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Housing Market Not Showing Any Life
2008-05-28 15:31:00
Inventory levels of existing homes had been steady for several months but preliminary April figures show another spike to more than 11 months of supply. The housing market cannot improve until the supply and demand picture does and these numbers are pretty ugly. When supply is growing faster than demand, prices will continue to fall, so investors should keep this in mind when allocating investment dollars to anything that is dependent on home prices.
More About: Life , Market , Housing

Are Legacy Costs Really AMR's Biggest Problem?
2008-05-22 16:42:00
Rubens writes: "Can you give some specific advice to the big airlines on how they can cut costs and become profitable? I don't think you really understand their situation. To compare the big airlines with the budget ones is like comparing a Ford and GM plant with a Toyota one. Ford and GM has massive legacy costs of high salaries and benefits, and so do the big airlines. American is one of the few (or is it the only one?) of the big airlines that hasn't filed for Chapter 11 in recent years, which would have let them reduce costs and renegotiate legacy employee agreements." Thank you for the comment, Rubens.Unfortunately, it simply isn't true that legacy costs are the problem for American. In fact, Southwest actually spent more on wages, salaries, and benefits than American did in the first quarter.As you can see from the Q1 summary below, American's cost structure is higher than Southwest despite the fact that they spend less than Southwest on compensation expense. The di...
More About: Problem , Legacy , Costs

$130 Oil Leads to Irrational Moves at American Airlines
2008-05-21 19:08:00
With oil prices surpassing $132 per barrel today for the first time ever, American Airlines (AMR) has reacted by raising prices. Most notably the airline will charge travelers $15 to check a bag. The company calls this a "revenue growth initiative" in their press release, but it is really just silly. When high fuel prices are pressuring an already bloated cost structure and a weak economy is reducing air travel, price increases are not going to help AMR. It simply does not address the problem.In such a competitive industry, weak players increasing fees will only result in more people going to discount airlines, which are run far better than their larger counterparts. There is a reason Southwest Airlines (LUV) has been taking market share and has never lost money in any year since its founding more than three decades ago and it is not because they started to charge their customers for things like checking baggage. In fact, they have used those boneheaded ideas in their brilliant mark...
More About: Leads , Moves , American Airlines

Election Worries Have Put HMO Stocks Like United On Sale
2008-05-16 16:14:00
Owning healthcare stocks in an election year, especially one in which universal healthcare has taken center stage on the Democratic agenda, is not surprisingly a wild ride. With less than six months to go until our country chooses its next president, near-term headline risk for healthcare stocks should stay elevated for a while. That said, some healthcare names, most notably the health insurance providers, have seen their share prices get beaten down to levels that can’t help but get value investors’ attention.A perfect example is United Healthcare (UNH), one of the largest health insurance providers in the country. The combination of political risk and a recent acceleration in healthcare cost inflation have investors nervous. The stock has fallen from a high of more than $59 in December and hit a new 52 week low on Thursday, trading below $32 per share. This dramatic 45 percent decline leaves UNH trading at merely 9 times trailing earnings. Such a meager valuation indicates tha...
More About: Stocks , Sale , Election

Taking Some Profits in Apple
2008-05-13 01:44:00
Shares of Apple (AAPL) rose nearly $5 today to close at more than $188 per share. The company is faring very well during an overall weak time for consumer spending, thanks to a strong product lineup, and Wall Street is excited over the prospects for the company's forthcoming next generation iPhone.This overall bullishness is the polar opposite scenario we saw back in February when I wrote that Apple's Valuation Looks Attractive Again amidst worries over a consumer-led recession and a lapse of new product introductions from the company. Since then the stock has soared from $119 to $188, for a gain of 58%. As a result, the shares have gone from very compelling from a valuation standpoint (22x 2008 earnings estimates) to fairly valued in my eyes (34x 2008 earnings estimates) and accordingly I have been taking some chips off the table at current prices.Apple Stock Performance - 2008 Year to DateThis is not to say the fundamental outlook for Apple has changed (it hasn't), just that th...
More About: Profits , Taking

Citigroup First Quarter Update, As Promised
2008-05-06 17:45:00
JoJo writes:"Now that Citigroup has posted its first quarter earning for 2008, do you still stand by your original analysis, or you think you have to revise it?"Thanks for getting my butt in gear for the update I promised, JoJo.As many of you may know, Citigroup (C) reported a loss of $5.1 billion in the first quarter, which hardly makes it easy to figure out what a more "normal" quarter would look like for them. While the losses and writedowns did go down in Q1, versus Q4, there is still plenty of cloudiness in Citi's results.Nonetheless, there is no point in shying away from digging through the numbers, even if they are complicated, which is why I even bothered writing about Citi in the first place. The first thing I did was update my spreadsheet showing Citi's quarterly income results by segment going all the way back to 2007. This allows us to see the trend for the last five quarters. Then I added my prior forecasts from February (For those who don't recall, I projected three...
More About: Update , Quarter

Microsoft Played Brilliantly, Hands Off Negotiations to Yahoo Shareholders
2008-05-06 03:17:00
This blog has been rather quiet recently, but things should pick up shortly. I am in the process of relocating and other things have limited my time lately.This Microsoft (MSFT), Yahoo (YHOO) story just can't get any more interesting. Now that MSFT has walked, what can we expect? Well, YHOO's management team looks like fools, not only for misplaying their hand, but also for taking very lightly their fiduciary duty. Expect YHOO shareholders to revolt. I would not at all be surprised if YHOO is forced to do the deal, because the board really can not say anything to shareholders that remotely convinces them that the company is worth $37 per share or more. When the market thinks you are worth about $20 and someone offers you $33, you take it. End of story.Even if MSFT really is out for good, this whole thing will help YHOO because it will have to work hard to make meaningful changes now that they balked at such a great buyout offer. The problem is that morale at Yahoo is probably at r...
More About: Shareholders , Hands , Negotiations

Business Week Reads This Blog Too
2008-04-24 13:37:00
In the current issue of Business Week , dated 4/28, an article about Citigroup (C) mentioned my conservative $22 break-up value for Citigroup in an article entitled "Where Pandit Is Taking Citi."Although the piece failed to put the $22 number in context (it was the lowest of three projected scenarios I made - conservative, moderate, and aggressive), a special thanks to Business Week for reading this blog as part of their research.If you would like to read the article online, I have included a link above. Links to my three Citi posts are below:Citigroup Break-Up Analysis:Part 1, Part 2, and Part 3Full Disclosure: Neither a position in Citigroup, nor a subscription to Business Week, at the time of writing
More About: Blog

Housing Price Stabilization Nowhere In Sight
2008-04-23 15:22:00
March 2008 existing home inventory data was released this week and for about nine months now we have seen inventories hover around a ten month supply, as shown by my updated chart below.Without declining inventories (prompted by sellers reducing their prices to more reasonable levels) we will not see stabilization in housing prices or improved loan performance in the banking sector. So for anyone looking for housing market improvement anytime soon, it looks pretty bleak on a national level. After all, basic economics tells us that when supply far exceeds demand, prices fall..
More About: Housing , Price , Sight

Merck's First Quarter Report Substantiates View of Vytorin Overreaction
2008-04-22 16:08:00
Back in February I wrote that Vytorin worries looked overdone and concluded that Merck (MRK) shares especially looked attractive. Since then the stock has dropped further (MRK is down 32% year-to-date as shown by the chart below), but yesterday's earnings report from the company leaves my prior view unchanged.Merck reported first quarter earnings of $0.89 per share, three cents above estimates. They also reiterated their 2008 profit view of $3.33 per share. So, MRK shares have lost a third of their value this year but Vytorin losses are not expected to meaningfully impact their earnings. Such a dichotomy makes me even more confident of my previous assertions.Merck has lowered its 2008 projections for its share of income from the cholesterol joint venture which sells both Vytorin and Zetia by $700 million to account for the negative ENHANCE study results. While it may be too early in the year to know exactly if such a cut is enough, the fact that a $700 million hit leaves earnings g...
More About: Report , View , Quarter

No Wonder Yahoo Ads Don't Perform Well
2008-04-18 23:36:00
Sports-related ads on Yahoo 's sports pages? Sounds reasonable, but evidently there is a diabetes connection to baseball I am unaware of. Something tells me Google would serve up more relevant ads...
More About: Yahoo! , Perform

Two Big Reasons Why The Google Bears Were Wrong This Quarter
2008-04-17 22:50:00
I am getting ready to hop onto a conference call here in a few minutes but Google (GOOG) shares are soaring 60 points in after-hours trading tonight after the company beat estimates on both the top and bottom lines, so I figured I would weigh in briefly. Bears on the stock have been insisting that the weak domestic economy was going to severely impact Google's results, but this view ignored two very important points.First, Google's core market (online advertising) is not completely dependent on the economy. If the online ad market was mature already, then the bears would have been right. However, online advertising is still growing very quickly as a percentage of the overall advertising market. As a result, lower overall ad spending can actually occur simultaneously with growing online advertising, which is what Google is benefiting from. When you are taking market share, as Google is, those gains can offset much of the decline in corporate discretionary spending.Second, Google ge...
More About: Reasons , Wrong , Quarter

Despite Writedowns and Loan Losses, Core Banking Businesses Remain Very Pro
2008-04-14 18:24:00
Since earnings season gets underway in full force this week, the headlines are going to look bad for the financial services industry as loan losses and asset writedowns lead to severe first quarter losses. However, investors need to focus on where these losses are coming from and how the core banking business is holding up during this mess.I bring this up because the media would have you believe that the banking business is broken and loan defaults by consumers on their mortgages, credit cards, car loans, and student loans are crippling the banks. Interestingly, that is simply not the case.Consider the first quarter earnings report from Wachovia (WB) issued this morning. The company reported revenue of $7.9 billion and a loss of more than $300 million, or $0.20 per share. That sounds bad, and it is, but digging deeper into the company's income statement reveals that more than 90% of WB's business remains extremely profitable, as you can see from the numbers below.Why is this impor...
More About: Loan , Banking , Core , Losses , Businesses

Blockbuster Bid for Circuit City Makes Little Sense
2008-04-14 15:08:00
The Wachovia (WB) news is garnering all the headlines today, but an interesting story is developing in the retail space; Blockbuster (BBI) is making a bid for Circuit City (CC) and taking the offer directly to shareholders after CC ignored the video rental giant's repeated attempts to negotiate a deal.A couple of different reasons come to mind as to why this deal is a bad idea. First, we have too many retailers in this country, which is why so many of them are marginally profitable, if profitable at all. The credit bubble we have experienced in recent years has led to more retail stores than can be supported in a typical economic environment. These excesses can only be corrected by bad retailers going away.We have already started to see bankruptcies in the retail space (Sharper Image, Bombay, etc), which is a good thing. Blockbuster and Circuit City have thousands of poor performing locations. The solution to make these companies more stable financially is to shrink them, not keep...
More About: Sense

Participate in Blog Improvement
2008-04-11 15:48:00
I have been meaning to ask for feedback on this blog for a while but never got around to it. I have now added a Blog Suggestion Form link to this site so readers can offer ideas on how to improve this blog. If you have any input, please take a moment and make suggestions. Thanks in advance for the feedback!
More About: Improvement

Yahoo to Outsource Ads to Google for Two Week Trial Run
2008-04-10 02:41:00
So much for Steve Ballmer's attempt to get a Yahoo (YHOO), Microsoft (MSFT) deal done more quickly by making threats. Now it looks like Yahoo is really serious about fighting back (or they're just pissed).This afternoon we learned that Yahoo is going to use search advertising technology from Google (GOOG) on its own site for a two week test period. The goal of this trial, of course, is to see if Google's system can boost Yahoo's advertising revenue substantially. If it can then Yahoo certainly has some ammunition left as it tries to argue that Microsoft's current bid actually undervalues the company.It is pretty fascinating that in a few short years we have the old search leader (Yahoo) outsourcing its search advertising to the very upstart that took over the top spot (Google). What makes this even more interesting is that some are speculating that if the Google test is successful, Yahoo could choose to merge with AOL, not Microsoft.Why would that make sense? Well, AOL looks a...
More About: Trial , Week , Yahoo!

Motorola Valuation - Part 2
2008-04-08 16:23:00
Last I month I asked the question "Are Motorola Shares a Bargain at Nine Bucks?" To help answer that I decided to do rough valuations for each of the company's major business segments (mobile devices and networking/mobility). Carl Icahn has been involved with Motorola (in fact he won two board seats from the company this week) and has been calling for the firm to spin off its cell phone business, which they have agreed to do sometime next year. Hence, my desire to value each segment separately.I came up with an ~$8 value estimate for the non cell phone division (Motorola Valuation - Part 1). With Motorola trading at $9 and change right now, the market is essentially saying the cell phone business is worth next to nothing. Below are my estimates for that segment. My main assumption is a 5% operating margin (half of the 2004-2006 average due to more intense competition nowadays) and relatively steady sales from here on out. As always, I try to be realistic, and this is by no means an...

Microsoft, Yahoo Deal Hopefully on Fast Track
2008-04-07 17:05:00
I can't blame Microsoft (MSFT) for getting a little impatient with the top brass over at Yahoo (YHOO). Now that Microsoft has set a three-week deadline for making some progress (in a letter sent out this weekend), hopefully this whole thing will be concluded shortly.For some reason, Yahoo seems to think they have leverage here. Their stock was in the teens, their business was deteriorating, they got a $31 per share buyout offer, and yet they are still quacking that MSFT should raise their offer. With no competing bids? Why would Steve Ballmer do that?Yahoo should be thrilled that Microsoft is so keen on doing a deal. Deal s with 60% premiums aren't really open for renegotiation when there are no other interested parties, and this fact will force Yahoo's hand.Yahoo should simply come to the table and tell Microsoft that they'll agree to sell, but that they will take no less than $31 per share in real economic value (MSFT is offering half stock, so the actual price is below $31 rig...
More About: Fast , Track

Expedia-Google Deal Seems Very Unlikely
2008-04-02 16:49:00
Shares of online travel site Expedia (EXPE) have rallied about 15% this week on rumors of a buyout offer forthcoming, perhaps from Google (GOOG). I don't own EXPE, but if I did, a buyout offer from Google is not something I would place a very high probability on.Thus far, of the many acquisitions Google has made, the vast majority have focused on their core business of advertising, not e-commerce. Sure, Google could buy a site like Expedia and create a very impressive (and likely popular) travel portal from which it could generate both ad revenue and transaction fees. For those investors who want Google to expand the number of ways the search giant makes money, generating fees from e-commerce transactions, as well as advertising such offers, would go a long way in diversifying the company's profit center.That said, Google has not shown enough interest in doing so for us to think this is going to be part of their growth plan in the short term. While I think buying a site like Exped...
More About: Deal

Market Action Shows How Much Negativity Is Priced Into Stock Prices
2008-04-01 16:59:00
One of the most important things to know about investing is that the stock market is a discounting mechanism. That does that mean? It means that expectations for future events are reflected in stock prices ahead of time, before the events actually occur. People who try to guess what the headlines next week are going to be, and invest accordingly, might not make any money in the market. Remember, stock prices go up or down not based on how well the underlying companies do, but rather how well the companies do relative to the market's expectations.I bring this up because today's market action shows us that a lot of bad news has already been priced into equities. UBS (UBS) reported astonishing writedowns of $19 billion and Lehman Brothers (LEH) raised $4 billion of capital even though they claim they don't really need it. Pretty bad headlines, but the Dow is up 260 points as I write this. Last month when Bear Stearns (BSC) nearly went belly-up the market reacted by dropping 1%, and ...
More About: Action , Market , Stock , Prices

Citi Announces Mini Break-Up Plan, But It Should Do More
2008-03-31 16:42:00
Today we hear that Citi group (C) has decided to split its consumer business into two. While not nearly as dramatic as the real break-up plan many, myself included, have discussed, it is a start. Citi will split the consumer business into two parts: consumer banking and global cards. The global card segment will include both U.S. and international credit card lending.I think CEO Vik Pandit has the right idea here, but for Citigroup shareholders to really see full value realized for the company, they need to split off global wealth management, consumer banking, and corporate banking from each other.Just my two cents...Full Disclosure: No position in Citigroup at the time of writingRelated Posts:Citigroup Break -Up Analysis - Part 1Citigroup Break-Up Analysis - Part 2Citigroup Break-Up Analysis - Part 3
More About: Break Up , Mini , Plan

One Reason Apple Might Be Hoarding $18 Billion
2008-03-30 21:50:00
Today I'm watching the NCAA tournament and trying to lower the stack of unread magazines on my desk. In the March 17th issue of Fortune I came across an interesting article about Apple (AAPL) and CEO Steve Jobs. Some investors in Apple have been disappointed that the company refuses to return any of its $18 billion war chest to shareholders in the form of stock buybacks or dividend payouts. Why haven't they, you might wonder?Well, when asked how he plans on managing through the economic downturn, here is what Jobs told Fortune:"We've had one of these before, when the dot-com bubble burst. What I told our company was that we were just going to invest our way through the downturn, that we weren't going to lay people off, that we'd taken a tremendous amount of effort to get them into Apple in the first place - the last thing we were going to do is lay them off. And we were going to keep funding. In fact we were going to up our R&D so that we would be ahead of our competitors w...
More About: Reason , Billion

Motorola Valuation - Part 1
2008-03-28 15:18:00
Following up on my initial Motorola (MOT) post yesterday, here are my numbers on the company's networking and mobility (non cell phone) segment. With MOT shares languishing near multi-year lows at nine dollars, doing individual valuations on both segments that will be spun off next year can help us figure out if there is much downside left in the stock.My calculation is meant to be realistic, rather than overly conservative or aggressive. I get to about $8 per share for Motorola's non cell phone business, which just shows you how little faith Wall Street has in the cell phone segment right now. Let me know if you think tweaks in my numbers are warranted.Full Disclosure: No position in MOT at the time of writing
More About: Part , Valuation

Are Motorola Shares a Bargain at Nine Bucks?
2008-03-27 19:24:00
I haven't considered Motorola (MOT) a viable investment opportunity for a long time, mainly due to the overly competitive market environment for the company's core cell phone business. Not too long ago Nokia (NOK) and Motorola dominated the cell phone market and both stocks did well.In recent years, however, the market landscape has changed. Smart phones like the Blackberry, iPhone, and Treo have taken share. A slew of Asian manufacturers have also played a role, with Samsung, LG, and Sanyo selling far more phones in the U.S. than they ever have before. As a result, MOT has seen cell phone share sag, profits plummet, and a stock price of about $9, down 65% over the last two years.With the help of activist shareholder Carl Icahn, Motorola has been persuaded to split up the company. The cell phone business is bleeding red, distracting investors from the company's profitable home and enterprise broadband and mobility divisions. In 2007, the cell phone business lost $1 billion on sal...
More About: Bargain , Bucks , Shares

Yikes, California Home Values Drop 26% in February
2008-03-26 20:41:00
From the LA Times:Signs of distress are piling up in the California housing market, where prices are falling at three times the national rate of decline. Statewide, median sales prices fell by a stunning 26% from year-ago levels in February , with home prices dropping at a rate of nearly $3,000 a week, the California Association of Realtors reports. Further, the CAR says the Fed's interest rate-cutting campaign "will have little near-term direct effect on the housing market."That's right. If you live in California chances are your 401(k) has outperformed your home over the last year. Normally that would be expected, but we're in a bear market for equities!I am amazed that it has become conventional wisdom that a house is the best way to accumulate wealth in this country. Hopefully a year-over-year decline of 26% in the California housing market will diminish some people's desire to accumulate as much property as possible. Remember everybody, homes appreciate by 3% per year over t...
More About: Home , Values , Drop

A Fresh Look and a Possible Anecdotal Contrarian Indicator
2008-02-23 00:30:00
Over the weekend I hope to update this blog's template to make it organized a little more efficiently. I'm not a web designer, and don't hire one, so every once in a while the site gets unappealing in my eyes and I try to refresh it a bit. I'm just letting you know so if you visit here over the weekend and things are screwy, you'll know why and that it will be fixed shortly. And please give suggestions if you think improvements to the layout can be made.On an unrelated anecdotal evidence tangent, I got a call today from a client who requested I slash their financial services exposure by 50% (it had been a market-weight allocation -- 18%). This type of anecdotal evidence often serves as a contrarian indicator, so I am interested to see if financials bottom out here in coming weeks and months. I got the call at 2:43pm central time, when the Financial Select Sector SPDR (XLF) was trading around $26.70 so we can track this random indicator. Maybe it signals capitulation, maybe not,...
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Citigroup Break-Up Analysis - Part 2
2008-02-20 17:22:00
Okay, so after looking over Citigroup (C) net income by segment over the last four years (see prior post), it's time to make some projections about the future profitability of the company. First, I am going to do an extremely conservative valuation to try and find out what our likely downside is with the stock. Clearly, these are simply educated guesses at this point, so they could prove way off base.Nonetheless, if I make a point to be both very conservative and realistic, it will likely be a valuable exercise. As Citigroup reports future earnings (first quarter numbers are due in April), I can see how the projections are holding up and making adjustments if needed.Sticking with the conservative view, I am going to use a price-earnings ratio of 10x for each of Citigroup's businesses. One can certainly argue that some divisions are worth more than that, but I'll factor that into my more aggressive valuation model later on. For now, conservatism means 10x earnings.As you saw from ...
More About: Break Up , Analysis , Break , Part

Citigroup Break-Up Analysis - Part 1
2008-02-15 19:31:00
Long before the sub-prime debacle really got going, shareholders of Citigroup (C) were clamoring for the company to break itself up into several pieces. The argument for such a move stemmed from the fact that enormously large companies get very difficult to manage. By splitting them into smaller free standing operations, they not only can be managed better, but stand a greater chance of growing if they are let loose on their own with separate management teams acting autonomously.Although I was/am not a Citigroup shareholder, I can certainly understand this concept and think it has a lot of merit. Of course, Citigroup did not break itself up, and now the sub-prime crisis has depressed the share price so much that many pieces of Citi are doing well, but have been ignored as writedowns take center stage.Doing some kind of break-up analysis can go a long way to figuring out how much each business unit within Citigroup is worth. This would make it easier to figure out if the current shar...
More About: Break Up , Analysis , Break , Part

Excerpts from Bill Miller's Latest Letter
2008-02-12 19:06:00
As usual, quality insights from the manager of Legg Mason Value Trust in his latest shareholder letter dated February 10, 2008. In my view, a couple are definitely worth posting: On the constant chatter of possible recession:Investors seem to be obsessed just now over the question of whether we will go into recession or not, a particularly pointless inquiry. The stocks that perform poorly entering a recession are already trading at recession levels. If we go into recession, we will come out of it. In any case, we have had only two recessions in the past 25 years, and they totaled 17 months. As long-term investors, we position portfolios for the 95% of the time the economy is growing, not the unforecastable 5% when it is not.On Microsoft's offer for Yahoo:"The 60% premium MSFT offered for YHOO highlights what we believe are the significant opportunities present in our portfolios. Clients and shareholders are understandably disappointed when the performance of their portfolio does no...
More About: Letter , Bill

Yahoo Says "No Thanks" To Microsoft, For Now
2008-02-11 15:00:00
Despite having little in the way of leverage over Microsoft (MSFT), Yahoo (YHOO) rejected the software giant's $31 per share bid, deeming it inadequate. With no clear opposing bidders at this point, most industry sources simply think Yahoo will try its best to drum up interest from other parties, or at least that perception, in order to get a little more money out of Microsoft. Since the $31 offer is half stock and half cash, it only represents about $29 right now based on a lower MSFT share price ($28).A Microsoft deal is still most likely, perhaps at $33 or $34 if Yahoo is lucky enough to get a higher offer. All of this back and forth commotion will likely keep Microsoft's stock price under pressure. When it is all said and done, there will likely be an attractive entry point for that stock. Should Yahoo agree to a deal with them, the merger arbs will be shorting MSFT until the deal closes. But after that, Microsoft shares will look very cheap. Even at current prices ($28), prio...
More About: Yahoo!