Archive: February, 2007

DRCO: Dynamics Research Posts Dynamic Margins

Small Cap Watch List (Track at Marketocracy) member Dynamics Research (DRCO) issued their earnings News Release:

Dynamics Research Corporation (DRCO), a provider of innovative engineering, technical and information technology services and solutions to federal and state governments today announced operating results for the fourth quarter and full year ended December 31, 2006.The company reported revenue for the fourth quarter of 2006 of approximately $60.3 million, consistent with previously issued guidance of $59 to $62 million. Net income was $1.5 million, or $0.16 per diluted share for the fourth quarter of 2006, compared with $0.31 per diluted share for the same period a year ago. For the year ended December 31, 2006 revenue was $259.0 million, compared with $300.4 million for 2005. Net income was $4.1 million, or $0.43 per diluted share for 2006, compared with $11.4 million, or $1.24 per share for 2005 which included $0.13 of non-recurring gain from the sale of investments.

Wall Street analysts were expecting the company to earn $0.13 on $60 million in revenue, so it was indeed in line. Their guidance looks light on the revenue side, but appears to blow out earnings estimates. “We are focused on achieving continued success from our business development initiatives while concurrently expanding profit margins,” said Jim Regan, DRC’s chairman and chief executive officer.

The company estimates revenues in the range of $225 to $240 million and earnings per diluted share in the range of $0.65 to $0.75 for the calendar year 2007. For the first quarter of the 2007 the company anticipates revenues in the range of $53 to $55 million and earnings per diluted share of $0.11 to $0.13.

Consensus estimates were pegged at $0.52 on $243 million in revenue for the full year and $0.11 on $60 million in Q1. In 2006 new business wins, measured in the estimated first year revenue value of contracts, grew by more than 50%. Total estimated value (all years) of new business contract wins was $145 million in 2006.
Sales are down considerably from a year ago, and the working capital accounts have been scaled back accordingly. New orders were less than sales for 2006, so further slowdown is to be expected. However, trading at an enterprise value of less than 6x EBITDA and 8x free cash flow the stock appears reasonably priced even if sales decline modestly.

Topics: Dynamics Research (DRCO), Stock Market | No Comments

USO: Revisiting Oil

Oil prices rise as demand worries fade – Yahoo! News

The U.S. government reported Wednesday that stockpiles of gasoline and distillates, which include heating oil and diesel fuel, dropped last week by a larger amount than analysts had forecast. Gasoline and distillate inventories are lower than they were at this time last year.Light, sweet crude for April delivery rose 17 cents to $61.63 a barrel in early afternoon trading on the New York Mercantile Exchange, after falling as low as $59.92 in electronic trading on the worry that U.S. and Chinese fuel demand growth could decelerate.

We’ve felt some pain with the recent decline in oil, as our position in the USO ETF is down more than 13% since we bought it.  Still, we held on, and part of the reason for the rising prices now is the change in weather that was all too predictable.

Still, what does the overall picture for supply and demand look like today? According to the EIA, total stocks have come down from record highs and are now approximately in line with the 20-year average.


However, we have never felt it made much sense to compare long-term averages in inventories to a generally rising trend in demand. Looking at the number of days the inventory will supply, the last two weeks have presented what may be a downside breakout for supplies (and thus present the possibility of an upside breakout for oil prices.) Note too that the economic slowdown fears would probably be reflected by a rising days of supply even if inventories were flat – so the declining days of supply pretty much washes out that excuse for prices to fall.


So we’re optimistic that our USO holding will recover its losses and then some.

Topics: Commodities, Oil (USO), Stock Market | 2 Comments

BRL: Barr the Windows

Large Cap Watch List (Track at Marketocracy) member Barr Pharmaceuticals (BRL - Annual Report) reported a GAAP Loss:

For the three months ended December 31, 2006, the Company recorded a loss of $390.9 million, or $3.67 per share, compared to net earnings of $94.9 million, or $0.88 per share, for the same period last year. Revenues in the period were $584 million, compared to $326 million for the same period last year.For the six months ended December 31, 2006, the Company recorded a loss of $338.2 million, or $3.18 per share, compared to net earnings of $178.1 million, or $1.66 per share, in the prior year period. Revenues in the period totaled $916 million, up from $636 million for the same period last year.

Adjusted earnings per fully diluted share for the three and six months ended December 31, 2006 would have been $0.83 and $1.70, respectively, after excluding certain charges that are primarily related to the PLIVA acquisition. For comparison purposes, in the prior year periods, adjusted earnings per fully diluted share for the three and six months ended December 31, 2005 would have been $0.92 and $1.77, respectively, excluding certain one-time items.

Consensus estimates, presumably excluding the charges, were for $0.73. But the guidance for the rest of 2007 was disappointing relative to consensus (which was for $3.23 on $2.57 billion in sales):

The Company expects its adjusted earnings per fully diluted share for the year ending December 31, 2007 to be in the range of approximately $3.00 – $3.30. The adjustments are discussed in the paragraph immediately below. The Company expects total revenues for that period to be in the range of $2.3-$2.4 billion. R&D investment for 2007 is expected to be approximately $240-$250 million. SG&A expenses for 2007 are expected to be approximately $775-$800 million.

The Company’s adjusted guidance for 2007 excludes amortization costs associated with acquired products, charges related to the step-up of inventory acquired from PLIVA, contributions from operations that the Company anticipates divesting during 2007 and stock-based compensation costs. The Company’s adjusted guidance for 2007 also excludes the impact of potential patent challenge outcomes or other business development activities that may be completed by December 31, 2007.

That’s a lot of things to be excluding and still miss the estimates out there.

Topics: Barr Pharmaceuticals (BRL), Stock Market | No Comments

SIE: Sierra Misunderestimates Cost of Drugs

Sierra to Incur Loss on Enhanced Medicare Part D Prescription Drug Product Offering: Financial News – Yahoo! Finance

Sierra Health Services, Inc. (SIE) today announced that it expects to incur a loss in its 2007 fiscal year from the enhanced version of its Medicare Part D Prescription Drug Program (PDP) product offering. Based on its claims experience for the month of January, Sierra expects pharmacy costs on this product to be higher than previously projected. For the month of January, the only month for which full claims data is currently available, the Company has incurred pre-tax losses of approximately $3 million, or $2 million after tax, from the enhanced product. After completing discussions with the Centers for Medicare and Medicaid Services (CMS) and analyzing data, including additional claims history, Sierra expects to develop a best estimate of the losses associated with the enhanced product and record a premium deficiency reserve in the first quarter, for the entire 2007 period. This best estimate is expected to be developed within the next 45 to 60 days.The Company’s earnings per share guidance for 2007 did not include a contribution from the enhanced PDP product. Sierra remains comfortable with its original guidance of $2.30 to $2.40 per diluted share, excluding the expected impact of losses for this enhanced product.

Given that the company’s initial estimate of the cost (the one they used to set their premiums) was off by so much, it is only natural that the company wants to take its time figuring out the full-year impact. But given the $2 million after-tax loss in January, allow us to hazzard a guess that the full year impact will be approximately 12 x $2 million, or $24 million. If we use that as the over/under, the per-share impact would be about $0.42.

On this announcement the stock fell just 4.5%, which could suggest that:

  • The market believes the impact will be less than $0.42 this year
  • The company will be able to raise prices and recover the losses in future years

There may also be other explanations, which we would be happy to hear.

Topics: SIE, Stock Market | No Comments

SJI: South Jersey Industries Beats Estimates

Mid Cap Watch List (Track at Marketocracy) member South Jersey Industries (SJI - Annual Report) reported earnings that exceeded consensus estimates.

South Jersey Industries (NYSE: SJI) today announced income from continuing operations for 2006 of $72.3 million, and restated income from continuing operations of $39.8 million in 2005. Earnings per share from continuing operations for 2006 totaled $2.47 compared with the prior year period restated at $1.40. The restatement of 2005 results, which was previously announced in an SEC Form 8-K filing on February 14, 2007, reflected a downward adjustment of $8.8 million, or $0.31 per share, due to the elimination of hedge accounting treatment for our commodity derivative positions.Our on-going practice will be to provide supplementary information to reflect the economic value, as opposed to the marked-to-market value, of all of our commodity derivative transactions with the establishment of a non-GAAP measure called “Economic Earnings.” Economic Earnings, which eliminates all unrealized gains or losses on commodity derivative transactions, rose 9% to $54.0 million, or $1.85 per share, for 2006 compared with $49.5 million, or $1.74 per share, for 2005.

The consensus estimate for 2006 was for $1.84 in economic earnings. No balance sheet or cash flow statement was presented with the earnings release, leaving little opportunity for further analysis.

Topics: South Jersey Industries (SJI), Stock Market | No Comments

XLNX: Xilinx Joins the Dumb Financing Decision Parade

For some reason, the latest fashion appears to be issuing convertible notes. The practice allows companies to reduce the apparent share count, but assuming the share price rises (which stockholders are presumably rooting for) the shares willl just come right back. We’ve seen this with Ceradyne (CRDN) and Finisar (FNSR), and now Xilinx prices $900 mln 3.125 pct convertible debentures |

Xilinx Inc. (XLNX) said it priced $900 million of 3.125 percent convertible junior subordinated debentures due in 2037, and expects the sale to close March 5.The debentures will initially be convertible into shares of Xilinx’s common stock at a conversion rate of 32.0760 shares of common stock per $1,000 principal amount of debentures, the company said.

At recent share prices, the company should be able to buy back between 32 and 33 million shares with the proceeds. If the company does well and the shares rise above $31.18 before 2037, the company will then exchange the bonds for approximately 29 million shares. So, for a net reduction of 3-4 million shares the company will be paying a 1.725% premium (the convertible yield less the dividend yield on the stock) for 30 years.

The additional interest expense relative to the dividends that would otherwise be paid amounts to $15.5 million per year. That would allow the company to buy 600,000 shares annually at the current price, which would give them the same net share reduction after just 5 or 6 years rather than the 30 year term of the convertible bonds.

Or alternatively, the company could buy back shares with the $300 million it used in the December quarter to increase its balance of short term investments. That would allow them to buy back 11.5 million shares and retire them permanently, never having to worry about the dilution again, and never incurring the interest payments on the debt. Over time, that would quadruple the net share buyback and they would recover more than 100% of the initial outlay in interest savings over the life of the convertible. If, for some reason, the company then failed to generate sufficient cash flow to run its operations (which appears to be an unlikely outcome) they could always then turn to the convertible securities market for a cash injection.
Of course, the company won’t have to reissue the shares if the stock does not rise above $31.18 by 2037. But we’re pretty sure shareholders aren’t interested in that potential outcome. No matter how you slice it it is hard to see how this deal is positive for existing shareholders.

Topics: Ceradyne (CRDN), Finisar (FNSR), Stock Market, Xilinx (XLNX) | 4 Comments

Gross. Domestic Product.

BEA: News Release: Gross Domestic Product

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 2.2 percent in the fourth quarter of 2006, according to preliminary estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.0 percent. The GDP estimates released today are based on more complete source data than were available for the advance estimates issued last month. In the advance estimates, the increase in real GDP was 3.5 percent (see “Revisions” on page 3).

Last month, when the advance report came out, we trotted out our handy-dandy year/year unadjusted comparisons to provide some perspective. We noted that the supposed sharp acceleration (that has since been revised away) didn’t look so sharp based on the raw data. Here is the chart as it looked then:

And here is how it looks now, after the revisions.


Total GDP growth still looks steady as she goes. However, the business spending slowdown looks even more bleak than it had previously. This is further illustrated with a comparison of the GDP components before the revision:

And here it is based on today’s revision:


Personal spending has been strong despite the turmoil in housing. In a way, this is even more frightening because it leaves one to wonder what will happen if it does weaken. Unless business spending picks up soon, it could get ugly.

Topics: Economy, Stock Market | No Comments

PZZA: Papa John’s Drops the Pizza

Small Cap Watch List (Track at Marketocracy) and Mid Cap Watch List (Track at Marketocracy) member Papa John’s International (PZZA) reported earnings last night. Highlights:

# Fourth quarter earnings per diluted share of $0.59 in 2006 vs. $0.42 in 2005 ($0.55 in 2006 vs. $0.36 in 2005, excluding the consolidation of the company’s franchisee-owned cheese purchasing entity, BIBP Commodities, Inc. (BIBP))

# Fourth quarter 2006 earnings includes a $0.07 benefit from a 53rd week of operations and a $0.05 benefit from the settlement of certain tax issues

# 37 net Papa John’s restaurant openings during the quarter and 89 for all of 2006

# Domestic system-wide comparable sales decreased 0.5% for the quarter and increased 3.1% for the year

# Earnings guidance for 2007 reaffirmed at a range of $1.48 to $1.56 per diluted share, excluding the impact of consolidating BIBP’s results

# Board of Directors approved a $50 million increase to an aggregate of $675 million for repurchases of the company’s common stock

Yahoo reports the consensus estimate at $0.46, comparable to $0.36 in 2005. Since the $0.36 excludes BIBP, the extra week and the tax settlement, it looks like apples-for-apples the earnings report missed by $0.03. That thesis is further reinforced by the “reaffirmed” full-year guidance, which now looks to be made on a gooey dough of share buybacks.

Topics: Papa John's (PZZA), Stock Market | No Comments

SAFM: Chicken Purveyor Sanderson Farms Jumps from Fryer to Fire

Small Cap Watch List (Track at Marketocracy) and Mid Cap Watch List (Track at Marketocracy) member Sanderson Farms SAFM) Released disappointing earnings (compared with analyst estimates of a ($0.07) loss on $277 million in sales):

Net sales for the first quarter of fiscal 2007 were $292.7 million compared with $236.2 million for the same period a year ago. For the quarter, the net loss was $2.8 million, or $0.14 per diluted share, compared with the net loss of $8.6 million, or $0.43 per diluted share, for the first quarter of fiscal 2006. Operating income for the first quarter of fiscal 2006 was reduced by incurred but unrecognized lost profits and expenses of approximately $3.0 million related to losses sustained as a result of Hurricane Katrina.

While fading bird flu fears helped stabilize poultry prices, demand for corn-based ethanol has caused feed prices to soar.

“While all of these factors, along with the favorable trends in chicken prices, are positive indicators for our business going forward in fiscal 2007, we expect our feed costs will continue to rise,” [CEO Joe] Sanderson continued. “The demand for corn from ethanol producers is affecting market prices for corn and soybeans. However, we remain confident that the chicken and grain markets will strike a favorable balance over time.”

Accounts receivable and accounts payable both rose far faster than sales. Sanderson Farms also released its 10Q yesterday, so we turned to that for more information. While the company did not address the receivables and payables directly, they did note that:

The additional pounds of poultry products sold can be attributed to the new complex in South Georgia, which began operations during the fourth quarter of fiscal 2005 and was ramping up production during the first quarter of fiscal 2006, and increased pounds of products sold at the Collins, Mississippi processing plant, which was down for one week during the first quarter of fiscal 2006 to allow for the conversion to serve the big bird market from the chill pack market. The Company also sold fewer pounds during the first quarter of fiscal 2006 due to the destruction of inventories during Hurricane Katrina that would have been available for sale during the first quarter of fiscal 2006. In addition, the disruption of shipping caused by Hurricane Katrina and sluggish demand resulting from the appearance of H5N1 in certain countries in Asia and Europe during the first quarter of fiscal 2006 postponed the sale of certain export products until later in fiscal 2006.

It is possible that the delays caused an overall operational slowdown in Q1 2006 that caused both receivables (no sales to collect on) and payables (no new orders to pay suppliers for) to be artificially low. However, turning to the 2006 10Q doesn’t bear that out. Both were down, but only slightly. The reason for concern is that cash is relatively low, and if the company is having problems collecting on its sales it may be pushing out its own payments. As any credit card holder knows, that can be a costly decision.

Topics: Sanderson Farms (SAFM), Stock Market | No Comments

AZO: AutoZone

Large Cap Watch List (Track at Marketocracy) member AutoZone, Inc. (AZO) reported earnings:

AutoZone, Inc. (NYSE:AZO) today reported net sales of $1.300 billion for its second quarter (12 weeks) ended February 10, 2007, up 3.7% from fiscal second quarter 2006. Same store sales, or sales for stores open at least one year, were down 0.3% for the quarter.Net income for the quarter increased 6.2% over the same period last year to $103.0 million, while diluted earnings per share increased 15.5% to $1.45 per share from $1.25 per share reported in the year-ago quarter.

The revenue was a bit shy of consensus estimates of $1.31 billion, and EPS was right on target – which is generally interpreted as a miss (especially when the market is trading like it did today.) And management did little to assuage fears of a slowing economy, noting on the conference call that:

The in-store sales, or sales per-store open more than one year, were down 0.3% for the quarter. At the start of the quarter, we were cautiously optimistic regarding sales, the price went down in gas, and we were down to around $2.25 a gallon.

And we believed our customers began to feel less pressure on their pocketbooks, but a sales improvement never really materialized when there were similar patterns across all regions of the country…

The company is, however, hopeful regarding a new merchandise mix that is being rolled out:

A second major focus for this year will be product assortment, more specifically, refining our hard-parts assortment to be more responsive to our customer’s needs in both retail and commercial. We have completed our major liner views and are currently rolling these improved steps to our stores. The majority of these new assortments began arriving in our stores in the second quarter and will be substantially complete in the third quarter.

We are always extremely mindful of our working capital levels so we attempt to balance the additions to inventory reductions where appropriate. And we’re proud to report an inventory per store number this quarter under $500,000. This is down approximately $6,000 from last quarter and was achieved at the same time the additional products were being added.

Reducing total inventory while bringing in new products is a noteworthy accomplishment that can have a huge payoff if management is correct in its assessment that the new merchandise will sell better. More efficient inventory management would allow the company to leverage its fixed costs over a larger revenue number, with the potential for significant gross margin improvements. And of course, the reverse applies if managements assessment is incorrect.

Topics: AutoZone (AZO), Stock Market | 2 Comments