Wednesday, September 28, 2005

Credit delinquencies hit the highest level in Q2

ABA (American Banking Association) just released its Q2 delinquecies data and showed a jump in every category. This is Q2 numbers, before Katrina and before gasoline hits $3 which curiousy was the main reason quoted by ABA as the reason for increased delinquency. I believe oil is only one reason among the many factors that is causing delinquency to go higher.

The main point I was going to make is that as people were looking at Q1 and Q4 of last year data, CEOs were confident that credit quality remains benign. As a result there was a big push to continue using credit as a boost to top line growth as I have detailed in my post, " Snapshots of receivable growth".

Now as delinquencies climb, will we see a drop in top line growth as manufacturers shun away from credit financing or will we need to dig deeper in SEC filings to see more underhanded selling of receivables such as DELL has been doing?

I vote the latter.

Friday, September 23, 2005

Where are those receivables, Mr. Dell?

Vitally at Minyanville raised a very interesting question saying that it may be ok to have some receivable growth. Specifically, he questioned that DELL may not carry as much credit risks as it may appear on the Balance Sheet. So I took a peek a their 10Q.

Guess What I've found? Dell has a subsidiary called DFS (Dell Financial Services). It is a joint venture with CIT group but is 70% owned and consolidated. When a sub is consolidated, you'll include all income, asset and liabilities at 70% of whatever DFS owns onto DELL's profit and loss statement. That's strike one.

Now, for an even stranger note. DFS has been selling loans/receivables of $191mm or about 80% of total generated from DFS to, get this, UNCONSOLIDATED SPECIAL PURPOSE ENTITIES WHOLLY OWNED BY DELL. Why would someone do this? Even though receivables are generally good because they are assets but if run your receivables too big and too fast, you essentially become a bank. GE and BA are fast becoming banks even they are still classified as industrials. If you are a bank, you will run into credit risks eventually and that'll will wipe out all your previous and future earnings that you anticipate. DELL is fully aware of this risks and thus actively managing it, although the underhanded manner that it is being handled strike me the wrong chord.

Haven't we watch this movie before...wasn't it called "Enron & its special purpose entities?" IMDB rating 9.8.

Wednesday, September 21, 2005

FDX good numbers?

Wall Street is going gaga over FDX's earnings. It was my bad not covering when a stock is selling down with upcoming earnings, it will typically do the opposite after the company reports (eg CSCO went up before reporting but reversed down 10% immediately after). Having said that and do away with the short term trading set-up, let's dig a little deeper into FDX's number.

I have 2 questions immediately having looked at the results:
1)How can a company as big as FDX turn on a dime? It's a titanic (yes I do imply it's sinking albeit noone sees it yet) that does not turn very fast. Only a quarter ago, they missed and now everything is hankytory? Let's pretend that biz do turn this quick, then what's to say that next quarter you could get lumpiness as things that drove this quarter suddenly goes away?
2)Oil is not the issue here: as I stated in my last post, oil is not the driver here as FDX uses surcharge to offset that.
3)Revs has been growing like weeds but how come margins are not improving? As I have pointed out, cyclical growth company such as FDX will continue to experience growth while their margins peak at the late stage of the cycle. That's the sign that things are deteriorating underneath (like the titanic)with the effects not seen until too late.
4)Besides, technically speaking, FDX is still trending in the downtrend even after today's spike.

Wednesday, September 14, 2005

Follow up on GCI and newspaper stocks

GCI and TRB jumped on rumours that Icahn or other financiers may come in and scoup up the companies because they are cheap on EV/EBITDA basis. I have laid out why newspapers companies are not cheap (July Archive) even though they are trading near their median valuation for the following reasons:

1)revenues may weaken (a surprise to many bull pundits that expect economy to recover all prior to Katrina)
2)legacy revenues losing to upstarts like Yahoo and Google with a double whammy on increased legacy costs such as newsprints.

GCI just announced its Aug results, missing its estimates citing exactly the above reasons. Stock tanks hitting 52 week low. For media bulls out there, buyers beware, we ain't seen nothing yet!