Monday, April 30, 2012

Delta Buys A Refinery

Very interesting that Delta (DAL) is going forward with buying a refinery in PA. The refinery is located on the Delaware River in Trainer, PA and has a crude oil processing capacity of 185K barrels per day of light, low-sulfur crude oil.

The benefit is that the refinery will provide jet fuel reaching Delta's operations throughout the NorthEast, including its hubs at LaGuardia and JFK. That is at least the theory.

What could go wrong? How much do you want to bet that in 2-3 years, Delta will be paying more for jet fuel than the average airline?

The concept sounds great. One of the highest expenses for airlines is jet fuel and by purchasing a refinery a airline can provide itself with stable supplies. Thats the only hitch, airlines don't have issues with supplies, bur rather costs and jet fuel costs are based on crude oil. Something that a refinery won't actually control.

The part that does make sense is that this was one of the refineries being shutdown and by reopening it Delta might be able to help pressure prices lower by increasing supply of refined products. Does this help them or the other airlines? Now JetBlue (JBLU) will be buying jet fuel from a refinery that no long has Delta as a client.

Delta claims that the refinery will allow it to reduce fuel expense by $300M annually. Anybody got the math on that? If it was that simple to run a refinery than why is everybody closing them in the US? Why isn't every transportation company including other airlines and trucking companies not lining up to buy refineries?

Keeping up with the regulatory changes will be a headache and what happens if a fire closes it for weeks or months. Will Delta be forced into massive buying on the sport market while also absorbing the expense of a closed refinery? This is why somebody very reliant on a product typically isn't locked into one source.

Delta will spend on $150M to buy the refinery and roughly $100M  to convert the existing infrastructure to maximize jet fuel production. Not an insane investment considering the expenses of running a major airline.

My guess is that combining two historically bad businesses won't make a good business. Definitely will be worth watching though.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Markets Are Missing Remarkable Yields At Ameriprise Financial

Ameriprise Financial (AMP) has one of the juiciest yields in the markets these days, but most investors don't even know it. How could a company with a nearly $12B market cap have a large yield without the market realizing it?

Maybe it goes back to Ameriprise Financial splitting from American Express (AXP) several years ago. Combine the split with the financial crisis and maybe most investors don't know or trust what appears to be a new name in the financial world. After all, American Express has much lower yields and forecasted growth rates, so investors appear to trust the old parent more.

The other culprit is that investors remain completely focused on the dividend yield while ignoring the buyback yield or even more importantly, the earnings yield.

Read the full article at Seeking Alpha.

Disclosure: No position, but might initiate a position in AMP this week. Please read the disclaimer page for more details. 

Thursday, April 26, 2012

The Surging Brand At Liz Claiborne

Quick name the retail brand that had the fastest growth rate in March? Bet not many people come up with kate spade. For March, kate had a 73% comp growth rate. Now don't officially quote the fastest part since I don't have access to any database of all brands around the world to confirm. Though seriously doubt that any major brand with over $50M in quarterly sales is growing that fast.

The growth rate of kate spade is what makes the debate about the value of Liz Claiborne (LIZ) such a heated conversation. Too many investors look at the total numbers for the company reported this morning and it doesn't really impress. Technically Liz reported no growth and basically flat EBITDA. Why would such a company be worth $2B as suggested by numerous articles speculating on buyout offers?

The answer is rather easy for anybody doing the research. Liz is a compilation of basically three brands. One that is surging, one that has turned around with good growth, and one that is still struggling. The total growth keys off which one of those brands is the largest.

Unfortunately the largest brand was the weakest and the smallest brand was the strongest. This is about to turn and will have a dramatic impact on the perceived value of Liz going forward.

What is the value of a brand with 38% comps and another with 21% comps?

Originally thought it would be worth comparing the size of Vera Bradley with kate spade, but Vera Bradley (VRA) has no where near the growth rate of kate spade. In reality, Lucky Brands is even growing faster than Vera and has similar revenue levels. Vera trades at nearly $1.1B while the whole Liz stock is worth $1.4B.

So does that mean that the second fastest growing brand at Liz has reasons to justify a valuation near $1B? Probably not as the current strong comps might just be a turnaround after some weak years. Will the growth continue?

Also, worth noting due to the massive conglomerate that was Liz Claiborne none of these concepts have had capital to fund expansion. Kate spade only grew square footage by 8% while Lucky was virtually flat.

With a lack of funding, this wouldn't be the ideal time to sell the company. Both kate and Lucky have a lot of growth ahead and Juicy has the potential to turnaround similar to what Lucky is now seeing.

While some investors don't see value at the current stock price, the recent numbers make it apparent that Liz is on the verge of turning the transformation into strong results. What is about to become Fifth & Pacific (FNP) could become one of the top retail stocks during 2012.

kate spade alone might be worth more than the current valuation and Lucky is increasing becoming a brand with some decent value as well. Selling out for $2B or $20 is starting to look like a dream for the buyers.

Details from earnings report:

- Reports Q1 2012 adjusted EBITDA of ($1) million, excluding unrealized foreign currency losses
- Reaffirms 2012 adjusted EBITDA guidance of $125 to $140 million, excluding unrealized foreign currency gains or losses
- Juicy Couture revenues were $110M, a 4.4% decrease
- Luck Brand revenues were $100M, a 20.3% increase
- kate spade revenues were $86M, a 45.9% increase

The Company also announced first quarter 2012 direct-to-consumer comparable sales as follows:
Brand                January    February    March
Lucky Brand       29%          20%         18%
kate spade           30%         19%          73%
Juicy Couture     (8%)         (2%)        (3%)

The stock price looks ready for another major breakout. See the chart below:

Disclosure: Long LIZ. Please review the disclaimer page for more details. 

Mixed Earnings Results For Oilfield Services Companies Outshine Valuations

With the dramatic fall in domestic natural gas prices during 2012, the results of the domestic oilfield services firms have been increasingly scrutinized. The performances have been mixed and the results have been very location specific as expected. The stocks have all headed lower.

The key is location, location, location. While the stock market has obsessed daily about the natural gas market in the US, just about every other market whether oil or natural gas around the world is very robust. This provides plenty of opportunity for the best positioned stocks that have been sold off with no regard to location.

Naturally results can be relatively predicted based on a companies exposure to domestic natural gas. The less the better. Hence Baker Hughes (BHI) preannounced bad results and Basic Energy Services (BAS) reported bad numbers. On the other hand, Haliburton (HAL) and Schlumberger (SLB) had generally good results though analysts had reduced expectations. Other major players like C&J Energy Services (CJES) and Weatherford International (WFT) have yet to report.

Read the full article at Seeking Alpha.

Disclosure: Long CJES and WFT. Please review the disclaimer page for more details. 

Wednesday, April 25, 2012

The Facebook Slowdown

Interesting report from Bloomberg West on the Facebook (FB) Q112 results just released. Amazingly, Facebook had a revenue decline for the first time ever. This might highlight why Zuckerburg made just a fast move to buy Instagram for $1B. A move that a company in the process of going public shouldn't make.

Has any young tech company ever paid so much money for another company?

The really crazy part is that Apple (AAPL) just reported faster growth than Facebook. How is it that the most valuable company on the planet is growing faster than the hottest tech company around?

Contrary to what is mentioned in this report, the larger social media companies have been waiting too long too go public. Groupon (GRPN), Zynga (ZNGA), and now Facebook have apparently waited to the point that growth has slowed down before going public. 

My concern with Facebook is that sites such as Twitter and Pinterest are pulling away users time. For business people especially in the financial world, Twitter provides a better way to attract new followers than Facebook. Or at the very least it takes away from the time spent on Facebook.

Watch the video for some interesting data on Facebook:

Disclosure: Long AAPL. Please review the disclaimer page for more details.

Tuesday, April 24, 2012

Impressive Numbers From Apple Yet Again

Oddly the bets on a negative Apple (AAPL) quarter were off the charts prior to the release. Every other person on the street suggested that the weak numbers from AT&T (T) and Verizon Wireless (VZ) were signs of impending doom for AAPL. The executives must get a chuckle out of all the non-sense that exists in the media.

AAPL reported earnings of $12.30 versus the estimate of $10.06. Yes you read that correctly. Though analysts were rampantly debating whether AAPL would miss estimates, the company actually beat numbers by over 20%.

Below are the highlights from Q112 earnings report:

  • quarterly revenue of $39.2 billion compared to revenue of $24.7 billion last year. 
  • quarterly net profit of $11.6 billion, or $12.30 per diluted share compared to $6.40 last year. 
  • Gross margin was 47.4 percent compared to 41.4 percent in the year-ago quarter. 
  • International sales accounted for 64 percent of the quarter’s revenue.
  • sold 35.1 million iPhones in the quarter, representing 88 percent unit growth over the year-ago quarter. 
  • sold 11.8 million iPads during the quarter, a 151 percent unit increase over the year-ago quarter.
  • sold 4 million Macs during the quarter, a 7 percent unit increase over the year-ago quarter. 
  • sold 7.7 million iPods, a 15 percent unit decline from the year-ago quarter.
  • $14 billion in cash flow from operations.
  • Cash and marketable securities now total an incredible $110B
Amazingly the company generated enough cash to buy Twitter for the estimated $10B price tag while leaving $4B left to add to the coffers. Not that I see Twitter as a good purchase for a product company, but rather just an interesting view on the cash flow generation ability at AAPL. At this point, any of the options the company has mentioned for it's cash won't even cover the cash coming in the doors. Much less the $110B on the books. AAPL must have a whole department bigger than most silicon valley startups working tracking on that cash. 

As updated 2013 estimates file in, AAPL will be trading somewhere around 8x ex cash earnings. How does it not double from here? Though I do see a $1,000 price as a potential speed bump. AAPL needs to split the stock. 

The below chart just makes one wonder what investors were thinking.

Disclosure: Long AAPL. Please review the disclaimer page for more details. 

Will SodaStream's First Report In U.S. Dollars Be The Catalyst For Gains?

Back on February 29th, SodaStream (SODA) announced Q411 results and provided a little nugget that apparently the whole market missed.

The company announced a change to reporting in the U.S. currency (USD) effective January 1st, 2012. Anybody following this company has known that it has reported in euros (EUR) and provided a translation to the USD. This is common of foreign companies. The odd part though is that popular finance websites such as Yahoo Finance (see below Figure 1), Reuters, and probably most others continue to report the analyst estimates in euros.

Read the full article on Seeking Alpha.

Disclosure: Long SODA. Please review the disclaimer page for more details. 

Monday, April 23, 2012

How Did A $5M Revenue Cut Turn Into A $1.35B Market Value Drop?

Clearly the market doesn't work in very precise ways, but honestly how does a $5M revenue cut in guidance lead to such a dramatic loss of market value? Maybe "fuzzy math" is at work.

Most investors probably saw that Riverbed Technology (RVBD) lost nearly 29% of its market value on Friday. The company reported basically in-line Q112 numbers. Not too bad at this point considering the major product transition going on. Then the wheels started falling off during the conference call. The CFO guided to revenue that at the high end would miss the $202M Q2 estimate by roughly $5M.

Yes, anybody doing the math is probably struggling to understand the stock plunge. It dropped 29% due to a 2% reduction in revenue. All while investors should've known that the company was going through a product transition that would muddy up the financials for the 1H of the year.

Read the full article at Seeking Alpha.

Disclosure: Long RVBD and CSCO. Please review the disclaimer page for more details. 

Sunday, April 22, 2012

The Qualcomm Sandbag

No, this isn't a next generation chip from Qualcomm (QCOM). After the bell, Qualcomm reported Q2'12 results that handily beat estimates, but the company provided disappointing guidance for Q3'12. Naturally this disappointed investors to the tune of an initial 5% loss in after hours trading. Should investors react negatively to such guidance or blow it off as management sandbagging?

It has become commonplace in the technology world to provide off-the-wall pessimistic guidance in order to not disappoint investors when actual results are reported. The end effect though is that investors get hurt in the process of having a stock sold off following earnings.

This appears to be the norm for tech stocks whether born out of the tech collapse in 2000 or due to the success of Apple (AAPL) with a history of guiding below reality. Why not follow the leader?

Read the full article at Seeking Alpha.

Disclosure: Long AAPL. Please review the disclaimer page for more details. 

Friday, April 20, 2012

What Action To Take When Your Stock Plunges After Hours?

Its always a bad situation to have a stock that plunges after hours. Do you panic and sell immediately? Do you hold and hope for a rebound? Or do you read the earnings report, listen to the conference call, and use your past research and knowledge on the stock to make an educated decision?

Honestly, it really depends on what the company says compared to expectations. Knowing the company and the stock is the key. The stock reaction can have nothing to do with the company. It might be a buying opportunity. Or if the story has changed, investors have to be willing to cut and run.

After the bell tonight, Riverbed Technology (RVBD) reported Q112 numbers that were essentially in-line. Unfortunately, the company guided to Q212 numbers that were a major disappointment to the market. The stock plunged nearly 18% in after hours.

Was this move justified? Is the valuation so stretched that bad numbers suggest the stock should plunge?

Riverbed is in the middle of a massive product refresh cycle along with numerous new products. Large customers can take up to 2 or 3 quarters to qualify new products for their networks so a slack in revenue shouldn't be unexpected.

Sure the guidance was lower than hoped after already being let down after the Q411 report deflated the excitement over this stock. Still the company guided to major sequential growth plus 15% YoY growth.

Anybody taking time to listen to the conference call should have a more positive outlook on the company. Riverbed will benefit from the massive move to the cloud and apparently the company isn't losing any market share. In fact, #3 player Blue Coat Systems became less competition during the quarter. So much for the competition fear!

Below is a summary of the new product per the earnings report and a summary of the major news from the conference call.

New products released during Q112:
  • Launched Steelhead® CX Series - dedicated wide area network (WAN) optimization appliances that overcome bandwidth and geographic limitations to make users more productive, data transfers faster, and applications perform seamlessly regardless of location.
  • Introduced Steelhead EX Series - multi-function, enterprise-class branch office appliances that build on Riverbed's award-winning WAN optimization solution and add a robust platform with more memory, solid state drives, and CPU capacity to support the Virtual Services Platform (VSP) and Granite™.
  • Introduced Riverbed® Granite, extending WAN optimization to support edge-VSI (edge virtual server infrastructure) that allows IT to consolidate and manage all edge servers in the data center.
  • Introduced Steelhead Cloud Accelerator, a jointly developed solution that combines Akamai's innovative Internet optimization technology and market-leading Riverbed WAN optimization technology to deliver end-to-end optimization for SAAS applications. 
  • Delivered industry-first capabilities to the Cascade® application-aware network performance management (NPM) solution. Cascade Profiler is the first NPM solution to provide streamlined configuration for service monitoring across application delivery controllers including Riverbed Stingray™ Traffic Manager, F5 Local Traffic Manager, and others. Virtual Cascade Shark is the first product to offer continuous packet capture and performance analysis in virtual environments. 

Conference call highlights:

  • Customers delayed purchases to test new products including looking into replacing Steelhead with Granite. 
  • CIO's place WAN Optimization in top 2 priorities. 
  • Majority of boxes are for greenfield customers. Very few go to replacing existing boxes. The new products might finally provide the ability to up sale though older products will be supported through early 2014.
  • Company estimates that the WAN optimization market is still in infancy. Roughly 400K units delivered with a potential market of 4-6M.

Tomorrow might be ugly for RVBD, but investors need to understand that the future is probably stronger than ever with all these new products. Granite and Steelhead Cloud Accelerator have the potential to allow Riverbed to finally breakout from a one product shop. The Steelhead line needed a major update.

Don't fall for the panic as Riverbed has a bright future.

Wednesday, April 18, 2012

Brazil Cuts Rates Again

Brazil's central bank slashed interest rates yet again making the sixth rate cut in under a year. Rates were lowered a dramatic 75 basis points making the rate 9%. Yes, that is correct. The rate in Brazil still remains one of the highest rates in the world even after 350 basis points in cuts since August. The rate peaked at 12.5%

The reason for the cut was an anemic GDP print in Q4 of only 0.3%. Inflation has also dropped with expectations now at only 4.4% for 2012. This could provide cover for even more cuts this year.

Amazingly, the interest rate could fall below levels last hit in July 2009 of 8.75%. Even possibly lower. Heck, I'm not sure I understand why Brazil has such a insanely high rate. It doesn't have GDP growth faster than China or India so why are interest rates higher?

Anyway, guess that is besides the point.

Eventually these rate cuts should help spur the economy. Stocks in our models such as home builder Gafisa (GFA) and wireless provider NII Holdings (NIHD) should see a huge boost. Both stocks trade near 52 week lows. Investors have fled the stocks in the face of these rate cuts.

Interest rate cuts typically take 9-12 months to impact the US economy. Assuming a similar impact in Brazil, the first rate cut back in August should just now be having an impact. Unfortunately central banks just don't allow the original cuts to flow through the economy before panicking with more rate cuts or increases in boom times.

Brazil rates are so high that it is hard to complain that the central bank has made so many cuts without even allowing the first cut to run its course.

Details from

  • Brazil's central bank slashed its benchmark interest rate to 9% Wednesday, and left the door open for future rate cuts. It was the sixth consecutive cut by the bank's monetary-policy committee, or Copom, lowering the rate from 9.75%.
  • The bank began its latest rate-cutting cycle last August, when it reduced the Selic benchmark rate to 12% from 12.5% amid growing concern by policy makers that the economic slowdown outside the country was hurting growth in Brazil.
  • the economy has resumed growth, with GDP increasing 0.3% in the fourth quarter from the third and leaving the growth rate at 2.7% for 2011, from 7.5% in 2010.
  • The bank in March cut its forecast for the inflation rate for this year to 4.4% from its previous forecast of 4.7%, citing disinflationary pressures from the global economy. 

Disclosure: Long GFA and NIHD. Please review the disclaimer page for more details. 

Tuesday, April 17, 2012

Investment Report - April 2012: Opportunistic Levered Portfolio

This model lost a disappointing 5.8% in March versus a 3.1% gain for the benchmark S&P 500. This model typical outpaces the major indices by a large margin in up periods so the last month was a major exception.

Since the end of 2011, this model has been running on the theme that the majority of stocks would retrace the losses experienced since the July 2011 levels. In essence, our theory all along has been any losses since that time period were from irrational fear of a second financial collapse that the Europeans were unlikely to allow. Naturally this fluctuates on a case by case basis where any individual stock could move a lot higher or lower depending on circumstances since then.

Unfortunately this theory took a major turn in March as investors piled into dividend paying stocks sending most major indices higher while at the same time selling the higher risk, global growth stocks. In some cases, it was just a small reversal of the gains from the last couple of months, but it other cases some stocks continued to face relentless selling pressure.

Some major gains occurred in the positions of Liz Claiborne (LIZ) and Monster Worldwide (MWW) as both companies gained from speculations of takeover bids. In either case, this model would be happy to take a premium bid and roll the money into other cheap stocks, but neither stock was bought specifically for the takeover theme. Both stocks remain incredibly cheap probably a contributing factor to the buyout themes.

Those gains were swamped by major losses in AerCap Holdings (AER), SodaStream (SODA), Terex (TEX), and numerous other stocks. For the most part, the selling just makes these stocks cheaper. Fluctuations will occur in some of these volatile stocks, but ultimately the expectation is that prices will eventually end up higher making the reward worth the risk.

Trading for the month was mostly limited to reducing positions in a couple of winners such as Dicks Sporting Goods (DKS) and Radware (RDWR).

A new position was initiated in leading mobile advertising firm Velti (VELT) as the company trades significantly below the recent and 5 year growth rates. The position in Foster Wheeler (FWLT) was eliminated mainly to reduce leverage though this stock was selected as it appeared from a technical view to be rolling over.

The biggest impact to the model has been the fear over global growth and especially China. As China growth begins accelerating in the second half of the year, we’d expect material stocks to roar back. Materials such as copper and met coal haven’t faced growing demand from both the US and China in a long time which could place significant stress on supply. Hence, stocks such as Alpha Natural Resources (ANR) and Freeport McMoran Copper (FCX) should benefit from dominant positions.

The market in general remains in an uptrend that likely will lead to multi year highs and possibly eventually to all time highs in the S&P 500. This remains in place even after weakness at the end of March and the start of April. This model while fully invested now will likely allow leverage to unwind with future gains.

After trimming a couple stocks approaching peak valuations, the remaining stocks owned or followed trade at extremely low valuations. Investors need to understand that growth stocks have underperformed the market during this rally since last October in favor of dividend stocks. It would not surprise us to see a period over the next few months where growth stocks surged ahead even as the S&P 500 stalls.

Disclosure: Long all positions mentioned. Please review the disclaimer page for more details. 

Sempra Energy Signs Agreements to Develop LNG Export Facility

Big news lately on the LNG export front. Yesterday Cheniere Energy Partners (CQP) got approval to begin construction on it's export terminal in Louisiana. Today Sempra Energy signed agreements with 2 major Japanese companies to develop and construct a natural gas liquefaction export facility in Louisiana as well.

While another major step towards exporting the abundance of cheap natural gas in the US, it will take until 2016 before the facility would commence operations.

With these 2 commercial agreements with Mitsubishi Corporation and Mitsui & Co., the project would already have 66% of production set for 20 years. Now the question is whether the US government will ultimately allow the export of this natural resource. The answer so far is yes, but what happens in 2014 when the future prices for 2015 and beyond start soaring?

The plan involves building 3 liquefaction trains with a total export capability of 12 Mtpa of LNG, or approximately 1.7 Bcf per day. Construction on the project would begin in 2013 with operations commencing in late 2016. That is over 4 years from now so a lot could change by then.

By comparison, the Cheniere project expects to complete 4 LNG trains for 16 Mtpa or 1 train larger than the Sempra Energy plan. The Cheniere plan also allows for operations commencing in 2015 with 1 train added per year. It also is fully sold out already.

Details on the Sempra Energy plan:

  • signed commercial development agreements with Mitsubishi Corporation (8058.TYO) and Mitsui & Co., Ltd. (8031.TYO) to develop and construct a natural gas liquefaction export facility at the site of  Cameron LNG receipt terminal in Hackberry, La. 
  • bind the parties to fund all development expenses, including design, permitting and engineering, as well as to negotiate 20-year tolling agreements, based on agreed-upon terms outlined in the commercial development agreements. Each tolling agreement would be for 4 million tonnes per annum (Mtpa). 
  • completed liquefaction facility is expected to be comprised of three liquefaction trains with a total export capability of 12 Mtpa of liquefied natural gas (LNG), or approximately 1.7 billion cubic feet (Bcf) per day.  
  • Construction on the project is expected to start in late 2013 with operations to commence in late 2016.
  • liquefaction facility will utilize Cameron LNG's existing facilities, including two marine berths capable of accommodating Q-Flex sized LNG ships, three LNG storage tanks of 480,000 cubic meters, and vaporization capability for regasification services of 1.5 Bcf per day. 
  • The anticipated incremental investment in the three-train liquefaction project is estimated to be $6 billion, the majority of which will be project-financed and the balance provided by the project partners in a joint-venture arrangement.  
  • Cameron LNG has awarded an engineering services contract to Foster Wheeler AG (NASDAQ: FWLT - News) for project development, front-end engineering design to support permit applications to the FERC and support for engineering and construction contracting.

The investment implications will be immense if both projects actually make it to operations. Foster Wheeler will be one of the first beneficiaries with the engineering services. Other than that, oil service and exploration companies will benefit from the higher demand. Conversely, chemical companies and users relying on cheap natural gas to fuel vehicles could be impacted by higher prices. 

The later companies could really get squeezed if they make huge investments over the next couple of years based on cheap fuel that ultimately becomes very expensive as demand soars. The fuel is so expensive around the world that everybody wants access to it. Hopefully somebody is monitoring future demand so that it doesn't explode beyond production capabilities. 

Can the US market support new demand for fueling vehicles, exporting, and new chemical plants? Remember this is a major heating source for US homes and jumping back to prices above $10 won't be acceptable if the fuel is being exported to Asia. 

Disclosure: Long FWLT. Please review the disclaimer page for more details. 

Pass On Chesapeake Oilfield Services IPO

After the close on Monday, Chesapeake Energy (CHK) filed for an IPO of its oilfield services division. Based on initial review of the S-1, Chesapeake Oilfield Services (COS) should be avoided at best if not shorted. Naturally this will highly depend on the ultimate valuation place on the stock once it prices and starts trading.

Chesapeake intends to raise $862M in a much announced IPO of the oilfield services division that performs a big portion of the work for Chesapeake itself. The interesting part is that the sector is under pressure so a lot of investors will see this as a desperate move. Industry leader Haliburton (HAL) is around 52 week lows and last year's fracing IPO C&J Energy Services (CJES) trades near lows as well.

Additionally, Chesapeake has made it clear that it needs to raise cash so most contrarian investors might think that such an IPO might be priced to sell. Unfortunately, the funds to be raised and the past comments from the company don't suggest any discounts on the sale.

Read the full article at Seeking Alpha.

Disclosure: Long CJES. Please review the disclaimer page for more details. 

Monday, April 16, 2012

The Failure Of iAd

Or at least for the moment, iAd has been one of the few recent product failures for Apple (AAPL). As a long time Apple investor, this honestly doesn't move the needle for them so it isn't much of a concern. Actually, I'd prefer that the company stay out of the ad market all together. Focus on the phone, tablet, and possibly tv markets.

As we've written over on Seeking Alpha in 2 articles (I, II) about the Millennial Media (MM) IPO, device makers just aren't going to be successful creating systems such as ad networks that only target just the users of those devices. Clearly Samsung has learned nothing from Apple's failure.

On a bigger picture, this speaks to some of the issues Apple originally had in the PC market. It had the better PCs and operating system, but the ability of Windows based systems to create cheaper machines and more software eventually over took what Apple could do in a controlled environment.

Will history repeat itself again in the phone and tablet markets? For now, the answer is no. Developers prefer the iOS platform as users spend more money. Not to mention, all the apps created for Android and iOS systems are equal. The cheaper phones and volume hasn't led to a developer and software advantage at least yet either. When that happens, the time to evacuate the stock might be at hand.

Conversely, the iAd system faces those challenges. Shawn Scheuer wrote this article for Forbes highlighting the 5 reasons for failure of iAd. He is the CEO of Moolah Media so his perspective is very telling.

  1. It's (still) too expensive for too many advertisers. (requires $100K minimum)
  2. It forces advertisers to take a big gamble before seeing real results.
  3. It limits consumer reach dramatically.
  4. The better app experience, the worse the ad engagement.
  5. iAd's self-serve tool can't keep up. 

Shawn brought up some interesting points such as the more sensitive screen leading to more accidental clicks and that iOS users can't wait to go back to their more engaging apps. Basically the success of the iPhone leads to less interest in viewing ads. Guess android users get bored and look for something else to do on the phone?

Anyway, some of the major points are what we've been harping about that gives Millennial Media and Velti (VELT) advantages in this market. With a $100K minimum, Apple still forces marketers to either just focus on the iOS users or be willing to spend some $200K+ in order to reach Android users as well. 

Being that mobile ads are a new medium and the vast difference between a phone screen and a computer screen, it seems inconceivable that Apple originally started with the requirements of a $1M budget. Not sure why Apple would eliminate $20K budgets if the customer is creating the ad. 

As mentioned in the Seeking Alpha articles, Google (GOOG) might prevail with the background in working in the ad network sector. Though the market would suggest that marketers especially in the tech sector will want to avoid using them. Its just natural to want to avoid market domination by one company especially in a business to business environment.  

As an example, new public companies such as TripAdvisor (TRIP) and Yelp (YELP) face direct competition from Google while also relying on it for delivering search results. Do you think these companies want to enrich Google with more revenue? Not to mention such an ad might provide Google with valuable competitive information. 

This all provides some comfort that Millennial Media and Velti will be able to overcome the normally difficult task of competing with multi billion dollar companies. Unfortunately, Millennial came out with an expensive IPO only leaving mobile marketer Velti as a reasonable investment at this point. 

Disclosure: Long AAPL and VELT. Please review the disclaimer page for more details. 

Sunday, April 15, 2012

Chart of the Day: Bespoke Reader Sentiment

Bespoke ran a poll this weekend asking readers where they thought the SP500 would end one month from now. Very interesting to see that currently 58% of respondents are bearish.

While a poll of only 429 votes is hardly scientific, it is very indicative of the current mood of the markets. Apparently everybody is expecting a another summer selloff which could be a good signal that after 2 nasty summers the market is ready for a surprise.

Will the S&P 500 be higher or lower than its current level one month from now?Selection 
Higher 42%                     182
Lower 58%        247
429 votes total

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Friday, April 13, 2012

3D Home Printing - Way Cool

Impressive stuff from 3D Systems (DDD). Watch the below video as the CEO showcases the new 3D home printer with Blomberg West.

Definitely need to keep an eye on this stock along with Proto Labs (PRLB) that recently went public. This real time printing and creation of manufacturing products has the potential for huge growth. Right now though, 3D Systems trades at 24x forward earnings with only 15% long term earnings growth.

Clearly for now the stock doesn't match the growth rate. The question is whether the company has created a product that will dramatically increase growth or whether this product is ultimately a novelty product.

This is clearly worth more research. Maybe a weekend project.

Disclosure: No positions mentioned. Please read the disclaimer page for more details. 

Investment Report - April 2012: Net Payout Yields

This model gained a solid 4.3% in March versus 3.1% for the benchmark S&P 500. The model remained strong all month even as the SP500 struggled toward the end of the month.  

March was a normal trading month for this model with only 1 trade initiated in order to reduce the cash balance.

Time Warner (TWX) was bought as the stock flashed one of the highest Net Payout Yields in the over $10B market cap group with a huge buyback. The stock also maintains a strong 2.9% dividend providing for that investor class as well. For more details on why Time Warner was selected, please read this article.

Top Performers
The largest gains came from Lowes (LOW), WellPoint (WLP), Gap (GPS), and Goldman Sachs (GS) along with several other stocks that had solid gains. Most of those stocks saw gains that exceeded 10%.

Typical of a model that allows for trading signals based on an indicator such as the Net Payout Yield, a stock like Goldman Sachs was purchased back in January at a time when most investors were ignoring it. Then by March, the stock was producing major gains as most other investors were just catching on.

The market in general remains in a uptrend that likely will lead to multi year highs and possibly eventually to all time highs in the S&P 500. This model will remain fully invested to capture as much upside as possible while protecting against any major downside from owning solid large cap stocks with outsized yields.

Our biggest concern to this model remains that end of year tax hikes to dividends  will hurt these stocks in the short term. This appeared to happen during the last quarter of 2010 when the Bush tax cuts were on threat of expiring. Naturally 2011 was a strong year for dividend stocks as the fears subsided. This might not happen in 2013 if the taxes are hiked.

The other concern is that most dividend stocks have reached lofty levels after a very strong Q1. This model has rotated out of several stocks where the dividend yield had declined below acceptable levels and expects to add a few more in the coming weeks and months. Considering this, we don’t expect a huge impact on the model from such a tax hike as the buyback stocks in the model could excel as investors rotate to the more favorable tax treatment.

2 Promising Oil Equipment IPOs

On Wednesday night, 2 oil equipment companies priced IPOs. While solid companies in a booming oil and gas shale sector, neither has been hyped a lot by the IPO buzz network.

For one, MRC Global (MRC) priced at the low end of the range at $21. Also on Wednesday, the Natural Gas spot price closed below $2 for the first time in 10 years. This is clearly not the ideal time to price an IPO for the energy sector.

The other stock is Forum Energy (FET) that provides products and services for the oil sector. Neither stock has gotten much fanfare. For example, both companies have under 30 email alerts followers on Seeking Alpha, while Splunk (SPLK) already has 52 followers, yet it won't go public until next week.

Read the full article at Seeking Alpha.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Thursday, April 12, 2012

Signs Of A Recovery In The Construction Market

Last week, the market presented some major signs of the beginning stage of a recovery in the construction sector. First, railroad shipments of lumber and crushed stone increased dramatically. Second, PPG Industries (PPG) reported blowout earnings in part due to a recovery in the US construction market.

While most construction related stocks have already had a run, most are no where near multi year highs.

Several options exist for playing the construction recovery. The main debate is whether to focus on US based companies that will benefit solely from the rebound in US construction or globally based companies that will benefit from the largest two economies (US and China) rebounding at the same time.

Read the full article at Seeking Alpha.

Disclosure: Long ANR, FCX, SHLD, and TEX. Please review the disclaimer page for more details. 

Working Natural Gas in Storage - March

Interesting chart from the EIA on natural gas storage back to 1994 based on the end of March totals. March is the period when inventories normally hit the lowest level after a draw down from winter heating. Naturally since production is down and the winter was one of the warmest on record, inventories have soared.

Figure - Working Natural Gas in Storage, End of March Inventories

Source - EIA

The real question will be whether producers such as Chesapeake Energy (CHK) have cut back enough on production to reduce supply. If not, prices will continue going lower and storage will max out over summer.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Wednesday, April 11, 2012

Mobile Payments: Nothing Worth Investing In Just Yet

After recently writing articles (I, II) about mobile advertising, it seemed appropriate and interesting to check out the mobile payments industry next.

With smartphones and tablets now widespread, the mobile payments industry appears ripe for major growth in the next 5 years. Normally being ahead of the curve on mobile adoption, I actually found myself very uninformed on mobile payments. Maybe the central part of the country is just behind on this technology adoption as I've yet to run across a small business owner using a mobile card reader.

For now, the industry is very fragmented with numerous developments underway. Not to mention that concepts of whether mobile payments means the customer or the business uses the mobile device are mixed.

The potential in this sector has attracted big boys including Intuit (INTU), the PayPal division of Ebay (EBAY), and Google (GOOG) to develop various solutions. Also, traditional payment processors MasterCard (MA) and Visa (V) are working with various mobile payment systems so not to be left out. Numerous startups are working on solutions with Square the most visible.

Read the full article at Seeking Alpha.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Tuesday, April 10, 2012

Terex CEO on US Transportation Bill

Absurd that this country can't pass a long-term transportation bill. Dysfunctional to say the least in Congress.

Even with these issues, Terex (TEX) is hiring 500 employees in Washington for Aerial Work Platforms though it is unfortunately only to replace aging equipment as much as new equipment. Globally though Terex continues to hire as infrastructure is a lot higher priority for those countries.

See below interview CEO Ron DeFeo on Bloomberg:

Disclosure: Long TEX. Please review the disclaimer page for more details. 

Monday, April 9, 2012

Did The Samsung AdHub Announcement Crush The Millennial Media IPO?

It was just over a week ago that the Millennial Media (MM) IPO opened nearly double the IPO price. The stock soared to $28 on high hopes of new investors hoping to capture a part of the fast growing mobile ad market. Now after the first full week of trading, the stock has plunged all the way down to $18.42. What happened? What caused a hot IPO to plunge 26% from the opening day closing price in just a week?

My only guess is that the Samsung (SSNLF.PK) announcement of building its own mobile ad exchange for its wireless devices scared off the enthusiasm for the hot IPO.

Velti Remains More Attractive

To be fair, my recent assessment was that Millennial Media was vastly overpriced and that Velti (VELT) was a much better deal. The recent drop has brought Millennial's valuation more in line with reality, but the impact has also been felt by Velti making it that much cheaper as well. Not to mention, the impact of the Samsung mobile exchange will directly impact Millennial more than a mobile ad agency like Velti.

Read the full article at Seeking Alpha.

Disclosure: Long AAPL and VELT. Please review the disclaimer page for more details. 

Forget Hard Landing, Is China Already Re-accelerating?

Over the last few months, the markets have been struggling with whether China was headed for a hard landing. The Shanghai Index ($SSEC) recently headed back to 3 year lows on these fears.

What though if China was already re-accelerating? Recent reports on bank lending and inflation suggest that the economy has already hit bottom.

David Carbon, Managing Director of Economics and Currencies at DBS Bank, thinks China hit bottom prior to the start of 2012. Now with the inflation data picking up (March came in at 3.6% vs 3.3% for February) it signals the economy already turning around.

Song Wun of CIMB Research thinks China could expand as much as 9% this year with a target of 8.7%. Remember that the government set an official target of 7.5% though any smart investor should've known this was the lowest possible. Instead, the market sank thinking a hard landing was on the way.

Is it possible that just as the European crisis was much to ado about nothing so could the fears of a hard landing? It appears that after the financial crisis of 2008 every fear will be blown out of proportion.

Time will tell.

Details via CNBC report:

  • Gross domestic product (GDP)  figures to be released Friday may indicate that the economy is expanding faster than the official target of 7.5 percent for 2012, Carbon added. "We look at the broad body of data including GDP, which will be out at the end of this week. China is already re-accelerating again."
  • Inflation  in China came in at a higher than expected 3.6 percent in March, according to government data Monday, after hitting 3.3 percent in February. 
  • China's big four state banks extended almost 300 billion yuan ($47.50 billion) in new local-currency loans in March, the official Securities Times reported on Saturday, citing unidentified sources.
  • Still, analysts are increasingly bullish on China’s growth outlook. Song Seng Wun, Regional Economist at CIMB Research, said China could expand as much as 9 percent this year, much higher than the official target of 7.5 percent.

Disclsosure: No positions mentioned. Please review the disclaimer page for more details. 

Friday, April 6, 2012

Samsung Reports Large Profit Increase on Smartphone Demand

Samsung Electronics reported a large increase in profits that easily beat analyst estimates. The largest Asian consumer-electronics maker beat estimates by selling more phones than even Apple (AAPL).

Not that this is new to most investors, but Samsung has become a very formidable competitor in the smartphone market. Also, assuming Apple enters the TV market as expected both companies will go head to head in that market as well.

The real question remains whether people are buying Samsung phones over an iPhone or as the best option available or for the price. Either way, it definitely shows where consumers are buying phones instead of Nokia (NOK) and Research in Motion (RIMM).

Without doing much research, I'm assuming most of the gains come from Asian markets and not North America. With most of my friends owning iPhones, its difficult to assess the Galaxy as a true threat to the iPhone.

Bloomberg West did a nice piece the other night about the margins on the two phones. The Galaxy cost less to make and starts out with comparable margins. Over time though, costs dropped for both phones, but only Samsung had to lower prices. This left the iPhone with much higher profit margins as the products aged.

According to this Bloomberg report, Samsung made $5.1B in operating profits for Q112. This was nearly 10% above analyst estimates.  Significantly below what Apple makes each quarter.

This highlights how the market has become a stock pickers paradise. The new economy will not lift all boats especially in the tech sector. Apple and Samsung appear the dominant players while everybody else might just fade away.

It also highlights how Apple is Samsung's biggest customer, buying chips and displays from the company. Something tells me this won't last much longer as they've become each others biggest competitors especially if Apple enters the TV market as expected.

One has to wonder if Apples undoing will ultimately come from a company like Samsung that can offer a similar product for a cheaper price. Wireless carriers have to be getting tired of subsidizing Apple profits while the carriers spend billions upgrading networks to handle all the data traffic.

Some lesson has to be learned from how Microsoft (MSFT) took the PC market away from Apple back in the 1990's. Will it happen again? Probably not as long as the carriers allow consumers to buy new phones for as little as $200. When that changes might just be the signal to sell Apple.

Highlights from the report:

  • Operating profit rose to a quarterly record 5.8 trillion won ($5.1 billion) in the three months ended March 31 from 2.95 trillion won a year earlier
  • Profit at the mobile-phone business probably more than doubled in the quarter from a year earlier after Samsung introduced the Galaxy Note
  • Operating profit may be 200 billion won higher or lower than today’s estimate when audited results are announced later this month (maybe I've not read enough Korean reports, but this statement is scary)
  • Samsung probably sold 44 million smartphones in the first quarter, more than tripling from a year earlier. That would exceed Apple’s shipments “by a significant margin,” making Samsung the top smartphone seller during the three-month period
  • Profit at the semiconductor division probably fell 28 percent to 1.2 trillion won on sales of 8.65 trillion won

Disclosure: Long AAPL. Please review the disclaimer page for more details.

Tuesday, April 3, 2012

Time Warner Cable Vs. Time Warner: Here's Why TWX Wins

Which company is a better investment at this point: Time Warner Cable (TWC) or Time Warner (TWX)? I bet most investors wonder if the answer isn't none of the above.

From a high level, both stocks offer nearly 3% dividends, making the stocks attractive to a large swath of investors. What about for investors that want the 4%+ dividend yielders? Let's first review these two companies that split back in 2009.

Overview: Time Warner Cable
The company is among the largest providers of video, high-speed data and phone services in the United States, connecting more than 14.5 million customers in 29 states to entertainment, information and each other. Time Warner Cable Business Class offers data, video, and phone services to businesses of all sizes, cell tower backhaul services to wireless carriers, and through its NaviSite subsidiary, enterprise-class hosting, managed application, messaging and cloud services. Time Warner Cable Media, the advertising arm of Time Warner Cable, offers national, regional and local companies innovative advertising solutions.

Read the full article at Seeking Alpha.

Disclosure: Long TWX. Please review the disclaimer page for more details. 

Monday, April 2, 2012

$1,000 Target On Apple Is Not New

As we highlighted on our blog back in August 2009 [Apple to $1,000], the concept has been around for over 2 years now. Back then the rumor of a tablet was circulating and the Mac was expected to continue gaining share. Instead, the iPad has taken off and offers such great functionality that it has replaced a lot of the expected new demand for the Mac. Either way though, the concept of Apple (AAPL) gaining more share of the computer market has come to fruition.

The news of the day was that analyst Brian White of Topeka Capital slapped a $1,001 price target on Apple. While this is the first official Wall Street analyst to place such a lofty target on the stock, he clearly wasn't the first mainstream analyst to shoot that high.

Not to mention the big difference between suggesting that target with the stock at $140 in the midst of a financial crisis and saying it with the stock at $600 with the S&P500 at multi year highs.

Either way, the only reason Apple hasn't already reached $1,500 is the size of the company. At a market cap approaching $600B, it just takes too many additional investors in order to push the stock that high.

Maybe that is a vote for the buyback over a dividend. The law of big numbers could be helped by a buyback that reduced the outstanding shares. Attempting at least to keep the market cap down.

Naturally missing in this analyst call is the past track record. What was he calling for at $140, $300, $450, etc.

Highlights from Brian's prediction:

  1. The Internet: Apple is going to own the mobile Internet, thanks to its big splashy move to 4G
  2. China China China: If you think the mobile Internet is going to be fantastic, wait till you see the mobile Internet in China, where 1.4 billion people fiddling with mobile devices will make it “a wonder of the tech world.” Well, Apple is there too and “well positioned to capitalize on this trend.”
  3. Your living room: Yes, Apple will own your living room too. How? With “full blown TV,” Mr. White says. More details to come.

Disclosure: Long AAPL. Please review the disclaimer page for more details. 


Express Scripts Finally Completes Merger of Medco Health

Finally the merger of Express Scripts (ESRX) and Medco Health (MHS) closed today. It took since last July to close the merger and any investors holding on this period had limited gains. See graph below nothing the Medco stock closed around $67 around the announcement and only recently reclaimed those levels.

Unfortunately our Net Payout Yields model held onto the stock for that period, but at least the end result has been positive. As of the close today, each original Medco share would be worth $73.75.  Now the key to holding Express Scripts going forward will be whether the combined company continues funding huge dividends and buybacks.

See our previous blog post after the original announcement.

Details from the PR:

  • Following consummation of the acquisition, each share of pre-closing Medco common stock was converted into (i) the right to receive $28.80 in cash, without interest and (ii) 0.81 shares of common stock of the new Express Scripts
  • The company expects synergies of $1 billion once fully integrated, which represents approximately 1 percent of the combined company's costs. 
  • The transaction is expected to be slightly accretive to earnings per share (excluding integration and deal-related costs and charges) in the first full year after closing and moderately accretive once fully integrated.

Long: ESRX via MHS shares. Please review the disclaimer page for more details. 

Is Liz Claiborne Going Private At $20 A Share?

The WSJ reported around noon on Friday that Liz Claiborne (LIZ) has been in talks with private equity firms over a potential deal around $20 a share. Currently, it doesn't appear that any of the firms, such as KKR & Co (KKR), Permira or Warburg Pincus LLC, find that price appealing. Not to mention that the Liz management has denied any interest in selling the company.

The news was enough to send the stock soaring. It closed at $13.36, up nearly 13% at a new 52-week high. At $20, Liz would have a value around $2B. Is that an appealing price for long investors?

First, lets look back to the recent transformation of the company. Back in October, I wrote an article about the transformation of the company. Just prior to that article, an investor could've bought Liz's stock in the $4s. Now the stock has tripled and a deal around $20 would've given an investor a 300% gain in less than six months.

Read the full article at Seeking Alpha.

Disclosure: Long LIZ. Please review the disclaimer page for more details. 

Sunday, April 1, 2012

Analyzing The Millennial Media IPO

Several interesting IPOs went public this week. The leading ones include mobile advertising provider Millennial Media (MM) and Annie's (BNNY), both soaring over 100% from the IPO price at one point. While the organic bakery market is interesting, in this article I wanted to focus on the rapidly growing mobile advertising market. This space became more appealing recently with the great results posted by Velti (VELT) a few weeks back. Now with the IPO of Millennial Media, the sector now offers a couple of good investment options.

Millennial Media
The company is the leading independent mobile ad network provider. Its technology, tools, and services help developers maximize their advertising revenue, acquire users for their apps, and gain insight about their users. The company has a proprietary tech and data platform known as MYDAS, that determines which ad to deliver in real-time.

Read the full article at Seeking Alpha.

Disclosure: Long VELT. Please review the disclaimer page for more details.