Thursday, March 30, 2006

Telestone Tech: Investors are Picking up the Phone.

On February 28, 2006, Telestone Technologies Corp. (TST-$4.30), a leading provider of wireless communication coverage solutions primarily in China, announced the successful completion of a comprehensive 3G wireless coverage test for China Mobile's Guizhou Province Division using Telestone's new 3G wireless coverage platform system. The test specifications were outlined and supervised by China Mobile and Huawei Corporation technicians who monitored and measured the overall quality and stability of the signal coverage of the Telestone system. The trial testing was conducted at a frequency of 1800 MHz for 3G using Telestone's new 3G-coverage platform system.

Investors had been anticipating this news, for in the wake of the Company’s news release, the price of the stock rose to at a seven-month high, closing at $5.20.

Technically, the stock has come under short-selling pressure, for with average daily trading volume of only 21,100 shares, more than 400,000 shares were sold short in the last thirty-days. The stock retraced, successfully testing the $4.12 level—its 200-day moving average.

We recommend that readers—new and old—revisit our initial BUY recommendation of Telestone Tech., “The Peoples Investment for 3G Wireless in China,” (when the stock sold for $4.01 per share).

On January 25, 2006, we stated:

“The catalyst for a sustainable upward move in the share price is the highly-anticipated rollout of the 3G (Third Generation)-related technologies for the PRC, [Peoples Republic of China] for which Telestone is one of only four principal companies that are licensed and capable of delivering on 3G wireless technology and equipment to China’s two largest wireless phone companies, which are China Mobile and China Unicom.
The Chinese authorities are expected to award 3G licenses to service providers later this year, as the country readies its high-speed network in time for the 2008 Olympics in Beijing. China's future 3G mobile network will use a home-grown TD-SCDMA standard co-developed by Siemens.

The subsequent rollout of 3G cell-phones will open up a market with a projected value of $25 Billion per annum. Of this market, Telestone’s wireless coverage solutions’ opportunities is approximately $2.5 billion per annum over the next three-to-five-years. Currently, the Company owns 2.7% of this market. Given that Telestone has a strong domestic presence in the PRC, we are being conservative in our belief that the Company can grow the top-line from existing businesses and the expected new 3G opportunities to easily hit approximately $100 million in top-line growth—dependent upon the release date of the 3G licenses….

Telestone is financially sound, with a current ratio better than 2:1, and no long-term debt.
Even without the inclusion of revenue generated from the upcoming 3-G deployment in China, management still expects top-line growth and share-net EPS in the order of 20%-to-30% year-over-year. We do, however, expect a big impact on revenues and profitability, assuming a 2H:06 deployment of the 3G technologies in the PRC. Our early estimates call for Telestone to show top-line of approximately $55 million, throwing of share-net of $0.50 [assuming 10 million shares, fully-diluted]. For aggressive investors willing to assume the inherent risk of owning a small-cap company, we recommend dialing up your broker and buying some shares.

Our initial target price for Telestone is $12.50 per share. This valuation assumes a multiple expansion to 25x forward 12-month earnings."


Information has been obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. We advise readers to recognize that they should not assume that present or future recommendations will be profitable or will equal the performance of securities listed or recommended here in the past. Readers should be aware, too, that the purchase of securities, particularly in the case of low-priced shares, involves substantial risk of capital. The 10Q Detective is published by Blue Sky Enterprises, LLC. Blue Sky Enterprises, LLC. is not a registered investment advisor and therefore cannot give individual investment advice. The opinions expressed herein are subject to change without notice. Neither the information nor any opinion expressed herein constitutes a solicitation by us of the purchase or sale of any securities. Blue Sky Enterprises, LLC., its affiliates, and/or their officers and employers may from time to time acquire, hold, or sell a position in the securities mentioned herein. Upon receipt of queries, specific information in this regard will be furnished.

Wednesday, March 29, 2006

Spectrum Brands--In Need of More than Doggie G.I. Relief!

Shares of Spectrum Brands, Inc. (SPC-$21.25), formerly known as Rayovac Corp. (as in batteries), are trading down (47.5%) in the last 52-weeks. The only stakeholders in the Company, which also makes pet foods, lawn and garden products, and insect control products, who seem to have made any money, are the directors and top executives.

In FY 2005, David A. Jones, Chairman of the Board and CEO, Kent J. Hussey, President and COO, and Randall J. Steward, CFO, each earned salary and (cash) incentive compensation of $918,500/$938,000, $548,500/$462,00, and $428,000/$281,000, respectively.

Spectrum Brands filed its DEF 14A on March 24, 2005, which revealed that David A. Jones also made “Other Compensation” of $272,000, including approximately $37,000 for use of a company-owned automobile, $44,500 related to personal use of Company aircraft and $191,000 related to a supplemental executive retirement program.

Kent J. Hussey picked up an extra $159,000 in “Other Compensation,” including approximately $24,000 for use of a company-owned automobile, $20,000 related to the use of Company aircraft and $115,000 related to a supplemental executive retirement program.

Randall J. Steward brought home $118,000 on “Other Compensation,” including approximately $8,000 for relocation, $20,000 for use of a company-owned automobile and $90,000 related to a supplemental executive retirement program.

The Company also disclosed that a previous employment agreement with David A. Jones granted him the right to purchase his Spectrum-owned home for one dollar. In April 2004, the CEO waived such right in exchange for the Company paying him the fair market value of the property, $993,000, plus an amount equal to 50% of leasehold improvements to the property of $38,000.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. On February 7, 2005, the Company completed the acquisition of all of the outstanding equity interests of United, a leading manufacturer and marketer of products for the consumer lawn and garden care, pet supplies, and household insect control markets in North America. Excluding options, the Company’s CEO and trusts for his family members, collectively owned approximately 203,000 shares of United common stock as of immediately prior to the Merger, which shares were converted into an aggregate of approximately 36,000 shares of Company common stock pursuant to the merger, worth approximately $1.4 million.

For fiscal 2006, Directors will get paid an annual retainer of between $40,000 and $50,000 (dependent on committee memberships) for their service as directors, excluding share rights, too. Each director shall also receive $1,500 for each meeting of the Board of Directors that he or she attends ($750 if participating telephonically) and $1,500 (or $2,500 in the case of committee chairpersons) for each meeting of a committee of the Board of Directors.

Now that the 10Q Detective has exposed to our readers some of Spectrum Brands' dirty laundry—we will comment on what our readers really want to know—is Spectrum Brands an attractive valuation at current prices? [ed. note. for more on Spectrum’s goings on, we recommend that our readers read the March 27, 2005, comments of entitled, Draw Me a Picture].

On January 31, 2005, Spectrum Brands Inc. said that its first-quarter profit was dragged down by the discontinuation of some operations and weaker sales, as it faced what it described as "tough consumer spending environment and significant inflationary pressures."
The Company reported earnings from continuing operations in the latest quarter ended January 1, 2006, of 12 cents per share, on revenue of $620 million, compared to pro forma share-net of $0.30 on sales of $490.8 million last year.
The 26% increase in net sales for the fiscal 2006 was is due to sales of products of the companies acquired in fiscal 2005, partially offset by declines in legacy battery (13.7%), shaving and grooming (8.1%), and personal care products (11.1%).
Analysts polled by Thomson Financial, who typically don't include charges in their estimates, expected the company to earn, on average, 22 cents per share for the quarter on $684.8 million in revenue.
Shares of Spectrum Brands, which have traded between $16 and $46.11 over the last 52 weeks, fell 11.9% to $18.91 per share from the prior day’s close.
In recent weeks, anticipating a turnaround in the Company’s operating environment, investors have bid the stock price of Spectrum Brands back to pre 1Q EPS valuations. Citing management’s ability to pass on rising commodity costs and additional cost savings from ongoing restructuring efforts, some analysts who follow the Company believe that the stock cannot be ignored at current prices.
For the full year 2006, Spectrum Brands is proffering sales guidance of $2.7 billion, and said it expects diluted earnings of between $2.10 and $2.20 per share, while analysts are looking for $2.09 per share on $2.78 billion in revenue. Next year, consensus analyst estimates call for Spectrum Brands to earn $2.54 on revenue growth of approximately 1.1% to $2.81 billion.
Spectrum Brands looks like a bargain, discounted at 8.4 times 2007 EPS compared to its peer group: Matsushita Electric Industrial Co. Ltd (MC-$21.71) goes for 26.2 times FY 2007 EPS estimates, Energizer Holdings, Inc. (ENR-$54.17) priced at 11.8 FY 2007 numbers, and a 21 multiple on the personal products industry.
Reality check—remember, you read it here first. The 10Q Detective does not believe that FY ’06—or FY ’07—estimates are tenable, which means that the valuation of Spectrum Brands will have to be re-calculated—at lower stock prices.
Although Spectrum Brands is successfully diversifying away from its dependence on battery sales, consumer batteries still account for approximately 41% of net sales [compared to 90% in FY ‘04].

The Company’s general batteries category includes alkaline and zinc carbon. Spectrum sells a full line of alkaline batteries (AA, AAA, C, D and 9-volt sizes) for both consumers and industrial customers. In the U.S. alkaline battery category, the Rayovac brand is positioned as a value brand. In Europe, the VARTA brand is competitively priced with the competition. In Latin America, where zinc carbon batteries outsell alkaline batteries, the Rayovac brand is competitively priced with the competition.
Spectrum Brands is currently the largest worldwide seller of hearing aid batteries, sold through retail trade channels and directly to professional audiologists under several brand names and under several private labels, including Beltone, Miracle Ear, Siemens and Starkey; Rechargeable batteries and chargers are sold under the Rayovac and VARTA brands; and, the Company’s specialty battery products include photo batteries, lithium batteries, silver oxide batteries and keyless entry batteries.
In August 2005, to combat significant increases in raw material costs, Spectrum Brands raised the retail prices of Rayovac brand alkaline and zinc carbon battery by 6% to 7% in the U.S. This price hike was quickly followed by its competitors, including Energizer, Panasonic (Matsushita), and Duracell (Gillette).
Zinc continues to be Spectrum Brand’s largest commodity exposure, with current per metric ton pricing significantly higher than last year. The price of zinc has more than doubled in two years, driven by commodity fund buying, weather-disrupted issues (such as the recent hurricane that disrupted Australian operations), and strong industrial demand. Prices recently touched record highs of $2,530 a metric ton for three-month delivery.
Going forward, the 10Q Detective does not believe that Spectrum Brands will be able to offset continued increases in raw material costs through cost control efforts or efficiency gains. Also, the Company continues to lose share to private label offerings, which carry substantially lower gross margins.
According to industry forecasts, demand in the $10.7 billion U.S. battery industry will grow 5.5 percent per annum through 2007. Growth will be driven by strong demand for battery-powered electronics (e.g., digital cameras, wireless phones), and increasing production of electrical/electronic equipment. An ongoing shift toward improved, more expensive batteries (e.g., high-rate primary alkaline and lithium) will also support gains.
Despite forecasted growth in the battery industry, the 10Q Detective does not believe that Spectrum Brands will see any meaningful top-line growth in THEIR battery business. The battery category remains highly competitive—for limited shelf space and consumer attention.
The Company also faces competition from the private label brands of major retailers, particularly in Europe. The offering of private-label batteries by retailers creates pricing pressure. According to Spectrum Brand’s management: “Typically, private-label brands are not supported by advertising or promotion, and retailers sell these private label offerings at retail prices below competing brands. The main barriers to entry for new competitors are investment in technology research, cost of building manufacturing capacity and the expense of building retail distribution channels and consumer brands.”

According to the China Industrial Association of Power Sources, Mainland China is the leading producer of primary batteries with an annual capacity of 19 billion units. The industry is valued at more than US$4 billion annually. There are estimated to be more than 2,000 manufacturers in the region, 300 of which export.
Industry pundits also point out that battery manufacturers in the mainland are rapidly increasing production of [higher-margin] rechargeable batteries. While China currently lags Japan and Korea for rechargeable batteries, the country is expected to become the main producer of these batteries by 2010.
Readers should know by now that unlike Wall Street analysts, the 10Q Detective does not have to play nice with any CEO, CFO, or COO. For example, the management of Spectrum Brands believes that they can capture share by engaging in an “alkaline marketing strategy in North America centered around an improved value position.”
What the h-ll does that statement mean? Correct us if we are mistaken, but the 10Q Detective believes that corporate is euphemistically saying that the Company is negotiating with its trade channels to shift to product mixes that feature larger package sizes with lower per-unit prices.
As previously mentioned, the Company is also sweating under the bathroom lights in its Remington brand personal care products segment(s), too: shaving/grooming and electric personal care products net sales fell 8.1% and 11.1% in the 1Q:06 compared to last year.
Looking ahead to the 2H:06—when analysts expect profits to ramp up—we expect the contrary to happen. Realization of forward price increases in the U.S. (which will probably happen in August 2006) will be delayed by holiday promotions, thus delaying the benefits of material cost inflation.
Spectrum Brands has grown the scope and sales of its business segments the last three years through acquisitions. For example, pet products as a net percentage of total revenue rose from nothing to 21.4 percent in the 1Q:06 compared to last year. Excluding the $133 million contribution of the pet segment, aggregate sales would have been flat with the prior year quarter’s reported $491 million.
  • .
    This strategy of growth through acquisitions is starting to leak oil. The 10Q Detective has unearthed some problems in Spectrum Brand’s engine:

  • · The Company’s substantial indebtedness could adversely affect its business, financial condition and results of operations in the coming quarters. As of September 30, 2005, long-term debt (net of current maturities) was a staggering $2.3 billion, or 275% of shareholder equity. Spectrum Brand’s times-interest-earned ratio, which shows how many times the business can pay its interest bills from profit earned, was an anemic 1.5 times (down from 2.4X in FY 2005). If you were a bondholder, contrast that to competitor, Energizer Holdings Inc, which could meet its debt obligations 11.6 times over.

  • · Sensitivity Analysis. According to corporate projections: “As of September 30, 2005, a 100 basis point rise in underlying interest rates would lead to a $7.1 million fair value loss in outstanding interest rate derivative instruments. The net impact on reported earnings, after also including the additional reduction in one year’s interest expense [due to corporate exposure to variable-rate notes outstanding] on the related debt, would be a net loss of $0.5 million.

  • · In fiscal 2005 approximately 45% of net sales and 43% of operating expenses were denominated in currencies other than U.S. dollars. The Company benefits from increases in the value of the Euro against the U.S. dollar. Significant increases in the value of the U.S. dollar in relation to foreign currencies could have a material adverse effect on Spectrum Brand’s business, financial condition and results of operations. Year-to-date, the Euro has risen 1.22% versus the U.S. dollar. However, some analysts forecast that with the Fed raising its funds rate by another 25 bps to 4.75%, and more increases likely to follow, that this should spark a renewed rally in the dollar.

  • · The Company ‘seems’ to be constantly jiggering its Net non-current Deferred Tax Liabilities—blaming the constant updates on a plethora of reasons, such as differences in book basis and tax basis of trade names to undistributed earnings of the Company’s foreign operations (which are intended to remain permanently invested to finance future growth and expansion). Shareholder Beware: Tax Tinkering can often be used to boost profits—and will inevitably invite examinations by the IRS and other taxing authorities (which could lead to Financial Restatements).

  • · PENSION PLAN CONCERNS. The Company recorded an additional minimum pension liability of $24.3 million and $16.2 million at September 30, 2005 and 2004, respectively, to recognize the under funded position of its benefit plans.

  • · Spectrum Brands is dependent on a small number of key customers for a significant percentage of its sales. As a result of retail sales company consolidations in the past decade, a significant percentage of the Company’s sales are attributable to a very limited group of retailer customers, including Wal-Mart, The Home Depot, Carrefour, Target, Lowe’s, PetSmart, Canadian Tire, PetCo, and Gigante. Wal-Mart Stores, Inc., the largest retailer customer, accounted for approximately 18% of 2005 net sales.

At an October 2005 meeting with Wall Street analysts, Wal-Mart said that it was planning a shift in its inventory strategy. According to conference transcripts, Thomas Schoewe, CFO, was quoted as saying: "Is there anybody in management here that thinks that we are doing as well as we should in managing inventory? The answer is no.” Any elimination of products and/or reduction in inventories held by Wal-Mart could potentially have an adverse material effect on Spectrum Brand’s fundamentals.

The Company has consistently attributed a stagnant consumer-spending environment as an additional reason for poor product sales. The 10Q Detective believes that the core weakness facing Spectrum Brands is management itself.

Spectrum Brands is being lead by a team that believes innovation can best drive top-line growth by acquiring it. What our readers need to know is that we believe that this boardroom of executives have confused consumer wants with consumer marketing.

On March 20, 2005, United Pet Group, a Spectrum subsidiary, announced that it had signed a licensing agreement to bring to the pet market a new canine diarrhea treatment, Canine G.I. Relief.

Sorry to disappoint, but doggie-doo-doo will not bring back profitability to Spectrum Brands. AVOID/SELL.

Monday, March 27, 2006

Gigabeam: Reversal in Fortunes

On February 15, 2006, with the stock selling at $9.oo per share, we said that there was no compelling reason to buy Gigabeam Corp. (GGBM-$10.80), a manufacturer of wireless point-to-point communications equipment designed to operate in the 71-76 GHz and 81-86 GHz radio spectrum bands, which were authorized by the FCC, in October 2003, for commercial use.
At the time, our investment thesis argued that: "although the ability of GigaBeam’s management team to integrate its WiFiber architecture with component suppliers was impressive, the backbone of corporate to bring costs in line and to reach breakeven or profitability was equally unimpressive."
"Looking ahead, we went on to say, "GigaBeam was but one of many WiFiber companies with cost-efficient “bridging” technology. The Company, with an enterprise value of $45.69 million—had a valuation grounded solely on its potential promise."

The 10Q Detective believes that there are now compelling reasons to buy GigaBeam. First, the Company has received several purchase orders for its WiFi products. Second, corporate has been aggressive in signing new channel partners to penetrate the market. Third, GigaBeam recently announced that it had received approval to trade on the NASDAQ. In our opinion, this heightened exposure that the listing offers will broaden the interest in the Company to a broader investor base.

The stock has the potential to trade higher on momentum alone. First target, $15.00 per share.

Saturday, March 25, 2006

Trumped by The Donald

On November 21, 2004, Trump Hotels & Casino Resorts, Inc. (THCR) filed for bankruptcy, buckling under the weight of trying to simultaneously service $1.8 billion in debt and overhaul aging casinos in the face of increasing Atlantic City competition from the Borgata Hotel Casino & Spa, a joint venture of Boyd Gaming (BYD-$46.27) and MGM Mirage (MGM-$41.40). This marked the second bankruptcy for Donald Trump's casino empire. In 1992, the developer's Atlantic City casinos had previously filed for Chapter 11 after collapsing under the weight of $1 billion in debt.

Effective May 20, 2005, the bankruptcy court approved THCR’s prepackaged restructuring. The Company emerged from bankruptcy, slimmed down, with $400 million less debt, a 400 basis point reduction interest costs and a more flexible capital structure

Under the restructuring plan, the company issued about 40 million shares of stock, and took a new name, Trump Entertainment Resorts Inc. (TRMP-$16.29).

Holders owning about $1.8 billion of notes exchanged them for about $74 million in cash, along with $1.25 billion of new 10-year notes and about $395 million worth of common stock. These creditors ended up owning about two-thirds of the company.

After a 1,000 for 1 reverse stock split, previous holders of common stock who were unaffiliated with the Company, saw their existing shareholder interests wiped out.

As for The Donald, after infusing the restructured company with a $55 million cash equity investment and converting $16.4 million of debt he owned into common stock, he saw his stake shrink to about 27 percent from a prior 56 percent. Although the Donald was forced to cede day-to-day control of the gaming operations to others, to the dismay of common stock shareholders, The Donald remained chairman and chief executive.

Given The Donald’s penchant for attractive women, it should not surprise our readers that the Bankruptcy Court also approved the transfer of a 25% interest in the Miss Universe Pageant to Mr. Trump.

Critics of the reorganization plan called it a "sweetheart deal" for the real estate tycoon.

“Money was never a big motivation for me, except as a way to keep score,” said Donald Trump.” The real excitement is playing the game.” [Art of the Deal]

After reviewing the Company’s recently filed Annual Proxy Statement, the 10Q believes that Trump plays the game very well.

In the DEF 14A filed with the SEC, the 10Q Detective unearthed the following material comments, listed under “Employment Agreements, Termination of Employment and Change-in-Control Arrangements:”

· Pursuant to Mr. Trump’s services agreement, Mr. Trump serves as Chairman of the Board and has agreed to participate in promotional events on the Company's behalf. The initial term of the agreement is three years, and is automatically extended so that the remaining term of the agreement is always three years, subject to the Company’s and Mr. Trump’s right to terminate the agreement in certain circumstances.

· Under the services agreement, Mr. Trump is paid an annual fee of $2 million and is eligible to receive an annual bonus at the discretion of the Compensation Committee. Mr. Trump is also entitled to reimbursement of reasonable and documented expenses incurred by him or his controlled affiliates in connection with the performance of his services. In 2005, Trump received fees and reimbursement of expenses of $1,283,000 paid under his services agreement.

· If the Company terminates the services agreement, with or without cause, at any time after the initial three-year term, Mr. Trump will be entitled to receive a lump sum cash payment of $6 million. [ed. note. When The Donald eventually leaves his new wife, 34-year old model, Melania Knauss, at least she knows there is a lump sum payment waiting for her!]

· The reorganized Company has also entered into an amended and restated partnership agreement that requires the Company to indemnify Mr. Trump up to an aggregate of $100 million for the U.S. federal income tax consequences to Mr. Trump should the Company sell or transfer any of the Company’s current properties.

· Should Mr. Trump’s services agreement be terminated by the Company other than for “cause” or if it is terminated by Mr. Trump for “good reason” and the Company does not offer terms amenable to The Donald, to continue to use Trump’s name or likeness as trademark licenses, Mr. Trump will be entitled to an annual royalty of between $100,000 and $500,000, payable quarterly—for each property [provided that the aggregate royalties will not exceed $5.0 million a year]! The 10Q Detective admits that we have never read any of The Donald’s published books, but are we missing something? Mr. Trump’s likeness and/or name on casino properties in the past did not seem to drive incremental gambling revenue or traffic through the front doors—witness the prior two bankruptcy filings!

· Mr. Trump’s private real estate organization, the Trump Organization LLC, has a three year right of first offer to serve as development manager, project manager, construction manager and/or general contractor with respect to construction and development projects with an initial budget of at least $35 million, for casinos, casino hotels and related hospitality lodging to be performed by third parties on TRMP’s existing and future properties.

TRMP currently owns and operates the Trump Taj Mahal Casino Resort, Trump Plaza Hotel and Casino and Trump Marina Hotel Casino in Atlantic City, New Jersey. On March 2, 2006, the Company reported its 4Q:05 and year-end results. For the period from May 20, 2005 (the effective date of the Company's reorganization) through December 31, 2005, the loss from continuing operations was ($36.3) million or ($1.19) per share.

The 10Q Detective decided to look at operating metrics (post-reorganization) for continuing operations for the fourth quarter of 2005 compared with the fourth quarter 2004:

  • Overall interest expense decreased by $25.0 million from $57.2 million to $32.2 million due to the decrease in debt levels and interest rates.
  • .
    The Company reported adjusted EBITDA of $27.5 million on net revenues of $234.7 million in the fourth quarter of 2005 compared to adjusted EBITDA of $41.0 million in 2004 on net revenues of $236.7 million.
  • .
    A loss from continuing operations of $(26.1) million compared to $(108.9) million last year.

The Company is now financially healthy, and is ready to begin its previously announced plans to renovate existing properties. "The sale of Trump Indiana closing in December 2005,” said James B. Perry, the new CEO and President,” gives us in excess of $228.5 million in cash and cash equivalents, and had $200 million available under the revolving credit portion of our credit facility and $150 million available under the delayed draw term loan. The first phase of our capital improvement plan is to spend some $110 million on the reinvigoration of our properties. This plan will include projects at all three of our properties, including improved restaurant and retail venues, more exciting casino floors, improved meeting and convention space and re-themed entertainment areas, as well as completing the renovation of all our rooms and suites. In addition, we plan to commence construction of a new tower at the Taj Mahal in June 2006, which should enable us to maximize operating results by taking advantage of existing capacity on the gaming floor and in our restaurant and convention facilities."

In addition to organic growth at existing properties, TRMP also looking for growth opportunities beyond Atlantic City, both domestic and internationally, that would enable the Company to leverage the Trump brand. TRMP has proposed a casino in Philadelphia and is preparing for the first set of public hearings to be held in April 2006.

The Company announced the following relating to expected financial performance in 2006:

  • 1. The Company expects to begin to see year over year gains in revenues towards the end of the first quarter as a result of the initial operational and marketing changes that have been implemented. The Company expects to see improvements in EBITDA from these changes beginning sometime in the second quarter.
    2. Interest expense for 2006 will be approximately $120 million to $125 million.
    3. In 2006, the Company expects to record a total provision for income taxes of $9 million to $11 million including non-cash charge-in-lieu of taxes of $4 million to $5 million.
    4. Capital expenditures in 2006 are estimated to be in the range of $155 to $180 million.

Analysts’ consensus estimates place 2006 EPS at $0.31 on revenues of $1.05 billion. The stock is selling at a forward P/E of 23.6 times 2007 share-net of $0.69 on revenues of $1.09 billion [witness the assumed built-in operational efficiencies going forward].

TRMP has a current market capitalization of $450.2 million, compared to $1.41 billion, $14.2 billion, and $11.8 billion of competitors Aztar Corp. (AZR-$39.38), Harrah’s Entertainment (HET$77.21), and MGM Mirage (MGM), respectively.

Is Trump Resorts undervalued? Riverboat casino operator Pinnacle Entertainment (PNK-$29.45) just announced that it will acquire Aztar, the owner of Tropicana properties on the Las Vegas Strip and in Atlantic City, in a $2.1 billion deal, including $38 per share, or $1.45 billion in cash (along with the assumption of $723 million in long-term debt and $88 million in cash on its balance sheet at the end of 2005). In choosing growth through the acquisition route, Pinnacle is paying 10 times Aztar's $212 million in 2005 EBITDA, or 21.9 times Aztars’ 2007 consensus estimate of 1.73 per share.

Trump Resorts is currently selling for 11.2 times its current enterprise value to trailing twelve-months EBITDA.

True, under performing gaming operations are a hot market—witness Harrah’s $6.8 billion deal last year for Caesars Entertainment. And according to industry analysts, consolidation and perceptions of high asset value remain themes in the gaming and lodging sector.

Our problem with Trump Resorts remains The Donald. As history has shown, Donald is out for The Donald. Despite the Company licensing Trump’s “likeness” and “brand,” we do not—at present—see any new value to the reorganized Trump Resorts gaming stock.

We would avoid Trump Resorts. If readers are insistent—put speculative monies to work in a basket of other (better-run) takeover candidates currently in play, including Ameristar Casinos Inc. (ASCA-$25.26) and riverboat and dockside casino company Isle of Capri Casinos Inc (ISLE-33.78).

As for us, since we do not plan on rolling the dice, we need not worry about rolling snake eyes!

Thursday, March 23, 2006

Executive Compensation = M.A.D. Money

In 1980, a chief executive made $42 for every dollar earned by a blue-collar worker. By 1990, according to figures published by the labor federation, the AFL-CIO, that gap was $85. But the real gains in the boardroom were made in the decade that followed as firms ramped up share options. By 2000, chief executives were earning $531 for every dollar taken home by a typical worker.

Another way of looking at the growth is that the compensation given to the top five executives in a company accounted for about 10% of that firm's earnings in 2003, compared to 5% in 1995, according to a Harvard study.

There are many controversies about executive compensation. None, however, are as colorful as the unending media coverage of the other components of an executive compensation package, which may include such perks as generous retirement plans, a dental plan, a chauffeured limousine, use of the corporate jet, interest free loans for the purchase of a house—in theory, all expenditures that come out of the pockets of company shareholders.

The stock performance of OfficeMax, Inc. (OMX-$27.96), the nation’s third largest office supply retailer, has trailed both the S&P 500 and the S&P 500 Specialty Store indices the last two years, with an annual return of (2.81%) in 2004 and (17.54%) in 2005, compared to positive annual returns for both aforementioned indices.

The Compensation Committee of OfficeMax reviews performance by using metrics including, but not limited to, revenue, sales, cash flow, EPS, ROE, ROA, margins and cost savings achieved—the 10Q Detective notes that stock performance is not on the list of objective criteria assessed.

According to disclosures in OfficeMax’s just filed Annual Proxy Statement, the top paid executives in the last two years were the following individuals:

Mr. Christopher Milliken, who served as president and CEO, beginning October 29, 2004 until February 11, 2005, “earned” $125,192 and $1,060,900 in CASH salary for 2005 and 2004, respectively; $9,634 and $396,415 in $$$ bonuses for the years 2005 and 2004, respectively.

Mr. George Harad, who served as CEO, during the period beginning February 11, 2005 through April 14, 2005 (and as executive chairman of the board until June 30, 2005), earned $576,1256 and $1,500,000 in CASH salary for 2005 and 2004, respectively; $1,500,000 and $1,542,973 in $$$ bonuses.

Mr. Sam Duncan, who became president and CEO beginning April 14, 2005, earned CASH salaries and CASH bonus paid to him last year of $588,461 and $850,000, respectively.

The incentive compensation $$$ do not even include the millions—yes millions—paid to each of the aforementioned executives in long-term compensation in the form of Restricted Stock Units and Stock Options.

Within ten days of Mr. Harad leaving the employment of OfficeMax, according to his signed Separation Agreement, the Company paid him a bonus of $1,320,000. This bonus payment was afforded to him in lieu of Mr. Harad's participation in the company's 2004 long-term incentive program after October 29, 2004, and in lieu of his participation in any of the company's 2005 incentive programs. As a retention payment for continuing to serve the company during this period, the Board of Directors also agreed to pay Mr. Harad a retention bonus of $1,500,000. At the time of his separation from service, pursuant to the agreement, Mr. Harad was also paid severance equal to three years of his annual salary ($1,100,000) and target bonus ($1,320,000), for an aggregate severance payment of $7,260,000.

For three years following the Separation Date, Mr. Harad will continue to be eligible to participate in the company's healthcare programs, including disability and accident insurance plans Mr. Harad will also receive a financial counseling allowance of $5,000 per year for three years.

For purposes of Mr. Harad's pension benefit, he will be deemed to have accrued three additional years of service in addition to any service accrued through June 30, 2005. He will also be deemed to have earned compensation for each year of the three additional years of service equal to his annual salary of $1,100,000 and target bonus of $1,320,000. This additional pension benefit has an estimated aggregate value of $4,300,000.

OfficeMax has also agreed to reimburse Mr. Harad for two years of “pretending-to-work.” He will be afforded office space and secretarial assistance in an amount not to exceed $80,000 per year!

If any payments or benefits paid to Mr. Harad are deemed to be parachute payments pursuant to the Internal Revenue Code, Mr. Harad will be entitled to receive an additional gross up payment to place Mr. Harad in the same position he otherwise would have been had the excise tax not been payable. [ed. note. Did he have a financial hardship such that he could not afford to pay the taxes himself?]

The Company disclosed under “Other Annual Compensation,” that Sam Duncan, the new CEO, received $93,211 for relocation expenses. For working eight-months in 2005, Mr. Duncan also received stock options of 180,000 shares, 39% of which fully vest in three years instead of in five-years.

On January 27, 2006, the SEC issued proposed rules amending the disclosure requirements for executive and director compensation, related party transactions, director independence, and other corporate governance matters. The public comment period on the proposed rules ends on April 10, 2006. The SEC is not expected to issue final rules until the summer of 2006 at the earliest.

One of the discussions held had to do with corporate perquisites. The current threshold for disclosure of perquisites and other personal benefits would be reduced from an aggregate value of $50,000 to $10,000 and each perquisite or other personal benefit would be identified by footnote. If a perquisite or personal benefit exceeded $25,000 or 10% of the total amount of perquisites and personal benefits, it must be quantified in the footnote.

The issues being debated by the SEC focus attention on the following: (1) the amount and type of compensation paid to chief executive officers and other highly compensated executives of public companies; (2) the degree of Board of Directors’ oversight of the executive compensation process; and, (3) will lowering the disclosure threshold affect the appropriateness, manner of review, and reasonableness of executive severance arrangements?

On March 20, 2006, ServiceMaster Co. (SVM-$12.88), the operator of Merry Maids, Terminix, Rescue Rooter and other chains providing home maintenance services, filed its DEF 14A with the SEC. The Company disclosed that effective February 1, 2006, James C. Day, the CEO, received an increase in his annual salary from $900,000 to $950,000. In accordance with the Company’s short-term incentive plan, Mr. Day was also awarded a bonus of $1,377,000 in 2006, relative to 2005 performance. ServiceMaster also paid for the annual country club dues for Mr. Day and other senior executives.

ServiceMaster disclosed in its Annual Proxy Statement that the Company’s compensation plan for executive officers was designed to “attract, motivate, and retain highly-qualified executives.”

Shareholders’—on the other hand—might just have said, let the executives walk. In the last 12-months, the shares of ServiceMaster, with a loss of (6.73), significantly under performed the S&P 500 Index, which rose 11.30 percent.

Baxter International Inc. (BAX-$38.59), through its subsidiaries, assists healthcare professionals with treatment of complex medical conditions by offering a plethora of products used to deliver fluids and drugs for cancer, hemophilia, immune disorders, kidney disease, and trauma patients. In its recent DEF 14A filing, the Company disclosed that Baxter also provided its officers with certain perquisites that Baxter believed were “reasonable and competitive.” These perquisites included: car and financial planning allowances, executive physical exams, airline club memberships and certain subscription dues. Officers could also use the company aircraft for personal travel [if such aircraft usage was pre-approved by the Chief Executive Officer]. In addition, if circumstances warranted, Baxter would also provide home security systems for certain officers.

The 10Q Detective, after examining a plethora of similar SEC DEF 14A filings, has concluded that greater Federal oversight legislation would do little to change perceived abuses in both the reasonableness of senior executives’ and directors’ base/incentive compensation and the process by which it was determined.

The 10Q Detective is more concerned with an executive compensation doctrine we call Mutually Assured Destruction (M.A.D.).

Mutual assured destruction (MAD) is a doctrine of military strategy in which a full-scale use of nuclear weapons by one of two opposing sides would result in the destruction of both the attacker and the defender. It is based on the theory of deterrence according to which the deployment of strong weapons is essential to threaten the enemy in order to prevent the use of the very same weapons. The strategy is effectively a form of Nash Equilibrium, in which both sides are attempting to avoid their worst possible outcome—nuclear annihilation.

In business, the MAD doctrine can help our readers to understand the behavior of Compensation Committees [in the last 20 years] in fulfilling their governance responsibilities to all shareholders in attracting, motivating, and retaining the broad-based management talent critical to achieving the respective company’s’ business goals.

A CEO will look around at his peers and say, “I want what they are getting.” The Compensation Committee, fearful of losing [in many cases] the executive, acquiesces and deploys the appropriate monies to deter the competition from trying to recruit the so-named executive.

Unfortunately, as with the M.A.D. doctrine in warfare, deterrence leads to escalation. The noun escalation is defined to mean: “an increase to counteract a perceived discrepancy.”

When our hypothetical executive hears that one or more peers are getting a bigger raise or more perks, our executive now wants the same package. And so the next escalation cycle has begun….

Despite the best of intentions, better disclosure in Annual Proxy Statements will do nothing to change this historically observed behavior.

  • If with the serpent wisdom we unite the serpent guile, terrible will be the damage we do; and if, with the best of intentions, we can only manage to deserve the epithet of "harmless," it is hardly worthwhile to have lived in the world at all. - Theodore Roosevelt (1858–1919) The Strenuous Life.

Monday, March 20, 2006

Life Time Fitness--A Stock Price on Steroids?

Life Time Fitness, Inc. (LTM-$46.50) currently operates sports and athletic, professional fitness, family recreation and resort/spa centers under the LIFE TIME FITNESS brand. In addition to traditional health club offerings, most of the Company’s centers include an expansive selection of premium amenities and services, such as indoor swimming pools with water slides, basketball and racquet courts, interactive and entertaining child centers, full-service spas and dining services and, in many cases, climbing walls and outdoor swimming pools.
Life Time currently operates 48 centers, primarily in residential locations across nine states. The Company operates multiple centers in several metropolitan areas, including seventeen in the Minneapolis/ St. Paul market, eight in the Chicago market, six in the Detroit market, and five in the Dallas market.

Life Time participates in the large and growing U.S. health and wellness industry, which the Company defines to include health and fitness centers, fitness equipment, athletics, physical therapy, wellness education, nutritional products, athletic apparel, spa services and other wellness-related activities.
According to International Health, Racquet & Sportclub Association, or IHRSA, the estimated market size of the U.S. health club industry, which is a relatively small part of the health and wellness industry, was approximately $14.8 billion in revenues for 2004 and 41.3 million memberships with approximately 27,000 clubs as of January 2005. Based on IHRSA membership data and U.S. Census Bureau population estimates, the percentage of the total U.S. population with health club memberships increased from 9.1%, or 24.1 million memberships, in 1995 to 14.0%, or 41.3 million memberships, in 2004. IHRSA reports that total U.S. health club memberships increased from 24.1 million memberships in 1995 to 41.3 million memberships in 2004, resulting in a compound annual growth rate of 7.9%. Over this same period, total U.S. health club industry revenues increased from $7.8 billion to $14.8 billion.
Life Time’s economic model is based on and depends on attracting a large membership base within the first three years after a center is opened, as well as retaining those members and maintaining tight expense control.

Management expects the typical membership base at the large format centers to grow from approximately 35% of targeted membership at the end of the first month of operations to 90% of targeted membership capacity by the end of the third year of operations--which, according to corporate, has been consistent with historical performance. Average targeted membership capacity is approximately 9,000 for all of the large format centers and 10,500 to 11,500 for the newer, large format centers. Generally, targeted capacity for a center is 1,000 memberships for every 10,000 square feet at a center
Average revenue at 23 large format centers that were opened in 2003 or earlier exceeded $12.1 million for the year ended December 31, 2005.
Management says that a typical capital investment for a current model center has averaged approximately $22.5 million from inception, which includes the purchase of land, the building, and approximately $2.7 million of exercise equipment, furniture and fixtures. In 2005, the cost of current model centers grew slightly, averaging approximately $23.5 million.
The Company has never closed a center, and the larger format centers produced, on average, EBITDA in excess of 21% of revenue and net income of approximately 1% of revenue during their first year of operation.

Driven by increasing membership rolls, Life Time's profit rose 63 percent to $41.2 million, as revenue climbed 25 percent to $390.1 million for the year ended December 31, 2005.

Life Time forecast a 2006 profit of $1.25 to $1.27 per share, including a stock options expenses, or $1.37 to $1.39 per share excluding items. Analysts' average 2006 estimate is $1.36 per share, up 20.3% from share-net of $1.13 reported last year.
The Company also sees a continued rise in membership and eight new outlets driving 2006 revenue growth by 22 percent to 24 percent to between $475 million and $485 million. Wall Street expects the company to post $475.5 million in revenue for the year.
Life Time plans to open eight current model centers in 2007. The new centers that the Company plans to open will be built in both new and existing markets.
Corporate believes that there is the potential for adding over 200 additional current model centers throughout the U.S. in existing as well as new markets.
At December 31, 2005, the Company had centers under construction in each of the following new markets: one each in Georgia, Kansas, and Maryland.
Existing centers built in 2004 and 2005 are not even running on all cylinders. According to Life Time, the 13 centers that opened in 2004 and 2005 averaged 58% of targeted membership capacity as of December 31, 2005. Management expects the continuing ramp in memberships at these centers to contribute significantly to targeted growth in 2006 as these centers move toward the Company’s goal of 90% of targeted membership capacity by the end of their third year of operations.

Management also believes that organic growth in centers’ products and services can make material contributions to the top-line. Life Time’s centers offer a variety of in-center products and services, including private and group sessions with highly skilled and professional personal trainers and dieticians, relaxing LifeSpa services, engaging member activities programs and a nutritional LifeCafe restaurant. These are potentially lucrative revenue streams, with a high degree of visibility.
From 2001 to 2005, revenue from the sale of in-center products and services grew from $26.3 million to $97.7 million and in-center revenue per membership increased from $173 to $300. The Company believes the revenue from sales of its in-center products and services will continue to grow at a faster rate than membership dues and enrollment fees.
Life Time is also putting in place a broad infrastructure that will enable the Company to bring further services to members and broaden top-line growth. Corporate is expanding the scale and scope of the LIFE TIME FITNESS brand through the build-out of a national presence by delivering products and services in the areas of exercise, education and nutrition. For example, the Company is growing its Experience Life magazine, leveraging an internationally recognized and award winning triathlon, and expanding its proprietary line of nutritional products.
The Company uses a centralized marketing agency to generate membership leads for its sales force, to support its corporate business plans, and to promote the Life Time brand.
Life Time has a commissioned sales staff in each center that is responsible for converting the leads generated by the centralized marketing agency into new memberships.
Buyers of Life Time common stock, however, should be aware that material risks do exist:

· Delays in opening new centers could hurt the Company’s ability to meet its growth objectives. The ability to open new centers on schedule depends on a number of factors, many of which are beyond corporate control, including but not limited to: obtaining acceptable financing for construction of new sites; obtaining entitlements, permits and licenses necessary to complete construction of the new center on schedule; and, delays due to labor issues, material shortages, and weather conditions. In 2005, membership dues and enrollment fees contributed 67.5% and 5.2%, respectively, to total center revenue.
· The opening of new centers in existing locations may negatively impact same-center revenue increases and operating margin because new centers openings may attract some memberships away from other centers already in operation [geographies]. The 10Q Detective did want to bring to our readers attention that three of the remaining six openings in 2006 will be in existing markets.
· Life Time currently has significant operations concentrated in certain geographic areas, and any move to locations in new markets will involve increases in SG&A expenses to build brand recognition, which might pressure corporate profitability.

The balance sheet is strained, primarily due to center construction costs. As of December 31, 2005, Life Time had negative working capital of approximately $(66.1) million.

The 10Q Detective is obligated to wave this red flag to our readers. Net cash provided by operating activities was $108.0 million for 2005 compared to $80.4 million for 2004. The increase of $27.6 million was primarily due to a $15.3 million increase in net income adjusted for non-cash charges. However, free cash flow from operations was $(82,624) and $(76,419) in 2005 and 2004, respectively.

The 10Q Detective anticipates free cash flow from operations to be negative in the coming quarters, too. Life Time expects capital expenditures to be approximately $220.0 to $230.0 million in 2006, of which approximately $25.0 to $30.0 million will be for the updating of existing centers and corporate infrastructure. This number could be subject to change, for corporate expects the total cost of new centers constructed in 2006 to increase above the $22.5 million average due to higher land costs and higher construction costs in other states where the Company plans to open centers.

The 10Q Detective does applaud management, for total operating expenses have held steady at 79% of net revenue in the last three years. [ed. note. No comment from an auditing point of view, but the Company's wholly owned subsidiary, FCA Construction Company, LLC, is in charge of all the constructing concerns.]

As of December 31, 2005, Life Time had total consolidated indebtedness of $273.3 million, or a total debt-to equity ratio of almost 89 percent! Readers ought to keep in mind that these debt levels, which may limit management’s flexibility in obtaining additional financing and in pursuing other business opportunities, could temper the Company’s growth prospects. As of December 30, 2005, the times interest earned ratio (which indicates how well the firm's earnings can cover the interest payments on its debt) was 5.75 times.

The 10Q Detective does acknowledge that the Company could wring needed capital out of company-owned centers through sales-leaseback financing(s). As of March 1, 2006, Life Time operated 48 centers, of which the Company leased 12 sites, were parties to long-term ground leases for four sites, and owned 32 sites.

Despite the Company being a capital-intensive, cash hog, managements’ aforementioned call for fiscal restraint does not seem to apply to senior executives.

According to the Company’s recent DEF 14-A SEC filing, Bahram Akradi, 44, who founded the Company and is the CEO and Chairman of the Board of Directors, made $870,000 in base pay last year, $467,327 in cash bonuses, and $71,652 in ‘other’ compensation. The 2005 ‘other’ amounts for Mr. Akradi included $25,852 for personal use of company aircraft, $17,837 for home connectivity, $14,443 for personal use of a company car and other car expenses, a $12,000 car allowance and $1,520 in executive medical benefits.

This does not even include the $2,485,500 in restricted stock (75,000) shares, which vest equally over a three-year period. For more on DO AS I SAY, NOT AS I DO –the perks heaped on other senior executives was just as crazy—we recommend that our readers flip to page 11 of the Company’s Annual Proxy Statement, page 11, entitled “EXECUTIVE COMPENSATION -Summary Compensation Table.”

In addition to the aforementioned perquisites, Life Time Corp. is also involved in many related-party transactions that personally benefit senior executives. For example, In October 2003, the Company leased a center located within a shopping center that is owned by a general partnership in which Mr. Akradi has a 50% interest. In December 2003, the Company and the general partnership executed an addendum to this lease whereby the Company leased an additional 5,000 square feet of office space on a month-to-month basis within the shopping center.

The 10Q unearthed why it is that Life Time has to play nice with Mr. Akradi:

The 10-Q filing reveals that Life Time has financed 13 of its centers with Teachers Insurance and Annuity Association of America. The loan documents provide that the Company will be in default if the Chief Executive Officer, Mr. Akradi, ceases to be Chairman of the Board of Directors and Chief Executive Officer for any reason other than due to his death or incapacity or as a result of his removal pursuant to the Company’s articles of incorporation or bylaws. As of December 31, 2005, $127.4 million remained outstanding on the notes.

The stock price of Life Time has climbed 73.30% in the last year, buoyed by positive surprises in sales and share-net in each of the last three sequential quarters. On a valuation basis, the stock is staring to look a little pricey. Life Time is selling for approximately 29.3 times 2007 consensus estimates of $1.59 per share (on a 2007 run-rate of $480 million). Life Time’s PEG ratio is flashing a yellow ‘go slow’ signal—at 1.42 times projected five-year compounded earnings of 25% per annum.

The stock price of Life Time is on steroids, and is tracking well above its 200-day moving average of $38.88 per share. We believe momentum players are climbing onboard, too—which should drive the stock price higher. Average daily volume in the last 10 trading days is 306,078, up approximately 50% from its spot three-month average. The time to cover short positions is approximately 11 days.

The 10Q Detective prefers to sit this one out. Granted, as previously mentioned in this report, Life Time’s revenue and EPS have room to run, but we are concerned that the current premium in the stock leaves little room for a stumble. Should the timing of new center openings fall behind schedule, fixed costs will pressure operating margins, and—we predict—the share price will tire.

Granted, Life Time offers health benefits to its members, but to its shareholders, the share price and related volatility is sure to raise their blood pressure(s)!

Sunday, March 19, 2006

Seeking Alpha Welcomes the 10Q Detective.

We wanted to share with our dedicated readers the news that The 10Q Detective has been asked to contribute content to the Seeking Alpha , a community of leading stock market and personal finance blogs:

Seeking Alpha Welcomes the 10Q Detective!
Seeking Alpha is excited to welcome the 10Q Detective..... David’s articles are longer than the average submissions to Seeking Alpha, but we think the depth and rigor of the analysis are remarkable. If he writes about a stock you own, you’ll want to read what he has to say.
[ed. note. Thank you, David Jackson, Publisher, for those kind words!]

Friday, March 17, 2006

Gum Arabic Company--IPO in the Making?

Despite the 10D Detective's recent focus on the petroleum market in Sudan, the country's primary resources are agricultural (but oil production and export are taking on greater importance since October 2000). Although the country is trying to diversify its cash crops, cotton and gum arabic remain its major agricultural exports.

Although gum arabic, a resin exuded from the acacia tree, is a little known substance to a majority of the American public, it affects almost everyone's daily lives. Gum arabic, a derivative of the acacia tree, is an important ingredient in various products ranging from soda and candy to pharmaceuticals. European traders, who imported the products from Arabian ports such as Jeddah and Alexandria, coined the term `gum arabic’ and most gum traders of the time were associated with Arab countries.

The main uses of gum arabic are in the food industries, particularly confectionery, which uses about 60% of world consumption. It is also used in flavorings and in pharmaceutical preparations as a building and emulsifying agent. Other industrial products that use technical grades of gum arabic include adhesives, textiles, printing, lithography, watercolors, paints, paper sizing and pottery glazing.

Gum arabic exports from Sudan compose 70 to 90 percent of the world's supply. The state-owned Gum Arabic Company has a monopoly on the export of the crop.
Other African suppliers of gum arabic include the nations of Senegal, Nigeria, and Mauritania, exporting 5.5%, 5.1%, and 4.9% of total world exports, respectively.

The gum arabic produced by countries other than Sudan is cheaper—but there is consensus that—alternative supplies are generally of lower quality, because the cleaning and grading are not as effectively and strictly regulated.

The US alone imports 4,000 to 5,000 tons of gum arabic from Sudan, approximately US$9 million a year.

“You don’t need a weatherman
To know which way the wind blows.”
[Bob Dylan]

Due to pressure from interested businesses, the United States House of Representatives passed legislation exempting gum arabic from the embargo. Some companies like Coca-Cola (CCE-$20.69) and Pfizer, Inc. (PFE-$26.05), reportedly rely heavily on gum arabic supplies from the Darfur region for the gum arabic used in their products.

Let us pray we do not have to invade Sudan to "guard this strategic resource." If we do find ourselves in Sudan to protect the unrestricted outflow of gum arabic, the 10Q Detective predicts that it will be under the cover of a U.N. mandate to protect the refugees in Darfur, or to seek out Osama Bin Laden and/or his associates in, "The Base," Al-Qaeda.
And while we our troops are "visiting" in Khartoum, perchance Don Rumsfield, the U.S. Secr. of Defense, could ask some of his old friends, to come into Sudan and create a blueprint for a Western-style democracy--like his footprint in Iraq--replete with a capital market system. To take it one step further, why not privatize the Gum Arabic Company--take it public in an IPO?
After all, Rumsfield has experience selling the idea of capitalism to totaletarian regimes. For example, in the year 2000, while on the Board of Directors of the global technology company, ABB Ltd. (ABB-$12.37), he approved the sale of engineering and design services and sytems' components to North Korea for two nuclear power plants!
Sending in the armed forces to seek out "WMD"--weapons of mass destruction--would probably not fly this time around with the American public. The IPO story would probably make for better headlines on Wall Street.

Thursday, March 16, 2006

Divesting from Sudan--a Moral or Investment issue?

On November 3, 1997, President Clinton issued Executive Order No. 13067, which imposed a trade embargo prohibiting American businesses from operating in Sudan and placed a total asset freeze against the Government of Sudan. The Khartoum regime had been implicated in exporting terrorism and in the prevalence of human rights violations, including slavery and the denial of religious freedom to the non-Islamic minority in the South of Sudan.

Ergo, because of comprehensive US sanctions against Khartoum, imposed in 1997, no American companies could directly operate in Sudan (these sanctions were renewed by President Bush on November 1, 2005).

Lao Tzu, a sixth century B.C. philosopher and the Father of Taoism, is quoted as having said: “there is no greater disaster than greed.” The 10Q Detective would like to add this corollary: the greater the disaster, the greater the greed!”

Significant petroleum finds were made in the Upper Nile region and commercial quantities of oil began to be exported in October 2000, reducing Sudan’s outflow of foreign exchange for imported petroleum products. Sudan's proven oil reserves are estimated at about 700 million barrels, and the country is now estimated to be self-sufficient in oil. At 60 dollars per barrel, the value of the oil would come to 42 billion dollars. Actual oil reserves range from 300 million to 3 billion barrels, however, depending on definition and opinion.

Sudan currently produces between 312,000 barrels and 500,00 per day (b/d) of oil, which brought in about $1.9 billion in 2003 and provides 70% of the country’s total export earnings. Although final figures are not yet available, these earnings may have risen to an estimated $2 billion as of the end of 2004.
There are indications of significant potential reserves of oil and natural gas in southern Sudan, the Kordofan region and the Red Sea province.
Soon after U.S. firms were ordered out of Sudan in the late 1990s by then-President Bill Clinton, foreign oil companies rushed in and began producing and exporting the African nation's vast reserves of crude oil. Other firms entered Sudan to build roadways, pipelines and dams. [ed note. China-that bastion of human rights & personal liberties—and its state-owned firms have made billions developing the infrastructure of Sudan—in the Northern part of the country].

The ongoing civil war has displaced more than 4 million southerners.

In 2003, after decades of economic and political marginalization, the war exploded in the Darfur region, which is located in the western part of the Sudan. Exiled Sudanese rights activists and Human Rights Watch allege [with a fair amount of evidence to back up their claims] that the ongoing conflict in Western Sudan's Darfur region is not the result of escalating ethnic polarization at the local tribal level—as claimed by the Government—but deliberate ethnic cleansing—read genocide. The Khartoum government allegedly supports Arab militias in their massacre of Fur and other indigenous people termed "slaves".

The 10Q Detective recommends that its readers check out the writings of a domestic, grass-roots organization, called South Sudanese Friends International (SSFI), for a primer on the role that oil and energy-related companies have played in the chaos and murder playing out in the Sudan: “To the extent that the oil has actually generated revenue, that revenue has been used up in the war, along with many lives of both northern and southerners. The South has lost the schools it once had and gained nothing but the roads and pipeline needed to remove the oil. If the oil suddenly disappeared, Sudan would be a far happier country.”

On the first day of oil export shipments in 1999, an import shipment of 20 Polish T-55 tanks arrived in Port Sudan.

The 10Q Detective—in addition to our moral outrage—feels it appropriate to spotlight the Sudan because there are investment considerations for readers to consider, too. We are not going to get involved in a “slippery slope” discussion—why talk only about corporate culpability and malfeasance in Khartoum? Why not China or Iraq?

Organizations of all stripes and colors have launched divestment campaigns that target the European and Asian multinational corporations that provide critical economic, commercial, and financial support to Khartoum Investors ought to be aware that they might hold positions in companies that could face divestment-related selling pressures in the coming months:

“The Sudan divestment campaign, which included the consideration of divestment bills in one-fifth of U.S. state legislatures in 2005, shows no signs of tiring in 2006…. In the past four weeks alone, Yale and Brown have agreed to divest of some of their assets in Sudan, with Brown pledging total divestment....”

Much of Sudan is being explored for oil, including the Upper Nile and the Suakin region near the Red Sea. The problem in correctly identifying divestiture candidates is that business organizations ‘officially’ registered in Sudan can be hard to identify. It is a complicated and interlinked web that is weaved. There are both private and government-owned companies, and many of them have subsidiaries or joint ventures with different names.

As a service to our readers, the 10Q Detective has culled a listing [though not complete] of possible U.S. exchange and O-T-C-traded stocks being targeted for divestment:


  • In May 2004, ABB Ltd. (ABB-$12.37) announced a $16 million project to strengthen Sudan’s national power grid at the Merowe hydroelectric power station, according to Genocide Intervention Network. The company has signed contracts totaling more than $36 million in the country.

    Alcatel SA (ALL$14.52), the French telecommunications giant, offers commercial telecommunications support that benefits Khartoum, and the immediate environs of Khartoum; yet [allegedly] has no plans to rollout supporting infrastructure in the rest of Africa’s largest country.

    Alcatel SA said it's been urged by some U.S. investors to stop activities in Sudan, though the French telecommunications equipment maker plans to continue to do business in the war-torn African nation. “A divestiture would be counterproductive to helping the Sudanese population, said the Company. “We sincerely hold the view that our limited operations in Sudan help foster the dissemination of communication services to the population as a whole and as such, our activities help promote democracy and economic development.” [GAG!]
  • .
    BP AMOCO (BP-69.92) invested $1 billion to take a 2% stake in PetroChina (the biggest oil exploration concern in the Sudan). [ed. note. Talk about an end-run!]. The Company also has more than US$4 billion in commercial projects in China, and has recently signed a deal with a major Sudanese investor, China-based Sinopec, for a petrochemical deal worth at least $68.5 million.
  • .
  • BNP Paribas (BNPQY.PK-$45.40), Merrill Lynch (MER-$78.72), Citigroup, Inc. (C-$47.18), Goldman Sachs Group (GS-$149.42), and UBS AG (UBS-$109.60)—are among a legion of global banks alleged to have underwritten [either directly or indirectly] loans for companies needing monies to do business in Sudan.

    Eni SPa (E-$57.04), Italy’s largest energy exploration company is engaged in the exploration and production of hydrocarbons in North and West Africa.

    Hyundai Motor Company Ltd. (HYMLF.PK-$57)

    Lundin Petroleum AB (LNDNF.PK-$11.25), and its partners, Austrian OMV and Malaysian Petronas, have never made—according to Human Rights Watch—public statements condemning the displacement, destruction, or other abuses brought about by oil development in their issued energy exploration parcels (blocks). Lundin claimed, however that [local] people were grateful for the road(s) the Company built in its block 5A.

    PetroChina Ltd. (PTR-98.85), the renamed subsidiary of China National Petroleum (CNPC), went public in April 2000. Goldman Sachs was the lead underwriter in the deal. PetroChina is believed by most activists to essentially be a capital market surrogate for China National Petroleum Corporation (CNPC)—also considered by the divestment activists to be the dominant and most ruthless international player in Sudan’s oil sector.
  • .
  • [Goldman Sachs failed in 2000 to secure a $10 billion Initial Public Offering for CNPC, so the Wall Street firm created a so-called financial “cut-out,” which became the new entity “PetroChina”: it is PetroChina, wholly controlled and 90%-owned by CNPC.
  • .
    Royal Dutch Petrol (RDS.B-$65.27) owns a refinery in Port Sudan. The newest refinery is at El-Geili, 44 miles north of Khartoum.
  • .
    Schlumberger Ltd. (SLB-$120.54) is the world's leading oilfield services company supplying technology, project management, and information solutions that optimize performance in the oil and gas industry. In 2005, Schlumberger’s operating revenue was $14.31 billion. The company employs more than 60,000 people of over 140 nationalities operating in more than 80 countries. And if you read the Company’s 10-K, you will not find any corporate-owned property in Sudan. The 10Q Detective, did, however, find Schlumberger Overseas SA Branch registered in Khartoum, Sudan. As the Company employs a plethora of attorneys with I-Qs in the high triple-digits, we doubt that SLB is violating any trade sanction regulations.

  • Siemens AG (SI-$92.55), Germany’s electronic conglomerate, is presently building outside Khartoum the world’s largest diesel-powered electrical generating plan. The Company has signed contracts totaling more than $180 million in Sudan.

    Sinopec Shanghai Petrochemical Co. Ltd (SHI-$60.00) also known as, Sinopec, is another subsidiary of China’s biggest oil refiner, China Petroleum and Chemical Corp. Sinopec is the major contractor in a $65.5 million pipeline that will carry oil from the Melut Basin in Eastern Upper Nile (southern Sudan) to Port Sudan on the Red Sea, allowing the Khartoum regime to boost its petroleum exports substantially.

    Norway’s oil & gas exploration company, Statoil ASA (STO-$26.77).

    Stolt Nielsen SA (SNSA-$33.82), is one of the world's leading providers of transportation services for bulk liquid chemicals, edible oils, acids, and other specialty liquids. The Company, through the parcel tanker, tank container, terminal, rail and barge services of its wholly owned subsidiary, Stolt-Nielsen Transportation Group, provides integrated transportation services for its customers. The Company just announced that it is building a petrochemical terminal in Tianjin, China.

    Talisman Energy (TLM-$53.47), the Canadian oil & gas company owns a 25% stake in the biggest oil Company operating in Sudan, (GNPC) Great Nile Petroleum and Oil Company. GNPC is a consortium of energy characters that include the China National Petroleum Company, Petronas (owned by the Malaysian government), and Sudanese-owned Sudapet.

    Talisman justified its presence in Sudan—and argued even that its withdrawal would be “immoral”—on the grounds that it undertook community development programs for the dwindling population, and because of the unsubstantiated claim that “development” would be beneficial and would bring peace.

    TAFNET (TNT-$107.10), a Russian oil & gas exploration company that also has a history of allegedly trading Russian firearms for oil!

    France’s energy concern, Total SA (TOT-$129.30).

Social and moral issues aside, the 10Q Detective wanted to find out—strictly from an investment perspective—what might be the wealth effect to investors from divesting in companies that do business in Sudan?

Perhaps the history of growing public protestations and scaling up of divestments from South Africa in the apartheid era of the late 1970s to 1985 could provide a model to our readers:

In 1992, Christopher Ngassam, at the University of Delaware, wrote, “An Examination of Stock Market Reactions to U.S. Corporate Divestitures in South Africa.”

Mr. Ngassam’s conclusions: The findings of this study indicate that divestment of South African assets have a negative effect on stockholder wealth for the firms involved. However, we also find that when the sample is restricted to firms that withdrew after 1985 during the period of mounting divestment pressures, the negative wealth effects are more pronounced. When the sample is divided into large versus small divestitures, we find that shareholders of large divestitures experienced significant negative annualized returns while shareholders of small divestitures did not.

The 10Q Detectives read:

  1. If an investor believes that the divestment debate will become more pronounced, the investor might look to re-align their portfolio sooner--rather than wait.
  2. If monies invested in Sudan do not have material impact on aggregate assets on the company's balance sheet, then an eventual divestment of these assets from the Sudan probably will carry an insignificant intrinsic risk to the Company's stock price. For example, most of the oil companies mentioned by name in our report have proven oil and gas reserves worth billions of dollars. Ergo, independent of when and if they choose to divest of any reserves found in the Sudan will not impact the companies' stock prices [i.e. insignificant wealth effect]. Now if we were talking about a small-cap company that was "betting the farm" on creating shareholder riches by discovering oil in Sudan--divesting would most certainly have an adverse wealth effect.
Divesting,therefore, becomes a moral debate--not an investing issue.

Tuesday, March 14, 2006

Martek Bioscience--Premium-Priced, Like West Texas Crude!

Last week, Martek Biosciences, Corp. (MATK-$34.24), the maker of microalgae-derived oils used in baby formula and dietary supplements, announced results that topped Wall Street forecasts, despite a decline in both profit and revenue.
Martek Biosciences Corp. said that that for the first quarter ended January 31, 2006, its profit slipped 21 percent, but results came in ahead of expectations. The Company earned $5.6 million, or 17 cents per share, down from $7.1 million, or 23 cents per share last year. Revenue for the quarter was $62.9 million, down 5 percent from $66.5 million last year.
The decrease in the quarter compared to the first quarter of fiscal 2005 was primarily due to a previously disclosed build-up of inventory by certain customers in the three months ended January 31, 2005, which corporate now believes has since been substantially eliminated.
Analysts polled by Thomson Financial had expected the company to earn, on average, 13 cents per share on $61.3 million in revenue.
Martek has entered into license agreements with 21 infant formula manufacturers, who collectively represent approximately 70% of the estimated $8.5 to $9.5 billion worldwide wholesale market for infant formula and nearly 100% of the estimated $3.0 to $3.5 billion U.S. wholesale market for infant formula. Customers include infant formula market leaders Mead Johnson Nutritionals, Nestle, Abbott Laboratories, Wyeth and Royal Numico, each of whom is selling infant formula fortified with Martek’s nutritional oils, which contain DHA (docosahexaenoic acid).
DHA, an omega-3 fatty acid, is the prominent structural fatty acid in the gray matter of the brain and retinal tissues of humans, as well as other animals. DHA is vital for normal brain development for the fetus and infant and for the maintenance of normal brain function throughout life. Whether to supplement infant formulas in the U.S. continues to be a matter of considerable controversy.
DHA is found primarily in tuna, salmon and deep-water fish, and in some algae. DHA is found in fish, primarily tuna, salmon and deep-water fish, but with the threat of mercury contamination, the safest route for DHA supplementation, according to Martek, is a non-fish source, such as algae.
Martek manufactures oils rich in DHA through a fermentation and oil process at manufacturing facilities located in Winchester, Kentucky and Kingstree, South Carolina.
Martek is also expanding its DHA footprint by signing manufacturing deals to sell its branded DHA for use in foods, beverages, and nutritional supplements.
In 2005, Hidden Villa Ranch began selling Gold Circle Farms liquid egg whites containing Martek’s DHA and Vincent Foods launched Oh Mama! nutritional bars for pregnant and nursing women.
In February 2006, the Company and Odwalla, Inc. announced that Odwalla would launch Odwalla Soymilk, which features Martek-branded DHA. Odwalla Soymilk is the first soymilk in the United States to contain DHA.
GlucoBurst, a diabetic drink, and CITRACAL prenatal vitamins, are two other new products launched that are fortified with Martek’s DHA.
The Nutritional Products Group of Martek also specializes in the research and development of another nutritional fatty acids, ARA (arachidonic acid). ARA is a principal omega-6 acid that is present in the membranes of the body's cells, and—like DHA—is highly enriched in the brain. It is a precursor in the production of eicosanoids ( the prostaglandins, thromboxanes, prostacyclin, and leukotrienes. Eicosanoids are important in immunity, blood clotting and other vital functions in the body. Since little or no ARA is found in plants, humans obtain ARA by eating foods such as meat, eggs and milk.
Martek has signed worldwide license and supply agreements with Mead Johnson, Nestlé, and other manufacturers relating to the use of Martek DHA and ARA in infant formulas.
Encouraged by better-than-expected first quarter results and positive analyst commentaries, investors have driven the shares of Martek up almost 13% since its March 7 earnings report.
Citigroup analyst Elise Wang—for one—told clients in a report that the Company's revenue is already tracking above the $235 million low end of Martek's guidance for the year. “New deals and expansion in the company's infant formula market will likely serve as catalysts for the stock,” she said.
Wang rates the stock a "Buy" with a $48 target price.
Despite the Company’s intent to expand the scale and scope of its operations, the 10Q Detective warns its readers that substantially all of the product sales in the quarters ended January 31, 2006 and 2005 relate to the sale of nutritional oils for use in infant formulas.
Approximately 85% of product sales in the quarter ended January 31, 2006 were generated by sales to Mead Johnson Nutritionals, Abbott Laboratories, Nestle and Wyeth. Albeit corporate cannot give precise information by its customers as to the countries in which infant formula containing Martek oils are ultimately sold, management estimates that approximately two-thirds of the sales to infant formula licensees for the three months ended January 31, 2006 related to sales in the U.S.
The first infant formulas containing Martek oils were introduced in the U.S. in February 2002 and, as of January 31, 2006, corporate estimates that formula supplemented with its oils had penetrated approximately 79% of the U.S. infant formula market.

The 10Q Detective unearthed the following item in Martek’s recent 10-Q filing:

  • .
    ....the Ross Products Division of Abbott Laboratories, a significant Martek licensee and customer, filed a generally recognized as safe notification on January 2, 2002 seeking Food and Drug Administration (“FDA”) concurrence that its fish oil source of DHA and its fungal source of ARA are generally recognized as safe when used as ingredients in infant formula. At this time, the notification continues to be under consideration by the FDA.

If and when the FDA approves labeling for Abbott Lab’s infant formula subsidiary, the 10Q Detective expects Abbot Labs to back away from use of Martek’s branded DHA, and for revenues to materially decline.
Martek is dependent on a single third-party supplier for its ARA (with whom the Company has a contractual relationship). If this supplier of ARA, Netherlands’-based DSM Food Specialties is unable to supply Martek with its required amounts of ARA or if an over-capacity situation by the supplier leads to higher cost ARA, results of operations and/or financial position may be adversely affected.
Martek spent 8.7% of net revenue of $62.9 millions on R&D. Costs increased by $700,000 or 14% in the 1Q:06, as compared to the quarter ended January 31, 2005. The increase is attributable to $400,000 of non-cash equity-based compensation charges in the most recent quarter and to costs incurred on clinical studies focusing on the cognitive benefits of DHA. Readers ought to be aware that management expects (as we do), for R&D expenses to increase during fiscal 2006 as ongoing clinical studies increase in scope.
In addition, through Martek’s collaboration with a Canadian biotechnology company, corporate continues to expend amounts in the development of DHA products from plants. If certain milestones are achieved during fiscal 2006 in connection with this collaboration, Martek would be required to make and expense a milestone payment in the current fiscal year of up to $2.5 million.
Selling, general and administrative costs (SG&A) increased by $1.7 million or 21% in the quarter ended January 31, 2006 compared to last year. The increase was attributable to ($600,000) in non-cash equity-based compensation charges, personnel costs (increase of $700,000), legal costs (increase of $200,000) and costs associated with Sarbanes-Oxley Act compliance (increase of $200,000).
We anticipate that operating margins will shrink further in upcoming quarters as additional marketing costs are incurred related to new personnel and promotional campaigns, primarily in support of international infant formula expansion and growth in the foods and beverages market. Legal dollars will also increase, too, for the Company is continually under assault from would-be competitors and must litigate patent-infringement related-matters.
Despite the aforementioned investor giddiness and Wall Street analysts’ positive reviews, the price of Martek’s common stock is down (41.33%) in price in the last 52-weeks. That said, for shareholders’ owning the stock at much higher prices, there might be some soap opera-like antics and protestations waiting to spill out at the Company’s Annual Shareholder meeting to be held on March 16, 2006.
The 10Q Detective had an opportunity to review Martek’s recent DEF 14-A Filing with the SEC.

  • One of the two proposals to be voted on is the election of two Class II Directors for the term expiring at the 2009 Annual Meeting of Stockholders. Henry Linsert, Jr., CEO, and George P. Barker, General Counsel, or each of them acting singularly in the absence of the other, are proxies whom are instructed in the absence of specific instructions, to vote “FOR” proposal 1 and in the discretion of the proxy holders as to any other matters.

Why should this be of any unusual interest? One of the two director nominees, Robert J. Flanagan, who currently is both on the compensation and the nominating committees, is an affiliated outsider. He is an executive vice president of Clark Enterprises, whose wholly owned subsidiary Clark Construction, provided $6.8 million in building and project management services to Martek as of December 31,2005, to expand the latter's Kingstree, S.C. DHA production facility.
The Board has determined that: (i) all Director nominees are independent under the NASDAQ Stock Market’s listing standards and (ii) except for Messrs. Linsert and Jerome Keller, Senior VP-Sales & Marketing, all directors continuing in office at the 2006 Annual Meeting are independent under the NASDAQ Stock Market’s listing standards.
According to Merriam-Webster’s Collegiate Dictionary [11th edition-2004), the definition of independent is: "not affiliated with a larger controlling unit."
Perhaps the SEC & NASDAQ have their own nominal definition, for the 10Q Detective adamantly believes that Mess. Flanagan, whose construction company has made $6.8 million in services provided to Martek, and who owns 362,705, or 1.1% of shares outstanding, cannot be considered a casual, or an outside observer.
Executive compensation is sure to be brought up by disgruntled shareholders’, too. Reflecting the troubled operating environment in 2005, the price of Martek’s stock price fell from $51.20 to $24.69, a loss of almost 52 percent!
Still, the Board of Directors, at the recommendation of the Compensation Committee [see Flanagan, Robert: Member — Compensation Committee, Nominating and Corporate Governance Committee], voted to hand out bonuses to the top five executives, Messrs. Linsert, Dubin, Keller, Buzy, and Barker—they were paid [excluding stock options] $133,238, $104,458, $81,009, $81,009, and $86,959, respectively.
The shares of Martek have moved up 24 percent since the start of the year, and currently trades at a forward multiple of 51.89 times 2007 share-net of $0.66, on estimated sales of $292.6 million. In our opinion, apparent in the current share price is built-in optimism that past inventory issues are a lesson learned, ample growth prospects in the company's infant formula market still exist overseas, and that new product introductions, such as products developed to promote cognitive function and cardiovascular health, will be successful.
Investor and analysts’ enthusiasm also fed on Martek’s pronouncement. The belief that DHA-branded O-T-C products for improvement of cognitive function, cardiovascular health or other health applications, whether packaged in the food and beverage market or the dietary supplement market, is still in its infancy—and “annual sales will continue to expand and could ultimately represent a larger potential market than infant formula.”
We remind readers to come back from the Twilight Zone, for even though clinical data are not required to market food and beverage ingredients or dietary supplements outside of the infant formula market, clinical studies may be needed to validate the benefits of DHA supplementation in order to gain widespread entry into these markets.
Hello? Are you listening Wall Street? Also, substantially all of the Company’s product sales in the quarters ended January 31, 2006 relate to the sale of oils for use in infant formulas, for which barriers to entry are limited.
The 10Q Detective is not certain, too, that the Wall-Street analysts who optimistically raised forward sales/EPS even took the time to read Martek’s recent 10-Q filing:

  1. .
    We [Martek] are currently in and may continue to face a period of excess production capacity. When experiencing excess capacity, we may be unable to produce the required quantities of oil cost-effectively, which could have a material adverse effect on our product margins and overall profitability….
  2. Infant formula pricing is very competitive and the market is very sensitive to product price changes. Because the inclusion of our oils into infant formula may add 10% to 20% to the retail cost of standard infant formula, there is the risk that our licensees may not be able to sell supplemented products at prices that will allow them to gain worldwide market acceptance while, at the same time, remaining profitable. This may lead to price pressure on us. If we have to reduce our prices, we may not be able to sell products at a price that would enable us to be profitable.....

Martek estimates that approximately two-thirds of its sales to infant formula licensees for the three months ended January 31, 2006 relate to sales in the U.S. Ergo, corporate believes ample room exists to grow the Company’s branded nutritional oil sales overseas, particularly in Asian countries.

Suntory Limited, Cargill Inc., through a joint venture with a company in China, and other independent Chinese manufacturers are producing and distributing a fungal source of ARA. In addition, it is probable that there may be manufacturers in China attempting to produce an algal source of DHA. And other companies, several with greater financial resources than Martek, are developing plant-based DHA and other companies are developing chemically synthesized DHA.

First Albany Capital analyst David Webber said the stronger-than-expected results prompted him to upgrade the stock to a "Buy" from "Neutral." Martek also forecast "record" second-quarter revenue, he said. Webber had downgraded the stock back in September, citing concerns over the company's production and international business. "With improved guidance, orderly manufacturing, and equilibrated customer inventories, the biggest problems of the recent past appear less threatening," the analyst wrote in a client note.

Technically, the price of Martek has broken through resistance at $31.75 (200 day-moving average). In our opinion, the price of Martek will probable pop another 5 percent to 10 percent in the coming weeks, for there a possible short-squeeze in play, too [short ratio: 10.3].

Mark Twain liked to say: “Whenever you find yourself on the side of the majority, it's time to pause and reflect.”

Readers—it’s time to pause and reflect.

R&D spending does not necessarily raise innovation success, and securing new networking deals are not in of itself sufficient to guarantee consumer acceptance of Martek’s new DHA-branded products. All said, the 10Q Detective believes that it is not the known, but the unknown, that will serve as the catalyst to unravel Martek’s current price.

The stock is priced for the perfect execution of new product rollouts, no FDA interference of purported health labeling, and continued sequential improvement in sales driven by mommy or mommies-to-be demand.

West Texas Intermediate (WTI) crude oil is of very high quality and is excellent for refining a larger portion of gasoline. Its API gravity is 39.6 degrees (making it a “light” crude oil), and it contains only about 0.24 percent of sulfur (making a “sweet” crude oil). WTI is generally priced at about a $2-per-barrel premium to the OPEC Basket price.

What has WTI to do with DHA/ARA? Answer: Both are known as premium “oils.” Martek’s oils, though rich in DHA or ARA, are not WTI—and the stock should not carry a premium price!