Freeze your Credit,iPhone Security, WSJ, Peridot Capitalist
– A way for you to almost guarantee someone cannot open credit in your name.
– If Apple (AAPL) is going to tout its iPhone as the mobile internet, why did they do this?
– Another thank you to the Wall St. Journal for the mention yesterday.
– Welcome Chad Brand and his fine newsletter to the fold.
Hard to come up with anything really positive on this one other than “at least it wasn’t worse”.
Dow Chemical (DOW), unlike DuPont (DD) earlier this week posted earnings that impressed no one. It was not a disaster but shareholders are not dancing either this morning. After DuPont reported increased earnings and raised full year guidance, expectations for Dow were elevated. DuPont got significant contributions from its agricultural division and Dow’s did see dramatic improvement of EBIT of $65 million ($15 million after acquisition charges) up from $0 last year but like I said yesterday, this segment is not yet large enough to carry the day for Dow like DuPont’s is for them. Soon enough…
Profits fell dramatically in the Q3 due to changes in German tax laws, higher domestic tax rates and R&D charges. Despite sales increasing to $13.59 billion from $12.36 billion last year, Dow posted net income after paying preferred dividends of $403 million, or 42 cents per share, compared with a year-earlier profit of $512 million, or 53 cents per share. Dragging Q3 results was a provision for income taxes of $659 million, 5 times larger than the $137 million put aside last year. Excluding items, Dow reported profit of 84 cents per share.
The area I was most interested in was the equity earnings and even there the news was less than encouraging as earnings for Q3 were $296 million – down compared with the record $317 million posted in the same period last year.
There was some good news as Dow reported price increases in every geographic area and across all operating segments, outpacing an increase of almost $400 million in feedstock and energy costs.
Even Dow CEO Andrew Liveris was less than enthusiastic in his comments saying, “Global economic conditions remain reasonably healthy, even though there may be some concerns about the resilience of the U.S. economy going forward.” He continued “This was another sound quarter for Dow. We posted record quarterly sales with substantial growth in Europe, Asia Pacific and Latin America; we achieved solid price increases across every business and in every geographic region; we saw strong volume improvements in all but one of our operating segments; and our equity earnings were once again outstanding.”
Equity results were good, not outstanding. Outstanding would have been an increase over last year.
Sales are at record levels but feedstock costs are mitigating that. Dow is in the process of moving production to areas where these costs are a fraction of where they are now but that will take time. It will happen and the end results will be fantastic, but until then we have to wait. One good thing about buying shares this cheap now is that there isn’t really anywhere for them to go down unless the wheels completely fall off, which is unlikely. Any good news will cause an immediate jump..
Dow is transitioning and doing a great job at it and shareholder need to expect quarters like this every so often. My outlook has not changed long term.
The call today will be interesting…
The comparisons have been rampant about Warren Buffett’s Berkshire Hathaway (BRK.A) and Eddie Lampert’s Sears Holdings (SHLD). Let’s look and rather than comparing the 42 year old Berkshire with the 2 year old Sears in both their current states, let’s look at Berkshire’s beginnings and take an apples to apples approach when making the comparison.
First things first. This is not a “who is better” look between Buffett and Lampert but a look at the beginning of both businesses and the investment by both owners. Most people do not know about Berkshire’s beginnings and if we are going to make the comparison, we need to look back at Warren early experiences so that we can look at Lampert’s and draw honest conclusions. One cannot look at the finished product of Berkshire and then look at Sears Holdings, still in its infancy and draw any meaningful comparison. Doing that is a bit like one neighbor with a kid in kindergarten contrasting their child to the neighbors child, a 27 year old doctor and making an effort to discern their own child’s future from that. Can’t be done.
Given the recent stock slide of Sears Holdings from $190 to $130, many people have jumped ship on Lampert and given up on Sears and their Chairman. Gone now are the Buffett comparisons and the doubters have surfaced. However, if one looks at the history of Berkshire one also sees dramatic price drops. In 1973-74 the stock dropped from $90 to $40 a share. After the ’87 stock crash it fell from $4,000 to $3,000. In 1990-91 it fell from $8,900 to $5,500 and from mid-1998 to 2000 the stock slid from $80,000 to $40,800. A drop in the share price of the has very little to do with the ability of either Buffett or Lampert to do what they so best. As a matter of fact at the turn of the century, Buffett was deluged with doubters who said he was “out of touch” and did not understand the “new paradigm” of business. I think we all know how that turned out.
If we look closer at the beginnings, Berkshire was bought by Warren is 1965 for about $16 a share and, according to Buffett “had no net cash”. In fact, according to Buffett in the previous 10 years, the business had earned “less than nothing”. After two years of ownership (the same time period Lampert has owned Sears) shares fetched between $17 and $21 in 1967, virtually flat. Sears, shares conversely have gone from $50 when the deal was announced to the $130 they sit at today. At the end of the 4th year Buffett owned Berkshire it traded between $32 and $39 a share.
Earnings:
In 1965 and 1966 Berkshire was profitable but in 1967 saw a dramatic downturn in earnings and at that point Buffett used Berkshire cash and acquired National Indemnity Insurance in the spring of 1967. It was an attempt by him to level out the cyclical earnings of the textile industry and Buffett thought the insurance float would provide a buffer for the erratic textile operations. Soon after that was See’s Candy, Wesco, Illinois National Bank ans Sun Newspapers.
When Lampert acquired Sears it had lost almost $5 billion the previous 4 years and since he took over it has earned about $3.7 billion in just two and a half years and more importantly produces near $2 billion a year in cash for Lampert to invest in the business (that number will clearly be down this year due to the retail environment).
Lampert doubters will point to this years profit decline as their proof what he is doing at Sears is not working. However, if one looks at Berkshire in the last decade, one will see earnings large declines in 1999, 2001 and 2004 due to a challenging insurance environment. With retailers like Target (TGT), Home Depot (HD), Lowes (LOW), Macy’s (M) and JC Penney (JCP)all lowering expectations recently, 2007 has
shaped up to be a similar environment for retailers. An earnings decline is not proof what he is not doing is not working nor is the Berkshire declines in those years meant to absolve any issues at Sears but it is meant to illustrate that not all earning go up in perpetuity and a bad year does not mean disaster. What Berkshire fans always point to is the cash available for Buffett to use for investment in years that earnings suffer. Lampert devotees point to the same metric and how it is being used. Sears is so young compared to Berkshire that Lampert followers currently are focused on his use of that cash within Sears (repurchases, debt reduction, IT investment) and how those actions will maximize its production later on.
Shares:
Like Buffett in his early Berkshire years Lampert is using weakness to buy more shares. Buffett began buying Berkshire shares in 1962 and took control in 1965. He kept buying in 1965 until he had 70% of Berkshire shares and did not become chairman until 1970. Lampert first bough Sears in 2004 and 2005 and has kept buying and estimates are that he control almost 60% of Sears shares after the current buyback is done. Sound familiar?
The business:
Buffett was very judicious in his use of Berkshire’s cash in the early years just as Lampert has been with Sears. Unlike Berkshire, Sears is in a business that will continue to earn Lampert money and produce large amount of cash and will not eventually be forced to close like Berkshire was in 1985 (the textile mill). That being said Lampert, also unlike Buffett is sitting on a fortune in real estate in Sears Holdings and also billions of dollars in licensing fees from the valuable Craftsman and Kenmore should he opt to monetize them. Just because he has not, doesn’t mean he won’t, that is where the “value” lies.
Track Record:
Both Buffett and Lampert ran private investment operations before the big acquisition. Both had track records that trounced the markets as a whole and made themselves and investor very wealthy. Both were long term value investors who kept their thoughts close to the vest and invested with a time frame unlike their peers. Both experienced difficulties in the early years of their ownership of the business and used that difficulty to increase their ownership in that business.
In short, Sears is a better “business” than Berkshire was in 1965, what remains to be seen is what Lampert’s next move will be with that business. I do not think anyone has ever got very rich betting against either Buffett or Lampert.
Why start trying now?
Some more notes from day one of Wal-Mart’s (WMT) analyst meeting on Tuesday. Not exactly what I was looking for.
Wal-Mart stated it will keep capex at its current level of approximately $15 billion a year but that there would be a shift in that spending to its international division. By January 2010, over 40% of its spending on new stores will be internationally, up from less than 30% currently. Wal-Mart’s international sales currently account for almost 25% of its revenues, with about 40% of that coming from the UK’s Asda supermarkets.
The expenditures should add almost 30 million additional square feet to the international store base during its fiscal year ending in January 2010, some 50% more than the additional 20 million sq ft forecast for the current year.
Regarding the announced Japanese investment Wal-Mart addmitted, “it is going to be a while” before Wal-Mart can turn Seiyu around, but that they expected “significant progress” in the coming three to five years. Another area that was stressed was the potential of India, where Wal-Mart is expected to open its first wholesale market with Bharti next year.
They also acknowledged investors were concerned “about trading-off high returns at Wal-Mart US, for lower returns at Wal-Mart international”, but argued for the a balance between long and short term thinking. “We have to be making these investments for the long-term health of the business,”.
Sales and profits are surging internationally for Wal-Mart and the redirection of funds is long overdue. Wal-Mart is a cash cow and smart use of those funds could make shareholders very happy. Buying back shares by the truck load would have been a big step in the right direction. Pushing internationally is the right thing to do but if we are going to do it, then lets go. The “Best of Both Worlds” scenario would have been a cut to $12 billion in capex with 60% of that going overseas and the $3 billion savings going to additional share repurchases.
This is kind of a taking the band-aid off slowly approach… that does not make anyone happy..
YUM! Brands (YUM) Taco Bell chain has a World Series promotion that was talked about all throughout the game last night.
If a player steals a base during the World Series, American’s can go to Taco Bell on Oct. 30th from 2-5 pm and receive a free Taco. It is a great idea and the best part of the promotion was the constant chatter about it during the game. There was actually a hysterical exchange caught between Coco Crisp and Royce Clayton as they attempted to explain the intricacies (there aren’t any) of the promotion to each other on the Boston bench. If anyone can find it on YouTube, please send it to me, it was priceless.
In a gamer that was a blowout after the 5th inning, there wasn’t interesting for the announcers to talk about and they filled much of the time dreaming and chatting about taco’s.
YUM is getting every pennies worth out of this one.
UPGRADES
Riverbed Technology RVBD Collins Stewart Market Perform » Buy
Western Union WU DA Davidson Neutral » Buy
BTU Int’l BTUI Needham & Co Hold » Buy
Novellus NVLS Needham & Co Hold » Buy
QLogic QLGC Caris & Company Average » Above Average
Amgen AMGN Credit Suisse Neutral » Outperform
Symmetricom SYMM Cantor Fitzgerald Hold » Buy
Weatherford WFT Credit Suisse Neutral » Outperform
Dominion D Credit Suisse Neutral » Outperform
Smith Intl SII Calyon Securities Neutral » Add
Vodafone PLC VOD JP Morgan Neutral » Overweight
FirstMerit Corp FMER JP Morgan Underweight » Neutral
QLogic QLGC RBC Capital Mkts Sector Perform » Outperform
Citrix Systems CTXS Friedman Billings Mkt Perform » Outperform
STMicroelectronics STM Robert W. Baird Neutral » Outperform
Pactiv Corp PTV Deutsche Securities Hold » Buy
DOWNGRADES
XM Satellite XMSR Janco Partners Buy » Accumulate
Broadcom BRCM AmTech Research Buy » Sell
Range Resources RRC Friedman Billings Outperform » Mkt Perform
Petrosearch Energy PTSG Friedman Billings Outperform » Mkt Perform
PetroQuest Energy PQ Friedman Billings Outperform » Mkt Perform
Pogo Producing PPP Friedman Billings Outperform » Mkt Perform
Newfield Expl NFX Friedman Billings Outperform » Mkt Perform
Noble Energy NBL Friedman Billings Outperform » Mkt Perform
Mariner Energy ME Friedman Billings Outperform » Mkt Perform
CNX Gas CXG Friedman Billings Outperform » Mkt Perform
Comstock CRK Friedman Billings Outperform » Mkt Perform
Brigham Exploration BEXP Friedman Billings Outperform » Mkt Perform
SAVVIS Comm SVVS Stanford Research Buy » Hold
Trimble Navigation TRMB Needham & Co Buy » Hold
Charles & Colvard CTHR Northland Securities Outperform » Market Perform
C.R. Bard BCR Piper Jaffray Outperform » Market Perform
Prosperity Bancshares PRSP Stifel Nicolaus Buy » Hold
Buffalo Wild Wings BWLD Morgan Keegan Outperform » Mkt Perform
Eli Lilly LLY Cowen & Co Outperform » Neutral
C.R. Bard BCR Bear Stearns Outperform » Peer Perform
Burl Nrth Santa Fe BNI Credit Suisse Outperform » Neutral
Excel Maritime Carriers EXM Oppenheimer Buy » Neutral
Blockbuster BBI JP Morgan Overweight » Neutral
Biogen Idec BIIB HSBC Securities Overweight » Neutral
Wachovia WB Banc of America Sec Buy » NeutraL
Thursday’s Picks
Jeff Macke still likes Yahoo! (YHOO). Open $30.68
Guy Adami recommended Microsoft (MSFT). Open $31.25
Karen Finerman preferred Altria (MO). Open $72.36
Pete Najarian said Manitowoc Company (MTW) is a buy. Open $44.11
Wednesday’s Results
Jeff Macke recommended Microsoft (MSFT). Open $30.90 Close $31.25 GAIN
Guy Adami said Wal-Mart (WMT) was beginning to look interesting after it got hit Tuesday. Open $43.93 Close $43.87 LOSS
Karen Finerman recommended Washington Group (WNG). Open $95.35 Close $92.96 GAIN
Since my tracking began on 6/21 (1-1 means one up pick and one down pick and no results from my vacation weeks). The percentage is the percentage of successful picks
Guy Adami= 35-23 = 61%
John Najarian= 13-4 = 76%
Jeff Macke= 40-31 = 54%
Pete Najarian= 28-24 = 53%
Tim Seymore= 4-3 = 57%
Karen Finerman= 20-12 = 61%
Stacey Briere-Gilbert= 3-0 = 100
Ned Riley= 1-0 = 100%
Carter Worth= 0-1 = 0%
USBE US Bioenergy Corp 6.31
USAK USA Truck Inc 13.96
UPFC United Panam Financial Cp 6.46
UIS Unisys Corporation 5.90
TUES Tuesday Morning Corp 7.12
TSCO Tractor Supply Co 43.74
TRID Trident Microsystems Inc 13.11
TM Toyota Motor Corp 104.97
TLB The Talbots, Inc 14.49
RUTH Ruths Chris Steak Hse Inc 13.15
ROX Castle Brands Inc 3.09
RL Polo Ralph Lauren Corp 65.99
RDN Radian Group Inc 12.96
RAD Rite Aid Corporation 3.94
MTB M & T Bk Corp 96.74
MNI McClatchy Newspapers, Inc 16.49
MMPI Meruelo Maddux Proper … 3.87
MGYR Magyar Bancorp Inc 10.20
MGPI Mgp Ingredients Inc 8.50
MER Merrill Lynch & Co., Inc 63.70
MCBI Metrocorp Bancshares Inc 13.68
MBWM Mercantile Bank Corp 19.36
MAXE Max & Ermas Restauran … 4.00
MAR Marriott Intl Inc New 39.61
LVLT Level 3 Communication … 3.03
LUV Southwest Airlines Co. 13.83
DSL Downey Financial Corp … 39.61
DFS Discover Finl Svcs 18.23
CTBK City Bk Lynnwood Wash 22.61
CRFT Craftmade Internation … 9.27
CHRS Charming Shoppes Inc 7.22
CAKE The Cheesecake Factor … 22.11
CACB Cascade Bancorp 18.14
C Citigroup, Inc 41.80
Nothing to do with investing but great to watch. Thanks to Adam for finding it.
Cell Phones, Bloggystyle, Swans, Religion vs Poverty
– This article is just great in describing the monopolistic hold cell phone carries have on our devices.
– Adam Warner is out with his “bloggystyle” post that I enjoy so much…. no mention of the Red Sox?
– Challenging modern thinking is always very interesting
– It looks like religion can help win this battle.
Back in August I urged readers to lock in home heating oil prices or potentially face a huge heating bill this winter. For those who didn’t, the news today is not looking good.
Last week, heating-oil futures hit a record of $2.36 a gallon, up more than 40% since the start of the year.
With weather forecasters predicting a colder winter than last year, despite the unseasonably warm October in the Northeast, heating costs will rise no matter what fuel a homeowner uses. Now, we know we can trust weather forecaster about as much as a crack addict but oil fundamentals are strained currently and ANY disruption to the system will cause prices to rocket even higher.
Consumers who use heating oil will feel the most pain as their winter heating bill for the season according to the US Department of Energy is expected to average $1,785 vs. $891 for households that use natural gas. Unlike crude oil, natural-gas prices have been relatively restrained in the U.S. this year. In fact, it would seem there is a glut of natural gas out there with more coming online as Middle East and Asian operations come online.
The reason? No it is not market manipulation from Exxon (XOM), BP (BP) or Chevron (CVX) or other oil majors, it is Economics 101. Supplies of refined products have become historically tight, due to economic growth in developing countries like China and India. Any extra capacity that existed in the system when heating oil sold for $.90 cents a gallon has been absorbed and in fact several studies have shown it may be at equilibrium meaning supply and demand are equal. The problem here is that supply cannot be increased at the same rate demand is and that means that price have to go up.
Dow Chemical (DOW), whose share are up 9% to date this year and pay a near 4% dividend reports earnings tomorrow. What are we looking for?
-Health of Joint Venture (JV) Strategy:
We are going to be looking at the “equity earnings” to see how well the joint ventures are performing vs last year and what percentage of earnings they represent. To see the current JV’s and understand how to read the earnings of them, please visit here: This will become more important every quarter and in after 2008 this section should take real prominence as the slew of JV’s announced this year begin coming online. Last quarter this segment produced 11% earnings growth and are up 30% year to date.
– Share Repurchases / Dividends / Debt:
Earlier in the summer Dow increased the dividend so do not expect any news on this front (although it would be nice). What is most likely the best use currently would be an acceleration of the share repurchases and decreasing the debt which has fallen $3.5 billion or 30% the past 3 years.
Earnings:
DuPont (DD) reported increased earnings yesterday and that has put the pressure on Dow. Much of DuPont’s increase was due to their strong agribusiness division. Dow, which is expending very aggressively into this area, is not big enough here to allow this divisions expected increase to affect earnings to the same degree as DuPont. That being said the overall analyst estimates are for $.90 cents a share. I would expect Dow to beat that and come in at $.95 to $.96 cents a share.
My feeling s the JV strategy and its contributions is not yet being fully incorporated into estimates. This strategy is a self funding one and its success is allowing Dow to produce about $1 billion a quarter from operations. This has enabled Dow to make the above mention decreases in debt at the same time raising its cash balance to near $4 billion. The debt reduction alone has decreased annual expenses $100 million a year or has added $.10 a share to earnings.
Input costs have skyrockets in this sector in the last year and Dow is in the process of moving operation to areas that raw material are exponentially cheaper. What is important to look for is how these cost are being managed in the short term because in the long term ,we know they will fall dramatically.
Every since Dow canceled it appearance at a meeting last week, rumor have been running rampant. Lehman Brothers (LEH) analyst Sergey Vasnetsov said the announcement might indicate that Dow Chemical is planning a “significant transformation” in the near-term. Vasnetsov noted major moves by companies elsewhere in the sector. PPG Industries Inc. (PPG) purchased SigmaKalon Group, a Dutch paint and coatings producer, and Rohm & Haas Co. (ROH) said it will buy back $2 billion in stock.
“Dow is likely to undergo a significant transformation in the near-term, perhaps using the recent PPG and Rohm & Haas actions as a roadmap,” Vasnetsov wrote in a client note.
Honestly, do not expect much in the way of earth shattering news. It is not Liveris’s style.
Just results..
Merrill Lynch (MER) this morning actually may have done the impossible, they made Citigroup (C) shareholders sit back and say “at least we are not them”..
Merrill had warned in early October that it would post a net loss of up to $.50 a share because of writing down $4.5 billion in collateralized debt obligations and subprime mortgages. Merrill today reported a net loss of $2.24 billion, or $2.82 a share, compared with net income of $3.05 billion, or a $3.17 share last year. The actual amount if write downs? $7.9 billion.
Okay, here is the deal. When you come out a pre-announce, you are then required to come in very close to this number. A few hundred million would have been acceptable but to almost double to estimate and be off by a almost $4 billion, heads will roll.
CEO Stan O’Neal said the company reviewed its remaining CDO positions “with more conservative assumptions,” resulting in the write down amount almost doubling.
He continued, “We expect market conditions for subprime mortgage-related assets to continue to be uncertain and we are working to resolve the remaining impact from our positions. Away from the mortgage-related areas, we continue to believe that secular trends in the global economy are favorable and that our businesses can perform well, as they have all year.” In July, O’Neal claimed in a letter to employees that the company’s risk control procedures were “under control”.
I never thought that I would say this but as a Citigroup shareholder I am really glad we have Chuck Prince and not Stan O’Neal as our CEO. That is how bad things are are Merrill……….
Wal-Mart (WMT) shares are selling off today because they announced they are reducing CapEx plans to $14.4 to$15.4 billion. Good..
Originally Wal-Mart had forecast capex of $17 billion for 2007 and then in July lowered that number to $15.5 billion when they also announced a $15 billion share repurchase plan. Chief Administrative Officer John Menzer said recently the retailer’s goal was to beat that $15.5 billion figure. They will. For the first 8 months of this fiscal year, comparable sales at U.S. stores were up 1.5%, compared with a year-earlier gain of 2.6%. For its fiscal years 2009 and 2010, Wal-Mart forecast capital expenditures of $13.5 billion to $15.2 billion.
Investor apparently wanted more of a reduction but if the past is any predictor of the future, these new numbers are the upper limit of what we can expect. The good news is that they are steadily going down.
What really needs to be watched are the share repurchases. The last quarter $1 billion was bought and while a large number, it is a “base” level of what one would expect from a $178 billion company. Wal-Mart shares have not been this low in over 1/2 a decade now. One would expect them to be tripping over themselves to repurchase shares at these depressed prices like Sears Holdings (SHLD) Eddie Lampert is. I am looking for at least $1.5 to $2 billion in the current quarter, anything less is unacceptable. If current management is serious about shareholders, the almost $3 billion reduction in capex spending ought to go directly to repurchasing stock.
Dow Chemical (DOW) will not purchase all of Chemtura (CEM) as rumored but, look for an acquisition of portions of it.
Dow has said “our strategy involves growing the Company’s performance portfolio – both through organic growth and through carefully targeted acquisitions – while, at the same time, lightening our basics portfolio – principally through joint ventures. And we’ve made no secret of the fact that, right now, we’re looking at dozens of opportunities and potential ventures around the world to advance that strategy. Some are in an early assessment phase, others are further advanced.”
So, what does Chemtura have that Dow could want? For starters it is currently a very willing seller. Earlier this year the company put itself up for sale but the auction failed. That does not mean it is still not for sale as Trian Fund Management LP, run by activist hedge fund investor Nelson Peltz, sported a 4% stake in the company as of June and has his firm’s co-founder on Chemtura’s board. Pelts’s MO is to sell off assets of companies he invests in like he did with his investment in Wendy’s (WEN) and the Tim Horton’s (THC) chain sale. Additionally, Apollo Management, the private equity firm that owns nearly 2 percent of the company was rumored to be the lead bidder in the Chemtura auction before dropping out.
Chemtura does have a specialty chemical business growing profits at 35% YOY (year over year) and a crop protection business growing profits at 14% YOY. Dow has been aggressive in both areas in both acquisitions and joint ventures like the recent Monsanto (MON) announcement. Neither segment will be a large contributor to earnings (sales of roughly $600 million in the first 6 months of 2007) but at current level could be had for a song and would be accredive to earnings almost immediately (one of CEO Liveris’s determinant factors). Q3 earning come out 11/2.
It would not be a blockbuster deal for Dow but one that would add steady profits in growing areas for Dow and best of all could be had a very reasonable prices.
