Friday, April 18, 2008

Equifax ‘International Expansion What Are The Costs?”

Equifax (EFX) has agreed to acquire a 28 percent equity stake in Global Payments Credit Services LLC (GPCS), a leading credit information company in Russia. They will have the option to ramp up to 50% which is the maximum according to Russian regulations. This apparently is in keeping with their announced ambitions to open up in Russia, China, India and Mexico.

International sounds really good. If you break down the growth rates of many an enterprise the international numbers are where the action is. Domestic US numbers are tough trench warfare slugfests. But when an established product goes overseas the value proposition is obviously compelling. The underdeveloped world aspires to the trappings of the middle class and its inherent materialism.

Can this translate to a sophisticated intellectual capital purveyor such as a credit reporting company? The western world’s use of credit information, fraught with inaccuracies such as it is, has evolved over time and required a growing level of maturity and sophistication within the financial community. At the same time numerous consumer and privacy rights laws have been imposed by western governments.

These expansions along with what management has called opportunistic tuck ins do not have publicly declared price tags. Financial details have not been disclosed and probably will not be. Russia, China, India, Mexico are all huge markets and will not be cheap. Equifax has a market cap of some $4.67 Billion or thereabouts. They traditionally seem to run with a negative working capital ratio.

How do you track this one?

Thursday, April 17, 2008

Sally Mae “Off Point Excuses”

Sally Mae (SLM) officially known as SLM Corporation reported first quarter, “core earnings” net income was $188 million, or $.34 diluted earnings per share". They also reported that they made a record amount of student loans despite difficult economic conditions. Hey that all sounds pretty good. Tough times and they still serve up a profit. Keep that one on the radar.

Then they let you know that they are making loans at a negative spread. The actual sentence they used said “Under current conditions, however, loans can only be made at an economic loss.” Somehow they want to get onto the liquidity crisis bandwagon or need to get onto it.

Most people understand that lenders need to charge more for their loans than it costs to gather funding, admin and credit losses. That’s fundamental and remains unchallenged. Sally Mae has essentially allowed their origination machine to drive in business at uneconomic spreads.

The fault lies with management for operating at such razor thin margins that they have no room to manoeuvre. The liquidity crisis has been coming for some time and should have been foreseen in this context. On one hand they claim record volumes yet they are starting to engage in the practice of losing money. If management had been observing the road signs pointing to economic conditions they would not have been driving at record speeds to achieve losses.

Wednesday, April 16, 2008

AMR’s Despair

AMR Corporation (AMR) the parent company of American Airlines reported Q1 losses. A net loss of $328 million or $1.32 per share to be specific. Fuel costs are up some 48% adding $665 million to costs. Well of course they lost money. Who would not under those circumstances? The market was relieved that it was not worse and actually bid up the stock almost 7% by mid day.

Bad weather did have a negative impact in Q1 but the fuel costs just came out and took a big bite out of the investor. AMR Chairman and CEO Gerard Arpey said. "While our first quarter financial results were disappointing, through our hard work in recent years to contain costs and strengthen our balance sheet and liquidity we are better positioned to withstand today's uncertainty.”

OK you have to give him the point on that one. The real issue that management is not addressing is why do we have to rely on the balance sheet to get us through this problem? Balance sheets are supposed to provide the productive capital to create wealth. They are not pillows to fall down on.

Fuel has been a problem for this and all airlines since the Wright Brothers. No one seems to have an answer other than relying on the balance sheet which means you are consuming your equity. Aircraft manufacturers seem to make money and create wealth. Major oil companies have not disappointed.

AMR and Gerard Arpey need to tell us more about what they are doing to manage the overall strategic challenge that keeps them from reaching the promised land of profitability. Telling us about the menu changes and some adjustments to capacity just doesn’t cut it anymore.

Tuesday, April 15, 2008

State Street Slider

State Street (STT) announced record profits beating the street estimates. The triumphant press release issued through Business Wire came out around 7:14 AM April 15. Pre-market trading bounced the stock up some 2% on the exceptionally good news which the market is in short supply of. In case you do not know there has been much bad news within the financial sector. Conference call set for a few hours later.

The early news reports carry versions of the press release outlining the really good news. Then the bomb shell drops. Something called conduits did not work out and the losses are in the billions. Good enough to mention in the conference call but not important enough for the press release.

On the conference call and certainly in the press release they went to great pains to explain how good everything else is going. On the face of it the other businesses seem to be doing very well. State Street is doing poorly due to mark to market issues on many CDO type instruments. Liquidity or lack thereof has driven valuations down. Management on the conference call was adamant that they not expect to a loss on maturity of the instruments.

Here is the issue. The press release will survive as a regulatory filing and certainly is compliant with Reg FD and other disclosure requirements. The conference call while public at this point will not resonate in the same manner with the investor. Not all investors will take an hour to listen to it. How long will the conference call stay up on the website? Will they be able to access hard copy transcripts? The value of the conference call is frequently found in the Q&A following as management provides more color and expands on previous comments.

Management has positioned the news so that it was dealt with in a Q&A fashion and not through direct quotable management statements with full responsibility.

Monday, April 14, 2008

Blockbuster Goes Fishing

Blockbuster (BBI) has made a tentative offer to acquire Circuit City (CC) for six bucks subject to due diligence. Apparently there was an offer letter which was not disclosed by either party that dates back to Feb 17 which is almost two months to the day. Preliminary conversations date back to early Dec 07. Who knew?

Circuit City has been lagging the market over the past year with its stock dropping from a high of approximately $19. So how good does $6 look? Blockbuster has also been disappointing. The deal does not have a superior gene pool to lead investors in a bright and prosperous future. Carl Icahn aside; he will not be a factor in operations. He will only want to restructure and financially engineer.

Circuit City is openly sceptical about Blockbuster’s ability to secure the financing. Blockbuster’s offer would be a lot stronger if they were able to demonstrate that money is no object. Credit markets are jittery at best. This smacks of two wounded soldiers wondering if the other still has some ammo left. Some will tell you Uncle Carl will take care of the money so run along and play nicely.

So here is the fundamental problem. Carl Icahn. He has been a shareholder activist thorn in the side for Blockbuster for quite some time. Of his entire advocacy for change within Blockbuster, investors did not pick up on the strategy to quickly buy someone else and try to emulate the Apple retail strategy. Blockbuster has been struggling with the compelling trend to movie downloads over the internet.

Buying into a chain of physical stores does nothing to deal with this challenge which will define retail movie distribution.