Archive: August, 2007

Room for Cautious Optimism on Tech Spending

Key indicators for business spending include corporate profits and the cost of borrowing. Both have been favorable for years, yet businesses have focused more on cutting costs than on developing their infrastructure. With borrowing costs rising (at least in terms of the spread between Baa bonds and treasuries) I thought it another good opportunity to read the tea leaves from some recent conference calls.

Tech Data (TECD) starts things off on a positive note.

Looking at the Americas, our net sales exceeded our internal growth expectation which called for growth in the mid single digit range through strong execution and focused sales and product management efforts we want incremental business in the second quarter that boosted our growth rate to over 16% in the region, while still delivering our targeted operating margin. This double digit net sales growth was broad based with growth across virtually all of our product and customer segments….

Our Q3 business outlook calls for low double digit year-over-year growth in the Americas and flat to low single digit growth in Europe on the local currency basis.

(Excerpt from full TECD conference call transcript)

Staples (SPLS) is running into some tough spots.

Our North American retail business again experienced softer than expected sales during the quarter with same-store sales down 2% and total sales up 5%, which led to only a modest increase in the bottom line. Our North American delivery business continued to gain market share with top line growth of 16% and operating income of 18%. Finally, we’re happy with the strong improvement we’re seeing in our international business, where total sales were up 18% in U.S. dollars. That’s 11% in local currency. Same-store sales grew 7% and operating margin jumped 225 basis points to 1%.

So while we were very pleased with our results in North American delivery and international, it’s clear we’re operating in a tough retail environment in North America….

We had strong growth in copy center, laptop computers, ink and software, but these gains did not make up for negative comps in furniture, supplies, and tech durables.

(Excerpt from full SPLS conference call transcript)

And since both Staples and Tech Data source a good percentage of their tech products from Hewlett Packard (HPQ - Annual Report) it is important to get their take on the situation as well.

Moving to PSG, we shared an outstanding quarter with excellent revenue growth, market share gains in every region and strong margin performance. Revenue increased 29% year-over-year to $8.9 billion with unit shipments up 33% and double digit revenue in unit growth in every region. These results bring PSG’s year-to-date revenue growth to nearly $5 billion. We have a strong momentum driven by our notebook business which grew revenues 54%, and units 71% versus the prior year period. According to our estimates for the second calendar quarter, we increased HP’s notebook market share lead by over 5 points versus the prior year….

We now expect Q4 revenue to be approximately $27 billion to $27.2 billion, growing roughly 10% to 11% year-over-year. While the sequential increase of 6% to 7% implied by our guidance is less than the historical 10% to 12%, we do not believe it is prudent to set investor expectations that our Personal Systems business can continue to grow at almost three times the market rate, nor do we think it appropriate to build a cost structure on that basis.

(Excerpt from full HPQ conference call transcript)

There don’t seem to be too many signs of weakness, although the GDP numbers suggest there is. I’d argue for cautious optimism regarding tech spending over the next few quarters despite the rise in corporate interest spreads.

Topics: Computer Hardware, Computer Peripherals, Hewlett Packard (HPQ), Retail (Specialty), Staples (SPLS), Tech Data (TECD) | No Comments

Durable Goods: An Improvement of Sorts

According to the Census Bureau’s durable goods report:

New orders for manufactured durable goods in July increased $12.9 billion or 5.9 percent to $230.7 billion, the U.S. Census Bureau announced today. This was the fifth increase in the last six months and at the highest level since the series was first stated on a NAICS basis in 1992. This increase followed a 1.9 percent June increase. Excluding transportation, new orders increased 3.7 percent. Excluding defense, new orders increased 4.9 percent.

The news was generally treated quite favorably, such as this article from Reuters:

Analysts polled by Reuters were expecting durable goods orders to rise by 1 percent. Non-defense capital goods orders excluding aircraft, viewed as an indicator of business spending, gained 2.2 percent, the steepest climb since March.

U.S. stock index futures and the dollar rose on the strong economic news, while government debt prices pared gains….

Orders for computers and electronic products and machinery posted their sharpest gains since November 2006.

All of which, I suppose, is true – on a seasonally adjusted, month-over-month basis. On the year/year basis I prefer, which should not require any seasonal adjustments, the picture is a little – just a little – darker. year over year change in durable goods

There was a clear improvement – but in the longer outlook it wasn’t exactly breaking free of a downtrend and essentially resembled the September 2006 and April 2007 spikes that turned out to be head fakes. While it is certainly better than yet another decline, I’m not ready to throw a party. I did, however, shift the durable goods chit in my economic data table from the “bad and deteriorating” column to the “bad but improving” column. (By the way, subscribers can download my full spreadsheet with tables for all the major industry groups.)

[pay]durable goods [/pay]


Bad and Deteriorating Bad but Improving Good but Deteriorating Good and Improving
Existing Homes (June) Chicago Fed NAI (May) Consumer Confidence (June) Real Disposable Income
Employment (June) Durable Goods (June) Personal Spending (June) ISM Manufacturing (July)
New Home Sales (June) Construction Spending Retail sales (August 2007) ISM Services (June)
ATA Truck Tonnage (June) CPI (July 07) Leading Indicators (June)  
GDP (Q2 Advance) Trade deficit (July 07)    
PPI (July 07) Durable Goods (July)    
Industrial Production (July 07)      
Housing Starts (July 07)      

As to that spike in computers and electronic products, attribute it primarily to electronic products. The year/year change for computers continues to plummet.


Given the strength we’ve seen from several of the computer manufacturers, the data doesn’t bode well for Dell’s (DELL) earnings report this week.

Topics: Computer Hardware, Dell (DELL), Durable Goods, Economy | No Comments

KLAC: KLA-Tencor Case Study in Income Statement Adjustments for Pension Accounting

Pension accounting rules permit certain expense items to be smoothed into income. However, the required disclosures allow investors to adjust the income statement to reflect the true underlying economic cost related to pension plans. The economic cost should equal any change in the plan liability other than benefits paid or employer contributions.

Consider the following pension disclosures from KLA-Tencor’s 10K.

KLAC pension disclosures

The pension obligation increases by 4,175, and benefits paid of $1,519 should be added back to that amount to determine the underlying economic change in obligation. 4,175 + 1,519 = 5,694.

The fair value of assets rose by $1,255. The contributions and benefit payments were a net $789 which should be deducted from this. Notice that in this case the benefits paid figure differs between the asset side and the liability side. It is possible some benefits were paid as a lump sum settlement. At any rate, the net change in assets was 1,255 – 789 = 466.

The net change in the economic liability, then, was 5,694 – 466 = 5,228. Contrast that with the reported pension expense.


The economic change in the value of the pension was $5,228, but the income statement showed an expense of just $2,280. An investor might want to adjust the income statement by adding $2,948 to pension expense, reducing operating income by the same amount. The effect on net income would be smaller due to the tax effects.

For KLA-Tencor, reported operating income was 589,868 in 2007. After this adjustment it would have been$586,920 – approximately half a percent lower. Earnings per share for the year would have been at least a penny lower. In this case, I wouldn’t consider the difference material.

Topics: Forensic Accounting, Investing 101, KLA-Tencor (KLAC), Stock Market | No Comments

LOW: Lowe’s Shouldn’t Be Flocking With Home Depot

One of the first things many investors do when looking at a company is compare it to its peers. Many of the same trends will affect all of the companies in an industry, helping investors determine the winners and losers. Consider, for example, the 2-year performance of Home Depot (HD - Annual Report) and Lowe’s (LOW).

Home Depot vs Lowes

The two certainly trade like birds of a feather. Given that the housing market peaked about two years ago, perhaps it shouldn’t be surprising that two stocks closely tied to housing have drifted down. It’s hard to blame a company for doing poorly in a poor environment, so one might be sympathetic when listening to Home Depot explain its quarter.

Our market continues to be a challenging one. You are familiar with the statistics: housing starts are down 22%, existing home sales are down 12%, inventory of homes for sale is at 8.7 months — a 15-year high — and the home builder index is at 24%, a 16-year low. In addition, the issues around the subprime market continue to intensify and this is an important concern both for the financial markets generally and for housing specifically, since subprime mortgages accounted for 24% of the dollar volume in the mortgage market last year. So this is a difficult time and our performance reflects that.

Sales were $22.2 billion, down about 2% for the quarter. Comp sales were a negative 5.2%.

(Excerpt from full HD conference call transcript)

Not so fast, says Lowe’s.

The sales environment remains challenging as home improvement consumers hesitate to take on longer discretionary projects, but the core of our business remains relatively strong as our employees continue to help consumers maintain their largest financial asset. Total sales increased 5.8% while comp store sales declined 2.6% during the quarter.

(Excerpt from full LOW conference call transcript)

Ouch. Not to worry though – Home Depot management say they are taking care of that share loss.

We have reversed our market share loss; or in other words, we’re not losing market share as fast as we were.

(Excerpt from full HD conference call transcript)

Actually, I hate to break it to them but “reversing” share loss would be gaining share – not losing it at a slower pace. When management starts measuring its performance on the basis of “it could be worse,” it doesn’t exactly warm investor’s hearts. More encouraging words are heard from Lowe’s.

We can’t control the macro environment, but we are focused on executing and delivering great service in our stores to capture share….

In short, the message I want to ensure is conveyed today is that we’re always working to improve every facet of our business. In good times and in slower times, we’re focused on making our company stronger to become the store of choice for home improvement purchases. It’s those efforts to constantly improve our service to customers that helps drive market share gains and position the company for continued long-term success.

(Excerpt from full LOW conference call transcript)

It is always good to have a strong foundation. But it becomes even more important when things are tough. Given the apparent differences in strength between the two companies, it gets hard to understand how they have been trading in tandem.

Topics: Home Depot (HD), Lowe's (LOW), Retail (Home Improvement), Retail (Specialty) | 2 Comments

Two Minute Teen Trend Roundup

With back-to-school season upon us but little time to shop, we stock market nerds can get a heads-up on the latest fashions and trends simply by reviewing a few choice conference calls.

Consider, for example, American Eagle Outfitters (AEOS).

During the second quarter, our men’s business was strong, delivering a high single digit comp increase. Strength was broad-based across most major categories, including men’s shorts, knit-tops, and woven shirts. Our overall women’s comp declined slightly with strength in aerie, bare knit-tops, shorts, and dresses offset by declines in graphic tees and polos, skirts, and accessories….

We are now in the midst of the back-to-school season and are pleased with the customer response to our collection. Our new line of women’s knit tanks and tees is a major step forward from spring and summer and a better reflection of what on trend means for our customer.

We are also seeing ongoing momentum in denim. Building on our strong jeans business, this season we took our offering to a new level with a significant amount of fashion newness in our blue issue collection and within our fit systems. Both guys and girls are embracing new fits and responding positively to fashion elements.

(Excerpt from full AEOS conference call transcript)

Abercrombie and Fitch (ANF) saw some of the same trends.

the shorts business was very strong for the quarter, and I can also tell you that the trend in denim improved over the course of the quarter.

Now, what that means go forward, we really can’t comment on and again, overlaying that, our tops business has continued to be very strong across all categories — fashion knits, fleece, just continued to be very strong but I don’t want to get into commenting about the back half of the business.

(Excerpt from full ANF conference call transcript)

Footlocker (FL) comments on the shoe business.

There were also a number of external factors that contributed to our disappointing second quarter results, including the summer fashion trend of sandals, slides and flip flops, a continuing fashion shift to brown shoes, lack of newness in the athletic category, the back to school shift from July to August in certain important states like Florida and Texas. And while steps that we took in June and July adversely impacted our profits for the second quarter, our cash flow was strong, and I believe positions our business better for the back half of this year.

From a merchandising standpoint, the story for the quarter was mostly about clearance. With that said, the marquee category led by brand Jordan, Shox Running, some Nike Max Air products, Adidas Bounce, New Balance Zip and the high-end of ASICS continues to be a very important part of our business.

(Excerpt from full FL conference call transcript)

Finally, you’ve got to have some fun during back to school season. According to GameStop (GME):

The incredible acceptance of the Wii and DS Lite platforms, coupled with the emergence of what could almost be considered a new category – non-game games such as Guitar Hero, SingStar, Boogie, et cetera — has not only attracted more customers, but we are seeing an increasing number of young girls and women in our demographic as well.

(Excerpt from full GME conference call transcript)

So there you have it. The two-minute update on the latest fashions, courtesy of SEC Fair Disclosure regulations.

Topics: Abercrombie & Fitch (ANF), American Eagle Outfitters (AEOS), Foot Locker (FL), GameStop (GME), Retail (Apparel), Retail (Technology) | No Comments

Talking Dirty: A Look at Recent Vice Stock Conference Calls

First there were the socially responsible funds, which eschewed investments in “dirty” industries related to alcohol, tobacco, firearms, gambling or sex. The backlash, of course, was the “vice fund,” which specifically looks for stocks of questionable moral fiber. To see how the companies in that latter group are faring, I looked at the most recent conference call transcripts for what I consider a representative sample.

Rick’s Cabaret (RICK) shows that sex sells.

To begin the third quarter of 2007 our net income exceeded $1 million, we’re up 62% over 2006. Earnings per share or basic share were $0.17 versus $0.13. Our revenue topped $8.4 million which was up 35% over 2006 and our cash flows are up 52% for the nine months to $2.8 million.

The main driving factors, of course for the club, over the club operation with a gross income of $8.2 million and net income before tax on the club levels of $1.9 million. The main drivers of this is the Ft. Worth location which exceeded our expectations, we closed at the end of April. So we basically have about 10 weeks in the quarter from that location. The Austin and the San Antonio locations are now improving. We were able to cut some losses in San Antonio, although I changed some expenses and actually increased our revenues a little. The Austin Club is continuing to improve, we had a grand opening in August of the second floor of VIP area and we’re hoping to see continued growth there. And of course our New York City location having record months, and we are still continuing to see very strong growth in our New York City location.

Same club, same period, sales were up about 10%, which we’re very pleased with. We hope to continue that trend.

(Excerpr from full RICK conference call transcript)

Meanwhile, Altira (MO) shows tobacco isn’t exactly smoking.

PM USA’s shipment volume of 45.6 billion units was down 3.3% or 1.6 billion units versus the prior year. In the first half of this year Philip Morris USA estimates that total cigarette industry volume declined between 4% and 5%, and it is maintaining its prior estimate of a 3% to 4% decline in total industry volume for the full year 2007….

Turning to our international tobacco business; in the second quarter PMI’s operating companies income increased 4.7% to $2.2 billion, due primarily to higher pricing and favorable currency of $87 million, partially offset by higher asset impairment and exit costs of $76 million.

PMI’s cigarette shipment volume increased 3.3% or 7.1 billion units to 221 billion units, due primarily to the acquisition volume from Lakson Tobacco in Pakistan. Volume gains in several markets, including Argentina, Egypt, Indonesia, Korea, the Philippines and Ukraine, as well as the favorable timing of shipments in certain markets, were partially offset by shipment declines in Germany, the Czech Republic and Russia, as well as Japan, where comparisons to the second quarter of 2006 were distorted by heavy trade purchases in anticipation of the July 2006 excise tax increase.

Excluding the impact of acquisitions, PMI’s cigarette shipment volume was down 0.5%.

(Excerpt from full MO conference call transcript)

Anheuser Busch (BUD) is anything but flat.

Industry sales trends continue to be very good, despite the difficult comparison with the unusually strong first-half of last year when shipments increased 2.9%. Anheuser-Busch’s U.S. market share for the first six months of the year decreased one-tenth of a share point on a shipment basis.

Revenue per barrel increased 3.1% in the second quarter and was up 2.7% year-to-date. Front line price increases contributed 190 basis points to revenue per barrel growth in the second quarter. Promotional price adjustments contributed 10 basis points and portfolio mix was favorable by 110 basis points due to the mix impact from the import brands.

Average promotional prices were higher than the prior year for both the Memorial Day and Fourth of July holidays and we are encouraged about the outlook for the promotional pricing environment for the Labor Day weekend and the remainder of the year.

Consistent with the timing pattern for our 2007 pricing actions, we anticipate implementing price increases on the majority of our volume early next year with a few increases planned for the fourth quarter of this year. As in the past, AB’s pricing actions will be tailored to specific markets, brands and packages.

Our international beer segment net income increased 14% in the second quarter and was up 19% in the first-half, led by Grupo Modelo.

(Excerpt from full BUD conference call transcript)

Finally, MGM Mirage (MGM) is on a roll.

As far as operating results, net revenues increased 10% to $1.9 billion, up 4% excluding Beau Rivage, an all time revenue quarter for the company. Our fundamentals are clearly strong as evidenced by tremendous hotel results and excellent cash flow results across our portfolio of resorts.

As mentioned in the release, we had an all-time record second quarter property EBITDA of $686 million, which represents a 9% increase over the prior year. Las Vegas Strip occupancy percentage of 97.8% was our company’s highest occupancy since 2000. Combined with a strong average room rate of $162, our Las Vegas Strip RevPAR was up 7%. Demand has remained robust and increased visitor volume to our Las Vegas Strip resorts continues to drive revenues.

MGM Grand Las Vegas earned $108 billion of EBITDA which is an all-time record for any quarter in that property’s history, and a 43% increase from the prior year. TI and Excalibur also earned all-time record property EBITDA. The Mirage earned $59 million, a record second quarter which represented 41% increase over the prior year. New York, New York also had a record second quarter. Bellagio had its second-highest ever second quarter property EBITDA against a very tough comparison to the second quarter of ‘06, despite having an abnormally low hold percentage this year and a high hold percentage last year.

(Excerpt from full MGM conference call transcript)

Based on this admittedly selective sample, business is good for sin stocks. Even MO, the lone representative with declining sales, makes up for it with its generous dividend.

Disclosure: Author is long IShares MSCI Japan Index (EWJ) at time of publication.

Topics: Altria (MO), Anheuser Busch (BUD), Beverages (Alcoholic), Casinos & Gaming, Consumer Non-cyclical, MGM Mirage (MGM), Rick's Cabaret (RICK), Tobacco | No Comments

SBUX: Starbucks No Longer Decaf When it Comes to Debt

A glance at the most recent balance sheet for Starbucks (SBUX) reveals a company with virtually no debt offsetting its $5 billion in assets and $21 billion market valuation. That, however, is now old news. Today the company disclosed a large debt offering in an SEC 8K Filing:

On August 20, 2007, Starbucks Corporation entered into an underwriting agreement with Goldman, Sachs & Co., Banc of America Securities LLC and Citigroup Global Markets Inc., acting on behalf of themselves and the other underwriters named therein (the “Underwriters”), for the public offering of $550,000,000 aggregate principal amount of its 6.25% Senior Notes due August 15, 2017.

So, does this dent on its otherwise pristine balance sheet mark the beginning of the end for Starbucks? I don’t think so. First of all, raising financing at 6.25% in the middle of a credit crunch is, if anything, a confirmation of the company’s strong financial position. Secondly, the company generated more than twice that amount in cash flow from operating activities last year – suggesting the company will have no problem paying it off should they choose, let alone meeting their interest obligation.

It is that interest obligation, in fact, that I think is the best part of the deal. On an after tax basis, it comes out to just 4.6% or so. That is pretty cheap financing for whatever the company chooses to do with it. Up until now, they have been able to open thousands of stores annually using only internally generated cash flow. Adding debt could allow them to grow twice as fast, should they choose.

Alternatively, the company could use the debt to “restructure” their balance sheet by buying back stock. At the current stock price, the $550 million proceeds could take in approximately 2.7% of the total shares outstanding. On the basis of earnings per share, doing this wouldn’t make much difference by my calculations. (Subscribers can download my spreadsheet.) Using the full year ended October 2006 it would have reduced earnings by a penny. The effect is probably less on the current earnings and share base.

Starbucks pro-forma income statement using

[pay]Starbucks pro-forma [/pay]

But the larger impact comes from reducing the total cost of capital to the firm. As I noted when I compared the Starbucks valuation to that of McDonald’s (MCD - Annual Report):

SBUX is more efficient than MCD, which is reflected in a 20.8% ROE for SBUX compared to 17.7% for MCD. And MCD has debt funding which boosts its ROE. As growth slows at SBUX it too could add some debt to its mix to generate better returns for equity holders. But at any rate, the 3 per cent differential in ROE says that SBUX should be more valuable than MCD when it finally tops out. Looking up the fundamental P/E calculation on p. 192 of Analysis of Equity Investments: Valuation, we can get a good starting point. If we adjust the payout ratio to give us the same implied growth rate and required return for Starbucks as we currently have for MCD, we find that SBUX would deserve a 23.2x P/E multiple rather than the 17.3x that MCD has today. And assuming further that SBUX achieves the same debt/equity mix it could justify a $66.5 billion enterprise value. If we get there the average annual return would be more like 8.5 per cent, which is a good deal better but still may not justify the price now unless one is willing to bet that SBUX can, indeed, grow to a larger size than McDonalds (or if one assumes the average return on other investments will be less than that.)

Since that analysis, McDonald’s enterprise value has risen and that of Starbucks has fallen, which makes the comparison more favorable.  But even using that original $66.5 billion estimated future enterprise value is sufficient to merit a 12% annual return before any incremental debt contributions.

In other words, I think Starbucks is doing exactly what I thought they should be doing when I wrote the original post, and the valuation has come down to a point from which I think it can do better than most stocks.

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

Topics: McDonalds (MCD), Restaurants, Starbucks (SBUX) | No Comments

Discretionary Spending Hanging On Under Pressure

With the consumer high on everyone’s mind, I thought it a good time to take a look at some companies exposed to discretionary spending to see what they are saying.

Estee Lauder’s (EL) three percent growth in North America was in line with the total retail sales growth recently reported. A big question is whether they are in the wrong place at the wrong time.

Although our most rapid growth will come from overseas, we are taking action to improve in the largest individual market, the U.S. However, we expect progress to be slow because of continued softness in department stores. We anticipate that the tough retail climate in department stores will last for at least the first half of your fiscal year. However, we remain committed to the channel. Department stores have unique offerings of designers and brands, and we firmly believe they will remain the cornerstone of U.S. prestige distribution.

That said, we also note that we now generate approximately 34% of our net sales in North American prestige department stores down from 46% five years ago.

(Excerpt from full EL conference call transcript)

Starbucks (SBUX) grew significantly faster than the average retailer, but not nearly so fast as its investors have come to expect.

Company-operated U.S. retail revenue growth of 19% was driven by the opening of 1,116 new company-operated stores in the last 12 months. During the third quarter specifically, we opened 285 new company-operated locations.

Turning to comparable store sales growth for the U.S. segment, the third quarter saw trends similar to those in the second quarter. The average value per transaction increased 3% while traffic grew less than 1%, resulting in a 4% comparable store sales growth. During the quarter, sales of our core handcrafted espresso-based beverages and premium food offerings were the primary drivers of the growth in same-store sales.

(Excerpt from full SBUX conference call transcript)

The 3% per-transaction growth, again, was just average for US retail. What is still somewhat impressive is growing store traffic at all (even just 1%) while opening new stores at the rate of 3 or 4 per day. Still, they are noticing some shifts in their customer’s habits.

It’s clear that there is an increased competitive environment. There is an increased pressure on consumers from macroeconomic factors. But in all of those areas, we believe that we have a competitive advantage of being the coffee experts and being able to generate incremental traffic as we go forward, particularly in our core beverages, our core espresso beverages and the things that are uniquely Starbucks.

(Excerpt from full SBUX conference call transcript)

The credit crunch is hitting Nordstrom (JWN).

Approximately $14 million of the bad debt reserve is non-comparable due to the previous mentioned accounting treatment for our co-branded Visa receivables that did not occur in the prior year. The remaining $8 million of the incremental provision resulted from growth in both the Visa and proprietary card receivables ahead of plan and from changes to assumed repayment rates versus last year.

These changes stem from observed increases in early stage delinquencies.

(Excerpt from full JWN conference call transcript)

However, the company expects to gain market share.

Our same-store sales expectation is now 5% to 6% for the year, up from 3% to 4% based on our year-to-date performance combined with our plans for the remaining two quarters of the year.

(Excerpt from full JWN conference call transcript)

I think the general consensus is that consumers are feeling some pressure but not enough to really keep them from spending. These conference calls seem to confirm that consensus opinion.

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

Topics: Estee Lauder (EL), Nordstrom (JWN), Personal and Household Products, Restaurants, Retail (Department and Discount), Starbucks (SBUX) | 1 Comment

What the Big Boys are Saying About the Economy

I decided to take a look at what some of the largest companies by revenue are saying about their business.

All looks well at General Electric (GE - Annual Report).

The second quarter orders were a record, up 32%; we grew our backlog. We’ve got very strong global demand, up 21% in revenue. We continue our focus on margin expansion. Year-to-date we’re up 120 basis points; we’re up 70 basis points for the quarter. This is a big initiative inside the company, and one that we’re committed to….

Globalization and emerging markets, GE is very advantaged in these markets and these are just booming right now.

Infrastructure continues to be a real solid point for the company. Demographics as it pertains to both global growth and some of the action in GE Money is great. All of our focus on ecomagination, energy and investment/reinvestment is very solid.

If you look at what’s the same, we still see high liquidity in the marketplace. The U.S. consumer seems fine. Unemployment is at low levels, and we’re not seeing really any warning signs with the U.S. consumer….

On balance, we think we’re well-positioned in this environment. There’s no big surprises, and we feel like we’re in good shape as we look at the rest of the year.

(Excerpt from full GE conference call transcript)

Exxon Mobil (XOM - Annual Report) describes several reasons why investing in new projects can be risky, which helps explain why they haven’t invested as much as some would like (and why prices for oil are likely to remain high.)

Although increased volumes from the recent project start-ups in Russia, West Africa, and Qatar more than offset natural field decline, liquids production fell by 34,000 barrels per day, or 1% from the same quarter last year due to entitlement and OPEC quota effects in Africa….

ExxonMobile’s affiliate in Venezuela was not able to reach the agreement on the formation of a mixed enterprise and on June 27, 2007, the government took over our interest in the Serene rural project….

(Excerpt from full XOM conference call transcript)

And they didn’t even get to hurricanes, Iran, Iraq or terrorism. Makes you want to run out and drill an exploratory well, doesn’t it?

General Motors (GM) hopes to build a house of BRIC:

It was actually a very good quarter for other regions. Strong growth outside North America in the quarter, adjusted profitability of close to $700 million, $1.1 billion year-to-date. Revenue up 16%, share up 0.2%. I remind you our revenue does not include our business in China, as we carry it on the equity method so you would not see the growth in our business in China showing up in revenue. So this is really only on a consolidated basis.

Europe reported its best quarterly results since the second quarter of 1996, strong structural cost performance and favorable pricing. LAAM continues to leverage, it can only be termed explosive growth, reported the best quarter in ten years in both revenue and profitability. GMH reported a record second quarter adjusted net income with continued growth in China, India, and South Korea, as well as some improved performance in Australia….

Russia is a very fast-growing emerging market. 2.5 million units. It’s actually fast approaching one of the largest markets in Europe, actually, getting very close to France, Spain, Italy in terms of its size; and the U.K., as you can see. Our market share is up almost 4 points in Russia year-to-date.

Actually, we’re running behind in Brazil, we’re trailing in terms of market share in Brazil, but the driver of that is the market is up 50% in terms of its SAAR in the quarter. I would say the challenge in LAAM today is to keep up with the markets growth….

China, you can see the SAAR is up from 6.7 million to 8.3 million units. Our market share has not kept pace, so we’ve had some competitive pressures there, but nonetheless we’re still running pretty strong in China.

(Excerpt from full GM conference call transcript)

However, as if they needed any more challenges, they have subprime exposure that needs to be worked off.

ResCap lost over $900 million in the first quarter. We said that in the second quarter we expected that losses would narrow considerably and we expected better results. We did see that. Nonetheless, the $254 million is still a substantial challenge, it’s the largest business challenge for the GMAC management team in terms of restoring that business to where it needs to be. But it’s good to see the declining losses. We have sharply reduced our non-prime production, our non-prime exposure across warehouse lending, across some of our builder businesses. You saw run-off in the non-prime portfolio held for investment. We expect our run-off in the held for investment portfolio to be about $15 billion this year. So we’re basically reducing our exposure to non-prime and at the same time, we are seeing increased service fee income and lower structural costs.

So I would say the challenges continue here, but the first step in addressing the challenges is to stop deteriorating.

(Excerpt from full GM conference call transcript)

Citigroup (C - Annual Report) is also feeling the heat.

Net credit losses were up by $259 million, driven primarily by our global consumer business.

In consumer, key drivers are higher balances from organic portfolio growth and acquisitions; continued deterioration in the second mortgage portfolio; and the impact of the gray zone in Japan. In markets and banking, we continued to see a stable credit environment.

The third component is a $465 million net increase in the loan-loss reserve. There were two major drivers of this increase. First in the U.S. Cards business, the increase was driven by a change in the estimate of loan losses that are inherent in the portfolio. It is important to note that the underlying credit metrics have remained largely stable in our cards business. This reserve build reflects our focus on staying ahead of the visible credit trends, by considering as many factors as possible in establishing our reserves.

Second, in the international cards business, portfolio growth and seasoning and the impact of recent acquisitions resulted in higher reserve levels.

(Excerpt from full C conference call transcript)

Wal-Mart’s (WMT - Annual Report) customers are feeling the pinch.

Consumers today are pressed by a number of factors. Higher energy, higher gas prices and higher interest rates are all stretching their paychecks. Families with school-aged children are expected to spend more than $500 this year on back-to-school products. Our price campaign is designed to make a difference for families by saving them money where it counts most: on items like backpacks, pencils and socks. We’re encouraged by the response we’re seeing in back-to-school in August. 14 states have tax-free days during the start of this month. In addition, several states have delayed some school openings and we expect the trend we have seen with other seasons to continue. People are buying closer to the event.

As reported by other retailers, we’re experiencing similar trends in soft sales of home products driven by the slow down in housing. In addition, Wal-Mart’s softness in the home and apparel categories has been compounded by the difficulties we have had this past year and have shared with you. The result is that home and apparel remain soft through the second quarter. We’re starting to see some improvement in certain home categories this month and we are pleased so far with the sales results and customer response to the test of the New Home that we are piloting in several markets.

We continue to see pressure in all areas of apparel and continue to take pricing actions needed to sell through our inventory. We’re seeing some positive trends in sleepwear and men’s sports apparel. In the children’s areas, licensed apparel is picking up momentum and as I mentioned earlier on, we do expect our kid’s apparel categories to rebound this month.

(Excerpt from full WMT conference call transcript)

I guess it is not surprising that the top companies are seeing an outlook as mixed as that of the overall economy.

Disclosure: Author is long IShares MSCI Japan Index (EWJ) at time of publication.

Topics: Autos, Citigroup (C), Exxon Mobil (XOM), General Electric (GE), General Motors (GM), Integrated Oil and Gas, Retail (Department and Discount), Wal-Mart Stores (WMT) | No Comments

What Happened to the Competition for Telecom?

After the 1996 Telecom Act, the pricing environment for voice calls – particularly for landline phones, got ugly. Between wireless substitution, competition from cable and competition from other sources such as Skype, the price to make a voice call kept dropping. Until recently.

PPI for wired telecom

The ability to raise prices on wired telecom services has done wonders for the stock prices of wired carriers such as AT&T (T - Annual Report), Verizon (VZ - Annual Report), Qwest (Q) and CenturyTel (CTL). But can it continue? For clues I turned to the recent conference calls.

Verizon attributes some pricing gains to its broadband bundle.

Increases in broadband and video revenue, more bundled customers, as well as certain strategic pricing changes all helped drive consumer retail ARPU up $5.64 or nearly 11% year over year. The 3.3% sequential growth in ARPU is primarily broadband and video-related. In Texas the retail ARPU growth was in excess of 20%, and there are several other large markets with double-digit growth including New York, New Jersey and Virginia. We continue to see growth and retention opportunities in the retail consumer market, particularly as we introduced new bundles, many of which will include wireless.

(Excerpt from full VZ conference call transcript)
No wonder they are spending so much on their FiOS buildout.

Qwest is benefiting from having fewer competitors around.

Dick Notebaert

Yeah. Jonathan that’s the model that we have to follow, because we proven we can do the productivity; we have to execute against the marketing opportunity, we have got less competitors, new products. So, yeah, that’s the model that we are executing against. So, yes, we would expect to see margin expansion as we execute and if we execute, which we’ve already got the sales and we just got convert into revenues.

(Excerpt from full Q conference call transcript)

But AT&T sees more cable competition on the horizon.

In small and medium business, the situation there really in the last several quarters in terms of the results and the trends we’re seeing hasn’t changed dramatically. We are continuing to see growth in both voice and data in small and medium business and in our regional business overall. We are continuing to see access line gains and we are seeing relatively low churn rates for both access lines and broadband services.

Where we do have competitive losses and maybe a good way to say this would be if you look at our access line disconnects in the regional business space, most of them are related to technology migration. Only about 30% of access line disconnects are competitive disconnects. In terms of cable competition up to this point of that 30%, the disconnects that are cable related are very small, four to five percentage points of that 30. So we are not seeing a lot in the market at this point, other than probably from Cox who has been in the market for some time. But I do expect over this next year we’ll see more activity as Comcast and Time Warner both begin to roll out their plans.

Again, I think where we will see them will tend to be more in the lower end of the small/medium business space, kind of 10 lines and under, maybe even four lines and under.

Again, so far we are not seeing much impact there. In fact, our small/medium business revenue growth was in the mid 6% range this quarter, about the same as last quarter.

(Excerpt from full T conference call transcript)

As does CenturyTel.

Gaurav Jaitly – UBS

It’s Gaurav Jaitly, UBS. Couple of questions. First, yesterday Citizens mentioned on their call that they were seeing some aggressive promotions in their, rest of the [ph] markets from Charter. Just curious given your relatively large overlap at Charter, if you saw the same… we saw access lines kind of pick up a little bit to 5.2% from just in the 5% in the first quarter.

And then secondly, just wondering if you had any thoughts on the upcoming 700 MHz auctions, if you would consider joining a coalition or just bidding on your own, that would be great, thanks.

Glen F. Post III – Chairman and Chief Executive Officer

Yes, Gaurav, we have seen Charter pick up the promotions in recent weeks and months. And this did have a slight impact because we have access line losses, we do have about 25% overlap with Charter today and… 23% I think overlap with Charter today. And it’s, they’ve been very aggressive, but we don’t see unusual impact. It will be some tough competition, increased competition in some of those areas, but we don’t expect major impacts right now. But they are being more aggressive than they have in the past.

(Excerpt from full CTL conference call transcript)

For investors, it may pay to stick with the companies that are seeing less pressure from competition. In particular, Verizon has taken the biggest steps to stave off future competition rather than merely benefiting from the current lull.

Topics: AT&T (T), CenturyTel (CTL), Communications Services, Qwest Communications (Q), Verizon (VZ) | No Comments