Friday, May 11, 2007

Deutsche Telekom Clear Future Uncertain Present

Deutsche Telekom (NYSE:DT) posted serious problems in Q1. 58% drop in profits as landline customers leave in droves. Wireless business is up as large amounts of new customers are signed up. The future is clear but not yet profitable.

The union is stuck between a large rock and a very hard place. The workforce DNA comes from a legacy of state ownership. Entitlements were entrenched. Now the world has changed. DT is privatized and fighting in the free market.

The union ver.di seems to be fighting a scorched earth no retreat type of war. The problem is there can be more more retreat. Backs are up against the wall and changes must be made.

The investor question will be what are the short term costs of labour disruption. Telecom investors have seen this before and the ending is eventually the same everywhere. Union lines do not hold. Management probably does not want to fan the flames of animosity but they need to signal that they are serious about restructuring.

If the union holds them off and calls their bluff or even just makes them blink the stock will lose credibility.

From the land of Nietzsche one now wonders about "If it does not kill you it will make you stronger"

Thursday, May 10, 2007

Sara Lee Running On The Spot

Sara Lee (NYSE:SLE) reported an increase of 9.2% in revenues for Q3. While on the surface 9.2% increase sounds good they also announced that the media and promotional spend increased 28%. Sounds like the marketing program has encountered significant friction or may be just misfiring. While some significant product categories performed better than the average, no one approached the 28% level. Management needs to publicly address the discrepancy. Consumer marketing companies with mature established products cannot and should not tolerate these kinds of failures.

Sara Lee's press release reported operating profit of $152 million for Q3 07 compared to $151 million for last year. Sara Lee essentially was running on the spot while increasing revenues. They did resort to the magic trick of share buy backs and made the EPS number go up.

To achieve the share buy back they spent $490 million. They increased long term borrowings by $2.9 Billion and significantly reduced the dividend that they are paying. These numbers far outweigh the 28% marketing increase that does not seem to be working.

Sara Lee when sales go up 9.2% the bottom line should reflect the positive changes. The bottom line is more a result of financial engineering and not operating performance.

Wednesday, May 09, 2007

Virgin Disappoints

Virgin Media Inc (Nasdaq:VMED) released disappointing news. The press release leads with nine (9) highlights. The last one refers to the large losses that are being incurred. Corporate spin doctors were probably hoping that you might stop reading around the third or fourth point. Real investors continue reading until they find mention of the bottom line.

For a brand which is supposedly fresh and exciting they seem to have all the standard problems incurred by the industry segments that they operate in. As a matter of fact they seem to have all the problems that each industry segment seems to have. This begs the question "Why are they here?"

To make matters worse BSkyB has pulled their basic channels and more subscription cancellations are to be expected.

Maybe they are waiting for the proverbial takeover offer? But to entice the offer from someone with money you need to be growing and causing problems in your competitive space. Right now Virgin Media is not trouble except for shareholders. Given its very high debt levels and negative cash flows the lenders are feeling very ill over the future. The cherry is not worth plucking.

Tuesday, May 08, 2007

Motorola's Last Card

Motorola’s (NYSE:MOT) shareholders failed to put Carl Icahn onto the Board. The proposed slate of investors appears to have been voted in as per the wishes of the current senior management team. Carl Icahn has been very vocal about the need to fix things quickly and was looking at the board seat as an ideal vehicle to champion his views.

The directors may see a Board without Carl Icahn as a victory. In actual fact the board just has used its last Get Out of Jail Card. They need to turn the company around and make the market believe that it is really happening. Motorola has been described as a company that never misses an opportunity to shoot itself in the foot. The short term good news is that they may be out of bullets. They need more than just another good product. They need to make the market believe that they have the momentum.

But right now no one really believes that. So watch for some mergers and acquisitions. CEO Ed Zander will need to change the entire look of Motorola by buying into other products and companies and merging its way out of the current dilemma.

My prediction will be a take-over of Nortel (NYSE:NT) Nortel seems to have solved its internal financial reporting problems and is showing signs of resurgence. Motorola could still pull it off before Nortel’s phoenix rises too high. The combined entity would jolt the old Motorola away from current vexations. As Nortel becomes more valuable within the telecommunications maker markets they will become a take-over target as well.

Think about it Mr. Zander. Just releasing another hot phone that replaces the razr is probably not going to save your bacon.

Monday, May 07, 2007

Boeing's Board Practices Backfire!

Boeing (NYSE:BA) may be wondering about how to appoint a Board Director. Friday after markets closed they announced that Richard D Nanula resigned to pursue other interests. Richard Nanula only just recently became a Boeing Board member.

Approximately 30 days ago Richard Nanula was CFO of Amgen (NasdaqGS:AMGN) but was forced to resign because of disclosure issues relating to a failure to announce that a critical research study had failed. The SEC is investigating and it does not look good for Richard Nanula.

Boeing did the right thing. Boeings corporate governance requires directors to resign if their professional status changes. Their new focus on appropriate corporate governance could not tolerate this kind of controversy. Boeing shareholders deserve better.

How did Richard Nanula come to acquire a seat on Boeing’s board? He made his bones with the Disney organization. Following a twelve year career where he rose like a rocket and then left to become the President of Starwood Hotels. Then he ends up at Amgen where he basically stepped on a land mine.

The Boeing Board should have had a good view on him. Current Boeing director John Bryson has been on the Disney Board since early 2000 and certainly could have developed an excellent insight into his psyche. Mr. Bryson is currently a member of the governance, organization and nominating committee and has been a Boeing director since 1995. While the time lines do not exactly overlap Richard Nanula held significant positions and would have left his DNA and fingerprints behind on many Disney projects.

CFO’s who just omit to disclose bad news should not be on boards of other publicly traded companies. This is a gross infraction and there are usually pre-cursor events that may have predicted the problem.

Admittedly this posting is harsh. But Boeing may have just dodged a bullet. What needs to be nailed down? Perhaps Board members on senior companies such as Boeing should have some experience on other boards and have some seasoning. The bright shiny career rocket may actually be more of a negative when considering Board Members.