Sirius's Dead Cat Bounce

Stocks: (SIRI)(XMSR)(GOOG)(CBS)(AAPL)

After a sharp drop from its December 12, 2005 high of nearly $8, the shares of Sirius, the big satellite radio provider and home of Howard Stern, dropped to $3.68 on May 24. The company then ran through a week of great news. First, Sirius reaffirmed that it would end the year with 6.2 million subscribers, up 87%, while its rival, XM, cut its forecast for their end of the year subscriber base. Then, several banks, including Bear Stearns and Oppenheimer, made positive comments. Sirius then settled its long-running dispute with CBS over Stern's departure. For the paltry sum of $2 million. Then, news came that Sirius's CEO was buying stock. And, to top it off, XM suspended shipping some of its radios because of concerns at the FCC.

Naturally, the Sirius share price rose and hit $4.51. With all the good news, investors might have expected a bit more.

What happened? The story behind the story at Sirius is still not good. Morningstar has a "fair value" estimate on the stock of $2.00, and does not recommend buying shares unless they drop to $1. Wow. The thesis supporting this low valuation is that XM has a significant edge in terms of the chips it uses, and that the number of competitors that are vying for the consumer's entertainment time is growing at lightning speed.

There is some merit to both arguments, but they do not go far enough. It is true that the chipset that Sirius uses does not allow it to easily created smaller, more flexible portable devices. It is also true that everything from the Apple iPod to old-time over-the-air radio competes for listening time.

But, Sirius has more serious problems. Despite its troubles, XM still has a considerable lead over Sirius. The larger company expects to have 8.5 million subscribers at the end of this year, a lead of almost 40%.

Another issue is the valuation of the Sirius stock. The company has a market cap of $6.3 billion to $3.7 billion for the larger XM. According to Yahoo!Finance, Sirius also trades at about 19 times sales. Google can only manage 16x.

Sirius is also not helped by the fact that in the last quarter, ending March 31, the loss from operations was $446.2 million on revenue of $126.7 million. Cash and cash-equivalents have fallen to $630.8 million and long-term debt is $1.084 billion. Between this debt and contracts for items like satellite time, the company has obligations of over $2.6 billion.

With all of this headwind, the Sirius 10-K may state the market's concerns more eloquently than outsiders can: "Our business might never become profitable".

Sirius's 200-day simple moving average is about $6.00, and, given the skepticism that has built up around the stock, even with recent good news, it may not be back there again for a long, long time.


Douglas A. McIntyre

Brunswick-Bargain Basement Boating?

By Rick Konrad of Value Discipline

Brunswick Corp (BC) is the leading global manufacturer of boats including everything from inflatables, deck and pontoon boats, to sportfishing convertibles and motoryachts. As well, the company manufactures sterndrives, outboard and inboard

engines and trolling motors, GPS navigation and marine electronics and even marina management systems. In other recreational product areas, the company manufactures fitness equipment, bowling products, billiard tables, and foosball and Air Hockey tables. Finally, it does operate Brunswick bowling centers as well as retail billiard stores.

The company is explicit in its strategy. Growth, operating margin improvement, and creation of shareholder value are company mantras.

Growth will be achieved by innovation, by deployment of leading edge technologies, by brand building, by internationalization, and by improving and leveraging the core competencies of its supply chain.

Operating margin improvement will be achieved by technological investment and effective cost management.

Finally, the objective of shareholder value enhancement will be achieved by getting returns on investment that exceed cost of capital...I just love seeing this explicitly proclaimed!

The Boat segment represents some $2.8 billion in sales. Brands include Albemarle, Hatteras, Sea Ray, Bayliner, Maxum, and Meridian as well as Boston Whaler, Baja, Crestliner, Lowe, Princecraft and many more. In short, if you are a boat dealer, to satisfy your customers' needs, you almost certainly need to carry some aspect of the Brunswick line. About 2300 dealers carry at least one of the boat brands.

Marine Engines has the largest dollar sales volume of recreational marine engines in the world and had sales of $2.7 billion last year. Brands include Mercury, MerCruiser, Mercury Marine, and Mercury Jet Drive. Engines and propulsion systems are sold through over 7000 dealers and distributors.

Fitness is focused on commercial fitness and includes the Life Fitness and Hammer Strength lines, again representing the largest dollar sales volume of commercial fitness equipment in the world. Sales here are about $550 million.

Bowling and Billiards is a $465 million segment. As well as manufacturing and distributing products, this segment operates 113 bowling centers in the US, Canada, and Europe. The company has manufactured billiards tables since 1845!

Finally, the company has a 49% interest in a joint venture finance company, Brunswick Acceptance that is co-owned with GE Commercial Finance. This segment provides floor-plan financing to boat and engine dealers.

International sales represent about 35% of total sales with boat segment sales constituting 29% of international sales and marine engines 52%.

This is a cyclical growth business that Brunswick continues to dominate. The valuation of the business is extremely cheap in my opinion at EV/EBIT of 8.3 times. EV/EBITDA is only 6.1 times. These valuations are based on trailing twelve month numbers.

In a recent TWST interview, Elizabeth Osur, an analyst with Citigroup indicated :

"While 2006 could be a tough year for boating sales, the stock is attractively priced, likely limiting the downside and providing some potential forsizable upside. If they can execute a couple of acquisitions in Europe, the company may see some accretion."
The margins in Europe tend to be somewhat better than North American
margins, and the company has been highly successful in building its
brands through acquisition.

Cash flow from operations have always exceeded net income over the last five years and have totalled about $2 billion over that time. Contrast that with reported net income of $950 million. Capex over that time was also substantial representing almost $800 million. Free cash flow for the period totalled about $1.2 billion. Only about $60 million in stock has been repurchased in that time (all of that in 2005) and dividends totalled about $250 million.

Return on invested capital tend toward 5% in the cyclical low years and upwards of about 12% in the cyclical peak years though in 2000, ROIC hit 15.6%. The company generates about $2.19 in sales for every dollar of capital employed. Receivables and inventory tunover numbers have steadily improved over the last five years.

Long term debt to capital has tended down from what generally has been about 33% debt to its current 27%. Cash per share is over $5.00.

The stock is down about 25% from its peak valuation.

"The average boat buyer is 49 years old, very near the "sweet spot" pf the baby boomer population" according to Mark Keller of A G Edwards in an interview with TWST. The trade-up boater is becoming a more important part of the boating population and Brunswick is gearing its product line to satisfy that demand.

Though fuel prices and the economic outlook have made investors near-term skittish about ongoing demand, in my view the long term competitive advantages that Brunswick possesses should make this an attractive investment from these levels.

http://valuediscipline.blogspot.com/

Sleeping with an Elephant- Emerging Markets-How Diversified are You?

By Rick Konrad of Value Discipline

In a terrific U.S. Equity Strategy piece from Citigroup's Tobias Levkovich, dated May 25th, he reminds us of some interesting connections that he sees among emerging markets, energy, and commodities.

The important observation that Tobias makes is that bets on many emerging economies have a sinister side...they are merely leveraged trades on the U.S. consumer. China and India may well develop their own consumer base over time, but for the next few years, success relies on exports to the U.S.

Pierre Trudeau, the late former prime minister of Canad observed that Canada's relations with the U.S. were like sleeping with an elephant..."no matter how friendly and even-tempered the beast, one is affected by every twitch and grunt."

Weakness in the U.S. consumer will be a twitch and grunt that will be amplified through these emerging economies and markets.

Weakness in the U.S. dollar won't do others any good either.

As Tobias observes, money flows into emerging markets has been astonishing...in fact, money flows into emerging markets funds as a percentage of total money flows, is four standard deviations above the average. If regression to the mean is something you believe in, and I do, the outflow will not be pretty, especially if the US consumer economy softens.

If commodities and basic materials markets are a derivative on global growth in the developing world, there may be negative impact felt here.

Think about the sectors that got killed this month...basic commodities, energy, and emerging markets. It may not be a coincidence. There appears to be considerable convergence and consequent correlation in the economic drivers for each of these sectors.

You may be less diversified than you think. Simply owning different names across different economies does not provide risk reduction. If your holdings correlate in the market, they may have common economic drivers.

Now that the term BRIC (Brazil, Russia, India and China) has entered the investment lexicon, think of the derived demand picture. Back in 2000-2002, media and Internet convergence killed many investors. Diversification by names alone provided false comfort. Most companies were rooting for exactly the same thing and there was a common driver to the stocks.


Don't let it happen to you again.

http://valuediscipline.blogspot.com/

InfoSpace Buyback: Who Cares?

Stocks: (INSP)(GOOG)(YHOO)(NWS)

InfoSpace (INSP) announced a $100 million share buyback today. The stock did not react.

InfoSpace revenue in Q1 was $90.3 million up from $87 million in the prior year. The company had a gain of $77 million from a lawsuit in 2005, and adjusted EBITDA that backs this out was $12.7, down from $21.9 million in 2005. The company guided that Q2 would be an uninspiring $90 to $90 million with adjusted EBITDA of $5 to $6 million.

InfoSpace's online revenue was down and mobile revenue was up. The company provides online and mobile content such as yellow and white page data.

Stanford Group Company's Clayton Moran summed up what much of Wall Street thinks of InfoSpace recently at forbes.com: "The opposite is true for InfoSpace, which Moran rates as a "sell." Its mobile unit acts as a middleman between content providers and phone companies, a relationship Moran says is unnecessary and will eventually end. The Internet ad firm bucked an industry-wide trend last year and lost market share."

Over the last four quarters, the company has seen an erosion of its operating income. In the quarter ending June 30, 2005, this figure was $13.4 million. It dropped to $1.6 million in the quarter ending March 31, 2006.

InfoSpace's stock has dropped from a 52-week high of $36.81 to a low of $21.26. Even with the buyback, the stock only trades at $22.72.

InfoSpace's business is being targeted by companies like Google, Yahoo! and online community giant MySpace, owned by News Corp., so perhaps very few people are surprised that a decision to buy in shares was not greeted with any enthusiasm. A very large amount of InfoSpace's customers make up the bulk of its revenue, as the company's Q states: "Our top five customers represented approximately 84% and 80% of our revenues in the first quarter of 2006". One of the large search companies only has to pick off one of two of these to significantly hurt Infospace's revenue.

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at douglasamcintyre@gmail.com.

On Wells Fargo & Company

By Geoff Gannon from Gannon On Investing

Wells Fargo & Company (WFC) is a huge Western and Midwestern bank that provides a diverse array of financial services to its more than 23 million customers. The company employs more than 150,000 people at its over 6,000 locations nationwide. Wells Fargo has about $500 billion in assets.

While the company continues to derive more than half its revenues from interest income (about $26 billion), its activities are not limited to collecting deposits and lending money. Wells Fargo engages in other businesses such as brokerage services, asset management, and investment banking. The company also makes venture capital investments.

Over the last ten years, Wells Fargo has averaged a 1.57% return on assets and an 18.19% return on equity.


Location

Wells Fargo is closely associated with California in the minds of most investors. The company now operates in 23 different states. However, the concentration in California remains.

Mortgage lending in California accounts for approximately 14% of Wells Fargo’s total loan portfolio. Commercial real estate loans in California account for another 5% of the company’s total loans. No other single state accounts for a similarly sized portion of total loans. In fact, neither mortgage lending nor commercial real estate lending in any other state accounts for more than 2% of Wells Fargo’s total loans.


Cross-Selling

Wells Fargo’s focus on cross-selling is well known. The company has a stated goal of doubling the number of products the average consumer and business customer has with Wells Fargo to eight products per customer (from the current four products per customer).

Cross-selling increases customer stickiness. It also helps increase profitability by decreasing expenses relative to revenues. The need for a large physical footprint is reduced – as is the need for a large number of bankers. Instead, the existing infrastructure is able to provide additional revenue from the same customers.

Wells Fargo’s Chairman & CEO, Richard Kovacevich, explains the importance of the company’s cross-selling in the “Vision & Values” section of the corporate website:

Cross-selling — or what we call “needs-based” selling — is our most important strategy. Why? Because it is an “increasing returns” business model. It’s like the “network effect” of e-commerce. It multiplies opportunities geometrically. The more you sell customers the more you know about them. The more you know about them the easier it is to sell them more products. The more products customers have with you the better value they receive and the more loyal they are. The longer they stay with you the more opportunities you have to meet even more of their financial needs. The more you sell them the higher the profit because the added cost of selling another product to an existing customer is often only about ten percent of the cost of selling that same product to a new customer. This gives us—as an aggregator — a significant cost advantage over one product or one channel companies. Cross-selling re-invents how financial services are aggregated and sold to customers — just like other aggregators such as Wal-Mart (general merchandise), Home Depot (home improvement products) and Staples (office supplies).
(Vision and Values)


Mr. Kovacevich’s enthusiasm for the cross-selling model is well justified. It is difficult to quantify the importance of meeting all the varied needs of your customers, because you can not measure the opportunities you missed. However, it is obvious that reducing each customer’s interest in considering a competitor’s services will greatly increase long-term profitability for any company engaged in any line of business – not just for a bank.

Later, in the same website section, Mr. Kovacevich addresses the importance of customer stickiness:

(Cross-selling) is our most important customer-related sales metric. We want to earn 100 percent of our customers’ business. The more products customers have with Wells Fargo the better deal they get, the more loyal they are, and the longer they stay with the company, improving retention. Eighty percent of our revenue growth comes from selling more products to existing customers.
(Vision and Values)


This focus on retention is an important part of a long-term plan to maintain Wells Fargo’s above-average returns on assets and equity. Extraordinary profitability comes from differentiating your product or service from those of your competitors. Increasing customer stickiness and reducing “comparison shopping” is a key part of maintaining extraordinary profitability.

Some businesses are blessed with enviable economics because of their product’s natural prominence in the minds of their customers. Most businesses are obsessed with market share. But, how many really think about “mind share”? Obviously, a product like Coke (KO), Hershey (HSY), or Snickers is going to have a positive association in the minds of consumers.

For many people, these products will also have a prominent place in each customer’s mind (relative to other products and services on which money can be spent). A few other businesses have a healthy mind share without the positive association; GEICO is the most obvious example. The company’s brand conjures up nothing but the words “auto insurance”. Of course, that’s all the GEICO brand has to do.

So, what does all this have to do with Wells Fargo? Mind share isn’t just the result of exposure to advertising. In fact, in most cases, exposure to advertising can not duplicate the kind of results that a direct, differentiated experience creates. Entertainment properties are by far the leaders in mind share. People who saw and loved Star Wars remember the film. In fact, they don’t just remember the film, they actually file it away (or, more precisely, cross reference it) in countless ways within their mind.

The evidence for this particular example is abundant. There are countless references to Star Wars in other media. The name, the music, the opening text and countless other elements are immediately recognizable. Even the films Star Wars fans hated made more money than almost any other movies in the history of cinema – and this was decades after the original came out. So, obviously Star Wars has the kind of lasting mind share any business should aspire to if it hopes to continuously earn extraordinary profits.

Unfortunately, most businesses, however well run, can not attain this kind of mind share. The products and services they provide can never be as differentiated and memorable as a motion picture. Just as importantly, the positive associations will not be present, simply because the product or service is not inherently exciting, entertaining, or pleasant. This is clearly the case in financial services.

So, what can a financial services company do to improve its mind share? The most obvious tactic is simply to “wow” its customers. In fact, Wells Fargo’s CEO discusses this particular option in the “Vision and Values” section of the company’s website:

We have to “wow!” them. We know what that feels like because we’re all customers. We go to the cleaners, the grocery store, a restaurant or whatever, and we find a situation where we’re “wowed!” We walk out and we say, those people really listened to me and helped me get what I need. All of us hear stories about customers, say, who pick a certain line at the supermarket because they know the person who bags the groceries connects with customers — smiles, greets regular customers by name, asks how their families are doing. When a personal banker helps a customer in one of our stores, or when a customer gets help from one of our phone bankers or does transactions on wellsfargo.com we want them to say, “That was great. I can’t wait to tell someone.”
(Vision & Values)


Another option worth pursuing is widening the associations present in the customer’s mind. Financial services is a business where associations tend to be more conscious, categorized, and hierarchical than the associations formed in more heavily branded businesses. Put simply, the (potential) customer usually thinks of a “set” before thinking of an “element” within that set. Like many mental associations, the information can be returned in either direction. For example, the customer may normally think “banks” and then think “Wells Fargo”, but will also be able to return the word “bank” if prompted by the name “Wells Fargo”. This categorization is important, because it provides (limited) permission for Wells Fargo to expand its mind share horizontally (across service categories).

In other words, providing a diverse range of financial services doesn’t just make sense from the provider’s perspective, it also makes sense from the user’s perspective, because the user of financial services has already grouped deposits, borrowing, credit cards, insurance, brokerage services, asset management, etc. together in a very loose way within his mind. As a result of this mental network, one positive experience with Wells Fargo will greatly affect a customer’s desire to pay for an additional service, even if the two services are not really all that similar.

The three key elements here are: a broader definition of what Wells Fargo is (a place that does “money things”, not just a bank), a positive experience, and some sense of trust that the quality of service will be consistent. The last requirement is the easiest to meet, because it’s natural for a customer to assume that the positive experience was not a fluke, much the way a diner assumes the good meal he had at a particular restaurant was not caused by his picking the best offering from the menu. The diner usually assumes the overall quality of the restaurant’s various entrees is superior. Likewise, a good experience with one of Wells Fargo’s products or services will likely rub off on its other offerings.


Valuation

Shares of Wells Fargo currently yield just over 3%. The stock trades at a price-to-book ratio of just under 2.75 and a price-to-earnings ratio of less than 15.


Conclusion

Over the last 5, 10, 15, and 20 years shareholders of Wells Fargo & Company have fared better than the S&P 500. As of the end of last year, WFC’s total return over the last ten years was 17% vs. 9% for the S&P. Over the last 20 years, WFC outpaced the S&P 500 by an even wider margin: 21% vs. 12%.

Wells Fargo has a stellar reputation with investors. The company is the only U.S. bank to earn Moody’s highest credit rating. Wells Fargo also boasts a well-known major shareholder. The largest owner of the company’s common stock is Berkshire Hathaway. Warren Buffett’s holding company has a roughly 5.5% stake in Wells Fargo. Berkshire’s last reported purchase occurred during the first quarter of this year.

Wells Fargo has a stated goal of achieving double-digit growth in earnings and revenue while managing a return on assets over 1.75% and a return on equity over 20%. Those are both very ambitious goals. The company has achieved some of the highest returns on assets and equity of any major U.S. bank. However, Wells Fargo will probably need to increase the percentage of revenue it derives from fee businesses if it is to achieve these goals.

In the years ahead, the company may well become more of a diversified financial services business. In fact, that’s what I expect will happen. The company’s commitment to cross-selling is not some fad. Eventually, this commitment will change the way investors think about Wells Fargo. Soon, it may be considered much more than a bank.

Wells Fargo’s CEO makes the case that his company’s P/E is simply too low. Wells Fargo has a solid history of strong growth and profitability. So, why should it be valued similarly to most other banks? Shouldn’t it be awarded a multiple more in line with a growth company?

There’s actually some merit to this argument. Wells Fargo is unusually well positioned for a bank. Often, those banks that seem certain to earn very high returns on assets and equity for many years to come are poorly positioned for future growth. These banks are often smaller than their competitors and focused on a specific geographic niche. Any acquisitions would dilute the exceptional profitability of the bank’s niche.

Of course, there are also many consolidators in the banking industry. Unfortunately, many of these banks do not have a history of earning the kind of returns on assets and equity that Wells Fargo has achieved. Even more importantly, there is little differentiation between these titans of the banking industry and their national competitors. Therefore, their moats are highly suspect.

Wells Fargo is a different kind of bank. It has a history of extraordinary growth and profitability. There are two obvious opportunities for future growth: geographic expansion and cross-selling. Of these two opportunities, it's clear I’m more enamored with the latter. An eastward push is not necessary, and certainly not via an ill-advised acquisition.

There is a lot of value in the Wells Fargo franchise and there is plenty of room within that franchise for future growth. That’s one of the great advantages of the financial services industry. With the right model, limits to growth are almost non-existent. In other highly-profitable industries, there is often nowhere to reinvest new capital at a similar rate of return.

If Wells Fargo is a growth stock, it is a peculiar sort of growth stock. Maybe that is what attracted Buffett to the company in the first place. Here is a business with a strong franchise that can grow for many years to come. Perhaps most importantly, it is a growth business that frequently trades in the market at value like multiples, simply because it’s a bank.

At the current market price, Wells Fargo is the sort of investment you make once and forget. The valuation is not so cheap as to promise a good return if the business falters. But, the business is not so suspect as to require the margin of safety be provided by a low P/E ratio. Sometimes, near certain growth is the margin of safety.

On a separate topic, I’d like to encourage anyone with an interest in competitive advantages to read the entire "Vision and Values" section of the Wells Fargo site.

Superficially, it looks like any other online presentation to investors. In truth, it is nothing like those hollow, sugary slide shows. It's actually an engaging exploration of competitive advantages within an industry that seems totally unlike the sort of branded, consumer-oriented businesses one normally associates with strong franchises. Even if you aren’t interested in the banking industry in particular, I recommend reading this section for its insights into customer psychology and behavior.

http://www.gannononinvesting.com/

DivX and Vonage

Stocks: (VG)(MSFT)(RNWK)(AAPL)(SUNW)(GE)(SNE)(FTE)(T)

Does the IPO of Vonage tell investors anything about the DivX offering? Certainly since both are in the tech space and are fundamentally software-based enterprises, there are some potential parallels in valuation. Vonage describes its product as "VoIP technology which enables voice communications over the Internet through the conversion and compression of voice signals into data packets". DivX says it has created "a technological platform and galvanized the community necessary to enable a digital media ecosystem". The factor that is very different is that Vonage can claim, at least for the time being, that it is the market leader in VoIP in the U.S. DivX cannot make this claim in its media player markets, especially with the presence of Windows Media and RealPlayer.

Accounting for the drop in stock price since its IPO, Vonage's stock is down 27% from the $17 initial offering . Vonage was priced at roughly ten times 2005 revenue. If DivX was priced on the same basis, it would now be worth about $241 million. The company said it plans to raise up to $135 million. Will they sell 56% of the company in an IPO? Not likely.

The other issue is that the DivX core intellectual property comes from the patent pool MPEG and is licensed through their IP authority MPEGLA. The MPEG patent pool includes intellectual property from companies including Samsung, Sharp, Sony, France Telecom, and GE Technology Development. Some of the IP in this pool is being challenged by AT&T, so it is unclear whether companies like DivX have clear title to it or what will happen if the AT&T claims go to court.

With this kind of IP risk, and DivX holding a market position well behind Microsoft and Real in media player usage, it is extremely hard to see how the company could command even the discounted multiple that Vonage did. In other words, there is little in the way of precedent to justify the company being worth even $200 million.


In the current market environment, deals like this often get shelved, so it would not be shocking if the DivX IPO gets pulled or at least has the terms lowered.

Douglas A. McIntyre

Joe's Quick Takes: SBUX

From The Average Joe Investor


I'm sure everyone has a pretty good idea as to the business behind Starbucks (ticker: SBUX) and most of you have probably enjoyed some of their beverages. If you haven't, you're likely not sufficiently caffeinated and I'd ask that you up your caffeine level before reading any more of this blog. To restate the obvious: Starbucks, through their retail locations, makes and sells beverages including hot and cold coffee and espresso beverages and teas. 'Bucks also sells ground and bean coffee (both at retail locations and through other channels), food (mostly cake in various forms that is not kind to my waistline), coffee making equipment and music.

Currently the breakdown in sales at 'Bucks goes like this (as of end of fiscal year end '05): 85% in-store, 10% licensing and 5% foodservice; 77% beverage, 15% food, 4% whole bean coffee and 4% coffee making equipment and other; 84% US and 16% non-US. The company owns around 6,000 stores and opened over 700 new stores in '05 (simple math says that's roughly two stores per day!). Revenue has grown at around a 25% CAGR from 2001 to 2005 and diluted EPS has grown about 28% per year in the same period. Operating margins have gone up 2% over that span and comparable store sales, though down in '05 versus '04, are up versus 2001 and 2002.

Great.

And with a significant amount of growth expected to come from China and other overseas markets, not to mention continued growth in the US (SBUX's long-term goal is to have 30,000 total stores - 15,000 in the US and 15,000 abroad), the 20%+ annual growth isn't expected to end any time soon. Heck, I like the story here - anecdotally, I have trouble turning the heat on at home during the winter but readily shell out $3 on a daily basis for a double tall latte. And guess what - I'm not the only one in there...

The problem with the stock, though, lies in their risk factor #2 in their 10-K (for those not familiar with the "risk factors" in SEC filings, they're basically a section of the document where the company gives every conceivable risk to their business and stock price, basically so that if something does go wrong they can point to the document and say "see, we told you that could happen!"):

"Market expectations for Starbucks financial performance are high.
Management believes the price of Starbucks stock reflects high market expectations for its future operating results. In particular, any failure to meet the market’s high expectations for Starbucks comparable store sales growth rates, earnings per share and new store openings could cause the market price of Starbucks stock to drop rapidly and sharply."

A nice way for management to say that the stock is perhaps a bit overvalued.

SBUX trades at 46x the current EPS estimates for 2006 - that's a nice 2.3x a 20% five year growth rate. And this is after shedding 12% since the first part of May. I think there's a great company behind the SBUX ticker, but you're not going to get me to pay that kind of a price for it. My take is that people may be a little too worked up about music and movies (which 'Bucks is using to enhance customer experience to sell more coffee not necessarily to be a big new source of growth) and letting the fundamentals fly out the window.

I think SBUX has a good amount of room to fall to become interesting in the least, and a heck of a lot of room to fall before it becomes a buying opportunity.

Bottom Line: HOLD

http://theaveragejoeinvestor.blogspot.com/

Claires Stores Inc.

From ValueDiscipline

I know the stock market is rough. I know consumer confidence is dwindling. But when Mr. Market is having one of his downers, it's time to pull out the calculator and have a look at some decent businesses that may be getting cut unmercifully.

I believe that Claires Stores (CLE) is one of those kinds of businesses. Down about 26% from its peak of April (most of that fall occurred in May,) the company continues to demonstrate significant profitability, predictability, and at this point, decent valuation characteristics.

Enterprise value is about $2.2 billion reflecting zero debt and just under $400 million in cash. CFFO for last year was $243 million with capex of $82.5 million for free cash flow of $160.4 million. Hence, a FCF yield of 7.3%.

Not a random occurrence...free cash flow was generated in each of the last five years totalling $602 million. Dividends of $120.3 million were paid over that period. Share buybacks are non-existent but share issuance has been miniscule amounting to less than $20 million. Dividend growth rate for five years is 52% i.e. they have treated shareholders as partners.

Valuation has just dropped below 9 times EV/EBIT. Less than 7.5 times EV/EBITDA.

ROIC on a TTM basis is 19.8%. Average ROIC in the last five years has been 16.6%.

Long term growth estimates range from 12 to 18%. Let's use 9%. Operating margins have been running near 18% recently. Lowest operating margins in the last five years were 7%, median was 14%. Let's use 14%. I come up with a DCF of over $30 using these very conservative inputs versus its current price of $26.12.

As of January 28, 2006, Claires operated a total of 2,878 stores in all 50 states of the United States, Puerto Rico, Canada, the Virgin Islands, the United Kingdom, Switzerland, Austria, Germany, France, Ireland, Spain, Holland and Belgium. The Company has two store concepts: Claire's Accessories and Icing by Claire's. About 29% of sales are outside the U.S.


Seems to me that even in the worst of economic environments, young girls will still want to be buying low priced accessories. As Ms Schaefer describes it, "we appeal to people 2 to 92 because when it comes to fun items that are well priced and impulse driven, we are the place to go."

Seems to me that even in the ugliest of stock market environments, investors will still want to own low priced stocks.

http://valuediscipline.blogspot.com

Europe Market Report 5/31/2006

Stocks: (BCS)(BAB)(BT)(HBC)(RTRSY)(UN)(UL)(VOD)(AZ)(BAY)(DCX)(SI)(ALA)(AXA)(FTE)(TMS)(V)

European markets were recovering at 5.30 AM New York Time.

The FTSE 100 was up almost .7% to 5,690. Barclays was up 2.8% to 606. British Airways was up 1.4% to 337. BT Group was off nearly .7% to 229. HSBC was up 1% to 923. Reuters was up 1% to 377. Unilever was off .3% to 1,184. Vodafone was up nearly 1.3% to 121.

The Daxx was up almost .2% to 5,632. Allianz was up 1.2% to 120. Bayer was off .6% to 35. DaimlerChrysler was up over .6% to 40.6. SAP was off 1% to 162.7. And, Siemens was off almost .6% at 66.

The CAC 40 was up very slightly to 4,901. Alcatel was up .5% to 10.27. AXA was up .7% to 26.94. France Telecom was up 2.6% to 17.19. L'Oreal was up .7% to 69.25. Thomson was up 1.1% to 14.9. And, Vivendi was flat at 27.97.

Douglas A. McIntyre

Nasdaq Short Interest, May 2006

Stocks: (SIRI)(LVLT)(YHOO)(JDSU)(CHTR)(INTC)(SUNW)(MSFT)(CIEN)(EBAY)(CNXT)(AMTD)(HAWK)(ORCL)

The largest short interest in Nasdaq stocks in May was:

Nasdaq 100 Trust 122.248 million
Sirius 119.144 million
Level 3 100.041 million
Yahoo! 78.282 million
JDS Uniphase 69.511 million
Charter Comm 69.412 million
Intel 55.962 million
Sun 51.681 million
Microsoft 50.844 million
Ciena 46.914 million
eBay 46.301 million


The largest changes up in short interest were:

JDS Uniphase up 17.9 million to 69.5 million
Level 3 up 15.7 million to 100 million
Conexant up 9.7 million to 31.6 million
TD Ameritrade up 6.2 million to 12.2 million
Petrohawk Energy up 5.9 million to 9.7 million
eBay up 5.6 million to 46.3 million

The largest changes down in short interest were:

Nasdaq 100 Trust down 25.3 million to 122.2 million
Sun down 9.3 million to 51.7 million
Intel down 6.3 million to 55.9 million
Microsoft down 6.2 million to 50.8 million
Oracle down 6.2 million to 37.3 million
Charter Comm down 5.1 million to 69.4 million


The largest short interest ratios were:

SCO Group 188 days
Navarre 55 days
Introgen 54 days
Convera 52 days
Mair Holdings 52 days
Integrated Alarm 47 days

Other notable short ratios:

Valence 23 days
Costar 21 days
eCollege 21 days
DTS 20 days
NeoPharm 20 days

Douglas A. McIntyre

Media Digest 5/31/2006

Stocks: (GM)(VOD)(TWX)(CMCSA)(VG)(XMSR)(FRE)(CA)(NRG)(MIR)

Reuters reports that Lenovo Group, the world's third largest PC company, would have profits in 2006 that would not be below 2005.

Reuters also reports that a small cable programming company, The American Channel has sued TimeWarner and Comcast accusing them of "big-rigging" in their purchase of Adelphia. The suit says that this would keep unaffilated networks off the cable system.

Reuters writes that Vonage will pay back the bankers in its IPO if Vonage customer who bought stock do not pay for their shares. The price dropped sharply after the offering and is now down almost 27%.

Reuters also writes that XM Satellite Radio will stop selling two of its radio products "after a U.S. regulator said the devices exceeded limits for wireless signal strength".

The Wall Street Journal reports that Freddie Mac (FRE) reported a 27% drop in net income in 2005 to $2.13 billion.

The WSJ also reports that Vodafone will shift its focus to broadband internet access and away from international acquisitions of cell phone operations. The company is the world's largest cell phone operator.

The Journal also writes that Computer Associates will delay its annual report "because of additional work on sales commissions and income taxes".

The WSJ also reports that NRG Energy has rejected an offer of nearly $7.9 million from Mirant, another power generation company.

In the New York Times, GM has named the head of its Asia division to run its troubled North American operations.

The NYT also reports that Vodafone had an annual loss of $41 billion which "would qualify as the largest in recent European corporate history".

Douglas A. McIntyre

Asia Markets 5/31/2006

Stocks: (CAJ)(FUJIY)(HMC)(NIPNY)(NTT)(DCM)(TM)

Asian markets dropped sharply on concerns about the U.S.economy and interest rates.

The Nikkei dropped almost 2.5% to 15,467. Shares in Bridgestone were off over 4% to 2,290. Canon was down over 4% to 7,760. Daiwa Securites was off 3.4% to 1,378. Fuji Photo was off 3.2% to 3,670. Honda Motors was down 2.5% to 7,320. Japan Airlines was down .7% to 298. Mitsubishi Corp was down 1.7% to 2,365. NEC was off over 4% to 668. NTT was off nearly 2% to 549,000. DoCoMo was down 1.6% to 181,000. Sharp was down 3.2% to 1,860. Softbank feel sharply, 5.4% to 2,720. And, Toyoto fell 3.4% to 5,930.

Markets in Hong Kong and Korea were closed for holidays.

The Straits Times Index was off 2.4% to 2,384. Singapore Airlines was down 1.6% to 12.4. Singapore Telecom was down 1.6% to 2.5.

Douglas A. McIntyre

Rex’s Earnings Vanish; Assets Remain

(RX)(PGN)

By Geoff Gannon

Shares of Rex Stores (RSC) are down nearly 8% in today’s trading. This decline extends Friday’s fall-off following Rex’s disappointing earnings release.

Net income for the quarter came in at $1.5 million or $0.13 per diluted share vs. $6.1 million or $0.48 per diluted share during the year ago period. Net sales dropped to $86.1 million from $87.9 million during the year-ago period, despite a 0.5% increase in same-store sales.

The decline in net sales was primarily the result of store closings. Rex has continually closed stores over the past few years. The decline in net income was primarily the result of a drop in Rex’s synthetic fuel investment income. Income from limited partnership investments was $2.1 million in the first quarter vs. $6 million in the year ago period.

The sharp sell-off is likely the result of news from Progressive Energy (PGN), Rex’s partner in its Colona synthetic fuel investment, that production at the fuel facilities has ceased in anticipation of the reduction or phase-out of Section 29/45K tax credits. Synthetic fuel credits are phased out if oil prices reach certain levels.

Rex had always been aware of the possible phase-out, but hadn’t previously stated that it did not expect to receive any additional income from the sale of its synthetic fuel interests. Last week, Rex’s Chairman and CEO, Stuart Rose, acknowledged that Rex no longer expected additional income from the synfuel investments.

The market’s violent reaction to Rex’s first-quarter results and the synfuel announcement is entirely overdone. Such a reaction would have been appropriate if the market had been valuing Rex on an earnings power basis with the expectation that income from the sale of the synfuel partnership interests would have continued at the same level as a year ago.

But, that was never the expectation. In the first quarter of 2006, shares of Rex stores were trading at less than seven times last year’s earnings. Obviously, the stock was not being valued on the basis of last year’s earnings.

Even a year ago, the majority of the value in Rex Stores was not derived from the income received from the sale of the company’s LP interests. For several years now, Rex Stores has been an asset play. The company has substantial real estate holdings (largely unmortgaged) spread across many different states.

In addition to its many real properties, the company still has both state NOL tax credits - and much more importantly, federal AMT credits. The credits are largely the result of the synfuel investments. While the value of the company’s real estate is difficult to value, the fact that Rex has managed to halve its total liabilities in less than five years has created an interesting opportunity in the company’s common stock.

Shares of Rex Stores currently trade at about 75% of book. The book value of the company’s assets is less inflated than the book value of the assets of most public corporations. Even if the retail chain merely managed to break even, shares of Rex Stores would not be overvalued at current levels. So, why all the selling?

Part of the problem may be speculators. Recently, Rex has been making investments in ethanol. Earlier this year, shares of Rex Stores had risen suddenly when the company’s interest in ethanol became more widely known.

For long-term shareholders, the transition from synfuel investments to ethanol investments was not unexpected. However, Rex Stores was not particularly well known outside of investors who hunt for such book value bargains. The public’s interest in ethanol and its new found knowledge of this small, rather obscure electronics retailer may be the reason for the recent wild ride – both on the way up and on the way down Of course, it remains to be seen if steadier hands (particularly value-oriented funds) are taking part in the selling, or are staying on the sidelines.

Geoff Gannon's site is www.gannononinvesting.com

Microsoft Whistling Past The Graveyard MSFT, YHOO, GOOG

Microsoft's management has yet to come out and admit how serious problems at the company have become. In June 2001, the stock was above $36. It dropped below $23 in 2002, and the current $23.50 is as low as it has been since. Odd, in a way.

Revenue for the quarter ending March 31 was up nicely from $9.6 billion a year ago to $10.9 billion. Operating income was up to $3.89 billion from $3.33 billion. How many companies can boast about that kind of margin. And, the company has about $35 billion of cash and short-term investments.

Operating income in the Client, Server and Tools, and Information Worker segments is large and growing. Together, these older-line businesses brought in operating income of $5.6 billion in Q1. Which means the other three businesses operated by the company, MSN, Mobile and Embedded Devices, and Home and Entertainment, were a big drag.

Piracy, open source solutions, and IP and antitrust problems have all taken a piece out of Microsoft's vaunted reputation. But, the core fear about Microsoft is that software will no longer be sold the way it has been in the past. This means that companies delivering applications over IP will overtake the Microsoft model in the next few years.

In the arena of search technology, it is unlikely that Microsoft can cut into the lead that Google and Yahoo! have established. The fact that Google will be bundling some of its critical software with Dell PCs is hardly good news for Microsoft.

In a recent downgrade of Microsoft's stock, Caris & Co. made a prescient observation:
"Microsoft's forced shift from a software company to a digital services company is an admission that its traditional business model is challenged," said Analyst Tim Boyd. The company's stock price is an indication that this view is now widely held.

So, what can Microsoft do? Based on Microsoft's inability to change the minds of the doubting legions of investors, the stock has dropped 17% from its 52-week high of $28.38 and trades barely above $23.

But, the company still has two critical assets. One is its huge cash reserves and positive cash flow and the other is its market capitalization of over $238 billion. Perhaps the best course for Microsoft is based on the old adage "if you can't beat them, join them".

What does Microsoft need? A better position in search is the sine qua non of delivering services and software over IP to the PC and many other devices. And,it needs traffic.... Access to the tens of million of regular internet users.

The company that has both is Yahoo!. Yahoo!'s stock is now trading near a 52-week low and its market cap is small compared to Microsoft's at $45 billion. Yahoo!'s stock has not been above $40 for any sustained period in the last 5 years! Would shareholders take $40? It is a large premium given current valuations, but Microsoft's situation absolutely requires something that will transform the company in a moment's time.

Douglas A. McIntyre

Tribune Company Eats Its Own Cooking TRB

Tribune Company today announced that it would buy back 25% of its shares for $2 billion. Shares can be tendered for not less than $28.00 and not more than $32.50. The offer begins immediately.

Tribune has been trading near its lows, with a 52-week nadir of $29.07 against a high of $39.56. The stock rose 7.6% to $30 on the news.

The tick up is not nearly enough under the circumstances.

Tribune's revenue has been fairly flat over the last three years. In 2003, revenue was $5.595 billion, then $5.26 billion in 2004, and $5.596 billion in 2005. Operating income dropped from $1.36 billion in 2003 to $1.147 in 2005.

But the company's interactive properties have been doing unusually well. In April, Netratings says that company's 50 sites drew 14.8 million average unique users per month. This is up 32% from the same period a year ago.

In the first quarter of the year ending March 31, revenue dropped 1% to $1.299 billion. Operating profit dropped 12% to $222.9 million. The company insists that due to staff and other cost cuts that overall expenses are trending down. Tribune says it is committed to reducing costs another $200 million over the next two years.

Because the company has several very large newspapers, it has the opportunity to drive traffic to its online properties in a way that public newspaper companies in smaller markets do not. Tribune owns the LA Times, the Chicago Tribune and Newsday. Tribune's websites also tend to be large and in profitable internet niches. These include careerbuilder.com, cars.com and apartments.com. All fit well with the newspaper classified business which is migrating online.

Given the share drop in the number of Tribune shares, the online progress the company is making and expense reductions, the company should trade much closer to its 52-week high.

Douglas A. McIntyre

GM Takes A Downgrade GM

Lat week, 24/7 Wall St. published two stories saying that the rise in GM's stock was unwarranted by the fundamentals and the risks facing the company. In particular, it is unclear whether the UAW and other unions will strike Delphi, which would shut down GM's North American operations in a matter of days. In addition, there is strong evidence that GM's sales are continuing to drop, especially in their profitable SUV and pick-up lines.

This morning, Deutsche Bank dropped its rating on the stock from a "hold" to a "sell", indicating that "At this point we believe increased caution is once again warranted, as underlying business fundamentals continue to deteriorate, and appear likely to overwhelm GM's cost cutting efforts."

The trend in GM's stock is likely to be down from here, unless the Delphi strike issue is resolved favorably or GM reverses its negative sales trends.

Douglas A. McIntyre

Sealy Loses Its Spring ZZ

Shares of Sealy Corporation, the largest bedding manufacturer in the world, have fallen in almost a straight line since the company’s IPO in April. The company has traded as high as $18.20 and as low as $12.95. The stock trades at $13.10 at this point, which is quite a drop in a very short time.

The company’s debt was recently upgraded by S&P and Moody’s and Banc of America Securities initiated coverage with a buy. That’s a lot of support for a company sitting at its lows.

What happened? Sealy recently announced earnings for the quarter ending February 26, 2006. Revenue rose to $395.7 million from $359 million, or 10.2%. Operating income was $56.7 million from $53.2 million, up 6.6%.

Since the end of the November 27, 2005 quarter, accoureceivableable have risen to $204 million from $174.5 million. Payables have dropped to $110.4 million from $119.6 million.

The company IPO raised $299.5 million and a good deal of these proceeds went to redeem Senior Subordinated PIK Notes and some of the company's 8.25% Senior Subordinated Notes. So, the company's balance sheet improved.

The company has marquee brands: Sealy, Sealy Posturepedic, and Stearns & Foster.

Sealy has very few major negatives. The cost of some of the foam used in its bedding is impacted by oil prices, but the company has been able to raise prices to consumers to offset this. The company is not a huge growth engine, but it does market premium brands.

With the stock down 28% from the April IPO, these shares are a bargain.

Douglas A. McIntyre

Europe Market Report 5/30/2006 BAA, BCS, BP, BT, GSK, PSO, RTRSY, UN, UL, VOD, BAY, DB, DT, SAP, SI, ALA, AXA, FTE, V

European stock are off sharply at 5.30 AM New York Time.

The FTSE 100 is down almost 1.5% at 5,706. BAA was up over 6% on takeover talk to 875. Barclays was off 1.9% to 600. BP was off 1.8% to 631. British Airways was down 1.5% to 339. BT Group was up 1.9% to 233. Cable and Wireless was down 1.2% to 100. GlaxoSmithKline was down 1.9% to 1,477. Pearson was off 1.8% to 721. Reuters was off 1.7% to 375. Unilever was off 1.3% to 1,205. And, Vodafone was up 1.5% to 121 on good divident news.

The Daxx was down 1.4% to 5,675. Bayer was off 1.5% to 35. BMW was off 1.4% to 40.4. Deutsche Bank was off 1.1% to 90. Deutsche Telekom was off .7% to 12.4. SAP was off 1.1% to 166. And, Siemens was down 1.6% to 67.

The CAC 40 was down 1.1% to 4,960. Alcatel was down .8% to 10.49. AXA was down 1.6% to 27.24. France Telecom was down .9% to 16.84. Michelin was down 2.3% to 49.8. ST Micro was down 1% to 12.81. And Vivendi was off .9% to 28.12.

Douglas A. McIntyre

The High And The Mighty: Redback Networks RBAK, CN, CHA, BLS, T, VZ, ALA, NT, FTE, CSCO, JNPR, TWX

There is no denying that Redback Networks has run like a scalded dog, from a 52-week low of $5.46 to a high of $24.99. Even with the Nasdaq sell-off, the stock trades at $23.81. Redback, which describes itself as a provider of next-generation networking systems recently announced deals with China Netcom and the largest subsidiary of China Telecom. Redback is obviously running with a fast crowd.

Redback is also planning to buy back 3.5 million of its own shares, but, if past is prologue, that is not always a good sign. Look at TimeWarner.

A research analyst from RBC Capital Markets was recently quotes by Forbes saying that investing in Redback was not for the faint-of-heart, because so much of the company’s backlog is with BellSouth. As a matter of fact, Redback relies heavily on its business from BellSouth, AT&T, Verizon, Alcatel, Nortel, R-Core, and France Telecom. If one of more of these clients begins to more away from Redback, the impact on financial results could be considerable.

Redback’s results have certainly earned it a strong stock performance. In Q1 06, ending March 31, revenue jumped to $57.9 million from $34.3 million in the same period in 2005. Gross profit rose from $17.9 million to $32.5 million. But, expenses rose too much for the company to show a profit, and the loss from operations was $2.4 million, better than the loss of $7.1 million in the same period a year ago.

The other important issue is that larger competitors like Juniper Networks are lurking in the woods. At $57 million a quarter, Redback is not yet a giant.

Redback now has a 7.8 price to sales ratio according to Yahoo!Finance. Juniper’s is less than 4.0 and Cisco’s is 4.7.

That’s too heady a valuation for a company with competition of this size and scope. It will take a lot more proof of the business model to keep it at these levels.

Douglas A. McIntyre

Priceline and Expedia: The Road Less Traveled EXPE, PCLN

Oddly enough, Priceline hit a 52-week high this last week and Expedia hit a 52-week low. On the face of it, this seems to make no sense. The businesses of the two companies are not radically different, and Expedia is larger, with more market share and resource.

Priceline has a trading range from $18.20 to $32.16 and is now at $31.40. Expedia has a range of $13.36 to $27.55 and now trades at $13.99.

In the quarter ending March 31, Expedia’s revenue rose to $493.9 million from $485 a year earlier. Not thrilling by any means. Operating income dropped to $26.2 million from $66.3 million as G&A and marketing costs ran up. Expedia said it intends to continue spending to expand it brands, particularly overseas. The company does expect improvement in its G&A costs now that its IPO is behind it. According to Morgan Stanley analyst Christopher Gutek, Expedia could “get interesting” if it trades in the mid-teens because although the first quarter results were disappointing, cash -flow has stayed strong “which may allow performance to recover some in a few quarters”. Well, a price of $13.99 should qualify.

Priceline, on the other hand, did not have a spectacular first quarter either, although its booking rose sharply, which should help in future periods. Revenue was $241.9 million up 3.7% over the year earlier, but the 2006 results including revenue from a company Priceline had acquired, Bookings B.V. The company also said that revenue in Q2 should increase 8% to 12% from a year earlier. But, Priceline had an operating loss of $1.2 million compared to an operating profit in Q1 05 of $5.2 million. And, online marketing costs more than doubled to $21.9 million.

Priceline was more optimistic about its upcoming quarters that Expedia was, but that is not always a perfect indication of what will happen to revenue or earnings.

Priceline may have the better metrics now, but Expedia has substantially more resources, and is unlikely to give up the ghost easily. The online travel market is know for its vicious competition, so neither company is immune to problems arising from other travel sites, including those owned by the airlines, hotels and car rental firms.

But, the disparity in the trading of the two stocks is too extreme. The valuation of one of them is off, perhaps considerably.

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at douglasamcintyre@gmail.com.

Media Digest 5/30/2006 GE, GM, MSFT, KMI, GS, VOD, IBM

Reuters reports that the CEO and management of pipeline company Kinder Morgan and Goldman Sachs have of $13.4 billion in a move to take the company private.

Reuters also writes that Vodafone will boost its dividend. The company is planning to return an additional $5.6 billion to shareholders, after announcing strong earnings. The company already announced that it would return over $11 billion after the sale of its Japanese unit.

Reuters writes that BAA has rejected an $18 billion offer from Groupo Ferrovial. BAA operates airports.

Reuters also reports that IBM will be able to sell its 15% in Chinese computer company Lenovo in November 2007, six months earlier than originally agreed.

The Wall Street Journal reports that U.S. catalyst maker Engelhard will accept a $5 billion buy-out offer from BASF of Germany.

As GE pushes to get more of its growth from developing markets, the company's CEO is expected to forecast revenue in that country of $8 billion by 2010. This is eight times what the company did in India last year. GE expects sales of its heavy equipment would make up a great deal of the increase.

According to the New York Times, GM's investment in Daewoo Motor has been a success. Its sales of cars in China are rising and GMDaewoo sold 1.16 million cars, double the year before and sales are up 53% in the first four months of this year. The company is now Korea's second largest car manufacturer.

The NYT also reports that China is beginning to seriously attack software piracy in that company, a move that could eventually help Microsoft and other U.S. software companies.

Douglas A. McIntyre

Asian Markets Off Slightly 5/30/2006 TM, HIT, HMC, NIPNY, NTT, DCM, TM, SNE, CHU, CN, HBC, PCW,

At 4.30 AM New York Time, Asian markets were down modestly.

The Nikkei was off .35% to 15,859. Daiwa Securities was up 1% to 1,426. Fuji Heavy Industies was up 1% to 680. Hitachi was down 1% to 773. Honda was up .8% to 7,510. Japan Airlines was down .3% to 300. Mitsubishi Corp was up 1% to 2,405. NEC was up 1.2% to 696. NTT was down 1.7% to 560,000. NTT Docomo was down .5% to 184,000. Sharp was down 1% to 1,922. Sony was off .8% to 5,190. And Toyota was flat at 6,140.

The Hang Seng was off .2% to 15,947. Telecoms were off sharply. China Unicom was down 2.1% to 7. China Netcom was down 2.4% to 12.3. Shares of banking group HSBC were up .2% to 135.9. Computer company Lenovo Group recovered from poor earning last week, up 4.2% 2.425. PCCW was down .5% to 4.85.

The Kopsi was off .8% to 1,318.

The Straits Times was flat at 2,428. Singapore Airlines was off .8% to 12.6.

The Shanghai Composite was up over .5% to 1,567.

Douglas A. McIntyre

Media Digest 5/29/2006 WMT, GS, GE, AMD, NIPNY, MC, MT, SNE

Retuers reports that General Electric expects its sales in China to double to $10 billion by 2010. The sale of clean energy technology products should represent a substantial part of that increase.

Reuters also says that Advanced Micro Devices will spend $2.5 billion to upgrade its two factories in Germany.

Also according to Reuters, NEC and Matsushita Electric are in talks about cooperating in the cellphone businesses. NEC's operation has been losing money.

Reuters also reports that Arcelor will have to convince investors why it made $16.59 billion deal with Russia's steel maker Severstal instead of combining to suitor Mittal Steel, accoridng to some of Arcelor's shareholders.

The New York Times reports that Sony has gone into so many businesses around that world that it is losing its core reputation as an engineering company that builds premium products. One of the largest hurdles facing Sony in its turnaround is that its product once commanded premium prices. They are now often priced at the same level as comparable products from competitors. Electronics and entertainment are no longer the most profitable businesses at the company. Financial services has taken that lead.

Also in the NYT, Goldman Sachs is trying to get Arcelor shareholders to block the steel company's plans to sell off a major stake to Severstal.

The Times also reports that Wal-Mart same store sales were up a small 2.3% in May as consumer buying power dropped due to high energy prices.

Douglas A. McIntyre

Europe Market Report 5/29/2006 BAY, DCM, DB, DT, SAP, SI, AXA, FTE, V

London is closed.

The Daxx is is off .6% at 8 AM New York Time. Bayer is off .7% to 35.88. DailerChrysler is flat at 41.49. DeutscheBank is off .6% at 91. Deutsche Telekom is off .9% at 12.46. SAP is off .25% at 168.59. Siemens is off .4% at 68.18.

The CAC 40 is off .5% to 5,019. AXA is off .5% to 27.77. France Telecom is off .5% to 17. Michelin is off .9% to 50.75. ST Micro is up .2% to 12.92. And, Vivendi is off .8% to 28.25.

Douglas A. McIntyre

Asia Markets 5/29/2006 PCW, HBC, CN, HMC, NTT, SNE, TM, DMC

The Nieei was down 55 point to 15,915, a drop of .34%. Honda was up .1% to 7,450. Japan Airlines was down 1% to 301. Mitsubishi Corop. was up over 2% to 2,380. NTT was off 1% to 571,000. Sony was up .4% to 5,230. Toyota was up .5% to 6,140. DoCoMo was up 1% to 185,000.

The Hang Send is up .4% to 15,964. China Netcom is off 1.5% to 12.6. HSBC is up .5% to 135.6. PCCW is off 1% to 4.875.

The ASX All Ordinaries is up 1% to 5,070. The KOPSI is up .5%% to 1,329. And, the Shanghai is up 2.1% to 1,649.

Douglas A. McIntyre

Barron's Digest 5/29/2006 Issue FRNS, XOHO, VG, IDT,LINTB, LRSC, MU, STEI, SCI, SI, GE, PHG, FSL, STM, IFX, INTC

Barron's has an upbeat story on Philips Electronics which points out that revenue and earnings have been lackluster for 10 years and the stock price has moved very little since 2001. But the company has promising prospects. The company's staff has been cut about 25%. In the first quarter, sales rose 14% and net profit was up 37%. Philips PE is not low, about 7 for 2007.

Philips plans to sell or IPO its semiconductor business, with potential buyers including Freescale, STMicroelectronics, Infineon, and Intel. Philips has four divisions, but Barron's believes that the medical operations division has the most promise. It had sales of $7.8 billion in 2005, 21% of Philips' total. This part of the company competes with GE and Siemens.

Philips is also pushing into emerging markets such as India and China. Barron's says that Philips has done well adapting to the local marketing and sales practices in these countries.

Barron's also reports that Service Corp. International is facing a poor business environment for its major product, funeral sevices, because people are living to be older. The same problem faces its competitors Alderwoods and Stewart Enterprises.

According to Barron's, after seven years, the run in small stocks may be facing problems. Although the access to capital for small firms is good and M&A activity is strong, some small caps are facing headwinds. Lam Research is one example of the issues facing companies with market caps this size. The company's earnings have been strong, but other companies are adding capacity. Output of NAND flash-memory chips could rise 200%. Companies vying for this market include Samsung, Toshiba, SanDisk, Intel and Micron Technology. Barron's says "the looming glut of NAND chips will batter shares of Lam and SanDisk".

Barron's says IDT may be about to deliver good returns for shareholders. The company sold its animated-movie division to Liberty Media. The sales could balloon IDT's cash position to over $1 billion, and some of this money may be used to buy back shares. IDT Telecom is the leader in pre-paid calling cards. IDT also owns wireless spectrum that may have future value. IDT also owns Net2Phone, which competes with Vonage. If IDT's parts are worth $1 billion and the company has $1 billion in cash after the Liberty transaction, the per share value is about $25. But, the company trades for under $13.

Barron's Tech Week looks at First Avenue Networks, which is in the "wireless backhaul" business. The stock may be expensive now. The company is small compared to rivals IDT and XO Holdings are larger and have much stronger balance sheets.

Barron's interviewed James Turk of Goldmoney.com. He says gold prices could go to $2,000 near-term and eventually $8,000. The physical demand for gold is rising. Also, gold tends to rise with the price of crude oil, and oil has gone up much more than gold recently.

Douglas A. McIntyre

Was the Mastercard IPO Underpriced? GS, C, MA

By Chad Brand of
http://peridotcapital.blogspot.com/


Lead underwriters Goldman Sachs (GS) and Citigroup (C) priced the Mastercard (MA) IPO Wednesday night at $39, below the expected range of $40 to $43 per share. On Thursday shares opened at $40.30 and then soared another $6 to close at $46 each. That trading action is quite baffling if you ask me.

Usually where the IPO is priced tells you how strong demand is, and subsequently, how well the stock will do upon opening for trading. The $39 pricing indicated to me that the smart money wasn't very enthusiastic about the deal. Then less than 24 hours later the stock is fetching $46. If demand was that strong, they easily could have priced it within the proposed range.

The conclusion I draw from this is that the smart institutional money wasn't sold on the price, but retail interest after the stock opened was strong. Following the retail crowd is rarely a good strategy, so I will put more weight into the $39 pricing than the $46 first day closing price. The stock's valuation also supports the cautious view. Mastercard earned about $2 per share in 2005, so the P/E is north of 20x, very high for a financial services company.

Broad Appeal for Broadcom BRCM

By Chad Brand of
http://peridotcapital.blogspot.com/

It's tough to find good, cheap technology stocks these days. I've been underweight the sector for many months due to a lack of good ideas. However, the recent market decline has given the Nasdaq a 9% haircut over the last few weeks.

Earlier this week I saw Broadcom (BRCM) cross my screen at $33 per share. That quote surprised me a bit. Broadcom is a very good chip company but its stock usually reflects that. Growth investors have traditionally been perfectly willing to fork over 30 times earnings for the stock. That's fine, but rarely will I pay up that much for something. In fact, I don't think I've ever owned Broadcom.

My instincts told me that BRCM hadn't traded at $33 for a while, which is why the price alone got my attention even though the stock is not really on my radar screen, so I took a closer look. It last closed there during the first week of the year, so it's been more than 5 months.

Looking at current estimates ($1.47 in EPS for 2006 and $1.66 for 2007) along with the company's pristine balance sheet ($4 per share in cash and no debt), Broadcom trades at an enterprise value to earnings ratio of only 20x for 2006. That seems very reasonable for a 15% long term grower that serves some of the best markets within technology.

I still think the market as a whole goes lower, and tech will get whacked more as well. That said, Broadcom at $33 looks like an opportunity that I'll strongly consider despite a market that has not yet gotten the 10% correction that I'm looking for.

And just in case readers might think I purposely failed to mention the options backdating issue (Broadcom's name has been mentioned as being "at risk"), that is not so. I plan on talking about the issue more broadly (no pun intended), so look for that sometime next week.

Media Digest 5/27/2006 Wall Street Journal NWS, PSO, HD, NWIR, UNH, CBST, HUMC, DITC, SCHW

According to the WSJ, News Corporation will launch a U.S. edition of The Times, one of Britain's oldest newspapers. Pearson already publisher their UK paper, The Financial Times, in the U.S.

The Journal also reported that investors brought out the long knives at the Home Depot annual meeting criticizing the CEO's very rich pay package.

The Journal also wrote that NWH rose 32% to $17.80 as the e-commerce provider agreed to be acquired by UnitedHealth Group. Cubist Pharmaceuticals rose 20% to $25.55 as it received supplemental approval of its antibiotic for blood stream infections. Hummingbird was up 21% to $27.90 as it agreed to be bought by Symphony Technology Group, a software holding company, for $465 million. Ditech Networks fell 9% to $9.29 as its earnings dropped. Charles Schwab rose 2.4% to $16.85 after it was upgraded by Banc of America Securities.

Douglas A. McIntyre

Media Digest 5/272006 New York Times HIT, DIS, MCS, TWX, CMCSA, PA, LVS

From The New York Times, Disney is considering layoffs at its studio due to declines in DVD sales and increased costs for making major pictures. In 2005, Disney was only No.5 in box office receipts

The NYT also reports that McDonals Japan intends to create a new food business by October. It may form a partership with a local company to improve the results for its lower-producing stores.

The NYT wrote that Adelphia, the struggling cable company, has asked a judeg to approve the sales of its asset to TimeWarner and Comcast without a creditor vote to meet and August 31 deadline.

Also, the NYT reports that Intelstat has won Justice Department approval for the purchase of PanAmSat. The FCC still needs to clear the deal.

The Las Vegas Sands has won the right to build a casino in Singapore. MGM Mirage and Harrah's both competed for the business.

Douglas A. McIntyre

The Sorry Tale of XMRS and SIRI

from http://theaveragejoeinvestor.blogspot.com/

Why oh why everyone is so fascinated with XM Satellite Radio Holdings (ticker: XMSR) and Sirius Satellite Radio (ticker: SIRI) is beyond me. After being propped up by hopeful souls for a long time, it's nice to see that at the very least the two are starting to come down a bit in price (for the last twelve months XMSR is down 55% and SIRI is down 27%), but I think they still have a long way to go. Here are two companies delivering a product that people want - as evidenced by Sirius' 300%+ compound annual growth from '03 to '05 - but just can't seem to get their operating model to where they can bring home a profit for their shareholders.

So what's holding these two back? Getting and keeping customers. Though revenue has been growing at a breakneck pace, so has customer acquisition costs: in the first quarter of 2006 Sirius spent an impressive 94% of their revenue on customer acquisitions! XM doesn't break it out quite as nicely as Sirius, but their "subsidies & distribution" (basically offering free services and marking down merchandise) has been growing around 70% per year. Are these guys just competing with each other too hard or are people really not all that interested in satellite radio unless someone gives them an unbelievable (and unprofitable for the company) deal?

As far as I can tell, it looks like a lot of institutional support has moved away from these two, but there is still obviously support out there as they are trading at very high multiples of price to sales and price to book value. And this support is in the face of some solid pressure from short sellers - according to Yahoo!Finance XMSR has nearly 16% of outstanding shares shorted, while SIRI has about 9%. Even worse for shareholders, as these guys continue to blow through cash they are hammering their shareholders by issuing lots of debt and issuing shares. Right now, both companies have over $1B of debt on their books and SIRI has sold an additional $650m worth of stock over the past three years.

These guys need to do something and do it fast. I don't know whether it's to completely restructure or to pursue a combination for the two companies (heck, at least they wouldn't have to compete with each other), but, at least according to current analyst estimates, the way things stand right now positive profits are still no where in sight.

For readers that own these stocks, please feel free to email me, give me a reason why you think there's hope for these stocks. Give me something! But also consider this: psychological research has shown that investors have a distinct tendency to hold onto losing investments hoping for a comeback while being more comfortable selling off investments that have made them money. The key in investing is to really keep a cap on your losses so that your winners can have an effect on your bottom line. So think hard about SIRI and XMSR and where they are right now (regardless of where you bought them), if you really think that there's good reason that the stock price should come back then great, hold on to them. If not, dump the dogs and find something that has some real meat to it.

Just remember, in the stock market what goes down does not always come back up.

-AvgJoe

Loudeye In Reverse LOUDD, SVVS

A reverse split won't save Loudeye. The company did a 10-1 reverse on May 23 in the hope of maintaining its listing on Nasdaq. The company had 132.6 million shares before the action.

In the nine months before the reverse split occurred, the company's stock dropped from $1.14 to $.35. Eighteen months ago, it traded for over $2.50. On an adjusted basis, the company now trades at $2.91, or about $.29 pre-reverse.

Recently, Loudeye sold it's music download business to Muze, Inc. for $11 million in cash. The company needs the money. According to the Loudeye 8-K on the event, the businesses it has sold were about 22% of revenue in 2005.

Loudeye continues to be a basket case. In the March 31 quarter, the company lost $4.6 million on $8.4 million in revenue. Gross profit was only $2 million, or 24%.

Loudeye and a former division are being sued by Savvis (SVVS) for early termination of a contract. The amount of that suit is $1.6 million.

In February, the company did a private placement of 16.5 million shares and 12.375 warrants at $.68 (all before the reverse split). Given the price of the stock today, the warrants will probably not be exercised any time soon.

Based on historical data, Loudeye's quarterly expenses are about $6.8 million. With a gross margin of less than 25%, the company would have to reach revenue of over $27 million a quarter to breakeven. Not likely.

Providing software and services for digital media stores is highly competitive. Part of the reason is that all the companies in this business are up against iTunes. The other is that the price charged to end customers continues to drop.

It does not look like Loudeye will make it out of this room alive.

Douglas A. McIntyre

Blue Chips In Pain? INTC, AMD, PFE, ORCL, AIG, SWY, JNJ, HD, C

By Asif Suria

I happened to come across an excellent article today on Business Week called Blue Chip Blues that describes how the stocks of some of the biggest and most profitable companies in America have performed terribly over the last five years. The most intriguing part of the article was a section titled "Boiling Down To Zilch" which talks about how "the S&P 100-stock index - the bluest of the blue chips - has returned just 2.03% annually to investors during that span, chiefly from dividends". Without dividends the annual returns from the S&P 100 index drops down to just 0.19%. They say a picture is worth a thousand words and this chart from the article that shows the disparity between earnings growth and stock price growth made my jaw drop.

I did find it very interesting that Intel (INTC), the company (as featured in the chart above) that had the maximum earnings growth of 173.1% also saw its stock drop 29.9% since 2001. I had considered featuring Intel in the March 2006 edition of SINLetter, but then decided against it. You can read the reasons in my blog entry Stocks That Almost Made the Cut: March 2006. I am glad I decided to hold off featuring Intel as a SINLetter pick since the stock is down another 7% since March.


One important thing this article failed to mention was that stock prices are often driven by expectations of future earnings growth and many of the companies listed in the chart face daunting problems. Intel faces stiff competition from AMD (AMD) and the new "Cell Processor" developed for the Playstation 3, Pfizer (PFE) and Eli Lily face looming patent expirations and loss of market share to biotechs, Oracle (ORCL) has to assimilate all its recent acquisitions and build its "fusion" product, AIG (AIG) faces regulatory problems and both Citigroup (C) and Home Depot (HD) face the challenge of a real estate bust. Given the poor performance of blue chips over the last five years, can a contrarian case be made for going against the grain and investing in them now? As a value investor, I am inclined to believe that the upside potential is greater than downside risk for some of these blue chips. This is reflected by the fact that I chose to feature Johnson & Johnson (JNJ), Pfizer (PFE) and Safeway (SWY) in recent editions of SINLetter. www.sinletter.com

Borland, Not So Fast BORL

Borland Software announced results for its Q1 06 ending March 31. The company had delayed its filing for the quarter and announced a realignment of its business to cut annual costs by $60 million.

Borland optimizes application software products for companies. The company describes its advantage this way: "An end-to-end managed software delivery process that mirrors the success enterprises have had with other key business functions, including manufacturing, human resources, customer relationship management, procurement, finance, and IT operations". Not an easy business to understand.

Borland, which just finished the acquisition of Segue Software in April, saw its revenue drop in Q1 to $69.6 million from $71.3 million in the same period a year ago. Operating loss jumped to $8.9 million from $1.5 million. Costs were driven up $4.4 million by stock-based compensation and M&A costs. Revenue outside the U.S. and Germany dropped 6% compared to the period a year ago.

Borland payed about three times sales ($105 million) for Segue, which had revenue of $36.4 million in 2005 up 10% from 2004. Segue had net income of $2.9 million in 2005. Not exactly a barnburner of a business.

Borland is a company in transition. It is selling off some lines of business while it integrates Segue. The company admits that it is relatively new to marketing and selling comprehensive solutions for the application development lifecycle. Whether the company can actually make $60 million in cost cuts is open to question. And, the company's revenue has been running down since it hit $309.5 million in 2004.

The market's reaction to the quarter was good, but it leaves open the question as to what real positives there are in the company's news. The stock is at $5.40, up about 7% on the news, on a 52-week high/low of $7.14/$4.72. This was a stock that traded at $12 in late 2004.

There is more downside to Borland now because of the risks of its business transformation. The stock is likely to reflect that over time.

Douglas A. McIntyre

Credence Exits Stage Left CMOS

Credence Systems (CMOS), which provides test solutions from design-to-production for the worldwide semiconductor industry, announced for its fiscal Q2, ending April 30. The numbers were good, but the news was bad.

Revenue rose to $124.8 million from $101.9 a year ago. The company's operating loss improved to $12.8 million from $18.2 million. But, the company had $11.8 million in inventory write-off, and that was the rub. The company is dropping its next-generation memory product due to lack of demand and will fall back on mixed-signal and wireless products. Credence had been pushing the next-generation Kalos 2 system hard.

The company papered the announcement this way: "We are redirecting our resources on opportunities identified in our higher return consumer market segment," said John Batty, chief financial officer of Credence Systems Corporation. "We believe these actions will allow us to concentrate on those market segments that will improve the Company's financial performance and stability long-term. By placing more resources on our digital and mixed-signal business the Company can accelerate development programs more effectively to compete in the emerging consumer-mobile market."

In other words, the Credence will need to substantially transform its business as it changes direction.

The company's shares are down 17% in the pre-market at $5.31, which would be a new 52-week low. The high is $11.27.

But, with the challenge ahead, Credence could go lower still.

Douglas A. McIntyre

Tetra Tech Gets Cheap TTEK

Tetra Tech, which provides consulting, technical and engineering services, posted a strong quarter for the period ending April 30. The company does work like its recent contract to help rebuild police facilities for the Irac Recontruction Work, and its Base Realignment and Closure work for the U.S. military. These contracts to build and reconstruct facilities are often worth tens of millions of dollars.

Revenue rose to $318.9 million from $297.5 million. Net income was $9 million. A year ago the net loss was $123.8 million due to "a non-cash impairment charge in the second quarter of fiscal 2005 of $105.6 million for goodwill and other identifiable
intangible assets". The company's backlog at the end of Q2 was $941 million up from $869 million at the end of the immediately previous quarter.

Tetra Tek guided that revenue in the next quarter, net of subcontractor costs, would be between $230 and $240 compared to $237.7 in the current quarter.

After the news, First Analyst Securites upgraded the stock to "overweight".

After a solid year in the fiscal that ended in September 2004 when the company did $1.376 billion, up 26% from the previous year, the fiscal ending September 2005 slowed, with revenue at only $1.286 billion. But, revenue in the last four quarters has picked up, and the company has shown an operating profit in each one.

The company has a $1 billion market cap, so it trades at about one time sales.

Tetra Tek's business in environmental restoration has legs as concerns about this issue continue to climb in the U.S. and the developing countries.

The stock is up to $17.68 from its 52-week low of $11.84. But, the stock traded at nearly $28 in early 2004.

It could go there again.

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at douglasamcintyre@gmail.com.

Oil Prices And Detroit F, GM, DCX

At the Reuters Global Energy Summit, Deutsche Bank's chief oil economist said "oil could spike above $100 a barrel if a new shortfall were to hit already tight crude supplies." This, of course, could spell trouble for the automobile industry, and particularly Ford and GM.

Both stock have risen in the last two days. GM, which traded under $25 two days ago, rose over $28 in intraday trading yesterday. However, all is not well. S&P said it may downgrade Ford's debt due to its drop in market share.

Rising oil and gas prices would have the greatest impact on the Ford and GM SUV and pick-up lines, which are essential to their overall vehicle margins.

The next month of sales for both companies should give some indication of whether gas prices are hurting the sales of these important segments of the product mix. But, if oil spikes sharply for some period, the idea of underwriting gas costs for customers may expand beyond the limited program GM introduced. And, that could be very, very expensive.

Douglas A. McIntyre

Europe Market Report 5/26/2006 BCS, GSK, PSO, UN, WPPGY, BAY, DT, SAP, SI, AXA, FTE, V,

Europe is modestly higher at 7 AM New York time.

The FTSE is up .8% to to 5,724. BAA is up 8% to 810. Barclays is up 8% to 608. BT Group is up 1% to 229. GlaxoSmithKline is up .2% at 1482. Pearson is up 1.5% to 730. Unilever is up 3% to 1,210. WPP Group is up 3% to 666.

The Daxx is up .6% to 5,741. Bayer is up 2% to 35.7. Deutsche Lufhansa is down 2% to 13.5. Deutsche Telekom is up 1.4% to 12.5. SAP is up 1.2% to 169.1. Siemens is flat at 68.

The CAC 40 is up .7% to 4,985. AXA is up 1.6% to 27.6. Cap Gemini is up 3% to 43.3. France Telecom is up 1.9% to 16.9. Michelin is up 1.9% to 50.9. ST Microelectronics is up .7% to 12.9. Vivendi is up 1.6% to 28.2.

Douglas A. McIntyre

Media Digest 5/26/2006 YHOO, EBAY, DELL, GOOG, MT, MA, HD, F

Reuter reports that both Ken Lay and Jeffrey Skilling were convicted of most charges in the Enron trial and face many years in prison when sentenced September 11. Most of the charges involved fraud and conspiracy that lead to the collapse of the company.

Reuters also reported that Yahoo! and EBay are forming an alliance which will compete with certain parts of Google's business. Yahoo! will provide online advertising banners and some search functions for EBay and promote PayPal, Ebay's online payment system. EBays stock rose over 12% to $33.88. Yahoo!'s stock rose 3.6% to $32.92.

Reuters said that steel company Arcelor plans to merge with Russian steel manufacturer Severstal instead of accept a takeover bid from Mittal Steel.

Reuters also reported that Samsung claims that its semiconductor business hit its bottom in early May and that earnings should improve in the third quarter.

The Wall Street Journal reports that MasterCard's IPO went well rising $5.70 to $46.

According to the Journal, Home Depot Inc. shareholders rejected seven out of eight proxy proposals at the retailer's annual meeting This including giving investors an vote on executive compensation.

Also, the WSJ reported that Google and Dell have entered into an agreement to load certains Google software on millions of Dell computers before they are shipped.

According to the New York Times, over 26 hedge fund managers made in excess of $120 million each in 2005. T. Boone Pickens made $1.4 billion, due mostly to his energy funds.

The NYT says that S&P may cut Ford's debt rating again. It currently stands at BB-.

Douglas A. McIntyre

Asia Markets Sharply Higher May 26, 2006 FUJIY, HIT, HMC, NIPNY, NTT, SNE, TM, CN, HBC, PCW

Following the run-up in U.S. markets, all major Asian indices are up over 1%

The Nikkei is up 1.8% to 15,971. Shares in Casio are up 2% to 2,055. Daiwa Securities is up 3% to 1,417. Fuji Photo Film is up 4% to 3,810. Hitachi is up over 2% to 776. Honda Motor is up 1.5% to 7,440. Komatsu is up over 4% to 2,305. Konica Minolta is up 2.7% to 1,388. Mitsubishi Electric is up 3.7% to 928. NEC is up 2% to 677. Nikon is up 4% to 2,300. NTT is up 2.3% to 577,000. Ricoh is up over 3% to 2,290. Sharp is up over 3% to 1,999. Sony is up 2.$% to 1,510. Toshiba is up 2.8% to 733 Toyota is up 1.7% to 6,110.

Th Hang Seng is up 1.3%. China Netcom is up 3.4% to 12.75. HSBC is up over 1.1% to 135.1. Lenovo is off 6% to 2.3. PCCW is flat at 4.9.

The Kopsi Index is up over 2% to 1,322. The Shanghai Composite is up over 1.4% to 1,614.

The Straits Times is up almost 1.7% to 2,444. Singaport Airlines is up 1.6% to 12.6. Singapore Telecom is up 2% to 256.

Douglas A. McIntyre

Stocks For A Risky Market: High Yield, Low Beta SLE, BMY, T, CMA, VZ, UL, PFE, BCS, WM, AB, ED, AEP,

The market has been an unsafe place for many investors to be lately, a bit like the ocean in "Jaws". So, taking a look at large market cap stocks with betas under 1, and yields above 4% might offer some relatively safe havens for those weary of the risk.

Some examples:

Washington Mutual (WM), beta:.58, mark cap:$43.3B, yield:4.5%
AllianceBerstein (AB), beta:.6, mark cap:$5.4B, yield:4.9%
Con Edison (ED), beta:.54, mark cap:$10.6B, yield:5.5%
American Elec Pow (AEP), beta:.53, mark cap:$13B, yield:4.5%
Barclays PLC (BCS), beta:.62, mark cap:$73.3B, yield:4.1%
Pfizer (PFE), beta:.66, mark cap:$173.8B, yield:4%
Unilever (UL) beta:.68, mark cap:$64.3B, yield:4.7%
Verizon (VZ) beta:.73, mark cap:$89.8B, yield:5.2%
Comerica (CMA) beta:.8 mark cap:$9B, yield:4.3%
AT&T (T) beta:.8, mark cap:$98.1, yield:5.3%
Bristol Myers (BMY) beta:.84, mark cap:$46.9B, yield:4.6%
Sara Lee (SLE) beta:.87, mark cap:$13.2B, yield:4.5%

Douglas A. McIntyre

Will Opsware Even Make Money? OPSW

When Opsware (OPSW), the provider of information technology automation software, announced Q1 earnings for the period ending April 30, there was great fanfare about beating forecasts and raising guidance. But, where's the profit?

Revenue rose to $21 million from $12.6 million a year ago. But, expenses rose to $28.7 million from $18.4 million last year. The operating loss for the quarter was $6.7 million up from $5.7 million. When revenue rises, shouldn't the loss go the other way? At least the company is becoming less reliant on revenue from EDS.

In Q2 of the fiscal, ending July 31, the company expects revenue to inch up to $23 million or a bit more. Perhaps Opsware can increase the loss as well. But, the company says it will breakeven. Skeptics abound. The stock dropped 6% to $7.60 on the news. The 52-week high/low is $9.25/$4.17.

Opsware's revenue tripled from the period ending January 31, 2004 to January 31, 2006, but the operating loss got worse going from $14.2 million to $17.7 million on this significant increase in top-line.

Opsware's claims about its software are fairly extraordinary: "Opsware provides the only enterprise automation software on the market to bring together management of business services, UNIX automation, Linux automation, and Windows automation servers, software, applications, network devices, and asset tracking". But, if this is the case, investors have to wonder why the company only does $21 million a quarter.

The stock now trades at an eye-popping 13 times sales.

Opsware rarely traded much above $5 from June to November 2005, and with shareholders selling into the earnings news, it may just go back there again.

Douglas A. McIntyre

Network Appliances Big Quarter NTAP

Network Appliances (NTAP) announced a good quarter and its stock dropped, proving there is no justice on Wall Street. The developer of advanced network storage systems saw revenue up 32% to $589 million. Revenue for the fiscal year rose 29% to nearly $2.1 billion. This is a trend, mind you. In fiscal 2004, revenue rose 31% and in fiscal 2005, it was up by 36%.

The company guided for the upcoming year to be good again. "Network Appliance estimates that growth in revenue for the first quarter of fiscal year 2007 will be in the range of 2% to 4%, which translates to 36% to 39% growth year-over-year". So, the company thinks it can keep its growth pace for a fourth year.

Income from operations for the quarter rose from $70 million a year ago to $87 million. But, the company had a non-recurring tax charge of $22.5 million. Based on the company's reported non-GAAP measures, income from operation rose from $70 million to $96 million, or 37%.

At $32.25, the stock is at the higher end of its 52-week range of $38.50 and $22.50.

But, there are those who think the stock is expensive. An S&P analyst quoted at Forbes.com thinks the shares have had their run. "We think Network Appliance remains well positioned to take advantage of growth opportunities within the data storage market wrote analyst Richard Stice. But he added that these advantages are already factored into company shares, which are trading at a "notable premium' to the S&P 500".

With a performance like the one just turned in, the wisdom here may well be wrong. The number of large tech companies growing at a rate of around 35% is relatively small. Network Appliances has a ways to run.

Douglas A. McIntyre

TiVo's Bad Numbers TIVO, DISH

TiVo (TIVO) reported earnings, and while revenue grew at a solid pace, the numbers behind the numbers were poor. For the quarter ending April 30, revenue rose 20% to $56.5 million. Operating loss rose to $11.7 million from $1.5 million a year earlier. The company did have significant litigation costs for it IP fight with Echostar (DISH), a case which TiVo has won and is on appeal. Cash and short-term investments dropped $11.8 million to $92.4 million. At that burn rate, the company has less than eight quarters of cash.

TiVo's subscriber base grew to $4.4 million, a 33% increase over the course of the year. However, TiVo-owned gross subscriptions for the quarter were only 91,000 compared to 104,000 in the quarter last year.

Guidance was not hopeful. Fiscal Q2 revenue should be $50 to $53 million with a net loss of $12 to $15 million.

Buried, as bad numbers often are, in the TiVo announcement, were the subscriber acquisition costs. On a per subscriber basis, these rose to $232 in the quarter from $150 in the quarter a year ago, an increase of 55%. For the twelve months ending April 30, the cost per subscriber rose 18% to $218.

With the cost to get new customers rising this sharply, TiVo does not have a catalyst to jump-start its business. And, this has to be troubling to investors.

TiVo trades at about $7.00 on a 52-week high/low of $9.49/$4.56. With revenue projected to be flat, and rising costs to acquire new customers, the stock is likely to trade down toward the low end of that range.

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at douglasamcintyre@gmail.com.

Europe Flat 5/25/2006 BCS, BAB, ICI, RTRSY, VOD, DCX, BAY, DT, SI, AXA, FTE

Markets were generally higher in Europe at 6:30 AM New York time.

The FTSE 100 was up .3% to 5,604. Shares in BAA were off almost 6% to 786. Shares in Barclays were up .5% to 598. BP shares were off .5% to 617. Shares in British Airways were up .75% to 338. Cable and Wireless was off 3.75% to 96. Imperial Chemical was up .72% at 352. Reuters was down .73% to 374. Standard Chartered was flat at 1,289. Vodafone was up 1.1% to 115.

The Daxx Indes was up .5% at 5,618. BASF was up .67% to 63. Bayer was up 1.35% to 34. DaimlerChrysler was up .3% to 40.6. Deutsche Telekom was off .4% to 12.3. SAP was up .9% to 166. Siemens was flat at 66.9. And Volkswagen was down slightly at 54.8.

The CAC 40 was flat at 4,873. AXA was flat at 26.7. France Telecom was down .5% to 16.4.

Douglas A. McIntyre

Press Summary 5/25/2006 INTC, RF, ASO, MSFT, TASR, XMSR, SIRI, CBS, TIVO, CNET, ADI, POWI, MEDX

According to Reuters, Intel will not have an IPO for its memory chip business. Bertelsmann has agreed to buy-out minority holder GBL to avoid a public offering, according to the news service. Reuters also reported that the PC firm, Lenovo Group, has poor earnings losing $116 million in the fourth quarter. Profits was also down sharply for the year. Reuters also said the the MasterCard IPO will be priced below the expected level at $39, not the $40 to $43 expected.

According to the Wall Street Journal, Regions Financial will merge with AmSouth, creating the 10th largest bank in the U.S. Microsoft is in talks to buy Third Screen Media, which provides advertising to cellphone, according to the paper. The WSJ also said that XM Radio was cutting its year-end subscriber targets from 9 million to 8.5 million and its full-year revenue forecast from $860 million to $835 million. WSJ aslso says that CBS has settled it lawsuit with Howard Stern who now works for Sirius. Also, Tivo widened its loss in the last quarter because of lower prices on its digital video recorders.

The New York Times reports that the safety of Tasers is being questioned by a Wisconsin scientist. The paper said that the sotck options inquiry by the SEC and federal prosecutors had hit four more companies, Analog Devices, CNet, Power Integrations, and Medarex.

Asia Takes A Pounding 5/25/2006 HIT, HMC, TM, NTT, CHL, HBC, PCW

Stocks were sharply lower throughout much of Asia. Declines in oil and commodities prices took shares down with them. According to Reuters, hedge funds may be taking money out of Japanese markets due to poor earnings.

The Nikkei was down over 1.3% to 15,694. Shares in Casio were down almost 3% to 2,015. Daiwa Securities was off almost 4% to 1,377. Hitachi was off 1.4% to 759. Honda dropped 1.4% to 7,330. Japan Airlines was off slightly to 303. Mitsubishi Corp. was down 4% to 2,310. NTT rose 1% to 564,000. Sony was off 1.3% to 5,090 Toshiba dropped 2.7% to 712. And, Toyota 2.1% to 6,010.

The Hang Seng was off half a percent to 15,750. China Mobile was up slightly at 40. HSBC was off slightly to 134. Lenovo reported poor earnings and dropped 5% to 2.4 PCCW was up half a percent to 4.9.

The KOPSI dropped 2.8% to 1,296.

The Straits Times Index dropped 2% to 2,338.

Douglas A. McIntyre