Wachovia Raises Dividend
Posted by Eddy Elfenbein on August 22nd, 2006 at 11:02 am

I haven’t talked much about Golden West Financial (GDW) since the merger announcement with Wachovia (WB). It’s sort of a dull company and doesn’t generate much excitement.
At the end of this month, GDW shareholders will vote to approve the merger. Most of the criticism has come from WB shareholders who think the deal is worth too much. That stock has dropped about 6% since the deal was announced. Assuming all goes well, our GDW shares will soon be exchanged for 1.051 shares of WB, plus $18.65 in cash.
For track record purposes, I’ll assume that all the cash was invested in Wachovia stock. Today, Wachovia announced a 10% increase to its quarterly dividend, from 51 cents a share to 56 cents a share.

The Long Tail
Posted by Eddy Elfenbein on August 22nd, 2006 at 10:54 am

Here’s an interesting interview with Chris Anderson, the author of The Long Tail.

One Wall Street Inc.
Posted by Eddy Elfenbein on August 22nd, 2006 at 10:09 am

I know this is cynical, but as soon as I read the beginning of this WSJ story, I knew where it was going:

The SEC complaint, filed yesterday in U.S. District Court for the Eastern District of New York, accused One Wall Street Inc. and its chief executive, among others, of selling securities to at least 64 investors, falsely promising that the company would soon conduct an initial public offering and that it was preparing to merge with E*Trade Financial Corp.

You know it’s coming.

Instead, the SEC said, Chief Executive Donte Jarvis used the proceeds as “a personal piggy bank,”

Not yet.

paying for jewelry,

Almost.

gambling

A little more.

and “adult entertainment” services.

Bingo!

The 31-year-old also was accused of giving his wife, La Shondra Hatter, at least $166,000 in checks drawn on the One Wall Street account. One Wall Street allegedly raised money by issuing unregistered securities starting in March 2003.

This further confirms the “Elfenbein Hypothesis,” which states that the securities and porn industry are slowly converging.

David Phillips on Biomet
Posted by Eddy Elfenbein on August 22nd, 2006 at 9:46 am

David Phillips at 10-Q Detective looks at Biomet (BMET), one of our Buy List stocks:

Biomet is in the midst of several major product launches and management anticipates that the Company will continue to be rolling out instruments at least early into fiscal 2007.
Looking ahead, Biomet said it remains “comfortable” with analysts’ sales and earnings estimates of $513 million to $530 million and 43 cents to 45 cents per share for the first quarter of fiscal 2007, and $2.15 billion to $2.22 billion and $1.85 to $1.95 per share for fiscal 2007.
The Company’s valuation looks attractive. The Common Stock’s valuations are priced at multi-year lows. For example, BMET’s P/E is only 17.5 times forward May 2007 consensus estimates of $1.87 per share [low end]. This is a 38.5% discount to its trailing five-year mean multiple of 28.5 times earnings. And with an estimated forward five-year EPS growth rate of 15.0%, the Company’s PEG multiple is an attractive 1.2 times [in line with its peer group multiple, which includes Stryker Corp., Zimmer Holdings, and Smith & Nephew].
Value investors might also note the predictable 30% operating margins, and the 20.4% return on capital (compared to its cost of capital of 5.8%).
Tempering these valuations, however, is the boring—in your face—thesis that there are few catalysts on the event horizon to expand valuation multiples (such as a turnaround in its EBI operations or margin improvement gains).
Patient investors with a longer-term view might consider the current price as an entry point, but (with a dividend yield of 0.90%) we prefer to put our dollars to work elsewhere.
In April 2006, the Company confirmed that it hired investment banker Morgan Stanley to help explore future strategies, including a possible move to put itself up for sale. Analysts have cited Medtronic and Smith & Nephew as potential buyers. The asking price for Biomet, should it decide to sell, could be more than $10 billion—or approximately $44.40 per share.

Andy Young and Wal-Mart
Posted by Eddy Elfenbein on August 21st, 2006 at 11:58 am

Many of Wal-Mart‘s (WMT) critics overlook the fact that the company’s shares haven’t done particularly well over the past few years. Since the beginning of 2003, the stock is down 10% while the S&P 500 is up over 40%. Of course, that may please some of critics.
The company has embarked on a much-needed PR compaign. As I said before, this may be the world’s first PR campaign that itself needs a PR campaign. Now Andrew Young has defended the company due to its bigotry:

Young was asked whether he was concerned Wal-Mart causes smaller, mom-and-pop stores to close. “Well, I think they should; they ran the `mom and pop’ stores out of my neighborhood…But you see, those are the people who have been overcharging us, selling us stale bread and bad meat and wilted vegetables. And they sold out and moved to Florida. I think they’ve ripped off our communities enough. First it was Jews, then it was Koreans and now it’s Arabs; very few black people own these stores.”

Charming. Young is a former UN ambassador and winner of the Congressional Medal of Freedom. (Hat tip: Ideoblog via DealBreaker).

To the Beach
Posted by Eddy Elfenbein on August 18th, 2006 at 6:56 am

That’s enough for me. I heading to Newport.
I’ll be back Monday. Have a great weekend!

Dell’s Earnings
Posted by Eddy Elfenbein on August 17th, 2006 at 4:13 pm

Dell (DELL) just reported earnings of 22 cents a share, in line with its lowered (um, dramatically lowered) guidance. For last year’s second quarter, Dell earned 38 cents a share. Sales were up 4.9%, not much higher than inflation.
The stock was briefly above $23 a share earlier today, but it will certainly open lower tomorrow. The stock may be a little cheap in the near-term, but I really underestimated the problems at Dell. Worst of all, I no longer find management credible. Their reassurances have all come to nothing.
Here’s a thorough look at Dell I did when earnings came out last quarter.

S&P 1300!
Posted by Eddy Elfenbein on August 17th, 2006 at 12:58 pm

One of the unusual characteristics of this market is that stock prices have continued to lag earnings growth. I can’t think of a bull market before when price/earnings ratios have declined as the market wore on.
Thanks to the market getting head-butted in the chest this summer, the market’s price/earnings ratio fell to 15, a level it hadn’t seen in over 11 years. Since then, the market has snapped back and the S&P 500 just broke 1,300 for the first time in three months.
Here’s how the S&P 500 and earnings have done since 1990:

The left scale is the for the S&P 500. The right scale is for earnings. I rigged it so when the lines cross, the p/e ratio is exactly 20.
Notice how much higher the blue line is compared with the peak from six years ago. Profits have soared but the index is still much lower. Here’s what the market’s P/E ratio looks like:

Down, down, down….
What’s interesting is that lower bond yields aren’t helping the market’s p/e ratio climb. Normally, lower bond yields allow the market to carry higher earnings multiples. Not this time.
Today, the market’s p/e ratio is about 15.6 (based on trailing operating earnings). That works out to an earnings yield of about 6.4% (1 divided by 15.6). The market’s earnings yield has most often been about 1% to 2% lower than the yield on the 30-year Treasury bond. Now it’s 1.4% higher. (Note: This is slightly different from the Fed model which uses estimated earnings).
Here’s how the earnings yield has fared compared with the 30-year Treasury:

The two lines seem to have mirrored each other until a few years ago.
Hey Eddy, I bet you can’t scatterplot that.
You guessed wrong my friend:

The horizontal axis is the 30-year Treasury yield. The vertical is the S&P’s earnings yield (the inverse of the p/e ratio). Up to about four years ago, the relationship was fairly strong (r^2=0.54). But the relationship has gone kablooey since then.
All the points north of 4.5% and west of 5.5% have come since 2002.
If the market’s earnings yield were to match the 30-year yield, the S&P 500 would have to have to be over 28% higher (or long-term yields would have to rise). On top that, earnings are still growing. By my estimate, profits for the S&P 500 should grow in the low double-digits for the rest of this year and 2007.

Home Depot’s Earnings
Posted by Eddy Elfenbein on August 17th, 2006 at 10:40 am

I have a few quick comments about Home Depot’s (HD) earnings. For some reason, people think this company is suffering much worse than it really is. (I defended the stock last month).
Home Depot has beaten Wall Street’s expectations for the past few quarters, and the company did it again on Tuesday. HD earned 93 cents a share, a penny better than expectations.
The company said its earnings will come in at the low-end of its guidance, which was 10% to 14%. Last year, HD made $2.72 a share, so the stock is now going for less than 13 times trailing earnings. If the company makes $3 a share this year (a 10.3% increase), then the stock is trading at about 11 times this year’s earnings.
I think investors are highly distrustful of the stock and they were ready to hear awful news. No such luck yet. I’m not a big fan of Bob Nardelli, but HD is a good stock at a good price.

July CPI +0.4%; Core +0.2%
Posted by Eddy Elfenbein on August 16th, 2006 at 8:25 am

Both are in line with estimates. Here’s how core and headline inflation have performed over the past few years:

Sorry folks, but we’re still not out of the inflation-fested woods yet.
The good news is that the year-over-year core rate is still lower than where it was during much of 2001. Over the last 12 months, the core CPI was up 2.69%.
The bond market is happy this morning, and the yield on the 30-year Treasury is now close to 5%. The 30-year briefly dipped below 5% earlier this month, but it didn’t hold. This time may be different.
For the record, Bernanke said that the Fed sees core CPI falling to 2.25% to 2.5% this year, and 2% to 2.25% next year. I don’t think that’s going to happen.
The chain-weighted CPI was flat for July, although that’s not a seasonally adjusted number, the data series is too new to see a clear seasonal pattern. For the last 12 months, the chain-weighted CPI was up 2.54%.
The Fed funds rate is now 2.56% above the trailing core CPI rate. That’s still pretty low for an expansion. During the 1990s, the economy was growing much faster than it is now, and real interest rates were much higher.
I think Lacker was right, the Fed needs to raise rates again.