Thursday, April 30, 2009

Power to the Shareholders

CEOs and Boards who don't want to be pushed to change by their shareholders, and their apologists, have often trotted out the argument that, if you make it easier to throw out bad CEOs and bad directors, no one will want to serve.

In my view, this argument is completely off-base. There will always be well qualified people capable of serving on boards. There were after Sarbanes-Oxley passed (although we were warned there wouldn't be), and there will be after the SEC green-lights "proxy access" and Schumer's bill passes.

Let's remember, any activist investor who wants to challenge a CEO or board still has to make his or her case. No one is going to get a free pass from other shareholders just for complaining.

There's no question that finally giving shareholders a voice and a real ability to reshape a board will have dramatic ramifications on the way most of these sleepy boards operate. Power to the shareholders!

Position: None.

Originally published in on 4/27/2009 11:16 AM EDT

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Another Tool for Activists, thanks to Chuck Schumer

If Chuck Schumer has his way, he'll add several arrows to be available to activist investors seeking to influence under-performing managements and boards of directors.

According to an article over the weekend, Schumer is preparing a bill that would be favorable to shareholders in the following ways (summarized in

1. Say-on-Pay - require companies to give shareholders an annual nonbinding vote on executive pay practices

2. Say-on-Severance - give shareholders a nonbinding vote on severance packages for executives following mergers or acquisitions

3. Proxy Access - buttress potential SEC rules that would make it easier and cheaper for investors to nominate their own directors (article says SEC is considering a number of "proxy access" techniques and could issue a proposal in mid-May)

4. No More Classified Boards - require companies to hold annual director elections rather than putting only a portion of the board up to vote each year

5. Majority Vote Standard for Director Elections- require directors to resign if they don't win a majority of shares voted

6. Independent Board Chairs - require board chair to be independent

7. Risk Management Board Committees - require boards to appoint special committees to oversee risk management

In my view, the most important parts of this are numbers 3, 4, 5, and 7. However, all these subtle changes, combined with the SEC's decision to revisit "Proxy Access" later next month and their decision to disallow broker votes in being automatically counted in favor of incumbent management on shareholders votes, will lead to a sea-change in how activists engage with entrenched boards and managers starting in 2010.

Position: None.

Originally published in on 4/27/2009 9:04 AM EDT

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Is Whirlpool Rally for Real?

Whirlpool (WHR) was one of many debt-laden companies that was taken to the woodshed in the first 2.5 months of this year. It's price was halved on concerns about (1) continued housing decline leading to softened demand for its appliances, (2) weakness overseas, and (3) its future pension commitments.

It's now back to similar levels to the start of the year, as it's rallied off the March lows. It came out with its latest quarterly earnings this morning which posted a surprise profit due to cost cuts in Q1 which took effect and about $100MM in gains from a change they made in how they track their pension commitments. Cost savings have driven big gains in surprises we've heard recently in other companies reporting in the last few weeks, although WHR's stock is down in pre-market trading.

However, WHR saw revenues drop 23% in the last quarter. It cut expectations for the rest of the year. Europe declined faster than previously forecast. And, of course, it still has the pension albatross hanging over it.

Doug Kass is readying a piece for later today, in which he suggests taking some money off the table given how far and how fast this market has rallied since his prescient long call of early March.

With that in mind, you need to be making a short-list of weak stocks which have snapped back too much, given their fundamentals. I think WHR is one.

Position: None.

Originally published in on 4/27/2009 8:36 AM EDT

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John Thain vs. Ken Lewis vs. Hank Paulson vs. Ben Bernanke

There's something highly annoying about watching the blame game playing out over the last week, first with Ken Lewis blaming Hank Paulson and Ben Bernanke and, this morning, with John Thain getting in some licks against the guy who saved his firm from a Lehman-like outcome.

The press and shareholders often complain about the size of executive compensation (as well they should), but the truth is that execs and most notably CEOs (not unlike politicians) are driven by a more powerful motivation (especially towards the end of their careers): preservation and enhancement of their reputation and legacy.

What prompted Ken Lewis last week to point the finger at the US government for Bank of America's (BAC) troubles is the fact that he'll be facing the music this week at his shareholders' meeting. There will be a large number of highly respected shareholders voting against him and he might well follow Terry Semel's lead and resign a few days afterwards, if the votes against are large enough.

In Lewis' mind, his life's work (building up BAC into the world's largest financial supermarket -- no longer a positive -- buying FleetBoston, MBNA, Countrywide, and Merrill) is about to go by the boards with a negative vote. That would be even more devastating to him than losing his job or a paycheck.

Lewis is putting up his last defense in striking out at Paulson and Bernanke. Nothing personal guys, business is business.

For Thain, the situation is different. This is a guy that should have another good 15 years in front of him as a major financial services CEO. Now, that's in question since he decided to move up the Merrill bonuses last year and the whole office deco-gate.

In my view, neither man is coming off well with their latest accusations and both will have to spend more time in the penalty box. For Lewis, that might include a large mark is his career accomplishments after this week's vote.

Position: None.

Originally published in RealMoney on 4/27/2009 7:39 AM EDT.

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Wednesday, April 29, 2009

Shareholders Unite: Ken Lewis Ousted as Bank of America Chairman

Ken Lewis has been removed as Chairman of Bank of America (BAC), as we predicted earlier. Massey has been named Chair. It might signal Lewis' leaving the CEO role soon.

Results of the vote are here.

Shareholders almost approved a proposal giving them the right to hold special stockholder meetings (to oust directors during the year) -- missing the votes needed by 0.5%. They were also 9% away from approving the say-on-pay proposal.

What's scariest for any inept CEO or director about these results is that they included "broker votes" going in BAC's favor. That is, all the shares held by brokers who are never instructed by the underlying shareholder how to vote those shares usually throw them behind the current management and board. Next year, in 2010, that changes and those votes won't be counted. It's likely in most corporate elections, pro-shareholder votes on director re-elections and shareholder proposals will increase by 15 - 20%.

We might start to see some real changes in our boardrooms across America.

Position: None.

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Great Day for Long-Suffering Microsoft Holders

A +10% day for the Microsoft (MSFT) longs. When was the last time that happened?

Obviously, despite Chris Liddell's somber tones in yesterday's earnings call, the Street had expected much worse and liked the OpEx and CapEx savings the company has quickly put in place.

Where does the stock go from here? I think it's still under-valued relative to its peers, some of whom are up +35% for the year. Microsoft has been tech's forgotten man -- flat for the year even with today's ramp.

Lingering questions remain about how management is going to leverage its strong cash position into actual operational growth, how to deal with sluggish PC demand, and what it is going to do to stop the bleeding in its Internet group. But, for today, Microsoft investors can smile.

Position: Long MSFT.

Originally published in on 4/24/2009 4:23 PM EDT

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SEC puts Under-performing CEOs and Directors on Notice

Some great news today that the SEC is planning to end the current broker vote rules. This is a "win" for any shareholder who is tired of seeing over-paid and under-performing directors re-elected by seemingly vast majorities of shareholders at their annual meeting.

Take the Citigroup (C) meeting earlier this week. Several in the media pointed out that, despite the large number of angry shareholders voicing their displeasure at the meeting, Citi's board (including Vikram Pandit) was "comfortably" re-elected with about 70% of the vote. Turns out this is really an inflated number.

As the Wall Street Journal reported today, these vote numbers are skewed because the large number of brokers, who hold shares in companies and never hear from the underlying shareholders as to how they want those votes cast, end up throwing them behind management.
The article discusses the upcoming Bank of America (BAC) meeting next week where Ken Lewis will face a lot of heat. Because Ken Lewis will have 1.22 billion broker votes in the bag from the start, he only will need to capture about one-third of the votes from real voting shareholders to "win" a majority of support.

The SEC, under Mary Schapiro, is saying that this free ride is over starting in 2010. These broker votes will no longer count towards the encumbents' stash. All CEOs and directors will truly have to receive a majority vote. That's good for everyone -- including, ultimately, the directors. We'll have much more vigilant boards and better capital markets.

If Ken Lewis survives the vote next week, he likely won't in 2010 under these new rules, which is why my bet is that he announces his departure sometime this summer (after declaring that BAC is stonger than ever and poised to reap the benefits of his Merrill and Countrywide deals).

Position: None.

Originally published in on 4/24/2009 2:48 PM EDT

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Benihana (BNHNA): Another Ignored Restaurant

Last January, Scott Rothbort recommended Benihana (BNHNA) when it was trading around $2.30. It's roughly doubled since then.

For the last month, leading into some good earnings, the stock has been on a tear -- doubling. Despite the big move up and hitting Scott's earlier target, I would hang on to it from here.
It's significantly lagged other consumer restaurant chains over the past year, even with its move in the last month. The trailing Enterprise Value to EBITDA multiple is 2.7x vs. PF Chang's China Bistro (PFCB) at 6.8x. BNHNA has a much heavier debt-load relative to its cash than PCFB. But in this environment, with some positive earnings, a further doubling in shares from here isn't unreasonable. The stock is up big today, so you might want to wait for a better entry.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider BNHNA to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Position: None.

Originally published in on 4/24/2009 2:01 PM EDT

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RUTH and MRT: Finally Participating

Yesterday, in the last half hour of trading, I made the case that Ruth's Chris (RUTH) and Morton's (MRT) had missed out of the run-up in restaurants because they cater to business travelers, not consumers. However, I thought a turn was coming.

Today, we see that turn. RUTH is up 34% and MRT is up 18%.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider RUTH and MRT to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Position: None.

Originally published in on 4/24/2009 11:31 AM EDT

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Betting on M&A Skills

We constantly hear about tech companies' strong balance sheets. While some, like Apple (AAPL) and Microsoft (MSFT), seem intent on building the largest pile of cash possible, others will no doubt use their cash to begin making acquisitions in the next year.

One lens to apply to your stock selection then should be judging a company's M&A purchase and integration skills. Some companies -- like Yahoo (YHOO) and EBAY -- have a track record of making lots of unrelated acquisitions at inflated prices (today we read about YHOO shutting down its 1999 GeoCities group because it's not competitive). EBAY is now in the process of unwinding itself from that failed approach and it's likely that things will change in this regard under Carol Bartz at YHOO.

When MSFT has made acquisitions (like aQuantive or its investment in Facebook), it's over-paid, giving the sense it's more desperate than thoughtful. Fears about its lack of M&A integration skills among its management team helped push investors to urge Ballmer to drop the YHOO bid last year.

The three tech companies who have proven themselves adept at making strategic deals at fair prices and then quickly integrating them into the fold are Oracle (ORCL), IBM, and Cisco (CSCO). There are more deals ahead for the sector and these companies have an edge for their shareholders in seeking out the best of what's for sale.

Position: Long MSFT.

Originally published in on 4/24/2009 9:43 AM EDT

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Metalico (MEA) is Due for a Rebound

Metalico (MEA) is a scrap steel provider in New Jersey and Upstate New York. Last June, this was almost a $20 stock, with a large institutional following. It hit $1.15 as a low in November, as investors disgorged commodity stocks in general -- with scrap steel seen as being even more downstream than the steel stocks themselves, making them even less desirable.

This morning, Metalico announced a debt-for-equity swap with some of their creditors to reduce the company's debtload by $10mm, taking it down to approximately $175mm. Their cash balance is around $63MM. This should provide a modest boost to the stock this morning as we've seen with other leveraged companies in this environment.

Another reason to look at the stock is that is has lagged the rebound of other scrap steel providers such as Schnitzer Steel (SCHN) and Steel Dynamics (STLD) over the last 6 months by 110% and 40% respectively. It's another baby-with-the-bathwater stock that is due to rebound (although it sports a higher Enterprise Value to EBITDA ratio than the two other scrap steel companies).

Please note that due to factors including low market capitalization and/or insufficient public float, we consider MEA to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Position: Long MEA.

Originally Published in on 4/24/2009 8:59 AM EDT

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MSFT's Earnings Call: No Ballmer and No Strategy

Microsoft (MSFT) held its Q309 earnings call last night. The market liked that they met the consensus of $0.39 EPS (if you back out severance costs). They liked that the company announced an additional reduction of OpEx by $1B and CapEx by $200MM from the January call. Shares ended the after-hours session up 3%.

But, the real reason for the rally was that MSFT didn't fall off a cliff.

Some observations about the call:

Where was Steve? Steve Ballmer pulled a Vikram and didn't make himself available for the call. That shocked me, given the short interest and bearish sentiment on the stock over the last year. The message Ballmer -- and any CEO who does this -- sends to shareholders (including MSFT employees) is: "you're not important enough for me to spend my time with you." Evidently he was doing "real" operational work -- perhaps thinking of how to get the Online Services Business (OSB) segment to start making money.

A Dour View. Chris Liddell, the CFO, handled the call and provided three quarters of an hour of pure bleakness. There were no upbeat earnings to discuss like at AAPL or AMZN. You get the sense from Liddell that everyone at MSFT is in the bunker waiting for the all-clear. The leaders' best guess of when that will happen seems to be FY11 or FY12. Not very motivating for employees -- or investors. Fortunately for me a holder of the stock, the market seems to discount Liddell's apocalyptic views.

"Hurry Along. Nothing to See Here." MSFT's new GM of IR at MSFT, Bill Koefoed, who handled the earnings call, had the most militaristic approach I've ever heard to analysts on an earnings call. The analysts were warned they would get 1 question. It had to be short -- no embedding multi-part, multi-threaded question, and certainly no follow-ups. You had the impression these analysts were being hustled in the room to ask their question and hustled right back out. Koefoed also had an uncanny ability to not allow half a second to pass between Liddell's last word and urging to moderator to get on to the next analyst. The call ended 49 minutes after it began -- a record for any earnings call I've been on (unless you count some of the sub-$200MM market cap companies I've listened to who only have 2 analysts on the call). I love efficient people -- especially engineers and CPAs -- but the whole point of these calls is to let shareholders and analysts ask questions, not shut people up as quickly as possible, which is how it came across.

Analysts Posed No Questions About OSB's Performance The analysts' quesitons were largely forgettable. There were more to help them tinker with their Excel models than address some of the real challenges facing MSFT. For example, I would have liked to hear Liddell expound on where things stand with the OSB segment. Revenues for the segment dropped and losses doubled. None of the rumored partnership deals with Yahoo (YHOO) will really change that.

What is the Growth Strategy for this Company? Stepping back, it would have been nice if one of the analysts asked: "where is this company going?" The costs savings this quarter are great (and there are -- in my view -- many other areas where they could further reduce costs). But how exactly is this management team going to use its considerable assets to grow the business segments again? How are they going to get MSFT's forward multiple up from 8x (ex-cash) to above the S&P average of 15x?

Cash is Still King. Despite these issues, the company continues to be "Fortress Redmond." Its cash increased to $25B in the quarter. They are clearly conserving their horde, by slowing down stock buybacks and showing no interest in acquistions. Liddell indicated that this attitude would continue indefinitely -- or when the economic nuclear winter ends, whichever comes first.

Well done: Server & Tools. This segment -- the smallest of the biggest 3 segments -- actually grew revenues and EBITDA in the quarter (7% and 32% respectively).

Position: Long MSFT.

Originally published in on 4/24/2009 7:00 AM EDT

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Tuesday, April 28, 2009

As Restaurants Stay Hot, Watch MRT and RUTH

Two months ago, the only restaurant investors were talking about was McDonalds (MCD). Within the last month, many other restaurant chains have outperformed the market handily, such as Darden (DRI) and Panera Bread (PNRA).

Yesterday, we saw stand-out numbers for casual diner PF Chang's China Bistro (PFCB) and a great move for Buffalo Wild Wings (BWLD).

So, which restaurants might be next to join the party? More business-oriented ones such as Mortons (MRT) and Ruth's Chris (RUTH). Both cater to the business exec entertaining clients. They've suffered with the general downturn even more than the consumer-oriented chains. Turns out the business execs (or at least their CFOs) are more frugal about their steaks than families are about going out for a sit-down at their local Olive Garden in tough times.

Looking at MRT and RUTH, you can see both have lagged other chains over the last 6 - 12 months. If things continue to stabilize in the broader economy, look for these two to make a comeback relative to their consumer-oriented peers. RUTH has already made a good move in the last month (but beware its debt levels).

Position: None.

Originally published in on 4/23/2009 3:35 PM EDT

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What MSFT Must Say Today

Microsoft (MSFT) is the Ebay (EBAY) of a month and a half ago. Tossed to the trash heap by the market, thought of as a has-been.

That was where EBAY say in early March, yet it's now up over 60% in 6 weeks or so. What changed for EBAY? They held an analyst day in late March and did a much better job that previously in laying out the case for the future growth of their businesses -- especially for PayPal. They also delivered some solid earnings yesterday to back up the talk that there's a real future here

Which brings us to MSFT. They've done a terrible job in selling the growth prospects of their 5 business segments. Because of their ham-handed handling of it, they've made investors think that MSFT's future prospects hinge on whether they can do a deal (any deal) with Yahoo (YHOO) -- they don't.

It's tough to do in an earnings call, but MSFT tonight (at 5:30pm ET) needs to retell its long-term story again, which can include significant growth from here. This isn't a dinosaur (at least, it doesn't have to be). This is a company with one of the best balance sheets in business which it could use to make some very interesting acquisitions -- yet they've been gun-shy to do so and, when they have (think aQuantive or the Facebook investment), they've overpaid. Steve Ballmer needs get us excited with a real story and a real strategy.

Their decision to withdraw guidance at last January's earnings call further reinforced perceptions that this is a company that is no longer growing -- it is and it will. More than most companies, MSFT does have pretty good visibility into its businesses for the next couple of quarters. It should provide guidance during today's call to give investors more comfort. That will be a bullish sign for the stock.

It goes without saying (given some other comments I've made in this column) that Steve Ballmer should be on the call -- and I'd be shocked if he wasn't, given investor concerns these days.

Of course the most important thing they can do is deliver some strong numbers and guidance for the rest of the year. With some of the positive PC numbers out of IDC last week, it would be nice to hear them talk up the June quarter for Client.

Originally published in on 4/23/2009 2:49 PM EDT

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EBAY and PayPal

I agree with Jim Cramer's comment earlier about EBAY. A big financial institution should buy this company, in order to get the PayPal crown jewel.

EBAY's been such a mish-mash for so long with all these various web companies flung together. They could and should be sold off. The Skype business unit could be quickly sold back to the original founders by a financial company that didn't care about getting back the $1.7B in value which is sitting on EBAY's books. MSFT, GOOG, and YHOO would be interested in the web assets. Ticketmaster (TKTM) should look at Stubhub.

I went back to the EBAY March analysts' day replay this morning and it's really compelling when you start to look at PayPal. Donahoe said it's the most misunderstood part of EBAY and he's right (and he's responsible for that). PayPal does have the chance to be the only dominant payment player in the online merchant space going forward. No credit risk, multiple relationships with financial institutions and merchants. It would be a compelling asset for any large player like a V, MA, or AXP.

Originally published in on 4/23/2009 2:22 PM EDT

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eBay's Ticker Might Be 'PYPL' in Three Years

Christa Quarles, the Thomas Weisel Partners analyst who covers eBay (EBAY), had a throwaway line about yesterday's earnings from the auction and payment company: "We like to joke that they are changing the ticker symbol to PYPL."

She's referring to the large and growing part of PayPal within the eBay empire. Even as eBay's core auction or marketplace business saw revenue drop 18% in the last quarter to $1.22 billion, the PayPal division grew revenue 11% to $643 million.

At the recent analysts' day a few weeks back, eBay CEO John Donahoe and PayPal President Scott Thompson both clearly spelled out how the PayPal group was poised to dominate the world of online payments for years to come: Think the online equivalent of Visa (V) and Mastercard (MA).

Donahoe even went so far to say, the "opportunity at PayPal is bigger than the opportunity at marketplace."

Today, Visa trades at a forward P/E of 18 times, Mastercard is at 13 times and eBay is at 10 times. eBay has roughly the same market cap as Mastercard. I'm not a fan of quick fixes, but there's a compelling argument to make for changing eBay's name to PayPal with a PYPL ticker.

It doesn't make sense to do this today perhaps, but it will soon. PayPal is the core to an eBay turnaround in the next couple years.

Originally published in on 4/23/2009 12:09 PM EDT

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New Trend This Earnings Season: If You're Breathing, We'll Bid Up Your Shares

There's a trend emerging this earnings season -- especially for small- and mid-caps -- if you still have a pulse and can hold an earnings call, the market will take that as upside.

Several names pulled that off this morning. Fifth Third (FITB), the Midwest regional bank, saw shares trade up 8% this morning as losses were less than feared. International Game Technology (IGT), the casino gaming supplier we mentioned yesterday, saw its profit fall 44% in first quarter, but that was better than expected and the stock is up 6%. Royal Caribbean (RCL), the smaller of the two main cruise lines -- and a company I'm bearish on due to continued consumers pullback from discretionary spending but, as I said last week is one likely to go higher before it goes lower -- saw shares jump 16% this morning. Even as it lowered revenue numbers for the year, it was able to show it was keeping costs under control (important with its debt load).

What's the lesson here? It doesn't take much in this environment to spark a relief rally coming out of earnings. Keep that in mind, especially in the smaller names.

Originally published in on 4/23/2009 10:24 AM EDT

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Van Natta a Good Hire for News Corp's MySpace

The two co-founders of MySpace, Chris DeWolfe and Tom Anderson, have stepped aside or been pushed out by News Corp's (NWS) Rupert Murdoch and new digital boss Jonathan Miller.

Kara Swisher is reporting that former Facebook No. 2 Owen Van Natta will get the top job.
It's a good move for NWS. After buying MySpace for $500 million, and hearing cat-calls from critics, Murdoch's purchase was soon viewed as one of the biggest steals of the decade, given the social networking site's early explosive growth. Soon, MySpace signed a $900 million advertising deal with Google (GOOG), which essentially paid NWS back for the entire purchase and then some.

Yet, the GOOG deal is coming to a close, and there's little chance of renewal at similar terms. MySpace, despite huge traffic, has stalled in terms of its growth relative to Facebook and Twitter. It's no longer the shiny new toy it once was.

Van Natta is a well-respected exec who has worked closely with Jeff Bezos (his former boss) and Steve Ballmer (with whom he worked on partnership deals when he was the No. 2 at Facebook). On paper, he's the right guy with the right experience to lead MySpace now (and hopefully stick it to his former boss, Mark Zuckerberg).

MySpace may be a laggard in the social networking space, but its size and user base could still be turned around to the benefit of the NWS mothership again.

Originally published in on 4/23/2009 7:53 AM EDT

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Vikram Too "Tied Up" to Make Last Friday's Earnings Call

When we wondered a few days ago where Vikram Pandit was for last Friday for Citi's (C) earnings call, we weren't the only ones.

According to yesterday's Wall Street Journal, several shareholders asked about it during Tuesday's annual meeting in New York.

Mr. Pandit responded that he was tied up with "a lot of other things." Mr. Parsons [Citi's chair] then elaborated saying that he and Mr. Pandit had to meet Friday morning with Citigroup's federal regulators, "who hold the fate of the company in their hands."

If true, I would hope, in the future, the federal government (as a 36% shareholder in C) would see that it's important for Pandit to carve out an hour four times a year to talk to shareholders on these calls.

Originally published in on 4/23/2009 7:38 AM EDT

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Monday, April 27, 2009

IGT will tell tale on whether Casino Stocks move higher

Big gains today for casino stocks like WYNN and LVS today. All the casino names have snapped back strongly from their March lows. One related name that hasn't participated in this upward March: International Game Technology (IGT), a supplier of the gaming consoles to all the big hotels. Its one month returns have been modest.

IGT hasn't had the same drop-off since the start of the year compared to the casinos, so the 1 year charts are similar (both down about two-thirds from a year ago).

If IGT starts to move up in tandem again with the casinos, it could be a sign that there's a real move up here and not just making up for January and February losses.

Originally published in on 4/22/2009 4:01 PM EDT

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My favorite restaurant chain at the moment is PF Chang's China Bistro (PFCB). Admittedly, I should have posted this yesterday instead of today (before the strong earnings results). Even still, the stock in my view has similar fundamentals to CMG, but is so much cheaper.

It's only a 5.7x Enterprise Value to EBITDA vs. 13x for CMG. CMG has better operating margins (10% vs. 4%) but PFCB's return on equity is close to CMG (11% vs. 13%). CMG has more cash, but it's pricey.

Even after a 20% pop today on the back of a good earnings report, PFCB looks good to me.

Originally published in on 4/22/2009 2:57 PM EDT

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Key Assumption for GeoEye (GEOY): Forward Earnings

I've written several times in and about GeoEye (GEOY). It's been a long holding of mine since March of 2008 and it's been a big disappointment overall.

It sells its Earth imagery take from its satellites to the US government, foreign governments and to commercial customers including Google (GOOG) for maps and their mobile apps.

The reason for my heartburn with this stock has been chronic delays of launching GEOY's latest satellite last year and then waiting on its approval by the federal government to begin the $12.5mm a month revenue payments. While the company has waited, its stock drooped.

Now, the satellite is approved and the company has switched on the meter for beginning to charge the government (we should start to hear more about this when the company holds its Q1 call). We also are still in the dark about how much GOOG is paying GEOY for its images (which are currently the state-of-the-art in that industry).

Assumptions about earnings for the next year are key in determining whether to buy in to the stock. At the moment, consensus EPS estimates for 2010 range from $0.78 - $1.84. Yet, analysts appear to be under-estimating how well this company does when revenues are flowing, with historical operating margins of 45%.

Back in 2007, the last time GEOY launched a new satellite, 15% of its $183MM in sales dropped to the bottom line. If GEOY hits its high revenue estimate of $320MM next year (and remember it just switched on a guaranteed contract from about half of that from 1 customer), 15% of that would be $48MM or $2.59 in EPS. That's giving the company an 8.8x forward P/E -- way too low in my book. Other comparable tech companies trade at double and sometimes triple that.

Originally published in on 4/22/2009 12:24 PM EDT

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Twitter Should Be Apple of YHOO's, GOOG's and MSFT's Eye

Twitter is the most exciting private company available for any of the big Web companies to buy -- despite its lack of revenue.

The two most valuable pieces of its business are user stickiness (return page views each day off the main Twitter site and through various Twitter clients) and its search. You're right that Twitter search will never best Google's (GOOG). People will use the two for different purposes: Conventional search for library look-ups of info, Twitter Search for polling friends/trusted sources or pop culture info.

Take me for example (this won't make me look good): My TiVo cut off the end of Dancing with the Stars last night, so I didn't know who got kicked off. I went on Twitter and within 20 seconds knew LT got the boot. Couldn't have done that with GOOG search.

Conventional search will always be important, but competitors such as MSFT and YHOO need to find new angles to chip away at GOOG's lead: like Twitter. All three should be looking at it.

Ironically, I told a friend of mine who worked in YHOO's M&A/corp dev group that YHOO should buy Twitter back in 2007. He laughed and said they thought it was a small little fad.

Originally published in on 4/22/2009 9:54 AM EDT

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Carol Bartz's Version of the Straight Talk Express

Yahoo! (YHOO) held its Q1 earnings call last night with Carol Bartz (in her first call since starting as CEO) and Blake Jorgensen (in his last call as CFO).

It was classic Bartz: direct, under-promising, and a few vulgarities thrown in for good measure -- to show both her exasperation with YHOO's ways of the past and her determination to fix them.

YHOO shareholders should like what they heard. After years of neglect, the company is being retooled, so that the deadwood is removed -- not just in headline reductions (a new 5% in reductions was announced last night), but in being able to speak in specificity about where and why those cuts are being made. It's clear that she has her hands around the problem; something her predecessors never conveyed on these calls.

What I also liked about Bartz was that she's clearly a techie who can also speak to CMOs about advertising spend and their needs. She laid out some of the pluses and minuses of the YHOO engineering organization, but also the earful she's getting from YHOO customers and the general macro environment and how that's affecting where and how dollars are spent. Sue Decker, who was very bright, came from a Wall Street background and never really was able to speak with credibility to an engireering or a marketing audience.

Bartz and the rest of her team have a lot of work to do -- something she went out of her way to reiterate to the analysts last night. But she's on the right track. As I said the other day, the biggest payoff to YHOO shareholders will come at the end of the year after more of Bartz's seeds begin to sprout.

Originally Published in on 4/22/2009 9:10 AM EDT

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Activists Must Adjust Their Aim


APRIL 27, 2009

By GREGORY ZUCKERMAN, The Wall Street Journal

It's hard to scare a target when you are on the run yourself. But that is the awkward position in which activist investors find themselves.

Activist funds lost almost 10% in the first two months of this year, after falling almost 31% last year, according to Hedge Fund Research. That's worse than other hedge funds and in line with the overall market, suggesting that many are simply long-only investors who take concentrated positions in single stocks.

Meanwhile, many of the largest activists are dealing with unhappy investors who are fleeing their hedge funds. A focused fund started by William Ackman succeeded in getting Target to buy back shares, among other things. But Target has resisted some of his other suggestions. And amid the market downturn, Mr. Ackman's Target fund has lost more than 50% since its launch.

Despite such setbacks, activists might again be trying to flex their muscles, pumped up by gains of 9.3% in March. Carl Icahn has been pushing top executives at Amylin Pharmaceuticals to trim waste and not resist any possible sale. Smaller hedge funds such as Ironfire Capital are preparing to launch campaigns, according to people familiar with the matter.

The question is what playbook will work in today's environment. Activists have spent much of the past few years pushing companies to take on more debt and pay out cash to shareholders. It turns out that many of the companies were correct to try to conserve cash for a rainy day, given the tsunami in the markets and economy that subsequently resulted. Companies should easily shrug off pressure to return cash right now.

Another activist favorite, pressuring companies to break up or sell themselves, also could be a challenge. Financing markets remain in disarray and valuations are distressed in many cases.

And such attempts have included notable failures. Investors jumped into Yahoo stock when Mr. Icahn last year pushed the company to sell to Microsoft, figuring he could bridge the gap between the two sides. But they still are dragging their feet, and Yahoo is down more than 40% since he got involved.

A more fruitful area could be on forcing cost cuts. Activists have often targeted entrenched and overpaid managers they believe are looking after themselves rather than shareholders. With many executives receiving generous compensation packages, even as their companies struggle, there could be plenty fodder for activists. A range of academic research suggests that hedge-fund activists have had a positive impact in areas such as reining in executive pay and perks.

Research also shows that activists can have a positive impact on long-term share prices, although some studies cover bull-market periods when companies could be successfully prodded to sell themselves or certain assets and pile on debt to boost payouts. In today's leaner times, activists have their work cut out demonstrating that they aren't a spent force.

Write to Gregory Zuckerman at

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Friday, April 24, 2009

MF Global is a Nice Recovery Play

MF Global (MF) is a broker of exchange-listed futures and options. It sank 95% last year amidst a US-based trading scandal that led to questions about risk oversight. The former CEO ended up resigning. However, it was a case of shareholders over-reacting and tossing the baby out with the bath water in terms of the company's valuation.

MF installed new CEO, Bernard Dan, last October. He's changed management, bought back debt, closed far-flung offices in favor of major trading centers, and implemented a new risk management system to assure investors that MF's prior problems are a thing of the past.

The company was a spin-out of the brokerage arm from UK hedge fund, Man Group. It still does a lot of trading with them, but has diversified considerably since in separated at the height of the market in 2007.

Investors have bought in. The stock is up 161% YTD and it still only has a 10x forward P/E. Recently, analysts have set a 12 month price objective of $9 for the stock, which trades now at $5.30.

The stock is a holding of activist Jana Partners and value investor Leon Cooperman's Omega Advisors. Look for the stock to continue its upward trend into its next earnings release in early May. It's a good example of an oversold stock getting back to normalized levels.

Originally published in on 4/21/2009 3:04 PM EDT

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IBM Has Real Underlying Strength

Even long-term "investors" who don't sell all their positions at the end of the day can't help but get sucked into the short-term price movements in the markets -- especially over the last 8 months, when you've had to from a risk management perspective. However, reaction to IBM's (IBM) initial earnings release last night and the performance of the stock today suggests why cool heads need to prevail.

When the numbers first came out last night, investors seized on the top-line revenue drop of 11% from a year earlier. The stock dropped from $100.43 to $97.30 initially after-hours. Market commentators immediately worried that shares would be under pressure this morning at the open. The did open down at $98.41 but, within 20 minutes, were back above the previous closing price. They're now trading up 1% this afternoon.

With more time, investors digested some important facts about IBM from the release and commentary: the overall revenue drop was only -4% before the dollar conversion, EPS and gross margins were both up from a year earlier period, they signed $12.5B in new services contracts in Q1 which will get recognized over time (building their book of business), and they paid a healthy amount into their pension reserves which will free up EBITDA in future quarters to drop to the bottom line. The CFO reiterated confidence in the rest of year's earnings too.

IBM is one of the best run tech companies these days. The shares are fairly cheap at a 10x forward P/E. It looks like a strong bet for the rest of the year and you get a small (2%) dividend for your troubles to boot.

My beef with the company is their R&D spending: it's $6.3B a year -- almost 3x the amount spent by Google (GOOG). This is still a company that's historically spent gobs of money in their labs (in the old spirit of Xerox PARC and AT&T Labs). Sometimes, it's led to blockbusters in innovation, but mostly it hasn't. It would be nice to see their batting average improve with less money spent.

Originally published in on 4/21/2009 1:52 PM EDT

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Not All Ag Names Are Created Equal

This morning, we got some disappointing news about slowing sales at Caterpillar (CAT). There's been a softening of orders in new machinery/equipment tied to global infrastructure and agriculture, which has led the company to slash costs and forecasts.

Earlier this month, we heard a similar story from Deere (DE), which has seen orders for agricultural equipment drop sharply.

You might be tempted to conclude that weak orders for agricultural machinery equates to a weak outlook for "ag" as an industry. It doesn't. You just need to pick your spots.

My checks of farmer demand indicate that, while uncertainty about the global economy remains a concern, farmers still need to grow their crops. To get the most from their crops, demand for nutrients, chemicals and fertilizer remains very high. Suppliers I've checked in with are very happy about orders for the coming season.

My two favorite nutrient/fertilizer plays here are Potash (POT) and Agrium (AGU) -- with trailing enterprise-value-to-EBITDA ratios of under 6 times and 4 times respectively. Both should see their stocks rise over the summer as results come in.

I also mentioned AgFeed (FEED) last week, a favorite Chinese small-cap of mine, selling pork in that market -- it's up about 20% since my mention last Thursday.

Ag makes sense. You just have to realize that not all in the space are created equal at this stage in the cycle.

Originally published in on 4/21/2009 11:29 AM EDT

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CEOs Scratching Each Others' Backs

Following my post yesterday about why I was against CEOs serving on another company's board, I got a lot of supportive email.

One reader, Burt, said:

I agree with you completely. I would like to see a comparison of the incomes of the board of directors for the companies that the CEO's from other companies sit on. They take care of each other, and do not take care of their own companies, in my opinion. I believe that the pay for the top management should not be set by other CEO's and get away from the "good ole boys network" and bring their pay back to a scale which is indicative of their performance at their companies.

Let's take Yahoo!'s (YHOO) board again, which I still believe is highly dysfunctional, even though I like what Carol Bartz is doing. Recall that one of the things that got investors steamed at the company was how the stock vastly under-performed against Google (GOOG) and NASDAQ from 2004 - today, yet the company company continued to award lavish pay to former CEO Terry Semel.

All told, Semel took out over half a billion dollars in executive comp from YHOO's shareholders during his tenure, even as the company passed on the chance to buy GOOG and Facebook and saw its search market share drop precipitously. Who served on the YHOO comp committee during this time? Art Kern, a current CEO; Roy Bostock (now Chairman), a former CEO, and Ron Burkle, a private investor who has been known to pay his fellow partners well and who also serves on the boards of Occidental Petroleum (OXY) and KB Home (KBH) where exec compensation still is very high compared to the rest of the S&P.

I don't think any of these men set out to deliberately overpay Terry Semel, they simply decided to pay him the way they'd want to be paid if they were CEO. This type of back-scratching in our boards needs to stop.

Originally published in on 4/21/2009 7:35 AM EDT

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Thursday, April 23, 2009

Marketwatch: Private investors skeptical of toxic bank purchase plan

Banks are less likely to sell illiquid assets investors will consider buying

By Ronald D. Orol, MarketWatch

Last update: 5:47 p.m. EDT April 23, 2009

Comments: 9

WASHINGTON (MarketWatch) -- Private investors seeking to participate in the Treasury Department's program to clear $1 trillion in so-called toxic mortgages and other assets from banks must submit their applications by Friday.

However, many private securities managers believe the program is doomed to failure.
"Investors don't want to buy a piece of dirt where they have to build something," said Richard Lashley, co-founder of Naperville, Ill.,-based hedge fund PL Capital LLC. "They don't want to have to go to Iowa and work on a construction project."

At issue is a program that aims to strengthen banks to get them to lend again by having private investors and the Treasury put in equal amounts of money backed by a loan guarantee from the Federal Deposit Insurance Corp. to buy troubled loans and mortgage-backed securities from banks. Private investors will also be eligible to buy other securitized products such as packaged auto loans and student debt products. Auctions for the toxic assets are expected in June.

Nevertheless, a variety of private investment vehicles, including mutual funds, private equity and hedge funds, are all contemplating participation in one of two programs. One program seeks to bring in private investors to buy individual loans from troubled banks. The other program, which is more substantial, seeks to buy securitized mortgages and other packaged products from financial institutions.

Treasury will consider the applications and ultimately choose five large private investors in the coming weeks that meet a variety of requirements including an ability to raise $500 million in private capital, including retail investors.

However, private investors argue that regional loan securities for undeveloped land is not something most private investors who normally prefer buying securitized products will be interested in buying, in part, because investors won't want to do the local research necessary to identify the value of these securities. Investors also are unlikely to be interested in buying packaged subprime mortgages that were based on misrepresentation and fraud, he added.

New accounting guidance from the Financial Accounting Standards Board approved last month also gives banks additional flexibility in how they value some of their illiquid mortgage securities. The result: banks will be less likely to sell some toxic assets that they can instead report on their books in a favorable manner.

Banks continue to be wary about the price at which they sell their assets. Ironfire Capital LLC director Eric Jackson argues that banks are wary about selling assets because the price it sells for will determine the value of a wide variety of their other assets. Banks, he said, will have to mark down a lot of their assets to the price the asset sold for in the auction.

"Banks don't want to sell the best assets, buyers don't want to buy," said Jackson. "Buyers still worry about losing their capital, even if the government is taking on a lot of the purchase price."

Kenneth Lore, partner at Bingham McCutchen, said he believes private investors are worried that the government may impose additional restrictions on their investment.

"Many are afraid of working with the government on any level because of restrictions on pay and other conditions that have happened to people that have worked with the government," Lore said. "Some might think, 'If I make too much money, I'll be criticized.'"

PL Capital's Lashley added that he believed the only way to make the public-private partnership fund work would be for Treasury to set up regional offices where a small developer could get
together with a distressed investor and government financing.

Treasury may provide localized auction opportunities. Treasury is expected to release details of its rules for auctions in the coming weeks.

According to Robert Lee, a managing director at Keefe, Bruyette & Woods in New York, some institutions and buyout shops may have a difficult time meeting some of the participation criteria. He pointed out that buyout shops generally are not experienced at selling products to retail investors - one of the requirements of the program. However, he added that private equity shops could team up with other private investors to qualify.

A number of investors are considering applying for the program, including BlackRock Inc., Invesco, Legg Mason's Western Asset Management, PIMCO and AllianceBernstein, according to Lee. Some private equity companies also have expressed an interest, including Blackstone and Carlyle Group. Other private investors, including John Paulson & Co., could be interested as well.
Peter McKillop, a spokesman for Kohlberg Kravis & Roberts, said the buyout shop is considering the program. However, he declined to comment on whether KKR will submit an application Friday.

"We are supportive of the program and think it's a great first step and we are interested in future participation," McKillop said.

Lee expects Treasury to pick five large investors that will then have time to raise retail and other capital if they don't already have it.

Ronald D. Orol is a MarketWatch reporter, based in Washington.

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CEOs and Other Execs Should Be Barred from Serving on Outside Boards

Where do current CEOs and even their underlings get the idea that it's a good idea for them to sit on another public company's Board of Directors?

This was a big beef I had with former Yahoo! (YHOO) CFO Sue Decker. Over the last two years of her tenure at Yahoo!, she received two promotions, going from CFO to eventually president (although she always referred to herself as Jerry Yang's "partner," which I assume means she thought of her job as co-CEO). With each promotion, she received increased responsibility and an increased number of direct and indirect reports to oversee.

The pressure on her and the rest of Yahoo!'s board and management to turn around the fortunes of the floundering Internet company remained intense -- yet, the stock collapsed. Through it all, Decker continued to serve on no less than three other public company boards: Costco (COST), Intel (INTC) and Berkshire Hathaway (BRK)). I asked her and Yahoo! Chair Roy Bostock at last August's annual meeting how they justified her spending what I calculated to be an extra 187 hours a year on different outside board and committee meetings (although I didn't factor in travel time to Omaha, Neb., and Issaquah, Wash.). Neither Decker nor Bostock really had an answer.

Bostock said the Yahoo! board was "proud" of Decker's associations with this other board. As a shareholder, I understood how these directorships were a benefit to her personally but didn't see how they were helping Yahoo!'s stock price. Decker left the company a few months ago when Carol Bartz was hired as the new CEO.

I recently was going over Citigroup's (C) board of directors from last year (before the bottom fell out on the company). I was stunned to see that Alcoa's (AA) then-CEO Alain Belda, Xerox's (XRX) CEO Anne Mulcahy and Dow Chemical's (DOW) CEO Andrew Liveris were all taking time out of their busy jobs to hobnob in NYC on that board.

In retrospect, shareholders for all three of these CEOs' companies should have been ringing the alarm bells when they saw this. These three companies' stocks are down 70% on average over the last 12 months. To make matters worse, Mulcahy also serves on the boards of Target (TGT) and Washington Post Company (WPO).

Let's be honest: The only reason these busy CEOs agree to serve on these other boards is vanity; it's not for the knowledge they glean or the social contracts they make. In this post-Sarbanes-Oxley world where directors have to slog through binders of risk disclosures and company updates, it makes no sense for any officer to sit on an outside public company board.

Not only does it hurt their own firms' stock prices, it hurts the stock prices of the companies on whose boards they sit. Did Liveris and Mulcahy really have enough time to go through the full extent of Citigroup's risk exposure last year? The composition of Citi's board is another story entirely.

Originally published in on 4/20/2009 4:18 PM EDT

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Green Mountain Coffee Roasters Brewing Up Some Strong Returns

Hat-tip to Louis Navellier for a great profile of Green Mountain Coffee Roasters (GMCR) this morning.

This company has been on my radar screen for the last three months because of the abnormally high number of times I've seen it listed as a core long holding at some top hedge funds in their latest 13-Fs.

Brett Barakett's Tremblant Capital, Julian Robertson's Tiger Consumer Management, David Rosenberg's new firm Gluskin Sheff, DE Shaw & Co., and Ken Griffin's Citadel all own stakes in the company.

The company supplies coffee to a number of other brands, including Paul Newman's line (which is how I tried the coffee for the first time a few weeks ago and was blown away). It also owns Tully's, a big chain that runs from San Francisco to Seattle. It appears to be well managed.

The stock is up 35% YTD and appears to be well run. My biggest issue with the stock is its premium roast price: 31 times forward earnings. One to watch and perhaps wait for, but certainly one to drink.

Originally published in on 4/20/2009 3:37 PM EDT

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CEO Accountability: Why They Need to Be on all Earnings Calls - and Taking Questions

Some great feedback to my Friday post about how I think it's shameful when any public company CEO (like Vikram Pandit at C or Steve Ballmer at MSFT) misses a quarterly earnings call with analysts and (more importantly) shareholders.

One reader said:

As an institutional investor, I am appalled when CEOs aren't [on these calls], and I always read it as somehow sneaky or deceptive. Macy's (M) is famous for this. Terry Lundgren is NEVER on the calls. And Tom Ryan at CVS tried to get away with not being on the calls a while back, but finally came back. Mike Jeffries at ANF has been on and off the calls. As soon as his new CFO gets more settled, I bet he gets back off the call.

Next worse practice is when companies do prerecorded, listen-only calls. WMT does this. TIF does a live call, but doesn't take any questions.

Frankly, if you're man enough to be CEO, then you should be man enough to answer investor questions four times a year in a public forum. If you're not, that's a definite strike against me wanting to provide capital to your company.

Absolutely agree.

Originally Published in on 4/20/2009 12:20 PM EDT

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Yahoo! Will Be a Good Long -- In Three Quarters

I've had a love-hate relationship with Yahoo! (YHOO) for nearly three years now. I led an activist campaign against the company in 2007 encouraging it to make a number of changes (from a new CEO to revamping the board to restructuring and simplifying the operations) to better take advantage of its many strengths (strengths Yahoo! still retains to this day, including its tremendous brand and traffic).

Unfortunately, I (and other shareholders) was only successful in helping to effect one important change: a new CEO after Terry Semel stepped down thanks to a large "against" vote at the June 2007 annual meeting.

I sold my Yahoo! stake last September at $20 after being frustrated by the "status quo" message coming out of the board and management at last August's shareholders' meeting. With the exception of Icahn and his associates, the Yahoo! board is substantially the same as it has been for the past five years, when the company sagged behind Google (GOOG) and others.

I think Carol Bartz seems to be saying and doing all the right things since she came aboard (with the exception of offering a bounty to employees who turned in other employees for leaking news to the press). She's cutting and consolidating in a way that Yahoo! has desperately needed for years. Just last week she sold off the Korean Gmarket stake to eBay (EBAY) and could still monetize other Asian assets.

Yet, even without the headwinds of the ad market, she has a lot of work still ahead of her in restructuring -- and she still is overseen by a terrible board of directors. The Yahoo! bulls seem to overlook how real organizational and cultural change takes time.

Yahoo! has a lot of upside -- in three quarters -- after Bartz has more time to clean things up.

Originally published in on 4/20/2009 10:20 AM EDT

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Beginning of the End for Ken Lewis

Next week, on April 29th, Bank of America (BAC) will hold its annual meeting. An issue which will come to a head there in a shareholder vote is whether Ken Lewis should retain the two roles of Chair and CEO.

Longtime BAC shareholder Jerry Finger (who sold his bank to NationsBanK in 1996) put the issue on the proxy and is right to call for change, given the bank's disastrous performance in the last 12 months.

Late last week, we learned the 3 largest and most influential proxy advisory firms (RiskMetrics, Glass Lewis and ProxyGovernance) all threw their support behind the splitting of these roles. This means it's virtually assured that the split will happen, given how closely large institutions and pension funds follow these suggestions from the advisory firms.

In my view, this stripping of Lewis' Chair role makes it more likely that Lewis will also step down as the bank's CEO in the next year. He's already dropped hints that he is open to doing so "when the crisis passes" -- that's CEO-speak for "Ok, I'm getting tired of the abuse I'm taking."

If BAC really wants to show shareholders (including the government) that it's turning the page, a change at the top is probably best for everyone.

Originally published in on 4/20/2009 9:01 AM EDT

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Five Stocks which will Drop, but Might still Snap Back Higher

A friend of mine said to me yesterday that he's never seen so many stocks that trade like options. They're "bifurcated specials" -- either they're going to double or triple from here or go to zero in fairly short order.

Even though many commentators, including Doug Kass in these pages, are warning against the market being short-term overbought, there are some stocks of companies with bad fundamentals facing terrible headwinds, which nevertheless keep going up in the short-term. Even though they look overbought, it's difficult to pull the trigger on shorting them.

Stocks like Harley-Davidson (HOG), Capital One (COF), Royal Carribbean (RCL), Carnival(CCL) and Liberty Global (LBTYA) have gone up 50 - 110% in the last 6 weeks. Yet they're down 50 - 65% in the last year. It's an overbought snap-back.

Eventually, the weak consumer environment that will persist will sour their results and impact the stocks. However, investors need to be mindful of betting on a downturn too soon -- which can be just as hazardous as betting on a recovery too soon.

Originally Published on on 4/20/2009 8:20 AM EDT

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Oracle Wants Sun's Installed Base

It's fitting that IBM (IBM) and Oracle (ORCL) have been the ones fighting over Sun Micro (JAVA). Both have taken an aggressive approach to growing their top and bottom lines -- compared to, say, Microsoft (MSFT). The markets have rewarded growth over increased EPS as a result of retiring shares alone.

Sun Micro is a shell of its former self 10 years ago. It is simply being put to rest through this deal. For years now, it has struggled selling its older expensive OS (SPARC Solaris) in the face of Linux. Java has been popular but hasn't replaced that declining Solaris revenues.

Left alone, Sun would have continued to shrink. Why do ORCL and IBM want to buy them? Installed base. Both want those relationships which Sun has had for years so they can upsell new ORCL and IBM gear.

Sun's shareholders will ensure the deal gets done this time.

Originally published in on 4/20/2009 7:56 AM EDT

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Wednesday, April 22, 2009

Best Way to Play Dry-shippers: TBSI

An upgrade by Oppenheimer to DryShips (DRYS) this morning has sent that stock and the rest of the dry-bulk shippers flying today. DRYS is the big daddy of the space with the most revenues of their peers. It's also had one of the highest debt-loads, which caused it to recently dilute holders through a $500MM equity offering. With the fresh new capital raised, and today's upgrade, DRYS has been off to the races - recently trading up 26%.

The fact is the whole dry-shipper space is a good buy -- unless you believe the world is going really dark for a while. Stocks such as Eagle Bulk (EGLE), Diana (DSX), Genco (GNK), Excel Maritime (EXM), and FreeSeas (FREE) are all good values here and most pay good dividends. They've all gone through a vicious sell-off and stabilized a few months ago. Now, any hints of strength in commodities in China or India and these stocks all tick higher. (If you can't stand super-high beta stocks: avoid these.)

The big cloud hanging over the sector has been the high levels of debt these companies are carrying and whether they'd be able to renegotiate this. DRYS' ability to raise cash is a bullish sign for the sector (their debt-to-cash ratio had been 10:1 before the new slug of capital came in).

My favorite play in this space is TBS International (TBSI). They operate smaller vessels which they can move around quickly to meet customers' demand. They also have perhaps the most conservative debt-to-cash profile in their industry. They just got out of some commitments to take on new vessels to better control their costs in the current enviornment.

TBSI pays no dividend, because their management reports they need to use it to better follow growth opportunities. Yet, pick any time period over the last couple of years and map TBSI's stock performance against their peers and you'll find TBSI tends to outperform. Their biggest strength, in my view, is their relative valuation. While their peers trade at Enterprise Value-to-EBITDA ratios in the 5s (still cheap), TBSI trades at 1.8x.

Originally published in on 4/17/2009 3:17 PM EDT

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Google's Shareholders Should Thank Patrick Pichette (and Shona Brown)

Google's (GOOG) investors quickly cheered yesterday's earnings out of the gate in the after-hours, bidding the shares up to $410 -- they've since fallen back to $385. We'll see what they do today in the broader session.

The reason for the fall back in share price? After initial investor euphoria over a top and bottom line beat and increase over a year ago, some cautious macro comments from Eric Schmidt and perhaps the announcement of the moving on of one-time sales rock star, Omid Kordestani, gave investors pause. Still, the results are impressive.

What GOOG shareholders should be thankful for is the hatchet the company took to expenses and cost rationalization. Trimming jobs and other expenses -- previously not a GOOG strength -- helped profit climb almost 9% from a year ago to $1.42B. $110MM here, $110MM there: it starts to add up over time.

Shareholders should directly thank Patrick Pichette, the new CFO who came over last summer after cooly and calmly driving costs out of Bell Canada in his previous stint. Pichette was clearly brought in with a mandate -- and he's delivering.

And if you want to thank the person for bringing in Pichette, thank Shona Brown, GOOG's SVP of Business Ops. Brown -- a Canadian like Pichette -- also was a McKinsey consultant in her former life, just like him.

Originally published in on 4/17/2009 8:04 AM EDT

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Tuesday, April 21, 2009

Panera Bread (PNRA) is Upscale McDonalds

Panera Bread (PNRA) has looked like a champ through the last 6 months -- up 50% while the S&P has slumped 8% over that same period. Conventional wisdom has been that only McDonalds (MCD) was supposed to do well in the downturn, as people bought "value meals" en masse. Darden's (DRI) results a few weeks ago showed that, even in tough times, people do still want to go out and eat at restaurants other than the golden arches. So, what's going on at Panera? I hadn't been to one until a few months ago. I noticed that the number of stores in Naples, FL, went up from 2 to 5 almost overnight -- and they were always packed. Once you go in, you understand the formula: Upscale McDonalds. It's good healthy food that's fast and cheap. People are going there instead of a more expensive sit-down restaurant for dinner -- although lunches are the busiest time of day. With the number of new Panera stores opening in recent months (Management has said they like opening franchises in this environment because they lock-in low leases for many years out), revenue growth should continue to move upwards for the coming quarters.

Originally published in on 4/16/2009 3:04 PM EDT

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Zale: Big Run-Up, Still Room to Move

Zale (ZLC) is up over 300% in the last month. The middle-of-the-road jeweler was basically left for dead in the wake of the last six months of the savage bear market. It's the ultimate retail accessory in this meat-and-potatoes environment we're now living in. Lease obligations and almost $400 million in debt also hang over the company.

Yet, some stabilizing signals from their competitor Signet (SIG) a few weeks ago have lit a fire under the stock, taking it from its 52-week low of 89 cents to $4.65 today. Even with that run-up, the stock is still down 73% for the last six months -- nowhere near the selloff for Tiffany's (TIF) and Signet.

Given that, plus recent insider purchases and still $80 million in cash on the balance sheet, expect Zale to keep chugging higher as the market realizes that bankruptcy is off the table.

Originally published in on 4/16/2009 11:56 AM EDT

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All Public Company CEOs Should be Required to Attend Quarterly Earnings Calls

This morning, Vikram Pandit decided not to attend Citi's (C) earnings' call. To me, this is an affront to any C shareholder. Even in the best of times, a public company CEO should see it as a job requirement to be on these 4x a year calls. After taking billions from taxpayers, I'm amazed that Pandit couldn't fit this in his schedule and left CFO Ned Kelly to soldier on without him. Whatever conflict Pandit had, he should have rearranged it. The optics are terrible and optics matter these days.

Next week, Microsoft (MSFT) will report. Until the last earnings' call in January, Steve Ballmer had routinely skipped these opportunities to communicate with his shareholders -- leaving his CFO, Chris Liddell, to fend for himself. I simply can't understand such reasoning. Do you think Larry Ellison skips out on these kinds of calls? Never.

We shouldn't need Mary Schapiro at the SEC to have to mandate this: public company CEOs need to simply start seeing these calls as obligations -- not distractions.

Originally published in on 4/17/2009 3:39 PM EDT

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After Big AgFeed Rally Last Monday, Wait for Opportunity to Buy

AgFeed (FEED) rallied big Monday and through yesterday on news that it is entering into an agreement to genetically improve the quality of the swines it breeds in China to sell into that market. This company is a play on China and ag. It has been tremendously under-valued, as it's a small-cap. Even with the run-up this week, its forward P/E is only 6, and it has almost no debt.
Watch for profit-taking, including what we're seeing today, for next few days, but it is worth looking at as a long afterwards.

This post was originally published in on 4/16/2009 10:21 AM EDT

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Friday, April 17, 2009

Microsoft (MSFT) Should Spin-Off Its Internet Assets To Yahoo! (YHOO): Reuters

Reuters, Friday April 17 2009

* CEOs Bartz and Ballmer have held talks on partnership
* Microsoft may take search, Yahoo control display ads
* Still significant doubts, could be antitrust concerns

By Alexei Oreskovic

SAN FRANCISCO, April 17 (Reuters) - It's been more than a year since Microsoft Corp's unsolicited bid to buy Yahoo Inc ended in tatters and acrimony.

Now the two companies are talking again, with the less contentious agenda of forging an Internet search advertising partnership having replaced the notion of an outright merger.

Analysts say that co-opting Yahoo's search assets represents Microsoft's best hope to turn around its money-losing online business and to challenge Google Inc's dominant and growing share of the U.S. search market.

But handing search over to Microsoft would be fraught with risk for Yahoo, which would cede what is believed to be a profitable and increasingly vital plank in its online business. Search data is increasingly used to custom-tailor display advertisements for Web surfers.

"You don't walk away from search unless there's some ridiculously huge number in front of you," said RBC Capital Markets analyst Ross Sandler.

Yahoo Chief Executive Carol Bartz and Microsoft CEO Steve Ballmer recently talked about various partnerships, possibly with Microsoft managing Yahoo's search advertising business and
Yahoo handling display ads across Microsoft's websites, according to a source familiar with the situation.

Any deal would have to be sweeter than the one unsuccessfully brokered by activist investor
Carl Icahn last July, in the wake of Microsoft's failed $47.5 billion acquisition bid for Yahoo, said RBC's Sandler.

Under Icahn's search-only plan, Microsoft was willing to pay Yahoo a $1 billion upfront fee for Yahoo's search assets, plus $2.3 billion a year in guaranteed revenue for five years.


Microsoft and Yahoo have each lost 1 percentage point or more of market share in U.S. search queries since the two companies first considered combining in February 2008. Google has widened its lead from 59.2 percent market share in February 2008 to 63.7 percent in March 2009, according to comScore.

"There is urgency. I hope they both realize they need to get something done sooner rather than later," said Sid Parakh, an analyst at McAdams Wright Ragen, who has a "buy" rating on Microsoft. "But they are not going to rush into a deal that might not work out long-term."

Market share is key in search-based advertising, say analysts, since many of the small businesses that buy online ads do not have enough money to spread their messages across a smattering of websites with limited audiences.

For that reason, running ads with Google is generally considered a "no-brainer." But a combined Microsoft-Yahoo with nearly 30 percent search market share could provide a large enough audience to also be worthwhile.

And because search advertising is based on an auction system, size is doubly important. The more advertisers participate, the more keyword prices tend to be bid higher.

Microsoft may be best-placed to run the combined search business, given its strength in sophisticated software needed to run search engines and its superior organization, said one analyst.

"What Yahoo does best is make interesting content to attract users, but they can't do project management very well," said Kim Caughey, an analyst at money manager Fort Pitt Capital Group. "Microsoft's very good at software and they are a little more structured."


Such an arrangement might put both companies' display ad business under the control of Yahoo, which is the U.S. No. 1 in that market. In February, Yahoo led the market with 13 percent of display ad views. Microsoft was fifth with 4.3 percent and Google sixth with 1.2 percent, according to comScore figures.

That is likely to attract the attention of antitrust regulators, who thwarted a proposed advertising pact between Google and Yahoo last year. But antitrust experts say the market for online display ads is still relatively open, and regulators' main concern is Google's dominance in search.

"From a pure antitrust standpoint, it's hard to see a problem here," said Evan Stewart, an antitrust lawyer with Zuckerman Spaeder LLP. "If you're from the (U.S. Justice Department) Antitrust Division, what you really want to have is more effective competitors for Google."
Analysts say any deal would have to guarantee Yahoo's access to users' search data.

"Without search, Yahoo looks like AOL," said RBC Capital Markets' Sandler, referring to Time Warner Inc's online division, which does not have its own search engine and which has seen its users and revenue erode in recent years.

There are many ideas about how a Microsoft-Yahoo partnership could work. Ironfire Capital's Eric Jackson believes they should create a joint venture where Microsoft transfers its online business and combines it with Yahoo's.

The arrangement, first outlined in a Bank of America Merrill Lynch report, would have Microsoft take a 49 percent stake and give Yahoo 51 percent.

The new venture was projected to have $9 billion in net revenue in 2010 versus Google's estimated $16 billion, which would make it a strong No. 2 Internet search player, while boasting the largest Internet display advertising business.

The company would be run by Yahoo, which Jackson said has a better track record in the online business than Microsoft.

(Additional reporting by Bill Rigby in Seattle and Diane Bartz in Washington; editing by Tiffany Wu and Gerald E. McCormick)

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Monday, April 06, 2009

Activist Investors Sidelined by Brutal Market


By Eric Jackson

04/06/09 - 12:12 PM EDT

S , HD (Cramer's Pick) , MOT , WEN , TIF , CSX , TGT , YHOO

Earlier this year, Ken Squire, who runs the consultancy 13-D Monitor, which follows those filings with the SEC, wrote an article in Barron's predicting that 2009 would be a "golden age" for activists (which I also predicted recently).

His article made several strong points for why this should happen, including the low valuations, a favorable political climate likely to ease hurdles for activists to challenge companies, and shareholder discontent at record levels. Yet, this activist activity has yet to materialize. Why and when will this change?

There is a finite set of large activist investors in the world today with the assets to take on large public company battles. Some of the biggest have included: Relational Investors (active in Sprint(S Quote - Cramer on S - Stock Picks), Home Depot(HD Quote - Cramer on HD - Stock Picks), and National Semiconductor(NSM Quote - Cramer on NSM - Stock Picks) last year), Trian (active in Wendy's(WEN Quote - Cramer on WEN - Stock Picks) and Tiffany's(TIF Quote - Cramer on TIF - Stock Picks) last year), Carl Icahn (active in Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) and Motorola (MOT Quote - Cramer on MOT - Stock Picks) last year), The Children's Investment Fund (or "TCI," active in CSX(CSX Quote - Cramer on CSX - Stock Picks) last year), Jana Partners (active in Cnet last year), and Pershing Square (active in Target(TGT Quote - Cramer on TGT - Stock Picks) last year).

Like most investors, they had terrible results last year, although their previous 10-year returns have been outstanding. These activists suffered more in 2009 than other hedge funds because of two reasons: (1) they typically run long-only or long-biased funds and therefore had very little hedged going into last fall and (2) they have concentrated portfolios of typically fewer than 15 holdings, which can work very well in up years but terribly in down years.

These large activist funds have seen heavy redemptions in the last six months, and there is no reason not to believe they won't see more for the balance of this year. Even Jana Partners, which had relatively positive returns in 2008, has been hit with large redemption requests reportedly affecting 20% to 30% of assets.

As a result, all of them have pulled in their horns on potentially new activist campaigns, in favor of working out existing investments. Some activists are even exiting existing investments, after spending significant time and money on winning board seats (e.g., Relational exited its Sprint investment and TCI plans to exit its CSX investment later this year), in order to focus on a smaller set of investments within their portfolio.

To meet redemption requests, large activist founders have had to inject significant personal capital into their funds. Carl Icahn, whose fund was down 36% last year, put $500 million in. Bill Ackman recently invested a further $25 million in his Target-only fund Pershing IV.

Christopher Hohn, founder and head of TCI, who was recently regarded as one of the top activist investors in the world (and who some former employees cattily referred to as the "Sun King" made waves recently when he indicated he is considering turning his back on activism.

He complained at a recent investor day that activism was too "expensive and unpredictable," citing the recent $10 million spent by his firm on a bitter proxy battle with CSX last year (which he ended up winning, taking four board seats. He plans to give up those seats at the next annual meeting, possibly signaling an intent to sell CSX shares later).

The redemption siege mentality gripping large activist managers (which carries over to other hedge fund managers as well) is, in my opinion, the biggest reason for the drop in large activist battles. The New York Times recently reported that new activist campaigns dropped by nearly 80% in the fourth quarter of 2008 compared to a year earlier, according to data from Thomson Reuters, and activists made 59 new investments last month, compared with 87 a year earlier, according to Hedge Fund Solutions.

Of course, the evaporation of credit has taken away one "quick fix" strategy out of the quiver of some activists: Call on the company to take on an unhealthy amount of debt in order to buy back shares to artificially boost EPS and immediately dividend out this cash to shareholders -- all in the name of "creating shareholder value."

Marty Lipton, who has been corporate America's top watchdog against activist investors, recently attacked these kinds of practices, asking: "Can the global economy afford to allow institutional investors, who are seeking to maximize the price of their shares on a daily basis, determine industrial business, policy and strategy of major corporations?"

Of course, there are examples of bad behavior at both ends of this spectrum: greedy, short-termist activists enriching themselves at the expense of long-term holders, and greedy, out-of- touch boards and CEOs filling their own pockets out of the company till while driving a company's value into the ground. There can be highly effective boards and CEOs, as well as highly effective activist investors who advocate actions that are in the company's and its long-term shareholders' interests.

The fact is that Ken Squire's thesis is still correct that the broader environment has made it much more favorable for activist investors to launch campaigns. There are many companies today trading at or near their cash levels. Some of these companies are in this situation due to the wash-out of the broader market, but many are there because of their boards approving poor capital allocations (buying back stock at the top of the market or taking on large amounts of debt which cannot be rolled over), poor acquisitions, excessive compensation, or simply leading their company to value-destroying mediocrity.

A year from now, the SEC is likely to approve a new "proxy access" rule making it much less expensive for activists and other shareholders in general to challenge boards doing a poor job representing their interests in overseeing the company's direction. It's likely that many smaller activist investors will be involved. The most active activists today are the firms going after companies below $2 billion in market capitalization -- on the assumption that they can have more sway over these companies because they can hold a larger percentage of shares than would be possible if they went after the larger public companies.

Yet even the most favorable conditions will promote activist campaigns against large-cap companies if the current generation of large activists continues to be inwardly focused by their redemption and performance problems.

This could be a generational succession moment for activist investors, where the elders give way to a next generation of activist investors taking on the largest companies in corporate America.

For this next generation of activists to successfully take over this mantle of their industry, they must do the following:

  • Hedge, in order to preserve partner capital in the event of terrible years like 2008. The days of long-only are over.
  • Build a reputation for always doing right for shareholders (especially long-term holders). Some of the "quick fix" activists of the last five years never won the trust of large mutual funds and pension funds, who tend to be the biggest holders of stock of the large-cap companies. As a result, proxy contests failed to win over the support of this important constituency, for fear of how these activists would represent their interests properly.
  • Focus more on strategy and operations, less on single events. There will always be a place for activist investors to go after a company, advocating they sell a single division, or do a quick dividend to shareholders. However, these situations tend to be more prevalent in small-cap companies. Large-cap companies, by definition, have more complex problems and require more complex solutions. The next generation of top activists will understand this and have deep expertise in their firms on strategy and operations.
  • Use the tools of the Internet and social networking. In 2007, when I ran a successful activist campaign against Yahoo!, which resulted in unseating Terry Semel as CEO after a large "no" vote at the annual meeting, I owned 96 shares of Yahoo! However, I was able to get my message out to large and small shareholders via my blog, YouTube, wikis, Facebook and Twitter. More than calling attention to my ideas, these social networking tools allowed fellow shareholders to pledge support to my group and encouraged them to suggest additional ideas for how Yahoo! could improve. I was most surprised and pleased with how many existing Yahoo! employees participated. Yet, their interests were perfectly aligned with our groups: We were all stockholders of Yahoo! and wanted to see the stock price go up through needed changes, which the current board and management were not making. The next generation of large activist investors will be masters at using the Internet to conduct their campaigns.
  • Be more collaborative, less combative with target companies. It will always be necessary to run successful -- sometimes nasty -- proxy contests against entrenched boards and management. In my opinion, the Yahoo! board, for example, will never respond to a "nice guy" activist approach. It is so entrenched and disconnected from the opinions of shareholders that it would be impossible to reason with them. There's a time to knock heads. However, some activists only knock heads. They only know how to hit one key on the piano. The next generation of activist investors will be able to play hard ball but tend to be much more collaborative with the board and the CEO -- at least at the beginning, until reasonable dialog leads nowhere. Such an approach is also far less expensive than an "all-negative, all-the-time" approach.

There is a job opening in the activist investor industry. Wanted: the next generation activist investor leaders to take the lead in waging successful campaigns against large cap companies. Who will assume the mantle? We'll see over the next few years.

At the time of publication, Jackson was has no positions in stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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