Mullaneblog

Mortgage Market Getting Ugly

HSBC Holdings PLC (HBC) said late last night that its loan impairment charges and other credit risk provisions in 2006 are now expected to be 20 pct above the consensus estimate of $8.8 billion made by analysts, due to higher-than-earlier expected provisions for its US mortgage business.

HSBC now expects their mortgage loss to be $10 billion.

New Century Financial (NEW), a large subprime mortgage lender, projected a fourth-quarter loss, and said it expects to restate each of the previous three quarters’ earnings lower because it did not set aside enough money to buy back subprime loans that went bad.

This unwinding of the mortgage market is just beginning. Large financial institutions have been reporting spectacular results due to gains in fixed income and credit related trading. It appears this era is over. While investors often refer to equity bubbles bursting, credit bubbles are equally as ugly. Watch out for more blow ups.

February 8, 2007

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Analysts Not Impressed With Analyst Day

Sun Microsystems (SUNW) held its annual investor’s day with the investment community yesterday. Analysts seemed not to share Jonathan Schwartz’s, CEO of Sun, enthusiasm for where the company is headed.

Here are some opinions from analyst reports which were posted on Barron’s Tech Trader Daily:

Richard Gardner of Citigroup believes Schwartz continues to adopt the view that Sun’s decision to open source its entire software stack will drive developers and users to its platform(s), eventually creating opportunities to monetize R&D investments. Gardner agrees with the premise that volume drives value, but how much value, for whom and over what time period is still unclear.

Thomas Weisel analyst Kevin Hunt still has concerns regarding the “lackluster” storage business (tape market and integration of StorageTek), and as a result, maintains a Market Weight rating on Sun’s shares.

Deutsche Bank’s Chris Whitmore believes that Schwartz and his team are driving operational and product line improvements, but that this is more than reflected in Sun’s shares. Whitmore believes Sun’s operating margin goal requires double digit revenue growth through F09, and maintains a Hold rating with a price target of $5.50.

Goldman Sachs’s Laura Conigliaro said, “There are significant execution elements to be hurdled and timing could be lumpy.”

While analysts reports are peppered with optimistic caveats, they are few and far between. Also, analysts and investors are still questioning the reasoning behind the convertible bond offering with KKR.

Sun’s stock has had a massive rally recently, it might be time to take some profits.

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Investing in Internet Protocol

Cisco’s (CSCO) quarter-after-quarter of strong results is due to its focus and domination in developing the best Internet Protocol (IP) networking technology. Are there other ways to invest in IP and profit? Look at the remaining pure IP service providers:

• Level 3 (LVLT)
• Time Warner Telecom (TWTC)
• Global Crossing (GLBC)
• Qwest (Q)

Level 3 still has the most bang for the buck. Also, do not forget about Qwest which owns an old Baby Bell but also owns a sizable nationwide IP backbone.

Chambers mentioned a number of interesting stats during Cisco’s conference call. Cisco’s optical business grew 40% and its sales to service providers jumped 20%. Chambers went as far as to say that there are signs in the enterprise space that look very much like that of the mid 1990s before technology stocks went through the roof.

If Chambers forecast proves to be correct, this most likely means a shortage of pure IP capacity could be on the horizon.

February 7, 2007

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Simply Amazing Results

Of all the boom stocks from the 1990s, Cisco (CSCO) is the only one that has maintained the stellar growth:

• Sales up 27%, the fastest stand-alone growth in years. Way above Cisco’s long-term growth objective of 10 to 15%
• $2.1 billion in net income, up 28%
• Cash flow from operations of $2.7 billion
• Cisco has $20.7 billion in cash and repurchased 121 million shares for a total purchase of $3.3 billion
• Gross margins stayed strong at 65%

Stand-alone service provider orders are up big, clearly suggesting that the old-time telcos continue to move away from Alcatel-Lucent-type stuff to pure IP technology. Alcatel-Lucent’s results were awful.

Chambers said business remains strong. Most analysts expected Cisco to show signs of slowing growth, however, it is hard to find. While it is tough to chase Cisco’s stock after such strong performance, its business remains strong. Chambers continues to do one of the most amazing corporate management jobs in US business history.

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Confidence Building at Kodak

Eastman Kodak (EK) will be hosting its annual meeting with the investment community on Thursday in New York. It would be a good idea to listen to or attend this meeting. It appears the turnaround is very much underway.

• Net cash generation of $592 million versus an estimate of $400 million to $600 million, hitting the higher end of the estimate
• Digital earnings grew five-fold, albeit only hitting the lower end of guidance
• Intellectual property development doing well, as it makes progress with its CMOS business and generates profits from its other IP businesses

The negative side of Eastman Kodak’s earnings release was slower digital growth than expected as management decided to focus on profitability versus chasing the lower end of the digital camera market.

Kodak ended the year with $1.5 billion of cash on the balance sheet. And will receive $2.35 billion in cash from the health care business disposition.

Antonio Perez, although focused on his task, has demonstrated some nervousness with the investment community as his turnaround strategy hit bumps in the road. However, it appears the biggest bumps have been hit and smoother roads are ahead. Investors need to revisit Eastman Kodak. It is no longer an asset intensive, slow moving company.

Feburary 6, 2007

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Interesting Technology Data Points

Barron’s interviewed Michael Cahill, portfolio manager of Chilton Investment, on the outlook for tech stocks. Cahill made some interesting points:

• From 2004 to 2006, the Nasdaq has been the single worst performing major index.
• The Nasdaq is up only 23% versus 35% for the S&P 500, 47% for the Russell 2000, 47% for Japan, 60%-range for the European Indexes and over 100% for emerging markets.
• Cahill also points out that tech stocks have had serious multiple compression in addition to a huge accumulation of cash on their balance sheets. When adjusting for cash, tech valuations become even more attractive.
• In 1999, there were 282 tech IPOs; in 2000 there were 205; in 2005 there were 23 and in 2006 there were 26.

Cahill concludes that with the massive share buybacks and the lack of new supply coming to market via IPOs, the supply and demand balance for tech stocks is becoming more and more favorable. Further, Cahill says most of the liquidation of tech shares by mutual funds in the post-tech bubble environment is completed.

The area he particularly likes is broadband wireless. Companies he likes are Anadigics (ANAD) and EchoStar Communications (DISH).

February 5, 2007

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The Big Internet Companies Are Here To Stay

If one theme came out of this earnings season it is the big Internet players are for real and they are here to stay.

eBay (EBAY), Amazon (AMZN) and Google (GOOG) all reported results that show that their business models are sustainable. Even Yahoo (YHOO), which continues to struggle, has value as a takeover candidate.

eBay for 2006 reported $6 billion in revenue, up 31%. It bought back $1.0 billion in stock and announced it would increase the buy back to $2.0 billion. This is the first big stock repurchase program in the company’s history.

Amazon forecasts revenue to exceed $13 billion up from $10.7 billion in 2006, a 21% increase. Amazon looks to earn $355 to $505 million in operating profit next year.

Google’s revenue grew 67% in the fourth quarter and earnings for the quarter reached $1.0 billion. That means, unless something goes terribly wrong, Google will earn over $4.0 billion next year. I think Google will be around for a while.

For most of the 1980s and 1990s investors did not believe Microsoft, Oracle, Intel and Dell would grow to the size they have become. When companies become dominant players in new industries, it is often best to go with the trend and ride these stocks for the long haul.

Ten years into the Internet, the results reported by eBay, Amazon, Google and even Yahoo, show that the industry and these companies are for real.

February 2, 2007

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A Real Business Model Might Be Evolving

For those who have not looked at Amazon (AMZN) for a while, here are some interesting stats.

Revenue:

• 2007 – $13.0B to $13.7B (estimated)
• 2006 – $10.7B
• 2005 – $8.5B
• 2004 – $6.9B
• 2003 – $5.3B
• 2002 – $3.9B

Amazon is turning into a large company from a revenue perspective and its growth rate is very impressive. In addition, the company is profitable and generates a good amount of cash.

While revenue growth is quite impressive, its ability to forecast operating profits is interesting. Amazon is guiding for first quarter operating profit of $88 million to $122 million, for either a 22% decline or 16% growth versus last year.

For the year, Amazon is forecasting operating profit to decline 9% or to increase 30%. Management expects $355 million to $505 million in operating profit for 2007.

Amazon has a market cap of $16 billion. So it is selling for 1x sales, which is OK for a retailer. However, from the operating guidance, Amazon’s business model is still a work in progress. With that said, if the company does get its model figured out, which it appears it will during the next couple of years, this stock could become a big winner.

Start following this stock again, the numbers are too good to ignore.

February 2, 2007

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