Thursday, August 21, 2008

ICBC World’s Largest Bank Makes Largest Profit. - That makes sense?

ICBC (HK 1398) which appears to be the world’s largest bank has announced what appears to be the worlds largest bank profit. That all makes sense from a financial institution point of view. Size begats size. This explains much of the behaviour of senior banking officers around the world. All business models seem to need bulk, bulk and then more bulk.

Much is being made of the lack of sub prime exposure. Yes it is true that US sub prime debt is relatively low and will not be a factor in any future earnings and or credit losses. The bank is state controlled and has extensive exposure in what is a hyper hot economy. Growth is expected to slow in the coming year.
But what does this mean for the ICBC? If commodity pricing stays high and the west slows down purchases of cheaply priced products, the Chinese economy will do more than slow.

Large bank investing is difficult to fathom. On one hand investors analyze to determine if its a reasonable prospect. Some banks are better than others. On the other hand banks become proxies for economic activity and to buy, sell or hold a bank becomes a defacto opinion on the economy. So why buy a bank? Why not buy an ETF or index in its stead?

One thing for sure. You should not get excited about a bank stock because it has relatively modest levels of sub prime investments.

Wednesday, August 20, 2008

Hewlett Packard – Lets Think About Financing Assets

Hewlett Packard (HPQ) came out with Q3 numbers which they should be proud of. Investors rewarded themselves by bidding up the stock and declaring the enterprise value has increased. Much of the positive results come from non US earnings. In what has become a very common comment on many earnings releases revenues for operating units in Asia and Europe, Middle East and Africa (EMEA) were substantially ahead of what the domestic US operations could deliver. Roger so far, nothing new we think.

The long term financing of receivables and other assets has increased by 35% from approximately $7.6 billion as at Oct 31, 2007 to $10.3 billion on July 31, 2008. Revenues are not up 35% during the comparable time frame. We need greater clarity on what is happening within the finance unit and how the assets are allocated.

US oriented investors normally think of financing in terms of American-Euro centric jurisprudence. If someone reneges on his lap top lease from a small tropical country what recourse does HP have. They may not care about their credit ratings.

Tuesday, August 19, 2008

Target Merchant Retailer or Financial Institution

Target (TGT) announced slightly better results than anticipated and management is rightfully encouraged despite the very tough economic circumstances. They claim to continue “delighting” their customers with bargains. But yet same store sales are dragging and but when you include new stores sales overall revenues are up.

Target needs to decide if it’s a merchant retailer or if it’s a financial institution. Credit card loses are becoming a major factor in explaining earnings. When you look at the balance sheet, investment in credit card receivables equals the investment in inventories. Inventories you understand for a retailer. The target credit card is not something you will fight hard for if a consumer runs into difficulty. You have to believe they will deal with Visa and MasterCard first.

We know that JPMorgan chase has made non recourse investments in the credit card receivables but is it enough for Target to be considered a true merchant. The conundrum is in the margin play. Target wants to delight customers with compelling differentiated merchandise at low prices. Than to make back the profit opportunity they need the credit card debt to skate them back onside.

As any business knows or will soon find out you need to monetize. That’s when cash goes in the bank.

Monday, August 18, 2008

Ford Brilliance or Stupidity?

Ford (F) announced last Friday that they will issue $500 million dollars worth of their own shares enabling them to buy their way out of problems that Ford Motor Credit has found itself in. (Read sub prime loans to some extent) No mention in the public announcement of what this will do to EPS. But if the stock is trading around $5.11 that’s approximately 100 million shares. But does anyone do math with Ford stuff anymore? They have approximately 2.26 Billion shares outstanding so what’s another 100 million.

The debt to be repurchased will be either on the open market or through private deals. Will Ford be able to negotiate substantial deals with panicky debt holders and perhaps build in some gains somewhere into the future?

Will the shareholders realize that Ford may do a reverse stock split and roll up much of the float? Will the panicky debt holders who are probably institutions agree to buy the stock which may have an upside and get out of what is clearly terrible looking paper and get their books in balance?

Who wins? Who loses? Goldman Sachs (GS) that’s who! They will be handling the sale according to Ford. For investors the question is “Have you driven a Ford lately”