30 December, 2008

Ironic Headline of the day: GMAC's Here we go again

Today's Ironic Headline of the day comes via the New York Times and their humorous and insightful take on GMAC. Granted this is the first 'headline of the day' post ever written for WC Power Tech Fund Investment Blog but reading the NYT article (Link) the irony was too pronounced to ignore.

Here's the New York Times Headline: "With Needed Cash, GMAC Will Ease Lending Rules"

Seriously?? GMAC, whose automobile financing business has been in utterly dire straits as the credit crisis unfolded in the 2nd half of 2008 in step with domestic auto maker General Motors (GM) own struggles on its way to the brink of bankruptcy, now starts back on the same path? Let's hope these firms learned a few lessons along the way.

It was the ease of lending restrictions that got infamous mortgage houses Fannie Mae (FNM) and Freddie Mac (FRE) into such a mess in the first place. Armed with $5Billion of Government Bailout money the auto lending business can get back into full swing, or so thinks GMAC. According to the New York Times, the company is lowering its credit score from 700 to 621 for Americans to qualify for financing in order to stimulate business and expand the current potential customer base.

Credit scores of 620 or below are considered by the credit bureau to be "higher risk transactions" so at the very least GMAC is steering clear of those for the time being. It has been a tumultuous few days for the financing company, which is jointly owned by GM and private Cerberus Capital Management, its last second win or approval to become a bank opened the possibility for bailout funds in order to keep the company afloat. The Federal Reserve gave tentative approval for GMAC to become a bank holding company and thus allowed it to tap into a portion of the $700Billion bailout passed by US Lawmakers those months ago.

Clearly the infusion of cash gives GMAC invaluable time and monetary room in which to conduct and grow a broken business, but for investor sake, the company had better not be on a path of 'Here we go again'.

Disclosure: Author holds no position in above mentioned companies.

19 December, 2008

Happy Holidays from WC Power Tech Fund

Wishing everyone a Merry Christmas and a Happy Holidays 2008!

16 December, 2008

Apple says 2009 MacWorld to be its last, Keynote sans Steve Jobs

Spin the panic wheels and beat the panic drums, Apple (AAPL) is pulling out of MacWorld. For years the marquee event for most Apple faithful, 2009 will unfortunately be the company's last hurrah.  On top of that, stock holders should feel some momentum pain as Steve Jobs will not be giving the Keynote speech at the final circling of the wagons.

The reasons given by the company were clear. Apple's too big now and too global to succumb to the whims of trade shows. Granted the corporate speak was a little more amiable.  With iPhone sweeping the globe, the AppStore a certified hit and Mac's selling in record numbers in a multitude of demographic and geographic segments, the company is actually right on the money.

The rumor-mills and press brigades will be sad to see the company go from the spotlight of MacWorld, but if this year has been any indication Apple continues to innovate and send out their darling press invites for more intimate Q&A sessions to show off new products or services. There's nothing in today's announcements to suggest these will not continue either.

While this announcement will cause a bit of a sell-off, likely led by the lingering questions of Steve Jobs health, it is clear Apple is shifting the power structure, or more so the perception of the power-structure of the company. The last press events have seen Jobs take a much smaller role in presenting and explaining. Even though I feel Apple is a much stronger stock and company than say Microsoft, I do see Apple taking a similar approach in moving Jobs into a "Chief Apple something" role in the future so that the company can be eventually transitioned with someone else as CEO.

Yes Jobs is a huge part of Apple's uprising and a huge part of the vision of the company, however with its market position, its small (albeit growing push and need for the enterprise) and its multiple product platform (iPods, computers, phones, music distribution, application distribution etc.) and its massive cash horde the prudent thing to do would be to position this "flier-momentum" company into its next phase of growth on a more even plane.  And that's shifting away from shows, doing product releases and showcases on their own terms and moving along with other potential acquisitions.

All Apple faithful love Jobs for everything he has done for the company and I don't think this is directly related to his health at all, but rather a move to begin to transition the spotlight to others at Apple. The sheer shock from "change" is enough to send Apple lowered, but investors should stay confident for a stronger than expected 2009 and beyond for the stock and the company as a whole.

Disclosure: Author is long AAPL

Electronics a tough sell yet Best Buy stands by forecast

Oh to be a Electronics Retailer during a recession, roughly as sought-after a profession as 'Big 3 personal flight crew', after that first trip to Washington. But Best Buy (BBY) is holding on in the midst of turbulence while its main competitor has all but bowed out. With Circuit City Stores (CCTYQ) trading OTC and trying to stay afloat, BBY would seem to be serving for the match. If only customers would come to the stores and buy that is.

With profits down 77% year over year in the latest quarter it appears on the surface Best Buy is facing some troubles of its own. But the company is being run effectively despite consumer spending reports that are on record as the worst since the early 30s.

So to the numbers: Quarterly profits of $0.13/share ($0.35/share excluding special items) were better than expected. Analysts had the numbers pinned at $0.24/share excluding special items. Revenue also topped expectations at $11.5Billion vs. $11Billion estimated. For retailers the all important same-store-sales metric was watched closely and Best Buy numbers fell about 6% for stores open longer than 1 year. Now in this environment, a 6% drop has to be put in perspective and seen as a slight positive. Overseas sales rose slightly, fueled by growth in mobile phones. So, somewhere, somethings, have people buying. Nonetheless Best Buy is taking a cost cutting approach to share price appreciation, offering buyouts to thousands of employees and slowing store growth in North America and China. Best Buy hopes to cut capital costs by 50% over next year. Certainly ambitious!

For those workers who don't accept the buyouts, there will certainly be job cuts ahead at Best Buy Corporate. The outlook is much brighter for shareholders though, as cost cuts will certainly help profitability in a tough 2009 and the fact that Best Buy kept its lowered profit forecast in tact over the Christmas helped matters as well.

The company expects to meet its range of $2.30-$2.90 (a wide range to be sure for the year through February) and falls in line with analyst estimates of $2.47 for the year. The positives in this report propelled shares higher by $2.50 at the end, and the Fed rate-cut fueled shares to close higher by 18% ($4.21/share). This also notched the BBY P/E ratio to near 9, which is reasonable in most respects but perhaps not in this climate.

Nonetheless, the retailer should trade in a P/E range of high single-low double digits going into 2009, so while today's rise (and its recent climb from $17) makes Best Buy a less attractive on a valuation basis, the competitive landscape clearly leans heavily towards BBY, making it an attractive hold for when America rises from the consumer spending blues.

Those on the fence, it will likely be available for the mid 20s soon, which makes it a steal for the next year and a half.

Disclosure: Author is long BBY

15 December, 2008

Investor eyes to be on Goldman Sachs tomorrow

2008 will be remembered as the year Wall Street ceased to exist! The Investment Banking model essentially died with elaborate, excessive and downright dangerous investments in poor credit. The companies that have survived on their own, Morgan Stanley (MS) and Goldman Sachs (GS) had to change their business structure and take government money. A year to forget for all financial companies.

Write-downs have been aplenty, but somehow Goldman Sachs has been able to keep everything on the profitable level. While profitability has been in substantial decline for the firm lead by Lloyd Blankfein, Goldman was the one investment bank that could claim profits quarter after quarter. This time however, investors expect the party to end.

With Goldman on tap to report its quarterly results tomorrow morning, analysts are giving no chance of profitability by predicting about a $3/share loss. As bad as things were, Goldman was prior still expected to eek out a tiny profit. But with the market's latest downturn, the worsening of the US economy and the lack of business deals in a quarter marked with losses that eek has turned from black to red by those same analysts.

According to MarketWatch, analysts expect a $2.83/share loss for Goldman Sachs, while a similar number is seen from Zacks Investment Research, with an average loss of about $3.30/share expected. Goldman shares have been on a steady decline, but were propped from lows in the $50s to a near term high of about $80. Investors should note that Goldman has surprised before, and can surprise again. The first quarterly loss during the public history of the company seems inevitable via the collective of analysts but the size of the loss will determine Goldman's direction going into 2009. With shares sitting in the mid 60s, a positive (relatively speaking) result may spark shares back to near term highs.

While economists and market analysts expect 2009 to be tumultuous to say the least, the common perception is that the latter half of 2009 will proliferate a US recovery, spurred by President Barack Obama's infrastructure initiatives and a return to typical lending practices for the major banks. Goldman will be primed for a recovery rally with the market, but as it is transformed further into a bank, expectations will be muted for sometime to come.

With that in mind is Goldman a good investment? A resounding yes! The smartest folks on Wall Street work for a company that has seen all but one of its competitors go bankrupt or be bought up by larger financial institutions. MarketWatch analysts have an average target of $135, but $100 may be more reasonable over 2009, based on market recovery, which potentially finds Investors of Goldman netting a 54% gain.

The competitive landscape has surely changed but Goldman was left standing. It had always been the strongest in its field, and after investors digest tomorrow's results a case can be made whether it will continue to be.

Disclosure: Author owns GS

09 December, 2008

Markets pause for breath after 2 day rally

Spurred by low valuations, the prospect of the Auto bailout culmination and President-elect Barack Obama's massive infrastructure plan, stocks finished last week on a high and continued that trend Monday, tacking on about 700 points for the Dow during the 2 day span.

A new wave of profit warnings and profitability downgrades have turned Tuesday into gut-check trader's day with the Dow hovering lower by about 250 points into the close. FedEx (FDX) plunged today after its forecasts took a hit due to current and forward looking economic troubles. FedEX shares were off about 14% after citing "significantly weaker" economics and talking about profit expectations that were lower than Wall Street was anticipating.

National Semiconductor (NSM) predicted a quarterly revenue drop of 30% and Texas Instruments (TXN) followed up by reducing internal quarterly estimates for Revenue and Profit. NSM and TXN were able to shake off the negativity and closed higher by 13% and 4% respectively.

This certainly goes to show that even though recovery is on the radar and the minds of traders, the valuation game will still be played on a day to day basis and stocks, which appear cheap, continue to downgrade their own profitability.

Disclosure: Author holds no position in above mentioned companies

03 December, 2008

Apple's holiday quarter shackled by Good problems, high iPod demand

When Steve Jobs came on Apple's (AAPL) conference call the last go-round it was designed to put analysts and investors at ease. That it did, his presence calmed questioning and glossed over a then shockingly broad and conservative forecast for the holidays: Earnings of between $1.05 and the $1.30s per share of Cupertino fruit.

Introducing the Non-GAAP method for earnings was equally brilliant and needed, as analysts couldn't shake their traditional valuation methods of the company. The curve ball thrown by the iPhone's subscription accounting led to steady devaluation of the company stock, which then was taken brutally by the whirlwind of economic turmoil alongside the market. Bullish Cross (Link) did some of the most notable work recreating Apple's earnings for FY2008 putting "actual" earnings at around $7.50 vs the $5.36 reported in the standard GAAP way. A difference of over $2/share in earnings and about $40/share in price at a P/E of 20.

However, this subscription method which undervalued the company tremendously during the early stages of the Bears, will help propel the company forward in the troublesome economics that exist today. Steve's worker zealots could completely take the holiday months off and still count 1/8th of a year and half of the incredible selling iPhone revenues and earnings. But Apple folk aren't taking any time off and the expanding retail chain will be busier than ever this Christmas. Unfortunately it appears some of the company estimators forgot 2 important facts when placing Christmas build orders.

1) Apple products are hotter than ever and
2) People buy iPods as gifts no matter what

According to some work by long time Apple researcher Shaw Wu, Apple's experiencing wide shortages on iPods of all shapes and sizes. While analyst work can fall into several quality categories, most notably the work done by Gene Munster is always carefully calculated, checking shipping lead times on several web sites just doesn't qualify as ground-breaking research. It does however provide a simple barometer for demand if the sites you're checking happen to be some of the biggest in America (Sites like Amazon.com, Best Buy and Wal-Mart). As an aside, Wu, has been a constant on the Apple analyst providing reports to clients almost constantly.

When these retailers are showing shortages of select colour/storage combinations and long shipping times of other models it does qualify as cause for concern. Did Apple ship pessimistically along the lines of its forecast? Did it simply underestimate strong demand for its ubiquitous music players?

I believe the answer lies somewhere in the middle. Apple is being incredibly prudent in its cost controls these days, and after revealing to the world its new line-up of MacBook and MacBook Pro laptops and their new all-aluminum design process the R&D costs are aplenty. Couple this with the on-going work on the next version of its operating system OS X Snow Leopard, which is expected in early-mid 2009, iPhone/iPod Touch continuous software updates and whatever surprises are in store for MacWorl 2009 in January and some cost prudence is almost a necessity.

The company may have overshot it though in assuming current economic conditions would make the $230-$400 iPod Touch a tough sell. The reality is that the "Funnest iPod Ever" is performing exceptionally well and there are several reasons for it. Apple's online store has plenty of stock and has the Touch as a top seller. The App Store however, is near the top of the list if not at its peak of reasons to get the Touch. The Software marketplace pushed heavily by the iPhone in all adverts is also on and available for all iPod Touch devices, making the device far more than an iPod. As for the other models, iPod Nanos and Shuffles continue to make a great stocking stuffer year after year.

Amazon.com's list of top selling MP3 players is dominated by Apple, currently holding the top 10 spots, and 15 of the top 16. Dominance like this is incredibly hard to achieve, and even harder to maintain, as Apple has now done for the last several years. So with that research in hand, Wu's estimates call for 21Million iPod units to be sold, a little short of last year's record of over 22Million, but nonetheless a very successful holiday given current economics. Given the premise of over 20Million iPods, driven primarily by iPod Nano and iPod Touch devices, the logical thing for analysts to do would be to project a very healthy stream of iPod related revenue and earnings in the quarter.

Analyst conclusions on iPhone sales also represent the type of growth the company saw in the early years of the iPod rise. Last year's 2Million+ unit number is expected to nearly triple through the combination of in-store activations and iPhone specific gift cards. Corresponding AppStore sales will also be ready to incline in step, thus its safe to say the phone division is on solid ground for 2009. If China ever gets works out, the addressable iPhone market could potentially growth by another 600Million users.

So, all that's left for Apple to do is to prove the new Mac portables are as popular as they've started out being and you've got a company that will spend another conference call giving each other "corporate-speak" high fives, trying to step around analyst typical questions on how Apple bucked all these devastating economic head-winds. Year ago earnings of $1.76/share seemed so far away during the conference call and its accompanying guidance. With these latest analyst reports there is plenty of room for the consensus estimate to move higher.

The Vegas Line stands at $1.46 and I expect it to move to the 1.50-1.60 range as Jolly Saint Nick nears.

Disclosure: Author is long AAPL

02 December, 2008

Sears Holdings: Retail Blues equal Stock Greens?

A consumer environment at the apex of, what can only be described as the very definition of fragile doesn't lend itself to positive business results at retailers. Specifically retailers which struggled even before the US went recession-official. Sears Holdings (SHLD) was one of those retailers. And after this morning's quarterly results it still is.

While not suffering the doomsday fate of electronics retail specialty chain Circuit City, the department store giant and its approximate army of 3800 stores reported a loss of $1.16/share ($146Million). Hedge Fund impresario Edward Lampert was known to make magic happen with the cash horde at Sears in years prior, however in today's economic and financial climate it is getting harder to keep ahead of the curve. The company did make some gains in hedge transactions with Sears Canada but it also took a charge with the closing of 14 'under performing' stores.

Excluding all special items the loss ran to $0.90/share, which still almost doubled the analyst predictions of a loss $0.49/share. Revenue was down year over year by 8% ($10.7Billion) and the all important same-store sales metric was down over 10%. Sears did however do some trimming around its bulging edges, chopping almost $600Million in inventory and installing another $500Million share buyback. And yes, those that have followed SHLD's share price descent know all too well about these buyback announcements. They, the buybacks, come practically quarterly as Lampert and co. try to resurrect a failing share price and a company that still sits on over $1Billion in cash.

Forecasting is proving to be an increasingly difficult endeavor for retailers and Sears is no different. Offering the public the unsparing sentiment that previous forecasts are 'no longer relevant'. The economic difficulties just add to the struggles of an already battered Sears retail operation. Going into Christmas and 2009, the analysts covering the company aren't ready to sell a turnaround story just yet. Forecasting earnings of $1.10 on average for next year, Sears sits at a forward P/E ratio in the low 30s. Far too high in this climate, as general merchandise competitors Wal-Mart (WMT) and Target (TGT) have forward P/E ratios in the 15 range. On the lower and higher end of clothing and appliances, J.C. Penny (JCP) and Home Depot (HD) respectively, sport forward multiples of 13.

Why does Sears deserve such a premium? Perhaps the market knows, as it has been able to stay irrational for much longer than anyone anticipates, but today all these Retail Blues have turned into Stock Greens for Sears. SHLD has rebounded with the market to the tune of 13% to price around $36/share in today's trade. Sears can and surely will survive the economic turbulence of North America, but the question for Investors is where can it possibly go?

To put it in perspective, Sears as a retailer, is executing far less successfully that either Wal-Mart or Target, and would have to beat estimates by 100% in the next year to be valued by the market the same way. But Sears is not just a retailer some will say, its also a holding company! Sears as a holding company, doesn't appear to be doing much of anything of late, except of course buying shares of Sears.

This one will continue to under perform its peers in the year to come.

Disclosure: Author holds no position in the above mentioned companies