US Treasury Secretary Seriously Messes Up
Blaming Friday's mini crash on the 20th anniversary of the 1987 stock market collapse and a few earnings misses is not even close to being on target.
The blame for Friday's collapse can be squarely placed on the shoulders of US Treasury Secretary Hank Paulson. Paulson hosted his G-7 contemporaries last week in Washington to discuss exchange rates and other policies, however, while publicly stating the US supports a strong dollar, there did not appear to be much conviction behind his statements. Word has it, the US did little to support a reversal in the weak dollar--particularly against the euro--and this left the other treasury secretaries not very happy. Rather than direct their statements of rejection at the US, they chose to blame China instead with further calls for yuan appreciation. As the news leaked out, the US market began to tank.
Paulson's move not to support a reversal of the US dollar against the euro follows the formation of the SIV fund to provide financial support for off-balance sheet debt held by the major money-center banks. SIVs are not very different from what Enron did and in certain ways is worse since these institutions have decades of experience at knowing what is and what is not on- or off-balance sheet financing. Paulson still has not clearly detailed the reasoning behind the move.
Mr. Paulson also had few good things to say about housing this week. While many of the seeds for the housing collapse were put in place prior to his tenure at the Treasury, why he felt the need to remind the markets of what it already knows, leaves one to ponder. Paulson was pretty much stating the obvious.
Friday's stock market mini-crash should be called Paulson's Crash. He is bailing out his pals on Wall Street with the SIVs fund and he will not help the Europeans get out of their difficult position of too strong of a currency who now have decided to turn their blame for the US' incompetence to China. Forcing appreciation of the yuan when Chinese officials are working very hard to slowdown their economy and stop their run away stock market is a recipe for disaster and unfair for the Chinese. As the yuan appreciates, this will only bring more money into China and drive an overly inflated stock market even higher.
Paulson falls into a long line of Bush Administration appointees who are charismatic, are excellent at articulating a thought and are willing to express their views to the world. However, there is only one problem--whether it is Cheney, Rumsfeld, Wolfowitz or Paulson--it is that they are always wrong.
Unlike Rubin and Corzine, former Goldman Sachs partners who have demonstrated some serious success after leaving the investment firm, it looks like Paulson is not following the same path.
Sunday, October 21, 2007
Monday, October 15, 2007
Fox Business Channel
Tarzan Meets Bambi
Fox Business Channel, in its long-awaited debut, launched its new post-trading show called Happy Hour.
For those who missed the show, it is set in a New York bar and hosted by Cody Willard, a Wall Street investor with a Johnny Weissmuller haircut but without the physique, and Bambi, a well-endowed actress on loan from a small San Fernando Valley film company. When asked why she took the Fox anchor position, Bambi responded: "It was the first job offer I ever got that did not require taking an AIDS test."
This blogger has since learned that John Holmes and Tracy Lords will be hosting tomorrow's show.
Soon after the launching of the show, it was said that the ground above long-time Wall Street Journal editor Robert Bartlett moved as he was rolling over in his grave. This blogger was also informed from a well-connected source at Craigslist that the job-placement website got a record number of hits as jounalists for the Journal sought to find new employment following the shows' debute.
A lawyer, who negotiated the terms and conditions of Rupert Murdoch's acquisiton of Dow Jones, said the parties negotiated every possible detail ensuring the editorial integrity of the Journal. Even prohibiting the global-media magnate from posting a Page 3 Girl in the 100-plus-year-old business paper.
However, it has since been learned that Murdoch found an out in the contract that will allow him to post the Page 3 Girl on the cover of the newspaper. It is our understanding that the first girl to grace the cover of the Journal will be Bambi, the host of today's Happy Hour. And on her breast will be written: "Fox: America's Business Channel." And yes, her endowment is such that it will be able to display the entire slogan.
As a final note, the Tarzan & Bambi hour followed an interview with Alan Greenspan.
Fox Business Channel, in its long-awaited debut, launched its new post-trading show called Happy Hour.
For those who missed the show, it is set in a New York bar and hosted by Cody Willard, a Wall Street investor with a Johnny Weissmuller haircut but without the physique, and Bambi, a well-endowed actress on loan from a small San Fernando Valley film company. When asked why she took the Fox anchor position, Bambi responded: "It was the first job offer I ever got that did not require taking an AIDS test."
This blogger has since learned that John Holmes and Tracy Lords will be hosting tomorrow's show.
Soon after the launching of the show, it was said that the ground above long-time Wall Street Journal editor Robert Bartlett moved as he was rolling over in his grave. This blogger was also informed from a well-connected source at Craigslist that the job-placement website got a record number of hits as jounalists for the Journal sought to find new employment following the shows' debute.
A lawyer, who negotiated the terms and conditions of Rupert Murdoch's acquisiton of Dow Jones, said the parties negotiated every possible detail ensuring the editorial integrity of the Journal. Even prohibiting the global-media magnate from posting a Page 3 Girl in the 100-plus-year-old business paper.
However, it has since been learned that Murdoch found an out in the contract that will allow him to post the Page 3 Girl on the cover of the newspaper. It is our understanding that the first girl to grace the cover of the Journal will be Bambi, the host of today's Happy Hour. And on her breast will be written: "Fox: America's Business Channel." And yes, her endowment is such that it will be able to display the entire slogan.
As a final note, the Tarzan & Bambi hour followed an interview with Alan Greenspan.
Sunday, October 14, 2007
Corporate Credit Crunch
Saving The Economy or Saving Their Ass?
US banks are going to set up an $80 billion fund to limit the credit crunch, Reuters reports. The fund will buy ailing mortgage securities and other assets in a bid to prevent the credit crunch from further hurting the global economy, anonymous sources said who were too embarrassed to disclose their identity for the newswire's story.
How noble for these titans of industry to perform such a task for the masses.
The source neglected to say that it was the lack of controls and self-discipline of management at these money-center banks that created the crunch in the first place. Enticed by huge bonuses, there was little concern for the well being of the US economy when no-money-down mortgages and leveraging transactions at 8x EBITDA were being committed to ad-infinitum.
The Reuters report goes on to say representatives from the U.S. Treasury have organized conversations among top global banks, as financial institutions grow increasingly concerned that a certain type of investment fund linked to banks may have to dump billions of dollars of repackaged loans onto financial markets. The reason why Treasury officials have to speak to global banks is due to the outstanding job US bankers did selling this junk to investors from around the world.
Further, US bankers are saying that a fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets. No kidding! That is what is supposed to happen after you make bad loans.
This news report shows that the depth and duration of this debt problem is coming home to roost. The credit evaluation process for many of these loans has moved away from the investment banking departments to the CFO's department at many of the major money-center banks.
A month ago bankers were claiming it would take three to six months to work through the $300 billion pipeline of private equity transactions. But, after having some success with financing the First Data transaction, it is not going so well for the other deals. Banks have to write the checks for the commitments they have made with limited interest by lenders to scoop up the debt in other transactions. Supposedly, private transactions are being negotiated to place this debt with big discounts being suggested--meaning the writedowns that big money-center banks took in this recent quarter will continue in upcoming quarters.
The bankers' plea to suggest that they are attempting to help the US economy by setting up this fund is pure hogwash. The fact of the matter is that regulators and CFOs are now running the show. And they are concluding that these masters-of-universe investment bankers did some real dumb things and have a big hole to climb out of.
US banks are going to set up an $80 billion fund to limit the credit crunch, Reuters reports. The fund will buy ailing mortgage securities and other assets in a bid to prevent the credit crunch from further hurting the global economy, anonymous sources said who were too embarrassed to disclose their identity for the newswire's story.
How noble for these titans of industry to perform such a task for the masses.
The source neglected to say that it was the lack of controls and self-discipline of management at these money-center banks that created the crunch in the first place. Enticed by huge bonuses, there was little concern for the well being of the US economy when no-money-down mortgages and leveraging transactions at 8x EBITDA were being committed to ad-infinitum.
The Reuters report goes on to say representatives from the U.S. Treasury have organized conversations among top global banks, as financial institutions grow increasingly concerned that a certain type of investment fund linked to banks may have to dump billions of dollars of repackaged loans onto financial markets. The reason why Treasury officials have to speak to global banks is due to the outstanding job US bankers did selling this junk to investors from around the world.
Further, US bankers are saying that a fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets. No kidding! That is what is supposed to happen after you make bad loans.
This news report shows that the depth and duration of this debt problem is coming home to roost. The credit evaluation process for many of these loans has moved away from the investment banking departments to the CFO's department at many of the major money-center banks.
A month ago bankers were claiming it would take three to six months to work through the $300 billion pipeline of private equity transactions. But, after having some success with financing the First Data transaction, it is not going so well for the other deals. Banks have to write the checks for the commitments they have made with limited interest by lenders to scoop up the debt in other transactions. Supposedly, private transactions are being negotiated to place this debt with big discounts being suggested--meaning the writedowns that big money-center banks took in this recent quarter will continue in upcoming quarters.
The bankers' plea to suggest that they are attempting to help the US economy by setting up this fund is pure hogwash. The fact of the matter is that regulators and CFOs are now running the show. And they are concluding that these masters-of-universe investment bankers did some real dumb things and have a big hole to climb out of.
Saturday, October 13, 2007
The U.S. Dollar
Negative Sentiment of the Dollar Continues To Build
Gold, the Canadian dollar, the euro and the lowering of short-term interest rates does not bode well for the U.S. dollar. Or at least that is what conventional wisdom is saying. You will be hard pressed to find a financial TV show or publication saying anything positive about the greenback these days.
Arguments are a plenty: the dollar is weak because the Fed added to much liquidity to U.S. economy in 2001 and 2002, the dollar is weak because of our huge trade and budget deficits, the dollar is weak because we are a people who are undisciplined and cannot save. The arguments go on and on. Someone in Barron's actually wrote that the dollar is weak because inflation is high. Outside of housing there does not seem to be a lot of price deflation, but taking the leap to suggest inflation is pervasive enough to cause the dollar to weaken is somewhat of a stretch.
As we have blogged a few times this past month, the U.S. dollar is weak because currency traders have a trend-is-your-friend mentality. They will lever up and follow that trend until they get spanked by central banks. Currency reversals are driven by Treasury secretaries working with central bankers to change the direction of a currency. Expect that to soon happen particularly with the U.S. dollar reversing against the euro. The seeds are already being sown to spank those currency traders good and to drive the U.S. dollar higher. The U.S. economy remains the place to be and the global leader in new business creation. Do not sell the dollar short, go long the greenback.
Gold, the Canadian dollar, the euro and the lowering of short-term interest rates does not bode well for the U.S. dollar. Or at least that is what conventional wisdom is saying. You will be hard pressed to find a financial TV show or publication saying anything positive about the greenback these days.
Arguments are a plenty: the dollar is weak because the Fed added to much liquidity to U.S. economy in 2001 and 2002, the dollar is weak because of our huge trade and budget deficits, the dollar is weak because we are a people who are undisciplined and cannot save. The arguments go on and on. Someone in Barron's actually wrote that the dollar is weak because inflation is high. Outside of housing there does not seem to be a lot of price deflation, but taking the leap to suggest inflation is pervasive enough to cause the dollar to weaken is somewhat of a stretch.
As we have blogged a few times this past month, the U.S. dollar is weak because currency traders have a trend-is-your-friend mentality. They will lever up and follow that trend until they get spanked by central banks. Currency reversals are driven by Treasury secretaries working with central bankers to change the direction of a currency. Expect that to soon happen particularly with the U.S. dollar reversing against the euro. The seeds are already being sown to spank those currency traders good and to drive the U.S. dollar higher. The U.S. economy remains the place to be and the global leader in new business creation. Do not sell the dollar short, go long the greenback.
Financial Stocks
Is It Time To Jump Into Financial Stocks?
Historically, when the Fed has started cutting rates, investing in financial stocks has proven profitable for investors. Will the same hold true in today's easing cycle? Probably not.
The Bear Stearns (BSC) model for its mortgage business might point to problems ahead for the financial industry in general. The financial services industry has done an outstanding job during the past twenty years developing new products and marketing them to institutions who specialize in buying these new instruments -- primarily hedge funds. With mortgage hedge funds, publicly traded vehicles such as mortgage REITs and other investors now shutting their doors to these products, who gets stuck with them? You guessed it! The investment firms and large commercial banks.
Now let's go to $300 billion of private equity debt that needs to be placed. Who is buying that up? While some institutions are, much of it is staying on the books of the investment firms and banks. Will funds be formed to invest in this debt? Yes, but it will take time.
Also, a point worth noting is that much of the debt for private equity deals is in the form of leveraged loans -- meaning floating rate debt. If a series of events unfold where these interest rates have to be set higher, many companies that have gone private will have a tough time making their interest payments. Not too different than what is currently happening to homebuyers who purchased homes with adjustable rate mortgages.
Further, as the Fed starts priming the pump to keep the economy going, the liquidity will not flow into the sector that just went bust. Following the tech and telecom bubble of the late 1990s, when the Fed dropped rates, money went into real estate, not back into tech and telecom. As this current easing cycle unfolds, money is unlikely to flow back into the mortgage market and PE deals.
While the investment firms and commercial banks are not going bust like many did in the earlier 1980s and early 1990s, they will have trouble growing earnings for the next few years. Also, it appears the Fed's easing cycle may not create the steep yield curve for financial firms to make easy money. All totaled, earnings growth in the financial sector will be hard to come by during the next few years and the stocks' performance will mirror the companies' inconsistent earnings performance.
Historically, when the Fed has started cutting rates, investing in financial stocks has proven profitable for investors. Will the same hold true in today's easing cycle? Probably not.
The Bear Stearns (BSC) model for its mortgage business might point to problems ahead for the financial industry in general. The financial services industry has done an outstanding job during the past twenty years developing new products and marketing them to institutions who specialize in buying these new instruments -- primarily hedge funds. With mortgage hedge funds, publicly traded vehicles such as mortgage REITs and other investors now shutting their doors to these products, who gets stuck with them? You guessed it! The investment firms and large commercial banks.
Now let's go to $300 billion of private equity debt that needs to be placed. Who is buying that up? While some institutions are, much of it is staying on the books of the investment firms and banks. Will funds be formed to invest in this debt? Yes, but it will take time.
Also, a point worth noting is that much of the debt for private equity deals is in the form of leveraged loans -- meaning floating rate debt. If a series of events unfold where these interest rates have to be set higher, many companies that have gone private will have a tough time making their interest payments. Not too different than what is currently happening to homebuyers who purchased homes with adjustable rate mortgages.
Further, as the Fed starts priming the pump to keep the economy going, the liquidity will not flow into the sector that just went bust. Following the tech and telecom bubble of the late 1990s, when the Fed dropped rates, money went into real estate, not back into tech and telecom. As this current easing cycle unfolds, money is unlikely to flow back into the mortgage market and PE deals.
While the investment firms and commercial banks are not going bust like many did in the earlier 1980s and early 1990s, they will have trouble growing earnings for the next few years. Also, it appears the Fed's easing cycle may not create the steep yield curve for financial firms to make easy money. All totaled, earnings growth in the financial sector will be hard to come by during the next few years and the stocks' performance will mirror the companies' inconsistent earnings performance.
Friday, October 12, 2007
AT&T and Verizon
Don't Forget About The Large Telcos
While investors are focusing on the ensuing battle between AT&T (T) and the big cable companies over providing voice, video and data to the home, many might need to be reminded that the telco giants have a massive enterprise business that is ripe to benefit from improved pricing.
Remember there are few companies that can provide high-level enterprise service on a nationwide basis -- AT&T and Verizon Communications (VZ) are pretty much it. You would be hard pressed to name another.
Qwest Communications (Q) has not said much about what it wants to do with its fiber network and although Level 3 Communications (LVLT) is picking up its business, it will not be enough to threaten the positions of the two behemoths.AT&T and Verizon's stock performance, while doing well recently, has been held back by investors wondering where the revenue growth is.
Now it appears that growth might be ready to return. Jim Crowe, Level 3's CEO, said a few months back that one issue the industry no longer has is pricing, a big change from a few years ago.Verizon and AT&T have been written about more positively over the past few days, as Bear Stearns and Citigroup are both recommending the stocks. Sometimes the best stocks are in the most obvious places. AT&T and Verizon are two large companies that are worth looking at again.
While investors are focusing on the ensuing battle between AT&T (T) and the big cable companies over providing voice, video and data to the home, many might need to be reminded that the telco giants have a massive enterprise business that is ripe to benefit from improved pricing.
Remember there are few companies that can provide high-level enterprise service on a nationwide basis -- AT&T and Verizon Communications (VZ) are pretty much it. You would be hard pressed to name another.
Qwest Communications (Q) has not said much about what it wants to do with its fiber network and although Level 3 Communications (LVLT) is picking up its business, it will not be enough to threaten the positions of the two behemoths.AT&T and Verizon's stock performance, while doing well recently, has been held back by investors wondering where the revenue growth is.
Now it appears that growth might be ready to return. Jim Crowe, Level 3's CEO, said a few months back that one issue the industry no longer has is pricing, a big change from a few years ago.Verizon and AT&T have been written about more positively over the past few days, as Bear Stearns and Citigroup are both recommending the stocks. Sometimes the best stocks are in the most obvious places. AT&T and Verizon are two large companies that are worth looking at again.
Saturday, February 24, 2007
Newmont Mining
Gold Up Big: Stay With Newmont Mining
Yesterday, gold was up over $23 in trading, hitting a seven month high. A CPI report of 2.7% helped send gold flying.
The concern is that with energy and home prices having declined since the spring of 2006, that the CPI would be close to zero or even negative by now. Yesterday's data show there is still plenty of liquidity in the economy to keep it going and rate decreases are going to be pushed out for a while. The possibility of an increase or two exists if growth ticks up a bit too much.
We blogged in October about the merits of investing in Newmont Mining (NEM). Our rationale was the huge correction in its stock price and the discount it sold for relative to the value of its gold reserves. The value of its gold reserves are estimated to be 20% to 50% higher than its stock price.
Newmont reports earnings today, not that it really matters since it trades relative to the price of gold price. But it would be worth a listen.
There are a number of factors which favor the outlook for gold. Most countries have floating currencies or have their currencies backed by floating currencies. Central banking mistakes will lead to higher levels of inflation--and we know that central banks will make mistakes.
Newmont is a good hedge in a world of floating currencies and awash with cash.
Whole Foods
Holy Clarity
This Fly has never read an earnings release from Whole Foods Market (WFMI) prior to last night. I recommend those who have read plenty of them to read this one. The clarity and transparency is refreshing.
In particular is the table which breaks down the age of stores, their comp growth rate and the return on invested capital. For example, for stores open for 11 years, Whole Foods stores show a same-store-sales growth rate of 3.8%, which is pretty good for a store open that long.
More impressive, however, is the ROIC for stores open eleven years is 77%.
Whole Foods' stock peaked at $78 in December 2005. It is now around $46, a big correction. Despite increased competition in the organic food space, Whole Foods has built a powerful brand name. In addition, its acquisition of Wild Oats is not a bad idea. Wild Oats has been restructuring the past few years and should not require too much work to integrate these stores.
It is time to do more work on Whole Foods. This looks like a good growth stock selling at a low valuation.
Hewlett-Packard
Hewlett-Packard may Pull Back
Cost discipline and revenue growth go hand in hand, said CEO Mark Hurd during Hewlett-Packard's (HPQ) conference call last night. HP emphasized its unit volume growth for the quarter.
* Notebook units up 57%; 40% revenue growth
* Printer hardware units up 18%; revenue up 7%
* Personal system group, in total, was up 19% in units, with revenue up 17%
HP was able to gain market share gains while improving margins. The margin improvement in such a competitive market was impressive, as GAAP operating margin increased to 7.3% up from 6.6%.
However, the balance sheet and cash flow statement metrics showed signs which historically preceded difficult times for the PC business. Guidance was a bit weak and inventory has jumped up. In addition, there was concern about the apples to apples comparisons of gross margin due to the Mercury acquisition. In addition, there was some concern about sources and uses of cash. Particularly about $1.48 billion cash outflow for rebates and other uses--also a signal of a weakening PC business.
HP is a stock you do not have to rush into. There are warning signs that this stock might run into a couple of quarters of weak results. Stay on the sidelines for now.
Home Depot
Home Depot Holds Up Despite Awful Results
The Home Depot (HD) declined a mere $0.37 in trading yesterday despite reporting awful results. Same store sales were down 6.6% for the quarter and in one month were down 11%--that is pretty bad.
However, despite these tough results, management appeared to be confident that the weakness is manageable and measurable. It appears the worst might be hitting Home Depot currently and the poor operating performance could bottom in the first half of 2007.
While Home Depot's supply business rolled over, the real concern appears to be its decision to enter the electronics appliance business. Home Depot mentioned this business was very disappointing. This could be a business line they exit.
Due to the relatively good stock performance following such awful results, investors need to start looking at this stock again. Home Depot will most likely be a Fed stock -- meaning when there is enough evidence that the Fed might start dropping rates, Home Depot stock might be off to the races.
The other thing to look for is a bottoming in its same store sales decline.
JetBlue Airways
Oddity Of The Airline Industry Comes Home To Roost
If you invest in turn around situations, you will have spent a lot of time focused on airline stocks during the last five years.
When interviewing airline executives, they universally say the same thing: the airline industry is different than other industries, as you grow there is point at which your costs substantially increase as a percent of sales. The old concept of economies of scale does not work the same way in the airline industry.
This appears to be happening at JetBlue (JBLU). When asking airline executives about JetBlue as a competitor, many said that at some point its costs are going to have to go up.
The JetBlue irony is that the start-up airline is having trouble when legacy airlines are actually raising prices. There is no price war going on.
What are the reasons cited for JetBlue's blues? Regulation, as pilots need to follow federally established rest rules; poor communications -- a big expense; failed reservation systems -- very expensive; employees are in locations where they are unable to provide a helping hand -- more expenses.
JetBlue appears to have reached a size where it needs massive infrastructure investment. It will be interesting to hear if management comes clean on how much all the investments will cost.
The airline had scheduled 600 flights for Presidents Day, more than the 550 to 575 flights on a typical Monday. So far, 139 flights have been canceled.
If you invest in turn around situations, you will have spent a lot of time focused on airline stocks during the last five years.
When interviewing airline executives, they universally say the same thing: the airline industry is different than other industries, as you grow there is point at which your costs substantially increase as a percent of sales. The old concept of economies of scale does not work the same way in the airline industry.
This appears to be happening at JetBlue (JBLU). When asking airline executives about JetBlue as a competitor, many said that at some point its costs are going to have to go up.
The JetBlue irony is that the start-up airline is having trouble when legacy airlines are actually raising prices. There is no price war going on.
What are the reasons cited for JetBlue's blues? Regulation, as pilots need to follow federally established rest rules; poor communications -- a big expense; failed reservation systems -- very expensive; employees are in locations where they are unable to provide a helping hand -- more expenses.
JetBlue appears to have reached a size where it needs massive infrastructure investment. It will be interesting to hear if management comes clean on how much all the investments will cost.
The airline had scheduled 600 flights for Presidents Day, more than the 550 to 575 flights on a typical Monday. So far, 139 flights have been canceled.
Agilent Technologies
Solid Quarter For A Solid Company
Agilent (A), the tech equipment company that was spun-off from Hewlett-Packard (HPQ), reported solid results yesterday. While they might not drive the stock higher, it is a good stock to keep up to date with and buy on a market correction.
- Handset test measurement business was weak, which should not be a surprise since we have been blogging about weakness in the handset market for the past three or four months.
- Bio-analytical business is doing very well, having a "blow-out" quarter. Revenue was up 22% year-over-year. Operating profit in this business was up 69%. Sales to China and India were up 33% and 38%, respectively.
Keep an eye on Agilent and jump in during market sell-offs. Agilent has a strong balance sheet and good product innovation to be around for a long time.
Monday, February 19, 2007
Chipotle Mexican Grill
The McDonald's Of 2007
What Ray Kroc was to hamburgers, Steve Ells is to Mexican food. Ells, Chipotle Mexican Grill's (CMG) founder, has created a stock to buy and put away. This company is too early in its growth phase to be ignored. There is a long way to go with this stock.
Highlights for full year 2006 as compared to full year 2005 include:
- Revenue increased 31.1% to $822.9 million
- Comparable restaurant sales increased 13.7%, compared to 10.2% in 2005
- Restaurant level operating margins increased 240 basis points to 20.9%
- Income from operations approximately doubled to $62.0 million
- Diluted earnings per share were $1.28, compared to $0.66 in 2005
Getting Cheaper, But Not There Yet
Coca Cola (KO) has been dead money for years. After reporting solid results yesterday, the stock may be due for a good 15% rally.
Coke had a great 10-year run which ended 1998, when a bear market in value stocks began. When Warren Buffett built his position in the late 1980s, the stock sold for $4.50 per share, according to Yahoo's new charts. By 1998, the stock peaked at $89, an almost twenty-fold gain.
Since peaking in price in 1998, the stock has declined almost 50%. By 1998, the P/E on Coke exceeded 40 x earnings, a high-tech type valuation. Today, the P/E is at 19x. Getting cheap, but not very cheap.
Coke grew revenue 7% for the most recent quarter and its operating profit improved 10%, very solid for this $112 billion company. With the market rallying, these results will force large institutions to own this stock. Coke most likely has a good 10% to 15% rally ahead. But after that, take profits. Coke's valuation is not cheap enough to be a big winner yet.
February 15
Newell Rubbermaid
Newell Gets Across-The-Board Upgrades
Newell Rubbermaid (NYSE:NWL) held its analyst day with the investment community Tuesday. Today, Newell is getting across-the-board upgrades.
We began blogging about the merits of Newell's turnaround back in April when the stock was trading at $26, today the stock is around $31, up 19%. Merrill Lynch, Smith Barney and Oppenheimer have raised their targets to the $34-to-$35 price range.
In this Fly's opinion, the analysts’ price targets are too low. Estimates are for Newell to earn $1.95 per share, but Newell will most likely earn over $2.00. Also, as the company exceeds earnings expectations, the P/E investors are willing to pay will go from 18x to 20x. Look for Newell's target and stock price to approach $40 by 2007 year-end.
February 14
Applied Materials: Results OK; Semiconductor Equip Cycle Appears To Be Bottoming
Applied Materials (NASDAQ:AMAT), the semiconductor equipment powerhouse, appeared to show signs that the semiconductor equipment market is close to bottoming during its quarterly conference call. Equipment orders were guided to be up 2%-7%, a good sign for the industry.
Michael Splinter, AMAT's CEO said the logic, foundry and display businesses should be bottoming during the next few quarters. Splinter sees strong memory purchases as some 20 memory fabs are due to be constructed to meet the growing demand for new products, such as NAND, which are being used more often as a substitute for disk drives.
What is becoming more and more clear as you listen to AMAT's conference calls and meetings with the investment community is just how powerful a company this is: 90% of orders are 300-millimeter, as semiconductor equipment buyers continue to push toward using newer technologies. This allows AMAT to build a bigger and bigger moat to fend-off competition.
AMAT generated free cash flow of $322 million, which is at the lower end of its free-cash-flow generation cycle. AMAT expects free cash flow generation to move higher from here. The stock buyback is large and dividend increases are also up ahead. AMAT is a very powerful company in a very important industry. It is time to start chipping away at this company.
Feburary 15
Venezuela
Chavez Pays Market Price For Verizon Stake
Hugo Chavez, the socialist Venezuela leader, agreed on Monday to buy Verizon Communications' (VZ) 28.5% stake in the country's CANTV, the country's leading telecommunications provider.
Chavez offered $17.85 per CANTV ADR versus the $16.08 per share Monday trading price, an 11% premium. Last year, Carlos Slim, the Mexican billionaire offered $21 per share.
The CANTV offer follows the government's agreement to pay $740 million for AES's 82% stake in Electricidad de Caracas which was again close to the current trading value.
Anyway you look at it, Venzeula is a country that simply cannot get out of trouble. If its run by capitalists, the rich keep all the money and the poor get poorer and poorer. If the country is run by an extreme reformist, like Chavez, the state runs the businesses into the ground. If you even have an opportunity to go to Venezuela to evaluate investment opportunities, don't go. It is too tough of a place to make money whether a capitalist or communist is running the country.
February 13
Wireless Software
A War In The Wireless Software Business Is About To Begin
Today, Nokia (NOK) and Vodafone (VOD) announced their collaboration on the development of S60 software on Symbian OS, with the release of the first Vodafone specific software package to all S60 licensees.
Comverse yesterday announced the expansion of its Converged Messaging portfolio with the launch of Comverse Instant SMS, which combines the worlds of SMS and Mobile Instant Messaging, or MIM.
Additionally, Openwave (OPWV) is launching a whole line of new products.
2007 and 2008 will be the battle between handsets and smartphones, those with the best software will win out. Wireless service providers have been slow to bring PC functionality to handset devices for fear of losing control of the handset. In the PC business, Microsoft (MSFT) and Intel (INTC) make all the money, with little left over for anyone else.
This means industry consolidation in the wireless software market is about to begin. Look for everyone to start making wireless software acquisitions, either acquiring or partnering, with Openwave, Comverse (CMVT) and Symbian. Also look for the big software companies like Microsoft and Sun Microsystems (SUNW), with its Java platform, to get into the M&A activity.
Today, Nokia (NOK) and Vodafone (VOD) announced their collaboration on the development of S60 software on Symbian OS, with the release of the first Vodafone specific software package to all S60 licensees.
Comverse yesterday announced the expansion of its Converged Messaging portfolio with the launch of Comverse Instant SMS, which combines the worlds of SMS and Mobile Instant Messaging, or MIM.
Additionally, Openwave (OPWV) is launching a whole line of new products.
2007 and 2008 will be the battle between handsets and smartphones, those with the best software will win out. Wireless service providers have been slow to bring PC functionality to handset devices for fear of losing control of the handset. In the PC business, Microsoft (MSFT) and Intel (INTC) make all the money, with little left over for anyone else.
This means industry consolidation in the wireless software market is about to begin. Look for everyone to start making wireless software acquisitions, either acquiring or partnering, with Openwave, Comverse (CMVT) and Symbian. Also look for the big software companies like Microsoft and Sun Microsystems (SUNW), with its Java platform, to get into the M&A activity.
IP Phone
Looking To Invest In IP Voice: Stay Away From Vonage, Look At eBay
Vonage's (VG) woes continue as detailed in Barron's Follow-Up column this weekend. The stock is currently trading at $5 per share down from its $17 offering price.
The article cites the lack of triple-play offering -- voice video and data -- that the cables can offer and that the baby bells most likely are heading towards offering. However, from this Fly's perspective, the real play in voice over IP could be with Skype, which is owned by eBay (EBAY).
eBay completed the acquisition of Skype during the past year which is now part of its Power of 3 strategy -- marketplaces, payments and communications.
While the cable companies are adding hundreds of thousands or millions of customers, eBay has over 171 million customers around the world. Skype now offers phone numbers that work through your PC. In addition, there is, although it is still expensive, a Skype USB port phone that is wireless so you can walk around with your Skype device in your home.
Skype will be charging for services that go into public-switched networks, but the cost is virtually nothing when compared to cable and the baby bells.
eBay said in its year-end conference call that it is still figuring out the best way to monetize Skype. Any way it does it, it will be a lot cheaper and more profitable than any of its competitors.
February 13, 2007
Optical Stocks
Optical IPOs Are Slowly Coming Back
Opnext (OPXT), a maker of laser diodes, optical modules and pluggable modules, is expected to go public this week. Opnext is the second optical component company to come public in the last four months. Optium (OPTM), a Chalfont, Pa-based company, came public in October 2006 at $17.50 and is now trading at $24.95.
Opnext has been funded by Hitachi and venture capital firm Clarity Group. Hitachi will be transferring some 670 patents to this start up.
The stock is supposedly going to be priced around $14 per share. With only two optical companies recently coming public, as one would expect, the financials for the company are pretty solid.
Supposedly, Opnext is strong in the 10-Gigabyte optical space and has product for 40 gigabyte technology also.
These optical components are very cyclical as are most new higher growth industries. The upcycle in this space appears to be still in its early stage. It may be worth a spec on this IPO.
February 12, 2007
Level 3 Communications
Buying Opportunity
After Cisco's (CSCO) outstanding results, we blogged that another way to play the huge growth in IP traffic was through pure IP service providers such as Level 3 (LVLT), Global Crossing (GLBC) and Time Warner Telecom (TWTC). That day, these stocks rallied big, especially Level 3.
Yesterday, Level 3 reported outstanding results but the stock gave back all the gains made on Wednesday. Why? The company said EBITDA would be down sequentially.
Use yesterday's price weakness to get into this stock. Level 3 is going to spend a boat load of money in the first quarter to properly integrate the Broadwing and other companies it acquired during 2006. After that, operating results, along with the stock, should be off to the races again.
Sprint Nextel has been one disaster of a merger because it never bit the bullet and spent the money to properly integrate the two companies. Sprint, after years of poor performance, is finally going to do the ugly work. But it might be too late.
The strong underlying trends in Level 3's business are too powerful to ignore. The core IP communications business is growing 25% to 30% per year, its growth rate and operating margins are the best in the industry and it continues to attract better and better customers--the who's who of the Internet era. In addition, Level 3 will substantially improve the debt-to-EBITDA ratio by 2008.
Yesterday's sell off was an overreaction. Use it as a buying opportunity.
February 9, 2007
Merrill Lynch
Mortgage Market News & Insider Selling Most Likely Connected
Merrill Lynch's (MER) top executives have been selling a lot of stock, according to Barron's Online. So far this month, the top three execs have grossed $29.7 million. Supposedly, this is the highest level of monthly selling since January 2001.
Yesterday, HSBC increased its reserves for the blow-up of its mortgage portfolio. New Century Financial also reported blow-up results. Both of these companies are in the higher risk part of the mortgage market, but that is where the trouble always starts.
Brokerage firm results have been utterly spectacular for the past five years. A lot of that success can be attributed to the fixed-income business. However, the flat yield curve is most likely going to start impacting results as steep-yield curve trades begin to expire and cannot be replaced in this flat-yield curve environment.
The old-line brokerage firms are too big to report the results they have been reporting for so long. The law of large numbers has to apply at some point. The insider selling is pointing to a tough time ahead for fixed income traders and the brokerage stocks.
February 9, 2007
Mortgage Market
Mortgage Market Getting Ugly
HSBC Holdings PLC (HBC) said late last night that its loan impairment charges and other credit risk provisions in 2006 are now expected to be 20 pct above the consensus estimate of $8.8 billion made by analysts, due to higher-than-earlier expected provisions for its US mortgage business.
HSBC now expects their mortgage loss to be $10 billion.
New Century Financial (NEW), a large subprime mortgage lender, projected a fourth-quarter loss, and said it expects to restate each of the previous three quarters' earnings lower because it did not set aside enough money to buy back subprime loans that went bad.
This unwinding of the mortgage market is just beginning. Large financial institutions have been reporting spectacular results due to gains in fixed income and credit related trading. It appears this era is over. While investors often refer to equity bubbles bursting, credit bubbles are equally as ugly. Watch out for more blow ups.
February 8, 2007
Sun Microsystems
Analysts Not Impressed With Analyst Day
Sun Microsystems (SUNW) held its annual investor's day with the investment community yesterday. Analysts seemed not to share Jonathan Schwartz's, CEO of Sun, enthusiasm for where the company is headed.
Here are some opinions from analyst reports which were posted on Barron's Tech Trader Daily:
Richard Gardner of Citigroup believes Schwartz continues to adopt the view that Sun’s decision to open source its entire software stack will drive developers and users to its platform(s), eventually creating opportunities to monetize R&D investments. Gardner agrees with the premise that volume drives value, but how much value, for whom and over what time period is still unclear.
Thomas Weisel analyst Kevin Hunt still has concerns regarding the "lackluster" storage business (tape market and integration of StorageTek), and as a result, maintains a Market Weight rating on Sun's shares.
Deutsche Bank’s Chris Whitmore believes that Schwartz and his team are driving operational and product line improvements, but that this is more than reflected in Sun's shares. Whitmore believes Sun’s operating margin goal requires double digit revenue growth through F09, and maintains a Hold rating with a price target of $5.50.
Goldman Sachs’s Laura Conigliaro said, "There are significant execution elements to be hurdled and timing could be lumpy.”
While analysts reports are peppered with optimistic caveats, they are few and far between. Also, analysts and investors are still questioning the reasoning behind the convertible bond offering with KKR.
Sun's stock has had a massive rally recently, it might be time to take some profits.
Internet Protocol
Investing in Internet Protocol
Cisco's (CSCO) quarter-after-quarter of strong results is due to its focus and domination in developing the best Internet Protocol (IP) networking technology. Are there other ways to invest in IP and profit? Look at the remaining pure IP service providers:
Cisco's (CSCO) quarter-after-quarter of strong results is due to its focus and domination in developing the best Internet Protocol (IP) networking technology. Are there other ways to invest in IP and profit? Look at the remaining pure IP service providers:
- Level 3 (LVLT)
- Time Warner Telecom (TWTC)
- Global Crossing (GLBC)
- Qwest (Q)
Level 3 still has the most bang for the buck. Also, do not forget about Qwest which owns an old Baby Bell but also owns a sizable nationwide IP backbone.
Chambers mentioned a number of interesting stats during Cisco's conference call. Cisco's optical business grew 40% and its sales to service providers jumped 20%. Chambers went as far as to say that there are signs in the enterprise space that look very much like that of the mid 1990s before technology stocks went through the roof.
If Chambers forecast proves to be correct, this most likely means a shortage of pure IP capacity could be on the horizon.
February 7, 2007
Cisco Systems
Simply Amazing Results
Of all the boom stocks from the 1990s, Cisco (CSCO) is the only one that has maintained the stellar growth:
Of all the boom stocks from the 1990s, Cisco (CSCO) is the only one that has maintained the stellar growth:
- Sales up 27%, the fastest stand-alone growth in years. Way above Cisco’s long-term growth objective of 10 to 15%
- $2.1 billion in net income, up 28%
- Cash flow from operations of $2.7 billion
- Cisco has $20.7 billion in cash and repurchased 121 million shares for a total purchase of $3.3 billion
- Gross margins stayed strong at 65%
Stand-alone service provider orders are up big, clearly suggesting that the old-time telcos continue to move away from Alcatel-Lucent-type stuff to pure IP technology. Alcatel-Lucent’s results were awful.
Chambers said business remains strong. Most analysts expected Cisco to show signs of slowing growth, however, it is hard to find. While it is tough to chase Cisco’s stock after such strong performance, its business remains strong. Chambers continues to do one of the most amazing corporate management jobs in US business history.
Eastman Kodak
Confidence Building at Kodak
Eastman Kodak (EK) will be hosting its annual meeting with the investment community on Thursday in New York. It would be a good idea to listen to or attend this meeting. It appears the turnaround is very much underway.
- Net cash generation of $592 million versus an estimate of $400 million to $600 million, hitting the higher end of the estimate
- Digital earnings grew five-fold, albeit only hitting the lower end of guidance
- Intellectual property development doing well, as it makes progress with its CMOS business and generates profits from its other IP businesses
The negative side of Eastman Kodak's earnings release was slower digital growth than expected as management decided to focus on profitability versus chasing the lower end of the digital camera market.
Kodak ended the year with $1.5 billion of cash on the balance sheet. And will receive $2.35 billion in cash from the health care business disposition.
Antonio Perez, although focused on his task, has demonstrated some nervousness with the investment community as his turnaround strategy hit bumps in the road. However, it appears the biggest bumps have been hit and smoother roads are ahead. Investors need to revisit Eastman Kodak. It is no longer an asset intensive, slow moving company.
Feburary 6, 2007
Solar Power
Making Money In Solar Power
SunPower (SPWR), the Cypress Semiconductor founded company, has performed well since going public. The stock has moved up to $43, increasing from the mid-20s when it initially started trading.
SunPower makes solar electric power products based on semiconductor technology. Due to the strong growth of these semiconductors, management has cited that getting access to the much needed materials might limit SunPower's growth.
In this weekend's Barron's interview, Michael Cahill, portfolio manager of Chilton Investment, has found a way for investors to possibly profit from any supply shortages that SunPower might face.
Cahill recommends the purchase of MEMC Electronic Materials (WFR). For SunPower to make its chips, it needs a lot of polysilicon, the material used to manufacture semiconductor wafers. However, as this new solar application for semiconductors takes off, polysilicon will most likely be in short supply.
MEMC Electronic earned $2.07 for 2006 and Cahill expects earnings to hit $3.00 in 2007 and $4 per share by 2008. MEMC Electronic appears to be a way to profit from the take off of the solar semiconductor business.
February 6, 2007
In this weekend's Barron's interview, Michael Cahill, portfolio manager of Chilton Investment, has found a way for investors to possibly profit from any supply shortages that SunPower might face.
Cahill recommends the purchase of MEMC Electronic Materials (WFR). For SunPower to make its chips, it needs a lot of polysilicon, the material used to manufacture semiconductor wafers. However, as this new solar application for semiconductors takes off, polysilicon will most likely be in short supply.
MEMC Electronic earned $2.07 for 2006 and Cahill expects earnings to hit $3.00 in 2007 and $4 per share by 2008. MEMC Electronic appears to be a way to profit from the take off of the solar semiconductor business.
February 6, 2007
High Technology
Interesting Technology Data Points
Barron's interviewed Michael Cahill, portfolio manager of Chilton Investment, on the outlook for tech stocks. Cahill made some interesting points:
Barron's interviewed Michael Cahill, portfolio manager of Chilton Investment, on the outlook for tech stocks. Cahill made some interesting points:
- From 2004 to 2006, the Nasdaq has been the single worst performing major index.
- The Nasdaq is up only 23% versus 35% for the S&P 500, 47% for the Russell 2000, 47% for Japan, 60%-range for the European Indexes and over 100% for emerging markets.
- Cahill also points out that tech stocks have had serious multiple compression in addition to a huge accumulation of cash on their balance sheets. When adjusting for cash, tech valuations become even more attractive.
- In 1999, there were 282 tech IPOs; in 2000 there were 205; in 2005 there were 23 and in 2006 there were 26.
Cahill concludes that with the massive share buybacks and the lack of new supply coming to market via IPOs, the supply and demand balance for tech stocks is becoming more and more favorable. Further, Cahill says most of the liquidation of tech shares by mutual funds in the post-tech bubble environment is completed.
The area he particularly likes is broadband wireless. Companies he likes are Anadigics (ANAD) and EchoStar Communications (DISH).
February 5, 2007Internet Stocks
The Big Internet Companies Are Here To Stay
If one theme came out of this earnings season it is the big Internet players are for real and they are here to stay.
eBay (EBAY), Amazon (AMZN) and Google (GOOG) all reported results that show that their business models are sustainable. Even Yahoo (YHOO), which continues to struggle, has value as a takeover candidate.
eBay for 2006 reported $6 billion in revenue, up 31%. It bought back $1.0 billion in stock and announced it would increase the buy back to $2.0 billion. This is the first big stock repurchase program in the company's history.
Amazon forecasts revenue to exceed $13 billion up from $10.7 billion in 2006, a 21% increase. Amazon looks to earn $355 to $505 million in operating profit next year.
Google's revenue grew 67% in the fourth quarter and earnings for the quarter reached $1.0 billion. That means, unless something goes terribly wrong, Google will earn over $4.0 billion next year. I think Google will be around for a while.
For most of the 1980s and 1990s investors did not believe Microsoft, Oracle, Intel and Dell would grow to the size they have become. When companies become dominant players in new industries, it is often best to go with the trend and ride these stocks for the long haul.
Ten years into the Internet, the results reported by eBay, Amazon, Google and even Yahoo, show that the industry and these companies are for real.
February 2, 2007
Amazon
A Real Business Model Might Be Evolving
For those who have not looked at Amazon (AMZN) for a while, here are some interesting stats.
Revenue:
For those who have not looked at Amazon (AMZN) for a while, here are some interesting stats.
Revenue:
- 2007 - $13.0B to $13.7B (estimated)
- 2006 - $10.7B
- 2005 - $8.5B
- 2004 - $6.9B
- 2003 - $5.3B
- 2002 - $3.9B
Amazon is turning into a large company from a revenue perspective and its growth rate is very impressive. In addition, the company is profitable and generates a good amount of cash.
While revenue growth is quite impressive, its ability to forecast operating profits is interesting. Amazon is guiding for first quarter operating profit of $88 million to $122 million, for either a 22% decline or 16% growth versus last year.
For the year, Amazon is forecasting operating profit to decline 9% or to increase 30%. Management expects $355 million to $505 million in operating profit for 2007.
Amazon has a market cap of $16 billion. So it is selling for 1x sales, which is OK for a retailer. However, from the operating guidance, Amazon's business model is still a work in progress. With that said, if the company does get its model figured out, which it appears it will during the next couple of years, this stock could become a big winner.
Start following this stock again, the numbers are too good to ignore.
February 2, 2007
Dell Inc
Michael Dell Back In Charge; Do Not Chase Stock Yet
Michael Dell finally decided to step back into an operating role at Dell (DELL). This follows a tough period for Kevin Rollins and Jim Schneider, both of whom had a tough time anticipating where technology was going.
The old Wayne Gretzky line "you have to skate where the puck is going to be" was seriously lacking with Rollins and Schneider. Both were good executives and diligent but were not tech guys.
Do not chase today's rally in Dell's stock. Dell needs to hire a whole new management team. Wait to see if he can convince executives to join him or if he can find people from within Dell to run the company. It will take a couple of quarters for Michael Dell to have an impact.
February 1, 2007
Spectacular Results Any Way You Look At It
- 47% market share of search business, Google continues to grow share
- 67% growth in revenue
- Earned over $1 billion in net income for the quarter—A Big Number
Google’s strategy of letting users develop content continues to work. Yahoo and old-line media continue to believe only large institutions with deep pockets can generate content for the masses.
During the conference call, Google decided to spend time discussing its ad platform in which it paid over $3.0 billion to its partners during the past year. It was clearly an effort to distinguish between Google and Yahoo!’s Project Panama—which is just being introduced.Any way you slice it, Google is becoming more and more powerful of a company. It’s ability to share revenue with partners based on algorithms built by the company is very powerful. Yahoo is going to have a tough time catching up.
February 1, 2007
Saturday, February 17, 2007
Microsoft
New Product Launch Will Re-accelerate Growth
Microsoft (MSFT) reported revenue growth of 6% , but if you include the big jump in deferred revenue, revenue increased 20%, according to the company. Bookings growth was also up over 20%.
Microsoft will be launching the consumer version of Vista in February. As a reminder, Microsoft has also launched a new Office and Exchange Server. This broad product launch is huge for Microsoft.
Chris Liddell, Microsoft's CFO, said he expects an excellent year. He also cited that hardware sales for the December quarter was strong, another positive data point for the sofware giant.
Going forward, Microsoft expects double digit revenue growth and for earnings per share to exceed revenue growth.
Microsoft's stock has had a good run anticipating the launch of Vista. However, it appears results are already exceeding most expectations. It appears Microsoft has its growth back and the stock has more to run. Investors have to ride the Vista launch.
January 26, 2007
Microsoft (MSFT) reported revenue growth of 6% , but if you include the big jump in deferred revenue, revenue increased 20%, according to the company. Bookings growth was also up over 20%.
Microsoft will be launching the consumer version of Vista in February. As a reminder, Microsoft has also launched a new Office and Exchange Server. This broad product launch is huge for Microsoft.
Chris Liddell, Microsoft's CFO, said he expects an excellent year. He also cited that hardware sales for the December quarter was strong, another positive data point for the sofware giant.
Going forward, Microsoft expects double digit revenue growth and for earnings per share to exceed revenue growth.
Microsoft's stock has had a good run anticipating the launch of Vista. However, it appears results are already exceeding most expectations. It appears Microsoft has its growth back and the stock has more to run. Investors have to ride the Vista launch.
January 26, 2007
SAP
SAP's Weak Results Point To Oracle's Success
SAP AG (SAP), which warned earlier in the month, made comments in yesterday's Q4 earnings conference call point to Larry Ellison's prognostication of SAP's demise being more and more correct.
Back in September, after reporting a blow-out quarter, Oracle's (ORCL) Ellison said SAP is a number of years behind. Ellison went as far to say that if Oracle doesn't screw up, SAP is in big trouble.Since Ellison made those comments, more and more evidence is coming out supporting his view.
Since late 2006, SAP has reported poor results and IBM has reported weak results in businesses that work closely with SAP.
SAP said it is going to spend an extra 300 to 400 million euros over the next eight quarters for new software development. This further supports Ellison's claim of SAP beginning behind the curve.
Oracle's stock had a good year in 2006 with industry spending in a lull. But now it appears the lull is over and Oracle could be off to the races again.
January 25, 2007
SAP AG (SAP), which warned earlier in the month, made comments in yesterday's Q4 earnings conference call point to Larry Ellison's prognostication of SAP's demise being more and more correct.
Back in September, after reporting a blow-out quarter, Oracle's (ORCL) Ellison said SAP is a number of years behind. Ellison went as far to say that if Oracle doesn't screw up, SAP is in big trouble.Since Ellison made those comments, more and more evidence is coming out supporting his view.
Since late 2006, SAP has reported poor results and IBM has reported weak results in businesses that work closely with SAP.
SAP said it is going to spend an extra 300 to 400 million euros over the next eight quarters for new software development. This further supports Ellison's claim of SAP beginning behind the curve.
Oracle's stock had a good year in 2006 with industry spending in a lull. But now it appears the lull is over and Oracle could be off to the races again.
January 25, 2007
eBay Inc.
The Power Of 3 Is Powerful
The "Power of 3" is what Meg Whitman calls eBay's (EBAY) 3 primary businesses -- marketplaces, payments and communications. Any way you slice it, the Power of 3 is working.
The "Power of 3" is what Meg Whitman calls eBay's (EBAY) 3 primary businesses -- marketplaces, payments and communications. Any way you slice it, the Power of 3 is working.
- For 2006, $6 billion in revenue, up 31%
- Purchased $1.0 billion in stock and is upping it to $2.0 billion -- eBay has never repurchased its stock prior to July 2006
- eBay has 220 million users and Skype is now up to 171 million users, both growing nicely
- Other eBay names that it owns or has interest in or relationships with are doing well like Shopping.com, Craigslist and VeriSign
Of the many positive points for eBay, the most important to drive this stock higher is that growth is now re-accelerating. Historically, large growth companies perform best when the growth rate picks up. The company is guiding to 18% to 21% growth for 1Q07, which appears too conservative.
Sometimes it is best not to think -- just buy and put a stock away. That is what investors should do with eBay.
January 25, 2007
Sun Microsystems
Sun's Results solid, but KKR Convert Raises Questions
Sun (SUNW) reported a solid 7% increase in revenue for its second quarter, citing good demand for its SPARC chip multithreading (CMT) servers and x64-based servers as well as the increased acceptance of the Solaris 10 Operating System.
More importantly in the tech world, the company showed strong gross margins, coming in at 45%, up from 43% last year.
Sun generated cash from operations of $153 million and had cash and marketable securities at the end of the quarter of $4.8 billion, a lot of cash.
However, despite good cash generation, improved margins and a strong balance sheet, Sun decided to go forward with a $750 million convert with KKR. During the earnings conference call, analysts could not figure out why Sun did the deal.
Jonathan Schwartz, Sun's CEO, said the KKR transaction will allow it to better explore strategic opportunities. He added there could be some cross selling opportunities between KKR's portfolio companies and Sun. Analyst did not appear to believe him.
The reality is the only reason for Sun to need this extra cash is to make a sizable acquisition. Despite an improved operating performance, the growth metrics for Sun, especially within the US, are still weak.
Look for Sun to do another big transaction this year.
January 24, 2007
Sun (SUNW) reported a solid 7% increase in revenue for its second quarter, citing good demand for its SPARC chip multithreading (CMT) servers and x64-based servers as well as the increased acceptance of the Solaris 10 Operating System.
More importantly in the tech world, the company showed strong gross margins, coming in at 45%, up from 43% last year.
Sun generated cash from operations of $153 million and had cash and marketable securities at the end of the quarter of $4.8 billion, a lot of cash.
However, despite good cash generation, improved margins and a strong balance sheet, Sun decided to go forward with a $750 million convert with KKR. During the earnings conference call, analysts could not figure out why Sun did the deal.
Jonathan Schwartz, Sun's CEO, said the KKR transaction will allow it to better explore strategic opportunities. He added there could be some cross selling opportunities between KKR's portfolio companies and Sun. Analyst did not appear to believe him.
The reality is the only reason for Sun to need this extra cash is to make a sizable acquisition. Despite an improved operating performance, the growth metrics for Sun, especially within the US, are still weak.
Look for Sun to do another big transaction this year.
January 24, 2007
Yahoo!
Worth Chipping Away At: Good Risk-Reward Bet
Buying Yahoo’s (YHOO) stock is a bet on Project Panama, its new advertising platform. If it succeeds, the stock goes up. If it fails, Terry Semel gets fired and the stock goes up. Therefore, investors are almost in a win-win situation.
In addition, the downside risk is protected by the powerful cash flow machine that this company is. For 2006, Yahoo generated revenue of $6.4 billion, EBITDA of $1.9 billion and free cash flow of $1.27 billion. Any way you look at it, Yahoo's cash generating ability is not going away over night.
For the stock to take off, Project Panama needs to be able to better dynamically link search with advertisers, thereby driving growth again. However, investors will not see this growth until 2Q07. Yahoo stated that 1Q07 will be a transition period.
Waiting for Project Panama to show positive results could prove to be a big risk. If the new advertising platform takes hold the stock might have already discounted the success, making it too late to profit. With little downside risk, Yahoo is worth purchasing and putting away. If the new advertising platform begins to work, this stock will quickly come back into favor.
January 24, 2007
Buying Yahoo’s (YHOO) stock is a bet on Project Panama, its new advertising platform. If it succeeds, the stock goes up. If it fails, Terry Semel gets fired and the stock goes up. Therefore, investors are almost in a win-win situation.
In addition, the downside risk is protected by the powerful cash flow machine that this company is. For 2006, Yahoo generated revenue of $6.4 billion, EBITDA of $1.9 billion and free cash flow of $1.27 billion. Any way you look at it, Yahoo's cash generating ability is not going away over night.
For the stock to take off, Project Panama needs to be able to better dynamically link search with advertisers, thereby driving growth again. However, investors will not see this growth until 2Q07. Yahoo stated that 1Q07 will be a transition period.
Waiting for Project Panama to show positive results could prove to be a big risk. If the new advertising platform takes hold the stock might have already discounted the success, making it too late to profit. With little downside risk, Yahoo is worth purchasing and putting away. If the new advertising platform begins to work, this stock will quickly come back into favor.
January 24, 2007
Texas Instruments
Weak Results at TI; Waiting For New Product Ramp
The handset market is maturing and Texas Instruments (TXN) results clearly showed this:
The handset market is maturing and Texas Instruments (TXN) results clearly showed this:
- 5% decline in semiconductor sales sequentially
- Wireless was the primary reason for the weakness, declining 10% sequentially. Handset growth is shifting to lower end products
- Orders down 10% -- weak
- Book to bill is at .89 -- weak
- Expect revenue to decline for 1Q07 of 5% to 13% -- weak
- Growth at TI is coming from a low-cost integrated chip for low-end phones sold in emerging markets. While this business is growing, it does not offset the weakness of the higher end 3-G business.
For TI to grow again, it needs a higher end product to take hold. Specifically, a mass market RIMM, Treo, or Q-type device. This most likely will not happen until the 2007 holiday season.
No need to rush into TI's stock. Wait for seasonally weak summer season to look at this stock again.
January 23, 2007
Lyondell Chemical
Lyondell's Got it All: Earnings, Cash Flow and a Huge Refinery
Lyondell Chemical (LYO) was mentioned twice as a stock to buy in this past weekend's Barron's roundtable, recommended by both Archie MacAllaster and John Neff.
At $25, the stock is selling for 6.25x earnings versus the S&P 500 selling for 15x to 16x earnings. What is particularly attractive about Lyondell is that it bought out its Venezuelan partner's 41% stake in the Citgo refinery and now fully owns this sizable refinery. This asset should generate a lot of cash flow for Lyondell's shareholders for years to come.
Lyondell put a good chunk of debt on its balance sheet to purchase the Citgo refinery stake, but has already reduced debt by $2 to $3 billion, according to MacAllaster, who put a $40 price target on the stock.
January 23, 2007
Lyondell Chemical (LYO) was mentioned twice as a stock to buy in this past weekend's Barron's roundtable, recommended by both Archie MacAllaster and John Neff.
At $25, the stock is selling for 6.25x earnings versus the S&P 500 selling for 15x to 16x earnings. What is particularly attractive about Lyondell is that it bought out its Venezuelan partner's 41% stake in the Citgo refinery and now fully owns this sizable refinery. This asset should generate a lot of cash flow for Lyondell's shareholders for years to come.
Lyondell put a good chunk of debt on its balance sheet to purchase the Citgo refinery stake, but has already reduced debt by $2 to $3 billion, according to MacAllaster, who put a $40 price target on the stock.
January 23, 2007
The U.S. Dollar
Dollar Weakness Is Not Necessarily Bad
Bill Gross, of Pimco fame, joined the chorus of Warren Buffett and others saying the U.S. dollar is "doomed." Gross made these comments in this weekend's Barron's Roundtable.
Gross repeats the same comments as many others: the twin deficits (federal and trade) will force the country to inflate its way out of the deficits. This is pure hogwash.
The U.S. dollar will go down relative to some currencies due to other countries becoming wealthier. This is a good, not a bad thing. Emerging economies will provide goods and services at competitive prices and the market will reward those countries with a stronger currency.
This is exactly what happened to Japan in the post-World War II era. Japan started off making low-end trinkets and then moved up the value chain, becoming a powerful global economic participant. Its currency appreciated relative to the dollar along the way.
The same will happen to other currencies. China was the prime example in 2006 as it began to manage the appreciation of the yuan.
When you hear all this negative babble that the U.S. currency is doomed, take it with a grain of salt. The dollar weakening because other economies are doing smart things is a good, not a bad thing. History has shown that as long as the U.S. keeps inflation between 2% to 2.5%, then a weaker dollar is manageable.
January 22, 2007
Bill Gross, of Pimco fame, joined the chorus of Warren Buffett and others saying the U.S. dollar is "doomed." Gross made these comments in this weekend's Barron's Roundtable.
Gross repeats the same comments as many others: the twin deficits (federal and trade) will force the country to inflate its way out of the deficits. This is pure hogwash.
The U.S. dollar will go down relative to some currencies due to other countries becoming wealthier. This is a good, not a bad thing. Emerging economies will provide goods and services at competitive prices and the market will reward those countries with a stronger currency.
This is exactly what happened to Japan in the post-World War II era. Japan started off making low-end trinkets and then moved up the value chain, becoming a powerful global economic participant. Its currency appreciated relative to the dollar along the way.
The same will happen to other currencies. China was the prime example in 2006 as it began to manage the appreciation of the yuan.
When you hear all this negative babble that the U.S. currency is doomed, take it with a grain of salt. The dollar weakening because other economies are doing smart things is a good, not a bad thing. History has shown that as long as the U.S. keeps inflation between 2% to 2.5%, then a weaker dollar is manageable.
January 22, 2007
Pioneer Natural Resources
Start Looking At Select Commodity Stocks
TheFly blogged to avoid commodity stocks back in the spring. Our timing was quite good. However, a lot of these stocks have corrected significantly and they are beginning to represent good value.
Pioneer Natural Resource (PXD) was mentioned by Archie MacAllaster in this weekend's Barron's Roundtable. Pioneer is the third largest independent oil and gas producer in the U.S. and its stock has come down from a high of $54 to $38 -- a big correction.
According to MacAllaster, Pioneer had forward sold a lot of its output considerably below today's prices. Therefore, as these contracts come off, Pioneer can sell their gas at much high prices and earn greater profits, despite the recent natural gas price pullback. Pioneer's reserves are all domestic, so they will benefit from better prices due to the inevitable decline in U.S. reserves.
Also, Pioneer has shrunk it shares outstanding from 145 million to 125 million and is supposedly on its way to 100 million shares outstanding.
January 22, 2007
TheFly blogged to avoid commodity stocks back in the spring. Our timing was quite good. However, a lot of these stocks have corrected significantly and they are beginning to represent good value.
Pioneer Natural Resource (PXD) was mentioned by Archie MacAllaster in this weekend's Barron's Roundtable. Pioneer is the third largest independent oil and gas producer in the U.S. and its stock has come down from a high of $54 to $38 -- a big correction.
According to MacAllaster, Pioneer had forward sold a lot of its output considerably below today's prices. Therefore, as these contracts come off, Pioneer can sell their gas at much high prices and earn greater profits, despite the recent natural gas price pullback. Pioneer's reserves are all domestic, so they will benefit from better prices due to the inevitable decline in U.S. reserves.
Also, Pioneer has shrunk it shares outstanding from 145 million to 125 million and is supposedly on its way to 100 million shares outstanding.
January 22, 2007
JDS Uniphase
Guidance Raised: A Sign Optical Is Coming Back
JDS Uniphase (JDSU) raised its revenue guidance last night. The company had seen Q2 revenue of $332M-$352M and now sees revenue at $360M-$365M; consensus is for $343.29M.
The company cited strong performance by its communications test and measurement segment, which has been an area of focus for JDSU CEO, Kevin Kennedy, a former top executive at Cisco (CSCO).
However, JDSU's test and measurement business is focused more on IP and optical traffic than the test and measure tools used in the semiconductor space. Two different businesses.
This is another data point that the optical business continues to improve. Ciena (CIEN) should also benefit from this news.
Written January 19, 2007
JDS Uniphase (JDSU) raised its revenue guidance last night. The company had seen Q2 revenue of $332M-$352M and now sees revenue at $360M-$365M; consensus is for $343.29M.
The company cited strong performance by its communications test and measurement segment, which has been an area of focus for JDSU CEO, Kevin Kennedy, a former top executive at Cisco (CSCO).
However, JDSU's test and measurement business is focused more on IP and optical traffic than the test and measure tools used in the semiconductor space. Two different businesses.
This is another data point that the optical business continues to improve. Ciena (CIEN) should also benefit from this news.
Written January 19, 2007
Apple Inc
Numbers Beat Expectation, But Are They Strong Enough To Drive Stock Higher?
Apple (AAPL) reported very solid numbers last night. Revenue hit $7.1 billion, up from $5.7 billion last year, or a 24% increase. Apple beat the consensus estimate of $6.4 billion. It appears Apple, once again, set the bar pretty low.
iPod sales jumped to 21 million units, up from 14 million units last year, for a 50% increase.
It appears a lot of the Apple-hype ran out last week at MacWorld and the next catalyst appears to be the launch of iPhone.
Apple's stock, historically, has waited to appreciate until data is available on the success of a new product. Obviously, iPhone is the next big push. Wait for data points on the iPhone launch before getting into this stock. iPod is entering a seasonally weaker period and Apple needs the next great product to drive this stock higher.
January 18, 2007
Apple (AAPL) reported very solid numbers last night. Revenue hit $7.1 billion, up from $5.7 billion last year, or a 24% increase. Apple beat the consensus estimate of $6.4 billion. It appears Apple, once again, set the bar pretty low.
iPod sales jumped to 21 million units, up from 14 million units last year, for a 50% increase.
It appears a lot of the Apple-hype ran out last week at MacWorld and the next catalyst appears to be the launch of iPhone.
Apple's stock, historically, has waited to appreciate until data is available on the success of a new product. Obviously, iPhone is the next big push. Wait for data points on the iPhone launch before getting into this stock. iPod is entering a seasonally weaker period and Apple needs the next great product to drive this stock higher.
January 18, 2007
Consumer Vs. Business
Consumer Vs. Business
Consumer Has Been Driving Technology This Decade: Is It Time For A Change?
Intel, last night in its conference call, said that the consumer will be driving the first ramp in demand for Microsoft's Vista operating system. Tonight, Apple reports results whose huge success has obviously been driven by iPod, a consumer product.
However, beneath the headlines, Intel mentioned that its server business is doing quite well. Also, other large-volume high-end companies such as Sun Micro, Level 3, IBM and possibly EMC are seeing improvement in their operating performances.
While investor attention is still focused on Apple, the iPod and the consumer, the revenue and operating performance of technology companies focused on the business customer appear to be improving nicely for the first time in a long time.
January 17, 2007
Consumer Has Been Driving Technology This Decade: Is It Time For A Change?
Intel, last night in its conference call, said that the consumer will be driving the first ramp in demand for Microsoft's Vista operating system. Tonight, Apple reports results whose huge success has obviously been driven by iPod, a consumer product.
However, beneath the headlines, Intel mentioned that its server business is doing quite well. Also, other large-volume high-end companies such as Sun Micro, Level 3, IBM and possibly EMC are seeing improvement in their operating performances.
While investor attention is still focused on Apple, the iPod and the consumer, the revenue and operating performance of technology companies focused on the business customer appear to be improving nicely for the first time in a long time.
January 17, 2007
Cotton
Compelling Argument To Go Long Cotton
Art Samberg, of Pequot Capital fame, provided a compelling argument to go long cotton in this weekend's Barron's investor round table.
For you commodity traders out there, Samberg said go long the December '07 cotton contract. His reasoning is while cotton consumption in the US has been in decline, China consumption which has been growing nicely, is picking up more steam.
Cotton consumption in the US has fallen from 12 million to 5 million bales a year due to the growth of polyester and other materials. Conversely, Textile spending is on a big upswing in China - up 27% in '06, after jumping 36% in '05. Chinese consumption which had been growing 4% to 6% per year is now growing 15% per year.
According to Samberg, China's cotton consumption has increased from 25% to 39%-40% of world cotton consumption.
Because of strong prices of corn and soybeans--corn being used for ethanol production, US farmers are going to remove acreage from cotton to earn better profits in higher priced corn and soybeans. Supposedly, there have only been four times since 1913 when cotton was this cheap relative to grains like corn and wheat. The last time being 1974. From 1974 to 1976, cotton tripled in price.
Written January 16, 2007
Art Samberg, of Pequot Capital fame, provided a compelling argument to go long cotton in this weekend's Barron's investor round table.
For you commodity traders out there, Samberg said go long the December '07 cotton contract. His reasoning is while cotton consumption in the US has been in decline, China consumption which has been growing nicely, is picking up more steam.
Cotton consumption in the US has fallen from 12 million to 5 million bales a year due to the growth of polyester and other materials. Conversely, Textile spending is on a big upswing in China - up 27% in '06, after jumping 36% in '05. Chinese consumption which had been growing 4% to 6% per year is now growing 15% per year.
According to Samberg, China's cotton consumption has increased from 25% to 39%-40% of world cotton consumption.
Because of strong prices of corn and soybeans--corn being used for ethanol production, US farmers are going to remove acreage from cotton to earn better profits in higher priced corn and soybeans. Supposedly, there have only been four times since 1913 when cotton was this cheap relative to grains like corn and wheat. The last time being 1974. From 1974 to 1976, cotton tripled in price.
Written January 16, 2007
Monday, January 15, 2007
Housing Battle
To Go Long Or To Go Short
Bill Miller, the famed-Legg Mason fund manager, was on television last week saying he is long housing stocks. In Barron's Up & Down column, Doug Kass of Seabreeze Partners was cited as being short the stocks--no big surprise there.
Kass referred to order cancellation as the reasoning for his bearishness. Typically, publicly traded homebuilders have cancellation rates of 15% of orders; however, that has jumped considerably.
Cancellation rates of publicly traded homebuilders:
Centex -- 37%
DR Horton -- 40%
KB Homes -- 53%
Lennar -- 31%
Pulite Homes -- 36%
Beazer -- 57%
Hovnanian -- 35%
MDC Holdings --49%
Standard Pacific -- 50%
These numbers are all provided by Kass, according to the Barron's article. These numbers are so bad that the worst might be unfolding right now.
TheFly's advice, Miller tends to be too early and Kass is often too negative when the worst is already priced in the stocks. Start following these stocks again, expecting a bottom in the spring and early summer.
The most recent rally is mostly from an oversold condition. Wait for another correction and see where the industry fundamentals stand.
Bill Miller, the famed-Legg Mason fund manager, was on television last week saying he is long housing stocks. In Barron's Up & Down column, Doug Kass of Seabreeze Partners was cited as being short the stocks--no big surprise there.
Kass referred to order cancellation as the reasoning for his bearishness. Typically, publicly traded homebuilders have cancellation rates of 15% of orders; however, that has jumped considerably.
Cancellation rates of publicly traded homebuilders:
Centex -- 37%
DR Horton -- 40%
KB Homes -- 53%
Lennar -- 31%
Pulite Homes -- 36%
Beazer -- 57%
Hovnanian -- 35%
MDC Holdings --49%
Standard Pacific -- 50%
These numbers are all provided by Kass, according to the Barron's article. These numbers are so bad that the worst might be unfolding right now.
TheFly's advice, Miller tends to be too early and Kass is often too negative when the worst is already priced in the stocks. Start following these stocks again, expecting a bottom in the spring and early summer.
The most recent rally is mostly from an oversold condition. Wait for another correction and see where the industry fundamentals stand.
Stock Shrinkage
Stock Outstanding Shrinks By 3%
In 2006, between private equity and share repurchases by US corporations, the amount of stock outstanding declined by a good chunk in 2006.
In a newsletter released this morning by investment strategist and portfolio Don Hays of Hays Advisory, there was $400 billion in cash takeovers this year by private equity and corporate mergers and acquisitions. In addition, there was over $600 billion of share repurchases.
This adds up to 3% shrinkage in the supply of stock available for purchase.There could be a lot more of this in 2007 as a whole host of US companies are generating a lot of excess cash that management will need to put to work. Home Depot (HD) is the poster-child stock for excess cash generation and share buybacks.
A good investment approach for 2007 might be to find companies like Home Depot with little debt that generates a lot of free cash flow and can afford big stock buy backs. Sooner or later demand will outstrip supply and drive stocks with these characteristics higher.
In 2006, between private equity and share repurchases by US corporations, the amount of stock outstanding declined by a good chunk in 2006.
In a newsletter released this morning by investment strategist and portfolio Don Hays of Hays Advisory, there was $400 billion in cash takeovers this year by private equity and corporate mergers and acquisitions. In addition, there was over $600 billion of share repurchases.
This adds up to 3% shrinkage in the supply of stock available for purchase.There could be a lot more of this in 2007 as a whole host of US companies are generating a lot of excess cash that management will need to put to work. Home Depot (HD) is the poster-child stock for excess cash generation and share buybacks.
A good investment approach for 2007 might be to find companies like Home Depot with little debt that generates a lot of free cash flow and can afford big stock buy backs. Sooner or later demand will outstrip supply and drive stocks with these characteristics higher.
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