Archive for August, 2005
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Petrokaz Bid May Face Kazakh Opposition
Eddy Elfenbein, August 26th, 2005 at 10:36 amCNPC’s buyout of PetroKaz might not go so smoothly. The Kazakh government is not too pleased.
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Walking on Sunshine
Eddy Elfenbein, August 26th, 2005 at 8:03 amTropical Storm Katrina Brings Her Waves Closer to Florida
Katrina and the Waves Set Oil on Course for $70
Katrina Bringing Her Waves to Southeast Florida
Tropical Storm Katrina Brings the Waves as It Nears Florida
Katrina and Its Waves Spread Across Southeast Florida
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Dell on the Defensive
Eddy Elfenbein, August 25th, 2005 at 12:50 pmEveryone seems to be attacking Dell lately. Business Week, in particular, has taken a strong anti-Dell stance. They have a story now on how HP is outmaneuvering Dell.
Few investors would dispute the notion that Dell is one of the great companies in tech. The world’s largest computer maker’s earnings jumped more than 25% last year, outpacing a nearly 19% rise in sales. It has a clear playbook to push into higher-margin products and new geographic markets. So why are Dell shares down 16% since the end of last year, while those of rival Hewlett-Packard have soared more than 27%?
HP is simply beating Dell hands down in managing Wall Street’s expectations. HP was long one of tech’s most mediocre performers — famous for big earnings disappointments and unfulfilled ambitions. But the stock lost its “Carly discount” after the divisive Carleton S. Fiorina was shown the door in April, and the new chief executive, Mark Hurd, began doing the right things.Please. HP has huge problems of its own. The company is laying off 15,000 employees, and it’ll be lucky if sales rise 5% this year. True, the stock is up this year in the sense that it’s less sharply off its high. Wall Street is applauding HP’s cost-cutting initiative. But Dell never implements one because it never has bloated costs.
By contrast, Dell is becoming a victim of its own success. On Aug. 11 the company announced a second-quarter sales increase of 14.7%, far outpacing HP’s 10% rise. The Round Rock (Tex.)-based Dell said it cut prices too much and didn’t sell as much as it hoped to the federal government.
Trouble is, the sales number was below its own earlier forecast of a 16% to 18% increase. Worse yet, Dell also ratcheted down its revenue projections for the current quarter ending in October. Dell’s stock immediately tanked 7.4%.This story is searching for a theme that doesn’t exist. Dell could have made up the sales shortfall with a minor price increase on each of its units sold.
On Aug. 12, high profile Goldman Sachs analyst Laura Conigliaro downgraded Dell to “market perform” from “outperform” because of the lower estimate for future sales growth.
That’s for people who haven’t gotten the hint. On the day of its earnings report, Business Week ran another anti-Dell story quoting, again, Laura Conigliaro.
Clearly, Dell is still a fabulously successful company. It’s earnings grew 28%, and sales–while slightly low of expectations–still grew a brisk 15%. But the specter of slower revenue growth in the future has analysts worried that even Dell is running out of easy pickings–that even it will have to break a sweat to find customers willing to pay enough for plain old PCs to keep its financial formula in good working order.
As with almost everything these days, there may be a “rise of Asia” component to this story. Laura Conigliaro, Goldman Sachs’ excellent hardware analyst, points out in a report titled “A Miss With Much Wider Implications,” that rivals such as Acer, Lenovo and BenQ are pushing prices down farther than even Dell may care to match. What’s more, much of Dell’s growth is coming from Asian customers, who typically buy cheaper configurations.A more serious problem that Dell is facing is a massive attack from blogs. Jeff Jarvis wrote about his experience with a new Dell and the company’s lousy customer service. Again, Business Week reports the gory details:
The Jarvis affair seems to have struck a chord with other Dell customers. Daily visits to BuzzMachine have doubled, to more than 10,000, estimates research firm Intelliseek. Among the responses: “Dude, get an Apple.”
This comes on the heels of a University of Michigan report showing that Apple creamed Dell in a customer survey.
Customer satisfaction at Dell, the world’s largest personal- computer maker, declined 6.3 percent, based on the University of Michigan’s American Customer Satisfaction Index. Dell fell further behind Apple Computer Inc., which grabbed the top spot in 2004.
I’d be much more concerned with a reputation for poor customer service. Initial reports show that Dell is taking this very seriously. I’m not so worried about Dell’s revenue shortfall. AMR Research rises to Dell’s defense:
Wall Street is punishing Dell for missing its revenue target last quarter, but a closer look reveals a price management strategy in play, writes Laura Preslan and Mark Hillman of AMR Research.
Dell has long been the poster child for using price to shape demand and keep the supply chain running smoothly.
The ability to match available configurations to consumer discounts has set the company apart from its competitors. Look back to when Dell made headlines during the 2002 dock strike, offering flat screen monitors for a nominal price increase because they could be shipped via plane more easily than traditional monitors.
Dell knows how to use price to shape demand.
Nonetheless, doomsayers have claimed that Dell’s revenue miss signals its demise. Faced with a shrinking market, Dell, the only PC maker that has generated consistent revenue and profit growth for several years, is no longer able to keep up.
Except for one thing: profits are up. In fact, profits are up by 28 percent to $1.02 billion in quarterly net income, and Dell took market share in every region. Clearly revenue growth is important, but in a rapidly commoditising business, profit is king. The less popular, but more accurate interpretation of Dell’s miss is that it bought customers with lower prices, but was able to increase profits, only cementing its leadership in price management.
The effective application of price management discipline can create several outcomes, from higher revenue, to more customers, to increased profits. Dell grew quarterly revenue by 15% and net income by 28 percent. Add the marketing perspective of cementing loyalty with price and that buyers today become less price-sensitive over time, and Dell reveals itself to still be on top of its price management game. -
Boom and Bust at Sea
Eddy Elfenbein, August 25th, 2005 at 10:54 amThe Economist looks at the shipping industry, at the outlooks is not good:
The uninspiring track record of some shipowners is but a squall compared with the storms that may be gathering over the horizon. The recent bumper returns from shipping have prompted a ship-building boom. As a result, an armada of new ships is joining the world’s fleets just as the rate of growth of world trade may be slowing. According to the Economist Intelligence Unit, a sister company of The Economist, the rate of growth of world trade in goods is set to slow, albeit to a still respectable 6.6% this year and 7.0% in 2006.
And Slate asks, “What’s with the Greek Shipping Magnates?”
On Tuesday, indicted lobbyist Jack Abramoff agreed to answer questions about the murder of a Greek business contact named Konstantinos Boulis. Boulis was shot to death a few months after he sold 11 casino ships to Abramoff and a partner. Meanwhile, Paris Hilton continues to plan her marriage to Greek shipping heir Paris Latsis, and Mary-Kate Olsen has been seen around town with Greek shipping scion Stavros Niarchos III. What’s with all the Greek shipping magnates?
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Financial Times: Google’s Wake-Up Call
Eddy Elfenbein, August 25th, 2005 at 10:26 amAn editorial in today’s Financial Times:
What should you do when Google parks its tanks on your lawn? The temptation is to panic. Having rapidly established itself as the world’s largest search engine, the group has breezily upturned industries as diverse as academic publishing and map-making. Now it is the turn of telecoms.
Google’s decision to establish an online voice calling service, Google Talk, is a vivid illustration of a young technology coming of age. A decade after the first commercial Voice over Internet Protocol services launched, Voip’s growing popularity is beginning to threaten traditional carriers.
The promise of free, or dramatically discounted, calls via personal computers attracted an estimated 3m people in the US to internet telephone services last year. IDC, an IT and telecoms consultancy, predicts that will rise to 27m by 2009. An estimated two thirds of large US businesses are using Voip for all or some of their telecoms needs.
Google is entering a crowded field, but some early leaders are emerging. Vonage, which charges $24.99 (£13.89) a month for unlimited calls, has signed up 700,000 people in three years. Skype, which has grown through word of mouth, has signed up 2m paying customers before its second birthday.
As an OECD report published yesterday spelled out, the march of internet telephony threatens traditional, fixed-line revenues, particularly for lucrative international calls, where online upstarts can offer the steepest discounts. Revenues from fixed-line voice traffic account for 70 to 90 per cent of the typical incumbent’s total income, and are already under pressure.
Mobile operators are similarly vulnerable, as Skype and others develop dedicated WiFi phones.
The industry has begun to respond. AT&T has declared its intention to be the market leader in Voip services, BT group is offering cheap international calls through BTCommunicator, and Comcast is plugging the “triple-play” attractions of voice, video and data services over its cable network.
Yet some still seem reluctant to promote Voip, for fear of eroding their traditional businesses. They have comforted themselves with the thought that Voip will encourage wider adoption of broadband services. But broadband prices are already under pressure.
Early problems with Voip’s reliability have largely been sorted out, but Google, Vonage and Skype do not yet have services that will appeal to everyone. Google Talk, for example, will only allow calls between PCs. This is unlikely to be the case for long.
Traditional providers can respond by offering higher value services, such as voicemail and call forwarding, and by bundling voice and broadband services. The future of the industry may yet be an integrated one. But incumbents must face the need to cannibalise old revenue streams, which means cutting costs further. It is time for them to walk the talk. -
Happy Birthday, Julio Franco
Eddy Elfenbein, August 24th, 2005 at 8:51 pmAtlanta’s first baseman, Julio Franco, turns 47 today. Dear lord. I can’t even imagine what that’s like.
Franco was drafted by Philadelphia in June 1978. I bet half the league wasn’t even born then. He debuted for Phillies as a shortstop in 1982. To put that in perspective, also on that Phillies team were Pete Rose (born 1941), Mike Schmidt (born 1949) and Steve Carlton (born 1944).
Then next year, Franco was traded to Cleveland. Ironically, the Phillies’ manager, Pat Corrales, also went to the Indians. At this time, the Indians weren’t very good, but they had some top-notch players like Franco and Joe Carter, who later became break out stars. In 1984, Franco led the league in at bats, and came in fifth in hits. In 1986, he batted .306, then .319 in 1987. In 1988, he moved to second base, and even got a tiny smattering of MVP votes.
After five years in Cleveland, Franco was traded to the Texas Rangers right as the George W. Bush era was beginning. Julio had his best years in Texas. He made the all-star team for three straight years. In 1990, the all-star game in Wrigley Field was scoreless through six innings. Sandy Alomar led off the AL seventh with a single, followed by another single from Lamar Parrish. Franco was due up next, but the game was halted for a 68-minute rain delay. When play resumed, Franco smacked a double scoring both Alomar and Parrish. He won MVP honors as that was the only scoring of the game.
Franco’s best year was 1991. He won the batting crown with a .341 average. He collected 201 hits, and stole 36 bases. In 1994, Franco was traded to the White Sox. He was probably on his way to a better year than 1991, but the players strike put an end to that. When the season ended, Franco was batting .319 and he had 20 home runs, the most in his career.
Then Julio’s career started to hit some snags. He missed 1995, and in 1996 went back to Cleveland where he hit .322 in just 112 games. That also marked his first post-season appearance, but the Indians were bounced in the ALDS by the Orioles. In the middle of the 1997 season, he was traded to Milwaukee. He missed all of 1998, had one at bat for Tampa Bay in 1999 and then missed all of 2000.
Most players would hang it up, but not Julio Franco. On August 31, 2001, the Atlanta Braves bought him from the Mexico City Tigers. The Braves used him at first base and in 25 games, he batted .300. Atlanta won the division title, and knocked off Houston in the ALDS, but lost to Arizona in the NLCS. Franco hit home runs in both series.
The Braves decided to keep Franco at first base. He played 125 games in 2002, 103 in 2003 and 125 in 2004. Each year, he’s raised his batting average. Last year, Franco batted an amazing .309. This year, he’s hitting .298 in 84 games. He went 0-for-4 today against the Cubs, but he’ll certainly be playing in this year’s post-season.
All told, Franco has 2,513 hits in 21 major league seasons through Tuesday. He also has 3,833 hits in 29 seasons in the minors, majors, Japan, Korea and Mexico. Happy Birthday, Julio!
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Today’s Market
Eddy Elfenbein, August 24th, 2005 at 1:57 pmThis is a frustrating market. Every time stocks start to rally, they quickly run out of steam. Earlier, I mentioned how the market was stuck in a tight 2% trading range—not anymore. The S&P 500 is now below its March high. The index has fallen in five of the last six sessions. The market is up today, led by a big surge in the homebuilders. The automakers are also having a good day. General Motors is up about 4%, and Ford is up 1.7%.
What’s unusual now is that stocks and bonds are completely “delinked.” When stocks are up, bonds are down. When bonds rally, bonds lose ground. In July, the 10-year T-bond tanked. In just six weeks, long-term yields jumped 30 basis points, but stocks were doing well. But now, the yield is back below 4.2% and stocks can’t get a footing.
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Betting on Oil
Eddy Elfenbein, August 24th, 2005 at 10:19 amThis is good. John Tierney is betting Matthew Simmons on the price of oil. Simmons thinks oil is headed to $200 a barrel by 2010. He’s the author of the latest oil scare book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. Tierney isn’t so worried, but it doesn’t have much to do with Saudi Arabia.
I didn’t try to argue with him about Saudi Arabia because I know next to nothing about oil production there or anywhere else. I’m just following the advice of a mentor and friend, the economist Julian Simon: If you find anyone willing to bet that natural resource prices are going up, take him for all you can.
Julian took up gambling during the last end-of-oil crisis, in 1980, when experts were predicting a new age of scarcity as the planet’s resources were depleted by the growing population. Julian had debunked these fears in The Ultimate Resource, which showed how human ingenuity had kept driving down the price of energy and other natural resources for centuries.This is exactly right. The price of nearly every commodity has declined almost continuously for centuries. There are occasional price spikes, but they’re all temporary. I won’t guess where this top will be, but the price of oil will certainly fall.
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How Much Would You Pay?
Eddy Elfenbein, August 24th, 2005 at 9:48 amHow much would you pay for a company that made $100 last quarter? I’ll give you some more details. The company had sales of $527, and it’s expecting sales of $640 to $660 next quarter.
Maybe $2,000? How about $3,000? Or you can be crazy and pay $10,000? If this company were Baidu, the market is offering $180,000. When you put financial numbers in smaller terms, it’s easier to see how crazy Baidu’s valuation is. All I’m doing is dividing Baidu’s real numbers by 15,000. Of course, on the bright side, Baidu used to be worth $350,000 just two weeks ago.
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Fall of the Homebuilders
Eddy Elfenbein, August 24th, 2005 at 9:27 amAfter a tremendous rally, the homebuilders have been selling off recently. The industry group peaked on July 28. Then on August 5, Carl Reichardt of Wachovia downgraded Toll Brothers due to a perceived housing slowdown in the Washington, DC market. Several stocks followed Toll Brothers lowered. Since July 28, the group is down well over 10%.
The news isn’t getting better. Yesterday, the National Association of Realtors reported that existing home sales dropped 2.6% last month. Also, the number of homes for sale on the market increased. Overall, the median home price is now $218,000, a 14.1% increase over last year. Condo sales dropped 5%, compared to a 2.3% drop for single-family homes.
The market’s concern is if this is a minor pullback or the beginning of a long-term trend. Picking a change of direction of a long-term trend is always a dangerous undertaking. Trends can last much longer than you think. However, I think the best and safest assumption is that the homebuilders are due to head lower.
D.R. Horton, the largest homebuilder by market value, is down over 17% since July 28. Toll Brothers and KB Home are both down 15.4% (the homebuilders favor names with initials). M.D.C. Holdings is off 14.9%. Lennar and Centex are both off about 13.6%. Pulte is down 12.9%. The best performers are Champion Enterprises, which is down just 10%, and NVR which is down 9.5%.
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