7/12/10 Midevening Report: Hefner bid titilates Playboy stock, shares bust out

There was little news in the market today as investors waited for AA's earnings tonight as a signal of things to come as everyone knows aluminum production is what really drives the economy (and yes that was sarcasm).  Without much macro news other than shit continuing to get worse with temporary census jobs ending, republicans filibustering extended unemployment benefits to further punish the people who likely had little to do with the recession (other than likely borrowing way beyond their means), and no new actresses coming out as bisexual this week, we were left with a flurry of M&A driving the market (as opposed to a flurry of T&A, which likely would have led to a strong rise).

The biggest M&A deal occured between two companies about whom no one gives a fuck, as AON is purchasing Hewitt for $4.9B in cash, stock, and old actuarial tables signed by Elizur Wright.  While AON will be in flux for a bit, they should be able to immediately make use of Hewitt's human resource and outsourcing capabilities to fire the appropriate amount of people while making sure that everyone gets a smiley face cupcake.  Once done, they can further get value out of Hewitt's consulting business by leveraging them for a business case to try figure out why the hell anyone would have paid a 41% premium of 7.5x forward EBITDA for Hewitt.  Of course using their now fully owned Hewitt for that study would either be considered a virtuous circle, a vicious circle, or the least fun daisy chain since full bush was still in style.

In other M&A news, Hugh Hefner wants to take Playboy private (after years of taking it to his privates) at a 40% premium to current price, or about what he pays to the Shannon sisters.  Playboy magazine sales were down 48% in Q1 as the business continues to struggle with the invention of a little something called the internet where people can now read the hard hitting and biting journalism Playboy offers for free.  The company has gone through a major facelift over the past year by laying off staff, streamlining functions, and putting out bigger and more well-rounded (and very NSFW) articles.  The fact is, Playboy still has a recognizable and aspirational (as well as ass-pirational) brand and now that Hefner is opening up his robe for the company, there appear to be multiple bidders including PE firms, top competitor Friend Finder, and the creepy guy in the airport gift shop.  The company is definitely at a tipping point with the internet producing more free porn per minute than David Duchovny can view, but in the right hands, and with a stroke of luck, the brand could come strongly back. 

In other M&A news, BP may be selling assets in order to pay for a new Gulf.  The company is said to be in negotiations with Apache to divest $18B worth of some of the largest Alaskan assets in the world.  Finally, JNJ is buying MEND, a company that makes a device for treating brain aneurysms in stroke victims just in time to catch the growing popularity of the KFC Double Down.

Internationally, the European Commission came out with a reform package to boost consumer confiidence from "holy fuck we're screwed" to "at least we're not Kazakhstan."  The package includes EU-wide measures to protect bank account holders by guaranteeing savings accounts up to 100k euro and  investment accounts up to 50k euro while promising to pay account holders within seven days of the almost certain to come bank failures.  Lastly, China anounced exports grew by 44% as more people sink to poverty and can only afford the cheap shit made in China.

In large cap stocks, MSFT is up on news that they are going to make it rain in the cloud computing space by teaming up with Fujitsu to invest money in the growing cloud technology sector while GOOG continues to rise after having their license renewed in China.  Money McBags was told that to get their license renewed, GOOG just had to follow the chinese road rules of stopping at yellow lights, driving 20 miles under the speed limit, and using their turn signal sparingly.

In small cap stocks, NLS is up 16% on no news that Money McBags could find other than people hate making money.  If you remember back in December, longtime reader Matty McSacks hypothesized that NLS was worth ~$4 per share and it was trading at $1.85 at the time.  Money McBags looked in to the matter and thought those estimates seemed high since the company sells expensive discretionary items during a little bit of a recession and after a hella confusing quarterly release and a jump up, NLS has settled back to where it was at the beginning of the year with today's run up.  In their last Q, NLS trimmed their losses to only a loss of $.08 per share but their biggest segment, retail, shed 30% of their revenues as if revenue had spent the entire Q working out on a Mobia.  The drop in direct business was driven by a 37% drop in credit approvals from their finance partner and while Money McBags is no Fair Isaacs, it doesn't take Isaac Hayes to see that credit isn't going to get better anytime soon.  With the direct business lagging, gross margin dropped to 50% from 56% but thanks to restructuring, the company did away with $10MM of operating expenses which allowed them to lose only $2MM and have near breakeven EBITDA.  The company hasn't made money since 2006 and with the economy sputtering again, it's not clear who the fuck is going to be out looking for a new Universal machine to build muscle since they won't be able to afford to buy supplements to help maintain that muscle.  The only arguments that can be made for this company are that it is trading at ~.35 of sales, they didn't burn cash last Q, and they have ~$12MM of unrestricted cash which is ~20% of their market cap.  That said, rat tails, hammer pants, and Bea Arthur will come back before this company does as gyms aren't upgrading their equipment, people continue to get lazier and fatter, and those who used to be able to afford expensive clothes holders for their bedroom (which NLS machines invariably windup being), remember they have something less expensive called a closet and a floor.  So even though the stock is up big today signalling something is happening (like potentially a big short investor getting a capital call), Money McBags would not be a buyer because the consumer remains weaker than a virgin tequila shot.

And before we go, on Friday Money McBags told you about TSYS and the opportunity it presented for a short term trade.  The company was up 3.5% today (though on light volume) with IWO down ~120bps so something seems to be going on there.  The company is hella cheap and while their earnings releases and segment financials are more complicated to decipher than a Rube Goldberg contraption or what the fuck your lady friend is actually saying to you, they are in growing markets and seem to be winning business.  Money McBags doesn't have a great longterm feel for the company since he doesn't quite get the step function revenue stream of their text messaging business and why they never seem to make that next step up, but if they can really hit their guidance of $80MM-$85MM of EBITDA this year, this stock should see solid appreciation now that it has seemingly bottomed.

4/20/10 Midday Report: Goldman blows quarter out, then offers to blow SEC Chief of Enforcement Robert Khuzami as part of "settlement"

The markets are modestly higher today despite a blow out quarter by Goldman as other blue chip companies mostly met expectations and meeting expectations after an 80% market rally is like trying to impress Grigori Perelman with long division or Tommy Lee with a Hawaiian Tropic girl.  The big news is obviously that Goldman released their quarter today by smacking their CDOs on the table and yelling "Securities fraud this!"  They demolished analyst guesses of $4.14 eps by earning $5.59 per share on $3.46B of earnings which was 91% growth.  Though to be fair, it is not clear how much fraud and market manipulation analysts had in their models as Excel's goal seek function isn't yet equipped to handle that.  What's also amazing is how a company who produces nothing other than writing on paper can earn $3B. Anyway, the quarter was so jizztastic for GS that Lloyd Blankfein is going to spend the rest of the day at the spa getting his nails done so they will now match the drapes in his conference room.  But all is not well for Goldman, they still have to deal with the SEC's lawsuit about how they misled investors (but only on that one CDO, wink wink, and if you believe that, Money McBags not only has a bridge he'd like to sell you but he'll give you a great deal on it) and in the quarter they lowered their compensation payout from 46% to 43% so all of the traders who have been manipulating the market are now going to have trade down from a hooker a day to one every other day and might have to pass up on the third bottle of Dom at their local Rick's Cabaret.

There is no macro news out today and the only international news is that Greece's latest bond offering met strong demand.  Of course they had to double the previous yield on these short term bonds to 3.65% which was actually below estimates but still hella expensive for the ponzi scheme George Papandreou is running where he will gladly give you three souvlaki's and a glass of greek wine tomorrow if you pay him for one today.  The IMF is starting to get a bit frisky here and is warning about sovereign debt impeding global growth.  Wow Captain Obvious, you think?  Next week it is rumored that the IMF will issue warnings that staring directly in to the sun may cause blindness, eating foods high in saturated fats may cause obesity, and getting too close to Paris Hilton may cause herpes.

The real story of the day though is earnings with KO, IBM, and J&J mostly meeting expectations but trading down as the market demands quarters to be cleaner than an OCD sufferer's closet for stocks to appreciate.  KO's profit rose by 20% to $.80 per share taking out one-time charges while their revenue grew 5% to $7.53B.  The eps number beat analyst gueses by $.05 per share while the revenue number disappointed as analysts had guessed they would bring in $7.72B.  Driving growth was the international business which was up 5% thanks to Brazil and India where sugary sweetnees is still seen as the cool thing to do while North American sales fell 6% thanks to people avoiding higher end products and wanting their teeth to stay cavity free.  Money McBags is actually an owner of KO and bought more last week to get some market exposure from a blue chip stock that hasn't really participated in the recent rally.  Despite weak North America sales, KO isn't going anywhere and will be a place investors go for safety if the market gets chippy again or if it finally consolidates.  IBM's earnings rose 13%, they beat revenue and EPS guidance, and they raised their forecast for the year to at least $11.20 per share and yet the stock is trading down 2% because their service booking dropped 2% in the quarter, margins were slightly below forecasts, and Chewbacca was a Wookie.  Finally, JNJ had a 29% increase in earnings yet lowered their outlook due to recent health care legislation which is the same thing every drug company has done so this is more of a non-event than a Larry King divorce.  The stock is flatter than Heidi Montag's singing voice or her original chest, so a big fucking yawn here.

In small cap news, SFSF got an upgrade today to buy from an analyst at something called Janney Capital Markets or known better as "Morgan Stanley wasn't hiring."  The analyst raised SFSF to a buy claiming that the worst for them is likely over and that they should be able to continue to grow bookings at 20%.  The company has a decent balance sheet with ~$300MM in cash and no debt though most of that is thanks to a recent follow on offering to give them some powder for future M&A and they are already using some of it to buy Inform for $40MM of cash and stock.  The company is in a niche space of selling performance/compensation management software for businesses to evaluate employees, essentially outsourcing and making HR more efficient while relegating the number of smiley face cupcakes employees receive.  They sell the software as a service which should yield a better multiple than the traditional software model.  That said, this comany still has no earnings and guidance is for at best breakeven this year with revenue growth already in decline and estimated to be 17% for 2010.  Money McBags is a bit perplexed by this stock as the valuation assumes a hefty growth rate and analysts seem to be valuing them on the fictitious EV/adjusted FCF and anytime a company is being valued on a non-traditional metric, that usually points to something being fucked up (and in this case the fucked up is the earnings which are less positive than Don Rickles at an ugly convention).  The company is up 4% on today's upgrade but Money McBags thinks the valuation is way ahead of itself especially as the company relies on big deals, hence the rebound in the last half of last year.  Money McBags is staying away from this stock for now as it seems too rich despite a decent software offering and being in a market less penetrated than Ellen Degeneres, but it is that market potential that keeps SFSF on his radar.

And don't forget Money McBags is now testing out twitter, for reals this time.