The Bitchiest 8-K Report
Posted by Eddy Elfenbein on May 23rd, 2006 at 5:35 pm

I bet you didn’t know SEC filings could have such a nasty attitude. Check out this Q&A from Expeditors‘ (EXPD) 8-K report:

20. You are generating a lot of cash and you are increasing the dividend. Your working capital is strong, etc. The balance sheet is probably the best in the transportation industry, so what else do you with the cash? You have always reinvested in the business, but you must be getting to the point where there is little else to invest in. Are there locations where you can open other offices? What’s next for your company? Where do you go from here? Is it more of the same in terms of growth? How should we think about the company going forward in terms of next steps? I know it’s an open-ended, broad question, but you have been one of the few companies that have consistently delivered on growth, on promises, etc., and the company has obviously shifted to a level of growth that your peer group has never been able to match. Thanks for indulging the question.
This was not an “open-ended, broad question” it was an interrogation that left us exhausted just reading it. We did not ‘indulge” your question, we endured it.
As much as we love being asked what we are going to do with the cash, we wonder why you don’t look to see what we have done so far? Last year, we generated approximately $280 million in cash flow from operating activities. We bought back $127 million worth of stock and paid out $32 million in dividends and we invested another $91 million into the business via capital expenditures. We ended the year 2005 with $55 million in additional cash. All in all, we think that was a pretty good use of cash.
This year, we estimate that we are going to use about $130 million for capital expenditures and as you note we’ve just raised the dividend to a level that means we might spend about $45 million on dividends. As to stock repurchases we would expect to spend at least as much as we did last year in keeping with our current goal of keeping our outstanding share count relatively flat.
As for the rest of your question, there are many locations where the company can and will open. As our same store sales figures demonstrate, new offices are not the story behind our historical growth and as we have said before, they do not require massive capital outlays.

It seemed like a reasonable question to me. (Sheesh, they should see some of my e-mail.) It’s a good thing they’re making money. Otherwise, they might come across as jerks.

S&P Is Bullish on FactSet
Posted by Eddy Elfenbein on May 23rd, 2006 at 5:16 pm

They give FactSet (FDS) a 12-month price target of $55 a share:

Standard & Poor’s favorable opinion of FactSet Research Systems (FDS) reflects our belief that, at current levels, the shares do not fully reflect the company’s positive business momentum. We see solid fundamentals for its target market, the global financial investment community, and we expect that international markets will offer strong revenue-growth opportunities. We continue to think the company has an important, entrenched position in a niche market with significant barriers to entry.

Medtronic Earned 62 Cents a Share
Posted by Eddy Elfenbein on May 23rd, 2006 at 4:17 pm

In line with expectations:

Medtronic Inc. on Tuesday said quarterly earnings rose on higher sales of its implantable devices to manage irregular heart rhythms.
Fiscal fourth-quarter net income rose to $746.6 million, or 62 cents a share. A year ago, the company reported net earnings of $194.4 million, or 16 cents a share, after taking a charge to settle patent litigation over its spine devices.

The stock hit an 18-month low today.

Dell to Open Retail Stores
Posted by Eddy Elfenbein on May 23rd, 2006 at 2:49 pm

The first one is scheduled for Dallas.

The store, at NorthPark Center, will not carry inventory, Dell spokesman Venancio Figueroa said. Rather, it will allow customers to try out Dell’s products and order them for delivery, Figueroa said.
The store is a pilot initiative to see whether it can spark interest in Dell’s products while letting the company maintain its distinct business model.
Long known for selling computers directly to customers, Dell has seen its stock fall in the last year amid lagging U.S. sales. Some analysts have said the company could boost sales by selling its products through major retailers, but Dell executives have insisted that their business model is more cost-effective.

The Fall of Fannie
Posted by Eddy Elfenbein on May 23rd, 2006 at 2:01 pm

The accounting scandal at Fannie Mae (FNM) is certainly one of the saddest. Few companies had the corporate image of FNM. People don’t expect much from companies like Enron, but Fannie was supposed to be different. Now we learn that it was all a charade.

Fannie Mae’s regular quarterly reports of smooth profit growth in recent years were “illusions deliberately and systematically created” by senior executives through improper accounting and manipulation of earnings, the company’s regulator said in a report issued Tuesday.
The report from the Office of Federal Housing Enterprise Oversight, or Ofheo, came as the mortgage-finance company prepared to announce a settlement with Ofheo and the Securities and Exchange Commission under which Fannie will pay a fine of $400 million.
“We are glad to resolve these matters. We have all learned some powerful lessons here about getting things right and about hubris and humility,” said Fannie Mae President and Chief Executive Daniel H. Mudd in a statement. “We are a much different company than before. But we also recognize that we have a long road ahead of us.”
Ofheo’s 340-page report blamed both the board and management for a corporate culture that allowed managers to disregard accounting standards when they got in the way of achieving earnings targets. The company then rewarded executives with huge bonuses for hitting those targets, the report said. (Read the full report.)
For the six years through 2003, the report said, $52 million of the $90 million of compensation for Franklin D. Raines, the chief executive officer, was directly tied to meeting targets for earnings per share. Mr. Raines was forced out of the company in December 2004 when regulators confirmed that Fannie had violated accounting rules. Lawyers for Mr. Raines couldn’t be reached immediately for comment.

The report showed that Raines systematically misled the public:

In the summer of 2002, interest rates fell 100 basis points in 60 days to a 40 year low, and mortgage prepayments accelerated dramatically. That acceleration caused Fannie Mae’s duration gap, the only published measure of the Enterprise’s interest rate risk exposure, to move well outside of Board-approved limits. In Fannie Mae’s 2002 Annual Report, Mr. Raines described the Enterprise’s response:
“Even though we took actions to rebalance our portfolio, the actions were routine … and had no material impact on our business or core business earnings. In fact, our core business earnings per share increased by 21 percent during 2002.”
Mr. Raines’ statements failed to mention several important facts. First, the change in the duration gap occurred because Fannie Mae had not fully hedged its exposure to mortgage prepayments — in other words, senior management had taken significant interest rate risk. Second, the decline in rates had had a multi-billion dollar economic impact — the market value of the Enterprise’s assets had risen much less than the market value of its liabilities, so that its net asset value had declined. The rebalancing required to address Fannie Mae’s duration mismatch in 2002 — accomplished through the repurchase of high-coupon long-term debt and the cancellation of pay-fixed swaps — was quite costly. Mr. Raines failed to mention that core business earnings did not reflect that cost.
Failing to Acknowledge Deficiencies
Another example of that behavior occurred during a press briefing on July 30, 2003. During that briefing Mr. Raines attempted to reassure the participants that Fannie Mae did not have the types of accounting problems then plaguing Freddie Mac. His statements about the quality of Fannie Mae’s internal control system were categorical and sweeping:
“So it is possible to run these things properly, but you’ve got to make the investments. You’ve got to say that this has got to stand scrutiny internal and external. You can’t just go get [sic] by saying, Well, let’s do the cheapest or easiest thing to do. So Fannie Mae had always made the investments. We made the investments over Y2K. We’ve made the investments in our accounting systems. We’ve centralized our accounting so we don’t have to go all over the company to find out what the facts are you can to one place….
Management does matter, and a management that cares a lot about internal control does matter. I think that’s really the important difference. It would not take 500 people for us to go back, even if we had made the same mistakes, because we have these systems automated and we can go back and quickly adjust them.”

Raines served as Director of OMB from 1996 to 1998.

The Vonage IPO
Posted by Eddy Elfenbein on May 23rd, 2006 at 1:25 pm

I know the big worry now is supposed to be inflation. I’m sorry, but I can get into it. It’s like sake. I know I’m supposed to like it, but I just…can’t. I’ve looked at the inflation numbers and it doesn’t seem like that big a deal. Sure, it’s probably true that the government understates inflation, but that’s the kind of thing governments do.
Jeff Matthews had a great post mocking the idea of the core rate of inflation. As usual, he’s right. But I’d like to add that I don’t often use gold or silver or platinum in my day-to-day dealings. If I did, then the prices probably wouldn’t bother me anyway.
Let’s remember that there are areas where prices are falling. At the same time, we’re told that Dell is a complete mess because its competitors are underpricing it, and inflation is roaring back.
If you want to watch for falling prices, just look at the Vonage (VG) IPO. Well, the offering price is certainly inflating. The offering is oversubscribed. But the price of voice-over-Internet protocol (VoIP) is plunging. And so will Vonage’s share price.
Check out this gem from a Reuters article on Vonage:

Vonage has acknowledged that it may never be profitable and is viewed with skepticism by many analysts, who cite the growing competition it faces in providing voice-over-Internet protocol (VoIP) services.
“We haven’t liked the offering since we first saw the registration,” said David Menlow, president of IPOfinancial.com. “There are so many other companies out there that can deploy this strategy or this product in a heartbeat.”

For the love of carbs! May never be profitable??
In 11 years, the company has never made a profit. All told, Vonage has lost over $460 million, which is roughly the amount it will raise from its IPO. (Irony, no?)
In the first quarter, the company had sales of $119 million, and it spent $88 million on marketing.

David Phillips on Arden Group
Posted by Eddy Elfenbein on May 23rd, 2006 at 9:44 am

David Phillips, the 10-Q Detective, looks at Arden Group (ARDNA) and likes what he sees:

Perhaps the Company should rename itself, “The Cheap Gourmet.” In 2005, despite generating operating cash flow of more than $33.0 million, capital expenditures totaled $6,390,000, which included costs of approximately $2,400,000 related to the remodeling and expansion of the Century City store. The balance sheet is in great shape, with Total Debt-to-Equity of approximately 2.0 percent.

Medtronic’s Financials
Posted by Eddy Elfenbein on May 23rd, 2006 at 7:44 am

Here are Medtronic’s numbers for the past several quarters:
Quarter………..EPS………….Sales
Jul-01…………$0.28………..$1,455.70
Oct-01………..$0.29………..$1,571.00
Jan-02………..$0.30………..$1,592.00
Apr-02………..$0.34………..$1,792.00
Jul-02…………$0.32………..$1,713.90
Oct-02………..$0.34………..$1,891.00
Jan-03………..$0.35………..$1,912.50
Apr-03………..$0.40………..$2,148.00
Jul-03…………$0.37………..$2,064.20
Oct-03………..$0.39………..$2,163.80
Jan-04………..$0.40………..$2,193.80
Apr-04………..$0.48………..$2,665.40
Jul-04…………$0.43………..$2,346.10
Oct-04………..$0.44………..$2,399.80
Jan-05………..$0.46………..$2,530.70
Apr-05………..$0.53………..$2,778.00
Jul-05…………$0.50………..$2,690.40
Oct-05………..$0.54………..$2,765.40
Jan-06………..$0.55………..$2,769.50
Apr-06………..$0.62………..$3,080.00 (est)
Jul-06…………$0.59………..$3,020.00 (est)
If the earnings report is inline with expectations, then Medtronic’s trailing P/E ratio will drop to 22, its lowest level in a decade.
In October, the company boosted earnings guidance for FY06, FY07 and FY08. Remarkably, the stock is down 11% since then.

Medtronic’s Earnings Preview
Posted by Eddy Elfenbein on May 22nd, 2006 at 11:44 am

Medtronic reports earnings tomorrow. The AP has a preview:

OVERVIEW: The acquisition of Boston Scientific Corp. and Guidant Corp. during the period changed Medtronic’s competition landscape slightly. Guidant had always been second to Medtronic in the market for implantable defibrillators _ devices implanted in the body to regulate heart rhythm _ while Medtronic seeks to grab share in the drug-coated stent market currently dominated by Boston Scientific and Johnson & Johnson Inc.
Medtronic, the world’s largest medical device maker, gained share in the defibrillator market following Guidant’s product recalls last year, but must hold onto those gains now that Boston Scientific is working to revamp its acquired product lines.
BY THE NUMBERS: Although Medtronic did not issue fourth-quarter guidance, it has fiscal-year earnings guidance of $2.20 to $2.23 per share, and revenue guidance between $11.1 billion and $11.6 billion. Given total adjusted earnings per share of $1.59 and revenue of $8.23 billion for the first three quarters, that implies a fourth-quarter estimate of 61 cents to 64 cents per share earnings on revenue of $2.87 billion to $2.92 billion. Analysts surveyed by Thomson Financial estimate earnings of 62 cents per share on revenue of $3.08 billion.
ANALYST TAKE: Lehman Brothers analyst Bob Hopkins said the upcoming earnings report is an issue of concern. The analyst estimates earnings per share of 61 cents for the quarter. Hopkins, who rates Medtronic “Overweight,” said as long as Medtronic can keep defibrillator sales at $760 million or above, the stock may avoid weakness.
Merrill Lynch’s Katherine Martinelli, with her “Buy” rating, considers Medtronic a preferred heart device stock given the premium price of competitor St. Jude Medical Inc.
WHATS AHEAD: Medtronic and other medical device makers are likely to unleash their lobbyists on Washington this summer to dispute steeper-than-expected proposed reimbursement cuts by the Centers for Medicare and Medicaid Services on such products as stents, defibrillators and pacemakers.
STOCK PERFORMANCE: Shares of Medtronic fell 12 percent to close the fiscal quarter ended April 28 at $50.12 on the New York Stock Exchange. Over the previous four quarters, shares have slid 5 percent.

The Late Cyclicals Are Being Left Behind
Posted by Eddy Elfenbein on May 22nd, 2006 at 11:30 am

I just ran this chart a few days, but it’s worth updating for today. The black line is Morgan Stanley’s index of consumer stocks. The gold is the early cyclicals, and the blue is the late cyclicals.
My point is that this is not a broad downturn. The market is being very selective. Outside of energy and metals, things aren’t so bad. Yet.

The 10-year yield just dipped below 5%.