Friday, December 21, 2007

Goldman Sachs Is It All Good PR?

Goldman Sachs (GS) released their year end numbers and proved to the market that they are the smartest guy's around. They bet the right way on the sub prime mortgage products and scored lots of home runs. Most everyone else is struggling, recapitalizing and restaffing key executive positions.

Goldman compensation costs remained at 44% of revenues for the past two years.

So if these guys are the champions why has the stock only appreciated from $198 to approximately $209 over the past twelve months. All commentary and analysis indicates Goldman has bested the street and will continue to do so.

I know all the other comparable ibanks are down so relatively speaking Goldman Sachs looks excellent. But if you are beating up the other ibanks for problems and Goldman Sachs has it right you would think the valuation would be proportionately higher.

Sounds like the market is not believing the hype at this point.

Wednesday, December 19, 2007

General Mills Needs To Explain Inflation Concerns

General Mills (GIS) reported its Q2 08 results. Through the first six months of 2008 net sales increased 7 percent to $6.78 billion. Segment operating profits grew 4 percent to $1.29 billion. Net earnings through six months grew 4 percent to $679 million.

The company which is clearly heavily influenced by food commodity prices is starting to make some noises about inflation. Read this quote from Chief Executive Officer Ken Powell "segment operating profits were up 4 percent through the first six months despite significant input cost inflation..."

Later on comments made under Outlook included this quote "The company expects input cost inflation will be higher in the second half than in the first half, and that full-year inflation will be greater than originally estimated. However, above-plan results through the first half, pricing and increased productivity savings are expected to offset this cost pressure."

The company is reporting results as if it is entirely a consumer products company and occasionally looking over its shoulder and pointing to inflation as a possible problem. Discussion is presented in a marketing format such as price points, discounts, product recalls and revenue growth.

The investor needs to consider how inflation will start to manage this company's finances. It would be helpful if management would be clearer on how they are managing these costs.

Tuesday, December 18, 2007

Eli Lilly Energizes BioMS. Why Not Just Buy It?

Eli Lilly (LLY) has acquired the exclusive rights to compound MBP8298 from BioMS (TSX.MS) Press releases and media articles indicate that "BioMS Medical will receive an upfront payment of $87 million, as well as potential development and sales milestones up to $410 million and escalating royalties on sales commensurate with the current stage of development of the product if MBP8298 is successfully commercialized. BioMS Medical will continue to oversee the current clinical trials. Other terms of the deal were not disclosed."

Eli Lilly has a market cap of say $61 Billion, with cash and short term of approximately $3.6 Billion. So we figure the cheque is going to clear. BioMS has a market cap of $367 million (approximately)

Given the recent good news from regulators there seems to be promise with the compound MBP8298. So who is really winning with the financial conditions and why where other terms of the deal not disclosed?

At this price point Eli Lilly can just buy up the company. They now have a lock on the key product. From Eli's point of view just acquiring the company may be cheaper in the long run. The question is when do we bite? If there are any hiccups in the approvals Eli may step in and readjust the deal and cut themselves a bigger slice of the pie. Then BioMS shareholders are the poorer.

Time will only tell but small cap shareholders need to be wary of mega cap deals. The small cap side of the table just played their best card and everyone is still not safely home.

Monday, December 17, 2007

ACE buys CICA. What About The Investment Portfolio?

Ace Limited (ACE) announced that it will be buying Combined Insurance Company of America (CICA) from AON Corporation (AOC)for $2.3 billion in cash. closing expected in Q2 of 08. AON also takes a parting gift of a $325 million dollar dividend.

A.M. Best also commented on the transaction several hours later essentially stating "ACE’s financial strength (FSR), issuer credit (ICR) and debt ratings were affirmed on November 26, 2007. The ratings are unchanged by the proposed transaction."

In comparing the two press releases ACE placed a great deal of emphasis on how good the deal is for them. They was very little financial detail given. In the A.M. Best press release you found more financial information that had some substance to it.

After reading about the dividend that AON will get they slip in the following phrase as an add on "and a restructuring of the investment portfolio to meet ACE’s asset quality requirements." Then everyone starts to look at other issues and no further elaboration is offered.

Asset quality issues! In today's environment especially for financial institutions who as an industry are struggling with asset quality issues just throwing out that comment is completely unsatisfactory.

If the assets do not meet ACE's requirements why were they good enough for AON. Or is AON going to slip some stuff out through the cracks. In reading the press release it was not clear who would bear the financial brunt of adjusting the quality requirement. Will there be the usual closing adjustments or will AON experience some losses. One would hope that A.M.Best has figured this out but their press release did not shed light on this question.

What is the role of a rating agency as they communicate with the market place?