Sunday, March 30, 2008

Trader Alerts: March 31, 2008

AMAG Pharmaceuticals Inc (AMAG-$39.34) is awaiting FDA approval on its lead product candidate, Ferumoxytol, an intravenous iron replacement therapy for iron deficiency anemia in chronic kidney disease patients. In February, the stock was unfairly pilloried, says Mad Money host Jim Cramer, after the FDA rejected a rival drug candidate, made by Daiichi Sankyo Co, based on safety issues—that AMAG doesn’t have—and a rookie analyst [Merrill Lynch] downgraded it to neutral (which Cramer called a joke). "AMAG is now too cheap to pass up." The FDA is expected to make a decision on Fermuxytol by Oct. 19.

Arrhythmia Research Technology (HRT-$7.19) reported
disappointing results for the quarter ended December 31, 2007, late Friday, with net income falling 67 percent to $186,000 on a 23 percent drop in revenue to $4.62 million. In after-hours trading, the share price plunged 41 percent, or $2.94 a share, in value as investors expressed their impatience with management’s slow pace in moving away from continued dependence on its historical core business of conductive sensors for the disposable medical electrode industry.

Shares of Bonso Electronics International (BNSO-$2.16) were trading higher—by as much as 34 percent—in after-hours trading on Friday on rumors that Nam Tai Electronics, Inc (NTE-$9.63) was interested in buying the telecommunications products manufacturer.

America's second-largest hamburger chain, Burger King Holdings, Inc (BKC-$27.35), is planning to launch a hipper, targeted-market version of its restaurants this year, called the
Whopper Bar, aiming to maximize the sales margin of its signature burger- the whopper.

Cal-Maine (CALM-$37.83) the largest U.S. egg producer, reports fiscal
third-quarter earnings on Monday. Two portfolio managers who own Cal-Maine stock estimate it earned at least $2 a share in its most recent quarter, bolstered by lofty egg prices in a moderately supplied market. And, with supplies tight, demand remaining strong, egg prices show no signs of cracking soon.

China is inching closer towards the long awaited launch of internet services on mobile phones after China Mobile (CHL-$74.80) said it would
start trials of 3G wireless technology in eight cities on April 1. The trials involving up to 60,000 China Mobile customers are considered a test of TD-SCDMA, the 3G mobile technology that is favored by the Chinese government but is not commercially proven.

Clear Channel Communications Inc (CCU-$29.20) said its board has decided
to defer its first-quarter dividend payment. The decision is in response to a request from Bain Capital and Thomas H. Lee Partners to defer the payment date given the delayed closing of Clear Channel's merger with CC Media Holdings Inc.

Electronic Arts Inc (ERTS-$49.34), the world’s largest video game maker,
extended its $2 billion hostile bid for Take-Two Interactive Software (TTWO-$25.33), pushing back the bid's expiration date by a week, to April 18.

"The stock of Enterprise Products Partners LP (EPD-$29.09), a holding company for energy - sector services companies, is simply way
too cheap," said host Jim Cramer to his Mad Money viewers on Friday evening. "Throw in a beautiful 6.9% dividend yield – this is the year of natural gas and EPD is right in the sweet spot."

Extra Space Storage Inc (EXR-$15.85)
lowered its first-quarter funds-from-operations guidance due to a $2.6 million loss on the liquidation of the company's auction rate securities. The real estate investment trust said it expects funds from operations, after the impact of its development program, of 24 cents to 25 cents a share, compared with FFO of 27 cents, on average, according to analysts surveyed by Thomson Financial.

Fiserv Inc (FISV-$47.76) is largely
immune to the woes of its banking-industry clients. Baring a long recession or major acquisition problems, shares in the provider of information technology services to the financial industry could rise by 30% or more in the next year, according to a weekend story in Barron's.

Federal and state banking regulators have given Fremont General Corp (FMT-$0.52) sixty-days to
raise new capital or sell its banking subsidiary, the financial services company said Friday.

A month-long strike at an axle supplier will force General Motors Corp (GM-$18.67)
to close a car plant in Detroit on Monday, an indication the work stoppage may take a heavier toll on the auto maker than previously believed.

HB Fuller (FUL-$21.29) should report first-quarter earnings of 33 cents a share, according to analysts surveyed by FactSet Research. Expect investors to react to management's guidance on how rising oil prices and sluggish growth in the U.S. and Europe
will affect the specialty chemical maker's recovery in 2H:08.

IAC/InterActiveCorp (IACI-$20.49) Chairman Barry Diller won a
significant victory in his legal dispute with Liberty Media (LCAPA-$15.80) Chairman John Malone, as a Delaware court ruled Mr. Diller could move ahead with his plan to split IAC into multiple companies.

Mounting inventories of wrinkled suits—425 days of inventories, at last report—and
softening sales are red flags for Jos. A Bank Clothiers Inc (JOSB-21.93). The suits at the menswear retailer never go out of style, but its common stock has, with a short ratio of 20.9 days, as of February 26. "If this company issues any news that is good or just not so bad, calling the short covering action here as being "Spring-Loaded" would be an understatement," commented 24/7 Wall Street in a recent report.

Newspaper owner Lee Enterprises Inc (LEE-$10.76) expects a net loss in its fiscal second-quarter ending March 30 (and fiscal year ending September 28) because of a
non-cash impairment that could total $500 million to $700 million.

U.S. investment bank Lehman Brothers Holdings Inc (LEH-$37.87) appears to have been a
victim of a fraud in which swindlers used forged documents from one of Japan's biggest trading companies to bilk it out of as much as $250 million.

Merck’s (MRK-$44.51) asthma and allergy drug, Singulair, may see a decline in prescriptions due to recent
concerns about suicidality, but many physicians opine that the drop-off will likely be limited to high-risk patients (with a personal or family history of depression).

Northwest Airlines Corp (NWA-$8.76) executives are
pitching a new deal to Delta Air Lines Inc (DAL-$8.61) that would allow the airlines to go ahead with the stalled merger, The Wall Street Journal reported on its Web site, citing people familiar with the matter. The new Northwest proposal would give less generous terms to pilots, the newspaper said.

Pall Corp (PLL-$38.25) said late Friday its
second-quarter net income rose to $48 million, or 39 cents a share, from $44.3 million, or 36 cents a share, a year ago. Excluding restructuring and other charges, adjusted earnings were 46 cents a share compared with 35 cents a share in the same quarter last year. Revenue in the latest quarter totaled $625.8 million, up from $544.9 million in the year-earlier period.

Riskmetrics (RMG-$20.14) is forecast to post earnings of 2 cents a share in the fourth-quarter. Shares have climbed more than 30 percent in the last two weeks on
analysts' comments that forward revenue and earnings visibility for the provider of risk management and corporate governance services is unlikely to be clouded by the loss of Bear Stearns’ business.

Standard & Poor's said Friday it may
raise the ratings of global auctioneer Sotheby's Holdings Inc (BID-$27.78) based on the company's performance. The rating agency said it placed its Sotheby's ratings, including the company's BB+ corporate credit rating, on CreditWatch with positive implications.

Bell Boeing, an alliance between Textron Inc.'s (TXT-$54.62) Bell Helicopter unit and Boeing Company (BA-$73.47), received a $10.4 billion,
five-year contract from the U.S. Department of Defense for 167 Osprey aircraft.

Thornburg Mortgage Inc (TMA-$1.65) said late Friday that it received a
second extension through Monday to raise up to $1.4 billion in new capital (seven-year notes with an initial interest rate of 18 percent) as part of a financing agreement with a group of lenders. The beleaguered real estate investment trust must convince holders of its preferred stock on the merits to trade in their shares for one-fifth of face value (successful redemption would drop the notes to a more manageable 12 percent yield).

UBS AG (UBS-$27.77) planned to
mark down the value of auction-rate securities in brokerage accounts Friday afternoon, The Wall Street Journal reported on its Web site, citing people familiar with the matter. UBS will mark down the securities from a few percentage points to more than 20% and inform clients online, according to the Journal.

Randy Harl, CEO of Willbros Group Inc (WG-$29.63), told Jim Cramer on Friday's Mad Money show that the engineering company (to the oil sector) suffered from a couple of "legacy projects" that hurt its backlog and ate into earnings last quarter, but he is more bullish on the rest of 2008. "The market got this one wrong," Cramer said. "One earnings miss does not tell the story of a company
on the cusp of profiting from a worldwide infrastructure boom."

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, March 27, 2008

Meredith Whitney Late on Merrill EPS Cut: "Mr DeMille, Ready for My Close Up"

It looks like the 10Q Detective will continue to have to pound our own drums for recognition.

In an
interview on CNBC today, Oppenheimer analyst Meredith Whitney said Merrill Lynch (MER-$41.90) may lose money this quarter and suffer write-downs of $6 billion, as credit problems worsen.

Whitney now expects Merrill to lose $3 per share in the first quarter, and tripled her projected write-down from $2 billion. She had previously forecast a profit of 45 cents per share. The analyst also cut her 2008 profit-per-share forecast to 20 cents from $4 a share.

Analysts on average expected profit per share of 17 cents and $3.82 for the respective periods, Reuters Estimates said.

Norma Desmond:
There once was a time in this business when I had the eyes of the whole world! But that wasn't good enough for them, oh no! They had to have the ears of the whole world too.

"Many expected the fourth quarter to be the 'kitchen sink' for the industry," Whitney wrote in a separate report dated Thursday. "First-quarter results (will) be a rude awakening."

Max Von Mayerling: Madame is the greatest star of them all.

Is Meredith secretly pinching our feeds?

Cecil B. DeMille:
You know, a dozen press agents working overtime can do terrible things to the human spirit.

On January 19—weeks ahead of Whitney’s revised earnings guidance—we said: "The 10Q Detective believes that the Company
understated asset impairment charges in the fourth quarter, and we believe that the stock will underperform the market as rising levels of non-performing assets continue to adversely impacting 1H:08 profitability."

Norma Desmond: All right, Mr DeMille, I'm ready for my close up. ~ (Gloria Swanson,
Sunset Blvd.)

When Meredith Whitney Talks, Must We Listen?

It is fascinating to watch the PR machine(s) thrown into overdrive, pumping up the legend of the moment. Today — Oppenheimer & Co banking analyst, Meredith Whitney, is the toast of Wall Street. Ms. Whitney, ahead of the herd, bravely went out on a limb, issuing a downgrade on Citigroup in an Oct. 31 report, predicting the bank would be hard hit by the subprime market meltdown. I say 'bravely,' for her dire predictions shook the financial giant to the core and brought upon her death threats!

"No one had the moxie to put in print what I put in print,'' said Whitney in an interview recently.

Actually, Ms. Whitney, the 10Q Detective did have the gameness to put in print a thesis that you did—more than a year ahead of your prescient call.

Loyal readers of
the 10Q Detective blog know that Editor David J Phillips, in December 2005, first cautioned investors on the adverse affect to financial performance of sub-prime loan originations:

"HRB is counting on its mortgage origination unit to be a continuing strong driver of top-line growth. For the second half of fiscal year 2006, management believes that the Company can achieve funding volumes consistent with first-quarter levels of $10 billion to $11 billion per quarter resulting in full year origination growth of approximately 40 percent. HRB's mortgage-centric reliance on the subprime mortgage market will be its EPS albatross: tighter credit requirements and higher borrowing rates will lead to smaller interest rate spreads on loan originations, lower average gains on whole loan sales, and reduced net margins on its loan portfolio."

Casting aside the hubris of ego, it is a tiring exercise, nonetheless, to watch as others get the credit, glory, and $$$ that elude me. Perchance, if I had the institutional/banking relationships of Wall Street's new Maverick, some Street outfit would foot the bill to leverage the most of my winning bet, too.

Oops! My mistake. Where is Elliot Spitzer when we need him to lecture us about that alleged firewall between banking and research? Oh, I forgot, Client No. 9 is too busy consorting with prostitutes—riding dirty—to remind us what befell erstwhile Internet analyst, Henry Blodget—who, In December 1998, correctly predicted that's stock price would hit $400 (which it did a month later, gaining 128 percent).

Meredith, are you listening?

Glory is like a circle in the water,
Which never ceaseth to enlarge itself,
Till by broad spreading it disperses to naught.
~ William Shakespeare (King Henry the Sixth, Part 1)

Media attention ensued, and in 2000 Mr. Blodget milked his newfound 'moxie' into a prized position at Merrill Lynch. Of course, Merrill, in turn, leveraged the business media’s worship of their new Internet deity to bring in buckets of web-related investment banking and institutional research fees (trading commissions).

"The glory that goes with wealth is fleeting and fragile," mused philosopher George Santayana (1863-1952).

Shown the door when the dot-com bubble burst, Blodget joins other former Wall Street oracles - and now mere media footnotes of the past 25 years - Joe Granville, Elaine Gazarelli, and Ryan Jacob.

He who pursues fame at the risk of losing his self is not a scholar. ~ Chinese philosopher Chuang Tzu (ca. 369-ca. 286 B.C.)

Maybe its better to toil in obscurity.

Wednesday, March 26, 2008

Growth Derailed at FreightCar America, Inc

Railcar freight volume in the U.S. totaled 363.6 billion ton-miles in this year's first 11 weeks, up 2.3% from last year—despite weather-related volume shortfalls in January. Survey data suggests that rising diesel fuel prices—i.e. higher freight surcharges—are adversely affecting trucking volumes, shifting shipper freight demand to rail from trucking because of higher total transportation costs in the latter.

As freight demand rebounds (ahead of the broader economy), Burlington Northern (NYSE:BNI), Norfolk Southern Co (NYSE:NSC), and other rail transport companies are expanding capacity on rail infrastructure to meet the expected growing demand.

Specifically, ought investors use the emergence of the aforementioned growth catalysts to either add to (existing holdings)—or initiate positions in—FreightCar America, Inc (RAIL-$35.60), a manufacturer of railroad freight cars (with particular expertise in coal-carrying railcars)?

Cyclical Nature of the Railcar Market

FreightCar specializes in the production of aluminum-bodied coal-carrying railcars, which represented 86 percent and 96 percent of deliveries of railcars in 2007 and 2006, respectively. The company’s
BethGon series of coal-carrying gondola railcar has been the leading aluminum-bodied coal-carrying railcar sold in North America for nearly 20 years.

The North American railcar market is highly cyclical, and trends in the railcar industry are closely related to the overall level of economic activity. Given the current downturn, FreightCar is facing a challenging environment, with its aggregate backlog of firm orders for new railcars falling 42.0% Y/Y to 5,399 railcars as of December 31, 2007, representing estimated sales of $422 million.

Investment Thoughts

FreightCar shed 28.4% in valuation during the past year—the downturn being seen in weakening demand for freight shipments; in turn, softening the company’s Y/Y orders and corresponding EPS. Ergo, one might argue that the share price already discounts the current slowdown in the transportation equipment space.

Bulls present a two-legged argument for a “BUY” on railcar makers like FreightCar and (a competitor) Trinity Industries (TRN-$26.82): (i) replacement demand of aging railcar fleets with newer railcars offering greater capacity and durability, and (ii) average
weekly spot coal prices are strong, which will be reflected in more coal mining –shipping demand increases.

Capital Spending Outlook

The Department of Transportation estimates that the demand for freight transportation will grow from 19.3 billion tons today to 37.2 billion tons in 2035, an increase of about 93 percent. To absorb this growth (and maintain its existing share of the freight transportation market) railroads must add capacity to handle 88 percent more tonnage.

Existing freight railcars need upgrading to handle more capacity. The railway business is capital intensive—and many railways
do not earn sufficient returns to cover their weighted cost of capital. For example, the WACC at Burlington Northern Santa Fe Railway Company is approximately 7.6% versus a 6.7% Return-on-Assets. Consequently, the freight haulers favor lower-cost means of boosting capacity, such as improving signaling systems, improving asset utilization, or better timetable planning.

That said, other infrastructure investments take priority over railcar replacement, too: capacity of freight yards, primary corridor improvements (e.g. investments required to bring the weight-bearing capacity of Class I track, bridges, and tunnels up to code), and capital costs of new rail lines and support facilities.

Concentration of Sales Risk

Revenue from three customers, Burlington Northern, Norfolk Southern Corporation, and TXU Energy, accounted for approximately 37.0% of total revenue in 2007.

A review of these customers’ infrastructure budgets for 2008 supports our thesis that although capital spending will remain strong, most of the demand will be for rail infrastructurenot the replacement of railcars. For example, the planned capital commitments of BNI in 2008 are approximately $2.45 billion, with all but $400 million targeted to rail infrastructure and capacity (track and facilities) improvements.

Coal Outlook

Norfolk Southern, which generates roughly 25 percent of revenue from coal-hauling contracts, is not as optimistic as some FreightCar investors on coal tonnage outlook in the coming year. In 2008, the freight rail operator expects demand for utility coal to be mixed, with declining utility inventories in the Northeast stimulating growth but above normal stockpiles in the Southeast mitigating the growth.

In addition, given legacy contracts (as long as five-years in duration) coal-hauling demand/ volume is independent of short-term price-swings.

Norfolk’s forecast for coal demand is buttressed by a recent assessment by the Energy Information Administration: Slow growth in electricity consumption, combined with increases in hydroelectric generation, will dampen growth in electric-power-sector
coal consumption to 0.3 percent in 2008. Electric-power-sector coal consumption is projected to increase by an additional 0.4 percent in 2009.

Projected weak demand for coal in 2008 and 2009 will result in only a 0.1-percent increase in
U.S. coal production in 2008 followed by 0.2-percent growth in 2009. In the Western region, the Nation’s largest coal-producing region, production is expected to increase by 0.7 percent in 2008, but decrease by 0.6 percent in 2009. Total coal stocks are estimated to have grown by 1.6 percent in 2007 to 190 million short tons. Total coal stocks are expected to rise by 1.1 percent in 2008 and remain at that level (192 million short tons) in 2009.

Coal prices are a necessary but not sufficient reason to argue that demand—and tonnage hauling—will show improvement in 2008.

For example, utility companies, such as TXU Energy, are significant customers of FreightCar’s coal-carrying railcar lines. Should coal prices rise too high, customers might select an alternative energy source to coal, thereby reducing the strength of the market for coal-carrying railcars—adversely affecting FreightCar’s operating results.

Financial Health

FreightCar’s balance sheet looks deceptively healthy, with working capital of $185.17 million and little long-term debt.

Long-term liquidity needs, however, depend to a significant extent on obligations related to the company’s pension and welfare benefit plans, according to regulatory filings.

FreightCar’s pension obligations are currently underfunded by $10.4 million. Pension and post-retirement benefit obligations underfunding would be higher, but were met by scaling back benefit coverage (due to a decrease in the estimated remaining future service years of employees let go when management closed its manufacturing facility in Johnstown, Pennsylvania in December 2007).

Management expects that any future obligations under its pension plans- that are not currently funded- will be funded from future cash flow from operations, which shrank almost $113 million Y/Y to $41.3 million as of December 31, 2007. [Another bad year and CFFO could be negative.]

[Ed. Note. Employees at the Company’s Johnstown, Pennsylvania manufacturing facility filed a
lawsuit alleging that they and other workers at the facility were laid off by the Company to prevent them from becoming eligible for certain retirement benefits, in violation of federal law. As of March 4, 2008, pending appeals by management, the plant is still open.]

We believe that future contributions could be materially higher than the $6.75 million that management expects to contribute to its pension plans in 2008 (vs. the $5.4 million contribution made in December 2007). Why? In 2007, the Company owed $53.1 million in post-retirement benefits to existing retirees.

In addition, management’s expected rate of return on pension assets in 2008 is projected to be 8.25 percent. Optimistic—in light of the fact that whoever is managing the plans lost $4.17 million and $3.72 million, respectively, in the net actuarial values of the pension and post-retirement benefits plans in 2007. And, like in 2007, 72 percent of plan assets are invested in equities.

Investors ought note, too, that because of accounting rules, FreightCar is sitting on $15.5 million in stockpiled losses that as of December 31, 2007, have not shown up as red ink—yet—on the income statement!

Loan Covenant Restriction

FreightCar is limited to maximum capital expenditures of $10.0 million per year, effectively erasing the company’s footprint into other railcar product lines.

Investment Conclusion

FreightCar is not positioned for accelerating growth and does not represent an attractive recovery story in the transportation equipment space. A cursory look at shippers and rail transport operators forward 12-month business plans suggest freight hauling will be weighted to leasing over buying railcars. Less than 5 percent of FreightCar’s $817 million in 2007 sales resulted from leasing operations.

FreightCar shares are fully valued, fetching almost 19 times forward 12-month earnings estimates of $1.87 per share—a peak cycle ratio in a period of weakness! In addition, with the possibility of an additional cut in earnings guidance, we believe the stock is vulnerable, with additional pricing bias to the downside.

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, March 23, 2008

Trading Alerts: March 24, 2008

The U.S. Justice Department began a criminal investigation into whether aluminum maker Alcoa Inc (AA-$34.68) participated in bribery in the Persian Gulf state of Bahrain.

Shares in Bankrate, Inc (RATE-$45.08), a leading online source for consumer banking information, have been hurt recently by fears about demand prospects for its Internet-based offerings. Barring a deep recession, some analysts believe that its
traffic outlook remains strong. Bulls see the stock price gaining 25 percent—or more—in the coming year.

Are investors just in denial, or do the speculators bidding up the share price of The Bear Stearns Companies (BSC-$5.96)
know something?

The latest victim of the credit squeeze, Borders Group Inc (BGP-$5.07), announced Thursday its inability to remodel stores and pay for new technology. The bookstore chain has hired J.P. Morgan Securities Inc and Merrill Lynch & Co to look into future strategies, including possible
sale of the company.

Is billionaire investor, Warren Buffet, stalking lender CIT Group (CIT-$9.64)? Sources tell that the commercial finance shop has essentially been in
search of a buyer or partner for the past several months.

As a key deadline approaches next week,
confusion surrounds the buyout of Clear Channel Communications (CCU-$34.64) due to tensions between the private equity companies behind the deal and the banks that have agreed to finance it.

Zacks Equity Research cuts the price target of CRA International (CRAI-$29.22) to $27.00 a share, blaming the
downgrade on the consultancy's inability to execute successfully its business plan in recent quarters.

Even with prices at the pump near all-time highs, producing
incremental barrels of oil just to ease prices for consumers is not part of Exxon Mobil Corp.'s (XOM-$85.00) calculations.

Standard & Poor's Corp, in a continuing sign of loss of confidence in investment banks' eroding profitability, put Goldman Sachs Group, Inc (GS-$179.63) and Lehman Brothers Holdings Inc (LEH-$48.65) on
negative outlook on Friday.

"Times like these call for caution," said Jim Cramer. "And there may be no better defense than a dividend." That’s why the
Mad Money host recommends HCP, Inc (HCP-$31.74) the largest healthcare-focused real estate investment trust, which is paying out 5.8 percent.

Moody's Investors Service on Friday lowered Hillenbrand Industries' (HB-$48.46) debt ratings to Baa3 from A3 ahead of the planned
spin-off of its casket division. The rating outlook is negative.

Numerous issues continue to plague H&R Block (HRB-$21.09), including concerns related to liquidity and regulatory probes into
alleged discriminatory loan practices. Nonetheless, Chairman Richard Breeden spent almost $50 million to increase his holdings in the tax preparation company by 40 percent. From Tuesday through Thursday, Chairman Breeden purchased 2.4 million shares for $47.8 million, at an average of $19.82 a share. The purchases were made indirectly through Breeden Capital Partners LLC, which now owns 8.43 million shares, or 2.6% of H&R Block's shares outstanding, according to a Securities and Exchange Commission Form 4 filing.

Standard & Poor's Ratings Services
lowered its outlook on National City Corp (NCC-$11.00) to 'negative' from 'stable' Friday, citing risk from the shaky housing and mortgage markets. During the quarter, credit metrics deteriorated significantly and non-interest income fell short of expectations for the Cleveland-based financial services company.

Neurogen Corp (NRGN-$3.08), which recently initiated Phase 2 studies with aplindore in both Restless Legs Syndrome and Parkinson's disease, announced today that in its 2007 financial statements included in the Company's Annual Report on Form 10-K, the auditor's opinion contained a "going concern" qualification (opining that working capital would not be sufficient to fund planned operations in 2008). No surprise—no FDA marketing approval to date for any of its drug candidates and more than $288.0 million in accumulated net losses.

Standard & Poor's said Friday it put the 'B' corporate credit rating and other ratings it holds for Palm Inc (PALM-$4.72) on
CreditWatch with negative implications due to the Treo maker's falling revenue and profitability.

Standard & Poor's said on Friday it may
downgrade FGIC Corp and its insurance arm, citing a decision by the bond insurer's principal owner PMI Group (PMI-$5.92), with a 42 percent stake, not to put more capital into FGIC. Zacks Equity Research is maintaining a "SELL" recommendation on the shares of PMI.

In a research note published Thursday, analyst Robert S Drbul of Lehman Brothers said he expects Phillips-Van Heusen (PVH-$35.13), which markets brands such as Calvin Klein and Izod, to report fourth-quarter earnings of $0.53 a share. Although he maintained his "overweight" rating on the apparel retailer, he
reduced the target price from $50 to $45 a share.
Analysts expect Sonic Corp (SONC-$22.00), which operates drive-in fast-food restaurants, to post second-quarter earnings of $0.15 per share on revenue of $177.47 million, on average. Separately, same-store sales—a key gauge of retailer performance because it measures sales at existing stores rather than newly opened ones—remain within the company's target range of a 2%-to-4% increase, according to management’s previous guidance. Investors will be looking at two key metrics: growth in average check size and growth in traffic (number of transactions per drive-in).

SteelCloud, Inc (SCLD-$0.84), a manufacturer of embedded integrated computing systems for the industrial automation marketplace, reported a 31 percent increase in
first-quarter revenues to approximately $5.8 million, reflecting significant progress in gaining new contracts with longstanding and new customers.

A San Diego judge has ordered coffee giant Starbucks Corp (SBUX-$17.53)
to remunerate more than $100 million in tips and interest owed to staff across outlets in California.

Synopsys Inc (SNPS-$21.78), a maker of software for designing semiconductors, said it agreed
to buy Synplicity Inc (SYNP-$5.32) for about $227 million, or about $8.00 a share in cash, to boost its chip-design software portfolio and enter new markets.

Syniverse Holdings (SVR-$17.01) integrates disparate carriers' systems and networks in order to provide global voice, data communications, and anti-fraud roaming solutions to wireless subscribers. The company is
well positioned to find big profits as wireless technologies expand across the globe.

Investors will be looking to see if international sales can offset weak same-store domestic sales growth at Tiffany & Co (TIF-$38.60). Analysts expect
fourth-quarter earnings of $1.21 per share on revenue of $1.05 billion, on average, from the jewelry and luxury goods retailer.

3Com Corp (COMS-$1.98), whose merger deal with an affiliate of Bain Capital
imploded, should post earnings of 3 cents a share in the third quarter, on sales of $332.82 million, on average, according to analysts polled by Thomson Financial. Given the subdued economic environment and poor competitive position of the networking company, Zacks Research analyst, Steve Biggs, does not believe its shares are worth more than $2.00.

United Airlines parent, UAL Corp (UAUA-$23.17), voluntarily disclosed to the FAA the
unscheduled retesting of altitude indicators on seven of its Boeing 747 jumbo jets after determining that test equipment at a maintenance facility in South Korea needed to be checked for calibration.

Drugstore chain Walgreen Company (WAG-$36.78) expects the downturn in consumer spending to
pose a challenge through its fiscal second quarter ended in February. Zacks consensus estimate is for the retail pharmacy chain to post $0.67 per share on revenue of $15.43 billion. Watch out for front-end store traffic/comps and RX market share growth (vs Wal-Mart Stores Inc and CVS Caremark Corp).

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, March 21, 2008

Boston Scientific is Married to Co-Founder Peter Nicholas -- 'Til Death Do Them Part'

On April 26, 2006, interventional medical device maker Boston Scientific (BSX-$12.43) acquired Guidant Corp—the then second-largest maker of implantable cardiac defibrillators (ICD) and pacemakers (behind Medtronic) for $27.3 billion.

Instrumental in negotiating the deal to purchase Guidant was Peter M. Nicholas, co-founder of BSX. Messer. Nicholas retired in May 2005, but retained title as Chairman of the Board, the dais from which he lobbied other directors and major shareholders to sign off on the Guidant deal.

Nicholas argued that BSX was growing too reliant on its TAXUS (paclitaxel-eluting) coronary stent technology for growth, which accounted for 32 percent of revenue in fiscal 2006. No new proprietary blockbuster on its event horizon, Nicholas articulated to board members the need for BSX to look outside the company for [high margin] industry drivers capable of diversifying BSX’s product mix, re-invigorating top-line growth, and overall competitive position.

Nicholas, known for his aggressive 'winner-take all' decision-making style, set his sights on Guidant Corp, a major provider in the $10 billion global cardiac rhythm management (CRM) market.

Unfortunately, this bet-the-franchise corporate brinkmanship lead to miscalculation and overreaching. And, Nicholas was competing, too, with Johnson & Johnson for his prize. To buy Guidant, BSX increased its share count by 80 percent and took on $6.5 billion in debt—on which it is paying more than $300 million a year in interest.

Rushed due diligence failed to discover that Guidant was a company with defective implantable defibrillators (with a known history of short-circuiting), resulting in safety-related product recalls and slowing growth.

Tallying the Cost

Guidant has yet to prove to be accretive to the company’s bottom-line.

Analysts opine that the deal is arguably the second-worst ever, trailing only the $164.7 billion AOL-Time Warner debacle of 2000-01.

Faced with lingering fundamental problems—including the Company’s highly leveraged balance sheet (total debt of $8.19 billion at December 31, 2007), decelerating growth in the defibrillator/pacemaker and drug-coated heart stent markets, and competitive margin pressures—investors fled BSX, with the share price plunging more than 46 percent since the close of the deal, wiping out $15.8 billion in shareholder value.

During the third quarter of 2007, Standard & Poor’s Rating Services and Fitch Ratings downgraded the company’s credit ratings from investment grade to BB+, citing the company’s slowing rate of cash flow and debt-repayment issues.

Looking to improve its balance sheet, in the 4Q:07, management sought to better align expenses with revenues, divesting five non-core businesses to reduce operating expenses and debt load.

In addition, BSX moved forward with head-count reductions, and simplified its business model to better position the Company to focus on core markets—cardiology and endosurgery.

The cost of the Guidant failure to the Company: (i) acquisition-related charges (after tax) of $4.48 billion, or $3.52 per diluted share, in 2006; (ii) acquisition-, divestiture-, litigation- and restructuring-related charges (after tax) of $1.092 billion, or $0.73 per diluted share in 2007.

An argument might be posited that Nicholas, who beneficially owns 70.33 million shares, or 4.7 percent, of the outstanding stock of BSX, has seen net payback—the depressed valuation of his holdings—wrought by the ill-conceived Guidant deal.

When considering payback as in punishment for poor performance, our readers should know by now that the consequences of said payback never directly and indirectly affect Named Executive Officers the same as common stockholders.

Pay for Failure

The 10Q Detective argues that all Named Executive Officers—including Nicholas—are no more entitled to safety nets than the average employee is asked to put ‘on-the-line’ on a diurnal basis, and that their employment terms should not outlast the situations that give rise to severance.

You know I've lived a few mistakes and I stand by them.
Oo, it's me, myself, and I till death do us part, yeah.
Till death, till death do us part, yeah, yeah, No, no, no, no.
~ Motley Crue ("Til Death Do Us Part")

Unfortunately, from a governance point of view, Pete Nicholas’ Post-Employment Agreement provides that benefits continue to flow to him, regardless of whether he is asked to step down as Chairman of the Board:

  1. As Chairman of the Board, Nicholas receives an annual retainer of $210,000 and an annual grant valued at $120,000 in restricted stock. For the fiscal year-ended December 31, 2007, Nicholas owned 1.25 million outstanding stock options (granted to him in his capacity on the Board).
  2. In 2007, Nicholas received additional compensation of $1.45 million, including—but not limited to—a 'Founders Benefit,' medical benefits, charitable donations, and transportation services of $225,000, $24,937, $1.0 million, and $30,865, respectively.
  3. Mr. Nicholas continues to have the use of an office at BSX’s Natick headquarters or other Boston Scientific facilities and secretarial and administrative support, on an as-needed basis.
  4. When Mr. Nicholas steps down as Chairman, he will retain the title of director emeritus. As defined, he will continue to receive the equivalent benefits of an active board member.

Boston Scientific is stuck with Nicholas--Till Death Due Them Part.

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, March 19, 2008

Greenhouse Effect Pollutes Judgement of Alcoa's Compensation Committee

Every day, Alcoa Inc (AA-$38.60) mines 86,300 tons of bauxite, refines 41,000 tons of alumina, and smelts 9,575 tons of aluminum, worldwide, from Iceland to Australia. This upstream business model remains highly profitable, with fiscal 2007 income from operations up 19 percent Y/Y to $2.6 billion, or $2.95 a share, on $30.7 billion in revenue.

Growth, however, does not come without external costs. EPA fines in the United States for wastewater runoff pollutants, accusations of increased greenhouse gases, claims that its emissions are making
nearby residents sick (cancers and respiratory illnesses)—the world's largest aluminum producer is under increasing attack from environmental activists that it is leaving toxic footprints wherever it treads.

The Free Enterprise Action Fund, beneficial owner of 734 shares of common stock of Alcoa, notified the aluminum manufacturer that it intends to present an environmental proposal at the annual meeting on May 8, requesting the Board of Directors to prepare by October 2008, a Global Warming Report that describes how actions taken by Alcoa has affected global climate to date, according to its Proxy filing on Monday.

The Board of Directors is recommending a vote "against" this proposal, arguing that the Company is successfully executing on a plan to reduce greenhouse gas emissions—and the Company is well ahead of a future 'carbon-constrained horizon.

Speaking of unchecked greenhouse emissions—the 10Q Detective did cough several times after reviewing Alain Belda’s compensation package for fiscal 2007.

Chief Executive Alain Belda received compensation valued at $25.65 million in 2007—more than twice the amount he received the previous year, according to the regulatory filing.

The aluminum manufacturer paid the 64-year-old executive a salary of $1.46 million and performance awards of $2.0 million in cash incentive, $6.94 million in stock grants, and $12.42 million in stock options (which also included reload options).

Irritating our lungs, however, was breathing in the newsprint that the Board saw fit to spew out to Belda additional largesse of $1.0 million 'to recognize his sustained performance and contribution to the company and its stakeholders in his nine years as CEO.'

Now, if the greenbacks don't stack large on my side of the yard
I ain't f*ckin with it

The 10Q Detective rhetorically asks: Did Alcoa need to reward Belda with this one-time $1.0 million bonus? Excuse us for asking, but did not his pay package already include both annual and long-term performance incentives?

This cake has got to be all icing baby
Now I know I'm taking the biggest piece

Belda is sitting on retirement and SERP benefits (with a present value) of $1.72 million per annum and $17.80 million, respectively, too.

but god damn I'm the biggest fish with the biggest mouth bitch
You wanna be rich right? (Hell yeah)
~ Rapper Ice Cube

And, the aggregate balance of Belda’s nonqualified deferred compensation was about $7.91 million, as of December 31.

As for that one-time $1.0 million 'recognition award,' just another pathetic example of an already well-compensated executive being enriched by a Compensation Committee that does not know the meaning of the word 'enough.'

And speaking of egregious compensation—our old friend, E. Stanley O’Neal, former Chairman & CEO of Merrill Lynch, joined the Board of Alcoa in January 2008. His director pay is estimated to be about $203,500 per annum.

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, March 16, 2008

Bear Stearns Abandons Ship!

"I am honored to have the opportunity to lead one of Wall Street's great franchises," said Alan D. Schwartz, the new chief executive of The Bear Stearns Companies (BSC-$30.00) on January 8, 2008. "Bear Stearns has a bright future. Our franchise is rock solid thanks to Jimmy [Cayne's] leadership; investors, customers and employees should not expect any abrupt changes in the period ahead. We have a strong capital position, a unique culture and great talent throughout the organization. Although the operating environment has been difficult, we are off to a good start in 2008."

You read the paper, watch the news
and you think you're well informed
Well I got some news for you my friend

This afternoon, J.P. Morgan Chase said
it was buying Bear Stearns for a mere $2 a share!

That headline that you read
the story that broke
it was a scandal - yeah a scam
political masterstroke
Tell you what they you want you to hear
close your eyes and open your ears
~ The Waifs ("Lies"/ Sink or Swim)

The only solace for investors lies in knowing that major
Bear shareholders—including Chairman Cayne and chief executive Schwartz lost a bundle, too.

Let the securities class action games—claims—continue…

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.

Saturday, March 15, 2008

Trading Alerts: Monday, March 17, 2008

Cardium Therapeutics Inc (CXM-$2.20), a medical technology company developing devices for cardiovascular and ischemic disease, reported a narrower loss for the fourth quarter, helped by higher revenues of INNERCOOL therapies.

Analysts polled by Thomson Financial expect Century Casino Inc (CNTY-$3.81) to bring in chips totaling 4 cents a share on revenue of $23.3 million, on average, when the gaming concern reports its fourth-quarter results on Monday. In a research note,
Sterne Agee argues a new smoking ban in Colorado and new competition will adversely affect gaming revenues in fiscal 2008. The analysts reduced EPS estimate for 2008 by 11 cents to $0.22 a share.

Cephalon Inc.’s (CEPH-$59.63) Treanda (bendamustine) will initially see
limited uptake in the first-line setting for chronic lymphocytic leukemia (CLL), if approved, say clinical researchers.

CV Therapeutics Inc. (CVTX-$6.30) said that it expects
FDA action on the NDA for its heart- imaging agent, regadenoson, within the next few weeks.

Standard & Poor's Ratings Services said Friday it cut the
corporate credit rating of Darden Restaurants Inc (DRI-$29.28), saying the casual dining operator's business has deteriorated.

Specialty finance company Deerfield Capital Corp. (DFR-$1.16) said it finalized a
number of transactions primarily aimed at increasing the company's liquidity, reducing risks related to residential mortgage backed securities and to focus on its asset management business.

Shares of drug maker Dendreon Corp (DNDN-$4.73) fell 6.7 percent, or 34 cents, in trading on Friday as analysts say
they doubt the company's prostate-cancer vaccine will be a success.

Despite a downdraft in electronic sales, Jerry W. Throgmartin, Chairman & CEO of electronic retailer hhgregg Inc (HGG-$10.04), expressed confidence in his company,
buying $1.4 million in stock over the last week (between $9.66 and $10.19 a share).

Fitch Ratings on Friday
upgraded its rating on homebuilder Hovnanian Enterprises Inc.'s (HOV-$9.17) revolving credit facility, saying the recovery prospects are "outstanding."

4Kids Entertainment, Inc. (KDE-$11.08), a global provider of children's entertainment and merchandise licensing, will announce fourth quarter results for fiscal 2007 on Monday before the start of market trading. Investors should expect a net loss of about 12 cents a share for the fourth quarter, due to declining worldwide interest in two properties, "Yu-Gi-Oh!" and "Teenage Mutant Ninja Turtles," which represented 37% of consolidated net revenues in FY ’06.

Lehman Brothers Holdings Inc (LEH-$39.26) is expected to report first-quarter earnings of $0.81 a share on Tuesday morning, according to analysts surveyed by Zacks Equity Research. Given the investment bank’s extensive
mortgage exposure— $37.3 billion of residential mortgage assets on its balance sheet as of November 30, and another $38.9 billion of commercial mortgage assets—Wall Street will be sniffing for any whiff of impairments.

Eli Lilly and Co (LLY-$47.81) on Friday
denied a report in The New York Times that said John Lechleiter, set to become chief executive in April, had encouraged the promotion of its schizophrenia drug, Zyprexa, for a use not approved by federal regulators.

Mannatech Inc. (MTEX-$8.37), a provider of nutritional supplements and healthcare products, reported
a 13 cent loss compared to a profit of 30 cents a share in the fourth-quarter last year, due to higher expenses and a fall in revenue (hurt by softness in North America sales and a reduction in new recruits impacted by ongoing litigation).

Nature Vision Inc. (NRVN-$1.80), a manufacturer and marketer of recreation products, announced a
wider loss for fiscal 2007, mainly due to a decrease in gross margin.

Mortgage insurer The PMI Group (PMI-$5.69) previously warned it would
report a loss of more than $250 million for the fourth quarter ended December 31 due to higher claims. The Company will release results on Monday morning. Investors will be watching to see the actual dollar value write-down of its 42% investment in bond insurer FGIC.

Analysts polled by Thomson Financial expect casino equipment maker Shuffle Maker Inc (SHFL-$7.37) to report share-net of $0.08 on revenue of 44.97 for the second-quarter ended January 31, 2008. Catalyst for any material move in the stock price will be management’s forward guidance on how much the softening economy will adversely affect demand for the Company’s shufflers and specialty table games.

UBS AG (UBS-$27.76) and its brokerage unit
were sued Friday for allegedly deceptive and manipulative marketing of so-called auction-rate securities.

Senior executives from Microsoft Corp (MSFT-$27.96) and Yahoo! Inc (YHOO-$26.71) met on Monday
to discuss the software maker's unsolicited takeover bid, according to people familiar with the matter.

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, March 13, 2008

More Carnival Barking At Raser Technologies

Despite another quarter of red ink, Martin Petersen, Chief Financial Officer of Raser Technologies, Inc (RZ-$8.65), which is looking to develop geothermal assets as an alternative energy source, said the Company "made tremendous progress in achieving [our] goals during the year, setting the stage for a productive and exciting 2008."

President Patrick Schwartz, crowed, too, about "significant relationships and agreements [that we] completed this past year," including a signed license agreement with Wilson Auto Electric Ltd. Of Canada, in which Wilson will have the right to incorporate Raser’s Symetron™ technology into truck and automotive alternators.

Whenever the 10Q Detective starts to feel despondent about the plight of the markets, we turn to Raser press releases—any one of them—for a good chortle.

The 10Q Detective has followed the alleged progress of the Company for
more than two years now. Like we said back in December 2005, Raser [remains] a stock-promoter's dream--hyped PR with no content.

As a result of six-years of ongoing operating losses, Raser has an accumulated deficit of approximately $51.2 million on cumulative revenues (from inception) of approximately $0.8 million, as of December 31, 2007.

Despite repeated stumbles in finding revenue pathways to profitability, management shoulders on.

You made me promises, promises
You knew you'd never keep
Promises, promises
Why do I believe
~ English synth-pop band Naked Eyes (“Promises,Promises”
Youtube video)

When we last lookied in on the Company, management was promulgating how its
Symetron platform would revolutionize the efficiency of electric motors, offering the "tremendous promise in delivering improvements in power and efficiency in many industrial motor applications."

New Business Strategy

A funny story apropos of energy politics (increased dependence on foreign energy sources and West Texas crude topping $110 a barrel), management is now reinventing itself as a renewable energy stock play with a
new priority: Geothermal Development & Monetization.

Without promotion something terrible happens... Nothing! ~ Circus Entertainer P.T. Barnum (1810 – 1891)

Public Relations is running at full capacity, touting the benefits of Razer’s proprietary
heat transfer technology in improving energy efficiencies of geothermal power plants.

Raser is acquiring one of the largest portfolios of geothermal assets in the country, with interests (and leases) in more than 200,000 acres of land in six western states identified as having potential to provide sufficient geothermal energy to operate geothermal power plants.

Development of Geothermal Power Plants

From the potential resources acquired, management is looking to identify properties that it believes can be developed rapidly and efficiently, and will initiate efforts to develop power plants on such properties.

Raser announced in April 2007 that it would initiate the development of approximately 100 MW per year over the following three years and then ramp up to 150 MW per year for each year thereafter.

The 10Q Detective notes, however, that critical to the successful development of each of the power plant projects is adequate financing—an ongoing concern for the Company (in addition to necessary cash needed to cover upfront lease bonuses and annual delay rentals for the leases until a geothermal power plant is placed in service).


When it comes to small capitalization companies, the 10Q Detective embraces the maxim: success runs inverse to the total of press releases.

Fiction is obliged to stick to possibilities. Truth isn't. ~ Author Mark Twain (1835 – 1910)

No major electronic manufacturers or car makers have signed with Raser, leading us to question the visibility of the technology and/or management’s ability to exploit the potential commercial viability of its Symetron technologies. Ergo, we are doubtful that Named Executive Officers will be any more successful in executing on revenue and income opportunities in the Geothermal Energy segment.

To date, Raser has not received ANY power purchase agreements for its estimated geothermal reserves, so no forward revenue stream can be relied upon to cover requisite expenses.

The $300,000 in revenue for FY 2007 was generated from one government contractor.

Do the math…the Company’s ability to continue 'as a going concern' is dependent on future financing deals—with more dilution to follow.

Consistent with our limited operating history, we have generated limited revenues from operations. We anticipate that material revenue will not be generated from our Power Systems segment until the geothermal power plants we intend to develop are constructed and placed in service. To date, our primary source of revenue has been from research and development subcontracts administered through contractors for certain government agencies. Form 10-K, filed March 11, 2008.

Investment Risks & and Considerations

As of December 31, 2007, Raser had cash on hand of $5.9 million. These funds will not last too long.

Management loves to spend monies: cash used in operations and for capex were approximately $6.7 million and $9.9 million, respectively, for the year ended December 31, 2007.

The Company also has contractual obligations (operating leases and purchases) due in the aggregate of $34.2 million, with about $26.4 million owed in less than one year!

[Ed. note. As of December 31, 2007, Raser is obligated to pay purchase and service fees to one vendor of approximately $25.1 million in 2008—eighty times actual sales delivered in FY 2007. We believe that the unnamed vendor is UTC Power (NYSE:UTX) and the purchase agreements are for the delivery of PureCycle modular units for the first three geothermal power plants that Raser intends to develop.]

Raser’s independent registered public accounting firm’s report on the Company’s 2007 financial statements questions Raser’s ability to continue as a going concern, due to the lack of sufficient capital and management’s [continued] inability to operate at cash breakeven.

Each geothermal power plant build-out leaves a dilutive footprint, too. To date, Raser has financed operations principally through the sale of equity and equity related securities.

Give me a Leonard Cohen afterworld
So I can sigh eternally
I'm so tired I can't sleep

A financing agreement with Merrill Lynch in January 2008, which provides for the funding of up to 100 MW of power plant construction, was structured to provide the brokerage with the ability to receive warrants to purchase up to 3.7 million shares of Raser’s common stock (ancillary to $38.4 million in the form of 15-year fully amortizing notes for the construction of the Company's first 10.5 MW geothermal power plant in Nye County, Nevada).

I'm a liar and a thief
Sit and drink Pennyroyal Tea
I'm anemic royalty

Raser is like a heroin addict looking for his next fix.

I'm on warm milk and laxatives
Cherry-flavored antacids
~ Kirk Cobain, Nirvana (“Pennyroyal Tea”)

Most recently, in 2007, the Company raised gross proceeds of approximately $18.9 million, pursuant to private placements, warrant exercises, and stock issuances for geothermal land leases totaling about 4.6 million shares. As of December 31, 2007, the Company had 55.92 million shares issued and outstanding.

What is management doing to preserve cash? Effective March 9, 2007, the Company reduced the number of credit cards available under its corporate credit card program (with about $75,000 in annual savings).

In addition, the Company is issuing shares of its common stock as compensation for services rendered by certain vendors. On May 24, 2007, Raser issued 15,000 shares, valued on the date of issuance at $110, 250, to Cummins and Barnard as compensation for engineering services provided to assist with the development of geothermal power plants.

Investment Analysis

Beyond 'proof of concept,' and absent visible revenue streams—actual commercialization of Symetron technology and/or production of geothermal energy—the 10Q Detective does not believe the risk/reward ratio favors speculative purchase of Raser shares. 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.

Tuesday, March 11, 2008

“Talk Is Not Cheap” At Life Time Fitness

According to a proxy statement filed last week with the Securities and Exchange Commission, Life Time Fitness (LTM-$27.36) reimbursed its founder and chief executive, Bahram Akradi, $31,777 for his cell phone plan and home Internet connectivity.

Hey! You over there, I know about your kind
You're like the Independent Network News on Channel 9
Everywhere that you go, no matter where you at
I said you talk about this, and you talk about that
When the cat took your tongue, I say you took it right back
Your mouth is so big, one bite would kill a Big Mac

U.S. Cell Phone Plan analysis finds several carrier plans offering up to 6,000 minutes per months ($149 - $199 a month)—much cheaper than the $2,648 a month being spent by Akradi.

You talk too much
You never shut up
I said, “You talk too much”
Homeboy you never shut up…

Shares in the health club operator are selling at a multi-year low, two-weeks after the gym operator reduced its FY 2008 EPS outlook below consensus on its
fourth-quarter earnings call. The Company expects to bring in earnings of $2.05 to $2.08 per share in 2008 on sales of $780 million to $800 million. Analysts polled by Thomson Financial had expected share-net of $2.18 on sales of $806.8 million, on average.

Life Time’s profitability depends on attracting—and retaining—a large membership base within the first three years after a new center is opened. In FY 2007 ended December 31, 2007, the Company opened ten new centers, bringing the number of open centers to 70, with memberships growing to 499,092, up Y/Y 12.5 percent.

In FY 2007, revenue per membership grew 6.2% to $1,360.

In our view, stiffer headwinds from a slowing U.S. economic climate will give prospective members reason to pause, making them question the value proposition of spending more than $1,000 a year on individual membership dues and in-center costs (including fees for personal training, dieticians, and the purchase of LifeCafe and LifeSpa product offerings).

In-center revenue increased 80 basis points to 27.8% of total revenue, driven primarily by members’ increased use of personal trainers, LifeCafe sales, and heart rate monitor sales.

Average in-center revenue per membership (ACpM) increased $36 Y/Y for the year ended December 31, 2007.

Management remains optimistic that the ACpM metric can offset some of the expected slowdown in new member additions in coming months. "We continue to see very strong performance on our personal training business," said Mike Robinson on the
Q&A part of the earnings call. "We continue to grow the heart rate monitor sales. We got a lot of connectivity points that have held up very, very strongly in this time. So, that’s the main driver of it. We have seen good cafe growth as we have entered into the first part of this year. Again, it’s a really a combination of many, many of those things. We continue to add new products. We have added new menus in the café. We continue to add new products and expand our line of retail products in this cause."

The Company does not discount membership fees. However, the one-time origination cost is negotiable. According to management, the average enrollment fee has come down approximately $20 per acquired member, offset by incremental increases of $120 to $240 more per year in dues ('member advisers' receive incentive bonuses by directing customers to higher
membership tiers).

You talk too much
And you never shut up
I said, “You talk too much”
Homeboy you never shut up!

Life Time is highly dependent on less-mature centers for growth. For the year, the Company generated growth of 6.1% for 13 month same store sales and 0.8% for the 37-month metric.

A big blabbermouth, that's what you are
If you were a talk show host, you'd be a star
I said your mouth is big, size extra large
And when you open it, it's like my garage

During 2008, Life Time plans to open 11 centers. Market cannibalization (only three centers will be in new markets) and/or delays in new health club openings, anticipated lower operating margins (driven by increases in advertising/marketing costs for brand awareness and higher construction costs), and slowdowns in projected membership growth (targeted capacity is 90% within three years)—the 10Q Detective believes Life Time Fitness will likely revisit revenue growth and FY 2008 profit metrics in coming months—giving Akradi more reasons for filibusterism on his cell phone.

You talk too much
And then you never shut up
I said, “You talk too much”
Homeboy you never shut up
~ Run DMC (“You Talk Too Much”)

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.

Saturday, March 08, 2008

Trading Alerts: Monday, March 10, 2008

Newsprint producer AbitibiBowater Inc (ABH-$10.00) announced a $1.4 billion refinancing plan to address upcoming debt maturities and general liquidity needs.

Shares in Ambac Financial Group Inc (ABK-$9.50) rose 28.03%, or $2.08, Friday after the bond insurer unveiled plans to sell a big piece of itself at a discount. In after-market trading, however, the price reversed more than 15% in volume exceeding 6.4 million shares.

Drug maker Amgen Inc (AMGN-$44.18) said Friday it expanded
black box warnings about risks of death and tumor growth of its blockbuster anemia drugs, Aranesp and Epogen.

If a company has to borrow to make money, Jim Cramer said the stock must be sold. No exceptions. "Even the best borrowers are
still vulnerable in this market," including former darling Annaly Capital Management, Inc (NLY-$15.00). Deutsche Bank, however, defends the real estate investment trust, which fell 18 percent Thursday on concerns over declining prices in agency mortgage-backed securities.

On the "Speculative Friday" segment of Mad Money, Cramer is back on board with Blockbuster Inc (BBI-$2.72). After cutting costs and reducing free rentals last year, the Dallas-based video rental giant posted better-than-expected fourth-quarter results on Thursday and told Wall Street it plans to be profitable in 2008. Cramer sees the current valuation as a
buying opportunity.

Also,in a
Schedule 13D regulatory filing, Fine Capital Partners disclosed a 6.13% passive stake in BBI at purchases prices between $2.94 and $4.02 a share, from November 12 to March 6.

The proposed buyout of BCE, Inc (BCE$-36.07), Canada's biggest telephone company, moved a step forward after a Canadian judge dismissed a lawsuit by a group of bondholders opposed to the deal.

The housing-market meltdown won't hurt
senior-housing companies as much as investors think, according to an article in Barron’s Monday edition. Brookdale Senior Living (BKD-$25.18), the largest U.S. provider of private-pay senior housing, has seen its shares slip 48% over the past year, trading about 19 percent below the Street's consensus target of $31 a share.

Carlyle Capital Corp (CCC-$5.00), the investment fund affiliated with private equity firm The Carlyle Group, said Friday that it's received another wave of margin calls from lenders, which could quickly deplete its remaining resources and lead to impairments of its capital. A meeting among the fund's lenders is scheduled for Monday, at 10:30 a.m. in New York.

MSN Money stock-picking contributor, Russell Carpenter,
articulates a compelling BUY thesis for Mexico's Cemex SAB de CV (CX-$25.15). Shares of the world's third-largest cement maker have lost one-third of their value since hitting a 52-week high of $41.36 last June on concern about an acquisition that broadened its exposure to the U.S. market. However, cement will remain a beneficiary of booming worldwide growth, offsetting a slowdown in U.S. growth caused by the housing bust.

Punk Ziegel
recommends investors buy Citigroup Inc (C-$20.88), a day after the bank announced moves to overhaul its U.S. residential mortgage business, and said new rumors in the market suggest that the financial giant's capital strength may be greater than thought.

After the closing bell Friday, business and legal consultancy company CRA International Inc (CRAI-$38.16) reported preliminary first-quarter fiscal 2008 results
below market estimates, citing a decline in company-wide utilization rates to 70 percent (due to lower-than expected business overseas).

The Federal Bureau of Investigation is probing subprime lender Countrywide Financial Corp (CFC-$5.07) for possible securities fraud, according to law-enforcement officials and finance-industry executives.

Interstate Bakeries Corp’s (IBCIQ-$0.03) plan to exit bankruptcy protection went off the rails Friday as the maker of Hostess Twinkies and Wonder Bread asked a court
to delay hearing the plan because it has begun talking with a new investor.

Keryx Biopharmaceuticals Inc (KERX-$5.26) announced that a Phase 3 clinical trial for Sulonex, a drug designed to treat diabetic neuropathy,
failed to meet the study's primary objective, which was to increase the proportion of patients that achieve therapeutic success at 6 months as compared to placebo over background therapy of maximal doses of ACE-inhibitors or ARBs. Therapeutic success was defined as the conversion from microalbuminuria to normoalbuminuria, as measured by albumin/creatinine ratio (ACR), with at least a 25% reduction in ACR relative to baseline ACR

Eli Lilly & Co (LLY-$49.70) confirmed Friday it is
halting development of its Air Inhaled Insulin (AIR) program because of regulatory uncertainties. As a result, the Indianapolis-based drug company expects a first-quarter charge of $90 million to $120 million, or 5 cents to 7 cents per share.

Bond insurer MBIA Inc (MBI-$11.99) has asked Fitch Ratings to withdraw its insurer ratings on six of its units, saying it disagrees with the ratings company's approach. (CRM-$56.66), the market and technology
leader in Software-as-a-Service and Platform-as-a-Service, may be the “last momentum stock standing,” Cramer said on Friday’s Mad Money. Last week, Citigroup analyst, Brent Thill, reiterate a buy opinion on the software stock, upping fiscal year 2009 (January) share-net estimate 3 cents to $0.33and $60 target price to $70 a share.

Spectrum Pharmaceuticals, Inc (SPPI-$2.44) received marketing approval from the U.S. Food and Drug Administration for Levoleucovorin for Injection (indicated after high-dose methotrexate therapy in patients with osteosarcoma).

Home lender Thornburg Mortgage Inc (TMA-$1.79) said on Friday falling mortgage prices and liquidity imperiled by a surge in margin calls, "have raised substantial doubt about the company's ability to continue as a going concern."

In a SC 13G filing after the close of trading on Friday, asset management firm SAC Capital Advisors disclosed a 4.1% stake in XenoPort, Inc (XNPT-$41.75), which is working with British drugmaker GlaxoSmithKline PLC (GSK-$42.41) on XP13512, an experimental restless leg syndrome drug in late-stage development.

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, March 07, 2008

Assessing Other Credit Risks At Citigroup

In an internal memo released yesterday, Citigroup Inc (C-$21.17) Chief Executive Vikram Pandit called the bank "well capitalized," and characterized most of its major units as "dynamic and thriving businesses."

This morning, the largest U.S. bank said it aims to
cut its home loan exposure by $45 billion, or by about 20 percent, over the next year.

In addition, the Company plans to "improve the quality of origination, tighten underwriting criteria, and make changes to policy and process to mitigate losses."

Albeit these changes tackle residential mortgage loan exposure, yet to be addressed are potential write-downs to come in other consumer lending and commercial real estate loan origination businesses.

As of the end of the fourth quarter FY 2007 (ended December 31), in the U.S. consumer credit division, total loans 90 days or more Past Due increased Y/Y to $9.84 billion, up 37 basis points to 1.66% of total Consumer loans outstanding:
  • Managed loans for credit cards 90 (plus) days Past Due increased 14 percent Y/Y to $2.65 billion.
  • Auto loans 90 (plus) days Past Due increased 73 percent Y/Y to $285 million.

As of the end of the fourth quarter FY 2007 (ended December 31), loans 90 (plus) days Past Due in the U.S. commercial loan division increased 20 percent Y/Y to $179 million.

Citibank has, in the aggregate, U.S. commercial lending exposure of about $42.7 billion at year-end 2007, with most of this exposure in commercial real estate and equipment finance. Delinquencies of $179 million are an invisible number—for now.

As of December 31, allowance for credit losses stood at $17.36 billion, or 2.07% of total loans (excluding allowance for unfounded lending commitments), up from $10.04 billion, or 1.32% of total loans in the year ago period.

And it's too late, baby, now it's too late
Though we really did try to make it
Something inside has died and I can't hide
And I just can't fake it

Risk management initiatives are by definition, prospective exercises. Such assessments, however, come too late for deteriorating loans already on the books.

It used to be so easy living here with you
You were light and breezy and I knew just what to do
Now you look so unhappy, and I feel like a fool

Contrary to the pontifications of many pundits, the 10Q Detective does not believe that aggressive monetary easing by the Fed will forestall a broad-based recession. To wit, leading credit indicators at Citigroup suggest non-performing loans will spread materially beyond subprime-related exposure in coming quarters.

And it's too late, baby, now it's too late ~ Carole King (It’s Too Late
youtube video)

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