I Buy Onyx Pharmaceuticals (ONXX)

Friday, May 9, 2008, I bought my first shares of Onyx Pharmaceuticals. Since I have been writing about Onyx for a while, and intend to continue to write about the company, this is just a disclosure to my readers.

I consider Onyx to be promising but risky. My initial position is a small fraction of my small portfolio.

To see all my writing on Onyx, including my summaries of past analyst conferences, go to my main Onyx page.

Keep diversified!

Onyx In The Black

Onyx Pharmaceutical reported GAAP net income yesterday for Q1 2008, a first. It has been a long road for Onyx, which was set up in 1992. Nexavar (sorafenib) for advanced kidney cancer (also referred to as RCC, renal cell carcinoma), was approved by the FDA in December 2005. It was developed with Bayer, which also does the sales and marketing.

Onyx reported no revenues for Q1. How, then, can it make a profit? All Nexavar sales are by Bayer. Onyx has always reported their joint venture as an expense item. Their joint expenses are deducted from sales. Half of the remaining profit or loss in the joint venture is transferred onto Onyx's statements. Until Q4 2007, this had been a loss. The joint venture loss was added to Onyx's own operating expenses to get their net loss.

In Q4, the joint venture netted Onyx $4.4 million from Bayer, but that was swamped by Onyx's own expenses. This latest quarter the joint venture was $37.7 million, quite a leap, and allowing Onyx to show an overall profit of $15.4 million, or $0.24 per share.

You might think the stock price would have jumped today, but it opened down. Maybe some traders just sold on the news. But probably this was a result of the guidance Onyx gave and its responses to analysts' questions about the guidance (See my Onyx Analyst Conference Summary for Q1 2008 for details). The low end of guidance for revenue for all 2008 was basically flat against Q1 revenue.

A couple of things might be going on here. This is the first time ever management has given forward guidance. They probably just wanted to give a number they are sure to beat. On the other hand growth in revenues has been heavily dependent on introducing Nexavar to new countries internationally. If for some reason introductions are delayed, it is conceivable that revenue growth could flatten out.

Right now Onyx is a one drug company, so growth depends on three things. Of course they will try to sell more Nexavar for liver and kidney cancer, for which they have received approval. They also have a number of trials underway for other types of cancers. Third, they may license other drug candidates for development.

Downside risks are the usual for a pharmaceutical development company. Some downside to Nexavar that did not show up in clinical trials could appear -- that is what happened to Amgen. And it might turn out that Nexavar is not good for anything besides renal and liver cancer. There has already been one disappointment, the failure of a study last year of Nexavar for non-small cell lung cancer.

Probably the future is bright for Onyx. I have it on my short list of potential buys.

Keep diversified.

More data:

Onyx Pharmaceuticals corporate web site
My main Onyx page

The Microchip Model

At the Xilinx analyst conference the other day [see my Xilinx analyst conference summary] one of the analysts asked if Xilinx would consider imitating "the Microchip model" and paying out higher dividends.

How the worm has turned.

Today Microchip reported on its Q1 2008 results and held its own conference [See my Microchip (MCHP) analyst conference summary]. The results were pretty good. Anyone who has followed Microchip this last year would have been worried that Q1 could be another quarter of declining revenues. Instead revenues were up sequentially 3% and up 1% from year earlier, to $260.4 million. Non-GAAP earnings per share hit a record.

The Microchip model (which in addition to knowing and having used their products attracted me to their stock) includes paying out dividends. For years Microchip management resisted doing share buy backs and instead kept increasing the dividend, at least in good times. And how Wall Street seemed to hate that. Every analyst conference included suggestions to take some (or most) of Microchip's cash and buy back stock.

What is great about Microchip, aside from their microcontroller products, is that management cares about long term investors. Such investors aren't going to sell their stock during a share buy back, nor do any short term gains from this game help them. Dividends mean revenue. You can do what you want with your dividends. Sure, you have to pay taxes on the dividends you receive, but you don't have to sell stock (and pay capital gains taxes) to get a stream of money. As far as I know, Microchip had (and has) the highest dividend payout in the semiconductor industry, where many companies pay little or no dividend.

This change of sentiment towards higher dividends may not last. Oddly, last fall the board of Microchip finally relented and set up a share buy back. They borrowed money to do it, too; I don't like that. But they are so profitable that are likely to be able to both continue to increase dividends and to pay down the debt (which is in the form of convertible debentures).

Best part of the conference? They raised the dividend yet again, to 33 cents per share per quarter.

In case it has not been perfectly clear, I own Microchip stock.

Keep diversified!

Altera Q1 Shows PLD Sector Strength

Altera (ALTR) reported Q1 results on April 16th, at which time I was recovering from my recent Microsoft project. I listened to the analyst conference recording today. If you like you can read my summary of the conference.

Revenues were up 4% over Q4 and 10% over Q1 2007. While that is not hockey stick growth, it is respectable when many semiconductor companies are reporting numbers that are down to flat from a year ago. What is Altera's competitive advantage?

Altera make PLDs, programmable logic devices. Essentially a PLD is a piece of silicon with a bunch of logic gates arrayed on it. Need some new cell phone logic? You use software to design what you want, then program the PLD. Stick the programmed chip on the board with the other chips and you are ready to run, or at least debug. So you can use this process for prototypes or small runs. For larger, stable runs usually manufacturers go with the well known process of making an IC that has the logic in the physical design, an application-specific IC or ASIC.

There are common sorts of PLDs, and Altera makes both. FPGA are fully programmable gate arrays. CPLDs are Complex PLDs. Increasingly other functions besides logic are available on these chips, notably analog communications functions.

According to Altera, the PLD market is growing faster than the chip market in general as ASICs are increasingly replaced by programmable devices.

Rival Xilinx will be reporting its Q1 on April 23. My summary of that conference will be here, in case you want to bookmark it. Of course several other companies are in the PLD business as well. Altera is moving to a 40nm process this year, and yes, that is a smaller transistor size than Intel is using at present. Xilinx will doubtless tell us why theirs is the product of choice when it reports.

Altera is looking at continuing growth based on customer feedback, a book-to-bill ratio over 1, and a strong backlog of orders to fill.

I don't own the stock and am not about to run out and buy it. Strangely, this is because Altera is too well managed. They have generated a lot of cash and have been buying back their stock throughout the current liquidity squeeze. I would not call the stock overpriced, and it is relatively safe for a technology stock. But there are a number of technology companies that are growing as fast or faster that have lower price-to-earnings ratios at this time. If Altera stock got caught in a market downdraft, however, I might add it to my buy list.

More data:

www.altera.com
my main Altera page

Bottom Fishing Time?

Fans may have noted my absense from Dissecting the Bull for multiple weeks. I was doing a project for Microsoft. I turned it in Monday night. I was so far behind on rest and other requirements that I have not had time to write until now. I did go to a local poetry reading last night and read a poem:

Touching the old skills
Fingering them like tools
The Mind sends forth tendrils
Frosty and interwoven

Which I wrote an amazingly long time ago. But the question for many investors, that I continue to ponder as well, is: time for bottomfishing? That is an old skill, for sure.

In a normal week I would be writing blogs on AMD and Gilead's analyst conferences, but that would take more energy than I have this morning.

When the tide goes out ... around here lots of people go looking for abalone. I have always considered abolone too beautiful and too rare to grace my barbeque. While taking them should be banned until they become plentiful again, at least Fish and Game has cut back to 4 the number a person can take in one day.

Taking stocks off the bottom is limited only by your available cash and credit. The problem is knowing when there is a bottom. While many signs and portents are visible in the world now - famines and melting glaciers and three-headed snakes - let's look at something we are better at interpreting, the housing market, mortgage crisis, and overall U.S. economy.

The thing about downward spirals is that there are usually two options. One is that the downward action impells more downward action. The other is that balancing forces come into play, breaking the cycle, and perhaps even causing an upward cycle to resume.

I think the bulls and bears both have it right. The bears say that housing prices are continuing to fall, which will continue to make houses worth less than the mortgages on them, which will hurt consumer spending, anyone involved in the banking and mortgage industries, and hence rippling out to the general economy. And the slowing general economy will feed back into the spiral. So bears believe it is not time to buy stocks, in fact if you have not been smart enought to sell off your entire portfolio, you should do so now.

The bulls say that we have passed through a liquidity crisis. The Federal Reserve may have screwed up in the past by allowing the housing bubble to form, but now it has created enough liquidity to restore confidence and allow growth to resume. There is a lot of new and used housing out on the market right now, but housing starts are now below the real level of increasing demand. Because immigrants are still immigrating, young adults are still having children, and increasing population requires increasing housing. Are people being turned down for loans in large numbers? Well, that shows there is pent up demand.

So the overstock of housing on the market will dwindle, then it will drindle rapidly (varying in rate by locality). One man's foreclosure is another man's windfall. Then the new home builders will start upping their building permit applications. Then workers will be hired and demand for cement and lumber will return. The stock market will go up, and people will wish they had bought while it was down. Given that the rest of the economy is pretty sound, so far, that means GNP will start growing again, aggregate consumer spending will go up, and we can start worrying about famines and three-headed snakes instead of the economy.

Of course, you should hedge your bets. The bears might be crowing for a few more months. Then again they might be underestimating the American spirit. I know a lot of people who have tightened their belts in the past 2 years. And the payoff has already begun. With less debt, they have less interest to pay, and more real disposable income.

We won't know when the corner has turned. The statisticians will let us know three months later.

There are no tide tables for the economy. But if you want abalone, you have to go to the tide pools while the tide is out. When the tide comes in, the picnic is over.

Red Hat Tricks

Red Hat (RHT) reported it results for its fiscal Q4 2008, which ended February 29, 2008, on Thursday. Analysts were particularly interested in seeing if any slump in sales occurred in January or February due to the turmoil in the mortgage security market and its effects on the U.S. economy. For a detailed report on results and answers to analysts' questions, see my summary of the Red Hat (RHT) analyst conference on March 27, 2008.

Red Hat distributes and supports the Linux open source operating system and the complimentary middleware, JBoss. It clients are mainly large corporations that have datacenters running large numbers of servers.

From Red Hat's point of view, the economy is doing just fine. Revenues were $141.5 million, up 5% sequentially from $135.4 million in the November quarter and up 27% from $111.1 million in the year-earlier quarter.

Usually rapidly growing, profitable companies have a high price-to-earnings (PE) ratio. But there are different ways to calculate earnings. The safest bet is usually (but not always) GAAP earnings per share (EPS). GAAP means Generally Accepted Accounting Principles. But there are other measures worth looking at if you are trying to value a stock.

Red Hat's GAAP EPS were $0.10, flat sequentially from $0.10 and from $0.10 in year-earlier quarter. Which would seem to mean profits are flat despite growing revenues, which is usually a negative sign.

Non-GAAP EPS measures have been used unscrupulously at times in the past to inflate the value of a stock. But some times they are more realistic than GAAP measures; it just depends on what you exclude from GAAP EPS and why. Red Hat reported non-GAAP EPS of $0.20, up sequentially from $0.19 in Q3 and up from $0.16 year-earlier. That is 25% annual growth.

Difference with GAAP numbers is due to stock-based employee compensation of $10.0 million and $10.7 million difference in provision for income taxes. These are not cash expenses, but the stock-based employee compensation does tend to dilute the shares of people already owning stock.

If you want to exclude history and see how a firm really did in a quarter, a good indicator is cash gains. Operating cash flow was $71.6 million, or about 50% of revenue. That is $0.32 per share. In addition, the company has $1.3 billion in cash and equivalent securities on its balance sheet.

How do we choose? Red Hat is a relatively new company that has had high startup costs. Under GAAP, many of the cash expenses of yesteryear show up in today's profit and loss statements. So the money, which came from venture capitalists and those who bought into the IPO, was spent long ago. But the money coming in today is real. As long as everything is kept in perspective, I think the cash is the leading indicator in this situation.

Take the low extreme and you have a company generating GAAP earnings of $0.10 per share per quarter, or $0.40 per year, and not growing profits. Even in normal times you would not want to pay more than about $8.00 per share for its stock.

Keep your eye on the cash and you have $0.32 per share per quarter or $1.28 per year, and rapid growth. A ratio of 30 in that situation would be considered conservative in a bull market, plus you would add in the $1.3 billion. That would make Red Hat worth about $38 per share. But of course we are not in a bull market.

Any price between those extremes $8 and $38 per share is arguable. Red Hat stock ended trading today at $18.49 per share, up over 5% during the day on a day the stock market fell considerably.

I own Red Hat. My portfolio rules allow me to buy more, and I might, but there are a lot of undervalued stocks to choose from right now.

Keep diversified.

More data:

www.redhat.com
Red Hat investor relations page
My Red Hat (RHT) page (with links to past analyst conference summaries)

Positive Yield Curve

Remember the negative bond yield curve? Negative yield curves are supposed to predict recession, and there is some good reason for that. Now if we are not in a recession we are in what might be called a pause. With only a slight return to normal consumer spending patterns and house sales, however, the pause could turn into a ramp. You have heard enough dire predictions for the rest of 2008; I won't repeat them here, and they remain a possibility.

However, lets look at that yield curve. One place to see it is at CNN-Money. It looks extremely positive to me.

So I would not be surprised to see the economy go back into positive territory in Q2. And if the Federal Reserve, as usual, ramps interest rates too slowly, we could start seeing rapid expansion of the economy, and unwelcome inflation, as early as Q4.

For my analysis of specific companies see my Company List page.