The Sax Angle

SFD, Smithfield Foods Inc scores 3 on our checklist

Posted on 09. May, 2012 by S. Owais Ahmad.

Overall Score:3

Trading Chart +1

Smithfield is showing bullish RSI divergence but note the  correlation with lean hog futures

which have fallen out of bed

Analyst Opinion: 1

Barron’s made the bull case in an April 11th article, titled Can Smithfield Foods go Hog Wild?

Insider Buying: 1

There was significant insider buying in Sept 11.  Usually stocks are higher within six months.  SFD was higher but collapsed under

sinking live hog prices.

Management Discussion and Analysis: 0

Company is subject to various federal, international and state regulation for safety and environmental reasons

Results are highly cyclical and very dependent on commodity prices for feedstock, hog prices, fuel, packaging etc

Outbreak of disease and health scares will negatively impact results

Company is vulnerable to various health risks associated with the food industry

GIPSA proposed rule will negatively impact relationships with hog producers and customers

Company has high indebtedness, covenants associated with the credit facilities

Multiple lawsuits pending (totalling $15-30mm)

FY11 Pork segment operating profit increased by $214.7mm as a result of higher fresh pork prices (which more than offset higher raw materials)

FY11 Hog segment operating profit increased by $763mm due to a 29% increase in domestic market live hog prices

Widespread Ethanol15 use is increasing prices of livestock feed.

YTD 3Q12 sales increased primarily due to the Pork segment were ASPs increased 9% due to higher market prices for fresh pork and and improved sales mix in packaged meats

Gross Margins were negatively impacted due to higher raw material costs, Live hog prices increased to $66/cwt from $55. Raising costs increased to $64/cwt from $53 as a result of higher feed prices

Outlooks looks to be stable, with operating margins in packaged meats to average 10-15 cents / lbs. Hog production margins should average between $10-15 per head

$300mm CAPEX over the next 5-7 years to move to group pens from gestation stalls

23,000 employees under CBA, 3,700 whose CBA expires in 2012, relations are good

Liquidity is adequate, $925mm revolver, $275mm receivables facility,

Company has been redeeming debt as part of its debt reduction programs

Company has $506mm (as of 1/29/12) in investments in joint ventures and equity in various companies

Company is underfunded $373 million.  Company contributes $100 million a year to pension fund

Stock Performance relative to the Market: -1

Sector Outlook: 1

Management is optimistic on the pork and hog producing segment, feel that they have a very good handle on margins

Cash Flow: 0

PEG Ratio: -1

Valuation: 1

Value Pro shows a 88% upside from the current price of $20.16

Adjusted FCF for 7 yrs from 10 yrs

Adjusted growth rate to 5%

10 yr treasury at 3%

Company interest rate is approximately 7%

Equity risk premium assumed at 5%

Beta is taken from finance.yahoo

Adjusted investment rate to account for pension payments

Catalyst: 0

Hog price stabilization, increase in demand for packaged meats, lower feedstock prices

NLY, Annaly Capital Management scores low inspire of being a Cramer have

Posted on 17. Apr, 2012 by S. Owais Ahmad.

Overall Score: 1

Trading Chart: 1

Analyst Opinion: -1

Insider Trading: 1

Large purchase Kevin Keyes on 8-8-11 of 50,000 shares at $17.13.  Numerous exercises without evidence of sales, quite bullish considering the negative tax implications of exercising stock and not selling sufficient amount to pay taxes.

Management Discussion and Analysis: 0

Company is extremely vulnerable to changes in financial market conditions and liquidity in mortgage related assets

The potential limiting / winding down of Fannie and Freddie will negatively impact securities NLY invests in

A considerable portion of assets are guaranteed by Freddie and Fannie which may be jeapordized depending on the Government’s role

Prepayment rates might rise depending on various Government loan programs negatively impacting income

European crisis will have a negative impact on liquidity for assets NLY is invested in as well as financing provided by various affected banks

NLY relies on short term borrowings to invest in longer term assets

Current debt:equity leverage is 5.4:1 (target is between 8 and 12:1)

Counterparty risk in repurchase transactions

NLY investments are subject to credit risk. At least 75% of securities must be high quality MBS and short term investments. The remaining 25% have to BBB or higher. The portfolio is structured to maintain at least an overall rating of “A”

NLY is subject to various REIT and REIT related tax legislation

Authorized capital stock doubled from 1,000,000,000 to 2,000,000,000

Company is exempt from being regulated as an investment company, but the SEC is considering making changes to prevent this

Net Income dropped to $344.5mm as a result of a $1.8bn unrealize loss on interest rate swaps.

Economic Net Interest income rose $697 mm as interest earning assets rose $29.7bn with interest bearing liabilities rising $24.2bn

Average prepayment rates were 17%, 27% and 19% in 2011, 2010 and 2009

Stock Performance Relative to Market: -1

Sector Outlook: 0

Cash Flow: 0

Peg Ratio: 1

Valuation: 0

Value Pro Valuation will not work with a REIT

Catalyst:

Interest Rate Stability, Economic and Political Stability, Recovery in mortgage market

Revision 5-19 Score is negative now.CALL, magicJack Vocal Tec Ltd Snapshot scores high at 7 of 10

Posted on 17. Apr, 2012 by S. Owais Ahmad.

Overall Score: 7

Trading Chart: 0

The chart is neutral to me at the moment.

magicJack Vocal Tech has been magic to shareholders recently

 
Analyst Opinion: 1

Insider Trading: 1

Recent insider buy at by Dir Ventor of 22,000 at $23.07 on 4/13/12 is a strong endorsement

Management Discussion and Analysis: 1

Potential E911 regulation fees for nomadic VOIP providers

Network Neutrality is key in the Company being able to provide it’s services to customers

Change in contributions to USF will negatively impact net income

Continued product and service innovation will be require to grow revenue

Company’s product are subject to intellectual property infringement

Majority of sales are through independent retailers

As a CLEC the Company is subject to changing regulation

Company purchases switching elements that are key to its operations from it’s competitors

Broadband telephone service is growing and as such is not subject to regulation, but this might change in the future

Privacy and online security risks are a concern

Israeli Company, therefore certain US laws and judgements may not be enforceable

Potential lawsuit against 3 telecoms for $25.9mm in access services rendered being debated by federal courts, clarified by FCC rulings

Revenues in 2011 were lower as a result of lower unit sales, lower access and termination charge revenue (related to FCC ruling), partially offset by higher renewal revenues, related products and prepaid minutes

Direct sales were 43%, 27% and 35% in 2011, 2010 and 2009

Company is guiding to 20-30% revenue growth, $1.25-$1.50 2012 EPS an $2.00-$2.25 2013 EPS

Share buyback to resume, increased by $20mm

Stock Performance relative to Market: 1

Sector Outlook: 1

Good revenue outlook, increased clarity on billing for accessed services, new product introductions and product maturity should provide revenue stability and growth

Cash Flow: 1

Cash flow is higher than net income, primarily because of a recent FCC ruling and large amounts of deferred revenue

PEG Ratio: 1

Valuation: -1

Value Pro shows a 24% downside from the current price of $23.85

Adjusted FCF for 4 yrs from 10 yrs

Adjusted growth rate to 25%

10 yr treasury at 3%

Adjusted NOP%, tax rate, depreciation and investment rate

Equity risk premium assumed at 5%

Beta is taken from finance.yahoo

Catalyst: 1

Increased consumer adoption rates, increased product offerings, increased stability with regulation and rate determination

PMC, PharMerica Corporation will be proven right turning down $15 from Omnicare

Posted on 13. Apr, 2012 by S. Owais Ahmad.

Overall Score: 3

Chart: 1

See chart

Analyst Opinion: -1

Insider Trading: 1

Management Discussion and Analysis: 0

Omnicare withdrew from their hostile takeover offer at $15 share after FTC moved to block the takeover

Government and Regulation risk is high

Shift from Branded to Generic drugs is resulting in accelerating margin compression

Pharmacies are subject to federal and state laws regulating financial relationships with healthcare providers

Pharmacies are licensed and are regulated under the DEA and FDA

These laws and regulations may impact business practices (anti kickback,Stark laws)

Recent Healthcare legislation may impact reimbursement rates for drugs sold

Company is subject to HIPAA

Company might be subject to shareholder lawsuits relating to failed takeover by Omnicare

Reduction in manufacturer’s rebate will have a negative impact on margins

Continuing efforts to contain healthcare costs are likely to impact margins negatively

Kindred provides all of the Company’s Information services, potential for cost increases

Growth in 2011 sales was primarily due to acquisitions. Volume and pricing improved and was partially offset by increased generic sales and pricing concessions

Gross margins improved as a result of improved rebates under a new vendor agreement

Company guided to lower revenue at $1.9-1.95bn, with EBITDA at $93-102mm

Stock Performance Relative to Market: -1

Sector Outlook: 0

Healthcare sector is up 10%YTD, Overall stable outlook, it would seem that the regulation risk is low-minimal for now.

Free Cash Flow: 1

Cash flow is growing, and adjusted for one time payments aggregating $99.7mm, CFO in 2011 would have been $126.5mm

PEG Ratio: 1

Valuation: 1

Adjusted FCF for 7 yrs from 10 yrs

Adjusted growth rate to 1%

10 yr treasury at 3%

Investment rate is adjusted higher to closer match depreciation rate

Equity risk premium assumed at 5%

Beta is taken from finance.yahoo

Catalyst: 0

Reversal on healthcare cost controls, increased manufacturer’s rebates

VRX, Valeant Pharmaceuticals remains a mystery. What does the CFO see?

Posted on 13. Apr, 2012 by S. Owais Ahmad.

Overall Score:

Trading Chart: 0

Directionless for now

Analyst Opinion: 1

Insider Trading:1

Insiders definitely see some potential here leading off with the CFO Schiller’s apprarent open market purchase of 27,800 at $53.64 between 3-1 and 3-12

Management Discussion and Analysis: 1

Government regulation risk is high

Significant product liability risk

2012 guidance for revenue in the $3.1-$3.4bn range

Company merged with Biovail in Sep 2010

Company claims 9% organic growth in 2011. Results are murky due to the multiple acquisitions

US Neuro Volume was down 12%, but was partially offset by price increase of 8%

Other segments showed strong growth both in volume and price

4,100 SKUs, Wellbutrin 9% of sales, Zovirax 8%. Wellbutrin to continue to decline due to generic erosion

Mckesson (23%), Cardinal Health (21%), and AmerisourceBergen Corporation (10%) are top 3 customers

Continued R&D is needed to help offset declining sales once patent’s expire

Company is extremely acquisitive and has been a major source of growth

12/21/2011: Acquired iNova for $657mm, fair value of $44.5mm in contingent payments

12/16/2011: Acquired Dermik for $420.5mm

12/12/2011: Acquired OrthoDermatologics division of Janssen Pharmaceuticals for $346.1mm

10/17/2011: Acquired 74% of Afexa for $67.7mm, Acquired remaining shares for $22.5mm

08/19/2011: Acquired 87.2% of Sanitas for $392.3mm, Acquired remainder for total purchase price of $448.2mm

June 2011: Acquired exclusive rights to commercialize Elidel and Xerese cream for fair value of $437.7mm

Feb / Mar 2011: Acquired US and Canadian rights to Zovirax for $300mm

Mar 2011: Acquired PharmaSwiss  for $491.2mm

Company has $6.65bn in debt

Forex risk, Company estimates that a 1% change in FX rates will impact shareholders equity by $35mm

Regulation Risk includes drug approval, sales practices and medicare rebates

Securities Purchasing Program authorizes upto $1.5bn in capital structure retirement

US Healthcare reform has potential to impact the Company negatively. Company has not quantified the impact

$275mm credit facility, $570mm in cash

Stock Performance relative to market: 0

Sector Outlook: 1

Positive, growth amongst all sectors driven by acquisitions. Negative overhang from healthcare regulation

Cash Flow: 0

Cash flow is difficult to determine given the rapidly changing nature of the Company through acquisitions

Peg Ratio: 0

Not Applicable since we have no EPS estimates for 2012

Valuation: 0

Given the rapidly changing nature of the Company (through acquisitions) ValuePro would not provide an accurate valuation for the stock.

Catalyst: 0

Continued acquisitions, good pipeline management, succesfull drug development

CAKE, Cheesecake Factory is tasty but leaves one hungering for more

Posted on 13. Apr, 2012 by S. Owais Ahmad.

Overall Score:0

Trading Chart: 0

Cheesecake Factory is bouncing along support almost a short term buy

Analyst Opinion: 0

Insiders: 1

Director Simon persistent buyer

Management Discussion and Analysis: 0

Government and Health Safety Risk is High

Comp sales rose 2% driven by increased traffic, and higher average checks which included pricing increases

Cost of sales increased 60bps to 25.5% due to higher dairy and grocery prices

International Expansion risk (22 stores over 5 years) which is concentrated in the MENA region

170 total restaurants, 11 new expected in 2012, 3 internationally

Sales / sq ft have been $864, $850, 830 in 2011, 2010, 2009

New Store spend is $650-750 / sq ft

Company does not use a centralized food purchasing system relying instead on local and regional suppliers

Marketing and Advertising spend is ~1% of sales as a result of focused and selective approaches

Results are seasonal with 2Q and 3Q and last two weeks of 4Q being revenue intensive

Revenues are highly dependent on consumer’s discretionary income

Exposed to rising food and dairy costs for which effective hedging is not possible

Negative publicity risk

Regulations include wage rules, health insurance provision, worker safety, alcohol permits

Caloric reporting requirements could negatively impact sales

Healthcare costs are rising, not quantified as yet but will squeeze margins

Company carries insurance for protection against various lawsuits

$200mm credit facility maturing in Dec 2015

Board of Directors has a poison pill

Capex to be running higher than average going forward, $100-110mm in 2012

8.8mm share repurchase authorized outstanding

Stock Performance Relative to Market: 0

Sector Outlook: 1

Consumer discretion 3rd best performing sector YTD up 14.48% versus 10.33% for S&P 500 Relatively neutral, with moderating demand from consumers, risk from rising food prices and declining economic environment

Cash Flow: 0

Cash flow is relatively stable, but new restaurant openings, refreshes and expansion requires higher capex resulting in declining free cash flow going forward

PEG Ratio: -1

Valuation: -1

Value Pro shows a 22% downside from the current price of $29.70

Adjusted FCF for 7 yrs from 10 yrs

Adjusted growth rate to 5%

10 yr treasury at 3%

Investment Rate is adjusted to reflect higher CAPEX

Equity risk premium assumed at 5%

Beta is lowered to accurately reflect a lower cost of capital

Catalyst: 0

Dairy and Produce price stabilization, consumer confidence and disposable income needs to improve

RYN, Rayonier Inc. Snapshot

Posted on 13. Apr, 2012 by S. Owais Ahmad.

Overall Score: 6

Trading Chart: 1

Rayonier showing positive divergence

Analyst Opinion: 1

Insider Trading: 1

Director Brown bought 17,000 shares at 44.26

Management Discussion and Analysis: 1

Sales benefited from price and volume increase in timber. Cellulose sales were strong with an increase in volume and price

Absorbent materials sales were stagnant as higher prices offset lower volume

Housing activity is a key driver for lumber demand

Eastman Chemical (15%), Celanese (11%) and Nanton Cellulose (11%) are top 3 customers

Union agreement for 700 employees (out of 1900) expires in June 2012

Commodity price risk (oil, natural gas and chemicals)

EPA and government regulation changes would negatively impact operating results

Environmental groups can curtail operations

Company is undertaking a $300mm project expanding it’s Jessup facility (performance fibers)

Company is focused on timberland acquisitions

$450mm credit facility maturing in 2106

Company has $847mm in debt

$117mm underfunded pension plan

Stock Performance Relative to Market: 1

Sector Outlook: 1

Long term fundamentals remain strong, 2012 volumes to improve over 2011 in timber and performance fiber with weakness in absorbent materials

Cash Flow: 1

Free cash flow (ex-acquisitions) is stable, but will be negatively impacted in 2012 due to higher CAPEX

PEG Ratio: -1

Valuation: -1

Value Pro shows a 23% downside from the current price of $43.5.

Adjusted FCF for 7 yrs from 10 yrs

Adjusted growth rate to 10%

10 yr treasury at 3%

Company interest rate is 6%

Equity risk premium assumed at 5%

Beta is taken from finance.yahoo

Catalyst: 1

Stronger than expected pickup in home building activity will increase volume and pricing for timber sales

FDP Fresh Del Monte Produce Snapshot

Posted on 11. Apr, 2012 by S. Owais Ahmad.

Overall Score: 1

Chart: 1

Fresh Del Monte Produce appears to bottoming after earnings plunge

Analyst Opinion: -1

Insiders: 1

CEO Amir Abu-Ghazela buys 100,000 shares at 22.59 between 3-1-12 and 3-6-12.

Management Discussion and Analysis: 0 

Government and Regulation Risk

Natural Disaster Risk

Sales rose slightly largely due to higher prices, partially offset by lower volumes

Gross margins improved slightly because of higher sale prices, partially offset by higher fuel costs

Higher SG&A expenses due mainly to increased selling and mkting expenses in South Europe

Fuel costs rose 37% ($38.6mm), container board dropped 8%, charter rates stable

48% from Company owned farms, 35% from Costa Rica

Bananas are 46% of sales

#3 in Banana, #1 in Pineapples, fragmented mkt share elsewhere

Walmart 12% of sales, top 10 is 32% of sales

Low barriers to entry, distribution and logistics network is competitive advantage

EU has tariffs on Banana import till 2020, might change structure

No material environmental proceedings

Seasonality, 1Q highest margins, 2Q highest revenues

Good labor relations

Currency exposure is hedged

Southern Europe dist and marketing is new and untested

Abu Ghazaleh family owns 34% of shares

$300mm credit facility maturing in 2013 (downsized from $500mm), MGT happy with liquidity

$590mm tax loss carry forwards

No PENSION or OPEB risk

Multiple lawsuits / antitrust pending ($30mm+)

EPA cleanup costs ~$20mm over 10 years

Stock performance relative to Market: -1

Sector Outlook: -1

High commodity prices, minimal pricing controls point towards compressing margins, negative economic outlook for consumer

Cash Flow: 0

Cash flow is relatively stable, working capital has been a source of cash in the past 3 years

PEG Ratio: 1

Valuation: 1

Value Pro shows a 65% upside from the current price of $22.27

Following changes were made to Value Pro’s assumptions:

Adjusted FCF for 7 yrs from 10 yrs

Adjusted growth rate to 1.5%

10 yr treasury at 3%

Company interest rate is 1.75%

Equity risk premium assumed at 5%

Beta is taken from finance.yahoo

Catalyst: 0

Commodity price stabilization, Consumer confidence and disposable income needs to improve

HAL, Halliburton Company Snapshot

Posted on 11. Apr, 2012 by S. Owais Ahmad.

Overall Score: 6

Chart: 1

Halliburton may be ready to turn upward, RSI diverging

Analyst Opinion: 1

 Insiders: 1

Director Gerber bought 30,000 shares at $36.84

Management Discussion and Analysis: 0

Government, Political, Environmental and Regulation Risk is very high

Catastrophe / Accident Risk is high

Sales rose significantly due to higher rig count and demand for services particularly in NA

Operating Income increased due to improved demand and pricing particularly in the Completion and Production segment

Corporate expenses increased due to higher legal expenses

Demand for oil and gas determine end demand for Company services

End demand is directly impacted by Customer’s capex levels

Venezuelan operations are at high risk depending on Venezuelan govt sentiment

EPA / State regulations on hydraulic fracturing may negatively impact demand for those services

55% revenues from the US, no other country is more than 10% of sales

Defendant in Deepwater Horizon accident, no charges taken so far

Increased regulations may result in higher operating costs

Insurance costs and availability has worsened as a result of the Deepwater Horizon accident

SEC lawsuit related to accounting measures for recognizing revenue

$2bn credit facility maturing in 2016 and $2.7bn in cash ($500mm overseas)

No PENSION or OPEB risk

Stock Performance relative to Market: -1

Sector Outlook: 1

Long term fundamentals remain strong, short-intermediate period natural gas demand (through rigs is low). Hydraulic fracturing demand is strong but coming under margin pressure as companies turn away from dry gas and compete in oily sector.  A lot of this will hinge on how easily oil can be transported out of North Dakota by pipeline.

Cash Flow: 0

Cash flow fluctuates significantly, due largely to volatile swings in demand impacting working capital and CAPEX

PEG Ratio: 1

Valuation: 1

Value Pro shows a 61% upside from the current price of $32.12.

Adjusted FCF for 7 yrs from 10 yrs

Adjusted growth rate to 8%

10 yr treasury at 3%

Company interest rate is 5.5%

Equity risk premium assumed at 5%

Beta is lowered to more accurately reflect low interest rates and a long term WACC

Catalyst: 1

Elimination of doubt relating to liabilities related to the Deepwater Horizon accident, Reduced regulation on hydraulic fracturing, Rebound in natural gas rig count