In a recent column I described the work of David Strasser of Janney Montgomery Scott, a senior analyst who was rewarded for hanging tough with a buy rating on the stock of Best Buy Co. even as doubts started appearing last year about the company’s very existence.
So far this year the stock has moved from less than $12 per share to a peak of more than $44 earlier this month and closed the week at $39.37.
There is today the same sort of independent thinking on Best Buy, but instead of holding fast to a positive rating, this view is all about sticking to a pessimistic outlook. That bearish analyst is Michael Pachter of Wedbush Securities, Inc.
Pachter doesn’t appear to be quite as high-profile as Strasser but he is far from a fringe figure, an experienced analyst working with a well-known firm based in Los Angeles. His recent update is polished and grounded on some of his own team’s legwork.
“Best Buy management has done a laudable job in streamlining the company’s cost structure,” he wrote after the company released results from its third quarter on the 19th. "With that said, net income and cash flow are expected to be lower this year compared to last, with [comparable store sales] declines and margin compression more than offsetting the benefits from the lower overall cost structure. We… believe that Best Buy’s profits and cash flow will continue to decline at a faster rate than it can cut costs.”
It’s important to note that he does not knock Best Buy’s management, but he doesn’t bother to sugarcoat his views, either. The company’s holiday season initiatives, he wrote, will “result in a costly failure by year-end.”
With the stock trading near $40 per share, Pachter has a 12-month price target of $9. His formal investment rating is underperform, which means the analyst expects this stock to do worse than the broader market.
But with a 12-month target price of $9 per share on a stock trading near $40, it’s a rating that would be read by any portfolio manager as “sell it, and sell it now.”
Somebody is going to be very wrong on this stock – which is why we have a market.
It’s hard to know whether the initial public offerings of Twitter or Facebook had been the more poorly managed deal.
It’s a tough call. One was set up to maximize proceeds to the company and the other apparently planned for there to be a big pop in value on the opening trade. Neither was the perfect IPO.
The perfect IPO is one that comes at a fair price. What’s fair? A good indication is when the price of the stock the morning after the offering opens up maybe 15 percent from the IPO price and then sticks at that valuation, not one that shoots up 73 percent as Twitter’s did on Thursday. By that measure Facebook’s was even closer to the mark.
That’s not the way it’s been playing, as Friday Twitter seems happy and in the days following Facebook’s 2012 IPO its leaders were anything but, having apparently bungled its deal.
Remember how Facebook co-founder Mark Zuckerberg wore a hoodie to an early roadshow meeting, an act investors correctly understood as a mark of immaturity? With strong projected demand for shares, the company increased the offering by 25 percent. Then the expected price kept inching up. The deal finally came at $38.00 per share.
It wasn’t that long after the offering before it had fallen by more than half.
So Twitter’s was going to be the anti-Facebook deal, planning to trade on the New York stock exchange rather than Nasdaq and seeking to not overprice its shares.
The result was a 73 percent pop on day one, from $26.00 per share in the offering to open at $45.10 per share when trading began.
It’s not fair to say that the investment bankers mishandled that deal, as it’s the company with the final say on price. The bankers work for management.
But the bankers could be held accountable for knowing what the fair price was, and there is a traditional way of discovering the fair price. It’s the book.
Goldman Sachs & Co. was called the “book runner” on that Twitter deal because it was keeping track of the indications of interest that came from potential buyers of the stock. It’s bankers should have had a great sense, when went into the pricing meeting, about what the fair value should be.
Instead, a lot of money that could have gone in to the company’s checkbook (and rewarding its earliest investors) instead went to the privileged few who got shares allocated to them in the IPO. It’s unclear why the Twitter executive team can be so pleased about that.
The financial crisis of five years ago taught us to be mindful of asset bubbles, and one of the places to check occasionally is the price of farmland.
That’s a thought shared by the banking analyst Ben Crabtree, now writing for Oak Ridge Financial. His focus is community banks, and overleveraged farm land was a disaster for many community bankers – and farmers – back in the 1980s.
What recently got his attention, he wrote in his most recent update, was when he heard from a rural banker that farmers were “beginning to use the seductive but economically indefensible thought process of ‘average cost analysis.’”
The example Crabtree used is a farmer with 640 acres that cost only $1,000 per acre. So the farmer decides he can easily afford to pay $3,000 an acre for an additional 160 acres because his average cost will still be only $1,400 an acre.
The Crabtree put it, “the math is correct, but the economics are irrational.”
Whether land prices have gotten to irrational price levels or not, they have certainly surged. Minnesota farm land values have moved up from just under $3,000 per acre, on average, in 2009 to just under $5,000 per acre now, according to data Crabtree got from the U.S. Department of Agriculture.
Farm incomes have been strong, of course, and Crabtree in checking found that farmers’ total debt-to-total-asset ratios, after peaking in the 1980s, have generally been trending down. And as for the quality of the region’s community bank agriculture-related loans, Crabtree noted, the credit quality is better now than it’s been any time in at least 30 years.
“But community banking is not done on national scope, but on a county-wide or even local basis, so what is broadly true may not be true on a more granular, farm-by-farm basis – especially when one takes into account weather patterns and their effect on crop yields,” he wrote. “Furthermore, the issue of crop prices needs to be taken into account. A reasonable farmland value when corn was $7.00 a bushel could easily be excessive if corn prices drop back to $4.50 a bushel, as some observers expect.”
Crabtree concluded that the evidence so far is that the region’s community bankers serving farm country don’t appear to be lending on irrational economics, but “the situation bears close watching.”
One of the most interesting aspects of the Mosaic Co.’s decision to spend $1.4 billion for phosphate assets in Florida is that the all-cash acquisition isn’t expected to get in the way of its other big capital allocation priority, and that’s buying back stock.
Mosaic was formed by Cargill in part to provide liquidity for certain Cargill shareholders, and it’s less than a month away from that really kicking into gear. Those Cargill trusts own about 129 million Class A common shares of Mosaic, with restrictions on transfers of the first third of those shares rolling off on November 26.
The company told its analysts and shareholders earlier this month that it wasn’t sure whether the Cargill trusts would “play ball” but that it was intending to buy back stock aggressively with or without the trusts as sellers. The company suggested up to $4 billion of share repurchases by mid-year next year was possible.
Then it announced a big acquisition, but even with having to fund a $1.4 billion deal its aggressive share repurchase goal seems in reach.
The simple reason is the company just bought assets or secured capacity that it had intended to build. It was planning to invest more than $1 billion into a green field ammonia plant in Louisiana and construct a second $1 billion plant for its phosphate operations.
In addition to buying the phosphate assets, Mosaic and the seller, CF Industries, have reached a long-term agreement for CF to supply Mosaic with ammonia beginning in January 2017. So, Mosaic won’t have to build that ammonia plant in Louisiana.
With the acquisition it’s planning to save the $2.1 billion in capital expenditures, but with the deal it will have to invest $500 million to develop the mine and other assets and an additional $200 million for transportation assets. So the net is $1.4 billion in capital spending savings – the exact amount it is planning to spend on the acquisition.
Look for news after Thanksgiving on the amount of stock Mosaic buys.
In June 2009 I shared a table at lunch with Drew and Adam Bledsoe of a small firm called Bledsoe Capital. The occasion was an exclusive investor conference at the Sheraton Hotel just outside the main entrance of Stanford University in Palo Alto, Calif.
Adam was a smart and engaging investor, but Bledsoe Capital was an insignificant player in the venture business. They should have been relative nobodies at this conference like I was, as it was dominated by Silicon Valley venture partners and the likes of Google and General Electric Co..
They would have been, too, were it not for the fact that Adam’s brother Drew Bledsoe was well-known in the room as a former National Football League quarterback. Drew Bledsoe had even been invited to speak.
Bledsoe got up after lunch and joked a bit with the audience about his athletic career, but he mostly played it straight. He chose to talk about how small investors like he and his brother tried to support entrepreneurs with time and connections from personal networks, and not just capital.
He only brought up his football experience to make a point once, talking about an injury during the second game of the 2001 season. Later I learned that it was a collision that severed an artery in his chest, nearly killing him.
As he explained that afternoon, he recovered quickly. By then another player on the New England Patriots had taken over his position. He never got it back.
Losing his job when he was unable to perform physically, he said, wasn’t right. It’s performance on the job that should matter. “It’s not the way you build a winning organization,” I remember him saying.
The reason this comes to mind is that the Minnesota Vikings face such a decision, also at the critical quarterback position. Christian Ponder, the incumbent, has a rib injury. The team has just found another proven player at Ponder’s position, and with a capable backup already on the team, it appears all but certain that Ponder has lost his job.
Eight years after his own injury, losing his job as a result still bugged Drew Bledsoe. And, as a question of management, it’s not the way you build a great organization.