21 February 2007

An Anecdotal Case Against GM

The Truth About Cars is a thoroughly interesting shit-tossing automobile-loving website that's been running a General Motors deathwatch for 110 posts and counting.

My dad cursed General Motors after buying his last American car--a '79 Seville that had gaps so large between panels that you couldn't slam your hand in the car door. And let's not discuss the shockingly crooked rear tail light. From that point, he would only look at Toyotas, Datsuns/Nissans, and Hondas.

I recall JVL's metallic brown Oldsmobile self-immolating after he lent it to a friend at Johns Hopkins. (That's not him in the picture, nor a pre-fire shot of his car.) Granted, the car may just have had too much of Baltimore and chosen the quickest path to the automotive afterlife.

As a New Yorker, I don't own my own wheels. So I drive Avis-provided GM and Ford crap-o-ramas. They remind me of my old '87 Acura Legend, except that these fine cars are often '06 and '07's. I expect a bit more automotive evolution over a twenty-year span.

Anyway, if I had listened to TTAC's anecdotes and thought about my dad when making an investment decision regarding GM over the last year or so, I'd me much poorer. Yes, yes, it's quite the shocker that GM was the best performing Dow component of 2006.

All the better then--that recent performance gives a put option investor that much more room for the stock to fall.

There was quite a bit of volume today on the March 35 puts (GM OG). That's what I'm looking at tomorrow.

Fantastic Five Part Two

The Advisory Board Company (ABCO) is the second member of the Fantastic Five from the the March issue of Smart Money.

Here are the two sentences touting ABCO. Vince Gallagher of Needham Funds made the pick:

A consulting firm that makes hospitals and doctor groups more efficient. "It's the sweet spot of health care and business services--two home runs," Gallagher says.

The first stop for the Pig was ABCO's website. This is ABCO, in its own words:

The Advisory Board is a membership of 2,500 of the country's largest and most progressive health systems and medical centers. The Advisory Board provides best practices research and analysis to the health care industry, focusing on business strategy, operations and general management issues.

Gathering data across and beyond the membership, the Advisory Board publishes daily and weekly news services, 50 major studies and 3,000 customized research briefs each year on progressive management and clinical practices in health care. In general, the research focuses on the best (and worst) demonstrated practices, helping member institutions benefit from one another's learning curves.

There are some solid fundamentals at play with ABCO. Free cash flow has climbed from $19.0MM in 2002 to $50.4MM in 2006.

And I'm not finding much recent analyst coverage, meaning ABCO is currently trading under the Wall Street radar. SmartMoney's competition page yielded no consensus analyst recommendation. Morningstar doesn't publish an analyst report on ABCO.

Hey, not every post can be a wealth of information. I'm finding it a bit funny that a company specializing in research and analysis doesn't have that much research and analysis for investors.

20 February 2007

The First of the Fantastic Five - CY

The online version of the March 2007 Smart Money cover story beckoned an airport newsstand peruser (yours truly) with the headling "Double Your Money." My first thought, upon picking up the magazine, and buying it, was How long to double? The feature makes five sector picks with the idea of hitting a double in five years, namely biotech (FBT), water (PHO), semiconductors (XSD), small cap (IWO), and emerging markets (EEM). Some of these picks are intruiging--I would much rather spread my risk investing in biotech with an ETF, than with trying to pick an individual stock that could easily disintegrate on some unexpected bad news from the FDA. On the other hand, if I'm looking into water, I think I'd rather just pour some investible dollars into WTR instead of spraying them into the PHO ETF.

Reading further into the wood pulp version of the March '07 issue, I found a sidebar entitled "The Fantastic Five," eschewing the broad sector picks for some down-and-dirty individual stocks. Assorted money managers made some picks. I thought it might be worthwhile to look beyond the two sentences dedicated to each ticker. In this post, I'm going to look at the first of the five, Cypress Semiconductor (CY).

John Buckingham of the Al Frank Fund made this selection. Here are the two sentences from Smart Money justifying the choice:

"The company has $5 a share in cash and a $2 billion ownership stake in solar-cell maker SunPower. Given the company's $2.3 billion market valuation, Buckingham says, investors essentially get Cypress's solid microchip business for free."

Larry Cao, a Morningstar analyst, doesn't think much of CY, giving it a fair value of $6 a share. So much for the free "solid" microchip business:

Cypress' roots in commodified products have hurt its growth and profitability over the years. The low-margin and slow-growing SRAM (static random-access memory) product line remains about one third of its revenue. Invented in 1971, the technology is showing its age and has been giving way to flash memory products in handset applications. As a result, SRAM revenue dropped by about $100 million last year, to $300 million. A few other product lines such as specialty memory and USB products have better margins, but end-market demand remains a concern. These aging products will in aggregate grow at a below-industry rate, in our opinion.

Cao isn't as bullish as Buckingham regarding CY's cash hoard either:

Cypress is in decent financial shape, with about $400 million in cash and investments offsetting $600 million in long-term debt. But free cash flow--at less than 3% of sales the past two years--is somewhat meager in our eyes.

Cao believes that investors in CY could see some gains if the SunPower business were spun off. Some shareholders agree:

In December, activist investor Chapman Capital LLC urged Cypress to split off its stake in solar panel company SunPower Corp. (SPWR.O: Quote, Profile , Research) and then take its core chipmaking business private.

Trade publication Electronics Weekly posted a brief interview with Paul Bentley, CY director of sales and marketing. Here are some excerpts:

EW: On the lists of potential takeover targets of private equity funds, Cypress usually figures. Does Cypress feel these funds have anything to contribute to Cypress?
Paul Bentley: In October of 2006, we completed a review of strategic options relative to our market valuations. We concluded that we could deliver more value to our customers and to our stockholders by continuing on our current path.

EW: Is Cypress interested in the solar power market?
Paul Bentley: We are not only interested, but we are already a major player. Our SunPower subsidiary had revenues in 2006 of more than $230m, and they continue to grow rapidly. We also recently completed the acquisition of PowerLight, a leading integrator of solar-power installations. The acquisition allows us to deliver faster solar system innovation to our customers as we execute our plan to reduce the installed cost of a solar system by half over the next five years.

Zack's recently commented on CY's latest quarter:

Cypress Semiconductor (NYSE: CY) reported its financial results for the fourth quarter [Q4] of 2006. Revenue was $287.0 million, down 1.1% sequentially and below our estimate of $290 million. On a GAAP [generally accepted accounting principles] basis, earnings per share was $0.09. Including the impact of stock-based compensation, the pro forma EPS [earnings per share] was $0.08, below our estimate of $0.11. Revenue and gross margins in Q4 were adversely affected by softness in the communications market. On the other hand, SunPower revenue grew 14% sequentially and over 154% year over year. Also, entering the first quarter, revenue for that quarter was 86% booked. We rate the stock a Hold and have set a target price of $19.

What's my take?

CY does not paint an interesting fundamental story. Morningstar's Cao makes that point clearly. But I'm not sure he has the right perspective. For me, CY is not about its staid, low-growth semiconductor business. The core chipmaking business limits the dowside risks.

The investing thesis for CY is about potential:

1. Potential continued growth of SunPower;
2. Potential spin-off of SunPower;
3. Potential private equity takeover of CY.

The upside for CY is one or two of these theses coming true.

Up next...The Advisory Board (ABCO)

11 February 2007

APOL - University of Phoenix Gets Torched by the Gray Lady

Sam Dillon, reporting with a Phoenix dateline, eviscerated the for-profit University of Phoenix, owned and operated by the publicly-traded Apollo Group. The dateline caught my attention as Dillon's piece could be reported from any of the 39 states where there's a campus, I guess. I always thought the name attaching the mostly online institution was a bit of a ruse to root itself to a specific geographic locale. But I digress.

It's a withering piece--perfect fodder for the Pig to build a case against Apollo.

First off, the image of today's Times below shows the prominence this story's receiving. It appears on the far left column, just above-the-fold.

Here's the crux of the piece, broken down into major points by yours truly:

The complaints have built through months of turmoil. 1.The president resigned, as did the chief executive and other top officers at the Apollo Group, the university's parent corporation. 2.A federal court reinstated a lawsuit accusing the university of fraudulently obtaining hundreds of millions of dollars in financial aid. The university denies wrongdoing. 3.Apollo stock fell so far that in November, CNBC featured it on a "Biggest Losers" segment. The stock has since gained back some ground. [Quite a bit, actually.] 4.In November, the Intel Corporation excluded the university from its tuition reimbursement program, saying it lacked top-notch accreditation.

These are significant negatives. Granted, the turnover at the top should subside, and shares in APOL have rocketed up 40% from their November lows. The lawsuit and Intel spurning the University of Phoenix remain, bolstering the bearish case.

Will press like this encourage other states and the federal government to scrutinize the UoP? Will companies other than Intel question the quality of education UoP provides for its employees, and follow Intel's suit?

Dillon continues:

"Wall Street has put them under inordinate pressure to keep up the profits, and my take on it is that they succumbed to that," said David W. Breneman, dean of the Curry School of Education at the University of Virginia. "They seem to have really stumbled."

In the interview, Dr. Pepicello shrugged off the bad news. Many top corporations still pay for employees to attend the university, he said, and the exodus of top officials has resulted from a healthy search for new directions. "We are reinventing ourselves," Dr. Pepicello said.

What can Dr. Pepicello say? He's on the defensive here.

Scrutiny of for-profit universities is on the rise. Here in NYC, for-profit schools are advertised all over the subway. Of these, the Interboro Institute has been investigated for enrolling unqualified students and reaping federal student aid it didn't deserve, and the Taylor Business Institute was ordered closed by the New York State Board of Education at the end of 2006 for failing to meet minimal education standards. And there's the story of Decker College, a for-profit vocational school in Kentucky that fell into bankruptcy, ruining the thin chance William Weld had of taking on now-Governor Spitzer.

Prestige and accreditation back up the degree a student receives. What is the value of a degree that lacks either of those qualities?

"Their business degree is an M.B.A. Lite," said Henry M. Levin, a professor of higher education at Teachers College at Columbia University. "I've looked at their course materials. It's a very low level of instruction."

In November, the university's reliance on part-time faculty caused a problem with Intel, hundreds of whose employees it has educated. Alan Fisher, an Intel manager, said the company had decided to pay for employees to attend only highly accredited programs. Although Phoenix is regionally accredited, it lacks approval from the most prestigious accrediting agency for business schools, the Association to Advance Collegiate Schools of Business.

John J. Fernandes, the association's president, said the university had never applied. "They're smart enough to understand their chances of approval would be low," Mr. Fernandes said. "They have a lot of come-and-go faculty. We like institutions where the faculty is stable and can ensure that students are being educated by somebody who knows what they're doing."

Wouldn't a school like UMUC, a University of Maryland school, be a better choice for older students? UMUC offers an array of online degree programs accredited by the Middle States Association of Colleges and Schools.

The Pig understands the allure of convenience distance learning. I took classes at Hunter College while working with the help of a flexible schedule that permitted me to hop on the 6 train, sit in a classroom for an hour or two, and then return to the office. But then again, I was lucky to have that option; not many people have flexible schedules, a college 25 blocks from my office, and CUNY's uber-cheap tuition--about half that of UoP.

The big kicker in the case against APOL comes in the last paragraph:

Those questions are likely to dog the university as it defends itself in the lawsuit, which a district court had dismissed but an appellate court reinstated in September. The university could be forced to repay hundreds of millions of dollars if it loses. It asked the Supreme Court last month to review the appellate ruling, arguing that an adverse outcome in the lawsuit could expose it to "potentially bankrupting liability."

Potentially bankrupting liability makes me want to look at put LEAPS, on top of shorter-term put options.

Check out APOL's weekly chart, care of stockcharts.com:

Notice how APOL rarely trades above its 40-week moving average? And when it does, it drops soon thereafter?

Morningstar rates APOL five-stars, giving the company's shares a fair value of $65 per. On the surface, APOL fits Morningstar's criteria in that it's the leader in online education, has a wide economic moat, and produces lots of free cash flow. Enrollment is up 8.6% based on Apollo's focus on growing its associate's degree programs.

Problem is, Morningstar's generally positive view of APOL contradicts the Times piece. From the current APOL Morningstar report:

Apollo's regional accreditation, recognizable brands, and solid reputation contribute to its wide moat...

Apollo's ability to attract working adults and its students' employers' willingness to support tuition reimbursement for an Apollo education are indication of its solid reputation.

The Times' harsh spotlight on Apollo's University of Phoenix shows the flaws in Apollo's reputation, and Morningstar's arguments.

APOL, along with SNE, are christening the new WershovenistPig Negative Stock Watch List, joining the numerous other sections over to the left.

The Case Against Sony - Response by Priya Ganapati

Recall a couple of weeks ago (or just scroll down a bit) the thestreet.com piece on Sony. I was harsh, yet fair in my excoriation of the arguments presented in the reportage and commentary. And then I went on vacation...

Priya Ganapati, the thestreet.com reporter and author of said piece graciously replied to my ornery post. I'm flattered by the response, and felt it proper to present her clarifications:

1. Regarding Sony protecting its PS3 franchise. Sure, parents are going to be concerned with violence on video games available for the PS3 and sure they may opt for the Wii. But try looking at this from the Sony perspective. Sony doesn’t want to turn off potential buyers (and a large number of consoles do tend to be gifts), which is why it is publicly saying that it won’t support adult content on Blu-ray, while the Sony supported Blu-ray association will work with adult content producers. I think it clearly shows that Sony wants to have it both ways and lets not forget the PS3 is the primary delivery channel for the Blu-ray player right now.

2. I do agree there are adult video rentals available through the Internet but I do suspect a lot of viewers watch adult content on the Internet now. And that’s a huge huge shift from the 1980 when Everybody went to the store to rent adult movies. So there is a change in user behavior there.

I don't find her arguments wholly convincing, though I'm sure she's accurate on point two regarding the internet being one big porn delivery system.

In any case, Blog Hog Jonathan Last recently bolstered the case against Sony by digging up a report that the Wii and the PS2 are outselling the PS3 in Japan.

However, I am not ready to commit to picking up SNE puts as Bloomberg reported today that the Yen may decline further, which in turn could put upward pressure on the price of SNE shares:

The yen may decline after the Group of Seven industrial nations stopped short of saying that the currency's weakness is a threat to the global economy.

The Japanese currency is trading near a record low against the euro and the weakest in four years versus the dollar as the Bank of Japan holds interest rates at 0.25 percent, the least among major economies. At a meeting in Essen, Germany, G-7 officials sought to reconcile Europeans who want the yen to strengthen with the U.S. and Japan, which say the market should set exchange rates.