30 September 2005

Shit, now Cramer's on board with WMT.

From the 9/28 Mad Money recap:

Cramer issued a "triple buy" on Wal-Mart (WMT:NYSE - news - research - Cramer's Take) Wednesday on his "Mad Money" TV show.

Cramer, who has long been bearish on Wal-Mart, is changing his opinion for three reasons. First, with consumer confidence low and the Federal Reserve "going after the economy," Cramer said people will start shopping more at the "lowest-price" retailer.

Second, Wal-Mart is "actually thinking about style and taste" in bringing on former Target (TGT:NYSE - news - research - Cramer's Take) executive John Fleming and in contemplating buying Tommy Hilfiger.

Third, with Wal-Mart's stock at a six-year low, the stock is finally "cheap," said Cramer.

A caller asked if dollar stores are good investments now. Cramer said he expects Wal-Mart to turn around first and then the dollar stores' business will follow. He would not buy the dollar stores' stocks yet though.

In response to a question about Target, Cramer said he sees Target flat-lining while Wal-Mart goes up.


Since his mention, the stock's up about 1.5%.

Part of me is glad that I arrived at a similar conclusion, with the focus on WMT, while still keeping an eye on FDO. But part of me would prefer Cramer to keep his big yap shut, and focus on, y'know, tech stocks.

29 September 2005

Comparing companies making $$ in Fort McMoney - Part Two (Crunchin' Numbers)

Before I get underway with the numbers, I just found an article from 2002 on Suncor. Here are some excerpts:

Suncor Energy squeezes profit from Canadian sands
Global Finance, Sep 2002 by Platt, Gordon

"We are a very unusual energy company because we have such huge reserves," says Rick George, president and CEO. The company's oil-sands leases contain more than 12 billion barrels of recoverable resources.

"We have no exploration costs, which makes us more like a manufacturing company," he says. "On our leases you can find oil with the toe of your boot in many places."
...
The Athabasca oil-sands deposit, created millions of years ago when the area was an inland sea, is the world's largest known petroleum resource. The Canadian government estimates there are at least 300 billion barrels of recoverable bitumen, a tar-like substance that can be upgraded to high-quality oil, within 250 miles of Fort McMurray.This is comparable to all of the proven oil reserves of Saudi Arabia, George points out. It is enough oil to supply all of Canada's consumption needs and all of the United States' import needs for the next 75 years.
...
Since he joined the company in 1991, George says, Suncor has reduced cash operating costs of oil production from about C$20 a barrel (US$15) to C$12 a barrel (US$8).

"Our goal is to cut the cost per barrel in US dollars to about $6 or $6.50, which is certainly competitive with anybody," he adds.
...
Analysts praise Suncor for its well-planned growth strategy and say the company is likely to continue to grow despite uncertain economic conditions in the United States, Canada and other markets around the world. However, some analysts point out that the oil-sands business is beginning to get more crowded, particularly with Shell Canada expected to start up a C$5 billion entry by the end of this year.

The Syncrude Project, a joint venture of AEC Oil Sands, Canadian Oil Sands Investments, Conoco Canada, Imperial Oil Resources, Mocal Energy, Murphy Oil, Nexen, and Petro-Canada Oil & Gas, is the largest oilsands producer, with a slight lead over Suncor.

Paul Cheng, analyst at Lehman Brothers in New York, says oil-sands production costs have begun to rise rapidly in the past several years.

Cheng notes that Suncor's Project Millennium, a four-year expansion program completed at the end of 2001, was plagued by cost overruns. The C$3.4 billion capital cost was about C$1.4 billion more than the original 1997 estimate of C$2 billion.

Labor costs in the Alberta area are rising, Cheng says, and as more companies pursue the oilsands business, there could be limits on the availability of well-trained workers.

"I don't mean to sound negative on Suncor," Cheng says. "They have a good management team that has been doing this for some time. They have more technical know-how than the others."


So Suncor is sitting atop oil, but competitors have noticed, and are joining in on the festivities. Labor and production costs were in question back in 2002, but that was back when oil was bargain-priced.

Now that we have some basic background on these companies, let's look at some numbers:

Ticker/Share Price(as of 9/28/05)/PEG/ROIC/Enterprise Value/CNBC Stock Scouter Score/% Ownership of Syncrude

SU - $60.52 - na - 11.16% - $63.85 - 7/10 - na
ENB - $31.78 - 3.54 - 5.21% - $52.54 - 6/10 - na
IMO - $115.35 - 3.06 - 30.18% - $113.83 - 10/10 - 25%
PCZ - $42.60 - na - 11.77% - $46.07 - 10/10 - 12%
NXY - $47.94 - 3.12 - 7.78% - $61.49 - 10/10 - 7.23%
MUR - $50.50 - .65 - 20.55% - $48.96 - 7/10 - 5%

ECA - $57.28 - 2.15 - 11.13% - $61.48 - 10/10 - na

HAL - $69.36 - 1.86 - 15.88% - $72.26 - 7/10 - na

COS.UN - C$125.00 - 3.40 - na - na - na - 31.74%

Part of me just wants to buy shares of the Canadian Oil Sands Trust. It's a pure play on the Albertan oil sands, like Suncor, but then I have to go through the hassle of buying a security that trades on the TSX. COS.UN is also not as easily tracked as the other above-listed stocks. That's why I left out another oil sands participant, Shell Canada, SHC, as it trades on the TSX.

So do I want to invest in a pure play, or do I want shares in a company with exposure beyond the Canuck version of Texas?

A quick look at the above numbers shows IMO and MUR with the highest ROIC. MUR has a suspiciously low PEG, while ECA has a PEG lower than expected considering how much its stock price has rocketed over the last few months. ENB has the biggest differential between its enterprise value and its share price, but it also has the lowest ROIC, Stock Scouter score, and does not have ownership in the Syncrude partnership.

Also, all of these companies' share price has boomed over the summer. We could be in store for a short-term correction.

What to do? Anyone have any opinions on these companies? Do any stand out, positively or negatively, from the others?

For now, I'm going to group these stocks together in the newly-reorganized WershovenistPig Stock Watch List.

Comparing companies making $$ in Fort McMoney - Part One (Company Profiles)

Let's examine Suncor and Enbridge, companies cited in the Maclean's and Canadian Business articles, plus the companies involved in the Syncrude Project, and a couple other big name energy plays for comparison's sake.

I'm going to break this up into two posts, this first, functional post that offers basic company profiles for reference, and a second post with numbers, math, and some stock picking. Sounds like great fun!

All company descriptions are pinched from Marketwatch.com, except when swiped from MSN Money.

C'mon, like I'd spend valuable time writing these up when I could be wasting it, using my newfangled valuation model to come up with a negative price for Suncor. That's right, my model said that Suncor owes shareholders big time. Stupid, dumb model.

Now back to being serious:




Suncor (SU)- Suncor Energy Incorporated. The Group's principal activities are to acquire, explore, produce and market crude oil and natural gas. The Group operates in three segments: Energy Marketing and Refining, Oil Sands and Natural Gas. The Energy Marketing and Refining segment refines crude oil and transports and markets finished petroleum and petrochemical products. The Oil Sands segment produces and markets light sweet and light sour crude oil, diesel fuel and various custom blends. The Natural Gas segment explores, acquires, develops, produces, transports and markets natural gas and crude oil. The Group owns mines in the Athabasca region of Alberta, natural gas facilities in Calgary and refining facilities near Toronto. The products are sold in the United States and Europe apart from Canada. On 01-Jun-2005, the Group acquired Colorado Refining Company.


Enbridge (ENB) - Enbridge Inc. The Group's principal activities are transportation and distribution of energy. The Group operates through five segments: The Liquids Pipelines segment includes the operation of common carrier and feeder pipelines that transport crude oil and other liquid hydrocarbons. The Gas Pipelines segment transports natural gas. Sponsored Investments consists of partnership investments that transports crude oil and other liquid hydrocarbons. The Gas Distribution and services segment consists of gas utility operations to serve residential, commercial, industrial and transportation customers. The International segment invests in energy transportation that provides consulting and training services related. The operations of the Group are carried out in Canada, the United States and other foreign countries. On 01-Jan-2005, the Group acquired Shell Gas Transmission LLC and 28-Mar-2005, acquired remaining 20% interest in Garden Banks Gas Pipeline, LLC.


Canadian Oil Sands Limited (COS.UN-T) - Canadian Oil Sands Trust (the Trust) is an open-ended investment trust that generates income from its oil sands investment in the Syncrude Joint Venture (Syncrude). Syncrude operates an oil sands facility and produces crude oil through the mining of oil sands from ore deposits in the Athabasca region of Northern Alberta, Canada. As of December 31, 2004, Syncrude operates in its Base, North and Aurora North mines, which represent its proved reserves of about three billion barrels. An additional undeveloped lease, referred to as Aurora South, represents substantially all of its probable reserves. Syncrude's total resource base is nine billion barrels, including the resources of other leases. Syncrude also operates bitumen extraction plants and an upgrading complex that processes bitumen into a light sweet crude oil. Syncrude is administered by Syncrude Canada Ltd. on behalf of eight joint venture owners. As of December 2004, the Trust holds the largest interest (35.49%) in Syncrude.


Imperial Oil Resources (IMO) - Imperial Oil Limited. The Group's principal activities are to provide petroleum products and explore for, produce and market crude oil and natural gas. The Group operates through three segments: Petroleum Products, Natural Resources and Chemicals. The Petroleum Products segment consists of transportation, refining and blending of crude oil and refined products and the distribution and marketing of these products. The Natural Resources segment explores and produces crude oil and natural gas, including, upgraded crude oil and crude bitumen. The Chemicals segment manufactures and markets various petrochemicals. Brand names include 'Esso'. The Group operates in Canada.


Petro-Canada (PCZ) - Petro-Canada. The Group's principal activities are to explore, develop and market crude oil and natural gas. The Group's business is divided into two sectors: Upstream sector which explores, develops, produces and markets crude oil, natural gas, natural gas liquids, sulphur and oil sands. Upstream Canada sectors includes activity in the Western Canada, East Coast Offshore, Mackenzie Delta and Alaska regions. International sector includes activity in the United Kingdom, the Netherlands, Trinidad, Venezuela, Syria, Libya, Kazakhstan, Algeria and Tunisia. Downstream sector which refines crude oil and other feedstocks and markets and distributes petroleum products and related goods and services.


Nexen (NXY) - Nexen Incorporated. The Group's principal activity is to explore, develop and produce crude oil and natural gas. The Group operates in three segments: Oil and Gas, Syncrude and Chemicals. The Oil and Gas segment includes onshore operations in Yemen and Canada and offshore in the US Gulf of Mexico. Other oil and gas operations are conducted in West Africa, Australia and Colombia. This segment also includes the Group's marketing operations, which sells its own oil and natural gas, as well as, third party oil and natural gas. The Syncrude segment includes the operations of the Syncrude Joint Venture, which develops and produces synthetic crude oil from oil sands in northern Alberta, Canada. The Chemicals segment manufactures, markets and distributes industrial chemicals, principally sodium chlorate, chlorine and caustic soda. On 01-Dec-2004, the Group acquired EnCana (U.K.) Limited.

Murphy Oil (MUR) - Murphy Oil Corporation. The Group's principal activities are to explore, produce, refine and market oil and gas. The Group's operations are classified into two segments: Exploration and Production and Refining and Marketing. Exploration and Production operations are carried out primarily in the United States, Canada, the United Kingdom, Ecuador and Malaysia and consist of exploring and producing crude oil, natural gas and natural gas liquids. Refining and Marketing operations are located in North America and the United Kingdom and consist of refining crude oil and other feedstocks into petroleum products such as gasoline and, the transportation and trading of petroleum products. The Group's production of crude oil, condensate and natural gas liquids averaged 108,000 barrels per day in 2003 from 1,040 gross Oil wells and 923 gross gas wells as of 31-Dec-2003. The Group's products are marketed under the Murphy USA (R) and SPUR(R) brandnames.


EnCana (ECA) is here for comparison's sake - Encana Corporation. The Group's principal activities are to explore, produce and market natural gas, crude oil and natural gas liquids. It operates through two segments namely: Upstream and Midstream and Marketing. Upstream focuses on the exploration, development and production of natural gas, crude oil and natural gas liquids (NGLs) and other related activities. The Midstream and Marketing division focuses on natural gas operations, NGLs processing and power generation operations. It also undertakes market optimization activities to enhance the sale of Upstream's proprietary production. The Group operates in the United States and Canada. The new venture exploration programs are focused on opportunities in Africa, South America, the Middle East and Greenland.

Halliburton (HBR) is here because Blog Hog JVL thought it mighty patriotic (and profitable) to include this internationally involved company - Halliburton Company. The Group's principal activities are to provide services, products, maintenance, engineering and construction to energy, industrial and governmental customers. It operates in five segments: Drilling and Formation Evaluation Segment involved in drilling and evaluating the formations related to bore-hole constructions. Fluids segment focuses on fluid management and technologies to assist in the drilling and construction of oil and gas wells. Product Optimization segment primarily tests, measures, and provides means to manage improve well production. Landmark and other Energy Services segment provides integrated exploration and production software information systems. Engineering and construction segment provides energy and industrial customers and government entities worldwide. The Group operates in United States, Iraq, United Kingdom and Other Countries. In August 2004, the Group sold Surface Well Test and Subsea Test Tree product and service lines.

27 September 2005

Fort McMoney, Alberta, Canada

I like Canada.

I subscribed to Maclean's for a year in high school. Some of my favorite bands are Canadian. Poutine is a wonderful food, nee cuisine. Icewine from the Niagara Peninsula rivals Yuengling and scotch for my affections.

I also own shares in the Fidelity Canada mutual fund, which has done extraordinarily well. So you know I'm pleased when I read the following in the most recent Economist:

"The engines of growth in the 1990s-cars and high-tech industries-have
slowed or shrunk. In their place, dowdy perennials, such as mining,
have become the new stars. "The economy has just been flipped on its
head," says Philip Cross, the chief economic analyst at Statistics
Canada."

"The soaring price of oil and other commodities has prompted a surge
in investment. Some C$46 billion ($39 billion) of new investment was
announced earlier in Alberta's oil patch alone. Railway lines are
being built, ports expanded, and oil and gas pipelines laid.
Investment cycles in Canada generally run for seven to ten
years. This one is just beginning.


Purchasing this fund has been the easy way for me to get in on the Canada boom. (I have money in mutual funds; soon I will have saved enough for individual stocks.)But I don't particularly want to keep things simple. I went out onto the frontier of websites ending in ".ca" to search out some stories on Alberta's oil sands.

So I started off with my high school mainstay. Here's an excellent, yet lengthy, overview of what's going on up north, with some choice comments on the political tension between Ottawa and Western Canada:

June 13, 2005
Alberta is about to get wildly rich and powerful
What does that mean for Canada?
STEVE MAICH
At Suncor Energy's Millennium oil sands project, just north of Fort McMurray, Alta., the unmistakable odour of black gold drifts up from the ground and hangs thick in the air. Everywhere around you, water pooled in footprints, tire ruts and potholes carries the telltale rainbow sheen of oil. "The smell of economic progress," jokes Brad Bellows, a spokesman for Suncor, playing host on a damp spring afternoon. But it's much more than that. It's the smell of raw power -- the kind that comes from having plenty of what the rest of the world can't live without.
...
Suncor's extraction plant on the bank of the Athabasca River looks like a science fiction movie set -- hundreds of kilometres of steel pipe twisted into incomprehensible knots around hulking industrial buildings, storage tanks and smokestacks. The whole scene is bathed in a constant haze of steam and exhaust. Two other such plants are now operating within an hour's drive of here, and several more are scheduled to commence operations over the next few years, all to exploit what may be the biggest petroleum deposit anywhere in the world, a sea of oil-saturated soil covering an area the size of New Brunswick.
...
Terrorism, trade, the war in Iraq, nuclear diplomacy -- all of it, on some level, is related to the international preoccupation with energy, and access to affordable oil. So if Canada is to play a more significant global role in the years ahead, experts agree it will be due to the reeking, doughy black soil in northern Alberta, and the rest of the world's keen desire to share it. "The oil sands give Canada one of the single greatest advantages of any state in the Western world," says Paul Chastko, a University of Calgary historian who recently published a book called Developing Alberta's Oil Sands. "It gives Canada the ability to supply all of North America for the next 50 years without touching a drop of imported oil." It is, in short, an economic engine and political lever that any nation would desperately love to have.
...
Now Alberta is poised to reap the biggest bonanza in its history, an economic jackpot giant enough to fundamentally shift the balance of wealth and power westward. The province can control its own destiny more than any other because, in the years to come, Canada will need Alberta far more than Alberta will need the rest of Canada.
...
The locals have taken to calling this northern outpost "Fort McMoney" and it's not hard to see why.
...
And this, clearly, is just the beginning. The region's population is projected to grow by about 43 per cent in the next five years, all because of the oil sands. The National Energy Board estimates there are approximately 1.6 trillion barrels of crude bitumen saturating the ground in northern Alberta. Bitumen -- a form of heavy, thick oil laden with sulphur and deficient in hydrogen -- can be refined into synthetic crude oil to make everything from gasoline to plastics. It is the lifeblood of every industrialized economy. According to the Alberta Energy and Utilities Board, about 178 billion barrels of bitumen are economically recoverable using existing technology -- enough to produce more than 150 billion barrels of crude.
If these estimates are accurate, Canada's oil reserves rank second behind only Saudi Arabia's 260 billion barrels.
...
It's all being driven by a slew of expansions and start-ups scheduled to commence over the next several years, sending an estimated $60 billion in construction and development costs sloshing through the Canadian economy. The Petroleum Human Resources Council of Canada recently estimated that the number of people directly employed in oil sands operations -- currently about 50,000 -- will reach 80,000 by 2008. An additional 70,000 construction, manufacturing and service jobs will also be created -- 40 per cent of them outside Alberta.

Even now, most Canadians still don't fully grasp the significance of the industry, says Rick George, the president and chief executive of Suncor. "There's going to be $6 or $7 billion in new capital put into this business this year," he says. "What other industry is putting that level of capital into the country? There's no comparison that I'm aware of. And you will see that each and every year for the next 10 years, if not the next 20. Obviously that's a huge benefit to the country."
...
Barry Cooper wasn't surprised at Chretien's audacity. A University of Calgary political science professor and staunch critic of the federal Liberals, Cooper fully expects that, as the oil sands continue to develop, they will become a flashpoint in federal-provincial relations. Alberta already pays far more in equalization transfers to other provinces than it receives in federal program spending. And as the gap grows between rich Alberta and the poorer parts of the country, the demands to spread the wealth are sure to follow -- especially if prices for gasoline and heating oil skyrocket, as many predict. It's guaranteed to fan the flames of western discontent, Cooper says. "It's Alberta's oil if you live in Alberta and it's Canada's oil if you live in Ottawa," he says. "Energy has become the basic fault line of federalism."
...
Although producers like Suncor are reducing emissions on a per-barrel basis with better technology, and are researching ways to cut the amount of gas and water used in the extraction process, the total environmental impact of oil sands development is sure to increase substantially over the next decade. That has many convinced Ottawa is on a collision course with industry. "If government decides to clamp down hard on CO2 emitters to meet the Kyoto commitments, or if they use Kyoto and the treaty-making power to confiscate income that belongs to the province, the anger generated by the National Energy Program would pale in comparison," says Cooper.
Paul Chastko agrees, and says the environment is just one of many potential conflicts. What will happen if we're heading for a worldwide oil shortage that will send prices shooting higher? Will the rest of the country, particularly manufacturing-reliant commuter cities like Toronto and Montreal, be content to let Alberta profit while their industries are crushed by higher fuel prices, or will there be renewed calls for government intervention, as there were in the 1970s?
...
To be sure, many skeptics remain, in part because oil sands present a much greater technological challenge than conventional oil fields. In operations like Suncor's Millennium project, raw oil sand must be dug up using massive power shovels, or liquefied using steam so bitumen can be pumped to the surface. Either way, the process is arduous, expensive and consumes vast amounts of natural gas and water. ...
Energy security is not just an American fixation, however. China is in the early stages of an industrial revolution which will vastly increase that country's energy demands over the next decade. And recently Chinese officials have been eyeing the oil sands as a source of precious fuel. In April, a Chinese firm bought a minority stake in MEG Energy Corp., a tiny oil sands developer, and a few days later PetroChina signed a deal with Enbridge Inc. to build a new $2.5-billion oil pipeline between Edmonton and Canada's west coast, to ship up to 200,000 barrels a day to China. And last week, another Chinese energy company, Sinopec Group, bought a 40-per-cent stake in Synenco Energy Inc.'s Northern Lights Project for $105 million, and committed to invest an additional $2 billion to help build the project, aiming for completion by the end of 2010.
...
But Chastko, who can tell you as much about the oil sands as anyone, knows that keeping politics out of the way won't be easy. "The oil sands have tremendous potential, but it also has the whiff of political dynamite about it," he says. "The born-and-bred Albertan in me says I should be shouting from the highest rooftop about how the oil sands are going to pave the way for our future. The historian in me recognizes that rarely are things ever so simple."


So what are the risks in investing in companies exploiting the Albertan oil sands? The price of oil and the expense of procuring refined oil from the earth, Kyoto compliance, and political meddling from Ottawa threatening the profitability and share price of companies like Suncor.

I think the rewards are intriguing. The big question is whether the money soothes tensions or heightens them

Now for a more colorful piece that mixes business with pleasure from Canadian Business:

Alberta Oilsands: Boom Town
by Jeff Sanford
Fort McMurray reaps big money--and big problems--from the oilsands.
2005-09-12

If you drive four hours north of Edmonton along Highway 63, you eventually reach Fort McMurray, a remote mining town of about 61,000 chilly souls. Situated amid thousands of square kilometers of muskeg, it is basically the last bit of significant civilization directly north of Edmonton until you're travelling south again in Russia. Fort McMurray is so isolated that the first car didn't show up here until 1957, and residents watched television for the first time in 1970. In the winter, the temperature can dip to -51C, while the weak sun seems to set far too quickly. For most, all of that suggests this frontier city isn't worth the trip.

So why was Dick Cheney, the vice-president of the United States, planning to come here in early September? To shake hands, of course, and poke around the oilsands. His visit (postponed because of Hurricane Katrina) was to include a tour of one of the major operations that is busy digging up oil-soaked sand trapped between the Alberta boreal forest floor and bedrock--a task that has of late become monumentally important, both economically and politically.
...
No wonder Dick Cheney was planning to visit Fort McMurray. The end of easy oil is generating a one-time and permanent upward shift in the long-term price, as unconventional sources like the oilsands--which are more expensive to mine and develop--come to be relied upon more heavily.
...
Welcome to the last western boom town, riding high on the arc of oil depletion. Like Dawson City during the Yukon gold rush of the late 1890s or Saskatchewan's Uranium City in the Cold War '50s, Fort McMurray, and two of its main oilsand mining and extraction operations run by Syncrude Canada Ltd. and Suncor Energy Inc. (TSX: SU), is attracting people from across the country. Which is important. For years, the big issue was how to dig up the sand and then separate it from the oil and water, a process that requires massive extraction plants, but do it at a price that was competitive. That's largely been taken care of. The challenge now is finding people willing to man the massive expansion that is coming. So far, that doesn't seem to be a problem. Plentiful jobs and high wages--on top of the $30 to $40 an hour skilled tradespeople can command, some firms offer between $100 and $150 for a daily living allowance--have swelled the city's population 8.7% since June 2004. The migration has attracted people from across Canada, and the result is a remarkably vibrant social scene for a city of this size--even though men decidedly outnumber women.

That times are good is obvious on a recent Saturday night. Crowds of twentysomething guys, many of them welders, pipefitters or millwrights who work on the sands and have lots of cash, line up to get into the several bars clustered around the north end of the city's main street. At Diggers, the dance floor is packed, and patrons knock back pitchers of mixed drinks to help them get down to a distinctly Albertan mix of hip hop and country. Next door, at the Oil Can, well-dressed males in cowboy hats and boots twirl their equally spiffy partners around the dance floor to the sounds of a country band. There's a strip club in the same complex, as well as a cheque-cashing operation, while across the street the 7-Eleven, locally acknowledged as the best place to score any sort of illegal substance you might desire, is a hive of activity. Outside, revellers wander along the main street as a never-ending stream of massive, tricked-out pickup trucks drive by. If there is a sign of the wealth being created here, it is the ubiquity of the fully loaded Dodge RAM 2500 Mega Cab four-by-four (MSRP: $50,345)--though there are any number of other examples, too.

The next day I meet up with Jayme, the owner of the town's top escort agency, Paige's Playmates. She's finally found the time (10 p.m. on Sunday--"paperwork night") to talk about what it's like to run an escort service in a boom town overrun by itinerant workers. "You can do all right," she says, understatedly, and goes on to mention that her 2004 Mustang convertible was an impulse buy. She picked it up while at a dealership to purchase a truck to carry her son's quad ATV. "It was nice to be able to buy two cars at once," she says. When isn't it?
...
Biker gangs are reported to be moving into Fort McMurray because of the money. And crack cocaine and crystal meth are becoming quite common downtown; many young revellers have a certain glassy-eyed look about them. "It's getting pretty crazy here," says Jayme, the escort agency owner. "They have to do something about the camps. When you put guys together like that, they take on a new attitude." Indeed, on a recent Saturday night there were reports of a 15-person brawl outside Cowboys, another local watering hole that had three bullets fired into it the weekend before.
...
The big problem for the sands, however, will be keeping needed talent. Just a month after visiting Fort McMurray, I heard from Lovell, one of my hosts, that he has returned to Windsor, Ont., after only four months. "I couldn't take it anymore," he explained. "I needed a life." If Fort McMurray is going to retain tradespeople, it's going to have to do something more than pay good wages.

Perhaps it should look to Paige's Playmates for some suggestions on keeping workers happy. Many Canadians may be tempted to turn their noses up at the type of business she runs, but Jayme considers the services she offers vital in a town where the only two psychiatrists are booked solid. "If we didn't provide the option we do, it would be much worse up here," she says matter-of-factly. She also prides herself on running an "enlightened" business compared to most in the adult entertainment business. "By offering them a better place to work, I attract all the best girls. I've cornered the market here," says Jayme, like the true entrepreneurial Albertan she is. You might even say she's doing her bit to wean the United States off Mideast oil. One wonders what Dick Cheney would think about that.


Well there's some food for thought. In my next post, I'll examine the investible companies (not Paige's Playmates), like Suncor, Enbridge, and Syncrude Canada, a joint venture among many companies, which include Canadian Oil Sands Limited (COS.UN), Imperial Oil Resources (IMO - AMEX), Petro-Canada (PCZ), and Nexen (NXY). I also should take a look at EnCana (ECA).

Yep, Canada's got some fine offerings.

26 September 2005

Valuation of WMT - Look at What the Rookie Did

A very helpful reader, John Coumarianos
figured out that I favored Wal-Mart under my Discount Shopping Thesis. John then put forth the challenge: "How about a valuation analysis now?"

I didn't have a valuation method, or know anything about developing one. So over the weekend, I accepted the challenge to come up with a valuation for WMT.

So let's look at what the rookie did:

I worked through valuation materials from Prof. Aswath Damodaran of NYU/Stern at his resource-rich site.

I also pulled numbers for WMT off of Yahoo! Finance, SmartMoney.com, and MSN Money.

There was a tremendous amount of trial and error with the various FCFE models I found. Invariably, I would be left with one or two variables that I just could not figure out. I settled on the following last night at around 4 am:

Value Per Share = (Free Cash Flow to Equity(1 + Expected Growth Rate of Earnings)) / (Cost of Equity - Expected Growth Rate of Earnings)

Here's how I figured the inputs to the above equation:

For the numerator, I tried operating cash flow minus cash expenses for growth equals FCFE. Operating cash flow is net income ($10.267B) plus depreciation and amortization ($4.405B) minus (capital expenditures ($12.893B) + change in working capital ($- 1.4B)) which equaled $3.179B.

Now for the denominator, I had to artfully fudge some numbers. The Cost of Equity I devised was the approximate 10-year interest rate for U.S. bonds, or 4.25%, plus a 5% premium for the U.S. market times Beta (.52), minus the Expected Growth Rate of Earnings for WMT of 5.8%

Solving for VPS, I divided $3.179B by the outstanding number of shares (4.16B) to get .764. I then multiplied .764 by (1 + expected growth rate of earnings per share, or 1.058) to get .808. I then divided .808 by ((.0425) + .52(.05) - (.058)) to get $76.98.

$76.98 is significantly higher than the $43.22 share price that WMT traded at after Friday's close. But that's nothing compared to some of the inflated numbers I came up with in earlier attempts.

Assuming my model isn't flawed, and that's assuming quite a lot, WMT is looking really cheap.

Trying to put a value on WMT has been a frustrating but educational experience. Any suggestions for tweaking my model/figures, or does anyone have a completely different valuation model that you would suggest I use?

23 September 2005

Wal-Mart avoids Echelon Mall (see previous post)

Wal-Mart avoids Echelon Mall in a smart move
dodging the slow death of Echelon Mall.

Wal-Mart plan for Echelon scrapped
The owner is expected to propose a mix of stores and apartments.
By Edward Colimore
Inquirer Staff Writer

The proposed big-box store at Echelon Mall is out.

A town center with smaller stores and upscale apartments is in.

Plans for the redevelopment of the ailing Voorhees mall took a turn yesterday when township officials announced that the application to build a Wal-Mart there had been withdrawn.

The mall's owner, the Pennsylvania Real Estate Investment Trust, is instead following the lead of residents seeking a Main Street-style town center.
...
Part of the mall, including the former Sears portion, would be demolished for a wide boulevard lined by a supermarket and apartments above shops.

The rest of the mall - including two department stores and a food court - would remain. The plan also calls for underground parking, fountains, and the preservation of trees.

"We're certainly anxious to see what their thoughts are conceptually," said Mayor Michael Mignogna, a member of the planning board. "We want what's in the best interest of the township... .
...
In recent months, hundreds of residents attended rallies and signed a petition opposing the Wal-Mart proposal. Smart Action for Voorhees and Echelon (SAVE) and the Voorhees Environmental and Recreational Alliance (VERA) cited traffic and noise, harm to area businesses, and the loss of trees.

They presented a town-center concept at a July meeting on the township's proposed master plan. It called for a Main Street with a hotel, a new municipal building, shops, offices, and housing.

Yesterday, the Wal-Mart opponents praised the new vision for the mall.

Marylee Margolis, cochair of SAVE, said she had been given a preview during a meeting last week between residents and trust representatives.

"Personally, I'm thrilled - just with the fact that Wal-Mart is not coming," she said. "This plan shows more creativity and vision, and is much more community-friendly."

Lori Volpe, president of VERA, a nonprofit environmental group, said the mixed-use plan "is consistent with the principles of smart growth and can do a lot to revitalize the mall. It beats a big box and is much more in scale with the neighborhood. I hope it will help revitalize the entire area.

"I don't know how many people have been successful in chasing Wal-Mart away, but PREIT deserves some credit for changing their minds about what would work there and responding to public sentiment."


Makes me proud to have WMT on the Watch List. Also proud that I don't live in the SJ suburbs anymore. How bored must one be to become a member of SAVE or VERA? I mean, if you have that much free time, start a blog or something.

One more post to feed the Discount Thesis beast: SHLD - Sears and K-Mart

Does the combination of Sears and K-Mart have what it takes to take on Wal-Mart and Target? Is it synergy or stupidity? Let's look at some pros and cons I've found, but first, some important personal anecdotes:

My Dad was a mall developer for many years. When I was quite wee, he worked on developing Deptford Mall, five minutes from where I grew up in South Jersey. He negotiated leases and put together a diverse selection of retailers, or at least as far as his personal tastes would allow. (He overrepresented shoe stores in the retail mix.) He was proud of the mall, and loved taking me, parking in one of the special reserved spaces, and roaming the corridors like it was his.

I recall some of his comments about the then anchor stores at Deptford. He seemed to like the Bamberger's, especially the kitchen goods gallery and its array of gadgets. He was happy to have a classy John Wanamaker's outpost, even though that prevented the mall from getting a Strawbridge and Clothier location. (I remember there was a feud between these then-family-owned Philadelphia department stores; neither company would have a store at a mall that housed the other. I think that's why the Cherry Hill and Moorestown Malls exist within a few miles of each other, as well as the proximity of Echelon Mall to Deptford.)

And then there was the Sears.

Sears was quite unlike the other two department stores. Part of the parking lot was taken up by a shed of sorts that emanated smells of fertilizer and mulch. The store itself was a downscale amalgam of hardware store and second-rate clothing departments. It was also at the end of the mall where the Thom McAn, video arcade, and smurf emporium all resided. Most of the mall reflected a hopeful, optimistic feeling that Dumpford, er Deptford was developing. Soon, the trailer parks and turkey farms in the surrounding area would soon be history. The Sears end of the mall reflected Deptford's then current state of affairs.

We'd go to Sears for the occasional Craftsman tool and little else.

Years later, my Mom had re-entered the workforce, and took a job at a brand-new Sears that opened at the Echelon Mall around '98 or '99. In 1999, Echelon mall had four (4!) middling department stores (Boscov's, JC Penney's, Strawbridge's, and Sears), an inconvenient location far from highways, and a tumbling vacancy rate. Surprise, surprise, the store closed in 2001. (It wasn't my Mom's fault; her sales skills probably kept the place open as long as it was.)

Summing it up in an alliterative fashion, Sears sucks.

So who likes Sears? Jim Cramer, that's who:

Cramer also said Sears' (SHLD:Nasdaq) "gigunda buyback" is the first of many to come, and he "wants you in Sears."

Cramer doesn't talk up SHLD because it's a wonderful synergy of two dying retailers, K-Mart and Sears. He loves Sears because he want to make sweet sloppy love to Eddie Lampert. Cramer's hoping he's found the next Berkshire Hathaway. He's been trying to convince Mad Money viewers to buy this story, even to go so far as to convince those low on funds to buy a single share of SHLD.

That's a bit rich to me. And it's a bit rich according to some others:

Sears-Kmart and Core Competencies (SHLD)
I never really understood the whole Sears-KMart thing, writes Greg
Newton. Two wrongs never make a right and all that - but it starts to
make sense now that Ed Lampert, principal of ESL Investments and
chairman and largest shareholder of Sears Holding (SHLD), will take
over the marketing, merchandising, design, and on-line businesses of
Sears Holdings, including its Lands' End unit, to ensure that these
initiatives are clearly focused on responding to customer needs.

One of the great investors? Turns out that all he really wanted was to
be a buyer for a fourth-rate department store chain. Next thing you
know, Paul Jones is going to show up behind the counter at McDonalds -
if such things are allowed in Greenwich.

Positions: None. But with the lack of asset sales to date undermining
the SHLD bull case, dismal second quarter results announced yesterday,
and the great investor supervising photoshoots for another damned
Land's End catalog, my short trigger finger is getting itchy. I need
to find that Traders Anonymous phone number…


And how about Jeff Matthews' take:


Thursday, June 30, 2005
Wal-Mart 9, Sears Holdings Corp 2
...
Grand Lux Café is a retail concept that works.

As for one that doesn't, check out your local K-Mart.

After watching from the sidelines while Eddie Lampert built his own version of Berkshire-Hathaway buying up the remnants of two once-great retail chains and combining them into a single once-great retail chain, I was interested in seeing how the nearest "Big K" was faring.

This particular "Big K" is off Route One, in a C+ location next to an Ocean State Job Lot, a Dollar Tree and a Fashion Bug, and it looks a lot better than it looked during the the K-Mart Chapter 11 when the vendors weren't shipping: the shelves are full, the signs are cheery, the lighting is good and the floors are clean.

And that's about it.

"Big K" had that curiously soul-less feel of a decent-looking place with no particular franchise, nothing driving people in and little to keep them there. One ancient clerk moved slowly around the racetrack, putting up signage from a shopping cart when he wasn't stopping to chat with other clerks. A few customers lurked in the aisles, but the only crowd was at the service desk.

Registers open? Two.

I then drove a few miles down Route One to the nearest Wal-Mart, which is in an A+ location next to a supermarket and a Home Depot. It was a typical Wal-Mart, bustling even at 11:30 on a Wednesday morning. The demographics of the shoppers were probably thirty years younger than the "Big K," with mothers dragging children through the apparel section, kids roaming the DVD aisles and men in the tool area. Overall, it had the energy of a store doing a lot of business.

Registers open? Nine.

Now, Eddie Lampert is smarter, and richer, than 99.9% of the money managers on the planet. He found value in AutoZone and Sears and K-Mart, and extracted billions. A couple of other big investments didn't work out so well, but that's still a remarkable batting average for anyone in any line of work—and right up there with his role model, Warren Buffett.

But people forget that the original Berkshire Hathaway—the New England textile company Buffett acquired and turned into the conglomerate we all know and admire—failed.

Even Warren Buffett couldn't make a New England-based textile company successful in a world of cheap southern mills and, later, offshore producers; so he liquidated that business, put the money into insurance, and used the float from the insurance business to buy high-return businesses with "moats," as he calls their competitive advantages.

I have no doubt Sears Holdings Corp will be an even more successful investment vehicle for Eddie Lampert than it already has been.

But in its base business, with Wal-Mart adding more sales every two years than the combined annual sales of Sears and K-Mart together, I also have no doubt that whatever Sears Holdings Corp is making money at twenty years from now, it will not be making money from its motley collection of stores without billions of dollars of newly invested capital.

Yes, I know the "story" of Sears Holdings—just shut down a few hundred more lousy locations, start selling Sears appliances in the K-Mart locations, and get store productivity up to the level of Target. Voila! The incremental EBITDA and earnings are mind-boggling.

But there are no moats around those Sears stores and K-Mart stores with their lousy merchandising and old clerks and the ratty fixtures and 1980's-era technology—only streets leading to better-looking, better-run, lower-priced Wal-Marts and Targets and Costcos and Sam's Clubs.

And to get the customers back will require more than bright signs and Kenmore dishwashers.

From what I saw, the score right now stands at Wal-Mart 9, Sears Holdings Corp 2.


That was a pretty convincing anecdote-rich analysis against further consideration of SHLD (but a vote in favor of WMT).

Now for the piece de resistance, the topper, the nail in the coffin, the cliche to end all cliches against SHLD, from the New York Times:

September 9, 2005
Shake-Up at the Top at Sears

By JEFF BAILEY
CHICAGO, Sept. 8 - Edward S. Lampert, the billionaire who bought Kmart
when it was in bankruptcy and then used it to buy Sears, Roebuck, put
himself in charge of creative decision making on Thursday, taking a
measure of personal responsibility for lifting two retailers out of a
long sales slump.
...
Kmart and Sears were weakened in recent years due to uninspired
merchandising, squeezed between the fierce discounting of Wal-Mart and
Target and more fashionable offerings at department stores and
specialty retailers.

A person familiar with Mr. Lampert's thinking, who declined to be
named because Sears keeps tight control of all disclosures about its
business, said the financier believes there is a shortage of talented
merchants in the industry. "This is a work in progress," the person
said. "It's going to be a bumpy ride." But he noted that Kmart's sales
have pulled out of a nosedive under Mr. Lampert and that both chains
are also forsaking mere sales growth through discounting.

Mr. Lampert personally received compensation of more than $1 billion
last year, according to an estimate by Institutional Investor
magazine, in large part due to the big run-up in the value of Kmart
shares held by his ESL Investments fund. But the prospect of the
financier now overseeing merchants who make decisions on fabrics,
colors and other fashion elements disturbs Mr. Loeb, the retailing
consultant.

"That's scary," he said. "He's a terrific financial person. But he
doesn't necessarily know the details of merchandising.
Every company
needs a strong merchant at the top."




Sears still sucks. SHLD will not be appearing on the WershovenistPig Stock Watch List. If you think I'm wrong, leave a comment.

22 September 2005

Is the PEG Ratio worthwhile or worthless?

Dunno.

That's why this post is titled in such a manner.

I've done a bit of homework, pulled some nice research. Oh yes, we'll get to that shortly. I still just don't know. If anyone reading this has an opinion, please share in the comments.

I did a search on PEG ratios on a9.com (just for the 1.57% savings at Amazon) and found the old site
of Richard Miller, the purveyor of triplescreenmethod.com. Apparently, this fellow has a commercial concern based on this method of investing. With that grain of salt, let's take a look:

IBD and Zacks approaches to stock qualification identify fundamentally sound companies, but that's not enough. There's another piece of information needed: investors need to determine whether a stock is overpriced or not. Great fundamentals just aren't enough to produce winning trades. Frequently, these otherwise well-qualified stocks become overvalued as others see the potential, buying pressure builds, and price eventually exceeds the support of its earnings growth. PEG ratios (price/earnings/ earnings growth) provide one that estimate of value.

Earnings should be important to traders as well as investors, since future price is related over the intermediate-to-longer time frame to just three factors: earnings, earnings growth, and the stability of both. Peter Lynch in "One Up on Wall Street" said: "The P/E ratio of any company that is fairly priced will equal its (earnings) growth rate." That is, a PEG=1 marks a fully valued stock. The Motley Fool calls the PEG ratio their "Fool's" Ratio, and defines an undervalued company as one with a Fool Ratio less than 0.50. The importance of PEG ratios is well recognized. You probably have two questions: How does one calculate a PEG ratio? And how useful are such ratios in predicting price?

Mitch Zacks, in "Ahead of the Market," points out that analysts do only one thing well: project the next two year's earnings estimates from discounted cash flow modeling. Historically, they haven't rated stocks effectively, and they haven't provided good long-term earnings-growth estimates either. Though my PEG-ratio calculations differ from those made with historical earnings and five-year growth projections, I'm specifically targeting the value expected over the next two years, and the earnings projections over that timeframe are all that's needed.


I painstakingly plugged in data on all the stocks from the WershovenistPig Stock Watch List, using this so-called triple screen method. Assuming I didn't screw the math up, here are the results as of today, after the markets closed:

Ticker/PEG This Year/PEG Next Year/PEG Average
APC - .15/.59/.37
ARXT - na/1.38/na
ATYT - na/na/na
BDE - na/.81/na
BJ - .99/1.16/1.08
BYD - .29/.94/.62
CBH - 1.56/1.09/1.33
CTRN - na/1.44/na
CUB - na/.11/na
CVTX - na/na/na
DSW - na/.82/na
DWRI - .73/.30/.51
EDO - 2.58/1.31/1.95
FDO - na/1.65/na
HET - 2.06/.86/1.46
IGT - na/5.58/na
MRH - na/.02/na
TGT - .69/1.11/.90
UNT - .16/.54/.35
WMT - 1.72/1.06/1.39

An "na" appeared if the stock is too new to have prior year earnings, or if the stock's earnings declined.

So according to my calculations, the above stocks with the most promising PEG's are MRH, CUB, UNT, APC, and DWRI.

The least promising are EDO, FDO, HET, CTRN, and WMT.

Well, that really cleared things up for me. I'm really seeing the differences now.

On that note, let's look at some arguments from Professional Investor
against the PEG:

The PEG ratio has become increasingly popular over the past few years, particularly among growth investors, who want some way of relating the high P/E ratios they commonly have to contend with to a company's growth prospects. It is calculated by dividing the P/E ratio, usually the forecast P/E for next year, by the expected earnings growth rate. The convention is that a PEG ratio of one (for example, a P/E of 15 and a 15% forecast growth rate) is fair value; a PEG significantly above one means the company is overvalued, and if it is significantly below one then it merits further investigation.

Unfortunately, academics have documented major problems with using past earnings growth, and predictions of future growth, as a basis for anything. Back in 1962, Little of Oxford University showed that earnings growth is not a permanent attribute of a stock: past earnings growth does not carry over into the future any more than would be expected by chance alone. In 2003, Chan, Karceski and Lakonishok came to similar conclusions using large amounts of US data. As regards forecasting earnings growth, Ben Graham memorably described analysts' earnings predictions as 'somewhat less reliable than the simple tossing of a coin'. This is not hyperbole: it has been confirmed by a lot of recent research. For example, Keil, Smith and Smith in 2004
showed that analysts' forecasts would have been better in two-thirds of cases if they had simply said that company earnings would grow at the same rate as the average for all companies, rather than trying to guess it for individual companies.

Since the PEG ratio is calculated by dividing one of these predictions by the other, and the evidence is that analysts cannot predict either figure better than by chance alone, its usefulness should be in some doubt. But leaving aside these well-documented problems, here we concentrate on one particular aspect of assessing growth
stocks: the insistence on a history of growing earnings. Does a history of growing earnings mean good subsequent returns?
...
Many investors, and not only growth investors, believe that a company with a long history of growing earnings should tend to have good prospects for the future. This belief is false: knowing about past earnings growth tells us nothing significant, good or bad, about future returns. Where such companies do score over the average of companies in the market, however, is in the softer attributes of returns variability, and the chances of going into administration.


Alfred Rappaport and Michael J. Mauboussin also think the PEG is a load of hooey: I've distilled their effusively windy report
just for you:

[A] frequently used rule of thumb in the investment community is that stocks are attractive when they have P/E multiples less than the company's projected three- to five-year EPS growth rate. This so-called PEG ratio is expressed as the ratio of the P/E divided by the growth rate. The basic idea is that the lower the PEG ratio, the less you are paying for a company's future earnings. This rule of thumb is no more defensible than the simple P/E. After all, the numerator of the PEG ratio is the P/E itself. Further, we see no economically sound relationship between the P/E multiple and earnings growth projected over an arbitrarily short period.

I think I'll end up using the PEG as a minor consideration, one of many factors in determining whether to purchase a stock.

21 September 2005

Discount Mens Clothing - Casual Male and Men's Wearhouse




Continuing with the discount shopping thesis, let's compare a couple of low-end men's clothing stores, Casual Male, CMRG, and Mens Wearhouse, MW. Here are some numbers, including a new one for me, the PEG, or the price to earnings ratio, divided by the earnings growth rate. A PEG below 1.0 shows that a stock has a low price for its potential growth.

Ticker/Name/Price/52-Week Range/PE Ratio/Gross Margin/Profit Margin/PEG

CMRG - Casual Male - $6.30/$4.31-7.95/45.29/39.38%/0.07%/1.15/Big and tall men's apparel.
MW - Mens Wearhouse - $26.07/$18.33-37.44/17.15/40.00%/5.64%/1.38/Low-price-point men's business and casual wear.

George Foreman may not sell grills at Casual Male, but he has clothing lines with his name emblazoned on the offerings. Just look closely at his jacket sleeve in the above photo. Would you expect anything less modest from George? Speaking of modest, CMRG has a modest price if you don't take into account the incredible 45+ PE ratio, and its meager profit margin of .07%. The guys at thestreet.com's Stocks under Ten have a much more flamboyant
outlook on CMRG:

The company appeared on our radar screen as a low-dollar way to play a
slowdown in consumer spending on high-end clothing. Casual Male group
has been publicly traded for 15 years and sells casual and formal
attire for big-and-tall men through its 500 stores in the U.S. and
Europe.

Industry experts say the big-and-tall market is currently $5.5 billion
to $6 billion, and research firm Thompson Davis reports that 49 states
now classify 15% or more of their population as obese, vs. just four
states in 1991, giving Casual Male an expanding customer base.
...
In 2004, Casual Male sold off its stake in Levi's and Dockers outlet
stores and bought high-end, big-and-tall company Rochester Big & Tall.
Rochester cost Casual Male $15 million in cash and the assumption of
$5 million in debt, and added 22 stores to its total store count. The
swap-out of outlets and into Rochester refocused Casual Male on its
core business and should lead to operating efficiencies in the future.

In addition, Casual Male now carries name-brand clothing in
big-and-tall sizes, providing its customers -- regardless of height or
weight -- the opportunity to wear the latest in fashion. Partners
include Polo, Perry Ellis and Sean John. And in 2003, the company
began working with boxing legend George Foreman to offer sporty
clothing for the big-and-tall male.
...
The consensus outlook for full-year 2005 calls for sales of $440
million and earnings of 23 cents a share, a nice potential boost from
2004 levels when the company earned 2 cents a share on sales of $365
million. The Street's earnings consensus looks attainable given Casual
Male's recent initiatives designed to increase store traffic through a
customer loyalty program and its plans to add another 5% to its total
store count by the end of 2006.


As I'm neither big, nor tall, I haven't had any personal shopping experiences at Casual Male. The Stocks under Ten guys may have found an interesting pick, but they could also be struggling to find a stock that fits into their main criteria, a stock under ten dollars. But this isn't a cheap stock as you're paying quite a lot for CMRG's earnings. And you're paying for a growth story, even though the PEG isn't below the magic one-point-oh.



Mens Wearhouse came to mind immediately when I started thinking of discount shopping. My first experience with the chain was back in 1999, when I was fresh off the U-Haul, back on the East Coast. I had my one Brooks Brothers suit, but since I was starting out not as a big-firm associate, but a big-firm contract attorney, I needed to stock up on some inexpensive Tuesday through Friday suits.

I bought three at the Deptford, NJ location. I believe the store manager helped me, and the customer service was quite friendly.

I started work, and within the month, business casual reached the distant shores of Newark, New Jersey, and I was wearing khakis and polos by October. And not a moment too soon as the Mens Wearhouse suits began to look like they came from Mens Wearouthouse...(rim shot). I can't imagine I'm that hard on a suit; sitting for eight hours a day in front of a computer shouldn't wear out fabric so quickly.

Since 1999, the only purchase I've made at a Mens Wearhouse is a black leather belt. Still have it. Keeps the pants up. Works just fine.

The stock, on the other hand, has taken a beating very recently, and is trading around the middle of its 52-week range. I read that George Zimmer, the face and CEO of the company recently fell ill and had surgery; I wonder if those events, plus the retail sector slump contributed to its downward trajectory.

Still, MW has a reasonable 17 PE, and makes a healthy profit. But MW is not a growth story, as there are locations in 44 states and 10 provinces.

So, CMRG has a bit of a growth story, say a growth novella, whereas MW has the sounder fundamentals and a plummeting price. If I were to choose between the two, I'd buck thestreet.com and go with MW, but I think I'll keep looking for another pick for my discount shopping thesis.

20 September 2005

Is bulk the buy from broadline retailers?

I pulled the Dow Jones Broadline Retailers Index off of Marketwatch.com to make sure that I wasn't leaving any obvious big-box store names unexamined. And also to spot any small regional retailers that operate outside of the NY metro area, and would thus be off my radar.

What I'm looking for are stocks that fit into my discount thesis, that offer lower price points, yet are still profitable and growing. I'm also looking for stocks that are trading beneath their 200-day moving averages, or near their 52-week lows. Wall Street has been hammering this sector, and ideally, I'd like to find a bargain amongst the bargain retailers.

Here are some names that caught my attention, with some statistics of interest:
Ticker/Name/Price/52-Week Range/PE Ratio/Gross Margin/Profit Margin/Comments

BJ - BJ's Wholesale Club - $27.45/$25.96-34.70/15.78/9.91%/1.28%/158 locations, generally on the East Coast.
COST - Costco Wholesale - $42.00/$39.48-50.46/20.29/12.53%/1.96%/452 locations
CULS - Cost-U-Less - $6.36/$4.95-11.94/9.22/na/na/11 locations in bizarre out-of-the-way locations, like various Pacific and Caribbean islands...and one in California. The company operates out of Bellevue, Washington, hundreds of miles from their nearest location. Check out the corporate website, and look at the photos of their locations; not too promising. However, their same store sales numbers keep rising, and they shouldn't need to worry about competitors entering their D-list markets.
DG - Dollar General - $19.03/$18.10-22.80/17.62/28.63%/3.47%/About 7900 locations, with over 550 added in the past fiscal year.
FDO - Family Dollar - $20.93/$19.50-35.25/15.28/33.23%/3.77%/5700 stores in 44 states; Katrina losses pegged at about 50-60 stores.
PSMT - Pricesmart - $8.45/$6.11-9.65/na/16.15%/-3.71%/26 smaller wholesale clubs in 12 countries. Low trading volume.
RVI - Retail Ventures - $12.23/$6.02-14.34/na/39.47%/-9.43%/Formerly known as Value City Department Stores, on the bright side, RVI spun off DSW and owns a significant portion of that company. It also operates Filene's Basement stores.

And let's throw in WMT and TGT for comparison's sake:
TGT - Target - $51.01/$45.03-60.00/21.08/31.52%/4.41%
WMT - Wal-Mart - $43.31/$43.82-57.89/17.05/23.26%/3.56%

The above stocks trading the furthest below their 50-day moving averages on a percentage basis are CULS, TGT, FDO and BJ.
The above stocks trading the furthest below their 200-day moving averages on a percentage basis are FDO, CULS, WMT, and BJ.

Before I go any further, I'm well aware that I'm doing some apples and oranges comparisons here, mixing warehouse clubs with strip-center dollar shops.

PSMT is not making any money and has a very low trading volume. Way too speculative for me. RVI isn't making any money either, and I recall seeing Value City stores in a crappy part of Northwest St. Louis County and in Vineland, NJ. It's also trading much too close to its 52-week high. I'm figuring its up because of the DSW IPO and the financial benefits arising from its DSW holdings.

BJ versus COST. When it comes to shopping, my friends prefer Costco. Wall Street prefers COST, too. It's a tad bit more profitable than BJ, yet trades at a much higher premium, forcing a stock purchaser like myself to pay more for COST's profits than BJ's. Also, BJ is lagging its moving averages. This could be a bargain that warrants more research.

Moving onto CULS, this looks like a cheap but highly-speculative move. The same-store sales growth figures are nice, but not enough to convince me to continue looking. Would you invest in stores that look like this?



Now, DG versus FDO. FDO wins with a slightly higher profit margin, and a somewhat lower P/E ratio. FDO is also lagging its 50-day and 200-day moving averages.

Finally, as I was writing this up, WMT hit its 52-week low.

I'm going to load up the WershovenistPig Stock Watch List with BJ, FDO, WMT, and TGT. Please note that the Watch List is a work in progress; it's not meant to be a diversified portfolio, but a collection of stocks from which I may make a purchase in the near future.

19 September 2005

A first attempt at second-guessing my thesis...

I just found the following piece on Wal-Mart at one of my Pig Pen links, Random Roger:


One asked about my thoughts about the hit Walmart took during the switch to the float method of calculating the S+P 500.

If you don't know, a lot of Walmart stock came out of the index as a result of the changes. I'm not sure if the question behind the question is should Walmart be bought here . All I can say is I have no interest in the name. From a market cycle stand point, companies larger than $100 billion have lagged and I think will continue to do so.

From a fundamental stand point the growth has slowed dramatically in the last few years and I am not sure how it can ramp up again. I live in the biggest town in my county, our town has only 35,000-40,000 people and we have two Walmarts. The point being there will be no more Walmarts here.

There are many other parts of the country that are also saturated to the point that there will be no new Walmarts. Sure they can expand overseas but there might be easier places in big box retail to make money while Walmart figures out how to market bok choi and Dodger's t-shirts in China.


Hmm. Well. Um. I gotta give this one a go:

I was never looking at Wal-Mart, or Target, for that matter, as a growth stock. When I'm looking at these companies, I'm looking for a decent reward at low risk. These companies are making decent profits off of sizeable revenues. And they are not going to go the way of Clover, Ames, or Montgomery Ward anytime soon.

Regarding growth, I've found in my research that Wal-Mart is trying to expand into LA, Chicago, and NYC, but has only had success in penetrating the Chicago market. So perhaps China is the (difficult) way to go.

But I'm not so sure about Random Roger's anecdote that two Wal-Marts satisfy 35-40K people. I went on the Wal-Mart website to their store finder. I typed in a bunch of zip codes where I have resided. I have always lived in or near a major city, except for those St. Louis years. Here's what I found:

08012 - South Jersey - 1 location within 5 miles; 2 locations within 10 miles; 10 locations within 20 miles (considering the psychological barrier that is the Delaware River, there are only 5 on the Jersey side)
10024 - NYC - 1 location within 5 miles; 2 locations within 10 miles; 6 locations within 20 miles (all in NJ or LI, not exactly the stomping grounds of New Yorkers)
63130 - St. Louis - 1 location within 5 miles; 4 locations within 10 miles; 15 locations within 20 miles (okay, Wal-Mart has St. Louis covered)
19041 - Main Line, Philly - 0 locations within 5 miles; 4 locations within 10 miles; 17 locations within 20 miles.


There are lots of Wal-Marts out there, but there seems to be some room for expansion according to my small sample size.

Finally, this is not an either/or situation. I may avoid both Wal-Mart and Target, and try to find a solid discount retailer with growth potential, perhaps a nice regional store looking to go national. But I haven't found that yet. If anyone reading this has any ideas, please share them.

In the meantime, look for upcoming posts examining the strange pairing of Sears and K-Mart, Sears Holdings (SHLD) and some mocking of Mens Wearhouse.

Behold! My Discount Shopping Thesis

$100 oil! Category 5 hurricanes! Alan Greenspan’s itchy trigger finger! Dust bunnies and nothing else in Americans' wallets! Human sacrifice, dogs and cats living together - mass hysteria!


Hyperbole and histrionics aside, I had a thought, a stock-buying thesis, if we’re going to get all highfalutin’. Discounters and chain stores that offer more consumer value will do better in a tighter economy than mid-level and high-end stores, right?

Wall Street responded to the August retail sales report negatively. Cramer pooh-poohs the retail sector on a nightly basis. Katrina and high oil costs should affect our GDP and economy, but shouldn't stores with lower price points prosper from the tightening of America's wallets? People will shop at Wal-Mart and Target to save pennies on the necessities. That's thestreet.com’s Stocks Under Ten guys' argument:

"Higher inflation could soon start taking a toll on the U.S. consumer, and that means high-end retailers such as Coach (COH) and Nordstrom (JWN) could see a chill in luxury sales.”

Retailstockblog.com
also sees problems with the retail sector and with the consumer:


The US Consumer is Broke, Time to Short Retail and Auto Stocks?
Barron's interviews (paid subscription required) two LA-based short
sellers, Lee Mikles and Mark Miller, partners in (guess what)
Mikles/Miller Management. Their viewpoint:

the consumer is broke and he doesn't know it yet. But he is about to find out. All the buckets that propelled consumer spending are empty
now, whether it is the increase in mortgage debt, the increase in
consumer debt or the reduction in the savings rate. No one statistic
will tip the scale at the end of the day. But one very obvious and
very curious statistic is that we have dipped into a negative savings
rate for the first time. That is not only unsustainable, it is
sustainable only for a few months. That's important to note because it
tells you consumers are borrowing money to make debt payments. The
U.S. consumer has become payment driven. He is driven not by the
aggregate amount of debt he possesses but by the amount of the
payment. And now the consumer has not only taken his savings rate to
nothing, it has turned negative.


Or is this all a bunch of alarmist bullshit?

Perhaps the bad news is a bit overblown, as U.S. News thinks:

So what's the real story with retail sales? Excluding sales of cars,
food, and gasoline, they were up 0.5 percent in August and were
unchanged in July. The trend suggests that retail sales are slowing
slightly but still OK
, according to Ian Shepherdson of High Frequency
Economics.

Though sales in several categories rose in August, including
electronics, appliances, furniture, and health- and personal-care
items, high gas prices should continue to slow retail sales of all
items over the next few months.


Here's some more piling on of the wishy-washy-sorta-negative consensus: “Higher fuel costs and job losses after Hurricane Katrina may sap spending in coming months, economists said.”

Now for the horrendous news, the American consumer is feeling a bit like a pimply-faced wallflower in this Reuters report from 9/16:

Consumer Sentiment Index Drops Sharply

CHICAGO (Reuters) - U.S. consumer confidence plummeted to a 13-year low in early September, battered by record high gasoline prices and the full force of Hurricane Katrina, a report showed on Friday.
...
The University of Michigan’s closely-watched consumer sentiment index fell to 76.9 in September from 89.1 in August, far below Wall Street forecasts and the 81.8 hit after the September 11, 2001, attacks on New York and Washington.

The current conditions dropped to the lowest level since December 2003 while the expectations index plummeted to the lowest since February 1992.


Of course, Wal-Mart is right on top of this crisis of confidence:
``Where you have your slowness is in the things that people don't have
to have,'' Wal-Mart Chief Executive H. Lee Scott said at a meeting
with analysts in Boston on Sept. 7. ``With higher fuel prices, we are
seeing an increasing difference between the first of the month and the
end of the month,'' with spending winding down as the month goes
along.


Okay, I think I've pummeled you with enough argument and evidence. The American consumer's billfold is light on the Jacksons but still bustling with Washingtons. There's money to spend after filling the tank, but not quite as much.

So, will discount retailer stocks soon be as cheap as their inventory? Will Wall Street price down retail stocks in the coming months, expecting the lack of consumer confidence to hinder earnings?

Over the next few posts, I am going to examine various retail stocks using this thesis as background. I hope to figure out if there are any buying opportunities in the near-term.

Wal-Mart and Target



Let’s dive right into the discount shopping thesis by examining the Wal-Mart conundrum. Wal-Mart has been receiving lots of positive publicity
from its good works in the Katrina aftermath.

Wal-Mart Stores Inc. is enjoying its best publicity in years as even its harshest critics laud the retailer's Hurricane Katrina relief efforts.

But Chief Executive Lee Scott isn't resting on his laurels just yet.

For years, Wal-Mart largely ignored its image problems as customers
flocked to its stores and its growth seemed nearly unstoppable. But
the company acknowledges that it can no longer dismiss increasingly
vocal and well-organized groups that are having some success in
blocking its U.S. expansion, particularly in urban areas.
...
He estimated that Wal-Mart's critics are spending $25 million on what
he calls the largest and best-financed campaign in history "directed
at slowing this company down."

As more and more communities adopt restrictive zoning laws, he has
asked executives to come up with ways to speed up Wal-Mart's U.S.
expansion.
...
"I think most reasonable people would say zoning will probably be more
difficult in 5 years or 10 years than it is today," he said in a
presentation to analysts. "And so every store we get today over what
we normally would have planned might be the store that would have
really been delayed in the future as zoning got tougher and tougher."
...
Things won't get any easier this holiday season. A documentary by
filmmaker Robert Greenwald is slated for release in early November,
and both Wake Up Wal-Mart and Wal-Mart Watch have scheduled a national "week of action" in November to try to turn up the heat on the retailer.


I have friends who wouldn’t be caught dead at a Wal-Mart. A college roommate works in DC on preserving traditional Middle America main streets. His work often entails fighting Wal-Mart incursions that destroy halcyonic small town civic life by shifting commerce from the town square to acres-of-asphalt-just-off-the-interstate.

Nevertheless, when the wife and I rent a car and leave precious Manhattan, we often keep an eye out for a Wal-Mart, or if we’re lucky, a Target. There, we can pick up vast quantities of bargain-priced potty paper, papertowels, and other household items at prices that NYC merchants like Duane Reade openly mock.

When it comes down to it, I’d rather save a dollar on the necessities than spend more at a quaint main street mom-and-pop. And considering Wal-Mart's success, I'm not alone in this assessment.


But when we want the best of both worlds, cheap prices and that good clean consumer feeling, that’s when we prefer Target, or Tarzhay, as it’s pronounced by us UHB
snahbs.

Cash-strapped social work students I knew back at Wash U lahhhved the Target Greatland. They treated shopping there like they were headed to Bergdorf’s, of course, I'm assuming those Midwesterners knew what Bergdorf’s was, back in those pre-Sex in the City days.

Looking at WMT, it’s trading at about $44 per share, a drop of about $9-10 from a year ago. Its P/E is about 17.33 and it’s trading very near its 52-week low. TGT is trading at $52 and change, with a P/E of 21.63 and trading in the middle of its 52-week range. So typical. Wal-Mart comes out a bit cheaper. Even Wall Street perfers buying Target, even though it's a little pricier.

But wait, before we get too excited about a WMT buying opportunity, note the following article by Dune Lawrence, published yesterday by Bloomberg:

S&P 500 shift could hurt Wal-Mart
...
Some analysts believe shares of U.S. consumer companies such as
Wal-Mart Stores Inc., trailing the Standard & Poor's 500 Index in
2005, will fall further behind as S&P completes a shift to valuing
companies based on the stock available for trading.
On Friday the S&P adopted a "free-float" method of calculation,
excluding all the shares owned by insiders or other corporations when
determining the weighting of companies in its U.S. benchmarks. The
weight previously was based on the number of shares outstanding, no
matter who held them.
...
Index-fund managers must move $7.8 billion out of the S&P's two
consumer-related sectors and technology and into the remaining seven
industries, according to research by Paul Lieberman, a quantitative
strategist at Bear Stearns & Co. in New York. Of the total, he expects
$7 billion to come from consumer shares.
...
The index provider classifies Wal-Mart, the largest U.S. grocery
retailer, along with the makers of so-called consumer staples such as
food and soap. An index of the staples group's S&P 500 companies has
dropped 0.1 percent in 2005.
The staples group will have the biggest drop in weight among the
S&P 500's industries, 0.49 percentage point to 9.52 percent, according
to Bear Stearns. The decline will reflect selling in Wal-Mart.
Descendants of Wal-Mart founder Sam Walton hold twofifths of the
stock, and their shares will be excluded from the calculation. The
retailer will fall to 1 percent of the index's value from 1.3 percent,
according to Bear Stearns, and the resulting outflows of $3.5 billion
will be the highest for any S&P 500 company. Wal-Mart shares already
have slumped 15 percent this year.


So perhaps we should wait for that ridiculous Wal-Mart smiley face to bounce around and rollback the WMT stock price, or just wait for the S&P to do it, before making a move.

12 September 2005

A couple of Cramer choices took big hits today. Are they buys now? Next up, MRH



Right after the deluge of the Gulf Coast, Cramer talked up some Katrina plays. He argued that the sell-off of insurance companies was an irrational response of the market fearing huge payouts. Cramer believed that his viewers and listeners should take advantage of this sale on insurance companies. His theory: the payouts are already accounted for in their business model and the insurance companies will be able to hike their premiums and make significantly higher profits.

Let's revisit today's Movers & Shakers section of Marketwatch.com:

Decliners

Montpelier Re Holdings Ltd. (MRH: news, chart, profile) shares dropped 13.8% after the company said it estimates an impact of between $450 million and $675 million from Hurricane Katrina-related flood losses. "This is a significant net loss for us," said Anthony Taylor, the company's chairman, president and CEO, "but nevertheless it remains consistent with the nature of our business plan and our capitalization remains strong."


I read the MRH's response as fitting exactly with Cramer's theory. Cramer seems to agree, in the following excerpt from today's Real Money summary:

In response to a question about Montpelier Re (MRH:NYSE - news - research - Cramer's Take), a stock that Cramer has been bullish on and that was down more than 16% Monday, Cramer said he has looked into the situation and can find "no reason it should be down $5." He is sticking with his recommendation and thinks the stock "should be bought and bought aggressively." MRH traded at $26.09 Monday afternoon.

Before I wish that I had about five grand to pick up 200 shares, let's look at some numbers:

The IBD Ratings for MRH began the day at 18/22/C/A/E. Now, they are 18/7/C/A/D. The A grade demonstrates that MRH has a profitable business model, but the 7 score shows that the stock price is lagging significantly. Consider that MRH's market cap dropped today from $1.9B to $1.6B, leaving the stock with an 8.36 P/E and $4 below its previous 52-week low. This is prime buying territory, if the fundamentals are sound.

Sweetening the deal is the fact that MRH pays 36 cents quarterly, or $1.44 per year as a dividend. Dividing that figure into today's close of $25.99 or the after hours price of $26.30, MRH delivers a 5.5% yield, based on these purchase prices.

A quick look at the Dow Jones Property and Casualty Insurance Industry Index shows the top market cap stocks as:

BRKA - Berkshire Hathaway - 68 25 C C B 16 P/E, $107B market cap
ALL - Allstate - 79 35 C C E 11 P/E, $35.8B market cap
STA - St. Paul Travelers - 76 64 C B D- 11.5 P/E, $24.6B market cap
MLEA - Millea Holdings - 57 62 C C B+ 24.6 P/E, $24.6B market cap
PGR - Progressive - 77 55 C A B- 12.62 P/E, $19.1B market cap.

Other industry stocks with a market cap comparable to MRH ($1.6-2.0B range) include:

OCAS - Ohio Casualty Corp - 67 67 C D A- 11.23 P/E, $1.6B market cap
DHC - Danielson Holding Corp 26 82 A+ B B- 25.92 P/E, $1.8B market cap
CGI - Commerce Group - 86 30 C B C+ 7.81 P/E, $1.9B market cap
SCO - Scor Ads - 23 64 C E B- 4.98 P/E, $2.0B market cap

Out of these stocks, CGI has interesting scores; the 30 price strength lags the 86 earnings score, and the B for profitability. I'll save this stock for revisiting, but otherwise, looking at these other insurance companies, I am increasingly comfortable with MRH's P/E ratio and profitability.

I see nothing here to dissuade me from, as Cramer might put, buying MRH and buying aggressively, except for the lack of funds. I'm going to place MRH on the WershovenistPig Stock Watch List, with regrets that I cannot pull the trigger on those aforementioned 200 shares. Fooey.

A couple of Cramer choices took big hits today. Are they buys now? First up, CBH


As you know, I bank at Commerce, and its stock resides on the WershovenistPig Stock Watch List. Cramer loves Commerce Bank. Although he recently sold some shares from his charitable trust, he then publicly regretted the move as Commerce's stock continued to rise. Until today...

From the Movers & Shakers section of Marketwatch.com:

Decliners

Commerce Bancorp (CBH: news, chart, profile) shares fell 7% after the Cherry Hill, N.J., banking holding company revealed in a filing with the Securities and Exchange Commission that it expects to miss Wall Street's profit forecasts for both the third and fourth quarters. The company said it expects to post per-share earnings of 45 cents in both periods. At last check, analysts polled by Thomson First Call were looking for third-quarter earnings of 47 cents a share and a fourth-quarter profit of 48 cents a share.

Montpelier Re Holdings Ltd. (MRH: news, chart, profile) shares dropped 13.8% after the company said it estimates an impact of between $450 million and $675 million from Hurricane Katrina-related flood losses. "This is a significant net loss for us," said Anthony Taylor, the company's chairman, president and CEO, "but nevertheless it remains consistent with the nature of our business plan and our capitalization remains strong."


More details are in Matthew Goldstein's piece
at thestreet.com. Here are some choice excerpts:

The flattening yield curve is squashing profits at fast-growing Commerce Bancorp (CBH:NYSE) .
The New Jersey-based lender warned Monday that the narrowing spread between short-and long-term interest rates will reduce its profits in both the third and fourth quarters.
...
"The continued flattening of the yield curve over an extended period of time has had a greater negative impact on net interest income, net income and earnings per share than originally projected by management," the company said.
...
Ever since the Federal Reserve began raising interest rates a year ago, banks have been forced to deal with a flattening yield curve.
Normally, long-term rates rise when the Fed increase short-term rates. But that's not happening this time. And the narrowing spread between interest rates has made it more difficult for banks to make money off of their investments.
...
"I try to avoid financial institutions that have large securities portfolios,'' says Michael Stead, the manager for River Aire Investment, a hedge fund that mainly invests in financial stocks. "It's really an extent of how much of the assets are tied up in securities. And what is the average life of those securities.''
Stead doesn't own shares of Commerce and says he has shied away from the bank because its growth has been heavily tied to its investment strategy.
The flattening yield curve also has a negative impact on a bank's lending operation, because there's less of a spread between a bank's own borrowing costs and the interest rate it can charge borrowers. A small spread diminishes the profit opportunities for a bank.

However, Commerce's warning could be harbinger of more bad news to come.


CBH's IBD ratings earlier today were 90/72/D+/A/B+. That 72 Relative Price Strength rating is now a 52 after CBH closed at $30.75, down $3.01.

I've been reading and hearing mentions of the flattening yield curve. I think that may have been the major factor in Cramer selling shares in CBH. But then he convinced himself and his viewers that CBH was more like a retailer than a traditional bank. Well, the retail sector is no great shakes right now, but the banking sector is worse (note the D+ grade; that's for the sector).

I'm keeping CBH on the Stock Watch List because it is a great bank with growth potential. I just don't know how soon that potential will be realized. The banking sector is not where I want to be right now, so even with this significant drop, I would be cautious in purchasing CBH, or any bank, right now.

Should I invest in a filet from Ruth's Chris?






Ruth's Chris has been in the news quite a bit recently, with an IPO last month. This month, the formerly-New Orleans-based restaurant chain is in the news because Katrina forced the corporate headquarters to move permanently to Orlando, as detailed two days ago by Eric Dash in the New York Times:

...last Wednesday, not long after the levees burst in New Orleans, the top executives of Ruth's Chris Steak House gathered here in the lobby of the downtown Orlando Embassy Suites for an hourlong, soul-searching meeting.

As the executives debated whether to operate out of temporary quarters in another city while keeping their headquarters just outside New Orleans or to relocate permanently elsewhere, they decided that there were simply too many unknowns about the future of the city where their nationwide chain of 88 restaurants got its start.
...
Just three months after Ruth Fertel, its founder, mortgaged her house for an $18,000 loan to buy the Chris Steak House in 1965, Hurricane Betsy stormed through the Gulf Coast and cut off electricity in New Orleans. Not wanting to spoil thousands of pounds of beef, she cooked steaks over a gas stove while her brother served them to victims and relief workers who flocked to her restaurant. Later, those same people came back as customers.

But that storm did not overwhelm New Orleans the way Katrina did. Nor did it pose the same challenge to Ruth's Chris, now a newly public company with a responsibility to shareholders it has never before known. Indeed, only last month Ruth's Chris was celebrating its initial public offering as the largest restaurant chain to do so since Domino's Pizza started trading in 2004.
...
the bigger question facing the company is whether leaving New Orleans at its time of greatest need - something outsiders say that Ruth Fertel, who died in 2002, would have never done - will come back to haunt Ruth's Chris, particularly when its new headquarters is in Orlando, known for its suburban sprawl and dozens of bland food outlets. "When they give you a start, you kind of owe it to the city," said Brad Brennan, a member of the family that owns Brennan's Restaurant and Commander's Palace, a small New Orleans-based company with restaurants in Las Vegas and Houston, too. Mr. Brennan vows to return as soon as he can. "Payback is staying your ground," he said, "and employing the people that want to remain there and want to be employed."

Mr. Miller vigorously defends the company's decision. And he argues that with half of his employees in the area without homes and current prospects for good-paying jobs in New Orleans dim, the best thing Ruth's Chris can do is provide a steady paycheck in other locations for its employees thrown out of work.

"If I had the choice and it was at all feasible to operate in New Orleans, why would I move?" Mr. Miller asked rhetorically. "If Ruth had been running a public restaurant company, she would have done exactly what we did."


From an emotional perspective, Ruth's Chris bailing on New Orleans reads like Pat's and Geno's ditching Philly. But my emotional response to the article does not run cheesesteak deep. I applaud the executives for taking bold action quickly and resolutely, something rarely seen these last couple of weeks. As a potential shareholder, my interest is piqued that the executives are trying to preserve shareholder value. I'm not sold on their move to Orlando; but I'm quite the Yankee, so I found all of the other southern cities they considered moving to, well, unappealing.

I've also never really associated Ruth's Chris with New Orleans, so I'm not sold on the Florida relocation affecting the heart and soul of the restaurant. My two meals at Ruth's Chris occurred in the same week at the end of 2001 in King of Prussia, Pennsylvania, while away on business. I enjoyed a couple of nice buttery filets while stretching our expense accounts, not once thinking I was anywhere else but the Philly suburbs.

All right, enough reminiscing. Let's get to the numbers for RUTH and some other publicly-traded steakhouses of varying caliber:

Ruth's Chris IBD scores: 51/15/B/na/na; no stock scouter score
OSI - Outback Steakhouse - 53/22/B/B/D- - 6
TXRH - Texas Roadhouse - 96/70/B/A/C+ - 4
SWRG - Smith and Wollensky - 44/73/B/D/C+ - 4
GRLL - Roadhouse Grill - thinly traded for around 20 cents
RYAN - Ryan's Family Steakhouse - 27/12/B/D/E - 4
RARE - 67/15/B/B/D- - 4

These are not stellar numbers by any means. TXRH has been doing the best, and is splitting its stock later this month. However, its P/E is currently around 54, but it's about $6 off the 52-week high. I just know nothing about this chain, as their NY location is near Binghamton, and their NJ location is in Millville. Their website says that they're in 33 states, but I wouldn't consider either NY or NJ location to be significant as they are located in the middle of effin' nowhere. So they have plenty of growth potential, which seems to be reflected in TXRH's inflated P/E ratio.

OSI, a $3.1B company, is about $6 off their 52-week high, has a P/E around 20, but is in all 50 states and 21 countries. And looking at its D- score, investors have been selling off their shares recently.

But let's get back to RUTH. Business Week's Robert Barker
was very sceptical of the moneymaking opportunities with RUTH, back in June:

Take This Steak House IPO With A Grain Of Salt

THE DEAL IS COMING 40 YEARS after the company's late founder, Ruth Fertel, bought her first restaurant in New Orleans. In 1999, a group led by Madison Dearborn Partners, an $8 billion Chicago private-equity firm, took over the chain. Results since have proved wobbly. Operating profit -- $19.7 million in 2000 on revenue of $162 million -- the next year sank below $15 million, on $154 million in revenue. After bumping along near those levels, business in 2004 firmed notably, with $23.3 million in operating profit on sales of $192.2 million. Sales should jump again this year as units open in Biloxi, Miss.; Boston; Charlotte, N.C.; Sacramento, Calif.; and Virginia Beach, Va.

Ruth's is hoping each year to add from 8 to 12 new restaurants, some of them via franchising. Naturally, there's no guarantee that the new units will prosper. Late last year, operating losses forced Ruth's to close two restaurants, one in Sugar Land, Tex., and another in New York City near the U.N. Such mistakes may be expected in any business, but Ruth's can't easily afford them. Its balance sheet is burdened by long-term debt and preferred stock that must be redeemed. Net worth at yearend stood at a negative $51.5 million. Part of the IPO proceeds are set to go straight to the selling equity holders, led by Madison Dearborn. Another part stands to go to Ruth's itself, which then will turn around and repay creditors, including Madison Dearborn, Banc of America Securities ( BAC ), and Wachovia Investors. Affiliates of the latter two are the deal's leading underwriters.

Because no price has yet been set for shares in Ruth's, it's impossible to say whether they will prove as tempting as Ruth's steaks. But some guideposts to how the company might fairly be valued do exist. For starters, there are comparisons with competitors. Smith & Wollensky Restaurant Group last year had sales of $123 million. Its enterprise value -- that is, stock market value plus net debt -- now comes to $82 million, or 0.7 times last year's sales, according to Capital IQ, a division of Standard & Poor's (MHP ). Another rival, Morton's Restaurant Group, is no longer public. But when it went private in 2002, the buyout valued Morton's at not quite 0.8 times trailing sales. Then there is Ruth's itself. Madison Dearborn bought Ruth's in 1999 when the economy -- and demand for fancy steak dinners -- were ablaze, valuing it at $182 million in cash and assumed debt. That works out to more than 1.1 times 2000 sales.

At last report, Ruth's net debt came to $117 million. Figuring generously that the chain still is worth 1.1 times sales suggests an equity value of, say, $95 million. It's a good bet the sellers want to get much more. If Ruth's tempts you, wait for the sizzle to fizzle.


RUTH has a current market cap of about $407M, more than four times the $95M equity value figure posited in the Barker article. Add to that the poor performance of Smith & Wollensky and Morton's (who some say have better steaks, although I was underwhelmed at my puny filet earlier this year), and you don't even have to factor in the costs of Katrina to see that RUTH is still overvalued and risky. Why should RUTH do better than its competitors in the stock market if it's not beating them in the steak market?

Well, folks at the Motley Fool
think RUTH winning at the steak market:

"...In its first quarterly report since going public last month, Ruth's Chris Steak House (Nasdaq: RUTH) delivered the beefy results that its new investors were banking on. The company earned $0.11 a share, reversing a loss from last year's second quarter. Revenues rose by 11% on a robust 10% gain in comparable restaurant sales at its company-owned units and a 7% spike at its franchised locations.

The comps rose despite the widespread belief that higher fuel prices will keep restaurant diners away. Between the convenience of eating at home and the financial bite of higher prices at the pump eating away at disposable income, Ruth's Chris believes that it is mostly sheltered from those trends given the high-end clientele at its upscale chophouses.

...For investors, this is a great start for Ruth's Chris as a public company. Restaurants can be tricky, especially when it comes to steakhouses. For every Outback (NYSE: OSI) and Texas Roadhouse (Nasdaq: TXRH) that hits it out of the park after their IPOs, you have others like Smith & Wollensky (Nasdaq: SWRG) and Roadhouse Grill that have struggled to prove themselves worthy.

That's why it was important for Ruth's Chris to deliver the goods early. Wall Street won't view August's stock offering as an exit strategy, since it now sees a company where the future appears to be even brighter than its past.

Ruth's Chris weathered Katrina. Things can only get better from here."


I don't buy it. The success stories mentioned, OSI and TXRH, are mid-level suburban chains, on par with Olive Garden. The failures are Smith & Wollensky's and Morton's, on par with, um, Ruth's Chris. I think I'll stick to buying the also-rans' steaks, but not their stocks.

All this talk of mouth-watering steak, and yet I'm not flinging any beef into the Stock Watch List trough. I wouldn't be so rude as to leave you empty-handed, so here's a fine link
to a delicious-sounding recipe from the fine folks at Esquire.