Motorola Shareholders Still on Hook for $30 Million to Zanders

Ed Zander, the embattled chief executive of Motorola (MOT-$15.81), will resign at the end of the year and will be replaced by No. 2 executive Greg Brown, the company announced today.

Mr. Zander’s reward for driving the struggling mobile phone maker’s market share down an embankment? The 2007 Annual Proxy filed in March reveals that Mr. Zander is entitled to severance, stock options (unvested and accelerated), Restricted Stock Units (unvested and accelerated), health and welfare benefits of $7.05 million, $11.89 million, $10.83 million, and $40,652, respectively. Add in the $178,630 (present value) of accumulated pension benefits, and Messer. Zander will walk away with about $30 million!

Canadian Probe of Hershey for Involvement in Chocolate Price Fixing Will Not Melt Profits

An investigation is under way by Canada's consumer watchdog agency, the Competition Bureau, into allegations of price-fixing by the Canadian divisions of Hershey, Nestle, Cadbury and Mars, according to the Toronto Star.

The probe concerns allegations that the companies worked together to influence prices in the Canadian chocolate-bar business.

Canadians buy about $2.3 billion worth of chocolate and candy every year, according to the Confectionery Manufacturers Association of Canada.

Principal chocolate products manufactured and sold in Canada by The Hershey Company (HSY-$39.88) are HERSHEY’S milk bars and milk chocolate bars with almonds, OH HENRY! candy bars, REESE PEANUT BUTTER CUPS candy, HERSHEY’S KISSES, and WHOPPERS malted milk balls.

The Hershey Company derives less than 11% of its net sales from customers located outside the United States. Ergo, we doubt that any evidence uncovered of alleged anti-competitive practices in the Canadian chocolate confectionery trade will have much of an adverse material impact on the U.S.-based candy maker’s financial performance.

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

"Mad Money" Cramer Sees Price of Starbucks Going Lower

Shareholders of Starbucks (SBUX-$22.61) need to wakeup and smell the decline in market value of the specialty coffee retailer.

Jim Cramer told viewers of his "Mad Money" show on Tuesday that Starbucks "once was a fantastic growth story, but the key word here is was."

Affirming what we posted about Starbucks yesterday, Cramer informed his CNBC audience: "at first glance, people might see the current price as a good entry point for Starbucks, but [he] sees the stock going lower."

He went as far as to say the stock should not to be owned until it goes well below $16.

Hungry? Say hello to a Premium Roast Coffee at McDonald’s—a worthy companion to a tasty McGriddles Sandwich!

Stock Price Still Too Frothy at Coffee Purveyor Starbucks

Starbucks (SBUX-$23.07) recently reported an in-line 4Q:07, but continued pressures from dairy costs and soft transaction comps in the U.S. prompted management to trim its share-net guidance for FY 2008, to $1.02 - $1.05 (representing 17% to 21% growth), from the prior $1.04 - $1.06 per share range (20% - 22% growth).

Comparable store sales growth was 4% for the quarter, all driven by a 5% increase in the average value per transaction (resulting from the two price increases implemented in fiscal ’07, offset by a 1% decrease in transactions).

On its year-end earnings’ conference call, the specialty coffee purveyor admitted that softer consumer spending and rising commodity costs will adversely impact 1Q:08 EPS. With ongoing dairy cost pressure, which in the first quarter alone will be $0.02 of headwind to EPS, and expectations of continued softness in the U.S. consumer and economic environment, management is currently expecting 1Q EPS of 28 cents.

For the full fiscal year range, management has factored in the impact of dairy costs, which are expected to ease the latter part of the year. All said, EPS expansion is expected to be greater in the second-half of fiscal 2008.

Seasonality

The 10Q Detective believes that caution is warranted, given that significant portions of the Company’s net revenues and profits have historically been realized during the first quarter of each fiscal year, which includes the holiday season. In our view, because of the prospect for a weak Christmas seasonal, additional cuts to EPS forecasts and growth rates will likely come.

Over-building

Starbucks remains highly dependent on the financial performance of its Unites States operating segment, which comprises about 80% of consolidated total net revenues.

The traditional Starbucks strategy for expanding its retail business in the U.S. was to increase its market share, primarily by offering a premium cup of coffee at additional stores in existing markets and to open stores in new markets where the opportunity existed to become the leading specialty coffee retailer.

In addition to opening new retail stores, Starbucks worked to increase revenues generated at new and existing Company-operated stores by attracting new customers and increasing the frequency of visits by current customers. The strategy was to increase comparable store sales by continuously improving the level of customer service, introducing innovative products and improving speed with service through training, technology and process improvement—executing on a brand image, called the Starbucks Experience.

Management targeted the opening of 2,400 net new stores globally and finished fiscal 2007 at 2,571 new stores; 1,788 in the U.S. and 783 in International markets.

Comparable store sales growth of 5% fell right in the midpoint of the stated range of 3% to 7% growth, while the traffic comp for U.S. business was below expectations (running at negative 1%).

Achieving growth targets by executing on its ability to open more new stores in the current year as well as future years than it opened in prior years is now a shopworn model. Investors are adjusting to thinking about Starbucks as a mature, slower growth company—and issues of cannibalization have arisen.

Given an expected continuation of a challenging operating environment, management modestly scaled back domestic unit expansion plans to approximately 900 new company-operated stores (from the prior target of 1,000). Licensed store openings remain unchanged at 700 units.

Competition

The Company’s primary competitors for coffee beverage sales are restaurants, specialty coffee shops and doughnut shops. In almost all markets in which the Company does business, there are numerous competitors in the specialty coffee beverage business. Of concern, fast-food chains (such as McDonald's) and other coffee chains—Dunkin’ Donuts and Canadian coffee chain Tim Hortons (which is expanding its own U.S. presence)—are expanding their proprietary lines of upscale coffee drinks at a lower cost.

International

International total net revenues increased 31% to $472 million in the fourth quarter of fiscal ‘07.
On the call, management talked optimistically about growth opportunities oversees, especially in China and Russia. International unit expansion targets remain unchanged at 900 stores. However, Starbucks is not the only Western brand to recognize the upside potential in overseas markets. For example, McDonald’s and Yum! Brands—which already have established footprints in the Far East—are pushing coffee on their respective menus, too.

Other FY 2008 Sales Initiatives

To provide a greater degree of access and convenience for non-pedestrian customers, the Company has increased development of Drive-Thru retail stores. At the end of fiscal 2006, the Company operated approximately 1,600 Drive-Thru locations. Curiously, not one analyst on the conference call mentioned the inherent contradiction of how this impersonal point-of-sales initiative dilutes the Starbucks Experience—““connecting with customers by delivering the highest quality coffee and hand-crafted beverages in a warm and inviting store environment.”

Fiscal 2008 Targets

In light of the weaker transactions experienced in 2007, a trend shared by many others in the consumer space, management now expects comparable store sales growth in the range of 3% to 5 percent.

Total net revenue growth is expected to be in the range of approximately 17% to 18%, to over $11 billion.

Management expects operating margin improvement in 2008 as follows: total company operating margin of 11.2% is expected to expand slightly year over year (contracted 30 basis points Y-O-Y in FY 2007). Given the continued pressure from dairy costs, along with the other factors previously discussed, Starbucks expects the margin to contract in the 1Q, but to improve in the second-half of the year. This will be driven by U.S. initiatives, such as “sharpening [the] focus on [the] core business and be uncompromising when it comes to executing to standards.”

In addition, the Company plans fewer product introductions.

“With our renewed focus, we believe we are poised to not only maintain our leadership position during these tough economic times but to capture significant growth in this business for the years to come,” said Jim Donald, president and CEO.

Aside from mentioning the launch of its first national television campaign highlighting the holiday promotion, Donald or any other Named Executive Officer did not offer any concrete examples as to the mechanics behind the planned service upgrades at the store level.

Management stated a shift in its growth paradigm—the premise that the company can grow EPS through operating margin faster than revenue. As we see it, additional menu price increases in 2008 will be necessary to offset higher cost products (food items) and the continued impact of higher dairy costs. As such, the 10Q Detective believes the frequency of customer visits to Starbucks stores will be adversely impacted in FY 2008.

Valuation Analysis

Does the stock of Starbucks deserve a 12-month forward price multiple of 22 times 2008 EPS?

Management expects much of the improvement in its operating metrics to be in the second half of fiscal 2008. Ergo, the price of Starbucks stock has built in a premium—market expectations for successful 2H:08 operating results.

Selling below its 50-day and 200-day moving average of $25.25 and $26.90, respectively, any failure to meet these turnaround expectations—for comparable store sales growth rates, margins, and earnings per share –could cause the share price of Starbucks stock to drop precipitously.

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

Weekend Stock Alerts: November 25, 2007

Banc of America Securities initiated coverage of Akamai Technologies (AKAM-$36.35) with a “Neutral” rating and $42 price target. Shares of the leading provider of content-delivery solutions have sold off about 28 percent in the last year; nonetheless, as there are no obvious revenue catalysts on the horizon and the shares trade near their fair value, Banc of America believes a “Neutral” rating is appropriate for now.

Paulette Miniter, columnist for SmartMoney.com, writes that online jewelry auctioneer Bidz.com (BIDZ-$19.94) may offer an attractive value proposition, trading at more than a 40% discount to the S&P 500—a diamond in the rough.

Chip maker Broadcom Corp. (BRCM-$27.83) said it would pursue an injunction against Qualcomm Inc. (QCOM-$40.53) to stop its rival wireless chip developer from making, using, selling or developing cellular chips based on contested patents.

Shares in Circuit City Stores (CC-$6.51) dropped to a four-year low on Thursday after JPMorgan predicted the consumer-electronics chain may not find a buyer to turn around its business "until the second-half" of 2008. Shares snapped back in a relief rally on Friday, climbing 19.5%, or $1.06 per share.

The decline in the share price of E*Trade Financial (ETFC-$5.33), along with pressure for a sale from hedge funds including Jana Partners LLC and SAC Capital Advisors LLC, may jumpstart takeover negotiations for the struggling online brokerage.

In a regulatory filing, H&R Block (HRB-$19.36) said lender Greenwich Capital Financial Products gave $350 million in additional funding for Option One, its embattled mortgage unit. The U.S.'s largest tax preparer said the Greenwich facility provided financing to fund servicing operations through Oct. 1, 2008.

NYMEX Holdings (NMX-$123.50), frequently mentioned as a takeover target for the New York Stock Exchange, was recently highlighted by Citigroup's risk arbitrage analysts as worth about $155 a share in a deal, or about 40 times 2008 earnings.

Barrington analyst Walter Liptak says automotive chassis maker Spartan Motors (SPAR-$9.98) can grow both sales and EPS over the long term as military production inefficiencies and parts shortages are worked out.

Silver Standard Resources Inc. (SSRI-$40.57) announced that it would issue a news release regarding the Pirquitas Project in Argentina on Monday morning, November 26, 2007.

Bear Stearns raised its rating on Tibco Software (TIBX-$7.38) to “Peer Perform” from “Underperform.” Analyst John DiFucci said that concerns about weaker financial services are priced into the shares of the business-software company.

Whole Foods Markets’ (WFMI-$40.75) margins will be squeezed in the next year, but analysts are optimistic about earnings growth down the road for the food retailer.

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

Weekend Stock Alerts: November 18, 2007

As of October 31, the average day rate on operating rigs for Bronco Drilling (BRNC-$15.17) was $17,341, compared to $17,256 for the third quarter of 2007.

Cathay Bank's holding company, Cathay General Bancorp (CATY-$28.41), introduced a program to buy back up to 1 million additional shares of stock. This is the third one million-share repurchase program authorized by its Board this year. Since the start of the year, Cathay General has bought back 2.5 million of its shares at a cost of $82 million.

Biopharmaceutical company Celgene Corp. (CELG-$64.90) has agreed to acquire Pharmion Corp. (PHRM-$49.28), a maker of blood-cancer treatments, for $72 a share in a cash-and-stock deal worth $2.9 billion, the companies said Sunday.

Cisco Systems Inc. (CSCO-$29.91) has boosted its stock buyback effort by $10 billion, a sign the Internet networking supplier still believes its shares are undervalued.

Royal Bank of Scotland Group Plc Chief Executive Fred Goodwin has been informally approached by Citigroup Inc. (C-$34.00) to become its new chief executive, the Sunday Telegraph newspaper reported.

During the show's "Lightning Round" segment on Friday, Jim Cramer told viewers of his "Mad Money" show that he disliked Internet venture capital concern CMGI (CMGID-$10.49): “That's a dot-com relic [which recently completed a 1:10 reverse stock split] that keeps trying to come back. It's got a vampire feel to it but I be Van Helsing."

The board of directors of Cooper Tire & Rubber Co. (CTB-$14.67) approved the repurchase of up to $100 million worth of the tire manufacturer’s stock in the open market. The decision cancels the previous share repurchase program approved by the board in February 2005.

TD Ameritrade Holding Corp.'s (AMTD-$19.38) chief executive expressed interest in acquiring rival E-Trade Financial Corp.'s (ETFC-$5.44) retail trading operation Friday, but cautioned that such a deal would only happen if it benefits both companies' shareholders.

Internet service provider EarthLink Inc (ELNK-$7.27) is considering strategic alternatives for its municipal wireless operations, as further investments in the business would not help in maximizing shareholder value.

AT&T Inc is trying to put together a bid for EchoStar Communications (DISH-$39.83) before the end of the year, whetted by the satellite operator's recent stock dip, according to Barron's financial newspaper.

FedEx Corporation (FDX-$96.80) lowered its FY 208 (May) share-net guidance to $6.40-$6.70, from $6.70-$7.10, citing an 8% rise in fuel costs since it announced August-quarter results. The shipper also said trends in freight segment remain weak. S&P is cutting FY 2008 and FY 2009 EPS estimates by 35 cents each, to $6.65 and $7.65. Despite these current negative factors, S&P thinks FedEx will start to see some benefits from what is expected to be ongoing global economic gains, and a bit of a downturn in fuel prices. The research firm is keeping its 12-month target price at $140, a little under 20X its calendar 2008 estimate.

Fitch Ratings late Friday downgraded Fulton Financial Corp.'s (FULT-$12.17) long-term issuer default rating to A- from A because of negative trending in asset quality.

Analyst Mike Hickey of Janco Partners reiterated his "buy" rating on Gamestop Corp (GME-$55.00), raising his target price from $57 to $68 per share. Other analysts believe, too, that GameStop is well positioned to take advantage of what is sure to be a robust holiday season for video games and systems. During the "Favorite Earnings" segment on Friday, former hedge fund manager Jeff Macke told viewers of CNBC’s "Fast Money" show that the video game market was one of the few retail areas where he thought it was okay to be long. “Get long right here, right now,” Macke said. The video game retailer, whose bestsellers include Mass Effect LE and Super Mario Galaxy, has scheduled third quarter earnings report for November 20.

Genentech Inc. (DNA-$74.99) on Sunday revealed encouraging data from a Phase II clinical study of Avastin administered alone or in combination with irinotecan chemotherapy in patients with relapsed glioblastoma multiforme or GBM, the most common and aggressive type of brain cancer. The most recent data demonstrated encouraging six-month progression-free survival or PFS and objective response rate in patients with relapsed glioblastoma multiforme.

Jerry York, a former General Motors Corp (GM-$29.27) board member and adviser to billionaire investor Kirk Kerkorian, said on Sunday GM had made substantial progress in its turnaround.

The chief executive of shoe and hat retailer Genesco Inc. (GCO-$39.23) refuted allegations by investment bank UBS AG that the shoe and hat retailer defrauded UBS after agreeing to a takeover.

Google Inc (GOOG-$633.63) is considering bidding alone on coveted airwaves to launch a U.S. wireless network, as a deadline nears to declare bidding plans, sources familiar with the situation said.

Hewlett-Packard Co (HPQ-$ 50.75), the world's largest maker of personal computers, should report fourth-quarter earnings of 82 cents a share on Monday, according to analysts surveyed by Thomson Financial.

Natrol, Inc. (NTOL-$2.27), a leading manufacturer and marketer of nationally branded nutritional products, announced today that it has signed a definitive merger agreement under which Plethico Pharmaceuticals Limited of India will acquire all outstanding shares of Natrol’s common stock for approximately $80.8 million, or a cash purchase price of $4.40 per share.

After the close of trading on Friday, Cresendo Partners disclosed in a standard 13D filing (“investment purposes”) that it held an 8.9% stake in Nashville-based restaurant chain O'Charley's, Inc. (CHUX-$15.06), which operates 363 restaurants under three brands: O'Charley's, Ninety Nine Restaurant, and Stoney River Legendary Steaks.

It's important that investors learn from mistakes, and Jim Cramer told viewers of his "Mad Money" show Friday that he made one on St. Jude Medical (STJ-$38.97). Cramer had called the maker of implantable defibrillators a sell during the show's "Lightning Round" segment on Thursday. "I was dead wrong to say anything but that it is a screaming buy," he said. "I had a misapprehension about this great company."

Shares of solar panel maker Suntech Power Holdings (STP-$69.42) continued to power higher in after-marketing trading Friday as analysts raised their estimates following strong third-quarter earnings.

CEO James Mermis of Superior Offshore International (DEEP-$7.83) stated, "Chief Financial and Administrative Officer Roger Burks and I do not plan to make any additional sales this year and have terminated our 10b5-1 trading plans. We both believe Superior Offshore common stock is undervalued at current levels based on peer trading multiples and our financial guidance for the remainder of 2007 and 2008."

If Cisco Systems wants to make a big splash in the managed security arena, it may need to do some more shopping. Among the possible candidates for future deals, The 451 Group mentions publicly traded Sourcefire (FIRE-$9.10), a leader in network intrusion prevention. According to the enterprise IT analyst company, the purchase of Sourcefire could do several things for Cisco: It would give Cisco better intelligence about what's going on within the network, expertise in the IDS space it doesn't currently possess, an inroad into the open source community (if it doesn't screw it up with its marketing of such a takeover) and even better, a massive challenge to Check Point on the perimeter security and IDS/IPS front.

During the "Lightning Round" segment on Friday, Jim Cramer told viewers of his "Mad Money" show that the shares of global multi-industry company Textron (TXT$64.14) were a buy. “It's a rest-of-worlder,” he said. “It's got great military business. It's firing on all cylinders. ... I wanna buy Textron here."

Homebuilder Tousa Inc. (TOA-$0.14) said late Friday it was informed by NYSE Regulation Inc. that its stock and debt securities would be suspended before market opening on Monday.

Private equity firm Cerberus Capital Management has offered to renegotiate new terms with United Rentals (URI-$23.37) after abandoning a $4 billion buyout this week, according to regulatory documents. The prior deal valued the largest U.S. construction-equipment rental company at $34.50 a share.

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

Be Skeptical of Blodget's Yahoo! Musings.

Yahoo! Inc. (YHOO-$26.82) rose nearly 6 percent, or $1.41 per share, on Friday, sparked by comments by former Wall Street analyst Henry Blodget that the online Internet search company could be a takeover target for Microsoft Corp.

At a UBS conference, Microsoft division president Kevin Johnson said yesterday that Microsoft plans to grow its search share from 10% to 30% and its online ad share from 6 percent.

"Buying Yahoo would give Microsoft 30 percent search share instantly. It would also boost Microsoft's ad share close to that 40 percent goal," wrote Blodget on his digital business blog, Silicon Alley Insider.

More than 28,000 and 23,000 December Yahoo call options (with strike prices of $27.50 and $30 per share, respectively) crossed the tape on Friday. In contrast, less than 15,000 of the December put options (strike prices of $27.00 and $30.00 per share) traded on Friday.

Henry Blodget, once Merrill Lynch’s top Internet securities analyst, advised investors to buy Internet stocks through most of 2000. Evidence surfaced that Blodget had knowingly written biased investment advice giving favorable coverage to certain Internet companies, encouraging customers to buy or hold poorly performing stocks (which supported Merrill Lynch’s investment banking interests), while simultaneously dispatching e-mails deriding as “junk,” “crap,” and “a disaster,” the same stocks that he had publicly rated at “buys.”

In 2003, he was charged with civil securities fraud by the SEC. He settled without admitting or denying the allegations and in April 2003, was fined $4 million and subsequently barred from the securities industry for life.

Blodget has been writing about Yahoo! for years. In March 2001, his research note on Yahoo! predicted the company might be about to offer an insight into its earnings, an announcement of restructuring, an acquisition or a decision to enter into a strategic investment. Whatever. As it happened, then-CEO Timothy Koogle was about to quit.

Blodget was half-right, as he so often was. The problem was it was impossible to tell which half, according to a Forbes article in 2003.

Skeptical scrutiny is the means, in both science and religion, by which deep insights can be winnowed from deep nonsense. ~ Astronomer Dr. Carl Sagan (1934 – 1996)

Silicon Alley Insider opines on its disclaimer page, “[investors] should be skeptical of any information on Silicon Alley Insider, because it may be wrong.”

I'm skeptical of banana trees
Cause they sway too much in the tropic breeze
I'm skeptical that the world is round
What keeps it up and what keeps me down
I'm skeptical that the sky is blue
But I'm not skeptical about you. ~ Kim Carnes (Skeptical Shuffle Lyrics)

Sorry. Given Blodget’s history of talking out of both sides of his mouth, and the failure of Silicon Alley Insider to disclose whether or not any of its columnists hold a financial interest in Yahoo! Inc., perhaps investors out to take heed of Blodget’s own advice—and be skeptical of any information published on his blog.

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

GE Money Fund Losses -- Tip of the Iceberg?

Is the worst damage evident in the credit and mortgage markets? Are there signs that conditions in financial markets have bottomed?

Investors got their answer late in trading on Wednesday when Barron’s Online reported a $5 billion money market fund run by General Electric Co.'s (GE-$39.01) Asset Management unit offered a handful of outside investors—who put money alongside GE's assets (primarily from GE's pension trust and other GE employee benefit plans)—an option to redeem their holdings at 96 cents on the dollar.

Ironically, prior to Wednesday, shareholders thought that ongoing turmoil in the mortgage markets would no longer have a material impact on GE’s Money Segment unit. As a result of pressures in the U.S. subprime mortgage industry, GE previously committed to a plan to sell its U.S. mortgage business. In connection with this exit, the Company had recorded an after-tax loss of $43 million in the third quarter of 2007 (which represented the difference between the net book value of the business and the projected sale price).

For the three months-ended September 30, 2007, segment profits from GE Money were $942 million, or 13.8 percent of total segment profits.

Barron’s exposed that in a Nov. 8 e-mail to institutional holders of the fund, GE Asset Management cited "extreme conditions in the credit markets" and told investors that "it would soon begin to sell certain securities held in the Fund which would result in realized losses and likely bring the Fund's yield to zero."

GE's fund is slightly different than a traditional money market fund because it is an “enhanced” cash fund, taking on more risk to provide a slightly higher yield.

Unlike money market funds, too, the GE Asset Management's GEAM Trust Enhanced Cash Trust never promised to preserve what was invested—i.e. maintaining an asset value of $1 per share.

Still, letting any money fund lose principal is a rare event—financial institution’s reputation and all.

Recently Legg Mason, Wachovia, and Bank of America ($600 million in reserves!) have all shored up ailing money market funds with their own funds to prevent them from sliding below the dollar-per-dollar-invested level.

GE not stepping in—and letting institutional investors eat the 4 percent decline on principal—suggests to us that these initial losses are just the “tip of the iceberg.” Like a floating Bergy Bit—where about 90% of mass lies below the surface of the water—how much GE will book in realized losses and asset impairments in coming quarters is still anyone's guess right now.

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

Empty Stockings for Retailers This Holiday

'Twas the night before Christmas, when all through the house

Not a creature was stirring, not even a mouse;

The stockings were hung by the chimney with care,

In hopes that St. Nicholas soon would be there. ~ Clement C Moore (1779 - 1863), A Visit from St Nicholas

A slumping housing market, consumer worries over jobs and tight credit, rising gasoline and food prices, and unusually warm weather in much of the country—amid a decelerating discretionary consumer spending environment, the 10Q Detective suspects that many of the leading retailers of apparel and home goods expected to announce earnings this week will slash sales and share-net guidance for the critical holiday selling season.

Tuesday Nov. 13th

• The TJX Cos. (TJX-$29.32) expects earnings from continuing operations between 53 cents and 55 cents per share for the third-quarter 2008. Analysts polled by Thomson Financial expect the off-price retailer of apparel and home fashions to report earnings of 55 cents per share on revenue of $4.78 billion.
• The world's biggest retailer Wal-Mart Stores (WMT-$43.32) will report before the bell. The discounter is expected to say that third-quarter net income rose 2.5 percent to $2.71 billion, or 67 cents a share, in the three months through Oct 31. Revenue probably rose 9.9 percent to $91.8 billion, the average estimate of 16 analysts in a Bloomberg survey.

Wednesday Nov. 14th

• Excluding acquisition integration costs, Macy's (M-$28.75) forecast third-quarter profit of 5 cents to 10 cents per share. Analysts polled by Thomson Financial expect the department store retailer to post a profit of 8 cents per share.

Thursday Nov. 15th

• Kohl's Corporation (KSS-$48.59) has already reported weaker-than-expected October sales and slashed its third-quarter profit estimate. Last week, the mid-priced retailer of apparel and home goods lowered third-quarter profit to 59 cents to 60 cents a share, down from a previous forecast of 67 cents to 71 cents a share. Analysts' had forecasted an average of 66 cents a share, according to Reuters Estimates.

Friday Nov. 16th

• AnnTaylor Stores (ANN-$31.52), a specialty retailer of women's apparel, shoes, and accessories in the United State, cut estimates last month and is expected to deliver 61 cents per share.

Current Trends & Outlook

Analysts have said that lackluster results—to date—from other retailers portend a challenging holiday outlook. In our view, from a top-line perspective, store traffic and same-store comps will be dependent on inventory (product assortment) selection and increased discounts and promotions to lure shoppers.

According to the National Retail Federation, the world's largest retail group, total 2007 Holiday sales should rise 4 percent, the slowest holiday sales growth since 2005, when sales rose just 1.3 percent.

On the heels of soft October sales numbers (for most retail chains), and the continued dependence on promotional discounting this holiday season (including markdowns/clearance), the 10Q Detective doubts that most companies in the retail space will be able to best manage inventory positions (avoid inventory shortages of hot products and product assortment misses) to expand gross margins. We see additional downside risk to fourth-quarter operating share-net across the vast majority of retailers. Save for the occasional take-out rumor, we believe few catalysts exist to do any retail stock shopping.

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

Weekend Stock Alerts: November 11, 2007

Sales of golf shafts and related products declined 22% in the third quarter 2007 from the comparable quarter of 2006 for golf equipment manufacturer Aldila, Inc. (ALDA-$17.29). Chairman & CEO Peter R. Mathewson said, “While we are disappointed in the third quarter results, historically it is our weakest quarter and we remained profitable in the quarter even as our sales declined significantly.”

On Tuesday, semiconductor equipment-maker Applied Materials (AMAT-$18.71) will report earnings, providing another insight into how tech stocks are faring. Citigroup, which expects Applied to post an EPS of about $1.50 in fiscal 2009, raised its price target on the stock by $1 to $23 per share.

Plagued by rumors of credit-market losses all week, Barclays PLC (BCS-$39.86) said on Friday that a $10 billion write-down is not imminent, and Britain's third-largest bank denied reports, too, of imminent resignations by senior executives.

The Blackstone Group L.P. (BX-$24.28) is expected to post earnings of 30 cents a share on revenue of $765 million for the quarter ended in September, according to analysts surveyed by Thomson First Call. The private equity firm is slated to report third-quarter earnings on Monday, the firm's first full quarter of results since going public in the summer.

Billionaire Saudi Prince Alwaleed bin Talal, the largest individual shareholder of Citigroup Inc. (C-$33.10), regards the bank's share price as ridiculous low and is not selling any shares, Fortune magazine quoted him as saying.

Bloggers are talking up the shares of Crocs Inc. (CROX-$38.49), telling their readers “to take advantage of the recent weakness in the price of the edgy shoe retailer” and do some buying—adding that (supposedly) “potential future catalysts may move the stock upward shortly.”

Countrywide Financial Corp. (CFC-$13.83), the largest U.S. mortgage lender, said in a U.S. regulatory filing on Friday, that if its credit rating dropped below its current lowest rating, this would "severely," limit its access to the public corporate debt market and that could have repercussions on its business.

Dominion Homes, Inc. (DHOM-$1.26) announced a third-quarter net loss of $15.3 million, or $1.86 per share, compared to net loss of $5.9 million, or $0.73 per share, in the same quarter a year-ago. Revenues for the quarter were $38.1 million from the delivery of 197 homes, compared to revenues of $64.9 million from the delivery of 338 homes in the comparable quarter previous year.

EchoStar Communications Corp. (DISH-$48.51) reported third-quarter net income of $200 million, or $0.44 per share, compared to $140 million, or $0.31 per share, during the corresponding period in 2006. On average, 17 analysts polled by First Call/Thomson Financial expected the company to report earnings of $0.43 per share for the quarter. The satellite-television broadcaster posted a 12.9% increase in revenues to $2.79 billion, slightly below the consensus revenue estimate of $2.81 billion.

E*Trade Financial Corp (ETFC-$8.59) said it had seen declines in the fair value of its $3 billion asset-backed securities portfolio that will result in write-downs that exceed previous expectations included in the company's 2007 earnings outlook on Oct. 17, and investors should no longer expect those earnings levels in the fourth quarter for the online brokerage.

Coffee roaster Farmer Bros. (FARM-$22.21) posted a first-quarter net loss of $0.9 million, or $(0.07) per share, compared to a net profit of $1.0 million, or $0.07 per share, in the same quarter last year, due to the higher average cost of green coffee and operating costs.

For the third quarter of 2007, GenTek (GETI-$32.09) reported income from continuing operations of $8.6 million, or $0.75 per share, compared to income from continuing operations of $4.3 million, or $0.38 income per share, in the third quarter of 2006. The provider of inorganic chemical products and services said revenue in quarter fell to $151.3 million from $158.5 million a year ago.

Goldman Sachs Group (GS-$211.33) Chief Executive Lloyd Blankfein may earn a pay package of up to $75 million in cash and stock this year, the New York Post said on Sunday, citing sources inside the firm.

The trust that has a controlling stake in Hershey Co. (HSY-$41.04) on Sunday forced a sweeping overhaul of the company's board amid dissatisfaction with the chocolate maker's recent results.

Intel Corp. (INTC-$25.15) plans to roll out its newest—and fastest—generation of processors on Monday, flexing its manufacturing muscle with a sophisticated new process that crams up to 40 percent more transistors onto the company's chips

JP Morgan Chase & Co. (JPM-$42.31) may have to write-down more of its loan portfolio due to faltering credit markets.

Rumors abound at apparel and shoemaker Kenneth Cole Productions (KCP-$18.99) that the company’s founder, chairman, and chief executive may have to step aside and relinquish day-to-day control to a different executive.

Lions Gate Entertainment (LGF-$10.52) posted a second-quarter loss of $(0.47) per share, $0.15 worse than the Reuters Share-net consensus of ($0.32); revenue rose 57.4% year/year to $343.5 million, up from the $280.2 million consensus. The Company noted that revenue growth was driven by strong theatrical box office results and television production revenue gains in the quarter.

Merck & Co. (MRK-$55.93) agreed to pay $4.85 billion to settle most lawsuits (about 85 percent of the outstanding claims) stemming from the painkiller Vioxx, which the drugmaker withdrew in 2004 after a study showed it raised the risk of heart attacks in some patients.

Jim Cramer told viewers of his “Madd Money” TV show Friday that McDonald's Corp. (MCD-$58.31) is loaded with American growth and European growth," important qualities for a stock that is expected to weather a market storm. Additionally, there's a catalyst to buy McDonald's, Cramer said: "There's an analysts' meeting next Tuesday, and if I were you, I'd get in ahead of this meeting."

Diversified media enterprise The New York Times Company (NYT-$18.54), which shed less-profitable circulation and increased some prices in the last year, lost 4.5 percent of its weekday circulation (to less than 1.04 million) of its name-sake newspaper and 7.6 percent of its Sunday circulation (to 1.5 million), according to figures released by the Audit Bureau of Circulations.

Research In Motion (RIMM-$113.22) is in a good position to keep dominating the business and professional smart phone market, according to Investors Business Daily.

The rejection by Rio Tinto plc (RTP-$478.35) of a $140 billion all-share offer from BHP Billiton Ltd. (BHP-$75.81) is likely to trigger rival bids from resource companies awash with cash from record commodity and stock prices, analysts said.

Exposure to the fast-expanding Chinese economy and strong petrochemical demand makes Shanghai Petrochemical Co., Ltd. (SHI-$65.15) a BUY, according to Zacks senior equities analyst Paul Raman, CFA.

The Shaw Group Inc. (SGR-$71.45), a provider of services to the energy, chemical, and environmental and infrastructure industries; First Solar (FSLR-$206.85), which manufactures thin-film solar photovoltaic (PV) modules for primarily large-scale solar-power projects; and, MEMC Electronic Materials (WFR-$71.22), a silicon solar panel components maker—three stocks for investors looking to “go green,” said Jim Cramer on CNBC's “Stop Trading!” segment last Friday.

Barron's, in its November 12 edition, suggests Internet security and info loss prevention software provider Symantec Corp. (SYMC-$16.90) could spark the interest of potential acquirers like International Business Machines (NYSE:IBM) or Hewlett Packard (NYSE:HPQ).

Package delivery company United Parcel Service Inc (UPS-$70.71) said on Sunday it expects to handle 22 million packages on its peak day ahead of the holidays this year, an increase of less than 5 percent from its forecast of 21 million in 2006.

Wachovia Corp. (WB-$40.65) the fourth-largest US bank by assets, on Friday estimated that the value of its subprime mortgage-related securities had fallen $1.1bn last month. It said loan-loss provisions would be increased by as much as $600m in the fourth quarter due to “dramatic declines” in home values.

Watts Water Technologies Inc. (WTS-$28.32) announced a stock repurchase agreement under which the water valve manufacturer will buy back up to 3 million shares of its Class A common stock.

The stock price of Whirlpool (WHR-$75.44) hit a 52-week low Thursday. According to Longbow Research analyst David MacGregor, shares of the world's largest appliance manufacturer have suffered from the misperception that Whirlpool is tied solely to U.S. housing fortunes; but just 18% of Whirlpool's U.S. shipments are linked to new residential construction. The bargain-basement prices could offer buyers of Whirlpool stock over 70% upside in the next 12 months, based on the average analyst target price.

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

Slowing Demand Takes its Toll on High-End Homebuilder

Toll Brothers, Inc. (TOL-$20.89) reported that its operating metrics continued to deteriorate for preliminary fourth quarter and fiscal year totals, with home building revenues, contracts and backlog for the period ended October 31, 2007, declining year-over year.

For the fiscal year ended October 31, 2007, home building revenues were approximately $4.63 billion and net signed contracts were approximately $3.01 billion, a decline of 24% in home building revenues and 33% in contracts compared to FY 2006’s year-end results, respectively.

The fourth quarter cancellation rate was 38.9% as a percent of current quarter contracts compared to 36.7% in the 4Q:06, with the West segment (California and Arizona) setting the pace in the high-priced point products. [Ed note. Just 11 percent of the cancellations were for mortgage-related issues.]

In addition, the nation’s leading builder of luxury homes ended FY 2007’s fourth quarter with approximately 59,300 lots owned and optioned, a 6-7 year supply based on historical pace of growth. According to analysts, however, based on expected closings over the next four quarters, the Company is sitting on about thirteen years worth of inventory.

A look at Toll’s order pace, however, suggests that a number of communities are going weeks without seeing a sale—656 net signed contracts across 315 selling communities.

The Company ended the fourth quarter with 315 selling communities, down from its peak of 325 at the end of 2Q:07, and expects to be selling from approximately 300 communities by fiscal-year-end 2008.

While Toll has not yet finalized its impairment analysis, management estimates that pre-tax writedowns in the 4Q:07 will be between $250 million and $450 million. The slowdown in new contracts signed, increases in cancellation rates (homes under contract but not yet delivered), and mortgage subsidiary exposure of more than $1.27 billion suggest to us that the recognized estimates for fourth quarter impairment charges could prove to be too conservative.

On the fourth-quarter earnings call, Robert I. Toll, chairman and chief executive officer, stated: “We continue to believe that excess supply created by cancellations, speculative buyers, and overly ambitious builders; customer concerns about selling their existing homes; and a general lack of confidence are the primary impediments to our market’s recovery. An inability to obtain mortgages does not appear to be a major factor for our buyers, although it may affect our buyers’ buyers.”

Patience is the companion of wisdom. ~ Saint Augustine (353 –430)

Albeit several quarters of poor earnings visibility has already been discounted by investors in high-end homebuilder Toll Brothers, a further weakening of demand in key markets and the risk of additional inventory impairment charges reflect our view that new monies should continue to stay on the sidelines.

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

What Happens if the FDA "Leashes the Beast" at Hansen Natural?

Downing an energy drink may boost blood pressure as well as energy, according to a study presented at the annual meeting of the American Public Health Association in Washington, D.C. earlier today.

These findings follow results from another study presented at the Scientific Sessions on Sunday, which detailed how students who consumed alcohol mixed with energy drinks were twice as likely to be hurt or injured, twice as likely to require medical attention, and twice as likely to ride with an intoxicated driver, as were students who did not consume alcohol mixed with energy drinks.

[Ed. note. The effort to encourage the consumption and popularity of mixing alcohol/energy drinks moved forward in February 2007, when Anheuser-Busch announced a deal with Hansen Natural to manage the sales, distribution, and merchandising of Monster energy drinks at bars, restaurants, and nightclubs.]

Although touting "natural" ingredients like the amino acids arginine, taurine and creatine, or B vitamins and exotic extracts like guarana and ginseng, the "energy" in these drinks, scientists suspect, comes instead from a very familiar source. "The underlying pharmacological mechanism is caffeine, pure and simple," says Roland Griffiths, Ph.D, a professor in the psychiatry and neuroscience departments at Johns Hopkins School of Medicine. "There’s no scientific basis to believing that [other] additives are integral to the stimulating effects of the energy drinks."

The energy drinks in the blood pressure study contained 80 milligrams of caffeine and 1,000 milligrams of taurine (about the same amount as found in the average 8 fl. oz. energy drink).

The 10Q Detective brings to the attention of investors that a substantial portion of sales at fast-growing Hansen Natural Corp. (HANS-$58.02) is derived from energy drinks, with more than 89 percent of its 1H:07 sales coming from energy drinks (up from 84.7% of net sales last year).

For the six-months ended June 30, 2007, net sales at the juice and beverage maker were $410.6 million, an increase of approximately $134.8 million, or 48.9%, from net sales of $275.8 million for the six-months ended June 30, 2006. The increase in net sales was primarily attributable to increased sales by volume of Monster Energy brand energy drinks. To a lesser extent, the increase in net sales was attributable to increased sales by volume of Unbound Energy energy drinks and Rumba brand energy juice.

Tear into a can of the meanest energy supplement on the planet, MONSTER energy. We went down to the lab and cooked up a double shot of our killer energy brew. It's a wicked mega hit that delivers twice the buzz of a regular energy drink. The MONSTER packs a vicious punch but has a smooth kick ass flavor you can really pound down. So when it's time to unleash the beast within, grab a MONSTER and GO BIG!

Increased risk of seizures, insomnia, panic attacks, and diabetes—there is a growing concensus among public health researchers that high-caffeine energy drinks can have adverse health consequences. [online beverage caffeine content database]

Hansen’s management acknowledges that future growth will be even more dependent on the introductions of new energy drinks in the fast-growing, $3.2 billion a year energy-drink market. If the FDA steps in to “leash the beast,” the share price of Hansen Natural could be in for an unhealthy stumble.

Hansen shares declined $3.05, or about 5 percent, during afternoon trading.

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

Weekend Stock Alert: November 4, 2007

Wall Street is fretting that the subprime carnage could spread to bond insurance firms, such as such as American International Group (AIG-$59.12), MBIA (MBI-$35.55), and Ambac Financial Group (ABK-$23.51). A key concern is big exposure to collateralized debt obligations.

American International Group Inc (AIG-$59.12) stockholder and former chief executive Maurice "Hank" Greenberg said in a regulatory filing that he anticipated holding discussions with other shareholders and third parties that would "improve ... the value of their investment."

Ballard Power Systems (BLDP-$5.02) confirms that it has been reviewing strategic decisions with regard to its automotive fuel cell assets due to the lengthy projected timeline to commercialization and high cost of development.

Citigroup Inc.'s (C-$37.94) Chairman and Chief Executive Charles Prince, beset by the company's billions of dollars in losses from investing in bad debt, resigned Sunday and is being replaced as chairman by former Treasury Secretary Robert E. Rubin.

The acquisition of Global Signal has positioned Crown Castle International (CCI-$40.55) as the largest tower operator in the U.S.A. is providing better-than-expected cost synergies for the merged entity, according to Zacks senior telecom analyst David Weissman, CFA.

The United Auto Workers union said early Saturday it reached a tentative four-year contract agreement with Ford Motor Co. (F-$8.95), avoiding the threat of a strike against the struggling automaker.

Google Inc (GOOG-$711.25) will unveil its mobile strategy on Monday, including a phone operating system and a broad alliance with multiple wireless service providers and handset vendors, people familiar with the matter said on Friday.

Goldman Sachs Group Inc. (GS-$229.60) took the unusual step of publicly denying market speculation that the top U.S. brokerage by market value could announce billions of dollars in write-downs.

Drugmaker Eli Lilly and Co. (LLY-$52.67) said its investigational anti-clotting drug, Prasugrel, was better able to prevent heart attacks than the standard treatment Plavix, but the drug led to excess bleeding, a study released on Sunday found, a shortcoming that could curb its usefulness.

Merck (MRK-$56.04) said it has plans to submit new data on its cervical cancer vaccine, Gardasil, to the US Food and Drug Administration before the year-end to seek an indication for women through age 45. Gardasil was approved by the FDA on June 8, 2006, and is recommended for use by girls and women ages 11 to 26.

An unconfirmed report in The Wall Street Journal on Friday suggested that Merrill Lynch & Co. (MER-$57.28) may have been offloading risky debt instruments to hedge funds, with agreements to repurchase them at a later date, in order to delay potential writedowns.

Metal Storm Ltd. (MTSX-$1.98), a multi-national defense technology company engaged in the development of electronically initiated ballistics systems, has executed a Memorandum of Understanding with iRobot Corp. (IRBT-$16.84). The agreement establishes a framework for collaboration and outlines the companies' plans for the joint pursuit of opportunities within the Global Defense and Security sectors.

Siemens AG''s (SI-$135.40) fourth-quarter results to be reported Thursday will be impacted by the sale of the VDO automotive unit to Continental AG, but close attention will also be paid to restructuring comments from Peter Loescher, the newly minted chief executive officer of the multi-industrial company, analysts said.

In his "Game Plan" segment on Mad Money Friday, Jim Cramer said it's time to buy Tekelec (TKLC-$12.89), "a nice little telephone-equipment supplier."

Trump Entertainment Resorts (TRMP-$6.79) shares fell more than 16 percent on Fiday, according to a Star-Ledger newspaper report that talks between the casino operator and Cordish Co. collapsed after Cordish's financial broker, Goldman Sachs balked.

The recent raid by federal and state officials on WellCare Health Plans Inc.’s (WCG-$27.37) Florida headquarters involves allegations that the insurer committed Medicaid fraud, according to a report by The Wall Street Journal.

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

What's Good for Michael Dell Is Not Good for Employees

In May 2007, Dell Inc. (DELL-$30.60) set about revamping its operations—amid an accounting scandal, personnel changes, and slowing growth in the domestic PC market. As part of a broader strategy to trim costs, the No. 2 maker of personal computers outlined a plan calling for the company to cut 10 percent of its workforce.

“While reductions in headcount are always difficult for a company, "we know these actions are critical to our ability to deliver unprecedented value to our customers now and in the future," company CEO Michael Dell said in a written statement.

Why is it that Named Executive Officers (NEO) rarely suffer the consequences of 'cost initiatives' that non-ordained employees suffer?

In its proxy statement filed on Wednesday with the Securities and Exchange Commission, the company said it paid about $1.05 million for the "personal and residential security" of founder Michael Dell.

The amount shown for Mr. Dell’s security costs represents the amount of company-paid expenses relating to personal and residential security. “The Board believes that Mr. Dell’s personal safety and security are of vital importance to the company’s business and prospects and, therefore, that these costs are appropriate corporate business expenses,” the company said in the proxy statement.

In addition, the Company reimbursed Mr. Dell and former CEO Kevin Rollins $1.86 million and $2.49 million, respectively, for the cost of using their private aircraft (while traveling on Dell business).

It's not what I do, but the way I do it. It's not what I say, but the way I say it. ~ American actress Mae West (1892 – 1980)

Albeit the board rejected all bonuses and performance-based stock awards for NEOs in the last fiscal year, according to the company's proxy, might not Michael Dell have stepped up as an example of restraint?

Yes, security and airline travel expenses coincide with the office of the CEO; but, costs of $1.05 million and $1.86 million, respectively, are beyond prudence. Laid-off staffers at call centers in McGregor (Texas), Roseburg (Oregon), and Twin Falls (Idaho) would probably ‘second’ that opinion.

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