Rosneft IPO Priced at $7.55 a Share
Posted by Eddy Elfenbein on July 14th, 2006 at 7:13 am

Rosneft’s offering will raise $10.4 billion.

The company said in a statement that the pricing gives Rosneft a total value of $79.8 billion, a higher market capitalization than Russia’s biggest oil producer, Lukoil. The shares are due to start trading next Wednesday in London and on Russian exchanges.
Preparations for the highly anticipated offering come as Russia shows off its oil-fueled economic clout, hosting leaders from the world’s richest democracies in St. Petersburg for the Group of Eight summit this weekend.
Despite the anticipation, the listing has been dogged by OAO Yukos, which has sought to stop the IPO. The company sought a last-minute injunction at a British court late Thursday. It was unclear whether the injunction would be granted.
After a jittery start, bankers say investors’ appetite rose throughout the marketing process for the IPO. Rosneft said Friday that the listing was 1 1/2 times oversubscribed, with total demand at $15 billion. Strategic investors accounted for 21 percent of the demand, with international investors from the U.S., Europe and Asia having made 36 percent of bids. Russian investors had bid for 39 percent of the shares while Russian retail investors had applied for 4 percent of the stock.

Dow -166.89
Posted by Eddy Elfenbein on July 13th, 2006 at 4:20 pm

For the eighth time in the past nine weeks, the S&P 500 dropped by over 1.1%. That only happened once in the previous 29 weeks. The index is now 1.5% from its June low,

To the Home Depot Haters
Posted by Eddy Elfenbein on July 13th, 2006 at 2:02 pm

Oh for the love of carbs, people. This Home Depot (HD) nonsense is getting out of control. I can’t believe what I’m seeing. The stock’s popularity is somewhere between Hamas and Diptheria, and it’s getting worse. In the less than three months, shares of HD have plunged over 20%. And the stock made another 52-week low today.
Now there’s a lynch mob after CEO Bob Nardelli. He’s even getting blamed for things he’s had nothing to do with. To quote Hoover from Animal House: “They confiscated everything, even the stuff we didn’t steal!”
To be honest, I’ve never been terribly impressed with Nardelli. He was one of Jack Welch’s protégés at GE. Nardelli rose through the ranks at GE to lead its Power Systems division. He did a great job there but I think he’s a bit too rough around the edges to be the corporate face of Home Depot, or any other company for that matter. Perhaps that’s why Jack Welch passed him over to be GE’s next top dog. In any event, Home Depot jumped at the chance, and made him their CEO in December 2000.
There’s an important point to remember. Nardelli didn’t start Home Depot. He was the rock star manager brought in to take over from the founder. Just because he thrived in the GE system, doesn’t mean he’ll be effective at a major company in an entirely different industry. In fact, it doesn’t make much sense at all.
Sadly, the loudest protests concerns Nardelli’s pay. This is really a lame issue. Last year, he raked in $32 million, and over $120 million in the last five years. Yes, yes, I know. It would be great to see CEOs get paid the same as teachers. Give me a petition and I’ll sign it, but I’m not going to pretend that CEOs can be found on the cheap.
The fight against CEO pay has probably caused shareholders more problems than the pay itself. In 1993, Congress capped the tax deductibility of salaries at $1 million, so CEOs fought back by issuing stock options. This led to companies slashing dividends payments which, in turn, increased the market’s volatility. Then we had the battle to expense stock options. Now we have the battle on back-dating, which in some cases, is perfectly legal. Chris Cox said that the 1993 law deserves “pride of place in the museum of unintended consequences.” Let’s keep the pay issue is proportion. Nardelli’s compensation last year works about to about 1.6 cents a share. This isn’t exactly soaking a $34 stock.
The anti-Bob furor got even louder when the company said that it would no longer provide same-store sales figures. Again, I’d prefer to see this number. (Except that, Lowe’s (LOW) always creams HD’s same-store sales.) But when I hear these critics yell and scream, I don’t think they understand what Nardelli is trying to do.
Let’s look at HD’s position from management’s point of view. They have a maturing retail business and strong competition from Lowe’s. The difficulty is that they’re running out of prime retail spots. So Nardelli is shifting HD’s strategy. If they decide to go to war with Lowe’s and play the game of “who can open up the most new stores,” Home Depot will lose, and lose badly. Remember what happened to Rite Aid?
Instead, he’s doing something different. He’s focusing the business on commercial customers. This is a huge market segment, and it makes sense for HD to shift the battle to this front. I didn’t quite “get it” until HD made its bid for Hughes Supply. This was Home Depot’s largest acquisition in its history. Now I see how committed HD is. Plus, the company has been quietly snatching up several smaller wholesale suppliers, even one in China. Notice how they’re acting before the problems get worse.
While, I’d prefer to see HD report the same-store sales figures, I understand why they’re not doing it. It’s simply not going to be a key component of its business strategy. Last week, however, Nardelli back-tracked and told Maria Bartiromo that HD may go back to reporting same-store sales.
The really big showdown came at the company’s annual meeting in May. This was a PR disaster. None of the outside director showed up. The meeting was just 30 minutes long, and Nardelli refused to answer any questions about his pay. Shareholder activists were furious and they urged shareholders to withhold their support of HD’s directors.
In the past, the company has given the results of the votes at the annual meeting. Um…not this year. The company eventually said that 10 of the 11 directors saw over 30% of their votes withheld. That ain’t good. Of course, shareholders have another way of voting—they can sell, and that’s what’s been happening.
But Home Depot is not like Dell. The company is still doing very well. In fact, Home Depot has beaten Wall Street’s estimate for the past few quarters. The company has also reiterated its earnings guidance. We’re not seeing those ugly earnings warnings that have hit so many others. In May, Home Depot said that it expects earnings growth of 10% to 14% this year, which translates to per-share earnings of $2.99 to $3.10. This means that HD is going for just 11 times this year’s earnings. That seems pretty darn cheap to me.

Dell Revamps Pricing Structure
Posted by Eddy Elfenbein on July 13th, 2006 at 12:20 pm

From the AP:

Dell Inc. outlined plans Thursday to simplify pricing and reduce the number of mail-in rebates for consumers and small business as part of the computer maker’s recent $100 million initiative to improve customer service.
Beginning next month, Dell said it hopes to reduce the number of promotions per product line by 70 percent and the number of promotions for any single product by 80 percent within the next 18 months.
Ro Parra, senior vice president of Dell’s Home and Small Business Group, said the new system should make it easier for customers.
“They told us what they wanted and we’re delivering what they asked for,” he said.
The move comes as Dell shares have hovered near a 52-week low following several analyst reports questioning its future growth prospects and tough competition from Hewlett-Packard Co. and other computer makers.
While Dell saw its revenue grow by 6 percent in the first quarter, HP’s jumped 10 percent. During the same period, worldwide PC shipments grew from 13.8 percent to 14.9 percent for HP, according to research firm Gartner. Dell, meanwhile, saw its share slip to 16.5 percent from 16.9 percent last year.
Shares of the Round Rock, Texas, gained 13 cents Thursday on the Nasdaq Stock Market to $22.51. The stock price has ranged in the past year from Wednesday’s close of $22.38 to $41.99.
The plan announced Thursday will take effect in August, beginning with a reduction in mail-in rebates for Inspiron laptops and Dell televisions. Rebate cutbacks for Dimension desktops will come later in the year, followed by other electronics and accessories, software and services.
Part of the plan, Parra said, will involve doing away with paper-based rebate forms in favor of system for customers to file for their rebates electronically.

The shares are back up to $22.50 (Woo!).

Sterling Bancshares
Posted by Eddy Elfenbein on July 13th, 2006 at 10:24 am

Investor’s Business Daily looks at one of my favorite regional banks, Sterling Bancshares (SBIB):

Sterling, with $3.7 billion in assets, focuses on Texas’ three largest markets: Houston, Dallas and San Antonio. It has 26 branches in its home base area of Houston and seven each in the Dallas and San Antonio markets.
The firm competes mostly with large banks based outside Texas. These banks, which tend to go after much bigger loans, include Bank of America, (BAC) JPMorgan Chase (JPM) and Wells Fargo. (WFC)
“It’s a bit of an underserved market that Sterling’s going after,” Cardenas said. “I think that’s a big part of their success.”
There’s still room to grow in those markets.
Sterling has less than 3% of Houston’s deposit market. It holds 1% or less in the Dallas and San Antonio markets.
“(Sterling’s) management team has had excess capital for many years, but they haven’t wasted it by overspending,” Arfstrom said. “They’ve been patient and prudent.”
The company could buy its way into a bigger share of its markets. Sterling has plenty of experience in this area, having acquired nine banks over the past seven years.
It also has been quick to hire folks away from banks that have been acquired by other firms.
“Our ability to pick up people from banks that have either announced they’re selling or (have been) sold to others has just been a windfall for us,” Bridgwater said on the conference call.

Tough Times for Apple and Dell?
Posted by Eddy Elfenbein on July 13th, 2006 at 10:16 am

The market is down again today. The S&P 500 has fallen below 1,250, and oil is up to $76.30 a barrel—a new all-time high. There’s a lot of anxiety in the tech sector today as Dell (DELL) will announce its new pricing strategy at noon today.
Business Week notes that there’s growing concern the computer industry is in for a bigger slump that previously thought:

Some (analysts) are concerned price wars are imminent and that economic slowdown could crimp overall demand. “There’s a softness in the market that’s building,” says Richard Shim, a senior research analyst at Interactive Date Corp. In the past two weeks, IDC cut its 2006 forecast for U.S. PC growth to 5.7%, from 6.8%. “In ’04 and ’05 there was tremendous growth. In a market that’s as mature as this industry is, there’s no way you can maintain those levels.”
Dell fed worries on July 12 by announcing that the following day it would unveil a “major pricing initiative”e; for U.S. consumers and small businesses. The same day, UBS Investment Research said it was cutting earnings estimates for Dell on the belief the company “continues to be impacted by competition and adverse mix shifts within the PC market.” Dell’s performance in recent quarters (it lost U.S. share to rivals in the first three months of the year) has given investors little reason for confidence—though the company has embarked on a turnaround campaign that includes beefing up customer service.
Credit Suisse issued a report the same day that did a number on Apple’s stock. The computer maker, which reports fiscal third-quarter results July 19, will probably issue sales and earnings forecasts for the current period that falls short of analysts’ expectations, Credit Suisse analyst Robert Semple wrote.
Apple is likely to tell analysts that fourth-quarter sales will be $4.6 billion to $4.8 billion, compared with analysts’ estimates for sales of $5 billion, the report says. “We expect Apple will once again use the September quarter to reduce iPod inventories as the company prepares for a refresh of its product lineup.”

Enron Witness Found Dead
Posted by Eddy Elfenbein on July 12th, 2006 at 2:25 pm

On the day of Ken Lay’s funeral, Neil Coulbeck was found dead in east London:

A body discovered in a London Park has been identified as a banker reportedly questioned by the FBI in connection with the Natwest Three fraud case.
Neil Coulbeck, who worked for the Royal Bank of Scotland (RBS), disappeared from his home in Woodford Green, east London last Thursday.
Yesterday a member of the public discovered a body in a park in Chingford, near to Mr Coulbeck’s home.
Police are currently treating the death as unexplained and would not confirm if it was linked to the Enron fraud case in which three British former Natwest workers face extradition on Thursday to the US.
In 2002 David Bermingham, Gary Mulgrew and Giles Darby were accused of an £11million fraud during which they advised their employer to sell its share in US energy giant Enron, below market value.
It is alleged the trio then left their jobs, bought a stake in the Enron unit and sold it on at a much higher price for profit.

CVS vs. Walgreen’s
Posted by Eddy Elfenbein on July 12th, 2006 at 2:03 pm

I’ve always been intrigued by the battle between Walgreen’s (WAG) and CVS (CVS). Both are great companies, and both have made lots of money for their shareholders. Walgreen’s, however, is definitely the Marcia to CVS’ Jan (we won’t even discuss Rite Aid’s Cousin Oliver). Thirty years ago, you could have picked up Walgreen’s stock for just 12 cents a share (that is, adjusting for seven 2-for-1 splits). Today, you’d be sitting on a 40,000% gain.
Not surprisingly, WAG usually trades at a premium to CVS. But the question I’m always asking is, how much? Right now, WAG is going for 28.7 times trailing earnings while CVS is going for 21.6 times trailing earnings. So that’s a premium of 33%. Is that fair?
Sometimes the premium has gotten as high as 100%. Last November I notice that the premium got to 50%, which I thought was way too large. I was right. Since then, shares of CVS have done fairly well, and they even made a new high today. WAG, on the other hand, slumped until May and has started to bounce back recently
I think a lot of Walgreen’s premium is due to its consistency. If people know you can deliver the goods, they’ll pay extra for it. Coke (KO) is a great example of a consistency premium. For years, Coke was always slightly overpriced by most reasonable valuation measures. But since it always stayed overpriced, there was no harm. That is, until it stopped being so consistent. Today, shares of Coke are worth less than half of what they were eight years ago. Pepsi (PEP) is up about 30% and is at a new high today as well.
Paying for consistency is another way of investing in risk. The problem with measuring risk is that it’s highly subjective. What I consider risky may not be to you. The “return” side of the equation is pretty simply. We should all be able to agree on what a 40,000% return looks like.
As I like at CVS and Walgreen’s, I don’t see how the market can justify a premium any larger 15%. I’m still staying away from Walgreen’s.

Vatican Reports Profit
Posted by Eddy Elfenbein on July 12th, 2006 at 1:58 pm

The Vatican (POPE) is raking it in:

The Vatican on Wednesday released its best financial report in eight years, saying it had a surplus of 9.7 million euros ($12.4 million) in 2005 despite extraordinary costs of 7 million euros ($8.9 million) for the funeral of Pope John Paul II and the election of his successor.
Cardinal Sergio Sebastiani, who heads the Vatican’s office for economic affairs, called it “good news” as he presented the Holy See’s annual financial statement after it was examined last week by international auditors and presented to Pope Benedict XVI.
In recent years, the Vatican’s accounts have been battered by labor costs, a falling dollar and the costs of the Vatican’s growing diplomatic mission while experts expressed concern that donations might drop from dioceses in the United States and elsewhere struggling to meet settlements in the sex-abuse scandal.
In 2004, the Vatican netted 3 million euros after four years in the red.

I’m raising the Holy See to a near-term outperform.

Third-Quarter Performance of S&P 500 by Sector, 1990-2005
Posted by Eddy Elfenbein on July 12th, 2006 at 1:52 pm

Since 1990, this is how the sectors of the S&P 500 have performed during the third quarter:
Energy…………………………1.8%
Utilities…………………………0.9%
Health Care………………….-0.1%
Staples………………………..-1.1%
Financials…………………….-1.3%
Telecom……………………….-2.3%
Technology…………………..-2.5%
Industrials……………………-2.8%
Materials……………………..-3.7%
Consumer Discretionary…-4.8%
S&P 500……………………..-2.0%