Archive for 2005

• Electronic Arts Upgraded
  Eddy Elfenbein, September 13th, 2005 at 6:53 am

  Electronic Arts jumped nearly $3 yesterday on an analyst upgrade. Wedbrush Morgan raised ERTS to a “buy” from a “hold,” and analyst Michael Pachter set a price target of $66 which seems pretty conservative. Earlier this year, the stock got as high as $71 (pre-split), but it plunged 17% in March after it warned of lower earnings growth.

  Looking ahead, Pachter said video game publishers should see expansion during the next three months as excitement builds toward the release of the new Xbox from Microsoft Corp. Electronic Arts has also invested heavily in research and development — which now stands at about 22 percent of annual sales — to meet demand for next generation games.
  Electronic Arts also is expected to benefit from games it makes for the Sony Corp.’s new PlayStation Portable. In addition, the company is seen benefiting from a potential price cut in the PlayStation 2 console.
  Another key selling point for the stock is that rival Take-Two Interactive Software Inc. has been having problems. Earlier this month, Take-Two said its loss doubled in the fiscal third quarter, hurt mostly by reserves set aside for returned copies of “Grand Theft Auto: San Andreas,” the hit game that came under intense scrutiny for a downloadable hack that unlocked sexually explicit material.

  The stock is pretty pricey. The company has forecast earnings of $1.45 to $1.60 a share, which comes to a p/e ratio of 37 to 41. Electronic Arts is a great company, but I don’t see it growing its earnings that fast to justify the current price.

• SEC Block’s Cisco Options-Expensing Plan
  Eddy Elfenbein, September 12th, 2005 at 2:30 pm

  Good news for investors. Companies will soon be required to expense stock options in their income statements. This will take a huge bite out of earnings, especially at a lot of tech stocks. It’s no wonder that Silicon Valley fought the new regulation very hard. The loudest voice came from Cisco Systems. If it had expensed stock options, Cisco’s earnings would be 18% lower for the first nine months of this fiscal year.

  Cisco had a plan to circumvent the new regulation by creating financial contracts that would value employee stock options. The SEC just said that the plan was insufficient. It could have cut the cost of expensing options by 90%.

• Hewlett-Packard Is Cutting 6,000 Jobs in Europe
  Eddy Elfenbein, September 12th, 2005 at 1:53 pm

  HP is going to cut 6,000 jobs in Europe. In July, the company said it was cutting 14,500 jobs and it was going to restructure its retirement plan. About 20% of the job losses will be in France. The French Deputy Labor Minister Gerard Larcher has asked for a meeting with HP to discuss the layoffs

• Does Wall Street Have Zero Intelligence?
  Eddy Elfenbein, September 12th, 2005 at 1:45 pm

  According to an article from New Scientist magazine:

  A model that assumes stock market traders have zero intelligence has been found to mimic the behaviour of the London Stock Exchange very closely.

  You can read the research paper here.

• Oracle Buys Siebel
  Eddy Elfenbein, September 12th, 2005 at 9:54 am

  Oracle said it will buy Siebel Systems for $10.66 a share in a deal that values Siebel at $5.85 billion. Thomas Siebel is a former Oracle executive who built Siebel into a software giant. This is a pretty good deal for Oracle–it’s just a 16% premium over Friday’s closing price. Five years ago, shares of Siebel were worth $120. Oracle has been aggressively buying other firms recently. The company recently completed its acquisition of PeopleSoft which was worth of $10 billion. The Siebel deal still needs to be approved by shareholders.

• Defensive Accounting
  Eddy Elfenbein, September 12th, 2005 at 7:43 am

  Hewlitt Heiserman Jr. has an interesting article in Barron’s on the limitations of GAAP accounting and traditional income statements. He advocates “defensive accounting.” He gives high marks to 3M, Dell, Blue Nile, Pepsi and UnitedHealth Group

• The Dell Bandwagon
  Eddy Elfenbein, September 12th, 2005 at 7:20 am

  Barron’s Jay Palmer has more on Dell.

  The pessimism about Dell has gone way too far. The company, despite its recent slip, still has an excellent strategy for personal computers — an industry that itself is growing nicely — and the company has been pushing forcefully into new regions, including Europe and Asia, and into new products, such as data storage for corporations and printers for businesses and consumers.
  “While it’s true that Dell can’t hope to continue growing at the same pace it did in the ‘Nineties, the growth that it can deliver will still be very respectable,” says analyst Ted Moore, who advises portfolio managers in the private banking group of National City, based in Cleveland. “Reports of Dell’s demise are premature.”
  In fact, he thinks the recent drop in Dell’s stock presents a big buying opportunity. The stock, now just under 35, could well head to 50, Moore maintains.
  The shares certainly don’t look expensive: They’re changing hands at 22 times the consensus earnings estimate of $1.59 a share for this fiscal year. That’s higher than the broad market’s multiple but low compared with Dell’s recent earnings growth rate of 24% and its historical P/E of 27. Dell’s multiple is well below Apple Computer’s (AAPL) 35 and not that much above those of Gateway (GTW) and Hewlett-Packard (HPQ), computer rivals from which Dell continues to steal market share.

  The most overlooked part of Dell’s business is that it’s no longer just a PC company.

  Playing on its established corporate PC connections, Dell now sells and services the network servers, workstations and storage systems that power corporate back-office operations, taking on both Sun Microsystems and IBM. Using its expertise from making computer monitors, the company now offers a range of very competitive large-screen plasma and LCD televisions, challenging the likes of Sony and Panasonic. Building on its direct consumer sales link, its has come out with a digital music player to compete against Apple’s iPod and a personal digital assistant that goes head to head with Palm.
  Perhaps the most daring move of all has been Dell’s decision to take on HP in printers. That move began after a market study convinced Michael Dell that HP was using its high-margin printer profits, which contribute about 70% of total operating profits on just 30% of revenue, to subsidize its ailing PC operations.
  The method behind the diversification is clear. “We are PC-centric,” says Rollins. “The idea was and is to look for synergies. The MP3 players uses PC components. The TVs are based on monitors, which we have long been making. The printers sell alongside our PCs, the servers go to existing corporate customers. We are looking a new areas of opportunity all the time, but you will not see Dell offer home electronic knickknacks.”
  The area of servers and storage for corporations has been a big winner, thanks in part to the fact that Dell has been able to apply its build-to-order model, allowing it to offer products that are highly competitive on both price and performance. The company makes its own servers and, for storage units, produces some of its products in partnership with industry leader EMC. Limiting its activities to the biggest market — systems running on Windows and Intel chips — Dell has become the No. 1 player in the U.S. and No. 2 worldwide in just five years, beating out the likes of HP, IBM, NEC and Fujitsu.

• NYT Profile of Dell’s CEO Kevin Rollins
  Eddy Elfenbein, September 12th, 2005 at 6:13 am

  The New York Times looks at Kevin Rollins, the CEO of Dell.

  Mr. Rollins was living in Boston, a partner at Bain & Company, the management consulting firm, when he was asked to fly to Austin in 1993 to meet with executives at Dell. He readily acknowledges that he was hardly thrilled about the assignment. “Texas is a lo-o-o-ng way from Boston, in many ways,” he said. He had worked primarily with aerospace companies before his partners asked him to help what was then a modest-size computer company on pace to lose $100 million that year.
  Just before Mr. Rollins arrived, Dell announced that it would sell its computers at Wal-Mart stores, as well as continuing to sell directly to consumers over the Internet. Breaking into big-box retail outlets, Dell said, could bring in an additional $125 million in annual revenue – and rapidly build its brand name.
  Mr. Rollins promptly suggested that Dell scuttle the deal, telling a meeting of top Dell executives that the arrangement, over time, would prove to be a money loser. He apparently made a persuasive case. Within days Mr. Dell said he asked Mr. Rollins to end the company’s agreements with retail chains. After that, Mr. Dell added, “very rapidly Kevin became a critical part of the senior management team” – although he was still technically a consultant.
  Largely, his work involved bringing a basic management discipline to a company that had been growing so fast that even Mr. Dell was inclined to acknowledge that things were something of a mess. Over the next several years, Mr. Rollins would spend weekends with his family in Massachusetts and his weekdays with Dell in Texas – essentially functioning as if he were a top executive working within Dell. “It was all extremely odd,” Mr. Rollins said.

  Rollins doesn’t seem particularly worried about Dell’s long-term outlook.

  Among Mr. Rollins’s gifts as chief executive, those around him say, is what Mr. Bell, head of Dell’s European operations, calls his “tight messaging.” So crisply does Mr. Rollins convey the Dell line, said Roger L. Kay, the founder of Endpoint Technologies Associates, a research firm that monitors the personal computer industry, that it is “a little bit scary how everyone from the highest to the lowest employee is on message.”
  Today Mr. Rollin’s message is that everything is fine at Dell, despite a depressed stock price—now at $34.65, down 17 percent for the year. Dell may be the leading computer maker in the world, but it is No. 2 in Europe and No. 2 in Asia, leaving plenty of room for growth there.
  There is also plenty of opportunity for growth in other product areas, like printers, which Dell has been selling for less than three years, and plasma televisions, which it has been selling for less than two years. The company is making progress in selling the more expensive equipment used in corporate data centers, and it is starting to do a brisk business in consulting. So what if its stock has fallen more than 12 percent since disappointing Wall Street last month?
  “As our big strategic initiatives capture share and profits, the profits we deliver will go up and our stock price will naturally rise,” Mr. Rollins said. “We have a lot of room for growth for a long time before we have to ask what’s the next vision thing. It’s really a matter of execution.”

• Crossing Wall Street Four Years Ago
  Eddy Elfenbein, September 11th, 2005 at 9:43 am

  

• Micro-Caps
  Eddy Elfenbein, September 9th, 2005 at 4:15 pm

  There’s a lot to like in small-company stocks. I’m greatly indebted to Dr. Ken French of Dartmouth who keeps a terrific data library at his Web site. I downloaded some files and did a little research.

  Over nearly eight decades, the smallest 10% of stocks—called micro-caps—have been the top-performing size category of all stocks. From mid-1927 to the end of 2004, micro-caps are up over 2,000,000%. That comes to 13.45% a year. The largest stocks have done the worst, up a measly 140,000% or 9.70% a year. Since the market’s low in 1932, micro-caps are up over 10,000,000%, or 17.35%. (If I had only known!)

  The problem with micro-caps is that although the out-performance premium has been quite generous, it’s also been very volatile. Since July 1983, Micro-caps have underperformed the largest stocks. Micro-caps have had an amazing turnaround since March 1999. Since then, the small fries are up over 250%.