Friday, December 04, 2009

Del Monte -- Debt Restructuring Looms Large

Del Monte Foods (DLM) reported improved earnings and watched its stock sell off anyway. Go figure the market is manic depressive. Or is it? The company used an interested term to describe its increase in revenues and I quote “fiscal 2009 pricing actions net of elasticity”. Yep right there in the first bullet point. So they increased their prices yet they start talking about net elasticity in demand. This means management is waiting for the other shoe to drop.

The other shoe to drop will influence their ability to refinance their debt which they admit needs to be done in F10. Their debt is approximately equal to 50% of their market cap when the stock is trading near its 52 week high. Hmmm. They already are making noises about the big million dollar fees they know they have to pay. Watch how price elasticity affects debt negotiations.

Investors should take note that the pet food division creates more profits than the people food division; despite the fact that the people food division has more revenues and therefore more expenses and resources. So the extra financial cherry is in the pet food. Expect corporate communication to be very positive but the gains will go to debt repayment and not shareholder wealth.

Thursday, December 03, 2009

Goldman Sachs & Backdoor Governance

Goldman Sachs Group (GS) continues to have a most capitalistic problem. Their employees make too much money. They currently are in discussions with major investors to prove that their compensation is in line. The investors are motivated by legal storm clouds that are compelling them to investigate. This is probably the worst case scenario of corporate governance through the back door. Some kind of deal needs to be worked out so that the big funds get the cover they need. Otherwise the stock becomes too hot to hold and everyone heads for the exit doors. Many of these investors actually trade with Goldman or use their services so it’s rather hypocritical that they are scrutinizing Goldman in this fashion.

Here are a few things Goldman can do.

1. Increase their dividend. The yield is abysmally low at these levels. If they are a bank holding company they will need to raise capital just like the other bankers. Investors will be rewarded.
2. Declare special dividends when results are good. The capital Goldman uses is rented they will need to pay for it. Otherwise why not just poach the good guys and set them up in their own shops.
3. Stop calling it a bonus and embrace an accounting term that covers risk such as profit sharing. These guys are not true employees like most wage slaves. They are entrepreneurs and they are there for the big score.

Tuesday, December 01, 2009

Guess? Inc -- Cash Is For What?

Guess?, Inc (GES) reported results and watched the stock pop off it’s bottom. Imagine an apparel brand that is doing well in this economy. I guess people buy fancy jeans to make themselves feel good. The stock is still near its 52 week low. Guess claims to have increased their cash position which now stands at 10% of its market cap. That’s with the stock at the bottom of its trading range.

A couple of things to worry about. For nine months their cost of product sales is up approximately 2.5%. This fact alone should make investors worry. SG&A expenses are down by approximately 1%. They did not differentiate where the reductions were. But if you throttle back the marketing costs you lose marketplace momentum. Investors have no way to determine just what Guess is doing.

They conclude by sending a dividend signal. No change in dividends despite increases in cash. Therefore cash is earmarked for activities other than shareholder wealth creation.

Monday, November 30, 2009

Tiffany Retailer or Commodity Play

Tiffany (TIF) reported a surprise increase in consumer demand and made some noises that the financial pulse still beats. This company tends to be viewed as the canary on the coal mine and it seems to be fine for now. The problem with the company’s valuation is getting a handle on their inventories. The book value of approximately $1.5 Billion on the balance sheet is roughly equal to 20% of its market cap. You have no idea how much is in which jurisdiction, how much is in gold, silver, platinum, diamonds or how much is in finished goods or raw material. Margins are declining due to higher costs (must be the gold right) so the consumer is not motivated by higher intrinsic value of precious metals. Yet we have no tools to measure the commodity risk.