Month: June 2009

Playing Jobs With Volt

Employment sucks. We know that. BUT, we also know it will get better. Let’s look at a potential play on that improvement.

When the turn does come, where will we look? I am guessing employers will crawl, not rush into re-employment of staff. With that being said, I think companies that provide professional services will be the first to benefit from this trend. The cost/benefit to employer is huge and given any recovery will most likely be a shaky one, employers will want to add people at a minimal cost in term of both training and continued employment cost. Volt enables both of these scenarios.

Enter Volt Information Services (VOL):

Company Description:

Volt Information Sciences, Inc., incorporated in 1957, provides staffing services, and telecommunications and information solutions. The Company is organized in two businesses: Staffing Services and Telecommunications and Information Solutions. Staffing services segment provides a range of employee staffing services to a range of customers throughout North America, Europe and Asia/Pac, and has expanded operations in Latin America. Telecommunications services provide telecommunications and other services, including design, engineering, construction, installation, maintenance and removal of telecommunications equipment for the outside plant and central offices of telecommunications and cable companies. In September 2008, the Company sold the net assets of its DataNational and Directory Systems divisions.

Staffing Services

Services offered by the Staffing Services segment fall within three major functional areas: staffing solutions, information technology (IT) solutions and e-procurement solutions. Staffing solutions provides managed staffing, temporary/contract personnel employment and workforce solutions. This functional area comprises the Technical Resources (Technical) division and the Administrative and Industrial (A&I) division. This functional area also provides direct placement services and, upon request from customers, subject to contractual conditions, is focused to allow the customer to convert the temporary employees to full-time customer employees under negotiated terms. In addition, the Company’s Recruitment Process Outsourcing (RPO) services deliver end-to-end recruitment and hiring outsourced solutions to customers. The Technical division provides skilled employees, such as computer and other IT specialties, engineering, design, life sciences and technical support. The A&I division provides administrative, clerical, accounting and financial, call center and light industrial personnel.

E-procurement solutions provide global bid human capital acquisition and management solutions by combining Web-based tools and business process outsourcing services. IT solutions provides a range of services, including consulting, outsourcing and turnkey project management in the software and hardware development, IT infrastructure services and customer contact markets.

Telecommunications and Information Solutions

This segment is divided into three sub segments: telecommunications services, computer systems, and printing and other. Telecommunications Services segment designs, engineers, constructs, installs and maintains voice, data, video and utility infrastructure for public and private businesses, military, and government agencies.

Computer Systems segment provides directory and operator systems and services primarily for the telecommunications industry and provides IT maintenance services. The segment also sells information systems to its customers and, in addition, provides an application service provider (ASP) model, which also provides information services, including infrastructure and database data services to others. This segment consists of Volt Delta Resources LLC, Volt Delta International, LSSiData and the Maintech computer maintenance division.

Super…so why Volt?

1- Volt is global and stands to benefit as the global recovery takes hold
2- Professional/technical skills will be in high demand and Volt enables employers to better manage costs
3- Insiders/Founders/Directors own 42% of the outstanding shares
4- VALUATION…..

Let’s look closer at #4 because we value guys like that stuff.

Volt has typically traded at 16-20 times earnings and about twice book value (remember that). Earnings, as one would expect have suffered along with employment and Volt has reported operating loss from continuing operations in the 2009 six-month period of $21.7 million, or ($1.04) per share, compared to a loss from continuing operations of $12.3 million, or ($0.56) per share, in the fiscal 2008 six-month period. The Company incurred a restructuring charge of $7.1 million ($4.2 million, or $0.20 per share, net of taxes) and goodwill and long-lived intangible impairment charges of $7.3 million ($6.8 million, or $0.32 per share, net of taxes) in the first six months of fiscal 2009 as compared to a restructuring charge of $1.5 million in the comparable fiscal 2008 period.

About what you would expect given what has happen to employment…

So then, what to like?

1- Cash and cash equivalents, excluding restricted cash, totaled $141.5 million at the end of the second fiscal quarter of 2009.

At May 3, 2009, the Company had sold a participating interest in accounts receivable of $50.0 million under its securitization program and had the ability to finance an additional $125.0 million under the program. In addition, the Company may borrow under a $42.0 million five-year unsecured revolving credit facility (“Credit Facility”) and the Company’s wholly owned subsidiary, Volt Delta Resources (“Volt Delta”), may borrow under a separate $75.0 million revolving secured credit facility (“Delta Credit Facility”). At May 3, 2009, the Company had borrowed $10.7 million under its Credit Facility and Volt Delta had borrowed $41.7 million under the Delta Credit Facility.

Why does that matter? The company’s current market cap? $131 million meaning it is trading for LESS THAN THE CASH ON ITS BOOKS..

2- Book Value.

Currently about $18 a share. Remember earlier we said Volt tends to trade on average about 2x book? It current valuation of .3x book. Look close, this isn’t 3x it is point 3x book or 33%.

Lets look at it this way. Say tomorrow the company decide to close up, sell it all and distribute the proceeds to shareholders.

Right now you would pay $6.61 a share for the stock. The cash on hand comes to $6.77 a share so already your are up in the investment and not a single asset has been sold. Let then say the current book value of $18 a share gets slashed 80% (I am not saying it would, just picking an extreme scenario for illustration). That leaves $3.60 a share for shareholders for a nice total of $10.37 or 56% profit. The margin of safety here is huge..

Risks:

Simple, the global slowdown takes longer than anyone thinks to resolve itself. If US unemployment hits 10% and then stubbornly stays there for all of 2010, large share price recovery is put off. Now, depending on the global economy we could see improvement as it recovers absent the US but large shares gains will need US participation. The company has ample cash and debt availability to withstand a prolonged poor employment scenario. Because of this, the risk is not a “will it survive or not” but a “how long before shares recover” situation.

Like any of these deep value plays (especially ones tied to employment), because the valuation is so rock bottom, if you wait until you see clarity in employment you very well may be buying a $10-$12 stock vs $6.

Latest 10-Q:
Vol

Disclosure (“none” means no position):none

Tags vol

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Tuesday’s Links

Post author By ToddSullivan
Post date June 30, 2009

Climate change, Lead Paint, GM, Stimulus

– Now that the earth is no longer “warming” skeptics are growing..

– Perfect….eat wood, sue someone

– Will retain liability for future product claim cases…….the least they could do after soaking taxpayers for $50B

– This is an excellent piece on the stimulus and the “effect” it is having

Disclosure (“none” means no position):

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Lampert’s Interesting AutoZone Sale..A Reason?

Post author By ToddSullivan
Post date June 29, 2009

OK, we all saw last week that Eddie Lampert sold 4% of his holdings in auto parts retailer AutoZone (AZO). He must not be bullish anymore? Not quite. Let’s look.

Remember this agreement from last year?

AutoZone also announced that it has entered into an agreement with ESL Investments, Inc. (with its affiliates, “ESL”) setting forth certain understandings and agreements concerning ESL’s continued investment in AutoZone. ESL currently owns approximately 36.2% of the outstanding AutoZone common stock. Pursuant to the agreement with ESL, the Company has agreed to use its commercially reasonable efforts to achieve at least the new 2.5x adjusted debt / EBITDAR leverage metric by the end of the Company’s second quarter fiscal 2009.

“We are very pleased to have reached this agreement with our long-term and significant stockholder, ESL, which was motivated, by our desire to continue to return excess capital to stockholders in the context of appropriate, mutually agreed governance arrangements,” said Bill Rhodes AutoZone’s Chairman, President and Chief Executive Officer. “We appreciate ESL’s belief in the Company and its management over the past eleven years and look forward to its continued involvement in helping us achieve our goals for the benefit of all stockholders.”

The agreement with ESL provides, among other things, that, should ESL’s percentage ownership of Company shares increase above certain thresholds, ESL will vote its shares owned above such thresholds in the same proportion as shares unaffiliated with ESL are actually voted. The initial threshold is 40%, which will reduce to 37.5% following the 2009 annual meeting of stockholders. The agreement also states the Company’s intention to add three directors in the near future, two of whom will be identified by ESL for consideration by the Company’s Nominating and Corporate Governance Committee, thereby increasing the Board’s size to 12 members. Thereafter, the Company expects to reduce the Board’s size to 10 members in conjunction with the 2008 annual meeting in December. The agreement also contains certain other protections for non-ESL affiliated shareholders as well as for ESL.

The agreement with ESL or certain of its provisions will terminate, except as the parties otherwise mutually agree, upon the earlier of the date upon which the shares (a) owned by ESL constitute less than 25% of the then outstanding shares or (b) owned by ESL constitute more than 50% of the then outstanding shares, provided that ESL has acquired subsequent to the date of the agreement additional shares representing above 10% of the then outstanding shares.

Then his news from last week?

AutoZone Inc (AZO.N), the leading U.S. auto parts retailer, said on Wednesday its board had authorized another $500 million to buy back common stock.

Shares in the Memphis-based company have gained almost 12 percent since the start of the year as the U.S. recession has prompted more consumers to drive cars longer and shop for better deals on replacement parts.

“AutoZone’s strong financial health has allowed us to continue to repurchase our stock while operating within our targeted leverage metric,” said AutoZone Chief Financial Officer Bill Giles said in a statement.

In late May, AutoZone posted a 9-percent gain in profit that topped analyst estimates.

Billionaire investor Edward Lampert and his ESL Investments owns about 43 percent of AutoZone (prior to recent sale). Lampert is also the largest shareholder in AutoNation (AN), the largest U.S. auto dealership chain.

So, Autozone is upping its leverage ratio and using it to repurchase shares. Lampert’s recent sale lower his ownership to below the 37.5% threshold so he may vote his shares as he wishes and maintains board representation.

What happens now? As Autozone completes their repurchase (approx $600m left) they will have reduced the outstanding shares (at today’s prices) by 7.5%. That sale also triggered a 6% drop in the stock price so that $600, will repurchase moire shares. In essence, Lamper sold shares for a nice profit and then Autozone will repurchase shares to increase his ownership once again back to the mid 40% range.

Why not hold them to get to the 50% threshold? The agreement above requires Lampert “to acquire” additional shares to the gain benefits from being at/above 50% in terms of voting. One can only assume he sees no “value” in shares at these prices (they aren’t) and therefore does not want to buy more. Doing it this way he can free up capital and have the company maintain his ownership level for him.

Nice….

On another note, Autozone, in my opinion is nearing an earnings peak. With auto sales at decade lows they have benefited from the repair biz. If “cash for clunkers” does increase sales as predicted by AutoNation CEO Mike Jackson, that will directly negatively impact Autozone’s biz. Perhaps another reason Lampert is not buying more???

Disclosure (“none” means no position):Long AN, none

Tags AN

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Wilbur Ross Comments on Economy/Regulation

Post author By ToddSullivan
Post date June 29, 2009

Wilbur Ross talks about the US economy.

Couple of notable quotes:

“I can’t even think ten years down the road much less make predictions for that time frame”. Said in response to a question regarding predictions that the US economy is stagnant for the next ten years

Regarding consumer sentiment:
“Yes, it has risen three consecutive period but look where it is in absolute terms, its not at a very happy point in absolute terms.”…meaning it is still historically low

Regulation:
“You can’t really legislate against people making mistakes”

The old wall street model was partnerships:
“Participants had unlimited individual liability and that is a much better policeman that some kids out of college trying to catch a Madoff”

On the Gov’t:
“What worries me is they are trying to do too much too fast, you can’t fix everything overnight”

Disclosure (“none” means no position):

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AutoNation: "Cash for Clunkers" Should Add 10%

Post author By ToddSullivan
Post date June 29, 2009
1 Comment on AutoNation: "Cash for Clunkers" Should Add 10%

I think 10% may be a bit conservative. From the empirical evidence department. I know several folks who are eagerly looking into the “cash for clunkers” program’s details to get a new car. These are folks who have been putting off buying a new car for the past year and a half not wanting a new car payment. But, the advertised incentives, coupled with the age of their current vehicles, has them taking a very close look at this.

From Bloomberg:

– AutoNation Inc. said the “cash-for- clunkers” law President Barack Obama signed may increase new- vehicle sales at the largest publicly traded U.S. auto retailer by 10 percent through year end.

AutoNation sold 65,698 new vehicles in the third quarter of last year through its 289 dealer franchises. A 10 percent increase from the law approved yesterday may mean “roughly” an extra 4,000 new vehicles because industry demand has been running as much as 40 percent lower than last year, according to Marc Cannon, a company spokesman.

“The fact that this incentive will be available only at new-vehicle franchises is a big advantage,” Chief Executive Officer Mike Jackson said in an interview. “At a minimum it will generate a lot of traffic.”

Knowing Jackson, my guess is that 10% is “in the bag” so to speak and he is looking for much more. In the past he has said about other statements of this order, “if we weren’t sure we could do it, we wouldn’t say it”, and to this point, he has yet to let investors down on that.

No reason to expect him to start now…

Disclosure (“none” means no position):Long AN

Tags AN

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Wall St. Media 6/24

Sorry for the lag on this…getting used to the “new baby” schedule…

Doug and I here are talking about my initial thoughts on Saks (SKS), more on natural gas (UNG) and General Growth Properties (GGWPQ) .

Catch more great investing video at Wall St. Media

Disclosure (“none” means no position):Long SKS, UNG, GGWPQ

Tags ggp, sks

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Monday’s Links

Post author By ToddSullivan
Post date June 29, 2009

Bernanke, Porn, Rules, RMBS

– Great WSJ piece on him. Ben is going to take the fall for everything. He does not deserve as he was handed a huge shit pile from Greenspan.

– This is a bad idea….it is hard enough to keep it away from kids w/o Johnny putting it up on the school bus on his iPhone.

– “4 Investing Rules to Ignore”. Morningstar does a good job here

– S&P finally downgrading these…..finding it hard to believe this was not done last year

Disclosure (“none” means no position):

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Anon Bidder Ponies Up $1.68M For Lunch With Warren

Post author By ToddSullivan
Post date June 27, 2009
2 Comments on Anon Bidder Ponies Up $1.68M For Lunch With Warren

I am sure there are a bunch of jokes as to who coming until we actually know the bidder….

Visit msnbc.com for Breaking News, World News, and News about the Economy

Disclosure (“none” means no position):

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"House of Cards"

Post author By ToddSullivan
Post date June 27, 2009

Personally, I think Faber does a nice job on this one. Wondering how the whole thing started and came tumbling down? Check it out…

Greenie gets off a bit easy though…

Disclosure (“none” means no position):

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Buy and Hold Dead? Um…No

Been hearing this a ton lately. Problem with the statement is it taking a blanket approach and doing that in anything, is wrong. Those who typically espouse it say that the S&P 500 has done a round trip over the past decade so those who “bought it” have made no money. But, do most of us “buy the S&P”? No one I know does.

I’m going to take a look at the longest holding I ever had…Altria (sold last December).

I bought it in late 1999 in the midst of the “Master Settlement” and Chapter 11 fears for them. The buying thesis was simple:

1- Addicts will buy their products
2- They can’t go Chapter 11 because those suing them (States) need the money they provide
3- Because of that, their long term health was assured.

The purchase price for Alria was $21.65 a share and when I sold it was $16.75. In addition to that I received $21 a share in the Kraft (KFT) spin-off (sold immediately), $48 a share in Phillip Morris International (PM) shares (still held and today worth $42).

Oh, and over the 9 years I held it I received $23.25 a share in dividends.

Here is a 10-yr. chart of Altria.

Now the temptation would have been to dump it in 2003 as it fell and then even again in 2004 as it dipped. But why? Just because the price fell?

Questions to have asked yourself then:

Were the fundamentals of the tobacco business impaired?
Did the legal environment deteriorate?
Did management do something that changed the earnings profile of the company in a negative way?

The answer to all of those questions was no and in reality the legal environment improved steadily in those years to the point then CEO Camilleri said prior to the PM spin, “the current legal environment is the best we have seen it in years”.

So in 9 years here is the tally:

That is a 18% annual return over those 9 years for doing…….nothing…

A very similar scenario has unfolded with McDonalds (MCD) since I first bought during the “Mad Cow” scare. While not as extreme, and I did make the HUGE mistake of selling Chipolte (CMG) shares when I received them in the spin, it has been a fantastic investment.

Has the market done a round trip the past decade? Yes. Are there plenty of companies whom over that time have gone up/down and then back to start? Yes. BUT, if you buy it low enough and pay attention to its business environment/prospects to determine your selling time, you can avoid many of the losses.

Altria’s business environment never deteriorated over the 9 years and in fact dramatically improved over where it was at purchase. I sold it in December because I felt that changed and PM International has a superior one. The same can be said of McDonalds, it environment is still improving with its very successful move into coffee and consumer trade to value.

Have it missed any? Sure. Dow Chemical (DOW) comes to mind. I got caught up in the Rohm & Hass/Kuwait deals and their potential benefits while the surrounding business climate deteriorated. The stock fell to a low of $6 from $50’s in 2005 (my original cost was $26 in 2002). While I lost a bunch of unrealized profits, between $8 and $9 in March of this year I was able to lower my cost basis to $14 with several purchases. Again, when we add in $9.32 in dividends received since 2002, we are still up nicely, although not nearly as much as before..not nearly.

Am I selling Dow now? No. The Rohm deal is done and the business environment, while I missed the downside, looks to improve going forward. This will still turn out just fine eventually IMO, it will just take some time. We’ll see…

Beware of “X investing theory is dead” proclamations. There are plenty of value folks who do great, plenty of day traders who do great and plenty of swing/momentum ones that do. There are also plenty of all three that do awful.

Find good ones in the style that fits you and get to know them. Blogs & twitter allow unprescedented communications between investors, take advantage of it.

Disclosure (“none” means no position):Long PM, MCD, DOW, none

Tags dow, mcd, MO, PM

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Phillip Morris International to Return $9B in ’09

Post author By ToddSullivan
Post date June 26, 2009

Received Phillip Morris International (PM) shares from Altria in last years spinoff. Due to the deteriorating US legal environment for tobacco recently, I sold my long time holding Altria (MO) in December and now only still hold PM shares.

I consider PM the company of the two with better longer term prospects and business environment.

One overlooked investment thesis for PM is that it is a hedge against the general devaluation of the US dollar. PM sells tobacco in other nations in their local currencies, it then convert those currencies to US dollars for reporting purposes. As the dollar falls in value, those conversions yield more dollars for shareholders.

For those who do not want to go through the whole presentation, slide 67 is the applicable slide. The comments were:

In August last year, we raised our dividend by 17.4% to an annualized rate of $2.16 per share and we have confirmed our willingness to exceed our target 65% dividend payout ratio in 2009. At the current stock price, our dividend provides an attractive yield of approximately 5.2%.

We have completed over half the $13 billion two year share repurchase program that we initiated in May 2008 and are one of the few major companies in the world to have maintained their share repurchase program throughout the current financial crisis.

All in all we expect to return some $9 billion in cash to our shareholders during 2009.

So we have a 5% dividend yield and a company growing earnings 10-12% annually. Based on that earnings growth, we should see a dividend next year or $2.43 a share for a current yield of 5.7%. PM did say they may consider exceeding that (65% of earnings) this year which would boost it higher.

Phillip Morris International

Disclosure (“none” means no position):Long PM

Tags MO, PM

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Friday’s Links

Post author By ToddSullivan
Post date June 26, 2009

Railroads, Frank, Onion, Google

– Bolling seconds my railroads call.

– Actually wants to lower lending standards for Condo’s. Apparently has been asleep the last two years?

– Another classic

– Sell ads on mobile phones

Disclosure (“none” means no position):

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Notes on Buffett’s Media Tour

Post author By ToddSullivan
Post date June 25, 2009
3 Comments on Notes on Buffett’s Media Tour

Berkshire’s (BRK.A) made the rounds yesterday. Some of his comments:

For those not sure Berkshire is intimately tied to the consumer through its Shaw Carpets, American Express (AXP), Dairy Queen, Home Services (real estate brokerage), furniture companies, banks and more. Because of that, Berkshire is uniquely sensitive to all sectors of the economy. So, when Buffett says he is seeing little improvement, it is something we all need to pay attention to. Quote may not be 100% accurate verbally but are for sentiment. For instance, “we” rather than “us” etc….meaning of quotes intact.

“We are setting the stage for VERY SIGNIFICANT inflation down the road”

On US Dollar: “probability of significant purchasing power decline has risen dramatically”

US AAA Rating: “the US will keep it as long as I and you (Liz Claymen) are alive and longer”

Unemployment: “it is going higher, we are not coming off the bottom yet”..

Obama’s health care reform: “malpractice premiums are 1/2 of 1% of what we (the US) spend on health care each year”

Regulation: “the wrong regulation would be one that attempts to solves evils and stifles the markets system that has worked pretty well over the years”

Acknowledged he is sitting on a $1 billion profit from his Goldman Sachs (GS) investment and said he will “keep the warrants for their duration”

On the de-leveraging process for consumers and corporate America “there is a lot still to do”

“Economy will be in shambles this year and well beyond”

“you can’t produce a baby in 1 month by getting 9 women pregnant”. Meaning we can’t turn the economy around in a couple months, it is a long process and gov’t officials would be wise to acknowledge this.

Should Ben Bernanke be given another term?: “I don’t know how you could do any better”

“The incentives in a market system are too overshoot” and he gave the impression he was relatively sure it would happen again some day.

“I do not worry about deflation a all and we will not see any serious deflation….”

On Gov’t TARP funds & Wells Fargo (WFC) “the gov’t set the terms, they (WFC) just signed a blank piece of paper”

On Steve Jobs “if any CEO is facing serious surgery, it is a material event”

Cap and Trade: “is a regressive tax”

Disclosure (“none” means no position):Long WFC, None

Tags buffett

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Why Competition Matters: Apple & RIMM

Post author By ToddSullivan
Post date June 25, 2009

Here is a very interesting smart-phone study that primarily deals with Apple’s (AAPL) iPhone and RIMM’s (RIMM) Blackberry. This has nothing to do with value investing although it does show how tech margins always compress when a hot products sees competition.

Crowd Science Smart Phone Results

So, if you are RIMM seeing this study you have two options:
1- Lower your blackberry prices to capture value conscious buyers
2- Dramatically improve the add-on availability and functionality of the social aspects of your product.

Either of those options will cost RIMM and benefit users of their products. Apple users are very loyal no matter what the product. RIMM has very little chance of altering that barring an earth shattering product. Their choice is to now keep their users and entice those entering the smart-phone market to buy theirs over Apple’s.

With Apple lowering the price of its 3G 16GB phone to $147 in Wal-Mart (WMT), (down from the original $599 8GB price only just over two years ago), consumers ought to see even better deals in the future.

How long before a 32GB 4G phone hits the shelves for $99? Another year? RIMM needs to so something fast. Now, I discount the “loyalty” part of the equation for the Apple folks. They were this way about the company before the iPhone. What matters more here is the number of “other smart-phone” users considering buying an iPhone with their next purchase.

That means defections for RIMM and other makers. It also means they are probably busying themselves finding ways to bend over backwards to give users “a deal they cannot resist”. RIMM did drop prices last year and was very successful capturing value conscious shoppers. Apple followed suit and based on RIMM most recent earnings call, that drop looks to be having an effect on RIMM going forward.

What does it all mean then? Look for more applications, better & faster phones and lower prices going forward….

Capitalism at its finest..

Disclosure (“none” means no position):Blackberry user, none in stocks

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Thursday’s Links

Bing, Predictions, China, Banks

– It just keeps growing. Good, more options make those that are available improve them

– Sorry but this end of the world stuff just does not wash. While we may stagnate for a good long time until we work through this, doomsday predictions will not come true. Also, any economic prediction of 10 or 20 years time frames is not worth the paper you print it on.

– Actively lowering its cost of oil

– This is a startling chart and shows how far US banks nave fallen

Disclosure (“none” means no position):