Monday, November 17, 2008

A Best Case Economic Forecast

What am I doing saying this recession might be shallow and short? After all, I'm known as a doom and gloom kind of analyst. Does a company have a flaw it is hiding? It is my job to find it. I warned investors of the Internet stock bubble back in 1999, I even resisted my wife's plea to buy more California real estate in 2003-2005. I called oil prices a bubble in March this year (See Oil Bubble to Burst, March 11, 2008).

On the happy side, I do sometimes conclude that a particular stock may make more money than other investors think (Stocks covered by William Meyers). So I am doing this rosy economic forecast as an exercise. It is not a prediction.

It is always good to look at history before acting too certain of the trends based on current details. In American history the economy has gone back and forth between expansion and recession dozens of times. While there are non-American historic examples of total economic collapse, they are almost always due to wars, not to peaceful economic activity. So the question is not whether the nation will come out of a recession, but how deep it will be and how long it will last.

The current consensus is: deep and long.

The questions that needs to be asked are: what feeds the downward spiral, what breaks the down trend, and what starts a new upward spiral.

How did we get here? What broke the upward spiral of 2002-2006? What started us down?

It is generally accepted that the stock market was not to blame. We had a typical crisis of over production, concentrated in one sector. This was combined with a price bubble in the same sector, housing. After housing prices peaked and investors started trying to find real home owner types to unload their investments on, it became obvious to increasing numbers of potential homeowners that: 1. houses were not necessarily a good short-term investments and 2. by delaying making a purchase, they could save money.

The downward spiral of house prices corresponded with layoffs in the housing and real-estate industry. The rest of the economy was immune for a while, and if the finance crisis had not hit probably would have pulled us through without a recession. Aggravating the situation, however, was a bout of inflation, notably in the price of gasoline. This summer we saw the credit markets dry up as the bright-greedy-boys were forced to deleverage their bets. All this could have been prevented if Alan Greenspan, as Federal Reserve chair back in 2004, had paid more attention to the real economy and had spent less time kneeling in adoration at the great god Free Markets.

Now we have declining consumer spending, increasing unemployment, and a slowing world economy. The Fed is giving banks extremely-low interest rate loans but the banks are not lowering interest rates to the rest of us. Yesterday the sharks at Citibank even announced they were raising interest rates for their credit card customers.

Let me show you how to get a rosy scenario out of that.

First, Americans are saving more. Don't think of that as someone putting $100 a month into a credit union savings account at 3% interest. Think of it as millions of people who are lowering their credit card balances by $100 to $500 per month, and who are paying 20% a month in interest and fees. At our high end, after only four months a family has $2000 less in credit card debt than they would have had otherwise. Just from that $2000 in "savings" they are now going to save $400 per year in ineterest for the rest of their lives, money that would have gone to CitiGreedyCard. They have effectively given themselves a large raise.

Likewise, suppose a family realizes it now costs less to buy a home, in the long run, than to rent. Instead of buying a McMansion they buy something reasonable, a home built back in the 20th century. They start paying off their new 30 year mortgage. They build equity, remembering the lessons of 2007, and never touch that equity. Pretty soon rents have gone up, but they have that same monthly mortgage payment. Life looks good, and they have more cash to save or spend.

Throw some fuel on the fire: lower gas prices. While they are no lower than a year ago, and so won't really help, at least they are not sucking the blood out of the American consumer like they did for the past year.

The soup is looking good now. The Federal Reserve is trying to pump at least enough credit into the economy to allow people who are credit worthy to get mortgages on the homes they want. Unemployed people are milling around in large numbers, eager to find productive jobs.

As best as I can guestimate, we don't even have excess housing stock, on the whole, in the United States today. Every year many houses are lost to fire and other construction. Every year more immigrants arrive (want to solve the housing crisis in a few months? Let anyone on the immigrant waiting list who has the money to buy a house into the country immediately). The home construction industry has slowed way down lately, so as soon as mortgages can be obtained easily, the glut of new, empty housing should dry up in a few months [except in the Central Valley of California and a few other truly over-built areas].

Given all this, we could still see a thawing in the economy in time for Holiday shopping, although I would expect even a rosy scenario would have a flat period into 2009 before an actual expansion resumes.

Heck, maybe I'm not Mr. Gloom and Doom after all. Maybe I am just being realistic.

In any case, all investments (and not investing, too) carry risks, so ...

Keep diversified.

Tuesday, November 11, 2008

ONYX Positive Surprise for Investors

Onyx Pharmaceuticals delivered investors a nice positive surprise when it reported its third quarter 2008 results at its analyst conference on November 6: better than expected revenue and earnings. Given the minefield the stock market has become lately, it is good to have a stock like Onyx in my portfolio.

Onyx is in a partnership with Bayer to develop and market a cancer therapy, Nexavar. Because Bayer takes in all the revenue and generates much of the expense, what Onyx reports as revenue is their share of the profits, which only turned positive in 2007. Since Onyx has its own operating expenses as well, at first when Bayer started transferring revenues over, Onyx still was recording net losses.

But Nexavar global sales continue to grow at a healthy clip, mainly due to its approval for reimbursement in new nations. In the quarter Bayer's Nexavar revenues were $181 million, up 73% from year earlier. Onyx's share was $40 million, more than doubling the $18 million it got in the year-ago quarter.

After taking into account Onyx operating expenses, it reported a GAAP net income of $12.2 million or $0.21 per share. For those of you who like non-GAAP numbers, the net income was $16.6 million or $0.29 per share. The main difference between GAAP and non-GAAP was stock-based compensation. This requires no cash from the company, but GAAP requires it to be valued and taken as an expense.

As I have written in earlier columns, Onyx has chosen to try to maximize long-term rather than short term profits. This has meant a high R&D spend on proving Nexavar's efficacy and safety in the two indications for which it is already approved, liver cancer and kidney (renal) cancer. They also have been spending on clinical trials for other forms of cancer, notably lung cancer, colorectal cancer, and ovarian cancer.

While Onyx's stock price popped up a bit on the news, it is still very reasonably priced because of the gloom on Wall Street. At this moment it is trading for exactly $30 per share. That is off a 1 year low of $21.66 but off the 1 year high of $61.18.

All biotechnology and pharmaceutical stocks are risky (as Anesiva showed yesterday) so ...

Keep diversified!

More data:

My Onyx (ONXX) analyst conference summaries page
Onyx Pharmaceuticals

Anesiva (ANSV) Drops Zingo

Just a couple of weeks ago I was optimistic about Anesiva and the rollout of Zingo, a quick-acting pain killing system for children getting IV punctures. I was able to verify that several hospitals were using the treatment and that patient response was good.

Yesterday, buried in a press announcement about Adlea, an Anesiva's analgesic under development, Anesiva said they would discontinue Zingo. Here's what they said:

"Anesiva has determined that it will cease further commitments to support Zingo commercialization as a result of continued manufacturing challenges and the need to recall product in the field due to a potential non-safety related shelf life issue from a lot of unreleased product. Anesiva plans to seek a device-oriented partner for this asset. The company will also seek to license rights to the underlying drug delivery technology to third parties for use with other medications."

Well, sometimes things go wrong, that is why my investment motto is "keep diversified." However, sometimes management is not being entirely honest with investors or analysts (and there are cases where they have even tried lying to the FDA).

On May 8, 2008 management said that manufacturing and packaging issues were resolved [See my Anesiva (ANSV) Analyst Conference Summary for Q2 2008] . As far as I know, yesterday was the first time the issue was raised since that time.

Anesiva stock is virtually worthless today, but that might be a mistake. Adlea is also a promissing therapy. However, now I don't trust management. They should have kept investors informed of problems as they happened. True, that might have knocked the stock price down earlier, but at least people would be investing, or selling, based on good information and management might have kept investors' trust.

Zingo, too, should be worth something in the hands of competent managers. Now it can be bought for a song, or maybe its competitors will just arrange for it to die.

Now more than ever ...

Keep diversified. And be more cautious about development stage drug companies, even if they have an FDA approval for a therapy.

more data:


Sunday, November 9, 2008

Rackable Systems Has Ice Cube Orders

Rackable Systems (RACK) has been talking about its ICE Cube containerized datacenter systems for over a year now. At their analyst conference on November 3, 2008, they announced that an indefinite amount of ICE Cubes will ship in Q4. My take is that if the orders are not cancelled, and if they ship early enough in Q4, Rackable may report revenues from the orders in Q4. This is great news for Rackable investors (which includes me).

We knew from the pre-announcement that Q3 results would be bad, and they were. Revenues were $65.3 million, down 14% sequentially from $76.0 million and down 25% from $87.2 million year-earlier.

On the other hand, even though net income was negative, it improved significantly due to tighter cost controls. Net income was a loss of $6.0 million, a sequential improvement on Q2 loss of $27.9 million, but worse than essentially $0 results year-earlier. EPS was negative $0.20, compared to negative $0.95 in Q2, and $0.00 year-earlier.

Rackable still has a lot of cash and equivalents, ended at $184.6 million, down sequentially from $198.1 million. Most of the reduction, according to management, was to produce the ICE Cube units that will ship this quarter.

Rackable was not able to sell its RapidScale storage division, so that will be written off as a loss. Instead it is partnering with NetApp for storage. You may recall how RapidScale was once lauded as a division that was going to give Rackable a competitive edge and good profit margins once it ramped up. Well, that does not mean closing it down now is not the right thing to do.

The NetApp partnership might work out to be more than it appears. Management says the NetApp people are introducing them to potential new clients. Since NetApp is probably confronted with occasional losses against vendors like HP and Dell that can provide both servers and storage, working with Rackable could prevent them from losing from sales. It is conceivable that the partnership could be quite beneficial for both parties, but I would not bet on it until I saw some actual revenues coming in. Rackable expects the NetApp partnership to start generating revenue in 2009.

They continue to lead with their high-quality, computationally intense, energy efficient technology. Their newest technology is called CloudRack. Obviously they are targeting the cloud computing market.

Rackable's stock is in the dumps, but then again they have not turned in a profitable quarter in some time. They have enough cash to survive a downturn, but so do their principal competitors. So Rackable, while promising, has to be rated as a risky tech stock.

For details on what management said on November 3, see my Summary of the Rackable Systems analyst conference for Q3 2008.

Keep Diversified!


Rackable Systems

Friday, November 7, 2008

Maxim (MXIM) Sees Weak Q4

Maxim Integrated Products (MXIM) had some accounting issues these last couple of years that have now been cleaned up, so it is a good time to take a close look at this leading analog semiconductor chip maker.

Revenues held steady in Q3. At $501.2 million, they were flat sequentially from $501.3 million and down 4% from $524.1 million year-earlier.

Guidance for Q4, based on what management saw in October, is to revenues of $410 to $440 million, which would be quite a slump.

Fortunately Maxim has good profit margins, which should leave it profitable even if revenue erosion is that bad. In Q3 GAAP net income was $67.6 million, or $0.21 per share. Non-GAAP EPS was $0.35. Cash flow from operations was an astonishing $157.1 million.

How can Maxim be so profitable in the highly competitive semiconductor market? They keep on top of markets where they have a competitive advantage and abandon markets where they don't. They are in diverse end markets: by percent of full revenues: 28% computer, 28% consumer, 24% industrial, and 20% communications. Within these markets they focus on areas like power management and integration of multiple functions on a single chip.

Also in contrast to many chip technology companies, Maxim pays a hefty dividend, $0.80 per year per share at present. This allows you to have some of your profits without having to sell stock, which is nice in this undervalued, illiquid market.

For a fuller report on Maxim's results, see my Summary of Maxim (MXIM) Q3 Analyst Conference.

Keep in mind that while Maxim is pretty solid, all investments involve risks, so ...

Keep diversified.

More data:

Thursday, November 6, 2008

Akamai (AKAM) Grows Through Recession

Akamai accelerates content delivery over the Internet. This is particularly important to companies that sell merchandise, but it is also important for companies that generate revenue from advertisements. Akamai's revenue growth rate has slowed, but it is still growing despite the economic turmoil that has knocked down revenues at many technology companies.

Akamai reported revenue for the quarter ending September 30, 2008 (Q3) at $197.3 million, up 2% sequentially from $194.0 million and up 22% from $161.2 million year-earlier.

GAAP net income was $33.4 million, down 3% sequentially from $34.3 million but up 36% from $24.6 million year-earlier. GAAP EPS (earnings per share) were $0.18.

Those are great results (for more details see my Akamai (AKAM) analyst conference summary for Q3 2008). When it comes down to it, almost no one wants to save a little money in a downturn by making the response time of their Web site climb, which would lose customers and revenues.

For the fourth quarter, management guided to revenue of $202 to $210 million. This includes $4 to $5 million revenue from the Acerno acquisition. Q4 is usually a strong one for Akamai. They are expecting some impact from the economic softening, with advertisement dollars weak and Internet sales not climbing as fast as in the past few years.

83 new customers were signed in the quarter, and Akamai's newer value-added services contributed significantly to revenue and to the ability to get new customers.

Akamai is also getting more directly into the advertisement business with its Advertising Decisions Solutions segment. Acerno was bought to help with that. Once Acerno is integrated with Akamai, expect revenue from this segment to grow through 2009 and beyond.

Akamai still seems to be able to stay ahead of competitors in the Internet acceleration arena. Since Akamai is profitable and many of its competitors are not, it is possible there will be consolidation to Akamai's benefit if the recession lasts in 2009. Also Akamai's customers are mostly profitable at this point. Competitors have tended to pick up newer companies that are not yet making profits.

On the other hand, I don't think Akamai would be immune to a severe recession. At some point it would lose enough customers to impact net income substantially.

Fortunately, Akamai generates a lot of cash compared to revenues. Cash from operations in the quarter was an amazing $93 million, an amazing 47% of revenue.

Akamai also had plenty of cash on its balance sheets, $789 million at the end of the quarter.

A year ago if you wanted to buy Akamai stock you would have paid dearly for it. Today, like most stocks, it is a bargain. I own some Akamai stock, so consider that I may be biased.

There is risk everywhere, but there is opportunity in quite a few places too, so

Keep diversified.

More data:
My main Akamai analyst conferences page
More Technology Stock Analyst Conference Summaries

Tuesday, November 4, 2008

TTM Technologies (TTMI) Okay Despite Economy

TTM Technologies (TTMI) reported $169.0 in revenues for the third quarter of 2008. It is interesting to see which companies are being impacted by the economic turmoil. Many technology company management teams, earlier in the year, took the line that they enabled their customers to save money, and so could grow even during a recession. Q3 earnings reports tests that theory, and in some cases it has turned out to be right, as with Akamai, and in others wrong, as with Rackable Systems.

TTM Technologies makes printed circuit boards (PCBs). These used to be pretty mundane, essentially pieces of plastic with holes drilled in it to receive component wires, with copper foil lines running between the electronics. But today's high-end components are so small and require so many connections that PCBs themselves have become high technology. Holes must be precision drilled with lasers, and the boards tend to many alternating conductive and non-conductive layers.

Usually truly mass production of PCBs is done in Taiwan, China, or some other low-cost Asian nation. TTM Technologies can do prototyping of boards before the mass production run, and runs of boards that are at the cutting edge of technology. Examples are networking equipment, electronic testing equipment, medical devices, and aerospace devices.

TTM's revenues were down 3% from Q2, but up 4% from Q3 2007. Probably they were impacted by the economy and would have shown sequential growth in a normal environment. GAAP net income was $9.5 million, just above flat compared to Q2 but up 15% from the year-earlier quarter.

TTM gets better profit margins on its high-end products than on lower-end and mass production products. During the quarter the mix of products shifted to the high-end, so they were able to do pretty well.

Despite that guidance for Q4 was down to $156 million to $164 million in revenues, with EPS between $0.14 and $0.19. If there is a drastic reduction in economic activity, TTM will feel it.

For a full report on TTMI's Q3 see my TTM analyst conference summary for Q3 2008.

On a cash basis results were even better, with EBITDA (earnings before interest, taxes, depreciation and amortization) of $22.2 million.

TTM Technologies ended the quarter with $135 million in cash, enough to get through a downturn. It also has been looking to acquire an Asian PCB manufacturer to do high-volume, low cost runs, so cash could go to that if the right match is found.

TTMI stock is trading today at around $6.80 per share, giving it a market capitalization of about $290 million. Using GAAP net income for the quarter, it has a current P/E ratio of under 8. In any stock market but today's that would be a tremendous buy.

I own TTMI stock, which I picked up earlier this year. You can find more information at my main TTMI page.

Like all stocks TTMI carries risks and uncertainties, so keep diversified!

More data:

TTM Technologies
PCBs (printed circuit boards) at Wikipedia