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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).

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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:

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Sears Holdings: A Technical Look

Sears Holdings (SHLD) is in the process of finishing the rarest and most important “technical analysis” chart pattern, the “humping bulldog.” This phenomenon began in June of last year. You will notice on the chart below the arched tail of the bulldog as SHLD dipped until it bottomed in August of 2006. Then came the share price explosion upward from August to November, which represents the “humping” back of the bulldog. Predictably, the stock leveled out and dipped a bit (From November to January 2007) at the peak of the dog’s back heading into its head.

Then, following this classic chart pattern, the dog’s arched head is represented by the January to March upward trend in the stock. This is classic technical indicators of this pattern. The drop from February to mid March is the tell tale sign of the dog’s open and panting mouth.

The euphoria the dog feels is represented by the share price appreciation both during the chart pattern and after it is completed from mid March to mid April. This bodes very well for SHLD shares in the future as the current downturn since the recent highs may just be the beginning the rarest of rare, “round 2” bulldog patterns. We will need to get confirmation of course like all chart patterns but it looks good so far.

The question that now needs to be asked is….. who bought that? If you did, why? While the name of my “chart pattern” was ridiculous, the theory behind it is not really any different than any other chart pattern out there. The thought you can anticipate stock prices based on a pattern they make is not really any different that guessing you future from the alignment of the stars or a fortune teller reading the lines in your hand. What really drives stock prices? EARNINGS, period. Both actual and anticipated earnings, in the end are what determine the price of a stock. Not a mythical pattern on a piece of paper.

Let’s break it down. If earnings are what causes stock price appreciation or depression, then the lines on the chart simply reflect that sentiment. This means they are always backward looking in nature and give you no insight into any future patterns since their future trends depend on the future earnings of the company. It does not matter what “formation” the stock trading is making because if earnings beat expectations, the stock will rise no matter what the “chart” says it should do and vice versa if earnings disappoint.

I read on another post yesterday the saying “even a stopped clock is right twice a day”. It is true. You will find occasions when the “chartist” accurately predicts price movement in a stock. You will, however, find multiples of instances in which the chartist “did not get confirmation of the pattern”. Translation? They were wrong.

Earnings drive stock prices, not fortune tellers. The next time you are inclined to believe them, remember the “humping bulldog.”

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What Leprosy Can Teach Us About Investing

Pain…

Anyone who has ever had quad tendon surgery is intimately familiar with this concept. Try doing anything without the use of a quad muscle and then consider that the movement, or any effort to move it will cause your entire body to freeze as you attempt to deal with the searing pain it induces. Pain is your body’s way of saying “hey, you are damaging me… stop it.” The pain caused by hitting your thumb with a hammer while painful at first, is useful because it is your body’s way of telling you not to do that anymore and probably saving you from losing the use of your thumb.

In their non-fiction book “The Gift of Pain”, Phillip Yancy and Dr. Paul Brand describe a world without any pain:

” A WORLD WITHOUT PAIN?

Can such a place exist? It not only can—it does. But it’s no utopia. It’s a colony for leprosy patients: a world where people literally feel no pain, and reap horrifying consequences.”

Yancy writes about Dr. Brand who ran a leper colony in Louisiana. Most people associate leprosy as a skin disease. It is not. What leprosy basically entails is the dying of nerves in the extremities. This causes the leprosy sufferer to feel no pain so a cut on a foot is not known and becomes infected, a broken ankle is not felt and heals disfigured. Those with leprosy, since they cannot feel any pain behave in ways that cause more damage to themselves. Dr. Brand descibes a young boy who reaches into a fire to grab a potato that had fallen off a grill causing third degree burns to his hand all the while feeling nothing and continuing a conversation as though it had not happened. The boy is amused by all the attention he gets from the staff and continues to do things that cause more harm to himself, eventually losing his hands to injuries he never felt. Eventually lepers become crippled due to injuries they receive or, if not medically treated, die from infections they do not know are ravaging their bodies. Brand and Yancy argue that the pain we feel from events actually protects us from far greater pain and harm.

So how does this involve investing Todd?

Investing involves some pain. Not all of our pick are winners and we all lose money from time to time. It is what we learn from that pain that matters . Why did we make the pick we did? Was it a “hot tip” from a cousin? Was is up big one day so we bought it not knowing what the company really did or what kind of financial shape they are in? Was there a stock that we sold because the talking heads on TV or the “analysts” said we should even though in our gut we knew we shouldn’t, only to watch is double or triple after we sold? Did we buy a stock recommended by those newsletters we all get in the mail and lost a bunch? For a great analysis of these picks go the Stock Gumshoe here.

Doing any of these things when investing can cause you financial pain. Repeating them with more money on the line will lead to more pain and possibly financial ruin if the bet is large enough. An investing leper is someone who does not feel the pain of financial loss and continues to repeat the same mistakes until they have no more money left to invest. They refuse to learn from or accept the pain from their actions and repeat them with increasingly dire consequences.

In order to invest with success you must have a investing strategy. I am always amazed how people will invest thousands in a stock because Uncle Leo said to yet will drive to 3 different stores to save 20 cents on a gallon of milk. Why don’t they take the same time with their investments than they do shopping for food or clothes? The strategy you begin with will not be the same you end with. Learn from the mistakes you have made (we all make them) and adjust your strategy to eliminate them in the future. Making an investing mistake is not a crime, repeating it is.

In 2003 I sold USG because I listened to analysts and talking heads who said the company would be ruined by asbestos induced bankruptcy. I then sat and watched as the stock doubled, tripled and then quadrupled. I vowed to never make that mistake again. Because of that vow I have held Altria (MO) since 2003 despite the dire predictions regarding their litigation situation and continue to hold Sears Holdings (SHLD) despite the “dying retailer” predictions on TV and both have rewarded my patience spectacularly. Had I not learned from my earlier mistake I would have sold both long ago and would have a headache from beating my head against the desk and I watched thousands in potential profits never materialize.

You will make mistakes, learn from them and avoid far greater pain.

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Short Term Thinking and Altria, A Profit Killer

I received an email this weekend from “Rich” in Weston, VA. in response to my post on Altria last Thursday. I will paraphrase the applicable portion of it:

  • “No matter how you try and spin it, they missed the quarter, missed it. All the other items in your post (spin off of PMI, buybacks) are all old news, the street has already factored them into the price of the stock. That is why it did not even participate in this weeks action.”
This email is the poster child of short term thinking. If you are a long term investor what did you take away from the post? They raised full year guidance! I have a real hard time understanding how someone can think this is a bad thing. Unless that is, your time frame for investing does not extend to the whole year. Now, it should be noted than earnings adjusted for items were up 5% from last year. They just fell short of what analyst expected. So a 5% quarterly profit increase is bad?

I said in my interveiw with Geoff Gannon for his wonderful blog Gannon on Investing my best investing decision was buying MO in 2003 (my worst was selling USG in that same year, although my not buying CHD last year is rivaling that moronic decision). Let’s see what MO has done since then:


I am averaged in at about $29 a share. Has MO beat every quarter ‘s estimates the last 4 years? Absolutely not! But, is there anyone out there, looking at this chart who would have sold this stock, OR be disappointed had they bought it? Let also not forget the 12% dividend I got in 2003 that has continued to climb along with the stock. Had some of you been “Rich” from the email and a short term thinker, I am sure you would have sold along the way after an earnings “miss” and would be kicking yourself now.

Let’s talk about the “news already factored in” comment. To a certain extent this is true. To an extent. The “hope” of these events are in the stock, not the actual event. For proof we only need look at the recent Kraft spin off from MO. The day before the actual event (well after it was first announced in Jan.), MO traded for $85 a share. For the spin, we got Kraft shares with a monetary value at just under $22 a share. The day after the spin, MO traded for $70 a share. Given our $22 Kraft windfall that means MO had a pre-spin value (for trading purposes) of $92 but traded for only $85. Why the difference? If the announced event was fully factored in, the value of it should have been realized in the stock pre-spin, but it wasn’t.

Should the actual spin of PMI be announced, the stock will jump. It will jump again after the actual event. The same can be said of a share buy-back announcement. There is a possibility these will not happen anytime soon or ever, this is why the value of them is not fully being realized in the stock now. The buyback possibility is not being factored in at all because nobody knows how much they will buy back. 1% of the shares? 10%? More? The amount is a huge determination is what happens to the price of MO shares.

More proof that a PMI spin and buybacks are not being factored in? Look at MO’s PE. It currently stands at about 13 times earnings, well within it historical range. Were these upcoming stock boosting events being factored into the stock price currently, one would expect MO to be trading at a premium to it’s it historical PE, not at the midrange of it.

In my reply to “Rich” I stated the above albeit an abbreviated version and asked him to save my response and get back to me in a year…… let’s see if he does.

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ValuePlays in Forbes.com Personal Finance

Forbes.com:

This past week my post on selling puts was picked up in Forbes.com. You can view it here. I received a ton of email on it from readers and will probably do a follow up piece soon. I seem to have people thinking about them and it did spur a bunch of additional questions the original piece may have not answered totally.

They have been featuring articles by various bloggers lately and the site is full of great info. Please visit them here.

A Good Read:

Since I am laid-up recuperating from a torn quad tendon and patella bone repair and will be for the next 6-8 weeks (If I was a horse I would have been Barbaroed’ by now), I now have a bunch of time to catch up on some reading. This weekend I read through a little known Benjamin Graham book, “The Interpretation of Financial Statements”. It is a short book , only 88 pages plus 31 pages of financial terms defined at the end. I highly advise this book to anyone who decides to take stock picking into their own hands (which you should do if you currently own mutual funds). It is written for investors of all experience levels and provides examples for each “Lesson”. Please click on the link below and pick up a copy for yourself.

Read front cover flap here:

Table of Contents here: Note: click on the arrows on the side of the page 1 to see the second page of contents, it is the good stuff!

Oh yea…………. “Who was Ben Graham”? You may be asking. None other than Warren Buffet’s teacher and mentor. Read it and you will be keeping good company!!

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SUGGESTED BLOGS AND SITES- Updated

SUGGESTED BLOGS AND WEBSITES TO VISIT:

New Titles Are In Bold

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Sherwin-Williams: Just Paint Baby!


Earning Highlights:

  • Consolidated net sales were $1.756 billion and diluted net income per common share was $.83
  • Opened 27 net new stores; 17 in Paint Stores Group and 10 in Global Group
  • Working capital ratio–accounts receivable plus inventories less accounts payable to 12 months sales–was 13.1% for the quarter compared to 13.7% last year
  • Gross margin increased 150 basis points to 45.1% of sales from 43.6% last year
  • Reaffirming EPS guidance of $4.55 to $4.65 per share for the full year


Christopher M. Connor, Chairman and Chief Executive Officer, commented

  • “In spite of the tough paint market in the first quarter, we continued to invest in new stores, opening 17 net new locations in Paint Stores Group and ten in our Global Group. We made further progress in our management of working capital, reducing our working capital ratio to 13.1% of sales from 13.7% in the first quarter last year. Our operating segment management teams continued to achieve improved gross margins as a result of hard work invested over the last few years to return our gross margins to more normal run rates after being pressured by the significant rise in raw material costs during 2004, 2005 and 2006. We created shareholder value by our practical use of cash to buy shares of our own stock and increased the dividend rate (26%), and have strategically positioned our balance sheet to be financially sound and capable of financing our business growth. “
  • “During the second quarter of 2007, we anticipate achieving a percentage increase in consolidated net sales in the low single digits over last year’s second quarter. With sales at that level, we expect diluted net income per common share for the second quarter to be in the range of $1.37 to $1.45 per share compared to $1.33 per share last year. For the full year 2007, we anticipate that the percentage increase in our consolidated net sales will be in the low single digits over 2006. With annual sales at that level, we are reaffirming our guidance that our diluted net income per common share for 2007 will be in the range of $4.55 to $4.65 per share compared to $4.19 per share earned in 2006. For the second quarter and full year 2007, we expect the effective tax rates will be slightly higher than the rates recognized in 2006.”


Sherwin Williams (SHW) has taken a hit the past month due to it’s ties to the US housing market and the RI ruling. This ruling, while a short term negative is virtually meaningless when compared to the California Superior Court Ruling which will eventually lead to the RI case case being filed where it should be, the garbage can. This quarters numbers prove that management is adept at managing the company through these headwinds. Let’s not forget, these numbers are up against 2006 numbers that included a still booming residential housing and DIY (do it yourself) market. Two key factors contributed to offsetting the earnings decline:

  • The Company acquired 3,350,000 shares of its common stock through open market purchases at an average price of $69.27 during the quarter and had remaining authorization at March 31, 2007 to purchase 9,471,000 shares.
  • The Global Group’s net sales in the quarter increased 5.7% to $402.2 million from $380.6 million in the first quarter last year when stated in U.S. dollars. This Segment’s net sales increase of 4.8% in local currency was due primarily to a new product introduction in the U.K., architectural paint selling price increases and volume gains in South America and improved automotive and product finishes sales. Segment profit of the Global Group for the quarter improved $2.9 million, or 9.0%, to $35.4 million from $32.5 million in the first quarter of 2006 and increased as a percent to net sales to 8.8% from 8.5% last year

The growth in the global group offset the decline in the US DIY and New Residential segment and the shares buybacks did the rest as SHW was able to avoid an earning decline of a strong 2006 comparison. It should not be lost on readers that this international segment will take on further prominence and do more to insulate SHW from the US housing market due to it’s recent purchase of India’s Nitco Paints. This gives SHW a huge footprint in an paint market growing at a near double digit rate. The effects of this should be seen in the second half of 2007 and is probably the reason that despite the predicted Q2 earnings miss by the company, they still back their full year estimates. Another note: This anticipated “earnings miss,” is a miss on the current estimates that analysts have for Q2. SHW’s estimate of $1.37 to $1.45 a share is still above last years $1.33 number. I can live with that given the drastic deterioration in housing since last year.

Let’s also not forget the stock buyback. Although they do not expect to use the bulk of the authorization this year, the number of shares they are still authorized to buy represent about 7% of outstanding shares, providing another buffer for us shareholders. Gotta love it.

Lead Paint
After a brief summary of current litigation statuses, the subject was not revisited. Not one analyst on the call ask a single question about this. This is very telling as during the Altria (MO) call this morning (yesterday), several questions referenced the litigation environment surrounding tobacco, despite this being the best that environment has been in almost a decade. This has to lead one to believe that the analysts on the call (as well as yours truly) are not very concerned about the possibility of an eventual negative outcome here. While it is having a restraining effect on the stock now, when this cloud eventually evaporates, away we go..

SHW CEO, Mr. Christopher O’Connor is another wonderful example of a CEO who takes his fiduciary responsibility to us shareholders very seriously. Everything he is doing at SHW (dividend increases, buybacks, overseas expansion) are all geared at rewarding us shareholders. Sherwin is going to be not just a national leader but a global one soon. I currently own shares and will look to pick up more on weakness.

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Phillip Morris: Smokin’


MO Earnings Highlights:

— Adjusted for items, diluted earnings per share from continuing operations up 5.1% to $1.03 versus $0.98 in 2006
— Altria raises forecast for 2007 full-year diluted earnings per share from continuing operations to a range of $4.20 to $4.25, up from its previous projection of $4.15 to $4.20
— Strong operating companies income growth of 9.5% at Philip Morris International

So, another great quarter for “Big Mo”. Now, going forward, what do we expect? We would like to see the international operations spun off from the PMU (Phillip Morris USA). In the earnings release CEO Camilleri said:

  • “Strategically, the key event of the first quarter was the successful spin-off of Kraft. We now are focused on growing our tobacco businesses, while continuing to take measures to further enhance shareholder value,”…..”Philip Morris International had a strong first quarter with robust income growth, driven by higher pricing and aided by favorable currency, but faced challenges in certain markets, most notably Japan and Germany,” Mr. Camilleri said. “Philip Morris USA had a relatively weak quarter, but its retail share and volume performance improved as the quarter unfolded.”
Say what you want about tobacco and it’s evils, but as shareholders, MO has been wonderful stewards of our dollars. There is no doubt in my mind that “enhance shareholder value” means a couple of things. First, a dramatic increase in the dividend. Second, the international operations will be spun off. Third, MO will begin buying back shares on a large scale. Now, these may or may not be announced today at 9 am during the conference call but I would be very surprised that if they are not “officially” announced, they are not at least alluded to.

What will we have then? In PMU, we will have a slow growing cash machine that will most likely end up crushing the yield of every other DJIA stock. It’s cash position will allow it to buy back shares on a regular basis to enhance eps growth and reward shareholders.

In PMI (Phillip Morris International) you will have a fast growing company that will begin to gobble up more tobacco companies around the world. It will also be free from US regulation since it will be headquartered abroad and have no US operations. This is a point that cannot be overlooked. The regulations that currently hamper PMI operation and the US litigation threat always present are a damper on the valuation of this segment. Once these are removed, in the word of Ralph Kramden “to the moon Alice”. In Q1 2007 PMI:

  • PMI’s market share in the first quarter of 2007 advanced in many countries, including gains in Austria, Argentina, Australia, Egypt, Finland, France, Greece, Hong Kong, Hungary, Indonesia, Italy, Korea, Mexico, Philippines, Poland, Portugal, Singapore, Serbia, Sweden, Ukraine and the United Kingdom.
  • Operating companies income increased 9.5% to $2.2 billion, due primarily to higher pricing and favorable currency of $96 million.
  • Cigarette shipment volume for Philip Morris International (PMI), Altria Group, Inc.’s international tobacco business, increased 1.5% to 213.3 billion units,
  • During the first quarter of 2007, Philip Morris International (PMI) acquired control of Lakson Tobacco Company Limited, increasing its shareholding to over 97%. Lakson Tobacco is Pakistan’s second-largest tobacco company, with cigarette volume of approximately 30 billion units in the fiscal year ending June 30, 2006.
This segment will be a gusher for shareholder once free from the US. No matter what MO shares do today hold them. Let them drop today, I do not care , it will let me buy more cheaper. Altria is the single best performer in the history of the US stock market. Just hold your shares, collect your 4 percent plus dividend (taxable at only 15% after a year by the way) and wait for Altria to treat you like a true owner and reward you for your loyalty.

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