Friday, November 03, 2006

NRG convoluted Improvement

NRG Energy (NYSE:NRG) released results contained in a very complicated press release. The headline and lead in spin how NRG is doing better revenue wise, income wise and how they are improving their hedge position. While they are reporting much improved cash flow from operations management has chosen to first to discuss their hedging program.

NRG today announces a coordinated series of initiatives designed to both extend and strengthen our baseload hedging position and to enable further optimization of the Company's ongoing capital allocation program.

It appears that NRG is overly fixated with financial instruments and not focused on sustainable operations, which create long term shareholder value. Given the huge improvement in net operating income they should have been explaining the win and why it has happened in this quarter. Much of the improved results are attributable to acquisitions. The question becomes will the new assets continue to improve profitability. Which may be the reason the management does not want to talk very much.

Management reports the hedge reset was so large that guidance has been increased to “2007 cash flow from operations and adjusted EBITDA guidance has been raised to $1.5 billion and $2.1 billion, respectively, from previous 2007 guidance provided in January 2006.” They are amending their credit agreement to allow for the hedge reset while at the same time announcing plans to increase debt reduction by another $250 million.

Hard to follow. Hard to write. Hard to read the press release. If you want to trade energy there are other vehicles which are more straight forward and cleaner to assess.

Thursday, November 02, 2006

Evergreen Problems Continue

Evergreen (NYSE:EEE) keeps getting fingered by Asensio for highly inadequate results. Asensio has a remarkably accurate record for identifying problem companies and sometimes problem managements. In this case Evergreen has been promoting something called K-Fuel. Quoting from Asensio’s recent press release where they have quoted from recent Evergreen’s reports “What were the results? After all the hoopla, today EEE admitted that total K-Fuel sales have amounted to the paltry sum of $192,000. EEE achieved this remarkable $192,000 sum by selling an undisclosed amount of K-Fuel to some undisclosed customers for an undisclosed selling price, produced at undisclosed cost.”

Asensio has also identified that Evergreen “$17.2 million in what it called "plant start-up costs" and $31.3 million in capital expenditures in the nine months ended September 30, 2006. These "plant start-up" costs are in addition to the over $166.1 million and over 4 years EEE has spent on a scheme it claimed would only cost $20 to $25 million and take only 9 to 12 months to build when it started.”

Asensio has made a fortune in short selling. I do not have any insights into their position. But Evergreen was as high ranging around $20 last March 1, 2006. It has recently dropped to under $10. The question becomes can the short position if one exists follow the stock to significantly lower levels (say under $5), or should covering start to occur. Short sales are bullish indicators because the stock eventually has to be repurchased. It does not appear that corporate fundamentals will come to the stocks rescue.

This stock is not for the faint of heart. But it does have a lot of drama.

Wednesday, November 01, 2006

BCE Blindsided By Canadian Gov't

Bell Canada (NYSE:BCE) has been blindsided by the Canadian governments announcement to tax income trusts. The minority conservative government, which had campaigned on not applying this tax has turned on a dime and changed their mind. BCE announced their quarterly earnings Nov 1. Earnings were off. On Oct 11 they had announced their intention to convert to an income trust. Management included this comment "Yesterday the federal government announced proposed changes to Canada's taxation system. Finance Minister James Flaherty said the changes are designed to level the playing field between trusts and corporations," said Mr. Sabia. "The Minister's announcement clearly has a significant impact on our proposed conversion and the immediate benefits such a conversion would have delivered to our shareholders. We will assess the proposed changes over the coming days and evaluate our options. In any case, we will continue to build our business to create long-term, sustainable, shareholder value," added Mr. Sabia. "We will proceed with plans to eliminate BCE's holding company operations."

BCE will almost certainly not convert. The real political question becomes will Canada lower its corporate tax rate to become competitive internationally. This may be on the agenda for the next federal budget. However widespread thinking is that the conservative minority government will fall and a national general election will be held. Therefore the tax reduction question will remain unresolved.

Vonage Going Going Maybe Sold?

Vonage Holdings (NYSE:VG) is at the tipping point. They have announced encouraging numbers such as doubling revenue and substantially reducing losses. They anticipate profits as early as Q1 2008. However management does admit to a higher churn rate last quarter. Average telephony revenue was sequentially flat from last quarter, which is not encouraging as it places too much emphasis on acquiring new customers. Most distressingly management reports Marketing costs per gross subscriber line addition were $254 for the third quarter 2006, an increase of 6% from the second quarter 2006.” (emphasis mine) The question becomes has the business model reached a point where marginal revenue increases are growing at a slower rate than marginal costs. Have they managed to attract the majority of cheap price conscious clients. Another quarter and the game should be called one way or the other. Look for management to start pointing out how the parts are worth more than the whole, how they are reviewing their strategic alternatives and trying to get a take-over premium into the stock price.

Tuesday, October 31, 2006

Clear Channel's Impending Cracks

Clear Channel (NYSE:CCU) reports improved net revenues and improved net operating income from continuing operations. The company or significant parts are being shopped about. $750 million of long term debt will be refinanced in Q4. The company claims they have sufficient bank lines. But working capital and liquidity are worsening dramatically. Using managements selected balance sheet numbers and the $750 million of debt coming due the working capital position has dropped to $333 million. Last year they were at $1,182 million. Also long term debt currently stands at 104% of equity. Last year’s comparable was 80%. Clear Channel is cannibalizing itself with share repurchase financed by debt. If as and when asset sales occur the lenders will be first in line before shareholders realize value. The company is now becoming increasingly forced to reach asset sales agreements, which naturally weakens their hand. In the mean time debt service charges will apply. The clock is ticking much too fast.

Monday, October 30, 2006

Open Letter to SEC About Dividend Announcements

Open Question to SEC

Does declaring a dividend before an earnings announcement constitute an implied but ambiguous form of disclosure?


Dividends are typically paid from net earnings. Usually corporate directors adopt a dividend pay out policy, which is predicated upon the boards view of earnings. Consistent and or consistently increasing dividends are viewed as excellent indicators of corporate financial health making ownership that much more desirable. Therefore dividends as declared quarterly are an implicit form of guidance emanating from the Board of Directors.

Senior executives author official guidance and management comments contained within earnings releases, guidance statements as well as conference calls. The board may have been consulted or informed but responsibility lies with the senior officers. I do not believe that we have ever heard that there is a board buy in. Senior officers may speak to the dividend policy and dividend coverage and earnings payout ratio’s but it is ultimately the board’s responsibility to approve or not approve all dividends.

Several conundrums appear. A company may declare a dividend and then release poor and surprising results. Investors will feel ambushed, as they have found that they may no longer rely on the dividend as an indicator of financial health. At the other end of the scale a dividend may be declared followed by superior results and a possibility of long-term improvement, which had not been previously anticipated. The investor who relied on the dividend would not have had sufficient financial information. Various investor toxic scenarios may be constructed.

If dividends are declared and announced separately from earnings results an arbitrage opportunity develops. Cash is fact and everything else is an opinion. Dividends are cold hard cash.

My suggestion is to require that all dividends be declared and announced at the same time as the quarterly earnings report. The board reviews the quarterly financials and is then in the best position to decide the dividend. By announcing earnings and declaring dividends in one consolidated announcement you integrate board with management responsibilities thereby improving accountability to the investor while reducing governance risk.

Avon Misdirects Advertising

Avon (NYSE:AVP) announced increased sales. But when you wipe the face cream off they actually had a Q3 operating profit decrease of 32%. The profit margin dropped from 13.1% to 8.1%. The culprit has been fingered as a $40 million dollar write down of inventories. They also claim to be doubling advertising from last years levels. Now lets think. Avon is sold by rep’s so as to avoid the need for big advertising. Also where can you spend big advertising dollars? Usually this involves western markets and Japan; both area’s are experiencing downward Q3 sales. But where is the growth? Latin America and China do not have a comparable big media spend capability. Are they really placing their advertising bets in the correct market? Do they remember or recognize their core competency in using representatives? Look for rocky results until more reality checks reach the boardroom.

Weekend Follies Oct 28

The following companies release information at oddball hours over the weekend when investors are typically not looking at their screens. Basically they are sneaking news out and hoping to call it disclosure. The culprits are:

ESS Technology (Nasdaq:ESST) reported poor results, announced that they are reorganizing and that they are in discussions with a variety of entities but have nothing to report. Sounds like this company has nothing to offer but heartburn.

GATX (NYSE:GMT) declared a dividend after the market closed. Made the point that the dividend is unchanged and then went home without any further comment.

Lawson Products (Nasdaq:LAWS) announced increased sales but lower operating income. They are incurring costs as they terminate independent representatives. If there is a change they should have identified the total probable cost and reserved for it once. Investors need not die the death of a thousand cuts. The press release did not provide any adequate explanation or discussion about operations.