Tuesday, April 29, 2008

Stryker Corp: A Hip Stock for An Uncertain Market

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

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

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

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

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

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

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

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

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

Shares of Gum Maker Wm Wrigley Regains Flavor!

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

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

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

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

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

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

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

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

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

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

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

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

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

Sunday, April 27, 2008

Trading Alerts: Monday, April 28, 2008

"If you're looking for hidden environmental stocks, look no further than the suppliers of The Boeing Co (BA-$84.84)," Jim Cramer told fans of his "Mad Money" TV show Friday. He singled out Precision Castparts (PCP-$120.59) and BEA Aerospace (BEAV-$39.50) as two Boeing suppliers for the new 787 Dreamliner that could appreciate in price significantly.

Bristol-Myers Squibb Co (BMY-$22.15) and Medarex Inc (MEDX-$8.01)
will delay the Biologics License Application (BLA) submission for ipilimumab, an investigational immunotherapy for patients with advanced metastatic melanoma. The FDA has requested additional overall survival data to further demonstrate the benefit of the biotechnology drug. Revised timelines are under development, but a BLA for the monoclonal antibody will not be submitted to the FDA in 2008.

Cooper Tire & Rubber Co (CTB-$14.70) said its first-quarter March earnings would be "considerably below expectations" due to the U.S. economic slowdown and higher raw material costs, according to an
8-K regulatory filing with the SEC on Friday. Initiatives taken by CTB to improve its product mix and cut costs did not offset forecasts of lower replacement tire volumes. Analysts surveyed by Thomson Financial expected the Ohio-based tire company to post earnings of 20 cents a share for the quarter ended March 31.

Deerfield Capital (DFR-$1.32) has
reduced leverage to improve its liquidity position and will not pay a dividend in the first quarter of 2008 to preserve cash. No surprise, for its trailing-twelve-month dividend yield (based on the REIT’s current price) was 182.60 percent!

executive exodus from troubled online brokerage E-Trade Financial Corp (ETFC-$4.00) is continuing, with the chief financial officer's and general counsel's departures announced Friday as the company grapples with massive losses stemming from its hemorrhaging mortgage business.

Humana Inc (HUM-$44.88) reports earnings for the
first-quarter on Monday. In March, the Louisville, Ky.-based health insurer nearly halved its first-quarter earnings estimate due to higher-than-expected claims in its stand-alone Medicare prescription plans. Analysts polled by Thomson Financial, on average, now forecast earnings of 45 cents per share on sales of $6.94 billion.

MasterCard (MA-$237.39) is estimated to report a profit of $1.98 a share in the first quarter, according to FactSet Research's poll of analysts. Wall Street will value the credit card provider on free cash flow generated and credit/debit purchase volume(s).

Derivatives brokerage MF Global Ltd (MF-$12.55) is
weighing the sale of 10% in common stock to a handful of private equity players, a source close to the situation and a senior industry banker monitoring the circumstances from Europe told dealReporter.

Osteotech Inc (OSTE-$4.58) announced that
the FDA cleared its Plexur P Biocomposite for use in spinal applications as a bone void filler and as a bone graft extender. The skeletal graft and stabilization products maker previously received FDA clearance for the use of Plexur P in filling bony voids of the pelvis and extremities.

Following the stock market close on Monday, Plum Creek Timber Co (PCL-$42.65) is expected to report first-quarter earnings of 20 cents a share, analysts surveyed by FactSet Research said. The timberland owner
slashed its earnings forecasts on April 1 due to delays in land sales and weak demand for lumber.

RadioShack Corp. (RSH-$17.50) is projected to post a
first-quarter profit of 29 cents a share on Monday, according to analysts surveyed by FactSet Research. Struggling with tough competition from other consumer electronic retailers and discount stores such as Target Corp, Wall Street is keen to see how the company’s turnaround plan (which includes a shift in merchandise mix, aggressive cost-cutting, and inventory initiatives) is fairing. Beholden to a decaying business model and a slowing economy, on average, analysts believe it unlikely the electronic retailer can improve sales over coming quarters.

Drugmakers Schering-Plough Corp (SGP-$18.64) and Merck & Co (MRK-$40.72) said
the FDA rejected a proposed allergy/rhinitis drug that would have combined two best-selling drugs, Claritin and Singulair into one tablet.

STMicroelectronics NV (STM-$11.60) is likely to report a first-quarter profit of 19 cents a share, FactSet Research said. In January, the
chip maker said it expected a decline in revenues in the first quarter of between 5 and 11 percent compared to the previous three months, in line with seasonal patterns and forecasts. The gross margin is expected to be about 36.3%, plus or minus 1 percentage point.

Sysco Corp (SYY-$28.12) is forecast to post earnings of 38 cents a share for the fiscal third quarter, according to FactSet Research. Sentiment in the foodservice provider has been negative, with the share price trading off its two-year low, due to investors lumping the stock in with the depressed restaurant dining group.

The owner of the New York Daily News, developer Mortimer Zuckerman, offered $580 million to acquire Newsday from Tribune Co. (TRB-$33.98),
matching a preliminary offer submitted earlier in the week for the Long Island Newspaper by Rupert Murdoch’s News Corp (NWS-$18.33).

Tyson Foods (TSN-$18.15) has not offered any guidance for its second-quarter. Analysts polled by Thomson Financial, however expect earnings of 1 cent per share on revenue of $6.69 billion. When the meat producer
reports on Monday, investors will be watching to see how much grain costs cut into profits this year at the meat producer. Wall Street will also be looking to see if consumers balk at price increases.

United Airlines parent, UAL Corp (UAUA-$15.21), is
nearing a decision about its potential merger partner, which industry watchers familiar with the talks believe to be carrier Continental Airlines (CAL-$17.22).

Wm Wrigley Jr. Co (WWY-$62.45) is projected to post a first-quarter profit of 55 cents a share, according to FactSet Research. Weighting down the share price of the stick gum maker is lingering concern of too much inventory at retailers/distributors.

Verizon (VZ-$ 37.04) is expected to report
first-quarter earnings of 62 cents a share on Monday before the opening bell, according to analysts surveyed by FactSet Research. Investors will be looking for sequential subscriber growth in broadband, wireless, and demand for the telecom company’s services (Average Revenue/Subscriber). Industry watchers predict net broadband subscriber growth of 272,000 (down 144,000 Y/Y), wireless net adds of 1.5 million, and 2% Y/Y growth in ARPU to $50.95.

Visa Inc (V-$75.10) reports its fiscal
second-quarter earnings on Monday. Analysts polled by Thomson Financial forecast earnings of 46 cents per share on revenue of $1.45 billion, on average. In 2007, the credit card processor handled more than 44 billion transactions totaling more than $3.2 trillion. Catalyst for a price move will be the company's guidance for forward growth prospects, including transaction volume, in a slowing economy.

Yahoo! Inc (YHOO-$26.80) let Microsoft's (MSFT-$29.83) deadline for a response to its $40 billion-plus offer for the Sunnyvale Internet company
elapse without a word Saturday, putting the ball back in the software giant’s court.

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

Saturday, April 26, 2008

Future Blurry for LASIK Providers?

A number of concerns had been raised about patient satisfaction with the vision correction procedure, known as laser-assisted in situ keratomileusis, or LASIK. At a public meeting held today in Maryland, the FDA eye-related panel examined the relationship between LASIK complications and quality of life issues, hearing testimony from Lasik eye surgeons and patients of the surgery who have suffered from a variety of issues, including blurred vision and dry eyes.The committee also heard from a father whose son committed suicide after suffering from psychological problems (the result of post-op chronic eye pain and blurred vision).

Companies that could be affected by the meeting include Lasik device makers such as Advanced Medical Optics Inc (EYE-$20.33) and Lasik providers such as TLC Vision Corp (TLCV-$1.20), and LCA-Vision Inc (LCAV-$12.47).

LASIK procedures are considered relatively safe, with the number of complaints to the FDA about the outcome of LASIK surgery reported to the FDA since 1998 through 2006 at about 140—out of an estimated 7 - 8 million laser corrective procedures.

Regulators have no direct control over physicians who handle the patients.

Nonetheless, regulators will debate whether educational materials—listing the most
common side effects of LASIK surgery—provided to patients considering the procedure require changing. At present, most brochures do not warn that about 25% of patients considering the procedure are not good candidates (such as those with large pupils and severe astigmatism).

Few Growth Catalysts for LASIK Providers

In our view, operators of these laser vision centers—given the lack of multiple growth drivers—need be concerned about adverse publicity affecting traffic and (incremental costs of defending against) class action lawsuits clouding forward earnings visibility, for both outcomes will pressure company margins, which are already hurting from competitive pricing issues and a slowing economy (given that these procedures are elective).

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

Friday, April 25, 2008

Barnes & Noble Gift Card Keeps Giving and Giving to Chairman Riggio

Leonard Riggio is widely known as a visionary in the bookselling industry, having acquired the flagship Barnes & Noble, Inc (BKS-$31.98) bookstore in 1971 and building it into the largest specialty book retailer in the United States. The company operates 798 stores in 50 U.S. states, with retail store sales of $4.6 billion in FY 2007 (ended February 2, 2008).

Mr. Riggio is a brilliant entrepreneur, helping to resurrect GameStop Corp (GME-$55.97), the largest video game retailer in the world, from Chapter 11 reorganization in November 1996.

Riggio, who beneficially owns approximately 27.6% and 8.6% of the common stock of BKS and GME, respectively, is a savvy marketer, too—of his own self-interests.

What you become directly influences what you get ~ Motivational speaker E James Rohn

In addition to earning more than $1.0 million and approximately $460,000 per annum as Chairman of BKS and a director of GME, respectively, Riggio earns millions more per year from other relationships and transactions, according to a BKS filing Thursday with the Securities and Exchange Commission.

  • Riggio is the principal beneficial owner of MBS Textbook Exchange, Inc (MBS), which is the largest used textbook wholesaler, bookstore systems provider in the U.S, distributing new and used textbooks to more than 4,000 colleges and universities nationwide.

BKS purchases textbooks directly from MBS, with aggregate purchases of $7.5 million and $6.9 million for FY 2007 and FY 2006, respectively.

  • Since 1965, he has been CEO and the principal stockholder of Barnes & Noble College Booksellers, Inc, the scholastic sister company of BKS, operating more than 600 college and university campus bookstores across the United States and in Canada. In addition, BKS operates Textbooks.com, a college campus-focused online retailer, owned by Riggio, too.

Money, its a gas.
Grab that cash with both hands and make a stash.
New car, caviar, four star daydream,
Think I'll buy me a football team.

Pursuant to license agreements, BKS pays Textbooks.com a royalty on Internet sales realized by from the sale of books designated as college textbooks. The income stream to Textbook.com was $4.9 million and $3.9 million for fiscal years 2007 and 2006, respectively.

Money, get back.
Im all right jack keep your hands off of my stack.
Money, its a hit.
Dont give me that do goody good bullsh-t.
Im in the high-fidelity first class traveling set
And I think I need a lear jet.
~ Pink Floyd ("Money" / Dark Side of the Moon)

And, speaking of jets…

  • B&N College leases a jet aircraft to BKS, receiving payments of $1.9 million and $1.7 million during FY 2007and FY 2006, respectively.

  • Riggio owns a majority interest in office/warehouse space leased to BKS.

Aggregate lease payments paid by BKS totaled $5.4 million and $5.3 million for FY 2007 and FY 2006, respectively.

  • Leonard Riggio is an investor in Scopia Management Inc, which owns a 10.5% interest in Source Interlink Companies, Inc (SORC-$1.46), a leading distributor/ rackjobber and publisher of entertainment products and publications.

BKS uses Source Interlink as its primary supplier of music and DVD/video, as well as magazines and newspapers. BKS paid Source Interlink $438.2 million and $442.7 million for merchandise during FY 2007 and FY 2006, respectively.

The 21.9% drop in the share-price of BKS reflects investor concern about the adverse impact to forward sales and EPS guidance, resulting from the projected slowdown in consumer spending.

Given his sizeable holdings in BKS, Leonard Riggio, 67, illustrates the importance of managing investment risk exposure through diversification across asset classes. He owns a portfolio of companies that range all the way from textbooks to jets and real estate.

Unfortunately, Riggio epitomizes the grip retired founders can maintain on their companies. The poor corporate governance at BKS speaks to the problem of fealty to Riggio by the Board of Directors . Mr. Riggio, leveraging his links to BKS and the Board, continues to build his stack of riches while common stockholders suffer.

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

Thursday, April 24, 2008

Israel Chemicals Benefits From Rising Demand for Potash

At present, China, US, Brazil and India are the largest potash consuming countries, together accounting for 60% of total world potash demand. According to the IFIA (www.fertilizer.org/) the market will remain tight in the coming years, with utilisation rates in the high 80s. The limited capacity additions over the next several years reflect: (1) the limited availability of potash reserves, and (2) the fact that the development of a new potash complex has a lengthy lead time (from five to seven years according to Potash Corp and Uralkali).

The premier companies operating in this industry are Potash Corp and Mosaic, but today I'd like to highlight a more speculative, young company, trading on the Tel Aviv exchange,
Isreal Chemicals Limited (TLV:ICL).

ICL is the second largest company in Israel in terms of market capitalisation. ICL’s main shareholder is Israel Corp, an Israeli-based holding company whose main holdings are ICL, Oil Refinery, Zim Shipping and Tower Semiconductor. Israel Corp is a strategic and long-term investor at ICL. The second largest shareholder is Potash Corp (PCS), the global leader of potash.

PCS has a strategic interest in ICL but has no representative on the board and maintains no working relationship with the company. PCS also has a strategic investment in Arab Potash Company (APC) in Jordan.

ICL operates in three main areas: fertilizers (47% of sales), industrial products (21% of sales), and performance products (28% of sales). In the fertilizers segment, the company produces potash and phosphate fertilizers and compounds. In the industrial products division, ICL’s main focus has been on brominated products for the flame-retardant (FR) industry, oil drilling industry and other areas.

The acquisition of Supresta in 2007 expanded this line of business into organophosphorus flame retardants. ICL’s performance products segment consists primarily of phosphate downstream products for the food industry and other areas.
I believe ICL is well positioned to capitalise on the dramatic price action in the fertilizer market. Potash prices in Brazil and Southeast Asia more than doubled in 07, and substantial adjustments are expected in China and India. With no substantial increase in capacity due in the coming years, IFIA expects more price hikes to follow.

In the most recent quarter, March 08, ICL posted an 82.5% rise in fourth-quarter net profit, boosted by a 44% surge in sales. ICL's quarterly net profit rose to $164.7 million vs. $90.2 million and sales in the October-December period increasing to $1.211 billion vs. $839.6 million YoY.

Investors can expect ICL to gradually realise the sharp increase in potash and phosphate prices in the coming quarters and with rising costs and demand characteristics expect additional hikes to follow. This should lead to strong top-line momentum and higher margins in 08 and 09. According to Investext (Thomson subsidiary) the average expected revenue growth is 34% in 08 and 11% in 09 to coincide with earnings growth of 77% and 19%, respectively.

The fertilizer industry is undergoing a structural change led by growing consumption of meat in Asia, and biofuel production. The rapid economic growth in China, India and other Asian countries, which combined account for the majority of world population, has boosted meat consumption.

In China, for example, meat consumption has tripled over the past 20 years and is currently growing at 4-5% annually. Given the essential role of grain in animal feed (the production of 1 kilogram of beef requires seven kilograms of grain), this trend imposes significant strain on available stocks.

Further strain on grain availability is imposed by the growing production of biofuel, and ethanol in particular. The USDA projects that ethanol production will continue its rapid expansion in the coming years, and will consume more than 30% of US corn in 2009/10 from 18% in 06.

Main risk with ICL, and the industry, is the cost control, most notably, ICL's freight costs have surged this year especially with the BDI index registering an increase of 122% in 2007. Then there is the FX risk: increasing freight costs, the Israeli shekel has significantly appreciated against the USD.

More recently, the appreciation of the shekel has continued and every 1% appreciation in the shekel inflates ICL’s reported costs by cUS$4.5m. Other risks besides rising cost pressures & appreciation of the shekel are lower than expected fertilizer prices and soft demand for brominated electronic components.

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

Tuesday, April 22, 2008

Trading Strategy for a Weak Dollar

Over the past three years, a good trading strategy has been buying US companies with highest revenues outside the US and shorting ones with highest inside the US. Given all the talk about a strong EUR hurting exports, I did a test to find out which companies would hurt from a strong EUR in the UK (given EURGBP has performed very well since markets started dropping in Sep 07).

Since September 2007, sterling has fallen roughly 15% against the EUR. Given the comments by the MPC members on Wednesday to the House of Commons Treasury Select Committee, sterling could come under further downward pressure, even though some technical indicators are pointing to a short-term top (fundamentally because UK is the EURozone's 2nd-largest trade partner, so a weaker GBP and a slowing UK economy pose another threat to European corporates).

For companies with a high exposure to the euro area, the benefits that would normally flow from this have been difficult to detect, largely because it has occurred during a period in which market conditions have deteriorated significantly. Any share price support that might have been implied by the weak sterling has been mostly overridden by market volatility.

Utilizing Thomson Datastream, I screened the FTSE 350 (a more comprehensive screen vs. just FTSE 100 or 200) for companies with exposure to Europe that exceeds their exposure to the UK, US, and RoW and recorded their relative performance since the 10th September (please see images below).

As the image above depicts, we can see that most of this group have underperformed during this period of GBP weakness with an average performance of -6.1% relative to the FTSE 350. Market developments have been central to this and prevented these companies from deriving any benefit from the weakness of GBP.

While there are, of course, many other factors at work, if the market were to now stabilize (doubtful), there is perhaps greatest room for ‘catch-up’ across these companies if they are to reflect the benefit that sterling weakness may give to their earnings.

The German Pay-TV Market

As the April auction for the Bundesliga rights approaches, News Corp will have an increasing incentive to raise its stake and maximise its 'capture' of the value it brings to the table. News Corp's existing stake already confers some influence at the AGM. On Friday evening (4 Apr) it raised its stake to 22.7% from 19.9% on 21 Feb having announced the purchase of Unity Media's 14.8% stake at EUR17.5/share (38% premium) on 8 January.

NWS will want to maximise the benefits of the opportunity it perceives in the German pay-TV market where its sees "enormous potential for growth" (even CNN's parent, Turner Broadcasting, took an 8% stake in it). The German pay-TV market is the most underpenetrated in Europe. Penetration is 13% vs 40% in the UK and more than 20% in Spain, France and Italy. Premiere's positioning as the only premium content provider in Germany makes it best placed to benefit from pay-TV market growth.

The market appears to be discounting a high probability of Premiere failing to win the rights and some deep concern around serious operating performance issues: weak ARPU momentum, strong competitive offerings, subsidies on hardware and costs of the Bundesliga rights and/or the loss of exclusivity.

Contributor Yaser Anwar does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Fu

Sunday, April 20, 2008

2008 vs. 1990-91: Similarities and Differences in Global Markets

Fed Chairman Bernanke’s April 2 testimony to Congress specifically noted how capital constraints in the banking system are affecting lending. Supporting this, data from Dealogic, shows high yield debt underwriting fell 48% QoQ in Q1, the volume of equity underwriting fell 58% QoQ, completed M&A fell 45% QoQ while announced M&A dropped 26% QoQ, and investment grade issuance was flat.

I believe this credit crunch will persist longer than the recent rally in US rates, 2s to 1.871% and 10s to 3.575% imply. I looked at the capital position of the 10 largest financial institutions—by risk-weighted assets in the US—which revealed the capital position is weaker going into this US downturn than in 1990 (7.2% in ‘08 vs. 7.5% in '90). This seems logical because lending tends to fall when banks rebuild capital (more on this below).

A counterargument is that the magnitude of Fed stimulus in this cycle implies a rapid end to the credit crunch. However, the credit growth continued to collapse even after Fed rates had become highly stimulative in the early 1990-91 credit-driven recession.

Similarities between now and 1990-91: a) inflation spikes moderately and erodes consumer purchasing power; b) housing and real estate suffer a downturn amid a sick banking sector; c) credit market conditions tighten significantly and d) relatively strong growth abroad persists amid domestic weakness.

However, the current situation is worse than in the 1990s. The US economy is dramatically more leveraged with bank credit alone at 65% of GDP, up from about 47% of GDP in '90. Additionally, housing prices are falling more broadly and more rapidly going into this recession than in '90, increasing the magnitude of write-downs. Bridgewater makes a good case of increasing bank losses in their Daily Observations on April 3rd.

  1. Banks have barely taken any losses in old-fashioned loans, but these losses are coming. In the past, banking crises tended to lag market crises, because most of the banking system was based on loans that were not marked to market. Loans don’t go sour until the cash flows go bad, while markets go sour in anticipation of problems.

  2. Loans still make up the vast majority of commercial banks’ balance sheets and major losses. If the loans were marked to market, our numbers suggest write-downs in major commercial banks’ capital of nearly 70 percent.

  3. Banks won’t be marking to market, but the loan losses will add up quickly and for commercial banks the losses will likely be at least in the range of the recognized security losses (i.e., the losses on the securities were much higher per unit, but the loans make up much more of the balance sheet). ~ April 03, 'The Loan Losses Are Still To Come' Bridgewater Daily Observations.

Equities & FX Biases

Regionally, US equities ought to benefit most from a fall in risk premiums, as the policy response has been most aggressive from the Fed. A weak USD is also a plus for US earnings. EUR strength poses a risk to European growth and margins. Similarly, a strong yen and a lackluster domestic growth are likely to hamper Japanese share price performance (reflected in equity outflow in the image below). Emerging markets may show relative strength due to better-placed economies, but downward earnings revisions appear likely and valuations, which trade at a near-premium to developed markets, aren’t particularly attractive.

Similarly, a strong yen and a lackluster domestic growth are likely to hamper Japanese share price performance (reflected in equity outflow in the image below). Emerging markets may show relative strength due to better-placed economies, but downward earnings revisions appear likely and valuations, which trade at a near-premium to developed markets, aren’t particularly attractive.

Whereas FX outlook is a lot more positive in a select few where a) FX reserves are rising; b) the central bank finds the current inflation rate uncomfortably high; c) the central bank appears to have a policy preference for the use of currency appreciation over rate increases as the tool for containment of inflation, leading me to the Brazilian Real and the Chinese renminbi most notably.

US Equities & FX- No strong opinion on market index of late as the bounce in equities has not been all due to short-covering (the main cause for the last 3% rallies) but remain positive on US exporters with majority of revenue outside the US vs. short domestic, highly-leveraged companies with minimal foreign exposure; long large caps/small caps (short); risk arbitrage trades such as MSFT-YHOO, NMX-CME and BCE.

Given the US scenario I referenced, I Ben Bernanke will not only reduce rates but keep them low for a while. Lower risk free rates are needed to cushion the fallout of rising joblessness and tight credit on aggregate demand and investor risk appetites.

Increasing unemployment and broadening out from just housing related losses to nearly every sector of the economy confirms that a vicious cycle of slowing consumer spending, rising business caution, and reduced hiring/production is entrenched, while tight credit, if left unchecked, will continue to be a meaningful drag on demand for credit-sensitive goods (e.g. housing, consumer and business durables). All of which makes me think investors will reach for yield in the long-end of the curve.

EUR Equities & FX- No opinion on market index but am closely monitoring the DAX. Even though ZEW economic expectations index rose to -32.0 points from -39.5 points in Feb, the trend remains to the downside.

The ISM in the US have been on a downward trend. With the US economy slowing and resilience of the world on the US consumer and dollar (even though we've seen diversification into Euros) will lead to a slowdown world wide, especially the industrial aspect which booms during early stages of economic recovery and growth.

Currently, the DAX has a 53% market-cap weight in cyclical industries, higher than any other index in Europe except the OMX. According to the IFO institute notes that fewer companies reported their willingness to hire new staff, compared to previous months. The image below depicts a positive relationship between the IFO and the DAX.
The rising oil prices have been boon for energy companies, and indexes such as the TSX and other related indices, but it's no good for Germany. Why? The DAX offers little protection against the high oil price.

The FTSE 100, MIB have 18%-20% of their market cap in oil stocks, vs. the DAX with no oil companies. Lastly, keep an eye out on the EUR 2s-10s spread because of the positive correlation (0.68) between The German DAX and Euro 2-10s spread. A steep curve would mean a weaker EUR and DAX.

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

Friday, April 18, 2008

Will Bell Canada Deal Be Repriced?

· Synopsis: Canadian telecom market is dominated by Rogers, Bell Canada and TELUS. Largest Private Equity buyout set in motion by Ontario Teachers Pension Plan (largest Canadian Pension fund) looking to buy Bell Canada (BCE-$36.65) for $51 billion. Key issues: (a) Bondholder dispute ruled in favor of acquirers and regulatory issues over foreign ownership. (b) The $42.75 offer price represents a 6.4x EV/EBITDA multiple vs. 5.8x average multiple of telecom universe average (FactSet estimates).
· Parties Involved: Purchase- Bell Canada (BCE) by Acquirer- Ontario Teachers Pension Plan backed by Providence Equity Partners, Madison Dearborn Partners LLC, Merrill Lynch Global Private Equity and Toronto-Dominion Bank (OTPP has to have majority ownership due to regulatory requirements).
· Based on Wednesday’s closing price of $36.83, investors are looking to earn roughly 18% absolute return within this year (expected deal closing). Readers should keep in mind that while the financing required for the BCE deal to go through is enormous, big deals have closed—TXU, First Data, Alltel, and Chrysler.
· Recent Quarter Results of BCE: BCE's EBITDA grew by 5.4% vs. Q4 2006 to $1.33 billion due to cost containment, ARPU growth and lower pension costs, leading to an improvement in EBITDA margin by 120 basis points to 34.9 percent. For the FY07, EBITDA grew by 4.1% to $5.49 billion; OI grew 4.7% to $2.6 billion (higher EBITDA and lower amortization expenses were almost entirely offset by higher restructuring charges); and free cash Flow grew by 30% to $891 million due to the growth experienced in Q4. FcF for Q4 after dividends and working capital changes increased significantly to $393 million in Q4 07 vs. $200 million last year.
· Q4 overview by segments: Strong margin expansion driven by ExpressVu (5.4% YoY driven by 16.4% YoY increase in average revenue per unit but weak subscriber growth which likely made margin expansion look better as it was distributed over smaller number of subscribers. Furthermore, despite strong ARPU growth and an 11.9% YoY decline in the cost of acquiring a subscriber, wireless EBITDA margin actually declined to 35.7% in Q4/07 from 36.7% in Q4/06; Strong FcF (mentioned above); Weak residential access lines as BCE lost 117K net residential access lines in the Q.
· Key Takeaway: The absence of any alarming negative trends will leave the market comfortable that the sponsors have no reason walk from this deal from an operating results standpoint.
· Bond Holders Issue: About a month ago, the court ruled against the bondholders, but since they plan on taking the matter to higher court, I’ve included an overview of the matter prior to court ruling. The holders of Bell’s 1976 and 1996 debentures are asking the Quebec Superior Court to rule on whether the proposed privatization qualifies as a “reorganization or reconstruction” since these debentures include protection such that the trustee has the right to vote on any such change. Alternatively, BCE is countering that this deal is a “change of control” given that it was initiated by an outside party.
· Let's look at a previous case where a similar problem occurred. According to a Lawyers Weekly issue (Feb 13th, 2004- search for "bondholders debt takeover problems" in Factiva) indicates how certain 1997 Rio Algom convertible debenture holders were not successful in a similar oppression claim since there should be a reasonable expectation that a takeover could occur and that the indenture could have included provisions specifically related to such an event.
· However, if one looks at BCE's current stock price it seems that the market is discounting that bondholders arguments are gaining traction in court. That said, there is no concrete proof to support this view.
· The bondholder issue has been delayed further till June of this year. In the event that bondholders loose, we can expect them to file an appeal with Quebec Court of Appeal and the Supreme Court. The time line for this I'm expecting would be between 45-50 days
· Enough Material Adverse Change (MAC)? If the lawsuit is ruled in favor of the bondholders in any way, or if it is ruled in favor of BCE with damages awarded to the bondholders, the chance of a deal collapse increase significantly. However, it is important to note that the bondholder oppression claim does not include a request for specific damages, but the CBCA allows considerable flexibility for judges in this respect.
· OTPP has previously indicated that a damage allowance would put the deal at risk and so I assume they would use such a ruling as an excuse to break the deal, even though the offer is not conditional on bondholder approval or the outcome of this lawsuit.
· Bank Financing: No doubt we are facing a tumultuous time in the credit markets so anything is possible, but my assessment that this risk is lower than what the market thinks focuses mainly on the incentives facing these bankers, and the litigation and reputation risk of not executing.
· The banks stand to earn fees of 2-3% on the total debt being raised + future deal fees from any banking BCE does. While the banking syndicate is likely facing a $3-$6 bn writedown on the total committed debt package if the deal closes, but they stand to make $600 million to $1 billion in immediate fees and will almost certainly be sued for at least the $1 billion reverse break fee if they do not honor their commitments.
· Is the avoidance of net $1-$4 billion in writedowns for this deal worth the reputation damage for the banks? I would conjecture not because BCE involves key clients of the banks (OTPP, MLGPE, Providence Equity Partners), BCE is a stable cash generator with a current FcF yield of 8% and looking at financing for key deals going through shows good potential i.e. TXU, First Data, Alltel, Chrysler (as mentioned above).
· What If Deal Falls Through? In the event that the deal does not go through, I would expect the stock price to drop to a range between 25-27. At which point BCE will be trading in line with its closest competitor TELUS at a multiple of 11.3x 08 EPS, implying a hefty dividend yield of 5.8%.
· Since the BCE board was prepared last year at this time to commit a considerable portion of the Telesat sale ($1.89 bn net) proceeds to shareholders before the BCE was put into play, it is reasonable to assume a major share buyback as a starting point.
· BCE was sitting on almost $2.7 billion in cash at the end of fiscal 07. If we assume the BCE would be guaranteed an additional $1 billion as a result of the reverse break fee, then the cash on hand would be roughly $3.7 billion (plus any additional cash generated in Q1 2008).
· According to Scotia Capital (leading the league tables in Canada) "BCE can increase their debt leverage to 2.2 from current 1.1x EBITDA and borrow an additional $4 bn to acquire additional 16% of shares, in the process adding $3-3.5 in accretive value."
· Negotiated Lower? A few friends I have talked to in the industry inform me that this deal could be potentially repriced. So in scenario 2 I've assumed a deal price of $39 (which I've been told is quite possible if bondholders win). This assumption can be made because a) the deal was made in comparatively much better times and b) as I alluded in the overview, the $42.75 offer price represents a 6.4x EV/EBITDA multiple vs. 5.8x average multiple of telecom universe average (FactSet estimates).
· Hedge: Given the uncertainty involved in risk arbitrage, it is always a good idea to hedge one's ownership of BCE shares through an options strategy or by buying Bell Canada bonds. While the equity market fears that the BCE LBO may collapse, as evidenced by the fact that the stock is trading at a significant discount to the bid price, the bond market seems to be assuming that the deal will go through. This is evidenced by the wide Bell bond spreads.
· Key takeaway: New entrants for the time being are no threat to the big 3. One thing is guaranteed—the move to GSM networks will be the industry trend given Rogers' margins and better performance. New entries would mean a higher probability for TELUS/BCE deal going through but the time line for this I believe is long-term.

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

Thursday, April 17, 2008

BNET Industries & New Ideas

In addition to posting for the 10Q Detective, editor David J Phillips will be posting on daily news for BNET Industries. Specifically, Mr. Phillips will cover the energy sector, providing coverage on major utilities, oil companies, and clean tech and renewable energy businesses. BNET Energy offers analysis on deal flow, new technology, alliances and partnerships, competitive intelligence, and a host of other critical business issues.

We welcome back to the blogging scene, Yaser Anwar, known for his body of work at
Investment Ideas, a web log dedicated to helping investors understand and profit from changing dynamics in the global markets. Yaser,who is currently enrolled at York University, will become a contributor to the 10Q Detective. His tenure includes prior work on Wall Street, The City and Dubai on the sell-side and the buy-side.

Tuesday, April 15, 2008

Is the Board to Blame for Crocs' Demise?

Shares of Crocs Inc (CROX-$10.11) sank 43.2 percent, or $7.68 a share, on Tuesday after the shoemaker cut EPS guidance on lower-than-expected demand for its branded footwear.

"The retail environment in the U.S. has become increasingly challenging as consumer spending and traffic levels have slowed," said Chief Executive Officer Ron Snyder. "Retailers in general are planning more cautiously, and therefore, we did not experience the level of at once business we originally expected."

On April 4, amid a 53 percent drop in the share price (since the beginning of 2008) and rising short interest, Wedbush Morgan Securities analyst, Jeff Mintz, reiterated his
Strong Buy and $44 price target on the company. Oops!

A director of the colorful shoemaker bought 250,000 shares, according to a Securities and Exchange Commission filing on March 10. In a
Form 4 listed with the SEC, Michael E Marks, reported the purchase of $4.98 million in stock at an average price of $19.95 a share. Mr. Marks, retired CEO of Flextronics, has serves on the board of the OEM provider since 1991, and also serves as a director of NAND flash-storage card maker SanDisk Corporation.

I need a smart fellow
to make all the sounds,
Who can bark like a dog,
and bay like the hounds!

Of interest, two other board members have ties to Flextronics, too. Chairman Richard L Sharp (of Circuit City fame) acts as the chairman of Flextronics; and, Thomas J. Smach, a member of the board of directors since April 2005, is currently the Chief Financial Officer of Flextronics.

Your GONG is terrific,
your toot is inspired!
Quick come to BONG-BONG-BONG,
McMoing Boing—you’re hired!
~ American Writer Dr. Seuss, Gerald McBoing Boing (1904 – 1991)

A lesson learned too late: 'who-you-know' politics, electronics manufacturing, and knowing how to go BOING BOING instead of talking English do little to serve the best interests of shareholders in a shoemaker!

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

Sunday, April 13, 2008

Trading Alerts: Monday, April 14, 2008

Acorda Therapeutics, Inc (ACOR-$19.20), developing therapies for spinal cord injury, multiple sclerosis and related nervous system disorders, will host an analyst and investor breakfast on April 14, 2007, at the American Academy of Neurology annual meeting. The Company, along with its scientific collaborators, will present highlights from its pre-clinical programs on neuregulins—a class of naturally occurring protein growth factors that have multiple effects on the nervous system and potential therapeutic applications in neurological conditions, such as remyelination.
  • We believe, however, the market is waiting for the confirmatory results on the safety and efficacy of Fampridine-SR, currently in a Phase 3 clinical trial (from MS-F204) to improve walking ability in people with MS. (Data is expected second quarter 2008.)

Contrary to market rumors, AirTran Holdings, Inc (AAI-$4.13) reassured its stakeholders late on Friday that the holding company for low-cost carrier AirTran Airways had "ample balance-sheet strength to support its operations."

Specialty chemicals maker Albemarle Corp (ALB-$34.93) said late Friday it
plans to acquire Sorbent Technologies Corp (SORB-$3.65), a provider of mercury emissions control technology, for about $20 million in cash, or about $5.75 a share.

AMR Corp (AMR-$9.48), the parent company of American Airlines, said on Saturday it
received clearance from federal aviation officials to return all of its grounded fleet of MD-80 jets to service.

During the Q&A session of "Lighting Round" on Friday evening, Mad Money host, Jim Cramer, told an inquiring caller "to sell" Boston Scientific Corp (BSX-$12.88), citing the medical device maker’s debt-load (52.4% of total shareholder equity).

  • Our concern with Mr. Cramer’s quick call, however, is that the stock is already trading well-below its two-year high of $19.00 a share, and already discounts S&P's June 2007 bond rating cut one ranking to 'BBB-minus' (just one step above junk status). Fundamental concerns are warranted, but Cramer ought to have told the caller instead to watch for additional asset sales in coming months.

Look for a Monday morning pop in shares of Canadian Natural Resources (CNQ-$76.65), an oil & gas play recommended Friday evening by Mad Money host, Jim Cramer. The stock has been held back because of delays in its $8.9 billion oil-sands project in Alberta, called Horizon. Nonetheless, now that the company says it's on schedule, Cramer believes "the sky could be the limit!"

The 10Q Detective also disagrees with Cramer's "Lightning Round" view of Chicago Bridge & Iron Company NV (CBI-$44.07), when he dismissed the construction and engineering company as an "infrastructure stock with [too] much exposure to municipalities."

  • True—rising energy prices could hamper an economic recovery in the U.S., but CBI has exposure to the global infrastructure boom (and is expanding its worldwide hydrocarbon, water, and natural gas projects), with a backlog of $7.7 billion in contracts, as of December 31, 2007. More than 65 percent of new business orders were generated outside the U.S., too! The ROE for CBI is 26 percent, which is double the industry’s average of 13 percent. Of course, cancellation or delays in completion of major construction projects could disrupt this growth story.

ImmunoGen, Inc (IMGN-$3.62) will post abstracts on pre-clinical findings and other research involving its proprietary TAP technology at the Annual Meeting of the American Association for Cancer Research (AACR), on Monday, April 14.

Standard & Poor's Ratings Services
revised its CreditWatch implications on the 'BB-' corporate credit rating of Lam Research Corp (LRCX-$41.00) to CreditWatch positive, indicating it may hike the chip equipment maker's bond rating.

NutriSystem Inc (NTRI-$18.21), a provider of weight-loss management products and services,
will be added to the S&P SmallCap 600 after the close of trading on Tuesday, April 15, 2008.

Citing an increase in new orders, antenna manufacturer Phazar Corp. (ANTP-$6.79) said that earnings for the
third-quarter rose to $334.3 thousand or $0.14 per share, compared to $7.8 thousand or breakeven per share in the preceding year quarter.

Sallie Mae Corp (SLM-$17.85), the nation's largest student lender, said Friday it would
stop offering lower-cost consolidation loans to college graduates, saying the federally backed business had become unprofitable.

Chip maker Simtek Corp (SMTK-$2.55)
rejected an unsolicited proposal by Cypress Semiconductor Corp (CY-$26.29) to buy the company, saying the $2.20 cash bid was not in its shareholders' best interests because the offer undervalued the company.

Believing that the recent surge in natural gas prices would likely result in
margin compression for ethanol producers going forward, analyst Chris L Shaw of UBS cut his EPS estimates for VeraSun Energy Corp (VSE-$7.02). After dropping 47 cents, or 6.3 percent, during regular hours, shares lost an additional 3 percent in after-market trading.

Standard & Poor's Ratings Service
raised its ratings outlook on broadband services provider Windstream Corp (WIN-$11.79), citing the company's ability to offset a revenue decline in its voice business.

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

Tuesday, April 08, 2008

Pike Place Roast Coffee: The Profit Will Not Be in This Cup at Starbucks Corp.

Starbucks Corp (SBUX-$18.04) launched its new brewed coffee, Pike Place Roast, today at its company-operated stores in the U.S.

The new coffee is intentionally named after the location of Starbucks' first store, which opened in Seattle's Pike Place Market in 1971.

At the coffee purveyor's annual meeting last month, the founder and CEO Howard Schultz told shareholders: "We are returning to the very best elements of our heritage and bringing back the simple romance and excitement of coffee. Since 1971, we have sourced, roasted and sold the world's finest coffees. By highlighting that history through Pike Place Roast, and bringing back the sounds and aromas of the coffeehouse, we are raising the bar on what it means to serve the perfect cup of coffee."

To further elevate the fresh brewed coffee experience for its customers, stores also will brew smaller batches with a hold time of no more than 30 minutes.

Emphasizing Pike Place’s smooth taste, the company wants to bring back customers who fled to Dunkin' Donuts and McDonald's Corp, claiming Starbuck’s coffee tasted too strong or burnt.

Nonetheless, the 10Q Detective does not believe that this back to basics initiative will yield a material increase in traffic or average value per transaction. Brewed coffee, assorted coffee beverages, and a broad selection of Italian-style espresso beverages already account for 85 percent of net sales. Starbuck’s emphasis on a differentiated 'store experience' business model will not bring back Schultz's yearning for the local coffeehouse hangout of yesteryear—not for a company with more than 6,800 retail outlets in the U.S., and not with a cup of Pike Place Roast costing almost as much as a loaf of bread.

To execute on more meaningful innovation, management ought to invest its capital on true growth potential, such as expanding retail operations overseas (China).

And here's a thought, Mr. Schultz, instead of expanding the menu--including coffee beverages--cut the daily offerings on the chalkboard. Simplify beverage and food service items--and then focus on the coffee experience!

Margin Pressures

In the U.S., the premier roaster and retailer of specialty coffee needs to focus on operational efficiencies—its costs:
  1. During fiscal 2007, “C” coffee commodity prices traded on the New York Board of Trade within a price range of $1.00 to $1.35 per pound and prices were, on average, approximately 10 percent higher than in fiscal 2006. Prices continue to move higher during fiscal 2008, with July contracts at about $1.37 per pound. Starbucks will likely need to increase the use of price-to-be-fixed purchase contracts to meet its demand for coffee. By volume, approximately 20 percent of the Company’s coffee purchase agreements entered during fiscal 2007 were price-to-be-fixed contracts.
  2. In addition to coffee, the Company also purchases significant amounts of dairy products, particularly fluid milk, to support the needs of its Company-operated retail stores. Dairy expense for the U.S. segment represents approximately 75 percent of the Company’s total dairy expense. Looking at Dairy, February’s Class I Fluid Milk price (fresh milk product) is at $19.68, more than $6.29 higher than a year ago. And, according to company regulatory filings—unlike coffee beans—commodity costs for fluid milk are difficult to effectively hedge.

Investment Considerations

Despite management plans to expand its international retail operations, the Company’s
financial performance remains highly dependent on its United States operating segment, which comprised 78 percent of consolidated total net revenues in fiscal 2007. As such, we are not optimistic that select initiatives to leverage the Starbucks brand through the introduction of new products, such as Pike Place Roast, will do much to percolate share-net or the share price of Starbucks Corp. AVOID

Editor David J Phillips does not hold financial interests in any of the companies mentioned in this posting. The 10Q Detective has a Full Disclosure policy.

Saturday, April 05, 2008

Trader Alerts: April 7, 2008

Will Alcoa Inc (AA-$39.00) kick off a surprise quarter? The aluminum manufacturer is expected to report fourth-quarter earnings of 55 cents a share, according to analysts surveyed by FactSet Research. Investors will be watching, however, to see if the high price of aluminum will offset a host of factors, including weakness in the automotive and construction industries and cost issues in its smelting division.

Shares of metals processor Allegheny Technologies Inc (ATI-$84.00) jumped almost 12 percent on Friday and its option volume surged (the April 80 & 85 calls) on
renewed chatter that it was a takeover target, option analysts said.

Fitch Ratings affirmed TD Ameritrade Holdings Corp.'s (AMTD-$17.63)
issuer default rating at ‘BB+’ Friday, saying it appropriately reflects the discount brokerage's financial position.

Bond insurer Ambac Financial Group Inc (ABK-$5.99) has
created a special team to assist clients with challenges arising from the auction-rate securities and variable-rate debt markets, such as penalty interest rates that have increased their financing costs.

T-Mobile Germany is currently running
significant discounts on the iPhone when purchased with a 2 year contract, signaling that a new version of the Apple Inc (APPL-$153.08) device may arrive by June, according to some analysts.

Barnes & Noble, Inc (BKS-$31.87) will likely think twice before buying Borders Group, Inc (BGP-$6.17) and could wait for it to implement restructuring efforts
before pursuing a deal, a senior industry banker and a source familiar with the situation told dealReporter

Circuit City Stores Inc (CC-$4.78)
wants a meeting with an investor, Wattles Capital Management, who is seeking the ouster of the struggling company's chief executive and board of directors.

Shares of for-profit educator Career Education Corp (CECO-$15.91) continued to surge in after-market hours, trading up 6.25 percent, after jumping 54 cents (or 3.51%) on Friday, following the introduction of
legislation that will help students pay for college in a tight credit market.

Credit rating agency Fitch Ratings said Friday it
cut the financial strength rating of MBIA Inc (MBI-$13.61) to ‘AA’ from ‘AAA’ because the bond insurer no longer has enough spare capital to warrant a top-notch rating.

Micrel, Inc ($9.04)
set a date for a special shareholder meeting requested by Obrem Capital Management, which owns a 14.9% stake in the chip maker, and is looking to install its own slate of directors on Micrel’s board.

Fitch Ratings
cut the issuer default rating MoneyGram International Inc (MGI-$1.62) to ‘B+’ from ‘BB-‘ late Friday, citing the Minneapolis-based payment services firm’s rate of increased leverage, a debt balance that is likely to rise and reduced profitability at the company’s payment system business.

Fifth Third Bancorp (FITB-$22.71) has emerged as a
possible buyer for struggling National City Corp (NCC-$8.99), The Wall Street Journal reported on Friday, citing people familiar with the situation.

Shares in Petrohawk Energy Corp (HK-$21.22) hit all-time highs in after-market trading on Friday and its option volume soared (the April 20 & 25 calls) on speculation that the oil and natural gas producer was a
takeover target.

Natural gas driller Range Resources Corp (RRC-$66.99) looks to
strike it rich in Appalachia.

Looking to expand its international communications market, ScanSource Inc (SCSC-$34.39), a provider of bar coding, videoconferencing and electronic security products, said Friday it bought MTV Telecom Distribution PLC, a UK-based communications company.

Schering-Plough Corp (SGP-$16.12) CEO Fred Hassan
appeared on Mad Money Friday night, telling host Jim Cramer that the Vytorin fallout is a U.S.-only problem. Hassan added that the drug maker’s overseas cholesterol business is doing well and brushed aside any rumor, too, that the company would be taken over by Johnson & Johnson (JNJ-$65.73) or another big pharma company, saying that Schering management is "doing a very good job."

Sirius Satellite Radio (SIRI-$2.79) shares wavered to close unchanged Friday after an analyst
downgraded the stock, saying the expense of Sirius' buyout of rival XM Satellite Radio (XMSR-$12.04) will keep the stock around its current price.

Trump Entertainment Resorts Inc (TRMP-$3.58) said Friday it has
no casino agreement in place to sell any of its three Atlantic City properties.

UBS AG's (UBS--$33.65) former chief executive Friday called for the Swiss bank
to consider a breakup and criticized this week's appointment of Peter Kurer as chairman, in a move welcomed by some fellow shareholders.

United Therapeutics Corp.'s (UTHR-$86.41) inhaled treprostinil may have
limited efficacy due to a lack of improvement on the New York Heart Association (NYHA) functional class scale, physicians told Pharmawire.

Private-equity firm TPG and other investors are close to a deal to invest $5 billion in Washington Mutual Inc (WM-$10.18), people familiar with the matter said Sunday.

Yahoo Inc (28.36), which previously rejected a $44.6 billion takeover offer from Microsoft Corp (MSFT-$29.16), fell in extended trading on reports that its software suitor
is re-examining its bid.

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

Friday, April 04, 2008

Too Much Respect Shown to Boyd Gaming Elders?

Management of Boyd Gaming Corp (BYD-$21.23) recently intimated on its fourth-quarter conference call that its operating performance would continue to be adversely impacted by a challenging economy (and its effect on consumer spending), disruption from new construction, and increased competition for the foreseeable future.

Shareholders have not dismissed the effects of the current market environment on the Company’s operating results, exhibited in the 52-week loss of 56 percent in the stock price.

William S. Boyd, Executive Chairman as of December 31, 2007, together with his immediate family, beneficially owns approximately 36% of the outstanding shares of common stock. Mr. Boyd is the father of Marianne Boyd Johnson and William R. Boyd, who are both directors and officers of the Company.

Given such influence, it is easy to deal oneself a hand of 'blackjack.' In 2007, Mr. Boyd still managed to bring home bonus compensation of $1.7 million, only 10.5% less than the $1.9 bonus rewarded to him the prior year.

In the aggregate, Boyd’s compensation in 2007 was $6.8 million, including a salary of $1.5 million, stock and option awards valued at $3.2 million, and perks worth $71,586, according to the casino’s proxy filing with the Securities and Exchange Commission.

Defer to Your Elders

As a show of respect for their elders, the Japanese celebrate 'Respect for the Aged Day' on September 15th each year.

Japanese business culture values its elders for the wisdom and experience they provide to the company. William S. Boyd, 76, is well respected by the Company—witness the extraordinary monies he continues to make even in a down-cycle year.

However, must shareholders pay for a special bonus that he receives each year, too? In the amount of $250,000, the bonus is paid to him "in recognition of the loss of a benefit" that Mr. Boyd previously received under certain split-dollar life insurance arrangements, which were terminated by the Company in December 2003.

The Compensation Committee expects to extend the $250,000 special bonus to Mr. Boyd in 2008, too.

Legacy Debts

In 2004, the Company elected Perry B. Whitt, a former member of the board, to serve as director emeritus. As such, Mr. Whitt is invited to attend board of director meetings.

Albeit Mr. Whitt does not have any voting rights, he receives compensation from the Company for serving as director emeritus in the amount of $35,000 per annum. He also receives medical reimbursements under the Director’s Medical Reimbursement Plan (in the amount of $21,329 for 2007). Mr. Whitt also maintains an office at corporate offices.

Mr. Whitt has more than 57 years of experience in the gaming industry, most of it with the Boyd family; first working under the clan’s patriarch, Sam Boyd, at the Flamingo in 1947.

Mr. Whitt, 81, is not exactly waiting at the mailbox, living from one social security check to the next. According to SEC filings, Whitt sold more than $16.5 million in common stock of Boyd Gaming from 2003 –to- 2005.

A youth who does not respect his elders will achieve nothing when he grows up. ~ Confucius (551 BC – 479 BC)

The last year Boyd Gaming reported free cash flow growth Y/Y was 2005.

It is too bad that Confucian teachings on respect for elders do not extend to deference for common stockholders, too.

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

Wednesday, April 02, 2008

Management Shovelin' Manure at Annaly Capital

Annaly Capital Management, Inc (NLY-$16.55) does not believe in providing its executives with excessive perquisites and other fringe benefits. Consistent with its pay-for-performance mandate, the m-REIT provides few executive fringe benefits, save for health and welfare benefits, such as group medical, group life and long-term disability coverage.

As stated in the company’s annual proxy: "We believe that our executives should be able to provide for their retirement needs from the total annual compensation they earn based on our performance. Accordingly, other than an employer matching contribution, which is the same that we provide all of our employees, we do not offer our executives any nonqualified pension plans, supplemental executive retirement plans, deferred compensation plans or other forms of compensation for retirement."

In fiscal 2007, Chairman and Chief Executive Michael A. J. Farrell received just $160 in "all other compensation."

Nonetheless, there is more than one way to milk the cash cow.

One thing's for sure,
I hate shovelin' manure,
It gets all over my overalls.
Them horses need shoein'
I hear Bessie mooin'.
So I thought maybe I'd ask you all.

Pursuant to their employment agreement, the bonus compensation of all Named Executive Officers is linked to percentage gains (Y/Y) in book value.

How do you milk a cow?
I think it's safe to say
A man could get arrested for this in LA
This heifer must be empty 'cause she ain't puttin out.
Oh E I E I O,
Tell me how do you milk a cow.
~ Cledus T. Judd

Farrell received $12.35 million in total compensation in 2007, including a salary of $2.43 million and a cash bonus of $9.62 million, according to the Company's proxy statement filed Monday with the Securities and Exchange Commission.

Book value for the year-ended December 31, 2007, increased 13.4% to $13.04 a share.

The 10Q Detective believes the Company used opportunistic capital raising to deliver sequential book value gains in the current challenging credit environment. Net proceeds from a preferred stock offering (and follow-ons) delivered $2.48 billion, or $6.38 a share, to additional-paid in capital in FY '07.

Yes, we are cognizant of the fact that net income increased 200 percent (Y/Y) to $1.32 a share. Mark Twain was right, however, when he said: "Get your facts first, and then you can distort them as much as you please."

Net income of $414.4 million pales in comparison to proceeds of $2.48 billion!

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