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Starbucks Annual Meeting: Presents Initiatives, Yet Stock Issues Persist (SBUX)

Starbucks Corp. (NASDAQ: SBUX) is holding its annual shareholder meeting today (playing right now), and with shares having slid more than 50% from highs it can't be any shock that the home of "coffeeflation" is initiating its new plan.  For starters, now that Howard Schultz has returned, the company is slowing what was its ridiculous "take over the coffee world" aggressive store opening strategy.  It has also tried to take some of the more time-demanding products that slow down the line at rush hour.

In the first 30 minutes Schultz has noted that the company is very aware of the current challenges and the stock price, and assured that they are all highly motivated to remedy this.  Also noted was that the trends of a slowing traffic trend combined with much higher and record dairy prices that affect it.  International growth is still the big surge, even though it has been slowing US store growth plans.  Consumer products are still in the very early stages and the company believes that will be a $1 Billion segment.  As far as what's ahead, Schultz said in the long initiative process that there are no sacred cows.  Our own comments on prior releases and issues:

• Retraining benefits?
• On streamlining
• Stock value... $18, $22, or $26?

Analyst estimates have already been brought down over the last quarter yet again and its earnings estimates out of First Call are $0.97 for fiscal Sept-2008 and $1.13 EPS for fiscal Sept-2009.  So at $18.25, its forward P/E ratio for this year is 18.8 and roughly 16.1 for forward 2009 numbers.  As far as valuations are concerned, this is far from dirt cheap and far from expensive.

The truth is that Starbucks hasn't gone to hell in a hand basket.  It isn't like you are thought of as a loser if you go there.  But it has lost its mojo and its days of being a growth stock are far behind in the rear view mirror.  Now it is a mature dominant brand that has competition from formerly uncool brands that is nipping it from all sides.

The market cap is $13.2 Billion, down from what used to be $25+ Billion.  So we aren't talking anymore about "a coffee shop with a 50 P/E..."  Now we are just talking about a coffee shop.  The share price of two years ago no longer matters.  Shareholders of today will just have to look at this as a maturing premium coffee company with a slowing consumer that is looking for ways to trim expenses, and the old mantra of driving real earnings growth will become primary.  Everything else is just spilled coffee.

Jon C. Ogg
March 19, 2008

No Nasty Surprises in GE's Annual Report (GE)

General Electric (NYSE: GE) issued its annual report, which Wall Street considers as a Bible for public companies.  We normally peruse 10-k filings (annual reports) for all sorts of tidbits on companies and use them as references for many years. 

But today's annual report filing from GE was by and large nothing that investors needed to worry about.  Not this time anyway.  We just noted that CEO Jeff Immelt plunked down a couple million dollars to buy stock, and he bought more shares a few weeks ago.  It isn't as though CEO's and CFO's aren't aware of what is about to be published in an annual report.  If the report was going to have all sorts of bad news he would have waited to buy shares after the report came out.

In his annual letter, Immelt did note that GE should hit its annual targets in 2008 with 10% revenue growth to $195 Billion on EPS growth of 10% and an average return on capital should be near GE's target of 20%. It still plans to return some 418 Billion in capital to holders via dividends and buybacks.  But there are some interesting issues regarding how units are growing:

• It has $150 Billion in infrastructure products and services in backlog.
• It has NO exposure to CDO's and SIV's and has a AAA rating.
• The company noted that its Ecomagination unit sales will be roughly $20 Billion by 2009. It will also invest $6 Billion to finance renewable energy projects. It now sees $25 Billion in its Ecomagination revenue target by 2010.
• Emerging markets are expected to generate roughly $40 Billion this year.
• It sees $2 Billion in business from its leadership position in China on the Olympics this year.  It sees Middle East & Africa revenues of $13 Billion in 2010.

There are many other points as well, but these are some of the efforts that have developed into solid businesses that had not been dominant in the past.

Immelt will host a retail investor call tomorrow.  This webcast is a first for GE and will be broadcast across a number of internet properties, including CNBC, MSNBC, CNN, MSN, AOL, Yahoo, Bloomberg, Forbes and thestreet.com.

Jon C. Ogg
March 12, 2008

Implications Of Warren Buffett Panning Insurance Industry (BRK/A, BRK/B, ABK, MBI, AIG, RE, HIG, CB, PGR)

It is no great mystery that Warren Buffett of Berkshire Hathaway (NYSE: BRK.A, NYSE: BRK.B) is still one of the most followed and most revered "long term value investors" on the planet.  Any time there is Warren Buffet news you can count on every financial website having at least one story on him.  We even have our own "Buffett" index code.

His annual investor letter is always an important read, although investors should really note that this should be viewed and interpreted as a "macrocosm" of Microcosms.  Warren Buffett will be the first to tell you he cannot predict the stock market, cannot exactly predict the economy, cannot predict the weather, and cannot predict the short-term implications on every stock out there.  But he smooths out all the news and noise from the long-term vision.  That is what a long-term value and income manager is supposed to do, particularly if his holding period is "Forever." If you look over his latest public stock investment holdings, you'll see he still goes for the simple and easy to understand. We gave a list of candidates that could fall under his ambitions of a "whale of a deal," although this seems more like the past rather than the present or future.

So what are the implications of the Oracle of Omaha panning the insurance sector.  Of his $2.35 Billion in net earnings for the last quarter, $1.44 Billion of the total $2.35 Billion came from insurance underwriting and insurance investment income (61%).  For Q4 2006, the percentage of insurance-tied numbers was 60% of the $2.868 Billion in operating earnings.  For all of 2007, the percentage of insurance-tied numbers was 59% of the $9.634 Billion in operating income.

In his annual letter to shareholders, Mr. Buffett noted specifically that margins in insurance were going to be lower even if we had another disaster free year.  He even noted, “If the winds roar or the earth trembles, results could be far worse.”  In the past two years he has joked about having the foresight to benefit from no disasters.  If that prediction isn't harsh enough, try this one: “It is a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise.”  Or better yet, "That party is over." 

Mr. Buffett has even gone out on a limb to predict the future Berkshire Hathaway as a whole will have breakeven or positive earnings.  He admitted the law of large numbers has caught up with Berkshire Hathaway.  But what happens if you are an executive or bean counter at OTHER insurance companies?

Berkshire Hathaway from best we can tell has not gotten mixed up with all of the leveraged and crazy CDO structures that couldn't be explained.  That isn't true elsewhere.  But every portfolio manager talks his or her own book.  There are many things that have yet to be resolved and there are likely to still be at least some failures from all this fallout.  Insurance companies will be in that boat too as their financial bets are frequently much farther out than that of banks. 

• Mr. Buffett has already made a backstop offer for the bond insurers to pick up their municipal assets on the cheap, which were rebuffed faster than the offers were made.  MBIA (NYSE: MBI) and Ambac Financial (NYSE: ABK) are still a "pending situation" as far as ultimate long-term viability, and Berkshire Hathaway decided to open a competing municipal bond insurance operation to compete.
• American International Group (NYSE: AIG) has been hamstrung by leveraged loan and CDO exposure that was first disclosed as immaterial and somehow has grown to a quarterly loss of some $5 Billion.  It also has noted a total of $42.2 Billion of exposure to the troubled bond insurers, and it has written roughly $61 Billion of credit default swaps on CDO's with some subprime collateral.  They are far from immune, AIG stock fell some 6.5% Friday alone to $46.86, and its 52-week trading range is $44.10 to $72.97.
• Everest Re Group, Ltd. (NYSE: RE) is one of the largest pure-play reinsurers out there, another arena in which Berkshire Hathaway is a giant.  It only fell 1% Friday to $96.88, and its 52-week trading range is $90.27 to $115.86.  They would not at all be immune, particularly after its profits fell some 90%.
• Hartford Financial Services (NYSE: HIG) is another insurance monster that saw shares fall another 3.75% to $69.91, and its 52-week trading range is $65,76 to $106.23.  Chubb (NYSE: CB) is yet another that saw a 3.1% drop Friday to $50.90, while its 52-week trading range is
• $45.65 to $55.99.
• Progressive Corp. (NYSE: PGR) competes head to head with GEICO and it too saw a 3% drop on Friday to $18.33, while its 52-week trading range is $16.98 to $25.16.

Realistically, this list could just go on and on.  There is no reason to.  Most of the reports out there merely just cover his comments in case everyone doesn't have the time to read through his endless letter.  We have one solid rule when we question anything in the financial markets, and the answer is almost always "FOLLOW THE MONEY."  Mr. Buffett is a great manager, and those who bash him based only upon the "today" really look like clowns.  Regardless, it's almost like he is trying to prepare his holders for the worst again after two years of no catastrophes.  Maybe he is trying to talk down other insurance operations so he can buy them on the cheap or show how Berkshire Hathaway insurance subsidiaries have better balance sheets.  Either way, he's talking up his book even if it was meant to sound cautious.

The fact that we noted "Buffett's Loss Could Be Your Gain" after Barron's panned this one change nothing about the situation.

Jon C. Ogg
March 1, 2008

SCO's Last Annual Report Ever? (SCOX, SCOXQ)

SCO Group, Inc. (Pink Sheet-SCOXQ), formerly "SCOX," has filed its annual report.  After you have seen the history of this company through the years, it is almost impossible not to wonder if this is likely the end of the road for the company.  Very few companies this small are involved in this much litigation.  The stock was booted from trading on the NASDAQ at the end of December and it is now traded on the Pink Sheets.  It is under bankruptcy protection.  Its revenues appear to be racing faster and faster to zero.  Its balance sheet is in the same boat.

It turned out that having a business model of suing everyone under the sun wasn't a good one.  Go figure.  All of these are excepts from the 10-K, and we have focused on the more pressing issues with comments from the company:

Mutual Fund Year-End Window Dressing Meets FOMC Date (MSFT, CSCO, GOOG, AAPL, RIMM, VMW, EMC, KO, YUM, MCD, BIDU, CROX, DELL, SCI, GS, STT, NYX, TXT)

Wednesday is much more than Halloween and it is more than the FOMC announcement date.  We have an event that has been perhaps more influential to many key stocks than the upcoming announcement on Wednesday out of the FOMC.  The key event is that it coincides with being the fiscal year-end for most mutual funds out there.  There are many stocks that were prior beneficiaries of WINDOW DRESSING at the end of September, but this list may be far more important as the year-end names will appear in annual reports for mutual funds.  Oddly enough, these might not see the same love as the last quarter (see below).

DELL: Fully Reporting Soon After Restatements & Internal Investigation Results (DELL, HPQ)

Dell (NASDAQ:DELL) has decided to do something that is probably not coincidental.  It announced that it has completed its internal investigation and will restate its financials.  Any shot this was to take away some of the momentum or thunder from what would have otherwise been a Hewlett-Packard (NYSE:HPQ) focused day after its solid earnings?  That can't be a coincidence, not one bit.

As a result of accounting errors and irregularities identified in that investigation and in additional reviews conducted by management, the Audit Committee has determined to restate the company's financial statements relating to fiscal 2003, 2004, 2005 and 2006 (and interim periods) and the first quarter of fiscal 2007. Dell's previously issued financial statements for those periods should no longer be relied upon.  Here is the result of the findings in summary:

• Net revenue for each annual period is expected to be reduced by less than 1 percent of the previously reported revenue for the period.
• The cumulative change to net income for the restatement period is expected to be a reduction of between $50 million and $150 million and the cumulative change to earnings per share  for the restatement period is expected to be a reduction of $0.02 to $0.07.
• The largest percentage changes in quarterly net income and EPS are expected to be in the first quarter of fiscal 2003 and the second quarter of fiscal 2004, each with expected reductions of between 10 percent and 13 percent; the fourth quarter of fiscal 2005, with an expected reduction of approximately 7 percent; and the second quarter of fiscal 2005 and the third and fourth quarters of fiscal 2006, each with an expected increase of approximately 5 percent to 7 percent. Net income and EPS for each of the other quarters are expected to change by 5 percent or less.
• The adjustments are not expected to have a material impact on the current balance sheet.  The adjustments are not expected to have a material impact on cash flows during the restatement period and are not expected to have a significant effect on the reported results of future operations.

If you read on through the company's release, you'll see that the company also found intential manipulation to attain certain financial targets.  It also found it did not maintain an effective control environment with adherence to GAAP standards.  CFO Don Carty has also issued several remedies it will take to fix the control issues and to eliminate this ahead.  Lastly, it addresses the ongoing SEC investigation.  The SEC's investigation is ongoing, and there can be no assurance that there will not be additional issues or matters arising from that investigation.

All that really matters to us is that the wrong doings are not so bad that they will topple Michael Dell.  He came back and everything he telegraphed and that had been indicated before could have led anyone with a half brain or more to conclude that there were some pretty big manipulations inside the company.  As long as Michael Dell is not toppled, then this is the news we have finally all been waiting for.  The company will begin reporting again, and that is all we really care about.  This just fixes the rearview mirror.  The restatements are bad as all restatements are, but they don't look so crucial that past analysis was anything that will topple it.  It is even possible that some will be given a pair of cuffs instead of a slap on wrist by the SEC, but this still gets the issue mostly behind and should be viewed with some relief as long as it has no effect on Michael.  The doomsday crowd will say this is horrible and they will point to the years of intentional misgivings, but longer-term PC and tech investors will say this is what the market has been waiting for and the company can finally spend all efforts focusing ahead rather than dealing with the past.  You can find Dell's full release here on their IR site.

Jon C. Ogg
August 16, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he is the publisher of the 24/7 Wall St. Special Situation Investing Newsletter and does not own securities in the companies he covers.

Wal-Mart Proves 'Less Bad' Is Really Good (WMT)

Wal-Mart (WMT-NYSE) finally remembered that they are a public company today because they have held their annual shareholder meeting.  This proves that the company is truly owned by the investors for at least one-day of any year.  If you thought you would only hear negative comments from us on the company, that is not true.  Today's news in the company isn't quite as good as the company could have done.  But the reality is that it only has to do 'less bad' to end up being good.

Despite all of my slamming Lee Scott and calls for him to go and despite criticisms of how the company has been under-performing, I actually said on CNBC in an interview that Wal-Mart may actually begin to recapture some of its lost mojo that Target (TGT-NYSE) and that the company will likely be a better long-term investment than Target.  Does Lee Scott absolutely and positively have to go?  The simple answer is NO.  But he's got serious issues ahead of him and frankly there are probably very few men or women who would want to step into his shoes.  The good news is that so far everything being telegraphed looks  'less bad' today and this will ultimately be good  for shareholders.

There is a ton of data out of the company and you can literally spend your whole day on this if you choose.

Here are the guts of the actual plan.

The company is taking its $3.3 Billion share buyback plan up to a new amount of $15 Billion.  The company has already boosted its dividend, although that was snubbed initially earlier this year.  They are slowing down their supercenter growth, albeit not by enough of a slowdown by my account; but it is still a start.  As I have noted before: the company doesn't actually have to get it exactly right to reward shareholders, they just have to get it 'less wrong.'  The result will be between 190 and 200 new U.S. supercenters during this fiscal year and approximately 170 supercenters each year for the next three fiscal years.  The company has also said it will review its growth strategy annually, although that is a promise that doesn't mean much.

For fiscal year 2008, the 190 to 200 range includes approximately 70 relocations and 40 expansions of discount stores into supercenters. In October 2006, the Company had announced that its fiscal year 2008 growth plans included between 265 and 270 supercenters in the United States. Approximately 80 of the supercenters originally scheduled to open in January 2008 now will open in early fiscal year 2009.  I have been under the belief that the growth and expansion plans needed to be cut in half or even by two-thirds for it to focus on its core operations and fix what it already has, but as already noted this is still good because it is 'less wrong.  It also notes that its consolidated square footage growth rate will be approximately 6% for fiscal years 2008 and 2009; Wal-Mart U.S. square footage growth rate is expected to range from 4% to 5% during these same fiscal years. This figure is key and one that analysts will probably applaud.

It is also in the second year of a three-year plan under Eduardo Castro-Wright to improve customer relevancy in operations and merchandise.  That plan should perhaps be scrubbed and rekindled with a newer plan, but once again, it is still 'less bad.' 

Capital expenditure (Cap-ex) cuts have finally come into play.  Wal-Mart is recognizing that they are no longer a growth company inside the U.S. and this is a start. This Cap-ex cut is now going from a planned $17 Billion down to $15.5 Billion, and the extra $1.5 Billion will go to fund the buyback.  The company could cut this by much more and they should consider it, although once again it is 'less bad' and that is good for shareholders.  The new strategy does not affect the capital investment plans for the Company's Sam's Club or International operations.  This is actually good (not even 'less bad') because the company has major opportunities there outside of the U.S.  I previously noted that their recent purchase in China was a home run and looked like a great purchase.

continued....

Vonage Files Its Annual Report; Risks, Legal Proceedings, & All

If you look through the Vonage Holdings' (VG-NYSE) annual report just filed with the SEC, you might end up asking yourself if the company is just an accounts payable entity that funds lawyers and trials rather than the company being a VoIP telephony provider.  The "RISKS" section of this 10-K filing goes on and on, but that is actually typical of many companies.  That section also spells out some of the judgements and royalties it may have to pay.  The "LEGAL PROCEEDINGS" section of the document does at least show the "actual" issues the company is involved in, and it is substantial.

The good news is that at least the company did get its 10-K filing in at the SEC, and the stock actually looks up almost 1% in after-hours.  It is actually fairly odd that the shares closed up less than 1% today when you consider the "talk of a sale" news last night had the shares up over 10%.  Perhaps the market was even more skeptical than we were about the probability that the company would be able to get shareholders to go along with it.

Crocs Sues Its Way Out of Ugliness

Perhaps one of the more interesting ways of looking at companies is trying to garner the mindset of the company's legal department and the "Legal Proceedings" section of annual reports.  Crocs (CROX-NASDAQ) filed its annual report last night and it appears to be in many different legal activities where it is suing companies for trying to sell similar shoes and the companies distributing them.  Patent, trademark, and copyright does have to be protected, but sometimes things go too far.  At least they didn't sue The Netherlands Historical Society for making clogs long ago as the original work shoes, even if theirs were made of wood.  The suits won't likely damage Crocs, but they may be delusional on what they really own and what others should be allowed to do.  Read their pending lawsuits and legal actions below:

Why UnitedHealth's Filing Catch-Up Doesn't Matter

UnitedHealth (UNH-NYSE) has finally become current in its SEC Filings as of this morning, but this shouldn't be that big of a surprise.  The company did go back and restate earnings over stock option grants to reflect a $1.55 Billion reduction in earnings for 2006 and prior years to 2003.  This has been perhaps the largest of the telegraphed options cases out there and this should be no surprise.

The truth is that as long as Bill McGuire, the CEO that backdated options to a monstrous personal empire-building tune, didn't pilfer actual funds and didn't get involved in off-balance-sheet transactions that this was really more of media frenzy than it was a shareholder fiasco.  To prove this, there have actually been NO calls for the company to dissolve strangleholds in certain markets and there have been NO true shareholder revolts other than the attempt to get some of that money back after forcing McGuire out.  Its prized AARP deal was never really deemed at risk either.

It is ridiculous that the board let that man get away with so much, even if he has relinquished (or will have to) some of that money.  He isn't the founder and he grew that company through major acquisitions.  Has the consumer been a beneficiary of fewer healthcare choices? Yeah right.  Have the shareholders made that much since the Pacificare merger?  No, in fact they are down.  There is a silver lining: the shares are actually up roughly 20% since the 2006 lows and this really was limited.

The company has grown to where it will be difficult for it to do more than smaller regional
mergers at this point.  They are up 1.7% to $53.85 on the day; and its 52-week trading range is $41.44 to $57.86.  Volume is already close to double its average daily volume and now sits at 11.5 million shares just after 2:00 PM.  The company had already telegraphed that it was "becoming current" in its filings on more than one occasion.

The good news is that this removes the "investability" issue for those who are barred from investing in companies which are either not current in SEC Filings or in companies that have excessive "unknown risks" for litigation.  Mr. McGuire may still have some pain to take, but this at least gets the current company back to operating on its own merits.

It will be interesting to see how the company performs in a year where premiums are expected to be low ahead of the 2008 election cycle, as many insurers tend to lighten up on their "increased insurance premium trends" ahead of shift changing elections.  How much of that is "opinion-based" rather than statistical?  Ask health insurance brokers who are friends or family. 

The last bit of good news is that after the earnings came in, it can now resume its share buyback now that it has resolved its delinquent filing issues.  It has 130+ million shares available under the current buyback plan when it resumes, and it would probably be prudent to assume that the company will begin some accelerated buybacks.

Jon C. Ogg
March 6, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

GE's "Material Weakness" Not That Material

Usually when a 10-K (Annual Report) filing comes out, the first thing traders peer at is the 'Legal Proceedings' section and the 'Auditor notes'.  Particularly of note, they look for phrases such as "Going Concern" and "Material Weakness," among others.  It was surprising to see the "material weakness" actually come up in the screen on a company the size of GE, but if you look at the explanation it looks like it is not a huge deal at all:

We identified the following material weakness in our internal control over financial reporting -  we did not have adequately designed procedures to designate each hedged commercial paper transaction with the specificity required by Statement of Financial Accounting Standards 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The restatement that resulted from this material weakness is discussed in (b) below. Solely as a result of this material weakness, we concluded that our disclosure controls and procedures were not effective as of December 31, 2006. Other than with respect to the identification of this material weakness, there was no change in our internal control over financial reporting during the quarter ended December 31, 2006, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The company remedied part of this by doing some restatements.  The "Legal Proceedings" section was actually shorter than on many smaller companies and that is perhaps some of what was adding gains right after the open on the stock besides a pre-market upgrade from UBS to a Buy from Attractive and the target was raised from $40.00 to $45.00.

The company also showed that its 2006 share buybacks were 49 million shares and it still has $11.8 Billion that it can use to repurchase stock.  Traders have taken the stock down today and it is either because of the weak market or because of the restatement from the "material weakness" note.  If it is on the material weakness note then they are probably reading too far into it and not qualifying the details in the statement.

GE said it is positioned for sustained high single-digit revenue and double-digit earnings growth, while expanding margins and returns.  GE had been positive on the day early on, but shares are now down 0.4% at $35.20.  Today's high is $35.60 and the 52-week trading range is $32.06 to $38.49.

Jon C. Ogg
February 27, 2007

Jon Ogg is a partner in 24/7 Wall St., LLC and he can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.