Archive for August, 2010

• Medtronic Falls on Lower Guidance
  Eddy Elfenbein, August 24th, 2010 at 10:32 am

  Shares of the Medtronic (MDT) are getting bashed this morning after the company lowered its earnings guidance for fiscal 2011. In my opinion, the market is overeacting but of course, that’s what markets do.
  Here are the facts. Medtronic earlier said to expect EPS for FY 2011 (which ends in April 2011) to range between $3.45 and $3.55 with revenue growth ranging between 5% and 8%. Now they’ve lowered that to a range of $3.40 and $3.48, with revenue growing between 2% and 5%.
  If we take the midpoints of the EPS forecasts, then the downward revision is just 1.7%. The shares, however, have been down by as much as 11.5% today. I am concerned that one lowered forecast often leads to another (and another and another….).
  Still, let’s not get ahead of ourselves. Medtronic just reported pretty good earnings for their fiscal Q1 of 80 cents per share. That hit the Street’s forecast on the nose. In June, the company said to expect EPS between 79 and 81 cents which at the time was lower than the Street’s view of 84 cents per share.
  With today’s earnings, MDT technically earned 76 cents per share plus there were four cents per share in charges. Revenue fell by 4% to $3.77 billion but some of that was due to currency conversion. I don’t worry so much about variables that are out of the company’s hands.
  What’s causing Medtronic’s problem? CEO Bill Hawkins said, “Although we have experienced a slowdown in the markets of our largest businesses, the investments we are making in emerging markets and emerging therapies will allow us to achieve market-leading performance over the long-term.”
  The AP notes:

  The world’s largest medical-device company said global sales for its Cardiac and Vascular Group fell 5 percent to $2.03 billion in the quarter. Those sales actually increased 1 percent when adjusted for foreign currency and the extra week last year.
  Spinal revenue dropped 9 percent to $829 million due to growing pricing pressures and weaker procedure growth, the company said.
  Spinal devices make up Medtronic’s second-largest franchise. Medtronic spent nearly $4 billion to acquire spinal implant maker Kyphon in 2007, though many analysts say the unit is not living up to expectations.

  If you own MDT, I know today’s news seems very bad, but the stock is still a very attractive buy. With today’s downturn, MDT is going for about nine times the lower bound of the revised forecast. Plus, the dividend yield is up to 2.9%.
  Here are the sales and earnings numbers going back a few quarters:

  Quarter	EPS	Sales in Millions
  Jul-01	$0.28	$1,456
  Oct-01	$0.29	$1,571
  Jan-02	$0.30	$1,592
  Apr-02	$0.34	$1,792
  Jul-02	$0.32	$1,714
  Oct-02	$0.34	$1,891
  Jan-03	$0.35	$1,913
  Apr-03	$0.40	$2,148
  Jul-03	$0.37	$2,064
  Oct-03	$0.39	$2,164
  Jan-04	$0.40	$2,194
  Apr-04	$0.48	$2,665
  Jul-04	$0.43	$2,346
  Oct-04	$0.44	$2,400
  Jan-05	$0.46	$2,531
  Apr-05	$0.53	$2,778
  Jul-05	$0.50	$2,690
  Oct-05	$0.54	$2,765
  Jan-06	$0.55	$2,770
  Apr-06	$0.62	$3,067
  Jul-06	$0.55	$2,897
  Oct-06	$0.59	$3,075
  Jan-07	$0.61	$3,048
  Apr-07	$0.66	$3,280
  Jul-07	$0.62	$3,127
  Oct-07	$0.58	$3,124
  Jan-08	$0.63	$3,405
  Apr-08	$0.78	$3,860
  Jul-08	$0.72	$3,706
  Oct-08	$0.67	$3,570
  Jan-09	$0.71	$3,494
  Apr-09	$0.78	$3,830
  Jul-09	$0.79	$3,933
  Oct-09	$0.77	$3,838
  Jan-10	$0.77	$3,851
  Apr-10	$0.90	$4,196
  Jul-10	$0.80	$3,733

• Pujols and the Triple Crown
  Eddy Elfenbein, August 24th, 2010 at 9:56 am

  Last night, Albert Pujols went three-for-four; he hit a single, a double and a three-run home run which was the 399th of his career.
  Pujols now leads the National League with 33 home runs, 92 runs batted in, and he’s third in batting average at .319. Pujols trails only Joey Votto (.323) and Martin Prado (.320). In 18 games this August, Pujols is hitting .425 with nine home runs and 20 RBI.
  All this means that Pujols has a good chance of becoming the first major leaguer to win the Triple Crown since Carl Yastrzemski in 1967. In fact, no one has really come close since then. In all that time, perhaps the next closest is Joey Votto this year who, as mentioned, is leading the league in batting, and he’s second in RBI and third in home runs.
  Even if Pujols win the Triple Crown, there’s a good chance that Votto might edge him out for MVP. Votto’s Reds are currently 2.5 games head of Pujols’ Cardinals in the NL Central.
  In my book, Hank Aaron is still the home run king. When he does hit his next home run, Pujols will be the third youngest to 400. I’ll be strongly rooting for him to get to 756.

• The War for Potash
  Eddy Elfenbein, August 23rd, 2010 at 10:39 am

  If it’s Monday and it’s 2010, then the market is probably up and wouldn’t you know it, it is! Right now, 19 of our 20 Buy List stocks are trading higher and Nicholas Financial (NICK) is unchanged with just 100 shares traded. Once again, the cyclical stocks are trailing the overall market. I think that’s going to be a major theme going forward.
  The big news today is that Potash (POT) has officially rejected the $39 billion buyout bid it got from BHP Billiton (BHP) last week. Now Potash is looking around for a “white knight” to rescue them, but it won’t be easy. Billiton’s bid is $130 per share which is pretty rich. The Street expects Potash to make $5.50 per share this year, so the BHP bid is 23.6 times that. Plus, you know the old saying, “$39 billion in hand is better than nothing in the bush.” Interesting tidbit: In any deal, Potash’s CEO will walk away a cool half billion. That’s not bad for saying “yes.’
  What will Potash do? Beats me. Maybe some private equity guys will link up. Maybe the Chinese. Maybe the Brazilians. It’s an open game. I also think Billiton will up their bid just to play nice because they may go hostile.
  Honestly, I’m not so interested in who will win but who’s willing to play. I still think that the bond market has far outrun the stock market so we should be seeing more aggressive plays like this. The Potash bid is good for the market and I’d like to see some more players join in.
  We saw almost the exact same story three years ago when Billiton went after Rio Tinto (RTP), who had just snagged Alcan. Rio shot down the offer so BHP went hostile. Soon after, the world economy exploded and Billiton threw in the towel. When BHP first made the offer in November 2007, shares of Rio surged from $84 to $103. Today, Rio is at $52. Ouch!

• Another Down Friday
  Eddy Elfenbein, August 20th, 2010 at 1:02 pm

  The market is down again on a Friday which has been the trend this year. And once again, the cyclical stocks are leading us lower.
  Every so often I like to look at ratio of the Morgan Stanley Cyclical Index (^CYC) divided by the S&P 500. This is a quick-and-dirty way of telling us where we are—or at least where the market thinks we are—in the economic cycle.
  As you might expect, this ratio often moves in a cycle. Cyclical stocks tend to lead the market up out of a recession and conversely, lead us lower at the beginning of a recession.
  I’ve said before that cyclical stocks, as a whole, probably aren’t a good place to be right now. This graph of the ratio shows how elevated the ratio is:
  
  You can also see how dramatic the ninth-month period was from September 2008 to August 2009. The ratio closed at an all-time high of 0.803 on April 26 of this year, exactly one session after the market’s highest close in nearly two years. Since then, the S&P 500 has given back about 12% while the CYC is off by more than 16.5%. Although I think the broad market will recover, I still believe that cyclical stocks will be laggards.

• Jos. A Bank Clothiers Split 3-for-2
  Eddy Elfenbein, August 19th, 2010 at 6:27 pm

  There’s one small housekeeping announcement. Jos. A Bank Clothiers (JOSB) split 3-for-2 today.
  For tracking purposes, I assume the Buy List is a $1 million portfolio starting on January 1 of each year. That means all 20 stocks are equal positions of $50,000 each. On January 1, our position on JOSB was 1,185.115 shares at the buy price of $42.19.
  With the 3-for-2 split, our JOSB position is 1,777.6725 shares at a starting price of $28.1267.

• Is There a Bond Bubble?
  Eddy Elfenbein, August 19th, 2010 at 12:40 pm

  Lately, there’s been a lot of talk among financial bloggers of a Bond Bubble. There very well could be but the key question is, a bubble relative to what?
  Compared with stocks, yes, I think bond yields are far too low. My hope is that stocks will rise to bring the two into better balance. You can think of investing as a perpetual battle between stocks and bonds. Is it better to raise money by borrowing, or taking on new partners? Understanding that key fact is to see how the market works.
  The plus of borrowing is that when you’re done renting someone else’s money, it’s over. Taking on new partners never goes away unless you by them out. The negative of borrowing is that you have to pay interest, so whatever you sell, a few pennies in price goes towards paying interest. The positive of equity financing is that there’s no up-front cost.
  Right now, I believe bond yields are very, very low, even adjusting for inflation. Just look at the TIPs yield curve.
  
  The TIP coming due in July 2010 currently yields just 1% over inflation (or rather, over the CPI). In my opinion, that’s awful.
  I don’t, however, believe that bond yields will plummet like dot-com stocks did 10 years ago. Rather, I think investors are unduly fond of the security of Treasury bonds. Sure, they’re safe but that safety comes at a price. One percent real yield for 10 years is too rich for me. The good news is that our massive debt can be financed rather cheaply.

• Intel Buys McAfee for $7.7 Billion in Cash
  Eddy Elfenbein, August 19th, 2010 at 11:39 am

  The stock market is down again today, but the big news is that Intel (INTC) is buying McAfee (MFE) for $7.7 billion in cash. In my opinion, this is an awful move. There are so many better uses for that money, like dividends, rather than an acquisition. According to Yahoo Finance, Intel has $18.3 billion in cash which translate to $3.29 per share.

  The boards of both companies have unanimously approved the deal, but it’s still pending McAfee shareholder and regulatory approval. Intel said that the deal “reflects that security is now a fundamental component of online computing.” Intel went on to say that security is now just as important to the company as energy efficiency and internet connectivity.

  Sure, I don’t doubt how important security is but Intel is paying a gigantic premium. The acquisition price is $48 per share which is a 60% premium over the closing price from yesterday. Think of it this way: MFE was trading at 10.5 times next year’s earnings. Now it’s trading at close to 17 times next year’s earnings.

  McAfee will become a wholly owned subsidiary of Intel, and will report to its Software and Services Group. Both companies are based in Santa Clara, Calif. Founded in 1987, McAfee has some 6,100 employees, and saw $2 billion in 2009 revenue , making it the world’s largest security company.
  Intel will benefit from McAfee’s entrenched position in the security field, and McAfee may be able to optimize its notoriously performance-hungry software now that it’s a part of the company that provides the CPUs to many computers.
  Intel recently announced its best quarter ever with $2.9 billion in profit, thanks to an influx of delayed computer purchases by businesses.

  Despite all press a mega-deal gets, they rarely work out. At best, they’re a wash. At worst, both firms are hurt. The problem is that deals often look good on paper, but the actual merging of two companies is very hard. There are two cultures, two ways of doing things and two histories. That isn’t given up so easily.
  What it comes down to is that I think executives like to lead large organizations. They see “large size” as translating to “good for shareholders.”
  I think smaller “fold-in” mergers can work very well, but beyond a certain size, you’re asking for trouble. The frustrating part is that Intel looked so attractive here with lots of cash and a low valuation.

• Lilly’s Dividend Is Holding Strong
  Eddy Elfenbein, August 17th, 2010 at 10:07 am

  This hasn’t been a very good year for Eli Lilly (LLY). The shares are down again today on news that it will halt development of semagacestat, a potential Alzheimer’s treatment.
  The preliminary tests just weren’t working out. Lilly said that this will result in a Q3 charge of three to four cents per share. That’s bad but not awful.Lilly confirmed its previous 2010 earnings per share guidance range of $4.44 to $4.59 on a reported basis, or $4.50 to $4.65 on a non-GAAP basis (consensus is for $4.61).
  As rough as this year has been, Daniel Lee notes that one bright spot has been the stock’s dividend. Lilly currently pays out a 49-cent dividend. That comes to $1.96 per share per share. At the current price of $34.72, Lilly yields 5.6% which is well more than double the 10-year T-bond yield. Lilly has also paid a dividend for the last 125 years.

• The CRA Didn’t Cause of the Crisis
  Eddy Elfenbein, August 17th, 2010 at 9:17 am

  Eric Falkenstein argues that the Community Reinvestment Act didn’t cause the financial crisis but the mindset driving it sure did:

  The zeitgeist suggested that lowering underwriting criteria for homeowners was costless, turn renters with their various social and economic deficiencies into homeowners with their various social and economic proficiencies, and be morally just. The mindset that underlay the CRA, not the CRA itself, caused the housing crisis. The CRA was joined by the Fair Housing Act and other explicit legislation. The regulators from the OFHEO, OCC, FDIC, SEC, and Federal Reserve were all on board with the tactics consistent with the strategy, meaning that bankers weren’t criticized for lowering their standards in regards to home lending, but rather congratulated. The US Department of Housing and Urban Development, and Department of Justice had similar objectives and initiatives to those in the CRA. The CRA, in this context, was unnecessary.

  That mindset hasn’t gone away. If anything, it’s now spread to education financing.

• Math Nerds Have Taken Over the Bond Market
  Eddy Elfenbein, August 16th, 2010 at 3:58 pm

  The 10-year T-bond just broke below the mathematical constant e — 2.719.
  The 30-year is closing in on pi — 3.142.
  The 5-year is now below phi — 1.618.
  This alignment is unprecedented! Do you have any IDEA WHAT THIS MEANS???
  Seriously, do you? Cause I sure as hell don’t.