April 28th, 2006
According to Forbes Magazine, Morgan Stanley analyst Mark Edelstone lowered 2006 and 2007 earnings-per-share estimates on LSI Logic after the chipmaker posted weak results in its consumer business due primarily to a decline in demand for Apple Computer’s iPod. The article goes on to say:
While the company saw strength in storage components business, those gains were offset by softness in its consumer business, which declined almost 24% sequentially due largely to seasonal decline in demand for Apple’s iPod digital audio player, for which LSI supplies certain components.
Umm, what would a seasonal decline have to do with full-year 2006 and 2007 estimates?
April 28th, 2006
DigiTimes discusses Sony’s shift toward LCD TVs, which Sony favors over Plasma. The article suggests that LCD will actually outsell traditional cathode ray tube sets for Sony this year. The article includes this graphic on the types of TVs Sony sells.
Source: company, compiled by DigiTimes, April 2006
April 28th, 2006
Nobody can buy a stock without someone to sell it. Here is a roundup of some recent opinions on DELL.
Alex Bondar of the McGill Investment Croup seems to like the company more than the stock.
The real question is whether Dell has lost its competitive advantage? I
wouldn’t bet on it, given the brand name and the market share Dell
commands. Although I don’t see the stock rebounding in the near future,
I don’t think the company is broken, and I would be willing to buy at
Meanwhile, UBS thinks we may have entered the “HP Era.”
April 28th, 2006
Faisal Laljee notes what we observed yesterday on Ceradyne (CRDN): little movement on very positive news. He believes that product diversification or an analyst upgrade will get the stock moving. We disagree, as a look at the comparables still suggests CRDN is trading at an appropriate level. In fact, yesterday’s multiple looked to have more room for downside than upside.
Speaking of its comparables, the McGill Investment Club talks in detail about Armor Holdings (AH).
In fact AH P/E is around 16 whereas the industry average is approximately 23. AH
is has been considerably growing in the past years, having a average 5
year growth in sale of 63%. Yes, 16 P/E and 63% average growth rate.
Well, that was then. What investors see now is a company producing as much vehicle armor as the military wants to order right now, and although the demand should stay strong we said before that strength and growth are two separate monsters.
April 28th, 2006
Microsoft (MSFT - Annual Report) is the third-largest company in the US by market cap (although 31 billion smaller today) and it is hard to turn around a tanker that big. So not surprisingly, when Microsoft issues news of yesterday’s nature there will be a wide range of interpretations.
Barry Ritholtz is not a fan of the products or the investment outlook. He likes the shares in the high teens or low $20’s and says:
From an investment perspective, there are 2 key issues to observe:
first, they are a mature company whose fast growth days are well behind
them. They are too big to be responsive, too expensive to be a value
stock, too slow growing to be a growth stock. In short, they are in the
process of morphing from the software PC leadership company to nice,
quiet, money machine. I would expect a good entry purchase (i.e., from
lower levels) could throw off gains of 10-15% a year, including
Paul Kedrosky soured on the name, calling Microsoft a Pig in a Poke. In his view, investing the windfall of simultaneous Windows and Office upgrades in less certain businesses is foolish. (We agree.)
Finally, a few choice quotes from the Reuters article:
“This effectively takes the wind out of the sails of
investor sentiment at a time when investors were beginning to
warm up to the prospects for accelerating earnings momentum,”
wrote Goldman Sachs analyst Rick Sherlund in a research note.
“If Microsoft can’t get operating leverage when it’s in its
biggest product cycle ever (and customer interest is high),
when can the company show leverage?” wrote Morgan Stanley
analyst Mary Meeker.
Microsoft can win back investor’s hearts by underspending the costs they have outlined, and by delivering on their promises. Dramatically reducing the capital employed in the business would also help. One thing investors may be overlooking in the current selloff is that if MSFT can successfully shift to a software-as-service business model there won’t be any more issue of whether Vista will be delivered on time. Operating system upgrades could take the form of small tweaks over time rather than a rushed, trimmed and delayed big package upgrade.
William Trent currently has a short position in put options related to Office Depot (ODP).
April 27th, 2006
Ceradyne (CRDN) reported huge gains in revenue and earnings. They also increased their guidance for the remainder of the year. Yet the stock was flattish despite, according to Motley Fool, management predicting a strong market through 2007. Aye, but there’s the rub. There is a difference between “strong” and “growing.” At $3.80-4.00 per share, the new guidance for this year is also probably close to the maximum potential earnings unless there is either a large new opportunity or the company decides to steal revenue from future years.
See, the military could potentially order 1 million sets of body armor. If they do, that could keep Ceradyne humming at the current production levels through 2008 or 2009. But unless they order the next generation body armor after that, or CRDN is able to branch out into other product lines, there is no growth to the numbers. Ceradyne could add capacity and shift some of the sales from 2009 to earlier periods, but that would just derail the gravy train earlier. So we have strength rather than growth.
What is strength worth? As we noted before, Alliant Techsystems (ATK) and Armor Holdings (AH) have found themselves in a similar situation. ATK is trading at 16.5x forward earnings, while AH is trading at just above 13x. CRDN at $54.50 is trading at 14x the midpoint of the new guidance, which looks about right. No wonder there wasn’t a big reaction to the news.
April 27th, 2006
So Ballmer is in Paris saying software prices could fall in the future, while in Seattle the company reports disappointing numbers and guides for more of the same.
Chief Financial Officer Chris Liddell said its third quarter
earnings and fourth quarter outlook were below Wall Street’s estimates in part because the company has decided to increase research and
development spending in areas where it isn’t a market leader but sees
These include things like security, high-performance computing and voice over Internet Protocol, VoIP, or Internet calling.
Paul Kedrosky called this the Google line. John Dvorak might say it is Microsoft continuing to support an albatross. Regardless of what anyone calls it, it just seems outrageous to spend $2 billion on R&D at this stage in the game, when most of the interesting work is being done on shoestring budgets in the living rooms of people who haven’t even necessarily been trained as computer programmers. And to think, earlier I called them one of the smart companies in the space.
April 27th, 2006
Tornadoes touched down outside Tulsa, Oklahoma on Monday, just as we were arriving there on business. However, the stock market’s Tulsa Tornado was IBM’s announcement at it’s annual shareholder meeting in Tulsa (why they picked Tulsa – who knows) that it would raise its dividend by 50% to $0.30 per year, which now equates to roughly a 1.5% yield. The stock picked up steam on the news and continued to gain today.
Tech is not the growth vehicle it once was, and the smart companies in the space realize this. Microsoft initiated a dividend, paid out a one-time dividend, and is buying back massive amounts of its own shares. IBM has now raised its dividend and increased its buyback authorization. Oracle is buying other companies for cash (rather than the stock-based acquisitions of the old days.) Although the approaches are different, all three strategies have the same end effect: they reduce the amount of investment capital deployed on technology. If the old investments are not returning the growth they should, the right response is to take that capital off of the markets so the existing levels of sales and earnings are spread among fewer investors.
The process will be long, but it will leave the industry far stronger.
April 26th, 2006
Many companies offer to sell products to their customers on credit. When a company sells products on credit it records the full value of the sale as revenues immediately. In addition, it may earn future interest income as the loan is paid off. Although the practice is common and legitimate, it also can frequently be a source of trouble for the lending company. Analysts and investors should always be on the alert for potential problems when considering a company that offers financing to its customers.
The first potential issue is that the customer is unable to repay and the company does not actually receive the cash it has already booked as revenue. To guard against this risk, companies do not book all of the revenue up front, but rather reserve some of it as an allowance for potential bad debts. We have discussed in the past these issues, particularly as they relate to Xerox. To spot potential trouble investors can look for changes in the allowance for doubtful account relative to the level of financial receivables and sales.
The second issue is that companies (or their commissioned salespeople) may have an incentive to make sales to customers with questionable credit quality. During the telecom boom in the late 1990’s, Lucent and Nortel sold an enormous amount of equipment to startup companies that ended up going bankrupt. Although the equipment makers were able to take back the equipment, there were no other buyers for it. Investors should look out for this when financial receivables are growing at a faster rate than overall sales, as it may be a sign that the company has targeted lower credit quality customers.
Similarly, companies may temporarily offer enticing financing arrangements in order to boost sales levels in a given quarter to meet earnings or sales targets. Management bonuses may be significantly impacted by such short-term factors. This is harder for investors to spot. Some management compensation disclosures, found in proxy statements or 8k reports, may be useful for determining target sales levels. This is also an area where Peter Lynch’s “invest in what you know” philosophy can pay off. Industry insiders are more likely to know when their own company or a competitor is issuing short-term incentives to boost sales.
April 25th, 2006
Revenue should be recorded on the basis of the net proceeds received from customers. Intermediaries who sell the products and services of other firms should count only the fees they charge for their own services. Consider a real estate agent. When she sells your house, she should record only her commission as revenue, not the full value of the house.
Sometimes companies report revenues on a gross basis in order to appear larger. In Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, Howard Schilit discussed Papa John’s pizza, which reported $171.8 million of revenue during the first nine months of 1995, of which $78.7 million represented equipment sales to franchisees. Such sales are of weak quality, as once the franchisee has an oven it is unlikely to need another. Given the magnitude of such sales as a percentage of the total, investors in Papa John’s should have been anticipating a sudden slowdown in sales growth as the number of franchises approached saturation.