Archive for 2006

• The Market Now Expects At Least One More Rate Hike
  Eddy Elfenbein, February 13th, 2006 at 4:08 pm

  Here’s a major change in sentiment: One month ago, the futures market indicated that there was a 56% chance that the Fed would raise rates on its March 28 meeting, and a 0% chance of a rate hike in May. Today, the futures indicate a 94% chance of a rate hike in March, and a 62% chance of another rate hike in May.

• This Week’s Earnings
  Eddy Elfenbein, February 13th, 2006 at 2:47 pm

  Expeditors International (EXPD) will release its fourth-quarter earnings tomorrow morning. The current consensus estimate is for 51 cents a share. Last year, Expeditors earned 39 cents a share. This is a great stock, although it’s getting a bit rich for me.
  Dell (DELL) will release its fourth-quarter earnings on Thursday.
  For the record, Dell originally said that its third-quarter earnings would come in at 39 to 41 cents a share, on sales of $14.1 to $14.5 billion. However, the results were 39 cents a share on sales of $13.9 billion. That was the “miss” that freaked everyone out.
  For this quarter, Dell expects earnings of 40 to 42 cents a share on sales of $14.6 to $15 billion. Wall Street’s original forecast was for 42 cents on $15 billion.
  If Dell earns 43 cents a share, I will never listen to another Wall Street analyst for the rest of my life.

• Is the Oil Crises Over?
  Eddy Elfenbein, February 13th, 2006 at 1:52 pm

  Yes, according to Matthew Lynn at Bloomberg:

  Forget that order for a funny- looking electric car. Take the solar panels off the roof. Don’t worry about hoarding tinned food for the long economic slump that is about to engulf the world.
  Why? Because the oil crisis we were all concerned about less than a year ago is quietly going away.
  The laws of supply and demand are starting to restore market calm. They suggest that although oil isn’t about to get really cheap, talk of $100 a barrel can now be put to rest.
  That will give an extra leg to economic growth and stop central bankers from fretting about inflation.
  “The fundamentals are starting to quietly reassert themselves,” Simon Hayley, senior international economist at Capital Economics Ltd. in London, said in a telephone interview.

  Oil is down to $61.15 a barrel today.

• Venture Capitalist Turns Romance Novelist
  Eddy Elfenbein, February 13th, 2006 at 1:33 pm

  Tom Perkins, one of the legendary venture capitalists of Silicon Valley, has a new book out. But it’s not what you think.
  The new book, Sex and the Single Zillionaire, is actually a romance novel and it sounds like the kind of thing Danielle Steel would write. Of course, that’s hardly a coincidence considering that Ms. Steel is not only his editor, but his ex-wife.
  Yah Zhao at the Harvard Crimson outlines the plot:

  The protagonist, Steven Hudson, is a powerful N.Y. investment banker. Like Perkins, Steven receives a letter asking him to be the star in a reality television show called “Trophy Bride” where young, female 20-somethings compete to marry a “zillionaire.” After repeated assertions about the absurdity of the offer, Steven ends up agreeing to do the show—partially because he is lonely after his wife’s passing and partially because he falls in love with the producer of the show, Jessie Jones.
  After 280 pages of trials and tribulations—including Steven being conned by a girl pretending to be on the U.S. Olympic ski team, being pursued by a nymphomaniac, and pacifying his extremely conservative colleagues who were outraged by his “sex frolic”—the obligatory happy ending is duly set down.

• Gurgle
  Eddy Elfenbein, February 13th, 2006 at 11:31 am

  Musn’t gloat.
  Ther media is turning around Google (GOOG) is a big way. Barron’s featured Google on its front page this weekend.

  To get a sense of what might happen to the stock, we gave one über-bull’s 2006 revenue estimate for Google a 20% haircut, trimmed his projected expenses by 5% (but no further, because bulls greatly underestimate Google’s costs), deducted stock-based compensation and, generously, gave the company credit for the considerable interest income on its cash. The result: Earnings would be 30% lower than the bull’s projection, at $6.28 a share. If the stock were to maintain its current multiple of 41 on those lowered earnings, it would be worth $257. It’s more likely the multiple would shrink to as low as 30, in line with the slower growth. That would make the stock worth $188, versus its recent $360.
  Though this exercise is less than scientific, it clearly demonstrates two things. First, Google’s business has tremendous leverage — changes in revenue, in either direction, have outsized impacts on the bottom line. That’s the result of high profit margins: 88% of net revenue and 58% of gross revenue. Second, the exercise provides a glimpse of the risk posed by a lofty stock multiple.
  “Google reminds me very much of what went on in 1999 and 2000,” says Fred Hickey, editor of the well-regarded High-Tech Strategist newsletter and a member of the Barron’s Roundtable. “The valuation is insane, relative to what they do.”

  The stock opened at $344 today. The AP is reporting that analysts are standing behind Google:

  “Google remains our No. 1 buy recommendation in the Internet sector, and our price target remains $490,” said Citigroup analyst Mark Mahaney, who added the March 2 analyst day might be another catalyst for the lofty stock.
  Sasa Zorovic, an analyst with Oppenheimer, said the recent stock weakness since Google reported disappointing fourth-quarter earnings might even provide a buying opportunity. The stock has fallen 20 percent since reported quarterly numbers on Jan. 31.
  “We continue to believe the online advertising industry remains a powerful growth story and that Google enjoys a market-leading position, gaining share from the competition in recent months,” Zorovic said in a report. “We believe the recent pullback provides a buying opportunity, and we reiterate our ‘Buy’ rating and $540 price target.”

• BlackRock shares jump amid talk of Merrill deal
  Eddy Elfenbein, February 13th, 2006 at 11:28 am

  Merrill launches a pre-emptive strike:

  Shares of BlackRock Inc. shot higher on Monday in thin, pre-market trading amid speculation the money management firm was involved in a deal with Merrill Lynch & Co.
  BlackRock shares rose almost 14 percent to $149.80 on the Inet electronic brokerage.
  Both The New York Times and The Wall Street Journal, citing people familiar with the discussions, reported in Monday editions that Merrill Lynch would acquire a large stake in BlackRock, known for managing fixed income. The Journal valued the transaction at about $8 billion.
  Megan Frank, a spokeswoman for Merrill Lynch, said the company can’t confirm or deny market rumors. A call to BlackRock seeking comment was not immediately returned.
  A deal would create a company with $1 trillion in assets under management, the most of any publicly traded company.
  A BlackRock deal would be more strategically compelling than the alleged Merrill deal with Morgan Stanley, Buckingham Research said in a note to investors.

• Stay Away from the Big Drug Stocks
  Eddy Elfenbein, February 10th, 2006 at 2:50 pm

  Everyone knows about the troubles of Big Pharma. Last year, I said that I had more faith in Merck (MRK) rather than in Pfizer (PFE), although I wasn’t going to buy either.
  Today, Pfizer lowered its earnings forecast for 2006. Wall Street was looking for $2.03 a share, but the company is only expecting $2 a share. Last year’s earnings came in at $2.02 a share.
  Merck could be a good buy in a year or so, but I still wouldn’t touch either of these stocks.

• Spinning Their Wheels
  Eddy Elfenbein, February 10th, 2006 at 12:24 pm

  An editorial is the Seattle Times on the problems of Ford and GM:

  What’s with the carmakers? American labor? Nissan uses American labor. So do Toyota and Honda. If properly managed and set to work on a product the people want to buy, American labor does a fine job.
  Health-care costs? Those are a problem for us all.
  A depression in the car industry? No, actually not.
  The more we learn about the problems of GM and Ford, the more it seems that the problems were of their own making. Wages and benefits too high? Management agreed to the terms.
  Now, years after these problems have been made public, when rumors swirl about Chapter 11, the board of directors acts. GM’s board has reduced CEO Rick Wagoner’s cash pay from $2.2 million to $1.1 million, and cut the dividend in half.
  Someone should ask: A dividend? Paid out of what? Paying any dividend is like asking an accident victim to donate blood.
  Having cut Wagoner’s and the GM shareholders’ pay only in half, the companies now whisper in the ear of Michigan’s congressmen. Though The Wall Street Journal reports that there is no appetite in Washington, D.C., for a direct bailout, one idea is a trade bill that would penalize imports from countries that keep their currencies too low. That spells protectionism.
  Another thought, less obviously bad, is some special programfor vehicles that use alternative fuels.
  Alternative fuel is a fine idea. We support it. But in this circumstance, an “alternative fuels” bill is almost certain to be a bail-out-GM-and-Ford bill.
  If these companies can’t survive as now structured, it may be better to try reorganization in Chapter 11, the provision under which a company can shed debts, renegotiate contracts and keep operating. There is more chance of success from that process than from any laying-on of federal hands.

• Quality Systems
  Eddy Elfenbein, February 10th, 2006 at 11:41 am

  Another superstar returns to earth.
  Late last year, I decided not included Quality Systems (QSII) on the Buy List for 2006. It had been one of our best stocks on last year’s list, but I felt that the shares were getting too expensive.
  The stock continued to soar higher this year. It went from $76.76 at the end of the year to nearly $92 on Monday. Then suddenly, the stock dropped $7 a share yesterday, and it reported earnings after the close. The earnings were horrible. Quality Systems earned 35 cents a share, ten cents less than estimates. The stock is down another $10 a share this morning.

• Brown & Brown’s Earnings
  Eddy Elfenbein, February 9th, 2006 at 5:36 pm

  After the bell, Brown & Brown (BRO) reported earnings for the fourth quarter of 25 cents a share. Revenues rose 20.7%, and earnings-per-share increased 17.2%.
  What else can I say? This company just grows and grows. They finished off their 13th straight year of record sales and earnings. For the year, Brown & Brown earned $1.08 a share, a 16.1% increase over last year. Slow and steady wins the race.
  I think the stock is slightly expensive right now. I think they’ll earn about $1.27 a share this year (the current consensus is $1.24). If it pulls back below $23, it’ll be a terrific buy.

  Commenting on the results, J. Hyatt Brown, Chairman and Chief Executive Officer, said, “We are quite pleased to again announce outstanding earnings growth of at least 15% per share, the thirteenth consecutive year we have achieved this remarkable goal. Even though this past year’s hurricane season had a very dramatic impact on our people and clients, the strength of the Brown & Brown culture and our people allowed us to overcome these challenges. This single-minded effort has brought us ever closer to our active intermediate goal of achieving B-40, that is, $1 billion in revenue and a 40% operating margin (pre-tax income with interest, amortization and non-cash stock grant compensation expense added back). We feel quite positive about our ability to continue growing in the future.”