Author Archive

• Black Friday Begins
  Eddy Elfenbein, November 25th, 2005 at 10:50 am

  I love the smell of commerce in the morning:

  Target Corp. offered wake-up calls this morning from Kermit the Frog to entice shoppers to its stores. Sears, Roebuck & Co. gave $10 gift cards to the first 200 customers at each of its more than 2,400 locations.
  Wal-Mart Stores Inc., the world’s largest retailer, said it had 2 million customers in the first two hours of shopping today after opening its stores at 5 a.m., an hour earlier than last year. Crowds lined up for DVDs priced as low as $3.44 and a Hewlett-Packard Co. desktop computer selling for $398.

• Taser to Be Delisted
  Eddy Elfenbein, November 25th, 2005 at 10:45 am

  The Nasdaq doesn’t like it when you stop reporting financial results.

• Google at $125 Billion
  Eddy Elfenbein, November 24th, 2005 at 2:39 pm

  Google (GOOG) closed yesterday at $422.86 giving the company a total market value of $125 billion. To put it in perspective, ExxonMobil’s (XOM) market value is almost exactly three times larger than Google’s, yet its free cash flow is roughly 25 times larger.
  Google now has $7 billion in the bank, plus a highly-valued stock that can be used as currency in many transactions. In Silicon Valley, tech start-ups are no longer trying to make it on the Nasdaq, they want to be bought out by Google.

  The Google effect is already changing the delicate balance in Silicon Valley between venture capitalists and startup companies. Instead of nurturing the most promising startups with an eye toward taking the fledgling businesses public, a growing number of VCs now scour the landscape for anyone with a technology or service that might fill a gap in Google’s portfolio. Google itself and not the larger market has become the exit strategy as VCs plan for the day they can take their money out of their startups. Business founders have felt the tug as well. “You’re hearing about a lot of entrepreneurs pitching VCs with their end goal to be acquired by Google,” says Daniel Primack, editor of PE Week Wire, a dealmaking digest popular in VC circles. “It’s a complete 180 [degree turn] from the IPO craze of five years ago; now Google is looked at like NASDAQ was then.” Other entrepreneurs, meanwhile, are skipping the VC stage altogether, hoping to sell directly to Google.

  Right now, Google and Microsoft (MSFT) are squaring off in a battle to buy AOL, which could be worth $20 billion. My guess is that Microsoft will win in the end. Still, it will be interesting to see what Google does with all its resources.

• Happy Turkey
  Eddy Elfenbein, November 24th, 2005 at 11:52 am

  The Presidential Proclamation.

  Thanksgiving Day is a time to remember our many blessings and to celebrate the opportunities that freedom affords. Explorers and settlers arriving in this land often gave thanks for the extraordinary plenty they found. And today, we remain grateful to live in a country of liberty and abundance. We give thanks for the love of family and friends, and we ask God to continue to watch over America.
  This Thanksgiving, we pray and express thanks for the men and women who work to keep America safe and secure. Members of our Armed Forces, State and local law enforcement, and first responders embody our Nation’s highest ideals of courage and devotion to duty. Our country is grateful for their service and for the support and sacrifice of their families. We ask God’s special blessings on those who have lost loved ones in the line of duty.
  We also remember those affected by the destruction of natural disasters. Their tremendous determination to recover their lives exemplifies the American spirit, and we are grateful for those across our Nation who answered the cries of their neighbors in need and provided them with food, shelter, and a helping hand. We ask for continued strength and perseverance as we work to rebuild these communities and return hope to our citizens.
  We give thanks to live in a country where freedom reigns, justice prevails, and hope prospers. We recognize that America is a better place when we answer the universal call to love a neighbor and help those in need. May God bless and guide the United States of America as we move forward.
  NOW, THEREFORE, I, GEORGE W. BUSH, President of the United States of America, by virtue of the authority vested in me by the Constitution and laws of the United States, do hereby proclaim Thursday, November 24, 2005, as a National Day of Thanksgiving. I encourage all Americans to gather together in their homes and places of worship with family, friends, and loved ones to reinforce the ties that bind us and give thanks for the freedoms and many blessings we enjoy.
  IN WITNESS WHEREOF, I have hereunto set my hand this eighteenth day of November, in the year of our Lord two thousand five, and of the Independence of the United States of America the two hundred and thirtieth.
  GEORGE W. BUSH

  Gooble Gooble!

• Frontier Airlines Files Shelf Registration
  Eddy Elfenbein, November 24th, 2005 at 11:29 am

  Yesterday, Frontier Airlines (FRNT) filed a $250 million shelf registration. This means that the company is looking to sell $250 million of bonds or stock within the next two years. The company isn’t doing it now, but the plans are “on the shelf,” and they’ll file updates periodically.

  Denver-based Frontier said the shelf registration would allow it to offer and sell debt securities, preferred stock, common stock and securities warrants from time to time.
  Proceeds from the sale of the securities will be used for general corporate purposes, which may include repaying debt, purchase of aircraft, or other capital equipment and other capital expenditures, aircraft lease payments and additions to working capital.
  A second prospectus in the same filing states Frontier may offer and sell pass through certificates up to $250 million. Each certificate will represent an interest in a pass through trust and can used to finance or refinance all or a portion of the purchase price of aircraft.

  Yesterday was another up day for us and the market, although the Buy List trailed the S&P 500. The S&P 500 gained 0.35% and the Buy List added 0.25%. Quality Systems (QSII) and Brown & Brown (BRO) both reached new highs. If you own shares of Brown & Brown, the stock will split 2-for-1 next week. This means that you’ll have twice as many shares and the share price will fall in half.
  Here are a few items to pass along. There might be a dreaded cranberry shortage. Also, the Xbox 360 has already made it to eBay (EBAY). You might be able to win an auction for about $5,000. Or you can wait a few days; the console retails for $399. Microsoft (MSFT) actually takes an estimated $126 loss on each one sold.
  Finally, the stock market is closed today, and tomorrow is a shortened session.

• Dubai: Do Sell
  Eddy Elfenbein, November 23rd, 2005 at 3:20 pm

  
  I’ve been thinking about what’s the biggest investment bubble in the world right now. After careful consideration, I decided that Baidu (BIDU) comes in a close second. In fact, it’s so close that it has the syllables right, just in the wrong order. Not even Baidu can match what’s going on now in Dubai.
  Dubai is one of the emirates of the United Arab Emirates. This city is being built up so quickly it’s almost like science fiction. The Burj Al Arab (pictured above) is the largest hotel in the world. It’s over 1,000 feet tall and sits on an artificial island just off the beach. Each room comes with its own butler. The hotel is so big, the Statue of Liberty can fit in the atrium. Pedestal too. (If you’re interested in staying there, here are some details.)
  The world largest building is also being built here. Oh, did I mention the new airport? It will be the size of Heathrow and O’Hare combined. It doesn’t end there. There’s the Dubai Waterfront. I don’t even know how to describe this one. It’s basically a giant artificial city being built on the water. Imagine the Tower of Babel, but with WiFi. The development will be larger than the island of Manhattan. Nearly one of every four construction cranes in the world is currently in Dubai. This is just absurd.
  As you might expect, Dubai has a stock market and it’s doing rather well. I believe this is the entire listing. Their market is making our Nasdaq bubble look like a wimp. In the last 12 months, the Dubai market is up 162%. In the 12 months before that, it was up 181%. Going back three years, the Dubai market is up over 1,000%. One observer said that Dubai is “like Singapore on steroids.”
  There’s also an indoor ski slope, and an underwater hotel is being planned. The city is being flooded with workers from all parts of the world. According to a survey, Dubai will need 150,000 new housing units a year.
  This is a good time to remember that there’s an interesting correlation between market crashes and the largest buildings in the world. The Empire State Building went up just as our market crashed. The Petronas Towers were built as the Asian Tigers fell apart. The World Trade Center and Sears Tower accompanied the crash of the early 1970s. Even the Nasdaq’s shiny new office was opened just before its bubble burst.
  The price of oil is already well below its high price. What’s good for consumers here isn’t good news for Dubai. I think Dubai is ready for a fall.

• FactSet Research Systems
  Eddy Elfenbein, November 23rd, 2005 at 1:49 pm

  FactSet Research Systems (FDS) is starting to impress me. As you can tell from my Buy List, I like to find companies that are key suppliers to an industry. As I watch the broker/dealer stocks soar, I know FactSet has a good client base.
  Here’s a corporate description from the latest 10-Q filing:

  FactSet Research Systems Inc. (the “Company” or “FactSet”) supplies financial intelligence to the global investment community. FactSet applications support and make more efficient an array of workflows for buy and sell side professionals. These professionals include portfolio managers, research analysts, performance analysts, marketing professionals, sell-side equity research professionals and investment bankers. FactSet applications provide users access to company analysis, multicompany comparisons, industry analysis, company screening, portfolio analysis, predictive risk measurements, alpha and backtesting, portfolio optimization and real-time news and quotes.
  The Company combines more than 200 databases, including content regarding tens of thousands of companies and securities from major markets all over the globe into a single online platform of information and analytics. Clients have simultaneous access to content from all the sources, which they can combine and utilize in any FactSet applications. FactSet also is fully integrated with popular Microsoft Office applications such as Excel, Word and PowerPoint and allows for extensive custom reports.
  The Company aggregates third-party content from over 50 database suppliers. FactSet seeks to maintain contractual relationships with a minimum of two content providers for each type of financial data, when possible. Third-party content contracts have varying lengths and normally can be terminated on one year’s notice at predefined dates. Third-party content fees are either billed directly to FactSet or the Company’s clients. Content fees billed to the Company may be on a fixed or royalty (per client) basis.
  FactSet has historically focused on integrating third-party content into the Company’s system. A large number of FactSet’s content suppliers are in direct competition with each other and in some cases, with FactSet. As the financial information industry has consolidated over the past several years, it has become increasingly evident that, strategically, FactSet must be in a position to control access to critical content to its clients that is not available from a third-party at attractive terms. Toward that end, FactSet continues to pursue mutually beneficial partnerships with long-time third-party data providers. However, if necessary, FactSet is committed to acquiring or building content sets on its own. Since 2001, the Company has acquired five content businesses – Lionshares, Mergerstat, CallStreet, JCF and TrueCourse – and has fully integrated their data sets into the Company’s system, while at the same time continuing to invest in development of third-party data feeds across all content areas. The net effect of this strategy to date has been to increase the accessibility of data to the financial industry and to improve the quality of the data for its clients.

  

• The Elliott Wave
  Eddy Elfenbein, November 23rd, 2005 at 1:11 pm

  On Wall Street, there’s a cult of technical analysts who follow the Elliott Wave. If you’re not familiar with it, here’s Wikipedia’s description:

  The Elliott wave theory is the basis of a technical analysis technique for predicting the behavior of the stock market, invented by R. N. Elliott in 1939. It is based on the belief that markets exhibit well-defined wave patterns that can be used to predict market direction.
  The Elliott wave theory hypothesizes that stock prices are governed by cycles which adhere to the Fibonacci sequence 0, 1, 1, 2, 3, 5, 8, 13, 21,….
  According to the Elliott wave theory, markets move in a predetermined number of waves up and down. Specifically, markets move in five waves up and three waves down and price charts have a self-similar fractal geometry. This is true for bull markets. Waves 1, 3, and 5 are called impulse waves, and subdivide 1, 2, 3, 4, 5. Waves 2 and 4 are corrections, and subdivide a, b, c. In a bear market, the pattern is reversed, five waves down and three up.

  Personally, I think this is Wall Street’s version of Nostradamus, but there are lots of folks who take it seriously. Very seriously.
  So if you’re a believer, you’ll be happy to know that we’re at two Fibonacci numbers. Yesterday was the 987th day from the March 2003 low, and the Dow is closing in on 10,946.
  I have no idea what it means, but I thought I’d pass it along. After that, you’re on your own.

• Krispy Kreme’d
  Eddy Elfenbein, November 23rd, 2005 at 12:31 pm

  Stocks are up again today. It looks like we’re headed to our sixth straight rally.
  I noticed an article in Business Week on the turnaround of Krispy Kreme Doughnuts (KKD), or more accurately, the lack of a turnaround. This is a theme I’ve talked about before: Companies don’t turn around so easily.
  There was a time when Krispy Kreme was one of the most popular stocks around. Quarter after quarter the doughnut shop reported fantastic results. Wall Street loved them and everyone wanted to what was the secret of their success?
  Lying!
  The company overstated earnings by $22 million (at first, they blamed the Atkins Diet). Once the glaze it the fan, the stock plunged from $50 to $5. So Krispy brought in Stephen F. Cooper, a well-known turnaround specialist, as their new CEO.
  Things aren’t go so well. The company hasn’t filed a quarterly earnings report since last October. That’s really not a good thing. In fact, it can get you delisted.

  What’s more, two franchisees have filed bankruptcy, and three others have sued. Worst of all, sales remain in a downward spiral. In an Aug. 10 filing, Krispy Kreme said that, for the fiscal quarters ended in April and July, average store sales fell 21% and 18%, respectively. Meanwhile, Krispy Kreme keeps closing stores. The chain, which earlier this year boasted 440 outlets, has shrunk to 349. Small wonder that its shares, which closed on Nov. 22 at $5.45 — 89% below its 2003 peak — remain among the more heavily shorted stocks on the Big Board.
  Cooper remains upbeat about Krispy Kreme’s prospects. In his first interview since his arrival last January, Cooper told BusinessWeek on Nov. 18 that none of the company’s short-term challenges was insurmountable. He’s confident the current lenders, who stepped forward with $225 million in April, will grant him time to fix the problems even if his auditors can’t make enough headway on Krispy Kreme’s backlog of missed earnings reports by the December deadline.
  “The lenders lent us the money without financials being available,” says Cooper. “That gives you a sense of the value they see in Krispy Kreme.”
  PUSHING COFFEE. Longer term, Cooper remains sure that Krispy Kreme will be a growth stock again, so much so that he agreed to take his “success fee” not in cash, but in 1.2 million warrants, convertible into shares at $7.75 apiece. Cooper says Krispy Kreme has not scratched the surface of what it can achieve overseas. Even in the U.S., he sees plenty of room to expand. “We are by no stretch of the imagination approaching the saturation point for our retail outlets,” he says.
  Still, it’s clear that Cooper has lowered Krispy Kreme’s once-lofty ambitions. Whereas previous Chief Executive Scott Livengood built expensive 4,000-square-foot “doughnut theaters,” as he called them, where patrons could view freshly glazed doughnuts rolling down an assembly line, Cooper’s ambitions are much more modest. Franchisees say that current management is looking to build more cost-efficient units that, at 1,500 to 2,000 sq. ft., are more akin to a small doughnut counter.
  Franchisees also say that Cooper & Co. intend to promote the sale of coffee, a high-margin item that accounts for 50% of Dunkin’ Donuts’ revenues but just 10% at Krispy Kreme. “Things have finally started moving in the right direction,” says John C. Metz, a Pennsylvania franchisee and Cooper fan.

  Shhh…don’t tell Starbucks (SBUX). So what’s the future for KKD?

  More broadly, Harlan Platt, a professor at Northeastern University who studies corporate turnarounds, notes that most highfliers find it difficult to recreate their old growth rate after crashing back to earth. “I give it a 10% chance that Krispy Kreme will ever regain the luster it once had,” says Platt. “I put them in the same category as Hard Rock Cafe. They had their moment, but the lines are no longer out the door.”

• The Morning Market
  Eddy Elfenbein, November 23rd, 2005 at 9:57 am

  Today should be a very quiet day on Wall Street. Appropriately, Hormel Foods (HRL) announced strong earnings on increased turkey sales. Keeping with the subject of turkeys, Patterson (PDCO) reported earnings of 32 cents a share, only a penny more than last year. Recently I wrote about how Patterson’s long history of 15%-20% earnings growth has come to an end. The company has forecast earnings of 38 to 40 cents a share this quarter. Last year, Patterson earned 36 cents a share. That’s not a confident outlook so I’m still weary of Patterson’s stock.
  The market has been up 14 of the last 18 days, and yesterday was another good day. The S&P 500 was up 0.51% and the Buy List was up 0.18%. Unfortunately, health care stocks were the laggards and that weighed us down. Nevertheless, November has been an outstanding month for us. For the month, we’re up 7.13% and the S&P 500 is 4.49%.
  I’ve had a lot of questions about how often I update the Buy List. I’m going to update the Buy List in the middle of December, and I’ll start tracking the new list on January 1. I won’t make any changes for the entire year. The updated Buy List will be significantly similar to this year’s Buy List.
  This morning, Placer Dome (PDG) rejected the buyout offer from Barrick Gold (ABX). Research in Motion (RIMM) lowered its subscriber forecast for the quarter. The company said that this revision isn’t related to its recent legal troubles.
  The Federal Reserve released the minutes from its last meeting. Although the minutes didn’t signal a major change of policy, futures traders have started to alter their forecast. The market is convinced that two more rate increases are coming, one in December and another in January. But now the futures contracts indicate that there’s a 30% chance of a rate hike in March, down from 58% on Monday. The yield curve is basically flat after about six months. That means that investors are not being rewarded for taking any time risk. That’s the key driving force of capitalism. Lenders are soon going to wonder: “why go long?” Once Wall Street is convinced that the rate hikes are behind them, a major rally could get underway.