Archive for December, 2006

  • Have Dwight Call Your Friends
    , December 21st, 2006 at 7:16 am

    rainn-wilson.jpg
    If you’re a fan of The Office, go to this site. Click on “Get a Call,” and follow the steps from there.

  • Update on Bed Bath & Beyond
    , December 21st, 2006 at 7:07 am

    I’ve had some time to review the Bed Bath & Beyond (BBBY) conference call (see here, via Seeking Alpha). First, the company had a charge to SG&A last quarter of $7.2 million related to the review of stock option grants and procedures. We already new this was coming. In fact, the company said it was going to be $8 million. After tax, that comes to about two cents a share, so we have our earnings shortfall right there. The company said there might be a little more this quarter.
    Next, CEO Steven Temares commented on employee tax charges the company was taking as a result of its stock options grants.

    We anticipate the potential cash payments pursuant to the program to be approximately $40 million. While we are still reviewing the accounting treatment related to the potential program, we anticipate the pre-tax income statement impact in the fourth quarter to be slightly higher than the total cash payments. The potential cash outlay primarily represents payments to our employees in connection with increasing the exercised prices on certain stock option grants so as to protect them from certain potential adverse tax consequences.
    It’s currently believed it is likely the company will recoup a substantial portion of the cash outlay over the next several years through higher proceeds from future stock option exercises, although this recovery will not flow through the income statement.
    I want to emphasize that any program arrived at by our Board will be consistent with our company’s beliefs that our people are the reason for our success. As such, we would want to protect them against any adverse tax consequences for events that were beyond their control.
    While the program has not been finalized, Warren, Len and I as executive officers, who are also members of the Board of Directors, has informed the Board that we decline to be considered for payments.

    That only seems fair. Employees shouldn’t be punished for this, and the company did the right thing. The charge will amount to about nine cents a share.
    Now let’s turn to SG&A, which I initially found a little troubling:

    Selling, general and administrative expenses for the fiscal third quarter were about $493 million, compared with approximately $410 million in the corresponding quarter a year ago. As a percentage of net sales, SG&A expenses were 30.4% compared with 28.3% a year ago, as a result of the previously mentioned $7.2 million increase in stock-based compensation expense along with legal and accounting charges related to the stock option review and a relative increase in advertising, which includes an increase in paper cost and postal rates.
    In addition, there were one-time benefits experienced in the prior year for settlement of credit card litigation and certain insurance recoveries which we did not have in this year’s third quarter. As a result of the deleverage in SG&A expense partially offset by the improvement in gross profit margin, the operating profit margin in the fiscal third quarter decreased by approximately 115 basis points. The company’s results also benefited from a reduction in its year-to-date effective tax rate from 36.6 to 36.3%, resulting in a third quarter effective tax rate of 35.8%.

    The company also said that it’s targeting earnings of 78 cents a share for the February quarter, which is a penny less than what it said on its last conference call.
    My view is that the operationally, BBBY look just fine. The company’s sales-per-share increased by 17.4% from last year. That’s darn good. It’s been helped by the company’s aggressive buyback program. Share buybacks don’t impress me much, but with BBBY, it really has an effect on its earnings statement. Today, BBBY said it’s going buy back another $1 billion worth of stock.
    Unfortunately, the company hasn’t had all the benefits of its growth in gross margins reach the bottom line. Gross profits-per-share were up 20% last quarter. Unfortunately, they dug around looking for one thing (back-dating), and the probe found an even bigger charge (this tax thing)!
    On today’s call, the company said that it’s looking for sales- and earnings-per-share growth of 10% next year…(cough)…low-ball..(cough).
    Conservatively, I’d say that BBBY’s calendar year-earnings will be about $2.34 a share next year. (Their fiscal year doesn’t follow the calendar year, but I’m estimating for sake of comparison.) That means that the stock is going for just 17 times next year’s earnings, which strikes me as a very good price.

  • In China Feng Shui Guys See Market Top
    , December 21st, 2006 at 6:51 am

    From Reuters:

    Forget fund flows and profit predictions, 2007 is about “fire sitting on water”. Buy oil, avoid metals, and don’t get your fingers burnt.
    Feng shui experts steeped in the ancient Chinese knowledge of geomancy, or natural energies, see a turbulent year ahead for both markets and mankind.
    “The elements — they are in conflict,” said Raymond Lo, a practitioner for more than 10 years, whose office close to Hong Kong’s Victoria Harbour is considered a repository of positive feng shui energies in this hotbed of capitalism.
    “Because it’s fire and water, and they’re not in harmony. So therefore next year in January, it’s not so peaceful.”

    Wait, don’t get my fingers burnt! Oh, that does make more sense.

  • Bed Bath & Beyond Earned 50 Cents a Share
    , December 20th, 2006 at 4:29 pm

    Bed Bath & Beyond (BBBY) just reported earnings of 50 cents a share, two cents below estimates. Wall Street was expecting earnings of 52 cents a share. Last year, BBBY made 45 cents a share.

    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
    Nov-06 $1,619,240 $704,073 $211,134 $142,436 $0.50

    Historically, more than one-third of the company’s earnings comes during this (the February) quarter. I have to say that I’m very impressed with BBBY’s gross margins. For this quarter, gross margins topped 43%. That’s an improvement of 2.6% in the last six years.
    Perhaps I’m missing something, but I don’t see where the big increase in SG&A is coming from (that’s gross profit minus operating profit). This had been decreasing for several quarters. It jumped in the four quarters prior to this one, but that was due to that FASB 123(R) jazz. That I understand, but this I don’t get.
    Like I said, I could be missing something. This is just a first look. Perhaps the company will address it on the call (btw, BBBY is one of the few companies that doesn’t take on questions on its call).
    The company also announced a $1 billion share buyback program. The AP also notes:

    Bed Bath & Beyond expects a $40 million charge during its fiscal fourth quarter as part of “a program intended to protect over 1,600 employees from certain potential adverse tax consequences.” The tax consequences are a result of historical issues with some of the company’s stock option grants disclosed through a company stock option review.
    The Securities and Exchange Commission is conducting an informal investigation into Bed Bath & Beyond’s stock option grant practices. The U.S. Attorney for the District of New Jersey is conducting a similar inquiry. Both probes are looking at backdating, in which the vesting date of a stock option is changed to make it more valuable to the holder. While not illegal, the practice must be properly disclosed to shareholders.

  • Vornado Realty Trust
    , December 20th, 2006 at 11:54 am

    More boring stocks. Today, I give you Vornado Realty Trust (VNO). Over the last 32 years, shares of Vornado are up more than 600-fold.
    The flat gold line on the chart is the S&P. It’s not really flat, it just looks that way in comparison to Vornado.
    VNO.gif
    By the way, that 60,000% doesn’t include dividends. Since VNO is a REIT, it pays fairly generous dividends. The current yield is 2.8%. If I had to estimate, I’d say that dividends by themselves gave VNO shareholders about a 200% return since 1974, meaning the stock’s total return is about 180,000%.

  • Blankfein Rakes In $54 Million
    , December 20th, 2006 at 6:46 am

    The WSJ reports that Lloyd Blankein’s, Goldman Sachs’ CEO, bonus was for $54 million, the biggest in Wall Street history.

    Mr. Blankfein’s pay package reflects the firm’s performance atop the Wall Street heap over the past year, when its profits rose 70% to $9.54 billion and its stock price surged 59%, increasing its stock-market value by $31 billion.
    But it also reflects the inflation in Wall Street CEO pay packages, which last year generally came in at between $30 million and $40 million, with the stock market in the fourth year of a bull run and a boom in private-equity buyouts and hedge-fund trading.
    A former tax lawyer and gold salesman who rose to become head of the firm’s fixed-income, currency and commodities division in 1998, the 52-year-old Mr. Blankfein epitomizes Goldman’s risk-taking culture.
    His latest pay package includes a cash bonus of $27.3 million, restricted shares valued at $15.7 million and options valued at $10.5 million, according to a filing yesterday by Goldman, which disclosed the stock awards and included the cash bonus. He also earned a salary of $600,000.

    Goldman has 450 million shares, so Blankfein’s pay comes to 12 cents a share. In the past year, the stock is up $76.

  • An Open Letter to Biomet Shareholders
    , December 19th, 2006 at 2:02 pm

    Vote Against the Private Equity Buyout
    Dear Shareholders of Biomet,
    On Monday, the Board of Directors of Biomet (BMET) announced that it agreed to a buyout offer from a consortium of private equity frims. The consortium consists of the Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts, Texas Pacific Group and one of Biomet’s founders, Dane Miller. The deal is for $10.9 billion ($44 a share) and is due to be completed by October 31, 2007.
    We believe this is a poor deal for shareholders of Biomet and we urge all shareholders to vote against it.
    Biomet’s track record is known to everyone. For the last three decades, the company has been one of the great success stories of American free enterprise. Biomet has delivered record sales and earnings every year since it began operations in 1977. This is an astounding achievement. Moreover, the company’s products have helped millions of people all over the world lead a better life. This is something we all should be proud of.
    In 1977, the company had sales of just $17,000. For FY 2006, Biomet’s sales exceeded $2 billion. Today Biomet employs over 6,000 people. Since 1982, the stock has split nine times. In the last 20 years, shares of Biomet have increased by more than 40-fold.
    Biomet has regularly had its return-on-equity top 20%. Additionally, the company has no long-term debt and a very healthy cash position.
    Give all these facts, we’re very disturbed by management’s decision to sell Biomet for such a low price. Monday’s press release notes that $44 is “a 27% premium over Biomet’s closing price on April 3, 2006.”
    This is a misleading fact that was repeated with question through much of the financial media. This “premium” is measured from over eight months ago to more than ten months in the future. Annualized, this premium works out to 16.1% which is less than the shares’ long-term performance.
    Additionally, we believe the shares were unusually low-priced in April so the appearance of a premium is illusionary. Forty-four dollars a share is not only well below Biomet’s high price from 2004, but it’s also below the average share price for the entire second half of 2004. Since that time, Biomet’s sales and earnings have continued to increase.
    image373.png
    The graph above shows Biomet’s share price (black line) with the $44 buyout offer (red line). The yellow line is Biomet’s earnings-per-share (right scale), and the blue portion is Wall Street’s consensus projection. The earnings and share prices and scaled by a ratio of 25 to 1.
    For a number of reasons, shares of Biomet and the entire health care sector have been punished over the past year. This should not be a reflection on Biomet’s long-term intrinsic value. And it should not be a reason to sell the company at a distressed price. Bear in mind that the stock often traded above 25 times earnings. Despite being called a premium, the private equity deal represents a substantial discount to Biomet’s historic valuation. We have to asked the Board of Directors, “What’s the hurry?”
    While there certainly are problems with Biomet’s business, particularly in the spinal business, these problems are a small part of the company’s overall business. Consider that over the next decade, the number of Americans aged 55 to 75 will nearly double. David Phillips at 10-Q Detective notes that “hip and knee and extremity joint replacements account for more than 95% of all orthopedic implants and Biomet holds about 12% of this market, which accounted for 68% of the company’s net sales in FY 2006.”
    We’re not opposed to a buyout offer, but we encourage the Board of Directors to consider other offers. The present offer undervalues Biomet’s potential and does not adequately reflects its proper value.
    We encourage all shareholders to let the board know that this deal is unsatisfactory and not in the best interest of shareholders. If it comes to vote, we encourage a no vote on the present offer.
    Sincerely,
    Eddy Elfenbein
    Crossing Wall Street

  • FactSet Earns 47 Cents a Share
    , December 19th, 2006 at 11:00 am

    FactSet Research Systems (FDS) just reported earnings of 47 cents a share, a penny better than estimates. The company made 38 cents a share last year. Sales were up 21% to $108.9 million.
    The stock is up $3 a share today to a new high. It’s now a 40%+ winner for the year.image372.png

  • What to Look for This Week
    , December 18th, 2006 at 4:55 pm

    We have two Buy List stocks reporting earnings this week. FactSet (FDS) reports tomorrow. The company already gave guidance for revenues ($106 to $109 million) and operating margins (31.5% to 33.5%), but not EPS. Fortunately, I own a calculator so I’m expecting EPS of 47 cents a share. Maybe 48.
    I should add that FDS is by far the most expensive stock on the Buy List. Ultimately, I decided to keep it on the 2007 Buy List. Its business is strong and I think it deserves to be richly priced.
    Bed Beth & Beyond (BBBY) is set to report on Wednesday. BBBY has been one of my favorite stocks. Wall Street is expecting 52 cents a share, but I think BBBY can top that. This can easily be a $45 – $50 stock.

  • Moron of the Year
    , December 18th, 2006 at 12:40 pm

    We have a winner:

    A former UBS PaineWebber employee was sentenced to eight years in prison on Wednesday for planting a computer “logic bomb” on company networks and betting its stock would go down.
    The investment scheme backfired when UBS stock remained stable after the computer attack and Roger Duronio lost more than $23,000.
    A federal judge in New Jersey sentenced Duronio, 64, to 97 months in prison and ordered him to make $3.1 million in restitution to his former employer, the U.S. attorney’s office said in a statement.
    Duronio was convicted on July 19 of one count of securities fraud and one count of computer fraud in the 2002 case.
    Duronio quit his job as a systems administrator in February 2002 after repeatedly expressing dissatisfaction about his salary and bonuses, the statement said.
    He then planted malicious computer code known as a “logic bomb” in about 1,000 of PaineWebber’s approximately 1,500 networked computers in branch offices. On March 4, 2002, the “bomb” detonated and began deleting files.
    Duronio attempted to profit from the attack, the statement said. He bought more than $23,000 in put option contracts for UBS AG stock, betting the stock’s price would go down after his “logic bomb” went off.
    But, according to testimony at his trial, the stock remained stable after the computer attack and Duronio lost all of his investment.

    He would have gotten away with it, too. If it weren’t for those meddling kids.