Credit Concerns Resurface at Smithfield Foods

Hog and pork producer Smithfield Foods Inc (SFD-$14.36) sought to reassure investors on Friday that it was in compliance with its debt covenants and had adequate liquidity after its shares fell sharply.

Before some Wall Street analyst with a well-oiled PR machine takes credit for having predicted potential credit problems at Smithfield, remember you heard it first at the 10Q Detective – back on July 29.

Original new stories can also be found at BNET Energy & 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.

BNET ENERGY Updates: Monday, September 29, 2008

Capstone Turbine (CPST-$1.21) expects to raise $29.5 million through an offering of common stock (and warrants). In large part, the proceeds will be used for continued performance testing and commercial production of its C200 (200-kilowatt) microturbine product.

Despite posting strong second-quarter numbers, a concern remains that a new silicon supply agreement covers only 20 percent of China Sunergy’s (CSUN-$8.20) targeted 2009 production of 220-250 MW.

Management believes that two new contracts further affirms EMCORE’s (EMKR-$5.39) position as the leading supplier of concentrator photovoltaic arrays in the emerging CPV components and systems business.

Teck Cominco Limited (TCK-$32.43) said its share of capital costs for the first phase of the Fort Hills oil sands project, of which it owns a 20 percent working interest, is now pegged at $4.2 billion, up $1.84 billion from an initial June 2007 cost estimate.

Can Sarah Palin in the White House redirect TransCanada’s (TRP-$36.66) Alaskan pipeline to nowhere?

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.

How Imminent Turnaround in Real Estate Markets?

Homebuilder stocks, historically, tend to rebound six – 12 months before the real estate market itself. True to form, shares in DR Horton (DHI-$13.92), KB Home (KBH-$21.16), and Toll Brothers (TOL-$25.88) are up more than 40 percent, 46 percent, and 50 percent from their mid-July lows, as investors speculate that a rebound in housing activity is just around the corner.

Evidence continues to mount, however, that it still may be premature to bet now on a real estate rebound: sales of new U.S. single-family homes in August fell sequently 11.5% from July 460,000 new homes, its lowest point in more than 17 years, according to a government report released on Thursday.

In addition, new claims for jobless benefits jumped for the week ending September 20 by 32,000 to a seasonally adjusted 493,000, their highest level in seven years. Erosion in consumer purchasing power suggests that less folks have the ability and means to step up and purchase homes – irrespective of prevailing incentives and discounts currently being offered by the homebuilders.

The fishermen know that the sea is dangerous and the storm terrible, but they have never found these dangers sufficient reason for remaining ashore. ~ Dutch Post-Impressionist painter Vincent van Gogh (1853-1890)

In my opinion, aggressive discounting by home builders to convert window-shoppers into buyers and steeper drops in the value of unsold homes/lots could result in further margin compression and asset writedowns, respectively, delaying the expected fundamental turnaround beyond 3Q:09. Ergo, the realized gains in their stock prices since mid-summer could see reversal of fortunes. Then again, the fisherman knows he won’t catch a 500-lb blue fin remaining ashore.

Original new stories can also be found at BNET Energy & 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.

The Hole in Krispy Kreme’s Doughnut

By its own account, Krispy Kreme Doughnuts, Inc. (KKD-$3.46) is in an uncomplicated business: buy and mix together flour, sugar and a few other ingredients and recognize revenue when the sugary confections are sold to hungry customers. Investors seem to think of the company in such simple terms, having driven the stock price down more than 23 percent in the last few weeks after the company reported lower sales and rising costs.

Yet the company’s most recent SEC filing shows Krispy Kreme has anything but a simple balance sheet. Buried in footnotes are the details of its franchise relationships, which disclose an entirely different set of worries than just sagging demand for high-calorie snacks.

In the final quarter of Krispy Kreme’s fiscal year ending January 2008, the company added $3.2 million to its liabilities related to guarantees the company had made for franchisee debt and lease obligations. Apparently, the franchisee is in default and now Krispy Kreme is on the hook to pay back loan principal and interest.

As of August 2008, Krispy Kreme still had another $8.5 million in such guarantees for its franchisees. The company does not consider any portion of that amount in doubt and therefore has not included any of it in the company’s liabilities. To put those guarantees in perspective, Krispy Kreme’s current liabilities would be increased by 19.2% if those franchisees also went into default. Yet franchisees account for only about 6% to 7% of Krispy Kreme’s total sales.

There is no way to avoid disclosing in those footnotes the $13.3 million in additional loan and lease guarantees that Krispy Kreme has made for franchisees in which the company has an ownership interest. The level is down from the beginning of the 2008 after one franchise operation was dissolved and Krispy Kreme divested its interests in two others. Yet even this reduced level represents 20.8% of equity on the balance sheet in August 2008.

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

10-Q INSIGHT Updates: Monday, September 22, 2008

One insurance company that does not need assistance from the Federal Reserve is ACE Limited (ACE-$66.00), which has managed to sidestep the financial meltdown befallen competitor AIG.

In the last year, CKE Restaurants (CKE-$11.99) has sold 224 restaurants to franchisees and secured commitments for 105 new franchise restaurants under development agreements for those markets. The 10-Q regulatory filing for the second-quarter ended August 11, however, suggests the formula used to finance these Carl’s Jr. and Hardee restaurants could be a recipe for disaster – think Boston Market or Krispy Kreme Doughnuts.

To its credit, Toll Brothers (TOL-$26.84) had its lowest contract cancellation rate (195 homes) in more than two years. If the current crisis on Wall Street spreads to Main Street, however, potential sales could evaporate along with consumer confidence and success in finding affordable mortgage loans.

According to its 10-Q filed with the SEC on September 12, in the second quarter ended August 3, specialty retailer Williams-Sonoma (WSM-$19.05) took advantage of a bustling corporate aircraft market and sold its Bombardier Global Express airplane for approximately $47 million in cash.

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 ENERGY Updates: Monday, September 22, 2008

Stockholders of Bronco Drilling (BRNC-$12.24) who voted down a merger proposal from oil service provider Allis-Chalmers are probably wishing they had not heeded the advice of Wexford Capital LLC, an investment fund that beneficially owns 12.8% of the company.

Constellation Energy (CEG-$25.76) confirmed that it retained Morgan Stanley and UBS to advise on available strategic alternatives, such as a sale of the company. France’s EDF SA, which owns a 9.5 percent stake in the company and is a joint partner with respect to nuclear projects, could be a likely suitor.

Despite assurances by Michael El-Hillow, Chief Financial Officer of Evergreen Solar (ESLR-$6.20), the Chapter 11 filing by Lehman Brothers could expose the solar panels maker to a potential shareholder dilution of more than 20 percent if shares lent to an affiliate of the insolvent brokerage are not returned.

Like most refineries, profitability at Holly Corp (HOC-$35.26) depends on the spread between market prices for petroleum products (such as gasoline and diesel fuel) and crude oil prices. In the wake of Hurricane Ike, about 20 percent of U.S. refinery capacity has been idled — creating the perfect storm for refiners, such as Holly, located outside the Houston beltway.

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.

McDonald's Talking Up Double Cheeseburger w/o the Cheese

McDonald's Chief Operating Officer Ralph Avarez told analysts on the second-quarter conference call in July that backing for the Dollar Menu remained strong throughout the U.S. system, in spite of continued increases in beef, wheat, and other commodity costs. This runs contrary to what I am hearing directly from franchisees and affiliates, who operate 78 percent of all restaurants and contribute about 66 percent to operating profits (through rent and/or royalty payments), according to the recent 10-Q.

However, with wheat prices trebling in two years, and chicken and beef costs expected to rise about six percent and about 9 percent in 2008, local operators can no longer sit idle. Working on thin margins -- pennies for the four-piece chicken nugget item on the Dollar Menu -- franchisees are also feeling the hurt from rising fuel, rent, and utility costs. One franchisee privately told me that his margins actually rose in June, when the company stopped serving serving tomatoes on burger and chicken sandwiches during the recent salmonella outbreak.

Acknowledging the concerns of franchisees, McDonald's is testing the Double Cheeseburger at different price points in a limited number of restaurants, according to McDonald's USA spokesman Bill Whitman.

However, restauranteers in expensive locales like Manhattan are not waiting for corporate's lead, they have already removed the popular Double Cheeseburger from the Dollar Menu. Other chain operators have taken to selling the double-burger less one slice of cheese (and/or without pickles).

So far, the company has announced no specific changes to the Dollar Menu, but more information on the fate of its Double Cheeseburger should come on or about October 22, when McDonald's tentatively plans to release third-quarter operating results.

Original new stories can also be found at BNET Energy & BNET Insight: 10-Q Detective

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

Coldwater Creek Suffers Cold with its Spa Concept

Women's clothing retailer Coldwater Creek (CWTR-$7.17), which caters to females ages 35-60, with average household income in excess of $75,000, opened the first of its nine day spa locations in Spring 2006. Management believed that the spa concept would increase retail traffic and offer cross-merchandising synergy, especially from its line of assorted Sports apparel.

In the second-quarter 2008 ended August 2, the company admitted that certain assets (equipment, furniture, and fixtures) at some spa locations would never be recovered, and took a $1.5 million writedown related to the Coldwater Creek Spa concept, according to the 10-Q filed with the SEC on September 11. To date, the spa business has had a negative impact on earnings.

Retail trends remain sluggish, as seen in new co-branded credit activations, which fell about 60 percent year-over-year to 10,700 in the second-quarter. Nonetheless, management refuses to admit the day spa concept was a mistake:

• "We have not formed a conclusion as to the long-term prospects of this concept, although we have no plan to build additional day spas. "

Such wording suggests behavior to the contrary. In addition, how can management determine that the day spa concept has been long enough to perform a detailed impairment evaluation -- as the concept continues to incur operating and cash flow losses -- but not long enough to reflect long-term prospects?

"Health is the greatest possession," said Chinese taoist philosopher Lao Tzu (600 BC - 531 BC). Coldwater should not lose sight of the reality, however, that clothes can bring the greatest joy to women shoppers. [Ed. note. Forgive me for that sexist comment!]

In the filing, management did admit to a failure to differentiate its merchandise from its competitors, for comparable same-store sales declined 13.7% year-on-year. The company is hoping its fall wardrobe-prints, prints, and more print fashions -- will resonate with its customers.

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

Bankrupt Lehman Brothers Eclipses Evergreen Solar

Michael El-Hillow, Chief Financial Officer of Evergreen Solar (ESLR-$4.39) told Reuters last Wednesday that the company was in talks to license its new solar thin-film technology to other solar panel makers. Agreements could be announced—next year!

Reading that press release wasted fifteen seconds of my life I cannot recover. As if El-Hillow's credibility was not already strained with that insipid release, now comes word that Evergreen is vulnerable to potential shareholder dilution of more than 20 percent if shares lent to an affiliate of the insolvent Lehman Brothers are not returned.

El-Hillow insists, however, that the company is availing itself "of all legal remedies to protect the Company and its shareholders in this very fluid situation."

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

BNET Update: Monday, September 15, 2008

Canadian Natural Resources (CNQ-$78.54) is encountering testing and commission delays with the upgrading plant at its Horizon Oil Sands Project, located in Alberta. Open mining of the first oil sands is ready, but the scheduled September ramp-up in producing the first barrels of Synthetic Crude Oil (SCO) has hit a snag.

In this sluggish economic environment, CarMax (KMX-$15.66) is getting aggressive in attempts to move pre-owned vehicles off its lots. In the last month, the nation’s largest retailer of used cars has upgraded its search tools to avoid the showroom floor.

In a recent letter to shareholders, Ener1 (HEV-$6.37) Chief Executive Charles Gassenheimer shared his view that each dollar of capital expended at its automotive battery subsidiary EnerDel would return between $4.00 and $6.00 in annual revenues. A significant claim- - as Ener1 has generated minimal revenue to date, for its battery technology is still in development.

Although it no longer services or originates mortgages, H&R Block (HRB-$24.07) is required to indemnify WL Ross for any potential losses made due to deception or warranty breaches by its former mortgage subsidiary. In the first-quarter 2009 ended July 31, anticipating future recourse for bad loans the nation’s largest tax service provider added about $203 million to its reserves, according to the company’s 10-Q filing.

Mariner Energy (ME-$25.52) is a case profile in the risk and rewards to be had by drilling in the Gulf of Mexico. Approximately 280 million cubic feet of natural gas equivalent per day (MMcfe/d), or 75 percent of daily production, comes from its offshore production. Although the company experienced no significant damage from Hurricane Gustav, the Houston-based driller might not be so lucky with Hurricane Ike.

Synopsis (SNPS-$20.62), a developer of chip set design software, provided details on its recent dust-up with the IRS in its third-quarter 2008 filing on Tuesday.

Yingli Green Energy (YGE-$13.67) forecasts shipment of between 270 megawatts to 280 megawatts of PV modules in 2008, representing an increase of 89 percent to 96 percent compared to 2007. Management’s outlook could prove too optimistic should the government of Spain sharply reduce existing energy subsidies, set to expire on September 29.

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.

Drop in Raser Tech Vindicates 10Q Detective

"Raser Technologies (RZ-$6.18) reaffirmed its business strategy and expressed continued confidence in its near and long-term business outlook." The comments were in response to the unusually heavy trading volume and 12 percent drop in the share price.

Against a backdrop of 'boos' from the bullish corridor, I have warned investors to stay clear of RZ for almost three years running.

“Truth is generally the best vindication against slander.” ~ Abraham Lincoln

Original new stories can also be found at BNET Energy & BNET Insight: 10-Q Detective

The 10Q Detective is closing its active research on Raser Technologies effective today.

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

BNET Update: Monday, September 8, 2008

Energy Conversion Devices (ENER-$66.27), which builds solar cells right into its roofing materials (UNI-SOLAR), is capitalizing on opportunities provided by feed-in-tariffs in the European Union for building integrated photovoltaic applications.

General Mills (GIS-$67.84) has no intention of embracing the "say on pay" movement anytime soon.

Despite concerns in energy corners that slowing global economic growth could diminish demand — and pricing — for commodities, Patriot Coal (PCX-$44.98) remains optimistic on the market for thermal coal for 2009 and beyond.

Range Resources (RRC-$44.31) said shut-in wells at the Marcellus Shale development in Appalachia are now expected to commence production early in fourth quarter of 2008, ahead of the previously scheduled second-quarter 2009. Falling natural gas prices, however, could turn good cheer at the company to bad tidings.

Demand for offshore drilling units continues to be strong, particularly for floaters. In the second-quarter ended June 30, Transocean (RIG-$122.35) reported that average rates for its fleet of deepwater floaters increased 32 percent from last year, on average, to $360,500 per day.

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.

Microsoft Says "Ciao!" to Greenfield Online

Microsoft (MSFT-$27.29) said Friday that it had reached a deal to acquire Greenfield Online (SRVY-$17.35), operator of the Ciao! shopping and price comparison sites, for $486 million, or $17.50 a share.

Two factors in Microsoft's decision to acquire Greenfield were management's belief that Ciao online platforms offered a flexible springboard from which to gain some market share in the U.S. search engine market against Google and to launch its proprietary Live Search footprint in Europe, according to a regulatory filing made with the SEC on August 29.

The software giant continues to struggle in the search engine business, with its U.S. search market share declining 340 basis points year-on-year to 8.9 percent, compared with an increase of 620 basis points year-on-year to 61.9% at Google, according to comScore data.

Ciao offers one of Europe's leading online price comparison, shopping, and consumer review solutions. The company operates portals in seven European countries and the U.S, with a combined 26.5 million unique visitors per month, according to comScore.

Greenfield derives revenue from its Ciao comparison-shopping portals (from Internet traffic generated via e-commerce, merchant referrals, click-throughs, and advertising sales) and its Internet Survey Solutions segment (selling respondent data to marketing research clients).

Microsoft has agreed to sell the Internet survey business of Greenfield to an unidentified financial buyer.

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.