Posts tagged AA
The market traded down today as earnings season began not with a bang, or a whimper, but with a Kirstie Alley-esque thud as AA missed revenue guesses (and the 6% drop in the stock likely caused some AA investors to fall off the wagon), Japan’s market fell again as the severity of the nuclear disaster continues to worsen from “there’s nothing to see here” to “Get your free plutonium,” Oil prices dropped which capped the biggest two day drop since jheri curls went out of style, and US import prices rose to their highest level since Lucy Pinder’s last photo spread in Nuts magazine.
In all, there was little positive news (other than the Phallological Museum finally getting their human schlong, and Money McBags can only imagine what that will do for traffic) and with the market already priced as if the ponzeconomy™ has recovered, as if flat wages and spiking input prices won’t cause a decline in the average American’s standard of living on par with the decline in Bernie Madoff’s, and as if Josie Maran will be the next visitor to the delightful meinmyplace, a sell off was more inevitable than death, taxes, and a Miley Cyrus sex tape (and trust Money McBags that will happen).
In US macro news, as already mentioned import prices rose 2.7% but luckily that was only driven by a 10.5% increase in petroleum prices and a 4.2% increase in food prices (and the rise in food prices had the indirect effect of causing bacon perfume to challenge Imperial Majesty and Marisa Miller‘s vulva for the world’s most expensive scent) and as the Fed has taught us, food and energy are irrelevant for prices so a big fucking yawn (and yes that makes as much sense as saying the number 5 is irrelevant for Math or a sharp tongue is irrelevant for a cunning linguist, but as we can see from the National Debt, the Fed may not be the best source for logical proofs).
Stripping out the prices of petroleum, food, and common sense, prices rose only .3% which means that after you spend all of your money to eat, stay warm, and drive to another job interview, you’ll barely have to pay more for those non-discretionary items that you can’t afford to buy anyway. That said, the rising import prices led the trade gap to be above analyst guesses which means analyst guesses of GDP are likely too high and thus should start to fall faster than Glenn Beck’s ratings or civility. So GDP getting cut at the same time that QE2 runs out, means only one thing, buy the fucking dip because the US’ shadow(y) bank will have to reignite the market manipulation with QE3.
Speaking of the Fed, they released their minutes today which simply should have read “ibid.” The only interesting parts of the minutes were that the Fed Banks of Kansas City and Dallas asked for a 25bp raise in rates while the Fed Bank of NY asked not to be seated by those assclowns again. Money McBags does look forward to the Fed meeting next month where he hopes to finally understand the fallacy of core inflation and also hopes to get the Fed’s opinion of this cocktastic look at the TALF by Matt Taibbi (and if you are going to read one thing today, hopefully it will be the rest of this column, but if you are going to read two things today, hopefully it will be the rest of this column and Ashley Dupre’s tattoo, but if you are going to read three things today, hopefully it will be the column, the tattoo, and the piece by Matt Taibbi as he annihilates the rich shitsticks who keep abusing the system because they are the system. If reading it doesn’t make you angrier at the Fed than Christina Applegate at a Femen rally, then Money McBags can’t help you).
The only other real US market news was that the compromise budget cuts were finally announced and they will affect a wide range of programs and services including high-speed rail construction, emergency first responders, the NEA, the EPA, and likely even some T&A. More than $1 billion will also be cut from programs to prevent sexually transmitted diseases, AIDS, and viral hepatitis which means you will now be required to have health insurance before coming in contact with a Kardashian. But not everything is geting cut as some important programs and departments are actually getting increased funding such as the SEC which is getting $74MM more which should also be great for Vicki Richter’s career (and if you didn’t get that reference, this should help).
Along with the short-term budget agreement, President Obama is scheduled to give his proposal for the budget going forward which will likely include provisions that say any tax increases will need to include spending reductions, so really the worst of both worlds (Money McBags would love to hear the logic that went in to that line of thinking which sounds like the “Cut your nose to spite your face but then cut your face to spite your nose” strategy). It is said that Obama is trying to align his budget with the yet to be released objectives of the orgy-tastically nicknamed Gang of Six, which is not just the name of Faye Reagan‘s next movie, but also a group of three Republican and three Democratic senators working on a bipartisan solution (and interesting enough, Ms. Reagan will also be working on bi solutions).
Internationally, Japan lifted their atomic alert to Chernobyl levels as entropy keeps rearing it’s ugly head. Japan’s Nuclear and Industrial Safety Agency raised the rating to a 7 from a 5 after determing the East German judges had been keeping the scores down. The governemnt said the delay in reporting the radiation was because of concern that the margins of error had been large in initial computer models so they thought it was best to err on the side of whatever is the exact oppostie of caution.
In the market, CSCO flipped off their flip camera business citing shitty margins, a poor strategic fit, and too many peeping tom complaints. Elsewhere airline stocks rallied on falling oil prices and Morgan Stanley’s telecom analyst apparently hasn’t been bringing in the trading commissions as he plopped out a series of ratings changes including downgrading Nokia to underweight from equal weight, upgrading ALU to overweight from equal weight and ERIC to equal weight from underweight, and promising to increase his flow of bullshit in the future.
In small cap news Money McBags bought some more KITD at the open (so um, fuck you very much) but regardless of the sell off during the conference call, KITD is poised for at least $70MM in EBITDA next year so is trading at only ~6.5x that and for a company growing organically at 30%+ rates, that is way too fucking cheap, so Money McBags may even buy more tomorrow. Money McBags hopes to break their announcement down in more detail tomorrow but he has yet to receive their conference call tranny and Money McBags refuses to listen to calls anymore as he finds them duller and more time consuming than foreplay.
That said, Money McBags was alerted to the fact that on the call CEO Kaleil Tuzman made a veiled shout out to Money McBags by referencing the amount of teasing he has received for all of the dilution KITD has had in the past (and remember WGP originated the phrase “you can’t spell “dilution” without KITD: Ok, you can, but lets pretend it is a silent K.”). Not only does Money McBags hope to get to KITD tomorrow, but he swapped some emails with CEO Kaleil Tuzman last week and Kaleil promised to come back to WGP and answer Money McBags’ now outdated questions from last Q, so perhaps, Kaleil will show up to discuss the transaction once Money McBags gets his questions out.
In other small cap news, JOEZ continues to blow (and remember Money McBags has been telling you to short Joez since jeggings were still in style) by announcing another shitriffic quarter. Sales were down 9% and holding everything else equal, the company earned no dollars and no cents per share. The positive news is that taking out the drop in jeggings, the company would have had sales up 4%. The negative news is that taking out jeggings, the company would have lost money, so um, yeah. Their main wholesale women’s and international business was down and while their retail channel showed sales up 105%, that’s because the store count tripled as same store sales were also down 9%. So JOEZ served up the pu pu platter of ways to underperform on revenue.
Anyway, Money McBags won’t waste your time anymore with a company trading under $1 per share, earning no net income, and with a management team that is just slightly more shareholder friendly than Angelo Mozilo, because he knows you have more important things to do. That said, this company is still fucked and while it is good they had positive cash flow from operations, they only have $8MM in cash on the balance sheet and if they want to aggressively open soon to fail stores, they may need to raise funds. Money McBags isn’t sure how to value this company because any multiple times zero happens to be zero, but it is way too early to think about going long and shorting a ~$.90 stock is not as easy at it seems.
Writer’s note: Two shitty headlines in a row, fuck Money McBags.
It was a fairly quiet day on the market as investors get ready for earnings season, brace for an East Coast snow storm, and actively try to bet on which porn star Charlie Sheen will bang next (and for the record, Money McBags is taking Gracie Glam, in the kitchen, with his lead pipe). That said, of the shit that did happen, most of it was less positive than a Ted Williams family reunion. The market is just less interested in data right now than banks are interested in marking to market or Americans are interested in common sense (because there is really no fucking reason to own a glock, no joke here) but none of that is relevant because the market believes in the Bernanke Put more than Money McBags believes in riding the subway pantsless, so Money McBags guesses you should just buy the dip and the undip.
On the economic front, wholesale inventories fell by ~.2% which was within ~1% and an absolute value sign of economist guesses of a 1% gain. But hey, so economists missed again, it’s not like they shot anyone’s cock off so Money McBags will give them credit for guessing an actual number for wholesale sales and not something like “b.” That said, falling inventories could be a positive in that it means people are buying shit, or it could be a negative in that it means wholesalers realize people are going to stop buying shit and aren’t restocking, it just depends on if you see the glass as half full or half empty. The only thing to take from this is that the number should have a negative effect on GDP since about 2/3 of GDP growth was driven by restocking so be very careful about expectations.
Elsewhere, small business owner optimism slipped as the National Federation of Independent Businesses’ index fell from 93.2 to 92.6 which means about as much to Money McBags as or a copy of Strunk and White means to a Palin. Also, job openings decreased by 2.4% to 3.25MM which means there are only ~5 people overqualified for every job out there (or 7 if you include the discouraged, the downtrodden, and Tom Delay).
But all of that data is irrelevant because newest voting member of the Fed, Narayana Kocherlakota (“Kocher” from the Sioux for “Full of” and “La Kota” from the Inuit “The shit”) said the economy will grow slightly more rapidly” in 2011 than last year, which is a bit like saying Ellen Degeneres will suck slightly more dicks than last year, but why let details get in the way of a good narrative (you hear that James Frey or James K. Polk?). Kocherlakota guessed an inflation rate of between 1.5% and 2% by the end of this year, though he was likely using core inflation which is about as useful as a paint by numbers kit is to Ray Charles (and not because Ray Charles was blind, but because he’s dead) since it excludes necessities such as food, energy, and Bangbus memberships. Mr. Kocherlakota (gesundheit) also opined: “...it is clear to me that the recession and its subsequent recovery would have been significantly worse in the absence of the actions of the Federal Reserve” which is like thanking the iceberg for curing the Titanic’s kitchen of their problem of having run out of beef.
Internationally, Portugal says they won’t seek a bail out despite borrowing costs being at levels more unsustainable than OPEN’s stock price or a Pam Anderson marriage. After a series of dialogues, Prime Minister Jose Socrates has not revealed his method for slashing the debt but he let it be known that Portugal’s budget deficit should fall from 9.3% of GDP to 7.3%. Should that miss, Socrates may be charged with corrupting the truth. Either way, the country needs to raise ~20B euros this year and Wednesday will be their first debt offering so the market is anxious to see at what yields they raise the funds and if they will have to include Luisa Beirao as collateral. And speaking of debt, China’s foreign currencies swelled to the size of John Edwards’ ego as they now own a lot of fucking dollars. Chinese foreign reserves leaped by $199B in the Q4 to $2.85T which was much larger than economists guessed and at the rate of $2B a day, China will soon be holding more dollars than Lisa Ann‘s g-string on a Friday night at Rick’s Cabaret.
In the market today, Goldman released a 63 page report on its business practices and disclosure policies which can be whittled down to 2 words: “Suck it.” Also, financials were up today after Societe Generale upgraded European banks to overweight, saying banks can achieve more profitability than the market expects thanks to their proven ability to manipulate their balance sheets and earnings.
And earnings sort of officially started today with AA putting up decent results by beating guesses by $.02 with revenue inline, yet they traded down ~2% as the Q caused AA investors to sober up. Interestingly, AA’s CEO says he sees growth continuing from emerging economies such as India, Vietnam, and Miley Cyrus‘ pants. In other earnings news SHLD rose after posting guidance above guesses thanks to their strategy of simply having a lower tax rate. So well done Mr. Lampert, what’s next for the business, including “browsing” in revenue recognition? Despite the better than expected earnings, SHLD saw same store sales decline because even most poor people have standards (except for any of Kelsey Grammar’s wives). In other news, LEN jumped up after beating earnings guesses despite lower revenue but then again, how hard is it to beat a guess of negative infinity?
Not everyone was a winner though today as Talbots customers Tal-bought a fuckload less shit. The stock fell ~17% after the company reduced guidance and announced that revenue in the fourth-quarter is down 7% compared to a year ago which they blame on the growth of chubby chasers causing their clientele to all of a sudden care about what they wear. Finally AMD was down ~10% after their CEO resigned citing his desire to not lead such a crappy company. When asked, former CEO Dirk Meyer said: “Look guys, the economy is tough and if something should happen and AMD goes to zero, how the fuck am I going to get a job with that on my resume?”
In small caps, RICK announced that this Q’s revenue will be up only 4.3% with same club revenue down 3.7% driven by their Las Vegas club still sucking dick (actually, sucking dick might have increased revenue). Money McBags bought the stock recently and while this Q’s growth was below his guess of 10% for the year, the stock is still cheap enough that there shouldn’t be much downside as 4% growth is still growth. That said, Money McBags does have one suggestion to help grow the business: more tits. Also TSTC which Money McBags wrote about in November was down 20%+ after something called The Forensic Factor wrote a scathing analysis of the company. If you go back and read what Money McBags wrote, he was dead fucking on in his disdain of the company. There is simply no way to really know what the fuck is going on in these small Chinese companies so the only reasonable thing to do is to stay the fuck out unless you can somehow build confidence in their management teams.
Finally ININ pre-announced their Q today and crushed the fuck out of numbers as if numbers were Alexis Texas’ backside and they were Whitezilla. After their last pre-announcement, Money McBags broke them down and said they were an interesting company with growth potential, so you’ll have to excuse Money McBags while he figuratively fellates himself (though if his new found love Malene Espensen were here, he’d be happy to have her do it literally).
Anyway, ININ will grow top line ~40% this Q which is well above Money McBags’ high end guess and if they can keep that up next year, EPS will be ~$2.00 with non-Gaap eps closer to $2.25 which means at $36.50, they are only trading at 16x which is fucking cheap for 40% growth. Of course growing 40% for a year is harder than winning a land war in Asia or a cock off against Peter North so it is important to try to get some more color on the drivers of this growth when the company has its earnings call. But look, when little companies like this pop on good earnings, if they can hold that and form a new base over the next couple of days, it is usually a hella positive sign. The 24% jump today could have been a bit of short covering, but good things are happening here so as ININ creeps down a bit in the next few days, you may want to take a position here (and not just the t-square position). Money McBags will continue to point out interesting companies like this because recognizing companies early where good things are happening is the easiest way to get alpha.
Editor’s note: It’s late. There was no theme today. Fuck the headline.
The market was off to the races today as if it the races were going to feature Usain Bolt taking on Sara Jane Underwood in the 100 meter dash with the loser having to run a lap in the buff. The big news of course was that Alcoa started off the earnings season by destroying analyst guesses of $.12 eps by earning a whopping $.13 per share in the last Q. That’s right, the fact that a whole extra penny (with rounding) is the difference between a down market and an up 2% market makes as much sense as the theory that gravity is an illusion or candwiches.
Making it even more ridiculous is that as ZeroHedge points out, just last month Bloomberg showed consensus analyst guesses of $.16 for AA’s Q. So with analysts lowering their guesses before the quarter, AA is now back to where it was when guesses were for $.16 so the would have been $.03 miss has been mitigated by strategic downgrades. Brilliant stuff. As the late great Kurt Vonnegut would say, “No damn cat, and no damn cradle.” Analysts are now quickly dropping their guesses on companies across the board because they only get paid when the market goes up and with unemployment benefits going away, they need to keep their jobs like Kathy Griffin needs to keep off of HDTV. That said, AA did raise their guidance for aluminum consumption for the year from 10% to 12% and revenue was up 22% despite cratering aluminum prices as a result of demand slowing down and oversupply given that aluminum is the 3rd most prevalent element in the earth, behind only oxygen and whatever medal Mr. T wears around his neck. That said, the declining prices and rising energy costs are hurting overall profitability but with foreclosures up, demand may surge as the recently homeless grab sheet aluminum to build shanty towns to be known to future generations as WhothefucklentthosepeopleallofthatmoneyVilles or for short Goldmanvilles.
In macro news today, the US trade gap widened to 4.8% or $42B, which is the largest since November 2008 and a gap wider than between the antenna on a new Apple iPhone or the gap between Paris Hilton‘s legs on a Sunday morning. Not surprisingly, a trade gap is the exact opposite of what economists had guessed and thus once again proves that “economist” is not a real job, like rap music spell checker. Imports were up 3% thanks to a 12% increase in imports from China which, as pointed out yesterday, was driven by people not having any money and thus only being able to afford the cheap shit made overseas. US exports continued to see strength, which is a bit surprising given the weakness in the Euro last Q, as they were up 2.4% which was their best month since September 2008 when the US instituted buy one get one free Wednesdays for foreign countries.
And finally, the National Federation of Independent Business (known better as NFIB or “irrelevant”) said optimism declined among small businesses by 3.2% in their monthly survey to which no one pays attention to anyway. NFIB’s chief economist William Dunkelberg (who is still smarting from his decision to leave his hosting gig at Small Business Idol to pursue other career opportunities) opined that: “Confidence is lacking and the news out of Washington is discouraging. Until this changes, don’t expect small businesses to start hiring.” He then went and stole an ice cream cone from a little kid, told his wife she looked fat in those jeans, and ordered a ton of coal so he’ll be prepared to adequately fill the stockings of everyone at the NFIB during Christmas time.
Internationally, Moody’s cut Portugal’s debt rating by two whole notches which means absolutely nothing to Money McBags as he cares what Moody’s has to say about rating debt as much as he cares what Art Laffer has to say about tax policy, Jeffrey Dahmer has to say about cuisine, or Mel Gibson has to say about anything. Moody’s dowgrade stems from Portugal’s national debt having risen sharply relative to GDP as a result of stimulus measures and the 168 siesta hour work week. Moody’s also warned that weak growth would weigh on government finances for two or three more years while Portugal warned that weak analysis would weigh on Moody’s finances for eternity. European markets are up on this news as even they realize that Moody’s is worse at their job than a eunuch sperm donor or Alan Greenspan.
In large cap stocks, just about everything was up as we move in to earnings season with INTC, C, BAC, and GOOG to report this week so hopefully analysts already lowered their guesses in order to keep the market moving. One interesting stock to note is AAPL as the company is down after Consumer Reports said it will not recommend the new iPhone 4 due to reception glitches, and Steve Jobs simply being a dick. In their defense, Apple maintains that any cellphone will lose reception if held a certain way, like in a toilet, at the bottom of Lechuguilla Cave, or up Candice Swanepoel‘s well chiseled buttocks (and Money McBags is volunteering to test that theory out) so there is really no big deal. Plus, to fix the problem, AAPL claims all one needs to do is wrap some duct tape around the iPhone where the gap in the antenna is and who doesn’t want a piece of metallic tape draped around their sleek and expensive gadget? It would almost be like fixing a tear in the Mona Lisa by putting a SpongeBob Squarepants band aid over it.
In small cap news, LHCG was down ~6% today after competitor AMED announced a shitactular Q and dropped nearly 25%. Money McBags broke LHCG down the other week after the SEC announced they were investigating AMED and AFAM for potential shadiness in how they were charging medicare for visits that may not ever have happened or visits that were unneeded. Anyway, guesses for AMED were for quarterly earnings of $1.37 per share and today they said that earnings will be closer to $1.12 which makes it almost as big of a miss as the Edsel or Glitter. Money McBags did not hear AMED’s call but it is reported they said that their client base changed and they will need to reevaluate their structure and will hold off on full-year forecasts. Now look, without further color Money McBags isn’t sure how this will affect LHCG because he has no idea what AMED means by their “client base changing” because either they stopped treating sick people (which would seem a silly thing to do for a home fucking healthcare company) or they started treating fewer sick people and thus had fewer home visits (which is a more likely scenario, especially with the SEC all in their business about charging for too many medicare visits). More concerning though is that shareholders have filed a suit against LHCG for an investigation from April into LHCG’s reimbursement procedures, so fuck Money McBags on that one.
The industry makes sense longterm, the cost savings to insurance companies are too great, and home care is simply better, so it remains a good way to play the aging population trend but there is way too much fucking noise right now for an investor without access to industry insiders to get a leg up on the billing practices. As a result, Money McBags would stay the fuck away from this sector even though a few days ago he said LHCG was an interesting longterm buy (and it still remains that way but Money McBags needs more information to be able to make a sensible decision about the SEC investigations). Anyway, with all of this uncertainty, there are easier ways to make money (like TMRK which is a great takeout candidate and is getting a boost with MSFT’s entry into cloud computing ) so keep watching LHCG but you probably want to avoid going long in the short term unless you have better contacts in the industry than Money McBags has. In times of turmoil, money can be made, but to do so, one needs to be confident that they have all of the information, so do your work here carefully.
The market rallied today in the morning like a chubby chaser with a bottle of crisco on his way to a Peter Paul Rubens exhibit until it faded in the afternoon thanks to common sense and volume. Rallying the market in the morning was news that China is going to unpeg their currency from the dollar thanks to pressure from global leaders who felt that the currency peg gave China an unfair trade advantage in selling their cheap shit even cheaper. The announcement comes ahead of the G-20 summit in Toronto this weekend where finance ministers and central bankers from around the world will no doubt descend upon the NSFW Brass Rail and flaunt their ability to negotiate currency while manipulating bottoming assets (of course after the EU’s latest bailout, finance ministers will certainly wonder if that is a printing press in EU central bank governor Jean Claude-Trichet’s pants or if he is just happy to see them). While it’s good that China is willing to let the renminbi/yuan float (and if anyone can explain to Money McBags the difference between “renminbi” and “yuan,” other than several letters, he’ll send you a free autographed poster of Gong Li), China has stated that they will do it gradually so as to avoid a potential destabilization bubble like what happened in Japan when the yen was unpegged from the dollar in the mid-1980s or like what happened in Britney Spears’ pants after she was unpegged from Justin Timberlake. With the return of a “managed floating rate,” the yuan/renmindbi/johnson rod was up ~40 bps against the dollar to its highest level in five years which means happy endings just got a little less happy for all of us.
In US macro news, less is happening today than on a Bernie Madoff trading desk in 2006 or in a eunuch’s pants. The SEC is going after a firm called ICP Asset Management for manipulating CDOs in ways that would have made even Meggan Mallone blush. ICP is accused of pumpng up CDO prices to increase the value of their funds, pushing profits to their owners rather than their investors, and being what I believe the SEC called “a bunch of dicks.” In other news, the proposed Durbin Bill which is supposed to keep credit card companies from charging merchants exorbitant interchange fees as a way for those credit card companies to have adequate reserves when their customers charge off due to the high prices the customers have to pay for goods which of course are partly caused by merchants raising prices to make up for high credit card interchange fees (it is the least fun daisy chain Money McBags has ever encountered), is rumored to be losing steam. News today is that the bill will take out “network fees” from interchange and thus credit card companies will still be able to charge retailers the fuck out of transactions due to a semantics loophole. The result of all of this is that V and MA shot up at midday while politicians once again do their best to to take the bite out of their bark or the steam out of their cleveland steamer if you will.
In stock news Alcoa ran up today as high frequency algorithmic traders have stumbled on to the phonebook approach and are just buying the first company listed alphabetically (though a smiliar strategy worked for Malachi Constant). Actually, AA is up as over the weekend their CEO said he expects demand to grow 10% with half of that coming from China and with China releasing their yuan today, demand for imports in China should improve. In other stocks, BP is down again today because the stock hasn’t reached zero yet and Goldman Sachs cut their earnings forecast for banks causing banks to rally as investors realize trading against GS’ recommendations and thus WITH GS’ ACTUAL BOOK is the best way to make money. GS front runs and ditches shit to clients once it has appreciated more often than marginal celebrities come out as bisexual (and today it was some singer named Vanessa Carlton who claimed she is bisexual which would have made Money McBags excited if he knew who Vanessa Carlton was and if she didn’t look like the man in the relationship). Anyway, the short GS recommendation, long their actual book trade wins again.
In small cap news a Money McBags favorite KITD was down 9% on no news that Money McBags could find though he wouldn’t be shocked if they were getting ready to dilute shareholders another 25% just because they can. This company is more frustrating than a one-armed man trying to solve a rubik’s cube. That said, Money McBags still believes in the long term growth story so is not sweating their huge Euro exposure and their predilection to raise equity as a daily operating procedure. Money McBags is short on time today, so no detailed analysis of any small cap names but if the market has topped out here with the sell off in the afternoon (and Money McBags is no chartist, though he will technically analyze Hilary Rhoda‘s bollinger bands if need be), then he would be selling his illiquid names in to the downturn.
The market sold off at the open today but is climbing back like a Phoenix from the ashes or Paul Volcker’s economic reputation. Alcoa’s earnings initially brought the market down as they were a bit disappointing and Alcoa is considered to be the first bellweather company to report in this critical earnings season where baked in expectations are greater than they were for Ulysses S. Grant’s presidency, the launch of the Space Shuttle Challenger, or Jay Leno’s 10pm time slot. Alcoa missed on revenues earning only $4.9B instead of analyst guesses of $5.2B while putting up an inline earnings per share number. The company blamed the top line miss on the fact that they sell a fucking commodity and on Canada. Interestingly, even though they were short of analyst guesses on revenue, they still grew the topline by 18% thanks to a 49% surge in the price of aluminum off of the depressed levels of last year (apparently aluminum was depressed because it found copper cheating on him with silver. It’s his own fault though, as steel tried to warn aluminum that copper was a whore and would smelt anything, but he didn’t want to listen). That said, shipments of aluminum slid 3% so demand still has quite a way to go. In other macro news, the US trade deficit widened in February like a hooker‘s purse when seeing Eliot Spitzer walk by her after he has hit the ATM. The trade deficit was up 7.4% to $39B and signaled that US consumers are getting stronger as they once again pass up American made goods for shit produced overseas. Imports surged 1.7% with the majority of that coming from electronics, aparrel, and Laetitia Casta posters.
In international news, Greece had a bond offering to raise capital to help ease their budget deficit and the bonds are seeing stronger demand than Sarah Palin at a tea bag convention, potatoes during the great Irish famine, or Ann Darrow on Skull Island. The latest bond offering was more than 6x oversubscribed which is more oversubscribed than a New Century subprime mortgage B tranche in 2004, the theory of intelligent design in Texas, or the rumored Jessica Simpson Juggs magazine photo shoot. With the EU and IMF backing up Greece (and we all know the Greeks love getting backed-up), investors should have faith that the country won’t go bankrupt and thus the incremental yield being offered by these Greek bonds should be solid investments.
In other stock news, the markets eagerly await the earnings of large cap banks tomorrow while UBS’s regional bank anlayst is getting in front of those numbers by downgrading mid-sized banks. The analyst thinks banks’ earnings and valuations are unsustainable and they are due for a “meaningful pullback” as investors somehow forgot that normalized bank earnings no longer exist thanks to something called banks not lending any fucking money and reserving the shit out of their balance sheets. Ford announced revenues are tracking ahead of last year, though that is like being smarter than Carrie Prejean, creepier than Larry Craig, or less herpe-ridden than Paris Hilton. Ford has done a solid job of managing through the downturn and thinks the economy continues to get marginally better, like day old chinese food and the Winter Olympics. The market is not only anticipating bank earnings, but GOOG is trading up into their earnings release on Thursday after hours. Money McBags is long GOOG as the online advertising market isn’t going anywhere and they dominate it like Tony Danza dominated Judith Light in showing her who was the boss.
In small cap news, PALM is tumbling because potential buyers must be coming to their senses or must have read When Genius Prevailed yesterday to realize that buying the #6 player (and likely dropping with Microsoft introducing the Kin) in a competitive and near commodity market is about as good of a business decision as investing with Bernie Madoff or letting Dexter Manley write your presentations. In other small cap news, JOEZ is apparently still not fitting investors well despite offering a nice booty fit as it trades down another 4% to $2.60. Money McBags has put some analysis behind JOEZ numbers over the past couple of days and thinks it is getting to a more reasonable valuation (of course being down almost 30% in 4 days will do that to you). What is interesting is that the analyst from Roth Capital came out with an upgrade of JOEZ yesterday and had close to the same numbers as Money McBags with ~$.07 eps for 2010 and $.13 for fiscal 2011. The key difference being that Money McBags thinks $.13 is a bit of a stretch, though possible (In fact $.15 wouldn’t be out of the realm of possibilties), and that even if they were to hit $.13, they shouldn’t trade at 28x that which is where the Roth analyst’s price target is. The stock is now trading at 20x the fiscal 2011 $.13 estimate which is a reasonable valuation for JOEZ growth if you think $.13 is attainable. If Money McBags were a betting man, he’d bet that the butler did it, but he’d also bet that JOEZ will earn somewhere between $.10 and $.15 per share in fiscal 2011 which is actually not a very small range but he just doesn’t have a good feel for management’s ability to execute a business since their margins have yet to show the leverage associated with scale. Either way, the valuation is becoming more reasonable and if it were to drop a bit more, Money McBags might think about buying some. Until then, he’s going to wait for the institutions to finish puking this thing out and see where it is when the smoke clears as volume over the past few days has been higher than Lindsay Lohan on a Columbian vacation as people just want to get the fuck out of this stock right now.
Earnings season is about to begin and Money McBags is more excited than Thomas Malthus at a pro-abstinence conference or Tiger Woods at a sleepover in Charlie Sheen’s house. The Street is going in to this earnings seasons with expectations higher than those of Elin Nordegren in October of 2004 so a few slip-ups could cause the market to sell off faster than the career of a VH1 reality show contestant. Alcoa opens earnings season tonight with financial firms due to follow this week so keep your eyes on net interest margins, credit costs, and Lucy Pinder.
In international news, Europe has unified to bail out Greece with a line of aid in events less surprising than Michael Jackson dying of unnatural causes or a family values republican liking a little ding-a-ling. It is the most unified Europe has been since Charlemagne took Italy or since the Keeley Hazell sex tape was released. European leaders are offering Greece up to $40B at 5% interest which is a discount to market rates and will allow Greece to help cut their deficit and perhaps even improve their public works by adding more fire hydrants. Along with the EU, the IMF is offering Greece $20B of assistance while NAMBLA is offering them a mature shoulder on which to cry. Greek finance minister, George Papaconstantinou, and Greek Prime Minister George Papandreou, still think Greece can make it through this crisis without needing the capital infusion, while Greek cultural leader George Papasmurf couldn’t be reached as he was busy hiding from Gargamel.
In stock news UBS is out saying they will earn $2.35B in profits this quarter as apparently they started selling tickets to the fountain of youth and hired Bernie Madoff’s auditors. UBS has been hit hard by the financial meltdown and it’s nice to see they learned from it by not elaborating on how they swung to profitability. So good on you UBS for continuing to not provide shareholders with information. Also PALM continues to soar on takeout rumors. Money McBags addressed this a bit on Friday but he doesn’t understand why a PC company would want to buy the #6 player in the smartphone market, especially one whose estimates for the quarter were 50% below analyts guesses. Sure they have decent technology, but going after AAPL and Blackberry is a bit like taking on Visa and Mastercard, Coke and Pepsi, or getting ass implants and going after Coco or Kim Kardashian. Money McBags is guessing whoever buys PALM pays way too much for them unless they can somehow use PALM’s operating system in their PCs.
In small cap news, most companies are getting ready for earnings so Money McBags will address a reader named Richard who posted some thoughts on JOEZ in the comments section of Friday’s post. Money McBags will answer those questions here since the comment section handles long replies like the Meaghan Cheung handles ponzi scheme investigations. In Friday’s post, Money McBags broke down JOEZ quarter of strong growth but infinitesimal profitability and questioned whether they would earn more than $.07 this year. Richard responded by questioning Money McBags’ assumptions saying that 40% sales growth is too low due to an improving economy and operating leverage should drop to 36% with those improving sales and thus JOEZ could earn $.13. Now look, Money McBags has no position in JOEZ but would like to pursue this because it could be a great long or short and he is happy to collect all information in what right now is strictly an intellectual pursuit, like debating the existence of God or pondering why people drive on parkways and park on driveways.
So let Money McBags test those numbers out a little and see if they are possible. First of all, cost of goods sold in the last quarter rose to 51% as JOEZ either picked up their discounting to shed inventory or sold lower margin items. Anyway, let’s assume that doesn’t degrade further even as competition increases when fashions potentially change which would cause further discounting (and remember, consumers of fashionable items are more fickle than Hugh Hefner at a casting call). So call COGS 51% leaving gross margin at 49%. Then we’ll take Richard’s assumption that they can get their operating margins down to 36% and assume interest and any other charges are non-existent as Money McBags wants to keep this simpler than a Texas high school science class (you know, because the answer to everything is “God did it”). So before taxes, JOEZ has an at best 13% pre-tax margin (51% COGS + 36% operating costs). Now their tax rate is more inflated than Oprah Winfrey’s ego (and her gut) as the earnout from the acquisition of Joe’s is going to cause them to be taxed ~45% this year. So that brings their net margin down to ~7.2%. They have 63MM diluted shares so in order to hit $.13 eps for this calendar year (and remember, Money McBags thinks they will earn $.07), they need to earn $8.2MM in net income which means they need to earn $.12 or $7.6MM over the next 3 quarters. Now it doesn’t take Norman Einstein to see that in order to get to $7.6MM in net income over the next 3Qs with 7.2% net margins, they need to do >$100MM of revenue (~$105MM to be more exact). In the last 3 calendar Qs of last year they had $63MM of revenue, so in order to hit $105MM of revenue, they need to grow sales by 66%. To put that in perspective, these are the annual growth rates starting with 2006: 30%, 35%, 10%, 16%. So sure, there was a recession and sales sucked donkey dick through it (though to JOEZ credit they were still able to grow when most retail stores were taking it deeper in the yingus than Alexis Texas in Ass Titans 3) but 66% growth is above anything they have done in the past 4 years and there is something called the law of large fucking numbers which tends to hinder growth rates. While they grew 40% this last Q, Money McBags doesn’t get how that growth accelerates even more unless they open a fuckload more stores and institute blumpkin Wednesdays or just discount the shit out of everything, which would kill their gross margins. So it is doubtful that this year they earn $.13 even with an extrememly generous 36% operating cost assumption.
Of course it is possible Richard was talking about fiscal 2011 since he mentions an assumption of $30MM sales for Fiscal Q1 2011 (Q ending in November 2010), but he also mentions 12 month earnings, so it’s not quite clear which 12 months he was talkng about. As a result, Money McBags will go through this as if Richard were talking about fiscal 2011 and not calendar 2010. If so, to hit $30MM in revenue in fiscal Q1, they would need sales to just increase by 20%, which seems infinitely reasonable and would earn them ~$.03 (at 51% COGS and 36% op costs) which would annualize to ~.12 eps, which is exactly where we started. Of course if they keep growing that top line and keep margins at least flat, that $.12 could turn in to $.15-$.16 for fiscal 2011. The big question is, is the 36% SG&A reasonable or is that way too low? As companies grow, they should be able to get leverage out of their infrastructure since they don’t need to buy new computers porportional to sales and they don’t need to add another administrative assistant just because revenue was up (though sometimes two admin assistants are preferable). Since 2005, as a % of sales, SG&A has been running at 51%, 46%, 37%, 38%, and 39%. So is it reasonable to think 36% margins are achievable? Maybe. Though if they are launching new stores and promoting new products, margins will have trouble dropping as we saw in this last Q where there was a $700k “one-time” charge for promotional spend which led to a 43% all inclusive operating cost margin. Now Richard argues that the changing sales channels should help drop margins because JOEZ’ own stores somehow have a lower cost structure than pushing their product through department stores, but Money McBags does not know the difference in margin between the channels nor how many stores they plan to open (it may be public, but fuck if Money McBags is going to dig for it, so if you know the answer, kindly post it in the comments section). The point is, there has been no proof that JOEZ can hit 36% oparting cost margins and if that number stays in the 38% range, they will struggle to earn $.13 for fiscal 2011.
To wrap this all up, even taking aggressive margin assumptions, JOEZ would need to grow 66% in the remaining 9 months of this calendar year to earn $.13. That said, if they can get margins down to the 36% level as Richard suggests, with moderate growth $.15 looks possible for fiscal 2011. So best case scenario, JOEZ is now trading at about 20x that number which isn’t a horrible multiple for the growth rate, but to get there, you have to bet that management can lower the cost structure (something they haven’t done in 3 years despite top line growth) and that fashion trends continue. Money McBags prefers to stay on the sideline here (though he would prefer it more if Alice Eve joined him on the sideline) until a management team that thought a 7 year earnout causing a 40%+ income tax rate and a management team that has created more negative leverage than Emmanuel Lewis trapped under an avalanche, can start showing they can manage a business and not just grow revenue.