Example: oil/ore tanker operator Frontline Ltd. Today, it got an upgrade from "Underperform" to "Market Perform" by an analyst at FBR Capital. If this news helped the stock, it didn't help much: Frontline lost 4.26% to close at $22.27.
Of course, the upgrade wasn't much of one. The analyst said that Frontline is no longer squeezed for cash, and its "above-average day rates" are making the company's prospects look less doleful. The old target for the stock was $14, and the new target is $23 - only slightly above where Frontline stock ended up.
Still, it shows that upgrades don't always have the potency sometimes ascribed to them. That's good in a way, because an immediately ineffectual upgrade gives people time to act on it without chasing a mini-bubble. It's kind of hard of traders, though.
Monday, August 31, 2009
Daily Wrapup For August 31st
Trading ended for August today, and the last day wasn't exactly a good day. News that the government of China is planning to cut back on bank lending sent the Shanghai market plummeting; so did the American market. On fear of interrupted global recovery, the three major averages all opened up with more than 0.5% losses. They fell further before 10 AM ET, to recover somewhat in early-mid morning. Most of the rest of the day was spent with the averages in trading ranges. A shortlived rally, beginning at about 2:30 PM ET, was largely erased but was replaced with a more durable rally starting an hour later. Thanks to a end-of-day added push, none of the three averages closed below 1.0% loss territory. The Dow closed with a 0.50% drop, the S&P declined 0.81%, and the NASDAQ ended the trading month with a 0.97% loss on the day. Oil also plummeted on the same news from China, as the connection between China's slowing economy and less demand for oil was quickly seen. Light sweet crude for October delivery plummeted $2.78 per barrel to end the day at $69.96.
The lowest-quintile cut-off also dropped today, from Friday's 11.95 to 11.80. Due to a readjustment, the S&P dividend yield cut-off remained unchanged at 2.59%. Once ETFs and stocks with market caps of less than 500M were gotten rid of, along with ones possessing greater than 10% yields, the Low P/E Bin was left with ninety-nine stocks for a drop of one from Friday. Here are the changes in the Bin, as dash-listed below:
Arrivals:
- China Petroleum & Chemical Corp.
- Cooper Industries, Ltd.
- France Telecom SA
- Hubbell Incorporated
Departures:
- FPL Group, Inc.
- Plains All American Pipeline, LP
- PriceSmart, Inc.
- SCANA Corporation
- Williams Pipeline Partners LP
All of the Arrivals got back in through drops in their stocks. The first Arrival is the only new one. China Petrolem and Chemical is an integrated major oil company; given the troubles both in the Shanghai and oil markets, it's not that surprising to see it show up in the Bin. The next Arrival, circuit protection device and tool maker Cooper Industries, had the worst stock decline of the four. A 4.10% drop, largely caused by the company being booted out of the S&P 500, brought its P/E below the Bin cut-off. France Telecom got back in for the same reason, even if its stock only dropped 1.15%. The final Arrival also returned for the same reason as the other three. Hubbell Inc., a maker of electrical components used in construction of homes/offices and components for electrical power transmission, hasn't been in the Bin for more than a month. A 3.24% drop in its stock brought it back.
A similar unanimity exists for today's Departures: all of them got out because the P/E cut-off fell below their own. Only one, liquid petroleum products storer and transporter Plains All-American Pipeline, saw its stock price rise today. The others declined, but didn't outpace the fall in the cut-off. Florida-based electric and natural gas utility FPL Group, international warehouse-club operator PriceSmart, North and South Carolina based utility SCANA, and natural gas transporter/storer Williams Pipeline all saw their stocks decline less than 1% today; those falls, as noted just above, weren't enough to keep them in the Bin.
Brookfield Properties Corp., a Canadian commercial real-estate company with holdings in several major North American cities, sent out a double annoucement today; both concerned a new preferred-stock offering. The first annoucement, made early in the afternoon, said that Brookfield would be selling C$150 million worth of preferreds yielding 6.75% for the first five years of their existence at C$25 per share. The second announcement, made after markets closed, upped the amount to C$250 million; the terms are the same. It's not every day that a share offering is bumped up 67% a few hours after the initial allotment has been announced. Brookfield common didn't do all that well today, suffering the same fate as other recent high-flyers. The stock dropped 3.35% to $10.97, even though dilution of this issue wasn't a factor. It was just a bad day for stocks that had rocketed up in the last couple of months; Brookfield common has been one of them.
That's all for today's Daily Wrapup. Thanks for reading, and may patience be your salve (if not salvation.)
The lowest-quintile cut-off also dropped today, from Friday's 11.95 to 11.80. Due to a readjustment, the S&P dividend yield cut-off remained unchanged at 2.59%. Once ETFs and stocks with market caps of less than 500M were gotten rid of, along with ones possessing greater than 10% yields, the Low P/E Bin was left with ninety-nine stocks for a drop of one from Friday. Here are the changes in the Bin, as dash-listed below:
Arrivals:
- China Petroleum & Chemical Corp.
- Cooper Industries, Ltd.
- France Telecom SA
- Hubbell Incorporated
Departures:
- FPL Group, Inc.
- Plains All American Pipeline, LP
- PriceSmart, Inc.
- SCANA Corporation
- Williams Pipeline Partners LP
All of the Arrivals got back in through drops in their stocks. The first Arrival is the only new one. China Petrolem and Chemical is an integrated major oil company; given the troubles both in the Shanghai and oil markets, it's not that surprising to see it show up in the Bin. The next Arrival, circuit protection device and tool maker Cooper Industries, had the worst stock decline of the four. A 4.10% drop, largely caused by the company being booted out of the S&P 500, brought its P/E below the Bin cut-off. France Telecom got back in for the same reason, even if its stock only dropped 1.15%. The final Arrival also returned for the same reason as the other three. Hubbell Inc., a maker of electrical components used in construction of homes/offices and components for electrical power transmission, hasn't been in the Bin for more than a month. A 3.24% drop in its stock brought it back.
A similar unanimity exists for today's Departures: all of them got out because the P/E cut-off fell below their own. Only one, liquid petroleum products storer and transporter Plains All-American Pipeline, saw its stock price rise today. The others declined, but didn't outpace the fall in the cut-off. Florida-based electric and natural gas utility FPL Group, international warehouse-club operator PriceSmart, North and South Carolina based utility SCANA, and natural gas transporter/storer Williams Pipeline all saw their stocks decline less than 1% today; those falls, as noted just above, weren't enough to keep them in the Bin.
Brookfield Properties Corp., a Canadian commercial real-estate company with holdings in several major North American cities, sent out a double annoucement today; both concerned a new preferred-stock offering. The first annoucement, made early in the afternoon, said that Brookfield would be selling C$150 million worth of preferreds yielding 6.75% for the first five years of their existence at C$25 per share. The second announcement, made after markets closed, upped the amount to C$250 million; the terms are the same. It's not every day that a share offering is bumped up 67% a few hours after the initial allotment has been announced. Brookfield common didn't do all that well today, suffering the same fate as other recent high-flyers. The stock dropped 3.35% to $10.97, even though dilution of this issue wasn't a factor. It was just a bad day for stocks that had rocketed up in the last couple of months; Brookfield common has been one of them.
That's all for today's Daily Wrapup. Thanks for reading, and may patience be your salve (if not salvation.)
Saturday, August 29, 2009
Lockheed Martin: Dip Or Pause?
A few days ago, Jonathan Goldberg posted a bullish analysis of Lockheed Martin. He used his equity value per share model, combined with a 3% growth assumption, to come up with an intrinsic value of $108.50 per share. Since its current price of $74.95 is slightly below Mr. Goldberg's margin-of-safety entry point of $76, he concluded that it was undervalued.
This post is intended to be a complement to his own analysis.
Lockheed Martin is a well-known defense contractor, with about 93% of its revenues coming from the U.S. government. Its four segments are Electronic Systems, Information Systems and Global Services, Aeronautics, and Space Systems. The company has done rather well for itself over the last ten years, with the notable exception of 2000 and 2001. 10-year return on equity, as calculated by dividing a 10-year sum of net incomes by a 10-year sum of shareholders' equities, is 18.26% for 1999 t0 2008. Growth in continuing-operations earnings per share, as calculated by a brute-force method using 2008 and 1999's EPSs, was 15.26% over the same timeframe. Long term, the company's grown a fair bit.
Its presence in the Low P/E Bin could be explained by a combination of the recent bear market, creating fears that Lockheed's earnings will implode, and a new Democratic Administration that might cut back on defense expenditures. The first risk factor has not shown up in Lockheed's earnings, and the second has not made itself evident yet. There's only been a bit of an earnings slump relatively recently.
Nevertheless, Lockheed's performance in 2000 and '01 was disappointing. Continuing-operations EPS were -$1.05 and $0.18 respectively. Another major defense company, General Dynamics, suffered no such blow to its own earnings in that time. General Dynamics is no longer in the Bin, but recently it was.
A glance at Lockheed's 10Ks for the period show why the company got itself into the trouble that it did. A large part of the losses were the result of an abortive attempt to get into global telecommunications. It could have been caused by tech-bubble mania back then. No similar effort has been launched by the company as of now; as noted above, almost all of its revenue comes from the U.S. government. Given the company's standing as a defense contractor, that 93% is indicative of Lockheed management sticking to the company's knitting. They venturing beyond that confine didn't work out too well last time. As of 2000, only 70% of Lockheed's sales were made to the U.S. government. A year later, it had wound down its global-communications segment. It seems that Lockheed's earlier troubles taught it a lesson, subsequently learned.
Its latest earnings have seen somewhat of a slump. As of June 30th, according to its latest 10-Q, 2Q '09 diluted EPS were $1.88 as compared with 2Q '08's $2.15. Diluted EPS for the first half of '09 were $3.55 as compared with $3.90 in '08. In 2008, the last year of EPS growth, all quarterly EPSs were above the EPSs of the same quarters a year ago.
The order backlog is also rising, which ostensibly is good news. The backlog was virtually steady from 2001 to 2007, though: those years saw EPS growth much higher than the 10-year results. The last jack-up of the backlog was in 2003, and the following year saw EPS growth of 20.9%. On the other hand, the backlog grew smartly in 2000 and 2001. Both years were real disappointments for Lockheed. I don't believe that next year will be a repeat of 2001 because Lockheed has not moved beyond its core business this time 'round. I include this discussion to point out that a rising backlog isn't always as good as it seems.
Disappearance in EPS growth explains why Lockheed's in the Bin. Also, the company's growth over the last eight years came in large part from the wars the U.S has been in. Anyone buying this company as a growth engine at a discount is assuming that there will be similar compelling reasons for the U.S government to buy Lockheed's higher-margin products. It's an assumption that has good odds behind it, as post-WWII U.S. history shows, but it may not hold up during this Administration. The trouble with Lockheed is that its 3.04% dividend yield isn't that great, so there's not much pay for waiting. It has increased its dividend every year in the last six, but that growth took place in tandem with EPS growth. That growth can't be expected in the near future, even though its dividend is solidly covered.
Should this Administration and Congress turn out to be dovish, then Lockheed's earnings won't do all that much. However, there's nothing on the horizon to suggest future disaster will afflict the company. It may prove to be a churner, but there's no sign it's a disaster in the making.
This post is intended to be a complement to his own analysis.
Lockheed Martin is a well-known defense contractor, with about 93% of its revenues coming from the U.S. government. Its four segments are Electronic Systems, Information Systems and Global Services, Aeronautics, and Space Systems. The company has done rather well for itself over the last ten years, with the notable exception of 2000 and 2001. 10-year return on equity, as calculated by dividing a 10-year sum of net incomes by a 10-year sum of shareholders' equities, is 18.26% for 1999 t0 2008. Growth in continuing-operations earnings per share, as calculated by a brute-force method using 2008 and 1999's EPSs, was 15.26% over the same timeframe. Long term, the company's grown a fair bit.
Its presence in the Low P/E Bin could be explained by a combination of the recent bear market, creating fears that Lockheed's earnings will implode, and a new Democratic Administration that might cut back on defense expenditures. The first risk factor has not shown up in Lockheed's earnings, and the second has not made itself evident yet. There's only been a bit of an earnings slump relatively recently.
Nevertheless, Lockheed's performance in 2000 and '01 was disappointing. Continuing-operations EPS were -$1.05 and $0.18 respectively. Another major defense company, General Dynamics, suffered no such blow to its own earnings in that time. General Dynamics is no longer in the Bin, but recently it was.
A glance at Lockheed's 10Ks for the period show why the company got itself into the trouble that it did. A large part of the losses were the result of an abortive attempt to get into global telecommunications. It could have been caused by tech-bubble mania back then. No similar effort has been launched by the company as of now; as noted above, almost all of its revenue comes from the U.S. government. Given the company's standing as a defense contractor, that 93% is indicative of Lockheed management sticking to the company's knitting. They venturing beyond that confine didn't work out too well last time. As of 2000, only 70% of Lockheed's sales were made to the U.S. government. A year later, it had wound down its global-communications segment. It seems that Lockheed's earlier troubles taught it a lesson, subsequently learned.
Its latest earnings have seen somewhat of a slump. As of June 30th, according to its latest 10-Q, 2Q '09 diluted EPS were $1.88 as compared with 2Q '08's $2.15. Diluted EPS for the first half of '09 were $3.55 as compared with $3.90 in '08. In 2008, the last year of EPS growth, all quarterly EPSs were above the EPSs of the same quarters a year ago.
The order backlog is also rising, which ostensibly is good news. The backlog was virtually steady from 2001 to 2007, though: those years saw EPS growth much higher than the 10-year results. The last jack-up of the backlog was in 2003, and the following year saw EPS growth of 20.9%. On the other hand, the backlog grew smartly in 2000 and 2001. Both years were real disappointments for Lockheed. I don't believe that next year will be a repeat of 2001 because Lockheed has not moved beyond its core business this time 'round. I include this discussion to point out that a rising backlog isn't always as good as it seems.
Disappearance in EPS growth explains why Lockheed's in the Bin. Also, the company's growth over the last eight years came in large part from the wars the U.S has been in. Anyone buying this company as a growth engine at a discount is assuming that there will be similar compelling reasons for the U.S government to buy Lockheed's higher-margin products. It's an assumption that has good odds behind it, as post-WWII U.S. history shows, but it may not hold up during this Administration. The trouble with Lockheed is that its 3.04% dividend yield isn't that great, so there's not much pay for waiting. It has increased its dividend every year in the last six, but that growth took place in tandem with EPS growth. That growth can't be expected in the near future, even though its dividend is solidly covered.
Should this Administration and Congress turn out to be dovish, then Lockheed's earnings won't do all that much. However, there's nothing on the horizon to suggest future disaster will afflict the company. It may prove to be a churner, but there's no sign it's a disaster in the making.
Friday, August 28, 2009
Biovail Gets Turfed Out Of Court
Canada has stricter anti-defamation laws and customs than the United States, so it's not that much of a surprise that a Canadian company used to Canadian norms would have its defamationesque lawsuit thrown out by an American court. That was the fate of a lawsuit launched by drug-delivery technologies maker Biovail Corp. against SAC Capital Advisors, in which Biovail accused SAC of producing misleadingly negative research for the benefit of SAC's short positions of Biovail stock.
It seems that Biovail hasn't exactly been an obedient corporate citizen with respect to the regulators, although that factor didn't influence Judge Goldman's dismissing its lawsuit. He said that he lacked jurisdiction, and that Biovail had failed to meet its burden of showing entitlement to damages.
As it turns out, Biovail is one of those companies that's claimed as a victim of so-called naked shorting. As a related post in Blogging Stock points out, the company's checkered past doesn't make it much of a poster child for any campaign against naked short sellers.
The headquarters of the naked-shorter watch is, of course, Patrick Byrne's Deep Capture Website. Those not impressed with the crew (or the company Mr. Byrne's CEO of, Overstock.com) label those guys conspiracy theorists.
Biovail is the first Low P/E Bin company associated with this crew. Those unenchanted by the Deep Capture world emphasize that cries of 'abusive shorters' tend to be made by companies whose stocks basically deserve to be shorted, or at least avoided. Ironically, Biovail has the highest 52-week change in the entire Bin: up 35.81%.
Update: Subsequent to the original part of this post, Biovail has dropped 6.92%. This item provides a certain closure to the tale: one of the defendants in that thrown-out lawsuit, analyst David Maris, has moved on to yet another firm. He had initiated coverage of Biovail with a "sell" recommendation while still with Bank of America, and was dropped out of the lawsuit when he left BoA.
That last point, an analyst might do well to take to heart.
Also, Law.com has an excerpt of Judge Goldman's reasoning, in which he stated that a mere drop in share price does not constitute damages under the rubric of trade libel. In order to claim damages in this manner, a company has to prove that it was cut off from access to credit, or had another kind of financing ruined, as a result of the stock price drop. Biovail didn't.
[I got this article from HedgeCo.net]
It seems that Biovail hasn't exactly been an obedient corporate citizen with respect to the regulators, although that factor didn't influence Judge Goldman's dismissing its lawsuit. He said that he lacked jurisdiction, and that Biovail had failed to meet its burden of showing entitlement to damages.
As it turns out, Biovail is one of those companies that's claimed as a victim of so-called naked shorting. As a related post in Blogging Stock points out, the company's checkered past doesn't make it much of a poster child for any campaign against naked short sellers.
The headquarters of the naked-shorter watch is, of course, Patrick Byrne's Deep Capture Website. Those not impressed with the crew (or the company Mr. Byrne's CEO of, Overstock.com) label those guys conspiracy theorists.
Biovail is the first Low P/E Bin company associated with this crew. Those unenchanted by the Deep Capture world emphasize that cries of 'abusive shorters' tend to be made by companies whose stocks basically deserve to be shorted, or at least avoided. Ironically, Biovail has the highest 52-week change in the entire Bin: up 35.81%.
Update: Subsequent to the original part of this post, Biovail has dropped 6.92%. This item provides a certain closure to the tale: one of the defendants in that thrown-out lawsuit, analyst David Maris, has moved on to yet another firm. He had initiated coverage of Biovail with a "sell" recommendation while still with Bank of America, and was dropped out of the lawsuit when he left BoA.
That last point, an analyst might do well to take to heart.
Also, Law.com has an excerpt of Judge Goldman's reasoning, in which he stated that a mere drop in share price does not constitute damages under the rubric of trade libel. In order to claim damages in this manner, a company has to prove that it was cut off from access to credit, or had another kind of financing ruined, as a result of the stock price drop. Biovail didn't.
[I got this article from HedgeCo.net]
Daily Wrapup For August 28th
The week ended with the three major averages stuck in a holding pattern. After opening with all three in positive territory, particularly the NASDAQ, the averages began a drift downwards starting at about 10 AM ET. The University of Michigan consumer confidence index, released at about that time, showed a "Consumer Mood at Four-Month Low." Quantitatively, the Reuters-University of Michigan index dropped from 66.0 to 65.7. Oddly, it contradicted the Conference Board's own number released three days ago; the latter exhibited a surprising leap upwards. Suffice it to say that the current picture consumer-wise is murky. Other consumer-related data released today showed a small rise in spending combined with flat incomes for July.
The downdrift in the three major averages continued to just before 12:30 PM ET, when they all showed losses. The rest of the day saw a slow trundle upwards, although faster for the NASDAQ. At the end of the regular trading day, the Dow was down 0.38%, the S&P 500 was down 0.20%, but the NASDAQ was up 0.05%. Encouraging results from Dell before the bell, along with the recent performance of the NASDAQ itself, encouraged speculation that tech might save the overall market from an expected September-October correction.
The lowest-quintile P/E cut-off rose from yesterday's 11.92 to today 11.95. Also rising was the yield cut-off, being the S&P dividend yield, which inched up a basis point to 2.59%. Once ETFs and stocks with less than 500M market cap were thrown out, along with ones that yield more than 10%, the Low P/E Bin was left with one hundred stocks for a drop of three from yesterday. Here are the changes in the Low P/E Bin, as dash-listed below:
Arrivals:
- PriceSmart, Inc.
- Snap-on Incorporated
Departures:
- Cooper Industries, Ltd.
- France Telecom SA
- General Dynamics Corporation
- PartnerRe Ltd.
- Safety Insurance Group, Inc.
Both Arrivals have been in the Bin before, with one of them straddling the borderline. The stock of PriceSmart, a chain of warehouse shopping clubs, dropped 0.67% today; that drop brought its P/E down below the lowest-quintile cut-off. The second Arrival, tool maker Snap-On, got back in for the same reason; its stock dropped 0.62%.
Three of the five Departures got out because their yields dropped below the S&P 500 yield cut-off. France Telecom, defense company General Dynamics, and international reinsurer PartnerRe were the three. Of the other two, only one got out of the Bin due to a rise in its stock. Cooper Industries saw a gain of 1.79%, putting its P/E above the Bin cut-off. On the other hand, the stock of Safety Insurance dropped 0.92% today. That fall put its market cap below the 500M cut-off.
J.P. Morgan's upgrade of Compass Minerals International seemed to have set off a cascade. This last week, two other investment firms have added Compass to their watch lists and assigned it a "buy" and an "outperform" respectively. The first firm was KeyBanc, which initiated coverage last Monday with the "buy." The second is BMO Capital Markets, which initiated coverage today with the "Outperform." The latter recommendation notes that winter's a'comin, and expects the sulfate of potassium market to pick up. [It also assumes normal winter conditions.] Considering that two firms have already followed in his or her wake, the J.P. Morgan analyst responsible has something to eat out on.
That's all for today's Daily Wrapup. Thanks for reading, and have a restful weekend - whether it be hot or cold.
Disclosure: I'm holding Compass Minerals in the actively-managed Marketocracy mock fund I run.
The downdrift in the three major averages continued to just before 12:30 PM ET, when they all showed losses. The rest of the day saw a slow trundle upwards, although faster for the NASDAQ. At the end of the regular trading day, the Dow was down 0.38%, the S&P 500 was down 0.20%, but the NASDAQ was up 0.05%. Encouraging results from Dell before the bell, along with the recent performance of the NASDAQ itself, encouraged speculation that tech might save the overall market from an expected September-October correction.
The lowest-quintile P/E cut-off rose from yesterday's 11.92 to today 11.95. Also rising was the yield cut-off, being the S&P dividend yield, which inched up a basis point to 2.59%. Once ETFs and stocks with less than 500M market cap were thrown out, along with ones that yield more than 10%, the Low P/E Bin was left with one hundred stocks for a drop of three from yesterday. Here are the changes in the Low P/E Bin, as dash-listed below:
Arrivals:
- PriceSmart, Inc.
- Snap-on Incorporated
Departures:
- Cooper Industries, Ltd.
- France Telecom SA
- General Dynamics Corporation
- PartnerRe Ltd.
- Safety Insurance Group, Inc.
Both Arrivals have been in the Bin before, with one of them straddling the borderline. The stock of PriceSmart, a chain of warehouse shopping clubs, dropped 0.67% today; that drop brought its P/E down below the lowest-quintile cut-off. The second Arrival, tool maker Snap-On, got back in for the same reason; its stock dropped 0.62%.
Three of the five Departures got out because their yields dropped below the S&P 500 yield cut-off. France Telecom, defense company General Dynamics, and international reinsurer PartnerRe were the three. Of the other two, only one got out of the Bin due to a rise in its stock. Cooper Industries saw a gain of 1.79%, putting its P/E above the Bin cut-off. On the other hand, the stock of Safety Insurance dropped 0.92% today. That fall put its market cap below the 500M cut-off.
J.P. Morgan's upgrade of Compass Minerals International seemed to have set off a cascade. This last week, two other investment firms have added Compass to their watch lists and assigned it a "buy" and an "outperform" respectively. The first firm was KeyBanc, which initiated coverage last Monday with the "buy." The second is BMO Capital Markets, which initiated coverage today with the "Outperform." The latter recommendation notes that winter's a'comin, and expects the sulfate of potassium market to pick up. [It also assumes normal winter conditions.] Considering that two firms have already followed in his or her wake, the J.P. Morgan analyst responsible has something to eat out on.
That's all for today's Daily Wrapup. Thanks for reading, and have a restful weekend - whether it be hot or cold.
Disclosure: I'm holding Compass Minerals in the actively-managed Marketocracy mock fund I run.
Thursday, August 27, 2009
Hidden Aggravator Of Corporate Fraud: CEO Ego Stroking From Media
The article discussing it, "Ego And The CEO", comes from the Globe and Mail:
Back in the olden days, many a CEO shunned publicity. That may have been the result of seeing the same lesson taught in the 1920s.
Thankfully, many value companies are below the publicity radar. Many CEOs of value companies are "below temptation." It makes for a relatively nice world, if not necessarily Arcadiaesque.
Note: I got this article because it was quoted in today's edition of the Casey Research Daily Dispatch
Which is the biggest red flag for a potential accounting fraud: Bad corporate governance, an overinflated share price or too many stock options?It makes sense. People who are puffed up either get the idea that they can pull magic rabbits out of hats, making any rule-breaking apparently "harmless," and/or feel pressured to live up to the hype even if it requires chicanery to do so.
None of the above, according to a new study by researchers from three Canadian universities.
They argue that the biggest risk factor for fraud is a CEO with a truly oversized ego....
Back in the olden days, many a CEO shunned publicity. That may have been the result of seeing the same lesson taught in the 1920s.
Thankfully, many value companies are below the publicity radar. Many CEOs of value companies are "below temptation." It makes for a relatively nice world, if not necessarily Arcadiaesque.
Note: I got this article because it was quoted in today's edition of the Casey Research Daily Dispatch
Cracker Barrel Old Country Store: Example Of A Muted Response To Upgrade
Cracker Barrel Old Country Store, the operator of a chain of restaurants and retail stores, was the beneficiary of an upgrade eight days ago. The upgrader, Bryan C. Elliott of Raymond James, reclassified it to "Market Perform" from "Underperform." Since then, the stock has moved from $27.59 to today's $29.13. The response has been muted, but it could be argued that the upgrade was muted too. Suffice it to say that Cracker Barrel has moved up, but not by much.
The company hasn't done all that badly in the last ten years, despite some restructurings that lopped a fair bit of earnings from its continuing-operations record. Absent discontinued operations, 10-year 1999-2008 EPS growth (as calculated by logarithmic regression) was 12.62%; the current P/E is 10.35. Return on equity over the same time period, as calculated by a 10-year sum of net incomes divided by a 10-year sum of shareholder's equities, was 15.23%. Quarterly EPS for the latest reported quarter, which ended May 31st of this year, was up 13.0% from the EPS of the same quarter a year previously. Operations cash flow for the nine months ending May 31st was up 7.47% from the same period last year, and free cash flow was up almost 75% due to a large drop in capital expenditures. EPS growth hasn't slowed down.
The company's balance sheet would give a value investor pause, though. Its current ratio, as of May 31st, was only marginally above 1. The quick ratio was below 0.5. The debt-equity ratio is 6.77 to 1; debt as a percentage of total capitalization is an eye-opening 87.1%. If this company does stumble, it could get itself into a repayment crisis. Shifting to the earnings side, its earnings before interest and taxes was 2.28 times interest expense as of May 31st. The high leverage has likely been justified by earnings power, as 2.28 isn't a very uncomfortable margin. Provided the company doesn't stumble on the earnings front.
The upgrade itself, and its effect on Cracker Barrel's stock price, shows one of the weak points of technical analysis. A downtrend on the chart shows a stock getting lower-priced over time. If the fundamentals have't changed, then said downtrend shows a stock getting cheaper over time. The reason given for the upgrade was Cracker Barrel moving into fairly-valued territory.
The company hasn't done all that badly in the last ten years, despite some restructurings that lopped a fair bit of earnings from its continuing-operations record. Absent discontinued operations, 10-year 1999-2008 EPS growth (as calculated by logarithmic regression) was 12.62%; the current P/E is 10.35. Return on equity over the same time period, as calculated by a 10-year sum of net incomes divided by a 10-year sum of shareholder's equities, was 15.23%. Quarterly EPS for the latest reported quarter, which ended May 31st of this year, was up 13.0% from the EPS of the same quarter a year previously. Operations cash flow for the nine months ending May 31st was up 7.47% from the same period last year, and free cash flow was up almost 75% due to a large drop in capital expenditures. EPS growth hasn't slowed down.
The company's balance sheet would give a value investor pause, though. Its current ratio, as of May 31st, was only marginally above 1. The quick ratio was below 0.5. The debt-equity ratio is 6.77 to 1; debt as a percentage of total capitalization is an eye-opening 87.1%. If this company does stumble, it could get itself into a repayment crisis. Shifting to the earnings side, its earnings before interest and taxes was 2.28 times interest expense as of May 31st. The high leverage has likely been justified by earnings power, as 2.28 isn't a very uncomfortable margin. Provided the company doesn't stumble on the earnings front.
The upgrade itself, and its effect on Cracker Barrel's stock price, shows one of the weak points of technical analysis. A downtrend on the chart shows a stock getting lower-priced over time. If the fundamentals have't changed, then said downtrend shows a stock getting cheaper over time. The reason given for the upgrade was Cracker Barrel moving into fairly-valued territory.
Daily Wrapup For August 27th
It didn't start off as a very good day, but it ended up as one. From the get-go, until about 10 AM ET, the three major averages plummeted. Then, they began a slow but durable climb that changed the losses into gains. After an aborted start between 10 and 11 AM ET, the first wave of the upswing clicked in; it took the Dow up to slightly positive territory. After a near-hour pause, the second wave kicked in at about 1:30 PM ET. That wave had all three averages sporting gains as of 2:30 PM ET. After the day's high was reached about fifteen minutes later, the averages drifted down for the rest of the day except for the NASDAQ; it benefitted from an end-of-day rally. At the close of regular trading, the Dow was up 0.39%, the S&P 500 gained 0.28%, and the NASDAQ put in a gain of 0.16%. Light sweet crude for October delivery stopped dropping, closing up $1.06 at $72.49 per barrel. Natural gas, though, continues to plumb new multi-year lows.
The lowest-quintile cut-off for the Low P/E Bin advanced slightly, from yesterday's 11.91 to 11.92. The yield cut-off, being the S&P 500's dividend yield, dropped one basis point to 2.58%. Once ETFs and stocks with less than 500M market cap were eliminated, as well as stocks with greater than 10% yields, the Bin was left with one hundred and three stocks for an increase of three from yesterday. Here are the changes in the Bin, as dash-listed below:
Arrivals:
- Cooper Industries, Ltd.
- Raytheon Company
- United Bankshares, Inc.
Departures:
None
Two of the three Arrivals got back in because of declines in their stocks; the third one re-arrived because the dividend cut-off fell below its own. The stock of Cooper Industries, a maker of circuit protection devices and tools, dropped 0.93% and brought its P/E back into Bin range. The same was true for United Bankshares, except more so: the stock dropped 2.39%. The final Arrival, Raytheon, is another of those companies whose stats drift around the Bin's cut-offs. The stock of the defense company rose 0.34%, but the drop in the dividend cut-off put its yield slightly above the S&P 500's.
Often, an upgrade does wonders for a Bin stock. Olin Corporation got one today, and its stock rocketed up 13.67% to close at $17.05. The company, which makes chlor alkili products and Winchester small arms, got upgraded from Equal Weight to Overweight by Barclay's Capital. Barclay's new target for the stock is $22.00. After a spill about a month ago, the company's been inching up. Today's leap comes at the end of that near-month uptrend.
That's all for today's Daily Wrapup. Thanks for reading, and keep in mind that patience still pays.
The lowest-quintile cut-off for the Low P/E Bin advanced slightly, from yesterday's 11.91 to 11.92. The yield cut-off, being the S&P 500's dividend yield, dropped one basis point to 2.58%. Once ETFs and stocks with less than 500M market cap were eliminated, as well as stocks with greater than 10% yields, the Bin was left with one hundred and three stocks for an increase of three from yesterday. Here are the changes in the Bin, as dash-listed below:
Arrivals:
- Cooper Industries, Ltd.
- Raytheon Company
- United Bankshares, Inc.
Departures:
None
Two of the three Arrivals got back in because of declines in their stocks; the third one re-arrived because the dividend cut-off fell below its own. The stock of Cooper Industries, a maker of circuit protection devices and tools, dropped 0.93% and brought its P/E back into Bin range. The same was true for United Bankshares, except more so: the stock dropped 2.39%. The final Arrival, Raytheon, is another of those companies whose stats drift around the Bin's cut-offs. The stock of the defense company rose 0.34%, but the drop in the dividend cut-off put its yield slightly above the S&P 500's.
Often, an upgrade does wonders for a Bin stock. Olin Corporation got one today, and its stock rocketed up 13.67% to close at $17.05. The company, which makes chlor alkili products and Winchester small arms, got upgraded from Equal Weight to Overweight by Barclay's Capital. Barclay's new target for the stock is $22.00. After a spill about a month ago, the company's been inching up. Today's leap comes at the end of that near-month uptrend.
That's all for today's Daily Wrapup. Thanks for reading, and keep in mind that patience still pays.
Wednesday, August 26, 2009
Daily Wrapup For August 26th
For the second day in a row, a wild ride in the market ended with the three major averages virtually unchanged. Before the lastest releases, the averages opened down, and were all losing more than 0.5% by 9:50 AM ET. Then, two economic-aggregate items hit the wires. Durable goods orders for July increased 4.9% overall, but the market didn't react all that much to it. That lassitude wasn't true of the other datum, from a series more closely watched. New home sales for July rose 9.6%; the median price was virtually unchanged from the previous month. The second item added an extra push to the subsequent rally, which carried the averages from loss to gain. As was the case yesterday, though, the rally fizzled. Until a much weaker rally kicked in at about 2 PM ET, the averages were in loss territory once the morning one backslid. The second rally also faded; had it not been for a third one in the last minutes, the averages would have ended up in negative territory. Instead, like yesterday, they were virtually unchanged. The Dow was up 0.04%; the S&P and NASDAQ, both 0.01%. Yesterday's drop in oil continued today, with light sweet crude for October delivery closing down 62 cents per barrel to end the day at $71.43.
The lowest-quintile cut-off also fell, slightly, from yesterday's 11.95 to today's 11.91. Once again, the yield cut-off remained unchanged: the S&P dividend yield stayed at 2.59%. After ETFs and stocks with market caps of under 500M were thrown out, along with ones yielding more than 10%, the Low P/E Bin was left with one hundred stocks for a gain of one from yesterday. Here are the changes in the Bin, as dash-listed below:
Arrivals:
- Banco de Chile
- Bancolombia SA
- FPL Group, Inc.
- Williams Pipeline Partners LP
Departures:
- Altria Group, Inc.
- Cooper Industries, Ltd.
- CPFL Energia SA
Three of today's Arrivals are new to the Bin. The first, Banco de Chile, got in because a 3.64% drop in its stock put its P/E well below the Bin's cut-off. FPL Group, an electric utility based in Florida, also saw its stock drop and its P/E lowered to Bin levels. The third new Arrival got in for the same reason. The stock of Williams Pipeline Partners, which transports and stores natural gas, dropped 1.07% and its P/E dropped below the cut-off. Bancolumbia got out only yesterday: a 0.56% drop in its stock puts its P/E below the lowest-quintile cut-off, but only slightly so.
The Altria Group do-si-do continued today. The stock of the American arm of Phillip Morris was up slightly, edging its P/E slightly above the Bin cut-off. Cooper Industries, a maker of electrical circuit protection products and tools, fared better today. Its stock was up 0.93%, making for enough P/E expansion to put it out of the Bin too. The final Departure was a recent Arrival, whose stock put in an even bigger gain. CPFL Energia, a Brazilian electric utility, saw its P/E go above the Bin maximum with a 1.80% gain in its stock.
Sunoco's a Bin stock that was easy to underestimate. About a month and a half ago, it had hit a 52-week low. The company, which is the only major oil to not have any significant upstream operations, was poleaxed by collapsing crack spreads that ended up hitting its second-quarter income statement to the tune of a 47 cent per share loss. Since then, though, the stock has undergone a quiet, slow but largely steady recovery. Crack spreads have improved subsequently, and the alarm that had permeated the petroleum-products market is now gone. Today, the stock's recovery was a little on the quick side: it gained 5.01% to close at $27.69. Not bad for a stock that was below $22 as of July 8th.
That's all for today's Daily Wrapup. Thanks for reading, and be comforted by yet another example of market overreaction.
The lowest-quintile cut-off also fell, slightly, from yesterday's 11.95 to today's 11.91. Once again, the yield cut-off remained unchanged: the S&P dividend yield stayed at 2.59%. After ETFs and stocks with market caps of under 500M were thrown out, along with ones yielding more than 10%, the Low P/E Bin was left with one hundred stocks for a gain of one from yesterday. Here are the changes in the Bin, as dash-listed below:
Arrivals:
- Banco de Chile
- Bancolombia SA
- FPL Group, Inc.
- Williams Pipeline Partners LP
Departures:
- Altria Group, Inc.
- Cooper Industries, Ltd.
- CPFL Energia SA
Three of today's Arrivals are new to the Bin. The first, Banco de Chile, got in because a 3.64% drop in its stock put its P/E well below the Bin's cut-off. FPL Group, an electric utility based in Florida, also saw its stock drop and its P/E lowered to Bin levels. The third new Arrival got in for the same reason. The stock of Williams Pipeline Partners, which transports and stores natural gas, dropped 1.07% and its P/E dropped below the cut-off. Bancolumbia got out only yesterday: a 0.56% drop in its stock puts its P/E below the lowest-quintile cut-off, but only slightly so.
The Altria Group do-si-do continued today. The stock of the American arm of Phillip Morris was up slightly, edging its P/E slightly above the Bin cut-off. Cooper Industries, a maker of electrical circuit protection products and tools, fared better today. Its stock was up 0.93%, making for enough P/E expansion to put it out of the Bin too. The final Departure was a recent Arrival, whose stock put in an even bigger gain. CPFL Energia, a Brazilian electric utility, saw its P/E go above the Bin maximum with a 1.80% gain in its stock.
Sunoco's a Bin stock that was easy to underestimate. About a month and a half ago, it had hit a 52-week low. The company, which is the only major oil to not have any significant upstream operations, was poleaxed by collapsing crack spreads that ended up hitting its second-quarter income statement to the tune of a 47 cent per share loss. Since then, though, the stock has undergone a quiet, slow but largely steady recovery. Crack spreads have improved subsequently, and the alarm that had permeated the petroleum-products market is now gone. Today, the stock's recovery was a little on the quick side: it gained 5.01% to close at $27.69. Not bad for a stock that was below $22 as of July 8th.
That's all for today's Daily Wrapup. Thanks for reading, and be comforted by yet another example of market overreaction.
Tuesday, August 25, 2009
Behavioral Finance Article In The Wall Street Journal Online
This article's already been picked up by Simoleon Sense, but I'm linking to it here because I want to highlight it as an easy-to-read introduction to cognitive and emotional biases that pop in when we invest or trade. It's called "The Mistakes We Make—and Why We Make Them," and it's by Meir Statman.
He spends more time on emotional biases than the usual intro. Regret is discussed thoroughly, but anchoring isn't mentioned. Prof. Statman has the gift of matching biases to investing activity we can all relate to; it's as if he had been there himself. He even ends with why a well-known investing technique gets around our regret bias. It makes for a good read.
He spends more time on emotional biases than the usual intro. Regret is discussed thoroughly, but anchoring isn't mentioned. Prof. Statman has the gift of matching biases to investing activity we can all relate to; it's as if he had been there himself. He even ends with why a well-known investing technique gets around our regret bias. It makes for a good read.
Daily Wrapup For August 25th
Thankfully for the bulls, the good-news parade continued today. The three major averages opened up about 0.4%, but they all got a real kicker with the release of the new consumer confidence index number. Rather than increase to 48, it shot up to 54.1. Last month's number was also revised upwards. This item added a kick in the pants to the averages, all of which were up by more than 1% shortly after the release. Then, they reversed completely. By 10:30 AM ET, they were all lower than the level they were as of the start of trading. However, a second rally ensued. More slow than the first, it also lasted longer. It too faded, though: at the day's nadir, the averages were well below the morning's lows. A late-day rally, beginning at 2:45 PM ET, held but only partially. After a session that could be called exciting, or frustrating, the Dow closed up 0.32%, the S&P 500 up 0.24%, and the NASDAQ up 0.31%. After trying yet again to break the $75 a barrel barrier, light sweet crude for October delivery plummeted $2.32 to close at $72.05.
The two main cut-offs for the Low P/E Bin barely budged. The lowest-quintile cut-off dropped one hundredth of a point, from yesterday's 11.96 to today's 11.95. The yield cut-off, the S&P 500 dividend yield, was unchanged at 2.59%. Once ETFs and stocks with market caps of less than 500M were eliminated, along with ones that yielded more than 10%, the Bin was left with ninety-nine stocks for a drop of one from yesterday. Here are the changes in the Low P/E Bin, as dash-listed below:
Arrivals:
- Altria Group, Inc.
- CPFL Energia SA
Departures:
- Bancolombia SA
- Snap-on Incorporated
- United Bankshares, Inc.
The first Arrival is one that's shifted in and out of the Bin for some time now. Altria Group, the U.S. arm of Phillip Morris, fell 0.98% today; that drop brought its P/E slightly below the lowest-quintile cut-off. The second is a newcomer. CPFL Energia, an electric-utility holding company whose operating subsidiary does business in Brazil, got into the Bin through a 3.35% drop in its stock. That plummet put its P/E well below the cut-off.
The first Departure has been a mainstay since the Bin's inception. Bancolumbia, one of Columbia's biggest banks, got out of the Bin thanks to a sustained rise in its stock. Today's 1.94% gain put its P/E over the cut-off. The same happy outcome visited Snap-On, a maker of tools and diagnostic equipment for professionals. Its stock gained 0.87%, which put its own P/E above the lowest quintile. The final Departure benefitted from a reversal in the regional banks. United Bankshares, a bank holding company whose subsidiaries operate in Virginia and West Virginia, gained 2.16% today. That rise put its P/E, like those of the other two Departures, above the Bin's cut-off.
A done deal, done with the FDIC as broker, still adds a kicker to a bank stock. Spanish bank Banco Bilbao Vizcaya Argentaria is now the new owner of most of the assets of the now-failed Guaranty Bank of Texas. The stock didn't react much when it was rumoured that Bilbao had won the bidding, but today's officiality did the trick - or added some fuel to an already-existing rally. Bilbao gained 2.90% in regular trading, and was up a little more in after-hours trading. The benefit was far smaller than BB&T's take-over of Colonial's assets last August 14th, but there still was one. Or what seemed to be one.
That's all for today's Daily Wrapup. Thanks for reading, and hold on to your valuation metrics.
Disclosure: I'm holding Bilbao in the actively-managed Marketocracy mock fund I run.
The two main cut-offs for the Low P/E Bin barely budged. The lowest-quintile cut-off dropped one hundredth of a point, from yesterday's 11.96 to today's 11.95. The yield cut-off, the S&P 500 dividend yield, was unchanged at 2.59%. Once ETFs and stocks with market caps of less than 500M were eliminated, along with ones that yielded more than 10%, the Bin was left with ninety-nine stocks for a drop of one from yesterday. Here are the changes in the Low P/E Bin, as dash-listed below:
Arrivals:
- Altria Group, Inc.
- CPFL Energia SA
Departures:
- Bancolombia SA
- Snap-on Incorporated
- United Bankshares, Inc.
The first Arrival is one that's shifted in and out of the Bin for some time now. Altria Group, the U.S. arm of Phillip Morris, fell 0.98% today; that drop brought its P/E slightly below the lowest-quintile cut-off. The second is a newcomer. CPFL Energia, an electric-utility holding company whose operating subsidiary does business in Brazil, got into the Bin through a 3.35% drop in its stock. That plummet put its P/E well below the cut-off.
The first Departure has been a mainstay since the Bin's inception. Bancolumbia, one of Columbia's biggest banks, got out of the Bin thanks to a sustained rise in its stock. Today's 1.94% gain put its P/E over the cut-off. The same happy outcome visited Snap-On, a maker of tools and diagnostic equipment for professionals. Its stock gained 0.87%, which put its own P/E above the lowest quintile. The final Departure benefitted from a reversal in the regional banks. United Bankshares, a bank holding company whose subsidiaries operate in Virginia and West Virginia, gained 2.16% today. That rise put its P/E, like those of the other two Departures, above the Bin's cut-off.
A done deal, done with the FDIC as broker, still adds a kicker to a bank stock. Spanish bank Banco Bilbao Vizcaya Argentaria is now the new owner of most of the assets of the now-failed Guaranty Bank of Texas. The stock didn't react much when it was rumoured that Bilbao had won the bidding, but today's officiality did the trick - or added some fuel to an already-existing rally. Bilbao gained 2.90% in regular trading, and was up a little more in after-hours trading. The benefit was far smaller than BB&T's take-over of Colonial's assets last August 14th, but there still was one. Or what seemed to be one.
That's all for today's Daily Wrapup. Thanks for reading, and hold on to your valuation metrics.
Disclosure: I'm holding Bilbao in the actively-managed Marketocracy mock fund I run.
Monday, August 24, 2009
President Obama Reappointing Bernanke As Fed Chair
It's been up in the air for a long time, but Ben Bernanke - the experts' choice - is getting reappointed to the chairship of the Federal Reserve.
I have to admit to haing doubts on the matter, prompted by the annoucement delay. For a time, I was wondering if it was to be Larry Summers who got the appointment. But no, it's "Helicopter Ben" that's going to stay in charge.
In a way, it makes little difference on the inflation front. There's been so much fear of a second Great Depression, a new consensus has emerged which will put up with more inflation as the price of keeping the financial system afloat. Charima Bernanke's going to have a few more worries in the commercial real estate and Option ARM departments during his second term.
It would have been more fun to see Larry Summers in the job, though. He would have made a good G. William Miller.
I have to admit to haing doubts on the matter, prompted by the annoucement delay. For a time, I was wondering if it was to be Larry Summers who got the appointment. But no, it's "Helicopter Ben" that's going to stay in charge.
In a way, it makes little difference on the inflation front. There's been so much fear of a second Great Depression, a new consensus has emerged which will put up with more inflation as the price of keeping the financial system afloat. Charima Bernanke's going to have a few more worries in the commercial real estate and Option ARM departments during his second term.
It would have been more fun to see Larry Summers in the job, though. He would have made a good G. William Miller.
Daily Wrapup For August 24th
It was supposed to be the start of another winning week, but an early afternoon drop put an end to that hope. The three major averages were up in the morning, continuing Friday's rise until about 11 AM ET. At that point, they were all up more than 0.5%; the S&P 500 was close to a 1% gain. Then, the decline started. Slow at first, like the first dip on a roller coaster, the slide took the averages into loss positions by early afternoon. A recovery attempt in mid-afternoon kept the averages at about the break-even point, but that failed to hold until an aborted 3:30 rally was replaced by a sustained last-minute rise. The Dow was the only one of the three to end regular trading in positive territory, with a miniscule gain of 0.03%. The S&P was down an almost as miniscule 0.06%, and the NASDAQ dropped 0.14%. Although disappointing, the day could have been worse. Light sweet crude oil was a mitigating factor: October crude was up 31 cents a barrel to close at $74.20. $75 is near, and the bullish comments are coming back.
The lowest-quintile cut-off for the Low P/E Bin, contrary to the averages, was also up, from Friday's 11.89 to today's 11.96. Almost like the index itself, the S&P 500's yield didn't budge from Friday's 2.59%. Once ETFs and stocks with less than 500M market cap were discarded, along with ones that yielded more than 10%, the Bin was left with one hundred stocks for a drop of three from yesterday. Here are the changes in the Low P/E Bin, as dash-listed below:
Arrivals:
- Baytex Energy Trust
- Snap-on Incorporated
- United Bankshares, Inc.
Departures:
- Altria Group, Inc.
- Holly Corporation
- Honeywell International Inc.
- NTELOS Holdings Corp.
- Telecom Corp of New Zealand
- WSP Holdings Limited
Baytex, an oil and natural gas energy trust based in Canada, was up slightly. Its P/E, though, didn't rise enough to match the rise in the P/E cut-off; that brought it back into the Bin. Snap-On got back in for the same reason, although its stock declined slightly in regular trading.
Thanks to some discouraging comments made recently about the regionals, the stocks of those banks haven't performed all that well lately. One of the stocks that was affected by today's rout in those financials was United Bankshares, Inc., a regional with subsidiaries in Virginia and West Virginia. It dropped 3.82% today; the resultant P/E compression brought it back to the Bin after an absence precipitated by a hope-induced rally in the regionals.
Despite the overall market droop, Altria Group racked up an impressive 1.61% gain today. Holly Corporation gained an even more inpressive 3.41%. These gains in the stocks of the American arm of Phillip Morris and one of America's larger independent refiners, respectively, put both companies out of the Bin as their P/Es expanded to above the cut-off. Honeywell, a well-known maker of control systems, also exited the Bin for the same reason: its stock jumped up 2.62% today.
The fourth Departure, NTELOS Holdings, continued Friday's zoom-up by posting a 6.42% gain today. That jump makes for a 12.8% two-day gain for the Virginia and West Virginia telecommunications service provider. There was no news to account for it on Friday, but there was today: NTELOS announced a stock buyback program. Perhaps it was just a relief rally, though: in after-hours trading, the stock lost all of today's gain. Unless this fall-back is due to after-hours vagaries, it looks like NTELOS will be in tomorrow's Arrivals.
New Zealand Telecom makes for the fifth of five Departures to be pushed out because of a jump in its stock. A 4.00% gain expanded NZTel's P/E enough to put it out of the Bin. The last Departure, though, got out through a drop. WSP Holdings shares' 1.44% loss on the day put its market cap below 500M.
About two weeks ago, in an earlier entry, I mentioned Suburban Propane Partners' tender offer for no more than $175 million worth of 6.875% Senior Notes due 2013. That offer included a $50 bonus, per $1000 face-value in notes, for tendering on or before the early-tender deadline. That deadline expired at 5 PM ET last Friday. Today, the company announced that holders of more than $300 million worth of the notes had tendered by that expiry date. Since the early tender option was oversubscribed, Suburban will be paying $1025 per $1000 face value for the entire buyback. My back-of-the-envelope calcualtion in the same entry, assuming 2% yield on cash, concluded that the deal would be accretive to earnings if the entire allotment was tendered. Despite that calculation, Suburban's stock dropped 0.07% today. It's still below the secondary-offering price of $41.50 for the trust-unit issuance that'll provide partially payment for the tendered bonds. Despite that discrepancy, the underwriters agreed to a partial taking up of their over-allotment option this morning: about 231,000 of the available 330,000 units.
That's all for today's Wrapup. Thanks for reading, and may any discrepancies you happen upon be to your advantage.
Disclosure: I'm holding Suburban Propane Partners in the actively-managed Marketocracy mock fund I run.
The lowest-quintile cut-off for the Low P/E Bin, contrary to the averages, was also up, from Friday's 11.89 to today's 11.96. Almost like the index itself, the S&P 500's yield didn't budge from Friday's 2.59%. Once ETFs and stocks with less than 500M market cap were discarded, along with ones that yielded more than 10%, the Bin was left with one hundred stocks for a drop of three from yesterday. Here are the changes in the Low P/E Bin, as dash-listed below:
Arrivals:
- Baytex Energy Trust
- Snap-on Incorporated
- United Bankshares, Inc.
Departures:
- Altria Group, Inc.
- Holly Corporation
- Honeywell International Inc.
- NTELOS Holdings Corp.
- Telecom Corp of New Zealand
- WSP Holdings Limited
Baytex, an oil and natural gas energy trust based in Canada, was up slightly. Its P/E, though, didn't rise enough to match the rise in the P/E cut-off; that brought it back into the Bin. Snap-On got back in for the same reason, although its stock declined slightly in regular trading.
Thanks to some discouraging comments made recently about the regionals, the stocks of those banks haven't performed all that well lately. One of the stocks that was affected by today's rout in those financials was United Bankshares, Inc., a regional with subsidiaries in Virginia and West Virginia. It dropped 3.82% today; the resultant P/E compression brought it back to the Bin after an absence precipitated by a hope-induced rally in the regionals.
Despite the overall market droop, Altria Group racked up an impressive 1.61% gain today. Holly Corporation gained an even more inpressive 3.41%. These gains in the stocks of the American arm of Phillip Morris and one of America's larger independent refiners, respectively, put both companies out of the Bin as their P/Es expanded to above the cut-off. Honeywell, a well-known maker of control systems, also exited the Bin for the same reason: its stock jumped up 2.62% today.
The fourth Departure, NTELOS Holdings, continued Friday's zoom-up by posting a 6.42% gain today. That jump makes for a 12.8% two-day gain for the Virginia and West Virginia telecommunications service provider. There was no news to account for it on Friday, but there was today: NTELOS announced a stock buyback program. Perhaps it was just a relief rally, though: in after-hours trading, the stock lost all of today's gain. Unless this fall-back is due to after-hours vagaries, it looks like NTELOS will be in tomorrow's Arrivals.
New Zealand Telecom makes for the fifth of five Departures to be pushed out because of a jump in its stock. A 4.00% gain expanded NZTel's P/E enough to put it out of the Bin. The last Departure, though, got out through a drop. WSP Holdings shares' 1.44% loss on the day put its market cap below 500M.
About two weeks ago, in an earlier entry, I mentioned Suburban Propane Partners' tender offer for no more than $175 million worth of 6.875% Senior Notes due 2013. That offer included a $50 bonus, per $1000 face-value in notes, for tendering on or before the early-tender deadline. That deadline expired at 5 PM ET last Friday. Today, the company announced that holders of more than $300 million worth of the notes had tendered by that expiry date. Since the early tender option was oversubscribed, Suburban will be paying $1025 per $1000 face value for the entire buyback. My back-of-the-envelope calcualtion in the same entry, assuming 2% yield on cash, concluded that the deal would be accretive to earnings if the entire allotment was tendered. Despite that calculation, Suburban's stock dropped 0.07% today. It's still below the secondary-offering price of $41.50 for the trust-unit issuance that'll provide partially payment for the tendered bonds. Despite that discrepancy, the underwriters agreed to a partial taking up of their over-allotment option this morning: about 231,000 of the available 330,000 units.
That's all for today's Wrapup. Thanks for reading, and may any discrepancies you happen upon be to your advantage.
Disclosure: I'm holding Suburban Propane Partners in the actively-managed Marketocracy mock fund I run.
New Article In Enter Stage Right
I've veered into prognosticating this time around, about "The fall and rise of the religious right."
If you're here from ESR, welcome and thanks for dropping by.
If you're here from ESR, welcome and thanks for dropping by.
Saturday, August 22, 2009
The Buckle: Too Good To Be True?
When the financials of demins, tops and footwear retailer The Buckle, Inc. are gone through, the question that occurs is: "why is its P/E in the lowest quintile?" Or, why is it in the Low P/E Bin? After lackluster earnings growth from 1999-2004, the company took off. 1999-2008 growth in earnings per share, as measured by logarithmic regression, was 12.66%. Growth in net income, calculated by the same method over the same timeframe, was 12.30%. That's a fairly creditable performance.
The last five years have been better. 2004-08-year EPS growth was 25.62%; net income growth for the same period was 23.76%. Ten-year average return on equity from 1999-2008 was 18.34%. Five-year average ROE was 20.73%. Sales per square foot and sales per store were also up smartly from 2004 to 2008.
Given this growth, one might wonder why its P/E wasn't higher. The ratio actually was at the high-flyer level, as recently as eleven months ago. The Buckle was a stock that bucked the 2008 bear market until late September. It made its 2008 high on Septenber 19th, closing at $41.05. Its price at the beginning of 2008 was about $20.64. After dropping with the general market in late 2007, the stock reversed itself and spent most of the mid-year around $30-$33. The Buckle's 2008 earnings explain why: its earnings and revenue growth were still hot last year.
The September-November period saw the stock slaughtered: from $41.05, it plummeted almost without interruption to $16.18. However, no earnings disappointment came. March 6th saw its price higher than at December 5th. A one-month tear, ending on April 9th, saw the stock go from $22.94 to $36.97. That price marked the 2009 high, after which it's been drifting down.
The earnings, however, didn't co-operate with the market. The Buckle's latest earnings report shows above-expected earnings for 2Q '09, which were 12.5% above 2Q '08's on a diluted basis. Net sales were up 13.6% in the same timeframe, so the increase in EPS can't be explained by cost-cutting. Gross margin was up, from 41.4% to 42.7%, and operating margin rose slightly from 19.6% to 19.8%. Net profit margin did decrease slightly, from 13.1% to 13.0%. This last statistic may indicate why The Buckle's growth story is "too good to be true."
Another indication of slowing growth is found in its accounts receivables: they rose 80.0% from 2Q '08 to 2Q '09. Although inventories dropped slightly in that timeframe, despite the 13.6% growth in sales, the jump in accounts receivables suggests that sales are being pushed by lowering credit standards. That could be true, but its impact wasn't that much. 2Q '09's total accounts receivable was $6.719 million. Net sales for the same period were $192.906 million. Had accounts receivable stayed at 2Q '08's level, or $3.734 million, net sales for 2Q '09 would have been $189.921 million. Revenues would still have increased by 11.9%. Using a 13.0% net profit margin, the decrease in net income for those sales would have been $388,050. 2Q '09 net income would have been reduced to $24.605 million. Earnings per share would have been reduced by one cent. The EPS increase would have been lowered to a 10.4% gain on a diluted basis. The company still would have beat expectations.
So, if accounts receivable had stayed constant from 2Q '08 to 2Q '09, The Buckle would still have been on a growth trend. The rate would have been lessened, but the earnings and revenue growth would still be there.
More serious is the slight decline in the net margin. Does it meant that The Buckle is in for a period of subnormal growth? Will its recent record prove to be too good to be repeatable?
More than 40% of its sales come from denims - jeans. Teenagers and young adults are The Buckle's target market. They're legendarily fickle, so it is possible that they may throw away the jeans for something else. That change isn't very likely, though; designer jeans have been around for more than two decades and show no sign of losing their popularity.
It could also be that The Buckle will lose its "cool," which is a more likely possibility. There wasn't any sign of it in the financials, however. Revenue hasn't slumped. The net margin has, slightly, but a more plausible explanation for that dip is the recession finally catching up with the company.
Its July same-store sales did disappoint: they were only up 2.8% from the same period a year ago. That increase is much smaller than its 13-week increase of 13.6% and its 26-week increase of 13.1%, which further indicates that the recession has finally gotten to The Buckle. The same day of the July figure's annoucement, shares in the company dropped 15.2%.
The July disappointment answers the question at the top of this post. The market's reaction to the lackluster July figure pushed the company into the Low P/E Bin.
Had The Buckle been a high P/E stock, the July figure would have been decisive for a "sell/avoid" recommendation. But is it an "avoid" at its current P/E level of 11.21? That question is more ambiguous. The Buckle proved not to be recession-proof; in this sense, the stock's overall decline in the last 11 months can be said to have discounted its eventual same-store sales slip. Seeing accounts receivable shoot up again in the next quarter would be a clear warning sign. So would a continuation of July's disappointing same-store sales results, especially since the third (back-to-school) quarter has usually been The Buckle's biggest in terms of sales.
I suggest that it's largely been discounted. Granted that this suggestion is speculative, but the lack of recession proofing in The Buckle's results does not change it as a recession-resistant company. Its same-store sales figures for July, considered in isolation, are like that of a discount store - even though it isn't one. All through this recession, The Buckle's results have been way above a full-price store like Abercrombie & Fitch.
Of course, I'm assuming that consumer spending patterns are going to return to a more normal level. A more conservative person would take the July figures as a signal to avoid until the growth comes back, regardless of the P/E ratio.
Disclosure: I'm now holding The Buckle in the actively-managed Marketocracy mock fund I run, as a recovery play. What swayed me was its long-term EPS growth (12.66%) as compared with its P/E ratio (11.21), and the fact that it's in a trading range right now.
The last five years have been better. 2004-08-year EPS growth was 25.62%; net income growth for the same period was 23.76%. Ten-year average return on equity from 1999-2008 was 18.34%. Five-year average ROE was 20.73%. Sales per square foot and sales per store were also up smartly from 2004 to 2008.
Given this growth, one might wonder why its P/E wasn't higher. The ratio actually was at the high-flyer level, as recently as eleven months ago. The Buckle was a stock that bucked the 2008 bear market until late September. It made its 2008 high on Septenber 19th, closing at $41.05. Its price at the beginning of 2008 was about $20.64. After dropping with the general market in late 2007, the stock reversed itself and spent most of the mid-year around $30-$33. The Buckle's 2008 earnings explain why: its earnings and revenue growth were still hot last year.
The September-November period saw the stock slaughtered: from $41.05, it plummeted almost without interruption to $16.18. However, no earnings disappointment came. March 6th saw its price higher than at December 5th. A one-month tear, ending on April 9th, saw the stock go from $22.94 to $36.97. That price marked the 2009 high, after which it's been drifting down.
The earnings, however, didn't co-operate with the market. The Buckle's latest earnings report shows above-expected earnings for 2Q '09, which were 12.5% above 2Q '08's on a diluted basis. Net sales were up 13.6% in the same timeframe, so the increase in EPS can't be explained by cost-cutting. Gross margin was up, from 41.4% to 42.7%, and operating margin rose slightly from 19.6% to 19.8%. Net profit margin did decrease slightly, from 13.1% to 13.0%. This last statistic may indicate why The Buckle's growth story is "too good to be true."
Another indication of slowing growth is found in its accounts receivables: they rose 80.0% from 2Q '08 to 2Q '09. Although inventories dropped slightly in that timeframe, despite the 13.6% growth in sales, the jump in accounts receivables suggests that sales are being pushed by lowering credit standards. That could be true, but its impact wasn't that much. 2Q '09's total accounts receivable was $6.719 million. Net sales for the same period were $192.906 million. Had accounts receivable stayed at 2Q '08's level, or $3.734 million, net sales for 2Q '09 would have been $189.921 million. Revenues would still have increased by 11.9%. Using a 13.0% net profit margin, the decrease in net income for those sales would have been $388,050. 2Q '09 net income would have been reduced to $24.605 million. Earnings per share would have been reduced by one cent. The EPS increase would have been lowered to a 10.4% gain on a diluted basis. The company still would have beat expectations.
So, if accounts receivable had stayed constant from 2Q '08 to 2Q '09, The Buckle would still have been on a growth trend. The rate would have been lessened, but the earnings and revenue growth would still be there.
More serious is the slight decline in the net margin. Does it meant that The Buckle is in for a period of subnormal growth? Will its recent record prove to be too good to be repeatable?
More than 40% of its sales come from denims - jeans. Teenagers and young adults are The Buckle's target market. They're legendarily fickle, so it is possible that they may throw away the jeans for something else. That change isn't very likely, though; designer jeans have been around for more than two decades and show no sign of losing their popularity.
It could also be that The Buckle will lose its "cool," which is a more likely possibility. There wasn't any sign of it in the financials, however. Revenue hasn't slumped. The net margin has, slightly, but a more plausible explanation for that dip is the recession finally catching up with the company.
Its July same-store sales did disappoint: they were only up 2.8% from the same period a year ago. That increase is much smaller than its 13-week increase of 13.6% and its 26-week increase of 13.1%, which further indicates that the recession has finally gotten to The Buckle. The same day of the July figure's annoucement, shares in the company dropped 15.2%.
The July disappointment answers the question at the top of this post. The market's reaction to the lackluster July figure pushed the company into the Low P/E Bin.
Had The Buckle been a high P/E stock, the July figure would have been decisive for a "sell/avoid" recommendation. But is it an "avoid" at its current P/E level of 11.21? That question is more ambiguous. The Buckle proved not to be recession-proof; in this sense, the stock's overall decline in the last 11 months can be said to have discounted its eventual same-store sales slip. Seeing accounts receivable shoot up again in the next quarter would be a clear warning sign. So would a continuation of July's disappointing same-store sales results, especially since the third (back-to-school) quarter has usually been The Buckle's biggest in terms of sales.
I suggest that it's largely been discounted. Granted that this suggestion is speculative, but the lack of recession proofing in The Buckle's results does not change it as a recession-resistant company. Its same-store sales figures for July, considered in isolation, are like that of a discount store - even though it isn't one. All through this recession, The Buckle's results have been way above a full-price store like Abercrombie & Fitch.
Of course, I'm assuming that consumer spending patterns are going to return to a more normal level. A more conservative person would take the July figures as a signal to avoid until the growth comes back, regardless of the P/E ratio.
Disclosure: I'm now holding The Buckle in the actively-managed Marketocracy mock fund I run, as a recovery play. What swayed me was its long-term EPS growth (12.66%) as compared with its P/E ratio (11.21), and the fact that it's in a trading range right now.
Friday, August 21, 2009
Daily Wrapup For August 21st
[Note: Corrected number of stocks in the Bin, and added appropriate commentary.]
This time, it was the latest housing figures that supplied the rationale for another big rally. The three major averages opened up with greater than 0.5% gains, and took off like a shot just before 10 AM ET. When the spurt-up was finished, they were up around 1.50%. The rest of the day saw them range-bound until Fed Chairman Bernanke's remarks were disseminated. His suggestion that the recession seems to be over provided an extra boost near the end of the day. Although the averages drifted a little lower near the close, their gains were still strong: the Dow closed up 1.67%, the S&P ended with a gain of 1.86%, and the NASDAQ finished the week up 1.59%. Light sweet crude also gained today, closing at $73.89 per barrel and setting a 10-month record in the process. It's at about where it was in June, but this time without the blithe bullishness that accompanied its last visit to the $75 area. Interestingly, at the same time oil made a year-to-date high, natural gas hit a seven-year low.
The lowest-quintile P/E cut-off also rose today, to 11.89 from yesterday's 11.71. For the first time since this blog started, the S&P dividend yield fell below 2.60%; it ended up at 2.59%. After ETFs and stocks with market caps of under 500M were thrown out, along with ones sporting dividend yields of greater than 10%, the Low P/E Bin was left with one hundred and three stocks for a gain of one from yesterday. Here are the changes in the Bin, as dash-listed below:
Arrivals:
- Altria Group, Inc.
- CenterPoint Energy, Inc.
- CVB Financial Corp.
- PartnerRe Ltd.
- WSP Holdings Limited
Departures:
- Merck & Co., Inc.
- PH Glatfelter Company
- PriceSmart, Inc.
- Snap-on Incorporated
All of the Arrivals are former Bin members returning; all but one got in because their stocks didn't keep pace with the overall market. Altria Group, the American arm of Phillip Morris, saw the P/E cut-off rise above its own. So did electric utility CenterPoint. CVB, a company that I had mistakenly thought would be gone from the Bin permanently, is back once again: the holding company for the Californian Citizens Business Bank got in for the same reason as the two preceding. PartnerRe, an international reinsurer, returned to the Bin becasue the yield cut-off dropped below its own. The last Arrival, WSP Holdings, did keep pace; its stock rose 1.87% today. That gain put its market cap above 500M.
Three of the four Departures got out because 3+% gains in their stocks put their P/Es above the lowest-quintile cut-off. Major pharmaceutical company Merck, warehouse-club discount retailer PriceSmart, and tool maker Snap-On all got out for that happy reason. The sole exception was P.H. Glatfelter, whose stock dropped 2.67% today. There was no news to account for the drop, which put Glatfelter's market cap below the 500M cut-off.
Sometimes rallies engender relief rallies. NTELOS is a stock whose one-month beta is almost certainly negative; as the market rose, it fell. Starting on July 1st, when it had closed at $18.53, NTELOS was declining steadily until five days ago. Until four days ago, it had been stuck in a short-term trading range. Today, however, it shot up 5.79% to close at $14.79. There was no news to explain why this battered-down stock would reverse; the last item of significance was its lowering of its FY 2009 net income estimate about two weeks ago.
That's all for today's Daily Wrapup. Thanks for reading, and remember to check if those dollars at a discount are genuine or adulterated.
This time, it was the latest housing figures that supplied the rationale for another big rally. The three major averages opened up with greater than 0.5% gains, and took off like a shot just before 10 AM ET. When the spurt-up was finished, they were up around 1.50%. The rest of the day saw them range-bound until Fed Chairman Bernanke's remarks were disseminated. His suggestion that the recession seems to be over provided an extra boost near the end of the day. Although the averages drifted a little lower near the close, their gains were still strong: the Dow closed up 1.67%, the S&P ended with a gain of 1.86%, and the NASDAQ finished the week up 1.59%. Light sweet crude also gained today, closing at $73.89 per barrel and setting a 10-month record in the process. It's at about where it was in June, but this time without the blithe bullishness that accompanied its last visit to the $75 area. Interestingly, at the same time oil made a year-to-date high, natural gas hit a seven-year low.
The lowest-quintile P/E cut-off also rose today, to 11.89 from yesterday's 11.71. For the first time since this blog started, the S&P dividend yield fell below 2.60%; it ended up at 2.59%. After ETFs and stocks with market caps of under 500M were thrown out, along with ones sporting dividend yields of greater than 10%, the Low P/E Bin was left with one hundred and three stocks for a gain of one from yesterday. Here are the changes in the Bin, as dash-listed below:
Arrivals:
- Altria Group, Inc.
- CenterPoint Energy, Inc.
- CVB Financial Corp.
- PartnerRe Ltd.
- WSP Holdings Limited
Departures:
- Merck & Co., Inc.
- PH Glatfelter Company
- PriceSmart, Inc.
- Snap-on Incorporated
All of the Arrivals are former Bin members returning; all but one got in because their stocks didn't keep pace with the overall market. Altria Group, the American arm of Phillip Morris, saw the P/E cut-off rise above its own. So did electric utility CenterPoint. CVB, a company that I had mistakenly thought would be gone from the Bin permanently, is back once again: the holding company for the Californian Citizens Business Bank got in for the same reason as the two preceding. PartnerRe, an international reinsurer, returned to the Bin becasue the yield cut-off dropped below its own. The last Arrival, WSP Holdings, did keep pace; its stock rose 1.87% today. That gain put its market cap above 500M.
Three of the four Departures got out because 3+% gains in their stocks put their P/Es above the lowest-quintile cut-off. Major pharmaceutical company Merck, warehouse-club discount retailer PriceSmart, and tool maker Snap-On all got out for that happy reason. The sole exception was P.H. Glatfelter, whose stock dropped 2.67% today. There was no news to account for the drop, which put Glatfelter's market cap below the 500M cut-off.
Sometimes rallies engender relief rallies. NTELOS is a stock whose one-month beta is almost certainly negative; as the market rose, it fell. Starting on July 1st, when it had closed at $18.53, NTELOS was declining steadily until five days ago. Until four days ago, it had been stuck in a short-term trading range. Today, however, it shot up 5.79% to close at $14.79. There was no news to explain why this battered-down stock would reverse; the last item of significance was its lowering of its FY 2009 net income estimate about two weeks ago.
That's all for today's Daily Wrapup. Thanks for reading, and remember to check if those dollars at a discount are genuine or adulterated.
Thursday, August 20, 2009
The Buckle: A Significant Slamdown
Fashion footware and casual-clothes retailer The Buckle, Inc. reported 2Q '09 earnings that were not only above expectations, but were also about 12% above 2Q '08's. That growth didn't come from cost-cutting, either. Revenues were up 18% in the same period, and comparable same-store sales were up smartly too. Other details can be found in this write-up.
With an earnings report such as this one, common sense says that Buckle should have gained today. Instead, it dropped 3.90% in today's trading. The reason given in that write-up was disappointing July same-store sales.
Today's performance doesn't give all of the story: The Buckle's stock was up 3.02% yesterday, closing at $27.93, and the earnings news kicked it up to about $29 in early-morning trading. Today's close of $26.84 still puts it above last Monday's close of $26.52.
Still, the later-day plummet suggests that The Buckle is a company that's expected to have no blots on its reports in order for the effect of good news to stick. That says the company is being watched by people looking for something to go wrong, whose influence swamps optimists.
One company does not an industry make, but The Buckle is a pretty good one, comparatively. Their boots and clothes aren't intended to be discount items, and they've avoided the fate that all-too-many full price stores have endured. It's only a single indicator in and of itself, but the stock indicates that retail is out of favour. The bad-news crowd is getting the better of the good-news optimists.
Of course, industries that are out of favour can stay that way for years: some are outright value traps. The Buckle's dividend is only 2.98%, even though it's been raised smartly since October 2003. It's selling at more than three times book, according to GuruFocus, and about 1.4 times sales. As of 1Q '09, its 12-month trailing free cash flow was well in the red. Based on its year-to-date chart pattern, a technical analyst would say "avoid." It being out of favour does not necessarily make it a good value or a good buy at this time.
With an earnings report such as this one, common sense says that Buckle should have gained today. Instead, it dropped 3.90% in today's trading. The reason given in that write-up was disappointing July same-store sales.
Today's performance doesn't give all of the story: The Buckle's stock was up 3.02% yesterday, closing at $27.93, and the earnings news kicked it up to about $29 in early-morning trading. Today's close of $26.84 still puts it above last Monday's close of $26.52.
Still, the later-day plummet suggests that The Buckle is a company that's expected to have no blots on its reports in order for the effect of good news to stick. That says the company is being watched by people looking for something to go wrong, whose influence swamps optimists.
One company does not an industry make, but The Buckle is a pretty good one, comparatively. Their boots and clothes aren't intended to be discount items, and they've avoided the fate that all-too-many full price stores have endured. It's only a single indicator in and of itself, but the stock indicates that retail is out of favour. The bad-news crowd is getting the better of the good-news optimists.
Of course, industries that are out of favour can stay that way for years: some are outright value traps. The Buckle's dividend is only 2.98%, even though it's been raised smartly since October 2003. It's selling at more than three times book, according to GuruFocus, and about 1.4 times sales. As of 1Q '09, its 12-month trailing free cash flow was well in the red. Based on its year-to-date chart pattern, a technical analyst would say "avoid." It being out of favour does not necessarily make it a good value or a good buy at this time.
Dilution's Becoming A Worry...
...at least for the oil and gas sectors. Enerplus Resources Fund, a Canadian oil and gas income trust, announced last night that it's planning to issue an additional 9.25 million trust units at a price of C$21.65 per unit. At today's exchange rate, it amounts to US$19.88 for each unit. This financing will provide cash to acquire 30% of three companies' interests in their Marcellus shale natural gas property. The terms of the deal require US$162 million on closing, and US$243.6 million as a shouldering of half of the three companies' drilling and completion costs. Since the three companies' interest in the property amount to about 72%, Enerplus will have a 21.5% interest in the property itself. It's already a producer: the driling costs are to open up new wells to capture more of the underground gas.
It sounds like a good deal, but all the market saw was "dilutive." As of June 30th, Enerplus has 166.02 million units outstanding. The additional 9.25 million units will add about 5.6% to the total shares outstanding, assuming that the 166.02 million figure is also current.
At the open this morning, after the deal was announced, Enerplus units were down 4.36%: they were slightly below the offering price. The trust units did lumber back up somewhat, but couldn't breach the $20 level with any conviction. Enerplus closed at $20.01 on the NYSE today.
There's a real resemblance between the fate of Enerplus's stock and the knock-down that Suburban Propane Partners took last week. For whatever reason, energy trusts that issue additional units for either debt repayment (Suburban) or expansion (Enerplus) are seeing their units punished by the stock market for doing so. Both stocks dropped below the decided-upon offering price.
In Enerplus' case, this leaves the underwriters in a bit of a spot. This financing's a "bought deal," where the underwriter commits to buy the issued shares at the specified price. In Enerplus' case, as noted above, it's US$19.88 per unit. That's ver-y close to $20.01.
At any rate, this is the second time a secondary offering's shot down the price of an energy-related income trust. This slam-down applies even to a funding that have a good chance of being accretive to earnings. I'm making this point more as a warning than a tip, even if it results in said units going on sale. These income trusts ain't banks, that's for sure.
Disclosure: I'm holding both Enerplus and Suburban Propane Partners in the actively-managed Marketocracy mock fund I run.
It sounds like a good deal, but all the market saw was "dilutive." As of June 30th, Enerplus has 166.02 million units outstanding. The additional 9.25 million units will add about 5.6% to the total shares outstanding, assuming that the 166.02 million figure is also current.
At the open this morning, after the deal was announced, Enerplus units were down 4.36%: they were slightly below the offering price. The trust units did lumber back up somewhat, but couldn't breach the $20 level with any conviction. Enerplus closed at $20.01 on the NYSE today.
There's a real resemblance between the fate of Enerplus's stock and the knock-down that Suburban Propane Partners took last week. For whatever reason, energy trusts that issue additional units for either debt repayment (Suburban) or expansion (Enerplus) are seeing their units punished by the stock market for doing so. Both stocks dropped below the decided-upon offering price.
In Enerplus' case, this leaves the underwriters in a bit of a spot. This financing's a "bought deal," where the underwriter commits to buy the issued shares at the specified price. In Enerplus' case, as noted above, it's US$19.88 per unit. That's ver-y close to $20.01.
At any rate, this is the second time a secondary offering's shot down the price of an energy-related income trust. This slam-down applies even to a funding that have a good chance of being accretive to earnings. I'm making this point more as a warning than a tip, even if it results in said units going on sale. These income trusts ain't banks, that's for sure.
Disclosure: I'm holding both Enerplus and Suburban Propane Partners in the actively-managed Marketocracy mock fund I run.
Daily Wrapup For August 20th
Yesterday's action carried through to today's. After opening only slightly up, the three major averages climbed to over 0.50% gains for each. After sinking back a little in late morning (ET) trading, they crept up through most of the afternoon. A late-day rally kicked in about 3 PM ET, which pushed the averages up to their close for the day. The Dow was up 0.76% at the end, the S&P was up 1.09%, and the NASDAQ gained 1.01%. Of some note was the S&P's rise back above the 1000 level. The NASDAQ has yet to follow through for its "millenium" number, but it's less than eleven points below 2000. On the day of the September contract expiry, light sweet crude closed at $71.85 for a drop of 57 cents, dashing earlier-day hopes that yesterday's jump would be continued.
The lowest-quintile cut-off also rose, from yesterday's 11.62 to today's 11.71. Inversely with the S&P index, the yield dropped three basis points to 2.64%. After ETFs and stocks with less than 500M market cap were eliminated, along with ones that yield greater than 10%, the Low P/E Bin was left with one hundred and two stocks for a gain of two from yesterday. Here are the changes in the Bin, as dash-listed below:
Arrivals:
- Biovail Corporation
- Merck & Co., Inc.
- SCANA Corporation
Departures:
- CVB Financial Corp.
The first Arrival is new to the Bin. Biovail, a Canadian maker of drug-delivery technologies, got in because the S&P has outpaced it enough to make its yield sit above the yield cut-off. The stock was up 0.22% today, even if after-hours trading reversed that slight gain. Merck dropped a little today, bringing its P/E back below the lowest-quintile cut-off. The stock of South Carolina electric utility SCANA rose a little, but not enough to keep its P/E above the cut-off. The only Departure, CVB Financial, got out because a 2.68% rise in its stock put its P/E above the respective cut-off.
The oil-tanker transportation industry has been ridden with recent losses because of the recession-induced drop in global oil demand. Ship Finance International has not been one of these companies, at least for the second quarter of this year. It reported earnings of 72 cents per share for 2Q '09, as compared with 98 cents for 2Q '08. It also declared a full 30 cent per share quarterly dividend. Both of these items took some cloud off the stock today, pushing it up 4.36%. Ship Finance was a company that had a lot of doubt thrown on it: it fell out of the Bin last month becuse a declining stock price pushed its yield well above 10%. Even after its gain today, it still yields 9.46%. Since the stock isn't an income trust, the current yield suggests that there's still some doubt about how long the 30-cent dividend will be maintained.
That's all for today's Daily Wrapup. Thanks for reading, and enjoy the dwindling days of August while they last.
Disclosure: I'm holding Ship Finance in the actively-managed Marketocracy mock fund I run.
The lowest-quintile cut-off also rose, from yesterday's 11.62 to today's 11.71. Inversely with the S&P index, the yield dropped three basis points to 2.64%. After ETFs and stocks with less than 500M market cap were eliminated, along with ones that yield greater than 10%, the Low P/E Bin was left with one hundred and two stocks for a gain of two from yesterday. Here are the changes in the Bin, as dash-listed below:
Arrivals:
- Biovail Corporation
- Merck & Co., Inc.
- SCANA Corporation
Departures:
- CVB Financial Corp.
The first Arrival is new to the Bin. Biovail, a Canadian maker of drug-delivery technologies, got in because the S&P has outpaced it enough to make its yield sit above the yield cut-off. The stock was up 0.22% today, even if after-hours trading reversed that slight gain. Merck dropped a little today, bringing its P/E back below the lowest-quintile cut-off. The stock of South Carolina electric utility SCANA rose a little, but not enough to keep its P/E above the cut-off. The only Departure, CVB Financial, got out because a 2.68% rise in its stock put its P/E above the respective cut-off.
The oil-tanker transportation industry has been ridden with recent losses because of the recession-induced drop in global oil demand. Ship Finance International has not been one of these companies, at least for the second quarter of this year. It reported earnings of 72 cents per share for 2Q '09, as compared with 98 cents for 2Q '08. It also declared a full 30 cent per share quarterly dividend. Both of these items took some cloud off the stock today, pushing it up 4.36%. Ship Finance was a company that had a lot of doubt thrown on it: it fell out of the Bin last month becuse a declining stock price pushed its yield well above 10%. Even after its gain today, it still yields 9.46%. Since the stock isn't an income trust, the current yield suggests that there's still some doubt about how long the 30-cent dividend will be maintained.
That's all for today's Daily Wrapup. Thanks for reading, and enjoy the dwindling days of August while they last.
Disclosure: I'm holding Ship Finance in the actively-managed Marketocracy mock fund I run.
Wednesday, August 19, 2009
Daily Wrapup For August 19th
It took a surprise drop in crude inventories to get the market up today. The three major averages started down about 1%, due to the resumed fall in the Chinese stock market last night. That opening gap didn't last, however: by 10 AM ET, all three averages were near the break-even point. Then, the news of the surprise inventory drop was disseminated. That was enough to get all three averages shooting well into positive territory. By noon ET, they were all up about 0.5% on the day. A drift upward ensued, which was staunched in mid-afternoon. An end-of-day rally helped the Dow to close with a 0.66% gain, the S&P to close up 0.69%, and the NASDAQ to close with a gain of 0.68%. Light sweet crude for September delivery was, of course, kicked up by the news: it closed at $72.42 per barrel for a gain of $3.23.
The lowest-quintile cut-off rose quite a bit today, from yesterday's 11.41 to today's 11.62. The S&P 500 dividend yield, which forms the yield cut-off, dropped one basis point to 2.67%. Once ETFs and stocks with less than 500M market cap were discarded, as well as stocks with greater than 10% yields, the Low P/E Bin was left with one hundred stocks: the same as yesterday. Here are the changes within the Bin, as dash-listed below:
Arrivals:
- Enersis SA
- Plains All American Pipeline, LP
Departures:
- Baytex Energy Trust
- Merck & Co., Inc.
The first Arrival, as it turns out, had gotten out through a glitch. Enersis, a Latin American electric utility, had a recorded yield above 10% two days ago. It's now recorded as 4.45%, putting the stock back in the Bin. Plains All American dropped slightly today; the rise in the lowest-quintile cut-off put its P/E back in Bin range.
Both Departures got out because of P/E expansion outstripping the cut-off rise; both were gainers today. Baytex Energy Trust, an oil and gas income trust with interests in Canada and the U.S, closed up 1.57% today. Major pharmaceutical company Merck gained 2.51%. Both stocks' gains lifted them out of the Bin.
Bin stock Banco Bilbao Vizcaya Argentaria made the business news today, for reportedly making the winning bid for the assets of ailing Texas bank Guaranty Financial Group. The deal was brokered by the FDIC, and marks the lastest inroad into Texas banking by the Spanish bank. Unlike the stock of an earlier acquirer, BB&T Corporation, Bilbao's stock did not rocket up as a result. It closed with a 0.87% gain, about in line with the three major averages.
That's all for today's Daily Wrapup. Thanks for reading, and remember that prudence works.
Disclosure: I'm holding Bilbao in the actively-managed Marketocracy mock fund I run.
The lowest-quintile cut-off rose quite a bit today, from yesterday's 11.41 to today's 11.62. The S&P 500 dividend yield, which forms the yield cut-off, dropped one basis point to 2.67%. Once ETFs and stocks with less than 500M market cap were discarded, as well as stocks with greater than 10% yields, the Low P/E Bin was left with one hundred stocks: the same as yesterday. Here are the changes within the Bin, as dash-listed below:
Arrivals:
- Enersis SA
- Plains All American Pipeline, LP
Departures:
- Baytex Energy Trust
- Merck & Co., Inc.
The first Arrival, as it turns out, had gotten out through a glitch. Enersis, a Latin American electric utility, had a recorded yield above 10% two days ago. It's now recorded as 4.45%, putting the stock back in the Bin. Plains All American dropped slightly today; the rise in the lowest-quintile cut-off put its P/E back in Bin range.
Both Departures got out because of P/E expansion outstripping the cut-off rise; both were gainers today. Baytex Energy Trust, an oil and gas income trust with interests in Canada and the U.S, closed up 1.57% today. Major pharmaceutical company Merck gained 2.51%. Both stocks' gains lifted them out of the Bin.
Bin stock Banco Bilbao Vizcaya Argentaria made the business news today, for reportedly making the winning bid for the assets of ailing Texas bank Guaranty Financial Group. The deal was brokered by the FDIC, and marks the lastest inroad into Texas banking by the Spanish bank. Unlike the stock of an earlier acquirer, BB&T Corporation, Bilbao's stock did not rocket up as a result. It closed with a 0.87% gain, about in line with the three major averages.
That's all for today's Daily Wrapup. Thanks for reading, and remember that prudence works.
Disclosure: I'm holding Bilbao in the actively-managed Marketocracy mock fund I run.
Tuesday, August 18, 2009
Daily Wrapup For August 18th
Yesterday's spill was not repeated today. From the get-go, the three major averages were all up. After a slight reaction about twenty minutes after trading started, the averages kept climbing for the rest of the day. News reports like the one following attributed the rise to better-than-expected retail results, but an earlier recovery in the Asian markets had an influence too. A last-minute decline whittled down the averages' gains somewhat: the Dow ended up by 0.90%, the S&P 500 gained 1.01%, and the NASDAQ ended regular trading with a gain of 1.30%. Light sweet crude perked up, rising $1.44 per barrel to close at $69.19. This quote is for the September contract, which is due to expire in two days.
The lowest-quintile P/E cut-off also rose, although only slightly. Today's cut-off was 11.41 as compared with yesterday's 11.39. The dividend yield of the S&P, which forms the yield cut-off, dropped a good four basis points to 2.68%. After also eliminating ETFs and stocks with market caps of less than 500M, as well as ones with yields greater than 10%, the Low P/E Bin was left with one hundred stocks for a gain of five from yesterday. Here are the changes in the Low P/E Bin, as dash-listed below:
Arrivals:
- CVB Financial Corp.
- H&R Block, Inc.
- Holly Corporation
- Magyar Telekom Plc.
- Merck & Co., Inc.
- Permian Basin Royalty Trust
- PriceSmart, Inc.
Departures:
- Financial Federal Corporation
- Plains All American Pipeline, LP
All of the Arrivals are companies that were in the Bin earlier; three of them returned because of drops in their stock. CVB Financial, a holding company for the Citizens Business Bank in California, saw its stock drop 0.13% today to bring its P/E below the cut-off. H&R Block stock dropped by a more substantial amount, but got back in for the same reason as CVB. Holly, a petroleum-products refiner, rose a fair bit. Its yield, though, didn't drop enough to put it below the lowered yield cut-off. Magyar, Hungary's main communications services company, rose even more today: 5.17%. This leap puts its yield back below the 10% cut-off. Merck, a major pharmaceutical company, dropped 0.55%; this loss put its P/E back below the cut-off. Permian Basin, an express trust holding interests in several Texas oil and gas properties, is another gainer in the Arrival list. Its 2.67% rise put its market cap above the 500M cut-off. PriceSmart, an operator of discount warehouse-shopping clubs, also gained today. However, its P/E didn't rise enough to keep it out of the Bin.
The two Departures were gainers that both got out through P/E expansion. Financial Federal, a collateralized lending, financing and leasing company for the construction industry, gained 2.33% and saw its P/E rise well above the Bin's cut-off. A similar fate befell Plains All American, an owner-operator of several oil and natural gas pipelines plus LNG facilities. Its stock rose 1.63%, and its P/E rose enough to push it out of the Bin.
Telefonos de Mexico, Mexico's main communication-services company, saw its stock plummet close to 5% in after-hours trading last night - at about the time when it announced good corporate news. Specifically, it announced an early repayment of a loan tranche due this year, which has cleared its decks of any repayment commitments for the rest of this year. As it turns out, Telmex stock didn't drop at all today: for the entire trading day, it was riding a gain with respect to yesterday's pre-after-hours close. So, that reversed after-hours plummet has to be chalked up to an after-hours trading vagary. Perhaps there was a rumour that the coming news was bad news, which proved to be the opposite of the truth.
That's all for today's Wrapup. Thanks for reading, and I hope any rumour-driven bobbles affecting you are duly disregarded.
The lowest-quintile P/E cut-off also rose, although only slightly. Today's cut-off was 11.41 as compared with yesterday's 11.39. The dividend yield of the S&P, which forms the yield cut-off, dropped a good four basis points to 2.68%. After also eliminating ETFs and stocks with market caps of less than 500M, as well as ones with yields greater than 10%, the Low P/E Bin was left with one hundred stocks for a gain of five from yesterday. Here are the changes in the Low P/E Bin, as dash-listed below:
Arrivals:
- CVB Financial Corp.
- H&R Block, Inc.
- Holly Corporation
- Magyar Telekom Plc.
- Merck & Co., Inc.
- Permian Basin Royalty Trust
- PriceSmart, Inc.
Departures:
- Financial Federal Corporation
- Plains All American Pipeline, LP
All of the Arrivals are companies that were in the Bin earlier; three of them returned because of drops in their stock. CVB Financial, a holding company for the Citizens Business Bank in California, saw its stock drop 0.13% today to bring its P/E below the cut-off. H&R Block stock dropped by a more substantial amount, but got back in for the same reason as CVB. Holly, a petroleum-products refiner, rose a fair bit. Its yield, though, didn't drop enough to put it below the lowered yield cut-off. Magyar, Hungary's main communications services company, rose even more today: 5.17%. This leap puts its yield back below the 10% cut-off. Merck, a major pharmaceutical company, dropped 0.55%; this loss put its P/E back below the cut-off. Permian Basin, an express trust holding interests in several Texas oil and gas properties, is another gainer in the Arrival list. Its 2.67% rise put its market cap above the 500M cut-off. PriceSmart, an operator of discount warehouse-shopping clubs, also gained today. However, its P/E didn't rise enough to keep it out of the Bin.
The two Departures were gainers that both got out through P/E expansion. Financial Federal, a collateralized lending, financing and leasing company for the construction industry, gained 2.33% and saw its P/E rise well above the Bin's cut-off. A similar fate befell Plains All American, an owner-operator of several oil and natural gas pipelines plus LNG facilities. Its stock rose 1.63%, and its P/E rose enough to push it out of the Bin.
Telefonos de Mexico, Mexico's main communication-services company, saw its stock plummet close to 5% in after-hours trading last night - at about the time when it announced good corporate news. Specifically, it announced an early repayment of a loan tranche due this year, which has cleared its decks of any repayment commitments for the rest of this year. As it turns out, Telmex stock didn't drop at all today: for the entire trading day, it was riding a gain with respect to yesterday's pre-after-hours close. So, that reversed after-hours plummet has to be chalked up to an after-hours trading vagary. Perhaps there was a rumour that the coming news was bad news, which proved to be the opposite of the truth.
That's all for today's Wrapup. Thanks for reading, and I hope any rumour-driven bobbles affecting you are duly disregarded.
Monday, August 17, 2009
Insurance Company Raises Dividend
No, not Chubb: Cincinnati Financial. It's kept its spot in the Dividend Aristocrats list by raising its quarterly dividend 0.5 cents to 39.5 cents.
Interestingly, the stock yields more than Chubb: 6.38% versis Chubb's 2.93%. Having not been the beneficiary of a recent earnings release with a positive surprise, Cincinnati's been trundling along in a range for almost a month. Perhaps it's because Cincinnati's 10-year return on equity has been in the single digits, while Chubb's is confortably in the double digits.
As a point of thought: Cincinnati's free cash flow per share, as measured by GuruFocus, has been at least double its dividend disbursements for the last ten years. That span includes disaster-laden years 2001 and 2005, neither of which saw Cincinnati pushed into a loss. At a first glance, the dividend looks safe.
Interestingly, the stock yields more than Chubb: 6.38% versis Chubb's 2.93%. Having not been the beneficiary of a recent earnings release with a positive surprise, Cincinnati's been trundling along in a range for almost a month. Perhaps it's because Cincinnati's 10-year return on equity has been in the single digits, while Chubb's is confortably in the double digits.
As a point of thought: Cincinnati's free cash flow per share, as measured by GuruFocus, has been at least double its dividend disbursements for the last ten years. That span includes disaster-laden years 2001 and 2005, neither of which saw Cincinnati pushed into a loss. At a first glance, the dividend looks safe.
A Good Move That Seems To Have Been Punished
Telmex announced after the bell that it's repaying $1.3 bilion in debt earlier than the specified maturity date. The company committing to do so means that substantially all of its 2009 maturity commitments have been met.
In these times, it would seem to be a good move. The Mexican economy ain't out of the woods, and the lesson of leverage has been well rubbed in during the past year.
And yet, Telmex dropped 4.94% in after-hours trading. This drop comes on top of a 1.96% decline in regular trading.
It could be a result of selling on the good news. Telmex has been in a trading range since early April, and the stock did poke above that range recently. Perhaps this was the good news that was expected. Now announced, there's no further reason to see Telmex as attractive in the near term. Perhaps.
Still, the Telmex tale is a case study in market refractoriness (or unpredictability.)
In these times, it would seem to be a good move. The Mexican economy ain't out of the woods, and the lesson of leverage has been well rubbed in during the past year.
And yet, Telmex dropped 4.94% in after-hours trading. This drop comes on top of a 1.96% decline in regular trading.
It could be a result of selling on the good news. Telmex has been in a trading range since early April, and the stock did poke above that range recently. Perhaps this was the good news that was expected. Now announced, there's no further reason to see Telmex as attractive in the near term. Perhaps.
Still, the Telmex tale is a case study in market refractoriness (or unpredictability.)
Daily Wrapup For August 17th
There wasn't any hint of an August rally today. Following in the wake of the Asian averages, particularly the Shanghai, the three major American averages plummeted about 2% right after trading began. After that plunge, they continued to drift downwards until about 11:15 AM ET. A short relief rally pushed them up somewhat, and the resultant range held until about 3 PM ET. Then, the downward drift continued until the close. Interestingly, there were no end-of-day rallies or plummets today. The Dow closed down 2.00%, the S&P 500 dropped 2.43%, and the NASDAQ ended down 2.75%. Stocks in general weren't the only asset class that was clobbered: light sweet crude closed at $66.75 a barrel.
The lowest-quintile P/E cut-off also ramped down, from Friday's 11.63 to today's 11.39. The S&P dividend yield, which forms the yield cut-off, rose seven basis point to 2.72%. After ETFs and stocks with market cap of less than 500M were eliminated, as well as ones with greater than 10% yields, the Low P/E Bin was left with ninety-five stocks for a drop of seven from Friday. Here are the changes in the Bin, as dash-listed below:
Arrivals:
- Honeywell International Inc.
- Snap-on Incorporated
Departures:
- Altria Group, Inc.
- CenterPoint Energy, Inc.
- Enersis SA
- H&R Block, Inc.
- Merck & Co., Inc.
- PartnerRe Ltd.
- SCANA Corporation
- The Travelers Companies, Inc.
- WSP Holdings Limited
Both Arrivals saw their stocks plummet enough to bring them back into the Bin. Honeywell, a maker of control devices with uses in several industries, saw its stock drop 2.65% and its P/E drop to below the Bin's cut-off. Snap-On, a toolmaker, also got back because its P/E dropped to below the cut-off.
The Departures got out for mostly happy reasons. By coincidence, two electric utilities in the Departure list saw their stocks close unchanged in regular trading. As a result, both CenterPoint and SCANA saw the P/E cut-off drop below their own. The stock of Altria Group, the U.S. arm of Phillip Morris, dropped only slightly today; like the previous two stocks, the low P/E cut-off lowered below its own P/E. Enersis got out because its Stock-Screener-recorded yield shot up well above 10%: that could be the result of a special dividend. With the exception of a quickly-reversed opening plummet, H&R Block was up (slightly) all day. Its P/E rose above the lowered cut-off. Merck didn't rise, but it got out of the Bin for substantially the same reason. International general reinsurance provider PartnerRe's stock also declined only slightly: its yield dropped below the yield cut-off. So did regular insurance company The Travelers. The last Departure is, in a way, the saddest. WSP Holdings was a high flyer in early-mid June, but was hammered earlier this month due to an earnings miss. This company, a China-rooted maker of seamless oil-country tubular goods, was doubly hit by the Chinese market's plummet and the oil market's. It dropped 10.18%, shooting its market cap to well below the 500M cut-off.
Speaking of reversing fortunes, BHP Billiton hasn't been having the best of times lately. Its stock declined 5.02% as the bloom on the reflation story wilted in the metals market. The recent strength of the U.S dollar was the major factor. Its drop put the stock below $50, a level not seen since almost a month ago.
That's all for the today's Wrapup. Thanks for reading, and watch out for non-falling utilities.
The lowest-quintile P/E cut-off also ramped down, from Friday's 11.63 to today's 11.39. The S&P dividend yield, which forms the yield cut-off, rose seven basis point to 2.72%. After ETFs and stocks with market cap of less than 500M were eliminated, as well as ones with greater than 10% yields, the Low P/E Bin was left with ninety-five stocks for a drop of seven from Friday. Here are the changes in the Bin, as dash-listed below:
Arrivals:
- Honeywell International Inc.
- Snap-on Incorporated
Departures:
- Altria Group, Inc.
- CenterPoint Energy, Inc.
- Enersis SA
- H&R Block, Inc.
- Merck & Co., Inc.
- PartnerRe Ltd.
- SCANA Corporation
- The Travelers Companies, Inc.
- WSP Holdings Limited
Both Arrivals saw their stocks plummet enough to bring them back into the Bin. Honeywell, a maker of control devices with uses in several industries, saw its stock drop 2.65% and its P/E drop to below the Bin's cut-off. Snap-On, a toolmaker, also got back because its P/E dropped to below the cut-off.
The Departures got out for mostly happy reasons. By coincidence, two electric utilities in the Departure list saw their stocks close unchanged in regular trading. As a result, both CenterPoint and SCANA saw the P/E cut-off drop below their own. The stock of Altria Group, the U.S. arm of Phillip Morris, dropped only slightly today; like the previous two stocks, the low P/E cut-off lowered below its own P/E. Enersis got out because its Stock-Screener-recorded yield shot up well above 10%: that could be the result of a special dividend. With the exception of a quickly-reversed opening plummet, H&R Block was up (slightly) all day. Its P/E rose above the lowered cut-off. Merck didn't rise, but it got out of the Bin for substantially the same reason. International general reinsurance provider PartnerRe's stock also declined only slightly: its yield dropped below the yield cut-off. So did regular insurance company The Travelers. The last Departure is, in a way, the saddest. WSP Holdings was a high flyer in early-mid June, but was hammered earlier this month due to an earnings miss. This company, a China-rooted maker of seamless oil-country tubular goods, was doubly hit by the Chinese market's plummet and the oil market's. It dropped 10.18%, shooting its market cap to well below the 500M cut-off.
Speaking of reversing fortunes, BHP Billiton hasn't been having the best of times lately. Its stock declined 5.02% as the bloom on the reflation story wilted in the metals market. The recent strength of the U.S dollar was the major factor. Its drop put the stock below $50, a level not seen since almost a month ago.
That's all for the today's Wrapup. Thanks for reading, and watch out for non-falling utilities.
New Article In Enter Stage Right
My latest piece takes its cue from an old libertarian work by Frank Chodorov, but moves to a more pragmatic emphasis. It's called "The income tax: The grand comeuppance" and it ties the spread of the income tax to the thickening of politicians' incoming mail sacks.
If you're here from Enter Stage Right, welcome. Unfortunately, you'll find fewer posts because I've had to shoulder more brick-and-mortar duties.
If you're here from Enter Stage Right, welcome. Unfortunately, you'll find fewer posts because I've had to shoulder more brick-and-mortar duties.
Friday, August 14, 2009
Daily Wrapup For August 14th
It was not a good day for American stocks. Despite a better than expected industrial production figure, the market took its cue from the flat CPI for July. By the time the consumer sentiment index numbers were released, the averages were flat to down. The unexpected decline in consumer sentiment was enough of a shake to get the averages tumbling down: by 10:15 AM ET, all three major averages had dropped to well below a 1% loss. (The Russell small-cap index fared worse.) After hitting a nadir at about 11:30 AM ET, all three averages slowly trundled up until a relief rally kicked in at about 3:30 PM ET. That rally wiped away about half of the averages' earlier-day declines. The Dow closed down 0.82%, the S&P posted a loss of 0.85%, and the NASDAQ sunk 1.19%. Light sweet crude got hammered by $3.01 per barrel to close at $67.51.
The lowest-quintile P/E cut-off joined the overall trend by falling today, from yesterday's 11.74 to 11.63. The S&P's dividend yield, which forms the yield cut-off, jumped three basis points to 2.65%. After ETFs and stocks with less than 500M market cap were sifted out, as well as ones with yields greater than 10%, the Low P/E Bin was left with one hundred and two stocks for a decline of four from yesterday. Here are the changes in the Low P/E Bin, as dash-listed below:
Arrivals:
- Cooper Industries, Ltd.
- France Telecom SA
Departures:
- Carpenter Technology Corporation
- Cousins Properties Inc.
- Edison International
- Permian Basin Royalty Trust
- Tsakos Energy Navigation Ltd.
- UIL Holdings Corporation
The two Arrivals are ones that have been in the Bin before, although one of them has been gone for some time. That one is Cooper Industries, a maker of electrical circuit protector products and tools. Its 2.61% drop today lowered its P/E below the Bin cut-off. The same cause got France Telecom back in.
The six Departures got out for drop-related reasons, with the notable exception of two. Those two are, significantly, both electric utilities: Edison International and UIL Holdings. Edison was up 1.99% today, and UIL was up 0.35%. Both gains pushed both companies' P/E ratios above the lowest quintile cut-off.
A 2Q loss pushed Carpenter's 12-month trailing EPS down to the point where its P/E is well above the cut-off: the stock of the specialty metals manufacturer dropped 1.59% today. Cousins Properties's market cap dropped below 500M today due to a 4.63% drop in the REIT's stock. The same fate got Permian Basin, an express trust with interests in several Texas oil and gas properties, out of the Bin too. Tsakos, a ship-transportation company specializing in crude oil tankers, saw its yield go above 10%.
There was another drop today, a surprising one given the company's fate in its home-country exchange. Yanzhou Coal announced a takeover of Australian company Felix Resources. The news sent the stock up on both the Shanghai and Hong Kong exchanges today, but the American market was far less impressed. Yanzhou's ADRs closed down 3.79% at $15.49 on the first day they've traded since last Friday.
That's all for today's Daily Wrapup. Thanks for reading, and may your weekend be free of the anxieties of the momentum trader.
The lowest-quintile P/E cut-off joined the overall trend by falling today, from yesterday's 11.74 to 11.63. The S&P's dividend yield, which forms the yield cut-off, jumped three basis points to 2.65%. After ETFs and stocks with less than 500M market cap were sifted out, as well as ones with yields greater than 10%, the Low P/E Bin was left with one hundred and two stocks for a decline of four from yesterday. Here are the changes in the Low P/E Bin, as dash-listed below:
Arrivals:
- Cooper Industries, Ltd.
- France Telecom SA
Departures:
- Carpenter Technology Corporation
- Cousins Properties Inc.
- Edison International
- Permian Basin Royalty Trust
- Tsakos Energy Navigation Ltd.
- UIL Holdings Corporation
The two Arrivals are ones that have been in the Bin before, although one of them has been gone for some time. That one is Cooper Industries, a maker of electrical circuit protector products and tools. Its 2.61% drop today lowered its P/E below the Bin cut-off. The same cause got France Telecom back in.
The six Departures got out for drop-related reasons, with the notable exception of two. Those two are, significantly, both electric utilities: Edison International and UIL Holdings. Edison was up 1.99% today, and UIL was up 0.35%. Both gains pushed both companies' P/E ratios above the lowest quintile cut-off.
A 2Q loss pushed Carpenter's 12-month trailing EPS down to the point where its P/E is well above the cut-off: the stock of the specialty metals manufacturer dropped 1.59% today. Cousins Properties's market cap dropped below 500M today due to a 4.63% drop in the REIT's stock. The same fate got Permian Basin, an express trust with interests in several Texas oil and gas properties, out of the Bin too. Tsakos, a ship-transportation company specializing in crude oil tankers, saw its yield go above 10%.
There was another drop today, a surprising one given the company's fate in its home-country exchange. Yanzhou Coal announced a takeover of Australian company Felix Resources. The news sent the stock up on both the Shanghai and Hong Kong exchanges today, but the American market was far less impressed. Yanzhou's ADRs closed down 3.79% at $15.49 on the first day they've traded since last Friday.
That's all for today's Daily Wrapup. Thanks for reading, and may your weekend be free of the anxieties of the momentum trader.
In Some Cases, Things Move More Slowly In China
Yanzhou Coal Mining has been pursuing a takeover of the Australian company Felix Resources. The Yanzhou board has just given approval to the deal; Felix's board has already done so.
Yanzhou's stock has been halted because this takeover represents a material change in the company's fortunes. In the Canadian markets, halting happens all the time. The stock stops trading for sufficient time to get the news out; the halt typically lasts between thirty minutes and three hours. The Chinese stock markets have similar strictures, which are designed in accordance with a fairness standard: the quick should have no advantage over the less quick.
So, the Chinese coal company has been suspended to get the takeover news out; there's not much unusual in that to a Canadian like myself. What is unusual is the length. Yanzhou's been halted for almost a week.
It looks like some things are slower in China. Evidently, the halt period for a takeover includes the whole takeover process. I can't even say if Yanzhou will start trading tomorrow, even though the takeover's at the done-deal stage.
Update: An analyst with the Macquarie Group has panned the deal, recommending that shareholders reject Yanzhou's offer despite the Felix board's recommendation to vote for it. The reason given is that there's no takeover premium in Yanzhou's price.
So it's not quite a done deal yet...
Update 2: The story's made Yahoo Finance's roster. As it turns out, Yanzhou's shares have started trading again on the Hong Kong exchange: they gained 2.3%. The ADRs should start trading today on the NYSE.
Yanzhou's stock has been halted because this takeover represents a material change in the company's fortunes. In the Canadian markets, halting happens all the time. The stock stops trading for sufficient time to get the news out; the halt typically lasts between thirty minutes and three hours. The Chinese stock markets have similar strictures, which are designed in accordance with a fairness standard: the quick should have no advantage over the less quick.
So, the Chinese coal company has been suspended to get the takeover news out; there's not much unusual in that to a Canadian like myself. What is unusual is the length. Yanzhou's been halted for almost a week.
It looks like some things are slower in China. Evidently, the halt period for a takeover includes the whole takeover process. I can't even say if Yanzhou will start trading tomorrow, even though the takeover's at the done-deal stage.
Update: An analyst with the Macquarie Group has panned the deal, recommending that shareholders reject Yanzhou's offer despite the Felix board's recommendation to vote for it. The reason given is that there's no takeover premium in Yanzhou's price.
So it's not quite a done deal yet...
Update 2: The story's made Yahoo Finance's roster. As it turns out, Yanzhou's shares have started trading again on the Hong Kong exchange: they gained 2.3%. The ADRs should start trading today on the NYSE.
Thursday, August 13, 2009
Daily Wrapup For August 13th
Despite the morning news disclosing weaker retail sales and an unexpected rise in first-time jobless claims, the rally ended up continuing. After a plummet in the early morning, which took the three major averages to about a 0.5% drop on the day, they recovered and were in positive territory by 10:30 AM ET. After reaching the morning's high point at about 11 AM ET, they sunk back somewhat until an aborted rise in early afternoon ET, after which they briefly plummeted. By 2 PM, all three were down on the day. The last two hours of trading saw them pull back up, to close with all three on the upside. The Dow gained 0.39%, the S&P 500 was up 0.69% and the NASDAQ gained 0.53%. After being up considerably more earlier in the day, light sweet crude ended at $70.52/barrel for a gain of 36 cents.
In sympathy with the averages, the lowest-quintile P/E cut-off rose to 11.74 from yesterday's 11.65. The S&P dividend yield, which forms the Low P/E Bin yield cut-off, dropped two basis points to reach 2.62%. After ETFs and stocks with less than 500M market cap were eliminated, along with ones with yields greater then 10%, the Bin was left with one hundred and six stocks for a gain of two from yesterday. Here are the changes in the Low P/E Bin, as dash-listed below:
Arrivals:
- Edison International
- Permian Basin Royalty Trust
- Plains All American Pipeline, LP
- UIL Holdings Corporation
Departures:
- Allianz SE
- Barclays PLC
Of the Arrivals, all but one are returns. Edison International, an electric utility in Southern California with electricity selling and investment arms also, got back in the Bin because its P/E fell below the upped cut-off; Edison dropped 1.34%. Permian Basin Trust, a holder of several oil and gas producing properties in Texas, got back because its market cap rose above 500M. UIL Holding stock wasn't down; in fact, it gained 0.39%. This electric utility got back in because the P/E cut-off rose to exceed its own.
The new Arrival is Plains All American Pipeline. The stock was down 1.29% today, which brought its P/E down to cross the lowest-quintile cut-off. Plains is a company that transports crude oil, natural gas and liquified petroleum gas. Its pipelines are in several regions of the United States and extend into Canada.
The two Departures were both up on the day, but each got out for a different reason. Allianz, global insurance and banking services provider, saw its P/E shoot up because its 12-month trailing earnings sunk: that, plus its 2.02% rise, got it out of the Bin. Barclays was also up, but it hasn't declared a dividend in about a year. Hence, it's left the Bin because it has no more yield - and won't until it declares another dividend of sufficient amount.
This list of insider transactions, which I got from today's edition of the Casey Research Daily Dispatch, presents a sobering (and comprehensive) sight. A large majority of the listed transactions are sales. One exception that sticks out is a 3,500 share purchase of electric utility Ameren Corporation, bought by VP and Controller Mark Clarke two days ago. After hitting a low of $23.36 on July 10th, in part because of cap-and-trade fears, Ameren drifted upwards until it settled into its current above-$26 trading range. It closed up 0.30% today at $26.35, for a P/E of 9.87 and a yield of 5.84%. The stock is virtually unchanged from Tuesday's range.
That's all for today's Daily Wrapup. Thanks for reading, and I hope your outsider trading has gone well.
In sympathy with the averages, the lowest-quintile P/E cut-off rose to 11.74 from yesterday's 11.65. The S&P dividend yield, which forms the Low P/E Bin yield cut-off, dropped two basis points to reach 2.62%. After ETFs and stocks with less than 500M market cap were eliminated, along with ones with yields greater then 10%, the Bin was left with one hundred and six stocks for a gain of two from yesterday. Here are the changes in the Low P/E Bin, as dash-listed below:
Arrivals:
- Edison International
- Permian Basin Royalty Trust
- Plains All American Pipeline, LP
- UIL Holdings Corporation
Departures:
- Allianz SE
- Barclays PLC
Of the Arrivals, all but one are returns. Edison International, an electric utility in Southern California with electricity selling and investment arms also, got back in the Bin because its P/E fell below the upped cut-off; Edison dropped 1.34%. Permian Basin Trust, a holder of several oil and gas producing properties in Texas, got back because its market cap rose above 500M. UIL Holding stock wasn't down; in fact, it gained 0.39%. This electric utility got back in because the P/E cut-off rose to exceed its own.
The new Arrival is Plains All American Pipeline. The stock was down 1.29% today, which brought its P/E down to cross the lowest-quintile cut-off. Plains is a company that transports crude oil, natural gas and liquified petroleum gas. Its pipelines are in several regions of the United States and extend into Canada.
The two Departures were both up on the day, but each got out for a different reason. Allianz, global insurance and banking services provider, saw its P/E shoot up because its 12-month trailing earnings sunk: that, plus its 2.02% rise, got it out of the Bin. Barclays was also up, but it hasn't declared a dividend in about a year. Hence, it's left the Bin because it has no more yield - and won't until it declares another dividend of sufficient amount.
This list of insider transactions, which I got from today's edition of the Casey Research Daily Dispatch, presents a sobering (and comprehensive) sight. A large majority of the listed transactions are sales. One exception that sticks out is a 3,500 share purchase of electric utility Ameren Corporation, bought by VP and Controller Mark Clarke two days ago. After hitting a low of $23.36 on July 10th, in part because of cap-and-trade fears, Ameren drifted upwards until it settled into its current above-$26 trading range. It closed up 0.30% today at $26.35, for a P/E of 9.87 and a yield of 5.84%. The stock is virtually unchanged from Tuesday's range.
That's all for today's Daily Wrapup. Thanks for reading, and I hope your outsider trading has gone well.
Wednesday, August 12, 2009
An introduction to behavioral finance
The Globe and Mail has webbed an article that provides a basic introduction to behavioral finance, with four biases explained therein. It's entitled "Bad habits sow bad investments: Avoid traps created by overconfidence, herding, anchoring and regret." The four biases are explained in everyday terminology.
The authority quoted is Lisa Kramer. Her University of Toronto Web page is here.
The authority quoted is Lisa Kramer. Her University of Toronto Web page is here.
Daily Wrapup For August 12th
It's often held that the end of a Fed meeting bodes well for stocks. Despite the iffiness of that rule, it held up once again. The three major averages started off strong, leaping up to over 1% gains by 10 AM and basically holding there. News reports, like this one, attributed the early rise to good earnings news from Macy's and Toll Brothers. A leap-up later in the day, prior to a dip staring right after 2 PM ET, was attributed to the Fed's decision to leave the Fed funds rate unchanged. The NASDAQ briefly had a more than 2% gain, and the other two major averages were close to 2%. Near the end of regular trading, though, that late-afternoon rally was erased; the three major averages were left at about the same point they were at as of about 2:30 PM. The Dow was up 1.30%, the S&P 500 gained 1.15%, and the NASDAQ was up 1.47%. All told, it could be argued that the morning leap had discounted the Fed's decision and report all along. September light sweet crude closed today at $70.16.
The lowest quintile P/E cut-off also shot up, to 11.65 from yesterday's 11.41. In line with the S&P's rise, its yield sunk three basis points to 2.64%. After ETFs were thrown out, as well as stocks with more than 10% yields and/or market caps of less than 500M, the Low P/E Bin was left with one hundred and four stocks for a gain of five from yesterday. Here are today's changes in the Bin, as dash-listed below:
Arrivals:
- Alliance Resource Partners, LP
- Altria Group, Inc.
- CenterPoint Energy, Inc.
- NTELOS Holdings Corp.
- SCANA Corporation
Departures:
None.
All but one of the Arrivals are companies that have been in the Bin before. The exception is the first one, Alliance Resource Partners. Alliance, which sells metallurgical and steam coal to steel companies and utilities, got in the Bin becaue its price dropped 2.20% today; that loss pushed its P/E below the upped Bin cut-off. Altria Group, the holding company for Phillip Morris USA, returned due to the P/E cut-off's rise. So did CenterPoint, a Texas utility holding company, and SCANA Corp, another electric utility; SCANA has its operations in South Carolina, but its natural gas arm does business in both Carolinas. The final Arrival, NTELOS, fell 2.88% in regular trading. Although this drop was reversed in after-hours trading, the regular day's drop put its P/E low enough for it to return to the Bin. NTELOS is a communication-services company that services Virginia and West Virginia.
A Bin stock got panned today by UBS, but the stock wasn't affected by the "sell" rating being maintained. As the first paragraph of the Globe and Mail write-up explains, "UBS expressed concern over Brookfield Properties' decision to buy distressed properties around the world and said it would keep its 'sell' rating on the property manager intact." The analyst responsible, Ross T. Nussbaum, also cited Brookfield's high debt-equity ratio as a concern. Despite that negative assessment, Brookfield climbed up today and ended with a gain of 1.85%.
That's all for today's Daily Wrapup. Thanks for reading, and may your holdings not depend too much on the Fed.
The lowest quintile P/E cut-off also shot up, to 11.65 from yesterday's 11.41. In line with the S&P's rise, its yield sunk three basis points to 2.64%. After ETFs were thrown out, as well as stocks with more than 10% yields and/or market caps of less than 500M, the Low P/E Bin was left with one hundred and four stocks for a gain of five from yesterday. Here are today's changes in the Bin, as dash-listed below:
Arrivals:
- Alliance Resource Partners, LP
- Altria Group, Inc.
- CenterPoint Energy, Inc.
- NTELOS Holdings Corp.
- SCANA Corporation
Departures:
None.
All but one of the Arrivals are companies that have been in the Bin before. The exception is the first one, Alliance Resource Partners. Alliance, which sells metallurgical and steam coal to steel companies and utilities, got in the Bin becaue its price dropped 2.20% today; that loss pushed its P/E below the upped Bin cut-off. Altria Group, the holding company for Phillip Morris USA, returned due to the P/E cut-off's rise. So did CenterPoint, a Texas utility holding company, and SCANA Corp, another electric utility; SCANA has its operations in South Carolina, but its natural gas arm does business in both Carolinas. The final Arrival, NTELOS, fell 2.88% in regular trading. Although this drop was reversed in after-hours trading, the regular day's drop put its P/E low enough for it to return to the Bin. NTELOS is a communication-services company that services Virginia and West Virginia.
A Bin stock got panned today by UBS, but the stock wasn't affected by the "sell" rating being maintained. As the first paragraph of the Globe and Mail write-up explains, "UBS expressed concern over Brookfield Properties' decision to buy distressed properties around the world and said it would keep its 'sell' rating on the property manager intact." The analyst responsible, Ross T. Nussbaum, also cited Brookfield's high debt-equity ratio as a concern. Despite that negative assessment, Brookfield climbed up today and ended with a gain of 1.85%.
That's all for today's Daily Wrapup. Thanks for reading, and may your holdings not depend too much on the Fed.
Tuesday, August 11, 2009
Sometimes (Presumed) Dilution Does Kick In
Suburban Propane Partners announced that it will be offering 2.2 million limited partner interest units, priced at $41.50 per unit. That price would have made for an adequate discount as of yesterday's close, but today's doesn't. The stock dropped 7.47% in regular trading to close at $40.75. Given this drop, the secondary is going to be a difficult sell. It may be undersubscribed.
The proceeds are being used to buy back some of its 6.875% senior notes due in 2013: up to $175 million of them by tender offer. If the secondary offering is completely sold, then the gross proceeds will be $91.3 million. (Net proceeds could be $90 million.) Those notes are being bought around face value: anyone who tenders before 5 PM ET on Aug. 21st gets 101.25% of face, and anyone who tenders after that time but before 9 AM ET on Sept. 8th gets 98.25% of face.
At those prices, the secondary offering may be dilutive to earnings. Suburban pays 8.10% at $40.75. At $41.50, it pays about 7.95%. With net proceeds, it might be about 8.05%. The yield to maturity of any bonds picked up for 101.25% of face will be about 3%. Clearly, for this part of the bond buyback, Suburban's going to be paying more.
2.2 million extra shares of Suburban, with an 83 cent quarterly dividend, is going to mean an extra payment of $1.826 million each quarter if the dividend stays the same. Given Suburban's pattern of dividend increases, that's not likely. It seems prudent to bump up the indicated annual dividend expense of $7.304 million to an even $7.5 million. I'm assuming that the secondary offering will be completely sold, and the net proceeds of such will be $90 million.
If Suburban gets $175 million of bonds at 101.25% of face, for a net bill of $178.06 million, and $90 million from the secondary, then it will be required to pony up an additional $88.06 million in cash plus any after-deal fees for the tender offer. I'm assuming that those fees will be an extra $2 million, which would bump up the cash commitment to $90.06 million. As of June 27th, it had $256.1 million in cash and cash equivalents, which is more than enough. The annual interest savings on the bonds will be $12.031 million. As noted above, the added dividends will be about $7.5 million. Increasing that $7.5 million estimate to $7.531 million leaves a gross cost savings of $4.5 million. Assuming that the cash-and-equivalents can yield 2%, then the annual cost of the foregone cash would be $1.801 million. This figure leaves Suburban with a net savings of about $2.69 million annually, or 7.7 cents per share after dilution. If the offering is fully subscribed, and all else remains equal, then it will be accretive to earnings.
On the other hand: if the offering isn't fully subscribed, then it may be dilutive. If $117 million or less of the bonds are tendered, given the above assumptions, then it will be. At that level, the dividend cost of the new limited partnership units exceeds the interest-savings gain on the bonds.
There is a chance that the tender offer will pull in all of the bonds, As noted above, the yield to maturity is about 3% at the higher tender price, and the use of a time-competitive tender structure may encourage a lot more tendering. Nevertheless, the "judgment of the market place" says that the buyback of the bonds will be dilutive. If the market is wrong in this judgment, then Suburban units have gone on sale.
There's also the other side to consider, from a balance-sheet perspective. What if all of the bonds are tendered at the higher price and no shares are sold in the secondary? That would produce maximum accretion to earnings, but it would also subtract $178.06 million from Suburban's cash balance. As of June 27th, the company has $400.49 million in curent assets and $146.53 in current liabilities for a current ratio of 2.73. Having to pay $178 million would reduce Suburban's cash balance to about $78 million, if all else current-related remains equal, and its current assets to $222.43. That outcome would leave a current ratio of 1.52. Consequently, this possibility would leave the company fairly strapped, even if its debt-equity ratio would end up well below 1.
Disclosure: As of the time of this post, I have a live buy order for some Suburban in my actively-managed Marketocracy mock fund.
The proceeds are being used to buy back some of its 6.875% senior notes due in 2013: up to $175 million of them by tender offer. If the secondary offering is completely sold, then the gross proceeds will be $91.3 million. (Net proceeds could be $90 million.) Those notes are being bought around face value: anyone who tenders before 5 PM ET on Aug. 21st gets 101.25% of face, and anyone who tenders after that time but before 9 AM ET on Sept. 8th gets 98.25% of face.
At those prices, the secondary offering may be dilutive to earnings. Suburban pays 8.10% at $40.75. At $41.50, it pays about 7.95%. With net proceeds, it might be about 8.05%. The yield to maturity of any bonds picked up for 101.25% of face will be about 3%. Clearly, for this part of the bond buyback, Suburban's going to be paying more.
2.2 million extra shares of Suburban, with an 83 cent quarterly dividend, is going to mean an extra payment of $1.826 million each quarter if the dividend stays the same. Given Suburban's pattern of dividend increases, that's not likely. It seems prudent to bump up the indicated annual dividend expense of $7.304 million to an even $7.5 million. I'm assuming that the secondary offering will be completely sold, and the net proceeds of such will be $90 million.
If Suburban gets $175 million of bonds at 101.25% of face, for a net bill of $178.06 million, and $90 million from the secondary, then it will be required to pony up an additional $88.06 million in cash plus any after-deal fees for the tender offer. I'm assuming that those fees will be an extra $2 million, which would bump up the cash commitment to $90.06 million. As of June 27th, it had $256.1 million in cash and cash equivalents, which is more than enough. The annual interest savings on the bonds will be $12.031 million. As noted above, the added dividends will be about $7.5 million. Increasing that $7.5 million estimate to $7.531 million leaves a gross cost savings of $4.5 million. Assuming that the cash-and-equivalents can yield 2%, then the annual cost of the foregone cash would be $1.801 million. This figure leaves Suburban with a net savings of about $2.69 million annually, or 7.7 cents per share after dilution. If the offering is fully subscribed, and all else remains equal, then it will be accretive to earnings.
On the other hand: if the offering isn't fully subscribed, then it may be dilutive. If $117 million or less of the bonds are tendered, given the above assumptions, then it will be. At that level, the dividend cost of the new limited partnership units exceeds the interest-savings gain on the bonds.
There is a chance that the tender offer will pull in all of the bonds, As noted above, the yield to maturity is about 3% at the higher tender price, and the use of a time-competitive tender structure may encourage a lot more tendering. Nevertheless, the "judgment of the market place" says that the buyback of the bonds will be dilutive. If the market is wrong in this judgment, then Suburban units have gone on sale.
There's also the other side to consider, from a balance-sheet perspective. What if all of the bonds are tendered at the higher price and no shares are sold in the secondary? That would produce maximum accretion to earnings, but it would also subtract $178.06 million from Suburban's cash balance. As of June 27th, the company has $400.49 million in curent assets and $146.53 in current liabilities for a current ratio of 2.73. Having to pay $178 million would reduce Suburban's cash balance to about $78 million, if all else current-related remains equal, and its current assets to $222.43. That outcome would leave a current ratio of 1.52. Consequently, this possibility would leave the company fairly strapped, even if its debt-equity ratio would end up well below 1.
Disclosure: As of the time of this post, I have a live buy order for some Suburban in my actively-managed Marketocracy mock fund.
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