Archive for 2005

• ExxonMobil’s (XOM) Earnings
  Eddy Elfenbein, October 27th, 2005 at 10:32 am

  ExxonMobil (XOM) reported third-quarter earnings of nearly $10 billion and Royal Dutch Shell reported earnings of $9.4 billion. These numbers are gigantic. I doubt any corporations have ever posted numbers that larger.
  Exxon Mobil had sales of over $100 billion for the quarter. Most large corporations don’t do that kind of business for an entire year. Keep in mind that daily oil production fell from last year. From July through September, ExxonMobil made on average, $1 million in profit every 13 minutes. The company’s quarterly dividend payment comes to nearly $2 billion.
  The stock is higher in today’s session, but XOM has not been treated well lately. The shares have lost about 13% in the last month. I wouldn’t be surprised to see $50 oil by Christmas.

• Q&A: Fair Isaac (FIC)
  Eddy Elfenbein, October 26th, 2005 at 11:33 pm

  Eddy, I’m a new visitor to your blog via billcara.com. I’ve just been reading some of your old posts – I like your writing.
  I was wondering how large an impact rising interest rates will have on Fair Isaac’s credit scoring (FICO) business. Fewer consumers will be interested in refinancing their mortgages or taking on consumer debt at rising levels.
  Any thoughts?

  
  Thanks for the kind words!
  I don’t think the impact will be that large. In fact, if there’s any impact, a credit squeeze could actually place Fair Isaac’s services in greater demand. If credit is tight, a lender wants to be extra-careful will their capital.
  The good part of Fair Isaac’s business is that it’s not tied directly to lending, but instead it services the lenders. That helps take a lot of the interest rate risk away from their business. I look at Fair Isaac as a software company, not as a bank or financial institution.
  Even if consumer borrowing dries up, lenders will still have a need for Fair Isaac. The company often works in ways you never realize. I’m sure you receive lots of junk mail offering you pre-approved credit cards. The credit card companies aren’t shooting in the dark. Fair Isaac’s logarithms tell them who’s a good risk. Low rates or not, I think it’s safe to assume that the junk mail will keep flowing!
  Also, consumer credit-scoring is just one part of Fair Isaac’s business. The company works in sectors like government, insurance and health care. Looking at recent history tells me that Fair Isaac has weathered higher rates quite well. When interest rates jumped in 1994, shares of FIC went up, up, up. When the shares hit their low last year, it was shortly after the Fed started raising rates. Again, the stock doesn’t seem too concerned, so neither am I.
  The company will report earnings next Wednesday. The average of eight analysts comes to 49 cents a share. However, the forecasts are in a very tight trading range. The high is 50 cents a share, the low is 48 cents a share. I’m looking forward to another solid quarter.
  If you have any stock questions, feel free to e-mail me at eddy@crossingwallstreet.com. I’m happy to give you my opinion on any stock or investing in general; however per SEC rules, I’m not allowed to give personal portfolio advice.

• The Market Today
  Eddy Elfenbein, October 26th, 2005 at 5:48 pm

  On Friday morning, the government will report on third-quarter GDP and right now, the bond market is in full retreat. The yield on the 10-year T-bond is close to 4.6%, and the yield on the 30-year bond is up 4.8%. The bond bulls are scared and they’re right to be.
  After telling us for months how the consumer is tapped out and energy prices are burying us, the market is finally realizing what I’ve been saying all along—the economy is very strong. According to surveys, Wall Street’s estimate for third-quarter GDP growth is 3.6%. That’s way too low. I expect to see a number over 4%. In fact, I wouldn’t be surprised to see a number over 5%.
  After more than three years, we might finally break the bond market’s tight trading range. The yield on the 10-year has traded between 3% and 5% everyday since June 11, 2002.
  As long-term bond yields rise, cyclical stocks tend to outperform consumer stocks, and that’s exactly what happened today. The Morgan Stanley Cyclical Index rose 0.52% today, while the Consumer Index dropped -0.19%. What’s interesting today is that the cyclicals were not led by energy. Energy stocks were among the poorest performers today. Some of the big winners included stocks like Dow Chemical (DOW) and International Paper (IP).
  The yield on the 90-day T-bill fell back some, but it’s still above the Fed’s 3.75% target for the Fed funds rate. This fits a pattern. Rates will be going higher next year. Yesterday, the futures markets was telling us that there’s a 64% chance that the Fed will raise rates in January. Today, there’s a 76% chance.
  Our Buy List eked out a tiny 0.03% gain for today, while the S&P 500 lost -0.43%. Although we had some trouble spots; Medtronic (MDT) and St. Jude Medical (STJ) were subpoenaed by the government for info on their heart-device businesses. There have been some concerns about pricing strategy in this sector.
  As a rule of thumb, I don’t get too worried about these sorts of things except that Guidant (GDT), which is not on our Buy List, was also subpoenaed. Guidant is just one of those stocks that you have to stay away from. Everything they do seems to turn out wrong. I’m curious to see what J&J (JNJ) will do with Guidant.
  Brown & Brown made another new high today. By the way, IBD had an article on new market leaders, which includes insurers and medical device companies, two of my favorite sectors.
  Three of our stocks reported earnings after the close today. Zimmer Holdings (ZMH), which has been getting slammed lately, beat by three cents a share and guided higher. Our star stock of late, Varian Medical Devices (VAR), beat by two cents a share. The company also guided higher for next year. The stock is down after-hours, but it’s done very well recently. CACI International (CAI) reported inline and guided slightly higher for next year.
  Outside our Buy List, Amazon.com (AMZN) dropped -13.9%. Google (GOOG) busted the $350 barrier. Human Genome Sciences (HGSI) lost three cents a share today. And Cendant (CD) still sucks. It lost 3.6% and made a new 52-week low. Again.
  Finally, Baidu.com (BIDU) reported earnings of $1.1 million. That’s not a typo. Baidu made $1.1 million with an M. The company has a market value of $2.6 billion. That is, until trading opens tomorrow.

• My Take on Amazon.com (AMZN)
  Eddy Elfenbein, October 26th, 2005 at 12:58 pm

  Amazon.com (AMZN) is getting slammed in the market today. Right now, the shares are down about 13%. I hate to say this, but I think this is just the beginning. I love the Web site, but the stock is simply overpriced.
  My concern comes down to the fact that while Amazon may be growing fast, it’s not growing that fast. For the first nine months of this year, sales were up 25.9%. I also don’t like the way Amazon uses gimmicky promotions like Amazon Prime to increase sales. These are nice to have but they cut into profit margins and you can only do that for a limited time.
  Amazon’s gross margins seem to have stabilized around 25%, which is a good number but I doubt we’ll see much improvement. Net profit margins had been falling, but those too seem to have stabilized.
  Wall Street has targeted a growth rate of 22%, which strikes me as a bit generous. Considering that we’re in a good economy, I’d say that Amazon’s true growth rate is closer to 18%. Let’s be very generous and say that Amazon will be able to maintain a 25.9% growth rate—the same as its sales growth for this year. Compare that with the fact that Amazon is going for over 42 times next year’s earnings and you can see how rich the shares are.
  I’ll repeat what I said three months ago. Enjoy the service, but steer clear of Amazon’s stock.

• Human Genome Sciences (HGSI)
  Eddy Elfenbein, October 26th, 2005 at 9:57 am

  I look at income and balance sheets almost all day long and there are few more barren than Human Genome Sciences (HGSI). This is a biotech stock that’s worth over $1 billion, but it doesn’t have a single product on the market.
  The company has virtually no revenue. Earlier this year, the company got a $7 million payment from GlaxoSmithKline (GSX) for a licensing agreement. They recognized $5 million of it for last quarter, giving them a grand total of $5.9 million in revenue. That’s it? I don’t get it. How does the company stay in business? Why would anyone buy their stock? Total costs for the quarter came to $63.9 million. They spend more than ten times what they take in.
  Aside from the licensing deal, Human Genome brought in about $1,000 per employee for the quarter. If the company ceased operations and sent their workers out to mow lawns, they would have brought in more money.
  To be fair, Human Genome is working on new drugs, however LymphoStat-B, its lupus drug, failed to meet main targets in a mid-stage study. This doesn’t mean the drug is dead, but it will take longer to see hard data. That’s fine. I have nothing against a drug company doing important research, but that’s all this company does. I don’t understand how any analyst could follow Human Genome, but 15 currently follow it. If Human Genome can be a stock, why can’t a charity go public? I’d rather buy shares in the United Way or the Salvation Army.
  An average of four million shares of Human Genome trade each day and they have absolutely nothing to go on. It’s pure speculation. This is a disservice to investors. The company should either go private, or consider the lawn-mowing idea.

• Google Watch
  Eddy Elfenbein, October 26th, 2005 at 8:35 am

  In a rare interview, Sergey Brin talked to Alan Murray about Google Library in the Wall Street Journal:

  There was a time when folks thought compelling content would be king of the Internet. Attract enough “eyeballs,” the gurus said, and money would follow. But instead, Google’s blank home page has trumped all. The Google economy is a kind of high-tech feudal system: The peasants produce the content; Google makes the profits.
  That’s all the more annoying to the content crowd because the lords of this money machine — Sergey Brin and Larry Page — perpetuate the goofy-sounding notion that they do all this to help the world, rather than line their own pockets.
  “That’s true,” Mr. Brin said in an interview yesterday. “We talked at Stanford for a while about making Google an open-source project. We ultimately decided that would not be an efficient way for us to get the resources we needed to make it run. So we started a company.”
  As for the Google Print Library Project, Mr. Brin says, “We actually dreamed of the ability to do this back before we started Google as a company.” It is good for Google’s users, good for the business, it’s fair and it’s legal, he says. “But more importantly, I think it is really great for the world.”
  The publishers may find Mr. Brin annoying. And he certainly is successful and rich. But he also happens to be right. The Google Print Library Project is great for the world.

  The problem is that Google wants to include all material unless a particular author opts out. The publishers want everything to be excluded, unless the authors opt in. It seems very unreasonable to me that an author has to work to protect his or her copyright. If it’s so great for the world, then it should be worth paying for.

• Fiserv (FISV) on Mad Money
  Eddy Elfenbein, October 25th, 2005 at 6:53 pm

  One of the things I love about Fiserv (FISV) is that it doesn’t draw much attention to itself. It’s a solid company that delivers consistent growth. This is a stock that will never light up the message boards.
  Until today.
  A certain Mr. Cramer on television just recommended Fiserv. He said it’s boring, but it may be a target for a buyout. This Cramer fellow thinks it could “easily” go for $10 over the current share price. This was followed by rather odd shouting and I believe what were animal noises.
  Well, I have no earthly idea if anyone is going to buy it, but Fiserv is a good stock selling at a good price. I don’t like Cramer’s reasoning which is, “I don’t like it, but buy it because other people like it, or may like it at some point.” I only recommend stocks that I like. And I only like stocks of outstanding companies. Boring or not, that’s Fiserv.
  As always, I welcome any questions from my readers. Please feel free to e-mail me at eddy@crossingwallstreet.com. I’m happy to give you my opinion on any stock or investing in general; however per SEC rules, I’m not allowed to give personal portfolio advice.

• Today’s Market
  Eddy Elfenbein, October 25th, 2005 at 5:11 pm

  Today was a strong day for energy, and a crummy day for most everything else. The price of crude oil jumped over $2. The S&P 500 lost -0.24%, while our Buy List dropped -0.30%. Nine of our stocks were up, fifteen were down, and Dell (DELL) was unchanged. Expeditors International (EXPD) closed at a new 52-week high. What a great stock! Varian Medical Systems (VAR) is also at a new high. The stock has been our top-performer for the month, rising nearly 15%. Financial services are my first true love. Health care stocks are more of a friend with benefits.
  The two big drags on our Buy List were eBay (EBAY) and Frontier Airlines (FRNT). eBay was hurt by the announcement from Google (GGOG) of its new Google Base service. According to the WSJ:

  Google Base would let users submit information to a searchable Google database, according to a page posted at base.google.com that was available briefly on Tuesday.
  In the Web page, Google cites “description of your party planning service,” “listing of your used car for sale,” “articles on current events from your website” and “database of protein structures” as types of content that a user could submit. Several Web logs also carried an image of another Google Web page that contained a form for entering information such as price, property type, and photos, presumably for listing real estate for rent or sale.
  Google in a statement described the service as “an early-stage test of a product that enables content owners to easily send their content to Google.” It said it didn’t have anything further to announce about it. Google confirmed the screenshots posted on blogs were legitimate.
  The existence of Google Base heightens anticipation of the Mountain View, Calif., company’s long-expected entry into direct competition with online auctioneer eBay, which also owns a minority stake in classified listings site Craigslist Inc.

  eBay might be weak tomorrow due to Amazon’s (AMZN) lousy earnings. The company’s profits dropped from $54 million to $30 million, although sales rose 27%. The reason for the bad earnings was a $40 million legal charge. The company settled a patent-infringement suit with Soverain Software LLC. Even without the charge, Amazon’s earnings would have dropped. This has been a theme for Amazon for the past few quarters–higher sales, lower profits. I’ve always believed this company has been overhyped.
  Tomorrow, three of our Buy List stocks report earnings, Zimmer Holdings (ZMH), CACI International (CAI) and Varian Medical (VAR).
  Perhaps the most underreported story today is that the 10-year Treasury bond yield closed over 4.5% today, the highest in seven months. I didn’t see anything on CNBC about this. Also, the two-year Treasury note is about to make a four-year high. Here’s a chart of the 10-year yield since April. The message is that money is leaving stocks and bonds and is going into gold and other hard assets.
  

• Gazprom of Russia
  Eddy Elfenbein, October 25th, 2005 at 4:22 pm

  Gazprom is the most powerful company that you’ve probably never heard of. The company is Russia’s state-controlled natural gas monopoly. Imagine if the KGB went into the energy business, and you have a good idea of what Gazprom is all about. Basically, these boys don’t like to lose. While everything else is falling apart in Mother Russia, Gazprom is raking in the bucks. For the most recent quarter, profits rose 34%. And if the price of natural gas keeps rising, Gazprom will become even more powerful.
  Gazprom is easily one of the most important institutions in Russia today. The company accounts for 8% of Russia’s GDP, and an astounding 25% of its tax revenue. The government recently upped its stake in Gazprom to 51%. The company provides natural gas to Russians at break-even prices, and it makes a profit though exports to Europe.
  Earlier this year, Gazprom got into a nasty fight with Belarus. The company demanded that Belarus sell them a pipeline operator for $1 billion. The government in Belarus thought it was worth five times that much. So Gazprom made them an offer they couldn’t refuse: They shut off all gas supplies to Belarus in the middle of winter. Yep, these guys are Disney-level evil.
  When Putin got elected, he promised to clamp down on the oligarchs that dominated Russian industry. Today, the oligarchs are either in jail or they’ve fled the country, and they’ve been replaced by state-owned enterprises. In other words, the Kremlin. (The Economist has an article about the current level of corruption in Russia.)
  Earlier this year, the CEO said that he wanted to make Gazprom the world’s largest energy company. The company already has more hydrocarbon reserves than ExxonMobil, Royal Dutch Shell, British Petroleum, Total and Conoco Phillips put together. They’ve even buddied up with Hugo Chavez. Gazprom recently won development rights to Venezuela’s off-shore oil fields.
  The company just bought Sibneft, an oil company, for $13 billion. Ranking behind only Saudi Arabia and Iran, Gazprom is now the third-largest owner of oil in the world. Sibneft’s owner, Roman Abramovich, walked away with $9 billion. Contrast that with the former head of Yukos, Mikhail Khodorkovsky, an oligarch who openly criticized the Kremlin. He’s currently sitting in jail for tax evasion.
  I guess you could say that what’s good for Gazprom is good for Russia.

• Consumer Confidence Drops
  Eddy Elfenbein, October 25th, 2005 at 11:50 am

  Consumer confidence unexpectedly dropped in October to its lowest reading in two years. Economists were expecting a small rebound, but worries about Katrina and oil are weighing on American consumers. For example, Nissan (NSANY) said that U.S. sales dropped 22% in the first two weeks of October.
  The market is mostly flat this morning. None of our Buy List stock is reporting earnings today. Golden West Financial (GDW) announced that it will increase its quarterly dividend by 33%. Yesterday, Frontier Airlines (FRNT) announced plans to add flights to Salt Lake City, Dallas, Phoenix, Las Vegas and Chicago.
  While the broad market doesn’t seem to be very volatile, there’s a stealth bear market going on. John Dorfman reports that of “2,399 U.S.-traded stocks with a market value of $500 million or more, 58 have fallen 20 percent or more through Oct. 21.” Fortunately, our Buy List is ahead of the market this month.