Archive for the ‘Daily Views’ Category

Daily Views February 6, 2008

Wednesday, February 6th, 2008

Tags: Yahoo! (YHOO); Microsoft (MSFT); Intel (INTC); Google (GOOG) + Model Portfolio Review; Kubota (KUB); Caterpillar (CAT); Deere (DE); CNH Global (CNH)

11 am ET…February 6, 2008 — Special Edition…Part II (of II)

After Big Tech — alternative investments to Big Tech

We come not to bury Microsoft, but to praise it. That company’s historical track record is arguably the most-envied in the world. The problem is that track record IS history. And therein lies Microsoft’s frustration. This track record is illustrated in a table at the end of today’s “Views”, along with Google for direct comparison. Here is a summary of that comparison ~

1. Microsoft’s current market value of $288 billion has hardly budged since 2004;
2. In fact, Microsoft’s market value isn’t much larger than it was 10 years ago.
3. Google’s market value, while $57 billion less than a month ago, is still triple its 2004 market value.
4. Over the same period (2004 – 2007), Google’s revenues have increased by a factor of 5-times and its Net Income by a factor of almost 10-times.
5. By comparison, Microsoft’s revenues over that period increased by 40% (admittedly, from a base that is 10-times larger) and Net Income increased by 72%.

The Bottom Line— in yesterday’s “Daily Views”, we cited various empirical studies that the long term baseline Price-to-Earnings ratio for public companies is 16 times trailing earnings and 12 times leading earnings. We also pointed out, graphically that this is the stock price Yahoo was headed for, prior to Microsoft’s hostile bid at $31 / share last Thursday. One final conclusion we offer with respect to the Microsoft table…Microsoft’s current stock price is already at 16 times consensus earnings estimates.

Microsoft’s admitted motive to acquire Yahoo is to garner market share in search and online advertising. Even assuming the Yahoo acquisition enables Microsoft to do this (which means amalgamating search systems and advertising algorithms), Yahoo’s $7 billion in revenues are only a fraction of Microsoft’s $51 billion in revenues, and its earnings are almost statistically insignificant. Other than market share boasts and positioning by the millionaire businessmen running MSFT and GOOG, there is little for the average investor in this commercial battle.

Another motive may be to recapture the glory days of the last stock market boom. Here again, Microsoft is mistaken — those days were a once-in-a lifetime event. Here are some statistics to highlight that never-to-be-repeated era ~

When Microsoft and Intel were included in the Dow Jones Average in November 1999, that inclusion gave legitimacy to all so-called “4-letter (NASDAQ) stocks”. From September 1999 to March 10th, the NASDAQ Composite Index advanced 83%. Microsoft’s stock price was actually pretty lame in that period, however, newer arrivals, like Yahoo, doubled and tripled in price.

THE BASIC INVESTMENT CONCLUSION of the foregoing analyses (yesterday’s and today’s) is that the investment alternatives most likely to produce above average investment returns in the 12 months ahead will not be the large cap, highly visible stocks that generally get the most comprehensive coverage. We offer two graphs to confirm this outlook.

The above graph illustrates that for most of the past 6-months, Google (GOOG: $506.80) and Microsoft (MSFT: $29.27) have been preferred holdings within the overall market. However, that same graph for the past 5 days (since the announced hostile takeover of Yahoo by Microsoft, January 31st) tells a much different story…both Google and Microsoft are now underperforming all three stock market averages, a paradigm emerging only in the last 5-days. This divergence could accelerate.

This is the appropriate time to refresh collective memories about our Model Portfolio, specifically constructed out of the “other”, less visible public companies that operate below the radar screen, stocks that are underfollowed, overlooked, and possibly unloved. Companies like Kubota (KUB: $33.00) and Terex (TEX: $56.12), and one just added today – CNH Global (CNH: $45.66). CNH is a Dutch company, also in farm equipment, with consensus earnings growth of 22%. The stock is off $20 since the start of the year, and could get back to that level with a little patience.

Let us hear your thoughts below:

Daily Views for February 5, 2008

Tuesday, February 5th, 2008

Tags: Yahoo (YHOO); Microsoft (MSFT); Google (GOOG)

February 5, 2008 — Special Edition…Part I (of II)

Big Techs — Toothless or Tigers

Special Editions are rare — this is the first from Daily Views. The primary conclusion from the biggest news last week, the hostile takeover of Yahoo by Microsoft, is that this is an event that will remain a serious presence in the financial media for weeks to come. It cannot help but exert influence on investment strategies that emerge, either from these electronic pages or others that subscribers read. We felt compelled to weigh in on this event.

The initial market euphoria seemed to view this takeover as a harbinger of more ‘tech deals’ in the near future. We disagree. This is an acquisition Microsoft had to make as technology goes from desk top to mobile. CEO Ballmer’s stated a Yahoo! merger a year ago failed. That timing might have produced more enduring expectations but to pull that trigger now is 100% defense, and an expensive defensive move at that.

The markets opened flat on Thursday, January 31st, and then shot up after Microsoft’s announcement. By Friday’s close, the Dow was up 2.4%, NASDAQ up 2.8%. Yesterday, the markets sold off a bit, possibly dampened spirits from underwhelming Super Bowl ads, though these indexes are still about 1% higher than pre-Microsoft news. Yahoo! rose to close at $29.33, up $0.95, or 3.3% from Friday’s close. It is significant that Yahoo! has yet to hit the $31 / share Microsoft bid.

Some of this uplift in the indexes represents nothing more complicated than ‘sellers’ fatigue. From the beginning of 2008 until the day before Microsoft’s announced hostile takeover of Yahoo, the S&P 500, a broader, market-value weighted index, declined by more than 11%, in less than a month from 2652 to 2349. As depressing to portfolio values as that may be, both Microsoft and Yahoo were performing well below market indexes, prior to January 31st.

Microsoft’s acquisition of Yahoo! provided a momentary antidote to this sellers’ fatigue. In its aftermath, overhanging uncertainty now aptly describes the next year or so while regulators in the USA and Europe review this proposed transaction. The USA regulatory landscape may be resolved this year, however, Europe, where Microsoft has some challenging history, is unlikely to rule on this until 2009. Meanwhile, there are some genuine operating impediments to this merger.

Here is a link to the New York Times technology blog, that points out three practical hurdles ~ http://bits.blogs.nytimes.com/2008/02/01/microsoft-is-building-a-spaceship-out-of-spare-parts
1. “Microsoft and Yahoo have taken different technical approaches to search. .. merging the best from both would take years. Would Microsoft throw out its multibillion dollar investment in search?”
2. “Advertising systems are more complex than search engines…combining algorithms to pick the best ads to show with a real time auction among advertisers. Yahoo’s Panama system is weak, a year late and over budget. Combining it with MSFT’s Ad Center will cause a lot of pain.”
3. “Portals and Applications — merging instant messaging systems might create a rival to AOL’s AIM. The race for applications is wide open for products like Google Docs. If this deal can get Microsoft to separate this effort from Office, it could give Microsoft an advantage.”

Finally, there is the matter of valuation of the Yahoo takeover price itself. At a purchase price of $31 per share, Microsoft is proposing to purchase Yahoo at 61 times 2008’s projected earnings. This works out to a transaction value of $43 billion. The table below provides a history of Yahoo’s market value since it went public in April 1996. To place Yahoo’s 1999 valuation into perspective, that was in the middle of the stock market bubble inflating — from September to December 1999, the NASDAQ index advanced a stunning 48% (from 2746 to 4069)

There is some other market history to help shape an investment point-of-view, however; the merger of AOL and Time Warner. Though that transaction was consummated in 2001, the commercial terms were set in the fourth quarter of 1999 — or right in the middle of a NASDAQ stock market feeding frenzy. Here is a link to refresh collective memories ~ http://www.referenceforbusiness.com/businesses/A-F/AOL-Time-Warner.html

The AOL bought Time Warner for $163 million. At the time, the combined enterprise had earnings of $1 billion, hence, a multiple of 163 times. As painfully recalled in the linked historical article, two years later, the enterprise took a $54 billion write-off, or one-third of the purchase price. Given the infrastructure obsolescence highlighted by the New York Times tech blog, write-offs of a combined Microsoft-Yahoo seem inevitable, though probably not of a similar magnitude (i.e. one-third of $43 billion = $14 billion).

Had Microsoft pursued this acquisition when Yahoo was selling in the vicinity of $8 – $9 / share, which it was, not too long ago, that might have demonstrated the Microsoft perspicacity of the past. But, like many huge companies, Microsoft got to a point where there was more to protect than gain. Similarly, Yahoo should have bought Facebook when it could, which it didn’t.

The only observation that is inescapable is that of a couple of tired old companies trying to recapture the limelight, including the buzz, of days gone by. It’s not going to happen. It reminds us of a rock concert this summer that featured the popular groups of days-gone-by…the Platters, the Coasters and the Four Tops. They provided some great memories, but many years later, the performances are just not the same.

The best conclusion to offer individual investors at this time is expect nothing definitive about this merger for a year, and to channel investments to Alternatives other than the Big Techs like Microsoft, Google and Intel. Research studies are abundant confirming that over the long term, all stocks gravitate toward a leading 12 months Price-Earnings multiple of 16…which is precisely where Yahoo was headed prior to Microsoft’s hostile takeover bid.

It is doubtful another suitor will emerge to surpass Microsoft’s 61-times-EPS purchase price, which begs the unspoken question in the market place and in the financial media: Other than the $31 per share purchase price, sometime this year, what’s in this for Yahoo’s shareholders and is this a return worth waiting for…?

In our next issue, we will provide a review of the Model Portfolio which illustrates some stocks that comprise a sampling of Alternative Investments.

Let us hear your thoughts below:

Daily Views for February 1, 2008

Friday, February 1st, 2008

Company Tags: Google (GOOG); Microsoft (MSFT); Office Depot (ODP); Staples (SPLS) Wal-Mart de Mexico (WMMVF); Medarex (MEDX);

11am ET…February 1, 2008 — Comment on Markets, Companies and Events in the News

Google TV…and 3-Position Builders

The morning news is dominated by the Microsoft (MSFT: $32.60) takeover of Yahoo! (YHOO: $28.66), setting the stage for the competitive environment in the online advertising industry. Google (GOOG: $564.30), however, already seems poised for the next generation of media…announcing on January 24th that it would file an application to bid on the 700-meghahertz spectrum being vacated by the television networks re-tooling to digital.

“Google has said it will bid for the so-called C Block of the auction which it could use to offer nationwide wireless broadband service that competes with digital subscriber line service and cable Internet access.” Google TV is only a matter of time. Meanwhile, one cannot help but think Microsoft was a little late in this move.

In this morning’s conference call, Microsoft CEO, Steve Ballmer, said the first overture to Yahoo! was made 18 months ago. Today’s development would have been bigger news 18 months ago…today, it merely reflects what was inevitable, but on a more fundamental level, it is an example of a big company moving too slowly.

There will come a time to buy Google…but not at $564 a share. Today, 32 analysts cover Google, all with a Buy recommendation. This is 7 analysts more than when Google closed north of $700 a share last month. In other words, 7 brokerage firms have been recommending the stock over the last 150 point decline in the stock. If Google’s stock closes below $500 a share, the next technical support doesn’t show up until $450 a share. That would be a buying opportunity, especially since more could go wrong for Google than right in the months ahead.

Three prior stocks are re-visited to provide position builders…Office Depot (ODP: $14.82); Wal-Mart de Mexico (WMMVF: $3.61) and Medarex (MEDX: $9.99). The office supply sector in general has been out of favor for the past year, plus cost-pressures due to expansions of the past have taken their toll on margins. At the same time, the continuing growth in the work-at-home market combined with cost-cutting measures should begin to improve operating margins and same store sales this year.

Within this sector, Office Depot appeared to offer the best value — Gross Margins at 30% are about the same as Staples (SPLS: $23.94) yet operating profit margins are half. As the cost-cutting implemented by CEO, Steve Odland, kicks in, his stated objective is to increase these margins to 7.5% from the current 4.5%. Perhaps the most compelling stat is the P/E, ODP sells for 9 times the consensus EPS estimate of $1.65 versus a multiple of 15 for SPLS. Even cutting that multiple difference in half, to 12, could produce a $20 stock price later this year, or sooner.

ODP is up 7.7 % since last week’s showcase vs. a 2.6% gain for SPLS. See Table Below.

The second position builder is Wal-Mart de Mexico. Wal-Mart USA owns the controlling interest in this Mexico City-based company, which represents 10% of Wal-Mart’s consolidated sales and about 20% of operating income. Working off a 27.2 million share short position in the weeks ahead should propel the stock price due to short covering.

Longer term, we’d envision Wal-Mart USA purchasing the minority ownership interests to make this a wholly-owned subsidiary. That’s the take-out strategy. The graph below shows that the stock hasn’t done much for the past year — and the ‘bet’ is that the combination of (i) covering a short position that the market doesn’t seem to notice (yet); and (ii) a buy-out by Wal-Mart USA will, together, move this stock to north of $5 in the months ahead.

Finally, Medarex has bounced back smartly from its FDA rejection last month. The short interest in this stock is a whopping 30% of shares issued. As better FDA-data is collected in this year’s first quarter, Medarex’ stock price could retrieve most of its lost ground (from recent high of $18/share) by the middle of the year…building a patient position in this stock might pay off.

 

Let us hear your thoughts below:

Daily Views for January 31, 2008

Thursday, January 31st, 2008

Company Tags: Anheuser-Busch (BUD); Fosters (FBRWY); Kirin Brewery (KNBWY); Kyowa (KYKOF); Terumo (TRUMF); Medarex (MDEX); Medicis (MRX) Allergan (AGN)

11am ET…January 31, 2008 — Comment on Markets, Companies & Events in the News

Suds and Drugs…and Japan

You know it’s the week before Super Bowl, when the financial news networks showcase beverage companies. Absolut Vodka has been making the rounds. It is part of the V & S Group, which is owned by the Swedish government. Its web site is entertaining and informative. Last July, the government began looking at ways to divest. That usually means IPO.

A myth to regularly resurface is buying “Budweiser stock”, Anheuser-Busch (BUD: $47.30), since its Super Bowl ads are among the best. This hasn’t been a good idea for the past four years. The chart below illustrates no correlation whatsoever. Only two conclusions: (i) If you own BUD, probably a safe bet to write an “in-the-money” call; and (ii) February has been a lackluster month.

http://finance.yahoo.com/q/hp?s=BUD&a=01&b=1&c=2003&d=01&e=28&f=2003&g=d

One stock our research did turn up is Fosters Brewery (FNRWY: $5.20)…flat for a year. (A graph attached at end of this article.) Only one analyst covers the stock…and unless he’s been sampling Fosters’ wares…projects EPS at $0.37. This is not an expensive stock.

In the category of foreign breweries, we’ve written up Kirin Brewery (KNBWY: $15.30) when it was a buck lower. There is more to this company than suds, however. If your investment focus includes overseas stocks, this is one to add to your screening process. Here’s just a sample of its diversification.

Late last year, Kirin announced its intention to team up with Kyowa Hakko (KYKOF: $10.35), a pharmaceutical company that is in the process of spinning off its chemical and food businesses to concentrate on drugs. Kirin is expected to invest $2.6 Billion. Earlier in the year, it announced an alliance with Terumo (TRUMF: $49.50), a leading Japanese medical equipment maker.

Here’s what a stock price summary table of these three companies looks like:

The inescapable conclusion is each of these companies is closer to its 52-week high than its low.

As a working example of globalization, the pharmaceutical division of Kirin, Kirin Pharma, developed break-through biotechnology with its mouse…not a PC mouse, but an actual mouse. An American biotech, Medarex (MEDX: $9.90) teamed up with Kirin, and is using that technology for a new type of cancer treatment. FDA tests are pending. As back-up to the otherwise bizarre assertion that a Japanese brewery is contributing to medical science, here is the link to the Medarex’ site — http://www.medarex.com/Development/UltiMAb.htm, from which we duplicate this section, including the photo of the mice…

Kirin TC Mouse™

“Through an exclusive partnership with the pharmaceutical division of Kirin Brewery Co., Ltd., we have access to the Kirin TC Mouse. The KM-Mouse® Together with our partner, Kirin, we have developed the KM-Mouse, a crossbred mouse that combines the characteristics of our HuMAb-Mouse with Kirin’s TC Mouse that retains the capability to produce all human antibody isotypes with an immune response we believe previously unseen in any human antibody producing mouse system.”

After the FDA gave Medarex a cool review last month, the stock sank to a low of $8.90. It has since bounced back. There may be a lesson in this for the owners of Medicis (MRX” $19.58). Medicis also received some bad news from the FDA on its Reloxin trials, off more than 10% from just a few days ago. Its principal competitor in this area is Allergan (AGN: $66.35), so naturally, AGN is on a tear. Both MRX and AGN appear to be trading vehicles for now.

POLITICAL SNIPPETS…Delegate Count… As of today, the front runners for the Democratic nomination, based on pledged delegates, shows Obama with 63 delegates to Clinton’s 48. For the Republican nomination, McCain has 93 delegates to Romney’s 59. Here’s a link to a Yahoo site that tracks this relevant election data, http://news.yahoo.com/election/2008/dashboard, updated every day.

This site also tallies “Money Raised” by the front running candidates. Clinton comes in first with $91 million. Obama is #2 ($80 mm), Romney ($60 mm), and McCain ($30 mm). An editorial in today’s New York Times points out that if Clinton is elected President, by 2017, 40% of Americans will have lived under a President Bush or President Clinton. A web site pokes fun at this prospect, Bush-Clinton Forever, projecting a Bush or Clinton president until 2057.

GENERAL SNIPPETS ~ GQ magazine features a piece that addresses the feeling you get when you send an ill-conceived email. Called “e-grets”, the article offers this guideline — “Never send an email you wouldn’t want to have read back to you in public”. Another good suggestion, just to get it off your chest, is to write the email but do not type in the address. Usually, by the time you’re finished writing, you’ll lose the urge to send what looks like, in retrospect, a heat-seeking missile.

Inc. magazine offers this — managing email isn’t just dealing with the spam and free-offers, but also managing those emails requiring responses. It is information management. “If you can’t do that”, the magazine writes, “your problems run much deeper than your in-box.”

Let us hear your thoughts below:

Daily Views for January 30, 2008

Wednesday, January 30th, 2008
Company Tags: Amerco (UHAL); Public Storage (PSA); Sovran Storage (SSS); U-Store-It Trust (YSI); Wal-Mart Mexico (WMMVF); Westpac Bank (WBK); Kubota (KUB)

11am ET…January 30, 2008 — Comment on Markets, Companies & Events in the News

Trailer For Sale or Rent

Wall Street has a way of bringing out the more practical views about current events. One theme getting visibility focuses on the public storage companies. If downsizing housing is in store for the millions forecast, the three most prominent could experience accelerated earnings growth. Consensus earnings forecast 5% – 10% growth for Amerco (UHAL: $70.00); Public Storage (PSA: $78.63) and Sovran Storage (SSS: $39.46).

Another company in that space, however, seems a better value…U-Store-It Trust (YSI: $9.24). This is a self-administered, self-managed real estate investment trust focused on self-storage facilities. Here is a link for guidance on 2008 http://biz.yahoo.com/iw/071213/0339504.html

The company projects a dividend of about $0.80…which translates into a yield of 9%. Whether the re-housing of America increases sales or not, a 9% return isn’t a bad premium while waiting.

Here’s a table summarizing these four companies. YSI operating margins are close to PSA’s, the industry leader, yet its market valuation to sales is one-third.

REVISITS- Wal-Mart de Mexico (WMMVF: $3.53) was written up at $3.50 and appears poised to make its move. Same store sales continue to come in at 8%. Overall, Wal-Mex represents about 10% of Wal-Mart USA’s sales and as much as 20% of Net Income.

Westpac Banking (WBK: $113.15) was mentioned as a world class money center bank that might stay out of the sub-prime fray…and these have moved up. Remember, the stock price is an ADR and is comprised of 5 shares of common stock…so 100 ADRs of WBK is equivalent to 500 shares of its common stock.

Kubota (KUB: $35.30), a prominent agricultural and construction equipment manufacturer has begun to respond to an increased following in the USA. Its stock price is up 10% since showcased here (January 24th). Caterpillar (CAT: $68.99) and Deere (DE: $86.71) are also up, but by 5%.

Let us hear your thoughts below:

Daily Views for January 29, 2008 — Snippet

Tuesday, January 29th, 2008

Tags: Reddy Ice Holdings (FTZ)

Noon supplement … January 29, 2008 — Comment on Companies & Events in the News

Reddy Ice Holdings (FRZ: $23.03: MV: $ 506 million) was a hot topic last summer. A hedge fund had agreed to buy FRZ, the country’s largest producer of packaged ice, at $31.25 per share. Morgan Stanley was to provide the hedge fund with $700 million of financing, however, its interest in doing the deal evaporated once the sub-prime mortgage crisis hit.

Naturally, the stock melted on news of the broken deal, down 30% initially, but it may have overshot its correction. Even before the buy-out was announced, the stock never sold for much less than $25 a share. Plus, there are some market observers (such as www.thestreet.com) who hint that another deal may take this buy-out-waiting-to-happen out of the deep freezer.

Just looking at the fundamentals, it is apparent why Reddy would be attractive as a buy-out candidate. It generates more than $80 million a year in EBITDA and Net Income is $10 million. Market value is less than 1.5 times annual sales. Long term debt of $347 million is high, but easily serviced, based on cash flow. Presumably, Morgan Stanley’s objective was to clean up the balance sheet, re-tool the management, then return the improved company into the public arena.

More on Reddy Ice —

• Largest manufacturer and distributor of packed ice in the USA
• 2,000 year-round employees
• Distributes thru 82,000 locations in 31 states

Even without a buy-out re-surfacing, there appears little downside in the stock at the moment. On the positive side, any news about a renewed takeover can be expected to give this stock a boost. Two private companies also fuel speculation about FRZ being a consolidator — Home City Ice (Cincinnati-based, $80 million in annual sales); Arctic Glacier (Winnepeg, $180 million in sales). Note that FRZ’s $345 million in annual sales are more than these two private companies combined. Plenty of banking business to attract Wall Street’s attention.

Let us hear your thoughts below:

Daily Views for January 29, 2008

Tuesday, January 29th, 2008

Tags: Mastercard (MA); Amex (AXP); Office Depot (ODP); Office Max (OMX); Staples (SPLS)

11am ET…January 29, 2008 — Comment on Markets, Companies and Events in the News

Working at Home

A relatively obscure trade magazine reported that 28 million people now work at home, at least part-time. With non-farm payrolls at 138 million people, this means 20% of the country works from home, or one-out-of-five. That’s pretty remarkable. Even more remarkable is that this work-at-home figure is 40% greater than it was in 2002.

While the wizards of Washington continue to debate if we are in a recession, we see plenty of evidence pointing to a slow-down in the economy. The week before last, American Express (AXP: $47.40) reported a pronounced slowdown in spending among its 84 million card members, and a slower pay down of credit balances.

MasterCard (MA: $189.00) seems sure to follow. A graph (below) comparing Amex and Mastercard for the past 5-days indicates that the traditional premium between these two stocks has already disappeared, compelling us to repeat a short sale opportunity in MasterCard. A slowing economy also means that more people can be expected to work from home — either due to layoffs or efforts to supplement income.

The three major public companies servicing in this sector of the economy are

• Office Depot (ODP: $13.76),
• Office Max (OMX: $22.63) and
• Staples (SPLS: $23.33).

These three public companies collectively represent less than 15% of the total office supply industry — consequently, there is plenty of room for consolidation within this highly fragmented industry. These are three companies that can be expected to lead that consolidation. This point-of-view has been the market play in these stocks from the start. Note that institutions own, respectively, 89%, 98% and 86% of these stocks. However, based on the comparative graph below, it looks like Staples, clearly the industry leader, has become more generously priced in relation to Office Depot and Office Max.

Research looked a little closer at the numbers —

Staples position as the industry leader is irrefutable. However, Office Depot appears to be a better value —

1. ODP’s sales are 20% less than Staples, though gross margins are the same; this spells out an overhead issue; Steve Odland, the new CEO who came on board in 2005 after successfully heading up Autozone is perfect for this challenge.
2. A P/E of 8 times earnings for ODP versus, a multiple of 17 for Staples, is overkill to the downside. If the slowing economy does begin boosting sales forecasts and consolidation increases market share, even the slightest P/E expansion will propel the stock price.
3. Perhaps the most diminished of all is ODP’s market value to Sales…at less than 30%. Even a 0.5 ratio (50% of $15.5 billion in sales) equals a $28 stock price (50% x $15.5 B = $7.750 divided by 273 million shares issued = $28 / share)

Let us hear your thoughts below:

Daily Views PM – January 25, 2008

Monday, January 28th, 2008

Company Tags: Kubota (KUB); Caterpillar (CAT); Deer (DE) Terex (TEX)

11:59 pm Edition…January 25, 2008 — Last Comment of the Day

The Irony of Globalisation…from Osaka, Japan to Gainesville, Georgia

Late night editions are rare. There wasn’t a convenient way to integrate this overseas public company into earlier editions. Our research staff introduces Kubota Corporation (KUB: $32.25), an Osaka, Japan-based manufacturer of engines, machinery & equipment and other industrial products. Kubota is an old-line Japanese company (founded 1890) with a 21st-century dynamic. It is an irony of globalization that 20% of KUB’s employees work in the USA.

US Agricultural exports are up 28%…so we trolled in the farm sector for some ideas, beginning with Caterpillar (CAT: $65.25) and Deere (DE: $82.59). Many farmers in this sector started buying smaller equipment to increase yields. We discovered this space was Kubota’s specialty, and they outsell Caterpillar and Deere. Japan-based Kubota has had a US subsidiary (Kubota Tractor, Torrance, California) making farm equipment since 1972. Since then, two other Kubota units have opened in the USA: Kubota Manufacturing (1988) in Georgia (lawn tractors, mowers and other implements) and Kubota Engine in Illinois (compact engines for agriculture & industry).

http://finance.yahoo.com/q/co?s=KUB – This links to a Yahoo Finance table that compares Kubota (KUB: $32.25) to Caterpillar (CAT: $65.25) and Deere (DE: $82.59). Referring to that table, Kubota is 25% the size of Caterpillar…25% of the employees, about 25% of revenues, even EBITDA is proportional. Operating margins are not, however.

 

 

Kubota has a Market Value of $8.7 Billion, 21% of Caterpillar’s Market Value. However, KUB’s operating margins are close to 12%, better than the margins at both Caterpillar and Deer; at 11%. KUB’s Gross Margins are also better than CAT and DE. Finally, as a Balance Sheet benchmark, Debt-to-Equity, Kubota has total long term debt equal to only 40% of equity versus long term debt at Caterpillar and Deere that is a whopping 2 to 3 times equity.

Research embraces the optimistic outlook for American equipment manufacturers like Caterpillar and Deere. Indeed, institutional ownership is 82% of Deere and 66% of Caterpillar. Now, check out the number of analysts following each company…somewhere between 15 and 20. There seem to be a number of vested interests to keep the stock prices of CAT and DE at present levels.

BEWARE: Caterpillar and Deere remain at lofty price levels, even in this bearish market — we anticipate selling pressure as analysts gradually assess debt levels of industrial companies in an imminent credit-challenged environment.

Kubota, on the other hand, seems the safer play in this sector, a growing one. KUB also serves as an example of a stock meeting Growth at Reasonable Price criteria (GARP), meeting 2 of the 6 GARP criteria: (i) Its P/E is less than those in its peer group; (ii) operating margins are at least as good as its peers. These two criteria alone can keep an investor from a lot of financial heartache.

For the Model Portfolio, we put our money in 100 shares of Kubota, or $3,275 including transaction costs. No off-setting short sale in Deere or Caterpillar, however. Those two stocks are so heavily-owned by institutions, outright disposal is unlikely. We don’t see those stocks moving much…unless their debt loads start to attract attention. The graph below illustrates this foregoing investment point of view. A picture, like the graph below, says a 1,000 words, or in this case, 567.

Let us hear your thoughts below:

Daily Views – January 25, 2008

Monday, January 28th, 2008

Company Tags: Wal-Mart de Mexico (WMMVF.PK); LTD, M, AAPL, NWS, MGM

9 pm ET…January 24, 2008 — Comment on Markets, Companies & Events in the News

South of the Border

Tonight we go south of the border…from Wal-Mart (WMT: $22.22, Mkt Value: $195 B) in the USA to Mexico City, Mexico. Wal-Mart de Mexico (WMMVF.PK: $3.50; MV: $29 B) represents Wal-Mart’s first international operation, a 50% joint venture with Cifra S.A in 1992. In 2000, Cifra officially changed its name to Wal-Mart de Mexico. Here’s a link to its December news: http://www.pinksheets.com/otciq/ajax/showFinancialReportById?id=13402

Other retailers, like Limited (LTD: $17.15; MV: $6 B) and Macy’s (M: $25.02; MV: $10 B) reported disappointing December sales, both down 8%; WMT itself was up 2%. Wal-Mart-Mexico had an increase in December sales of 8%, one of the highest in the industry. If one is timid about investing in non-USA stocks, then consider Wal-Mart de Mexico. It has a market value almost twice the market values of Limited and Macy’s combined…and its stock sells for $3.50.

Here’s how Wal-Mart Mexico’s stock performed since October, relative to Wal-Mart USA and the Dow Jones Average, of which WMT is a member.

Our research unsurfaced some interesting developments about Wal-Mart Mexico’s short position: The number of shares sold short increased to 19.8 million shares at the end of December from 4.4 million shares sold short as recently as the middle of December. The stock price during the last half of December ranged between $3.70 and $3.30 (see graph below). Hence, at an average short sale price of $3.50 per share — about where the stock trades now — this 15 million share increment equals an investment point of view of about $54 million.

Given that a bleak outlook for December retail sales began to emerge right after Thanksgiving, this position was probably viewed as a cheap and out-of-the-way means to play the expected downside in stock prices for retailers…however, “Wal-Mex” didn’t collapse. Upon further inspection, we noticed this wasn’t the first time there was a spike in the short interest.

In mid-October, Wal-Mex shot up to almost $4.30 from the end of September…and sure enough, the number of shares sold short shot up to 11.2 million shares. Then, by the end of November, back to the 4 million shares sold level. Based on an average sales price of $4 share at the time, we calculate that the engineer behind this position pulled out at least $25 million.

The only estimates in the public domain look for Wal-Mex to grow at 12% per annum. Our own research says that right now, “Wal-Mex” is valued at 1.5 time annual sales: $30 billion market value versus $ 20 billion in annual sales. As a rough barometer, if Wal-Mart USA is valued at 3 times annual sales, even valuing Wal-Mex at 2 times annual sales yields an arithmetic stock price of $5.35 per share.

Here’s the math — two times $ 23 billion in fiscal ’09 sales for Wal-Mex = $ 46 billion, divided by 8.6 billion Wal-Mex shares issued = $5.35 per share. Research points out that the all-time high for Wal-Mex is almost $6 per share. Hence, this is probably a defensible objective. But that’s just an opinion.

SNIPPETS —

• How fleeting is Wall Street’s love? Apple Computer (AAPL: $130: MV: $114 B) hit an intraday high of $202.96 per share less than 30 days ago. By the end of January, Apple will have lost over $60 billion in Market Value…! That was the day Apple announced a deal with News Corp (NWS: $19.25; MV: $11 B)
• AMERICA On-Sale — Dubai World, the government-owned, “sovereign” fund, purchased 5,000,000 shares of MGMMirage (MGM: $70.80; MV: $21 B) for $84.50 per share. This gives Dubai a total of 19.5 million shares in MGM, or 6.5%. This latest capital injection equals $423 million. But that’s not the whole story. In addition, Dubai World will invest $2.7 billion in MGM’s CityCenter real estate development on the Vegas strip. Total investment: $4.1 Billion.

Let us hear your thougths below:

Daily Views for January 22, 2008

Tuesday, January 22nd, 2008

Company Tags: Mastercard (MA); American Express (AXP), Discover (DFS); Citigroup (c), Westpac Bancorp (WBK)

9 pm ET…January 22, 2008 — Comment on Markets, Companies & Events in the News

The stock market was a roller coaster today. The Dow fell 128 points to close at 11971. Traders considered this a bearable loss after the morning saw a 300 point drop in literally the first minute of trading – and that drop came after the Fed cut rates by ¾ of a percent, the first cut of such magnitude since 1990 when the economic fallout from the S&L crisis of the late 1980’s was just ramping up.

The S&L debacle eventually totaled $150 billion in losses to the banking system. The subprime mortgage crisis, by comparison, is already over $100 billion (based on reported losses to date) and still counting. Therefore, the market adjustment may be far from over, despite the recovery in stock prices as the day wore on. At one point today, the Dow dropped 464 points.

Despite all the turmoil, volume on the NYSE was 6.3 billion shares, only 7% higher than Friday’s 5.9 billion in volume, leading some market observers to conclude investor sentiment is not as pervasively negative as the indexes would otherwise indicate. In fact, most of the selling came from pre-market opening orders from overseas, where Monday was even grimmer than today in the USA.

For example, on Monday, when US stock markets were closed, London’s FTSE and Hong Kong’s Hang Seng Index each fell 5%. Germany’s DAX dropped 7%. One can almost consider this morning’s 464 point drop in the Dow as a mere extension of overseas market sentiment…and a natural consequence of globalization. So there may be more days like today in the weeks to come. So stay cool, and when that happens, consider buying Diamonds.

On other exchanges in the US, the S&P 500 finished down 15 points to 1311 and NASDAQ fell 48 points to close at 2292. Diamonds (DIA: $119.22) which appeared in our morning edition, was down only marginally, $1.35, or 1% by day’s end. This is certainly not the end of the world — it only means investors need to be a little shrewder in stocks purchased, or sold short.

Frankly, credit card delinquencies are a more serious problem, and for many more people, than the current crisis in mortgage. MasterCard (MA: $182.17), for example, was identified as the most compelling short sale almost two weeks ago, when the stock was at $195 (The Wide Angle, January 10th edition).

MA closed up $7 today, though still sells at a multiple of 6 times sales versus a multiple of 1.7 times sales for American Express (AXP: $43.34) and 1.5 times sales for Discover (DFS: 12.71). MasterCard’s Price-to-Earnings ratio is no less out of whack in relation to its peers at 30 times and compares with an EPS multiple of 13 for Amex and 11 for DFS.

This isn’t exactly rocket science, or original. The short interest MasterCard of 11 million shares is 8% of total shares outstanding. The short interest in Amex and Discover is 2% and 1% respectively. In addition, Fidelity Management, the giant mutual fund company, recently announced that it had cut its stockholding in MasterCard in half, to 5% from 10%.

Given the approximate dates that Fidelity sold its stock, virtually all sales were north of $200 per share. At a minimum, Fidelity grossed $1.3 billion in stock sale proceeds, meaning it is carrying the remaining 5% of MasterCard that it owns at a zero cost basis — unless it has sold more stock, which we won’t know for a few more months.

Before we wrap up for the evening, here’s an example of shrewd. Citigroup (C: $24.40) recently cut its dividend by 40%, receiving applause and kudos for its attention to balance sheet management. It would have made more sense to eliminate the dividend altogether in order to retain as much capital as possible this year, however, with new overseas investors purchasing new stock, it was probably not a viable option. Citigroup’s earnings are still a fraction of the reduced dividend.

Compare this with an Australian money center bank, Westpac Banking Corp (WBK: $110.24). Westpac trades on the New York Stock Exchange (www.nyse.com) as an American Depository Receipt, called ADR’s. ADR’s are shares of foreign companies that are deposited in the USA, and traded as one would trade any American stock. In the case of Westpac, each ADR traded on the NYSE contains five shares of the bank’s stock back home… or $22.05 apiece.

However, Westpac’s trailing 12 month earnings of $8.13 is 42% greater than its annual dividend, and it doesn’t have any foreign investors to jump through hoops for. We’ll have more analysis on this stock in a future edition, or you can complete the comparative analysis on your own. But, as we’ve written often, any individual investment strategy that does not include foreign stocks is an incomplete investment strategy.

Until tomorrow…

Let us hear your thoughts below:

Daily Views for January 10, 2008

Thursday, January 10th, 2008

Airlines, Banks and Gold — The stock markets extended yesterday’s advance to a second day, with the Dow up 118 points to 12853, the S&P 500 up 11 points to 1420 and NASDAQ ahead 14 points to 2489. The biggest news weighing in was from Fed Chairman Bernanke, who gave the impression of interest rate cuts at the January 29th meeting. Gold also continued to advance, hitting $897 an ounce before closing at $892, $11 more than yesterday.Two gold stocks showcased yesterday are fully participating in this move — Yamana Gold (AUY: $16.30; Mkt Value: $6 B) up $0.62, or 4% and Kincross Gold (KGC: $22.65; Mkt Value: $14 B), up $1, or 5% for the day. For the newer readers of this newsletter, Yamana has a presentation video on display at the New York Stock Exchange web site ~ (www.nyse.com).

A second factor bolstering today’s market sentiment included Bank of America (BAC: $39.30; MV: $174B) announcing it was in talks to acquire Countrywide Financial (CFC: $7.75: MV: $4.4B). Since B of A already purchased 16% of Countrywide for $2 billion, even at the current stock price, it wouldn’t cost more than $4 billion for B of A to purchase the CFC shares it doesn’t own.

Countrywide’s stock price was $5.12 when we wrote about it yesterday. This isn’t a slam dunk…far from it. As B of A now begins reviewing what it may buy, it is conceivable that Countrywide’s contingent liabilities at the corporate level are so open-ended that instead, BofA merely purchases the underlying mortgages instead of the company. A gutsy move might be to sell CFC short, since the stock’s as high as it’s likely to get. Moreover, with some regional courts now hearing complaints of CFC mortgage application frauds, we suspect that CFC’s future will come to a head pretty soon.

A third development shaping positive market sentiment was news in the airline industry. The long-awaited consolidation of the airline industry’s majors appears poised to play-out. Delta (DAL: $15.98: MV: $4.3 B) is getting ready to merge with either United (UAUA: $32.19; MV: $3.7 B) or Northwest (NWA: $15.85; MV: $3.7B).

Maybe even a 3-way—altogether, a Delta-United-Northwest merger would be $50 billion in revenues, larger than Air France (AKH: $30.78; MV: $9 B) with $35 billion in revenues, and Deutsche Lufthansa (DLAKF.PK: $26.10) with $27 billion in revenues. Just to include the other major US carriers – add to this list American (AMR: $13.44; MV: $3.3B) and Continental (CAL: $23.25; MV: $2.2B). The collective market value of these 5 airlines is $17.2 billion.

Left out of this mix is US Air (LCC: $12.55; MV: $1.2 B). A year ago, this stock sold for $55 per share. At today’s stock price, and with 92 million US Air shares issued, that’s a loss of $4 billion in market value. With the other major airlines about to get their act together, it could easily be that US Air is left standing when the merger music stops. It wouldn’t surprise us if the remaining 2 or 3 majors have already carved up US Air’s markets amongst themselves…! Here’s a graph we think you’ll like, and it says it all —

 

 

Below the radar screen, there are a number of airline operators that might warrant attention. Consider Copa Holdings (CPA: $36.08; MV: $1.6 B). Copa Air transports people, cargo and mail via 108 daily flights between 36 destination-cities in North, Central and South America. Its hub is Panama City. Annual revenues are forecast to surpass $1 billion this year by the analysts covering the stock with EPS of $4 per share. (http://finance.yahoo.com/q/ae?s=CPA) This represents a multiple of less than 10 times earnings, a decent valuation in an industry coming into sharper focus. Here’s a link to CPA’s annual Investor Day: Click Here

Is there a cheap stock play in this industry…? Yes – Great Lakes Aviation (GLUX.OB: $2.25; MV: $32 mm). Revenues are $94 million, and the company is profitable. It also transports mail under long term contract, so with this contract, and $4 million in the bank, “Glux” will be around.

Let us hear your thoughts:

Daily Views for January 9, 2008

Thursday, January 10th, 2008

 

 

The Oracle of Omaha has spoken. Bond Insurance is in; Western Union is out

The stock market recovered some lost ground today — the Dow was up 146 points to 12735, the S&P 500 was up 19 points to 1409 and NASDAQ ahead 33 points to 2475. Though recovering a tad from the beating the markets have taken since Day 2 of 2008. The major stock indexes are still off 4% YTD. These are times when gold comes to mind, and indeed, the price of gold reached a record $894 per ounce today on the New York Mercantile Exchange before settling at $881.

In the process of checking in at the New York Stock Exchange web site for the daily movers (www.nyse.com), we came upon something much more interesting — a video of Yamana Gold (AUY: $15.68; Mkt Value: $5.6 B)at the bottom of that site. We checked it out further at www.yahoo.com/finance.

Yamana is a gold producer. Trailing 12 month revenues are $588 million and Earnings are $0.32 per share. Looks like a real company. The back story to bringing it to your attention, is that is appears overlooked, and possibly under-loved. Yamana appears similar to Kinross Gold (KCG: $21.64; MV: $13 B) in an industry comparable screen, yet Kinross is valued by the market at 13 times revenues versus 9 times for Yamana.

Also, we learned from the Yahoo! Site that there are now 9 analysts covering Yamana, compared to 1 a year ago…when Yamana’s stock price was near today’s. Kinross’ stock price, meanwhile, has shot up 100% over the same time. Worth looking into…! http://finance.yahoo.com/q/ae?s=KGC

In the days ahead it might be worthwhile to look at is the Bond Insurers. Ordinarily, this is a pretty sleepy business. Actuaries who cannot stand the excitement go into municipal bonds…the genesis of this industry. In fact, MBIA (MBI: $13.40; MV: $1.7 B) was founded as Municipal Bond Insurance Company. It’s basic business used to be municipal risk. This is the type of insurance that enables states and cities to undertake public works projects for the common good, like bridges and sewage.

The industry is now caught up in the sub-prime mortgage loan mess as much as the Investment Banks, except their reach is a lot further into the community-fabric of America. In today’s issue of the www.nytimes.com , we learn that a New York State insurance regulator, Eric Dinallo, contacted the famous Oracle of Omaha investor, Warren Buffet, to get into the Bond Insurance business…which his company, Berkshire Hathaway, did (BRK: $103,400; MV $202 B).

Include Ambac Financial (ABK: $19.25; MV: $2 B) in your search with MBAI. Each of these companies once had market values of almost $10 Billion, and within the past 6 months. It is structurally and culturally a lot easier for Mr. Buffet to purchase an operating company that is already in the business than to staff from scratch. Even if you cut the difference between these companies’ current market value and the $10 Billion they once were, $ 6 Billion is well within the Oracle’s financial reach. Remember, Berkshire Hathaway disposed of its financial interest in Western Union (WU: $22.35; MV: $17 B). In any event, these are our opinions…we could be wrong…

Let us hear your thoughts below:

Daily Views for 1/8/2008

Wednesday, January 9th, 2008

The Odd Couple

The stock market took a hit on all fronts today. All three major stock markets were off 2%. The Dow sank a whopping 238 points to 12589, the S&P 500 was down 26 points to 1390 and NASDAQ off 59 points to 2441. The major American stock market averages are now down 5% from the start of the year. Not a good start to 2008, the year of the Rat on the Lunar calendar. Today’s market results lend credibility to the Wall Street adage “Better Standard than Poor”…and there wasn’t much that was standard today.

Among the ten most active stocks traded on the New York Stock Exchange today only Pfizer (PFE: $23; Market Value: $160 B) advanced, and even then, only 24¢. Countrywide Financial (CFC: $5; MV: $3 B) was the leader on the most active list, with 178 million shares traded. There are only 579 million shares issued (see stats http://finance.yahoo.com/q/ks?s=CFC), which means 30% of CFC’s shares issued to the public changed hands today.

At $5, another day like today, and there’d be an entirely new shareholder base at $3. Might be ripe for a bounce. Our inclination is caution — never try to catch a falling knife. The securitization marriage between real estate and Wall Street (marrying residential real estate mortgages and investment pools of capital) was an odd couple marriage in the first place. Real Estate is one of the most fragmented asset classes in the world; the investment pools all gravitated to New York…and from New York, the rest of the world.

On the list of top decliners today, however, Countrywide was #2. In first place was Quebecor World (IQW: $1; MV: $146mm), a Canadian printing company that borrowed a bunch of money in 2001 to repurchase company shares in the market. Those loans are now coming due. Management has run out of time. This speculative play might have legs. The drama is straight out of Falcon Crest.

The reason it may have legs is that the most likely outcome here is for the owner to fork over those shares used for collateral back to the lenders who lent the money in the first place. The bankers install new management, and the company is on its way…!…and at $1 per share, the downside is tolerable. IQW employs almost 30,000 people so it’s not about to disappear…just experience a redistribution of its ownership. 

Let us hear your thoughts below: