Daily Archives: January 2, 2007

As Car Sales Slump, Can One Of The Big Three Pull Out Of A Flat Spin?

Stocks:  (GM)(F)(DCX)(TM)(HMC)

In flying, going into a flat spin is about the worst news a pilot can get. As the aviation spec books say: "It is very difficult to recover from a flat spin because there is little or no smooth airflow over the control surfaces"

Well, the Big Three are just about there. Experts predict that December will be another tough month for the domestics in their home market. Sales should be particularly rough for Ford. GM and Chrysler are expected to be little better than flat with December of last year. Toyota and Honda may well have more market share gains.

Part of the solution to the problem, according to the conventional wisdom in the Motor City, is that cutting back on fleet sales and large incentives may drive down unit volume but each car sold should yield a better margin. The US car companies end up being smaller but modestly profitable. Or, so the theory goes.

The real question for Wall St. is whether any of the three firms can surprise the markets by getting its share and operating margins to move up. Ford and GM stocks probably have a poor 2007 factored in. That would be a year with dropping market share and large cost cuts.

But, if everything happened as forecast, no one would ever make any money in the market. There would be no surprises. The market woud be omniscient and completely efficient.

The only company that would seem to have the management to pull off real product and sales improvement is GM. Self-proclaimed car wizard Bob Lutz has been the company’s Vice Chairman. He is the "car man" at GM, and designing new, successful cars falls to him.

Lutz is engineering the launch of new SUVs and cars for brands like Chevy. If he works some magic, GM could be the car company surprise of 2007. If not, he’s 74 and can retire.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 2, 2007 – 8:00 pm in Autos

When You Go Out Of Business, You Can Always Sue Google (GOOG)(AAPL)(MSFT)

Intertainer, which was one of the pioneers in delivering movies over the internet has sued Apple, Google, and Napster. Intertainer was so early into the internet movie business that it folded. Or, maybe it was just badly run.

Intertainer claims that the companies listed in its complaint violate patents to its digital entertainment platform.

The idea that Intertainer could collect something on it suit is not entirely insane. Creative Technology brought and IP suit against Apple for certain interfaces on the iPod. Creative ended up collectng a large settlement.

Burst.com, a defunct server technology company, filed IP suits against Apple and Microsoft. Microsoft settled the suit for $60 million.

The only way Intertainer will get any money from its business is to win one of these suits. Some law firm must be willing to take some risk on that.

You never know.

Douglas A. McIntyre can be reached at dougasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 2, 2007 – 7:32 pm in Technology Companies

Semis Surge (BRCM)(SNDK)(TXN)(ADI)

A lot of companies in the semi portion of the market have taken a bit of beating. Texas Instruments and Sandisk are on that list.

But, there may be some light and there may not be a tunnel. Semi sales are doing well.

Semi sales reached $22.7 billion in November. That is 11.3% better than November 2005 figures and is also up from October 2006. Sales of digital signal processors lead the way with a 12.3% year-over-year increase.

Theory would say that companies like TI and Analog Devices would do well on the news.Some of Broadcom’s products should also do well. But, gross sales numbers do not tell the market much about discounting or margins.

Who knows? With shares prices down, maybe stocks like TI and Broadcom will have a revival.

Anyone see an evangelist?

Posted on: January 2, 2007 – 1:36 pm in Semiconductor

Citi Downgrades Amazon: Too Late (AMZN)

Citigroup downgraded Amazon from "hold" to "sell" saying that the valuation of the company was too high and could not be sustained. The bank is also concerned that Amazon cannot maintain margins, and cut its price target for the big online retailer from $35 to $34. The stock now trades just above $39.

The question this raises is where the Citi brain trust was on November 15 when the stock almost touched $43. Or, on November 22, when it reached $42.98. The stock is obviously down about 8% since November.

So, where was Citi then?

Douglas A McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 2, 2007 – 12:08 pm in Internet

Housing Prices May Not Be Getting Better

At least some of the economists surveyed by The Wall Street Journal believe that problems in the housing industry will "abate" in 2007. Anecdotal information suggests otherwise.

Big home builder Lennear (LEN) cuts its fourth quarter estimates by as much as 46%.

Maybe someone is wrong.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 2, 2007 – 11:37 am in Housing

Big Pharma Whines About Generics

If you can’t beat them, cry about them. the chairman of Sanofi-Aventis of France recently complained that generic drug companies were making product in poor countries where costs were low and then selling the drugs in wealthier companies at a profit.

Big pharman executives need to be a little more careful about what they say, lest it be turned back on them. There is a broad perception that these companies with their patented drugs to fair too little to supply them to the poor in underdeveloped countries. Strong enforcment of their patents, and, therefore, profits make the issue of inexpensive therapies all the more acute.

Off the soap-box before someone pushes you.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 2, 2007 – 10:00 am in Pharmaceuticals

Advice for Google Investor Relations

Is Google a good or bad investment after it closed the year out at $460.48?  Google shares closed out 2005 at an adjusted $414.86 but closed as high as $471.63 in January 2006.  The high and the low for the year $513.00 and $331.55 respectively.

The Financial Times recently rehashed how YouTube software is still a threat to Google’s plans and youcan see what Doug of 24/7 Wall St. keyed in on that here too.

Motley Fool said on December 27, 2006 that it may be the worst stock for 2007.

Calling anything bearish on Google can create a near riot in the investment community.  You can take a look at the November search rankingsfrom Nielsen/NetRatings in this link and see if you think the glorygrowth has already happened or if any leveling off was merely a blip.

My partner recently ran something asking if Google’s growth has run out of runway. 

Everyone knows that Jim Cramer still loves it, although he even said it’s asleep until after the new year.

Most of the analysts that follow the stock are positive and anaverage price target is close to $550, depending on which analysts youcount in a consensus. 

One thing is for sure right now in my opinion: If GOOG announced astock split and went to a normal share pricing with say a 5-1 stocksplit or even a 10 for 1 stock split, this would be a differentdiscussion and we could all move on beyond "How high Google’s share price is" and we could all finally discuss the stock’s growth prospects other than some late 1940’s archaic belief that the sound barrier was unbreakable.  There is merely too much focus on a HIGH STOCK PRICE.  Idon’t have any dogs in the fight either way, but much of the realdiscussion and criticism out there seems to be based on this $500mark.  Most of the smaller investors out there think the stock is tooexpensive to buy.  After all, if a small investor wants to invest $5,000 they will think about investing elsewhere because who out there wants to buy 10 shares of stock.

So, get the Google management to use 2007 as "The Year Google Split Its Stock." This won’t change the company fundamentally at all, but it mightactually help even sophisticated investors look at the company easier.  GOOG shares have a market cap of more than $140 Billion.  Its trailing P/E is 58.7,and with the street looking for roughly $13.75 in 2007 earnings it hasa forward P/E of 33.6.  For the sort of earnings and revenue growth thecompany has posted it just doesn’t look or feel expensive.  But a growth stock at $400 or $500 sounds expensive and looks expensive.

Dear Google Management: Split your stock so the investment communitywon’t be so hung up on the share price. Most people get it, but thereare too many who are just hung up on the stock price. Period.

Feel free to make a prediction and send it in: Will GOOG the stock be at $600 or $300 at the end of 2007?  Will Yahoo! recapture losses to Google?  Will AOL win back more and more of the Internet pie?  What will be the biggest Internet and media merger merger in 2007?

Jon C. Ogg
December 29, 2006

Jon Ogg can be reached at jonogg@247wallst.com for emails.  He does not own securities in the companies he covers.

Posted on: January 2, 2007 – 7:01 am in Internet

Global Auto Report: No Good News For Big Three (DCX)(GM)(F)(TM)(HM)

Scotia Economics Global Auto Report is predicting a flat 2007 for worldwide vehicle sales. Units in mature markets like Canada, the US, Western Europe, and Japan could actually attriite. Sales in growing markets like China and India should continue to rise.

In general, the news is not good for the large US automakers. GM is doing well in China, which should help it in 2007. But, all three of the large US car companies are losing share to Japanese rivals like Honday and Toyota in the critical North American market, a market that may shrink this year.

Ford and Chrysler will not have a big enough presence in China or India to offset problems in their home market. GM will get some manner of help from sales in Asia. But, Ford and Chrysler need it more, and that won’t happen.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 2, 2007 – 5:57 am in Autos

AT&T’s Advertising Pipe Dream (T)(BLS)(SIRI)

Perhaps the revenue that AT&T gave up in backing off charging large websites for their traffic to get the FCC to approve its BellSouth merger will be made up by it plan to charge for advertising in cell phones and internet service.

Not likely.

AT&T believes that growth from its big wireless unit, Cingular, and its new advertising placement model will help the big telecom to keep growing. The Cingular part of the argument makes sense and more and more customers add service, upgrade service and upgrade calling plans.

AT&T will let customers sign up for a bundle of internet service and wirelss service.

Putting ads on broadband service and cell phones is a dicey business. These are products that consumers already pay for, so their could be a backlash much as there might be if Sirius added marketing messages to paid satellite radio or its HBO added commercials to its programming. Customer do not want to, in essence, pay twice for their service. But, AT&T believes that advertising could drive several billion dollars over the next few years.

Dream on.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 2, 2007 – 5:46 am in Telecom

Europe Markets 1/2/2007 Barclays, British Air Rise

Stocks:  (BCS)(BP)(BT)(GSK)(PUK)(RTRSY)(UN)(VOD)(BAY)(DCX)(DT)(DC)(SI)(ALU)(AXA)(FT)(V)

Markets in Europe were sharply higher at 5.30 AM New York time.

The FTSE rose 1.1% to 6,290. Barclays was up 2.1% to 745. BP was up .7% to 571.5. British Airways was up 2.7% to 641. BT was up 2.1% to 307.75. GlaxoSmithKline was up .9% to 1356. Prudential was was up 1.6% to 711. Reuters was down .2% to 444.25. Unilever was up .7% to 1438. Vodafone was up 1.2% to 143.25.

The DAXX rose 1% to 6,663. Bayer was up .4% to 40.82. Daimler was up 1.8% to 47.64. DeutscheBank was up 1% to 102.37. Deutsche Telekom was up .6% to 13.92. Siemens was up 1.3% to 76.09.

The CAC 40 rose 1.3% to 5,612. Alcatel Lucent was up 2.3% to 11.15. AXA was up 1.2% to 31.04. France Telecom was up 1.6% to 21.28. Vivendi was up 1.8% to 30.14. ST Micro was up .4% to 14.13.

Data from Reuters

Douglas A. McIntyre

Posted on: January 2, 2007 – 5:36 am in International Markets

Media Digest 1/2/2007 Reuters, FT, WSJ, NYTimes, Barron’s

According to Reuters, Korean car maket Hyundai expects it global revenue growth rate to double in 2007 based on strong foreign sales and a higher mix of luxury cars. Oerall vehicle sales are expected to rise 9% in 07.

The Wall Street Journal writes that the new AT&T including BellSouth expects most of its near term growth to come from its Cingular wireless unit and advertising. AT&T will begin selling ads on mobile phones, TV, and internet access.

The Wall Street Journal reports that, despite stronger than expected December sales, Wal-Mart still has a great deal to do to convince investors that its US unit is recovering.

The New York Times reports that Avis will begin to offer service that can connect its car to Wi-Fi spots.

Barron’s writes that the need for more processing power in notebooks to run Microsoft’s Vista OS could help sales of AMD chips.

FT.com writes that there were a record $150 billion in delistings, mostly from the NYSE and London Stock Exchange, as companies went private.

Douglas A. McIntyre

Posted on: January 2, 2007 – 5:19 am in Press Digest

Year End S&P Data

From Ticker Sense

Now that the year is over for stocks, we updated this chart that we did last year that shows the percent of stocks in the S&P 500 that were down for the year, the % that were down more than their sector, the average change of all stocks in the index, and the average change of down stocks.  This year is unique in that there was a higher number of stocks that underperformed their sectors than in previous years, even though the average stock was up 13.37%.  This implies that the larger stocks in the sectors were the ones outperforming.

Spx2006_1 

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Posted on: January 2, 2007 – 5:00 am in Research

Seasonal Pattern Shifts

From Ticker Sense

With so much investor attention being focused on seasonal patterns over the last few years, we wondered what impact, if any, this had on the actual patterns themselves.

In order to gauge whether the patterns of the last fifty years are as strong today as they were several years ago, we calculated the average forward three-month return of the S&P 500 on each day of the year from 1950 through 2005, and then again using only the years from 2001 through 2005.

As the chart highlights, there appears to be some evidence that traditional patterns are moving up on the calendar. For example, the summer doldrums usually ended on July 30th when the average three month forward return briefly dipped into negative territory. Over the last five years however, the worst three month period for the market has moved up the calendar and now begins on June 29th.

Similarly, the best three month period for the market used to begin on October 28th. Over the last five years however, the best three month period for the market has started coming a little earlier (October 9th).

Applying these trends to today, we find that longer-term, the market’s return over the next three months averages about 2%. Over the last five years however, as more investors have anticipated and positioned themselves for the Santa Claus and New Year’s rallies, the market has become less generous, as average returns are now flat.

Seasonal_patterns

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Posted on: January 2, 2007 – 4:58 am in Research

2006 Stock Performance

From Ticker Sense

With 2006 officially in the books, we analyzed the best and worst performing US stocks of the year. In the chart below,we divided the 4,000+ US stocks into deciles based on market cap and calculated their average performances.

As the chart illustrates, this year there was no clear decile which outperformed all the others. This is in contrast to prior years where gains have been concentrated in the small cap area. In fact , the second best performing decile of the group was the magacaps (decile 10) which is noteworthy given that gains in these stocks "create" the most wealth.

Check back later this weekend for the top performing individual stocks.  Happy New Year!

Average_us_stock_performance

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Posted on: January 2, 2007 – 4:57 am in Research

Banner Year for Private Equity

Ten Busiest Industries for Private-Equity Deals

The 10 Biggest Private-Equity Buyouts of 2006

Top Private-Equity Dealmakers in 2006

Source: WSJ

http://www.equityinvestmentideas.blogspot.com/

Posted on: January 2, 2007 – 4:54 am in Mergers and Buy Outs

The Convergence of Hedge Funds & Private Equity

By Yaser Anwar, CSC of Equity Investment Ideas

Last week Roger Ehrenberg had a great post pertaining to the convergence of HFs into PE. I commented on his blog & liked what I said, so I’ll reprint it here.

1) Control- When they buy the equity of a target company, private equity firms may replace the company’s senior management. However, finding top-notch management is, in many instances, more difficult than finding the right investment. Even if senior management is retained, the private equity fund will control the board of directors. Newly appointed directors are often principals of the private equity firm.

In the case of many hedge fund investments, management may often be left alone while the hedge fund works towards a buy-and-sell trading position in debt or equity. The trading position often is protected through esoteric and complicated hedging strategies.

I’m sure readers remember the Steven Cohen interview with WSJ- I bring it up because he talks about how he’s been holding investments longer than he used to, as returns have shrunk due to the sheer size of funds fighting to generate alpha. Similarly- in a “loan to own” investment, the hedge fund may mimic the private equity fund with respect to both management and board involvement [read: Carl Ichan, Daniel Loeb- more HFs are leaning towards some sort of activism- while I don't know the MCD 5%+ shareholder's name he's been on MCD's back to raise dividends/buybacks. More recently Steve Cohen saying he will not back FCX's bid for PD- I'm not sure about you but I've seldom seen SAC act activist, they like to keep things quite.]

2) Strategis Direction- The above point brings me to the strategic direction- Private equity funds, having longer hold periods, are very interested in the strategic direction of the companies and industries in which they invest. For that reason, prior to making an investment, private equity firms engage in a significant amount of research regarding both the targeted company and the industry in which it operates.

Hedge funds assess target companies’ strategies with a different focus, one tied to hold periods, returns and company and industry hedging strategies. However, hedge funds are
increasingly seeking board seats and seeking to influence management decisions made by companies in which they have invested.

The average pension fund is looking to make just 8 percent, after deducting fees, on its hedge fund investments, according to a recent study by the Bank of New York and Casey, Quirk & Associates, a consulting firm. That is a far cry from the returns of more than 25 percent generated by celebrated managers like Mr. Soros and Michael Steinhardt at their peaks.

Update- Also hear the 2 minute podcast of Michael Covel on September 5th, 2006, where he talks about Paul Tudor Jones and why PTJ returns have been reduced (due to investors wanting preservation and not as much as risk as before)

Now that the performance bar has been lowered, there is less incentive for managers to make more aggressive bets, consultants said, especially when they can still charge the same steep fees they did in the past.

So when Roger said the trend for compensation is more PE like for HFs, I agreed for the most part. However, investors in hedge funds are resigned to paying dearly for top hedge fund talent thanks to the law of supply and demand. Sure there are lots of HFs underperforming but then there are stars like Peter Thiel- who over three years has notched a 200% return for original investors, and I’m quite sure investors will pay very handsomely to be in his fund.

To read Roger’s response to my points, click here.

http://www.equityinvestmentideas.blogspot.com/

Posted on: January 2, 2007 – 4:50 am in Mergers and Buy Outs

Analyzing AT&T (T) & Telcos

By Yaser Anwar, CSC of Equity Investment Ideas

  • On Dec. 28th, T agreed to offer additional concessions in a letter addressed to the FCC. AT&T agreed to a 15% reduction in special access rates for DS1 and DS3 customers who are not currently subject to price cap regulation.

According to CSFB the 15% reduction is slightly higher than the 10% reduction they were expecting, it is only applied to a subset of customers whereas we expected it to be applied to all customers. With no change in usage, we estimate this could impact EPS by 2-3 cents.

  • Furthermore the new merger commitments include net neutrality provisions on the last mile for 24 months – at the low end of the 24-36 months expected. T also agreed to divest BellSouth’s 2.5GHz spectrum within 1 year of the merger closing date.
  • AT&T will retain BellSouth’s 2.3GHz spectrum and agreed to offer services using the spectrum to 25% of the POPs by July 2010.

According to ValuEngine- Over the past 10 years, T’s average PEG is 2.42. T earned $2.28 per share in its recent 4 quarters. The analyst consensus estimate is $2.53 for its 4 quarter forward EPS. T’s current sales per share is 2.78.

The services and products that the T offers include: local exchange services, wireless communications, long-distance services, data/broadband and internet services, telecommunications equipment, managed networking, and wholesale transport services and directory advertising and publishing.

  • AT&T was the most active with regards to price changes in 06. They lowered pricing for their entry level, 1.5 Mbps, and mid-speed tier, 3 Mbps, in January & February, followed by its high-speed tier in April.
  • Given its plans to deploy IPTV, I believe the price adjustments were largely driven to grab share in order to upsell video services in the future.
  • In October, AT&T introduced a 768 Kbps offering while raising the price of its existing services by $7 each. At $14.99 per month, the new low speed service maintained an attractive price point to lure dial-up subscribers while increasing the ARPU of existing offers.
  • BellSouth made very few changes in 2006- In Jan, they lowered their 3 Mbps service from $42.95 to $37.95. More recently reduced their 6 Mbps service by $4, to $42.95.
  • Its current price structure allows subscribers to double their speeds for an incremental $5, a compelling value proposition in our view. With its recent price change, the company also began including its home networking service at no extra charge for subscribers of its top two tiers.
  • Verizon, like BellSouth, left broadband pricing largely unchanged in 06. The company was most active with its entry-level 768 Kbps offering, raising the price in April, lowering it in May, and then raising it more substantially in December.
  • At $19.99, the price is now 34% higher than its January 06 pricing. VZ has also become aggressive with its FiOS service in New York, New Jersey, and Connecticut where it competes with Cablevision.
  • VZ’s cut its pricing on its top-tier offering (50 Mbps in NY, NJ, and CT) by approximately 50%, to $89.95. Pricing outside these Cablevision markets remains around $180 per month.
Bear Stern’s Monthly Update On Critical Broadband Issues

Telcos Shift DSL Pricing Strategy Late in 2006 While Cable Remains Content. Telcos were more active on the broadband pricing front than cable in 2006, recently reversing earlier price reductions as part of a shifting strategy towards increased profitability.

With broadband flowshare relatively stable, cable had little incentive to lower pricing and subsequently only made minor modifications.

We expect DSL ARPU will continue to increase in 2007, narrowing the price gap.

  • DSL Outperforms Cable in 2006; Fiber Builds to Boost Telcos in 2007. We expect DSL to outpace cable by capturing roughly 55% of broadband net adds in 2006. While incremental share gains for DSL is slowing, the on-going price discrepancy with cable supports our belief that DSL will continue to outperform cable modem net adds in the near-term. Despite increasing cable competition, we expect the ramping fiber builds at AT&T and Verizon to help the telcos maintain the flowshare lead in 2007.
  • Cable VoIP Growth in 2006 and 2007 Driven by Broader Deployments. We estimate that the cable VoIP subscriber base will reach 6.0M by YE06 due to aggressive cable VoIP deployments by Comcast and Charter, as well as incremental penetration driven by bundling promotions. We expect cable VoIP will add another 3.9M subscribers to reach 9.9M customers by YE07, with continued deployments offset partially by higher penetration making for more challenging incremental gains.
  • Independent VoIP Benefiting from Stable Pricing but Competition is Intensifying. For full-year 2006, we expect independent VoIP subscribers to reach 2.8M, up from 1.6M at yearend 2005.

Yaser adds- It appears that cable companies are not yet becoming aggressive on price and are unwilling to sacrifice margins and cash flow in order to gain market share.

Furthermore, investors should expect broader cable VoIP deployments by Comcast and Charter to contribute to loss of independent VoIP gross add flow share in 07.

http://www.equityinvestmentideas.blogspot.com/

Posted on: January 2, 2007 – 4:47 am in Telecom

Asia Markets 1/2/1007 China Mobile, China Netcom Rise

Stocks:  (CHU)(CN)(CHL)(HBC)(PCW)

The Nikkei was cloased but the Hang Seng had sharp gains.

The Hang Seng index rose 1.7% to 20,310. Cathay Pacific rose 1.3% to 19.52. China Mobile rose 3.7% to 69.7. China Netcom rose 2.2% to 21.3. China Unicom rose .9% to 11.2. HSBC rose .6% to 143.5. Hutchison rose 2.7% to 81.18. PCCW dropped .2% to 4.72.

The KOSPI rose .1% to 1,435.

The Straits Times and Shanghai Composite did not trade.

Data from Reuters.

Douglas A. McIntyre

Posted on: January 2, 2007 – 4:43 am in International Markets