TRID - What to expect

TRID hs not announced an earnings date. Their last meeting was April 26th, and I expected them to file their latest results Jul 26th (3 months later).

One thing is clear - they continue the practice of limiting information sharing.

If I had to guess, I'd say things are looking good. The market is strong and their share has grown.
1. LCD TV sales are up
iSuppli is projecting firm, agreed with volume projections for 2007 for large TV to 90% unit growth. Much of the growth is due to manufacturing processes that have dropped costs on larger (40"+) screens. Because LCD TVs take up much less space than traditional CRT TVs, consumers are moving to bigger screens.
Sharp and Matsushita reported strong LCD TV sales
GNSS even announced stronger than expected demand.
2. TRID is growing share.
TRID dominates the large TV sector. Companies like Toshiba are expanding their presence in this section, giving TRID opportunities for growth.

3. Competition is concurring
Genesis is seeing strong demand in LCD TV market.

So I project strong unit growth, and the question is about margins and prices. At the last conference call, this issue kept popping up. TRID repeatedly said that they expected margins and earnings to remain steady.

This stock is not being driven by fundamentals. When we look at fundamentals, I would expect ~$300M in sales for the past 12 months and ~$55M in earnings. That's $1 EPS.

Obviously, the stock price should rocket up: 15 P/E and growing 40%+. But it all hinges on TRID getting this baby wrapped up.

Liverocket Week 30 Performance - Down 6.7%

Bloody week. What happened and why?
Start with the fact that this was indiscriminate: every stock was hit. Small cap and large cap, biotech and consumer spending - this was a wholesale exit from the market.

Also, the stocks that crashed hardest seemed to be the ones that moved up the most recently.

Consider that most companies beat earnings and then factor in the strong GDP results. Clearly fundamentals today and going forward look generally good.

The lack of a bounce on Friday after the selloff Thursday also suggests that this wasn't exacerbated by program selling. If it isn't fear about stock performance and it isn't sector specific, I must conclude that money was removed because money was needed somewhere.

That gets back to my comments starting last month that a liquidity strain would rattle the markets. Investment Banks are closing positions to lock in profits and use the cash to cover massive losses in housing related adventures. It takes a while for this drop in liquidity to resolve itself.

The carry trade is another factor to consider. The carry trade is a fancy way to describe a certain type of arbitrage. If the US offers rates of 5.25% and New Zealand offers 8%, a person can borrow in the US and buy NZ notes for 8.25%. Assuming exchange rates don't change, that's a tidy 3%. If you use leverage, that return grows a lot more. Even better, if the exchange rates move so that the US dollar drops in value, someone can make even more money.

But what if it is the opposite: borrowing Yen at 3% and buying US Treasury notes at 5.25%. Then the US dollar drops in value by 10%. In this case, money will flow away from the US markets.

Whether the drop is tied to the carry trade or to covering subprime loan problems, the consequence is liquidity tightening.

Also, this helps the Fed. Without raising rates, liquidity is drying up. Inflation is tied to liquidity, so we should see some ebbing in inflationary pressure. While this gives the Fed room to drop rates, I don't think that they will.

In this volatile atmosphere, investing will be challenging. If you must buy, consider buying calls about 6 months out.

REALITY CHECK & DEBT CHECK
We want to watch for stocks where the P/E is too close to earnings growth. And, with debt servicing getting more expensive as credit tightens, we need to see who has debt.
1 year PEG Debt
AMX .6 $3B
ATW .2 $36M
CLB .9 $300M
CTSH 1.2 0
ESV .4 $500M
HOLX 1.3 $9M
IMA .5 $160M
MDR 2 $270M
NUAN 1.2 $353M
OCN .3 $1B
PCP 1.1 $875M
PWR 1.2 $447M
TIE .6 0
TRID unknown
UCTT .3 $32M

Focusing on the PEG >1, we see CTSH, HOLX, MDR, NUAN, PCP and PWR as being expensive relative to expected growth. I think the future growth of HOLX, NUAN, & PCP is under stated. I think MDR is very understated, so I am not concerned. I am concerned about PWR and CTSH. I need to see accelerating growth or I would expect price drops.

Most companies with debt can service it easily using existing cash and forward cash flow. OCN can not.

HIGH TECH
AMX – Down 8%. Paid a dividend of $0.37 per share. They reported very nice earnings (30% growth). They grew the subscriber base by 4M. With a P/E of 24 they seem a little undervalued.
CTSH – Down 5%. They are tracking INFY. It’s all about the earnings.
NUAN – Down 7.5%. No news, but they hit a near term high of ~$18 before crashing.
TRID – Down 8%. Competitors PXLW and GNSS were down 18% for the week. They are losing business and TRID is just waiting to deal with the options issue and release earnings. Interestingly, short positions dropped 7%.
PWR – Down 11%. No news.
UCTT – Up 3%.

ENERGY EQUIPMENT/SERVICES

Drillers were rewarded early in the week with the merger of RIG and GSF. Rumors of a merger among drillers pushed them to new highs, until the market pullback took back the excitement. I’m thinking that this sector has legs for maybe 6 more months before growth and P/Es come a little more into alignment.

ATW – Flat. Although they popped up to $74 and ended at $68. Earnings in 2 weeks.
CLB – Down 2%. Great earnings release. Earnings rose 69% and revenue rose 20%. They just beat expectations by a penny. They also raised guidance a little for the rest of the year.
ESV – Down 2.5%. Earnings release showed 31% growth and beat expectations by 4%. Credit Suisse actually called ESV underperform. I’m not sure what they expect – this company is throwing out ~$7 EPS and has a P/E 10.
MDR – Down 13%. Ok, I’m just puzzled. It’s possible that the July 15th article in Barron’s shoved MDR up too fast, but MDR had been ~$90 for a week before that article.

BIOTECH
HOLX – Down 5%. They just can’t seem to hold on. Meanwhile shorting has increased dramatically.
IMA – Down 5%. No news.

OTHER
TIE – Down 9%. Although rivals are reporting great results, TIE remains a trading stock, hovering in the $32~$35 range. On the downside, Insider buying has begun again. That is a sign that no deal is in the works. Meanwhile, the short position in this company rose to 34%.
KSU – Sold at 38.5. I didn’t like their earnings, but I’ll back at the new low. I am investing for the Mexico port opportunity.
OCN – Down a whopping 15%. I must be wrong about this stock and they do have exposure to loans and housing prices. Otherwise this makes no sense. They are supposed to benefit from a rise in foreclosures but they are dropping like a rock. I guess we’ll find out Tuesday.
PCP – Down 1%. They had a great earnings release this week.

Very ugly day - here's why

I see so much good news in earnings and forward guidance, but the market is responding with doom and gloom.
A lot of our stocks are down 4% today, despite very positive results. NASDAQ is down 4% in 3 days.

The fingers are being pointed at the subprime and mortgage woes. That is partly related to consumer spending (the key driver for the US economy) but mostly related to credit tightening.

The collapse of the subprime market means two things: less money around to lend and lending has become slightly more expensive.

Put into historical context, rates and borrowing costs are still very low. But compared to last year, it's suddenly more expensive.

That casts a shadow across equity speculation in several ways:
1. Investment banks get margin calls. Investment banks have to sell equities to cover losses
2. Borrowing is more expensive. Less margin trading results, less speculation, and that leads to less froth in the stock market
3. Slowdown in M&A market - deals get pushed out because the numbers don't quite work because borrowing costs are higher.

I called this out and I still think that it will take 2 more months of volatility

Apple Meets and Beats

Apple hit the revenue number and clobbered the earnings.
Earnings continue to benefit from ongoing chip pricing softness.
As expected, sales came down to the Mac because iPod growth is slowing: the MAC is 60% of their revenue.

I am concerned that Apple's earnings fortunes are outside of their control. Just as chip price drops helped Apple, chip price increases can hurt them.

But for now, all is great.

Sold KSU

Sold at $38.5

KSU Stop

I am setting a stop of $38.5
I don't like the BNI release that highlights a slowdown in coal. Coal was critical last quarter for KSU ($45M out of $411M)

Why is MDR slipping

It hasn't escaped my attention that MDR has slid ~$4 in 2 days.

I am chalking it up to pre-earnings excitement that has ebbed a bit.
The key to MDR is backlog, which has been growing. As long as they can continue to win contracts and add to their business growth, then margins should expand.
Recent contracts they have won:
* Qatar project: 80 miles of pipeline (no $ announced)
* West Palm Beach Waste facility $300M
* Australian LNG potential win: $200M
* Vietnam 27 mile pipeline (no $ announced)
* Trinidad (with Fluor) 4,000 ton platform (no $ announced)
* Aramco 4 year management contract (no $ announced)
* Coal boiler $250M

They had a backlog of $7.9B last quarter. I figure this dropped to $6.5B and the new deals added $2B, raising backlog even higher

Additionally, their debt ratings have improved, which will lower their operating costs somewhat.

PCP beats Estimates

PCP released great earnings today
* Revenue up 49% and beat estimates by 5%
* Earnings up 96% and beat estimates by 15%

Most of the growth is from aerospace products. Naturally, we can expect strong titanium demand....

Watch for major revisions to earnings estimates

UCTT is up, ESV Beats

UCTT rocketed up today as investors decided that the 2008 growth prospects were worth waiting for.
-----------------------------------
Meanwhile, ESV shone today
* Revenue up 15%. They missed by 1%. Dayrates continue to surge: average dayrate is up 25% to $143K
* Earnings up 31% and beat estimates by 4.5%. It beat the highest estimate too, btw.

The Gulf of Mexico remains an area of exposure. Natural gas drilling was softer and pushed down utilization rates. ESV has already taken measures by moving rigs away.

They have a P/E of 10 but are growing earnings by 30%.

Tuesday earnings - AMX, ESV, PCP

Let's make up for the UCTT mistake

UCTT is a broken stock - leave

UCTT just broke my heart.
The only reason that I have been holding on was that I saw an undervalued stock with growth potential undergoing growing pains from being small and vulnerable to some bigger expenses. A 15 P/E with a 40% growth upside.

Wrong.

They did the opposite of what I expected. I expected a short term miss followed by longer term growth. Instead they hit the quarter and missed the rest of the year.

I'm sorry, but that's the 3rd strike. They are a good company with good prospects (they build ISRG's robots, for example). I liked them for what I thought was a growing product mix.

I am not wrong, but the payout is further out than I like.

UCTT - A prediction

UCTT will miss the $0.23.
Every $210K earnings is $0.01 EPS. They are expected to hit $0.23 this quarter or $4.8M.
They've been in the $4.7~$5.5M range for 3 quarters.

The three reasons I expect a miss (other than the fact that they lowered expectations to $0.2~$0.26)
1. Legal fees - this was the prime reason they missed last quarter. SOX fees of ~$600K hit the results by $0.03. I don't expect those fees to have suddenly dropped or disappeared in 1 quarter
2. Lower than expected Sales - I think they got some pushout. The mentioned $100M (a ~10% drop) which would be an earnings drop of $500K or ~$0.035
3. New costs - Options costs and intangibles will lower an additional $0.03. I think that they are woefully lowballing the options expensing. I see ~500K shares sold by insiders and I would imagine a $2.5M expense.

I think they will hit $0.20, maybe.
BUT I also think they will point to a strong 2H.

Overall, the low results are baked in and I think the strong 2H may give some push.

Deepsea drillers merging (GSF & RIG): ATW soars

I have been saying that mergers would hit this area.
CLB & ESV are enjoying a bit of the sudden interest but look at ATW: up 8%+.

If consolidation is going to happen, this one won't go for under $120. Exciting to think about.

Is there more on the way? Hard to know, obviously, but there are interesting partnerships out there.

LiveRocket Week 29 Performance Down 0.85%

Almost everything slipped this week, with some notable exceptions. TRID is the big variable to watch.

I will be changing the portfolio at the end of earnings season. I think there are better plays for our money versus some of these laggards.

The iPod points the way

Throughout 2006 I was waiting for cell phone companies in the US to turn on the after burners. I specifically saw the emergence of mobile entertainment and interactivity. After all, the ability to watch TV and movies was already happening in Korea and Europe, among other places. Basic PC functionality had already migrated onto various versions of the cell phone. And new functionality like music downloads, file swapping, and eCash seemed about to burst.

But nothing happened. Not in 2006 and not for most of 2007. Cell phone makers focus on packaging and the software interface continues to get clumsy and less user friendly.

If anything, the cell phone was trying to be more than a cell phone and not quite succeeding. A little camera and text messaging and what else?

Now Apple has shaken things up. The difference between a cell phone and the iPhone is the difference between a mobile telephone and mobile communications.
1. Interface - The interface is really nice. It is very user friendly and intuitive. There are nice touches that individually don't matter but taken on the whole make for a satisfying experience.
2. Touch screen interface - The screen is large, and that's a plus. But the interface is much more important. The challenge with web surfing on a tiny screen is that there is too much information compression. You need a mouse. The interface allows the hands to be the mouse in a very natural way. If you remember Palm, they had you memorize a new way of writing the alphabet in order to take notes. The iPhone has a similar learning curve for manipulating the applications but it's far more intuitive
3. Storage device. I think folks are starting to like the concept of the portable storage device. The killer apps of music and pictures/video are how people express themselves. While the iPod can be an intensely isolating device, the ability to share personal info is socializing. Cell phones have just not done a good job with that.
4. Ease of applications - Sure I can surf the web on any device, but the iPhone makes it feel smoother and more integrated, instead of being a bolt-on or after thought. Indeed, that is the basic theme: intelligent integration. Apple wants to have this device become the integration of PC-on-the-go, phone, camera, storage device, TV/movie center, and stereo system.

Can other companies compete?
Up to a point, probably. The touch screen interface can be mimicked to some extent, I would imagine. But I don't think other cell phone makers have got the concept yet. Or maybe it's the wireless phone companies. When people start experiencing a mobile communications device, will they start questioning the value of their current offering?
Most likely, yes.

The winners, as I've pointed to, are Sandisk, THE flash memory maker. Follow that with anyone enabling cell phone easy interface (NUAN, GOOG, AAPP) and, of course, anyone supplying bandwidth (CSCO) and managing access (T). I don't use my phone for web interface because it is too many steps for too little payoff. I would be a big web user on an iPhone. Look for much more cell phone web traffic

Harley Davidson (HOG) Running on Fumes - Short

I mentioned many times that the days were numbered for HOG. Primarily because I believe that US customers are tapped out and may in fact have been swelled by easy financing.

I was right.

The background is still pretty decent: Revenue up 17% YoY and Earnings up ~25%.
HOG's earnings show a smart drop in US sales of 5.5%. International sales perked up (given the drop in the dollar, they should). The US makes up 71% of sales.

Harley stood by their 2008 guidance of 17% EPS growth. But I don't believe it. They were surprised by the drop in US sales. And this is basically the big quarter for them, when everyone is out tooling around.

My premse has always been that they were a toy bought by blue-collar workers who were suddenly made wealthier via the housing boom (construction jobs, for example). As everyone knows, those folks are struggling to make house payments now. They aren't buying new bikes - they are selling the old ones.

I went on Craigslist. Almost all Harleys for sale are in what I call blue collar neighborhoods.
Go on ebay: about 30% of the Harley's for sale are 2005~2007 models. Need cash, anyone?

Last time I checked, times are getting tighter for the working man. And this is a working man's toy.