Archive for September, 2009
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Peter Schiff: Gold to Hit $5,000
Eddy Elfenbein, September 24th, 2009 at 12:23 pmHere’s a bold prediction:
Unlike the “legitimate bull markets” of many foreign markets, Peter Schiff believes the U.S. is merely experiencing a “rally in a bear market,” and is lagging the rest of the world “for a reason.”
The worst is not over, according to Euro Pacific Capital’s Schiff, who predicts the Dow will fall another 90% from current levels when measured against gold.
A longtime dollar bear and gold bull, he foresees gold hitting $5000 per ounce “in the next couple of years,” and predicts the Dow and gold will trade on a one-to-one ratio vs. the current level of around 9.7-to-1.
Schiff believes gold is currently “climbing a wall of worry” but will eventually become as hot as tech stocks in 1999 and start moving up $100 per day.
Schiff’s forecast is based on his view the U.S. dollar is going to collapse under the weight of our massive deficit and reckless policies of the Obama administration, which he compares to the massive spending programs of the 1960s, which paved the way for gold’s ascent in the 1970s. “Obama is making the same mistakes as Bush, but he’s doing them on a grander scale,” says Schiff, who is running for U.S. Senate in Connecticut as a Republican.I wish Peter will in his Senate bid,, however I have a feeling this prediction won’t be remembered in a few years.
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For Valuations, You Need to Look Forward
Eddy Elfenbein, September 24th, 2009 at 11:48 amDavid Rosenberg writes in the Financial Times:
An unprecedented eight-point price/earnings multiple expansion during a six-month faith-based rally has left the market at its most expensive (26 times operating profit, 180 times reported profit) in seven years. On a reported basis, this market is nearly four times overvalued, as it was during the tech bubble!
The problem is Rosenberg is looking backward not forward. The S&P500’s earnings for the fourth quarter of last year were dismal. In fact, they weren’t even earnings, it was a slight loss. Once that weight is off the trailing four quarters, things will look much better.
The latest estimates say that the S&P 500’s operating earnings will hit $54 for 2009, and nearly $73 for 2010. A multiple of 15 gives the market a fair value of roughly 1100. Discounted back to today means the market is fairly accurately priced.
Of course, the underlying assumptions may be wrong, but I don’t see any current disconnect between today’s outlook and prices. -
BBBY Is Down Today
Eddy Elfenbein, September 24th, 2009 at 11:27 amJust a quick note. I’m not sure why BBBY is down today. I thought it was a good earnings report.
Oh well. A wiser feller than myself once said, “Sometimes you eat the bar and sometimes the bar, well, he eats you.” -
Bed Bath & Beyond Reports 52 Cents a Share
Eddy Elfenbein, September 23rd, 2009 at 4:18 pmBed Bath & Beyond (BBBY) reports Q2 earnings of 52 cents a share. This is good news. The Street’s consensus was 47 cents; I said 50 cents.
Bed Bath & Beyond Inc. today reported net earnings of $.52 per diluted share ($135.5 million) in the fiscal second quarter ended August 29, 2009, an increase of approximately 13.0% over net earnings of $.46 per diluted share ($119.3 million) in the same quarter a year ago. Net sales for the fiscal second quarter of 2009 were approximately $1.915 billion, an increase of approximately 3.3% from net sales of approximately $1.854 billion reported in the fiscal second quarter of 2008. Comparable store sales in the fiscal second quarter of 2009 decreased by approximately 0.6%.
For the fiscal first half ended August 29, 2009, the Company reported net earnings of $.86 per diluted share ($222.7 million), an increase of approximately 13.2% over net earnings of $.76 per diluted share ($196.0 million) in the corresponding period a year ago. Net sales for the fiscal first half of 2009 were approximately $3.609 billion, an increase of approximately 3.1% from net sales of approximately $3.502 billion in the corresponding period a year ago. Comparable store sales for the fiscal first half of 2009 decreased by approximately 1.1%.Here are the earnings results going back a few years:
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 Feb-07 $1,994,987 $862,982 $309,895 $205,842 $0.72 May-07 $1,553,293 $646,109 $154,391 $104,647 $0.38 Aug-07 $1,767,716 $732,158 $211,037 $147,008 $0.55 Nov-07 $1,794,747 $747,866 $203,152 $138,232 $0.52 Feb-08 $1,933,186 $799,098 $259,442 $172,921 $0.66 May-08 $1,648,491 $656,000 $118,819 $76,777 $0.30 Aug-08 $1,853,892 $739,321 $187,421 $119,268 $0.46 Nov-08 $1,782,683 $692,857 $136,374 $87,700 $0.34 Feb-09 $1,923,274 $785,058 $231,282 $141,378 $0.55 May-09 $1,694,340 $666,818 $142,304 $87,172 $0.34 Aug-09 $1,914,909 $773,393 $222,031 $135,531 $0.52 -
Imagine If Lehman Brothers Had a Football Team
Eddy Elfenbein, September 23rd, 2009 at 3:02 pmLately it’s been all the rage to complain about companies that are too big to fail. However, there’s another prominent American institution that’s also become too big to fail. It’s bloated, overstaffed and often fails to meet the most basic need of its customers.
Welcome to American higher education.
More Americans are wising up to the fact that college is a big fat waste of money. Sure, if you’re lucky enough, and smart enough, get into a big-name school, college is just fine. But for millions of other students, a four-year degree often puts them in a mountain of debt and doesn’t give them the skills they need in the job market.
First, let’s consider how long it takes many students to finish college. Even after six years, only 54% of college students even get a degree. For high-school students in the bottom 40% of their class and who go to a four-year college, an amazing two-thirds hadn’t earned a diploma after eight-and-a-half years. Sheesh, that’s worse than Bluto! I can’t think of another industry that has such a dismal record.
David Leonhardt recently wrote at the New York Times: “At its top levels, the American system of higher education may be the best in the world. Yet in terms of its core mission—turning teenagers into educated college graduates—much of the system is simply failing.” He’s exactly right.
Still, tuition costs continue to skyrocket. Between 1982 and 2007, tuition and fees rose 439% compared with just 147% for median family income. The trend shows no sign of stopping. One year at Yale now goes for $47,500. The University of Florida system wants to raise tuition by 15%, the maximum allowed.
Much like the housing bubble, the Higher Ed bubble is being driven by cheap, government supported credit. The problem is compounded by the fact that hugely important financial decisions are placed on the backs of 19-year-olds, many of whom simply don’t have the life experience to weigh the implications of a gigantic, 20-year debt load. Heck, at least the irresponsible mortgage borrowers during the crazy days were adults (even though many acted like infants).
One report shows that students from lower-income families need to pay 40% of their family income to enroll in a public four-year college. That’s a lot of coin to have some Marxist feminist theorist tell you about atavistic nature of late-stage capitalism. Please, you can watch the Oscars to learn that. Don’t think community colleges are a bargain, either. The average tuition is up to 49% of the poorest families’ median income from 40% in 1999-2000.
The pro-college crowd likes to repeat the claim that college grads earn $1 million more, on average, over their working lifetime. Sure, this is true, but college grads start out in a big hole. On average, they don’t even catch up to high school grads until age 33.
The debt load piled on students is scandalous. One in five students who graduated in the 1992–93 school with over $15,000 in debt defaulted on his or her loan within 10 years of graduation. We’re setting young people up for failure and ruin credit records. Thanks to the recession defaults are up 43% over the last two years. Many students go to grad school and pile on even more debt. The average law grad owes $100,000. Plus, many schools often use grad students as greatly underpaid professors in order to cut costs. Think of Lehman Brothers. Now imagine if they had a football team.
The loans fall especially hard on minorities since colleges love to boast their “diversity.” For African-American students, the overall default rate is more than one-third. That’s five times higher than white students and over nine times higher than Asian students.
What makes things even worse for many colleges is that the recent bear market put the squeeze on their endowments. Harvard’s endowment dropped by $11 billion and they announced they’re laying off 25% of their investment staff. Cornell’s endowment plunged 27% in the final six months of 2008. Yale lost $5.9 billion, or one-fourth its value. Lower endowments means…you guessed it, higher tuition.
School financing has exploded in recent years, doubling in just ten years. Total student debt now stands at over half a trillion dollars. The average borrow took out a loan worth $19,200. That’s a 58% jump since 1993.
Naturally, the government is set to make a bad situation worse. Last week, the House of Representatives voted to elbow Sallie Mae (SLM) out of the student loan biz and shift all student loans to a government-run, taxpayer financed system. So instead of government subsidized loans run through banks to students, we’ll now have a government monopoly. Hmmm…what could possibly go wrong?
I got a better idea. It’s a real simple government program. I call it, “Dude, you really shouldn’t be going to college.” Best of all, the program is very cheap. The costs are solely a postcard and my consulting fee. If don’t want to listen to me, fine, then listen to the folks at the ACT who say that only 23% of students have the skills to do well in college.
The good news is that Americans are catching on to the college scam. Admissions applications are dropping at elite school. Applications are off by 20% at Williams College. Middlebury saw a 12% decline and Swarthmore had a 10% drop. I believe this is just the beginning.
The reason I’m so confident is that these are boom times for the for-profit education sector. Long derided as diploma mills, these companies are raking it. Already this decade, shares of Strayer Education (STRA) are up over 1,000% and shares of ITT Educational Services (ESI) are up over 1,300%.
Business is so strong that the schools are having difficulty even making earnings estimates. In January, ESI issued 2009 EPS guidance of $6.25 to $6.45 which well above the Street’s view of $5.73. Since then, the company raised guidance three times. The current EPS range is now $7.55 to $7.85. In other worlds, no bailouts needed here.
These schools are ideal for older students who are attending school on their own initiative instead of doing what their parents expect. Many of the schools have comprehensive programs but students often go there to take a few courses to round out their job qualifications. Businesses also like to use the schools for employee training. The graduation rates tend to be high and the default rates are low (though still not ideal as some members of Congress have noted).
I also like the fact that the school has an efficient business mode. Operating margins tend to be high and they businesses don’t drain capital.
Look at the success of a company like Lincoln Educational Services (LINC). A few weeks ago, Lincoln reported blowout Q2 earnings. Check out these digits. Revenue rose 51% and earnings-per-share jumped an astounding 440%. The company netted 27 cents a share which schooled the Street’s consensus of 19 cents a share. On top of that, Lincoln boosted its full-year EPS guidance to a range between $1.40 and $1.45 from their prior range of $1.25 to $1.30. Who’s laughing at the diploma mill now?
Lincoln is hardly alone. Last month, Corinthian Colleges (COCO) issued 2010 EPS guidance of $1.30 to $1.36 which was well above the Street’s view of $1.14. If COCO hits their range, then we’re talking about a growth rate of over 50%.
The big kid on the block is Apollo Group (APOL) owner of the University of Phoenix which has more than 200 campuses and over 400,000 students. Apollo has a market cap of $10 billion and it’s one of the two for-profit ed stocks in the S&P 500 (DeVry being the other). The shares have vaulted nearly 100-fold since the IPO 15 years ago. Apollo is doing more than any bureaucrat to reshape the landscape of American higher education. Make no mistake how serious they are. Three years ago, the company shelled out $150 million to turn the home of the Arizona Cardinals into the University of Phoenix stadium.
The for-profit sector still contains many risks. Loan defaults rates are a problem which doesn’t look so good considering the schools have healthy operating margins. The industry was dreading a recent GAO report which turned out to be milder than expected.
Of all the for-profit schools, I think Lincoln Educational Services offers the best value right now. The company just gave a big earnings boost and the shares are now going for about 12 times 2010’s forecast. Strayer, on the other hand, is the one to avoid. The stock is up to 23 times next year’s consensus. For a school stock, that’s not very smart.
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The Fed’s Statement
Eddy Elfenbein, September 23rd, 2009 at 2:27 pmYawn.
Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.
In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen. -
The Swine Flu Index
Eddy Elfenbein, September 23rd, 2009 at 10:13 amIt had to happen sooner or later:
Rather than reaching for rubber gloves and face masks for protection, some investors are trying to expose their portfolios to the swine flu.
As governments brace to see if the H1N1 flu strain, better known as swine flu, worsens, investors are looking for companies that might profit from the pandemic.
“Investors can make money and avoid losses when it comes to swine flu,” says Jason Kantor, analyst at RBC Capital. “The secret is to own companies that will benefit directly regardless of (the outbreak’s) severity.”
That includes companies that:
•Produce mainstream flu treatments. Perhaps the most straightforward way to invest in swine flu is through companies that make popular mainstream drugs that fight viral infections.
GlaxoSmithKline’s (GSK) Relenza and Gilead Sciences (GILD)’ co-developed Tamiflu are two of the most commonly used to combat swine flu symptoms, says analyst Jason Kolbert of ThinkEquity. Gilead gets a roughly 20% royalty from Tamiflu sales from Roche, which makes and sells the product.
Gilead stands to benefit if the regular flu this year is worse than expected, Kolbert says, and also benefits if the H1N1 flu is more virulent than forecast. It’s a highly profitable licensing arrangement, Kantor says. Gilead is expected to reap $200 million in sales from Tamiflu in 2010. GlaxoSmithKline and Novartis could benefit, too, since they make seasonal flu vaccines, he says.
•Develop vaccines targeted to swine flu. BioCryst (BCRX) is working on the antiviral agent peramivir, which may be more appropriate for H1N1 due to its greater potency, says analyst Joe Schwartz of Leerink Swann. If H1N1 is more serious than thought, this treatment may be more popular. Plus, the drug is more important economically to BioCryst than Tamiflu is to Gilead. Monday, BioCryst got $77.2 million more in funding from the U.S. Department of Health and received a request for information about potentially stocking the treatment.
Other smaller firms working on H1N1 vaccines include Novavax (NVAX) and Vical (VICL), Kolbert says. If those vaccines pan out, they could be more meaningful than Tamiflu is to Gilead at 5% of revenue, Schwartz says. Meanwhile, large French drugmaker Sanofi-Aventis (SNY) said Monday that it received an additional order from the U.S. for H1N1 vaccine, bringing the total order to 75.3 million doses. And Monday, the U.S. ordered more nasal-spray vaccine from AstraZeneca’s (AZN) MedImmune.
But there’s reason to be skeptical. Previous scares, such as mad cow disease and avian flu, only gave stocks a short-term boost until the hysteria faded. “The concern is H1N1 gets worse. That’s the unknown,” Schwartz says. “It has that potential, but that’s far from a certainty.” -
AP: Hedge fund sells part of its New York Times stock
Eddy Elfenbein, September 22nd, 2009 at 10:59 amHarbinger Capital Partners LLC says it has sold part of its 20 percent stake in The New York Times Co., but still considers the company a core holding.
The hedge fund said in a securities filing this week that it sold 5 million Times shares at $8.25 each. That leaves it with about 23.5 million shares, or a 16.4 percent stake in the company.
Fund spokesman Charles V. Zehren says the media company “is still a core holding, and the sale was done to take advantage of the strength in the market.”
The New York Times Co. publishes The Boston Globe, the International Herald Tribune and 15 other dailies along with its flagship newspaper.
Its shares rose 36 cents, or 4.4 percent, to $8.52 in morning trading. -
FactSet Guides Higher
Eddy Elfenbein, September 22nd, 2009 at 10:37 amFactSet Research Systems (FDS) reported fiscal fourth-quarter earnings this morning. For the June through August period, the company earned 74 cents a share compared with 67 cents last year. That matched Wall Street’s estimate. Revenue rose 1% to $155 million which slightly better than estimates.
Here are some highlights of the quarter listed by the company:* Client count was 2,045 at August 31, 2009, a net increase of 12 clients during the quarter.
* Professionals using FactSet increased to 37,300, up 200 users.
* Portfolio Analytics (“PA”) 2.0 was deployed by 647 clients representing 5,640 users. PA users increased by 40 during the quarter, while the number of PA clients remained the same as the previous quarter.
* Annual client retention rate was greater than 95% of ASV and 87% of clients.
* Employee count at August 31, 2009 was 2,962, up 412 employees during the quarter.
* Common shares outstanding at August 31, 2009 were 46.7 million. The Company repurchased 594,600 shares during the quarter and $102 million remains authorized for future repurchases.For their first quarter, FactSet sees EPS ranging between 73 and 75 cents which is higher than the Street’s consensus of 71 cents. The shares have been up as much as 10% to a new 52-week high.
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Oh Becky
Eddy Elfenbein, September 22nd, 2009 at 10:21 am
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