Daily Archives: April 8, 2008

Wall St. Frets Over Sun (JAVA)

Sun Microsystems (NASDAQ: JAVA) titillates investors every year or so with some series of announcements. It is building up its operations in China. It has a new open source software initiative. It will offer vitualization products on its servers. Whatever the next big thing is, Sun has a piece of it.

But, the piece never amounts to much because Sun cannot generate any revenue growth. The sales increases it has had over the last couple of years were due to M&A. The operating income improvements came largely from firing people.

Over the last six months, the market has lost confidence in Sun again. It shares are down 35% over that period. By contrast, Hewlett-Packard (NYSE: HPQ) is off 12% and IBM (NYSE: IBM) is flat.

Sun now gets a chance to prove Wall St. wrong. Expectations for the quarter the company is about to report are embarrassingly modest. Revenue is expected to grow less than 4% to $3.4 billion according to First Call. It is a number that most companies could make with a hand tied behind their backs

Sun is not most companies.

Douglas A. McIntyre.

Posted on: April 8, 2008 – 7:29 pm in Hardware, , ,

Citigroup (C) To Dump Debt For 90% Of Face

Citigroup (NYSE: C) is near a deal to sell $12 billion of problem corporate debt to a group of private equity firms. According to The Wall Street Journal the firms include "Apollo Group, TPG and Blackstone Group ."

Citi would like to have the deal done before it reports it Q1 numbers. The haircut on the paper is supposed to to be 10%. Given how close the price is to par, it is somewhat surprising that the want to let it go.

Douglas A. McIntyre

Posted on: April 8, 2008 – 5:29 pm in Banking,

EMC Wins In Pursuit of Iomega (EMC, IOM)

EMC Corp. (NYSE: EM) has won in its attempt to acquire Iomega Corporation (NYSE: IOM).   EMC will acquire San Diego-based Iomega for a purchase price of $3.85 per share in a deal valued at some $213 million.

This merger will marry EMC’s corporate and enterprise data storage and with Iomega’s business and personal data storage.  The addition of Iomega’s products, brand name, distribution channel and industry expertise will also bring EMC into the rapidly-growing consumer and small business markets.

Iomega subsequently announced the termination of a share purchase agreement With ExcelStor entities, and Iomega has paid a $7.5 million break-up fee to the group as a result.

This is one of those mergers that should have been expected by now since Iomega had already gotten a sweetened buyout offer from EMC and ultimately acknowledged that it was a superior transaction to what it had on the table with ExcelStor.  EMC intends to commence the tender offer in the next two weeks, and it expects to complete the tender offer expected in the second quarter of 2008

You can join our open email distribution list to hear about mergers, speculation, buybacks, special financings, secondary offerings, M&A, and more previews for other special situations.

Iomega shares closed down 1% at $3.64 today in regular trading and shares are up close to 5% at $3.81 in after-hours.  That leaves barely 1% arbitrage for a merger that has already been approved and is almost certainly a done deal.

Jon C. Ogg
April 8, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at jonogg@247wallst.com and he does not own securities in the companies he covers.

Posted on: April 8, 2008 – 3:53 pm in Mergers and Buy Outs, Technology Companies, ,

ATV Sales Hurting Arctic Cat (ACAT, PII)

Arctic Cat Inc. (NASDAQ: ACAT) is seeing shares come off the tracks in after-hours trading after the company previewed poor results.  The company places the blame on on lower than anticipated all-terrain vehicles sales.  This is attributed to continued weak retail sales, the reduction of a large planned retail customer order, and finally on a parts supply issue.

Arctic Cat now expects fourth-quarter diluted EPS of $0.00 to -$0.08 and net sales are now estimated to be $167 million to $169 million compared to $172.6 million in the prior-year fourth quarter.  First Call had estimates of $0.23 EPS and $198.9 million in revenues.  Analysts had only taken this down by $0.01 over the last ninety-day period, although analysts were mostly cautious anyway on this one.

The company now see reporting a net loss for the March 31, 2008 fiscal year in the range of $0.20 to $0.28, compared to year-ago diluted EPS of $1.15.

Shares are down some 18% at $6.01 in after-hours trading after closing up less than 1% at $7.37 in regular trading.  That will also be a new 52-week low under the prior $6.81 low if this holds.  While this would be easy to keep bashing, Arctic Cat’s stock had already sold off roughly 65% since last summer’s highs and are down far worse than this since early 2005.

Shares of larger competitor Polaris Industries, Inc. (NYSE: PII) are also lower by more than 2% at $42.75 in after-hours trading, after it also closed up nearly 1% in regular trading.

Jon C. Ogg
April 8, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at jonogg@247wallst.com and he does not own securities in the companies he covers.

Posted on: April 8, 2008 – 3:30 pm in Earnings Warning, ,

Mortgage Problems: A $945 Billion Loss

The International Monetary Fund came late to the mortgage crisis, but they bought the worse news.

The IMF said that "Total losses, including the securities tied to commercial real estate and loans to consumers and companies, may reach $945 billion," Bloomberg writes. Analysis of the report indicates "the forecast signals the worst of the credit crunch may be yet to come, because banks and securities firms so far have posted $232 billion in asset writedowns and credit losses."

Jamie Caruana, the IMF’s director of monetary and capital markets, also said to have a nice day.

Douglas A. McIntyre

Posted on: April 8, 2008 – 3:15 pm in Economy

The 52-Week Low Club (FMD)(GRD)(GRMN)(SSCC)(SCUR)

First Marblehead (FMD) Fears about student market loans hit company. Down to $4.62 from 52-week high of $45.70.

Agria (GRD) COO leaves and annual report delayed. Shares down to $4.03 from 52-week high of $17.

Garmin (GRMN) Competition warns on earnings. Drops to $48.02 from 52-wek high of $125.68.

Smurfit-Stone Container  (SSCC) Concerns in the paper industry due to rising costs and and energy prices.. Sells off to $7.02 from 52-week high of  $14.08.

Secure Computing (SCUR) Lowers earnings forecasts. Sells down to $6.01 from 52-week high of $10.54.

Douglas A. McIntyre

Posted on: April 8, 2008 – 3:01 pm in HI/LOW, , , , ,

FOMC Admits Recession, Without Saying Recession

Today’s March 18 minutes from the FOMC meeting, which already gave us a rate cut and comments about a weak economy, included comments that fed governors were more worried than they led on. 

The minutes noted what anyone with a brain would have deduced.  Growth in consumer spending slowed, labor markets softened, financial markets remain under considerable stress, and tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth "over the next few quarters."  Most Fed officials saw inflation moderating in late 2008 or 2009, although Joe Public better be convinced by now that the FOMC has zero foresight into prices of oil, food, and other raw materials.

The full version of the minutes does not include the word "recession" once throughout.  Not even in context.  The fact is that even though this is a much more cautious Fed, it feels like watching the turtle on the Comcast commercial say, "And/or, Duh!" 

Read More »

Posted on: April 8, 2008 – 2:35 pm in Economy

Garmin Punished by TomTom Warning, A Week After Garmin’s Own Downward Guidance (GRMN, TRMB, NVT, NOK)

Garmin Ltd. (NASDAQ: GRMN) is in a funk, after being in its own funk less than one week ago.  Just last week it gave comments to Reuters discussing forward guidance that Wall Street rightfully took as a light version of an earnings warning, which was going to be under estimates if the company wasn’t trying to leave itself with a huge amount of leeway so it would be well received.  Garmin’s biggest problem now, besides a market and economy that won’t be good for it, is that its shares just took out 52-week lows again.

Today, TomTom overseas issued its own warning. It noted that retailers had reduced PND devices inventory levels by more than expected.

This just goes to show you that even after a major market drop and recovery that the markets are nowhere close to efficient as of yet.  Garmin already outlined much of this last week.  We noted that Garmin’s woes looked adequately factored in after a 60% drop last week with using some common sense about what people will spend on in 2008, although we also noted that the PND and GPS sector was still going to have problems of its own.  So the market is back to headline-reactionary only: "Industry leader warns, stock drops severely… 1 week later its competitor warns, industry leader’s stock whacked hard again."

We first started seeing signs of a crack in the GPS market back in November, 2007, when we saw Trimble Navigation (NASDAQ: TRMB) issue statements.  Speaking of Trimble, its shares are down mildly by almost 1% at $27.10 today.

Shares of NAVTEQ Corp. (NYSE: NVT) are actually up marginally today and up quite a bit higher than last week, so perhaps the fears are easing about any concerns over Nokia (NYSE: NOK) acquiring it.  That is still under European Union review and could be close to three months before the full answer is known.  NAVTEQ shares are up 1.3% at $66.90, which is more than 6% off of the lows of last week.

A downgrade out of Soleil Securities from this morning certainly isn’t helping after the boutique lowered its Buy rating down to a new Hold rating.  Just keep in mind that this downgrade while the stock is under $50.00 comes after a 60% sell-off after this has been as high as $125.00.  We would caution that stocks that gap under $52-week lows twice tend not to see immediate recoveries, and a stock trading community that can only react to every headline as if it was fresh and developing each day isn’t going to offer much help either.

You can join our open email distribution list to hear about buybacks, special financings, secondary offerings, M&A, and more previews for other special situations.

Jon C. Ogg
April 8, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at jonogg@247wallst.com and he does not own securities in the companies he covers.

Posted on: April 8, 2008 – 1:32 pm in Consumer Electronics, , , ,

IPO Withdrawal: CampusU

CampusU has filed a registration withdrawal form with the SEC today.  The company has filed to withdraw its proposed IPO.  You can guess why"

  • "The Registrant has determined, because of unfavorable market conditions, not to proceed with the registration and sale of its common stock as contemplated …."

This was one of those IPO’s that looked questionable from the start with much of the business looking like it was still "being planned" rather than operational.

Here was the original filing summary.

You can join our open email distribution list to hear about buybacks, special financings, secondary offerings, M&A, and more previews for other special situations.

Jon C. Ogg
April 8, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at jonogg@247wallst.com and he does not own securities in the companies he covers.

Posted on: April 8, 2008 – 1:00 pm in IPOs

Valuation Of The New York Times Newspaper (NYT)

Everyone wants to buy a seat on the board of The New York Times Company (NYT). Morgan Stanley’s asset management arm made a run at it, and they were turned away. Capital Partners and Firebrand Partners tried. They were able to get two seats. It may not matter since the founding Sulzberger family has most of the votes.

The Times has a value beyond its financial worth. Like The Wall Street Journal, there are buyers who would pay more for the company, and the newspaper, than they are could pay back in cash flow over any reasonable period. NYT currently has a market cap of $2.7 billion. Short-term and long term debt together are about $1 billion.

Buyers of newspapers have learned a hard lesson over the last year. Locals bought the daily in Philadelphia. They will be likely to make it out with their shirts. Sam Zell, a genius in a former incarnation, bought The Tribune company. Wall St. bond people are now betting the company will default on it debt next year.

What is The New York Times worth? The newspaper? The answer will be different for a vanity buyer than one with a purely financial interest.

In 2007, NYT had revenue of $3.195 billion. Operating income was $227 million. Of that $35 million came from odd-ball online division About.com. The News Media Group, all of the company’s papers, had operating income of $249 million on revenue of $3.092 billion. Corporate cost ate up some of the operating income from each division in the consolidated numbers. Fire all the people at HQ.

The New York Times Media Group, the Times and its online operations, were $2.052 billion of the company’s total revenue in 2007. The parent does not break out operating revenue for each of the newspaper groups which also include The New England Media Group (The Boston Globe) and The Regional Media Group (several smaller papers).

Based on rapidly falling revenue, there is a very reasonable chance that the Boston operation does not make a dime. It may even be losing money. Revenue for the division fell from $633 million in 2006 to $592 million last year. Monthly figures show that the topline is still moving down fast.

The regional papers also have falling revenue and had a topline of $448 million last year. If they generated operating income of $50 million, it would be impressive.

That leaves The New York Times and it web operations with $2 billion in revenue and about $200 million in operating profit. The revenue is still falling. In February, advertising revenue at the regional papers dropped almost 16%. In Boston, ad revenue was off 11.6%. The New York Times itself did somewhat better with ad revenue off only 4.1%.

With dropping revenue, the multiple given to newspaper properties trends down each quarter. With a multiple of 8x, at the high end of the range of what these businesses go for now, The New York Times newspaper is worth about $1.6 billion.

NYT could probably get someone to pay twice what the newspaper of record is worth. But, the buyer would be wise not to borrow to make the purchase. The leverage would be overwhelming.

The numbers also indicate that the NYT market cap is too high even with the stock down from $47 in early 2004 to $19 today.

Douglas A. McIntyre   

Posted on: April 8, 2008 – 12:17 pm in Old Media,

Morgan Stanley (MS) CEO Clairvoyant As Usual

John Mack, who has run every investment bank on Wall St, and is now CEO of Morgan Stanley (MS) says the next few quarters will be tough for the financial markets. Mack believes the United States is nearing the end of the subprime mortgage crisis he told Reuters.

The interesting thing is that Mack would have no way to know when the crisis will end. If the recession deepens and housing defaults keep rising, the trouble could continue well into next year.

Mack may also be a poor forecaster. His firm did put billions of dollars into mortgage-backed paper which he and his managers thought would make a great deal of money. Bad guess.

Douglas A. McIntyre

Posted on: April 8, 2008 – 11:29 am in Financial Stocks,

Devon Scores Major Gain On Sale of Equatorial Guinea Ops (DVN)

Devon Energy Corp. (NYSE: DVN) has reached an agreement to sell its oil and gas business in Equatorial Guinea to GEPetrol, the African country’s national oil company.  The value of the transaction was listed as $2.2 billion.  Devon said it anticipates an estimated after-tax gain of roughly $1.7 Billion on the sale, and it expects a close by May 30, 2008.

The Oklahoma City-based energy company noted that this encompasses its 23.75% interest in the Zafiro offshore oil field and includes two currently undeveloped offshore explorations and field development blocks.

Shares of Devon are up almost 2% at $110.37, which would also match a 52-week high for Devon.  With a $49 Billion market cap, this is probably another incremental deal for Devon.  The full company listed $11.362 Billion in 2007 revenues and it listed its net income as roughly $3.6 Billion.  As of December 31, 2008, Devon listed $41.4 Billion in total assets (before backing out over $6.6 Billion in goodwill and other assets), and total liabilities were listed as $19.45 Billion.

You can join our open email distribution list to hear about buybacks, special financings, secondary offerings, M&A, and more previews for other special situations.

Jon C. Ogg
April 8, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at jonogg@247wallst.com and he does not own securities in the companies he covers.

Posted on: April 8, 2008 – 11:29 am in Oil & Gas,

Intel Capital’s New China Ventures Could See IPO’s (INTC)

Intel Corp. (NASDAQ: INTC) has announced full details for its venture capital arm’s Intel Capital global venture investment activities in China with the launch of a second China investment fund.   The Intel Capital China Technology Fund II is a new US$500 million fund that will invest in wireless broadband, tech, media, telecom, and clean tech ventures that it believes will complement and expand Intel’s corporate initiatives and technology efforts in China.

Read More »

Posted on: April 8, 2008 – 9:26 am in China, IPOs, Semiconductor,

WaMu Gets Takeunder Financing From TPG (WM)

Washington Mutual (NYSE: WM) has outlined its details of a financial aid or rescue finance package.  The company is raising a total of $7 Billion via direct stock sales to an investment vehicle managed by TPG Capital, which includes others and existing top institutional holders.  Unfortunately, this is more of a takeunder financing and more similar to past rights offerings than anything.

TPG as the anchor will buy $2 Billion in newly issued securities.  Outside of this, it is issuing 176 million shares at $8.75 and 55,000 contingently convertible perpetual non-cumulative preferred stock at a purchase price and liquidation preference of $100,000.00 per share; and that convertible preferred has an exercise price of $8.75 per share.

In order to save cash, it will slash its $0.15 dividend down to $0.01 in an effort to save $490 million annually.

Washington Mutual will also post a net loss of approximately $1.1 billion, or -$1.40 EPS.  On top of that it has loan loss provisions of $3.5 Billion and net charge-offs of $1.4 Billion.

Goldman, Sachs & Co. and Lehman Brothers served as placement agents.  WaMu shares closed up big yesterday at $13.15, and shares are listing lower by almost 12% at $11.58 in pre-market trading.

You can join our open email distribution list to hear about buybacks, special financings, secondary offerings, M&A, and more previews for other special situations.

Jon C. Ogg
April 8, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at jonogg@247wallst.com and he does not own securities in the companies he covers.

Posted on: April 8, 2008 – 8:30 am in Banking, Financial Stocks, Private Equity, Secondary Offering,

Goldman Sachs Makes Key Financial Calls (BEN, JNS, NYX, NDAQ, MET, FII, NITE, OZM)

Goldman Sachs has issued a call on its asset manager universe, and says it’s time to go on the offensive.  Its rating on the group is now attractive.  The bulge bracket brokerage leader has also made some key calls in the financial sector this morning.

In the call it has raised the following to Buy from Neutral:

  • Franklin Resources, Inc. (NYSE: BEN), Janus Capital Group, Inc. (NYSE: JNS), NYSE Euronext, Inc. (NYSE: NYX), MetLife Inc. (NYSE: MET)

There were actually some downgrades as well, with the following downgraded to Neutral from Buy:

  • Federated Investors, INC. (NYSE: FII), Knight Capital Group, Inc. (NASDAQ: NITE), Och-Ziff Capital Management (NYSE: OZM).

It has maintained a Neutral rating on NASDAQ OMX Group (NASDAQ: NDAQ), although it raised estimates by $0.10 for both 2008 and 2009. 

Jon C. Ogg
April 8, 2008

Posted on: April 8, 2008 – 8:00 am in Analyst Calls, Financial Stocks, , , , , , , ,

Nuance Makes Strategic Acquisition, Partly With O.P.M. (NUAN)

Nuance Communications, Inc. (NASDAQ: NUAN) has announced a dual-pronged deal this morning.  It has signed an agreement to acquire eScription, a provider of computer aided medical transcription technology.

The total consideration for this transaction is approximately $363 million, which is broken down as $340 million in cash and $23 million in Nuance common stock.  It will also include the assumption of vested employee options with a value of roughly $37 million.

With an estimated $7 billion spent on medical transcription in North America annually, this acquisition of eScription is intended to accelerate Nuance’s ability to effectively serve the medical transcription industry.  Nuance expects that its combined revenues for on-demand medical transcription and clinical documentation solutions will be between $175 million and $200 million in fiscal 2009.  As far as a direct add, it expects the deal to add $16 million to $18 million in non-GAAP revenue in fiscal 2008 and $63 million and $68 million in fiscal 2009.  This acquisition is expected to be accretive to 2008 non-GAAP EPS by $0.00 to $0.01 and $0.06 to $0.08 non-GAAP EPS in fiscal 2009.

But here is where this gets interesting.  Private equity firm Warburg Pincus will purchase Nuance shares in connection with the transaction.  Warburg Pincus will purchase 5,760,369 shares of Nuance at a price of $17.36 per share for $100 million. It will also purchase a warrant for 3.7 million shares of Nuance with an exercise price of $20.00 per share and a four-year term.

Nuance had $323.7 million cash on its books as of December 31, 2007.  Not including what it would have earned this last quarter yet to be reported, the Warburg Pincus capital infusion will provide enough cushion for the company to continue smooth operations without having to depend on its credit lines or any debt.  It already has almost $1.3 Billion in total liabilities, so this will allow this slight "other people’s money" acquisition to not be a burden on its books.

As Nuance is the leader in speech-to-text software solutions, this one has been under review before for our Special Situation Investing Newsletter.

Shares of Nuance are trading up nearly 3% pre-market at $17.96 this morning, and its 52-week trading range is $12.45 to $22.56.

Jon C. Ogg
April 8, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at jonogg@247wallst.com and he does not own securities in the companies he covers.

Posted on: April 8, 2008 – 7:45 am in Mergers and Buy Outs, Software,

Top 10 Pre-Market Analyst Calls (AAPL, GLW, FNM, FRE, JBL, KCI, LVLT, PCS, TWTC, WM)

These are the top individual analyst calls we are focusing on this Tuesday morning:

  • Apple (NASDAQ: AAPL) Cut to Underperform from Market Perform at Morgan Keegan.
  • Corning (NYSE: GLW) raised to Outperform at RBC Capital Markets.
  • Fannie Mae (NYSE: FNM) raised to Overweight at Lehman.
  • Freddie Mac (NYSE: FRE) raised to Overweight at Lehman.
  • Jabil Circuit (NYSE: JBL) Cut to Neutral from Buy at Goldman Sachs.
  • Kinetic Concepts (NYSE: KCI) Raised to Outperform at Wachovia.
  • Level 3 Communications (NASDAQ: LVLT) Started as Market Perform at FBR.
  • MetroPCS (NYSE: PCS) Raised to Outperform from Market Perform at Wachovia.
  • Time Warner Telecom (NASDAQ: TWTC) Started as Outperform at FBR.
  • Washington Mutual (NYSE: WM) downgraded to Underperform at KBW.

Jon C. Ogg
April 8, 2008

Posted on: April 8, 2008 – 7:10 am in Analyst Calls, , , , , , , , , ,

Dell (DELL) Predicts A Good ‘08

Michael Dell, CEO of Dell (DELL) predicted that 2008 would be a prosperous and profitable year for the company, even in the teeth of a recession.

According to Reuters, the company will "expand its profitability this year as the company shifts its resources to faster-growing emerging market regions ." The firm is looking to regions like China and the Middle East.

What Dell did not mention is that Hewlett-Packard (HPQ), Apple (AAPL), Lenovo, and Acer are already working hard in the same markets.

Douglas A. McIntyre

Posted on: April 8, 2008 – 6:24 am in PC Companies, , ,

Auction-Rate Securites: A $20 Billion Legal Headache For Banks

Palm (PALM) took a $25 million write-off yesterday due to the falling value of the auction-rate securities on its balance sheet.

Diamond, Kaplan, and Rothstein is the first law firm to file suit against a major bank, USB, for mis-representing the "cash" nature of auction-rate paper. Jeff Kaplan, who leads the legal action, says that even some brokers will testify against the banks. Their customers are than upset and may sue the brokers themselves.

The auction-rate market froze when several large banks and brokerages stopped underwriting the auctions, something which they had done since 1985. Kaplan says the market, at $360 billion, could take a haircut of at least 10%, of $36 billion if and when the securities start to trade again.

The case against the banks is for fraud and abandoning their fiduciary obligation for putting customers first. If the series of lawsuits against the banks is successful as many as 50% to 60% of the people and companies who were sold the paper under the impression that it was as liquid as cash, will have claims. That put potential bank liability at $20 billion.

At the core of the case is a simple principle. Banks must put customer interests ahead of their own. In this case that probably didn’t happen.

Douglas A. McIntyre

Posted on: April 8, 2008 – 5:58 am in Uncategorized

The “AAA” Club: Why The Safest Companies Bet The Market

There are only six companies left with "AAA" ratings from both S&P and Moody’s. The are Automatic Data Processing (ADP), Berkshire Hathaway (BRK), GE (GE), Johnson & Johnson (JNJ), Exxon (XOM), and Toyota (TM).

Wall St. might think that companies with strong ratings would be modest market performers because they make "safe" business decisions. In reality, all of the companies, except Toyota, have out-performed the S&P over the last year. Toyota at least has the excuse that it operates in an industry which has had two brutal years.

The trick for doing well might seem to be that the companies are diversified. But, that is not entirely true, especially with Exxon and ADP. More likely, the firms do extraordinarily well because they have a very large portion of their business coming from outside the US. While the market may be slowing here, it is still robust in some emerging markets and these operations are moving assets to those regions.

The advantages of being global can be overstated. Emerging countries can be politically unstable. But, for the time being, they produce.

Douglas A. McIntyre

Posted on: April 8, 2008 – 5:41 am in Research, , , , ,