29 August, 2007

Altria Confirms further splits with Philip Morris International

Through all the Surgeon General Warnings, packaging pictures, stop campaigns and legal battles, cigarettes continue to draw both criticisms and profits. The world's largest cigarette company Altria (MO) laid out plans to spin off the International arm of the Philip Morris business.

PMI (Philip Morris International), the maker of the flagship Marlboro brand will now have complete and independent control of operations in over 160 countries. Altria will retain the Philip Morris USA division and will provide specifics of the spin-off after the annual board meeting in January. The International business dwarfs US operations with a revenue disparity of $48Billion to $18Billion. Smoking is a cultural necessity in some regions around the world and despite oncoming legislation is not going anywhere, anytime soon. So smoking kills, which is really terrible, but does that make it a bad investment?

Altria has been instrumental to the Dow's resurgence over the last couple of years and has rewarded shareholders handsomely. The company spun-off its majority ownership in Kraft Foods (KFT) paying shareholders with Kraft Shares and the same thing is to happen with PMI. Now the Kraft spinoff gave investors the peace of mind of having a solid food company without the underlying legal issues associated with cigarette companies. This will, for obvious reasons, not be the case with Philip Morris International. Investors here are getting a pure smoking play in the massive International markets.

The single biggest reason for the spinoff? Valuation. The international business was being dragged down by being associated with its American counterpart where smoking volumes are falling. Its been reported that smoking volume in America fell 3% while International volumes rose over 3%. The only way to truly extract the value in the International business is to spin it off and the thinking is that PMI is going to perform better individually than packaged with Altria in the future of cigarettes.

This is now going to become a cigarette pure play and for those investors confident in the future of smoking there will be no better investment in that industry. So should investors buy MO now or wait for PMI? While the board meeting in which the split will be detailed is 5 months from now Altria is still a solid stock to own and at a price under $70/share is a very reasonable investment. Why? Well for starters, a 4% dividend yield and an expansive array of business lines. Altria also runs the financial segment of Philip Morris and owns a stake in the producer of Miller Lite beer among others.

Legal battles are withering away for the cigarette makers and the overhang of having to pay additional massive settlements is nearly gone. The best part as an investor is that the majority of your customers are addicted for life to your product. So you should be addicted to PMI stock, and until that's spun off, be addicted to Altria.

Disclosure: Author holds no position in any companies mentioned at time of writing

28 August, 2007

Consumer Confidence Slips, Market Tumbles from Uncertainty

A second straight day of falling economic metrics gives way to a second straight day of losses for the markets. Fresh off the heels of Monday's Housing report, in which housing sales fell to a 5 year low, came this morning's Consumer Confidence metrics. The Consumer Confidence Index fell from previous month high levels of 111 to around 105 and further economic fears clouded American Markets.

Federal Reserve minutes came out also and pulled markets down further as talk centralized on the possibility of the housing slump being more prolonged than initially thought. Investors took this sentiment from the Fed as a sign to head for the door leaving the Majors (Dow, Nasdaq and S&P) down across the board about 2%.

Will this mean that the Fed will need to provide the market with the needed September interest rate cut? Investors seem to be hoping that the rate cut will come and the markets will more than likely continue in this drifting pattern till the interest rate policy is known. The Financials led the sell off today as earnings estimates are being trimmed left and right for the Investment Banks and Major Financials. Goldman Sachs (GS), Morgan Stanley (MS), Bear Stearns (BSC) and Merrill Lynch (MER) all were sold off substantially today with Lehman Brothers (LEH) being the biggest victim of the selling. Citigroup (C), Bank of America (BAC) and Wachovia (WB) were also sold heavily showing that the dip in the financial sector was widespread.

The selling was broad across North American markets with all sectors seeing red. The Fed revealed that it had hoped the market would, in essence, fix itself but that clearly has not been the case. Now although the American economy is still in good shape, to create market stability here the Fed has really no choice but to interject again and produce an Interest Rate cut soon.

24 August, 2007

Bulls End The Market Week in Control

A strong finish to the week for American Markets as investors piled back into stocks after some surprising news. July New Home Sales were stronger than expected and that lifted sentiment across the board. Deep in the midst of a so-called credit crunch and fears of a creeping recession the numbers highlight that through it all the economy is still stable and healthy.

The Dow went forward 140 points (1%) while the Nasdaq and S&P fared slightly better. On the Canadian side positive bank earnings at Toronto-Dominion (TSE:TD) led the TSX index higher but Royal Bank (TSE:RY) faltered despite profit increases. On the American side brokerages went higher together today following the general market despite Morgan Stanley (MS) cutting its retail sales outlook.

Investors have seemed to calm themselves of fears of recessions and credit crunches for the time being, which bodes well for the sustainability of the recent recovery of the major indices. The Dow sits about 750 points from its highs of the year meaning that the losses from those highs now sit at only about 5%. I believe its safe to say that the markets have stabilized the so-called correction, with the help of the Fed, and are now looking ahead to future interest rate discussions.

22 August, 2007

Merger Mania props up Stocks during Wednesday's Session

North American markets got a lift from the early going Wednesday as merger speculation and deal pondering was afoot. Topping the headlines, reports that TD Ameritrade (AMTD) and E-Trade Financial (ETFC) were talking about merging, and although merger speculation from the online brokerages have seemingly been years in the making the thinking was that its for real this time.

Now TD-Ameri-E-Trade as it should obviously be called, if only for the humor, would instantly become the big player in the online brokerage space leaving Charles Schwab (SCHW) out of luck. Due to synergies involved in merging analysts speculated that the combined $10Billion and $6Billion market cap companies could be worth almost $20Billion together.

Further deal speculation surfaced in the exchanges as Nymex Holdings (NMX) revealed it has been in talks with several players about a buyout, including locally based NYSE Euronext (NYX). Shares of NMX were up 6% on the news. In the casino space MGM Mirage (MGM) shot up 8% as it announced receiving a $5Billion investment from Dubai World in the form of company shares and a stake in Las Vegas projects.

Markets overall finished up over 1% on the day with the Canadian side once again faring slightly better than the neighbours to the south. Canadian markets were fueled by easing of some credit worries with almost all sectors well positive on the day.

21 August, 2007

Apple signs iPhone deal with European Carriers in UK, France, Germany

Apple Inc. (AAPL) has reportedly signed three separate distribution deals in Europe for the iPhone. The company has signed up three providers in three different countries - France, United Kingdom and Germany. Investors of Apple have known that a European deal was inevitable so what is the next step for company shares?

Apple's own targets for iPhone were 10 million in sales in Calendar 2008, and this included expectations of being in Europe and Asia throughout the year. So do investors sell the news here as the expectation is that the announcement will be made official at the end of next week at a European conference. The analysts following the company echo my own bullish sentiment regarding the company. The deals with T-Mobile in Germany, Orange in France and O2 in the U.K. are simply a starting point for worldwide iPhone expansion. An expansion that seems to be well on track to not only meet but beat sales expectations. Analysts reports recently on the company track U.S. iPhone sales expectations as well ahead of the stated 1 Million sales goal by the end of the current quarter.

The bigger news for shareholders of Apple with these deals is the terms that Apple was able to secure. A full 10% of voice and data revenues from iPhone customers. This is unprecedented in the wireless industry and it just shows how much of a game changing product Apple and the carriers themselves believe that the iPhone is. Since Apple is able to guarantee steady device sales revenue for the carriers it has the clout to negotiate a bigger pie of the usage revenues. It is well known now that the iPhone sells without any subsidy either at carrier stores or Apple's own retail stores and as such the expectation of a price drop on the handset, regardless of contract, for consumers is virtually nil. This revenue sharing plan that Apple gets from the carriers will become increasingly important to a sustained bottom line for the company and as such will provide Apple with predictable, growing and steady cash flow.

It has been speculated that Apple receives somewhere around 7-10 dollars per month per user from AT&T and with this 10% deal in Europe investors should expect the same influx of cash. When Apple meets its sales goal for the end of 2008 the company will be looking at over 10 million iPhone users netting the company in the neighbourhood of $100Million in monthly revenues, which comes with it a nose-bleed type high margin. That's a significant influx of cash that is as of yet difficult to model for analysts given the company changes to subscription accounting. Through this next phase of Apple growth shares of the company can continue to command P/E ratios and forward P/E ratios in the mid-high 30s and high 20s respectively. In the years to come this can effectively turn a $100Billion electronics juggernaut into a Microsoft sized market entity. Apple shares have fallen some $30/share from their 52 week high with the entire market, but have started to regain some losses. In the months ahead technology sizzles and Apple with its continuous schedule of announcements and innovations will likely be one of the first in line to provide market beating returns.

Disclosure: Author is long AAPL

20 August, 2007

See-saw Trading leaves Markets with a Positive Monday

North American Markets hovered around the flat line early Monday morning as Friday's Fed induced buying didn't spill over into this week. Stocks drifted lower midday but recovered to end slightly higher by the end of the day. The Dow picked up 40 points and the Nasdaq 3. Canadian markets were higher as well with the TSX faring better than its American counterparts.

Perhaps some signs of relief were seen today as home renovator Lowe's (LOW) reported good quarterly numbers sending the stock higher by 6%. With the home crisis cloud hanging over the home builders and renovating stocks investors seemed relieved that Lowe's was able to somewhat weather the storm. The financials, which led the week-end charge last week fell overall today as the major US banks were lower across the board.

Technology stocks got a boost from positive comments surrounding Research In Motion (RIMM) as the Blackberry maker prepares for its 3 for 1 stock split. This wasn't enough to cause an extended rally in technology shares as the sector was mainly flat for the day.

18 August, 2007

Market Week ends on a High as Fed and Options Expiration Lead Rally

Markets in North America climbed back amongst heavy losses early in the week as the US Fed cut the Discount Interest rat by half a percentage point. This is the rate that banks borrow from the Federal Reserve. The news sent stocks flying early Friday and the rally held steady in the late afternoon led overall by the Financials.

Positive earnings and a positive outlook from Hewlett-Packard (HPQ), Dell's (DELL) internal earnings audit completion and general bargain hunting helped Technology put the Nasdaq ahead by almost 2.5%. Options Expiration also helped fuel some of the buying as several big tech names hit even strike levels. Whole Foods (WFMI) completed another hurdle in its attempt to acquire Wild Oats (OATS) which in turn made company shares jump 7% and 17% respectively.

Thursday's quick climb from the aftermath of a morning 300+ point Dow drop continued Friday and the major indices almost climbed back to even for the week. The TSX in Canada was also led by Financials but the market saw a 400 point gain close to only 200 by the end of the day. Canadian currency gained strong on the US rate cut news and the Bank of Canada went back on its plan for a rate hike later this fall. The markets in North America are still in uncertain and turbulent times, however Friday showed that on positive news buyers are there just waiting to jump in.

16 August, 2007

Hewlett-Packard Firing on all Cylinders with Earnings Beat

Hewlett-Packard (HPQ) reported today after the close. The results were nothing but positive as the largest computer maker continued to take market share from its main rival, Dell (DELL). The computer maker reported $0.71/share earnings excluding items on $25.4Billion in revenues.

Both figures topped estimates and the revenue number showed top-line growth of 16%. That's good news for HP investors, however the better news came with the company forecast for next quarter. Forecasting 2-3 cents higher than previous analyst estimates showed that indeed all businesses are doing very well and growth is set to continue worldwide. Shares of the company hit a 52-week high of $49 recently and have not fallen as hard as other growth tech names such as Apple (AAPL) or Research In Motion (RIMM).

The growth in PC shipments for the company shows that it is on par with high growth Apple machines in the sector as both companies continue to leave Dell in the dust. IDC market research reports showed recently that HP increased its PC shipments by over 35% year over year. Dell is trying desperately to lure customers back but HP is working very well in all channels and is the PC of choice while Apple is enjoying its great success with Macs.

The cost cutting plans implemented by management a couple years ago are paying dividends now as HP competes in all PC sectors and is widening its market share lead across the globe. Even the printer division is doing better as market share is being taken from Lexmark and Dell here also. HP trades at a forward P/E multiple in line with IBM and several points cheaper than Dell. This is a bargain of a growth technology company with the Price-Earnings-Growth ratio now under 1.

The market trends currently don't support heavy bullish buying as credit fears and liquidity problems sweep across all sectors but a winner is clearly here in HPQ and its difficult to stand idle when solid growth like this is available for such a discount. Hewlett-Packard proved in its latest quarter that it is the biggest and best PC company in the world. Investors should take notice.

Disclosure: Author is long AAPL and holds no position in HPQ, DELL, RIMM

Selloff spreads throughout North American Markets yet again

The market sell off, which again began with Asia falling, spread all through North American markets as the Dow midday was down 300 points. The TSX on the Canadian side fell over 400 points as cash is king in the days of this credit-crunch.

Panic is running rampant in the markets now as investors of all sizes pull out of stocks to gain cash. How patient must the patient investor be? No one seems to know just how bad the situation is and no one likes to sit each day looking at more paper losses. However there are 2 irrational things that I think are going on here.

1) The reality of the crisis has to be less devastating than the worst-case rumors that plague the street these days. The markets have heard it all from doomsday default scenarios to out of control interest rate tampering.


2) Great companies are being sold off simply due to fear. But when does the sell off end and the opportunity begin?

As far as time lines go, August and September historically aren't the high times for the market but what is happening here is a full scale exit from a smorgasbord of investors. Why buying has to be put on hold for the time being there are many very attractive entry points to great companies within technology, consumer staples and life necessity sectors.

Patience has always been a virtue but has not been tested to these extents in the market for quite some time.

UPDATE: The end of day comeback was dramatic for the markets as the Dow almost pulled it back even only down 15 points and the TSX in Canada took back over half of its losses from the lows.

A ray of hope? That's too early to tell but bargain hunters were out this afternoon in force.

Patience, not Panic is still the better of the two for investors.

15 August, 2007

Bullish Sentiment Suppressed by more Credit Fears

The markets suffered another heavy bearish day as the late morning's positivity was pulled down by more woes from the credit sector. Merrill Lynch issued a report which uttered the infamous "bankruptcy" warning for investors of Countrywide Financial (CFC). Countrywide shares plummeted on the news and the persistent fears of more backlash swept through the market.

The Dow's almost 100 point gain in the early going was wiped out by the end of the day as Funds and investors pulled out further in attempts to raise their own cash levels. The sell off was across the board and with seemingly no near term end in sight to this panic-driven spree, spooked investors are heading to the door in droves. One bright spot again was the new IPO VMware (VMW) as it rose again in its second day trading to almost reach a high of $60 before falling back and settling with a 10% gain.

13 August, 2007

Is the Hype behind the VMware IPO Worth the Investment?

VMware (VMW) is a software service unit that creates various virtualization solutions for a multitude of consumers. EMC Corporation (EMC) is behind VMware and is spinning about 10% of the company in the IPO that is due to open trading August 14th. EMC acquired VMware in 2004 for around $600Million and if the hype machine behind the IPO translates into interested investors, the company will surely reap the benefits. The biggest sell of virtualization software is the ability to run multiple operating systems on the same physical machine at the same time. With the amount of money that is spent on server infrastructure within American corporations this, some argue, is the future of computing. Less physical boxes running simultaneous split operating systems will save incredible amounts of money, use less resources and provide increased flexibility as the world of multi-core computing becomes reality.

VMware also creates smaller scale solutions for consumers, such as its popular desktop virtualization tools that allow Apple (AAPL) Mac users the ability to simultaneously run Windows on their Intel-based iMacs or MacBooks. Apple's own solution called Boot Camp provides a similar functionality however the user is forced to reboot the machine in order to switch between Windows and Mac OS X.

This growing business isn't anything close to small peanuts as VMware did $700Million in Revenue last year and had $87Million in profit. Last quarter the growth continued as VMware reported $300 Million in revenue, representing an 89% increase year-over-year. EMC plans to issue 33 Million shares of the around 375 Million in VMware. That's right EMC is keeping almost 90% of the company out of public hands. VMware has certainly been popular among the huge market tech names as both Cisco (CSCO) and Intel (INTC) have stepped up and purchased small pieces of the firm.

Can VMware make the average investor money on IPO day? It's possible but I would be extremely cautious of over-paying for a tiny piece of this solid, growth company. Investors started to realize that EMC would actually be the safer way to get in on the VMware craze and shares of EMC jumped 8% today to $19/share, giving the company a market cap of $40Billion and a P/E ratio of 31. A company that showed growth of 20% last quarter and posts an estimated growth rate of 19% from this year to next is certainly attractive at P/E levels in the low 30s.

The hype behind VMware is icing on the cake for EMC investors, and this should be the safer, smarter play for those who won't get in on the ground floor when VMware's IPO price is announced. Ranges for the IPO have increased from the mid 20s to the high 20s with some analysts expecting over $30/share. There's also been talk that the company could open as high as $60/share. At $60 that would give VMware an implied market cap of $22Billion. Half the market cap of its owner EMC. That would be extremely high for a company that looks at estimates of $1-2Billion in revenue this year. In contrast, EMC had over $11Billion in revenues last year and sports of growth rate of almost 20%.

Virtually the entire market expects a red hot VMware IPO, no pun intended. Plenty of money will change hands and opportunities will be there, however, a word of caution for investors because if reasonable prices can't be found in the early going I would not recommend the chase. With EMC still owning 90% of VMware anyway, that should be the way to play this one.

Disclosure: Author is long AAPL, INTC and holds no positions in the other stocks mentioned

10 August, 2007

Universal Readies DRM-Free Music, Snubs iTunes for Real Networks et al

Universal Music Group, the music giant owned by Vivendi (EPA: VIV), has announced a testing phase of an online music plan that will see the company sell digital tracks without Digital Rights Management (DRM).

The debate over DRM has raged since the inception of digital music and the growth of Apple (AAPL) and its iTunes Store. Even Apple's head Steve Jobs wrote a letter discussing DRM on Apple's website (Link). Apple's first partner into the DRM-free world was EMI (LON:EMI) and together they launched iTunes Plus. An additional service for music that gave customers better quality tracks that were free of restrictions. These tracks could be played, burned or used anywhere, virtually on any device.

Universal has shunned the online music juggernaut that is iTunes and its 70+% market share. It has chosen to partner with Real Networks (RNWK), which has its well known Rhapsody service starting to gain some momentum in the space. The stock jumped off its 52-week low today finishing up 7% on the news. Before we jump on the Rhapsody bandwagon, investors need to consider that this 6-month Universal test is available also to online stores run by Best Buy, Wal-Mart, Amazon and Google. While some of these big net names don't exactly offer complete online music services to consumers you can see that the biggest name is missing. Apple Inc.

Contract renewal negotiations fell apart between Universal and Apple some time ago and it was clear then that Apple's firm demands were not met with smiles. Reportedly during the talks, Universal wanted changes to pricing and Apple wanted to keep the same pricing simplicity and get rid of DRM completely. It seems Vivendi's Universal unit holds a big grudge. However, if DRM-free music is truly the wave of the future it wont be long before iTunes is back in Universal's good graces. With CD sales down sharply quarter after quarter and digital sales, although growing, failing to compensate, its only a matter of time before shareholders become unhappy with the fact that the biggest music distributer in the world excluded the most powerful online music store in the test.

The question investors have to ask now is whether the 6 month test period is enough for any competing service, such as Real's Rhapsody, to gain any traction against iTunes simply because of DRM-free music? The same songs will still be available through iTunes just packaged with digital rights management. Will this be enough to lure people away from the iTunes store and into competitor online music stores, where they can buy individual songs, put them back into the iTunes media management software and load them onto their iPods? Based on market trends it doesn't appear very likely.

iTunes music sales have always been a low margin business for Apple as its been said that of each $0.99 track almost $0.70 goes to the record label and the rest covers network and advertising costs. What Apple's profit machine feeds off of is sales of iPods and Mac Computers. So for Apple shareholders is this a big deal? Well, yes and no. It isn't a big deal being shut out of the DRM-free test by Universal, however if this strains the company relationships further and Universal decides to pull songs from iTunes that could provide a significant blow to Apple's music business. Universal does sell about 1/4th of the world's music.

Anything Apple loses in the online music business will most notably be picked up by Real's Rhapsody, which would have a positive effect on shares of Real Networks. However, the online music business is still very low margin and Real as a stock I would not recommend based on this DRM-free test alone.

The music trends are clearly forming to a purely digital age with freedom and sharing being at the forefront of consumer minds. With that will come more DRM-free offerings, which will spur further music player sales. The product everyone seems to still want is the iPod and the company making that particular gadget is none other than Apple. Those executives at Universal better start to mend fences soon because not working with Apple in online music is a severe mistake, with the iPod still on the consciousness of virtually every music consumer on the planet.

Disclosure: Author is long AAPL

09 August, 2007

Bears, Bears and Bears Oh My!

Stocks took a big tumble lower today after three positive sessions. Credit woes sprung up again as rumors of further hedge funds losses spread from Europe. Financials were amongst the hardest hit and weighed on the Dow Jones Average.

American Markets:
Dow Jones: down 387 points (-2.83%)
Nasdaq: down 56 points (-2.16%)
S&P: down 44 points (-2.96%)

Canadian Markets:
TSX: down 280 points (-2.04%)

Goldman's Flagship Alpha Fund Showing Problem Signs

Markets, domestic and abroad went lower in trading Thursday Aug 9th as renewed credit fears swept in again. The European Central Bank officially said that it injected almost 100Billion Euros into Money Markets to provide liquidity. This news only raised concerns of credit tightening and was compounded negatively by reports of more hedge fund losses.

BNP Parisbas, the French-based global financial firm officially suspended 3 of its funds due to losses and exposure to the American sub-prime industry. Adding to that were persisting rumors of cracks in the armor at Goldman Sachs (GS).

Goldman's flagship Alpha fund reportedly lost 8% in one week in July and now stands at -16% in year to date performance. Talk amongst traders began yesterday that GS would have an after-market announcement regarding concerns in fund operations. This quickly turned the market lower, but a denial from Goldman Sachs sent American markets back to near highs of yesterday's session. Further reports today quantified Alpha Fund losses and required the firm to respond with the poignant "business as usual at Alpha" rebuttal. Rumors persisted that the fund was liquidating assets in various risky investments in order to stabilize its major fund. The Alpha fund has a history of successful performance but Goldman's consecutive earnings reports showed steep falls in asset management incentive fees. A sign of uneasiness for the investment bank not to be taken lightly by traders. The comparisons come against a very strong 2006 year for the investment firm and industry as a whole, so these numbers have to compared more closely to historic levels. Even so, a troubling trend is certainly forming.

Is this the time to jump out of the best investment bank on the market? While the stock may be stagnant or drifting slightly lower during the panic of the sub-prime meltdown, it is till a top tier company sporting very low P/E and PEG ratios. Goldman just won a bid for ownership of large portions of toll roads in Mexico for an astonishing 30 years. It has gotten approval from China to purchase a 12% stake in Chengdu Yangzhiguang Industrial Co., a tool making company, and it just agreed to purchase Nursefinders Inc., a health-care staffing organization. Clearly Goldman is diversifying its investment strategies for the long term, and this is a positive thing for the company and will be a good thing for investors down the road.

Goldman's next earnings report will be crucial, as a slowdown in Mergers & Acquisitions activity and the fall out from more sub-prime sector losses will weigh on all the investment banks. It will be hard for GS to get close to all-time highs of $230 in the near term as the growth story is being silenced by credit worries. However it seems as though the bottom is near and within the next few months buying opportunities could be plentiful for longer term investors.

Those holding may feel some pain during this storm as losses are realized throughout the industry but the plan that Goldman has in motion should lead it to calmer seas well ahead.

Disclosure: Author is long GS

08 August, 2007

Bulls are Back in Town

Markets scoring their 3rd straight positive day means a 3-peat for the Bulls on Wall Street. No, that wasn't Michael Jordan on the floor of the exchanges this week but with the positive start of the week the major indices - Dow Jones, Nasdaq, S&P and TSX - are all up around 3%.

Murky waters still lay ahead as the sub-prime scares are by no means over, but with the Fed's interest rate stance providing a little relief to those fears, investors were buying for the time being. Couple that with a slight drop in oil and a few key positive earnings reports, specifically Cisco (CSCO) yesterday, which powered the stock to a 52-week high, and you've got yourself 3 straight sessions in the green.

07 August, 2007

Apple unveils new iMacs, Software and more at Media Event

Apple Inc. (AAPL) held a special media event today that saw CEO Steve Jobs take the stage for nearly 2 hours talking about new Apple products. This event was Mac focused and that could be seen early on. Most rumors circulating on today's event assured virtual certainty that new Mac desktops would be shown in a sleek new form factor.

My were the experts, rumor-mongers and amateurs right. New iMacs were revealed in 20" and 24" form factors, encased in sleek aluminum with the screen covered by glass, thinner and sexier than ever. The 17" model computer was cut from the lineup completely. Photos of the keyboard circled briefly on the Internet in the days leading up to this event and it seems those too were right on the money. The new Apple keyboards that come with these computers are a measly 0.3 inches tall.

Investors are watching this presentation with bated breath for any surprises out of the Cupertino company as the stock of late has really shown its inherent volatility to rumors, news and surprises. The iMac computer price points have also dropped with this new line, which is sure to entice even more consumers to consider Apple computer purchases. Steve Jobs points out that Mac sales are growing at more than 3 times to industry average. A number that if it can continue for several more quarters would see Apple's computer share climb dramatically and shareholders rewarded handsomely.

On the software side of things, Apple seemed to address their lagging Internet platform .mac by making it completely integrated with the new iLife '08 software package. The .mac platform, was an area of contention as it had been neglected and consumers paid $99/year for the services. The announcement of 1.7Million subscribers was dubbed by Steve Jobs as the starting point for future excellent growth in .mac as usability features are added and integrated through the iLife software suite. Virtually everything you could do with iLife, you can now publish to a ".mac Web Gallery", at home or out and about with your iPhone, which is sure to be a big hit with the growing socialite-nature of this "New Internet".

iLife programs get a revamp for this '08 iteration as the bundle of iPhoto, iMovie, iWeb, iDVD and GarageBand come with new Macs for free and the one year .Mac subscription with 10GB of space is $100. Apple is well known for providing great usable software in a beautiful hardware package and these improvement to iLife will certainly be appreciated by the computer buying public. As foot traffic increases in Apple stores the ability to demo all of these software features in-store, with an expert on hand, is a major selling point, which allows Apple Retail Stores to have much higher sales conversions than traditional electronics stores. Better software helps drive further hardware sales. The upgrade of both the hardware and software cycle will surely bode well during this "transition period" for Apple as it leaves itself 3 months before it has scheduled shipping its new operating system Leopard. So instead of a sales lull, the company should expect steady volume as excitement over new hardware is seen in the early stages, and a secondary sales bump once Leopard ships. A great business model and strategy that should translate into additional shareholder value.

Apple's productivity software suite is also revamped for its '08 iteration. iWork, previously Pages (word processor) and Keynote (Presentation application) were joined by a third application named Numbers (spreadsheets). This was long overdo for some Apple software analysts, but its inclusion now adds that needed productivity application to round out the suite and make it a formidable alternative to Office for Mac by Microsoft. This coming at a time when Microsoft announced delays in bringing the next version of Office to the Mac platform.

Expectations from Apple announcements usually carry unrealistic hopes from antsy investors and if breakthrough products aren't announced the stock can be very volatile. This is a the Apple game short term investors play and it can be a lucrative one. This announcement left a lot of possibilities open, as did the impromptu Q&A session, and may be viewed as a disappointment short term. Apple shares come under pressure when announcements don't live up to the hype but the long term future of the company is safely within Steve Jobs' vision.

Disclosure: Author is long AAPL

06 August, 2007

Could Novastar be a Sign of Life in Sub-Prime?

To see the most battered investments over the last couple of months, one need look no further than the companies who gave out risky loans. A quick look at that charts of NovaStar Financial (NFI) and American Home Mortgage (AHM) one can see the disaster that has plagued the industry.

With defaults rising, and credit problems seemingly spreading throughout the entire market its easily to let fire, get out and watch the world burn, while these companies struggle to stay afloat and remain in business. New Century Financial was not so lucky as it went bankrupt earlier in the year, and with AHM filing for Chapter 11 it seems like it won't be far behind. AHM's high for the year is $36 and now the stock sits at about $0.40! Yes that's right 40 cents for this mortgage player. Investors actions are speaking volumes as AHM tries to shield itself with bankruptcy protection. Seemingly days after it announced that it was laying off a vast majority of its workforce. No stop-gap measures could save this play it seems.

NFI was also in a lot of trouble even though it managed to work out a deal to get $150Million in funding recently. Trouble persisted as analysts came out saying even that wasn't enough and the company was doomed. Add to that the spreading word that more hedge funds invested in this industry are now worthless or close to worthless and you've got a fire sale spreading throughout the investment banking community.

Goldman Sachs stepped up and announced a new fund that will be going into the industry and it is to be valued at $20Billion. A sign of life? Maybe, but there's a lot of work to be done here. NFI also had problems last week announcing that it will suspend some loans that have not yet been processed. This news made the stock fall further as it dipped to about $4/share. A reverse 4 for 1 split went into effect last week and since then the stock has not drifted but been battered to the downside. That is until news today from the company that it will indeed be going back into the business of giving sub-prime loans. Now is this a sign that the winds are changing or is this a desperate ploy from a company that is still on the hook for a paying out a trust dividend this year? That much is not clear yet as it may take months and maybe years for this industry to climb out of this hole. However on the news NFI stock shot from the low $4/share to over $7/share. Volatile trading that reaped glorious rewards for day traders of the stock. However for NFI to think of coming back to earlier year highs it must do a lot more business in a lot longer period of time. Only the most patient of investors will probably stick with this company until, if ever, the institutional players see the market leveling and signs of undisputed life and profitability emerging.

Till then stay away from the chaos that is risky lending.

Disclosure: Author is long NFI

04 August, 2007

Bears continue the Rampage

The markets were once again battered this week as credit-risk sentiment swept over the market and a July jobs number came in softer than expected.
A couple of mid week positive days were overshadowed by Friday's over 2% drop in the major indicies. As money poured into REITs in Canada the overall market bearish blanket held the TSX down with an overall 240 point loss.

American Markets
Dow: down 281 points (-2.09%)
Nasdaq: down 64 points (-2.51%)
S&P: down 39 points (-2.66 %)

Canadian Markets
TSX: down 248 points (-1.80%)

There seems to be little indication that these loan fears are subsiding and the "market-correction" appears to be in full swing. The only question seems tobe, how far still do we have to fall. Some of the major companies in both markets are becoming so cheap that it'll be hard for big investors to continue to jump ship or stay on the sidelines. The bargain bin is filling up and as such the floor should come soon.

03 August, 2007

Google Seriously Looks to the Mobile Space

gPhone? That's the moniker that's been plastered over the headlines since the Wall Street Journal article (Link) that cited Google (GOOG) as having "invested hundreds of millions" into cellular phone development. Reports are that this project goes far and beyond current incarnations of Google products on today's mobile handsets.

So what exactly is Google up to? Are they in fact developing hardware to show to carriers and manufacturers? This in effect could be a Google Phone or gPhone if you so desire to call it. So to break down Google's strategy, I think we need to look at their current and past offerings. Google's made major leaps into the mobile space of late as it expands Google Search, Gmail and Maps onto any and every phone. I expect this strategy to seriously continue, the problem is however, that carriers bog down their cell phones with all kinds of proprietary software. Why do you think Google fought so hard to win open access for the 700Mhz band in the FCC auction. By making that area of the network open, it means that any and all devices would in essence have to work with any and all types of software. It also happens that this band is ideal for longer distance broadband Internet, a space Google desperately wants to be and excel in.

The Wall Street Journal also quoted figures saying that the mobile ad market could be worth $14Billion in 2011, up from about $1.5Billion currently, now that's sizable growth for a business. While Google already makes its billions from Internet advertising; attempts at print, radio, video and mobile ads show the company is intent to broaden itself from a Search company to an Ad firm. The mobile space is that next wave of advertising. Phones with full Internet capability are here and more are on the horizon, none more publicized than Apple's (AAPL) iPhone, which features a majority of full-fledged browser features in its Safari application. Not surprisingly, Google's products (GMail, Maps, YouTube) are available as standalone applications on this product.

If Google is indeed pushing multi-millions into R&D in the cellular space I would think the money is used currently to provide a framework for openness within mobile devices rather than the development of a Google Uberphone. When iPhone was announced it was labelled the "Jesus Phone" so any product that Google may or may not be working on would have the grave distinction of falling under the category of "Yeah, it is pretty cool but it's no iPhone".

With Google's CEO on Apple's board of directors it would be an odd step for the company to try to push itself with a new product into this competitive space, given that Google has no experience creating hardware, except for its servers and mini appliances. A more realistic approach is that Google may in fact be using some R&D resources to create mock-up or engineering versions of cellular device concepts that it shows to manufacturers and carriers in order to try to get everyone on the same page as to what the next generation of technology could and should be. Both from the hardware perspective and the software perspective. For an innovative software company this seems like the logical course of action, however Google is anything but conventional. For all we know, during the Google's Engineering 20% personal time someone had the bright idea for make a "simple Internet phone" and here we are today.

What this all leads to is Google's attempt to place itself within the mobile space in a very meaningful way. Reports go on to say that Google's device would offer free subscriptions to customers and support the costs with advertising. Now that is certainly the ambitious undertaking and one that has the potential to turn the industry on its ear. However, the idea of advertising before, after or during phone calls or regular phone use is certainly a tough sell. If Google can get the message across that devices should be open and function equally well with all types of software, then the innovative nature of Google's products would be at the forefront for millions of cellular users. A new wave of Internet enabled handsets are much more likely to prominently feature Google services, ad supported of course, if the company is deeply involved during the development phase.

No one at this point who is speculating can say for certain what Google's plans are, but the facts of the matter are clear. Google making a push into the hardware space would be by far its toughest challenge yet and the carriers would certainly have high demands of their own. On the software side expect to see the G inside more devices as Internet capabilities of cellular phones improve and users become accustomed to using their mobile phones the same way they use the Internet at home. Google's shown that a broad base of users click aplenty on targeted advertising and if the same Net experience can be found while on the go, I would, and certainly Google hopes for strikingly similar advertising results.

Disclosure: Author is long GOOG, AAPL

02 August, 2007

NYSE Euronext Profit Jumps as Exchanges Combine

NYSE Euronext (NYX), this morning reported their first quarter as a combined entity of NYSE Group and Euronext and the results year-over-year were strong. On a straight-up basis NYX reported earnings of $0.62/share vs. $0.39/share, with revenue rising to $161Million up from $60Million. That's an over 160% increase. But before we pop the champagne corks lets look at the relative numbers. Due to share increases from the joining of the two companies and other related costs adjusted earnings were also released.

On this adjusted basis NYX earned $0.65/share vs a year ago $0.50/share and the street's expected $0.64/share. Analysts have said that favourable tax rates led to the earnings upside. Net Earnings on this basis were reported as $172Million vs. a year ago 133Million. Up almost 30%.

The company said that they are continuing to look at merger or buyout possibilities but assured investors that these will be undertaken with the utmost discipline. Investor fears of late have centered around the company having to drastically overpay to acquire assets in the Exchange space. Euronext experienced a record increase in trading and the NYSE had its biggest trading volume quarter ever with over 166Billion shares traded. The growth story in NYX in seen through these raw listing, trading and volume numbers. With 1.4Billion in cash at the end of the quarter, and a gain of almost $600Million from the sale of LCH Clearnet in hand, the company looks to be readying the war chest for further acquisitions. The words of management regarding patience and diligence before moving forward with deals should be met favourably by investors.

One area of contention may be the statistics that show the decrease in trading share for NYX on its own exchange. Nasdaq Stock Market (NDAQ) is making inroads in trading NYSE listed securities as the market share for NYX fell from 74% to 63%. It is a very competitive industry as these two American exchange heavyweights fight for a majority share of trading volume. With record volumes being reported across the exchanges, I believe this fall will be neutralized and NYX will settle with a majority of volume in the 65-70% range. Any further market share losses would certainly be a talking point in the quarters to come.

NYX, now sports a trailing P/E of 37, however this will continue to adjust downwards as the effect of Euronext is seen on the companies earnings. Forward P/E is a better barometer in this case and rides in the low 20s. For a company with this much organic growth, it almost looks like a value play and this kind of talk should have long term investors excited about future company and stock prospects. Case in point the Price earnings Growth ratio sits at well under 1, given these most recent results and this would be expected to normalize in the coming quarters.
I believe the further upgrades will be coming soon as will price target increases.

The average estimate of $3.35 for CY08 has substantial upside if NYX can continue to show the organic trading and listing growth it has demonstrated. Let along the trading giant uses its cash to buy another asset and bring it into the fold. With almost 10% of its market cap in cash, and a Price to sales under 10 there is room to expand numbers for 2008 and with this can peg 2008 earnings near $3.50/share. Applying a P/E of 30 would bring a target price of $105 into next year. This is on the high end of analyst estimates but it is a level that is attainable if the company stays the course. Downside risk seems minimal from these levels and as such investment could represent as much as 40% to the upside. A rock solid business model, increasing organic metrics and potential acquisitions on the horizon there's a lot to like here.

Disclosure: Author is long NYX

01 August, 2007

Animation King Disney has Bright Future

Forever known as one of the pioneers of animation, Disney (DIS) has put management reshuffling behind it and now looks refocused and determined to deliver for shareholders. Current quarter earnings were a good indication that the strategy is working. Nearly all segments of the business looked good as Disney delivered $0.58/share vs. a year ago $0.51/share and the market expectation of $0.55/share. On the revenue front Disney reported $9.05Billion vs the expected $9.02Billion.

The biggest rise came from the television unit as ABC posted strong numbers led by lower production costs and higher ABC Studio sales, as hit shows like "Lost" continue to do well in several markets. ESPN also helped here and the company even stated that ESPN will recognize $185Million more in deferred revenue in the 4th quarter than last year.

In its theme park segments Disney saw increases of 6% in revenue and 13% in operation income. These numbers were particularly strong as attendance gains were seen even as an increase in ticket prices more than offset rising gasoline prices. Management even went as far as to say that margin improvements were seen and the theme park business is very strong.

The movie division was down year-over-year due to strong DVD sales from the prior year, however with movies like the 3rd "Pirates" and "Ratatouille" coming to DVD for the holiday season there's reason to be optimistic that the movie business will be strong in the coming quarters. Disney made the big animation splash when it purchased Pixar, then became the first studio to offer movies for download on iTunes, and it is this management vision that Bob Iger brings that was lacking in years past when the company was run by Michael Eisner. While Pixer's latest film "Ratatouille" is doing well at the domestic box office, the foreign nature of the film's subject matter should propel it to much larger returns in foreign markets than its predecessor "Cars". All reasons to smile as Disney regains its position as the studio for animated features.

Disney further expanded its online strategy as it purchased Club Penguin for as much as $700Million. Club Penguin is a virtual online world for kids and already sports as many as 700,000 subscribers. A nice addition to Disney's already growing stable of online properties.

With these latest numbers Disney sports a trailing P/E of 15 and a forward P/E in the low-mid teens. With the business growing in double digits, and it looks like this will continue into next year, the stock sports a PEG of around 1.1, which is very reasonable for this kind of media powerhouse. Analysts targets should be reaffirmed after this quarter and as the average estimate is around $40/share the 18% upside makes for a healthy risk/reward ratio.

With old favourites and a growing nest of new properties there's a lot of positives surrounding the house that Mickey built.

Disclosure: Author holds no position in DIS