Abercrombie & Fitch's Jeffries Smells the Teen Spirit

Michael S Jeffries, Chairman and Chief Executive of Abercrombie & Fitch (ANF-$75.03), received compensation of $9.9 million and $19.9 million for fiscal year 2007 and fiscal year 2006, respectively, according to a recent proxy filing with the SEC.

Almost all of the increase in FY ’06 was in $8.4 million in stock option awards expensed by the teen apparel retailer in 2006.

In 2007, Messer. Jeffries also received a salary of $1.5 million, performance-based cash incentives of $1.9 million, stock grants of $5.0 million, and other compensation totaling $1.4 million, including $656,545 for personal use of helicopter/aircraft use, $543,033 in contributions to his retirement & savings plans and $111,311 in a related tax gross up.

Similar to other retailers, ANF’s profit strategy largely depends on the timely opening of new stores and/or remodeling of existing stores.

A Competent CEO Still in the Building

Under the stewardship of Jeffries, Chairman and Chief Executive Officer of ANF since May 1998, the company has expanded from 250 stores into a chain of 1040 stores in the United States.

In addition, he shepherded new branded concepts, successfully launching five differentiated retail businesses, including Abercrombie & Fitch, targeting college-age kids with its casual—sometimes provocative—causal sportswear apparel, Hollister, which markets Southern California 'cool' at 14 to 18 year-old guys ("dudes") and girls ("bettys"), and the urban, post-grad style RUEHL for those at 22 to 35 year-old men and women.

Net income as a percentage of net sales averaging more than 12.0% per annum, tangible book value almost tripling in value to $19.17 a share, and a return on equity of 31.6% per annum—Jeffries has steered shareholders to profitable returns (with a pristine balance sheet—nil in long-term debt) during the five-year period ended January 31, 2008.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Abercrombie & Fitch Co., The S&P 500 Index
And The S&P Apparel Retail Index

The aforementioned metrics are strong testimony that Michael Jeffries has overseen one of the best business models in the apparel retailing industry.

If Jeffries chose to retire for 'good reason,' he would receive a severance package worth about $99.8 million, which includes cash payment of $10.1 million, ANF equity valued at $68.4 million, and a retirement plan value of $22.6 million, according to regulatory filings.

The cash and equity rewards include a pro-rata "stay bonus" (worth $6.0 million if he stayed on as chief executive until January 31, 2009) and the pro rata value of a 1.0 million "career share" grant awarded to Jeffries (at $25.58 a share), respectively.

You Play. You Win. You Play. You Lose. You Play. ~ British writer Jeanette Winterson

On January 30, 2003, the Company amended Jeffries employment contract, with the intent to secure his continued employment through December 30, 2008. [FY 1999 – FY 2003, shareholder equity and share-net grew from $311.1 million to $871.2 million and $1.39 to $2.06, respectively.]

Growth Drivers

There are few visible growth drivers for specialty apparel companies in the United States—a crowded market with similar concepts competing for the ephemeral clothing tastes of tweens, teens, and young adults.

And I forget just why I taste
Oh, yeah, I guess it makes me smile
I found it hard, it's hard to find
Oh well, whatever, nevermind

In our view, with Jeffries at the helm, ANF has the brand strength and management to successfully navigate and penetrate intenational markets.

Hello, Hello, Hello, How Low
Hello, Hello, Hello

Save for three Abercrombie & Fitch stores and three Hollister Company stores in Canada, the company operates one ANF store in London, opened in May 2007.

With the lights out it's less dangerous
Here we are now, entertain us
I feel stupid and contagious
Here we are now, entertain us ~ Nirvana ("Smells Like Teen Spirit" youtube video)

Consistent with its European expansion plans, Abercrombie & Fitch announced its plan to open a new 16,000-square foot store in Copenhagen, Denmark in 2009. Management is also in the process of securing locations in Italy, France, Germany, Spain, and Sweden. The Company plans to open its first flagship in Asia, centrally located in Tokyo's Ginza district, in late 2009.

Debate over the pay-for-performance orthodoxy aside, as shown by compensation activities at ANF: "to win you gotta' play—pay!"

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Trading Alerts: Monday, May 12, 2008

American Technology Corp (ATCO-$1.93) late Friday posted share-net loss of 7 cents, wider than the First Call dual-analyst estimate of $(0.03) a share. The maker of hailing and warning acoustic products for the military attributed the decrease in profit margins to lower sales associated with the transition to a new Long Range Acoustic Device (LRAD) product line (launched in late March).

Bally Technologies Inc (BYI-$35.66) will release its third-quarter fiscal 2008 results after the market closes on Monday. Analysts surveyed by FactSet Research expect the gambling equipment company to report fiscal third-quarter earnings of 47 cents a share, on average. On April 18, citing "a very attractive valuation, as well as continued solid business fundamentals," Deutsche Bank gaming analyst, Bill Lerner, upgraded the shares to "BUY" from "HOLD." Investors should be watching margins, for management signaled back in February that it expected improvement in game sales and operations compared to 2007.

After the close of trading, China Security & Surveillance Technology Inc (CSR-$19.05), a supplier of digital surveillance technology, said its president, Shufang Yang, resigned effective Tuesday with "plans to pursue other opportunities outside of the security industry."

Circuit City Stores Inc (CC-$5.08) on Friday gave in to pressure from activist shareholders, essentially putting itself up for sale and agreeing to nominate dissident directors to its board.

Shares of Dr Pepper Snapple (DPS-$25.24) fell flat in their Wall Street debut, trading in New York on Wednesday at a lower-than-expected $25 a share. But when investors finally warm to the beverage maker's story, chances are the stock will bubble up, said columnist Andrew Barry in a Saturday Barron’s online story.

Farmer Bros Co (FARM-$22.58) reported an operating loss for its third-quarter ended March 31, 2008, of $1.0 million, compared with an operating loss of $2.2 million in last year's third. The coffee roaster said profit margins continue to be pressured by volatility in green coffee prices, higher fuel costs and increasing costs for packaging supplies.

FedEx Corp (FDX-$90.37) cut its earnings guidance for fiscal fourth-quarter by fifteen cents, blaming continuing increases in fuel costs. The Memphis-based shipping company said it now expects profits in the range of $1.45 to $1.50 per share for the three months ended May 31, 2008.

Fluor Corp (FLR-$183.97) should report a profit of $1.26 a share in the first quarter on a 27.4 percent Y/Y gain in sales of $4.64 billion, according to analysts surveyed by FactSet Research. The engineering and construction company is expected to show a 36.9 percent Y/Y gain in share-net, fueled by global demand for energy, infrastructure, mining, and basic materials. The Company closed FY 2007 with $30.2 billion in backlog--and investors will be watching for hints of any slowdown in spending by customers in the aforementioned sectors.

Will Google Inc (GOOG-$573.20) and Yahoo! Inc (YHOO-$25.93) come together on a search advertising partnership? The two companies have been discussing an agreement under which Google would deliver some ads alongside Yahoo’s search results.

Hawk Corp (HWK-$16.95), a friction products supplier (brakes, clutches and transmissions) increased its full year 2008 guidance for pre-tax income from continuing operations to between $21.0 million and $23.0 million, an increase of between 7.7 percent and 18.0 percent compared to 2007 pre-tax income from continuing operations of $19.5 million. The Company expects to benefit from improved operating leverage due to increased sales volumes and continued operating improvements through the balance of 2008.

Iomega Corp ($3.83), the Zip drive maker being acquired by data storage systems provider EMC Corp (EMC-$15.96) for $3.85 a share, late Friday reported net income of $1.95 million, or 4 cents a share, a penny below the mean estimate of analysts polled by Thomson Reuters. Revenue for the quarter ended March 30 rose 26 percent to $95.9 million, helped by climbing external hard disk drive product(s) revenue, versus the mean estimate of 92 million its first-quarter profit rose.

On April 1, LDK Solar Co (LDK-$37.05) lowered its profit outlook and raised its revenue guidance for the first-quarter of 2008 ended March 31, due to the Chinese New Year holidays and severe snowstorms. The maker of multicrystalline photovoltaic wafers now estimates fully diluted earnings to be in the range of $0.40 to $0.44 per ADS. Wall Street is not as optimistic, expecting LDK to report profit of 39 cents a share following the close of trading on Monday. Investors should watch for the impact of polysilicon pricing and increasing competition in the wafer segment on gross margin.

Nutritional supplements maker Mannatech Inc (MTEX-$6.42) swung to a loss of $2.3 million in its first quarter, sunk by lower North American sales and litigation costs.

In our view, Wall Street already discounts an expected loss of 19 cents a share when MBIA Inc (MBI-$9.43) reports its first-quarter numbers before the market opens on Monday. What do investors really want to know? Does the bond insurer have enough assets and liquidity to meet maturing liabilities and to post collateral in the event of downgrade from credit rating agencies. In an open letter to shareholders, MBIA Chairman and Chief Executive Officer, Jay Brown, wrote he continues to believe the company "has adequate equity capital to get through this crisis."

McDermott Int’l (MDR-$53.90) is expected to report earnings of 58 cents a share on sales of $1.48 billion in the first-quarter, on average, according to nine analysts surveyed by Thomson Reuters. Last month, the engineering and construction company cautioned Wall Street of business delays in its Offshore Oil & Gas Construction Segment for the 1Q:08 ended March 31. More than one-half of planned offshore working days for major construction vessels were unproductive, primarily due to harsh weather in certain parts of the Asia-Pacific and Middle East regions.

As the only remaining major independent player in the market for Graphic Processing Units used in PCs, NVIDIA Corp (NVDA-$22.53) is well positioned to benefit from increased graphics requirements. However, product related transitional issues are pressuring gross margins, according to Zacks Equity Research. Analyst Steve Biggs, CFA, is lowering his estimates for full fiscal year 2009 to $1.33 a share.

News Corp (NWS-$19.35) unexpectedly withdrew a $580 million offer for Long Island newspaper Newsday, three days after its chairman, Rupert Murdoch, said talks with owner Tribune Company were in a "pretty advanced stage.''

Standard & Poor's cut the corporate credit rating of Pitney-Bowes Inc (PBI-$37.54) and its subsidiaries to 'A' from 'A+.' Last week, the provider of mail processing equipment and integrated mail solutions posted better-than-expected first-quarter results, helped by strength at its mailstream services segment.

Expect Radian Corp (RDN-$5.43) to post a loss of $2.13 a share in the first-quarter, according to analysts polled by Thomson Reuters. On May 2, Fitch Ratings withdrew its ratings on the company and its mortgage insurance and financial guaranty subsidiaries because Radian "had not provided it with adequate information to maintain credible ratings."

Repros Therapeutics Inc (RPRX-$8.83) posted a wider first-quarter loss on higher spending for clinical development programs, including pivotal Phase 3 clinical trials for Proellex, which is being studied for the treatment of symptoms associated with uterine fibroids.

Santarus, Inc (SNTS-$2.50) needs to reduce its dependence on its Zegerid line of products, which are a combination of a proton pump inhibitor and one or more antacids used to treat gastrointestinal disorders, and should try to boost growth through the in-licensing or acquisition of suitable candidates, according to Zacks Equity Research. Analyst Jason Napodano, CFA, is maintaining a Hold rating with a target price of $3.00 a share.

Analysts, on average, are expecting Sprint Nextel Corp (S-$9.38) to post a profit of 2 cents per share on sales of $9.41 billion, according to a poll by Thomson Reuters. Investors will be looking for any variance emerging on subscriber, ARPU and churn trends in the wireless carrier’s earnings report.

Stewart Information Services Corp (STC-$24.50), a real estate information and title insurance provider, said Friday its losses during the first quarter were larger than originally reported because of a previously missed charge of $4.6 million.

Valspar Corp (VLR-$2187) should report anemic Y/Y second-quarter profit growth of about 5 percent, posting share-net of 42 cents, on average, according to analysts surveyed by FactSet Research. J.P. Morgan Securities lowered share-net visibility of the paint and coatings maker on April 11, citing a short-term risk to sales prospects due to the weakness in the residential and commercial construction markets. Owing to higher raw material costs, investors should expect a drop in margins, too.

Virgin Mobile USA Inc (VM-$3.16) and Helio LLC, two cellphone companies that offer service through re-sell agreements with Sprint Nextel Corp., are in advanced merger discussions and could announce a deal in coming weeks, people familiar with the matter said on Friday.

Winn-Dixie Stores, Inc (WINN-$17.29) plans to file its financial results with the Securities and Exchange Commission on Monday, May 12. Two analysts polled by Thomson Reuters expect the Florida-based grocer to record a third-quarter profit of 21 cents a share on sales of $1.71 billion. Shareholders should watch to see if rising food prices are adversely impacting traffic and/or effect of promotional events and Easter holiday shopping on operating margin and sales, respectively.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Drilling Costs Presage Lower Profits at ExxonMobil and Other Majors

ExxonMobilOil, PetroChina, and other oil exploration companies should expect the extended up-cycle in day rates to rent offshore floaters to continue unabated. Declining yields from mature, onshore energy fields coupled with increasing natural gas and oil prices is driving the demand for global drilling activity in deep-water provinces, pushing fleet utilization rates for high-end rig counts close to 100 percent, too.

Record oil prices are lifting corporate profits to dizzying heights throughout the energy industry, with energy giants ExxonMobil, Royal Dutch Shell plc, and BP plc posting record first-quarter 2008 earnings of $10.9 billion, $7.8 billion, and $6.6 billion, respectively, up Y/Y 17 percent, 12 percent, and 48 percent, respectively.

However, rising oil and natural gas prices, combined with full capacity worldwide in the offshore rig market — and competition for these fleets — is hurting the backside of international oil companies, with drilling and production costs more than doubling in recent years. My own review shows that exploration and production costs in the first-quarter Y/Y at ExxonMobil, Royal Dutch Shell, and BP, rose 30 percent to $5.8 billion, 39 percent to 7.4 billion, and 59 percent to $10.0 billion, respectively. [read more…]

Circuit City Should Remind Blockbuster Investors of 2005 Bankruptcy Fears

"Just because I don't care doesn't mean I don't understand." ~ Homer Simpson

Circuit City Stores Inc (CC-$4.95) rejected the recent offer by Blockbuster Inc (BBI-$2.79) to acquire the company for between $6.00 and $8.00 per share in cash, questioning how the video rental chain would finance the offering.

Circuit City Board of Directors – Fools or Geniuses

There are a good many fools who call me a friend, and also a good many friends who call me a fool. ~ Essayist G K Chesterton (1874 – 1936)

Activist shareholder Wattles Capital Management, a 6.5 percent holder of the electronic retailer’s shares, in a proxy filing derided management and the Board for "dismissing the legitimate, third-party interest in acquiring the Company."

Mark Wattles faulted the Board, too, for its failure to open its books: "During the due diligence process the ability of Blockbuster to finance the transaction and the ultimate structure of the financing [could be] fully fleshed out by all parties."

Mr. Wattles is best known for selling the video chain he founded, Hollywood Entertainment Group, to Movie Gallery Inc for approximately $1.2 billion in April 2005.

In the view of the 10Q Detective, the Board of Directors did not neglect their fiduciary duties. Their refusal to negotiate further with Blockbuster was in the best interests of shareholders, for after examining the books of the video chain we strongly believe Blockbuster would find it difficult to (i) refinance its existing debt and/or (ii) raise the proceeds sufficient to purchase Circuit City.

How would BBI, which held just $184.6 million of cash on its balance sheet and burned through $56.2 million in cash from its operating activities, as of the fourth quarter ended Jan. 6, 2008, finance (up to) a $1.4 billion acquisition?

Blockbuster CEO Jim Keyes tried to assure Circuit City and investors that billionaire Carl C. Icahn, who beneficially owns 16 percent and 7.7 percent of Blockbuster’s Class A shares and B shares, would provide support for the deal (backstopping a rights offering).

You might as well praise a man for not robbing a bank. ~ American golfer Bobby Jones (1902 – 1971)

Amid foundering growth prospects at Circuit City, in our view, Mark Wattles feigned sympathy for other long-suffering Circuit City shareholders. A savvy investor—not accustomed to being on the losing end of a deal—he now sits on dead money, with purchases of several million shares made in December 2007 at prices between $6.00 - $7.00 per share, according to regulatory filings with the SEC. His comment that they [shareholders] "were immediately and substantially damaged" because of "a lack of cooperation by the Board"rings hollow.

Bait and Switch

Blockbuster was definitively less than a "legitimate third party."

BBI was tapped out. As of January 6, 2008, BBI’s available borrowing capacity totaled $247.3 million—significantly less than the $1.4 billion tender offer.

In addition to aggregate indebtedness of $757.8 million, minimum rental payments under non-cancelable operating leases (commitments for various real and personal property, including office space, and stores) of $542.6 million and $438.4 million come due in fiscal 2008 and fiscal 2009, respectively.

The 10Q Detective opines that BBI’s play for the electronic gadgets retailer was an effort to turn Street attention away from its own business failings—and, a last-ditch effort to revive a moribund brick& mortar business model. "The transaction would allow both companies to benefit from the revenue growth generated by their complementary products," said CEO Keyes. "While the resulting synergies would substantially improve consolidated financial performance, thereby increasing shareholder value.

Does anyone remember the RadioShack - Blockbuster alliance? In June 2001, 130 “RadioShack Cool Things” boutiques opened in Blockbuster outlets--six months later BBI pulled the plug on the 'pilot program.'

"I'm normally not a praying man, but if you're up there, please save me Superman." ~ Homer Simpson.

Increasing competition from other retailers (more favorable studio pricing policies for mass merchants such as Wal-Mart, Best Buy and Target) coupled with a shorter "rental window" (timing and exclusivity of home video retailers versus alternative methods of content delivery, such as video-on-demand) is the video trailer for an accumulated deficit of $4.85 billion at this disaster-in the-making motion picture!

"Kids, you tried your best and you failed miserably. The lesson is, never try." ~ Homer Simpson

Although same-store sales increased 3.4 percent Y/Y, rental and merchandise margins fell 450 basis points and 160 basis points, respectively, to 60.7% and 23.3 percent. Management did not breakout revenue per transaction, but we suspect that much of the same-store comps improvement was due to price hikes.

Is BBI is headed for bankruptcy?

In the early 60's Edward Altman used statistical techniques—combining a set of 5 financial ratios—to predict a company's fiscal fitness—its probability of failure—called the Altman Z-Score. The beauty of Altman’s equation is its ability to pinch the fat and read only the muscle on a balance sheet.

Two of the eight variables used in Altman’s equation are working capital and total assets. As of fiscal year ended January 6, BBI reported Total Assets of $3.14 billion. Back out, merchandise inventories & rental library (zero residual values), pre-paid assets (monies already allocated for future uses), and goodwill—value of Total Assets declines about 60 percent to $1.30 billion. Ergo, working capital falls from $170.3 million to $(852.5) million, and the Ratio of Working Capital/Total Assets at BBI plummets to less than zero from 5.42 percent.

A Z-SCORE less than 1.80 suggests the "Probability of Financial Embarassment is very High." BBI scored a negative 2.90!

"Oh, people can come up with statistics to prove anything, Kent. 14% of people know that."

BBI escaped insolvency in 2005--when liquidity problems threatened its a/c payable(s) with its trade distributors. Unfortunely, Homer, this time around, we believe the statistics do not bode well for the future of Blockbuster Inc.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Trading Alerts: Monday, May 5, 2008

Is the engine overheating at Chinese Internet search provider Baidu Inc (BIDU-$361.50)?

Insurance-focused conglomerate Berkshire Hathaway (BRK.A-$133,600) said Friday that its first-quarter profit slumped 64% compared with the same period a year earlier, hurt by $1.6 billion of pretax losses tied to derivatives contracts and softer underwriting income.

The Boeing Company (BA-$85.69) denied a media report from German daily Die Welt on Saturday it had informed customers of another delay on its new '787' Dreamliner model.

Bristol-Myers Squibb Co (BMY-$23.35) is selling its ConvaTec wound therapy unit to Nordic Capital Fund VII and Avista Capital Partners for $4.1 billion.

Cablevision Systems Corp (CVC-$23.14) made a $650 million bid for Tribune Co's Newsday newspaper, topping rival offers from media titans Rupert Murdoch and Mortimer Zuckerman, a source briefed on the matter said on Friday.

The share price of Cimarex Energy Co (XEC-$62.06) is up about 50% in the last three months, running higher with NYMEX oil and gas prices. Brokerage analysts have repeatedly raised their EPS forecasts, too, pushing the first-quarter consensus earnings estimate to $1.62 per share, up from $1.09 a share ninety days ago. Analyst Jeffrey W Robertson of Lehman Brothers recently raised his target price from $59 to $70 a share. The energy company is scheduled to report on Tuesday, May 6, before the start of trading.

Shares of Cirrus Logic Inc (CRUS-$5.85) plunged 21.3% Friday after the chip maker reported it swung to a fourth-quarter loss and guided first-quarter revenue below analyst estimates. However, in a research note, Zacks Equity Research is calling the company a logical buy, with a 12-month target price of $8 a share.

Countrywide Financial Corp.'s (CFC-$5.98) credit rating was cut to junk on Friday by Standard & Poor's rating, after a regulatory filing called into question whether Bank of America (BAC-$39.79) would repay the troubled lender's outstanding debt after their planned merger.

Deutsche Telekom AG (DT-$18.11), the owner of T-Mobile USA, is considering buying mobile-phone firm Sprint Nextel (S-$7.89), according German magazine Der Spiegel.

Wall Street is wondering what executives from Walt Disney Co (DIS-$33.49) will say Tuesday when the entertainment giant discloses how well attendance is holding up at its theme parks in the face of a possible recession. Analysts polled by FactSet Research are forecasting profits to come in at 51 cents a share on sales of $8.51 billion, compared with the 43 cents a share on sales of $8.07 billion posted a year ago.

Jim Cramer told his "Mad Money" television audience on Friday evening that Dover Corp (DOV-$50.63) is a great manufacturing company with new innovative technologies, such as a trash compactor fueled by solar power and biodegradable fluids and refrigeration units for grocery stores that are energy efficient. The maker of industrial equipment and parts trades at 12.6 times earnings and has a 15% growth rate.

Fannie Mae (FNM-$29.50) is expected to report first-quarter earnings before the opening bell on Tuesday. Wall Street analysts suspect the mortgage-finance giant will swing to a loss of 81 cents, compared with a profit of 85 cents a share in the year-ago period, as the U.S. housing market remains weak. Weighing on investors’ minds, however, is the prospect of Congress passing legislation further strengthening oversight over loan portfolio (including an increase in minimum capital requirements of the home lender).

If shares in General Dynamics Corp (GD-$90.69) drop in price this week on the expected announcement of a new CEO, "snap 'em up," said columnist Neil A. Martin in a Barron’s online story Saturday. The departing chief’s legacy is built to last, which is why some analysts think the stock price could hit $100 in about a year.

Hewitt Associates, Inc (HEW-$41.90) reports its fiscal second-quarter earnings before the market opens for trading on Monday. The global provider of human resource benefits is expected to post earnings of 38 cents a share, according to analysts surveyed by FactSet Research. As earnings are expected to remain under pressure from upfront business development costs and higher compensation expense, Zacks Equity Research continues to believe the stock is overvalued.

Standard & Poor's Ratings Services said late Friday it placed H&R Block's (HRB-$22.55) ratings, including its BBB- long-term counterparty credit rating, on CreditWatch with positive implications. The CreditWatch listing is based on the momentum H&R Block has achieved by successfully exiting the subprime mortgage business.

The growth strategy of Marvel Entertainment Inc (MVL-$30.25) is to leverage the brand-name recognition of its proprietary library of more than 5,000 characters, including Spider-Man, The Incredible Hulk, and The Fantastic Four, by licensing, publishing, toys and film production —either through third party and/or in-house development deals.

1. The company is expected to report first-quarter earnings of 44 cents a share on sales of $111.65 million on Monday, as compared with share-net of 54 cents on revenue of $151.40 million in the year-ago period. Financial guidance previously posited a Y/Y EPS and revenue shortfall because of the timed releases of two self-produced films ["Iron Man" and "The Incredible Hulk" are not in theatres until May 2 and June 13, 2008, respectively], film production cost over-runs, timing of receipt and payments from two feature films [distributors are reimbursed their associated costs prior to Marvel], and delayed results from subsequent DVD sales.
2. In our view, investors ought take caution, for 1H:08 movie trends are mixed, with higher ticket prices offset by lower attendance. The company reports before the bell on Monday, but investors will be more interested in box office receipts from this weekend’s release of "Iron Man"—its first in-house production.

Analysts surveyed by Thomson Financial call for McKesson Corp (MCK-$54.30) to post fourth-quarter earnings of $1 a share on sales of 26.83B, on average. The traditionally strong 4Q should get a boost from strong growth in Technology Solutions (product mix weighted to high-margin IT solutions) at the medical/surgical wholesaler & health-care IT solutions giant, offset by s slight dip in Y/Y Distribution Solutions (lower profit on generics) operating income.

Microsoft Corp (MSFT-$29.24) CEO Steve Ballmer said Saturday the software giant is dropping its three-month-old bid to buy Yahoo! Inc (YHOO-$28.67) as the two sides remained at least $5 billion apart on price. Now that Microsoft has walked away after offering $33, where does the Yahoo! stock price go? Doug McIntyre, posting on BloggingStocks, reasons down to $22 a share.

Spearheaded by credit card franchisors Mastercard Inc (MA-$285.04) and Visa Inc (V-$82.75), the banking industry failed to blunt a Federal Reserve proposal on Friday to initiate new credit card reforms, such as halting the common practice of raising interest rates on a balance when a cardholder fails to make payments on an unrelated bill and banning a practice known as double-cycle billing (when lenders reach back to prior billing cycles when calculating the amount of interest charges in the current cycle).

Billionaire Carl Icahn’s Motorola (MOT-$10.04) morass—one case study where the shareholder’s activism did little to maximize shareholder value.

Riverpoint Capital Management in Cincinnati, which manages about $1 billion in assets, recently added NVIDIA Corp (NVDA-$22.52) to its holdings. "It's a very cheap valuation," said Kirk Koppenhoefer, an analyst at the investment firm, pointing out that the graphics chip maker trades at 13 times this year's estimated profit, about one-third its average price-earnings ratio of 36 over the past five years and below Intel's 18 multiple of EPS.

Pilgrims Pride Corp (PPC-$24.10) will hold a conference call on Monday, May 5 at 11:00 am to discuss the second-quarter earnings for 2008. Analysts polled by Thomson Financial, on average, expect the vertically integrated poultry producer to show a loss of 81 cents per share, as margins continue to be pressured by higher grain prices. Opining on the adverse affect of higher feed costs, Credit Suisse analyst, Robert Moscow, recently raised Pilgrims Pride to "Outperform" from "Neutral," proclaiming 2009 “the year of high protein prices.”

Analysts polled by Thomson Financial expect Post Properties Inc (PPS-$37.54) on Tuesday morning to report EPS of $0.46 on revenue of $76.06 million, on average. Share-net consensus for the apartment landlord was slashed by one-cent in the last sixty-days, reflecting an increase in financing costs, limited leverage in ability to charge higher rents due to higher unemployment and the slowing economy. On its earnings call, management will likely remain reticent about why they turned down several bidders looking to acquire the REIT at significant premiums to its current value.

The Procter & Gamble Co (PG-$66.80) is suing rival Johnson & Johnson (JNJ-$68.26) over its teeth-whitening strips, alleging patent infringement related to the tooth whitening active ingredient and delivery systems.

Options traders are playing Wal-Mart Stores Inc (WMT-$57.50) close to the current stock price of about $58 a share, buying May 60 calls. An expected catalyst is a sales windfall driven by consumers cashing and spending their rebate checks on deeply discounted necessities lining the aisles of the big box-retailer.

Editor David J. Phillips holds a financial interest in Bristol-Myers Squibb Co stock. The 10Q Detective has a Full Disclosure Policy.

Too Late to Cry 'Wolf' at Investools!

In December 2007, the 10Q Detective warned readers of the panoply of red flags flying overhead at Investools Inc (SWIM-$12.48), when shares fetched $17.34 a share.

After the close of trading Thursday, the online brokerage and investor education services company posted a quarterly profit that was below Wall Street estimates and said the U.S. Securities and Exchange Commission was conducting an informal inquiry into some of its presentations (the seminars the company conducts).

Alone on the hill day after day, the boy got bored. He decided to play a practical joke on the villagers. He took a deep breath and shouted, "Wolf! Wolf! A wolf is here!"

The villagers ran up to drive the wolf away. But when they reached the top of the hill, all they saw was a laughing boy, and no wolf.

The villagers scolded the boy. "This is not funny. Don't cry 'wolf' when there's no wolf!" Grumbling among themselves, they went back down the hill.

We take no comfort in reminding investors--again--that this disaster was avoidable: (i) neither Investools or its employees, nor its independent contractors [were] licensed financial advisors; (ii) only three of the coaches had more than ten years of personal investing experience; and (iii) management consistently masked revenue as deferred liability (among other accounting concerns).

The next day, the boy yelled again,"Wolf! Wolf! The wolf is chasing the sheep!"

He bent over with laughter when the villagers once again came to the rescue.

When the villagers saw no wolf, they warned the boy: "If you ever do this again, we won't answer your call when there really is a wolf!

Don't waste our time. Don't cry 'wolf' when there's no wolf!"

Shares of the company were trading at $9.97 per share after the bell, down almost 20.1 percent.

Later that day, the boy saw a REAL wolf prowling about his flock.
Immediately, he jumped to his feet and sounded the alarm: "Wolf! Wolf!"

But the villagers thought that the shepherd boy was trying to fool them
once more, so they ignored him. ~ "The Boy Who Cried Wolf" ~ Aesop fable

Stryker Corp: A Hip Stock for An Uncertain Market

Stryker Corp (SYK-$64.50) has been a leading international medical technology company for over 60 years, with a diversified product line focused on orthopedics and a presence in other medical specialties, including pain management, and emergency medical equipment.

In the most recent quarter, Stryker’s 1Q sales increased 14.7% to $1.63 billion, largely inline with street estimates. Favorable exchange contributed 4.4% points to growth. Excluding the FX benefit, sales were up 10.3% as MedSurg sales growth of 14.9% was offset by Orthopedic Implant sales growth of 7.3%.

Deloitte estimates that the spending power of Americans aged 50+ is $1.7 trillion. One of the main expenditures of aging consumers is health care. And, as all of the men and women who took up jogging in their teens get older, they are putting a lot of stress on their joints. That creates a lot of business for orthopedic surgeons. Stryker (SYK) is a direct beneficiary of this trend.

SYK has risen 25% annually on average over the past 10 years, which is quite impressive. Its steady performance has made it an institutional favorite especially in periods when the market has been relatively soft.

Gross margin came in 20 bps higher to 69.4% YoY although SYK expects to incur higher compliance and quality expenses, as well as higher raw material cost (e.g. steel and cobalt chromium) for the rest of the year and therefore expects 08 FY gross margins to be around the same level as that of 07.

While the recall of Trident by SYK recently may have hampered its growth, to offset the weakness SYK has other options such as ramping up training on the Cormet hip resurfacing implant more aggressively and SYK might attempt to accelerate the launch of its Triathlon revision knee system. With regards to Cormet, so far the street expects it to become a more meaningful growth driver over the course of 2008.

SYK is likely to continue through at least 09 (track record of navigating through even the toughest of times). Investors can expect that SYK to deploy its $2B+ cash balance to acquire higher- growth and/or higher- margin entities, in order to achieve historical growth targets.

A catalyst for an upswing in share price could be the company’s analyst meeting on May 8, when the medical device maker reviews its product pipeline portfolio and its strategic outlook. Management should also provide an update on the status of the FDA warning letters and possibly comment on monthly trends within Orthopedics and Medsurg.

Contributor Yaser Anwar does not hold a financial position in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure policy.

Shares of Gum Maker Wm Wrigley Regains Flavor!

Wm Wrigley Jr Co (WWY-$76.91) had some Winterfresh news for investors Monday, announcing candy maker Mars Inc, the closely held company behind Milky Way and Snickers chocolate bars and M&M's , agreed to buy it for $80 a share , or about $23 billion, with the backing of Warren Buffett’s Berkshire Hathaway.

We are not expecting a rival bid to Eclipse the offer on the table, for Mars’ is paying a rich 32.2 forward 12-month EPS multiple for the chewing gum maker.

The combined entity creates the world's leading confectionery, with more than $27 billion in sales.

Wrigley's Board of Directors unanimously approved the terms of the deal, led by its Chairman, Bill Wrigley Jr, the great-grandson of the founder.

"First and foremost, this is a great transaction at a great price that provides tremendous value to Wrigley stockholders," noted Mr. Wrigley, Jr.

Of couse it does! He and/or members of his family (over which he acts as trustee) beneficially own 45 percent of the voting stock, and stand to walk away with about $2.72 billion!

Following the change in control—expected in six to nine months—the 10Q Detective does not believe the top five Named Executive Officers will be retained by Mars—save for Wrigley (who will probably have no more than a titular role to play after the merger). Wrigley stepped down as CEO in 2006.

As the table below shows, each of the Company’s named executive officers will float away on golden parachutes, accorded to the proxy statement filed with the SEC in February 2008. (The disclosed severance packages discount the actual amounts to be received, too, for share grants and options are based on a closing price of $57.96 a share, the closing price on December 31, 2007.)



Oh-me, oh-my, oh-you
Whatever shall I do
Hallelujah, the question is peculiar
I'd give a lot of dough
If only I could know
The answer to my question
Is it yes or is it no

The proposed deal—for a change—aligns the interests of insiders and common stockholders alike. Lingering concern of too much inventory at retailers/distributors has depressed the share price of the stick gum maker for the past ten-months. The $80-a-share cash offer is a Life Saver, representing a 28 percent premium to Wrigley’s closing share price on Friday.

Does your chewing gum lose its flavour
On the bedpost overnight
If your mother says don't chew it
Do you swallow it in spite
Can you catch it on your tonsils
Can you heave it left and right
Does your chewing gum lose its flavour
On the bedpost overnight ~ Singer Lonnie Donegan (1931 – 2002)

We say Hubba Bubba. The chewing gum "on the bedpost" finally has some taste!.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.