Thursday, 28 July 2011

nothing interesting to say, just some personal notes

  1. market very choppy, with a lot of negative expectation now built into the next couple of trading days
  2. any 'value' stock, or event stock that has even slightly come in under the whisper, ie. it might have beat analyst estimate but is below where hot money was wet dreaming for has been decimated, viz $aks, $stx, $mu, and I hope $gt tomorrow.
  3. it has only taken a week for the market to totally discount the EFSF bailout package, although the Greek PM is calling it the first step the an e-bond, Schauble is clearly saying that Greece is a special case. IMHO, as much as it pains me to talk about the market as some independent entity, "they" are going to gun it until there is cold hard cash, signed, sealed, delivered. Its not because of some evil conspiracy, but because holders of debt will slowly get more nervous the more they feel they are relying on political intent rather than legislation.
  4. Earnings commentary out of China has been mixed, half of companies have been very bullish, and half have been neutral, not that I expect corporates to see a hard landing before prices react!!
  5. Vol isn't elevated enough
  6. GBP is a sale, and gilts deserve to be smashed, the market is giving far too much credence to Conservative intentions.

Thursday, 21 July 2011

seagate q4 call notes

I have about three clips of this on, so my read is going to be biased whether I want it to be or not. clip one from when its deal was announced, clip 2 was a slow add on pull backs, and clip 3 was added yesterday as a punt on earnings. stock is down 11% amc, I was wrong and got my fingers burnt, mentally its very tempting to try to go through the call and find reasons that the market was wrong and to look for excuses, going to try to NOT be biased.

seeking alpha have the transcipt of the call, which I find very handy; seekingAlphaLink

$2.9bn revenue for quarter
$0.28 eps non-gaap
tam 166mm
32% market share
- believe june TAM is not inventory build but true demand
margin improved, not as much as they would have historically in this environment
*THAT* is the disappointment. they say because of four factors;
1) agreed pricing with OEM before demand surge
2) 'didn't achieve out time to maturity targets'
3) commodity price rises
4) able to service demand, but in lower margin segments

sold $600mm of senior unsec notes
sep tam think 165-170mm, $2.9bn revenue, see 200bp impact of commodity prices on margins, looking to offset them (but sound skeptical), also say that they'll look to pass them on.
r&d and sga @ $350mm
0.29-0.33 forecast eps

cerium oxide

q&a shows they aren't executing transitions well, and are wasting resources and tech -> not what I or the market expected.

Yes its disappointing, especially as its really execution failure when the market is presenting good opportunities, and if you're and investor like me, that bought the stock because of improving sector dynamics you're probably even more frustrated. It certainly marks down management in my books. What will enrage me is if management still take fat comp.

I messed up adding to the position yesterday. Am glad that I have sensible risk limits and will review whether to add based on price action today.

Wednesday, 13 July 2011

not something to look at before you try to go to bed tonight

government accounts

the total liabilities are £2.4trn. The 'assets' really aren't assets in the sense that they can't be sold without having to then purchase the use of them annually. 200% real debt to GDP is a harrowing thought.

Tuesday, 12 July 2011


Fiscal Union is muted as the silver bullet.

If only EU citizens will unite behind the idea of a Finance Ministry of Europe, all will be ok.

WHY? essentially because then NAG (Netherlands, Austria and Germany) will be able to permanently subsidize Greece et al, and then there will be no defaults.

Greece has two problems, (1) an unsustainable fiscal position and (2) an uncompetitive and contracting economy.

FU would solve (1), but shows why FU is impossible unless the FME has total control over tax and spending. German taxpayers can't and shouldn't vote just to hand over money to Greece, when they pay more tax, and work longer and don't have rampant tax evasion. German taxpayers should not be funding swimming pool tax dodging Greeks.

Greece has to solve its own fiscal hole, and to do that it must actually collect the taxes it tries to levy and to cut its spending. Public sector workers will moan that its not their fault, they should count themselves lucky that they got that unsustainable spending in the first place, rather than feel entitled to more.

Now (2) is harder. Many will argue that a fiscal contraction can only make matters worse, BUT, are having interest rates of 20% better for the economy?? NO WAY.

What has to be recognized is that the standard of living in Athens was unsustainable. It has to fall if Greece is to become competitive.

There are some that would now try to argue that if the EUR was much lower, then Greece would be competitive, however if that was the case, their purchasing power would be significantly lower, and so would their standard of living, the two are different sides of the same coin. Greece's economy is not sluggish because of Germany productivity, believing Germany should pay Greece for some of the benefit of having a slightly weaker euro is absurd nonsense. Germany could demand payment as recompense for having lower purchasing power.

Greece can devalue, but then it must accept a lower standard of living, or they can demand the same standard of living and become incrementally less competitive and watch the rest of their economy sink.

micro cap notes

FSTA:LN #56.208 @ 675p Fuller, Smith & Turner

Several revenue streams, managed pubs (£138mm revenue), tenanted pubs (£27mm), Fuller's beer sales (£104mm). I quite like London Pride. the numbers look pretty solid, with some good growth, and a decent brand, sensible organic use of FCF, opening up some small accomodation, spending on refurbs. In liquidation the firm would be worth ~ 540p, so there is a good floor to the valuation, its on about a 15x multiple, which is not cheap, BUT, it is well run and is a good brand. However the really bitter thing is the shareholding structure, they have three classes of shares.

A shares, listed on the LSE, which you or I could buy, in total have 58% of the economic exposure, but only 24% of the control, because the B shares effectively 10x the number of votes compared to their economic value, making up only 10.7% of the economic exposure, but having 65% of the votes. These shares cannot be sold on the open market, and effectively the families that still own these shares have first dibs on them if they come up for sale. Then there are the C shares, which are just like the A shares except they are not listed, but can be listed with 30days notice.

That puts me right off, I don't want to own a business and not have any say over it. Even when you get down to the liquidation floor, there isn't really that much you can do, because the family will want to continue to run the business.

Redhall group RHL:LN #29.589 @ 75p

hits nearly every red flag on my last list, absolutely terrible cash conversion, and appalling contract management. a bag full of semi unrelated businesses, being poorly run, with very little board level ownership of the stock, stay well clear. The Vivergo contract saga permanently excludes this stock from my investment universe.

Dignity PLC DTY:LN #54.757 @ 812p

without making jokes about this business, because I have a black sense of humour, it is important to note that there is a stable and increasing revenue stream, it is unlikely people are going to stop dying any time soon, so a funeral business does have some structural demand. The issue with this business is that it effectively has too little working capital for the expansion that it should be making, and is running too much leverage for my linking. Sure the cash flow is steady, but effectively £350mm of debt is too high for £72mm of FCF, because they need to invest £35mm to grow, with financing costing £30mm, it doesn't leave a lot for shareholders, so you're banking on growth, a lot less fun than picking up burnt cigarette butts. a fair value of ~ 827p being aggressive doesn't leave much meat on this one.

Molins PLC MLIN:LN #20.172 @ 109p

They've made what appears to be a good change of management, APB seems like a good pair of turnaround hands, and has taken a stance against unions with which we agree. Again its a mix of businesses, at least the there is a theme though, and the valuation looks ok, a 138p valuation doesn't look too difficult, thats 25% of good upside, without having to fight the tape too much one should imagine, especially as the balance sheet appears to give you a bit of a backstop. Need to do a bit more work on this one...

Monday, 11 July 2011

some red flags

  1. if a firm regularly takes out more than half of the actual costs to get "adjusted" earnings, that is a big red flag, especially if it is amortisation of goodwill, and they appear to want to create value with aquisitions
  2. they have slightly off key job titles, especially if its an engineering firm.
  3. very low shareholdings in the firm by the ceo and cfo, ie less than one years salary.
  4. low cash conversion on sales
  5. boastful and unrepresentative patter in the annual report, boasting about growing sales, when they've bought a business, and margins have declined, while paying themselves more; outrageous. 

sky falling in??

There has been more than enough ink spilled over the NOTW scandal; only a few points really need to be said;

  1. if hacking is institutional within NOTW, then it will be present in other papers
  2. the police's role is a much bigger issue, witness Guardian reporters getting information illegally as to where Coulson is being held, etc. venal.
  3. the attacks on news corp are politically driven, as are the attempts to block the bid for bskyb, the bbc moaning about too much media power is ridiculous.
so what though, none of that is going to make me a penny, the price action in b sky b (BSY) share may well do though. They've fallen about 150p down to 700p, what is the price level where one would take a punt then?

Well looking at the pre-bid price of 560p, the 30% return in the FTSE since the bid and the stock having a pre bid adjusted beta of 0.92 that would give 714p as the floor, which its currently trading through. There the very low probability that somehow Newscorp actually get made to reduce their BSY shareholding, or it becomes permanently blocked. Additionally the FTSE isn't a great index to measure BSY against.

Bottom up, fair free operating cashflow of ~£1,300mm, inc growth of 10% a year for the next few years, at we're talking about a forward multiple of ~ 11x, that's not too ugly a price.

Thinking of picking up a clip at 680p, with another at 570p.

The trade that has made money though, has been selling Trinity Mirror shares which popped on the news that NOTW was closing. If anything, from this point forward its only going to be negative news, without even looking at valuation we slapped out a clip this morning.

Friday, 1 July 2011

Jeffrey Sachs makes the Eurocrat case;

to paraphrase, Greece doesn't have to default if it has 3% interest rate, and breathing space and can magically get its economy growing again and cut its 18% deficit into a surplus....

if you punch all of those assumptions and hope into a model you'll see that the debt load is sustainable.

(red lines are historical data from Eurostat, that we've aggregated, blue lines are the forecasts with all of the assumptions above)..

It is a *little* rich for Mr Sachs to call those expecting a default naive, especially when the scenario that avoids default has so many conditions and unrealistic political movements.

I'll say it again, Greece will not default while they are still getting more loans, they'll borrow more money, but when the time comes for budget surpluses to be run, then they'll default and use the cover of the rioters and language of 'odious debt'.