The Marlboro Man Is Free to Roam
By Will Frankenhoff March 31, 2008
Altria (NYSE: MO) completed the long-awaited spinoff of its subsidiary Philip Morris International (NYSE: PM) last Friday, and the Marlboro Man is finally free to roam the globe unfettered by the legal and marketing shackles of the U.S. domestic market.
Benefits for both the slimmer Altria and the new international company will be realized, but I think the international division will flourish on its own thanks to its leadership position in the international cigarette market and the strength and marketing potential of its global brand.
A global giantPhilip Morris International, or PMI, is the world's leading tobacco company and the third most profitable international consumer goods company. It generated revenue in excess of $55 billion and operating profit of roughly $8.9 billion in fiscal 2007.
The company sells its products in some 160 countries and owns seven of the top 15 brands in the world, including Marlboro, Parliament, Virginia Slims, and L&M. In all, PMI held a 15.6% share of the international cigarette market in 2007. The company is especially strong in the higher-margin premium segment of the market, where it estimates that it held a 52.4% share (excluding China) in 2007.
While cigarette consumption in the U.S. has been declining, the international tobacco market is an entirely different story as volume growth has been rising. I believe that PMI is well-positioned to benefit from this trend and management accordingly anticipates long-term earnings-per-share growth of 10% to 12%.
A strong and marketable brandWhether you despise smoking or are an unrepentant chain-smoker, there's no denying that Marlboro is one of the world's best-known brands. According to BusinessWeek's annual rankings report, "The Best Global Brands 2007," the Marlboro brand was worth a cool $21.3 billion, placing it 14th on the list, and ahead of such household names as American Express (NYSE: AXP) and PepsiCo (NYSE: PEP).
While some analysts are concerned with intensified competition from recent consolidation of global rivals, PMI already holds No. 2 global market share among tobacco companies. And to put the strength of the Marlboro brand in perspective, consider this: In 2007, Marlboro's volume of 311 billion units was larger than the next three best selling international brands combined. It also outsells the total combined volume of all of British American Tobacco's (NYSE: BTI) global drive brands.
I can't help but believe that PMI's brands will only increase in strength as the company is now freed from marketing and regulatory constraints that were part and parcel of being part of Altria. Further, the company has already created a number of new Marlboro-branded products targeted at local markets, like the Marlboro Mix 9 in Indonesia, Marlboro Crisp Mint and Fresh Mint for Hong Kong, and Marlboro Wides for the Mexican market.
An attractive valuationShares of Philip Morris International opened today at around $51, or roughly 16 times fiscal 2008 earnings estimates of $3.11-$3.17, while offering a dividend yield of 3.6%. (Did I mention that management has already authorized a two-year, $13 billion share buyback program?)
This valuation is fairly in line with those of its smaller competitors, British American Tobacco and Imperial Tobacco Group (NYSE: ITY). But I believe that PMI should trade at a premium to these players given the company's leadership position in the international markets, its strong global brands and the fact that management has said it expects earnings growth of 12%-14% in 2008, without the impact of any accretive acquisitions that I fully expect to happen now that PMI has its own acquisition currency and doesn't have to worry about competition concerns in the U.S.
I'm extremely bullish about the prospects of Philip Morris International and think investors should pick up a pack or two of PMI. No ID required.
Monday, March 31, 2008
Smoking Hot Or A "Sin"sational Investment?
By ANDREW BARY
NOW THAT CIGARETTE COMPANIES have gained the upper hand in their U.S. legal battles, Altria, the parent of Philip Morris, is setting free its giant overseas tobacco division, Philip Morris International. The long-awaited spin off, which occurred Friday, is a bullish development for investors in both companies, particularly the new Altria, which has room to cut costs and raise profit margins.
For the past two weeks, new Altria and Philip Morris International have been trading on a "when-issued" basis. They will begin regular trading today on the New York Stock Exchange. Altria investors will get one share of Philip Morris International for each Altria share, and "old Altria," which ended Friday at 74, will disappear. New Altria, which will keep the MO ticker, closed Friday at about 22; Philip Morris International finished at 52.
Nik Modi, a tobacco analyst at UBS, recently rated Altria a Buy and set a $30 price target. He argued Altria will best its main U.S. peers, Reynolds American (RAI) and Carolina Group (CG), with impressive 13% compound growth in earnings per share in the next three years. Carolina is the tracking stock for Lorillard, maker of Newport cigarettes.
Modi's growth target exceeds Altria's guidance of a 9% to 11% increase in 2008 earnings per share, and 8% to 10% annual growth starting in '09. He believes Altria can do better through a combination of price increases, cost reductions and stock buybacks. He notes that tobacco investors like cost-cutting stories, citing the strong showing in recent years of Reynolds American, the No. 2 U.S. cigarette producer with such brands as Camel, Winston and Salem.
Facing limited growth opportunities in the U.S., where cigarette consumption is declining at a 3% to 4% annual rate, new Altria is apt to focus on returning cash to shareholders through dividends and stock buybacks. Altria aims to pay out 75% of its earnings in dividends.
Both Altria and Philip Morris International will have strong balance sheets, with modest debt and huge annual cash flow. New Altria's stake in SABMiller, now worth $9 billion, or more than $4 per Altria share, could be monetized in coming years. The company will pay a hefty $1.16 a share in annual dividends, and aims to buy back $7.5 billion of stock in the next two years. New Altria also has an ambitious cost-reduction program that already has yielded $300 million in annual savings and could deliver another $700 million by 2010.
Altria has a dividend yield of 5.3% and a 2008 forward P/E of 13.3. Phillip Morris has a dividend yield of 3.5% and a 2008 forward P/E of 16.4. If you don't mind investing in "sin" this might be a pretty good investment.
NOW THAT CIGARETTE COMPANIES have gained the upper hand in their U.S. legal battles, Altria, the parent of Philip Morris, is setting free its giant overseas tobacco division, Philip Morris International. The long-awaited spin off, which occurred Friday, is a bullish development for investors in both companies, particularly the new Altria, which has room to cut costs and raise profit margins.
For the past two weeks, new Altria and Philip Morris International have been trading on a "when-issued" basis. They will begin regular trading today on the New York Stock Exchange. Altria investors will get one share of Philip Morris International for each Altria share, and "old Altria," which ended Friday at 74, will disappear. New Altria, which will keep the MO ticker, closed Friday at about 22; Philip Morris International finished at 52.
Nik Modi, a tobacco analyst at UBS, recently rated Altria a Buy and set a $30 price target. He argued Altria will best its main U.S. peers, Reynolds American (RAI) and Carolina Group (CG), with impressive 13% compound growth in earnings per share in the next three years. Carolina is the tracking stock for Lorillard, maker of Newport cigarettes.
Modi's growth target exceeds Altria's guidance of a 9% to 11% increase in 2008 earnings per share, and 8% to 10% annual growth starting in '09. He believes Altria can do better through a combination of price increases, cost reductions and stock buybacks. He notes that tobacco investors like cost-cutting stories, citing the strong showing in recent years of Reynolds American, the No. 2 U.S. cigarette producer with such brands as Camel, Winston and Salem.
Facing limited growth opportunities in the U.S., where cigarette consumption is declining at a 3% to 4% annual rate, new Altria is apt to focus on returning cash to shareholders through dividends and stock buybacks. Altria aims to pay out 75% of its earnings in dividends.
Both Altria and Philip Morris International will have strong balance sheets, with modest debt and huge annual cash flow. New Altria's stake in SABMiller, now worth $9 billion, or more than $4 per Altria share, could be monetized in coming years. The company will pay a hefty $1.16 a share in annual dividends, and aims to buy back $7.5 billion of stock in the next two years. New Altria also has an ambitious cost-reduction program that already has yielded $300 million in annual savings and could deliver another $700 million by 2010.
Altria has a dividend yield of 5.3% and a 2008 forward P/E of 13.3. Phillip Morris has a dividend yield of 3.5% and a 2008 forward P/E of 16.4. If you don't mind investing in "sin" this might be a pretty good investment.
Friday, March 28, 2008
Top 30 CEOs
Barrons has listed the world's top 30 CEOs. Why is this important? It will give us a hint of where to invest our money. Twenty-one of the CEOs are returnees, while nine are new to the list this year. From a personal standpoint seven of the CEOs represent companies that I am invested in.The companies I'm invested in include
Research In Motion, Merck, HP, Coach, GE, Apple, and Costco.
Thursday, March 27, 2008
GE Cashes Out
APAmerican Express Buying GE Money UnitThursday March 27, 8:57 am ET
American Express to Acquire GE Money's Corporate Payment Services Division for $1.1 Billion
NEW YORK (AP) -- American Express Co. said Thursday it will acquire the corporate payment services division of GE Money, a unit of General Electric Co., for $1.1 billion in cash.
The corporate payment services division handles commercial card and corporate purchasing transactions, and serves more than 300 corporate clients, including GE. GE agreed to sign a multiyear contract to become a client of American Express' new division.
The corporate payment services unit generated more than $14 billion in purchase volume in 2007.
The acquisition is part of American Express' strategy to grow its payments business. The unit being acquired is similar to American Express' commercial card business, which handles work expenses by employees of mid- and large-sized companies.
American Express said the deal will add to revenue immediately, but reduce earnings slightly in the first few years after the deal is completed. The expectation for a small decline in earnings is based on an expectation the cash used to buy the unit would have otherwise been used to repurchase common stock.
The deal is expected to close by the end of the month.
It was the second deal GE was involved in Thursday. GE Money and Commercial Finance agreed to exchange certain European assets with Banco Santander SA in a deal worth about 1 billion euros ($1.57 billion).
Shares of GE rose 7 cents to $37.20 in premarket trading. American Express shares added 55 cents to $45.91.
American Express to Acquire GE Money's Corporate Payment Services Division for $1.1 Billion
NEW YORK (AP) -- American Express Co. said Thursday it will acquire the corporate payment services division of GE Money, a unit of General Electric Co., for $1.1 billion in cash.
The corporate payment services division handles commercial card and corporate purchasing transactions, and serves more than 300 corporate clients, including GE. GE agreed to sign a multiyear contract to become a client of American Express' new division.
The corporate payment services unit generated more than $14 billion in purchase volume in 2007.
The acquisition is part of American Express' strategy to grow its payments business. The unit being acquired is similar to American Express' commercial card business, which handles work expenses by employees of mid- and large-sized companies.
American Express said the deal will add to revenue immediately, but reduce earnings slightly in the first few years after the deal is completed. The expectation for a small decline in earnings is based on an expectation the cash used to buy the unit would have otherwise been used to repurchase common stock.
The deal is expected to close by the end of the month.
It was the second deal GE was involved in Thursday. GE Money and Commercial Finance agreed to exchange certain European assets with Banco Santander SA in a deal worth about 1 billion euros ($1.57 billion).
Shares of GE rose 7 cents to $37.20 in premarket trading. American Express shares added 55 cents to $45.91.
Paychex Earnings Report
SAN FRANCISCO (MarketWatch) --
PAYX 32.88, -0.41, -1.2%) on Wednesday reported a third-quarter profit of $142.5 million, or 39 cents a share, to meet the estimates of analysts surveyed by FactSet Research. The payroll services provider reported revenue of $532.2 million, slightly below analysts $532.8 million estimate. During the same period a year ago, Paychex earned $126.6 million, or 33 cents a share, on $485.3 million in sales. The company said that for its entire fiscal year, it expects its earnings to rise between 11% and 13%, and its sales to grow 9% to 11% over the prior year, when it earned $531.5 million on $1.89 billion in revenue.
PAYX 32.88, -0.41, -1.2%) on Wednesday reported a third-quarter profit of $142.5 million, or 39 cents a share, to meet the estimates of analysts surveyed by FactSet Research. The payroll services provider reported revenue of $532.2 million, slightly below analysts $532.8 million estimate. During the same period a year ago, Paychex earned $126.6 million, or 33 cents a share, on $485.3 million in sales. The company said that for its entire fiscal year, it expects its earnings to rise between 11% and 13%, and its sales to grow 9% to 11% over the prior year, when it earned $531.5 million on $1.89 billion in revenue.
Wednesday, March 26, 2008
The Goose That Laid The Golden Egg - Part III
Aesop's Fable
A man and his wife had the good fortune to possess a goose which laid a golden egg every day. Lucky though they were, they soon began to think they were not getting rich fast enough, and, imagining the bird must be made of gold inside, they decided to kill it in order to secure the whole store of precious metal at once. But when they cut it open they found it was just like any other goose. Thus, they neither got rich all at once, as they had hoped, nor enjoyed any longer the daily addition to their wealth.
The goose is the free market economy that continues to lay the golden eggs of prosperity.
The government views the goose as a never ending source of money. Not just money that is needed for appropriate role of government (Article I Section 8 of the Constitution, i.e. national defense, regulation of commerce, coining money) but money that it is doled out to affect every segment of society. So there is constant pressure to raise taxes to fund a never-ending intrusion into the lives of Americans. The tax and spend behavior of the president and congress, past and future, are killing the goose. Ronald Reagan summed up government's view of the economy like this: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.
Businesses and some of the people that run them also view the goose as a never ending source of money. Not just money that is needed to run and expand a business, not just money that is needed to pay salaries, invest in new equipment or expand into new markets but ever increasingly to pay themselves exorbitant salaries and bonuses. This is the new American greed.
Take Dennis Kozlowski as a poster boy for American greed.
Dennis Kozlowski takes dull little Tyco and creates a brand name that's making its stockholders rich. Wall Street takes notice. Kozlowski's winning smile peers out from a Business Week cover. He becomes one of the country's highest paid CEOs.
Kozlowski goes on a buying spree. $4 million for a Monet painting. $2 million for a birthday party, and the infamous $6000 shower curtain. Authorities are suspicious. Kozlowski is accused of plundering the company that made him rich.
Once a CEO, now a convicted felon, Kozlowski says he's innocent...his only crime, making too much money and drawing the ire of Tyco's board of directors. Kozlowski speaks out from prison and tells his story of American Greed.
A sometimes all too greedy corporate CEO and other executives can kill the goose that lays the golden eggs to the harm of not only themselves but to employees, employee families, and stockholders, the ones that actually own the company.
And finally just everyday people can get caught up in the hysteria of the goose that lays golden eggs. The two best examples of this in recent years have been the .COM bubble of the late 1990's and early 2000's, and the overheated housing boom of the last few years. As investors we wanted more and more golden eggs from the goose, not just one a day but several everyday. We weren't satisfied with normal golden eggs (returns of 8-12% per year), no we wanted returns of 20-30-40% or more. But we killed or severely maimed the goose. Did we learn our lesson about the goose. Sadly, no. It wasn't but a few years later when we were expecting our homes to increase by 10-20% per year. We then borrowed against the supposed increase and spent it on things we really couldn't afford. But alas the goose has died and there are no more golden eggs. Greed has won out again.
The Moral
Much wants more yet often loses all.
Greed destroys the source of good.
Think before you act.
A man and his wife had the good fortune to possess a goose which laid a golden egg every day. Lucky though they were, they soon began to think they were not getting rich fast enough, and, imagining the bird must be made of gold inside, they decided to kill it in order to secure the whole store of precious metal at once. But when they cut it open they found it was just like any other goose. Thus, they neither got rich all at once, as they had hoped, nor enjoyed any longer the daily addition to their wealth.
The goose is the free market economy that continues to lay the golden eggs of prosperity.
The government views the goose as a never ending source of money. Not just money that is needed for appropriate role of government (Article I Section 8 of the Constitution, i.e. national defense, regulation of commerce, coining money) but money that it is doled out to affect every segment of society. So there is constant pressure to raise taxes to fund a never-ending intrusion into the lives of Americans. The tax and spend behavior of the president and congress, past and future, are killing the goose. Ronald Reagan summed up government's view of the economy like this: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.
Businesses and some of the people that run them also view the goose as a never ending source of money. Not just money that is needed to run and expand a business, not just money that is needed to pay salaries, invest in new equipment or expand into new markets but ever increasingly to pay themselves exorbitant salaries and bonuses. This is the new American greed.
Take Dennis Kozlowski as a poster boy for American greed.
Dennis Kozlowski takes dull little Tyco and creates a brand name that's making its stockholders rich. Wall Street takes notice. Kozlowski's winning smile peers out from a Business Week cover. He becomes one of the country's highest paid CEOs.
Kozlowski goes on a buying spree. $4 million for a Monet painting. $2 million for a birthday party, and the infamous $6000 shower curtain. Authorities are suspicious. Kozlowski is accused of plundering the company that made him rich.
Once a CEO, now a convicted felon, Kozlowski says he's innocent...his only crime, making too much money and drawing the ire of Tyco's board of directors. Kozlowski speaks out from prison and tells his story of American Greed.
A sometimes all too greedy corporate CEO and other executives can kill the goose that lays the golden eggs to the harm of not only themselves but to employees, employee families, and stockholders, the ones that actually own the company.
And finally just everyday people can get caught up in the hysteria of the goose that lays golden eggs. The two best examples of this in recent years have been the .COM bubble of the late 1990's and early 2000's, and the overheated housing boom of the last few years. As investors we wanted more and more golden eggs from the goose, not just one a day but several everyday. We weren't satisfied with normal golden eggs (returns of 8-12% per year), no we wanted returns of 20-30-40% or more. But we killed or severely maimed the goose. Did we learn our lesson about the goose. Sadly, no. It wasn't but a few years later when we were expecting our homes to increase by 10-20% per year. We then borrowed against the supposed increase and spent it on things we really couldn't afford. But alas the goose has died and there are no more golden eggs. Greed has won out again.
The Moral
Much wants more yet often loses all.
Greed destroys the source of good.
Think before you act.
Tuesday, March 25, 2008
The Medicare and Social Security Mess
Thanks to our politicians (Republicans and Democrats) Medicare and Social Security are going bankrupt and will be unable to meet future obligations (see below). Taxes must be raised on taxpayers and/or cuts made to beneficiaries. What's the solution? My answer to this is to means test benefits for the wealthy, cut some benefits (for example the $250.00 SS death benefit), raise Medicare and SS payroll taxes but offset the tax increase with an accompanying decrease in the income tax rate. The decrease in the income tax rate must be in conjunction with a decrease in discretionary program funding.
Paulson: Action needed on Social Security
Federal government will need to pay back what it owes program starting in 2017, according to report released Tuesday.
NEW YORK (CNNMoney.com) -- Treasury Secretary Henry Paulson, saying that Social Security is "financially unsustainable," called Tuesday for quick action to keep the system strong and released a report detailing the program's funding shortfalls.
The federal government will have to start paying back what it owes the Social Security trust fund in 2017 so the program can continue paying 100% of benefits. By 2041, if the system is left unchanged, Social Security will only be able to pay out 78% of benefits promised to future retirees.
Those are two key estimates in the Social Security and Medicare trustees' 2008 annual report.
Shoring up Social Security is one of the main economic issues that will face the next president. Most proposals involve raising taxes or reducing benefits. Democrats typically have opposed benefit reductions while Republicans have opposed tax increases.
"This year's Social Security Report again demonstrates that the Social Security program is financially unsustainable and requires reform," Paulson said at a briefing. "The sooner we take action ... the less drastic needed changes will be."
For years, the Social Security program has been taking in more in payroll taxes from existing workers than it needed to fund benefits. The government borrowed that surplus and promised to pay it back with interest by issuing special issue bonds to the program.
But the proceeds from those bonds are finite, which is why the trustees estimate that the trust fund will run dry by 2041. Without that cushion, Social Security would only be able to pay out the money it collects in payroll taxes.
Demographics are a major reason for the funding shortfall. The number of workers, compared to retirees, has begun to shrink. That means the system will produce a smaller surplus, then none at all, and eventually it won't be able to pay out all benefits promised to future retirees.
Last year, the trustees also estimated that the government would need to start paying back the program in 2017, and that the Social Security trust fund would be exhausted in 2041.
Currently, the first $102,000 of wages are subject to the 12.4% payroll tax that funds Social Security. Typically, half the tax is paid by workers, and the other half is paid by employers.
To keep the system solvent over the next 75 years, the trustees estimated that the Social Security payroll tax rate would need to increase to 14.1%, up from the current 12.4%.
Medicare a bigger headache
Medicare, which was also addressed in Tuesday's report, has an even larger and more immediate funding deficit to address.
The Medicare program is already taking in less than it has committed to pay out, and the trustees forecast that the Medicare trust fund will be depleted by 2019, at which point Medicare would only be able to pay out 78% of costs.
Medicare was designed to be funded by three sources: payroll taxes; Medicare premiums paid by beneficiaries; and general revenue or money from income taxes.
The payroll tax portion of that funding comes from a 2.9% tax on all wages - half of which is paid by workers and half by their employers. To make Medicare solvent over the next 75 years, the trustees estimate that 6.44% of wages would need to be taxed.
As they did last year, the trustees issued a funding warning in their 2008 report, which they're required to do by law when they anticipate that general revenues will have to fund more than 45 percent of Medicare's total expenditures within the next six years.
Paulson: Action needed on Social Security
Federal government will need to pay back what it owes program starting in 2017, according to report released Tuesday.
NEW YORK (CNNMoney.com) -- Treasury Secretary Henry Paulson, saying that Social Security is "financially unsustainable," called Tuesday for quick action to keep the system strong and released a report detailing the program's funding shortfalls.
The federal government will have to start paying back what it owes the Social Security trust fund in 2017 so the program can continue paying 100% of benefits. By 2041, if the system is left unchanged, Social Security will only be able to pay out 78% of benefits promised to future retirees.
Those are two key estimates in the Social Security and Medicare trustees' 2008 annual report.
Shoring up Social Security is one of the main economic issues that will face the next president. Most proposals involve raising taxes or reducing benefits. Democrats typically have opposed benefit reductions while Republicans have opposed tax increases.
"This year's Social Security Report again demonstrates that the Social Security program is financially unsustainable and requires reform," Paulson said at a briefing. "The sooner we take action ... the less drastic needed changes will be."
For years, the Social Security program has been taking in more in payroll taxes from existing workers than it needed to fund benefits. The government borrowed that surplus and promised to pay it back with interest by issuing special issue bonds to the program.
But the proceeds from those bonds are finite, which is why the trustees estimate that the trust fund will run dry by 2041. Without that cushion, Social Security would only be able to pay out the money it collects in payroll taxes.
Demographics are a major reason for the funding shortfall. The number of workers, compared to retirees, has begun to shrink. That means the system will produce a smaller surplus, then none at all, and eventually it won't be able to pay out all benefits promised to future retirees.
Last year, the trustees also estimated that the government would need to start paying back the program in 2017, and that the Social Security trust fund would be exhausted in 2041.
Currently, the first $102,000 of wages are subject to the 12.4% payroll tax that funds Social Security. Typically, half the tax is paid by workers, and the other half is paid by employers.
To keep the system solvent over the next 75 years, the trustees estimated that the Social Security payroll tax rate would need to increase to 14.1%, up from the current 12.4%.
Medicare a bigger headache
Medicare, which was also addressed in Tuesday's report, has an even larger and more immediate funding deficit to address.
The Medicare program is already taking in less than it has committed to pay out, and the trustees forecast that the Medicare trust fund will be depleted by 2019, at which point Medicare would only be able to pay out 78% of costs.
Medicare was designed to be funded by three sources: payroll taxes; Medicare premiums paid by beneficiaries; and general revenue or money from income taxes.
The payroll tax portion of that funding comes from a 2.9% tax on all wages - half of which is paid by workers and half by their employers. To make Medicare solvent over the next 75 years, the trustees estimate that 6.44% of wages would need to be taxed.
As they did last year, the trustees issued a funding warning in their 2008 report, which they're required to do by law when they anticipate that general revenues will have to fund more than 45 percent of Medicare's total expenditures within the next six years.
Let's Give The Government A Big Thanks - NOT!
By MARTIN CRUTSINGER, AP Economics Writer
45 minutes ago
WASHINGTON - Trustees for the government's two biggest benefit programs warned Tuesday that Social Security and Medicare are facing "enormous challenges" with the threat to Medicare's solvency far more severe.
The trustees, issuing a once-a-year analysis of the government's two biggest benefit programs, said the resources in the Social Security trust fund will be depleted by 2041. The reserves in the Medicare trust fund that pays hospital benefits were projected to be wiped out by 2019.
Both those dates were the same as in last year's report. But the trustees warned that financial pressures will begin much sooner when the programs begin paying out more in benefits each year than they collect in payroll taxes. For Medicare, that threshhold is projected to be reached this year and for Social Security it is projected to occur in 2017.
The first year that payments will exceed income for Social Security will occur in 2017, just nine years from now, reflecting growing demands from the retirement of 78 million baby boomers. Medicare is projected to pay out more than it receives in income starting this year.
"The financial difficulties facing Social Security and Medicare pose enormous challenges," the trustees said in their report. "The sooner these challenges are addressed, the more varied and less disruptive their solutions can be."
Treasury Secretary Henry Paulson, one of the trustees, warned that the country was facing a fiscal train wreck unless something is done.
"Without change, rising costs will drive government spending to unprecedented levels, consume nearly all projected federal revenues and threaten America's future prosperity," Paulson said in releasing the new report. "Our nation needs a bipartisan effort to strengthen both programs for future retirees."
President Bush, who wanted to make overhauling Social Security his top domestic priority in his second term, tapped Paulson to lead that effort. However, Paulson has been unable to forge a consensus with Democrats, who took control of Congress in 2006.
Democrats contend that Bush lost valuable time after his 2004 re-election pushing a plan to allow younger workers to direct their payroll tax contributions into private accounts, an idea that went nowhere in Congress.
While the Social Security trust fund will have resources until 2041, the more critical date in terms of government revenues will occur in 2017. That is the date that Social Security will have to pay out more in benefits than it collects in payroll taxes. At present, Social Security is running large surpluses that are going to fund the rest of government.
However, in 2017, the situation will be reversed and the government will have to start filling the gap between what Social Security will be collecting in payroll taxes and what it must pay out. Technically, it will do that by redeeming the non-marketable Treasury securities that are held in the trust fund. However, those bonds are simply government IOUs.
To get the money to pay the benefits, the government will have to borrow or close the gap in other ways such as cutting benefits or raising taxes
45 minutes ago
WASHINGTON - Trustees for the government's two biggest benefit programs warned Tuesday that Social Security and Medicare are facing "enormous challenges" with the threat to Medicare's solvency far more severe.
The trustees, issuing a once-a-year analysis of the government's two biggest benefit programs, said the resources in the Social Security trust fund will be depleted by 2041. The reserves in the Medicare trust fund that pays hospital benefits were projected to be wiped out by 2019.
Both those dates were the same as in last year's report. But the trustees warned that financial pressures will begin much sooner when the programs begin paying out more in benefits each year than they collect in payroll taxes. For Medicare, that threshhold is projected to be reached this year and for Social Security it is projected to occur in 2017.
The first year that payments will exceed income for Social Security will occur in 2017, just nine years from now, reflecting growing demands from the retirement of 78 million baby boomers. Medicare is projected to pay out more than it receives in income starting this year.
"The financial difficulties facing Social Security and Medicare pose enormous challenges," the trustees said in their report. "The sooner these challenges are addressed, the more varied and less disruptive their solutions can be."
Treasury Secretary Henry Paulson, one of the trustees, warned that the country was facing a fiscal train wreck unless something is done.
"Without change, rising costs will drive government spending to unprecedented levels, consume nearly all projected federal revenues and threaten America's future prosperity," Paulson said in releasing the new report. "Our nation needs a bipartisan effort to strengthen both programs for future retirees."
President Bush, who wanted to make overhauling Social Security his top domestic priority in his second term, tapped Paulson to lead that effort. However, Paulson has been unable to forge a consensus with Democrats, who took control of Congress in 2006.
Democrats contend that Bush lost valuable time after his 2004 re-election pushing a plan to allow younger workers to direct their payroll tax contributions into private accounts, an idea that went nowhere in Congress.
While the Social Security trust fund will have resources until 2041, the more critical date in terms of government revenues will occur in 2017. That is the date that Social Security will have to pay out more in benefits than it collects in payroll taxes. At present, Social Security is running large surpluses that are going to fund the rest of government.
However, in 2017, the situation will be reversed and the government will have to start filling the gap between what Social Security will be collecting in payroll taxes and what it must pay out. Technically, it will do that by redeeming the non-marketable Treasury securities that are held in the trust fund. However, those bonds are simply government IOUs.
To get the money to pay the benefits, the government will have to borrow or close the gap in other ways such as cutting benefits or raising taxes
The Goose That Laid The Golden Egg - Part II
By Richard Cummings -
Once there was a goose that laid gold eggs, and the people in the land of Consumption grew rich from them. The goose was happy because he was well fed and the people were happy because the golden eggs kept coming.
But one day, an angry mob demanded to know why the goose had to eat so much to lay those golden eggs.
"The goose is ripping us off!" they shouted. "In fact, it is the biggest rip-off in history."
These people called themselves "populists" because they claimed to speak for the people.
Soon, others wanted to know why the goose had to eat so much and they started shouting:
"Less food for the goose! More eggs for the people!"
The goose waddled over to the bowl in which its food was usually found, and discovered some scraps. It ate, looked sad, and sat down in a dark corner of the yard.
"The goose’s feathers are falling out," a liberal shouted. "This should not be allowed. A law must be passed forbidding this."
And so it was, but the feathers fell out anyway.
"The goose is polluting the water with its feces," an environmentalist shouted. "A law must be passed forbidding this."
And so it was, but the goose continued to relieve itself, because it had no choice. Less food was given to the goose to reduce the waste, and the goose grew weaker. There were fewer and fewer golden eggs, and people grew angrier.
"I’m tired of cleaning up the yard," a union leader shouted. "I will not do it unless I get more eggs."
But there were not enough eggs, and the yard was left to grow filthy. The goose became morose and stopped laying eggs altogether.
"It costs too much to feed the goose at all, now that there are no eggs," the mob shouted. "What shall we do without golden eggs to sell that we might buy food?"
The communist wolf, which everyone had believed to be extinct but which had been reintroduced by the environmentalists, stirred and licked its chops. He grinned and said:
"There is no problem. There is plenty for all of us to eat. We will seize the goose and kill it. Then, we can share the parts. No one will go hungry, although a few will have less than before."
This they did, the communist wolf leading the way, followed by the liberal (who denied knowing the wolf), the populists, the environmentalists, and the union leader. When the goose was slaughtered, plucked clean and roasted, not a tear was shed, for he had been regarded as a selfish bird. There was great celebration as every inch of his flesh was devoured, with the wolf leading the singing and cheering.
The next day, the people noticed that they had nothing more to eat, that there was no goose to lay golden eggs for them, and that there was no way to buy food.
"What shall we do now?" they cried out. The populists had no answer. Neither did the liberal, nor the environmentalists, nor the union leader.
Then, they all looked at the wolf, who grinned again.
"You told us to kill the goose and eat him," they shouted with rage. "Now, we have no goose, no golden eggs, no nothing. You are to blame!"
And they picked up stones and marched toward the wolf, who bared his huge, sharp teeth.
"You may have no golden eggs, no goose and no food. But I have all that I will ever need," he sneered.
And he devoured each and every one of them. When there wasn’t a soul left in the land of Consumption besides the wolf, he rubbed his belly, found the last comfortable spot in the yard, and went to sleep. Forever.
Moral: The goose has great nobility when soaring in flight but can get cantankerous when his detractors clip his wings and force him to stay on the ground. But those detractors eventually are forced to acknowledge that life without him is a pain in the neck. In fact, it is impossible.
Once there was a goose that laid gold eggs, and the people in the land of Consumption grew rich from them. The goose was happy because he was well fed and the people were happy because the golden eggs kept coming.
But one day, an angry mob demanded to know why the goose had to eat so much to lay those golden eggs.
"The goose is ripping us off!" they shouted. "In fact, it is the biggest rip-off in history."
These people called themselves "populists" because they claimed to speak for the people.
Soon, others wanted to know why the goose had to eat so much and they started shouting:
"Less food for the goose! More eggs for the people!"
The goose waddled over to the bowl in which its food was usually found, and discovered some scraps. It ate, looked sad, and sat down in a dark corner of the yard.
"The goose’s feathers are falling out," a liberal shouted. "This should not be allowed. A law must be passed forbidding this."
And so it was, but the feathers fell out anyway.
"The goose is polluting the water with its feces," an environmentalist shouted. "A law must be passed forbidding this."
And so it was, but the goose continued to relieve itself, because it had no choice. Less food was given to the goose to reduce the waste, and the goose grew weaker. There were fewer and fewer golden eggs, and people grew angrier.
"I’m tired of cleaning up the yard," a union leader shouted. "I will not do it unless I get more eggs."
But there were not enough eggs, and the yard was left to grow filthy. The goose became morose and stopped laying eggs altogether.
"It costs too much to feed the goose at all, now that there are no eggs," the mob shouted. "What shall we do without golden eggs to sell that we might buy food?"
The communist wolf, which everyone had believed to be extinct but which had been reintroduced by the environmentalists, stirred and licked its chops. He grinned and said:
"There is no problem. There is plenty for all of us to eat. We will seize the goose and kill it. Then, we can share the parts. No one will go hungry, although a few will have less than before."
This they did, the communist wolf leading the way, followed by the liberal (who denied knowing the wolf), the populists, the environmentalists, and the union leader. When the goose was slaughtered, plucked clean and roasted, not a tear was shed, for he had been regarded as a selfish bird. There was great celebration as every inch of his flesh was devoured, with the wolf leading the singing and cheering.
The next day, the people noticed that they had nothing more to eat, that there was no goose to lay golden eggs for them, and that there was no way to buy food.
"What shall we do now?" they cried out. The populists had no answer. Neither did the liberal, nor the environmentalists, nor the union leader.
Then, they all looked at the wolf, who grinned again.
"You told us to kill the goose and eat him," they shouted with rage. "Now, we have no goose, no golden eggs, no nothing. You are to blame!"
And they picked up stones and marched toward the wolf, who bared his huge, sharp teeth.
"You may have no golden eggs, no goose and no food. But I have all that I will ever need," he sneered.
And he devoured each and every one of them. When there wasn’t a soul left in the land of Consumption besides the wolf, he rubbed his belly, found the last comfortable spot in the yard, and went to sleep. Forever.
Moral: The goose has great nobility when soaring in flight but can get cantankerous when his detractors clip his wings and force him to stay on the ground. But those detractors eventually are forced to acknowledge that life without him is a pain in the neck. In fact, it is impossible.
Monday, March 24, 2008
Paychex Earnings
Paychex earnings report is due Wednesday, March 26, 2008. Consensus estimste is $0.39 per share vs. $0.35 a year ago.
The Goose That Laid Golden Eggs - Part I
Aesop's FableA man and his wife had the good fortune to possess a goose which laid a golden egg every day. Lucky though they were, they soon began to think they were not getting rich fast enough, and, imagining the bird must be made of gold inside, they decided to kill it in order to secure the whole store of precious metal at once. But when they cut it open they found it was just like any other goose. Thus,they neither got rich all at once, as they had hoped, nor enjoyed any longer the daily addition to their wealth.
The Morals
Much wants more yet often loses all.
Greed destroys the source of good.
Think before you act.
In the English language, "Killing the golden goose" has become a metaphor for any short-sighted action that may bring an immediate reward, but will ultimately prove disastrous.
Part II and Part III to follow.
Sunday, March 23, 2008
Are There Anymore Cockroaches?
Fears crawl into minds of investors
Call it the "cockroach theory." (MarksJarvis)
It's the assumption among investors that if one cockroach takes you by surprise, there are more to come, even if you see no sign of another at the moment. You apply the same thinking to investing as you apply at home. In other words, on some unsuspecting day you are startled by a lone cockroach darting across your floor. You might crush it, but then for days afterward you are leery when you turn on a light at night or open the cupboard under the sink. Anyone with experience with cockroaches knows that if you spot one, there are probably more hiding, ready to surface and rattle you when you least expect it. Likewise, investors worry when financial messes seem to surface. And they now are on guard, fearful of hidden cockroaches related to years of lax lending practices and tremendous borrowing by everyone from financially stressed home buyers to overreaching private-equity firms and hedge funds. The cockroaches that surfaced last year are subprime mortgages and securities based on those mortgages, which are loans to home buyers with weak credit. Some of the worrisome securities are called CDOs, or asset-backed securities called collateralized debt obligations. The value of these securities is based on homeowners making monthly mortgage payments on schedule. But lenders went too far with subprime mortgages, granting them to people who obviously could not afford them. And with defaults on mortgages rising, the securities have plunged in value.
I'm betting that there are few cockroaches left, if any. That's why it's a good time to invest. But hey, so what if there are one or two cockroaches left.
Call it the "cockroach theory." (MarksJarvis)
It's the assumption among investors that if one cockroach takes you by surprise, there are more to come, even if you see no sign of another at the moment. You apply the same thinking to investing as you apply at home. In other words, on some unsuspecting day you are startled by a lone cockroach darting across your floor. You might crush it, but then for days afterward you are leery when you turn on a light at night or open the cupboard under the sink. Anyone with experience with cockroaches knows that if you spot one, there are probably more hiding, ready to surface and rattle you when you least expect it. Likewise, investors worry when financial messes seem to surface. And they now are on guard, fearful of hidden cockroaches related to years of lax lending practices and tremendous borrowing by everyone from financially stressed home buyers to overreaching private-equity firms and hedge funds. The cockroaches that surfaced last year are subprime mortgages and securities based on those mortgages, which are loans to home buyers with weak credit. Some of the worrisome securities are called CDOs, or asset-backed securities called collateralized debt obligations. The value of these securities is based on homeowners making monthly mortgage payments on schedule. But lenders went too far with subprime mortgages, granting them to people who obviously could not afford them. And with defaults on mortgages rising, the securities have plunged in value.
I'm betting that there are few cockroaches left, if any. That's why it's a good time to invest. But hey, so what if there are one or two cockroaches left.
Friday, March 21, 2008
Bad Greed, Bad Greed
My Take on Greed
Greed came close to throwing the entire country into an economic recession. But greed has its upside too.
By Fred W. Frailey, Editor
From Kiplinger's Personal Finance magazine, April 2008
Lately, I've been thinking about greed. In our capitalist system, it does a lot of good by prodding us to become successful financially. But it can also do a lot of harm. People break laws under the influence of greed -- or they do only what's best for themselves, at the expense of everyone else.
Want some examples? Out of greed, mortgage bankers made home loans to people with poor credit histories, then immediately sold the loans. Now when borrowers default, it's somebody else's problem.
Out of greed, Wall Street's investment bankers packaged the same loans in ways that earned the securities undeserved investment-grade ratings, then sold them to eager clients. As those securities are now downgraded to junk, they become pretty close to worthless.
Four of the five biggest firms on the Street -- Bear Stearns, Lehman Brothers, Merrill Lynch and Morgan Stanley -- recently took losses in the tens of billions of dollars for subprime skeletons in their own closets.
So what did greed accomplish? It destroyed the share prices of the investment banks, punishing those of you who invested in them. It cost thousands of employees their jobs as the firms downsized. It at least came close to throwing the entire country into an economic recession, by causing the financial machinery to seize up.
And yet, the four investment banks, plus Goldman Sachs (which didn't underwrite securities that contained subprime-mortgage loans), handed out year-end bonuses in 2007 totaling $39 billion -- that's right, billion. That's more than three times the combined profits of all five firms last year. Bloomberg News reports that Wall Street firms will pay the best 2007 bonuses ever, despite massive loss in the public market value of their securities. Specifically, the five biggest Wall Street firms will pay 6% higher bonuses totaling $38 billion to be spread among their 186,000 workers — an average of $201,500 per employee.
Bloomberg News, which recently revealed these interesting facts, quotes an executive recruiter: "It's critical that pay is still there or you're going to lose really good people." Let me get this straight: In reckless pursuit of underwriting profits, the executives and talented people at four firms almost brought down their companies and the U.S. economy -- and their reward is an even bigger bonus pool so they won't jump ship?
Still, I think greed can be good. Bill Gross has spent his adult life building Pimco, in Newport Beach, Cal., into a bond-trading megabusiness. As its co-founder and managing partner, he has amassed a net worth of $1.3 billion, according to Forbes magazine. And now he and his wife, Sue, are happily giving it away through their family foundation.
Can greed be good? No, greed is never good. The examples of a Bill Gross, Warren Buffet, or Bill Gates are not examples of greed but one of grace and compassion.
Greed came close to throwing the entire country into an economic recession. But greed has its upside too.
By Fred W. Frailey, Editor
From Kiplinger's Personal Finance magazine, April 2008
Lately, I've been thinking about greed. In our capitalist system, it does a lot of good by prodding us to become successful financially. But it can also do a lot of harm. People break laws under the influence of greed -- or they do only what's best for themselves, at the expense of everyone else.
Want some examples? Out of greed, mortgage bankers made home loans to people with poor credit histories, then immediately sold the loans. Now when borrowers default, it's somebody else's problem.
Out of greed, Wall Street's investment bankers packaged the same loans in ways that earned the securities undeserved investment-grade ratings, then sold them to eager clients. As those securities are now downgraded to junk, they become pretty close to worthless.
Four of the five biggest firms on the Street -- Bear Stearns, Lehman Brothers, Merrill Lynch and Morgan Stanley -- recently took losses in the tens of billions of dollars for subprime skeletons in their own closets.
So what did greed accomplish? It destroyed the share prices of the investment banks, punishing those of you who invested in them. It cost thousands of employees their jobs as the firms downsized. It at least came close to throwing the entire country into an economic recession, by causing the financial machinery to seize up.
And yet, the four investment banks, plus Goldman Sachs (which didn't underwrite securities that contained subprime-mortgage loans), handed out year-end bonuses in 2007 totaling $39 billion -- that's right, billion. That's more than three times the combined profits of all five firms last year. Bloomberg News reports that Wall Street firms will pay the best 2007 bonuses ever, despite massive loss in the public market value of their securities. Specifically, the five biggest Wall Street firms will pay 6% higher bonuses totaling $38 billion to be spread among their 186,000 workers — an average of $201,500 per employee.
Bloomberg News, which recently revealed these interesting facts, quotes an executive recruiter: "It's critical that pay is still there or you're going to lose really good people." Let me get this straight: In reckless pursuit of underwriting profits, the executives and talented people at four firms almost brought down their companies and the U.S. economy -- and their reward is an even bigger bonus pool so they won't jump ship?
Still, I think greed can be good. Bill Gross has spent his adult life building Pimco, in Newport Beach, Cal., into a bond-trading megabusiness. As its co-founder and managing partner, he has amassed a net worth of $1.3 billion, according to Forbes magazine. And now he and his wife, Sue, are happily giving it away through their family foundation.
Can greed be good? No, greed is never good. The examples of a Bill Gross, Warren Buffet, or Bill Gates are not examples of greed but one of grace and compassion.
Nike - Swoosh
Nike Profit Tops Forecasts on Strong Overseas Sales
By CNBC.com with Wires 19 Mar 2008 05:02 PM ET
Nike reported a third-quarter profit that easily beat expectations, helped by strong international sales, especially in Asia, of shoes and clothing.
The world's largest maker of athletic footwear and apparel said a weak dollar helped contributed to the 16 percent gain in third-quarter sales, while fatter margins and lower costs boosted profit.
Earnings increased to $463.8 million, or 92 cents per share, from $350.8 million, or 68 cents per share, a year earlier. Total sales jumped 16 percent to $4.5 billion.
A consensus forecast of analysts had put Nike's profit for the most recent quarter at 81 cents a share. The sales forecast stood at $4.36 billion.
Gross margins rose to 45.1 percent of sales from 44.2 percent, while costs fell to 30.9 percent of sales from 31.7 percent. The company also benefited by a slightly lower tax rate.
Global orders for delivery of shoes and apparel from now until July rose 11 percent, Nike said. Goldman Sachs was looking for an increase of 10.5 percent.
While futures orders abroad saw the healthiest growth, they rose a mere 1 percent rise in the United States.
The company has seen rapid growth in emerging markets for its Nike footwear as it ramps up for the Beijing Olympics and robust demand for its smaller, non-Nike brands. It claims sports items are relatively immune to economic downturns, but has been controlling inventory in a challenging U.S. marketplace as athletic shoe retailers struggling.
Nike shares leaped about 6 percent at more than $65.50 in extended trading Wednesday. Shares are up 14 percent over a year ago.
Shares of Nike traded at 15 times fiscal 2009 earnings at a premium to its largest competitor, German brand Adidas, trading at over 10 times for the same period.
- Reuters contributed to this report.
By CNBC.com with Wires 19 Mar 2008 05:02 PM ET
Nike reported a third-quarter profit that easily beat expectations, helped by strong international sales, especially in Asia, of shoes and clothing.
The world's largest maker of athletic footwear and apparel said a weak dollar helped contributed to the 16 percent gain in third-quarter sales, while fatter margins and lower costs boosted profit.
Earnings increased to $463.8 million, or 92 cents per share, from $350.8 million, or 68 cents per share, a year earlier. Total sales jumped 16 percent to $4.5 billion.
A consensus forecast of analysts had put Nike's profit for the most recent quarter at 81 cents a share. The sales forecast stood at $4.36 billion.
Gross margins rose to 45.1 percent of sales from 44.2 percent, while costs fell to 30.9 percent of sales from 31.7 percent. The company also benefited by a slightly lower tax rate.
Global orders for delivery of shoes and apparel from now until July rose 11 percent, Nike said. Goldman Sachs was looking for an increase of 10.5 percent.
While futures orders abroad saw the healthiest growth, they rose a mere 1 percent rise in the United States.
The company has seen rapid growth in emerging markets for its Nike footwear as it ramps up for the Beijing Olympics and robust demand for its smaller, non-Nike brands. It claims sports items are relatively immune to economic downturns, but has been controlling inventory in a challenging U.S. marketplace as athletic shoe retailers struggling.
Nike shares leaped about 6 percent at more than $65.50 in extended trading Wednesday. Shares are up 14 percent over a year ago.
Shares of Nike traded at 15 times fiscal 2009 earnings at a premium to its largest competitor, German brand Adidas, trading at over 10 times for the same period.
- Reuters contributed to this report.
Thursday, March 20, 2008
A Little Help From Our Friends?
APSovereign Wealth Funds DiscussedThursday March 20, 5:21 pm ET By Martin Crutsinger, AP Economics Writer
US: Agreement Reached With Abu Dhabi and Singapore on Funding Principles
WASHINGTON (AP) -- The Bush administration said Thursday it had reached agreement Abu Dhabi and Singapore that they will not use their huge government investment funds to further their political goals.
The funds have raised concerns about the potential threats that large amounts of foreign investment could pose to the U.S. economy and other industrial countries.
A set of policy principles was released after Treasury Secretary Henry Paulson met with officials from Abu Dhabi, home to the world's largest government investment fund, and Singapore, which also controls a sizable investment fund.
"We had a good discussion today on the issues surrounding sovereign wealth funds," Paulson said in a statement. He said the principles that had been agreed to would further efforts to develop a set of best practices to govern how the funds operate.
The International Monetary Fund and the Paris-based Organization for Economic Cooperation and Development are working to develop a voluntary set of best practices to address issues that have been raised.
Sen. Charles Schumer, D-N.Y., praised the administration effort and urged other countries to follow the example of Abu Dhabi and Singapore.
"Transparency is what we are asking for from sovereign wealth funds," Schumer said in statement. "Now it is up to other sovereign wealth funds to follow this lead. I hope the administration, the IMF and other governments will encourage them to do so."
Paulson's meeting followed a letter released earlier this week that Abu Dhabi sent to the administration and other Western governments in which it spelled out the principles it said guides its investment procedures.
The first of nine principles released Thursday says that sovereign wealth fund investment decisions "should be based solely on commercial grounds, rather than to advance, directly or indirectly, the geopolitical goals" of the government that controls the fund.
The principles also endorse greater disclosure of information concerning the funds, saying this disclosure "can help reduce uncertainty in financial markets and build trust in recipient countries."
These funds, in many cases bulging with revenues earned through the sale of oil, have raised concerns among members of Congress and officials in Europe regarding their intentions in making investments in the United States and Europe.
The administration has sought to walk a fine line on the issue, reflecting the fact that the United States must depend on foreign investment to finance its huge trade deficits.
Paulson, in his statement, said that the United States "welcomes sovereign wealth fund investment and looks forward to continuing to work with these two countries and others to support the initiatives under way at the IMF and the OECD to develop best practices" for the funds and countries where the funds are making investments.
One of the principles for countries receiving the investment was that they "should not erect protectionist barriers to portfolio or direct investment."
Abu Dhabi is the capital of the United Arab Emirates. Officials from Abu Dhabi, Singapore and their two large investment funds attended the meeting with Paulson.
The Abu Dhabi Investment Authority is estimated to have holdings of as much as $900 billion, making it the largest sovereign wealth fund in the world. This fund, which was set up more than 30 years ago to invest the Persian Gulf emirates oil wealth, late last year invested $7.5 billion in Citigroup Inc., giving it a 4.9 percent stake in America's biggest bank.
In a statement, the Abu Dhabi investment group said that it welcomed "the opportunity to have voluntarily participated in the development of the policy principles proposed by the U.S. Department of the Treasury."
Critics, including some in Congress, have expressed concerns that the investments could be influenced by politics or that U.S. businesses could lose their ability to control their operations to foreign governments.
US: Agreement Reached With Abu Dhabi and Singapore on Funding Principles
WASHINGTON (AP) -- The Bush administration said Thursday it had reached agreement Abu Dhabi and Singapore that they will not use their huge government investment funds to further their political goals.
The funds have raised concerns about the potential threats that large amounts of foreign investment could pose to the U.S. economy and other industrial countries.
A set of policy principles was released after Treasury Secretary Henry Paulson met with officials from Abu Dhabi, home to the world's largest government investment fund, and Singapore, which also controls a sizable investment fund.
"We had a good discussion today on the issues surrounding sovereign wealth funds," Paulson said in a statement. He said the principles that had been agreed to would further efforts to develop a set of best practices to govern how the funds operate.
The International Monetary Fund and the Paris-based Organization for Economic Cooperation and Development are working to develop a voluntary set of best practices to address issues that have been raised.
Sen. Charles Schumer, D-N.Y., praised the administration effort and urged other countries to follow the example of Abu Dhabi and Singapore.
"Transparency is what we are asking for from sovereign wealth funds," Schumer said in statement. "Now it is up to other sovereign wealth funds to follow this lead. I hope the administration, the IMF and other governments will encourage them to do so."
Paulson's meeting followed a letter released earlier this week that Abu Dhabi sent to the administration and other Western governments in which it spelled out the principles it said guides its investment procedures.
The first of nine principles released Thursday says that sovereign wealth fund investment decisions "should be based solely on commercial grounds, rather than to advance, directly or indirectly, the geopolitical goals" of the government that controls the fund.
The principles also endorse greater disclosure of information concerning the funds, saying this disclosure "can help reduce uncertainty in financial markets and build trust in recipient countries."
These funds, in many cases bulging with revenues earned through the sale of oil, have raised concerns among members of Congress and officials in Europe regarding their intentions in making investments in the United States and Europe.
The administration has sought to walk a fine line on the issue, reflecting the fact that the United States must depend on foreign investment to finance its huge trade deficits.
Paulson, in his statement, said that the United States "welcomes sovereign wealth fund investment and looks forward to continuing to work with these two countries and others to support the initiatives under way at the IMF and the OECD to develop best practices" for the funds and countries where the funds are making investments.
One of the principles for countries receiving the investment was that they "should not erect protectionist barriers to portfolio or direct investment."
Abu Dhabi is the capital of the United Arab Emirates. Officials from Abu Dhabi, Singapore and their two large investment funds attended the meeting with Paulson.
The Abu Dhabi Investment Authority is estimated to have holdings of as much as $900 billion, making it the largest sovereign wealth fund in the world. This fund, which was set up more than 30 years ago to invest the Persian Gulf emirates oil wealth, late last year invested $7.5 billion in Citigroup Inc., giving it a 4.9 percent stake in America's biggest bank.
In a statement, the Abu Dhabi investment group said that it welcomed "the opportunity to have voluntarily participated in the development of the policy principles proposed by the U.S. Department of the Treasury."
Critics, including some in Congress, have expressed concerns that the investments could be influenced by politics or that U.S. businesses could lose their ability to control their operations to foreign governments.
How To Bring Down The Cost Of Gas
I drive a truck, a Ford F-150 and it gets about 15-16 miles per gallon. Last year I spent about $6,000.00 on gasoline. As just like anyone else I wish the price of gas would go down to last year's levels. But I don't think that is going to happen soon if ever. So what does a normal person do? Well first I am buying a tonneau cover that fits over the bed of the truck. Less wind resistance means an improvement in fuel consumption of about 5% for a yearly savings of $300.00. But the biggy is this, I plan to drive less. I live in the country so trips are a little bit longer but I'm retired and last year I still drove 20,000+ miles. My goal this year is to reduce my mileage by 10% or 18,000 miles. This would result in a savings of $600.00. By doing these two things I will save $900.00 a year.
If we all could consolidate trips, plan trips, and do some car pooling we could actually bring down the price of gasoline. After all the fundamental price of gasoline is driven by supply and demand. The oil companies, nor President Bush, nor the Arabs get together every morning and set the price of gas.
If we all could consolidate trips, plan trips, and do some car pooling we could actually bring down the price of gasoline. After all the fundamental price of gasoline is driven by supply and demand. The oil companies, nor President Bush, nor the Arabs get together every morning and set the price of gas.
The Warren Buffet Way
From Money -
Why Warren Buffett is buying railroads
Improved technology and fuel efficiency have made the rails a perfect industry for the 21st century.
Want to invest in a green industry that employs the latest technology, reduces U.S. oil consumption and is priced very attractively? Look no further than the railroads. Laggards for decades after the 19th-century boom ended, they're hot again.
"There was steady traffic growth until last year, and the trend looks good once the economy gets back up to speed," says Kenneth Kremar, an economist who follows the railroad industry for consulting firm Global Insight. Perhaps that's why railroad stocks have largely escaped the battering that other sectors have taken so far this year.
Of course, their business could still be hurt temporarily if the economy deteriorates further. But eventually, says Kremar, "we'll see a pickup in demand, especially in the kinds of commodities railroads carry."
Astute investors are climbing aboard. Warren Buffett has been loading up on shares of Burlington Northern Santa Fe and was buying in January at prices only 13% below current levels. (News of his buying boosted the stock.) At last count, he owned more than 18% of the company.
The chief reason that the railroads' long-term prospects look so good today is that they began upgrading their operations soon after the industry was largely deregulated in 1980. "The railroads finally had an incentive, as well as the cash flow, to reinvest," says Robert E. Gallamore, a former Union Pacific executive and former director of the Transportation Center at Northwestern University.
Those investments took a while to pay off. But the ultimate result, says Gallamore, has been a huge increase in productivity. There are seven giant North American freight railroads, which handle 90% of the continent's traffic. The two largest are Burlington Northern and Union Pacific, both of which are in the Sivy 70.
Here are some of the specific trends that have contributed to the industry's success and that are likely to continue to drive growth:
Technology is creating greater cost efficiencies. Railroads have been merging, and these big systems can enjoy enormous cost efficiencies.
"The key is knowing where your cars are at all times," explains Kremar. Sophisticated software calculates the best way to put different cars together into trains. And onboard electronics assess topography, track curvature, train length and weight to calculate the optimum speed for conserving fuel.
Overall, the Federal Railroad Administration calculates that productivity has more than doubled since 1990.
Globalization and growth are providing a lot of new business. Railroad capacity can be increased only slowly, while demand has been rising quickly. That gives the industry some ability to raise rates.
In addition to domestic growth, booming imports from Asia and from NAFTA partners Canada and Mexico are contributing, and so is foreign demand for U.S. coal and grain.
The ethanol industry has also created a new source of business. "Both the corn used to make ethanol and the finished product are most likely to be shipped by rail," says Kremar.
Railroads are far more energy-efficient than their competition. Locomotives today get 80% more mileage from a gallon of diesel than they did in 1980. As a result, trains consume far less fuel than trucks do to move the same amount of freight.
That not only saves on costs, it reduces emissions of greenhouse gases. In fact, the Environmental Protection Agency calculates that for distances of more than 1,000 miles, using trains rather than trucks alone reduces fuel consumption and greenhouse gas emissions by 65%.
A second-half rebound
Railroads have seen a drop-off in shipments connected with home building and construction during the past few months, but most other business lines are solid.
And earnings held up fairly well last year. Union Pacific (UNP, Fortune 500) reported a small earnings increase for the fourth quarter and a 17% rise for 2007 as a whole. Some of that profit gain was attributable to stock repurchases.
UP expects some softness in the first half of 2008, with a pickup in business in the second half. For the year as a whole, earnings are expected to top $8 a share, a gain of more than 15% compared with last year. Based on those estimates, the shares are currently selling at a 15.1 price/earnings ratio.
Burlington Northern's (BNI, Fortune 500) results have been less robust recently. Although the company has bought back more than 14 million shares, both fourth-quarter and full-year earnings were just about flat.
Burlington has been cautious in its predictions for 2008, but earnings are projected to grow more than 14% annually over the next five years. The shares trade at just under a 15 P/E.
Burlington has a record of more consistent management than Union Pacific does. As a result, some analysts think Burlington has the better long-term prospects - an assessment with which Buffett seems to agree
Why Warren Buffett is buying railroads
Improved technology and fuel efficiency have made the rails a perfect industry for the 21st century.
Want to invest in a green industry that employs the latest technology, reduces U.S. oil consumption and is priced very attractively? Look no further than the railroads. Laggards for decades after the 19th-century boom ended, they're hot again.
"There was steady traffic growth until last year, and the trend looks good once the economy gets back up to speed," says Kenneth Kremar, an economist who follows the railroad industry for consulting firm Global Insight. Perhaps that's why railroad stocks have largely escaped the battering that other sectors have taken so far this year.
Of course, their business could still be hurt temporarily if the economy deteriorates further. But eventually, says Kremar, "we'll see a pickup in demand, especially in the kinds of commodities railroads carry."
Astute investors are climbing aboard. Warren Buffett has been loading up on shares of Burlington Northern Santa Fe and was buying in January at prices only 13% below current levels. (News of his buying boosted the stock.) At last count, he owned more than 18% of the company.
The chief reason that the railroads' long-term prospects look so good today is that they began upgrading their operations soon after the industry was largely deregulated in 1980. "The railroads finally had an incentive, as well as the cash flow, to reinvest," says Robert E. Gallamore, a former Union Pacific executive and former director of the Transportation Center at Northwestern University.
Those investments took a while to pay off. But the ultimate result, says Gallamore, has been a huge increase in productivity. There are seven giant North American freight railroads, which handle 90% of the continent's traffic. The two largest are Burlington Northern and Union Pacific, both of which are in the Sivy 70.
Here are some of the specific trends that have contributed to the industry's success and that are likely to continue to drive growth:
Technology is creating greater cost efficiencies. Railroads have been merging, and these big systems can enjoy enormous cost efficiencies.
"The key is knowing where your cars are at all times," explains Kremar. Sophisticated software calculates the best way to put different cars together into trains. And onboard electronics assess topography, track curvature, train length and weight to calculate the optimum speed for conserving fuel.
Overall, the Federal Railroad Administration calculates that productivity has more than doubled since 1990.
Globalization and growth are providing a lot of new business. Railroad capacity can be increased only slowly, while demand has been rising quickly. That gives the industry some ability to raise rates.
In addition to domestic growth, booming imports from Asia and from NAFTA partners Canada and Mexico are contributing, and so is foreign demand for U.S. coal and grain.
The ethanol industry has also created a new source of business. "Both the corn used to make ethanol and the finished product are most likely to be shipped by rail," says Kremar.
Railroads are far more energy-efficient than their competition. Locomotives today get 80% more mileage from a gallon of diesel than they did in 1980. As a result, trains consume far less fuel than trucks do to move the same amount of freight.
That not only saves on costs, it reduces emissions of greenhouse gases. In fact, the Environmental Protection Agency calculates that for distances of more than 1,000 miles, using trains rather than trucks alone reduces fuel consumption and greenhouse gas emissions by 65%.
A second-half rebound
Railroads have seen a drop-off in shipments connected with home building and construction during the past few months, but most other business lines are solid.
And earnings held up fairly well last year. Union Pacific (UNP, Fortune 500) reported a small earnings increase for the fourth quarter and a 17% rise for 2007 as a whole. Some of that profit gain was attributable to stock repurchases.
UP expects some softness in the first half of 2008, with a pickup in business in the second half. For the year as a whole, earnings are expected to top $8 a share, a gain of more than 15% compared with last year. Based on those estimates, the shares are currently selling at a 15.1 price/earnings ratio.
Burlington Northern's (BNI, Fortune 500) results have been less robust recently. Although the company has bought back more than 14 million shares, both fourth-quarter and full-year earnings were just about flat.
Burlington has been cautious in its predictions for 2008, but earnings are projected to grow more than 14% annually over the next five years. The shares trade at just under a 15 P/E.
Burlington has a record of more consistent management than Union Pacific does. As a result, some analysts think Burlington has the better long-term prospects - an assessment with which Buffett seems to agree
Wednesday, March 19, 2008
Visa IPO - Priceless
If the initial public offering of credit-card processor Visa Inc. (V) goes off as scheduled today, it will be the biggest stock offering in U.S. history. And it could supercharge a moribund IPO market that’s been held down by the same credit-market concerns that have repeatedly threatened to send the key U.S. stock indices spinning down into bear-market territory.
The San Francisco-based Visa has filed to sell 406 million “Class A” common shares at $37 to $42 apiece, for proceeds of $15 billion to $17 billion. That would easily leapfrog the largest U.S. IPO to date, the $10.6 billion stock offering for AT&T Wireless, which occurred in April 2000.
If demand is strong, an additional 40 million shares could sell, generating a much as $19 billion in proceeds. That would actually push the Visa deal up near the biggest global IPO of all time, the October 2006 IPO of the Industrial & Commercial Bank of China, or ICBC, which raised $19.1 billion – or nearly $22 billion when the over-allotment provisions were fulfilled.
If the Visa deal is oversubscribed, the fallout could be highly bullish. The stock offering was supposed to be priced yesterday so the shares can begin trading today.
“If the Visa IPO does as well as everyone expects, comes out on schedule and is oversubscribed as I believe it will be, it could have a huge impact on the stock market in general and the IPO market specifically,” said Louis Basenese, an IPO expert who is the editor of the investment newsletters The Hot IPO Alert and The Takeover Trader. “It could give deal underwriters a renewed confidence in the IPO market and could green light the many deals now waiting on the sidelines. If it comes out on schedule and does well, it’s a green light. If it’s delayed for any reason – even if there’s no real problem – it’ll be a huge red light.”
When it comes to the Visa deal, Basenese sees no red lights, stop signs or warning signs of any type. In fact, according to his calculations, Visa’s shares could be worth $80 by the end of this year – and perhaps more, if all goes according to plan.
But even if that’s the case – and the IPO doesn’t re-ignite the U.S. stock-offering market – Visa’s shares can still be a profitable play for investors.
Here’s why.
According to Basenese, the Visa deal is one of the better IPOs to come down the pike in some time. For one thing, the company is the market leader, dwarfing its rivals in terms of both transaction volume and total transactions.
As the largest processor of retail payments the world, Visa Inc. dwarfs its rivals. It accounts for 60% of the debit-card transactions in the U.S. market – a four-to-one advantage over rival MasterCard. As the chart demonstrates, it is also bigger by total transactions and total volume.
Visa is an electronic payments network that focuses on retail transactions. It actually acts as a facilitator of global commerce, enabling money and information to move among banks, retailers, consumers, businesses and even government entities.
There are three basic points investors need to understand – especially with the chaotic credit markets investors now face, Basenese says:
Visa is not a credit-card issuer.
It’s not a lender.
And it’s not exposed to consumer-credit risk.
The bottom line: Visa is simply a transaction-processing company that collects a fee based on the number and dollar value of the transactions that it processes, he said. In short, this is a financial-services company whose shares investors can snap up with confidence and a feeling of safety, since there aren’t any worries that another credit-crunch-related catastrophe could obliterate its business and send its shares into the ground overnight, Basenese said.
Investors have been eager to grab shares in Visa’s offering as shares of the much-smaller rival MasterCard Inc. (MA) have more than quadrupled in value since the company went public in May 2006. MasterCard shares have largely been untouched by the stock-market turmoil generated by the ongoing credit crisis and closed yesterday (Monday) at $201.52, down $7.13, or 3.42%. They are down 11% from their 12-month high of $227.18.
With a public company, at the end of the day, it’s always about earnings. And Visa is poised to deliver profit growth. In its latest quarterly report, Visa generated $1.49 billion in revenue and $430 million in profits [excluding one-time events]. Company managers are conservatively projecting that profits will advance at a 20% clip.
But with his own analysis, Basenese uncovered three catalysts that will help Visa boost its profit-growth rate up to the 30% to 35% pace. Those three key catalysts:
No Chinks in its Armor: To generate profits, a company has to have strong sources of revenue. And Visa does. In fact, Basenese says there’s “not a weak spot in this company’s revenue mix.” Sales are increasing at healthy, double-digit rates across all business segments and in all geographic markets.
Killer Cost Controls: Since 2003, the total number of transactions Visa processes have soared 61%, but costs have increased only 12%. And since the company’s VisaNet payment-processing network is capable of handling double its current volume without really increasing its costs, incremental additions to revenue will translate into “dramatic increases” in earnings, Basenese says.
A Less-Taxing Tax Rate: Before the stock offering, Visa didn’t really have to fret about its tax rate, since it wasn’t a public company that had to engage in the quarterly cow-towing to Wall Street. As a result, it’s one of the few companies with a horrid tax rate of 41%. Even archrival MasterCard boasts a tax rate of only 35%. But now that it’s a public company, Visa will pull out all the stops in its efforts to pare its tax rate. If it gets down to MasterCard’s level, a 6% reduction in the tax rate on hundreds of millions of dollars in income will have a big impact on the bottom line, Basenese says.
The global payments sector is undergoing a true paradigm shift – away from cash and checks in favor of one that’s card-based and highly focused on electronic transactions. Since 2001, transactions using credit and debt cards went from 13% of payment volume to 27%, a compound annual growth rate of nearly 15%.
As dramatic as that metric is, it’s important to note that Visa grew at double that rate during the same period.
Expect the trend to continue – and to expand globally.
According to The Nilson Report, a newsletter that focuses on the payments industry, the purchasing card market will expand at an annual rate of at least 11% on a global basis between now and 2012. And much of the growth will be generated internationally – especially in the emerging markets.
Once again, Basenese says that his analysis has found that Visa is poised to grow faster than the market, which means that it’s going to grab market share from rivals.
First, two-thirds of Visa’s debit cards are in foreign hands, where consumer-spending levels are on the rise and where the use of electronic-payment technologies is still in its infancy.
And, second, research shows that six out of 10 consumers prefer Visa cards. That kind of brand loyalty means that Visa will be able to introduce new products with very little resistance. Visa already plans to introduce those products in four key areas: Prepaid cards, money-transfer technologies, e-commerce and mobile-transaction-processing.
At a time when U.S. consumer confidence is ebbing quickly and when fears of a major potential recession are escalating, investors need to note that Visa’s business is increasingly becoming almost recession proof. Here’s why:
Research underscores that 42% of Visa’s revenue is derived from non-discretionary spending, meaning that a lot of that revenue won’t disappear even if consumers and businesses make major cutbacks in their outlays for luxuries or other non-essential goods and services.
During the last two recessions, Visa continued to grow – both in terms of total transactions and total volume. And in each of the last 13 months – as a recession becomes more and more likely – Visa’s business has continued to grow at double-digit rates.
The Right Play at the Right Time
According to Basenese, Visa’s shares could be worth $80 by the end of this year – and perhaps more, if all goes according to plan. The stock actually will pay a small dividend – about 1%, based on the projected IPO price. That’s a rarity among newly public companies. But Money Morning Investment Director Keith Fitz-Gerald puts a premium on stocks that generate income.
Basenese likes the company, its business plan, its market position, and its financial strength.
“The pitch for Visa is simple,” he said. “It’s a rare opportunity to own a piece of a relative monopoly.”
The San Francisco-based Visa has filed to sell 406 million “Class A” common shares at $37 to $42 apiece, for proceeds of $15 billion to $17 billion. That would easily leapfrog the largest U.S. IPO to date, the $10.6 billion stock offering for AT&T Wireless, which occurred in April 2000.
If demand is strong, an additional 40 million shares could sell, generating a much as $19 billion in proceeds. That would actually push the Visa deal up near the biggest global IPO of all time, the October 2006 IPO of the Industrial & Commercial Bank of China, or ICBC, which raised $19.1 billion – or nearly $22 billion when the over-allotment provisions were fulfilled.
If the Visa deal is oversubscribed, the fallout could be highly bullish. The stock offering was supposed to be priced yesterday so the shares can begin trading today.
“If the Visa IPO does as well as everyone expects, comes out on schedule and is oversubscribed as I believe it will be, it could have a huge impact on the stock market in general and the IPO market specifically,” said Louis Basenese, an IPO expert who is the editor of the investment newsletters The Hot IPO Alert and The Takeover Trader. “It could give deal underwriters a renewed confidence in the IPO market and could green light the many deals now waiting on the sidelines. If it comes out on schedule and does well, it’s a green light. If it’s delayed for any reason – even if there’s no real problem – it’ll be a huge red light.”
When it comes to the Visa deal, Basenese sees no red lights, stop signs or warning signs of any type. In fact, according to his calculations, Visa’s shares could be worth $80 by the end of this year – and perhaps more, if all goes according to plan.
But even if that’s the case – and the IPO doesn’t re-ignite the U.S. stock-offering market – Visa’s shares can still be a profitable play for investors.
Here’s why.
According to Basenese, the Visa deal is one of the better IPOs to come down the pike in some time. For one thing, the company is the market leader, dwarfing its rivals in terms of both transaction volume and total transactions.
As the largest processor of retail payments the world, Visa Inc. dwarfs its rivals. It accounts for 60% of the debit-card transactions in the U.S. market – a four-to-one advantage over rival MasterCard. As the chart demonstrates, it is also bigger by total transactions and total volume.
Visa is an electronic payments network that focuses on retail transactions. It actually acts as a facilitator of global commerce, enabling money and information to move among banks, retailers, consumers, businesses and even government entities.
There are three basic points investors need to understand – especially with the chaotic credit markets investors now face, Basenese says:
Visa is not a credit-card issuer.
It’s not a lender.
And it’s not exposed to consumer-credit risk.
The bottom line: Visa is simply a transaction-processing company that collects a fee based on the number and dollar value of the transactions that it processes, he said. In short, this is a financial-services company whose shares investors can snap up with confidence and a feeling of safety, since there aren’t any worries that another credit-crunch-related catastrophe could obliterate its business and send its shares into the ground overnight, Basenese said.
Investors have been eager to grab shares in Visa’s offering as shares of the much-smaller rival MasterCard Inc. (MA) have more than quadrupled in value since the company went public in May 2006. MasterCard shares have largely been untouched by the stock-market turmoil generated by the ongoing credit crisis and closed yesterday (Monday) at $201.52, down $7.13, or 3.42%. They are down 11% from their 12-month high of $227.18.
With a public company, at the end of the day, it’s always about earnings. And Visa is poised to deliver profit growth. In its latest quarterly report, Visa generated $1.49 billion in revenue and $430 million in profits [excluding one-time events]. Company managers are conservatively projecting that profits will advance at a 20% clip.
But with his own analysis, Basenese uncovered three catalysts that will help Visa boost its profit-growth rate up to the 30% to 35% pace. Those three key catalysts:
No Chinks in its Armor: To generate profits, a company has to have strong sources of revenue. And Visa does. In fact, Basenese says there’s “not a weak spot in this company’s revenue mix.” Sales are increasing at healthy, double-digit rates across all business segments and in all geographic markets.
Killer Cost Controls: Since 2003, the total number of transactions Visa processes have soared 61%, but costs have increased only 12%. And since the company’s VisaNet payment-processing network is capable of handling double its current volume without really increasing its costs, incremental additions to revenue will translate into “dramatic increases” in earnings, Basenese says.
A Less-Taxing Tax Rate: Before the stock offering, Visa didn’t really have to fret about its tax rate, since it wasn’t a public company that had to engage in the quarterly cow-towing to Wall Street. As a result, it’s one of the few companies with a horrid tax rate of 41%. Even archrival MasterCard boasts a tax rate of only 35%. But now that it’s a public company, Visa will pull out all the stops in its efforts to pare its tax rate. If it gets down to MasterCard’s level, a 6% reduction in the tax rate on hundreds of millions of dollars in income will have a big impact on the bottom line, Basenese says.
The global payments sector is undergoing a true paradigm shift – away from cash and checks in favor of one that’s card-based and highly focused on electronic transactions. Since 2001, transactions using credit and debt cards went from 13% of payment volume to 27%, a compound annual growth rate of nearly 15%.
As dramatic as that metric is, it’s important to note that Visa grew at double that rate during the same period.
Expect the trend to continue – and to expand globally.
According to The Nilson Report, a newsletter that focuses on the payments industry, the purchasing card market will expand at an annual rate of at least 11% on a global basis between now and 2012. And much of the growth will be generated internationally – especially in the emerging markets.
Once again, Basenese says that his analysis has found that Visa is poised to grow faster than the market, which means that it’s going to grab market share from rivals.
First, two-thirds of Visa’s debit cards are in foreign hands, where consumer-spending levels are on the rise and where the use of electronic-payment technologies is still in its infancy.
And, second, research shows that six out of 10 consumers prefer Visa cards. That kind of brand loyalty means that Visa will be able to introduce new products with very little resistance. Visa already plans to introduce those products in four key areas: Prepaid cards, money-transfer technologies, e-commerce and mobile-transaction-processing.
At a time when U.S. consumer confidence is ebbing quickly and when fears of a major potential recession are escalating, investors need to note that Visa’s business is increasingly becoming almost recession proof. Here’s why:
Research underscores that 42% of Visa’s revenue is derived from non-discretionary spending, meaning that a lot of that revenue won’t disappear even if consumers and businesses make major cutbacks in their outlays for luxuries or other non-essential goods and services.
During the last two recessions, Visa continued to grow – both in terms of total transactions and total volume. And in each of the last 13 months – as a recession becomes more and more likely – Visa’s business has continued to grow at double-digit rates.
The Right Play at the Right Time
According to Basenese, Visa’s shares could be worth $80 by the end of this year – and perhaps more, if all goes according to plan. The stock actually will pay a small dividend – about 1%, based on the projected IPO price. That’s a rarity among newly public companies. But Money Morning Investment Director Keith Fitz-Gerald puts a premium on stocks that generate income.
Basenese likes the company, its business plan, its market position, and its financial strength.
“The pitch for Visa is simple,” he said. “It’s a rare opportunity to own a piece of a relative monopoly.”
Understanding The Credit Crisis
The following link may help all of us understand how the credit crisis started.
http://www.cnbc.com/id/23704055/site/14081545/
http://www.cnbc.com/id/23704055/site/14081545/
The Fed Makes A Statement
The move by the Fed to force a sale of Bear Stearns to J.P. Morgan to some seemed an over-reach. Employees will be fired. Employees have lost almost all value in their portfolios and shareholders have suffered. But the stock market can still be a risky investment with no guarantees, especially in the short run.
The Fed by the actions yesterday made a psychological statement. One was a warning to other investment banks, we will let you fail. And two we will use everything in our bag of tricks to prevent a run on financial institutions.
This was a great move and proved that the Fed and Bernacke are in control of the financial markets.
The Fed by the actions yesterday made a psychological statement. One was a warning to other investment banks, we will let you fail. And two we will use everything in our bag of tricks to prevent a run on financial institutions.
This was a great move and proved that the Fed and Bernacke are in control of the financial markets.
Boeing Fires Back
Reuters
Boeing confident of winning back tanker dealTuesday March 18, 5:47 pm ET By Jim Wolf
WASHINGTON (Reuters) - Boeing Co's program manager for tanker aircraft voiced great confidence on Tuesday about winning back a $35 billion aerial-refueling deal from a team that includes European archrival Airbus.
Mark McGraw, a company vice president, said he was "as confident as I can be" that congressional auditors would find fault with the U.S. Air Force's February 29 choice of the rival team of Northrop Grumman Corp and Airbus parent EADS to build 179 planes.
On March 10, Chicago-based Boeing, in a protest to the Government Accountability Office, said the Air Force had gone overboard to keep Northrop and EADS from withdrawing and to preserve the "possibility of competition."
In an edited summary of its complaint provided to reporters on Tuesday, Boeing said the winning plane, a modified Airbus A330, was a much riskier choice than Boeing's proposed tanker based on its smaller 767 airliner.
In picking the A330, the Air Force misapplied its own selection criteria, disregarded its bidding specifications and breached federal acquisition rules, Boeing told the GAO.
The result was a contract "that is fundamentally unfair not only to Boeing, but to the warfighter and the American people," the protest summary said.
Despite his stated confidence in reversing the outcome, McGraw, in a teleconference with reporters, said Boeing faced an "uphill battle" to persuade the GAO, which has up to 100 days to make a recommendation to the Air Force.
"I think the best we can hope for is another shot" at the competition, he said, referring to a possible rerun of all or part of the contest to correct alleged flaws in the process.
The Air Force has said the Northrop/EADS plane was the best suited to replace aging tankers used to extend the range of warplanes by in-flight refueling.
Boeing, in its complaint, said the Air Force had opted for among other things "an illusory cost benefit fueled by EADS' reliance upon illegal foreign subsidies."
The United States has accused Europe of improperly subsidizing Airbus, while Europe has complained of U.S. help for Boeing, in twin complaints to the World Trade Organization.
In a hastily called teleconference to respond to Boeing, Northrop Grumman's tanker program manager, Paul Meyer, said he considered the WTO dispute a "red herring" with no relevance to the tanker contest.
Meyer also denied that Northrop, the prime contractor for the winning plane, had threatened to walk away even though he said Northrop failed to persuade the Air Force to change evaluation criteria in a way it had sought.
He rated as "low" the chance that GAO would uphold all or part of Boeing's protest. Northrop halted work on the tanker contract after receiving a routine "stop work" letter sparked by Boeing's protest, Meyer said.
Randy Belote, a spokesman for Northrop Grumman, said the Air Force made clear that capabilities outweighed cost in its choice of the newly named Northrop/EADS KC-45A tanker.
"The KC-45 was selected as a result of the most rigorous, transparent, acquisition process in the history of the U.S. Defense Department," he said in reply to the Boeing complaint.
Boeing confident of winning back tanker dealTuesday March 18, 5:47 pm ET By Jim Wolf
WASHINGTON (Reuters) - Boeing Co's program manager for tanker aircraft voiced great confidence on Tuesday about winning back a $35 billion aerial-refueling deal from a team that includes European archrival Airbus.
Mark McGraw, a company vice president, said he was "as confident as I can be" that congressional auditors would find fault with the U.S. Air Force's February 29 choice of the rival team of Northrop Grumman Corp and Airbus parent EADS to build 179 planes.
On March 10, Chicago-based Boeing, in a protest to the Government Accountability Office, said the Air Force had gone overboard to keep Northrop and EADS from withdrawing and to preserve the "possibility of competition."
In an edited summary of its complaint provided to reporters on Tuesday, Boeing said the winning plane, a modified Airbus A330, was a much riskier choice than Boeing's proposed tanker based on its smaller 767 airliner.
In picking the A330, the Air Force misapplied its own selection criteria, disregarded its bidding specifications and breached federal acquisition rules, Boeing told the GAO.
The result was a contract "that is fundamentally unfair not only to Boeing, but to the warfighter and the American people," the protest summary said.
Despite his stated confidence in reversing the outcome, McGraw, in a teleconference with reporters, said Boeing faced an "uphill battle" to persuade the GAO, which has up to 100 days to make a recommendation to the Air Force.
"I think the best we can hope for is another shot" at the competition, he said, referring to a possible rerun of all or part of the contest to correct alleged flaws in the process.
The Air Force has said the Northrop/EADS plane was the best suited to replace aging tankers used to extend the range of warplanes by in-flight refueling.
Boeing, in its complaint, said the Air Force had opted for among other things "an illusory cost benefit fueled by EADS' reliance upon illegal foreign subsidies."
The United States has accused Europe of improperly subsidizing Airbus, while Europe has complained of U.S. help for Boeing, in twin complaints to the World Trade Organization.
In a hastily called teleconference to respond to Boeing, Northrop Grumman's tanker program manager, Paul Meyer, said he considered the WTO dispute a "red herring" with no relevance to the tanker contest.
Meyer also denied that Northrop, the prime contractor for the winning plane, had threatened to walk away even though he said Northrop failed to persuade the Air Force to change evaluation criteria in a way it had sought.
He rated as "low" the chance that GAO would uphold all or part of Boeing's protest. Northrop halted work on the tanker contract after receiving a routine "stop work" letter sparked by Boeing's protest, Meyer said.
Randy Belote, a spokesman for Northrop Grumman, said the Air Force made clear that capabilities outweighed cost in its choice of the newly named Northrop/EADS KC-45A tanker.
"The KC-45 was selected as a result of the most rigorous, transparent, acquisition process in the history of the U.S. Defense Department," he said in reply to the Boeing complaint.
Visa IPO Priceless
Visa IPO prices at record $17.9B
Credit card company's initial public offering surpasses estimates at $44 a share.
By Katie Benner, writer-reporter
Visa priced its IPO at a record $17.9 billion, or $44 a share.
NEW YORK (Fortune) -- Visa buyers paid a whopping $17.9 billion, or $44 a share, when the company priced its initial public offering Tuesday evening.
The number punctuated a Wall Street comeback that included another Federal Reserve rate cut, surprisingly strong earnings results from Goldman Sachs and Lehman Brothers, and a 420-point spike in the Dow, its largest one-day point gain in five years.
The San Francisco-based credit card processor became the largest IPO ever, surpassing the $11 billion record held by AT&T (T, Fortune 500) wireless as well as its own $37 to $42 a share price range.
As the markets surged Tuesday, Visa's lead underwriters JPMorgan (JPM, Fortune 500) and Goldman Sachs (GS, Fortune 500) spent the afternoon frantically tying up loose ends on one of the largest public offerings in history. Along with 17 other main underwriters and several smaller banks, JPMorgan and Goldman scrubbed the book of potential buyers to make sure that shares were going into the hands of holders, rather than quick sellers looking to make fast money on the landmark deal.
"They had to place Visa shares in strong hands. They didn't want another Blackstone debacle," says Scott Sweet, managing director of IPO research firm IPOBoutique.com. On Blackstone's (BX) first trading day, the very first trade of the day was a 19 million-share sale, which Sweet says was the largest stock flip in IPO history.
"When there were hedge funds dumping Blackstone after the IPO, it screwed people," says Sweet. "Goldman and JPMorgan worked all afternoon to weed out the opportunists, knowing that the stock will likely open strong [Wednesday]. It could be tempting to sell after the pop."
The Visa IPO comes amid a sea of troubles for the stock and the IPO markets. Before Tuesday, the three major indexes were down an average of 12% for the year as financial services companies struggle beneath the weight of bad asset-backed bonds. And the demise of Bear Stearns (BSC, Fortune 500), the latest victim of the lending blow-up, has Wall Street wondering who else could go out of business.
Since the beginning of the year, 21 IPOs have been cancelled and five have been postponed, according to IPO research firm Renaissance Capital. Meanwhile, the Renaissance IPO index, which tracks companies from their market debut until two years later, is down 26% for the year vs. 12% for the S&P 500 broad stock market index.
Even so, Visa buyers clamored for a piece of the credit card market leader. So far it looks like Visa sold its planned 406 million shares. IPOs generally have green shoe provisions, which means that the company can sell 10% more shares than planned to meet demand.
Visa (V) created a nice windfall for its owners, including its largest shareholder JPMorgan. The bank, which just picked up Bear Stearns (and its considerable debts) for $236 million, made about $1.3 billion on its 29 million shares of Visa.
JPMorgan was also the lead underwriter on the deal, which means that it took home the biggest slice of the fee pie. In exchange for moving shares into the hands of buyers, underwriters get to keep a percentage of the value of the shares sold. The exact fee jackpot is unknown, but it is estimated to exceed $500 million. Other underwriters included Goldman Sachs, Bank of America, Citigroup, HSBC, UBS, Merrill Lynch, Wachovia and Wells Fargo.
But will Visa prove as lucrative for investors when it trades Wednesday?
Few dispute the fact that Visa is a company poised to deliver earnings growth for years to come. It is the largest U.S. card company in terms of number of transactions and dollar amount; and in its IPO prospectus it predicted that its overseas market share would see more than 18% compounded annual growth through 2012. More importantly, like main rival MasterCard (MA), it doesn't hold any consumer debt on its books.
Dan Davidowitz, a research analyst at Polen Capital Management, adds that the company is taking care of lawsuits that might otherwise concern investors. It settled its longstanding legal dispute with American Express (AXP, Fortune 500) over Visa's alleged non-competitive practices, and it is about to settle a similar case with Discover.
In the immediate future, it may be hard for Visa to outrun a down market. "When markets turn around IPOs outperform the overall market, but untested companies fall out of favor when markets are down," says Kathy Smith, a principal at Renaissance.
And for the long-term, the biggest risk to Visa is that a worldwide recession reduces the use of both debit and credit cards, which would affect MasterCard as well, says David Menlow, director of IPOFinancial.com. For serious buyers, Menlow says it comes down to the strength of Visa itself. "The company is in the top quality tier and it's the number one company in its industry."
Credit card company's initial public offering surpasses estimates at $44 a share.
By Katie Benner, writer-reporter
Visa priced its IPO at a record $17.9 billion, or $44 a share.
NEW YORK (Fortune) -- Visa buyers paid a whopping $17.9 billion, or $44 a share, when the company priced its initial public offering Tuesday evening.
The number punctuated a Wall Street comeback that included another Federal Reserve rate cut, surprisingly strong earnings results from Goldman Sachs and Lehman Brothers, and a 420-point spike in the Dow, its largest one-day point gain in five years.
The San Francisco-based credit card processor became the largest IPO ever, surpassing the $11 billion record held by AT&T (T, Fortune 500) wireless as well as its own $37 to $42 a share price range.
As the markets surged Tuesday, Visa's lead underwriters JPMorgan (JPM, Fortune 500) and Goldman Sachs (GS, Fortune 500) spent the afternoon frantically tying up loose ends on one of the largest public offerings in history. Along with 17 other main underwriters and several smaller banks, JPMorgan and Goldman scrubbed the book of potential buyers to make sure that shares were going into the hands of holders, rather than quick sellers looking to make fast money on the landmark deal.
"They had to place Visa shares in strong hands. They didn't want another Blackstone debacle," says Scott Sweet, managing director of IPO research firm IPOBoutique.com. On Blackstone's (BX) first trading day, the very first trade of the day was a 19 million-share sale, which Sweet says was the largest stock flip in IPO history.
"When there were hedge funds dumping Blackstone after the IPO, it screwed people," says Sweet. "Goldman and JPMorgan worked all afternoon to weed out the opportunists, knowing that the stock will likely open strong [Wednesday]. It could be tempting to sell after the pop."
The Visa IPO comes amid a sea of troubles for the stock and the IPO markets. Before Tuesday, the three major indexes were down an average of 12% for the year as financial services companies struggle beneath the weight of bad asset-backed bonds. And the demise of Bear Stearns (BSC, Fortune 500), the latest victim of the lending blow-up, has Wall Street wondering who else could go out of business.
Since the beginning of the year, 21 IPOs have been cancelled and five have been postponed, according to IPO research firm Renaissance Capital. Meanwhile, the Renaissance IPO index, which tracks companies from their market debut until two years later, is down 26% for the year vs. 12% for the S&P 500 broad stock market index.
Even so, Visa buyers clamored for a piece of the credit card market leader. So far it looks like Visa sold its planned 406 million shares. IPOs generally have green shoe provisions, which means that the company can sell 10% more shares than planned to meet demand.
Visa (V) created a nice windfall for its owners, including its largest shareholder JPMorgan. The bank, which just picked up Bear Stearns (and its considerable debts) for $236 million, made about $1.3 billion on its 29 million shares of Visa.
JPMorgan was also the lead underwriter on the deal, which means that it took home the biggest slice of the fee pie. In exchange for moving shares into the hands of buyers, underwriters get to keep a percentage of the value of the shares sold. The exact fee jackpot is unknown, but it is estimated to exceed $500 million. Other underwriters included Goldman Sachs, Bank of America, Citigroup, HSBC, UBS, Merrill Lynch, Wachovia and Wells Fargo.
But will Visa prove as lucrative for investors when it trades Wednesday?
Few dispute the fact that Visa is a company poised to deliver earnings growth for years to come. It is the largest U.S. card company in terms of number of transactions and dollar amount; and in its IPO prospectus it predicted that its overseas market share would see more than 18% compounded annual growth through 2012. More importantly, like main rival MasterCard (MA), it doesn't hold any consumer debt on its books.
Dan Davidowitz, a research analyst at Polen Capital Management, adds that the company is taking care of lawsuits that might otherwise concern investors. It settled its longstanding legal dispute with American Express (AXP, Fortune 500) over Visa's alleged non-competitive practices, and it is about to settle a similar case with Discover.
In the immediate future, it may be hard for Visa to outrun a down market. "When markets turn around IPOs outperform the overall market, but untested companies fall out of favor when markets are down," says Kathy Smith, a principal at Renaissance.
And for the long-term, the biggest risk to Visa is that a worldwide recession reduces the use of both debit and credit cards, which would affect MasterCard as well, says David Menlow, director of IPOFinancial.com. For serious buyers, Menlow says it comes down to the strength of Visa itself. "The company is in the top quality tier and it's the number one company in its industry."
Tuesday, March 18, 2008
Owning Visa Priceless
Mar. 17, 2008 (Thomson Financial delivered by Newstex) --
NEW YORK (AP) - As Visa Inc. (NYSE:V) readies for what promises to be the largest initial public offering in U.S. history on Wednesday, analysts generally feel it won't do much to jolt a slumbering IPO market.'We have an IPO market anomaly with Visa,' said David Menlow, president of IPOfinancial.com. 'This is a singular seismic event that is not going to re-ignite the market as far as instill confidence or bring more deals into the system.'Francis Gaskins, president of IPODesktop.com, agreed.'It's a unique, one-time event,' he said. 'All eyes will be on Visa and then it's over.'The San Francisco-based credit card processor is offering a whopping 406 million shares, which it expects to price between $37 and $42, according to filings with the Securities and Exchange Commission. The underwriters have been given the option to buy up to an additional 40.6 million shares to cover any overallotments.In total, the IPO could raise up to nearly $19 billion -- surpassing current record holder AT&T (NYSE:SBT) (NYSE:T) Wireless, which raised $10.6 billion when it went public in 2000.
The latest market shake-up, driven by JPMorgan Chase (NYSE:JPM PRH) (NYSE:JPM PRX) (NYSE:JPM PRK) (NYSE:JPM PRJ) (NYSE:JPT) (NYSE:JPM) & Co.'s $2-per-share buyout of struggling investment bank Bear Stearns Cos. (NYSE:BSC) , could cause the IPO to price at a slight discount, but should have little effect overall, analysts said.'I don't foresee any reduction in demand for Visa based on the takeover,' said Scott Sweet, managing director of research firm IPO Boutique.'It might be a dollar or two per share short of what they thought they could get last week, but what is happening in the market today does not mean that Visa is not a very strong business,' said Nicholas Einhorn, an analyst at Renaissance Capital's IPOHome.com.
NEW YORK (AP) - As Visa Inc. (NYSE:V) readies for what promises to be the largest initial public offering in U.S. history on Wednesday, analysts generally feel it won't do much to jolt a slumbering IPO market.'We have an IPO market anomaly with Visa,' said David Menlow, president of IPOfinancial.com. 'This is a singular seismic event that is not going to re-ignite the market as far as instill confidence or bring more deals into the system.'Francis Gaskins, president of IPODesktop.com, agreed.'It's a unique, one-time event,' he said. 'All eyes will be on Visa and then it's over.'The San Francisco-based credit card processor is offering a whopping 406 million shares, which it expects to price between $37 and $42, according to filings with the Securities and Exchange Commission. The underwriters have been given the option to buy up to an additional 40.6 million shares to cover any overallotments.In total, the IPO could raise up to nearly $19 billion -- surpassing current record holder AT&T (NYSE:SBT) (NYSE:T) Wireless, which raised $10.6 billion when it went public in 2000.
The latest market shake-up, driven by JPMorgan Chase (NYSE:JPM PRH) (NYSE:JPM PRX) (NYSE:JPM PRK) (NYSE:JPM PRJ) (NYSE:JPT) (NYSE:JPM) & Co.'s $2-per-share buyout of struggling investment bank Bear Stearns Cos. (NYSE:BSC) , could cause the IPO to price at a slight discount, but should have little effect overall, analysts said.'I don't foresee any reduction in demand for Visa based on the takeover,' said Scott Sweet, managing director of research firm IPO Boutique.'It might be a dollar or two per share short of what they thought they could get last week, but what is happening in the market today does not mean that Visa is not a very strong business,' said Nicholas Einhorn, an analyst at Renaissance Capital's IPOHome.com.
GE Is Solid
General Electric, Berkshire Hathaway: Winners in a Losing Market
There are many losers in today’s financial markets. In short, if a company has exposure to any kind of assets that are mortgage related, then it is likely that Wall Street is punishing the share price. Different financial segments are getting hit, such as the brokers (Bear Stearns (BSC), Lehman Brothers (LEH), the banks (Citi (C), Wachovia (WB)), the monolines (Ambac (ABK), MBIA (MBI)), the insurers (AIG (AIG), Hartford Financial (HIG)) and the mortgage REITs (RAIT Financial (RAS), Thornbug (TMA)).
Right now, trying to catch a bottom in these stocks is extremely difficult – it seems like there is no end in sight. Several of the aforementioned stocks that are getting hit right now may eventually go higher when (and if) they recover from the current financial crisis (we are not there yet!). However, it is the purpose of the article to identify the companies that can take advantage of the current financial meltdown and profit from the misery of others.
An obvious choice as a winner in today’s environment is JP Morgan (JPM). Since JPM’s acquisition of Bear Stearns is currently all over the news, I will not go into depth of their acquisition.
In my opinion, two other companies stand to benefit from the financial crisis – General Electric (GE) and Berkshire Hathaway (BRK.A) (BRK.B). Both companies maintain a AAA credit rating – and essentially are the only financial companies that carry such distinction (the other companies are Automatic Data Processing (ADP), Exxon Mobil (XOM), Johnson & Johnson (JNJ), Pfizer (PFE) and UPS (UPS). Technically, Freddie Mac (FRE) and Fannie Mae (FNM) are also AAA rated, but they can’t invest like GE and BRK.) The strong credit ratings of GE and BRK allow both companies to have an overall lower cost of capital while making investments, increasing overall returns. In addition, both GE and BRK are large enough such that they can make big investments that other companies may not be able to make
In addition to their excellent credit ratings, both GE and BRK are similar in that both are conglomerates. One big advantage to the conglomerate structure is diversification. There may be periods where some businesses may be struggling within the conglomerate, but other businesses may be excelling to offset the struggling businesses. Another advantage of the conglomerate is that cash generated from the businesses can be reinvested into other business lines and/or other passive investments. Both GE and BRK have huge investment and finance divisions, and both have historically been good allocators of capital.
Considering both their strong credit ratings and their track record for making good investments, I believe that both GE and BRK provide interesting investment opportunities. In my opinion, the biggest risk for both these companies is that their businesses may struggle as the U.S. recession continues (assuming we are in a recession, which I believe we are). Each investor will have to weigh the benefits of the potential opportunities these companies will have versus the tough business environment. The result may be erratic share prices in the short term with above average returns for long-term investors (over two years).
There are many losers in today’s financial markets. In short, if a company has exposure to any kind of assets that are mortgage related, then it is likely that Wall Street is punishing the share price. Different financial segments are getting hit, such as the brokers (Bear Stearns (BSC), Lehman Brothers (LEH), the banks (Citi (C), Wachovia (WB)), the monolines (Ambac (ABK), MBIA (MBI)), the insurers (AIG (AIG), Hartford Financial (HIG)) and the mortgage REITs (RAIT Financial (RAS), Thornbug (TMA)).
Right now, trying to catch a bottom in these stocks is extremely difficult – it seems like there is no end in sight. Several of the aforementioned stocks that are getting hit right now may eventually go higher when (and if) they recover from the current financial crisis (we are not there yet!). However, it is the purpose of the article to identify the companies that can take advantage of the current financial meltdown and profit from the misery of others.
An obvious choice as a winner in today’s environment is JP Morgan (JPM). Since JPM’s acquisition of Bear Stearns is currently all over the news, I will not go into depth of their acquisition.
In my opinion, two other companies stand to benefit from the financial crisis – General Electric (GE) and Berkshire Hathaway (BRK.A) (BRK.B). Both companies maintain a AAA credit rating – and essentially are the only financial companies that carry such distinction (the other companies are Automatic Data Processing (ADP), Exxon Mobil (XOM), Johnson & Johnson (JNJ), Pfizer (PFE) and UPS (UPS). Technically, Freddie Mac (FRE) and Fannie Mae (FNM) are also AAA rated, but they can’t invest like GE and BRK.) The strong credit ratings of GE and BRK allow both companies to have an overall lower cost of capital while making investments, increasing overall returns. In addition, both GE and BRK are large enough such that they can make big investments that other companies may not be able to make
In addition to their excellent credit ratings, both GE and BRK are similar in that both are conglomerates. One big advantage to the conglomerate structure is diversification. There may be periods where some businesses may be struggling within the conglomerate, but other businesses may be excelling to offset the struggling businesses. Another advantage of the conglomerate is that cash generated from the businesses can be reinvested into other business lines and/or other passive investments. Both GE and BRK have huge investment and finance divisions, and both have historically been good allocators of capital.
Considering both their strong credit ratings and their track record for making good investments, I believe that both GE and BRK provide interesting investment opportunities. In my opinion, the biggest risk for both these companies is that their businesses may struggle as the U.S. recession continues (assuming we are in a recession, which I believe we are). Each investor will have to weigh the benefits of the potential opportunities these companies will have versus the tough business environment. The result may be erratic share prices in the short term with above average returns for long-term investors (over two years).
Monday, March 17, 2008
Exxon's Future
ExxonMobil Is Best in Breed
ExxonMobil (XOM: NYSE) By Credit Suisse ($87.19, March 14, 2008)
HAVING REVIEWED THE STRATEGY presentations of the three big U.S. oils, we have concluded that ExxonMobil has the best combination of business momentum, free cash yield and capital efficiency among the group. We are upgrading the stock to an Outperform from Neutral and we are setting a $102 target price.
Our rationale for this upgrade is based partly on the recent disconnect between the performance of commodity prices and the performance of the U.S. Big Oil sector. Oil prices are well over $100 per barrel, suggesting consensus earnings forecasts for the sector need to move up in the near term.
Last week ExxonMobil disappointed some investors with an increase in capital expenditure, but we saw this as more of a mark-to-market and ExxonMobil is still the most efficient re-investor of capital in the business.
There is some inevitability to ExxonMobil's higher upstream capital expenditure: ExxonMobil is in the same industry and in many of the same projects as the other Big Oils. ExxonMobil's costs had been relatively contained in the 2005-2007 period as for projects executed in that timeframe ExxonMobil had pre-bought a significant amount of steel, had contracted drilling rigs at favorable rates and had secured some advantageous construction contracts.
As cost inflation accelerated over the last several years, we think this favorable contracting strategy, plus the underlying execution excellence of the company, had shielded ExxonMobil from the full effect of current pricing. Eventually, however, this protection wears off as older projects are completed and new projects take their place. ExxonMobil is aiming to remain at the top end of industry efficiency measures, but cost inflation finds everyone in the end.
ExxonMobil combines reasonable volume growth to 2010 with the highest operating free cash flow in the industry, and we find this attractive in the current environment. A weaker U.S. refining environment will hurt all of the Big Oils, but ExxonMobil generated only 10% of its net income in U.S. refining and marketing last year, the peak of the U.S. refining cycle, and 2008 will be under 6%.
Continued capital discipline and a focus on return on capital employed are the building blocks of ExxonMobil's high free-cash-flow generation, and the stock is currently exhibiting an attractive free-cash-flow yield, we think. ExxonMobil effectively distributed all of the free-cash-flow in 2006 and 2007 via dividends and share buybacks and at the analysts meeting it was implied that this would continue in 2008 and 2009.
A weak U.S. dollar is helping push up oil prices, and while this puts a dent in headline production volumes, the net earnings effect is positive. Big Oil equity prices have not benefited enough from the 20% increase in the oil price since February.
We think this will change in the near term, pushing up the relative performance of Big Oil versus the S&P 500, and ExxonMobil is our favorite U.S. Big Oil name to play this anticipated re-rating.
ExxonMobil (XOM: NYSE) By Credit Suisse ($87.19, March 14, 2008)
HAVING REVIEWED THE STRATEGY presentations of the three big U.S. oils, we have concluded that ExxonMobil has the best combination of business momentum, free cash yield and capital efficiency among the group. We are upgrading the stock to an Outperform from Neutral and we are setting a $102 target price.
Our rationale for this upgrade is based partly on the recent disconnect between the performance of commodity prices and the performance of the U.S. Big Oil sector. Oil prices are well over $100 per barrel, suggesting consensus earnings forecasts for the sector need to move up in the near term.
Last week ExxonMobil disappointed some investors with an increase in capital expenditure, but we saw this as more of a mark-to-market and ExxonMobil is still the most efficient re-investor of capital in the business.
There is some inevitability to ExxonMobil's higher upstream capital expenditure: ExxonMobil is in the same industry and in many of the same projects as the other Big Oils. ExxonMobil's costs had been relatively contained in the 2005-2007 period as for projects executed in that timeframe ExxonMobil had pre-bought a significant amount of steel, had contracted drilling rigs at favorable rates and had secured some advantageous construction contracts.
As cost inflation accelerated over the last several years, we think this favorable contracting strategy, plus the underlying execution excellence of the company, had shielded ExxonMobil from the full effect of current pricing. Eventually, however, this protection wears off as older projects are completed and new projects take their place. ExxonMobil is aiming to remain at the top end of industry efficiency measures, but cost inflation finds everyone in the end.
ExxonMobil combines reasonable volume growth to 2010 with the highest operating free cash flow in the industry, and we find this attractive in the current environment. A weaker U.S. refining environment will hurt all of the Big Oils, but ExxonMobil generated only 10% of its net income in U.S. refining and marketing last year, the peak of the U.S. refining cycle, and 2008 will be under 6%.
Continued capital discipline and a focus on return on capital employed are the building blocks of ExxonMobil's high free-cash-flow generation, and the stock is currently exhibiting an attractive free-cash-flow yield, we think. ExxonMobil effectively distributed all of the free-cash-flow in 2006 and 2007 via dividends and share buybacks and at the analysts meeting it was implied that this would continue in 2008 and 2009.
A weak U.S. dollar is helping push up oil prices, and while this puts a dent in headline production volumes, the net earnings effect is positive. Big Oil equity prices have not benefited enough from the 20% increase in the oil price since February.
We think this will change in the near term, pushing up the relative performance of Big Oil versus the S&P 500, and ExxonMobil is our favorite U.S. Big Oil name to play this anticipated re-rating.
The Fed Meets Tomorrow
After this weekend's financial crisis the Fed's meeting on Tuesday takes on even more importance. The Fed is expected to cut the Fed Funds Rate from 3% to 2%.
In the United States, the federal funds rate is the interest rate at which private depository institutions (mostly banks) lend balances (federal funds) at the Federal Reserve to other depository institutions, usually overnight.[1] Changing the target rate is one form of open market operations that the Chairman of the Federal Reserve uses to regulate the supply of money in the U.S. economy.[2]
In the United States, the federal funds rate is the interest rate at which private depository institutions (mostly banks) lend balances (federal funds) at the Federal Reserve to other depository institutions, usually overnight.[1] Changing the target rate is one form of open market operations that the Chairman of the Federal Reserve uses to regulate the supply of money in the U.S. economy.[2]
Collapse Of A Bear
The collapse of Bear Stearns was rapid and deadly. The 52 week high of Bear Stearns stock was $159.36 and today is worth $2-3.00. J.P. Morgan has offered to buy out Bear Stearns for $2.00 a share for a total of $236m. As of Friday Bear Stearns was worth $3.5b. Last January (2007) Bear was worth $20b. Oh how the mighty have fallen.
Watch the markets today and this week closely. Not where they start today but where they end on Thursday. Also note that two other major brokerages/banks report tomorrow, Goldman Sachs and Lehman Brothers, and Morgan Stanley reports on Wednesday.
To help facilitate the J.P. Morgan deal, the Federal Reserve is taking the extraordinary step of providing as much as $30 billion in financing for Bear Stearns's less-liquid assets, such as mortgage securities that the firm has been unable to sell, in what is believed to be the largest Fed advance on record to a single company. Fed officials wouldn't describe the exact financing terms or assets involved. But if those assets decline in value, the Fed would bear any loss, not J.P. Morgan.
Watch the markets today and this week closely. Not where they start today but where they end on Thursday. Also note that two other major brokerages/banks report tomorrow, Goldman Sachs and Lehman Brothers, and Morgan Stanley reports on Wednesday.
To help facilitate the J.P. Morgan deal, the Federal Reserve is taking the extraordinary step of providing as much as $30 billion in financing for Bear Stearns's less-liquid assets, such as mortgage securities that the firm has been unable to sell, in what is believed to be the largest Fed advance on record to a single company. Fed officials wouldn't describe the exact financing terms or assets involved. But if those assets decline in value, the Fed would bear any loss, not J.P. Morgan.
What Is The Discount Rate/Window
The discount window is an instrument of monetary policy (usually controlled by central banks) that allows eligible institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions.
The interest rate charged on such loans by central bank is called the discount rate, base rate, repo rate, or primary rate. It is distinct from the federal funds rate or its equivalents in other currencies, which determine the rate at which banks lend money to each other. In recent years the discount rate has been approximately a percentage point above the federal funds rate (see Lombard credit). Because of this, it is a relatively unimportant factor in the control of the money supply, and is only taken advantage of at large volume during emergencies.
The interest rate charged on such loans by central bank is called the discount rate, base rate, repo rate, or primary rate. It is distinct from the federal funds rate or its equivalents in other currencies, which determine the rate at which banks lend money to each other. In recent years the discount rate has been approximately a percentage point above the federal funds rate (see Lombard credit). Because of this, it is a relatively unimportant factor in the control of the money supply, and is only taken advantage of at large volume during emergencies.
A Bear Week?
APFed Takes New Steps to Ease CrisisMonday March 17, 6:23 am ET By Jeannine Aversa, AP Economics Writer
Fed Takes Steps to Ease Crisis, Cuts Lending Rate to Financial Institutions to 3.25 Percent
WASHINGTON (AP) -- Worry about the damage a growing credit crisis is inflicting on an ailing U.S. economy led the Federal Reserve to make a rare weekend move, lowering a key lending rate before Wall Street opened Monday.
The central bank approved a cut in its emergency lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately, and created a lending facility for big investment banks to secure short-term loans. The new lending facility will be available to Wall Street firms on Monday.
"These steps will provide financial institutions with greater assurance of access to funds," Federal Reserve Chairman Ben Bernanke told reporters in a brief conference call Sunday evening.
The Fed acted just after JPMorgan Chase & Co. agreed to buy rival Bear Stearns Cos. for $236.2 million in a deal that represents a stunning collapse for one of the world's largest and most venerable investment banks. Just on Friday the Fed had raced to provide emergency financing to cash-strapped Bear Stearns through JPMorgan. Days earlier the Fed announced a set of other unconventional steps to thaw out a credit market in danger of freezing shut.
"It seems as if Bernanke & Co. are pulling out all the stops to avoid a serious financial market meltdown," Richard Yamarone, an economist at Argus Research, said Sunday evening.
However on world financial markets, Asian stocks plunged Monday after the JPMorgan and Fed announcements. Markets in Australia and New Zealand were also off and European stocks fell in early trading.
Oil prices hit a record in Asian trading as the value of the dollar continued its free fall and U.S. stock index futures were down sharply, suggesting Wall Street would open lower after sinking Friday.
"There is persistent credit uncertainty. Market players have been repeatedly let down which shows the subprime mortgage problems are so deep-rooted," said Atsuji Ohara, global strategist of Shinko Securities in Tokyo.
President Bush has scheduled a White House meeting Monday afternoon with his Working Group on Financial Markets, which includes Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox.
Paulson said Sunday, "I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets."
The new lending facility -- described as a cousin to the Fed's emergency lending "discount window" for banks -- is geared to give major investment houses a source of short-term cash on a regular basis -- if they need it.
It will be in place for at least six months and "may be extended as conditions warrant," the Fed said. The interest rate will be 3.25 percent and a range of collateral -- including investment-grade mortgage backed securities -- will be accepted to back the overnight loans.
The "discount" rate cut announced Sunday applies only to the short-term loans that financial institutions get directly from the Federal Reserve. It doesn't apply to individual borrowers.
The Fed's actions are the latest in a recent string of innovative steps to deal with a worsening credit crisis that has unhinged Wall Street. The action comes just two days before the central bank's scheduled meeting on Tuesday, where another big cut to a key interest rate that affects millions of people and businesses is expected to be ordered. That key rate is now at 3 percent and is expected to be cut by at least one-half percentage point on Tuesday. Analysts said the Fed's new steps may lessen pressure for a super-sized cut to that rate.
The Fed said in a statement that the steps are "designed to bolster market liquidity and promote orderly market functioning ... essential for the promotion of economic growth."
Even with the Fed's aggressive moves, economic and financial conditions keep deteriorating. An increasing number of economists believe the country already has slipped into its first recession since 2001. Many economists think that the economy is shrinking now in the January-to-March quarter. The first government figures on first-quarter economic activity will be released in late April.
The Fed on Sunday also approved the financing arrangement through which JPMorgan will acquire Bear Stearns. JPMorgan said the Fed will provide special financing for the deal. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets, according to JPMorgan.
AP Business writers Joe Bel Bruno and Madlen Read contributed to this report from New York.
Fed Takes Steps to Ease Crisis, Cuts Lending Rate to Financial Institutions to 3.25 Percent
WASHINGTON (AP) -- Worry about the damage a growing credit crisis is inflicting on an ailing U.S. economy led the Federal Reserve to make a rare weekend move, lowering a key lending rate before Wall Street opened Monday.
The central bank approved a cut in its emergency lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately, and created a lending facility for big investment banks to secure short-term loans. The new lending facility will be available to Wall Street firms on Monday.
"These steps will provide financial institutions with greater assurance of access to funds," Federal Reserve Chairman Ben Bernanke told reporters in a brief conference call Sunday evening.
The Fed acted just after JPMorgan Chase & Co. agreed to buy rival Bear Stearns Cos. for $236.2 million in a deal that represents a stunning collapse for one of the world's largest and most venerable investment banks. Just on Friday the Fed had raced to provide emergency financing to cash-strapped Bear Stearns through JPMorgan. Days earlier the Fed announced a set of other unconventional steps to thaw out a credit market in danger of freezing shut.
"It seems as if Bernanke & Co. are pulling out all the stops to avoid a serious financial market meltdown," Richard Yamarone, an economist at Argus Research, said Sunday evening.
However on world financial markets, Asian stocks plunged Monday after the JPMorgan and Fed announcements. Markets in Australia and New Zealand were also off and European stocks fell in early trading.
Oil prices hit a record in Asian trading as the value of the dollar continued its free fall and U.S. stock index futures were down sharply, suggesting Wall Street would open lower after sinking Friday.
"There is persistent credit uncertainty. Market players have been repeatedly let down which shows the subprime mortgage problems are so deep-rooted," said Atsuji Ohara, global strategist of Shinko Securities in Tokyo.
President Bush has scheduled a White House meeting Monday afternoon with his Working Group on Financial Markets, which includes Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox.
Paulson said Sunday, "I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets."
The new lending facility -- described as a cousin to the Fed's emergency lending "discount window" for banks -- is geared to give major investment houses a source of short-term cash on a regular basis -- if they need it.
It will be in place for at least six months and "may be extended as conditions warrant," the Fed said. The interest rate will be 3.25 percent and a range of collateral -- including investment-grade mortgage backed securities -- will be accepted to back the overnight loans.
The "discount" rate cut announced Sunday applies only to the short-term loans that financial institutions get directly from the Federal Reserve. It doesn't apply to individual borrowers.
The Fed's actions are the latest in a recent string of innovative steps to deal with a worsening credit crisis that has unhinged Wall Street. The action comes just two days before the central bank's scheduled meeting on Tuesday, where another big cut to a key interest rate that affects millions of people and businesses is expected to be ordered. That key rate is now at 3 percent and is expected to be cut by at least one-half percentage point on Tuesday. Analysts said the Fed's new steps may lessen pressure for a super-sized cut to that rate.
The Fed said in a statement that the steps are "designed to bolster market liquidity and promote orderly market functioning ... essential for the promotion of economic growth."
Even with the Fed's aggressive moves, economic and financial conditions keep deteriorating. An increasing number of economists believe the country already has slipped into its first recession since 2001. Many economists think that the economy is shrinking now in the January-to-March quarter. The first government figures on first-quarter economic activity will be released in late April.
The Fed on Sunday also approved the financing arrangement through which JPMorgan will acquire Bear Stearns. JPMorgan said the Fed will provide special financing for the deal. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets, according to JPMorgan.
AP Business writers Joe Bel Bruno and Madlen Read contributed to this report from New York.
Friday, March 14, 2008
Humana's Medicare Part D Problem
Humana's Hurting
By Brian Orelli, Ph.D. March 13, 2008
Humana's (NYSE: HUM) chart looks like steps in the Grand Canyon that go down to the Colorado River.
A day after the health-insurance provider took a 24% drop based on WellPoint's (NYSE: WLP) reduction of its 2008 guidance, Humana dropped another 14% yesterday on news that it would nearly halve its own guidance for the first quarter.
While WellPoint blamed its woes on higher-than-expected medical costs, Humana's gloomier outlook owes to a miscalculation in setting up its Medicare prescription-drug plans.
When Humana set up the plan, the Centers for Medicare and Medicaid Services (CMS) rules required it to lower the copayments on drugs because members are allowed to pay only a certain percentage of the total costs. But the company overestimated the use of high-cost drugs, when it should have assumed that members would substitute the lower-cost drugs that require lower copayments.
By lowering the copayments on drugs, Humana shifted more of the costs onto itself. That's bad enough, but the situation gets worse. Seniors who were taking high-cost medicines and looking for a deal found one in Humana's plans, which further increased its costs.
For Humana, the good news is that the problem is limited to this year. The Medicare plans reset every year, so it'll only have to carry the high costs of the plans for the rest of 2008. Hopefully, its 2009 plan is better constructed.
For the industry, the problem appears limited to Humana. The bigger issues surrounding rising health-care costs and lower member retention could still affect other companies in the industry. While Aetna (NYSE: AET) has reaffirmed its guidance, UnitedHealth Group (NYSE: UNH) was a little wishy-washy, saying "there may be pressure on first quarter and full year 2008 results" but that it was "premature to draw adverse conclusions."
Time will tell whether the industry is entering a small valley or the Grand Canyon, but one thing's for sure: First-quarter results for health-care companies will be interesting.
By Brian Orelli, Ph.D. March 13, 2008
Humana's (NYSE: HUM) chart looks like steps in the Grand Canyon that go down to the Colorado River.
A day after the health-insurance provider took a 24% drop based on WellPoint's (NYSE: WLP) reduction of its 2008 guidance, Humana dropped another 14% yesterday on news that it would nearly halve its own guidance for the first quarter.
While WellPoint blamed its woes on higher-than-expected medical costs, Humana's gloomier outlook owes to a miscalculation in setting up its Medicare prescription-drug plans.
When Humana set up the plan, the Centers for Medicare and Medicaid Services (CMS) rules required it to lower the copayments on drugs because members are allowed to pay only a certain percentage of the total costs. But the company overestimated the use of high-cost drugs, when it should have assumed that members would substitute the lower-cost drugs that require lower copayments.
By lowering the copayments on drugs, Humana shifted more of the costs onto itself. That's bad enough, but the situation gets worse. Seniors who were taking high-cost medicines and looking for a deal found one in Humana's plans, which further increased its costs.
For Humana, the good news is that the problem is limited to this year. The Medicare plans reset every year, so it'll only have to carry the high costs of the plans for the rest of 2008. Hopefully, its 2009 plan is better constructed.
For the industry, the problem appears limited to Humana. The bigger issues surrounding rising health-care costs and lower member retention could still affect other companies in the industry. While Aetna (NYSE: AET) has reaffirmed its guidance, UnitedHealth Group (NYSE: UNH) was a little wishy-washy, saying "there may be pressure on first quarter and full year 2008 results" but that it was "premature to draw adverse conclusions."
Time will tell whether the industry is entering a small valley or the Grand Canyon, but one thing's for sure: First-quarter results for health-care companies will be interesting.
The Health Of HMOs
From John Frankola
On Tuesday, WellPoint's (WLP) stock fell a whooping 28.3% as the company lowered guidance for the first quarter and full year. WellPoint reduced its EPS guidance for the first quarter to a range of $1.16 to $1.26, and its 2008 forecast to a range of $5.76 to $6.01. The mid-points of these ranges are about 16% and 8%, respectively, below WLP's previous guidance. The stock prices of other managed health care companies fell in sympathy. Aetna (AET), Coventry (CVH) and Unitedhealth (UNH) fell by 8.3%, 13.0% and 15.2%, respectively, on a day when the S&P 500 Index advanced 3.7%. WellPoint attributed the change in guidance to higher than expected medical costs, lower than expected fully insured enrollment and changing economic and regulatory environment.
Sell-side analysts were quick to reduce estimates, target prices and recommendations for WLP, as well as the other companies in the sector. On top of the reasons mentioned by the company, analysts are concerned that WellPoint's issues may signal the beginning of a cyclical downturn for the industry, which will be characterized by rising medical costs and competitive pricing. On top of these concerns, the managed care sector had already started to retreat as investors worried that a possible Democratic presidential victory could produce a more difficult regulatory environment.
From it 52-week high of 90.00 which occurred on January 8, WLP has declined 47% to its current price. It is now selling at just 8.0 times expected 2008 EPS. While sentiment has turned very negative on this sector, the current price level presents an attractive entry point for long-term investors. And while management has reduced guidance, they are still forecasting EPS growth of between 4% and 8% for 2008. (That doesn't seem like much of a cyclical downturn compared to other market sectors.)
Looking beyond the current weakness, WellPoint is well-position for long-term growth. It is the largest Blue Cross Blue Shield licensee, and with 35 million members, it is the largest managed care company in the U.S. when ranked by membership.
The managed care sector has a number of very attractive characteristics.
- There is an annuity aspect to the business - the vast majority of customers renew their coverage from year-to-year.
- After a number of years of industry consolidation, most geographic markets are now dominated by just two or three major competitors. This reduction in competition should keep pricing somewhat rational.
- The increased market share obtained industry leaders also gives the managed care companies more clout when negotiating fees paid for products and services.
- The size and scale which most companies have achieved present a barrier to entry for new competitors.
- With concern over rapidly rising healthcare costs, the managed care companies have strategically positioned themselves to be part of the healthcare cost solution. These companies realize their future success will depend on helping to control costs by forcing healthcare providers to be more efficient, providing products that give their members market incentives to control costs, and by making better use of information.
- Despite the current concern over a possible cyclical downturn, companies in this sector have historically demonstrated a high level of earnings and cash flow stability.
With the long-term fundamentals intact and a price/earnings ratio that is almost half that of the market, WLP looks to be a great value for long-term investors.
With the entire sector getting crushed in the wake of WellPoint's announcement, Aetna, Coventry and Unitedhealth also look attractive at current levels. All have a price/earnings ratio of 11 or less on 2008 EPS estimates. Aetna reiterated it guidance for 2008 this week, yet is trading 25% below its 52-week high. Coventry (down 31% from its 52-week high) could be an acquisition candidate at current price levels.
Its market cap is just $7 billion, compared to $21 billion, $47 billion and $26 billion, respectively, for Aetna, Unitedhealth and WellPoint. Unitedhealth (off 36% from its 52-week high) is the largest managed care company in terms of revenue and has the most diversified suite of products and services. Unitedhealth also made an announcement this week, recognizing some of the market's concerns, but stopping short of changing guidance.
Disclosure: Author owns a position in AET, CVH and WLP and manages accounts which hold AET, CVH, UNH and WLP.
On Tuesday, WellPoint's (WLP) stock fell a whooping 28.3% as the company lowered guidance for the first quarter and full year. WellPoint reduced its EPS guidance for the first quarter to a range of $1.16 to $1.26, and its 2008 forecast to a range of $5.76 to $6.01. The mid-points of these ranges are about 16% and 8%, respectively, below WLP's previous guidance. The stock prices of other managed health care companies fell in sympathy. Aetna (AET), Coventry (CVH) and Unitedhealth (UNH) fell by 8.3%, 13.0% and 15.2%, respectively, on a day when the S&P 500 Index advanced 3.7%. WellPoint attributed the change in guidance to higher than expected medical costs, lower than expected fully insured enrollment and changing economic and regulatory environment.
Sell-side analysts were quick to reduce estimates, target prices and recommendations for WLP, as well as the other companies in the sector. On top of the reasons mentioned by the company, analysts are concerned that WellPoint's issues may signal the beginning of a cyclical downturn for the industry, which will be characterized by rising medical costs and competitive pricing. On top of these concerns, the managed care sector had already started to retreat as investors worried that a possible Democratic presidential victory could produce a more difficult regulatory environment.
From it 52-week high of 90.00 which occurred on January 8, WLP has declined 47% to its current price. It is now selling at just 8.0 times expected 2008 EPS. While sentiment has turned very negative on this sector, the current price level presents an attractive entry point for long-term investors. And while management has reduced guidance, they are still forecasting EPS growth of between 4% and 8% for 2008. (That doesn't seem like much of a cyclical downturn compared to other market sectors.)
Looking beyond the current weakness, WellPoint is well-position for long-term growth. It is the largest Blue Cross Blue Shield licensee, and with 35 million members, it is the largest managed care company in the U.S. when ranked by membership.
The managed care sector has a number of very attractive characteristics.
- There is an annuity aspect to the business - the vast majority of customers renew their coverage from year-to-year.
- After a number of years of industry consolidation, most geographic markets are now dominated by just two or three major competitors. This reduction in competition should keep pricing somewhat rational.
- The increased market share obtained industry leaders also gives the managed care companies more clout when negotiating fees paid for products and services.
- The size and scale which most companies have achieved present a barrier to entry for new competitors.
- With concern over rapidly rising healthcare costs, the managed care companies have strategically positioned themselves to be part of the healthcare cost solution. These companies realize their future success will depend on helping to control costs by forcing healthcare providers to be more efficient, providing products that give their members market incentives to control costs, and by making better use of information.
- Despite the current concern over a possible cyclical downturn, companies in this sector have historically demonstrated a high level of earnings and cash flow stability.
With the long-term fundamentals intact and a price/earnings ratio that is almost half that of the market, WLP looks to be a great value for long-term investors.
With the entire sector getting crushed in the wake of WellPoint's announcement, Aetna, Coventry and Unitedhealth also look attractive at current levels. All have a price/earnings ratio of 11 or less on 2008 EPS estimates. Aetna reiterated it guidance for 2008 this week, yet is trading 25% below its 52-week high. Coventry (down 31% from its 52-week high) could be an acquisition candidate at current price levels.
Its market cap is just $7 billion, compared to $21 billion, $47 billion and $26 billion, respectively, for Aetna, Unitedhealth and WellPoint. Unitedhealth (off 36% from its 52-week high) is the largest managed care company in terms of revenue and has the most diversified suite of products and services. Unitedhealth also made an announcement this week, recognizing some of the market's concerns, but stopping short of changing guidance.
Disclosure: Author owns a position in AET, CVH and WLP and manages accounts which hold AET, CVH, UNH and WLP.
Thursday, March 13, 2008
Duh
Store sales suffer big stumble
Retail sales were much worse than expected in February, a sign that consumers are cutting back.
By Parija B. Kavilanz, CNNMoney.com senior writer
Last Updated: March 13, 2008: 8:41 AM EDT
Monthly retail sales suffered a surprising drop last month as American households continued to curtail their spending amid higher energy and food prices and a weakening jobs market.
The Commerce Department reported Thursday that total retail sales fell 0.6%, compared to a revised 0.4% increase in January. January sales were originally reported to have increased 0.3%
Economists surveyed by Briefing.com expected a 0.2% gain in retail sales for the month.
Stripping out volatile auto sales, sales fell 0.2% compared to a revised 0.5% gain in January. January sales, excluding autos, were originally reported to have increased 0.3%.
Economists had anticipated a 0.2% gain in the measure.
Retail sales were much worse than expected in February, a sign that consumers are cutting back.
By Parija B. Kavilanz, CNNMoney.com senior writer
Last Updated: March 13, 2008: 8:41 AM EDT
Monthly retail sales suffered a surprising drop last month as American households continued to curtail their spending amid higher energy and food prices and a weakening jobs market.
The Commerce Department reported Thursday that total retail sales fell 0.6%, compared to a revised 0.4% increase in January. January sales were originally reported to have increased 0.3%
Economists surveyed by Briefing.com expected a 0.2% gain in retail sales for the month.
Stripping out volatile auto sales, sales fell 0.2% compared to a revised 0.5% gain in January. January sales, excluding autos, were originally reported to have increased 0.3%.
Economists had anticipated a 0.2% gain in the measure.
Target Raising Cash
From Todd Sullivan -
This looks like another activist victory for Bill Ackman.It is being reported that Target (TGT) is currently in talks to sell 1/2 it credit card business. Details are not forthcoming at this time. The sale is expected to net $4 billion which could repurchase almost 10% of outstanding shares at today's prices. The move is a good one considering the deterioration in quality of the portfolio and will enable the company to repurchase shares to keep EPS growing to satisfy investors, even if the actual net income line does not grow that fast.
This looks like another activist victory for Bill Ackman.It is being reported that Target (TGT) is currently in talks to sell 1/2 it credit card business. Details are not forthcoming at this time. The sale is expected to net $4 billion which could repurchase almost 10% of outstanding shares at today's prices. The move is a good one considering the deterioration in quality of the portfolio and will enable the company to repurchase shares to keep EPS growing to satisfy investors, even if the actual net income line does not grow that fast.
Wednesday, March 12, 2008
Gee - no GE!
From Ockham Research
General Electric (GE) stock has underperformed versus the Dow and the S&P 500 over the last five years, but it is now showing signs of improvement. GE is making the effort to further diversify as its Energy Financial Services unit has plans to invest more than 5 times its normal 3 year investment in overseas development, some $5 billion. This is a wise move for the already multifaceted company that sells a wide range of products from appliances to ultrasound equipment. However, the significant news of today is all about their energy infrastructure sales in emerging markets in Asia, Latin America, and the Middle East.
Emerging markets such as these have been growing quite rapidly and their infrastructure spending simply has not kept pace. The Asian Development Bank estimates that there is a need in the next 10 years for over $3 trillion in roads, energy projects, ports, and sanitation. Current investment trends suggest that infrastructure investment could fall short of that estimate by half. Energy infrastructure expenditures in emerging markets is one way that GE is hoping to offset weakness from domestic sales as the U.S. economy continues to slow. Thus, GE is jumping at the opportunity to assist emerging economies mostly with energy and water projects.
However, GE is also at the forefront of the rapidly growing wind power industry, as evidenced by a $1 billion deal to build a wind turbine in the United States, its second such contract in recent months. Out of all U.S. energy producing projects completed during 2007, wind power accounted for about 30%.
General Electric is trending towards a more global business model, as last year was the first year in GE’s history in which more than half of their revenue was from sales outside of the U.S. The ramp up of GE’s Energy unit to focus on emerging markets is just one of the ways that GE is working globally.
Since U.S. consumer sentiment is weak, it appears that this strategy shift could not have come at a better time. We have little reason to question the prudence of GE management in making such a leap. Management also achieved a fairly high 19.2% return-on-equity [ROE] at last reporting. Based on the Ockham Research methodology, we believe that GE’s price-to-sales is about a third lower than we would normally expect given historical ranges. Furthermore, we would expect to see price-to-cash flow in the range of 12.1 to 16.3, but this valuation metric is also fairly low at only 9.2 times. As such, patient investors should consider purchasing GE shares in the low thirties.
General Electric (GE) stock has underperformed versus the Dow and the S&P 500 over the last five years, but it is now showing signs of improvement. GE is making the effort to further diversify as its Energy Financial Services unit has plans to invest more than 5 times its normal 3 year investment in overseas development, some $5 billion. This is a wise move for the already multifaceted company that sells a wide range of products from appliances to ultrasound equipment. However, the significant news of today is all about their energy infrastructure sales in emerging markets in Asia, Latin America, and the Middle East.
Emerging markets such as these have been growing quite rapidly and their infrastructure spending simply has not kept pace. The Asian Development Bank estimates that there is a need in the next 10 years for over $3 trillion in roads, energy projects, ports, and sanitation. Current investment trends suggest that infrastructure investment could fall short of that estimate by half. Energy infrastructure expenditures in emerging markets is one way that GE is hoping to offset weakness from domestic sales as the U.S. economy continues to slow. Thus, GE is jumping at the opportunity to assist emerging economies mostly with energy and water projects.
However, GE is also at the forefront of the rapidly growing wind power industry, as evidenced by a $1 billion deal to build a wind turbine in the United States, its second such contract in recent months. Out of all U.S. energy producing projects completed during 2007, wind power accounted for about 30%.
General Electric is trending towards a more global business model, as last year was the first year in GE’s history in which more than half of their revenue was from sales outside of the U.S. The ramp up of GE’s Energy unit to focus on emerging markets is just one of the ways that GE is working globally.
Since U.S. consumer sentiment is weak, it appears that this strategy shift could not have come at a better time. We have little reason to question the prudence of GE management in making such a leap. Management also achieved a fairly high 19.2% return-on-equity [ROE] at last reporting. Based on the Ockham Research methodology, we believe that GE’s price-to-sales is about a third lower than we would normally expect given historical ranges. Furthermore, we would expect to see price-to-cash flow in the range of 12.1 to 16.3, but this valuation metric is also fairly low at only 9.2 times. As such, patient investors should consider purchasing GE shares in the low thirties.
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