Friday, March 02, 2007

CN Stealth Problems

Canadian National Railway (NYSE:CNI) has had an interesting existence in recent past. 06 year end results show a small decline in pre-tax operating income. They have recently settled a strike with a major union. Q1 07 results will reflect the ugly reality of work stoppages that almost needed government back to work legislation.

On March 1 32 cars of a 105-car eastbound intermodal train went off the tracks at Pickering Junction, on the railroad's line between Toronto and Montreal. There were no reports of injuries. Two of the 50 containers on the derailed cars were carrying dangerous materials, including batteries, but there were no reports of leaks, CN spokesman Mark Hallman said.

The incident is under investigation but the derailment occurred as Canadian National was trying to clear a backlog of freight caused by a two-week strike by freight train conductors and switch crews.

CN has had several derailment problems in the past and has been criticized for inadequate maintenance. Q1 numbers already strike ugly will be further negatively influenced by the derailment.

Here is the kicker. Everyone thinks the strike is settled. The union 2800 member strong UTU (United Transportation Union) is being challenged by the Teamsters. More than 65% of the membership has paid $5 for a Teamster Card. This allows the Teamsters to make application to change over the union. The membership is very disgruntled. After a two-week strike when your union settles with a legislative gun to its head the labor force has elected to change unions. The expectations and implicit labor agenda will create a lot of rock and roll for CN’s income statement.

On another note keep a watch on the Teamsters. They seem to be on the march and are signing up support. They continue to beaver away at Fedex (NYSE:FDX) in both the US and Canada.

Thursday, March 01, 2007

Staples Which Way Now?

Staples, Inc (NASDAQ:SPLS) reports record Q4 sales and earnings. The entire year looks pretty good with a 27% increase in EPS. The numbers include an extra week but once you factor it out the results are still pretty good. To celebrate the company has declared a dividend increase of 32%. A dividend increase is the best form of guidance. These are all great numbers and any investor should be very happy with management.

So why has the stock traded basically sideways since mid fall? It seems that no one is prepared to put their money on the line. Institutional holdings are off by just under 30 million shares or approximately 5.2%. Insider behaviour indicates no significant accumulation. If anything officers seem to be shedding the stock. Directors seem to be exercising options and almost immediately shedding in offsetting transactions.

If you believe in the dividend and the quality of earnings than the market is wrong and investors should increase exposure.

Tuesday, February 27, 2007

Carl Icahn Makes Waves at Blockbuster

Blockbuster Inc (NYSE:BBI) released their Q4 and year-end results along with the financial apologies associated with them. Apparently because they are attempting to enter the on-line business they have to create some losses along the way and disappoint investors in the process.

The real focus should be on a bizarre section of their press release entitled “Other Matters” The Board of Directors and the CEO are having a disagreement over the CEO’s bonus. The press release reads

“The Company and its Chief Executive Officer are in discussions in an attempt to resolve a disagreement concerning the Board of Directors' 2006 bonus award to the Chief Executive Officer.”

In the board’s wisdom they want to award the CEO an amount which is substantially less than the agreed upon formula as set out in SEC filings. They appear to be about $4.5 million dollars apart.

In the conference call transcript made available through the CFO Larry Zine in response to Tony Wible of Citigroup confirmed that the disputed amount has been reserved for in Q4 and therefore earnings will not have to be re-stated. The CEO John Antioco made no comment.

When the board wants to overtly change a senior level bonus there must be a performance reason. The now public dispute will surely leave an awkwardness even if resolved amicably. If there are serious performance issues than the board has to deal with them. If the board cannot make this stick then several compensation committee members will have to go. Someone has it wrong. If the CEO is going to lose this much bonus will he stay or will they need to find a new quarterback.

Too much smoke in the back-room and no-one has thought to pull the fire alarm. So maybe I should do it.

By the way Carl Icahn is on the board and perhaps is dissatisfied with this particular underling. The CEO John Antioco bought 220,000 shares at $4.66 reported last Nov 21, 2006. Check out the CFO Larry Zine he seems to have sold big time for the past two years around Christmas time. The last as recently as Dec 21, 2006. John Antioco was also a big seller in previous insider reports over the past two years, disposing of shares around $3.67 and then buying just recently for a dollar more. Mr Antioco, extensive research has shown it is "buy low sell high" which is not what you did. Do you suppose Carl Icahn is explaining that as they go along?

Heidrick & Struggles Poor Excuse

Heidrick & Struggles International, Inc. (Nasdaq: HSII), a firm that hails itself as the world's premier executive search and leadership consulting firm, announced financial results for its Q4 and fiscal year ended December 31, 2006. Profits are down despite huge 30% plus increases in revenues. A good portion of the disappointment is attributable to the acquisition of Highland Partners and severance costs. These guy’s should know how to negotiate a compensation package.

But management promises that 2007 will be much better. Kevin Kelly CEO mentioned

“….We also have new management in place in all three regions and they are as committed as I am to accelerating our revenue growth, while continuing to improve our operating margins. We believe that the actions taken in the fourth quarter to align the leadership, and the industry and functional teams in our global network will position us for more profitable growth in 2007."

Of course they would say that. Most CEO’s say that stuff. Recruiters talking about themselves would say nothing else. Problem is the promise has a tired common element to it leading investors to say “So what?”

The critical issue is consultant productivity. How well, how fast and how often can these high-class ponies run. Adding more consultants is exactly comparable to retailers expanding locations. Investors want to know about same store sales as a true measure of performance.

Management in their own press release slipped in this little sentence before they skipped off to talk about other issues.

“Productivity, as measured by annualized revenue per executive search consultant, remained strong at $1.2 million and the average fee per executive search was $104,600.” No comment was offered on where this number is going.

The expansion has been regional in focus. Yes more offices and more consultants will bulk up the numbers. But at this level the challenges will be in specialization. Look at and see the large range of global industry practices and global functional practices. Management has not spoken about how they are truly driving these businesses especially with the recent expansion.

Monday, February 26, 2007

TXU Theft or Just Opportunistic

TXU Corp (NYSE:TXU) is to be acquired in a mega private equity deal. Shareholders appear to be big winners. Environmentalists also should be happy with plans to cancel and or stop approximately eight coal fired plants which of course reduces future pollution.

The announcement does a hard sell on a planned 10% price reduction for residential customers reportedly reaching $300 million. The price protection will be extended to September 2008. Does this mean that when the inevitable IPO comes to market there will be lots of room for price increases?

The cancellation of eight coal fired power plants is also interesting. I assume that they were needed in the first place. Are the remaining three plants or other facilities to be expanded dramatically? I do not pretend to understand carbon emissions credits but is there a windfall for TXU as they now have more than before.

The wealth technique is buy low sell high. KKR, Goldman Sachs and TPG understand the procedure perfectly. Are the investors being penalized by self-inflicted short-term thinking?