciated by Wall Street.
2. The company's valuation, both on a P/E and Free Cash Flow Yield (FCFY) basis is too cheap.

For more detail on my reasons for owning it see here and here. Back in November I said that "With only a modest improvement in operating margin next year, they could earn over 1.90 per share, putting the stock over $30," and that remains the case today. The company took 2010 guidance to a 1.71-1.75 range, and I think they will beat that handily. My one change is that given the quality of the execution, the shares deserve a higher multiple... meaning they should hit $30 before they earn 1.90...

In 2009, The Gap's focus on sourcing and their diligent promotional stance helped gross margin increase to 40.3%, almost 300basis points higher than the previous year. This gross margin increase comes despite a 2% decrease in comp store sales (sales from stores open at least a year). That gross margin allowed operating income to increase to 12.8% from 10.7% in 2008, despite store-level costs increasing.

The expectations for 2010 were mixed going into this call. One key question the street has is whether the increases in operating margin are largely behind the company, or if there's still room to improve. For their part, management still sees room for improvement, guiding 2010 to an operating margin of 13%. Some upside may come from an improvement in sales per square foot, which decreased again in 2009. The company confirmed expectations that 2010 will be a year in which they aggressively go after market share, meaning they might give up some gross margin to get those new shoppers.

Among Wall Street's reactions:

FBR Capital thinks the stock is under-owned, the story is unappreciated, and the sentiment on the company is low, all of which should work to investors' advantage. They like Gap's outlook in 2010...

Oppenheimer was very impressed with Gap's 2009 performance, greatly increasing earnings despite sales being down. That said, they are not fans of the stock at current levels.

Wedbush likes the stock in 2010 and sees upside to earnings estimates. They think the company's targeted promotion, international expansion, and new store prototypes could boost results.

Deutsche Bank sticks with their Sell rating, as they think this year's forward estimates are too high. They give the stock an 11 P/E ratio, and apparently do not add back the cash per share.

I think the stock will trade at 15-17 times trailing earnings estimates by the end of 2010, and adding back $3.70 per share in balance sheet cash puts the stock near 30. As other investors warm to the story - a fantastic CEO turning around a former category leader, with the extra kicker of a dirt cheap valuation and prodigious free cash flow generation - the stock will head up.

Copyright 2010 AlphaNinja

Thursday, February 25, 2010

Safeway impresses with huge cash flow. readers unsurprised. (SWY)

Grocery-store operator Safeway (SWY) opened for trading this morning down 4.3%, at 22.50.  The shares then proceeded to climb 10% from that level to close at 24.73, a +5.2% gain on the day.

Along with the broad market being down early, some investors may have sold the stock on the headline news that Safeway lost $4.59 per share or $1.609billion in the fourth quarter 2009.  

That massive loss was due to a non-cash, goodwill writedown of $1.818billion, to erase from the balance sheet assets that are not assets. (Goodwill is the premium paid for previous acquisitions, and is an intangible asset).    The reason for the stock to so broadly outperform the market today was the big 2009 Free Cash Flow performance, as highlighted by  CEO Steve Burd:

“Excluding the non-cash goodwill impairment charge, our results were in line with our expectations,” said Steve Burd, Chairman, President and CEO. “Despite very challenging economic conditions, Safeway generated free cash flow of $1.5 billion in 2009. This exceeded our expectations and is the highest annual free cash flow ever achieved by Safeway.”

I bought the shares last August and encouraged TheAlpaNinja readers to do the same:

Over the last few years, Safeway embarked on a big push to transform its stores to a new “Lifestyle” format – essentially redecorating and remodeling stores, with the main difference being an expanded perishables section. Tough period to go “upmarket” of course, as the economy tanked at the same time. The point though, is that heavy capital expenditures on store remodels will slow, with about 76% of stores currently being Lifestyle models.

Though the company reduced earnings guidance, their expectation for Free Cash Flow remains in the $1.1-1.3billion range. The midpoint would lead to a FCFY(Free Cash Flow Yield) of over 15%, which is a great yield that compensates for the many dangers facing Safeway. I’m buying shares and think they’ll hit the mid-20’s before too long.

So here we are in the mid-20's.  I still like the stock and I think it's headed higher, as I'll explain further below...

Gross margin was down 1% from the previous year, as a deflationary food environment continues to pummel grocers like Safeway.  Operating and administrative expenses, as a percent of sales, increased almost a percent.  Safeway's cost structure is hugely fixed in nature, and they're at the whim of deflationary trends that squeeze margins.  What should be clearly impressive to everyone, however, is their incredible 2009 cash flow performance in the face of such pressures.

As the company reduced their borrowing levels, 2009 interest expense dropped from $112.5million to $98million.  That's no small number, accounting for 4cents per share...

On the conference call, CEO Burd sounded very upbeat and could hardly wait until the March 3rd investor day, when the company will officially give some 2010 guidance.  He plans to share data with the investment community that should get people excited about a possible reversal in price trends in their stores.

As I've said before, Safeway is in a brutal business.  No only that, but a brutal business in direct competition with not just Wal-mart, but other suicidal competitors who can cause damaging price wars.  Safeway has high pension expenses and ongoing labor disputes.  They also are at the whim of (I keep repeating it) wild swings in food costs that are beyond their control, as well as the consumer "trade-down" effect to cheaper, lower margin products.  Safeway fights back on the trade-downs by offering a terrific assortment of their own store branded products, but in categories like liquor and wine they're out of luck.

Despite the above headwinds, I still think the stock is a great value.  The number one reason to own these shares is that Free Cash Flow is expanding as capital expenditures are slowing.  The big investments in Lifestyle remodels are largely behind them, and the contribution of remodeled stores will become more apparent in the coming years.  Safeway's strategy has been to grow "wallet share," or the percent of a person's shopping that is done at Safeway.  The thinking is that once prices rebound, that same shopper will do the same amount of unit volume, but at higher prices.

I have pretty conservative Operating Cash Flow Estimates for 2010/2011, but I'm quite curious about Safeway's capital expenditure outlook, which is critical for Free Cash Flow.  We'll find that out March 3rd.  But based on where I am now, Safeway has a current Free Cash Flow Yield of between 12 and 15%.  That's more than three times what it costs Safeway to borrow, as their 2019 debt yields 4.6%.

A Price-to-Earnings ratio in the mid-teens sends this stock to the upper 30's, and a Free Cash Flow Yield of 10% gets the stock there as well.  The market doesn't tend to reward this company with multiples on profits, but their increasing Free Cash Flow Yield will not be ignored forever.

Copyright 2010 AlphaNinja

Intra-day action (CCE, KO, TRLG, PALM)

Tough day for stocks, down due to the very weak durable goods orders reported earlier.  After bottoming at 10,195ish, the DJIA has spiked a bit, down down just 93points on the day.  Still, only Walmart and Alcoa are positive among the 30....

Despite the down market, there are some good gainers today.

Leading the upside is Coca-Cola Enterprises, Inc (CCE) - NOT to be confused with The Coca-Cola Company (KO).  CCE is the bottling operation, and the stock is up 32% on news it will sell the North American bottling business to KO, while agreeing to buy KO's bottling business in Norway and Sweden.  KO already owns about 34% of CCE outstanding shares.  Complex enough for ya?  Oh they will also exchange each share of CCE for a new CCE structure based solely on Europe, and will receive $10 per share in cash.  KO shares are down 4% on the news.

Another winner today is jeans outfit (ha, outfit!) True Religion (TRLG), up 17% after reporting upside to earnings.  It's one of those stories where people give the company little credit (by way of a tiny P/E), yet the company keeps out-earning the expectations, proving the short sellers wrong.  New store openings go from 23 to about 28, and comp sales (sales in stores open at least a year) blew away estimates.  2010 earnings guidance however, is very conservative, leaving management room to beat again.  Based on 2010 EPS guidance of 2.05, a PE of 14 would be a stock price of $28.70.  Add in $4.43 in cash per share, and the stock has another $9 in upside easily...

Among losers is Palm, Inc. (PALM), down after giving upcoming quarterly guidance that missed consensus estimates by a country mile.  They see about $300million in revenue, versus expectations near $425million, as they're having a tough time getting sales of new products to ramp up:

"Revenues for the quarter and full year are being impacted by slower than expected consumer adoption of the company’s products that has resulted in lower than expected order volumes from carriers and the deferral of orders to future periods. Accordingly, Palm expects fiscal year 2010 revenues to be well below its previously forecasted range of $1.6 billion to $1.8 billion. The company will provide more detail on its financial results during Palm’s third-quarter financial results conference call currently scheduled for Thursday, March 18.
“Palm webOS is recognized as a groundbreaking platform that enables one of the best smartphone experiences available today, and our work to evolve the platform and bring industry-leading technology to market continues. However, driving broad consumer adoption of Palm products is taking longer than we anticipated,” said Jon Rubinstein, chairman and chief executive officer. “Our carrier partners remain committed, and we are working closely with them to increase awareness and drive sales of our differentiated Palm products.”

Copyright 2010 AlphaNinja

Market down big on ex-transportation durable goods orders

A very confusing Census Bureau advanced report on durable goods orders is sending the market down.  The DJIA is off 160points or 1.55%.

The headline number was strong -> a 3% rise in durable goods in January, double the expected 1.5% rise.  What spooked the market though, was the number after excluding transportation orders.  Ex-trans, orders were DOWN .6%, far short of a +1% gain.

The report lends credence to the bears who've suggested that big late-2009 gains in GDP were largely due to unsustainable inventory rebuilding, rather than actual, repeatable growth.

The confusion looks to be due to several factors, not the least of which is a min-boggling increase in "non-defense aircraft and parts" orders....

Copyright 2010 AlphaNinja

Quote of the day, it might save your life.....

No joke, keep it in mind next time you have the silly urge to work out...

From the AP:

ATLANTIC CITY, N.J. – A Florida woman said her love handles saved her life when she was shot entering an Atlantic City barSamantha Lynn Frazier said she heard two pops when she walked into Herman's Place early Saturday. The 35-year-old then felt pain and saw blood on her hand after she grabbed her left side. Atlantic City police said Frazier was an innocent bystander.
Detective Lt. Charles Love said the gunman was aiming for a man who escaped with a bullet hole in his down jacket.
The suspect remains at large.
Frazier told The Press of Atlantic City that 'I could have been dead. They said my love handles saved my life."
Frazier also told the newspaper that she had been "hollering" that she wanted to lose weight. She now said "I want to be as big as I can if it's going to stop a bullet."

Copyright 2010 AlphaNinja

California faces a trip-up in its race to defraud bond investors

California is postponing a $2billion bond sale, because of delays in pushing a "cash-management" bill through the state legislature.  From The Bond Buyer:

The State Treasurer’s Office pulled a planned $2 billion GO bond sale off next week’s calendar after the cash-flow management bill stalled in the Assembly this week following its passage in the state Senate.
That legislation gives state budget and finance officials additional authority to manage the timing of payments for various state programs through the end of fiscal 2011.

In candid comments that would get anyone but a politician fired, Lockyear stressed how important it is for the bond sale to get done ahead of the next dreadful budget assessment:

Lockyer told the committee that bond funded construction projects could dry up by the summer if the state doesn’t get market access.
His office has a limited window to act before the release of the governor’s May revised budget proposal, which creates an issuance blackout for the treasurer’s office because of disclosure concerns.
We’ve got until maybe mid-April to try and get to the market three or four times,” Lockyer said.

Can you imagine IBM's CEO saying "it is CRITICAL that we sell some corporate debt at current rates, before we release earnings that will cause our borrowing rate to soar"?

The poor Greeks are being lambasted by international bond investors for various "cash management" tricks, while California goes about its merry business doing the same thing.

Copyright 2010 AlphaNinja

Moody's threatens to correct the anomaly of Japanese government bond yields

According to the WSJ, credit rating agency Moody's is saying that Japan's credit rating could be at risk if the government there doesn't reduce deficits in short order.

Most interesting is the mention of why Japan enjoys a total dislocation from reality in its borrowing rates:

At the same time, there are several factors weighing in Japan's favor, he said.
"Affordability for such a high level of debt comes from special characteristics, in particular, a deep and stable domestic funding base, captive savings in the postal savings system and other financial institutions, and a strong home bias among domestic investors."

That "deep and stable" domestic funding base comes by way of outright propaganda to buy government debt instead of park savings in higher yielding assets such as stocks.

As Kyle Bass of Hayman Capital put it, "Cultural forces spawned the generally accepted belief among Japanese citizens that it is their patriotic duty to lend their government money." He was referring to ads like the one below, which feature a Japanese celebrity imploring people to buy bonds.

“Government bonds are worth another look,” the Ministry of Finance says in its latest advertisement, which features a picture of 37-year-old Junko Kubo, a former anchor on Japan’s public broadcaster NHK. Individuals can buy government debt at local banks for as little as 10,000 yen, or about $106, according to the ads. The ministry is hawking the bonds on its Web site with the slogan, translated from Japanese, “Peace of mind. Piece of happiness.”

This is akin to the US Government using your tax dollars to put out advertisements telling you to BUY treasuries instead of invest in stocks, to support public employee salaries that you already pay with your taxes. Madness, but don't count it out.....

The current administration has started the ball rolling in this direction, with the suggestion that Americans might forced to own annuities in their tax-deferred savings accounts:

The Obama administration is weighing how the government can encourage workers to turn their savings into guaranteed income streams following a collapse in retiree accounts when the stock market plunged.

It may start with annuities, but the holy grail for big-spendin' government would be forcing Americans to buy another "guaranteed income stream"......treasuries.

That entire Hayman piece is below. It's required reading for anyone interested in long term structural and even demographic imbalances...

Hay Man

Copyright 2010 AlphaNinja

LOVE IT! General Growth bankruptcy "turned on its head" by actually considering equity holders

It's an ugly, complicated fight between different parts of the capital structure, in the battle to "make oneself whole" with the General Growth Properties bankruptcy process.

After Simon Properties (SPG) offered to give common shareholders around $9 per share, General Growth and Brookfield Asset Management announced its own proposal that would give them $15:

GGP’s existing shareholders will receive one share of new GGP common stock with an initial value of $10.00 per share, plus one share of General Growth Opportunities (“GGO”) with an initial value of $5.00 per share, for total consideration of $15.00 per share (see description of GGO below under “Terms of the Brookfield Investment and Proposed Recapitalization”)
Unsecured creditors will receive par plus accrued interest

The key to this is what the unsecured bondholders receive.  People who think the common stock is worth much higher levels use an analysis that assumes the unsecured bondholders will accept much less than par (full) value, in exchange for diluted new equity shares going forward.  Whitney Tilson of T2 Partners emphatically argued against a Hovde Capital presentation (before any deal from Simon was announced) that a bankruptcy judge would NOT give the unsecured creditors full par value, meaning they'd accept equity:

Hovde doesn’t appear to understand bankruptcy law and what will likely happen to the unsecured debt. There is almost no chance that it will remain outstanding: it will either be refinanced or, more likely, be converted into equity (this is what Pershing assumes – there is no inconsistency). But here’s the key: it will NOT BE DILUTIVE because it will convert AT FAIR VALUE, as determined by the bankruptcy judge. Of course, if the judge determines that fair value is $1/share, then it would be massively dilutive, but that’s not going to happen. The judge has a great deal of discretion in determining fair value, but will certainly take into consideration the current stock price, comps and the price of any equity offering(s) GGP might do.

Turns out that the judge didn't need to give the unsecured creditors $1 per share - Simon has offered it - making Tilson wrong on that count.  Now a portion of the unsecured creditors are arguing that they would prefer to take Simon Property Group's full value for their bonds, rather than rick converting into equity and letting it ride...

Objection by General Growth's Unsecured Creditors to Exclusivity

More details from Simon's most recent offering points out that this is a company in bankruptcy, and the value for the common stock is less important than achieving breathing room, by way of more cash:

$9 billion of cash upfront vs. the General Growth plan which offers only $2 billion in cash and the hope of additional cash down the road, subject to highly uncertain market conditions.

100% immediate and certain cash recovery to unsecured creditors vs. the General Growth plan which would likely result in unsecured creditors receiving most of any recovery at some point down the road in the form of equity in a highly leveraged, capital constrained entity. In addition, the inevitable sale of shares by creditors who receive stock would put downward pressure on the value of General Growth shares.

Cash value to equity holders with no dilution vs. the General Growth plan which would result in significant dilution of General Growth shareholders -- who would be left with two speculative equity securities that are likely to underperform.

Fully addresses claims of unsecured creditors vs. General Growth's proposal which turns the bankruptcy process on its head by favoring equity holders at the expense of creditors.

No financing condition vs. the combination of the massive required capital raising and asset sales in the General Growth plan which amount to a financing condition for the majority of potential cash recovery for creditors.

Potential for equity holders and certain creditors to elect SPG stock in lieu of cash, providing certainty and upside potential in an established equity security of an S&P 500 company that has historically outperformed.  Stakeholders who elect SPG stock will be investors in an entity that has enhanced growth prospects through superior management, synergies and access to capital to realize value creation.

Copyright 2010 AlphaNinja

Wednesday, February 24, 2010

ION Geophysical spikes on insider buying (IO)

ION Geophysical (IO) shares are getting a midday lift, after Director James Lapeyre disclosed that he bought 50,000 shares on the open market.  Always nice to see insider putting their money alongside other shareholders, as it often signals that they find the stock undervalued.

The shares are down a painful 37% from their early January highs, and the Feb17th earnings report was ugly:

So are the shares undervalued?  Not compared to other companies with the same gross profit dollars.  ION trades a slight discount to them on Price-to-Sales, likely due to it's uglier balance sheet.  Market cap after subtracting cash, divided by gross profits, shows a much more generous valuation for ION than the others.  And it's not just due to recent gross margins either - this group's average 5 year maximum gross profit margin is 42% versus ION's 37%....

Copyright 2010 AlphaNinja

Intra-day action (EMC, STEC, KFT,AA,SLXP)

US Stocks are up nicely today.  The DJIA is up 101points to 10,383, with only Kraft (KFT) and Alcoa (AA) in the red.

Among gainers today, Salix Pharmaceuticals (SLXP) shares are up 22% after the FDA's gastrointestinal drugs panel voted 14-4 that the firm's Xifaxan drugs warrants approval, to treat brain damage caused by liver failure.  The shares were off so much yesterday during the FDA review that they were actually halted by Nasdaq.  Volatility like that is why I leave these drug developer stocks to the healthcare experts to dig into....

Among losers is data storage firm STEC (STEC) down 24%.  They gave Q1 2010 revenue guidance that was about 50% less than Wall Street was looking for, as an inventory glut at their largest customer (EMC) will wreck the quarter, maybe the whole first half of 2010:

"We believe that the first half of 2010 will be a trough period for our business due to an inventory carryover by our largest customer. Although, we believe the marketing programs that we implemented last quarter have had a positive effect on the sell-through of SSDs, based on our best estimates we now anticipate this inventory carryover to continue to negatively impact our sales to this customer during the first half of 2010, as we do not expect any meaningful production orders from this customer during that time.
"We currently expect first quarter of 2010 revenue to range from $33 million to $35 million with diluted non-GAAP loss per share to range from $0.11 to $0.13."

And as is typical lately, they follow bad news the only way they know how - spending shareholder dollars to repurchase company stock, announcing an $80million share repurchase program.

Copyright 2010 AlphaNinja

Greek Deputy Prime Minister, trying to assure no one ever lends them a DIME again

I've heard first-graders make more sense.

While about a third of the country goes on strike, Greek Deputy Prime Minister Theodoros Pangalos claims that it's all Germany's fault  -again - from way back in WW2.

Pangalos criticised Germany's attitute towards the Greek crisis, saying Athens had never received compensation for the economic impact of the Nazi occupation during World War Two.
"They took away the Greek gold that was at the Bank of Greece, they took away the Greek money and they never gave it back. This is an issue that has to be faced sometime in the future," he said.
"I don't say they have to give back the money necessarily but they have at least to say 'thanks'," he said. "And they shouldn't complain so much about stealing and not being very specific about economic dealings."

Copyright 2010 AlphaNinja

What's the potential dividend at American Tower? (AMT)

Cell-tower giant American Tower (AMT)  reported earnings earlier today.  Q4 2009 EPS of 16cents missed the street's expectation by 2cents, yet revenue came in higher than expected.  The company's outlook for 2010 looks pretty good to me.

Their gross margin, by my estimate(using revenue minus site rental expenses, etc) , increased 40basis points in 2009, from 75.5% to 75.9%.  SG&A costs dropped from 11.6% of revenue to 11.3%, so those add up to nearly a point of extra margin.  AMT stock of course, is way out ahead of itself, up 57% in 12months.

The company does not currently pay a dividend, preferring instead to continue investing heavily in it's network of towers.  I know of very few other business models as well-positioned over the coming years as American Tower's - they can leverage each tower with more and more tenants (to a degree of course), as smartphone explosion creates simply mind-boggling need for more bandwidth.

American Tower has a great operating model, but it's only a decent stock at the right price.  AMT is one of those stories that is LOVED by the PBA community (PBA being "Price-Blind-Argument," which I outlined in my 2010 outlook), but they neglect to mention at what price it makes sense.

 I don't personally see a reason to own the shares unless the company changes its stance on paying a dividend - not in the cards currently.  By my estimates, they could pay out 40% of 2010's after-CAPEX Free Cash Flow, for a dividend of 64cents per share and a dividend yield of 1.5%.  Maybe that's what the stock is pricing in, or maybe it's pricing in a higher dividend yield.  We'll see.

Copyright 2010 AlphaNinja

New home sales weaker than expected.

The Census released new home sales data for January 2010 earlier this morning.  On an annualized basis, sales are running at 309,000, well below the 354,000 that the consensus of economists were predicting.

Months supply is still very elevated, and houses are sitting on the market for an average of 14.2months.  I also put in a chart of all-cash purchases.  They're way down from levels of 20 years ago - as they should be with borrowing rates half of what they were then.

Copyright 2010 AlphaNinja

H&R Block cuts guidance due to weak preliminary tax season results (HRB)

H&R Block (HRB) shares are down in premarket trading, after the firm said that a weak start to the 2010 filing season puts previous guidance for earnings out of reach:

KANSAS CITY, MO--(Marketwire - 02/24/10) - H&R Block Inc. (NYSE:HRB - News) today announced preliminary tax season results for the interim period through Feb. 15, 2010. Same-office tax returns prepared in retail operations fell 5.6 percent compared to the prior-year period. Total tax returns prepared through Feb. 15 were down 6.3 percent.
Total retail returns prepared year-to-date fell 8.2 percent, while the net average retail fee per tax return increased 1.9 percent. Total digital returns prepared by H&R Block (consisting of H&R Block At Home online and desktop software products, excluding Free File Alliance returns) were down 1.8 percent. Total online return growth of 3.1 percent was more than offset by a 7.6 percent decline in software-based returns. Total digital returns including the Free File Alliance fell 1.4 percent.
In light of the foregoing preliminary tax season results, the company's previously announced guidance for fiscal 2010 will not be reached.
"We believe industry filings are down significantly due to the recession and sustained, high levels of unemployment," said Russ Smyth, president and chief executive officer of H&R Block. "The weak economic conditions have also contributed to a greater shift to do-it-yourself tax preparation methods among first-half clients. We still have millions of clients to serve in the second-half of the tax season, which we are aggressively targeting," added Mr. Smyth.

The investment community expects revenue to be up 1.6% for the April quarter, and earnings per share to be up 7%.  The guidance looks to be significantly below those estimates.  Appropriately, shares are down 16% in early trading.

Copyright 2010 AlphaNinja

News flow not going Google's way... (GOOG, MSFT)

The Financial Times is reporting that Google is the subject of an antitrust investigation by the European Union.  The company's 90% search market share in Europe is about 10% higher than it is in the US, and investigators are also looking at Google's potential interference with ad prices:

At an estimated 90 per cent, Google’s share of search advertising in Europe is higher even than its home market in the US, where most analysts put it at up to 80 per cent.
The complaint from Ciao, now part of Microsoft’s Bing search engine, centres on Google’s advertising system. While it has always maintained that advertising prices are set by auction, leaving it without any direct influence over pricing, it has faced complaints from a number of companies over its practice of setting minimum bid levels.

A Google response on their company blog chalked it up to it's size, making it an inevitable target of corporate-suspicious commissions:

Given that these complaints will generate interest in the media, we wanted to provide some background to them. First, search. Foundem - a member of an organisation called ICOMPwhich is funded partly by Microsoft - argues that our algorithms demote their site in our results because they are a vertical search engine and so a direct competitor to Google.'s complaint seems to echo these concerns.
We understand how important rankings can be to websites, especially commercial ones, because a higher ranking typically drives higher volumes of traffic. We are also the first to admit that our search is not perfect, but it's a very hard computer science problem to crack. Imagine having to rank the 272 million possible results for a popular query like the iPod on a 14 by 12 screen computer screen in just a few milliseconds. It's a challenge we face millions of times each day.

In completely unrelated news - but plenty unfortunate for Google - three Italian Google execs were convicted of privacy violations in connection with a bullying video of an autistic boy.  It will likely be appealed, as it's an attempt to hold Google responsible for the actions of anonymous uploaders:

MILAN (AP) - An Italian court convicted three Google executives of privacy violations Wednesday because they did not act quickly enough to pull down an video online that showed bullies abusing an autistic boy.
The case was being closely watched around the world due to its implications for Internet freedom.
In the first such criminal trial of its kind, Judge Oscar Magi sentenced the three to a six-month suspended sentence and absolved them of defamation charges. A fourth defendant, charged only with defamation, was acquitted.
Google called the decision "astonishing" and said it would appeal.
"The judge has decided I'm primarily responsible for the actions of some teenagers who uploaded a reprehensible video to Google video," Google's global privacy counsel Peter Fleischer, who was convicted in absentia, said in a statement.

Copyright 2010 AlphaNinja

Tuesday, February 23, 2010

By their own admission, Bowne is selling low in its approved sellout to RR Donnelley (BNE, RRD)

First of all, congrats to Bowne shareholders for a quick $65% jump in the stock.

It was announced after hours today that RR Donnelley would buy fellow printing company Bowne (BNE) for $481million or $11.50 per share.

It's a great move on Donnelly's part.  Despite paying .71 times sales for Bowne while their own P/S is.42, Bowne is in a higher-end business with higher-end margins.  Bowne's gross margin for 2009 was 33%, well off it's 2007 peak of 38% but still way above RRD's 25-26% range.

The problem is, despite the 65% premium in the all-cash deal, the price is too low.  Don't take my word for it, just look at management's December 2009 presentation materials.  Ironically, it was for Gabelli's "Best Ideas of 2010" conference.  Well with this deal they've got a winner already, but management's chart shows that it's still a sub-par price.

Bowne's largest business is in the capital markets, and that's why 2007 - the last year of huge deals, IPO's, etc. - was the peak in revenue and earnings.  This chart shows that they're selling at the absolute low in capital markets activity, which they expect to revive in 2010 and beyond...

Looking at past and future (expected) results, the company is selling low before their end markets pick up.  And they don't need to, as they improved their liquidity and financial profile tremendously in the last year.  By my estimates, they can blow past 2007's Free Cash Flow levels even without attaining the same gross margin profile.  The deal represents a great short term boost to the shares, but Bowne is leaving money on the table.  If management is confronted by shareholders who think the buyout is too low, they will NO DOUBT downplay the upside and stress the lower-end level of earnings possibilities, not to mention the slow start in 2010 capital markets activity.  There is not a massive concentration of shares held by any one investor (Lord Abbett owns the most, at 2.9million shares or 7.4% of outstanding), but that doesn't mean they won't put up a fight.

One last thing.  In my estimates below, wherever I might be too aggressive in margin or cash flow assumptions, remember that an acquirer will take out a huge amount of cost here, as well as improving Bowne's gross margin, simply because Bowne's small size hurts it in terms of procurement scale advantages.  

Copyright 2010 AlphaNinja

Verizon's CFO gives us some confidence in their juicy dividend yield...(VZ)

Mr. Cramer had Verizon CFO John Killian on his show, to discuss the company's big 6% dividend yield. A yield this high normally gets people worried that the dividend might be cut or that capital expenditures must be increased - especially in a capital-intense business like telecom.

Killian points out the HUGE amounts the company spends - $7billion their wireless network alone - to keep their networks in top shape, and points out that even after that, they have ample room to protect (and raise?) the dividend.

Could investors be worried about the company's leverage? Sure, but in their most recent quarter, EBITDA was 7.6times higher than interest expense - a very comfortable margin. The company's Free Cash Flow Yield is approximately 17%, with a cost of debt (due in 2037 in this case) of 6%. Far too big a difference between those two numbers. Verizon shares could yield 5% on their dividend and the stock would be ten dollars higher. They're a bargain....

Copyright 2010 AlphaNinja

Beware incorrect ETF recommendations (DUG, DTO)

You'd think a site called "ETF Prodigy" would at least know the proper Exchange Traded Fund to short oil.

They suggest that if you want to capitalize on falling oil prices, you should buy DUG:  

Their MASSIVE error is that while their premise is declining oil prices, the instrument they use is DUG, which will give you short exposure to the Dow Jones US Oil And Gas Index rather than oil the actual commodity.  This index is a double short, so it gives you double the inverse performance of the DJ Oil and Gas Index, of which over 37% consists of XOM and CVX (top holdings below).  If oil tanks, these stocks may or may not drop to the same degree.  For pure crude exposure, DTO is a direct inverse play on downside in the commodity price.

Copyright 2010 AlphaNinja

Here's the Congressional Budget Office's estimate of the health care bill's cost


Tomorrow's televised, bipartisan meeting to discuss the administration's healthcare proposal will have to be done without the critical cost estimate from the hard-working (I actually mean that) non-partisan Congressional Budget Office.

Why?  Because the CBO said the bill released yesterday did not have enough detail for them to estimate costs.


From yesterday:

The Obama Administration’s Health Care Proposal
This morning the Obama Administration released a description of its health care proposal, and CBO has already received several requests to provide a cost estimate for that proposal. We had not previously received the proposal, and we have just begun the process of reviewing it—a process that will take some time, given the complexity of the issues involved. Although the proposal reflects many elements that were included in the health care bills passed by the House and the Senate last year, it modifies many of those elements and also includes new ones. Moreover, preparing a cost estimate requires very detailed specifications of numerous provisions, and the materials that were released this morning do not provide sufficient detail on all of the provisions. Therefore, CBO cannot provide a cost estimate for the proposal without additional detail, and, even if such detail were provided, analyzing the proposal would be a time-consuming process that could not be completed this week.

Copyright 2010 AlphaNinja

Bank of America shares about to go up 10.3% !!!!!! (BAC)

SHARES that is...not price per share....

BAC shares are plummeting as I write this, down 90cents on the day or 4.56%, on news that they'll increase the authorized number of common shares to 11.3billion from 10billion...much of which will be thanks to the conversion of the government's stake into 1.28 billion new shares.

As of now there's 8.65billion shares, so the government's conversion into equity necessitates the authorization to increase total shares.

As assets crumble, the only thing ahead for banks is

-Lower equity
-Lower Return ON that Equity
-More shares outstanding to split that return among.

Copyright 2010 AlphaNinja