Random Thoughts
Posted by Eddy Elfenbein on December 21st, 2006 at 1:05 pm

I watch CNBC in my office with the sound muted. Strangely, even with no sound, I can always understand what Rick Santelli is saying.
Also, if you’re looking for high CD yields, check out Bank Deals. This is a cool site. It lists high-yielding bank rates all around the country. Many require branch visits or in-state residency to qualify (though not all). Check it out, there might be a six-percenter near you.
And finally, Lenny Dykstra—all-star centerfielder, all-star options trader.

3Q GDP Revised to 2.0%
Posted by Eddy Elfenbein on December 21st, 2006 at 10:11 am

This morning, the government revised third-quarter GDP growth to 2.0%. The initial estimate was for 1.6%. Then it went to 2.2%, and now it’s back to 2.0%.
Here’s a look at GDP growth going back to 1994:

Sarkozy Calls Shareholders Hooligans
Posted by Eddy Elfenbein on December 21st, 2006 at 9:45 am

From Nicolas Sarkozy, a candidate for president of France:

Our country has to get organised to stop the actions of shareholders who… aren’t entrepreneurs but who behave like hooligans….

As a proud shareholder hooligan, I almost take offense. By the way, Sarkozy is running as the free-market reformer.

Biomet PE Group to Bid for Smith & Nephew
Posted by Eddy Elfenbein on December 21st, 2006 at 9:33 am

This is getting interesting. There’s a report that the private equity group that’s buying Biomet is now considering a bid for Smith & Nephew.
Just before Biomet’s board accepted the private equity group’s buyout offer, Smith & Nephew considered making a bid for Biomet. Their bid must have been very low, or Biomet’s board wanted to make it clear that it had explored all options.
In any event, the idea of Biomet merging with Smith & Nephew still lives.

Have Dwight Call Your Friends
Posted by Eddy Elfenbein on December 21st, 2006 at 7:16 am

If you’re a fan of The Office, go to this site. Click on “Get a Call,” and follow the steps from there.

Update on Bed Bath & Beyond
Posted by Eddy Elfenbein on December 21st, 2006 at 7:07 am

I’ve had some time to review the Bed Bath & Beyond (BBBY) conference call (see here, via Seeking Alpha). First, the company had a charge to SG&A last quarter of $7.2 million related to the review of stock option grants and procedures. We already new this was coming. In fact, the company said it was going to be $8 million. After tax, that comes to about two cents a share, so we have our earnings shortfall right there. The company said there might be a little more this quarter.
Next, CEO Steven Temares commented on employee tax charges the company was taking as a result of its stock options grants.

We anticipate the potential cash payments pursuant to the program to be approximately $40 million. While we are still reviewing the accounting treatment related to the potential program, we anticipate the pre-tax income statement impact in the fourth quarter to be slightly higher than the total cash payments. The potential cash outlay primarily represents payments to our employees in connection with increasing the exercised prices on certain stock option grants so as to protect them from certain potential adverse tax consequences.
It’s currently believed it is likely the company will recoup a substantial portion of the cash outlay over the next several years through higher proceeds from future stock option exercises, although this recovery will not flow through the income statement.
I want to emphasize that any program arrived at by our Board will be consistent with our company’s beliefs that our people are the reason for our success. As such, we would want to protect them against any adverse tax consequences for events that were beyond their control.
While the program has not been finalized, Warren, Len and I as executive officers, who are also members of the Board of Directors, has informed the Board that we decline to be considered for payments.

That only seems fair. Employees shouldn’t be punished for this, and the company did the right thing. The charge will amount to about nine cents a share.
Now let’s turn to SG&A, which I initially found a little troubling:

Selling, general and administrative expenses for the fiscal third quarter were about $493 million, compared with approximately $410 million in the corresponding quarter a year ago. As a percentage of net sales, SG&A expenses were 30.4% compared with 28.3% a year ago, as a result of the previously mentioned $7.2 million increase in stock-based compensation expense along with legal and accounting charges related to the stock option review and a relative increase in advertising, which includes an increase in paper cost and postal rates.
In addition, there were one-time benefits experienced in the prior year for settlement of credit card litigation and certain insurance recoveries which we did not have in this year’s third quarter. As a result of the deleverage in SG&A expense partially offset by the improvement in gross profit margin, the operating profit margin in the fiscal third quarter decreased by approximately 115 basis points. The company’s results also benefited from a reduction in its year-to-date effective tax rate from 36.6 to 36.3%, resulting in a third quarter effective tax rate of 35.8%.

The company also said that it’s targeting earnings of 78 cents a share for the February quarter, which is a penny less than what it said on its last conference call.
My view is that the operationally, BBBY look just fine. The company’s sales-per-share increased by 17.4% from last year. That’s darn good. It’s been helped by the company’s aggressive buyback program. Share buybacks don’t impress me much, but with BBBY, it really has an effect on its earnings statement. Today, BBBY said it’s going buy back another $1 billion worth of stock.
Unfortunately, the company hasn’t had all the benefits of its growth in gross margins reach the bottom line. Gross profits-per-share were up 20% last quarter. Unfortunately, they dug around looking for one thing (back-dating), and the probe found an even bigger charge (this tax thing)!
On today’s call, the company said that it’s looking for sales- and earnings-per-share growth of 10% next year…(cough)…low-ball..(cough).
Conservatively, I’d say that BBBY’s calendar year-earnings will be about $2.34 a share next year. (Their fiscal year doesn’t follow the calendar year, but I’m estimating for sake of comparison.) That means that the stock is going for just 17 times next year’s earnings, which strikes me as a very good price.

In China Feng Shui Guys See Market Top
Posted by Eddy Elfenbein on December 21st, 2006 at 6:51 am

From Reuters:

Forget fund flows and profit predictions, 2007 is about “fire sitting on water”. Buy oil, avoid metals, and don’t get your fingers burnt.
Feng shui experts steeped in the ancient Chinese knowledge of geomancy, or natural energies, see a turbulent year ahead for both markets and mankind.
“The elements — they are in conflict,” said Raymond Lo, a practitioner for more than 10 years, whose office close to Hong Kong’s Victoria Harbour is considered a repository of positive feng shui energies in this hotbed of capitalism.
“Because it’s fire and water, and they’re not in harmony. So therefore next year in January, it’s not so peaceful.”

Wait, don’t get my fingers burnt! Oh, that does make more sense.

Bed Bath & Beyond Earned 50 Cents a Share
Posted by Eddy Elfenbein on December 20th, 2006 at 4:29 pm

Bed Bath & Beyond (BBBY) just reported earnings of 50 cents a share, two cents below estimates. Wall Street was expecting earnings of 52 cents a share. Last year, BBBY made 45 cents a share.

Historically, more than one-third of the company’s earnings comes during this (the February) quarter. I have to say that I’m very impressed with BBBY’s gross margins. For this quarter, gross margins topped 43%. That’s an improvement of 2.6% in the last six years.
Perhaps I’m missing something, but I don’t see where the big increase in SG&A is coming from (that’s gross profit minus operating profit). This had been decreasing for several quarters. It jumped in the four quarters prior to this one, but that was due to that FASB 123(R) jazz. That I understand, but this I don’t get.
Like I said, I could be missing something. This is just a first look. Perhaps the company will address it on the call (btw, BBBY is one of the few companies that doesn’t take on questions on its call).
The company also announced a $1 billion share buyback program. The AP also notes:

Bed Bath & Beyond expects a $40 million charge during its fiscal fourth quarter as part of “a program intended to protect over 1,600 employees from certain potential adverse tax consequences.” The tax consequences are a result of historical issues with some of the company’s stock option grants disclosed through a company stock option review.
The Securities and Exchange Commission is conducting an informal investigation into Bed Bath & Beyond’s stock option grant practices. The U.S. Attorney for the District of New Jersey is conducting a similar inquiry. Both probes are looking at backdating, in which the vesting date of a stock option is changed to make it more valuable to the holder. While not illegal, the practice must be properly disclosed to shareholders.

Vornado Realty Trust
Posted by Eddy Elfenbein on December 20th, 2006 at 11:54 am

More boring stocks. Today, I give you Vornado Realty Trust (VNO). Over the last 32 years, shares of Vornado are up more than 600-fold.
The flat gold line on the chart is the S&P. It’s not really flat, it just looks that way in comparison to Vornado.

By the way, that 60,000% doesn’t include dividends. Since VNO is a REIT, it pays fairly generous dividends. The current yield is 2.8%. If I had to estimate, I’d say that dividends by themselves gave VNO shareholders about a 200% return since 1974, meaning the stock’s total return is about 180,000%.

Blankfein Rakes In $54 Million
Posted by Eddy Elfenbein on December 20th, 2006 at 6:46 am

The WSJ reports that Lloyd Blankein’s, Goldman Sachs’ CEO, bonus was for $54 million, the biggest in Wall Street history.

Mr. Blankfein’s pay package reflects the firm’s performance atop the Wall Street heap over the past year, when its profits rose 70% to $9.54 billion and its stock price surged 59%, increasing its stock-market value by $31 billion.
But it also reflects the inflation in Wall Street CEO pay packages, which last year generally came in at between $30 million and $40 million, with the stock market in the fourth year of a bull run and a boom in private-equity buyouts and hedge-fund trading.
A former tax lawyer and gold salesman who rose to become head of the firm’s fixed-income, currency and commodities division in 1998, the 52-year-old Mr. Blankfein epitomizes Goldman’s risk-taking culture.
His latest pay package includes a cash bonus of $27.3 million, restricted shares valued at $15.7 million and options valued at $10.5 million, according to a filing yesterday by Goldman, which disclosed the stock awards and included the cash bonus. He also earned a salary of $600,000.

Goldman has 450 million shares, so Blankfein’s pay comes to 12 cents a share. In the past year, the stock is up $76.