Friday, February 02, 2007

NYSE Where Is The Value?

NYSE Group Inc (NYSE:NYX) announced impressive increases in Q4 net income swinging from losses to profits. They reviewed a flurry of mergers, alliances, investments and technological innovations. All of which are designed to capture more and more trading transactions and the associated revenue stream.

Some of the spends are huge as increasingly difficult efficiencies are wrung out of the system. In the final analysis the conclusion is so what? Investors large and small seek profits and wealth creation. No one really takes serious pride that they have purchased on NYSE rather than NASDAQ. Everyone wants to reduce their friction costs.

In the olden days the exchange was a club run primarily for the benefit of investment dealers who would charge the end user for the value added service. Today the exchange seeks to be competitive so that investment dealers can charge end users for a value added offering.

The exchange is in a hyper competitive environment requiring increasing amounts of capital for technology which seems to be easily matched. The best one can hope for is that the stock becomes a utility with a reasonably predictable flow of revenues that creates a yield play. The core value proposition of acting as an intermediary between buyer and seller is ancient. Price competition usually disappoints shareholders.

Thursday, February 01, 2007

Monster Margins Need a Look

Monster Worldwide Inc (NASDAQ:MNST) reported Q4 earnings which were improving. The press release headline announced that International Revenues grew by 63%. They pointed to International Revenues as the main contributor to driving consolidated revenue upward by 33%. Sounds good. International earnings have a certain cachet. Investors probably do not know the employment environment in multiple foreign countries so the tricky questions will be at a minimum.

Continue reading the press release to the end with particular attention to unaudited operating segment information. Monster has been blowing their brains out in the international sector. The operating margins are miniscule when compared to North America. It must be noted that margins seem to have improved in Q4 so the holes in the brain are getting smaller. The press release makes no real mention of the international margin problem.

Fortunately the cash and marketable securities position has improved dramatically; approximately a double. Accounts receivable seem to have increased by 72%. With consolidated revenues up only 33% someone is slow in paying the bills. In the meantime Monster seems to be focused on developing alliances with North American newspapers so as to drive more employment ads.

The stock option scandals have been side stepped by the CFO Lanny Baker. The claim is they do not know what the regulators and courts will do so the will not attempt to forecast. Surely the independent auditors who truly represent shareholder interests will insist on some provision being made because this will cost something significant. Prudence is usually a financial virtue.

Look for this company to start paying a dividend as they try to buy shareholder support. There are now seven independent board members. They clearly have a mandate to fix. A fix frequently looks at something new. When a stock valuation reflects a dividend it should be harder to drive the market valuation purely on growth and capital appreciation leading to naughty and inappropriate stock option grants.

Wednesday, January 31, 2007

Kodak Profits But No R&D

Eastman Kodak (NYSE:EK) reported a small but significant profit for Q4 of $17 million. It was probably the toughest $17 million they have ever earned. The milestone of digital earnings growth surpassing the rate of decline from traditional product lines was also critically important.

I found the large reductions in R&D expenditures to be troublesome. They were explained away by claiming savings, efficiencies, integration and in one obvious case the pending sale of a division. At no point did they attempt to claim they are working on new stuff that will drive revenues in the future. Yet they claim early in the press release that “…increase in income from licensing arrangements which reflects the company's continuing progress in generating returns from its intellectual property.”

If growth in digital earnings is to continue either R&D has to be properly focused on a ramp up or you will have to buy it. A $42 million dollar decrease in Q4 R&D expenditures to generate a $17 million profit looks suspicious and opportunistic.

Kodak is like the wolf whose foot is caught in a trap. It eventually concludes that is has to gnaw its own appendage off and worry about it later.

Tuesday, January 30, 2007

CNET Sets UP Again

CNET Networks (NASDAQ:CNET) filed statements and regulatory fix ups. The Company has restated historical financial statements reflecting the results of an investigation into historical stock option grant practices, and has recorded a whopping cumulative non-cash, stock compensation charges of $105.7 million associated with stock options grants made from 1996 through 2005.

As a result of the investigation the ranks of C level executives were obliterated as inappropriate behaviour was identified and dealt with.

George Mazzotta the current CFO during the conference call in prepared remarks said

“The adjustments corrected the measurement dates of approximately 41 million options out of a total 74 million granted during the ten-year time frame. The magnitude of these adjustments are the function of three variables: the elapsed time between grant date and measurement date, the volatility of our stock price during this period, and the number of options granted. It is important to know that over 99% of our total adjustments were related to stock options that were granted to prior to July 2003. “

He then laid out the very self serving statement

“We also evaluated our internal controls and processes supporting our stock option granting practices. While process deficiencies existed previously, our current controls were found by our independent auditor to be sufficient.”

While you can look at controls and senior level managers when it gets this bad the problem was at the board level. What changes have occurred at the board level as they attempt to direct this company? They hired and nurtured the previous crew. They were tricked by the previous crew. They let $106 million dollars of problems by.

Just because the statements have been tidied up and refilled may not be enough. Just because the independent auditor says the new procedures seem to be fine is not enough. What investors need to know is that the board is on the job. Management says they are on the job and that’s fine. What is the board doing to ensure problems of this magnitude do not occur again. Relying on an annual audit seems inadequate.

Monday, January 29, 2007

Mattel Not So Swell

Mattel Inc (NYSE:MAT) served up some psuedo good results. EPS is up but the number was partially tricked by reducing total amount of shares outstanding. Income before taxes increased from $652 million to $683 million. The provision for taxes dropped dramatically from $235 million to $91 million. I almost never believe huge drops in income tax when they happen and fully expect some restatement in the future. This low level of taxation will probably not hold in future quarters. Management essentially makes no comment about it in the press release and probably does not want to talk about it.

While some good news was observed in sales and margins the SGA rose by 100 basis points as announced by the company. Never a good sign. Of particular note was the drop in advertising from 12.1% of revenues to 11.5%.

The stock trades very near its 52 week high with an improbably high dividend yield of 2.70%. Insider trading and institutional trading has been overwhelmingly in the sell column for the past six months. Robert A. Eckert, chairman and chief executive officer of Mattel states that he is pleased that margins are improving and that the sale of Barbie products has finally turned positive; something that has not been seen since 2003.

On balance the company may have some more performance increases to serve up. But real growth that will create shareholder wealth probably needs to come from acquisitions and or new products. Lo and behold Mattel has approximately 25% of their balance sheet invested in cash. With a market cap of approximately $9.12 Billion cash on hand is approximately 15% of market cap. The total debt to capital ratio stands at 22.3%.

Acquisitions are not wrong but this company will probably look very different in about two years. Is this the management group to act as the change agents and take the company forward?