Friday, January 08, 2010

Apollo Group Governance Weakness Leads To Financial Problems

Apollo Group (APOL) issued their earnings and headlined their results by saying

“We are pleased with our first quarter results and continued enrollment growth, particularly among our core bachelor’s programs,” said Apollo Group Co-Chief Executive Officer and Apollo Global Chairman Greg Cappelli”

The emperor wears no clothes today. They snuck in a paragraph well into the press release just before the conference call detail and laid out the bomb shell that they are probably on the hook for $125 million because they are non compliant with returning government funds for students who have discontinued their studies. That’s code for failed or flunked out.

Apollo has the cash to deal with the financial ramifications. At issue is the business model which is commission driven to generate students. This earnings quarter commissions are up and you have to wonder if the sales staff disguised as career counsellors is on the hook for their share of failed students.

Further at issue is the board’s ability to lead. This is a major failure. You can argue about technicalities and Apollo will probably win some technical points in the argument. Investors do not want to be lead anywhere near a problem such as this. This morning they find that they are chin deep in ...

This is where the lead independent director should have been taking the lead and challenging management to ensure they are not in this difficulty. Below please find a brief career background on Mr. Dino J. DeConcini as laid out by Reuters. Judge for yourself if this was the right man for the job.

“Mr. Dino J. DeConcini serves as Lead Independent Director of Apollo Group Inc. He became a member of the Board of Directors of the Company in 1992. He currently serves as lead independent director, Chair of the Nominating and Governance Committee and a member of the Compensation Committee. From December 2006 to October 2007, Mr. DeConcini served as Chair of the Compensation Committee. He also served as a member of the Audit Committee from fiscal year 1996 to March 2009. From 2002 to 2008, Mr. DeConcini was Senior Vice President of Projects International, Inc., an international business consulting firm. From 1995 to 2000, Mr. DeConcini was the Executive Director, Savings Bonds Marketing Office, U.S. Department of the Treasury. From 1991 to 1993 and 1980 to 1990, Mr. DeConcini was a Vice President and partner of Paul R. Gibson & Associates, an international business consulting firm. Between 1981 and 1992, he was a member of the Board of Directors of the University of Phoenix, Inc. He served as a member of the Board of Directors of Arizona Public Service Company from 1980 to 1990. From 1979 to 1995, Mr. DeConcini was a shareholder and employee of DeConcini, McDonald, Brammer, Yetwin and Lacy, P.C., Attorneys at Law. He was Chief of Staff for the Governor of Arizona from 1975 through 1978. Mr. DeConcini was also Chairman of the Arizona Commission on the Arts from 1980 to 1983, and the founder and President of Arizonans for Cultural Development from 1983 to 1986. Mr. DeConcini is a graduate of the Georgetown University School of Foreign Service and the University of Arizona Law School.”

Thursday, January 07, 2010

Sears Less Is More Communications

Sears Holding (SHLD) came out with Dec sales and quarter to date numbers. The earnings release just deals with high level financial concepts and does not speak to merchandising or retail issues. From a disclosure point of view, from a transparency point of view, from an engage the investor point of view there is no real information that is truly useful to an investor looking at retail stocks.

Is that because Management does not wish to communicate at this point in time? Yet the stock pops about 10%. So coming in cold to the stock you have to understand the sub-script. But for now management does not have their finger prints on anything.

Wednesday, January 06, 2010

Monsanto Ignores Fundamentals

Monsanto (MON) issued their Q1 earnings and headlines the release as delivering on Guidance. The market still sold off as they did not like the losses. If Monsanto delivered on guidance the market would not have been surprised. A few things investors should be worried about.

1. They claim a 56% marginal tax rate but have losses not taxable profits. Taxes confuse most investors. Monsanto is not helping today.
2. They have not been able to reduce their SG&A to match declining revenues.
3. Their gross profit has shrunk considerably
4. Cash and equivalents have dropped by 75%
5. Accounts Receivable are up 25% on a revenue drop of some 36%.

Management is not addressing the issues. This is a large cap company that is closely watched. What is the executive thinking?

Tuesday, January 05, 2010

Warren Buffett Investment Culture Clash!

Berkshire Hathaway (BRK.A; BRK.B) has a value investor’s dilemma. It holds some 138.3 million shares of Kraft. That’s approximately $3.9 Billion. (Roughly 10% of Kraft) Berkshire does not want Kraft (KFT) to overpay and dilute Kraft equity. Kraft to increase cash is selling a promising Pizza Division. Not exactly what a value stock is supposed to do. Berkshire Hathaway AKA Warren Buffett issued a statement indicating he does not support the possible issuance of some 370 million new shares of Kraft.

In a Value Investors mind equity is an extraordinarily valuable and some say sacred instrument. In a deal makers mind equity is a currency. Currency is to be circulated and exchanged. Hence you have an inherent conflict of core values. Cadbury (CBY) investors naturally favour cash for its currency value. If there is too much Kraft for sale the price will drop downwards and stay low for quite some time. Therefore they prefer cash. After all, their shares dividend yield just under 2%.

Warren Buffett has the stature to comment on the deal and give other Kraft investors pause for thought. He has given Kraft management some room to manoeuvre. With a 10% stake he is caught in the middle. Kraft is charged with creating shareholder wealth. The Kraft dividend yield is just over 4%. If they sell promising food divisions and dilute the stock the dividend will be at risk. When will Las Vegas bookmakers start posting odds on management survival?

Monday, January 04, 2010

Google Not Better Than Bing or Yahoo

Comparing Google (GOOG), Bing (MSFT) and Yahoo (YHOO) I search for my favourite search term Financial Skeptic. The results are

Google 938,000
Bing 1,210,000
Yahoo 10,300,000 (OK Yahoo explain yourself)

Boolean Search “Financial Skeptic” results
Google 26,000
Bing 2,440,000 (OK Bing explain yourself)
Yahoo 22,500

The top twenty hits all seem to be similar so one cannot conclude that for financial search any search engine is better or worse.