Wall Strip on Smoking, Jeff Matthews, iPhone
killer” or, Not a iPhone “killer”
– This just may be one of the funniest things I have ever seen.
– Jeff makes a good point here
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Categories
A Bottom Called?
From the “timing is everything” department.
In a post entitled “Financials: This is What a Bottom Starts to Look Like” I said “So does this means the financials index (XLF) has nowhere to go but up? No, there may be a little more downside from here. It does mean that there will not be much more significant downside though. Currently trading at a 5 year low, the sector as a whole is vastly oversold.”
The XLF (the financial sector ETF) stood at $27.88 the following trading day (1/14) and dropped 8.5% to $25.50 on January 18th. Since then it has rebounded from that low and stands just over $29.
Was that the low for the financial sector in 2008? Barring a seminal event (terrorist attack, another war, etc.) my gut tells me yes..
Consider since then Wilbur Ross is now in talks with Ambac (ABK) or another bond insurer, Ajit Jain at Berkshire Hathaway (BRK.A) has said they “are talking with” them or MBIA (MBI) and Leucadia (LUK) is acquiring shares of AmerCredit (ACF) at a breakneck pace. These are very smart people who have made billions of dollars picking up scraps of unwanted sectors.
The fact they are now circling the financials must tell us something…
Disclosure (“none” means no position): None
“What we have to do is simple: Differentiate our experience, so that when a customer walks into a Starbucks store, they get something that they can only get from us..” Starbucks (SBUX) CEO CEO Howard Schultz
Notes from the earnings call:
The financials:
** Revenues for the quarter were up 17% to $2.8 billion, from $2.4 billion a year ago.
** Earnings per share increased to $0.28 cents in Q1 of this fiscal year, compared to $0.26 cents per share in Q1 of ‘07.
** Dairy costs resulted in a negative $0.02 impact to EPS in the quarter.(ValuePlays readers first got this in May of 2007)
** Operating margins contracted 160 basis points to 12% from last year’s Q1 margin of 13.6%. (Dairy cost)
** Higher interest expense driven by an increased level of debt when compared to the first quarter of 2007. The debt was used to repurchase shares, resulting in a net neutral impact on earnings per share in the quarter. (Again, see May of 2007)
** A new share repurchase authorization by our Board of Directors for up to an additional 5 million shares
** For 2008 “we are looking to deliver low double-digit earnings growth — lower than expected”
The stores:
** plan to open a total of approximately 1,175 net new stores in 2008, down 34% from fiscal 2007 openings.
** Closing approximately 100 underperforming stores.
** For 2009, plan to open fewer than 1,000 new stores in the U.S.
** Will open approximately an additional 75 net new stores in international markets
** In fiscal 2009, that number will rise to over 1,000 new stores internationally,
Products:
** will discontinue warmed breakfast sandwiches in our North American stores
Plans:
** “At our Annual Meeting of our shareholders on March 19th, we will lay out five specific, bold consumer-facing initiatives that will be a major catalyst for change and transformation.” Schultz
The sentence that really mattered? “Comparable store sales declined 1% in the quarter, driven by a 3% decrease in transactions.” That is the whole ball of wax.
So Schultz and company have a plan? Here are some more helpful hints:
1- 100 US store closing just are not even the beginning of what is necessary
2- Differentiation? If I am going to pay premium prices for ANY product, I want a service level that equates. Most people feel the same way. I do not expect the service at McDonalds (MCD) to be the same as a Mortons (MRT). That being said, if I go to McDonalds and have to wait for my order to be completed, they politely ask me to go sit down and relax and they bring it to me. If I am in Starbucks, I stand in the “cattle line” and wait, and wait, and wait. Why?
3- Too many small locations. Now, I am sure the little locations are money makers but their proliferation has had a negative effect. Why? If it is a nice day, I do not mind stopping and dragging the kids inside to get some coffee, but, if it is raining, snowing and very cold, I won’t go in because there will be no place for us to sit and it is just too much effort to walk and and then turn around and go. The proliferation of the “counter stop” locations with no real sitting area causes a mental picture of Starbucks. I now (and so do others) pass them by when I see them because there now is an assumption of their lack of adequate seating. They have changed the perception of the company from a place to hang out and drink coffee to one of inconvenience.
4- Get rid of all the crap. There is just too much junk for sale and the stores feel claustrophobic. Has anyone ever purchases one of the cappuccino machines there for sale? I keep waiting to see lawn mowers for sale out front..
Starbucks shares are getting hit on Thursday and even with all the pain in 2007, they trade around 26 times this years earnings. They are by no means cheap. With growth expected to slow even more, there isn’t anything to warrant shares going higher anytime soon.
Disclosure (“none” means no position): None
If you thought Ackman’s letter to the ratings agencies was something else. In a letter to the NY & Wisconsin Insurance Commissioners as well as the SEC, he lays out the cases for massive losses to MBIA (MBI) and Ambac (ABK). It is stunning…
The full 20 page letter can be found on pdf. here
Disclosure (“none” means no position): None
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Friday’s Upgrades and Downgrades
Upgrades
Alliance Data (ADS)= Robert W. Baird Neutral » Outperform
MIPS Techs (MIPS)= B. Riley & Co Neutral » Buy
Ryder System (R)= BB&T Capital Mkts Hold » Buy
NCR Corp (NCR)= Wedbush Morgan Buy » Strong Buy
Imation (IMN )= Needham & Co Hold » Buy
Cablevision (CVC)= Kaufman Bros Sell » Hold
Big Lots (BIG)= Wachovia Underperform » Mkt Perform
Enterprises Finl (EFSC)= Keefe Bruyette Underperform » Mkt Perform
Comerica (CMA)= Rochdale Securities Sell » Hold
Pinnacle West (PNW )= Lehman Brothers Underweight » Equal-weight
Alliance Data (ADS)= Sun Trust Rbsn Humphrey Neutral » Buy
SCP Pool (POOL)= JP Morgan Neutral » Overweight
Alliance Data (ADS)= JMP Securities Mkt Perform » Mkt Outperform
Alliance Data (ADS )= Bear Stearns Peer Perform » Outperform
Sealed Air (SEE)= Credit Suisse Underperform » Neutral
Astoria Fincl (AF)= Bear Stearns Underperform » Outperform
Nordstrom (JWN)= Bear Stearns Peer Perform » Outperform
Hess (HES)= JP Morgan Neutral » Overweight
Gilead Sciences (GILD)= Wachovia Mkt Perform » Outperform
Downgrades
Cirrus Logic (CRUS)= Longbow Buy » Neutral
Polo Ralph Lauren (RL)= Morgan Keegan Mkt Perform » Underperform
Mattson (MTSN)= Caris & Company Above Average » Average
Allstate (ALL)= Sandler O’Neill Buy » Hold
bebe stores (BEBE)= Morgan Keegan Outperform » Mkt Perform
Audible (ADBL)= Merriman Curhan Ford Buy » Neutral
Accuray (ARAY)= Soleil Buy » Hold
TriCo Bancshares (TCBK)= Keefe Bruyette Outperform » Mkt Perform
Affiliated Managers (AMG)= Keefe Bruyette Outperform » Mkt Perform
Baker Hughes (BHI)= RBC Capital Mkts Outperform » Underperform
Schlumberger (SLB)= RBC Capital Mkts Outperform » Sector Perform
W&T Offshore (WTI)= JP Morgan Neutral » Underweight
Saks (SKS)= Bear Stearns Peer Perform » Underperform
NuCo2 (NUCO)= Bear Stearns Outperform » Peer Perform
Baker Hughes (BHI)= Wachovia Outperform » Mkt Perform
Delhaize Group (DEG)= JP Morgan Overweight » Neutral
Harris Stratex (HSTX)= Morgan Joseph Buy » Hold
Century Aluminum (CENX)= Friedman Billings Outperform » Mkt Perform
Cadence Design (CDNS)= JP Morgan Neutral » Underweight
Polo Ralph Lauren (RL)= Banc of America Sec Buy » Neutral
Monster Worldwide (MNST)= Deutsche Securities Buy » Hold
Adobe Systems (ADBE)= Jefferies & Co Buy » Underperform
YUM! Brands (YUM) Deutsche Securities Buy » Hold
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52 Week Low’s 1/31
(ZRAN) Zoran Corporation
(TLGD ) Tollgrade Communicati …
(TKPU ) Polaris Acquisition Corp
(TELK ) Telik Inc
(RNOW) Rightnow Technologies Inc
(RDY ) Dr. Reddy’s Labs, Ltd.
(RCRC) Rc2 Corp
(NEWP) Newport Corporation
(MTSN ) Mattson Technology Inc
(MSII ) Media Sciences Intl Inc
(HTCH ) Hutchinson Technology Inc
(HSTX ) Harris Stratex Ntwrks Inc
(HMG ) HMG/Courtland Propert …
(HLDU ) Secure Amer Acquisiti …
(GRVY ) Gravity Co Ltd
(BCRX ) BioCryst Pharmaceutic …
(AWBC ) Americanwest Bancorpo …
(AVRX) Avalon Pharmaceutical …
(ARIA ) ARIAD Pharmaceuticals Inc
(ARAY )Accuray Inc
As usual, Jane Genova is on top of this as the briefs were filed.
From NL Industries’ (NL) Brief:
“The trial court sanctioned liability without requiring the jury to find that any defendant acted negligently, or intentionally, or that any defendant knew or should have known of any alleged danger, or that any defendant ever sold lead pigment in Rhode Island or that any defendant’s lead pigment was present on any building in this State at anytime, past or present.” [page 1]
“If the trial court’s jury instructions stand, the only question is which industry will be next. What happens if hair spray is found to be a problem five years from now? What about polyurethane?” [page 6]
From Millennium Holdings’ Brief:
“If the aggregate presence of a product in the State is to be recognized as a new basis for liability, then certainly no person should be charged with responsibility beyond the extent to which that person’s product is present in the State. Yet, here each Defendant has been held liable to abate lead pigments in Rhode Island that it never made or sold, and without any evidence as to whether that Defendant’s product is in the State and, if so, how much.” [page 1]
Excerpts from Sherwin-Williams’ (SHW) Brief:
“The end result was a trial so stacked in Plaintiff’s favor that Defendants effectively were forced to defend themselves with both hands tied behind their backs, while attempting to strike at a moving target – a trial so unfair in its conception and execution as to violate the U.S. and Rhode Island Constitutions.” [page 7]
“It is impossible to know what comprises the alleged nuisance when the nuisance is an unidentified fiction over which Defendants exercise no control. It is impossible to challenge actual cause where there is no specifically identified nuisance or injury. It is impossible to argue that others are the sole or alternative cause of any harm, a key defense, when no particular injury, no specific property, and no other potential cause can be investigated. The conception of the nuisance thus relieved Plaintiff of required elements of proof and denied Defendants the ability to rebut any particular instance of the purported nuisance. It created, without fair notice and after the fact, limitless, endless liability, without proof of fault, actual causation, or proximate causation.” [page 6-7]
“The suit and the legislative approach are very different universes about to collide. Based on the recognition that well-maintained properties are not dangerous, the Lead Poisoning Prevention Act places the responsibility for lead remediation on the property owners who have control over the condition of the paint and creates incentives to encourage owners to maintain their properties.” [pages 3-4]
“A jury of six people was encouraged to issue a verdict, and Plaintiff insists that the jury has issued a verdict, tantamount to new statewide policies for public health and manufacturer liability. The common law is not filling a gap; it is trespassing on the legislative domain and creating conflicting rules.’ [page 5].
More to come …
Disclosure (“none” means no position): Long Sherwin, none
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Thursday’s Links
Lead, Cramer, Mozillo, 60 Minutes
– More lead paint hypocrisy……..
– More on Jim Cramer making investors dizzy.
– This is great. A “hats off” to Joe Ponzio.
– How do we know the sub-prime story has run its course? 60 Minutes did a story on it. Do they know Kennedy was assassinated?
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Altria Earnings Call Notables
Here are the notable items from Altria’s (MO) earnings call yesterday
CEO Louis Camilleri
Regarding smokeless products”
“…Marlboro Moist Smokeless Tobacco. The latter introduction has [inaudible] much debating in ink in the recent past. While it is still early days, let me just say that we are very encouraged by the results to date, particularly in terms of the consumer response to the product and repurchase rates.”
PMI
** 70% of PMI’s top 25-income markets registered improved trends in the fourth quarter
Effect of share repurchases:
** “benefit of share repurchases in ’08 is slightly less than 1% in terms of growth, and clearly it will impact 2009’s growth rate a lot more.”
** combination of the buybacks plus the dividends equals 20% of the market cap
** Altria will start in April and PMI will start in May
Litigation risk to PMI:
“No, it’s certainly not non-existent. There has been litigation internationally as you are aware and as the disclosure showed. However, the industry has been very successful, and I think we will continue to be successful. That is not to say that there won’t be claims and litigation internationally, but it’s not something that I’m unduly concerned about.”
Most of the really big questions were deferred until the investors conference on March 11th. At that time the details of both companies will be discussed.
Disclosure (“none” means no position):Long Altria
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Wal-Mart Tinkers With Clothing Again
Wal-Mart (WMT) will move clothing merchandising jobs to New York as it seeks to narrow its focus on basic clothes its customer base wants. About time…
Word from Bentonville is that a large number of workers are bring let go as the company has decided to finally put to rest its quest for “hippness”. After trying for years to one up Target (TGT) in the style department, Wal-Mart is listening to its shoppers and rather than trying to sell them clothing, it will stocks its stores with the clothing they want to buy.
This is a good move for Wal-Mart. I do not think no matter how hard they try, Wal-Mart can ever hope to become a “fashion” stop for shoppers. You know what? That is ok. Folks still need underwear, t-shirts and the like and if they know they can get those items at Wal-Mart at a great price, they will shop there.
If nothing else, Wal-Mart will now save the millions of dollars they have invested in the pursuit of fashion and can put that cash to better use.
Disclosure (“none” means no position):Long Wal-Mart, None
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Thursday’s Upgrades and Downgrades
Upgrades
Marsh McLennan (MMC)= Credit Suisse Neutral » Outperform
Smith Intl (SII)= Citigroup Hold » Buy
Washington Mutual (WM)= Fox Pitt In Line » Outperform
Marsh McLennan (MMC)= Stifel Nicolaus Hold » Buy
CyberSource (CYBS)= Wedbush Morgan Buy » Strong Buy
Callidus Software (CALD)= Northland Securities Market Perform » Outperform
Northern Dynasty Minerals (NAK)= BMO Capital Markets Market Perform » Outperform
HF Financial Corporation (HFFC)= FTN Midwest Neutral » Buy
Walt Disney (DIS)= Pali Research Neutral » Buy
Ivanhoe Mines (IVN)= BMO Capital Markets Market Perform » Outperform
Travelers (TRV)= Sandler O’Neill Hold » Buy
NuStar GP Hldgs (NSH)= Wachovia Mkt Perform » Outperform
NuStar Energy (NS)= Wachovia Mkt Perform » Outperform
Atlas Pipeline Holdings (AHD)= Wachovia Mkt Perform » Outperform
Oil States (OIS)= RBC Capital Mkts Sector Perform » Outperform
Regal Entertainment (RGC)= JP Morgan Neutral » Overweight
Avon Products (AVP)= Bear Stearns Peer Perform » Outperform
Quanta Services (PWR)= JP Morgan Neutral » Overweight
Albemarle (ALB)= JP Morgan Neutral » Overweight
Quiksilver ( ZQK)= JP Morgan Neutral » Overweight
Kinder Morgan Prtnrs (KMP)= JP Morgan Neutral » Overweight
Red Lion Hotels (RLH)= JMP Securities Mkt Outperform » Strong Buy
Electronic Arts (ERTS)= Bear Stearns Peer Perform » Outperform
Unisys (UIS)= Jefferies & Co Underperform » Hold
Eagle Test Systems (EGLT)= Broadpoint Capital Neutral » Buy
NRG Energy (NRG)= Credit Suisse Neutral » Outperform
DTE Energy (DTE)= UBS Neutral » Buy
Nike (NKE)= JP Morgan Neutral » Overweight
Dionex (DNEX)= Robert W. Baird Underperform » Neutral
Canadian Solar (CSIQ)= Oppenheimer Perform » Outperform
Qimonda (QI)= UBS Neutral » Buy
Albemarle (ALB)= UBS Neutral » Buy
BEA Systems (BEAS)= Bernstein Underperform » Mkt Perform
Downgrades
CNX Gas (CXG)= RBC Capital Mkts Outperform » Sector Perform
Canadian Pacific (CP)= CIBC Wrld Mkts Sector Outperform » Sector Perform
Hutchinson (HTCH)= Caris & Company Above Average » Average
Centex (CTX)= UBS Buy » Neutral
Natl Instruments (NATI)= Citigroup Hold » Sell
Cymer (CYMI)= Brean Murray Buy » Hold
Hutchinson (HTCH)= Brean Murray Hold » Sell
Yahoo! (YHOO0= Citigroup Buy » Hold
Conseco (CNO)= Credit Suisse Outperform » Neutral
Cabela’s (CAB)= Wachovia Outperform » Mkt Perform
Columbia Sportswear (COLM)= JP Morgan Overweight » Neutral
T. Rowe Price (TROW)= Friedman Billings Mkt Perform » Underperform
Yahoo! (YHOO)= Oppenheimer Outperform » Perform
Hanmi Financial( HAFC )= Oppenheimer Perform » Underperform
Merrill Lynch (MER)= Oppenheimer Perform » Underperform
Scotts Miracle-Gro (SMG)= JP Morgan Overweight » Neutral
Cabot Micro CCMP (GARP)= Research Buy » Neutral
Categories
More On Altria
Now that Altria (MO) has announced the spin details, let’s look at some numbers.
If we assume a multiple of 15 times earnings, a fair one considering MO ought to grow at 9% to 11% and 20 times earnings for PM (PMI) as it ought to grow 12% to 14% and be free of litigation.
That gives us an initial share price of $22.50 for MO and $57.40 for PM. These will adjust slightly but the exercise is to give more details to what is being announced. Currently the combined entities trade at $76 and change so the above numbers are fairly accurate.
The dividend yield at those price levels will be 5.1% for MO and 3.2% for PM
As of 9/30 there were 2.1 billion shares outstanding giving MO a new market cap of approx. $47 billion and PM of $120 billion. The share repurchases will equate to roughly 16% of MO’s outstanding shares and 11% of PM’s.
The earnings call at 1pm today ought to be interesting…
Disclosure (“none” means no position): Long MO and will be long PM
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Altria Releases Spin Details
Altria (MO) just released the spin information we have been waiting for.
PHILIP MORRIS INTERNATIONAL SPIN-OFF EFFECTIVE MARCH 28, 2008
* Identifies new Board of Directors post-spin for both Altria and PMI
* Sets spin-off share distribution ratio of one-for-one
* Announces dividend policies, initial dividend rates and share repurchase programs
— Altria dividend policy anticipates payout ratio of 75% post-spin
— Altria initial post-spin annualized dividend rate of $1.16 per common share
— Altria post-spin share repurchase program of $7.5 billion over 2 years
— PMI dividend policy anticipates payout ratio of 65% post-spin
— PMI initial post-spin annualized dividend rate of $1.84 per common share
— PMI post-spin share repurchase program of $13.0 billion over 2 years
* To commence tender offer shortly for all outstanding Altria notes
* Forecasts 2008 earnings per share growth rates
— Altria 2008 full-year diluted earnings per share from continuing operations projected to grow approximately 9% to 11% from a 2007 adjusted base of $1.50, excluding PMI, which will be accounted for as a discontinued operation for the full-year 2008
— PMI 2008 full-year diluted earnings per share from continuing operations projected to grow approximately 12% to 14% at current exchange rates, from a 2007 pro-forma adjusted base of $2.78
Disclosure (“none” means no position): Long MO
There were some interesting things said on the Sherwin Williams (SHW) call.
CEO Chris Connor:
“New residential consumption was down in a high 20% range for the year. Existing home turnover declined nearly 20%; consumer spending slowed dramatically, credit markets contracted, manufacturing activity turned negative. Consumer confidence sag and GDP growth stalled. In short, it was exactly the kind of year that we anticipated 12 months ago.
We entered 2007 prepared for the inevitable slowdown in end market demand and as a result of this preparation, Sherwin turn in, what I would describe, as a solid performance last year. Consolidated net sales grew a modest 2.5% to just over $8 billion in sale. Consolidated net income increased almost 7% and earnings per share increased more than 12% to a record $4.70 per share.”
Regarding the dividend:
“I will be recommending a continuation of our policy of paying out approximately 30% of prior year’s earnings per share in the form of a cash dividend in 2008. This would result in a quarterly dividend of $0.35 per share or $1.40 per share for the year, an increase of 11.1% over the $1.26 per share we paid out in 2007.”
Sherwin will yield around 2.5% at those levels.
Earnings:
Sherwin sold off yesterday 1.7% based on this one sentence, “first quarter will be in the range of $0.72 to $0.80 per share, compared to $0.83 per share earned in the first quarter of 2007.”
It ignored what followed “Full year 2008, we expect net sales will also increase in the low to mid single digits over 2007. With annual sales at that level, we estimate diluted net income per common share for 2008 will be in the range of $5 to $5.15 per share, compared to current analyst consensus of $5.03 for 2008, and $4.70 per share earned in 2007.”
So, Q1 will fall 3 cents short but the full year looks to be above estimates and shares get whacked. This is the very reason you cannot let the market guide your investment decisions.
Had anyone bother to even listen to Connor, he explained the earnings later. “If we just look at our Stores segment which is we all know the lion share of our company. The southern divisions and Bob takes you through that on the call in terms of which parts of the Stores Group are performing the best and I think he made the comments that our southeastern division was the first performing of the geographic segments in the Stores division.
And typically it’s been the southeastern division to a lesser extent to the southwestern division carried the company to the first quarter. This is where we have a better weather, flatter sales curve throughout the year and these are the parts of the country that are being impacted the most aggressively in particularly Florida which we’ve talked about in this call in the past.
So we are not getting the lift from the southern portions of our Stores segment, early in the year to carry the first quarter. Adding to that, the two acquisitions that we’ve made this past year are northern type acquisitions. And again they have a more traditional and a profit curve with a second and third quarter or the quarters when they make most of their contribution.
So we’ve added a significant number of stores that lost money in the first quarter. So stores that have historically carried up to or something through the market environment and for that reason we guided the first quarter down to expect all those things as they typically would do to catch up in the second and third quarter and that’s why we have somewhere between 8% and just below 10% guidance for the year earnings.”
Share Repurchases:
Expect about 8 million shares in 2008 (about 6% of outstanding shares).
In Q4 repurchased 3 million shares at “around” $60 a share.
Paint Stores:
Plan to open 100 more in 2008
I would expect 2008 to be an anemic year in term of repurchases as Sherwin digested to activity of 2007. Now, should housing turn ahead of expectations and the economy rebound, Sherwin, as it is positioned should see the incremental improvement to it own bottom line as it is currently geared for a poor 2008 operating environment in the US.
That being said, expedited share repurchases would most likely be first on the list with the stock at these levels.
Disclosure (“none” means no position): Long Sherwin
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Altria Earnings: One Question, The Spin
Altria (MO) reports later today.
Expectations for Q4 EPS are 97c on revenue of $9.19B. The consensus range for EPS is 96c to $1.01, and the consensus range for revenue is $8.9B to $9.62B. Comparisons to 2006 are skewed due to the Kraft (KFT) spin last year.
The spin. That is all we really want to know. I detailed the preliminary spin plans in October.
When will it happen and when will the re-capitalize both companies. What will the dividends be and how many shares will they repurchase. Do I expect to get answers to all those, no, but we usually get some hints later on the call.
Disclosure (“none” means no position): Long MO