Monday, August 3, 2009

Pepsi Bottling Group Follow Up: Is the Current Price Justified?

On July 8, Pepsi Bottling Group (PBG) posted stronger than expected earnings of $.78 per share as compared to analysts expectations of $.73 per share.

Revenue for PBG declined by 7% on a Y/Y basis and operating expenses declined by 10% Y/Y. As a result of the expenses being reduced by PBG, they were able to post a $.78 per share profit. And for the past 12 months, PBG earnings have declined 67.75% TTM and have declined by 13.54% during the past five years.
s addressed in the previous note, the LT Debt of PBG is a cause for concern. Even though PBG has reduced their long term debt by over 1% Q/Q which now represents a LT Debt/Equity ratio of 3.19. This is a good sign that PBG is not using debt to finance their business. Debt will hinder PBG's bottom line in the future. For example, PBG has paid $1,304M in interest payments due to their debt and as a result it has reduced their earnings year till date because of these interest payments.

As the revenue stream remains weak, PBG should take a few steps to increase their earnings and to strengthen their balance sheet, and as a result it will increase the bottom line.

1. PBG should temporary suspend their dividends. As the end of 2Q of 2009, PBG has paid out $72M in dividend payments to shareholders. This will help PBG bottom line, and should be used to pay off debt.

2. PBG should continue to make cost reductions and use those cost savings to reduce their debt.

3. PBG should continue to make an aggressive effort to increase the top line (revenue), instead of the continuous trend of revenue reductions.

PBG Current Fundamentals:

ROA (TTM): 1.9

ROE (TTM): 10.9

Current Ratio (MRQ): 1.38

Quick Ratio (MRQ):1.08

LT Debt/Equity (MRQ): 3.19

Total Debt/Equity (MRQ): 3.42

As it was noted last time, does PBG's current price of $33.65 justify itself? We know that PBG is being pursued by Pepsi, and investors hope to make money off the purchase due to the current P/E ratio of 33.1. However, we believe PBG is over – priced at these current levels and should take the necessary actions to help the bottom line.

Disclosure: No position

Thursday, July 2, 2009

Is Pepsi Bottling Group's Current Price Justified?

The Pepsi Bottling Group (PBG) is within 10% of its 52 week high. PBG has met or beaten expectations for the past four quarters.

However, on April 22, PBG earnings were down 23.1% from first quarter of 2008, and for second quarter 2009, the consensus estimates for PBG are for .73 per share, which would represent a 6.5% decline Y/Y.

Investors seem to believe that PBG has a strong future with a P/E ratio of 40.8, but PBG earnings for the past twelve month have declined 63.7 for the twelve trailing months. Does this justify the price of $33.86?

Now let us look at the fundamentals of the company:

ROA (TTM): 1.5

ROE (TTM): 10.5

Current Ratio (MRQ): 1.42

Quick Ratio (MRQ): 1.10

LT Debt/Equity (MRQ): 4.64

Total Debt/Equity (MRQ): 4.91

For the Pepsi Bottling Company, the ROE and ROA is a laggard to its peer Coca Cola (KO). In regards to the Current Ratio and Quick Ratio, PBG has enough current assets to pay off their current liabilities. However, what is a cause for concern is the LT Debt/Equity ratio of 4.64.

Since Q2 2008 to Q1 2009, the long term debt for the PBG has increased by 37%. This can hurt future earnings for PBG as the interest expense will play a negative impact on their bottom line.

On July 7, PBG will be reporting their Q2 2009 results. We should pay careful attention of their revenue stream as it has shown weakness for the past three quarters, their bottom line, and to see if they continue to use debt to finance their business.

Disclosure: No Positions

Thursday, June 25, 2009

JPMorgan: Number One Bank in America

It should come to no one’s surprise of the recent news that J.P. Morgan (JPM) is the number one bank in the world last year, due to their capital adequacy or their Tier 1 ratio according to The Banker magazine and reported by Reuters. Tier 1 is the most relevant measurement of bank strength.

Top Foreign Stocks (David Hunkar) listed the top U.S. banks with highest Tier 1 in the most recent quarter (based on 1st quarter reports):
Rank Bank Tier 1 Ratio

1 State Street (STT) 19.13%
2 Bank of New York Mellon (BK) 13.80%
3 BB&T (BBT) 12.10%
4 Citibank (C) 11.80%
5 JPMorgan Chase (JPM) 11.30%
6 KeyCorp (KEY) 11.16%
7 Suntrust (STI) 11.00%
8 US Bank (USB) 10.90%
9 Fifth Third Bank (FITB) 10.90%
10 Regions Financial (RF) 10.37%
11 PNC Bank (PNC) 10.20%
12 Bank Of America (BAC) 10.09%
13 Wells Fargo (WFC) 8.28%

As banks are starting to repay the TARP funds infusion that they received, we should pay careful attention to the bank’s Tier 1 ratios this upcoming earning season – as this will give us a clear picture on how banks are building their capital reserve to offset the continuing credit losses.

Monday, April 13, 2009

Wells Fargo: Earnings Announcement No Cause for Euphoria

Bloomberg reported Monday that Wells Fargo (WFC) may need an additional $5OB to pay back the U.S. Treasury and to cover loan losses. WFC surprised the market last week, by pre – announcing a $3B profit in the 1st quarter, but provided limited details of that pre – announcement.

We should not be euphoric about this announcement, as there are some unknown details and negative headwinds that the company still faces.

With the current job losses continue to increase at a 700K per week clip, we can expect the credit losses for WFC will rise with the higher unemployment. This will reduce the company’s bottom line, and will impact their earnings going forward.

As reported by Bloomberg, WFC charge – off rate significantly increased to $3.3B in its current quarter compared to $2.8B from the last month.

Credit Suisse analyst Moshe Orenbuch stated,

“Given rising unemployment, continued home price declines and general macroeconomic headwinds, WFC’s consumer and commercial portfolios remain at risk for meaningfully higher credit losses over 2009 and 2010.”

I could not agree more.

I believe the strong movement in WFC is premature, and will settle back down in the mid to low teens.

Disclosure: The author does not have a position in WFC.

GS: Strong Earnings, Still Faces Negative Headwinds

The early earnings released today by Goldman Sachs (GS) came as a surprise to all, but what is more of a surprise is the results were better than expected.

The street was expecting $1.60 (First Call) per share for the quarter, but GS reported a quarterly result of $3.39 per share, a 5% increase as compared to the first quarter of 2008.

Strong Trading and Principal Investments helped the top line, but weak Asset Management and Investment banking hinder GS total revenue stream. GS liquidity continues to gain strength.

There are some important highlights that we should look at from their press release.

Their investment banking segment showed a 30% decline Y/Y, and what is alarming is decline of 20% Q/Q. This is primarily due to a “significant decline in industry – wide equity and equity – related offerings.” We should expect this to be the constant theme for the upcoming year, as the global market conditions are unfavorable to stable.

The trading and principal investments showed a healthy increase of 40% Y/Y. This is very impressive given the current market conditions. This is due to a strong “performance in interest rate products, commodities and credit products.”

There are also a few things that we need to bear in mind in their press release statement. GS advises that their “illiquid assets generally continued to decline in value.” This can cause some concern in the near future.

In addition, GS mentioned that “credit products included losses from corporate debt and private equity investments, and mortgages included a loss of approximately $800M (excluding hedges) on commercial mortgages loans and securities.” This is an improvement over the 1st quarter of 2008, when GS reported a $1B loss in credit products.

The Asset Management and Securities services declined 29% Y/Y, and for the past quarter it reported a 17% decline Q/Q. During the recent quarter, GS reported a decrease of $27B to $771B, due to $16B of market depreciation, primarily in equity assets, and $11B of net outflows. This is a major area that investors should keep their eye on for the next year.

As assets continue to deteriorate, we can see continue decline of GS Asset Management business segment to continue to hinder their revenue stream.

However, on the bottom line of the income statement, GS expenses increased by 10% Y/Y. Of that amount the compensation expenses increased by 18% Y/Y, while other operating expense offset the increase due to modest to healthy reductions in other businesses expenses.

As been reported for the past couple days, GS has announced that it will offer $5 Billion of its common stock for sale to the general public. The purpose of the sale is to pay back part of the $10 Billion of the TARP funds received from the U.S. Treasury.

In closing, Chairman and CEO Lloyd Blankfein mentioned that

“Given the difficult market conditions, we are pleased with this quarter's performance…Our results reflect the strength and diversity of our client franchise, the resilience of our business model and the dedication and focus of our people. We believe these attributes position the firm to continue to create value for our clients and actively fulfill our role in the capital markets.”

Although GS has reported strong earnings for the quarter, as like Wells Fargo (WFC), I believe we have to take a wait and see approach with GS. We do not know the whole details of their earnings and what is on their balance sheet.

Disclosure: The author does not hold any positions in GS

Tuesday, August 26, 2008

Lehman Brothers (LEH): Countdown to earnings

In a little over two weeks from now, Lehman Brothers will be reporting their quarterly earnings. The current consensus estimate for LEH is a loss of $1.73 per share, as compared to $1.54 that was earned in Q3 in 2007. This will represent a reversal of -112% from the same quarter from last year.

For this current quarter, there is much expectation that LEH will have to write off a significant amount on the income statement due to their credit exposure that they have. Some estimates have the amount hitting around $4 million this quarter.
As a result, one the key for LEH is for them to build their capital stream by strengthening their balance sheet. From the first quarter to the second quarter, LEH assets on the balance were reduced by 19% (from $786,035M to $639,432M).

As a result, LEH has realized that their goal is to build their liquidity by building their balance sheet. As current news report has LEH actively seeking buyers for their asset management unit, and there are recent reports that LEH is looking for buyers for their mortgage assets.

Another tool that LEH can use is to cease their dividends for the time being. For the past six months, Lehman Brothers has paid out $334M in dividends to their shareholders. LEH can use this proceeds from the dividends to add liquidity to the balance sheet.

In essence, LEH must build their liquidity to continue to fight against the negative headwinds that the company is facing. LEH needs to make some tough decisions e.g. cutting their dividends and selling their assets. Once they recapitalize themselves and build their balance sheet with capital, LEH will come out stronger on the other side of this cycle.

I have no position in LEH

Tuesday, August 19, 2008

Why sounding the alarm of another financial failure is going to be self fulfilling?

An article I stumbled across yesterday entitled “Credit crunch may take out large US bank warns former IMF chief” brings back memories of the downfall of Bear Stearns.

The target now is Lehman Brothers (LEH).

On CNBC’s Asia Squawk Box Wednesday, Ron Ianieri mentioned that "Lehman is definitely right there. They're caught between a rock and a hard place. They have to raise capital right now."

The news on the street yesterday about Lehman Brothers is that they would have to write down about $4 billion dollars due to their credit exposure.

As a result of the news, LEH stock fell $1.96 or 13.04% through yesterday’s trading; after the market closed, the stock continued to slide as doomsayers continued putting pressure on the stock. People are betting that LEH will continue to decline based on the options trading that took place yesterday.

We should pay careful attention as to where the price of LEH will be at the market's close on Friday. My guess is that by the end of Friday, based upon on the amount of trading and the downward trend of LEH, the stock will fall below $10.00.

I have no position in LEH.