Tuesday, January 31, 2006

“Beef is Ugly”…How Does the Internet Look?

“Beef is ugly.”

So stated Richard Bond, CEO of Tyson Foods on yesterday’s earnings conference call.

Or, rather, lack-of-earnings call, because Tyson both missed the estimates for the quarter and guided down the full year by half, which you don’t see very often, except at companies like Tyson that not only don’t control their input costs—beef and chicken—but don’t control their selling prices either.

Like its CEO Mr. Bond’s namesake when he gets caught in one of those shrinking elevators devised by whatever evil nemesis is seeking his doom, Tyson is being squeezed on all sides: a Midwestern U.S. drought cut the beef supply, raised beef costs and, well, sliced beef margins. Meanwhile, Asian-Flu scares hurt international poultry sales, causing the chicken side of the business to, er, lose altitude.

More interesting than the miscues of a nuts-and-bolts food processing company will be the earnings calls from both ends of the Internet spectrum: Overstock.com next Tuesday, and Google tonight.

Expectations for high-growth, high-margin, high-everything Google run very high, with all eyes focused on sequential net revenue growth.

Depending on the analyst talking, Wall Street expects a minimum of 22% sequential growth (more than most growth companies experience year-over-year) and as much as 30% sequential growth (way more than most growth companies experience year-over-year). “Pro-forma” earnings should be at least $1.75 a share—and probably closer to $2.00 to satisfy the hoards.

I have no idea what the numbers will look like when Google reports after the close, but we have some clues that add up to strong numbers—particularly the fast growth in eBay marketing costs (eBay is Google’s largest user) and the continued ramp-up in online marketing spend described on many conference calls in the last two weeks.

Indeed, if the Alexa.com numbers are to be believed, Google usage has continued to grow substantially—significantly outpacing Yahoo!

You can see this yourself: go to Alexa.com’s “Traffic Rankings” page, type in “google.com” and then type “yahoo.com” into the “Compare Sites” function. You will see the Google blue line crossing the Yahoo red line—at least for internet users utilizing the Alexa.com toolbar.

Whatever the outcome tonight, I doubt there is much of a short-term “play” in Google stock, because short-term option volatility has soared to absurd levels and will almost certainly collapse the minute the press release hits the tape.

I’d be willing only to bet that Google put buyers and Google call owners see little profit, unless Google management misses huge or beats very large.

Expectations are not so high, however, for Overstock.com, following its pre-announcement of weaker-than-expected sales in the 60% range, along with negative cash flow and earnings—a sorry state of affairs for a company whose CEO once said, “You tell me when you want me to stop growing at 80 to 100% per year, and I’ll tell you when we can get profitable.”

Judging by the urgent emails I get each day (“Month-End Closeouts – Hurry, Time is Running Out!” reads today’s version) from Overstock, as well as the reach and page view graphs on Alexa.com, I wonder how sales currently look at “Earth’s Biggest Discounter™” or whatever the company is calling itself these days.

Although it’s unwise to read too much into one data point, I have found the Alexa.com data to be a decent directional indicator. And as of now, they indicate flattish-to-downish year-over-year reach and page views on Overstock.com—in contrast to, for example, what looks like a nearly 100% year-over-year increase at Buy.com. Spikes in Overstock.com usage appear to correlate (and I stress "appear to") with changes in shipping fees.

Tyson will, no doubt, recover in time, thanks to the magic of market forces. I give Mr. Bond credit for one of the most direct statements about the state of his business on any conference call this season.

Would that other CEOs might adopt such a direct, no-frills approach.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Note: Last night Overstock issued the following statement:

Overstock.com, Inc. (Nasdaq:OSTK - News) today announced that it is scheduled to release fourth quarter and full-year 2005 financial results before the market opens on Tuesday, February 7. An accompanying webcast and slide presentation are scheduled for 11:00 a.m. Eastern Time on Tuesday, February 7.

Shareholder.com reported that the Overstock.com webcast was scheduled for January 31: that information was incorrect and should not have been published.

Monday, January 30, 2006

Maybe, Just Maybe, J&J Was Right All Along

Having examined a Guidant deal three years ago and passed, the company [Boston Scientific] became intrigued at possibly taking advantage of a lower J&J bid.

“J&J opened the door to us, and we’re gutsy enough to walk in,” said one Boston Scientific executive.—Wall Street Journal

Thus the Journal reported how it was that Boston Scientific sprung its surprise $25 billion bid for Guidant just a few weeks after Johnson & Johnson had negotiated a price cut with the regulatory-entangled Guidant.

Wall Street loves a good bidding war, of course—what with the duplicate advisory fees, duplicate legal fees, duplicate financing fees, and, in the end, the higher share price upon which so many other sharks in the tank can feed.

But will Boston Scientific shareholders benefit from the company’s self-proclaimed “gutsy” move?

Consider that J&J had agreed to buy Guidant in December 2004. Think about the number of J&J lawyers, finance people, doctors and consultants combing through Guidant, evaluating the business units product-by-product, working out the details of the merger and how the post-merged company would function.

Consider the fact that the deal had to be approved by our Federal Trade Commission as well as the European Union, and think about how many individuals from both companies had to work together to convince hundreds of regulators around the world to approve the deal.

Ask yourself how much J&J was spending on the deal—a million bucks a day? Two million a day?

And consider the detailed due diligence J&J had thereby acquired on every aspect of Guidant during that entire process

Now, recall that six months after the deal was announced, Guidant reported a flaw in one of its defibrillators, and soon pulled five of the devices from the very market for which J&J wanted Guidant in the first place.

And recall that J&J felt compelled to issue a press release describing these product issues as “serious matters,” but said it was working with Guidant to resolve the issue.

Then think about why it was that J&J eventually lowered its deal price for Guidant—the very act which “opened the door” for Boston Scientific to swoop in with its dramatic, 11th Hour offer and ultimately prevail with the kind of high drama and stretched bid that Wall Street loves and for which it has been cheering on the BSX crew.

And ask yourself who really knows more about Guidant and what it will take to restore its franchise and take advantage of the medical and demographic trends upon which the premise of the deal itself rests?

Is it the folks at J&J who, metaphorically speaking, spent over a year roaming the House of Guidant, peering in the attic, ripping up floorboards, checking the plumbing and inspecting the roof?

Or is it the outsiders at Boston Scientific, who drove by a house they had thought of buying three years ago, before the price tripled, but had passed on it—and now, admiring anew what they saw, found a friendly set of bankers and started bidding?

“Gutsy” may be the right adjective for the bid-‘em-up folks at Boston Scientific—they’ve proved themselves full of that quality in years past.

Time will prove whether “stupid,” “desperate,” “naive” or, perhaps, “brilliant” are better.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Friday, January 27, 2006

Google: “Our Thesis is Still Intact”

"As you know, we're in the middle of a transition in search advertising business, moving from Yahoo's platform to our own proprietary ad platform called MSN adCenter, which we began testing in the US during the quarter."

When you hear somebody start a discussion with the qualifier “As you know,” you brace yourself for news that is not-so-great, and that’s how Microsoft began its discussion of search results at Microsoft Network on last night’s call.

The bad, though not-necessarily-unexpected, news came in the next sentence:

"The ramp-up of a new ad platform requires significant investment from Microsoft, both in development costs as well as in reduced revenues related to fewer numbers of overall advertisers and the resulting lower keyword pricing."

In other words, Microsoft’s online search business, in the midst of the biggest boom in the history of the world, was down year-over-year and flat sequentially. Readers should keep in mind that Google is expected to show 100% year-over-year and 20-25% sequential growth when it reports earnings next week.

After a company like Microsoft, with so many hopeful investors eager for a hint of past glory, drops that kind of news, you should expect some positive spin in order to leave the masses feeling more upbeat—after all, Yahoo! got smashed last week after reporting “only” 13% sequential search growth.

Microsoft obliged as follows:

"The good news is that in response to our platform has been great, and we are ramping up deployment by rapidly on-boarding advertisers and moving more search traffic to the platform."

Microsoft may be ramping up advertisers, but that doesn’t mean it is ramping up the customers that actually use Microsoft Network. I know one individual who has shifted his entire email business away from Microsoft Network to Google’s Mail product; and based on the increasing numbers of emails I receive from “gmail.com” addresses, it appears I am not alone.

For that reason, and because of the fact that Microsoft's entire reason for existing is not to create the greatest search product but to drive people to buy Microsoft operating system software, I doubt Microsoft will win the search war, no matter how much money it throws at the business.

Now, Google may or may not be a good investment, stock-wise. I have been a fan of the company for some time, but reasonable people can disagree on the company’s prospects and the stock’s valuation. In any case, much ink, both real and digital, will be spilled in the next few days trying to game the company’s fourth quarter earnings report, due out next Tuesday after the close.

A few weeks ago I highlighted a press release (“The Most Interesting Press Release You Didn’t See”) from FTD Group, the flower-delivery organization that utilizes internet search advertising to generating a significant portion of its business.

In the release, FTD said that online search costs had “increased significantly,” causing the company to curtail its use of the medium and ponder “a more diversified marketing portfolio.”
It looked like search—for FTD, at least—had reached the limits of its marginal utility.

In response, I received a number of comments, some agreeing with the FTD experience and others disagreeing entirely. Feedback from friends whose businesses utilize search for a significant portion of their customer acquisition were likewise mixed, although more indicated that the bills they paid to Google were still increasing than not.

Just yesterday, however, another data point emerged in the search-cost conundrum, squarely on the side of Google.

1-800 Flowers.com (yes, that’s the actual name of the company) reported 21% revenue growth, as well as continued dependence on, and effectiveness of, search-based advertising:

"During the quarter we attracted more than 1.3 million new customers with 57% of them coming to us online, up from approximately 1.2 million and 54% in the second quarter of last year….

"Certainly search is an expensive yet effective marketing vehicle for us, one of our overall marketing channels. We did not see any spike in costs this holiday season. Actually, this past holiday season, search costs were comparable to last year's holiday season."

I hesitate to extrapolate from this any firm conclusion about next Tuesday’s earnings report from Google.

However, I suspect—to use one of Wall Street’s Finests' favorite, most clich├ęd, and least informative old sayings, “Our thesis is still intact.”

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Sunday, January 22, 2006

One of Wall Street’s Finest, Indeed

I make fun of those I call “Wall Street’s Finest”—the brokerage firm employees who call themselves “analysts”—so frequently that it might appear I have no use for any analyst working for any brokerage firm anywhere.

This, of course, is not true.

I started on Wall Street as just such an analyst, but very low on the totem pole, being one of those junior assistants whose job it is to construct the vast Excel spreadsheet models which form the backbone of every research report, good or bad, coming out of every broker on the Street.

Except in those days we didn’t have Excel spreadsheets: we had a centralized computer center where strange FORTRAN-literate employees created earnings models on mainframe computers, using our hand-scratched numbers.

We'd get a ream of computer paper back from the FORTRAN guys, look at pages and pages of numbers, make adjustmentss and send it back. And repeat the process any number of times, until we had a nice-looking computer-generated forecast that was basically meaningless by the time it was done.

Eventually we acquired something totally new: personal computers, which came with a cool spreadsheet program called “Lotus 1-2-3.”

What this revolutionary, time-saving device did was allow me to spend all my waking hours experimenting with complex formulas, typing in numbers, hitting the "recalc" button and playing with secretary-style formatting techniques in order to create a computer-generated forecast that was, likewise, basically meaningless by the time it was done.

Garbage in, garbage out, as they say.

Which is why I find most Wall Street “models” to be pretty much nonsense, at least so far as the precision that is implied in an earnings forecast of, say, $3.28 per share in 2008. (Why not just round to the nearest nickel, or dime, or quarter?)

A good example of the garbage-in, garbage-out school of earnings models relates to Nextel, which we looked at a few years ago when that company was coming out of its near-death experience and appeared to be on the verge of showing positive cash flow—something not many of Wall Street’s Finest were expecting, having finally abandoned the former darling of the Telecom Bubble on the Worldcom scrap-heap.

Nextel stock looked cheap, and I requested an Excel spreadsheet from one of the larger Wall Street houses. The "model" had everything—income statement, cash flow statement, balance sheet—and more, including a very impressive bottoms-up construction of the revenue forecast, with subscriber additions, subscriber churn and “ARPU” as the Street calls it (Average Revenue Per User)… In short, everything you needed to forecast the future for Nextel.

Except for one couldn’t-be-bigger problem: the cash flow statement was entirely wrong.

During its build-out years, Nextel had accumulated huge operating losses which would shelter any forward earnings from Federal taxes up to some amount in the billions. The analyst—detailed though his spreadsheet was—had neglected to take this “NOL” into account.

What happened was this: even though the model showed Nextel generating future earnings, and even though the model's income statement included, correctly, a provision for Federal income taxes that would not be paid thanks to the large NOL, the model neglected to add back the NOL-sheltered taxes into the cash flow statement.

Consequently, one of Wall Street's Finest was understating Nextel’s future cash generation by more than a billion dollars. Hardly a rounding error.

(I figured I was missing something, so I called the firm's salesman who talked to the analyst…who agreed that the model was incorrect.)

Now, there are some truly good-to-great analysts out there who balance the poor-to-middlings.

Kurt Wulff, for example, revolutionized the way Wall Street looks at energy stocks back in the early 1980’s, demonstrating their value was reserves in the ground rather than in earnings-per-share. (Kurt is still at it and posts his research on his own web site).

More recently, and on a less grand scale, I have another nominee for one of Wall Street’s Finest, based entirely on a single piece of research written a few weeks ago by an analyst I have never actually met.

The analyst is David Manthey at Robert W. Baird, and the piece he wrote was about Hughes Supply.

Hughes Supply is a good company I have followed for many years—a fairly mundane distributor of plumbing, electrical and building products that got its start supplying the contractors who built Walt Disney World in the late 1960’s. And for those paying attention to the headlines, Hughes recently agreed to sell out to Home Depot.

Speculation surrounding a Home Depot-for-Hughes deal surfaced in the fall, and the stock had been bouncing around in the high-$30’s in the months following an October 31 press release stating that the board had authorized management to look at “strategic alternatives” to “maximize shareholder value.”

But most analysts, who prefer not to get too close to the line when it comes to takeover speculation, either stayed radio silent on the issue or proffered vague price targets based on theoretical deal-multiples.

Which is why Mathney’s update on January 6—brief though it was—came as such a pleasant surprise:

“We believe it is very possible that Hughes’ senior management, seeing the stock in the mid-to-upper $20s, and hearing rumors about Home Depot, decided to line up financing to take the company private.

“Doing nothing, HUG [the Hughes ticker symbol] could potentially be acquired at a much lower price, with the acquirer deriving the benefits…. By partnering with a financial buyer, management could increase equity stakes, make changes as a private enterprise, and accrue the benefits of margin enhancement. Eventual exit strategies could include a sale, break-up, or IPO.

“By announcing the process, Hughes’ board likely clears fiduciary responsibility to shareholders by seeking the highest bid from the public markets, potential acquirers, or management’s own bid.

“We believe shareholders should hold the stock, because if HUG is acquired by any entity, it would likely occur at a premium to the current price [then $37.62]…. We believe the ceiling would likely be in the $45 range or 10x 2006 [estimated] EBITDA, which would represent a similar multiple as Home Depot’s National Waterworks acquisition.”

Four days later, Hughes Supply announced it would be acquired by Home Depot for $46.50. The stock is trading for $45.72. Wall Street's Finest, indeed.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Wednesday, January 18, 2006

“Vince, It Looks Like Jim and Larry are Going All In! Incredible!”

Mr. Tobin suggested a dramatic new offer at $78 a share -- then headed out to a Rolling Stones concert… —Wall Street Journal

Thus the CEO of Boston Scientific raises the price of his company’s bid for Guidant by $1.5 billion, and then goes out to see Mick and Keith play “Satisfaction” for the zillionth time.

But wait—Boston Scientific’s CFO had an even better idea! Read on!

Over the weekend, Chief Financial Officer Larry Best suggested an even bolder bid of $80 a share…

And so it was that Boston Scientific, which had just weeks before, metaphorically speaking, emerged from the crowd, bellied up to the poker table opposite J&J, and audaciously starting bidding for the Guidant pot, went “all-in” with an $80 a share bid for Guidant, as described in today’s Wall Street Journal.

That kind of mano-a-mano bid-hiking might make great ratings for Mike and Vince covering a match at the Mohegan Sun casino, but it is not necessarily the way to spend $27 billion on a company that needs serious attention to recover its leadership in a notoriously complex business.

I have no idea who’s going to “win” the bidding war for Guidant, and I have no idea if in the long run the “winner’s” shareholders will come to celebrate or regret this kind of testosterone-charged deal-making.

But the last headline-splashing, high-stakes takeover-poker-match I recall was RJR. And after the initial thrill of walking away from the table with all the chips, KKR spent years living it down.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Tuesday, January 17, 2006

What Else is He Hiding?

Bob Ney is a Congressman, described in today’s New York Times as “until recently…an obscure, sometimes eccentric, lawmaker from Ohio.”

He also—judging by the color headshot of the Congressman in the paper just below the fold—wears a wig.

I point this out not to make fun of the Congressman in question, who has enough troubles as it is, being identified as “Representative No. 1” in court documents filed as part of the Jack Abramoff bribery scandal.

Indeed, the Congressman, whose contribution to toppling Saddam and supporting American troops around the world was—I am not making this up—enforcing use of the term “Freedom Fries” in place of “French Fries” at the House cafeteria, may be a very decent guy. Or, he might be as bad as they come. I don’t have any idea.

But why would a Congressman—a guy who gets photographed every day of his life, shaking hands at breakfast, speachifying at lunch, walking across the wind-whipped steps of the Capital building to some immediately forgettable news conference about, well, calling them “Freedom Fries” instead of “French Fries”—wear a toupee?

Especially a toupee that, in the old expression of comedian Robert Klein, looks pretty much like a giant piece of lettuce, even in the not-exactly-high-resolution photo on the front page of the New York Times?

Perhaps it’s the self-deluding nature of politicians in general and Congresspeople in particular, who think—like that ex-Vietnam Vet from California who resigned last year—they can take bribes in return for votes, and nobody will ever find out.

And maybe they’re right.

Perhaps the average American voter does not share the common feeling among friends of mine on Wall Street that you “Never trust a CEO who wears a toupee.”

This may sound heartless, trite, or absurdly simplistic, but, at the core of the matter is Warren Buffett’s old dictum that “a CEO who misleads others in public may eventually mislead himself in private.”

For example, I always suspected Tyco CFO Mark Swartz of wearing an unusually good rug of very curly fake hair. I thought that the first time I saw him face to face at the ballroom of the Plaza Hotel when he and Dennis announced the breakup plan that led to their downfall, and I thought it every time I saw his picture in the papers heading into or out of the court room over the next couple of years.

Sure enough, when Swartz showed up for his sentencing in September, the curls were no longer visible, having been replaced by a baseball cap. Now, I may still be wrong about him wearing a rug, but after his conviction, one of the jurors who voted to convict said many of the jurors had concluded Mark Swartz was “an extremely good liar”—quote/unquote.

I could be wrong about Congressman Ney, both rug-wise and what-else-is-he-hiding-wise. Only his wife, and his hairdresser, knows for sure.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Monday, January 16, 2006

Weekend Edition: “Friends of Animals” Have an Appetite for Destruction

Long-time readers may have gathered that I’m a bird-watcher, a serious one.

But I’ve only half-followed a controversy between our local utility, United Illuminating, which wants to get rid of stray monk parakeets and their large nests for the sake of maintaining the power lines, and the so-called “Friends of Animals,” a Darien, Connecticut-based group trying to protect the squawking, bright green birds, for the sake of the birds.

Then last week Friends of Animals announced a lawsuit against UI in a press release containing the following language, which I am not making up:

The suit claims that numerous other birds, including song sparrows, house finches and great horned owls, also use the parrot nests for shelter.

“The presence of the Monk Parakeet, a strict herbivore, is a benign effect on other local species and may actually increase numbers and variety of wildlife in an otherwise ecologically barren urban environment,” the suit says.

Now, I live in this “otherwise ecologically barren urban environment” described in the press release.

And in the past year I have witnessed—in the midst of this burned out holocaust of a region—the following wildlife in my yard: sparrows, finches, Goldfinches (both summer coats and winter coats), a Rose-breasted Grosbeak, Carolina Wrens, Winter Wrens, a Black-throated Blue Warbler, Black and White Warblers, Yellow Warblers, Yellowthroats, Northern Flickers, Hairy Woodpeckers, Downy Woodpeckers, Cedar Waxwings, doves, chickadees, and—just last week—a Red-Tailed Hawk perched eight feet away from me.

Quite a “barren urban environment”!

But that’s not the only bit of disinformation contained in the “Friends of Animals” press release.

Let’s examine the nests themselves—described as “shelter” for native bird species—since the nests started the whole conflict with United Illuminating, which wants to kill the birds and eliminate the nests.

Monk parakeets build their nests on utility poles or high up in oak trees. The nests look like giant mutant squirrel condominiums. The parakeets build them stick-by-stick with small branches they find on the ground and carry to the nest in their large beaks.

Being made of sticks and being very big, a monk parakeet nest can weigh more than 400 pounds. I am not making that up.

Since native New England oak trees were not designed to carry 400 pound monk-parakeet nests on the ends of their branches, the nests routinely break off the oak trees and fall in a huge clump to the sidewalk or the road. (The birds favor utility poles as well as trees along roads, rather than deep in woods, for reasons that likely relate to their eating habits.)

I have hauled more than one broken nest off the road beneath a parakeet-inhabited tree a few blocks from our house during early-morning walks, and they are an engineering marvel: more than a yard wide and two or three feet high, they look like an ant-hill made of sticks. Tunnels run deep inside them, protecting the birds from harsh New England winters—which is why there is such a thing as a monk parakeet population 5,000 miles from their native sub-tropical habitat in South America.

As for the “Friends of Animals” claim that the nests are used by other birds, such as “song sparrows, house finches and great horned owls,” I’m guessing that “Friends of Animals” just made that up.

Anybody who knows anything about birds knows that no two types of birds build the same type of nests. The really obsessive birder can identify not just birds, but bird nests. I know about this unfortunate obsession, because I own a book about bird nests.

The finches and sparrows identified as users of parakeet nests do not shelter in giant stick tunnels. They build loose, spherical nests from grass and twigs, with a soft inner lining. They reuse the nests, rebuild them, and refit them season after season—like an old New England couple in a salt box colonial. And old New England couples don’t up and move into a McMansion just because one happens to become available.

Now, it is true that some birds occupy other bird nests. European Starlings, for example, (an aggressive, intrusive and destructive species brought here by a “Friends of Animals” type group dedicated to—and I am not making this up—introducing to America all the birds mentioned in the works of Shakespeare) evict native woodpeckers from their nests.

Great Horned Owls—mentioned in the press release as possible parakeet nest-renters—sometimes occupy nests of herons and other birds. Therefore it would be possible that a Great Horned Owl might be interested in a monk parakeet nest, except for the fact that horned owls do not climb through tunnels.

Owls perch on branches because they eat living things: they do not sleep in caves and emerge to feast on seeds, like parakeets.

Besides, the notion that other birds might make use of a parakeet nest ignores the central fact of the issue: monk parakeets are highly aggressive and they flock together, like crows and starlings.

Anybody who has watched the parakeets drive away flickers, sparrows, chickadees, goldfinches and cardinals from a bird feeder knows that monk parakeets—colorful though they may be—are not “benign” as the press release claims.

They are, in fact, destructive—potentially with catastrophic effect.

How, you might wonder, can a bunch of cute green parakeets be so destructive?

As the members of “Friends of Animals” appear not to realize, we have a beautiful native North American bird species that nests every summer in the very same type of oak trees the monk parakeets now monopolize.

These birds arrive from their winter feeding grounds in mid-April, roost high up in oak trees and build beautiful, simple nests out of the same sized oak-branches used by the monk parakeets. These birds are the size of hawks, only with elongated bodies and stick-legs. They nest so high, and keep so to themselves, that most people fail to notice them.

These birds mate, lay eggs and raise hatchlings which they feed regurgitated crabs picked out of Long Island Sound and the marshes nearby. The hatchlings grow over the summer into large, beautiful, birds. Late in the summer they all fly south, leaving behind a bowl-shaped nest of sticks high on an oak branch.

They are Yellow-crowned Night Herons. And Yellow-crowned Night Herons are infinitely more “colorful” and more “benign” and more integral to the Southern New England ecosystem than a bunch of squawking, intrusive parrots.

But because the monk parakeets favor the same oak trees used by the herons year after year, these herons may well, over time, be crowded out by a bunch of South American parrots released from home bird cages.

Back in the 1890’s, a bunch of well-meaning but badly informed Shakespeare admirers set loose 100 European Starlings in Central Park. There are now over 200 million starlings in North America—displacing hundreds of millions Blue Birds, Flickers and other native birds over the last century.

As a Friend of Birds, I’ll side with United Illuminating over “Friends of Animals” on this one. Get rid of the monk parakeets now, while we still can.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Friday, January 13, 2006

Fighting Joe and the SEC Get Tough

During the call, IBM Chief Financial Officer Mark Loughridge told analysts to "update" their models to reflect the new expense for the just-elapsed first quarter. A chart distributed with the call suggested that analysts lower their earnings-per-share estimates to 90 cents from $1.04, a drop of 14 cents. They did just that.

Thus today’s Wall Street Journal describes how IBM guided the barking seals I otherwise refer to as Wall Street’s Finest to lower their expectations for IBM’s first quarter 2005 earnings in a “hastily arranged conference call” last April, shortly before IBM actually reported those earnings.

When the earnings came out nine days later, however, IBM reported only $0.84 of earnings, net of $0.10 worth of options and stock-based compensation that IBM had successfully trained the barking seals to consider “non-recurring”—as though compensation for the human beings who run the company isn’t an actual expense and won’t recur.

Hence, $1.04 of expected earnings had mutated into $0.84 of actual earnings: a big miss.

Somewhat surprisingly, even the best-trained among Wall Street’s Finest recognized a failure to score, despite IBM’s last-minute attempt to move the goal-posts without anyone noticing.

“A Material Miss…and Acknowledgement of Weaker Revenue Growth,” one post-earnings headline read. “Not Great, but not Terrible Either,” ran another, while “IBM: Pass the Alka-Seltzer, Please,” was perhaps the most artistic way to express disappointment with IBM while demonstrating empathy with clients who don’t like to hear bad things about the stocks they own.

IBM’s share price dropped more than ten bucks in the days following the Alka-Seltzer episode, which, I gather, is the subject of the SEC Wells Notice to IBM. Quotes the Journal article:

Securities lawyers unconnected with the case have said that IBM may have been obligated during the options conference call to give investors more detail about the shortfall in the quarter, which had ended days before. Under securities law, they say, companies have some latitude to determine whether to announce known shortfalls early -- but if they don't, they generally can't put out other earnings-related news.

I’m no expert on SEC-related disclosure issues. At the time it happened, however, it seemed obvious to me and most everybody else who follows the company that IBM had thrown some dust in the air to obscure a basic earnings miss. After all, $0.84 looks a lot worse to analysts expecting $1.04 than it does to analysts expecting $0.90.

That’s my opinion based purely on an admittedly cynical view of the earnings-management practices of public companies developed in 25 years of quarterly-earnings reports. It is not based on any particular knowledge of what was going on or not going on inside IBM.

But why is the SEC doing this Wells-Notice stuff now? Looking at the calendar, I see that it is mid-January 2006, almost a year since IBM tried to finesse numbers lower under the screen of “non-recurring” type compensation expenses. To its credit, the SEC's recent action was in fact preceded by an “informal” investigation begun last June—but that was seven months ago.

Which means the poor shlubs who owned IBM stock prior to that first quarter earnings report and held onto it in the wake of management’s pre-earnings conference call in which numbers were taken down without really being taken down, but then sold their stock at a loss in the days following the actual earnings miss, are long gone.

Which means all this Wells-Notice stuff is, in my opinion, irrelevant, and once again the SEC, having noticed a draft coming from the direction of a barn door through which a horse has vanished and made its way across the country-side to the other side of the mountain, has decided to investigate just how the heck that door was left open and what can be done to secure the door.

Surely there are companies that have mishandled their public disclosure obligations more recently than last April.

But, then again, if Joe Biden—remember, the Senator who ran for President with a plagiarized speech?—can get outraged about what a guy might or might not have done twenty years ago in college, I guess whatever it was IBM might or might not have done nine months ago probably seems like it’s worth wasting time on.

“I didn't even like Princeton,” Biden told Alito on Tuesday. “I mean, I really didn't like Princeton. I was an Irish Catholic kid who thought it had not changed like you concluded it had.”—Associated Press.

Tough stuff, Senator! You and the SEC go boy!

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Wednesday, January 11, 2006

Pandora’s Box Evaporates

I once shared a ski lift with a lawyer. I will spare the obvious lawyer-joke, since I am married to an attorney, and go straight to the point: he worked for Nickelodeon, the kid’s TV network, and he was working on protecting Nick’s content from being poached by the emerging digital downloading pirates.

This was at least three years ago, just as the thing that started it all—Napster—was being shut down by lawsuits and an anti-piracy campaign led by none other than Lars Ulrich, drummer and co-founder of death/thrash/hair-metal band Metallica.

Ulrich, who is a terrific drummer even if you don’t happen to like his music (sample lyric: “Taste me you will see/More is all you need/You’re dedicated to/How I’m killing you”), ultimately succeeded in helping shut down Napster.

But he did not succeed in stopping digital downloading. It went, as the Godfather liked to tell his wife the Corleone family was also doing, “legitimate.”

Now, back to my lawyer on the ski lift.

I asked him, very innocently, about what kind of lessons the TV industry had learned from its music counterparts, who had at first ignored Napster and then brought out the lawyers—while dismissing the fact that the digital downloading of music made enormous sense, being both far easier for the customer and far cheaper for the music companies.

He went, to use the technical term, “off.”

How could I say customers wanted digital downloading? Didn’t I know it took too long to download? Didn’t I know there wasn’t enough bandwidth? Didn’t I know the music quality suffered with digitization? Didn’t I know customers like to browse?

And where, he wanted to know, did I get off with the idea that downloading music was cheaper than printing a CD and a CD case, wrapping them in plastic that is harder to open than the President’s nuclear briefcase, shipping them to distribution centers and then to stores, losing some off the back of the truck and others to the sticky fingers of the store clerks, and selling the rest at whatever mark-up was necessary to cover store rents and utilities???

(He didn’t actually say all that—but he did, and I am not making this up, scoff at the notion that downloading music was a cheaper way to go than the brick-and-mortar approach.)

All I can say is, it’s a good thing he was wearing thick ski gloves, or he might have tried to strangle me.

I did not bother explaining to him about my daughters, who loved Napster for its speed, variety, and ease-of-use. Nor about my self, who loved it for the fact that you could find anything you wanted, no matter how obscure—even some stuff never-before-available to anybody, like outtakes from old Beatles recordings.

Nor did I try to tell him that he and Nick-at-Nite and the rest of the video world ought to get ready for the digital shift, in whatever form it would take. He didn’t want to hear about it.

So I thought about that lawyer as I looked at Google Video, the new Beta from the folks who brought you Google Maps and Google Mail and just plain old Google.

Announced last Friday at CES, I expected very little from Google Video, owing to the fact that I had been studying it a couple of weeks ago when doing “The Business Story of the Year”—about the digital downloading phenomenon.

At the time, I was disappointed in the breadth of the Google offerings compared to, say, YouTube.

But now that the site is available, and content from CBS is being offered for downloading at an Apple-like rate, the shift has really begun: legitimate video content is available on the biggest search engine in the world.

Pandora’s box didn’t just open—it evaporated. I wonder what that lawyer is doing these days?

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Monday, January 09, 2006


Mr. McGuire: I want to say one word to you. Just one word.
Benjamin: Yes, sir.
Mr. McGuire: Are you listening?
Benjamin: Yes, I am.
Mr. McGuire: Plastics

Most anyone over forty can identify that those lines come from The Graduate.

Over the years, the word “Plastics” by itself, said with a sarcastic, I-am-a-heartless-money-grubbing-adult-who-does-not-know-the-true-meaning-of-life intonation has become a tag line, used in the media every time some new money-making trend comes along that captures the imagination of a new generation.

In fact somewhere, I’ll bet, right now, “Plastics” is being invoked by some headline writer to describe the Google phenomenon, as a way of encapsulating that search engine’s hold on both popular culture and on Wall Street’s fertile, trees-grow-to-the-sky imagination.

Just last week we had the complete breaking of the “price-target” barrier for Google—the first unabashedly Bubble-Era price target for the stock, a whopping $2,000 a share, by Mark Stahlman, who is receiving Henry Blodget-style attention for his call, and not all of it scornful.

Almost unnoticed in the Google-phoria, however, has been the recent revival of a company that was left for dead in the wake of the Internet bust. To whit: Sun Microsystems.

Sun is the last of the “Four Horsemen of the Internet” (Cisco, Oracle, EMC and Sun) to recover its bearings from the post-Bubble crash, and probably the least-admired of the bunch among Wall Street’s Finest. It was also, last I watched, getting one of those eye-rolling, sudden-onset-of-migraine faces and an emphatic “Sell-Sell-Sell” from Jim Cramer on Mad Money.

But a funny thing happened on the way to Chapter 11. Sun Micro’s stock has been showing up on the new high list. And, get this: it’s actually outperformed Google this year.

That’s right: both stocks opened the year around $420 (multiplying SUNW by 100). And on Friday, GOOG closed at $466 while SUNW closed at $471.

No, I’m not a big fan of Sun, nor do I own the stock. Yes, I know that four days’ worth of so-called “out-performance” means nothing at all.

But after considering Sun’s appearance on the new high list and pondering the apparent recovery in one of the most poorly managed of the major IT equipment makers—measured by almost any metric you want to throw out there—I am beginning to wonder if it has to do with a single word, like plastics.

In this case, however, the word is: “Storage.”

Yes, we all know storage needs are increasing a lot. But to understand what that actually means, I have looked at my own storage needs, as measured by the capacity utilization at two email accounts—a ten-year old Microsoft Hotmail account, and an 18-month old Google Mail account—and I can confidently say that storage needs are increasing A LOT.

Thanks to Google’s “never-delete-anything” email structure and easy search techniques, I've archived over 400 emails in the last few weeks, half of which I would have deleted out of my MSN account.

With Google Mail’s search capability, you get comfortable actually keeping pretty whatever email comes in—except for the Thank You Please Congratulations I Have Ten Million Necessary Nigerian Bank Account emails that get through the spam-filter—without fear you won’t be able to find the email when you actually need it.

Once your mindset becomes comfortable with this shift away from the delete-everything-not-necessary mode, you start to run up some pretty serious megabits at the Google storage farm.

To put a number on it, in my MSN hotmail account, which, as I said, has been around for more than ten years, I am currently using 120 megabytes out of the 2,000 available for storage.

On Google Mail, which I have had since July 2004 but only began using for the last two months (following the last and final disruption by Microsoft Hotmail, which started automatically moving new emails into the Trash Can without asking), I am currently using 134 megabytes out of 2,682 available—and that capacity is increasing daily.

Hmmm...120 megabits in 10 years versus 134 megabytes in 2 months. That's some acceleration in storage demand.

Combine changing email habits with video and photography sites such as Flikr and YouTube that are collecting massive amounts of digital content—and you're talking about mega-megabits.

Which makes me think the word from the cuckolded Mr. McGuire to poor, confused Benjamin, would today be “Storage.”

How an investor can make money from the trend is a question for the house. Whether Sun Microsystems becomes more than a temporary resident of the 52-Week High list and makes Cramer’s “Buy-Buy-Buy” or Hallelujah Chorus buttons is something else.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Thursday, January 05, 2006

The Most Interesting Press Release You Didn’t See

“During the Christmas season, certain online search engine costs increased significantly over the prior year, and as such we made the decision not to pursue the resulting high cost order volume.”

That comment was contained in the long first paragraph of a press release from FTD Group, the flower delivery people, that was issued at 5:54 E.S.T. last Thursday night, when almost nobody was around to care.

Now, I don’t follow FTD closely, but its business model depends more than you might guess on internet searches—after all, somebody searching for “flowers” on Google is probably not doing deep scientific research into botany. They are very likely a guy, running late, kicking himself for putting it off until the last minute.

Indeed, Google the word “flowers” and you will find an FTD ad, third from the top:

Get it There Today. Fresh Flowers

Satisfaction Guaranteed-Order Now!

What is also interesting about the FTD release is that the company states that despite a pull-back in online ad spend and the resulting revenue shortfall, the company will still hit its EBITDA and earnings targets:

“As a result, despite this slight decline in order volume for the Christmas season, we are reiterating our EBITDA and EPS targets for the year.”

This suggests that at least in the floral delivery category of online search, and assuming FTD is not just blaming an innocent bystander like some companies we could imagine, the marginal cost of a new customer has reached parity with the marginal profit from that customer. Which is not something anybody expected happening any time soon.

So what is FTD doing about this turn of events?

“…we have begun making additional investments in our marketing staff to help build a more diversified marketing portfolio. We believe these initiatives will enable us to regain our competitive position in the marketplace and continue to deliver long term bottom line results for our shareholders.”

I’m not sure what it means to build “a more diversified marketing portfolio.” 30 second spots on Howard Stern? Sandwich boards in Times Square?

Whatever it means, the fact that FTD says the cost of using “certain online search engine(s)” has increased so significantly that the company cut back its online marketing is worth investigating.

Therefore, the question before the house is this: is there any indication from anybody else who uses online search that online search is no longer economic in any field outside the flower delivery business at FTD?

Informed responses are welcome.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Tuesday, January 03, 2006

Don’t Blame Me, I’m Only the Windows User

Windows PCs face ‘huge’ virus threat
By Kevin Allison in San Francisco

Computer security experts were grappling with the threat of a new weakness in Microsoft's
Windows operating system that could put hundreds of millions of PCs at risk of infection by spyware or viruses.

That’s from today’s FT.com—the web site of the Financial Times of London.

I know some readers will accuse me of grinding my ax on poor old Microsoft again, just a few days after my final 2005 post stating that the undermining of the Microsoft desktop software monopoly was the biggest news story of the year—but believe me, I didn’t intend to start the new year attacking the Evil Empire.

It's just that stuff, as they say, happens. And it happened over the weekend, when my Microsoft Hotmail inbox started
automatically moving emails from my inbox to my trash can.

I am not making that up.

For about half a day I thought the unusually small number—i.e. zero—of emails in my Hotmail inbox merely reflected the fact that not a lot of people were cranking out emails over the weekend.

But then in the course of finishing up year-end business I sent myself an email from a Google Mail account established last year as a back-up to Hotmail.

The email never arrived.

Actually, what I discovered was that it had arrived but was immediately transferred to my trash can—without me doing a thing.

This morning I found 6 emails in my Microsoft inbox, and
26 unread, unseen emails in my Microsoft trash can.

I suppose I should thank Bill Gates for deciding what is really important and what can be discarded without viewing.

I also suppose I should contact Microsoft’s so-called Help Desk and tell them about my new Hotmail problem. But if they are as useless as they were the last time I had a major Hotmail problem (it took me 4 weeks to receive a response to my email requesting help), I would rather spend the time simply moving the rest of my email business to the Google Mail account I established during the last major Hotmail problem.

And if readers still think I am being too tough on Microsoft here, well, check out the following from today’s FT.com article:

Unlike most attacks, which require victims to download or execute a suspect file, the new vulnerability makes it possible for users to infect their computers with spyware or a virus simply by viewing a web page, e-mail or instant message that contains a contaminated image.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.