Archive: June, 2006

Untangling a Mess

We wrote not too long ago on the crazy contortions Fidelity National Information Systems went through as part of its merger with Certegy. We also noted that the firm was continuing to reorganize, further muddying the water for analysts trying to get a handle on how the company is performing. Now SmartMoney has an article that tells us it’s all for the best:

Getting Untangled | SmartMoney.com

Fed up with the discounted share price that Wall Street was awarding their big, intertwined mortgage title-insurance and financial data-processing businesses, executives at Fidelity National decided in April to jettison a third operation — a holding company that held stakes in both. They hoped that analysts and portfolio managers would then more easily understand the two operating units. Only a few months before, Fidelity had divided itself from one unit into three.

“A title-insurance analyst did not understand processing and the processing analyst really didn’t want to get on board because we are known as a title-insurance company,” explains William P. Foley II, the Jacksonville, Fla., company’s founder, chairman, chief executive and largest individual stockholder. “Then, when we formed the holding company, we probably confused people even more,” he added.

Of course, while the restructuring may simplify things over the long term, it prolongs the period of obfuscation. For a year after the reorganization, comparisons of results to the prior year will not be… well… comparable.

Topics: McAfee (MFE), Stock Market | No Comments

Growing with Accenture

Consulting firm Accenture (ACN), which is on our Watch Listreported strong earnings Thursday after the market close. The outsourcing market appears to remain strong, which has positive implications for other Watch List names including IBM and Cognizant (CTSH).
Fiscal third-quarter net income advanced 2.5 percent to $496.1 million, or $0.56 per share, from $484 million, or $0.51 per share, in the year-ago period. Analysts were expecting $0.46. The year-ago results included a benefit of $66 million, or 8 cents per share, related to the company’s 2001 reorganization into a corporation from groups of partnerships. Revenue rose 6.8 percent to $4.81 billion from $4.5 billion last year and compared favorably to analyst estimates of $4.43 billion. Consulting revenue rose 6 percent to $2.66 billion, and outsourcing revenue gained 11 percent to $1.75 billion.

Accenture shares have tumbled about 11 percent in the three months since its last earnings report on March 28, when the company surprised investors with a $450 million charge for losses expected on a computer system project for the British health care system. The Standard & Poor’s 500 Index fell 4 percent during the same period.

New bookings, a key indicator of future revenue, were $5.57 billion in the third quarter, the highest in nine quarters, Accenture said.

Accenture said it now expects full-year 2006 revenue growth at the upper end of its earlier forecast of 9 percent to 12 percent. It expects full-year net income per share of $1.55 to $1.57, including a $140 million tax benefit recorded in June.

For the fourth quarter, Accenture forecast revenue of $4.2 billion to $4.35 billion and net income of 52 to 54 cents per share. Analysts are forecasting profit of 38 cents per share, before items, and revenue of $4.27 billion.

Topics: Accenture (ACN), Cognizant Technology Solutions (CTSH), IBM, Stock Market | No Comments

Carnival of the Mobilists 34 is up at W2F

You can read it all here. We sent in our take on the continuing spat between Nokia and Qualcomm.

Topics: Stock Market | No Comments

Sell Side Comes to Investing Epiphany

Comments from Merrill Lynch semiconductor analyst Joe Osha, found via Tech Trader Daily.

The worse the data points get, the more bullish we become, and we think that the key lesson of the last six months is that the value of data point investing in semiconductor stocks has now been eliminated.

Markets are amazingly efficient at arbitraging excess profit opportunities away, and we’ve seen it in semiconductor stocks before. Ten years ago all one had to do was correctly call the inflection point in industry revenue growth, and the stocks would follow. By 2001 investors had started to figure that out, and over the next several years the relationship broke down. Few semiconductor analysts bother with the sweeping sector calls that used to be so popular, as the market has figured out that adding value that way become almost impossible.

Data point investing in semiconductor stocks is now headed for a similar fate, in our view. Consider the fact that no amount of channel checking would have turned up weakness in January despite the fact that January was the selling opportunity. Meanwhile, publicly available SIA data showed the industry hitting dangerously high unit shipment levels, and valuations were too high as well.

There are too many investors taking too many airplanes to Taiwan and China, and the exercise is now undifferentiated and valueless. Oddly enough, some of the tools that used to work better – watching industry data closely, and paying attention to valuation – seem to be working better. No doubt that we’ll see another shift in semiconductor stock behavior that will render those measures useless as well. For now, though, the formula for success seems to favor watching earnings multiples and SIA data, and staying off those flights to Taipei.

We will set aside our confusion over why published industry sales data does not constitute a “data point” in Osha’s parlance. Or, for that matter, why the P/E multiple for a stock does not count as a “data point.” It seems amazing that an equity analyst would suddenly realize that valuations (earnings multiples) and macroeconomic data such as that delivered by the SIA are more important to an investment thesis than some random tidbit gleaned in a channel check. (For the uninitiated, a channel check is basically asking someone who buys semiconductors “how’s business?”) If there was ever an anomaly in the stock market, it was a time when valuations didn’t have an enormous impact on investing returns. On the other hand, perhaps we’re being too harsh on Osha. His pay – no, his very job – is driven by what tiny edge he can glean for hedge fund managers that none of the other sell side analysts were able to glean. More »

Disclosure: William Trent has a long position in SMH.

Topics: Investing 101, Semiconductors, Stock Market, Technology | 1 Comment

PC Market Still Slowing

Thus spake Lenovo.

While the news is likely no surprise to DELL’s investors, it may be one for those who own Hewlett-Packard. Furthermore, the delays to Microsoft’s Windows Vista continue to cause many to wonder whether businesses will alter their PC replacement plans in order to do a more comprehensive upgrade at a later time.

Passive component maker Walsin Technology Corporation (WTC) said that lower-than-expected demand from the PC sector has affected the company’s performance in the second quarter and it regarded July to August as the key indicator for this year’s business outlook, according to DigiTimes.

Meanwhile, industry analysts at IDC expect notebook computer shipments to grow in Asia, though not enough to offset a decline in the US and Europe.

Region

1Q06

4Q05

1Q05

Q/Q

Y/Y

Source: IDC (Via DigiTimes)

Topics: Dell (DELL), Hewlett Packard (HPQ), Microsoft (MSFT), Stock Market | No Comments

Red Hat Woes a Modest Positive for Oracle

We knew Oracle was doing much better in applications after having had trouble digesting acquisitions. We know their main target is SAP. But open source models are something of a threat to all of the existing software vendors, so today’s disappointing Red Hat performance, attributable in part to their acquisition od JBoss. As Marketwatch noted:

Early this month, Red Hat bought JBoss for around $350 million in cash and stock. The deal aimed to help accelerate a shift towards service-oriented architecture.

JBoss was a maker of open-source middleware products, which are designed to help different software applications work together. The products, including application servers, compete against offerings from the likes of Oracle Corp. (ORCL), BEA Systems Inc. (BEAS) and International Business Machines Corp. (IBM - Annual Report).
Plus, having some of the smaller players help clean up the excess capital (translation: buy up some of the extra companies) out there saves Oracle the trouble and gets the industry to a sustainable structure faster.
Topics: IBM, Oracle (ORCL), Red Hat (RHT), Stock Market | No Comments

Microsoft pushes back Office 2007 release (yawn)

Microsoft (MSFT) pushes back Office 2007 release: Financial News – Yahoo! Finance

The world’s biggest software maker said it will now aim for a launch of Office 2007 to business customers by the end of 2006 rather than an earlier autumn target. Microsoft also said it would delay the general availability of the Office upgrade to early 2007 from its previous January target.

It should come as no surprise, really, as Microsoft is known for serially delaying new products.  Furthermore, with the Vista operating system delayed what was Office 2007 supposed to run on anyway?

For the record, we feel about Office as we feel about Vista: Microsoft needs to get them right so delays are better than half-baked products. However, longer-term it will be crucial for Microsoft to get more effecient use of its R&D budget. It needs to release reasonably significant upgrades on an ongoing basis rather than having huge overhauls every 4-5 years. In short, it needs to get smaller because that is the most likely way to get more nimble.

William Trent currently has a short position in put options related to Office Depot (ODP).

Topics: Microsoft (MSFT), Stock Market | No Comments

Mixed Signals for Consumer

With the end of the second quarter a day away, this morning’s announced revisions to first-quarter GDP are old news. Yet they are interesting in light of the differences between the story they tell and today’s other news. As has been the case for some time, the strength in GDP was driven by the consumer. In fact, 3.53 of the 5.6 percentage points of GDP growth were due to increased personal consumption expenditures.

Against this backdrop, Advanced Auto Parts saw its shares plunge as much as 20% early Thursday as the No. 2 U.S. parts retailer slashed its second-quarter profit forecast, citing the impact of soaring gas prices and rising interest rates on customer spending.

“We believe that macroeconomic factors, including higher energy prices, ever-higher interest rates, and higher required credit-card payments are further reducing discretionary income for our lower- and middle-income customers and has unfavorably impacted customer traffic,” said Chairman and CEO Mike Coppola.

The weakness also affected other companies in the industry, including our Watch List component Autozone.

Consumers most likely to be buying their own auto parts tend to be those at the lower end of the income spectrum, where higher interest rates and gas prices hurt the most. Yet buyers of new cars are also stepping back, as the New York Times reports.  More »

Topics: AutoZone (AZO), Autos, Consumer Cyclical, Economy, Stock Market | 1 Comment

Good For Consumers, But for Garmin?

We have written several times about how the digital navigation market appears finally to be taking off, which has certainly helped shares of Garmin (GRMN - Annual Report) over the last couple of years (see chart below). We have also noted the increasing competition from major consumer electronics companies such as Pioneer and Sony. An article caught our eye today that shows how far the competition is going.
IBM Embedded Speech Technology to Drive Pioneer In-Car Navigation System: Financial News – Yahoo! Finance

“Speech recognition is at the beginning of a tidal wave in cars,” said Karen Rubin, director of product planning and marketing for navigation, Pioneer Electronics (USA) Inc. “Drivers can now enter destinations, search for points of interest, and access their music on the built-in hard drive using their voices.”

All of this is clearly good for consumers, who will have more choices than ever when considering a new digital navigation system. Whether Garmin will be able to maintain its stock performance against new competition is an open question.

Topics: Sony (SNE), Stock Market | No Comments

A Business Model That Ought to Take Off

A bit off topic when it comes to the stock market, but the trends and technology involved could have a profound impact on many businesses, so we’ll take the diversion.

Tom Evslin writes about a new business model for sharing WiFi access.

FON is a commercial/cooperative worldwide WiFi access network. Huh? Actually it’s an interesting idea and a great laboratory for pricing models.

Linus_alien_bill

Foneros are members who’ve agreed to share their Internet access through their WiFi routers.  If you’re a Fonero, you can be a Linus and allow other Linuses to use your access free in return for free use of all FON hotspots.  Or you can be a Bill and charge nonLinuses for use of your access. Currently the rate is 3 Euro/day.  The Bill keeps half and FON keeps the rest. More »

Topics: Stock Market | No Comments