Friday, February 26, 2010

AIG -- Still Humpty Dumpty

AIG (AIG) reported Q4 and year end numbers. The numbers are better. How could they not be better? They have sold some assets, achieved better returns in other assets and have reduced their addiction to government money. The company is still enormous and almost impossible to understand. You look at Google (GOOG) and based on your perception of on line advertising you can develop an opinion. You look at Burlington Northern (BNI) and based on your perception of commodities and the domestic economy you can develop an opinion.

You look at AIG and you still do not understand this behemoth. Yes it may be improving. But if Humpty Dumpty is put back together again it will just fall off the wall and “All the kings horses and all the kings men” will get very tired.

Invest in what you understand. I still maintain this company is not at all understood. Current management comments are not helpful.

Thursday, February 25, 2010

Dr Pepper Snapple -- Wealth Creation Conundrum

Dr Pepper Snapple (DPS) reported better results. They also announced that the $900 million windfall from the licensing of certain products to Pepsi will essentially be used to buy back shares. DPS President and CEO Larry Young did say “While we have made a lot of progress, we still have opportunities to optimize our supply chain, standardize our IT platforms and get our products in more consumers’ hands every day. “

What the CEO is saying is that they have to spend a lot of money on infrastructure which is currently not working. What is the price tag? This will be an enormous financial engineering project as shares are repurchased, squeezing EPS upwards while serious infrastructure spending occurs.

On paper this looks good to some. But is this really wealth creation?

Wednesday, February 24, 2010

Yahoo Twitter Trojan Horse

Yahoo (YHOO) entered into a deal with Twitter. Twitter does a lot of what the old message boards used to do for Yahoo. Except Yahoo has revenues and we are not sure how Twitter will be compensated. I assume they will be compensated. Probably there will be a revenue sharing agreement.

The more effective Twitter will be the better the revenue. But as in any apprenticeship relationship (surely you jest) the supposed junior will want to strike out on its own. So how does Yahoo control this revenue stream and not wake up one morning to read a twitter 140 saying it’s over.

Twitter just wheeled in the proverbial Trojan horse.

Tuesday, February 23, 2010

Wal-Mart & VuDu Desperate Strategy?

Wal-Mart (WMT) announced the acquisition of VuDu a video download service that Wal-Mart clearly hopes to leverage to counter what surely must be a growing decline in movie DVD sales. If it’s cool enough they probably have sugar plum fairy dreams of dominating the electronics and home entertainment market and give Best Buy a run for their money.

At the strategic level this sounds excellent. But Wal-Mart does not have any viable expertise in deploying technology and leading the consumer. It’s only successful skill is deep discount value pricing complemented by massive box store locations which kill all other competition.

Wal-Mart has done very well by beating up its supply chain to deliver even cheaper price points. The consumer of global culture does not buy a new movie because it is cheap. The movies get buzz and people become excited because it is cool. I do not see Hollywood complying with Wal-Mart putting the squeeze on them for lower pricing on principle.

Not to mention the technological risks involved with running a movie download business. Many players with money and expertise have been working on this market segment for a long time and still do not have it right. Wal-Mart does not have an edge in this field.

Monday, February 22, 2010

Lowe's -- Is It Blind Man's Bluff

Lowes (LOW) reported Q4 earnings headlining the new $5 billion dollar share re-purchase program. For the fiscal year ended January 29, 2010, net earnings declined 18.8 percent to $1.78 billion and diluted earnings per share also declined 18.8 percent to $1.21. Robert A. Niblock, Lowe’s chairman and CEO said improvement in many bigger-ticket, project categories, provides an encouraging sign that consumers are gaining the confidence to take on more discretionary projects.

When you look at the earnings release there is no information on product lines or regions. But the CEO is thinking that consumers are starting to move to bigger ticket projects. There is just such a huge gap between executive comments and tangible information the investor will find this difficult to swallow. This increases the risk of surprises as the investor play blind man’s bluff.

Campbell Soup -- Is Dividend Shaky?

Campbell Soup (CPB) manufactured a growing bottom line, but top line growth is suspect. Soups Sauces and Beverages are in serious decline. Particularly in the US. One in eight working Americans uses food stamps; is this really killing the soup business.

This US category has been in serious decline for quite some time. But for some reason the international numbers are growing smartly. Campbell’s needs to take the problem to hand and start addressing it as a marketing problem.

They are not thinking globally and are neglecting their largest easiest to serve market. Which surprisingly is in their own back yard.

Cost reduction is a short term fix where the CFO rules. There is a point where the lack of top line growth will ratchet down to earnings per share and jeopardize the dividend. Campbell’s may hit this wall sooner than they realize.

By the way their long term debt is up $250 million. Dividend yield is around 3.2%.