Friday, June 27, 2008

KB Homes Is It Better?

KB Homes (KBH) released Q2 results and announced that, while the housing market is still bad, they have generated cash. Cash is king especially when you are levered as a home builder. They have also taken the opportunity to redeem an expensive debt issue which will improve the balance sheet and reduce interest costs.

Managements comments are all based on rear view mirror considerations. Yes cash is up. Given that the markets stink so badly you need to get a handle on the burn rate for cash. How much longer can the company go before it hits the wall? There is a scenario that can make any company blow up and go under. Management needs to show that it knows where the precipice is, before it goes over it.

Thursday, June 26, 2008

Google Scoops BCE

Google (GOOG) finally got around to hiring a new CFO. They scooped BCE (BCE) Canada’s largest telco and hired Patrick Pichette. BCE is just in the final throes of going private and the Google thing sounded better. Cannot say I blame the guy.
Everyone has been focused on the Google, Yahoo Microsoft triangle. Then Google brings in a Telco guy. If they had brought in an American there would have been suspicions. But the Canadian knows enough about the industry and is not in anyone else’s camp.

BCE trades on NYSE so Patrick Pichette will have the governance issues figured out. Telco accounting deals with a lot of small charges happening very often. Look at your phone bills and calculate the minutes. Google’s income statement is based on millions of click transactions. The accounting infrastructure is almost identical.

Google has a big front end. The brand is huge. Everyone gravitates to Google. So where is the next big strategic thing? What if you could control the backbone? Telco’s control much of the backbone. So hire a Telco guy to be CFO and run the strategy of taking over the backbone or Telco’s or whatever you want to call it.

Wednesday, June 25, 2008

Ticketmaster is being Scalped

Ticketmaster is being prepped for a public scalping err I mean offering. IAC (IACI) is going to off load this little gem onto the market that is maybe just waiting for the opportunity to invest in the world’s largest ticket retailer.

A few skeptical points to consider:

1. Ticketmaster will start off with $750 million of debt courtesy of the closing kiss that IAC will extract. Financially it’s called an upstream dividend.
2. If Ticketmaster is so large and dominant why are there so many small upstart companies who figure they have a chance?
3. Ticketmaster says that now they will have aggressive cost cutting. Why could you not have done this in the past?
4. Everyone is excited about the resale market. Frequently referred to as scalping. Ticketmaster also could have already moved into this market in a big way. It does not need to go public before it starts to exploit this segment.

Tuesday, June 24, 2008

Kroger Explains Nothing

The Kroger Co (KR) released Q1 results and essentially said nothing in the press release other than just throwing a few regulatory must have numbers up on the wall. Q1 sales are $23.1 Billion. Grocery retailing is a tough business. Food costs are subject to the ag commodities boom plus fuel costs are only going up. Is it that investors expect nothing from this company and the executives know it?

The only comment was a quick sentence about how their strategy is OK and the customers are saving a billion dollars. Have no idea how that comment may be substantiated but watch for a consumer watchdog group to ask for some proof.

Read this quote and see if you can develop a sense of what is happening with this investment “Our strategy positions us well to deliver consistent results and make investments for our future. Kroger continues to help customers stretch their budgets in a number of ways, including lower prices and our expanded generic drug and gas discount programs," said David B. Dillon, Kroger chairman and chief executive officer. "Through these kinds of price reductions, our customers are saving $1 billion annually."

Monday, June 23, 2008

BCE Lessons Ratings Redux

BCE (BCE) shareholders were allowed to exhale on Friday when Canada’s Supreme Court told financial markets to return to sanity and allowed the largest LBO to proceed. On Monday everyone is writing why this was destined to happen. On Friday the market did not have a clue as to what was going to happen. How did all these really smart and incredibly well paid people become confused? Are they still confused but just working on another file this week?

The debt holders felt aggrieved because their investments suddenly achieved junk status. Until very recently BCE was considered one of the best corporate covenants and a must have in all bond portfolio’s. Bond investment managers who had peddled their product promising to stay in the investment grade range did have a serious problem.

Lets not talk about the persistent market talk about BCE being a takeover candidate that should have tipped off the bond investors to at least start thinking about being careful. What are the real lessons?

The debt market is ratings driven. Just take a quick glance at the sub prime slime on Wall Street before you argue that one. The ratings allow bond investors to go to sleep. Between the actual rating and the covenants they enjoy enormous advantages. Frequently they become part of the problem and are surprised when an LBO shows up promising to change the landscape.

Bond investors need to become more pro-active when relating to corporate circumstances. Until now they focus predominantly on interest rate and yield. This may no longer be enough.