Friday, March 30, 2007

CN Sidelined

Canadian National Railway Company (NYSE:CNI) has warned downwards citing a longish strike, bad weather and neglecting to point out derailment problems). If you follow this stock and could not figure out that Q1 was going to stink you have a perception deficit problem.

Having said that listen to what management is saying. They still claim that for the year earnings will grow 10%. Read this quote from E. Hunter Harrison, president and chief executive officer

"CN has an exceptional team of railroaders dedicated to recovering delayed traffic on its network. We expect a tough first quarter, but our recovery program is ongoing and we will continue to make every effort to deliver diluted earnings per share growth of 10 per cent-plus for the full-year 2007."

This means that the next nine months will move at an above average tempo to catch up. How is management going to do this? They have a serious union problem. Workers were forced back to work and may be overthrowing their existing union and signing up with the Teamsters. Expect at best a passive aggressive decreased productivity issue.

Management has been criticized by regulators and safety experts over derailment issues. The fix requires cap ex to go up. Watch financial statements for the strategy. If they do not spend now they will continue to derail in the future. Of course you need to take a view on future economic activity and how much shipping/rail activity it will generate.

Once management starts to warn there is a tendency to wash out an assortment of other problems under the guise of previously announced problems. Right now in the executive suite you have both forward momentum pressure and increasing operational friction. This will eventually cause financial brake failure.

When QI is released listen to how any forward statements are hedged. Unless they are complete kamikaze pilots they will start loading up the caveats and looking for cover.

Thursday, March 29, 2007

Nabors Warns Insiders Load Up

Nabors Industries Inc. (NYSE:NBR) continues to warn downward. They continue to claim rig utilization is off because of bad weather and other factors. The bad weather is an early spring thaw. Several months ago they were complaining that the winter freeze up was late and rigs could not be moved into place. These are all normal short term frustrations in the rig business.

This time they are even pointing towards increased costs contributing to 30% of the reduced expectations. More specifically they are pointing toward increased costs attributable to the expensive investigation of stock option granting processes.

Nabors is playing the reduced expectations and guidance game. By being ultra disclosure hysterical they keep pointing to the same short-term issues and keep beating the bad news drum.

The institutions seem to be believing the bad news vibe as they have sold approx 17.2 million shares or 8.1% of their holdings as at recent reports.

There is very little focus on anything long term. In reviewing insider transactions the board seems to have been awarded on Feb 22, 2007 an allotment of 12,000 shares per person.

On Mar 6, 2007 Anthony Petrello in what is reported as a Direct Option Exercise pulled the trigger on 2,298,650 shares valued at approximately $53.5 million. ($23.25 @ share)

Despite the supposed bad news that is one hell of a commitment.

Wednesday, March 28, 2007

DMC's Conflicted Conflicts

Document Security Systems (AMEX:DMC) has taken a few punches in the head on the intellectual property front. The Rochester New York based company develops anti-counterfeiting products. Specifically the company's technologies protect documents and printed products including currency, ID cards, passports and gift certificates from counterfeiters and identity thieves. Should be a big business.

But they have just lost a patent validity lawsuit in the UK and the International Bureau of World International Property Organization’s (WIPO) March 13, 2007 denied DMC's European patent. (DMC has been silent to date about the WIPO ruling).

The company was quick to point out that each European country would decide for itself. On March 27 we hear that the German Federal Patent Court approved the validity. It is believed that several other jurisdictions are grinding their way to decisions.

Asensio doesn’t like these guy’s and ties the current actions in with a 1995 patent infringement case between DMC and US Federal Treasury which DMC lost. In an recently emailed press release Asensio in relation to the UK decision points out

“This adverse ruling comes almost one year after questions concerning the legitimacy of DMC's claims and irregular stock transactions made their first public appearance. The decision's detailed technical fact discovery and findings that add credence to the belief held by some that DMC's claims were never brought in good faith but were formed to create a questionable, and possibly illegal, penny-stock promotion scheme.”

The stock has yo yo’ed for the past twelve months with a 52 week range between $7.50 and $13.70. So if we check the litmus test of insider trading we will find that insider Mr. Thomas Wicker has been selling stock exclusively for the past two years. This individual holds the title of Chief Technology Officer, Vice President and Secretary.

Strangely enough Mr. Peter Ettinger (the current President) has been making some rather large acquisitions of the stock. Signals from management are schizophrenic.

Not exactly your widows and orphans investment grade stock. DMC has not been able to generate revenues in excess of $5 million a year in the past few years. If their technology is so hot someone knowledgeable in the field would have made a takeover bid by now.

Long term prospects appear dismal.

Tuesday, March 27, 2007

Netflix Hastings Graduates To Microsoft

Microsoft (NasdaqGS:MSFT) just tipped its hand about how it views the future of video downloads by appointing Netflix (NasdaqGS:NFLX) Chief Executive Reed Hastings to not only the board but also to the all important finance committee of Microsoft.

Usually you just buy out the new technology, make some guys rich and then swallow it like a between meal snack. Microsoft values this individual to the point where it has put him on the board and has put his hands on the steering wheel. But so far they are not complimenting the investors.

The shareholders of Netflix who believed and invested in the vision of Reed Hastings will not benefit. Netflix has been the beta test site for Reed Hastings ideas. If you bought the stock on 02 you made some money but not the type of return that disruptive technologies provide when successful.

Insider trading reports indicate some recent significant selling on the part of Reed Hastings. There is a signal here. The long-term case for Netflix with a $1.6 Billion market cap may not be as strong as you would want from an investment.

Watch for other key personnel to graduate to other situations.

Monday, March 26, 2007

Magna Solutions for DailmerChrysler

DaimlerChrysler (NYSE:DCX) may be increasingly in the firm embrace of Frank Stronach’s Magna International (NYSE:MGA). The formerly powerful autoworkers union has heard emphatically that the old North American car model is broken and Frank Stronach has some new idea’s. The message was not an accident there are reasons why they chose to make such a large point of it.

Disgruntled car buyers and exasperated Chrysler dealers will tell you the old ways no longer work. The question is becoming will Stronach attempt to fix just Chrysler problems or will he also reach into the Daimler side of the business and fix/change a few other problems as well.

Given Frank Stronach’s immigrant success story roots from Europe (Austria to be specific) coupled with existing Magna Manufacturing operations in Europe my money is on a more comprehensive global approach. This means some of the North American operations will receive permanent closure notices.

Most observers view automobiles as a product-offering problem. There is some truth to this but the real fundamentals point to infrastructure and jurisdiction issues. DaimlerChrysler just like many American based manufactures are facing an increasing unfounded health care and pension cost crisis. You cannot undo the past but it would be insanity to continue the present.

The United States does not have a satisfactory public health care solution. Costs are wildly out of control. Social Security is under funded and waiting to sink just like the Titanic after it hit he iceberg.

Solution: Surviving manufacturing will be increasingly re-allocated to Canada, which is close to US markets and has a functioning public health care system. Canadian manufacturing entities do not have the same health care and pension funding issues that their US Counterparts have. In Europe with an enlarged EU and cheap but good labor in former East Bloc countries watch for newer plants drawing production away from high cost legacy plants.