Archive for 2005

• What’s Wrong with Patterson?
  Eddy Elfenbein, October 3rd, 2005 at 12:09 pm

  One of the best stocks on Wall Street keeps getting hammered. Patterson Companies (PDCO) is now below $40 a share. The stock is over 25% below its high, and it’s not far from where it was last May.
  This is so surprising when you consider how strong Patterson has been. The company makes dental supplies. Patterson has simply been one of the best stocks on the Street. Every quarter, every year, Patterson delivers rising sales and earnings. The company’s return-on-equity has been above 20% for the last 10 years. It could be longer but that’s as far back as my records go.
  So what’s happening? Last quarter, PDCO was only able to grow its earning-per-share by 3%. And in the quarter before that, it grew its earnings by 9%. For most stocks, that’s not so bad. But for Patterson, it’s quite a break from its usual 15%-20% earnings increases. Note how smooth and steady the earnings line (rolling EPS) has been on the chart below.
  The company is now being hit by the predictable rash of class-action lawsuits. I’d ignore those, but the real test will be next quarter’s earnings which are due on November 23. The current estimate is for 35 cents a share, which would be a 13% increase over last year. But if PDCO delivers 37 cents or more, that will tell me that its troubles may be behind it and the stock is worth another look.
  

• Scrushy Acquitted, Going to Hollywood
  Eddy Elfenbein, October 3rd, 2005 at 10:12 am

  F. Scott Fitzgerald said that there are “no second acts in American lives.” I’m not so sure. Consider the case of Richard M. Scrushy. The former CEO of HealthSouth was acquitted in June on 36 counts of money laundering, securities fraud and conspiracy. So what’s he up to now? Well, his story may be made into a Hollywood movie. A newspaper in Alabama asked readers who should play Scrushy.

  Some of the recommendations: Christopher Walken, Steve Buscemi, Michael Douglas and O. J. Simpson to play Mr. Scrushy; Morgan Freeman or Samuel L. Jackson to play one of the lawyers, Mr. Watkins; Billy Bob Thornton and Danny Aiello to play Mr. Scrushy’s other main lawyer, Mr. Parkman; and Jessica Simpson or Priscilla Presley to play his often-smiling wife, Leslie.

  I’d go with “more cowbell.”

• Google Snubbed, Lennar Added to the S&P 500
  Eddy Elfenbein, October 3rd, 2005 at 9:51 am

  With Gillette being bought out by Procter & Gamble, there’s a big opening in the S&P 500. Many market observers thought that Google would be tapped to move into the index. However, the folks at McGraw Hill decided to go with the homebuilder Lennar instead.
  Even though Google has a much larger market cap ($88 billion for Google to $9 billion for Lennar), Lennar is a much better representation of the overall economy. Lennar has nearly four times as many employees (12,000 to 3,000), and Lennar will generate more sales this year ($14 billion to $4 billion).
  I’m also happy to see Lennar get selected because it’s been public much longer than Google. Lennar started trading on the market over 30 years ago, while Google hit the market last year.
  Why was Google snubbed? I think it’s because Google is overpriced and more and more people are realizing it. For example, Professor Aswath Damodaran at NYU has run the numbers on Google, and he thinks its worth just $113. Click here for his analysis. (Warning: link contains math). The last thing the index keepers at McGraw Hill want is to add a company that immediately plunges. I think Lennar is overpriced, but it has a lot more going for it than Google.
  Google will report its earnings at the end of this month. The market currently expects earnings of $1.35 a share. However, I think the more important number to watch is the estimate for next year’s earnings. Wall Street currently expects Google to earn $7.30 a share next year. But this number has actually been heading down slightly over the past few weeks. This means that Google is trading at over 43 times next year’s earnings. For comparison, General Electric is going for 16 times next year’s earnings and Citigroup is trading at about 10 times next year’s profits. Yes, Google should be given a premium for its growth, but there’s no way to justify a premium that high.
  Google is headed for a fall and McGraw Hill knows it. Of course, some people still love Google.

• Too Cute
  Eddy Elfenbein, September 30th, 2005 at 10:07 pm

  Washington’s newest panda cub. Wook at dat face.
  
  Watch out for the claws…

• Google Watch
  Eddy Elfenbein, September 30th, 2005 at 1:05 pm

  The Google Dolls never tire of telling us how they’re not focused on share price. Apparently, some one is taking notice. Larry Page has filed to dump another batch of shares.

  Google Inc. co-founder Larry Page filed this week to sell 1.2 million shares, setting him up to collect $370 million and pushing his sales to more than $1 billion since the company went public last year.
  The stock sales by Page, and similar sales by partner Sergey Brin, have helped drive Google insider stock trades to almost $3 billion this year, the most for any U.S. company, according to the Washington Service, a research firm that keeps track of sales by company executives.
  Page and Brin, both 32, benefited as the stock surged to a record $320.95 this week from an $85 initial public offering price in August 2004. The two, each with a net worth of about $11 billion, raised more money on insider sales this year than any corporate executive except Microsoft Corp. Chairman Bill Gates, who has sold $1.58 billion in Microsoft stock. Mountain View, California-based Google raised $1.67 billion at its IPO and this month sold an additional $4.18 billion of stock.
  “I’m not aware of any other companies that have had massive insider selling like this,” said Richard Howe, a lawyer at Sullivan & Cromwell LLP in New York, who advises on insider stock sales. “This is amazing for the people who started the company from nothing and turned it into this amazing profit-making machine.“

• The Last Day of the Third Quarter
  Eddy Elfenbein, September 30th, 2005 at 11:59 am

  Today is the final day of the third quarter, which is also the end of the fiscal year for many companies, plus the federal government. Today is also the last day at Disney for Michael Eisner. After 21 years at the helm, Eisner is moving on. I’m curious if Roy Disney will make it over to the retirement party. After looking over his resignation letter, I’d lean towards the doubtful camp.
  Also, GM will end its employee-pricing discount today. Considering the state of GM’s pension plan, I’m a little worried that a GM employee would even consider buying a GM car. As a taxpayer, I might have to bail those folks out pretty soon. If this is going to involve me, I’d much rather have them buy a reliable car. Rich Aristotle Munarriz at the Motley Fool has more.

  GM’s Employee Discount pitch is seen by many as a rousing success. I think history will reveal the move as a colossal failure. The marketing resonated with car owners right away. June deliveries were up 41%, the company’s strongest showing since September of 1986. It bled into July, where GM saw a 20% spike. By August, the public had already had their fill. US deliveries were off by 16%.
  However, I don’t think the promotion was a mistake based on how it grew stale last month. No, I think it was a failure because it was a success. Let me explain: The “employee pricing” approach was so effective because it gave the perception that consumers were getting a great insider deal. GM started. Ford followed. DaimlerChrysler’s Chrysler tweaked the marketing with its Employee Pricing Plus approach, which offered smaller discounts but padded them with more conventional rebates.
  The end result is the same in all three cases. How are these companies going to move their 2006 models? Some have already turned to offering lower prices on the 2006 models, but consumers now expect employee pricing. They were trained to forget the fluctuating cash rebates of the past. This one, they remember.

• E*Trade to Buy BrownCo
  Eddy Elfenbein, September 30th, 2005 at 11:17 am

  E*Trade Financial said that it’s going to buy BrownCo from J.P. Morgan Chase. This is good news, and I expect to see more mergers in the future. This comes on the heels of E*Trade buying Harrisdirect. Also, Ameritrade is merging with TD Waterhouse.
  BrownCo is famous for its rock-bottom fees. The company’s average account size is $146,247, compared with $31,663 for E*Trade. I think we’ll see more of the big boys on Wall Street pick up niche brokers.

• Google May Be Bad for You?
  Eddy Elfenbein, September 29th, 2005 at 3:47 pm

  John Battelle, one of the founders of Wired, has a warning for avid Googleholics:

  Next time you tap a phrase into the Google toolbar on your Internet browser, think about what you’re revealing to one of the America’s biggest corporations.
  Whether you “googled” for Paris Hilton, a stock tip or a gift for Mom, you’ve opened a window on your life to a company with a market value of $92 billion, the 22nd largest in the U.S.

  He takes a close look at the search engine in his new book, “The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture.”

• Bayou’s Marino and Israel Plead Guilty to Fraud
  Eddy Elfenbein, September 29th, 2005 at 3:35 pm

  This is hardly a surprise. Samuel Israel and Daniel Marino have pleaded guilty to fraud charges in relation to the Bayous hedge fund. The fund has, or at least had, $300 million.

  Israel, who rents a Tudor house with enclosed grounds in Westchester County, north of New York City, said in July that he would shut Bayou’s four hedge funds, which he managed, and return investors’ money in August. That didn’t happen, triggering investigations by Connecticut banking regulators, the U.S. Securities and Exchange Commission and the Federal Bureau of Investigation.
  Marino wrote a six-page suicide note with details of the alleged fraud that was recovered by police at Bayou’s office in Stamford, Connecticut, police said. Marino, who didn’t take his life, grew up in Staten Island, New York, before relocating to Westport, Connecticut. He earned a Certified Public Accountant’s license in 1990, according to New York records.

  And now for the understatement of the year:

  The confession in the suicide note may have made a defense by Marino and Israel difficult had they gone to trial.

  Yes, that would hurt your defense a tad.

• Today’s GDP Report
  Eddy Elfenbein, September 29th, 2005 at 10:29 am

  The government revised the GDP report for the second quarter. Before, the government said that the economy grew by 3.285% for April to June quarter. Now it turns out the economy really grew by 3.307%.
  To some people what I have to say will be heresy, but economic growth is surprisingly stable. By listening to political rhetoric, you’d think the economy gyrates wildly, usually corresponding to policy changes in Washington. But the facts say otherwise.
  Since March 1966, the economy has grown by 3.0792% a year.
  Since December 1997, the economy has grown by 3.0798% a year.
  Since June 1986, the economy has grown by 3.0795% a year.
  Since December 1997, the economy has grown by 3.0710% a year.
  Looks like a trend to me.