Hornsbeck Offshore Optimistic on On Deep Water Rates

Hornbeck Offshore (HOS-$16.77) does not believe that short-term fluctuations in energy prices will affect the long-range investment plans of major oil companies, and remains upbeat on long-term prospects for day rate pricing of its offshore supply vessels. Chairman and Chief Executive Officer Todd Hornbeck told analysts on the third-quarter 2008 earnings call that a growing world population, developing economies in China, India, Latin America, and the Far East, and projected long-term overall economic growth– despite existing global events— will result in net increases in demand for hydrocarbons. Nonetheless, the company remains dependent on cash flow generated from existing supply vessels to meet contractual obligations on new builds under construction … continue reading…

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.

Nike Sues MercadoLibre over Fake Sneakers

On August 14, 2008, Nike requested a preliminary injunction against a subsidiary of MercadoLibre’s (MELI-$11.16) in the First Civil and Commercial Federal Court, Argentina. The sportswear maker alleged that the subsidiary of the leading online auctioneer in Latin America was infringing Nike’s trademarks as a result of sellers listing allegedly counterfeit Nike branded products through the Argentine page of the Company’s website. A preliminary injunction was granted on August 11, 2008, to suspend the offer of Nike-branded products …continue reading…

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.

More House Cat than Cougar in Force Protection's Future?

Force Protection (FRPT-$3.47), a manufacturer of ballistic- and blast-protected wheeled vehicles for the U.S. military, reported a profit of $19.9 million for the third quarter of 2008 ended September 30, compared to a net loss of $(799,000) in the prior-year quarter. Chief Executive Officer Michael Moody credited the earnings’ turnaround, in part, to growth in spare parts and services revenues. Nonetheless, as the company lost out in its bid to build the Pentagon’s next-generation, mine-resistant Humvee, forward growth visibility is somewhat hazy. The Cougar series remains its top ‘Mine Resistant Ambush Protected’ (MRAP) vehicle, representing 95 percent, or $882 million, of total MRAP vehicles it sold to the U.S. military for the nine-months ended September 2008.

A key challenge to future growth will be lessening its dependence on the Department of Defense for virtually all of its business, especially when President-elect Obama campaigned on withdrawing substantially all troops from Iraq in 2010. [ …continue reading… ]

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.

Wanted: New Business Model at Crocs

Sales at Crocs (CROX-$1.16) fell 32 percent in the third-quarter ended September 30 to $174.2 million, as the company experienced substantial declines in demand for its brightly colored clogs, largely attributable to reduced consumer spending, market share erosion to cheap knock-offs and counterfeits, and decreased foot traffic at shopping malls. Challenging global economic and retail environments aside, management is ignoring the reality that the novelty of its footwear, introduced in 2002, has worn thin. Further evidence that the lightweight, resin clogs are long past the maturity phase of their product life cycle can be found in [… continued … ]

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.

Ford Motor Company's Retiree Obligations

Ford Motor Co (F-$1.58) said it burned through $7.7 billion in its third-quarter ended September 30, reflecting operating losses and the carmaker’s purchase of Ford Credit debt securities. To conserve cash, Ford has undertaken several cost reduction initiatives, including salaried job cuts and reduced capital spending (up to $1 billion in both 2009 and 2010). Even if management is successful in meeting its objective of trimming $5 billion in cash ouflows from North American operations, the company is still obligated to fund $13.2 billion owed to retired workers (and spouses) covered under terms of a Health Care Settlement Trust Agreement reached with the United Auto Workers union. [ continued…]

Jamba Juice Growth Prospects Sour

For the third quarter of fiscal 2008 ended October 7, comparable store sales at Jamba Juice (JMBA-$0.60) declined by 10.3 percent. While other quick service restaurant concepts have also experienced declining comparative store sales in the current economy, management of the smoothie maker said it believed sales declines had been exacerbated by a combination of the high concentration of Company Stores in states facing high home foreclosure and adverse economic activity, and the consequences of focusing corporate resources in trying to grow operations too quickly. California operations generate approximately 75 percent of total revenue.

What is rare, however, is that management owned up to another misstep — one rarely admitted by other fast food operators. As stated in its third-quarter 10-Q regulatory filing:

"By significantly slowing Company Stores growth, the Company expects to better optimize its resources and better understand potential cannibalization resulting from new Company Stores, which we believe contributed to declines in our Company Store average sales volumes and increased costs."

Although I applaud management for being candid, I question whether their business model itself can offer sustainable profitability. The Jamba branding message of encouraging "healthy living," though notable, is an easily duplicated strategy, with few barriers to entry — as any purveyor of quick, convenient food and beverage products, such as coffee shops, donut shops and grocery stores, can offer similar fruit drinks and healthy food items.

This article first appeared in BNET Insight: 10-Q Detective.

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.

Higher Day Rates at Transocean

The Company: Transocean (RIG-$52.00), the world’s largest offshore drilling contractor.

The Filing: FORM 10-Q filed with the SEC on November 6, 2008.

The Finding: Transocean believes most of its deepwater drilling projects remain economically viable at $60 oil and the company reports seeing no change in interest from its customers regarding additional deepwater capacity, or renewal of existing services.

The Upshot: Transocean continues to experience historically high day rates across its high-end fleet, with average daily revenue per rig of $369,300, up 26 percent from third-quarter 2007. Management expects deep-water and harsh environment drilling revenue in the fourth quarter of 2008 and the full year 2009 to benefit from commencement of higher rate contracts and start-up operations of five new ultra-deepwater drillships. In addition, the company believes that exploration successes in the deepwater offshore provinces of Brazil, Angola, and India will continue to drive significant demand for its Ultra-Deepwater Floaters.

Transocean inked a five-year deal in October with Exxon Mobil for a Hyundai Heavy Industries drillship. The contract is expected to commence in the fourth quarter of 2010 at $650,000 a day for operations in Brazil and $640,000 per day for operations in the US Gulf of Mexico. Depending on the country of operations, contract revenues over the contract term are expected to range from $1.17 billion to $1.19 billion.

Chief Executive Bob Long told analysts during the recent third-quarter 2008 conference call, however, that there were some markets in the mid-water floater and jackup business, such as the North Sea, where he anticipated $60 oil might adversely impact margins. He is also no longer optimistic that the $700,000 threshold for deepwater average day rates will be crossed this year.

Contract backlog at October 31 was approximately $41.1 billion, up from approximately $32 billion at December 31, 2007. In addition, no contract contains any put clause where counter-parties could nullify or modify terms to any signed deals due to falling energy prices. Long said on the call that 90 percent of its drilling contracts are with investment-grade companies or state-owned oil companies.

The Question: Despite signed contracts, with oil prices now trending below $60 a barrel, could Brazil’s state-owned oil company, Petrobras, and/or independents (such as Chevron and StatoilHydro) delay drilling activities of certain offshore blocks in the (difficult to access) Brazilian Tupi field and Gulf of Mexico — and postpone delivery of eight Transocean drillships still in construction shipyards?

This article first appeared in BNET Energy.

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.

Oral Remodulin Failure Sinks United Therapeutics

United Therapeutics Corp (UTHR-$58.62) said a late-stage trial of its experimental oral treatment for pulmonary arterial hypertension (sustained-release formulation of treprostinil) failed to meet the main goal of the study, a six-minute walking distance at Week 16, sending its shares tumbling 36 percent to a new year-low. As the 10-Q Detective warned readers back on August 27, the company was drifting into troubled waters, given the over-reliance on Remodulin for top-line growth.

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.

BNET Update: Monday, November 17, 2008

Apache (APA-$76.05), the largest acreage holder in Egypt, continues to benefit from its active drilling program in the Western Desert, a gas-rich area of about 450,000-square kilometers.

Avis Budget Group (CAR-$1.03) warned on Nov. 7 that it might be unable to comply with financial covenants contained in its principal corporate credit facility, due to slowing demand for vehicle rental services and increases in borrowing costs associated with fleet financing.

Online jewelry retailer Bidz.com (BIDZ-$2.84) said Tuesday that new buyers to its website for the third-quarter of 2008 fell 2.4% to 54,072, as potential customers shied away from discretionary purchases of luxury goods

Capstone Turbine (CPST-$1.00) continues to incur significant operating losses, and sales growth remains insufficient to cover operating costs.

Going forward, while comScore (SCOR-$9.33) anticipates the need for ongoing investments in technical infrastructure and new digital market intelligence formats to support the combination of an increased customer base and new products, management believes that capex requirements will be less than the revenue growth generated by these actions.

Now may be a propitious time for Kerkorian increase his stake in Delta Petroleum (DPTR-$5.69).

A key obstacle to future growth at Force Protection (FRPT-$2.81), a manufacturer of ballistic- and blast-protected wheeled vehicles, will be lessening its dependence on the Department of Defense for virtually all of its business.

These first appeared in either BNET Energy or BNET Insight: 10-Q Detective.

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.

Has Warren Buffett's Hot Hand Finally Gone Cold?

Warren Buffett, 78, through his investment vehicle Berkshire Hathaway (BRK.A-$109,000), spent billions buying stakes last month in Goldman Sachs and General Electric? As recorded in the third-quarter 2008 regulatory filing:

On October 1, 2008, Berkshire invested $5 billion in Goldman Sachs perpetual preferred stock. The preferred stock has a stated dividend rate of 10% and is callable at any time at a 10% premium. Berkshire also acquired warrants to purchase $5 billion of Goldman Sachs common stock at $115 per share.

On October 16, 2008, Berkshire invested $3 billion in General Electric Company perpetual preferred stock. The preferred stock has a stated dividend rate of 10% and is callable after three years at a 10% premium. Berkshire also acquired warrants to purchase $3 billion of common stock at $22.25 per share. The Goldman Sachs and General Electric warrants are exercisable at any time over five years. These investments were funded with available cash balances.

Where others see junk, Buffett looks for opportunity. Did the Oracle from Omaha move too quickly? Goldman Sachs, which will report an unexpected loss in the fourth-quarter 2008, has lost 43 percent in value in the last month; shares in General Electric are also trading 18 percent below the stated exercise price.

“If a business does well, the stock eventually follows.” – Warren Buffett

Legendary for his patience, Buffett can afford to wait for a turnaround, as he is receiving a yield of 10 percent on his preferred holdings.

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.

BNET Update: Monday, November 10, 2008

As lower natural gas prices and tight credit cause some natural gas companies to cut back on drilling activity in the costly Appalachian Basin, Carrizo Oil & Gas (CRZO-$23.05) announced a joint venture with Avista Capital Partners to pursue growth opportunities in the Marcellus Shale. Terms of the deal, however, initially favor the private equity firm.

To offset weaker construction spending in the United States, Europe, and Japan, Caterpillar (CAT-$38.45), the global leader of construction and mining equipment, is making it easier for customers in developing countries to access credit.

In the current environment of lower natural gas prices, especially in the Mid-Continent and Permian Basin, Cimarex Energy (XEC-$$33.67) expects to drop its operating rig count from the third-quarter high at 42 to somewhere between 25 and 30 rigs by the middle of the fourth-quarter ended December 31. As the company has historically increased production through the drill bit, one would expect downward revisions to add-ons in 2009 production and proved reserves to follow.

Turmoil in the financial markets has temporarily limited credit reporter Equifax’s (EFX-$25.32) ability to finance new initiatives via the credit markets

Albeit Exxon Mobil (XOM-$73.95) reduced GreenHouse Gas emissions by about 5 million metric tons in 2007 — equivalent to removing about one million cars from roads in the United States — it is clear from a read of the company’s third-quarter 2008 earnings report that policy options seriously being pursued by the company do not include a commitment to developing renewable fuel alternatives.

In its most recent quarterly filing, Manpower, Inc (MAN-$29.50) detailed a write-down of $140.8 million in goodwill and $22.3 million in intangible assets, signaling another asset bubble bursting in this global slowdown – that of employment service providers.

Mobile phone maker Motorola (MOT-S4.79), still stumbling from its failure to design smartphones to compete against the likes of Apple’s iPhone and Blackberry models from Research in Motion, now has a new misstep to deal with – poor returns on its in-house Fund, SigmaFund.

Based on the current annualized distribution rate of $1.20 a share, Provident Energy Trust (PVX-$6.10) offers an attractive dividend yield of approximately 20 percent. In addition, much of the income being generated from the company’s oil and gas properties would be effectively sheltered from the proposed legislation by the Canadian government, Budget Implementation Act (Bill C-52), until 2016.

SunPower (SPWRA-$33.86) filed its third-quarter 10-Q with the Securities and Exchange Commission late Friday. In addition to new foreign exchange currency issues, a read of the report suggests the solar cell maker could face a cash shortage in coming quarters, too.

These first appeared in either BNET Energy or BNET Insight: 10-Q Detective.

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

Is CBS Eyeing Dividend Cut?

Les Moonves, Chief Executive of CBS Corp. (CBS-$8.25), told analysts on the third-quarter 2008 earnings call that the company was committed to paying a healthy dividend to its shareholders. As global recessionary pressures mount, whether the broadcaster can continue to produce the free cash necessary to support the current 13 percent yield, or $1.08 per share, is questionable.

During the third-quarter ended September 30, free cash flow was a $38 million use of cash compared to the 2007 September-quarter when CBS threw off excess cash of $265 million. The drop in free cash flow of $304 million was due to $120 million lower adjusted operating income (before depreciation and amortization), resulting from a nearly seven percent year-on-year drop in advertising sales and higher capital spending (at TV stations and on a London Underground advertising contract).

Ad buys are the engine driving growth at CBS, representing approximately 70 percent of total sales. In my opinion, uncertainties from current economic conditions will likely depress advertising sales in 2009, blurring earnings visibility at the "EYE" network. Although non-cash in nature, anticipated cash flows to be generated from certain properties in the future have been lowered, as evidenced by write-downs disclosed in the third-quarter 2008 regulatory filing:

• "During the third quarter of 2008, the Company performed an interim impairment test as a result of its assessment of factors such as the continuation of adverse market conditions, which affected the Company's market value and trading multiples for entities within the Company's industry, as well as the continued economic slowdown which has adversely affected the Company's advertising revenues, primarily at the Company's local businesses.
• As a result of this impairment test, the Company recorded a non-cash impairment charge of $14.12 billion in the third quarter of 2008 to reduce the carrying value of goodwill by $10.99 billion and intangible assets by $3.13 billion. The charge was reflected as a reduction to goodwill at the Television segment of $5.81 billion, the Radio segment of $2.33 billion and the Outdoor segment of $2.85 billion as well as a reduction to the carrying value of intangible assets related to FCC licenses at the Television segment of $2.13 billion and the Radio segment of $984.6 million, and franchise agreements at the Outdoor segment of $8.2 million."

At first glance, the balance sheet appears healthy, with leverage of 2.3 times operating income (before depreciation and amortization) and a coverage ratio at 5.6 times interest costs. However, cash on-hand has fallen $1.75 billion in six-months to $550 million, due to stock buybacks, CNET acquisition, and lower operating income.

The company is comfortable with a dividend payout ratio of approximately 50 percent, suggesting the company will need net profit of about $1.37 billion in 2009 to satisfy existing common stock dividend commitments. Whether earnings from higher-margin content businesses, such as syndication and online/interactive, will offset anticipated pullbacks in radio and TV spending by advertising customers remains the $64,000 Question.

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.

Credit Crunch Flattens Growth at Harley-Davidson

Shipments of Harley-Davidson (HOG-$23.89) motorcycles totaled 74,704 units for the third-quarter ended September 30, a decrease of 11,831 units or 13.7 percent compared to last year's third quarter. Deteriorating economic conditions are also adversely impacting credit results at Harley-Davidson Financial Services (HDFS), according to the recent FORM 10-Q regulatory filing:

Annualized losses on HDFS’ managed retail motorcycle loans were 1.97% during the first nine months of 2008 compared to 1.65% during the first nine months of 2007. The 30-day delinquency rate for managed retail motorcycle loans at September 28, 2008 increased to 5.59% from 4.91% at September 30, 2007. Managed retail loans include loans held by HDFS as well as those sold through securitization transactions. The increase in losses was primarily due to a higher incidence of loss resulting from an increase in delinquent accounts. The Company expects that HDFS will continue to experience higher delinquencies and credit losses as a percentage of managed retail motorcycle loans in 2008 as compared to 2007.

Going forward, Chief Executive Officer Jim Ziemer expects the global economy and consumer concerns to continue to create challenges for Harley-Davidson through year-end and into 2009. The company has narrowed its shipment expectations to 303,500 to 306,000 Harley-Davidson motorcycles for the fourth-quarter.

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.

BNET Update: Monday, November 3, 2008

In 2001, eBay (EBAY-$15.27) bought a 19.5 percent stake in the Latin American online auction-site operator MercadoLibre. The global slowdown and current turmoil in the credit markets, however, has eroded the value of that holding.

Returning an attractive 17.2% on shareholder equity, on average, over the last five years, the board of Ensco International (ESV-$38.05) obviously felt that repurchasing its own shares on the open market was a prudent investment. Like many of its offshore contract drilling peers who made similar fiduciary decisions, however, Ensco International overpaid for its own stock.

First Solar (FSLR-$143.70) is striving to open new markets that do not depend on traditional photovoltaic (PV) subsidiaries, such as feed-in-tariffs, and can offer significant long-term growth, such as the California Renewable Portfolio Standards market for utility scale generation. Despite good intentions, approximately 70 percent of 2008 module volumes and an estimated 60 percent of 2009 module volumes will be deployed in Germany.

For-profit education provider ITT Educational Services (ESI-$87.65) delivered on its third-quarter ended September 30, with sales and operating income up year-on-year 17 percent and 28 percent, on a 19.4% jump in student enrollment. Going forward, however, ITT’s prospects during the current economic climate appear less sanguine, for disruptions in the credit markets have reduced significantly the amount of private loans available to potential students.

McMoRan’s Explorations’ (MMR-$14.19) strategy focuses on the deep gas plays, drilling to depths of 15,000 to 25,000 feet in the shallow waters of the Gulf of Mexico and Gulf Coast area, and on ultra-deep gas plays below 25,000 feet. Drilling in deep water is not without risk, however, as assessments following Hurricane Ike identified several platforms with significant structural damage. Based on current information, McMoran currently expects fourth-quarter production to average approximately 180 MMcfe per day, down from a production average of about 296 MMcfe/d in July and August.

Tidewater (TDW-$43.61) has 57 vessel commitments of various class and type, ranging from offshore tugs to deepwater vessels, scheduled for delivery from November 2008 through 2012. Given uncertainties in the credit and energy markets, the company is in the process of re-assessing its previous strategy of fleet expansion and replacement plans.

Jeff Fettig, Chief Executive of Whirlpool Corp. (WHR-$46.65) told analysts on the third-quarter 2008 earnings call the company was implementing previously announced cost-based price increases and cost control initiatives, such as plant closings, yet he failed to discuss the potential impact on the company’s profitability and cash flow generation should the credit crisis adversely impact Latin American operations.

Anticipating a challenging business environment in 2009, Xerox Corp. (XRX-$8.02) will slash five percent of its work force, or about 3,000 jobs, in the next six months. Going forward, retirees of the copier giant, however, will share the burden in cost displacements, too.

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.