Daily Archives: February 19, 2008

Texas Roadhouse, Barbecue Fans Staying Home (TXRH)

Texas Roadhouse(NASDAQ: TXRH) just proved the risks of owning a stock that is only a one restaurant chain pure-play.  The company posted earnings at $0.10 EPS versus a $0.11 First Call consensus estimate.  Its revenues came in with a 22% gain to $186.3 million, but First Call had estimates at $191.8 million.

Texas Roadhouse put guidance for diluted EPS growth of 5% to 15% forfiscal 2008, which includes a $0.01 to $0.02 benefit from an extra weekin 2008.   Earnings on a diluted EPS basis grew 15% to $0.51 for fiscal 2007. So if we imply this 5% to 15% jump, we get a new target of $0.5355 to $0.5865.  We would note that there is a note discussing a $0.014 impairment charge, so some might add that number into the figure.  Unfortunately, First Call has estimates at $0.64 EPS so it is going to be clocked in as a projected earnings miss regardless of the realities in charges.

The metric that restaurant analysts are going to hate the most is that its benchmark comparable restaurant sales in the first six weeks of Q1-2008 actually fell by about 1.5% year over year.  Texas Roadhouse also put its comparable store sales for this year at a whopping Flat to +1%.  It also sees company-owned restaurant openings of roughly 30 units, which compares to its own number of "operating 288 restaurants today."

The company also announced a $25 Million stock buyback plan, although that obviously isn’t a winner after missing its targets.

Shares closed down 4% at $10.67 today ahead of the numbers, but in after-hours the restaurant chain is seeing shares trade down some 15% at $9.05.  With a 52-week trading range of $8.96 to $16.05, that is almost a new low.  That will be close to a post-IPO low as well, since this came public and traded at just under $12.00 at the end of 2004 before peaking at nearly $19.00 in mid-2005.

Before today’s after-hours drop, this one traded with a $798 million market cap.  Without factoring in for franchise or any license stores, that would generate a rough value of $2.5 million per store if you implied a 318 unit-count for the end of 2008 (or some $2.13 million now after the drop).  That would also give it a forward P/E ratio of about 15.9, which isn’t expensive but also doesn’t leaves any overly inspiring barbecue and grilled after-taste in any GARP or value manager’s mouth. 

If you own this one at higher prices you may have to wait a while (and hope) for a better month of sales, but if you are looking at this with new money it just looks fairly valued at levels around the new prices.  In a recession or soft economy, many may choose to enjoy their grilled barbecue and beer back at home.

Jon C. Ogg
February 19, 2008

Posted on: February 19, 2008 – 6:36 pm in Earnings, Earnings Warning, Food, Retail,

Crocs Earnings Reaction Uglier Than Its Shoes (CROX)

Crocs, Inc. (NASDAQ: CROX) has posted its fourth Quarter revenues rose more than 99% to $224.8 Million while its diluted EPS rose more than 73% to $0.45.  First Call had estimates at $207.6 million and $0.44 EPS.

For fiscal December-2008, Crocs reiterated its previously issued growth targets of 50% for the first half, and it expects revenues of approximately $1.16 Billion and net income per diluted share of approximately $2.70.  We show First Call estimates at $1.18 Billion and $2.71 EPS.  That means that the bulls are going to have to hope the company is merely under-promising so it can over-deliver.

Ron Snyder, President and CEO: "…We experienced better than expected sell through of our fall line across men’s, women’s, and children’s in each of our markets. To meet the higher than anticipated orders over the holiday period we delivered a meaningful amount of Mammoths by air-freight, which impacted our gross margin."

If you think we are critical of Crocs shoes being an ugly fad, you should see what we said about OLD NAVY after its president left today. CROX shares closed down 4% today at $32.08 ahead of results, yet shares are down another 12% at $28.25 in after-hours trading.  Its 52-week trading range is $21.68 to $75.21.  That low is from a year or so ago, because over the last couple of months shares only traded as low as $25.28 during the sell-off.

The truth is that this reaction is the initial reaction in after-hours trading.  By the morning, we could even see a recovery if the value investors manage to show any force.  In a slower economy and after a more than 60% cut in the stock price you would expect that at some point even a fickle Wall Street will learn to factor in a lack of upside in apparel fads.  This now trades with a 10.46 forward P/E if its own estimates for 2008 come to fruition.  Even if we think the shoes are ugly, this one is starting to look cheap on valuations if that fad just stabilizes rather than disappears.

Jon C. Ogg
February 19, 2008

Posted on: February 19, 2008 – 4:38 pm in Apparel, Earnings, ,

H-P Keeps Exceeding Targets (HPQ, DELL)

Hewlett-Packard (NYSE: HPQ) posted non-GAAP EPS of $0.86 on $28.47 Billion in revenues.  First Call had estimates pegged at $0.81 EPS on $27.6 Billion.  H-P also put next quarter at $0.83 to $0.84 EPS versus $0.82 estimates, and it put revenues in a range of $27.7 to $27.9 Billion.  HP sees Fiscal-2008 revenue will be approximately $113.5 to $114.0 Billion, and it sees non-GAAP diluted EPS is expected to be in the range of $3.50 to $3.54.  First Call has estimates at $111.7 Billion and $3.36 non-GAAP EPS.

All units appear to have fired well:

  • Americas revenue grew 8% on a year-over-year basis to $11.2 Billion, revenue grew 15% in EMEA to $12.3 Billion, and revenue grew 22% in Asia Pacific to $4.9 Billion.
  • Personal Systems revenue grew 24% year over year to $10.8 billion; unit shipments up 27%.
  • Imaging & Printing revenue grew 4% year over year to $7.3 Billion.
  • Enterprise Storage & Servers rose 9% to revenue of $4.8 Billion.
  • HP Service revenues increased 11% to $4.4 Billion.
  • HP Software revenue grew 11% to $666 million.
  • HP Financial Services revenue rose 17% to $642 million.
  • HP generated some $3.2 Billion in cash flows from operations for the quarter, and its inventor of $7.9 Billion was down 6-days from last year.
  • HP used roughly $3.3 billion of cash in the quarter to repurchase roughly 72 million shares of common stock in the open market.

We had noted how the chart was likely to play in today.  H-P’s 50-daymoving average is $46.71 and the even more rigid 200-day moving is$47.70.  Shares are up $2.05 in immediate after-hours trading to $46.00.  H-P shares are up almost 6% at $46.50 in after-hours trading, so pay attention to those key moving averages.  Dell Inc. (NASDAQ: DELL) shares are up as well, although only about 1.4% in after-hours trading.

Jon C. Ogg
February 19, 2008

Posted on: February 19, 2008 – 4:18 pm in Earnings, PC Companies, Technology Companies, ,

The 52-Week Low Club (VZ)(IAR)(MS)(BX)(UBS)

Verizon (VZ) Bad news on broadband set-top delays and price cutting for cellular service. Falls to $35.37 from 52-week high of $46.24.

Idearc (IAR) New CEO appointed after weak earnings. Not much of a first day at work. Shares drop to $7.64 from 52-week high of $38.

Morgan Stanley (MS) Fear of more write-offs. Sells down to $41.42 from 52-week high of $90.95.

Blackstone Group (BX) Market hates private equity. Shares drop to $16.05 from 52-week high of $38.

UBS (UBS) Bad day to be a bank. Moves down to $32.57 from 52-week high of $66.26.

Del Monte Foods (DLM) No news, just selling. Falls to $8.05 from 52-week high of $12.94.

Penwest Pharmaceuticals (PPCO) Generic competition trying to come into market. Drops to $2.90 from 52-week high of $15.42.

Douglas A. McIntyre

Posted on: February 19, 2008 – 4:01 pm in HI/LOW, , , , , , ,

ETF Launch: SPDR S&P International Dividend ETF

State Street Corp (NYSE: STT) has announced that its investment management arm State Street Global Advisors has launched the SPDR® S&P® International Dividend ETF (AMEX: DWX) and it began trading today. 

The SPDR S&P International Dividend ETF aims to track the S&P International Dividend Opportunities Index.  This index includes 100 liquid and exchange-listed stocks from around the world that offer high dividend yields.

Here are some of the qualifications:

  • stocks included in this index must have a minimum total market capitalization of $1.5 billion,
  • a three-month average daily value traded greater than $10 million,
  • at least 300,000 shares for each of the preceding six months,
  • positive 5-year earnings growth,
  • profitability measured by positive earnings per share over the latest 12-month period.

This one is going to need some extra PR to get the word out if it wants to be a successful ETF.  Unfortunately, its volume was to the point that it was almost Nil. 

Jon C. Ogg
February 19, 2008

Posted on: February 19, 2008 – 3:57 pm in ETF, ,

Whitman & Third Avenue Value Fish In Financial Insurers, REITs, Land (ABK, ACGL, LM, MBI, JOE, TPGI, TGIC, USG, VNO)

If there is one seer and age-old timeless veteran in value investing, it is M.J. Whitman.  His Third Avenue Management, LLC has filed its 13F with the SEC and it shows he is still (or at least was) betting big on what financial guarantors, land banks, and REIT’s for a portion of his value investing assets.  This total filing showed some $11.5 Billion in equity and equivalent positions (not including fixed income).  What is interesting is that this is not even all of his holdings out of financial related stocks.  But this is still nearly $1.2 Billion in combined assets.  Below are a portion of his top holdings: 

Stock (Ticker)                                                              Shares             $$$$
Ambac Financial Group (ABK)               2,699,896   $69,576,000
Arch Capital Group Ltd.(ACGL)              1,461,659   $102,828,000
Legg Mason Inc. (LM)                               3,343,553   $244,581,000
MBIA Inc. (MBI)                                           13,773,096  $236,607,000
St. Mary Land & Exploration (SM)            2,620,703   $101,185,000
The St. Joe Company (JOE)                    15,347,635  $54,4995,000
Thomas Properties Group Inc. (TPGI)    2,566,549   $27,667,000
Triad Guaranty Inc (TGIC)                          1,064,023   $10,427,000
USG Corporation (USG)                             5,573,058   $199,460,000
Vornado Realty Trust (VNO)                       1,327,543   $116,757,000

M.J. Whitman and his entire crew readily admit that they do not always catch the bottom.  They try to get in before the flood gates of buyers swarm in, and sometimes they are very early and have no problem taking a 3-year or even longer time horizon.  But they do try to look through the junk heap to see what can be cleaned up with some TLC.  Please be advised that this is a small portion of their holdings, and that full list can be seen here. 

Here are the other activist and billionaire value-esque investors we covered this weekend:

Jon C. Ogg
February 19, 2008

Posted on: February 19, 2008 – 3:27 pm in Mutual Funds, Value Investing, , , , , , , , , , ,

Oil Tops $100 A Barrel

Fears that OPEC may cut is production in the spring drove oil to $100.10.

Douglas A. McIntyre

Posted on: February 19, 2008 – 3:15 pm in Oil & Gas

Gap Loses OLD NAVY Skipper…. It Should Spin This Dog Off (GPS)

Gap Inc. (NYSE: GPS) is losing its President of its Old Navy brand.  Dawn Robertson, 52, is leaving Gap effective immediately, and Tom Wyatt of the Gap Outlet division will become acting president while a search for a permanent replacement is conducted.  This was said to be a mutual decision…. Do you believe it was mutual, and more importantly does it even matter? 

We don’t usually like to bash a brand nor do we like to bash people.  We noted prior management changes were not enough, and this is no different. The problems at Gap and at OLD NAVY were not caused by Dawn Robertson and the new CEO Glenn Murphy has no fault here either.  We panned Paul Pressler as one of our first CEO’s THAT NEED TO GO, and all of these officers are inheriting what his regime left behind.  It is very unlikely that the OLD NAVY brand will miss her after 16 months.  For that matter, she probably won’t miss it either. 

If any president in corporate America wants to run any brand out there, the chances that it would be OLD NAVY might be as little as 1 in 1000.  This is the cheapie brand for Gap.  Glenn Murphy should take this as an opportunity here.  He is still a new CEO there and frankly he could get away with anything short of a capital crime if it would fix a company and fix a brand.  Gap didn’t do well with its more upscale womens fashion line Forth & Towne so it closed it.  But OLD NAVY is so cheap that acts as a mental drag to even a casual apparel store like Gap and Banana Republic. 

We doubt seriously that Gap would jettison its brands or break itself up.  But the one brand that could make a difference is for it to unload its cheapie brand.  It could go out and strike new design contracts for say the 2010 product lines and run as an independent company.  Jim Cramer last year used to say "GAP WILL BE TAKEN PRIVATE IN A YEAR!" before the private equity meltdown happened.  The problem is that Gap’s market cap is over $14 Billion as of now, and private equity firms are having a hard time borrowing even a couple billion dollars.  It has also been a dead stock and longer-term shareholders who had gotten used to making 10% and 20% in share appreciation year after year may want more than just an at-market buyout.  We have had this up for review in the Special Situations letter, but it has yet to make the cut.

OLD NAVY in North America generated a same store sales drop of -8% this January, and -10% in January 2007.  The problem isn’t the economy, it’s that this OLD NAVY brand is complete garbage and barely appeals to the lowest rungs of society.  This brand is so bad that it is extremely difficult not to address it with offensive language.  Go get your new president, but make it a challenge that a CEO or president would actually want.  The job ad could read "Crummy company about to spun-off, needs brand improvement, major stock options package, needs visionary."

Gap was already weak before the September 11, 2001 put another nail in its coffin.  While shares did recover from those lows, the reality is that Gap stock has been dead money for almost 5-years.  We noted long ago about needing a headcount cut and brand revamping.  This would even allow the company to stop wasting its cash on share buybacks when it needs the cash for its brand.  There is an opportunity to jettison its cheapest brand here, and it might actually make a difference to shareholders. 

We are looking mostly at the North American stores for comparison here.  As of November 3, 2007, there were 1,188 domestic and 90 Canadian GAP brand stores.  There were 997 domestic and 65 Canadian OLD NAVY brand stores.  When you consider that BANANA REPUBLIC had 519 location in the U.S. and 30 in Canada, you can see why we would note a potential powerful "unlocking value" here.

Jon C. Ogg
February 19, 2008

Posted on: February 19, 2008 – 2:24 pm in Apparel, Management Change, Retail, , , , , , ,

Hewlett-Packard’s Chart May Outweigh Earnings News (HPQ, DELL)

After today’s close, we get to see earnings out of Hewlett-Packard (NYSE: HPQ).  We gave a full earnings preview over the weekend but we have some updates for the options and the chart.  Tech traders will be paying close attention to aspects of the business,particularly how much "printing and imaging" contributes to the bottomline.

Options are still hard to use with more than 1 month to expiration, but today’s pricing indicates that options traders are prepared for H-P to move more than $2.00 in either direction.   What is perhaps more interesting than the news report is looking at its chart and factoring in these potential option anticipated moves.  H-P’s 50-day moving average is $46.71 and the even more rigid 200-day moving is $47.70.  That coincides highly with that $2.00+ expectation from options traders, so we’d be paying attention closely to those levels if shares try to stage a comeback after the earnings report.  Shares have also recently used this $40+ and $41 area for hard support in both January and February.

H-P shares have pulled back more than 20% from recent highs before recently recovering.  The chart activity after today’s report may be more telling than the actual earnings report.

This earnings report may also set the tone for Dell Inc. (NASDAQ: DELL) as well.  Dell shares have fallen worse than H-P shares over the last 90-days and the company is still trying to get its turnaround plan into overdrive.  Today’s news out of H-P may also further shape Dell’s trend as well. 

Jon C. Ogg
February 19, 2008

Posted on: February 19, 2008 – 12:48 pm in Earnings, PC Companies, Technology Companies, ,

BlackRock Denies Any CDO Issues (BLK)

BlackRock Inc. (NYSE: BLK) is one of the more well thought of asset managers out there.  It typically doesn’t have to respond to market rumors, but there were rumors abound that BlackRock was hiding CDO losses, and the rumors even evolved into rumors of an investigation.

While BlackRock usually doesn’t comment on rumors or speculation, it did today since this had taken shares down nearly 10% from intraday highs.  Here are some of the important guts of the firms comments.  As far as rumors related to potential losses from CDO and subprime exposure, BlackRock stated:

  • "There is simply no truth to today’s reported rumors….. BlackRock has no material exposure or losses related to either subprime assets or CDO investments….. In its fourth quarter earnings release, the Company disclosed $12 million of impairment charges related to CDO seed investments, which represented a substantial portion of the remaining balance sheet exposure to CDOs….. BlackRock is not aware of any Department of Justice investigation relating to BlackRock."

Many market and stock rumors still make their way around Wall Street, and often rumors move stocks more than actual news does.  Shares have recovered sharply from intraday lows.  At $193, BlackRock is still a bit closer to its highs of the year than to its lows.  Its 52-week trading range is $139.20 to $231.99.

Jon C. Ogg
February 19, 2008

Posted on: February 19, 2008 – 12:21 pm in Financial Stocks, Rumors,

MMI Pushes Another (UIS, BCO)

Shares of Unisys Corp. (NYSE: UIS) are trading up 8% today after capitulating to activist investor MMI Investments, LLP, which is one of the largest shareholders of Unisys.  Unisys has delayed its annual meeting to July 24 to allow it more time to "explore certain portfolio rationalization and other actions that may enhance shareholder value" with its investment banker Bear Stearns.

If this sounds familiar at 247WallSt.com, it is because this was listed as one of "turnarounds that hasn’t turned around" recently.  In the we noted: "When you backdate the news and look at the history of the company you’d think that the turn may have already started.  But shares are barely above 52-week lows and are barely off of multi-year lows too."

MMI was one of the reasons we named Brinks (NYSE: BCO) to our Special Situations newsletter, and is also part of the reason we have not wanted to close out that position to lock in would-be profits.   You can look at their last proxy filing to see how involved MMI can get.

MMI sent a shareholder letter in early January to urge its review of alternatives, and part of that encouragement included its government services business.  We are not actually under the belief that a mega-premium buyout is in the cards for Unisys.  We are not overly encouraged by an already-leveraged balance sheet that is too heavy in goodwill and intangible assets.  But we do believe that the company can continue to make cuts as needed and can streamline certain operations that are not contributing to the bottom line.  The company is still underperforming compared to analyst estimates, but it has at least come back to ‘quarterly profitability’ and that is at least a start.

Those of you who trade turnarounds will want to keep this one on your watch lists.  It may be a long slow road, but it looks like the car is at least out of the shop even if it isn’t on the road yet.

Jon C. Ogg
February 19, 2008

Posted on: February 19, 2008 – 12:07 pm in Activist Investor, Turnarounds, ,

Goldman Sachs Sees Gold in Offshore Drillers (DO, PDE, RIG)

Goldman Sachs has said enough is enough in oil drillers.  The firm is suggesting that investors take advantage of recent weakness seen in the offshore oil drillers.

Its two Buy-rated picks in the call were Diamond Offshore (NYSE: DO) with some 23% upside to its price targets and Pride International (NYSE: PDE) with about 20% upside to its price targets.

Goldman Sachs even noted Transocean (NYSE: RIG) with 22% upside to its target, although Goldman Sachs only has a neutral rating on that name.

This huge discovery in Brazil is noted as part of the reason for day rates rising, although this now notes a record $639,000/day rate.

Jon C. Ogg
February 19, 2008

Posted on: February 19, 2008 – 9:37 am in Analyst Calls, Oil & Gas, , ,

Fidel Castro Gone, Herzfeld Wins (CUBA)

Herzfeld Caribbean Basin Fund Inc. (NASDAQ: CUBA) has been "the go-to trade" for Americans that wanted to invest in the potential normalization of US-Cuba relations. Until today, that always seemed more of a mystical potentiality rather than a finite event with a known time frame. 

With the news that Fidel Castro will not be returning to official power to run the country, this will get a lot of attention today and this week.  We’d advise traders that the swings we see this week should be quite wild.  If you want to see how "Castro-rumors" in the past have moved this closed-end fund, look at the move in late-2006 and then again in early to mid-2007.  This saw similar moves in the earlier part of this decade and in the late 1990’s.  You can find more historical data at the herzfeld.com site.

Unfortunately we are still a long ways off from any normalized relations.  Fidel’s brother Raul has been in charge of the country for much of the last 18-months as Fidel has "been ill."  But the good news is that this is at least step one of a ten or twenty step process.  We have covered this one before for our "10 Stocks Under $10" letter, and this one is now looking like it can come to fruition.

We’d beware of any major gap-ups that are too high in this closed-end fund because its total share count is so small and the float is extremely thin.  Herzfeld also closed at a discount to its N.A.V. last week, and this used to trade at a slight premium to a large back when this was above $10.00.

Be advised that this recently had a float of about 1.7 million shares before the last distribution and its market cap was only about $12.5 million, but that appears to have roughly doubled after a fairly recent rights offering.  It has an extremely thin daily trading volume, so today’s moves are going to probably be quite exaggerated.

Jon C. Ogg
February 19, 2008

Posted on: February 19, 2008 – 8:48 am in Cult Stock, ETF, International Markets, Mutual Funds, Politics, , , ,

OPEC Walks The Price Off Oil Up

The OPEC ministers are talking lower oil supplies in the spring. Maybe they believe that global slowdown will cut demand. Or, perhaps they just like the profits from crude selling above $90.

Rumors of a cut on production sent oil prices for March delivery above $97. It may have to wait to the end of the week to hit $100.

Douglas A. McIntyre

Posted on: February 19, 2008 – 8:30 am in Uncategorized

MBIA (MBI) Rises On CEO Replacement

MBIA (NYSE:MBI) has replaced it CEO with former Chairman and CEO Joseph "Jay" Brown, 59, who retired from the firm last May.

Brown expressed some degree of confidence about the company’s prospects no matter how dismal they seem to the rest of the world.

His jaw-boning worked and the shares are up 4%.

Douglas A. McIntyre

Posted on: February 19, 2008 – 8:26 am in Financial Stocks,

Can Diller Buy Malone Off With Home Shopping Network? Update

There has been some speculation that Barry Diller might be able to keep control of IAC/Interactive (IACI) without fighting with majority shareholder Liberty Media, if he hands over his largest division, The Home Shopping Network. Liberty, controlled by John Malone, might think it would get the better part of the deal.

According to The Wall Street Journal the two companies "might negotiate a deal in which Mr. Malone would take control of HSN and possibly another asset in return for giving up its majority voting stake in IAC." Pretty nifty.

The problem is that HSN is a dog. A look at the pro forma numbers provided by IACI show that in the fourth quarter HSN revenue rose only 3% to $905 million. Operating income fell 7% to $79 million.Malone would be giving up his control of IACI, which is worth $6 billion, and not be getting much in return.

Malone also owns QVC, another home-shopping operation. There is no evidence that is net customer gain in owning both networks would be significant. On the other hand, he might have a large net gain in the number of people who sit in front of TVs looking a pictures of cheap jewelry and giving out their charge card numbers.

Malone is better off mounting a proxy fight.

Correction: Malone, and the IAC board, already approved the original plan for the spin-off.  It is true, however, that Malone does not agree with the latest proposal to change the voting structure.  But he did approve the spin concept

Douglas A. McIntyre

Posted on: February 19, 2008 – 7:46 am in Mergers and Buy Outs,

Top 10 Pre-Market Analyst Calls (AHO, BKUNA, CHRT, FTI, HANS, MU, SIGM, UBS, X, WYE)

These are not the only analyst calls today, but these are the top ten analyst calls that 247WallSt.com is looking at in early pre-market trading:

  • Ahold (NYSE: AHO) raised to Overweight at JPMorgan.
  • BankUnited Financial (NASDAQ: BKUNA) downgraded to Market Perform at Wachovia.
  • Chartered Semiconductor (NASDAQ: CHRT) raised to Neutral from Underweight at JPMorgan.
  • FMC Tech (NYSE: FTI) downgraded to Neutral at JPMorgan.
  • Hansen Natural (NASDAQ: HANS) raised to Overweight at JPMorgan.
  • Micron Tech (NYSE: MU) raised to Overweight at Thomas Weisel.
  • Sigma Designs (NASDAQ: SIGM) downgraded to Neutral from Outperform at Robert W. Baird.
  • UBS (NYSE: UBS) downgraded to Peer Perform at Bear Stearns.
  • US Steel (NYSE: X) raised to Buy from Neutral at UBS.
  • Wyeth (NYSE: WYE) raised to Overweight at Morgan Stanley. 

Jon C. Ogg
February 19, 2008

Posted on: February 19, 2008 – 7:12 am in Analyst Calls, , , , , , , , , ,

Wal-Mart (WMT) Posts First $100 Billion Quarter, Driven By Overseas

Despite concerns to the contrary, Wal-Mart (NYSE: WMT) is still growing. It posted the first $100 billion quarter in its history. The world’s largest retailer said net sales for the fourth quarter of fiscal year 2008 were $106.269 billion, an increase of 8.3 percent over the fourth quarter of fiscal year 2007. EPS from continuing operations for the fourth quarter of fiscal year 2008 were $1.02, up 7.4 percent from $0.95 per share in the same prior year quarter, including a net charge of approximately $0.02 per share for certain items this year.

The top-line numbers were a bit misleading. US sales at the Wal-Mart flagship brand rose a pathetic 5% to $67.4 billion. Sales from international operations rose almost 19% to $27 billion. At that growth rate, overseas sales could match domestic sale in seven or eight years.

Operating income overseas rose over 14% to over $1.7 billion, or 23% of the global total.

Wal-Mart says it expects expects diluted earnings per share from continuing operations to be between $0.70 and $0.74 for the first quarter of fiscal year 2009, and between $3.30 and $3.43 for the full fiscal year 2009. Both numbers were below analyst estimates of $.74 and$3.44.

It is clear that Wal-Mart will now have to rely almost completely on international sales to meet its forecasts for the up-coming year. China and Mexico better deliver.

Douglas A. McIntyre

Posted on: February 19, 2008 – 6:48 am in Retail,

Storm Clouds Form For China Recession

When tens of thousands of visitors make their way to China for the summer Olympics they may be greeted by a country heading into a deep recession.

The Chinese government announced today that inflation got further out of hand, hitting 7.1% in January. So far, the country’s banking policy has not helped. According to one analyst quoted by MarketWatch "Even though China has raised interest rates and their reserve-requirements ratio … it really hasn’t done very much to rein in the monetary aggregates." That probably means that banks will have to further tighten credit and try to keep the out-flow of money into the economy at a dull roar.

But, there are several pieces of data which point to a sharp slowdown in Chinese growth, and perhaps even a contraction as the year goes on. A recession in the West is now all but a foregone conclusion. Certainly big huge US companies like Wal-Mart (WMT) will cut inventory coming from China as their US sales flatten. Demand for everything from auto parts to garden hoses is going to fall, perhaps precipitously.

On the other hand, if credit in China is tightened by the central government much of the capital which has fueled the run in the stock market and real estate will be wrung out of the economic system. It is often said that stock market activity is a leading indicator of recessions and recoveries. The Shanghai Composite is down 15% over the the last three months after being up almost 100% over the nine months prior to that.

China has also been willing to underwrite the cost of energy, buying oil on a market where crude is over $90 a barrel and selling by-products like gas and diesel at a fraction of where a real supply-and-demand market would mark their prices. That means that the real rate of inflation in China may be closer to 10% without the government’s hand in the economy.

An inflation rate of close to 10%, tightening credit from banks, and falling exports add up to one thing–a China recession.

Douglas A. McIntyre

Posted on: February 19, 2008 – 6:22 am in China,

Signs Point To Banking Crisis Getting Much Worse

The evidence comes in in pieces. One bit of bad news here and one there.

Today, the FT reported that US banks had tapped the Fed’s Term Auction Facility for over $50 billion in the last few weeks. As one analyst pointed out "The TAF … allows the banks to borrow money against all sort of dodgy collateral,” says Christopher Wood, analyst at CLSA. “The banks are increasingly giving the Fed the garbage collateral nobody else wants to take … [this] suggests a perilous condition for America’s banking system.”

The news that Credit Suisse (NYSE: CS) had "found" $2.85 billion in write-downs for asset-backed paper was not terribly encouraging. It is certainly an indication that banks are still having substantial problems valuing assets which are based on a weakening housing market and do not trade because of a locked-up credit markets. The banks can guess at the value of what they hold,  but have no way to know for certain.

There is also an emerging body of analysis which says that large banks may have to write-down about $15 billion in LBO loans in the early part of this year. According to The Wall Street Journal "the extent of the damage is likely to emerge as banks file their annual reports next month and report first-quarter results in April."

None of these calculations take into account the falling value of paper backed by student loans, credit card debt, or loans for car purchases. They also leave out a potentially massive hit if bond-insurers like MBIA (MBI) or Ambac (ABK) face cuts in their credit ratings.

The total market in LBO debt now runs around $200 billion. The size of the mortgage-back and consumer-credit markets can only be guessed at. Write-downs for some of these securities have not begun in earnest.

The debacles at AIG (AIG) and Credit Suisse are surely a sign that financial companies and their auditors are having trouble putting a dollar amount on assets for which there is not market.

Every sign, and that is every sign, points to bank and brokerage write-downs in 2008 which will make 2007 seems like a picnic.

Douglas A. McIntyre

Posted on: February 19, 2008 – 6:02 am in Banking, , , ,