Friday, October 02, 2009

Constellation Brands -- Foreign Exchange Disaster

Constellation Brands (STZ) which bills itself as the world’s largest wine company headlines some positive results such as debt reduction of $155 million for the quarter and cost reduction benefits. But revenues are down. So consumers are not drinking away the recession. In fact they are cutting back.

The company is highly leveraged so they have to squeeze out very significant debt service payments. This is what concerns me. Sales are down and accounts receivable are up. This is a classic finance 101 trouble sign. Management is not speaking to this issue.

Perhaps more importantly is the question of foreign exchange. Spirits in general and wine in particular are a global business. If you believe that US currency will depreciate vs other world currencies how will this company fare. Management provides you geographically segmented data on sales but not on costs. So if you depend on grapes from Australia or Argentina and wine sales in Manhattan do you have an iceberg straight ahead?

Thursday, October 01, 2009

Bank of America - Ken Lewis Orbituary

Bank of America (BAC) is without its President today. Normally not having someone in that chair is a serious problem. But Ken Lewis has been so vexed with regulatory issues one can say that he has not been on the job for quite some time. Many will say that when he was on the job he was not creating shareholder wealth.

They say he made the decision on his own and was not pushed. He wore a beard one day when coming back from vacation. Beards are not last minute decisions. The writing was on the wall when he was removed from his seat as Chairman of the Board. It was clear to most what that really meant. Except to Ken Lewis.

There were subtle but strong pressures. When the board of directors asks you how much longer you are planning to stay that is essentially a termination interview with interruptions. The board bears ultimate responsibility. The board is being recast with new individuals who are not tied to the sins of yesterday.

The big signal to investors is to be concerned about large companies where the same individual is both chairman directly representing the shareholders while at the same time being the President and CEO directly doing the work that shareholders have hired you to do.

Wednesday, September 30, 2009

Ernst & Young Still a Deal Junkie

Ernst & Young reported global numbers. What is still striking is how reliant they still are on non audit or non assurance services. They reported US$21.4 billion in revenues for the year ending June 30. 26% is non assurance and non tax.

They are still hooked on the wheeler dealer deal junkie revenue.

Look at the head count attributable to advisory and TAS 35,322 virtually unchanged from last year. The practice support group came in at just over 29,000 again virtually unchanged from the previous year. Practice support can mean a lot of things of course.

Tuesday, September 29, 2009

Gannett Reverse Commodity Play?

Gannett (GCI) publisher of USA Today and many financially disastrous local newspapers announced better earnings and wowed the market creating a nice daily surge on a down market day. But wait read the numbers and think about the reasons. The price of newsprint is down so a major cost input has been reduced. Not sure how to follow newsprint prices (I am not really a commodities guy) but was there no way to figure that one out in advance. Was there any guidance from Gannett that was believable about newsprint costs that investors could rely on?

After you come off the newsprint high you see that top line revenue growth is still a very difficult story. Advertising is driven by the economy and the economy is 70% consumer. More when you consider local advertising. Chief Financial Officer Gracia Martore commented that publishing advertising continued to improve, with the year-over-year decline expected to improve from the one- third tumble seen in the first half of 2009. Specifics for the third quarter weren't provided.

If it’s still dropping it’s still ugly.

Monday, September 28, 2009

Xerox Shoots Itself

Xerox (XRX) announced its takeover of ACS and its entry into the services sector. Everyone seems to be doing it. IBM a long time ago. Dell just snapped up Ross Perot’s old company EPS. All these deals are basically about what’s in it for the acquiring company. The company being snapped up will help solve some fundamental problems in the new mother ship. Xerox dropped some 20% on the news.

The deals are signs of desperation and admission that the core business model was no longer working and seems to be fundamentally flawed. The acquisition will not necessarily solve the problem. But it just may delay the inevitable.

If you call your lawyer when wealth is destroyed just follow the track of press releases and public messages. Xerox did not give any indication that they were unhappy with the core business and wanted to re-invest themselves.