Monday, February 28, 2011

Is Tower Group Leaning A Bit?

Interesting results from Tower Group (Nasdaq: TWGP) tonight. Although the company beat estimates for the quarter, the company's guidance for next year is pretty uninspiring. Barring a good explanation or abject conservatism on the call (a nicer way of saying “sandbagging”), I expect this stock will be weak.

Tower announced that gross premiums rose almost 33% in the fourth quarter, while the combined ratio was below 92%. Even more impressive is the company's 31.8% expense ratio – a slight improvement from the third quarter and the lowest level Tower has seen in years. It is also interesting to see that the company has a significantly lower loss ratio in its personal segment (48.1%) than in its commercial segment (66.5%). It seems to be an unfortunately reality that the company's acquisitions have lead to a higher loss ratio than in the past.

Insurance markets are still not particularly healthy for the company. To that end, the company saw rates rise 3% overall on its renewal business (5.2% in personal, 1% in commercial), with an overall retention ratio of 82%. That tells me that insurance companies are happy to compete on price and are likely pricing business for a loss. Any veteran reader of Berkshire Hathaway's (NYSE: BRK.A) annual reports will know that Warren Buffett often talks about how most insurance companies operate with underwriting losses and this is part of the reason why – losing discipline on price to get business.

Making matters worse, this is not a great investment environment for insurance companies. Although recognized investment income jumped 40%, the yield declined to 4.7% from 5.5% a year ago.

Turning back to the guidance issue, the company is looking for earnings of $2.70 to $2.90 next year. Taking the midpoint, that means about 10% growth. That does not bother me as much as the implied ROE – something on the order of 10% or so and well below what the company has offered before as a target of 13-15%.

To an extent, I can see how the company gets at this number. The pricing environment gives the company the losing choice of either refusing to write bad policies or seeing customers walk away from fair prices and buy their insurance from less disciplined companies. Moreover, the investment environment is doing them no favors now and it wouldn't seem that there's obvious leverage left on the expense side.

Factoring in a new lower ROE (13%) and maintaining a discount rate of 11%, I get a price target of $32.25 for these shares. That's not a terrifically exciting target price, particularly in this kind of insurance market. I might be wishy-washy on holding a stock with such modest appreciation potential, but I think there is a lot of quality in Tower Group and I think the company can lever its recent acquisitions over time. Moreover, I do think that, over time, mid-teens ROEs are certainly possible.

I always keep an eye on the insurance sector, but there is not a lot that excites me today. MetLife (NYSE: MET) and Aviva (NYSE: AV) look kind of interesting, and Ace (NYSE: ACE) and Arch Capital (Nasdaq: ACGL) are kind of cheap. Beyond that, though, W R Berkley (NYSE: WRB) is the only intriguingly cheap insurance company on my list.

So, I'll sit tight for now but I can't deny a bit of an itch to switch over from Tower Group into WRB at today's relative valuations.

I would HOLD shares of Tower Group

Disclosure: I own shares of Tower Group

Seeking Alpha: Battered But Unbroken Biotechs

Disappointment is a fact of life with biotech investment. While clearly some companies do go on to become Amgen (AMGN) or Gilead (GILD), the roughly 85% failure rate for new experimental drugs means that most companies will eventually fail … or do little more than struggle along from disappointment to disappointment while using even the slightest glimmers of hope to shake down shareholders for more capital.

Despite that somewhat morbid lead-in, the reality is that some biotechs do recover after periods of disappointment and malaise. Current successes like Alexion (ALXN) and Celgene (CELG) had their trials by fire and came back to handsomely reward those who took a chance on them during the dark days. In fact, history has shown that sometimes the best time to buy is after the initial enthusiasm has been wrung out of a stock and management has earned some credit hours from the school of hard knocks.

To read the full piece at Seeking Alpha, please click here:

Please note: I mistakenly listed "Glaxo" as Nektar's partner on the inhaled pneumonia drug, when it should be (is) Bayer. That correction should get made promptly...

Investopedia: Home Depot Pulls Ahead Of Lowe's

Hopefully the management at Lowe's (NYSE:LOW) are racing fans, because it seems like NASCAR tracks are about the only place where Lowe's is really beating Home Depot (NYSE:HD) these days. While both companies are clearly pulling out of the depths of the one-two punch of the housing crash and recession, Home Depot seems to have pulled ahead in many operating metrics and this fiscal fourth quarter is a good opportunity to assess where these two rivals stand. 

Good Caps to the Year, But Better For HD
Both companies ended 2010 on solid notes, but Home Depot is likely to come away with the gold ring for this quarter. Home Depot saw revenue rise just under 4%, with comp growth of 3.9%. That comp growth, in turn, was comprised of average ticket growth of 2.6% (people buying more) and transaction volume growth of 1.4% (more people buying).

Without wanting to make too much out of it, it is notable that Home Depot saw comps fade throughout the quarter - a detail that would have been more concerning in the absence of pretty healthy guidance. It is also worth noting that "real" comp growth was more on the order of 2-2.5%, as the company benefited from a more aggressive position in appliances and a home improvement credit. (For more, see Analyzing Retail Stocks.)

Please continue on via this link:

Investopedia: Can Chico's Be Chic Again?

Women's retailer Chico's (NYSE:CHS) was a great growth stock for almost a decade, profiting off its relatively fashionable offerings for working women and ability to differentiate itself from the likes of Gap (NYSE:GPS), Limited Brands (NYSE:LTD) as well as mall anchors like JCPenny (NYSE:JCP) and Dillards (NYSE:DDS). But then Chico's experienced what almost all retailers experience - merchandising missteps, overexpansion, questionable acquisitions and a customer base that just wants to shop somewhere else for a change. 

The good news for retail investors is that there are certainly second acts in retailing (as well as third, and fourth). The question, though, is whether Chico's has whipped itself into shape in time to take advantage of an improving market. (For related reading see 5 Retail Stocks For 2011.)

An Iffy End to the Year
Chico's did not report especially exciting numbers for the fourth quarter, but the market was expecting worse so it all netted out to a "positive quarter", especially as the company gave encouraging sales growth guidance for fiscal 2011.

Please follow this link for the full piece:

Investopedia: Can NutriSystem Find A Healthy Size?

With the FDA seemingly adamant about approving new weight loss drugs, it would seem to be better days for Weight Watchers (NYSE:WTW) and NutriSystem (Nasdaq:NTRI). Although it is anybody's guess as to how much competition would have come from Vivus (Nasdaq:VVUS), Arena (Nasdaq:ARNA) or Orexigen (Nasdaq:OREX) (or may still come, if these companies can appease the FDA), these two companies represent the only concentrated plays on weight loss and obesity. 

Unfortunately, dismal guidance from NutriSystem has this stock on the ropes for the time being.  

A Sour End to 2010  
The problems at NutriSystem start right at the top. The company reported that revenue fell 17% in the fourth quarter; analysts were expecting a down year-on-year comparison, but more on the order of 5%. Surprisingly, the company nevertheless posted solid improvements in gross margin, adjusted EBITDA, and operating profit - the latter of which clearly benefited from a lower marketing spend in the quarter.  

Please continue to the full piece:

Seeking Alpha: The Tradeoff Of Processed Foods: Less Nutritious, Better Investment

Processed foods get a bad rap. They are often loaded with salt and sugar, low in fiber, and generally deficient in vitamins and nutrients when compared to fresh food. As processed foods are so often energy-dense and affordable, nutritionists have frequently implicated them in the rising rates of obesity and hypertension in the United States.

But there is another, often underappreciated, angle to processed foods – they have largely eliminated the problem of food security in much of the Western world. Though soaring food costs appear to be one of the proximate causes of social unrest in North Africa, and a major concern in countries like Indonesia, India, and sub-Saharan Africa, there has been barely a ripple in the United States or Western Europe.

The Hormel Example
 Hormel (HRL) is a case in a point for the economics of processed food. Corn prices have nearly doubled since late 2009, soybeans and hogs are up more than 50%, and the cost of metal packaging, transportation, and other inputs have all been on the way up. Nevertheless, Hormel's profits have been growing over that same time period and the company raised its 2011 guidance by 5% when it recently reported earnings.

Please continue on through the link below:

Sunday, February 27, 2011

Investopedia: - High Octane Growth With A Price To Match

Nothing frustrates a value analyst more than a breakaway growth stock that keeps posting excellent results and a seemingly bullet-proof valuation. (NYSE:CRM) offers growth investors a choice not unknown to those who enjoy a good adult beverage or two - quality does not come cheap. So the question for investors is whether they are comfortable paying single-malt prices for a story that does not have that kind of age just yet. 

A Hot End to a Great Year
The sea change that is cloud computing is not stopping, and neither is CRM's growth. Revenue rose about 29% this quarter with 9% sequential growth - beating the average estimate, though not exceeding the highest estimates out there. The company also announced that billings grew 36%, while the year-end customer count was 27% higher and the company's deferred revenue was 33% higher.

CRM's profitability performance is more mixed. Gross profit rose 27% for the quarter, but the company significantly ramped up expenses across the operating spectrum. Even investors who buy the notion that stock compensation expense is not a "real" expense (the main difference between the company's GAAP and non-GAAP operating income figures) have to contend with the reality that operating income fell on a year-over-year basis. Granted, spending on R&D and sales may very well help further the company's competitive edge, and the company's trailing cash flow is not problematic, but this is what passes for a black mark on CRM's performance these days. 

Please follow this link for the full piece:

Friday, February 25, 2011

Busy Days

Been busy adjusting the portfolios.


Now I own quite a few more individual positions than I'd normally like to ... but that's what happens when you don't want to sell much of what you already own. I'll adjust the Portfolio page soon to reflect this.

Investopedia: Hewlett-Packard Primed For An Overreaction Trade

It says something about today's market when a company that already carried relatively modest expectations gets hammered anew over a relatively small slip in guidance. Fair or not, that is the reality for Hewlett-Packard (NYSE:HPQ) - yet another tech greybeard that investors seem to want to pack off to glue factory. While it is true that Hewlett-Packard has challenges and deficits to correct, patient investors may want to be opportunistic here as the hot money cashes in their chips and moves on to the next idea.

A Sour Start To The Year
Hewlett-Packard impressed nobody with its fiscal first quarter results. Revenue rose 4% from the year-ago level, but fell 3% on a sequential basis. Unfortunately, that level was below even the bottom end of the analyst range for this quarter.

Although the company's servers, storage and networking business was strong - a good read-through for EMC (NYSE:EMC) and Juniper (Nasdaq:JNPR), but problematic for Cisco (Nasdaq:CSCO) - that was about it. Imaging and printing was not bad and seems to be outperforming Lexmark (NYSE:LXK) and Xerox (NYSE:XRX), but software performance was mediocre and computer and service revenue were quite disappointing.

HP is in decent company with its poor service results. IBM (NYSE:IBM) and Dell (Nasdaq:DELL) both had sluggish performance here recently. But the computer results are more concerning. HP's consumer computer revenue was down 12% and the company is not doing especially well in China. While some of the computer under-performance might be due to channel inventory issues ahead of the new Intel (Nasdaq:INTC) chip launch, it may also be the case that Apple's (Nasdaq:AAPL) iPad sales really are biting into the laptop market.

Please click below for the full article:

Thursday, February 24, 2011

Investopedia: Medco Looks To Stay In The Pink

Medco Health Solutions (NYSE:MHS) is part of the oddball contingent of the healthcare spectrum. While many investors reflexively think of healthcare as a sector with high margins and proprietary products, the pharmacy benefit management space is the opposite - a low-margin business that relies on contracts and scale rather than innovative new products. Nevertheless, Medco has carved out a sizable market presence and delivered solid returns on capital, even if some investors are still quite worried about upcoming contract expirations.

The Quarter That Was
Medco delivered a solid end to the year. Revenue climbed more than 11% this quarter, surpassing even the high end of the analyst range of estimates. Revenue was boosted by 21% growth in the specialty pharmacy business and solid prescription volume growth of 7.4%.

Looking at some additional details, the company's mail-order value grew by 7.3%, with generic mail-orders up over 15%. With this quarter, generic penetration exceeded 72%, while mail penetration more or less stayed put around 34%.

Please continue on:

FinancialEdge: Who Will Be The World's First Trillionaire?

Wealth really is a relative concept. Some treat millionaire status as passé (after all, there are about three million millionaires in the United States alone), and these days it takes billionaire status to get much attention. On the other hand, there are over two billion people getting by on less than $1,000 per year.

John D. Rockefeller is held to be the world's first official billionaire, achieving that status in 1916 largely through his ownership of Standard Oil. From that point nearly a century ago, wealth has multiplied to the point where the richest men in the world top out at around $50 billion (by comparison, Rockefeller's wealth in modern inflation-adjusted terms would amount to about $400 billion). The question then, is how long it will be before the world sees its first trillionaire. (More than 70 years after his death, this man remains one of the great figures of Wall Street. See J.D. Rockefeller: From Oil Baron To Billionaire.)

One trillion dollars is a phenomenal sum of money. In present day terms, $1 trillion is roughly the nominal GDP of Mexico or South Korea. One trillion dollars is also enough money to buy Exxon Mobil (NYSE:XOM) and Apple (Nasdaq:AAPL), with enough left over to buy Google (Nasdaq:GOOG), and Nike (NYSE:NKE) and Agilent (NYSE:A) - and still have enough left over to be a billionaire with the money in the bank.

Please read the full column at:

Investopedia: A Win-Win For Chesapeake and BHP?

Whenever a significant deal is announced between two companies, there is an immediate interest in figuring out which company got the best of the deal. When looking at Monday's transaction between BHP Billiton (NYSE:BHP) and Chesapeake Energy (NYSE:CHK), investors should keep an open mind with respect to the notion that maybe both parties are getting something they need out of this transaction. 

The Terms of the Deal
In the deal announced Monday evening, Chesapeake achieved its stated goal of selling its 75% interest in the Fayetteville shale, a gas-rich area extending across Arkansas. Chesapeake is selling this asset base to Australian mining major BHP Billiton for $4.75 billion in cash, and the two companies will execute a service agreement to assure a smooth transition in operations.

BHP Billiton is acquiring about 2.5 trillion cubic feet (natural gas equivalent) of proven reserves, with a total potential reserve base of maybe 10 trillion cubic feet. The deal also includes related midstream assets, but the companies did not provide a breakdown of value assignment in the press release.

Please continue on via the following link:

Investopedia: Lincoln Electric: A Quality Niche Industrial

With a 42% rise in the stock over the past year and 140% since early 2009 lows, clearly there have been rewards for the nimble and patient with welding equipment maker Lincoln Electric (Nasdaq:LECO). Lucky for Lincoln Electric, though, welding is strongly tied to industrial activity, and the company seems to be looking at a prolonged multi-year recovery in business.   

A Solid End to a Rebound Year
Lincoln Electric surpassed analyst expectations for the fourth quarter, posting 22% revenue growth and surpassing the high-end analyst estimate by 7%. Those results are good enough in their own right; even better when considering the 9% sequential growth and the historical trend for the fourth quarter to be soft. Looking at the company's markets, North American sales jumped 25%, while South America was the laggard at 8% growth. Overall, the company saw volume increase 20% - a strong testament to the increased business activity and product demand.

Profitability was more of a mixed bag for the company. Gross margins shrank by nearly three full points as the company reversed a large LIFO credit to a small charge, but the company did recover a lot of this through an even bigger reduction in SG&A spending. All in all, adjusted operating income rose 26%, while adjusted net income increased 38%. 

Click below for the full piece:

Investopedia: Medtronic's Midlife Crisis

Companies, like people, do not often grow old gracefully. More often than not, parts stop working right, it takes more effort to achieve the same ends, and the overall pace slows down. While some accept this and do the best they can, others resort to cosmetic fixes to patch over the ravages of age. To that end, Medtronic (NYSE:MDT) seems to be handling its maturity with integrity and realism. 

A Mediocre Quarter
Medtronic's fiscal third quarter results are not likely to excite long-term investors that much. Revenue grew less than 3%, which was mostly in line with analyst expectations and overall medical device sector growth. That, then, is part of the problem with Medtronic - it has matured to a point where it no longer flies ahead of the pack. Looking at some of the details, the company's core CRM business saw revenue decline 2%, while spine grew by 2% and cardio rose better than 7%. Diabetes and surgical technologies were also solid growers (up 10% and 8%, respectively), but they are relatively small businesses for Medtronic. (For more, see Keeping Pace At Medtronic.)

Third quarter earnings quality looks a bit problematic. Although the company did beat the consensus estimate for the quarter, gross margin fell more than a full point, and operating income dropped more than 3% (with operating margin contracted two points). Like so many other companies, an unexpectedly low tax rate allowed the company to meet the earnings bogey, but the quality of that beat is low. (For more, see Strategies Of Quarterly Earnings Season.)

Please continue to the full piece:

Wednesday, February 23, 2011

Investopedia: Should Investors Bother With Campbell Soup?

What should investors make of a company whose signature product is associated with cold weather and yet that company could not make much headway during a rather cold and nasty winter? That is the dilemma for investors in Campbell Soup (NYSE:CPB) as this relatively specialized food company continues to struggle with growth. 

A Winter Of Discontent  
Even though Campbell got more aggressive with promotions for the fiscal second quarter, and the weather should have helped, none of it seemed to matter to the top line. Overall revenue declined 1% as reported and missed the average estimate. Sales in the U.S. soup, sauce and beverage category fell 4% as reported, as did international sales. The baking/snacking business was a solid bright spot with 8% revenue growth, but as this unit contributes less than a quarter of the company's total revenue the outperformance only helps the company a little bit. 

As sales fell short, so too did the company's profitability. Gross margin fell more than a point on the higher promotional activity. Although marketing and selling expenses declined a bit (the "promotional activity" impacted the sales and gross profit lines), earnings were nevertheless down 8%. Making matters worse, earnings quality was not great - though the company appeared to miss estimates by only a penny, Campbell paid less in taxes than analysts had forecasted, so results were actually worse on a relative basis.

The full piece can be read at:

Investopedia: Some Good News Is Bad News For Investors

Context and presentation often matter more than substance, at least in the short term. Many public companies have elevated this notion to a perverse art form - announcing news that is actually quite bad for shareholders, but spinning it in a way that makes it sounds as though shareholders should be grateful to have such far-sighted leadership. Being able to separate the real good news from puffery and double-talk is a valuable skill, and investors should be on the lookout for some of these examples of good news that really is not good news. (For more, check out Can Good News Be A Signal To Sell?)

Given the end of the Great Recession and the recovery in the economy, it seems more likely that companies will be in a mood to hire and expand rather than restructure and retrench. Eventually, though, there will be another wave of corporate restructuring among public companies. Though analysts and institutions often cheer these moves, savvy investors should be skeptical.

Sometimes restructuring makes all the sense in the world; particularly when a company hires a new management team to improve or turn around a business that has been lagging and underperforming. But what about cases where the management team doing the firing is the same team that did the hiring? Barring a public mea culpa (and perhaps the surrender of some bonuses or salary), why should an investor trust a CEO who is basically saying "I confess … they did it!"

Please go to the full piece through this link:

Tuesday, February 22, 2011

FinancialEdge: Why The First $1 Million Is The Hardest

Existing in the shadowy world between trope and meme is the notion that on the path to wealth, nothing is quite as hard as making the first $1 million. While it may be a phrase repeated in jest by people who think building even $1 million in wealth is unthinkable or impossible, there are actually a lot of interesting reasons that this saying is true. Moreover, the more people understand about the difficulties that go into building the first $1 million, the better their odds of surmounting these obstacles and achieving that worthy goal. (With a little discipline and the help of some powerful savings vehicles, anyone can hit this mark. See How Much To Save To Become A Millionaire.)

The Difference Between Wealth and Income
For starters, it is very important to distinguish between making a million dollars and having a million dollars. While having an accumulated net wealth of over $1 million is an attainable goal for most people, only a very select few will ever earn that much in a single year. Moreover, "earning" a million dollar paycheck may not leave someone as rich as commonly thought - recent history abounds with examples of athletes, entertainers, businessmen, and lottery winners squandering their money by throwing away unthinkable amounts of money on frivolities. It is also worth noting that there are many "million-dollar earners" who do not actually earn $1 million. Someone may own a business that brings $1 million in revenue, but has to pay most of that out in expenses. Likewise, owning a million-dollar piece of property secured by $2 million in debt is not really being a millionaire.

To read more, please go to:

Investopedia: ABB Needs To Power Up

Swiss automation and power equipment giant ABB (NYSE:ABB) has a lot of what investors say they want these days. Not only does the company have a clean balance sheet and ample dry powder for acquisitions, but ABB has more emerging market exposure than almost any other large industrial company. While investors seem disappointed that the company's power business has not offered much energy of late, the company has done a good job of leveraging the industrial automation recovery and should be in good shape for the eventual recovery in power product demand (which typically lags industrial automation by six to 12 months).

A Good End to the Year
Although ABB's full-year decline in revenue seems disappointing in a world where industrial companies are seeing booming revenue growth, the picture is not all that bleak. ABB reported 6% revenue growth for the fourth quarter, with order growth of 18% and a full-year book-to-bill in excess of one. ABB also reported that EBIT grew 23% in the fourth quarter, due at least in part to well-controlled corporate expenses. (For more, see Utilities Keep ABB A Little Dim.)

Please continue through the link below:

Investopedia: Running Like A Deere

When crop prices are high, there is a go-to line-up of stocks for theme investors to play. Fertilizer names like Potash (NYSE:POT) and Mosiac (NYSE:MOS) usually catch a bid, as do seed companies like Syngenta (NYSE:SYT). And then there are the machinery companies - stocks like AGCO (Nasdaq:AGCO), CNH Global (NYSE:CNH) and the biggest of them all, Deere (NYSE:DE). Whether the logic always works out as expected (high crop prices produce more cash for farmers who can buy new equipment) or not, these have been bullish times for crops and bullish times for Deere's stock. 

The Quarter That Was
Whether the byproduct of high crop prices, better credit access, more optimism among farmers, or some combination, Deere delivered another strong quarter. Revenue rose 30% this period to over $5.5 billion, with agriculture (and turf) up 21% and construction (and forestry) up 81% from a low base. Although that was a solid jump in sales, it was nevertheless below the average analyst estimate of $5.67 billion.

Like most heavy machinery manufacturers, Deere's business is more profitable when the factories have solid throughput. To that end, higher revenue helped enable improved gross margin (up about 150 basis points from last year). Deere's management also deserves praise for holding the line on operating expenses, as operating income more than doubled and the operating margin expanded by more the four points. As a result, though Deere came up short on revenue the company handily surpassed the average EPS estimate. (For more, see 4 Things to Know About Earnings Season.)

Please click below for the full piece:

Seeking Alpha: Clinical Data And Forest Labs Agree To Split The Risk

The tug of war between Clinical Data (CLDA) bulls and bears has ended in what has to be called a draw. Flying in the face of the bear argument that Clinical Data's recently-approved depression drug Viibryd is little more than a me-too drug with scant prospects, Forest Labs (FRX), a company that knows more than a little about depression drugs, has agreed to purchase the company for $30 a share in cash and up to $6 more in contingent payments.

Of course, bulls should not be limbering up for an unbridled victory lap either. At $30, the guaranteed part of Forest's bid represents a take-under to the tune of nearly $4 per share. Moreover, if Viibryd really takes the market by storm and becomes a $2 billion or even $3 billion a-year drug, this deal is hardly full and fair compensation.

To read the full piece, please go to:

Monday, February 21, 2011

Will “Days Of Rage” Be The End Of Al-Qaeda?

This isn't really a stock market or investing post, but it could have far-reaching implications on multiple sectors of our market, our national security, and international policy in general. Besides, it's on my mind and sometimes writing these things out are the best way to exorcise them from my mind.

Will these popular revolts spell the end of Al-Qaeda?

Al-Qaeda promotes the psuedo-historical fantasy of “rebuilding” a caliphate throughout the Muslim world of Africa, the Middle East, and Central/South Asia. In part, Al-Qaeda succeeds through exploiting popular hatred of existing regimes, branding them as anti-Islamic and stooges of the Western world and Israel. Key, then, is a sense of oppression and a stifling of religious expression among the population of these countries.

Now, though, people are rising up and attempting to throw off rulers/dictators that in many cases have been in place for decades. In many of these countries, the rulers have suppressed political Islam as a means of holding onto control. Problematically for Al-Qaeda, though, is that it is not the religious establishment that is leading these revolts, and the impetus seems much more secular than theological. Instead, this looks to be a byproduct of a mix of economic frustration, a sincere longing for new government, and perhaps some sort of self-reenforcing mass social-media movement.

So what does Al-Qaeda do now? Maybe the unsettled masses will choose religious leaders to replace their former dictators, but that doesn't seem especially likely. In almost all cases, it seems like people sincerely want to elect their own leaders and want candidates that are competent, honest, and moderate – not religious demagogues.

But that's a big problem for Al-Qaeda – if people now have a choice and they actively choose against the sort of theocratic conservatism that is the stuff of Al-Qaeda's fantasies, that largely repudiates their whole legitimacy (however scant and pathetic that already is). Moreover, it leaves Al-Qaeda with basically only one option – overthrow new democratically-elected (and presumably popular) governments and forcibly replace them with theocracies.

Easier said than done … particularly when a lot of the Western world would rise up to support and defend those newly-elected democracies (assuming they're largely pro-Western or at least publicly anti-Al-Qaeda. Making matters even more problematic is that the armies in many of these revolting countries has shown remarkable restraint towards protestors – suggesting that they really are sensitive to the will of the people and would be less likely to participate in a violent theocratic coup.

A frustrated and impotent Al-Qaeda seems like a consummate good news-bad news situation. Desperate people do desperate things, particularly when they feel their very survival is at stake. So, a marginalized Al-Qaeda would likely be desperate to strike a high-profile target and once again capture the hearts and minds of the man on the street. That's a clear threat not only to the safety of people living in the West, but also insurance companies, airlines, and other companies that rely upon a confident consumer (in other words, think of the companies that suffered most in the wake of 9/11).

Longer term, if Al-Qaeda is really on the ropes, that changes the game for the U.S.. Hundreds of millions of dollars have gone into the fight against terrorism, and it is uncertain if Congress would continue to allocate huge sums of money if the threat were seen as “yesterday's news”. I'm not suggesting it would be smart to stop spending on counter-terrorism just because Al-Qaeda is weakened, but Congress does not often do what's smart – once people believe the threat is gone, they'll vote against those Congressmen who continue to push for lucrative contracts for electronic warfare and surveillance companies. So, companies that have done well serving the post-9/11 needs of the Pentagon and CIA may find a more difficult world.

On the flip side, an obsolete and impotent Al-Qaeda would be good for just about everybody else. At the corporate level, it would be good for insurance companies, airlines, shipping companies, and banks. It would also likely mean cheaper oil and a better chance at economic growth for countries like Pakistan and the Central Asian republics, certain African countries, and perhaps even Indonesia.

Of course, it would be an even better boon for humanity. But then, I don't think I need to go on at any length about how the world would be a better place with fewer people in it trying to force others to adopt their political and religious beliefs and being willing to kill for it.

So, just food for thought. While these revolts across the Mid-East and Africa are definitely cause for concern and a short-term threat to energy prices and investors' peace of mind, there could be brighter days ahead. Not only might these revolts give tens of millions of people the chance to have a voice in their government and more say in their own economic destinies, but it could ultimately make the world a safer place.

Investopedia: Apache A Good Bet In Oil And Gas Sector

Investors often learn to appreciate conservatively run companies during tough times, but that same conservatism can seem like a drag when times are good. Maybe that is why Apache (NYSE:APA) never quite seems to get its due during the good times in the energy industry. Although this oil and natural gas production and exploration company has proved itself over many cycles, investors always seem to forget this name in lieu of spicier ideas during the boom years ... only to come back to it when the boom names have gone "boom" and wrecked themselves with debt or extended their operations too far. 

A Messy End to the Year  
That said, Apache management did itself no favors at end 2010; fourth-quarter results for this company are quite a bit messier than the many other E&P earnings report. Revenue did rise 35% in the fourth quarter, fueled in part by a 24% increase in production, but profitability is where things get messy. Net income looked to be up about 18%, so the company's baseline profitability seemed to track top-line growth. That said, issues like the timing of acquisitions, undeclared incentive compensation, and equity tied to uncompleted transactions made things a lot more confusing. Moreover, lease operating expenses did jump pretty significantly from the third quarter, rising almost 55%.

The fourth quarter is also when E&P companies discuss their reserve situation. Apache replaced 344% of its production this year (far better than Statoil (NYSE:STO) recently announced, for instance), but organic reserve replacement was a more sedate 102%. Costs also continue to rise here as well.

Please continue on via this link:

Buffett And Brasil Foods? If Only...

Brasil Foods (Nasdaq: BRFS) jumped on Friday on the rumor that Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) started buying shares and aims to hold 5% of the company.

I have my doubts about this one.

The rumor appears to be coming from Sao Paulo's Valor Economico – a joint venture between Globo and Abril (two of the largest media companies in Brazil) and one of the largest business-oriented papers in the country. So it is not as though this is coming from a paper that routinely publishes stories about alien abductions or Kim Kardashian's latest boyfriend.

That said … well, let's say I have my doubts. The story talks about “fund managers” from Berkshire visiting Brasil Foods a week or so ago, and then the company buying in the wake of those visits. Perhaps this is an artifact of translation, but I think we all know that Mr. Buffett doesn't exactly employ “fund managers” as we commonly think of the term. “Company representatives/executives?” Sure, why not. But “fund managers”? I don't think so.

And now there's a story on Bloomberg quoting a Brazilian investment manager talking about how people are speculating that Buffett/Berkshire will ultimately buy 5% of the company. To be fair, he's not claiming to have any first-hand knowledge himself, but I get suspicious when the only source for a story is “speculation”.

Now don't get me wrong – I would be thrilled to hear Warren Buffett talking up and buying up Brasil Foods. My history with this stock goes back to Sadia and the disastrous currency speculation fiasco that led it to accept a merger with Perdigao. Even though I'm still down quite a bit from peak valuation, I have a nice profit here and I think the company can continue to thrive. After all, there's a long-held trend in history that higher household incomes go hand-in-hand with more meat consumption and Brasil Foods is a very cost-effective meat producer with an excellent export business.

On top of that, this would be a pretty solid Buffett-like way to play the growth in the emerging markets. Let's be honest, Buffett is not going to buy some crappy Chinese shell company headquartered in the Caymans and audited by an accounting firm operating from Malawi. If Buffett is going to play emerging markets, it's going to be in relatively stable and well-run businesses – like his prior involvement with PetroChina (NYSE: PTR). So, as one of the world's emerging powers in protein, with large domestic and export exports, and a good local cost advantage, Brasil Foods makes some sense.

On the other hand, Brasil Foods is not shockingly cheap and there is the risk not only of recurrent inflation in Brazil, but global trade hangups (like Russia's stated goal of becoming self-sufficient in chicken and periodically banning imports from certain countries). Now Buffett does not always subscribe to other people's notions of “cheap”, but I'm not convinced Brasil Foods meets the Buffett margin of safety requirements.

Whether Buffett agrees with me or not, I'm likely to hang on to these shares for a while. After all, I like it for the same reasons he presumably would – a well-run emerging markets company with low costs and high leverage to rising global standards of living, coupled with a good play on rising on food costs (assuming that the company can continue to pass on higher grain costs and so on).

Buffett involvement or no, I would BUY shares of Brasil Foods.

Disclosure: I own shares of BRF Brasil Foods

Friday, February 18, 2011

FinancialEdge: How The Rich Got That Way

There is a huge industry behind getting rich. While it's maybe not a universal goal, millions of people spend a lot of time and energy in the pursuit of wealth. Leaving aside the irony that some of this machine seems to involve making people rich by telling other people how to become rich, there is nevertheless a lot of advice out there. What is interesting, though, is that not much of this advice seems to focus on taking lessons from what has actually worked in the past. (Don't just hope for the best - develop a course of action to achieve your goals. See Plan To Retire Rich.)

To that end, then, it is worth exploring how many of the wealthiest Americans got that way.

It's All in the Genes 
Inheritance is clearly one of the proven pathways to getting rich. About one-third of the 50 richest Americans can tie their wealth directly to being the fortunate son or daughter of wealthy parents. Now, to be fair, many of these people received the golden baton from their parents and managed to run even further with it – but the fact that they proved themselves to be good runners in their own right does not erase the reality that they began they race with a sizable head start.

Please click below for the full column:

Investopedia: NetApp Down But Far From Out

Few things feel as rewarding in the market as riding a hot beat-and-raise story. As corporate tech spending has rebounded sharply from the recession, storage technology provider NetApp (Nasdaq:NTAP) has been on a strong run of late. With an apparent pothole in the beat-and-raise story, though, will investors continue to hang on to this quality growth name, or will they abandon it in favor of a hotter table at the stock market casino? 

The Quarter That Was
For the most part, NetApp's fiscal third quarter came in as analysts thought it would. Revenue rose 25% from last year and 5% from last quarter, though a slowdown in the low-end and some supply constraints robbed the quarter of a little bit of its momentum. Still, the company has found that demand for the new FAS3200 has outstripped their ability to supply it, so that's a relatively good problem to have (at least so long as customers are willing to wait).

On the profitability side, performance was a little more mixed but still solid. Gross margin rose more than a full point from last year, but fell 143 basis points from the prior quarter and equipment margins were slightly disappointing. Operating margin offered a similarly mixed picture, as the year-on-year improvement was solid but there was sequential softness. Still, the company delivered GAAP operating income growth of over 50%, so that is hardly a poor performance. (For more, see Analyzing Operating Margins.)

Continue by clicking below:

Investopedia: A Deal At Last For Sanofi And Genzyme

Ultimately it looks like two major drug companies are getting what they both think they need. After months of posturing, Sanofi-Aventis (NYSE:SNY) and Genzyme (Nasdaq:GENZ) found common ground on the value and structure of a deal, and Genzyme will become part of Sanofi. Though this deal was long in the making, only time will tell whether shareholders on both sides of the deal really benefit. 

The Deal
Sanofi-Aventis agreed to pay $74 a share in cash up front for Genzyme, a price that on its own virtually matches the all-time high set back in 2008. At that price, Sanofi is paying over four-times trailing revenue and over 26-times trailing EBITDA - a pretty generous premium compared to larger biotechs like Amgen (Nasdaq:AMGN) and Gilead (Nasdaq:GILD) as well as other growth names like Celgene (Nasdaq:CELG).

In response to charges of opportunism from Genzyme's management, Sanofi agreed to sweeten the pot with so-called contingent value rights (CVR). If Genzyme's business reaches certain milestones after the deal, Genzyme shareholders will get additional payments. There are six different hurdles laid out for Genzyme, worth up to $14 per share in total (or about $3.8 billion), but only the first three (production levels for Cerezyme, approval of Lemtrada and Lemtrada sales in excess of $400 million in certain territories) seem highly likely to be reached. If those three are reached, it will cost Sanofi about $4 per Genzyme share, while the remaining hurdles are all tied to ever-higher levels of sales. 

Please find the full piece here:

Note: I realize how out of date this is now. My apologies for that ... I submitted it Wednesday morning, but it got held up in the queue. 

Investopedia: A Real Dell Dilemma

Once in a while value investors face a real puzzle - what to do with a company that looks really, really cheap but lacks most of the hallmarks of long-term winners. Looking over Dell's (Nasdaq:DELL) fiscal fourth quarter results, it seems apparent that there is growth and some value here, but it is also clear that the company has a very long way to go in realizing its goals of becoming a more diversified tech company that can really compete with the likes of Hewlett-Packard (NYSE:HPQ) and IBM (NYSE:IBM). 

A Mixed Bag of Fourth Quarter Results
Dell's fourth quarter results are another interesting study in the differences between absolute performance and performance relative to expectations. While the market is quite pleased with Dell's results, it is less certain that long-term investors should be so enthusiastic.

Sales rose 5% for the fourth quarter and rose 2% on a sequential basis. That's not especially compelling when investors consider that the giant IBM is growing faster, and it was just a bit below the consensus expectation. Within that total, servers grew quite nicely (up 16%), while software and peripherals did fine (up 7%), and computers did okay (up 4% for both desktop and notebooks). Services revenue grew only 1%, though, and storage revenue actually shrank 4%.

Please click this link for the full piece:

Thursday, February 17, 2011

FinancialEdge: 5 People Blamed For The Financial Crisis

Whenever anything goes wrong in view of the public, attention quickly moves to rooting out those who should be blamed for whatever it was that went wrong. Given the enormous and far-reaching magnitude of the housing bubble, and the credit crisis and recession it produced, naming and shaming those responsible has turned into something of a cottage industry. (Take a look at the factors that caused this market to flare up and burn out, check out The Fuel That Fed The Subprime Meltdown.)

While finding those to blame would be impossible and it does not resolve a crisis, it is nevertheless part of the catharsis and the recovery process. With that in mind, let us examine some of those who have drawn scrutiny for their roles in the crisis, as well as a few who may have unfairly escaped their share of blame.

1. Realtors
David Lereah, former chief economist of the National Association of Realtors, was an outspoken promoter of the investment virtues of housing throughout the bubble. Penning books with titles like "Why The Real Estate Boom Will Not Bust" (2006) and referring to housing skeptics as "Chicken Littles", Mr. Lereah dismissed the notion of a bubble and may have helped to stoke an already too-hot market.

To read the full piece, please go to:
Note: I don't know why it's titled "5 People" when it was more than that...

Also want to thank my friend James Adams, author of Waffle Street, for his help with this article.

Investopedia: Macando Takes Out Another Seabird

Given the scope and scale of the Macando explosion and oil spill disaster in the Gulf of Mexico, it is not at all surprising that it pushed a company out of business. Many people will be angry to learn, though, that it was not one of the prime culprits like BP (NYSE:BP) or Halliburton (NYSE:HAL) that was taken down by the disaster. Instead, a relative small offshore driller is the first to go. 

Seahawk Clipped
Seahawk Drilling (Nasdaq:HAWK) had the second-largest jackup fleet in the Gulf of Mexico, but not the staying power to surmount several fundamental problems with its business model. Spun out of Pride International (NYSE:PDE) in August of 2009, Seahawk had issues from the start.

Of the company's rigs, none were built later than 1982 and some were built in the 1970's. While 10 rigs were upgraded in 2002, the fact remains that this was an old and out-of-date fleet. Perhaps even more problematic, Seahawk was entirely dependent upon the Gulf of Mexico (a region seen as in decline) and hugely dependent on Pemex, Mexico's state oil company, as a customer. More than 70% of the company's revenue in 2009 came from Pemex and this is even more problematic considering that Pemex is not particularly well-run and that Seahawk had an ongoing tax dispute with the Mexican government. (For more, see A Primer On Offshore Drilling.)

Please continue to the full piece:

Investopedia: Agilent Goes Three For Three

It is interesting to see that however sophisticated the markets get (or market participants think they are), there are still plenty of oddities. For a decent stretch of time, Agilent (NYSE:A) was undervalued. Then it began moving on no particular news and not only made up the valuation gap but perhaps overshot it a bit. Individual investors can look at this in one of two ways: Take heart from the fact that the "professionals" leave plenty of fat opportunities on the table for retail investors, or despair that the market is less about finding and assessing value and more like a casino full of hyperactive traders with attention deficits. 

The Quarter That Was
Agilent reported a very solid beginning to its fiscal year. While revenue was a bit light relative to expectations, that seems to be solely a byproduct of some revenue recognition adjustments tied to the acquisition of Varian. All in all, revenue rose more than 25% from last year (though down 4% sequentially). Organic growth was led by measurement and test business (up 31%), with both chemical analysis and life sciences chipping in high single-digit growth as well.

Profitability was a little bit of good and bad news, more heavily weighted toward "good". Gross margin slipped almost a point from last year, but moderate growth in SG&A and R&D spending allowed the company to deliver nearly three full points of operating margin improvement. Although gross margin is important, there is still a "settling in" process going on with the company's acquisitions and divestitures, so this quarter's decline really does not seem like anything to worry about at this point. (For more, see R&D Spending An Profitability: What's The Link?)

Please continue to the full text:

Investopedia: Atlas Air Flying Higher Now

Whether it is trains, planes or trucks, these are generally good days to be in the business of moving freight. As one of the larger players, Atlas Air Worldwide (Nasdaq:AAWW) continues to benefit from a healthier overall economic environment and healthier demand for airfreight services.

The Quarter That Was
By almost every measure, Atlas ended the year on a solid note or at least did so relative to expectations. Operating revenue grew 12% in the quarter as the company's total block hours increased by 11.3%. This growth was lumpy, though, as the ACMI business saw hours increase more than 18%, while the AMC charter and commercial charter businesses were down by mid-single-digit percentages. In other words, while the company is seeing less business shuttling equipment for the U.S. military, its "core" business is growing strongly.

Although revenue is growing nicely and the company is seeing customers fly above minimum contract levels, it's not all great news. The company has been transitioning away from military and spot market airfreight business, but those lines can be very profitable in peak times (when the U.S. government needs to get equipment to war zones, they do not hold out for the best possible price).

Please click this link for the full piece:

Investopedia: A Siemens Shopping List

Following its rivals ABB (NYSE:ABB) and General Electric (NYSE:GE), it looks like Siemens (NYSE:SI) is preparing to pull out its wallet and try a little more growth-by-acquisition. In an interview with the Financial Times, the conglomerate's CFO Joe Kaeser said that the company had reached a point of "management maturity" and was looking to do deals in the power network and/or plant automation markets worth potentially billions of dollars.  

This is an interesting move for this management team. CEO Peter Loescher has earned high marks for cleaning up and transforming this company and putting it back on a credible growth path. What makes this decision a little more surprising is that a lot of the mess that Mr. Loescher had to clean up was a byproduct of a long series of questionable deals that never really delivered on their price or promise. Perhaps, then, Siemens is tempting fate. Or perhaps a good CEO is a good CEO and Mr. Loescher can successfully integrate deals where his predecessors could not, making M&A a sound use of Siemens' prodigious cash resources.
Who's on the Menu? 
At this point, all that Siemens has really declared is that they want to spend billions of dollars in the automation and power markets. Accordingly, that opens a wide range of possibilities for investors to consider. Right off the top, though, investors should forget about ABB, GE or Honeywell (NYSE:HON). The first two vastly exceed Siemens' budget and antitrust officials would go berserk. Likewise, Schneider Electric (Nasdaq:SBGSY) seems too large despite some clear synergies. As for Honeywell, that would seem to involve Siemens moving into too many new and unrelated markets to justify the synergies that may there in areas like automation and power.

Please click below for the full piece:

Wednesday, February 16, 2011

Investopedia: Has Dry Bulk Shipping Reached Low Tide?

It is easy to make a bunch of "perfect storm" references to the dry bulk shipping industry these days. Serious floods in Australia, Indonesia and South Africa have created major problems for suppliers, as have commodity export bans in countries like Russia and India. On the flip side, China's desire to control inflation has investors worried about the state of iron ore demand. If that all was not enough, shipping companies continue to order new vessels and refrain from scrapping older ones, and a major chartering partner (Korea Line) recently declared bankruptcy. 

All of this has wreaked havoc on shipping prices. During the week of Chinese New Year, spot rates for the monstrously large Capesize vessel class troughed at around $5,000 a day - a level that is below the daily operating costs of even the most efficient operators and dramatically lower than the average of approximately $33,000 seen in 2010. And it is not just the Capesize vessels seeing tough times - Capesize is down the most, but every category is down from fourth quarter levels (with Handysize faring the best). (For more, see Is Dry Bulk Shipping All Dried Up?)

What Is An Investor To Do?
Investors should probably invest with an eye towards safety. It is all well and good to own riskier operators when rates are climbing (in fact, lower-quality companies tend to seriously outperform then), but this troubled environment could last for a few years and the halcyon days of $100,000+ spot rates for Capesize vessels is a long time ago (2007, to be exact). If daily spot rates are low, it makes sense to gravitate towards companies with more of their vessels under contract and/or those who can profit even in low-rate environments. By the same token, debt can become a lethal deadweight during market troughs, so investors should keep an eye on the balance sheet.

Genco (NYSE:GNK) is fairly efficient as an operator, with relatively low operating costs. It does have more than 60% exposure to spot rates, but less than 10% of that in the Capesize category. This could be an interesting play for aggressive investors wanting a company with strong earnings leverage to an eventual recovery.

Please click below for the full article:

Tuesday, February 15, 2011

Looks Like Another Good Quarter For Portfolio Recovery

I have to confess that I've been thinking a lot lately about selling Portfolio Recovery Associates (Nasdaq: PRAA), booking my gains, and moving on to a new idea. But here again I'm conflicted – I do not like selling the stocks of very well-run companies just because they get a little expensive. So, I hold on … and today's earnings report makes me feel a little better about it.

Solid Earnings
PRA reported that revenue jumped 38% in the fourth quarter, reaching just under $101 million. EPS jumped 50% to 1.20. That compares very favorably to the average estimates of $97 million and $1.12 and the high-end estimates of $99 million and $1.16.

Looking at the details, Portfolio Recovery reported a 52% increase in cash collections (to $144 million) and maintained the same amortization rate as in the year-ago quarter. Call center collections, the company's core business, was the laggard if 19% growth is “lagging”. External legal collections rose 38%, while the company's efforts to grow its internal legal collections paid off in 70% growth (though a still-small absolute level of collections at $13 million). Purchased bankruptcy collections were up 110% to $56 million; most interesting to me because this is the first time something has been a larger contributor than internal call center collections.

Productivity was also better – collector productivity per hour paid rose 2% from the third quarter to $204 per hour paid. All in all, operating expenses rose 26% with a big jump in spending on internal legal – a business that has quite a bit of promise, but is still something of a drag on margins.

Paying Less But Getting More?
The company was also once again quite active buying paper. In this quarter, Portfolio Recovery bought written-off paper with a face value of $1.87 billion, paying a bit under $86 million for it. Although paper prices have been moving up as credit quality and household finances improve, PRAA paid $0.045 on the dollar – down from $0.067 in the third quarter (when the company paid $92.5 million for $1.38 billion in face value). Of course some worry that PRA bought lower-quality paper, but Portfolio Recovery has a long history of realizing value from its paper – even if the company's projections for its 2010 purchases are a 210% return (versus the long-term average of 243%).

Better Times On The Way
All in all, it looks like things are getting better in this market. JPMorgan (NYSE: JPM), Citigroup (NYSE: C), Bank of America (NYSE: BAC) and American Express (NYSE: AXP) all seem to be reporting better charge-off data on credit cards. Moreover, it doesn't look like the job situation is getting any worse in the country – an important consideration as Portfolio Recovery really cannot collect if people don't have jobs. That said, this is always something of a mixed blessing – it ups the odds that PRA will enjoy good collections, but it has always brought more competition back into the market and bid up the price of paper.

The Bottom Line
As the economy improves, I think Portfolio Recovery will see a lot of earnings leverage. After all, contrary to a lot of the stereotypes, a lot of the people who default on debt actually do want to make good … and once they get the economic wherewithal to do so, they do. Moreover, even though the market for paper is largely an auction market where the high bid wins, PRA's long standing in this market does serve it well when dealing with sellers. Moreover, there is something to be said for know-how and employee relations in this business and PRA knows how to find, train, and retain good collectors.

So, what's the stock worth? This is a trickier type of stock relative to a healthcare company or industrial. Nevertheless, even very modest projections of mid-single-digit free cash flow growth for the next decade and a relatively high discount rate of 12% are sufficient to power a price target in the $90's. I'm happy to hold PRA shares for the time being.

I would HOLD shares of Portfolio Recovery Associates.
   Note - I mistakenly wrote that I would "Buy" PRAA at these levels in my initial post. With an expected return of about 20% from these levels, that doesn't meet my "Buy" standard. 

Disclosure: I own shares of Portfolio Recovery Associates and JPMorgan

Investopedia: Can Nokia And Microsoft Recapture Their Magic?

Human beings are nostalgic creatures, and "retro" often plays well. Millions of people enthusiastically played the Pac-Man doodle that Google (Nasdaq:GOOG) offered up on that game's 30th anniversary. More recently, the SyFy channel ran a B-movie reuniting Tiffany and Debbie Gibson and over 2 million people actually chose to watch it.

So then, will the union of Nokia (NYSE:NOK) and Microsoft (Nasdaq:MSFT) bring customers and investors back to the glory days when these were among the leaders in the tech world, or is this just a Wall Street version of "Mega Python versus Gatoroid"?    

Nokia Looking To Shake Things Up 
Nokia's new CEO, Stephen Elop, is clearly not pleased with how prior management of Nokia effectively painted the company into a corner. True, the company still has the number one worldwide share of cellphones, but the company has virtually no momentum in the smartphone market and has been effectively no threat at all to Apple (Nasdaq:AAPL), Motorola (NYSE:MMI), Research In Motion (Nasdaq:RIMM) or the Taiwanese and Koreans. In fact, Mr. Elop recently wrote in a memo that Nokia was essentially "standing on a burning platform" and had to make major changes to survive.

Going With Another Also-Ran? 
Instead of waiting to see whether the company's new Symbian platform could hold the answer to a recovery, Elop has chosen to ally the company with Microsoft instead. In essence, the two companies will combine assets and know-how to jointly develop new smartphone technology. This is hardly a rerun of the WinTel duopoly that was so successful in the 80s and 90s.

Please continue on below:

Investopedia: Kraft Stares Down A Catch-22

It is common to find investors and writers talk about food companies like Kraft (NYSE:KFT) in the context of "people always have to eat." While that is true, it overlooks a fairly important point - nobody has to eat their food. There is a big difference between food companies like Kraft and Kellogg (NYSE:K) and the likes of ConAgra (NYSE:CAG) and investors should not just lump all food companies into the same basket. While Kraft certainly has a tough environment to navigate and may have indeed overpaid for Cadbury, this is a food company that merits more than casual attention. 

The Quarter that Was
All in all, Kraft delivered a quarter that was a little complicated (due to charges and adjustments and the like), but pretty much consistent with expectations. Sales, though, were a bit higher than the analysts expected. On a reported basis, Kraft served up 5.7% organic revenue growth this quarter, or 4.7% if the effect of an extra week in the quarter is subtracted. The legacy business delivered growth of 5.3%, while Cadbury chipped in about 2.2% organic growth.

Looking at profitability, Kraft's story was like so many others this quarter - mixed. The company's gross margin fell by two points and that appears to be worse than most analysts expected, as the analyst community was apparently surprised by the extent of cost inflation in the market. On a more positive note, the company trimmed down operating expenses better than most expected (and the Cadbury integration is ahead of schedule) and recaptured some of that lost margin, as adjusted operating margin ticked up 20 basis points from the year-ago period. Continuing an oddly consistent trend (at least among the large corporations), Kraft reported lower-than-expected taxes and that helped the company meet the earnings-per-share target for the fourth quarter. (For more, see The Unseen Taxes That You Pay Every Day.)

Please click below to continue:

Monday, February 14, 2011

Komatsu And Joy Global?

I heard an odd rumor the other day ... namely that Komatsu (Nasdaq: KMTUY) would consider taking a run at Joy Global (Nasdaq: JOYG) in an attempt to basically match Caterpillar's (NYSE: CAT) acquisition of Bucyrus and create another highly vertically-integrated mining company.

On the very outermost surface, it makes sense. Komatsu is big enough that it could conceivably do a deal, and Komatsu does have a relatively large business in trucks, haulers, shovels and other above-ground equipment useful in mining, as well as construction equipment that I'm sure has dual-use utility in areas like mining. Moreover, Komatsu has a pretty respectable presence in the emerging markets where a lot of mining activity is occurring. The only thing the combination of Komatsu and Joy Global would lack is underground trucks/loaders and drills.

Still, I don't buy it. Quick - name the last big acquisition made by a Japanese company. That's the problem ... Japanese companies by and large don't buy other companies and it's even less common in the industrial sector. I don't know if there is a fear of a culture clash, an arrogance that a foreign company would have little to offer, or simply an understanding that most deals don't work. Whatever the case, it is pretty rare for Japanese industrial companies to step up and buy large American industrial companies.

With that in mind, it makes the acquisition prospects of Joy Global a little ... interesting. Hitachi (NYSE: HIT) has some of the same above-ground machinery as Komatsu, but also happens to be a Japanese company. And while Liebherr has some above-ground mining business, that would be a pretty big swing for a company of Liebherr's size, particularly since it is private and can't really use equity to do the deal. Sandvik complements Joy Global in a few niches but overlaps in others, and probably wouldn't be interested.  

Atlas Copco (Nasdaq: ATLKY) might be a darkhorse to consider, though.  Atlas's mining business is highly concentrated (drills, underground vehicles, and such), but Joy Global would certainly be a means of taking a larger step into a sector that is clearly benefiting from booming cap-ex now and for at least the next few years. Atlas is just slightly smaller than Komatsu in market cap terms and could likely afford the deal. It would obviously leave a gap in some of the above-ground equipment niches, but not so much so that it would negate the logic to a deal.

So, there you have it ... Although it makes a certain amount of sense to hear rumors that Komatsu would consider buying Joy Global, I'd argue it's even more likely that Atlas Copco would be the bidder if Joy Global were to get a takeover offer. Time will tell, though, and the most likely outcome is probably no deal at all.

Investopedia: Rail Traffic Data Still Largely Good News

Another month has gone by, but the data concerning rail traffic in the U.S. is still positive. That, in turn, is another positive read for the economy overall, as well as industrial and material companies. And of course, let us not forget the rail companies - so long as rail traffic continues to climb, that is a tailwind for the sector as well. 

January's Data Mostly Positive 
For January of 2011, the Association of American Railroads reported that U.S. train carload traffic rose 8% from the year-ago level. The level of traffic seen in January also represented a 1.5% sequential increase from December's levels. Of the 20 categories tracked by the AAR, 15 saw carload growth in the month, with coal (always the biggest commodity for railroads) posting above-average growth of 8.8%. Grain traffic was also notably higher (up 10%), while sand, gravel, and aggregate shipments climbed 16%. The biggest laggards, waste/nonferrous scrap and nonmetallic minerals, were both down by double digits, but represent less than 3% of normal rail traffic anyway. (For more, see Rail Traffic Points To An Ongoing Recovery.)

Investors may want to pay attention to the "mostly positive" part of this news, though. For although U.S. rail traffic was again strong, U.S. intermodal traffic may be softening up. For January, intermodal traffic was up 7.4% on a year-on-year basis and 1.8% on a sequential basis. That is still quite good, but I believe this is the first quarter in quite some time where the year-on-year increase in rail traffic exceeded the increase in intermodal. It may mean nothing at all, or it may be a sign that international trade activity is lightening up a bit.

Also of note is the performance in Canada: Canadian traffic was down in January on an annual (-1.6%) and sequential (-5.9%) basis and although intermodal volumes were positive, they were not terribly strong. Seeing as how a lot of Canada's rail traffic is part of the "stuff trade" - mostly moving commodities to shipyards for export - this is worth watching as it pertains to commodity demand growth. If China and India are cutting down on the coal, lumber and metal they buy from Canada, that would not be positive for Canadian Pacific (NYSE:CPI) or Canadian National (NYSE:CNI), though both also have operators in the United States.

Continue below: