13G Disclosures: Goldman's stake in HILL Carlyle

By Yaser Anwar, CSC of Equity Investment Ideas

Goldman Capital Management Raises Stake in Dot Hill (HILL)

In a 13G filing released to the SEC, Goldman Capital Management disclosed a 5.1% stake (2.27 million shares) in Dot Hill Systems (HILL). This is up from the prior 907.5K share stake the investment firm disclosed in a quarterly 13F filing with regulators.


Dot Hill is the market leader in providing flexible storage offerings and responsive service and support to OEMs and system integrators, from engagement through end of life.
Carlyle Offshore Partners Discloses 5.3% Stake in Focus Media Holding (FMCN)

In a 13G filing released today to the SEC, Carlyle Offshore Partners disclosed a 5.3% stake (27.5 million shares) in Focus Media Holding Ltd. (Nasdaq: FMCN). At the Carlyle Group website, the firm notes a past position in Focus Media, but does not disclose the size.


Focus Media Holding Limited is China's leading out-of-home multi-platform life-style media company, which operates the largest out-of-home advertising network in China using audiovisual flat-panel displays

Note: The Carlyle Group is one of the world’s largest private equity firms, with more than $41.9 billion under management.

Sources: SEC & SI

http://www.equityinvestmentideas.blogspot.com/

Oops On Apple

Stocks: (AAPL)(DELL)(INTC)(HPQ)(GTW)

Apple's shares took a nice tick up on an upgrade form Bank of America. The analyst who covers the computer and iPod wonder increased his price target from $68 to $79, So, the stock has to move up 16% from where it trades now to hit the B of A target. The reasons for the upgrade are improved sales of the iPod Nano and Mac laptops later in the year.

Where did B of A find a crystal ball?

Maybe a new iPod will sell better, but, maybe it won't. Mac laptops are nifty computers, but Dell, Gateway, and HP are cutting prices to gain share as the big PC manufacturers bleed margin. Intel has dropped Pentium prices as much as 61% to make way for its new chip. That means that PC pricing could be even lower in the second half of the year.

Another interesting piece of news is that Verizon will introduce a cell phone that doubles as an MP3 player. Of course, Microsoft is entering the iPod look-alike market as well. Investor should expect big marketing pushes from both Verizon and Microsoft in a market where Apple had very little competition for the iPod a year ago.

According to Apple's 10-Q for the period ending April 30, sales of portables/laptops were up only 8% from the same quarter last year. This was a sharp slowdown from the immediately previous quarter growth rate. And, iPod unit sales are no longer growing at a torrid pace, hitting 8.5 million units in the last reported quarter.

Will unit sales of iPods and portables jump up as 2006 closes. Maybe. But, the competition in both markets will provide a stiff headwind.

The B of A crystal ball my be right, but, it may not be.

With Apple's stock up almost 30% since mid-July, buying in now could be an expensive gamble.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.

Nortel: Taxes Aren't The Issue, Survival Is

Stocks: (NT)(MOT)(ALA)(LU)(NOK)(SI)

Nortel is engulfed in another set of problems with its P&L and balance sheet. It seems to be an annual ritual like the gulls returning to Capistrano. The result of the confusion over tax credits was raised in the Wall Street Journal, based on a study by research firm Glass, Lewis. If Nortel continues to lose money, the tax credits could go away and send the company's shareholder equity. The company is holding on to the credits on the basis that it will be profitable soon.

The conversation is interesting, but it begs the question of whether Nortel is a viable entity under any circumstances. Nortel's shares hit a 52-week low on the tax credit news, dropping to $1.92. The company's shares are down almost 50% over the last 12-month period from a high of $3.57. The stock was at $4 in the Fall of 2004.

Nortel's core business in optical network equipment is a fairly good one, but the costs to run the business as a standalone business are clearly too high. And, its balance sheet is hardly a thing of beauty. According to Morningstar, cash and cash equivalents are $2.7 billion. Long-term debt is $2.5 billion.The company has $5.2 billion in accrued liabilities and only $675 million in equity. The company still commands a market cap north of $8.4 billion.

With the Alcatel merger with Lucent, and the Siemens joint venture with Nokia to combine telecom infrastructure unites, Nortel is the odd man out. And, the stock trades that way.

The balance sheets and pricing power of these new entities, created by "mergers" of telecom equipment vendors, puts Nortel's back to the wall. It cannot afford to see margins drop in the hopes of pricing its products to gain share. It simply does not have the financial power to do it.

Motorola, the other bride left at the altar in the consolidation of telco equipment giants, may be Nortel's last, best hope. Without a well-financed parent, Nortel has little chance of surviving.

Douglas A. McIntyre canbe reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.

Confusion Engulfs Yahoo!

Stocks: (YHOO)(GOOG)(MSFT)(TWX)

Amtech/JSA Research upped Yahoo! from "Hold" to "Buy" today according to Briefing.com. MarketWatch reported that First Global Securities downgraded the net giant on concerns that it will continue to lose share to Google and Microsoft's MSN.

With Yahoo!'s shares off almost 2% to $27, the bearish view seems to be ascending. AOL's announcement that it would launch a major video site probably did not help Yahoo!'s cause.

It is becoming increasingly difficult to determine who is right about Yahoo!. One thing is for certain. Very few stocks have seen their prices cut nearly in half (from $43.66 in January to $25 this month) while growing at a rate of 30%. Especially a company as large as Yahoo! ($5.3 billion in 2005 according to Yahoo!Finance). Morningstar projects that Yahoo! will continue to grow at a 23% per annum clip over the next five years. Not bad.

Depending on which measurement service investors look at, Yahoo! is still the most visited web destination in the world. It is not a "one legged table" like Google. Short-term, diversifying beyond search may have hurt Yahoo! some, but over time having a number of strong online businesses should help the company. The identity crisis at AOL may also benefit Yahoo! A seemless transition from its subscriber model to advertising is likely to be difficult for the Time Warner web unit. MSN also seems to be making little progress. ComScore says that Microsoft's share of the global search market is a mere 9%.

If Yahoo! is well-positioned as a combination search and content destination, the share price will catch up to the success of the business model. If that happens, Yahoo! is will be on its way back toward $40.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.

Sirius Radio's Dead Cat Bounce

Stocks: (SIRI)(XMSR)

Share of Sirius jumped up 4% on new that it had signed a deal to put it products in Mitsubishi cars. Not all of them, just four models.

Now, Mitsubishi sells about 8,000 cars a month in the US, so the arrangement is with one of the smallest car marketers in North America.

With the Sirius stock at $4.30 on a 52-week high/low of $7.98/$3.60, almost any news about distribution of the company's products is good news.

But, Sirius still trades at 18 times its revenues, and that is probably too expensive.

Rival XM Satellite recently reported a loss of $232 million for its last quarter. Revenue did grow 82% to $228 million, but the company cut its year-end subscriber target. XM has set a goal of being profitable by the end of 2006, but management stated after its poor performance last quarter that generating cash in Q4 would be more of a challenge.

The market often assumes that what is bad for XM is good for Sirius. Not necessarily. Several analysts have suggested that the behavior of XM subscriber base will be the same for Sirius as its base gets closer to 7 million users. That would mean a higher churn rate. The theory, which will not be proven until Sirius grows some, is that once a base of customers hits a certain level, higher cancellation rates are inevitable.

Wall St. continues to have concerns that Sirius may have to raise more money to reach profitabilty and dilute its already huge count.

One thing is certain. Most of the large car companies are now partners with one or both of the satellite radio companies. Investors can tell that when a Mitsubishi deal rates press.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.

Will Private Equity Call On Avon?

Stocks: (AVP)

Avon's earnings were not particularly good, but the company has the advantage of being able to say that they were not supposed to be. The company has cut 10% of its work force and several layers of management, and the costs of much of that restructuring were in the quarterly numbers out today.

Revenue at the company did rise 5% over the same period last year, hitting $2.08 billion. Operating profit was down 35% to $225 million, but some of the drop can be attributed to restructuring.

The company's cash position equals its debt. The cash flow from operations for the quarter was almost $290 million. Shareholder equity is $1 billion.

The question is whether a private equity firm would pay 13 times net tangible book value.

If the company can be engineered as a private enterprise to produce cash flow of $1.5 billion, the company's $17 billion market cap may not be a huge obtacle. The stock now trades at $30. If it moves closer to its 52-week low at $24.33, it will be on a lot of radar screens.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.

Diversity is Tur-key at Semiconductor Companies

Stocks: (AMD)(INTC)

By William Trent, CFA of Stock Market Beat

Barron’s says the price war between Intel and AMD (our discussion here) should send investors to more broadly diversified (less PC-oriented) semiconductor stocks.

With semiconductor stocks, diversity is key-Barron’s Reuters.com

A price war between chipmakers Intel Corp. (INTC) and Advanced Micro Devices Inc. (AMD) highlights a slowdown in the PC market and investors intent on the semiconductor industry might do well to consider shares in companies with more diversified revenue streams, Barron’s financial newspaper reported on Sunday.

Diversity is seldom what you should seek in semiconductors. Typically you want pure-play exposure to an end market that is working. If there are no end markets that are clearly working, you may just want to avoid the semis altogether.

http://www.stockmarketbeat.com/

Wal-Mart's Bad News

Wal-Mart (WMT) made a number of announcements over the last several days. None of them were good. The market's view was that same store sales being up 2.4% was a net positive, and Wal-Mart's shares rose about 1% to $44.86.

The news about Wal-Mart's same store sales is only positive in light of its meager 1% increase in same store sales in June. The July figure is better, but no much above the rate of inflation.

Wal-Mart's retreat from Germany, at a loss of a reported $1 billion, demonstrates that the model that has been so successful in the US and places like the UK, does not necessarily work in all markets. Given the size of the German market, the lesson is a particularly difficult one. Wal-Mart's sales in Japan have also been disappointing. And, the company's earlier exit from South Korea may be further evidence that the Wal-Mart model does not play everywhere.

The last bit of news is the most difficult to read. Wal-Mart employess in China have begun o unionize workers in the company's stores. The unions are controlled by the state-run All-China Federation of Trade Unions. Some initial press reports about the organization of workers at the big retailer chain (WMT has 30,000 workers in China) indicated that the union was viewed as pro-management. However, the move puts the Chinese government at the wheel of the labor issue in Wal-Mart's stores, a measure that the firm is unlike to have wanted.

With sales in the US running about flat with inflation and failures in South Korea and Germany, Wal-Mart must look to markets like China and possibly India for its growth. Indian legislation is keeping the company out of that country for the time being. And, Wal-Mart is now a partner, probably unwillingly, of the Chinese government's labor union organization.

Wal-Mart still trades near its 52-week low of $42.31, and will have to do more radical "reinvention" to move out of its hole.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies he writes about.

WSJ Update

By Yaser Anwar, CSC of Equity Investment Ideas

AOL to Launch Portal for Videos
AOL plans an Internet video portal featuring content from both users and cable networks.

SanDisk Agrees to Buy msystems
SanDisk agreed to buy msystems for $1.55 billion in stock in the latest sign of consolidation in the flash-memory sector.


Verizon Introduces New Music-Playing Phone
Verizon Wireless will release a cellphone that plays music and resembles Apple's iPod as carriers edge into the MP3 market.


Live Nation to Buy Stake in Musictoday
Live Nation is to acquire a majority stake in Musictoday, which runs services for such acts as the Rolling Stones.


White House Will Skip Climate Talks
Blair is to meet with Schwarzenegger and a group of CEOs in California on climate change and clean energy, but Bush's top environmental adviser won't attend.


'Miami Vice' Busts 'Pirates' to No. 2
"Miami Vice" overtook "Pirates of the Caribbean" to capture the top spot at the weekend box office, taking in $25.2 million, compared to $20.5 million for "Pirates," which became Disney's highest-grossing release to date.


Faurecia Chief Is Investigated in Germany
Frankfurt prosecutors said they are investigating the CEO of car-parts firm Faurecia on suspicion he abetted corruption by covering up bribes.


Investor AB CEO Charts a Bold New Course
Sweden's Investor AB has been creating a ruckus akin to the wheeling and dealing usually associated with private-equity firms. Behind the change: Boerje Ekholm, who last year became the investment firm's new chief executive.


Sony Remains Guarded in Its Outlook
Sony remains conservative about its outlook, despite a strong fiscal first quarter on a rebound in its electronics business.


U.S. Court Upholds Ebbers Conviction
An appeals court upheld the fraud conviction and 25-year prison sentence of former WorldCom CEO Bernard Ebbers. (Court ruling)


Market Volatility Takes Investors for a Ride
Stock-market volatility could persist for at least several more weeks while investors continue to assess the Federal Reserve's strategy for fighting inflation. Share prices are ending July close to where they started.

http://www.equityinvestmentideas.blogspot.com/

Digging Into GDP

By William Trent, CFA of Stock Market Beat

The market rallied on Friday on news that the economy was weaker than expected, with all of the convoluted logic about the fed pausing on rate hikes and blah-de-blah. Far be it from us to take away the punchbowl. Yet, as often is the case, actually reading through the data yielded some interesting insights.

Consider the chart, which breaks the GDP number into its four main constituents: consumer (personal consumption), business (PDI), trade (net exports) and government spending.

The second quarter marked only the second time (though there were some close calls) that all four constituents had a positive impact. However, in one way that tidbit shows just how weak the economy has become. The last time we fired on all four cylinders, GDP grew at an annualized rate of more than 7 percent. This time it got us 2.5 percent.

The second thing we want to touch on is the maxim we keep hearing about how business will take over when the consumer tires out. Let’s face it: all of the other categories have, at least for one quarter, been a drag on GDP within the last four years. It seems reasonable to believe that the consumer may take a turn resting. As has been the case when other components failed to pull their share, isn’t it possible that total GDP could come in at a reasonable number - say 3 percent?
The problem here is one of magnitude. In the second quarter, total GDP was a little more than $13 trillion. In round numbers, $9 trillion of that was consumer, business and government put in a little more than $2 trillion each, and net exports took that “little over” back by being negative (they had a positive impact on GDP because they were slightly less negative than they were last quarter.)

So now let’s do the math, and assume that consumers spends 1 percent less than they did last year. That creates a $90 billion drag the others need to make up. But if we want the whole pie to grow 3 percent, that is $390 billion that needs to be added to GDP overall, plus the $90 that needs to be made up equals $480 billion. That would mean business and government each growing 10 percent, or one of them growing 20 percent. It just doesn’t seem all that likely.

There is one wild card, and that is net exports. If we made the assumption that consumers only bought less foreign goods, then the personal consumption would be neutral to GDP rather than a drag. But even in that optimistic (unless you are an importer) case business and government would have to grow faster than 8 percent each for the economy to grow 3 percent overall in the face of flat consumer spending.

http://stockmarketbeat.com/blog1/

LCD Market

By William Trent, CFA of Stock Market Beat

The good news is that companies are seeing the light and cutting back on planned capacity expansions.

CMO to delay equipment installation at 8G plant, say sourcesFurthermore, the lower prices are starting to spur some demand. On their recent earnings conference call, tech reseller CDW Corporation said:
Continuing the recent trend, average selling prices of large format LCD monitors have declined significantly year over year. The more affordable prices havedriven unit volume.

The bad news is that some manufacturers continue to pour on the capacity. Sharp will invest 500 billion yen (about US4.26 billion) to build a tenth-generation (10G) TFT LCD plant, with construction to begin in the third quarter of 2007 and volume production to begin in mid-2008, according to the Japanese-language Nihon Keizai Shimbun. The plant will process 2,850×3,050mm glass substrates into eight 57-inch panels or six 65-inch panels.

Prices are now expected to fall a further 25% by year-end for some categories:
The ASP (average selling price) for a sixth-generation (6G) substrate is expected to drop to 14,000-15,000 yen (US$119-128) by year-end, according to the Chinese-language Economic Daily News (EDN).

First-tier makers are now offering prices for a 6G substrate at 20,000-19,000 yen while prices from second-tier makers are about 22,000-23,000 yen, the paper indicated citing sources as saying.

Other news:
The currently tight supply of 19-inch monitor panels will ease by September, when supply will have increased at panel makers, according to assistant general manager Gatti Park at LG Taiwan, as quoted by the Chinese-language Apple Daily.

Samsung Electronics sustained profitability for its LCD division in the second quarter despite weak LCD TV sales, inventory pile-ups and an ASP (average selling price) reduction while LG.Philips LCD turned to losses during the period. There are several factors that contributed to Samsung’s success, including an earlier ramp up at its seven-generation (7G) LCD plants and strong support from downstream LCD TV brands.

Taiwan liquid crystal display panel maker AU Optronics Corp. said its second quarter net profit dropped nearly two-thirds because of steep price declines.

http://stockmarketbeat.com/blog1/

McAfee Will Rise Again

Stocks: (MFE)(SYMC)

McAfee’s stock has been beaten like a red-headed mule. The company, best known for its computer anti-virus software, has been dogged by a history of poor corporate governance that has lead to financial restatements and the ouster of senior management for inflating revenue from 1998 to 2000. The company was known as Network Associates until recently.

McAfee announced its second quarter results with the proviso that they may have to be revised due to improper accounting for back-dated stock options. The company also said that previously issued financial statements “could not be relied upon”. That is, of course, a lot of bad news.

The company’s results were not half bad. Revenue rose to $277 million from $245 million a year ago. Net income was off to $31 million compared to $42 million in the period a year ago. The company’s cash position was just shy of $1.2 billion. McAfee expected revenue in Q3 to be flat with Q2 revenue. However, that would be a healthy increase from the 2005 third quarter when revenue was $253 million.

A little over a month ago, Friedman Billings Ramsey had an “outperform” rating on the stock with a price target of $35. The firm pointed to healthy cash flow, a “compelling valuation” and the launch of the new Falcon consumer anti-virus line as reasons to look at the stock. It is easy to look at the Friedman Billings analysts as dupes and lamebrains, but, in the long run they may be right.

The McAfee announcement of a less than stellar second quarter and possible restatements dropped the stock to below $21, before it closed at $22.35. This is well below the twelve-month high of $33.24. The company is actually doing relatively well. The last four quarters have shown revenue increases over the immediately previous quarter. The company had positive operating income in each of these periods.

McAfee is in a business that is likely to continue to growth as the number of threats to computer security expands. Aside from consumer PC anti-virus products, the company has carrier class security services used by large businesses and the government.

Because of the company’s revenue trend and the value of its products to both consumer and enterprise computer systems, McAfee is likely to be in reasonable shape to continue to increase it top line over the course of the next several year. With the company’s cash backed out, McAfee has a market cap of $2.5 billion against a revenue run rate of $1 billion.

Companies that get hit with earnings restatements and SEC investigations usually fall into one of two categories: those they are destroyed by the actions and those that pass through them with some distraction but move on to continued success. McAfee looks like it falls into the latter category.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.

Time For The NYT To Sell The Boston Globe

The New York Times Company has a stock price sitting at multiyear low as its advertising lineage and circulation continue to drop. Revenue at its newspaper online businesses grew 25% last quarter, slower that the online units of most other newspaper companies. The company’s debt was recently downgraded by S&P because of the cost of its new headquarters, deteriorating margins, and the closing of one of the company’s large printing facilities.

In addition to the other bad news, the company’s CFO retired, a little early it would seem, and the company’s flagship property was forced to cut the width of its newspaper to save costs.

Although none of the properties owned by the company is having a spectacular year, the real drag on the company’s financial progress is what the company quaintly describes as the New England Media Group, known to the rest of the world as The Boston Globe. The NYT bought The Globe’s parent in 1993.

In the second quarter of 2006, advertising revenue at the New England Media Group fell 10% to $109 million. Circulation revenue fell 7% to $40 million. Both figures accelerated downward from the numbers in the first quarter.

Based on the most recent numbers, the New England Media Group will have annual revenue of about $1.2 billion this year. Based on the multiples that successful publicly traded newspaper companies get today, the operations could be worth as much as $1.7 billion. The New York Times showed total debt of $1.4 billion at the end of Q2. Times management has said that they won’t sell the unit, but, who knows, if their jobs depend on it.

Imagine the Times, debt free, with its New York flagship, regional newspapers (which are good little money makers) and broadcasting unit, in a position to drive forward on the Internet and make a go of it. Certainly a better picture than a stock trading at $22, down from over $40 in the Fall of 2004.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.

The Money Center Bank Problem: Citi and B of A

Stocks: (JPM)(C)(BAC)(WFC)


The environment that has been driving near-record results at the nation’s largest money center banks is running out of steam. Not unlike the year 2000, when the banks hit record high stock prices, problems in consumer lending and investment banking cut some of the stock prices of the big money centers by as much as 50% by 2003.

Because of the success of the stocks at the large banks, investors have been pressuring the management at Citigroup to improve returns, or even break the bank into pieces to improve shareholder value. The bank has been trading at $48, around its 52-week low. By contrast, Bank of America has been trading near its 52-week high at $51.66. Another huge U.S. bank, Wells Fargo, also trades near a one-year high at $72.41. So does JPMorgan, which is just a $1 below its 12-month high at $45.48.

While Citicorp may be viewed as the worst off of the lot, all the banking firms face the same, acute problems.

The consumer-based real estate mortgage business is in retreat. As a matter of fact, mortgage defaults are rising. According to a recent article in the Chicago Tribune: "For many people, buying meant using exotic mortgage products such as adjustable-rate mortgages, with low initial rates that typically jump after a few years, which can raise payments by thousands of dollars a year. As interest rates rise, experts say potential buyers should be cautious before agreeing to one of these loans .A person can lose money on a home — especially if the housing market cools, as many analysts predict. People in over their head with mortgage payments who made a low down payment might have to sell a house for thousands less than they have to pay their lender."

According to RealyTrac, which keeps track of problem real estate loans, delinquencies rose 25% this spring compared to a year ago. The firms said that there were 272, 000 homes facing foreclosure in the second quarter.

Jamie Diamond, the head of JPMorgan and Citi’s CFO have both made statements regarding their concern about the potential problems in their consumer lending businesses. Quoted in the Houston Chronicle, they voiced their worries about consumer credit: Jamie Dimon, JPMorgan Chase's chief executive officer, said credit delinquencies and defaults have been at extremely low levels. This has allowed banks to reduce reserves against possible defaults, adding to their profitability.That's changing, Dimon warned.He said rising interest rates and a likely increase in bankruptcy filings — which were depressed after the bankruptcy law was toughened last fall — could lead to credit card losses at JPMorgan Chase of "several hundred million dollars" in the third quarter, and perhaps as much as $500 million before year's end."In credit cards, we know it's going to happen. ... We're telling people upfront," Dimon said. Sallie Krawcheck, Citigroup's chief financial officer, also expressed concern about credit quality as consumers grapple with the higher minimum payments on credit card bills that went into effect earlier this year. Still, she said, consumers were handling the rule change better than expected.

Consumer credit card and mortgage issues are only a part of the problems facing the banks.

Private equity deals and investment banking income are also facing a slowdown. The record pace of corporate buy-outs cannot continue. At JPMorgan, net income from investment banking rose 37% in the last quarter to $839 million.

A firm that tracks private equity investment says that the pace of such deals is at a record level according to Reuters: “The rise in private equity-backed deals comes as the volume of global mergers and acquisitions has risen to $2.18 trillion in the year to date, topping the $2.13 trillion notched up during the same period in 2000 at the height of the Internet boom, Dealogic data shows” But, as was true in the rush of money that hit the market six years ago, the financing environment cannot defy gravity forever.

After the heady days of 2000, JPMorgan’s stock dropped from over $60 to under $20 in 2003. During the same period, Citi’s stock fell from about $60 to $30. Bank of America’s traded flat.

As the market in private equity cools and consumers struggle with rising rates in adjustable rate mortgages, money center bank stocks could easily hit two or three year lows in 2007.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.

Barron’ Digest July 31, 2006 Issue

Stocks: (COH)(RRC)(DNR)(EP)(TEVA)(CHKP)(SFUN)(PDSN)(INTC)(AMD)(TXN)(MCHP)(LLTC)(ADI)(TTEK)(DVA)(OMN)(CMCSK)(BG)


Coach, the luxury goods marketer, will likely raise fiscal 2007 guidance. Investors have been concerned about the profit growth at Coach, and the drop of its stock from a high of $37.40 to the current price of $27.56. The company says that sales have shown positive trends, especially in it stores, during June and July. The company’s new Legacy line has been selling well, according to the company CEO “blowing out” of store.

RoundRock Capital is looking for bargains in natural gas stocks. Among those it likes is Range Resources which has a large inventory of low-risk prospects and efficient costs of finding new reserves. Of the 521 wells it drilled or recompleted in the first half, 99% were successful. The firm also likes Denbury Resources, an exploration and production company which is the largest producer in Mississippi.

El Paso has cut costs and is beginning to grow again. The oil and gas company may be trading at a discount to the aggregate value of its divisions. On that basis, UBS says that the company is worth $19.62 looking at the private value of each of its units. However, the company stock trades at only $15.60.

China’s economic growth could be limited by sever water shortages, political and social problems and major health and environmental issues. Parts of the government structure are also highly corrupt. Rapid credit growth and an investment booms may also lead to profit drops and bankruptcies. The bank system has problems with embezzlement, fraud and bribery. Some analysts also believe that economic confrontation between the US and China is highly likely.

Israeli stocks may do well despite unrest in the area. Many of the company’s large companies sell most of their products and services outside the country. Teva Pharmaceutics has seen its shares rise recently. Many of the largest companies in the country are south of where the major fighting is centered. Check Point Software’s stock has dropped 5% since July 10, but the company now trades at a relatively inexpensive 12 times forward earnings. WR Hambrecht also thinks semiconductor stocks Saifun Semi and PowerDsine could be oversold.

Intel and AMD may be facing a decelerating PC market. More diversifies semiconductor stocks may be better investing bets for the time being. This would include microcontroller makers, Microchip Technology, analog semi companies Linear and Analog Devices and wireless chip company Texas Intruments.

Motorola’s management is talking about overtaking Nokia as the world’s largest cell phone maker. Over the last seven quarters, the company’s global market share has gone from 13.5% to 22.1%. Nokia’s has been flat at 33%. Most of the company’s success in cells has been based on the popular RAZR phone. The company has just introduced seven new handsets to add to the 50 million RAZRs sold since it was introduced.

Tetra Tech, which was hurt by the telecom bust is not focusing on water projects like dams and river cleanups. Analysts think that the company could add 12% to its backlog to more than $1 billion by the end of their fiscal in September. Standard Washington Research Group values that company at $22 compared to a current price of $15.54.

Epoch Investment Partners gives its market Pick and Pans. On the positive list are DeVita, Phonak Holding, OMI, Comcast, C&C Group, Bunge, and China Shineway. The investment firm is negative on AMD.

Douglas A. McIntyre

Returns Accrue When Accruals Don't

From Value Discipline

As many of you may know, I hold the CFA (Chartered Financial Analyst) designation. I am very proud to have completed this rigorous program. For many of us, the deeper learning and understanding only begins after this point. Continuing education through seminars, workshops, abstracts, and our professional journal, The Financial Analysts Journal (FAJ) is available. For those who are serious about investing as a career, it is the credential of choice. Please contact the CFA Institute, for further information.

In two interesting articles in the current FAJ, the issue of earnings quality is examined. Previous pioneering work by Richard Sloan indicated that net operating cash flow is more closely associated with future income and stock returns than accruals. His work examined annual accruals.In the current edition, Joshua Livnat and Massimo Santicchia looked at quarterly accruals and found that what has become known as the "accrual anomaly" applies to quarterly information as well. "Companies with extremely high (low) current quarterly accruals have significant and negative (positive) abnormal returns through the subsequent four quarters." In other words, stocks with earnings which show high accruals tend to provide low returns.

In the second article, Qiao Liu and Rong Qi study the persistence of the accrual anomaly and why sophisticated investors have not taken advantage of this mispricing.

What are accruals and how can the average lay investor use this fact?Accruals arise from GAAP...say a business expects great future sales and buys a pile of inventory to sell for future periods. It guesses wrong. In the calculation of earnings, the cost of inventory sold is matched against revenues generated. However, the excess inventory remains an asset on the balance sheet. In the operating section of the cash flow statement, the effect of the accumulation of excess inventory is a use of working capital that can be seen as a reduction in net operating cash flow.

Accruals can be current operating assets and liabilities such as inventories, receivables, and accounts payable, but non-current operating accruals exist as well such as deferred taxes.In short, most investors tend to view earnings reports quite literally and treat all aspects of reported earnings as having equal value, even though the accrual component of reported earnings has been demonstrated to be less reliable, and consequently have less value than the cash component.How do you find out about accruals? Cramer will not scream them to you nor will Maria Bartiroma breathe them at you! You've got to dig for them yourself.

Go to the 10-Q in Edgar or in some cases, to the press release of the company. Ensure that net income for the period is less than cash flow from operations.A quick and dirty solution to looking at cash flow from operations comes from Anumati.com. A free registration is required.

Enter the symbol and turn to the cash flow statement for the appropriate period. Compare the top line, "Net Income" versus the bottome line of the operating section, "Cash From Operating Activities." Companies with very high accruals will show net income greater than Cash Flow from operating Activities.

In truth, the analysis of the CFFO is a little more intensive than this. Various components of cash flow from operations (which in the past, have arisen from tax effects of stock options) may complicate or overstate CFFO.But as a first step toward better understanding the economics of the business in which you invest, this is important analysis.

When accruals tend to be low, returns tend to be higher than one would expect. When accruals are high, the market values these "earnings" as having lesser quality, and returns are lower than one would expect.

In short, returns accrue when accruals don't!

http://www.valuediscipline.blogspot.com/

The Economy, Bonds & Interest Rates

By Yaser Anwar, CSC of Equity Investment Advisors

Bond yields declined for the third week in a row as weaker than expected economic data diminishes the odds of additional Fed rate hikes (2nd Q GDP was reported rising only 2.5%, well below the 3% expected).


According to surveys conducted by ISI Group on a weekly basis, there is the sharp and rapid decline in new home sales expectations, which is not new. The surveys also points to the increasing odds of a hard landing in housing which will echo throughout the economy, since housing has been responsible for alot of the employment.




In a study released last week, the Dallas Fed noted that the fraction of components experiencing annualized increases of more than 3 percent had grown to 57 percent, from 33 percent in December. Prices have risen more in the past three months than in the preceding three months, regardless of whether owners' equivalent rent is included or excluded. A model developed by a Fed researcher puts the odds of a recession occurring in the next year at more than 35 percent.


PIMCO finds that real house prices are pro-cyclical and tend to reach a maximum near business cycle peaks, often after a prolonged period of buoyant growth in activity has raised output above its potential level and inflation pressures have begun to emerge. With the core PCE deflator in the GDP report increasing 2.9%, in line with expectations but above the Fed’s comfort level, could lead to Fed raising rates further.


The bond market is signaling a slowing economy, an impending pause in the Fed's rate hiking campaign and lower bond yields going forward. If the Fed takes rates to 5.75 it will exacerbate the inversion of the yield curve & longer-term be more beneficial to the bond market by further dampening inflation pressures and creating a headwind for the economy.


The credit spreads are also indicating a cooling of in the economy. A slower economy increases credit risk, hence the expansion in the risk premium demanded by creditors.


Real house prices fall for about five years and their previous run-up is largely reversed. Real GDP growth slows during the first year or so after house prices peak as do growth rates of private consumption and investment.


An index of trucking companies sales expectations shows that while the its absolute level is in neutral territory, the index suffered its largest decline in the history of the survey. This is another indicator that the economy is slowing faster than many expect (Pointing to a possible Fed hike sometime soon).




Bond prices usually bottom several months before the last Fed Funds hike as the market begins to anticipate the Fed, which in turn is attempting to anticipate the economy and inflation. With the Fed near the end of its tightening cycle and the economy increasingly looking vulnerable, it may present an opportunity to add some bonds in your portfolio.

Sources: ISI Group, Reuters & PIMCO

http://www.equityinvestmentideas.blogspot.com/

Europe Stock Market Report 7/31/2005

Stocks (BCS)(BAB)(BP)(BT)(GSK)(PUK)(RTRSY)(UN)(UL)(VOD)(BAY)
(DCX)(DB)(DT)(SAP)(SI)(ALA)(AXA)(FTE)(V)

European markets were off slightly just before 5.30 AM New York time.

The FTSE was down .3% to 5,959. Barclays was up .1% to 634.5. British Airways was up 1% to 393.25. BP was down .4% to 648.5. BT was up .1% to 239.5. GlaxoSmithKline was down ..6% to 1484. Prudential was down 1.1% to 571. Reuters was down .1% to 395.75. Unilever was down .6% to 1264. Vodafone was down 1.5% to 117.5.

The DAXX was off .2% to 5,694. Bayer was down .7% to 38.82. BASF was up .6% to 63.04. BMW was up .4% to 40.45. DaimlerChrysler was up .4% to 40.61. DeutscheBank was down .5% to 90.71. Deutsche Telekom was down .9% to 12.16. SAP was down .2% to 142.97. Siemens was off .2% to 62.9.

The CAC 40 was off .2% to 5,020. Alcatel was up 1.6% to 8.93. AXA was up .4% to 26.98. France Telecom was down .3% to 16.38. ST Micro was up 1% to 11.66. Vivendi was down .3% to 26.51.

Douglas A. McIntyre

Media Digest 7/31/2006

Stocks: (GM)(HBC)(SNDK)(FLSH)(NOC)(VZ)(WMT)

According to Reuters, GM and the UAW are supporting the new pension bill which will be voted on by the US Senate. The bill requires all major corporations, except some major airlines, to fully fund their pensions within seven years.

Reuters says banking giant HSBC has a profit increase of 18% in the first half of the year.

Reuters writes that Sandisk will buy Msystems, which develops memory for mobile phones. The price is $1.55 billion in stock.

According to the Wall Street Journal, two California defence operations have been put up for sale. One is Northop's navigation system unit, which could be sold for $1 billion. The other is Wyle Labs, which is on the market for under$400 million.

The WSJ writes thatAOL says it plans a video content portal for both material provided by users and cable TV content.

The WSJ reports that Verizon Wireless will release a new handset that plays music as the cellphone company moves into the MP3 market.

The New York Times reports that a Chinese union has begun to organize workers at Wal-Mart in China. The union is known for supporting management rather than employess.

Douglas A. McIntyre

Asia Markets 7/31/2006

Stocks: (CAJ)(FUJ)(HMC)(NTT)(SNE)(TM)(CHL)(CN)

Most Asian markets were up.

The Nikkei was higher by .7% to 15,457. Canon was up .9% to 5510. Daiwas Securities was up 2.9% to 1281. Fuji Photo was up 1.9% to 3860. Hitachi was up 1.4% to 734. Honda was down 1.2% to 3780. Japan Airlines was down .9% to 211. Mazda was up .4% to 746. NEC was up 2.1% to 634. NTT was up .8% to to 599,000. Softbank was up 2.2% to 2105. Sony was up 1% to 5280. Toshiba was up 1.4% to 741. Toyota was up .7% to 6060.

The Hang Seng was up .4% to 17,017. Cathay Pacific was up .1% to 13.94. China Mobile was up .4% to 50.45. China Netcom was up .3% to 14.18. HSBC was up .1% to 140. Lenovo was down .2% to 2.47. PCCW was up .6% to 4.87.

The KOPSI was up .1% to 1,298.

The Straits Times Index was up .5% to 2,442.

The Shanghai Index was down 3% to 1,613.

Douglas A. McIntyre

Media Digest 7/30/2006 Management Buy-Out Pitfals

According to Reuters, Hilton Hotels reached agreeement with its North American hotel workers. The agreement covers the next five years.

According to the Sunday Telegraph, Swiss company Xstrata, plans to raise $5.1 billiion in a rights issue to underwrite the costs of buying Canadian mining company Falconbridge.

According to the Boston Globe, Morgan Stanley is in talks to acquire 20 acres of waterfront land in Boston that is currently owned by News Corporation.

According to the Wall Street Journal, CA Inc, the former Computer Associates, appointed Nancy Cooper as its new CFO as part of an effort to rebuild the company which has been involved in an accounting scandal.

The New York Times writes that buy-out deals of public companies, turning them into private enterprises, may no be a good deal for shareholders if company management is involved. The premium payed for management-led buyouts is only 20%. Buy-outs lead by outside firms paid an average premium of 27.5%. The data is based on stock prices average of the 30 days before a buy-out was announced.

Media Digest 7/29/2006

Stocks: (MNI)(GCI)(FAL)(PD)(PFE)(WMT)(LCC)(NOK)(T)(BLS)(MOT)(VZ)(ATVI)

According to Reuters, a courts will not block the sales of three California papers that McClatchy bought in its acquisition of Knight-Ridder. The antitrust suit was filed against several companies including MediaNews Group, Gannett and Hearst.

Reuters writes that Inco dropped its plans to buy Canadian mining company Falconbridge. Xstrata, a Swiss company has increased its holdings in Falconbridge. Inco itself may now be in play, although US firm Phelps Dodge has bid to acquire the company.

The Wall Street Journal reports that Pfizers board has named its general counsel, Jeffrey Kindler, to become the drug giant's next CEO.

The WSJ also reports that U.S. Airways approached Delta about a possible merger. Delta apparently rejected the offer.

The WSJ also writes that same-store sales at Wal-Mart were up 2.4%, the high end of the projected range. The figure showed a rebound from slower growth in June.

The WSJ writes that a proposal by Bristol-Myers and Sanofi to delay a generic version of Plavix by drug firm Apotex was rejected by state attorneys general. The move by state officials appears to signal a tightening of restrictions on deals between generic drug makers and branded drug companies to keep generics off the market for some time period.

The Wall Street Journal reports that Chevron's net rose 18% to $3.45 billion in its most recently reported quarter.

The New York Times reports that the ability of handsets to make WiFi calls has telephone companies concerned. Cell companies like Nokia, Samsung and Motorola will introduce phones with the new feature. The success of these projects could pose problems to Verizon Wireless and Cingular, which is owned by AT&T and BellSouth.

The New York Times also reports that Wal-Mart will exit the German market selling its 85 stores to a German retailer at a loss of $1 billion. Wal-Mart faced stiff competition from other retailers in the country.

The New York Times also reports that the SEC has asked for options data from Activision, the video game company.

Douglas A. McIntyre

EchoSar's Wildest Dreams

Stocks: (DISH)(DTV)

The management and shareholders of EchoStar must think that the bankers at the local saving and loan left the vault open and put a sign on the door that says "Free Money". With local cable companies offering the "triple play" of VOIP, television, and broadband and the telcos about to offer IPTV over fiber to the home, Echostar hit a 52-week high at $35. Its low for the period is $24.44 which it hit in November of last year.

According to Morningstar, it takes EchoStar about two years to get back the acquistion costs of a new customer. The cost to convert hardware and systems, plus content costs, will grow with the demand for HDTV and other costs. There is, of course, always the problem that satellite TV does not work during a heavy rainstorm. Not a bad point to make if someone is selling cable or telco fiber products door-to-door.

Recent growth at EchoStar has been decent, but hardly spectacular. In the December 05 quarter, revenue was $2.18 billion. In the March 06 quarter, revenue hit $2.29 billion, a 5% increase. Operating income went from $252 million in the Decmber period to $274 million in the quarter ending in March.

The real engine behind the run-up in Echostar's stock is merger rumors. Pretty thin. It is also speculation to assume that the merger would value Echostar much higher than its current price. EchoStar trades at 1.74 times sales while DirecTV is at 1.62 times. Then, there is the thorny issue of antitrust and the anthropoids at the FCC.

Investing on merger chatter can be risky business. Has EchoStar's value really gone up 40% in a little over six months?

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.

Conexant Falls Too Far

It does not take much bad news in this market for a stock to be flogged within an inch of its life. Conexant Systems, which makes semiconductors for broadband communications and digital home systems, has some big one-times expenses including a write-down of some Mindspeed warrants and a patent litigation settlement with Texas Instruments.

The company also guided that the next quarter will be about flat with the one just reported. Not great news.

But, the company is hardly going out of business. Revenue for the quarter ending June 30 was $251.6 million compared to $197.4 million in the quarter a year ago. The company's operating loss was $5.7 million compared to a loss of $37.8 million in the quarter last year. The company's non-GAAP core operating income was $$25.5 million compared to a loss on that basis of $11.2 million last year.

Conexant has shown revenue growth in each of the last four sequential quarters, and it is now saying it will have a period when it does not grow for at least a quarter.

Although the company has seen a slowdown in some of its business segments, all is not lost. One of the Conexant's key markets is still growing quickly according to the company: "In Broadband Media Processing, we continue to see strong customer demand across our set-top box portfolio, and we anticipate that these products will deliver yet another quarter of double-digit revenue growth".

Conexant's stock is off from $3.90 in late April to $1.68, very near its 52-week low. Is the company really worth less than half of what it was three months ago? That's probably a bit of an overreaction.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.

Intel's New Chips Can't Fix A Broken Industry

Stocks: (INTC)(AMD)(DELL)(GTW)

Intel's new Core 2 Duo chips are a marvel. The deliver more processing power, use less battery power, and throw off less heat. But, as gun owners will tell you, people get killed as often with a 22 caliber as with a 45 model. The market may not want a better chip.

Intel cut the prices on its older chips as much as 61%, which hurts competitor AMD, but does not necessarily help Intel. The PC manufacturers are squeezed. Companies like Dell, Lenovo, and Gateway are desparate to increase sales and margins, and a chip that is a better mouse trap may not be the solution.

PC companies that want to improve margins want the old chips at a 61% rake off, not an expensive new chip that most consumers cannot tell from the Pentium 4.

Dell may have wanted AMD chips when they had better performance that Intel's. But the new Core 2 Dual can run as much as $999, and that may not be much help to a manufacturer pressured ny margin problems.

Don't look for the Core 2 Dual to save Intel's bacon. Nice product, but how many people really want it? Maybe that's why Intel's stock, trading near its 52-week low at $17.60 is only up 1% on the product launch.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own shares in companies that he writes about.

To Your Health

By William Trent, CFA of Stock Market Beat


Summary: Rising costs harpooned the HMOs, but could have been foreseen by looking at the detailed PPI data.
In the latest Value Line Industry Survey on the drug industry they say:

The major pharmaceutical companies that dominate the Drug Industry will report June-quarter results over the next few weeks. Year-over-year comparisons are likely to be generally unexciting, primarily reflecting pressures on the top line from significant patent expirations and the resulting assault from generic competition. The silver lining in the drug sector’s multiyear descent, however, are valuations that have reached extraordinarily low levels, from which the downside risk appears manageably low and the dividend yield temptingly high.


The New York Times says the pharmaceutical industry is beginning to reap a windfall from a surprisingly lucrative niche market: drugs for poor people.

PPI data shows that hospital costs are rising faster:

As are pharmaceutical costs:


But a doctor’s visit is not rising as quickly.


Watch List news:

Israeli generic drug maker Taro Pharmaceutical Industries Ltd. said Friday it received notice it may be delisted from the Nasdaq Global Select Market for failing to file its annual report on time. In July the company said it was completing an audit of financial statements for the year ended Dec. 31, 2005 and expects to finish the audit in August. Taro has requested a hearing before Nasdaq’s listing qualifications panel to review the possible delisting. Its shares will remain listed pending the review.

Home healthcare company Apria Healthcare Group Inc. (AHG) said earnings ballooned from a year-ago period weighed down by a hefty charge, and said its finance chief is stepping down. In the second quarter, Apria’s net income increased to $18.5 million, or 43 cents per share, up from $3 million, or 6 cents per share, a year earlier. Year-ago results were hurt by a charge for a $20 million settlement of a government lawsuit over Medicare billing. Analysts, on average, expected earnings of 40 cents a share, according to a Thomson Financial survey.

Biosite says will pay in settlement of patent litigation

Other news:

Johnson & Johnson (JNJ) earned $2.82 billion, or 95 cents per share. A year go it earned $2.59 billion, or 86 cents per share. Excluding special items, J&J earned 98 cents per share. Analysts, on average, expected 97 cents per share, according to Reuters Estimates. Company sales rose 4.7 percent to $13.4 billion, a bit higher than Wall Street expectations of $13.29 billion.

Pfizer earnings rise on sales growth

ImClone profit up, stock sinks


The author may hold a position in the securities discussed.

http://stockmarketbeat.com/blog1/

Getting Defensive

By William Trent CFA of Stock Market Beat

In reviewing yesterday’s Durable Goods report, one segment jumped out at us: Defense aircraft and parts. A look at the table to the right, which presents the year/year change in shipments, orders, inventories and backlog shows that something interesting may be going on.

Shipments have been poking along at barely above last year’s numbers (and actually below last year in June.) The lag from orders to shipments can be extended in aircraft (less so for parts) so the decline in orders from April was a predecessor to June’s decline in shipments. This was also foretold in the stock prices, which peaked in March (ahead of the rest of the market) and in most cases have not fully recovered.So what has happened to orders since April? They have been rising at an accelerating pace.

Our bet is - you guessed it - defense aircraft and aircraft parts should have strong shipments ahead. Meanwhile, the performance of related stocks has been mixed this year. Names worth researching include L-3 Communications, Rockwell Collins, Precision Castparts, Boeing, Lockheed Martin and Teledyne.

http://stockmarketbeat.com/

Have Pirates Boarded Apple's iPod?

Stocks: (MSFT)(AAPL)

Rob Glaser, CEO of RealNetworks, is well-known for his colorful and often unintelligible comments on his competition. He hates the success of Apple's iPod because it has largely frozen Real out from any substantial success in the online music business.

During RealNetwork's earning announcment and call with investors, Glaser made two points about the iPod. One went over almost everyone's head. He called the iPod "the biggest Three Card Monty ever seen". It is fairly hard to imagine exactly how the music player is like a game of deception using playing cards, so it may have to be left at that.

Glaser's second comment was more troubling, at least for Apple investors. He commented that Apple was ignoring the iPod's use for "pirated" music.

There are a number of ways to alter the iPod's basic functions. It is possible to download music onto an iPod from other devices without buying the content from the iTunes story. This breaks the record industry rule that each download must be accompanied by a payment.

The legal issues around this kind of downloading are complicated. Typically, the consumer is at fault for "illegal" downloads. But, operations like Kazaa and BitTorrent have learned, the courts can go after them for setting up systems that "enable" downloads that violate copyright laws.

Apple finds itself in a sticky wicket. Another industry executive has accused it of aiding and abetting piracy of the intellectual property belonging to the record companies.

Apple's huge success with the iPod has not been without drawbacks. Among them is the accusation of Singapore based Creative Technology that the iPod violates its patents on portable multimedia players.

The iPod's issues as a device that can be used for playing "pirated" content is now front and center as something that Apple must face. Even President Bush has said that one of his staffers downloaded content from another player without going through a "store" and paying for the content.

The tremendous success of the iPod make it a target for a number of ground-breaking issues, and investors should not be surprised if, inside some courtroom, the debate over the iPod's status as a "pirate device" gets settled.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.

Microsoft's Wrong Turn: Could Its Stock Go Below $20

Stocks: (MSFT)(YHOO)(GOOG)(TWX)

Steve Ballmer, Microsoft's CEO, told analysts that he want to turn Microsoft into a "multi-core" firm with four key businesses. These would be the operating system business, the enterprise Office business, online operations like MSN and Microsoft Live, and an entertainment and device business. He seems to be off to the right start. Company executives said that the think the oft-delayed Vista upgrade to Windows will launch on its new projected date, if it is ready. The company also said it would spend "hundreds of millions of dollars" on its iPod competitor, called Zune.

Key to the company's succcess will be having search technology be a function of all of its software and not a "destination", a clear shot across the deck of rival Google. Microsoft is so far behind in search share of market that catching Google, or even Yahoo!, would appear to be nearly impossible.

At the center of the company's strategy is the delivery of software over the internet which will replace the notion that functions like the operating system, word processing, spreadsheets, and other functions will be loaded on PCs and servers before they are shipped.

Since MSN, Xbox, and the company's move into the delivery of products like VOIP and IPTV has not proved to be a huge success, the gamble on the delivery of the new Vista system and its component parts is critical. Microsoft admits that it loses money on every Xbox shipped. MSN is behind Yahoo!, Google and AOL in audience, and Zune's profits are at least five years away by the company's own calculations.

Microsoft is projecting revenue growth of its Office franchise at as much as 10% for the fiscal year ending June 30, 2007. That assumes that Vista is launched in a timely manner, and that Microsoft's ability to sell more of its software online will work. Vista ships to corporate customers in November.

Aside from the risk that Vista adoption will happen on Microsoft's timetable, the idea of selling software online, via a "subscription" model is still largely unproven. The applications that have been successful in online adoption are largely free like the Google spreadsheet offering and eBay's Skype VOIP software. The huge distributions of some of these applications proves only one thing: if you give away software, you may get a lot of takers.

Microsoft's bet on online delivery of its products to increase penetration and revenue is a significant gamble on a business model that is largely unproven, and its is build around the delivery of the company's most profitable franchises. Microsoft can hope that MSN, Xbox and Zune will become larger operating income contributors, but so far the evidence of that does not point to tremendous success.

With so much at stake, and so much at risk, its is not surprising that Microsoft's stock trades at $23.87, not much above its 52-week low. Even news of a gigantic share buyback has not moved it up much. If Microsoft's changing strategy to build its "four pillar" business falters at all, the stock could drop below $20.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.

Europe Stock Market Report 7/28/2005

Stocks: (BCS)(BP)(BAB)(BT)(PUK)(RTRSY)(UN)(UL)(VOD)(BAY)(DB)
(DT)(SAP)(SI)(ALA)(AXA)(FTE)(TMS)(V)

Stocks in Europe were relatively flat at 5.30 AM New York time.

The FTSE was off less than .1% to 5,926. Shares in Barclays were up 1.2% to 634.5. BP was up .4% to 651. British Air was up .1% to 389.25. BT was off .3% to 236. GlaxoSmithKline was down .1% to 1484. Prudential was down 3.8% to 573. Reuters was up .4% to 397.75. Unilever was up .6% to 1266. Vodafone was up .4% to 116.

The DAXX was off .1% to 5,655. Bayer was up .4% to 38.45. BMW was up .7% to 40.09. DeutscheBank was down .3% to 89.55. Deutsche Telekom was down .3% to 12.11. SAP was up .3% to 142.8. Siemens was down 1.4% to 62.46.

The CAC 40 was off .4% to 4,984. Alacatel was down .2% to 8.67. AXA was down .4% to 26.48. France Telecom was down .9% to 16.22. ST Micro was down 1.8% to 11.38. Thomson was down .9% to 12.36. Vivendi was off 1.3% to 28.21.

Douglas A. McIntyre

The Outlook For Commodity Prices

By Yaser Anwar, CSC of Equity Investment Ideas

The current volatility in commodity prices begs the question of whether this is the start of a bear market or just a correction in a very long-term bullish trend. Historically commodity bull markets last upto 10-15 years.


The odds are good that the bull market that began in 01 has not yet run its full course.


The important thing to remember is that no great bull market has been immune to such corrections. Even the Nasdaq in the 1990s and gold in the 1970s saw corrections of as much as 30 percent in the context of a longer-term trend higher.


Brazil, Russia, India & China's industrialization alongside rapid growth in the entire developing world will act as key forces to sustain structural demand for commodities, from steel to platinum & gold reserves to oil.


Gulf of Mexico oil and gas production still hasn't fully recovered from hurricanes Katrina and Rita. And supplies were severely interrupted for months after the storms last year. If another major storm were to affect drilling operations in the region, supplies of oil and gas could be cut off once again, causing another shortage and spike in energy commodity pricing.


Furthermore, real commodity prices are still low relative to their long-term trend, despite rapid increases in recent years. One example would be Natural Gas, which is selling roughly around 59% of their Crude equivalent value.


Bottom line: The secular bull market in commodities remains intact.

http://www.equityinvestmentideas.blogspot.com/

Media Digest 7/28/2006: WSJ, NYT, Reuters

Stocks: (BMY)(MSFT)(SNE)(HCA)(PETC)(XOM)(AET)(C)(BAC)(AAPL)(DCX)(XMSR)

According to the WSJ, the FBI raided the office of the CEO of Bristol-Myers as part of a criminal antitrust investigation.

Reuters writes that although Microsoft is acquiring companies at a record rate, it still plans to rely on its own R&D for its major growth in the future.

Reuters said that Sony's losses in its game division may rise in Q3, probably due to higher chip costs for its Playstation 3.

The Wall Street Journal says that unusual trading patterns before major deals were announced at Petco, HCA and other companies is raising concerns about insider trading.

The WSJ reports that ExxonMobil's profits were up 36% to over $10 billion, making it the second best quarter in the oil companies history. Shell's profits rose 40% on higher oil prices.

The WSJ also writes that because Aetna could not raise premiums quickly to keep pace with medical costs sent the stock down to a 52-week low of $33.25. Profit for its most recent quarter was down 1%.

According to the WSJ, Bank of America is close to overtaking Citigroup as the nation's most valuable bank based on market capitalization.

Also reported in the WSJ, DaimlerChrysler's net almost doubled on strength at its Mercedes unit. Sales at Chrysler were hurt by falling demand for its SUVs and trucks.

The WSJ writes that XM Satellite Radio's loses increased to $232 million in the latest quarter compared to $148 million in the period a year ago. The company cut its year-end subscription goal to 7.7 million from 8.2 million.

The WSJ says the Microsoft confirmed that it would launch a multimedia player, Zune, to compete with Apple's iPod and would spend "hundreds of millions of dollars" on the project.

The WSJ also writes that Intel launched its new line of 10 microprocessers called Core 2 Duo. The chips provide more calculating power while requiring less power consumption.

The New York Times writes that the IRS is now involved in the options repricing scandal checking to see if the practice affects company tax obligations which could rise into the millions of dollars for the 40 companies being reviewed.

The NYTs writes that at Microsoft's meeting with Wall Street analysts, the company said it would invest heavily in moving software delivery to the internet.

Douglas A. McIntyre

Asia Markets 7/28/2006

Stocks: (HIT)(HMC)(NTT)(SNE)(TM)(CN)(CHL)(HBC)(PCCW)

Asian markets bounced up.

The Nikkei rose 1.1% to 15,343. Canon was up 1.3% to 5460. Daiwa Securites was up 3.4% to 1245. Hitachi was up .1% to 724. Honda was down .8% to 3820. Nissan was down .5% to 1244. NTT was up .7% to 594000. Softbank was up 1.5% to 2060. Sony was up 4.2% to 5230. Toyota was up .5% to 6020. Yahoo!Japan was up 1.1% to 46700.

The Hang Seng was up .4% to 16,984. Cathay Pacific was up .6% to 13.94. China Mobile was up 2.2% to 50.4. China Unicom was up .1% to 6.99. HSBC was off .4% to 139.6. Lenovo was up 1.2% to 2.53. PCCW was down .2% to 4.84.

The KOPSI was up .1% to 1,297.

The Straits Times Index was down .7% to 2,429.

The Shanghai Composite was down .8% to 1,662.

Douglas A. McIntyre

Are M&A Guys Calling On Finisar?

Stocks: (FNSR)(JDSU)

Everyone wants to believe that the business of building optical components for network equipment vendors is a good business. The theory is that Finisar and JDS Uniphase will power the rising market in additional network capacity for telecom companies. But, there are more than a few companies playing in the optical equipment maker field. And, Finisar does not have the balance sheet that companies like JDSU do.

The company has had some encouraging news recently. It won a large patent suit against DirecTV and aside from a settlement, Finisar will get $1.60 for each TV set-top that DirecTV deploys.

Finisar also had a decent quarter for the period ending April 30. The company announced results on June 7. Revenue for the quarter hit $102 million up from $75 million a year earlier. And, the company had an operating profit of $5 million. The company's cash and short term investment increase about $2 million from the immediately previous quarter.

Wall St. thought the numbers were lackluster, and drove the stock down 24% the day after earnings came out. The company had a heady run over the 52-week period, starting below $1 and moving up to $5.49 this May. So, results had to be spectacular to keep the run going.

Investors have begun to bet that the future for the company is dimming. The short position in the company rose 55% for the period posted in mid-July moving to 27.3 million shares. Finisar trades 14 million shares a day, so the coverage ratio is not bad, but the increase is a sign of eroding confidence that a company as small as this can make its way in a very competitive market.

Finisar would be an excellent fit with JDS Uniphase.(Short interest in JDSU dropped 7.6 million shares to 83.2 million in July.) It has to have occurred to both companies. They are, essentially, in the same business and both struggling. The amount of overhead that could be taken out in a consolidation would likely increase the cash flow from the Finisar operations well above the $2 million it was able to produce last quarter. The company does hav a large convertible preferred instrument that would have to be taken care of in a transaction, but the quants at any first-tier investment bank can work that through.

If someone tells you that bankers and the managements at JDS Uniphase and Finisar have not give all this a great deal of thought...

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.

U.S. Employment: Soft Landing Ahead

By Yaser Anwar, CSC of Equity Investment Ideas

Despite some hype this week that a blockbuster payroll report loomed, the June gain was below the average of the past 12 months, continuing a trend that started in April. A further moderation looms.


Corporate profit growth is expected to cool, and while we do not foresee a contraction ahead, executives are still likely to respond if our forecast for weaker consumption pans out.


I doubt that mass layoffs will occur (unemployment claims remain fairly low), but new job creation is likely to cool further.


The contraction in temporary employment during the past six months indicates that some cautiousness is developing and is a harbinger of weaker total payroll growth.


In sum, employment growth should slow over the balance of the year, enough to keep consumers from overspending, but not so much as to trigger a recession.

Source: BCA

http://equityinvestmentideas.blogspot.com/

Sell into this strength 'cause Fed will raise rate

By Yaser Anwar, CSC of Stock Market Beat

The government reported that orders to U.S. factories for big-ticket jumped by a durable goods stronger than expected 3.1& in June, powered by a rebound in demand for commercial aircraft.


The Labor Department said that the number of Americans filing claims for unemployment benefits last week fell by 7K to 298K, indicating continued strength in the labor market even though job growth has slowed in recent months.


For June, orders for durable goods, items expected to last at least three years, totaled $216.3 billion, an increase of $6.52 billion from the May level.


Excluding transportation, orders were up a solid 1 percent in June with strength being shown in demand for computers, communication equipment and primary metals such as steel.


Tomorrow's GDP report, which i expect to be stronger than expected (atleast 3.2%), will further add to my belief that Fed will now raise rates two more times.


Bottom Line: The strength in business investment shows the economy, even though slowing, is still doing better than expected. Falling unemployment claims means companies are hiring thus adding wage pressure. The market is showing strength due to two days of stellar earnings by Dow components (CAT, BA, GM & XOM). I think you should sell into it 'cause the Fed will be raising rates two more times.

http://equityinvestmentideas.blogspot.com/

Advertisers Embrace Analytic Tactics

By Yaser Anwar, CSC of Equity Investment Ideas

With Internet ad spend spiraling upward, JupiterResearch finds advertisers changing tactics to keep a lid on spending for their "key word" advertising.


Jupiter research associate Sapna Satagopan told a July 18 audio conference for Jupiter clients that simply making high bids for the top three key words—which are parceled out in blind auctions—will be increasingly "irrational" given ad price escalations. The first page of results from any consumer-directed Web search contains three slots for key word ads that are most coveted.


She notes that Jupiter's U.S. Paid Search Forecast, 2005 to 2010 estimates the average cost per click (CPC) for each consumer response to such key word ads will spike 14% from 2005 to 2007.



To keep ad spend efficient, a Jupiter survey U.S. Search Engine Marketing Executive Survey, 2006 found that five advanced tactics are now the first choice to direct key word ad spend for about three quarters of "sophisticated" advertisers. The most popular of the five is making future buys based on past buys with the highest return on investment (ROI), irrespective of changes in consumer traffic. Sophisticated advertisers accounted for one-quarter of advertisers in the Jupiter search marketing survey; they spent the most on ads and tended to use complex media tools.
Besides ROI at 28%, the other top criteria cited by surveyed advertisers in buying key word ads included:

• 20% spread their ad spending over increasingly more search engines to achieve consumer
traffic goals;

• 12% place based on search marketing revenue;

• 9% cite analysis of cost of goods sold per spot;

• 4% rely on bidding tools such as Google's bidding interface, third party vendor tools such as
Atlas Search as well as agency-provided tools.

"These are smarter ways to bid," says Satagopan. As the accompanying table indicates, only 10% of these sophisticated advertisers are primarily relying on internally-generated estimates. And just 7% of sophisticated advertisers in 2006 are bidding high simply to concentrate ad spend on just the top top-positions for key word ads—an elementary tactic. "This is good news as 'irrational' bidding is down for sophisticated marketers," notes Satagopan.


She noted that advertisers juggle several considerations when buying key words such as "digital camera" or "automobile." Advertiser ads accompany search results in Google, Yahoo!/Overture, Ask.com and other search engines.


Jupiter estimates the average click will cost an advertiser 47 cents in 2005, from blending the figure for expensive products such as houses at perhaps $20 per click down to low-cost key key words for mundane consumer items such as soda pop at 5 cents.


With Yahoo's search engine project being delayed, this gives Google the upperhand (not like it didn't have that already) to further boost its market share. Google has also improved its Adwords interface & customer service is alot better than before. Once the Fed stops raising rates (Historically, The Fed has to cut rates every 9-12 months after they stopped raising rates) i believe the market will pay a higher multiple for Google.

Sources: Excerpts from Kagan Research Newsletter & Jupiter Research

http://equityinvestmentideas.blogspot.com/

The Shorts Face the Guillotine At Symantec

Stocks: (SYMC)(YHOO)

The short position in Symantec at mid-July was huge. It had risen 23.9 million to 45.1 million, or 88%. Given that Symantec has the 11th largest short position of any stock traded on Nasdaq, the move was breathtaking.

But, the bet was wrong, or so it seems now.

Symantec revenue rose to $1.26 billion from $699 million in the year ago period. The revenue from the 2005 quarter did not include revenue from acquired company Veritas. The company raised its outlook for the year, and the CEO commented that the market had been overly concerned about the acquisition risk of Veritas.

The share of the company, famed for its Norton anti-virus software, jumped 10% top $17.38. The company now trades at 18% above its 52-week low. The company is still well shy of its 12-month high of $24.01, but getting out of the trough.

Short sellers obviously gambled that putting Symantec and Veritas together would be tough. The market also probably did not see the alliance with Yahoo! to distribute Norton software to the big websites customers. On the surface, it is a very good deal for Symantec.

Even Merrill Lynch rolled the dice a few days ago and cut Symantec to "neutral" from "buy". It could be that move cost some Merrill customer a few dollars.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.

So Far, So Good on the Earnings Front

By Chad Brand of The Peridot Capitalist

We still have a lot of reports to come, but so far second quarter profit reports have once again come in very strong. Aside from the obvious, a fairly strong economy, I think there are two key reasons why we are seeing strong corporate results.

The first is clean corporate balance sheets. Public companies are flush with cash which gives them a lot of flexibility in managing their business. Excess cash has been used for acquisitions as well as share repurchases quite heavily in recent quarters. M&A can be very accretive if done right, and buyback programs can add a penny or two to the bottom line in any given quarter.

The second reason earnings have been so strong, in my opinion, is because managements have finally figured out that the key is to under-promise and over-deliver. This is true in any business, public or private. However, in the go-go days of the late 1990's, stocks would only rise if the firms beat numbers and raised guidance every three months. CEOs had to be overly optimistic in everything they said in order to prop up their already richly valued stocks. As a result, expectations got way out of line and eventually the bar had to be ratcheted downward.

I think today is different. The trend has been to beat numbers and issue cautious guidance. This serves to hurt share prices right after results are released, but it brings expectations down for future quarters. Then, the company beats the reduced expectations the next quarter and again issues cautious guidance. The cycle simply repeats itself over and over again. Executives have finally figured out that hyping their company's future prospects can end badly if they fail to deliver on the lofty promises.

Readers of this blog know that I'd prefer companies shun quarterly guidance completely. However, if they insist on giving out financial projections every three months, at least most are setting the bar low enough that they can at least hit, and often even surpass, their projections.


http://www.peridotcapitalist.com/

All CSG Systems Go

By William Trent, CFA of Stock Market Beat

Analysts are paid to be paranoid, and sometimes the paranoia gets the better of us. One example of this was last week’s observation about Watch List member CSG Systems (CSGS) when we said that two press releases in one week was unusual for the company. We worried that they were trying to flood the market with good news ahead of potentially bad earnings.
We needn’t have worried.

CSG beat analyst estimates and raised guidance, sending the shares up 3 percent. Even after the move the company is trading at an enterprise value of just 12.5x its trailing free cash flow, a capitalization rate that implies approximately 2 percent annual free cash flowgrowth, which ought to be manageable. In fact, the company is projecting it will grow 25 percent this year (though that is somewhat of an anomaly). The company announced another share buyback, having already reduced the average share count by 2 million shares (four percent) in the last year. These are not just buybacks to replace shares issued to employees on stock option exercise. This is honest-to-goodness reduction in the share count.

So we misread this one. To be fair, it isn’t like we were pounding the table to sell. We closed out our argument with:
Now, before you pull out your order book consider a few points. First, really bad news like losing a top five customer would probably have been announced already due to the Sarbanes Oxley rules. Second, the stock is already pretty reasonably valued on an enterprise value to free cash flow basis. Third, the nature of the companies business results in earnings and cash flows that are quite stable. Of course, that overall stability sometimes results in market overreactions to small misses.

In the end, we may be reading too much into two stories that just coincidentally came out this week. But they caught our attention, and we figured we would bring them to yours.
But let’s not whitewash it. The jist of the piece was clearly negative and clearly wrong, and we want to own up to those just as we crow about our successful calls.

http://stockmarketbeat.com/blog1/

Rockwell Automation: Will Investors Ever Learn?

By William Trent, CFA of Stock Market Beat

Rockwell Automation (ROK) sells factory automation equipment. If ever there was an industry poised to do well in today’s economic environment, Rockwell is in it. Productivity growth is the only way manufacturing companies can keep up with low-cost providers.
Rockwell just posted an outstanding quarter.

According to Reuters:
Net income increased to $149 million, or 83 cents per share, from $127.3 million, or 68 cents per share, a year ago. Wall Street analysts expected net income of 81 cents per share, according to Reuters Estimates.

Sales of its products, which help factories run more smoothly, came in at $1.4284 billion, up 13.5 percent from $1.2647 billion a year ago. Analysts expected third-quarter sales of $1.3989 billion.
Rockwell expects full-year 2006 results to “modestly exceed” its prior forecast of earnings per share from continuing operations of $3.25 on 11 percent revenue growth.

Not the kind of news one expects to send a stock down more than 10 percent for the day. In part, Wall Street was disappointed that after beating estimates the full-year guidance wasn’t really raised. In fact, some analysts consider the company to have reduced guidance:
Deutsche Bank analyst Nigel Coe wrote in a research note that the profit beat Wall Street expectations largely due to a lower-than-expected tax rate. The lower tax rate, he said, means that “the quality of this (full year profit forecast) number has been lowered.”

Whatever. Management reiterated on the call their past comments that the tax rate can jump around from quarter to quarter due to the timing of various items.This all brings us back to April, 2005. The stock sold off sharply because the company “missed” its earnings target for the quarter. Problem is, Rockwell doesn’t give quarterly guidance. The high ticket prices of their equipment means there is too much volatility in quarterly numbers just because a sale occurs a few days earlier or later than the quarter end. No matter. Wall Street came up with their estimates and punished the stock for failing to meet them.

Of course, the company went on to exceed the annual guidance it had provided, the selloff marked the low of the year and by the following April the share price had nearly doubled.

Can the same thing happen again? Possibly. The stock is now trading at about 16x the consensus estimate for fiscal year ending in September 2007. That is not dirt-cheap in today’s market, but not outrageous either. Now consider some of management’s comments on the conference call:
We are currently in the teeth of a major correction in demand from our Detroit automotive market. Sales from the Detroit region were down almost 50% this quarter, which in turn reduced total company growth by more than a point, Logix growth by about two points, and control systems’ conversion margin by about five points. In the past, a correction of this magnitude would have had significant consequences for Rockwell Automation. Our ability to deliver double-digit growth during such a correction would have been unimaginable 10 years ago. Quarter four will see a similar 50% year-over-year sales decline in Detroit – and we expect to again deliver double-digit revenue growth.

Currently, we still believe we’re in the 11th quarter of the expansion (of industrial capital spending), and if you look at the historical definition of those expansions, it would last anywhere between 25 and 35 quarters, and I think what we’re continuing to see is disciplined spending by our customers.

This is a solid company that backs up its promises. While it had gotten expensive for today’s market, there was no need for the panic selling following its earnings report.

http://stockmarketbeat.com/blog1/

Back to Basics

By William Trent, CFA of Stock Market Beat

Summary: Higher
Value Line says the following in their latest Metals & Mining Industry Survey:

Thanks to good recent price and earnings momentum, the Metals & Mining (Diversified) Industry continues to be ranked near the top of all the industries covered by Value Line in terms of Timeliness. Equities of companies here, however, have not been immune to the considerable volatility that the stock market has experienced thus far in 2006, arising partly from fears that record oil prices will spark a pickup in inflation and ultimately damage the economy. The Metals & Mining Industry, though, has tended to perform better than many other sectors, supported mainly by strong commodity prices. Another contributing factor has been heightened merger activity, as managements are hoping that the current industry up-cycle will last longer than previous ones, given the rise of China, India, and other developing nations. That said, several issues here are good selections for relative price action for the coming six to 12 months.


PPI data showed that pricing remains strong for most of the basic materials.


Organic chemicals bucked the trend:
But steel looks like it may be rising again (right).

Zinc shortfall was 120,000 t short of demand for the first five months of the year, because of higher consumption of the metal used to galvanize steel, the International Lead and Zinc Study Group said. Watch List Companies

Freeport-McMoRan Copper & Gold Inc. (FCX) reported second-quarter profit more than doubled, as higher prices helped offset a shortfall in copper production at its vast Grasberg mine in Indonesia. Net earnings jumped to $367.3 million, or $1.74 per share, from $175 million, or 91 cents, in the same quarter of 2005. In June, Freeport said copper production at Grasberg would be below estimates because of an unusual amount of clay in the section being mined. Glamis Gold Ltd. (GLG) finalized an agreement with the Guatemalan Government to begin payment of income tax effective July 1, 2006. The temporary exemption from the payment of income tax would have expired at the end of 2007. The earlier payment of the income tax will accelerate improvements to services and infrastructure in areas near the Marlin Mine and complement the employment and economic benefits currently being provided (2005 activity details can be found on the Glamis website under Properties-Marlin-Reports/Technical Items-2005 AMR). The funds will also be used for increased capacity building within government ministries with mining responsibilites. Assuming $600 gold and $10 silver prices the income tax will be approximately $4.8 million in 2006 and $10 million in 2007 based on current production guidance.

Sasol, Solidarity reach deal, three-day strike ends

Other News

Xstrata of Switzerland said it would increase its all-cash bid for the Canadian mining company Falconbridge a second time, by 7.2 percent, to 19.2 billion Canadian dollars ($16.9 billion).

World No. 2 gold miner Newmont’s output will be slightly down in 2006 and 2007 before it begins to rise in 2008, CEO Wayne Murdy said, adding that he expected gold prices to remain strong for years.

Palamin reports 8% rise in H1 copper production Falconbridge 2Q Copper Output Up 6% At 107,500 Tons BHP’s carbon-steel materials unit, which produces iron ore, coking coal and manganese, was the largest contributor to earnings in the six months ended December, earning $2.3 billion, or 34 percent of total pretax profit. Iron ore output has fallen for two straight quarters for BHP before this one, partly due to wet weather and as its expansion works limit production. Copper production rose 16 percent to 311,700 tons in the three months ended June 30, it said. Nickel output rose 31 percent to 41,600 tons. Its metals production rose as last year’s A$9.2 billion ($6.9 billion) acquisition of WMC Resources Ltd. made BHP the world’s third-largest nickel producer and one of the biggest copper producers.

Teck Cominco reports record net earnings of $613 million for the second quarter

Inco produced 140 million pounds of nickel during the quarter, which was 26% higher than a year-earlier production. Cash cost of sales for nickel unit, after by-product credits was well below at US$2.08 per pound, 26% lower from costs for prior-year quarter.

Global miner Rio Tinto Ltd has boosted its iron ore production to record levels, after fighting back from a cyclone-affected first quarter to take full advantage of a recent iron ore price hike. The miner produced 33.32 million tonnes of iron ore in the second quarter, up four per cent on the previous corresponding period.

http://stockmarketbeat.com/blog1/

Shorts Flee Sun Micro (SUNW)

If the world of short sellers in any indication, Sun Microsystems has better days ahead. The short position in the big hardware company fell 21.6 million shares to 38.2 million in mid-July.
It's good news for Sun shareholders.

The company has already demonstrated that it may be in the early stages of turning the corner. Revenue in the last quarter hit $3.83 billion. Sun's EPS and revenue were both better than the Wall St. consensus. Investors were particularly pleased to see service revenue up 25% to $1.3 billion. This unit probably has more promise that the computer systems part of the company.

The stock rose on the news and now stands at $4.27, up 20% from its 52-week low.

If the shorts keep moving out, or get pushed out, of the stock by a rising share price and improved results, the stock could run back toward $5.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.

TWX: Dick Parsons and George Armstrong Custer

Stocks: (TWX)(NWS)

Generals and CEOs seem to have more lives than cats do. Custer had eleven horses shot from under him and was wounded in the leg during the Civil War. He was under fire on dozens of occasions. Dick Parsons has not had such a dangerous life, but he has been around. He was the president of a modest bank in New York. Later, he was recruited to TimeWarner, before the AOL merger. He not only survived the merger, but outlived Gerald Levine and Steve Case, the architects of the agreement. Parsons has even dodged an attempt by Carl Icahn to rally institutional investors, throw the CEO out, and break the company into pieces.

The problems for Mr. Parsons are serious again. He has done most of the obvious things to improve his company’s fortunes. Costs have been cut at the lagging divisions like the old-line publishing operation, Time, Inc. The company plans to spin out its cable operation, which is an extraordinary cash cow, in the hopes that it will “unlock shareholder value” by not being tucked in with AOL, Time Inc, the Warner studio and the company’s other operations.

Sobeit. Those things are done or in process and have almost certainly been priced into the stock. Ah, the stock. The chart of the company’s stock has graced hundreds of stories about Time Warner. Suffice it to say that, at $16.20, it trades near its 52-week low. The share price is 1.6 times sales. Even down-and-out rival Viacom trades at 2.4 times.

Now, Time Warner has decided that the only way to save its most visible problem, AOL, is to allow paid subscribers of its service free access to all of its content. The internet service provider will still charge for dial-up services, but will not promote them. Various figures have been put on the loss of revenue for making this move, but the one from the Wall Street Journal is as good as any--$1 billion out the door between now and 2009. To replace that, AOL would have to make a gross margin on its business that is larger than Yahoo!’s annual gross profit.

It won’t work. Time Warner’s operating income in the quarter that ended in March was $1.866 billion. If the AOL math for replacing subscription revenue with advertising is not perfectly executed, the costs to shareholders are near the edge of reasonable calculation.

If TimeWarner thinks $16 is a low share price, they ain’t seen nothing yet.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.

GM’s Stock Could Rise 75%, Again

Stocks: (GM) (DCX)


The stock in General Motors has risen 75% from its 52-week low of $18.33 to the current $32. A lot of Wall St. investors would suggest that anyone who thinks it will rise that much again this year should be put on anti-psychotic drugs. Maybe not.

GM’s revenue rose from $48.5 million in the quarter a year ago to $54.4 billion in the current quarter. Without one-times items factored in, the company made $1.2 billion. Cash on the balance sheet went up $500 million. The company made two other important announcements. One was that it would up its annual savings target by $1 billion to $9 billion per annum. The other was that the company’s new line of pick-ups and SUVs is doing well. Counterintuitive, given gas prices.

Now that the General has effectively thrown out Carlos Ghosn with good numbers and muscle-man statements about the pace of its turnaround, the question becomes how high is up?

GM’s stock trades at 10% of revenue. DaimlerChrysler trades at 25% of revenue. GM is not near where Daimler is from a balance sheet or earnings level, yet.

In January 2004, GM’s stock changed hands at $55, which is roughly 71% above the stock’s current price. The year 2003 had not been a bad one for GM. Revenue was $185.5 billion. Earnings before taxes were almost $3 billion, and, after taxes, $2.3 billion.

Take the quarter just reported, less one-time events, and annualize it. Revenue would be $216 billion. Income would be $4.8 billion.

If GM commanded DaimlerChrysler’s revenue-to-price ratio, the General’s stock would trade at $80. Not likely. But, if the company gets back to an annual income run rate of $4 billion, the idea of the stock hitting $55 is entirely possible. With annual cost saving of $9 billion a year, and a small tail wind in sales, GM may just get there.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.