ValuePlays

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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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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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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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.

Full filing

Disclosure (“none” means no position):None

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“Assuming no dramatic change in economic trends, we are planning for total sales growth in fiscal 2009 of 6% to 10%. We expect comparable store sales growth of 1% to 5% and identical store sales growth of zero to 4%.” Whole Foods CEO John Mackey. OK, so, what defines “dramatic” John?

I hate these conditional predictions. Essentially no matter what happens, Mackey is giving himself an “out”. How about just telling us either “we have no idea” or give us numbers that investors (I am not one) can rely on. Mackey basically told them nothing…

Here is a statement that struck me from Walter Robb at Whole Foods (WFMI). The questions he was asked was about consumer purchasing behavior. “Its cyclical in the sense as when the economy turns back up again and customers feel more financially secure we expect they’ll probably return to previous purchasing patterns so we’ll still have the value focus and we think that will position us better competitively for the long run but we do think customer purchasing patterns will evolve as the economy evolves.”

This is the “line in the sand” at Whole Foods. Simply put, they recognize that they are not a “value” proposition for shoppers. However, they think that when the economy turns (1 year? 2 years?) shoppers will resume spending more for the same items they can now get at Wal-Mart (WMT), Costco (COST), BJ’s (BJ) or every other local supermarket selling lettuce and potatoes.

Here is my problem with that. Just two years ago organic foods and grocery items were not widely available, leaving Whole Foods as the only real option. Since then offerings at all food retailers have exploded. For instance, when my boys were born years ago we had to go to Whole Foods to get the “Earths Best” baby food. When my daughter was born 18 months ago, I could get it anywhere. I no longer needed to make the trip to Whole Foods for it. The same goes for potatoes, tomatoes, and tons of other items.

Mackey expanded on Robb’s claim when he said, “Competition of course is a factor and as is cannibalization but they are not any more intense right now then they were in Q2 or Q1. So although we can’t know for certain we think it’s reasonable to conclude that the deceleration in our comp store growth has primarily been due to the economy.” I disagree. Just looking at the shelves in local markets tells me that more of what I want organically is available everyday. The change in the last nine months is dramatic. Is the economy a factor? Of course. I think Mackey is placing too much emphasis on it because it is an easy scapegoat.

As a shopper, I have no reason to return to Whole Foods unless I want a specific specialty item. I am in the middle. I prefer organic when I can get it but will not refuse a purchase because of it and at the same time I do not purchase solely on price. Either end of the spectrum will either avoid or solely frequent Whole Foods. Those of us in the middle need a better reason to go to Whole Foods than having a few extra bucks in our pockets. This is what Mackey and Co. are missing.

It isn’t the economy that that the main driver changing consumer behavior, it is the fact that Mackey is no longer operating in a market of one, but thousands. Consumers have a plethora of choices and given the choice of the same potato at $2 vs $.75, the cheaper option always wins.

This view by management is bad news for shareholders as it clearly signals the fundamental changes necessary for the company to become more appealing to a wider audience will not be happening anytime soon.

Want more evidence? Read this Q&A regarding the last “slowdown”: in 2001 and Whole Foods results:
Andrew Wolf – BB&T Capital Markets
“Looking back in 2001, the last slowdown, you fared a lot better, your comps were strong and the transactions were way up and I think at the time you posited that it was you were benefiting that the chain was benefiting from the trade down from restaurants so forth. What do you think has changed, do you think it’s either the economy is tougher or people shifting where they’re spending or do you think there’s more competition for the kind of restaurant equivalent type food or close to equivalent type food that can be provided at other outlets?”

John Mackey
“We’re not positive what it is. We speculate two things that are different in 2008 from 2001 is one the oil prices are so high and gasoline is so expensive. Whole Foods has always attracted because we have such unique and special stores, we’ve always attracted a wider geographical radius then conventional supermarkets do. People drive further to come to Whole Foods. And we think that with the price of gasoline right now that people aren’t driving as far as frequently to our stores as they used to. So we think on the margin that’s hurting our comps.

Secondly although we don’t want to break it out I will say that the real estate markets that have been the hardest hit on the whole subprime mess we have felt that. We’ve seen a greater slowdown in comps in those markets then we have in the markets that have been less affected. So I think those two things are factors, the price of oil i.e. gasoline and the markets that have particularly been hit hard by the housing downturn. Those have both affected Whole Foods comps.”

Notice the key words for excuses? “Subprime, gas ,oil, real estate”. What is really different? The competition and consumers choices for similar products, in 2001 there really wasn’t any, today there is tons.

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

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Once again the MSM coverage skews actual results…This time they do it to Archer Daniels Midland (ADM)

The headlines “ADM Profits Falls” and “Archer Daniels fourth-quarter profit slips by more than half” are as misleading as they come. Why?

What do we really care about? The health of operations. ADM’s profit of $3.30 a share last year was boosted $1.01 by asset sales. That means actual operations, what is does to make money, had a profit of $2.30 a share. This year, operations posted a profit of $2.79 a share. That is growth… Just as we tend to discount “one time” charges when they hurt earnings, we should do the same when they help and focus on core results.

Earnings call notes:

– 90% of the increase (in net sales and profits) was attributable to increases in selling prices, primarily resulting from the significant increase in underlying commodity costs. The remaining 10% of the increase in sales revenue was due to higher sales volumes.

This is important because it signals higher selling prices are sticking and not hurting demand. ADM is coming off a year of record demand and it increased, along with prices in the current one.

Along with this was that gross profit grew approximately 12% for the quarter to $807 million, as overall operating margins improved. In short, higher commodity costs are not hurting results.

– ADM expects to see higher selling prices for ethanol in this current quarter that we are in compared to last quarter and shipments should remain at a good pace. As current market prices for ethanol remains very attractive relative to unleaded gasoline.

Here was an interesting comment that came out of a question of what ADM will do in regards to debt repayment vs share buybacks:
“The agencies, of course, discourage share buy backs, but we still have some commodity volatility. We have our ongoing CapEx program that’s got a little more than a year to kind of run out. We’re kind of at the peak spending period as we stand here. And we see some good M&A opportunities out there that we’re evaluating each and every day.”

M&A is almost never mentioned on an ADM call in any way. The fact that the subject was broached in this way gives real credence to last weeks reports that ADM is planning to announce something in Brazil very soon.

Ethanol mandate:
“We’re already blending over the mandate right now. Ethanol is a lot cheaper than unleaded gasoline. So everybody is going to be trying to expand and blend as much as they can. So even if there is a waiver, which really doesn’t make much sense, we still do not see the ethanol demand slowing down at all, just because it is very price competitive.”

On the increased ethanol supply coming on;line:
Diane Geissler – Merrill Lynch: “In terms of picking up (demand) the incremental supply that’s scheduled to come online over, say, the next 12 months?”

John Rice: “Yes. We keep seeing new markets come in and as ethanol is $0.60 to $1 under unleaded gasoline, more and more people keep blending it and using it.”

Ethanol Tariffs:
“There is a lot of talk about the tariffs, but logistically, Brazil is just not set up to handle and ship any more ethanol than they already are. I mean we have the infrastructure issues, we are very involved in the Brazil infrastructure. Probably over the long term, that can change, but it also comes down to just a revenue issue, doing away with the tariff, it’s just less revenue in the United States because X amount of gallons will come to the United States one way or the other.” John Rice

All in all as an investor, there wasn’t anything that alarmed me a a whole lot that was encouraging. Capex will peak in 2009 as new processing plants begin to come online ans that will further boost earnings. Brazil will open up and there does not seem to be anything (other than the media) stopping the blending of ethanol into gas with or without the tariff. People still need both food and fuel and until they don’t ADM will be just fine.

SEC filing

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

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Owens Corning’s CEO was on CNBC recently and had this to say about his composite products use in auto’s.

Watch the video:

The word “housing” was not used once…….good.

Some interesting notables from the earnings call:

– “Today, about 10% of our revenue in composites results from wind energy sales. It is a fast growing market. Wind energy generates just over 1% of the world’s electricity. Wind energy in terms of me”gawatts generated is expected to grow at an average of greater than 15% annually over the next decade. The mono glass fiber in each window blade is significant. There are about 18 tons of fiber glass in each window, 6 tons per blade. Wind is an immediate and long-term growth opportunity for Owens Corning.” Thalman

– “There is little doubt that use of glass fibre composites will continue to replace traditional materials like steel, aluminum and wood as a lightweight, non-corrosive and affordable alternative. The opportunities in this business have few limits.” Thalman

Regarding housing starts:
– “I mean year-to-date start to been about a million. There were a little bit weaker in the second quarter. So, we would expect that the full year will probably come in less than a million, and I think that’s pretty consisting with consensus.

I mean just a note, I think since consensus started keeping records, that’s the first time housing starts were been less than a million if this impact happens since 1959 when they started publishing these numbers. So, it’s bad out there. The consensus seems to be that we’re going to continue to see this for another year. And we might even see a second consecutive year less than a million. We are certainly building our business plans as we go into our planning season here in the fall or not counting on the big market turnaround or to drive performance.” Thalman

Regarding composite sector:

– “We’re participating in a market that in total will grow at 1.5 to 2 times global GDP organically with some segments like wind energy that could grow high double-digits for the coming decade.” Thalman

Essentially a return to modestly normal housing conditions will mean a large increase in Owens earnings. That earnings are increasing under housing conditions not seen in 5 decades is a testament to the work Thalman has done changing the earnings profile.

View 10-Q

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

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Mark Shaprio is working overtime “putting some lipstick on the pig” that is Six Flags (SIX).

Ready?
“We told you on our last call that we planned to be flat in attendance through May. Then in June internally we knew we had difficult comps in June. 2007 was up 10% in attendance in June over 2006 and revenue in June for 2007 was up 13% over June 2006, so we knew we had a difficult June in front of us. Therefore for us to come out flat for the first six months in attendance plus 5% in revenues and plus 3% in guest spending is extremely gratifying. We’re in a good position so to speak walking into July. We knew this business, this year for us, was going to be about July, obviously going up against the I would say favorable comps we had last year with the Texas rain which really hurt us and of course the accident in our Kentucky park which we had at the end of June last year that impacted us negatively for the month of July. Remember July is essentially 30% of our business and August is 20% of our business, so July is historically the most significant month for the company.”

So, what did he just say? If we go with last years results, based on the “difficult comps” they are going up against last year, they are in real trouble. Even though last year was so good, the suspended the dividend, refinanced debt at oppressive terms and had large shareholders throw in the towel.

Remember though, it was just last fall that Shapiro blamed God for the disappointing results then that are “tough comps” now. Funny what time can do…. It should be noted here that the weather was credited as having a “positive effect this year”.

More Shapiro:
“We are at or above all time highs on our guest satisfaction scores, ranging from overall visit, intend to visit again, intend to recommend to a friend, cleanliness, restroom cleanliness, speed of our ride lines, speed of our food lines. I could not be happier with the product that our parks and our park presidents by way of leadership are putting out there.” So, why do results suck?

Jeff Speed got into the act:
“Attendance for the quarter declined to 8.6 million while year to date attendance was flat at 10.1 million. As we highlighted on our first quarter call, the second quarter attendance reflects fewer operating days this year due to the Easter holiday falling in the first quarter this year as opposed to the second quarter last year.”

Now, remember the Q1 call when they jumped up and down and patted themselves on the back because of the Q1 attendance jump that was cause by the very Easter Holiday they now blame for the Q2 drop? Of course Easter got far less credit then than it does blame now.

More Speed:
“we ended the June quarter with approximately $153 million of cash and liquidity consisting of $66 million in cash and $87 million available on our revolver and we have since paid down the revolver further such that we now have approximately $150 million available. However, as you and we are well aware, the redemption date for our mandatory redeemable preferred stock or [PERS], is approximately one year away, and we have approximately $130 million of senior notes remaining outstanding and due in February 2010.

At this point I’m not going to comment on the what, when, how, or why regarding the strategy to deal with these obligations.”

Uh, why not? If you are going to end every sentence with “free cash flow positive” (EBITDA) then you have to address the fact that cash is already spoken for. You also should mention that, next August, Six Flags is obligated to pay $288 million to preferred stockholders. On Thursday, for the second straight quarter, it suspended dividend payments to those shareholders. That will save the company $5 million, for now, but the amount will be tacked on to next summer’s bill.

Three words not mentioned on the call? Earnings Per Share…..wonder why?

Disclosure (“none” means no position):None

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