Archive for September, 2006

• Citigroup sees S&P hitting 1,500 by end of 2007
  Eddy Elfenbein, September 22nd, 2006 at 10:43 am

  From Reuters:

  Citigroup Inc. set 2007 year-end targets of 1,500 for the Standard & Poor’s 500 index (that’s 14.3% over 15 monnths) and 12,750 for the Dow Jones industrial average, with the cash on corporate balance sheets providing some downside protection.
  In a research note, analyst Tobias Levkovich forecast another year of high-single-digit gains. The risk of a decline in the S&P 500 index was modest given that at S&P 500 companies, excluding financial firms, cash holdings are about 8 percent of market capitalization.
  Citigroup said that after weighing several factors, it predicted the S&P would range between 1,400 on the low end and 1,630 on the high end as 2007 comes to a close.

  Given the current yield curve, this strikes me as somewhat overly optimistic.

• The Forbes 400
  Eddy Elfenbein, September 22nd, 2006 at 10:11 am

  Forbes just came out with its new list of the 400 wealthiest Americans. Here’s the top 25 and their fortunes (in billions):
  1 William Henry Gates III……………….$53.0
  2 Warren Edward Buffett……………….$46.0
  3 Sheldon Adelson………………………..$20.5
  4 Lawrence Joseph Ellison……………..$19.5
  5 Paul Gardner Allen……………………..$16.0
  6 Jim C Walton……………………………..$15.7
  7 Christy Walton & family……………….$15.6
  7 S Robson Walton……………………….$15.6
  9 Michael Dell……………………………….$15.5
  9 Alice L Walton……………………………$15.5
  11 Helen R Walton………………………..$15.3
  12 Sergey Brin……………………………..$14.1
  13 Larry E Page……………………………$14.0
  14 Jack Crawford Taylor & family……..$13.9
  15 Steven Anthony Ballmer…………….$13.6
  16 Abigail Johnson………………………..$13.0
  17 Barbara Cox Anthony………………..$12.6
  17 Anne Cox Chambers………………….$12.6
  19 Charles De Ganahl Koch…………….$12.0
  19 David Hamilton Koch………………….$12.0
  21 Forrest Edward Mars Jr………………$10.5
  21 Jacqueline Mars………………………..$10.5
  21 John Franklyn Mars……………………$10.5
  24 Carl Icahn………………………………..$9.7
  25 John Werner Kluge……………………$9.1
  For the first time, everyone on the list is a billionaire.

• Market gossip goes high-tech
  Eddy Elfenbein, September 21st, 2006 at 4:06 pm

  The Financial Times is on the story:

  Market gossip is to take on a more high-tech form thanks to a new automated system that will trawl through more than 40m internet sources – from blogs to regulatory filings – on behalf of hedge funds.
  Due for an official launch early next year, the platform is being run by a former Deutsche Bank executive and has received financing from, among others, Draper Fisher Jurvetson, the venture capital firm that backed Skype before it was sold to Ebay for $4.1bn last year. Ten hedge funds are trying out the system.
  Called Monitor110, the platform acts as an aggregator and a filter for hedge funds trying to keep up with the explosion of information sources on the internet, such as blogs. The blog search engine Technorati currently tracks 50m blogs, with about 175,000 new ones created every day.

  Let’s see. The hedgies watch the blogs, and the blogs make fun of the hedgies. All rather post-modern if you ask me.

• Convergencification
  Eddy Elfenbein, September 21st, 2006 at 2:51 pm

  Step aside: The bond market is rolling today. The yield on the 10-year bond (^TNX) just fell below 4.65%, and the yield on the 30-year (^TYX) fell below 4.78%.
  Here’s some perspective: The 10-year is now 60 basis points below Bernanke.
  But there’s something else that’s been happening. The stock and bond markets have converged.
  For most of this spring, the stock and bond markets moved in completely opposite directions. If bonds zigged, stocks zagged. Check out this chart of the S&P 500 Spyders (SPY) and the American Century 2025 Fund (BTTRX):
  
  They’re almost like mirror images.
  But in early June, everything changed. The two markets suddenly converged, and started to move like waltzing partners:
  
  What happened is the fight for capital changed. It was stocks against bonds. Then the paper assets decided to team up and kick the ass of real assets like gold and oil (think Rocky III):
  
  The gold line is the Oil ETF (USO).

• Headline of the Week
  Eddy Elfenbein, September 21st, 2006 at 12:51 pm

  HP Spy Scandal Hits New Weirdness Level

  The old weirdness level just wasn’t cutting it.

  Not only did investigators impersonate board members, employees and journalists to obtain their phone records, but according to multiple reports, they also surveilled an HP director and a reporter for CNet Networks Inc. They sent monitoring spyware in an e-mail to that reporter by concocting a phony story tip.
  They even snooped on the phone records of former CEO and Chairwoman Carly Fiorina, who had launched the quest to identify media sources in the first place.

  If they had only put that much time, effort and creativity into something more useful…say, running HP’s business.

  And in a twist that might seem preposterous if it happened in a movie, The New York Times reported that HP consultants considered hiring spies to pose as clerical or custodial workers at CNet and The Wall Street Journal.

  Um…that did happen in a movie: Wall Street.
  And they’re right, it was preposterous.
  What if those consultants were really spies from Dell who were secretly trying to sabotage HP? How cool would that be?
  Honestly, I should be writing for 24.

• Dell Gets Delisting Notice
  Eddy Elfenbein, September 21st, 2006 at 11:41 am

  OK, the Nasdaq isn’t really going to delist Dell (DELL). But still, you gotta get that 10-Q in sometime.

• Bed Bath & Beyond Earned 51 Cents a Share
  Eddy Elfenbein, September 20th, 2006 at 10:25 pm

  Now it’s official: For the August quarter, Bed Bath & Beyond (BBBY) earned 51 cents a share (see earnings call transcript). That’s not too much of a surprise since it’s what the company said to expect.
  Well…they were right!
  Sales were up 12.3% to $1.607 billion. Interestingly, net income was nearly the exact same as last year. The difference is that there are now 17 million fewer shares.
  Although Bed Bath & Beyond doesn’t pay a dividend, last year the company bought back $600 million worth of stock. That’s a frickin ginormous amount for a company this size (5.7% of current market value).
  As I’m sure you know by now, I’m a big fan of Bed Bath & Beyond. Let’s geek out at some of stats:

  Quarter	Sales	Gross Profit	Operating Profit	Net Profit	EPS
  May-99	$356,633	$146,214	$28,015	$17,883	$0.06
  Aug-99	$451,715	$185,570	$53,580	$33,247	$0.12
  Nov-99	$480,145	$196,784	$50,607	$31,707	$0.11
  Feb-00	$569,012	$238,233	$77,138	$48,392	$0.17
  May-00	$459,163	$187,293	$36,339	$23,364	$0.08
  Aug-00	$589,381	$241,284	$70,009	$43,578	$0.15
  Nov-00	$602,004	$246,080	$64,592	$40,665	$0.14
  Feb-01	$746,107	$311,802	$101,898	$64,315	$0.22
  May-01	$575,833	$234,959	$45,602	$30,007	$0.10
  Aug-01	$713,636	$291,342	$84,672	$53,954	$0.18
  Nov-01	$759,438	$311,030	$83,749	$52,964	$0.18
  Feb-02	$879,055	$370,235	$132,077	$82,674	$0.28
  May-02	$776,798	$318,362	$72,701	$46,299	$0.15
  Aug-02	$903,044	$370,335	$119,687	$75,459	$0.25
  Nov-02	$936,030	$386,224	$119,228	$75,112	$0.25
  Feb-03	$1,049,292	$443,626	$168,441	$105,309	$0.35
  May-03	$893,868	$367,180	$90,450	$57,508	$0.19
  Aug-03	$1,111,445	$459,145	$155,867	$97,208	$0.32
  Nov-03	$1,174,740	$486,987	$161,459	$100,506	$0.33
  Feb-04	$1,297,928	$563,352	$231,567	$144,248	$0.47
  May-04	$1,100,917	$456,774	$128,707	$82,049	$0.27
  Aug-04	$1,273,960	$530,829	$189,108	$120,008	$0.39
  Nov-04	$1,305,155	$548,152	$190,978	$121,927	$0.40
  Feb-05	$1,467,646	$650,546	$283,621	$180,980	$0.59
  May-05	$1,244,421	$520,781	$150,884	$98,903	$0.33
  Aug-05	$1,431,182	$601,784	$217,877	$141,402	$0.47
  Nov-05	$1,448,680	$615,363	$205,493	$134,620	$0.45
  Feb-06	$1,685,279	$747,820	$304,917	$197,922	$0.67
  May-06	$1,395,963	$590,098	$148,750	$100,431	$0.35
  Aug-06	$1,607,239	$678,249	$219,622	$145,535	$0.51

  The first thing you’ll notice is a big spike in business during the February quarter due to the holiday shopping season. Retailers live or die by the holidays.
  Let’s break down the numbers. The first thing I like to look at is a company’s margins. First we’ll start with gross margins:
  
  Ah, tres bien! This shows Bed Bath & Beyond’s gross margins for the trailing four quarters. As you can see, gross margins have climbed very nicely. In short, they can charge $7 for something that costs them $4 to make. We like that. We like that a lot.
  This is also referred to as a company’s variable costs. Let’s say you run a lemonade stand. Your variable cost is simply how much it costs to make your lemonade. For each unit you sell, your variables costs should rise by the same percent. Variable costs are always a function of sales. That’s why gross profit margins don’t change much, and it speaks well of the company that gross margins have climbed in recent years.
  Now let’s look at operating margin and net profit margin:
  
  Again, these graphs are very good. The red line is operating margin, and the black is net margin. Don’t worry about the recent downturn in operating margin. For the last four quarters, Bed Bath & Beyond has implement Statement of Financial Accounting Standards 123(R) which accounts for stock-based compensation. That’s shaved…oh, a couple million dollars each quarter.
  The charges work out to three cents a share in this quarter and in last quarter. Excluding those charges, the company’s operating margins are still over 15%, so these numbers are still looking good.
  Now let me explain what operating margin is. Operating margin is gross margin minus “selling, general and administrative” expense. These are your fixed cost. For you lemonade stand, it would be things like salaries, maintenance and marketing (what can I say…it’s a fancy lemonade stand). These costs are hard to control because they’ll rise simply because you’re still in business. Hey, you gotta pay the phone bill.
  Net margin is operating margin minus interest expense and your tax bill. This is my favorite line, the bottom line. In Bed Bath & Beyond’s case, it makes a small amount of money from interest income.
  Now let’s look at the growth in sales-per-share:
  
  Again, this is what I like to see–a nice smooth trend.
  For the quarter we’re currently in (the company’s third), Bed Bath & Beyond forecasts earnings of 52 cents a share. And for the fourth quarter (ending in February), the company sees earnings of 79 cents a share.
  Here’s a chart of earnings-per-share for the past few years, along with the company’s estimate for the next two quarters, plus my estimate for the four quarters after that:
  
  Also in the press release was this:

  The Company also announced an independent committee of its Board of Directors is carrying out a review of the Company’s stock option grants and procedures. The independent committee’s review was initiated voluntarily by the Company and is being conducted with the assistance of independent legal counsel and outside accounting experts selected by the committee. The independent committee’s review is not complete. The Company expects to report further with respect to the review in its Form 10-Q for the quarter ended August 26, 2006, which the Company expects to file on a timely basis on or before October 5, 2006.

  The shares dropped sharply in the after-hours market but this struck me as a perfectly ordinary review. I don’t see how we can read any more into it.

• Frontier Airlines Jumps
  Eddy Elfenbein, September 20th, 2006 at 2:45 pm

  I had Frontier Airlines (FRNT) on last year’s Buy List. I hate airline stocks, but FRNT looked like a sound investment at a good price. The stock was doing well until it got slammed after Southwest Airlines (LUV) said it was going to enter the Denver market, Frontier’s home turf. Ultimately, I decided againt keeping Frontier on this year’s Buy List, which was a smart move since the stock has fallen for most of the year.
  Shares of Frontier got as low as $6, but have to started to perk up recently. Fuel is a huge cost for the ailines, and crude oil briefly fell below $60 a barrel today. Frontier is up strongly this session and is back over $8 a share.

• The Fed Leaves Rates Unchanged
  Eddy Elfenbein, September 20th, 2006 at 2:18 pm

  Here’s the statement:

  The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
  The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market.
  Readings on core inflation have been elevated, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.
  Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

  Once again, Jeffrey M. Lacker wanted a 0.25% increase. Me too.

• Earnings Preview for Bed Bath & Beyond
  Eddy Elfenbein, September 20th, 2006 at 1:53 pm

  Bed Bath & Beyond (BBBY) reports after the bell. The company has already said it expects 51 cents a share. The AP has a preview:

  OVERVIEW: The company operates 819 stores nationwide under the names Bed Bath & Beyond, Christmas Tree Shops and Harmon selling home furnishings, food, gifts and health and beauty care products.
  Consumers are being squeezed by rising interest rates, the slowing housing market and higher fuel prices. Rising energy costs have also lifted utilities costs, hurting some companies’ bottom line. Furniture sales have been weak in recent weeks, as people cut back on big-ticket items amid the slowing housing market. However, analysts see Bed Bath & Beyond as a savvier merchandiser and better equipped financially to handle economic pressures, compared with Pier 1 Imports Inc. and other rival chains.
  BY THE NUMBERS: Wall Street expects earnings of 51 cents per share, the mean estimate of 24 analysts surveyed by Thomson Financial, on $1.60 billion in sales. The company didn’t provide any financial forecast in its last earnings release in June. (They said 51 cents a share in the conference call.)
  ANALYST TAKE: “Given the company’s historical top-line immunity to furniture sales fluctuations and housing turnover, we remain confident that planned 3 percent to 5 percent (same-store sales increases) are achievable,” Goldman Sachs analyst Adrianne Shapira wrote in a client note. Selling, general and administrative costs could pose some risk, “but our gross margin assumptions should prove conservative.” Shapira forecast quarterly earnings of 52 cents per share, which she said was a penny higher than management’s guidance.