Archive for February, 2006

• Expensing Stock Options
  Eddy Elfenbein, February 14th, 2006 at 12:44 pm

  You may to check out Barron’s Online this week. The site is free-for-all for a limited time. Andrew Bary has a good article on the impact of expensing stock options, especially in the tech sector:

  Tech outfits tend to be generous dispersers of stock options. At Intel and Cisco, the value of these are expected to equal about 13% of profits this year, versus 3% at Pfizer (PFE) and less than 1% at General Electric (GE).
  Cisco reported “pro-forma” profits, excluding option expense, of 26 cents a share for its quarter ended Jan. 28, and of 22 cents, with option expense. Some investors and analysts, hoping for earnings that would justify a high stock price, still focus on Cisco’s pro-forma results.
  Nonetheless, says David Bianco, the chief equity strategist at UBS. “There are not too many investors out there who think stock options aren’t an expense.” Option grants have been falling in recent years — Cisco, however, issued more in its latest fiscal year than in the prior one — and Bianco wonders how much further they’ll slip now that expensing is mandatory. He estimates that options will cut profits for the S&P 500 by about $2 this year, off an earnings base of around $80. That’s a hit of roughly 2.5%. The hit in tech will be an estimated 15%.

• Random Market Stat of the Day
  Eddy Elfenbein, February 14th, 2006 at 11:36 am

  It’s hard to overstate the impact of long-term interest rates on equity prices. As long as long-term yields head lower, the stock market does well. But when rates rise, it’s like running into the wind.
  Since 1962, there have been over 2,300 weeks of trading. The yield on the 10-year Treasury bond has fallen for 1,060 of those weeks. During those weeks, the S&P 500 is up a combined 6,187%, which is about 22.5% on an annualized basis.
  The 10-year yield was unchanged over 129 weeks. During that time, the S&P 500 was up just 4%, or 1.6% annualized.
  And for the 1,112 weeks of rising yields, the S&P 500 was down 72.3%, or 5.8% a year. When you separate out the data like this, you can really see the impact that bond yields have on the market.
  Perhaps the most important fundamental aspect of this market is that long-term interest rates have been remarkably flat for so long. For the last two-and-a-half years, long-term yields have traded in a band between 3.68% and 4.87%. Over 75% of the time, the yield has been between 4.0% and 4.5%.
  In other words, stocks aren’t getting any help from bonds.

• Expeditors Earnings
  Eddy Elfenbein, February 14th, 2006 at 9:50 am

  This morning, Expeditors (EXPD) reported fourth-quarter earnings of 72 cents a share. However, that included a tax benefit of 19 cents a share. Discounting that, Expeditors earned 51 cents a share, two cents more than Wall Street’s estimates. Net sales increased 23%.

  “This quarter has to be viewed as a fitting end to what was an outstanding year,” said Peter J. Rose, Chairman and Chief Executive Officer. “Our operating income was 27.6% of net revenue during the fourth quarter of 2004, but this expanded to an amazing 31.3% in 2005 as we were able to handle a significant increase in freight without having to add a commensurate amount of expense. This positive leverage was a result of our ongoing process and productivity initiatives. By every measure, our people did a superb job executing in what was really a very difficult environment: simply put, there was just a bunch of freight out there,” continued Rose.
  “Air freight volumes were strong during the fourth quarter and ocean freight, which was a little subdued in November 2005 compared with October, came through very strong in December,” Rose said. “We think that a 39% operating income increase off of our already sizeable base is extremely indicative of just how well we executed during the busiest time of the year. We just finished recording our second straight one billion dollar quarter and this put us over the top to enjoy our first year with over one billion dollars in net revenue. More than empty talk, these are real measures of progress,” Rose concluded.

• Obscenely Profitable Stock
  Eddy Elfenbein, February 14th, 2006 at 1:00 am

  In my continuing series, “here’s an obscenely profitable stock that I don’t own,” I bring you Capital One Financial (COF).
  They’re one of the major credit card companies (David Spade, “what’s in your wallet?”). The company is massively profitable.
  Capital One uses a combination of heavy mass marketing and pinpoint datamining. They know exactly who to lend to and how much. Despite their aggressive marketing, the loan portfolio has actually been fairly conservative.
  I often hear people complain about junk mail from credit card companies. The companies do it for a highly sophisticated and complex reason. It works.
  Capital One grew so quickly that the market assumed something had to be wrong. Four years ago, banking regulators demanded tighter controls and the stock cracked. But the company stood by its loan portfolio, and the results speak for themselves.
  Here’s their earnings-per-share for the past few years: $0.77, $0.93, $1.32, $1.72, $2.24, $2.91, $3.93, $4.92, $6.21 and $6.73. Constant growth.
  The company forecast earnings this year of $7.40 to $7.80 a share, which translates to growth of 10% to 16%. It also means that at today’s price, Capital One is going for 11.0 to 11.6 times this year’s earnings. That’s very cheap, and if that isn’t enough, you also get a teeny dividend.
  One of my worries, however, is that the company recently completed a major merger with Hibernia bank. I always get nervous about growth-through-acquisition strategies.
  

• The Market Now Expects At Least One More Rate Hike
  Eddy Elfenbein, February 13th, 2006 at 4:08 pm

  Here’s a major change in sentiment: One month ago, the futures market indicated that there was a 56% chance that the Fed would raise rates on its March 28 meeting, and a 0% chance of a rate hike in May. Today, the futures indicate a 94% chance of a rate hike in March, and a 62% chance of another rate hike in May.

• This Week’s Earnings
  Eddy Elfenbein, February 13th, 2006 at 2:47 pm

  Expeditors International (EXPD) will release its fourth-quarter earnings tomorrow morning. The current consensus estimate is for 51 cents a share. Last year, Expeditors earned 39 cents a share. This is a great stock, although it’s getting a bit rich for me.
  Dell (DELL) will release its fourth-quarter earnings on Thursday.
  For the record, Dell originally said that its third-quarter earnings would come in at 39 to 41 cents a share, on sales of $14.1 to $14.5 billion. However, the results were 39 cents a share on sales of $13.9 billion. That was the “miss” that freaked everyone out.
  For this quarter, Dell expects earnings of 40 to 42 cents a share on sales of $14.6 to $15 billion. Wall Street’s original forecast was for 42 cents on $15 billion.
  If Dell earns 43 cents a share, I will never listen to another Wall Street analyst for the rest of my life.

• Is the Oil Crises Over?
  Eddy Elfenbein, February 13th, 2006 at 1:52 pm

  Yes, according to Matthew Lynn at Bloomberg:

  Forget that order for a funny- looking electric car. Take the solar panels off the roof. Don’t worry about hoarding tinned food for the long economic slump that is about to engulf the world.
  Why? Because the oil crisis we were all concerned about less than a year ago is quietly going away.
  The laws of supply and demand are starting to restore market calm. They suggest that although oil isn’t about to get really cheap, talk of $100 a barrel can now be put to rest.
  That will give an extra leg to economic growth and stop central bankers from fretting about inflation.
  “The fundamentals are starting to quietly reassert themselves,” Simon Hayley, senior international economist at Capital Economics Ltd. in London, said in a telephone interview.

  Oil is down to $61.15 a barrel today.

• Venture Capitalist Turns Romance Novelist
  Eddy Elfenbein, February 13th, 2006 at 1:33 pm

  Tom Perkins, one of the legendary venture capitalists of Silicon Valley, has a new book out. But it’s not what you think.
  The new book, Sex and the Single Zillionaire, is actually a romance novel and it sounds like the kind of thing Danielle Steel would write. Of course, that’s hardly a coincidence considering that Ms. Steel is not only his editor, but his ex-wife.
  Yah Zhao at the Harvard Crimson outlines the plot:

  The protagonist, Steven Hudson, is a powerful N.Y. investment banker. Like Perkins, Steven receives a letter asking him to be the star in a reality television show called “Trophy Bride” where young, female 20-somethings compete to marry a “zillionaire.” After repeated assertions about the absurdity of the offer, Steven ends up agreeing to do the show—partially because he is lonely after his wife’s passing and partially because he falls in love with the producer of the show, Jessie Jones.
  After 280 pages of trials and tribulations—including Steven being conned by a girl pretending to be on the U.S. Olympic ski team, being pursued by a nymphomaniac, and pacifying his extremely conservative colleagues who were outraged by his “sex frolic”—the obligatory happy ending is duly set down.

• Gurgle
  Eddy Elfenbein, February 13th, 2006 at 11:31 am

  Musn’t gloat.
  Ther media is turning around Google (GOOG) is a big way. Barron’s featured Google on its front page this weekend.

  To get a sense of what might happen to the stock, we gave one über-bull’s 2006 revenue estimate for Google a 20% haircut, trimmed his projected expenses by 5% (but no further, because bulls greatly underestimate Google’s costs), deducted stock-based compensation and, generously, gave the company credit for the considerable interest income on its cash. The result: Earnings would be 30% lower than the bull’s projection, at $6.28 a share. If the stock were to maintain its current multiple of 41 on those lowered earnings, it would be worth $257. It’s more likely the multiple would shrink to as low as 30, in line with the slower growth. That would make the stock worth $188, versus its recent $360.
  Though this exercise is less than scientific, it clearly demonstrates two things. First, Google’s business has tremendous leverage — changes in revenue, in either direction, have outsized impacts on the bottom line. That’s the result of high profit margins: 88% of net revenue and 58% of gross revenue. Second, the exercise provides a glimpse of the risk posed by a lofty stock multiple.
  “Google reminds me very much of what went on in 1999 and 2000,” says Fred Hickey, editor of the well-regarded High-Tech Strategist newsletter and a member of the Barron’s Roundtable. “The valuation is insane, relative to what they do.”

  The stock opened at $344 today. The AP is reporting that analysts are standing behind Google:

  “Google remains our No. 1 buy recommendation in the Internet sector, and our price target remains $490,” said Citigroup analyst Mark Mahaney, who added the March 2 analyst day might be another catalyst for the lofty stock.
  Sasa Zorovic, an analyst with Oppenheimer, said the recent stock weakness since Google reported disappointing fourth-quarter earnings might even provide a buying opportunity. The stock has fallen 20 percent since reported quarterly numbers on Jan. 31.
  “We continue to believe the online advertising industry remains a powerful growth story and that Google enjoys a market-leading position, gaining share from the competition in recent months,” Zorovic said in a report. “We believe the recent pullback provides a buying opportunity, and we reiterate our ‘Buy’ rating and $540 price target.”

• BlackRock shares jump amid talk of Merrill deal
  Eddy Elfenbein, February 13th, 2006 at 11:28 am

  Merrill launches a pre-emptive strike:

  Shares of BlackRock Inc. shot higher on Monday in thin, pre-market trading amid speculation the money management firm was involved in a deal with Merrill Lynch & Co.
  BlackRock shares rose almost 14 percent to $149.80 on the Inet electronic brokerage.
  Both The New York Times and The Wall Street Journal, citing people familiar with the discussions, reported in Monday editions that Merrill Lynch would acquire a large stake in BlackRock, known for managing fixed income. The Journal valued the transaction at about $8 billion.
  Megan Frank, a spokeswoman for Merrill Lynch, said the company can’t confirm or deny market rumors. A call to BlackRock seeking comment was not immediately returned.
  A deal would create a company with $1 trillion in assets under management, the most of any publicly traded company.
  A BlackRock deal would be more strategically compelling than the alleged Merrill deal with Morgan Stanley, Buckingham Research said in a note to investors.