Is anything worth owning in the Auto Industry?

In short, with today's high Oil prices and report after report from the big automakers cutting production, the answer's a resounding No! There's simply nothing compelling out there valuation wise in the Automotive space.

Ford (F)? Virtually slashing it's popular Truck line in half with delays and production cuts, and the only car worth talking about, besides police departments contracts, is the Mustang which now has been stagnant for almost half a decade.

General Motors (GM)? $40Billion in the hole and counting... Not to mention probably the ugliest set of cars in America goes to Chevrolet. Truly incredibly uninspiring automotive design.

Toyota (TM)? Actually the only compelling value out there with a P/E of 9. However, whispers of US sales expectation management are seeping through the proverbial cracks, which will put some serious pressure on upcoming earnings reports. The company has the clout of being the "leader" in the Hybrid segment going for it but could the Prius possibly look any worse, and if the respectable Jeremy Clarkson of Top Gear is to be believed, in a race the Prius provided worse fuel economy than a BMW M3! (*Obviously the car was not run under normal conditions*)

Toyota at levels below $100 is one to put on the watch list, however times will continue to be rocky in the Automotive segment as a whole until Oil speculation subsides and consumers instill in themselves a renewed confidence to go driving again.

Of the companies traded in the US, the only one continuing to do reasonably well is Honda (HMC). Is it a big secret that it is up 4% Year to Date while others are off significantly? F (-20%) GM (-40%), DAI (-30%), TM (-10%).

Honda's secret sauce? Fuel efficient well engineered cars, that have very good engines, are impressively reliable and most importantly, don't make you loathe getting into them every single morning. It isn't hard to understand that successes like Accord and Civic, year after year show up on best lists and best seller lists. The Acura luxury line continues to produce winners as well, but a watchful eye on the headlines is a necessity in this sector.

With Toyota starting to whisper statements that US sales targets will be "tough to meet" it doesn't require multiple graduate degrees to surmise Honda may be in for some dry spells to come. While at this stage Honda is a Hold in this book, closer to $30/share is an attractive entry point for an innovative car company, that yet sees almost none of the corporate stumbling blocks faced by its US peers and has a big enough worldwide presence to funnel out good small cars all over Europe and Japan.

Disclosure: Author holds no position in the above mentioned companies.

Update: Thursday June 26, 2008. Statement to clarify Chevy as a division of GM

Banks continue decline, Job cuts at Citigroup, QMNM Day Trade

Markets Monday couldn't hold onto opening gains and slide lower before finishing roughly flat, as Energy was the only real green sector and continued pressure was put on the Financials. The Dow Jones and S&P ended flat while the Nasdaq was lower by almost 1%.

Energy's rise made up for further weakening Financials today as Banks and Brokerages were mainly to the red between 2 and 5%. Bank Of America (BAC) was hit with selling as it closes in on finalizing its purchase of troubled Mortgage lender Countrywide Financial (CFC). Continued worries at Citigroup (C) grew as reports surfaced of potential job cuts in the bank's Investment Banking division. As much as 10% of that workforce could be getting walking papers. With the stock already under pressure, Citi dropped another 4% to rest just 50 cents shy of its 52-week low.

On a brighter note, Investors buying in now are sitting on a 7% yield, provided no further dividend cuts are in store, and there's certainly no guarantees on that front.

A very interesting and lucrative day trade also was developing today with Quest Minerals & Mining (QMNM), a penny stock listed as an OTC issue. The company virtually doubled at the open to $0.03/share as the Kentucky based firm over the weekend announced its plan to get into production imminently with some of its energy and mineral properties, specifically its location at Pond Creek. The stock stayed around the $0.02/$0.03 levels as volume surged in the security, however towards the end of the session, a secondary flood of bidding pushed the issue to close at $0.07/share, making the day's gain over 400%!

Trading and Investing in penny stocks is certainly not the recommended path for those just starting out or learning the investing ropes, but it can be a lucrative proposition at times, and with the volatility inherent in the energy and materials sectors, it can not be overlooked that in this day in age, an increasing amount of small companies can truly make market-noticing breakthroughs specifically in these areas of business.

Disclosure: Author owns C

On the heels of Lehman losses, Goldman shines again

As the turbulent and tumultuous times that are the Investment Banking earnings season move from just-around-the-corner to in-full-swing, all Wall Street eyes were on the leader of the pack. Goldman Sachs (GS). With the market continuing to see credit losses dragging down the performances of the Financial sector companies, there wasn't much to look forward too, and even less to be optimistic about.

Lehman Brothers (LEH), reported the first quarterly loss in the company's public history, and it was fairly hefty at that, $2.8Billion! Now that the cross-hairs are on Goldman, it was up to the darling of the Investment Banking world to reassure the industry all is not lost. Profits and Revenues were expected to decline at Goldman Sachs, but the company's ability to maneuver through the credit crisis gave it the ability to keep its head more than above water, while rivals continued to stumble.

Goldman's results were better than expected, despite year over year declines, and the executive branch at the head of the organization are singing their own praises. This little ditty from Lloyd Blankfein pretty much sums up the atmosphere around the sector and Goldman itself:

"Given the difficult market conditions, we are particularly pleased to be able to report strong results for the second quarter."

So you know it's party city down at the Goldman camp (Let's hope no one invites Henry Nicholas).

GS delivered profits of $2.09Billion, which equates to $4.58/share, down 11% from last year. On the top line, the drop was only 7.5% to $9.42Billion. Considering analysts were expecting $3.42/share on revenue of $8.74Billion this was indeed a substantial earnings beat. After an initial jump Goldman shares are coming back to the general market and as this company sits in the 180s it's time again to ask, just what the possibilities are for a trade from here?

Granted Goldman's Price to Book ratio has been notoriously higher than its peers at around 1.9, but that doesn't make it expensive. The industry, through this downtrend and the losses is in a time of consolidation and new metrics. In fact, Goldman, on Price to Book is inching closer to the sector near the high 1.7s. Since P/E ratios don't mean much if they're negative, for some other Investment firms, analysts need new ways of valuation. But GS, has always been on a profitable path, and its trailing P/E now stands at 8! In a perfect world this ratio would be at 12 and it's forward number about the same.

An opportunity exists over the next year or so, to truly make a splash with Goldman Sachs! The cream rises to the top as they say, and a year from now, when GS is looking at trailing earnings once again getting $20/share with a trailing multiple near 12, shareholders getting in the company at this $170-$180 stage will inevitably be 30 to 40% to the good.

Disclosure: Author owns GS

Apple Aims for the Fences with $199 3G iPhone at WWDC

Apple's (AAPL) Annual Worldwide Developer Conference is typical fanfare for just that, Developers, but this year, all eyes were focused on the iPhone, both device and software platform. Steve Jobs took the stage with typical Jobsian fanfare and proceeded to showcase the future of the mobile development platform. Eager gadget connoisseurs, Apple fanatics and casual observers have been known to be caught up in The Steve's Aura, and while the typical WWDC is geared toward the most technically proficient computer folk, the rabid waiting for a faster iPhone had to come to a head at some point.

That time was now, as Jobs showed off a sleeker 3G+GPS iPhone that will be available in 22 Countries come July, with an additional 48 Countries seeing the device later in the year. The remarkable thing was not the expected iPhone announcement, the remarkable thing was the price. $199 for the 8GB model with a 2 year contract. It's a price point the mass market was waiting for, and should spur incredible demand for the must-have product. Apple's goal of 10Million units sold by the end of the year, seems ever closer now, and as Apple's shares dip to the $180 mark, it moves the company from "attractive valuation" closer to "is it really this cheap?" levels.

Not only is the 3G, GPS equipped iPhone coming, it is bringing with it the Application Store and open Software Development Kit. Apple showed off several applications at today's event and plenty more can be expected as the days roll off the calendar. Reporters of all shapes and sizes, in publications both big and small, are clamouring over the new "open" iPhone and the possibilities that the SDK promises, hailing the device and the platform as the next wave in computing. While customer's of iPhones and iPod Touches will undoubtedly be happy with the new selection of applications for their devices, Apple also stands to gain plenty keeping a 30% cut of all sales from the App Store. With a few games shown off today priced at $9.99 it stands to reason, the App Store will give Apple another supplemental Revenue and Profit stream.

While 3G and GPS were the two things consumers were clamouring for in the iPhone update, business users wanted the device to be secure, sync with their offices and provide full enterprise support & functionality. With the newest iPhone software, slated to be released in early July, Apple's answered the most determined business user requests. Exchange support for e-mail, calendar and contacts, various other networking protocols, and remote locking down and wiping of devices. Apple had previously outlined these features in their Roadmap event, but with the software available in a month, the time for business is now.

A Stat from the keynote: 35% of Fortune 500 have been testing the iPhone's enterprise software and SDK. That's a substantial percentage of businesses who see use and value in what Apple's device provides, and if even a fraction of this percentage produces a company wide roll out, Apple will have the clout to really compete with RIM's Blackberry on the business front.

As the "iPhone killers" roll off the assembly lines of competitors, Steve showed once again today that Apple still carries that design swagger, and holds such sway over the media, that each move is written about, rewritten about and scrutinized over till the next such Apple special event. When was the last time a phone from Samsung, LG, Nokia or Motorola was mentioned in thousands of news stories?

With today's market, the high P/E consumer sector, especially technology gadgets, is one most traders are very cautious about and with Apple sporting a Forward P/E of about 30, there has to be incredible growth to justify the price tag. Lucky for Apple holders, that growth is there, and has been proven time and again, regardless of economy. In time, those patient with the market, and Apple, will surely be rewarded, as today's iPhone announcement becomes tomorrow's iPhone worldwide roll out and at $199 to start, that's going to be a deal too incredible to pass up.

Disclosure: Author is long AAPL

Nico Bellic stars in Take-Two Interactive's Expectation Beating Q2

While it may seem like eons ago now, that Grand Theft Auto 4 (GTA IV) was on the minds and in the hearts of every entertainment writer, blogger, Guiness World Record Book updater and most importantly gamer, the title is still on the books of Take-Two. PS3 and Xbox 360 owners the world over platooned into stores to own what would become the biggest video game launch in history.

With first day sales of $310Million, Take-Two Interactive (TTWO) shattered previous records for a video game launch. Almost 6Million copies sold virtually immediately and by the end of May the tally stood at 8.5Million units. The game's big star, the brash and vengeful European Nico Bellic has become a household name among that critical 18-29 demographic and Take-Two stands at the base of the mountain of its own Liberty City.

The success of the game pushed earnings beyond expectations (adjusted $1.52/share & real $1.29/share vs. $1.12/share expected) and sent Revenue skyrocketing on a year over year basis. Revenue jumped to $540Million from $205Million a year ago. The top line number handily beat analyst estimate averages of $499Million.

And all this while battling a takeover offer from Electronic Arts (ERTS). The EA offer stands at $25.74 a share, currently, with Take-Two stock closing Thursday's trading at $27.65. Clearly there's a gap there and TTWO shareholders are waiting for one of two things. EA to raise its offer by $2 or $3 a share, or to pull the offer of the table completely. When EA initially launched its bid it was valued at approximately $2Billion, and with Take-Two's market stance at a now lofty $2.13Billion, something has to give.

I know what Nico Bellic would do in this situation, but that's neither here nor there. What is clear however, is Take-Two has an absolutely bombshell on its hands and the franchise will only expand as GTA V and GTA VI eventually come through the pipeline. Take-Two has the clout these days to demand much more from EA, but in fact it would be better off to do it alone.

Holding the title of "smaller game studio" underdog is revered in the world of gaming and nothing spells doom for hardcore gaming enthusiasts like their favourite 'chic' development houses getting swallowed by conglomerates. The worst thing that could happen to the golden franchise of GTA is to have it being developed on a yearly basis with small tweaks and thrown on shelves alongside the latest iteration of Madden.

Nevertheless, the ball's in Take-Two's court, and as next quarter's expectations reveal, the company has plenty to keep smiling about. It forecast earnings of $0.45 to $0.55/share for its next quarter, which was a big step up from analysts which centered around $0.32/share.

Now all that sounds rosy, but here's where it gets a little dicey and strange for Investors. Q4 expectations from the company came out at $0.10 to $0.20/share versus analyst estimates of $0.46/share. With revenue numbers falling right in range of the averages for both quarters, the question has to be asked, where are the earnings going later in the year? That's a solid conference call question if I've ever heard one. Nevertheless full year profits of $1.65 to $1.85 per share, bested previous estimates of $1.35 to $1.65.

It's clear the EA offer is still too low and Take-Two has every right to holdout for much more. EA itself sports a healthy Forward P/E ratio of 53! Applying even a 30 forward P/E for the now uber-growth Take-Two gives it a price of $55/share, twice the current offer price. Scaling things back to only a 20 forward P/E for Take-Two sets a price of $37/share.

Shareholders should revolt against the EA offer till it is somewhere in the $30s, then management should start to listen to what EA has to say. With the success of GTA and the impending movie development deal for its BioShock property Take-Two has the swagger, the clout, and the results to demand more, much more. It's in the game!

Disclosure: Author holds no position in TTWO or ERTS

Verizon looks to a Future as the Biggest Carrier with reported Alltel buyout

The deal, which is reported to be valued at $28.1Billion certainly isn't a drop in the bucket for Verizon (VZ), but it does show just how aggressive the mobile space will be in the years to come. With an estimated 3Billion people with mobile phones worldwide, the subscriber growth curve is certainly getting to its last legs, if it isn't already there.

To paraphrase the famous Narcotics Trafficker, Stringer Bell, from the wonderful David Simon created HBO drama The Wire.

"That guy we got down at the pit working for us, now he's got the one cell phone I gave him for re-ups, and he's got another cell phone only for when the girl calls, now if a low level guy like that can have 2 cell phones, how you gonna sell any more phones? That's market saturation right there"

The above was obviously cleaned up and paraphrased, as HBO is well known for cutting edge programming and not being shy when it comes to expletives. The point is still very valid. Not every customer in the country is going to have multiple cellular phone accounts, so saturation is a big concern for Verizon and its competitors AT&T (T) and Sprint (S). So with subscriber gains mainly coming out of the pockets of other carriers the way to increase the top line is to purchase smaller regional carriers, or have the breakthrough product that most users will want and will need to have.

A lot has already been written about Verizon's unwillingness to work with Apple (AAPL) and secure the iPhone rights, essentially handing the break-through device to rival AT&T. More recently however, the company has been on the soapbox about going open with its mobile phones, even including the possibility of using Google's (GOOG) Open Source Android mobile platform on some phones. As customers in the US grow, with regards to their mobile phone usage and feature expectation it'll be up to the carrier to foster an environment of functionality, ease of use, and customizability. With the industry headed in that direction, the playing field should be level.

So when Americans emerge in a future where cell phones will be open, customizable and feature-plentiful on a seemingly level playing field, how does a carrier win? It's simple, have a bigger stick than the other guy! And in the world of mobile phones, that means more subscribers on better, faster networks. Verizon's got the network part down, but was playing second fiddle to AT&T when it came to US subscribers. With this deal, not any more. Combining Alltel's base with Verizon's will make VZ the biggest carrier in the US, couple that with it's recent win in the 700Mhz Spectrum auction and Verizon is looking to secure the face of the Wireless Nation for the next 10 years.

Alltel was taken private just last May at a price tag of roughly $27.5Billion on a combination of debt, equity and a tremendous amount of leverage. It seems the private equity partners, TPG and Goldman Sachs Capital Partners, were looking to make a quick buck here and get out while they could with even the slightest of profit, even though at current levels Verizon would be paying a reported 8 times earnings, while last year's private deal fetched 9.2 times.

While the price tag will be debated Verizon can certainly justify the purchase as it builds for its future with as many subscribers as it can. And on top of that, it now has a whole new database of addresses to send letters to recommending an upgrade of existing Internet and Television connections to Verizon's high speed FiOS, the fiber optic solution VZ has spent tons of time and even more money rolling out across the country.

Update: June 5/2008. Official aggregate deal price of $28.1Billion

Disclosure: Author is long T, does not own VZ or S

Up and Down Wednesday for The Street

American markets saw both ends of the spectrum on Wednesday as a flurry of economic data and commentary were on Trader minds. Oil Inventory data was out for morning trading and the fall of inventory by 4.8Million barrels seemed to initially lead the markets higher. Tech was in the drivers seat for most the day as the Nasdaq finished higher by almost 1%.

But by mid-day the party was over and the Financials and Energy led the decline. Oil prices continued to sell-off with Crude prices fell to $122/barrel. Fed Chairman Ben Bernanke spoke with some conviction about the Fed's view on inflation, and in the world of rising food prices and high oil there should be no surprise inflation is on the mind of the Federal Reserve.

Traders sold off heavily in the early afternoon after digesting the economy data and commentary leading the Dow Jones average from a gain of 100 points to a 50 point decline before ending the data just about at the flat line (.1% lower).

For the financials, this stance of 'inflationary concerns' doesn't bode well as traders were already exhibiting some heavy selling pressure on the sector. With the latest round of earnings coming from the sector and several executive shuffles (see Wachovia (WB)) there doesn't seem to be much optimism on the Street for a financial turnaround in the near term.

More Trouble Brewing at Wachovia after CEO ousted

Losses, losses and more losses appear to be the name of the game at Wachovia (WB). Quarter after quarter of losses and increased write down provisions, analysts and investors had hoped the worst had come and gone for the bank. With shares down almost 60% from their 52-week levels, sooner or later the patience well will run dry and for Wachovia's board, that day was today.

After claiming dividends would be safe and then subsequently cutting them (Link) Wachovia showed further chinks in an already severely weakened armor. Today's chink, the axe for CEO Kennedy Thompson. Analysts immediately started speculating that the worst is yet to come and 2nd quarter numbers will show another substantial loss. The company gave a statement that it isn't "in crisis" but shareholders have heard that for the last 2 quarters and having the board oust the CEO in an environment where economic data points have started to slightly rebound certainly makes a bold counter-point.

Analysts have also begun speculating about take-overs or buyouts with respect to Wachovia, but with a $50Billion market price tag, Wachovia doesn't seem the most attractive take over target. However, the credit crisis and sub-prime collapse have crippled some very respectable names over the months and if there's any truth to this speculation shareholders may indeed stick around in the hopes of getting an offer that would boost their holdings near the $40/share range.

It is hard to see in this environment a suitable bidder, although JPMorgan (JPM) seems to make the most sense. Coming off its buyout and rescue of Bear Stearns, JP could take another run in the regional banking sector by trying to get Wachovia on the cheap. However, all signs as of today seem to point to further losses and JP could find itself with Wachovia in the high teens after its next quarterly results hit the wire.

The Financial turnaround will come eventually, and it wont be quick. The major US banks are like tanker ships that can't turn on a whim, so Investors should feel solace and knowing they may get several chances to catch the rebound. Today's announcement at Wachovia shows that this still just isn't the time.

Disclosure: Author does not own WB