2/2/10 Midday Report: Volcker to Banks: "Prop trade this!"

The market is bouncing back today even though it is a relatively quiet day news wise (though not as quiet as a Lindsay Lohan straight to video movie premier or a Trappist monk game of hide and seek).  Pending home sales in the US rose 1% after falling 16% last month thanks to renewed tax credits and something called math.  Sure the 1% rise is good, but it is still down 15% from October, so let's not break open the bottles of Dom and tins of beluga just yet.  The biggest problem with home sales is that frictional unemployment has dropped the frictional and is just plain old unemployment.  People are no longer moving between jobs and thus moving to new houses because, to close the transitive logic,  there are no jobs.  Also, Paul Volcker is supposed to testify in front of the Senate Banking Committee today where the 82 year old will rant about proprietary trading at banks, how he used to walk 2 miles up hill both ways to get to school, and then wonder why none of the dames look like Clara Bow anymore.  The banking industry awaits Lord Volcker's testimony like a necrophiliac awaits the cremation of a loved one.

In global macro news, Australia held their interest rates flat which was somewhat of a surprise since their economy is healthier than a vial of Jack LaLanne's urine (and that is for my older readers, but I can assure you young'ens out there that there is nothing on this planet healthier than the dickwater of the workout guru Mr. LaLanne who even at the age of 96 still can still rip a man's heart out with his pinky finger).  For those sheltered Americans out there, Australia is more than just boomerangs, crocodiles, and Miranda Kerr and Patsy Kensit pillow fights (though if it were just Miranda Kerr-Patty Kensit pillow fights, that would be sufficient).  For the past several years Australia has benefitted from being close enough to China to supply it with natural resources out the wazzou while serving as a middleman in the shipping/trade business.  Additonally, their banks missed out on the opportunity to cut up packages of mortgages and sell them for additional yield by inflating the mortgage market through lending money to speculators who bought and then sold houses to other speculators who couldn't afford the houses in what is known now as the subprime vicious circle (and the circle was even more vicious than a daisy chain at an overeaters anonymous meeting).  The point being, Australia has had a robust economy during this downturn and thus Australia holding their rates is a bit of a good sign that inflation is not running away, but it is more likely just a pause in their monetary rate hikes

As for stocks, Lexmark put up a huge quarter tripling earnings to $.76 a share and giving guidance for next Q of $.80, thus besting the $.62 earnings per share estimates.  The printer maker also beat revenue projections and attributed their success to strong customer demand and the fact that HP makes such shitty printers.  UPS also saw profits triple, yet their topline was down 2.5% and their CFO said the first quarter ''will be the most challenging of the year.''  He then said it will be more challenging than the time they tried to ship a plane full of angry circus bears who hadn't eaten in a week.  However, the CEO said "It looks like this recession is finally over," so I guess there's nothing to see here.

In small cap news, ARTG was upgraded or maintained at strong buy today by most analysts on the street even though they chose to dilute shareholders yesterday like ice cubes in a Makers Mark at an overpriced NYC bar.  Money McBags addressed this in yesterday's Midday Report and its comments section, but ARTG has plenty of cash on their balance sheet so the capital raise is likely for a big acquisition and thus investors need have confidence in ARTG's management team's ability to negotiate and integrate a large deal before they become shareholders.  Estimates are for around $.20 earnings for 2010 but $.25 could be reasonable so the stock isn't expensive (nor extremely cheap) at 16x to 20x earnings.  COOL is up 5% today as investors perhaps forgot the assrapingly bad Q they recently put up (here were Money McBags thoughts) though this should give shorts a better entry point.  And TSYS was initiated as a buy by JP Morgan and a $12 price target and this is a company Money McBags has followed off and on for a while and used to own.  They basically provide licenses for text messaging to carriers, location based services (like E911), and satcom solutions for the government.  You really only need to know that text messaging is still growing 100% a year (TSYS powered almost 2B messages a day last year, which is fuckload of teenagers saying "cu l8r") and they provide gateways for carriers to be able send these volumes of text messages.  These licenses are sold as a step function so the company's revenues haven't scaled lockstep with the exponential growth of text messaging, plus there is competition and the pricing keeps coming down.  That said, they did recently get a new deal with Verizon and their government business has been a solid performer.  Estimates are for TSYS to earn $80MM of EBITDA in 2010 and they are currently trading at around 6.5x EV/EBITA.  That is very cheap for a company that can still grow 20%+ (though the growth rate has been declining and that is not all organic growth).  Today may be a good entry point though as the stock has been trading down and earnings are in two days so the JP Morgan analyst would not want to release a glowing report of the company two days before earnings were he/she not confident in the numbers.  Now look, Money McBags is prone to mocking analysts like Adam Sandler is prone to starring in bad movies and Alexis Texas is prone to having to try on many pairs of jeans until she finds a pair to properly fit her best asset, so having faith in this JP Morgan analyst is a bit hypocritcial (though not as hypocritical as Larry Craig's gay rights (wide) voting stance), but the timing of the report should be a signal that TSYS's Q will be good or else the JP Morgan analyst is a complete dope (and unfortunately we can't rule that out, so let's say a 25% chance because JP Morgan is mildly reputable).  It may be worth picking up some shares for at worst a trade.  Money McBags does not own TSYS right now but may buy some before earnings after he does some more digging.  If any of you have done work recently on TSYS, feel free to share with the rest of us, and if any of you have Hayley Atwell's phone number, feel free to share that too.

2/1/10 Midday Report: Pat Sajak miffed as $3.8T budget allows government to buy as many vowels as they'd like.

Obama's budget is out and it looks like more stimulus is coming as the administration continues to try to sweep the recession under the rug (though I hear it is a delightful afgahn this time as Mrs. Obama has uncomparable taste).  The budget is roughly $3.8T which is equivalent to 190MM lap dances or as it is known in the NFL, "Wednesday."  Who knows, spending our way out of this recession may work, as I have found that spending my way out of depressions by dropping $20 bills like they're unpinned hand grenades (which is fast, furious, and with immaculate precision) at my local Rick's cabaret, is a suitable remedy.  Basically, the new budget is attempting to buy more time for the economy to recover on its own while channeling its inner Keynes and hoping the multiplier on GDP is somewhere near 1 billion.  Given the exponential pace of technological innovation and Keynes' logically thought out and unprovable equations (like all of economics with its oh so idealisitic goals which never work in the complexity of the real world, like a contractor with no competition or anything made in China) it is possible it could work.  The only problem is it gives investors more mixed signals than an indecisive three year old with tourettes.  Q4 GDP seemed decent, but it was driven largely by stimulus spend so it is hard to gauge if the economy really did improve (Money McBags maintains that inventories were just being built back up and may have even overshot their targets since consumer spend was stimulus driven).  Of course, to pay for the new stimulus, taxes will go up on the evil banks who we bailed out who continue to get money for free, big businesses, oil, gas and coal producers, people who make more than $250k, and Gabe Kaplan.  But fear not because the budget does contain a plan to trim future deficits to give or take $1T (that is unless things remain bad) so Keynesians can still rejoice that in either case the US will still owe a fuckload of money.

In macro news, the market is up today as the ISM reported that manufacturing in the US expanded at its fastest rate since August of 2004, back when everyone was buying new flat screen tvs for the 8 houses they were about to flip.  The index rose to 58.4, besting analysts forecasts and the 54.9 reading of December.  Anything over 50 signals expansion which means my pants are constantly over 50 whenever Jessica Simpson comes over for dinner.  Also, personal income was up .4% slightly ahead of estimates while consumer spending was also up .2% but below estimates.

In stock news, Exxon Mobil's proft fell 23% but they still beat estimates thanks to their exploration and production businesses as well as higher oil prices (OPEC this, bitches).  They did have some weakness in refining to the tune of a $287MM loss which may signal a shift from those gas guzzling SUVs and will likely require CEO Lee Raymond to stop double dipping his balls in gold (only one dip now Mr. Raymond).

In small stock news ARTG and ISYS both beat estimates and yet are trading very differently today with ARTG, to use a technical term, taking it in the yingus.  ARTG provides services to help power and optimitize e-commerce and we all know that even in this poor economy, e-commerce continues to grow faster than a Yeti's taint hair (and trust me that is fast, but don't ask how I know).   They earned $.06 non-gaap on 9% revenue growth and recurring revenue grew to over 50%.  They did around $10MM of EBITDA which would put them at a EV/EBITDA run rate of 10x to 11x but if they can continue to grow even modestly, they could earn almost $.30 next year.  With $85MM in cash, the company is now trading at around 13x next year's earnings with a nice cash cushion, though not as nice as Carmen Kinsley's cushion.  But here's the thing, they annonuced a 25MM share offering today despite all of that cash and gave the bland statement that it is for working capital and other general corporate purposes, such as possible acquisitions and the beginning of "Lobster Tail Tuesday's" in the company cafeteria.  With 134MM shares already outstanding, adding another 25MM dilutes the company by about 16% and thus the previous numbers all have to be reduced (the $.30 eps this year is more like $.25).  The stock is down 10% on the dilution, so actually up a bit on the decent quarter and now trading at around 16x a potential $.25 eps number which is still relatively cheap for a company growing like ARTG and selling at a lower multiple than comps.  The big unknown is why a company with $85MM in cash and with positive cash flow from operations who could have been an acquisition candidate themselves, needs to dilute shareholders for another $100MM.  Their biggest competitor is IBM so clearly $180MM is not going to allow them to take over Big Blue, so the question becomes who do they plan to buy with the capital raise or what business do they plan to enter?  Money McBags awaits to get some clarity on their use of cash but the company remains in an advantaged market and is trading at a reasonable, though not cheap multiple, so deserves paying attention to.  As for ISYS, they earned $37MM in revenue and had net income grow 50% to $2MM with gross margins expanding above their target 37% to 38.4%.  ISYS basically builds satellite systems for the military and after going through a few years of CEO turmoil and being in tertiary businesses, they have seemingly turned the company around and started to focus on their core capabilities.  The company has talked about a goal for 2010 of $20MM of EBITDA (analysts are closer to $15MM) and the company currently has about a $120MM enterprise value so is trading at 6x EV/EBITDA that goal.  Of course, the recent Q had $2.5ishMM of EBITDA so the $20MM relies on the rest of the year to pick-up.  They are up 5% today on their decent Q and if they can continue to improve margins and win deals, they could easily trade above $10.  It's not the sexiest company in the world, but the relaince on military spending which per Obama's new budget isn't subject to the discretionary freeze, should give them ample revenue opportunities.