Friday, January 25, 2008

Harley Davidson Over Engineers The Numbers

Harley Davidson (HOG) reported disappointing Q4 and year end results. This was expected as the domestic US demand for product is naturally off. Overseas demand is up dramatically in many countries and one wonders why they are not looking overseas for more growth. It’s not a secret that other economies are doing well and more than a few consumers can afford a Harley.

Check out the year end cash and marketable securities position. Year end 07 they came in at approximately $402 million. That’s down from $896 at the end of 06. Where did it all go? 07 net cash from operating activities was actually up slightly to approximately $798 million from $762 million in 06.

Working Capital Ratio has dropped from 2.23 at the end of 06 to 1.88 at the end of 07.The traditional sources and uses of cash actually makes it look like the cash position went up. But liquidity is really down.

Finance debt is up approximately $400. The current portion has jumped by $288 million and the long term portion jumped $110. But yet cash from operations is the same. Inventories are up only slightly but receivables held for sale is up $234 million. In today’s credit environment I do not believe consumer lenders are looking for motorcycle loans.

Harley has continued with its share buyback and spent almost the same amount of money in 07 as in 06. Except in 06 they had a rising share price and in 07 they had the mirror image chart of a falling share price. Smart in 06. Not smart in 07.

The company continues to focus on the financial engineering side of the financials and are not paying attention to the fundamentals of running the business. They have also increased the total payout of dividends from $213 million to $261 million in the face of radically reduced profits.

Thursday, January 24, 2008

Fairchild Channel Inventory Needs A Closer Look

Fairchild Semiconductor (FCS) announced its highest quarterly sales, gross margin and net income since 2000. They also trumpeted record sales for analog switches and smart power modules. Everything seems to be coming up roses. Everything is set for the next quarter. Over 80% of revenues contained in guidance are already booked and just need to be shipped. All they have to do is make the stuff, put it on a truck and send it. Then accounting picks up the cash and it’s all good.

Fairchild claims bookings for Q4 were higher and in line with expectations. They did not provide any numbers to support the comment. Then they comment that distributor sell through was down 4% in Q4 following an increase of 7% in Q3. Next they comment that they have increased channel inventory staying within an undisclosed range after having decreased channel inventory by one week in the previous quarter. Every time they needed to spin a point they provided a number to back up. When it was negative they failed to provide any numerical support.

Follow this quote from Mark Thompson, Fairchild’s president and CEO.

End market demand was in line with our expectations paced by solid shipments for our products supporting computing, handset and power supply applications,” said Thompson. “Bookings were sequentially higher in the fourth quarter and in line with expectations giving us a healthy starting backlog level. Distributor sell-through was down about 4 percent sequentially in Q4 after being up 7 percent in Q3. We increased our channel inventory while remaining well within our target range after reducing more than a week of inventory a quarter ago. We held lead times within a stable range of 8 to 9 weeks during the quarter and expect to maintain this level during Q1.”

Wednesday, January 23, 2008

General Dynamics Looks Good But Keeps It Close To The Vest

General Dynamics (GD) reported strong earnings and revenue growth in Q4 2007. Earnings from continuing operations grew 24.8 percent, with revenues increasing 15. Sounds good and investors should be happy with this. When you start to read the commentary all you get is an elevator style analysis. This is up. That is down. This is better that was sold and no longer counts.

Admittedly General Dynamics does provide several charts and tables providing some numerical detail about margins, sales and net earnings by division. But there is little qualitative commentary. Essentially we are asked to accept that they sold some tanks and marine systems and other munitions or related products and that the margins are all going up. Here is the dividend we’ll see you in 90 days for the next quarter.

The press release is much too abbreviated and one would hope that the all important conference call which occurs several hours later does not reveal significantly more information.

Tuesday, January 22, 2008

Bank of America Is Columbia A Problem?

Bank of America (BAC) came out with reduced earnings which was to be expected. The subprime slime and other deterioting credit quality issues have found there way onto this balance sheet as well.

Did they write off enough? The first loss is your sweetest. No one expects any homerun stand up and salute results in today's environment. So why not aggressively sweep out the problems and near problems now and set up for the future. A constant oozz of disappointing results will only create additional doubt in the future.

One item that concerns is this quote from the press release

"Columbia Management net revenue declined 2 percent to $1.51 billion,reflecting about $400 million in support for certain cash funds offset in part by 21 percent growth in asset management fees including the addition of U.S. Trust. Net income decreased 41 percent to $196 million."

This essentially means that Bank of America felt compelled to buy $400 million of what previously were accounted for as someone else's problems. Can we get some or any comfort as to what the future holds for this and similiar type problems where sudddenly an off balance sheet item reappears as a complete loss.

Monday, January 21, 2008

ArcelorMittal SA Declares A Whopping Dividend

ArcelorMittal (MT) has declared dividends for the rest of 2008. In an offhanded press release they announced the dividend program could be accessed on their own investor relations web site. The press release failed to announce what the dividend is. You need to go hunt around for it. Hmm

Other media outlets are reporting that the Mittals stand to make approximately $934 million which explains why Forbes Magazine thinks Mittal is the fifth richest person on the planet (currently about $34 Billion in net worth) Hmm

Usually dividends are declared by Boards of Directors. There does not seem to be a confirmation that this was approved by the board. The program will be submitted to the shareholders for approval at their next annual general meeting on May 13, 2008. but by then the first quarterly payment will have been made and the second payment will be just weeks away. Curious way for a company to run its affairs.

Most companies establish a dividend pay out policy but declare dividends quarterly if conditions warrant. We all know the Mittals are rich but do they need to prove that the stock will pay a dividend for some other financial engineering reason. Otherwise why bother with this structure?