Archive: April, 2007

RSH: Radio Shack Getting Its Act Together?

We’ve heard about the Business Week indicator, but now that Radio Shack (RSH) reported earnings we may have to devise an Onion indicator.

RadioShack Corporation (NYSE: RSH) today announced net income of $42.5 million or $0.31 per diluted share for the quarter ended March 31, 2007 versus net income of $8.4 million or $0.06 per diluted share for the quarter ended March 31, 2006. First quarter net income was favorably impacted by improved gross margin, a reduction in selling, general and administrative (SG&A) expenses and an increase in interest income when compared to the prior year period.

The results for the quarter were impacted by two unusual items. The negative impact of costs related to employee separations included in SG&A expenses ($8.5 million pre-tax) was more than offset by an increase to gross profit ($14.0 million pre-tax) associated with the recapture of federal telecommunications excise tax. The prior year period’s results included a charge for impairment of fixed assets which reduced the company’s 2006 first quarter pre-tax income by $8.9 million. The items noted above increased earnings per share in the March 2007 quarter by $0.02 and decreased earnings per share in the March 2006 quarter by $0.04.

Analysts were expecting the company to earn $0.14 on $1.04 billion in sales. While the earnings were better than expected due to the margin improvements, the sales did not live up to expectations.

First quarter 2007 comparable store sales were down 9.2% versus the prior year. Total sales decreased in the first quarter of 2007 to $992 million, down 14.5%, from total sales of $1,160 million for the previous year. The declines in the postpaid wireless business continue to impact both the comparable store and total sales results. In addition, total sales were impacted by 506 fewer company-operated stores and kiosks when compared to last year.

Apparently, when companies reach the point of parody things may be as good or as bad as they are going to get.

Topics: Radio Shack (RSH), Stock Market | 5 Comments

VZ: Verizon Finally Growing Again

Verizon Communications (VZ - Annual Report) reported reported earnings:

Verizon Communications Inc. (VZ - Annual Report) today reported strong, profitable first-quarter 2007 revenue growth, supported by industry-leading retail customer growth at Verizon Wireless and strong sales of broadband services, including video. Verizon reported first-quarter 2007 earnings of $1.5 billion, or 51 cents in fully diluted earnings per share [EPS]. This compares with EPS of 56 cents in the first quarter 2006 – which includes operations that Verizon has since divested.

Verizon’s first-quarter 2007 diluted EPS before discontinued operations was 51 cents, or 54 cents per share on an adjusted basis (before special items, non-GAAP), a 17.4 percent increase from 46 cents per share in the first quarter 2006. In total, on an adjusted basis (non-GAAP), Verizon’s first-quarter 2007 earnings were $1.6 billion, or 56 cents in EPS, compared with 60 cents in EPS in the first quarter 2006, which included operations that Verizon has since divested. Special item adjustments in the first quarter 2007 included an extraordinary loss of 5 cents in EPS due to the impact of the Venezuelan government’s nationalization of telecommunications services.

Analysts had been expecting the company to earn $0.53 on $2.5 billion in sales. In our preview of the earnings, we said there was “possible upside to sales.” We were right, as sales came in at $22.6 billion without adjusting for the discontinued operations. According to the company:

Revenues for Verizon Telecom’s consumer market decreased by 3.5 percent, to $4.2 billion, comparing first quarter 2007 with first quarter 2006. However, in legacy Verizon markets, consumer revenues reversed recent
year-over-year declines. (Legacy Verizon consumer markets exclude former MCI consumer markets – where Verizon’s strategic focus has led to expected declines.)

We saw that coming as well. Back in January we noticed that telecom pricing was going through the roof, and said “Which leads us to ask: why, again, is Verizon getting rid of its lines?”

All in all, these days are the best big telecom has seen since the bubble burst. We think estimates have not yet caught up to this new reality, which could lead to further positive surprises in future quarters if we are right.

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

Semi Cycle Ready to Turn?

According to data released today by the Semiconductor Industry Association:

Worldwide sales of semiconductors of $20.3 billion in March were 1.0 percent higher than the $20.1 billion reported for February, and 3.2 percent higher than the $19.7 billion reported for March 2006, the Semiconductor Industry Association (SIA) reported today. First-quarter global chip sales amounted to $61.0 billion, an increase of 3.2 percent from the $59.1 billion reported for the first quarter of 2006. Sales declined by 6.5 percent in the first quarter of 2007 compared to the $65.2 billion reported for the final quarter of 2006.

Looking at a chart of the year/year growth in semiconductor industry sales, it is clear that we are seeing a significant slowdown. In fact, we would be surprised if the sales do not decline this year.

semisales2.jpg
However, the industry has also slowed the pace of its orders for new semiconductor manufacturing equipment and for the first time since 2005 the growth in orders for new capacity was less than the growth in end demand. The longer this situation continues, the healthier it will be for future industry sales, pricing and profit margins.

semisupplydemand1.jpg

Disclosure: William Trent has a long position in SMH.

Topics: Applied Materials (AMAT), Intel (INTC), KLA-Tencor (KLAC), Lam Research (LRCX), MEMC Electronic Materials (WFR), Micron Technology (MU), National Semiconductor (NSM), Sandisk (SNDK), Semiconductor HOLDRS (SMH), Semiconductors, Stock Market, Taiwan Semiconductor (TSM), Texas Instruments (TXN) | No Comments

CNBC Bonus Bucks Video Trivia: As part of Delta’s reorganization plan to emerge from bankruptcy, how many different types of planes will they fly?

Those playing the CNBC stock picking game can earn bonus points by answering trivia questions. Since we are all about doing the research to make it easier for other people to make investment decisions, we are pointing to the correct answers. Subscribe for free to get our daily updates. You might even pick up a few good picks when you visit. Click here for a list of all the questions.

The Video trivia question for Monday, April 30:

As part of Delta’s reorganization plan to emerge from bankruptcy, how many different types of planes will they fly?

According to this video it is five.

Topics: CNBC Trivia, Stock Market | No Comments

CNBC Bonus Bucks News Trivia: According to the CNBC study, the Dow & S&P 500 have been positive for the 12 months leading up to every election since what year?

Those playing the CNBC stock picking game can earn bonus points by answering trivia questions. Since we are all about doing the research to make it easier for other people to make investment decisions, we are pointing to the correct answers. Subscribe for free to get our daily updates. You might even pick up a few good picks when you visit. Click here for a list of all the questions.

The news trivia question for Monday, April 30:

According to the CNBC study, the Dow & S&P 500 have been positive for the 12 months leading up to every election since what year?

CNBC Study: Markets Do Well Even When the President Doesn’t – News – CNBC.com

The Dow & S&P 500 have been positive for the 12 months leading up to every election since 1960, the NASDAQ since 1984 regardless of whether the executive branch was GOP or Democratic.

1,000 Bonus Bucks for us.

Topics: CNBC Trivia, Stock Market | 5 Comments

PNCL: Pinnacle Wins Some, Loses Some

Small Cap Watch List (Track at Marketocracy) member Pinnacle Airlines Corp (PNCL) issued the following News Release:

Pinnacle Airlines Corp. (PNCL) announced today that it has entered into a new capacity purchase agreement with Delta Air Lines (DNTNQ) to operate 16 CRJ-900 aircraft as a Delta Connection carrier. Pinnacle currently expects that the aircraft will be operated by its wholly owned regional jet subsidiary, Pinnacle Airlines, Inc.Under the agreement, Pinnacle will directly acquire and finance the aircraft. Pinnacle will take delivery of the aircraft between November 2007 and July 2008, with scheduled service as a Delta Connection carrier beginning in December 2007. The term of the agreement is for ten years.

The “capacity purchase agreement” sounds similar to that described in another article. The fact that the capacity has been sold in advance reduces Pinnacle’s risk.

Furthermore, the deal almost exactly offsets the number of aircraft the company failed to get from Northwest (NWA) due to the breakdown in pilot negotiations. Within a week, what looked like a modest setback is now at least a break-even.

Topics: Delta Air Lines (DAL), Northwest Airlines (NWA), Pinnacle Airlines (PNCL), Stock Market | No Comments

ORCL: A Close Look at Oracle

Oracle Corporation

Oracle Corporation (NASDAQ:ORCL – Annual Report) is the world’s largest enterprise software company. It has been expanding from its original database offering by acquiring companies that make applications that run on its database. It is organized into two businesses, software (80%) and services (20%). The software business includes software licenses and product support, while the services business includes consulting, education and on-demand services. Its products and services are marketed both through its own sales and service organization and through indirect channel partners. Its primary competitors include SAP (SAP - Annual Report), IBM (IBM - Annual Report) and Microsoft (MSFT - Annual Report), as well as others in specific product areas. Furthermore, open source products such as the MySQL database are gaining traction among users.

Growing Through Acquisitions

Although the enterprise software market grew rapidly in the 1990’s, by the early 2000’s the market had reached maturity and had too many companies chasing too few dollars. While consolidation in some industries occurs because the weaker businesses fail, software balance sheets were too strong to for this to happen. The only way to fix that situation is for an industry leader to soak up the excess capital by leveraging its own balance sheet to acquire other companies – for cash, not shares. Oracle has been pursuing that fix, beginning with the PeopleSoft acquisition and most recently with the buyout of Hyperion Solutions. In addition to large acquisitions, the company is also filling in gaps to offer stronger software suites for industry verticals such as telecom and financials.

Software companies tend to generate significant cash flow, and Oracle has been able to use this cash flow to fund the acquisitions while both maintaining a healthy balance sheet and avoiding dilution to existing shareholders. As an example, consider its first large acquisition – that of PeopleSoft in January 2005 for $11.1 billion in cash. Prior to the acquisition Oracle held more than $9.5 billion in cash and marketable securities on its balance sheet, and had virtually no debt. The company used this cash and a $7 billion bridge loan to complete the acquisition, and by the end of its fiscal year in May, 2005 it had reduced the loan value to $2.6 billion while still maintaining nearly $5 billion in cash and marketable securities and actually reducing its share count.

By May, 2006 the company had made another $4 billion worth of acquisitions (net of the cash held by the acquired companies) and increased its cash and marketable securities to $7.5 billion while restructuring its debt load to $5.7 billion in long-term debt. Even though the debt was $3 billion more than the prior year, most of that was offset by the increase in cash – meaning that the $4 billion in acquisitions was made possible almost entirely through cash flow from operations.

By making these acquisitions, Oracle is also answering one of the priorities of corporate technology buyers – namely, reducing complexity. So many applications have been developed that IT staffs now spend much of their time getting the disparate systems to work together. Although it will take some time, Oracle’s Fusion platform aims to integrate all of the applications – both internally developed and those acquired. Although some buyers will still prefer “best of breed,” many others will choose a suite of applications that work well together. In many ways this is reminiscent of the way Microsoft’s Office platform gained share. The industry leading spreadsheet (Lotus 1-2-3), word processor (Word Perfect) and presentation program (Harvard Graphics) were widely viewed as being equal or better programs than Microsoft’s Excel, Word and PowerPoint. It was the way the Microsoft Suite worked together that shifted the market share permanently in Microsoft’s favor.

Corporate software buyers want their jobs made easier, and that means reducing complexity not only in getting different software packages to work together but also in price structure. Here, too, Oracle’s acquisition strategy is answering the need. Oracle is offering simplified licensing to make pricing more consistent across its portfolio of products. Four basic licensing models will be available for all Oracle products, including J.D. Edwards, PeopleSoft and Siebel applications. The Component Model offers customers simple a la carte pricing, while the Custom Application Suite Model allows them to create their own bundle of applications based on their specific business needs.

Economic Outlook

Other than acquisitions, the drivers of growth are likely to be macroeconomic. Here the current outlook is quite mixed. U.S. GDP data have shown a significant slowdown in corporate investments in equipment and software, and surveys of Chief Information Officers indicate a slowdown in technology investing ahead.

gdpgrowth.jpg

ciopoll.jpg

Risks

A general risk for investors in software companies is that quarterly sales tend to be back-end-loaded (meaning most of the sales occur late in the quarter.) This poses two risks: one is that a delay in a large order could cause the company to miss earnings estimates. The other is that management may try to manage earnings by offering customers discounts or other sweeteners to close deals before the quarter ends. This latter risk can be monitored by paying close attention to accounts receivable. If accounts receivable rise faster than sales it could indicate that more late-quarter sales were booked than is normal. For Oracle, the latest quarter’s accounts receivable balance actually declined, so this doesn’t seem to be a current concern.

One concern investors have about Oracle’s strategy is that the frequent acquisitions make it difficult to gauge how well the company is growing. For example, on their recent earnings conference call, CFO Safra Catz said:

Even though we have now owned Siebel for over a year, we got it mid-quarter last year so if you exclude Siebel entirely from both last year and this year, new license revenues were up 32%, still four times the reported growth rate of SAP.

The problem with that statement is that Oracle has since acquired, according to their site, eleven more companies (not counting the recently announced Hyperion deal.)   While these were relatively small acquisitions “with most takeovers likely falling in the range of $5 million to $100 million,” as the company described it, five million here and $100 million there and pretty soon you’re talking big money. Still, because the individual acquisitions are not deemed “material” the Company has no obligation to provide pro-forma financial information about them.

Another risk related to the acquisition strategy is that each acquisition means another product to be integrated. In the short term, this increases rather than reduces complexity for customers. Some Siebel CRM users say Oracle has been slow to provide details on its pledge to integrate Siebel and Oracle products and to reveal its long-term plans for its CRM product lines. While the delays aren’t causing customers to switch applications, the uncertainty about future upgrade plans is something customers would rather not face. The sooner Oracle can address such issues, the better.

Valuation

With a current market capitalization and enterprise value of approximately $95 billion, Oracle shares are trading at a trailing P/E multiple of 25, an EV/EBITDA multiple of 13.6 and an EV/Free Cash Flow multiple of 22, all of which appear relatively rich. Earnings per share are expected to grow by 14% in the fiscal year 2008, which is healthy but probably insufficient to support the current valuation. Investors may want to wait for a pullback in the share price or for estimates to catch up to the current price before taking a position.

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

Topics: IBM, Microsoft (MSFT), Oracle (ORCL), SAP (SAP), Software and Programming, Stock Market | No Comments

DVA: Davita Reports Earnings, Issues Confusing Guidance

Large Cap Watch List (Track at Marketocracy) member DaVita (DVA) reported earnings:

DaVita Inc. (DVA), today announced results for the quarter ended March 31, 2007. Net income for the three months ended March 31, 2007 was $76.6 million, or $0.72 per share, as compared with $57.5 million, or $0.55 per share, for the same period of 2006.

Analysts were expecting the company to earn $0.72. Although the numbers for the quarter were spot-on, the company raised its operating income guidance for the full year.

We are revising our 2007 operating income guidance: Operating income is now projected to be in the range of $740-$780 million. Our previous guidance was for operating income to be in the range of $700-$760 million. Operating cash flow for 2007 is currently projected to be in the range of $460-$510 million.

As a general rule, we don’t like it when companies issue guidance that you have to figure out. Why guide operating income when the reporting is primarily in net? In this case, when we extrapolate out the current non-operating items we get a $2.82 number, while the analyst consensus is at $3.12. Were the non-operating expenses (interest cost) higher than normal in the first quarter? Will there be higher expected non-operating income for the full year? Are analysts consensus figures incorporating some sort of pro-forma “operating income” based earnings per share? Or were the analyst estimates just too high?

It sounds like the company will have a lot of explaining to do on the conference call.

Topics: Davita (DVA), Stock Market | No Comments

The Week Ahead (29 April 2007)

The Economic Calendar has three potentially important events this week:

  • Personal Income and Outlays on Monday (consensus 0.6% income, 0.5% spending)
  • ISM Manufacturing on Tuesday (consensus 51)
  • The Employment Situation on Friday (consensus 100,000 jobs added, 4.5% unemployment)

Earnings season continues in full force.

Monday

Tuesday

  • Plantronics (PLT) – anyone’s guess, though our long position gives away our own guess

Wednesday

  • Cognizant (CTSH) – one of these days the growth will hit a wall, but probably not this day
  • Garmin (GRMN - Annual Report) – shouldn’t need a big surprise to move the stock from this level
  • Itron (ITRI) – risk to estimates in both directions due to Actaris acquisition
  • Sprint (S - Annual Report) – the worst may be over here
  • Symantec (SYMC) – Based on MFE and VDSL should have a big quarter

Thursday

  • Ansys (ANSS) – Dassault beat big, and we like Ansys better
  • QLogic (QLGC) – too risky for our tastes
  • Starbucks (SBUX) – probably no surprise, but risk probably to the downside when they are making this kind of move

Disclosure: Long PLT and ITRI

Disclosure: Author is long Starbucks (SBUX) at time of publication.

Topics: ANSYS (ANSS), Cognizant Technology Solutions (CTSH), Garmin (GRMN), Itron (ITRI), McAfee (MFE), Plantronics (PLT), QLogic (QLGC), Sprint Nextel (S), Starbucks (SBUX), Stock Market, Symantec (SYMC), Verizon (VZ) | 7 Comments

Earnings Season Unkind to Our Watch Lists

Earnings season is treating our watch lists unkindly. All three were down this week, despite positive gains from the respective benchmarks.

The Small Cap Watch List (Track at Marketocracy) lost 0.29%, while the S&P Midcap gained 0.43% and the Russell 2000 was up 0.1%. Two consecutive weekly losses have nearly wiped out the Small Cap Watch List (Track at Marketocracy)’s outperformance since the January 31, 2007 inception.

smallcap3.jpg

The Mid Cap Watch List (Track at Marketocracy) lost 0.94%, compared with a 0.71% gain for the S&P Midcap. However, the Watch List still retains about a 150-basis point lead to date.

midcap3.jpg

The Large Cap Watch List (Track at Marketocracy) lost 0.26%, compared to the 0.65% gain in the S&P 500. Since inception, the Watch List is still ahead by nearly 200 basis points.

largecap3.jpg

In fact, the only of our Watch Lists to gain was the legacy one we created in June 2006 and have not changed other than to account for corporate actions. It was up 0.62% for the week. Our own portfolio was down 0.46%.

legacy3.jpg

Topics: Stock Market, Watch List | No Comments