The Information Age: Interesting Quote
In a speech this week, UK's foreign secretary Jack Straw alluded to a report by leading Arab intellectuals living in the free world.
The report said that Hewlett Packard in one month signs as many patents as the whole Arab world has in the last twenty years.
Once again supporting the view that multi-ethnic societies based on freedom do best.
Friday, March 31, 2006
Level 3's Analyst Day: Playing Chess
As mentioned in Monday's blog, I attended Level 3's analyst meeting on Tuesday in New York. The negativity associated with the post-bubble environment is subsiding as supply and demand come back into balance. Speaking with Kevin O'Hara, Level 3's president, in the beginning of the decade, Level 3 had some 26 networks it had to compete with, now it is down to 6. So a lot of excess capacity is gone.
Another positive from the meeting was Level 3 CEO Jim Crowe's consistency regarding the company's business and its target markets. I focused on this in detail in the our September and November newsletters. Basically, the technological forces that have driven the advancement of the semiconductor and the network is now driving change in the communications industry. Regulation no longer drives network construction, but innovations does.
After five hours of speaking with management, listening to presentations and reviewing over 100 slides, there are certain points that stand out:
As mentioned in Monday's blog, I attended Level 3's analyst meeting on Tuesday in New York. The negativity associated with the post-bubble environment is subsiding as supply and demand come back into balance. Speaking with Kevin O'Hara, Level 3's president, in the beginning of the decade, Level 3 had some 26 networks it had to compete with, now it is down to 6. So a lot of excess capacity is gone.
Another positive from the meeting was Level 3 CEO Jim Crowe's consistency regarding the company's business and its target markets. I focused on this in detail in the our September and November newsletters. Basically, the technological forces that have driven the advancement of the semiconductor and the network is now driving change in the communications industry. Regulation no longer drives network construction, but innovations does.
After five hours of speaking with management, listening to presentations and reviewing over 100 slides, there are certain points that stand out:
- Level 3 is truly the only company that has built a continuously upgradeable network, meaning as new fiber technology comes to market, its conduit approach will provide it with a competitive advantage. (You have to review abovementioned newsletters to understand this.)
- The bandwidth-consumption trend continues: The movement from email to music to video is happening. If you or your child has a video ipod, you see this first hand. An interesting stat--standard television transmission uses 450x the bandwidth of an email. High definition TV will consume 3,000 x the bandwidth of an email. As per unit pricing drops for bandwidth, these newer applications can become available. Level 3 should lead this price-performance curve.
- Comcast indicates that a large percentage of its network capacity is used by bittorrent.com, a video peer-to-peer network, similar to Napster in the 1990s with music. As Napster's distribution method was found to be illegal, there will be issues about bittorrent's distribution of video, but as we see with Apple's perfectly legal success with music, these new technologies (whether legal or not) accurately forecast where the market is going. And the market is moving to higher bandwidth applications. In this case, Comcast provides access to the Internet at the local level, but uses Level 3's network for the longer haul transmission. Network providers cannot afford to build both local and long haul capacity.
- 55% of of network traffic is now peer-to-peer and 20% is streaming video or music. More support of high bandwidth consumption applications.
Technology success has been obtained by understanding the philosophical forces behind it. As with Moore's Law and Metcalfe's Law, Level 3 seems to understand this better than anyone else in the industry. It is a game of chess, can the relatively new up-start lead by Jim Crowe out maneuver the old-time baby bells. I think he will. This most likely is the very early stages of an industry recovery, even though the stock has moved up considerably the last week, this stock should be held on to for a long time.
Monday, March 27, 2006
Momentum Building With Newell Rubbermaid's Stock
After writing about NWL in last week's blog and being mentioned on thestreet.com and our newsletter, NWL was upgraded this morning by an investment firm. The momentum continues to build for this forgotten consumer staples company.
Tomorrow I will be at Level 3's analyst meeting in New York. I wrote a full newsletter on Level 3 in our November 2005 newsletter and also wrote a bunch of comments on the evolution of the internet in the September 2005 newsletter.
After writing about NWL in last week's blog and being mentioned on thestreet.com and our newsletter, NWL was upgraded this morning by an investment firm. The momentum continues to build for this forgotten consumer staples company.
Tomorrow I will be at Level 3's analyst meeting in New York. I wrote a full newsletter on Level 3 in our November 2005 newsletter and also wrote a bunch of comments on the evolution of the internet in the September 2005 newsletter.
Thursday, March 23, 2006
If You Are Looking For A New Broker (Some Friday Fun)
I found this on thecodyblog.blogspot.com while surfing the net. A little Wall Street humor.
A New Broker In Town.
I found this on thecodyblog.blogspot.com while surfing the net. A little Wall Street humor.
A New Broker In Town.
Wednesday, March 22, 2006
Meeting With Cendant
On Tuesday, March 21, Cendant held an analyst meeting with portfolio managers in New York. Cendant is a ridiculously cheap stock but its chairman is being punished by the investment community for his excessive compensation of over $100 million plus per year--if you can call making over $100 million-plus per year punishment.
In addition to Henry Silverman's excessive compensation, there are also concerns about so-called revenue synergies between the number of different businesses that Cendant owns. Many of the businesses are in similar industries and are dependent on one another in one form or another. However, even with these two concerns, Cendant is a cash flow machine.
To address these concerns, Cendant is breaking up its vast array of businesses into four groups. The breakup will occur serially during 2006. The four businesses are real estate, travel distribution, hospitality and vehicle distribution (rental cars--owns Avis and Budget).
The real estate business is a great business but has peaked in 2005 and will be on the decline for the next year or so. The travel distribution business consists of internet-related startups that are having some difficulty finding a profitable position in the marketplace and will most likely be part of a consolidation process after these businesses are independent. The hospitality is an excellent business but is most likely approaching a cyclical peak in the next twelve to eighteen months. And the final business group is the vehicle distribution business which appears to be bottoming and could be in good shape by 2007.
Cendant sells for about 7.2 x its operating cash flow, for those not in the finance business, that is pretty cheap for a company that owns such well-recognized names such as Coldwell Banker, Sotheby's, Wyndham, Ramada, Howard Johnson, Avis and Budget to name a few. It is also a cheap valuation relative to its low debt level, its growth prospects and its free cash flow generation.
Investors should not be hurt by chipping away at this stock at current levels. This stock has been dead money for a while and downside risk is most likely limited. There is the risk that a real estate slowdown could considerably hurt the operating performance of the company for a while, but the balance sheet is in great shape and from conversations with management, they have limited exposure in some speculative markets such as Las Vegas and Florida.
My approach will be to slowly chip away over time. We have plenty of investment prospects for 2006 and Cendant could turn into a much better investment idea in 2007.
On Tuesday, March 21, Cendant held an analyst meeting with portfolio managers in New York. Cendant is a ridiculously cheap stock but its chairman is being punished by the investment community for his excessive compensation of over $100 million plus per year--if you can call making over $100 million-plus per year punishment.
In addition to Henry Silverman's excessive compensation, there are also concerns about so-called revenue synergies between the number of different businesses that Cendant owns. Many of the businesses are in similar industries and are dependent on one another in one form or another. However, even with these two concerns, Cendant is a cash flow machine.
To address these concerns, Cendant is breaking up its vast array of businesses into four groups. The breakup will occur serially during 2006. The four businesses are real estate, travel distribution, hospitality and vehicle distribution (rental cars--owns Avis and Budget).
The real estate business is a great business but has peaked in 2005 and will be on the decline for the next year or so. The travel distribution business consists of internet-related startups that are having some difficulty finding a profitable position in the marketplace and will most likely be part of a consolidation process after these businesses are independent. The hospitality is an excellent business but is most likely approaching a cyclical peak in the next twelve to eighteen months. And the final business group is the vehicle distribution business which appears to be bottoming and could be in good shape by 2007.
Cendant sells for about 7.2 x its operating cash flow, for those not in the finance business, that is pretty cheap for a company that owns such well-recognized names such as Coldwell Banker, Sotheby's, Wyndham, Ramada, Howard Johnson, Avis and Budget to name a few. It is also a cheap valuation relative to its low debt level, its growth prospects and its free cash flow generation.
Investors should not be hurt by chipping away at this stock at current levels. This stock has been dead money for a while and downside risk is most likely limited. There is the risk that a real estate slowdown could considerably hurt the operating performance of the company for a while, but the balance sheet is in great shape and from conversations with management, they have limited exposure in some speculative markets such as Las Vegas and Florida.
My approach will be to slowly chip away over time. We have plenty of investment prospects for 2006 and Cendant could turn into a much better investment idea in 2007.
Thursday, March 16, 2006
The Street.com Agrees
Soon after posting today's blog on Newell Rubbermaid, I was made aware of this piece by thestreet.com
Soon after posting today's blog on Newell Rubbermaid, I was made aware of this piece by thestreet.com
Newell Rubbermaid: Quietly Coming Back To Life
Newell Rubbermaid (NWL) is coming back to life. Newell was our first newsletter idea for 2005, and as usual with most ideas that I write about, I was a year too early in forecasting their turnaround. As the chart shows, investor interest in the stock has picked up, driving it from $24 to $25.50 during the last month. In addition, CNBC mentioned earlier this week that the stock was one of the more widely accumulated stocks in 2006.
It has been a rough road for Newell Rubbermaid. Newell and Rubbermaid combined in the 1990s as the fortunes for both companies were deteriorating. Rubbermaid was the poster child for great shareholder returns and excellent management during the late 1980s and Newell was a well-respected roll-up during the 80s and 90s.
To solve the multiple problems the company had, new management was brought in in 2000 to turn it around. The company has a chock full of well-respected brand names and was a nice free cash flow generator. But Newell had too many plants spread out across the country; Rubbermaid had lost its edge at creating new products that could command a premium price and could not be easily knocked off by Asian competitors. In addition, the company got hit hard by higher natural gas prices (which drove up the cost of resin) and a strong dollar from 2000 to 2002. This led to margins contracting and little to no revenue growth.
Joe Galli ran the company from 2000 to fall of 2005. Galli did a good job at lowering costs, consolidating facilities and moving manufacturing to Asia when it made sense. He also did a good job at getting product innovation going again. If anything was accomplished under Galli's rein it was product innovation. In its meeting with analysts last fall, the company had tons of new products to bring to market.
After last fall's analyst meeting, it became apparent that the company had to do a better job at lining up its marketing dollars with fewer products and begin to drive revenue growth again. The board turned to a fellow member Mark Ketchum, a long-time executive at P&G with some good areas of success.
After a shaky conference call when first appointed interim CEO, Ketchum appears to be getting a good grasp of Newell's businesses. In addition, it appears that no major shake up is required. Most of what occurred during Galli's tenure was pretty good stuff, but now they have to get more targeted with the products they decide to bring to mass market and market them appropriately.
Newell earned about $2.50 per share early in this decade. In 2004, earnings bottomed at $1.39 per share and, in 2005, EPS equaled $1.54, so earnings are back on the upswing. Also, in 2006 the company should begin to benefit from more stable, or even possibly, lower resin costs as natural gas prices are way off their peak. And further, the company is not dealing with a blind strong US dollar policy of the 1998 to 2002 period.
All told, Newell which has been facing one brutal headwind after another may finally have the wind at its back. From all the work the company has done, they should be able to surpass the $2.50 in EPS of the earlier part of this decade. This is a stock to hold on to and let the benefits of the restructuring take hold.
Newell Rubbermaid (NWL) is coming back to life. Newell was our first newsletter idea for 2005, and as usual with most ideas that I write about, I was a year too early in forecasting their turnaround. As the chart shows, investor interest in the stock has picked up, driving it from $24 to $25.50 during the last month. In addition, CNBC mentioned earlier this week that the stock was one of the more widely accumulated stocks in 2006.
It has been a rough road for Newell Rubbermaid. Newell and Rubbermaid combined in the 1990s as the fortunes for both companies were deteriorating. Rubbermaid was the poster child for great shareholder returns and excellent management during the late 1980s and Newell was a well-respected roll-up during the 80s and 90s.
To solve the multiple problems the company had, new management was brought in in 2000 to turn it around. The company has a chock full of well-respected brand names and was a nice free cash flow generator. But Newell had too many plants spread out across the country; Rubbermaid had lost its edge at creating new products that could command a premium price and could not be easily knocked off by Asian competitors. In addition, the company got hit hard by higher natural gas prices (which drove up the cost of resin) and a strong dollar from 2000 to 2002. This led to margins contracting and little to no revenue growth.
Joe Galli ran the company from 2000 to fall of 2005. Galli did a good job at lowering costs, consolidating facilities and moving manufacturing to Asia when it made sense. He also did a good job at getting product innovation going again. If anything was accomplished under Galli's rein it was product innovation. In its meeting with analysts last fall, the company had tons of new products to bring to market.
After last fall's analyst meeting, it became apparent that the company had to do a better job at lining up its marketing dollars with fewer products and begin to drive revenue growth again. The board turned to a fellow member Mark Ketchum, a long-time executive at P&G with some good areas of success.
After a shaky conference call when first appointed interim CEO, Ketchum appears to be getting a good grasp of Newell's businesses. In addition, it appears that no major shake up is required. Most of what occurred during Galli's tenure was pretty good stuff, but now they have to get more targeted with the products they decide to bring to mass market and market them appropriately.
Newell earned about $2.50 per share early in this decade. In 2004, earnings bottomed at $1.39 per share and, in 2005, EPS equaled $1.54, so earnings are back on the upswing. Also, in 2006 the company should begin to benefit from more stable, or even possibly, lower resin costs as natural gas prices are way off their peak. And further, the company is not dealing with a blind strong US dollar policy of the 1998 to 2002 period.
All told, Newell which has been facing one brutal headwind after another may finally have the wind at its back. From all the work the company has done, they should be able to surpass the $2.50 in EPS of the earlier part of this decade. This is a stock to hold on to and let the benefits of the restructuring take hold.
Friday, March 10, 2006
Cigar Butt Investing & IDT Corp.
Cigar-butt investing came into being during the Great Depression. The thinking behind this strategy is that it is best to find something for free than to pay full price. Rather than going into a cigar shop and paying $12 bucks for an Ashton Reserve, you are much better off walking along the streets of New York, picking up a cigar butt out of the curb and taking a few puffs for free.
The same idea would be applied to investing--find a stock that was not doing well operationally but had a great balance sheet, buy it for a certain price below the value of the assets less the liabilities, and you have little risk and some nice upside potential.
Cigar-butt investing came into being during the Great Depression. The thinking behind this strategy is that it is best to find something for free than to pay full price. Rather than going into a cigar shop and paying $12 bucks for an Ashton Reserve, you are much better off walking along the streets of New York, picking up a cigar butt out of the curb and taking a few puffs for free.
The same idea would be applied to investing--find a stock that was not doing well operationally but had a great balance sheet, buy it for a certain price below the value of the assets less the liabilities, and you have little risk and some nice upside potential.
The father of cigar-butt or deep-value investing was Benjamin Graham--investor, Columbia professor and author of The Intelligent Investor, the bible of deep-value investing and security analysis. The impression that one has of people who still religiously follow the strict interpretation of Graham's work is that of a curmudgeon, cheap and misanthropic--not the type of person you want to spend much time with. You might make money, but not a lot of fun.
One stock that has come close to meeting the pure interpretation of Graham's cigar-butt definition of value is IDT Corp, a Newark, New Jersey-based telecommunications company. IDT and its Chairman, Howard Jonas, did one of the great deals of the late 1990s. By being years ahead of the curve in undestanding the transition of voice communications to IP networks, he formed Net2Phone which he sold to AT&T for over $1 billion plus (if memory serves me correctly).
Jonas' IDT group owned Net2Phone so a lot of money went on to IDT's balance sheet. For the last bunch of years, with little to no debt, IDT has traded at the value of the cash on its balance sheet. Essentially, the market is giving no value for management's ability to deploy the cash into future profitable ventures. Here comes the cigar-butt investor: "No management team could be that bad as to waste $1.0 billion bucks."
Reporting results this week, IDT is burning through cash at a nice clip. The company is run by Jim Courter, former New Jersey candidate for governor and very much wired like a politician. IDT's results support this--it runs a deficit every year. Cash has gone down from $1.0 billion to around $700 million in the most recent quarter. And the operating metrics completely collapsed during the quarter. In addition, the fixed wireless business that IDT owned and sold some parts of recently (which it attempted to dump on the public but had to pull from the market) is a financial disaster.
Also IDT is getting more into the movie production business, an industry notorious for losing money. While it seems that the company has some interesting projects coming to market in 2006, whether they can earn a profit to offset the losses in the other businesses appears unlikely.
All told, IDT has a lot of things going on, but most of them are consuming huge amounts of cash.
This is one cigar-butt stock I would stay away from. I would rather pay the premium price for the Ashton Reserve.
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