Author Archive

  • The Market Today
    , October 27th, 2005 at 6:51 pm

    I’m not pleased with the market today. Two of our stocks reported earnings that were inline with expectations, but they gave modest outlooks for next quarter. So both stocks got nailed for big losses. I don’t know what to say. This market wants results right now, and anything less gets punished. This was not a fun day. Every single sector was down. Today was the peak day for earnings. Tomorrow the market will focus on the GDP report.
    Our Buy List lost 1.69%, and the S&P 500 fell 1.05%. Our big loser was CACI International (CAI), which dropped $8.29 or 13.7%. If you’re not familiar with the company, it’s a major defense contractor based in Virginia. The company reported earnings that we inline with expectations, but it guided lower going forward. The company sees earnings next quarter of 69 to 72 cents a share. The Street was looking for 72 cents. That doesn’t seem so bad, but the market will hear none of it. Just so we have this right, the company’s low end is three cents below expectations, and we drop 829 cents. The market is giving these “missed profits” an earnings multiple of 275, and they’re not even missing yet! If you’ve been a long-time owner of CACI, you might have a sense of deja vu. Solid profits and the stock get slammed–that’s exactly what happened nine months ago.
    With Respironics (RESP), we have almost the same story. The company makes those weird mask things that help with sleep apnea. RESP reported earnings of 28 cents a share. Again, this was inline with forecasts, but the stock took a 5.4% hit due to a tepid outlook. The company sees earnings of 35 to 36 cents a share for this quarter, while the Street was looking for 36 cents a share. The stock dropped $2.05.
    One of the bright spots is Frontier Airlines (FRNT), which seems to be showing some strength lately. I think the main trends will continue. The economy is getting stronger, interest rates are going higher, and oil is going lower.
    Outside our Buy List, Aladdin Knowledge Systems Ltd. (ALDN) reported earnings of 24 cents a share, one penny above expectations. I had discussed this stock two weeks ago. I was happy to see their margins continue to expand. For this quarter, Aladdin’s operating margins reached 18.6%, up from 16% last year. The company sees earnings of 24 to 26 cents a share for next quarter. The stock rose 34 cents today.

  • AT&T Brand Lives On
    , October 27th, 2005 at 3:40 pm

    I have to say that I like this news. SBC Communications (SBC) is buying AT&T, and it will adopt its name. AT&T was originally formed 120 years ago. It’s a classic name that deserves to live on. I’ve already discussed how much I hate the names of telecom stocks.
    The Baby Bells are almost gone now. SBC has already bought two if its siblings, Ameritech and Pacific Telesis. Two others, Bell Atlantic and Nynex, merged to form Verizon. US West was bought out by Qwest (Q). BellSouth (BLS) is the only one left as originally conceived. Perhaps it will be bought by Starbucks (SBUX).

  • Don’t deficits matter?
    , October 27th, 2005 at 1:06 pm

    “Don’t deficits matter?” asks Buttonwood at the Economist. She’s not happy that the dollar continues to rally:

    The currency has gained more than 10% this year, hitting a two-year high against the yen last week and a three-month peak against the euro. This is despite an American current-account deficit even wider than last year’s and apparently reduced enthusiasm among Asian central banks for dollar-denominated assets. Buttonwood was among those early in the year who expected the dollar to go every which way but up. How wrong can a columnista be? Why didn’t the currency behave as she told it to? Don’t deficits matter?

    I hate it when currencies don’t do what columnists say. Here’s the awful admission:

    Despite hurricanes, higher oil prices and indeed higher interest rates, America’s economy has grown more strongly than most people expected.

    Imagine that! But don’t worry; here’s the mandatory “dark-clouds-on-the-horizon” ending. The dollar is about to crash. It has to crash. It must crash. Run! Hide!!

    Yet if all this sounds too Goldilocks to be true, it probably is, for a couple of reasons. Any big upward movement in the dollar’s exchange rate is probably limited by the perception that there are sellers of dollars out there waiting for right price (central banks, especially). “Non-commercial traders” have longer net positions in dollar futures than almost ever before, on figures from the Commodity Futures Trading Commission—always a bad sign. As the dollar strengthens, American investors themselves are pouring money into foreign markets, which in time could blunt the greenback’s rise. Some of Japan’s normally risk-averse investors are stripping off their currency hedges to capture higher yields in America; they could flee at the slightest sign that the dollar is in trouble or Japan’s economic recovery is finally starting to lift the yen. And the euro has lost 12% in value since the beginning of the year. If the ECB starts raising interest rates in the first half of next year just as the Fed stops, it might gain it back.

    Or it might not.

  • Business Week Takes another Shot at Dell
    , October 27th, 2005 at 12:43 pm

    You can tell Dell’s (DELL) earnings announcement is coming soon when Business Week starts publishing its anti-Dell articles. You can almost set your clock by them. This time, Business Week tells us that Dell is floundering in China.

    You couldn’t blame Michael S. Dell for sounding a little bit smug about his company’s prospects in China during a cocktail party for analysts in Austin, Tex., last April. Dell’s market share in Asia was growing fast, and it looked as if its formula of selling PCs directly to customers over the Internet and phone was catching on just as it had in the U.S.
    “Demand for our products and services in China is tremendous,” he said, adding that “99% of the economic value in China is in the large metro areas” where Dell (DELL) was concentrating its efforts.
    All of a sudden, Dell’s strategy in Asia is looking a little shaky. Third-quarter numbers released by tech market researcher IDC show Dell’s market share for Asia, excluding mature Japan, dropped by a full point, to 7.8%. Then, on Oct. 25, the company announced that the co-president of its Chinese operations, Foo Piau Phang, had “chosen to retire.”

    Please. Dell has an incredibly strong business in China. Four years ago, Dell held just 5% of the Chinese market. Today, the company has 4,500 employees there and it announced plans to build a second plant in China. Japan is Dell’s third-largest market. China is fourth.

    RURAL FREEZE. What’s happening to Dell’s march on Asia? The company won’t talk — it’s in the quiet period before its Nov. 10 third-quarter earnings announcement. But there’s plenty of evidence suggesting it’s out of sync with shifting market conditions in fast-growing China. While Dell has focused on large business and government customers in the country’s major cities, demand is emerging elsewhere — in hundreds of smaller cities, where Dell doesn’t sell as effectively as its rivals and where even some business customers want to see products before they buy.
    That’s where competitors Lenovo, Hewlett-Packard (HPQ), and Founder have been selling briskly through retail shops. Says HP Executive Vice-President Ann Livermore: “You have to wonder, how well does the direct model work in the hinterland?” HP has invested heavily in hiring staffers and recruiting retailers in secondary Chinese and Indian cities.
    The China setback is just the latest in a string of recent disappointments for Dell. Since the Round Rock (Tex.) company missed its second-quarter revenue target, its stock price, which peaked at $42 a share in July, has sunk to less than $32. A survey by the University of Michigan recently showed a decline in Dell’s customer-satisfaction rating. Also, the company was embarrassed in China in May after the publication of an e-mail from a Dell salesman criticizing the Chinese government — a key Dell customer.

    An HP executive questioning Dell’s business model? I’m sorry, but which company is laying off 15,000 employees? Does anyone know? Bueller? Anyone?
    As far as its revenue miss, Dell barely missed. The stock hasn’t done well lately (and that’s why I think it’s a great buy), but it’s still well ahead of the market over the last four years. The customer satisfaction issue is important, but the survey made it clear that customers are upset with Dell’s customer service, not the products. In other words, this is a problem that can be fixed.
    The article is cobbling together negative and slightly negative news and making it appear that there’s some large trend in play. The moral of the story is always the same. Dell can’t maintain its margins. Lower-cost competitors are under-pricing it, and Dell is losing market share. Just last week, we learned that Dell is still #1 and it’s slightly increasing its market share.
    We’ll find out more on November 10.

  • ExxonMobil’s (XOM) Earnings
    , October 27th, 2005 at 10:32 am

    ExxonMobil (XOM) reported third-quarter earnings of nearly $10 billion and Royal Dutch Shell reported earnings of $9.4 billion. These numbers are gigantic. I doubt any corporations have ever posted numbers that larger.
    Exxon Mobil had sales of over $100 billion for the quarter. Most large corporations don’t do that kind of business for an entire year. Keep in mind that daily oil production fell from last year. From July through September, ExxonMobil made on average, $1 million in profit every 13 minutes. The company’s quarterly dividend payment comes to nearly $2 billion.
    The stock is higher in today’s session, but XOM has not been treated well lately. The shares have lost about 13% in the last month. I wouldn’t be surprised to see $50 oil by Christmas.

  • Q&A: Fair Isaac (FIC)
    , October 26th, 2005 at 11:33 pm

    Eddy, I’m a new visitor to your blog via billcara.com. I’ve just been reading some of your old posts – I like your writing.
    I was wondering how large an impact rising interest rates will have on Fair Isaac’s credit scoring (FICO) business. Fewer consumers will be interested in refinancing their mortgages or taking on consumer debt at rising levels.
    Any thoughts?


    Thanks for the kind words!
    I don’t think the impact will be that large. In fact, if there’s any impact, a credit squeeze could actually place Fair Isaac’s services in greater demand. If credit is tight, a lender wants to be extra-careful will their capital.
    The good part of Fair Isaac’s business is that it’s not tied directly to lending, but instead it services the lenders. That helps take a lot of the interest rate risk away from their business. I look at Fair Isaac as a software company, not as a bank or financial institution.
    Even if consumer borrowing dries up, lenders will still have a need for Fair Isaac. The company often works in ways you never realize. I’m sure you receive lots of junk mail offering you pre-approved credit cards. The credit card companies aren’t shooting in the dark. Fair Isaac’s logarithms tell them who’s a good risk. Low rates or not, I think it’s safe to assume that the junk mail will keep flowing!
    Also, consumer credit-scoring is just one part of Fair Isaac’s business. The company works in sectors like government, insurance and health care. Looking at recent history tells me that Fair Isaac has weathered higher rates quite well. When interest rates jumped in 1994, shares of FIC went up, up, up. When the shares hit their low last year, it was shortly after the Fed started raising rates. Again, the stock doesn’t seem too concerned, so neither am I.
    The company will report earnings next Wednesday. The average of eight analysts comes to 49 cents a share. However, the forecasts are in a very tight trading range. The high is 50 cents a share, the low is 48 cents a share. I’m looking forward to another solid quarter.
    If you have any stock questions, feel free to e-mail me at eddy@crossingwallstreet.com. I’m happy to give you my opinion on any stock or investing in general; however per SEC rules, I’m not allowed to give personal portfolio advice.

  • The Market Today
    , October 26th, 2005 at 5:48 pm

    On Friday morning, the government will report on third-quarter GDP and right now, the bond market is in full retreat. The yield on the 10-year T-bond is close to 4.6%, and the yield on the 30-year bond is up 4.8%. The bond bulls are scared and they’re right to be.
    After telling us for months how the consumer is tapped out and energy prices are burying us, the market is finally realizing what I’ve been saying all along—the economy is very strong. According to surveys, Wall Street’s estimate for third-quarter GDP growth is 3.6%. That’s way too low. I expect to see a number over 4%. In fact, I wouldn’t be surprised to see a number over 5%.
    After more than three years, we might finally break the bond market’s tight trading range. The yield on the 10-year has traded between 3% and 5% everyday since June 11, 2002.
    As long-term bond yields rise, cyclical stocks tend to outperform consumer stocks, and that’s exactly what happened today. The Morgan Stanley Cyclical Index rose 0.52% today, while the Consumer Index dropped -0.19%. What’s interesting today is that the cyclicals were not led by energy. Energy stocks were among the poorest performers today. Some of the big winners included stocks like Dow Chemical (DOW) and International Paper (IP).
    The yield on the 90-day T-bill fell back some, but it’s still above the Fed’s 3.75% target for the Fed funds rate. This fits a pattern. Rates will be going higher next year. Yesterday, the futures markets was telling us that there’s a 64% chance that the Fed will raise rates in January. Today, there’s a 76% chance.
    Our Buy List eked out a tiny 0.03% gain for today, while the S&P 500 lost -0.43%. Although we had some trouble spots; Medtronic (MDT) and St. Jude Medical (STJ) were subpoenaed by the government for info on their heart-device businesses. There have been some concerns about pricing strategy in this sector.
    As a rule of thumb, I don’t get too worried about these sorts of things except that Guidant (GDT), which is not on our Buy List, was also subpoenaed. Guidant is just one of those stocks that you have to stay away from. Everything they do seems to turn out wrong. I’m curious to see what J&J (JNJ) will do with Guidant.
    Brown & Brown made another new high today. By the way, IBD had an article on new market leaders, which includes insurers and medical device companies, two of my favorite sectors.
    Three of our stocks reported earnings after the close today. Zimmer Holdings (ZMH), which has been getting slammed lately, beat by three cents a share and guided higher. Our star stock of late, Varian Medical Devices (VAR), beat by two cents a share. The company also guided higher for next year. The stock is down after-hours, but it’s done very well recently. CACI International (CAI) reported inline and guided slightly higher for next year.
    Outside our Buy List, Amazon.com (AMZN) dropped -13.9%. Google (GOOG) busted the $350 barrier. Human Genome Sciences (HGSI) lost three cents a share today. And Cendant (CD) still sucks. It lost 3.6% and made a new 52-week low. Again.
    Finally, Baidu.com (BIDU) reported earnings of $1.1 million. That’s not a typo. Baidu made $1.1 million with an M. The company has a market value of $2.6 billion. That is, until trading opens tomorrow.

  • My Take on Amazon.com (AMZN)
    , October 26th, 2005 at 12:58 pm

    Amazon.com (AMZN) is getting slammed in the market today. Right now, the shares are down about 13%. I hate to say this, but I think this is just the beginning. I love the Web site, but the stock is simply overpriced.
    My concern comes down to the fact that while Amazon may be growing fast, it’s not growing that fast. For the first nine months of this year, sales were up 25.9%. I also don’t like the way Amazon uses gimmicky promotions like Amazon Prime to increase sales. These are nice to have but they cut into profit margins and you can only do that for a limited time.
    Amazon’s gross margins seem to have stabilized around 25%, which is a good number but I doubt we’ll see much improvement. Net profit margins had been falling, but those too seem to have stabilized.
    Wall Street has targeted a growth rate of 22%, which strikes me as a bit generous. Considering that we’re in a good economy, I’d say that Amazon’s true growth rate is closer to 18%. Let’s be very generous and say that Amazon will be able to maintain a 25.9% growth rate—the same as its sales growth for this year. Compare that with the fact that Amazon is going for over 42 times next year’s earnings and you can see how rich the shares are.
    I’ll repeat what I said three months ago. Enjoy the service, but steer clear of Amazon’s stock.

  • Human Genome Sciences (HGSI)
    , October 26th, 2005 at 9:57 am

    I look at income and balance sheets almost all day long and there are few more barren than Human Genome Sciences (HGSI). This is a biotech stock that’s worth over $1 billion, but it doesn’t have a single product on the market.
    The company has virtually no revenue. Earlier this year, the company got a $7 million payment from GlaxoSmithKline (GSX) for a licensing agreement. They recognized $5 million of it for last quarter, giving them a grand total of $5.9 million in revenue. That’s it? I don’t get it. How does the company stay in business? Why would anyone buy their stock? Total costs for the quarter came to $63.9 million. They spend more than ten times what they take in.
    Aside from the licensing deal, Human Genome brought in about $1,000 per employee for the quarter. If the company ceased operations and sent their workers out to mow lawns, they would have brought in more money.
    To be fair, Human Genome is working on new drugs, however LymphoStat-B, its lupus drug, failed to meet main targets in a mid-stage study. This doesn’t mean the drug is dead, but it will take longer to see hard data. That’s fine. I have nothing against a drug company doing important research, but that’s all this company does. I don’t understand how any analyst could follow Human Genome, but 15 currently follow it. If Human Genome can be a stock, why can’t a charity go public? I’d rather buy shares in the United Way or the Salvation Army.
    An average of four million shares of Human Genome trade each day and they have absolutely nothing to go on. It’s pure speculation. This is a disservice to investors. The company should either go private, or consider the lawn-mowing idea.

  • Google Watch
    , October 26th, 2005 at 8:35 am

    In a rare interview, Sergey Brin talked to Alan Murray about Google Library in the Wall Street Journal:

    There was a time when folks thought compelling content would be king of the Internet. Attract enough “eyeballs,” the gurus said, and money would follow. But instead, Google’s blank home page has trumped all. The Google economy is a kind of high-tech feudal system: The peasants produce the content; Google makes the profits.
    That’s all the more annoying to the content crowd because the lords of this money machine — Sergey Brin and Larry Page — perpetuate the goofy-sounding notion that they do all this to help the world, rather than line their own pockets.
    “That’s true,” Mr. Brin said in an interview yesterday. “We talked at Stanford for a while about making Google an open-source project. We ultimately decided that would not be an efficient way for us to get the resources we needed to make it run. So we started a company.”
    As for the Google Print Library Project, Mr. Brin says, “We actually dreamed of the ability to do this back before we started Google as a company.” It is good for Google’s users, good for the business, it’s fair and it’s legal, he says. “But more importantly, I think it is really great for the world.”
    The publishers may find Mr. Brin annoying. And he certainly is successful and rich. But he also happens to be right. The Google Print Library Project is great for the world.

    The problem is that Google wants to include all material unless a particular author opts out. The publishers want everything to be excluded, unless the authors opt in. It seems very unreasonable to me that an author has to work to protect his or her copyright. If it’s so great for the world, then it should be worth paying for.