Friday, December 18, 2009

Rite Aid Grim Reaper Approaches

Rite Aid (RAD) released quarterly results and still cannot demonstrate how their debt will be repaid. I started my financial life by being a lender. The lenders need to be very worried. An interesting development has occurred. Their receivables have doubled to some $1 Billion. They claim their receivables securitization has pushed maturities out beyond 2010 so there will be breathing room. But when the deck was shuffled they end up with approximately $500 million more on the balance sheet. Which of course explains why long term debt is up by about the same amount.

Lenders at this stage are in a quandary. They have to keep lending to keep the corpse alive. They face legal challenges. If it can be proven that they acted recklessly they will be held liable and take a large haircut in their loan position.

If some 67% of sales are pharmaceutical this could be easily carved out and resold to another entity. But if Rite Aid goes bust do you want them filling your prescriptions. It’s all about trust and bankrupts are not trusted. Just look at General Motors. Therefore they need to bust a move now.

They are the third largest pharmacy chain in the US. Health care is an emotional topic in the US. If big pharma thinks it will not be paid it will stop shipping. A normal commercial decision.

What about the confidential medical records that the pharmacists have on probably millions of customers? There is also the Coutu connection from Canada. Politicians from the right will point out that Canada’s supposed lead in health care was of no value here.

The company has a nominal market value of some $1 Billion plus some $6.2 Billion in long term debt and a lot of leases in a lot of shopping malls across America. Hey I know. Let Wal-Mart (WMT) buy it. They have a $200 Billion market cap and could easily swallow this one and develop a huge hold on pharmacy sales. They could also look good by riding to the rescue of beleaguered individuals and keep their prescriptions going.

Thursday, December 17, 2009

Paychex Customer Base Issues

Paychex (PAYX) issued results and correctly argued that with declining payrolls their revenues went down. Long term investors would therefore conclude that the stock is a proxy for bets on economic direction. Well sort of.

Take a look at their accounts receivable net of doubtful. The item increased by approximately $44 million or some 25% since May 31, 2009 a short six months ago. At the same time any top line metric is experiencing substantial declines. These two trend lines are alarming. When clients feel compelled to drag their payables for payroll services you know they are in sad shape. Accounts receivable now exceed income before tax.

As a jobless recovery may be taking root Paychex may have to make some decisions about its customer base and therefore may have to shrink some more.

Wednesday, December 16, 2009

Borders Back Door China Hook Up

Borders (BGP) announced an interesting ebook strategy. They have partnered with a Canadian book retailer Indigo (TSX:IDG) to launch a service called Kobo. It seems to be all things to all people. In the press release it does not mention that Borders has had a long standing investment in Indigo of approximately 10%. So why was Borders so far behind the game that a minority investment comes up with the better deal.

Also check out Kobo’s other investors and you will find Cheung Kong (Holdings) Ltd. (Stock code: 001) who is the largest shareholder of Hutchison Whampoa Limited holding a 49.97% interest. So if you want to talk about markets these guy’s are connected in China which has enormous potential.

So far the investment is about $16 million which seems small. I’m sure Amazon spends that amount frequently on the Kindle. But it’s the connections that are important. Indigo vended in it’s Short Cover offering but at what valuation.

So how will Borders investors fare in this venture when many other partners have their finger in the pie. Indigo investors may also find that the benefits of this venture do not fully accrue to them. But that China market sure is large.

Tuesday, December 15, 2009

Pitney Bowes Is This Restructuring?

Pitney Bowes (PBI) announced guidance and promised better results. The transformation initiatives are designed to be the guide posts to future performance. When you read the initiatives closely you cannot help but taste the flavour of First Year Biz School.

Given that they expect substantial changes from these initiatives, it only signals to investors how far this company may have to go before it becomes economically efficient. The board and management may be deluding themselves with buzz words. How will they deliver? Here are the initiatives they are claiming to be implementing.

These initiatives, which the company expects to complete over the next two years include:

1. Implementation of enterprise-wide systems and common platforms to improve and streamline corporate-wide processes;
2. Enhanced use of technology to enable the company’s customers to more easily interact with Pitney Bowes when and how they choose;
3. Expansion of the company’s agile workforce strategy to be closer to its customers and rationalize its worldwide facilities requirements;
4. Utilization of enhanced procurement processes; and,
5. An increase in shared services across business units, including an increase in outsourcing relationships.

Monday, December 14, 2009

ExxonMobil grabs XTO.

Exxon Mobil (XOM) is swallowing XTO Energy (XTO) The numbers are mind numbingly large. A $330 billion market cap is buying a $28 billion market cap. The investor will find it very difficult to follow the numbers. Here is what the deal signals to the market place. Shale gas, which is unconventional but huge, commands a premium, if you do not have it. If you have shale gas you need huge amounts of capital to develop it.

The problem the majors have is asset replacement and the increasing cost of asset replacement. Exxon used its stock as a currency. But look at the relative dividend yields. Exxon was able to offer a double on yield. XTO was yielding around 1% at current prices (post deal announcement). Investors found this attractive.

So companies that have higher yields should also be able to close share exchanges on better terms. Did XTO pick the best deal?

Boeing -- Will Test Flight Change Guidance?

Boeing (BA) will soon conduct the defining test flight for its 787 Dreamliner. Of course it will fly and the publicity pictures will be spectacular. We think it might be on Tuesday Dec 15, 2009.

But let us read between the lines. In previous earnings releases they said they would adjust earnings guidance based on test flight results. The initial corporate reaction if they remember to talk about earnings will be “we are analyzing results”. The test flight will provide a huge amount of technical data. The product line financial model is based on computer simulations. This will be the first taste of reality and the model will most certainly need to be adjusted.

The question becomes are they just tweaks or will there be major changes. The project has a history of difficulty. Design changes have been made. Boeing has allowed its third party system to take the blame. Now it’s on Boeing’s shoulders. So when we look at guidance and earnings releases watch for the design comment wiggle and see how confident management really is.

Just for fun I am reprinting the definition of test flight that Wikipedia has

“Flight test is a branch of aeronautical engineering that develops and gathers data during flight of an aircraft and then analyses the data to evaluate the flight characteristics of the aircraft and validate its design, including safety aspects.

The flight test phase accomplishes two major tasks:

1) finding and fixing any aircraft design problems and then
2) verifying and documenting the aircraft capabilities for government certification or customer acceptance.

The flight test phase can range from the test of a single new system for an existing aircraft to the complete development and certification of a new aircraft. Therefore the duration of a flight test program can vary from a few weeks to several years.”