Daily Archives: March 11, 2007

Barron’s Digest March 12, 2007

According to Barron’s that Medtronic (MDT) could be a bargin. It is getting a larger share of the defibrillator market. It is also doing well in remote patient monitoring.

Barnes & Noble (BKS) could be an LBO candidate. The company has excellent cash flow an large investors plus the founding family own a large portion of the shares.

Constellation Energy (CEG) has more than doubled since mid-2004, but with the demand for energy still risin the shares have a 20% upside.

Oracle’s (ORCL) proposed purchase of Hyperion Solutions (HYSL) has cast the light on accounting for software acqusitions. Barron’s technology weekly does not like the way that Nuance Communications (NUAN) and Open Text (OTEX) account for their acquisitions. Balance sheet management may be inflating earnings.

Openwave (OPWV) may be on the market. Its largest shareholder, Harninger Capital, is pushing for changes. Goldman figures the company could be worth $12 to $14.

Synopsys (SNPS) is a big supplier to the computer chip industry. The stock could be worth 25% to 40% more than where it trades.

Douglas A. McIntyre

Posted on: March 11, 2007 – 5:21 pm in Press Digest

How Long Can XM and Sirius Survive on Their Own?

A crucial point may be getting lost in the shuffle in the XM/Sirius (XMSR-SIRI) merger approval process.  Both of these companies NEED the merger in order to survive as they stand today.  We took a look at the current cash burn rates for both companies to see how long they could survive on their own, which could become a big factor as merger proceedings drag on for months and months.  The companies do not expect all of the conditions and integrations to come until later in the year as it stands now, and there has already been the notation that new subscribers will slow until the outcome is clear.  This originally started out merely as a "how long until zero for each" scenario, but upon further review some obvious changes are showing themselves.

Sirius has shown higher growth rates but it also has much higher acquisition costs per subscriber: our forecast is $95 to $105 per subscriber for Sirius compared to $64 per subscriber at XM for 2007.  Total estimated operating expenses for 2007 are roughly equivalent at the two companies, and based on our subscriber estimates the monthly revenue and cash burn rates are as follows:

XMSR: Revenue $83 million/month; Operating Expense $129.8 million/month;
Current Cash Balance (including lease-back proceeds) $506,550,000
Estimated months of operation under current conditions – 10.8 months

SIRI: Revenue $75 million/month; Operating Expense $123 million/month;
Cash Balance (as of 12/31/06) $408,000,000
Estimated months of operation – 8.4 months

XMSR has recently opened a new door that probably gives them the best source of cheap capital available to them by negotiating a sale-leaseback on their most recently-launched XM4 satellite, bringing in over $280 million in proceeds.  Both XM Satellite and Sirius have 4 satellites in operation currently, but the XM4 was the newest and is therefore considerably more valuable than the other 7 in orbit.  But both companies can access cash in this manner if they choose to do so.  How much so we can’t say, but at least a benchmark level has been set that could prove vital in keeping these companies afloat in the face of disastrously-expensive debt financings or even more utterly-dilutive stock offerings.  It may even be arguable that these companies are now in a situation where the capital markets are partially closed to them.

There are some obvious issues here that can make or break any of these figures and circumstances.  S&P recently defended Sirius, sort of.  We openly admit that the companies could also curb certain expenses and renegotiate pacts to slow this cash-burn down; and there are credit facilities that can still be accessed.  While we have said the capital markets may be closed off, betting that there would be NO lenders, no financiers, no satellite equity ventures is probably silly.  Someone somewhere would give either or both of these companies money or access to credit, but they would want to do so after the merger approval decisions are a known event.  It is very likely that these companies could operate well into 2008 without having to go into voodoo financings.  Jim Cramer thinks this one goes through as well.

But the issue still revolves around the merger and this is what each government oversight group needs to consider: Higher prices now or higher prices later?  They can allow a monopoly in a non-critical entertainment and information industry that would sign in blood for 1-year to 3-year price-lock agreements without question OR they can block the merger and allow one or both to operate at levels where each may fail.  If the powers that be are worried about rising prices if this goes through, then they need to look at the fact that the subscription price will HAVE to rise immediately for each of these to survive independently without a lower combined cost structure.

Evaluating a merger of this proportion should be a comparative no-brainer to other DOJ and FCC mergers that have been approved, and the only reason this is an issue is because of a potential changing of the guard in 2008 (technically a change is coming either way, and the oversight committees are already under new leadership).  We aren’t forgetting the old law that prohibits the licenses from being under one company, but the FCC has already indicated this could be changed under the right conditions. If this was a merger of NBC and Clear Channel or something to that extent then it would have obvious objections.  This is nowhere as critical as a merger between AT&T and SBC Communications that was allowed to go through.  Satellite radio is non-critical radio, even if you are addicted to Howard Stern, Martha Stewart, or Oprah.  They both offer some serious packages and are almost without question an addition to their loyal fans and subscribers, but the flow of free information would not be cut off if these 8 satellites suddenly decided to come back into the atmosphere.

Congress, the FCC, and the DOJ need to determine the fate of these soon for the sake of consumers AND for the sake of the companies.  Do they want to "champion competition and the consumer" and force them to remain independent?  Or do they want to pander to business and shareholders?  If they force the companies to remain independent, then subscribers better just go ahead and presume they will face higher subscribers fees starting in 2008.  If Congress, the DOJ and the FCC allow the merger to proceed, then they will be able to assure that consumers get price locks and programming locks until 2010. 

It is very surprising that this is not brought up for discussion, and management should take this to task by saying that if they are independent that the only way they can survive is by price hikes.  It may only pertain to NEW subscribers, but prices would have to rise for both to remain independent.  As it stands right now, both companies could find themselves in a precarious spot toward the end of 2007.  If these are allowed to merge then there will probably be some easy access to capital and the combined cost structures will be much more efficient.

Late in 2006 we also evaluated how a combined company would look, so this is not the first ponderance of this sort.  The way the media and government cover things, you can probably assume it won’t be the last either.

Written by Jon C. Ogg & by Ryan Barnes
March 11, 2007

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

Posted on: March 11, 2007 – 5:01 pm in Accounting, Bait Shop, Consumer Goods, Earnings, Media, Mergers and Buy Outs, Regulation, Satellite, Technology Companies, Wireless

European Trouble That Apple Doesn’t Need

The EU hates anything that looks, feels, or walks like a monopoly, especially if it is not controlled by a European company. Students of recent business history will remember that the EU shut down GE’s (GE) attempt to take over Honeywell. The EU has also been especially hard on Microsoft’s (MSFT) bundling software likes its Windows Media Player into its operating systems.

Now, it Apple’s turn to run the EU gauntlet. The European Union consumer chief Meglena Kuneva  thinks that the bundling of Apple’s iPod with its iTune software is bad for music aficionados on the Continent. "Do you think it’s fine that a CD plays in all CD players but that an iTunes song only plays in an iPod? I don’t. Something has to change," EU Consumer Protection Commissioner Kuneva.

Well, that seems plain enough.

Apple has to battle the perception that as iPod sales growth begins to slow, its new iPhone and Macs can help keep the entire company moving ahead at full speed. The market obviously has its doubts about whether Apple is still a "hot" company. Its stock trades where its did three months ago despite excitement about the iPhone.

One of the unpleasant aspects of antitrust probes is that, once they start in one region in the world, they often spread to others. In this case, if that means Asia and the US, Apple may have a rough year.

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

Posted on: March 11, 2007 – 11:34 am in Consumer Electronics

Microsoft & Friends Go After Cable And Telecom

No one likes disruptive technology, except the disruptor. Microsoft (MSFT), Google (GOOG), Dell (DELL), and Intel (INTC) are backing a new wireless technology that could be extremely troublesome for the country’s largest cable and telecom companies. As MarketWatch describes it the "breakthrough, tapping into an unused part of the nation’s airwaves, is politically charged because it threatens to shift the Internet-access business away from telecom and cable companies that are historically well-connected in Washington, throwing open the field to a brand new batch of competitors."

So, the Microsoft group has begun to lobby the federal government to take a close look at the new tech as an alternative to the broadband delivered by the likes of Comcast (CMCSA), Verizon (VZ), AT&T (T) and Time Warner Cable (TWC). 

The battle for the airwaves could get ugly. "The telephone companies are terrified they’ll lose 40% of their wireless minutes, because you’ll be able to connect from work or home and bypass their wireless networks," said J.H. Snider, research director of the wireless future program at the New America Foundation, a Washington-based policy institute that has long advocated to allow use of white spaces. 

The potential option to get broadband internet via a new alternate means comes as Sprint (S) is building out its wireless WiMax network and Verizon (VZ) is spending $23 billion to create a fiber-to-the-home network. Interestingly enough, Intel is one of the largest WiMax backers and its chips allow many PCs to work with WiFi, so it would appear to have a horse in at least three races.

Another company that could be hurt is new IPO Clearwire (CLWR) which saw its stock drop immediate after the shares opened for trading. The company is a publci pure play in WiMax.

Life could get very, very nasty for phone and cable companies. The new Microsoft assault would represent an entirely new way for consumers to get broadband access, and WiMax may as well. The tradition broadband providers can ill afford any real competition. They spent too much to get to the pole position in the race.

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

Posted on: March 11, 2007 – 11:11 am in Telecom

Intel Debuts More Product, The Chips Are Down Again At AMD

Intel (INTC) has new quad core chips that use less electricity. The 50-watt chips are aimed at the server market, where rival AMD (AMD) has been able to get to a 25% market share over the last few years. According to The Wall Street Journal: "The company estimated in a press release that its latest Xeon models represent a nearly 10-fold improvement in power consumption per processor in the past year and a half." AMD is not expected to launch rival chip until June.

After years with the tech advantage being a wind at AMD’s back, the dynamic has clearly changed. And it shows in AMD’s share price and margins. Over the last year, AMD’s stock is down 60% which Intel’s is flat.

Wall St. is becoming particularly concerned. Quoted by The Associated Press one analyst made the point: "Our view is that this will get worse before it gets better," said Christopher Caso, a senior analyst with Friedman Billings Ramsey. "This quarter’s performance is evidence that it did get worse."

It is not news that some investors think that AMD may be running out of money, but that day of reckoning maybe coming soon. "It’s a dilemma — we believe AMD needs to spend the money to build the fabs (chip factories), but they may have to find some additional financing to achieve those goals," said analyst John Lau of investment bank Jefferies & Co. "We believe investors need to see some resolution of these issues before they start to get back into the stock again."

With a cash balance of $1.5 billion and debt of $3.8 billion, AMD may not be an attractive take-over target. The only logical buyer is Intel and the Justice Department is not likely to approve a monopoly of that magnitude.

If AMD needs to raise capital, the stock could go much lower.

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

Posted on: March 11, 2007 – 9:47 am in Technology Companies

Starbucks Goes Into Record Business: Genius Or Folly

Starbucks (SBUX) is about to go into the record business, perhaps with former Beatle Paul McCarthy as its first artist.

One source explained the coffee company’s thinking to The New York Post: "They have a very targeted, efficient distribution channel that allows them to be profitable in a limited way with music."

With McDonald’s (MCD) moving into the higher-end coffee and breakfast business, having hit music that is only available in Starbucks stores may actually be a stroke of genius. But, that could be undermined by the report that these albums, produced by Starbucks, will be available in other retail outlets.

If the wider distribution portion of the plan actually goes through, that is where Starbucks record label probably goes the wrong direction. The key to the overall success of Starbucks is traffic to the retail store level. It can sell its ground coffee in supermarkets and its bottled drinks in grocery stores, but without foot traffic, Starbucks stops growing. Resale of its products in other outlets will never be a big business.

If the coffee chain can get artists of the stature of Paul McCarthy, it should make the albums available in its own stores. Period. That might make it a loss leader, but the traffic it would create should make the "music label" model worth it.

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

Posted on: March 11, 2007 – 9:09 am in Food