Johnson and Johnson (JNJ) was founded by Robert Wood Johnson and his brothers. In response to Joseph Lister's discovery that airborne germs were a cause of infection in operating rooms, the Johnson brothers believed that dressings could be effective in reducing these infections. The rest, as they say, is history.
When JNJ purchased the consumer products of Pfizer last year, JNJ received Listerine as part of the purchase. Listerine is not the creation of Joseph Lister, but was named in honor of him. Unlike Lister, who had a long history of integrity, Listerine has frequently operating in the gray area of ethics, building its powerhouse business through the creation of a new disease - "chronic halitosis."
Tuesday, August 26, 2008
Wednesday, May 21, 2008
Having A Moody (MCO) Wednesday
Yesterday's Financial Times report on Moody's Corporation's (MCO) apparent shenanigans created a huge drop in the stock price today - down over 15%. The culprits - Constant Proportion Debt Obligations or CPDOs - are the latest in the alphabet soup disaster area.
CPDOs are basically a strategy for selling puts on the credit standing of investment grade corporations. The soundness is based on the fact that investment grade corporations have better balance sheets than either consumers or governments. So far, so good.
The strategy employs a high degree of leverage so that the returns are worthy of investments. Here's where the fun begins. When leverage comes in, the risks increase. Not so, said MCO and Standard & Poor's.
While their view of risk seems contrary, the rating agencies are not paid to be conforming. However, insiders (investment banking houses, not investors) smelled a "free lunch" and began to pig out by creating lots of CPDOs. Again, typical behavior. Nothing new.
But many months into the strategy, MCO noticed a mathematical mistake that had positively affected the rating received by CPDOs. On these complex computer models, mathematical mistakes do occur. Because so many factors are involved, one mistake does not usually render the model inoperable. Further, Standard & Poor's had arrived at the same rating by its own analysis. But the real mistake apparently came next: MCO did not own the mistake.
Instead, it is reported that MCO sought to arrive at the same conclusion by adjusting other factors so as to not create a ratings shock. While some might argue that the "managed" approach is most suitable to functioning markets, I would argue that trustworthiness is even more important. As a good friend of mine says, "it takes seven lies to cover up one lie."
Rather than attempting to seem perfect, MCO would have been better off owning the mistake (assuming it is as reported), taking the heat, changing the rating and demonstrating honesty. In an attempt to appear flawless, MCO has apparently shown a lack of character by manipulating its facts to fit the conclusion.
Even if this reprehensible behavior is true, I continue to believe that MCO has an outstanding franchise whose markdown today seems appropriate, but the size of it seems excessive (and inviting): $1.5 billion.
CPDOs are basically a strategy for selling puts on the credit standing of investment grade corporations. The soundness is based on the fact that investment grade corporations have better balance sheets than either consumers or governments. So far, so good.
The strategy employs a high degree of leverage so that the returns are worthy of investments. Here's where the fun begins. When leverage comes in, the risks increase. Not so, said MCO and Standard & Poor's.
While their view of risk seems contrary, the rating agencies are not paid to be conforming. However, insiders (investment banking houses, not investors) smelled a "free lunch" and began to pig out by creating lots of CPDOs. Again, typical behavior. Nothing new.
But many months into the strategy, MCO noticed a mathematical mistake that had positively affected the rating received by CPDOs. On these complex computer models, mathematical mistakes do occur. Because so many factors are involved, one mistake does not usually render the model inoperable. Further, Standard & Poor's had arrived at the same rating by its own analysis. But the real mistake apparently came next: MCO did not own the mistake.
Instead, it is reported that MCO sought to arrive at the same conclusion by adjusting other factors so as to not create a ratings shock. While some might argue that the "managed" approach is most suitable to functioning markets, I would argue that trustworthiness is even more important. As a good friend of mine says, "it takes seven lies to cover up one lie."
Rather than attempting to seem perfect, MCO would have been better off owning the mistake (assuming it is as reported), taking the heat, changing the rating and demonstrating honesty. In an attempt to appear flawless, MCO has apparently shown a lack of character by manipulating its facts to fit the conclusion.
Even if this reprehensible behavior is true, I continue to believe that MCO has an outstanding franchise whose markdown today seems appropriate, but the size of it seems excessive (and inviting): $1.5 billion.
Tuesday, May 20, 2008
Mr. Market's Gift: Home Depot (HD)
Watching HD stock fall over 5% today is fascinating. Just a couple of weeks ago, HD announced that 15 stores would be closed and plans for 50 would be cancelled. As a result, HD stock rose 5%.
Today's announcement included pricing on the costs of store closures and cancellations. The total of 65 has a cost of $543 million or roughly $8 million per store. That was not new information.
Other new information was that HD earned $0.41 per share as opposed to Wall Street expectations of $0.37 per share. Such information would normally be accompanied by a rising stock price, however the improvement was due to a "calendar shift." Results would have been lower.
HD has nearly 2,000 stores with a market capitalization of $45 billion for a store value of $22.5 million per store. The actual costs of building a store (zoning, parking lot, curb cuts, store structure, etc.) appear to be roughly $20 million per store. Today's price in HD gives no value to anything other than the real estate.
So, if 15 stores are closed, the associated drop in market value would be $330 million. Additionally, if 50 stores are cancelled, the associated drop (at a 50% assumption) would be $550 million. The combined $880 million is less than 2% of a drop in HD stock value (again, assuming no value other than the real estate value).
If Mr. Market's behaviors were "rational," the market would have dropped by less than 2% earlier this month on the store closing announcement. Instead, Mr. Market was ebullient. Today's announcement of lower quarterly earnings, on the other hand, was a non-event in terms of the true value of HD. Instead, Mr. Market nosedived on the information.
No real surprise here. Mr. Market is not addressing the true value of HD stock as a company. Instead, Mr. Market is concentrating on tiny movements in the quarterly earnings and margin results, continuing to provide investors an outstanding opportunity.
Today's announcement included pricing on the costs of store closures and cancellations. The total of 65 has a cost of $543 million or roughly $8 million per store. That was not new information.
Other new information was that HD earned $0.41 per share as opposed to Wall Street expectations of $0.37 per share. Such information would normally be accompanied by a rising stock price, however the improvement was due to a "calendar shift." Results would have been lower.
HD has nearly 2,000 stores with a market capitalization of $45 billion for a store value of $22.5 million per store. The actual costs of building a store (zoning, parking lot, curb cuts, store structure, etc.) appear to be roughly $20 million per store. Today's price in HD gives no value to anything other than the real estate.
So, if 15 stores are closed, the associated drop in market value would be $330 million. Additionally, if 50 stores are cancelled, the associated drop (at a 50% assumption) would be $550 million. The combined $880 million is less than 2% of a drop in HD stock value (again, assuming no value other than the real estate value).
If Mr. Market's behaviors were "rational," the market would have dropped by less than 2% earlier this month on the store closing announcement. Instead, Mr. Market was ebullient. Today's announcement of lower quarterly earnings, on the other hand, was a non-event in terms of the true value of HD. Instead, Mr. Market nosedived on the information.
No real surprise here. Mr. Market is not addressing the true value of HD stock as a company. Instead, Mr. Market is concentrating on tiny movements in the quarterly earnings and margin results, continuing to provide investors an outstanding opportunity.
Thursday, May 8, 2008
Wireless Wars
The announcement that Sprint and Clearwire will create a new company, named Clearwire by merging their next-generation wireless broadband networks is a significant step towards creating a high speed mobile WiMax network. The vision is that all of our devices, including phones, Blackberries, laptops and whatever gets invented, will be on a high speed wireless network. The question has been who will construct this network and who will get paid for its use. Many companies are involved.
But who's not involved? Microsoft, Verizon and AT&T. Sprint was the natural leader in this effort, but has been derailed from its commitment by financial difficulties. Clearwire is a next natural step in that it is an innovator in the space. Intel has committed $1 billion so that its chips are fit for the devices developed to access this network. Google has committed $500 million so that its software is the main platform utilized. The cable companies, Comcast and Time Warner, have committed $1.5 billion so that their content and delivery systems coordinate with the WiMax network.
An issue is that competition that will exist between the emerging Clearwire and a cable provider. Current users of the Internet through cable appear to have a likely choice: Clearwire everywhere access or the local modem at home through the cable company. Obviously, the cable companies hope to roll this wireless service into their package of services to prevent a similar strategy from the telephone companies.
But who's not involved? Microsoft, Verizon and AT&T. Sprint was the natural leader in this effort, but has been derailed from its commitment by financial difficulties. Clearwire is a next natural step in that it is an innovator in the space. Intel has committed $1 billion so that its chips are fit for the devices developed to access this network. Google has committed $500 million so that its software is the main platform utilized. The cable companies, Comcast and Time Warner, have committed $1.5 billion so that their content and delivery systems coordinate with the WiMax network.
An issue is that competition that will exist between the emerging Clearwire and a cable provider. Current users of the Internet through cable appear to have a likely choice: Clearwire everywhere access or the local modem at home through the cable company. Obviously, the cable companies hope to roll this wireless service into their package of services to prevent a similar strategy from the telephone companies.
Wednesday, April 30, 2008
Humility at BUD?
Anheuser-Busch's (BUD) 2008 annual report contains a graph that money managers hate to see describing one of their multi-year holdings:
BUD's share price has significantly underperformed other baskets of stocks as measured by these two indices. In the meantime, as I have written about in an earlier post, BUD's operational characteristics have been excellent. I continue to believe that BUD is no dud.
In keeping with the title "Scott's Random Bits," I do want to introduce evidence that something is happening at BUD: the latest generation of Busch leadership - August IV - has a signature which is increasingly reflecting the stock price pattern. In this first signature, the 2006 annual report shows his signature as CEO for the first time after succeeding Patrick Stokes:
Look at the change only 12 months later:
BUD's share price has significantly underperformed other baskets of stocks as measured by these two indices. In the meantime, as I have written about in an earlier post, BUD's operational characteristics have been excellent. I continue to believe that BUD is no dud.In keeping with the title "Scott's Random Bits," I do want to introduce evidence that something is happening at BUD: the latest generation of Busch leadership - August IV - has a signature which is increasingly reflecting the stock price pattern. In this first signature, the 2006 annual report shows his signature as CEO for the first time after succeeding Patrick Stokes:
Look at the change only 12 months later:
Wednesday, April 23, 2008
Dollar's Woes
I took my family to Switzerland for spring break and experienced the same painful lack of purchasing power that others have written about and the financial markets have demonstrated. The dollar's decline has been almost straight down, prompting investors to wonder if the bottom is near.
Today's announcement that Omaha, Nebraska-homebody Warren Buffett is taking a tour of Europe to look for investments is a resounding "NO." In the nineties, Mr. Buffett would reply to questions about global investing by stating that overseas investing was beyond his competence. Further, he would add that the U.S. was the location for thousands of opportunities and that if he couldn't find one competently in that pile, why look elsewhere. But that was back in the day of the strong dollar.
His annual reports are consistent in a cry against the weakening dollar. He is putting his money where his mouth is. After starting out with trades against the dollar, he has moved on to long term investing outside the U.S. - a serious indictment of current dollar-based policies and a caution for dollar-based investing.
Today's announcement that Omaha, Nebraska-homebody Warren Buffett is taking a tour of Europe to look for investments is a resounding "NO." In the nineties, Mr. Buffett would reply to questions about global investing by stating that overseas investing was beyond his competence. Further, he would add that the U.S. was the location for thousands of opportunities and that if he couldn't find one competently in that pile, why look elsewhere. But that was back in the day of the strong dollar.
His annual reports are consistent in a cry against the weakening dollar. He is putting his money where his mouth is. After starting out with trades against the dollar, he has moved on to long term investing outside the U.S. - a serious indictment of current dollar-based policies and a caution for dollar-based investing.
Monday, April 21, 2008
Capital ExpAnditures in Cable
This graph depicts the probable culprit for the low prices of cable stocks: a pattern of expanding capital expenditures. The analysts at Smith Barney have produced a graphic depictions of promises made and not kept (I hope Tessa - my graphics star daughter - doesn't attempt the same about me).
While capital expenditures have continued at a surprisingly high level, the dramatic improvements in data speeds and additional telephony income has certainly paid its way. In another post (imaginatively titled "Cable Profitability), I depict the significant margin expansion available for cable when connectivity charges go away as the business matures.
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