Thursday, March 30, 2006

Microsoft and EU

CNN carried an artile on the continuing fight between Microsoft and the European Union. Wall Street Journal is also carrying articles on the hawkish stance taken by European Union officials against Microsoft. While the merits and demerits of the case are not clear to a lay person, it is fairly certain that the EU is going to impose 2.4 million dollar fine on Microsoft. What does this mean for the stock and overall trade relations between US and Europe?

While the EU has its own motives for fining Microsoft, Microsoft hasnt helped its own cause by its confrontational attitude after paying a 540 million dollar fine. Microsoft could have easily released two versions of windows and charged different prices for the version with better features. It is also not helping Microsoft that many of the companies complaining are U.S companies. It undermines the U.S government from lobbying for Microsoft.

The fine is already priced into the Microsoft stock. The investors are expecting some type of settlement that will not require Microsoft to pay the daily fine after some time. If Microsoft has to pay fine on a daily basis, it will cost it 876 million dollars a year. This will reduce Microsoft's cash flow by approximately 6% a year.

The estimate is that Microsoft derives roughly 20% of its revenue from Europe. Out of this, the countries in the European Union probably contribute some where aroud 15% of the revenues. If we equate profits with revenues, 15% of the profits would be contributed by the European Union countries. If the government siphons off 6% of the profits, it is pretty much charging 40% of the after tax profit again. As I mentioned earlier, the EU's intentions are far from noble is putting this tax on Microsoft. The investors are not expecting this to be resolved quickly in some manner without Microsoft having to pay the penalty for every day of the year.

As the world stands today, Europe is dependent on the U.S far more than the U.S is dependent on Europe. U.S is the largest market for the fine french wines, the German automobiles and every European country with the exception of Netherlands runs a huge trade surplus with the U.S. A full blooded trade war will cost Europe more than it would cost the U.S. Since many of the companies complaining against Microsoft are based in U.S., it is likely that the Microsoft case will not get the full backing of the U.S government. Apple, another U.S company is being asked to open its ITunes so every music player can work like an IPod. In any case, the investors are betting on the issue to be resolved with minor financial loss to Microsoft. This is evident in the options market where most people are betting Microsoft to be around the $27.5 neighborhood for the next nine-twelve months.

Wednesday, March 29, 2006

Google(GOOG) Secondary Stock Offering

The CNN Article details Google's plans to do a stock sale of upto 5.3 million shares raising 2.1 billion dollars at current prices.

Companies sell stock primarily if they are over values. Companies use stock as a currency to make deals when the stock is over valued. Warren Buffett used Berkshire stock instead of money to buy General Re as he though the Berkshire stock was over valued. In Google's case, not only does the company think the stock is over valued, the company leadership also seems to think the stock price will decline further in the coming couple of years.

The competition is definitely going to heat up in the second half of this year and next year. In the prior article we discussed Google and Yahoo and found that a price of $340=00 provided a rough upside comparable to investing in U.S treasuries for the next two years. Given that the sale of 5.3 million shares will dilute the shares by about 2%, the target price in 2008 falls to 372 dollars.

In the previous segment we talked about the possible down side to Google stock. This included competitive pressures as well as stock dilution. In after hours trading, the stock was selling for $382=00. While stock price tends to overshoot in after hours trading, I believe this is a good opportunity for people that bought the stock in the 280-330 range to unload some of this stock and do some profit taking. A return of 9.725% can be achieved by investing the profits in treasury bonds with zero risk. As our analysis shows, there is little upside to Google at current prices. While the stock will likely continue to be volatile with more gyrations in the upcoming months.

Sunday, March 26, 2006

American Pharmaceutical Partners (APPX) Analysis

Toddi Gutner from Business Week wrote an article titled - "Where to Go For Growth" in the March 27th issue. In this article, she profiled a handful of companies including APPX. Let us quickly take a look at APPX and then see what Toddi has got to say about this stock. We will then analyze the balance sheets to see if APPX is a buy at today's prices.

In the 1o-K, the company is described as follows:

"We are a pharmaceutical company that develops, manufactures and markets injectable pharmaceutical products. We believe that we are the only independent U.S. public company with a primary focus on the injectable oncology, anti-infective and critical care markets, and we further believe that we offer one of the most comprehensive injectable product portfolios in the pharmaceutical industry. We manufacture products in each of the three basic forms in which injectable products are sold: liquid, powder and lyophilized, or freeze-dried. We hold the exclusive North American right to sell Abraxane®, a proprietary nanoparticle injectable oncology product that is a patented formulation of paclitaxel. In January 2005, ABI’s New Drug Application, or NDA, for Abraxane® was approved by the U.S. Food and Drug Administration, or FDA, and we launched the product on February 7, 2005. Our wholly-owned subsidiary, Pharmaceutical Partners of Canada, Inc., markets injectable pharmaceutical products in Canada."

APPX is a majority owned subsidiary of American BioScience, Inc., a California corporation. At December 31, 2005, American BioScience owned 47,984,160 shares, or 66.2%, of APPX outstanding common stock. ABI is 98% owned by Patrick Soon-Shiong. APPX and ABI are merging to form a common company to be called ABBI. ABI owns world wide licensing for Abraxane - the cancer drug. The terms of the agreement are disclosed in the 10-K.

"On November 27, 2005, we entered into an agreement and plan of merger with American BioScience, Inc., or ABI, under which ABI will merge with and into us, with our company continuing as the surviving corporation. In the merger, holders of shares of ABI common stock will receive 86,096,523 shares of our common stock, plus the number of shares of our common stock held by ABI at the effective time of the merger (which was 47,984,160 shares as of December 31, 2005), less the number of shares of our common stock issuable after the effective time of the merger with respect to restricted stock units issued under the ABI restricted unit plan contemplated to be adopted by ABI under the merger agreement (with this number of shares of our common stock to be issued as part of the merger consideration, but to be issued to holders of ABI restricted stock units in cancellation of such units). The 47,984,160 shares of our common stock held by ABI prior to the merger and acquired by our company in connection with the merger will be cancelled without payment of any additional merger consideration. Upon completion of the merger, the former holders of ABI common stock, together with the holders of ABI restricted stock units, will be issued shares of our common stock representing approximately 83.5% of our common stock outstanding on a fully-diluted basis immediately after the merger. This percentage reflects only the shares to be issued in the merger but does not include any shares of our common stock held by individual ABI shareholders prior to the merger. In connection with the merger, our certificate of incorporation will be amended to (a) increase the authorized number of shares of our common stock to 350,000,000 and (b) change our name to “Abraxis BioScience, Inc.” Following the merger, our common stock will be traded and quoted on The Nasdaq National Market under the symbol “ABBI.”"

Toddi has this to say about this merger. "... Many analysts believe APP overpaid for ABS and they turned negative on the stock, but, says Morningstar analyst Brian Laegeler, "the underlying business hasnt been affected"". Furthermore, she projects the earnings and profitability to increase after the merger. Five year revenue growth is expected to be 33.4% and earnings growth of 61.8%. Morningstar estimates the stock to be selling 25% below its market value.

Obviously, the company's profit engine is Arbaxane. The 10-K had the following to say about Arbaxane (developed by ABI ) prospects.

ABI, which is responsible for the clinical development of Abraxane® under the license agreement, has embarked upon an aggressive and comprehensive clinical development plan to maximize the commercial potential of Abraxane® in cancers involving the breast, lung, prostate, ovary, cervix, head and neck, pancreas, stomach and skin. Approximately 77 Abraxane® clinical studies (including investigator-initiated studies) were planned or underway as of December 31, 2005 .

Let us look at the balance sheets to see how the company did in the past year. Although past performance is not indicator of the future, it does give some indication of how the company is doing.

Net sales increased 27% in 2005 from 2004. Sales increased by 14% in 2004 compared to 2003. The operating income increased by 27% and 69% respectively in the two years. The stock holders equity a.k.a book value increased by 40% year over year in 2005 compared to 2004.

The only damper is the pending merger which will cause the company to issue 134 million new shares to take the total to 206 million shares altogether. This will take the market cap of the combined company to 5.84 billion if the stock price stays at the current levels. If we assume that ABI doesnt add anything to the revenues by merging but only provides full access to the cancer drug. This means the P/E of the stock will jump to 87 from its current levels of 27. If the stock jumps to 40 as suggested by Business Week, the P/E will jump to 110. Also, the merger will cause APPX not to pay the royalty and split its profits with ABI. With 90% growth in oncology products year over year, the elimination of royalty payments should help reduce the P/E to below 100.

Still, if Business Week analysis is to be believed, the stock is selling at a discount to its fair value at current levels. The article assumes upside for the merged company because of the higher profit margins for the cancer drung.

CarMax (KMX) Analysis

CarMax is a growth stock and was recommended by businessweek in one of their recent issues. In this segment, we look at CarMax and see if it looks like a good investment.

From its 10-Q, the description of CarMax business is noted below:

CarMax, Inc. ("CarMax" and "the company"), including its wholly owned subsidiaries, is the largest retailer of used cars and light trucks in the United States. CarMax was the first used vehicle retailer to offer a large selection of quality used vehicles at low, "no-haggle" prices using a customer-friendly sales process in an attractive, modern sales facility. CarMax also sells new vehicles under various franchise agreements. CarMax provides its customers with a full range of related services, including the financing of vehicle purchases through its own finance operation, CarMax Auto Finance ("CAF"), and third-party lenders; the sale of extended service plans; and vehicle repair service.

CarMax business is also seasonal. As noted below from its 10-K:

CarMax’s business is seasonal. Most CarMax superstores experience their strongest traffic and sales in the spring and summer fiscal quarters. Sales and gross margins are typically lowest in the fall quarter, which coincides with the new vehicle model-year-changeover period. In the fall quarter, the new model year introductions and discounting on model year closeouts can cause rapid depreciation in used car pricing, particularly for late-model used cars. Seasonal patterns for car buying and selling may vary in different parts of the country, and as CarMax expands geographically, these differences could have an effect on the overall seasonal pattern of the company’s results. In addition, the growth in sales to subprime customers, whose buying activity tends to peak early in the tax refund season, could modestly affect the seasonality.

KMX is a through and through growth story. From its inception in 1996 till to date it has grown revenues and profits consistently. The EPS for the stock declined in 2005 compared to 2004. This is one of the reasons the stock hasnt moved up a lot. Again from 10-K

"We believe the primary driver for future earnings growth will be vehicle unit sales growth from comparable store sales increases and from geographic expansion. We target a roughly similar fixed dollar amount of gross profit per used unit, regardless of retail price. Used unit sales growth is our primary focus. In fiscal 2006, we plan to focus our store growth primarily on adding standard superstores in new mid-sized markets, which we define as those with television viewing audiences between 1 million and 2.5 million people, and satellite fill-in superstores in established markets. We also are broadening our store base in the Los Angeles market, with one additional superstore opened in fiscal 2005 and two additional superstores opened early in fiscal 2006, which gives us a total of five stores in the Los Angeles market. We plan to open used car superstores at a rate of approximately 15% to 20% of our used car superstore base each year. For the foreseeable future, we expect used unit comparable store sales increases to average in the range of 4% to 8%, reflecting the multi-year ramp in sales of newly opened stores as they mature and continued market share gains at stores that have reached base maturity sales levels."

The company also states the projected earnings per share in 2006 in its 10-K.

"We currently expect fiscal 2006 earnings per share in the range of $1.20 to $1.30. We expect CAF income to increase only slightly from the fiscal 2005 level, as projected continuing interest rate increases will likely cause our cost of funds to once again rise more rapidly than consumer rates. Consequently, we expect CAF’s gain spread for fiscal 2006 to be slightly below the normalized range of 3.5% to 4.5%. "

The growth rate is 20% while accomodating the cost associated with the opening of new stores.

Let us take a look at the CarMax balance sheets to see how the company is doing.

On a positive note - the stock holders equity or book value increased by 17% to 800,976 million inspite of the EPS going down on a per share basis from the previous year. The company makes money primarily by selling used cars. Although the compnay does sell new cars, the new cars make a small percentage of the total revenue of Car Max. The company earns 11% of its earnings through financing. The rest of the income comes through the margins for used/new cars. Interestingly enough - the company earns better margins through the sale of used cars than the sale of new cars. The margins are in the 11% and 3% range respectively. If the business week story holds true - one can expect operating earnings growth of 25% per year for the next five years from CarMax.


Here are some comparisons between NDAQ and NYX. ( my opinion ofcourse ) Do you have other points?

  1. Trend - Every IPO has had a pop. CME, NDAQ after going public. Advantage NYX.
  2. Size - The market cap of all securities listed in NYX is 20+ trillion. NDAQ is 2.2 trillion. NYX market cap is four times that of NDAQ. Advantage NYX.
  3. Revenues - NDAQ recovered after years of stagnant/declining growth after buying INET and others. NYX has had steady revenues and Archipelago is gaining market share. Advantage NYX.
  4. Stock dilution - NYX former seat holders will oppose significant dilution by acquisitions without adding value. Advantage NYX.
  5. Listing companies - NDAQ fees are lower. Advantage NDAQ.
  6. Cost cutting upside - NYX has been a non profit. ( Grasso's pay excess is one example ). More opportunities to cut costs to make it a leaner organization. Advantage NYX.
  7. Moving the big board to electronic trade - neutral for the moment.
  8. Valuation - Difficult to put proper numbers around NYX right now - neutral for the moment.

Saturday, March 25, 2006

Nasdaq (NDAQ) Analysis

Nasdaq is a leading provider of securities listing, trading, and information products and services. Nasdaq gets revenues from transaction services, market data products and services, listing fees, and financial products. NDAQ operates The Nasdaq Stock Market, the largest electronic equity securities market in the United States, both in terms of number of listed companies and traded share volume. As of December 31, 2005, NDAQ was home to approximately 3,200 listed companies with a combined market capitalization of over $3.8 trillion. NDAQ also operates The Nasdaq Market Center, which provides market participants with the ability to access, process, display and integrate orders and quotes in The Nasdaq Stock Market and other national stock exchanges. Transactions involving 363.3 billion equity securities were executed on or reported t in 2005, 13.9% higher than the 319.1 billion in 2004.

Nasdaq business can be divided into two major segments: From NDAQ - 10Q

Issuer Services. Our Issuer Services segment includes our securities listings business and our financial products business. The companies listed on The Nasdaq Stock Market represent a diverse array of industries including information technology, financial services, healthcare, consumer products and industrials. We also develop and license financial products and associated derivatives based on Nasdaq indexes. These include the QQQ, which is an exchange traded fund, or ETF, based on the Nasdaq-100 Index. The QQQ is one of the most actively traded ETFs in the world and the most actively traded listed security in the United States. We have also introduced financial products based on other Nasdaq indexes, including the Nasdaq Composite Index and the Nasdaq Biotechnology Index. In addition, we generate revenues by licensing and listing third-party structured products and third-party sponsored ETFs.

For the year ended December 31, 2005, Issuer Services accounted for revenues of $226.1 million, which represented 25.7% of our total revenues and 43.0% of our gross margin (total revenues less cost of revenues). See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements.

Market Services. Our Market Services segment includes our transaction-based business and our market information services business. The Nasdaq Market Center is our transaction-based platform that provides our market participants with the ability to access, process, display and integrate orders and quotes, which enabled our customers to execute trades in over 7,700 equity securities during 2005. The Nasdaq Market Center allows us to route and execute buy and sell orders as well as report transactions for Nasdaq-listed securities and those listed on national stock exchanges, including the New York Stock Exchange, or the NYSE, and the American Stock Exchange, or the Amex, providing fee-based revenues. We also generate revenues by providing varying levels of quote and trade information to market participants and to data vendors, who in turn sell subscriptions for this information to the public. Our systems enable vendors to gain direct access to our detailed order data, index information, mutual fund pricing information, and corporate action information on Nasdaq-listed securities.

For the year ended December 31, 2005, Market Services revenues were $653.6 million, which represented 74.3% of Nasdaq’s total revenues. Market Services gross margin was $299.7 million, which represented 57.0% of total gross margin. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements.

NYX's acquisition of Archipelago and Nasdaq's acquisition of INET is making the two exchanges go head to head as competitors. Nasdaq charges lesser fee for companies to list in Nasdaq where as Nyse charges a higher fee. Nyse has reduced its maximum fee to half a million dollars a year from a million dollars a year. Nasdaq already has a lower maximum fee of $75,000=00 a year. Nasdaq's growth strategy is through acquisition as seen by Nasdaq's bid for London Stock Exchange. There could be considerable stock dilution beause of these acquisitions. This is also the case with Nyse - however, the presence of former seat holders is a blocking factor against significant dilution.

Let us now take a look at the balance sheets to see how NDAQ is doing. The NDAQ stock has done extremely well going from a low of about $5=00/share in 2004 to the current levels of $40=00/share. The company swung to a profit in 2005 from a loss in 2004. The revenues increased in 2005 primarily due to the acquisition of Inet after years of declining revenues. The overall revenues in 2005 increased to 62% from 2004. The stock holders equity increased in 2005 by 60% from 2004. However, the stock dilution increased by 42% in one year. The revenues are growing at 30-50% range on a year over year basis.

According to the analyst opinion, the EPS is expected to grow by about 17% this year and more than 200% in the coming year. NYX looks like a better bet than NDAQ at the moment primarily because of Archipelago gaining market share and possible cost optimizations in the big board. Hilary Kramer sums up the stock best - as the stock for risk takers with a potential upside at $50=00 in the next eight weeks.

Chicago Mercantile Exchange (CME) Analysis

Chicago Mercantile Exchange (CME) is the largest futures exchange in the United States for the trading of futures contracts and options on futures contracts, often called derivatives, as measured by 2005 annual trading volume. In 2005, the yearly trading volume of our products surpassed one billion contracts. CME posted record trading volume of 1.0 billion contracts in 2005, an increase of 33% over 2004, which was previously our busiest year. . CME's key products include CME Eurodollar contracts and contracts based on major U.S. stock indexes, including the S&P 500 and the NASDAQ-100. CME also offers contracts for the principal foreign currencies and for a number of commodity products, including cattle, hogs and dairy. CME is the clearing house for CBOT - Chicago Board of Trade.

CME - according to its 10-K has the following strengths.
• highly liquid markets
• global benchmark products
• diverse portfolio of products and services
• wholly owned clearing house
• proven and scalable technology and
• global reach.

CME has the following growth strategy
- expand our current core business;
- add new products;
- provide processing services and other business services to third parties; and
- pursue select alliances and acquisitions.

Now let us take a look at the financial data to see how CME is doing.

In 2005, the stock holders equity increased by 37% to 1.127 billion from 2004. In 2004, the stock holder equity was 812 million. The investment income increased three fold in 2005 from 2004 and again three times in 2004 compared to 2003. The interesting thing however is net income from operations. The net income increased by 37% in 2005 from 2004 and by 80% in 2004 from 2003.

From the stock dilution point of view - CME has diluted by 1.25% in 2005 from 2004. The dilution is reasonable and not over the top. Income per share increased by 37% in 2005 from 2004 and by 77% in 2004 from 2003.

However, the EPS growth has slowed in 2005 from 2004. The expectation is for the growth to slow further to around 25% per year in 2006 from the mid 30% in 2005. The growth is further expected to slow to 20% in 2007 from 2006. The forward P/E for the stock is at 39 and the trailing P/E is 49. The stock is fully valued at its current levels of $435=00/share. I would continue to monitor the stock for dips and possibly buy it when it dips.

Saturday, March 18, 2006

Buffalo Wild Wings (BWLD) Analysis

Buffalo Wild Wings (BWLD) is a small cap stock in the restaurant business. From BWLD 10K, we get a good description of the business.

We are an established and growing owner, operator and franchisor ofrestaurants featuring a variety of boldly flavored, made-to-order menu itemsincluding our Buffalo, New York-style chicken wings spun in any of our signaturesauces. Our restaurants create an inviting neighborhood atmosphere that includesan extensive multi-media system, a full bar and an open layout, which appeals tosports fans and families alike. Our concept offers elements of the quick casualand casual dining restaurant concepts featuring a flexible service model thatallows our guests to choose among convenient dining options such as quick casualcounter service, casual dining table service or take-out. Our award-winning foodand inviting atmosphere, combined with our guests' ability to customize theirdining experience, drives guest visits and loyalty.

BWLD has about 350 restaurants in about 35 states in the U.S. Management clearly states its operational goal as follows:

Our goal is to continue to grow and develop the Buffalo Wild Wings(R)Grill & Bar concept into a leading national restaurant chain. To do so, we planto execute the following strategies:
o Open restaurants in new and existing markets;
o Offer boldly-flavored menu items with broad appeal;
o Create an inviting, neighborhood atmosphere;
o Enable our guests to customize their dining experience;
o Continue to strengthen the Buffalo Wild Wings brand;
o Focus on operational excellence;
o Increase same-store sales and average unit volumes.

In other words, BWLD is a growth story. One can realize stock appreciation through growth of the company. Let us take a look at the balance sheets to see if this is a worthwhile investment at this time or not.

The company was has grown revenues at 37% rate in 2004 and 25% rate in 2005. The operating income has increased at the rate of 49.4% in 2004 and 22% in 2005. The operating expenses - especially the labor costs increased at a faster pace causing the decline in operating income compared to revenue growth. The EPS increased 33% and 19% repsectively in the last two years. The stock dilution is at 1.22% in 2005 which is pretty reasonable.

Looking at the balance sheets, the companies growth is slowing and EPS is declining. However, the companies shares are trading at a P/E of 38. The next thing to check for is the companies guidance for expansion in the upcoming years to see if the company has enough growth to justify the price.

BWLD's goal is to grow the number of units to 1000 nationally in the next several years with a yearly unit rate growth rate of 20%. The company primarily plans to expand in places where it already has a presence. It also plans to keep an eye on the cost of materials which tends to vary significantly. On the positive side, the operations side of the company doesnt require much expertise and can be learned fairly easily. Food and non alcoholic beverages account for 71% of the company revenues while alcoholic beverages account for 29% of the companies revenues. 25% of the companie's revenues come from the sales of chicken wings. The establishment of new restuarants is not a guarantee for increased revenue growth.

It is a safe bet that BWLD can grow in the 10-20% range for the next few years. Given the P/E, this growth is already factored into BWLD price. The analyst consensus price estimate of $41 for this year doesnt give much upward room at current prices.

Google and Yahoo! analysis update

In the prior article we analyzed Google and Yahoo!. We found that there is more downside risk in owning these stocks inspite of what Cramer says in his MadMoney show.

The cnn article below discusses on how Google's growth rates are slowing to 50-60 this year and to about 40 next year. This is lower than my earlier expectation of 60-70% growth this year and 40-50% next year.

We analyzed in the past segments that search is going to be a three way fight between Microsoft, Yahoo! and Google.

We are going to see declining P/E ratios at both Yahoo! and Google as the search battle intensifies. Microsoft is already loosening the purse strings by offering cash to people to use MSN Search. Expect Yahoo! to do the same as they figure out how to roll out their own adsense program within a year.

I think the Google model is still very viable but the catch is to diversify the revenue stream quickly. With the P/E declines, Google can expect to see its price decline further or remain steady. With 50% growth this year, Google's earnings will be 7.53/share. With 40% growth next year, Google's earnings will be about 10.54/share. If we take a P/E of 35 to account for further deceleration in Google's P/E, we are looking at a price of 370=00 in 2008. This is still up of about 8.8% compared to Friday's price. I can make about the same investing in U.S treasuries at 4.5% with zero risk in two years.

This doesnt account for competitive pressures in the ad market, more expenses because of additional stock compensation or venture into additional markets to increase revenue. It is likely all three will happen simultaneously.

Yahoo! price point is still not attractive to buy the stock. The growth rates for Yahoo! should decline further next year compared to this year. The stock is fully priced at the current levels and it doesnt provide any significant advantages over the treasuries at this time.

Thursday, March 16, 2006

Berkshire Hathaway (BRKA) Analysis Updated

In the previous articles ( links noted below ), we analyzed Berkshire Hathaway's annual earnings and its potential liquidation value.

In the article in January, we expected the liquidation value to be around 83,100 by the end of 2005 with more solid growth this year. Let us revisit the analysis and the factors for and against further appreciation in Berkshire's sharevalue.

Looking at the creativeacademics site, we get the following numbers.

current liquidation value: 83476
current conservative value: 112127
current cost of capital value: 123029
current optimistic value: 161427

The intrinsic value grew by 8.2% between 2005, 13.2% in 2004, 17% in 2003 and 13.5% in 2002.

The intrinsic value growth declined in 2005 compared the previous two years - does this mean the prospects for continued growth in intrinsic value are lower moving forward? Probably not as the hurricanes Katrina and Rita wreaked havoc this hurricane season. We would need to see further acquisitions for the IV to grow years down stream and an increase in equity investments in the large cap, international sectors.

Another factor not working in Berkshire favor is that the large cap value stocks are out of favor with the market at the moment. This is causing some very good buying opportunities. The small cap rally has lasted for a while and is likely continue this year. However, in general small caps are not as attractive from a valuation view point as large caps are at the moment. When the large caps come into favor, expect the rally to last four-five years with significant upside in share prices in the entire sector. analyzed the returns by large cap and small cap value, growth over the past eighty years and came up with these numbers.

Large Cap Value: 9.21%
Large Cap Growth: 6.17%
Small Cap Value: 12.13%
Small Cap Growth: 5.77%
Total Stock market:6.72%

Currently, large value is lower in price compared to small value from P/E perspective by atleast two points if not more. If the hurricane seasons dont end up being as bad as 2005, the next few years should be good in general for the economy and the market as a whole.

As for the price of Berkshire - impossible to say when it will start moving, but this stock is currently in the deep value territory with solid earnings. If the Fama and French three factor model holds good ( ), this stock should eventually do well.

Saturday, March 11, 2006

NYSE Group (NYX) Analysis

NYSE Group Inc. went public last week. In the past years, Chicago Mercantile Exchange has done extremely well after going public. This blog takes a look at NYSE Group and its financials to see if NYX can have the same upside.

From the investor relations site, we have the following information about NYX.
NYSE Group, Inc. (NYSE: NYX) is a holding company that, through its subsidiaries, is a leading global multi-asset financial marketplace that operates multiple securities market centers, including the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or Arca Ex®, and the Pacific Exchange). Through these market centers, the NYSE Group is a leader in securities listings, market-information products and services, and offers a range of investment vehicles and order execution services.

Nyse is a leader in its field - providing the largest and the most liquid equities market. On an average day $69billion worth of transactions are carried out in NYSE with an average volume of 1.8 billion. The market capitalization of listed securities is 22.5 trillion.

Since NYX is a merger between NYSE and Archipelago, we will look at the individual companies to see their strengths. NYSE has acted as a non profit organization whereas archipelago was a for profit organization.

The NYSE Group revenues are flat around 1 billion dollars between 2003 and 2004. The listing fees the company charges for listing has increased while revenues through other streams remained steady or slightly declined. The company makes money by charging data processing fees, market information fees, trading fees, regulatory fees, facility and equipment fees, membership fees and through investment income.

We wont go in to the financial details as they are a bit old. However, some trends are worth noting. Number of companies listed on NYSE continues to increase as does the stock volume. Given the continued globalization in the world economy, we should continue to see an increase in this trend in the upcoming years. This will be offset by declining fees charged for equity trades. One other factor to notice is members equity in NYSE has increased over the past several years.
This bodes well for the stock holders of this company.

ArcaEx on the other hand has been a growth story through and through. It has been growing market share in Amex, Nyse and Nasdaq every year. Its overall U.S market share has grown from 8.9% to 14.2% from 2002 to 2004. Meanwhile revenues have grown from 357 million to 541 million in the same period.

The combined company has about 1.6 billion in revenues and 11.8 billion in market cap currently. While this stock is not going to be a ten bagger like Chicago Mercantile Exchange, the global trends definitely give this stock some upside in the next three years.

Sunday, March 05, 2006

LEG Updated Analysis

In the previous article, we looked at LEG balance sheets and analyzed its prospects. The link to the previous article is in:

As noted in the above report, LEG has a very disciplined and principled management. The pointer to the companie's investor relations page is Very few companies state their objectives as clearly as LEG does. This is one of the reasons I like this company.

LEG revenues increased by 2.83% in 2005 compared to 2004. This is a significant drop from close to 16% revenue growth in 2004 compared to 2003. The previous two years, revenue growth has been somewhat stagnant at 2.73% and and 3.8% respectively.

Let us look at the 10-K form to see what management thinks the prospects of the company are for the next year.

The company has assets worth about $13/share. This is after subtracting the liabilities from the balance sheet. If one takes into account cash flow from operating activities, it has averaged about 400 million dollars per year for the past three years. Assuming 7% growth in cash flow and a 5% discount, in five years, there should be another 2billion added to the balance sheet. Subtracting the dividends paid, there should be about 1.350 billion dollars left over. If this is added to the assets the value of the stock is about $20=00. This doesnt count in the dividends. Including the dividends - the stock is currently rightly valued at 23-24$/share. The company is pursuing some acquisitions and if all goes well - there is more of an upside to the stock.

Saturday, March 04, 2006

Berkshire Hathaway (BRK.A/BRK.B) Analysis

In the previous report, we analyzed Berkshire Hathaway's third quarter results. which were good accounting for Hurricanes Katrina and Rita. In this section, we analyze Berkshire's earnings for 2005 and its outlook for 2006.

The fourth quarter earnings and Warren Buffetts letter to share holders are both a bonus. First, Berkshire did remarkably well in the earnings front in the fourth quarter. Berkshire earned 3,331 dollars in the fourth quarter to put up the best year ever in terms of earnings. Investment and derivative gains made 41% of the earnings this year. Even considering that, Berkshire's earnings in the fourth quarter beat the analyst estimates by almost a thousand dollars to 1965.00.

Let us do a rough estimate of Berkshire's intrinsic value. As denoted in the annual report, the per share amount is 59,377.00 dollars. This is an increase of 6.35% from the year before. In addition to this, Berkshire earned $5538/share. The average in the last three years has hovered around $5000=00. Putting a P/E of 10 against the earnings yields $50000=00/share. Adding the two, one gets an intrinsic value of 109,377=00/share.

This however doesnt account for the company operations in 2006. The companies revenues increased by 9.8% in 2005 compared to 2004. This compares to growth rates of 16% in 2004 from 2003. The company should do well in 2006 as MidAmerican comes under Berkshire fold where Berkshire will own 89% of the holdings. As the merger of Pacificorp goes through this year, it should add further to Berkshire's bottom line. Even if large hurricanes hit the gulf coast, the company has taken adequate precautions to underwrite policies more carefully. All in all, 2006 looks like a good year for Berkshire.

Separately, Warren Buffett also cleared the issue of succession which has been holding this stock back clearly in his letter to share holders. Warren disclosed that a person has been chosen to replace him if were to pass away or get incapicitated. He also mentioned that he remains in excellent health which is a good news to Berkshire share holders. It remains to be seen how Berkshire stock does in the coming week. As we discussed in the previous article, the stock will be a great buy below $86,000=00/share. In the past several years, the stock has done badly after announcing full year results. It is unlikely the scenario will repeat this year - however, I am ready to pick up some stocks if the price points fall below $86,000=00/share.

Wednesday, March 01, 2006

Apollo Group (APOL) Updated Analysis

We analyzed Apollo Group sometime back and liked the stock.

In this article, we liked the industry Apollo operated in and also its growth prospects. We noted however, that the stock is not cheap.

Yesterday, the company issues a profit warning for the current quarter. The earnings are expected to be 8-9% lesser than expected for the quarter. The revenues are going to lower by about 3%. The company has not given guidance for the rest of the year on this stock. The stock duly took a beating and lost approximately 15% of its value.

The stock is still not cheap after yesterday's drop. The expenses increased sharply at Apollo diluting earnings per share. The reason for increased expenses is not clear. It is also not clear if this is a one time event. The revenues are slightly lighter. It remains to be seen if the company is suffering from a resurgent economy (less need to retrain oneself as jobs are easier to come by) or some other fundamental shift. The report by the company in the second half of this month should provide more answers.