IV. SPRINT GIVES UP ON TRACKING STOCKS
SPRINT (FON, $18.98, up 1.25) will eliminate the SPRINT PCS (PCS, $9.47,
up 0.47) wireless tracking stock and combine it with the parent stock to
reflect the financial results of all operations. Each PCS share will
convert into 0.5 FON shares on April 23rd. Sprint is taking this step to
combine administrative and marketing functions.
Tracking stocks became popular in the late 1990s. Companies used them to
capitalize on the excitement over start-ups and to access venture capital
funding without adding risk to the parent. In other words, if PCS had
failed it wouldn't have hurt the FON stock.
For some companies, the benefits of the trackers wore off long ago. Now
they have to figure out how to keep funding operations that have lost
money for years. One way to keep them afloat is to pull them back into
the fold and support them to maturity. In Sprint's case, it looks like
the company has a different motive for the move. Sprint PCS is expected
to turn to a profit in 2005, and the parent is going to want a piece of
the action.
V. VOLATILITY VERY LOW
A weak ago Friday, the Chicago Board Options Exchange Volatility Index
(^VIX, 14.48, down 0.13) dipped below 14 and closed at 14.55, a smidge
above the seven-year low of 14.34 set in January. Investors are more
accustomed to seeing the Volatility Index at 20-30.
And it's not just recently that the markets have been volatility free.
The S&P 500, for example, has risen every month for the past year; it even
closed slightly up in last month's tepid market. But there hasn't been a
5% correction in the S&P 500 in a year. Over the same period, the Nasdaq
has moved more than 2% in either direction only 40 times. By contrast, it
did so 135 times in 2000, and 100 times in 2002.
Despite a lack of volatility, the markets have been anything but boring.
Instead, we've been wowed by strong appreciation. Why is that? Well,
three years of punishing markets shook out a whole lot of amateur traders
and made the remaining investors more cautious.
VI. NASDAQ BULLIES LISTINGS
The Securities and Exchange Commission has a beef with the Nasdaq stock
exchange. The Nasdaq recently changed its rules, saying that for a
company to be a part of the index it can ONLY be listed on the Nasdaq
exchange. The SEC said the Nasdaq can't make the change until it formally
files a request to the SEC. The Nasdaq ignored the SEC, saying that the
index is proprietary and therefore it can do anything it wants to it.
At first glance, that would seem to be true and fair. But it gets cloudy
when you consider the changes the Nasdaq has made. The new rules say that
for a company to be a part of the index it can only be listed on the
Nasdaq exchange. Whoa.
Wait a minute! The Nasdaq fussed over getting NYSE-listed companies to
dual-list on the Nasdaq. It got its way. Now it puts out a rule that
punishes its biggest listings if they want to dual-list on the NYSE!
No company wants to be removed from a major index, but they also don't
want to be told how to conduct their business in order to stay on it. If
it doesn't reverse the rule change, this is going to create a backlash
against the Nasdaq. If nothing else, the uncooperative nature of the
exchange isn't good for its reputation. The Nasdaq sure isn't treating
its customers very well.
VII. GEMSTAR-TV GUIDE CHANNEL SURFS FOR PROFITS
QUARTER 4Q02 4Q03 %CHG.
REVENUE $245M $215M -12
NET INCOME -$1.3B -$490M N/A
EPS -$3.19 -$1.20 N/A
Fourth quarter ended 12/31/03
Reported 03/02/04
GEMSTAR-TV GUIDE INTERNATIONAL (GMST, $7.88, up 0.64), publisher of TV
Guide, posted a sharply lower loss in 4Q. In addition to its checkout
aisle magazine, the company licenses TV guide technology to cable and
satellite television providers. On this front, the company has been
embroiled in every manner of legal battle over the past several years.
However, it ended a four-year patent suit against ECHOSTAR COMMUNICATIONS
(DISH, $34.55, down 1.57) after EchoStar signed a $190 million licensing
deal with the firm. With that suit out of the way, Gemstar is down to one
battle, a lawsuit against SCIENTIFIC-ATLANTA (SFA, $34.11, up 1.01), a
maker of set-top boxes. Unfortunately, Gemstar has other problems. It is
in the midst of an accounting scandal and an executive shakeup prompted by
its largest shareholder, THE NEWS CORPORATION (NWS, $37.63, up 0.18).
Still, Gemstar appears to be righting its ship. It projects a profit of
$45-70 million (that's QUITE a range!) this year. The company recently
signed a $250 million licensing agreement with COMCAST (CMCSA, $30.44, up
0.49), and has plans to form a joint research and development project with
the firm. Gemstar has a lot of potential, but we would let the dust
settle before considering an investment.
Good investing next week!
Todd Shaver
Editor in Chief
Editor@BullMarket.com
THE BULL MARKET REPORT
United States of America
Now 640,000 subscribers and growing
There's Always a Bull Market Here!
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1. SECTOR-RELATED NEWS
OILFIELD SERVICES
HALLIBURTON RISES IN THE THICK OF CONTROVERSY
When Oil Services company HALLIBURTON (HAL, $31.51, down 0.45) shows up in
the media, it is generally in discussions of controversial contract wins,
beneficial ties to Vice President Dick Cheney, or charges of price gouging
for gasoline deliveries in Iraq. But while the charges of misdeeds fly at
the company, investors have continued to buy the stock. In the past year,
it has gained 60% in value, and since the beginning of 2004 it is up
nearly 25%. Today it set a new 52-week high.
TODD'S TAKE: Yes, controversy follows the company. There have been
questions about contract wins in Iraq, kickbacks, and bribery. But
there's a good reason investors have overlooked these issues and bought
the stock. Most of the problems involve the firm's Kellogg, Brown & Root
(KRB) construction unit. It does a lot of business, but investors are
focused on the Energy Services unit -- and for good reason.
In 2002, Halliburton separated Kellogg, Brown & Root and the Energy
Services business. That's given investors a clear look at how each is
performing. In 4Q03, Halliburton lost $950 million, or $2.20 a share,
including a $1.1 billion, or $2.50 charge related to asbestos claims
settlements. Revenues were $5.5 billion, up 65% from a year earlier.
Income from continuing operations was 34 cents a share. Now look at this:
Business in Iraq, where most of the company's public relations problems
originate, accounted for only 6 cents of that.
Kellogg, Brown & Root generated $3.8 billion in revenue in the quarter,
accounting for 70% of total revenue. But margins came in at 2%, markedly
lower than the 13% margins at the Energy Services business. Given the
controversy, the headaches, and the low profit margins, Wall Street has
been urging Halliburton to spin off KRB and the company is considering it.
When you look at the solid results from the Energy Services, as well as
the controversy and low margins at Kellogg, Brown & Root, a spinoff is
likely. That possibility, and the underlying strength in the Energy
sector, is what attracts investors to the stock.
Corporate Statistics
Projected 5-year Growth: 12%
Trailing PE: 38 PE figures don't include
Forward PE: 24 asbestos settlement payments.
PEG Ratio: 3.2
Price/Sales: 0.9
Price/Book: 5.5
Total Cash: $1.8B
Total Debt: $3.4B
Market Cap: $14B
% Held by Insiders: 1%
% Held by Institutions: 75%
Dividend Yield: 1.5%
Options: Yes
Halliburton
Houston, TX
Website: halliburton.com
THE BOTTOM LINE: We expect Halliburton to spin off Kellogg, Brown & Root.
It makes sense all around. If separated from the parent company,
management can better focus on the unit's challenges. The same goes for
the Energy Services operation; with the construction unit gone, it won't
be distracted by the political nightmares attached to the work in Iraq,
and it can pay more attention to maximizing shareholder value. The one
caveat here is that we don't expect a spinoff until after the company
settles its ongoing $4 billion asbestos injury claim.
********************
INVESTMENT BANKING
CHINA FUELING HOT IPO MARKET
So far in 2004, 30 companies have raised more than $6 billion through
initial public offerings. Four IPOs hit the market in the same period a
year ago.
The hot action in the market has many investors reminiscing about the late
1990s, when what seemed like an endless stream of misconceived dotcoms
went public. But this time around, things are different in several
important ways. First, there is a substantial foreign component in the
IPO mix, particularly from China. Second, investors have put more
emphasis on solid business fundamentals than on a company's "concept". At
least where U.S. IPOs are concerned.
TODD'S TAKE: We're excited by the activity in the IPO market. It bodes
well for the overall markets in many ways, and the bottom line is that
with every new stock comes a new potential opportunity to grow your
wealth.
It's interesting, however, to hear how investors today assess the IPOs of
the dotcom era. Today they condemn the shortcomings that doomed many a
dotcom stock to failure: Inexperienced management; the absence of a
business model; excessive spending; a "missing" customer base. But at the
time, investors (and most analysts) paid little attention to these
problems. The IPO market was hot; end of story.
In 2004, the action looks healthier in so many ways. Most companies going
public are profitable and not only have identifiable revenue streams but
also well identified growth opportunities. What's more, many have been
operating for several years or longer, not months or weeks.
Investor reaction also has a brighter side this time around. Rather than
jumping into new offerings for the sake of it, in most cases investors are
showing discipline and caution. They're looking at fundamentals and what
the market in general is doing. That's a stark change. We haven't seen
wild speculation in IPOs driving the market. Instead, good returns in the
markets in 2003 have boosted investor confidence in IPOs.
From Wall Street's perspective, the rise in initial public offerings is
obviously good for investment banks. After years of trimming staff, their
costs are lean and they're raking in underwriting fees. Stocks like
MORGAN STANLEY (MWD, $62, up 2) and GOLDMAN SACHS (GS, $109, up 3) have
come back strong over the past year, largely due to the rebound in stocks
and IPOs. CITIGROUP (C, $50, unch.) and FRIEDMAN, BILLINGS, RAMSEY GROUP
(FBR, $28.02, up 1.40) have also done well underwriting new offerings.
Finally, there are the Chinese companies coming to U.S. markets. Over the
past few months, we've seen some big deals, but this year -- and we
believe from now up until the Olympics in 2008 -- Chinese stocks are going
to become a bigger force in our markets.
This past week, Wireless Messaging Service company LINKTONE (LTON, $15.70,
N/A) debuted on the Nasdaq, opening at $19.01, up 24% from its IPO price
of $14. The company priced 6 million American Depositary Receipts (ADRs)
well above the initial estimated range of $10-12. The company, which
sells ring tones, games, and messaging services to China's 270 million
mobile phone users, earned $3.6 million, or 59 cents a share, on $15
million in revenue in 2003. A year earlier, it lost $540,000, or 9 cents
a share, on $4 million in revenue. Watch for volatility here, as the
there aren't a lot of shares out there. But the company is a player in a
rapidly growing market, and could be an acquisition target for some of the
larger companies in China's Wireless sector. Credit Suisse First Boston,
Piper Jaffray, and J.P. MORGAN CHASE (JPM, $43, up 2) underwrote the deal.
Another Chinese online and messaging company, Tom Online, is expected to
begin trading this coming week. Citigroup and Morgan Stanley are
underwriting the deal.
THE BOTTOM LINE: Every IPO is a new potential opportunity for you to
profit. That's doesn't mean you should jump in heedlessly to each and
every IPO that comes along. But clearly, there are some solid companies
coming to the market for the first time. If these new stocks suit your
investment criteria, you could find them rewarding places to put your
money. Some of the best are coming from China, an economy and a market
opportunity that we expect to be one of the major stories of our time.
********************
MEDIA
SHAREHOLDERS FORCE CHANGES AT DISNEY
Shareholders of the WALT DISNEY COMPANY (DIS, $26.48, down 0.05) forced
change at the top. After shareholders withheld 43% of their votes for
chairman and CEO Michael Eisner, the company board of directors stripped
him of his chairman duties. Still, the leadership question is far from
answered. Eisner maintains he will stay as CEO at least through the end
of his contract, which expires in 2006. Many shareholders and analysts,
however, are calling for his replacement.
TODD'S TAKE: The call for Eisner's ouster began with disgruntled former
board of director members, including Roy Disney. Criticism of Eisner
focused on the company's languishing earnings, lack of direction,
suffering performance and standards at its theme parks, falling ratings at
the ABC television network, costly spats with former executives, and the
end of the lucrative relationship with PIXAR ANIMATION (PIXR, $67, up 1).
Now that Eisner is out as chairman, the question is where does it leave
the company? There are a few interesting aspects to the answer.
First, if you don't want Eisner as chairman, why would you want him as
CEO? His hold on the job is tenuous at best. A 43% vote against him is
huge. Until this issue is resolved, the company is going to be
preoccupied. And Eisner is going to have a hard time making any
significant changes with this hanging over his head.
Second, his replacement as chairman is former U.S. senator George
Mitchell. He's respected in Washington, but has no report with the people
in either Hollywood or on Wall Street. He hasn't run a company, and he
has nothing to bring to a Media firm. What's more, he's seen as something
of an Eisner man. In many ways, his election is a step back for the
company.
Next, we have the hostile bid from COMCAST (CMCSA, $30.44, up 0.49).
Disney looks directionless at the top, and yet we have Comcast making an
offer that could potentially create a true mega-Media company. The deal
is somewhat stuck, however. Comcast is sticking to its original offer
price of 0.78 shares for each Disney share. That values Disney at about
$24 a share. Comcast wants to make its pitch to Disney's independent
directors, believing that if they are truly focused on creating
shareholder value they will see the merits of the offer. But Disney's
board believes the offer is too low. Most analysts agree.
Finally, we have to discuss the role that pension funds in California,
Ohio, and other states played in the fight to take Eisner down. All
withheld their votes for Eisner. As significant shareholders, they had a
major role in the outcome. And they have maintained a prominent place in
discussions since the vote. Calpers, the California Public Employees'
Retirement System, for instance, said after the shareholder meeting that
Eisner should leave the company completely by the end of the year.
The funds are flexing political muscle. Calpers owns 9 million Disney
shares. That's a sizable holding, but it accounts for less than 1% of
Calpers' total portfolio. The funds are showing that they have growing
clout in Corporate America. It's a powerful message to the public and to
executives. You can be sure that CEOs around the country are listening
closely.
THE BOTTOM LINE: The shareholder vote has done little to clear up the
mess at Disney. Leadership in both the chairman and CEO positions is
still up in the air, and there are no obvious successors in line. This
might seem like an opportune time for Comcast to snatch up the company,
but as long as Disney wants more money, the deal remains in limbo. If
Disney won't flex, and Comcast remains disciplined about it acquisition
plans, it could simply walk away.
That's fine with us. While we like the potential of the deal, we don't it
is in Comcast's interests to pursue Disney for an exorbitant amount.
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ABOUT THE EDITOR:
Todd Shaver founded BullMarket.com and became Editor in Chief following a
distinguished tenure in the money management business with both Morgan
Stanley and Salomon Smith Barney. In the 1980s he ran his own real estate
company, The Dulles Group, which specialized in finding large tracts of
raw land for investors and developers. In the 1990s he was the host of a
successful local radio show, The Bull Market Report, on business radio in
Washington, DC, giving a live show each morning during rush hour. Todd
was also a regular guest on Business News Network radio, where he applied
his knowledge of the markets to finding quality growth stocks. He has
also been a guest commentator on Bloomberg TV. He loves to teach
investors how to buy quality stocks and how to use the options markets to
enhance incomes.
While in the brokerage business his clients were high net worth
individuals. He knows and understands quality, long-term investing and
has a specialty in growth stocks. He currently manages money for a number
of clients both in equities and futures. For 2002, with the market down
23%, Todd was up over 20%, on average, for all his clients. For 2003,
with the market up 26%, Todd was up over 65%. With over 640,000 readers,
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