Friday, May 04, 2007

Backdoor Rumble in Canada ISE Fails To Impress Canadian Banks

The Toronto Stock Exchange (TSX:X) got a backhanded bitch slap from Canada's biggest banks. In the month of March they announce a series of partnerships with International Securities Exchange (NYSE:ISE) for derivative trading platforms. Sounds good as it expands depth and breath and all that good stuff.

Then we have Alpha announced. Alpha will consume approximately $100 million in capital to develop an alternative trading system to allow the Big Canadian Banks to trade securities among themselves and reduce those nasty friction costs. The problem is that the Canadian Banks make up a very large portion of trading volume.
Toronto Stock Exchange shares dropped approximately 10% because in Canada investors large and small respect and fear the big 5. What is to be done? The TSX will soldier on and look for more listings (They currently have a US road show underway)

Both Nasdaq (NASDAQ:NDAQ) and NYSE (NYSE:NYX)have been beating their brains out attempting to acquire other exchanges. I am sure they have looked at Toronto which is so close and keeps scooping up US listings. Watch for a flanking move by Toronto Stock Exchange to hook up with one of these two. Canadian Banks may be left with a cupcake as the whole pie does what it has to do and joins the big leagues.

Interesting Side bar note: The current COO of Royal Bank of Canada Barbara Stymiest was only just recently CEO of Toronto Stock Exchange. Prior to joining TSX, Ms. Stymiest was Executive Vice-President and Chief Financial Officer for Bank of Montreal’s investment banking division. It's all there on her bio on the Royal Bank of Canada web site.

The Big Five Canadian Banks are Royal Bank of Canada (NYSE:RY), Canadian Imperial Bank of Commerce (NYSE:CM), Bank of Montreal (NYSE:BMO), Toronto Dominion Bank (NYSE:TD), Bank of Nova Scotia (NYSE:BNS). Also involved with Alpha is Canaccord which is an independent brokerage originally started in Vancouver with long roots in the resource financing sector ((TSX:CCI)

Thursday, May 03, 2007

ADP Awaits Its Future

ADP (NYSE:ADP) recently reported earnings and wants the market to believe all is reasonable well. They are even predicting earnings at the high end of guidance. But this is after three quarters are in the bag. They refused to give 08 guidance, stating they are still in the budget and forecast stage. ADP executives feel that because of favourable FX rates ADP will experience attractive revenue growth. This comment was not expanded on by management or significantly questioned by analysts on the conference call.

The FX comment needs to be considerable more colour. As ADP expands internationally, more revenue in foreign currency is sourced. They also are supposedly leveraging facilities and staff in India to take advantage of cheap labour costs. The mix of foreign revenues and foreign costs will become increasingly more critical.

As ADP continues to shift from expensive US domestic wage rates to cheaper foreign costs the favourable FX assumption for revenues may provide compensating penalties when calculating costs. Also as we can see from stocks such as Infosys (NasdaqGS:INFY) India is running out of cheap intelligent labour and ADP may have guessed wrong on India’s ability to reduce costs.

The sleeper on ADP’s income statement is the growing reliance on interest income earned from client balances
. Currently approximately 55% of net income is derived from this source. ADP is becoming a spread management concern. Clients will eventually start demanding pricing concessions as they become tired of this specific friction cost. When ADP refuses third party independent stand alone software solutions will become more attractive to employer organizations.

ADP is slowing turning on a roasting spit waiting for the future to run it over.

Wednesday, May 02, 2007

Murdoch vs Bancroft The Law of Unintented Consequences

Rupert Murdoch’s News Corp (NYSE:NWS) made an unsolicited offer for Dow Jones (NYSE:DJ) at an incredibly high premium to pre take over share valuations. The Bancrofts have stated that they will not be voting in favour. The union is naturally opposed citing concerns that News Corp will dumb things down. Also the union is correct in fearing any restructuring scheme.

Everyone else believes that the Bancrofts should let it go as they are not viewed as adequate stewards to the Dow Jones fortune. The one person on this planet who needs Dow Jones the most and is probably prepared to pay the most is on the playing field. It would not be surprising to see the News Corp offer price increased. Would other players even want to out bid News Corp? Would they even try if the Bancrofts only know how to say no?

The market is viewing the struggle in financial terms and seems perplexed on how you can force the Bancroft hand. The Bancrofts are probably expecting Rupert Murdoch to eventually withdraw. If as and when the News Corp offer expires and other offers are not forthcoming the share price cannot be expected to stay at current levels. Tens of millions and perhaps in some cases hundreds of millions will be lost by third party investors.

Investors particularly institutions will not sit idly and watch the valuation erode as they have to explain to their investors and stakeholders why they are losing money. In short the lawsuits will start. The Bancrofts face untold liability as aggrieved investors large and small argue that the Bancrofts have acted in a reckless fashion by failing to make a takeover deal work.

Methinks that somewhere a legal team in the employ of News Corp has conjured up a war game strategy where the takeover is based on litigation tactics and traditional financial analysis is just a supporting document. In the meantime News Corp will carry on with the motions of a takeover. Rupert Murdoch did not make this offer just to be publicly humiliated and then sent home with his tail between his legs.

GE (NYSE:GE) may consider a take over bid. But if they view the Bancrofts as non co-operative what is the point. Also GE may balk at the huge premiums required to trump News Corp. GE’s subsidiary investment in CNBC does rely on Dow Jones rather extensively. Human Resources will tell you that to replace the Dow Jones personalities it would not cost $5 billion. Other feeds and technical resources are available. Besides some of the on air personalities and key behind camera talent may be coming loose soon as they decide they do not want to work for Murdoch and News Corp.

The cost of a Bancroft NO may prove to be surprisingly prohibitive
. The Bancrofts may yet realize that when they get a flat tire, which they refuse to fix properly, the passengers may high jack the car and drive off. Frustrated with the entrapment investors will litigate and the courts decisions will invoke laws of unintended consequences.

I’m with the union about the dumbing down thing. Rupert Murdochs traditional approach conflicts with the historical cache of Dow Jones, WSJ and Barrons. His victory may be a triumph of money over brains and insight.

Tuesday, May 01, 2007

Pitney Bowes Needs Postal Reform. Does Postal Reform Need Pitney Bowes

Pitney Bowes (NYSE:PBI) posted lower profits and other disappointing metrics. The stock of course drops. The financial press release was issued Monday at 06:30 am ET well before market open. Commenting on the quarter, Chairman and CEO Michael J. Critelli noted, "The underlying trends in our business remain solid. However, our revenue growth this quarter was softer than anticipated due to delays in orders for mailing equipment and software in the U.S. and weaker sales in Europe....”

Mr. Critelli then went on to completely ignore any activity in Europe and focus entirely on US activity. Pitney Bowes is gambling that the US postal rate increases will stimulate additional sales of products and software. Forward looking companies who need to be concerned about postal rates and who invest in IT would already have eye balled the offerings and are probably not waiting for the rate increase to purchase productivity enhancing equipment. I find it hard to believe that the rate increase will be a significant driver.

Delays in orders for mail equipment excuses continue to be suspicious. Go to your own mail room and see if they have the new Pitney Bowes stuff. Ask them if it works and what they have had to return. There is anecdotal evidence that the return rate is disturbingly high for a supposed new product. Management may not yet realize it but the product is not impressing and costs are piling up for returns and reshipment. Because it’s a busted sale, management may be looking at reports that indicate order delays.

There have been two press releases within 48 hours of the financial results being made public. They are all major marketing messages signalling that Pitney Bowes is poised to profit from changes at the post office. If the mailers yawn Pitney Bowes will have trouble. I predict some serious oxygen deficient yawning.

Monday, April 30, 2007

Omnicare Executives Uber Investors

Omnicare (NYSE:OCR) laid an egg on Friday and announced disappointing Q1 results. Earnings’ per share are down. Net profits are down and revenues are down. Naturally the investor is down and the stock took a beating on Friday. Short term options traders prepared to feast on the Sep 07 35 and 32.5 puts as they bid up the prices on unusually higher volume. Where there is smoke there is fire and perhaps the bet is more bad news to come.

Joel F. Gemunder, Omnicare's president and chief executive officer made the usual comments that they are on the job and have strategies in place to fix the problem. At the same time he also said 2007 would be a rebuilding year. There was an admission that Q1 was short of expectations. It sounded like management was caught with their pants down.

The very same Joel F. Gemunder also had a direct non open market disposition on March 23 of 27,280 shares at valuations around $40.59 for a total value of approximately $1,100,000. Actually on March 23 there was an entire stampede of officers and directors selling shares that had been exercised or granted the day before.

The stampede was led by Mr. Gemunder the CEO. I am sure that it has the necessary veil of supposed good governance and pre-approved programs etc etc. It appears that the insiders are selling every chance they get. Put activity continues to suggest bad news. Management insists that they were completely surprised. The main reasons for the bad news are attributed to a margin squeeze on their generics and suddenly increased labour costs.

These two costs have constant management reports and the “we are surprised” explanation does not hold. Management is not to be believed here. They can see these problems from internal reports if they decide to look at them. Given the very dubious explanation, its time to replace management with more credible executives. Will the board do their job and represent shareholders?