Category: Uncategorized

GM to Slow Production of Big SUVs
Inventory Buildup Illustrates Risk of Near-Term Strategy As Gasoline Prices Stay High

—Wall Street Journal

That’s the headline, and I am not making it up.

Back in December (“McClellan Awaits Battle…in Detroit”), I compared the slow pace of General Motors CEO Rick Wagoner’s movements to Abraham Lincoln’s most stubbornly lethargic senior general, George McClellan.

McClellan, as Civil War buffs know (WARNING: Civil War buffs are not normal human beings—mentioning “Civil War” to them is like making eye contact with that guy in the subway who looks sort of glassy-eyed and eager to tell you something IMPORTANT about THE FBI: you will regret it the rest of the day, if not your life) could not bring himself to fight.

With McClellan, it was always something: he didn’t have enough troops, he didn’t have enough equipment, the weather was bad (I am not making that up), or there was too much pollen in the air (okay, I made that up).

And so with Wagoner. Seems he just recently discovered that rising gas prices and heavy dependence on SUV sales do not make for a profitable company.

As today’s Wall Street Journal reports:

General Motors Corp. Chief Executive Rick Wagoner said the company will slow production of its new lineup of large sport-utility vehicles during the second half of the year to cope with rising inventory as average U.S. gasoline prices stay at more than $3 a gallon.

Gasoline prices higher, SUV sales lower—D’oh!

Three months ago my pal who works in the drum shop at the local Guitar Center told me he was ditching his used SUV for a used Camry, owing to the fact that it was costing him $60 to fill up his used SUV. “Can’t afford it, man.”

Now, you would think that somebody in Detroit—particularly a major executive who is highly paid to deal with changes in the economic environment in which his company operates—would have sensed this sort of thing coming when gasoline prices first hit $3.00 a gallon a year ago, after the hurricanes.

But apparently at least one major executive did not—or could not, or would not. As the Journal says:

GM’s earnings have benefited from building and stocking the new line of SUVs, which it has said would do well despite high gasoline prices because the vehicles are more fuel-efficient than competing models. But sales of the large SUVs to consumers haven’t kept pace with production. Large-SUV sales overall fell 22% through the first half, according to Ward’s Automotive Reports.

According to Ward’s, GM built 106,334 Chevy Tahoes in January to June. According to Autodata Corp., 84,933 were sold in the same period, a 4.2% increase from a year earlier.

As of the end of July, GM and its dealers had 82 days’ supply of unsold Tahoes, 89 days of unsold GMC Yukons and 75 days of unsold Chevrolet Suburban ultralarge SUVs. Historically, auto makers have aimed for a 60- to 65-day supply, or less, to avoid resorting to profit-draining discounts to clear stock.

I realize that not everybody—even highly paid executives at Ford or Chrysler or Toyota—anticipated $3.00 a gallon gasoline prices, and that it’s not their fault that crude oil hit prices never anticipated by anybody except maybe Mark Faber, of the Barron’s Roundtable, who called for $80 oil years ago.

But, as Lincoln pointed out to McClellan whenever the general complained about the weather, generally speaking the weather is bad for everybody, not just McClellan.

According to the 2005 GM proxy statement, Mr. Wagoner was paid $5.5 million in total compensation in 2005. And $10 million the year before. And $12.8 million the year before that.

My guy in the drum shop was advising GM to stop making so many SUVs three months ago.

And his advice came free.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

“It looks like a much smaller generic private company completely outmaneuvered two of the giants of the pharmaceutical industry,” said Gbola Amusa, European pharmaceutical analyst for Sanford C. Bernstein & Company. “It’s not clear how or why that happened. The reaction from investors and analysts has ranged from shock to outright anger.”
—New York Times

Thus says one of Wall Street’s Finest in reaction to this week’s news that Barry Sherman, the CEO of a no-name company (named Apotex), had figured out a way to blow the doors off one of Big Pharma’s most profitable franchises five years ahead of nearly everybody’s estimates by using a deal he negotiated with Bristol-Myers that was subsequently nixed by the government.

Here’s how he described his coup:

Mr. Sherman, in a telephone interview, all but ridiculed his two big rivals, saying they had naïvely agreed to conditions that allowed his company to bring its product to market even though the deal was rejected by regulators.

“I think they acted foolishly in a number of ways,” said Mr. Sherman, a Toronto billionaire who amassed his fortune in the generic drug business.

Mr. Sherman said that he had never expected the American government to approve the deal, but that he had conducted the negotiations in a way to let him push the Apotex drug onto the market.

Mr. Sherman said Apotex was engaged in an “all-out launch” and has already shipped most of its inventory while manufacturing continues.

Now, I could have spared the Sanford Bernstein analyst quoted at the top—and any other of Wall Street’s Finest—all that “shock” and “outright anger” at the latest in a long string of bad news from Bristol-Myers, if anybody had asked, by pointing out that there is a reason bad things keep happening to Bristol-Myers: look at the track record of the man in charge.

Oh, sure, I know the latest spin—the company has a amassed a great cancer drug pipeline under its CEO, the MBA-trained Peter Dolan, who has to his credit been working feverishly to bring the company back from the brink of a channel-stuffing disaster that resulted in an SEC investigation, a fine, and subsequent earnings restatements.

But Mr. Dolan was—and I merely point this out as a fact—President of Bristol-Myers during the time period (“from the first quarter 2000 through the fourth quarter 2001” according to the SEC) that it was found by the SEC to have been doing what was described by the SEC as follows:

…improperly recognizing revenue from $1.5 billion of such sales[“excessive” amounts “ahead of demand”] to its two largest wholesalers and using “cookie jar” reserves to meet its internal sales and earnings targets and analysts’ earnings estimates.

Mr. Dolan was—and I merely point this out as a fact—both Chairman and CEO of Bristol-Myers in 2004 when the company settled with the SEC and paid a $150 million fine for the above.

Mr. Dolan was also—and I merely point this out as a fact—President of Bristol-Myers in 2001 when the company spun off its orthopedics business, Zimmer, in order to ‘focus on its pharmaceutical business’ (the one with the channel-stuffing problem), thereby freeing Bristol-Myers from the distraction of owning one of the great growth businesses in medical device history.

Likewise, Mr. Dolan was—and I merely point this out as a fact—Chief Executive Officer in 2001 when the company spent $7.8 billion to buy DuPont’s drug business, which left most of Wall Street’s Finest scratching their heads at the time, and still does.

And he was also—and I merely point this out as a fact—Chief Executive Officer when the company paid $70 a share for 20% of the about-to-become-scandal-embroiled biotech company Imclone in 2001 (Imclone trades under the ticker IMCL, and is currently $32.78 bid, $33.11 offered).

And here is how the Times described the situation by which Mr. Sherman has apparently outfoxed Mr. Dolan, Bristol-Myers, and its Plavix partner, Sanofi:

As part of the federal investigation, the F.B.I. recently searched the offices of Mr. Dolan and Dr. Andrew Bodnar, his close adviser. Dr. Bodnar visited Mr. Sherman’s Toronto office twice to personally negotiate part of the deal, according to Mr. Sherman.

The Justice Department is believed to be investigating whether Bristol and Sanofi tried to conceal a so-called side deal with Apotex that would not have passed regulatory muster. Both companies have denied doing anything improper.

“Bodnar kept saying that he was in contact with Peter Dolan and Dolan was 100 percent behind whatever he was negotiating,” Mr. Sherman said yesterday. “Whatever he was doing, whether or not there were side deals that were not reported to the F.T.C, I cannot comment on.”…

In the telephone interview yesterday, Mr. Sherman declined to comment on what Apotex had or had not told the government. But he said he never expected the deal to clear regulatory review and went along with it simply to position his company to enter the market with its generic. Mr. Sherman said he viewed efforts by brand-name companies to extend monopolies through settlement negotiations as “outrageous.”

“Our focus was to get the concession that would enable us to launch, when the F.T.C. turned us down,’’ Mr. Sherman said.

Now, somebody please explain to me why Wall Street is “shocked” that Bristol-Myers was, as today’s New York Times article says, “completely outmaneuvered” by a no-name generic drug maker?

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

“Cuban dictator Fidel Castro is still in the hospital with a serious medical condition. Castro said that a half century of Communist rule seemed like a good idea right up until the point he was rushed to the hospital in a ’55 Oldsmobile.”
—Conan O’Brien

“A message delivered on Cuban Television today said that Fidel Castro’s condition is listed as stable, which in Communist countries means he’ll be dead by Friday.”
—Jay Leno

The headlines (and the jokes) these days are all about Fidel Castro, the appears-to-be-dying Cuban strongman who also ranks as the favorite dictator of Connecticut’s own version of “Senator Forehead,” Chris Dodd.

Back in 2002, Dodd went on a “fact-finding” mission to that country, which is such a land of opportunity, equality and social progression that thousands of Cubans every year risk sharks, starvation, and other ways of dying in order to sail to freedom across the Straits of Florida. Dodd’s “fact-finding” mission apparently gleaned some very interesting “facts” courtesy of the thugs in control, because Dodd later gave a speech on the Senate floor criticizing not the Castro regime; but the “bullying tactics” of the United States government.

(In the interest of full disclosure, I should note that one of those who did escape from Cuba across those shark-infested waters on a raft is now a friend of mine, who found freedom, raised a family and built a successful small business in return. He does not, to put it mildly, like Castro. Nor is he a fan of our Senator Forehead—er, Dodd.)

Nevertheless, while the intense speculation regarding Castro’s fate is interesting and even exhilarating, considering the potential for the freeing of 11 million people from dictatorship, there is, south of our border, a far more ominous development in a far more important country—and that is the destruction of Venezuela’s oil producing capacity under its strongman, Hugo Chavez.

Venezuela, as I have mentioned before, has the biggest oil reserves outside the Middle East. Also, as I have mentioned before, it is the fourth largest oil supplier to the United States.

And it is run by Mr. Chavez, who has publicly declared that in order to counteract an impending U.S. invasion of his country, he is buying Soviet fighter jets:

“Do you all know from what distance the Sukhoi (Su-30MK2) can launch?” Chavez asked at a news conference last month. “Two hundred kilometers — that’s to say, an aircraft carrier that stops in the Caribbean. They (the United States) like to stop aircraft carriers in the Caribbean to invade.”

—from the San Francisco Chronicle.

In other words, he’s a mad-man.

And he’s a mad-man who controls a very large and important oil-producing nation—which Cuba is not.

Consequently, the health of an aging dictator in Havana is of far less import to the United States that the ongoing collapse of the Venezuelan oil company (known as PDVSA), upon which rests the entire social policy of the Chavez government. According to a recent and excellent Wall Street Journal article on the issue:

Since Mr. Chávez took power in 1999, he has become PDVSA’s de facto CEO, steering the oil company into political, economic and philanthropic ventures that have distracted it from its core business of finding and producing more oil. The consequences for PDVSA are stark: Output has fallen to an estimated 1.6 million barrels a day from nearly 3 million barrels in 1998.

That’s a 50% drop in less than 10 years, which works out to almost 8% a year. At that rate, Venezuela will be producing less than a million barrels a day in five years—not enough to export anything to the United States, and certainly not enough to feed Chavez’s hungry entitlements programs.

According to the Journal:

The company [PDVSA] must spend at least 10% of its annual investment budget on social programs worth about $1 billion a year. But that figure doesn’t include other spending by the oil giant on projects such as building roads and the government’s subsidized food program. That kind of economic aid totaled $8 billion last year alone, the company says. Palmaven, the PDVSA unit that oversees social spending, is the company’s fastest-growing division.

How much does that leave the Venezuelan oil company for, oh, finding oil? Not very much:

Such attention to economic development, however, gives the company less time and money to devote to its oil business. It spent just $60 million on exploration in 2004, compared with $174 million in 2001, according to the company’s recently published 2004 financial results.

$60 million worth of oil exploration is, almost quite literally, nothing.

Consider this: Venezuela is producing about 1.6 million barrels a day, and it is spending $60 million on exploration. Meanwhile, Apache Corporation, your basic independent oil and gas company, produced 450,000 barrels a day last year—one-third of Venezuela’s output.

Yet Apache spent $3.4 billion—with a “b”—on exploration and development, or 55-times what Mr. Chavez deems necessary.

As the Journal says:

That’s bad news for Venezuela, where current wells are so old that their output falls at an average rate of 23% a year, forcing the company to drill new wells just to keep production steady.

Yes, that’s bad news for Venezuela, but it’s even worse news for the United States, which relies on Venezuela—think about that for a second—for a healthy chunk of its daily needs.

And with this morning’s news about “British So-Called Petroleum” shutting down the North Slope oil field for repairs to the aging pipeline, Mr. Chavez is the guy we want to see being rushed to the hospital “in a ’55 Oldsmobile.”

Not Fidel Castro.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Burger King Posts Loss, Tepid Sales
Results Underscore Concerns Owners Took Big Payments And Left Investors in a Pickle

KKR Appears to Win Philips Unit
Deal With Silver Lake May Exceed $10.25 Billion For Semiconductor Division

What, you might be wondering, do those two headlines have in common? Well, both appeared in today’s Wall Street Journal. And they are both, in my view, two sides of the same coin.

On one side of the coin, Burger King, in its first quarter as a newly public company, missed sales targets set by Wall Street’s Finest—not the thing to do your first quarter out of the gate. The stock traded as low as $12.50 a share, which is something the poor shlubs who bought 25 million shares at $17.00 a share just 77 days ago were not expecting.

As the Journal notes:

The [sales] results underscore concerns that Burger King’s private-equity owners took huge payments while leaving investors with a struggling company that has yet to turn the corner.
Dragging down the earnings was a $30 million management-termination fee that Burger King paid out during the quarter to owners Texas Pacific Group, the private-equity arm of Goldman Sachs Group Inc. and Bain Capital.

That $30 million was not the only vig the private-equity owners skimmed here. As the Journal noted in a previous story on the Burger King deal:

According to company filings, the three firms collected a total of $448 million in dividends and fees from Burger King — approximately what they initially invested. All that took place before the May stock sale, which valued their remaining stakes at $1.8 billion — more than triple their original investment.

Now, in case you’re wondering precisely what these savvy flippers of Burger King bequeathed to that company in return for that near-half billion pre-IPO cash-out—great strategic initiatives, far-sighted new agendas, insightful management ideas—I refer to the story in today’s Journal, which quoted CEO John Chidsey:

Mr. Chidsey told investors Burger King is trying to persuade franchisees to open one hour earlier in the morning and stay open one hour later in the evening while pushing its omelet sandwich to lift breakfast sales. Mr. Chidsey says Burger King plans to more aggressively court children through movie and game promotions.

Wow! Talk about out-of-box thinking! Movie tie-ins! Game promos! Omelets!

Props to Chidsey!

I am being sarcastic, of course. But let’s soberly move on and see where the KKR/Silver Lake story fits in here. Where it fits is this: it is the other side of the private-equity coin, and again I quote today’s Journal:

The bidding for the Philips unit “was brutal,” says one lawyer who represented one of the unsuccessful groups in the bidding. As the rivals bid the price up, “everyone lowered their expectations on returns” they were willing to accept from the transaction. The private-equity business “is really stretching now” to do deals, this person said.

So, we have private-equity buyers “really stretching” to make deals work. And we have at least one of the largest of the recent crop of already-done deals groping for customers by adding omelet sandwiches to its menu and trying to get franchisees to open the doors an hour earlier.

Lower margin of error + lower deal quality = recipe for disaster.

A year or more ago I wrote about the impending energy crisis of 2006. I’m not claiming any particular smarts here—the math (84 million barrels a day worldwide demand + declining supply = crisis) was easy enough that even I could grasp it.

But now I’ll go out on what I think is an even stronger, sturdier limb and call 2007 The Year of the Private-Equity Crisis.

Let the buyers beware.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Not quite a year ago, in the halcyon days when oil was trading at a mere $65 a barrel, I noted (in “Why We Have an Oil Crisis, Or; Wait ‘Til Chuck Schumer Gets a Load of This,” September 25, 2005) that British So-Called Petroleum was spending more on dividends and share repurchases than on finding oil.

Seven billion dollars more last year, in fact.

I am not making that up. The Investors Relations person of British So-Called Petroleum told a group of investors back then that it made no sense to plan its exploration spending based on $65 a barrel crude oil when everybody knows crude oil prices fluctuate—so BP was using a more conservative oil forecast when calculating where and how to invest its unstoppable cash flow.

How conservative? If you guessed $50 a barrel, you would be wrong. If you guessed $40 a barrel, you would also be wrong. Not even $35 a barrel would have been close.

No, the crude oil forecast British So-Called Petroleum was using in its forecasts was $20 to $25 a barrel.

I am not making that up, either.

I suggested that BP should change its name to “British Dividends & Share Repurchases,” my point at the time being that the energy crisis wasn’t like to end so long as the major oil companies felt compelled to return more money to shareholders than they spent exploring for new sources of crude.

Now, you might think that given, 1) the rising political heat, and 2) the fact that crude oil is now over $70 a barrel, the majors would have re-thought their low-prices-forever forecasts and started pushing the pencil on more expensive projects that would help bring more supply on the market.

But just last week, Exxon Mobil announced earnings, and while the headlines in the mainstream media all focused on the so-called obscene profits now falling into the lap of the world’s largest largest oil company, not much has changed: the world’s largest bank—er, oil company—spent $5 billion on capital projects, including oil and gas exploration.

But it spent $8 billion making its shareholders richer.

Personally, I think the U.S. government’s Detroit-Friendly energy policy of the last 30 years has been dead wrong, and we’re getting exactly what we deserve. The windfall profits tax stuff floating around Washington these days is the usual shoot-the-messenger grandstanding my own Senator Forehead, Chris Dodd, practices every time a crisis comes along.

But with Big Oil getting $70 a barrel and giving more of it to shareholders than to drilling companies…they’re asking for it.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

When I was a kid, I knew how to be obnoxious—even if I didn’t know what it literally meant.

My sisters, who were both older and physically bigger than I, sat on either side of me in the back seat of the station wagon, and they made life miserable by hitting me whenever I crossed the weird plastic strips that defined the middle seat of those old cars.

This was in the days before SUVs gave everybody their own fully-reclining, climate-controlled entertainment center, with DVD players popping down from the ceiling and satellite radio on the sound system. It was even before seat belts became mandatory.

Hence, it was impossible for a squirmy kid not to cross one line or the other during the normal course of a ride. I was always getting whacked until the long arm of my father reached backwards over his driver’s seat, probing for the perpetrator of whoever was causing the muffled cries of pain.

Then I discovered the power of words, and learned that by being something called “obnoxious” I could make my sisters’ lives miserable for hours on end.

I didn’t actually know what “obnoxious” meant, but I was good at it. The best part was when they would tell me to “stop being obnoxious,” and I would say, “How can I be obnoxious when I don’t even know what it means?”

That especially drove them crazy—so much so that it was even worth the black and blue marks on my arms. Later, when I learned what “obnoxious” actually meant, I realized that as a seven year old I not only embodied it, I had defined it.

But, forty years later, I have discovered a new definition of the term “obnoxious.” It comes not from a seven year old kid in a car—not even from one of the gangly teenage boys with jeans hanging six inches below their Size 24-inch waists who mysteriously appear in my front yard waiting for my daughter to come out and go long-boarding.

It is this: lady sitting in coffee shop dictating notes into her computer.

The lady in question is not sitting in an isolated corner of the coffee shop, nor is the coffee shop itself devoid of other people attempting to work. Three or four individuals come here most mornings when the doors open at 6 a.m. to get coffee, plug in their laptops, connect to the wireless router and begin the day.

And today is no different, except that it is Saturday, and the lady in question is one we had never seen until she came in an hour ago, got a coffee, plopped herself down at a table smack in the middle of it all and opened a Dell laptop—one of the few Dell laptops which, based on the many web-cam videos zipping around the internet these days, are not spontaneously exploding on a desk while some guy who probably lives alone with his cats and writes feverish blogs DISCLOSING IMPORTANT INFORMATION THE GOVERNMENT HAS BEEN SUPPRESSING ABOUT NAKED SHORT-SELLERS AND AREA 59 happens to be filming it for immediate distribution on YouTube.

There was nothing unusual about this lady’s behavior…until she dug out of her briefcase a large air-traffic-controller style headset and put it on her head, and began dictating into her not-exploding-yet Dell laptop.

Now, this coffee shop is not exactly the best venue to dictate things, if for some bizarre reason you feel the need to dictate instead of typing with your fingers, which even Size 24-inch waist teenage boys can do. It is noisy. James Brown plays over the coffee shop speakers, espresso machines hiss and people stand in line talking. So anybody needing to dictate rather than type couldn’t dictate quietly if they had the basic decency to do so, which this lady does not: she must speak LOUDLY so her still-not-exploding Dell can hear her.

Not only must she speak LOUDLY, she must speak CLEARLY and ENNUNCIATE her words for the computer software program, the designer of which should be forced to sit next to her for the rest of his life, or until the Dell laptop explodes and kills her and him both.

Not only does she speak LOUDLY and CLEARLY and with good ENNUCIATION, she frequently inserts a COMMA or a BACKSPACE into her text. And sometimes she says SCRATCH THAT.

Now, I can get a lot of work done in a crowded coffee shop: the noises all blend together and there’s something about the background buzz that makes it easy to focus. But not when somebody is saying things like COMMA and BACKSPACE and SCRATCH THAT very LOUDLY and very CLEARLY, with very good ENNUNCIATION.

So I quickly resorted to Plan B, which is my version of noise-cancellation technology that always works in a pinch: headphones plugged into an iPod, with Arctic Monkeys played loud.

But if anybody knows the secret code that makes a Dell laptop spontaneously explode while some guy who lives with his cats films it for YouTube, please email me a copy so I can insert it onto her machine while she’s up at the counter getting another blueberry muffin. (Apparently, speaking LOUDLY and CLEARLY and with good ENNUNCIATION for an extended period of TIME causes people to STUFF THEIR FACES with pastries).

Or maybe I’ll sit next to her and start dictating IMPORTANT INFORMATION THE GOVERNMENT HAS BEEN SUPPRESSING ABOUT NAKED SHORT-SELLERS AND AREA 59 into the flower vase on the table.

Yes, that would be obnoxious, wouldn’t it?

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

“What that means for investors is a very consistent, highly margined, very predictable cash-flow stream,” Glenn Christenson, chief financial officer, said in an interview. “We’ve been able to give guidance all the way out to 2007.”

—Barron’s, July 24

Thus the CFO of Station Casinos dismissed Barron’s concerns about whether the business model and share price of Station Casinos could endure a cyclical—or worse—decline in the as-far-as-we-know-still-booming Las Vegas economy, in an article called “Does the House Always Win?” published just this weekend.

When I see or hear that kind of unadulterated confidence in financial forecasts from a guy who ought to know better than to pretend to be able to predict precisely what the future will bring, good or bad, I buy it about as much The Beaver’s mother used to buy it when Eddie Haskell appeared at the door saying:

“Hello Mrs. Cleaver, that’s a beautiful dress you’re wearing. Is Wallace home?”

And sure enough, today I read that the very same CFO of the very same company is revising the “guidance all the out to 2007,” as follows:

Today:
The Company is also reiterating EBITDA guidance for fiscal 2007 of approximately $630 million to $670 million and updating EPS guidance to $2.53 to $2.95. This guidance assumes that the Phase II master-planned expansion of Red Rock opens in early 2007, and further assumes an effective tax rate of 37.2% and 61 million diluted shares outstanding.

May 4, 2006:
The Company is reiterating EBITDA guidance for fiscal 2007 of approximately $630 million to $670 million and updating EPS guidance to $2.65 to $3.05. This guidance assumes that Phase II of Red Rock opens in early 2007, and further assumes an effective tax rate of 37.2% and 63 million diluted shares outstanding.
While not a whopping reduction—EBITDA stays the same—the net earnings per share range declines at both ends, despite the boost from an implied acceleration in share repurchases.

So “Back in the Day” apparently no longer means “6 Months Ago.”

It means 60 days or less.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

“Back in the day,” as an expression, is making a resurgence the origins of which I can’t fathom.

My daughter and her friends suddenly began using it a month or two ago, and this morning I saw it twice in the same article in one of the major-but-slowly-becoming-minor New York newspapers. (I imagine some character on South Park or Desperate Housewives has been using it as a catch phrase—the way most language gains broad usage these days.)

When my daughter’s friends use the expression they are not, I should point out, conjuring up images from early America or even the Eisenhower era. They are usually referring to as far back as, oh, six months ago.

In teenage-years, of course, six months does seem to pass in an agonizingly slow crawl, such that teens look forward to marking the half-years between birthdays in order to be able to round up their ages—15 plus six months becomes 16, 17-and-a-half becomes 18, and so forth.

Adults, meanwhile, begin to face their own mortality at warp speed, because six months goes by like a weekend. To those of us over 50, “back in the day” really does mean “back in the day.”

In any event, back in the day—and by that I mean 25 years ago—Caterpillar Tractor (“Cat” to Cramer’s Mad Money home-gamers) was what we called a classic cyclical stock in that it was perenially supposedly going to earn $5.00 a share in earnings next year. (Adjusted for stock splits, that old $5.00 earnings number equates to a mere $1.25 today.)

But “next year” never seemed to happen for Cat, at least not for many next years, thanks to persistently high interest rates and the rise in Japan’s Komatsu—which played Toyota to Caterpillar’s General Motors. In the face of eternal optimism from Wall Street’s Finest, Cat’s stock languished for, it seems, ever.

I remember those days because I had been given the responsibility for following Cat along with other construction and equipment companies, and Cat was the easiest company in the world to keep track of, because all you had to do was take last year’s reports from the Street, cross out the date and replace it with the current year, and you had a pretty serviceable piece on the company.

Then, the world changed—thanks, I think, to the collapse of the Berlin Wall, which set off a decade-plus worldwide construction boom and began to lift many formerly leaky cyclical boats. Cat’s management, sharpened by their battles with Komatsu, did better than most, steering the newly-sleekened vessel into uncharted waters of earnings well above the old $5.00-per-share glass ceiling and rewarding shareholders with a ten-fold increase in the stock price.

All of which came to mind this week on the heels of the Caterpillar quarterly earnings call, during which Cat management unreservedly expressed its view that the boom-times look set to continue, housing slowdown or not.

Said CEO Jim Owens right at the outset:

Bottom-line, we had a suburb second quarter. We raised our outlook for the full year and we don’t see 2006 as a peak.

This was followed by the investor-relations person’s similarly “upbeat” assessment:

Another interesting statistic…ROS [return on sales, or net margin] would be the best…for any full year since 1966.

To put 1966 into perspective — that was three years before man walked on the moon but unfortunately 20 years since the Cubs last appeared in the World Series; and as a Cub fan that’s a statistic I track.

This is the kind of high-fives chatter that makes somebody who remembers what “back in the day” actually means a little nervous.

It wasn’t that long ago—six months, in fact—that the CEOs of certain publicly traded homebuilders were declaring an end to the vicious housing cycles of years past and complaining about the benightedly outdated low P/E multiples Wall Street was according their stocks.

Check out the unadulterated bullishness expressed by D.H. Horton CEO Don Tomnitz in an earnings call “back in the day,” just six months ago…

January 19, 2006:

First, we would like to thank all of our employees for another great quarter. Specifically, we wish to express appreciation for our sales people for a fantastic quarter of sells relative to our competition. Your 19.2% first quarter sales increase is the leader in the clubhouse. D.R. Horton, America’s Builder, the largest homebuilder in America for the fourth consecutive year, continues to distance itself from the competition.

Our first quarter of fiscal 2006 was another record quarter as we once again generated double-digit increases in new sales orders, revenues, net income, and EPS, while continuing to expand our operating margins and growing our bottomline faster than the topline.

Now compare that to his more recent assessment of the company’s prospects, from just last week…July 20, 2006:
We would like to start off by thanking our people for their hard work during a time when the market conditions are more difficult in the homebuilding industry. We’ve experienced a changing home sales environment since the beginning of the calendar year which became much more evident during our third quarter.

The current housing environment is characterized by an increase in the use of sales incentives in certain markets, higher than normal cancellation rates, and an increase in the supply of new and existing homes for sale. It also reflects a decrease in consumer sentiment. As some home buyers are fence-sitters today pending price stabilization and respective markets.

There is more—much more—as follows.Here are comments from Tomnitz on Horton’s expected homebuilding unit sales for 2006…
Back in the day:

…part of the issue is…that we are staffed both on the homebuilding side as well as the financial services side, to close 58,000 units this year. And as Stacey has mentioned before, we will close 35 to 40% of those in the first half of the year and the remainder in the second half of the year.

And it’s not something that we can get day laborers to come in and do our work. We were staffed up to hit that 58,000 target, so we’re telling you at the end of the year when we close 58,000 units, our SG&A will be 10% or less.

Today:
And if you go back to fiscal year ’05 where we closed 51,172 homes, and we’re basically looking forward to this year of 50,000 homes then I think you can sort of back into our SG&A levels and our overhead and that sort of thing that were at fiscal year ’05, and clearly that’s what our goal is to get back to FY ’05 cost levels.
Now, I do not mean to pick on Mr. Tomnitz: his early-2006 bullishness was no more or less wild-eyed than any other homebuilding executive I heard on any conference call or read in any interview.And I do not mean to suggest that, at its current price, the shares of D.H. Horton are not of value. I only mean to point out how quickly things can change in a cyclical business.Here is his assessment of various markets, including California and Florida…
Back in the day:

We believe that if you look at California, that we have strong belief that our California margins will continue to exceed the Company average margins, which makes that a good investment for us. As we move money into that D.C. market and in the Florida market, those companies have consistently, over the last five years, earned a higher than average Company gross margin. And so as a result, we believe that as we move money into D.C. and Florida and the northeast that their margins will be every bit as good as we have been experiencing in California over the last four or five years.

Today:

California continues to get softer and incentives continue to increase. You can see by our sales decrease in Florida which has been a very good market, it’s 25% down. That market is still experiencing increasing incentives and even though our Arizona market, our Phoenix market was up 11 %, I can tell you that market is going to get softer going forward. So we’re looking at this future market with very very clear vision with no rose colored glasses on and we don’t want to paint a picture of anything else other than what we’re actually seeing in the marketplace out there. And if we’re going to get punished and we’re going to get pummeled because of the fact that we’re being more accurate than some people think we need to be, so be it.
Finally, his current overall mood…Back in the day:Right now we’re feeling confident…

Today:

…the market right now is weak. We think the market could get weaker going forward and …we’re going to position ourselves for a flat ’07 over ’06 and we’re going to assume that it even gets tougher in ’07.

And as you and I have talked privately one thing that I know, every time we’ve gone into a downturn in the homebuilding industry they’ve always been longer and deeper than we’ve all imagined so we’re preparing for the worst, and we think this one will be longer and deeper than just the last six months.

Which is why the unbridled confidence expressed by Caterpillar management on that equally cyclical company’s recent conference call would, if I owned the shares, make me nervous:

Well, certainly we have some of the strongest order backlogs we’ve had in modern history in the larger end of our machine and engine and turbine product line. So we like all of our products….

And the key market segments that we serve that we have been highlighting that we think have continued strength — like mining, global oil and gas and other energy sectors like coal and the Canadian tar sands — all tend to be relatively large end of the line oriented.

It seemed like it was only six months ago—that is to say, according to my teenager, “back in the day”— the homebuilders had the largest order backlogs in their history, too.Hey, it was only six months ago!

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Dell Expects Lower Revenue and Earnings Per Share in Q2
Friday July 21, 7:30 am ET

That’s the headline on the press release that hit the tape this morning, and it pretty much says it all: Dell, as we Wall Street types like to say in our sophisticated technical financial lingo, just puked the quarter.

Call me an irrelevant data point in a vastly larger scheme of things, but I can’t help think the root of the problem goes back not merely to the resurgence of HP under Mark Hurd, but to the collapse of Dell’s customer support—discussed in “Dell Screws Up a Good Thing” this past January.

The funny thing about that piece—aside from the huge volume of similar tales of woe from readers—was the call I received from a guy named Rob at Dell who wanted to make up for the whole experience by reimbursing me the hundred-plus bucks I’d spent getting the technical support Dell no longer wanted to provide, as well as giving me his direct phone number in case I needed any help in the future.

Rob was very nice, and it was very kind of Dell to reimburse me for the expense, but, not being a dog, I found it impossible to feel kindly toward Dell even after Rob’s nice call and follow-up emails.

Fellow dog-owners know that if Dell’s tech support people had abused my dog Lucy for five hours—keeping her on hold, switching her to another line, asking her to pay for tech support she’d already paid for—Rob would have only had to offer Lucy a Milk-Bone, or scratch her back, or smile, and Lucy would have instantaneously gone from Sulking Dog to Euphoric Dog, wagging her tail, rolling over, licking Rob’s face and generally promising her love forever and ever and ever until the end of time and beyond.

But people, unlike dogs, don’t forget so easily, and while I appreciated the hundred bucks and the direct phone number, it didn’t change a thing about my feelings towards Dell.

Interestingly enough, Dell’s efforts in adding people like Rob are mentioned in today’s release:

Dell continues to make significant investments in customer service and support capabilities. The company is seeing positive results and will continue to invest to drive a superior customer experience.

One more thing: unspoken in the press release is any impact from the current option-related problems engulfing many Silicon Valley companies. While Dell is not based in Silicon Valley, it has used options extensively as a key component of its employee compensation.

According to my Bloomberg, Dell spent more than $15 billion in the last four fiscal years buying back stock—yet fully diluted shares declined a mere 200 million shares over that time, thanks to the company’s willingness to dilute its shareholder base with large option grants. This is all perfectly legal, of course, but as options lose their place in the hearts and minds of investors, Dell may have to figure out a better way to keep costs down.

I suspect Dell’s problems are not over—no matter how many Robs they bring in.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Also, on the Project Panama, I was wondering if you could talk about specifically what’s changed since the analyst day, when it seems like you were pretty confident in the timing, to now.

So asked one of Wall Street’s Finest on last night’s Yahoo! earnings call.

Or, I should say, lack-of-earnings call, because earnings per share for Yahoo! net of stock-based compensation—meaning real, live, actual, after-tax, after-employee-related expenses—increased a whopping penny from last year’s 10 measly pennies of real, live, actual, after-tax, after-employee-related expenses earnings per share.

That’s right: Yahoo!—which trades at a hyper-growth P/E multiple of 67—grew net earnings per share by 10%.

But the point of this is not to rehash the flakey “non-GAAP adjusted net income” measure preferred by the dot-coms, both those still alive and those long dead. It is to follow up on yesterday’s “Reading Between the Lines” by pointing out a more timely opportunity to read-between-the-lines, which was presented to us on last night’s Yahoo call.

It came early in the Q&A, when UBS’s Ben Schachter asked the question posted above, about the announced one-quarter delay in Yahoo’s “Project Panama,” the so-called “next-generation user experience” in search that had been expected shortly.

To Schachter’s question, the company’s Chief Operating Officer Dan Rosensweig responded with a hilariously “upbeat”—as Wall Street’s Finest love to describe things—assessment. Note how “extremely pleased” everybody at Yahoo! appears to be about the project:

On the question of Project Panama and the timing, Terry did mention today that we are going to move it a quarter away. We are two months further into the process. We’re actually extremely pleased with the process. We’re extremely pleased with the product, the stability, as you saw from the 175 advertisers who have a chance to see it and comment. We think we have picked the right feature sets; they are extremely pleased with it.

Did he mention that they are all “extremely pleased”?

You can imagine what went on during the pre-call prep among the top Yahoolians:

“Now, how should we spin this delay?”

“I was thinking, ‘We are disappointed but remain upbeat’?”

“‘Upbeat’ is good, but ‘disappointed’ is bad. Very bad.”

“Right. ‘Disappointed’ is extremely bad. How about ‘We are cautiously upbeat’?”

“No—‘cautious’ is bad.’ They hate ‘cautious.’”

“Right. Hate ‘cautious.’ And ‘upbeat’ sounds trite. How about ‘Pleased’?”

“Better yet, ‘Extremely pleased….’”

“‘We are extremely pleased…’”

“And repeat it at least three times, just so they get it.”

After using “extremely pleased” the required three times, Rosensweig then got down to cases, which is that Project Panama isn’t yet ready for prime time:

But as we got further along in the process, we wanted to make sure that we did it right. We don’t manage the company for a particular quarter, so we focused on making sure that we did all the necessary testing. We’re going through testing now. Things seem to be looking good. But we do, for example, over 20,000 different tests to make sure that these things are right, stable, it’s the right advertiser experience, the advertisers get what they expect. We would rather take the extra time to make sure that we do it right, rather than try to rush into a quarter. This, of course, remains our top priority.

Reading between the lines, I’d say the most interesting single qualifier is “things seem to be looking good.” Worse, this is followed by the factoid that Yahoo! is performing “20,000 different tests” on it.

If I had to make a bet, I’d bet Project Panama doesn’t happen even in the revised time-frame.

Is this life-threatening to Yahoo!? Maybe to the stock’s P/E multiple (and there has been at least one downgrade this morning), but not to the business. After all, nothing in life or in business goes as planned—stuff happens.

Stuff happens to Joe Blow and it happens to Wall Street’s Finest; it happens to bad companies I won’t name and it happens to great companies like Yahoo!

But why can’t anybody just ever come right out and say it?

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.