Daily Archives: February 18, 2008

Nine Stocks Under $10: Looking Out A Year

Most stocks trading under $10 probably traded much higher at one point or another. Trading below that price point is usually not a badge of honor. But, inexpensive stocks often make huge percentage moves, both up and down, on news. Here are $10 stocks which trade an average of 10 million shares a day and a look at where they might be in a year.

Sirius (SIRI) has now been in a range between $4 and $2.50 for over a year. Its merger with XM Satellite (XMSR) has been sitting without any government clearance for over three quarters. Management has made the point that the two companies have 15 million paid subscribers between them and can cut tens of millions of dollars in costs. The market seems skeptical, but a look at the numbers indicates that the combined operation does have a shot at taking out a lot of expense, especially if it can consolidate on one satellite platform. That could take a couple of years, but if the merger goes through and the road map for taking out redundant tech costs looks good, the shares ought to double.

Charter (CHTR) recently traded as low at $.92 and has been around $1 in recent trading. The stock has a 52-week high of almost $5. At a $425 million market cap, the company now trades at .07x revenue. With nearly $20 billion in debt and a possible drop in consumer spending on telecom and cable services as part of a slowing economy, Wall St.is trying to figure out how the company will make its debt service this year. Billionaire Paul Allen, who has de facto control of the company, could put in more debt, but that would squeeze existing common shareholders down to zero.

Every time Wall St. looks at Level 3 (LVLT) it sees promise. The company provides broadband pipes all over the US and some abroad. In a world where high-speed data, video, and voice are powering internet traffic, the shares should be the perfect investment. But, they aren’t. Over the last year, LVLT is off  close to 60%. It is hard to find any other widely-traded stock in that neighborhood. Level 3 shares were downgraded recently, by Morgan Stanley, from "equal weight" to "underweight". The Morgan Stanley research note said "Level 3 expects to generate negative free cash flow for the rest of 2008." The operation still has $6.3 billion in long-term debt, and, without any operating profits, it is an unlikely buy-out target. If current management stays in place these shares could go from $2.14 to under $1.50 over the next year.

Ford (F) still looks like it cannot make it as a stand alone company. Its share of the US market are down below 15% and it does not have the earnings power that GM (GM) has overseas. Ford continues employee buy-outs but if sales continue down no reasonable level of cutting will make its North American operations profitable.The Ford family controls the company with its super-majority shares. Over the next few quarters the Ford may well strike a deal with Nissan or a big European car company. The share price is going to have to be closer to $9 than it is at the current $6.10.

E*Trade (ETFC) may have finally turned the corner. Its shares have moved from $2.08 in mid-January to $4.63. The discount broker recently announced that January trading volume was up 22% over the same month last year. The company says it is cutting spending by $275 million. Wall St. is beginning to believe that the company’s retail business can do well while its weak mortgage-related assets should require only modest write-downs this year. To say the shares could move up 50% or more over the next year sounds aggressive, but the stock did trade for $25 a year ago.

Dendreon (DNDN) is the market’s favorite biotech and Wall St.’s favorite whipping boy.The shares have gone from at 52-week high of over $25 to $5.14. The company did come out with some good news recently. DNDN’s prostate cancer vaccine candidate Provenge showed encouraging results in clinical trials. The company also got patent approval for the drug in Europe. In the September quarter, Dendreon lost almost $20 million and had cash and short-term investments of $120 million. The hedge fund Visium recently took a 10% position in the company. A lot of the news has been encouraging for this company recently. The stock has a shot at $8 or $9 a year out.

Sprint (S) is going to get sold, merged, or have its WiMax unit spun out. Activist investor Ralph Whitworth has just joined the board which should put a large fire under company management. There are rumors that Intel (INTC) will put $2 billion into a new firm which would hold the assets of WiMax start-up Clearwire (CLWR) and related assets from Sprint. Whitworth wants that company to stop messing around with a next generation technology and fix its customer retention. He is likely to get his way. A turnaround that looked like it might not start for several quarters is about to get underway. Sprint is under $9 now. Its 52-week high is over $23. A year from now it could certainly be back at $17 or better. Or, Whitworth will have fired everyone by then.

Circuit City (CC) is a retailer that is worse off than Office Depot The stock has gone from over $21 to under $5 in the last year. Bigger rival Best Buy (BBY) recently cut its 2008 outlook. Large general retailers like Wal-Mart (WMT) are likely to cut prices on consumer electronics to keep customers moving through the door. CC has under 700 outlets in the US, which gives it a much smaller geographic footprint than most of its rivals. About the time Circuit City reported poor December sales news hit the market that TCW Group, which had been the company’s largest investor, had liquidated almost all of its shares. Being a modest-sized player in a cut-throat business during a recession has the earmarks of real trouble. Circuit City could see $3 in the next year.

AMD (AMD) got a little interest from Wall St. last week on rumors that another chip-maker, Nvidia (NVDA) might buy it. NVDA is not going to spend $4 billion or more to buy a company which is a break-even business with modest revenue growth and $5 billion in debt. Two years ago, AMD was a $40 stock. It had strong gross margins and was taking market share from Intel (INTC). Intel pushed its smaller rival into a price war. AMD shares now trade at $6.53. Nvidia had bad news of its own. Gross margins at the company dropped and that pushed its shares down 15% in one day. Despite a tremendous balance sheet and its highly profitable chip business, Intel trades near its 52-week low. When the highest quality companies in an industry are being sold off, the weaker ones like AMD are due for real trouble. A year from now AMD could certainly be below $4.

Douglas A McIntyre

Posted on: February 18, 2008 – 8:09 pm in Most Actives, , , , , , , , , , , , , , , ,

Microsoft (MSFT) XBox To Be Damaged By Death Of HD DVD

Microsoft (NASDAQ: MSFT) backed the wrong horse in the fight for high definition DVD disks and players. Redmond sided with Toshiba and its HD DVD platform and shipped the Xbox 360 with playback capacity for that platform. Sony (NYSE: SNE) backed the Blu-ray format which runs on the PS3.

Now that Wal-Mart (NYSE: WMT), Best Buy (NYSE: BBY), and NetFlix (NASDAQ: NFLX) have walked away from HD DVD, the technology is likely to be pulled from the market. According to Reuters "We do not believe the recent reports about HD DVD will have any material impact on the Xbox 360 platform or our position in the marketplace," the company said. The statement should inspire some confidence, it doesn’t.

The XBox 360 has just lost and edge to PS3 in a market where it cannot give up an inch.

Douglas A. McIntyre

Posted on: February 18, 2008 – 5:33 pm in Consumer Electronics, , , , ,

Research In Motion (RIMM) Bring Patent Cast Against Motorola (MOT)

Research In Motion (NASDAQ: RIMM) has filed a patent cash against Motorola (NYSE: MOT) claiming that the US company infringed on several of its patents. It also alleged that Motorola was trying to collect excess license fees on some of the technology which RIMM uses.

According to The Wall Street Journal "RIM is asking the court to find that Motorola has violated an agreement that it says required it to license those patents on reasonable terms and to determine that Motorola has infringed several of its own patents, including a patent for a mobile device "with a keyboard optimized for use with the thumbs."

Motorola is in the process of deciding whether or not to sell its handset unit. The suit will probably not make that process any easier.

Douglas A. McIntyre

Posted on: February 18, 2008 – 1:17 pm in Law, ,

The Idiocy Behind Airline Mergers (CAL)(NWA)(UAUA)(DAL)(AMR)

Depending on which rumor is true, Delta (NYSE: DAL) may merge with Northwest (NYSE: NWA), or United (NASDAQ: UAUA).

The math behind airline mergers doesn’t add up, and the fact that the two most successful airlines in the US, American (NYSE: AMR) and Southwest (NYSE: LUV) are not merger happy is because they know the weakness of the math.

A merger of two airlines does nothing to save fuel costs. The price of planes does not get cut. Over time reservations and customer service personnel can be chopped down, but the consumer’s experience is almost always undermined in the process. Putting two reservations systems together is widely acknowledged as being a nightmare. Cutting the costs of crew and pilots may also take a long time because of union resistance. As The New York Times points out  "Any cost reductions, for example, could easily be eaten up by higher wages required to win labor’s support for a deal."

Northwest, which bought Republic Airlines, went into Chapter 11 in 2005. Continental, which bought Texas Air, filed for bankruptcy in 1983. In 1991, after taking over People Express and several other airlines, Continental filed again.

Mergers distract airlines for serving the customer population, and there is no evidence that they save a dime.

Douglas A. McIntyre

Posted on: February 18, 2008 – 10:14 am in Airlines, , , , , ,

Toyota (TM) Shows Detroit How To Save Money

Toyota (NYSE: TM) has rolled out the first car under its new cost savings program. Not only is the car cheaper to make, but the largest Japanese car maker claims it is safer to drive.

According to Reuters "Toyota began work three years ago on the ambitious plan, called "VI" for Value Innovation, which seeks to lump some of the tens of thousands of car components together to form modules and systems." Toyota is already known for its ability to make cars more cheaply than its counterparts in Detroit.

Every new model Toyota brings to market from now on will be based on bring down costs under the new program. Detroit needs to get one of these cars into a garage and start taking it apart. Who knows what they will find?

Douglas A. McIntyre

Posted on: February 18, 2008 – 8:58 am in Autos,

Europe Markets 2/18/2008 (BCS)(BHP)(SI)(FTE)

Markets in Europe were up at 8.15 AM New York time.

The FTSE was up 1.7% to 5,888. Barclays (BCS) was up 6.4% to 455. BHP Billiton (BHP) was up 3.1% to 1599.

The DAXX was up 1.5% to 6,935. Daimler was up 3.2% to 55.76. Siemens (SI) was up 1.8% to 89.16.

The CAC 40 rose 1% to 4,820. France Telecom (FTE) was up 1.5% to 23.68.

Data from Reuters

Douglas A. McIntyre

Posted on: February 18, 2008 – 8:21 am in International Markets, , , ,

In Northern Rock, A Template For US Bail-Outs?

The US government bailed out Chrysler all the way back in 1979. Nothing quite like it as been seen since then, but the financial sector has not been in as much trouble for decades as it is now.

Over the weekend, the UK government decided to take ownership of troubled mortgage company Northern Rock. The financial firm will eventually be sold or taken public again, but the government acted to save it short-term because it was in the public interest for the company not to fail.

The move may be a template for the US government as its struggles with possible collapses at bond insurers and mortgage lenders. It may even be a way for common shareholders to keep some of their investments.

The state government in NY and several regulators are concerned that Ambac (ABK) and MBIA (MBI) could go under because of their investments in subprime mortgages. They might, at least, loss their high credit ratings which would increase the cost of borrowing for municipalities and increase losses at banks which hold paper from the mono-line insurance firms.

Right now, the government would like money center banks to make loans to Ambac, MBIA, and their peers. But, the banks are tight on capital themselves. The other solution being floated is that the bond-insurers be broken in two. One part of the firms would hold the valuable insurance policies for cities and states, the other part would hold the near-worthless mortgaged-back paper.

The Northern Rock move by the UK government is a full nationalization. There is not reason a more measure approach could not work in the US. The Treasury would take a piece of the insurers to give them financial support in the form of capital. Current shareholder would keep a piece of the equity.

The Brits may have come up with an elegant solution to  problem which also exists in the US.

Douglas A. McIntyre

Posted on: February 18, 2008 – 6:09 am in Financial Stocks, ,

Apple (AAPL) iPhones Secreted Into China Could Cost Company $1 Billion

Apple (NYSE: AAPL) iPhones, perhaps hundreds of thousands of them, are finding their way into China. There they are "unlocked" so that they can work on local cellular networks. According to The New York Times "For months, tourists, small entrepreneurs and smugglers of electronic goods have been buying iPhones in the United States and then shipping them overseas."

There is every reason to think that the same thing in happening in countries like India and Russia.

While that people moving the phones overseas may buy them in the US, a transaction which makes Apple money, the company does not get a part of the mobile contract for the cellular service which runs these phones. Apple has carefully set up a business model in the US, with AT&T (T), and Europe, so that the company gets a piece of what customers pay to carriers for voice and data.

Some analysts believe that the "unlocked" iPhones could cost Apple as much as $1 billion over the next three years. For a company which has annual operating income run rate of about $7 billion, the number is not insignificant.

Apple may have a partial solution to the problem. It could bring out new versions of the phone which are more difficult to tamper with or it could increase the frequency of software upgrades in the hopes of making the older phones less attractive.

But, no matter what it does, Apple’s program for taking a piece of its carriers’ revenues is already at least partially broken.

Douglas A. McIntyre

Posted on: February 18, 2008 – 5:47 am in Consumer Electronics, ,

Qatar’s $15 Billion Bank Rescue Fund

The government of Qatar has begun investing in Credit Suisse (CS) and the country’s prime minister says that Middle East country is prepared to put up to $15 billion into US and European banks.

For the Swiss the deal may have some benefit. "Credit Suisse in March 2006 became the first European bank to get a license for the Qatar Financial Centre, a self-regulated business park designed to attract lenders to the Gulf state as part of a plan to diversify the economy away from oil and gas," according to Bloomberg.

The statement from the Qatar government raises two questions, one which has been causing political friction for some time. Congress and some officials in the Administration have wondered in public whether it is good for foreign sovereign funds to own very large pieces of the largest US banks. The fear is that these entities could push their financial agendas through their equity stakes. The comments by the government are absurd. Troubled banks can either take sovereign money or face the threat of going under. No one in the Congress has suggested that the US government put money into these banks, so where else will the capital to save these firms come from?

The second and more persuasive argument for the value of taking sovereign fund investing is that it improves ties between banks and the countries. With hundreds of billion of dollars in sovereign capital in need of management, banks could earn billion in money management fees. Surely banks which are partially owned by overseas governments have a better chance of managing that capital and making a profit on it.

Bring on the sovereign funds. Doings business with them could be extremely profitable.

Douglas A. McIntyre

Posted on: February 18, 2008 – 5:28 am in Banking,

Media Digest 2/18/2008 Reuters, WSJ, NYTimes, FT, Bloomberg

According to Reuters, China e-commerce company Alibaba will try to participate in the decision of the potential sale of Yahoo! (YHOO) to Microsoft (MSFT) Yahoo! owns 39% of Alibaba and there are some restrictions on the transfer of that stake.

Reuters writes that Qatar has bought a stake in Credit Suiss and plans to spend $15 billion in the next year to invest in banks in Europe and the US.

Reuters writes that Toshiba will probably give up on its HD DVD initiative in the next few weeks.

The Wall Street Journal writes that the USDA has recalled 143 million pounds of frozen beeft.

The Wall Street Journal writes that Ambac (ABK) is in discussios about breaking itself into two pieces to protect its muni-bond insurance operation.

The Wall Street Journal reports that Providence Equity is disappointed in a suit by Clear Channel (CCU) to force the completion of an LBO.

The New York Times writes that a large number of Apple (AAPL) iPhones are being smuggled into China.

The New York Times writes that the British government has taken over troubled mortage lender Northern Rock.

The FT writes that wheat prices have soared to a new high.

Douglas A. McIntyre

Posted on: February 18, 2008 – 4:41 am in Press Digest, , , , ,

Asia Markets 2/18/2008 (CHL)(SNP)

Markets in Asia were mixed.

The Nikkei ended up a fraction at 16,635. NEC dropped 2.5% to 428. NTT (NTT) dropped 2.4% to 495000.

The Hang Seng fell 1/6% to 23,759. China Mobile (CHL) fell 2.1% to 118. China Petroleum (SNP) fell 2.1% to 9.05.

The Shanghai Composite rose 1.6% to 4,568.

Data from Reuters

Douglas A. McIntyre

Posted on: February 18, 2008 – 4:14 am in International Markets, ,