Wednesday, November 22, 2006

Dells Next Problem

Dell (Nasdaq:DELL) reported late results and everyone reminded themselves that the numbers are late, preliminary and subject to restatement because of regulatory investigations. Then the market pundits all became very excited about how the numbers have improved and indeed in certain cases there is reason for optimism.

Here is a regular business problem that will probably come home to roost and surprise. Desktop revenue was negative 5%. Market Researcher Gartner states that Dell had their slowest ever PC shipments in the July to Sept timeframe. The company also lost their top spot to Hewlett Packard (HPQ).

Dell indicates they are shifting to higher margin products. Watch for write-downs and impaired valuations in the very near future. Management might as well fix the books and get this very large bit of bad news behind them, while all the other problems are swirling around and take a few bounces while investors are still forgiving and hopeful.

One is reminded of a bush pilot attempting a take off from a dirt air strip that is too short. You may have to bounce the aircraft real hard to gain altitude. The trick only works a few times and there is no time for parachutes.

Tuesday, November 21, 2006

Bank of America Dodges Legal Bullet

Bank of America (NYSE:BAC) and the California Banking Industry dodged a bullet Monday when San Francisco Court of Appeals 1st District overturned an earlier $1.5 billion decision against BAC.

The plaintiffs lawyers James Sturdevant and Thomas Brandi, who may be out huge legal fees, promised to appeal to the state supreme court. The case revolves around Bank of America’s ability to charge over-draft fees on accounts that were set up to receive social security payments.

The trial was presided over by San Francisco Superior Court Judge Anne Bouliane. The unanimous 14 page ruling was written by Justice Peter Siggins. The court did make the comment that the problem was complex and more suited to legislative solutions than judicial actions. Therefore they were overturning the trial courts ruling.

While this is good news at Bank of America, the market hardly blinked. Mainly because most investors cannot follow the complexity of legal argumentation and therefore they dismiss it. This time it probably will not bite them. The potential settlement was huge. With $284 million in compensatory damages and a correspondingly gargantuan legal fee the total bill to Bank of America would have been just over $2 Billion. (About half of a quarters profits) Next time who knows? Most investors have a blind spot and usually dismiss these problems all too easily.

Monday, November 20, 2006

Teamster Nibble at FedEx. The New Reality?

FedEx Corp. (FDX) drivers at two distribution centers in Wilmington, Massachusetts, voted by a margin of 3 to 1 to seek representation by the Teamsters. Management immediately announced that they will be challenging the vote.

The Teamsters represent drivers in UPS and the US Postal System has their own union. FedEx has maintained that many of these drivers are independent contractors. Recent court decisions have ruled against management assertions.

The certification appears to be small for the time being. Only about 32 drivers operate from these two locations. FedEx has approximately 15,000 truckers. Can FedEx ship around them and/or fire them somehow? Probably and maybe. Will this fuel further militancy if management gets rough? Certainly. Casual conversations with FedEx drivers indicate there is substantial sympathy for signing on with the union. Management has been throwing the drivers little bones along the way such as lifting the prohibition on facial hair. The little moves have only whet the drivers appetite as they start to feel power and entitlement.

FedEx and the teamsters know they need to organize FedEx. Then they will be able to negotiate with the industry much the same way as the United Auto Worker’s negotiated when they were more important then they are now. The teamsters now represent approximately 1.4 men and women, including workers at UPS, UPS Freight and DHL.

The teamsters are looking at FedEx's profits of $1.8 Billion for last fiscal year and $475 during Q1. FedEx stock is trading at close to its upper 52-week range.

Here is the arithmetic. Assuming all 15,000 workers are full time equivalent and draw 40 hours per week for 52 weeks a year. Assume the new contract costs an extra $5 per hour in salary and benefits, the bottom line takes a hit of approximately a $156 million dollar, which is less than 10% of last years earnings. Not good news but not strategically disastrous if the competition is faced with the same circumstances.

The union may take around two years to organize the entire FedEx system. Watch for labor disruptions. If FedEx were smart they may enter into a profit sharing arrangement to keep the cost variable.