Has either Merrill Lynch (MER) or Citigroup (C) found their new CEO?
A 1pm press conference has been scheduled today by the NYSE (NYX). The hot rumor is that current CEO John Thain is leaving to take a similar position at either of the previously mentioned institutions.
Based on Thain’s history. I hope he is heading to Citigroup..
Berkshire Hathaway’s (BRK.A) Warren Buffett is buying banks.
Buffett bought Bank of America (BAC) during the 3-months ended 6/30. His purchase prices were between $ 48.34 and $ 50.14, with an estimated average price of $49.6 for his 8.7 million shares. Now, the BAC position is small for Berkshire as it represents 0.7 % of Berkshire’s holdings as of 6/30. His holdings was 8700000 shares as of 2007-06-30.
Buffett has long been a fan of financials holding shares in Wells Fargo (WFC), M&T Bank (MTB) and HSBC Holdings (HBC). According to the site Gurufocus, Buffett has almost 40% of Berkshire’s holding in financials.
Buffett’s buying is indeed a sign not of a short term bottom in the sector, but of the long term health of it. While Buffett’s typical holding period for a common stock has nearly evaporated for his “forever” mantra of earlier years, he still has a multi year time frame which on Wall St. is an eternity.
It also indicates “value” now exists in financials, a sentiment I post on yesterday. Do not confuse “cheap” with “value”. A cheap stock is one that will not cost you much money to purchase. A value stocks costs what it costs to buy but it is worth much more, a significant difference.
That did not take long. Anyone care to wager the doomed from the beginning share repurchase plan at Home Depot (HD) is not completed next year either?
Aside from suspending the buyback plans, they also said the recapitalization plan under which they planned to buy back $22.5 billion in stock would not be completed this year. Under that plan, the company bought back about 290 million common shares for $10.7 billion earlier this year in a tender offer. Most of those repurchases were done with the proceeds from the Supply sale. In August I joked that HD would end up with a $12 billion plan. It looks like even I was too optimistic.
Do not be fooled into thinking HD will complete this anytime soon. The ingredients necessary for it to happen, improved credit markets, improved business environment and improved business fundamentals are at least a year away. Don’t believe me? Blake said it himself on the call “We expect continued difficult conditions for the remainder of 2007 and into 2008.” That puts us a 2008 at the earliest before we can even consider more repurchases of anything other than a token amount. I would bet we do not see any additional ones this decade..
How did the sale of Supply end up? Carol Thome said “Earnings for our discontinued operation, HD Supply, were $20 million. Included in this quarter’s results are the net after tax financial results for the month of August, as well as the impact of the sale of HD Supply. After expenses and taxes, we recognized a $4 million loss on the sale of the business.”
Regarding the repurchase plan and buyback Thome said “We will move forward when we see improvement in both the home improvement and credit market, which we believe will not occur until some time in 2008.”
During the conference call, CEO Frank Blake said they continued to lose overall home improvement market share but at a lower rate compared with the year earlier. Of all the news this is the worse because it means that Home Depot as a company, is doing worse than its competitors.
Home Depot’s problems are so deep, it will be bad for a while. If you must invest in this sector, go with Lowe’s (LOW).
UPGRADES
Biogen Idec BIIB BWS Financial Sell » Hold
SPSS Inc SPSS First Analysis Sec Equal-Weight » Overweight
Posco PKX HSBC Securities Neutral » Overweight
Schlumberger SLB Calyon Securities Neutral » Add
Pioneer Natural PXD Credit Suisse Neutral » Outperform
Weatherford WFT Calyon Securities Add » Buy
Investment Tech ITG Keefe Bruyette Mkt Perform » Outperform
51job JOBS Citigroup Hold » Buy
Repsol SA REP Credit Suisse Underperform » Neutral
McDermott MDR Calyon Securities Add » Buy
Yahoo! YHOO CIBC Wrld Mkts Sector Perform » Sector Outperform
TAM S.A. TAM Bear Stearns Peer Perform » Outperform
Brooks Automation BRKS Bear Stearns Peer Perform » Outperform
Yamana Gold AUY UBS Neutral » Buy
Smith & Nephew SNN Bear Stearns Peer Perform » Outperform
Tyson Foods TSN Deutsche Securities Hold » Buy
DOWNGRADES
Cognos COGN BMO Capital Markets Outperform » Market Perform
Trans World TWMC Wedbush Morgan Buy » Hold
Amerigroup AGP Stifel Nicolaus Buy » Hold
Koppers Holdings KOP KeyBanc Capital Mkts Aggressive Buy » Buy
Royal KPN KPN Credit Suisse Outperform » Neutral
Cognos COGN Broadpoint Capital Buy » Neutral
MSC Industrial MSM Robert W. Baird Outperform » Neutral
Fastenal FAST Robert W. Baird Outperform » Neutral
Wednesday’s Picks
Guy Adami likes Microsoft (MSFT).Open $34.46
Karen Finerman prefers Kaiser Aluminum (KALU).Open $69.65
Pete Najarian says Evergreen Solar (ESLR) is a buy. Open $12.92
Tuesday’s Results
Jeff Macke liked Procter & Gamble (PG).Open $70.77 Close $71.75 GAIN
Guy Adami thought Cisco (CSCO) is a buy.Open $29.11
Close $30.14 GAIN
Pete Najarian and Karen Finerman recommend buying Ameritrade (AMTD).Open $18.89 Close $19.17 GAIN
Since my tracking began on 6/21 (1-1 means one up pick and one down pick and no results from my vacation weeks). The percentage is the percentage of successful picks
Guy Adami= 45-26 = 64%
John Najarian= 13-4 = 76%
Jeff Macke= 48-33 = 59%
Pete Najarian= 33-32 = 51%
Tim Seymore= 5-5 = 50%
Karen Finerman= 27-17 = 61%
Stacey Briere-Gilbert= 3-0 = 100
Ned Riley= 1-0 = 100%
Carter Worth= 0-1 = 0%
RVSN Radvision Ltd 10.69
ROX Castle Brands Inc 2.11
PEIX Pacific Ethanol Inc 6.49
OXGN OXiGENE Inc 2.87
OSP Osg Amer L P 18.50
OCCF Optical Cable Corp 4.20
NSTK Nastech Pharmaceutical Co 4.98
IMOS Chipmos Tech Bermuda Ltd 5.08
III Information Services … 7.00
IIG Imergent Inc 15.08
HOME Home Federal Bancorp Inc 12.43
HIA Highlands Acquisition … 9.05
HFWA Heritage Finl Corp Wash 20.52
HBNC Horizon Bancorp Ind 25.00
EYE Advanced Medical Opti … 24.58
EPIX Epix Pharmaceuticals Inc 3.33
EOF Merrill Lynch & Co Inc 9.31
ASFN Atlantic Southern Fin … 23.17
ASBI Ameriana Bancorp 7.25
ARM Arvinmeritor Inc 12.49
ANS Airnet Sys Inc 2.01
Here is a rumor sent to me about Citigroup (C) that has some merit
Robert Rubin remains chairman
John Thain brought in from the NYSE (NYX) to run the commercial bank
Vikrim Pandit would run the investment bank after it is spun off
Brokerage are would be sold to JP Morgan (JPM)
This scenario, has real merit as Citi gets to keep Pandit, who is now likely to leave if the CEO jobs goes to anyone under 60 and investors get the breakup many have been clamoring for.
Hmmmmm..
Last month I speculated “Goldman is still short the CDO markets and if they are, that means they are still profiting handsomely from it.” Goldman Sachs (GS) affirmed that speculation today.
CEO Lloyd Blankfein said Tuesday that the firm maintains a short position in the subprime mortgage market and will not be taking any significant charges to write off losses on its position. He also said that the firm remains bearish on the mortgage backed securities market and that new accounting rules regarding certain assets the firm holds would not hurt the company’s business.
Since Goldman reported results, the mortgage markets has declined significantly with the majority of bank write-downs coming recently. This has to lead one to believe that Goldman should see even better results from these short position that they saw last quarter. shares have retreated from a high of $249 down to almost $200 recently but are surging in this news today up $10 to $225.
Goldman is the creme of the crop here….
Home Depot (HD) is just in a world of hurt. Shares are now down 30% this year and shareholders are looking at the 3rd consecutive year of losses.
Home Depot reported Q3 net income fell 27% and same store sales were down 6.2%. Net income was $1.09 billion or $0.60 a share, versus net income of $1.49 billion and EPS of $0.73 last year. Earnings from continuing operations came in at $0.59 less than expectations of $0.60 per share. Sales fell 3.5% to $18,96 billion, versus $19.65 billion last year again short of expectations of $19.43 billion.
The company now expects earnings from continuing operations to fall by as much as 11% in FY2007. To make matters worse HD continues to lose market share to arch rival Lowes (LOW).
Now, Home Depot shares currently trade at $28 and change, yields 3% and trades at 11 times earnings. Value? No, not really. Why?
Home Depot is deteriorating. Were it not losing market shares to Lowes, one could argue that “once housing turns around, HD will rally”. Since they are, Lowes will reverse its current course far faster. One does have to wonder though hoe long HD can or will continue to pay a $440 million quarterly dividend. Consider that Capex runs them roughly $800 million to $1 billion a quarter, the interest on their now exploding debvt will run about $125 million a quarter and they only pulled in $1 billion last quarter and things do not look to be getting any better anytime soon.
How long can the negative math continue to not add up? Either they have to cut capex and risk falling further behind Lowes, cut the dividend or drastically reduce or just put the buyback plans on hold. Either one of the options will only hurt shareholders more…
What happened? Simple. Short term thinking and the sale of HD Supply. I first spoke out against it in June when it was announced. Three months later they finally managed to sell it at a reduced price, were forced to keep some of it and guarantee some of its debt. Shrewed.
Once Nardelli was ousted, incoming CEO Frank Blake sought to appease Relational Investors who lead the Nardelli lynching and caved to their demands. This included the Supply sale and HD taking on massive debt to repurchase shares. Now both those move are coming back to haunt Blake.
Supply, while not a fast grower contributed to HD’s cash and profits substantially. What cash HD received from the sale was used to repurchase huge blocks of stock and then additional debt was added to buy more. While I am a fan of buybacks, they must be done intelligently. This one wasn’t. With it’s business environment deteriorating rapidly and its position in that business falling just as fast, loading up on debt and making promises you might be able to keep was less than wise.
One cannot even say with confidence that when housing turns around Home Depot will be a winner. If you are making a bet here, Lowes is the pick because they are at least managing their way through the housing downturn.
Miss Nardeli yet?
I just cannot understand why Wal-Mart(WMT) CEO Lee Scott is not plowing money into the international operations. The best news is at the end of the post though.
Here are the sales growth numbers:
Sam’s Clubs= 6.1%
Wal-Mart= 6.4%
International= 16.9%
International sales, last year at 23% of sale currently stand at 27% this year. That is a significant jump when you are talking about $92 billions in sales, 4% of that is a huge number. Earnings per share from continuing operations was $0.70, up from $0.62 per share last year. Earnings per share from continuing operations for the third quarter were impacted positively $0.01 per share due to the recognition of $46.5 million in after tax gains from the sale of certain real estate properties.
Earnings for Q4 to be between 99 cents per share and $1.03 per share and the full year should be between $3.13 and $3.17. Analysts project quarterly earnings per share of $1.02 and full-year profit of $3.09 per share.
Earnings growth increases:
Sam’s Club= 6.2%
Wal-Mart= 11.1%
International= 8.6%
Wal-Mart gave the usual lowball 0% to 2% same store sales growth going forward and it is getting to the point that this projection is becoming meaningless.
Now, one might say hey, the Wal-Mart stores profit growth was in excess of the international operations, what gives? Why are the international operations more important?
Wal-Mart has induced heavy price cutting in US locations and the upcoming holiday shopping season has boosted results there. The question that needs to be asked is how much is left there? How much further can they cut? We know that there is saturation of locations in the US but internationally, there is hug
e room.
Admittedly Wal-Mart has not been successful in all markets but where they are a hit, they are huge and the results quarter after quarter are proving that.
What makes me the most happy? The company repurchased than 63 million shares in the third quarter, worth $2.8 billion. For the nine months, the company has repurchased almost 115 million shares, worth $5.3 billion.
In October I said, “I am looking for at least $1.5 to $2 billion in the current quarter, anything less is unacceptable. If current management is serious about shareholders, the almost $3 billion reduction in capex spending ought to go directly to repurchasing stock.” Nothing like getting what you ask for at Christmas. Since the new $15 billion repurchase plan was announced in June, Wal-Mart has now bought about $3.8 billion of it.
That being said, Q4 will have cash flooding Wal-Mart coffers. With prices still at decade low levels, there is no reason we should not expect $3 billion plus to be repurchased.
Despite a recent $1.1 billion write on on mortgage backed securities, business at Wachovia (WB) is just fine.
Wachovia’s chief risk officer, Don Truslow said recently regarding consumer loans,”The housing market certainly has been deteriorating very quickly in certain parts of the country, and we are not immune from that deterioration.”
But, buffering Wachovia from some of the more severe declines other institutions are seeing is the acquisition of option-ARM lender Golden West Financial last year. Truslow said the bank continues to take comfort from the historically low level of charge-offs in the Golden West portfolio. Even in a “worse case scenario” in which the amount of bad loans in Golden West’s portfolio doubled to the high levels hit in the mid-1990s, the business “is still a very profitable and attractive business for us,” said Truslow. How profitable? The segment has accounted for $2.1 billion in pre-tax profits during the first nine months of 2007.
The asset backed institutions like Bank of America (BAC), Citigroup (C) and Wachovia will weather this current situation fine. Those like Countrywide (CFC) who rely almost 100% on credit markets to finance its operations, will see pain from it for considerably longer. Scores have already close operations and in a “flight to quality” scenario, the big institutions will pick up the pieces on even more favorable terms.
News today that Blackstone (BX) is forming a unit to look at the current CDO markets in a desire to “go long” on it ought to be a sign that these instruments ought to be currently valued appropriately. If that is so and investors begin to by them, then the value of them has nowhere to go but up. When they go up the end result will be the opposite of what we have seen the past two months.
Everything still has a bottom and as Citigroup CFO Gary Crittendon remarked recently “it is strange to see these things valued below their cash flows”. Simply put, the value lowering has been overdone.
Investors are treating the banks like they are all Countrywide’s and on the precipice of failure. Nothing could be further from the truth. Bank after bank has commented on the strength of every other facet of their business and for an operation like Citigroup, almost 60% of its profits are coming from international activities that have no relation to US housing.
Does that mean there will be no pain? Of course not. What it does mean is the current dividend yields, with the exception of Washington Mutual (WM), many now around or well over 6% are safe and the businesses will rebound.
I keep repeating Buffett over and over in my head “buy fear”….and because of it we bought Wachovia shares and added to our Citigroup holdings recently. Both are yielding 6.5% and are doing just fine. It may take a while to pay off but it will, of that I am sure.
I was asked by a reader to consolidate the current state of Sherwin Williams (SHW) lead paint litigation. In order to do that I turned to the one person any lead paint watcher would when asked a question on the subject. Jane Genova.
SHERWIN-WILLIAMS LITIGATION UPDATE, as of 11/9/07
Prepared by blogger Jane Genova
Rhode Island:
The appeal of the Rhode Island lead paint trial II verdict to the RI Supreme Court is moving along very slowly. The holdup seems to be getting a complete copy of the official transcript.
On October 31, 2007, Sherwin-Williams departed from its low-profile public relations strategy. It went high profile with two motions to RI Superior Court.
One was to request two portions of DuPont’s agreement with the state be removed because they only served the state attorney general Patrick Lynch’s interest. This is being referred to as a “Slush Fund.”
The second is to stay the abatement process until another company Cyanamid goes to trial. Only then, contends Sherwin-Williams, will each of the defendants know what it must contribute to abatement.
Ohio:
The opposition to “117” has failed because of lack of interest. Therefore, the law stands that the state’s public nuisance law can’t be applied to the former lead paint companies. The state’s public nuisance is dead. All Ohio cities have withdrawn their individual public nuisance lawsuits.
The “117” opposition could plead with the OH Supreme Court for more time to try to get enough signatures for a referendum and/or it can challenge the constitutionality of “117,” claiming its focus is more than one issue.
Missouri/New Jersey:
Because of Supreme Court rulings Sherwin-Williams is no longer a defendant in public nuisance lawsuits.
Wisconsin:
The defendant victory in the personal injury trial Thomas v Mallet is to be appealed by the plaintiff.
There are 35 other personal injury cases pending. Some involve Sherwin-Williams.
California:
The public nuisance case remains pending as the plaintiff attempts to appeal the Santa Clara court’s ruling against the use of contingency in public nuisance. ARCO is the key defendants in the case but if the plaintiff wins, this public nuisance approach could spread throughout California.
Tuesday’s Picks
Jeff Macke liked Procter & Gamble (PG).Open $70.77
Guy Adami thought Cisco (CSCO) is a buy.Open $29.11
Pete Najarian and Karen Finerman recommend buying Ameritrade (AMTD).Open $18.89
Monday’s Results
Guy Adami recommends BorgWarner (BWA).Open $98.32 Close $99.13 LOSS
Pete Najarian prefers Energy Conversion Devices (ENER) Open $ 31.11 Close $29.18 LOSS as well as AGCO Corp. (AG) Open $63.35 Close $57.62 LOSs.
Tim Seymour says Powershares Water Resources ETF (PHO) .Open $20.91 Close $20.47 LOSS
Karen Finerman likes Kaiser Aluminum (KALU). Open $67.96 Close $66.27 LOSS
Since my tracking began on 6/21 (1-1 means one up pick and one down pick and no results from my vacation weeks). The percentage is the percentage of successful picks
Guy Adami= 44-26 = 63%
John Najarian= 13-4 = 76%
Jeff Macke= 47-33 = 58%
Pete Najarian= 32-32 = 50%
Tim Seymore= 5-5 = 50%
Karen Finerman= 27-17 = 61%
Stacey Briere-Gilbert= 3-0 = 100
Ned Riley= 1-0 = 100%
Carter Worth= 0-1 = 0%
SMI Semiconductor Mfg Int … 5.26
SMG The Scotts Company 37.47
TXA Tribune Co New 57.14
TWC Time Warner Cable Inc 24.81
TTI TETRA Technologies Inc 15.60
TSN Tyson Foods Incorporated 14.15
LSCC Lattice Semiconductor … 3.82
LL Lumber Liquidators Inc 9.25
LGBT Planetout Inc 5.88
JHX James Hardie Inds N V 27.60
JBL Jabil Circuit Inc 18.96
CFNB California First Ntnl … 11.38
CEM Chemtura Corp 8.25
CVC Cablevision Systems C … 25.57
CTHR Charles & Colvard Ltd 2.49
CRRB Carrollton Bancorp 11.27
COOP Cooperative Bankshare … 14.33
S Sprint 15.99
Blackstone (BX) investors must really feel like they stepped in it. The form reported a loss today and the news out of Washington is that the House passed Charlie Rangell’s latest wealth distribution ponzi scheme.
Back in June, they day before their IPO, I noted, ” If you believe in the “greater fool” theory then this would be an indication that these firm are at the top and the people in the know are cashing in” and that “I will stay away…”
Shares currently trade 30% below their IPO high and if today’s loss is not bad enough (due mainly to IPO one time charges), the news out of Washington ought to scare investors even more. The House voted 216-193 to approve a bill, introduced by House Ways and Means Committee Chairman Charles B. Rangel, a New York Democrat, that would tax carried interest, through which alternative-asset managers (private equity) derive the bulk of their income, at the 30% rate ordinary income is taxed rather than the 15% capital gains rate they now pay.
Why does this matter? PE has been good for the economy and business. Taxing the income derived from this business will not result in the tax revenue increase Rangell says it will. Why? If these folks recognize they are going to see a 100% tax increase, do we really think they will continue to operate the same way? Do we think they will find an alternate venue to invest their savings? I do. Tax increases never result in the additional revenue they claim to produce because those being taxes will always find a perfectly legal way to avoid the “new” tax.
That being said, if PE is forced to redefine the way it does business the result may be a dramatic decline in investor money that is currently pouring into it. Without new funds and with severely declining credit options, PE will see a huge decline in activity and thus profits.
Now, the senate will not take up the bill until December but, it has passed the House and the specter of its possibility ought to be enough to cause well heeled investors a pause until they know for sure one way or another what will happen. That alone will cause an activity contraction at firms. Chairman and Chief Executive Stephen Schwarzman said “it will be difficult to structure very large leveraged transactions in corporate private equity and real estate until the credit markets improve, pricing of assets is more favorable.”
Other PE firms like Fortress Investment Group (FIG) has shares down 45% this year and a planned IPO from Kolber Kravis Roberts (KKR) seems to have just disappeared.
The Blackstone IPO indeed was the peak of the PE market for the foreseeable future and if Rangell gets his way, much longer than that.
