Category: Articles

Going for the Gold(man) (GS)

Post author By ToddSullivan
Post date June 20, 2007

I just cannot find a reason not to buy shares in Goldman Sachs (GS).

Overview:
A global investment banking, securities and investment management firm who provides a wide range of services to corporations, financial institutions, governments and high-net-worth individuals. GS operates through three core businesses: Trading and Principal Investments, Investment Banking, and Asset Management and Securities Services.

The Trading and Principal Investments business (68% of 2006 net revenues) facilitates customer transactions with corporations, financial institutions, governments and individuals, and takes proprietary positions through market making in, and trading of, fixed income and equity products, currencies, commodities and derivatives. The activities of this business can be grouped under three segments: Fixed Income, Currency and Commodities (FICC);Equities; and Principal Investments.

The FICC business makes markets in and trades interest rate and credit products, mortgage backed securities, loans and other asset-backed securities, currencies and commodities. The Equities business makes markets in, trades, and acts as a specialist for equities and equity-related products. It generates commissions from executing and clearing client transactions on major stock, options, and futures exchanges worldwide through its Equities customer franchise and clearing activities.

The Principal Investments business primarily represents net revenues from corporate and real estate merchant banking investments. These net revenues are from three primary sources–returns on corporate and real estate investments, its investment in the convertible preferred stock of Sumitomo Mitsui Financial Group, Inc. (SMFG), and overrides. Overrides represent net revenues from the increased share of the income and gains derived from it’s merchant banking funds when the return on a fund’s investments exceeds certain threshold returns.

The Investment Banking business (15%) provides investment banking services to corporations, financial institutions, governments, and individuals. Investment Banking business is divided into two segments: Financial Advisory and Underwriting. The Financial Advisory segment includes advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings, and spin-offs, while the Underwriting segment includes public offerings and private placements of equity and debt instruments.

The Asset Management and Securities Services business (17%) offers investment strategies, advice and planning to institutions and individuals worldwide, and provides prime brokerage, financing services and securities lending services to mutual funds, pension funds, hedge funds, foundations, and high-net-worth individuals. GS’s assets under management increased 27% in 2006, to $676 billion.

MANAGEMENT. In June 2006, Lloyd C. Blankfein was named as chairman and chief executive officer. The management change was due to Henry (Hank) M. Paulson, Jr., GS’s then chairman and CEO, becoming U.S. Secretary of the Treasury.

FINANCIAL. At the end of FY 06, GS’s net revenues had increased 51%, to $37.3 billion, driven by improvements of more than 50% at both the Investment Banking and Trading and Principal Investments businesses. Investment banking benefited primarily from underwriting volume, up 73% year to year, while the trading business saw a 60% improvement at its FICC desk. Operating expenses increased 38%, to $22.7 billion, more than offset by the growth in net revenues. Net earnings registered a robust 70% increase, to $9.4 billion and EPS rose to $19.69, from $11.21. Assets under management were 27% higher than a year earlier at $676 billion.

The most recent quarter saw EPS of $4.93 vs. $4.78 in 2006 and was shy of $5.35 estimates and 6 month EPS $11.61 vs. $9.86 in 2006. Top line was hurt by exposure to sub-prime mortgages, although equity and investment banking results were strong. Margins were pressured somewhat by continued global expansion and high levels of business activity.

It’s main competitors are Merrill Lynch (MER), Morgan Stanley (MS) and JP Morgan (JPM)

Alumni include CNBC’s Jim Cramer, Sears Holdings (SHLD)Eddie Lampert, White House Chief of Staff Josh Bolton, NJ Governor John Corzine and Former Treasury Secretary Robert Rubin .

Here is the thing, Goldman is undoubtedly the king of this sector yet it trades at a discount to it’s competition. At only 10 times earnings, it is just too cheap to pass up. Rather than jump at the new Private Equity companies that are rushing to go public and will soon see their tax rates soar, why not take a run with the unquestioned leader in the field?

I am…..

Tags SHLD

Articles

Home Depot Buyback: Great, But, When?

Post author By ToddSullivan
Post date June 19, 2007
6 Comments on Home Depot Buyback: Great, But, When?

So the Home Depot (HD) made a splash this afternoon with the announced $22.5 billion buyback. But they failed to answer one little question… when?

The board of directors authorized a $22.5 billion increase in its share repurchase program and stated their intent to repurchase up to $22.5 billion in shares as soon as practicable. It will be funded with the proceeds from the sale of HD Supply, existing cash on hand and proceeds from an anticipated $12 billion issuance of senior unsecured notes. The $22.5 billion share repurchase may be in the form of a tender offer, open market repurchases or accelerated share repurchases, the details of which will be announced at a later date.

“Our planned recapitalization is transformational for our company. While we continue to invest heavily in the five priorities focused on our core retail business, this recapitalization plan allows us to return significant capital to our shareholders, improve the efficiency of our balance sheet by lowering our cost of capital, while at the same time retaining strong financial and operational flexibility,” said Carol Tome, CFO and executive vice president – Corporate Services.

“As soon as practicable?” When is that? 3 years? 13? Stuff like this drives me crazy, if you are going to announce something that big so you make headlines, give us some sort of time frame. The time frame of the buybacks is the only thing that really matters when it comes to their impact. Over the next decade I would expect them to come close to that amount, if they are going to do it in the next 3, that is something entirely different.

Details boys… details….

Articles

HD Supply Unit To Be Sold For $10b To Private Equity

Post author By ToddSullivan
Post date June 19, 2007
1 Comment on HD Supply Unit To Be Sold For $10b To Private Equity

Looks like Home Depot (HD) CEO Frank Blake caved to activist shareholders and now officially deserves the moniker, “Bend over Blake.”

In February I contemplated buying HD shares but wanted to see what was going to happen to the only division in the company actually growing, the Supply unit. Later, when it looked like the unit might remain a member of Home Depot, I backed off Blake and decided to take a “wait and see” approach. It now looks like my initial assessment was correct.

CNBC today announced “Home Depot Inc. agreed to sell its Home Depot Supply
business to a consortium of private equity companies for more than $10 billion,
the New York Times reported in its online edition on Tuesday. Citing people
briefed on the talks, the paper said Home Depot will announce the deal later
today with Bain Capital, the Carlyle Group and Clayton Dubilier & Rice.”

At least the folks at the PE companies see the value in the unit. This move is all about Blake trying to appease Relational Investors and jump the stock price today at the expense of long term gains. This smells eerily similar to what happened at Wendy’s last year when Pershing Square’s Bill Ackman demanded a spinoff of the Tim Horton’s (THI) coffee chain. He got what he wanted, cashed in, bolted and now Wendy’s (WEN) shareholders are left wondering what became of their company. How much better would Wendy’s sales and profits be today if they sold Tim Horton’s coffee at their drive thru’s given the success Mcdonald’s (MCD) has had with premium coffee?

Getting rid of the Supply unit will not fix the problems at Home Depot. The problems there are systemic, not financial. The thought that they cannot execute both a retail and a Supply unit only means they have incompetent management there, not that it cannot be done. Is it really that far of a stretch to picture them selling pvc piping to a homeowner vs a business owner? Had they entered the food business, it would make sense to sell it. This is a value destroyer long term…..

Too bad…

Tags ackman

Articles

Best Buy…..Not All Bad

Post author By ToddSullivan
Post date June 19, 2007

Here are the results for Best Buy (BBY), not good but not really bad either. This one depends on your time frame

Reported Q1 earnings of $0.39 per share, $0.11 below the consensus estimates of $0.50; revenues rose 13.9% year/year to $7.93 billion $6.9 billion last year. Full year guidance lowered for 2008, to $2.95-3.15 vs. $3.16 previous.

Brad Anderson, vice chairman and CEO stated, “Our first-quarter results fell short of our expectations. Strong revenue results from lower-margin products significantly cut into our gross profit rate.” The gross profit rate for the first quarter was 23.9 percent of revenue, a 150-basis-point decline compared with a gross profit rate of 25.4 percent of revenue for the prior-year first quarter. A significant contributor to the year-over-year decline was the inclusion of the China business acquired last June, which carries a significantly lower gross profit rate.

“Yet our customers continued to increase our market share. Our share gains, combined with other indicators we see, show that our core business is healthy. To us, the totality of our results suggests we are on the right track with our strategy, which is aimed at re-defining the customer experience.” He continued, “Early evidence suggests that consumer spending will be more difficult to predict this year – but it appears to be accelerating in lower-margin categories. We are confident that flat-panel TVs, gaming and notebook computers will remain very appealing to our customers.”

In short, more shoppers (my observation that stores were full was accurate) but the newly acquired China biz dragged down earnings. If you want to buy shares, you will get a great chance today as they will get hit hard and are already down $2.50 pre-market.

Fundamentally there is nothing wrong with the business. The repurchased $412 million of stock in Q1 (about 8.6 million shares) and still have $800 million remaining under the current authorization. Expect them to announce an increase soon (if not today, the conference call is at 10am). Why? They said so. “In addition, as seen in the first quarter, we anticipate continuing our increased share repurchase activity.” said Anderson.

How will this affect the rest of retail today? It really shouldn’t. Revenues were good which means folks are still shopping, that is always good for retailers.

Articles

Today’s Upgrades & Downgrades

Post author By ToddSullivan
Post date June 19, 2007

Here are the calls from late yesterday and early this am

Upgrades:

NOVA Chemicals (NCX)= Buy

Enbridge Energy (EEP)= Outperform

Pacific Sunwear (PSUN)= Buy

Bank of America (BAC)= Buy

US Airways (LCC)= Neutral

CIGNA (CI)= Neutral

Downgrades:

Conventry Health (CVH)= Peer perform

US Steel (X)= Reduce

Hercules Offshore (HERO)= Hold

Tags dow

Articles

Best Buy (BBY) Preview

Post author By ToddSullivan
Post date June 19, 2007

Best Buy (BBY) reports today, what should we expect? If we believe management, they predict fiscal 2008 earnings of $3.10 to $3.25 per diluted share on full-year sales of $39 billion (9% growth). Broken down, it will consist of an approximately 130 new stores and same-store sales growth of 3% to 5%.

For the current quarter, Q1 for 2008, the street is looking at 50 cents a share vs the 47 they posted last year. Been in a Best Buy lately? Still full of people, still busy and I see no reason they should not beat the expectations. With competition like Circuit City (CC) and Tweeter (who is now in bankruptcy) falling by the wayside so fast you would swear they were racing to get there, Best Buy clearly is the king of the hill.

The only serious competition for shopper’s value left is Costco (COST), Wal-Mart (WMT) and Sears (SHLD) but even they cannot hold a candle to Best Buy in term of selection. Best Buy is in a field of one here now. With the recent announcement that they will provide Apple (AAPL) a “store in store” concept soon, this gap only looks to widen.

Best Buy’s earnings become more important each quarter because if they are not doing well, the entire consumer electronics space is suffering. A word of caution, since they do not issue quarterly guidance, if they do miss, pay close attention to what they say for the rest of the year. If they miss and guide inline for the remainder of the year, don’t worry, it was the analyst who missed, not them.

Should they miss and guide lower? Watch for blood in the retail street today.

Tags CC

Articles

$1.3 Billion An Hour

Interested? Well that is what shareholders of Apple (AAPL) are pricing a new battery at today. Previous estimates had the new iPhone having about 6 hours of talk time, new ones, 8. This was apparently a reason not to buy the phone?

According folks who have been emailing and commenting to my posts, the battery life has never been mentioned once, not once in the hundreds of comments and emails. It was not mentioned as an issue by those who would not buy it and those who said they would buy it, any potential battery issue was inconsequential. Those who will not buy it are going to do so because of price according to polls and those who are going to buy it would do so even if Steve Jobs stood at the door to the Apple store and assaulted them when they walked in. The battery was irrelevant.

So, how can we add $2.6 billion to the market cap of Apple today just because there is an improvement to the device that just makes it comparable to other makers devices? An improvement, it needs to be noted that has not been mentioned by detractors in discussions about the phone?

I guess the question is, why is this important and did anyone really think battery life would not be improved?

It is almost like the stock running up because they are going to put it out in red… who cares?

Things like this that do not make sense are signs… Why doesn’t it make sense? If it was any other battery in any other cell phone from RIMM (RIMM), Nokia (NOK)or Motorola (MOT)
would anyone care?

Articles

This Mornings Upgrades and Downgrades

Post author By ToddSullivan
Post date June 18, 2007

Upgrades:

Ingersoll-Rand (IR) =Outperform
PrivateBancorp (PVTB)= Strong Buy
Natl Instruments (NATI) = Overweight
Tektronix (TEK) = Overweight
Fairchild Semi (FCS) = Outperform
CheckFree (CKFR)= Sector Outperform

Downgrades:

Hercules Offshore (HERO) =Hold
Action Semi (ACTS) =Hold
Western Digital (WDC) =Neutral
ChoicePoint (CPS) =Sector Perform

Articles

US Oil Companies Take A Page From OPEC’s Playbook

Post author By ToddSullivan
Post date June 18, 2007
5 Comments on US Oil Companies Take A Page From OPEC’s Playbook

“Why would I invest in a refinery when you’re trying to make 20 percent of the gasoline supply ethanol?” Sound familiar?

Just over a week ago an almost identical statement was made by the head of OPEC, Abdalla El-Badri. When asked about future refinery plans ge said, “If we are unable to see a security of demand…we may revisit investment in the long-term.” The first quote? None other than Chevron’s vice chairman Peter Robertson. Valero’s spokesman Bill Day apparently got his copy of the new playbook when he said “That’s not to say we’ve changed our plans, but it’s fair to say we’re taking a closer look at what the president is saying and what Congress is saying” about biofuels.

Okay… so we now have the US oil majors like Exxon (XOM), Chevron (CVX), Valero (VLO) and BP (BP) parroting the same sentiment as OPEC? This is just possibly one of the most simple minded acts I have seen in a long time. Just step back and look at it. Let’s put aside oil prices and resentment they always illicit towards big oil. Let’s also put aside whether of not gas prices are justified and assume they are. We also need to ignore the unfathomable profits oil companies make and just accept it is purely a function of scale and there is no market manipulation happening. Assuming all those things are true (they may or may not be, I am assuming they are for the point of the post). Why, why would any business ever align themselves philosophically with OPEC?

Are they just trying to make themselves hated even more than they are now? Is it some twisted masochistic urge the industry just cannot ignore? Why not put Bin Laden on their marketing materials? At a time when you have the Democrats, who hate oil companies only slightly more than they do Republican’s in charge in congress and the White House up for grabs, why would you give them more of a reason to vilify in the eyes of American’s?

Renewable fuels are being trumpeted as a national security issue. Whether or not you feel they are is irrelevant, the fact is that they are being market this way is what matters. The less we rely on OPEC for oil, the safer we are. Period.

So, now both OPEC and the US oil majors are going to take their ball and go home? After years of telling us biofuels were a pipe dream and would never amount to anything, they are suddenly so threatened that they are going to refuse to add refining capacity? This is their solution? To pout? Jesus, even my four year olds know that is not the way to get what you want.

This is a colossal mistake on the part of the oil companies and they are going to be doing some heavy damage control after this. Here is the question they will have to answer before congress, and yes they will end up there “Why are you and OPEC colluding to keep oil prices high by threatening to refuse to invest in more refining capacity, are you aware your actions are undermining the security of our nation?”

Can’t wait to hear the answer.

Articles

Buy Dow Because of Fundamentals, Not Rumors

Post author By ToddSullivan
Post date June 17, 2007

Lehman Brothers upgraded the chemicals giant last week and laid out three scenarios, a big purchase, significant sale or huge share repurchase, that could lift earnings next year. Do not buy DOW (DOW) shares because of this.

The analyst, Sergey Vasnetsov raised his recommendation on Dow Chemical’s shares to overweight from equal weight and lifted his price target to $55, or $15 higher than his previous projection.

He said the company’s large cash position and statements from executives over the past few months have made three outcomes possible that could add to earnings next
year. They include a big acquisition, such as the purchase of a company with sales topping $10 billion; a stock buyback worth up to $10 billion; and a $3 billion divesture of some of Dow’s commodity, or bulk, chemicals businesses.

Given the company’s strong free cash flow, Dow Chemical “could be quite an active
chemical company in M&A,” said Vasnetsov.

If not for those reasons, why buy Dow? Let’s put aside the stellar balance sheet, cash hoard and envious cash flow and look just at the business. Recently in an interview CEO Andrew Liveris said “The good news, though, is that volume is good, and I would tell you with the exception of housing, end-use markets are strong in North America, surprisingly strong, and the rest of the world is somewhere between dynamite and good,” said Liveris.

For proof of his statement? Look at recent pricing actions by the company.

Dow announced price increases for acrylic acid and esters, also known as acrylic monomers or acrylates, effective July 1, 2007, or as otherwise allowed by individual contract terms.

Dow will increase prices for glacial acrylic acid, butyl acrylate, ethyl acrylate, methyl acrylate and 2-ethylhexyl acrylate, as follows:

Butyl Acrylate/2-Ethylhexyl Acrylate

* In North America by US$0.05 per pound.
* In Asia Pacific by US$120.00 per metric ton.
* In Middle East/Africa by US$120.00 per metric ton.
* In Latin America by US$120.00 per metric ton.
* In Europe by 90 Euros per metric ton.

Ethyl Acrylate/Methyl Acrylate/Glacial Acrylic Acid

In North America by US$0.03 per pound. In Asia Pacific by US$70.00 per metric ton. In Middle East/Africa by US$70.00 per metric ton. In Latin America by US$70.00 per metric ton. In Europe by 50 Euros per metric ton.

“The need for these increases is driven by an industry-wide butanol and 2-ethylhexyl supply/demand imbalance,” explained Mark Bassett, global business director for the Acrylic Monomers business of The Dow Chemical Company. “This has reached such a critical point that production is not able to meet demand. This increase also attempts to recover increases in the cost of raw materials such as propylene and natural gas.”

They also announced recently they will raise list and off-list prices on a number of their Oxygenated Solvents products in North America effective June 1, 2007, or as contracts allow. This increase is primarily driven by the tight supply of butanol combined with the continued increased costs of propylene and natural gas.

“A tightening market for raw materials namely propylene and butanol are the primary drivers for this price increase,” says Martin Sutcliffe, global business director, Glycol Ethers. “The global butanol market has been steadily tightening this year, with supply now unable to keep up with demand.”

“Dow recognizes that we need to make exceptional efforts to meet the demand,” says Pat Gottschalk, global business director, Solvents & Intermediates. “However, when the industry is dealing with the need to maximize supply, we must raise our prices to continue to compete for raw materials and other resources.”

If you follow this link, you will see Dow’s 2007 pricing announcements. You will also notice that announcement after announcement has the words “price increase” in it. Demand and pricing are firming and that is never a bad thing.

Liveris said 2007 will be a good year for Dow, but it will definitely not outperform its 2006 earnings. He said earnings should be below $4.00 per share. The reason? Low cost production facilities are being built and Dow is still tied to the US energy market. That US dependence is being fixed but will take time and each year we will see a dramatic improvement.

In the meantime, Liveras does have Dow in a position to purchase more earnings and expand capacity without adding huge debt demonstrated by the recent announcement in five petrochemical projects in Thailand worth $2 billion… a win-win.

Tags dow

Articles

Top & Bottom 5 Sectors 2007 To Date

Post author By ToddSullivan
Post date June 17, 2007

Okay, first 6 months almost finished. so, what are the best performing sectors to date?

Ranked by price performance of ALL stocks in the group.

Top 5

1- Chemicals / Fertilizers = 84% (13 stocks)

2- Trucks and Parts /Heavy = 48% (13 stocks)

3- Steel Producers = 30% (22 stocks)

4- Heavy construction= 36% (26 stocks)

5- Oil & Gas Machinery = 36% (31 stocks)

Bottom 5 (#5 in the worst)

1- Banks/Southeast = -8% (171 stocks)

2- Retail/Home furnishings = -4.6% (20 stocks)

3- Banks/Northeast= -9.4% (128 stocks)

4- Banks/Midwest= -10.2% (76 stocks)

5- Computer-Data Storage= -16% (20 stocks)

Articles

Insider Buys For The Week

Peter Lynch once said, “there are a multitude of reasons insiders sell shares, but there is only one reason they buy, they think the stock is going up.” Here are the top 5 insider buys this week listed by size.

1- Celgene (CELG)= $5,582,000

2- Kapstone Paper (KPPC)= $4,022,000

3- Chesapeake Energy (CHK)= $3,605,000

4- Cardica (CRDC)= $2,530,000

5- General Growth Properties (GGP)= $1,925,000

Articles

Picks From The Master’s

Post author By ToddSullivan
Post date June 16, 2007

The gang over at The StockMasters tell us why we should be picking Sears Holdings(SHLD), Yahoo! (YHOO), Ivanhoe Mines (IVN) and Hansen Naturals (HANS)

Please visit them and read the article here: