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.
Saturday, February 24, 2007
Newmont Mining
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
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
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
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
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.