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Leucadia 10-Q: Pershing Losses Swell

Post author By ToddSullivan
Post date August 8, 2008

remember in June 2007 when Leucadia (LUK) invested $200 million in Pershing for it Target (TGT) investment? Check this out

In its annual report in February Leuvcadia booked an $85 million loss on the investment.

In its most recent 10-Q for the first six months of 2008 Leucadia is booking another $31 million dollar loss on the investment.

In short it is now down a total of $116 million or 58% in just about exactly a year.

It is funny. One has to assume Ackman saw the credit and housing trouble far before anyone else did based on his Ambac (ABK) and MBIA (MBI)shorts. It is equally apparent he did not foresee the credit issues creeping into the general economy as they have. You would think that if he did he would have held off on purchases like Target (TGT) and Sears Holdings (SHLD).

Long term I am sure Ackman will recognize gains on these just not the out-sized gains he could have.

Even Leucadia bet against mortgages in Jan. of 2007 and is still profiting from them now as they have booked a $10 million gain in the years first 6 months

Odd

Disclosure (“none” means no position):None

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Do You Shop At Whole Foods? A POLL

Post author By ToddSullivan
Post date August 7, 2008

Please take this poll…

So far as of this writing 47% of the responders back my claim that most people go Whole Foods (WFMI) for specialty items and 17% say “its too expensive“.

Here is where it gets bad for Whole Foods. If we take out the 20% of the folks who took the poll and do not have a Whole Foods near them, then 60% only go there for specialty items and 21% say it is too expensive.

Disclosure (“none” means no position):None

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David Einhorn Interview (3 Parts)

Post author By ToddSullivan
Post date August 7, 2008

This is really good stuff. Einhorn is great to listen to..

I like how cerebral he is. He does not get to worked up about what folks say ans sees the situation for what it is. I think to be a visual short seller you have to be that way. It is easy to see how Ackman and he get along so well (or at least work together so well).

Part 1

Part 2

Part 3

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Sears Bankruptcy? Really? Let’s Just Look Closer

Post author By ToddSullivan
Post date August 7, 2008
4 Comments on Sears Bankruptcy? Really? Let’s Just Look Closer

So when Jud emailed me this yesterday I spit coffee out my nose. I recommend not doing that, it hurts. Anyway, since things are slow here for the moment, let look at it.

So the jist of the article was that:
“It’s the economy, stupid. We are in a recession, sales and profit margin are falling year over year at Sears. Commercial real estate values are falling. Eddie wil unlikely sell any property at an attractive price anytime soon. In recent years, under the leadership of Eddie Lampert, Sears cut marketing expenses to the bone. There’s nothing left to cut. In its latest quarter ended May 3, 2008, the company posted a pretax loss of $64 million vs. pretax income of $381 million in the same period last year. As the economy gets tough for some extended period and the housing bust continues to get worse, departement stores like Sears will lose more business to the discount retailers. It will be increasingly more diffcult to turn a profit at Sears and K-Mart.

Sears Holding has bought back $2.96 billion dollars worth of stock in 2007, and that leaves Sears with very little or no money on hand to endure an economic downturn. That stress has clearly shown up in its latest quarter, as it had to borrow $646 million dollars in short term commercial paper to cover some cash flow issues.

I have a hard time believing that Sears will turn a profit this year, with almost $10 billion dollars in total current liability, and only $13 billion dollars in current assets, mainly comprised of $10.3 billion in inventory. A bankruptcy filing for Sears Holdings is a real possibility in the next two years if it continues to struggle.”

Where to start. Yes Sears did lose $64 million last quarter its first quarterly loss in over three years. That also left it with $1.4 billion (yes billion) in cash on the books. It should be noted that almost three times Macy’s (M) and Kohl’s (KSS) combined! That number is twice what sits on the books over at Home Depot (HD). It is also essentially equal to that of JC Penny (JCP) and Lowes (LOW). The main difference between JC Penny, Lowes and Sears is that Sears carries 40% LESS long term debt that Penny’s and Lowes do.

Sears carries the same amount of debt as Kohl’s does despite having in excess of three times Kohl’s sales and has 1/4 the debt of Macy’s despite almost doubling its sales. If we look at Home Depot, Sears tallies 65% of the sales the Depot does yet carries less than 20% of the debt of its appliance rival. In short Sears has the strength of balance sheet second only to Wal-Mart (WMT) and Target (TGT).

The exercise here is that if we are looking for a retailer that may face bankruptcy, I think a cursory look could find more likely candidates.

But hey, why listen to me? Let’s hear what none other than Bruce Berkowitz has to say.

Read more of Berkowitz’s thoughts on Sears here:

One also can easily look at the stunning success of the Land’s End brand.

From the article:

“But one part of the $50.7 billion company is sparkling: Lands’ End (SHLD). The apparel subsidiary is thriving with its reputation for impeccable customer service and sturdy-but-stylish designs. While Sears doesn’t break out numbers, retail analyst Anne Brouwer of Chicago’s McMillan/Doolittle estimates the unit made $200 million on $2.2 billion in sales last year. The Lands’ End Web site, where the brand rings up 80% of sales, is among the retailing industry’s top 10 by several measures. And offline sales are rising as Sears has put Lands’ End boutiques in more than 200 of its 935 mall stores. Retail consultant Howard Davidowitz calls the business “Sears’ shining star.”

More:
“Lands’ End was not such a gem when Sears acquired the company in 2002 for $1.9 billion. At the time, its apparel was available only online or through catalogs, and was generally seen as well-made but staid preppy gear. Seeking a chance to broaden its apparel offerings, Sears quickly began stocking Lands’ End shirts and slacks in stores, though it kept the two brands’ Web sites separate. But Lands’ End got lost in the aisles until Lampert took over Sears and pushed to build the brand. In mid-2005, a month after McCreight became president, Sears opened the first Lands’ End boutique in a White Plains (N.Y.) store.

With its own look and branding, McCreight’s store-within-a-store worked. He says transforming the brand’s catalog image into a physical space was “a once-in-a-lifetime career opportunity.” Analyst Brouwer figures the Lands’ End boutiques bring in at least $200 in sales per square foot annually. That’s just a third what a top retailer such as Nordstrom (JWN) produces, she says, but it’s far ahead of the $137 per square foot Sears averages from its goods and apparel.”

Almost forgot. The “had to borrow $646 million for cash flow issues” statement. A quick read of the last earnings release told us that as of the time of the release $400 million of it has been repaid. In other words it was a non-issue.

No folks, a Sears BK is not in the cards. Think of it this way. Sears is heavily levered to housing (a top appliance seller) yet despite the worst housing environment in 6 decades they lost $64 million. If housing just returns to historically average levels (it will) the profit again begin to flow.

I am buying more after the next earnings release. Do I expect a loss. Probably a nominal one unless Lampert pulled a rabbit out of his hat with the excess inventory. Chumps will sell off shares and I will pick some more up. I bet Ackman and Berkowitz will be there with me.

Good company…..

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

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Ackman’s Pershing Amends Longs Drug Stores 13D

Post author By ToddSullivan
Post date August 7, 2008

The applicable portions of the filing are below.

As of August 7, 2008, as reflected in this Amendment No. 1, the Reporting Persons are reporting beneficial ownership on an aggregate basis of 3,137,659 shares of Common Stock (approximately 8.8% of the outstanding shares of Common Stock). The Reporting Persons also have economic exposure to approximately 4,540,896 notional shares of Common Stock under certain cash-settled total return swaps (“Swaps”), bringing their total economic exposure to 7,678,555 shares of Common Stock (approximately 21.5% of the outstanding shares of Common Stock).
Item 3. Source and Amount of Funds or Other Consideration

Item 3 is hereby amended and restated in its entirety, as follows:
Pershing Square advises a number of client accounts, including the accounts of Pershing Square, L.P., Pershing Square II, L.P. and Pershing Square International, Ltd., a Cayman Islands exempted company (collectively, the “Pershing Square Funds”), which owns an aggregate of 3,137,659 shares of Common Stock and 4,540,896 notional shares underlying certain cash-settled total return swaps, and paid therefor total consideration (including brokerage commissions) of $136,609,962 derived from the capital of the Pershing Square Funds.

Full 13D/A filing

Disclosure (“none” means no position): None

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Target’s Results: Now that’s a "Miss"

Post author By ToddSullivan
Post date August 7, 2008
3 Comments on Target’s Results: Now that’s a "Miss"

Seems like only minutes after hitting the “publish” button on my Wal-Mart (WMT) post, Target (TGT) made my point.

Target (TGT) today reported that its net retail sales for the four weeks ended August 2, 2008 increased 4.7 percent to $4,566 million from $4,363 million for the four weeks ended August 4, 2007. On this same basis, July comparable store sales declined 1.2 percent.

“Our comparable store sales performance in July was near the low end of our -1% to +1% planned range,” said Gregg Steinhafel, president and chief executive officer of Target Corporation.

Uh, Greg. Let’s do a little basic math here. -1.2% is actually “greater than” -1.0% remember this little sign, -1.2 > 1.0? I think it was from “Intro to Algebra”? It is not “near the low end” Greg, it is officially “past it”.

Analysts expected a decline of -.4% once again proving the fruitlessness is listening to them. The news here is not that Target missed analysts expectations just as it was not in the case of Wal-Mart. The point here is that Target missed their own expectations meaning things for them are even worse than they thought they were. Perhaps the worse news is that their CEO does not seem to realize they missed it.

Year to date, Target comp sales are down .6% vs a 4.6% rise at this time last year. That, is not good no mater what the expectations.

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

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Wal-Mart "Missed"?

Post author By ToddSullivan
Post date August 7, 2008

So, in June Wal-Mart (WMT) forecast July same store ales to rise 2% to 4%. Today they announced they came in at 3%, this is bad. Only on Wall St.

Net sales grew 9.4% overall (Wal-Mart 6.7%, Sam’s 7.7% and International Stores 17%). Not bad for a company selling $1 billion dollars a day of merchandise.

“Walmart’s clear price leadership position continues to meet the needs of our customers in a difficult economy,” said Eduardo Castro-Wright, Walmart U.S. president and chief executive officer. “Better merchandise presentation, our everyday low price message and an improved store experience resonate with customers. With the end of the stimulus checks, we know consumers are spending more cautiously, and we continue to see a pronounced paycheck cycle at the end of the month. We also continue to see improvement in our customer traffic, relative to last year.”

The big news is the customer traffic increasing relative to last year. With virtually every other retail operation out there experiencing declines (Sears (SHLD), JC Penny (JCP), Macy’s (M), etc.) the fact Wal-Mart is selling more to more people should please shareholders.

The fact some people are gnashing teeth and calling for the “end of days” over the fact sales came in at .4% less that predicted (not by the company, by the “analysts”)is proof investors and the media are currently in a hyper reactive mode. Was the report great? No. Was it bad? Not by a long mile. Had they missed their own projections, that would have been bad. Nailing it right in the middle is good, no way around it.

From the “perfect timing” department regarding analysts posts. Check out Jeff Mathews this morning. Jeff points out, “Friedman Billings, it seems, is throwing in the towel and downgrading insurance has-been AIG (last trade, $29), cutting their price target from $53 to $38.” Until this morning they still “expected” AIG to hit $58 in a year, a price it likely will not see the remainder of the decade.

The moral of the story is here is what matters is how companies perform based on their own projections because we all know expectations are rarely very accurate…

Mr. Market is a fickle dude..

Guidance

“We believe our businesses are well positioned for the current economy,” said Tom Schoewe, executive vice president and chief financial officer. “We estimate U.S. comparable store sales, excluding fuel, for the August four-week period to be between one and two percent, because we still see sales volatility from week to week, especially around paycheck cycles.”

Anyone want to bet Wal-Mart is lowering projections to avoid the current scenario next month? Now Wall St. will lower “estimates”, Wal-Mart will beat them and everyone will be happy…..strange stuff.

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

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AutoNation 10-Q

Post author By ToddSullivan
Post date August 7, 2008

These 10-Q’s are a fountain of information. A look at
AutoNation’s (AN) today.

NEW AUTO:
Same store new vehicle revenue decreased $418.6 million or 16.2% for the three months ended June 30, 2008, and $654.1 million or 13.1% for the six months ended June 30, 2008, as compared to the same periods in 2007, primarily as a result of a continued challenging automotive retail environment, which resulted in decreased same store unit volume. Same store revenue per new vehicle retailed decreased 3.9% during the three months ended June 30, 2008, and 2.6% during the six months ended June 30, 2008, as compared to the same periods in 2007. We believe these results were driven by the current unfavorable economic conditions in the United States, including continued weakness in the housing market and tightening in the automotive retail credit market. Additionally, the increase in fuel prices has caused a shift in consumer demand toward more fuel-efficient vehicles. The average revenue per vehicle retailed has declined due to the relatively lower selling prices of these vehicles. To the extent that we continue to see unfavorable economic conditions, we anticipate that the automotive retail market will remain challenging in 2008. Accordingly, we expect the decline in our sales to continue in 2008.

Same store gross profit per new vehicle retailed decreased 8.3% during the three months ended June 30, 2008, and 9.2% during the six months ended June 30, 2008, as compared to the same periods in 2007, due to increased pricing pressure as a result of a competitive retail environment, tightening in the automotive retail credit market, and increasing margin pressure on less fuel-efficient trucks and sport utility vehicles due to rising fuel costs. We expect continued margin pressure in 2008.

Our new vehicle inventories were $1.9 billion or 62 days supply at June 30, 2008, as compared to new vehicle inventories of $1.8 billion or 52 days supply at December 31, 2007, and $1.8 billion or 55 days at June 30, 2007. The increase in our new vehicle inventory days supply is primarily due to lower than expected sales during the three months ended June 30, 2008.

The net new vehicle inventory carrying cost (new vehicle floorplan interest expense net of floorplan assistance from manufacturers) decreased $6.9 million for the three months ended June 30, 2008, and $10.3 million for the six months ended June 30, 2008, as compared to the same periods in 2007, primarily as a result of a decrease in new vehicle floorplan interest expense due to lower floorplan interest rates, partially offset by a decrease in floorplan assistance due to lower new vehicle sales.

USED AUTO:
Same store retail used vehicle revenue decreased $75.5 million or 8.8% for the three months ended June 30, 2008, and $126.8 million or 7.4% for the six months ended June 30, 2008, as compared to the same periods in 2007, primarily as a result of a reduction in revenue per vehicle retailed and a decrease in same store unit volume. Same store unit volume decreased as a result of a challenging retail environment driven by the current unfavorable economic conditions in the United States, including continued weakness in the housing market, the increase in fuel prices, and tightening in the automotive retail credit market. The decrease in used vehicle sales volumes was also driven in part by a decrease in trade-in volume associated with new vehicle sales. To the extent that we continue to see unfavorable economic conditions, we anticipate that the automotive retail market will remain challenging in 2008.

Same store gross profit per used vehicle retailed decreased 8.3% during the three months ended June 30, 2008, and 10.4% during the six months ended June 30, 2008, as compared to the same periods in 2007, due to increased pricing pressure as a result of a competitive retail environment, tightening in the automotive retail credit market, and increasing margin pressure on less fuel-efficient trucks and sport utility vehicles due to rising fuel costs.

Used vehicle inventories were $288.0 million or 42 days supply at June 30, 2008, compared to $308.6 million or 44 days supply at December 31, 2007, and $361.6 million or 44 days at June 30, 2007.

Interest Rate Risk:
We had $2.2 billion of variable rate vehicle floorplan payable at June 30, 2008, and $2.1 billion at December 31, 2007. Based on these amounts, a 100 basis point change in interest rates would result in an approximate change of $22.5 million at June 30, 2008, and $21.4 million at December 31, 2007, to our annual floorplan interest expense. Our exposure to changes in interest rates with respect to total vehicle floorplan payable is partially mitigated by manufacturers’ floorplan assistance, which in some cases is based on variable interest rates.

We had $0.9 billion of other variable rate debt outstanding at June 30, 2008, and $1.2 billion at December 31, 2007. Based on the amounts outstanding, a 100 basis point change in interest rates would result in an approximate change to interest expense of $9.0 million at June 30, 2008, and $11.8 million at December 31, 2007.

All in all not much that is not discussed and disclosed in earnings calls and press releases. That is good as an investor because it does reduce the risk for negative surprises from “hidden items”.

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

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If A Greenspan Talks on TV, Does Anyone Listen?

Post author By ToddSullivan
Post date August 7, 2008

Remember when Greenspan first started making recession predictions and the immediate reaction of the markets? Now? Nothing

Recently Alan G. was on CNBC running his mouth again about the odds of recession.

Video:

Remember last year when Alan was playing Vegas oddsmaker with the US’ chances of recession?

Then came his defense of his record in April of this year.

Why didn’t Alan just stick to analysis of the current conditions? When you start placing percentages of possibilities on the table and are wrong, it looks bad. When you had the position Alan had it makes everything you said and did in those years look suspect also. The “if he is wrong now he was probably wrong then” scenario is unavoidable.

I know he is trying to make a buck consulting and selling books but, does he really need it? Is it really worth the damage to his reputation he is doing? It just can’t be.

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LeapFrog Beats, Turnaround Continues

Post author By ToddSullivan
Post date August 7, 2008

Great products are helping the company win consumers dollars in a slumping economy..

LeapFrog’s (LF) second-quarter net loss was $20.6 million, or 32 cents per share, compared with a year-earlier loss of $28 million, or 44 cents per share. Sales rose 22% to $68.3 million, boosted by the Tag reading system and gaming systems Leapster2 and Didj (read more on these here).

Analysts had been expecting, on average, a net loss of 44 cents per share on revenue of $54.5 million. U.S. sales rose 57 percent but sales fell 11.5 percent internationally, where new products had not yet been introduced during the quarter.

On the earnings call:
– “Sales for the quarter came in better than we expected due to strong and earlier-than-anticipated shipments of our new products. So far we’ve received excellent feedback and we are seeing strong sell-through at retail for Tag. Leapster 2 and Didj are just being introduced but early indications are promising, particularly at LeapFrog.com.

Gross margins are also improving and stood at 39.3% for the quarter. As we’ve talked about before, we expect gross margins to improve over time but they won’t reach or exceed our 45% new product hurdle rate until products are in the market for a year and we begin to see the benefit of improved software tie ratios.” CEO Jeffery Katz

– “We have two remaining launches left for the year — the LeapFrog Learning Path, which will debut in August, as I alluded to earlier; and Crammer, our study and sound system, which will launch in the early part of the fall.” – Katz

– “Later in the fall, we are going to share with you the details of how we expect our strategy to evolve in the coming years but for now, you should know that we have quite an extensive product plan laid out through 2009 and into 2010 and 2011. The first elements of this will be on display at Toy Fair in October.”- Katz

I have followed LeapFrog here for over a year now and it has been good. Katz is a great CEO who has set goals for the company and beat them with transparency and candor. Investors aren’t left wondering for anything after conference calls and Katz’s strategy is clearly laid out for all to see. The project has been a long one though since the vast majority of LeapFrog sales come at the Christmas season. That means months will go by with no or little apparent progress in the plan. Patience is necessary but will be rewarded.

Full year estimates are for a 19 cent a share loss. Expect it to be beaten…

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

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Thursday’s Links

Post author By ToddSullivan
Post date August 7, 2008

WSJ, Racism, Mozilla, Flip, Merrill

– Thank you for the mention

– This is good

– Best browser

– This is a great phone

– Why are they kissing Thain’s butt?

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Third Avenue Files 13D/A in Bronco Drilling

Post author By ToddSullivan
Post date August 6, 2008

Marty Whitman and Third Avenue Management (TAM) have filed a 13D/A in Bronco Drilling (BRNC) opposing the Merger with Allis-Chalmers (ALY).

From the letter:

Third Avenue Management LLC (“TAM”), on behalf of its investment advisory clients, currently owns more than 6.1 million common shares of Bronco Drilling Company (“Bronco”), representing approximately 23.28% of Bronco’s outstanding common stock. This letter reiterates the position we conveyed to you in our April 8, 2008, letter (the “April 8 Letter”), that we oppose the proposed acquisition (the “Proposed Merger”) of Bronco by Allis-Chalmers Energy, Inc. (“Allis-Chalmers”), plan to vote our shares against the transaction and urge other shareholders to do the same.

Since the April 8 Letter, we have reviewed, among other things: (1) the terms of the amended merger agreement between Bronco and Allis-Chalmers, dated June 1, 2008 (the “Amended Merger Agreement”); (2) the most recent press releases of Bronco and Allis-Chalmers relating to the Proposed Merger; (3) the Schedule 13D and various amendments filed by Wexford Capital LLC (“Wexford”); and (4) the recommendations of the proxy advisory firms published by Institutional Shareholder Services Inc. (“ISS”), Proxy Governance, Inc. (“PGI”), and Glass Lewis & Co. (“Glass Lewis”). Based upon our review, we continue to believe that the Proposed Merger undervalues Bronco’s common stock and is not in the best interests of Bronco’s shareholders.

Valuation remains Inadequate

As we have previously stated, and continue to believe, the implied merger value is inadequate.

The value of the Proposed Merger does not give a proper value to Bronco’s assets given a strong United States land market and Bronco’s potential to expand beyond the United States land market. Our views are shared by investment banks without any deal-related conflicts. For example, FBR Capital Markets issued a research report on July 31, 2008, that values Bronco as a stand-alone at $22 per share based on both an NAV and peer comparison valuation, compared to an imputed value of the Proposed Merger of $16.31 based on Allis-Chalmers’ closing price on August 5, 2008.
·

Bronco is participating in the strong natural gas drilling market in the United States as evidenced by its recent operating results and the outlook highlighted in the second quarter earnings release. These improving fundamentals are not at all reflected in the Proposed Merger consideration. Bronco’s land drilling fleet utilization has been increasing (from 69% in the first quarter to 82% in the second quarter) and Bronco has new term contracts that will positively impact business in the second half of 2008 and early 2009. Bronco increased its term contracts during the second quarter, won a tender for three rigs to operate with Pemex in Mexico, and has six rigs now contractually committed to the Bakken Shale, a burgeoning area of development among natural gas producers.
·

There is an unacceptably high business risk in Allis-Chalmers’ common stock, both in regard to the integration of its 16 acquisitions between 2005 and 2007 and in the execution of a wide range of businesses, which is not reflected in the merger consideration.

Later in the letter:
Large Shareholders are OPPOSED to the Proposed Merger

1.Wexford

According to Wexford’s Schedule 13D, Wexford owns approximately 12.8% of the outstanding shares of Bronco common stock. On July 30, 2008, Wexford amended its Schedule 13D and filed a letter to Bronco’s board of directors, in which Wexford announced that it believed Bronco was worth $25.00 – $30.00 per share, and would therefore vote against the Amended Merger Agreement. Wexford also filed a presentation, in which it stated that (i) the Amended Merger Agreement was negotiated at a time when land rig market conditions were weaker and the consideration in the Amended Merger Agreement fails to recognize the value of current market conditions to Bronco; (ii) Wexford expects 2009 EBITDA to approach $150 million, well above the consensus estimate of $110 million; (iii) Wexford believes that Bronco’s underperformance when compared to its peer group is the result of the low value offered in the Allis-Chalmers proposal; and (iv) the Schlumberger/Saxon Energy Services transaction provides a good market comparable for an acquisition of Bronco, which valued the target company at 7x EBITDA, in contrast to the Proposed Merger that values Bronco at only 4.7x EBITDA (based on the consensus estimates).

On August 4, 2008, Wexford filed with an amendment to its Schedule 13D a letter to Bronco’s board of directors reiterating its view that the Proposed Merger is not in the best interests of Bronco and its shareholders. In the letter Wexford criticized Bronco for selective disclosure in connection with Bronco’s press release touting a Glass Lewis recommendation regarding the Proposed Merger without apprising shareholders of the PGI shareholder recommendation that Bronco shareholders vote against the merger and FBR’s research report regarding the under-priced Allis-Chalmers offer.

2. Alpine Associates L.P. (“Alpine”)

On April 25, 2008, Alpine, the owner of approximately 6.1% of Bronco’s outstanding shares, filed a letter stating that the price offered in the Merger Agreement undervalues Bronco and that it intends to vote against the Proposed Merger unless there is a “significant improvement” in the terms. Alpine has not amended its regulatory filings since April 2008.

Disclosure (“none” means no position):None

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Lampert Buys More AutoNation Shares

Post author By ToddSullivan
Post date August 6, 2008
2 Comments on Lampert Buys More AutoNation Shares

In a just filed SEC document, Sears Holdings (SHLD) Chairman Eddie Lampert, through his RBS Partners hedge fund has purchased another 386,000 share in two transactions of AutoNation (AN).

Lampert is picking up shares in bug chunks now vs the smaller transactions previously announced.

He is racing towards 50% ownership while the stock is depressed.

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

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Harley Davidson 10-Q

Post author By ToddSullivan
Post date August 6, 2008

Some interesting items from the 10-Q released by Harley Davidson (HOG).

HDFS (Harley Davidson Financial Services)
Income from securitizations during the first six months of 2008 was lower as compared to 2007 due primarily to the loss on the first quarter 2008 securitization transaction and the absence of a second quarter securitization transaction. This compares to two securitization transactions completed in the first six months of 2007.

During the first six months of 2008, HDFS sold $540.0 million in retail motorcycle loans in a securitization transaction and recognized a loss of $5.4 million, or 0.99% as a percentage of loans sold. This compares to a gain as a percentage of loans sold of 1.9%, or $32.5 million, on $1.75 billion of loans securitized in the first six months of 2007. The loss in 2008 was driven by increased securitization funding costs due to capital market volatility and higher projected credit losses. During the first six months of 2008, HDFS retained $54.0 million of the subordinated securities issued by the securitization trust. The subordinated securities that were retained have been included in the investment in retained securitization interests (a component of finance receivables held for investment) in the Condensed Consolidated Balance Sheets. The cash proceeds from the 2008 securitization transaction are net of the cost of the retained subordinated securities.

Additionally, income from securitizations was negatively impacted during the first six months of 2008 by a $6.3 million write down of certain retained securitization interests. The write down, which occurred in the second quarter of 2008 and is considered a permanent impairment, resulted from a decline in the fair value of certain retained securitization interests due to higher actual and anticipated credit losses on those securitization portfolios. This compares to an impairment charge of $3.5 million incurred during the first six months of 2007.

Annualized losses on HDFS’ managed retail motorcycle loans were 2.14% during the first six months of 2008 compared to 1.63% during the first six months of 2007. The 30-day delinquency rate for managed retail motorcycle loans at June 29, 2008 increased to 4.65% from 4.36% at July 1, 2007. Managed retail loans include loans held by HDFS as well as those sold through securitization transactions. The increase in losses was primarily due to a higher incidence of loss resulting from an increase in delinquent accounts. The Company expects that HDFS will continue to experience higher delinquencies and credit losses as a percentage of managed retail motorcycle loans in 2008 as compared to 2007.

I would have though that these might have been worse than reported. The 30 day delinquency was essentially flat and portfolio losses were only .6% higher despite the credit market conditions. Harley Davidson’s lending arm is doing markedly better that either auto or credit card lenders are currently. With some visibility returning to credit markets, these might be the highest these ratios get a nd we could see additions to earnings from here on out.

Financing Activities

The Company’s financing activities consist primarily of share repurchases, stock issuances, dividend payments and finance debt activity. During the first half of 2008, the Company repurchased 3.8 million shares of its common stock at a total cost of $150.1 million. The Company repurchased 3.1 million of these shares under a general authorization provided by the Company’s Board of Directors in October 2006 to buy back 20.0 million shares. As of June 29, 2008, no shares remained under this authorization.

The remaining 0.7 million shares were repurchased under an authorization granted by the Company’s Board of Directors in December 2007, which separately authorized the Company to buy back up to 20.0 million shares of its common stock. In addition, the Company also has an authorization from the Company’s Board of Directors that is designed to provide the Company with continuing authority to repurchase shares to offset dilution caused by the exercise of stock options and the issuance of nonvested stock. Please see Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds” for additional details regarding the Company’s share repurchase activity and authorizations.

Disclosure (“none” means no position):

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Articles

Altria Earnings Call Notes

Post author By ToddSullivan
Post date August 6, 2008

Catching up on the notables from Altria’s (MO) recent earnings call.

– Repurchased 53.5 million shares during the quarter at an average price per share of $21.81. Additionally, Altria declared a quarterly dividend of $0.29 per common share paid to stockholders of records as of June 13, 2008. This equates to approximately $600 million in dividend payments. Combined, the stock buyback and dividends totaled approximately $1.8 billion. This represents over 4% of Altria’s June 30th market capitalization.

– John Middleton (cigar) delivered $50 million in operating company’s income and grew its total cigar shipment volume by 11% to 355 million units in the second quarter. John Middleton is capitalizing on PM USA’s sales and distribution infrastructure and expertise to help grow Black & Mild.

The call was a bit disappointing as a number if the questions focused around the FDA bill (below) and even though management said at least seven times I counted they would not comment, the questions kept coming. Smokeless was what I wanted to hear about and neither the prepared remarks nor any of the questions really broached the subject in any type of detail.

With smoking rates dropping about 3% a year and both smokeless and cigar usage climbing, wouldn’t you think the “analysts” would have placed a bit more focus on Altria’s entrance into the area? Frustrating….

Here is the sole exchange on it:
David Adelman – Morgan Stanley
“Okay and then secondly Dave I am curious about your reactions to the observation particularly given some increased pace of movement within tobacco but outside the cigarette category that you are not moving more aggressively with respect to moist smokeless tobacco and particular and perhaps Snus the, the test market I think in Atlanta of moist smokeless started last October, its almost the year ago its really has an expanded materially and I just wonder the outside perception is there is a lack of urgency on those types of efforts because you are not moving. It would appear with great speed. So I am just curious about your reaction that observation.”

David R. Beran – Executive Vice President and Chief Financial Officer
“Yes, and out of it not characterize it as a lack of urgency, I would characterize it as and we want to make sure that we do this in a financially disciplined way, and when I say financially disciplined that we go out. We have tested all elements of the overall value equation behind both snus and with snuff and we got it completely right, then we won’t incorporate that into our plans. And right now, both of those initiatives are investment spent for us and our goal is to take it from investment spend to being, making a profit. But right we are in… these test markets are what I call burning laboratories and make sure we get it right.”

In other news, the much talked about Tobacco / FDA legislation passed the house but faces serious hurdles. Read more about the FDA and Altria here.

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

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