Archive: January, 2007

Insights from the GDP Report

According to the Bureau of Economic Analysis:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.5 percent in the fourth quarter of 2006, according to advance estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.0 percent.

It sounds like a sharp acceleration unless you know how much the seasonal adjustments tend to distort things, as we have pointed out with regard to a variety of economic indicators, including employment, durable goods and GDP. Ah, GDP. Here is how it looks by comparing the fourth quarter to last year’s fourth quarter without adjustment (since the fourth quarter was in the same season both years.)

GDPyearyear.jpg

Like the seasonally adjusted numbers, the unadjusted report shows a decline in Q3 GDP (the bars) and a resurgence in Q4. However, unlike the adjusted numbers neither seems very significant. If the point of seasonal adjustment is to make the data more meaningful, the job isn’t getting done. What the unadjusted data does show, however, is that business spending on equipment and software is slowing down significantly, not withstanding the acceleration in overall GDP for the fourth quarter. Looking at the components of GDP further clarifies this point:

contributions.jpg
Private domestic investment (business spending, primarily) cut a full two percentage points from GDP growth. It is fortunate that other components, particularly net exports, grew so much.

Finally, do the data indicate that concerns over the housing slowdown and its potential impact on consumer spending are unwarranted? Here the picture is mixed. Housing is acting as less of a drag on overall GDP:
residentialcontribution.jpg

ResidentialInvestment.jpg

However, the year/year decline continues to worsen.

Topics: Economy, Stock Market | No Comments

CRDN: Ceradyne Makes More Sales We Already Knew About

The way the defense spending process works, companies selling to the military generally receive a blanket order covering multiple years, but the actual spending must be approved by Congress each year. As a result, companies typically report both the blanket order (which allows investors to anticipate the likely future revenue stream) and the follow-on orders (which allows investors to see that the expected revenue will actually materialize.) With large companies like Lockheed Martin (LMT), the announcements are seldom sufficiently significant to move the market. However, with smaller companies investors must pay careful attention, as is the case with today’s announcement from Ceradyne (CRDN).

Ceradyne, Inc. Receives $113 Million Ceramic Body Armor Order for U.S. Army: Financial News – Yahoo! Finance

Ceradyne, Inc. received a $113 million delivery order for ESAPI (Enhanced Small Arms Protective Inserts) from the U.S. Army, Aberdeen Proving Ground, Maryland. This new delivery order is scheduled to be shipped beginning April 2007 through early September 2007. This delivery order will be shipped against a larger indefinite delivery/indefinite quantity (ID/IQ) contract announced earlier. The Company records as firm orders only delivery orders, such as the above, that have firm scheduled delivery dates.Dave Reed, Ceradyne President North American Operations, commented: “This delivery order is the largest single ESAPI order ever received by Ceradyne.”

The delivery is the follow-on order from a previously announced contract, so the only incremental information is that the order will actually go through as expected. Hopefully the 5% rise in the share price today is due more to investors appreciating Ceradyne’s attractive valuation than to a misunderstanding over whether this is a new order.

It also serves as a good illustration of  PR word-mincing, as this $113 million “largest single ESAPI order ever received by Ceradyne” should not be confused with the $133 million ESBI order they received in December. For the record that, too, was a follow-on order as part of a previously announced contract.

Topics: Ceradyne (CRDN), Lockheed Martin (LMT), Stock Market | No Comments

CHRW: C.H. Robinson Keeps on Trucking

We have written many times about why we believe the transportation companies that act more as brokers will perform better than their asset-owning peers.  And yesterday, the juxtaposition between the UPS disappointment and the C.H. Robinson blowout offered a case in point. According to CH Robinson:

Total Transportation gross profits increased 19.5 percent to $246.2 million in the fourth quarter of 2006 from $205.9 million in the fourth quarter of 2005. Our Transportation gross profit margin increased to 18.3 percent in 2006 from 15.7 percent in 2005.

Pretty spectacular given the cautious guidance and reports from both asset-based truckers and non-asset-based peer Landstar (LSTR - Annual Report).

Disclosure: At time of publication, author is short Landstar (LSTR - Annual Report) put options.

Topics: CH Robinson Worldwide (CHRW), Landstar Systems (LSTR), Stock Market, United Parcel Service (UPS), YRC Worldwide (YRCW) | 1 Comment

VZ: Are More Access Line Deals in the Works for Verizon?

When Verizon (VZ - Annual Report) announced a deal to swap some of its access lines for shares of FairPoint (FRP), we wondered if investors were getting a fair shake. At $1,800 per access line, the deal appears to be in line with recent transactions, and serves to take another slug of debt off Verizon’s balance sheet without incurring taxes for shareholders. However, small shareholders could come out of the deal with a handful of FairPoint shares worth little more than the commissions that would be incurred in selling them.

Raymond James is out with an excellent analysis of the deal and its implications for additional similar deals. According to Raymond James:

The FairPoint deal offered a few advantages for both parties. By diversifying into a larger base of customers and lowering its FCF payout ratio, while divesting its wireless minority partnership, we believe FairPoint shed some risk it had previously borne, while expanding its presence in one of its largest states (Maine). For Verizon, however, it would appear to us to be the best possible offer it could have structured. Had the company sold the property for cash (presumably at a multiple higher than the 6.3x it sold to FairPoint), then paid taxes, we believe Verizon would have netted a multiple below 6x. We believe the assets are close to if not fully depreciated, thus requiring a multiple higher than 7.5x which does not appear rational or likely for these properties. Thus, a spin out to FairPoint appears to be the best option for Verizon to maximize value, even if the multiple appears a bit low. A third option, would have been for the company to spin the properties out to shareholders as a new company, but that would have destroyed value in the process as a management team and company infrastructure would have to be created, leaving Verizon’s shareholders with an asset likely worth less than 6.3x. Again, this makes the announced structure appear to be the rational choice, in our opinion.

Why Smaller ILECs will be Advantaged in These Sales. We believe the apparent tax adverse nature of Verizon will lend itself to doing (or at least attempting to re-produce) a FairPoint-type deal in order to unload additional former GTE lines….

We do not believe these would be large enough for the usual access line aggregators due to equity limitations, leaving an interesting group of suitors, such as Iowa Telecom, Consolidated, Alaska Communications Systems, and Cincinnati Bell.

The Raymond James research piece is well worth reading, as it offers a concise summary of how the deal is structured and why it limits the pool of potential acquirors.

Topics: FairPoint Communications (FRP), Stock Market, Verizon (VZ) | No Comments

SLAB: Silicon Labs Disappoints Investors

Silicon Laboratories SLAB, which designs semiconductors used in wireless handsets and other devices, reported earnings this morning that came in below analyst estimates. Guidance was also weaker than expected. Of course, given the trend of disappointing results from companies in the semiconductor industry and the wireless handset food chain one wonders why the expectations were high to begin with.

According to the company:

During the fourth quarter, the company experienced strong demand for its Broadcast products, in particular FM tuners and satellite receivers. The broad-based mixed-signal business experienced a slight decline on a sequential basis due to lower modem shipments.

The mobile handset business performed within the company’s guidance for the fourth quarter. Silicon Laboratories experienced a decline in the total GSM/GPRS transceiver shipments, which was largely offset by the increase in EDGE transceiver shipments, initial AeroFONE(TM - Annual Report) revenue and FM tuner growth.

We highlighted the FM tuner line, as well as the transition in mobile handsets, in earlier posts. What concerns us now, however, is the very high expense related to stock option compensation, and concern over whether investors will still be inclined to ignore them now that they have been included on the income statement for a full year and year/year comparisons can be made based on GAAP earnings. (Side note: given that GAAP stands for Generally Accepted Accounting Principles, why is it that non-GAAP – presumably not accepted – numbers are those most commonly quoted?) The company says:

GAAP net income for the fourth quarter was $5.2 million, or $0.09 per fully diluted share. Non-GAAP net income, excluding certain charges, was $13.5 million, or $0.24 per fully diluted share.

The only difference between GAAP and non-GAAP is stock-based compensation, and for the full year the difference was more than 50% – GAAP earnings were only $0.56, while non-GAAP came in at $1.14. Even after this morning’s selloff that places the company’s valuation at a hefty 27x non-GAAP numbers, and an outrageous 55x GAAP earnings for a company that just guided for a year/year sales decline in the first quarter. 

Caveat emptor.

Disclosure: William Trent has a long position in SMH.

Topics: Silicon Laboratories (SLAB), Stock Market | 1 Comment

Top “Top Financial Blogs” Lists

Everybody loves lists, and while we might order ours somewhat differently, the top 20 financial blogs bear a strong resemblance regardless of the listmaker. So rather than make our own list, we point you to those lists which seem to have earned the most attention over time:

  1. 24/7 Wall Street listed the 20 best financial blogs.
  2. ValueWiki listed the 20 most popular. A sign of Barry’s popularity is that his reprint has earned us more traffic than the original post.
  3. They later expanded the list to 60.
  4. But Maoxian reordered the list to the top 20 by tenure.

No matter how you slice it, we are pleased to make the cut alongside other top-notch writers. If you know of any other lists of the top financial blogs, pass them along.

Topics: Stock Market | No Comments

FDC: First Data is a Company in Transition

Large Cap Watch List member First Data (FDC) recently spun off Western Union, which formerly accounted for a good chunk of the company’s business. And trust us, their recent acquisition doesn’t have the “size” to offset Western Union. As a result of the company being in transition, it is only natural that the analysts following the stock are not as accurate as they used to be.

In last week’s earnings release, the company issued the following guidance:

For the full year 2007, First Data announced that it intends to generate earnings per share from continuing operations of $1.20-$1.26 and revenue growth in the range of 8%-10%.

Additionally, the company announced that for the first quarter of 2007 it anticipates delivering earnings per share from continuing operations in the range of $0.21-$0.23. Beyond the first quarter of 2007, First Data does not anticipate providing further quarterly earnings per share guidance.

“First Data’s goal for 2007 is to deliver revenue and earnings growth that meet or exceed our stated long-term objective of 8-10%.

The full year number is more or less in line with analyst expectations of $1.24 in EPS on the back of 7.6% revenue growth. But the quarterly EPS number is far below the $0.31 consensus estimate.

Meanwhile, the company seems a bit insecure following the sell-off that accompanied their earnings report. They announced a contract signing that for all appearances looks like it should have been a lay-up:

Importantly the new five-year agreement, effective in January 2008, will allow subscribing Cuscal customers to automatically roll over existing processing and terminal driving services and gain access to new services. The renewal will bring the partnership between Cuscal and First Data to a 25-year business milestone.

“Cuscal is our foundation client in Australia with a relationship spanning two decades,” said Peter Wright, Managing Director, First Data International, Australia and New Zealand. “We are extremely proud of our capabilities in retaining and extending this business. We believe that Cuscal’s continued confidence in our partnership is a reflection of First Data’s ability to meet the evolving needs of its clients.”

Translation: a customer they have had for 20 years signed up for another five. It would have been far more newsworthy (though less likely to have resulted in a press release) had Cuscal not renewed following such a long relationship.

Topics: First Data (FDC), Stock Market | No Comments

XRX: Xerox and the Spirit of Honest Debate

In response to our somewhat heated reaction to Xerox’ (XRX) earnings report, a Xerox employee submitted a comment outlining the Xerox perspective. Since the company appears to be interested in fostering an honest debate, we encourage investors to consider their side of the story as well as our own. Of course, Xerox has presented their side in press releases, conference calls and investor conferences already, but there is certainly no harm in seeing it again here. So we present the comment, along with our response, as this article.

Warning: This is a long article. For those who lack the patience to read it all, our key points are:

  1. Xerox should insist that analysts and First Call base their estimates on Generally Accepted Accounting Principles, rather than adjusting them for “one-time” charges that occur every year.
  2. Whether due to price competition or slower unit sales, we don’t believe the negative constant-currency growth in equipment revenue says good things about the company’s future prospects.
  3. Enough with the light-lens to digital transformation story, already. We’ve been waiting for the growth businesses to offset the declining businesses for four years and are beginning to doubt it will ever happen.
  4. Key financial metrics have been flat to declining for several years.
  5. The company appears to be wasting money on share repurchases, because the share count keeps going up despite $1.5 billion in share buybacks.

Enough of the summary, here’s the beef. More »

Topics: Forensic Accounting, Stock Market, Xerox (XRX) | 3 Comments

OLN: Olin Corporation Earnings Tough To Estimate – Even for Management

Olin Corporation (OLN) reported earnings tonight, and the report was a doozy.

Joseph D. Rupp, Chairman, President, and Chief Executive Officer said, “I am pleased to report that our fourth quarter net income of $0.37 per diluted share exceeded our guidance of $0.25 per diluted share due primarily to better than expected results in our Metals and Winchester businesses, an inventory liquidation gain generated by operations, and a lower than expected restructuring charge. In Metals, weaker volumes were more than offset by improved pricing and lower costs. Winchester experienced stronger than expected sale volumes. Our Chlor Alkali business experienced normal seasonal weakness. Shipment volumes and pricing in Chlor Alkali both declined from the third quarter and pricing was weaker than the fourth quarter of 2005.”

However, while beating earnings by 50% in the fourth quarter the company expects they will more than give it back in the first:

Earnings in the first quarter of 2007 are projected to be in the $0.25 per diluted share range. This forecast reflects softness in both the Chlor Alkali and Metals businesses. In Chlor Alkali, we expect both shipment volumes and pricing to be lower than the first quarter of 2006. In the Metals business, we expect lower volumes to be offset by higher pricing. Winchester results are expected to improve year-over-year due to improved pricing. Year-over-year pension expense is expected to decline approximately $1.0 million.

Given that first quarter consensus estimates were at $0.44, that looks to be quite a miss. You’ve got to hand it to Olin, though – when they do something, they do it big.

Topics: Olin (OLN), Stock Market | No Comments

TPX: Tempur-Pedic Not Resting on its Laurels

Mattress maker Tempur-Pedic (TPX) has had a busy few days. In addition to being included in our Small Cap and Mid Cap Watch Lists, introduced a new product here and another two there, and opened a new manufacturing plant in New Mexico. This state-of-the-art facility, just over 800,000 sq. ft., is the world’s largest mattress factory.

But what we found particularly impressive was their earnings announcement. In it, they reported:

FOURTH QUARTER 2006 FINANCIAL SUMMARY

  • Pro forma earnings per share (EPS) were $0.40 per diluted share in the fourth quarter of 2006 as compared to $0.31 per diluted share in the fourth quarter of 2005. GAAP EPS increased to $0.36 per diluted share from $0.30 per diluted share in the fourth quarter of 2005.
  • Net sales rose 19% to $256.6 million in the fourth quarter of 2006 from $215.6 million in the fourth quarter of 2005. Retail sales increased 23% worldwide. Domestic retail sales increased 29% and international retail sales increased 12%. Sales in the U.S. furniture and bedding retail channel were especially strong, with an increase of 39%.
  • Cash flow provided by operations increased 41% to $32.7 million in the fourth quarter of 2006 from $23.2 million in the fourth quarter of 2005.
  • Worldwide, mattress unit growth increased 16%. Domestic mattress unit growth was particularly robust, increasing 23%. International mattress unit growth was up 8%.
  • Worldwide, pillow unit growth increased 13%. Domestic pillow unit volume increased 25%. Domestic pillow units and revenue represented new all-time quarterly records.

But unlike other companies we know, their pro-forma adjustments are truly things we would consider one-time in nature. More »

Topics: Stock Market, Tempur-Pedic (TPX) | 3 Comments