Monday, August 25, 2008

VeriFraud back to being VeriFone:

VeriFone Holdings (PAY), which manufactures the devices which enable debit/credit card transaction automation for merchants, is finally seeing a pop in their stock’s performance – months after an accounting debacle sagged PAY shares to a 52-week low of $10.10.

The San Jose based company was busy this past week, upping forecasts while naming a new CFO to the team- as a part of cleaning house. Veteran Clinton Knowles replaced Barry Zwarenstein after months of allegations and current SEC investigations into VeriFone’s books.

It looks like VeriFone is getting back on the right track after erasing $70 million in overstated profits from fiscal 2007. The company also beat earnings consensus of $0.28 per share [excluding books adjustment and other one-time expenses] and upped guidance for Q4 to $0.36-$0.39 from the original analyst forecast of $0.30 per share.

CEO Douglas Bergeron also pointed out the raised FY 2009 earnings guidance to $1.45/share versus the previous $1.21/share consensus.

The results prompted the following opposite reactions from analysts:

"The optimistic outlook prompted SunTrust Robinson Humphrey analyst Andrew Jeffrey to predict VeriFone's stock will rise to $30 within the next year, up from his previous target of $22.

'We are convinced that VeriFone's historical competitive advantage remains materially intact, even as its two primary competitors have probably used the company's recent travails as an opportunity to take market share,' Jeffrey wrote in a Wednesday research note titled 'Starting Over: Phoenix Rising.'

Other analysts, though, were more skeptical.

In a Wednesday research note Goldman Sachs & Co. analyst Julio Quinteros wrote that VeriFone still appears to be facing 'headwinds' because the company is selling less profitable products, particularly in international markets. VeriFone hopes to offset some of those pricing pressures by lowering its expenses." (AP via Yahoo! Finance)

The $64,000 question is: What now?

Here’s my take:

1. VeriFone has great secular growth potential (25% international, 40% latin America, 25% asia, as per the conference call)

2. The inherit nature of the industry- (i.e. an Oligopoly- I, personally have not seen debit keypads manufactured by any other company)

3. Note the huge pop in MasterCard (MA) over the past year and a half, the IPO buzz surrounding Visa (V) and the Warren Buffett apparent continued buying of American Express (AXP). All of these factors indicate higher margins for VeriFone.

4. Accounting mess cleaned up = takeover target for big tech? No one can rule that out.
This business just seems that it has such vast growth; had it not been for the account debacle, the stock could very well be hanging around in the $40/share range and threatening the 52-week high of $50/share.

Conclusion: Assuming the accounting mess is 100% straightened out- the stock is a bargain, assuming any multiple less than 1.5 times the growth rate. I often screen out stocks with high PEGs [very generally, for long term plays], but this stock really does looks cheap considering the 1.00 PEG ratio.

PAY added nearly 36% after-hours on Tuesday and finished the week at $18.79.

Disclosure: None

Thursday, August 21, 2008

Buffett and Gates help bid up Canadian Natural Resources:

Warren Buffett and Bill Gates, ranked #1 and #3 richest in Forbes [respectively], took an unusual summer trip together - to northern Alberta on Wednesday to explore CNQ’s multi-billion dollar oil-sands project.

The Horizon project is an “open pit mining strategy [which] will consist of mobile equipment and bitumen extraction facilities to mine and separate the raw bitumen from the oil sands. Canadian Natural will further upgrade the bitumen to a sweet synthetic crude oil using proven delayed coking and hydro-treating technologies” (CNRL.)

The project comes with some drawbacks: Budgeted costs have risen to (est.) $8.5 billion and drilling in the oil sands is not as environmentally clean as the likes of Transocean’s (RIG) deep-water drilling. CNQ projects that the costs will be easily covered, though, with the 40 year project life-span. Drilling technology over the next few decades will undoubtedly advance, as well.

In all, the oil sands of Canada are the second largest such reserve for crude oil production – an estimated 175 Billion barrels- not a bad output to help curb the supply-curve while alternatives to fossil fuels are explored.

I think it is unlikely that Buffett and Gates will invest in CNQ or one of its competitors – a lot of investors, politicians, journalists and government officials take trips to explore the future of energy in North America and the world. "We were asked to come up and give a general overview on the oilsands and Canada's role in the world of energy in general, which we did," said Greg Stringham, CAPP's [Canadian Association of Petroleum Producers] vice-president. "They were exercising curiosity, basically saying, 'Wow, this is neat.' " (Calgary Herald)

Even if Buffett has a desire to invest here, history says he is always highly educated on both the sector and company he invests in (i.e. no tech companies). I’m sure the idea has crossed his mind, but unless he’s seen more than a small presentation about how the industry operates, I would not expect anything more than a flicker of hope for CNQ longs (who, not to mention, have had a nice ride with CNQ already).

So, whether it be an investing trip, sightseeing trip or both- one thing is certain: Both institutions and individuals follow every footstep of Buffett. If there is a remote chance he will put capital towards this form of oil harvesting, you bet your house that the money will follow.

Edward Jones analyst Lanny Pendil apparently did not get the memo that these billionaires really do move stocks: “The fact that people were up there kicking the tires means nothing from a financial standpoint and therefore really shouldn´t really play into what the price of these stocks is doing today.”

So, why did CNQ jumping the highest since 2005 on the day of the visit? Hmm. I’m still amazed how Buffett can materially move stocks, especially from my point of view as a young investor who has not had the privilege of following Buffett.

CNQ added 7% on Wednesday on the speculation and another 3% Thursday on higher oil.

Disclosure: None

Friday, August 8, 2008

A Currency Called the Oil/Dollar?

The old “Which came first: The chicken or the egg ?”debate has turned into “Does oil affect the U.S. Dollar or does the Dollar strength (or lack thereof) drive oil prices?”

Here’s both sides of the story:

Option A: Oil is driven by supply and demand – Economics 101. Sure, there are speculators floating around, but certainly not prominent enough to drive the price of oil more than a few dollars either way. Oil prices react to socioeconomic events, conflict premiums and EIA data, among others.

Therefore, as demand increases, other countries (namely, the BRIC: Brazil, Russia, India, China) bid up the price and force oil to be valued at X amount of dollars in the eyes of the U.S. citizen/investor. In terms of companies that use the oil, like airlines, the smartest ones have had a hedge on prices for years.

Solituons: The government needs to look for both alternative energy and drill offshore to create our own extra supply. Citizens should demand congress to enact legislation promoting the use of nuclear power. Democrats argue that leaving Iraq would help lower prices (probably true, but should not be considered before we win the war). Other, in my opinion, less effective arguments include Sen. Obama’s call for a bigger reliance on the mass transit system.

Conclusion: Oil drives the Dollar.

Option B: I could not think of a better way to put this, so I’m using a quote I found in this FOREX Blog: “In a nutshell, this inverse relationship exists because global oil prices are denominated in dollars. Thus, as the USD declines, oil producers are paid fewer 'units' of foreign currency in exchange for oil. They must compensate for this decline in real revenues by raising the price of oil (in dollars).”

To add to that, the price of physically importing the oil from foreign countries increases.

Solutions: Raise Federal Funds rates while growing the economy- the Fed’s dual mandate (FYI, the ECB has a single mandate). If China and others would float their currency, the USD would strengthen versus the EUR.

Conclusion: The Dollar drives oil prices.

Clearly, we see an inverse relationship from the weekly closing charts of the Dollar Index and Lt. Sweet Crude, respectively:

Thursday, August 7, 2008

Carl Ichan Stocks Having A Bad Month

After the Yahoo! debacle that had us watching his every move this summer, August has not gotten off to the best start for the billionaire, either.
Blockbuster, Inc. (BBI) posted a larger than expected 2nd quarter loss lead by low DVD rental margins. The stock reacted by dropping $0.31 to $2.88 (-9.72%) in Thursday’s trading session. The $44.7 million dollar loss fell below estimates by a penny.

“Although it hasn't been driven into bankruptcy like some of its smaller rivals, Blockbuster has suffered nearly $4.5 billion in losses since 2001, causing its stock price to plummet by nearly 90 percent” (Liedtke, AP, 8/7/08).

My response to that is: …“Hasn't been driven into bankruptcy YET.” The industry is clearly moving towards different means of video rentals- from ordering movies directly from your cable service or using Netflix to have movies delivered to your home. Blockbuster’s in-store sales and rentals may become obsolete in only a few short years if they do not continue to diversify at a low cost. Their best chance of survival is to team up with a competitor like Netflix and get in front of the 8-ball rather than stay behind it (i.e. pull a Sirius-XM Satellite Radio merger).

Sure, Blockbuster is doing what they can – stocking more of the DVD hits, focusing on the hot XBOX360® and Nintendo Wii® games and closing 233 of its nearly 8,000 stores this year. But they still lag far behind rival, and also unimpressive, Netflix with their online rentals.

CEO James Keyes helped prop Netflix’s up 1.5%, saying spending on advertising its online rental service has probably peaked. If he really believes the stores are more important than its online rental service, I doubt he would close as many stores as he has. Downloading multimedia is the present, not the future. Sure, Blockbuster has more of a two-facet system going, but their advertising concentration should be more proportional to both current and projected costs, sales and growth.

By the way, Blockbuster is sure lucky they were able to get out of the Circuit City acquisition. They should be looking to become a takeover candidate, not vice versa. Two bad companies do not make a good one.

For Icahn, the August pain has not been limited to Blockbuster. Shares of Biogen (BIIB) fell $19.64 (-28.2%) to $50.12 during the August 1st trading session after they released material news: The Bioigen-Elan partnership prize Multiple Sclorsis drug Tysabri yielded new cases of brain disease in patients. The drug had previously been halted in 2005 because of the same problems.

Again, my response: There really is no reason to buy a biotech stock with a short pipeline. Celgene or Gilead Sciences would be much better options. Biogen still has not recovered any of the massive drop last week- trading flat to close at $49.88 on Thursday.

Check out these three Icahn favorites and their three month performance; Even he does not always beat a volatile market:

Disclosure: none