Friday, December 31, 2010

End of Quarter / End of 2010 Performance Review

All in all, it was an okay year for yours truly.

Fourth Quarter 2010
Portfolio A - up 15.0%
Portfolio B - up 10.7%
Combined portfolios - up 13.3%
S&P 500 - up 10.2%
Nasdaq - up 12.0%
Russell 3000 - up 11.1%

Full Year 2010
Portfolio A - up 25.2%
Portfolio B - up 19.4%
Combined portfolios - up 23.0%
S&P 500 - up 12.8%
Nasdaq - up 16.9%
Russell 3000 - up 13.6%

So there you have it - proof that you *CAN* beat the market without owning a gram of gold, a drop of oil, or a pound of copper - or the stocks of any of the companies that dig them up. Now, I'm not exactly bragging about not owning commodity stocks. I very clearly should have owned some this year and missed several opportunities to buy good companies at good prices. Hopefully I'll be a little wiser in the coming year.

Thinking about the next year, I probably have too much weighting towards industrials. I know I'm a bit overweighted to banks as well, but I think that will be a good move in 2011. All in all, I'd like to get more healthcare, more resources, and maybe a little more overseas into my portfolio. But as always, the trick is in figuring out what to sell. And personally, I'd rather hold great companies in the "wrong" industries than sell just so I can buy a different stock and check an arbitrary asset allocation box.

Here's hoping next year is even better!

FinancialEdge: Biggest Investing Blunders Of 2010

What is a successful year of investing without some regrets? After all, even the top performers could have owned a little more of something good or a little less of something that didn't work out so well. Considering that 2010 was a good year for the stock markets, but a lumpy one as well, there is no shortage of "woulda, coulda, shoulda" for this year. It is not all about self-torture, though. Sometimes an investor can learn valuable lessons by looking back at what they should have owned and should have avoided. (For related reading, also check out Finding The Right Stocks And Sectors.)

Should Have Owned: Materials
With the global economy rebounding out of the depths of the recession, commodity prices snapped back strongly this year. A wide range of industrial metals saw double-digit price increases in 2010, with iron, copper, aluminum, nickel and tin all substantially higher than a year ago. Not surprisingly, then, miners like Freeport McMoRan (NYSE:FCX) and Vale (Nasdaq:VALE) did quite well. In fact, "industrial materials" was the best-performing sector of the year and number two and three were not actually that close.

Should Have Avoided: Healthcare
2010 saw the multi-year malaise in healthcare continue. Angst and anger over the federal government's healthcare reform efforts cast a pall over the sector early in the year, but there was plenty of reality to back up the bad mood. As workers have lost jobs they have lost health insurance. Likewise, workers who still have jobs are feeling less comfortable about taking time off or opening their wallets for co-payments and deductibles. As a result, patient visits to doctors are down, as are procedure counts. Making matters worse, hospitals are still struggling to recover from the credit crunch, the recession and the losses in their capital funds - meaning there is less money to go around for capital equipment.

All in all, while there were winners like Illumina (Nasdaq:ILMN), Edwards Lifesciences (NYSE:EW) and Novo Nordisk (NYSE:NVO) that did well indeed, but malaise was the order of the day across drugs, devices and diagnostics.

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FinancialEdge: Worst Financial Decisions Of 2010

People, businesses and governments may not meet the same mistake twice, but the mistake family is prolific and global, so it is a good bet that they will all meet multiple cousins, nephews and other relations of past mistakes. In other words, no matter what number may be printed on the calendar, there is always a host of mistakes to choose from when analyzing a year in the markets. Here are some of the financial decisions that took place in 2010 that deserve a second look in hopes of avoiding them in 2011 and beyond. (For related reading, see 10 Reasons Real Estate Could Rebound In 2011.)

Piling Blindly Into Gold
Some will argue that there is always room for precious metals in a well-diversified portfolio, but the questions of "how much" and "which ones" are too often ignored. Gold was a strong asset in 2010, up about 25%, but silver did almost three times better - so those who obsessed about gold and ignored other precious metals really lost out. Moreover, those who rushed to sell their jewelry through those "convenient" mail-in services or buy the gold bullion and coins advertised on TV very likely got taken for a ride in the process. Diversification is a good thing, but too many gold bugs are losing sight of one important detail: Throughout America's long history, betting against the long-term prospects of the country has been a losing bet.

Bad Decisions After A Job Loss
Job loss, and the financial stress that goes with it, is a terrible thing indeed. What can make a temporary situation into a permanent issue, though, is not dealing with the problems in the right way. Some people buy into the notion of "lifetime earnings" and the idea that shortfalls in the early years can be ignored because they will earn more down the line. In these times, then, some people borrow heavily with their credit cards and dip into retirement savings to maintain their standard of living. It is absolutely understandable to go into debt and to do what must be done to put food on the table and keep the heat on. But it is almost unfathomable to read about people looting their 401(k) (and taking the 10% IRS tax penalty) just to go on spending sprees or vacations to "lift their spirits".

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Borders Group - Time For The Last Act?

Looks like my beloved Borders (NYSE: BGP) will quite likely leave the stage at some point in 2011. The company announced that it has been delaying payments to some vendors will trying to work out a refinancing/funding with its current lenders.

This is not exactly what you call "bargaining from a position of strength", and it is unlikely that there is any miracle solution. Now, allowing for the fact that there is a time lag in the company's operating model that can create liquidity issues (they have to reorder inventory after a sale before the payments actually reach them), there is just no reason to be optimistic here insofar as I can see. The holidays are generally a time when retailers should be getting fat, not struggling to keep merchandise on the shelves and angering vendors by paying late.

The writing is on the walls, though. Maybe Barnes & Noble (NYSE: BKS) survives, but nationwide chains of big-box booksellers will not. The power of Amazon (Nasdaq: AMZN) is just too much to resist, to say nothing of the myriad alternatives to actually reading a book. All in all, book stores look more and more like arcades - another place I used to love to while away hours, but really no longer exists.

A No-Brainer For CVS

On the last day of the year, CVS Caremark (NYSE: CVS) announced that they are effectively buying the Medicare Part D business of Universal American Financial (NYSE: UAM) for $1.25 billion in cash. With this deal, CVS will more than double the size of its Medicare Part D business - from 1.2 million covered lives to 3.1 million covered lives.

In actual fact, the deal is a little more complicated that prior paragraph suggests. CVS is actually buying all of UAM, for roughly $12.80 to $13.00 per share in cash, but also simultaneously giving each UAM shareholder a share in the "NewCo" that will be created to continue UAM's current Medicare Advantage and other insurance businesses. So, at the end of it all, each UAM shareholder walks away with about $13 a share and shares in a UAM that will no longer have this Part D business.

For CVS this looks like a no-brainer type of deal. CVS is paying less than $660 per covered life. To put that in scale, the average senior citizen pays about $2,800 for prescription drugs each year and a year's prescription for a common drug like Pfizer's (NYSE: PFE) Lipitor or Merck's (NYSE: MRK) Fosamax is about $900.

Now, it is absolutely true that pharmacy benefits companies like CVS, Express Scripts (Nasdaq: ESRX), and MedcoHealth (NYSE: MHS) make only tiny margins on their drug businesses, but there are significant advantages to scale in the business. Moreover, Medicare Part D isn't exactly like "regular" PBM operations, so CVS is no doubt looking at this deal as a way of expanding a more protected and potentially more lucrative niche at a time when the standard PBM business is not doing as well.

This looks like a reasonable deal for UAM, though I think the surviving company is going to have a hard time getting much attention or much analyst/institutional investor love. In point of fact, I would not be surprised to see another company (say, maybe, Coventry (NYSE: CVH)?) come in and acquire what's left of this business after the CVS transaction. That leverage and scale I mentioned goes both ways, and I think UAM's Medicare Advantage business is not going to be all that appealing on its own - at least not in the form of a publicly-traded company.

Wednesday, December 29, 2010

FinancialEdge: Can The Market Continue To Grow In 2011?

With only a few trading days left in the year, the market is poised for another year of double digit growth. Not only is a low-teens return solid in its own right, but it continues the recovery from the lows of early 2009. That said, the market has nearly doubled from those lows and it is hard to see how the market has not overshot the actual level of economic recovery in that time. The question has to be asked, then - can the market continue to grow in 2011? (For more, check out 2010's Highest Performing S&P 500 Stocks.)

The Bad: Debt, Debt, Everywhere
Simply put, there is a lot of debt out there right now. The U.S. federal government has been borrowing heavily to finance ever-larger deficits and state and local governments likewise find themselves straining under debt obligations taken on during the best years of the housing bubble. As Iceland, Greece and Ireland have ably demonstrated, there comes a point in time where debt can no longer be ignored or indefinitely rolled over.

Whether or not the U.S. is close to that point, the fact remains that increasingly difficult decisions are on the docket for governments. Governments have two choices in dealing with debt (assuming that simply not paying it is not really a valid choice) - cut spending or raise taxes. Neither would be good for the markets or investors in the short-run, though an argument can be made that lower spending would be "less bad" as private companies could step in to offer those services at perhaps a lower overall net cost to consumers.

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Huge Expectations Built Into TIBCO

There are plenty of valid ways to make money in the market, but one of the easiest is to find stocks that are underappreciated by investors and wait for the company's performance to merit a better multiple. On the flip side, one of the riskier ways to invest is to find fast-growing, highly-valued companies and count on ongoing torrid growth and expanding valuations. Much as today's shareholders won't like it, middleware specialist TIBCO Software (Nasdaq:TIBX) seems to fit into that latter category. 

No Quibbling with Growth
There is nothing wrong with the underlying performance at TIBCO these days. Revenue rose 23% in the company's fiscal fourth quarter, handily surpassing the high end of what had been a surprisingly tight range. The company saw significant growth in very large ($1 million plus deals), as the company booked 25 in this quarter, versus 19 a year ago. For the quarter, service-oriented architecture was 59% of tche revenue base, a number that has stayed relatively consistent.

There was likewise little to find fault with in the profitability of TIBCO. GAAP operating income rose 27%, and the operating margin expanded by about 60 basis points. GAAP net income rose 18%, though, as taxes took a bigger bite this time around.

Is TIBCO's Time as Independent Running Short?
TIBCO competes in a very attractive market - the company's software streamlines the IT process and allows disparate packages to communicate. Allowing programs to "talk to each other" is essential these days, and TIBCO stands alone as the last pure-play integration software vendor of any real size. 

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2010 - The Year in Med-Tech Deals

Medical technology has always been a sector with a high level of M&A activity in any given year. Large companies are always on the lookout for technologies and assets that can boost their growth rate, while a plethora of single-product/single-market outfits hope for the boon of a big-time payday. That said, 2010 was a bit of a disappointment in terms of deal activity. Though there certainly were notable deals throughout the year, the pace was slower than what most people predicted in late 2009. Perhaps, then, that means that 2011 will be an above-average year as economic recovery puts some life back into this lagging sector. (For more, see Where The M&A Action Is, And What's Next.)

The Gold Star Goes to Covidien 
Covidien (NYSE:COV) was certainly among the most active players this year. Covidien started off by getting rid of most of its respiratory care business and then turning around and buying peripheral and neurovascular specialist ev3 for $2.6 billion. Shortly thereafter, Covidien decided to expand its monitoring business by acquiring Somanetics in a $300 million cash deal. Time will tell whether the company can leverage these deals into sustainably higher growth rates, but it seemed to help Covidien's stock do a little better on a relative basis. (For more, see Covidien - Better Than People Seem To Think.)

St. Jude Quietly Following the Medtronic Model 
St. Jude (NYSE:STJ) still seems to carry a bad reputation from the days when it was the "other" company competing with Medtronic (NYSE:MDT) and Boston Scientific's (NYSE: BSX) Guidant in the pacemaker and ICD business. Nevertheless, St. Jude has quietly been building an interesting collection of businesses, largely through M&A. This year, St. Jude shelled out more than $1 billion to acquire AGA Medical and its cardiac repair business - a logical outgrowth of a company with interests in heart surgery, valve replacement, ablation, and other cardiology niches.

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2010 - The Year Silver Caught Up

Gold has a special hold on the minds of some investors; so much so that sometimes other precious metals are left behind in the rush to buy the yellow metal. While silver spent much of the recession rally lagging gold, 2010 was a little different and silver dramatically outperformed gold. Just how well has silver done? Within Morningstar's industry lists, only one industry has done better than silver, and the one-year appreciation is better than 90%. 

ETF Bullion
As has been true in gold, investors have flocked to the convenience of a bullion-supported ETF. The iShares Silver Trust (NYSE:SLV) now boasts over $10 billion in assets and holds 350 million ounces of silver in trust - enough to meet the industrial demands of the world for about a year. As it tracks the price of silver (minus a management fee and some ephemeral premium/discount from day to day trading), it is no surprise to see this ETF up more than 60% for 2010, trouncing the better-than 25% performance of SPDR Gold Shares (NYSE: GLD) as of late December. (For related reading, check out Commodities: Silver.)

Market Digs the Miners
As miners are clearly leveraged to the underlying prices of the metals they mine, it is no great surprise to see that the miners did even better than the metal in 2009. Not only is this relatively typical within the industry (again, since miners are leveraged to the metal), but it may be even more so in silver as there are relatively few investable silver companies listed on U.S. exchanges. Even at the end of 2010, a phenomenally strong year for the sector, there are just eight stocks labeled as silver miners with market capitalizations in excess of $250 million.

Among the larger players, Silvercorp (NYSE:SVM), MAG Silver (NYSE:MVG) and Endeavor Silver (NYSE:EXK) led the charge. Even the worst-performing stock in the group, Silver Standard (Nasdaq:SSRI) handily beat the market for the year.

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2010 - The Year In Chips

While the semiconductor space has fragmented into many sub-sectors that have relatively less correlation with each other, the fact remains that 2010 was still a pretty strong year for chips. Worries about the strength and persistence of the economic recovery and the computer sector weighed on some stocks, but most companies benefited from customers replenishing their inventories throughout the first nine months of the year. 

As is often the case, investors traded these stocks on the basis of guidance and worries that the sector might have peaked in 2010. This is a battle that will be resolved in 2011. The question is whether 2010 was the high water mark in the chip recovery, or is the first half of 2011 just a pause in an overall upward trend and longer recovery cycle?

Smart? Very Smart
The torrid growth of smartphones, and the introduction of tablets, feels like one of the most significant factors for chip stocks in 2010 and going on into 2011. Companies like Broadcom (Nasdaq:BRCM), ARM Holdings (Nasdaq:ARMH) and Atmel (Nasdaq:ATML) saw their stocks do exceptionally well as investors paid up for their exposures to this consumer segment. Conversely, Qualcomm (Nasdaq:QCOM) and Maxim (Nasdaq:MXIM) failed to outperform even though both companies are highly leveraged to these markets. (For more, see The Chips Are Down.)

Networking Paid Off This Year
Within the overall positive performance of chips in 2010, companies leveraged to networking did exceptionally well. Broadcom double-dips here (with the smartphone space), while purer plays like Cavium (Nasdaq:CAVM) and Mellanox (Nasdaq:MLNX) had exceptional years. With ever-greater demands on networks and increasing functionality in chip sets, it looks as though this sub-sector could see another good year of demand from customers like Juniper (Nasdaq:JNPR), F5 (Nasdaq:FFIV) and the like.

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2010 - The Year On The Rails

There has been a long-held theory in the stock market that the performance of transport stocks has a great deal to say about the health of the economy and the direction of the stock market. If that concept still has legs, then the performance of the railroad sector has to be encouraging for the health of the U.S. economy. On the whole, the railroad sector (which often includes companies that supply the operators as well as the operators themselves) rose about 30% for the year - making it one of the leading sectors in the market.  

All About The Traffic
It seems beyond question that the ongoing strength in rail companies and their stocks has been a product of ongoing strength in rail traffic. Around February of this year, average weekly carload numbers finally climbed above the very depressed levels of 2009. Since then, every month has seen year-on-year carload growth. That has given rail operators a two-fold boost - the companies can not only make more money on the volume (as well as stronger pricing), but can better leverage their very high fixed operating costs. (For more, see Top Performing Railroad Stocks.)

Class 1's Were Not Held Back
With widespread traffic growth and no major strikes or labor disputes, Class 1 railroads in the U.S. and Canada all performed well in 2010. As is so often the case, improving conditions had the greatest benefit to what had been the notable lagging operator. For years, Union Pacific (NYSE:UNP) suffered with under-priced long-term contracts, ineffective surcharges and weak operating performance. Although Union Pacific is still not a top operator, the company has made some significant improvements and the stock led the sub-sector with roughly 40% gains.

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Tuesday, December 28, 2010

Hottest Device Stocks Of 2010

2010 was a tough year for medical device stocks. Investors faced up to the reality that a popular myth - that people do not meaningfully change their health care consumption because of the economy - is just not true. Investors also had to digest the impact of a suddenly much more industry-unfriendly FDA, which is imposing new (and in many cases unspecified) standards regarding safety and the trade-off with efficacy.

All in all, the medical device industry lost about 5% in 2010, just barely missing the bottom 10 list of underperformers. In fact, in broad terms, banks (which includes many subcategories), biotechnology, solar and for-profit education were the only ones separating medical devices from the bottom.

That said, it was not all doom and gloom in the sector. In fact, many medical device companies not only outperformed the industry but did quite well in absolute terms. Here are some of the notable performers of the year. (For a quick refresher, check out A Checklist Of Successful Medical Technology Investment.)

Growth Is Growth
NxStage Medical (Nasdaq:NXTM) does not get all that much attention, but this company has brought to reality what many companies have tried (and failed) to develop for at least two decades - an at-home hemodialysis system that actually works in both a technical and practical sense. NxStage is not profitable yet, but the company is posting double-digit growth (annualizing over $100 million). On top of that, sell-side analyst interest is picking up, and institutional investors are becoming a bigger player in the stock. All of that has fueled a better than 200% jump in the stock over the last year.  

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Lighter Schedule This Week

I have a few pieces wending their way through the Investopedia editing process and those should go up this week. Beyond that, though, I suspect this will be a light posting week - there is typically minimal news this week and I'm not a huge fan of "year in review / year ahead" pieces (of course, those are precisely the pieces in the queue at Investopedia... lol).

So, if stuff happens, I'll write about it but it might be a light week. Then again, you never know when I'll get the urge to write on something ... there are a few Chinese and Brazilian stocks I've been mulling over...

Monday, December 27, 2010

The Feds Undercut H&R Block

Just a little while ago, I wrote about the downside risk to H&R Block (NYSE: HRB) if the company would be blocked from issuing refund anticipation loans. Well, it looks like we're going to see just how that is going to work out. Sometime on Friday (long after I'd signed off for the holiday weekend, at any rate), HSBC (NYSE: HBC) announced that the Office of the Comptroller of Currency had stepped in and effectively banned the bank from honoring its contract and its new plan with H&R Block to offer these loans. As a result, HRB is out of luck and will be without one of its most profitable products (and with little time to find a back-up plan).

This is a curious move by the OCC, but one that makes sense in the bigger picture. A lot of people have compared refund anticipation loans to the sort of payday loans offered by Cash America (NYSE: CSH) or EZCORP (Nasdaq: EZPW). As HRB itself pointed out in its press release, the fee for these loans ranges from the $40's up to $75 - a very nice return for these companies considering that the loans are only outstanding for a couple of months at most.

Anyways, getting back to the bigger picture, the current U.S. administration has openly targeted payday lending. To their aggravation, they have learned that there are limits on what the Feds can do to squash this industry, and it mostly under the purview of the states (some which have turned the screws on the industry, others have not). But, since HSBC is a national bank (and a subsidiary of a foreign bank), that puts them directly under the control of the OCC and the government can knock HSBC out of this business without much recourse or chance for appeal (not that HSBC is exactly screaming about this; they wanted out after all).

As of this AM, HRB's rival Jackson Hewitt (NYSE: JTX) was up in premarket - certainly on the presumption that tax-filers who want these high-priced loans will now flock to them instead. JTX's partner is Republic Bank (Nasdaq: RBCAA), a Kentucky-based bank with operation in four states that is organized as a state bank. As such, the OCC cannot touch it - though the bank is abiding by a $1,500 limit on refund anticipation loans.

As a curious aside, banks in the U.S. can organize themselves as "national banks" if they so choose. Doing so puts them under the direct supervision of the OCC instead of state bank officials. Why would any bank do so? Because the Feds don't have interest rate limitations and some banks have used this option as a  means of avoiding state restrictions on "predatory lending". Nice little irony there, huh?

When I last wrote about HRB, I thought that the market was essentially pricing the stock for inexorable decline. That still may be the case, and today won't be pleasant as the market digests the bad news. In the absence of a clear plan from management regarding how to rebuild the business, it is probably dead money. Still, very patient deep-value hounds may want to keep an eye on this one. I think there's more value in the business than the stock price suggests, though I'm not convinced management will realize all of it.

Friday, December 24, 2010

Happy Holidays!

Wishing you all a great and magical Christmas, and a new year filled with joy and good fortune.

2010 - A Year Of Banking Dangerously

From recovery in Asia to hot growth in Latin America to seemingly near-collapse in Europe, it is a yeoman's task to try to sum up the 2010 world of international banking in under 800 words. Perhaps, though, that is the summation; Asia came back, Latin America never left and Europe struggled to hang on through the latest crisis. Suffice it to say, it sets the table for an interesting 2011. 

Asia - Been There, Done That, Learned the Lesson
To some extent, it is probably fair to say that between Japan's property bubble-fueled bank bubble and collapse (and a 20-year zombie economy), Hong Kong's boom-bust real estate markets and Southeast Asia's debt-fueled over-expansion of past decades, Asian bankers had already seen this movie before. Consequently, while the decline of global trade during the Great Recession did no favors for these economies, the underlying models were in better shape and 2010 saw good rebounds in many markets. (For more, see 7 Ways To Position Yourself For Recovery.)

Publicly-traded Korean banks like KB Financial (NYSE:KB) and Woori (NYSE:WF) lagged the U.S. S&P 500 (Shinhan (NYSE:SHG) outperformed), but were still up for the year and did quite a bit better than American banks on the whole. Japanese banks like Mitsubishi UFJ (NYSE:MTU) and Mizuho (NYSE:MFG) were likewise "yeah, but" performers - yeah, they did better than most American banks, but still not all that well.

Elsewhere in Asia, there was substantially better performance. Indian wonder twins ICICI (NYSE:IBN) and HDFC (NYSE:HDB) were strong stocks this year, as was Australia & New Zealand Banking Group (Nasdaq: ANZBY.PK). While China's efforts to cool inflation impacted the likes of China Construction Bank, Industrial & Commercial Bank, and Bank of China, the share price performance still holds up relative to many regional U.S. banks.

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2010 - A Year Of Only Modest Recovery In Steel

As much as people want to write about the "new economy" and the new rules of economic development, the fact remains that steel is a key component. When economies are strong, there is higher demand for steel in non-residential construction, automobiles and all manner of industrial and consumer goods. To that point, 2010 was a challenging year for steel companies and steel stocks as soft demand capped not only shipment volume but restrained companies from fully pushing on the impact of higher input prices. 

A Rare Laggard In Materials
In almost every other respect, 2010 was a great year for materials companies. While the steel sector still did relatively well (basically tracking the S&P 500), much of that came from a late rally after third quarter earnings and rising optimism about higher prices in 2011. Relative to gold, copper, coal and other industrial metals, steel was a laggard for the year as a whole.

It made relatively little difference whether a company was an integrated global steel producer or a mini-mill. World-leaders like Korea's POSCO (NYSE:PKX) and Europe's ArcelorMittal (NYSE:MT) both saw their stocks decline by double-digit percentages, while U.S. mini-mill operators Nucor (NYSE:NUE) and Steel Dynamics (Nasdaq:STLD) did a fair bit better on a relative basis. American integrated producers U.S. Steel (NYSE:X) and AK Steel (NYSE:AKS) had very mixed performance, as AK Steel's stock fared quite poorly and U.S. Steel did relatively well. (For more, see Is Now The Time To Invest In Steel?.)

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Thursday, December 23, 2010

Jabil's Good News May Be Fleeting

Jabil Circuits (NYSE:JBL) is a very nice property in a really rough neighborhood. Unfortunately, being among the best electronics manufacturing services provider is a little like being the tallest Oompa Loompa - it is nice on a relative basis, but not so impressive outside its own industry. The fact is, the EMS industry is brutally competitive and price sensitive, and it is difficult to see how Jabil can sustain enough of an economic advantage to allow the stock to really do well over the long haul. 

A Solid Quarter To Start The Fiscal Year 
Jabil does deserve credit for producing solid results in this first fiscal quarter. Revenue rose 32% from last year and 6% on a sequential basis. As investors might imagine, the performance of a company like Jabil is always going to fall somewhere between that of its best-performing customers (like Research In Motion (Nasdaq:RIMM)) and its lagging customers (like Cisco (Nasdaq:CSCO)).

Diving a little deeper, revenue growth was strongest in the high-velocity systems business, which serves customers like RIMM, Hewlett-Packard (NYSE:HPQ) and Nokia (NYSE:NOK). Growth was also quite strong in the diversified manufacturing services segment (which serves customers like Tyco (NYSE:TYC)), where the "specialized" business more than made up for lagging performance in industrial/clean-tech and healthcare/instrumentation. Enterprise and infrastructure, which includes Cisco, was the laggard this time around. 

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Has Ingenico Done VeriFone A Favor?

VeriFone (NYSE:PAY) is a curious company. It is about to operate in a duopoly that arguably should not exist - who would have thought that there would be just two providers of electronic payment solutions for credit, debit and gift card transactions? It also happens to carry a rather rich multiple. 

What makes the situation even more interesting today is that its sole pure-play rival may have inadvertently done the company a major favor. If rumors and numerous press accounts are accurate, Ingenico (perhaps under some pressure from the French government) rejected a buyout bid from American conglomerate Danaher (NYSE:DHR).    

The Deal That Wasn't 
According to those same sources, Danaher offered $1.9 billion, or about 28 euros per share, for Ingenico. Although that deal would not have represented much of a premium to the stock's recent trading price, these shares were below 16 euros before the summer began. Then again, a $1.9 billion bid would not represent all that much of a premium in terms of multiples either. Based on analyst expectations, that deal would represent only 1.6 times sales and less than 10 times EBITDA - relatively meager given that VeriFone trades at approximately twice those multiples.
Not Just About the Money? 
If reports are to be believed, it was not just the valuation of the deal that was an issue. Apparently, the French government sees Ingenico as some sort of "essential" company to France's electronics industry and is not willing to see a foreign company acquire it.

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5 Unusual Assets That May Outpeform The Market

In the never-ending attempt to beat the market, some investors will leave the markets altogether to find outperforming investment ideas. These strategies range from the brilliant to the bizarre, and they are not necessarily the most accessible or liquid ideas. Still, for investors who want to look beyond stocks, bonds and mutual funds for portfolio growth, there are some unconventional ideas worth considering. (For further reading, read Alternative Assets For Average 

"Invest" in your Fridge? 
Much has been written over the past couple of years about how people could have beaten the market if they had simply bought various pantry or freezer staples and hung on for a while. To a point this is certainly true - the price of butter and bacon has absolutely gone up in the last year or so. But are these really investments? It is not as though you can buy $10,000 worth of butter, hold it in your freezer, and then sell it later. At best, it is a hedge against future commodity price inflation, though one that carries a risk of spoilage.

No Wine Before Its Time
In contrast, wine actually offers some investment potential. It is possible for people to buy bottles, cellar them properly, and then sell them at a higher price down the line. It is difficult to find properly audited performance reports on wine as an investment, but there is strong anecdotal evidence that investments in top first-growth vintages have done very well for the past decade-plus. To participate, an investor will have to educate themselves and be savvy about their purchases; buying wine at the local wine store isn't going to get the job done. Rather, prospective investors will need to investigate auctions and so-called "wine futures" to really benefit from this opportunity.

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An Intelligent Deal For Raytheon

The unpredictable and highly political nature of defense and intelligence spending make it difficult for small, publicly traded defense companies to really thrive. It is not all that surprising, then, that there has been a wave of M&A in the space - not only due to the increasing significance of electronic warfare and the need for bigger companies to add technology, but also the increasing uncertainty of spending in the face of higher deficits and debts.

With all that in mind, then, it is not surprising to see Monday's announcement that
Raytheon (NYSE:RTN) reached a deal to acquire Applied Signal (Nasdaq:APSG). (For background reading, check out the Mergers & Acquisitions Tutorial.)

The Scoop on the Deal 
What is a surprise is that Applied Signal's management essentially put itself on the block back in October of this year. This is surprising because the company's management had not been very warm to the idea of a sale for many years. With that change in attitude though, things moved quickly.

Raytheon, one of the largest defense companies in the world, announced that it would acquire Applied Signal for $490 million in an all-cash deal that values Applied Signal at $38 per share. That is not only a 9% premium to the stock's closing price on Friday, but also a 90% premium to where the stock traded before management publicly discussed the possibility of a sale.

All in all, this is an eminently fair deal for Applied Signal shareholders. Relative to deals like Boeing (NYSE:BA), which bought Argon ST; Northrop Grumman (NYSE:NOC), which bought Essex; and FLIR (Nasdaq:FLR), which acquired iCX Tech; if APSG goes out at more than 15 times its trailing EBITDA, it's a fair price.

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Nothing Appetizing About ConAgra

Underperforming companies do not turn themselves around quickly, if they ever do at all. Consequently, there was no reason to think that ConAgra (NYSE:CAG) was going to look any better after this quarter than it did it last quarter. Still, another unimpressive quarter and another look at the fundamentals makes it fairly apparent that there is really nothing stirring in this name. 

A Weak Quarter, As Expected
While ConAgra had telegraphed a tough quarter in its last quarter's guidance, the company did even worse than expected and pre-announced this a little while ago. Consequently, the disappointing performance results announced on Tuesday did not take the Street by surprise.

Revenue fell 2% this period, as volume growth of 1% could not outweigh price and mix pressures that pushed down by 3%. Compounding problems, gross margin contracted over 300 basis points (to about 24%), while operating margin fell almost 200 basis points to less than 11%. All of that translated into a decline in operating income of 14% and, ultimately, a decline of nearly 17% in earnings per share. (For more, see Can Earnings Guidance Accurately Predict The Future?)

A Tough Environment and Weak Brands
ConAgra is taking body-blows from several angles all at once. A weak economy has consumers pinching pennies and loading up the cart with more private-label goods when they go to Wal-Mart (NYSE:WMT) or Target (NYSE:TGT). On top of that, though, people just do not seem to like ConAgra's brands as much as they do those of General Mills (NYSE: GIS), Kellogg (NYSE:K) or Kraft (NYSE:KFT) - every branded food company is dealing with the same domestic pressures, but ConAgra seems to be faring relatively worse and losing share despite price cuts. Making matters worse, the company does not have a strong foreign business to offset the weakness in the U.S.

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Commercial Metals - A Tough Market May Be Getting Better

Although the sector has had a rough 2010, the stocks of many players have been doing a lot better of late, as investors take a more encouraging view of steel prices and demand in 2011. As Commercial Metals (NYSE:CMC) earnings reflect, though, there are still a lot of pressures in the industry and a great 2011 is no guarantee. 

Fiscal First Quarter Results - Some Good, Some Bad
In many respects, CMC's earnings this quarter are a microcosm of the industry; some good and some bad, with reasons for cautious optimism. On a simple top line basis, for instance, revenue was up 27% from last year as units like recycling and American mini-mills did well (each up about 41%) and no units had year-on-year declines. Within that top line number, the company saw total mill tons shipped increase 9%, with fabrication tons shipped up a similar 8%. Selling prices were also strong, with domestic prices up almost 20% and foreign mill prices up more than 30%.

Profitability also improved from the year-ago level. Although scrap costs were quite a bit higher (up 17% domestically and 23% overseas), per-ton operating profits still grew almost 22% and 45% at home and abroad, respectively. Interestingly, the purchase prices for scrap (as opposed to the cost of scrap used) were even higher, and that could be an issue. Still, the company reversed a year-ago operating loss and was profitable on an as-reported basis. 

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A Royal Present For Martek Shareholders

Martek Biosciences (Nasdaq:MATK) shareholders woke up to an early Christmas present Tuesday morning, as the company agreed to sell itself to a Dutch chemical conglomerate. Although Martek is going at price that is about 50% of its all-time highs, shareholders can take some satisfaction that their board of directors managed to get a price for these shares that the market has not been willing to pay for about two and a half years. 

A Healthy DealDSM (also known as Royal DSM) (Nasdaq:RDMSY), a Dutch conglomerate that is increasingly focused on nutrition and pharmaceuticals, has reached an agreement to acquire Martek for $31.50 per share in cash. That represents a total deal price of $1.09 billion for DSM and a premium of about 35% for Martek. That also represents roughly a 10 times multiple to trailing EBITDA - a price that is pretty fair for Martek given the multiples on comparables like Givaudan, Symrise, or Croda.

A Good Deal For DSM
This looks like a completely rational and savvy deal for DSM. The company has been working hard to reduce its industrial/performance chemical exposure (over $1.6 billion in divestitures recently), while increasing its nutrition and pharmaceuticals/life sciences exposure. To that end, not only does Martek's polyunsaturated fatty acids business fit in well with DSM's infant nutrition business, but the two companies had already been working together for some time. 

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Wednesday, December 22, 2010

Can Sasol Liven Up North American Gas?

For years now, natural gas bulls have sputtered and fumed over the expanding gap between the price of oil and natural gas. From an energy-content point of view, natural gas is extremely cheap and oil is relatively quite expensive. Typically those gaps do not persist, but there is a problem in this case - natural gas just is not as useful; it does not go into car gas tanks, it does not make diesel or jet fuel, nor any of the other follow-on products that come out of a barrel of oil. 

If Sasol (NYSE:SSL) has its way, though, the road to change may be in sight. 

A Tie-Up with Talisman   
Sasol, the large South African synfuel specialist, announced an agreement on Monday whereby it was acquiring a 50% operating interest in one of Talisman's (NYSE:TLM) shale gas assets. Sasol is paying a bit more than $1 billion for 50% of the Farrell Creek development in the Montney Shale. The way the deal is structured is a little unusual, though. Sasol will pay $263 million in cash upfront, and then fund three-quarters of Talisman's development costs up to the announced purchase price.
The Asset 
Montney is a bit like Canada's Barnett, Haynesville or Marcellus - a geological formation that contains huge amounts of hydrocarbon resources (natural gas, mostly), but requires advanced exploitation technologies to access. According to reports, this development may contain upwards of 9.6 trillion cubic feet of natural gas - clearly a sizable reserve base. An important part of the asset, though, is the fact that it is also relatively close to established pipeline infrastructure - given the problems that companies like Ultra Petroleum (NYSE:UPL) used to have in getting full value for its gas (due to a lack of infrastructure), that is not a trivial factor.

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Stocks With Good Growth, But Poor Outcomes

Given the stock market's bottomless appetite for growth, it stands to reason that companies posting solid growth will see good performance in their stocks. In most cases, this is true. But like every good rule of thumb, this is one that has some exceptions to it. Examining a list of some of the notable "growth underperformers" this year might be a good place to start an investor's after-Christmas shopping. 

No Good News in Healthcare 
If any sector is due for a rebound in 2011, healthcare might just be it. These companies already had enough problems with the recession - a poor job environment and overall economic worries have either taken away people's health insurance or made them very nervous about spending any extra money. As a result, patient visits are down, procedure counts are down, and hospitals are skittish about buying any non-essential equipment. Then the FDA decided to pick 2010 as the year to make a statement that it was prioritizing safety above all else and that new drugs and devices would have to pass a new and unpublished "double secret probation" to reach the market.

In that environment, both Intuitive Surgical (Nasdaq:ISRG) and Nuvasive (Nasdaq:NUVA) have found 
their status as one-time med-tech growth darlings come into doubt. Both have posted excellent and distinctly above-average growth (roughly 40% and 35%, respectively) and yet lagged the broader market by a meaningful amount (9% and 13%, respectively). Both stocks may be basing, but investors will need to see some assurance in the next quarterly report (or two) to feel comfortable about pushing these stocks up again. (For more, see Investing In The Healthcare Sector.)

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Roche's Noise May Be A Buyer's Best Friend

It feels like it has been a long time since Roche (Nasdaq:RHHBY) had good news for the Street. Clinical setbacks have led to lower growth assumptions, competition from biosimilars has become a "when, not if" scenario, and the company seems to be falling further behind the likes of Illumina (Nasdaq:ILMN) and Life Technologies (Nasdaq:LIFE) in the high-multiple world of life sciences. Even a relatively broad cost-cutting initiative produced only a tepid ho-hum response from the Street. 

So, with the company now facing the possible loss of breast cancer labeling for its drug Avastin, is it crazy to think that this might be a good time to consider Roche as a value stock buy?

The Latest Bad News: Avastin in Breast Cancer
When Roche announced this summer that a clinical trial of Avastin in breast cancer failed to show much benefit, the clock began ticking on when the company would see a response from regulators in Europe and the U.S.. As expected, particularly given the FDA's recent obsession with safety, regulators are now moving to pull (or at least severely restrict) the use of Avastin in breast cancer.

While European regulators have recommended that Avastin remain available for use in breast cancer, that recommendation extends only to its use in combination with paclitaxel. Other combinations, with Sanofi aventis's (NYSE:SNY) Taxotere and Roche's other drug Xeloda, were struck down. The FDA was more stringent. It issued complete response letters (rejections) for use with other chemotherapy agents and as a second-line treatment, and moved to pull the labeling for breast cancer altogether. This is a relatively uncommon occurrence, as Pfizer (NYSE: PFE) was the first to go through the process of having a drug approved under accelerated approval subsequently pulled when Mylotarg was pulled this summer. 

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Tuesday, December 21, 2010

Feds Nickel And Dime The System

Apparently the federal government is not finished trying to tinker with bank and finance laws in the hopes of creating a consumer paradise. Unfortunately, the laws of unintended consequences are still in effect, and changes to interchange fees could create a lot of turbulence in the business of processing the millions of debit card transactions that occur every year.

The New Rules
Although nothing is final yet, on Thursday the Federal Reserve proposed significant changes to the debit card processing business. The most important part of the potential new rules concerns the interchange fees that banks receive every time a card is swiped. While transaction fees had been averaging about $0.44, or about 1.1% of the transaction value, the new rule would cap the fee at $0.12 per transaction. Clearly that is a major cut in a line of revenue that had been virtually pure profit for the banking industry. (For related reading, see Watch Out For Changes In Credit Card Agreements.)

Shoot First, Ask Questions Later
While there were expectations that limits of some sort were in the offing, investors were taken aback by the scale of the cut and blasted Visa (NYSE:V) and Mastercard (NYSE:MA), the two largest card network operators. Although these fees are not part of the companies' revenue (even though they set them), investors seem to be making the assumption that banks will push back hard on these networks and demand some sort of concessions in the fees they have to pay to help make up the difference. Apart from the fees, there is also a risk that new rules will come into play that will promote and increase competition in the network space and that could be a direct problem for these companies. 

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Does The FDA Help Or Harm?

It is difficult to overstate the importance of the FDA to companies in the pharmaceutical, medical device, biotechnology and diagnostics industries. In short, the FDA effectively gets to decide who is even allowed to compete in the market. It is illegal to sell a drug or device with advertised medical claims without FDA approval, and insurance companies will typically not pay for their use. As a result, investors cannot afford to ignore the workings, or the prevailing mood, of the FDA when considering investments in this sector.

Unfortunately for investors, the FDA is not constant. The agency does not necessarily maintain a consistent view of its own mission, nor how best to execute it. As a result, the regulatory environment can sway back and forth between lenient and stringent, with little recourse for the companies or their investors. That said, understanding how the FDA operates and its shifting moods can help investors navigate these treacherous waters a little more safely. (To learn more, see Investing In The Healthcare Sector.)

Mission and Motivation
First and foremost, the FDA is in operation to help protect public health, primarily by ensuring that companies prove the safety and efficacy of drugs/devices, manufacture them properly, and market them appropriately. Almost every investor has probably heard stories of the traveling medicine shows of the 1800s and early 1900s where hucksters and frauds sold various "patent medicines" that, at best, did not cure anything and at worst were actually quite harmful.

The FDA also has a secondary mandate to help foster innovation in healthcare by working with industry and academia to find better ways to evaluate safety and efficacy and to respond to innovations in medicine. While the FDA is often criticized for moving too slowly, the agency has made strides in expediting the approvals of orphan drugs and oncology drugs, and has worked with the industry to figure out approval pathways for drug/device-hybrids, biologics, gene therapies and other medical approaches that were never contemplated by the legislation that gave the FDA its mandate(s). That said, the FDA is still somewhat behind the curve when it comes to molecular diagnostics, genetic testing and biologics, and that has created ample chaos for companies in these fields.

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Winnebago: OnThe Road To Recovery?

As manufacturers of big-ticket discretionary items that typically require credit financing and ample gasoline, RV makers took a major pounding during the Great Recession. So great was the damage, in fact, that two well-known companies (Fleetwood and Monaco Coach) declared bankruptcy, with the assets of the latter going to Navistar (NYSE:NAV). As one of the survivors, Winnebago (NYSE:WGO) hopes that the RV boom will enjoy a second act and that the company can recapture past growth and cash flow. (Read about the RV demographic in In Retirement, Snow Birds Leave Cold Weather Behind.)

A Strong Quarter on an Easy Comp 
Given how far sales fell for Winnebago, it stands to reason that the company should be able to produce impressive growth rates if or when it rebounds. Revenue in the company's fiscal first quarter snapped back by 53% over the same period a year ago to $123 million, as the company's unit shipments increased by 40%. Within that, Winnebago saw ever better growth in the highest-priced RVs (Class A) at 59%, with Class C unit sales increasing 44%. Class B sales dropped over 98% (to one unit) as the company left this business. As investors may have already suspected, average selling prices were also up on that higher contribution of Class A units.

Profitability improved, but once again from an easier low base. Gross profit bounced off the bottom and the company produced a gross margin of 9%. That 9% is clearly much better than the year-ago level (of almost nothing), but it's still well short of the mid-teens level that was commonplace a decade ago. Likewise, the company rebounded from an operating loss to an operating profit, with an operating margin (3.5% adjusted) of almost one-third of the old averages. (Take a deeper look at a company's profitability with the help of profit-margin ratios. For more insight, read The Bottom Line On Margins.)

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InterMune - The Black Knight of Biotech?

Fans of Monty Python no doubt recall the exchange between King Arthur and the Black Knight early in the movie, where the Black Knight refused to back down and concede defeat no matter what damage King Arthur managed to inflict. While the FDA inflicted far more than a flesh wound on InterMune's (Nasdaq:ITMN) stock price when the agency went against its own panel's recommendation and rejected the application to market pirfenidone (Esbriet) for idiopathic pulmonary fibrosis (IBF), the company may yet win this battle. 

Europe Comes To The Defense ... Maybe
InterMune's shares soared last week on the news that the Committee for Medicinal Products for Human Use (known by the very unfortunate acronym of CHMP) recommended approval of Esbriet within the European Union. Similar to the how the U.S. system works, the CHMP serves as a buffer between the company's application and final approval, and provides recommendations to the European Medicines Agency (like panels do for the FDA).

Like in the U.S., though, a favorable opinion/recommendation does not guarantee final approval, nor the possibility of restrictive labeling. Nevertheless, it is notable that this process moved along quite quickly - CHMP could have come back to the company with a further list of questions/issues, but instead decided it had enough information to issue its recommendation. At this point, then, a final decision will come within 60 calendar days. (For more, see Measuring The Medicine Makers.)

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Monday, December 20, 2010

Pier 1 No Longer A Recovery Story

There really is no handbook for corporate turnarounds or recoveries. With that in mind, there is also no hard-and-fast rule about when a company moves from "recovering" to "recovered". Nevertheless, when it comes to successfully annualizing difficult comps and regaining industry-normal valuations, it seems fair to say that Pier 1 Imports (NYSE:PIR) is no longer an intriguing retail recovery play - it's just a retailer with growing sales and profitability. (For background reading, see Analyzing Retail Stocks.) 

A Solid Third Quarter 
Like many retailers, Pier 1 reports a little off-center from the regular calendar quarter - an industry convention that may have something to do with capturing post-Thanksgiving Day sales and Christmas sales in two separate quarters. In any event, PIR reported revenue growth of over 8% this period, topping the average estimate, but not quite reaching the high end of the range. Growth was fueled by comp-store growth of more than 10%, down from the year-ago level of 13.7% but an excellent result in what should be the most difficult comp quarter for the company.

While retailers can slash prices to fuel some top-line growth, that is not what Pier 1 is doing. Instead, the company is taking the shockingly novel approach of stocking what customers actually want to buy. As a result, profitability is improving significantly. Gross margin improved by more than four full points this quarter (to almost 41%), while operating margin increased by more than five points as operating income jumped considerably from last year's low level. At this point, then, Pier 1 is back in line with many of its peers from a gross margin perspective, although there is work yet to be done on the operating line. (For further reading, check out Retailers To Watch This Holiday Season.)

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Nordson's Growth Story Sticks

Like it or not, the U.S. economy really is recovering. Rail traffic continues to highlight that companies are shipping more and more "stuff" around the country. Grainger's (NYSE:GWW) monthly sales rates have stayed strong, and then there is the case of Nordson's (Nasdaq:NDSN) volume and order growth. 

Okay, maybe this last point needs a little more explanation, since Nordson is not exactly a household name. Nordson sells a wide range of products that dispense and apply all sorts of adhesives, coatings, sealants, surface treatments and so on. What is intriguing, though, is that this company sells into many different parts of the economy (consumer non-durables, durables, tools, appliances and tech), and if they are seeing broad order growth, that means a lot of industries are opening their wallets for cap-ex spending.

A Solid End To The Year
For the fiscal fourth quarter, Nordson reported that revenue rose 22% on the back of a 23% jump in product volume. That result puts the company at the lower end of a narrow analyst range. Growth was strongest in the advanced technology business, with 42% overall growth led by nearly 43% volume growth. The adhesive dispensing business (the company's largest) saw revenue rise about 8%, while the industrial coatings business produced sales growth of 38%. (For related reading, see Is Growth Always A Good Thing?)

Operating leverage was also fully in play this quarter. The company's gross margin improved by a full point, while the operating margin improved about six full points (adjusting the year-ago figure for some impairments). All in all, adjusted operating profits grew almost 59%, with every segment showing improvement.

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Is RIMM Losing The War?

Research In Motion (Nasdaq:RIMM) would not be the first company to largely invent a market, only to see latecomers take the business away from them. Although it is absolutely fair to debate whether RIMM's Blackberry "invented" the market that Apple (Nasdaq:AAPL), Google (Nasdaq:GOOG) and Motorola (NYSE:MOT) are profitably exploiting now, the more relevant question is whether RIMM can withstand the battles in the market and remain a top competitor. After all, Nokia (NYSE:NOK) was seen as a leader once, too. 

A Bright Quarter With A Dark Shadow
In many respects RIMM delivered a fine quarter. Revenue rose 40% from last year (and 19% sequentially) to almost $5.5 billion, with handset revenue and shipments increasing by similar degrees. Given that RIMM surpassed the average estimate and was close to the high end of the range, that would normally be good news. On the other hand, U.S. revenue dropped 16% sequentially despite an aggressive promotion of Torch at AT&T (NYSE:T) and channel inventory ticked up - while either of these events on their own may be no problem, the combination is a valid reason for concern.

Nevertheless, profitability at RIMM is still good. Gross margin improved almost a full point from last year (though declined more than that sequentially), and operating margin was modestly better. All in all, operating income rose 42% from last year (and 16% from last quarter), while net profits rose 45%. RIMM also did well from a cash perspective, adding about $450 million in cash to the balance sheet

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Oracle Delivers Again

Those who do not like Oracle (Nasdaq:ORCL) and its often-outspoken CEO Larry Ellison should probably look away now. This software giant continues to show impressive growth and rebut skepticism that competition, both large and small, is going to eat away at the many and varied businesses of this database, middleware, application and hardware hybrid. 

A Good Present For Shareholders
Oracle delivered a strong fiscal second quarter almost across the board. Total revenue jumped 47% to $8.65 billion - handily beating even the highest published estimate on the Street. If there was a black mark, it would be in hardware systems where growth was up 3% sequentially.

Although Oracle still runs an exceptionally profitable business, there was some backsliding this quarter. GAAP operating margin fell almost five points, due in part to a different profitability profile for the hardware business and also some erosion from sales, marketing and R&D. Nevertheless, operating income grew 27% for the quarter and the change in margin structure was not a surprise, as the company surpassed analyst estimates at the bottom line. 

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Has Take-Two Found A New Path?

For quite some time it has been easy to figure out how Take-Two Interactive Software (Nasdaq:TTWO) would do in a given year. All an investor had to do was check and see if there would be a release in the Grand Theft Auto franchise; if so, assume profits, and if not, assume losses. That sort of reliance on a single brand is seldom good news for a company, and it has been no exception for Take-Two. The question raised by this fiscal year, though, is whether the old truths about Take-Two may need some reexamination and reconsideration. 

A Surprisingly Good Quarter
Take-Two closed out its fiscal year with something of a bang. Revenue rose 32% to $374 million - handily beating both the average estimate of $325 million and the high-water mark for the quarter of $362 million. Growth was actually pretty well balanced this quarter, as Red Dead Redemption and NBA 2K11 made up for the absence of a new GTA release, and the company's catalog delivered solid performance.

Profitability was also much better this time around. Operating profits exceeded $59 million this quarter, which is a far better result than last year's $3 million. Not surprisingly, the company handily beat analyst earnings expectations. Interestingly, this was not only the first year in more than a decade where the company was profitable without a new GTA title, this period also marked profitability for the 2K Sports franchise. 

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Saturday, December 18, 2010

FinancialEdge: How Riots Influence An Economy

Sometimes economic and political tensions go beyond the boiling point and lead to full-scale riots. Riots with clear economic proximate causes have fortunately become very rare in the United States, though they were much more common in the early days of industrialization and unionization and the protests that accompanied the WTO conference in Seattle in 1999 were an uncomfortable reminder. (If you've been a victim, your losses may be deductible. Find out how. See Deducting Disaster: Casualty And Theft Losses.)

Though Canada and North America are fortunate to be in a position where there are multiple nonviolent means of expressing outrage and dissatisfaction, the rest of the world is not so lucky. Economic troubles in Greece led to actual rioting earlier in 2010 and there were worries that Ireland would see similar problems when the government rolled out its austerity measures. Moreover, economic protests in much of Europe often take a violent turn (many of the strikes in France, for instance) and with many countries still straining under large debt and deficits, the risk of future disturbances cannot be ruled out.

It is fair to wonder then what the economic impact of rioting is.

Damage to Property and the Economy
It is not hard to imagine that rioting directly damages property values and economic activity. When people smash windows, steal things, or set buildings and property on fire, that all has direct economic costs. Moreover, if people are rioting they are not working, and even those who are not involved in the disturbances are affected - they cannot get to work, shop or otherwise carry on with business as usual. Some studies have suggested that the LA riots in 1992 ultimately cost the city nearly $4 billion in taxable sales and over $125 million in direct sales tax revenue - that in addition to $1 billion in property damage and the loss of many lives.

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Friday, December 17, 2010

BMO Buying Marshall & Ilsley

There was a widely held view that Bank of Montreal (NYSE:BMO) was going to expand its U.S. business, and the company did exactly this today - announcing that it was acquiring Wisconsin's Marshall & Ilsley (NYSE:MI) in an all-stock deal. Provided the deal closes as expected, this deal will make BMO the 15th-largest bank in the United States (it is already No.3 or No.4 in Canada, depending on the metric used to measure this), and the No.1 bank in Wisconsin (with 20% deposit share), as well as a leading bank in Arizona and several Midwestern states like Illinois.

The Terms of the Deal 
To acquire Marshall & Ilsley, BMO will exchange 0.1257 of its own shares for each share of MI - a deal that gives an implied value of $7.75 per share to MI. That's a 34% premium to where MI closed Thursday afternoon, although movement in BMO shares will change that imputed valuation and premium. All in all, it is a $4.1 billion deal for BMO, though the company will also be launching a nearly $800 capital raise as part of the deal and will be repaying MI's $1.7 billion TARP obligations.

A Weak Bank = No Premium 
Like the earlier deal between M&T Bank (NYSE:MTB) and Wilmington Trust, BMO is paying a fairly minimal premium to do this deal. In fact, BMO is taking out Marshall & Ilsley at a price that is roughly equal to its tangible book value. (For related reading, see Willmington Trust Sold For Tangible Book Value.)

So why is MI selling for so little? Well, BMO's comments about the deal suggest that MI was still in rough shape. In fact, BMO will be writing off about 12% of MI's loan book right off the top - a charge that will cost about $4.7 billion and means that cumulative losses for MI will be around 21% (if things get no worse from here). That is a pretty staggering amount of bad debt and a sharp indictment of management's decision to expand from the "boring" Midwest into hot real estate markets like Arizona and Florida. (For more, see Banking Merger Mania.)

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One Small Step For Amyris

Exciting stories are usually built with a lot of boring announcements. To that end, Amyris's (Nasdaq:AMRS) recent announcement that it had finalized a joint venture with Brazil's Cosan (NYSE:CZZ) is not surprising or exciting, but it is a good example of the blocking-and-tackling type of announcements that will go into making the Amyris story and business model work over time. 

A Deal That Works For Both Sides
Amyris and Cosan will work together to produce and sell various so-called base oils that will be made with the farnesene that Amyris will produce in other facilities. It is a pretty typical win-win type of deal. Amyris needs to find as many customers as possible for its farnesene, while Cosan needs diversification away from ethanol as an end product of Brazil's prodigious sugarcane production. (For more, see Brazilian Stocks To Watch In 2011.)

Just One Brick In The Road
Ultimately, the success of this Amyris-Cosan venture in base oils is not critical to the overall success of Amyris, but it highlights what I think is an important part of the Amyris business model - working with other companies and finding as many potential markets for its products as possible. Where many failed ethanol companies like VeraSun and Aventine went wrong was in being just another commodity producer, but one that relied upon other commodity feedstocks (corn, notably) and government subsidies. In other words, they were refiners with pretty much one product to offer.

In contrast, Amyris has found a lot of potential uses for its genetically-modified yeast. The first key product will be farnesene, which can be used in a wide range of products including diesel and jet fuel additives, lubricants, detergents and flavors and fragrances. As time goes on, and the company's yields improve, it may be possible to produce a much wider range of products including fuels themselves, plastics and synthetic rubber. (For more, see Back To The Future With Ethanol.)

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