Ameren Issuing More Stock, Price Drops

Once again, a non-financial company has issued plans for a secondary offering to the detriment of its stock price. Ameren, an electric utility holding company whose main operating subsidiaries are based in Illinois, has announced it will issue another 19 million shares. (With over-allottment rights of 2.85 million, the issance could be as high as 21.85 million.) Since the company plans to use the proceeds to up its investments in its subsidiaries, there's no reason to assume that the offering won't be dilutive. The best face for this offering would be an increase in regulatory capital leading to higher rates being allowed under the regulations.

Ameren's total shares outstanding as of June 30th was 214.2 million. Adding 21.85 million makes for an increase of slightly more than 10% of total shares outstanding. The money is earmarked to be spent, so there's no offset for the dilution factor except for the increase in earnings permitted by the increases in regulatory capital.

Left unspecified were the specific uses to which the funds will be put. Ameren stock dropped when cap-and-trade legislation was churining along, which leads me to suspect that the proceeds will be used to cut down the company's coal consumption by building natural gas generators.

Ameren stock was down 0.70% in regular trading, and down a further 3.12% in after-hours trading. The latter drop may not be reflected in its performance once regular trading starts again.

GE Leaps Up On Upgrade

Thanks to an upgrade of the company, from J.P. Morgan, the shares of General Electric rose 4.54%. The analyst, Stephen Tusa, now rates GE as "Overweight" because the worst seems to be over for the company; even if GE ends up raising money through a secondary offering, said Mr. Tusa, it would be good for the stock because it would dispel undercapitalization doubts.

Mr. Tusa could very well be right, but note the "even bad news is good news" thrust. Call me a worry wart, but that kind of reasoning makes me jumpy even if the troubled banks have shown the same effect over the last several months. Mr. Tusa's price target of $17 will likely be met from the latest close of $14.50, but I believe the path will be fairly jagged. I've been burned myself by "all clear ahead" bullishness.

Another Upgrade, Another Spurt-Up

This time, it's Alberta phone company Telus. The company was the beneficiary of an upgrade from Merrill/Bank of America on Thursday afternoon. Initially, the stock didn't react. On Friday, though, the stock shot up 4.46% to close at a year-to-date high. 1.42% of that gain was taken away in after-hours trading.

By my own reckoning, TELUS doesn't have the greatest of financials over the last ten years. Ten-year continuing-operations EPS growth is less than the S&P's, and its ten-year return on equity is 5.76% as calculated in C$ terms using Canadian GAAP figures. I haven't seen that upgrade, but it's likely based on recovery prospects for the Albertan economy.

August Same-Store Sales Out For The Buckle

This morning, demin, other casual apparel, and footwear vender The Buckle released its August same-store sales figure. Sent out before the bell, the release said that the chain's sales on that basis rose 3.6%.

That result wasn't bad, but for a (perhaps formerly) fast grower like The Buckle, it wasn't very good either. According to the same story, the retailer's same-store sales for all of 2009 were up 11.3% as compared to the same period a year ago. The company's July slip is what got it in the Bin in the first place.

Today, though, The Buckle stock was actually up 1.35%. Its stock fell in the early morning, but recovered in the afternoon. In the end, the market shrugged off the most recent same-store figure.

I earlier wrote an analysis of the company, which offered the opinion that any further slowdown has been discounted. So far, there's little call to change that opinion, even though August is one of The Buckle's big earner months. Hard evidence of margin erosion will have to wait the company's next quarterly.


Disclosure: I'm holding The Buckle in the actively-managed Marketocracy mock fund I run.

Brookfield Properties CEO Says Fears Of Commercial Real Estate Collapse Overblown

That's what Rick Clark said, according to this excerpt from a CNBC interview. His words didn't help the stock of Brookfield all that much, though. It was down 4.60% to close at $9.74.

Still, that supposed doom has been very widely anticipated. A contrarian would wonder...

Barron's Pans Oil Refiners...

...and later claims that the drops in their stock shows the panning was sound. The original article claimed that there was more to the gasoline consumtion drop than hard times: Americans are trading in less fuel-efficient cars for more fuel-efficient ones, a trend that the author claims is a long-term one.

The two stocks mentioned as evidence were Sunoco Inc. and Tesoro. The former dropped 1.86% in regular trading, but the latter only dropped 0.78% Tesoro's decline was about in line with the overall market, and Sunoco's was fairly gentle compared to some other oil stocks. Both were up in after-hours trading, too. Perhaps Barron's Online was a little eager to showcase the work, although time will tell.

Interestingly, another Bin stock in refining got slaughtered today, but was not mentioned by Barron's. Recent high-flyer Holly Corp. was down 4.07%, and was unchanged in after-hours trading.


Update: Perhaps I spoke too soon. Sunoco was slaughtered the following day, with a 4.68% plummet in its stock. On the other hand, Tesoro was down only 0.85%. Its two-day drop was less than the S&P 500's one-day September 1st drop.


Update 2: Tesoro's being hammered now. So, it seems I did speak too soon.

Upgrades Don't Always Help

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.

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]

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.

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.

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.

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 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.

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.

Harvest Energy Trust Declares 2Q Results

Harvest, a Canadian oil, gas and refiner income trust, reported a $1.59 per unit loss as compared with a $1.07 unit loss in 2Q '08. The loss per trust unit for the first six months of this year was $1.28 as compared with $1.08 in the first half of '08. I didn't know that my earlier attempt to "discount doomsday" would prove to be optimistic.

However, the distribution's being kept as is; the operations-cash-flow payout ratio has shrunk to 33%. The company explained that the distribution is not increasing because they want to divert cash flow to repaying bank debt. A cynic would interpret this statement as meaning the company got itself too leveraged earlier. As of March 31st of this year, Harvest had slightly more shareholders' equity than debt. Given the loss, the company may be trying to keep the debt-equity ratio below 1.


Disclosure: I have Harvest in my actively-managed Marketocracy mock fund.

Cousins Properties Records Loss, But Better Results Excluding Noncash Charges

Cousins Properties, a REIT, has reported its results for the second quarter after the bell. This detailed report starts off by pointing out that Cousins' earnings minus certain impairment, valuation and retirement charges were up in 2Q '09 with respect to 2Q '08. Once those charges are included, though, the company posted a $1.56 per share loss; 2Q '08's EPS was a gain of 16 cents.

When compared with 1Q '09's result, the $1.56 loss doesn't look all that bad: EPS for the first quarter was $3.13. The corresponding net income of $160.571 million would have been a slight loss had it not been for a $167.434 million gain from the sale of some properties. Since Cousins is a REIT, gain on sale of investment properties is treated as part of continuing operations.

Right around now is the predicted start time of a commercial real-estate collapse. In Cousins' case, though, the impairment charges came from a condo project and a residential real-estate development deal that went sour.

To move back to Cousins' second quarter, I note that its cash flow from operations for the first six months of 2009 was $15.516 million. For the first six months of '08, it was $26.324 million.

Universal Corporation's 2Q Earnings More Than Double 2Q '08's

Universal Corporation, a supplier of raw flue-cured, burley-leaf, oriental and dark tobacco, reported 2Q '09 diluted EPS of $1.47 per diluted share. (Full press release here.) That figure is 129.6% more than 2Q '08's diluted EPS of 64 cents. Its revenue also rose 22%, and its operating income rose 90%. 'Taint easy finding a company this quarter that's reported strong growth in both earnings and revenues, but Universal is one.

This performance, though, had something to do with acceleration of sales, plus cost benefits garnered because of a strong U.S. dollar. Conversely, the U.S dollar weakening (as is happening right now) will raise its costs. Also blotting the picture is the fact that operating cash flow was negative because of changes in the relevant current assets and liabilities. The main cause was a 65.5% drop in customer advances and deposits, which was buffered somewhat by a 31.9% decrease in Universal's advances to suppliers.

Accounts receivable barely budged, and the ratio of accounts receivable to sales fell from 44.4% to 37.3%. There's no sign of any squeeze in that end, which coheres with the CEO's claim that there's no tobacco glut in sight. The only negative factor that the CEO definitely brought up was the potential loss of Universal's sales to Japan Tobacco, which wants to buy from smaller suppliers.

When this report was disseminated, the market yawned. Universal opened at about where it closed, and edged up 32 cents to $38.92 by 9:38 AM ET. Up until 2:24 PM ET, it drifted in a range whose borders were $38.75 and $39.00.

Then, it ramped up to $40.33 in a hurry. After sinking back somewhat, to $39.23, the stock closed up 3.01% at $39.76.

The reason why won't surprise dividend watchers all that much. At 3:28 PM ET, Reuters Key Developments added a declaration of an unchanged 46 cent per share dividend...for shareholders of record on October 13th. Evidently, there had been a little concern about its dividend for the second half of this year.


Disclosure: I have Universal in my actively-managed Marketocracy mock fund.

Titanium Metals Reports A Not-So-Stellar Quarter

Titanium Metals released its second-quarter results this morning, and reported an EPS drop of 80.8% from the same quarter a year ago. The main reason was a drop in demand for its titanium products, which lowerd both the prices fetched and the volume sold. Demand diversion from scrap recycling was partly to blame. The company also attributed the drop to the delay in the introduction of the Boeing 787 and similar delays by Airbus.

The company won't be facing any liquidity or solvency crises soon. As of June 30th, according to its latest 10Q, its current ratio is 6.57 to one, and its quick ratio is an unusually high 2.14. Its quick assets, or its current assets minus inventory, are higher than all of its liabilities: the former is $264.6 million, and the latter is $245.9 million. Titanium Metals has no long-term debt, so its capital structure is all stockholders' equity. There's a miniscule amount of preferred outstanding; far less than 1% of shareholder's equity. Book value available to common equity is $6.27 per share; the stock is at $8.87.

On the other hand, it doesn't have much of a history of dividend payment; its dividend has been suspended as of the first quarter of '09. Its free cash flow for the first half of '09 was more than twice the amount needed to support its '08-level dividend of 8 cents per share, but that potential coverage ratio came from a slashing of capex spending by more than 75%. Had capex been the same level as it was in the first half of '08, free cash flow would have been less than half of the amount required for dividend payment. Interestingly, free cash flow in the first half of '08 was less than the amount needed to pay the dividend back then. Free cash flow was only 1.4 times dividend requirement in 2008.

Perhaps the lack of a free cash flow cushion, plus the recession, is what made Titanium Metals pass its dividend in the first quarter. Resuming the dividend at 8 cents, which seems unlikely for this quarter, would amount to saying that capital expenditures aren't going back to the old levels until earnings do.

Compass Minerals: A Low P/E Bin Oddity

The general market may have been down yesterday, but Compass Minerals was not. It rose 5.99%, although that gain was shaved with a 1.00% decline in after-hours trading. The company reported 2Q '09 earnings after the bell two days ago that were well above 2Q '08's. That report provided the catalyst for Compass' shares to shoot up yesterday.

Compass Minerals is a miner of rock salt and sulfate of potash, and it buys other products that are compatible with its main lines of business. It's only been a public company since 2003, and a complete set of available financials for it goes back to 2002. During the time it's been a public company, its EPS growth (as measured by logarithmic regression) has been an eye-opening 30.93%. These results have been skewed somewhat by 2008 earnings that were nearly double 2007's. Still, the first two quarters of 2009 show further EPS growth taking place.

Compass' latest 10Q report, for 2Q '09, shows something rather odd for today's revenue-nervous Street. Its revenues decreased 2% in 2Q '09 as compared with 2Q '08, and revenues in the first half of '09 have sunk 14% as compared with the first half of '08. Given today's fashions, this drop should cause concern. However, its gross margin has increased during those timeframes. 2Q '09's gross margin is 11 points above 2Q '08's. The same 11-point jump took place between the first half of '09 with respect to the first half of '08. And this, in a market where Compass' sulfate of potash sales are down because of price concerns amongst its agricultural customers.

Those who are used to seeing a current ratio 'supplemented' by a standby line of credit will find a pleasant surprise in Compass' balance sheet. As of June 30th, Compass' current ratio was 3.21. Using a strict form of the quick ratio, in which all current assets save cash and accounts receivable are excluded, Compass has a number of 1.17. This, from a company whose inventories are likely not to plummet in price as a result of fashion changes. Compass' working capital is equal to more than half of its long-term debt.

There's one easily-found trouble spot in its balance sheet. Compass' debt-equity ratio, including short-term and current long-term debt, is 3.42 times shareholder's equity. This ratio is so high in large part because Compass' shareholder's equity has been negative from 2002 to 2007^*. Its long-term return on equity figure is meaningless as a result, and its more recent return on equity figures are misleadingly high. The fact that it has a lot more debt than equity is a concern, as a debt equity of 1 to 1 is the high point of safety.

This weak point can be balanced with the debt-to-working-capital ratio, which is a much lower 1.90. The earliest due date on its long-term debt is 2012. although 80.8% of its debt ($395.2 million) is due in that year.

The last annual spurt-up in EPS before 2008's was 2004's 33.9% gain over 2003's. This gain reversed in 2005, when earnings got knocked down to below 2003's level. In 2006, though, EPS shot back up to over 2004's. This can be taken as a sign that derailed EPS growth will not be permanent, or as a sign that Compass' EPS is quite volatile. 2005's started out below 2004's right from the first quarter; 2009's first two quarters are both above 2008's. Nevertheless, there is a chance that the last two quarters of '09 will not be above '08s. A relatively mild winter could knock down EPS in the fourth quarter, for example.

Another weak point on its balance sheet, from a value-investing perspective, is its book value. Excluding intangible assets, Compass' equity per share is a mere $3.47. Its close in last evening's after-hours trading was $51.51. At that price, Compass is selling at 14.8 times book value.

It's a very high overage, and the reason is the same as for the high debt-equity ratio and misleadingly high near-term return on equity ratios. Compass started off as a public company with a large shareholder's deficit^*, for whatever reason^**, which has made for its weakness in two standard value investor's ratios.

On the other hand, its dividend is relatively safe. Compass currently yields 2.73%, and the dividend has increased in every year it's been a public company. From 2005 to 2007, its free cash flow was less than double its dividend-payout expenditure. In 2008, though, free cash flow was more than four times' dividend expenditure. For the first half of 2009, free cash flow was about 2.5 times dividend disbursements. Compass has not had a long record of free cash flow being well above dividend disbursements, which makes for another cautionary sign for a value investor. On the other hand, its recent record does show a nice margin of safety.

There's another, more earnings-related, weak point in Compass' most recent balance sheet: as of June 30th, inventories have shot up 63.5% from Dec. 31st's level and 49.2% from March 31st's level. This ramp-up seems seasonal. 2Q '08's inventory level was 67.4% higher than 1Q '08's; that earlier ramp-up did not portend a drop in earnings for the rest of '08 or even the for the first two quarters of '09. 3Q and 4Q revenue growth justified the increase. The company clearly is expecting that seasonal growth to continue this year. If that expectation is not met, however, then Compass will be stuck with a lot of inventory. Revenue for the first half of '09 has grown nowhere near the rate that inventory has, even if annual revenue growth has grown 18% from 2005 to 2008.

For this metric, standard interpretation says "stay away." Even if the reason is merely seasonal, its inventory bulge for the first half of this year - on the heel of declining revenue in the same timeframe - sends out warning that Compass might very well stumble soon. The only point of doubt comes from the seasonality factor.

Putting all of the above together, it's evident that Compass is an oddity in the Low P/E Bin: a low P/E speculative growth stock. It's selling at way above its book value. One of its solvency metrics is horrible, even if its liquidity position is great from a value investor's perspective. Its EPS growth is quite high, and its most recent results show no sign of a stumble. Compass is one of those companies with a current knack for expanding gross margin in the teeth of a current revenue drop. Its inventory level, although perhaps seasonally justified, is disturbingly high relative to 2008's and its revenue for the first half of 2009.

The inventory factor is what makes Compass a speculative low-P/E growth stock. In the near term, the speculative element is the weather. If this coming winter if going to be mild, Compass will be stuck with a lot of inventory that it can't unload. If this winter's going to be a cold and snowy one, however, the inventory problem will disappear like 2008's 2Q bulge did.

Ove the longer term, another speculative element is a pickup in demand for Compass' sulfate of potash fertilizer products amongst its agricultural customers. According to the company's most recent M D & A, price sensitivity is the current factor damping demand for this segment. Compass' target customers are evidently not prosperous enough to not worry about the expense. If they become so, then the company will have no trouble selling its specialty fertilizer even at current record prices. So, the second speculative element is the hope that Compass' farmer and turf-seller customers will become prosperous again. To put it another way, Compass is in part a speculative bet on agricultural commodities going up further.

Putting it all together, Compass looks like a great stock to someone who believes that: a) Compass' growth record, not impugned since 2005, will continue; b) the coming winters will be cold and snowy, and winter road conditions will be bad enough to further boost demand for Compass' rock salt; c) agriculture is in for a boom, creating upped demand for Compass' sulfate of potassium specialty fertilizer. For someone who believes that roads won't need that much winter treatment in the future and agriculture won't be entering a boom anytine soon, or that Compass' recent record won't be continued for other reasons, Compass' inventory jump-up sends out a red-flag warning.

A value investor, on the other hand, would shy away from Compass because of its low shareholder's equity. That paucity not only makes for a very high debt-to-equity ratio, but also for a very low book value per share relative to the stock's current price. Although it has a record of increasing its dividends, its free cash flow cushion hasn't been all that great until last and this year. That's not enough of a change in ways to make a true value investor comfortable - and the yield isn't all that high anyway.

What to make of this stock is up to the reader. The above analysis, I hope, managed to clarify what kind of an opportunity Compass represents, for what kind of person, as well as clarifying any cautionary or warning signals from the company's financials.

One more point: Compass has more than $10.2 million in net losses from interest-rate- and natural-gas-price derivatives that it intends to bring on the books as expenses in the near future. Those losses represent a drop of 31.3 cents' worth of EPS that will show up in the income statement soon. Had they been expensed in 2Q '09, Compass' earnings in that period would have been only somewhat above 2Q '08's. If natural gas prices keep dropping, then there will be more losses even though said drop will lower Compass' unhedged natural-gas costs too. Given that 2Q EPS was 42 cents as compared with 2Q '08's 5 cents, even though revenue did drop in the same timeframe, it's safe to assume that Compass will be a net beneficiary from a further natural-gas price drop. I note this point to show that Compass' EPS is going to be sliced downwards by 31.3 cents in the near future. Had Compass expensed the losses last quarter, EPS would have been 10.7 cents - still a gain from 2Q '08's, but far below the reported one.


[Note: I have to remind everyone that I'm not licensed as an investment advisor in my home jurisdiction of Ontario in Canada, nor do I qualify for such designation.]

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*: Buybacks were not responsible: Compass started off with a large negative shareholder's equity. As of the end of 2003, right after it first started trading, its shareholder's equity was -$128.1 million. As of the end of 2008, shareholder's equity was +64.5 million. Several years of earnings were required to reverse the initial shareholders' deficit. As of 2Q '09, shareholders' equity was +$143.9 million.

**: Your guess is likely to be better than mine. I don't even want to to try to guess why.

Banco Santander Disappoints; Barron's Vs. Minyanville

In the next-before-last issue of Barron's, there was a bullish article on Banco Santander. Today, before the bell, it announced second-quarter earnings that were down 4% from 2Q '08's. An increase in provisions for non-performing loans was the drag-down. The rest of its segmentation shows profit increases.

Because the number of Santander's common shares has shot up recently, EPS figures declined more rapidly than net income itself. 2Q '08's diluted EPS was 0.35 euros. Assuming that the number of shares of Santander was the same on June 30th as it was on March 31st., 2Q '09's diluted EPS would be about 0.284 euros. That drop of 0.066 euros, if accurate, means that Santander's 2Q EPS has dropped about 18% from the same quarter a year ago. The 0.284-euro estimate may be optimistic, given that the number of Santander's common shares has increased in each of the last three quarters.

The stock is well above the price it opened at as of the Monday after that Barron's article. Although Santander closed down 1.65% today, and lost a further 1.20% in after-hours trading, its after-hours closing price of $13.69 is 66 cents above July 20th's opening price of $13.03.

Run-ups attract other kinds of hopefuls, though. In the article "Have We Reached A Top?", Minyanville's James Kostohryz disclosed that he was short the stock as of the time of that article's posting (yesterday afternoon). Santander's dropped more than 50 cents per share since the posting of that Minyanville article. Odd that both articles can have a gain attributed, but that's what difference in timing gives you.