Friday, February 29, 2008

Do Dell Share BuyBacks Create Value for Shareholders?

Dell Inc (DELL-$20.50) said Thursday that its fourth-quarter profit dropped 6.4 percent, to $679 million or 31 cents per share, in the quarter ended February 1, 2007 (including several one-time expenses totaling 7 cents per share and gains of 4 cents per share).

Analysts surveyed by Thomson Financial had predicted a profit of 36 cents per share. A year ago, the No. 2 PC Maker earned $726 million, or 32 cents per share.

The weaker 4Q:08 was due to margins, owing to higher operating expenses (slower than-expected pace of headcount reductions) and a shift in product mix (higher-than expected sales of lower-margin U.S. consumer computers, slightly offset by greater shipments of higher-margin notebooks).

Sales rose 10.5 percent to $15.99 billion, but that was below the $16.27 billion that analysts had expected. Dell said that its strength in unit growth sales was offset by year/year decline in average selling prices and lower than-expected enterprise (server/storage) shipments, due to product transitions and cutbacks in U.S. business IT spending.

Stock Repurchase Program

Dell, which
resumed its stock-buy back program following the end of an internal accounting probe, said it spent $4 billion to buy back 179 million shares of common stock in the quarter, at an average price of $22.35 a share. This repurchase activity represented 8% of the outstanding stock at the time the quarter began, according to CFO Donald Carney.

And, in the 1Q:09, Carney said the Company expects to spend at least an additional $1 billion on stock buybacks.

Dell's share repurchase program was initially announced on February 20, 1996, and the program is authorized to purchase shares at an aggregate cost not to exceed $30.0 billion, in open-market purchases.

Does a share repurchase program matter?

"Simply stated,
ceteris paribus, buying back shares reduces the number of shares outstanding [dilution] and increases shareholders' stake in the future cash flows of the company, noted Dell's vice president of investor relations, Lynn Tyson, in a December 5, 2007, posting on the "Dellshares" blog.

"At the end of the day a company wants to generate a return on its capital that's in excess of what it costs the company to obtain that capital - that's how it creates value for its shareholders," Tyson said.

Texas-based Dell has reduced its outstanding share count by 15% in the last four years. By decreasing shares outstanding, ipso facto, buybacks are accretive to earnings.

This begs the question, however, are Dell stockholders best served when the company uses its available cash to buy back shares?

In the short-run, the market usually responds positively to announcements of buy backs because they offer a supposed belief, often called a signal, that management seems to believe that the stock is undervalued and is confident about a company's future—and, hence its share price.

A second positive signal is management's confidence about the Company’s financial health. The belief that the company doesn't need the cash to cover future commitments such as interest payments and capital expenditures.

Dell has historically generated cash in excess of the cash required to run the business, and has then used this cash from operations to buy back its stock.

Is funding buy backs with current assets the best use of cash from operations?

As of the end of fiscal 2004, Dell had cumulatively repurchased 1.1 billion shares for an aggregate cost of approximately $14 billion, or $12.72 a share. Given that Dell currently trades at $20.50 a share, these were capital monies that generated a positive return.

Digging through regulatory filings, the 10Q unearthed, however, that recent activity has not offered as favorable a return to shareholders. Illustrating, perchance, that
buy backs cannot prop-up the market’s skeptical response to poor long-term operational performance?

From October 2004 through December 2005, the Company repurchased 22.0 million shares at average purchases of $39.62 a share.

And, for the 4Q:06 ended February 3, 2006, Dell repurchased 66 million of its own shares at average purchases of $30.29 a share.

Ergo, aside from an artificial boost to share-net, a shareholder can reasonable ask of Dell management as to whether or not recent stock buying is the most efficient use of its own capital?

In most cases, buybacks [do] create value because they help improve tax efficiency and prevent managers from investing in the wrong assets or pursuing unwise acquisitions [think Sprint-Nextel meger or eBay/Skype deal].

[However], boards and executives [must] understand the difference between fundamental value creation through improved performance and the purely mechanical effects of a buyback program on EPS. ~ Richard Dobbs & Werner Rehm
McKinsey & Co. [September 20, 2005]

In other words, Dell shouldn't confuse the value created by returning cash to shareholders with the value created by actual operational improvements.

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

Thursday, February 28, 2008

How Bright Is China Solar's Future?

China Solar & Clean Energy Solutions, Inc. (CSOL-$2.70) provides solar hot water heaters and coal fired residential boilers in the People’s Republic of China (PRC), primarily in rural areas.

Going forward, given prospects for alternative energy solutions in the PRC and existing demand for China Solar’s products, the Company believes that a CAGR of 70% per annum is attainable for the next several years.

According to statistics from the Chinese Energy Research Association, there are currently over 3,500 solar hot water heater manufacturers producing products under more than 3,000 brands. The top three solar hot water heater companies (by market share) are government-owned companies.

Positioning China Solar for accelerated growth in such a fragmented—but highly competitive--industry will require that management successfully execute on a
multi-prong marketing strategy that expands and differentiates the China Solar footprint, including the pursuit of opportunities in foreign markets, extending its product offerings into additional clean product alternatives, and making accretive acquisitions.

Albeit China Solar has a
sexy alternative energy story, investors ought to note the intrinsic risks related with buying into a thinly traded, Beijing-based company—in constant need of financing to fuel its growth.

The development and marketing of new products and the expansion of distribution channels and associated support personnel requires a significant commitment of resources.

Financing Issues

As of September 30, 2007, China Solar had only $3.31 million in cash on its balance sheet.

On January 9, 2008, the Company entered into a $2.76 million cash Purchase Agreement to acquire Shenzhen PengSangPu Solar Industrial Products Corporation (SZPSP), which is principally engaged in the re-sale of energy-saving heating products (such as pressure water boilers, solar energy water heaters, and radiators) in southern China. Part of the consideration of the transaction contains future incentive-earning payouts to the three principal stockholders of SZPSP, too.

How to pay for this acquisition?

On February 25, China Solar announced that it would raise approximately $11.3 million from the sale of up to an aggregate of approximately 4.7 million shares of the Company’s common stock.

Unfortunately for existing shareholders, the financing contains "last-resort" dilutive terms on the part of China Solar, including an indemnification by the Company to deliver up to 1.0 million additional shares of common stock to the investors (for no additional consideration) in the event that the Company’s after-tax net income for the fiscal year ending December 31, 2008 is less than $4.8 million.

The Company is also required to deliver 1.0 million additional shares of common stock if the Company’s after-tax net income for the fiscal year ending December 31, 2009, is less than $8 million.

The terms of a $2.75 million Securities Purchase Agreement entered into on June 13, 2007, indemnify investors involved in this private financing, too. China Solar issued a promissory note that these prior investors could convert Class A and Class B Warrants at potentially very high discounts (up to 75%) to the market price of the common stock (arising from the failure by the Company to perform with respect to its financial performance). These 'death-spiral' convertibles reset—under the terms of the warrants—if the "pre-tax income" for the year ended December 31, 2007, is less than $3.0 million, then the exercise price will be reduced by the percentage shortfall, up to a maximum of 75 percent.

If reported pre-tax income for FY ’07 comes in below $0.75 million, the exercise price per share of the Class A and Class B Warrants is reset from $1.90 a share and $2.40 a share to $0.48 per share and $0.60 per share, respectively.

In the event the pre-tax income for the year ended December 31, 2008, is less than $5.5 million, the exercise price will be reduced by the percentage shortfall, again up to a maximum of 75 percent, too.

Operating Review

Revenue growth for the quarter ended September 30, 2007, increased 92% to $12.6 million, driven by higher unit sales of solar water heaters and residential boilers. However, gross margin fell 70 basis points to 20.2%, caused by pricing competition in the solar water heating market and rising raw material prices.

Operating income increased 41% to $782,685 from the prior year. However, net income declined 9.2% to $499,074, pressured by operating expenses.

Management emphasized product awareness in the quarter, resulting in higher advertising, branding, and sales costs.

Net cash provided by operating activities was $324,013 for the nine months ended September 30, 2007, a decrease of $624,854, or approximately 66.5 percent, from $966,867 for the same period of 2006. Of concern, accounts receivable and inventories soared, up $6.3 million and $4.9 million, respectively. The increases were both due to the consolidation of the May 2007 Tianjin Huaneng acquisition.

Investors will need to keep an eye on days of sales outstanding and inventory turnover numbers in FY 2008.

Business Outlook

Looking out to FY 2008, estimated pre-tax income is $5.5 million, which assumes a recovery in gross margin to 22% (due to the successfully integration of recent acquisitions, higher unit sales, and the bringing 30%-40% of peak season manufacturing production in-house). Eliminate duplicate overhead, coupled with effective management in the growth of the distribution network, operating margins could improve to 7.5%, yielding share-net income of 39 cents.

Water source heating provider WFI Industries Ltd (TOR:WFI) is the closest publicly traded peer comparable to China Solar and fetches a 35 multiple to trailing-twelve-month earnings. China Sunergy (CSUN-$7.20), a manufacturer of solar cell products in the People’s Republic of China, with no earnings, commands a market capitalization of $284.8 million; and, JA Solar Holdings Co., Ltd (JASO-$15.90), a manufacturer of solar cells based in China, yields 37.1 times earnings.

One could easily assign this 35 multiple to China Solar, given its above-average prospects for growth, and plans to expand its photovoltaic solar products.

Capital spending/financing issues, continued pricing/margin concerns, and limited visibility on management’s ability to execute on its business strategy, however, lends us to conservatively estimate that the stock be priced—at best—15 times earnings, generating a 12-month price target of $5.85 a share.

Other Investment Risks & Considerations

With growth comes existing shareholder dilution. As of January 9, 2008, there were 6.2 million shares of common stock outstanding. Assuming the exercise and conversion of all Preferred Stock and warrants there would be about 15.9 million shares of common stock outstanding!

Similar to other Chinese stocks traded on U.S. equity exchanges, China Solar is in non-compliance with Section 404 of the Sarbanes-Oxley Act of 2002, which requires an annual assessment of internal control over financial reporting, and attestation of this assessment by the company's independent registered public accountants.

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, February 27, 2008

Special Interests and Hillary Clinton

After seven years of a President who listens only to the special interests, you're ready for a President who brings your voice, your values, and your dreams to your White House. ~ Hillary Rodham Clinton, February 5, 2008

Is the erstwhile Democratic frontrunner for President talking about George Walker Bush—or is she
referring to her husband, William Jefferson Clinton [who put friends of the couple from agricultural giant Monsanto Co (MON-$120.76) in positions of influence at the FDA, as US Agricultural Trade Representatives, on International Biotechnology Consultative Forums, and more.]?
Editor David J. Phillips voted for the 43rd President of the United States, George W. Bush, in the year 2000 election. He left his chad hanging in the 2004 presidential election--exercising his right to NOT vote for any candidate. The 10Q Detective has a Full Disclosure Policy.

Tuesday, February 26, 2008

Plato Learning No Expert in Making Profits

In October 2006, Plato Learning, Inc. (TUTR-$3.64), a provider of computer-based and e-learning instruction for kindergarten through adult learners, switched its revenue model from dependence on a one-time perpetual software license model to a fee-based subscription model, the PLATO Learning Environment.

He who steals a little steals with the same wish as he who steals much, but with less power. ~ Greek Philosopher Plato (427 BC – 347 BC)

When it became apparent that market acceptance of new online learning subscription products was slower than anticipated—and that no payments would be made under the Company’s Incentive Performance or long-term equity grant plans—the Board wrestled with the issue of retention of its Named Executive Officers.

Rhetoric is the art of ruling the minds of men. ~ Plato

The Compensation Committee recommended and approved retention cash payments to CEO Michael A. Morache, CFO Robert J. Rueckl, CTO James T. Lynn, and Sr. VP David H. LePage for $175,000, $75,870, $93,336 and $73,361, respectively, according to its recent proxy filing.

Wealth is well known to be a great comforter. ~ Plato

Plato Learning did have in place a defined EBITDA-based incentive payment. An EBITDA achievement of $3.4 million was the minimum threshold necessary to receive an actual payment of 50% of contractual targeted incentives.

For the fiscal year-ended October 31, 2007, actual EBITDA was $0.7 million, for order growth did not offset a decline in the average value of orders (lower price points for subscription products versus perpetual license products).

Because the EBITDA goal was not achieved no annual cash Incentive Payments were to be awarded during the year.

The excessive increase of anything causes a reaction in the opposite direction. ~ Plato

Veering from an executive compensation program designed to closely link payment packages to corporate performance and returns to stockholders may keep senior managers onboard—but does little to retain investors. Shares in Pluto Learning declined 30 percent year-over-year, reflecting investor impatience with management’s pace of progress in transitioning from legacy products to online subscription courseware products.

No one ever teaches well who wants to teach, or governs well who wants to govern. ~ Plato

Dare we say, however, Plato Learning shares nothing cognate with the great Greek thinker. If it did, the Company would not be sitting on $69.2 million in accumulated deficits; and, the Board could better spend its limited resources finding managers that can execute on a stated business formula.

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, February 24, 2008

Trading Alerts: Monday, February 25, 2008

Telecom carrier Alaska Communications Systems Group Inc (ALSK-$12.71) found errors in its reported depreciation expenses for 2006 and 2007 and will have to restate its finances as a result.

Allco Finance Group Ltd. (AFG-$1.15) plunged more than 60 percent in Sydney trading after the Australian asset manager said lenders may force repayment of A$1.15 billion ($1 billion) of debt in the next three months.

A $3.0 billion
rescue for bond insurer Ambac Financial Group Inc (ABK-$10.71) may be announced on Monday or Tuesday, a person familiar with the matter said on Friday.

Michael Baker Corp. (BKR-$36.10), a provider of engineering and maintenance services, said Friday it will
restate its financial results for the first three quarters of 2007 because of non-cash errors at its energy business segment.

BlueScope Steel Ltd. (BSL-$11.93), Australia's largest steel maker, forecast improved earnings this half after underlying first-half profit beat analyst estimates

reversing intra-day losses on Friday, the stock of Boston Private Financial Holdings Inc. (BPFH-$15.08) plunged more than 8 percent in aftermarket trading, adding to recent price losses. Shares in the asset management and advisory firm are selling for their cheapest price in almost five years. On Thursday, the investment manager said loan quality deteriorated, and it needed to squirrel away more money to prepare for unpaid loans.

News from Cell Genesys, Inc (CEGE-$$2.62) this week doesn't do much to boost prospects for its GVAX prostate cancer vaccine, according to Adam Feuerstein of

When effective cost and inventory controls are finally put in place, clothing retailer Citi Trends, Inc (CTRN-$15.30) will be
positioned to deliver explosive earnings growth, says Zacks analyst Rob Plaza, CFA.

Clear Channel Communications (CCU-$32.38) has entered talks with Providence Equity Partners to negotiate a
new agreement on a stalled deal to sell its television stations to the private equity firm, news reports said Saturday.

Donaldson Co (DCI-$41.76) will issue a post-market earnings announcement on Monday. The provider of air and liquid filtration systems is likely to announce second-quarter earnings of 42 cents a share. Citing international strength, DCI
beat expectations last quarter. And, in a good sign, the Board recently increased the dividend by one cent to 11 cents per share, payable each quarter.

Electronic Arts (ERTS-$49.74) announced a hostile $2.0 billion, or $26.00 a share in cash, bid for gaming rival Take-Two Interactive (TTWO-$17.36), publisher of the Grand Theft Auto franchise.

Eli Lilly and Co (LLY-$50.51) on Friday said an
advisory panel to European regulators has recommended that Alimta (pemetrexed disodium) be approved for the new use as a first-line treatment for advanced lung cancer. A chemotherapy agent, Alimta is currently marketed to treat cancer caused by exposure to asbestos and second-line treatment of lung cancer. Standard & Poor also reiterated its "Buy" opinion on the shares of the drugmaker, keeping its target price of $62.00 a share.

Going against the recommendation of its advisory panel, the Food and Drug Administration judged the effectiveness of Avastin (bevacizumab) based on measurements of tumor growth, not patient survival, and granted
“accelerated approval” to the vascular endothelial growth factor made by Genentech, Inc (DNA-$71.60) as a treatment in metastatic breast cancer.

Zacks Equity Research’s "Buy" recommendation on Halliburton Co (HAL-$36.10) remains unchanged, and the research firm continues to view the energy play as a
core oilfield service holding. A price objective of $44 is based on 2008 P/E and EV/EBITDA multiples of 14.8x and 9x, respectively, still below its large-cap peers.

The Board of Humana Inc. (HUM-$68.87)
authorized the repurchase of up to $150 million of the health insurer’s shares.

Cowen and Co. analyst Eric Schmidt
ugraded Imclone Inc (IMCL-$42.02) to "Outperform" from "Neutral", citing the likelihood that data from an ongoing study of its colon cancer drug, Erbitux, will be viewed as positive and relevant for approval by the Food and Drug Administration for lung cancer. Schmidt believes, too, IMCL shares are 25% undervalued on probability-adjusted basis.

Following the close of the market on Monday, LDK Solar Co. (LDK-$31.05) is expected to report fourth-quarter earnings of 41 cents a share on sales of $181.94 million, on average. On February 5, the manufacturer of multicrystalline solar wafers
rained on its 1Q:08 guidance, citing delays in shipments to customers and from suppliers due to severe weather conditions in China.

Home-improvement retailer Lowe's Co.s (LOW-$23.59)
reports earnings for its fiscal fourth-quarter on Monday after the close of trading. Jefferies & Co. analyst Daniel Binder said in a note to investors that he expects same-store sales to be down at least 4 percent during the quarter, and believes there is a risk of the housing market getting worse. Analysts polled by Thomson Financial predict a profit of 25 cents per share on revenue of $10.63 billion, on average.

Merck’s (MRK-$46.07) much-heralded human papillomavirus (HPV) vaccine, Gardasil, is seeing physician skepticism regarding its wide-scale use, as doubts of long-term safety and efficacy linger,
PharmaWire has found. Recent reports have linked deaths and rare serious adverse events to the vaccine, doctors said.

Nordstrom, Inc. (JWN-$36.00) is expected to pull-down fourth-quarter earnings of 90 cents a share, according to analysts polled by FactSet Research. On February 15, Buckingham Research analyst, Barbara Wyckoff,
downgraded the upscale fashion specialty retailer from 'Strong Buy' to 'Accumulate', given uncertainty about consumer spending in the first half along with higher pre-opening expenses for 8 new stores.

Orient-Express Hotels (OEH-$54.26) will release its fourth-quarter numbers after the market closes on Monday. Analysts polled by FactSet Research estimate the luxury hotel and restaurant owner will report earnings of 20 cents a share. More important to investors, however, is what will be the next move coming from Manhattan-based activist shareholder D.E. Shaw, who recently
acquired a 5.7% stake in the luxury travel company.

International media conglomerate Reed Elsevier plc (RUK-$49.45), a London-based educational publisher and the owner of the Lexis Nexis information service, could reap as much as a billion pounds (almost US$2 billion) on the
divestment of its Business Information unit which includes including the publications Variety and New Scientist.

Shanda Interactive Entertainment (SNDA-$29.82), a China-based interactive entertainment media company, should post earnings of 45 cents a share in the fourth quarter, on average, on revenue of $93.48 million, according to analysts polled by Thomson Financial. In a
note to investors, Citigroup said it is maintaining its target price of $35.00 a share.

Tesco Corp (TESO-$20.70), a manufacturer of technology-based solutions for the upstream energy industry, is likely to report earnings of 22 cents a share in the fourth quarter, with sales of $119.20 million. Investors will be looking for any sequential improvement in [promised reductions] in manufacturing costs (of rental units) and the continued transition of the composition of the order base to the newer Top Drive motor units.

While the stock of Wet Seal, Inc (WTSLA-$2.87) is down over 50% in the last 12 months, Zacks Equity Research analyst, Rob Plaza, thinks it is premature to bottom-fish. Plaza believes it is
too early in this down cycle to get bullish on WTSLA shares. He rates the stock a "Hold" with a target price of $2.50, which assumes the stock will perform in-line with the overall market for the next six months.

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, February 21, 2008

Board's Ignorance Plays a Role in Sharper Image Bankruptcy Filing

Since August 2007, Sharper Image (SHRP-$0.41) had summarily dismissed notions that it was headed for bankruptcy. Late Tuesday in U.S. bankruptcy court in Wilmington, Delaware, the ailing electronics and specialty gifts retailer buckled, filing for reorganization under Chapter 11 of the bankruptcy code.

In an affidavit, Chief Financial Officer Rebecca L. Roedell said the Company was in a "severe liquidity crisis," hurt by tougher competition, deteriorating gross margins, pending litigation and the volatile credit and financing markets, among other factors.

Sharper Image has seen its sales decline steadily since 2004, and has posted three straight years of net losses (in fiscal 2005 to 2007, with an accumulated deficit of $52.8 million, as of the nine-months ended October 31, 2007).

The multi-channel gadget retailer said it had $251.5 million in assets (with about 40 percent in merchandise inventories) and $199 million in debt as of January 31, but just $700,000 of cash on hand, according to court papers.

The Company deals with more than 650 suppliers and vendors on a credit basis, many of whom, however, have begun to request cash upon delivery. [Ed. note. More than one-third of debt is in current accounts payable.]

Sharper Image is seeking a $60 million loan arranged by Wells Fargo Retail Finance to keep operating.

Last week, Sharper Image named crisis-management expert, Ron Conway, as its new chief executive, replacing direct-marketing/ mail order business veteran, Stephen A. Lightman (appointed less than one-year ago to prop-up flagging sales).

Conway and his New York-based management consultancy, Conway, Del Genio, Gries & Co., LLC (CDG), stand to benefit financially, irrespective of their performance in turning the gadget retailer around.

According to a regulatory filing with the Securities and Exchange Commission on Tuesday, CDG will receive a $100,000 monthly fee plus a 1.0% fee from any restructured debt or assets sold.

There is nothing more frightful than active ignorance. ~ German writer Johan Wolfgang von Goethe (1749-1832)

In hindsight, the writing was in the proxy that Sharper Image would not survive its own ignorance.

The Board had a history of granting contracts of desperation. To wit: "We aim to reward performance, while recognizing that our business performance has been challenging in recent years and that we still need to retain talented executives during difficult times." Sharper Image Compensation Philosophy [2006 Filing]

The Board handed out lucrative compensation packages to Named Executive Officers through the revolving door of leadership at the Company, with no guarantee that a CEO could right the foundering ship.

Stephen Lightman received severance of $1.1 million in salary and a guaranteed bonus of $275,000, for ten-months work.

The separation agreement with founder Richard J. Thalheimer, ousted in September 2007, was even more one-sided. Terms of his Settlement Agreement included, but were not limited to the following amounts: (i) severance in the amount of $1.85 million (including interest payments on severance, too!); (ii) $182,769 for unused vacation time; (iii) continued health coverage for himself and his dependents until his death; (iv) payment of a nonqualified retirement benefit of $3.90 million; (v) an allowance of $300,000 to assist him in renting office space and in securing secretarial assistance for three years; (vi) purchase of 3CPO model and Superman sculpture for $10,000 (which reflects the customary directors’ discount of 50% from the retail price for these sculptures); and (vii) lifetime entitlement to retain his 50% director’s discount card on all goods sold by Sharper Image, up to $50,000 per year (based on the marked retail price of such goods).
In addition, as profiled in a 10Q Detective posting on August 8, 2007, the Company never had Thalheimer sign a non-compete agreement. Today, while Sharper Image struggles to survive, Thalheimer’s new venture, the e-commerce gadget site,, seems to be thriving.

Since hitting an intra-day high of $39.92 a share on February 6, 2004, Sharper Image's stock has plunged 98.9 percent.

If misery has company, misery has company enough. ~ American author Henry David Thoreau (1817-1862)

Directors and Named Executive Officers beneficially own 24.3% of the common stock of Sharper Image. Small comfort to other stakeholders, but some pleasure can be derived from the knowing that the Board’s stupidity will lead to their holdings ultimately being worth no more than pennies a share, too!

The tangible book value is approximately $4.21 a share. However, value investors should not be misled, for promotional discounts to move the approximately $101.4 million in merchandise inventories would probably yield the company no more than $50 –to- $60 million in cash, wiping out most of stockholder equity.

Aside from the net deferred tax assets (related primarily to net operating loss carry forwards) of approximately $90.1 million (as of As of October 31, 2007), there is little of value to any potential buyers. AVOID

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, February 20, 2008

What a Croc! Bloated Inventory Causes Stock Slide, Not 2008 Guidance

Despite weak sales in the casual U.S. footwear retail space, Crocs Inc (CROX-$32.08) posted strong fourth-quarter net income of 45 cents a share on an 84% rise in sales of $224.8 million. Nonetheless, shares of the maker of colorful plastic shoes tumbled nearly 13 percent in after-market trading to $28.05 a share after on Tuesday only backing its previous 2008 guidance, slightly below average Wall Street estimates.

Crocs Inc expects to earn about $2.70 per share for the year on $1.16 billion in revenue. Analysts polled by Thomson Financial estimated profit of $2.71 per share on $1.18 billion in revenue, on average.

In our view, the reaction in trading after-hours had nothing to do with the weaker-than expected earnings guidance (of one cent).

Journalism largely consists of saying, "Lord Jones is Dead" to people who never knew that Lord Jones was alive. ~ English writer G.K. Chesterton (1874-1939)

Contrary to the lazy reporting by business journalists, what agitated analysts on the 4Q:07 earnings call was the 27.2% rise in inventory build-up during the third-quarter. Crocs ended 2007 with inventories of $248.4 million, up from $195.3 million the end of the third-quarter, slightly higher than most analysts had modeled going to the end of the year [e.g. Thomas Weisel Partners had forecasted a 15% sequential rise in inventories).

Management said that the Company had historically chased demand since inception and felt the planned inventory buildup was necessary "on a forward-looking turns basis to meet first half forecasted customer demand."

The 10Q Detective questions the ability of management to calculate sufficient inventory levels, as the Company failed to anticipate the higher-than-expected demand for the Mammoth (new fleece-lined Crocs) during the holidays (and had to air freight in a good deal of products, resulting in some gross margin pressure).

On the earnings call, CEO Ronald R. Snyder tried to re-assure investors, saying: "We have very strong indications from our retailers that there is not an overabundance of inventory in retail." He added that the Company had done a good job now of properly positioning the inventory in the right parts of the world to meet appropriate demand (and pre-bookings).

However, footwear products remain subject to seasonal variation, with a majority of Croc’s footwear sales coming in the second and third quarter, for the shoes are more suited for fair weather use. Ergo, the outsized inventory growth might not dip until the spring.

Given the market cap drop of $329.8 million in after-market trading, investors need more convincing that management can execute on tracking inventory versus revenue growth going forward.

On a valuation basis in the footwear space, Crocs now trades for 10.38 times forward P/E; whereas, Steve Madden (SHOO-$18.26)—a shoe company with an absence of any major fashion footwear hits—and operating in a decelerating sales and profit environment, fetches 13.33 forward share-net estimate of $1.37, on average.

However, should Crocs miscalculate demand for its footwear, the carrying costs of bloated inventory levels—warehousing, distribution, work-in-progress, and finished goods—will come back to haunt management, especially if prices start to fall (customer discounts or forced liquidation of excess inventories) for some of its 'fad footwear.'

Editor David J. Phillips is long Crocs call options. The 10Q Detective has a Full Disclosure Policy.

Sunday, February 17, 2008

Trading Alerts: Tuesday, February 19, 2008

Abbott Laboratories (ABT-$55.55) said late Friday the Food and Drug Administration approved its cholesterol medication Simcor. The medication combines Niaspan, Abbott's extended-release niacin product that raises "good" cholesterol, and simvastatin, which lowers "bad" cholesterol.

Alico, Inc. (ALCO-$41.66), a land management company, reported a
decrease in operating revenues for the three months ended December 31, 2007, a result of lower prices in citrus.

Will bond insurer Ambac Financial Group (ABK-$10.22) follow in the footsteps of Financial Guaranty Insurance and split into
two separate companies?

Moody's Investors' Service on Friday signaled it could cut the
credit ratings of several of American International Group Inc.'s (AIG-$46.11) subsidiaries amid concerns over the insurance giant's exposure to the troubled subprime mortgage market. Nonetheless, the insurance company's long-term prospects may not have been too badly hurt, Barron's reported in its latest issue.

Australia & New Zealand Banking Group Ltd. (ANZBY-$109.23) announced that it anticipates profit for 2008 to be offset by higher
credit-related provisions associated with the changing global credit environment.

Australian shopping center owner Centro Properties Group (CNP-$0.65) said Monday its Australian and US bankers have agreed to further
extend financing arrangements for $1.3 billion dollars in short-term debt to September 30.

Though Chipotle Mexican Grill (CMG-$105.25) missed the fourth-quarter profit forecast, analysts say the restaurant chain still has a
better chance of attracting cost-conscious diners than other brands.

Motley Fool columnist, Rick Munarriz,
opines on why footwear retailer Crocs Inc (CROX-$33.43) will achieve redemption after issuing fourth-quarter numbers on Tuesday morning.

Genentech (DNA-$72.67) is
awaiting word from the Food and Drug Administration on its cancer drug, Avastin, for breast cancer. In December 2007, an advisory committee voted 5-4 against recommending that the agency approve marketing for the drug, basing its decision on a separate study that found the drug's effectiveness in slowing the progression of the disease did not outweigh its toxic side effects. Nonetheless, some analysts and investors think the FDA could still say "yes."

Hewlett Packard (HPQ-$43.87) should report earnings of 81 cents a share in the fiscal first quarter on sales of $27.60 billion, on average, according to analysts polled by Thomson Financial. Investors will be
listening to what CEO Mark Hurd has to say about current IT demand/ spending and forward earnings guidance, given the slowing U.S. economy.

Medtronic (MDT-$49.12) is slated to report earnings for its third fiscal quarter before the open of trading on Tuesday. Current projections call for the medical technology company to post EPS of 61 cents on revenue of $3.34 billion, on average. Investors will want some
updates on how implantable cardioverter defibrillator (ICD) sales are doing as well as comments on the U.S. approval of the Endeavor drug-eluting stent.

Mediware Information Systems (MEDW-$6.16), a provider of software clinical systems for blood and medication management, is under pressure to put itself
up for sale by a major shareholder. Cannell Capital, which owns a 12.9 percent stake in the firm, sent a letter to the board of directors illustrating just how cheap MEDW was on both an absolute and relative basis.

After dipping in recent months, the shares of Phillips Electronics NV (PHG-$37.90) look cheap. They could climb by 30% or more as the company
powers up in lighting and medical gear, and reaps more cost savings, according to Barron’s.

On "Speculation Friday," host Jim Cramer
touted diagnostic company Quidel (QDEL-$15.97). "Diagnostics is one of the best long-term stories out there," said the Mad Money host. And, since diagnostics lowers medical costs and makes people healthy, it makes Quidel a twice- blessed stock, he added. Quidel currently holds 70% of the market share for flu testing and 40% to 50% of the market for strep and pregnancy detection.

Bloomberg News columnist, William Pesek, ponders what could come from
joining Apple Inc (APPL-$124.63) and Sony Corp. (SNE-$44.78).

Troubles at Sovereign Bancorp (SOV-$12.60) could sink the chances of what was once seen as an inevitable sale to Spain's largest bank, Banco Santander SA (STD-$17.25).

Stanley, Inc (SXE-$24.02), a provider of systems integration and professional services to the U.S. federal government
trades at a premium to the government IT sector, but doesn’t deserve to, Mad Money host, Jim Cramer, told his television audience on Friday night.

Steven Madden Ltd (SHOO-$16.78) is scheduled to report its fourth-quarter earnings on Tuesday morning. Last month, Jeff Mintz of Wedbush Morgan
downgraded the footwear retailer to 'hold' from 'buy,' citing "consumer weakness combined with a lack of a strong fashion trend." On February 12, Mintz trimmed his price target by $1 to $18 and his 2008 profit estimate by 9 cents to $1.46 per share. He still sees the shoemaker posting fourth-quarter earnings per share of 19 cents, a penny ahead of the Thomson Financial estimate.

Toshiba Corp. (TOSBF-$7.15) is planning to give up on its HD DVD format for high definition DVDs,
conceding defeat to the competing Blu-Ray technology backed by Sony Corp, a company source said on Saturday.

Given continuing problems in the US mortgage market, Zacks believes additional write-downs and losses are likely at UBS AG (UBS-$33.14) and is
downgrading the stock of the Swiss bank from 'Buy' to 'Hold.' A bearish equity report by Citigroup estimates UBS could need up to $18 billion in additional write-downs in 2008. Contrary to comments made by Chief Executive Marcel Rohner on Sunday.

Company observers question the ability of Internet phone service provider Vonage Holdings Corp. (VG-$2.07) to continue as a
‘going concern.’

On Tuesday, Wal-Mart (WMT-$49.44) will report its fourth-quarter results. Analysts expect the discount retailer to earn $1.02 for the quarter on revenues of $106.9 billion. Lehman Brothers analyst Robert Drbul said in a
research note on Friday that the company is well positioned with its low-price business model. In particular, Drbul predicts Wal-Mart Stores Inc. will be one of the biggest gainers from economic-stimulus checks when they begin to be distributed in May.

Recent approval of rhThrombin by the FDA for topical hemostasis in surgical procedures and the
clinical progress made by ZymoGenetics, Inc (ZGEN-$9.10) will for the company, according to Grant Zeng, CFA, of Zacks Equity Research. Zeng believes rhThrombin will provide a significant boost to top line growth in the coming quarters and maintains a ‘Buy’ rating with a price target of $16a share.

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.

Friday, February 15, 2008

Blowing Hot Air At China Wind Systems

In order to operate legally in China, offshore entities need sidestep substantial uncertainties regarding the proper interpretation and adherence to current laws and regulations of the PRC, including foreign ownership restrictions.

Investing in shares of the common stock of China Wind Systems (CWSI-$2.10), a provider of industrial equipment for use in the textile and energy related industries in the People’s Republic of China (PRC), represents the complexity and the high degree of risk found in most small-capitalization companies doing business—and based—in China.

To comply with foreign ownership restrictions, China Wind operates its businesses in the PRC through contractual arrangements with affiliates of the Huayang Companies, Huayang Dye Machine and Huayang Electrical Power Equipment, both of which are limited liability companies organized under the laws of the PRC, and each of which has the licenses and approvals necessary to operate in China.

As China Wind [allegedly] has the ability to substantially influence/control these companies’ daily operations and financial affairs, appoint their senior executives and approve all matters requiring stockholder approval, the Company is considered the primary beneficiary of the Huayang Companies.

Under the present business structure, as most of the Board and all of the Company’s Named Executive Officers reside in the PRC--and, substantially all of Company’s assets are located in the PRC--management consolidates the results, assets and liabilities of the Huayang Companies in its financial statements.

It is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement of criminal or civil penalties of federal U.S. securities laws—which begs the question of effective corporate governance.

PIPE Transaction

Prior to a series of complex exchange agreements in November 2007 with Fulland Limited, China Wind was no more than a publicly reporting blind pool company with nominal assets.

Fulland was incorporated under the laws of the Cayman Islands on May 9, 2007, by the owners of the Huayang Companies, Jianhua Wu and Lihua Tang, as a special purpose vehicle for raising capital, in accordance with requirements of the PRC State Administration of Foreign Exchange, known as "SAFE."

The reverse acquisition of Fulland Limited, resulted in end-control by the Company of the business and operations of the Huayang Group in the PRC.

To secure the equity financing sufficient to finance its growth, working capital, and acquisitions, China Wind found it necessary—like most early stage companies—to sweeten its initial PIPE with re-set mechanisms. To wit:

On February 14, 2008, the Company announced a shelf registration related to the public offering of an aggregate of 6.50 million private placement shares of common stock, to be sold from time to time by certain initial stockholders of China Wind. These shares are issuable upon the exercise of previously granted warrants.

China Wind will not receive any proceeds from the sale by the selling stockholders of their shares of common stock, save for the exercise price of the outstanding warrants (if and when the warrants are exercised). Based on the present exercise price of $0.58 per share, if warrants to purchase a total of 6,500,000 shares of common stock were to be exercised, the Company would receive gross proceeds of approximately $3.8 million.

Potential investors ought note, however, that in its eagerness to come up with earlier financing for its reverse acquisition, the Company issued "death spiral warrants." The toxic terms provide that if China Wind does not meet certain levels of pre-tax income for 2007 and 2008, then the exercise price shall be reduced by the percentage shortfall, up to a maximum reduction of 90 percent!

If pre-tax income per share is 20% below the threshold for each of 2007 and 2008 (a “20% shortfall”), 50% below the threshold for both years (a “50% shortfall”), or 90% or more below the threshold for both years (a “90% shortfall”), the adjusted exercise prices would decline to 37 cents a share, 14 ½ cents a share, or $0.006 a share, respectively!

The warrants provide that the exercise price of the warrants may be reduced by up to 90% per year if pre-tax income per share of common stock, on a diluted basis, is less than $0.08316 per share for 2007 and $0.13131 per share for 2008.

On November 13, 2007, concurrently with the closing on the reverse acquisition, China Wind also entered into a securities purchase agreement with the same selling stockholders. Pursuant to the agreement, China Wind issued and sold to the selling stockholders, 3.0% convertible subordinated notes. The notes are automatically converted into an aggregate of additional warrants of 5,588,252 shares of common stock at $0.83 per share, and 2,065,000 shares at $0.92 per share—with the same toxic, dilutive terms!

The warrants have a term of five years, and expire on November 13, 2012

In parallel, on the same date, the Board unanimously adopted, too, a restated certificate of incorporation to increase the number of authorized shares of capital stock from 75.0 million to 210.0 million shares.

Business Outlook

For fiscal year 2007, the company anticipates net revenues of approximately $23 million and net income of approximately $10.4 million (including a one-time gain from the forgiveness of income and VAT taxes of $6.8 million), or share-net of about 28 cents. For 2008, China Wind Systems anticipates net revenues of approximately $40 million and net income of approximately $7 million, or 19 cents a share.

Growth Strategy

Historically, the principal source of business at China Wind was as a manufacturer of textile dyeing and finishing machines. Since August 2007, however, the Company has shifted its strategy to focus on the growing wind energy industry in China, and has begun to supply high precision rolled rings to companies in the wind energy industry.

For the nine months ended September 30, 2007, dyeing and finishing equipment division accounted for revenues of approximately $14.5 million, or 87.3% of revenues; and, the electrical equipment division accounted for revenues of approximately $2.1million, or 12.7% of revenues.

In connection with the expansion of the electrical equipment division to develop and market rolled rings and related equipment to the wind power industry, China Wind are acquiring newly-constructed buildings and the related land use rights from Wuxi Huayuang Boiler Company, Ltd., in which the Company holds a 33% interest, for $11.9 million.

As of September 30, 2007, management had made payments of $5.9 million, which are classified as deposits on long-term assets on the balance sheet. The remaining balance of $6.0 million is due in the first quarter of 2008.

Favorable tax treatment in the PRC

In 2007, the Chinese local government granted the Huayang Companies a special tax waiver to exempt certain corporate income tax and value added tax liabilities (and any related penalties). For the nine months ended September 30 2007, net income increased 415.4% to $9.4 million from $1.8 million in the prior year. Adjusting net income to exclude total tax exemptions, the non- GAAP net income fell to $2.6 million in the first nine months of 2007, up 44.5% from $1.8 million for the same period prior year.

Related Party Transactions of the Huayang Companies

The voice of parents is the voice of gods. ~ William Shakespeare

Chief executive officer and chairman of the board, Jianhua Wu, 52, beneficially owns approximately 49.7% of the outstanding common stock. Mr. Wu founded both of the Huayang Companies, too, and is presently the executive director and general manager of Huayang Dye, positions that he has held since September 2002.

Mr. Wu is the husband of Ms. Lihua Tang, 53, the secretary and a director of China Wind.

From time to time, the Huayang Companies advance funds for working capital purposes to companies in which they have partial ownership interests. These advances are non-interest bearing, unsecured and payable on demand. At September 30, 2007, China Wind had a receivable from these entities of $377,860.

Huayang Electric, Lihua Tang, and Haoyang Wu (who beneficially owns 5.5% of China Wind and is the son of Mr. Wu) beneficially own 33.33%, 40%, and 26.67% of Wuxi Huayang Boiler Ltd., respectively. [see aforementioned land rights deal]

In addition, Lihua Tang has two bank accounts in the PRC under her name that have been assigned to China Wind and are being used by the Company in its operations!!! At September 30, 2007, the balance in these bank accounts amounted to $1,215,437 (reflected as due from related parties on the balance sheet).

Would it surprise anyone that as of February 14, 2008, the Company did not have any audit, compensation or nominating committee [rhetorical]?

Indeed, given the admitted lack of internal controls currently in place at the Company (in particular, Section 404 of the Sarbanes-Oxley Act of 2002), Wu and Tang are the voice of God at China Wind.

Investment Considerations

Forget about share dilution, Wu clan influence on all movable parts of the Company, and a dearth of internal audit controls—bring onboard a PR firm experienced in realpolitik of doing business in the PRC, and China Wind will soon be promulgated on message-boards and spam e-mail bursts for its significant wind power market potential and outstanding long-term earnings growth possibilities!

“HUGE GAIN opportunities for investors who capitalize and jump on shares early enough!”

To ... not prepare is the greatest of crimes; to be prepared beforehand for any contingency is the greatest of virtues. ~ Sun Tzu (The Art of War)

Propaganda could send the stock up ten-fold in price. Nonetheless, the 10Q Detective prefers not to make a ‘bet-the-store’ gamble on China Wind and we will sit this speculative play out.

Wednesday, February 13, 2008

Bristol-Myers Squibb Fires the Wrong Man In Asset Debacle

On its January 31 earnings conference call, Bristol-Myers Squibb Co. (BMY-$23.19), surprised Wall Street by reporting an unexpected fourth-quarter impairment charge of $275 million on the company's investments in auction rate securities (ARS).

As of December 31, 2007, the drug manufacturer had approximately $811 million of principal invested in ARS. The Company's investments in ARS represented interests in collateralized debt obligations (CDOs) supported by pools of residential and commercial mortgages or credit cards, insurance securitizations and other structured credits, including corporate bonds. Some of the underlying collateral for the ARS held by the company consisted of sub-prime mortgages, too!

With the liquidity issues experienced in global credit and capital markets, the ARS held by the company at December 31, 2007 experienced multiple failed auctions as the amount of securities submitted for sale has exceeded the amount of purchase orders. In addition, in the fourth quarter of 2007, $79 million of principal invested in ARS held by the company were downgraded and others were placed on credit watch.

The estimated market value of the company's ARS holdings at December 31, 2007, fell from $811 million to $419 million, reflecting a $392 million adjustment to the principal value of $811 million. Based on third-party valuation models and an analysis of other-than-temporary impairment factors, the company recorded the aforementioned impairment charge of $275 million in the fourth quarter, reflecting the portion of ARS holdings that the company concluded had an other-than- temporary decline in value.

Albeit the $275 million impairment charge did not have a material impact on the company's liquidity or financial flexibility, management had to record an unrealized pre-tax loss of $142 million in other comprehensive income as a reduction in shareholders' equity, $117 million of which reflected adjustments to ARS holdings.

Last Wednesday, speaking at a Merrill Lynch conference in New York, Chief Executive James Cornelius announced the firing of an un-named corporate treasurer allegedly responsible for the poor investment decision, saying, "I'm a big believer in accountability, and we're looking for a new corporate treasurer and a couple of people under him."

CEO Cornelius’ action demonstrates—once again—the beauty of The Peter Principle: The theory that employees within an organization will advance to their highest level of competence and then be promoted to and remain at a level at which they are incompetent. [After Laurence Johnston Peter (1919–1990)]

The incompetent employee who should have fallen on his corporate sword was the Chief Financial Officer, Andrew R.J. Bonfield—not some un-named number cruncher.

Finally, he [Brutus] spoke to Volumnius himself in Greek, reminding him of their student life, and begged him to grasp his sword with him and help him drive home the blow. And when Volumnius refused, and the rest likewise ... grasping with both hands the hilt of his naked sword, he fell upon it and died. ~ Greek Historian Plutarch, The Life of Brutus (46 – 120)

Albeit the treasury department invests corporate funds, in the hierarchy of the Company, the treasurer reports directly to the CFO (who has the fiduciary responsibility to analyze and review all the financial data and performance of the company). In other words, the ultimate responsibility of the CFO is to "routinely check the corporation’s financial health and integrity."

Think of it this way—if Bristol-Myers Squibb had reported an investment gain of $275 million in its ARS holdings, the individual standing front-and-center, crowing about his investment acumen would have been one R.J. Bonfield!

The September 2006 departure of former CEO Peter Dolan demonstrates that the Board of Bristol-Myers is loathe in dismissing 'one of its own.' In fact, we strongly believe that if not for the external pressure from Christopher J. Christie, the U.S. attorney for New Jersey and former federal Judge Frederick B. Lacey (whose job it was to monitor Bristol's conduct during its deferred prosecution agreement, and who made a preliminary recommendation that Dolan be terminated), Dolan would still be CEO!

History as a guide, corporate governance is not a strong suit at Bristol-Myers, and we do not expect Bonfield to lose his keys to the executive washroom anytime soon. But here’s a thought, maybe Bonfield could spend some of the $10,000 he receives annually for financial planning (as part of his compensation package) on an investment class, schooling him on the downside risk(s) of investing in auction rate securities.

As if worries about loss of patent protection and generic intrusions were not enough to rattle investors, now Bristol-Myers Squibb stockholders need to add tranches, CDOs and auction rate securities to their lexicon.

Editor David J. Phillips holds a financial interest in Bristol-Myers Squibb common stock. The 10Q Detective has a Full Disclosure Policy.

Sunday, February 10, 2008

Trader Alerts: Monday, February 11, 2008

Albany International Corp. (AIN-$35.74), a New York-based producer of paper machine clothing and doors, reported a 28% rise in fourth-quarter profit to $0.27 a share, while net sales rose more than 14 percent to $291.72 million.

Allergan Inc (AGN -$63.30) late Friday
responded to a Food and Drug Administration communication about an ongoing safety review of its Botox wrinkle reducer and Botox Cosmetic, based on reports of serious reactions in certain patients.

S&P analyst, P. Seligman, said, "Should the safety review lead to a black box warning, we think unapproved usage could slow. Meanwhile, we think the news could alarm prospective patients and hurt Botox sales for both FDA approved and unapproved use." Seligman
reiterated a prior January 2008 'Sell' Rating, but kept a $53 a share target price.

Given the
solid growth in its base business, a unique regulatory environment and government funding, American Ecology Group (ECOL-$23.11) is still largely protected from the economic cycle, said analyst Jamie Sullivan of RBC Capital Markets. The target price has been raised for the radioactive and hazardous waste services company from $25 to $26 a share.

Bear Stearns Cos. (BSC-$80.35), the U.S. securities firm that posted its first-ever loss last quarter on mortgage writedowns,
shorted more than $1 billion of trades that profit if subprime home loans and bonds continue to deteriorate. Given the investment bank’s track record—RUN!
Citigroup Inc. disclosed a 5.7 percent
passive stake, or shared voting power over about 2.3 million shares, in the homebuilder Beazer Homes (BZH-$7.74).

Higher demand for liquefied natural gas in Asia helped BG Group plc (BRGYY-$113.75) beat analysts' forecasts with a 36 per cent increase in fourth-quarter profits. Analysts at JP Morgan reiterated their "overweight" rating on the U.K gas producer, while raising their share-net guidance for the company.

Bradford & Bingley plc (LON:BB-$243.00) is considered likely to make
writedowns in its Treasury portfolio that could hit 2007 profits when the specialist mortgage lender kicks off the banking results season next week.

Insurer and broker Brown & Brown Inc. (BRO-$22.57) said its
fourth-quarter profit fell 12 percent, missing Wall Street share-net forecasts by 7 cents, as policy renewals declined and new business growth failed to offset the effect of lower prices.

Dallas-based Builders FirstSource Inc. (BLDR-$7.34), a building products supplier and manufacturer, expects to report a
net loss of 55 cents to 60 cents on revenue of about $300 million for the fourth-quarter when it releases its results on February 21, 2007.

Time Warner Cable Inc (TWC-$24.10) may try
to buy Cablevision Systems Corp. (CVC-$25.01) for as much as $40 a share, fund manager Michael J. Chren said last week in an interview on CNBC.

Century Aluminum Company (CENX-$54.60), the second largest primary aluminum producer in the United States, is
benefiting from tight aluminum supply/demand and rising prices. However, high customer concentration exposes CENX to risk of attrition and a global economic slowdown to a lower realized price. Zacks’ target price is $53, which is 9.5x their FY' 08 EPS estimate.

Shares of CNET Networks Inc (CNET-$8.29), currently battling dissident shareholders who want to
expand its board, soared almost 8 percent on Friday, on speculation that Google Inc might be interested in acquiring a stake in the media concern.

Deutsche Bank called comScore's (SCOR-$22.92) share price 16.5% sell-off in trading on Friday due to "lower guidance"
unwarranted and said it would be a buyer of stock in the Internet audience measurement service provider on this weakness.

Dot Hill Systems Corp (HILL-$3.96) narrowed its
loss estimates for the fourth quarter said it now expects to post a loss of 11 cents to 14 cents a share, before items, on revenue of $51 million to $52 million. On January 7, the data storage maker said it was expecting a loss of 10 cents to 15 cents a share for the quarter.

On Friday’s Mad Money, Jim Cramer warned that the stock of packaged bakery foods maker Flower Foods (FLO-$24.37) is now a 'Sell' after spiking more than 13 percent (on an earnings beat in the face of rising wheat costs). "The good news is baked into FLO," said Cramer, "and the
buyback it just announced is too risky for this environment."

Jim Cramer highlighted ADR shares of Brazilian homebuilder Gafisa SA ($30.85) on Friday’s Mad Money as a play on a "
money lending revolution" in the Latin American country.

Zacks believes drugmaker GlaxoSmithKline (GSK-$42.16) offers one of the stronger late-stage pipelines in big pharma. And, with issues surrounding the diabertes drug, Avandia, already baked into the stock price, the shares are fairly valued. The research firm believes, however, there’s some
potential upside in the stock if Avandia sales begin to show a rebound.

offered to buy Hypercom Corp (HYC-$3.95) for $6.25 per share, a 59 percent premium to the stock's closing price Friday. The French company launched the $332 million bid in a letter to Hypercom's board dated Tuesday, the electronic payments processor said.

JPMorgan added IntercontinentalExchange Inc (ICE-$127.80) to its 'Focus List', with a $180 a share, 12-month price target, noting that the trading exchange’s shares are an extremely
good value at current levels and represent an attractive buying position.

International Speedway Inc (ISCA-$41.80), the leading host of Nascar races, has spun out of control on Wall Street. Its shares have plunged more than 22% since last summer, as investors fret that the weak economy will keep the sport's blue-collar fan base at home. The company is in
much better shape for a downturn than you might expect, according to a report in Barron’s on Sunday.

With the Street's overall pessimism regarding LCA-Vision Inc (LCAV-$17.23), an operator of laser vision correction centers under the LasikPlus brand, ahead of its upcoming earnings report on Monday, the bar has been set fairly low. This could work out to the company's favor, according to
Schaeffers’ Research.

Punk Ziegel & Co. analyst, Richard Bove, said Lehman Brothers Holdings Inc (LEH-$60.04)—while sidestepping many of the bond-market problems hobbling competitors—should
benefit from a predicted boom in home refinancing as long-term mortgage rates decline.

Given the high level of earnings visibility going forward, Zacks see no justification for National-Oilwell Varco’s (NOV-$57.27) recent price weakness, and
reiterates its 'Buy' recommendation on the oil service company. Demand remains robust, driven by deepwater offshore and international land. The research firm is keeping its 2008 EPS estimate unchanged and introducing a 2009 estimate at $5.25 a share.

Asset manager Och-Ziff Capital Management Group LLC reported a 5.9 percent stake in scrap-metal recycler Metal Management Inc (MM-$52.26), in a
filing with the Securities and Exchange Commission. In September, the Chicago-based company agreed to be acquired by Australia's Sims Group Ltd.

Given previously announced internal forecasts, Qiagen NV (QGEN-$20.47), a provider of ready-to-use molecular diagnostic detection kits, should post full year share-net of $0.61-$0.62 on revenue guidance of $614-$635 million on Tuesday morning.

Qiagen's new product offerings, including its HPV testing (alternative to traditional cytology—the ''Pap smear") and hepatitis B detection test, are potential breakthrough procedures—but lack wider protocol acceptance—according to Zacks senior life sciences industry analyst, Grant Zeng, CFA. As such, Zeng "believes that Qiagen shares offer only limited upside at the current price," and maintains a 'Hold' rating with a target price of $24 a share.

U.S. Global Investors, Inc (GROW-$17.45), a boutique registered investment advisory firm specializing in natural resources and emerging markets,
reported that revenue and fund assets under management posted double-digit increases and earnings increased slightly in the quarter ended December 31, 2007, compared to the same three months in 2006.

Roche Holding AG (RHHBY-$87.95) said Friday it
has acquired 70.5% of shares in Ventana Medical Systems Inc (VMSI-$89.45), enough to complete its sweetened $3 billion-plus deal, worth about $89.50 a share, for the U.S.-based maker of drug testing equipment without the approval of its remaining shareholders.

If true, why has Roche extended the expiration of its offering period out to Friday, February 15?
Dissident board members want $95 per share, though settling for $93 a share could be an option, according to the Financial Times.

World Wrestling Entertainment (WWE-$15.32) is slated to report quarterly earnings before the market's open on Tuesday. More specifically, WWE is forecast to report earnings per share of 17 cents, with the Street predicting revenue of $115.01 million. With rising price action and a thumbs-up from analysts, why are investors
so pessimistic on pro wrestling?

After six years as its chief executive, Thomas Gutierrez
resigned as an officer and director of Xerium Technologies Inc. (XRM-$4.95), which makes textile belts and machine covers for paper manufacturers. The Board named Stephen R. Light as its new president and chief executive, effective Monday.

Yahoo Inc's (YHOO-$29.20)
will reject Microsoft Corp’s (MSFT-$28.56) takeover bid after concluding the unsolicited $44.6 billion offer undervalues the slumping Internet pioneer, a person familiar with the situation said Saturday. Analysts estimate Microsoft could raise its Yahoo offer to as much as $35 per share.
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.

Friday, February 08, 2008

Can The Children's Place and Former CEO Dabah Play Nice?

Shares of The Children's Place Retail Stores Inc. (PLCE-$21.28) surged 19.69%, or $3.50 a share, in trading Thursday after the Company said it was approached by its former Chief Executive Officer, Ezra Dabah, regarding a potential $578 million buyout of the children's apparel retailer.

According to a
regulatory filing, Ezra Dabah, who beneficially owns 17.2% of the common stock, requested that the Board authorize Mr. Dadah to enter into agreements with Golden Gate Private Equity Inc. for the purpose of making a proposal to acquire the company's outstanding shares at $24.00 a share in cash.

In September 2007, the Board of Children’s Place forced Dabah to resign for violating internal stock trading policies. According to the Company, Dabah's errors involved (i) pledging company shares (on two occasions) to a margin account during a blackout period without required prior approval and (ii) failing to properly report to the Company an increase in the number of shares owned by his wife, Renee Dabah, pertaining to a trust distribution.

Do not go gentle into that good night,
Old age should burn and rave at close of day;
Rage, rage against the dying of the light.

Though Dabah skipped out willingly, he expresses his ire with the Company's
portrayal of his departure. In a two-page letter to the Board's chairman, Sally Frame Kasaks, dated October 11, 2007, Dabah charged that his resignation was "solely attributable to a power play by certain members of the board" and upbraided the company for making remarks "that disparaged [his] good name and reputation."

Though wise men at their end know dark is right,
Because their words had forked no lightning they
Do not go gentle into that good night.

Will Dabah and Children’s Place make nice on the playground and come to an agreement?

Good men, the last wave by, crying how bright
Their frail deeds might have danced in a green bay,
Rage, rage against the dying of the light.

Section 9.03 of Dabah’s 'Restated Employment Agreement,' dated May 12, 2006, contains a mutual Non-Disparagement clause, precluding both parties from making "any public statement disparaging the other in its or his business interests and affairs."

Wild men who caught and sang the sun in flight,
And learn, too late, they grieved it on its way,
Do not go gentle into that good night.

History suggests a blatant disregard—if not a breach—of this particular provision by both the Board and Messer. Dabah.

Grave men, near death, who see with blinding sight
Blind eyes could blaze like meteors and be gay,
Rage, rage against the dying of the light.

Dabah can rage, rage against the dying of the light, but it looks doubtful that the Board will accede to his overture.

The share price of Childern’s Place closed in trading today at a discount of 11.3% percent to Dabah’s offer price, suggesting that investors do not believe that the Board will grant the requisite permission needed to bypass Delaware shareholder acquisition law that would otherwise prohibit Golden Gate’s participation in any offer by Dabah.

And you, my father, there on the sad height,
Curse, bless me now with your fierce tears, I pray.
Do not go gentle into that good night.
Rage, rage against the dying of the light.
~ Welsh poet Dylan Thomas (1914 – 1953)

Given that shoppers are cutting back on discretionary spending, we are not optimistic that a higher bid will emerge. The Board previously put the Company up for sale in October 2007, hiring Lehman Brothers to act as its financial advisor—to undertake "a review of strategic alternatives to improve operations and enhance shareholder value."

Management turmoil and a string of lower-than-expected profits are slamming the share price, with the stock down almost 63 percent from its 52-week intra-day high of $58.89 a share, touched on February 22, 2007.

The Company did post today, however, a same-store sales rise of 6 percent in January, driven by increased promotions (which will pressure gross margins). Consensus estimates called for a 2.2% increase year-over-year.

In our view, a failure by management to boost sales growth more than 7% -to- 8% per annum and/or to improve operating margins above trailing-twelve month value of 2.41% bumps the intrinsic value of The Children’s Place up against a ceiling of $24.00 a share.

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.

Tuesday, February 05, 2008

China Finance Online Remains A One-Trick Pony

On January 30, China Finance Online Corporation (JRJC-$18.10), an online financial data and stock market analytics provider to Chinese investors, said it expected to record a non-cash impairment charge (in the fourth-quarter of 2007) against its minority interest in mobile gaming services provider, Moloon International Inc.

Excluding the impact of the investment impairment against Moloon, China Finance Online expects adjusted earnings to be in the range of US$3.0 million to US$3.4 million in the fourth quarter of 2007, on estimated net revenues in the range of US$8.7 to US$9.0 million.

The Company did not specify the amount of the write-down and "does not expect the impairment charge against its investment in Moloon, or disposal of this investment in the future if possible, to have any adverse impact on its business growth."

The 10Q Detective is not as optimistic as management. In fiscal 2006, China’s Ministry of Information Industry announced policy changes which, among others, required mobile value added service, or MVAS, providers to extend free trial periods for customers prior to subscriptions and to send reminders to customers confirming new and existing subscriptions. Consequently, following an independent valuation, the Company determined that its $15.0 million investment in Moloon was impaired and recorded an impairment loss of $1.32 million in 2006.

Buried in regulatory filings, too, management admitted that business conditions at Moloon continued to deteriorate in fiscal 2007.

Business Strategy

The Company remains highly dependent on subscription services for growth, with more than 80% of sales generated by package fees to
premium services, such as 'Value Engine' and 'Grand Reference.'

Hes a one trick pony
One trick is all that horse can do
He does one trick only
Its the principal source of his revenue.
~ Singer/songwriter Paul Simon [1941 -]

Contrary to the dismissive attitude of management, new distribution channels are needed to feed continued retail subscriber growth—its core business. In this light, the disposal of this $15.0 million investment in Moloon in the future, if possible, cannot but have an "adverse impact on its business growth."

The online financial data and information service market in China is fiercely competitive, with few substantial barriers to entry. China Financial Online competes, directly and indirectly, for users and subscribers with companies in the business of providing financial data and information services, including other financial information web pages (such as, publishers and distributors of traditional media, internet portals providing information on business, finance and investing (such as and, and personal stock research software vendors (such as Shanghai Qian Long High Tech Corporation, that develop and market stock research software through stock brokerage companies).

To attract visitors to its sites, the Company offers much of its content free of charge. As of September 30, 2007, the Company had 8.1 million registered user accounts of and, compared to 7.3 million in the previous quarter, an increase of 0.8 million quarter-on-quarter. Fee-based active individual subscribers grew to 45,500, an increase of 22% from the previous quarter.

Telemarketing plays an instrumental role in the conversion from free registered users to fee-based customers. Cheap labor (fixed costs) at call centers held acquisition costs per subscriber to about $103 in the 3Q:07, up slightly from $96 in the prior quarter. Revenue per subscriber in the 3Q:07 was about $620 (annualized), on average.

The Company plans to triple the size of its telemarketing team from 260 as of 3Q:07 to 760 by the middle of 2008.

Business Opportunities

Dig the well before you are thirsty. ~ Chinese Proverb

The Company is rolling out Fund Guru, a mutual fund individual tools, targeting more than 10 million mutual fund investors in China.

The Company’s recent agreement to acquire an 85% stake in Daily Growth Investment Company Limited, a Hong Kong-based securities brokerage firm with a 35-year history, coupled with the September 2007 announcement by the Chinese government that Chinese individual investors could invest their money in the Hong Kong market, opens complementary market opportunities (such as cross-selling subscription services to brokerage clients).

Offsetting this potential growth, however, is current volatility in world stock markets—including the Far East—that could dampen investor enthusiasm for stocks and subscription-based service offerings.

In January 2008, China Finance Online said it would form a
financial news channel with China Telecom on the latter's Vnet Web site. However, given the inability of management to execute on transforming its business model to a vertically integrated financial media company, investors should remain skeptical of announced developmental initiatives.

Financial Health

Net operating cash flows for the third quarter of 2007 were $6.33 million, due primarily to strength in subscription services.

The balance sheet is strong, with cash and equivalents of $64.08 million at the end of September 2007 quarter, and no long-term debt.

Valuation Analysis

The stock of China Finance Online trades at 23.5 times forward FY ’08 consensus estimates of 77 cents, on average. Investors looking to buy financial web-content stocks, however, might look at U.S.-based (TSCM-$11.88), whose shares are currently changing hands at 16.9 times 2008 estimates.

In addition, is growing its business independent of a subscriber-oriented business model. TSCM’s third-quarter 2007 marketing services revenue, comprised of advertising and interactive marketing services, totaled $6.9 million, or about 43% of revenue.

Be not afraid of growing slowly, be afraid only of standing still. ~ Chinese Proverb

Like other aforementioned initiatives, China Finance Online is standing still with ancillary growth from advertising revenues. In the third-quarter ended September 30, 2007, advertising-related services represented only 7% of net revenues of 3Q:07, not a sizable business for the Company.

Aside from a steadily increasing registered user base (and associated fees), China Finance Online does not expect significant growth from its service lines in 2008, nor has management structured any growth from the potential acquisitions. In our view, evidence of management success in leveraging the value chain found in new services will be the inflection point to start buying this 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.