• Get into Google before Wednesday, Ski Daddy!
    Posted by on September 13th, 2005 at 3:11 pm

    Jim Cramer is telling you to “get into Google before Wednesday.”

    What happens when the best story on earth goes on the road to tell itself to dozens of the largest accounts in the world?
    I think it goes higher, especially when it dawns on people that there may not be enough Google to go around.
    All last week I watched in amazement as Google acted terrifically in the face of a mountain of supply. I know, from my sources, that much of this massive secondary offering deal is already taken.
    But now the company is going on the road to tell its story, including a boffo Wednesday lunch in New York. Can you imagine? It’s like spraying lighter fluid on general alarm fire! I mean, this thing might be priced at a premium to where it is right now.

    Google lacks in many things, but outstanding shares is certainly not one. This is the same company that forgot to register nearly 30 million shares and options it had issued before it went public. There are now nearly 280 million shares of Google. If you want one, just buy it. You don’t have to be on the “in” of its next offering. Boffo lunches don’t drive the market, earning do.

    We’re now a little more than a month away from Google’s next earnings announcement. Wall Street’s current estimate is for $1.35 a share, however there’s a pretty wide spread among the forecasts. Current projections range from $1.14 to $1.44 a share.

    The best thing about a Google income statement is that if you don’t like one result, you can simply choose another number. There are several to chose from. When, say, GE reports its bottom line number, investors are basically stuck with it. Not so for Google. Take last quarter. Google earned $476 million. Easy, right? But that includes the “non-cash, stock-based compensation charge” of $47 million. You don’t want that, do you? And don’t forget traffic acquisition costs (or TAC if you’re cool) of $494 million. So Google’s bottom line was $1.19 a share. Or if you go by diluted shares, it’s $1.27. Or you can include the “non-cash, stock-based compensation charge” and get $1.36. Take your pick, it’s all good.

    For next year, Wall Street expects at least one earnings result of $7.33 a share. This means that Google is worth about 43 times next year’s earnings. A bargain, right? Not exactly. A better estimate was recently done by Professor Aswath Damodaran of NYU. His research shows a valuation for Google at $110.13 a share. Click here for details. (Warning: link contains math).

    However, I’m assuming Dr. Damodaran wasn’t invited to the boffo lunch.

  • Today’s Market
    Posted by on September 13th, 2005 at 10:37 am

    For a very brief period last week, traders weren’t sure if the Federal Reserve was going to raise rates at its next meeting. The futures market was split 50/50, but now the market is pretty much convinced that the Fed will raise the Fed Funds rate for an 11th straight time.

    Today, the government reported that producer prices rose 0.6% in August, which is slightly less than what economists were expecting. The core rate, which excludes volatile food and energy prices, was unchanged, however this data does not include the effects of Hurricane Katrina. We’ll have to wait until next month to see how broad an impact the hurricane had on prices.

    The Commerce Department reported that the trade deficit narrowed to $57.9 billion in July. I doubt that trend will last very long. The reason is oil. As oil heads higher, Americans send more money overseas. For the year, the trade deficit will probably be close to $700 billion, which is a big increase over last year’s record of $617 billion.

    This is also the time when companies guide their earnings higher or lower in time for earnings season which kicks off next month. Nokia, the world’s largest cell phone company, raised its earnings estimate today. Nokia is a great company, but I’m a little suspicious of this earnings guidance. Not that Nokia won’t make it, but because Nokia was so gloomy beforehand. In July, Nokia shocked Wall Street when it missed its earnings then it said that third-quarter earnings will be no higher than 21 cents a share. Now it sees profits coming in at 22 or 23 cents a share. Still, Nokia is an excellent company and I expect it will rally over the next few months.

    Shares of Best Buy are taking a big hit today on the company’s lower guidance for next quarter. Best Buy reported earnings of 37 cents a share, which is one penny below estimates. However, the electronics chain sees earnings of just 28 to 32 cents a share for next quarter, where Wall Street was expecting earnings of 34 cents a share. I would never count Best Buy out. The company is still very strong and it had an amazing May quarter when it topped Wall Street’s estimates by 70%. For this quarter, sales were up 10% and profits were up 25%. The stock is trading for about 20 times this year’s earnings.

  • Electronic Arts Upgraded
    Posted by on September 13th, 2005 at 6:53 am

    Electronic Arts jumped nearly $3 yesterday on an analyst upgrade. Wedbrush Morgan raised ERTS to a “buy” from a “hold,” and analyst Michael Pachter set a price target of $66 which seems pretty conservative. Earlier this year, the stock got as high as $71 (pre-split), but it plunged 17% in March after it warned of lower earnings growth.

    Looking ahead, Pachter said video game publishers should see expansion during the next three months as excitement builds toward the release of the new Xbox from Microsoft Corp. Electronic Arts has also invested heavily in research and development — which now stands at about 22 percent of annual sales — to meet demand for next generation games.
    Electronic Arts also is expected to benefit from games it makes for the Sony Corp.’s new PlayStation Portable. In addition, the company is seen benefiting from a potential price cut in the PlayStation 2 console.
    Another key selling point for the stock is that rival Take-Two Interactive Software Inc. has been having problems. Earlier this month, Take-Two said its loss doubled in the fiscal third quarter, hurt mostly by reserves set aside for returned copies of “Grand Theft Auto: San Andreas,” the hit game that came under intense scrutiny for a downloadable hack that unlocked sexually explicit material.

    The stock is pretty pricey. The company has forecast earnings of $1.45 to $1.60 a share, which comes to a p/e ratio of 37 to 41. Electronic Arts is a great company, but I don’t see it growing its earnings that fast to justify the current price.

  • SEC Block’s Cisco Options-Expensing Plan
    Posted by on September 12th, 2005 at 2:30 pm

    Good news for investors. Companies will soon be required to expense stock options in their income statements. This will take a huge bite out of earnings, especially at a lot of tech stocks. It’s no wonder that Silicon Valley fought the new regulation very hard. The loudest voice came from Cisco Systems. If it had expensed stock options, Cisco’s earnings would be 18% lower for the first nine months of this fiscal year.

    Cisco had a plan to circumvent the new regulation by creating financial contracts that would value employee stock options. The SEC just said that the plan was insufficient. It could have cut the cost of expensing options by 90%.

  • Hewlett-Packard Is Cutting 6,000 Jobs in Europe
    Posted by on September 12th, 2005 at 1:53 pm

    HP is going to cut 6,000 jobs in Europe. In July, the company said it was cutting 14,500 jobs and it was going to restructure its retirement plan. About 20% of the job losses will be in France. The French Deputy Labor Minister Gerard Larcher has asked for a meeting with HP to discuss the layoffs

  • Does Wall Street Have Zero Intelligence?
    Posted by on September 12th, 2005 at 1:45 pm

    According to an article from New Scientist magazine:

    A model that assumes stock market traders have zero intelligence has been found to mimic the behaviour of the London Stock Exchange very closely.

    You can read the research paper here.

  • Oracle Buys Siebel
    Posted by on September 12th, 2005 at 9:54 am

    Oracle said it will buy Siebel Systems for $10.66 a share in a deal that values Siebel at $5.85 billion. Thomas Siebel is a former Oracle executive who built Siebel into a software giant. This is a pretty good deal for Oracle–it’s just a 16% premium over Friday’s closing price. Five years ago, shares of Siebel were worth $120. Oracle has been aggressively buying other firms recently. The company recently completed its acquisition of PeopleSoft which was worth of $10 billion. The Siebel deal still needs to be approved by shareholders.

  • Defensive Accounting
    Posted by on September 12th, 2005 at 7:43 am

    Hewlitt Heiserman Jr. has an interesting article in Barron’s on the limitations of GAAP accounting and traditional income statements. He advocates “defensive accounting.” He gives high marks to 3M, Dell, Blue Nile, Pepsi and UnitedHealth Group

  • The Dell Bandwagon
    Posted by on September 12th, 2005 at 7:20 am

    Barron’s Jay Palmer has more on Dell.

    The pessimism about Dell has gone way too far. The company, despite its recent slip, still has an excellent strategy for personal computers — an industry that itself is growing nicely — and the company has been pushing forcefully into new regions, including Europe and Asia, and into new products, such as data storage for corporations and printers for businesses and consumers.
    “While it’s true that Dell can’t hope to continue growing at the same pace it did in the ‘Nineties, the growth that it can deliver will still be very respectable,” says analyst Ted Moore, who advises portfolio managers in the private banking group of National City, based in Cleveland. “Reports of Dell’s demise are premature.”
    In fact, he thinks the recent drop in Dell’s stock presents a big buying opportunity. The stock, now just under 35, could well head to 50, Moore maintains.
    The shares certainly don’t look expensive: They’re changing hands at 22 times the consensus earnings estimate of $1.59 a share for this fiscal year. That’s higher than the broad market’s multiple but low compared with Dell’s recent earnings growth rate of 24% and its historical P/E of 27. Dell’s multiple is well below Apple Computer’s (AAPL) 35 and not that much above those of Gateway (GTW) and Hewlett-Packard (HPQ), computer rivals from which Dell continues to steal market share.

    The most overlooked part of Dell’s business is that it’s no longer just a PC company.

    Playing on its established corporate PC connections, Dell now sells and services the network servers, workstations and storage systems that power corporate back-office operations, taking on both Sun Microsystems and IBM. Using its expertise from making computer monitors, the company now offers a range of very competitive large-screen plasma and LCD televisions, challenging the likes of Sony and Panasonic. Building on its direct consumer sales link, its has come out with a digital music player to compete against Apple’s iPod and a personal digital assistant that goes head to head with Palm.
    Perhaps the most daring move of all has been Dell’s decision to take on HP in printers. That move began after a market study convinced Michael Dell that HP was using its high-margin printer profits, which contribute about 70% of total operating profits on just 30% of revenue, to subsidize its ailing PC operations.
    The method behind the diversification is clear. “We are PC-centric,” says Rollins. “The idea was and is to look for synergies. The MP3 players uses PC components. The TVs are based on monitors, which we have long been making. The printers sell alongside our PCs, the servers go to existing corporate customers. We are looking a new areas of opportunity all the time, but you will not see Dell offer home electronic knickknacks.”
    The area of servers and storage for corporations has been a big winner, thanks in part to the fact that Dell has been able to apply its build-to-order model, allowing it to offer products that are highly competitive on both price and performance. The company makes its own servers and, for storage units, produces some of its products in partnership with industry leader EMC. Limiting its activities to the biggest market — systems running on Windows and Intel chips — Dell has become the No. 1 player in the U.S. and No. 2 worldwide in just five years, beating out the likes of HP, IBM, NEC and Fujitsu.

  • NYT Profile of Dell’s CEO Kevin Rollins
    Posted by on September 12th, 2005 at 6:13 am

    The New York Times looks at Kevin Rollins, the CEO of Dell.

    Mr. Rollins was living in Boston, a partner at Bain & Company, the management consulting firm, when he was asked to fly to Austin in 1993 to meet with executives at Dell. He readily acknowledges that he was hardly thrilled about the assignment. “Texas is a lo-o-o-ng way from Boston, in many ways,” he said. He had worked primarily with aerospace companies before his partners asked him to help what was then a modest-size computer company on pace to lose $100 million that year.
    Just before Mr. Rollins arrived, Dell announced that it would sell its computers at Wal-Mart stores, as well as continuing to sell directly to consumers over the Internet. Breaking into big-box retail outlets, Dell said, could bring in an additional $125 million in annual revenue – and rapidly build its brand name.
    Mr. Rollins promptly suggested that Dell scuttle the deal, telling a meeting of top Dell executives that the arrangement, over time, would prove to be a money loser. He apparently made a persuasive case. Within days Mr. Dell said he asked Mr. Rollins to end the company’s agreements with retail chains. After that, Mr. Dell added, “very rapidly Kevin became a critical part of the senior management team” – although he was still technically a consultant.
    Largely, his work involved bringing a basic management discipline to a company that had been growing so fast that even Mr. Dell was inclined to acknowledge that things were something of a mess. Over the next several years, Mr. Rollins would spend weekends with his family in Massachusetts and his weekdays with Dell in Texas – essentially functioning as if he were a top executive working within Dell. “It was all extremely odd,” Mr. Rollins said.

    Rollins doesn’t seem particularly worried about Dell’s long-term outlook.

    Among Mr. Rollins’s gifts as chief executive, those around him say, is what Mr. Bell, head of Dell’s European operations, calls his “tight messaging.” So crisply does Mr. Rollins convey the Dell line, said Roger L. Kay, the founder of Endpoint Technologies Associates, a research firm that monitors the personal computer industry, that it is “a little bit scary how everyone from the highest to the lowest employee is on message.”
    Today Mr. Rollin’s message is that everything is fine at Dell, despite a depressed stock price—now at $34.65, down 17 percent for the year. Dell may be the leading computer maker in the world, but it is No. 2 in Europe and No. 2 in Asia, leaving plenty of room for growth there.
    There is also plenty of opportunity for growth in other product areas, like printers, which Dell has been selling for less than three years, and plasma televisions, which it has been selling for less than two years. The company is making progress in selling the more expensive equipment used in corporate data centers, and it is starting to do a brisk business in consulting. So what if its stock has fallen more than 12 percent since disappointing Wall Street last month?
    “As our big strategic initiatives capture share and profits, the profits we deliver will go up and our stock price will naturally rise,” Mr. Rollins said. “We have a lot of room for growth for a long time before we have to ask what’s the next vision thing. It’s really a matter of execution.”