The market is running in place today as it awaits further earnings and macro news later this week. The big M&A news today is that Schlumberger is buying Smith International for $11B, while the big T&A news today is that Rhian Sugden is hot. Schlumberger, which sounds like what is served for lunch in Berlin on the set of scat films in order to best prepare actors for their upcoming scenes, is purchasing Smith to improve their drilling technology. Wow, $11B seems like a lot of dough to get better at drilling when if they really wanted to learn how to drill better they could have just rented a Peter North compilation video for $5 and gone on their way (thanks, I'll be here all week, enjoy the soup). This is the biggest M&A deal of the year so far and with rates as low as they are and only likely to go up (since it's unlikely Bernanke would lower them below zero and thus pervert the entire financial system like Roman Polanksi on the set of High School Musical 4: Who Ordered the Pizza?), Money McBags is betting the M&A market only heats up from here so it is worth looking at small take-out candidates (like KITD or Meredith Eaton).
In international news, the Euro continues to sell off as investors grow more worried about Europe slipping back in to recession as a result of the potential Greek bail out. The WSJ has a long and narcolepsy curing expose today on Europe's clandestine use of complex financial instruments to prop up their economy over the past few years which served to hide the actual amount of debt and deficit on the continent. Apparently European countries used currency swaps like a tranny uses a gaff to doll themselves up and make themselves presentable. Well with Greece leading the debt spiral, Europe's adam's apple is beginning to show and those investors who put money into Europe and quietly wondered why Europe would only give them moderate returns (oral) are now finding out exactly why that was. Things are still a bit dodgy overseas which will likely cause further market volatility over the next few weeks, but it could also offer some solid opportunities.
In market news, Lowe's put up a good Q with top line revenue growth of 2% and 27% growth in earnings as they beat estimates by $.02. Lowe's CEO said the results ''suggest the worst of the economic cycle is likely behind us" and cited an uptick in the sale of big ticket items, like bulldozers to demolish foreclosed upon houses and storage sheds to keep one's valuables while the owners huddle in masses of cardboard boxes yearning to breathe air free from pollutants and disease. Lowe's gave conflicting guidance saying they expect the recovery to boost sales but that the spring quarter's profit will be below expectations and as a result, the stock is flatter than the singing voice of an American Idol contestant or the state of Illinois.
In the small cap space RICK is shaking off their awful quarter (which Money McBags broke down for you last week) and is up 10%. Now loyal readers know Money McBags was more disappointed with Rick's quarter than Abraham Lincoln was with General McClellan's slow pace in 1861, but somehow investors seem to be buying into the VCGH deal. Money McBags was considering selling some RICK after the Q, but he is glad he held on for now. That said, his target price was $16 and as RICK inches closer to that Money McBags will be reevaluating the company more often than Elin Woods reevalutes marriage or Christopher Reeve reevaluated riding horse back. In other small cap stocks, CTGX (a holdng of Money McBags) is due to report this week. CTGX has two businesses, one of them is basic, boring, and less sexy than Betty White in a GMILF video, and the other one has the potential to be hotter than any of the great Janine Lindemulder's classic Where The Boys Aren't movies. Their boring business is basically staffing and solutions to IBM for IBM's server installation business. CTGX provides people and knowledge to allow IBM to outsource this function. It's more boring than a Jane Austen novel and they have less control over it than an incontinent has over their urethra after drinking a 7-11 Big Gulp. Basically, if IBM is installing servers, CTGX gets work, if not, there is nothing they can do about it. The problem with this is that the staffing business has 3% margins and is 2/3 of their revenues with IBM being about 1/2 of that (and for you non-maffematicians, 1/2 of 2/3 is 1/3). Plus that business has been down 40ish% due to the economic decline. This is one of the reasons they started a new strategy a few years ago to focus on the health care IT market. The most exciting part of this strategy has been their foray into the electronic medical records business. Say what you want about Obama-care, but EMR is coming and the government will be funding it. CTGX's health care IT business is now 25% of their revenues and growing (with EMR being about 1/3 of that). They are one of only 8 companies that can install EMR systems and they focus on the smaller hospitals and charge on the order of 40% less than competition (which of course means they can move their price up as the demand picks up). The goverment is already giving big monetary incentives to hospitals to install EMR but are mandating that hospitals have these systems up and running by 2015. Now look, Money McBags is not a health care expert but he does know there are a fuckload of hospitals and only 8% of them currently have adequate EMR systems. So the demand is going to be huge while the supply is shorter than a Britney Spears mini-skirt or an Ogden Nash couplet (for example, the government thinks it will take 212k people over ten years to install adequate systems and there are currently only 10k people trained to do this). CTGX won 6 new EMR deals last Q but they say the market is still slow as hospitals are having trouble getting funding due to banks tightening up on lending. That should pass and government incentives are picking up and CTGX thinks this business will take off in 2011. The company is trading at around 20x 2010 earnings estimates which is hella expensive for a 3% operating margin staffing business, but their health care business has higher margins and is growing. CTGX is basically an option right now. As long as their staffing business doesn't completely fall off (and it appears to have stabilized), they should earn enough in the next few years to support their EMR busines while it continues to grow. It's a small position for Money McBags as it is a bit early, but it will be interesting to see if their core business was able to maintain in the past quarter.