Thursday, July 31, 2008

TTM Technologies (TTMI) Analyst Conference Summaries Initiated

I have begun providing analyst conference summaries for TTM Technologies (symbol: TTMI). See my main TTM Technologies page and the July 29, 2008 TTM Technologies analyst conference summary.

I did some research on companies that manufacture PCBs (printed circuit boards) in 2007 and liked TTM because of its profitability and growth potential. I bought the stock in February 2008 as part of an effort to diversify and buy stocks cheap during this liquidity squeeze.

TTM Technologies is a relatively high-end PCB maker with clients like Cisco. It does not make the raw boards. Rather it prepares boards for population with electronics parts by drilling the necessary holes and providing the copper tracks that connect the elements. In most cases it produces boards with multiple planes of copper and insulator.

Much of this business has moved to Taiwan and mainland China. However, there are a couple of reasons TTM and other companies are still able to operate in the United States. One is the need to make prototype boards prior to large production runs. The other is the need for high quality engineering and manufacturing that cannot be easily matched.

TTMI's 2nd quarter showed an ability to hold up well in a tricky economic environment. TTM generates cash very nicely. It is looking to acquire an Asian PCB manufacturer so that it can serve its customers need for low-cost, large scale runs, in addition to the low and medium volume work that it makes sense to do in the United States.

TTM has the usual risk of competitive pressures from both domestic and foreign PCB manufacturers.

So ... keep diversified!

TTM Technologies web site

Wednesday, July 23, 2008

Dendreon: October 2008 Interim Provenge Data

Dendreon announced today that it expects to have interim data for Provenge for prostate cancer in October 2008. Now the waiting for Provenge game has a clearer time frame attached to it.

If you have followed the Dendreon Provenge story (See my Dendreon (DNDN) page), you know that Phase III trials of Provenge for treating metastatic prostate cancer had some interesting results. An FDA committee recommended that Provenge be approved for treatment, but the final (so far) decision was to ask for more data. There were accusations that the committee members who nixed Provenge had relationships with competitors. Prostate cancer victims who know that Provenge, which is an immune therapy, is safe and sometimes effective are angry about the FDA decision.

The FDA and Dendreon have agreed in advance what the threshold must be in the current trial for the FDA to grant approval for allowing doctors to treat patients. However, statistics are involved. If Provenge has (to some degree) effective, the more patients who try it, the more a positive outcome is probably reality based, rather than just a random statistical fluctuation.

Dendreon thinks the earlier statistics will hold up when a larger number of patients are tested. In October an independent committee will look at the data from the current trial. If the data show a sufficient degree of benefit to patients, this interim analysis will be taken to the FDA for approval. If the data is good but not statistically strong enough, the trial will continue. If the data is so poor that even improved outcomes in the next leg can't raise the benefits to a statistically significant level, then probably the trial will be stopped, and certainly Dendreon investors should be informed.

The sad thing, if Provenge is approved, is that a large number of men who would have benefited from the therapy will have died in the meantime, or will have seen their cancers progress to the point where Provenge is no longer effective. Including those who were given placebos in the current double-blind trials.

Provenge, if it works, would be proof of concept to a whole new biotechnology. If money flows in after approval, expect Dendreon to conduct tests on a wide variety of cancer types (every cancer type is different, so each requires a different chemical target to be verified for the technology to work.)

Wednesday, July 16, 2008

Intel Beats; AMD Thursday

Intel (INTC) reported revenues and earnings that beat Street estimates on Tuesday. See my summary of the Q2 2008 Intel analyst conference. AMD will report after the market closes on Thursday, July 17, 2008.

AMD investors are doubtless wondering whether Intel did well because the overall microprocessor end market was strong, or because it took substantial market share from AMD.

AMD preannounced three unusual items, but did not contradict its prior guidance that revenues would be seasonally down in Q2. The big scary item was a $880 million write down from its ATI acquisition, which is actually almost meaningless because it is a non-cash item. It will have a $32 million restructuring charge, which is real. It also sold some old equipment for $190 million, which strengthens its cash position. [See the AMD July 9, 2008 SEC filing]

The most important data to look at Thursday is Q2 revenues. Intel's revenues dropped 2% from Q1 to Q2 (Q2 is typically seasonally slow for microprocessor revenues, with Q3 and Q4 stronger due to back-to-school and holiday sales). If AMD revenues dropped 2 to 4%, I would characterize that as okay. Worse than 4% I would start to worry, even though excessive worry is already built into the stock price. Anything from a 1% drop to positive territory will be cause for celebration.

If you look at past AMD year-over-year and sequential comparisons, or AMD to Intel comparisons, you get a very broad spectrum of possibilities.

AMD Q1 2008 revenues were $1.505 billion, down 15% sequentially from $1.77 billion, but up 22% from $1.23 billion the year-earlier quarter

INTC (Intel) Q1 2008 revenue was $9.7 billion, down 10% sequentially from $10.7 billion in Q4 2007, but up 9% from year-earlier $8.85 billion (Q1 2007). Q2 revenue was $9.47 billion, down 2% sequentially from $9.7 billion, but up 9% from $8.68 billion year-earlier.

Suppose AMD Q2 revenue is up 22% from year-earlier Q2 of $1.38 billion, as it was in Q1. Then Q2 2008 revenue would be $1.68 billion, up 11.6% sequentially. That seems unlikely.

Suppose AMD is down 2% sequentially like Intel. Revenues would be $1.47 billion.

Guidance was seasonally down Q2 revenues. Q2 2007 revenue, however, was up 12% sequentially from Q1 2007.

So it is possible AMD is just being conservative, given that the main factor in their sales is Intel pricing schemes, which are not in AMD's control. However, Intel reported healthy profit margins the first half of this year, so they are not putting as much pricing pressure on AMD as they were in 2006 or 2007.

AMD seems to finally have its quad-core Opteron production ramped up. It may be doing better in its graphics division, and it actually managed to beat Intel to the punch introducing a new line of notebook computer system chips. Computers built around Phenom processors seem to be available from most major retailers.

So a good Q2 would not be a complete surprise. If it is a good Q2, I would like to see an updated roadmap for 2009-2010. Intel is already out selling pitching microprocessors that it is only dreaming of; AMD paused in its wild, rosy roadmap announcements during the Barcelona delays.

I would also want to hear that AMD's 45 nm chips are starting to come off production lines. AMD has done a terrific job closing the gap with Intel on chip manufacturing, but there is still a gap and it does help Intel keep its chips more competitive than they would be otherwise.

I am a long-term investor in AMD.

Keep diversified!

More data:

You can read my summary of the AMD Q2 analyst conference when it is ready on Thursday, or listen yourself from a link on the AMD investor relations page.

Tuesday, July 15, 2008

Genentech Pipeline and Analyst Conference Summary

I listened the the Genentech (symbol: DNA) Q2 2008 analyst conference yesterday in order to write my summary of the event. In fact I listened to most of it twice. I don't own Genentech stock. I currently own ANSV, DNDN, BIIB, GILD, and CELG among the biotechnology companies. I prefer simpler stories, in particular where one or two relatively new drugs are apt to make a company's fortune. But after listening to the presentation and looking at the slideshow, I am thinking about putting the July cash designated to be converted into undervalued stocks into DNA. Short term I don't expect much from it, but in the coming decade I suspect we are all going to wish we had a position in Genentech.

Why? Because of the enourmous breadth of Genentech's pipeline. Just mentioning all of the trials taking place right now requires a document pages long. There are trials to extend the labels of blockbuster drugs like Avastin. There are trials for hitting cancers earlier or later than is currently recommended, and for hitting different varieties. There are trials of a variety of new drugs for cancer and other indications. There are whole new bits of science that are in preclinical trials (they are not yet being tested on human beings).

Of course, even a successful company like Genentech will have failures. The failure rate for drug candidates is very high, though by the time a drug makes it to Phase III its chances are getting reasonable enough for investors to bet on. Genentech announced both failures and successes already this year. When you try so many drugs for so many different diseases, that is what you will get.

Remarkably, Genentech is solidly profitable despite the heavy investment in drug development. GAAP earnings were $0.73 per share in the quarter just reported. At this moment it is up, trading for $79 per share. That gives it a current (not trailing) PE of 27, which sounds high in this current market where growing companies sometimes have current PEs in the 10 to 15 range. But compared to the past, this is not a high PE for DNA. Just the growth trend lines in its current drug line up could justify today's price.

Look at the summary of trials and pipeline developments on pages 13 through 41 of the slideshow. There are risks, certainly, but on the whole I believe some remarkable profits are going to be generated in this next decade from the winners in the pipeline.

Friday, July 11, 2008

Cash is King

The United States of America has a long history of booms financed largely by credit followed by periods of recession and limited credit. You don't have to be an economist to see these trends. You do have to be a calculating, unemotional investor to take advantage of them. Take the Kennedy family. They were doing pretty well during the 1920's, but Joseph Kennedy knew his history and economics. He cashed out well before the crash. Then, in the depth of the Depression, he went on a buying spree with the cash he had. Thus a family of little economic note went from the lower middle class to being one of the richest in America in a single generation. Only then did the political experience of the family, previously of account only in Boston, bloom into a dynasty of national importance.

There is nothing wrong with taking credit under appropriate circumstances. Between 1936 and 2003 buying a house on credit was a sound investment in most of the United States. Taking some credit to ease a business startup can be rewarding too. But even when these general rules applied, there were specific counterexamples. Buying a house in a city whose factories moved to Mexico or China, or even to Alabama, did not work out for a lot of people. Most small businesses fail or limp along.

You would think with the Internet stock bubble of the late 1990's in the rear view mirror that people would have been more cautious about buying McMansions on credit between 2002 and 2006. In the vast majority of cases, while the price of the house was an issue, the two main factors in the personal disasters were buying a house that was too big, and spending too much on luxuries (often fueled by additional loans).

For about a year and a half now we have been seeing the other side of the equation, a contraction of credit. The Federal Reserve was created to minimize the credit cycle, but it did a poor job at that starting when Alan Greenspan took over. Voodoo economics, the theory that markets always reach an equilibrium that has good results for humans, can only partly be blamed. Credit was created off the Federal Reserve's books, so to speak, and like Enron stockholders, the Fed acted like that was none of its business.

In 1928 Al Smith was the Democratic Party candidate for President. Herbert Hoover won by a landslide; he was already a national hero. The Dixie wing of the Democratic Party could not get the voters behind Smith, a Catholic whose only real political difference with Herbert Hoover was that he was for ending Prohibition (of the sale of alcohol). If Al Smith had won the election there would still have been a Great Depression. The Republican Party would have come to power in 1932, and as the credit cycle turned it would have established itself again as the party of Prosperity. History would be very different.

While we are in a credit crunch, cash is king. Unless you want to use your dollars to buy foreign assets, you can buy almost any investment cheap. Stocks, bonds, real estate, you name it.

True, if the U.S. or world economy collapses, you will look like a fool for not holding onto your cash. But if that happens, all bets are off; even cash may not save you. A collapse is not very likely. Parts of our economy, notably agriculture and manufacturing not related to construction, are doing quite well. Unless the Fed or Congress does something really stupid, there will be a bottom and then a liftoff period. No one will really be able to see the bottom until it is a quarter or two behind us.

Best bet in this environment? Stocks and bonds of well-established, profitable companies with global distribution networks. Buy what looks cheapest on a value basis; don't read too much into other people's selling, which is based on their liquidity needs and their fears. Figure this credit squeeze will last a while, which means spreading your conversion of cash into assets over time. Keep in mind that the important bottom is the credit bottom, not the stock market bottom.

And keep diversified.

Saturday, July 5, 2008

Gualala Fireworks, Independence, and Slavery

Recently the wire services have carried stories about the prohibition of a Fourth of July fireworks show in the Gualala area of Mendocino County. The story has been cast as a small band of environmentalists who got the California Coastal Commission to say the event required a permit, and that one would not be granted. While this works as a short summary, it misses a story that has as much to do with town rivalries, and money, as it does with conservative patriots having their holiday spoiled by rude nature lovers.

Similarly, as we celebrate the Fourth of July, we are almost always told a simple story. The British Empire did not allow the American colonies to be represented in Parliament, yet taxed them. So a nation was born that wanted self-government. Inconvenient historical details are swept under the rug. For instance, the southern colonies, with economies based on slavery, did not want to be represented in Parliament. If they had been represented in Parliament, they might be considered English soil. And slavery had long been abolished on English soil, as was re-confirmed in the Somersett decision of 1772. Shortly after the leading southern slavers learned about that decision handed down by a British court, freeing an American slave, they suddenly took a big interest in the idea of independence that had been so popular in Massachusetts since the Boston Massacre.

The new stories don't mention that Gualala is a short drive from the "city" of Point Arena, where fireworks have been held at the harbor annually for over 2 decades. The fireworks were first set up by one (now deceased) Raven Earlygrow, who also had the distinction of being the first Green Party member ever elected to be mayor of any town or city in California. Nor do they mention Billy Hay, a major local landowner and businessman. Among his possessions are the Point Arena water utility and a gravel business. The first has a long history of irritating rate payers. The gravel business was an irritation to the local environmentalists, who managed to close down the extraction of gravel from the Garcia River. There are still no salmon in the Garcia, but at least now it isn't because of the gravel operations. A book could be written on Mr. Hay, and it would be a pretty interesting book.

Similarly, simplistic historical summaries don't mention that George Washington and many other land speculators, claimed to own land in the Ohio territories. In order to keep the costs of the Indian wars down, the British forbade Americans taking Indian lands beyond the Appalachian Mountains. By winning the Revolutionary War, a whole new era of land speculation and genocide was opened up.

Point Arena, the city with the fireworks, has had a hard time economically since the 1970s. Just south of the Gualala River, which marks the Mendocino County line, a vast planned community known as The Sea Ranch has been developed. No allowance was made for commercial areas in The Sea Ranch, which was to be an ecological community. But people who build 5000 square foot houses need to shop, and Gualala (which is not an incorporated area) developed into the local shopping center, eclipsing the businesses in Point Arena.

There is a lot of local rivalry between The Sea Ranch, Gualala, and Point Arena. There is a class basis to this, with the wealthiest people tending to live on The Sea Ranch, the poorest in or near Point Arena and its nearby Pomo reservation. There is a historic theater in Point Arena, but The Sea Ranchers considered it too tacky and too far a drive so they built their own theater/art center in Gualala. Mostly this rivalry is friendly, little more than banter, but there are economic interests at stake too, mainly tourist and shopping dollars.

So everyone assumes that Billy Hay lurks in the background of the idea to have a rival fireworks display in Gualala, where he now owns the cement and gravel business. Hence the opposition of the Point Arena citizens is easy to understand, fueled by usurpation of a historic function by a nearby town and by personal animosities. But the hard-core opposition to the Gualala fireworks came from Gualala and Sea Ranch citizens, not Point Arena.

In 1776 coalitions had to be forged. Many Americans remained loyal to the King and Parliament. Those who wanted independence had many motives. Each state had different motives, and within each state different factions of people had their own feelings on the subject. That is why the Revolutionary War had been going on quite a while before the Continental Congress declared Independence.

The California Coastal Commission would not have known about the Gualala fireworks if they had not been pestered about it. Permits for parades and the like are usually issued by local authorities. The real reason for opposition to the fireworks had little to do with protecting nesting sea birds. It was about peace and quiet.

Many people who live around Gualala are there to enjoy nature, peace and quiet, and (if they are rich or lucky) ocean views. There is not much else to draw a person to Gualala. Tourists are a contradiction. They seldom come to Gualala to party; they too are drawn to the natural splendor and quiet. But when a whole bunch of tourists come at once, the little area is overburdened. There is not enough parking, the food store shelves are stripped, and it gets crowded and noisy. Nature retreats from the smell of crowds of humans.

A faction of merchants were willing to promote the fireworks because they felt that would both increase their weekend receipts and encourage people to make visits at other times of the year.

But to retired residents, and those not in the tourist or retail trade, the fireworks take away from the value of the community.

When you write a Declaration of Independence, and are not sure that all that many of your fellow colonists are willing to fight so that you won't be hung as a traitor, you might spin things in a direction that will motivate people. You might not want to mention that England has abolished slavery and that is why you are fighting. It might work better to write beautiful words about men being created free and equal, and list the bad qualities of your enemies.

In the microcosm of fights about development in this 21st century, it isn't cool to say, "I just don't like tourists." You need to find something more humane to complain about. Like poor endangered birds.

And even then the cards are stacked against ordinary citizens and in favor of the local business class. The first year the fireworks were held no one even bothered to get a permit. And it was not just fireworks. The whole thing was called Patriot Days and included a number of historical re-enactments, including a full scale revolutionary war battle.

Of course, back in 1776 Gualala was part of a Spanish land grant. Nothing particular happened in Gualala in 1776.

The American Revolution was a big, complex phenomena. Each town and county had its story of conflicted citizens, to some extent looking out for themselves, but also to some extent looking to the greater good. Some families were split between Tories and revolutionists.

In the Gualala Fireworks war there are no bad people. Some people think historic reenactments are entertainment; some find them educational; some use them to prop up patriotism and support for U.S. military might. Others find them noisy, tourist magnets, propping up the sentiments of war crimes.

In the aftermath of the American Revolution slavery would last almost 90 years and every Native American Indian would eventually be put on a reservation. But democratic institutions also emerged, and the idea of civil rights emerged, and over time these institutions have provided great benefit, at least to the victors.

With the Coastal Commission decision the anti-fireworks people won at least a temporary victory. But they did so at the cost of failing to solve the problem within the local community. This stems largely from the corrupt, undemocratic system of government that exists in Mendocino County. If Gualala had an elected City Council, the decision might have been made locally. If voters did not like the decision, they could elect a new council. The California Coastal Commission is also appointed, not elected. While I may see no need to have a fireworks display in Gualala when there is already one in Point Arena, I don't like the precedent of appealing to the Commission to micro-manage our local events.

Wednesday, July 2, 2008

Oracle (ORCL): Unstoppable?

Oracle is one of those stocks that I always wish I had bought 2 years ago, but if I have a bit of money to invest, there is always something that seems like a better idea right now. Following Oracle's reporting of its fiscal Q4 2008 results and analyst conference on June 25, 2008 (See my summary), the stock price plunged mainly because Oracle was not as bullish about Q1 2009, the current quarter, as investors had hoped. As I write you (or I) can buy ORCL for 21.01 per share. According to the NASDAQ Oracle page, that puts Oracle's trailing P/E at 16.16 and its forward P/E at 14.16. Even in today's market that is cheap for a company that is growing as fast as Oracle does.

How fast? Q4 revenues were $7.2 billion, sequentially up 36% from $5.3 billion and up 24% from $5.8 billion year-earlier. Some of this was due to the acquisition of BEA and other companies.

Oracle says it can maintain this kind of growth because it is pursuing the right strategy for dominance in today's highly competitive software market. When it makes an acquisition, it does more than pick up some software and some new clients. Oracle makes a suite of software available to the clients, maintains backward compatibility (for a while) and integrates the new functionality to be sold to all its current clients. Oracle mainly pursues enterprise sized businesses, although you can run many of it products, like its database software, on a PC or small server if you want to. It also has figured out the vertical market game. It perfects its software suites for a particular market so that the customization process, essential with any software, is minimized. Customers love that.

Oracle is becoming a full-service software provider for enterprises in much the same way that Cisco is a full service network hardware provider. Oracle can provide a corporation with database software and all the management goodies that sit on top of that: CRM, ERP, BI, etc.

Oracle competes with the software big boys, notably Microsoft, IBM, and SAP. It has been gaining market share against all of them. Divide up the typical enterprise software bundle into four parts: the operating system, middleware, database, and applications. SAP can provide the lot, but all of its solutions are proprietary and notoriously difficult to program or customize. IBM certainly knows its way around the enterprise, but does not have a complete middleware suite based on industry standards. Microsoft competes well with SQL Server for databases, but its real power is at the desktop level; it is weak in enterprise-wide applications, plus it is almost all proprietary rather than standards based.

Of course Oracle has its critics. Red Hat reported recently that it is picking up former BEA customers that don't want to follow the company to Oracle. On the other hand, this may be crumbs, given the difference in size between Oracle and Red Hat. Nor would anyone in their right mind write off Microsoft, SAP or IBM in this contest.

A key area of competition is Asia. Enterprises there can get the same efficiencies as European and American corporations when they use the right software systems, and they are adapting ERP, CRM, etc. at a rapid pace. So the overall market is growing globally. If Oracle is able to continue to capture market share as the market grows, it can continue to show impressive growth in revenues and earnings.

I don't think Oracle is unstoppable yet, but I'd certainly be worried if I were running SAP. Talk about a dinosaur that seems to have no idea of how to adapt.

If Oracle paid a dividend I'd be more likely to take a position. Dividend payment shows confidence. I am not a fan of the old idea that technology companies should not pay dividends. Growth is great, but only if you can plan on growing dividends.

More data: