Thursday, May 01, 2008

Burger King Shrinking Margins

Burger King (BKC) reported strong Q3 results led by global business momentum and raised fiscal year guidance. Then as you read the press release and I mean read, for nine full paragraphs, until you realize that the margins are starting to shrink dramatically. Overall sales growth has been strong enough to overcome the problem and create a bottom line. But the problem persists.

Management points to two major factors. The rather large spend on rebranding stores which temporarily takes a large bite out of margins. As well the cost of food and paper has gone up. The rebranding can be understood. Stores are in need of a new image and the program will bear fruit when it is rolled out.

The shrinking margin attributable to food is of concern. As food becomes more expensive the entire fast food model may need to be re-validated. When Ray Kroc started serving hamburgers no one in the western world was worried about the cost of ground meat and the flour needed to make buns. Today we are.

Management comments in the press release focused almost exclusively on top line issues. And ignored the shrinking margin issues. This indicates a blindside tackle in the making.

Wednesday, April 30, 2008

Ingersoll Rand Tax Problem

Ingersoll Rand (IR) reported much improved results with revenues up by 9% and operating income up by 18%. They also have a high class problem they pay too much in taxes. Last years comparable quarter paid approximately $16.3 million in taxes. The latest quarter the tax man comes away with $47.2 million.

That is roughly triple for a company that calls Bermuda as its head office. The press release acknowledges the change in effective tax rate from 9.4% to a going forward rate of 22%. While some may call 22% modest the tax rate has gone up faster than revenues and operating income.

Management has chosen to not comment on this item. Most investors do not understand taxes, particularly corporate taxes. The problem is that as the company improves it is handing over too much to the tax man. Executives do not want to talk about any strategies to mitigate that issue.

Tuesday, April 29, 2008

CGI Positions Foreign Exchange Impacts

CGI (GIB) announced ”Revenue of $949.1 million, up 5.3% on a constant currency basis; - Q2 2008 bookings of $1.1 billion, up 23.4%; - Earnings before taxes of $100.4 million, up 8.6%; - Net earnings of $68.8 million, up 9.7%; - Net earnings margin of 7.2%, up from 6.6%; - EPS of 21 cents, up 11.7%; - Cash generated from operating activities in Q2 2008 of $44.4 million - Share repurchases in Q2 2008 totalled $68.1 million.”

Hey that all sounds pretty good I think. But read carefully and chew on these comments. “Relative to the same year ago period, foreign exchange fluctuations negatively impacted Q2 2008 revenue by $52.5 million, or 5.5%.” The company is having a hard time reconciling their real results which are impacted by foreign exchange fluctuations with the concept of constant currency basis.

Currencies are not constant. CGI does report in Canadian Dollars but to attempt to position your financial communication on a constant currency basis is a complete dis-service to investors. It is not reality based.

Michael E. Roach, President and Chief Executive Officer. Continued in the press release "As a result, in the first six months of fiscal 2008, we have grown our revenue by more than $100 million on a constant currency basis while improving our net earnings by 33%."

Generally when foreign exchange fluctuations make a company look bad they emphasize constant currency. When foreign exchange fluctuations enhance results, the brilliant management moves are trumpeted to the high heavens. This just creates a suspicion of the current executive and begs too many questions.

Monday, April 28, 2008

Cooper Tire & Rubber Company Blows A Tire

Cooper Tire & Rubber (CTB) announced very late on Friday April 25 after market closed that they are not doing very well. Further and complete details will be provided on May 7, 2008. Anxiety now and full disclosure a full eight trading days later.

The stock dropped almost $1.50 in late Friday afternoon trading but miraculously recovered the entire loss by the close of trading. Then on Monday the laws of financial gravity came into play and the stock does seem to be headed for a loss. After all you have to believe management that the results are going to be bad.

Someone let the cat out of the bag on Friday. Someone bid the stock back up so the closing price does not look too bad. Now we have to wait one and a half weeks to get the sordid details.

Management comments are more generic than useful. They claim headwinds and macroeconomic challenges are causing people to drive less and therefore not buy as many tires. They also mention that liability claims seem to be higher and have eroded profitability.

The announcement and events surrounding it are Reg FD challenged. At the very least management needs to make inquiries to ensure its governance practices are still solid. If there is a rogue culprit measures need to be taken.