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Blockbuster (BBI): NetFlix’s CEO is right…

Blockbuster’s (BBI) earnings call last week was a list of triumphs. To recap:

  • Total revenues for the quarter increased 5.4% to $1.47 billion
  • Worldwide same-store rental revenues increased 1.3%
  • Met aggressive online subscriber growth objective for the quarter and have added approximately 800,000 Blockbuster Total Access subscribers; our highest subscriber growth quarter thus far
  • Worldwide same-store retail revenues increased 14.3% during the quarter,
  • Our year-over-year comparison, our online revenues increased 116%, and we picked up 10 percentage points in market share going from approximately 20% of the online market to 30%. On the store side, despite the store-based industry’s first quarter decline, our customer visits and new membership sign-ups were both at the highest levels we’ve experienced in two years

    CEO John Antioco
    “We’re also attracting customers from outside the video rental category, customers who have been getting their movies from other sources,like satellite or cable pay per view services. Simply put, consumers are discovering or rediscovering Blockbuster in increasing numbers because of the flexibility, the convenience, and the value Total Access offers. As a result, we believe we will continue to pick up share in the overall rental market by attracting business from both our traditional and non-traditional competitors”.

    “We also believe it will be very difficult for our major online competition to impact our growth since we don’t think they have an answer to what we believe is a superior integrated service. Our competition has said they will simply wait us out until we change our proposition. They may have a long wait. We have no intention of making any changes to our Blockbuster Total Access proposition any time soon, unless we feel these changes will fuel our growth even faster or improve our cost efficiencies and service metrics”.

    Antioco was referring to NetFlix (NFLX) CEO Reed Hasting’s who said it’s “not a question if, but when Blockbuster will reset prices,” and that Blockbuster’s low prices weren’t “economically feasible.”

    Here is the issue, is everything is working as planned, why did Blockbuster’s operating loss for the first quarter totaled $18.4 million as compared to operating income of $32.1 million during the first quarter of 2006 and cash flow was also a negative $144 million, down from a positive $41 million in 2006.

    Unfortunately for Blockbuster, Hasting is right. They cannot add and subscribers and revenue and then increase losses and say “everything is working”. Blockbuster has two choices. They need to either rapidly accelerate the rate of store closings or raise prices because what they are doing now is just not getting it done. They were late to and continue to realize the stand alone video store concept is dead (or on its last breath). Technology is taking care of it. The race here is not to the mail, but to the download. When people are able to downloads movies to their TIVO’s (TIVO) or TV’s are internet enabled and they can do it that way, mail and store video rentals cease to exist. This technology does exist and will be more prevalent in the next 2-3 years. Click here for an article on it. The early bird price here ironically goes to neither of these companies but to Amazon. (AMZN)

Until Blockbuster acknowledges the realities of it’s business, I will avoid shares.

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Google Update: IL Caveat Emptor


As rapidly growing businesses become larger percentage growth inevitably declines. This is the law of large numbers

Back in January and February I had two posts on Google and it’s share price. Rather than regurgitate all of them you can view them here and here. Please read them before continuing so we are all thinking the same way. Let’s update with more recent numbers.

My opinion was and is that Google shares will be stagnant of fall near term (1-2 years). This is not due to a failure of management, products or execution. It is due to the share price getting ahead of the laws of math (large numbers)

% of Income From Revenues:
Net income as a percent of revenues fell from 29% in 2006 to 27% Q1 2007. This is probably due to the YouTube acquisition and the Doubleclick one will further deteriorate this metric but we will use it as so as to not being accused of fudging numbers to make a point.

Let’s do some numbers. Consensus estimates are for 2007 earnings of $15.12 a share (48% EPS growth over 2006). So the question is, “what revenue number do we need to get there”? I am going to use 329 million shares outstanding at year end to be consistent with the share dilution the last year. This number will turn out to be too low as there will be more dilution but again, don’t want to be accused of fudging. This gives Google net earnings of $4.97 billion in 2007. This is 60% net earnings growth but the continued share dilution will prohibit this from all dropping to the bottom line. At net income of 27% of revenues, Google must produce revenues in 2007 of $18.4 billion.

I should note here that that the $18.4 billion dollars represent 80% revenue growth of $8.4 billion dollars and is almost equal to the total revenue growth of 2005 and 2006 combined. Won’t happen. It is an especially large nut to crack when you consider that 2006 revenue only grew 73% and Q1 2007 only 63%. We also need to consider that Google is coming into the slower summer months which will put real pressure on the last 3 months of the year to produce revenues equal to almost the entire first 9 months. I get this by taking the $3.6 billion from Q1 and giving Google $3 billion for Q’s 2 and 3 to reflect the anticipated seasonal slowdown. This leaves us with $9.6 billion left at the end of Q3, $9 billion short of the revenue needed for our $18.4 billion to give us $15.12 a share eps. Even if we allow for Google to turn Q’s 2 and 3 into Q1 beaters and give them $4 billion in revenues each, that still leaves them $7 billion short for the Q4. Just too much.

Other Share Price Headwinds:

Dilution:
Google used stock to purchase YouTube and as of q1 2007, basic shares outstanding have increased 2.6% to 308 million since Dec. 2006 (13% since 2005 and 60% since 2004) and the employee option program will expedite the rate of increase of this dilution.

From the Google site:
“If an employee chooses to sell options in the TSO program, he or she will use an internal online tool built by Morgan Stanley to sell them to the highest-bidding financial institution. The financial institutions buying the options will then likely hold them until maturity and then settle with Google. Google’s employee stock options typically have a ten-year term from the grant date. Under the TSO program, Google’s employee stock options, upon transfer, will have a lifespan of the lesser of two years or up to the remaining term under the original grant.”

What is very interesting here is that in January, the Google site speculated that buyers of the options would short the stock to hedge the option purchase. This now has been has been eliminated from the explanation.

Now, Google could offset this dilution by buying back huge blocks of shares but this is highly unlikely since they re using the shares as currency to make purchases. This implies that they feel a dollar of stock is currently valued at more than a dollar of currency. This is another valuation warning

Acquisitions:
A large acquisition from Google could blow EPS estimates out of the water. But, looking at past history, Google did overpay for YouTube and did the same thing for Doubleclick and neither will do anything for earnings anytime soon and YouTube will likely turn into a litigation drain on cash well before it actually makes any money. Based on history, we need to discount this possibility as acquisitions are one thing Google has not done very well at all so far.

Analysts:
I cannot find a single “hold” or “sell” rating on shares of Google. As a bit of a contrarian, when I see that I instantly get alarmed. No company is flawless and when there are no dissenting voices, people hear the same positive drumbeat repeatedly. That leads to overconfidence in the company and its shares and make the inevitable mistake harder on everyone.

Now, let’s talk multiple on the shares and prices. Last year, Google grew EPS 97% and traded at a PE multiple of roughly 2/3 that in the 60’s. Companies with declining growth rates trade at multiples that are a discount to those rates. Let’s say I am wrong on everything and they do end up hitting the $15.12 estimates. That would mean EPS growth in 2007 of 48%, down from 97%. If we apply the same 2/3 multiple we get a PE of 31 times earnings or a price of $468. It is not unreasonable to expect a multiple contraction of 50% for a growth rate reduction of a like amount especially when you consider EPS growth in 2008 will be even slower.

In January I wrote:
“You should expect the multiple for Google to contract to a range commensurate with its growth rate. If that rate this year is around 30% expect the PE to shrink to about 30 times 2007 earnings. That gives us a price for Google shares of about $450 a share.”

Google hit $450 not long after (it was $500 when I wrote it) and has bounced around the $460 to $470 range most days since then. I cannot see any reason that Google deserves to be priced at any higher than that anytime soon.

I recently had an email conversation with a hedge fund manager who will remain nameless since I did not get his permission to air our discussion and have no desire to anger anyone. In that discussion he stated “…Google is at a new pace, one of none other than Google’s…” When I hear talk like that, I instantly flash back to 1999 and 2000. “New” seldom is new, only “different” and that means the same laws of finance and math still apply. In our digital age competitors catch up more quickly and tech titans reign at #1 become shorter and shorter. This is rather ironic because it is the same digital technologies that enable their meteoric accent to begin with. IBM reigned for almost 30 years, Microsoft for about 12 and Google has been there for about 5 now. Growth slowed for all as they grew and matured and Google has proven to be no exception. It shares, however, have not realized that fact yet as they have already priced in this years earnings. Should Google stumble one quarter as all companies eventually do, look out below.

I will reiterate my closing statement from my January post. Great company, great products, it’s shares are just over priced.

I await the angry emails and comments.

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Sears Holdings To Spend It’s Cash Hoard

Sears Holdings announced Thursday it currently expects that net income for its first quarter ending May 5, 2007 will be between $200 million and $235 million, or between $1.30 and $1.53 per diluted share. In the first quarter of fiscal 2006, the Company reported net income of $180 million, or $1.14 per diluted share. At those numbers we will have 14% to 34% EPS growth. Excluding one time items from 2006 and 2007, the high end range of the estimates gives us 13.5% EPS growth in a challenging quarter.

What did the street focus on? Domestic comparable store sales (as usual) for the first twelve weeks of the thirteen-week fiscal 2007 first quarter which ends May 5, 2007 for its Kmart and Sears stores. Kmart comparable store sales decreased by 4.7%, primarily due to lower transaction volumes across most businesses.

Results were buffeted by an improvement in children’s apparel sales and this marks the second consecutive quarter an apparel segment’s sales have increased. Last quarter it was women’s apparel. This is huge because once mom’s start going there for their kid’s and themselves, the retail results begin to really pick up. Home appliances and lawn and garden were down. No kidding. We are in a housing slump and had miserable weather to this point this spring. Lawn and garden will pick up now that the weather has changed for the better and housing will turn around this summer spurring increases in both segments. When you add this to improving apparel results, the second half of this year looks to be very exciting for us shareholders

Lampert has several options available aside from retail results to boost EPS and share price this year.

  • -He still has $604 million on the share repurchase plan left. This simply means that at today’s price of about $180 he could repurchase 3.6 million or 2.3% of outstanding shares.
  • -Cash on hand, the metric most Lampert followers watch will be “about $3 billion excluding Sears Canada”, essentially flat from earlier in the year. In March, the Sears Canada number was $700 million and I expect this to remain constant after the excellent quarter they just reported seeing a C$29 million swing in results from a loss to a profit. With this amount he could pay off 100% of Sears debt and complete the buyback program.
  • -He has also created over $1.8 billion in securities with the DieHard, Craftsman and Kenmore brands. He will use these when the time is right to make a big acquisition or sell them for additional revenue. With many retailers stumbling, there will be assets out there soon he can add at good prices.

Shares plummeted over $10 in after hours Thursday and those who bought in picked up over $2.50 a share Friday, and will see much more by year end. It is tough to get rich betting against Eddie Lampert. If you do not own shares, I would get some. Sears Holdings is in the infancy of what it will eventually become.

At the annual meeting on Friday, Lampert answered shareholder questions in a Buffet like Q&A session. Some notables:

  • In early March I opined “I am rapidly becoming convinced that the future of Sears retail operations will become predominately Land’s End merchandise”. It would appear I was correct on that one as Lampert announced they were doubling the “store in a store” Land’s End concept in Sears locations from 100 to 200 this year.
  • Kmart is bringing back the famed “blue light special” that was so successful for so long
  • Sears has a new marketing campaign entitled “Sears: Where It All Begins” with a new commercial that analyst Bill Dreher called “brilliant”. These begin Sunday, May 6th
  • Will expand the Craftsman and DieHard brands in Kmart locations

Personally, I feel the Craftsman and DieHard move should have been done long ago but probably was not due to production constraints with current suppliers. At any rate, the expansion of sales channels of these products will provide more value to the names and add more value to the recently created securities created from them. What does that mean? Essentially, Lampert created a bond – like instrument based on the Craftsman, Kenmore and DieHard brands. Holders of these “bonds” receive interest payments based on the performance of the brands. The better the performance of the brands (more sales) the more value these “bonds” then have. Here is the brilliant part. Currently these “bonds” are valued at approx. $1.8 billion and as these brands are sold through more channels, that only increases. In theory, Lampert could use them as cash to buy another company. Because there are future payments attached to the “bonds”, he would then be able to pay a discount for the company to it’s current price based on the future value of those payments.

Another way to look at it is Lampert now sits on about $4 billion in cash at Sears. By creating these securities, he essentially created another $1.8 billion “out of thin air”. The value of these brands was always there, he just found a way to monetize it.

2007 will be a seminal year for us shareholders, much like 2005 was for Kmart holders. My guts tells me that several acquisitions are on the way that will transform Sears holdings forever. Lampert seems to like brands so do not be surprised to see several smaller ones involving brands, not necessarily sales outlets. By doing it this way, he gives more people reason to go to Sears and Kmart locations to get those brands and by adding them to the “securtization bonds”, increases the value of them also.

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Don’t People Get Tired Of Doubting "Lampert U" Grads?

Another blowout quarter for RadioShack (RSH) and it’s Lampert University grad CEO Julian Day. Much has been written that past few weeks about The Shack in anticipation of its result and the sentiment was for of the end of the ride for shares. I will not point out those who wrote these articles but suffice it to say, wrong again folks. Results:

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LeapFrog (LF): Turnaround On Schedule


LeapFrog Enterprises, Inc. (NYSE: LFNews), a leading developer of technology-based learning products, today announced financial results for the first quarter ended March 31, 2007. For the first quarter of 2007, the company reported net sales of $60.9 million and a net loss of $30.4 million, or $0.48 per share. Cash and investments totaled $195.5 million at March 31, 2007.

“First quarter sales and gross margin were generally on track with our expectations,” said Jeffrey G. Katz, president and chief executive officer of LeapFrog. “Our cash balance at quarter-end remained strong and our new product milestones for 2007 and 2008 remain on plan.”

Highlights:

  • Net sales for the quarter ended March 31, 2007 were $60.9 million, compared to $66.5 million for the quarter ended March 31, 2006, a decrease of 8.4%. Net sales from the U.S. Consumer segment totaled $43.4 million for the first quarter 2007, compared with $46.8 million for the first quarter 2006.
  • Net sales from the International segment totaled $12.5 million for the first quarter 2007, compared with $12.0 million for the first quarter 2006.
  • Net sales from the SchoolHouse division totaled $5.0 million for the first quarter 2007, compared with $7.7 million for the first quarter 2006.
    Gross margin for the quarter ended March 31, 2007 was 40.5%, up 3.2 percentage points from gross margin of 37.3% for the first quarter 2006,
    Operating expenses totaled $54.9 million for the first quarter 2007, an increase of 1.7% compared to $54.0 million for the first quarter 2006. Higher research and development expense associated with new product development was partially offset by lower advertising expense in Europe.
    Loss from operations was $30.2 million for the first quarter of 2007 compared to $29.2 million for the first quarter of 2006. The $1.0 million increased loss reflects higher research and development expense, partially offset by lower selling, general and administrative expense and lower advertising expense.
    The company recorded a net loss of $30.4 million, or a net loss of $0.48 per share, for the first quarter of 2007, compared to a net loss of $23.6 million, or a net loss of $0.38 per share for the first quarter 2006.
  • Inventories, net of allowances, were $76.2 million at March 31, 2007, compared with $73.0 million at December 31, 2006, and $163.7 million at March 31, 2006.
  • Cash and investments totaled $195.5 million at March 31, 2007, compared with $148.1 million at December 31, 2006, and $202.3 million at March 31, 2006.

Key Performance Metrics and Outlook
Bill Chiasson, chief financial officer, stated, “Our first quarter sales decrease primarily reflects continued declines in LeapPad product sales as a part of our planned transition to a new reading platform in 2008 as well as the impact of our SchoolHouse restructuring strategy. As a result of the many operational changes we made last year, gross margins improved modestly and inventories at both LeapFrog and retailers remain at the lowest levels since 2001.”

The company reiterated its current expectations for full year 2007 results:
— Expects a modest sales decline from fiscal 2006 sales of $502.3 million, with sales being softer in the first half of 2007 pending shipments of new products in the second half of the year.
— Expects an improvement in gross margin compared with 29.3% for 2006 driven by inventory clean-up efforts in 2006 and an improved product mix in 2007.
— Operating expenses are expected to decline from $271.7 million for 2006 consistent with the expected sales decline.
Net loss is expected to show a significant improvement over 2006.

From the Call

  • Schoolhouse segment lost $600K in Q1 as most sales come in Q2 at end of school year
  • Retailer feedback on new items “very encouraging”
  • Inventories at historic lows
  • “Very encouraged” at progress and outlook for rest of year
  • Little competition in “learning segment” of business

Do not get excited about the 8 cent difference in earnings vs the estimates. With only 65 millions shares outstanding that only amounts to 5 million dollars and R&D was the reason. Sales are ahead of schedule and new product reception is excellent.

Things are looking very good here as both management and the analysts were all very positive on the results.

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Lead Found In Baby Bibs: Sue Paint Co’s?????

The discovery of lead in the fabric of a brand of baby bibs sold at Wal-Mart Stores (WMT) has resulted in a recall of the items, the company said. Jon Gambrell from the Associated Press reported today.

“The bibs, sold under the Baby Connection brand name, came in packs of two to seven bibs, with embroidered prints or images of Sesame Street characters. Some were sold as long ago as 2004. The bibs were made by Hamco Inc. exclusively for the Bentonville-based retailer.

Mia Masten, a Chicago-based spokeswoman for Wal-Mart, said the vinyl portion of the bibs exceeded the lead levels set by Illinois for children’s products. She said the company had worked with the Illinois attorney general’s office to pull the items and later decided to expand the recall nationwide.

Masten said about 60,000 of the bib bundles were sold in Illinois without any reported injuries.

Masten said officials with the world’s largest retailer have been in contact with Hamco, but referred all questions about the products’ manufacturing to Hamco.

Officials at Hamco, a subsidiary of Crown Crafts Inc. of Gonzales, La., said the company has no comment and referred questions to Wal-Mart.

The Illinois attorney general’s office identified the bibs as being sold between June 2004 and the end of March of this year in Wal-Mart stores throughout the state. Tests on three styles of the bibs tested positive for lead more than 600 parts per million, Illinois’ standard for lead in children’s products, said Robyn Ziegler, a spokeswoman with the attorney general’s office.

While Wal-Mart pulled the product from its shelves nationwide, Masten said only customers in Illinois would be eligible to receive refunds or replacements. It wasn’t immediately clear why the refunds only covered Illinois.

Initially, Masten said the recall only pertained to Illinois. Later Wednesday, she said it was nationwide.

Wal-Mart’s recall comes after a lawsuit over the bibs by the Center for Environmental Health, based in Oakland, Calif. Alexa Engelman, a researcher there, said the center became aware of the bibs in September. Engelman said a report by an independent laboratory test contracted by the center showed the bibs contained 16 times the amount of lead allowed in paint.

Lead, used as a stabilizer in vinyl plastic, can be “easily substituted” for other products, Engelman said.

Public health experts consider elevated levels of lead in blood a significant health hazard for children. Studies have repeatedly shown that childhood exposure to lead can lead to learning problems, reduced intelligence, hyperactivity and attention deficit disorder. There is no lead level that is considered safe in blood, and recent studies have shown adverse health effects even at very low levels.

The U.S. Consumer Product Safety Commission issued a statement Wednesday saying that the bibs were safe if in good condition. However, if a bib “deteriorates to the point that a baby could pull or bite off and swallow a piece of vinyl containing the lead, then the amounts of lead consumed could approach levels of concern,” the agency said.

Those who purchased the bibs in Illinois can return them at their local Wal-Mart for a full refund or can receive a free replacement by calling (877) 373-3812.”

This is more proof that lead is everywhere in our society and to hold one segment of the business community, namely paint companies like Sherwin-Williams (SHW), Valspar (VAL) and NL Industries (NL) responsible for all the damage is causes, especially when they have not produced lead paint in 50 years, is irresponsible. These bibs contained more lead than paint ever did and may have been poisoning children since 2004 especially when you consider how often children chew on them. But hey, lets go after paint companies??

These suits have no merit.

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Owens Corning (OC) Earnings Call Notes & A Lesson

From the Call:

  • Roofing business will see a resurgence “soon”
  • Housing market has become a “bit more pessimistic” and may be a bit slower for a little longer but, second half seasonality of OC’s business will see a improvement (45% 1st half, 55% 2nd half).
  • Sign’s are out there that they market may have bottomed and is improving in certain areas.
  • A prolonged housing slowdown will not affect this years results (as long as there is no further dramatic deterioration)
  • Current housing downturn was unlike any other as it was very dramatic and was not caused by overall deterioration of the economy and commercial business was not affected materially.
  • Insulation sales are picking up
  • 07′ sales should mirror ’06 and improve throughout the year
  • Roofing inventory has been built in Q1 when asphalt prices are low (new strategy)

A Lesson:
Did you panic today after the earning were announced? A whole bunch of people did as shares dropped $1.57 each in the first 4 minutes of trading on volume 40,000 shares. Those folks then watched as shares immediately climbed out of that hole and ended the day up almost 20 cents for a $1.77 swing. Us “long termers” maybe picked up few more shares when they went on sale this morning? Kudos to you if you did!!

Today was a perfect lesson for us. Those with short term outlooks will get burned time after time by news and those of us with long term perspectives will use those very instances to by more shares on sale and ad to our gains…..

Great day today…

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Owens Corning (OC) Earnings: Nothing Unexpected

Owens Corning (NYSE: OC) reported consolidated net sales of $1.324 billion for the first quarter ending March 31, 2007, compared with $1.601 billion during the same period in 2006.
First quarter sales declined 17 percent.

“As expected, our performance in the first quarter reflected weaker volume in our building materials businesses associated with the significant slowdown of new residential construction in the U.S.,” said Dave Brown, president and chief executive officer. “We are focused on delivering value to our customers through innovation, and our productivity initiatives to drive operational performance in a weaker market.

“Our Composite Solutions business continues to deliver solid results,” said Brown. “Strong demand for glass fiber materials in North America and Europe delivered improved margins that allowed us to offset cost inflation. Our Japanese acquisition, completed in the second quarter of 2006, also improved our top-line growth.”

When reviewing the operating performance of the company with its Board of Directors and employees, management makes adjustments to earnings before interest and taxes (“EBIT”) and diluted earnings per share. To calculate “adjusted EBIT” and “adjusted diluted earnings per share,” management excludes certain items from net earnings and earnings before interest and taxes, including those related to the company’s Chapter 11 proceedings, asbestos liabilities, and restructuring and other activities, so as to improve comparability over time (the “Comparability Items”). As described more fully in the attached financial schedules, such Comparability Items amounted to charges of $28 million in the first quarter of 2007 compared to a credit of $1 million during the same period of 2006.

Consolidated First-Quarter Results
— EBIT in the first quarter of 2007 was $33 million, compared with $115 million during the same period of 2006. Adjusted EBIT for the first quarter of 2007 was $61 million, compared with $114 million during the same period in 2006. The decline was primarily due to lower sales as the weakening new residential construction market impacted demand for building materials, and higher material and delivery costs.

— Diluted earnings per share for the first quarter of 2007 were $0.01. Adjusted diluted earnings per share for the first quarter of 2007 were $0.14.


Quarter Highlights:

  • — Weakened demand in Insulating Systems and Roofing and Asphalt, combined with seasonal slowdowns in the building materials market, resulted in continued production curtailments at selected manufacturing facilities during the first quarter.
  • — Demand for glass fiber reinforcement products was robust in the first quarter, leading to higher capacity utilization and improved productivity.
  • — At the end of the first quarter of 2007, the company had $2.063 billion of short- and long-term debt, compared with $2.736 billion at the end of 2006. The company’s debt at the end of 2006 included a note payable to the 524(g) Trust of $1.390 billion, plus interest, which was paid in full on January 4, 2007, a portion of which was funded by borrowing $600 million under the company’s delayed draw senior-term loan facility during the first quarter of 2007.
  • — Owens Corning announced a share buy-back program in the first quarter under which the company is authorized to repurchase up to 5 percent of Owens Corning’s outstanding common stock. The company did not repurchase any shares during the first quarter.
Update: Proposed Owens Corning and Saint-Gobain Joint Venture
On February 20, 2007, Owens Corning and Saint-Gobain announced that they signed a joint-venture agreement to merge their respective reinforcements and composites businesses, thereby creating a global company in reinforcements and composite fabrics products with worldwide revenues of approximately $1.8 billion and 10,000 employees. The new company, to be named “OCV Reinforcements,” will serve customers with improved technology, an expanded product range and a strengthened presence in both developed and emerging markets. The transaction, which has been approved by the Boards of Directors of both parent companies, is subject to customary closing conditions and regulatory and antitrust approvals. Given the timing of regulatory and antitrust review, the joint venture is targeted to close during the second half of 2007.

Update: Strategic Business Review: Siding Solutions Business & Fabwel Unit
Consistent with Owens Corning’s ongoing review of its businesses, the company announced during the first quarter that it will explore strategic alternatives for its Siding Solutions business, which includes its vinyl siding manufacturing operations and Norandex/Reynolds distribution business, and the company’s Fabwel unit, the leading producer and fabricator of components and sidewalls for recreational vehicles and cargo trailers. The company expects a midyear completion of this review process.

2007 Outlook

Based on current estimates by the National Association of Home Builders (NAHB), the slow down in U.S. housing starts is expected to carry well into 2007, which will continue to impact the company’s Insulating Systems business. Demand for Owens Corning’s Roofing and Asphalt products is driven primarily by the repair of residential roofs, with lesser demand coming from housing starts. Owens Corning is assuming a more normal level of demand associated with storm activity in 2007.

Owens Corning expects that the Composite Solutions segment will benefit from strong global demand for glass fiber materials throughout 2007. In addition, the recent introduction of new products has the potential to positively impact this segment in 2007.

Upon emergence and the subsequent distribution of contingent stock and cash to the 524(g) Trust in January 2007, Owens Corning generated a significant U.S. Federal tax net operating loss of approximately $2.8 billion. Based on current estimates, the company believes its cash taxes will be about 10 to 15 percent of pre-tax income for the next five to seven years. Owens Corning anticipates that its effective tax rate will be approximately 36.5 percent for 2007.

Allowing for continued uncertainty and based upon the NAHB’s current 2007 estimate of 1.45 million housing starts, the company continues to project that 2007 adjusted EBIT should exceed $415 million, not including the impact of the proposed Owens Corning – Vetrotex joint venture or other strategic organizational changes. This forecast will be updated and communicated quarterly.

First-Quarter Business Segment Highlights

Insulating Systems
— EBIT for the first quarter was $53 million, compared with $122 millionduring the same period in 2006. Results were unfavorably impacted by a decline in sales volumes, changes in product mix, idle facility costs resulting from production curtailments, and increases in material and labor costs. In addition, results were negatively impacted by $11 million, primarily related to depreciation and amortization costs, resulting from the adoption of Fresh Start Accounting.

Composite Solutions

— EBIT for the first quarter of 2007 was $26 million, compared with $14 million during the same period in 2006. The improvement was primarily the result of stronger demand, manufacturing productivity, improved margins and lower marketing and administrative costs. Results for the first quarter of 2006 also included approximately $6 million in expense resulting from downtime to repair and expand the company’s Taloja, India manufacturing facility, and $8 million of gains on the sale of metal. Results were negatively impacted by $1 million resulting from the adoption of Fresh Start Accounting.

Roofing and Asphalt
— EBIT for the first quarter was a loss of $8 million, compared with record first quarter earnings of $29 million during the same period in 2006. The decrease was primarily driven by lower volume resulting from declines in new construction activity in North America, combined with lower storm-related demand and the impact of higher material costs. Results were negatively impacted by $1 million resulting from the adoption of Fresh Start Accounting.

Other Building Materials and Services
— EBIT for the first quarter of 2007 was a loss of $1 million, compared with a loss of $3 million during the same period in 2006. The improvement was primarily due to increased earnings in the company’s Cultured Stone® business. The adoption of Fresh Start Accounting had no significant impact on this segment during the first quarter of 2007.

Synopsis:
As expected, a lousy quarter. As value investors we buy businesses when they are hopefully at their worst. Owen’s clearly is at that level yet it is still making money. The real important takeaways is that full year guidance was unchanged. The St. Gobian merger will go through later this year. An active (or even moderate) hurricane season will really bolster the stock and any revival in housing will help. Essentially all business segments (except composites) are bottoming. as value investors this is the perfect spot to be in as we will ride the wave when they rebound laster this year. Like I have said many times before, ignore today’s price activity in the stock. If it gets hit hard enough, buy more, the downside from here is minimal. This investment in a two year one at a minimum, do not let one quarter or one half a year shake you out of what will end up being a very profitable investment down the road.

I will be on the call today at 11 and update with any important announcements.

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ADM: Long Term Outlook Fantastic


From The Press Release:

  • Net earnings for the quarter ended March 31, 2007 increased 4 % to $ 363 million — $ .56 per share from $ 348 million –$ .53 per share last year.
  • Third quarter segment operating profit increased 8 % to $ 593 millionfrom $ 549 million last year.
  • Oilseeds Processing operating profit decreased due to lower softseed and biodiesel processing margins.
  • Corn Processing operating profit increased 15% due to lower operating costs and increased ethanol and sweetener selling prices partially offset by increased net corn costs.

“We performed well in a challenging quarter,” said ADM Chairman and CEO Patricia A. Woertz. “We are particularly pleased with continued strong performance in our corn processing segment. Our results also
benefited from actions to strategically align our portfolio and our outlook on future opportunities remains quite strong.”

From The Earnings Conference Call:

  • 15.4 million shares repurchased at $34 a share
  • US corn crop production up from 74 to 90 million acres
  • Brazil corn production up 7 million bushels (42 to 49 million)
  • Argentina, China will also have larger corn crop production in 2007-2008
  • Corn yields per acre will jump significantly either this year or next due to new seeds
  • There are still more acres under the conservation program that can be planted with corn
  • 4th Q 2007 will start selling HFCS to Mexico in large quantities.
  • Worldwide Soybean supplies adequate for 2007-2008
  • Washington will expand the RFA (Renewable Fuels standard) to 15% of all gasoline sold
  • Current studies indicate Flex Fuel car fleet expansion will not be necessary to accomplish this
  • Oil Processing results will correct itself this year as rapeseed production recovers from abnormally low levels currently
  • Ethanol expansion when complete will produce over 1.5 gallons annually billion annually or approx. 19% of US total (estimated at 8 billion gallons by the end of 2008)
  • Additional business and governmental partnerships “will most definitely” be announced this year.
  • HFCS pricing will remain at current historically high level throughout year (are contacted)
  • Ethanol prices will increase throughout year. Demand is very strong
  • Biodiesel demand will double between now and 2012
  • ROE is targeted at 13% which is “well above cost of capital” (q1 was 13.8%)
  • Long-term opportunities are “very strong”. Woertz “this quarters results actually increases my confidence in our ability to manage through any difficulty and make me more optimistic about our future”
  • Two cellulose ethanol project are continuing

A “challenging quarter” for ADM. Is it a “bad” one? Consider this, ADM encountered it’s highest corn prices of approx. $2.75 to $3.00 per bushel since 1984 yet still managed to increase profits in that division over a prior year comparison of $2.37 a bushel which was below the 35 year average of $2.57 a bushel. With a record US and worldwide corn crop planted this year (the most since WWII), prices will fall and ADM’s profits in this division will explode. ADM managed this price spike brilliantly and CEO Woertz ought to get kudos from investors for doing so.

Now, ADM is up 25% since I recommended it in January so expect the stock -to get hit because the “analysts” expected 60 cents a share. This will be a text book call by the analyst. Because of the run up, expect a downgrade or two in the stock and these folks only look out quarter by quarter. This is ok and expected. If you have been kicking yourself for not buying it sooner, you are now going to get a chance to get it cheaper. What does this mean long term? It means that even a spike in corn prices to 35 years highs cannot derailed this companies corn processing operations.

The Future: Massive Capacity Expansion (Completion Dates):
Missouri JV Biodiesel Plant : Completed 12/2006
N. Dakota Biodiesel Plant: 6/2007
Brazil Biodiesel Plant: 8/2007
Iowa Ethanol Plant: Phase I: 6/2007 Complete: 10/2008
Illinois Ethylene Glycol Plant: 10/2008
Pennsylvania, Cocoa Plant: Phase I : 3/2008 Complete: 1/2009
Nebraska Ethanol Plant: 11/2008
Nebraska PHA Plant: 11/2008
2nd Nebraska Etannol Plant: 12/2008

All are on schedule and on budget.

ADM has grown earnings spectacularly the past two years without adding any additional capacity. When this new production capacity goes online, earnings growth of 60% just from it alone is not only likely, but a in the end, probably a conservative estimate.

The ADM that reported to day is a shell of the company that will report earnings next year this time and will be dwarfed by the capacity of the ADM at the end of 2008. Long term shareholders are going to be richly rewarded as the long term fundamentals for all their businesses are favorable. One quarter does not a year make and smart investor will use the dip upcoming to buy more shares at artificially low prices.

Pentagon Wants Biofuels:
The U.S. Defense Department has launched an effort to reduce the military’s reliance on traditional aircraft fuel.

The Pentagon’s Defense Advanced Research Projects Agency has released a tender for the exploration of energy alternatives for the military. Officials said DARPA has sought proposals from companies and universities that would increase fuel efficiency and produce biofuel for military jets from agriculture or aquaculture crops.”DARPA seeks processes that use limited sources of external energy, that are adaptable to a range or blend of feedstock crop oils, and that produce process by-products that have ancillary manufacturing or industrial value,” the agency said.

Officials said commercial alternatives to traditional fuel have not met the higher energy density and wide-operating temperature range required for military aviation uses. They said the Pentagon has designed a program entitled BioFuels to convert crop oil to military aviation fuel, known as JP-8. Those invited to participate in the competition would deliver at least 100 liters of JP-8 surrogate biofuel for initial government laboratory testing.

Anyone want to bet this is the “governmental partnership” CEO Woertz spoke of being announced this year?

Summary:
Let’s not forget, despite the temporary headwinds, earnings still grew and even at $40 a share ADM only trades at 14 times trailing twelve months earnings. This stock is by no means overvalued. We have a company with fantastic long term fundamentals that is the world leader in all its product categories trading at a discount to the market. What is not to like?

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Where Did The Lead In Children Come From?

A question recently posed to me. “What can the lead paint companies (Sherwin Williams (SHW),and NL Industries (NL), do to preserve their image during these trials?”

In an word, attack. Punching bags get beat up. Go on offense and educate the public.

Three lead paint Facts the public is unaware of:

  • Master painters demanded lead-based paint, and government experts described it as the “best choice for house owners,” because it was washable and durable.
  • Federal and state governments recommended, and often specified its use – in the 1920s, the 1930s and all the way to the 1970s.
  • No U.S. public health official or government – federal, state or local –advocated restricting the use of lead in house paint until 1949, when public health investigations in Baltimore first identified the risks to children from chipping and peeling lead paint in poorly maintained homes. The federal government did not ban the use of lead-based house paint until the 1970s.

Lead Paint Was Recommended By US State & Fed Government- The Same Gov’t Now Suing Them For It’s Production:

The U.S. Departments of Commerce, Interior and Agriculture, along with other federal and state agencies, recommended lead paint for its durability from the early 1900s through the late 1970s. Fifty of the public housing projects built by President Roosevelt’s Public Works Administration in the mid-1930s specified use of interior lead-based paint to obtain the durability government paint experts found was best provided by such paint. “Public Housing,” “Unit Plans,” and “U.S. Housing Projects,” The Architectural Forum, 345-424 (May 1938). In 1939, the U.S. Forest Service said that lead paint is “the best choice for house owners who wish to allow very long intervals, longer than the durability of any other white or tinted paint, to elapse between jobs.” U.S. Forest Service, “Shopping For Paint,”Consumer’s Guide, Vol. 5, No. 16, at 6 (Feb. 13, 1939). In 1944, the War Production Board resisted the decrease of the amount of lead in paint.

“As a result of these formulation changes, the actual basic carbonate of white lead content of paints is already at an irreducible minimum. And any further reductions in the lead content could only be made at the expense of durability.”

In a 1945, Percy Walker, the chief of the Chemistry Division, and Eugene Hickson of the National Bureau of Standards, presented recommendations as to the use of painting materials to meet federal specifications. The manual stated:

“White lead, a component of almost all white and light-colored paints, is one of the most important white paint pigments.”

In 1933, the American Public Health Association wrote a publication responding to reports of childhood lead poisoning. The association recommended not using lead-based paint on baby toys, beds and carriages. However, it also said it otherwise had wide fields of usefulness like house paint:

“Although lead paint has many wide fields of usefulness, babies’ toys, beds and carriages are not the places to put it.”

The great majority of interior lead-based paint was applied before 1930. By 1940, very little lead pigment was being used for interior residences

Sherwin-Williams (SHW ) stopped producing lead pigmented paint in 1947, a full 30 years before it was banned!!

Beginning in the 1920s, industry sponsored no-strings attached research into risks from lead paint and worked with the American Academy of Pediatrics, the American Standards Association and other public health groups to develop a voluntary national standard to take most of the lead out of interior paint in 1955, long before the federal government required it. In fact, one of the State’s expert witnesses in Rhode Island – Dr. David Rosner – testified that the industry never hid scientific studies about the risks of lead paint from the public, the government or public health officials.

Only 12% of Children Are Even Tested for Lead:

How can we have a “public nuisance” that is so irrelevant that Dr’s and parents only have 120 in 1000 children tested for it and of those 120 children, only 1 of them even test positive for elevated levels? That is “elevated”, not dangerous. Of the 23.3 million children under 72 months in the US in 2005, only 2.9 million of them were even tested for lead in their blood. Of those, only 1.5% tested positive for lead in their blood. The question then needs to be asked: Where did the lead come from? Since there is no way to prove the source unless the possible contacts and sickness are immediately correlated, lead paint defendants need to show other source of possible lead paint exposure. If it is not the improperly maintained paint that is making people sick, then the paint can not be construed a “public nuisance” can it? Other proven sources of lead poisoning in children

From the CDC website:

The potential for children to be exposed to lead from candy imported from Mexico has prompted the U.S. Food and Drug Administration (FDA) to issue warnings on the availability of lead-contaminated candy and to develop tighter guidelines for manufacturers, importers, and distributors of imported candy. Lead has been found in some consumer candies imported from Mexico. Certain candy ingredients such as chili powder and tamarind may be a source of lead exposure. Lead sometimes gets into the candy when processes such as drying, storing, and grinding the ingredients are done improperly. Also, lead has been found in the wrappers of some imported candies. The ink of these plastic or paper wrappers may contain lead that leaches into the candy.

Lead has been found in some traditional (folk) medicines used by East Indian, Indian, Middle Eastern, West Asian, and Hispanic cultures. Traditional medicines can contain herbs, minerals, metals, or animal products. Lead and other heavy metals are put into certain folk medicines on purpose because these metals are thought to be useful in treating some ailments. Sometimes lead accidentally gets into the folk medicine during grinding, coloring, or other methods of preparation. People selling a remedy may not know whether it contains lead. You cannot tell by looking at or tasting a medicine whether it contains lead. Consuming even small amounts of lead can be harmful. There is no safe blood lead level. Lead poisoning from folk remedies can cause illness and even death. Lead has been found in powders and tablets given for arthritis, infertility, upset stomach, menstrual cramps, colic and other illnesses. Greta and Azarcon (also known as alarcon, coral, luiga, maria luisa, or rueda) are Hispanic traditional remedies taken for an upset stomach (empacho), constipation, diarrhea, vomiting, and used on teething babies. Greta and Azarcon are both fine orange powders that have a lead content as high as 90%. Ghasard, an Indian folk remedy, has also been found to contain lead. It is a brown powder used as a tonic. Ba-baw-san is a Chinese herbal remedy that contains lead. It is used to treat colic pain or to pacify young children.

If swallowed or put in the mouth, lead jewelry is hazardous to children. In 2003, a 4-year-old child swallowed a piece of jewelry bought from a vending machine. The child became ill because the jewelry was made of lead. The potential for children to be exposed to lead from this source caused the U.S. Consumer Product Safety Commission (CPSC) to issue on July 8, 2004, a recall of 150 million pieces of metal toy jewelry sold widely in vending machines. In 2006, there was a death of a child from acute lead poisoning after ingestion of a heart-shaped metallic charm containing lead. The charm had been attached to a metal bracelet provided as a free gift with the purchase of shoes manufactured by Reebok International Ltd. On March 23, 2006, a voluntary recall of 300,000 heart-shaped charm bracelets was announced by CPSC and Reebok

Other Proven Lead Hazards That Have Nothing To Do With Paint:

  • Drinking water. Your home might have plumbing with lead or lead solder. Call your local health department or water supplier to find out about testing your water. You cannot see, smell, or taste lead, and boiling your water will not get rid of lead. If you think your plumbing might have lead in it:
    • Use only cold water for drinking and cooking.
    • Run water for 15 to 30 seconds before drinking it, especially if you have not used your water for a few hours.
  • The job. If you work with lead, you could bring it home on your hands or clothes. Shower and change clothes before coming home. Launder your work clothes separately from the rest of your family’s clothes.
  • Old painted toys and furniture.
  • Food and liquids stored in lead crystal or lead-glazed pottery or porcelain.
  • Lead smelters or other industries that release lead into the air.
  • Hobbies that use lead, such as making pottery or stained glass, or refinishing furniture
  • In 1979, cars released 94.6 million kilograms (kg; 1 kg equals 2.2 pounds) of lead into the air in the United States. In 1989, when the use of lead was limited but not banned, cars released only 2.2 million kg to the air.” “lead was banned for use in gasoline for transportation beginning January 1, 1996.
  • The potential for exposure to lead in canned food from lead-soldered containers is greatly reduced because the content of lead in canned foods has decreased 87% from 1980 to 1988.
  • Lead may also be released from soldered joints in kettles used to boil water for beverages. “The domestic use pattern for lead in 1990 was as follows: lead-acid storage batteries, used for motor vehicles, motive power, and emergency back-up power, accounted for 80% of total lead consumption; ammunition, bearing metals, brass and bronze, cable covering, extruded products, sheet lead, and solder represented 12.4%; the remaining 7.6% was used for ceramics, type metal, ballast or weights, tubes or containers, oxides, and gasoline additives (USDOC 1992).”
From a Lead Inspector:

I’m a service provider in environmental health and safety. I go out to collect the samples, and train other inspectors to detect the danger. In what follows I will describe about nature of the threat from lead.

From my perspective in science and measurement, there are many sources of lead in the environment. So although we focus on lead paint in housing, let’s not lose sight of the big picture. When I think of lead exposure, I think of a lot of sources, with houses being possibly one of them. But also there are major exposures to lead in industrial areas. If any of you drive along Interstate 95, you will pass by or under bridges, water towers, various steel structures with lead paint on them. In fact, when we go out and do air monitoring and soil testing, our worst readings are not in housing at all. It’s when we go out on a bridge painting or repair project that see sky-high exposure. Also, I spent six years in ship-building and overhaul, and in that industry—due to the small confined spaces and compartments six-decks down—there are major exposures to lead.

At A Bridge Construction Site:

I pointed out that each bridge would have a dumpster full of the contaminated abrasive, and what the benefit was to the public health of removing it. The EPA staffer said, “You got a darned good point.” But when I asked him if he could change the regulation, he said, “I can’t do that. Lead-removal is the state’s job.” And yet, the state says that they will do it if the federal people make them do it. This has really been a challenge, to get different state transportation departments granted EPA waivers.

Homeowners Responsibility?
Home ownership carries with it responsibilities as well as rights, including the duty to maintain property in safe and habitable condition. Rental property owners properly are held accountable when they endanger children by failing to control lead hazards. Lead paint, when properly maintained is perfectly safe. Our homes are filled with substances that when improperly maintained, can be lethal (gasoline, oil turpentine, bleach, Draino, chemical cleaners, prescription meds). Lead paint is no different. In Providence,. a recent study from Brown University suggests that the vast majority of houses in Providence coated in lead paint are owned by just 204 landlords. The control of the hazard lies with the owner of the property.

Who’s Lead Paint?
There is no way to tell who manufactured the paint on the walls of an apartment that is poisoning a child. A Duke law professor and former solicitor general under President Bill Clinton has repeatedly testified that any attempt to hold manufacturers liable for paint sold even 100 years ago—when we can’t identify what pigment and what paint is causing the harm—would violate the due-process clause of the United States Constitution.

States Could Enforce Existing Laws:
Almost all states have law requiring landlord to rid premises of lead where children can get to it. These lasw are not enforced though. Fortunately that’s not the case in Maryland, where the city and state have begun to prosecute offending landlords. Since the year 2000, the state Department of the Environment and the Baltimore Health Department have taken 500 enforcement actions against landlords, including fines and renovation orders. Owners have finally begun sloughing lead from windows, doors and walls.During the same period, the number of children statewide who tested positive for elevated lead dropped from 3,900 to 3,400. The trim line is very positive. That suggests to me where communities need to be headed in order to deal with this problem.

The lead paint defendants need to educate the public about these still present dangers in everyday life regarding lead. Many of those who appear to care most about these children are pursuing dead ends, playing the blame game (See RI AG Patrick Lynch). Yet we know how to solve the problem at a cost that, if not trivial, is certainly less expensive than the road through the court system, with all its hidden toll-booths.If we don’t solve the problem by statute, we will live through a litigation nightmare, and the children will not be winners. But if we do pass the right laws, and enforce them, we will have much as a country to be proud of. Perhaps eliminating childhood lead poison might not rank right up there with eliminating smallpox, as we thought we had done twenty years ago. But what a feat it would be to eliminate this poison from the lives of those children who are already at greatest disadvantage.

Portions of this post from:

http://www.leadlawsuits.com/index.php?s=home

http://www.cdc.gov/nceh/lead/surv/stats.htm

http://www.manhattan-institute.org/html/lead_paint.htm

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Blogging From The Ohio Supreme Court

Jane Genova, who has done the most extensive and detailed reporting on the Lead Paint Litigation in Rhode Island, now moves her “live-blogging” talents to Ohio. She will be there next week blogging to us from inside the Ohio Supreme Court. I recommend all Lead Paint watchers check her blog for the updates as they will be coming fast and furious. What follows below is from her site “Law and More”:

“Tuesday, May 1st, is a double-header at the Ohio Supreme Court. First up, at 9:00 AM is the hearing on Governor Ted Strickland’s veto of Substitute Senate Bill 117 which we had thought had become a law when the former Governor Bob Taft didn’t veto it. The grapevine expects SRO since it’s expected that OH Attorney General Marc Dann is presenting the oral argument on behalf of Secretary of State Jennifer Brunner. She’s the one on the hot seat for taking the bill back and delivering it to the new Governor to veto.

Private counsel representing those who brought this appeal – OH Senate President Harris and OH House Speaker Husted – is Vorys, Sater, Seymour and Pease.

Next up is Arbino v Johnson & Johnson. That hearing is also important because it will test the constitutionality of OH’s tort reforms contained in comprehensive tort reform legislation – SB 80. I have calls out to those in the loop for interviews about that.

The court has wireless so the odds are good I will be live-blogging. I submitted a written request to the court. Incidentally, we bloggers don’t need press credentials to cover court hearings.

Those of you who can’t attend may tune in from a computer with broadband access.

Link to Ohio Supreme Court: http://www.sconet.state.oh.us/default_highres.asp

Link to Ohio Supreme Court Video: http://www.ohiochannel.org/

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ValuePlays Most Read Posts for April

5 Most Read Posts for April:

1- Altria (MO): Spin Q&A
2- Coal (BTU): There’s Green In It
3- Sears Holdings (SHLD) Securitizes Main Brands
4- Altria (MO): Spin Day And It’s Effect
5- Sherwin-Williams (SHW): No Lead Threat

Site traffic surged again this past month as subscribers rose 30% and daily traffic jumped 98% with 76% being new folks. Keep forwarding the daily email to family and friends and encourage them to sign up themselves, the more of us there are the better for all. Post’s that were picked up in The Street.com and Forbes really helped drive viewers.

  • I have added an email link on the main page. Feel free to email me thoughts and ideas for stocks or general investing. I do not always get a chance to review the comments on a post and if you are commenting on something that was posted days ago, chances are I may not get to it. Enhanced Features Subscribers always get top priority but I will try to get to all of you. As the numbers of site visitors grow each day the delay here may become longer. Do yourself a favor, just buy the subscription for $6.99 a month and guarantee a fast reply. Think of it this way, if you had bought just 10 shares of each stock I recommended when I recommended it, you would have paid for 41 months of the subscription already. It really is a no brainer.
  • Criticism and /or complaints are welcome also just, keep them constructive. I can promise insulting or otherwise inappropriate emails to me or other “commenter’s” will be deleted immediately and the email address blocked. If you are so inclined to send one, make it a good one because it will be the last.
  • I am always looking for way to better the site and frequent visitors at times have noticed some odd things as I learn programing code “on the fly” as they say. Feel free to email any ideas to me. I cannot promise I will act on them but they will be considered. Any legitimate suggestion to better your experience on the site will get serious consideration.
  • Stock or investing ideas are welcome and may be used in a future post. For your privacy, your email address will not (unless you want it to be).

158,304

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Notes From The Altria Shareholder Meeting


I have had quite a few posts on MO recently and this is a product of both earnings season and investor meetings, not a myopic focus on one stock. There were a couple of very important items discussed and disclosed at the annual meeting today. Here they are with opinion.

CEO Camilleri: “Over the next several months, we will continue to carefully and diligently examine the benefits of a spin-off of Philip Morris International (PMI) and other possible value-enhancing options to decide the optimal long-term strategic course to follow.”

Before the Kraft (KFT) spin there was no mention in any earnings report or announcement of the possibility of a spin. The very fact that Camilleri is even discussing it all but assures the spin shareholders want. It was also discussed on the earnings call last Thursday. It needs to be pointed out here that PMI is set up to run as an independent company so the actual spin will only be a paper transaction, not a logistical one.

Shareholder Returns

  • Our total shareholder return was 19.9% in 2006, assuming dividend reinvestment, outperforming the Standard & Poor’s (S&P) 500 Index for the fifth consecutive year.
  • Over the past five years, our total shareholder return has been an outstanding 142.6%, significantly ahead of the five-year total return for the S&P 500 Index at 35%.

New Products For PM USA Growth:

To enhance its growth profile, PM USA embarked on an adjacency strategy. It took the first step toward this goal in 2006 with the test market launch of Taboka, a smoke-free, spit-free tobacco product that provides a new way for adult smokers to enjoy tobacco in a pouch. PM USA has learned much from this test. While I cannot share our findings for obvious competitive reasons, I can state with confidence that these learnings will be translated into further action, and that a number of initiatives will be announced as the year unfolds.

Much has been said about the possibility of MO buying UST for the smokeless business. It will not happen. Why? Smokers are quite possibly the most brand loyal folks out there, chew users, not so much (I speak from experience, used to be one). What does MO have? The #1 brand of cigarettes with over 50% market share. If they introduce a new product, it will be accepted much like the instant acceptance a new Budweiser product gets by beer drinkers. It will receive a trial by chew users who will be inclined to like it as it will be perceived as being a quality product. They will have no problems abandoning their current product to try the new Altria one. The cost/benefit of a self-produced product vs. an acquired product is huge for us shareholders as it leaves billions to be returned to us.

Working With The FDA:
PM USA continues to be the only major cigarette manufacturer supporting regulation of the tobacco industry by the U.S. Food and Drug Administration (FDA). This February, legislation was introduced in the U.S. Congress that would grant the FDA comprehensive regulatory authority over all tobacco products sold in the United States. We believe that this proposed legislation offers the prospect of effectively reducing harm and providing real solutions to the many complex issues involving tobacco.

Altria and Philip Morris USA (PM USA) believe regulation of tobacco products by the Food and Drug Administration (FDA) would establish a comprehensive national tobacco policy that could potentially create a competitive framework within which manufacturers are focused on reducing the harm tobacco use causes. The companies believe regulation would also bring predictability and clear standards to the tobacco industry in the United States.

On February 15, 2007, Senators Edward Kennedy (D-MA) and John Cornyn (R-TX) and Representatives Henry Waxman (D-CA) and Tom Davis (R-VA) introduced legislation to grant the FDA broad authority to regulate tobacco products. Altria and PM USA strongly support this bipartisan legislation and urge Congress to take quick action on the Kennedy/Cornyn and Waxman/ Davis FDA bills.

The legislation, known as the Family Smoking Prevention and Tobacco Control Act establishes a regulatory structure and standards for the manufacturing and marketing of all tobacco products that will provide its greatest benefits to tobacco consumers. Key legislative provisions include:
  • Regulation of nicotine. The FDA would have authority to reduce nicotine yields and to reduce or eliminate harmful smoke constituents or harmful components of tobacco products;
  • Authority for the FDA to regulate descriptors such as “light” and “low tar”;
  • Changing the language of the current cigarette and smokeless tobacco product health warnings, enlarging their size and granting FDA authority to require new warnings in the future;
  • Full disclosure of ingredients added to tobacco products;
  • Authority for the FDA to require ingredient testing and to remove harmful ingredients;
  • Authority for the FDA to do more to prevent minors from using tobacco products;
  • Authority to establish standards for products that could potentially reduce the harm caused by tobacco products and to define the appropriate ways to communicate about these products; and
  • A ban on the sale of candy and fruit-flavored cigarettes.
Why would Altria be the only tobacco company that supports this? Easy answer. Because what this legislation will do is standardize cigarettes. Nicotine levels and other factors will be regulated, diminishing the differences between brands. When your brand is number one in a brand loyal market, eliminating the competitions ability to make their products substantially different than yours has the effect of negating them. Since cigarette companies cannot advertise their products, other companies will not be able to give tobacco users a reason to try something else. Essentially the brands people smoke will remain that way and when you have over 50% of the market, that is just fine. This is the reason other tobacco companies oppose this legislation. On another note, by letting the FDA control such wide ranging rules, Altria is taking a huge step at eliminating future liability threats. Every action they take will be approved by the Federal government and will remove liability that may stem from those actions. Brilliant. Much like the 1998 Master Settlement that made state governments defacto tobacco bond holders and slaves to the revenues they profess to want to reduce, this legislation will further cement Altria’s dominance of this highly profitable industry.

The Best Part
Camilleri: “Our ability to generate cash flow remains undiminished. Over the four-year period from 2006 through 2009, we project that cash flow will reach a cumulative level of some $41 billion. We plan to continue using our strong cash flow to reward you, our shareholders.”

This statement makes we want to go buy more shares. $41 billion dollars in the hands of one of the most shareholder friendly companies around makes me giddy. Without using any debt, MO could in theory by back almost 30% of the outstanding shares or, they could almost triple the annual dividend. They won’t go to those extremes of course but I point it out to illustrate the dramatic possibilities for shareholders of the amount of cash they will produce.

This stuff is really fun folks…..

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Dow Chemical 10am Earnings Call Highlights

  • Repurchased 9.3 million shares at a cost of over $400 million to complete 2005 program
  • 2006 share repurchase program triggered ($2 billion program)
  • Outstanding shares are being reduced and the new $2 billion program should be completed by middle of next year (approx. 45 million shares)
  • The “death of polyethylene” has been greatly exaggerated with demand only slowing in N. America
  • Liveris “2007 will change the earnings profile of the company from a commodity company”
  • Liveris “A big bang deal is not necessary to achieve this”
  • Debt is not being used for “assets light” expansion
  • High feedstock cost assets in N. America that were initially built to export, are being shut and moved to oversees to inexpensive feedstock geographic areas (Libya, Saudi Arabia, India, Russia, Asia) reducing costs.
  • Liveris on acquisitions when asked about GE Global “Nothing is off the table as long as it provides the correct integration” and “they are possible”
  • Increasing dividends vs increasing buyback: Desire to keep yield above 3.5% and add consistency to shareholder renumeration
  • Industry consolidation will continue

PDF. of presentation:

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Dow Chemical: Transformation Continues

Earnings Highlights:

  • Sales grew 3 percent to $12.43 billion from $12.02 billion last year
  • EPS of $1.00 a share met estimates
  • Earnings were $1.00 per share, down from $1.24 in the same period last year. The fall was principally due to a decline in licensing revenues from extremely high levels a year ago.
  • Double-digit sales growth in Europe, Asia Pacific and Latin America more than offset continued weakness in North America, particularly in the housing and automotive sectors.
  • Volume was up 1 percent in the quarter, with solid gains across most businesses.
  • Asia Pacific, Latin America and Europe all reported strong demand growth — with volume increases of 13 percent, 8 percent and 7 percent, respectively — more than offsetting an 8 percent decline in North America.
  • Prices edged 2 percent higher, with healthy gains across most of the company’s performance businesses and in basic plastics, dampened by lower prices in basic chemicals.
  • Equity earnings for the quarter were $274 million, an increase of more than 60 percent compared with the first quarter of 2006, reflecting the value of the Company’s asset light strategy.
  • Increased the quarterly dividend 12% to 42 cents a share –

CEO Andrew Liveris:

“We have spoken a great deal recently about the power of Dow’s integration and diversification – and these results amplify those words. Our geographic balance meant that robust sales in Europe, Asia Pacific and Latin America more than offset continued weakness in North America; strong growth in many of our Performance businesses and in Basic Plastics countered a downturn in Basic Chemicals; our joint ventures contributed another quarter of excellent earnings; and we continued to strengthen our position in several key industries through our market-facing business model.”

Regarding Feedstock Pricing:

“While there was a temporary pause in feedstock and energy cost increases at the start of the year, we saw a sharp change in direction mid-way through the quarter and expect second-quarter costs to be higher than the same period last year,” said Andrew N. Liveris, Dow’s chairman and chief executive. “That said, strong demand and good pricing momentum has continued through April — reinforcing our view that 2007 will be another solid year for the company.”

Buyout rumors:

Liveris on CNBC: “We are not for sale and have had no conversations with anyone regarding a sale”

Summary:

Another solid quarter for DOW. 5 years ago, the N. American decline would have decimated earnings. Now, it is becoming just a blip on the screen. Share buybacks are continuing, the dividend is increasing and it seems like each week another asset light highly profitable joint venture is being announced. There isn’t anything not to like about DOW now. Liveris is doing a masterful job at reinventing DOW and us shareholders are benefiting and will continue to for a long time… Kudos

I will be on the earnings call today at 10am and will update any significant statements.

Full Earnings Report Here: