Mullaneblog

The McDonald’s Of 2007

What Ray Kroc was to hamburgers, Steve Ells is to Mexican food. Ells, Chipotle Mexican Grill’s (CMG) founder, has created a stock to buy and put away. This company is too early in its growth phase to be ignored. There is a long way to go with this stock.

Highlights for full year 2006 as compared to full year 2005 include:

• Revenue increased 31.1% to $822.9 million
• Comparable restaurant sales increased 13.7%, compared to 10.2% in 2005
• Restaurant level operating margins increased 240 basis points to 20.9%
• Income from operations approximately doubled to $62.0 million
• Diluted earnings per share were $1.28, compared to $0.66 in 2005

There could be some negatives. Chipotle needs to invest heavily to get employees. Growing rapidly in a tight labor environment is extremely difficult. It will also have to deal with higher food costs and higher costs to open up new stores as it enters more expensive markets.

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Getting Cheaper, But Not There Yet

Coca Cola (KO) has been dead money for years. After reporting solid results yesterday, the stock may be due for a good 15% rally.

Coke had a great 10-year run which ended 1998, when a bear market in value stocks began. When Warren Buffett built his position in the late 1980s, the stock sold for $4.50 per share, according to Yahoo’s new charts. By 1998, the stock peaked at $89, an almost twenty-fold gain.

Since peaking in price in 1998, the stock has declined almost 50%. By 1998, the P/E on Coke exceeded 40 x earnings, a high-tech type valuation. Today, the P/E is at 19x. Getting cheap, but not very cheap.

Coke grew revenue 7% for the most recent quarter and its operating profit improved 10%, very solid for this $112 billion company. With the market rallying, these results will force large institutions to own this stock. Coke most likely has a good 10% to 15% rally ahead. But after that, take profits. Coke’s valuation is not cheap enough to be a big winner yet.

February 15

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Newell Gets Across-The-Board Upgrades

Newell Rubbermaid (NYSE:NWL) held its analyst day with the investment community Tuesday. Today, Newell is getting across-the-board upgrades.

We began blogging about the merits of Newell’s turnaround back in April when the stock was trading at $26, today the stock is around $31, up 19%. Merrill Lynch, Smith Barney and Oppenheimer have raised their targets to the $34-to-$35 price range.

In this Fly’s opinion, the analysts’ price targets are too low. Estimates are for Newell to earn $1.95 per share, but Newell will most likely earn over $2.00. Also, as the company exceeds earnings expectations, the P/E investors are willing to pay will go from 18x to 20x. Look for Newell’s target and stock price to approach $40 by 2007 year-end.

February 14

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Applied Materials: Results OK; Semiconductor Equip Cycle Appears To Be Bottoming

Applied Materials (NASDAQ:AMAT), the semiconductor equipment powerhouse, appeared to show signs that the semiconductor equipment market is close to bottoming during its quarterly conference call. Equipment orders were guided to be up 2%-7%, a good sign for the industry.

Michael Splinter, AMAT’s CEO said the logic, foundry and display businesses should be bottoming during the next few quarters. Splinter sees strong memory purchases as some 20 memory fabs are due to be constructed to meet the growing demand for new products, such as NAND, which are being used more often as a substitute for disk drives.

What is becoming more and more clear as you listen to AMAT’s conference calls and meetings with the investment community is just how powerful a company this is: 90% of orders are 300-millimeter, as semiconductor equipment buyers continue to push toward using newer technologies. This allows AMAT to build a bigger and bigger moat to fend-off competition.

AMAT generated free cash flow of $322 million, which is at the lower end of its free-cash-flow generation cycle. AMAT expects free cash flow generation to move higher from here. The stock buyback is large and dividend increases are also up ahead. AMAT is a very powerful company in a very important industry. It is time to start chipping away at this company.

Feburary 15

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Chavez Pays Market Price For Verizon Stake

Hugo Chavez, the socialist Venezuela leader, agreed on Monday to buy Verizon Communications’ (VZ) 28.5% stake in the country’s CANTV, the country’s leading telecommunications provider.

Chavez offered $17.85 per CANTV ADR versus the $16.08 per share Monday trading price, an 11% premium. Last year, Carlos Slim, the Mexican billionaire offered $21 per share.

The CANTV offer follows the government’s agreement to pay $740 million for AES’s 82% stake in Electricidad de Caracas which was again close to the current trading value.

Anyway you look at it, Venzeula is a country that simply cannot get out of trouble. If its run by capitalists, the rich keep all the money and the poor get poorer and poorer. If the country is run by an extreme reformist, like Chavez, the state runs the businesses into the ground. If you even have an opportunity to go to Venezuela to evaluate investment opportunities, don’t go. It is too tough of a place to make money whether a capitalist or communist is running the country.

February 13

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A War In The Wireless Software Business Is About To Begin

Today, Nokia (NOK) and Vodafone (VOD) announced their collaboration on the development of S60 software on Symbian OS, with the release of the first Vodafone specific software package to all S60 licensees.

Comverse yesterday announced the expansion of its Converged Messaging portfolio with the launch of Comverse Instant SMS, which combines the worlds of SMS and Mobile Instant Messaging, or MIM.

Additionally, Openwave (OPWV) is launching a whole line of new products.

2007 and 2008 will be the battle between handsets and smartphones, those with the best software will win out. Wireless service providers have been slow to bring PC functionality to handset devices for fear of losing control of the handset. In the PC business, Microsoft (MSFT) and Intel (INTC) make all the money, with little left over for anyone else.

This means industry consolidation in the wireless software market is about to begin. Look for everyone to start making wireless software acquisitions, either acquiring or partnering, with Openwave, Comverse (CMVT) and Symbian. Also look for the big software companies like Microsoft and Sun Microsystems (SUNW), with its Java platform, to get into the M&A activity.

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Looking To Invest In IP Voice: Stay Away From Vonage, Look At eBay

Vonage’s (VG) woes continue as detailed in Barron’s Follow-Up column this weekend. The stock is currently trading at $5 per share down from its $17 offering price.

The article cites the lack of triple-play offering — voice video and data — that the cables can offer and that the baby bells most likely are heading towards offering. However, from this Fly’s perspective, the real play in voice over IP could be with Skype, which is owned by eBay (EBAY).

eBay completed the acquisition of Skype during the past year which is now part of its Power of 3 strategy — marketplaces, payments and communications.

While the cable companies are adding hundreds of thousands or millions of customers, eBay has over 171 million customers around the world. Skype now offers phone numbers that work through your PC. In addition, there is, although it is still expensive, a Skype USB port phone that is wireless so you can walk around with your Skype device in your home.

Skype will be charging for services that go into public-switched networks, but the cost is virtually nothing when compared to cable and the baby bells.

eBay said in its year-end conference call that it is still figuring out the best way to monetize Skype. Any way it does it, it will be a lot cheaper and more profitable than any of its competitors.

February 13, 2007

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Optical IPOs Are Slowly Coming Back

Opnext (OPXT), a maker of laser diodes, optical modules and pluggable modules, is expected to go public this week. Opnext is the second optical component company to come public in the last four months. Optium (OPTM), a Chalfont, Pa-based company, came public in October 2006 at $17.50 and is now trading at $24.95.

Opnext has been funded by Hitachi and venture capital firm Clarity Group. Hitachi will be transferring some 670 patents to this start up.

The stock is supposedly going to be priced around $14 per share. With only two optical companies recently coming public, as one would expect, the financials for the company are pretty solid.

Supposedly, Opnext is strong in the 10-Gigabyte optical space and has product for 40 gigabyte technology also.

These optical components are very cyclical as are most new higher growth industries. The upcycle in this space appears to be still in its early stage. It may be worth a spec on this IPO.

February 12, 2007

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Buying Opportunity

After Cisco’s (CSCO) outstanding results, we blogged that another way to play the huge growth in IP traffic was through pure IP service providers such as Level 3 (LVLT), Global Crossing (GLBC) and Time Warner Telecom (TWTC). That day, these stocks rallied big, especially Level 3.

Yesterday, Level 3 reported outstanding results but the stock gave back all the gains made on Wednesday. Why? The company said EBITDA would be down sequentially.

Use yesterday’s price weakness to get into this stock. Level 3 is going to spend a boat load of money in the first quarter to properly integrate the Broadwing and other companies it acquired during 2006. After that, operating results, along with the stock, should be off to the races again.

Sprint Nextel has been one disaster of a merger because it never bit the bullet and spent the money to properly integrate the two companies. Sprint, after years of poor performance, is finally going to do the ugly work. But it might be too late.

The strong underlying trends in Level 3’s business are too powerful to ignore. The core IP communications business is growing 25% to 30% per year, its growth rate and operating margins are the best in the industry and it continues to attract better and better customers–the who’s who of the Internet era. In addition, Level 3 will substantially improve the debt-to-EBITDA ratio by 2008.

Yesterday’s sell off was an overreaction. Use it as a buying opportunity.

February 9, 2007

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Mortgage Market News & Insider Selling Most Likely Connected

Merrill Lynch’s (MER) top executives have been selling a lot of stock, according to Barron’s Online. So far this month, the top three execs have grossed $29.7 million. Supposedly, this is the highest level of monthly selling since January 2001.

Yesterday, HSBC increased its reserves for the blow-up of its mortgage portfolio. New Century Financial also reported blow-up results. Both of these companies are in the higher risk part of the mortgage market, but that is where the trouble always starts.

Brokerage firm results have been utterly spectacular for the past five years. A lot of that success can be attributed to the fixed-income business. However, the flat yield curve is most likely going to start impacting results as steep-yield curve trades begin to expire and cannot be replaced in this flat-yield curve environment.

The old-line brokerage firms are too big to report the results they have been reporting for so long. The law of large numbers has to apply at some point. The insider selling is pointing to a tough time ahead for fixed income traders and the brokerage stocks.

February 9, 2007

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