Wednesday, February 27, 2008

Google, Apple, RIMM, other stuff

Google stock has been very weak this year for a few reasons -- 1. because Cramer and others got every growth and mo investor in the world to buy the stock so it became ridiculously over owned and if I had any sell discipline whatsoever I would have sold when the stock started falling from the $740 to the $600 level. 2. Because their revenues are tied to the economy somewhat -- even though the growth is still very fast, their ability to exceed expectations is hurt during a slowdown. 3. the company's decision to improve click quality -- meaning remove all the accidental or false clicks but charge a higher price for the real click throughs -- has led to confusion about their growth.

They are purposefully reducing click volumes but raising prices -- the effect is much lower growth or even declines in paid clicks but much better pricing metrics. this makes it tough to predict how the quarter is going -- that plus the environment of lots of investors selling because the stock is no longer going up.... gets you down $50 or so in a couple of days.

While I obviously regret not trimming my position when the stock was up huge in the fall, the company continues to impress with their growth and profitability.

Apple -- lot of moving parts with that story. Have briefly looked into it and thought about it. No doubt its cheaper than RIMM but its more complicated than RIMM as well. Apple's main revenues come from selling PC's -- a business that is also growing rapidly given the market share gains vs. Windows. At some point those share gains will slow and their growth/pricing power in that business will be impacted by the shift to mobile devices. May not be for a year or two or more but it is inevitable. Apple also has a big iPod business that requires them to constantly come up with reasons for their customers to upgrade or replace their existing iPod. That will get harder and harder I suspect.

The iPhone is supposed to take care of that problem but Jobs is too stubborn trying to maintain some exclusivity to only a handful of carriers in the world -- that severely limits their distribution. But the exclusivity also drives high margin carrier payments for subscribers using the iPhone. Unlocked iPhones obviously get in the way of that high margin revenue stream. More importantly, the iTouch is an iPhone without the phone -- Internet access using wifi is available using the iTouch and its $100 cheaper -- not sure how the costs differ -- its quite possible that the costs are even lower so the margins on an iTouch could be better than an iPhone. As more users think about getting an iTouch instead of an iPhone not only does Apple lose the carrier payments but they also lose that extra $100 in the hardware pricing.

RIMM has no legacy issues in that the share of revenues from a smartphone is much higher -- not sure its 100% but its a lot closer to that than Apple's percentage. They are also a smaller company --both of which makes faster growth easier. Valuation reflects that. would be interesting on another pull back towards $100 but I need to get more comfortable with the story to know exactly what my price limit to buy is.

Some trades I have contemplated -- buying some more BLUD, selling a small piece of my ILMN, buying some more TSRA (options?), etc.

Rather smart sounding fella writing on the MCF yahoo board has called into question the valuation assumptions around Contango -- he argues its fairly valued rather than very cheap. His case is pretty decent. makes me a little nervous after having just bought more -- where was he a few weeks ago when I decided to add! That said, MCF is at bottom a bet on management and natural gas prices -- both of which will hopefully help improve the odds even if the current asset value isn't as strong as I thought. Also, if CLB gets back to $107 again, might just switch some MCF into it (presuming MCF hasn't also fallen a lot).

incremental TSRA thoughts

Last night I wondered about whether QCOM was behind this attack -- turns out it was Amkor. Pretty sharp lawyers relative to TSRA's but I would keep in mind we are early in the fight.

I guess I missed it or just forgot about it but in case anyone didn't know, we changed Chief Legal Officers sometime post the Micron win -- the old guy believed in one major case at a time, while this guy likes to fight multiple front wars (ITC case, Amkor, upcoming DRAM related ITC). Perhaps that strategy was a little too aggressive and perhaps this guy's tactical skills aren't up to the previous CLO's either.

ITC judge is new -- my understanding (can't vouch for accuracy) is that this is his 2nd case at the ITC. He might not know where the proverbial mensroom is yet in terms of how the ITC generally operates.

Amkor has successfully delayed paying for several years now (anyone familiar with the sometimes tenuous financial situation of Amkor knows this has been quite helpful to them at times) -- yes they actually use to pay but then stopped. That is why their case is being handled by an arbitration panel and NOT the ITC -- because they ARE A LICENSEE who has stopped paying, which triggers the arbitration provisions of the license contract. Unless something has changed, the 3 judges are made up of one picked by each side and the third being one they both agreed on.

The company has publicly stated there is no new arguments being made by this set of defendants vs. what previous defendants have used in previous trials. Could it be that Amkor tried a hail mary delay tactic that turned out to be successful? (just because ITC gets delayed doesn't necessarily mean Amkor arbitration will be delayed too but the tactic has certainly changed settlement negotiations and put TSRA back on its heels)

bottom line -- no idea how the appeal goes and no idea how the Amkor arbitration goes but I remain confident that in the end --- even if it takes 2-3 years... TSRA will prevail (IMHO). For trading prior to the appeal or the Amkor arbitration, I would think about options -- the volatilities are very high so be careful but they should serve as a way to limit the amount of capital at risk in this kind of situation. perhaps a strategy that includes selling some volatility as an offset may reduce the risk of the stock rising but the volatility collapsing causing the options to not gain much in value.

TSRA, UEPS, etc.

Well that was a fun day -- NOT! TSRA -- one of my largest individual holdings down 34% is not what I expected this week during the ITC trial -- now we know why the defendants didn't settle -- I suspect that QCOM had something to do with this timing and the ability to get the ITC to rule in their favor against TSRA.

The next step is an appeal that will be decided in 35 days -- if they lose that, then it might take 2-3 years for this to be resolved. We still have the Amkor arbitration that could add significant amounts of revenue and help the stock recover. The appeal could certainly turn this situation around but I wouldn't want to bet on it -- well anymore than I already have.

As far as the PTO goes -- think of this as similar to the prosecution having its say but the defense not getting to tell its side of the story -- yet. TSRA has not responded to their rejection comments yet so its hard to say how many will stay rejected during the full process.

keep in mind that 70 different companies have sicked their lawyers on TSRA and all have eventually paid. hard to believe that even QCOM's vaunted lawyers (who have lost to Broadcom by the way) are going to win in the end. this is just a delaying tactic.

I saw a few valuation exercises that suggest low to mid 20's based on the earnings from their existing business -- it is true that if their patents are invalidated that their current customers will seek to stop paying them even though their contracts are all for over 1000 patents most of which are not tied to those the PTO office is reviewing. Still valuation wise we now have some pretty good support.

for me -- no change in shares -- still have never sold a share since I bought in 2004 -- not necessarily the best idea given the volatility but it is what it is.

UEPS -- Morgan Stanely assumes 15 cents of earnings power from the new Iraq contract once it is fully up to speed. For about 4 mill potential new cards to only get a 15 cent jump in earnings doesn't seem right. I wonder just how profitable is the current south african contract, which is supplying the company with roughly 1.00 to 1.30 or so in EPS on a similar 4 million in cards. Now south africa has been up and running the longest but still -- I wonder if the risk isn't much bigger than previously thought -- perhaps they cut pricing on the contract to half what UEPS is getting now. That would still be a decent business for UEPS but the EPS potential would be a lot less. Now they would likely also get more subscribers but at less profit per sub that's not a good trade.

Tuesday, February 26, 2008


I have been out this week so far so I don't know what analysts are saying about TSRA -- no news as of yet so again its hard to know why the stock is plummeting. The ITC trial has started and perhaps it doesn't appear to be going well. There are rumors on yahoo about a patent being rejected and about omnivision coming out with a competing technology for wafer level camera lens, etc. but I don't think that would be enough to get the stock down so much.

the company has been adamant that there were no new arguments being made by the defendants and that therefore they expected a similar result. are they too cocky? are they being too obstinate about settling -- could it be that the defendants have made reasonable offers but TSRA is out for more?

Don't know yet.

On the positive side is UEPS which just won a contract to start up UEPS service in Iraq -- cool stuff.

Friday, February 22, 2008

bye bye MDT hello BLUD

Well I finally threw in the towel on MDT -- its only taken 7 years. My first purchase was at $40 so in 7 years I made 20% -- Yeah! how exciting. huge opportunity cost from what I could have made owning something else.

BLUD makes money by selling chemicals used in determining blood types prior to transfusions and other times when blood needs to be analyzed. This is a great business -- generally due to the quality of the management team more so than anything else. They have always been focused on blood banks for over 25 years. The growth story revolves around automating processes that are currently labor intensive. They are selling automated instruments which generally make up about 5% of revenues (their accounting forces them to recognize revenues over a 5 year period for any instrument but they take the costs immediately -- this depresses margins but has no impact on cash flow).

They have 40% operating margins, lots of free cash flow and a strong return on assets (cap ex requirements are low). Margins have been going up and while they will be under pressure in the near future due to strong instrument sales, I would expect margins to expand once growth in new instruments slows. Recently they missed numbers sort of due to some one time factors and they also are being investigated by the FTC but my understanding is it shouldn't be a big deal. The stock has pulled back about 30% or so and is now selling at about 24X next 12 month earnings. Not bad given its annuity like model (lots of consumables for each instrument sale or a razor and blade business) and long term growth prospects. I still have some cash in case I want to buy some more TECH.

I have thought about NTAP but there is also AAPL and RIMM now based on their pullbacks. I decided on BLUD because this allowed me to keep the money in the health care area and in a business that is not tied as much to the economic cycle.

AAPL and RIMM are plays on the secular growth in hand held computers -- we call them handsets or PDAs or whatever but they are really hand held computers that come with Internet access. The interesting part for Apple is many are bummed about the loss of iPhone carrier payments because of all the unlocking going on -- true but they also have iTouch iPods that are essentially the same product without the traditional phone service for a $100 cheaper. They will add email and it already has wi-fi so you can surf the web just like on the iphone where you have a wifi connection. The hard part is understanding the economics of the iTouch/iPhone and wondering how resilient to competition is Apple's lead -- which is based on a computer OS and a full browser more than the great screen (which helps but its the interface and the beautiful web access that makes a huge difference).

At what point have the stocks dropped enough to where expectations are well below reality. could be soon. need to do some reading on this. growth in this area will be much greater than NTAP's storage. 10% FCF yield for NTAP but Apple is now around 6% on my estimate for forward 4 quarters FCF. That doesn't subtract the huge cash position either. haven't done the numbers for RIMM either -- will have to check that one out too.

Key risk for both is margins -- blackberry gets high margin revenues from running the email network that every blackberry user subscribes too -- will those last? how much iPhone revenue will Apple actually receive from carriers and what are the offsets for Internet only products like the iTouch -- can they make money from other sources for their wi fi enable products to make up for the loss of carrier payments on an unlocked phone?

Thursday, February 21, 2008

tonight's thoughts

I apologize for the lack of posts -- I am in a very busy time at work and that means less time to spend with the family, which means less time to post.

Soc Gen fraud issues contributed to the lows in January so it will take more bad news to get us to those levels again. Not unlikely -- trading patterns sure seem more like 2001 than anything else. Just substitute financials and consumer discretionary for tech and telecom but the charts and returns look the same. I am seeing similar ridiculous numbers like stocks up 50+% in the last few weeks yet still down 50-70% over the last 6-8 months. Remember the old adage -- a 50% decline takes a 100% increase to get back to even.

So 2001 saw aggressive fed cuts and big rallies but overall a lot of declines for tech & telecom, which could mean financials and consumer this time. When you see these failed auctions and other issues hitting fixed income, its hard to argue the bottom has been made in financials. So far the damage has mostly been contained to those areas -- some pullbacks elsewhere especially this year (can you say ouch about Google!) but not too bad overall. Will financial issues spill over into other areas -- i.e. will we see a recession and big slowdown? I am still inclined to believe no recession but it won't feel that way. More likely lethargic will be the adjective used.

The big question about the financials and the economy is one reason why I haven't been in a hurry to buy more Moody's. So far I could have at least made a trade out of it.

I am still looking for additional ideas. I am questioning my current holdings -- a good practice to always do. The key is to question appropriately -- don't lose conviction unnecessarily but rather ask questions about whether the position/story still makes sense given any new info. Google makes one wonder -- great position and great growth but is it already in the stock even at these levels (i.e. post a $200 decline!)? I am betting no but I wonder if I shouldn't reduce my position size on a decent rally.

New ideas I am thinking about -- Network Appliance is a storage technology company that benefits from the switch to networked storage from direct attached. Networked is more efficient. Storage has been growing pretty quick -- email and other apps are great at getting users to require more storage. But most technology companies are constantly faced with new competitors and with falling prices, which makes revenue growth hard. NTAP has been growing over 30% but now its in the teens. They have demonstrated strong margins and profitability but recently margins have dropped several points. So the levels are good but the change is in the wrong direction for both margins and growth. Stock is near a 10% free cash flow yield -- that is pretty darn cheap. I would rather not play one time pops -- I am looking for something that makes sense owning for years to come. Not there yet on NTAP but still doing some thinking.

BLUD -- pulled back on some issues but its still an expensive stock but the growth is there and so is the profitability. They sell blood diagnostics equipment and the consumable supplies known as reagents to go with their equipment. This is mostly a product cycle story -- they produce some innovations in a new product which causes blood banks especially hospitals to buy new more expensive versions of the equipment and then buy more supplies to process tests. The innovation generally revolves around automation -- faster, more samples tested at a time and more tests done per sample are the main improvements. There is also new markets such as the echo, which is designed for lower volume customers who are generally performing the tests manually -- i.e. by hand, which is time consuming and costly. They could ship thousands upon thousands of these units over time which could easily double the size of the company.

still looking into this one. NTAP is cheaper but BLUD could have better growth. I think NTAP has more secular parts to the story in terms of storage but innovative product cycles can be powerful. So far BLUD faces less competition.

I don't have as much exposure to infrastructure spending such as what is driving Flowserve or Terex or others and I wonder if that is something I should add.

that's it for tonight. we shall see.

Friday, February 15, 2008

Tonight's thoughts

Latest muni auction rate securities crisis -- not a big deal. These firms will find liquidity through other means. Issue is this is another market that has done something no one thought was possible -- a failed auction is not something anyone thought would happen and certainly not 80% of the time! What other markets are about to fail? Its just one of those signs that says how could we possibly have reached the lows already?

Only hope on the market lows is that financials might go down but the rest of the market or at least significant parts are done going down. don't know for sure myself. volume on this rise would certainly make you think this is just a bear market rally.

Most of my stocks fit in well with the secular value theme but I can identify 3 different types:

There are the special situations that are more single event driven at least in the near term:

TSRA -- waiting on the litigation efforts that could add significant value -- perhaps a 50% move in the stock from the $40 level. (option volatilities would argue for a much more muted move into the $40's). Long term story is about the growth in their packaging technologies and their ability to enable electronic miniaturization.

UEPS -- waiting on the south african welfare contract decision. Stock could pop into the mid $30's depending on what happens to pricing and whether they gain any new provinces. Long term its about growing the number of cards and the revenues per card.

MCF -- its all about well drilling results -- either they find gas and make the proven reserves calculation bigger or they don't. Its also a play on nat gas prices rising.

GNVC -- either phase III on TNFerade will prove beyond a shadow of a doubt that the drug works or it won't. If its close the market potential won't be that great. Could reach between $5 and $10 if it works (next data comes out end of 2008).

Next comes the secular growers with decent momentum -- not necessarily the step function of the event driven stocks but they have great opportunities for big growth ahead:

FLIR -- infrared everywhere.

ILMN -- everyone's genome should be sequenced.

CME -- volatility equals growth in futures trading.

CLB -- need to produce more oil drives demand for reservoir services.

Next comes the slower but more consistent growers:

LH -- 7% free cash flow growth is pretty good. play on growth in testing especially growth in genetic related testing.

FDS -- low to mid teens growth from the proliferation of their new products. less penetrated overseas. extremely consistent growth track record -- strong free cash flow.

MCO -- high single digit growth in debt/ratings revenues across cycles. expect slow U shaped upturn but could see new peak in revenues by 2010. cheap valuation due to concerns about future growth and the sustainability of the franchise.

TECH -- consistent high single digit low double digit revenue growth due to consistent growth in bitoech or genetic/protein related research.

Then there are the money management stocks -- high betas that benefit from both new cash flows to manage and growth in assets from market appreciation.

AB and DFR are the main plays now -- ACAS is one I have owned in the past. TROW and BEN are other choices I have owned.

Income stocks -- EPD, MMP, ERF, -- all energy related. EPD and MMP have some growth in distribution potential.

That leaves a few out so far -- MSFT, MDT -- both are positions I am looking to reduce. GOOG -- they are getting bigger -- which makes the big outperformance harder. could easily put this one in with FLIR and CME. There is also the two staples -- Pepsi and Wrigley.

That's one perspective on how I think of these holdings.

Wednesday, February 13, 2008

Buffett to the rescue? NOT!

So Buffett offers to reinsure the muni portfolios of the bond insurers -- basically he would cover all the losses above a certain amount in exchange for a premium. Typical Buffett -- offers to make a can't lose investment that takes advantage of others problems.

The muni insurance is NOT where the problem is -- they aren't suffering any losses in that business so offering to reinsure it just takes the profits away from the bond insurers. The only reason why one of them would actually take the deal is because they were truly desperate. When a business gets in trouble they often have a choice to make -- sell the crown jewels or dump the problem areas that no one wants. If you sell the problem areas, you have to do it quickly before everyone knows they are a problem. Otherwise you have to be willing to dump them for almost nothing. What would you offer the bond insurers for their CDO guarantee business?

Sure seems to me that most sell the crown jewels instead -- they dump the best business and hope the cash they get can allow them to fix the bad business before the whole thing goes under. Not a good strategy for the shareholders but then again they got screwed the moment the bad business became a problem.

I would still look for opportunities outside of financials mostly -- Moody's has moved up again and most of the others have too many questions. I think Merrill has been potentially interesting simply because they have new management, have 20% of bloomberg and 49% of blackrock. Add up the asset values and they could account for as much as half of Merrill's market cap (well at least when I did this analysis a couple of weeks ago -- haven't kept up with Merrill's price).

I should be trying to find some non-financial stocks that have been crushed but I haven't had the chance yet.

Friday, February 8, 2008


All 4 of the above reported EPS yesterday and all 4 appear to have beaten expectations. I am pretty sure about UEPS but not completely.

Anyway a quick synopsis of their reports as I understand them so far (I have lots more reading to do)

LH -- lab testing is not a glamorous business but it is a nice steady growing one. They have compounded free cash flow at about 7% since I bought the stock in 2002 (or 2003 can't remember right now). Yesterday's report was better than many expected driving a sharp jump in the stock. many think that testng is more economically sensitive so they expect the slowdown to cause a drop in tests or a jump in bad debt expense. Lab corp raised guidance so that probably helped the stock. nice and steady upward although we have been stuck around $80 -- some point this year the stock will push through and head towards $90.

FLIR -- solid again -- they beat revenues and made EPS and raised guidance for both. announced another auto OEM for putting an infrared camera in a car -- won't start up till 2010. auto cycles are long but once in it takes a lot to get out too. stock may tread water for awhile since the PE is so high.

UEPS -- good upside to revenues and EPS but its all about the welfare contract with the south african government -- have to wait for that to be resolved before the stock will really move.

Moody's -- everything was at least in line if not better than many were expecting so the short sellers covered -- we'll see how well the stock holds up in the next couple of days once the rush of covering is done. When Cramer mentioning that a lot of smart investors were getting it wrong I think its the action of TSRA, ILMN and others that he meant -- they gap up 10% on the report and then sell off over the next couple of days once the short sellers are done (so investors were short and shouldn't have been then they ALL covered at once drove the stock up 10% and then went away. The stock falls because the buying pressure disappears.

was yesterday's rally enough after the more than 5% decline of the last few days? no telling but this market sure likes to go to extremes.

Thursday, February 7, 2008

CME, more on TSRA, ILMN, market

First some thoughts on TSRA again -- turns out I have overestimated the revenues but underestimated the margins -- still a net negative adjustment to my 2010 EPS estimates. Ok, so I knew that Cowen was using $3 in post litigation EPS but couldn't figure out how they got there other than assuming a lot of revenues. Turns out they were assuming flat op ex and the incremental revenues which drives much higher margins.

After reading a few different notes I would say the incremental revenues on the first set of actions is estimated to be about $100 mill in annualized revenues -- basically about $280-$290 mill run rate for total annuity revenues for 2008. Add in another $20 mill with the next DRAM related litigation and the $37 mill or so in services revenues and you get the total of about $337-$347. Add in some annual unit growth and the optics biz and by 2010 they should be earning.....about $500 million in revenues. I expect that their EPS would be somewhere between $3.60 and $4 plus they will likely have as much as $10 a share in cash by then. Figure the stock is in the low $80's -- pretty darn good from here but not quite as good as I said before.

CME -- have to hand it to the Citigroup analyst. When the news of a competing futures exchange came out he, like all the others, said no big deal; but unlike all the others, he went out and did some research. He talked to actual traders and other big wigs in the futures markets and realized this was a bigger deal than people thought. First of the year he gave his conclusions -- stock was still in the high 600's. One of his points was that the new exchange's goal wasn't just to lower prices for trading but to break the CME's vertical integration -- meaning split their exchange from their clearing operation. If you sold on his comments you missed a 30% decline in the stock. Who says street research isn't any good!

This is the crown jewel for CME -- this is the reason their operating margins are 60% instead of 20% or 25%. IF they have to get rid of their clearing operation then the stock will collapse even more than it has so far.

I have read their response and I have read some other people's comments and come to the conclusion that its a threat and it should be taken seriously and monitored but it will take either an act of congress or an antitrust action to carry this out. That's a little bigger deal than floating some ideas in a routine letter to the Treasury. We shall see. The funniest line is the part about how the new competing exchange endorsed the DOJ's letter -- no kidding -- more likely the other way around. The DOJ endorsed the competing exchanges ideas.

have to cover the rest later.

Monday, February 4, 2008

Illumina, moody's, market, other stuff

Illumina reported results tonight after the close -- haven't heard the call or read any analyst notes about it yet but the stock was up 7% after hours -- generally a good sign. The numbers are kind of confusing given all the proforma stuff but it looks like higher than expected revenues and earnings guidance -- pretty cool. They are still in the early stages of multiple product cycles -- usually companies in that situation beat estimates repeatedly until the cycles have reached a peak. With the stock at nearly $70 and 80% of my shares costing under $32 -- my biggest issue is not giving back my gains. For now it looks pretty solid. I might try to sell some calls on the name in the next few weeks if it seems like the rally is over.

Illumina is expensive -- no doubt about it but they have organic revenue growth faster than just about any health care company. Its a profitable company with lots of growth potential. a good combo.

Forgot to mention one intersestng tid bit the other day -- the Merrill analyst said he now believed estimates had dropped enough for 2008 based on the results and guidance from S&P and Fitch. In fact, his estimates were now too low. That's a sign the stock has bottomed for the moment -- yet on the day his report came out the stock was under $34 -- a low level relative to recent trading. Sure enough by the end of the day the stock was back over $35. I expect financial stocks to head back down in another few weeks or so. It just seems hard to believe that all the bad news is out by now.

TSRA -- more on them -- did some thinking about the story over the weekend and here is what I came up with:

they win the lawsuits or settle the cases -- either way their annuity revenues reach a $400 mill run rate. In 2010, I would expect them to have revenues near $600 mill which would equate to $200 mill in net income or about $4 in EPS. So add in the almost $10 per share in cash they should have by then and the stock price is around $90-100. not a bad return vs. the $41 its selling for now.

Friday, February 1, 2008

GOOG, TSRA and a word from the Dr

First up -- thanks to Dr John for his comments on my last note. Very good stuff indeed. If you have any interest in Techne or in Contango then please check out his comments. As he says I screwed up not buying more TECH on the pull back because its such a great business but expensive so buying a dip helps.

Google -- haven't read the transcript of the call yet but my initial thoughts would be that we have completed the chart pattern -- went from $500 to $700+ and now we are back to around $500. The business is still growing faster than virtually any other company with a market cap of $175 billion. or a double digit billion dollar revenue base. Internet advertising has some secular growth tail winds but those don't matter when the economy is slowing down. As a long term holder, I expect the stock will work its way back towards $600 in a rally. If the market drops to the lows or worse, then GOOG will continue to struggle.

TSRA was up after hours, which was nice although I'm not sure why the reaction other than the quarter was reassuring. They remain confident in the litigation and its almost here. You can see the stock has been doing better as we get closer to the trial. I have seen estimates of what is at stake -- they could see a dramatic increase in their royalty annuity stream -- enough to almost double the size of the company. I hope those numbers are right because that could drive a stock price of near $60.

The hope obviously is for settlements -- why go through the expense and length of a trial when a settlement finishes everything. Generally in the past, litigants have settled right before the trial started -- so in a few weeks.