Scholastic Huge Guidance Increase. But Wait is it a Media Company or an Educational Company? $SCHL #hungergames

Cover of "The Hunger Games"

Cover of The Hunger Games

Scholastic Corporation  (Nasdaq:SCHL) increased guidance to north of $3.40 per share from the previous range of $2.60 to $2.90. that s for the whole year folks. The enormous successful of the hunger games is driving the update. While investors normally would appreciate making more money you now have to start asking why are investors going to buy and hold the stock. In the press release the corporate communications mavens billed themselves as ” the global children’s publishing, education and media company” Blockbuster books such as “Hunger Games” are not guaranteed repeatable successes. Educational books and materials do have a steady cash flow as teachers and thoughtful parents buy learning materials which gives their students/children a leg up.

The stock price spiked just over two dollars on the announcement and then dropped off to below its trading range of the past few days. This means a lot of stupid money jumped in and got slaughtered within minutes. The market was not efficient shall we say. The long and short of it is it will be very difficult to produce comparable if not improving y/o/y results. So is the company worth any more or less now?

Take a quick look at the last sentence before the boilerplate was thrown in. and I quote “The Company’s prior guidance for revenue and free cash flow remains unchanged.” Ok so you got a block buster that will be increasing earnings per share but management says revenue and free cash flow will remain unchanged. Hmm. How is that possible on this scale? No additional cash flow for the biggest block buster since Harry Potter. The dots do not connect. At least not in a straight line.

The press release did go on to say ” This updated earnings guidance excludes the impact of one-time items associated with cost reduction programs and non-cash, non-operating items”. Hey management you got to have some more explaining here. Investors do not find this straight forward. How do you have non cash cost reduction, wildly increasing earnings but the all important cash flow does not change?

George Gutowski writes from a caveat emptor perspective.

NYSE Euronext Board of Directors Gets Bitch Slapped $NYX #governanace

NYSE Euronext Logo

NYSE Euronext Logo (Photo credit: Wikipedia)

NYSE Euronext (NYSE:NYX) watched one of their members of the Board go down in flames.  Ricardo Salgado tendered his resignation because he did not receive a majority of votes. As per by-laws he had to walk the plank and tender his resignation. Now as per common sense did he or the NYSE Euronext not have a sense of where his support stood. Maybe not because he essentially went kamikaze and went down in flames.

Apparently there is some concern about his ability to commit time to NYSE Euronext activities. Apparently he did not attend too many board meetings so the investors had to ask why should we vote for him. Good question. The nominations process which is controlled by the board and management could not see their way through the arithmetic of failure and put up his nomination anyway. OK so he must be a smart guy and you know what NYSE Euronext executives are not a bunch of dummies. So why was he nominated, why did he accept the nomination and why was he defeated. Read the press release for a few clues.

In thanking him NYSE-Euronext remarked on his twenty years of contribution. so like he is connected and can make stuff happen just like the godfather. The next sentence is crucial. and I quote ” However, we completely understand the business priorities and his leadership role in the Portuguese financial community which requires his full attention, and we wish him continued success.”

Leadership in Portugal which is a financial basket case is an interesting perspective. The whole euro-crisis has more back room maneuvering than front page headlines. Portugal of course is in need of help and Ricardo Salgado is working on it. Institutional shareholders who have the numbers in a proxy battle gave him the thumbs down. Now this is a time where I wish I worked mornings at the Fed Reserve and afternoons at the CIA. (Probably best job combo in whole world) and we could find out the true rationale for agreeing to stand re-election and the institutions finding it too distasteful and voting no.

So here is my take on it. NYSE Euronext made a long term decision and said lets keep this guy. He has been good for/to us in the past and we expect more of the same in the future. Proxy shareholders who think about the board look at his current overwhelming involvement in Euro zone financial problems and throw him over board. Short term decision A+. Medium to long term F-.

Is the NYSE Euronext so sensitive to one board member? Well no and that’s good. But it’s the mix that eventually counts. Short term thinking with board selections is not good. So the big gumba shareholders filling in the proxy cards and directors votes. Ya blew it.

To those of you blaming Euro games it will not matter.

George Gutowski writes from a caveat emptor perspective. One Two Punch Putting the Run on Investors $XHKG:0168 #alibaba $YHOO

Image representing Alibaba as depicted in Crun...

Image via CrunchBase

Alibaba (Hong Kong XHKG:0168) announced declining results for Q1 claiming they are cleaning up their act or the act of many of their vendors. The drop in recurring cash flow clocks in at a YoY drop of a mind numbing 87%. But later in the earnings release they claim their cash and bank balances improved  with a 24.3 % increase  year-on-year and flat from December 31, 2011.  Which means the spending is being curtailed somewhere or the bank loans are coming in fast and furious. In any event that needs some splaining by management.

The party line is stepped up its efforts to upgrade the trustworthiness of suppliers and  enhance the user experience. They have increased staff and operating costs as they attempt to rein in some less than satisfactory market behaviours. OK so this is a classic reset of a broken business model. Some will say this is the poster child for wild west style expansion in China’s boom economy where regulators have no clue about how to regulate. Wild eyed and naïve customers had no idea they could have so many unacceptable bad customer experiences. Wondering if the translation of bad customer experience into Chinese has the same connotation or if they are using something very much stronger.

But wait no sooner were the disheartening results released than a new press release was issued by independent board members recommending acceptance of a share buy out that had been made just recently. The buy out seems generous with a 60% premium over the 60 day moving average but somewhat unsatisfactory given the last two or three-year trading range.

The combination of poor earnings results and independent recommendation puts the run on investors. There are no other possible options. But when someone who is clearly the insider is ready to offer 60% premiums you have to think in the back of your head why?

The stock becomes an allegorical tale about investing in foreign jurisdictions with different governance models. Yes the China market is huge. But western investors may not have the mindset for the nuances of Asian stock markets when a publicly traded company runs into significant trouble.

Oh wait a second Yahoo owns a signifiant amount of Alibaba. There was this really strange sale which did not seem to benefit Yahoo (Nasdaq:YHOO)  and now the minority shareholders are being run off.

George Gutowski writes from a caveat emptor persepctive.


Qualcomm & Apple`s Cash Distortion. Will Rising Interest Rates Create a New Bank. $QCOMM $AAPL

Image representing Qualcomm as depicted in Cru...

Image via CrunchBase

Qualcomm (Nasdaq:QCOM) announced pretty good earnings but fessed up to probable delays in delivering chip sets for Apples (Nasdaq:AAPL) brand spanking new G5 iPhone. The market sells off in classic knee jerk reactionary mode. Take a look at something else on Qualcomm`s balance sheet. Cash and marketable securities now clock in at around $26 Billion which equates to 25% of their market value. The cash is starting to be so big it needs to start doing some heavy lifting. So if you believe interest rates are poised to start increasing, which I do, a new strategic new source of income is about to manifest.

Can you see a 2% increase in yield on cash and marketables. Sure no problem as long as Qualcomm is not a long bond investor which it isn`t. The 2% increase kicks out $520 million in EBITDA. Looking at it another way it`s about 12% of last years earnings. 12% for risk free and near effort free return. If the cash and marketable securities portfolio cannot yield an extra 2% in a rising interest rate environment then the whole cash position strategy will come into question.

Speaking of Apple, who drinks very similar cool-aide to Qualcomm you have a similar cash and marketable position, about $26 billion. But the two market caps are wildly different. Much has been made of Apples king of the world market cap. Qualcomm comes in at a very pedestrian $100 Billion give or take. An extra $520 million effort less risk free at Apple will not be kicked out of bed. But it just will not have the same impact relatively speaking.

Pressure will build for both to deploy cash more productively. As  yields rise investors will be able to find better uses for cash. Currently cash held directly by investors or held in corporate bank accounts of investments do not yield much. Therefore the pressure to do something clever is near non existent. The pressure for cleverness will grow as interest rates rise and cash loses it`s commodity value and becomes capital again.

George Gutowski writes from a caveat emptor perspective.

Citigroup Still Has Leash and Collar $C $XLF


Citigroup (Photo credit: Wikipedia)

Citigroup (NYSE:C) announced improved numbers and long-suffering investors some may say speculators were encouraged. Most financials such as Wells Fargo (NYSE:WFC) and JPMorgan (NYSE:JPM) as well as Citi seem to have the same mantra. Improving economy, reducing loan loss provisions and even pray tell some reversals where yesterdays red ink turns miraculously black. You have to love bank accounting.

The key difference for Citigroup was recognized by the CEO Vikran Pandit very early in his prepared remarks. Fed Reserve still decides the major issues. It sounds like the Fed will decide what are the major issues before they tip their hand. So as an investor you have to say thanks for the honesty when Vikran Pandit describes at length something he calls the CR Process. He continues to describe that Citi has to resubmit a capital plan to the Fed. Only a few paragraphs preceding he laid out where Citi was with the Basel ratios and everything seems lovely.

If you are re-submitting plans to the Fed things are not lovely. In fact you have been kept in after school so that teacher can pay special attention to your particular circumstances. in many ways you should say thank you but clearly the other banks running around the financial school yard are having way more fun and so are their shareholders. While we can only speculate about the Feds response Vikram Pandit is telling one and all that the Fed will respond just shortly before the end of their Q3. So basically he gets two more earnings announcements with the thousand pound gorilla sitting in the room sipping your best scotch.

So investors wishing to maximize wealth need to aware of the real back room power than the Fed has. All this before you consider the puny dividend yield which the Fed is probably restraining for now as well as the classic problem all banks and financial institutions have when interest rates start to rise that of managing interest rate margins as your cost of funds increases and borrowers attempt to go long and lock in the cheap rates.

George Gutowski writes from a caveat emptor perspective.

JP Morgan & Wells Fargo Set Tone. Except No One Thinks About Rising Interest Rates or Margin Compression $JPM $WFC $XLF

Interest Rates

Interest Rates (Photo credit: 401K)

Everyone is applauding JP Morgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) about their Q1 numbers. Red ink has turned black in many categories. Much improvement has been experienced in credit loss reserves. It’s always nice when you stop losing money because your customers are now able to meet their obligations. Not exactly genius more in the fundamental must have category. So if you believe the economy is improving as both sets of executives maintain you will see gradually improving fundamentals. Wells Fargo even went so far as to say that loans and mortgages taken on now in the early stages of the recovery have less risk than loans and mortgages taken on in the latter stages of the economic cycle [some would say bubble]. Hard to argue so far.

But think in terms of game changers. Nothing ever goes in a straight line. Financial institutions live and die by their ability to maintain adequate net spread. That is the difference between what funds cost and what they can charge their clients who can meet their obligations. Interest rates are at historically low levels. Yield oriented depositors and investors are only too aware of the pain and suffering low-interest rates have exacted.

The market dynamic in a rising interest environment will be for borrowers to attempt to lock in long while providers of funds in whatever form will attempt to stay short and lock in better rates higher up the cycle. This happens every time. Also while the credit risk seems to be improving as loans and mortgages increase in cost a lot of underwriting starts to fall apart. most consumers will struggle with an extra three percent cost on their mortgage.

We may already be seeing the beginnings of margin compression. Concern has been raised about JP Morgans increased cost of long-term debt which would be provided by bond investors who should be the smartest guys in the room when it comes to interest rates.

Do not be lulled into a false sense of security with the two supposed better names in the banking sector. They will all experience the same challenges of margin compression. It happens with every increase in the interest rate cycle. So far management is whistling through the grave yard and not speaking about it.

Iceberg straight ahead!

George Gutowski writes from a caveat emptor perspective.

Monsanto Make Me Believe Increase Dividends $MON

Flowers from a garden in Monsanto, Portugal

Flowers from a garden in Monsanto, Portugal (Photo credit: Wikipedia)

Monsanto Company (NYSE:MON) recently announced encouraging financial news. Improved profitability, improved cash flow and improved cash position all stacking up quite nicely. OK so now what. If management wants to maximize shareholder wealth and keep the long-term buy and hold investor interested they’ll need to boast the dividend and engage the market with promises of a certain payout. Currently they are offering a 1.56% dividend yield. Not exactly attracting the yield hounds is it? A major competitor Dupont (NYSE:DD) has roughly the same market cap with a 3.19% market yield. Looking further Syngenta (NYSE:SYT) with a slightly smaller market cap offers a 2.3% dividend yield.

Monsanto is unlikely to engage in serious financial engineering and repurchase very large quantities of its stock so as to back into a growing EBITDA. So the next logical financial move for Monsanto is to seriously increase its dividend in the very near future. Despite the nice earnings surprise analyst consensus has not shifted wildly. The official lists of institutional shareholders have the usual listing of index fund but a notable lack of yield and or dividend investors is prevalent.

When comparing Monsanto’s shareholder base you’ll note a real decrease in holdings by large value funds. Note the behaviour one would expect from an improving story. Check out Dupont in the very same category and you’ll find growth in this category. Large value investors are more attracted to DuPont than Monsanto. If management decides to walk the dividend walk they will have to transition their MD&A to a more robust level. Currently they present like a marketing company talking about margins and market segments on a macro-economic level.

If Monsanto cannot transition to a dividend yield senior the company will stay as an ag driven cyclical dependent on the weather and crop commodities futures.

George Gutowski writes from a caveat emptor perspective.

Alcoa Delights Investors With Shiny Q1 numbers. Careful How You Giggle! $AA $RIO

Alcoa - Expo Alumínio 2010

Alcoa - Expo Alumínio 2010 (Photo credit: industriabrasileira)

Alcoa (NYSE:AA) printed black ink delighting investors and surprising analysts. Consensus was for red ink. essentially the market for aircraft grew enough to overcome beer can disappointment. But lets take a close look at some of the individual components and determine if this is really a blue chip or just yesterdays floozie with a run in her stockings.

  1. 9 percent drop in the realized price of aluminum and a 13 percent drop in the realized price of alumina, year-on-year. Hard to rejoice and see increasing wealth when the commodity price is dropping substantially.
  2. Capital Expenditure has dropped and much capacity which was marginal at best was closed. Nice work. But what about improvements and expansion. The emphasis seems to be on how much they have cut not how much they have added. Healthy vibrant propositions will be adding, expanding and growing in some fashion. Not present in the current scenario.
  3. According to  Klaus Kleinfeld, Alcoa Chairman and Chief Executive Officer, “Performance rebounded strongly this quarter due to our proactive cash  sustainability actions, our relentless focus on profitable growth, and stabilizing markets.” Buzz word city for the CEO. Exactly what is a cash sustainability action? Also what markets are stabilizing and what markets are you exiting.
  4. At the same time Alcoa is forecasting a world-wide global aluminum deficit and is forecasting global aluminum demand 2012 growth of 7 percent. That is absolutely critical to hit your numbers in the future.
  5. BTW short-term borrowings has sky rocketed, cash has dipped slightly but long-term debt has plunged dramatically. This means we need to see some refinancing and stretch out the debt payments.
  6. Oh wait a second do you think Alcoa is going cap in hand to the debt markets and trying to refinance. The story is so much better if a loss was expected but no wait a strong Q1 was printed making the future picture very cozy and bright. Hmm

Now compare to another formidable aluminium player. Rio Tinto (NYSE:RIO) who swallowed up Alcan. Of course Rio Tinto is much more diversified and does not seem to have the same legacy costs as Alcoa seems to be solving. Also in the money talks and b**sh*t walks department Rio tinto has a $100 Billion market cap and pays a 3.5% dividend yield. Alcoa is a puny $11 Billion market cap and only pays a 1.29% dividend yield. So when Klaus Kleinfeld speaks Rio Tinto may only listen with one ear.

George Gutowski writes from a caveat emptor perspective.

George Gutowski also spent much of his formative time lending money and he has to tip his hat to Alcoa on timing. This is the oldest trick in the book. N’est ce pas.

Yahoo Throws Itself Into the Volcano-No it’s a Mass Crucifixtion-When do Vultures Swoop? $YHOO $GOOG $FB

Image representing Yahoo! as depicted in Crunc...

Image via CrunchBase

Yahoo (Nasdaq:YHOO) has walked up to the lip of a very live volcano and is preparing to sacrifice some 2,000 individuals or 14% of their workforce. Bad numbers coming in Q2 which is interesting disclosure because Q1 is about to come out and now suddenly no one cares. Ok so whats wrong with a little cost cutting? Lots of big companies take the corporate enema and lighten up; know what I mean? Well hasn’t Yahoo been restructuring already or something like that. Trying to become more relevant and finding more revenue streams.

Yeah they have and it hasn’t worked for some reason. The three crowns of internet advertising are financial services, travel and automotive. Yahoo finance is undisputedly one of the largest and most used financial web sites.  Yahoo travel and Yahoo automotive? Well no dominance there. China and Japan has taken up so much executive head space that the basic nuts and bolts has not been paid attention too. Oh when considering shrinking Yahoo just think of how many people have left voluntarily. Now employees who were thinking of leaving are hoping to snag a lucrative exit package move down the street and come right back at you. Throwing employees into the volcano is very tricky.

The statement leaves out what area’s are particularly targetted. Of course they will claim to make broad cuts and the market may look at management and say why did you wait so long. The key will be in the mix. As the termination notices travel around the corridor we’ll find out anecdotally. Hopefully on the upcoming conference call on April 17, 2012 17:00 ET the sell side analysts will be able to guess at how the axe was swung.

The cut backs officially are to cut costs and goose the bottom line. The hidden agenda will be to create a better fit with potential merger or acquisition partners. Eliminate potential overlapping areas and perhaps keep a few stars that may add some sparkle and lustre. In any event its all about how lovely you look sitting up their at the bar with your legs crossed and a to die for Jimmy Choo dangling off your toe as you gently bounce you leg, while you pretend to look around the bar in a pointedly bored vacuous manner.

Special note to politicans in a presidential election year. If Yahoo crucifies 2,000 good wage earners  and then substantial operations are transferred somewhere outside the US of A. God help you. Because if the working population decides we can’t even hold onto high-tech jobs what change does a regular hard-working guy have.

So Google (Nasdaq:GOOG) or maybe Alibaba (xtra:4AL) check the fit again. You know you need to go to the tailors a few times to ensure the cut and stitch work out.  But here is the very big rub. When can the takeover offers start? Will the predators pony up now that the over heads are coming down. Or will they wait until the amputation cauterised some and assess from there.  I’m thinking the latter so be careful before you load up on this news.

George Gutowski writes from a caveat emptor perspective.

Goldman Sachs Spawns a New Form of Literature and Then The Sex Site $GS

goldman sachs

goldman sachs (Photo credit: alyceobvious)

Goldman Sachs (NYSE:GS) much maligned and beloved in the same breath has spawned a new form of literature. The letter of resignation complete with reasons seems to resonate in the financial press. While some may be trying to remove a giant squid they accidentally found on their face others a comfortably blinded by their own hubris and narcissistic viewpoint that they really were not comfortable with the culture. In some cases employees had been uncomfortable for more than five years as they cashed large incentive checks, bonuses, stock options and other forms of financial incentives.

So maybe the new hot trending search term will be “Goldman resignation letter”

Corporate culture experts may see this as a fissure in the Goldman Sachs culture. Imagine leaving the firm not to start your own even more diabolic hedge fund. but leaving just because well you know there were too many pirate like things going on. Like that should be a surprise.

George Gutowski writes from a caveat emptor perspective.