Sunday, December 30, 2007

PreMarket Stock Alerts: December 30, 2007

Fitch Ratings upgraded the issuer default ratings of Allegheny Energy Inc. (AYE-$64.21) and its subsidiary, Allegheny Energy Supply Co. one notch, to BBB- from BB+. The hike reflects credit improvement resulting from increases in cash flow from higher realized prices on power sales as well as lower debt balances and associated carrying costs, according to Fitch. The outlook on the ratings is stable.

Friday, after the bell, Ashworth, Inc. (ASHW-$2.64), a designer of golf-inspired sports apparel,
posted a net loss that narrowed to $3.49 million in the fourth-quarter, from $4.36 million in the prior year quarter, on higher revenues. The company also announced a new management team led by CEO Allan Fletcher.

Psychiatric drugs like Seroque and Zyprexa, manufactured by AstraZeneca plc (AZN-$43.12) and Eli Lilly (LLY-$54.05), respectively, could be next on the list for
reimbursement restrictions based on comparative effectiveness data, according to insurance policy analysts.

Bayer AG (BAYRY-$91.40) and Johnson & Johnson’s (JNJ-$67.38) new oral Factor Xa anticoagulant, rivaroxaban, has shown superiority over Sanofi-Aventis’ Lovenox (enoxaparin), but the agent is still under close watch for
potential liver toxicity concerns, according to physicians interviewed by Pharmawire.

Berkshire Hathaway Inc (BRK.A-$141,100.00) is starting a
bond insurer that would help state and local governments lower their borrowing costs, and is likely to lure business from established rivals, MBIA Inc (MBI-$18.74) and Ambac Financial Group Inc (ABK-25.12), struggling with credit market turmoil.

On CNBC's Stop Trading, Jim Cramer, discussed Citigroup (C-$29.29), saying it may be a smart buy now. Cramer said there is about $4 of downside in Citibank, which assumes
a dividend cut.

Walter Pritchard, the infrastructure software analyst for Cowen, after talking with 900 people involved with technology purchases, concluded that Citrix Systems (CTXS-$37.90), a global leader in application delivery infrastructure, is at a high risk to a tech spending slowdown, according to a recent interview in Barron’s.

Piper Jaffray
lowered its price target on premium handbag and accessories retailer Coach, Inc. (COH-$30.47) from $36 to $32 a share, citing a soft Holiday environment.

Income-oriented investors salivate at the 8% dividend offered by Diana Shipping (DSX-$32.45), but in the long term this will be difficult to sustain, according to research analysts. The drybulk shipper uses roughly all of its free cash flow to pay the $2.32 dividend, which is more than 100% of its net income over the past 12 months. The dividend is currently secure through 2008, but any downturn in fundamentals or disruption in growth in China will lead to dividend cut.

Zacks senior mining analyst Paul Raman, CFA,
maintains a BUY rating to mining major Freeport-McMoRan Copper & Gold, Inc. (FCX-$104.55). The second largest copper producer is witnessing strong growth backed by improved productivity and a strong cash flow position. A rise in the prices of copper and gold lead Raman to raise his six-month target price to $125 a share, 12.4 times 2007 EPS estimates.

SmartMoney columnist Jack Hough insists that now might be an especially
good time to purchase the stock of Hasbro (HAS-$25.91). Wall Street is decidedly down on the nation's No. 2 toy maker's stock; eight of 10 analysts who cover it give it a Hold rating. Shares have lost 15% since summer. They trade at just 13 times forecast 2007 earnings, a discount of about a quarter to the S&P 500. Yet the main worry surrounding Hasbro seems to be that its 2007 performance was so strong that it will be difficult to improve upon in 2008. According to Hough, that's hardly a reason to abandon the shares, particularly since Hasbro seems stronger, more stable and more profitable than it has been in more than a decade.

When Immucor (BLUD-$33.86), the leading provider of automated instruments and reagents for blood typing and screening to U.S. clinical labs, reports earnings on Wednesday after the close, traders will be watching for $0.24 EPS.

Legg Mason Inc. (LM-$71.23), the Baltimore, Maryland-based global asset management firm, said Friday that it has taken action
to reduce asset-backed commercial paper in two non-us liquidity funds.

After the bell, LJ International (JADE-$3.47) said net income for the six months ending June 30 climbed to $1.83 million, or 8 cents a share, versus $952,000, or 5 cents a share, a year earlier. The Hong Kong-based jewelry manufacturer and retailer said revenue for the period rose 34 percent to $67.2 million, mainly due to the growth of the company's Enzo retail division, which currently has 93 retail stores in operation across Greater China.

Matria Healthcare (MATR-$23.12), a provider of wellness and disease management programs to employers, private and government sponsored health plans, and pharmaceutical companies, could make an
attractive takeover target and has seen strategic interest, industry bankers recently told dealReporter. A fair price in the event of the sale would be about a 35 – 40% premium to its current trading price, as the stock has recently been depressed, according to a banker familiar with the company.

Mesa Air Group Inc. (MESA-$3.22) said Friday its fiscal fourth-quarter and full-year earnings statement have been delayed until Jan. 15, as proper reporting of a business sale is taking longer than expected. Mesa Air Group is
seeking a buyer for its unprofitable Wichita-based Air Midwest operations or for the division's fleet of Wichita-built Beech 1900D aircraft.

According to a filing made with the Securities and Exchange Commission, the investment arm of the Dubai government
raised its holding in the casino operator MGM Mirage (MGM-$84.25) to 6.5% after it bought a piece from controlling investor Kirk Kerkorian.

News Corp.'s (NWS.A-$20.60)
strategic positioning is not reflected in its share price, according to Standard & Poor's Tuna Amobi. The analyst rates the parent company of social networking site, MySpace, and the owner of Fox News Corp. a buy and gives it a 12-month price target of $26 a share.

Standard & Poor's Ratings Services said Petrobras Energia SA's (PZE-$14.75) ratings will
not be affected by the Brazilian integrated energy firm’s announcement of several deals to rebalance its asset portfolio.

Piedmont Natural Gas (PNY-$26.64)
posted a net loss of $8.3 million or $0.11 per share, compared to a loss of $6.2 million or $0.08 per share in the prior year quarter. The gas utility said its fiscal fourth-quarter loss widened as warmer than normal weather lowered consumers' demand for gas. On average, four analysts polled by First Call/Thomson Financial expected a loss of $0.05 per share for the fourth quarter.

Goldman Sachs analysts led by Edlain Rodriguez in New York raised their 2008 earnings estimate for Potash Corp. (POT-$144.19) by 20 percent to $6.60 a share in a note to clients that cited the fertilizer manufacturer’s “unprecedented sustainable pricing power in potash,” due to
strong demand and tight supply. The analysts also increased their 12-month share-price forecast to $180 a share.

Macroeconomic pressures will likely hinder near-term growth at Resources Connection Inc. (RECN-$18.13), said Morgan Stanley analyst Christina Woo as she
downgraded her rating on the accounting and finance consultancy to "Equal weight" from "Overweight." Woo lowered her 2008 earnings forecast to $1.08 per share from $1.19 per share, and slashed her price target to $22 from $34.

Despite seeing
interest from strategic buyers for parts of the company, A. Schulman (SHLM-$21.09) does not see any sense in a break-up, dealReporter has learnt. The listed Ohio-based plastic resins company, which recently hired a new CEO, has not been approached by any potential suitor interested or able to pay a strategic premium for the entire company. However, a source claiming knowledge of the situation said interest had materialized for some of Schulman’s assets, specifically its plastics compounding plants in Europe.

Morningstar remains bullish on the prospects for
share price appreciation for Siemens AG (SI-$157.10) and ABB Ltd. (ABB-$29.13) in 2008. Despite stellar returns in 2007 (37% for Siemens and 43% for ABB), analysts think that strong earnings growth will lead to superior stock price gains in 2008 for both large-cap diversified companies in the global industrial space. Fair value estimates on Siemens and ABB is $190 and $36 per share, respectively.

Sandell Asset Management notified Sybase Inc. (SY-$26.11) on Friday it would
name three independent nominees for director at the next annual meeting. The hedge fund, which owns about 6 percent of the outstanding stock of the database-software maker—and is its second-largest shareholder—said in a statement that Sybase has failed to take suggested actions, including a spin-off and a $500 million share buyback, to improve its value. Sandell said the stock could reach $39 if its proposals were adopted.

Zacks senior Latin American markets analyst Claudio Freitas, CFA, maintains a Sell rating to the ADRs of airline company TAM S.A. (TAM-$24.18). Growing competition in Brazil’s airline industry, energy costs, and the accident in July 2007, at the Congonhas airport in Sao Paulo will continue to
undermine the company’s results for the next few quarters.

Theravance (THRX-$19.33) says the FDA’s Anti-Infective Drug Advisory Committee will review its Telavancin compound. While some investors equate an additional review with increased risk of regulatory delays, some analysts believe
a likely outcome is approval of the once-daily injection intended to treat infections caused by gram-positive bacteria. Credit Suisse analyst Michael Aberman thinks the stock will see continued pressure as it faces financing overhang, but believes telavancin will ultimately get approved.The analyst has a $36 price target on the stock.

Thanks to growing sales overseas and cost-cutting efforts, prospects for 2008 look bright at 3M Co. (MMM-$85.09), the maker of Scotch tape, Post-it notes and a variety of products used by the electronics, telecommunications and security industries. Deutsche Bank Securities analyst David Begleiter
rates the shares a BUY and has a 12-month price target of $105 a share.

Trump Entertainment Resorts (TRMP-$4.39) said it arranged
a new line of credit to pay off its mortgage debts. The key part of the refinancing is that the new five-year deal eliminates certain requirements restricting the firm's ratio of debt-to-earnings. Brean Murray, Carret & Co. analyst Ryan Worst, who rates the stock "Buy," added that investors are missing the value of the casino operator and of the Taj Mahal resort in particular. He holds a price target of $13 per share.

upgraded to BUY from HOLD the shares of organic food-distributor United Natural Foods Inc. (UNFI-$31.42), citing attractive valuation levels.

Standard & Poor’s Equity Research initiated coverage of semiconductor test company Verigy Ltd. (VRGY-$26.30), with a BUY recommendation. Analyst C. Montevirgen expects share gains in the testing market for the faster-growing semiconductor segments, and widening margins for Verigy as its outsourced manufacturing moves to China. Albeit concerned about capital expenditures among chipmakers, Montevirgen thinks that equipment spending will resume in certain segments, such as NAND flash, which, combined with market share gains, should aid Verigy's sales. The 12-month target price is set at $31 a share, based on a peer-average P/E of 15 times fiscal 2008 (Oct.) EPS estimate of $2.09.

Vonage Holdings Corp. (VG-$2.00) and Nortel Networks Corp. (NT-$15.24) are close to settling their
patent dispute, and under terms more favorable to the Internet phone service provider than in other patent cases it settled this year, according to a source close to the negotiations.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Thursday, December 27, 2007

Dual-Class Structure Benefits Tyson Family -- Not Tyson Foods

Since late June, shares of meat producer Tyson Foods (TSN-$15.43) have lost 36.5% of their value, reflecting investor pessimism that higher feed costs would continue to hamper profitability in 2008.

Irrespective of industry economics. the Tyson family will continue to profit, according to our analysis of a proxy statement filed Wednesday with the Securities and Exchange Commission.

On September 28, 2007, the Company entered into a ten-year contract with John Tyson, 54, who retired as CEO in May 2006.

Under the terms of the Employment Agreement, Mr. Tyson will receive a payment of $300,000 per annum to perform certain advisory and limited public relations services (not to exceed twenty (20) hours per month).

In addition, Mr. Tyson will be entitled to reimbursement(s) for annual country club dues, automobile, tax and estate planning advice, security services, personal use of the Company-owned aircraft, and annual premium payment on a $7.5 million life insurance policy. The 10Q Detective estimates the aggregate dollar cost to shareholders of the perquisites Messer. Tyson is contractually entitled to receive through the term of the severance agreement (assuming a four percent inflation factor for each year the contract) to be about $6.54 million.

Mr. Tyson also has equity-based compensation awards—in the aggregate—worth an estimated $17.7 million; and, he is eligible to receive $175,196 in annual benefit payments under the Company’s Supplemental Executive Retirement Plan, beginning in April 2008.

Donald J. Tyson, former Senior Chairman of the Board, entered into a similarly lucrative consulting contract in July 2004. Don Tyson, 77, is the father of John Tyson.

Related Party Transactions

  1. During fiscal year 2007, the Company leased farms from the Tyson family, with payments totaling $832,230.
  2. The Company has an aircraft lease agreement with Tyson Family Aviation, LLC, of which Mr. Don Tyson and Mr. John Tyson are members, with aggregate lease payments to Tyson Family Aviation, LLC during fiscal year 2007 of $2,043,552.
  3. The Company has an agreement with an entity of which Mr. Don Tyson is a principal, for the operation of two-wastewater treatment plants, which service the Company’s chicken processing facilities in Nashville and Springdale, Arkansas. Aggregate payments made by the Company during fiscal year 2007 for said services were $766,592 and $479,623, respectively.
  4. During fiscal year 2007, the Company leased office and warehouse space from entities in which the children of Mr. Don Tyson, including Mr. John Tyson, are partners or owners, with aggregate lease payments of $66,000.
  5. Certain Named Executive Officers of the Company belong The Blessings, a golf club owned by the Tysons. And, of course, the Company pays for senior officers’ membership dues, company golf outings, and business meals at the club.

Dual-Class Structure

Due to rising commodity costs, Tyson predicts it will earn 30 to 70 cents a share next year, well below the consensus analysts' estimate of $1.05 a share. This $0.40 range in earnings reflects management’s view that the Company will experience significant volatility in the beef industry and in the grain markets, according to Wade D. Miquelon – Chief Financial Officer.

Despite the challenging market conditions, the Tyson family knows the recipe for success: own the majority block of voting stock! The Company currently has a
dual-class stock structure—two outstanding two classes of capital stock, Class A common stock and Class B common stock.

Holders of Class B stock are entitled to 10 votes per share while holders of Class A stock are entitled to one vote per share.

Don Tyson, son of the founder, beneficially owns 99.9% of the Class B stock outstanding. In the aggregate, he beneficially owns 71.02% of the voting stock. As the aforementioned governance practices illuminate, whatever the operational success of his namesake company—the Tyson family remains strategically positioned to grow its wealth.

Editor David J. Phillips does not hold a financial interest in Tyson Foods. The 10Q Detective has a Full Disclosure Policy.

Friday, December 21, 2007

Time To Stop Nibbling on Monsanto Shares?

On-farm trials across the United States demonstrating a better seed corn product to farmers than leading competitors; rising global demand of corn for feed and fuel (ethanol); and, expectations that profitability will double over the next five years on U.S. sales of new, more profitable seeds and gains in sales outside the U.S.—is it no wonder that shares in biotech crop giant Monsanto Corp. (MON-$108.46) closed just below its 52-week high (of $109.85 a share) in trading Thursday, an increase of $5.42, or 5.4 percent, from the prior day.


Monsanto is now positioned as the leader in ag-biotech for growers and downstream customers, such as grain processors and consumers. With the exception of competitors in its vegetable and fruit seed business, too, most of the Company’s seed competitors are also licensees of its
germplasms or biotechnology traits.

In addition to the Seeds and Genomics segment, Monsanto is a leading provider of herbicides for residential lawn-and-gardens and animal agricultural feed products, with Roundup and other
glyphosate -based herbicides contributing approximately $854 million to gross profits in FY ’07 (ended August 31)—even though, glyphosate, the active ingredient in Roundup, lost key patent-protection back in 2000.

Driven by success in acceptance of its genetically modified row-crop seeds, which provide plant protection from herbicides and insects, investors rewarded the stock price with outsized (split-adjusted) five-year gains of more than 1,262 percent!

Can you, the investor, still find a buying opportunity here? Adding to the bulls argument: the World Agricultural Supply and Demand Estimates (WASDE) recently revealed lower corn and oilseed inventories by the end of the 2007/08, with prices for these respective commodities expected to rise.

Investment Considerations & Risks

Monsanto has been a bullish stock in a continuing
bullish commodity environment.

Nonetheless, at 45.2 times the company's FY 2008 consensus earnings estimate of $2.40 a share, the 10Q-Detective believes that—contrary to the majority of Wall Street analysts—Monsanto’s stated CAGR of 20 (+) percent over the coming five-years is already factored into the share price, and the stock is trading at a premium to its intrinsic valuation of $92 a share.

Monsanto’s steep P/E multiple leaves little wiggle-room, should adverse weather, exposure to global agricultural markets, and/or regulatory delays lead to special charges and lowered guidance.

In our view, investors have already discounted the expected future demand for corn by an expanding U.S. ethanol sector. While corn is currently the primary feedstock—and political favorite—for U.S. ethanol production, if/and when economically viable alternatives be developed, such as cellulosic biomass (wood fibers and crop residue), lower corn trait sales volumes might result.

Monsanto remains highly dependent on one commodity for its success—seed corn and traits, which accounted for about 32.8% and 57.1% of net sales and gross profits, respectively in FY ’07, up 57% and 69%, respectively, from last year.

Growth Outlook: Corn Seed

The company's national corn seed brand,
DEKALB, has realized six consecutive years of market share gains in the U.S. corn seed market, growing to 23 percent, doubling its presence in the market in the last five years, due in large part to yield and dry-down advantages.

Monsanto says corn seed will continue to be a key driver to the U.S. and international corn seed businesses. “Our success rests squarely on the shoulders of triple-stack penetra­tion," Monsanto Chief Executive Hugh Grant said on an Oct. 10 call with analysts.

Management is heralding advantages of its proprietary triple-stack combination, which offers three modifications (to protect against two types of insects and Roundup herbicide). For example, higher yields/acre are being reported for
continuous corn-corn growers (no crop rotation).

Triple-stack corn will account for at least half of Monsanto's U.S. corn-seed sales in 2008, up from 42 percent in FY ’07, according to management.

Backed by the aforementioned advantages that its seeds are delivering to farmers—with associated margin gains—management anticipates the DEKALB brand—including the next-generation YieldGard VT™ Triple technology—will be the significant catalyst of growth, gaining as much as 10 percentage points in the United States by 2012. In key international markets, the company expects to realize annual gains of 1-to-2 percentage points in most regions through 2012.

Adding a percentage point of corn-seed market share boosts Monsanto's profit by about $7 million in the European Union and $40 million in the U.S., where the market is bigger and gene modifications make the seeds more valuable, according to Monsanto.

Monsanto has high hopes, too, for the
SmartStax corn platform—a stacked-trait corn plant with eight different herbicide tolerance and insect-protection genes!

Management is aggressively talking up a FY 2010 rollout. In our view, given that the research is still only in
Phase One (Proof-of-Concept), a 2010 launch might be premature—inability to prove the original concept and/or runaway development costs/delays, two of a number of reasons why a new product concept may be abandoned.

[Ed. note. Monsanto bulls will counter that as every trait included in SmartStax is already either available commercially or in advanced stages of regulatory review, submission and subsequent approval could come quickly].

DEKALB represents Monsanto’s strategy of rolling-out "platform" technologies — genetic traits that Monsanto hopes will become as ubiquitous in soybeans and cotton as it is predicted to be in corn.

Soybean Seed

In our view, other current crop penetration data suggests that management might be too optimistic with sales volume guidance—even with predictions that the “bull-run” in commodities should continue unabated through the first half of 2008.

“Soybean business is on track for a one million to two million acre controlled commercial release of Roundup RReady2Yield technology in 2009, with a full-scale launch of five million to six million acres in 2010. The introduction of Roundup RReady2Yield soybeans will serve as the platform for up to five new stacked trait offerings in soybeans by 2012.”

Does it matter that
Asgrow brand ’08 Elites yielded on average 3.4 bushels more per acre than competitors’ brands (Pioneer and NK brands)? Demand for soybean seed and traits net sales fell 6 percent, or $59 million, in 2007, driven by a decrease in sales volumes of U.S. soybean seed and traits because fewer soybean acres were planted. This-despite average (Jan – Nov) 2007 soybean and soybean oil price increases of $103/metric ton and $258/ metric ton (year-over-year), respectively.

Agricultural analysts suspect that high demand for corn for ethanol production and distiller’s grains (a high-protein animal feed) has driven many farmers to plant two years of corn for every year of soybeans.

Cotton Seed

“Cotton business remains focused on converting the Delta and Pine Land portfolio to its double stack of second-generation technologies. By 2012, pending regulatory approvals, the company believes this business will be selling stacked, second-generation offerings in both its India and U.S. cotton business, effectively doubling the gross profit contribution of this business.”

In our view, in FY ’08, any revenue gains to be had from the $1.5 billion Delta and Pine Land acquisition in August 2006 will likely be somewhat offset by the divestiture of the Stoneville and NexGen businesses. [Ed. note. Monsanto's Stoneville and Delta & Pine Land together would have accounted for more than 57% of the total US cotton market. In June 2007, to receive the required regulatory approvals, including the Department of Justice, Monsanto completed the sale of the aforementioned cottonseed subsidiaries]

Beyond 2008, however, the purchase of DPL should enable Monsanto to accelerate its penetration of second-generation cotton traits. Of interest, how quickly Monsanto can execute on the competitive advantage [i.e. speed in getting a new product to market], given existing DLP distribution channels dealt by the Delta & Pine Land acquisition.

D&PL comes onboard with subsidiaries in 13 countries - including major markets such as China, India, Brazil, Mexico, Turkey and Pakistan.

We agree with Wall Street analysts who suggest that the takeover means that Monsanto will command a dominant position in some of the world's most important agricultural trade commodities and that millions of cotton farmers will be under increased pressure to accept genetically modified cottonseed.

In India, management believes its cotton trait product has the potential to be planted on 15 to 20 million acres by 2010.

Worldwide demand for cotton is projected to grow by about 20 million bales or 16 percent in the coming decade, according to an analysis published by Texas Tech University's Cotton Economics Research Institute in May 2007.

China will remain on top in production, and the United States will fall to number three. India will rise to the second spot on the heels of recent technological breakthroughs in seed and production practices, according to the forecast.

However, in 2007, seed cotton and traits net sales decreased 15 percent, or $57 million, driven by lower cotton trait sales volumes in Australia resulting from a decline in cotton acres. Planted cotton acres declined 54 percent there in the 12-month comparison because of a severe drought in certain parts of Australia in first quarter 2007. In addition, there was a decline in net sales of seed cotton and traits related to the decline in cotton acres in the United States.

Uncertain is
how will biofuel demand affect changes in U.S. farmers’ output (in terms of field usage). Albeit, the USDA, projects that actual U.S. planted area will drop by 28% in 2007.

Patent and Intellectual Property Issues

Patent positioning is strong. Herbicide tolerant products (Roundup Ready traits in soybean, corn, canola and cotton seeds) are protected by U.S. patents that extend at least until 2014; and, second-generation trait for cotton, Roundup Ready Flex, is protected by U.S. patents through 2025.

Net sale gains of corn seed in Europe, Argentina and Brazil— related to stronger customer demand—did not seem to translate to other commodity seed revenue gains, especially in Argentina and Brazil. Historically, Monsanto has had problems with
protecting its intellectual property rights in South America (e.g. Growers in Brazil have pirated Roundup Ready soy seeds, which can withstand applications of glyphosate herbicide, from neighboring countries, planting them illegally to reap higher yields and lower herbicide costs).

Credit Issues

Another unanticipated problem—should economic instability return to Argentina and Brazil, business could be adversely impacted—and Monsanto could decide to return to a cash payment system, rather than its current credit program.

Monsanto has agreements with banks that provide financing to its customers in Argentina and Brazil through credit programs that are subsidized by the respective governments. The amount of loans outstanding was $66 million and $47 million as of August 31, 2007, and August 31, 2006, respectively. For most programs, Monsanto provides a full guarantee of the loans in the event of customer default.

Brazilian farmers currently plant around 50 percent of acres with Monsanto’s Roundup Ready soybean variety, according to Monsanto’s vice president of global commercial business, Brett Begemann. In our view, stepping towards its targeted 95 percent penetration levels will not be accomplished without looser customer financing terms—credit risks in tandem.

Valuation Analysis

As our DCF model, which assumes an 8.3% weighted average cost of capital, a 22 percent growth rate, and 15 percent operating margins, calculates intrinsic value of $92 a share.

As any ‘act of God’—weather conditions and natural disasters—will affect the IF in the timing of planting and the IF in acreage planted, as well as the IF in yields and the IF in commodity prices.

Conversation about the weather is the last refuge of the unimaginative. ~ Novelist Oscar Wilde (1854 – 1900)

Lest we be accused of being tiresome beings, suffice it to say, technical momentum will probably carry Monsanto shares to new trading highs; we prefer not to nibble on this IFFY corn stock.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Monday, December 17, 2007

Weekend Stock Alerts: December 16, 2007

Accenture Ltd. (ACN-$34.00) reports its earnings on Wednesday, investors will be keen to hear how the perceived slowdown in corporate technology spending may be affecting the management consulting and tech services provider, especially new order wins. The Company previously guided investors to expect net revenues for the first-quarter of fiscal 2008 to be in the range of $5.40 billion to $5.60 billion.

Adobe Systems Inc. (ADBE-$42.11) reports
fiscal fourth-quarter earnings on Monday after the market closes. Analysts polled by Thomson Financial expect the desktop publishing software maker to report adjusted earnings of 48 cents per share on sales of $887.3 million, thanks to strong sales from recent upgrades of key products and the weak dollar.

Advanced Micro Devices Inc. (AMD-$8.43) has delayed shipments of a key, high-end microprocessor until the first quarter of next year and does not expect
to break-even until the second quarter.

Patients taking hormone blockers (known as aromatase inhibitors) to fight breast cancer showed
improvements in bone density when given shots of an experimental bone drug (denosumab) made by Amgen (AMGN-$48.40), researchers said.

Berkshire Hathaway Inc. (BRK.A-$143,000.00), the conglomerate built by billionaire investor Warren Buffett, could be
overvalued by as much as 10 percent, Barron's reported on Sunday

Best Buy (BBY-$50.34) will post
third-quarter numbers on Tuesday, with a conference call to follow at 10:00 A.M. Analysts expect the electronics retailer to post a 32% surge in earnings to $0.41 a share, boosted by strong videogames and consoles sales and overseas growth. On average, they expect to see 11% sales growth to $9.43 billion.

Power tools and accessories maker Black & Decker Corp. (BDK-$73.31)
guided fourth-quarter and fiscal 2007 earnings lower, citing a product recall and weak business conditions.

Shares of CDC Corp. (CHINA-$4.18) sank to a year low Friday, after the Chinese software and games maker swung to a
third-quarter loss of US$ 7.1 million (compared to a net profit of US$ 3.2 million last year) on declining game and mobile application revenue.

Cemex S.A.B. de C.V. (CX-$26.35), among the largest building materials companies in the world, on Sunday said it expects fourth quarter sales of about US$5.8 billion,
below the consensus estimate of $5.96 billion, according to three analysts polled by First Call/Thomson Financial. Cemex Chief Financial Officer Rodrigo Trevino said the earnings guidance for 2007 "reflects the continued weakness in the U.S. residential sector and the upfront costs associated with the post-merger-integration process." The company said it expects "zero growth" from its U.S. operations.

Analysts expect weak third-quarter results from Circuit City Stores (CC-$6.82) as it continues to lose market share to competitors. The electronics retailer is expected to
post a loss of 30 cents a share when it reports earnings next Friday.

Banking analysts
question whether Citigroup (C-$30.70) can continue to pay out $11 billion a year in dividends when the firm is, by its own admission, below its desired capital ratios.

Citizens Communications Co (CZN-$12.05) could
generate a total return of 35 percent for investors as it benefits from the adoption of high-speed Internet services in rural communities, Barron's reported on Sunday.

weak fourth-quarter guidance from Collective Brands (PSS-$17.18), Jeffrey Stein of Keybanc Capital Markets believes the current price to be an "attractive entry point for the stock," as the shoe retailer made investments this year —such as the acquisition of Stride Rite—that should pay off in 2008.

Zacks senior energy sector analyst Sheraz A. Mian has initiated coverage of Core Laboratories, N.V. (CLB-$123.32) with a Buy rating and $142 price objective, which reflects
a favorable view of the Netherlands-based provider of reservoir management services’ prospects in the current oilfield cycle.

Electronic Clearing House Inc. (ECHO-$9.09), an operator of electronic payment processor,
swung to a net loss of $0.11 million, or $0.02 per share, for the fourth quarter of fiscal 2007, impacted by lower revenues and higher expenses.

Standard & Poor upgraded its recommendation on shares of The Estee Lauder Companies (EL-$43.30) to STRONG BUY from BUY, citing valuation metrics. Analyst L.Braverman, CFA, thinks that fundamental positives include about 60% of Estee Lauder's operating income coming from outside the Americas geographic sphere, growth in other channels in the Americas offsets lingering issues from U.S. department store closures and conversions, and prospects that the cosmetic company’s current strategic initiatives program will help drive future sales gains. S&P is maintaining a P/E-based 12-month target price of $51 a share, which uses calendar 2008 EPS estimate of $2.53 as a base.

Franklin Resources Inc. (BEN-$111.04)
raised its quarterly dividend to 20 cents a share, up 33.3% from the previous quarter, the global money management firm said late Friday. The dividend is payable on Jan. 11 to stockholders of record on Dec. 28.

Goldman Sachs Group Inc. (GS-$210.57), The Bear Stearns Cos. (BSC-$95.29), and Morgan Stanley (MS-$50.30) will provide more pieces to the credit puzzle when the three brokers deliver their fiscal
fourth-quarter numbers next week. They all will be watched closely for write-downs or other lingering credit blemishes.

Harvard Bioscience Inc (HBIO-$4.52) has unanimously rejected an unsolicited offer from Skystone Advisors LLC, which currently owns a 15.4% stake, to take the scientific instruments maker private for $5 a share in cash, saying the offer
undervalues the company and is not in the best interest of the shareholders.

Home Solutions of America Inc (HSOA-$1.05) said in a
regulatory filing on Friday that its financial reports for the first two quarters of 2007 had errors and should not be relied upon.

Ingersoll-Rand Co. (IR-$49.21), a maker of refrigerated vehicles and industrial machinery, has agreed to acquire air-conditioner maker Trane Inc. (TT-$37.20) for about $10.1 billion. Under the terms of the deal, Ingersoll agreed to pay a total of about $47.81 per share for Trane, with $36.50 per share to be paid in cash and the remainder to be paid in 0.23 shares of Ingersoll-Rand stock.

Department store operator J.C. Penney Co Inc (JCP-$42.52) is
set for a rebound after losing about half of its value since February, Barron's reported on Sunday.

Nortel Networks Corp. (NT-$16.08), the Canadian maker of telecom equipment, filed a
patent-infringement lawsuit on Friday against Vonage Holdings (VG-$2.05)—claiming the money-losing Internet phone company is infringing 12 patents covering technology used in managing telephone data. Nortel seeks both an injunction and monetary damages.

Banc of America Securities analyst Kirk Materne said
a buyback plan would help support the shares of Novell Inc. (NOVL-$7.13), especially considering the business software developer’s balance sheet could support one. He kept his $8.50 price target.

Standard & Poor's Scott Kessler thinks that despite a forecasted slowdown in corporate spending on technology, Oracle Corp. (ORCL-$21.20) will benefit from two trends: international growth and consolidation in the business software industry. The world's largest enterprise software company, which reports Wednesday, is expected to continue its string of strong quarters. Consensus estimates project 23% growth in fiscal second-quarter earnings on a 20% increase in revenue. Morgan Stanley analyst Peter C. Kuper concurs that shares in the software company are
a safe bet in a worsening economy.

Morningstar believes Par Pharmaceutical (PRX-$21.17) does not deserve a selling premium to its specialty pharma peers. The company is rapidly losing relevance to large generic customers, as competitors like Mylan (MYL-$13.70) consolidate the industry. Branded pharma is bringing authorized generics in-house, reducing these opportunities for Par. Although this makes Par's transition to more complex and proprietary drug development necessary, the introduction of a branded salesforce by no means guarantees success.

A tentative
contract award to Peregrine Pharmaceuticals, Inc. (PPHM-$0.46) to investigate bavituximab and other anti-phosphotidylserine PS antibodies as possible therapies for hemorrhagic fever virus with the Defense Threat Reduction Agency - DTRA of the U.S. Department of Defense—was terminated due to Congressional budget cuts.

Bleak future prospects and the shrinking top-line of pharma giant Pfizer, Inc. (PFE-$23.10)have led Zacks senior pharmaceuticals analyst Jason Napodano, CFA to reiterate his Sell rating on the shares.

Quiksilver (ZQK-$8.91) declined 12%, or $1.26 a share, on Friday after the seller of Rossignol ski wear and other outdoor gear swung to a
fourth-quarter net loss of $110.9 million, or 89 cents a share, from a net profit of $65.3 million, or 51 cents a share, a year ago. Nonetheless, Morgan Stanley analyst Brian McGough reiterated his "Overweight" rating on the stock "Clearly - the core business is healthy, and the results prove how much more diversified and global the sportswear retailer is relative to competitors," he wrote in a research note. S&P reiterated its own strong BUY, as it continues to see opportunity for successful development of Rossignol as an activewear lifestyle brand—while minimizing its hardgoods exposure. Morgan Stanley and S&P hold 12-month target prices of $18 and $15 a share, respectively.

Research in Motion (RIMM-$105.98) reports its third-quarter results on Thursday, with Bank of America expecting revenue to hit the high end of the company's revenue range of $1.6 billion to $1.67 billion on the backs of the Blackberry Curve, Pearl and International and 8830 models. Analysts will be looking at the fourth-quarter forecast for smart-phone market growth and comments on improving international traction. Nonetheless, on “Mad Money” Recap, Jim Cramer said there are a lot of people
betting against this stock. Although he likes RIMM very much, Cramer said he believes the short-selling raid could put a lid on the stock.

Hoffmann-La Roche Inc., the Nutley,
New Jersey based U.S. pharmaceuticals division of Roche Holding Ltd. (RHHBY-$90.20), the world's biggest maker of cancer medicines, on Saturday said interim results of the Phase II XeNA trial suggested that the combination of oral chemotherapy drug Xeloda and Taxotere, with the addition of Herceptin in HER2-positive patients, may be an active and well-tolerated pre-surgical treatment option for women with invasive breast cancer.

Morningstar believes the market is being
far too pessimistic on Ruth's Chris Steak House (RUTH-$10.41), with the stock trading off nearly 40% since initial purchase in May 2007, largely on fears of a slowdown in consumer spending. The chain is a leader in the growing upscale steakhouse segment, with a respected and well-known brand built over the last 42 years. The company also has ample opportunities for expansion. Based on a weighted average of probable outcomes, the stock's expected value is $28 per share.

Billionare Edie Lampert’s big bet on Sears Holding (SHLD-$105.24) looks dicier as profits plunge, but the chairman has a
built-in safety net. Even if the turnaround doesn't pan out, he still can sell the chain's real estate for a tidy profit. "Lampert has far more financial flexibility [than do other retailers]," says Deutsche Bank analyst Bill Dreher. Sears owns 518 of its 816 locations outright, and many of the 1,333 Kmarts are located in strip malls close to big cities. So Lampert can get some juice out of Sears even if the turnaround doesn't materialize.

S&P Equity Research
upgraded J.M. Smucker Co. (SJM-$50.08) from Hold to Strong Buy. Analyst T. Graves, said SJM shares sell at a sharp P/E discount to a group of other packaged food stocks. To reflect additional caution about cost outlook, however, S&P is trimming its 12-month target price to $60, from $61 a share.

Cowen analyst Doug Creutz says Take-Two Interactive Software (TTWO-$18.48) remains his best idea ahead of its fourth-quarter earnings release. When Take-Two reports results on Tuesday (after the market close), he expects revenue of $309.7 million, vs. the company's guidance of $275-$300 million, and a loss (including option expense) of 7 cents, vs. guidance for a loss of 13 to 18 cents. Creutz looks for management to give a progress report on Grand Theft Auto IV, though he doesn't necessarily expect an announcement of an actual launch date. The analyst says investors should also get more clarity on the company's balance sheet situation; he believes concerns about a potential liquidity crunch are unwarranted.

In the opinion of Morningstar, prudent investors should exit their positions in Western Digital Corp (WDC-$29.75). The Company faces industry challenges that prevent the hard drive maker from building an economic moat. Competition among the drive manufacturers is fierce. Its two independent rivals, Seagate Technology (STX-$27.52) and Excelstor, routinely slash unit prices in an effort to gain share and fill idle capacity. Western Digital's four other competitors are large integrated systems builders (Fujitsu, Samsung, Hitachi, and Toshiba). These captive manufacturers derive only a portion of their revenues from hard drives, and can cut disk drive prices to irrational levels, forgoing profits for sales. Additionally, Western Digital derives most of its revenues from powerful integrated information technology providers, such as IBM. These companies ruthlessly demand price concessions and can cancel orders at a moment's notice without penalty. Because disk drives are a commodity, Western Digital must succumb to these demands or risk losing the business to a competitor.

Zacks Investment Research, however, contends Western Digital is a
cheap stock with a lot of momentum. It recently raised guidance citing strong demand in the computer and electronics industries. Analysts expect earnings to jump 18.6% next year. The stock is cheap at less than 10x next year's estimates.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Thursday, December 13, 2007

Sink or Swim with Investools

According to Lee K. Barba, Chairman and CEO of Investools Inc. (SWIM-$17.34), the "brokerage thinkorswim (TOS) and education metrics for November 2007 showed continued record trading activity and subscriber growth."

Shareholders in the investor education company applauded the report, with the stock hitting a new 52-week high intra-day of $17.77 a share. At the close of trading on Wednesday, the stock settled 2.91% higher than Tuesday’s close, up 49 cents a share.

In recent quarters, Investools has topped Wall Street’s expectations, and stockholders have been handsomely rewarded, with price gains of almost 70 percent in the past 7-months. To those loyal readers of the 10Q Detective, you know there is a "but" to follow. In some respects, Investools is no more than a glorified Seminar company (save for its online brokerage business)!

What is Investools?

Investools products and services are built around a proprietary 5-Step Investing Formula that is "designed to teach both experienced and beginning investors how to approach the stock selection process according to [its] proven investing formula."

A review of SEC filings suggests to us, however, that management never took the workshops or home study courses with the "proven investing formula." For the first six-months of FY 2007, the Company reported realized losses of about $4.0 million in marketable securities available for investment and subsequently sold!

Course offerings are generally combined with personalized instruction and ongoing support. They are offered in a variety of interactive learning formats, including instructor-led synchronous and asynchronous online courses, in-person workshops, and online coaching programs and telephone, live-chat and email support, which [supposedly] "solidify student understanding of the investing process and helps them take control of their financial futures."

Management boasts that the Company currently has more than 320,000 graduates and nearly 98,000 subscribers, "which indicates that the Investools Method is among the most widely adopted investor education system in the world."

Investools’ students can leverage the Company’s Investor Toolbox, consisting of "state-of-the-art proprietary investment tools, award-winning technology and analyst-quality data—the result of over 20 years of technical and user-interface refinements—to help with their investing."

Neither Investools or its employees, nor its independent contractors are licensed financial advisors. In fact, the premium fundamental and technical analytical software available at Investools can be had for FREE at a plethora of websites, from Morningstar to MSN Money's Stock Research Wizard.

"The Investor Toolbox takes the same institution-grade data and investing practices that commercial banks and investment firms use, and delivers them in a way that the average investor can easily leverage."

Investools Mentors

Investools brags that it "is the only investor education company that has more than 100 certified educators on staff to assist you." Funny thing--Investools is not an accredited educational institution. The 10Q Detective is left to ponder the definitive meaning of 'certified.'

In addition, of the seven mentor profiles to be found at Investools’ online homepage, only one has a history of employment with a Wall Street and/or Investment Banking concern—she was a stockbroker—and only three of the coaches had more than ten years of personal investing experience!

"Discipline weighs ounces. Regret weighs tons. Now is the operative word. The sooner you learn, the closer you are living your dream." ~ Workshop Instructor Eben Miller.

To all the bulls out there—tell me again how Investools is not a Seminar Selling company?

The Company ignored a request by the 10Q Detective for audited performance results for any of its coaches.

Accounting Red Flags

In November 2007, Investools restated its previously filed Form 10-Q for the 2Q:07 ended June 30, to reflect additional revenue recognition. The 10Q Detective believes that a material weakness still exists in Investools’ internal control over financial reporting.

For the Investor Education segment of Investools, which represents almost 69% of aggregate revenue, the Company recognizes revenue in accordance with the “Accounting for Revenue Arrangements with Multiple Deliverables” accounting principle: The Company often bundles (multiple deliverables) that include on-demand coaching services, website subscriptions, educational workshops, online courses, along with other products and services.

In our view, Investools is capable of determining many of these products/services being sold to—and received—by its customers. For example, the Investor Toolbox and Stocks Course offered online (for $199/month) and the Stock Workshop Seminar have clearly defined refund policies of 30 days and seven days, respectively.

  • As separation of revenue sources is possible, we question the need for management to have deferred more than $135.9 million and $43.1 million on its books in current liabilities and long-term liabilities, respectively, of deferred revenue (as of June 30, 2007).

Hiding revenue as a deferred liability, even when the real risk of the customer trying to cancel the contract has lapsed, is advantageous during periods of slowing growth. By being too conservative in deferring recognized revenue during prosperous cycles, management can impact—smooth out—future reported revenue by accelerating the recognized product/service as being completed, boosting sales (when needed).

  • Investools’ balance sheet is short on liquidity. At June 30, 2007, net working capital decreased by $39.4 million to $16.6 million, compared to $56.0 million at December 31, 2006, after excluding the change in the current portion of deferred revenue which is substantially a non-cash liability. The primary reason for the decrease in net working capital was the $45.0 million decrease in cash and marketable securities resulting from cash paid in conjunction with the merger with TOS (September 2006).

  • A cursory look shows debt to be a manageable 25.3% of total assets. However, back out $207.2 million and $139.2 million of goodwill and intangible assets, respectively, and this coverage ratio climbs to approximately 89% of total assets!
  • Although the Company’s debt levels may limit its ability to secure additional financing, payment of existing obligations should not be of material concern—given the Company remains profitable. For the three-months ended September 30, 2007, Investools could cover its interest payments five times over earnings (on a pre-tax basis).

However, in connection with the TOS merger, certain employees and consultants of TOS have the opportunity to participate in a retention bonus pool, which equals, in the aggregate, $20 million conditioned upon continued employment. The first payment is to be made in February 2008.The bonuses will be paid in equal annual installments over a three-year period.

In addition, come August 2012, a $37.5 million balloon payment on a term loan facility to JPMorgan Chase Bank, N.A. is due.

Investment Risks & Considerations

  1. Investools’ growth strategy for the educational segment of its business is dependent on the ability to sell existing training programs, products and services to new students, or to sell advanced training programs to current students.
  2. Access to leads and customers is becoming more costly. Marketing costs are increasing, primarily due to increased spending related to Investools branded events, which are marketed via a television advertising campaign and online media. Of concern, this attempt to increase brand awareness and drive traffic to, is coming at a time when Investools is lowering prices of the marketed initial education courses (directed at increasing the number of graduates who could then be sold graduate-level products and ancillary subscription services).
  3. Although active Investor Toolbox subscribers grew 15% (year-over-year) to 98,000, for the recently reported third-quarter ended September 30, sales transaction volume (STV) declined 16% to $47 million.

    [Ed. note. STV is a non-GAAP financial measure because it adds deferred revenue to recognized revenue to “assess the operating results and effectiveness of the Company and its reporting operating segments.” In other words, sales volume would have declined more precipitously had Investools reported only recognized revenue!]
  4. The Company accesses more than 25% of its Investor Education sales transaction volume through co-marketing with Success Magazine. However, this sales channel is not exclusive, and Success may enter into identical or similar relationships with competitors, which could diminish the value of the relationship.
  5. Economic, political and market conditions also impact discretionary consumer spending. Rising energy, additional credit market debacles, and/or falling stock prices could adversely impact the education segment’s unit transaction volumes, too.
  6. Investools Method™, Investor Toolbox ™, and Turbosearch ™--Investools has numerous registered /trademarks, but the Company does not have any patents on its educational tools or trading-related technology. As such, in our view, this weakens the core competence, for it is possible that competitors could adopt technology or product or service names similar to Investools, thereby impeding the Company’s ability to trumpet its ‘proprietary’ technology and build brand identity, possibly leading to customer confusion.

Infomercial Scam?

"Well, it's now been 2 years, and guess what, I am not the next INVESTools success story. Actually, I have lost nearly half of my savings trading the INVESTools method. I certainly never made my tuition back. I am now farther in debt than ever and my credit cards now exceed $50,000. The interest rates are so high that I can't keep up, and debt-collecting agencies are calling me, harassing me, and I am really in a serious financial state now. I can't say I owe it all to INVESTools, but I can honestly say about $30,000 of it has been lost going after the dreams that they sold me." ~ Rip Off Report 3/17/07


"There seems to be some misconception about Investools. First of all the few complaints to be found on the Internet are speaking from a perspective of a person(s) that were/are looking for a get rich quick scheme. Of course those things don't work and are scams. Investools is an educational system. Just as the books Warren Buffet suggest are educational tools. These tools are designed to teach Financial Knowledge. Never once was I told Investools would make me money. Simply they claim the system will teach you the principles of investing and teaches you the information that professional investors use to make their decisions. The point is you will still have to make your own will still have to "play" the game of investing. This is tool, an educational system. It teaches a comprehensive is not just a program that "tells you when to buy, what to buy, and when to sell." You will never find a true system for sale that does those things. " ~ Chase. 8/10/07

The 10Q Detective believes that having tools that help you do industry group research, focusing your attention on the very best market sectors, and leveraging analytical software to make sure that a stock you are considering is in an up trending industry is worth the monies—especially for experienced or professional traders. However, Investools target market of novice traders would best be served by enrolling in an investment course offered at a local community college (for a fraction of the cost).

Valuation Analysis

Operating metrics—funded accounts, trading activity and active subscribers—are firing on all cylinders. Noteworthy is the potential dual revenue stream, converting Investor Education Group graduates to active trading accounts on the TOS brokerage business.

Volatility is good for transaction volume at TOS; however, on the negative side, a weak stock market performance, an ongoing credit crunch, and erosion in discretionary income could damage the Company’s retooled business model.

The online brokerage business is a bright spot in Investools’ portfolio. Recent metrics suggest that the Company has hungrily digested its September 2006 purchase of TOS.

For the third-quarter ended September 30, the brokerage division added 17,900 accounts to bring the total to 47,850. The company said investors wanted to take advantage of the wild swings in the market during the third quarter to make money trading.

Revenue from brokering investments more than doubled to $32 million.

The average commission rate increased, too. TOS charged a commission of $10.16 per trade, compared with $9.25 per trade in last year's third quarter.

Trading activity remains heavily options-oriented, with average annualized trades of 170 per account (compared to 11, 9, and 13 for AMTD clients, SCHW clients, and ETFC clients, respectively).

Approximately 31% of revenue now comes from online investing services; and, management expects this business to continue to account for an increasingly significant portion of revenues in the future.

As any student of stock markets ought to know, downturns or disruptions in the securities markets could reduce trade volumes and margin borrowing and increase the Company’s dependence on its more active customers—who receive lower pricing.

In addition, top-line visibility could be obscured by continued weakness at the Education segment—loss of pricing power and higher SG&A costs.

Sink or swim
Sink or swim
Whats it going to be when you dive on in

Enrollment expansion might be adversely impacted, too, by continuing allegations of dishonest sales practices and working capital issues.

Dive on in
Dive on in

Investool is trading at 18.4 times FY ’08 consensus estimates of 94 cents a share, a 6.9% premium to its peer group average of 17.2 times (OXPS, AMTD, ETFC, and SCHW). In our view, OptionsXpress Holdings Inc., an online brokerage specializing in options and futures, and discount brokerages are a consistent comparable for a valuation analysis—as TOS is the visible growth engine.

Whats it going to be when you dive on in
Everybody knows what Im talking about
Everybody knows what theyre hiding from

The technical indicators for Investools are bullish, as the stock broke out above its 10-week and 30-week moving averages back in August. And, management’s outlook for a positive fourth-quarter could generate additional upside for the stock price.

Hiding from
Hiding from

Nonetheless, despite Investools’ robust growth prospects, the 10Q Detective prefers to sit this one out, for the red flags we have painted for readers remind us of our own youthful days back in summer camp—when we were taught never to swim out beyond the flags.

Everybody knows what they’re hiding from
Waters fine from the edge
But how you gonna know if you dont get wet?

The red flags signaled to us that the water at Investools was too deep to swim without a flotation device. We prefer to stay on the beach.

Dont get wet
Dont get wet
How you gonna know if you dont get wet?
~ Australian folk band The Waifs
[Audio Clip. Sink or Swim]

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Wednesday, December 12, 2007

Is Yahoo! Inc. anti-Semitic?

Shares in Force Protection Inc. (FRPT-$6.82) fell steadily in Tuesday's trading, closing down 66 cents, or almost 9 percent in value.

Tuesday's slide in the stock of the armored vehicle maker added to the sell off that started in late November after the U.S. Marine Corps announced that it
would cut its orders of bomb-resistant transports.

The 'patriotic' bulls who remain long the stock first blamed short-sellers, ‘Mad-Money’ Jim Cramer, and the
10Q Detective for the decline in Force Protection’s market value—as if we were conspiring to drive the share price down.

As that aspersion to our honesty failed to win a following—some bullish investors have taken to blaming the Jews. To quote from a posting on a Yahoo! Finance message board: "The @#$%en Jews did this to FPI…. Bring back the NAZIS to finish the job."

Granted, the same buffoons probably take the forged
Protocols of the Elders of Zion as gospel.

Nonetheless, the 10Q Detective fired off a complaint to the customer service division of the Internet Service Provider, reporting a violation of Yahoo’s obscenity policy.

The response received from Yahoo! Customer Care: take advantage of the Profanity Filter to remove the [offending] language from [your] viewing environment?

Sadly, Yahoo’s enforcement of 'censorship' applies only in selective cases that might adversely impact its profitability.

In April 2005, Shi Tao, 37, working for the Contemporary Business News in Hunan province, was arrested and sentenced to 10 years in prison.

I see a world where Yahoo is a place that consumers love. ~ Yahoo! Inc. CEO Jerry Yang (July 2007)

His crime? Tao was found guilty of sending foreign-based websites an e-mail text of an internal Communist Party message (about Chinese government initiatives to prevent commemorations of the 15th anniversary of the massacre in Tiananmen Square), according to
Amnesty International.

You must treat all Yahoo! people, customers, suppliers and others with respect and dignity. ~
Yahoo! Guide to Business Conduct & Ethics

The evidence that led to Shi Tao's sentencing? Yahoo! freely provided Chinese investigators with information that helped link Shi Tao's personal e-mail account and the text of the message to his computer.

A free man sold out for speaking the truth and the expressed tolerance of hate speech—Yahoo! Inc. (YHOO-$24.47) only feigns the respect and dignity of its people, customers, and others. This indifference suggests the Internet company’s business conduct is greed—not ethics.
Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Sunday, December 09, 2007

Weekend Stock Alerts: December 9, 2007

Ambac Financial Group (ABK-$26.84) and MBIA (MBI-$30.00) are the two biggest companies in the bond insurance business. Their stocks have come down from highs of $96 and $73, respectively, earlier in 2007. That has made them both value plays and income plays, as their dividend yields have risen pleasantly, to 3.1% and 4.5 percent. These stocks should recover smartly once the market figures out that their problems are exaggerated, according to Richard Lehmann, editor of the Forbes/Lehmann Income Securities Investor.

After the closing bell on Friday, American Mortgage Acceptance Co. (AMC-$4.25) provided
an update to investors on the adverse impact that credit market conditions continue to have on the REIT. The company said that it is withdrawing its previous adjusted funds from operations forecast of $0.95-$1.00 per share for the fiscal year 2007. In addition, to meet these margin calls and increase liquidity for future cash needs, the board of trustees has decided not to declare the regular dividend paid to the company's common shareholders in the fourth quarter.

At the American Society of Hematology meeting in Atlanta, Amgen Inc (AMGN-$52.10) said on Saturday that a
late-stage trial of its experimental drug AMG 531 (romiplostim) showed it boosted and sustained platelet counts in adults with chronic immune thrombocytopenic purpura, a bleeding disorder.

At the 49th annual American Society of Hematology Meeting, Celgene Corp. (CELG-$57.36) announced that results from the Southwest Oncology Group Phase III randomized, controlled trial (SWOG) showed that REVLIMID (lenalidomide) Plus Dexamethasone achieved superior progression-free survival in newly diagnosed multiple myeloma patients.

There are reports the Board of Citibank (C-$34.31) is meeting early in the week to discuss CEO candidates, and the Wall Street Journal says that inside candidate Vikram Pandit may be named to the job.

Zacks senior Chinese markets analyst Paul Cheung, CFA is reiterating his Buy recommendation on shares of Internet content provider CDC Corp. (CHINA-$5.98). Its stock is trading at a lower valuation than its peers and CDC is well positioned to leverage the
growth opportunities in small-to-medium business enterprise software market and China's online game market, according to Cheung.

Ford Motor Co (F-$7.06) said it
issued more than 62 million shares of common stock to an institutional investor in exchange for $442 million in debt to improve its balance sheet.

H&R Block (HRB-$20.02) is expected to report a fiscal
second-quarter loss after the closing bell rings on Monday. Analysts polled by Thomson Financial forecast the tax preparer to report a loss of 35 cents per share for the fiscal second quarter, which ended in October. Analysts expect revenue to shrink 18 percent to $463 million.

Hemispherx Biopharma (HEB-$1.29) received notice of an
incomplete new drug application from the U.S. Food and Drug Administration (FDA). Specifically, the Company announced that its NDA submission for Ampligen in Chronic Fatigue Syndrome (CFS), after preliminary review, had been determined to be insufficiently complete to permit a substantive review. The FDA cited eleven deficiencies in the Clinical Section and three in the Pre-Clinical Section.

JPMorgan Chase & Co. (JPM-$46.08), the third-largest U.S. bank, avoided most of the losses suffered by other investment banks and its growth could now "really accelerate," weekly financial publication Barron's reported on Sunday.

In an
amended 13D filing on Lifetime Brands, Inc. (LCUT-$14.43), Jove Partners disclosed a 7.8% stake (975,000 shares) in the company. In a letter to the operator of cutlery and kitchenware outlets, Jove Partners endorsed recent management initiatives to increase cash generation and shareholder value, such as the announced closing of marginal and unprofitable retail operations.

The possibility of U.S. Postal Service
surcharges on DVD mailers caused Citigroup analyst Tony Wible to reiterate his "sell" rating on online video rental company Netflix Inc (NFLX-$23.57), which ships over 1.6 million DVDs per day.

Osiris Therapeutics Inc (OSIR-$12.33) was granted
fast track status by the FDA for Prochymal, a stem cell therapy for acute graft-versus-host-disease, a reaction of donated stem cells against the patient's tissue.

It would be easy to hang up on PALM (PALM-$5.74) right now, but you just might want to hold the phone. Barron's columnist Mark Veverka says despite the Street's disappointment, shares in the TREO maker may be worth holding, as a recent cash infusion "may launch Palm into the smart-phone big leagues."

Patni Computer Systems Limited (PTI-$17.70), a pioneer in the growing
Indian IT industry, is currently trading at a 43% discount to its five-year average, a 50% discount to peers and 55% discount to the S&P 500 based on forward price-to-earnings and long-term growth projections, according to Thomson Financial. "Any stability in the rupee or stronger-than-expected sequential revenue growth in [calendar year] '08 could be a trigger for the stock," Morgan Stanley analyst Vipin Khare said in a recent research note.

UBS AG (UBS-$50.48), one of the banks most exposed to US subprime securities, will on Tuesday provide an update about its position at a special day for investors in London amid growing speculation about further hefty writedowns.

WCI Communities Inc. (WCI-$4.05) said the
limited waiver of performance previously granted by its banks has been extended to Jan. 7, 2008.

Editor David J. Phillips does not hold a financial interest in any of the stocks mentioned in this column. The 10Q Detective has a Full Disclosure Policy.

Tuesday, December 04, 2007

Force Protection Steps on Land Mine

Shares of armored vehicle maker Force Protection Inc. (FRPT-$9.61) stepped on an Improvised Explosive Device (IED), closing at a new 52-week lows, on reports that the U.S. Marine Corps will cut its orders of bomb-resistant transports.

Friedman, Billings, Ramsey analyst Patrick McCarthy wrote in a client note the impact to revenues in FY 2008 would be approximately $206.0 million (at approximately $550,000 per vehicle) and cut profit to about $1.36 per share from his current estimate of $1.57 per share.

On the surface, an investor might view the sell-off as overkill, with shares priced at only 7.1 times FY 2008 revised earnings. But then again, maybe the stock of Force Protection is efficiently priced, discounting our anticipated sales/profit guidance cuts to come from management.


1. Working Capital

For the nine-months ended September 30, 2007, Force Protection hit on all cylinders, delivering an operating profit of $34.6 million; however, cash flow decreased by $84.0 million. The 2007 decrease was due to increased working capital—including increases of $44 million and $123.4 million, respectively, in capital expenditures and inventories to support anticipated higher production volumes.

The Company has working capital of $244.3 million. Back out inventories and prepaid assets of $182.4 million and $16.3 million, respectively, and the company’s short-term financial health is not as robust, with liquidity of only $45.6 million.

Force Protection's recently spent $31 million for a 430,000 square foot assembly line in Roxboro, North Carolina for production of the Company’s Cheetah vehicle. Future armed forces cutbacks would idle manufacturing facilities, increasing fixed costs—and forcing a write-down of recent inventory build-ups.

2. Revenue Issues

The Company’s revenue is derived principally from the sale of its vehicles, and, to a lesser extent, sale of associated spare parts and training services to the U.S. government. For the three-months ended September 30, 2007, revenues from sales to military units of the U.S. government accounted for 98% of total revenues.

The Company recognizes revenue when earned under the unit of delivery method (after a material inspection and receipt of invoice is received from a representative of the U.S. government). As discussed by the 10Q Detective
in October 2006, operating results at Force Protection are sensitive to fluctuations, a result of the government contracting process, including the right of the U.S. government to delay or cancel contracts. In our view, management has under-estimated its "Allowance of Contractual Adjustments," setting aside only $15.9 million for contractual adjustments as of September 30, 2007. In our view, in coming quarters, the company will probably record contract revenues less than estimated upon final audit and will need to increase its contractual allowances, leading to reduced gross income.

Buyout Possibility

The stock has been volatile in the past year, trading as high as $31.16 a share due to buyout rumors. Despite announcements of new orders and
vehicle production records being broken monthly, we expect coming book-bill numbers to decline.

Force Protection’s market capitalization has been shelled in the last two months, losing more than $1.0 billion. In our view, even at a 52-week low in enterprise-value of about $600 million, a buyout by the likes of its manufacturing partner General Dynamics is less likely today than a year ago, for Force Protection is no longer a sole-source manufacturer of ballistic- and blast-protected wheeled vehicles.

In May 2007, New York Representative Louise Slaughter, Chairwoman of the Rules Committee, requested a report on the contracting for armored vehicles and up-armoring equipment headed to Iraq. The report, entitled Procurement Policy for Armored Vehicles, uncovered that no-bid deals resulted in
delays and questionable contracting practices. Pentagon procurement guidelines now require Force Protection to participate in competitive bidding

Valuation Analysis

"Force Protection’s history has been a remarkable one," said Force Protection Chief Operating Officer Raymond Pollard earlier today. "By every measure, it is an impressive American success story as a small start-up entrepreneur has become a mainstream assembly line manufacturer and industry leader in an astoundingly short period. The vision, expertise, and hard work of the company’s founders and workforce, along with the support of its shareholders and partners, have brought Force Protection to where it stands today. The leadership and infrastructure are in place, the product is proven and continues to be critically needed, and the future of Force Protection is bright."

Two roads diverged in a wood,and I--
I took the one less traveled by,
And that has made all the difference.
~ American poet Robert Frost, The Road Not Taken (1874 – 1963)

If the $6.00 drop in its share price in the last two trading days is any indication, Wall Street may be signaling that the bullish tailwinds that provided strong earnings growth in FY 2007 may stall in coming quarters. In fact, we believe that future troop cutbacks and stalled military spending bills in Congress could obfuscate earnings visibility and margin improvement through the balance of this decade, a factor that calls into question management’s spending initiatives. Still, even a dead cat can bounce—short-term.

Force Protection’s road yet to be traveled is laden with buried IEDs.

Editor David J. Phillips and the 10Q Detective do not have a financial interest in Force Protection. The 10Q Detective has a Full Disclosure Policy.