Mullaneblog

Guidance Raised: A Sign Optical Is Coming Back

JDS Uniphase (JDSU) raised its revenue guidance last night. The company had seen Q2 revenue of $332M-$352M and now sees revenue at $360M-$365M; consensus is for $343.29M.

The company cited strong performance by its communications test and measurement segment, which has been an area of focus for JDSU CEO, Kevin Kennedy, a former top executive at Cisco (CSCO).

However, JDSU’s test and measurement business is focused more on IP and optical traffic than the test and measure tools used in the semiconductor space. Two different businesses.

This is another data point that the optical business continues to improve. Ciena (CIEN) should also benefit from this news.

Written January 19, 2007

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Numbers Beat Expectation, But Are They Strong Enough To Drive Stock Higher?

Apple (AAPL) reported very solid numbers last night. Revenue hit $7.1 billion, up from $5.7 billion last year, or a 24% increase. Apple beat the consensus estimate of $6.4 billion. It appears Apple, once again, set the bar pretty low.

iPod sales jumped to 21 million units, up from 14 million units last year, for a 50% increase.

It appears a lot of the Apple-hype ran out last week at MacWorld and the next catalyst appears to be the launch of iPhone.

Apple’s stock, historically, has waited to appreciate until data is available on the success of a new product. Obviously, iPhone is the next big push. Wait for data points on the iPhone launch before getting into this stock. iPod is entering a seasonally weaker period and Apple needs the next great product to drive this stock higher.

January 18, 2007

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Consumer Vs. Business

Consumer Has Been Driving Technology This Decade: Is It Time For A Change?

Intel, last night in its conference call, said that the consumer will be driving the first ramp in demand for Microsoft’s Vista operating system. Tonight, Apple reports results whose huge success has obviously been driven by iPod, a consumer product.

However, beneath the headlines, Intel mentioned that its server business is doing quite well. Also, other large-volume high-end companies such as Sun Micro, Level 3, IBM and possibly EMC are seeing improvement in their operating performances.

While investor attention is still focused on Apple, the iPod and the consumer, the revenue and operating performance of technology companies focused on the business customer appear to be improving nicely for the first time in a long time.

January 17, 2007

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Compelling Argument To Go Long Cotton

Art Samberg, of Pequot Capital fame, provided a compelling argument to go long cotton in this weekend’s Barron’s investor round table.

For you commodity traders out there, Samberg said go long the December ’07 cotton contract. His reasoning is while cotton consumption in the US has been in decline, China consumption which has been growing nicely, is picking up more steam.

Cotton consumption in the US has fallen from 12 million to 5 million bales a year due to the growth of polyester and other materials. Conversely, Textile spending is on a big upswing in China – up 27% in ’06, after jumping 36% in ’05. Chinese consumption which had been growing 4% to 6% per year is now growing 15% per year.

According to Samberg, China’s cotton consumption has increased from 25% to 39%-40% of world cotton consumption.

Because of strong prices of corn and soybeans–corn being used for ethanol production, US farmers are going to remove acreage from cotton to earn better profits in higher priced corn and soybeans. Supposedly, there have only been four times since 1913 when cotton was this cheap relative to grains like corn and wheat. The last time being 1974. From 1974 to 1976, cotton tripled in price.

Written January 16, 2007

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To Go Long Or To Go Short

Bill Miller, the famed-Legg Mason fund manager, was on television last week saying he is long housing stocks. In Barron’s Up & Down column, Doug Kass of Seabreeze Partners was cited as being short the stocks–no big surprise there.

Kass referred to order cancellation as the reasoning for his bearishness. Typically, publicly traded homebuilders have cancellation rates of 15% of orders; however, that has jumped considerably.

Cancellation rates of publicly traded homebuilders:

Centex — 37%
DR Horton — 40%
KB Homes — 53%
Lennar — 31%
Pulite Homes — 36%
Beazer — 57%
Hovnanian — 35%
MDC Holdings –49%
Standard Pacific — 50%

These numbers are all provided by Kass, according to the Barron’s article. These numbers are so bad that the worst might be unfolding right now.

TheFly’s advice, Miller tends to be too early and Kass is often too negative when the worst is already priced in the stocks. Start following these stocks again, expecting a bottom in the spring and early summer.

The most recent rally is mostly from an oversold condition. Wait for another correction and see where the industry fundamentals stand.

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Stock Outstanding Shrinks By 3%

In 2006, between private equity and share repurchases by US corporations, the amount of stock outstanding declined by a good chunk in 2006.

In a newsletter released this morning by investment strategist and portfolio Don Hays of Hays Advisory, there was $400 billion in cash takeovers this year by private equity and corporate mergers and acquisitions. In addition, there was over $600 billion of share repurchases.

This adds up to 3% shrinkage in the supply of stock available for purchase.There could be a lot more of this in 2007 as a whole host of US companies are generating a lot of excess cash that management will need to put to work. Home Depot (HD) is the poster-child stock for excess cash generation and share buybacks.

A good investment approach for 2007 might be to find companies like Home Depot with little debt that generates a lot of free cash flow and can afford big stock buy backs. Sooner or later demand will outstrip supply and drive stocks with these characteristics higher.

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Mr. Bernanke: Have Some Guts, Stop Raising Rates

Fed Chairman Bernanke’s handling of the press has been anything but stellar since taking office. Hopefully he does a better job at handling the economy. He started off by confiding in the very ambitious Maria Bartiromo, assuming his comments were off the record, she rushed off to the studio and announced to the world that they were best friends and she would be the self-appointed mouth piece of the Fed.

However, if the Fed chairman wants to get back in good graces with the investment community, his best chance is to do what he says: make decisions that are data dependent and forward thinking. Do not base policy changes on rear-view-mirror data.

Employment

Recent economic data suggests the economy is slowing down. The employment data for May was simply awful. The economy created 75,000 jobs in the month, down from a few hundred thousand per month earlier in the year.

In addition, wage growth is virtually non-existent, with wages increasing $0.01 per hour in the month. That’s right, if you work a 40 hour week, the average Joe and Jane got an increase of $0.40 for the week. I don’t believe this covers the $20 increase in his or her gas bill. Take out a little extra for FICA, local taxes, some Fed taxes and now you are really living. The chart below clearly shows that real consumer spending has rolled over. The chart actually supports a view that the Fed should start lowering rates.

Housing Pricing Are Coming Down

The following chart paints a very clear picture: the supply and demand for housing is becoming increasingly imbalanced which is leading to a meaningful drop in prices. The chart shows the increase in the number of homes that are for sale, it clearly shows a big increase in inventory. As one would expect, this is leading to a nice decline in prices.

What Is The Fed Waiting For?

With employment growth now anemic, wage growth a joke and the house bubble now letting out a good amount of air, what is the Fed waiting for before it stops the increases?

Some suggest that the true measure of inflation and too much liquidity is the price of gold. However, even that is now coming down.

The substance of what Bernanki says after cutting through his inexperience at communicating publicly is pretty good. After the last FOMC meeting, he suggested that it might be the end of the rate increases, since Fed policy’s impact can often lag. However, after gold started rallying, he panicked and started second guessing his comments.

If the new Fed chairman sticks to his initial instincts and the data, the Fed should be done for quite a while. From looking at the two charts above, along with a lot of other data, the Fed should be ready to lower rates by October. However, does Mr. Bernanke have the confidence to do this and not wait for the data to become much worse before he stops raising rates? From the recent drop in stock prices, the market is saying he does not have that confidence and will continue raising rates.

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As the market corrects and consolidates, do not forget about adding some Yahoo! to your portfolio. The stocks is down big and has not moved despite a positive article written in Barron’s a few weeks ago. It might even be a takeover candidate.

There were even reports a few weeks ago that Microsoft executives have explored the idea of buying a stake in Yahoo!. Heck! Why not buy the whole company? When you dig into the numbers, it may not be a bad idea:

Yahoo! Market Cap. = $ 49.0 Billion
Less: Yahoo! Japan Stake = $ 12.4 Billion
Less: Alibaba (Chinese Portal) = $ 1.4 Billion
Less: Cash – Debt = $ 2.0 Billion
Enterprise Value = $ 33.2 Billion

Yahoo! is expected to generate 2005 EBITDA of $2.0 billion and 2006 EBITDA of $2.6 billion. A 16.6x multiple for 2005 and 12.8x multiple for 2006—not that expensive for a high growth company.
Microsoft has failed in almost every Internet business it has attempted to enter. Yahoo! and Google have destroyed them. And Barry Diller, the great programmer, now owns ask.com, and he plans to enter the search businesses in a big way.
Microsoft still has $34 billion in cash after the huge cash distribution to shareholders last year so it could pay cash. Yahoo! also generates margins that are better than many of the new businesses (outside of its core software business) that Microsoft is investing in. Yahoo! is also a cash generating machine like Microsoft.
While Silicon Valley despises the Redmond-based giant, a Microsoft deal could lead to a mass employee exodus, but the Yahoo! franchise name has already been built. In addition, as Yahoo!’s stock price suggests, Wall Street has not been overly enthusiastic about its performance recently.
Bill, this might be your last opportunity to become an Internet company. Let’s see a hostile takeover.

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Revlon warned it was going to miss its operating margin goals on Friday which led to the stock getting hit pretty hard. Of the six years of writing my newsletter, this is the first time one of the newsletter ideas have gotten hit so badly.

Revlon had six months of excellent performance going into May. The four years of restructuring that Stahl has been part of was beginning to working and it was picking up good momentum with its Vidal Radiance and Almay products. Sometime during the Spring, its competitors reacted to Revlon’s success with a slash in prices to keep market share and create a price war.

While price wars are unpleasant, they often signal a bottom in an underperforming industry. Often when a mature industry gets stale, a new management team is brought in to rebuild one of the companies (as in this case with Revlon) and the others fall behind and react to market share losses with a drop in pricing. This is often a short term response (often about six months) driven by competitors weakness which is the result of not being focused on investing in new products.

What is happening with Revlon is almost exactly what happened in the hamburger price wars during 2002 and 2003 when investors thought that the big fast food chains were going to sell hamburger for $0.99 forever. However, from looking at McDonald’s price chart, it was a great time to buy. This is most likely the case today for the cosmetics business. (McDonald’s stock jumped from $14 to $35 when the price war ended.)

Revlon has done a lot of good things the last four years: restructured its balance sheet, re-invented old products, created new ones, come up with an entire new store format that has shown some success. Well-placed business investment wins out over competing purely on price over time.

Also, remember that it would be cheaper for a competitor to buy Revlon than continuing this price war. A competitor could easily afford paying a big premium for the stock to get access to its distribution network, product names and shelf space. I recommend staying with the stock and shareholders will be well rewarded. I thought Revlon could be a big bagger, but if not, it should get a nice take out price.

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There was a very good article today on gigaOm.com by Robert Young titled “Back To The Future…For Broadcast TV. “ Young writes about the disruptive force that cable TV was for the big broadcast networks which is now repeating itself as the Internet disrupts cable TV.

The premise behind his argument is that as on-demand changes viewer habits, both due to the evolution of the Internet and more interactive cable TV services, viewers can more clearly decide what and when they want to watch something. This will place a lot of pressure on the marginally successful cable TV program and on its advertising revenue. Young concludes that there will be a shrinkage of programming, and subsequently cable TV channels, as advertisers continue moving to more targeted advertising platform.

Programming will shift to the Internet as channels like Myspace.com, YouTuBe.com, Veoh and Brightcove begin to gain a bigger audience.

For those of you who do not spend a lot of time on the Internet, it is worth seeing where the future is by looking at these websites. You might not like it, but it is the future.

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