Q3 2009 Earnings Call

November 13, 2009 8:00 am ET

• Liberty Global pays €3.5B for Germany's Unitymedia. Liberty Global (LBTYA) agreed to acquire Germany's #2 cable operator, Unitymedia, from its private-equity owners BC Partners and Apollo Management for a total of €3.5B including debt. Liberty said it's paying 7.4x 2010e Ebitda to acquire Unity, which will complement its "existing European footprint, and has significant untapped growth potential in one of the fastest-growing cable markets in Europe." Unity's competitors include Deutsche Telekom (DT) and Sky Deutschland (NWS). Liberty's global cable footprint including Unitymedia will exceed 40M homes.
• BA, Iberia to merge. British Airways (BAIRY.PK) and Iberia (IBRLF.PK) agreed to a complex, $7B "merger of equals." BA shareholders will own 55% of the new airline, which will be the world's third-biggest by revenue. Named TopCo, it will be led by BA CEO Willie Walsh, registered in Madrid, house its main offices in London, and will not be subject to U.K. takeover laws. The pair estimate €400M in synergies by the end of year-five, and expect to close the deal in late 2010. The merger will meld BA's web of U.S. routes with Iberia's Latin America services, extending its leading trans-Atlantic position and consolidating its #3 status in Europe. Shares of both were up 3-5% in early trading.
• Europe returns to growth, at a canter. The euro zone returned to growth in Q3, but quarterly GDP came in at a weaker than expected +0.4% (consensus: +0.6%), up from -0.2% in Q2. Year-on-year GDP contraction narrowed to -4.1% (consensus: -3.9%) from -4.8% in Q2. The consensus miss was expected after France and Germany announced Q3 growth that undershot estimates - +0.7% vs. +0.8% expected for Germany, and +0.3% vs. +0.7% expected for France. Economists were underwhelmed by the results, and warned growth could reverse in coming quarters once car scrapping and other stimulus schemes fade.
• Yuan will rise with time. A top Chinese central banker told Asia-Pacific officials Friday that Beijing wants to let the yuan move more freely, but that any change will be very gradual, and that China will not bow to external pressure. The APEC meetings have been noteworthy for their focus on the weak dollar, but officials - including Tim Geithner - have refrained from pressuring Beijing to unhitch the yuan from its informal dollar peg. "The U.S. and China depend too much on each other and this has to change," the banker said.
• Dell announces first smartphone. Dell (DELL) announced it will enter the smartphone business, sealing initial partnerships with two of the world's largest mobile operators - China Mobile (CHL) and Claro (AMX). The Mini 3 smartphones will be designed around the Android (GOOG) platform. "Our entry into the smart phone category is a logical extension of Dell's consumer product evolution over the past two years," Dell said. "We are developing smaller and smarter mobile products that enable our customers to take their internet experience out of the home and do the things they want to do whenever and wherever they want."
• AMD cashes in its chips. Archrivals Intel (INTC) and Advanced Micro Devices (AMD) announced a game-changing settlement to their antitrust and patent infringement dispute, including a $1.25B payment from Intel to AMD and a five-year cross-licensing agreement. Intel also agreed not to induce competitors to shun AMD, but Intel has denied ever doing so. Numerous government lawsuits and private class-action litigation against Intel will not go away as a result of the deal, but Intel did eliminate its exposure to AMD-related charges. Intel CEO Paul Otellini called the pact a good deal for Intel shareholders, a sentiment shared by analysts who believe a court ruling could have cost it more. AMD CEO Dirk Meyer said the agreement proves to its customers, once and for all, "that AMD will survive and continue to offer them a choice of suppliers."
• White House sure of debt increase. The Treasury is confident Congress will raise the U.S. debt limit by year-end, and not allow a showdown similar to one that shuttered parts of the government in 1995. Sources say the White House is looking for a $1-1.5T increase beyond its current $12.1T limit. The request is higher than a proposed increase already passed in the House, but would get the government through the November 2010 midterm congressional elections without needing another increase. Geithner has repeatedly stressed the need to bring deficits down to sustainable levels, but in the short-term he's more worried about the need to keep up spending until unemployment recedes.
• Barofsky bets on TARP losses. TARP will "almost certainly" result in a loss to taxpayers, Neil Barofsky, the special inspector general for the $700B U.S. financial-industry bailout, said Thursday. "We need to temper or be realistic about our expectations, a dollar-for-dollar return is just highly unrealistic." Barofsky also said he's conducting 65 investigations of possible TARP fraud.
• Boeing fixes one problem, finds another. Boeing (BA) finally finished fixing the problem that postponed the maiden flight of its long-delayed 787 Dreamliner, but in doing so discovered another issue with the plane's wings. Metal bolts inside the wings of one of the six test airplanes were found to have slightly cracked the surrounding material, which engineers cited as another reason to keep the plane grounded. Still, Boeing says it's "on track to fly by the end of the year."
• Iconix gets a read on Playboy. Iconix Brand Group (ICON), owner of London Fog, is reportedly in talks to buy Playboy Enterprises (PLA), and has looked at its books. Iconix CEO Neil Cole is thought to be looking to add more brands that it can license to retailers and manufacturers. 56-year-old Playboy, which was worth about $100M before yesterday, has been looking to sell itself since Scott Flanders replaced Christie Hefner as CEO in June. Her father, Hugh, owns 70% of Playboy's voting shares and 28% of the Class B shares.
• FHA's razor-thin reserves. The FHA's capital reserves are almost depleted, making it likely the goverment-controlled housing market lender will require a taxpayer bailout. The FHA has said for months that its reserves for unexpected loan losses would fall short of the required 2% level by this fall, but an audit released Thursday showed that reserves have been depleted much faster than expected; its capital-reserve fund fell to $3.6B as of Sept. 30, down 72% from a year earlier, leaving reserves at just 0.53% of the $685B in total loans insured by the FHA.
• FDIC orders banks to prepay $45B. The FDIC's board approved Thursday $45B of bank premium prepayments that it needs after its deposit insurance fund slipped into a deficit at the end of Q3. The prepayments - which equate to three years of dues - will satisfy the fund's "need for liquidity without imposing undue burden on the industry," FDIC Chairman Sheila Bair said. A surge in failures - 120 so far this year - has pushed the industry-supported fund into a deficit for the first time since 1991.

Earnings: Fri. Before Open

• Abercrombie & Fitch (ANF): Q3 EPS of $0.30 beats by $0.10. Revenue of $765M (-14.6%) in-line. Same-store sales -18%. Shares +7.5% premarket. (PR)
• Mizuho Financial Group (MFG): FH1 profit of ¥87.8B ($974M) vs. ¥56.3B expected and -7.1% from ¥94.6B a year ago. Revenue of ¥1.49T (-21.6%). Q2 net income of ¥92.3B vs. ¥69B expected and -¥38.4B a year ago. Bad loan charges -38% to ¥85.8B. (MW, Bloomberg)
• Yingli Green Energy (YGE): Q3 EPS of $0.18 beats by $0.01. Revenue of $326M (+1%) vs. $329M. Shares +1.3% premarket. (PR)

Earnings: Thur. After Close

• Blockbuster (BBI): Q3 EPS of -$0.20 misses by $0.09. Revenue of $910.5M (-21%) vs. $1B. Shares -13.2% AH. (PR)
• Disney (DIS): FQ4 EPS of $0.46 beats by $0.05. Revenue of $9.9B (+4%) vs. $9.3B. Shares +2.2% AH. (PR)
• Nordstrom (JWN): Q3 EPS of $0.38 misses by $0.01. Revenue of $2B (-5%) vs. $1.9B. Same-store sales -1.2%. Raises full-year EPS guidance to $1.83-1.88 from $1.50-1.65, vs. $1.81 and expects full-year same-store sales down 6-7%. Shares -4.8% AH. (PR)

Today's Markets

Asia and Europe stocks were mostly higher Friday, fueling modest gains in overnight futures trading.

Thursday, a report said Democrat Senator Schumer called to restrict the stimulus funds to be used in the 600MW wind farm joint venture in Texas, which is made up of A-Power Energy Generation (APWR), U.S. Renewable Energy Group and Cielo. A-Power owns 49% of the JV. The project is expected to get funding from the Commercial Bank of China (around $1.05B) and $450M from the US stimulus package. So Sen Schumer is supporting President Obama's policy to develop renewable energy, but assails the $450M being taken from stimulus. His reason is simple: the $450M will be used to create jobs in China, not in the US. Well, it looks that way, however, he ignores that $1.05B will be from China. China is financing the major part of the project! Let me list a few facts that prove Sen Schumer is not seeing the full picture here.

1. A-Power formed a joint venture with General Electric (GE) to develop wind turbines earlier this year. According to the announcement, GE owns a majority stake in the business that will serve as GE Drivetrain Technologies' Southeast Asia manufacturing center starting in mid-2010. Now it is clear that turbine shipped from A-Power is at least 50% owned by GE. In other words, China's $1.05B investment in the 600MW project is going to create jobs associated with GE.

The complete list of Chinese ADRs traded on U.S. organized exchanges is listed below:

Speculative stocks typically get hit the hardest during corrections in the stock market, and solar stocks definitely qualify for a beating. In the past 4 days of selling, TAN, the Claymore/MAC Global Solar Energy Index, is already down 10%. Solar stocks have been big laggards this year as TAN is now back to even on the year. See chart below:

As a group, solar stocks have gone nowhere this year

Last Thursday, the world learned China achieved 8.9% in Q3 based on year over year, while for the first three quarters the nation achieved 7.7% GDP growth year over year. Having said that, China needs to achieve at least 8.9% in Q4 to reach their average 8% growth for 2009, which means the massive stimulus policy needs to stay for Q4 at least. It was reflected recently in a speech by Premier Wen Jiabao. Chinese Premier Wen Jiabao pledged to continue his government's aggressive stimulus efforts on the World Economic Forum meeting in China last month. The Chinese leaders know that stimulus needs to stay well into 2010 to sustain the growth before the economy can grow itself.

China's $700B stimulus was largely spent on building infrastructure, such as the high speed railway across the nation. As a result, steel demand, hence the metal coal from overseas are sky rocketing. Both Peabody Energy (BTU) and Alpha Natural Resource (ANR) are seeing strong demand from China. The metallurgical coal demand is growing as China uses it to produce steel domestically. China is not importing steel from overseas, which is reflected in the weak demand in international steel names, such as US Steel (X), Nucor (NUE) and ArcelorMittal (MT). Building the high speed railway and other infrastructure will keep the demand of raw materials such as metallurgical coal growing in the next 5 years.

With a mix of developing countries such as China, India, Indonesia and developed countries such as Taiwan, South Korea, Singapore and Japan, Asian economies are becoming stronger and as a result investor interest is running high for Asian equities. New Asian companies have been listed on US markets in recent years and still more are being newly listed regularly.

Among the hundreds of Asian ADRs that are traded on a daily basis, the following are the 10 Most Traded Exchange-listed ADRs:

The founders of the Galleon Group, a hedge fund started in 1997 and which has a technology and healthcare focus, have been charged with insider trading. Galleon is one of the 250 hedge and institutional investment funds that are available on AlphaClone. The fund's Top 10 Holding Clone, which invests quarterly in the the fund's ten largest holdings at the time they are disclosed, is up 48.2% so far this year but has not performed very well over time returning a negative 3.9% annualized over five years and a dismal negative 18% annualized since 2000 (all returns as of 10/15/09 close). We thought we'd list the fund's 50 largest holdings below (as of 6/30/09). Now that the fund will almost certainly wind down, perhaps there are some good short opportunities.

Governor Arnold Schwarzenegger approved a new subsidy for solar power on Monday and joined forces with the federal government to fast-track renewable energy projects. This is on top of current solar incentives, hence it is huge for the industry. California support on solar energy has drawn many companies open office in the state.

Solarfun (SOLF) opened Solarfun USA in Southern California city Torrance, expecting to get a piece of the pie in the world's eighth economy, the company already raised Q3 shipment to exceed 100MW. Trina Solar (TSL) also sees module demand picking up, and the company opened US office earlier this year. Schwarzenegger also signed an agreement with the U.S. Department of the Interior on Monday to speed development of up to 7,000 megawatts of large-scale renewable energy projects.

Thursday’s stock market sell-off could finally be the start of the sharp Fall correction I have speculated about in various forms for months now. The extent of the technical damage and the heavy distribution of stock certainly seem to have put a ceiling on stock prices for now. Solar stocks were heavily hit as speculative stocks tend to experience aggressive selling in this kind of market backdrop. For some solar stocks, Thursday was just a continuation of on-going weakness, and for others, Thursday marked a definitive change in the chart technicals. It is interesting to observe how many solar stocks remain stuck within multi-month trading ranges.

The following list tallies some of the technical damage and identifies my latest thoughts on any potential opportunities. Again, the increasing risk of a sharp sell-off in the stock market is the biggest risk factor for any potential longs. (In the interest of space and time, I only posted one chart. Stocks are listed in descending order of Thursday’s price performance).

Last Thursday Collins Stewart raised Yingli Green's (YGE) price target based on strong demand in recent weeks. Yingli customers have indicated that the company has exhausted capacity which means new orders will pick up going forward. In the Q2 conference, Yingli also signaled that demand for the rest of 2009 is strong in both U.S. and Germany. China's domestic market is also picking up at a faster pace. Goldman Sachs also placed Renesola (SOL) on its "conviction buy list" 3 weeks ago, citing the new business model as generating more revenue. As China's central government indicated more policy support on solar energy over wind, and also with China's latest strong economy data (industrial output rose 12.3% versus 10.8 expectation), we would not be surprised to see a new wave of upward guidance from Yingli and some other solar names such as Renesola, Solarfun (SOLF), Suntech Power (STP) and Trina Solar (TSL) as these are strong players in the sector. Here are some upbeat comments from these companies recently:

Renesola: the company signed a 600MW deal with JIangsu province and in the recent conference call the CEO said demand is picking up for Q3 and Q4, and the previous guidance does not include revenue from domestic sales. Its Golden Sun project submitted to government is expected for approval in Q4. I expect earnings to surprise wall street to the upside.

It is obvious that Asia's PV market is heating up not only in China, but also in Japan. According to Japan's Kyodo News agency report, Sanyo Electric (SANYY.PK), Sharp (SHCAY.PK), Mitsubishi Electric and another 24 solar cell manufacturers in Japan reported second-quarter sales of solar cells in Japan rose 82.5 percent year over year to 830MW, a record high. The new-to-power Democratic Party has decided to implement a new policy for the power companies to buy up the electricity generated by home solar power generation systems. It is reportedly believed that the new government has pledged to speed up the green revolution along with China, and solar energy will be one of the industries promoted under the new administration.

Under the new initiative passed by the Chinese congress, China has set a goal of 20GW in solar energy by 2020. Many companies have signed mega contracts with local governments, with sizes ranging from 100MW to 600MW. On Tuesday, China granted a solar farm contract to First Solar (FSLR), and the company has agreed to built a 2GW solar farm in Inner Mongolia by 2019. The latest winner is China's Solarfun (SOLF), which signed a 600MW contract to build a farm that is adjacent to First Solar's 2GW farm. China has set Inner Mongolia as the solar energy base for providing electricity to the entire nation. It is expected that Solarfun (SOLF) and some other Chinese solar names will get more contracts down the road. Companies such as Renesola (SOL), JA Solar (JASO), Yingli Green (YGE) and Suntech Power (STP) are gaining ground in the Chinese solar market. Goldman Sachs has put Renesola in the conviction buy list due to its improving business model and the potential. The following is the listed of companies who recently signed mega contracts:

For Renesola (SOL) and LDK Solar (LDK) investors, the worst is yet to come. China's poly-silicon production increased dramatically in the last 12 months and two new companies just started to produce poly-silicon last month.

U.S.-listed solar wafer makers Renesola and LDK Solar are facing tougher and tougher competition, their futures have now dimmed further since two more companies in China announced plans to produce poly-silicon wafers: Puhong new energy Corp and Shengte new energy Corp. Puhong is expected to produce 1500 tons of poly-silicon by 2010 (a capacity compatible with Renesola's). Puhong won the bid in China's first 10MW solar project according to the China's official renewable energy website.

Half of the existing solar manufacturers may not survive through the end of next year, according to the market research firm The Information Network, as reported by DigiTimes.

The piece said Information Network chief Robert Castellano believes “massive inventory buildup and huge overcapacity” are having a serious impact on solar panel manufacturers. The industry is up to 122 days of inventory, from an average 71 days in 2008, he reports. Capacity utilization in the industry is down to 27.9%, from 48% last year.

You may not realize this, but "the next big thing" is where it always is: right under your own nose. Because let's face it: "the next big thing" never springs from a vacuum. Instead, it comes from what is already surrounding us. The problem is most investors just don't realize it at the time.

How else can you explain the chorus of doubters that couldn't see what the personal computer would become in the 80s or the internet in the 90s? Yet there they both were, hidden in plain sight.

Competition – as I used to say to my sales force – has a way of keeping competitors honest. The real beneficiary of a healthy business duel, however, is the customer. Particularly when the competition gets down to price.

Nowhere is that more apparent right now than in the solar energy industry. Over the past few weeks, solar panel and module prices have been dropping through the floor. The reason can be summed up in just one word: China.