I took nibble at another income stock yesterday. Sysco, the food and restaurant supply company.

SYY is one of the 319 Mergent Dividend Achievers, meaning they have a long track record of annual dividend hikes. If I did the math correctly, the last 10-years' dividend hikes have all been double digit increases. Fundamentals are reasonable; forward PE of about 15, PEG of 1.22, and dividend yield of 3.2% with a 45% payout ratio. Today's close of 30.68 is near the middle of the 52-week price range.

SYY reported fiscal third quarter earnings of 0.40 a share yesterday, beating estimates by a penny. Revenue was up over the year ago quarter, but slightly below estimates. The market apparently liked the news and took the stock price up nearly 8.5%. Even my late-to-the-party small buy was up nearly 2% on the day.

I scanned through the earnings transcript and didn't see anything earth shattering. Just solid execution and a company on track to keep growing revenues in the high single digits and earnings in the low double digits

For those following inflation, the COO, Ken Spitler, had this comment "Food inflation as measured by our internal measure of product cost inflation remained high, averaging about 6.2% for the quarter." Quote taken from Seeking Alpha's transcript.

I decided to make a small buy for SLO just to start tracking it. The big run-up yesterday had a little follow through today, but the two day move seems a little much for basically an in-line earnings report. I'm going to try being patient and see if it'll pull back to the low 29's or so before adding much more. My plan is to take gains and ease out of Conagra and move the funds to Sysco. Cramer may have helped me get a better price for CAG by highlighting it tonight - thanks Jim.

At time of posting, I don't have a position in any of the stocks mentioned in this post. But Sysco fits the profile for the type of company I like to buy; good yield and good prospects for raising it year after year after year.

Comments: View Comments |  Tuesday April 29, 2008  |  Stocks: syy,

I got most of the information for this post from the company's 15 Apr conference call prepared remarks and the associated credit risk management appendix. IMHO, Washington Mutual has done a pretty decent job of laying their balance sheet cards on the table.

As you probably know, WaMu's assets are dominated by home loans and one of the graphics right at the front of their conference call prepared remarks caught my attention. The Case-Shiller home price index graph. Note that fall-off doesn't appear to be leveling off.

For the first quarter of FY08, Wamu lost $1.1 billion driven by increases in loan loss provisions. They increased their loan loss provisions by about $2.1 billion over the previous quarter.

Balance Sheet:

The balance sheet shows $242.8 billion loans held in portfolio with $4.7 billion for loan loss provisions, or 1.94%. There are an additional $23.6 billion of loan backed securities available-for-sale. I believe the difference is that loans held in portfolio are valued based on the cash flow projections, not the market value of the security. Securities available for sale are listed at market value. Perhaps someone who knows more about accounting will weigh-in and correct me if that's wrong. In normal credit markets, there wouldn't be much difference between those valuations. But, credit markets haven't returned to normal yet.

In other words, we don't really know what the loans held in portfolio are worth - and it doesn't really matter unless they need to liquidate some of them. But, bottom line is we really don't know what Wamu's (or any other financial firm's) true book value would be if everything were listed at market value.

50% of Wamu's loans are in CA and they account for 36% of nonaccruals. 7% of the loans are in FL and they account for 17% of nonaccruals. For the math challenged, that's over half the portfolio in two of the toughest housing markets in the US.

Wamu has non performing assets of $9.1 billion, 2.87% of the total. Most, 7.1 billion, are non-performing loans. The remainder is $1.3 billion of real estate owned and $670 million of troubled debt restructurings.

Troubled debt restructurings are just what they sound like. Borrowers and the bank renegotiate the terms of the loan to try and avoid foreclosure. The bank typically gives up some money on the deal, but it's better than foreclosing. Of the $669 million in this category, 54% or $363 million, are current with the new plan. Not a great success rate, but I don't know what's typical for the industry.

The prepared remarks include this gem, "Net charge-offs in the first quarter of $1.4 billion were up 83 percent from the fourth quarter of last year. Consistent with prior quarters the majority of net charge-offs came from our subprime and home equity portfolios. However, during the first quarter, we also saw a significant increase in the net charge-offs from the prime home loans portfolio to $330 million from $101 million in the prior quarter." (emphasis added) More evidence that housing troubles are extending beyond sub-prime.

The loans in the portfolio consist of:

$108.5 billion of single family home loans. 4% of those have a loan-to-value ratio of greater than 90%, 22% have LTV greater than 80%. Net charge off rate for single family loans is 1.2% and climbing.

$55.8 billion of option arms, $1.9 billion of that total is principal that exceeds the original balance, i.e. borrowers have taken the option to pay less than even the interest on the mortgage. Although not huge, that amount is growing. 7% of the option arms have LTV greater than 90%; 30% have LTV greater than 80%. Net charge off rate for option arms is 1.81% and has been climbing. $3.8 billion of the portfolio resets in 2008, $7.2 billion resets in 2009.

$61.2 billion in first and second lien home equity loans and lines of credit. 14% of those have a total LTV of greater than 90%, 32% have total LTV of greater than 80%. Net charge of rate is a whopping 3.12% and rising.

$17.3 of the loan portfolio is subprime. $15 billion is home loans, $2.3 billion is home equity. LTVs are very high for this portfolio. Net charge off rates are running at 8.55% for the combined portfolio.

Forecasts:

Wamu is estimating $12 to 19 billion of losses on home loans over the next 3 - 4 years. About $4 billion is already reserved, so $8 to 15 billion still needs to be covered. The low end of that range assumes another 13% decline in home prices nationally, 18% in California. The high end assumes 30% nationally and 35% in California.

WM could have increased loan loss provisions by about a billion dollars last quarter without running a loss. Given that they project needing $8 to 15 billion additional loss reserves over the next 3 or 4 years, they'll need to increase loss reserves at something like half a billion to a billion a quarter over that time span. That doesn't leave a lot for earnings. Of course, they could also apply most of the new money from the $7 billion recapitalization to loss reserves and start reporting narrow profits again shortly after that.

Recapitalization:

Wamu recently announced a $7 billion recapitalization, selling common stock, convertible preferred and warrants to TPG and other unnamed investors.

The Wall St. Journal reported the net result of the $7 billion capital infusion could result in issuing 804 million new shares. There are currently 866 million shares outstanding. $7 billion of new cash brings book value to about $29 billion, across 1.7 billion shares would be about $17 per share in book. That assumes the current book value holds. And that they won't need to do any more recapitalizations. Big, big assumptions. Tom uses the lower, net tangible assets in his post recapitalization price-to-book calculations and that's probably a better metric.

Conclusion:

For Wamu to do well, loan losses and housing price declines have got to level off.

I'm very concerned by the concentration of loans in troubled real estate markets, the high percentage of option ARM loans in the portfolio and what seems to be a high percentage of high loan-to-value assets. It's also concerning that the net charge off ratios still appear to be climbing.

I have no clue how the portfolio loans are valued, but suspect Wamu would be in serious trouble if they got in a bind and had to sell any of that paper. Even with the market for mortgage securities improving lately, I can't believe there are very many buyers for option ARM loans from California and Florida.

If things go according to Wamu's optimistic scenario and they only need to write down another $8 billion or so or loan value and if the business model can replace the assets with quality loans as they go, Tom's best case scenario of the stock being valued at two to three times tangible book after dilution, or about $24 - 36 a share after 3-4 years is plausible. Those are two pretty big ifs. BTW, they cut the dividend to a penny a share, so you don't get paid to wait.

If things don't go well, there's enough leverage to drive the share price to near zero. TPG and the other new investors' convertible preferred shares are probably in line ahead of the common stock. So, if things really turn south there isn't likely to be much left for the common stock shareholders.

WM is pretty speculative and is much further out the risk curve than I'm interested in going. If I were going to buy it, I wouldn't chase it up after last week's run. Wait until some new credit mess hits the news and pulls the price down, then buy - that's a good approach for any financial.

Bottom line, I think there are more tough times ahead for Wamu and that there are better investments available. Count me among the bears on this one.

Disclosure: I don't own any WaMu stock at time of posting.

ETA: They don't mention WM, but nice video summarizing last week's bank earnings reports from Morningstar.

Comments: View Comments |  Sunday April 20, 2008  |  Stocks: wm,

Over the past few weeks I've written some bullish comments on Transocean (RIG), Graham (GHM), and Chevron (CVX). Those stocks have all had pretty decent runs over the recent past and I took some profits in all three on Friday.

I've been burned in this contest and in real life by failing to take profits, then watching as the stock drops back down and am trying to avoid that unhappy set of events. Of course, if I've sold early and they keep running, I'll miss out on some profits.

RIG was trading in the 130's a few weeks ago and closed Friday near 159. I still like the stock and the company and believe it will hit new highs before the year is out. I just thumbed through the annual report; rig demand is still high and dayrate projections are still climbing. But a 20% rise in one month is a little ambitious for any company. I sold two chunks on Friday, one near the open at 153 and one mid-day around 159. That took nearly half the position off the table.

GHM has had a monster run over the past few weeks. I really like this company, but 35 to 53 since the beginning of April is just begging to take some profit. My target on this one is mid-60's, so even though I really like the stock, I'm much more inclined to sell here than to buy more. Even after selling some, GHM is still one of my biggest SLO positions.

CVX has been more of a steady gainer, but the last time it was in the 90's, I held on and then watched it drop into the 70's - not fun. I've still got 500 shares in SLO, so even if I don't get a chance to buy the shares back I won't feel too bad about having missed profits on a piece of my original holdings.

In all three cases, I'm still positive on these stocks and am still holding enough to participate if the run-ups continue. If they pull back some, I'll buy the shares back. I just don't want to see nice profits turn into losses if I'm wrong.

I've been more aggressive with trading around a position in SLO than in real life, but am getting comfortable with the concept and plan on using it a little more. It sounds aggressive and risky, but when you think about it, taking some profits when you have them is a pretty conservative portfolio management approach. With low or free commissions, capturing even a small move is truly money in the bank and most stocks trade with enough volatility to make it work. Obviously, the strategy works best with cheap commissions and in something like an IRA account where you aren't getting hit with taxes on short term gains and don't have to worry about complicating your cost basis.

Guess I'll have to do some research on WaMu this weekend and weigh in on the QOTW since I've been spouting opinions on banks lately.

Also noticed my friend duffbeer snuck into the top five. Duff - when are you gonna open some cold ones and share your stock picking magic??

Disclosure: At time of writing, I own shares in RIG, GHM and CVX and wish I'd have bought a lot more of each.

Comments: View Comments |  Friday April 18, 2008

We've still got some earnings reports to go, but so far among the banks we've got none that are good, Wells Fargo and JP Morgan are bad, and Wachovia came in down right ugly.

Despite bad comparisons to last year's quarter, Wells and JPM ended up strong today by reporting quarters that were not nearly as bad as the market feared. Earlier in the week, Wachovia reported big losses that were much worse than expectations and dragged the whole sector down.

Citigroup reports on Friday and ugly doesn't even begin to describe market expectations. Bank of America reports early next week and expectations range from a loss to a small profit. I think Citi has firmly established its place among the ugly. BAC might slide in and just be bad, but then again, they actually agreed to pay money for Countrywide.

Our friends at InvestorPlaceBlogs did a nice summary of the WFC earnings release if you don't want to read the whole statement. I thought the most interesting quote in the release came from CFO Howard Atkins, "The available for sale portfolio consists of agency mortgage-backed securities, which have appreciated in value since the end of the year,..." (emphasis added) I haven't been thrilled with the Fed's apparent decision to inflate the economy out of the mortgage mess, but maybe all these rate cuts, credit swaps and lowered collateral standards at the Fed window are helping recreate a market for mortgage paper. .... Maybe.

If firms are finding it easier to price and trade paper, it could be a huge windfall for JPM. If all the paper that came with the Bear, Stearns buy is actually worth more than pennies on the dollar, JPM stands to make out on the deal.

I haven't read JPM's transcript, but from reports it was similar to Wells'. Company's making money, still lots of tough times ahead.

Significant in my mind for both JPM and WFC was that earnings are enough to cover the dividend payment with some cushion. Looking several months out, it will be interesting to see if Wells feels confident enough to hike the payout in late summer. They've been raising it every year for some time and I'm sure management doesn't want to break the string. JPM doesn't have the 'raise it every year' tradition so they won't be under the same pressure to hike the payout as WFC. For those who haven't checked, JPM yields 3.7% and WFC yields 4.6% - both higher than 10-year treasuries - as long as they continue to make enough to cover the payout.

Also significant, both of these banks are in a position to take advantage of fire sales on assets or acquisitions. For example, WFC recently announced they purchased a number of accounts from C in Nevada and California. Not sure how that works, I assume it's like buying a small piece of C. If anyone has any insight, please feel free to add a comment.

Just to be clear, I have no clue if we're near a bottom for financials. There was some good news in these two reports, but both companies also cautioned that there are still rough times ahead.

I've believed you could nibble and trade quality banks for some time and there was nothing in todays reports that changes my opinion. At this point, 'quality banks' consist of JPM and WFC. There may be some good buys among smaller banks, but I wouldn't touch any others in the big five. The key is patience on buys - when you think it's bottomed, wait 'til it gets cheaper. And if you're trading them, be quick to take profits as you get them.

Bourbon makes blogging more fun.

Disclosure: At time of posting, I hold WFC in both SLO and real life. No position in any other company mentioned.

Comments: View Comments |  Wednesday April 16, 2008  |  Stocks: BAC, C, JPM, WB, WFC,

The first stat that jumps out for Tesoro is the P/E ratio; 6.3 trailing and 5.5 on forward projections. Add a price-to-book of 1.2 and this starts looking like a classic value investor's target. Tesoro's closest competitor is probably Valero (VLO) and based on just a quick look at the numbers, there isn't a lot of difference in the valuation for the two companies.

The problem is the crack spread, the difference between crude prices and refined product prices, is very tight. Even though we've got high gasoline prices, refiners are paying record high prices for crude oil and crude is by far their largest expense. With the US economy weak, refiners will continue to have trouble raising prices and as long as the demand around the world for crude keeps prices up, refiners will have a tough time making much money. Add political pressure on oil companies over gasoline prices and it's tough to make a case for product prices rising faster than crude.

In order to be bullish on refiners, you need to believe that either refined product prices are going to climb faster than crude prices or that crude prices will fall and gasoline prices will stay high. I don't see an economic scenario that supports either of those outcomes.

For an investor with a long time horizon, it might not be a bad time to start building a position in TSO or VLO on the theory that some day the crack spread will widen. TSO is setting new 52-week lows as I type this and it's hard to imagine there's much downside left (I've discovered that's a very dangerous assumption). But, I think you have a long dead money wait. And, with a dividend yield of 1.5%, you don't get paid much to wait.

I'm not smart enough to know which part of the energy business will be hot over the next several months, so I would much rather own an integrated oil company like Chevron or ExxonMobil than a pure play refiner. With big profits from their upstream operations, the big integrated companies can afford to operate their downstream ops at very low crack spreads and put lots of pressure on refiners. They won't have as much upside when the crack spreads widen again, but they'll do better while you're waiting.

Disclosure: I own Chevron in SLO and real life, but don't have a position in any other companies mentioned in this entry at time of posting.

Comments: View Comments |  Tuesday April 15, 2008  |  Stocks: CVX, TSO, VLO, XOM,

What a great SLO week; got tapped for the blogger spotlight and my sloport lit the afterburners, moving into the black for SLO2, then on Thursday breaking back over 10 bucks for the long term run.

Two of the stocks contributing to the good week are Graham Corp. (GHM) and RPM International (RPM).

Graham Corp
Most of the increase was from GHM. They're a small cap, heavy industrial company. They make condensers, vacuum equipment, heat exchangers, etc. for refiners, chemical companies, power companies and other heavy industries. On Thursday, GHM announced record quarterly orders and increased revenue guidance for FY2009. The stock jumped from 36.90 at the open to close at 45.22. On Friday, it tacked on another three and a half plus to close at 48.79. Even after the run up, it's still only trading at a ttm PE of 17.8. Yahoo Finance shows only one analyst covering the company, that earnings estimate for next year puts the fwd PE at 15.4 and I suspect that estimate will go up based on the company's new revenue guidance. Management has absolutely blown the earnings estimates away the last two quarters. I did follow 'take some profits when you have them' discipline and took a little off the table. Even with that, the price run up vaulted GHM from my 4th or 5th largest SLO holding to number one.

I see several potential catalysts to drive this stock price higher. With the market cap approaching $250 million, they're getting to the point where they could pick up more analyst coverage and are big enough for bigger mutual funds and institutional investors to start looking at them. TTM EBITDA is 10.7, but with higher revenue projections bringing that down a bit, they could be attractive as a buyout.

The primary risk is that this is a cyclical growth story, so a bad quarter or falloff in the petrochemical business would be pretty ugly for GHM. Steel costs could be a problem for them, but with very strong customer markets, I believe they shouldn't have much trouble passing price hikes along.

The stock still looks like a good buy, even after the run up last week. But, with market volatility, I would look for a pull back before buying. In this market, patience is nearly always rewarded with a better buy point. With the company forecasting 15-20% revenue growth for FY09 and a track record of crushing estimates, I don't see any reason they shouldn't trade at a fwd PE of 20+. That would put the stock price well into the 60's.

RPM International
The other holding I wanted to review is RPM International. RPM has a number of coating, paint, sealant, flooring and roofing brands with commercial and industrial applications worldwide. Two of the better know brands are Rustoleum paint and DAP caulks. They reported earnings on Thursday, beating estimates and providing a slight increase to guidance going forward. Revenue and earnings growth projections were raised from 8-10% to 10-12%. I believe RPM's stock price is held in check by perceptions that its tied to the residential building cycle. However, in the annual report issued last fall, the CEO stated that less than 10% of their business is tied to housing construction.

In the earnings report, the company indicated they've recovered from a slow start to the quarter and are seeing strong sales to petrochemical, marine, offshore oil and related industries.

RPM has a history of making relatively small acquisitions to build the business and the current market combination of low interest rates / tougher credit for buyers and private equity looking to sell off assets to raise cash is opening up opportunities for them. The company's track record on these deals is quite good; they're normally accretive to earnings within a year if not immediately. During the conference call, they mentioned an $80 million dollar deal in Europe that will be slightly dilutive this year but accretive in 2009. They couldn't announce the name or details since the deal is pending, but will provide that information at an analyst meeting in July. They'll also sell with the price is right; last quarter they sold Bondo to 3M.

RPM has a diverse mix of products and markets, selling in the US and worldwide markets. The broad base makes it very unlikely that everything will be in the tank at the same time and provides a pretty steady overall business.

Risks include rising raw materials costs, although in the conference call they said they're now seeing a mixed picture in materials costs with some even declining slightly. RPM also has some exposure to asbestos litigation; they do have reserves set aside.

RPM pays a nice dividend, current yield is 3.3%, and they have a long track record of hiking the payout every year. Based on last fall's annual report, I'm expecting annual dividend increases of 8-10% over the next several years.

The stock price is probably pretty close to fairly valued at Friday's close - I think upside is 10-15% and downside maybe a little less. Yahoo shows a consensus target estimate of 25.75, which sounds about right. Of course, you also get the nice quarterly payout. This is one of the stocks that make me wonder why anyone would buy a 10-year treasury at 3.5% or so when you could own a solid, well-run company like this with nearly the same initial payout, but good prospects for increases.

Like GHM, I lightened up a little on the rise after earnings, but will look to buy back if the price dips.

Disclosure: I own both RPM and GHM and will be looking to add on any pullbacks.

Comments: View Comments |  Saturday April 5, 2008  |  Stocks: ghm, rpm,