Thursday, November 15, 2007

JC Penney Lame Excuses

JC Penney (JCP) came up with disappointing results and investors sold off the stock. If you believe the economy is having some problems you are not surprised. If you were surprised well what can I say.

But listen to some of the excuses that management is throwing on the table. They are blaming everything on bad weather, high fuel prices and sub prime induced credit problems as well as declining housing prices. It would appear that they are not concerned about anything that they were doing.

Myron E. (Mike) Ullman, III, Chairman and CEO of JCPenney commented

“Notwithstanding the difficult retail environment, our team is focused on the fourth quarter and beyond, and is working to seize opportunities to improve operating performance. For the upcoming holiday season, we are confident that our customers will find highly compelling merchandise assortments and smart prices supported by a competitive promotional calendar."

At this point when you consider the fourth quarter its all over. The merchandise strategy has been decided and rolled out. Other than last minute price adjustments what is really doable? Ullman continued to say

“As we look ahead, we continue to believe the strategies in our Long-Range Plan provide the best opportunity to achieve sustainable growth over the longer term. However, in light of the expected weak retail environment, we will be taking a cautious approach to planning our business for the fourth quarter and 2008.”

Doublespeak and bafflegab. JC Penney you are in free fall and wondering if the parachute will open up. Management needs to be prepared for bad times. Right now its only just starting to occur to them that there is a problem.

Tuesday, November 13, 2007

Fortress Fig Leaf Needs Adjustment

Fortress Investment Group (FIG) released its results. It opens very bullishly. Pre-tax distributable earnings of $111 million, up 66% from 3Q 2006. Management fee paying assets under management of $31.2 billion, up 62% from 3Q 2006. Segment revenues of $219 million, an increase of 80% from 3Q 2006. Then they tell you GAAP net income excluding principals' agreement expense is $17 million. GAAP net loss is $38 million. Is it too old fashioned to think that if you can post increases of 62% to 80% you should be making a pile of dough and not reporting losses.

These are the very smart guy's who can buy and restructure but apparently have trouble creating a profit. Hmmm

Pre-tax distributable earnings for the quarter were reported as $111 million, or $0.26 per dividend paying share, a 66% increase over our pre-tax distributable earnings for the third quarter 2006 of $67 million. Declared third quarter dividend is $0.225 per share (or $0.90 per share on an annualized basis). Can you stand to calculate the dividend coverage ratio. Currently the stock trades north of a 5% dividend yield. This is considered by many to be a warning signal of risk and trouble.

FIG goes on to say "Distributable earnings and distributable earnings per dividend paying share are supplemental measures of our operating performance that we believe provide a meaningful basis for comparison between present and future periods. We intend to target dividends that reflect a payout ratio over time of approximately 75% of distributable earnings after tax related payments and reserves."

Supplemental to what? Earnings headed to investors are not supplemental to anything. It's the only metric that means anything in the end. Targeting a 75% dividend payout when your stock is trading north of 5% dividend yield is pretty fancy talk. A lot of good things need to keep happening consistently.

FIG continues to double talk with the following paragraph "The Company's quarterly segment revenues and distributable earnings will fluctuate materially depending upon the realization events within our private equity business, as well as other factors. Accordingly, the revenues and profits in any particular quarter should not be expected to be indicative of future results. Quarterly dividends are not necessarily representative of the Company's earnings in the current quarter, but are reflective of our anticipated performance over time."

Talk about covering all the bases. The press release is circuitous. 5% dividend yield. Dividend targets of 75% payouts. Caveats that earnings may fluctuate dramatically. Further caveats that dividends are not always going to be connected to actual results but will be reflective of managements future expectations. Do not forget about a congress that wants to change the tax rules.

Highly unlikely that FIG would accept this rationale from an investment. Why should investors accept it from FIG?

Monday, November 12, 2007

Blackstone Soft Shoes Real Estate

Blackstone (BX) just released results and alas it is sad to say that the results are not stellar. They have lamented the fact that credit markets are tight and many mega deals are extremely difficult if in fact not impossible. Predictable comment and good to hear. But read this comment relating to real estate.

"During the periods presented, weakness in the sub-prime residential lending area spread to general commercial real estate lending. Although there was no evidence that these credit problems have significantly affected the underlying operating fundamentals of the investment portfolio, valuation multiples have declined modestly."

Excuse me. Lets connect a few of the dots. Sub-prime residential problems problems relate to silly underwriting practices. Many of those loans just should not have been made. Blackstone is now saying some of their commercial real estate deals are of the same ilk.

They then dish out the oxymoronic comment that credit problems are not having an operating effect but the assets are now worth less than before. Well if its worth less something is going wrong. If you are connecting dots to sub prime how can you expect everyone to say "Its OK"

The investor is being prepared for bad news. The future press release may now read "As Previously Disclosed". Investors need to watch how blips show up on the radar. There seem to be a few new incoming items of interest.