Category: Articles

Sprint Nextel(s),the #3 wireless carrier behind AT&T and Verizon was formed by the merger of Sprint and Nextel in 2005 with a stated goal: “Two great traditions of bold innovation have come together in a new company with a clear mission: To be No. 1 in providing a simple, instant, enriching and productive customer experience. Nice tag line but the company is failing at this goal at such a magnitude it makes one wonder if they even realize it is a stated goal. When Sprint bought Nextel they purchased quite possibly the single best wireless carrier at the time. It had an incredibly loyal customer based and it’s “walkie-talkie” feature was at the time the single most significant breakthrough for the average cell user. It allowed people to not use minutes when communicating to each other over the Nextel network. This caused families and businesses in mass to make the switch to Nextel for the cost savings this provided.

Aside from it’s features, what set Nextel apart from every other provider was it’s customer service. It had bar none the best in the industry. When one called customer service at Nextel you left the conversation feeling that they not only valued your business, but were thankful to have it. A call to customer service was actually a satisfying and enjoyable experience. I would actually receive calls from customer service out of the blue thanking me for doing business with them and giving me 100 or 200 free minutes that month to use. The call was not a “make good” due to a problem, it was just a thank you. They would even call me to offer a free upgrade to another phone, just for being a customer. When was the last time a company called you with a freebie that had no strings attached? Their efforts lead to shareholders being handsomely rewarded as the stock climbed from $3 in 2002 to $30 when the merger was announced.

All that changed with the combination of the two companies. A call to customer service today is only slightly less maddening than listening to Palestinians and Israelis argue about “whose fault it is”. The person on the other end not only does not speak English as a first language, I am not even convinced they are vaguely familiar with it. I know what the critics are going to say “you just cannot understand people with an accent”. Aside from not being true, the problem is that they cannot understand me and my dialect is about as vanilla as they come. The most glaring problem? The connection we have always, for lack of a better word… sucks. No matter if I call from my cell phone, home phone, business phone or pay phone the connection is always lousy and Habib and I spent 90% of the conversation asking each other to speak up so we not understand each other more clearly. How can a phone company have a lousy connection?

Another recent experience in which I attempted to switch from the Nextel to the Sprint network entailed 3 trips to the Sprint store (because the people at customer service in Bangladesh told me to go there, which was wrong), a phone delivered two days late to the wrong address and 1 hour on the phone trying to actually place the order. I could have refinanced the house quicker. The single most infuriating part? Apparently the folks at the Sprint store are not allowed to sell you the phone and switch you to the Sprint network!! Is this one company or not? Now, they can switch me from Verizon or AT&T to either Sprint or Nextel, but not from Nextel to Sprint, okay…. Understand this is two years after the merger.

Now, understand this is not just me, a recent JD Power Survey gave Sprint the lowest grade among the major cell providers for customer service.

The effect of this continued fiasco are felt in an consistent decrease in subscriber growth for the combined company. Sprint has tried to explain this by saying “it has been focusing on higher-quality customers, which has resulted in the losses”. Am I the only one who just cannot see the logic in this argument? If the customer you are going after is resulting in increasing losses, how can they be of “higher quality?” Remember, prior to the merger Nextel was a very profitable company.

Shares, after hitting a high of nearly $27 in July of 2005, current trade at $21. 2006 EPS fell 7% from 2005 and Q1 2007 EPS fell 150% from 2006 levels (6 cent profit to a 3 cent loss). It has been over 2 years and this is clearly not working.

Rather than focusing on “higher quality” customers and ignoring the rest of us, how about focusing on higher quality (or just competant) customer service? It worked wonderfully for Nextel.

With both home Depot and Lowe’s reporting numbers in the past two weeks after the dust has settled, what should you do? After all, both have disappointed with earnings falling 29% for Home Depot (HD) and 12% for Lowe’s (LOW). Both have lowered expectations for the remainder of 2007 and both stocks have been losers over the past year with investors seeing their investment flat lined. Now, eventually we all know that housing will turn around because nothing stays down forever and let’s be honest, folks do need a place to live and there are more of us every year. There is built in demand here. Neither Home Depot or Lowe’s will need to convince people they need to buy the products they sell, what they do need to do is convince them to get those products from them, not the other guy.

Enter Oprah. Probably the single most important endorsement a company or person can get today is one from Ms. Winfrey. The mention of a book on her show instantly makes it a best seller. A personal trainer or self help personality featured on the show will find their schedule instantly filled at whatever rate they demand. In short, if Oprah gives you the thumbs up, welcome to instant success. Love her or hate her, her impact is undeniable. You are probably asking yourself what this has to do with Home depot and Lowe’s.

Oprah shops at Lowe’s. This spring has featured various home improvement episodes like the most recent one in which Oprah did a favor for her neighbors by sprucing up their Chicago balconies. Who did the work and got essentially an entire show long infomercial and thumbs up from Oprah? Lowe’s.

The effect of this can be seen in the latest earnings report from Lowe’s when they reported that 17 of 19 company segments experienced market share gains during the last quarter and while customers are spending less per trip, more of them (to the tune of 5.9%) are choosing Lowe’s when they shop. While this number may seem small, it is staggering when you consider Home Depot experienced a 20% drop in store traffic during the most recent quarter.

Eventually housing will turn and the big winner will be the one with the most customers, thanks to Oprah, that will be Lowe’s.

After my first post on the iPhone last week in which I opined that the AT&T (T) lockup was a mistake for Apple (AAPL) and that the real winner in all this was AT&T. The #1 response from readers I received (other than I was a moron)was that this “was a short term arrangement that all carriers do, within 6 months the iPhone will be available to all carriers.” Hold the phone (pun intended), it would appear that the iPhone will only be available to the 47 million AT&T subscribers for the next 5 years!

USA Today reports the supposed half-decade deal also precludes Apple from developing a CDMA handset in that time. It would also appear that the arrogance and dismissive attitude Apple took with carriers during negotiations may come back to bite them. Word is that the #2 carrier in the US, Verizon will introduce it’s own version and is claiming it will be an iPhone-killer. According to Denny Strigl, Verizon CEO, “We do have a very good response in the mill. You’ll see that from us in the late summer.”

Rather than have a market all too itself for some time buy playing nice with all carriers, the attitude Apple took has caused a rush to introduce like versions to co-inside with it’s launch. Now not only will the iPhone not be available to the other 140 million plus US cell phone users, but those folks will be able to get their own version from other carriers this summer. Anyone want to bet it will be available for far less than the $500 -$600 the iPhone will be?

Now, any Verizon offering will not have the iPod application that the iPhone will have but if my many critics are to be believed, that was not going to be a major selling point anyway so the elimination of it will really be an insignificant factor to those purchasing these phones from Verizon. What will matter? Price. If consumers are able to avoid cancellation fees, can get a similar phone at a cheaper price and already have an iPod, there is zero incentive to rush out and get the iPhone.

This also means that the 10 million units Apple plans to have sold by the end of 2008 will be done to 47 million AT&T subscribers meaning 1 in 5 will have one? Doubt it.

How long does anyone think it will be before RIMM’s (RIMM)Blackberry has a version out there that will be available through all carriers?

When entering a new business, it is not really a good idea to strut in and tell folks who have been doing it for many years how much better you are than them and why you are going to dictate what they can or cannot do. All reports out there indicate this is what Jobs did and in the process seems to have focused the efforts of the other carriers into competing against him rather than working with him. Bottom line, he needs their networks for his product, he seems to have forgotten or chose not too recognize it.

I said before that the iPhone, as things are currently configured will be nothing more than a niche product and that it will be Apple’s first stumble after a string of hits in recent years, if the USA today article is correct, the AT&T deal all but assures it.

Here is a post I found from another blogger. His argument is almost identical about the iPhone. At is current pricing level, it will just not sell to the masses. He agrees the big winner will be AT&T and then takes the discussion one step farther and states it will actually increase Blackberry sales. The Blackberry sales increase angle is a concept I did not go into but do agree with.

From Big Ben’s Investing Blog:

There is no question that the late June debut of the Apple (AAPL) iPhone will create a lot of stir. Much of the hype is already priced into the stock. Or at least most of the hype will be priced into the stock before the iPhone debuts in about a month. I still think you a can stay long Apple until the release. Apple will have a tough time selling the iPhone. An initial $500 price tag for a 4 GB music phone and a $600 price tag for a 8 GB phone will be too steep for most consumers. Still many iPhones will be sold and I remain bullish on AAPL.

Who Else Will Benefit?

1. Research in Motion (RIMM): Many of the same features of the iPhone can be had for a lower monthly fee and lower upfront cost with a Blackberry. The Blackberry Pearl runs between $59 and $149 depending on the carrier. Plus the data fees are $10 less per month than the iPhone. I believe consumers will upgrade their cell phones this summer and choose RIMM over the iPhone.

2. AT&T (T) will be a winner no matter what happens. AT&T is the exclusive carrier of the iPhone and will gain wireless subscribers. More importantly more consumers will add media bundles to their wireless plans when they upgrade to a “smartphone” in order to use all of its features. This is a homerun for AT&T, as the average revenue per user should increase with more “smartphone” subscribers.

3. Motorola (MOT) is my sleeper pick. Hovering near its 52 week low, I see lots of value MOT. Motorola has the RAZR 2 set to debut in July and the Q9 smartphone also set to debut shortly. The Q9 will put added pricing pressure on the iPhone and Blackberry Curve & Pearl.

One important thing to remember is that these cell phone upgrades come in cycles. I would never “invest” for the long haul in any of the above names. These are simply 6-8 month “trades.”

The “apple-holics” can scream at the blogger here:

Corn Products (CPO) CEO Samuel Scott said in a conference call with analysts. “We were able to get prices through in the areas where we did not have fixed prices sooner than we anticipated.”

The company’s sweetener products, such as high fructose corn syrup, or HFCS, account for 55% of sales in all three of its segments. The #1 US producer in the US and worldwide is Archer Daniels Midland (ADM). Starches and co-products, such as corn oils and feed, make up the rest of the company’s products. Corn Products, the number 4 HFCS producer in the in the U.S. said it’s ability to pass along corn price increases to its customers faster than expected helped profits. .

Another major factor was the elimination of a 20% tax on US HFCS being imported to Mexico. The tax shut down a big chunk of the market overnight for U.S. exports of HFCS as well as bulk corn for HFCS production by U.S.-owned firms, said Corn Refiners Association spokeswoman Audrae Erickson.

The tax was ruled illegal and was repealed. Last summer, NAFTA reached an agreement to send up to 500,000 metric tons of HFCS into Mexico from October 2006 to December 2007. NAFTA’s full, free-trade agreement opens up a huge soft drink market to many corn refiners.

Assuring the use of HFCS in the US, Coca-Cola came out and said they were disappointed with their North American results and wanted to drive Coke Classic again. HFCS is the sweetner used in these non-diet drinks. With the South American ethanol boom increasing sugar prices, soft drink makers have no alternative but to swallow any price increase corn processors decide to pass onto them.

More good new for ValuePlays Portfolio member ADM, up 16% since my January recommendation. With gas prices surging, ethanol is very profitable desipite corn’s price increase. We now know that corn food processors are able to pass along this additional cost to buyers also. When you consider the additional demand from Mexico coming online soon, it looks like more demand induced upward pricing pressure will benefit corn processors. After all, what alternative product do HFCS users have? The answer? Nothing…

ADM will be ringing the registers

In September last year I bought shares of then Citigroup, now just Citi (C). I bought them because at the time they were trading at about 10 times earnings and had a dividend yield of over 4%. I paid $48 and change a share and then turned around it would appear and sold to them to greatest value investor of my generation, Eddie Lampert in December for $54 a share and a 12.5% gain in roughly 3 months. So why am I upset?

I am upset because I seem to have had this almost pathological inability to listen to myself prior to this blog. Had I not sold, my gain on the stock currently would have been 14.5%, plus the 2% in dividend checks I would have received for a total return of 16.5%. The pain here is felt even more when you consider after taxes my original gain is reduced to 8.25%!!

So, why did I sell them? I like businesses I can easily understand whether it be selling paint, cigarettes, insulation, clothes etc. Citi is massive and about as complex an international operation as there is out there. While it was (and apparently still is) “cheap”, “cheap and “value” are not the same thing. There are plenty of “cheap” stocks out there that are so because the underlying business just sucks, period. Here is where I went wrong. Citi has a great underlying business, it is just poorly run. That makes it’s cheap price a value once CEO Prince either gets his act together or is shown the door. Citi also would have paid me over 4% a year in a dividend to wait for either of these eventualities. Not a bad deal in retrospect. Fundamentally I saw this which is why I bought shares to begin with, I just was not convinced so I took the quick money.

Don’t get me wrong, 8% after taxes in 3 months is nice, but, making small mistakes can eventually lead to larger ones. In an interview I gave with Geoff Gannon, I said my biggest mistake as an investor has not been picking losers, but not being confident enough in my reasoning and leaving too much money on the table. Read it here. In other words, making very good instead of great returns.

Blogging seems to have cured that as my format and interaction with readers does force me to constantly evaluate and explain my reasoning and methodology. It has lead to a more intimate understanding of my picks and pans and has to date cured the “doubting Todd” side of me.

I know what you are saying, “Citi only trades at $55 a share now, the difference is only $1 from your sales price” True, but my total return is 1/2 of what it could have been. Funny how things like that work, huh?

So, what to do now? Lick my wounds and go back at it. What else is there? Life is about living and learning and if you stop doing either you can’t do the other. There was a great quote I heard once and if anyone knows who said it let me know so I can credit them, “there is no shame in making mistakes, just not learning from them”

Lesson Learned

PS. Eddie, can I have my shares back?

Recently word has been circulating that there may be a buyout offer for Archer Daniels Midland (ADM) in the not too distant future. Let look at the possibility and price.

Currently ADM has a market cap of $25 billion and annual sales of $40 billion. It is the one of the world’s largest processor of HFCS, ethanol, bio-diesel, cocoa and oil seeds. It does business in 35 countries and has over 26,000 employees. Shares currently trade at 15 times this years earnings and 14 times forward earnings. ADM has grown earning 21% in 2005, 40% in 2006 and should hit 21% in 2007 (year end June). After years of leaving analysts and Wall St. in the dark about earnings, former CEO G. Allen Andreas commented before he retired last fall that the current unprecedented expansion will “substantially add to earnings in 2008”. This is the first comments I have every heard an Andreas publicly mutter on earnings. Current CEO Patricia Woertz commented on the latest earnings call that she was “more enthusiastic about the future” of ADM than ever before.

That being said, if insiders are this optimistic at a company that has a storied history of playing it’s cards closer to it’s chest than la cosa nostra, one must imply from this that 2008 is shaping up to be a very good year. Current estimates have ADM increasing earning next year only 9% in part due to the rise in corn costs. Yet the empirical data coming out suggests that this, far from being an issue may actually lead to more profits. In the most recent call ADM said despite corn costs rising, corn processing earnings increased 15% . Other ethanol producers also experience similar results. Recently, Corn Products (CPO), who produces no ethanol, only HFCS and other corn products commented that they have easily been able to past cost increases along to end users. The reason? The economics of corn are such that end users of its byproducts have no substitute for them. When you consider that 500,000 extra tones of HFCS will be sold into Mexico annually beginning in the fall of 2007, you have this increased demand further pressuring prices upward. Corn processors are also in the unique position to be able to easily hedge against price spikes, further insulating them from their effects.

Production increases mean ADM will increase it’s ethanol production 50% by 2008, it biodiesel production will double and it will add substantial cocoa production in the US. HFCS production can be increased without the building of new facilities so the option to maximize anticipated demand increases is easily attainable.

Currently June options have speculators positioning themselves to pay $40 to acquire shares before June 16th with call options out numbering puts almost 4 to 1 clearly leading to an upward bias in shares. Currently ADM has an enterprise value of $30 billion or roughly $46 a share. With managements enthusiastic expectations for 2008, any offer to buy the company would have to be well in excess of that. More realistic earning estimates for next year that put eps growth in line with the 20% increases each of the past 3 years put 2008 share price at $44 at the low end of the PE scale. All this means shareholders should expect shares to trade in the lower 40’s for FY 2008 that begins in July 2007 and any buyout offer should be at a minimum a premium to that putting shares easily into the $50 range.

Will it happen? There would be immense pressure on new CEO Woertz not to do a deal and she will likely not want to go down as the one who “closed shop” so to speak on a 115 year history by selling out to private equity, or worse, an oil company. Insiders and shareholder have visions of ADM becoming the “Exxon of Biofuels” and a buyout would quell those dreams. The only offer that may receive support would be a management buyout that allowed current holders to retain ownership in a now private ADM with current management a vision. The Andreas family had led the company for generations and as large shareholders would lead a revolt against a buyout by another firm. This anticipated hostility to an offer means it will either be avoided, or, be one that it very hard for shareholders to resist.

Either way, through results or a buyout offer, shareholders stand to prosper.

Fed Chairman Ben Bernanke said last Thursday subprime mortgage woes do not present a serious problem to the U.S. economy. Not only do they not pose a serious problemn its effects on the overall housing market would likely be limited: “Curbs [on subprime lending] are expected to be a source of some restraint on home purchases and residential investment in coming quarters.” Can we stop panicking over this now?

In March in a post I wrote “Where do we go from here? A slow decent to normalcy. That is all. Not a crash, not a recession, not a depression, just normal housing conditions with realistic lending guidelines.”

It would seem Mr. Bernanke is now echoing that sentiment. Conditions now are not dire, they are getting back to normal. A little perspective is needed. Things have been insane for quite a few years in housing and the current slow down, while it may hit some of the more careless folks out there, is very good for everyone as a whole. The more froth and speculation in any economic activity, the harder the eventual fall then becomes. Bernanke should be given credit from resisting the shrill shrieks from the Barney Franks of the world on Capitol Hill to drop rates and increase regulation in the lending market. These actions would have lead to increased volatility in all markets and the uncertainty and guessing games that would have been created could have developed into something far more serious. In doing so he has all but assured a “perfect storm” of good things for the economy. The runaway housing prices will moderate, inflation is doing the same, economic growth has not suffered, job creation remains strong, unemployment is almost non existent, the S&P and DOW are at all time highs and historically speaking, interest rates are a non factor. All this in the face of Alan Greenspan running around the Asian continent telling everyone the sky is falling

While his predecessor, Greenspan, gets far too much credit for the “soft landings” he engineered from the problems he created, Bernanke should be credited for not needing a “landing” at all, just a nice smooth ride

In a stunningly underreported event, Congress approved the blueprint for the 2008 budget and in it is the single largest personal tax increase in US history. Where is the media on this?

Passed essentially online party lines 52-40 in the Senate and 214-209 in the house, the budget blueprint plans to allow the personal income tax, capital gains and dividend tax rates to increase in 2008. Quoting House Budget Committee Chairman John Spratt (D. SC), “It’s not the perfect solution, but it is a long step in the right direction.”

How? Raising taxes has never been the answer to our “budget” problems. Cutting spending has. More money in the hands of Congress will only lead to more spending. If history has shown us anything, this is an undeniable fact. In the outline, it proposes $20 billion dollars MORE of discretionary spending than the President had proposed. How about we back out that “discretionary waste” and not pick my pocket?

Corporations have spent the last 4 years raising dividends at a 20 year record rate as a way to reward shareholders. The effect of these increases will now be negligible when the tax rate on them is allowed to almost double. Look at the chart below.

The S&P has enjoyed a smooth ride as investor have parked their money and enjoyed the steady stream of reduced tax rate dividend checks. An increase in these rates would cut the value of these dividends by almost 50% and surely lead to a huge increase in volatility. While professional traders love volatile markets, they are the enemy of the average investor who gets sideswiped by the big market swings and end up losing money.

I cannot figure out why no one is talking about this now. One thing for sure, if it passes, it will be all we talk about..