Friday, March 16, 2007

Pitney Bowes Stumbles Forward

Pitney Bowes (NYSE:PBI) pulled the trigger and is buying MapInfo (NasdaqGM:MAPS) for $408 million or approximately a 53% premium to its previous close. Moody’s gets a little upset and says maybe they have to downgrade debt because they cannot figure out if Pitney Bowes has the resources to buy back stock and make cash offers for interesting acquisitions.

Pitney Bowes has to do something to get things moving. The stock has been moving sideways for the past four to five years. 79% of shares outstanding are owned by 510 institutions. Dividend yield and huge repurchases are draining cash.

Pitney Bowes is tied to the mail delivery business with all its traditional legacy asset and process issues. The acquisition does make some sense. The big question will be can Piney Bowes properly exploit the advantages of MapInfo? There are many other map and location service providers who have more effective distribution channels. Pitney Bowes talks to the logistics side of businesses and does not have any experiences or insights into the front end retail customer action.

We need management to make some public comments as to how this fits into their vision of the future and more importantly just what is their vision of the future.

Thursday, March 15, 2007

Subprime Bad and Ugly

Subprime mortgage default insurers such as PMI Group (NYSE:PMI) and MGIG Investment Corp (NASDAQGM:MGIC) will scratch back very soon. Insurers do not just write out checks. They will want to ensure that underwriting and documentation standards have been properly adhered to.

There is increasing anecdotal evidence that subprime mortgages were given to anyone; even in some circumstances individuals whose income was left off the application/underwriting form. Claims of this nature will most likely be declined. The lender will be declared reckless and the insurer could keep the premium. The battle will be trench warfare mortgage file by mortgage file. If the insurer cannot keep the premium watch for earnings restatements and decreased cash positions.

The insurers are fighting for their lives and will say and do almost anything. Remember the real estate and mortgage scandals from Savings and Loan days. Lots of documentation wars went on for years creating work for lawyers, accountants and associated fee sucking bottom feeders.

But we should have seen this coming. How blind were we all? In the just recently filed 10K PMI Group (NYSE:PMI) reports an increase in loss and loss adjustment (That’s the money they actually lose as an insurance company) in 06 over 05 of 17.5%. This is double the comparable 05 over 04 increase which was 8.6%. So the year over year trend was like a fast bullet train leaving the station.

The real indicator was PMI’s 10Q filed Nov 07, 2006, which showed a Q3 06 over Q3 05 increase of 29% in loss and loss adjustments. That was probably the real tip off of the coming storm.

In both the 10Q and 10K management took great pains to explain that NIW (New Insurance Written) had been dropping dramatically due to increased amounts of securitization.

Lots of foolish red ink around for all categories.

But if that was not enough Mr. L. Stephen Smith, 57 CEO, Pres, COO, Director, Member of Financial Guaranty Oversight Committee and Chief Exec. Officer of PMI Mortgage Insurance Co has been selling shares like a maniac and cashing in his chips. (As late as March 1 he exercised options and sold 10,000 shares into the market immediately; as well as Feb 6, Feb 2, Jan 3, all of 2007 and Dec 7, 2006.)

Oh and Mr. Victor J. Bacigalupi, 63 Chief Admin. Officer, EVP, Gen. Counsel, Sec., Chief Admin. Officer of PMI Mortgage Insurance Co and EVP of PMI Mortgage Insurance Co has also been bailing out.

While the CEO and key officers were running for the hills the stock surged approximately from $42 on Nov 1, 2006 to $50 in early Feb to almost back down to $42 in recent trading.

Methinks some SEC and DOJ scrutiny will be coming shortly. The ISS (Institutional Shareholders Services) Corporate Governance Quotient (CGQ®) for PMI as of 1-Mar-07 was better than 86.4% of S&P 400 companies and 97.8% of Banks companies. ISS will be reviewing their files and perhaps explaining why this company looked so good.

Wednesday, March 14, 2007

Revlon Hits Bottom?

Revlon (NYSE:REV) announced a loss and continued to supposedly disappoint the market. The stock closed at $1.10 which is a long ways from the $40 to $60 several years ago. Is this an option disguised as a low priced stock with the benefits of a NYSE listing?

Institutions do not seem to believe. They have sold approximately 55 million shares and reduced their exposures by about 82%. Not much more to sell off when the cupboard is bare.

Fidelity has a large holding, which they could have sold by now. They hold approx 51 million shares or 12.42% of outstanding shares.

The press release was all about the bad news. The stiff wire scrub brush is being vigorously applied. The non-performing Vital Radiance is being carted out to a marketing graveyard. AP even went so far as to say they are discontinuing lines of cosmetics for older women. (Are younger women easier to trick?)

Revlon said nothing about new efforts other than they plan to leverage the Revlon name. No encouragement to investors just a strict Calvinistic promise to work hard. This can only shake out any more weak stock.

But look at this: Ronald O Perelman reported on Jan 19, 2007 3.035,000 shares. The comeback play may have already started. They need to deal with their huge debt and develop strength and flexibility. Watch for debt restructuring that offers convertible features. Calculate the potential dilution carefully. Then watch the promotion machine kick in as they put some lipstick on this pig.

Tuesday, March 13, 2007

Halliburton's New Risk Profile

Halliburton (NYSE:HAL) has created a PR storm that few comprehend. The official spin is that they are moving something called headquarters to be closer to the market, which they perceive to be the Middle East. Most generals do not place their headquarters in the middle of the battlefield. Many global companies operate around the world and do not locate head offices in a major market.

The geo-political perspective will provide more insight than the straight financial perspective. Most observers cannot figure out the Middle East. By embedding your head office in a more politically complicated environment you are not providing more clarity for investors. The move has disturbed the American political scene unnecessarily. Many claim Halliburton is becoming a tax refugee.

By moving outside of the US Halliburton will be able to avoid political and regulatory scrutiny. Oil exploration requires close involvement with dictators and other corrupt elements. It makes for good headlines but we want our gas station full of gas for our convenience.

International banks have long engaged in jurisdiction shopping as they sought out tax effectiveness and secrecy laws to their liking. But banks are intermediaries and act on behalf of clients. Halliburton is a direct participant and gets its hands dirty.

Methinks somewhere there is a contract/deal/venture that is so juicy Halliburton is prepared to take the political heat in America. You would not do this just to get a few rigs into place. The move is entirely customer centric.

Disclosure of all varieties financial and political will be more obscured. Therefore the beta has increased dramatically. Many investors may find the newly increased risk reward unpalatable. Approximately 657 institutions and mutual funds now hold 82% of shares. Markets dislike uncertainty and will act accordingly.

Monday, March 12, 2007

Magna Wants Chrysler

Magna International (NYSE:MGA) is looking at purchasing Chrysler from DaimlerChrysler (NYSE:DCX). Of all the tire kickers this one perhaps makes the most sense from an operations point of view. Private equity types have no real and direct experience at operating plants, logistics, unionized work forces and delivering parts just in time. They probably cannot set the timer on an automatic coffee maker.

Magna currently derives approximately 25% of revenues from Chrysler. They will be able to intuit much of Chrysler much better than external financial types.

Magna is led by Mr Frank Stronach, an immigrant success story of whom a movie should be made. Currently at the age of 74 he is approaching the Warren Buffet question of who will succeed. A robust management team of some 50 year olds populates the executive suite. An exceptionally talented daughter is a full time politician and has held senior level cabinet positions.

Magna has hit many home runs but has some famous strike-outs. It did go bankrupt in the early 90’s because it became involved in many non-car part activities. There has always been the issue of horse racing and race tracks which now has been tucked away in a separate company. There is a tendency to get distracted. But I digress!

If Magna takes over Chrysler the other manufacturers will view Magna through exceptional hostile lens. 75% of revenues will be subject to hyper scrutiny. If Magna bids substantially less than private equity than the market will conclude that private equity is overpaying. Quite the stand off.

From Magna’s point of view I am sure they are giving thanks that Ford (NYSE:F) and the GM (NYSE:GM) are in weakened conditions and not at their old fighting weights where their word was law. In the old days they would not have dared.

The correct move will be for private equity to connect with Magna to ensure the purchase valuation is correct. Also they will need the operations management perspective to actually do something with Chrysler. Watch for this dating game to develop.