Friday, April 13, 2007

Infosys Will Bite Itself Soon Unless...

Infosys (NasdaqGS:INFY) released the latest numbers and beat expectations when calculating in rupee's. I do not calculate in rupee's. Readers probably do not calculate in rupee's. Infosys work force may eventually stop calculating in rupee's.

The outsourcing thing has been very successful. However it now has changing dynamics. The revenue drivers are overall IT spending and FX ratios (if currencies are allowed to trade freely). The cost drivers continue to be local labor costs and FX ratios. Another contract or two will probably not change shareholders opinion of this very high PE ratio stock.

Infosys probably understand this as they are establishing a development facility with approximately 300 seats in Mexico. The costs (mostly in Peso's) will be a US$ proxy. The challenge for Infosys which also trades on India's stock exchange will be to reallocate work flow and costs into cheap countries and avoid the increasing costs of previously cheap but very adequate Indian workers.

Clients will become increasingly concerned about locking in FX differentials. Look for outsourcing contracts to start including robust FX guarantees. Infosys will most likely start to include the FX lock in to avoid margin squeezes. Clients will look at end dates of contracts and may actually wish to extend when FX forward rates look favorable.

The Infosys play is running to its natural end game as it becomes another commodity provider much like the mining business which traditionally copes with local labor costs and FX rates. At least the resources business has a forward commodities market.Infosys is currently internalizing that entire risk.

Thursday, April 12, 2007

Pier 1 When Will the Pain Stop?

Pier 1 (NYSE:PIR) rolled in again with worse results than expected. The culprit this time is an inventory impairment charge. Margins are shrinking and promotion costs are through the roof. Investors are naturally not hearing the cash register ring the way it should. A conference call is scheduled to explain how they plan to work their way out. This explaination will probably not be important as it will be an excuse based look forward.

The concept of retailing is extremely simple. You must sell product that people want to buy. If you can do this quickly and get good inventory turns you are brilliant. The trick of course is in the execution. Pier 1 simply has not executed at any level. They loaded up with product that would not move and then they tried to promote their way out of it. Double Bad.

Basically the thinking is wrong as they have missed the market. This calls for an entire overhall of the retailing strategy which is usually kicked off with changes in the executive suite. Fortunately the cash position is still positive but will not be for long without immediate changes. Debt position is also manageable, What you need is leadership.

Look for a take over. This is not the mega-buck sized deal that Wall Street normally gets excited about. The new owners will need to show up with a strategy ready to go. This will include a new mangement team.

Institutions have shed approximately 50% of their recent holdings as they lost faith and found better things to do. A take over would be well received and probably would not need that much of a premium to get the job done. Not only that its relative bite size makes it more than manageable and should take only one year to turn around. Any takers?

Wednesday, April 11, 2007

CN Rail Earnings DeRail

CN (NYSE:CNI) continues to experience union problems. Yesterday the union membership rejected the contract offer and voted to strike. Management says they are disappointed. The union was out on a two week strike in Feb and basically ruined Q1 results and left behind operating difficulties that will persist into Q2. While there is the threat of back to work legislation Canada's national parliament is on Easter recess for another week.

CN has been known for huge productivity and efficiency increases which resulted in attractive stock performance. Management failed to engage their unionized workforce and are now reaping the failure. Essentially this means you can write off this fiscal year. The strike scenario seems to be this. Immediate strike action in Kamloops and other critical points in BC. Rotating strike action and other work stoppages in the east. The membership understands rail schedules and they will delay trains at the worst possible times.

The membership even if legislated back to work is madder than hell. Legislation will only sweep the problems under the carpet and create a passive aggressive labor situation which will sap profits and productivity. The contract was rejected by an overwhelming majority. The workers have even begun a campaign to replace their current union affliation and become Teamsters. (Over 65% of members have signed up allowing for a new union to be certified) Management may have won at the negotiating table but they appear to be losing on the track. This will create lower profits for shareholders.

If this problem cannot be cleared up quickly and profits fall then senior officers need to be replaced quickly. Given current public comments by management it appears they have miscalculated and misunderstood. The so called gains at the negotiating table have created a back draft. Investors are getting burnt needlessly.

Tuesday, April 10, 2007

Nuvelo's Bull Runs

Nuvelo's (NasdaqGM:NUV0) bull has been rampaging with great vigor. Option volume is up dramatically. The stock which is mid single digit has run quite nicely. Everyone is excited about the trials for Alfimeprase. Bayer is running the trials and will not comment but recent speculation is taking this one to the moon. Maybe yes maybe no but there are visions of financial sugarplums dancing throught the minds of certain speculators.

Reuters in their International Holders Summary for Nuvelo reports that institutions have been exiting the stock. Of the 112 insitutional positions there is only one net new position and 53 positions have been closed out entirely. Of approximately 38.3 million shares held institutions have distributed about 2.5 million shares.

I know some will not view this as a classic institutional investment but the fact remains that 112 big boys are in and they do not seem to be buying the story. 112 players all with their ears to the ground and they were not accumulating.

There could be something to the trial results and therefore investors should be rewarded. It does not seem complete enough to justify the homerun promise from the speculation crowd.

Monday, April 09, 2007

Mirant Explores Options

Mirant (NYSE:MIR) announced very early this AM that they have hired JP Morgan to explore strategic alternatives. On Thursday options volume spiked noticeably so someone knew something was up. There should be an investigatigation and sanctions.

Management has been very quiet with very little in the way of announcements and or press releases in recent past. Mirant has been a phoenix rising from the ashes. Lately the fundamental picture has been looking very good. A series of cash sales of some unwanted power generating plants are scheduled to close in Q2. The cash position was going to look so good they were probably going to come up on the acquisition radar.

Management was careful to point out that because they will be looking at some alternatives there is no guarantee or obligation to actually close any of the potential deals. There have been no major insider dispositions reported in the past twelve months or so. But improbably the level of institutional holdings has dropped by approximately 24 million shares as supposedly savvy investors shed approximately 13% of their holdings. Go figure!

The very real last minute signal was last weeks announcement that the CEO Edward Muller received a 2006 comp package of approximately $18 million which included $15.6 million of stock and option incentives. Sounds like the CEO is aligned with the shareholders so let's go and find someone who can drive up the price.

The turnaround at Mirant is still in its infancy. I am sure that they will attract attention for their successes to date. Investors need to ask themselves should they accept a quick offer now or wait for the long term value. Management has under communicated in general and therefore investor expectations may not be that well entrenched. (Look at bonehead institutions shedding the stock) Private equity may be able to steal this one.