One Page Annotated WSJ Summary, Tuesday Sept. 12

by: SA Editors
SA Editors
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Board Members At Bristol-Myers Told to Fire CEO

  • Summary: In response to a federal monitor's recommendation last night, the Bristol Myers (NYSE:BMY) board currently has to choose between firing CEO Peter R. Dolan and the company's general counsel or potentially face charges in connection with an ongoing probe. Yesterday's recommendation results from a deferred prosecution agreement to a $2.5 billion "channel stuffing" scandal in which the company was accused of overloading wholesalers with inventory in order to meet targets. According to an unnamed source, BMY is in violation of the agreement by delaying the entry of generic competition to blockbuster drug Plavix. Mr. Dolan has had trouble with the board recently surrounding the Plavix deal that was rejected by regulators: "The board had become worried that the Plavix debacle, coming on top of a series of other controversies during Mr. Dolan's five-year tenure, had so angered shareholders that it was impairing his ability to lead the company effectively." If fired, this would be the third removal of a CEO of a major US drug company in the last 16 months after Merck (NYSE:MRK) CEO was pushed into early retirement and Pfeizer's (NYSE:PFE) CEO was removed in mid-July. The company is not expected to announce a replacement, as there is no succession plan and nobody at the company with the experience necessary to take over the helm.
  • Comment on related stocks/ETFs: Last month, David Phillips outlined in detail BMY's Plavix headaches. Shlomo Greenberg believes that BMY's woes have created a win-win situation for Teva (NYSE:TEVA). George Gutowski wonders about the timing of BMY's recently reduced guidance.

H-P's Leak Probe Comes Under Wider Scrutiny

  • Summary: Yesterday, the Justice Department and the FBI both announced they were involving themselves in the investigation into Hewlett-Packard (NYSE:HPQ) wrongdoings. California's Attorney General Bill Lockyer is already involved in the case, stating recently that H-P definitely broke the law. The widening investigation is trying to determine whether tactics used by H-P investigators while looking into a corporate leak surrounding the former CEO's departure were illegal, and how high up the corporate ranks the illicit activity extends. Board member Tom Perkins resigned this summer over the investigation, which illegally obtained his as well as many other board members' phone records through "pretexting." H-P's board has been in around-the-clock meetings since Sunday to determine how best to deal with the affair. Speculation is that if current Chairman Patricia Dunn leaves the company, as many are calling on her to do, Perkins will retake his post on the board.
  • Comment on related stocks/ETFs: For more on the unfolding H-P investigation scandal, read past WSJ summaries. Paul Kedrosky believes that the time has come for Patricia Dunn to resign.

Rising Inventory of Unsold Homes Is Likely to Put Pressure on Prices

  • Summary: Home inventories rose 4.7% in August, signalling more downward pressure on prices. The biggest increases: 1) Dallas (16%) 2) Seattle (13%). Of 18 areas studied, only two saw a drop in inventory (Boston [-1.5%] and Washington D.C. [-1.6%]). Prices are falling as sellers become more realistic; over 35% of homes' prices have been reduced. Yet buyers, it seems, still await further price drops.
  • Comment on related stocks/ETFs: Rising inventory and falling prices begs the question: Who's building the things? One answer: Residential building permits take 12-18 months to get approval. Permits are just now being issued to builders who scurried to submit their applications at the peak of the bubble, when it seemed prices would keep going up. Yet despite an almost endless stream of negative data, homebuilder stocks, after hitting lows 4-6 weeks ago, have stubbornly rebounded (albeit modestly) and stayed above water since (see attached chart). Can low interest rates, and the Fed's apparent halt in rate-hikes, turn the current downturn into a bull-market pullback, or is what we've seen thus far the humble beginnings of a burst bubble that will take the entire stock market down with it? Would you perhaps consider asking Mr. Toll?

Telecoms Are Juicy Prey For Private-Equity Firms

  • Summary: It looks like a $50 billion acquisition of Telecom Italia's (NYSE:TI) mobile unit is not completely off the mark: these are good times for telecom companies to raise private-equity funding. A year and a half ago, seven funds invested $500 million each and raised additional debt in order to buy SunGuard Data Systems. Today, the funds have almost doubled their dry powder: Blackstone Group has $15.6 billion, and Texas Pacific Group has $15.2 billion. According to John Coyle, the head of JPMorgan's group that advises on and helps private-equity firms finance their deals: "Even a $10 billion or a $12 billion equity check is achievable. We still don't know the outer limit when it comes to raising debt." The stability and reliability of telcos' cash flows means that private-equity buyers can finance most of their investment with debt. And while telecom has been one of the strongest industry sectors this year, valuations are attractive for the private-equity investors due to the low cost of debt. Since the traditional potential acquirers--other telcos--are loathe to burden their balance sheets with debt, the playing field has been left wide open for the private-equity firms.
  • Comment on related stocks/ETFs: Telecom Italia was expected to announce plans yesterday to sell its mobile unit; while no formal announcement was made, the fixed and mobile units will be separated. Roger Nusbaum is favorable towards the telecom sector.

Expanding Investigations Increase the Heat on Dell

  • Summary: Dell (NASDAQ:DELL) announced yesterday that the widening SEC investigation will cause a delay in the filing of its quarterly financial report. Previously, Dell had downplayed any impact the investigation would have on its financials, but now Dell is warning that it may need to restate prior period financials. Dell also disclosed that the U.S. attorney for the Southern District of New York has issued a subpoena regarding financial reports from 2002-present. The SEC investigation is focused on “…accruals, reserves and other balance sheet items…”, which has analysts worried that Dell used “cookie-jar reserves” to smooth out their income statement. Additionally, Dell has suspended its share buyback program and cancelled an upcoming meeting with analysts. These disclosures, coupled with a declining stock price are raising the pressure on Dell’s management – specifically CEO Kevin Rollins, CFO Jim Schneider and company founder Michael Dell (who was CEO until March 4, 2004).
  • Comment on related stocks/ETFs: Aside from stress from the deepening investigation, Dell is feeling the pressure in the marketplace, as well. HP (HPQ) has made impressive gains with its PC business, but its broader product line (PCs, printers, software services, enterprise hardware) make it less dependant on one specific sector. Dell is also feeling pressure from Lenovo (OTCPK:LNVGY) , which is expected to start lowering prices. See: Dell Q2 2007 Earnings Conference Call Transcript.

How Hartmut Pilch, Avid Computer Geek, Bested Microsoft

  • Summary: Hartmut Pilch, a German linguist and translator, runs an organization called the Foundation for a Free Information Infrastructure [FFII] out of a small office in Munich. Its object: to ensure that "basic computer language...[remain] as free as human speech." This premise has brought him into direct conflict with some of the biggest players in the computer industry, including Microsoft (NASDAQ:MSFT) and Siemens (SI). Pilch views patents on software as an anathema, since they "mean any programmer can be sued at any time". Last July, he and the 200-odd members of his lobby group succeeded in stopping the European Parliament from enacting a law that would have placed patents on computer code -- a surprising result that benefited the few US software companies that had publicly opposed software patent law, including Red Hat, Inc. (RHAT). Now, the battle is over a special patents court that would be responsible for appeals cases from across Europe. Pilch is striving to keep Europe "free from the lawsuits over digital rights that...increasingly hamper innovation in the US". Theft is not a concern, he says, because software is already protected by copyright laws.
  • Comment on related stocks/ETFs: Pilch's battle has significant implications for companies in the US open-source market like Red Hat (RHAT). David Harper grants a tip of the hat to Red Hat's latest quarter, while William Trent examines the Red Hat/Oracle relationship.

Regional Banks Come Courting for Business

  • Summary: In what analysts see as the start of a new trend, regional bankers are looking for ways to sell customers advice on deals as the mergers boom continues. After largely abandoning investment banking in the aftermath of the 2000 tech-stock bust, regional banks have gotten back into the game. This is highlighted by two recent acquisitions. Wells Fargo & Co. (NYSE:WFC), the nation's fourth-largest bank by market value, recently announced the purchase of Barrington Associates, a 40-person investment bank in Los Angeles that specializes in advising midsize businesses with annual revenue of between $25 million to $1 billion. The deal follows a similar move last year by PNC Financial Services Group Inc. (NYSE:PNC), the nation's 14th-largest bank by market value, which purchased Harris Williams & Co., a 110-person boutique investment bank in Richmond, Va., that is considered a leader in middle-market mergers-and-acquisition advisory work. These deals mirror strategies pursued by the industry's biggest players - Citigroup Inc. (NYSE:C), Bank of America Corp. (NYSE:BAC) and J.P. Morgan Chase (NYSE:JPM) - the three largest banks in the U.S. by market value. The regional banks aren't looking to compete with the big players on a global scale, but want to offer more services to existing customers and attract new ones that are often ignored by the financial giants. "What is happening is that the bundled-product model is coming more into the middle market," said Jim Lawson, a co-founder of Lincoln International, a Chicago midmarket investment bank with 100 bankers in the U.S. and Europe. "You will see more consolidation between M&A boutiques ... and financial institutions."
  • Comment on related stocks/ETFs: For more on the regional bankers, see Seeking Alpha's Regional & Commercial Banks section. In addition, the Regional Bank HOLDRS ETF (NYSEARCA:RKH) captures a selection of regional banks.

Path to India's Market Dotted With Potholes

  • Summary: India continues to represent an attractive market for MNCs not only because of its large population but also and more so because of its burgeoning middle class. What's more is anti-Americanism is considerably less than what it used to be as younger Indians show a willingness to use Western products. One problem that's persisting however, is the rise of interest groups against the practices of some global companies such as Coca-Cola, Pepsi, and Microsoft. An Indian public relations firm owner comments, "India isn't simply a market -- it's a huge, messy political ecosystem." One turnaround success story in India is Yum! Brand's KFC. After facing strong anti-Americanism in the mid-1990s that left KFC with only one restaurant three years ago, KFC relaunched its chain in '03 focusing more on local consumers' tastes and culture -- and expects to have as many as 30 restaurants by the end of this year.
  • Comment on related stocks/ETFs: Yum! Brands (NYSE:YUM) KFC offers overseas companies doing business in India and especially those facing challenges from interest groups an example to learn from. KFC utilized Indian mass media, the same source that was reporting interest groups' animosity against it, to tell its side of the story and smooth things over. Although India doesn't represent a big money making market for Coca-Cola (NYSE:KO) and Pepsi (NYSE:PEP), both firms are aware of the attractiveness of its middle class as they face allegations of pesticides being found in their soft drinks. A similar situation exists for Microsoft (MSFT), which faces monopolistic allegations from a southern Indian state government calling for schools to stop using its software. There is growing concern among business groups and within the Indian government that the nation's foreign and domestic investment climate could be hurt. Morgan Stanley recently upgraded India's growth forecast. Read about how GM (NYSE:GM) and Ford (NYSE:F) are targeting India's middle class. Also, see the latest conference call transcripts for Microsoft and Yum! Brands.

To Protect Its Box-Office Turf, Ticketmaster Plays Rivals' Tune

  • Summary: In a bid to capture a greater percentage of the ticket sales business, Ticketmaster, a division of IAC/InterActiveCorp (IACI), has entered into a practice it has long spurned: The ticket resale business.bstix Sites like eBay (NASDAQ:EBAY) and StubHub have long acted as middlemen in the ticket sales business, allowing tickets to be resold - auction style - to the highest online bidder, then collecting a processing fee from both buyer and seller. With Ticketmaster's overall ticket sales decreasing, the company has been forced to rely on higher ticket prices and service charges to continue to grow its net earnings. With online ticket resales bringing in as much as $5 billion in revenue last year - perhaps as much as all of Ticketmaster's sales during the same period - Ticketmaster is beginning to offer online auctions with the hope it can capture some of its competitors' business. The practice on online ticket auctions is of questionable legality and until recently, Ticketmaster opposed it meaning their recent decision to engage in online ticket resales marks a 180 degree turnabout for the company.
  • Comment on related stocks/ETFs: For more on Tiketmaster, read Ticketmaster parent company IAC/InterActiveCorp's most recent conference call transcript. Also, see Jim Cramer's take on IACI. Here's a Personal Finance Tip for finding tickets to sold out events.

China's Trade Surplus Hits High For the Fourth Straight Month and Chinese Official Calls on U.S. To Jointly Develop Oil Fields

  • Summary: China's trade surplus for August grew 33% y-o-y to a new monthly record of $18.8 billion. This was the fourth-straight monthly record set and puts China's ytd surplus about $6 billion short of its entire surplus for 2005. The surplus will likely widen in coming months as it traditionally has ahead of Christmas. Imports increased 25% to $71.97 billion and ytd are up 24% over 2005. Treasury Secretary Henry Paulson is set to make his first official visit to China next week. He is seen urging Beijing to allow a market value for the yuan. A Lehman Brothers analysis of Chinese government trade data however, suggests that the "yuan's value might be becoming less important for Chinese exporters." Fewer of China's top foreign-funded exporters are in price-sensitive industries. A stronger yuan would make China's exports more expensive overseas but lower the cost of its imports. The latter would actually help exporters higher up the value chain such as in electronics since imported components would be cheaper. In separate news, a senior Chinese government official involved in energy policy extended an olive branch to the U.S., recommending the two oil-hungry nations jointly develop oil fields. Zhang Guobao said, the China and U.S. "need to oppose the cold war mentality." Mr. Zhang meets with his U.S. counterpart tomorrow but it's unclear whether he has specific collaboration proposals. There is already some cooperation among U.S. and other foreign firms in helping China develop some of its oil fields. China's oil companies are still largely state-owned and have limited overseas exposure. However, they are sitting on a lot of cash and show eagerness to do deals in places where the U.S. does not, such as in Iran and Sudan. U.S. oil firms are calling for more transparency from the Chinese government's domestic market policies.
  • Comment on related stocks/ETFs: Improved consumer spending in the euro zone has resulted in China's exports to Europe now exceeding those of the U.S. to Europe. Although China's imports increased at a double digit pace in August and are up double digits on the year it begs the question of how much is for domestic consumption versus future use in exports. See if you agree whether China is currently in one of the greatest bubble economies in history. China oil companies that trade in the U.S. include: CNOOC Limited (NYSE:CEO), China Petroleum & Chemical Corp (NYSE:SNP), and PetroChina Co Ltd (NYSE:PTR). Read about the risky business of investing in state-owned companies. Also, learn about investing in oil companies.

AHEAD OF THE TAPE: Trade Picture Brightens

  • Summary: Today's trade number is predicted to show a July trade-deficit increase from $64.8 to $65.5 billion, ostensibly frightening. But there are numerous reasons why the picture might not be as bleak as it appears: 1) The shortfall in oil accounts for 30% of the total trade-deficit. From June to July, the price of imported petroleum products increased by 4.7%. Since then, oil prices have dropped more than 10%. 2) There is a 10% decrease in inbound cargo volume compared to last summer, suggesting a shift in the import/domestic product ratio. (Less-optimistic reasons: Rising European demand is delaying U.S. orders; supply-chain improvements allow retailers to order later; retailers may be ordering less in anticipation of reduced spending.) 3) Continued Asian growth should keep U.S. exports strong.
  • Comment on related stocks/ETFs: One of the huge beneficiaries of the U.S. trade-deficit is China. Driven by a 33% surge in exports, their July trade-surplus came in at a record $18.8 billion, and $95.65 billion ytd. This has lead some to call for a market-determined yuan, the assumed strength of which would balance trade by making Chinese goods more costly and imports more affordable. David Andrew Taylor asks: Why hasn't the dollar collapsed amid a crippling trade deficit? His answer: With the proceeds from the goods we buy overseas, our beneficiaries invest in our financial markets. Phil Davis argues: When you're the richest guy in the bar, do you worry about the drink-deficit if you buy an extra round or two? No one should be surprised that the richest country in the world by a factor of 4 spends and extra 4% of their GDP on imports. Even Barron's Marc Chandler goes to great lengths to dispel the dollar/deficit myth. Speculators can play the dollar vs. deficit using the Euro Currency Trust ETF (NYSEARCA:FXE), which mirrors the euro's movement (short-sale rules do not apply to ETFs).

HEARD ON THE STREET: Is the New Avis Already Ripe for the Picking?

  • Summary: With auto rental company Avis Budget Group (NASDAQ:CAR) beginning to trade under its own ticker name last week (it previously traded as part of Cendant Group), investors are wondering in which direction the company may be headed. With Avis a stand-alone business, some debt investors are betting it may follow the road taken by rival Hertz (NYSE:HTZ), which was bought out late last year by private-equity investors who increased its debt and are preparing for a potential public offering. But Avis claims it isn't headed that way. Private-equity firms have been on a buying spree over the past year, often using cash from banks eager to lend to them to scoop up companies. Avis shares look inexpensive, the company doesn't carry much debt and the business generates steady cash flow - all traits buyout firms typically find appealing, adding to speculation a buyout may be pending. Morgan Stanley analysts said in a Sept. 5 report that Avis looks cheap at 15.5 times its projected 2006 earnings. They said Avis's stock has been depressed by expectations of a slowing economy and moderating travel demand, cost pressures and weak margins. They added that Avis has room to improve its margins and pinned a target of $26 to $27.50 to the stock. Morgan Stanley had positions in Avis's shares and debt as of July 31. In 4 p.m. composite trading on the New York Stock Exchange yesterday, shares were off 2.4%, to $18.25.
  • Comment on related stocks/ETFs: Read more on Cendant's various stock spinoffs. Also, Abbi Adest looks at Hertz's recent IPO filing.

TRACKING THE NUMBERS: Shanda's New Gaming Strategy Is Winning Over Players, Analysts

  • Summary: Chinese on-line gaming company Shanda Interactive Entertainment continues to try and prove its "free to play" business model introduced in November 2005 is a success and is how best to capitalize on the Chinese market. Q1 was a disaster with net income tanking 95% to $1.47 million and revenue falling 31%. Q2 however, was a different story with net income 10x that of Q1 and revenue rising 21% to $46.8 million. Its business model originated in South Korea and is "a little like luxury goods for the virtual world" allowing players to buy weapon and accessory upgrades to enhance their game. A DB Securities analyst in Hong Kong upgraded Shanda last month to a "buy" with a $19 share price target despite his skepticism and inability to understand why Shanda has been successful. Credit Suisse has a "neutral" rating due to concern about the number of games in its pipeline. Shanda is also at work trying to boost sales of a web TV-like console it calls EZ Pod. Q2 sales grew sharply but the device faces a challenge from government regulation.
  • Comment on related stocks/ETFs: Shanda trades in the U.S. on the Nasdaq, ticker (NASDAQ:SNDA). Two of its local competitors mentioned in the article that trade in the U.S. are Netease.com (NASDAQ:NTES) and The 9 (NASDAQ:NCTY). Shanda is currently trading about 51% off its 52-week high and 33% above its 52-week low. A majority of analysts that follow Shanda have a "hold" rating on it. Two major concerns for Shanda as the WSJ article mentions is eventual slowing of growth in new on-line gamers and as the DB analyst explained, it could be a "victim of its own success" because gamers willing to spend the most are almost certain they'll win, perhaps removing the losers from gaming (or a particular game) permanently. See Shanda's Q2 conference call transcript and an excerpt with Shanda's CEO explaining the firm's direct revenue growth. Also, Shanda's IR website and its Q2 financial results. Note that Q2 was a major improvement over Q1 but y-o-y both its revenues and net income were down double-digits. IRG Limited summarized Shanda's Q2 earnings mentioning that Shanda said its new business model is "cutting down on much illegal hacking" of its software.

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Notable articles on Seeking Alpha today: Our big news: Yahoo Finance Now Carries Seeking Alpha Articles; a look at executive compensation at Rupert Murdoch's News Corp.; Intel sells its telecom cash cow; Jason Wood finds Illinois Tool Work's latest acquisition to be very strange indeed; Phil Davis on the impact to Dell of Lenovo's price cuts; Richard Kang on the clean energy ETF; compared to its peers, Ceradyne's armor outshines the rest; Jim Cramer's latest stock picks.

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