Friday, April 04, 2008

KB Homes Dividend Begs Liquidity Question

KB Homes (KBH) announced a dividend of twenty five cents per share, payable on May 22, 2008 to shareholders of record on May 8, 2008. This was done on April 3 at almost the market close time and fully 29 days before the stock will go ex dividend. Just to review the macro trends in this business, home building is a terrible place and industries hit hard like this do not turn around on a dime and return to record levels of profitability. If they could the stock would not have dropped the way it did.

On March 28 they announced poor results which everyone expected from a home builder, regardless of stature in the industry. Five days later they try to apply a financial bandage and announce a dividend. They also try to embed the news of the dividend into the stock for a long period of time. At approximately 89 million shares outstanding we know this amounts to roughly $22 million.

While on one hand you have to understand corporate executives desperately trying to keep their stock valuations as high as possible, at the same time you need to look through the machinations and wonder about the liquidity issues over the long term. This would be a good time to conserve cash. I do not believe anyone is currently buying the stock for the dividend yield. $22 million at work within the company will create more long term wealth for shareholders than the last dividend declared.
The earnings press release did a good job of explaining the current problems they are faced with.

The dividend press release did a poor job in communicating management thinking on cash flow and liquidity.

Thursday, April 03, 2008

Patriot Coal What’s The Plan?

Patriot Coal (PCX) announced an agreement to acquire Magnum Coal. The announcement was strong enough to drive a one day gain of approximately 20%. On the surface it seems like a fine deal with many synergistic effects, no job losses, larger customer base, better transportation solutions, expanded product lines and every other business issue you can imagine.

So why wasn’t this done sooner. It seems it’s better than sliced bread. I always have problems with merger announcements that wax eloquently over all the benefits and then do not even provide any estimate about future earnings, accretive issues (like will it be accretive).

Sure the strategic value may be superb but Patriot Coal is losing money at the present. That’s fundamental. What will change that and when?

Tuesday, April 01, 2008

Canseco Insufficient Transparency.

Canseco (CNO) reported results very late Monday night probably hoping to miss the news cycle on Tuesday. Therefore they would be old news on Wednesday and well you can figure out the rest.

The press release commences with an exculpatory statement pointing to a previous preliminary announcement which indicated the news would be tough. But Canseco wants you to have the warm and fuzzy feeling that things are going to improve.
The press release is full of instances which beg more questions than are answered.

1. Q4 results were negatively influenced by an $11 million dollar hedging inefficiency. That accounts for 15% of the loss. No further explanations are offered. In today’s market most derivatives and hedges are suspect. You would think they could cough up some more relevant details.

2. Q4 results were also negatively influenced by a $14.8 million charge because they have changed estimates of future mortality rates in the universal life product category. Mortality rates do not fluctuate radically in the western world. They are usually subject to regulatory scrutiny. So suddenly they have decided people will be dying sooner. Or is it they have under priced the products and cannot get out of the contracts.

Hey I know insurance companies have their own quirks about accounting and operations but quite frankly this press release does not help the cause of transparency.

Monday, March 31, 2008

Red Hat What Of It?

Red Hat (RHT) announced decent earnings after market close on March 27. S&P upgraded them citing increased liquidity. Hey cash in the bank is good these days! Red Hat tipped their hand somewhat when in the opening paragraph of their press release Jim Whitehurst, President and Chief Executive Officer led off with a quasi religious statement about open source:

“During the fourth quarter, I spent a significant amount of time meeting with customers, partners, employees and thought leaders from the open source community. The momentum of open source solutions is strong and growing, and we believe there is a significant opportunity to expand our presence with existing customers and the many companies and industries that have only just begun to adopt open source solutions in a meaningful way,“

At this point Red Hat has been around long enough to have gained traction. I am not an IT guy but this open source concept should be a lot larger by now than just a half billion dollars in sales and only $77 million in bottom line.

Red Hat has an obligation to create wealth for its shareholders. Meetings with thought leaders does not lay out a roadmap for the future. It may even mean that Red Hat is lost in the woods and certainly not leading.

IT is a cold hard business that frequently eats its own babies. Red Hat seems to be on a restricted diet without reservations to any place interesting.