Last month we wrote about BigBand Networks pre-announcement in which they warned that revenues would be in the range of $35 to $39M, significantly lower than the initially projected $54 to $58M.
This week the actual third quarter results were announced. Revenues were at the high end of the lowered range, coming in at $38.6M, 11% lower than the previous quarter's revenue and beating analyst estimates.
As expected, the company was in the red, showing a loss of $12.2M versus a profit of $1.6M in the previous quarter.
The bad news doesn't stop there. The company also expects to post another loss in the fourth quarter on revenue that is projected to be even lower than the current quarter.
In light of this dismal performance, BigBand has said it is cutting 15% of staff and is discontinuing its Cuda CMTS broadband Internet access product. This will, of course, result in asset and inventory charges as the product line is shut down, further depressing fourth quarter results.
Is there light at the end of the tunnel? Management expects BigBand to regain profitability by becoming a leaner company and by focusing on its digital video segment. It seems this is where the action is as it has received wins in this segment from a number of large customers lately. The company was just selected by ComCast. In August, it was Cox Communications. In June, Korean cable company Keumkang Cable Networks. In March, six Chinese cable companies came on board. They are a supplier to Verizon and the FiOS program and Verizon's recent quarterly results indicate that FiOS is gaining traction among their customers.
The company does have some positives going for it. They have been building their business for eight years; ie, they are not a flash in the pan start-up. Their customer base might be too concentrated but those large cable companies do have deep pockets and the industry is moving in a direction that should benefit BigBand if BigBand can manage to stay in the game.
A wild card in all this is that Time Warner Cable is both a customer and a shareholder in BigBand. Time Warner received stock in exchange for taking a chance on BigBand in the company's early days. It would be in Time Warner's interest to make sure that BigBand survives and prospers.
So it appears there might still be hope for BigBand Networks but reading into management's comments, it could be several quarters before the company begins to truly turn around.
Disclosure: author still owns a few forlorn shares of BBND
Wednesday, October 31, 2007
Last month we wrote about BigBand Networks pre-announcement in which they warned that revenues would be in the range of $35 to $39M, significantly lower than the initially projected $54 to $58M.
Tuesday, October 30, 2007
We have had a parade of new web advertising concepts lately: Yahoo's Smart Ads, Google's Gadget Ads. Now we have Facebook's SocialAds.
Just as people are throwing around absurd valuations on Google, we now have some bloggers doing the same with Facebook, that's how important they are interpreting SocialAds to be. In keeping with the current silly season regarding all things Facebook, a $100 billion valuation has been projected for the company based on this development.
SocialAds will take advantage of all the profile data that users enter in Facebook. Knowing a user's age, location and interests will allow precise ad targeting. It's a no brainer for Facebook to use profile data for ads served on the Facebook site and, indeed, they are already trying this out with their Facebook Flyers initiative.
Many in the blogosphere, however, are speculating that Facebook will extend their advertising efforts beyond their own site and put in place a full blown ad network. How will they do this? All Facebook users have a cookie stored on their hard drive that identifies them to the site. That cookie can be used by ad serving software to look up a users profile in the Facebook database and target banner or text ads to that user. You won't have to be on the Facebook site for this to work as long as your cookie is available. Given the timing of the Microsoft investment in Facebook, there is the assumption that Microsoft may help support, build and run this new ad network.
Is this the Google killer?
The more excitable bloggers are proposing that this will eventually topple Google from the top of the web advertising heap. It may be useful to contrast the two approaches.
Google AdSense is available for any web publisher, big or small, in many different languages. The Google software crawls a publisher's site to identify what kind of content is present and serves ads that are complementary to that content. There is no reliance on cookies, it doesn't care who the users are. It assumes if the user is on the site, then the user must be interested in that kind of content. Judging by Google's revenues, they have this system working pretty well.
SocialAds, by definition, are based on Facebook profile data. As such, an ad audience will be limited to those people who actually have Facebook accounts and have taken the trouble to enter a sufficient amount of useful information. Even with Facebook's large user base (as many as 50 million), it is still just a small subset of worldwide Internet traffic.
Essentially, it seems Facebook would be basing the reach of their ad network on the popularity of their site. To me, that seems dangerous. What if Facebook is overshadowed by the next big thing, Web 3.0 or 4.0 or whatever. This would drastically reduce the value of their ad inventory and the usefulness of their profile data. Google, on the other hand, would just keep chugging along.
Given Google's head start, near universal acceptance and continuous improvement of their AdSense system, I don't think Google will have anything to worry about for quite some time.
P.S.: Enough speculation. On November 6, Facebook will make their announcement at the ad:tech conference in New York City.
Sources: thanks to Techmeme for listing several pertinent blog posts including those at TechCrunch, VentureBeat and Adonomics
Monday, October 29, 2007
Motorola (MOT) recently released earnings and the stock got a little boost. Was the stock gain warranted? Is Motorola out of the woods?
First, we can acknowledge there are a few positives mixed in with the negatives. After three quarters of declining earnings, two of which showed losses, MOT actually showed a profit of $60M. That is very good news and may indicate that the worst is behind the company and the tide is turning, to mix a couple of metaphors. On the negative side, the year-over-year comparison is stark: 3rd quarter earnings in 2006 were $968M, more than 16 times greater that this year's 3rd quarter.
On the revenue side, this year's 3rd quarter revenues of $8.8B were less than 10% lower than last year's $10.6B. $8.8B was a small improvement over the previous quarter's revenue and that's another positive. Still, earnings have plunged while revenues have shown a moderate decline. This indicates something's still wrong with Motorola. And this earnings shortfall comes despite progress in cost-cutting.
Segment results --
Home and Networks Mobility had segment sales of $2.4 billion, up 6 percent compared with the year-ago quarter. Excluding special items, operating earnings were $165 million, compared with operating earnings of $231 million in the year-ago quarter. As a future profitability driver, I'm interested to see if Motorola can leverage their early entry into WiMax and become a leading supplier of chips in this sector.
Enterprise Mobility Solutions had segment sales of $2.0 billion, up 47 percent compared with the year-ago quarter. Excluding special items, operating earnings were $336 million, compared with operating earnings of $280 million in the year-ago quarter.
As for the Mobile Devices segment, read on...
Cell phone problems --
Some of this quarter's numbers indicate improvement (increased number of units shipped, higher gross margins lower expenses) but there are still issues in the cell phone unit. Sales, at $4.5B were down 36% from the previous year's quarter and the segment incurred an operating loss of $138 million, compared with operating earnings of $843 million in the year-ago quarter.
In terms of product mix, Motorola has problems at the top and bottom ends of the market. At the high end, it has no product to directly compete with Apple's iPhone, for example. At the low end, it is losing share to its main competitors, Nokia, Samsung and Sony Ericsson. This means Motorola is not benefiting from the strong growth in emerging markets where lower-priced phones dominate.
I still see nothing compelling in Motorola's story. A better quarter financially may indicate the beginning of a turnaround but that notion is being undercut by the fact that the company has slid from number two to number three in the world wide cell phone market.
In looking at the 8-K, operating earnings for the company as a whole were actually negative and MOT would have shown another quarterly loss if not for positive numbers in the categories Other Income (interest income, gains on sales of investments and businesses and the catch-all category "Other") and Earnings from Discontinued Operations.
This is not the sign of the definitive turnaround investors have been hoping for. The stock could very well weaken further from here.
Disclosure: author owns no shares of MOT
Saturday, October 27, 2007
Earlier this week I had this year's first load of heating oil delivered for my drafty, 100 year old house. The cost was a good 25% higher than last year. I was astounded.
Based on emotion, I resolved to find my personal energy hedge against rising prices.
A year or so ago, as a result of rising prices at the gas pump, I had bought shares of XLE, the Energy Select Sector SPDR ETF. I naturally turned to that idea again. On thinking about it, however, I recalled that a number of energy companies had seen earnings reduced lately due to a falloff in refining profits. Maybe I could do better than XLE.
So I thought about the ETFs that track indexes of the actual commodities. The PowerShares DB Energy (DBE) tracks a mix of energy products including Light Sweet Crude Oil, Heating Oil, Brent Crude Oil, RBOB gasoline and Natural Gas. The alternative was PowerShares DB Oil (DBO) that tracks only Light Sweet Crude Oil. Performance of DBE was slightly better than the performance of DBO but, for me, DBO seemed easier to understand as there was only one component to it. I am clearly not an expert in energy markets, so from my point of view, the simpler the investment, the better. In addition, the performance of crude oil is discussed endlessly in most financial publications and web sites so I knew it would be easy to keep track of what was going on in that market.
So that was the decision. I purchased shares of DBO on Wednesday at $31.63. As of the end of the week, DBO was up to $32.88 for a quick 3.95% gain. There is continued talk in energy markets that, at this point, $100 oil is nearly a given. That should keep a floor under DBO for a while.
I'll be sure to tell the family they can turn on the thermostat this weekend.
Disclosure: author is long DBO
Wednesday, October 24, 2007
The Philadelphia Semiconductor Index ($SOX) plunged today. Is this the end for the tech rally?
In the chart below, I compared the Merrill Lynch HOLDRs that are focused on technology. The ETFs and their associated sectors are as follows:
SWH - software
IAH - hardware
BDH - networking
HHH - Internet
IIH - Internet infrastructure
As can be seen, the Software HOLDR (SMH, black line) is indeed breaking down. Notice, however, that the other ETFs are moving up or at least holding their own. Interestingly, the Internet HOLDR (HHH, light blue line) does show weakness despite all the hoopla over Google and Yahoo's good earnings reports recently. Still, for the most part, the other tech sectors are still showing growth.
Looking closer at the semiconductor sector, we have had some earnings reports that were good, some that were lackluster. Similarly, forward guidance has varied from company to company. Nevertheless, market research companies like iSuppli are predicting 11% growth in the sector in 2008. It could be that investors are over-reacting to a limited set of disappointing results.
In looking at the charts of individual tech sector ETFs, it appears there is still strength in the majority of them. Based on this, I think it is safe to say that the overall technology sector will not follow the semiconductor sector down. Tech will remain an area of strength.
Disclosure: author owns no shares in SMH, SWH, IAH, BDH, HHH, IIH
Tuesday, October 23, 2007
Having watched the Chinese stock market soar to what looks like bubble levels, I have been reluctant to look at any Chinese stocks as serious investments. I do watch a few though and I thought that it might be time to highlight one that is beginning to display accelerated growth.
China Automotive Systems (CAAS) has been drooping most of the year from a high of about $13 in January to a low of $6 in August. Still, CAAS came through with a big 2nd quarter earnings report and eventually the stock began moving up. In early October it managed to close over $9 but has been slipping since then to just over $8. This could be as cheap as the stock will get.
Industry Background --
As written in the Asia Times, July 10, 2007:
From January to June, 3.08 million passenger vehicles were sold nationwide, up 22.3%. The total included 2.29 million cars, up 25.9%, 107,000 MPVs (multi-purpose vehicles, known as minivans in North America), up 12.9%, and 158,000 SUVs (sport-utility vehicles), up 39.3%.
That is the kind of growth the US auto industry only dreams of.
Company Background --
Based in Hubei Province, People's Republic of China, China Automotive Systems, Inc. is a leading supplier of power steering components and systems to the Chinese automotive industry, operating through seven Sino-foreign joint ventures. The company offers a full range of steering system parts for passenger automobiles and commercial vehicles.
Its customer base is comprised of leading Chinese auto manufacturers such as China FAW Group, Corp., Donfeng Auto Group Co., Ltd., Brilliance China Automotive Holdings Ltd. (who has partnered with BMW), Beiqi Foton Motor Co., Ltd. and Chery Automobile Co., Ltd. In addition, in May 2007, the Company announced that its subsidiary, Jingzhou Henglong Automotive Parts Co., entered into an agreement with FAW Volkswagen to supply high-quality power steering products. The power steering products are being installed in Volkswagen's Jetta vehicles manufactured in China. With this supply agreement, China Automotive Systems has entered into Volkswagen's global sourcing system and become a tier 1 supplier to one of the largest auto makers in China.
Earnings reported in early August 2007 indicated CAAS had a standout 2nd quarter. Profit more than tripled on strong product sales. Net income reached $2.5 million, or 10 cents per share, compared with $751,636, or 3 cents per share, in the previous year. Revenue for the quarter rose 47 percent to $36.3 million versus $24.8 million in the prior year. Management is justifiably proud that revenue increased by double digits yet selling expenses were up only 6.8%. It has a P/E of 33.03 (ttm), much more reasonable than many other Chinese "rocket stocks". See the graph below for trends over the last four quarters. And by the way, the company has no long-term debt.
Technical Analysis --
The TradeRadar BUY signal was flashed on the daily chart as shown below:
The 20-day moving average has crossed above the 50-day moving average and the stock is currently sitting a hair above its 200-day MA.
CAAS is in the middle of the red-hot Chinese automotive market. Previously, most vehicles were owned by commercial businesses. Now that individual private citizens, with their increasing salaries and more sophisticated tastes, are able to buy cars, the automotive industry in China is exhibiting very strong growth. China Automotive grew faster than the market in the second quarter based on the new business that came through Volkswagen. Even if growth merely matches the market, we should still see double digit growth for a number of quarters to come.
We may be a little late in recommending the stock but it is our opinion that there is still ample upside. With the third quarter in the books as of the end of September, we are looking for the company to put up good numbers again when they report in the next few weeks.
Disclosure: as of today, author is long CAAS
Saturday, October 20, 2007
Naturally the markets would have to tumble as I was traveling Friday. It always seems that major down moves occur when I am out of pocket.
After reviewing the carnage this week I decided that I needed to step back and not jump to conclusions.
First, I decided that I would avoid trying to make any predictions as to what directions markets will take. Better to simply focus on my own portfolio and evaluate whether any changes need to be made.
This was a tough week on some parts of the TradeRadar portfolio. Two stocks were sold when they hit stops: Starbucks (SBUX) and Qualcomm (QCOM). Modest losses were taken in each.
I recently wrote a post describing why I'm overweight tech. Does this week's action signal a change in that strategy? I don't think so. In the tech sector we are holding the ProShares Ultra Technology ETF (ROM), Cisco systems (CSCO) and BigBand Networks (BBND). I track the Select Sector Technology SPDR (XLK) as my high-level tech stock indicator. Looking at the performance of XLK, it has moved up strongly when the trend was up and it has not given up much even as the rest of the market has weakened. For example, XLK had one down day this past week (Friday) while the DOW had five in a row. Though stocks may be weakening, the tech sector still looks to outperform the general market.
I have been negative on REITs for months and have been holding the ProShares UltraShort REIT ETF (SRS). This has been a painful position to be in as the iShares Dow Jones US Real Estate Index ETF (IYR) moved steadily upward from August through the beginning of October. As IYR approached its 200-day moving average it began to weaken and in the last week the downward slide has accelerated. This has given SRS a nice boost upward and I remain comfortable maintaining a negative outlook on REITs.
The remaining stocks in the portfolio, Generex Biotechnology (GNBT) and the ProShares UltraShort QQQ ETF (QID), both gained this week. GNBT finished the week up two cents and QID, as can be expected, finished up $1.62. QID I have kept as a hedge and this week it did provide some comfort.
So the bottom line on this week's action -- our portfolio strategies still seem to be valid (though I sure wish I had dumped BigBand months ago).
Wednesday, October 17, 2007
It's 100+ days and Yahoo (YHOO) has finally revealed its new strategy. They are not "blowing up" the company; it is more like they are going to mold it into something better. This is an incremental approach not a radical one.
There are three main points presented by CEO Jerry Yang. These are Yahoo's objectives going forward:
- Become the starting point for the most consumers on the Internet
- Establish Yahoo! as the must buy for the most advertisers
- Deliver industry leading platforms that attract the most developers
Become the starting point for the most consumers on the Internet -- Yahoo's strength has always been their content and management recognizes this. The focus on content in order to drive traffic is a logical extension of current strategy. Mail, the Yahoo homepage, MyYahoo, all generate millions of pageviews per day. Yahoo Finance, Sports, and News are known leaders in their categories. Yahoo has been lagging in social networking though they point to Flickr and Yahoo Answers as successes. They are committing to do more in this area though they did not indicate any new acquisitions that might accomplish that goal (ie, Facebook). Mobile was also mentioned as a channel that will not be neglected. Yahoo intends to stay clearly focused on the main goal of being the Internet starting point for consumers and shut down or stop funding initiatives that do not support that goal. Doing what it takes to keep Yahoo's high level of traffic and increase it makes sense and feeds directly into the next objective.
Establish Yahoo! as the must buy for the most advertisers -- top content and high levels of traffic are naturally attractive to advertisers. Yahoo, however, is not limiting itself to its own properties. It is also emphasizing partnerships with leading sites and using its acquisitions in Right Media and Blue Lithium to extend their ad network and provide superior targeting. This quarter's numbers confirm that display ads continue to command a significant part of ad spending and that plays to Yahoo's strengths. The company contends that the Panama upgrade to their search engine is bearing fruit (the numbers on Revenue per Search quoted in their earnings call seem to support this) and that the international roll out will soon be complete. Realistically speaking, they seem to believe they can be a strong second in the search advertising segment. They are clearly not entertaining any idea of outsourcing search to Google. The company feels that maintaining their own search functionality makes them a more complete advertising platform that can offer many channels in an integrated manner to meet advertiser needs.
In summary, it sounds like Yahoo wants to emphasize what's working, phase out what isn't necessary, craft a compelling end-to-end solution for advertisers and reinvigorate the technology-based soul of the company. Yahoo has reorganized divisions and shuffled management to more clearly focus on its new goals. Preliminary results as discussed in this week's earnings call indicate the strategy has potential. If Yahoo can continue to execute on this strategy, there is no reason why they can't be successful. After all, not every Internet company needs to look like Google.
Resources: Yahoo Q3 2007 Earnings Call Transcript on Seeking Alpha
Full disclosure: author owns no shares of YHOO
Tuesday, October 16, 2007
Another quarter is in the books and it is time to check in on Citi's expense reduction initiative and see how they're doing.
In all to shouting over the plunge in revenue and profits and the charges and off-balance-sheet vehicles and increased loan loss reserves this quarter, there hasn't been much attention paid to Citi's well-publicized expense reduction efforts.
Let's take a look at each expense category listed in the Consolidated Statement of Income in the 10-Q. I will provide two kinds of numbers, the year-over-year comparison between 3Q2007 and 3Q2006 and the sequential change from 2Q2007 to 3Q2007.
Compensation and benefits -- up y-o-y 15% but down sequentially over 13%. This is a significant improvement and the consequences are mostly being shouldered by the rank and file employees, of course, not the managers currently in the news. There have been staff reductions as planned and a not insignificant number of people leaving voluntarily. Interestingly, there has been some hiring in collections departments as loans go bad and the bank tries to recover their money.
Net occupancy expense -- up y-o-y 22% and up sequentially 9%. The plan was to move various business functions to cheaper locations like Buffalo, NY. I guess they're still waiting for the moving van. In the meantime, Citi continues to open new branches; hence, the increase in expenses.
Technology / communication expense -- up y-o-y 23% but up sequentially only 2%. Technology consolidation was a centerpiece of the cost reduction scenario. Still no saves apparent and, based on the last two quarters, technology spending seems to have stabilized at a level over 20% higher than before the expense reduction initiative was announced.
Advertising and marketing expense -- up y-o-y 39% and up sequentially 4%. It must cost plenty for Citi to put an umbrella over the Mets new baseball stadium.
Other operating expenses -- up y-o-y 36% and up sequentially almost 31%. This catch-all category is showing the most upward momentum. Acquisitions are mentioned as a driver in several lines of business as well as increased customer activity.
All told, total expenses including restructuring charges are up y-o-y 22% and down sequentially about 2%.
Against the current backdrop, a 2% decrease will probably be looked on as a victory. Citi investors, however, are still waiting for evidence this initiative is really succeeding.
For my commentary on expenses in Citi's previous quarter click here.
Full Disclosure: author owns shares of C in a retirement account
As predicted on the TradeRadar Track Profit & Loss page this past weekend, we hit our stop at $26 and sold the Starbucks (SBUX) position today.
Late last week the TradeRadar software showed SBUX popping out of the BUY zone. Sure enough, the stock continued to break down. This has resulted in a 6% loss.
My expectation has been that patience would be rewarded as Starbucks ramped up efforts to open new stores overseas. With growth in the US slowing, this seemed to be the appropriate strategy and recently opened international stores do seem to be showing accelerated growth.
I still believe there is good potential in Starbucks but for now it is best to step aside.
Looking at the charts, there doesn't seem to be much in the way of support below $26. We will most likely have an opportunity to buy the stock at a lower price and at a time when signs of its turnaround are more apparent.
Monday, October 15, 2007
On October 1, Teradata began trading on the NYSE under the symbol TDC. The company was recently spun off from NCR. Teradata begins this phase of its public life as a $5.2 billion company with shares changing hands at just under $29. Is there an investment idea in this stock now that you can invest directly in it?
Background --Teradata is a well-known vendor of data warehouse software. They have been around long enough and are big enough to have built a list of marquee clients in a number of different industries. In all, they have over 850 customers worldwide. Below is a very abbreviated list of the industries and customers served by Teradata but it will give you an idea of the reach the company has among large enterprises.
Customers --Financial Services: Bank of America, Charles Schwab, ABN Amro, Wells Fargo
Retail: Wal-Mart, Office Depot, Sears, Williams-Sonoma, Bed, Bath and Beyond
Miscellaneous: Fed Ex, Cardinal Health, UNUM, Nationwide Insurance, Verizon, Harrah's, British Airways, Delta Airlines, Travelocity, 3M, Ford, Coca-Cola, Toshiba.
Teradata also sells to government entities such as the US Air Force, Naval Air Command, States of New Jersey and Missouri, etc.
The data warehouse market --The company feels that the enterprise data warehouse industry is a $19 billion market growing at a 6.3% CAGR. Teradata's stated desire is to grow 30% faster than the market. This seems to be doable as long as the company avoids any major stumbles.
The company has an approximately 9% share of the total market among the Global 3000. They share this market with IBM, Microsoft, Oracle, HP and others. Gartner characterizes Teradata as the industry leader in both software and hardware.
Financials --Teradata's revenue has been steadily increasing over the last few years but growth in earnings per share seems to be slowing a bit lately. It is expected that 2007 EPS will be flat at about $1.09 with revenues coming in at around $1.6 billion. At its current stock price, it has a PE around 27, not cheap but not as richly valued as VMWare, for example.
The company sees an incremental increase in expenses as the result of going public but expects that this will be a short-term impact. As part of NCR, Teradata was taxed at a lower rate. That benefit will not be available as a stand-alone company.
Challenges --Teradata is positioned like the Cadillac of data warehouse systems. Their pitch is that they have the most efficient, scalable, flexible, highest performance system available.
As competitors reach for market share by reducing prices, however, Teradata can find themselves in the position of losing business, even at established customers. For example, Wal-Mart recently awarded a contract to Hewlett-Packard despite being a long-time customer of Teradata.
As prices are driven down the market expands to include smaller companies that previously could not afford a true enterprise data warehouse solution. This is a lesson that SAP is learning -- you need to be able to compete in the mid-size market as well as in the top tier.
Teradata is working to differentiate themselves from competitors by focusing on what they call "operational analytics" -- the ability to make decisions on the most up-to-date data. As business moves faster and faster, this concept is becoming more popular. Teradata's market leadership will depend on the company being able to leverage this strategy with more customers.
As competitors have added more features to their product offerings, they have been catching up to Teradata. The company needs to ensure they can provide functionality that both sets it apart from competitors and extends the platform. One way to do that is by partnering with complementary vendors. Teradata has partnered with SAS to enable the popular SAS analytics software to run on Teradata's databases.
ConclusionTeradata is a pure play in the data warehouse sector. They are the technology leaders but have tough competitors who are making inroads into their market. These competitors are also applying pricing pressure. Freed from NCR, the company can pursue a more focused and flexible approach to managing their business. They might even become a take-over candidate. Nevertheless, I think it is too early to invest in Teradata until we can see whether their strategy is yielding the growth that management promises.
Full Disclosure: author owns no shares of TDC
Sunday, October 14, 2007
Having just featured Rogers Corporation (ROG) in a previous post based on the chart (TradeRadar BUY signal flashed) and a news announcement (third quarter earnings expected be well above previous guidance), I thought it would be a good idea to dig a little further and understand why the stock had lost half its value between last November and August.
In the fiscal fourth quarter of 2006, the company recorded record revenues and earnings but provided weak guidance, indicating unit sales would be flat, taxes annd labor costs would increase and there would be higher equity compensation costs. The stock began its decent at this point.
As predicted, earnings took a hit in the fiscal first quarter of 2007. Expenses were high and, despite increased revenues, the year-over-year income comparison suffered. The stock continued its downward path.
In the second quarter of 2007, there was little positive news. Revenue was lower than the previous year's quarter and the company showed a loss of $0.26 per share. The loss, however, was in large part due to restructuring costs. It was recognized that certain flexible circuit products had become a commodity and impairment charges were taken as staff was reduced and portions of the business were phased out. In a bid to reduce expenses, more production was moved to China but this incurred charges as U.S. staff was offered severance and plants were shut down.
The fourth and first quarters were enough to put the stock on a firm downtrend for the better part of a year. Interestingly, after the second quarter's earnings came out the stock bottomed and popped up into the $40's. Guidance from the company at the time indicated that many of the restructuring activities would begin to provide positive results soon, with most benefit to be seen in 2008. Investor's apparently believed the company and the stock has held on in the $40's since then.
As discussed in my previous post , third quarter guidance surprised to the upside and the stock jumped up to over $49. The company is fortunate to be the beneficiary of two trends. First, its international sales in the Custom Electrical Components division are seeing strength due to higher overseas demand in the power infrastructure and locomotive markets. Second, analysts have recently pointed to strong sales of cell phone handsets and continued strength in cell phone infrastructure. Rogers sells into these markets and is well positioned to benefit from a rise in demand.
So, if management can be believed, it could be that the worst is over for Rogers and the company is returning to profitability and growth. If that is true, this could be a good time to buy for reasonably patient investors.
Disclosure: author owns no shares of ROG
Friday, October 12, 2007
I was looking at a list of stocks that made big moves today and I came across Rogers Corp. (ROG). They were up $4.67, or 11%, today. I hadn't ever heard of the company before so I took a look.
Rogers is a 175-year old industrial company that now focuses on four segments: Printed Circuit Materials, High Performance Foams, Custom Electrical Components and Other Polymer Products. They sell primarily to electronics, aerospace and defense, ground transportation and consumer product original equipment manufacturers.
This stock has the classic chart pattern we like to see in the TradeRadar software. It has been steadily dropping since November 2006 from a high of over $70 until it hit a low around $35 during the summer.
In early August Rogers jumped from $35 into the $40's and stabilized. By August 15 the stock had flashed the TradeRadar BUY signal. We are a couple of months late in recognizing Rogers as a buy but there may still be gains to be made.
Here is the chart from the TradeRadar software:
So what caused the jump today? Here is the quote from the 8-K: "Rogers Corporation (NYSE:ROG) today announced revised guidance for its fiscal third quarter ended September 30, 2007. Rogers now projects third quarter net sales to be between $109 and $110 million compared to the August 6, 2007 guidance of $94 to $97 million. Non-GAAP earnings for the third quarter, excluding any restructuring adjustments, are now projected to be $0.44 to $0.48 per diluted share versus the previous guidance of $0.32 to $0.35 per diluted share." That's an improvement in earnings of 30%. Not bad!
Can the momentum continue? The answer is maybe. Once again, from the 8-K: "Sales in the Custom Electrical Components segment are approximately 25% above our previous forecast. The volume of orders from one large cell phone program that is nearing end of life was much higher than expected. Additionally, the High Performance Foams ("HPF") segment achieved all time record sales for the quarter. The record HPF sales were driven by market share gains in portable handheld devices." So one segment beat forecasts but the contract driving the growth is about to end. The other segment driving growth, however, seems to running on all cylinders. The company will provide guidance for the fourth quarter when it formally reports earnings in early November.
In any case, the TradeRadar BUY signal is exhibiting good strength and the trend lines clearly support the reversal indication. For now, the stock looks like its ready to run.
Disclosure: author owns no shares of ROG
Wednesday, October 10, 2007
Garmin (GRMN) has been on a rollercoaster lately. First, Nokia (NOK) announces they are buying Navteq (NVT). That day, Garmin takes an almost 10% dive because Navteq provides the mapping data used in all Garmin's GPS systems. The only other significant provider of mapping data, Tele Atlas, is in the process of being bought by GPS-system competitor TomTom. Investors fear that Nokia could put the squeeze on Garmin if they so choose.
Then comes the rumor Microsoft (MSFT) is going to buy Garmin and the shares notch a 5% gain.
Neither Garmin nor Microsoft have been willing to comment on the rumors.
Background on Garmin --Based in Kansas, Garmin is the current leader in the portable GPS industry, well ahead of U.S. rival Trimble. The company sells more than 50 GPS products, including portable in-car navigation units, aviation systems, marine products and pocket-sized receivers for hikers, hunters or other outdoorsmen.
5 reasons Microsoft should buy the company --1. Microsoft needs to add heft to its in-car platform initiative. Microsoft's initial release will be a product called Sync. It is being cast as a communication and entertainment system, integrating cell phones and MP3 players and offering hands-free features. Partnering with Garmin allows Microsoft to combine Sync with Garmin's in-car navigation system to create an integrated computing platform that does something more useful than play tunes and make phone calls. Sync is due to be rolled out in several Ford products in 2008. A similar Microsoft product is already available in Fiat cars in Europe.
2. A Microsoft-Garmin combination would strengthen the two companies' existing relationship. Garmin has a deal in place with Ford and Microsoft. Garmin already sells its top-of-the-line navigation units in Ford products. The devices use MSN Direct to provide traffic data that enables dynamic routing around traffic accidents, road closures and construction. Like Sync, the Garmin devices also use Bluetooth for cell phone integration and include an MP3 player. It appears Garmin has made more progress than Microsoft (who has only announced that navigation is a feature to be added in the future) so it would be a clear benefit for Microsoft to acquire working technology (see reason #1). As for Garmin, having Microsoft standing behind it would strengthen its position vis a vis Nokia/Navteq and Tele Atlas/TomTom.
3. The price is right. Garmin, which currently has a $24 billion market cap and a stock price north of $110, may actually be reasonably priced. The company's P/E ratio (36.95) and growth rate (38.04%, based on the average of the three-, four-, and five year EPS figures) make for a PEG ratio of only .97, a level that implies the stock would be a buy for investors looking for growth at a reasonable price.
4. Garmin's fundamentals are strong. Garmin has no long-term debt. Sales have been increasing faster than its inventory. Last year, its inventory/sales ratio was 19.44%. This year, it dropped to 15.28%.
5. Microsoft has a huge cash hoard. Thanks to reasons 1, 2, 3 and 4, it seems there could be many worse things to do with the money than buying a growing company like Garmin, one of the few pure plays left in the mapping space.
Disclosure: author does not own shares of MSFT, GRMN, NOK or NVT
Monday, October 8, 2007
Each time Citigroup (C) disappoints investors, the calls go out for breaking up the company. The window for doing that is shrinking.
When Citi announced with great fanfare their expense reduction initiative, led by Bob Druskin, many analysts focused on the staff reductions. Citi was very clear, however, in describing that they are looking at a completely different way of doing business.
The following quote is from the NY Times:
This next quote is also from the NY Times:
What this means is that Citi is becoming more unified. As each line of business begins to rely on the "utility groups" as described in the first quote, that line of business will now be dependent on Citi for certain kinds operational support. Looking closer at the second quote you can see that lines of business are expected to share and integrate their mission-critical software systems and move their hardware into a smaller number of data centers.
This fabric of inter-relationships will make it harder and harder to extract a line of business from the Citi corporate structure in the event a breakup strategy is pursued. Essentially, a buyer would have to recreate many support services, from HR to call centers to tech support. A buyer would also have to move much of the system hardware out of Citi data centers and make arrangements to acquire the core system software and possibly staff up to support it. The Times article also mentioned how more and more back-office functions are being staffed in India. This implies that a buyer might have to replace staff for entire functions or accept outsourcing companies (and associated contracts) put in place by Citi.
How far will Citi go in creating "utility groups"? This is a strategy that seeks expense control via economy of scale benefits. Citi could logically pursue this strategy to the point where back-end functions like general ledger, loan servicing, billing, etc. are shared across many lines of business. As all customer facing organizations cross-sell Citi products, line of business sales teams
may even be reduced.
As Citi's strategy is implemented it will change the value proposition for the lines of business effected. The pool of buyers will shrink -- only certain companies would be willing or able to take the business to be bought and fill in the pieces that were subsumed into Citigroup. This will tend to reduce the price placed on any line of business to be sold.
Citi is well launched on this strategy but the implementation will not be complete overnight. As the strategy progresses, the window for breaking up Citi gets smaller and smaller.
Disclosure: author owns Citi shares
Saturday, October 6, 2007
The fourth quarter has gotten off to a great start and all the major indexes are sporting solid gains for the year. So where does the TradeRadar portfolio stand? Trailing by a mile.
Let's look at where the mistakes were and evaluate whether the TradeRadar software caused the problem.
First, I would like to comment on the content of the TradeRadar portfolio. There are many bloggers who are also money managers who discuss proper portfolio composition; ie, appropriate diversification, minimizing volatility, etc. The TradeRadar portfolio is not intended to be the only portfolio held by an investor. It is just meant to be a vehicle for tracking stock picks made using the TradeRadar software. As an individual investor, I have a 401K and an IRA where most of my investments are mutual funds being held for the long term. The TradeRadar portfolio is my opportunity to implement a "put your money where your mouth is" committment. It's only fair, in my opinion, that if I am to offer stock picks, I should invest in them myself.
Starting with the TradeRadar software, can we say that it hurt our performance? In looking at the results and the comments I have made week after week on each stock in the portfolio, it can be seen that many stock picks did indeed yield initial profits. So how did we end up with losses?
The problem with the TradeRadar software seems to be in identifying when to exit a position. To initiate a position, TradeRadar works best when processing several months of data and identifying a reversal in trend. If the position starts turning bad abruptly (like during the two market downdrafts we saw in February and July) or within only a few weeks of initiating the position, the TradeRadar software may not generate the trigger to exit that position on a timely basis.
OK, so the software didn't always direct us to take the appropriate action. But there is a simple, low-tech technique that would have preserved our profits or limited our losses: the good old stop-loss order. This would have saved us on all the investments that are showing big paper losses like BigBand Networks, Generex, the ProShares UltraShort QQQ, etc. I will begin discussing the levels at which I set stops going forward. As the next improvement to the TradeRadar software, I will be looking to improve the responsiveness when trades start to turn bad.
As a final comment, one of the nice things about recording a weekly commentary on each stock pick is that it lets you review your thinking from the point at which the trade was initiated and at every step up to the point where you exit the trade. It is often said that the best investors keep a journal of all their trades. Note that the TradeRadar software provides a facility to do this in the Portfolio -> Individual section.
Thursday, October 4, 2007
An article on Reuters today (US Web ad spending nears $10 bln in first half '07) discussed how ad spending on the Internet continues to increase, putting pressure on other media like newspapers, TV and radio.
This is a quote from the last two paragraphs:
"Search advertising, led by Google, remained the most popular form of online marketing and accounted for 41 percent of the money spent at $4.1 billion in the first half of 2007.
Graphic display advertising, such as banners, grew to account for 32 percent at $3.2 billion, compared with $2.4 billion in the year-earlier period."
There has been much discussion on financial blogs about how display advertising is losing ground to other kinds of ads, how it is hopelessly Web 1.0 and that companies dependent on display ads are doomed. Yahoo is usually mentioned in these discussions as a prime example of a site dependent on display ads and, as if to prove the point, we all know how badly Yahoo is doing these days.
The fact that display advertising spending has increased by one third over the previous year shows that display ads still have considerable life left in them. Witness Google buying DoubleClick for over $3 billion dollars; after all, a large part of DoubleClick's business is serving display ads. Google realizes that display ads are a necessary part of a full-service ad platform and, combined with search advertising (Google's specialty), display ads will allow the company to extend its reach with advertisers and publishers.
Yahoo's problem is not that they are dependent on display ads; Yahoo's problem is that they are not executing as well as they should be in other areas.
Disclosure: author owns no shares in GOOG or YHOO
Wednesday, October 3, 2007
Yesterday I wrote a post describing how Merrill Lynch was reducing earnings estimates for some financial companies. Today I'd like to highlight a group where Merrill is raising estimates: insurance companies.
After a tough summer, the KBW Insurance ETF (KIE) seems to have bottomed out. In the last few weeks it has begun its recovery and has just recently crossed back above its 200-day moving average. The indecision in the chart seems to be resolved: KIE is moving upward strongly and just in time to keep that 200-day MA, which was going sideways, from beginning to turn down.
When it comes to the financial sector, it appears the place to look for stock price appreciation based on improving fundamentals is in the insurance companies. Merrill Lynch, for example, has raised 2007 earnings estimates for a number of the larger players:
American Financial Group (AFG)
Chubb Corp. (CB)
Allstate Corp. (ALL)
Travelers Cos. (TRV)
Disclosure: author owns no shares of any companies mentioned in this article
Tuesday, October 2, 2007
Can the rally in financial stocks last?
On Monday, Citigroup and UBS announced that their third quarter earnings would be significantly and negatively impacted by the turmoil in the credit and mortgage markets.
Nevertheless, the SPDR Select Sector Financials ETF (XLF) gained 1.89% on Monday and tacked on another 1.29% Tuesday. Similarly, the KBW Bank Index ETF (KBE) gained 1.77% on Monday and added 0.41% on Tuesday. It seems investment is rotating to the downtrodden financial sector in a big way.
Is this a short-term trading bounce or is the move for real?
In a contradiction of the move in the market, Merrill Lynch reduced 2007 earnings estimates for the following financial companies:
|Prudential Fincl (PRU)||7.40||7.30|
|Bank of America (BAC)||4.75||4.60|
|Wachovia Corp (WB)||4.75||4.50|
Note that all the institutions listed above are not only having 2007 estimates reduced but are also expected to end up with lower year-over-year earnings.
In a recent research note on Mid- and Small-cap banks by Merrill analysts Heather Wolf and L. Erika Penala, only one bank received a BUY rating -- Marshall & Ilsley (MI). The other 26 banks listed were rated either Neutral or Sell. Not a particularly enthusiastic endorsement of the sector.
My only conclusion is that the rally in financials will be short-lived. As XLF and KBE begin to move up closer to their downward-trending 200-day Moving Averages, look for these ETFs and their underlying stocks to run into some strong resistance.
Disclosure: author owns shares of C in a retirement fund
Monday, October 1, 2007
Looking at Google's acquisitions to see how the company developed, I thought perhaps we could discern a roadmap of where Google might be going next. First, I was surprised to see how many deals Google has done over the years. I was also struck by how the company has focused very precisely on expanding and filling in certain lines of business within the company. Google's acquisition binge has actually been quite strategic and extremely successful.
We see that most acquisitions fall into a well-defined set of groups. Initially those groups were search, advertising, maps and a general Internet/Social Networks/Blogging category. More recently, they have added mobile, enterprise and security acquisitions while continuing to build the other categories.
Let's take a look at the categories, the companies acquired and when the deal took place. Where I can, I'll add a few comments.
Internet/Social Networking/Blogging --Deja News (February 2001) This web-based Usenet archive started life in 1995. Google bought the Usenet archives and reintroduced them as Google Groups. Today, Google Groups features Deja's Usenet, mailing lists, and Yahoo! Groups-esque features with a Gmail-like interface.
Blogger - (February 2003) Blogger was the flagship product of Pyra Labs. In an effort to become profitable, Pyra introduced the ad-powered Blogspot hosting and the pay Blogger Pro service. It wasn't quite enough, and Pyra needed more resources, so Google stepped in during 2003. Blogger was redesigned by professional web designers in May 2004, and is now one of the most-used blogging tools with AdSense as a built-in widget.
Picasa - (July 2004), software management of photographs online. Picasa, a $30 photo organizer program, was first released in October 2001. In May 2004, Picasa announced integration with the Google-owned Blogger, and in July 2004, Google bought the company. Soon, Picasa was free, and it featured Google trademarks like an "I'm Feeling Lucky" button. The software routinely wins awards from leading PC publications.
Urchin - (March 2005) web analytics and statistics. Used by my site and many others.
Feedburner - (June 2007) RSS management company formed in 2003, acquired in 2007 for around $100 million.
YouTube - (October 2006) bought for $1.65 billion, video-sharing site YouTube remains an independent site, a sub-brand, if you will. Google is working to further monetize the site and develop new ways of advertising within or around video.
Panoramio - (June 2007) A Spanish photo tagging and photo sharing site, Panoramio's service allows people to geo-tag the exact location where images were taken.
Summary -- Google has done a nice job of stitching these properties together. Look at how Blogger, Feedburner, Picaso and AdSense are all integrated together. And Panoramio and Google Maps.
Search --Outride - (September 2001), Outride, Inc. was an information retrieval spin-off from Xerox Palo Alto Research Center (PARC). Google acquired certain technology assets in September 2001 and quickly integrated them into its search engine.
Kaltix - (September 2003), This 3-person personalized search startup company became the foundation of Google Personalized Search.
Transformic - (September 2006) Tranformic was a small company, focused on building search engines for the deep web where major commercial search engines had difficulties crawling.
Summary -- Google was not too proud to acquire technology it didn't already have. In their quest to become the search leader, there was willingness to augment internal development with astute acquisitions from the earliest days.
Advertising --Applied Semantics - (April 2003) Google bought this contextual advertising company and used it to help develop its AdSense/AdWords services, allowing it to compete with Yahoo!'s Overture.
Sprinks - (October 2003) paid advertising
dMarc Broadcasting - (March 2006) Google paid $1.14 billion for dMarc Broadcasting's radio advertising infrastructure. dMarc connects advertisers and agencies directly to radio stations with an advertising platform that automates everything from sales to scheduling, delivery and reports.
Adscape Media ( February 2007) In existence under the name BiDamic since 2002, and as Adscape Media since 2006, this in-game advertising company offers dynamic delivery of advertising with plot and storyline integration.
DoubleClick - (April 2007) This deal, for a reported $3.1 billion, is Google's largest. This acquisition gives Google access to DoubleClick's advertising software and their relative position with Web publishers and ad constituents. The deal positions Google to expand their business in the banner ad realm. The clients may be a big benefit of this acquisition.
Summary - Google has added to advertising capabilities as needed and has built a juggernaut. Now that the contextual and search advertising sectors are dominated by Google, they are working on developing leadership in display advertising via the DoubleClick purchase. Radio, newspapers and cell phones are next on the agenda.
Mapping --Keyhole - (October 2004), imagery by satellite. Keyhole is a digital mapping company founded in 2001. Since the buyout, there has been an immediate price reduction for the Keyhole software and integrated satellite photos in Google Maps.
Zipdash - (December 2004) Provides navigation assistance for road traffic on mobile in real time by GPS. Now part of Google Maps.
Where2 - (October 2004) Internet mapping.
Summary - Google wasn't first to mapping but they have become practically the standard against which others are measured. These acquisitions helped along the way.
Enterprise --Upstartle (March 2006) - Their excellent Web-based word processor, Writely, is now part of Google Apps. It's no secret Google is planning to go after Microsoft's traditional office productivity product lines.
Postini - (May 2007) Google bought messaging security company Postini for $625 million. Google Apps customers will be able to use Postini services for tasks like scanning and encrypting e-mail, and archiving messages for compliance and legal purposes. The acquisition will take Google a step deeper into the enterprise IT market and increase its rivalry with Microsoft.
JotSpot - (October 2006) A wiki creation site with a number of collaborative tools for business users, and includes applications such as spreadsheets, calendars, and forms.
Zenter (June 2007) This company developed some online presentation tools which it appears became the beta presentation software recently announced by Google as part of the Google Apps suite and an alternative to PowerPoint.
Tonic Systems (April 2007) Company makes software that can extract information from presentation software such as Microsoft's Powerpoint. The information can then be saved in an HTML page or PDF.
Summary - With Google Apps, Google wants to challenge Microsoft in business productivity software. They have essentially bought the ability to compete against Microsoft Word and PowerPoint. Now, via the Postini acquisition, they are adding security features, a must have for most corporations. Another example of building out a full-featured solution.
Security --GreenBorder - (May 2007) - makes a sandbox for internet applications to run within, protecting the operating system of a computer from potentially malicious software. The user knows he's protected because a "green border" appears around the Web browser. Google could incorporate GreenBorder's technology to scan sites before allowing search engine users access (or at least warn them of the security risk). Google could also integrate GreenBorder in the Google Web browser toolbar, giving users an easy to use tool that provides a certain degree of insulation from malicious Web sites. Either way, Google enhances its value proposition to its paying customers and makes it increasingly more attractive to users than rivals, such as Microsoft and Yahoo.
Postini - see Enterprise category above
Summary - Google prides itself on being a good Internet citizen. Look for more acquisitions in this space. Google has only scratched the surface with the GreenBorder and Postini acquisitions but they are doing a nice job of integrating Postini with Google Apps. Will they buy a smaller anti-virus company like Panda to round out their offerings? Time will tell but the move would make sense.
Mobile --Dodgeball - (May 2005) Google acquired this two-person cell phone social networking company but so far, nothing much has happened with it. It will probably have something to do with Google Mobile.
Android (August 2005), software for mobile telephones. Said to be developing the operating system for the yet-to-be-introduced gPhone.
Reqwireless (July, 2006) Maker of popular mobile applications for email
and the web on wireless devices.
Grand Central - July 2007, GrandCentral lets users of its software combine all their phone numbers and voicemail boxes under one phone number so they can manage various phone features online. Users can set up their accounts so that the number can ring on one or multiple phones based on who is calling. Customers can hear voicemail online or from a phone and forward voicemails to others or post them to a blog. The
acquisition adds to other Google communications services, including Google Talk, an instant messaging service that includes VoIP calling.
Zingku - acquired September, 2007 - another mobile social network. Allows users to store & fetch mobile photos and txt reminders with alarms on your companion mobile web site, share mobile photos and posts with friends and friends-of-friends with txt msg'ing, instant messenger and web. Assemble a crowd with txt messaging, IM and email. Take an instant poll among friends, all with txt messaging.
Summary - acquisitions have not quite spelled out the direction Google is taking in the mobile space, still they have dropped enough hints and leaked enough secrets that the blogosphere has started an endless cycle of speculation.
Conclusion --Without really casting themselves as a portal (like Yahoo), Google has built and integrated a powerful and popular set of applications in the general Internet/Social Networking/Blogging space.
Similarly, Google has made good progress in the Enterprise space, assembling productivity and security tools. Acceptance is not yet huge but the company has what is needed to provide companies a useful feature set and it is expected that Google Apps will eventually grow into another profit center.
Search, Advertising and Maps are all mature and profitable areas for Google.
In the Mobile space, however, things are a little different. It appears that much of the work in this area has been done in secrecy, most likely with the technologists that came to Google in the Android acquisition. Google has been acquiring social networks that work on cell phones. This leads me to believe that they have figured out the basics of what they need to be successful in the mobile arena -- hardware, phone OS, search, advertising (Google recently announced that they have mobile ads available as part of the AdWords network) -- and the addition of the social networks is the last piece needed to roll out a full-featured mobile solution.
It seems that Google is more than the sum of its parts. Not only are they willing to buy companies as needed, they have been very effective at integrating the acquisitions into Google's major lines of business. The mobile sector seems to be a work in progress but it is clear Google won't hesitate to buy whatever they feel will round out their offering. This could mean they are serious about bidding on a slice of spectrum. Stay tuned...
Disclosure: author does not own Google
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- ▼ October (20)
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