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Tuesday, July 31, 2007

Through The Fly's Eyes: American Home Mortgage

from Joseph Lazzaro of Theflyonthewall.com

AHM Provides A Data Point, And Wall Street Waits For More

There are times when Wall Street, to borrow a phrase, takes "two steps forward and one step back."

Then there are times when the Street simply stands, and waits for the events on the ground to clarify the financial landscape.

And that was the case Tuesday, as Monday's rally faded into Tuesday's 140-point Dow sell-off. And one reason was the subprime issue, in general, which seems to offer a data point daily regarding the sector's health, and its impact on the housing sector, and the economy.

Tuesday's data point, in specific, was American Home Mortgage (AHM), which dropped more than 80% to about $1.00 per share from its recent $10.50 per share after the company indicated it is unable to borrow money under its banks lines and is looking at ways to raise money, including "the orderly liquidation of assets."

AHM needs the money to meet margin calls initiated by lenders, due to the declining collateral value of certain loans and securities in the company's portfolio. That margin call was in part prompted by AHM's Monday announcement: on Monday AHM announced a major write-down of loans, i.e. declared that it is unlikely to receive timely, full payment for certain loans, and also delayed its quarterly dividend. That sent a shudder through AHM's lenders, who, of course, fear AHM will default on loans to the company.

AHM characterized the circumstance as a "liquidity issue," and at first glance the event would appear to be limited / restricted to subprime mortgage segment. However, American Home Mortgage's portfolio contains not only subprime loans, but also near-prime loans, which allow borrowers to obtain mortgages with little documentation of income or assets. Hence, AHM's problems have reignited Wall Street's concerns that the home mortgage default issue may also include home loans to borrowers with average or even above-average credit ratings. If the last point is true, that would suggest a mortgage default problem involving a wider pool of citizens [translation: consumers].

Even so, with the above as background, it's important to maintain a dispassionate, balanced perspective regarding the subprime issue: the current, prevailing conventional wisdom argues that, regarding fundamentals, there are more positives than negatives pertaining to the market, and by extension, in the U.S. economy.

But right now the unknown is guiding the market - the unknown regarding the size of the subprime problem, the unknown regarding how deep - if at all - the problem is in the higher-quality loan category - which is why analysts, traders and typical citizens alike are waiting for more information, waiting for events on the ground to clarify themselves.

Through The Fly's Eyes: Amerigroup Corporation

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.













Amerigroup Corporation: Managed Healthcare For The Public Sector

Access to quality healthcare is one of the important social issues of the day. There is a Virginia Beach outfit that works to facilitate the process for low-income Americans.

Amerigroup Corporation (AGP) improves healthcare access and quality for low-income Americans, by developing innovative managed health services for the public sector. The firm targets people eligible for Medicaid, the State Children's Health Insurance Program, FamilyCare, and Special Needs Plans. It contracts with about 63,000 primary care doctors and specialists to serve more than 1.5 million members in the District of Columbia, Florida, Georgia, Maryland, New Jersey, New York, Ohio, Tennessee, Texas and Virginia.

The company pleased investors last week, when it reported Q2 EPS of 61 cents and revenues of $1 billion. Analysts had been expecting 46 cents and $920 million. Management also guided FY07 EPS to $2.00-2.10 ($1.89 consensus).

The stock popped through 30-day, 50-day and 90-day moving average resistance on the news and is now forming a bullish "flag" consolidation pattern. Prices frequently exit flags moving in the same direction they were traveling when they entered them. In this case, that would be to the upside. Brokers recommend the shares with one "strong buy," two "buys," nine "holds" and three "sells." The AGP P/E ratio (13.60), PEG ratio (0.94), Price to Sales ratio (0.44), Price to Book ratio (1.74), Price to Cash Flow ratio (10.68), Price to Free Cash Flow ratio (6.12), Sales Growth rate (56.26%) and EPS Growth rate (110.34%) compares favorably with industry, sector and S&P 500 averages.

Institutional investors 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, AGP has traded between $23.35 and $39.44. A stop-loss of $24.00 looks good here.


Through The Fly's Eyes: Crocs

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.












All Purpose Shoes, With a Back Handle

Crocs Inc. (CROX) designs, manufactures and markets footwear for men, women, and children. The company's shoes are soft and lightweight, non-marking, and slip-resistant. The firm also manufactures and sells a line of Crocs-branded apparel and accessory items. Products are distributed through retailers, including Dillard's (DDS) and Nordstrom (JWN). Nike (NKE) is a major competitor. On Monday, the firm agreed to acquire performance shoe and sports sandal maker Bite Footwear for $1.75 million.

The firm pleased investors last week, when it announced Q2 EPS of 58 cents and revenues of $224.3 million. Analysts had been expecting 44 cents and $192.7 million. Management also guided Q3 EPS to 58-62 cents (43 cent consensus), Q3 revenues to $240-250 million ($195.87M consensus), FY07 EPS to $1.89-$1.93 ($1.56 consensus) and FY07 revenues to $810-$820 million ($712.25M consensus). Wedbush Morgan subsequently reiterated its "strong buy" recommendation and boosted its price target to $71. Think Equity maintained its "buy" and raised its target to $72.

The stock popped into the initial stage of 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.

Altogether, brokers now recommend the issue with three "strong buys", four "buys" and one "hold". The CROX Sales Growth rate (162.03%), EPS Growth rate (205.26%), Operating Margin (28.37%), Net Profit Margin (19.59%), Return on Assets (36.34%), Return on Investment (48.35%) and Return on Equity (49.09%) compare favorably with industry, sector and S&P 500 averages.

Institutional investors hold about 95% of the outstanding shares. The stock is one of those used to calculate the S&P 600 Small Cap Index. Over the past 52 weeks, it has traded between $13.04 and $59.71. A stop-loss of $51.00 looks good here.

Through The Fly's Eyes: Johnson & Johnson

From Kevin Shult of Theflyonthewall.com

J&J Restructures


Johnson & Johnson (JNJ) announced plans earlier today to reduce its global workforce up to 4%, or about 4,800 jobs, in an effort to cut costs due to slumping sales and expiring drug patents over the next few years.

The restructuring would primarily target its pharmaceutical segments and its Cordis stent-making unit. The nation’s fourth largest drug company expects that the restructuring would entail pretax charges totaling $550M to $750M in the second-half of 2007, but expect to generate annual cost savings of $1.3B to $1.6B next year.

Jeff Jonas, portfolio manager with Gamco investors told Reuters the restructuring was “very positive” and didn’t believe the move was a sign of desperation, despite the upcoming expirations of its big-selling drugs like Resperdal for schizophrenia, and the Topamax epilepsy drug. "It's really just a matter of responding to the reality that's out there in the marketplace," says Jonas.

The restructuring announcement followed similar news from rival Pfizer (PFE), the world’s largest drug maker, which started eliminating 10,000 jobs in January, and Merck (MRK), who announced in 2005 that they would close five plants and slash 7,000 jobs over a five year period.

What this means for Johnson & Johnson is that the executives at J&J, Merck and Pfizer are willing to face reality and be proactive. Each year, patents on drugs that provide millions of dollars in revenues are expiring, opening doors for generic drug makers like Teva Pharmaceuticals (TEVA), Mylan Laboratories (MYL), Par Pharmaceuticals (PRX), Barr (BRL), and others, to hefty profits.

Johnson & Johnson’s attempt to reduce its cost base while investing in its pipeline is a sign that management knows the future will not be as rosy as the past.

Threats from generics, in addition to the safety concerns surrounding its Anemia drug, Procrit, and its drug-coated stents, are likely to have a negative impact on Johnson & Johnson’s revenues in the future. One potential option J&J could explore is acquiring generic companies that have similar focus, including pain management, anti-infective, dermatology, cardiovascular and oncology.

Investors have reacted positively to today’s restructuring news, pushing shares 1.85% higher, to $61.19 in mid-day trading.

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Through The Fly's Eyes: News Corp./Dow Jones

from Larry Ramer of Theflyonthewall.com

After the Sale: Murdoch’s Next Moves with Dow Jones

It’s all but certain that Dow Jones & Co. (DJ) and its flagship newspaper, The Wall Street Journal, will become part of Rupert Murdoch’s News Corp. (NWS) empire. Bancroft family members, who control 64% of Dow Jones, have seemingly agreed to deliver Murdoch votes representing at least 38% of the company’s voting stock, according to today’s Wall Street Journal. That amount of support will most likely enable News Corp. to acquire Dow Jones. Murdoch reportedly clinched the votes by agreeing to foot the bill for the family’s $30M in advisory fees. News Corp. will hold a board meeting at 4pm today to decide on its next steps. The company was looking for more than 32% of votes from the Bancroft family, in order to let the public know that it had ample support for the deal. It certainly appears that the transaction will go forward.

The big question is: What will Murdoch do with Dow Jones? In at least two interviews since he began his pursuit of Dow Jones, Murdoch has declared that he would use The Journal to promote News Corp.’s Fox business news channel, set to debut in October. In a May interview with The New York Times, the Australian media tycoon said that he would even incorporate the word “Journal” in the name of his business news channel, if he could find a way to legally do so.

The betting here is that Murdoch will indeed do everything possible to use The Journal as a promotional vehicle for his new business channel. In all likelihood, The Wall Street Journal will have many ads for the Fox business channel, and the newspaper will occasionally reference the channel in its stories. The channel’s programming schedule will probably be listed each day in The Journal, and the newspaper’s reporters will appear frequently on the station. Murdoch may even find a way to put the word “Journal” in the channel’s name.

Murdoch wants The Journal to lend credibility to the Fox business news channel, so it doesn’t seem logical that he would seek to diminish The Journal’s prestige in any way. People who have been worried that Murdoch would try to make The Journal’s news pages reflect his right-wing political views probably do not have to be concerned. On the other hand, The Journal’s editorial and op-ed pages will continue to have a conservative slant, and that slant may become slightly more pronounced under Murdoch’s stewardship.

The Journal’s promotion of the Fox business channel will give the station a modest boost. However, the channel’s success will ultimately be determined by the quality of its programming and the likeability of its on-air talent. Dow Jones’ performance won’t change much under its new owner, unless Murdoch has ideas for successful products that News Corp.’s latest acquisition can launch.

Through The Fly's Eyes: Patent Law

from Catherine Horner of Theflyonthewall.com

Supreme Court Patent Ruling Has Wide-Ranging Effects

Patents are not typically the most exciting branch of the law -- they've yet to come up with a Law & Order: Patent Infringement. But the April Supreme Court decision on KSR International v. Teleflex Inc. (TFX) is still making headlines three months after the fact. The ruling turned on the definition of "obviousness," a cornerstone doctrine of patent law established in 1851 which stated that a patent needed greater "skill and ingenuity [than] an ordinary mechanic acquainted with the business" would have. Post-KSR, a patent is deemed obvious if a person with general knowledge of the relevant subject can "fit the teaching of multiple patents together like pieces of a puzzle." As almost all litigated patent cases deal with claims of obviousness, KSR is being called one of the most important patent rulings in history.

Indeed, just three months after the decision was announced, KSR is already being invoked in patent hearings across the country. Last week, San Francisco federal judge William Schwarzer dismissed a patent-infringement lawsuit against RealNetworks Inc. (RNWK) which he had previously allowed to proceed. Schwarzer is believed to be the first trial-court judge to reverse his position and dismiss a case in the defendant's favor while citing the KSR ruling. When asked about the meaning behind the KSR decision, Schwarzer replied "Patents are being issued on obvious inventions, and [the Supreme Court] tightened the reins." Schwarzer's decision on the RealNetworks case is hardly the only instance of KSR's effects on patent lawsuits. In the wake of the KSR ruling, the International Trade Commission agreed to review a decision that pronounced 24 companies in violation of Seiko Epson Corp. (SEKEF) ink cartridge patents. KSR is also being invoked in the ITC battle between cell phone chip makers Qualcomm Inc. (QCOM) and Broadcom Corp. (BRCM). Qualcomm urged the ITC to respect the precedent set by the Supreme Court and dismiss as obvious Broadcom's patents on its 3G cellphones. Although the ITC sided with Broadcom, banning the importation of cell phones containing Qualcomm chips, Qualcomm is now calling for a Presidential veto of the ruling.

Companies like Qualcomm facing patent-infringement lawsuits are clearly happy with the RealNetworks' ruling and can only hope that more courts will follow Judge Schwarzer's citing of KSR. More such decisions would give companies a leg-up on patent-licensing and holding firms, which buy patents in order to collect royalties on alleged infringement, and encourage such firms to settle disputes as opposed to risking a court case which could result in a complete invalidation of their patent. As Dennis Crouch of the University of Missouri pointed out in a recent Wall Street Journal article, "Patentees have long had the upper hand in patent litigation but the KSR case has shifted that balance of power back to defendants." The Journal also pointed out that, with the increased flexibility granted to judges in determining the obviousness of patents, companies with large lobbying and litigation budgets, as well as good public relations, are more likely than ever before to influence court decisions. It's already evident that the KSR ruling will have big implications for the future of patent law.

Through The Fly's Eyes: MGIC

from Theflyonthewall.com

Magic: The Money Is Gone

MGIC Investment Corp (MTG) and Radian Group (RDN), the two mortgage insurance companies that are set to merge, announced last night that one of the cash cow partnerships that was to be used to give a boat load of cash to shareholders is not much of a cash cow anymore.

C-Bass, a partnership owned by both MGIC and Radian, "has been materially impaired," MGIC announced last night. Back in the Spring, when MGIC and Radian announced they were going to merge, management said the massive amount of cash in C-Bass, along with a second co-owned partnership called Sherman, was to be given back to shareholders. Total consideration was estimated between $1.75 to $2.0 billion. Well, I guess that is not going to happen.

MGIC said the $516 million in book value as of the end of June could be completely wiped out. I have not seen any news on the Sherman partnership as of yet. C-BASS is principally engaged in the business of investing in the credit risk of subprime single-family residential mortgages.

The MGIC and the Radian transaction is a classic example that investors should always be skeptical of management in any company, even when they are generally as well-respected as MGICs.

However, when companies merge in an industry where the fundamentals are rolling over, as is the case in the mortgage business, it is often best to stay away. Do not bottom fish in this sector yet, there is likely much more bad news to come.

Through The Fly's Eyes: Sun Microsystems

from Theflyonthewall.com

Great Margin Improvement; No Real Growth Yet

Sun Microsystems (SUNW), the networking computing company, reported impressive cash generation metrics while sales continue to be light.

For the June 2007 fiscal year, Sun generated $1.2 billion in operating income and cash flow from operations of $950 million -- a vast improvement. Gross margin also improved 200 basis points for the year and almost 400 basis points from last year's Q4.

The problem with Sun continues to be revenue growth, as there was little year-over-year growth in the current quarter and the company is guiding to low-to-mid single digit revenue growth for the year -- which is not a good sign for a tech company. Also, the company provided no guidance for the upcoming quarter, leaving much of the growth to the tail end of FY 2008, which typically is not good.

Sun announced that it will host its analyst day in New York on September 5 and mentioned that it will discuss its capital structure, which is typically a subject that is not highlighted, a sign something more dramatic might happen with the $5 billion in balance-sheet cash.

Overall, Sun has little downside risk and has a private equity investment via a convert priced in the $7 price range. The computer-is-the-network company appears it might be setting itself up for a private equity deal with its focus on higher margin businesses and better cost controls.

Through The Fly's Eyes: Anadigics

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.












Got Your Non-Silicon RFICs Right Here

Much of what we call "technology" is critically dependent on the operation of semiconductor integrated circuits. There is a firm in Warren, New Jersey that has put a non-silicon spin on the fabrication of such devices, with good results.

Anadigics Inc. (ANAD) makes gallium arsenide (GaAs) and indium phosphide (InP) radio frequency integrated circuits (RFICs) for the broadband wireless and wireline communications markets. The physical properties of GaAs and InP allow the firm to make chips that are smaller, faster and more energy efficient than the usual silicon-based devices. The company focuses on applications for wireless local area networks, cable set-top boxes, cell phones, cable television systems, microwave systems and fiber-to-the-premises communications systems. Customers include Intel Corp. (INTC) and Motorola Inc. (MOT).

The firm surprised the Street last week, when it reported Q2 EPS of three cents and revenues of $53.9 million. Analysts had been looking for two cents and $52.6 million. Management also guided Q3 EPS to six cents (five cent consensus) and Q3 revenues to $59.3 million ($56.91M consensus). Needham, Roth Capital and Charter Equity subsequently declared ANAD a "buy."

The stock popped on the news and is now forming a bullish "flag" consolidation pattern. Prices frequently exit flags moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Altogether, brokers now recommend the issue with six "strong buys," three "buys" and four "holds." Analysts see a 61% growth rate, through the next year. The ANAD Price to Book ratio (3.91), Sales Growth rate (37.15%) and EPS Growth rate (-0.06 to 0.03 yr/yr) compare favorably with industry, sector and S&P 500 averages.

Institutional investors hold about 93% of the outstanding shares. Over the past 52 weeks, the stock has traded between $5.03 and $15.67. A stop-loss of $12.75 looks good here.

Monday, July 30, 2007

Through The Fly's Eyes: Illumina

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.











Illumina: Investigating Your Genes

Innovative technologies now allow such detailed analysis of genetic variation and function that firms can work on the development of "personalized medicine". There is an outfit in San Diego that is in the front wave of firms designing the machines that make such research possible.

Illumina (ILMN) is engaged in the development and marketing of tools for the analysis of genes. The firm sells systems that determine variation in genetic sequences, analyze which genes are active in a particular cell or group of cells, profile changes in genetic sequence function, and determine which proteins are present in cells and how they interact. Customers include biotechnology companies, research centers, and academic institutions.

The firm pleased investors last week, when it reported Q2 EPS of 16 cents and revenues of $84.5 million. Analysts had been expecting 13 cents and $77.7 million. Management also guided Q3 revenues to $88-92 million ($82.32M consensus) and FY07 revenues to $335-345 million ($323.05M consensus).
The stock popped on the news and is now forming 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 shares with four "strong buys," seven "buys" and three "holds." Analysts see a 71% growth rate through the next year. The ILMN Sales Growth rate (103.32%) compares favorably with industry, sector and S&P 500 averages.

Institutional investors hold about 95% of the outstanding shares. Over the past 52 weeks, ILMN has traded between $28.11 and $48.00. A stop-loss of $40.65 looks good here.

Through The Fly's Eyes: Auto Parts Manufacturers

From Kevin Shult of Theflyonthewall.com

Auto-Parts Manufacturers Retrench


The domestic automotive business has been beaten and torn by foreign competition for several years now, forcing many auto-parts producers, such as Tower Automotive Inc. and Delphi Corp. (DPHIQ) into bankruptcy proceedings.

A growing number of auto-part manufacturers are leaving the U.S. automobile industry altogether, divesting auto-related businesses and diversifying into other, more profitable industries. The Wall Street Journal highlighted the latest companies trying to make the switch to stay alive.

  • SPX Corp (SPW), a North Carolina auto manufacturer that once earned 90% of its revenue from auto-related businesses, now earns less than 3% from auto-related businesses after multiple divestitures and acquisitions. SPX Corp is now an infrastructure-related products and service manufacturer for the global power market.

  • Pittsburgh-based glass and coatings manufacturer PPG Industries Inc (PPG) has put its windshield business up for sale. The company instead will rely on its high-tech coatings business and optical & specialty material segments that offer long-term growth potential.

  • Eaton Corp (ETN), of Cleveland, has been very successful in expanding into the aerospace business. To reduce its exposure to the auto-parts industry, the company recently sold its automotive mirror controls business for $111M to Englefield Capital LLD. Eaton also acquired a host of electrical businesses including Marina Power Lightening, Senyuan Int’l Holdings in China and selective assets of Catalytica Energy Systems.
Not all companies want out, though. Johnson Controls Inc (JCI) reaffirmed its commitment to their automotive segment, despite the fact that it’s other two business segments, building efficiency and power solutions, are more profitable. Johnson Control’s automotive segment provides seating, instrument panel, overhead, floor console and doors systems for passenger cars and trucks, and accounted for 57% of the company’s consolidated net sales last year.

In the long term who’s right and who’s wrong will be determined by the strength of the domestic automotive business. If the ‘Big Three’ could somehow be resurrected from the dead, the auto-parts space could start to feel a pulse again. However, the likelihood of domestic autos returning to its former glory is quite slim, especially with their dwindling balance sheets and “big-car” mentality when the rest of the world is searching for small, economical designs.

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Through The Fly's Eyes: Disney

from Eric Buscemi of Theflyonthewall.com

Disney Hopes Narnia Series Will Be a Box Office Annuity

At Comic-Con this year, Disney (DIS) announced its commitment to make all seven of C.S. Lewis's “Chronicles of Narnia” books into feature films, releasing one a year starting in May 2008 with “Prince Caspian.” This decision follows the success of the adaptation of the first book – “The Chronicles of Narnia: The Lion, the Witch and the Wardrobe” -- which grossed almost $300M domestically between 2005 and 2006.

This decision is not surprising, following the conclusion of Disney's “Pirates of the Caribbean” trilogy, which it has no immediate plans to continue. Disney is predictably looking for its next goldmine franchise, and what better choice to use than a seven book series which already has had a successful start?

The only question is whether the quality of production will suffer in the sequels from such an ambitious filming schedule, but after Disney pulled off the Pirates trilogy with such dazzling effects, I doubt that will be a concern -- although the quality of the Pirates scripts did fade down the stretch. At least with these movies, the writers will have classic source material to guide them.

Through The Fly's Eyes: Renewable Energy Certificates

from Larry Ramer of Theflyonthewall.com

Missing Information on Renewable Energy Certificates

Pepsi Co. (PEP) announced that its three largest bottlers would buy $1.1M of renewable energy certificates, or RECs, from Sterling Planet, Inc. Sterling claims to use proceeds from these RECs to purchase electricity generated by various sources of renewable energy, including wind, solar, and hydroelectric projects.

If everything is as it seems, the idea seems great. Almost everybody wants the environmental and geopolitical benefits that using more renewable energy would bring. The only objection from most people is the cost of implementing these alterative energy solutions. So, subsidizing clean alternative energy sources certainly seems like a good idea. Meanwhile, companies like Pepsi are willing to make sizable donations to the cause of clean energy in order to prove their environmental bona fides. It would seem that everything is great in this arrangement.

But in examining Sterling’s website, it was somewhat disturbing to see the absence of a couple of pieces of information. First of all, there was no information about the alternative energy sources that Sterling was buying electricity from. And there were no reports about solar energy and wind energy installations that Sterling was paying to produce electricity. There was a great deal of detail about the various types of certificates that companies, individuals, and utilities have purchased from Sterling, and any company or individual can easily find out how they can buy certificates from the company. But any information about what Sterling actually does with the REC money is, sadly, missing. The company did mention that their projects are certified by the Center for Resource Solutions' “Green-e program” or the Environmental Resources Trust (ERT), but these organizations are not exactly reliable, household names. Also, there was no mention of Sterling on their websites.

The other piece of information missing is how much of the proceeds from the certificates go to support Sterling’s overhead. On its website, the company references a business development employee on the West Coast, and a northeastern director. It also has contact information for a third person on its press releases. One would assume these people receive salaries as there was no information suggesting that Sterling is a non-profit organization. It would be helpful to know how much of the REC proceeds Sterling receives actually support alternative energy.

Companies, utilities, and individuals need to find a different, more transparent way of donating money to clean energy. Obviously, a great deal more research needs to be put into alternative energy. Perhaps companies could donate money directly to universities to fund research into renewable energy. Alternatively, perhaps a nonprofit foundation could be set up, with the mandate to help subsidize renewable energy efforts. Such a foundation would presumably have to make a list of all the donations they had made.

Through The Fly's Eyes: FedEx and Adobe

from Catherine Horner of Theflyonthewall.com

Printers’ Wars: FedEx Kinko’s, Adobe Deal Angers Competition

Adobe Inc. (ADBE), maker of Flash and Acrobat software, is facing harsh criticism regarding new software that directly links to FedEx’s (FDX) Kinko stores. The Adobe software, released in June, features a button that allows users to electronically send documents to a FedEx Kinko's store for printing. In response to a growing outcry regarding the alliance, whose financial terms have not yet been revealed, FedEx said on Friday that their partnership with Adobe was "established with customers in mind" and aims only to provide "a simple printing option for the many users of Adobe Reader."

However, on the software in question, there are no buttons for competing printers, leading privately-owned printing businesses to fear that FedEx Kinko's will quickly take away from their business. Adobe is particularly important to printing outfits as a growing percentage of their business comes directly from the Internet and computerized documents as opposed to walk-in customers. While these angry responses were predictable when Adobe and FedEx arranged the deal, Adobe says it is just now reviewing the printing industry's concerns and will address them publicly this Wednesday. Senior VP of Adobe, Johnny Loiacono, told the Wall Street Journal that Adobe is "doing everything possible to find a way to deliver a win-win situation on all sides."

But what caused the somewhat odd Adobe-FedEx relationship to blossom? The Adobe partnership is the most recent and aggressive move by FedEx to revive Kinko's, which the transportation company bought for $2.4B despite a total lack of knowledge regarding the retail-printing field. The plan was that customers would be able to send orders directly from their Adobe software to any one of Kinko's 1,675 stores worldwide from which FedEx would provide any further transportation services. FedEx hopes also to use the deal to sell office-support service to small business and travelers, and to further penetrate the retail sector where customers lacked large shipping volumes with which to negotiate low prices.

However, the fight to save Kinko's may be a losing battle for FedEx. Kinko's was already facing falling demand due to increasing personal computer and printer use when FedEx bought it. In the fiscal year that ended May 31, Kinko's revenue fell 2%, to $2.04B, while FedEx's other three operating units increased and the company's overall revenue rose 9%. The printing industry is simply less robust each year as in-home capabilities allow customers to print at home without going to a store. Adobe, however, is growing nicely, with profits jumping 24% to $152.5M in the Q2. While analysts predict that the recent negative publicity will not hurt Adobe's financial health, if it hopes to compete with software giants like Microsoft (MSFT), analyst Bill Whyman, of the International Strategy and Investment Group, pointed out that Adobe "needs to be making friends, not creating enemies."

Through The Fly's Eyes: Nanotechnology

from Larry Ramer of Theflyonthewall.com

Nanotech: Looking for Big Profits in a Small Technology

Nanotechnology is a hot new technology that refers to the manufacture and manipulation of materials at the molecular or atomic level. “Nano” materials are usually one thousandth the size of the thickness of a piece of paper, or smaller. With its vast potential in a wide variety of areas, from easily eliminating tumors to making solar energy cheaper, to allowing semiconductors to become ever smaller, nanotechnology is drawing a great deal of interest around the world. While there are some concerns about the effect of nanotechnology on human health, no major specific problems have yet been found.

In 2006, $12.4B was invested in nanotechnology research, according to Lux Research, which studies new technologies for investors. By 2015, the market for nanotechnology products will reach $1T, the National Science Foundation predicts. Meanwhile, many companies, including General Motors (GM), Hewlett Packard (HPQ), IBM (IBM), and Exxon Mobile (XOM), have begun incorporating nanotechnology into their products, and $50B of nano-enabled products were sold last year, Luz reports.

So how can investors make a play on nanotechnology? The most conservative route would probably be to invest in a company that specializes in products which facilitate research and development in nanotechnology. With that approach, investors will not be burned if nanotechnology proves to be ineffective in a particular field. Also, by buying stock in companies that facilitate nanotechnology research, investors can eliminate the need to wait for new products to hit the market – they can benefit immediately from the rapidly increasing amount of research and development into nanotechnology.

One company worth checking out in this area is Accelrys (ACCL), a provider of modeling and simulation software for nanotechnology. The company’s products are used by nanotechnology researchers for product design as well as drug discovery and development. In May, Accelrys announced that it had narrowed its loss to $1.1M in its fiscal Q4 ending March 31, compared with a loss of $6.4M in the same quarter of 2006. Revenue only increased 2%, to $19.9 million, but the company said that was because of reduced sales of older products that it had decided to phase out. The company has been in existence for 20 years, and also offers products for scientific research that does not involve nanotechnology.

Another similar, but more prominent company is FEI Company (FEIC), which makes nanoscale imaging, analysis, and prototyping instruments. The products are used in a variety of industrial, manufacturing, and research applications. FEI’s core technologies include particle beams that can modify nano-size structures to enable imaging, analysis, and measurement, according to a March article about the company in Forbes magazine. In Q1, FEI’s earnings were $15.1M, compared with a loss of $5.2M the year before. Revenues grew to $148M, versus $112.3M in 1Q06. FEI is the leader in the nanotechnology equipment field, with 70% of the market.

Other ways to invest in nanotechnology include Harris & Harris (TINY), a venture capital company specializing in nanotechnology and Arrowhead Research (ARWR), which invests in a variety of nanotechnology companies. Lux Nanotech Portfolio (PXN) is an exchange traded fund that tracks 26 publicly traded nanotechnology companies while the Merrill Lynch Nanotech Index (NNZ) tracks 25 nanotechnology companies.

Through The Fly’s Eyes: The Consumer

from Theflyonthewall.com

High Productivity Growth Means Labor Due For A Big Raise

Profits of the 500 largest companies in the U.S. are up 80% from 2000 to 2006 with revenue up just 39%. Why? U.S. productivity is growing 3.9% per annum, one of the highest productivity growth rates in the world.

Another interesting data point from Shlomo Maital in this weekend’s Barron’s editorial is that total capital formation is only 17% of GDP, with two-thirds of it reinvested in obsolete plant and equipment. With unemployment and investment in new capital formation so low, this could mean employees are in a strong position to demand higher wages.

Although Maital did not conclude this in the editorial, what the economic data suggest are that economists and other pundits calling for the collapse of the consumer and, ergo, the U.S. economy are simply way off. As the housing market collapses, this has more to do with the mortgage market and new home sales. Do not expect this to spill over completely into consumer spending. The growth in wages in this economic cycle to date has been muted, but do not expect that to last forever. High productivity and the supply-and-demand balance favoring the laborer, this will more than offset the impact of the mortgage market.

Through The Fly's Eyes: Stock Market Jitters

from Theflyonthewall.com

Private Equity Borrowers and Lenders Battle

Last week, the battle between private-equity borrowers and lenders in the debt market that began to unfold in the middle of July hit the equity market in full force. “Covenant light" loan packages that greatly reduced the terms borrowers had to meet became the norm in the beginning of 2007, however, lenders have now revolted. Major money center bankers are now stuck with $150 to $200 billion of loans that they have committed to for their private equity clients.

Borrowers, the Blackstones of the world, are reminding the banks that they committed to the loans, so they have to deal with them. The lenders, the institutions who buy the debt from the banks, say they are no longer going lenient with their lending terms. It appears this stalemate is going to last into the fall.

For equity investors, the unfortunate reality is that equity markets will remain volatile until this pipeline that needs to be financed is worked through. This huge pipeline can be viewed in terms of Intel having too much inventory or a widget company having too many widgets, meaning pricing will remain volatile until this excess inventory is worked off.

It is time to pick stocks you want to own for the long term and the price points you want to own them at, stepping up to the plate while everyone else is panicking.

Sunday, July 29, 2007

Through The Fly's Eyes: IPO & Syndicate Preview

from Joseph Lazzaro of Theflyonthewall.com



Wall Street's equity market offers a solid slate this week, including 7 IPOs and 4 Secondaries on the docket.

Those deals tentatively scheduled to price include:


IPOs:

Thursday

Amedica (AMCA), a 4.65M-share IPO for this artificial joints company. Morgan Stanley, Goldman Sachs, and Lehman Brothers are the lead managers. Filing range: $13.00-$15.00.

Concho Resources (CXO), a 21.2M-share IPO for this oil and gas company. JP Morgan Chase, Bank of America and Lehman Brothers are the lead managers. Filing range: $14.00-$16.00.

Dolan Media (DM), a 10.5M-share IPO for this media services company. Goldman Sachs and Merrill Lynch are the lead managers. Filing range: $13.50-$15.50.

Genpact (G), a 35.3M-share IPO for this information technology services company. Morgan Stanley, Citigroup, and JP Morgan Chase are the lead managers. Filing range: $16.00-$18.00.

NanoDynamics (NDMX), a 6.6M-share IPO for this specialty chemicals company. Jefferies is the lead manager. Filing range: $12.00-$14.00.

Sucampo Pharmaceuticals (SCMP), a 3.75M-share IPO for this pharmaceutical company. Cowen is the lead manager. Filing range: $14.00-$16.00.

Virtusa (VRTU), a 4.4M-share IPO for this information technology services company. JP Morgan Chase is the lead manager. Filing range: $14.00-$16.00.


Secondaries:

Possible

China GrenTech Corp Ltd (GRRF), a 3.2M-share Secondary. Bear Stearns and CIBC World Markets are the lead managers.

Wednesday

AerCap (AER), a 20M-share Secondary for this aircraft leasing compnay. Morgan Stanley, Goldman Sachs, and Lehman Brothers are the lead managers.

North American Energy Partners (NOA), 15.13M-share Secondary for this oil and gas services company. . Credit Suisse, UBS Investment, and CIBC World Markets are the lead managers.

Thursday

Great Lakes Dredge & Dock (GLDD), an 11.6M-share Secondary for this dredging services company. Bank of America and Lehman Brothers are the lead managers.


- -


For the latest market intelligence on IPOs, Syndicate, and after-market trades, check out The Fly Syndicate at http://www.theflyonthewall.com/. [Subscription required.]


Friday, July 27, 2007

Through The Fly's Eyes: Burger King Holdings

From Kevin Shult of Theflyonthewall.com

Burger King and the saga of the ”trademark” chips


Burger King (BKC) has licensed its brand name
for a line of chips to Inventure Group (SNAK), USA Today reports. This fall, junk-food lovers can try new Ketchup & Fries or Flame-Broiled burger-flavored chips. “It’s a fun fit,” BK’s chief marketer, Russ Kline, says. “This makes great sense for us. When you think about the sheer impressions of our trademark that this will create, the value is gigantic."

“Fun” fit? “Gigantic” value?

This looks like a direct marketing campaign to get children attached to the BK brand name. While the chips, sold in two-ounce and five-ounce packs, are expected to sell in stores, Inventure Group plans to market a one-ounce, 100-calorie pack in vending machines.


"We've got our own business objectives," Kline says. "You'll never see me interested in how Burger King Ketchup & Fries stacks up against Doritos in some Nielsen report."


Is it a stretch to think this is a direct attempt to attract kids? Is it also a stretch to think the new 100-calorie packs could be marketed for America’s schools?

No one is immune to the pressure to buy food, according to Marion Nestle, professor and chair of the department of nutrition and food studies at New York University. Companies use sophisticated marketing strategies to introduce children to their products. "You can even buy textbooks on how to market to children," she says.

Is it that the ‘King’ is unable to pull in enough business with its Flame-broiled Whopper? Not really. Burger King is attempting to get its name into the supermarkets of Walgreens (WAG) and Wal-Mart (WMT).

Everyone knows competition is fierce in the fast-food business. McDonald’s (MCD), Wendy’s (WEN), Domino’s (DPZ) and Yum! Brands’ (YUM) KFC, Pizza Hut and Taco Bell are all fighting for the fast-food dollar. To compete, BK plans to keep many of its stores open to midnight or later, seven days a week. In an attempt to get customers into stores before the sun comes up, BK has introduced the new BK Breakfast menu. Burger King also plans to focus abroad for 80% of its growth over the next few years, according to CEO John Chidsey, where the chain trails Yum! Brands and McDonald’s.

Regardless of Burger King’s objectives, there is at least one marketing expert that thinks licensing for chips won’t do much. "It is so far out of the Burger King brand domain," Rob Frankel, author of the book The Revenge of Brand X told USA Today. "Just because you can do it, doesn't mean you should do it." Remember that when you pass by the BK chips at your local grocer.

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Through The Fly's Eyes: Avici Systems

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.













Avici Systems: Serving Internet Service Providers

Whether it's in the carrier-class router business, or their upcoming network software specialty, there is a North Billerica, Massachusetts outfit that is in there pitching. The company provides IP solutions to some of the world's leading service providers.

Avici Systems (AVCI) provides high-speed data networking equipment that enables service providers to transmit data, voice, and video. The firm's Terabit router transmits large volumes over core fiber-optic communications networks. Other models are used by service providers with smaller core networks. The company is in the process of phasing into the network management software business. Avici has a technology partnership with Intel (INTC) and is a preferred supplier of IP core routers for Nortel Networks (NT). Alcatel-Lucent (ALU), Cisco Systems (CSCO) and Juniper Networks (JNPR) are competitors.

The company pleased investors last week, when it reported Q2 EPS of 81 cents and revenues of $29.6 million. Analysts had been expecting 21 cents and $15.8 million. Management also guided FY07 revenues to $110-125 million ($60.16 million consensus).

The stock popped on the news and is now forming a bullish "flag" consolidation pattern. Prices frequently exit flags moving in the same direction they were traveling when they entered them. In this case, that would be to the upside. Analysts see a 20% average annual growth rate, through the next five years. The AVCI P/E ratio (7.55), Price to Sales ratio (1.83), Price to Book ratio (2.03), Price to Cash Flow ratio (5.87), Price to Free Cash Flow ratio (8.58%), EPS Growth rate (202.18%), Operating Margin (20.60%), Net Profit Margin (23.95%), Return on Assets (24.70%), Return on Investment (32.48%), Return on Equity (32.48%) and Net Income per Employee ($196k) compare favorably with industry, sector and S&P 500 averages.

Institutional investors hold about 71% of the outstanding shares. Over the past 52 weeks, AVCI has traded between $6.47 and $13.96. A stop-loss of $9.10 looks good here.

Through The Fly's Eyes: Kohlberg Kravis Roberts

from Joseph Lazzaro of Theflyonthewall.com


Kohlberg Kravis Roberts: Is An IPO Postponement Ahead?

In the financial world, 'contagion' is a Wall Street phrase that describes market-wide selling in one region of the world, for example in Tokyo or Berlin, that leads to selling in another region of the world, for example, in New York.

But 'contagion' can take place within a market (or intramarket) as well, and that appears to be the case with private equity firm Kohlberg Kravis Roberts' (KKR) initial public offering.

A repricing of risk sparked by renewed concerns regarding subprime mortgage defaults, as well as a moderate stance regarding the deployment of new capital has produced more-conservative capital market conditions - conditions that may prompt KKR to postpone its IPO.

KKR filed to go public on July 3 and planned to raise $1.25 billion. KKR had sought to follow in private equity firm Blackstone's (BX) footsteps: in June Blackstone priced 133.33 million shares at $31 in a $4.13 billion IPO. BX's shares have since slipped to around the $26 mark.

More importantly, a new conservative tone has gripped the debt markets, and that mood has spilled into the initial stage equity market - conditions that will make it harder for KKR to attract an adequate price for its shares, and quite possibly, prevent the company from moving forward with the IPO at this time.

For the typical investor, the IPO market, can, at times, appear to be somewhat opaque, but it is roughly analogous to this: the IPO market is like a scheduled art auction for a painting or sculpture. If an auctioner believes there will be strong demand for the painting/sculpture, he/she may choose to hold the auction, hoping that well-heeled potential buyers will bid-up the price of the artwork. If he/she senses low demand, the auctioner may take the artwork for the docket, for fear of receiving an inadequate price. Likewise with the IPO market: a company going public is seeking the highest price possible for its "artwork" - its common stock; but if it senses low demand, in this case from financial institutions and other potential stock buyers, it may choose to postpone the IPO, to wait for a day when market demand may generate a higher price for its shares.

As of Friday afternoon, the initial, emerging consensus in Wall Street circles was that the negatives of KKR's going public outweighed the positives at this time.

"They should absolutely, unequivocally withdraw the IPO," said David Menlow, president of research firm IPOfinancial.com, told Reuters.

However, while one can sense that there has been a shift in investor sentiment regarding both the credit and equity markets, it's important to note that the recent selling in the financial markets represents just one data point: Wall Street's lead managers and syndicate parties, among others, will need a few more data points before substantially altering their schedules.

Through The Fly's Eyes: A Quick Look Ahead

from Eric Buscemi of Theflyonthewall.com

Highlights For Next Week

Monday July 30

* Verizon (VZ) to report Q2 earnings; conference call at 8:30am. Analysts will look at Verizon's marketing strategy [particularly for FiOS], infrastructure improvements, and operating expenses. Above-average debt remains a blemish, but Wall Street will overlook that if Verizon registers impressive subscription and market share statistics, and demonstrates that its fiber optic-based FiOS Internet/TV network roll-out timetable for major markets remains on schedule.
* Monster.com (MNST) to report Q2 earnings; conference call at 10am. Monster is expected to register adequate, albeit decelerating revenue growth in Q2 compared to Q1, hence the grade for the company's performance may hinge on analysts' projection regarding the likely revenue scenario moving forward.

Tuesday July 31

*Federal District Court Hearing to decided whether to approve the FTC's application for injunction blocking the proposed merger between Whole Foods (WFMI) and Wild Oats (OATS).
* FDA 8am Gastrointestinal Drugs and Drug Safety and Risk Management Joint Advisory Committee Hearing on Biogen's (BIIB) Tysabri for Crohn's Disease.
* RegenRX (RGN) to update on its clinical trials program at 4:30pm.

Wednesday August 1

* PDUFA date for GlaxoSmithKline (GSK) / POZEN's (POZN) Trexima for migraine headaches.
* Teva Pharmaceuticals (TEVA) to report Q2 earnings; conference call at 8:30am.
* Sales Conference Calls: Ford (F) at 1pm; General Motors (GM) at 2pm
* Starbucks (SBUX) to report Q3 earnings; conference call at 5pm. After recent sluggish stock performance, some analysts see Starbucks snapping back in the quarters ahead: Starbucks is expected to add a breakfast sandwich at 4,000 stores/coffee houses, which could increase per-store revenue by $70K annually.

Thursday August 2

* Eastman Kodak (EK) to report Q2 earnings; conference call at 11am. Note that the volatility in Kodak is elevated going into its earnings report.

Friday August 3

* Procter & Gamble (PG) to report Q4 earnings; conference call at 8:30am.

Through The Fly's Eyes: Bottled Water

from Catherine Horner of Theflyonthewall.com

Coke and Pepsi: Spilling the Truth about Bottled Water

Look into the refrigerated section of any deli and you’ll find, on average, about six or seven bottled waters to choose from. Facing the wall of water bottles, it isn’t hard to get lost amidst the pictures of snow-capped mountains, winding woodland creeks, or tropical island waterfalls. But, surprise! Some of those bottles of H2O are filled with something much more familiar to most people: Tap water.

This week, Pepsi’s (PEP) Aquafina, the largest U.S. bottled-water brand, and Coca-Cola’s (KO) Dasani, admitted to using purified water from public reservoirs, unlike Danone’s Evian or Nestle’s Poland Spring, which, true to their claims, are bottled from “spring waters” of less polluted locales. The admission comes after Boston-based watchdog group Corporate Accountability International complained that the current abbreviation on Aquafina’s label (“Bottled at The Source P.W.S.”—public water sources) paired with the images of snowy mountains misleads consumers to believe they are buying spring water.

Corporate Accountability is just one voice in an increasingly vocal protest against the huge American bottled water industry. In 2006, Americans bought 2.6B cases of water for a total of about $15B; Aquafina made up 15% of those figures, selling 379M cases last year, according to Beverage Digest. Critics claim that bottled water is a serious environmental issue. Un-recycled bottles add slow decomposing plastic to landfills; energy is wasted in the purification and bottling processes; fuel sources used to ship bottled water contribute to global warming; and, finally, bottled water lessens confidence in clean public water supplies. As major metropolises such as Ann Arbor, San Francisco, and Salt Lake City are taking action to encourage tap water consumption by banning bottled water at city events and offices, political campaigns are beginning to gather strength. Gigi Kellett, director of the “Think Outside the Bottle” campaign, told Reuters: “Concerns about the bottled-water industry, and increasing corporate control of water, are growing across the country.”

Yet sadly, it seems that environmental objections, while successful in getting Pepsi and Coke to spell out their P.W.S, will have little impact on the companies’ bottom lines. While increasing awareness on the issue and limited government action may slow the market’s growth rate, Americans are still addicted to the bottle.

Through The Fly's Eyes: Gap

from Larry Ramer of Theflyonthewall.com

How will new CEO Murphy fill in at the Gap?

Clothing retailer Gap (GPS) has chosen Glenn Murphy as its CEO. Murphy was CEO of Toronto-based Shoppers Drug Mart, Canada’s largest drugstore chain, from 2001 until last March.

Overall, Murphy, 45, appears to have a solid record. During Murphy’s tenure as CEO at Shoppers Drug Mart, the chain’s sales doubled, according to Bloomberg. The company was continuing to grow rapidly during Murphy’s last quarter as CEO. In 1Q07, profit at the Canadian drug retailer jumped 19%, to 39 Canadian cents per share from 33 cents per share. Same store sales rose 5.8%, and the company opened or expanded 13 drug stores during the quarter. Nine of 11 analysts covering Shoppers Drug Mart rated its shares a “buy” in March.

Perhaps more importantly for Gap, Murphy also compiled a very good record in cosmetics, where Shoppers Drug Mart faced more competition than in its core pharmaceuticals retail business. The chain’s share of the Canadian cosmetics market jumped to 15% from 6% during his tenure at the company. The company owned 95 beauty boutiques when Murphy left, and planned to acquire 45 more. With its emphasis on fashions and aesthetics, cosmetics bear some similarities to the world of apparel.

At the same time, pharmaceuticals – not cosmetics – were still Shoppers Drug Mart’s core product. As Canada’s only nationwide drug store chain, Shoppers Drug Mart probably did not have a great deal of competition. Moreover, pharmaceuticals are the quintessential non-cyclical industry. Murphy likely never had to worry about how to deal with the ravaging effects of a recession on the company’s sales.

Murphy’s selection seems to generally be a positive move for Gap. He led Shoppers Drug Mart to good results, and helped the drugstore chain make cosmetics an important part of its business. However, Murphy will still have to show that he can successfully help Gap overcome the tough competition in the U.S. clothing market, and figure out a way to steer the company through a recession, which is bound to come at some point.

Through The Fly's Eyes: Rumor Mill

from Tedd Cohen of Theflyonthewall.com

Rumor Round-up

The market may be struggling, but that hasn’t dampened enthusiasm for deal making.

BARR PHARMACEUTICALS (BRL)

The stock is up more than it has been in almost a year. Strong cash flow and growth prospects have made the maker of birth control pills, and a variety of generic medicines, an attractive target.

BUILD-A-BEAR WORKSHOPS (BBW)

Buy-a-Bear? Could be. Second quarter results were a bear as net income dropped to $1.6M from $3M a year ago, thanks to comparable store sales falling almost 10% in the quarter. They’re supposedly looking at “strategic alternatives” and recently brought on Lehman Brothers (LEH) to help increase share value. With a strong balance sheet it could well be a private equity target for a buyout.

AMR CORP. (AMR)

All week long word has been that the parent of American Airlines may be taken over. But while the stock jumped earlier in the week, it has since cooled. Either way, it hasn’t stopped top executives from tying their bonuses to the share price.

TELLABS (TLAB)

It actually didn’t come as a surprise that telecommunications networking products company Tellabs, battered by intense competition, saw its second quarter net income dive almost 45%. But then the stock was helped by ongoing talk that Nokia Siemens Networks wanted to buy them for $7B. Will it happen? The key from any deal would be their customer relationships, especially with Verizon (VZ).


BUZZ

Yahoo (YHOO): The company is still regarded as a takeover target…Wynn Resorts (WYNN): Still being talked about…Avon Products (AVP): They’re cutting jobs, and restructuring. Is there more to it?

Through The Fly's Eyes: AES Corp.

from Theflyonthewall.com

Do Some Bottom Fishing

AES Corp (AES), the emerging-market power generation company, has had a tough few months, declining from $24 to $20.50 -- a big decline for a company with steady and large cash flow generation.

The stock's weakness began when its multi-year earnings guidance was a little lower than expected. Another reason for investor nervousness is that in the last liquidity crisis, from 2000 thru 2002, the stock got crushed as the company suffered from a seriously leveraged balance sheet with concerns about bankruptcy being high.

However, this time around, the company has considerably less debt and generates considerably more cash flow. Also, emerging markets around the world have an even greater understanding that they must place an emphasis on power generation if they want their economies to improve.

Having dropped 15% during the past month, start bottom fishing in AES. The stock has been trading nicely between $20 and $24.

Through The Fly's Eyes: Kinetic Concepts

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.













Treating the Recovering Patient

Although patient needs in the hospital room may not be not quite so immediate as those in the operating theater, they can still be quite pressing. There is an outfit in San Antonio that addresses the requirements of the healing patient with a series of special beds and "negative pressure wound therapy" dressings.

Kinetic Concepts (KCI) makes lines of therapeutic and wound care products for acute and long-term care facilities, home health agencies and individuals. The firm's therapeutic surfaces include specialty hospital beds, mattress replacement systems and overlays. They are designed to address pulmonary complications associated with immobility, prevent skin breakdown and assist caregivers in the safe handling of obese patients. The company's wound healing and tissue repair systems use a vacuum assisted closure technology to treat trauma wounds, failed surgical closures, amputations and serious pressure ulcers.

The firm surprised the Street last week, when it reported Q2 EPS of 81 cents and revenues of $396.7 million. Analysts had been looking for 74 cents and $374.7 million. Management also guided FY07 EPS to $3.10-$3.20 ($3.10 consensus) and FY07 revenues to $1.56-$1.59 billion ($1.54B consensus).

The stock popped on the news and is now forming a bullish "flag" consolidation pattern. Prices frequently exit flags moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Brokers recommend the stock with two "buys," two "holds" and two "sells." The KCI P/E ratio (21.37), Price to Sales ratio (3.04), Price to Cash Flow ratio (15.14), Price to Free Cash Flow ratio (25.53), Sales Growth rate (20.21%), EPS Growth rate (28.57%), Operating Margin (22.60%), Net Profit Margin (14.25%), Return on Assets (23.55%), Return on Investment (31.73%) and Return on Equity (51.30%) compare favorably with industry, sector and S&P 500 averages.

Institutional investors hold about 88% of the outstanding shares. Over the past 52 weeks, the stock has traded between $29.83 and $66.77. A stop-loss of $53.90 looks good here.

Through The Fly's Eyes: Level 3 Communications

from Theflyonthewall.com

A Good Trading Opportunity

Level 3 Communications (LVLT), the IP telecommunications company, got hit pretty good yesterday due to the market's broad-based selloff and its coming up short on revenue.

Management cited integration issues due to its seven recently completed acquisitions as the prime reason. The sales backlog is increasing but it is slow bringing customers on to its network. Level 3 will be a show-me stock for the next few quarters as management will have to hit their numbers to regain investors' confidence. October is expected to be another weak quarter, but business is expected to ramp in 4Q.

However, with what looks like a weak or a flat opening this morning in combination with yesterday's sell off, a quick recoil is possible from its oversold condition for traders to make a nice profit. This $5.00 stock could trade up to $5.50 over the next few weeks.

Thursday, July 26, 2007

Through The Fly's Eyes: Textron

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.













Textron: By Air And By Land

Transporting the executive stylishly is a demanding business, but there is an outfit in Providence, Rhode Island that has several of the avenues covered. Their planes, helicopters and golf carts are well thought of by the business crowd. In fact, their products are popular with the military set, too.

Textron, Inc. (TXT) specializes in general aviation aircraft. The firm's Bell segment makes helicopters and tiltrotor aircraft for both military and commercial applications. This segment also manufactures weapons, surveillance systems, aircraft landing systems, hovercraft, rescue vessels, armored vehicles and turrets. The Cessna unit manufactures business jets, single engine turboprop caravans, and single engine piston aircraft. The Industrial division offers golf carts, off-road utility vehicles, lawn care machinery and power tools. The Finance segment handles commercial loans. Major competitors include General Electric (GE) and United Technologies (UTX).

The company pleased investors last week, when it reported Q2 EPS of $1.69 and revenues of $3.23 billion. Analysts had been expecting $1.45 and $3.09 billion. Management also guided Q3 EPS to $1.45-$1.55 ($1.53 consensus), FY07 EPS to $6.35-$6.55 ($6.31 consensus) and FY07 revenues to about $12.87 billion ($12.6B consensus). Further, the company announced a 2-for-1 stock split (8/24/07), a 19% increase in its annualized dividend rate and a 24 million share repurchase program.

The stock popped on the news and is now forming a bullish "flag" consolidation pattern. Prices frequently exit flags 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 four "strong buys", six "buys" and three "holds". Analysts see an 18% growth rate, through the next year. The TXT P/E ratio (19.85), Price to Sales ratio (1.24), Sales Growth rate (14.72%), EPS Growth rate (26.12%) and Return on Equity (26.38%) compare favorably with industry, sector and S&P 500 averages.

The stock is one of those used to calculate the S&P 500 Index. Institutional investors hold about 70% of the outstanding shares. Over the past 52 weeks, TXT has traded between $80.46 and $128.00. A stop-loss of $103.00 looks good here.

Through The Fly's Eyes: Blu-ray and HD DVD

from Eric Buscemi of Theflyonthewall.com

Blu-ray vs. HD DVD: The Battle Rages On

If you’re not up on the ongoing face-off between Blu-ray and HD DVD, here’s a quick synopsis on what is becoming the latest technology battle since that long ago technology struggle between VHS and Betamax:

Blu-ray and HD DVD are two next-generation DVD formats fighting to win over consumers. Electronics giant Sony (SNE) developed the Blu-ray format, and is using its Playstation 3 video game console to showcase it. Others supporting Blu-ray include Apple (AAPL) and Hewlett Packard (HPQ). HD DVD was developed by the DVD Forum, and is being championed by Microsoft (MSFT), Toshiba (TOSBF) and Intel (INTC), among others. The main difference between the two is that the Blu-ray format can hold more data, while the HD DVD format is less expensive.

The latest is that Target (TGT) has decided to sell only Blu-ray players in its stores, although the retailer was non-committal about its decision, saying "we are not proclaiming one format versus the other as the preferred consumer technology, and software will continue to be available to our guests in both the Blu-ray and HD DVD format." Target's decision follows a similar one by Blockbuster (BBI) to offer only Blu-ray titles when it expands its HD offerings this fall.

The momentum currently appears to favor Blu-ray, which is also winning the content provider battle. Many Hollywood studios are either releasing solely in Blu-ray format or on both formats. Two of the summer's blockbusters -- Spider-Man 3 and Pirates of the Caribbean: At World's End -- will both be Blu-ray exclusives. Only General Electric's (GE) Universal Studios is exclusively supporting HD DVD.

Although the HD DVD camp claims it’s not worried, pointing to other retailers including Best Buy (BBY) and Circuit City (CC) who carry their player, they should think again. This battle will be won by the content available on them, and not by the amount of shelf space given the players. Target and Blockbuster are pointing the way to Blu-ray, and that is clear indication that the choice may very well be Blu-ray.

Through The Fly's Eyes: Hybrids vs. Plug-Ins

From Kevin Shult of Theflyonthewall.com

Automobile Futures: Hybrids vs. Plug-Ins


Toyota Motors (TM) is launching the first U.S. tests of its plug-in hybrid technology in two converted Prius hybrids. The test cars will run on nickel-metal hydride batteries for 7 miles before a gas engine kicks in.

Although seven miles is nothing to rejoice about, other automakers are also developing plug-in vehicles that are more technologically advanced:

  • General Motors (GM) is developing the Volt plug-in, with hopes of reaching 40-miles of electric-powered travel with the new lithium-ion batteries.
  • Ford Motor (F) announced earlier this month they plan to give 20 Escape Hybrid SUVs modified as plug-ins to Southern California Edison for testing.
  • Chrysler Group (DCX) modified several Sprinter delivery vans as plug-ins, with one designated for newspaper delivery.
Why is Toyota testing plug-in models with old-school nickel-metal hydride batteries? Plug-in advocates believe Toyota had to start somewhere. As much as the industry wants more technologically advanced batteries, "Development has not happened as fast as we hoped," Toyota’s senior strategic planner Jaycie Chitwood told USA Today.

Regardless of how much testing the industry is doing on plug-ins, the technology is more than a decade away from mass production. The main problem stems from the fuel cell industry’s ability to produce a stronger, smaller battery on a budget that consumers can afford. Until that happens, the world will use hybrid technology.

Hybrid technology is flourishing in America and is now spreading into full-size SUVs. The new full-size hybrid SUVs are a marketing team’s dream, as Americans love their bigger, stronger and faster autos, but hate the higher gas prices. General Motors said Tuesday that it now expects 40% improved fuel economy in city driving with its hybrid full-size SUVs, compared to their gas-only counterparts. The Hybrid Chevrolet Tahoe and GMC Yucon will now travel 19-20 mpg in stop-and-go driving. This means they will now get better gas mileage than some mid- and full-size sedans.

General Motors has set a lofty goal at producing 10,000 hybrids this year. How does GM know they can sell that many? They don’t. Since this is an industry first, GM lacks a track record to show if buyers want them.

Keep in mind that consumers will no longer have those hybrid tax-credits Americans were raving about for the past two years Analysts must question how much of an impact that plays on slumping hybrid sales in 2007. If this ambitious plan fails, GM could find themselves with thousands of hybrid trucks on the lot and no one to drive them.

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Through The Fly's Eyes: Newspapers

from Larry Ramer of Theflyonthewall.com

Election Year Advertising Won’t Save Newspapers

Second quarter results from two of the nation’s largest newspaper publishing companies confirm that the industry is in trouble. There is a little bit of good news ahead for the industry, though, as newspapers will get a modest shot in the arm from the 2008 political campaigns. But true salvation for newspapers may lie in their online editions, and possible Spanish language and other international acquisitions.

Both the New York Times Co. (NYT) and Tribune Co (TRB), two of the country’s largest newspaper companies, saw their circulation drop substantially last quarter, continuing an industry-wide trend. Ad revenues dropped 5.7% at The New York Times Company, while The Tribune Company reported that ad revenues fell 11%. Classified advertising contributed a great deal to the drop, as the Times Company’s classified revenues sank 13.4% and the Tribune’s classified revenues plunged 18%.

Newspapers do have something to look forward to -- the 2008 election season. Candidates do still use print newspapers to reach voters, since newspaper readers are more likely to vote than the average American, as an article in today’s Wall Street Journal points out. Also, newspapers in some markets will benefit from the hotly contested presidential nomination fights in both parties.

But the election season is unlikely to be a panacea for the newspaper industry. Overall spending by campaigns on newspapers was only $104M in the midterm election year of 2006, according to PQ Media, as quoted by the Journal. That’s hardly a huge amount of money for the entire country. Also, the 2006 elections did not prevent newspapers’ ad revenue from falling in 2006, as newspapers’ advertising revenue slipped 3.7% last year, according to the National Association of Newspapers. And that was when the real estate boom was still in full swing.

Newspapers can save themselves by launching more interactive “Web 2.0” applications on their websites. Many of these websites are already profitable, but newspapers have to milk them for all they are worth. The newspapers should put more video offerings on their sites, and possibly even let readers post their own videos on some pages of their sites, a la YouTube. Online video advertising could be a big hit. The newspapers could publish readers’ blogs, and even hold interactive votes to determine the best blog on a certain issue. The winners could receive free subscriptions or other prizes. In fact, newspapers are already starting to team with TV stations to share audio and video news coverage, but publishers must accelerate this trend.

Newspaper publishers should also consider buying newspapers in other countries. According to ZenithOptimedia, newspaper ad revenue worldwide is expected to rise by a few percentage points between now and 2009, powered by increased revenues from Chinese and Indian newspapers. Publishers may also want to look at buying American Spanish-language newspapers, whose ad revenue is expected to continue growing steadily.

Through The Fly's Eyes: Kraft

from Catherine Horner of Theflyonthewall.com

Is Buffett the Calming Voice Kraft Needs?

Every kid loves Kraft (KFT) Mac & Cheese, but lately it seems that some very wealthy investors are also developing a fondness for the Kraft brand name. Billionaire Warren Buffett's company, Berkshire Hathaway (BRK.A), has bought a less-than-5% stake in the food giant, joining (other big-name investors) Carl Icahn and Nelson Peltz. While the size and time-span of Icahn’s shares in the company are unknown, Mr. Peltz acquired his 3% stake just a month ago.

What's the lure of Kraft’s? Since a restructuring after its spin-off from Altria Group (MO), Kraft has been at odds with activist investors who are clamoring for change. Among these is Peltz, who has called for Kraft to sell its Maxwell House coffee and Post Cereal businesses, and use the profit to buy back shares. Icahn, conversely, is not expressing strong pro-change sentiments as he recently did at Motorola (MOT) and Time Warner (TWX). Buffett is not yet expressing support for either activists or management, however, his past ventures have involved companies with strong brands primed for a comeback and we’d predict that he will support the company and not the other investors.

Though Kraft's operational performance has been unimpressive so far this year, its strong franchise in the packaged-food market is similar to other Berkshire holdings such as Coca-Cola (KO) and Anheuser-Busch (BUD). Most likely, Buffett was drawn in by Kraft CEO Irene Rosenfield's proposed strategies. Rosenfield, who was appointed CEO last summer, hopes to increase spending on marketing but does not plan on selling any of Kraft's existing brands. She does, however, hope to increase Kraft's presence abroad, evidenced by Kraft's recent purchase of French snack-maker Danone's cookie division. This international push mirrors Buffett's own desire to diversify revenue by entering foreign markets; earlier this year Berkshire bought a 4.1% stake in South Korea's largest steel company, Posco (PKX).

For Kraft, Buffett's investment could be the vote of confidence needed to prove to investors that plans to restructure will not lead the company astray, something neither Icahn nor Peltz are ready to believe. Since the Wall Street Journal reported Buffett's stake in the company this morning, Kraft's shares have risen 1.3%.

Through The Fly's Eyes: Boeing Co

from Laurie Pasternack of Theflyonthewall.com

A Bad Dream? After the Hype, Problems Arise with Boeing 787


Will Boeing's (BA) 787 Dreamliner be ready for its launch next May? That's the question being posed to Boeing Chairman and CEO James McNerney.

A BusinessWeek article reported that McNerney believes there is a "slight delay" with the Dreamliner, and the company is facing "some challenges." "Slight delay"? "Some challenges?" Is that code for "Really Big Problems?"

Let's examine the issues a little closer. McNerney places the Dreamliner's problems into three categories:

  1. A common issue, the company is having problems integrating the various software systems with the hardware. McNerney believes there's no "major issue" here.
  2. Trying to reduce the overall weight of the aircraft. Executives at the company said the Dreamliner is currently about 2% heavier than it should be. Engineers are working on the issue, but it's unclear whether they will be able to fix the problem by redesigning parts of the wing and window frames by the time it assembles the first projection jet for All Nippon Airways in May, 2008.
  3. Several first-tier suppliers are struggling to fix a new composite-based manufacturing system. To help, Boeing is sending teams to help suppliers stay on track and share their best practices.
The failure of Boeing to deliver the 787 Dreamliner on time could mean disaster not only for Boeing, but for every airline that has placed orders. Customers include Northwest Airlines (NWA), Continental Airlines (CAL), LAN Airlines, Virgin Atlantic Airways, Singapore Airlines, Qatar Airways, Air Pacific, CIT Aerospace, Air Berlin, Icelandair, Jet Airways, Korean Air, Kenya Airways, China Southern Airlines, Hainan Airlines, Arkia Israel Airlines, Aviation Capital Group and Japan Airlines Corp. In fact, the company has secured over 500 orders for the Dreamliner over the past 3 years. With each plane costing between $146M-$200M, that's a lot of money at risk.

Problems with the Dreamliner could also cause customers to flee, perhaps moving over to a similar model offered by Airbus.

To combat the issues, McNerney has pushed the first flight of the 787 Dreamliner to the end of September from the original date at the end of August. Additionally, Boeing has boosted R&D funds to $3.7B from $3.2B for the year so the jet will be able to test and be deployed on time. While this little snafu didn't hurt Boeing's second quarter any -- it was up 14% -- additional problems with the new aircraft would certainly cut a large hole in the company's profits.

Through The Fly's Eyes: Tempur-Pedic International

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.












Bedding with a Difference


Commercialization of technologies developed for the space program has led to a wide variety of interesting and useful products. Among them are the well-publicized offerings of a firm headquartered in Lexington, Kentucky.

Tempur-Pedic International (TPX) makes bedding materials, featuring a visco-elastic foam that was designed by NASA to help cushion astronauts during liftoff. Offerings include pillows, mattresses, adjustable beds and cushions. The company markets its products through furniture and department stores, medical retailers, hospitals and the Internet. They are sold under the brand names TEMPUR and Tempur-Pedic. About a third of Tempur-Pedic's revenue comes from international sales.

The company pleased investors last week when it reported Q2 EPS of 39 cents and revenues of $257.6 million. Analysts had been looking for 35 cents and $244 million. Management also guided FY07 EPS to $1.63-$1.66 ($1.56 consensus) and FY07 revenues to $1.065-$1.085 billion ($1.06B consensus). The CEO cited Q1 price increases and additional moves planned for Q3, in discussing the good results and favorable outlook. The company also announced a new $200 million share buyback. The stock popped on the news and is now forming a bullish "flag" consolidation pattern. Prices frequently exit flags moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Brokers recommend the stock with three "buys" and ten "holds." Analysts see an 18% growth rate, through the next year. The TPX Sales Growth rate (17.65%), Operating Margin (20.90%), Return on Assets (15.75%), Return on Investment (19.65%) and Return on Equity (61.87%) compare favorably with industry, sector and S&P 500 averages. Institutional investors hold about 95% of the outstanding shares. Over the past 52 weeks, the stock has traded between $15.52 and $33.57. A stop-loss of $27.50 looks good here.

Wednesday, July 25, 2007

Theough The Fly's Eyes: Sherwin-Williams

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.












Sherwin-Williams: Ask How, Ask Now


Sherwin-Williams Company (SHW) makes coatings and related materials for professional, industrial, commercial and retail customers. Products include a variety of paints, finishes, coatings, applicators and varnishes sold under the names Dutch Boy, Krylon, Martin-Senour, Red Devil, Sherwin-Williams, Thompson's and Minwax. The firm operates more than 3,000 North American retail stores and about 200 international wholesale outlets. Products are also sold to retailers, dealers, jobbers, licensees, and various third party distributors.

The company pleased investors last week, when it reported Q2 EPS of $1.52 and revenues of $2.2 billion. Analysts had been expecting $1.44 and $2.21 billion. Management also guided Q3 EPS to $1.45-$1.55 ($1.48 consensus), Q3 revenues to $2.2-$2.24 billion ($2.21B consensus) and FY07 EPS to $4.60-$4.70 ($4.60 consensus). The company acquired 1.3 million shares of its common stock through open market purchases during Q2 and had remaining authorization to repurchase 8.171 million more.

The stock popped into a bullish "flag" pattern on the news. Prices frequently exit flags 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 "strong buy", one "buy" and five "holds". Analysts see a 15% average annual growth rate, through the next five years. The SHW P/E ratio (16.35), PEG ratio (1.10), Price to Sales ratio (1.19), Price to Free Cash Flow ratio (18.56), Return on Assets (11.86%), Return on Investment (20.32%) and Return on Equity (32.83%) compare favorably with industry, sector and S&P 500 averages.

The stock is one of those used to calculate the S&P 500 Index. Institutional investors hold about 75% of the outstanding shares. Over the past 52 weeks, SHW has traded between $50.50 and $73.96. A stop-loss of $62.30 looks good here.