• Gurgle
    Posted by on February 13th, 2006 at 11:31 am

    Musn’t gloat.
    Ther media is turning around Google (GOOG) is a big way. Barron’s featured Google on its front page this weekend.

    To get a sense of what might happen to the stock, we gave one über-bull’s 2006 revenue estimate for Google a 20% haircut, trimmed his projected expenses by 5% (but no further, because bulls greatly underestimate Google’s costs), deducted stock-based compensation and, generously, gave the company credit for the considerable interest income on its cash. The result: Earnings would be 30% lower than the bull’s projection, at $6.28 a share. If the stock were to maintain its current multiple of 41 on those lowered earnings, it would be worth $257. It’s more likely the multiple would shrink to as low as 30, in line with the slower growth. That would make the stock worth $188, versus its recent $360.
    Though this exercise is less than scientific, it clearly demonstrates two things. First, Google’s business has tremendous leverage — changes in revenue, in either direction, have outsized impacts on the bottom line. That’s the result of high profit margins: 88% of net revenue and 58% of gross revenue. Second, the exercise provides a glimpse of the risk posed by a lofty stock multiple.
    “Google reminds me very much of what went on in 1999 and 2000,” says Fred Hickey, editor of the well-regarded High-Tech Strategist newsletter and a member of the Barron’s Roundtable. “The valuation is insane, relative to what they do.”

    The stock opened at $344 today. The AP is reporting that analysts are standing behind Google:

    “Google remains our No. 1 buy recommendation in the Internet sector, and our price target remains $490,” said Citigroup analyst Mark Mahaney, who added the March 2 analyst day might be another catalyst for the lofty stock.
    Sasa Zorovic, an analyst with Oppenheimer, said the recent stock weakness since Google reported disappointing fourth-quarter earnings might even provide a buying opportunity. The stock has fallen 20 percent since reported quarterly numbers on Jan. 31.
    “We continue to believe the online advertising industry remains a powerful growth story and that Google enjoys a market-leading position, gaining share from the competition in recent months,” Zorovic said in a report. “We believe the recent pullback provides a buying opportunity, and we reiterate our ‘Buy’ rating and $540 price target.”

  • BlackRock shares jump amid talk of Merrill deal
    Posted by on February 13th, 2006 at 11:28 am

    Merrill launches a pre-emptive strike:

    Shares of BlackRock Inc. shot higher on Monday in thin, pre-market trading amid speculation the money management firm was involved in a deal with Merrill Lynch & Co.
    BlackRock shares rose almost 14 percent to $149.80 on the Inet electronic brokerage.
    Both The New York Times and The Wall Street Journal, citing people familiar with the discussions, reported in Monday editions that Merrill Lynch would acquire a large stake in BlackRock, known for managing fixed income. The Journal valued the transaction at about $8 billion.
    Megan Frank, a spokeswoman for Merrill Lynch, said the company can’t confirm or deny market rumors. A call to BlackRock seeking comment was not immediately returned.
    A deal would create a company with $1 trillion in assets under management, the most of any publicly traded company.
    A BlackRock deal would be more strategically compelling than the alleged Merrill deal with Morgan Stanley, Buckingham Research said in a note to investors.

  • Stay Away from the Big Drug Stocks
    Posted by on February 10th, 2006 at 2:50 pm

    Everyone knows about the troubles of Big Pharma. Last year, I said that I had more faith in Merck (MRK) rather than in Pfizer (PFE), although I wasn’t going to buy either.
    Today, Pfizer lowered its earnings forecast for 2006. Wall Street was looking for $2.03 a share, but the company is only expecting $2 a share. Last year’s earnings came in at $2.02 a share.
    Merck could be a good buy in a year or so, but I still wouldn’t touch either of these stocks.

  • Spinning Their Wheels
    Posted by on February 10th, 2006 at 12:24 pm

    An editorial is the Seattle Times on the problems of Ford and GM:

    What’s with the carmakers? American labor? Nissan uses American labor. So do Toyota and Honda. If properly managed and set to work on a product the people want to buy, American labor does a fine job.
    Health-care costs? Those are a problem for us all.
    A depression in the car industry? No, actually not.
    The more we learn about the problems of GM and Ford, the more it seems that the problems were of their own making. Wages and benefits too high? Management agreed to the terms.
    Now, years after these problems have been made public, when rumors swirl about Chapter 11, the board of directors acts. GM’s board has reduced CEO Rick Wagoner’s cash pay from $2.2 million to $1.1 million, and cut the dividend in half.
    Someone should ask: A dividend? Paid out of what? Paying any dividend is like asking an accident victim to donate blood.
    Having cut Wagoner’s and the GM shareholders’ pay only in half, the companies now whisper in the ear of Michigan’s congressmen. Though The Wall Street Journal reports that there is no appetite in Washington, D.C., for a direct bailout, one idea is a trade bill that would penalize imports from countries that keep their currencies too low. That spells protectionism.
    Another thought, less obviously bad, is some special programfor vehicles that use alternative fuels.
    Alternative fuel is a fine idea. We support it. But in this circumstance, an “alternative fuels” bill is almost certain to be a bail-out-GM-and-Ford bill.
    If these companies can’t survive as now structured, it may be better to try reorganization in Chapter 11, the provision under which a company can shed debts, renegotiate contracts and keep operating. There is more chance of success from that process than from any laying-on of federal hands.

  • Quality Systems
    Posted by on February 10th, 2006 at 11:41 am

    Another superstar returns to earth.
    Late last year, I decided not included Quality Systems (QSII) on the Buy List for 2006. It had been one of our best stocks on last year’s list, but I felt that the shares were getting too expensive.
    The stock continued to soar higher this year. It went from $76.76 at the end of the year to nearly $92 on Monday. Then suddenly, the stock dropped $7 a share yesterday, and it reported earnings after the close. The earnings were horrible. Quality Systems earned 35 cents a share, ten cents less than estimates. The stock is down another $10 a share this morning.

  • Brown & Brown’s Earnings
    Posted by on February 9th, 2006 at 5:36 pm

    After the bell, Brown & Brown (BRO) reported earnings for the fourth quarter of 25 cents a share. Revenues rose 20.7%, and earnings-per-share increased 17.2%.
    What else can I say? This company just grows and grows. They finished off their 13th straight year of record sales and earnings. For the year, Brown & Brown earned $1.08 a share, a 16.1% increase over last year. Slow and steady wins the race.
    I think the stock is slightly expensive right now. I think they’ll earn about $1.27 a share this year (the current consensus is $1.24). If it pulls back below $23, it’ll be a terrific buy.

    Commenting on the results, J. Hyatt Brown, Chairman and Chief Executive Officer, said, “We are quite pleased to again announce outstanding earnings growth of at least 15% per share, the thirteenth consecutive year we have achieved this remarkable goal. Even though this past year’s hurricane season had a very dramatic impact on our people and clients, the strength of the Brown & Brown culture and our people allowed us to overcome these challenges. This single-minded effort has brought us ever closer to our active intermediate goal of achieving B-40, that is, $1 billion in revenue and a 40% operating margin (pre-tax income with interest, amortization and non-cash stock grant compensation expense added back). We feel quite positive about our ability to continue growing in the future.”

  • Google Down $116 in One Month
    Posted by on February 9th, 2006 at 4:53 pm

    Google (GOOG) has been getting pummeled lately. The stock closed today at $358.77 a share, its lowest close since October 28. On January 11, the stock reached an intraday high of $475.11.
    I wish I had seen this coming.
    goog.bmp

  • Whole Foods Market Down 6%
    Posted by on February 9th, 2006 at 3:47 pm

    Every so often, I get something right. Two months ago, I wrote that Whole Foods Market (WFMI) was overpriced. After yesterday’s close, the company reported earnings that were one penny a share below expectations. The stock is off about 6% today, and I think it has more room to fall.

  • Human Genome Sciences
    Posted by on February 9th, 2006 at 3:10 pm

    I honestly don’t know how Human Genome Sciences (HGSI) stays in business. The company is officially described as a biotech company, although it has exactly as many commercial biotech products on the market as Crossing Wall Street Global Holdings.
    In other words, zero.
    Last quarter, Human Genome Sciences had total revenues of $9.3 million, and they spent $81.4 million. Dear lord! Who’s there CFO? Willie Nelson.
    Since they don’t have any products on the market, almost all their revenue comes from a licensing agreement with GlaxoSmithKline (GSK). According to news reports, the company missed estimates by four cents a share. What I don’t get is how you can even make an estimate, and why would it matter if they hit it or not.
    How does one put a price tag on this stock? The company doesn’t do anything. The stock is currently valued at about $10 a share, giving it a market cap of $1.4 billion. I have no idea where that comes from. For argument’s sake, let’s say that the stock is trading with a P/E ratio of 20. That would mean that they’d have to have revenues for 2005 of $410 million. Instead, they had revenues of $19 million.
    The price of the stock is based solely on speculation of future products. Over the last four months, the stock is up about 30%. Here’s the CEO on everything the company is about to do:

    H. Thomas Watkins, President and Chief Executive Officer, said, “Progress toward commercialization was our priority focus throughout 2005, and we expect to accelerate our progress in 2006. Our lead products are moving towards Phase 3 clinical development, and we are making progress on our partnering objectives. We reported positive Phase 2 results for Albuferon in hepatitis C in 2005. A larger Phase 2b trial of Albuferon in combination with ribavirin compared to Pegasys is currently underway. We plan to initiate Phase 3 development of Albuferon by year-end 2006, assuming that data emerging from the Phase 2b study in the first half of the year are positive. We are also considering a number of collaboration opportunities for Albuferon this year. We completed Phase 2 clinical trials of LymphoStat-B in both systemic lupus erythematosus (SLE) and rheumatoid arthritis (RA), and we expect to initiate Phase 3 development of LymphoStat-B in SLE in 2006. We are also working to secure an order from the U.S. Government to supply ABthrax for the Strategic National Stockpile under our current contract.
    “GlaxoSmithKline (GSK) has advanced relacatib, the small-molecule cathepsin K inhibitor that GSK discovered using HGS technology, to Phase 2 trials in the treatment of bone metastases. GSK has also filed an Investigational New Drug application seeking to initiate Phase 1 trials of GSK716155 (formerly Albugon) in diabetes. HGS received $12 million in payments during 2005 related to the progress of GSK716155. We expect to complete the CoGenesys transaction in 2006, and we will continue to explore additional ways to monetize less critical assets that we are unlikely to develop internally. We will concentrate our efforts in 2006 on accelerating our progress toward commercialization, while at the same time remaining committed to ensuring the highest standards of quality throughout our Company.”

  • The First Auction of 30-Year Treasury Bonds in Five Years
    Posted by on February 9th, 2006 at 2:43 pm

    Today, the Treasury Department sold off $14 billion worth of 30-year Treasury bonds. The rate was 4.53%. That’s almost the exact same yield as the 5-year and 10-year bonds.
    The bid-to-cover ratio was 2.05, which was less than what I expect, but it still indicates that the public is willing to pay for these bonds. I’m curious if the government will ever try using longer term bonds. Last year, the British and French governments auctioned off 50-year bonds.