Archive for October, 2005

  • Today’s Market
    , October 24th, 2005 at 6:10 pm

    I didn’t think the S&P 500 could stay below 1200 for long. Today, it rallied to 1199.38. The S&P 500 added 1.68% today and our Buy List trailed it slightly, rising 1.55%. Every one of our stocks went up except for Dell (DELL). The NYSE had its broadest rally in 14 months. Advancers led decliners by more than 6-to-1.
    After the close, AFLAC (AFL) reported earnings of 66 cents a share, two cents ahead of estimates. The stock broke out to a new all-time high today. Despite Rita and Katrina, the insurance sector looks great. Brown & Brown (BRO) made a new high as well.
    Also after the close, Lincare Holdings (LNCR) reported earnings of 52 cents a share, also two cents above estimates. Lincare’s profits are down due to the loss of Medicare reimbursements. The company said that Medicare price reductions hurt sales by about 14%. I still think the company is delivering very strong numbers. This continues to be one of my favorites in the health care sector.
    I’m still venting about Merrill Lynch’s downgrade of Frontier Airlines (FRNT). The analyst, Michael Linenberg, downgraded the airline from a “buy” to a “sell.” You don’t many downgrades go straight from “buy” to “sell.” They prefer to downgrade a stock to a “medium near-term weak-hold,” or something along those lings. But he hurt his case by stressing the severity of the Southwest’s (LUV) entry into Denver’s market. Did it never occur to him that this could happen? Frontier’s management said that they knew it was coming, they just didn’t know when. I really liked the letter that Frontier’s CEO wrote. He laid out the issue very well. This is a difficult obstacle for Frontier, but it’s not a killer.
    Outside the Buy List, Merck (MRK) reported earnings today. The company’s profits rose, but the most telling fact is that sales fell. If someone told me a few years ago that Merck would report a quarter of declining sales, I don’t think I would have believed them. The Journal looks at Merck’s business:

    Vioxx-related lawsuits against Merck continued to pile up. As the second Vioxx trial begins to wrap up this week in New Jersey, the company announced that as of September, there were about 6,400 lawsuits filed against it, up from fewer than 5,000 a few weeks earlier. Merck lost its first Vioxx trial when a Texas jury returned with a $253 million verdict against the company. That verdict will be reduced to $26 million under Texas state caps, and Merck said it intends to appeal the decision. The company’s general counsel, Kenneth Frazier, reiterated on a conference call with analysts that the company plans to defend itself against each case individually in a long process. Mr. Frazier said the company faces six trials in the next six months.
    In addition to the loss of Vioxx, which at its peak contributed $2.5 billion in annual sales to Merck, the company is dealing with precipitously declining sales of its biggest blockbuster, Zocor. The cholesterol medicine has lost patent protection overseas and will lose patent protection in the U.S. next year. As a result, world-wide sales of Zocor in the third quarter fell 14% to $1.05 billion.

  • Cendant Splits Up
    , October 24th, 2005 at 1:53 pm

    I just don’t get Cendant (CD). Everybody loves this stock and I just don’t know why? Am I missing something? It’s like the saki of Wall Street. I know I’m supposed to like it, but I’m sorry. I just don’t.
    First there’s the name. It’s one of those modern names that sort of sounds like something, but it’s not. (The worst of these names, of course, are the spin-offs of Ma Bell, and the spin-offs of the spin-offs. I think it was part of Judge Greene’s break-up decision that henceforth all telecom names must be non-descript and wretched. Avaya? Lucent? Verizon?? Think about this: At some point in history there was a meeting that ended with the words, “So we’re all agreed. Agere!”)
    The problem with Cendant is that it doesn’t make sense. It never made sense. The idea was to combine HFS and CUC International into a giant cross-marketing dynamo. These always sound good on paper, especially whatever paper press releases are written on, but they never work out. The new conglomermess wants to get a high earnings multiple, so it can use its stock to buy more companies. The cycle repeats until you’re left with some Tyco/Citigroup hydra-headed monster that the market hates. I have to admire Henry Silverman’s determination to try a strategy that has never worked in the past. Not only did it not work this time, Silverman partnered up with a bunch of crooks.
    CUC International was cooking their books and they got caught. Getting nailed for accounting fraud back in the 1990s was pretty hard to do. CUC’s former president, Kirk Shelton, got a 10-year prison sentence and has been ordered to pay Cendant $3.27 billion. The judge ordered a payment schedule of $2,000 a month, so Kirk should be all done by about the year 15000. Walter Forbes is due for trial soon.
    Now Cendant has completely reversed course. The company wants to be a real estate and travel company, and nothing else. Bravo. At least this is a strategy. It’s not a good one, but now they have a game plan. The problem is that the company is selling off good businesses at the wrong time for too low a price. I really wish I had Henry Silverman in my fantasy football league. Cendant has sold off Jackson Hewitt (JTK), the tax preparer. In January, they sold PHH (PHH), then they sold off Wright Express (WXS). Separately, these stocks have outperformed shares of Cendant. They’re still not done. Henry also wants to sell Market Services.
    Cendant has tons of cash, but I still don’t like what they’re doing with it. They’re paying off debt, which is nice but not necessarily a priority. They’re gobbling up other businesses. They’ve snagged Orbitz, Fairfield Communities and the rest of Avis, plus some boring others. They’re also buying back their stock which makes no sense at all. Fortunately, that’s been put off due to the breakup. In short, Cendant is over-investing in real estate at the top of the real estate market. Is anyone there looking at the prices of homebuilding stocks? The sector is off 20% in the last three months.
    Cendant is in a quagmire. The stock hasn’t done anything in years. They’ve bought and sold 93 companies in seven years. They can’t be bought out because they’re too big. They can’t spin-off businesses because of the tax basis. So what’s left?
    Today we got the answer. Cendant is splitting itself up into four different companies:

    In breaking itself up, Cendant will create four companies out of its four main lines of business: real estate, travel, hotels and car rentals. The real-estate company will include brokers Century 21 and Coldwell Banker; the travel business will consist of Cendant’s Orbitz, Galileo and Cheap Tickets brands; the hotel company will include the Ramada, Howard Johnson and Days Inn brands; the car-rental company will have the Avis and Budget businesses. Cendant expects all the new companies to be major players in their industries.

    Cendant also guided lower for this quarter and next. Cendant is a great example of a stock where the numbers don’t give you a good idea of what’s happening. I think too many people saw a low multiple and high cash flow and thought there was a bargain there.
    I expect to see a lot of articles on Silverman’s “brave vision” for Cendant. In reality, this is a surrender to the market’s vision. It took too long to realize. I wish the Baby Henries well, but I’m still not convinced. Though I have to admit that the new strategy sounds great. On paper.

  • Bernanke to Head Fed
    , October 24th, 2005 at 10:57 am

    President Bush will appoint Ben Bernanke to be the next chairman of the Federal Reserve. He’s currently the head of the President’s Council of Economic Advisers. From 2002 to this past June, Bernanke was a Fed Governor.
    We don’t get new Fed chairmen often. Alan Greenspan has held the post since 1987. Paul Volcker Fed chariman from 1979-1987. If confirmed by the Senate, Bernanke will be the 14th Fed chairman since the Fed’s creation in 1914. He would takeover on February 1, 2006.
    There’s an old Vatican saying that “a fat pope is followed by a thin pope.” Perhaps the central banker version is that a jargon-filled Fed chair is followed by a plain-speaking one. The media likes the fact that Bernanke speaks clearly and is much easier to understand than Greenspan.

    My proposal that Fed governors should signal their commitment to public service by wearing Hawaiian shirts and Bermuda shorts has so far gone unheeded.
    -Ben Bernanke

    I can’t picture Alan Greenspan saying that. For more Bernanke, here’s a speech he gave warning against the dangers of deflation.

  • Five Gold Stars for Micros
    , October 24th, 2005 at 8:30 am

    One of my favorite blogs, Footnoted.org, gives five gold stars to Micros Systems (MCRS):

    For one, there’s the disclosure that the company doesn’t believe in perks for the top executives. That means no personal use of the corporate jet, no luxury apartments, no executive health plan, no private school tuition, etc…Instead a footnote to the proxy notes that the only perk executives receive are the same health insurance benefits that all employees get.
    But what really makes Micros stand out is that they make it very easy for individual investors to see how much the executive’s options are really worth. Because they offer no perks, the amount of money listed under “other annual compensation” in the summary comp table is the value of the options exercised in the past year. Most companies make investors work for this information by forcing them to read multiple charts and the accompanying footnotes.

    Micros reports earnings on Thursday.

  • Can Google Keep Rising?
    , October 24th, 2005 at 8:22 am

    Here’s an upbeat research report on Google from Needham & Co:

    Google (GOOG) reported Third-quarter 2005 revenue well above expectations. Given the momentum in Google’s business, and the implied 10% upside from current levels to our new price target, we are raising our rating to Buy from Hold.
    Gross revenue, which includes revenue both from Google’s owned and operating Web properties (proprietary) and from its partner sites (network), of $1.58 billion rose 96% year-over-year and 14% sequentially.
    Net revenue, which exclude traffic acquisition costs, or the revenue share with network partners, exceeded the consensus mean of $943 million by 11%.
    In all, growth was driven primarily by gains at Google’s owned and operated properties (up 20% sequentially), though Google’s network business was also solid (up 7% sequentially).
    And despite an increase in the revenue share with network partners, the overall gross margin increased 170 basis points sequentially to 59% due to the greater mix of higher margin proprietary revenue.
    Net revenue of $1.05 billion exceeded the consensus mean of $943 million by 11%. Operating earnings of $644 million exceeded the consensus mean by 8%.
    The adjusted earnings per share of $1.50 exceeded the consensus mean of $1.36. Not surprisingly, incremental operating margins (using gross revenues) declined 180 basis points to 41%.
    As usual, management did not provide guidance. Our revenue estimates increase due to the upside in the quarter and the likelihood of continued strong growth.
    Our earnings estimates also benefit from an assumed increase in mix of higher margin proprietary revenue, and from our use of a lower effective tax rate in 2006 (from 35% to 30%, which alone increases our 2006 adjusted earnings-per-share estimate by 54 cents).
    Given our new, higher forecasts and our shift to using 2007 forecasts to calculate our 12-month price target, we are raising our price target to $370 from $300.
    Google remains the leading technology company in the consumer Internet space, and arguably has one of the best platforms for expansion into new high-growth consumer Internet services.
    We continue to view Google as a core holding, and believe the company’s strong brand loyalty, the business’ substantial free cash flow and the team’s track record of innovation will lead to further gains.
    — Mark May, CFA

  • Will Harriet Miers Be Withdrawn?
    , October 22nd, 2005 at 2:01 pm

    I’ve been following the Harriet Miers futures at Tradesports. They have two contracts on Ms. Miers becoming a Supreme Court justice. One is simply whether or not she’ll be confirmed; the other is how many votes she’ll get.
    I noticed an odd discrepancy. The contract to confirm dropped far below the contract that she’ll get 50 or more votes. An arbitrage opportunity? I pointed this out to Donald Luskin at The Conspiracy to Keep You Poor and Stupid. He said that the vote total contract is only if there’s a Senate vote. Then we hit on the fact that there’s an implied withdrawl contract within these two contracts. Since the vote-to-confirm contract has fallen to 30, and the 50-or-more-votes contract is at 68, the withdrawl contract would be: 1-(.30/.68) or 55.8%.
    I’ve downloaded the historical data, and the withdrawl contract had been around 15%-20% for most of this week, but it only became Google-like in the past 24 hours.

  • Today’s Market
    , October 21st, 2005 at 5:22 pm

    So ends a very weird week. It seems like there’s no middle ground anymore. The S&P Value index was up 0.41%, while the Growth Index lost -0.11%. The Small- and Mid-Cap Indexes were both up, but the S&P 100 was down.
    Today was led by telecom tech and energy, while health care and industrials lost ground. Caterpillar’s (CAT) earnings held back the Dow, but the S&P 500 and Nasdaq finished in the black. Pfizer (PFE) continued to bleed and Merck (MRK) isn’t far behind. Pfizer’s low today was lower than its high price from July 3, 1997. Merck is below where it was on January 3, 1992. The company reports on Monday.
    So what’s doing well? Google. Today the stock jumped $36 making the search engine worth close to $100 billion. The company is now worth more than Coca-Cola (KO) and Wells Fargo (WFC). According to Bloomberg, Google is currently followed by 34 analysts; 25 rate the stock a “buy,” eight say “hold,” and only one, Philip Remek of Guzman & Co., says “sell.” In other news, Philip Remek disappears from Internet.
    The best news for us was the rebound in Frontier Airlines (FRNT). After yesterday’s debacle, the stock closed up about 6%, although it was weak in the afternoon. Our Buy List was up 0.38% today, compared with the S&P 500’s 0.15%. Nineteen of our stocks were up, and six were down.
    Among the losers, Fiserv (FISV) got dinged today. The earnings were fine by me, but David Trossman at Wachovia downgraded the stock. I’m not sure how a stock can beat estimates, give an upbeat outlook and get downgraded, but there you go.
    Brown & Brown (BRO) reached another new high today. On Monday, AFLAC (AFL) will report earnings. The insurance stocks have been doing very well. The consensus estimate is for 64 cents a share.
    And lastly, Business Week interviews Simon Ramo (the R of TRW) on why meetings stink.

    Do you have any tips for chairing meetings more efficiently?
    The most important thing is to be prepared, to know the subject and purpose of the meeting, and what you hope it will achieve. If you can’t find the time to prepare for meetings then you should stop calling so many. Another is to know the people who are invited. Think ahead as to which individuals are most likely to make the greatest contribution, and anticipate others who you’ll have to, as tactfully and gently as possible, interrupt to move the discussion along. Finally, keep the objective of the meeting constantly in your mind so you’ll keep moving toward the goal. But if the goal changes during or because of the meeting, be prepared to invent Plan B.

  • Top 10 Stock Symbols
    , October 21st, 2005 at 1:20 pm

    Just so you don’t think Wall Street is full of a bunch of stuffed-shirts:
    1. (BUD) Anheuser-Busch
    2. (WOOF) VCA Antech (veterinary services)
    3. (BOOM) Dynamic Materials
    4. (FIZ) National Beverage
    5. (LVB) Steinway Musical Instruments (in honor of Ludwig Van Beethoven)
    6. (ZEUS) Olympic Steel
    7. (CHUX) O’Charley’s Inc.
    8. (TAP) Molson Coors Brewing
    9. (BID) Sotheby’s Holdings
    10. (LENS) Concord Camera

  • Jeff Potter’s Letter to Frontier Employees
    , October 21st, 2005 at 11:10 am

    From the Denver Post, this is worth posting in its entirety.

    From: Potter, Jeff
    Sent: Thursday, October 20, 2005 11:19 AM
    To: All Frontier Employees
    Subject: Southwest Announces Service in Denver
    As you may have heard, and no doubt will hear repeatedly in the press over the next few days, Southwest Airlines announced today that they will begin service in Denver in the early part of 2006. We know that Southwest has a reputation that is sometimes larger than life so we wanted to address any potential concerns you might have about what this means to Frontier and what our strategy will be against a competitor like Southwest. While we didn’t know when, and we aren’t 100 percent positive as to where yet, it was an inevitability that Southwest would initiate service here. However, whether it’s Southwest or anyone else, we can all take solace in the fact that we have spent the past 12 years preparing to compete with any and all airlines, by building an amazing company, and offering the industry’s best product. So, in essence, it is each of you that has helped us prepare for Southwest.
    That being said, from a management standpoint, we too have been preparing ourselves for Southwest’s entry, and I think it is important to note that not everything you have heard about Southwest is necessarily true. It’s worth mentioning that we already compete with Southwest on about 75-80% of all F9 connecting markets (about 500 city pairs) and are competitive with them in pricing. While there is certainly no arguing their success, it may surprise you to know that based on the most recent DOT statistics (June quarter 2005), Southwest’s fares were actually about 12 percent higher than Frontier’s on a per-mile basis, in markets where we compete directly. Obviously, pricing power is one of Southwest’s primary competitive advantages in the markets it enters, but that won’t necessarily be the case here in Denver. In other words, we have been competing quite effectively for a long time.
    Just as the pricing “myth” is not necessarily always true, it is also important to recognize that at the end of the day, Southwest is just an airline. And, just as we would view any airline entering our home market, we will watch them closely. But we are not about to cower or back away. This is OUR home, and Southwest’s entry is just another opportunity for us to shine. It is an opportunity for us to show Southwest, as well as our passengers, what it really means to make a difference. Fact is, we have a better product with DirecTV, new A/C, more legroom AND, of course, assigned seating. But, more importantly, we have you. I have said it time and time again, our employees make the difference, and you will continue to be our competitive secret weapon. The loyalty you have helped create in this market with the level of service you provide our customers cannot be matched–by Southwest, TED or anyone.
    We are going to move forward as we always have–by running our own race. Yes, Southwest’s entry will have in impact in the markets they choose to serve from Denver, just as you would expect any additional capacity would. But, our goal is to continue to do what we all do so well–run a great airline and that requires each of you to continue doing what you have always done–keeping your focus on our customers, and not the competition. Again, they are the new kids on the block in Denver, and we should be ready to circle the wagons and protect our hub by continuing to run one of the most on-time airlines in the country; by consistently going above and beyond for all our passengers; and by never losing the intensity of our focus on offering an experience that is “a whole different animal.”
    However, I want to reiterate a statement we have made many times in the past-we MUST continue our diligent focus on CASM. Products, employees and loyalty aside, we are indeed doing battle on the cost side against all airlines, and Southwest is a staunch competitor when it comes to costs. We heard Gary Kelly, CEO of Southwest say it today on their conference call-they consider themselves the cost leader, and this industry is currently being won and lost on costs. We have done amazingly well on the cost side, particularly given that we operate out of one of the most expensive airports in the country, but there is much work to be done to remain competitive. So I urge each of you to scrutinize every financial decision you make for this company and view it in the context of cost containment.
    I personally want to thank each and every one of you for creating the best airline in the industry, and I assure you that our ability to compete with any airline, in any market, is a direct reflection of your efforts. Much as we did when TED launched, we will continue to keep everyone updated on any competitive measures taken by Southwest, or by Frontier, and if you have any questions in the meantime, please don’t hesitate to speak with your manager and as always, feel free to contact me directly.
    Jeff

    Well said.
    The Denver Post has more, including a list of possible routes Southwest (LVB) could fly to Denver International Airport. This move by Southwest is a direct response to Katrina.
    From Investor’s Business Daily, J.P. Morgan upgrades Frontier. It’s nice to see that not all analysts think alike.

    J.P. Morgan upgraded Frontier Airlines, Inc. (FRNT) to overweight from neutral and added it to its focus list. The broker told clients it believes the market has over-penalized Frontier for Southwest Airlines‘ (LUV) entry into Denver, while significantly underestimating Frontier’s earnings potential in fiscal 2007.

    And from the Colorado Springs Gazette:

    Mike Boyd, an Evergreen-based airline industry consultant, said fares will drop in Denver but likely not by much.
    “Denver is no longer a highfare market,” Boyd said. “Southwest will lower them somewhat more. But the other carriers will match (Southwest’s) fares, and they already offer a better product than Southwest does, including an assigned seat and satellite TV.”

    Frontier is up about 7% today, and oil is now below $60 a barrel.

  • Fiserv’s Earnings Report
    , October 21st, 2005 at 10:18 am

    Fiserv (FISV) reported earnings of 60 cents a share for the third quarter. This is a really good little stock. The company never floors Wall Street, but it almost always delivers solid results. It’s sort of the Craig Biggio of the financial data processing industry.
    Fiserv has consistently grown its earnings-per-share by about 18% for several years now. That doesn’t get anyone’s attention in one year, but when you look at the full record, it’s pretty impressive.
    Last year, FISV netted 47 cents a share. For the fourth quarter, the comapny sees earnings of 54 to 57 cents a share. For the full year, the company projects earnings of $2.28 to $2.31 a share. The stock was downgraded by Wachovia this morning, and it’s trading lower.