Friday, April 30, 2010

The problems with beta

In a recent note to clients, BofA analyst Savita Subrmanian made a case for a shift in stock market leadership from high-beta to low-beta stocks, based on extensive research into prior "beta rallies."

From CNBC:
"Over the last 25 years, there have been three other beta rallies like what we have seen recently," wrote Savita Subramanian, a Bank of America Merrill Lynch quantitative strategist, in a note to clients. "After each of these periods, value strategies consistently took the lead in the subsequent leg of market performance."
"The most pronounced tilt of quant funds was toward statistically inexpensive companies," wrote Subramanian, who analyzed a sample of U.S. Large Cap Quantitative Equity Funds for their holdings. "A tilt toward valuation and away from beta is currently appropriate, in our view."
I don't disagree with her analysis. I wouldn't be surprised to see cheaper, steadier, large cap value stocks outperform in the months ahead. The problem though, is what these large cap quantitative funds will own from shifting from "high" to "low" beta stocks, because beta changes. (A stock's beta is basically how much it moves in relation to the market. A stock with a beta of 1.2 will go up 1.2% for each 1% move up in the S&P 500. A stock with a beta of .8 will go up .8% on a 1% jump in the S&P500, and it works the same on the downside.) Beta changes because all it is is a backward looking measure of how a stock moves relative to the market.

I looked at two examples, Microsoft and Priceline. Back in March07, Microsoft had a beta of .99 and Priceline's was 3.15. Had you been a quantitative hedge fund and loaded up on high-beta stocks, you'd pick PCLN. Fast forward to today, and BofA's Subramanian suggest rotating out of high beta stocks and into low beta stocks. The only problem of course, is that PCLN now has a beta of .89, even lower than stodgy Microsoft! That's simply a function of its recent rise tracking the market closer than the rise in the year prior to March07:


A much larger problem with beta's is their impact on the equity cost of capital, in relation to Discounted Cash Flow Analysis. The Equity Cost of Capital is calculated as

(Beta X Equity Risk Premium)+(Risk-Free 10yr Treasury) = (.045 X 3.15)+.045 = 18.7%

So. The enormous changes in PCLN's beta cause enormous changes in the perceived value of 2011 Free Cash Flow. You did all this work to estimate that FCF, and it's now wrecked b/c of stock price movements. Even stupider: the less debt a company has, the more its stock price action affects the present value of future cash flows. It's even worse when discounting cash flows that are further away:


The Capital Asset Pricing Model is fatally flawed by its dependence on beta, and the "equity-risk" premium that boosts cost of capital by 4.5% for no other reason than it's not debt. You can spend all day telling Microsoft that their cost of capital is 8%, but in the end they'll laugh at you and go borrow in the debt markets for ten years at 4.2%...


Copyright 2010 TheAlphaNinja

Pick of the week from Jeffries


Jeffries' pick of the week rose 8% last week. This week's pick is American Electric Power(AEP), a regulated utility play that is a "collect the dividend while awaiting the recovery" story...













Goldman shares down as case goes to the justice department (GS)



Goldman Sachs (GS) shares are down about 7% today to 147.8, down about 8% from where I recommended buying them. The SEC's case has been handed off to the Justice Department, which may bring criminal charges against the firm.

Bank of America downgraded the stock to Neutral from Buy, and took their target to $160 from $220.

BofA wrote:
While the reports have not been confirmed, their publication by the WSJ and other media could lend them perceived credibility. Most such probes end inconclusively, with no charges filed; and we continue to believe that GS has long-term earnings power beyond what is discounted in the share price. However, it is very difficult to see the shares making further progress until the matter has been resolved.
GS was also downgraded by Standard & Poor's, the firm that once said they would be glad to rate securities packaged by cows.

S&P said this:
"Though traditionally difficult to prove, we think the risk of a formal securities fraud charge, on top of the SEC fraud charge and pending legislation to reshape the financial industry, further muddies Goldman's outlook."
And for perspective, here's what S&P once said about their ratings standards. From an internal text message:

S&P Official #1: Btw (by the way) that deal is ridiculous.
S&P Official #2: I know right...model def (definitely) does not capture half the risk.
S&P Official #1: We should not be rating it.
S&P Official #2: We rate every deal. It could be structured by cows and we would rate it:


It will be interesting to hear what Warren Buffet has to say about Goldman this weekend at his annual shareholders meeting. It would be refreshing for him to be candid about the role of an investment bank...which is to "pass the cake while taking a crumb"....just like every other middle-man on the face of the earth. As for mis-representing itself to clients, it's a pretty gray area. I know I've been pushed service plans on electronics without being told how massively profitable they are when they go unused. Is the justice department going to go and bring criminal charges about every residential Realtor who lied their faces off about people's ability to afford a home? Maybe Justice should investigate the senators who berated Goldman's dealing as gambling, while those same senators prey on the poorest of their constituents for lottery revenue and sin taxes on alcohol and cigarettes.

One thing is for sure - one of the bigger victims here will be the city of New York, which is heavily funded by Wall Street's largess. Goldman paid $16billion in compensation expenses last year, and those employees are taxed at a rather high rate.

Copyright 2010 TheAlphaNinja

Thursday, April 29, 2010

Ummm, can someone check my math on this Greek bailout?????



I get it, the Greek's need a lot of money.  But $14k per person?  That would be a USA bailout of $4.375 TRILLION dollars....ummm what the hell?

From CNNMoney:

NEW YORK (CNN) -- The aid package being negotiated to bail out Greece is worth 120 billion euros (about $160 billion) through 2012, according to Vassilis Papadimitriou, a spokesman for Greek Prime Minister George Papandreou.
But the International Monetary Fund and European Union are demanding further austerity measures as a price for the bailout, according to a top Greek labor union official.




Copyright 2010 TheAlphaNinja

KKR Financial comes in light on revenues (KFN)



KKR Financial Holdings reported earnings this afternoon.  Earnings are not comparable to the consensus estimate, but revenues look a bit low.


They do yield 4.4%, though I'm not sure if that's quite enough:
On April 29, 2010, the Company's board of directors declared a cash distribution for the quarter ended March 31, 2010 on the Company's common shares of $0.10 per share. The distribution is payable on May 28, 2010 to common shareholders of record as of the close of business on May 14, 2010.
A peek at their portfolio (this is as of December) shows how bad investors have been hit by the past decade's private equity binge:





Sterling Financial lives to fight another day. Kinda. (STSA)

The good news is that Sterling Financial (STSA) common stockholders will live to fight another day. The bad news is that the future earnings will be, um, "shared" by quite a few more stakeholders:


Tuesday, Sterling announced a "recapitalization and recovery plan" involving the injection of capital from Thomas H. Lee Partners, who describes themselves as "one of the oldest and most successful private equity investment firms in the United States."

Some of the details:
Under the terms of the agreement, THL would purchase shares of common stock and shares of a newly-created Series B convertible participating voting preferred stock at a price of up to $0.20 per share of common stock and $75.00 per share of Series B stock. The common stock and the Series B stock would represent a pro forma ownership interest of 16.6% on an as-converted basis. THL would also receive a warrant with a seven-year term to purchase 168,383,759 shares of common stock exercisable at a price of up to $0.22 per share, representing a total investment of 19.9%, on an as-converted basis and assuming the exercise of these warrants. Following the investment and subject to required regulatory approvals, THL Managing Director Scott Jaeckel would join the Sterling board of directors.
It's a bit complicated to get a clear picture of what is left for common stockholders. The company has repeatedly warned that very little will be left for that piece of the capital structure, so there was ample warning.

A company spokesman told me yesterday to assume that after full dilution, there will be about 3billion shares of common stock. So that at least lets us do some math.

With $10billion in total assets and a hugely optimistic future (clean of charge-offs) net interest margin of 3%, the company could earn about $300million or 10cents per share on 3billion shares. A PE of ten puts the shares at a dollar. This is a very rough way to look at it, but shows that there really is little possibility for the common stock to head much higher.

It's a crappy situation, brought on by horrendous lending and "hot-money" brokered deposits. Especially unfortunate for everyone is that management and employees could not legally take part in this transaction, and thus have no incentive through participation in a common stock recovery.

Copyright 2010 TheAlphaNinja

Dendreon spikes 6points on PROVENGE approval....(DNDN)



Shares of Dendreon (DNDN) are spiking up to $47 on reports that the FDA has approved their PROVENGE prostate cancer vaccine, which was widely expected to be approved.

There has been disagreement over what the shares could be worth. Brean Murray, to their credit, said that their peers were wrong to bail on the stock at $40, saying that "peak stock performance tends to occur early in the launch of therapeutics with high potential." They are being proved right so far, as the shares briefly hit $47 and now drift slightly lower.

The company's market cap is trading above the $5billion in expected sales within the fist couple years on the market.

Thursday Morning

Busy, busy earnings day.

The DJIA is +74 points or .67% today.  While most Dow companies are up, the "news-related" ones are not.

Procter & Gamble (PG) beat on the bottom line (net income), but the top line (revenues) came in light.  Guidance going forward is a little lighter than people were expecting, and the shares are down 2%.

HP is down 1% after announcing they would purchase PALM last night for about $1.2billion.  I really don't "get" the stock reaction, as they're paying (net of cash on PALM's balance sheet) 1/13th of their own cash for this deal.  As Kaufman put it today, HP is spending one month's cash flow to get 1,000 PALM employees, of which over a quarter are ex-Apple smarties working on PALM's WebOS system.  Among the acquired employees is CEO Jon Rubinstein, a man instrumental in making Apple what it is today.

ExxonMobil (XOM) is off half a percent today after earnings came in 4 cents below expectations and revenue missed by a cool $6billion.

Among AlphaNinja names today, Viacom is +2% on strong advertising trends despite continuing weakness in the film segment, and Safeway is down 1.5% as a weaker than expected gross margin led to a 4cent per share earnings miss.  I'll be back with more info on those two names later...


Copyright 2010 TheAlphaNinja

Wednesday, April 28, 2010

AOL's Free Cash Flow Yield has come down. Just not in the manner we'd like...(AOL)


Ugh. I generally prefer to buy at a high Free Cash Flow Yield(FCFY%) and sell when it goes lower. The preferred way (duh!) for that yield to drop is for the shares to rise. In AOL's case, that yield has fallen as I re-adjust expected Free Cash Flow downward. Fortunately, buying at a FCFY% over 30% gives us room for error, which is why w're still up 2% on this trade despite this big slip-up..

Shares of AOL - which we bought on December 8th at $23.50 - fell 15% today after reporting a surprisingly weak earnings figure. The company achieved one goal (cost-cutting) but gained another (ad sales practically "frozen" on the sales force reductions).

From the release:
“AOL continues to make progress against our long-term objective of becoming an internet growth company. Our results highlight the accomplishment of our first goal in AOL’s turnaround which was to significantly reduce AOL’s cost structure,” said Tim Armstrong, Chairman and Chief Executive Officer. “While our restructuring had an impact on Q1 advertising results, we are encouraged by the advertising market's recent strength. We are now entering the second phase of AOL’s plan which is to greatly improve the consumer experience, scale the advertising systems and teams, and aggressively pursue our strategy in the marketplace.”
Among the few decent figures from this quarter was the reduction in churn (adios) rate, to 3%:



Advertising was crushed, as the sales force is dealing with a major shakeup:


Free Cash Flow for the quarter was $125million, but was held down by continued restructuring costs. The key for us is what to expect for 2010/2011 Free Cash Flow. Along with the expected cash from AOL's sale of their ICQ instant messaging business, one could buy the company for about $2.1billion. A super-super-low estimate for Free Cash Flow would be $450million, and even then our FCFY% would be 21%. I still think Free Cash Flow will come in higher than that, so we have a yield closer to 30%.


Copyright 2010 TheAlphaNinja

Aflac stung by the horror show that is its "investment" portfolio....(AFL)

Shares of insurer Aflac (AFL) fell 5.3% today (and another 1% after hours so far..) after they disclosed on their quarterly conference call that they had about $1.75billion exposed to Greek and Portuguese banks.  Greece of course was cut to junk yesterday.

From Bloomberg:
Aflac has about $1 billion in Greek bank bonds and $750 million issued by Portuguese lenders, Chief Investment Officer Jerry Jeffery said in a conference call today. The insurer also holds about $285 million in Greek sovereign bonds, Jeffery said.     Greece is waiting on word of a 45 billion-euro ($59 billion) rescue package from the European Union and the International Monetary Fund after the nation’s credit rating was cut to junk by Standard & Poor’s yesterday. The ratings firm lowered its rating on Greece by three levels to BB+ from BBB+ and warned that investors could recover as little as 30 percent of their initial outlay if it restructures its debt.
Portugal isn't quite "there yet," but a look at credit protection costs doesn't inspire confidence...

(From CMA Datavision)

You name a problem country, and Aflac is ALL OVER IT.  You can download the entire fixed income portfolio here, but I put together some of the worst offenders in their portfolio below.  Oh and just to add insult to injury, they face a major write-down on their investment in IKB, the yield-hungry bank on the "idiot-side" of the transaction that landed Goldman Sachs in hot water:

Copyright 2010 TheAlphaNinja

The Palm saga, all over....HP to acquire them for $5.70 per share (PALM)


Just announced, HP will buy PALM for $1.2billion or $5.70 per share in cash, a premium of 23% to today's close. That amounts to one thirteenth of HP's cash balance, which was previously earning nothing.

Good move, I don't care what Palm's near-term issues are. This works out to under 7x PALM's annual investment in R&D. The operating system is the valuable piece here, and with HP's heft they might have more of an ability to get the in-store training required to sell PALM's devices..



“Palm’s innovative operating system provides an ideal platform to expand HP’s mobility strategy and create a unique HP experience spanning multiple mobile connected devices,” said Todd Bradley, executive vice president, Personal Systems Group, HP. “And, Palm possesses significant IP assets and has a highly skilled team. The smartphone market is large, profitable and rapidly growing, and companies that can provide an integrated device and experience command a higher share. Advances in mobility are offering significant opportunities, and HP intends to be a leader in this market.”
“We’re thrilled by HP’s vote of confidence in Palm’s technological leadership, which delivered Palm webOS and iconic products such as the Palm Pre. HP’s longstanding culture of innovation, scale and global operating resources make it the perfect partner to rapidly accelerate the growth of webOS,” said Jon Rubinstein, chairman and chief executive officer, Palm. “We look forward to working with HP to continue to deliver industry-leading mobile experiences to our customers and business partners.”
Copyright 2010 TheAlphaNinja




FOMC: No rate change

And the market loves it, up 40 points on the news. And more importantly, no language change. The "exceptionally low" phrase remains, as the government provides more free money...Hoenig continues to be the lone dissenter.


For immediate release

Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.


Copyright 2010 TheAlphaNinja


In light of IBM's big dividend boost...


...Some good insight on dividends. Keep in mind that if you're looking for the DJIA to return 7% per year, you get over a third of that just from the dividend yield....













Michael Lewis says "JUMP", the SEC says "how high?" (GS)



Now it's clear. You can tell what the SEC is up to, based upon how far into Michael Lewis' book "The Big Short" they are.

Goldman Sachs? Check. They're a big piece of Lewis' book, along with Deutsche bank, for their role in the securitization process. They are now the subject of a ridiculous (ridiculous in how LAZY it is) lawsuit alleging that a major institutional investor that calls itself a "a leading investor in CDOs" was duped by those evil folks at Goldman Sachs.

Smaller, but a major character in the book, is Michael Burry, a (former) hedge fund manager in San Jose, California. He had amassed a portfolio of credit default swaps(CDS) that would pay off once the mortgage market cratered, and the true value of what he owned was recognized (insurance against that fall). Problem was, his investors had had enough, and wanted their money back. Burry was able to defy his investors - to their own benefit, as his bet worked out and the fund made well over 100% - by putting his CDS in a "side pocket." That meant that he deemed there was no market for selling them, so he would put them off to the side until a market developed. Legally, he was on thin ice, as there were offers for these CDS, just not offers that reflected what they were worth.

So it seems the SEC has gotten about two thirds of the way through Lewis' book, judging by the news that they are now conducting an investigation into "side pockets." I'm not saying they're unworthy of scrutiny, but just keep in mind that the SEC's method of investigation is to sit around watching porn, until the whole financial world blows up and they can retroactively waste everyone's time.

Golly, you wonder what Lewis will write about next that the SEC would chase. Maybe a book about the Gramm-Leach-Bliley Act signed in November 1999, which allowed commercial banks that take deposits and loan against homes to basically turn themselves into investment banks. Carl Levin, the belligerent-without-a-clue Senator, signed that one, and still had the gall to ask Goldman execs why they caused the housing meltdown.

From the WSJ:

Federal regulators are examining whether hedge-fund managers abused tools known as "side pockets" that helped prevent clients from withdrawing billions of dollars of assets during the financial crisis.

The issue is one of several investigative priorities recently set by a newly organized Securities and Exchange Commission enforcement unit focused on ferreting out misbehavior by private-equity funds, hedge funds and other asset managers.

The group, run by co-chiefs Rob Kaplan and Bruce Karpati, held its first full staff meeting this week. Some 60 attorneys are assigned to the unit across nine offices, said people familiar with the matter.
Copyright 2010 TheAlphaNinja

Tuesday, April 27, 2010

As Greece is cut to junk, they must envy California....



...Because while Greece will simply flounder, California can not only drag down other states with it, but lecture them about how progressive CA is while doing so.  Standard and Poor's (the credit ratings agency that previously said they would happily rate products put together by cows) downgraded Greek debt to junk status today.


From Bloomberg:

Greece had its long-term grade cut three levels to BB+ with a negative outlook by S&P, which forecast investors would be paid no more than half their initial outlay in the event of any debt restructuring. Portugal had its rating lowered two steps to A-, also with a negative outlook which signals S&P is more likely to downgrade the nation in the future.
“S&P have made a large move here,” said Peter Chatwell, a fixed-income strategist at Calyon in London. “It has a wide- ranging impact on the corporate world too, with downgrades of Greek and Portuguese banks probably being priced in.”
One person who should take note ( he won't) is California Treasurer Bill Lockyer.  This man and the Greek PM have more in common than people might realize, including blaming others for their problems.  Both attack the CDS market, without grasping that without it no one would buy their bonds.  Both also have workforces with entirely unsustainable benefits baked in, including wildly loose definitions of "dangerous jobs" deserved of higher benefits...

Copyright 2010 AlphaNinja

As investors watch the Goldman spectacle, IBM quietly blasts its dividend 18% higher (IBM)

Accounting for 9% of the DJIA, IBM's board just boosted their quarterly dividend 18%, from 55cents to 65cents per quarter. Unfortunately, they're also authorizing $8billion in additional funds for stock buybacks. I'd much rather they plow money into high ROI projects, rather than buy their stock.

From the release:

MILWAUKEE, Wis. - 27 Apr 2010: The IBM (NYSE: IBM) board of directors today declared a regular quarterly cash dividend of $0.65 per common share, payable June 10, 2010 to stockholders of record May 10, 2010.
Today’s dividend declaration represents an increase of $0.10, or 18 percent higher than the prior quarterly dividend of $0.55 per common share.
IBM has increased its quarterly dividend over 330 percent since 2003. This is the 15thyear in a row that IBM has increased its quarterly cash dividend, and 7th year in a row of double-digit percent increases.
A look below at IBM's increased dividends - and especially at the increased expectations for 2010 earnings over the past year - help explain the rise in the DJIA over the same period.
Copyright 2010 AlphaNinja

As the Goldman "hearing" begins, a frame of reference


The SEC investigation into Goldman continues, but Carl Levin is bringing in Goldman CEO Blankfein and "rogue" trader Fabrice Tourre

"Today we will explore the role of investment banks in the crisis," said Levin a minute ago.  He is reading off a tirade against Goldman, apparently for the sin of trading for a profit.  This will be a "teachable moment" for those in the chattering class who seek to "ban" trading amongst adults in securities they both understand and consider themselves to be experts in.

This country's "housing as a universal right" mantra has been in motion for a long, long time, and Goldman is no more responsible than is a stupid 26year old borrowing from his parents and the taxpayer to put down 3.5% on a home 7times his income.

For background, here's the NYTimes talking about how to "aid mortgage lending" back in 1999:


Fannie Mae Eases Credit To Aid Mortgage Lending
WASHINGTON, Sept. 29— In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Copyright 2010 AlphaNinja

No buyout yet, but Lexmark up 3% on earnings. We'll take it...(LXK)

Shares of PC printer-maker Lexmark International (LXK) are up about 4% this morning, after they knocked the socks off earnings estimates. My prediction that they will be acquired hasn't borne out yet, but we're making money along the way, up 31% versus the 14% rise in the S&P500.

TheAlphaNinja readers own this stock b/c it would make a fabulous acquisition for larger cap tech firms whose cash is earning nothing in money market accounts. From February 8th:
In an increasingly commodity-like business, Lexmark is shifting its revenue mix upstream, to target small and medium sized businesses. Instead of being the Canon and Xerox giants with higher price points and looking nervously below you, Lexmark is attacking from the low end, driving market share increases with competitive pricing and excellent customer satisfaction. In some ways, their attack on the small business segment is like people trading down to store brands in the supermarket - cheaper product, but nearly equal quality.
As for a potential deal, it is a BARGAIN for an acquirer. Below are my estimates for 2010 and 2011. In a buyout scenario, I pull out a bit from operating expenditures, but not nearly as much as could be extracted. I am conservative on my Free Cash Flow estimates, pulling out working capital boosts from operating cash flow. I'm also likely conservative on my hefty estimates for "other expenses."
LXK's enormous cash position - $1.1billion in cash and securities, or $14 per share, is a major part of why the deal is a bargain. Some of it is in non-US bank accounts, so would be subject to confiscatory taxes once repatriated. I net it out of the purchase price (below) when calculating the potential buyer's return.
These shares are a great deal with or without a buyout. I purchased shares earlier today, and I suggest you buy some tomorrow morning.



Today's earnings beat came largely on the heels of gross margin, which came in at 36.9%, a full 1.6% above last year. Like other firms, tight inventory planning allowed for nice margins once sales returned:



Lexmark is taking up guidance for next quarter by about 20cents. I've boosted full-year estimates to about $3.85 per share in earnings, and that will prove conservative, partly based on the (above) continued low inventory planning. The stock nearly DOUBLES from here if they hit that earnings figure and trade at a trailing P/E of 16, plus cash per share (yes, discounted for repatriating it from abroad). On a Free Cash Flow Yield(FCFY%) basis, they're in the mid-teens. I'm still happy to continue to own shares of the standalone company, but I think there's a better chance that they get snapped up by someone larger.


Copyright 2010 AlphaNinja

Monday, April 26, 2010

Cliff Asness on the audacity of the government's anti-Goldman crusade...

It's pretty remarkable when you think about it.  A government that encourages poor people to buy lottery tickets is outraged - outraged! - that sophisticated investors are trading amongst themselves without the government getting more of that loot....

Cliff Asness, "Keep the Casino's Open":

By the way, and for the record, government loves betting, it just doesn’t love free people betting amongst themselves without government wetting its beak. Government loves Powerball. Government loves OTB. Government loves legalized casinos that pay big taxes. So please, don’t tell me it’s a moral thing about gambling, or about government protecting us from ourselves. It’s a power and revenue thing where the government wants it all.
 For fun, let’s talk about Powerball some more. Government monopolizes and promotes about the most regressive scheme in history (let's make a giant number of poor people a little poorer to make one poor person super-rich) and this causes them no shame whatsoever. But, at least after selecting each Powerball winner the government has one new "fat cat not doing his fair share" to demonize.

Keep the Casinos Open

The Dow is up 70%, and its dividend yield has fallen just 40%... (DIA)

No one is as confounded by this 13month rally as the perma-bears.  Over the course of the last two years, it seems that the "lazy baton" was handed from the buyers to the sellers.  They just cannot grasp how the market can run so far, so fast, in the face of so may terrible indicators.  I continually  make the point that just as the bulls weren't doing their homework in 2006-2007, the bears have stayed wedded to their doomsday predictions, despite facts on the ground changing.

Despite a 70% run for the DJIA off its March 09 lows, the dividend yield has only fallen from 4.1% to 2.5%, thanks to a shift in the index weights and increased payouts.  As the index has run, so too have the earnings estimates (and actual 09 results) upon which it is valued.  A year ago, Intel was expected to earn 79cents in 2010...now they're expecting $1.68 per share.  IBM earned more in 2009 that Wall Street expected them to earn in 2010, and that stock trades for a low teens PE and a 9-ish Free Cash Flow Yield.


As for cost of capital, most DJIA companies can access funds for about 4.5% for 10 year debt.  For many of these companies (CSCO, IBM, MSFT, the oil majors), the true cost of capital is even less, as their balance sheets enable them to borrow short(er) term for under 2%.  For these reasons, the DJIA does not need to yield 8-10% in Free Cash Flow Yield, but probably closer to 6-7%.

 Copyright 2010 AlphaNinja

Whirlpool beats big, raises full year guidance for earnings and Free Cash Flow (WHR)


Appliance-maker Whirlpool beat the stuffing out of earnings estimates for the first quarter, as EPS came in at $2.13 per share versus the $1.33 Wall Street had expected.  Of seven published estimates, the highest was 1.57.

Like many other earnings beats, Whirpool's conservative inventory stance set the stage for high operating leverage:


From today's release:
"We are pleased with the strong operational performance we reported in all of our regions," said Jeff M. Fettig, chairman and chief executive officer of Whirlpool Corporation.  "In addition, we are encouraged with the 18 percent increase in our global unit volumes during the quarter.  Our results reflect our lower breakeven point, continued innovation investment, and our expanding global product offerings.  By continuing to drive productivity improvements and leveraging our lower breakeven point, we are able to expand our operating margins and accelerate profitable growth."
For the full year, Whirlpool is increasing EPS guidance to about 8.25 per share, versus the street's consensus at 7.08.  Net of $15 in balance sheet cash, that makes for a PE of just over 10x this years results.

Geographically, Whirpool looks to have LOTS of upside.  Asia and Latin America make up 29% of sales, and  grew over 40% in the recent quarter.  Management's earnings guidance might prove to be conservative, judging by the full year estimates they're using for emerging economies, compared to their growth in q1.

The company increased full year Free Cash Flow guidance to about $550million, up about $100million from its previous estimate.  If the company hits the higher-end of their target, then Free Cash Flow Yield (net of $1.2billion in balance sheet cash) would be 9.3%, nice and juicy compared to their 5.5% cost of 5-year debt...
Copyright 2010 AlphaNinja

Sunday, April 25, 2010

Hertz to buy Dollar Thrifty, with (partly) Dollar Thrifty's own cash! (DTG, HTZ)


(Sunday 10:37pm PST) Car rental giant Hertz (HTZ) announced that they will acquire Dollar Thrifty (DTG) for $41 per share in cash, for a "a 19% premium to the 30-day average closing price of Dollar Thrifty's common stock."

Oh how nice. Dollar Thrifty shareholder might point out that the offer is only a 6% premium from last Friday's close, but hey! - that doesn't sound as respectable in a press release.

Dollar Thrifty President and CEO Scott Thompson kept it short and sweet:
Scott L. Thompson, Dollar Thrifty's President and Chief Executive Officer, said, "The combination of Dollar Thrifty with a larger company like Hertz will provide Dollar Thrifty with greater resources and the technology needed to expand our value focused leisure brands. We see the combination of our brands with Hertz's brands as very compelling."
I'd keep my words to a minimum too, had I just agreed to a deal to sell my company, funded in part with $200million of my own shareholders' cash:

From the release:
Under the terms of the definitive agreement, the $41.00 per share purchase price is comprised of 80% cash consideration and 20% stock consideration. The cash portion will be paid in two components; (1) a $200 million special cash dividend representing approximately $6.88 per share, to be paid by Dollar Thrifty immediately prior to the transaction closing and (2) $25.92 per share to be paid by Hertz at the closing. The stock is at a fixed exchange ratio of 0.6366 per share, based upon a Hertz common stock closing price of $12.88 per share on April 23, 2010. The $41.00 per share purchase price represents approximately a 19% premium to the 30-day average closing price of Dollar Thrifty's common stock.


On the positive side, the stock portion of this deal might increase the offer slightly when trading opens tomorrow. Given the shrewd pilfering of Dollar Thrifty's balance sheet, Hertz shares might get a warm reception...


Copyright 2010 AlphaNinja

Weekend reading



Always insightful, Jeremy Grantham's quarterly outlook can also make you $$$$$.

Friday, April 23, 2010

Prayers for Bret Michaels




Bret Michaels was rushed to the hospital late Thursday night after suffering a massive hemorrhage near his brain stem, this according to People.com.

Michaels is reportedly in critical condition at an undisclosed hospital. According to the report, Michaels was suffering from excruciating headaches earlier in the day.

According to the report, Michaels underwent several tests -- including CAT Scans and
MRIs.

The report claims it was determined Michaels suffered from a "subarachnoid hemorrhage" -- bleeding at the base of his brain stem.

Earlier this month, Michaels was rushed to the hospital after experiencing stomach pains -- he ended up having his appendix removed.