Friday, November 14, 2008

Sina Promises The Moon

Sina Corporation (SINA) reported interesting results. Much of the numbers were juiced with Olympic coverage which is understandable. Other media outlets usually have a let down after the Olympics. Sina is signalling that they will continue growing. The Chinese economy is showing signs of strain as the world economy slows, stutters and sputters. The three big verticals are real estate, finance and auto’s. It’s hard to believe that these three in a Chinese context will be totally immune to difficulties.

Sina management is still going for the brass ring. They claim that they are going to work on margins and attempt to expand dramatically. I cannot think of one corporate instance where dramatic expansion has been achieved on a long run basis without margin pressures coming into play. Its just not the capitalist way.

Check out this quote from the earnings transcript (sourced from where analyst Vivian Li from Piper Jaffray asks the key question.

“Vivian Li – Piper Jaffray

Hi, good morning Charles, Herman, and Cathy. Congrats on the quarter. Just a follow-up to Charles' comment in the last question. In term of margin strategy going forward, when looking at ‘09 on a relatively basis, will SINA focus more on managing margins given the uncertainty of macro economy or will SINA focus more on expanding to more verticals and gaming and trying to gain market shares? Thank you.

Charles Chao

Well, I think we’ll do both. Our current core businesses will be much more focused on the margin control and to provide better cost control and a better margin for our current business. But I think we’re not going to cut our investment, expansion in new areas if we see good opportunities basically.”

Wednesday, November 12, 2008

Thomson Reuters Good Q3 Tough Balance Sheet

Thomson Reuters (TRI) reported some good looking Q3 numbers. Underlying profit up, margins up and revenues are up. Thomas H. Glocer, chief executive officer of Thomson Reuters even said the following “Moreover, our ability to translate profits into cash flow, supported by our strong balance sheet and liquidity, should allow us to take advantage of investment opportunities that may result from market disruptions while maintaining a disciplined approach to capital allocation,"

So let’s take a look at this balance sheet that is supposed to be providing all this strength. From Dec 31 to Sep 30 the following has happened:

1. Cash down from $7.5 Billion to $983 million
2. Intangible assets up from $3.4 billion to $8.5 billion
3. Goodwill up from $6.9 Billion to $18.7 Billion
4. Long term debt up from $4.3 billion to $7.4 billion

Yeah they are executing for now. But when the market cap is roughly $18 billion and the value of goodwill and intangibles is $27 Billion you just need to get skeptical about the whole picture.

Tuesday, November 11, 2008

Herman Miller Asleep

Herman Miller (MLHR) revised guidance after huge sales drops in Sept and Oct. They neglect to comment on the wisdom of price increases in Aug. Only now do they start to cut costs. These guys were asleep

American Express Wants Low Cost Funding?

American Express (AXP) sought and received approval from the Fed reserve to become a bank holding company. Everyone points to the low cost funding available from the Fed. If this is American Express’s only reason, than it’s a bad one. Today the Fed is generous with its funding. Fireman and paramedics are also generous when at the site of a disaster. American Express does not want to go the disaster route.

Keep an eye on the fundamentals. There is a lot of plastic out there that is melting down. Already we know that American Express is starting to hurt. Even your best creditworthy customers are curtailing spending. They would be the responsible customers that you want to keep. The bank holding company may allow a few structural changes that will benefit American Express but it will not make a fundamental difference to those “Who do not leave home without it”

Monday, November 10, 2008

Ballmers Refreshing Approach to Deal Making

Microsofts (MSFT) Steve Ballmer works for Microsoft shareholders not Yahoo (YHOO) shareholders. It is refreshing to see a deal making situation where someone is not anxious to throw gobs of money around.

Six Flags

Six Flags (SIX) reported dramatically improved results. The management made the case that the spend is up and attendance is also up. Free tickets have been curtailed but the pricing model is a strong value proposition. The key item is that they are cash flow positive for the first time in some six years. Strong comments where made about “Watch our dust when we get rid of the huge leverage”

Analysts almost exclusively focused on balance sheet issues. They seem concerned with leverage and valuations. It’s too late for that the leverage is already astronomical by any measure. The analysts did not really focus on the operations side.

I worry about management view that operations will be adequate. The economy is in the tank. Spending will be curtailed. They need to be focusing on how to survive when millions are tapped out on their credit cards and cannot meet their mortgages.

I also worry about the analyst community which clearly has missed significant improvements in operations. There is a back story here. Comments are being made about Korea and Dubai. Watch for some dramatic restructuring to loosen the shackles of onerous debt. The danger will be for existing shareholders. Will you be adequately compensated for the risks you have taken. Or will you be crushed by strong new capital arriving in a very big boat.