Daily Archives: March 1, 2008

Implications Of Warren Buffett Panning Insurance Industry (BRK/A, BRK/B, ABK, MBI, AIG, RE, HIG, CB, PGR)

It is no great mystery that Warren Buffett of Berkshire Hathaway (NYSE: BRK.A, NYSE: BRK.B) is still one of the most followed and most revered "long term value investors" on the planet.  Any time there is Warren Buffet news you can count on every financial website having at least one story on him.  We even have our own "Buffett" index code.

His annual investor letter is always an important read, although investors should really note that this should be viewed and interpreted as a "macrocosm" of Microcosms.  Warren Buffett will be the first to tell you he cannot predict the stock market, cannot exactly predict the economy, cannot predict the weather, and cannot predict the short-term implications on every stock out there.  But he smooths out all the news and noise from the long-term vision.  That is what a long-term value and income manager is supposed to do, particularly if his holding period is "Forever." If you look over his latest public stock investment holdings, you’ll see he still goes for the simple and easy to understand. We gave a list of candidates that could fall under his ambitions of a "whale of a deal," although this seems more like the past rather than the present or future.

So what are the implications of the Oracle of Omaha panning the insurance sector.  Of his $2.35 Billion in net earnings for the last quarter, $1.44 Billion of the total $2.35 Billion came from insurance underwriting and insurance investment income (61%).  For Q4 2006, the percentage of insurance-tied numbers was 60% of the $2.868 Billion in operating earnings.  For all of 2007, the percentage of insurance-tied numbers was 59% of the $9.634 Billion in operating income.

In his annual letter to shareholders, Mr. Buffett noted specifically that margins in insurance were going to be lower even if we had another disaster free year.  He even noted, “If the winds roar or the earth trembles, results could be far worse.”  In the past two years he has joked about having the foresight to benefit from no disasters.  If that prediction isn’t harsh enough, try this one: “It is a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise.”  Or better yet, "That party is over." 

Mr. Buffett has even gone out on a limb to predict the future Berkshire Hathaway as a whole will have breakeven or positive earnings.  He admitted the law of large numbers has caught up with Berkshire Hathaway.  But what happens if you are an executive or bean counter at OTHER insurance companies?

Berkshire Hathaway from best we can tell has not gotten mixed up with all of the leveraged and crazy CDO structures that couldn’t be explained.  That isn’t true elsewhere.  But every portfolio manager talks his or her own book.  There are many things that have yet to be resolved and there are likely to still be at least some failures from all this fallout.  Insurance companies will be in that boat too as their financial bets are frequently much farther out than that of banks. 

  • Mr. Buffett has already made a backstop offer for the bond insurers to pick up their municipal assets on the cheap, which were rebuffed faster than the offers were made.  MBIA (NYSE: MBI) and Ambac Financial (NYSE: ABK) are still a "pending situation" as far as ultimate long-term viability, and Berkshire Hathaway decided to open a competing municipal bond insurance operation to compete.
  • American International Group (NYSE: AIG) has been hamstrung by leveraged loan and CDO exposure that was first disclosed as immaterial and somehow has grown to a quarterly loss of some $5 Billion.  It also has noted a total of $42.2 Billion of exposure to the troubled bond insurers, and it has written roughly $61 Billion of credit default swaps on CDO’s with some subprime collateral.  They are far from immune, AIG stock fell some 6.5% Friday alone to $46.86, and its 52-week trading range is $44.10 to $72.97.
  • Everest Re Group, Ltd. (NYSE: RE) is one of the largest pure-play reinsurers out there, another arena in which Berkshire Hathaway is a giant.  It only fell 1% Friday to $96.88, and its 52-week trading range is $90.27 to $115.86.  They would not at all be immune, particularly after its profits fell some 90%.
  • Hartford Financial Services (NYSE: HIG) is another insurance monster that saw shares fall another 3.75% to $69.91, and its 52-week trading range is $65,76 to $106.23.  Chubb (NYSE: CB) is yet another that saw a 3.1% drop Friday to $50.90, while its 52-week trading range is
  • $45.65 to $55.99.
  • Progressive Corp. (NYSE: PGR) competes head to head with GEICO and it too saw a 3% drop on Friday to $18.33, while its 52-week trading range is $16.98 to $25.16.

Realistically, this list could just go on and on.  There is no reason to.  Most of the reports out there merely just cover his comments in case everyone doesn’t have the time to read through his endless letter.  We have one solid rule when we question anything in the financial markets, and the answer is almost always "FOLLOW THE MONEY."  Mr. Buffett is a great manager, and those who bash him based only upon the "today" really look like clowns.  Regardless, it’s almost like he is trying to prepare his holders for the worst again after two years of no catastrophes.  Maybe he is trying to talk down other insurance operations so he can buy them on the cheap or show how Berkshire Hathaway insurance subsidiaries have better balance sheets.  Either way, he’s talking up his book even if it was meant to sound cautious.

The fact that we noted "Buffett’s Loss Could Be Your Gain" after Barron’s panned this one change nothing about the situation.

Jon C. Ogg
March 1, 2008

Posted on: March 1, 2008 – 12:41 pm in Annual Report, Buffett, Conglomerates, Earnings, Financial Stocks, , , , , , , , ,

Starbucks (SBUX): Coffee Costs Give Margins Another Squeeze

Starbucks (NASDAQ: SBUX) retrained most of its store workers last week. Howard Schultz, the returned founder and CEO, has replaced a number of the lame-brains in senior management.

It would be hard to tell from the stock price that any of this was more than wasted energy. The shares dropped 10% in February to finish at $18.71.

Wall St. understands that with slowing growth in the US, Starbucks earnings are still exposed to poor year-over-year comparisons as the quarters are reported during 2008.

But, the company may have a more serious problem. The cost of milk has gone up over the last year. Now the price of coffee is taking off. According to The Wall Street Journal "The price of green coffee beans has risen 22% since the beginning of the year in trading on ICE Futures U.S." While Starbucks buys most of its coffee under long-term contracts with set prices. However, those deals will not protect the company’s cost of sales margins forever.

Starbucks investors have one more headache. and they may have it for a long time.

Douglas A. McIntyre

Posted on: March 1, 2008 – 12:33 pm in Food,

Stocks Which Had The Worst Of It In February (T)(VZ)(S)(AIG)(GM)(MSFT)

No matter how bad the markets were in February, they were worse for some stocks than for others.

Shares in Microsoft (NASDAQ: MSFT) dropped 16% during the second month of the year, which shows how costly the company’s bid for Yahoo! (NASDAQ: YHOO) has been. Now that no other reasonable offer has materialized for the portal company, Redmond should withdraw its offer, let Yahoo! fall to $18 and then re-bid the deal at $22. That would certainly allow MSFT stockholders to recoup most of their losses.

Sprint Nextel (NYSE:S) has been a particularly gruesome piece of work, falling over 30% over the course of th last month. Earnings were bad and the company is still struggling to keep subscribers. The lowering of rate plans for cell customers at AT&T (NYSE: T) and Verizon Wireless puts even more pressure on Sprint. If the company does not put itself up for sale or get a large investor to put capital into the company’s WiMax initiative, the stock will go lower. There are rumors that Intel (NASDAQ: INTC) will invest $2 billion into a joint venture between Sprint and Clearwire (NASDAQ: CLWR) to help build-out a national WiMax network. The rumors had better be true.

AIG (NYSE:AIG) dropped about 17% in February because of a series of unexpected losses tied to investments in complex instruments which lost much of their value as the credit markets imploded. It is nearly impossible to see management doing anything to get shareholder confidence back. AIG gets to join other deservedly battered companies like Citigroup (NYSE: C) in purgatory.

GM (NYSE: GM) fell 15% over the course of February. The odds that there will be any good news for the company this quarter are unusually poor. The domestic car market shrinks by the month as does the chance for GM to make money in North America.

AT&T (NYSE: T) and Verizon (NYSE: VZ) are the surprising cripples of the last month. The stocks had been doing extraordinarily well. Their cellular businesses were growing and kicking off piles of cash. Their new fiber TV initiatives appeared to be giving cable companies fits. The most perverse thing about the companies, which were both down about 7% in February, is that they cut each others throats by getting into a cell service price war.

Douglas A. McIntyre

Posted on: March 1, 2008 – 9:39 am in Large Cap Stocks, , , , , , , , , ,

Fuel-Tech Readies For Earnings (FTEK)

On Wednesday we’ll get to see earnings out of Fuel-Tech, Inc. (NASDAQ: FTEK). The estimates for the combustion engineering solutions provider (cleaner coal) from First Call are $0.17 EPS and $28.04 million in revenues.  Next quarter estimates are $0.12 EPS and $25.39 million in revenues. Estimates for fiscal 2008 are $0.55 EPS on $107.87 million in revenues.  As there were discrepancies and as many analysts have changed targets on this one ahead of earnings, we’ll make an update on any key changes before the earnings release.

Analysts have an average price target north of $31.00, still some 50% north of current prices.  Fuel-Tech’s 52-week trading range is $14.15 to $38.20.  This remains one of the key potential beneficiaries of high coal demand and the need to clean up the coal process.  But its valuations and its stage where it is still dependent upon individual contracts have plagued the company for some time.  This is one of the more volatile names in all of the cleaner energy and alternative energy sectors, and its guidance is more important than current numbers for determining forward valuations.

Jon C. Ogg
March 1, 2008

Posted on: March 1, 2008 – 8:23 am in Alternative Energy, Earnings,

Urban Outfitters: Rare Retail Winner Ahead of Earnings (URBN)

On Thursday morning we’ll get to see earnings out of Urban Outfitters Inc. (NASDAQ: URBN). The estimates for the specialty retail company from First Call are $462.28 million in revenues.  Next quarter estimates are $383.06 million in revenues. Estimates for fiscal Jan-2009 are $1.82 billion in revenues.  Because of EPS revisions, we’ll give more formal EPS targets as the news event is closer.

Analysts have an average price target north of $31.00 and Urban Outfitters’ 52-week trading range is $19.20 to $31.32.  This one has over 20.7 million shares in the short interest upon last look.

Despite the stock being within about 10% of its 52-week highs at $28.78, it still seems like many had mostly forgotten about Urban Outfitters as a stock for quite some time after that exponential rise came to maturity in 2005.  What is interesting is that it is also toward the higher-end of its trading range highs from back in 2005.  Stay tuned for this one, because it is fairly hard to find a retail stock that has done this well over the last six months.

Jon C. Ogg
March 1, 2008

Posted on: March 1, 2008 – 8:01 am in Earnings, Retail,

Clothing Retailers Wait For Chico’s FAS Earnings (CHS, CWTR)

On Tuesday afternoon we’ll get to see earnings out of Chico’s FAS Inc. (NYSE: CHS). The estimates for the specialty womens retailer from First Call are $416.93 million in revenues.  Next quarter estimates are $467.74 million in revenues. Estimates for fiscal Jan-2009 are $1.84 billion in revenues.

Analysts have an average price target north of $9.00, in-line with the current share price.  Chico’s FAS’ 52-week trading range is $6.70 to $27.94.  This is one that we might not normally cover, but it has been one of the uglier womens retail plays out there.  Even with a near-50% recovery from its 52-week lows, this one is still nearly down by about two-thirds from its highs. 

The short interest on this is huge with roughly 18.8 million shares, so anything looking "not horrible" will probably create a short covering parade.  When this one turns, it will turn fast.  Investors just need to know that they are no longer investing in a growth stock if they are buying stock in Chico’s.  Traders will also be watching Coldwater Creek (NASDAQ: CWTR) on this news, as these are the two most compared companies after much of the same target market.

Jon C. Ogg
March 1, 2008

Posted on: March 1, 2008 – 7:56 am in Apparel, Earnings, Retail, ,

Chip Stocks Brace For Marvell & National Semi Earnings (NSM, MRVL)

By now, we’ve seen most major tech earnings and we’ve already seen most major chip earnings.  If it was a movie, the last earnings and guidance would be called "The Poor and the Fair" or something of the like.  On Thursday afternoon we’ll get to see two more key semiconductor earnings.  Late this coming week, we’ll see earnings out of both Marvell Technology Group Ltd. (NASDAQ: MRVL) and National Semiconductor Corp. (NYSE: NSM).

On Thursday afternoon we’ll get to see earnings out of Marvell Technology Group Ltd. (NASDAQ: MRVL). The estimates for the semiconductor company from First Call are $0.11 EPS on $782.36 million in revenues.  Next quarter estimates are $0.13 EPS on $764.99 million in revenues. Estimates for fiscal Jan-2009 are $0.69 EPS on $3.32 billion in revenues.  Analysts have an average price target north of $17.00, well down from the old highs.  One thing we would like to note was that over the last two weeks there had been some very unusual stock options activity.  One rumor pointed to earnings, and one to a possible buyout.  Until news is news rather than hearsay, we’ll treat it lightly until the facts are out.  Marvell Technology Group’s 52-week trading range is $9.77 to $20.84.  Marvell has some 32.8 million shares in the short interest, and at the lower rungs of the trading range this one has a potential of making a major move if it can ever show any good news.

Also, on Thursday afternoon we’ll get to see earnings out of National Semiconductor Corp. (NYSE: NSM). The estimates for the semiconductor company from First Call are $457.42 million in revenues.  Next quarter estimates are $472.45 million in revenues. Estimates for fiscal May-2008 are $1.9 billion in revenues.  We had some real discrepancies on the earnings numbers, so we’ll make an update before the Thursday information.  Analysts have an average price target north of $22.00, well down from the old highs.  National Semiconductor’s 52-week trading range is $16.73 to $29.69.  Traders still sometimes try to tie National Semi as a key chip stock that affects many others, although we think those days are close to a decade ago.

Jon C. Ogg
March 1, 2008

Posted on: March 1, 2008 – 7:55 am in Earnings, Semiconductor, ,

Short Sellers In Big Lots Ahead of Earnings (BIG)

On Wednesday morning we’ll get to see earnings out of Big Lots Inc. (NYSE: BIG). The estimates for the closeout retailer from First Call are $0.84 EPS on $1.41 billion in revenues.  Next quarter estimates are $0.26 EPS on $1.11 billion in revenues. Estimates for fiscal Jan-2009 are $1.53 EPS on $4.64 billion in revenues.

Its strategy change to add some slightly more upscale items couldn’t have come at a worse time when you consider that the discretionary income of its customers flew out the window of the 1978 station wagon. 

Analysts have an average price target of $18.00.  We’d also note that the short interest has grown to more than 24 million shares, which is almost 8-days worth of trading volume.             

Big Lots’ 52-week trading range is $12.40 to $36.15.  This is one we have been critical of for a while, although it appears that at least most of the damage to the stock may have been seen.  Either way, we think it will take a long time, a lot patience, and maybe even a miracle for this to not stay in the bottom third of ist 52-week trading range since it has already recovered sharply.

Despite our negativity, we’ll still be the first to admit that any "non-atrocious news" will probably create a minimum of a short covering rally.

Jon C. Ogg
March 1, 2008

Posted on: March 1, 2008 – 7:36 am in Earnings, Retail,

Can Staples Earnings Change The “going sideways” Path?

On Tuesday morning we’ll get to see earnings out of Staples, Inc. (NASDAQ: SPLS). The estimates for the office supplier from First Call are $0.47 EPS on $5.37 billion in revenues.  Next quarter estimates are $4.91 billion in revenues. Estimates for fiscal Jan-2009 are $1.58 EPS on $20.88 billion in revenues.

This last acquisition offer for Corporate Express (NYSE: CXP) is also going to be a key focus as this stock has been dead money.  Analysts have an average price target north of $27.00 and Staples’ 52-week trading range is $19.69 to $27.00.  On last look, this had just over 15 million shares listed as being in the short interest.

Jon C. Ogg
March 1, 2008

Posted on: March 1, 2008 – 7:16 am in Earnings, ,

Clearwire Earnings… Win, Lose, or Draw? (CLWR, S, MOT)

On Tuesday morning we’ll get to see earnings out of Clearwire Corporation (NASDAQ: CLWR). The estimates for the wireless broadband service provider from First Call are -$1.01 EPS on $46.13 million in revenues.  Next quarter estimates are $51.52 million in revenues. Estimates for fiscal Jan-2009 are -$4.08 EPS on $269 million in revenues.

With all the problems seen over at Sprint Nextel (NYSE: S), we’ll not consider anything a done-done deal.  Even the stake from Motorola (NYSE: MOT) is hard to count as gospel as there has been hardly anything good up in Schaumburg, Illinois to report.  As a reminder, every earnings release from Clearwire has the shot of seeing an announcement of additional securities in debt and/or stock being sold as well.  You can usually expect an insider selling window to open up as well.

Analysts have an average price target north of $25.00, which is still about 70% higher than current prices.  Clearwire Corporation’s 52-week trading range is $10.29 to $35.41.

Jon C. Ogg
March 1, 2008

Posted on: March 1, 2008 – 7:01 am in Earnings, Internet, WiMAX, Wireless, , ,

Corporate Bankruptcies Likey To Take Sharp Jump (CHTR)(MNI)(JRC)(LVLT)

It should come as no surprise that companies which has taken on too much debt over the last three years will start to fail and have to file for Chapter 11. Some of the signs that this process is about to accelerate are starting to show up.

"High-yield debt sales have sputtered so far in 2008 and are off to their weakest start in 17 years thanks to an anemic U.S. economy, a worldwide credit crunch and a pronounced absence of investor appetite for risky assets," according to Reuters.

While there is no saying which companies might face severe problems certainly several firms with widely traded stocks are at risk. This would include newspaper companies McClatchy (MNI) and Journal Register (JRC) which have high debt and rapidly falling revenue. Cable company Charter (CHTR) is saddled with $19 billion in long-term debt. Level 3 (LVLT) has a shaky balance sheet and extremely modest cash flow. Shares sold short in the firm are higher than those of any other stock listed on Nasdaq.

Douglas A.McIntyre

Posted on: March 1, 2008 – 6:26 am in Economy, , , ,

Venezuela Say Exxon (XOM) Asset Seizure Based On Fantasy

PDVSA, the state-owned oil company of crack-pot Hugo Chavez’s Venezuelan government, claims that Exxon’s (NYSE:XOM) seizer of $12 billion in assets is based on "fantasy". Lawyers for PDVSA said that the claim "that PDVSA would try to hide its assets was not credible," according to Reuters.

The South American government has nationalized some of Exxon’s assets in the country and the US company is seeking restitution.There is little question that the Exxon property was taken. Now the battle is over what it is worth.

Chavez is likely to wake up one morning and find the wreck of the Exxon Valdez parked in his back yard. The Exxon management are not nice people.

Douglas A. McIntyre

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Posted on: March 1, 2008 – 6:01 am in Oil & Gas,