Saturday, February 26, 2011

Testing The Water With Power-One, Inc

Power-One goy killed about two weks ago and dropped over 20 percent. It has flat lined at about $9 since the big downdraft. The cause, like so many other slaughters, wasn't a poor earnings report, they beat street earnings and revenues handily, but provided lowered guidance and mentioned the word "glut". That's how 205 can fly out the window.

PWER has two businesses: power solutions for data centers and inverters for alternative energy. They've been in the solutions business for a long time and it keeps chugging along. The sexiness is in the inverter business where they convert the energy from solar and wind generation into power that can be sold to, and used by, power companies. The reduced sales are in the latter, as is the glut. The company expects it will take a quarter or two to work excess inventory, at the distributor level, through the system. PWER doesn't sell their inverters in the US or China, Europe is their main market, but they entered those two markets at the tail end of Q4. They are the second largest inverter company so they have a reasonable shot at gaining some traction in the US and China. The more successful they are the faster the excess inventory goes away and revenues resume their trajectory. Even with the glut, the reduced guidance calls for revenues of $1.1B-1.3B, exceeding 2010 revenue of $1B. PWER made $.96 eps, including a $.14 charge, in 2010. Analysts have been taking dow estimates, but concensus is still $1.16 eps. At $9, PWER is selling very inexpensively. Its cashflow multiple is also a gift. They have several hundred million dollars of cash and almost no debt.

I've started a position and hope that I continue to gain confidence so I can build a larger holding, but what do I know about solar and wind? Believers have all sorts of sum-of-the-parts valuations that get to $20+ and a commanding market share in a growing industry. But, a glut is a glut, and why did the glut develop? I'm comfortable enough to tip my toes in, but not ready to wade out deeper. Hopefully I will be a quasi solar/wind power inverter expert within a short while and be able to know whether I should dive in or rush back to the shore.

Sold Silver Friday And Reinvested In Gold

About two years ago I put on similiar sized positions in gold and silver [ GLD, SLV ]. My worry was the same as most people, rising inflation and currency debasement. Since I wasn't targeting growth, just protection, I elected to stay with physical metal in a vault, not miners or intermediaries.

To my pleasant surprise, I got growth. Gold moved very nicely and silver skyrocketed. For many years the two precious metals have traded closely, but this past year silver took off. Gold was up, I'm trusting memory here, about 25% and silver about 100%! A look at any comparative chart will show it much more dramatically than my previous statement. Was silver really undervalued, compared to gold, by that much? Are they now at parity? I've read all the literature and silver bulls still love the metal and silver short sellers are giddy with anticipation.

I tell myself that I don't care what happens to the price of silver from here forward because I only want to own the metal for protection. Additionally, those two similiar positions had changed dramatically because of silver's 4-to-1 move and needed to be rebalanced anyhow. So, I sold SLV and intend to buy back more GLD as it pulls back when some of the geopolitical issues subside. I don't believe silver has another 100% year in it, and if it did run too far, it may give much of that gain back. My chances for price appreciation are better in GLD, plus I'm getting the protection I want. Silver has a large element of speculation in it at present and I prefer the sidelines after being lucky.

Now if silver jets up another 50% I'm going to memorize the preceding paragraph and try to feel better.

Thursday, February 10, 2011

The Corporate Cash Logjam May Begin To Flow

For the past several years we have heard about the huge cache of corporate cash that has piled up on large companies' balance sheets. Both political pundits and financial reporters have chronicled the fact that, for various reasons, big companies were hoarding, not spending cash. The implication was clear:when the spending starts the economy will strengthen, jobs will be created, the market will rally, and all will be well with the world.

Recent days have produced two clear signals that the logjam may start flowing. First, Obama chastised the Chamber of Commerce audience to start investing that cache of corporate cash in American projects and creating American jobs. The implied threat is that Obama will be watching and corporate cash totals shouldn't continue to grow while the American economy and unemployed workers are under stress. Implied threat or not, creating jobs for Obama's sake may not be in the best interest of corporations unless they make financial sense. What is in the best interest of America's corporations is to not incur the wrath of the Government.

Yesterday Dow Chemical announced, in my opinion, their version of how can we best reduce our cash totals prudently. After deciding that they had enough cash to fund all viable business expansions, they raised their quarterly dividend by 5 percent and approved a new $7B stock buyback in addition to the $2.5B still authorized. Over the next several years they are going to return lots of money to shareholders. If they saw 10B of projects that would hit their IRR hurdles, they'd invest in those money making projects. I read DOW's decision as disciplined management that isn't going to be pushed into reckless spending just to please the President. But, they aren't going to be caught in the spotlight either with lots of cash and facing potential regulatory repercussions.

While I believe we will see many more dividend increases and stock buyback authorizations, corporate cash is going to be increasingly put to use in strategic Mergers & Acquisitions. All three actions will be beneficial to the stock market as money will be flowing. The impact on the national economy and the unemployment rate may not be dramatic, but it will raise the major stock averages this year.

Saturday, February 5, 2011

Vulcan Materials' Shipments Peaked In 2005

The recession and it's impact on certain industries remains far from over. The aggregates industry, forgive the play on words, is bedrock to the U.S economy. However, it hasn't been very hospitable to owners in recent years. The lesson to learn is that even industries with scarce resources, difficult permitting, and central to the economy can experience significant troubles, especially if balance sheets get stretched. Vulcan [VMC ] is the poster child for this phenomenon.

Don James, Vulcan CEO, stated in the company's recent earnings release that shipments are down over 50% from the peak in 2005! He offered some positive comments about the tide turning, but pinned 2011 shipment growth on a resumption of residential building activity, no further deterioration in non-residential construction, and a timely passage by Congress of the Federal Highway bill. Three large orders. I don't envy Mr. James as he's in the hot seat, or should be.

James didn't create the Subprime building bubble, but he also did a poor job of protecting the downside of his business. At the peak of the mania, Vulcan made a large acquisition of Florida Rock for a premium price. To make matters worse he leveraged the purchase. Then VMC continued to pay a healthy dividend even while its payout ratio was very elevated. By comparison, Martin Marietta Materials [MLM], avoided the large M&A deals, didn't load up the balance sheet with as much debt, kept a reasonable dividend in relation to earnings, and has remained more profitable in spite of the same type of shipment declines.

The comparison i want to make is not that MLM is run better than VMC, but that extremely bad things can happen even in wonderful industries if stupid decisions are made. The recession is over, but VMC is still plagued by its section of the economy and its leverage. The same scenario can affect any commodity based industry that is mined or drilled. New supply has been flowing into most mining, and drilling arenas and an economic slowdown can wreak havoc on those participants that use lots of debt to bring on the new capacity.

My suggestion, in addition to staying away from VMC, is reposition portfolios to only include mining and drilling companies that have pristine balance sheets and management's that are not enamored with big acquisitions. When the next downturn arrives, and shipments fall in half, you want your companies to survive ala Martin Marietta as opposed to Vulcan Industries.

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