Buffett Expands Print Media Biz. – Analyst Blog
In 2009, Warren Buffett, Chairman and CEO of Berkshire Hathaway Inc. (BRK.A) (BRK.B), stated that it was not very reasonable to continue his ownership of the newspaper business. He did not particularly like the practice of newspaper companies providing news online for free, yet charging for the same in print. According to Buffett, online news posed a threat to the print medium.
However, it seems that Buffett’s outlook toward the future of the newspaper industry has changed and Thursday’s announcement to acquire 63 daily and weekly newspapers from Media General, at approximately 100% premium to Media General’s current market capital, points to the fact.
Berkshire Hathaway is expanding its newspaper business by paying a total amount of $142 million. It will also aid Media General, loaded with debt and ailing with decreasing earnings, by providing a loan of $400 million and $45 million of revolving credit. As a result of this financing, Buffett will gain control over 19.9% of Media General’s outstanding shares.
The deal is expected to close toward the end of June. Per the deal, Berkshire will own all newspapers owned by Media General except the Tampa Tribune of Florida and some smaller newspapers in the region. Some of the papers acquired include Richmond Times-Dispatch in Virginia, the Winston-Salem Journal in North Carolina and the Morning News of Florence, S.C., among others.
In November 2011, Buffett announced the purchase of The Omaha World-Herald Company, publisher of Nebraska’s principal daily newspaper, for $200 million. The deal added the World-Herald, six other daily newspapers and several weekly newspapers to the company’s media business portfolio. Berkshire’s media business portfolio also includes Business Wire and The Washington Post Co. (WPO).
Buffett’s altered opinion indicated that he was optimistic about the newspaper industry and considered it to be an institution, which holds a lot of importance in regions with a strong sense of community. He also believes that newspapers, which have been facing stiff competition from digitization, can prevent waning sales by focusing on providing community news.
Despite being a small budget deal, it has managed to create a stir, particularly amongst those who follow Buffett’s investment moves. Now that Buffett has changed his bearish outlook on the print media industry, we may witness new investment activity in this domain.
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AM Best Affirms Coventry’s Ratings – Analyst Blog
Credit rating agency A.M. Best Co. affirmed the issuer credit rating (ICR) of Coventry Health Care Inc. (CVH) at “bbb-”. The rating agency also reiterated all the debt ratings of the company.
Additionally, A. M. Best raised the financial strength rating (FSR) of Coventry’s subsidiaries – Coventry Health Care of Iowa Inc. and Coventry Health Care of Illinois Inc. – to “A-” from “B++” and the ICR of the subsidiaries to “a-” from “bbb+”. The rating agency also raised the FSR of two other subsidiaries - Coventry Health Care of Louisiana Inc. and Coventry Health Care of Delaware Inc. – to “A-” from B+” and their ICRs to “a-” from “bbb-”.
The FSR and ICR of Coventry Health Care of Kansas Inc. were also raised to “A-” and “a-” from “B++” and “bbb”, respectively. A. M. Best also raised the FSR of three other subsidiaries - Coventry Health Care of Florida Inc., Coventry Health Plan of Florida Inc. and Coventry Summit Health Plan Inc. – to “B+” from “B” and ICR to “bbb-“ from “bb-“.
Enhanced operating efficiency and expanding membership base of another subsidiary, HealthCare USA of Missouri LLC, led to reaffirmation of its FSR at “B++” and upgradation of its ICR to “bbb+” from “bbb”. Meanwhile, improved underwriting trend and satisfactory capitalization of OmniCare Health Plan Inc. prompted A. M. Best to upgrade the subsidiary’s FSR to “B++” from “B+” and ICR to “bbb” from “bbb-“.
A. M. Best has a stable outlook on all the ratings, indicating low possibility of any rating change in the near term.
Earlier this week, Coventry cancelled its agreement with Sequenom Inc. (SQNM) to provide coverage for the latter’s MaterniT21 PLUS test to its 2.2 million policyholders. Sequenom’s subsidiary, Sequenom Center for Molecular Medicine LLC, had signed a provider network participation agreement with Coventry on May 4, 2012, effective July 1, 2012.
However, on May 14, 2012, Coventry cancelled the agreement without citing any reason. The company will stop its overage of Sequenom’s tests from August 31, 2012.
Coventry currently carries a Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating.
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Dow, Syngenta in Trait Stacks Deal – Analyst Blog
Dow AgroSciences LLC, a unit of The Dow Chemical Company (DOW), and Syngenta (SYT) have united in a bid to offer refuge-reducing trait stacks to corn growers across the U.S. and Canada. The collaboration will focus on making high-performing trait stacks more widely accessible to independent seed companies through Syngenta’s fully-owned subsidiary, GreenLeaf Genetics. The entities have not divulged the financial terms of the deal.
Under the pact, the companies will offer high-performance trait stacks such as the Agrisure Viptera 3220 and Agrisure 3122 to the corn growers, helping them to boost productivity. Moreover, Syngenta’s Agrisure traits and Dow AgroSciences’ Herculex traits will be out-licensed through GreenLeaf, serving as the primary contract for seed companies.
The union of two advanced trait technologies will offer the corn growers across the U.S. and Canada greater option and genetic combinations to reduce the required number of refuge acres, maximize yield and control multi-pest complex insects including corn earworm and corn borer.
Multi-pest complex insects damage roughly 238 million bushels of corn alone in the U.S. and costs $1.1 billion in lost yield and grain quality every year. Agrisure Viptera trait is proven to be highly effective against corn earworm, one of the biggest threats to corn production in the U.S.
Indiana-based Dow AgroSciences is a leading provider of crop protection and plant biotechnology solutions. Syngenta, headquartered in Basel, Switzerland, is a leading specialized chemicals company focused on boosting crop yields and food quality globally.
Revenues from Dow’s Agricultural Sciences segment jumped 14% year over year to $1.8 billion in the most recent quarter, benefiting from new products. Sales of Seeds, Traits and Oils business soared 16%, driven by new seed technologies. Dow’s Corn business continues to see strong demand from farmers of SmartStax hybrids in North America and growing adoption of Herculex technology in Latin America.
Dow, which competes with EI DuPont de Nemours & Co. (DD), is benefiting from strong fundamentals in agriculture and food markets. The company’s performance in the emerging markets remains strong and we expect this to continue moving ahead. A string of innovative products in its pipeline also adds to its strength.
We currently have a long-term Neutral recommendation on Dow Chemical, which is in sync with a short-term Zacks #3 Rank (Hold).
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ConAgra Stays in Neutral Territory – Analyst Blog
We are maintaining our Neutral recommendation on ConAgra Foods (CAG). The company’s continued business portfolio expansion and cost moderation efforts leveraging on the value-added opportunities through the acquisition of private labels.
The food maker has been significantly expanding its business portfolio over time, focusing on strategic acquisitions as well as existing capabilities. The company’s promotional campaigns, strong sales force, dedicated customer-serving teams, and category leadership continue to add depth and dynamism to its existing product lines.
Strong productivity and robust cost saving in both the Commercial and Consumer food segments have been boosting the company’s revenue growth for quite some time. In addition, ConAgra expects the rate of input cost inflation to moderate in the upcoming quarter. The recent signs of modest job recovery in the US and the anticipation of receding gasoline prices raise hope.
However, concern remains as we anticipate food and fuel inflation to take a huge toll in the coming quarters.Various raw materials used in the food industry are exposed to market fluctuations, supply-demand inconsistency and changes in governmental agricultural programs. Thesewill continue to raise cost and have a negative impact on the company’s operations.
Moreover, the food industry in recent times is backed by value oriented price sensitive consumers, who prefer to spend more cautiously due to unemployment and housing pressures. Prevailing macroeconomic conditions are thus making it difficult for the company to raise prices even on the back of rising costs.
The food industry is intensely competitive, facing challenges from private label suppliers as well as big banners like HJ Heinz Co. (HNZ) and Kraft Foods Inc. (KFT). Therefore, fierce competition may shrink the company’s market shares and eat into ConAgra’s profits.
ConAgra retains a Zacks #3 Rank, implying a short-term (1-3 months) ‘Hold’ rating.
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Ford to Boost EcoBoost Output – Analyst Blog
Ford Motor Co. (F) intends to triple production of vehicles equipped with its EcoBoost engines to 480,000 vehicles annually by 2015 from 141,000 units in 2011 in order to meet stricter emission standards in Europe. As per the company, EcoBoost engines are capable of reducing carbon dioxide emissions by 15%.
The European Union (EU) has set a target of emission reduction by nearly 20% to 130 grams of CO2 per kilometer by 2015 from 161.3 grams in 2006. Ford’s fuel efficient and environment-friendly EcoBoost engines will help the company successfully meet the EU target.
Ford also plans to double its vehicle models equipped with the engines by 2015 from the existing five models. The automaker anticipates more than half of its cars marketed in Europe by 2015 to be equipped with the engine.
Ford plans to manufacture 1.3 million units of EcoBoost cars in Europe from 2012 to 2015. As many as 800,000 units of them will be produced with a small 1.0-liter engine that are manufactured in Romania and Germany. Other variants of engines include 1.6 liter and 2.0 liter.
Ford’s production plans may be in line with Europe’s emission regulation policies but it needs to worry about the slacking automotive market in the continent at the same time. In April, car sales in the continent dipped 6.5% to 1.06 million units as consumers stayed away from showrooms in a weak economy triggered by the sovereign-debt crisis in Euro zone.
All the major automakers, except Daimler AG (DDAIF) and Bayerische Motoren Werke AG (“BMW”), posted decline in sales during the month. Among the U.S. automakers, General Motors Company (GM) posted an 11.1% fall in sales to 85,493 units driven by lower Opel/Vauxhall (16.9%) and GM brand (50%) sales while Fordsaw an 8.3% drop in sales to 79,223 units.
In 2011, Ford lost $27 million in the continent. The company expects to lose between $500 million and $600 million further this year.
Ford, a Zacks #3 Rank (Hold) stock, posted a sharp 20% fall in profits to $1.6 billion in the first quarter of 2012 from $2.0 billion in the same quarter of 2011. On per share basis, profits ebbed 17% to 39 cents from 47 cents in the first quarter of 2011. Nevertheless, it was higher than the Zacks Consensus Estimate of 35 cents.
The automaker has attributed the decrease in profits to higher tax expense, lower operating results and higher charges emanating from buyouts of hourly workers in the U.S. as part of its UAW agreement in 2011.
The company’s profits drastically fell in all its operating regions, except North America. In fact, it recorded a loss in Europe and Asia Pacific Africa compared with a profit in the comparable quarter of 2011.
Total revenue in the quarter slipped 2% to $32.4 billion, barely surpassing the Zacks Consensus Estimate of $32.0 billion. The fall in revenues was attributable to lower wholesale volumes in Europe and Asia, partially offset by higher volumes in North America and South America.
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Canadian Pacific Management Changes – Analyst Blog
One of the leading Canadian railroads, Canadian Pacific Railway Limited (CP) has announced the resignation of president and chief executive officer Fred Green after tenure of 34 years. The resignation came ahead of Canadian Pacific’sannual general meeting, which was held on May 17. Along with Fred Green, chairman John Cleghorn also stepped down from his position in the company.
Following the annual general meeting, the company announced the names of the 16 directors, including William Ackman, who will hold their positions till the next annual general meeting. Additionally, the board of directors selected Stephen Tobias, as the interim CEO. Tobias has worked with Norfolk Southern Corporation (NSC) as vice chairperson and chief operations officer and has spent nearly 40 years in the industry. The board also selected Madeleine Paquin as the acting chairman of the company.
Given the managment changes in Canadian Pacific, we believe the railroad’s fight with its eminent investor, Ackman has finally reached a settlement. In January, Ackman, who owns approximately 12% stakes in Canadian Pacific, proposed a plan to replace CEO Fred Green with Hunter Harrison, former CEO of rival Canadian National (CNI). Ackman’s policy to bring improvements in Canadian Pacific beginning with the change in CEO was, however, condemned by the board of directors.
Management stated that the company, under the directions Fred Green, has been working towards successful execution of it Multi-Year Plan that endorses volume growth, network expansion and costs control measures that could drive operating ratio in the low 70s in next three years.
On the basis of these growth goals, the company has so far realized significant synergies evident by improvement in operating ratio compared to 2010 results despite a slowing economy. On continued implementation of the long-term plan, management expects further improvements in Canadian Pacific’s financial performance.
However, we believe that the resignation of Fred Green and changes in board members reflect the faith of shareholders on Ackman for turning around the fate of the company. Additionally, it also paves the way for Hunter Harrison as the next CEO of Canadian Pacific as desired by Ackman.
Consequently, we have a Neutral recommendation on Canadian Pacific. For the short term (1-3 months), the company has a Zacks #2 Rank (Buy).
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Top 5 Zacks #1 Ranked Precious Metals Funds – Best of Funds
Precious metals provide a hedge against the broader market slump during an economic downturn. When economic activities are sluggish and inflation is at a high, precious metals stand out as an investment avenue outperforming other asset classes. However, investments in precious metals involve a substantial amount of risk given their volatile nature. Mutual funds capturing the essence of this particular asset class, with their diversified portfolio and expertise, are therefore the appropriate choice for investors seeking to get exposure in the precious metal space.
Below we will share with you 5 top rated precious metals mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) as we expect the fund to outperform its peers in the future. To view the Zacks Rank and past performance of all precious metals funds, investors can click here to see the complete list of funds.
Oppenheimer Gold & Special Minerals A (OPGSX) invests primarily in domestic and foreign companies whose major operations include mining, processing or dealing in metals and minerals. The precious metals fund has a five year annualized return of 6.92%.
The fund manager is Shanquan Li and he has managed this precious metals mutual fund since January 1997.
Tocqueville Gold Fund (TGLDX) seeks long term capital growth by investing a large share of its assets in equity securities of domestic and foreign companies engaged in mining and processing of gold. The fund has exposure to developed as well as emerging markets. The precious metals mutual fund has a five year annualized return of 9.99%.
The precious metals mutual fund has a minimum initial investment of $1,000 and an expense ratio of 1.25% compared to a category average of 1.40%.
Invesco Gold & Precious Metals Investor Fund (FGLDX) invests a majority of its assets in equity securities of companies involved in mining, processing or dealing of precious metals. The fund may also invest directly in gold bullion. The precious metals fund has a five year annualized return of 7.76%.
As of March 2012, this precious metals fund held 40 issues with 6.45% of its total assets invested in Goldcorp, Inc.
Rydex Precious Metals Investor Fund (RYPMX) seeks to generate long term capital appreciation by investing a majority of its assets in precious metal companies. The fund also invests in publicly traded derivative contracts. This precious metals mutual fund is non-diversified and has a five year annualized return of 2.08%.
The fund manager is Michael P. Byrum and he has managed this mutual fund since August 2000.
First Eagle Gold A (SGGDX) invests directly in gold and other precious metals. The fund may also invest in financial instruments issued by companies principally engaged in the gold industry, including gold finance companies. This precious metals mutual fund is non-diversified has a five year annualized return of 10%.
The precious metals mutual fund has a minimum initial investment of $2,500 and an expense ratio of 1.20% compared to a category average of 1.40%.
To view the Zacks Rank and past performance of all precious metals mutual funds, investors can click here to see the complete list of funds.
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Why I Am Shorting Facebook – Real Time Insight
“I’m mad as hell and I’m not going to take this anymore!”
This is a classic case of a great company, but a poor investment. Meaning that I am impressed by what they have built and think it is another great American success story. Unfortunately there is too much laughing gas pumped into the FB story that people can’t see straight when it comes to what price to be paid for shares. And that is why it’s ripe to be shorted.
Could it truly be worth more than $110 billion some day?
Yes. But the odds are just far too long on that. I don’t want to bore you with all the forensic accounting on this one. Just consider some of the longer, more established and INFINITELY more profitable firms than Facebook who have market caps just under that of FB’s.
Yes, this is eye opening. So it’s clear that they need 1001 things to go right to deserve to be at these lofty heights.
Let me share with you what I believe are the 3 main reasons that Facebook will not be able to generate the profit needed to be worth the current valuation.
1) The only way to make more money is to advertise more to clients. And every step they take to advertise more to customers = higher invasion = lower satisfaction with the user experience. Certainly there is more money to be squeezed out of the company, but I think they will run into some speed bumps on this front.
2) Most people I know have gone through the following cycle with Facebook. So it’s good that they are adding new members…but eventually most will become infrequent users.
And if you say to me that it’s the younger generation that is hooked on Facebook, I say you are right. And when they get jobs and have families in the future, they too will use FB a LOT less often.
3) In general websites that have “sticky” content do not command high advertising rates. Meaning that if the customers are too interested in the content on the site, then they actively click to the next page, photo, video etc and don’t pay much attention to the ads. And if they don’t pay much attention to the ads, then the rates they can charge for the ads will be low. (I have some experience with this as I have run Zacks.com since 2001. And headed our ad network sales team for 5 years). Remember that GM just pulled their ad buy from Facebook because they were ineffective. I assure you there will be many others. The end result will be much lower ad rates than most people are using in their Facebook business models.
This short may not pay off today. Or even a couple months down the road. But just like Netflix (NFLX) and Green Mountain (GMCR)…there will be a day of reckoning. And that will be the first time that earnings or sales do not meet up with lofty expectations.
Note that I am only shorting a small position at this stage. That is because there may be some IPO euphoria that lasts for a while pushing shares higher. So I expect to short more shares down the road. That should probably be before the first wave of lock up folks can sell 91 days after launch. Quite often that selling action pushes down the share price.
Here is the only trick at this point. I have seen varying opinions of when people are able to short newly IPO’ed shares. They say it can be the first day IF the brokerage firm you are using has shares to pull from. Some will and some won’t on day one. But probably within 3-4 business days those shares will be there and whatever entry price we get will be plenty attractive enough. So keep trying to put in your order and whenever it clears will be fine.
What is my target price? I suspect this will get a 25-50% haircut at some point down the road. The only question is when. I don’t mind having it on the books for a long time to see it come to fruition.
Are you ready to take your rightful place in history by declaring that you shorted Facebook right from the outset? If so, then put in your trade.
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Big Banks Need Billions? – Analyst Blog
According to Bloomberg news that cited a Fitch Ratings’ report, big banks need to raise billions to conform to capital requirements scheduled to be implemented by 2019. These are 29 biggest banks in the world that are referred to as systemically important financial institutions (SIFI) need to raise around $566 billion in total, representing about 23% of these banks’ current total common equity.
Bank of America Corp. (BAC), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS) and Wells Fargo & Co. (WFC) are a few of the SIFI names in the U.S. Others include the likes of Barclays Plc. (BCS), UBS AG (UBS) and HSBC Holdings Plc. (HBC). These banking big shots are referred to as SIFI as failure of one of them could create a ripple effect and eventually lead to a global financial crisis. Therefore, the new Basel III rules require these banks to raise their capital levels for avoiding such financial meltdown.
According to Fitch, this capital building might limit these banks’ ability to returns shareholder wealth in the form of dividends or share buybacks. Moreover, they could curtail their risky asset holdings. With such a move, weaker companies’ borrowing costs are likely to increase and availability of credit might fall. Finally, they may need to borrow from private equity firms and hedge funds that are less controlled.
It may also create opportunities for some institutions to gain share from peers for having lower funding costs. On the other hand, others may find it appropriate to limit their business and avoid being termed as such institutions so as to avoid regulatory hazards.
Our Take
We believe that the near-term effects of building up capital levels for satisfying regulatory requirements of these banks will have an effect on their profitability, dividends and buybacks as well on the borrowing costs.
Yet, the long-term benefit cannot be denied either as a bank of such stature with weak capital is always a threat. A sturdy capital level of these banks would imply lesser bank failures and subsequently reduce involvement of taxpayers’ money to rescue them. This in turn would help in achieving stability of the financial sector and the economy as a whole.
Notably, to achieve the required capital levels, banks are already cutting their non core businesses, reorganizing their activities, cutting down expenses, boosting their operating leverage and seeking additional sources of cash. Such measures, we believe, would help in an overall improvement in the efficiency level of these banks and act as building blocks of the still unstable world economy.
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Data on Elan & Biogen’s Tysabri – Analyst Blog
Biogen Idec (BIIB) and Elan Corporation, plc (ELN) recently announced the publishing of research from the Tysabri risk management program in the New England Journal of Medicine.
The research was based on data from Tysabri trials, post-marketing studies and an independent Swedish registry to estimate the incidence of progressive multifocal leukoencephalopathy (PML) in patients on Tysabri.
Three risk factors, the presence of anti-JC virus antibody, prior treatment with immunosuppressants and treatment duration with Tysabri, were used in the analysis.
Patients with anti-JC virus antibody, who had taken immunosuppressant therapy before Tysabri and had been on Tysabri for 25 to 48 months, demonstrated the highest risk of PML. The number of PML cases in these patients was 11.1 per 1,000 patients.
On January 20, 2012, Biogen and Elan announced that the U.S. Food and Drug Administration (FDA) approved a label change for Tysabri. As per the updated label, anti-JC virus antibody status is a risk factor for developing PML, a rare and life-threatening brain infection. This step will enable doctors to assess the patients’ risk benefit matrix better.
Tysabri is approved in the U.S. for relapsing forms of multiple sclerosis (MS) in patients who show inadequate response to or are unable to tolerate other treatments. In the E.U., Tysabri is approved for highly active relapsing-remitting MS (RRMS) in adult patients who have severe RRMS or have failed with beta interferon treatment.
In the E.U., Tysabri was approved in 2006, while in the U.S.; it was initially approved in 2004. The product was withdrawn from U.S. markets in 2005 due to the PML concern. The drug was reintroduced by Biogen and Elan after a year with a strict warning regarding the occurrence of PML.
In-market net sales of Tysabri climbed 14.2% to $399 million in the first quarter of 2012. The increase was driven by higher global demand and higher price in the U.S. market. The sales of Tysabri recorded by Elan rose 17.5% to $288.2 million.
Our Recommendation
We currently have a Neutral recommendation on both Biogen and Elan. While Elan carries a Zacks #2 Rank (Buy rating) in the short run, Biogen carries a Zacks #3 Rank (short-term Hold rating).
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