AlphaNinja

Summer hiatus

2010-06-20T18:54:00.000-07:00

There will be occasional posts on TheAlphaNinja.com this summer, but will be sporadic.

More to follow.

Nice insider purchase at ION Geophysical (IO)

2010-06-08T10:27:00.000-07:00

ION Geophysical director James Lapeyre continues to buy shares on the open market, as the stock has become about 30% cheaper in a matter of a few weeks...

Netflix for iPhone.....

2010-06-07T10:44:00.001-07:00

Apparently Netflix (NFLX) will be available on your Apple(AAPL) iPhone this summer. Nice news for those of us who continue to wonder why we pay $90 per month simply to use a product that costs $100 at Walmart...

Netflix shares are up three dollars on the news. Interesting to see this news come out right after AT&T talked about going towards a usage model for pay plans, as Netflix will certainly be a bandwidth-hog....T shares are up 1.5%.

D Day....

2010-06-07T08:27:00.001-07:00

Yet another Wal-Mart effort to cut prices (WMT)

2010-06-03T08:28:00.001-07:00

Makes sense...

Wal-Mart figures if it can master logistics better than their suppliers can, then they may as well go ahead and take over deliveries, leaving suppliers to focus on production and passing on the cost savings to customers.

From Bloomberg Business Week:

The retailer aims to take over U.S. transportation services from suppliers in an effort to reduce the cost of hauling goods. Wal-Mart is contacting all manufacturers that provide products to its more than 4,000 U.S. stores and Sam's Club membership warehouse clubs, says Kelly Abney, Wal-Mart's vice-president of corporate transportation.
The goal: to handle suppliers' deliveries in instances where Wal-Mart can do the same job for less, then use those savings to reduce prices in stores, Abney says. Wal-Mart believes it has the scale to allow it to ship everything from dog food to lawn chairs more efficiently than the companies that produce the goods. "It has allowed our suppliers to focus on what they do best, manufacturing products for us," he says. "With lower costs usually comes increased sales."

A biased (but quite fair) opinion on Moody's from David Einhorn (MCO)

2010-06-03T08:15:00.001-07:00

He's short the stock on the premise that it is unlikely they will win each and every legal battle headed their way over flawed ratings.

Random thought for the day

2010-06-02T10:24:00.000-07:00

Warren Buffett continues to testify at the Financial Crisis Inquiry Commission today. It's pretty interesting because this commission is MUCH less willing to attack this man, compared to the way Goldman Sachs employees were treated.

If anyone needs some extra summer reading, below is a little bit of the introduction to Inside Job: The Looting of America's Savings & Loans, written by Stephen Pizzo, Mary Fricker, and Paul Muolo. Their research into the now extinct Centennial Savings & Loan is a fantastic look at the dangerous mix of brokered deposits and the riskier loan portfolios they necessitate.

Coauthors Steve Pizzo and Mary Fricker were jarred to attention by thrift
deregulation's fallout when tiny, conservative Centennial Savings and Loan in
their rural Northern California hometown of Guerneville began acting strangely
in December 1982 (two months after the signing of the Garn-St Germain Act)
and announced it was going to pay $ 1 3 million cash for a construction company.
Pizzo was editor of the Guerneville weekly, the Russian River News, and Fricker
was news editor. Pizzo wrote a news analysis highly critical of Centennial's plan
to spend seven times its net worth' on a construction company, and he began
aggressive coverage of a succession of strange happenings at Centennial Savings
and Loan.

Centennial officers suddenly were awash with money. Their names popped
up in complex real estate transactions documented at the county recorder's office.
Out-of-town visitors from places like Holland, Las Vegas, and Boston mysteri-
ously came and went, taking money with them. Still the thrift's financial state-
ments recorded phenomenal growth. And the small-town rumor mill geared up
to churn out dozens of explanations for this bizarre behavior. In the Russian
River News, Pizzo began asking some fairly obvious questions of the Centennial
officers: "Where is all this money coming from? " "Who are you lending it to,
and why?" "How can you justify these extravagant salaries, benefits, perks, planes, luxury cars, boats, and trips?" Was this, Pizzo asked, the proper role for a savings and loan, heretofore the most conservative, predictable, and reliable of all American financial institutions?


Pizzo's journalistic probings infuriated Erv Hansen, the president of Cen- 
tennial Savings, and he exploded. He dispatched his assistant to complain to 
the paper's publisher. Periodically he threatened that tellers at Centennial would monitor withdrawals, and if they were substantial, he would sue the News for causing a run on the thrift. Drunk in a local bar one night, Hansen told Pizzo's 
business partner, Scott Kersnar, "You tell your partner he better stop sticking 
his nose where it doesn't belong or I'll do to him what 1 did to that San Diego 
reporter on that stock manipulation deal." Pizzo had no idea what had happened 
to the San Diego reporter, but he took the warning seriously because he had 
already discovered that some of those customers buzzing around Centennial's 
loan window had organized crime backgrounds. 

For four years Pizzo pursued the Centennial Savings and Loan story, and 
gradually his Russian River News articles about Centennial Savings found their 
way outside tiny Guerneville. They circulated quietly at the Federal Home Loan 
Bank in San Francisco and Washington and at the Justice Department. In late 
1985 Centennial collapsed — $165 million was missing.

Congress to the rescue!

2010-06-02T07:30:00.000-07:00

Just a few years and a few trillion dollars too late, the "Financial Crisis Inquiry Commission" is grilling Moody's today on their failed ratings on (among other things) sub-prime mortgages.

A Google trends chart shows just how late this inquiry is.

Zipcars files for an IPO

2010-06-02T07:13:00.000-07:00

More interesting to see the details of this business, rather than anticipating buying shares.

Short-term car rental firm Zipcars filed an S1 yesterday, as it looks like they will tap the market for a modified IPO - I say modified because like almost every other IPO out there these days, this isn't raising money for pure growth, but rather to pay back other pieces of the capital structure.

A peek at their operating model:

And a discussion of recent trends:

Insiders will continue to own a large piece of the company, while backers like Benchmark will likely sell off a decent chunk of their stake:

And the risks. Among the most important is the entry of the North American rental giants into Zipcars' field.

The market for car sharing services is becoming increasingly competitive, and if we fail to compete effectively our business will suffer.

We expect that the competitive environment for our car sharing service will become more intense as additional companies enter our North American markets. Currently, our primary competitors in North America are traditional rental car companies that have recently begun operating car sharing services, which generally have greater name recognition among our target members and greater financial, technical and marketing resources. Secondary competitors include for-profit and not-for-profit companies who provide car sharing services in specific neighborhoods, communities or cities. These secondary competitors may increase the number of vehicles in their fleets or enhance the vehicle offerings in their existing fleets to be more competitive, and additional competitors may enter our markets in North America. Some of our competitors may respond more quickly to new or emerging technologies and changes in driver preferences or requirements that may render our services less desirable or obsolete. These competitors could introduce new solutions with competitive price and convenience characteristics or undertake more aggressive marketing campaigns than ours. We believe that price is one of the primary competitive factors in our market and pricing in our markets is very transparent. Our competitors, some of whom may have access to substantial capital, may seek to compete aggressively on the basis of pricing. To the extent that we decrease our pricing as a result of downward pricing by our competitors and are not able to reduce our operating costs, it could have a material adverse impact on our results of operations, as we may lose members and experience a decrease in Zipcar reservations.

Interesting interview with Bill Ackman (C)

2010-06-01T06:58:00.001-07:00

In it, he discusses his own surprise at being interested in Citigroup stock, and shares his view of where to find value in this market.

Shares of Vivus up on anticipation of phase 3 data on new ED drug (VVUS)

2010-05-28T07:11:00.000-07:00

Shares of Vivus(VVUS) are up 4% in a down market today, as the company said they will share phase 3 data about their new erectile dysfunction drug Avanafil.

From the release:

MOUNTAIN VIEW, Calif., May 28, /PRNewswire-FirstCall/ -- VIVUS, Inc. (Nasdaq:VVUS - News) today announced that phase 3 data on avanafil, a next generation oral phosphodiesterase type 5 (PDE5) inhibitor therapy being investigated for the treatment of erectile dysfunction (ED), will be presented next Tuesday at the American Urological Association (AUA) 2010 Annual Meeting inSan Francisco, California.

The key thing being that it is ingested orally, unlike their previous efforts to combat ED. Ouch.

Intra-day action

2010-05-27T09:34:00.000-07:00

Nice day today for most stocks, except for AlphaNinja holding Monsanto (MON), who has cut guidance yet again, as the glyphosate outlook worsens beyond their (and my) earlier estimates.

The DJIA is up 201points, to about 10,175...though with the volatility of late, who knows where it will finish the day. One headline put it this way:

"Wall Street Surges on China Comments"

I think it has more to do with positive news coming from the Gulf of Mexico. Various reports are coming in from the Coast Guard and other channels that the "top kill" procedure begun within the last couple days is proving successful at plugging the well. Along with that good news is the bad news that the well has probably been leaking between 2 and five times the amount of oil previously estimated. Fortunately, this is NOT heavy sludge like the type spilled by the Exxon Valdez in 1989. Shares of BP, RIG, and others involved are up sharply on the news, and my sense is that this success is giving the general market a boost as well.

Positive data from Census on housing

2010-05-26T07:38:00.000-07:00

The Census released new residential home sales for April 2010 a few minutes ago, and the headline number of 504,000 beat the consensus estimate of 425,000.

From the release:

Sales of new one-family houses in April 2010 were at a seasonally adjusted annual rate of 504,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 14.8 percent (±19.5%)* above the revised March rate of 439,000 and is 47.8 percent (±26.0%) above the April 2009 estimate of 341,000.

The median sales price of new houses sold in April 2010 was $198,400; the average sales price was $249,500. The seasonally adjusted estimate of new houses for sale at the end of April was 211,000. This represents a supply of 5.0 months at the current sales rate.

Any positive news here is welcome. The home construction market cannot get back into gear until currently "for sale" inventory is moved, not to mention "shadow inventory" lying in wait.

Intraday action

2010-05-25T10:11:00.000-07:00

So the indexes are off their lows, though that could change by the time I finish writing this. This 12% pullback has turned the DJIA's 70% rally off last March's lows into a 50% rally.

Among the few gainers today are Genzyme(GENZ), up on FDA approval of a treatment for a treatment for pompe disease. Autozone(AZO) is up after a great quarter, and AK Steel is up on a few brokerage upgrades.

Among losers today is Diamondrock Hospitality(DRH), a hotel REIT that - I'm serious - picked today to announced the pricing terms of a follow-on stock offering.

Headed for an ugly open....

2010-05-25T06:32:00.000-07:00

The DJIA started the day down about 230 points, at 9,835. Spanish bank worries and the ugly situation on the Korean peninsula are largely the reasons for the sell-off. Below are credit default swaps on South Korea, spiking on fears of a war with the North...

On the bright side, Autozone (AZO) reported a fantastic quarter. Earnings of $4.12 for their q3 came in 53cents higher than expected, and revenue beat by about $100million. The conference call is at 7am Pacific. Despite the impressive run for the shares, they now trade at just 12x this year's expected earnings. My estimates below are probably a bit conservative, as the company will likely spend a little less on capital expenditures than I've budgeted.

Oregon Senator Ron Wyden leads the (clueless) charge against Transocean (RIG)

2010-05-24T12:02:00.000-07:00

I'm really not quite sure what's going on here, because I'd like to believe that US Senators are not this ignorant.

Senator Wyden has drafted a letter to Attorney General Holder, asking him to investigate Transocean "Money Transfers," which he makes sound like a shady attempt to shield the company's cash from potential lawsuits related to the Deepwater Horizon incident. In actuality, the "transfer" is a long-awaited cash dividend to stockholders, a perfectly acceptable corporate action.

I've previously outlined RIG's insurance situation, in which nearly all their spill-related liabilities are shifted to BP, per day-rate drilling contract rules. On top of this, the Oil Spill Liability Trust Fund is explicitly designed to cover expenses in a spill such as the current one.

Wyden either doesn't understand the insurance coverage, doesn't understand what a one-time stock dividend is, or is simply a populist moron with little respect for private industry or the Constitution. We'll see.

The letter:

Oh dear. The Texas Rangers' sale plans will not please everyone......

2010-05-24T09:47:00.000-07:00

The Rangers will use the bankruptcy courts to "smooth" out some issues related to their proposed sale.

From ESPN:

ARLINGTON, Texas -- The Texas Rangers say the club's sale will be accomplished by midsummer through a voluntary bankruptcy plan that will fully pay the lenders of Tom Hicks' financially strapped ownership group.

The club said Monday the plan was previously negotiated between Hicks and the new ownership group led by Pittsburgh attorney Chuck Greenberg and team president Nolan Ryan.

The deal valued at $575 million includes Rangers Ballpark in Arlington and land around the stadium.

Commissioner Bud Selig said the agreement "serves the best interests of the team, its fans, MLB and all other parties involved."

"All other parties involved" might include Alex Rodriguez, and I can promise you that as the Rangers' largest unsecured creditor (originally reported at ZeroHedge), he'll not be pleased....

IBM acquires Sterling Commerce from AT&T, should add 6cents to EPS (T)

2010-05-24T09:33:00.000-07:00

IBM announced earlier today that it will acquire business collaboration firm Sterling Commerce from AT&T. Among other things, Sterling helps companies manage the ever-more-complex supply chains involved with global operations.

From the release:

ARMONK, N.Y. and DALLAS, May 24 /PRNewswire-FirstCall/ -- IBM (NYSE: IBM) and AT&T* today announced they have entered into a definitive agreement for IBM to acquire Sterling Commerce from AT&T for approximately $1.4 billion in cash. The acquisition of the Dublin, OH-based company will expand IBM's ability to help organizations create more intelligent and dynamic business networks by simplifying and automating the way they connect and communicate with customers, partners and suppliers both on-premise or through cloud computing delivery models.

Organizations are looking for ways to work more efficiently and profitably within their communities of business partners, customers and suppliers. IBM's products and services complement the world-class business-to-business capabilities of Sterling Commerce and together enable the integration of key business processes through the entire cross-channel solution lifecycle -- from marketing and selling to order management and fulfillment. These offerings also give clients the flexibility to manage their networks of business partners through public or private cloud computing environments.

The purchase price was $1.4billion, but Sterling's revenue data was not shared. Let's say IBM generously paid 3x sales for this business, and the pretax operating margin will be 25%. That's an after tax boost to IBM's earnings of 6cents per share. Not a heck of a lot when considering IBM will do $11.30 in earnings per share in 2010, but it's a better use of cash than letting it sit around earning nothing in a money market account. Interestingly, this might be a business with a high degree of recurring revenue, which would have made it very attractive to private equity firms. As I continue to expect, those LBO firms will face more and more competition from cash-rich public companies eager to deploy said cash at lower and lower "hurdle rates."

Copyright 2010 AlphaNinja

The pain remains, for West Coast home prices....

2010-05-24T08:59:00.000-07:00

The National Association of Realtors announced that sales of existing homes (versus new homes) rose in April:

Existing-home sales¹, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 7.6 percent to a seasonally adjusted annual rate of 5.77 million units in April from an upwardly revised 5.36 million in March, and are 22.8 percent higher than the 4.70 million-unit pace in April 2009. Monthly sales rose 7.0 percent in March.

Lawrence Yun, NAR chief economist, said the gain was widely anticipated. “The upswing in April existing-home sales was expected because of the tax credit inducement, and no doubt there will be some temporary fallback in the months immediately after it expires, but other factors also are supporting the market,” he said. “For people who were on the sidelines, there’s been a return of buyer confidence with stabilizing home prices, an improving economy and mortgage interest rates that remain historically low.”

The hangover continues on the West Coast, where the prices got the most out of hand:

And by metro area. These regions have been clobbered, thanks to price-to-median income ratio's hitting 10x during the peak (in LA), versus the national average near 4.6 at the peak and the 3x long term average.

Entry point is critical, if you're gonna buy Citigroup shares (C)

2010-05-24T07:27:00.000-07:00

Of course the "entry point" is critical. That might sound overly simple, but it's overly important with Citigroup (C).

Citi shares are +2.5% this morning, on a Goldman Sachs upgrade to Buy. Goldman took a new look at the financials after they've significantly underperformed the broad market. They like the super-banks like Citi based on a "normalized PE" analysis, with underlying earnings arrived at based on a "normalized" return on equity. The Goldman normalized EPS for Citi appears to be about 46cents, which is inline with what I'd expect for Citi in 2011. One could make the case that Goldman is using closer to "peak" earnings figures, rather than "normalized."

Investors would be better off by looking a little deeper than an assumed return on equity, because as we've seen with banks, equity is a moving target. Below is a simpler look at interest revenue and non-interest revenue at Citi, as well as the operating expenses required to get there. To be clear, I DO NOT own these shares, but rather am laying out potential earnings (and thus possible price targets). Buying today gives investors upside of about 105%, versus 58% upside had you bought weeks ago at $5.00 per share. The scenario below might assume a higher loss provision than is warranted, but offsetting that is generous assumptions about operating expenses. Even if Citi fires on all cylinders and generates $20+ billion in net income, stockholders are now splitting that net income with 28billion other stockholders, versus 5billion a few years back, thanks to the dilution from new capital. So, the limited earnings per share power make it a very different investment at $3.75 per share than it is at $5.00.

Good news and bad news for First Data Corp.....

2010-05-21T09:20:00.000-07:00

The good news is that they might not have to worry about pulling off a successful Initial Public Offering!

The bad news is, that's because there might not be any equity to be the "O" the in the IPO.....

ummm....

Bloomberg today, discussing the recent wreckage in the LBO-debt market:

First Data’s $2.4 billion of 11.25 percent notes due in 2016 have fallen 17.75 cents this month to 66.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The credit card processor, based in Atlanta, which KKR & Co. paid $27.5 billion for in 2007, lost $240 million last quarter and failed to improve profitability, said Stan Manoukian, an analyst at Independent Credit Research in Los Angeles. “Assumptions on revenue and earnings growth made during the LBO purchase by KKR have proven to be a leveraged fantasy.”

A fantasy indeed. I spoke recently with a large pension fund, whose administrators were being wooed by yet another slick LBO fund. They were actually "expressing gratitude" for being able to invest with the fund. Dumb money is not aware of the diminishing returns that lie ahead for private equity, thanks to:

1. MUCH higher equity portions of deals. Like a homeowner who puts 30% down, the upside from leverage is much lower than if he'd put 5% down...

2. The "L" in LBO is tougher to come by. Banks have been torched by previous buyout mania, in which they were "lucky" to be involved in deals where risk was under-priced. Now they're going to have so much debt-to-equity conversions on their hands, the lending side will be much more cautious.

4. With cash earning nothing on corporate balance sheets, the "hurdle rate" for acquisitions is getting lower by the day. That will compete with private equity for deals, pushing prices up and future returns down...

Dell is like defending a..... (DELL)

2010-05-21T07:15:00.000-07:00

Well, you're not supposed to "defend" your investments. If anything, understand the argument on the other side of your trade, and see if you still like it.

Dell reported earnings last night, and today the stock is down 6%. The thing is, earnings came in better than expected. Last quarter, they beat sales estimates by a billion dollars, but EPS was only in line with expectations.

The biggest disappointment with the recent quarter was the gross margin, which came in at 17.6%. Many people had been looking for higher, especially considering that the mix of revenue shifted towards (what we thought was!) higher-margin non-consumer sales. Didn't happen. Dell stated that component pricing was tight, leading to a weak gross margin. Several analysts on the call probed the company, as they didn't buy the argument that the supply chain was the only reason for the weak gross margin.

On the conference call, management tried to redirect focus towards "operating dollars." Fine. Grand. But there is less and less operating margin to be found from cost cutting. The balance sheet is obscene (in a good way!), and I can only hope the company deploys cash expeditiously on acquisitions (with the return on cash being zero, note that I don't even care what acquisition it is....).

On to the positives. The company has actually figured out a way to manage its working capital! It can be seen in the improvement in free cash flow below.

Those doing the math should take note of today's free-fall in the share price, as it's a good time to buy. The company's Free Cash Flow Yield (FCFY) is somewhere between 16% and 22%, depending on which year you use. That is literally 16times Dell's cost of capital, based on trading in its 2year debt! The difference between Free Cash Flow a year ago and Free Cash Flow now, is that the company is more consistently able to keep working capital needs from impeding free cash flow generation.

I continue to like this stock, an example of a "good company at a great price."

Uggggly day for the market

2010-05-20T13:15:00.000-07:00

The DJIA finished down 376points, to close at 10,068 -->> way off the 11,300 intra-day high of just under a month ago.

Caterpillar's dealer stats might be a reason for the market sell-off (CAT)

2010-05-20T07:22:00.000-07:00

Every time the market sells off the headlines simply revert to "Eurozone, Economy Woes," but that doesn't offer much detail.

I'd offer that a main reason for the DJIA's sharp drop today is the dreadful April dealer stats released by Caterpillar. Worldwide, dealer retail deliveries are down 4% for the month of April. Might not sound terrible, but that is one third of the quarter ending June, in which Wall Street expects sales to be up 22%....

Heavy selling hits US shares

2010-05-20T07:05:00.000-07:00

The DJIA is down about 180points as I write this, bouncing slightly off the day's lows. All 30 members are in the red. The bond market is strong, as investors flee to the "safety" of government debt.

Here is a "flight to safety" if I've ever seen one:

The US 10year:

As for the DJIA, I'd keep an eye out for bargains (HPQ, IBM, ummm pretty much all the non-financials). Remember, these firms will not "revert to the mean" and hand away huge chunks of margin if we see a "double dip" recession (we're kinda there already, right?). They'll let go of people before they let go of profit margins...That's not to say that margins can't fall, but the point is that this index discounts a lot of bad news...