Archive for March, 2006

• Top 10 Industry Groups Year-to-Date
  Eddy Elfenbein, March 23rd, 2006 at 6:46 pm

  Steel……………………………………………….38.95%
  Precious Metals……………………………….30.77%
  Commercial Vehicles………………………..24.28%
  Telecommunications…………………………17.12%
  Heavy Construction…………………………..16.44%
  Fixed-Line Telecommunications…………15.92%
  Building Materials…………………………….15.28%
  Industrial Supplies…………………………..14.78%
  Gambling…………………………………………14.76%
  Defense…………………………………………..14.56%

• GM Sweetens Buyout Deal with New Toyotas
  Eddy Elfenbein, March 23rd, 2006 at 6:28 pm

  I love it.

  General Motors today sweetened its $35,000 buyout deal for 113,000 hourly workers at GM and Delphi, saying that each employee who leaves the companies by the end of March will also get the keys to a brand new 2007 Toyota Sayonara SUV.
  The number one American automaker lost $10.6 billion last year, which according to an unnamed United Auto Workers (UAW) spokesman, is only about $100,000 for each union worker on the payroll.
  The UAW hailed the agreement as “the ultimate tribute to the organized labor movement.”
  “For years, GM has been offering incentives to get consumers to drive their cars out of the showrooms,” said the UAW source, “It’s only fair that they would give us incentives to drive their employees out of the factories.”

  Yes, it’s a parody. But GM is hard to parody these days.

• The Numbers Guy
  Eddy Elfenbein, March 23rd, 2006 at 3:19 pm

  Carl Bialik writes the “Numbers Guy” column for the Wall Street Journal. Today he has a fun article looking at the chances of picking perfect brackets for the NCAA Tournament.
  Put it this way, it ain’t gonna happen. There’s even a company that provides insurance to companies that sponsor events for picking all 63 games correctly. Talk about a safe business! Fifty contests and zero winners. Papa John’s contest had 90,000 entrants and no one got past the first round.

  To measure the probability for this year’s tournament, Jay Emerson, assistant professor of statistics at Yale, suggests using power ratings developed by Ken Pomeroy, a 32-year-old meteorologist from Cheyenne, Wyo. These ratings are based on team’s records, margin of victory, strength of schedule and other factors, and are expressed in units of points. For example, through last weekend’s games Villanova has a rating of 65.64 and Boston College has a rating of 61.99, so Villanova is expected to beat Boston by about four points — the difference in their ratings — when they play Friday.
  A forecaster could use the ratings from before the tournament (which Mr. Pomeroy sent to me) to predict who would win each matchup. Mr. Pomeroy says the ratings chose a winner in about 71.3% of games this year before the tournament. “There’s so much variation in performance from game to game, that even if you had a perfect system of ranking teams by how good they are, you’d still have significant errors,” he told me.
  Based on Mr. Pomeroy’s stats, I computed the probability that teams would win in all 63 matchups — I don’t recommend you try this at home — and found that if I had relied on power ratings, I would have had a one in 722 billion chance of a perfect bracket. (I’d also have chosen Kansas, a first-round loser, to make the Final Four.)
  Of course, none of these models account for forecaster psychology. The great satisfaction of picking an upset, and the lure of picking one’s own favorite team to win, combine to make picking all favorites more unpalatable than pizza is palatable. These forces conspired to make me, a writer of both a sports column and numbers column, pick first-round loser Syracuse to win the championship in our office pool. I’m tied for last place.

• Medtronic Wins Patent Ruling
  Eddy Elfenbein, March 23rd, 2006 at 2:16 pm

  From the AP:

  An arbitrator has ruled in favor of Medtronic Inc. in a patent dispute with Johnson & Johnson over the design of its stents, the tiny wire metal mesh used to prop open arteries.
  Johnson & Johnson had alleged that Medtronic’s “Driver” stent and several other Medtronic stents infringed on patents owned by J&J’s stent unit, Cordis Corp. The arbitrator ruled that the stents were licensed under a 1997 agreement between the companies, Medtronic said on Thursday.

• Defense & Aerospace Stocks
  Eddy Elfenbein, March 23rd, 2006 at 12:00 pm

  One of the hottest sectors of late has been defense and aerospace stocks. This decade’s NASDAQ might be the Spade Defense Index (^DXS), which is up 125% since March 11, 2003. And lately it’s been very strong, up 11.2% since January 23, 2006.
  The defense industry is dominated by six major large-cap stocks; Boeing (BA), United Technologies (UTX), Lockheed Martin (LMT), Northrop Grumman (NOC), Raytheon (RTN) and General Dynamics (GD). While many of these companies have done well over the past three years, the really big gains have come from smaller players like BE Aerospace (BEAV) and Precision Castparts (PCP).
  Though some have compared the war in Iraq to Vietnam, one area of difference is the behavior of stocks. Many defense stocks started underperforming the market in mid-1967, several months before the Tet Offensive, perhaps foretelling the end of American involvement.
  Also, defense stocks peaked in mid-1985, more than four years before the Berlin Wall came down. Again, the market proved the Wisdom of Crowds.
  But if the defense sector is telling us anything about the future, it’s that we’re going to be in Iraq awhile longer.

• The Morning Market
  Eddy Elfenbein, March 23rd, 2006 at 10:16 am

  Here are a few quick items for this morning:
  First is that Respironics (RESP) was upgraded by Wachovia. It’s about time this stock got some love.
  Also, Seeking Alpha has posted Biomet’s (BMET) conference call from Tuesday.
  Finally, Expeditors (EXPD) released its latest 8-K report. They’re the only company I know of that regularly takes time to answer questions from shareholders. I always learn something useful by reading these. On a related note, Virginia Postrel writes about how the shipping container changed the world.

• Crushing Your Enemies in a Pile of Collapsing Debris
  Eddy Elfenbein, March 23rd, 2006 at 9:40 am

  
  Behold! The Dell XPS 600 Renegade, the ulimate in computer gaming technology. The price tag, $10,000.
  Best. Computer. Ever.
  But what can it do?

  The limited-edition, custom-painted Dell(TM) XPS 600 Renegade delivers to U.S. consumers an immersive gaming experience based on the industry’s first dedicated physics accelerator — the AGEIA(TM) PhysX(TM) processor.
  The AGEIA technology lets users interact with supported games in more sophisticated and realistic ways. The AGEIA PhysX processor can power real-time dynamic motion and interaction on a massive scale so games can feature large numbers of complex characters and moving objects in incredibly life-like environments. For example, instead of using traditional weapons, gamers can pull down the roof on their enemies, crushing them in a pile of collapsing debris.

  Poland, sold separately.
  By “traditional weapons,” they mean traditional computer game weapons.
  Today, Dell announced that it’s buying Alienware Corp., a company that also makes high-end computers favored by gamers. I had no idea these things cost so much.
  Interestingly, Alienware uses AMD’s chips and Dell only uses Intel’s. Dell said that Alienware will be a subsidiary and will continue to use AMD’s products.
  Business Week has more.

• Language Matters
  Eddy Elfenbein, March 22nd, 2006 at 3:08 pm

  Polonius: What do you read, my lord?
  Hamlet: Words, words, words
  — Hamlet: Act II, Scene 2

  According to a recent academic paper, company press releases contain more information than we realize.
  Three researchers (Angela K. Davis, Jeremy M. Piger and Jeremy M. Piger) took an interesting approach. They ignored the numbers and instead focused on the language contained in press releases. Using text-analysis software, they looked for optimistic and pessimistic language used in 24,000 press releases.
  Optimistic language included words that conveyed praise, satisfaction or inspiration. This includes words like best, better, favorable, good, great, important, positive, profitable, strong and successful. Pessimistic words conveyed blame, hardship or denial (i.e., alarmed, burden, conflict, weakness, setback).
  Their results show that language matters. It’s as if the companies are tipping their hands. According to the researchers’ (jargony) conclusion:

  Taken as a whole, these results suggests that the optimistic and pessimistic language used in the narrative disclosures of earnings press releases contains information about future firm performance incremental to other factors that are commonly associated with future earnings. This result suggests that market participants consider optimistic and pessimistic language usage to be a credible (at least to some extent) source of information about managers’ future earnings expectations. Finally, the association between market returns and the unexpected portion of optimistic and pessimistic language is substantially stronger than the association between market returns and the expected portion of optimistic and pessimistic language. This result suggests that managers likely have reputations for routinely providing optimistic or pessimistic disclosures and that the market responds to language usage that differs from those initial expectations.

  Interestingly, they also found that corporate press releases are getting longer. Click here to see the paper.
  I double-checked Microsoft’s press release from yesterday, and it doesn’t contain a single negative word. These guys are good. In fact, at no point do they even say that Vista is being delayed.

• The Trend Away from Earnings Guidance
  Eddy Elfenbein, March 22nd, 2006 at 10:35 am

  Pfizer is doing it. Motorola said it will do it too. Companies like Citigroup, Google and General Motors already do it.
  More and more companies are no longer giving earnings guidance.

  Now senior corporate managers and corporate-governance activists are debating the pros and cons of issuing or scrapping guidance. Some say discontinuing updates boosts investor confidence in corporate accounting, since it removes the temptation to rearrange the books to meet earnings targets. Others criticize tight-lipped companies for keeping owners in the dark, highlighting the importance of providing as much information as possible to the marketplace.
  To be sure, investors can extract a toll from companies who remain silent about their future prospects. Google, which has never issued forecasts, experienced a 7 percent drop in its stock price on February 1, when its fourth-quarter results didn’t meet the markets’ expectations. Some have argued that if the Internet search engine had issued forecasts, expectations would have been more realistic, according to McKinsey.
  A number of companies, however, have managed to stave off negative investor reactions by putting a positive spin on their guidance cutbacks. In 2002, for instance, Coca-Cola explained that it stopped updating the market on its earnings projections as a way to focus on the company’s long-term performance. Even though investors had been slamming Coke for its alleged lack of business progress and its declining stock price, they didn’t react negatively to the news that no guidance would be forthcoming.
  Similarly, when Intel’s Otellini cited the company’s intent to focus on the long-term, the market seemed to accept that explanation. The company’s stock closed only pennies lower on the day Intel announced it would curb the frequency of its guidance.
  Indeed, there’s no evidence that frequent guidance positively affects valuation multiples, boosts shareholder returns, or curbs share-price volatility, according to the McKinsey study.

  People love to blame the companies for the “quarterly earnings game,” but how come no one blames the investing public?
  A few years ago, employees at Cisco were madly loading boxes onto trucks as midnight approached on the final day of the quarter. If the boxes were on the trucks, it would then count as a sale. Despite their best efforts, the company failed and for the first time in 11 years Cisco had to report that they missed earnings guidance.
  The next day, the stock plunged 13%. Cisco knew what it was doing. I don’t blame them, I blame the investors.

• What’s Wrong with the Newspaper Biz?
  Eddy Elfenbein, March 22nd, 2006 at 10:17 am

  Holman Jenkins in today’s WSJ:

  Peter Drucker once pointed out that new business models are seldom pioneered by old companies, because old companies are loath to cannibalize their existing businesses. On the specific case of voting lockups, a study by Harvard and Wharton economists found that such companies have lower share prices than their peers, and invest less in R&D and advertising. The authors conclude that a “misalignment of incentives leads dual-class firms to invest too little, leading to lower sales growth and valuations.”
  That describes the newspaper business to a tee. A Columbia University survey recently found that many operators have actually been dumbing down their online editions for fear of cannibalizing their dead-tree audiences. Newspapers have cut costs in round after round of journalistic downsizing, some of which was perfectly sensible: The local paper’s impregnable strength is local reporting, not having a Rome bureau. But while this disinvestment in customer service has helped maintain the industry’s enviable cash flows, it hasn’t done much for stock prices or boosting investor confidence in the future.

  Today’s New York Times Company’s press release:

  The New York Times Company also announced today that first-quarter diluted earnings per share are expected to be in the range of 22 to 24 cents, compared with 76 cents in the same quarter last year, which included a gain of 46 cents per share from the sale of the Company’s current headquarters and another property.
  The first-quarter range includes estimated expenses for the Company’s staff reduction program announced in September 2005 of $8 to $10 million or 3 to 4 cents per share.