Friday, February 19, 2010

Penske's Falling Knife

Penske (PAG) reported Q4 results which show clear improvement on a YOY basis. They have exhausted their last share and debt buy back program and claim no share buy backs in Q4. They also claim to be repurchasing a convertible issue with a 3.5% coupon due 2026. They have new authority to buy more shares and debt. $150 million to be specific.

Penske used to pay a dividend. There will be eventual pressure to re-establish the dividend as profits re-establish themselves. This will drive the stock upwards which makes the convertible story more compelling. Penske is trying to catch a falling knife. They want to buy back as much of the convertible as they can before the dilution becomes a reality.

The new buyback approval is huge when contrasted against Q4 net income of $18.7 million. Management says they will use cash flow and borrowings to achieve the buy backs. The good news is only $262 million of the convertibles are left. The bad news is the short term focus is on balance sheet, balance sheet, balance sheet.

Thursday, February 18, 2010

Wal-Mart Disappoints Guidance Junkies -- FX Risks Are Next Problem

Wal-Mart (WMT) reported better than expected quarterlies but disappointed the guidance junkies with the going forward outlook. Of significant interest; international sales broke through the $100 billion mark for the first time. We can expect this number to climb as Wal-Mart has exhausted significant US growth opportunities and may be hitting a regulatory ceiling as to how much of the US market it will be allowed to control.

Wal-Mart has long sourced product from low wage exporters and much of it’s cost base is foreign exchange sensitive. Think of all the Chinese Yuan issues that are on the table. Wal-Mart alludes to it in it’s press release. Read this quote and then ponder how large the numbers are and how they fluctuate from one quarter to the next. There probably is no other item that is as volatile in their business model.

Fourth quarter International net sales were $29.6 billion, an increase of 19.5 percent from last year. The increase in International net sales includes our Chilean operations (acquired in January 2009) and a $1.9 billion positive impact from currency exchange rate fluctuations. On a constant currency basis, International net sales were up 11.9 percent to $27.7 billion from last year's fourth quarter results of $24.8 billion.

Full year International net sales were $100.1 billion, an increase of 1.3 percent from last year. The increase in International net sales includes our Chilean operations and was reduced by the $9.8 billion impact from currency exchange rate fluctuations. On a constant currency basis, International net sales increased 11.2 percent to $109.9 billion in fiscal year 2010, compared to $98.8 billion in fiscal year 2009.”

In Q4 they have a positive impact of $1.9 Billion but for the year they have a negative impact of $9.8 billion. All this from a company which proudly announced Income from continuing operations attributable to Walmart of $14.4 billion.

The negative FX was equal to 68% of what shareholders want. Profits.

Wednesday, February 17, 2010

Winn Dixie No Segmented Info

Winn Dixie (WINN) reported that they doubled First Call consensus earnings and believe operations are moving along smartly. When reading the earnings release investors cannot help but notice that no information is provided on a geographical basis and no information is provided on a product line basis. They report the same store sales mantra and give you a peak at the new stores just to whet appetites.

Tuesday, February 16, 2010

Curtiss Wright Cash Flow Alerts

Curtiss Wright (CW) reported Q4 and year end numbers. For the year Net Sales decreased, Operating income decreased, New orders were down (with a good excuse), net earnings were down but cash flow was up. Hmm. Where is the value here? If you look at their guidance free cash flow appears to be headed down to $75 to $85 million.

Conspicuous by its silence is the MD&A discussion about their balance sheet. Short term indebtedness rose from some $3 million last year to some $81 million this year. Long term debt is down some $129 million. So basically the company cannot cash flow cover it’s own indebtedness. The guidance cash flow is equal to the short term debt. Not an encouraging metric. They make a point in their own notes to say free cash flow is before and debt repayments.

Healthy vibrant companies cannot continue on this trajectory. Management is whistling through the grave yard.

Monday, February 15, 2010

Illinois Tool Works Confuses Investors

Illinois Tool Works (ITW) issued a sneaky press release on Monday Feb 15 when most markets were closed. The press release purports to provide financial information but does not include any financials. The verbiage is challenging and confusing. They headlined a 9% increase in operating revenues for the quarter ending Jan 31, 2010. They continue to headline that base revenues are improving and in the same headline sentence lets investors know that base revenues declined 2%. The claim to improvement is because the comparable quarter is a 10% decline. The improvement is partially attributed to easier comparisons. They do not explain what was easier or why.