JOYG closes at 95.24 +5.13(5.69%)

At the closing bell, JOYG climbed 5.13(5.69%) to 95.24. Despite poor US manufacturing results, industrial companies have seen excellent results in the last week and a half. Joy Global’s recent success can be attributed to their acquisition of Letourneau Technologies, which was finalized on June 22(blogged on May 16).

As reported in the release of JOYG’s 2-Q results, China’s stockpiles of coal touched a yearly low in April, which has created a shortage for the coming summer. Also, the effects of major earthquakes and droughts in Asia have created a reduction in the usage of Hydro generation and nuclear generators. This should bode well for coal demand and production. In the 1-Q of 2011, US coal exports rose 49% to its highest level of exports since 1992. The industry witnessed a 160% increase in steam coal demand, in the same period.

-Jim

CAT Bounces Back

Since June 15th, Caterpillar, Inc. has surged nearly 12% to $106.46, a price not seen since mid-May.  This latest run reflects the flash of confidence investors are showing and their willingness to seek riskier assets.  Although CAT released their plan to invest $120M into a factory and hire over 200 employees, it is believed that this run was not specifically related to any news from the company.  CAT is currently approaching their target price of $108.74 and will be closely monitored in the coming days.

Jeremy Pellizzari

Nike 4Q Review

Nike, Inc. reported 4Q results after the close on Monday and held an investor conference today. The company reported quarterly EPS of $1.24 versus street expectation of $1.16 and our modeled $1.09. 4Q2011 net revenues were $5.7bn, a 14% increase from last year and greater than the 9% analyst consensus. Gross margin, as expected, decreased 310 basis points due to increased inflation and sourcing costs. Full year revenue was $20.8 bn. 7.5mn shares were repurchased during the quarter for a total of $607mn.

Top-line performance was driven by 21% growth in the North American market, 16% in the Greater China region and 19% in Emerging Markets; partially offset by a 1% decline in Central/Eastern Europe and -26% in Japan. Inventory increased 33% on a year-over-year basis, which management commented was due to early summer shipments. Total futures orders, a key determinant of upcoming demand, were up 12% on a consolidated basis versus the expected 9%.

CEO Mark Parker commented during the investor presentation today that “Nike holds more than twice the number of invention patents than its closest top 5 competitors combined.” Last year, Parker stated that a company-wide goal was to report net revenues north of $27bn by FY2014. During today’s conference, he not only stated that they were well ahead of meeting that mark, but also revised the guidance up to $28 to $30bn.

Shares of the stock surged over 10% during the day. Notably, the higher than expected top-line growth was more than enough to offset the significant decline in gross margin. Additional pressure on gross margin continues to be the major risk going forward, as any major deceleration in sales would quickly flow through and affect the bottom-line. Nike is well positioned within the large emerging markets and retains several competitive advantages, solidifying its position as a growth story.

-Ian

Endo Pharmaceuticals (ENDP) Court Ruling

Endo Pharmaceuticals (ENDP) dropped 1.8% today after a U.S. federal court ruled unfavorably in a case regarding the pain-relief patch Lidoderm. The firm has been in litigation with Watson Pharmaceuticals (WPI) over Watson's potential patent infringement. Watson has been attempting to market a generic version of Lidoderm, a product which comprises approximately 30% of Endo Pharmaceutical's revenues. Although the actual patent-infringement trial will not begin until February 2012, the court sided with Watson's interpretation of the Lidoderm patent, causing shares of WPI to rise 4.2%, and shares of ENDP to fall 1.8%.

It is my view that the court ruling will not have a significant impact on ENDP. Although Lidoderm is an important part of Endo Pharmaceuticals drug portfolio, with 30% of net revenues, its importance to the firm has been diminishing over the past few years. At one point the drug represented 60% of revenues, but the proportion has been decreasing as the firm has continued to successfully diversify its product line-up. In addition, the court ruling does not absolve Watson Pharmaceuticals from the patent-infringement accusation. Whether or not ENDP will actually face generic competition will not be decided until February 2012. With Lidoderm's impact weakening, and Endo Pharmaceuticals strong prospects in the tamper-resistant Opana, the ruling should not pose a significant threat to the firm or our investment.

-Ryan M. Kennedy

Rambus Inc. v. Micron Technology Inc

Today the stock price of Micron Technology has dropped almost 4 % on the news that California judge will not impose bad shredding rulings on Rambus, Inc. Last month, the U.S. Court of Appeals for the Federal Circuit found Rambus was wrong to shred hundreds of boxes of documents relevant in two patent infringement lawsuits it filed. However, this time,  jurors will not be told by the court that Micron have already proven that the chipmaker shredded documents as part of its legal strategy, Instead, Hynix and Micron will have to present evidence on that issue. Rambus is suing Micron and Hynix for $4.3 billion and according to California laws, this amount might be tripled. 

In the light of these events we will be closely monitoring Micron, as the trial progresses.

-Vlad

Ford's Mid-Decade Outlook Calls for Aggressive Expansion

On June 7th Ford announced its mid-decade outlook. They expect the following:

• Overall vehicle sales to increase by 50% to about 8 million  -- from 5.3 million in 2010
• Global Automotive operating margins will increase to 8 to 9 percent from 6.1 percent in 2010, with operating margins in North America by the mid-decade in the 8 to 10 percent range
• Capex will average about $6 billion annually through mid-decade, an increase from the $3.9 billion in capital spending in 2010
• They will pay down approximately $6.6 billion in debt bringing their total automotive debt to about $10 billion, down from $33.6 billion in 2009 
• The company expects to return to investment-grade in the near-term, and resume paying dividends
• The company plans to triple its electric vehicle capacity between now and 2013, going from 35,000 EV sales yearly to more than 100,000 come 2013

F plans to achieve these milestones by continuing to make progress on its Ford One plan.

By 2014, F plans to increase its global product portfolio by 140% from 2009 levels. Based on current trends the company expects 55% of its totals sales to come from small cars by 2020, with nearly a 32% contribution from the Asia-Pacific region. The company also expects to drop vehicle prices by $1,000 to $2,000 in emerging markets, in order to meet customer needs and win new buyers for its products, while maintaining top standards for quality, fuel efficiency, safety, smart design and value that customers expect. In the month of May China sales were up 14%, while China sales for rivals GM, Toyota, and Honda fell 2.7%, 35%, and 32% respectively. 

A key factor that is driving F’s mid-decade outlook is the expectations for growth of industry volumes. Ford is expecting industry volumes to grow to the 95 million to 100 million range by mid-decade, from the74 million in 2010.

Last year the company reduced its total automotive debt by $14.3 billion and the anticipated further debt reduction will help F secure an investment-grade debt rating helping it resume dividend payments.

Despite positive projections, healthy expansion plans, strong numbers, portfolio upgrades and debt reductions F shares fell as low as $12.88, down 3.52%, today as investors reacted to an Ohio court’s $2 billion judgment against the automaker late Friday in a class action lawsuit filed by a group of commercial truck dealers. The jury found that Ford had overcharged the dealers $800 million for commercial trucks. The $2 billion award factors in interest. Ford is appealing the ruling and said it is confident that the ruling will be reversed. The headline number appears very large, but it can take several years for any award to be dispersed, as well as the possibility that both sides could settle for a lower amount. Analysts are confident that a failure to win an appeal would be costly, but absorbable for F. No settlement or reduction in the amount awarded could erase about 47 cents per diluted share in Ford’s shareholders’ equity. However, upon further review, S&P equity analyst raised their 2012 EPS estimate by 1 cent to $2.19.

F’s initiatives have given us ample reasons to take a positive view on the company and we remain bullish on Ford in the long-term. F shares finished the day at $13.14, down 1.57%.


-Michael Biagi 
     

Morningstar Introduces New Ratings for Mutual Funds

http://www.marketwatch.com/story/mutual-funds-get-a-tough-report-card-2011-06-12?siteid=rss&rss=1

For those unfamiliar with Morningstar, it offers a 1-5 star rating system for mutual funds based off past performance for 1-, 3-, 5-, and 10-year time frames and is highly regarded in the industry by both individual and institutional investors alike. Previously, Morningstar did not offer any forward-looking analysis. Today, they announced a new outlook system similar to the outlooks given by ratings agencies such as S&P or Moody's. Funds will be assigned a positive, neutral, or negative outlook based off of analyst recommendations.

This development will add an entirely new dynamic to analyzing mutual fund companies. Funds with better outlooks will likely be more attractive to prospective investors, thus improving (or conversely, worsening) organic inflows. Depending on the frequency of outlook changes, this change could greatly increase the volatility of an already-volatile industry. The specifics of how Morningstar will use the "Five Pillars" - process, performance, price, people, and  parent - are yet to be seen, but it will certainly be interesting to see if/how it will influence fund managers and their investment strategies.

We sold out of TROW at our last conference call, so we currently do not have any direct exposure to the industry. I will stay on top of this as more information becomes available. If it looks like TROW will materially benefit from the new ratings, I will reconsider a position.

-Dan

CAT Raises Dividend

On Wednesday, June 8, Caterpillar voted to raise their dividend $.02 cents to $.46 cents per share.  Despite the raise and affirmation of their positive 2011 outlook, CAT has been trading down as the effects of worsening economic outlook weigh in.  From their open Monday at $100.49/share, they are now trading down about 2.5% on the week, around $98/share.  Since May 1, CAT has dropped more than 15% in value.

For our portfolio, I believe it is best to hold onto CAT despite the significant hits their share price has taken.  I believe the company still has strong fundamentals and is making moves that will not only carry them through any economic downturn, but allow them to come up stronger and more competitive on the other end.

Jeremy Pellizzari

Wells Fargo’s Poor Performance Triggers Stop

As of Wednesday’s close, UASBIG’s position in Wells Fargo (WFC) is down a total of 16%. There are six negative factors that suggest WFC will continue to underperform.

1.) On Wednesday, the senate voted 54-45 to maintain the scheduled caps on interchange fees. Bloomberg estimates that these new rules, which take effect on July 21st, could cut revenue by as much as $12 billion a year.

2.) Monday, Bernanke, in an exchange with Jamie Dimon, reiterated his support for additional capital restrictions on “systemically important financial institutions” like WFC. This constraint and other Basel III provisions will reduce returns on equity by as much as 3% when they are implemented.

3.) Recently a group of large banks, including WFC, have banded together to negotiate a one-time settlement that would satisfy all state and federal investigations into illegal mortgage origination and processing. The banks have offered to split a payment of 5 billion, but the government may be seeking up to 30 billion.

4.) The tepid housing market is making it difficult for WFC to fix their mortgage problems, and to create new loans.

5.) Net interest margins are being pressured by the low interest rate environment, exemplified by the 10-year treasury that is now yielding less than 3%.

6.) Any positive effects from QE2 will end in June.

At this point, there are significant headwinds affecting the valuation of WFC and all other large domestic banks. UASBIG will now seek more creative ways to invest in the financial sector.

~Zach

RCL Commentary

Shares of Royal Carribean fell 5.96% in the market today.  The significant sell-off today, and dip over the past few weeks is attributable to:

1) Oil – The 12 members of the Organization of the Petroleum Exporting Countries (OPEC) met today to discuss the volatility and issues surrounding crude oil.  The Saudis’ proposal to increase production by 1.5 million barrels per day (from current quota of 24.85 million barrels/day), which would aid the struggling world economy and meet a recent increase in demand, was met with steep opposition.  The Saudi Arabian Oil Minister said it was “one of our worst meetings ever” as 50% of the group voted against the plan.  Crude oil spiked over a dollar when news leaked that no compromise had been made.  Generally, RCL has been trading inverse to the price of oil.

2) Consumer – An industry-wide concern has been how the consumer will react on all matrixes in the current market climate.  Major indicators, notably rising unemployment and decreasing confidence confidence, have not been positive and the result has been a sell-off on top of general uncertainty.

However, RCL remains in a fundamentally solid position despite an underperforming stock price.  We are reticent to take aggressive action on RCL at this time and believe that the current drop does not reflect any change in their business/strategic initiatives going forward, given the following:

a) RCL remains significantly hedged against oil volatility and has proved their ability to mitigate (and profit from) commodity pressure.  The company is approximately 60% hedged in 2011, 55% in 2012, 35% in 2013 and 15% in 2014.  RCL remains hedged up to $120/barrel through the remainer of the year, and is protected from any higher prices through options.  Management noted that over the past 5 years, 20% of fuel consumption per guest has been reduced through a combination of cleaner technology and derivative strategies.

b) Concerns arose around the consumer potentially cancelling vacation plans in an effort to deal with rising cost prices (gas, food, etc.), as a few believe that leisurely activities will be the first to be cut from the budget.  According to RCL, historically, there have not been any material signs of inflation forcing a customer to change scheduled cruise plans.  In addition, cruises remain a relatively cheap alternative when compared to land based vacation options.

c) As specified in my original thesis, supply in the cruise industry is nearing an all time low, which will allow RCL and competitors to gain pricing traction and increase profitability on top of revenue growth.  RCL recently spoke that they have begun to see these effects take place, and from the beginning of 2Q to date, European pricing is up mid-single-digits, while Alaska and the Carribean have been over-performing (up high-single-digits). 

d) International growth continues to be promising.  RCL is slowly penetrating into Brazil, Australia, and China, and believes that the European market will eventually become comparable to the dominant US market (in 5-7 years).

RCL is a levered play on cruise-line fundamentals, an industry that has significant growth opportunity in the near-term but is being negatively viewed in the current economic environment.  We plan on holding the company despite the drop since inception, and further declines may be likely as the market continues its downward trajectory.  RCL management says that the company will perform in-line with the guidance provided at the beginning of 2011, a strong statement given geopolitical events that occurred in Libya and Japan and their respective impact on earnings.

Please contact me with any questions.

-Ian

Micron's Performance

In the last month the stock price of Micron Technology has dropped more than 15% because of various macroeconomic and industry specific reasons.

 Today the stock has declined 5% as Goldman Sachs downgraded Micron to sell, on the basis of the weak recovery in DRAM prices and slow down in computer sales. Yet, it seems that market didn’t come to a single consensus regarding the DRAM outlook. On May 11, Raymond James said DRAM prices are stronger than people realize. On May 13, Sterne Agee argued that DRAM prices would be stronger in the second half of the year.

  However, the primary catalyst for MU’s decline was earnings report by Hewlett Packard on May 17th, as the computer giant significantly lowered its guidance, expecting PC sales to decline. The situation got worse when Hewlett Packard’s CEO, Mr. Apotheker, sent email to senior 10 executives that was leaked and resulted in a major sell off of HPQ and other computer and chipmaker companies by investors. In his email Mr. Apotheker mentioned that HP needs to cut back on expenses and slow down hiring; “We must watch every penny and minimize all hiring." Since then, Micron shares have been trading under 10 dollars per share. Negative outlook in PC sales considerably impacted MU’s stock price, as 40% of the revenue for Micron comes from DRAM, a type of memory which is primarily used in computers.

It seems that market is also concerned about Micron’s trial that begun today.  Rambus Inc. is suing Micron Technology and Hynix, for patent infringement. However on May 13^th U.S. Court of Appeals for the Federal Circuit unanimously agreed with Judge Robinson's decision in the U.S. District Court in Delaware in favor of Micron that Rambus, Inc. wrongfully destroyed evidence. We believe that the trial might take a while, but we think based on previous decisions the outcome will be favorable for Micron.

Analyzing Microns fundamentals, product line and recent developments we still think that MU is one of the best plays in the industry. We see less volatility in revenue, as MU shifts from DRAM to NAND and Flash memory.  We think that innovation will be a primarily driver at Micron. On May 31 MU sealed a deal with Intellectual Ventures, the invention and patenting giant, which grants access for many patents. This strategic access will drive future innovation and development of superior products at Micron Technology.  Less than week after the announcement of the deal, Micron announced that it has developed the world's fastest enterprise solid-state storage system. This new RealSSD P320h series delivers extreme performance and endurance demanded by data-intensive enterprise applications including cloud computing, high-performance computing, data analytics, business intelligence, and video on demand.

This week Apple announced that it is trying to shift from Samsung, as its major chip supplier, to Intel, Micron and Sandisk. This might be a great opportunity for Micron, considering that just single IPhone has in it $80 dollars worth of chips. Besides that, Apple’s announcement of ICloud is another big opportunity for Micron. . ICloud lets users to store their music and files on the cloud storage. Cloud computing is a big consumer of NOR and NAND.  Even 40% of MU revenue comes from DRAM, another 40% is coming from NAND and Flash segments. We see Micron Technology as the one of the industry leaders, and think that it is well positioned to capitalize on growth of cloud computing and increased demand for NAND. However we are cautious about DRAM outlook and we believe that the stock is trading right now as if DRAM sales are going to be weak.
-Vlad

CAT - J.P. Morgan Diversified Industries Conference

On June 7, Caterpillar, Inc. presented at J.P. Morgan’s Diversified Industries conference. Throughout the press conference they touched upon their phenomenal 1Q11 results and then led into their forward looking numbers for the rest of 2011. The company revised their outlook for total revenue from above $50 Billion to $52-$54 Billion. For EPS, they revised from around $6.00/share to $6.25-$6.75 per share.

In the Q&A section, the first important note that came out is that CAT’s issue in China is not for demand but capacity. Investors were beginning to become concerned with increasing competition from Chinese companies, specifically Komatsu. CAT stated that the competition is not the issue, whereas capacity is. Throughout the press conference, they continually spoke about supply constraints in China and commented that most dealers in China would like more inventories if possible. They discussed plans of significant expansion of capacity in Xuzhou, China to come by 2015 so that they will be able to meet the high demand that they are seeing. As for other emerging markets, they feel that competition will continue to grow but that they are positioned well to handle this. As the developed company they are, CAT feels that their ability to produce top of the line products, while providing the fast, efficient service line behind their products provides them with a competitive advantage in the coming years. The second notable topic discussed was concerning the statistics that showed slowdown in economic growth. The company would not specifically comment on this, but they continued to press on that demand is not an issue. The last discussion was concerning the acquisition of EMD, which is one of the leading producers of locomotive technology. CAT feels that this is a great acquisition as locomotive transportation becomes prominent in emerging nations due to the fuel efficiency and effectiveness. EMD is a company known for producing top of the line products, but their distribution ability is what constrains them. CAT believes that the combination of EMD's products with their distribution capabilities will give them the competitive advantage to gain a big market share.

Following the press conference, CAT is trading up $.38. I believe that CAT is making strong moves to meet their long-term growth plans by 2015, assuming there is no recession. With their acquisition of EMD, pending acquisitions of MWM and Bucyrus, as well as expansion of facilities in the U.S. and around the world, CAT is becoming more competitive and responsive to all market needs.

Jeremy Pellizzari

Halliburton (HAL) falls 4.46% - 6/6/11

Halliburton fell 4.46% to $48.04 after news that the Supreme Court is reinstating a 2002 lawsuit by a group of investors was released. The investors claimed that Halliburton misled them by understating its asbestos liabilities and overstating its revenues from certain construction contracts and benefits from its 1998 merger with Dresser Industries. These resulted in an artificial increase in the stock price. When the company made corrective disclosures the stock price fell. The suit covers investors that purchased HAL stocks between June 3, 1999 and December 7, 2001. Halliburton does not believe that a loss is probable.

-Alex Perez

Cisco

Recently Cisco hit its stop loss of $16.00. The stock continues to take huge hits after each earnings announcement. After the last earnings announcement the stock actually rose 5% but fell more than 8% shortly after. The conference call talked about many of the struggles Cisco is facing. The public sector continues to slow, the EPS was lower due to cost reductions, many of Cisco's businesses are under pressure, and set top boxes continue to be a problem. There were some positive signs: Cloud revenue was up 30%, Emerging markets were up 11%, and the new line of products did very well. With all this being said, it is always important to be disciplined when it comes to booking gains and losses. Cisco will no longer be in the portfolio, I will continue to follow it and look for the turn around point.

-Simeon

Joy Global Inc. Announces Fiscal Second Quarter 2011 Results

Joy Global Inc. Announces Fiscal Second Quarter 2011 Results
Joy Global announced that second quarter bookings increased 46 % to $ 1.5 billion and net sales increased 19% to $1.1 billion, compared to the same period last year. Their Operating income of $234 million accounted for 22% of sales compared to the operating income of $181 million which was 20% of sales. Net income was $162 million which is equivalent to $1.52 per fully diluted share up from $1.15 per share.

During the second quarter Joy Global key acquisition of LeTourneau will complement their already successful electric rope shovels and drilling products. New orders for original equipment were 79 percent higher than they were in the second quarter a year ago. The second quarter bookings included benefits of $131 million in the foreign exchange rate, from a weakening in the US dollar compared to the Australian dollar. New equipment orders for electric mining shovels and blasthole drills for use in mining coal, copper and iron ore were received in North America, South America, Russia and South Africa.

The Mining industry remains strong despite slower economic growth. There has been a limited excess mine capacity today and expansion programs are still behind after a hold for most of 2009 into 2010. The seaborne coal has been controlled by the emerging economies, particularly China and India. China’s stockpiles at power plants reached a yearly low for 2 weeks in April, which has created concerns for power shortages this coming summer. Along with fears of a drought, the response would be a reduction in the usage of Hydro generation and it should increase coal burn for replacement power generation. India plans to double its rate of growth in power generation between 2010 and 2012, as well. In Japan, failed nuclear generators are expected to be replaced by previously shuttered coal plants.

The company raised their diluted earnings per share expectations to $5.30 to $5.60 up from $5.10 to $5.40. Following the positive announcement the company was trading at $90.512 + 4.627 (5.39%) on the day.

-Jim

A Bad Day for Banks, and the Economy

The S&P 500 dropped 2.28% on Wednesday, the largest single decline since June 2010, on ADP’s estimate that only 38,000 employees were added in the last month, versus the expectated 175,000. All the large banks saw declines well above the market average; WFC (a UASBIG holding) declined 5.04%, while BAC (a recently closed position) was down 4.26%, JPM and C fell 3.42% and 3.65% respectively.

Large banks seem to have three main factors working against them. One, a deteriorating macro environment reduces total business, and causes more mortgage related problems. Two, the low interest rate environment* compress net interest margins. Three, the federal government is becoming more aggressive in its push for a housing related settlement, which will be anywhere between 5 and 30 billion dollars total, to be split proportionally among the previously mentioned banks.

*10-year treasury closed below 3%

~Zach

CAT - BUCY One Step Closer

On Tuesday, May 24, the U.S. Department of Justice cleared the deal allowing Caterpillar to follow through with their $8.6 Billion buyout of Bucyrus International Inc. The importance behind this acquisition for CAT is to gain more exposure into the market for coal and minerals, where prices are rapidly increasing. Bucyrus generated $2.6 Billion in revenues in its last year, and CAT believes they will be able to see operating profits from the acquisition as early as 2013, and that they should exceed $400 million after that. Following the approval, CAT announced the sale of $4.5 Billion in debt, which would be their largest ever. Additionally, the company plans to use cash for the rest of the acquisition, declining to sell more equity.

Jeremy Pellizzari

MU Drops 5.6%

Micron Technology plunged today by 5.6% after South Korean rival Hynix said it may miss analysts' consensus estimate for operating profit in the second half of 2011. The news from Hynix is having a broad-based, negative impact on U.S.-listed memory chip makers. The stock performance today was also influenced by the news that Diversified Fluid Systems accused Micron of breaking contract. A chemical and fluids business that relied on Micron Technology Inc. for about one-fifth of its revenue accused MU of conspiring with four industry workers and a local construction company to take a half-million-dollar project away from it. DFS is suing Micron for breach of contract and fair-dealing and good-faith covenants. Despite this negative news many analysts are expecting strong third quarter for PC’s and believe notebook units may surge 10% to 15% in the quarter, which seen a as a positive driver for MU.
-Vlad