Paul Kedrosky has a nice table on the recent $23 billion infusion by Asian/Middle East sovereign funds in the U.S. banking system:
Buffett confirmed on CNBC today that he’s been indirectly solicited by several financial institutions to help shore up their balance sheets, but he passed on those deals.
Well, Buffett pulled the trigger, on a $4 billion purchase for 60% of Marmon Holdings, reported to generate about $7 billion in revenue.
Marmon has 125 businesses, comprised of nine sectors grouped into four business segments: (from their website)
Electrical Components: Wire & Cable Products serving energy related markets, residential and non-residential construction and other industries.
Transportation Equipment Services: Transportation Services & Engineered Products, including railroad tank cars and intermodal tank containers; and Highway Technologies, primarily serving the heavy-duty highway transportation industry.
Construction & Industrial Components: Distribution Services for specialty pipe and tubing; Flow Products for the plumbing, HVAC/R, construction and industrial markets; Industrial Products including metal fasteners, safety products and metal fabrication; and Construction Services, providing the leasing and operation of mobile cranes primarily to the energy, mining and petrochemical markets.
Retail Solutions: Water Treatment equipment for residential, commercial and industrial applications; and Retail Services, providing store fixtures, food preparation equipment and related services.
Member businesses employ 21,500 people and operate more than 250 production facilities, primarily in North America, the United Kingdom, Europe and China. Collective revenues totaled $7 billion in 2006. Forbes magazine ranked The Marmon Group 35th on its 2006 list of the largest private companies in the United States.
Marmon’s three year financials can also be found on their website:
Income Includes $184 million and $380 million gains on sales of investments in 2006 and 2005, respectively.
A couple items of note:
Operating margins have increased steadily, with a pretty substantial runup or 330 bps to 11.4% in 2006
Book equity actually declined in 2006, while revenue increased 24% and operating income increased 73%. At the same time liabilities (debt) also declined, so Marmon appears to be making more efficient use of their assets. Being a private company, I suspect they’ve paid out a fair amount of dividends. If you apply a 35% tax rate to their $1.028 million EBIT, you’d get to about $670 million in net income.
So Buffett’s $4.5 billion purchase of 60% (or $7.5 billion valuation) translates to about 11x 2006 earnings.
We have no guidance on 2007 results over 2006, but let’s assume 10% improvement across the board. This brings the multiple to under 10x P/E.
If you were to exclude the gains on investment as extraordinary items ($184 million in 2006, or about 18% of income), the P/E multiples would look like 13.7x 2006 earnings.
An interesting follow-up might be to look at these nine sectors to get an understanding of estimated growth and margin.
I’ll highlight a few investment ideas that might merit further analysis:
Wire and Cable Products: Corning (GLW), though known for its LCD glass, also makes bendable fiber for telcos like Verizon to wire up apartment buildings for HD video/telephony/internet over fiber. I bought shares today. According to Yahoo, it trades at a trailing 19 P/E and 15 P/E on 2008.
Transportation Services & Engineered Products: Trinity Industries (TRN) is a manufacturer of railcars (among other segments) whose stock has been punished after citing a weak outlook for railcar demand in 2008. The stock is off its 52-wk high of $49.70, and currently trades at $27 to $28. I bought shares today. It trades at a trailing and forward 8 P/E.
Flow Products: Flowserve (FLS). I’ve been long this maker of flow products. Check out William Trent’s great article on SeekingAlpha on October 26th, 2007 when it closed at $77.47. The stock trades today only 2 months later at $99.05. It’s the richest of the bunch on a valuation basis, at 29 trailing and 20 forward P/E.
Construction Services: Interesting that Buffett would invest in a leasing business. I wonder if he finds them more attractive than the manufacturing side in today’s climate. I own Terex (TEX), a manufacturer of cranes and mining equipment, who sells as well as leases its equipment (trades at a trailing 12 P/E and 10 P/E on 2008). Other companies worth looking into are Manitowoc (MTW) and Joy Global (JOYG).
The author holds long positions in GLW, TRN, FLS and TEX
My friend and former colleage Ron Feldman publicly launched his service today. It’s called Kwiry - and it allows you to text any message to K-W-I-R-Y (59469) - which you can then retrieve later to see all the things you wish you had done but forgot to do.
So all those great things you want to remember - restaurants you walk past, songs you hear on the radio, or stock picks you want to research - can now be stored in your own account and shared for the world to see, or stored privately, if you prefer. If you text “P” before any message to K-W-I-R-Y, that note is then private, so others who are tracking your KWIRYs won’t be able to see your note.
They’ve raised about $1 million in a Series A from Hummer Winblad.
Anything you text to K-W-I-R-Y will show a search results page (powered by Yahoo!) based on the keywords you texted, when you go to retrieve your message. So you’ll be able to research whatever idea you texted to yourself with a matter of a few clicks.
The data is unstructured, but that doesn’t prevent future products to structure the data in K-W-I-R-Ys. One interesting application would be to build a plug-in to a stock portfolio tracker. So imagine if you wanted to track long ideas and short ideas (while watching CNBC’s Fast Money, for example). I think it would be neat to text B CSCO or S WAMU, for buying Cisco or selling Washington Mutual. It would be neat to see a history of your buy and sell ideas (as well as a market price at the time of your texting) - to look back and see how much money you would have made if you actually traded those ideas. There are so many things this platform could power - I’m fascinated by all the opportunities that lay before them.
Congratulations Ron and team on the launch of a great service.
It’s interesting to read the different headlines covering the Whole Foods Q4 results, as they tend to emphasize different parts of the Q4 results and give conflicting impressions on the quality of the quarter.
It’ll be interesting to watch the trading action on Wednesday and next week, as investors pick through the news to see whether these results were positive or negative.
A couple of highlights on the quarter and the conference call:
Q4 sales increased 25%, comparable store sales were up 8%, identical store sales increased 6%.
Quarterly dividend was increased 11% to $0.20 per share.
Store contribution (or operating income prior to corporate G&A, pre-opening expenses, relocation costs, interest, taxes, and one-time expenses ) decreased to 8.6% of sales from 9.1% of sales
EPS fell from $0.28 in 2006 (12 weeks) to $0.24 in 2007 (13 weeks), so EPS was lower by 14% even though this year had an additional extra week which at equal run rate should generate an 8% improvement in quarter over quarter earnings - so normalizing for the different time period lengths, you get to a miss of 22%.
Net income margin for the quarter was 1.9% ($33.9m divided by $1,743.4m) compared to 3.1% ($39.8m divided by $1,291m). Margin numbers aren’t affected by the difference in the quarter lengths since they are normalized. If about 50 bps of the margin compression is from the Store Contribution change, about 24 bps is from interest expense on the debt issued to finance the Wild Oats acquisition, and the remainder from pre-opening and relocation expenses.
For forward looking guidance, the company indicated expecting 25% to 30% revenue growth (of which 10% is to come from Wild Oats, comp store sales growth of 7.5% to 9.5%), which I believe leaves new store openings to account for the remainder (using the midpoints from above: 27.5% top line growth less 10% Wild Oats less 8.25% comp store sales nets out at 9.25% from new stores).
From the Press Release: “The Company does not expect to produce operating leverage in fiscal year 2008 due primarily to a decrease in store contribution as a percentage of sales driven by a higher percentage of sales from new and acquired stores, which have a lower contribution than our existing stores, investments in labor and benefits at the acquired Wild Oats stores, and continued, though more moderate, increases in health care costs as a percentage of sales. In addition, the Company expects G&A as a percentage of sales to be in line with the 3.3.% reported in fiscal year 2007 due mainly to the temporary costs associated with integrating the Wild Oats acquisition, along with the cost of fully staffing the Company’s three smallest regions which gained the greatest number of stores in the merger. The Company expects G&A as a percentage of sales to improve sequentially from the first half to the second half of the year.”
The company targets a 7 year payback period on their EVA analysis for new store openings.
I heard a whole lot of “synnergies” on the conference call - synnergies from getting the Wild Oats stores to the higher Whole Foods 35% gross margin based on better sourcing of “perishables” and a remodeling of the stores to encourage better flow and more sales per square foot. Whenever you hear the word synnergies, in my opinion, you need to be extra skeptical - as it’s a word bandied about to justify just about any sort of thing, including making overpriced acquisitions.
The company claims they lowered prices at the Wild Oats stores, and yet were able to increase margins. I don’t know whether I believe this, but that’s what they’re saying.
For an interesting article on the bear case for WFMI, check out Alan Brochstein’s post on Seeking Alpha.
I don’t know how the Street will react. The stock was up 7% to $45.18 in after hours trading according to TheStreet.com, but as of this writing (10 pm-ish), it is now up 2.3% according to Yahoo! It’s not clear to me that the Bulls or Bears will take center stage on this one from these numbers.
I’m staying on the short side of this trade for the time being as I think the earnings miss will play front and center. I find it hard to believe in a long story over one year out in this economic environment, what with all types of retailers feeling the pain. Certainly synergies may accrue from the Wild Oats deal, but it’s not a guarantee given the economic climate we’re in. Risks abound, from inflationary pressures on food and distribution costs, pain in a slowing economy and disappearing wealth from real estate impacting discretionary spend (though it’s debatable whether customers consider their WFMI budget as discretionary).
With a forward P/E of 28, for a company growing idents at 6%, experiencing shrinking margins, offering no guidance on operating leverage for one full year, achieving growth through levering up their balance sheet to acquire a competitor, suggesting synnergies will accrue from better management - it seems to me that the execution risks outweigh the reward.
Disclosure: I have a position in the Jan 08 42.5 puts on WFMI
Shares of hog and beef producer Smithfield Food Inc. were down Monday, as analyst slashed the company’s projected earnings based on weak hog prices and growing hog supply. BB&T downgraded Smithfield from a buy to a hold, and cut its current quarter earnings target to $0.17/share from $0.48/share. "Hog-production profitability has deteriorated dramatically into loss-making territory, and we do not foresee a quick recovery," said BB&T analyst Heather Jones… The US Agriculture Department reported last month US inventories for hogs and pigs increased 3% from last year. Live hog prices are down 20% since August. China could change the demand concerns if it chooses to purchase more US-made pork, analysts added. Shares of Smithfield dropped 3.5% to $30.42 in early afternoon trading on Monday.
In light of the news, I wondered what the impact might be on one of my holdings, Brazilian food company Sadia (SDA). Armed with my trusty Google Translator, I downloaded the Portugese Investor Presentation from their website.
From their latest quarter - it looks like Sadia does about 47% revenue in exports. For the first half of 2007, 11 percent of their export revenue came from "Suinos" - which I’m guessing is swine. Americas (not broken up by U.S., Mexico, and South America) comprised 16 percent of export revenue. Though we don’t know the exact product mix by region - the following charts do give comfort around the diversification of Sadia’s revenue across their products (Beef-bovidos, Pork-suinos, Chicken-aves, Chicken Parts, Processed Foods-industrializado, Other) and their geographies:
Smithfield’s SEC Edgar filings don’t break out their export revenue, so I’m unsure how much of Smithfield’s experience with hog price decline is indicative of the U.S. market, versus the international supply and demand dynamics.
Sadia’s chart below tells an interesting story that pork prices in the world market have increased and then decreased slightly (in Brazilian Real), but because of the US Dollar devaluation against the Real, have increased in price by 7.1%. I’m guessing the way to read this chart is that Pork prices in Export markets declined from 4.44 Brazilian Real per Kilogram in 2006 Q2 to 4.34 R$/Kg in 2007Q2, or a 2.3% decline. Over the same year over year comparison, the US Dollar depreciated 9.4% against the Brazilian Real.
You can actually compare the Export market prices with the prices Sadia achieved locally, as shown below:
For pork and beef, it appears that Sadia has been able to garner higher prices abroad than domestically.
I think the long-term investment story still applies.
Check out this chart from the World Health Organization (via GreenFacts), that highlights the growth in per capita calories consumption of livestock products (meat and milk) in the developing world by 2030:
However, I think Sam Jackson and John Travolta were more convincing than all these charts and graphs, drawn from this classic exchange in Pulp Fiction:
Vincent: Want some bacon? Jules: No man, I don’t eat pork. Vincent: Are you Jewish? Jules: Nah, I ain’t Jewish, I just don’t dig on swine, that’s all. Vincent: Why not? Jules: Pigs are filthy animals. I don’t eat filthy animals. Vincent: Bacon tastes gooood. Pork chops taste gooood.
Other BI players in the market include, most notably, Canadian company Cognos, whose On-Demand / Software-As-A-Service (my definition, Enterprise 3.0) strategy is less concrete. Business Objects is definitely a better acquisition target.
Bottomline, SAP had to start learning the game of big acquisitions. This is a very good start. My guess is, coming up next is a Content Management acquisition, another gaping hole in their portfolio. The likely target is OpenText (Nasdaq: OTEX), a $1.4 Billion Canadian company, in 2008.
So was the acquisition for the traditional Enterprise Software business? Or the nascent Software As A Service business? Both?
It’s timely that Rapt (where I work as a software sales consultant) recently launched Rapt On Demand - the Software As A Service version of our inventory forecasting, planning and reporting application.
Though an earlier McKinsey study (as covered by Nick Carr) cited that the most popular SaaS business applications are for human-resource management, billing and order entry, and sales management, it’s clear that other analytics applications are also migrating to the SaaS delievery model (see David Hatch).
A big theme at TechCrunch 40 was social/web financial services. Mint and Cake launched there and Mint came away with the top prize.
The twist that Cake brings to the social investing field is that they use real transactions to build your profile by accessing your online trading accounts. Again, they are not the first to do this. A company out of the UK, called Covestor, has been doing the same thing for the past six months and has built a large network of traders who are sharing real trades with each other.
At this very moment I’m playing voyeur by following some hotshot investors as they move up and down the market…Better yet, I can study the strategy of other investors and use their performance as my lesson. And I gotta tell you that watching real people win and lose real money from real investments is much more instructive than reading any of the investment blogs and web sites.
In addition to allowing you to be a market peeping Tom, Cake Financial consolidates your investments by linking directly to your various portfolios from the major brokerage houses… Of course the security question loomed large in my mind. The site states that it provides you with a screen name and doesn’t divulge any member’s net worth or personal information. As with any social network, you are free to identify yourself to whomever you trust. By design, no one can come in to the site and try any shenanigans like fixing the market by pretending to buy and sell, since only real transactions conducted via the various brokers show up in the site’s data.
I recently set up a profile at Cake, under my username Zenrob. It’s pretty cool- as the service will download your transaction history from your broker, and then show you all the other members of the network who hold the same stocks. You can then check out their trades to find investment ideas. The site is differentiated from other financial social networking sites like Stockpickr, Marketocracy, Motley Fool CAPs, because all the portfolios are based on real trades downloaded from the online brokerages of the members.
In some ways, there’s no avoiding "survivor bias," where performance results are skewed by the fact that only surviving investors make it into the mix (check out Nassim Nicholas Talib’s book Fooled By Randomness for a great discussion on biases like this). Also, there is the notion of adverse (or positive selection). You would imagine that investors that have multiple trading accounts might only want to load up the data of their best performing accounts to put the best possible spin on their outcomes.
Here’s a screenshot of my profile:
Though I’m up 43% year to date and 65% for a 1-year return, there are no statistics reported on alpha, beta or volatility. So, I may have taken absurd risks to generate those returns (i.e. lever up to the hilt on junk credits that I was lucky to sell just before the crash).
Finally - this snapshot happens to hide the biggest decision (mistake) I’ve made over the last year, which is my asset allocation decision to hold a very large proportion in cash (about 40%)at fairly low short term rates. Probably a combination of both fear in the market’s frothiness and being too busy to come up with a plan to put the money to work.
Given the Fed’s recent loosening, the stock market’s ascent to all-time highs (as if the subprime blowup never happened or has been solved by banks taking one-time charges to their balance sheets), the US dollar’s plunge against almost every currency, inflationary pressures in oil and other commodity prices - I guess, yes, I am nervous.
So my investment theses in this environment are to be defensive (food and pharma spending still occur in recessions), look for dividends (utilities), find inflation hedges (oil, commodities, gold), and invest overseas (Brazil and Korea are my favorite based on growth and valuations). I’m also looking to get smart on options trading this year. Any advice?
My current holdings ranked by highest to lowest value held:
Companhia Vale Ads (RIO) - Brazilian iron ore mining
Dee deVries Salomon (SVP, Sales and Marketing, CondéNet) gave a great inside look at how media companies are adapting and innovating in an age where there are no longer borders for content.
Dee used the word “velocity” to describe the effect that sharing has on traffic. Reddit, another CondeNet acquisition, is a leading social bookmarking service (like Digg) that drives traffic to sites based on user ratings.
Epicurious, for example, has a recipe widget up on Widgetbox that allows people to post new recipes on their blogs. See below.
Flip.com, a social networking site that allows members to create flipbooks based on themes that are integrated with the advertisers’ brand or message. Dee referred to the recent Nike contest on Flip, where the person submitting the winning flipbook could win a trip to China to watch the U.S. women’s soccer team compete in the World Cup.
The winning entry was a flipbook submitted by itgirl_51 on U.S. women’s team forward Natasha Kai.
Conde’s sharing philosophy is widely evident on Flip as well… with links to post a flipbook on facebook or to embed it anywhere else.
The Changing Landscape Industry deals among, Google and DoubleClick, Microsoft and aQuantive, Yahoo! and Right Media and WPP and 24/7 have created much speculation about the future landscape of our industry. For the first time ever on one stage, here from the CEO’s at all the acquired companies as they discuss the impact of their individual deals and the cumulative effect on data analysis, the competition for leveragable marketing insights and achieving media optimization. This session will help define the future of interactive media and is a must attend for all industry participants.
Here’s a sample of a few interesting themes that emerged from the discussion:
Using technology to solve business problems
The Atlas CEO spoke about how the evolving media landscape is creating “problems that need technology”. The NY Times recently ran an article about how Microsoft is using its $6 billion acquisition of aQuantive/Atlas to solve the problem of “conversion attribution”:
[The] proposed system, called “conversion attribution,” would track all of the online places where consumers see ads and give advertisers a fuller picture of the various ways that consumers reach them. Tracking is important, because the site that gets credit for prompting a user’s visit is the one that gets paid for it.
“Google gets all the credit, and in fact, you might have just gone to Google to type in the U.R.L.,” Mr. McAndrews [aQuantive CEO] said, pointing out that people often search for companies’ names after seeing their ads elsewhere.
Ad serving as “commodity”
Michael Walrath of Right Media called ad serving a commodity, and that companies are creating value through the services around it.
While David Rosenblatt of DoubleClick didn’t agree on ad serving as a commodity, he conceded - “People don’t buy ad serving. They buy yield management.”
Alan Abelson of Barron’s [registration required] recaps in his weekly Up & Down Column Wall Street the large losses of Bear Stearns’ two hedge funds:
We don’t know if the Guiness Book of World Records keeps score on this sort of thing, but you’d think that losing close to $20 billion in a figurative wink is quite an achievement and surely deserves some special recognition
Bear Stearns Cos. told investors in one of its hedge funds that they won’t get any money back after creditors forced it to sell assets at depressed prices, according to a letter sent by the firm.
While a second fund still contains “sufficient assets'’ to cover the $1.4 billion it owes the New York-based firm, there’s “very little value left for the investors,'’ Bear Stearns said in the two-page letter, a copy of which was obtained by Bloomberg News from a person involved in the matter. Bear Stearns bailed out that fund last month with $1.6 billion in emergency funding.
The fund that now has nothing left for investors, the High- Grade Structured Credit Strategies Enhanced Leverage Fund, had $638 million of capital as of March 31, according to performance reports sent to clients at the time. The second fund, called the High-Grade Structured Credit Strategies Fund, had $925 million.
Both funds made leveraged bets in an effort to boost returns. The enhanced fund borrowed about $11 billion, or almost 20 times its capital. Its sister fund, the one Bear Stearns bailed out last month, borrowed almost $9 billion.
That second fund has lost about 91 percent of its value this year, according to a person with direct knowledge of its performance who declined to be identified because the figures aren’t public.
It looks like Abelson got his $20 billion number by adding these publicly bandied $11 billion and $9 billion numbers.
However, with regards to the 91% loss in one fund and the total wipe-out of the other fund, is Bear Stearns referring to only the equity investors? Or were the lenders equally wiped out?
If the Bear Stearns letter regarding performance is reference to only the equity investors, then this $20 billion number bandied about is misleading. I’m assuming the creditors will step in and try to liquidate the positions, though I doubt the lenders will be whole either.
This CBS Marketwatch article highlights how Barclays (acting in the dual role of equity investor and lender) lost its equity stake but recouped its loan:
Barclays lent the fund about $200 million and later offered an additional $250 million, the Journal reported. The $200 million loan has been paid off, while the $250 million was never extended, the Journal said.
However, Barclays is now considering its options for recovering $400 million that it invested in the fund separately from the loan, the Journal reported, citing people familiar with the matter. The possibilities are a negotiated settlement or litigation.
As most people with a margin account know, your brokerage typically issues a margin call if the equity in your account falls below a minimal threshold of leverage. Though I suspect the institutional leverage game differs substantially from the retail leverage game (not the least of which is the amount of leverage hedgies get - 10x versus 2x for the small fry).
At a keg party on the roof deck of a house in Kismet on Fire Island on a Saturday night this month, Dave Mahony, 42, an unmarried psychologist who lives in Staten Island, said he had joined a share house because a female friend told him it was stocked with oodles of single women and few men.
As he sipped beer in the fading light of the sun disappearing behind the Fire Island Lighthouse, Mr. Mahony, whose light brown hair is flecked with gray, considered how his life had brought him here tonight, one of the oldest people in a crowd drinking Heineken from plastic cups. “Relationships I thought were going to last didn’t last,” he said. “And to tell you the truth, the past five years, the older I get the shorter the relationships get, and now it’s like a game of musical chairs. There’s nobody left. It’s sad.”
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