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The Razor's Edge | Market Commentary

AT&T Strengthening Through Wireless
July 23, 2008  |  1:05 PM
In this era where 80% of Americans now own a cell phone, the days before cell phones were our constant connection to the outside world are a memory growing more distant every day.   Increasingly, professionals view mobile devices as an indispensable tool and individuals crave connectivity to the internet for email, gaming, and browsing.  Telecommunication companies are hopping on the bandwagon trying to feed the growing need for connectivity by expanding the rolls that can be filled by cell phones. Consumers clamor for the expanded capabilities of what could be described as mobile computers that feature a phone. AT&T (T) released its second quarter numbers early this morning, and EPS results were in line with estimates at 76 cents per share, excluding merger charges. A closer look at the numbers underscores the importance of the shifting dynamics of the industry and AT&T’s efforts to stay ahead of the curve are coming to fruition. 
The wireless unit was the highlight of the quarter for AT&T. Earnings surged 91% while revenue increased 16%. When taking away charges related to its merger with BellSouth, profits rose by 39%. One key to this success is the huge growth in data plan usage as revenue derived from data plans rose 52%. AT&T loves to sell the profitable data plans, which have helped to boost average revenue per user by a very respectable 3.5%. Furthermore, AT&T grew its subscriber base by 1.3 million as it has attracted Applephiles away from competitors with its exclusive offering of the iPhone.   Also, AT&T’s churn rate—the rate at which it is losing subscribers—has slowed from 1.2% to 1.1%.
The impressive strides made by the wireless unit contrasts with the wire line business, which continues to lose ground.  Earnings were down slightly at 2.4% as revenues slipped by 2.1%, which was actually more muted than losses in previous quarters. This is further demonstration that Americans view landlines as increasingly obsolete. Surely, businesses will continue to need landline telephones but the cell phone is well on its way to replacing the home phone.
AT&T also has a unique asset that no other carrier does, the Apple (AAPL) iPhone.   AT&T’s exclusive right to carry the iPhone has certainly been a huge draw for new subscribers. Demand for iPhones has been quite strong, and it has been widely publicized that Apple sold 1 million iPhones in the first 3 days. In order to buy the 3G iPhone, consumers are signing up for 2 year AT&T contracts. However, much of the earnings gains from new subscribers will be deferred over the life of the contract. The subsidy that AT&T pays Apple to make the iPhone more affordable could hurt earnings in the short run; some analysts have estimated a hit of $.10- $.12 per share. We view the iPhone as having a huge potential upside and--from the perspective of a long-term investor--the short-term earnings compression is worth the long-term subscriber gains.
We have AT&T rated a Strong Buy right now because its valuation is quite compelling. AT&T historically trades in a range from 1.95 - 2.81 times revenues, but the stock is currently trading at only 1.54 times current revenue. Likewise, price-to-cash earnings historically range between 6.5x and 9.3x, but this valuation measure is currently only 4.8 times. With the sort of momentum that AT&T is generating with the iPhone in combination with Blackberries and the stock trading near 52 week lows, the value that AT&T represents will not go unnoticed for long.
UPS—A Market Bellwether at a Fire Sale Price 
July 22, 2008  |  11:40 AM
Atlanta-based UPS (UPS) reported earnings this morning that were in line with analyst estimates but lowered the company’s full year per share earnings guidance to between the range of $3.50 - $3.70 from $3.90 - $4.20 citing a weak domestic economy and higher fuel costs. Because of its critical role in the distribution of products throughout the domestic and global economy, UPS is considered a bellwether stock regarding the health of the overall economy. The company’s stock has been stuck in a fairly narrow trading range for a couple of years and recently has plunged into bear territory as concerns about a U.S. recession mounted.
 
For the second quarter, UPS earned $837 million or 85 cents, which was the consensus estimate. A year earlier, per share earnings were $1.04. Revenues came in at $13 billion (up 6.7%) while analyst estimates called for $12.8 billion. Better than expected revenue results were somewhat encouraging, but earnings were really hurt by sky-rocketing fuel prices. The rise in fuel prices could have a corollary of increasing consumers’ propensity to shop from home via home shopping networks or more notably the internet. Both these brick and mortar shopping alternatives rely on companies like UPS to deliver their goods.
 
Overall, the company saw a slowdown in both domestic and international package shipments, while supply chain and freight shipments saw increases. Fuel costs rose a whopping 67%. The company’s earnings projections going forward are based on oil priced at $140 a barrel. Oil is currently at $126 and has been falling of late; if this trend continues expect UPS to be a beneficiary.
 
UPS is rated a strong buy by Ockham Research. Based on our metrics, the stock around $60 is selling at a deep discount and should be quite appealing to value investors at current levels, even with today’s modest rally. The stock’s historic price-to-cash flow range is 17.8 – 22.4 and it recently was trading as low as 11.4x. Its price-to-sales historic range is 1.71 – 2.22. The stock recently traded at 1.21x. Were UPS to return to a more rational level based on historic norms, the shares would be trading at $90.
Dark Knight: Exceeds Blockbuster Expectations
July 21, 2008  |  12:00 PM
The highly anticipated release of the latest installment of the Batman movie series has not disappointed as “Dark Knight” rode huge momentum into the biggest opening weekend in history. The movie—made by Warner Brothers, a division of Time Warner (TWX)—raked in an estimated $155.3 million beating the old box office revenue record held by “SpiderMan 3”. The buzz surrounding the movie’s release was palpable partially due to the untimely death of Heath Ledger, whose portrayal of the Joker has been critically acclaimed and may earn him a posthumous Oscar nomination. Having seen the movie, I am among those that believe that the movie was worthy of the hype. It will be interesting to observe whether or not the glowing reviews of critics and average movie goers will be enough to sustain the hugely successful box office results of this weekend.
Estimates for weekend revenues for “Dark Knight” ranged anywhere from $110 million to $130 million, but the reality beat even those lofty estimates. Overall box office sales of $255 million shattered the previous best weekend of $218 million from July of 2006 (that weekend’s blockbuster was Disney’s (DIS) “Pirates of the Caribbean: Dead Man’s Chest”). This weekend was an important one for movie studios that have seen a slow but steady decline in ticket sales recently. Studios have often claimed that their industry in highly resistant to economic slowdowns because it is still one of the cheapest entertainment options around for cash strapped consumers. Even though box office prices have been rising they are still cheaper than sporting events, theme parks, and travel. 
The success of this movie could be a shot in the arm for Time Warner, which it desperately needs. Warner Brother’s studios took a heavy loss on “Speed Racer” earlier this year which cost well over $100 million to make, but brought in a paltry $43 million at the box office. Some estimates have “Dark Knight” breaking even relatively soon, and may bring in over $800 million over the next five years due to everything from box office sales, DVD sales, merchandise, among other revenue streams. The movie has had an amazing opening but the true money maker is in the film’s longevity. The performance of Heath Ledger should go a long way to keeping the movie significant for longer than it otherwise would have.
Now, it goes without saying that even if TMX makes $1 billion from this one movie it is still little more than a drop in the bucket for Time Warner, whose revenues were over $46 billion in 2007. However, this is a very visible and news worthy success thus far and it is a timely reminder of what a company that looks undervalued by our methodology. Historically, Time Warner has traded between 9.4 and 16.1 times cash flow but currently it trades at 6.9 times. However, Time Warner is such a diverse company that this success could be swallowed up by the behemoth, but it certainly has not hurt.
Dark Knight may have a much larger effect on a smaller company, IMAX (IMAX). The demand for Dark Knight tickets in IMAX theatres has been huge as it played in 94 of their U.S. theatres, many of them sold out of all show times weeks in advance. The IMAX theatres brought in nearly $7 million, and the IMAX screens continue to be in demand as some of the scenes from “Dark Knight” were shot specifically for IMAX’s unique technology. Currently, Ockham has IMAX rated a hold mainly because in the last year the stock is up 63%, but it may still have further to go as the company continues to grow rapidly and blockbuster releases such as this heighten the profile of the relatively small company.
Wells Fargo Rides to the Rescue
July 17, 2008  |  9:55 AM
Better than expected second quarter earnings news from California-based Wells Fargo (WFC) and its unexpected ten percent dividend boost helped spark a hefty rally in the overall market—particularly beleaguered financials—on Wednesday. While the bank’s net income fell 21% in the quarter, this was better than forecast. Also, the bank was able to increase its net interest margin to 4.92% from 4.89% from the year-ago period. This is a pretty impressive accomplishment in a brutal market for financials. Furthermore, WFC is headquartered in “ground zero” for real estate troubles, California.
While the market—desperately looking for a reason to rally—widely celebrated Wells Fargo’s news and even the dividend increase, some analysts griped that it was not a smart move in the current environment. For one thing, WFC’s dividend already is over six percent and—unlike many of its peers—appears secure at this level. Secondly, with so many competitors struggling mightily, WFC might have been wise to put this cash to work on the acquisition front. Money is tight right now and many analysts seem to believe that WFC would be better hording every penny rather than returning any more to shareholders in the form of higher dividends.
WFC’s solid second quarter comes as a reminder at an opportune moment. By Tuesday, the market was trading as if every bank in the U.S. was on the road to insolvency. Wells Fargo served to remind all that, even in the battered California market, not every bank is on the ropes. It was a most propitious time for a little good news to put things into perspective. There are many tough months ahead for the U.S. financial system and there will be more bad news before all is said and done. Indeed, before this difficulty is behind us, some of the stocks that looked on their way to zero on Tuesday may well end up there. However, the financial system will survive this turmoil and likely emerge stronger and wiser in the future.
While Ockham prefers not to play the game of calling market bottoms, we do get a sense that we may be quite near one at least in the financials sector of the U.S. market. The doom and gloom in this sector is so profound that it is palpable and photos of elderly depositors lining up under tents at IndyMac branches in California earlier this week only add to the environment of despair. If one adheres to the adage that the time to buy is “when there is blood on the street,” then we are getting some glimpses of blood.
Banks like Wells Fargo and J.P. Morgan (JPM) have been well managed through all of this and do not deserve to be trading at such depressed levels, despite the challenging environment.   Despite yesterday’s nearly thirty percent rally, WFC’s stock is still fairly attractively valued to us. Using our valuation metrics as of Wednesday’s close, WFC is still a Buy. The stocks historic price-to-cash flow range is 12.7 – 16.6 and the stock currently trades at a multiple of 11.9X. The price-to-sales range is 2.2 – 2.9 and the stock is trading at 2.05x. Even at the low end of its historic range, WFC merits a price close to thirty.
Wells Fargo and J.P. Morgan’s better-than-expected earnings news may, in time, prove to be the nadir for financial stocks. Markets are discounting mechanisms and will anticipate future developments well in advance of reality. The troubles bedeviling financial companies are by no means behind us. Indeed, there will be many mergers of desperation and bankruptcies before the smoke clears. Five years from now, there will be fewer institutions than we have today and those that survive will be run far more conservatively than what we have seen in the past decade. However, the sun will still rise in the morning and the U.S. financial system, the dollar and the economy as a whole, will rebound in time.
Abbott Labs Delivers Above Expectations
July 16, 2008  |  12:05 PM
While many earnings reports these days are disconcerting to investors as fuel prices weigh on the economy, we think it is important to note those companies that are beating expectations.  Beating estimates amidst tough circumstances is a sign of solid management, which is always a positive for investors. Abbott Laboratories (ABT) announced an impressive second quarter earnings increase of 34% which surprised Wall Street with strong growth for its blockbuster arthritis drug Humira. It produced sales of over $1 billion, up 48 percent from last year. Also impressive were the double digit gains in HIV treatment Kaletra and cholesterol drug Niaspan.  The bulk (56.5%) of Abbott’s sales comes from prescription drugs such as these, and these results led the company to boost its full year guidance from $3.20- $3.25 up to $3.24- $3.28. 
As mentioned above overall pharmaceutical sales were robust with a gain of 17%; however other segments also showed significant gains.  Nutritional products—such as multivitamin drink Ensure—were up more than 21%. Of particular note is the coronary stent business which grew 30% to $217 million, Abbott's new drug-coated stent, Xience, received approval from the U.S. regulators in early July. It has been available in Europe for some time, although sales have cooled on drug coated stents it was once a $6 billion a year industry. Vascular products are at this point only a small portion (6.5%) of ABT’s revenue in this quarter but the company hopes that its new product will gain wide acceptance. Abbott sponsored a study that revealed Abbott’s Xience was safer and causes less scar tissue than Boston Scientifics’ (BSX) Taxus device. 
Abbott is a fairly diversified conglomerate which allows it to be particularly resilient to strain from generics taking away market share. Generics have eroded revenues of many large drug companies and their stocks have borne the brunt of it. The Healthcare Sector SPDR (XLV) is down more than 13% in the last year, but ABT has been resilient and is up about 7%. They have found a way to be successful in a truly difficult market.  Abbott, headquartered outside of Chicago, has benefited from strong growth of international revenue of 24%, which outpaced domestic sales growth of just 5.7%.
Clearly, we have been making the case for ABT based on improved fundamentals. We had ABT rated a Buy before these figures were released and this only strengthens that position. Over the course of Abbotts’ history, it has normally traded between 14.7 and 20.1 times cash flow, but the current level is only 12.7. Sales have increased substantially over the last year, continuing a trend of solid sales growth. Revenue per share has increased each of the last 10 years. Abbott would need to be trading near $62 per share in order for the stock to be at the low ends of its normal price-to-cash flow and price-to-sales ranges. We are reaffirming our Buy rating because of improved fundamentals, and we find it strange that ABT would be trading down nearly 2% this morning on the better than anticipated earnings in this market. Who is complaining though, all the better for value investors looking to buy on the cheap.
Financials Rout – Fear is in the Air
July 15, 2008  |  11:00 AM
The third quarter of 2008 will go down in history as one when real fear manifested itself in market behavior. Typically, such periods of outright despondency (capitulation) signal the end rather than early stages of a bear market. While there are ample underlying reasons for disquiet in the financial sector, the market is beginning to behave as if every bank in the country is on the brink of collapse. This is far from the case and the carnage of the past month clearly represents an over-reaction to a bad situation.
There is no doubt that the domestic real estate crisis is continuing to batter U.S. financials, the dollar and the global economy. Despite the carnage in markets like California, Florida, Las Vegas, Washington, D.C., Atlanta, etc., real estate values continue to decline largely because of a lingering supply imbalance. The vast over-supply of homes in these markets will take years to work down. However, many regions around the nation do not have this gross over-abundance of property for sale. Furthermore, while defaulted and non-performing loans (mortgages, HELOCs and unsecured) are rising nationwide, the vast majority of debt is being paid in a timely manner.
The Fed’s seizure of IndyMac Bank last Friday, far from calming things, has only deepened the general sense of fear and mistrust which now permeates the entire financial system of the country. No doubt there will be other bank failures. Analyst estimates say that as many as 150 banks nationwide will not survive this crisis. Problems at mortgage behemoths Fannie Mae and Freddie Mac have already required the intervention of Treasury Secretary Paulson to shore up confidence. To date, this intervention has not soothed frayed investor nerves.
Clearly, we are in a difficult situation and, to date, government action has not been sufficient to restore faith and trust in the system. As a result, each trading day sees steeper and steeper losses for virtually every financial institution’s stock. This unrelenting slide in value only makes it harder for financial entities to raise capital in order to put their houses in order. In many ways, the panic begets more grim economic reality and the process becomes a vicious cycle.
What is needed is leadership and courage on the part of investors, depositors and citizens. In his inaugural speech in 1933, Franklin Delano Roosevelt uttered the phrase: “the only thing we have to fear is, fear itself”. These were bold and truthful words spoken in the midst of the worst months of the Great Depression. They remain true today. While clearly suffering through a period of—sadly—self-inflicted economic adjustment, the United States continues to have the most adaptive, resilient and dynamic economy in the history of human endeavor. There are valuable lessons to be learned from this crisis and we have no doubt that they will help future generations build more rational and responsible economic structures. In the interim, it is helpful for investors to step back from the precipice and take a deep breath before joining in the panic that is brewing on Wall Street. We need a George Bailey moment here where we are all reminded of the need to show some spine and work to restore stability and trust in the financial system that serves us all. Without a restoration of that stability and trust, we face a long and difficult road ahead, indeed.
Republic Services: It's Not Trash, It's Big Business!July 14, 2008  |  2:50 PM
July 11, 2008  |  4:42 PM
There has been no shortage of merger and acquisition news from the waste management industry in recent weeks. It started last month when Republic Services Inc. (RSG) made a $6.24 billion offer for Allied Waste Industries (AW). That deal would combine the second and third largest trash collecting businesses in the industry in a direct challenge to industry leader Waste Management, Inc. (WMI). In an effort to thwart that deal and maintain its dominance of the industry, Waste Management announced today that it will bid $6.19 billion for Republic Services.   The two companies compete against each other in 19 of Republic’s 20 markets, which should create administrative cost savings and allow the businesses to integrate easily. The merger of WMI and RSG would create a company that’s combined 2007 revenue would be close to $16.5 billion.
The consolidation is being prompted by the pressure put on the industry’s bottom line by rising fuel costs. The waste hauling industry is also been hurt by a slowdown in construction waste cleanup. Housing starts are down 36% over the last year, and remodels have slowed down as well. With the prospect of increasing revenues looking increasingly difficult, WMI is going to attempt to pad its bottom line by cutting back on costs where it can. Waste Management estimates that cost savings from the proposed deal with RSG would be around $150 million in the first year. Waste Management expects most of the cost savings to occur within the first two years. Furthermore, Waste Management issued preliminary second quarter earnings of 64 cents on $3.49 billion of revenue, which puts them ahead of consensus Wall Street estimates of 58 cents on $3.42 billion. The company will officially report on July 29th.
WMI’s offer of $34 per share for Republic Services represents a 22% premium on its pre-announcement share price. Prior to the offer, our methodology had rated RSG a Strong Buy based on its valuation. The $34 bid is very near the high boundary of the range for which we could rationally expect RSG to trade in given current sales and cash flow. This deal represents an opportunity to find cost savings but more importantly for Waste Management, the acquisition would keep Republic Services from becoming an even stronger competitor to WMI. In this challenging and competitive environment, it is vitally important for Waste Management to gobble up more market share and keep its next largest competitor at a distance. The question is, will Republic Services accept WMI’s relatively low offer (considering that the WMI offer prices RSG shares only slightly above where those shares were trading prior to Republic’s offer for Allied Waste late last month)?
The First Round is on BUD Shareholders
July 10, 2008  |  11:00 AM
The saga over InBev’s (INB) offer for Anheuser Busch (BUD) is finally quieting down, and it appears that all it took was more money. We were taken by surprise by the rapid succession of negotiations between the two brewing giants, as companies of this size rarely move at this speed. It was on June 26th that BUD officially rejected InBev’s offer of $65 per share, claiming that it undervalued the company. August Busch IV, the company’s recently installed CEO was not ready to give up control of the company that his family started 156 years ago. He felt that BUD should remain independent and through his leadership the company could turn around its uninspiring stock performance over the last few years. It is clear to us that the new $70 per share offer is more than a fair valuation and in this economy shareholders and board members alike would be foolish to reject it.
InBev’s reasons for wanting to acquire BUD are obvious; the Belgian/ Brazilian brewer has strong brands in nearly every beer drinking corner of the world except the United States. Budweiser—with its 132 year history—“The Great American Lager” is one of the most recognized brands in the world.   However, it is such an American icon and business institution that the takeover bid became increasingly political in nature, prompting even Barack Obama to comment that a foreign ownership of Anheuser Busch would be a “shame”. While culturally this is a sad day for many in St. Louis and around the country, financially the deal makes sense. We would be stunned if the deal does not go through. The alternative for InBev was to continue its pursuit of a hostile bid which may have eventually won out, but would most certainly have taken much more time and engendered even more opposition from BUD loyalists.
We look at stocks from a value perspective and from our view BUD would simply be overvaluing itself if it were to reject the $70 per share offer. The stock was up 9% today after the new offer price was leaked. Prior to the talks with InBev, BUD stock had languished between $45 and $53 for years and the $70 price tag represents a 32% premium over the high end of that range. We have been positive on BUD from a value perspective for some time but even this price is more than fair. When we insert the $70 price into our valuation metrics, it puts BUD just slightly in overvalued territory. For example, historically BUD has traded between 11.54 and 14.34 times cash flow, given current cash flow and the $70 price, that metric pushes to 15.12. It is a similar story with price to sales as well. So, as we stated earlier, we are sympathetic to the blow to national pride of a foreign-owned Budweiser, but it is not pride that pays the bills, its money.
Wal-Mart Gets Boost from Stimulus Checks
July 9, 2008  |  4:55 PM
Wal-Mart Stores, Inc. (WMT) on Thursday reported an impressive same-store sales gain for June, a trend also seen at other value-oriented retailers such as Target and Costco. These reports offer some evidence that consumers are indeed spending their government-issued stimulus checks. Wal-Mart’s numbers were particularly impressive as the Bentonville, Arkansas-based retail giant reported a 5.8% jump in same-store sales—a whopping increase not seen at WMT in many years. The company had forecast same-store sales gains of two to four percent, so this was a very impressive out-performance and should help boost the company’s stock, which has enjoyed a nice run of late after years of stagnancy.
For years, market prognosticators had maintained that WMT shares would be a good defensive position in an economic downturn. During much of that same period, shares of the venerable retailer had been dead money as the stock languished for years as the stock transitioned from that of a go-go growth story to that of a massive, fully mature and lumbering behemoth. Wal-Mart’s management has struggled for years to try to reignite the stock’s former appeal. Attempts were made to emulate Target’s more upscale merchandising with minimal success. However, over the past year or so, management’s efforts to boost same-store sales results back to a level which one would expect from a growth stock are starting to pay off. Furthermore, these efforts dovetail perfectly with the stalling economy.
Wal-Mart’s laser-like focus on keeping costs down and offering the best everyday value to consumers are paying off in a tough economy. More than ever, shoppers are looking for bargains and this plays right into WMT’s wheel house. Year-to-date, the shares are up over twenty percent, which is almost a mirror image of the negative returns turned in by most major domestic stock indices over the same time period.
Ockham Research has maintained a strong buy on WMT shares for quite some time. The almost decade-long stagnancy in the stock coupled with solid year-over-year earnings growth compressed  once lofty multiples and gave us an appealing entry point for the world’s largest and—all things considered—one of the best run retailers. Despite the solid performance of the past year, WMT stock still trades at a price-to-sales level of 11.46 (while its historic price-to-sales range is 13.02 – 17.45). Its price-to-cash flow is .576 (while the historic range is .64 - .86). Thus, using these metrics, if WMT were to move back to just the lower end of its historic price-to-sales and price-to-cash flow figures, it should trade in the mid-sixties—a level twelve percent higher than its current price. Ockham views WMT shares as a good defensive position in a rocky and uncertain economy with long-term appreciation potential in any economic environment.
Apple's 3G iPhone Will Be Even More Successful
July 8, 2008  |  1:55 PM
Apple Inc. (AAPL) will release the long awaited second generation iPhone on Friday, and Apple faithful will be lining up to purchase the 3G phone. In fact, it’s been reported that lines at a New York City Apple store started forming last Friday, a week prior to roll out. Apple has worked hard to iron out some of the issues that hindered the first iPhone’s sales. This is not to say that the first iPhone was not a success because it most certainly has been. However, improving the product and the way it is sold will yield great benefits to Apple and its shareholders. A brief overview of these improvements is contained below.
The first improvement is the price point which —at least at time of roll out—has been dropped to $199 for the 8GB version, which is opens up the iPhone to a new group of consumers who were wary of shelling out $500 for the previous generation phone. Apple and AT&T (T) were strategic in pricing the iPhone and its accompanying service plan.  AT&T will bear some of the initial cost of the phone as a subsidy to Apple, but it will make up that cost by charging customers more per month to use the phone. If you total the extra monthly charges of the 3G iPhone, it is actually slightly more expensive than the original version. It is common knowledge that Americans have an affinity for credit and we believe many will be willing to pay the greater overall price because it will be collected over time rather than up front. 
Secondly, Apple and AT&T both were burned by the “jail broken” or unlocked iPhones which allowed users to use the devices on networks other than AT&T’s. In the previous agreement, AT&T and Apple shared revenue from voice and data plans, so each had a stake in keeping those revenue streams. To solve this problem, Apple and AT&T refined their agreement so that AT&T pays Apple the previously mentioned subsidy upfront and then all of the revenue from plans goes to AT&T. More importantly, when consumers buy the iPhone, they will not be able to leave the store without activating the iPhone with AT&T.
A 3G iPhone will have much more international appeal as well. The phone will be available in 22 countries right away, and Apple has plans to roll it out in some 70 countries worldwide in total. The global appeal of the first iPhone was marginal because much of the rest of the world has more advanced cell networks than those in the U.S. and the first generation iPhone was considered too slow. Now that Apple is offering the phone in 3G, the demand will be greater. For example, in the United Kingdom the wireless company O2’s website crashed when it was overloaded with activity trying to buy the iPhone as soon as it became available. During that time period, O2 claims to have sold as many as 13,000 iPhones per second at times.
Perhaps the most overlooked factor to be considered is the iPhone 2.0 software update, which will be released concurrently with the 3G iPhone’s introduction and will be also be offered as a free upgrade for existing first generation iPhone customers. One feature of this software package is the App Store which will allow game and application downloads. Pricing is still an unknown as surely some apps will be free and others will cost up to $999—income which will be shared by Apple and the developers. Another improvement is enterprise software clearly aimed at business users with push email, calendar, contacts, etc.   Also, Apple is introducing a rebranded email service called MobileMe, which is “exchange for the rest of us.”
Apple is unlike any other company in that they can generate such a huge buzz with relatively little marketing effort. This iPhone is guaranteed to sell to diehard Apple-fans, but this iPhone has a mass appeal that exceeds the first version. Some numbers to illustrate the point: 5-6 million 2G iPhones sold in a little over a year, Morgan Stanley estimates that 27 million 3G iPhones will be sold by the end of 2009 and Piper Jaffrey’s sales estimates are even higher.
Lift the Glass to Pepsi Bottling
July 7, 2008  |  3:15 PM
Pepsi Bottling Group Inc. (PBG) reported second quarter earnings today, kicking off a much-anticipated earnings season that will offer more insight into the weary equity market over the next few months.  Predictably, PBG’s news was mixed and the stock is off over three percent in this morning’s trading. The company reported a 7.4% increase in second quarter net income as well as respectable revenue gains.  However, it guided lower on its sales outlook for the balance of the year and that was enough to punish the stock in this somewhat despondent market environment.  Seemingly, it does not take much to spark a 5% selloff these days.
 
Wall Street’s per share consensus estimates for PBG were earnings of 75 cents on revenue of $3.55 billion.  The company earned 78 cents on revenue of $3.52 billion (a 4.8% increase.)  The revenue miss along with a decline in gross margin from 45.7% to 45.6% was not well received by traders.  Also, the sluggish domestic economy and inflation in everything from high fructose corn syrup to fuel and packaging offset strong revenue growth in overseas markets and caused PBG to lower expectations for the remainder of the year.  The company expects revenue growth of five vice six percent going forward but reaffirmed its full year 2008 earnings forecast range of between $2.30 to $2.38 per share.  Analysts had been forecasting $2.35 per share on six percent revenue growth, hence the disappointment evident in today’s market action.
 
Pepsi Bottling stock has been on a downward trajectory all year and is now off almost 40% for 2008.  As a result, Ockham Research now has a Strong Buy on the stock.  The stock’s historical price-to-cash flow range is 5.46 - 7.78 and it is currently 5.21.  Its price-to-sales range is .506 - .72 and it stands at .439.  With an above-money-market-rate dividend yield and in a relatively defensive market segment, PBG shares would appear to offer compelling value at these distressed levels and may be worth the attention of patient, value-oriented investors.
Can Alcoa Foil Its Skeptics?
July 3, 2008  |  2:25 PM