Housing prices are down across the US. Perhaps it is appropriate that it is in the world’s capital of gambling that they are down the most.
According to Bloomberg, home prices in "Las Vegas fell 25 percent to $137 a square foot."
But, it only takes one big jackpot at the nickel slots to pay off the whole mortgage.
Douglas A McIntyre
Revenge is a dish best served cold. The former CEO of UBS (UBS), pushed out by the bank’s current chairman, has suggest that the huge financial firm be broken up.
According to The Wall Street Journal the proposal is that "UBS should legally separate its investment bank from its private-client bank and ultimately sell the investment bank; it should sell its asset-management business to raise money."
Unfortunately, there is no way to know whether the program makes sense. It is not like the notion, which has floated around for at least two years, that Citigroup (C) be broken into parts with its investment bank, corporate bank, wealth management, and consumer bank becoming four entities. With huge write-downs over the last two quarters and an unclear picture of Citi’s future difficulties determining the values of the pieces of the pie has become remarkably complex.
It is also not unlike the proposals to split monoline bond insurers Ambac (ABK) and MBIA (MBIA) into two parts, one which would hold the safe muni-bond operations and one which would take troubled mortgage derivatives.
In the end, the math has become almost too complex, even for Wall St.’s best minds. This is because issues of liabilities have gone from a regular part of doing business as a financial institution to being a mine field of poorly understood pools of paper. The values of these depend on forces in the credit markets and economy which are far afield of where banks normally would invest capital.Mutations often end up being very different from the host.
There will be no big busting up of any of the large money center banks, brokerages, or insurance companies for now. No one knows how to do the math.
Douglas A. McIntyre
After 24/7 Wall St. published the Twenty-Five Most Valuable Blogs we decided to look at some niche content sites which compete with blogs and should have similar valuation data.
Sugar, Inc runs seventeen websites. The content at the sites is blog-like but the writing appears more highly controlled and edited than it would be at a blog. The destinations, which include PopSugar, FabSugar, and GeekSugar, are aimed at female teenagers and young women. The company was started by a husband and wife.
Sequoia Capital has put money into the firm. According to The San Francisco Business Times, Sugar bought in $5 million in revenue last year.
According to the company, Sugar’s network has 11 million monthly unique visitors and 55 million pageviews. The nature of the advertising would indicate that it gets low CPMs. For our model, we are putting that a $14 per page yield. Monthly revenue is estimated at $770,000., an annual run-rate of $9,240,000.
The company is expensive to run. It has 75 employees. With a full load of benefits, T&E, rent, and communications costs of $110,000 each, the costs for these people is $8,250,000. Accountants, outside consultants, hosting and serving add another $750,000.
The business is growing fast and has a small operating profit.
What is the company worth. Probably a lot to a company like NBC, Conde Nast, or even Hearst.
Could the company go for 12x revenue? Yes. That’s $111 million.
Douglas A. McIntyre
Lawson Software (NASDAQ: LWSN) may be in a strange spot now as the enterprise software and consultant firm issued earnings.
The company posted earnings of $0.08 EPS on a non-GAAP basis on an 11.3% rise in revenues to $212.9 million, while First Call showed consensus as $0.08 EPS and $217.2 million. Lawson issued guidance for next quarter at $0.08 to $0.11 EPS on revenues of $225 to $230 million. This is still sequential growth, but this lurks under the estimates of $0.12 EPS and $230.9 million from First Call. As far as charges, Lawson reported an additional permanent impairment charge of $8.1 million. It also reported a temporary impairment charge of $2.1 million to reduce the value of its auction rate securities.
The company is still growing and it isn’t an expensive enterprise software and consulting company if you are willing to stick by some longer-term forecasts out to Mid-2009. But the problem is that this new drop might make the required premium to secure a vote approval too high, assuming the company would even go along with a buyout if it came.
If a buyout offer ever comes for Lawson, it has to be a "friendly" merger. The company has both a blank-check preferred share provision and a poison pill provision according to Capital IQ.
If you would like to join our open email distribution list,we usually discuss other merger candidates, merger-arb, specialfinancings, and other issues that create special situations. We havealso reviewed this for our weekly "10 Stocks Under $10" newsletter.
Lawson has been public for now more than 5-years and for most of that time it has traded between $5.00 and $10.00 per share. The company’s stock closed up 1% at $8.00 in regular trading today, yet shares are down roughly 8% at $7.30 in after-hours trading. Its 52-week trading range is $6.94 to $11.39.
Jon C. Ogg
April 3, 2008
Jon Ogg produces the Special Situation Investing Newsletter; he does not own securities in the companies he covers.
Pilgrim’s Pride (PPC) Rising commodities prices will pinch margins. Falls to $18.51 from 52-week high of $41.
Superior Offshore (DEEP) Still concerns about solvency. Down to $1.15 from 52-week high of $19.58.
Equity Media Hldgs (EMDA) Receives "going concern" letter from auditors. Down to $.65 from 52-week high of $5.
X-Rite (XRIT) Cuts forecasts and jobs. Drops to $4.85 from 52-week high of $16.42.
Douglas A. McIntyre
After looking through the filing and press release regarding Dendreon Corporation (NASDAQ: DNDN), there are some interesting data points that could be a game changer for current and future investors.
The company raised roughly $47 million in gross proceeds in a private sale of securities to an institutional investor. The original filing showed $29.36 million as the filing amount, but the existing shelf registration is much larger. Lazard Capital Markets acted as the sole placement agent for this offering.
This offering put the per share purchase price at $5.92 for some 8 million shares and warrants to repurchase up to 8 million additional shares. This purchase price was well above yesterday’s $5.06 close. The purchasers are also going to get a warrant to purchase shares at a $20.00 strike price for a period of 7-years after the closing of the sale of shares. We would note that could allow the warrants to actually become available for sale down the road as they will become exercisable on or after October 8, 2008. In theory, you could even see public warrants trade as a result if it refiles for that.
The USE OF NET PROCEEDS from this sale were listed as follows:
This also addresses potential acquisitions, although with the size we wouldn’t expect anything major outside of new molecules or compounds being acquired that demonstrate new potential drugs for the company down the road. It lists these as "complementary technologies or products, although we currently have no agreements or commitments in this regard." So this could mean anything from microscopes to new lines.
Most importantly, this gives the company an additional bit of breathing room as it still has a long road in front of it. We have covered Dendreon in our open email distribution list regarding the stock options and ongoing corporate developments.
Shares of Dendreon are trading up about 3% at $5.23 today and the 52-week trading range is $4.15 to $25.25. The ultimate motivation behind an investment of this size for a controversial biotech can be many. It appears that it has gotten at least one true believer to provide funding.
Jon C. Ogg
April 3, 2008
Jon Ogg produces the Special Situation Investing Newsletter; he does not own securities in the companies he covers.
Sometimes it takes experts a quarter or two to catch up with the real world. The American Bankers Association reports that during the fourth quarter of last year consumer credit payments fell behind more than they have at any time since 1992. The bucket of loans referenced includes credit cards, auto loans, and home equity lines.
According to Bloomberg "Late loans climbed 21 basis points to 2.65 percent of all accounts in a consumer-loan index created by the group." Hardly a surprise.
What is not so obvious is that the Ph.Ds hired be Wall St. have built derivatives around these segments of consumer credit just as they did with subprime loans. It is a matter of time before this paper loses enough of its value for the problems to become an issue in the quarterly reports of financial companies.
Today, no one knows what the full extent of the fall-out from these deteriorating loans may be. It is most certainly another straw on the camel’s back
Douglas A. McIntyre
Garmin Ltd. (NASDAQ: GRMN) already saw the wrath of traders today after its CFO told Reuters in an interview that the revenue drop on a sequential basis (quarter/quarter) would see a drop of 40% to 50%.
With the last quarter showing some $1.217 Billion in revenues, you would derive a new range of $606 million to $730 million. Before any estimate changes have been made, First Call has estimates for the quarter at $731.4 million. When you compare that to Q1 2007, it doesn’t look so bad as the Q1 2007 showed some $492 million in revenues.
In no way can you call this good news, but….. There is always a silver lining if you look at the big picture. Garmin shares were trading down 10% around $50.00 in pre-market trading. The low print was $50.18 today, under the prior 52-week low of $52.18.
We noticed some trends peaking back in November when we saw some concerning data out of Trimble Navigation (NASDAQ: TRMB).
One other issue to constantly watch is that Nokia (NYSE: NOK) acquisition of NAVTEQ (NYSE: NVT). With a cash purchase price of $78.00 per share and a current share price of $64.70, you have to wonder about the reality of many thinking a Nokia regret or buyer’s remorse. That’s the situation, even if NAVTEQ already approved the deal. Shares were above $75.00 just one month ago. That is a wide enough arb-spread to scare many merger-arb players. The European Commission’s extended review already gives this another 90 to 125 days before that approval answer is known.
With a high of $125.68 over the last year (October 2007), this sell-off marked a more than 60% cut in share prices. An $11.7 Billion current market cap still seems high, but at some point enough is enough. Things can always get worse, that is always present. But shares are down by less than 5% at $53.84 after 90-minutes of trading.
It’s not prudent to call an all-clear and run out in the open here. But it would also be foolish to say that you have only seen the beginning. Sometimes "Less-Bad" is good enough. It might not be the perfect comfort level entry for a longer-term investor, but the day traders just cleaned up this morning.
We consistently review merger-arb statistics and spreads for our special situations newsletter and we also make many general updates regarding mergers, speculation, and more on our open email distribution list.
Jon C. Ogg
April 3, 2008
Jon Ogg produces the Special Situation Investing Newsletter; he does not own securities in the companies he covers.
Medarex, Inc. (NASDAQ: MEDX) wants to clarify a few issues regarding the study halt from Pfizer (NYSE: PFE) this week on advanced melanoma. The company says that there are key differences between Pfizer’s discontinuing its Phase 3 clinical trial of front-line treatment of tremelimumab compared to chemotherapy in patients with advanced melanoma.
Pfizer’s tremelimumab and Medarex’s ipilimumab do have a similar mechanism and have been considered by some as similar molecules, and it is natural to attempt to draw parallels between the two molecules.
But Medarex wants to clarify some issues. The two antibodies are different molecules, and results from one antibody program may not be indicative of the same results from another program. While it previously reported that results from the Phase 2 study did not meet the primary endpoint, the three studies in its Phase 2 program were suggestive of ipilimumab’s potential for clinical anti-tumor activity and are under discussion with regulatory agencies. Medarex’s ongoing ipilimumab Phase 3 program for front-line treatment of advanced melanoma is different in design from the Pfizer trial, and it is too early to draw any clinical conclusions from the Pfizer announcement and a recent review of its ongoing Phase 3 trial by the Data Monitoring Committee indicated that the Medarex trial should continue.
Lastly, Medarex noted that Bristol-Myers Squibb Company (NYSE: BMY) is its partner for ipilimumab and its studies are continuing to move forward; and prior guidance is unchanged and regulatory discussions are pending.
Medarex shares were up about 2% shortly after it issued this clarification statement. Unfortunately shares are back to down marginally by 0.25% at $7.61 right before the open. As we have noted, this is the largest potential candidate it has right now. But this company also has many partnerships and an extensive pipeline of potential drug candidates, and it continues to win milestones on other studies and candidates.
Jon C. Ogg
April 3, 2008
The Fed does not want to see all the money it has give to brokerages in exchange for lousy paper to go down the toilet so it has stationed its own personnel in the firms to keep and eye on things.
According to The Wall Street Journal "For the first time in more than a decade, the Federal Reserve has set up shop inside brokerages to monitor their financial condition" Bernanke has been reading George Orwell’s "1984"
The sleuths are stationed at Goldman Sachs (GS), Bear Stearns (BSC), Morgan Stanley (MS), Lehman (LEN), and Merrill Lynch (MER).
It is too much to hope that they will not find anything.
Douglas A. McIntyre
eBay, Inc. (NASDAQ: EBAY) shares are trading higher in pre-market activity this morning after Merrill Lynch issued an upgrade today. The brokerage firm raised its rating from Neutral to Buy.
Merrill Lynch believes that eBay can post upside to estimates on what may be a conservative 2008 outlook. The brokerage firm also believes that new management and a change mentality toward auctioneers will help as well. The part that is somewhat surprising about this call is that Merrill Lynch sees the potential for some accelerated gross merchandise value, which if things slow further or remain slow won’t be an easy task.
Who knows, maybe as people don’t want to go to pawn shops they will sell all their luxury goods and collectibles on eBay this year. eBay shares are trading up about 2.5% at $32.55 in pre-market trading this morning, while its 52-week trading range is $25.10 to $40.73.
Jon C. Ogg
April 3, 2008
MEMC Electronic Materials (NYSE: WFR) is seeing shares spanked this morning. The company has issued downward guidance with Q1 revenues of about $500 million. The problem is that previous guidance was $560 million and First Call was at $559.2 million. It also sees Q1 gross margins of approx 52%, compared to prior guidance of about 54.8%.
The company experienced an accelerated buildup of chemical deposits inside the new expansion unit at its Pasadena, Texas facility on multiple occasions, and each instance required several days of downtime for maintenance to clean and re-stabilize the unit. The utilization of the Pasadena facility was about 20% lower than Q4 and resulted in much lower than anticipated output.
Despite a softening economy and despite it being a materials supplier for semiconductors, this has become such a go-to supplier stock for solar cells materials that this much downside isn’t accepted by traders.
Shares closed at $76.39 yesterday, and they are trading down 10% in pre-market trading at $68.75 pre-market. Its 52-week trading range is $49.70 to $96.08.
Jon C. Ogg
April 3, 2008
Vical, Incorporated (NASDAQ: VICL) has been awarded a $2 million Phase II small business technology transfer grant from the US National Institute of Allergy and Infectious Diseases department from the National Institues of Health.
The grant is to fund an ongoing development of Vical’s plasmid DNA vaccine against Herpes simplex virus type 2. This is none other than the sexually transmitted virus that causes genital herpes.
Research is being conducted at the University of Wasington and the University of Texas. The goal of the study is to be used in people who already have HSV-2 with a primary goal of reducing or eliminating periodic herpes viral flare-ups and the associated viral shedding and transmission.
The potential list of users could be tens of millions and there is currently no such vaccine or drug that is a true cure for this.
Vical’s market cap is a mere $146 million.
Jon C. Ogg
April 3, 2008
There are other analyst calls affecting shares this morning, but these are ten of the top calls that we are focusing on this Thursday in pre-market trading:
AFLAC (NYSE: AFL) cut to Neutral from Buy at Banc of America Sec
Cisco Systems (NASDAQ: CSCO) cut to Neutral from Buy at UBS.
Devon Energy (NYSE: DVN) raised to Overweight at JP Morgan.
Jamba (NASDAQ: JMBA) started as Hold at Jefferies.
KBW inc. (NYSE: KBW) started as Sell at Stern Agee.
Marathon Oil (NYSE: MRO) raised to Outperform at Oppenheimer.
National City (NYSE: NCC) raised to Outperform at Bear Stearns; raised to Equal Weight at Morgan Stanley.
Prosperity Bancshares (NASDAQ: PRSP) cut to Neutral at Sun Trust Robinson Humphrey.
Urban Outfitters (NASDAQ: URBN) cut to Market Perform at Morgan Keegan.
VMware (NYSE: VMW) cut to Hold at Lazard.
Jon C. Ogg
April 3, 2008
AT&T (T) has indicated that it will ship phones with the Google (GOOG) Android operating system. That may happen later this year.
The news is bad for Yahoo! (YHOO) which has the search engine partnership with AT&T Wireless. And. the people at Microsoft (MSFT) which makes a portable device OS and Symbian, which dominates the mobile OS market should not view this as their best day.
The Android system is open source. AT&T likes that. It can build its own software applications for it cellular products and not pay Google a dime for the operating system platform.
The best things in life are free.
Douglas A. McIntyre
Markets in Europe were slightly lower at 6.50 AM New York time.
The FTSE was off .4% to 5,895. Barclays (BCS) was off 2.9% to 489.5. British Air was down 3% to 240.
The DAXX fell .5% to 6,747. Commerzbank was down 4.5% to 21.57. Infineon was off 2.6% to 4.94.
The CAC 40 fell .3% to 4,894. AXA (AXA) was down 2.6% to 24.77. Credit Agricole was down 3.7% to 20.88
Data from Reuters
Douglas A. McIntyre
Go to an AT&T (T) store. You can still get a Blackberry from Research In Motion (RIMM) for under $300, especially if you press the guy behind the desk.
Blackberry had a quarter most companies can only hope for in a recession. Revenue doubled in Q4 to $1.88 billion, much better than Wall St. expected. The company shipped 4.4 million smartphones during the quarter and 24 million for the year. It guidance was awesome.
The stuff that dreams are made of.
The success of RIMM may tell investors about one pocket of the economy which is still doing OK. Anecdotal evidence says that Apple (AAPL) is doing well enough with its iPhone. Some stores are out of the fancy SteveJobs-phone. Nokia (NOK) has indicated that handset sales are holding up.
On the consumer electronics side, sales of Ninendo Wii, Microsoft (MSFT) Xbox, and Sony (SNE) Playstation3 are running much better than was expected, as are the games that run on them. None of these things is terribly expensive.
PC sales are not doing as well as these other modestly price electronic gizmos and gadgets. But, a PC probably costs $1,500, at least if customers want to buy one that works.
The consumer seems to have a few dollars in his pocket, mixed in there with all that lint. He is willing to dish out for "cool" and inexpensive toys, some of which help him in his daily life and some of which entertain him. He can sit in his house, which may not be his much longer, and play games while he talks on the phone.
RIMM is OK. People love the Blackberry and it does not cost much,
Douglas A. McIntyre
A federal judge has approved an investigation into the lending practices of Countrywide (CFC). The mortgage company may have, among other things, charged borrowers large, unjustified fees. That was after they were given loans which the firm might have known they could not repay.
If all of this keeps heading down the path of discovering more and more bad behavior at Countrywide, the liabilities for the firm may pile up.
Bank of America (BAC) might still walk on its deal to buy CFC. How nice would that be?
Douglas A. McIntyre
The bets that companies will default on their debts is rising. Financials which own junk bonds or have financed junk deals will be on the hook. One S&P executive told Bloomberg “The markets are pricing in a default rate of 9 or 10 percent for high-yield corporate debt, which is a lot higher than we’re forecasting." The rating agency thinks the level of companies not making the note could be over 5% by early next year, so the market is guessing that S&P is wrong on the wrong side of things
Credit agencies don’t have much credibility left. They screwed up their evaluations of subprime assets and kept Aaa ratings on monoline insurers for too long.
The default rate at companies could take a sharp move up for several reasons. One is that companies like Charter (CHTR) and Level 3 (LVLT), which have massive debt and poor operating income, cannot turn to banks and brokerages for either more money or restructuring of their balance sheets The window is closed.
A recession will drive down sales at over-leveraged companies. As their sales fall sticking with covenants is going to become much harder.The airline and mid-level banks have a lot of exposure here.
Auction-rate securities are showing up on an alarming number of company balance sheets. Those will be written down and will hit P&Ls, but, worse, these firms will not have access to that money. A firm with debt problems would like to have access to all of its assets.
The big trouble in the financial markets are not over when the bets on defaults are at tremendous levels. Someone will have to pay for the over-extension of credit. That "someone" is likely to be banks and investors in common stocks in the companies with debt up to their eyeballs.
Douglas A. McIntyre
Live Nation (LYV) is about to sign over $150 million to rapper and serial business start-up master Jay-Z. For the privilege the NYSE listed company gets a piece of all Jay-Z’s business enterprises over the next ten years.
According to The New York Times "the arrangement would position Live Nation to participate in a range of new deals with Jay-Z, one of music’s most entrepreneurial stars, whose past ventures have included the Rocawear clothing line, which he sold last year for $204 million, and the chain of 40/40 nightclubs."
The deal won’t work on a number of levels. Jay-Z is almost 40 which is ancient in the rapper world. His most recent albums could not be given away for free. Whether he has more successful business ventures in his pocket is an open question. But, if he is no longer a popular rapper he has lost the coin of the realm which makes new enterprises more easy to open.
Last year Live Nation made only $32 million on $4.2 billion in revenue. The firm has long-term debt of $822 million.
LYV has a Jay-Z-like deal with Madonna. They have locked her up for years. She is also as old has the hills, which probably does not work to her advantage since she is not the Rolling Stones, still touring although most of them a close to 100.
Shares in Live Nation traded at $24 last October. Bad numbers and nut-job deals with major artist types have bought that share price down to under $13.
Jay-Z should be paid in LYV stock. At least then he could lose money, too.
Douglas A. McIntyre
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