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Friday, June 29, 2007

Through The Fly's Eyes: IPO & Syndicate Preview

from Joseph Lazzaro of

IPO & Secondary Preview - Week of July 2, 2007

In line with tradition, Wall Street's equity market is taking the 4th of July holiday week off, with only 1 deal, a Secondary, tentatively scheduled to price.



Silver State Bancorp (SSBX),
a 3.2M-share Secondary for this savings & loan holding company. Sandler O'Neill & Partners and Howe Barnes Investment are the lead managers.

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For the latest market intelligence on IPOs, Syndicate, and fter-market trades, check out The Fly Syndicate at [Subscription required.]

Through The Fly's Eyes: A Quick Look Ahead

from Eric Buscemi of

Highlights For Next Week

Monday July 2

* CRH (CRH) to hold conference call to give a trading update statement.
* UAP Holding Corp (UAPH) to report Q1 earnings; conference call at 5pm.

Tuesday July 3

* U.S. markets close at 1pm for July 4th holiday.
* Ford (F) to release June sales results at 1pm.
* General Motors (GM) to release June sales results at 2pm.

Wednesday July 4

* U.S. markets closed for July 4th holiday.

Thursday July 5

* Healthways (HWAY) to report Q3 earnings; conference call at 5pm.

Friday July 6

* Laidlaw International (LI) to report Q3 earnings; conference call at 10am.

Through The Fly's Eyes: Blockbuster

from Eric Buscemi of

Blockbuster or Bust

Blockbuster (BBI) said yesterday
that the in-store rental market was soft in the first half of 2007, and announced that expects to close 282 stores in the U.S. this year. Is this cost-cutting move a signal of a company fallen on hard times, tightening its belt?

After seeing the rest of Blockbuster’s plans for the year, it does not look that way. Blockbuster realizes the brick-and-mortar business model is not the future of the company, and is adapting. The company’s goals for this year focus on a few key points -- none of which focus on to the in-store market.

Blockbuster's plan does focus on "aggressive growth" of the already successful Blockbuster Total Access online offering -- with a target of 4 million online subscribers by year's end, as well debt reduction through asset sales (i.e., reducing stores) and to position itself for revenue growth and profitability beginning in 2008.

That is not belt-tightening, per se, but intelligent, progressive thinking.

Through The Fly's Eyes: Rumor Mill

from Tedd Cohen of

Rumor Round-up

There is no holiday break for the rumor mill as word of many a company’s activity is bantered about.


As the stock shot up 14% the other day, it was revealed that the warm and fuzzy big bear hired Lehman Brothers to “explore strategic alternatives.” Some analysts think an LBO is what will happen, and range the valuation at from $34 to $36. Very recently the company reduced its second quarter per share profit expectations to 7 cents to 10 cents, down from 15 cents to 19 cents, because of slow sales at stores that have been opened for at least a year. Here’s a bear to be bullish on.


It’s troubled times for the nation’s largest mortgage lender. Earlier in the week the shares began to fall when it was speculated that they may be a part of a government investigation into subprime loans. It certainly doesn’t help that three former company executives pleaded guilty to conducting insider trading in shares of Countrywide. The heat is on.


Two Texas investment groups, HBK Investments and Lone Star Funds, who between them own about 9.5% of the company, are said to be interested in digesting the whole dang thing. The 490 restaurant chain that has operations in 20 states just saw their most recent quarterly profit drop 30% from the previous year, as same store sales fell 4.7%. Gentlemen that they are though, they’ll only pursue the sizzle if the board cooks it up with them.



They say they may want to sell the company, and the latest firm to gobble up shares is Tudor Investment, purchasing a 6.1% stake.


Jana Partners and S.A.C. Capital Advisors, who have about an 8.4% combined ownership of AMTD, are keeping the pressure on for the firm to partner up with another brokerage firm, and have now formalized their demands.


DJO (DJO): MMI Investments purchased 9.4% of the company’s shares. When they buy in, they usually see the company acquired...Pride International (PDE): Spin off of foreign assets, or a possible takeover, has attracted interest…Legg Mason (LM): Pershing Square Capital, whose activist leader William Ackman has tried to push around McDonald’s (MCD) and Wendy’s, has taken a 1.5% share of the company.

Through The Fly's Eyes: Research in Motion, Palm

from Laurie Pasternack of

Two Companies, Two Directions

Research In Motion (RIMM) and Palm, Inc (PALM) are two different companies with two vastly different earnings reports. The big question, after they both reported earnings yesterday for the latest quarter, on everyone's mind is: Will they be able to withstand the heated competition from Apple's (AAPL) iPhone?

Research in Motion's Q1 results were $1.20/$1.08B vs. Reuters consensus of $1.06/$1.05B and sees Q2 subscriber additions of $1.32M-$1.38M. Palm, on the other hand, reported Q4 results of17c/$401.3M vs. Reuters consensus of 15c/$406.58M and said smartphone sell-through for the quarter totaled 750,000 units, a 43% increase year over year. What do these results tell investors and analysts? Perhaps that one company -- RIM - -is better prepared to handle the impact from the iPhone and the other -- Palm – may be in trouble. Research in Motion gained new customers last quarter when it began to offer consumer-friendly phones with music players and cameras. In addition, the announced 3-for-1 stock split won't hurt either. Palm, meanwhile, attempted to improve advertising and product development, a move that ended up inflating costs. Analysts believe that because of this, Palm may be more "vulnerable" to a takeover.

Jim Balsillie, Research in Motion's CEO, isn't worried about Apple's entry into the mobile phone market. Apparently, investors aren't worried either, as the company saw its shares shoot up nearly 18% today, the day the iPhone is launched. Analysts believe that even though RIM looks strong, the company should be cautious of the new device. Jupiter Research analyst Michael Gartenberg says that "anyone who is being dismissive of Apple's entry into the mobile phone market this week is probably not planning effectively." However, since RIM's business mainly stems from corporate customers as opposed to the iPhone, analysts believe RIM won't lose much market share to Apple, although it may see some pressure on its Curve Blackberry and Blackberry Pearl devices.

Palm CEO Ed Colligan appeared a little more cautious yesterday, saying he believes "the product may have an effect on sales of other advanced phones, at least temporarily." Palm, which is less corporate-based than RIM and will therefore go head-to-head with Apple, could be very hard hit by the iPhone.

Through The Fly's Eyes: Micron Technologies


Earnings Results Consistently Micron-like

Micron Technology (MU), the Idaho-based memory chip and NAND manufacturer, reported results that came in lite last night.

Actually, results were very consistent for Micron. Despite perennial hope that this commodity chip manufacturer will move up the value chain and be able to charge more for its products thereby earning more for shareholders, better earnings never seem to materialize.

Micron reported slightly below EPS consensus and it appears gross margins will head lower while operating expenses and inventory levels will head higher. While there is the opportunity for DRAM prices to further improve and a ramp in NAND production to help results, typically each time the supply & demand balance looks favorable for Micron's products, additional supply comes on -line from Asia, keeping margins and earnings below expectations.

If you want to invest in semis, look at Intel (INTC), National Semi (NSM) and Texas Instruments (TXN). Micron is in an eternal battle with commodity chip players from Asia.

Thursday, June 28, 2007

Through The Fly's Eyes: Luxottica Group

Larry Schutts is a contributing editor for and the Vice-President of

Luxottica Group: Eyewear For Everybody

The biggest eyewear firm in the world makes thousands of house brand and designer frames in Italy and China and sells them around the globe. Know who it is? Read on.

Luxottica Group (LUX) designs, manufactures, distributes and markets prescription eyeglass frames and sunglasses. The Manufacturing and Wholesale Distribution segment makes house brands, such as Ray-Ban, Persol and Vogue. It also provides designer lines, such as Chanel, Prada and Versace. The Retail Distribution segment runs a network of some 5,800 outlets, selling frames, sunglasses, watches and accessories. The stores are distributed throughout North America, Asia and Europe. The firm operates LensCrafters and Pearl Vision, the two leading North American retail optical chains, and Sunglass Hut, the leading North American sun specialty retailer.

The LUX share price popped above 30-day moving average support last week, on word of Luxottica's agreement to acquire all of the outstanding shares of American competitor Oakley (OO). It has since been consolidating the gain in a bullish "pennant" pattern. Stocks frequently exit pennants moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Brokers currently recommend the issue with two "strong buys". Analysts see a 15% average annual growth rate, through the nest five years. The LUX Price to Sales ratio (2.74), EPS Growth rate (19.79%), Return on Assets (8.94%), Return on Investment (12.30%), and Return on Equity (20.57%) compare favorably with industry, sector and S&P 500 averages.

Institutions hold about 4% of the outstanding shares. Over the past 52 weeks, the stock has traded between $25.07 and $38.83. A stop-loss of $33.60 looks good here.

Through The Fly's Eyes: U.S. Federal Reserve

from Joseph Lazzaro of

The Fed Remains On Hold

A Goldilocks economy it isn't, but for now, it is strong enough growth for the Fed.

As expected, the U.S. Federal Reserve kept the federal funds interest rate - the key U.S. short-term interest rate - the same at 5.25% Thursday, a rate it's been at for a year.

In its statement the Fed said it wasn't convinced that inflation had been lowered to an acceptable level, noting carefully that inflation had improved modestly, but that "a sustained moderation in inflation pressures has yet to be convincingly demonstrated."

Further, perhaps more so than in recent policy statements, considerable debate remained in Wall Street circles regarding whether the Fed's statement constituted a more-hawkish or less-hawkish monetary policy tone.

Fed doves - those who interpretted the statement as setting up a future interest rate cut by the Fed - argued Thursday that the Fed had altered its phraseology on inflation, and hence, was making the case for an easing of monetary policy down the road.

Fed hawks - those who interpretted the statement as setting up up a future interest rate hike by the Fed - argued that the "yet to be convincingly demonstrated" clause represents a signal that the Fed is still uncomfortable with elevated inflation.

Fly Analysis: The Fed statement appears to be an attempt by the Fed to hedge its position, given inconclusive evidence to even signal a rate cut or rate increase, let alone implement an actual cut/increase. The Fed does not have a Goldilocks economy [an economy not too hot, not too cold, with low inflation], but a slow-growth economy with mild inflation. U.S. economic growth is slow, but not slow enough to justify a rate cut. Core inflation is not low, but it isn't high enough to justify a rate increase. The Fed needs more data on either side of the scale to implement a rate change.

Further, history and macroeconomic case study suggests that over time data will emerge to push the Fed in the direction of either a rate increase [economic growth, inflation] or a rate cut [stagnation, price pressure]. But, as always, the Fed, to paraphrase a famous general, will wait for the reality of the "facts on the ground" before calibrating the monetary policy of the world's most important industrial economy.

Through The Fly's Eyes: Carl Icahn & private equity

from Joseph Lazzaro of

Icahn Says Private Equity Boom May Have Peaked

Has the private equity / leveraged buyout boom peaked?

One investor of consequence believes that it has: billionaire financier Carl Icahn said Wednesday that he believes a surge of recent LBOs has peaked because shareholders are resisting what they believe are too-low prices and because deal financing is getting more expensive.

Private equity has spent about $900 billion buying-up companies so far in 2007 - a pace that's set to best 2006's record $1.3 trillion, according to financial data provider Dealogic.

Still, if Icahn is correct, private equity may find it hard to keep up its frenetic pace. Icahn, speaking before an an investor audience, said private equity for years "has had a walk in the park" and, "I think [private equity dollar volume] has peaked out."

In addition to companies raising their price requirements because they sense that private equity firms are willing to overpay to buy their operations, Icahn said the other major deal driver has been the availability of cheap credit.

Typically, private equity deals are funded by bank loans and debt offerings, and each has benefited from the flood of domestic and international capital - what Wall Street calls liquidity - sloshing around in the capital markets. That same capital surplus also helped produce generation-low long-term mortgage rates which helped create the residential U.S. real estate boom of 2001-2006.

However, there are signs now that at least the era of 'remarkably cheap financing' may be over: several deals have been pulled, bond investors and other investors have re-priced the interest rate they need for added risk, and long-term interest rates have risen more than 50 basis points.

Icahn underscored that he "did not mean these guys [private equity professionals] won't make money," just that the era of cheaply-financed deals with bountiful capital may be over.

Through The Fly's Eyes: KB Home

By Kevin Shult of

KB Home Hears The Door Slam Shut

KB Home (KBH), the nation’s fifth-largest homebuilder by sales, reported an unexpected second-quarter loss as sales hit three-year lows in the middle of the nation’s housing glut. The net loss for Q2 was $148.7M, or ($1.93) a share, compared to last year’s $205.4M, or $2.45 a share. Revenue slid 36% to $1.41B, down from $2.2B a year earlier. Reuters consensus expected KB Home to post second quarter revenue of $1.76B and 7c EPS.

The loss was partly due to land value-related charges that highlighted the continued decay of the U.S. housing market. The company also said it was unable to provide investors with a full-year earnings forecast, or put a finger on when market conditions would improve.

Shares of KB Home were unaffected by the news, trading 23c lower, to $40.20 in mid-day trading, primarily because the stock has dropped 21% since the start of the year, and because investors already know the housing market is in shambles.

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Through The Fly's Eyes: Southwest Airlines

by Kevin Shult of

Southwest Airlines: Just Like Everyone Else

Two weeks ago, Southwest Airlines (LUV) CEO Gary Kelly said that Southwest may miss its earnings targets due to fuel costs and weak revenue growth.

Yesterday, Kelly promised a number of changes to help improve upon the company's 34 straight years of profitability. He said that to compete, Southwest needs to make changes to create $1 billion in additional revenues over the next several years.

Among the changes are:

• Seating: Southwest will more than likely drop their legendary open seating system. The company has been experimenting with assigned seating during recent months, and will announce its new boarding plan before the end of the year. The company may increase the price of aisle seats like some competitors previously have.

• Schedule Changes: The “discount” airline will cut 39 daily round-trip, non-stop flights by the end of the year, including all non-stop service on some of its biggest routes: Baltimore-Los Angeles; Baltimore-Oakland; Chicago-Orange County, CA; Cleveland-Phoenix; Philadelphia-Oakland; and El Paso-Midland, TX. The change will allow Southwest to create 46 new daily non-stop flights in key growth markets, including Denver and New Orleans.

• Frequent Flier Program: Southwest wants to make the “Rapid Rewards” program attractive to business-class travelers.

• Growth: The plan is to cut its capacity growth to 6% from 8% year-over-year.

As The Wall Street Journal points out , “Southwest's unit costs, or costs to fly each seat one mile, have risen nearly 20% over the past four years on higher fuel prices and increased labor costs."

Over the past two decades, Southwest shares have outperformed every U.S. airline on the Street. In the last two years shares have been range-bound. It looks like Southwest’s problems are really starting to impact the bottom line. By moving planes to more profitable routes and cutting labor costs Southwest officially lost its small-company appeal and has become just another airline.

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Through The Fly's Eyes: Progress Software

Larry Schutts is a contributing editor for and the Vice-President of

Helping Growing Businesses Manage Growing Pains

When businesses grow beyond a certain size, they can find that disparate hardware and software systems slow the implementation of new procedures and impede growth. There is an outfit in Bedford, Massachusetts that helps firms develop business applications that overcome those problems.

Progress Software (PRGS) provides programs designed to simplify and accelerate the development, deployment, integration and management of business software applications. The firm's various product lines help developers detect and act on patterns in high velocity data streams; achieve standards-based mainframe integration; connect applications running on various platforms; and integrate data for distributed applications. Customers include DaimlerChrysler (DCX), The Home Depot (HD) and Toyota Motor (TM). Competitors include Microsoft Corp. (MSFT) and Oracle (ORCL).

The company pleased investors last week, when it announced Q2 EPS of 45 cents and revenues of $120 million. Analysts had been expecting 41 cents and $116.3 million. Management also guided Q3 EPS to 42-44 cents (43 cent consensus), Q3 revenues to $118-$120 million ($117.90M consensus), FY07 EPS to $1.72-$1.75 ($1.72 consensus) and FY07 revenues to $475-$485 million ($477.32M consensus). The news kept PRGS shares cycling through a positive 14-week trading channel. The price is currently consolidating near the base of that channel, where oversold CCI, Stochastic and MACD technical parameters suggest the potential for a rise back toward the top.

Brokers recommend the issue with two "strong buys," three "buys" and one "hold." Analysts see an18% average annual growth rate through the next five years. The PRGS Price to Sales ratio (2.75), Price to Book ratio (2.74) and Price to Free Cash Flow ratio (24.59) compare favorably with industry, sector and S&P 500 averages.

Institutions hold about 95% of the outstanding shares. The stock is one of those used to calculate the S&P 600 SmallCap Index. Over the past 52-weeks, it has traded between $21.33 and $34.45. A stop-loss of $28 looks good here.

Through The Fly's Eyes: Beazer Homes

from Laurie Pasternack of

Rumors, Scandals and Investigations at Beazer

Beazer Homes USA (BZH): House of Cards?

Home builder Beazer said in a regulatory filing yesterday that it terminated its Chief Accounting Officer for violating the company's ethics policy. Beazer said it fired Michael T. Rand after an internal probe of the company's mortgage origination business. The Atlanta-based company said the action was taken by its board and management after saying Rand violated the company's ethics policy by attempts to destroy documents.

The country's sixth largest home builder is currently under investigation by the FBI and is the subject of several lawsuits. Earlier this year, media reports noted that the company was under federal investigation for alleged mortgage fraud, a charge Beazer has vehemently denied. In May, they announced the SEC was conducting an informal inquiry to determine if the company, or its employees, had violated any securities laws.

Rand's firing is bad news for the Atlanta company, particularly because of the FBI investigation. JP Morgan analyst Michael Rehaut said that Rand's termination "raises red flags regarding the content of the documents in question." It is unclear whether the allegations against Rand will become part of the investigation.

Rand is the second senior official to be fired at Beazer this year. The company dismissed Kenneth Gary, its general counsel, in February for "a pattern of personal conduct" that included violations of company policies. Former CFO James O'Leary resigned from Beazer in March. Shares of the company, whose competitors include D.R. Horton Inc (DHI) and Pulte Homes, Inc (PHM), fell nearly 8% on yesterday's announcement; shares have fallen more than 40% this year.

Who's responsible for the company's troubles? Rand, the others, or is the company looking for scapegoats?

Through The Fly's Eyes: Novellus Systems

from Laurie Pasternack of

Weak Semiconductor Market Foils Novellus’ Plans

This morning, Novellus Systems (NVLS) announced that it anticipates second quarter bookings, shipments, revenues and earnings per share to come in at the low end of the guidance range it previously provided on May 31st. The semiconductor equipment maker previously forecast Q2 results of 42c-45c/$410M-$420M vs. Reuters consensus of 44c/$415.61M.

The company, which makes equipment to help turn silicon wafers into computer chips, believes its earnings will be lower because of a weak semiconductor market. Novellus said theses industry declines will lead to cost cutting initiatives in the second half of the year, including a reduction in executive salaries for the rest of the year and company shutdowns in the third and fourth quarters.

Novellus is one company among several that have lowered expectations for the rest of the year. Due to a surplus in chips, companies have had to cut prices. Applied Materials (AMAT), for example, also predicts declines in global chip sales growth for the rest of 2007.

In the technology sector this morning, the profit warning from Novellus was offset by an upgrade of Intel Corp (INTC) by Lehman Brothers.

Through The Fly's Eyes: Taser and iRobot

from Eric Buscemi of

Taser and iRobot Form Alliance -- T-1000 Looming?

In what may be the coolest bit of news to hit the wires all week, Taser (TASR) and iRobot (IRBT) have announced their intentions to form an alliance to create an army of T-1000 robots. Okay, not exactly. The actual announcement read:

Under the terms of this alliance the two companies will work collaboratively to develop a new robotic capability utilizing TASER technologies. This combination of capabilities will allow law enforcement, federal, and military users to employ TASER technology from an iRobot platform at a safe distance to engage, incapacitate, and control dangerous suspects without exposing those personnel, the suspect, or bystanders to unnecessary risks, the companies said.

As the first step in this alliance, the two companies have integrated TASER X26 electronic control device technology into the iRobot PackBot Explorer.

This is still exciting news for both Taser and iRobot. It signals that both companies are aware of the limited markets for their niche products -- the Taser stun gun and the Roomba -- and are actively seeking to broaden their scope. How successful will this alliance be? Only after we see a prototype of the iRobot PackBot Explorer with Taser x26 electronic control device technology will we know for sure. But hopefully not as successful as the T-1000.

Through The Fly's Eyes: Intel


Another Upgrade for Intel

Lehman upgraded Intel (INTC) this morning giving a $28 price target, believing 2nd quarter sales will meet the high-end of guidance as Dell (DELL) and Hewlett-Packard (HPQ) restock in preparation for an improved PC market.

We blogged in late May and twice in April that investors should be buying the chip maker as both sentiment and fundamentals were changing for the positive.

In May, Citigroup’s Glen Yeung wrote Intel is "likely to substantially accelerate” its share repurchase program in coming months. Historically, Intel has picked up its share repurchase program when earnings are about to re-accelerate. Intel repurchased a measly $400 million worth of stock in 1Q, but has $16.9 billion to go on its current repurchase program, according to Yeung.

Another bullish sign is gross margin expansion which is on the horizon. Further, Intel has seriously wounded its nearest competitor AMD, once again, which means Intel has room to increase prices, margins and profits.

We blogged back in May that is was time to stop chipping away at the chip maker and load up the truck. We continue to believe that.

Through The Fly's Eyes: YouTube


Audience Getting Bigger and Bigger

YouTube's U.S. market share increased 70% from January through May, according to Hitwise in a survey published on Wednesday.

The Google (GOOG) subsidiary's U.S. audience is larger than the next 64 video-sharing sites combined, the survey found. Cumulative growth at YouTube's competitors was a mere 8%. YouTube's market share was 50% greater than those 64 sites combined.

YouTube's share of the U.S. online video market was 60.2% in May while News Corp's (NWS) MySpace garnered 16%. Other video sites such as YouTube's sister site, Google Video, held 7.8%, Yahoo (YHOO) had 2.8% and Microsoft's (MSFT) MSN 2.1%.

A start-up called Metacafe ranked eighth with 1.1% and AOL Media had 0.94% with Veoh coming in tenth.

This is just more proof that the power of Google continues to grow.

Wednesday, June 27, 2007

Through The Fly's Eyes: Actuant

Larry Schutts is a contributing editor for and the Vice-President of

Actuant Corporation: Fluid Engineering Solutions

Whether it's tools, or complex engineered solutions, some outfits just know electro-hydraulic systems. A leader in devising applications useful to the heavy vehicle market is headquartered in Butler, Wisconsin.

Actuant Corporation (ATU) is engaged in the manufacture and marketing of industrial products and systems. Its Tools and Supplies group offers high-force hydraulic tools, electrical tools and electrical consumables to the general industrial, construction, production automation and do-it-yourself retail markets. Its Engineered Solutions group provides motion control systems for the heavy-duty truck market. These include recreational vehicle slide-outs and leveling systems, heavy truck cab-tilt systems and electro-hydraulic convertible top actuation systems. Eaton Corporation (ETN) is a major competitor.

The ATU price popped early last week, when Bear Stearns upgraded its recommendation on the stock to "outperform" and issued a $72 price target. Shares kept going, when the company subsequently reported Q3 EPS of 96 cents and revenues of $385.1 million. Analysts had been expecting 93 cents and $366.17 million. Management also guided Q4 EPS to 90-95 cents (95 cent consensus), FY07 EPS to $3.38-$3.43 ($3.40 consensus), FY07 revenues to $1.43-$1.44 billion ($1.41B consensus), FY08 EPS to $3.70-$3.90 ($3.86 consensus) and FY08 revenues to $1.53-$1.55 billion ($1.50B consensus). Since then, the price has begun to define a bullish "pennant" consolidation pattern. Prices frequently exit pennants moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Brokers recommend the issue with two "strong buys", two "buys" and five "holds". The ATU P/E ratio (19.42), PEG ratio (1.34), Price to Sales ratio (1.22), Price to Book ratio (3.74), Price to Cash Flow ratio (12.81), Price to Free Cash Flow ratio (12.60), Sales Growth rate (21.59%), EPS Growth rate (23.08%) and Return on Equity (25.14%) compare favorably with industry, sector and S&P 500 averages. Institutions hold about 95 percent of the outstanding shares. Over the past 52 weeks, the stock has traded between $42.31 and $63.58. A stop-loss of $54.50 looks good here.

Through The Fly's Eyes: NYSE, Nasdaq, AMEX

from Joseph Lazzaro of

Short Interest Rises in June At NYSE, Nasdaq, AMEX

All three major exchanges reported an increase in short interest thru mid-June 2007.

The New York Stock Exchange said short interest totaled 12.5 billion shares in mid-June, compared to 11.6 billion in mid-May.

The Nasdaq reported short interest of 8.9 billion shares in mid-June, compared to 8.2 billion in mid-May. The Nasdaq also reported that the short ratio had increased to 4.35 days from 3.89 in the May reporting period. The short ratio is the average number of days it would take the market to cover - or close the trade with a Buy position - the outstanding short positions.

The American Stock Exchange reported short interest of 1.1 billion in mid-June, compared to 940.5 million in mid-May.

Short interest is one trading tool that bears - or those who believe stocks and/or the market will fall in the period ahead - use to establish positions that will be profitable if a stock/the market does fall.

Many view short interest - particularly shorts of many stocks, collectively - as an indicator of bearish or negative sentiment toward the market, and, by extension that an increase in short positions suggests that more traders believe the market is likely to fall in the period ahead.

However, it's important to note that short interest is only one technical indicator and like all indicators, it has its limitations. Short interest may accurately predict a future market decline, if subsequent objective events confirm the initial evidence. If, however, subsequent objective events offer evidence to the contrary - or even evidence the short interest barometer did not measure - the short positions will not, in consequence, lead to a market decline, but, conversely, lead to a stronger market rally, when many short holders scramble to cover their positions during that market rise.

Through The Fly's Eyes: Performance Food Group


Performance Food Group Shares Fizzle as Takeout Speculation Quiets

The air is out of the shares of Performance Food Group (PFGC) -- shares are trading down about 6% today, after takeover speculation slowed.

According to a report on Bloomberg late yesterday, U.S. Foodservice has postponed its planned sale of $650 million in senior notes, which was expected to be used to finance the company's leveraged buyout by a private equity consortium consisting of Kohlberg Kravis Roberts & Co. and Clayton Dubilier & Rice Inc. U.S. Foodservice, a unit of Royal Ahold NV (AHO), was expected to be acquired by KKR and Clayton.

While this is not a direct jab at Performance Food, shares of the company have traded up in sentiment and some observers think Performance could be the next LBO candidate. But as CNBC's David Faber commented this morning, "it may be quiet in LBO land for a while."

Through The Fly's Eyes: American Greetings

Larry Schutts is a contributing editor for and the Vice-President of

Salutations by Mail, or the Web

Did you know that the creator of Care Bears also invented the Strawberry Shortcake and Holly Hobbie characters? No? It's true. In fact, it's a Cleveland-based outfit that has been selling greeting cards for 101 years.

American Greetings Corporation (AM) designs, manufactures and sells greeting cards and other social expression products. It offers everyday and seasonal cards, gift wrap, party goods, stationery and giftware. It also distributes greetings over the Internet. The company operates about 500 retail outlets in North America and its products are sold in some 125,000 retail stores worldwide. Target Corp. (TGT) and CVS Caremark (CVS) are major retail customers.

Investors were pleased last week, when the company reported Q1 EPS of 55 cents and revenues of $418 million. Analysts had been looking for 34 cents and $393.9 million. Management also guided FY08 EPS to $1.35-$1.55, versus Street consensus of $1.35. The stock popped through 30-day and 50-day moving average resistance on the news and has since begun to consolidate the gain in a bullish "pennant" consolidation pattern. Prices frequently exit pennants moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Brokers currently recommend the issue with three "holds." Analysts see a 19% growth rate, through the next year. The AM P/E ratio (19.28), Price to Sales ratio (0.87), Price to Book ratio (1.48) and EPS Growth rate (139.13%) compare favorably with industry, sector and S&P 500 averages. The stock is one of those used to calculate the S&P 400 MidCap Index. Over the past 52 weeks, it has traded between $20.65 and $29.00. A stop-loss of $24.20 looks good here.

Through The Fly's Eyes: Northwest Airlines

from Kevin Shult of

Northwest Cancels Flights – Just In Time For Summer

Northwest Airlines (NWA) disclosed yesterday that it canceled 10.7% of its flights from Friday to Monday. One of the main reasons for the debacle? The higher-than normal-rate of pilot “sick calls.” Northwest said in a statement it was “working to remedy the situation and expects shortly to operate a normal summertime schedule.”

I’m sure that made all the delayed travelers so forgiving.

It’s a problem that Northwest pilots warned management of in the past. In the concessionary labor contract that was signed last year, the limit on monthly flight hours for pilots jumped from 80 to 90. Wade Blaufuss, a spokesman for the Air Line Pilots Association,
told the AP many Northwest pilots are finding themselves flying maximum hours and don’t get the adequate rest. The Muskegon Chronicle said the airline pilots union expects this problem to continue throughout the summer.

Northwest emerged from bankruptcy in May with less enthusiasm than when Delta (DAL) came out earlier last month. Instead, workers have been focused on the $26.6 million in stock awards given to CEO Doug Steenland – while rank-and-file took pay cut after pay cut to keep the company afloat.

Does this mean that pilots are staging a sick-out? Probably, but don’t expect them to admit it. It’s the summer-time - kids are graduating, people go on vacation and some just need to rest.

Sadly, that’s exactly what people who paid for a Northwest flight have been trying to do as well.

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Through The Fly's Eyes: YRC Worldwide

from Kevin Shult of

YRC Worldwide Kicks Open China’s Door

It’s been a month since YRC Worldwide’s (YRCW) annual shareholder meeting, when CEO Bill Zollars said that he would look to the East for future expansion. Look no further:

Today, the company announced they have entered a preliminary deal to acquire Shanghai Jiayu Logistics Limited, one of the largest providers of less-than-truckload ground transportation services in China.

The push into China more than doubles the size of YRC Worldwide in China, from 1,400 employees to over 3,000. While details of the transaction were not provided, Zollers said earlier this year that acquisitions in China would cost up to $100 million. With over 30,000 customers, 1,600 employees, 300 tractors and a network of over 3,000 vehicles in Shanghai’s possession, YRC Worldwide found a steal.

When comparing the assets to MeridianIQ, the Company’s logistics segment – now called YRC Logistics - it’s monumental. YRC Logistics has 18,000 transactional and 350 contractual customers around the globe and accounted for 6% of YRC Worldwide’s total operating revenue in 2006 ($162.5B). Today’s acquisition more than doubles the assets and overall customers of the Logistics segment alone, with the bulk now in China. Zollers said he expects to see significant revenues from China to hit the bottom line in 2008.

The transportation giant already has a jointly-owned air freight importer and a jointly-owned logistics’ company in the region, but the acquisitions are far from over. Zollars told analysts back in March to
expect two acquisitions this year, a ground hauler and a logistics company.

One down, one to go.

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Through The Fly's Eyes: Best Buy

from Laurie Pasternack of

Best Buy Tries to Jump Start Shares

Best Buy (BBY), looking to kick start its sluggish shares, has approved a $5.5 billion stock buyback and raised its dividend 30% to 13 cents a share from 10 cents. Additionally, the top U.S. consumer electronics retailer announced plans to open more stores in North America than previously planned.

This series of moves comes almost a week after Best Buy reported earnings last week that disappointed shareholders and missed analysts' expectations -- by a wide margin.

The company believes the buyback plan, which replaces a previously-announced $1.5 billion stock buyback plan, will benefit FY08 EPS "modestly." Part of the new repurchase program will be used to buy back nearly $3 billion of common stock by the end of February 2008.

Could this plan by the retailer to stay ahead of its competitors Circuit City (CC) and Wal-Mart Stores (WMT) work? Sure, especially if Best Buy is right in saying demand and profit for its offerings - especially high-definition TVs, cell phones and music players -- will increase beginning later this year.

Throught The Fly's Eyes: Impac Mortgage

from Joseph Lazzaro of

Impac Pulls A Dividend..And Sends A Mild Shudder

The subprime saga continues.

Impac Mortgage Holdings (IMH) announced Wednesday that it will not pay a Q2 dividend. Impac said its decision was part of the company's previously disclosed strategy to accelerate the liquidation of its real estate owned portfolio [REO] through a new auction process implemented this summer. Impac said it is experiencing higher than expected loss levels, adding that it believes accelerating the disposition of REOs through this auction process will ultimately reduce losses and preserve capital over the long-term.

Short-term, however, Wall Street did not respond favorably to the dividend suspension: IMH shares plunged $1.20 to $4.65 in Wednesday afternoon trading.

As a small mortgage player - Impac's 2007 revenue estimate was $200 million according to analysts surveyed by Reuters - the circle of investors directly affected by Impac's decision is small. Still, the psychological impact is the more-telling dimension to the development - one that has Wall Street's professionals paying close attention to.

That's because Impac's announcement - like a spring northeast U.S. rain storm that suddenly stalls off the east coast - provides a substantive data point to Wall Street that the worst may not be over for the subprime mortgage sector.

To be sure, there have been positive data points this year regarding a light at the end of the tunnel regarding the subprime sector. Wall Street has adjusted to the rise in subprime defaults: bond holders have adjusted the prices they're willing to pay for higher-risk subprime debt, and the subprime sector has tightened lending requirements.

Nevertheless, IMH's Wednesday announcement was a "pause for thought" moment in the Concrete Canyon - a thought that raises the specter that their may be more bumps in the road up head for the subprime sector, and for investors.

Through The Fly's Eyes: Apple Inc

from Catherine Horner of

The iPhone is Ringing: How Will Investors Answer?

If there is life on Mars, they've probably heard of Apple Inc's (AAPL) new iPhone, due to be released this Friday. The iPhone, which since its unveiling at the 2007 MacWorld Conference this past January, has been making a splash to rival that of Niagara Falls, is set to revolutionize the market for personal technology devices. A cell phone, iPod music player, and Internet browser are all unified within the sleek 4.8 ounce body. What are the main attractions of the iPhone, the reasons people started lining up on Monday eager to shell out $500-$600? The main catch seems to be the 3.5'' multi-touch LCD screen. Of course, eight hours of talk time, 24 hours of audio playback and a battery life longer than any other 'smartphone' also hold some appeal to potential buyers. It would take quite a while to list all of the iPhone's special features -- to the Apple engineers' credit they're extensive and to Apple's marketing credit, most of the civilized world could probably recite the complete product description in their sleep.

Where will the escalating hype of the last few weeks leave things? That's to be determined, but Apple and partner AT&T (T), the sole service provider for iPhone, are expecting thousands of loyal and eager iFans to line up by the thousands on Friday to purchase one. Apple declared that they expect 200,000 sales in the product's first two days on the market, with another 3M predicted for the second half of 2007 and a lofty 10M in 2008. However, the iPhone will primarily be sold only in Apple and AT&T retailers. That limitation, paired with the fact that all potential buyers must subscribe to AT&T service, and potentially face high termination fees should they leave current providers, make 200,000 sales in two days a tall order. Furthermore, the AT&T iPhone plans, released earlier this week, aren't cheap either -- ranging from $60 to $100 with a $36 activation fee. And to promote the loyalty of the first iPhone customers, AT&T will charge a $175 termination fee should a user decide to break the mandatory two-year contract necessary with an iPhone purchase. This is usually a way for providers to recoup profit lost through device subsidies and rebates, neither of which applies to the iPhone. It seems that neither Apple nor AT&T fear scaring away customers with additional costs.

In the end, cost may well be the arrow in iPhone's heel. Already there is talk from test-users of room for improvement, such as faster Internet and access to corporate email systems, most of which currently utilize Research in Motion's (RIMM) Blackberry, iPhone's main competitor. With Apple known for quickly releasing new and improved products for less, as they have done with iPod for the past six years, many consumers may put buying an iPhone on hold. So what would that mean for Apple? Trouble. Apple shares have soared 40% since iPhone's conception, reaching an all-time high of $125.09 on June 18th. However, Apple's aggressive marketing has placed itself under a microscope, meaning the smallest setbacks could send Apple stock plunging, a volatility evidenced by a late May scare when rumors of production delays sent Apple stock plummeting 4% in a matter of minutes.

Ultimately, Apple may have tried for too much, too soon, considering the task at hand. Trying to completely eliminate the separation of cell phone, computer, and iPod as established in the constitution of personal technology, it seems more than a tad overambitious to claim perfection on the first attempt. All the hype Apple has created may well end up magnifying initial flaws that, were Apple not proclaiming iPhone the Achilles of the technology world, would be completely expected and accepted. However, with expectations sky-high, minor flaws could spell disaster for Apple's future. But who knows, perhaps the doubtful among us will be proven wrong.

Through The Fly's Eyes: Yahoo!


Momentum Rolling Over

Yahoo's (YHOO) traffic, be it search or total visits, is beginning to resemble the New York Yankees in the Major League Baseball rankings, writes Om Malik of GigaOm.

The total number of visitors to various Google (GOOG) properties was up 18% yoy to 536 million, followed by Microsoft (MSFT) with 528 million, up 5%, and Yahoo ranking #3 with an actual decline -- about 2% yoy -- in the number of monthly visitors to 470 million. This is the second month of consecutive declines for Yahoo -- simply not good.

To provide some perspective, worldwide Internet traffic grew 9% in the month of May 2007, while the US saw a 3% increase in traffic for the month. In the U.S., Yahoo remains #1 with 131 million visitors, up 0.3%, the lowest we have tracked. Google is at #3 position with 120 million unique visitors, up 15% year-over-year. So Yahoo is clearly losing ground.

In the world of wireless mobile search, the data look even worse for Yahoo. In mobile space, M:Metrics reports that smart phone users prefer Google over Yahoo, especially in US and UK, where Google commands 62.5% and 31% reach. Yahoo in comparison has about 33.5% and 11% reach respectively, Malik notes.

Jerry Yang has his work cut out for him. Google is a steamship with few, if any, able to stand in its way.

Through The Fly's Eyes: Guitar Center

from Tedd Cohen of

Guitar Center Solo No More

For months, we’ve expected someone to pick up Guitar Center (GTRC), the largest U.S. musical instrument retailer. Now, Bain Capital Partners affiliates will pay $1.9B in cash, or $63 per share, equal to a premium of 26% over yesterday’s closing price of $50.06. Additionally, the buyers will assume about $200M in debt. Goldman Sachs (GS) helped to auction them off, and the deal is expected to close in the fourth quarter.

Guitar Center, which went public in 1997, now has over 210 stores. Last year they bought instrument retailer Woodwind & Brasswind for about $30M. Back in March came word that Sageview Capital upped its holdings to 8.69%. Brokers responded with strong buys, buys and some holds, based on expectations of solid growth in the year ahead. Now it’s time to tune it up. The stock has been a disappointment and the direct response business needs help.

Through The Fly's Eyes: Aspreva Pharmaceuticals

from Laurie Pasternack of

Aspreva Drug Hits Snag

Is Aspreva's (ASPV) experimental drug CellCept the Next Big Thing in the medical industry? Not so much, as it turns out.

Less than a month after the U.S. Food and Drug Administration granted "fast-track" status for the drug in order to speed up the application and review process, the Canadian drug maker said that CellCept, intended to treat a serious and rare form of lupus, failed to meet its primary endpoint in a late-stage trial. The Phase III clinical trial compared CellCept to intravenous cyclophosphamide, which is the current standard of care for lupus nephritis. 185 patients were tested with each, with the study showing that the response rates were similar in both.

Aspreva, which has a collaboration agreement with Roche Holding (RHHBY) for the drug, said that CellCept was not superior to the intravenous cyclophosphamide, its primary goal. The two companies announced they are currently in discussions to assess the drug's future potential, which is looking pretty grim right now.

Well, at least the company didn't put all of their drug-eggs in one lupus nephritis basket. Oh wait -- they did. Analysts believed CellCept would provide Aspreva with a steady revenue stream for the next three to four years, but without it, they believe this could create a selling opportunity.

The company, which develops drugs for patients that suffer from rare diseases that lack a multitude of treatments, saw shares drop 8% this morning.

Through The Fly's Eyes: Oracle Corporation


Numbers Too Good To Pass Up

Cross-selling opportunities from vertical application acquisitions should drive Oracle's (ORCL) stock higher.

Specifically, in last night's conference call, management discussed how its business relationship with Wal-Mart (WMT) has expanded. Prior to making an acquisition in the retail applications space, Oracle, believe it or not, did no business with the retailing giant. Today, however, the software company is cross-selling its broad product offerings to Wal-Mart. Management suggested the same is true for other verticals such as communications and healthcare, where Oracle has recently completed acquisitions.

Also impressive was Oracle's margin expansion, as operating leverage kicks in from over 30 acquisitions that are being integrated. Ellison expects acquisitions to continue, with five having been announced the past quarter, he sees no reason to slowdown.

Guidance was also strong with new software license revenue expected to be up 20 to 30% year-over-year. Total revenue is forecast to grow 19 to 21% on a GAAP basis.

The Oracle cash flow and acquisition machine is surging forward and it appears its stock will do the same. Somehow Oracle has put together a very unique ability to successfully integrate a massive number of acquisition unlike any other company has done before.

Tuesday, June 26, 2007

Through The Fly's Eyes: LSI Industries

Larry Schutts is a contributing editor for and the Vice-President of

LSI Industries: Pretty IS Better

When you have products to sell, the look of your site can make all the difference. There is an outfit headquartered in Cincinnati that can upgrade that look with a wide variety of lighting and graphics enhancements. One of its subsidiaries was responsible for the Nasdaq Marketsite video screen, the world's largest.

LSI Industries (LYTS) provides graphics and lighting products and services to the commercial, industrial and multi-site retail markets. The Lighting segment manufactures and markets outdoor, indoor and landscape lighting. The Graphics segment provides exterior and interior visual image elements related to graphics and menu board systems. The Technology segment designs, produces, and supports light engines and large format video screens using LED technology. Clients include BP plc (BP), Best Buy (BBY), ConocoPhillips (COP), Exxon Mobil (XOM), Ford Motor (F), McDonald's (MCD) and Yum! Brands (YUM).

Investors were pleased last week, when the company issued guidance for its fiscal fourth quarter. Management now sees EPS of 27-29 cents and revenues of $89-$93 million. Those ranges topped the consensus analyst estimates of 23 cents and $83.59 million. The CEO also noted, "We are currently in the early stages of several high-volume rollout programs that bode well for fiscal 2008." LYTS shares popped into a bullish "pennant" consolidation pattern on the news. Prices frequently exit pennants moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Brokers recommend the issue with one "buy" and three "holds". Analysts see an eighteen percent growth rate, through the next year. The LYTS P/E ratio (20.92), Price to Sales ratio (1.21), Price to Book ratio (2.22), Price to Cash Flow ratio (14.28), Sales Growth rate (16.77%), Return on Assets (9.22%) and Return on Investment (11.25%) compare favorably with industry, sector and S&P 500 averages.

Institutional investors hold about 73 percent of the outstanding shares. Over the past 52 weeks, the stock has traded between $12.83 and $20.81. A stop-loss of $15.50 looks good here. Note that the firm is next expected to report quarterly results in late August.

Through The Fly's Eyes: New Home Sales

from Joseph Lazzaro of

New Homes Sales Not A Confidence Builder For GDP Bulls

There are those economic statistics that, on second analysis, don't look nearly as dire as on the first, instant-analysis during the trading day.

Then there are those economic statistics that look just as bad.

Put Tuesday's new home sales in the latter category.

The U.S. Commerce Department announced Tuesday that new home sales fell 1.6% to a seasonally-adjusted annual rate of 915,000 units in May - the slowest pace in 4 years - and below the 924,000-unit rate analysts had forecast.

Further, the median price of a new home sold in April dropped to $226,100, down 0.9% from a year ago.

Wall Street closely follows housing statistics because of the ripple-effect housing has on the economy. Housing's economic circle of influence includes not just the wood and basic materials of home construction, but also the supplemental sectors of furniture, appliances, and yard care, among others. Hence, sustained increases in homes sold generally signal that the economy is strengthening; sustained decreases, that the economy is weakening.

Further, analysts also closely scrutinize the new home sales statistic because it provides a more-current read on the U.S. economy: new homes sales are recorded when a contract is signed, which generally is a more-current statistic than those kept for sales of existing homes.

Fly Analysis: While it's better to evaluate a series of monthly new housing statistics to discern a more-informative moving average, the May new home statistic is telling: it provides further evidence that the housing sector slump continues. Housing is far from at the recovery stage and the sector will act as a drag on overall U.S. GDP growth in 2007. Hence, the U.S. will need growth in other sectors if it hopes to achieve plus-2% GDP growth for 2007, considered the minimum growth necessary to meet targets for earnings and job growth.

Through The Fly's Eyes: Starbucks

from Kevin Shult of

I'll Have a McStarbucks, Please

Starbucks (SBUX) unveiled its new menu program today that includes an expanded lineup of beverages and lunch selections. It looked all too familiar. Coffee and salad, I thought? Can’t I get that at McDonald’s (MCD)?

Before its foray into salads, Starbucks had aggressively been competing with McDonald’s over the title of ‘best coffee’ ever since Canadian Business magazine’s blind taste-test last year declared McDonald’s the winner and champion.

Starbucks has already tried to compete for a spot in the crowded breakfast line-up. Back in October last year, they announced a plan to roll out its breakfast sandwiches. After a taste-test, The Columnist Manifesto thought them to be so bad that he compared them to airplane food.

With Starbucks’ grinds slightly burnt, management decided to tackle McDonald’s straight on: Salads. Customers now have the option to order the new Tomato Mozzarella Insalada, Champagne Pasta Salad or Albacore Tuna Penne, among other delights. Try that with your new Raspberry Mocha Frappuchino.

Starbucks seems terrified that people think McDonald’s coffee is better than theirs. Their expansion into selling music CDs and DVDs show the company’s desire to find new revenue outlets, but the expansion into breakfast and salads says that they’re afraid of losing its customer base to Ronald McDonald. Even worse, Starbucks is forgetting what made them Starbucks: The coffeehouse experience and quality coffee.

At this rate, Starbucks is en route to be a part of the complete fast-food market, and will directly compete with McDonald’s, Burger King (BKC), Wendy’s (WEN) and all the others.

What should McDonald’s think? George Yared, CIO of Yared Investment Research, actually believes that Starbucks will become the next McDonald’s. Time will tell.

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Through The Fly's Eyes: Lennar

from Joseph Lazzaro of

Lennar's Q2 Points To Housing Sector's Continued Doldrums

Ink does not lie: Tuesday's earnings reports contained another negative data point for the housing sector.

Lennar (LEN) unexpectedly reported a Q2 EPS loss of (22c), compared to the Reuters consensus estimate of 1 cent.

Further, Lennar said market conditions had eroded so much over the past six months that the company is now focusing limiting losses for this year, adding that the supply of homes continues to climb.

Lennar's shares dropped $1.07 to $37.68 on the news in Tuesday afternoon trading.

Lennar did post Q2 revenue of $2.88 billion, which was better than the Reuters consensus estimate of $2.49 billion, but it was not enough to alter the sub-par Q2 report's overall negative tone. Lennar said new orders for the quarter slumped 31% to 8,056, with orders plunging more than 46% in the hard-hit western regions of California and Nevada.

Fly Analysis: Lennar's Q2 performance indicates that the U.S. housing slump is far from over. The key statistic is new orders, which continues to indicate that consumer confidence as it relates to house purchases remains low. That fact, combined with industry-wide inventory increases, points to continued sluggish in thr U.S. housing sector though at least the end of 2007, and most likely, into Q1 2008.

Through The Fly's Eyes: Heelys

from Eric Buscemi of

Heelys: Going in Circles

Heelys (HLYS), the wheeled footwear company, has seen some recent weakness on insider and shareholder selling, and has reduced the amount of shares for its secondary offering scheduled for this Thursday night to 4.5M from 8M because insiders did not want to sell at the stock's current, depressed levels.

This creates a double-edged sword for the stock. On the positive side, it’s encouraging to know the insiders are optimistic that Heelys will head back up. On the negative side, the same insiders still do plan to sell if and when the stock does rise, which creates an overhang that will weigh the stock down.

Further complicating the matter is that most analysts that cover Heelys are in on the secondary, and must remain silent during the selling period. This has left the stock without defenders, except for one firm that initiated Heelys this morning. Brean Murray initiated the stock with a Buy and a $34 price target, saying that they do not believe the company's "wheeled footwear" is just a fad. Additionally, they say that the stock's price drop, fueled by consumer demand worries, insider selling and safety issues, has created a buying opportunity for company for the "action sports brand."

Through The Fly's Eyes: Topps Co

from Kevin Shult of

Upper Deck Gets Hostile With Baseball Card Rival, Topps Co

The privately-owned sports card and memorabilia company Upper Deck Co launched a hostile tender offer to buy its trading card rival Topps Co (TOPP) for $10.75 a share in cash today.

The move by Upper Deck comes after the fact that Topps agreed to be acquired by a group led by former Walt Disney (DIS) CEO Micheal Eisner for $9.75 a share, despite Upper Deck's unsolicited "indication of interest" last month.

In the past, Topps criticized Upper Deck for failing to show how it would finance the deal. Topps also highlighted The Upper Deck's higher regulatory risk and inadequate break-up fee if the deal failed to work.

Topps Co has seen its own criticism as well. The decision to be acquired by Madison Dearborn Partners and Tornante Co, Micheal Eisner's firm, has drawn criticism from activist hedge fund Cresendo Partners and three members of the Board, saying the $385 million price tag was too low and the auction process was flawed.

Upper Deck's new $425 million offer expires July 24th and is not conditioned on any financing arrangements. If the almighty dollar is the bottom line for Topps' Board of Directors, I would expect the company to be sold to its rival, The Upper Deck, by that time.

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Through The Fly's Eyes: M&A

from Tedd Cohen of

Basell Takes Huntsman; Lyondell Left Standing

Today came word that Basell, a leading producer of polypropylene, and a part of billionaire investor Leonard Blavatnik’s Access Industries, is buying Huntsman (HUN), a chemical products manufacturer, in a cash deal for $9.6B or $25.25 per share, including debt. There’s little chance that there will be a rival bidder. That’s certainly a relief for Huntsman, as they have been on the block for a while, including one deal last year that collapsed. The deal is expected to close in the fourth quarter of this year.

Now, what does that mean for Lyondell Chemical (LYO), itself a global manufacturer of chemicals and plastics? Just last month Blavatnik bought the right to acquire 8.3% of Lyondell. In the SEC filing, it was implied that he’d merge Lyondell with Basell. The Huntsman deal would seem to put an end to that. Lyondell shares are down approximately 3% in trading late this morning.

Not everyone is impressed with Basell’s Huntsman deal. One observer cited a lack of synergy.

Who else in the industry might be a takeover target? Hercules (HPC), whose shares are no longer trading at a discount, Cytec (CYT) and OMNOVA (OMN) are all said to be possibilities.

Through The Fly's Eyes: Ventana Medical Systems

from Laurie Pasternack of

Ventana Offered Huge Premium by Roche

In a move that could complement its other recent acquisitions, Roche Holding AG (RHHBY) yesterday made a $75-a-share hostile bid for Ventana Medical Systems, Inc (VMSI). The $3 billion cash offer would allow Roche to gain a test Ventana developed to screen patients who could respond to the Swiss pharmaceutical giant's breast cancer medicine, Herceptin. The main goal of acquiring Ventana would be to "move closer toward delivering tools to select the right drugs for the right patients, rather than saving costs," Roche CEO Franz Humer told the Wall Street Journal.

Roche has already agreed to three other diagnostic acquisitions this year: The company agreed to buy CuraGen Corp's (CRGN) 454 Life Sciences in March for $140 million, allowing it to gain the company's DNA-mapping technology, and later agreed to acquire BioVeris Corp (BIOV) for $600 million and NimbleGen Systems for $272.5 million. The acquisition of BioVeris will add a screening technology that stimulates cells to emit light, while the NimbleGen acquisition would add more genetic tools for drug research.

Should an acquisition be seen as a sure thing? No, executives at Ventana said. Although Roche has made several friendly efforts to engage in "meaningful discussions" with Ventana's chairman and board concerning a transaction, Ventana has so far rebuffed Roche. The company advised shareholders in taking any action in response to the offer, but said the Board would review Roche's offer and make a recommendation within 10 days. What may make this particular offer different is that the $75-per-share offer was nearly 45% higher than Ventana's closing price of $51.74 yesterday.

In the event of an acquisition, Roche said it would operate Ventana as a separate unit within its diagnostics division, allowing it to retain its management team and employees as well as its headquarters in Arizona. This would be a similar agreement to the one Roche maintains with U.S. biotech company Genentech (DNA), which is majority-owned by Roche but is managed as an independent company.

Based on a potential acquisition, analysts believe that biotechnology companies Gen-Probe (GPRO), Luminex (LMNX) and Cepheid (CPHD) could be potential acquisition targets based on their technology platforms and product offerings.

Through The Fly's Eyes: Dell Inc

from Eric Buscemi of

If Jobs Wrote to Dell

Dear Michael,

I see you decided to pull a page out of the Apple (AAPL) business plan and return as the company's prodigal son and savior. You have a long road carved out in front of you. A few words of advice from Cupertino -- look closer at what worked for me after I came back. You boys over there at Dell (DELL) haven't been paying enough attention.

We did the multi-colored Macs in 1998. Granted, they built up our brand awareness, but you're a little past that stage in the game. You don't need to make pink Dell laptops to get attention, everyone already knows about Dell. When I called your computers "ordinary beige boxes," you should have strived to change the "ordinary" part, not the "beige" part.

You need to do something really outside of the box. I'd suggest coming out with a revolutionary new mp3 player, but you may be a little late on that one. Maybe try a far-out, new-fangled cell phone? It's doing wonders for us here -- and we haven't even released it yet!

I'm looking forward to having you back as a real competitor -- beating up on Gates' old outfit is just getting too easy.


Steve Jobs

Through The Fly's Eyes: Target Corporation


Another Weak Data Point For The Consumer

Target Corp (TGT) yesterday told Wall Street that it expects June sales to come in at the lower end of its previously forecasted 3 percent to 5 percent gain.

In April, U.S. retail chains reported the weakest sales results on record, according to Reuters. While rebounding somewhat in May, sales results were weaker than a year ago. This follows Charming Shoppes (CHRS), which we blogged about yesterday, Wendy's (WEN), Best Buy (BBY) and Circuit City(CC), all having come up short.

This is not the end of the world, simply the Fed successfully slowing down growth. Investors should view a slowdown in consumer spending as a stepping stone for the Fed to start dropping rates.

Through The Fly's Eyes: Oracle Corporation


Needs Organic Growth To Drive Stock Higher

If Oracle (ORCL) is going to get investor's attention, it will have to demonstrate some organic growth, and not growth from simply adding on more sales from the recent slew of acquisitions.

Oracle reports results following the market's close tonight with profits expected to rise to $1.81 billion, or 35 cents a share, excluding one-time items for the May 31 quarter. Net income was $1.3 billion, or 24 cents, a year earlier.

Ellison set a target of $50 billion in annual sales by 2012 in a recent meeting with his sales force. Hitting that target would require a 23 percent annual sales increase, a huge number. That figure exceeds Oracle's recent growth rate of about 20 percent.

The Redwood City-based software company will once again post massive cash flow generation, however, if investors sense intense pricing pressure by combining product offerings and dropping prices, do not expect much upside in Oracle's stock price. Conversely, if price compression is not too bad, investors may be all over this stock.

Monday, June 25, 2007

Through The Fly's Eyes: U.S. Congress & hedge funds

from Joseph Lazzaro of

House Hedge Fund Tax Seen Hitting Incomes, Not Capital Flows

The initial, preliminary evaluation late Monday of U.S. House Democrats' proposal to increase the tax rate on managers of hedge funds was that it, "probably would not have as chilling an effect on talent or the industry as one might think."

At least that was the initial evaluation of one experienced, New York-based hedge fund sector professional, who spoke on condition that he not be identified by name.

The professional, a 10-year hedge fund pro, said, "No one likes the prospect of paying [substantially] higher taxes," but added that, in his interpretation, the House Democrats' proposal would not drive away talent, because the sector has many preferred qualities that managers like and that won't go away if the Democrats' proposal becomes law.

The source then listed numerous investment strategies managers use at hedge funds that are simply not allowed in other investment venues, for example, at mutual funds.

Managers who take a share of hedge fund and private-equity fund profits pay taxes at a 15% rate, the rate for capital gains. The Democrats bill would raise the rate levied on their compensation, known as "carried interest," to 35%, the level for income tax.

House Democrats introduced their bill on the heels of The Blackstone Group's (BX) IPO, a $4 billion initial public offering, the sixth-richest IPO in U.S. history.

Critics of the bill also argue that the bill could also slow funds into hedge funds and private equity funds, and they say this would undermine a sector that has strengthend and helped make more competitive companies - large, medium, and small. However to-date, no multivariable, longitudinal study exists to confirm the above, which plays into the bill's proponents' argument that the 15% tax rate for hedge fund and private equity managers represents a double standard.

Still, a higher tax rate would not substantially alter the secular hedge fund / private equity trend that's seen the sector amass more than $1.3 trillion in assets and hundreds of talented fund managers, the hedge fund source said. That's because hedge funds, "offer the freedom to deploy many more investing and trading strategies, over longer periods of time" than other environments, adding it is that operational flexibility and freedom that is giving investors what they seek: the chance to achieve massive returns that are not possible in most other asset classes.

While qualifying his remarks by stating, "We're early in the hedge fund game," the source underscored that it is that factor - freedom / flexibility - that will continue to lure talent to the sector, even if the tax rate is raised substantially: higher taxes "hurt, but they don't wipe out the sector's appeal, from a manager standpoint." And as long as the freedom and talent is there, "the high returns will follow, and so will the capital flows," he added.