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Circuit City starts taking Blockbuster seriously

2008-05-09T17:07:00Z

Blockbuster wants to buy Circuit City for $1.3 billion, but just about everyone has chalked up this proposal as ridiculous because Blockbuster doesn't have that kind of cash. Good thing the company has Carl Icahn in its corner. The billionaire investor -- and Blockbuster's largest shareholder -- said he'll buy Circuit City himself if Blockbuster can't cough up enough money for the $1.3 billion deal.

With an offer like that on the table, Circuit City has stopped giggling and is starting to seriously think about the deal. It's hired Goldman Sachs to help it explore options. Circuit City reminded everyone today that it hasn't made any decisions yet, but one thing is clear. this electronics chain is in play. And investors couldn't be happier; shares are up 9% today. Blockbuster shares are down slightly.

What would a CircuitBuster look like? For one thing, Circuit City stores would start offering movie and game rentals. And Blockbuster would expand into selling devices such as portable DVD players and iPods.

Perhaps it could work, but this deal will test all of Icahn's business skills. Both companies have been poorly managed for years, and are losing money and market share to rivals like Netflix and Best Buy. Icahn and Blockbuster's board will have to integrate both chains, energize a demoralized work force, close underperforming locations, revamp business models and develop a unified strategy to compete in retail and content distribution and delivery. Forgive my pessimism, but there's no way Blockbuster can pull this off.

Circuit City's board now has a few options to discuss. It could reject any offers and hope that CEO Philip Schoonover makes good on his struggling turnaround plans. It can load up Goldman Sachs' arms with chocolate and flowers and tell it to go find other suitors, hopefully instigating a bidding war. Or it can sit down with Blockbuster and talk numbers, emphasizing the cash part of the cash-and-stock acquisition proposal.

Cheers to Circuit City investors. This is the best thing to happen to the company in years.

A scary thought: Gasoline at $7.50 a gallon

2008-05-07T01:14:00Z

I'm really not here to scare you, but, get ready, I AM going to scare you.

The news got lots of attention: Goldman Sachs analyst Arjun Murti predicted Tuesday that the price of crude oil could hit $150 to $200 a barrel in six to 24 months. (Here's one discussion of the report. Another is here.)

Crude oil in New York promptly jumped to as high as $122.73 a barrel in New York before closing at $121.84. And, as I write this, crude was trading slightly lower in electronic trading. But it also had the perverse effect of pushing the stock market higher. Indeed, the biggest winners in Tuesday's stock market were oil and gas production companies, natural gas companies. (But not refiners; crude oil is rising faster than refiners can push their prices up.)

So, if crude jumps to $150 or $200, how does that translate into prices at the gas pump. Here's the scary part.

If crude hits $150 a barrel, we could be looking at $5 a gallon or so for the retail price of gasoline. That's based on Tuesday's $3.61-a-gallon national average and the rule of thumb that, for every $1 increase in crude oil, the pump price rises 5 cents a gallon.

If crude hits $200, the retail price of gas jumps to $7.52 a gallon. (Plus or minus a few cents) To fill the 10-gallon gas tank on my Honda Civic would cost $75.20, probably more because I live in Washington state, which has relatively high gasoline taxes.

Sure, one could say, well, Murti is a nut, but, as Barry Ritholtz noted on The Big Picture, Murti did suggest in 2005 that crude would hit $105 a barrel.

Gasoline at $7.50 a gallon is something nobody should go into denial over because there are going to be big problems from prices at levels I've suggested, including:

Will there be any U.S.-based auto manufacturers left? The answer depends entirely on how fast they can transform their product lines. Chrysler is in deep trouble already. That probably means more stress for the Midwest.

Will there be any domestic airlines left? The so-called legacy airlines (American, United, Northwest, Delta and Continental) would either try to combine into one big carrier or simply disappear. They're having serious troubles surviving as it is. This means big troubles for cities where these airlines operate hubs that generate thousands of jobs like Atlanta, Cleveland, Newark, Houston, Chicago, Denver, Dallas, Memphis and Minneapolis-St. Paul.

How will big convention cities survive? Places like Las Vegas, New Orleans, Atlanta, Chicago, New York, San Francisco and Houston have thriving convention industries, all built around the capacity of airlines to transport conventioneers to and from the destinations relatively cheaply. Emphasis on the word "cheaply."

How will tourist destinations like Florida or Hawaii cope? Add to that places like, say, Williamstown, Mass., whose Williamstown Theater Festival is a big draw, or Ashland, Ore., home of the Oregon Shakespeare Festival. They're not close to major cities.

Although as Douglas McIntyre noted on Blogging Stocks, gasoline at $3.50 a gallon has not cut demand enough to force prices lower, there are signs that adjustments are being made. Sales of big, gas-guzzling SUVs and pickups are slumping. Consumption of gasoline in California fell 4.5% in January from a year ago.

The Department of Energy believes that domestic consumption is likely to fall more steeply than expected this year, the New York Times reported Tuesday. It is forecasting that domestic gasoline consumption will fall slightly this year from 9.29 million barrels a day in 2007 to 9.23 million barrels a day this year. (That's about 140 billion gallons a year, enough to fill my Honda for, well, a very long time.)

Sales of homes in outer suburbs are falling and not just because of the credit crunch and the subprime mortgage mess. Look at the stock prices of U.S. airlines, down 90% in the last 10 years.

Many commentators have wondered at the ability of Americans to grin and bear higher gas prices. But grinning and bearing it is losing any sense of fun. It's just gotten expensive: Over the first four months of 2008, as Peter Beutel of Cameron-Hanover noted this week, gasoline has cost the United States $757.24 million a day more than in the first four months of 2002.

That’s more than the estimated $720 million a day spent in Iraq.

Disney - A National Treasure

2008-05-06T20:38:00Z

It would have been great if CEO Bob Iger had opened Disney's quarterly conference call with "Recession, we don't see no stinkin recession."

Unfortunately, earnings calls are dominated by Wall Street speak so we don't get anything nearly as bold or colorful. But the folks at Disney deserve to puff out their chests and do a little bragging, as the company turned in another magical quarter at a time when most media companies are hurting.

Most surprising to analysts was the strength of Disney's Parks unit, which posted revenue of $2.73 billion and income of $339 million - well ahead of the consensus estimates of $2.62 billion and $306 million. Traditionally, there has been a relatively strong correlation between consumer confidence and theme park attendance. Considering that the consumer confidence index has plunged by nearly 30 points over the past nine months to its lowest level in over a decade, investors were bracing for a material drop in park revenues.

It didn't happen. An earlier than normal Easter holiday, strength from overseas and the weak dollar (which attracts foreign travelers to US theme parks) combined to provide the company with its remarkable results.

Another area exhibiting surprising strength was the company's Studio, or movie, unit. National Treasure 2 contributed greatly to the bullish surprise, as did DVD sales of films such as The Enchanted and Game Plan. The next couple quarters might be difficult on a comparison basis given that Disney sets sail without another installment of the hugely successful Pirates of the Caribbean series, but never underestimate Iger or the house the mouse built. A second Narnia movie, combined with the next Disney-Pixar release, Wall-E, could easily result in another round of positive earnings surprises later this year.

Disney is also doing an exceptional job of monetizing its brandable assets such as High School Musical, Hannah Montana and now the Jonas Brothers. Earlier today the company announced that it will be releasing a new Jonas Brothers movie. Toss in the usual strength of its ESPN brand and you can see why the Broadcasting unit was able to withstand the writers strike and relatively lackluster ratings at ABC to post decent returns.

If Disney is truly recession proof, as these numbers suggest is the case, then the stock is even more attractive than the Vanity Fair pictures of the young superstar Miley Cyrus, aka Hannah Montana.

At less than 15 times estimated current fiscal year earnings of $2.32, Disney is trading at its cheapest multiple in the last decade. Don't know about you but I saw nothing in the quarterly report to suggest this media giant should be trading at a discount to historic norms. Recession be darned (this is a blog about Disney after all), the strength of Disney's brand, its stellar financials and its brilliant management team suggest that the stock should at least mirror the multiple of the S&P 500. In fact, over the past decade the company has traded at a premium to the S&P 500 of about 20% on average.

Nevertheless, simply par with the benchmark index would result in a move up to the 44 area, or 31% above Tuesday's close -- and that's the kind of treasure we can all relate to.

Is the Countrywide buyout a BofA blunder?

2008-05-06T20:06:00Z

After Countrywide's ugly $890 million first quarter loss, speculation has been rampant that Bank of America will try to pull a Houdini and wiggle out of its agreement to buy the mortgage lender. Speculation took to new heights this week when Friedman, Billings, Ramsey analyst Paul Miller strongly cautioned BofA against the deal, and suggested that the bank may try to renegotiate the price down to the $0 to $2 per share level.

The question at hand here really isn't whether Countrywide is going to suck for the foreseeable future -- despite what CEO Angelo Mozilo said late last year, that's pretty much a given. The issue is whether Countrywide will suck more than BofA's proposed buyout price suggests. Since BofA's original buyout offer was at about $4 billion, it's possible that it's already expecting at least another $9 billion hit to Countrywide's book value. That would assume a buyout at one time projected book value, which would be relatively cheap given Countrywide's trading history.

FBR's Miller thinks that it could be significantly worse than that, though, and suggested that loan losses at Countrywide could run in the $20 billion to $30 billion range. At those levels the acquisition certainly would make BofA feel like it had swallowed a brick.

For now at least, BofA has said publicly that it is sticking with the deal and is still targeting the proposed third quarter close date. Since I'd have to assume that the resources that BofA is putting towards doing its due diligence on Countrywide are far greater than what Miller has at his disposal, I'd wager that BofA either has better insight into Countrywide's level of exposure or has a different take on the trajectory of the housing market in the coming months. Of course it could also be gritting its teeth behind closed doors, expecting a mess but not wanting to walk away from the deal.

And speaking of walking away, it's also worth noting that BofA may be very limited in its options for going back to Countrywide with "remember we said we were going to buy you? Just kidding!" The terms of the deal cut off the ability for BofA to walk away due to economic conditions, and the bank already has a previous $2 billion investment on the line, as well as debt it has extended to Countrywide. That's a significant incentive to follow through, but shouldn't be enough if BofA thinks there's a reasonable likelihood that Miller's scenario will play out.

Speculation abounds on The Motley Fool's CAPS community with investors coming out on both sides of the deal. WhenOppsKnock, who's on the bullish side, put his thumb up recently on Countrywide and said:

Countrywide Financial (CFC) is oversold due to the comments of Friedman, Billings, Ramsey & Co. analyst Paul Miller. ... An easy 35 percent gain in less than 2 months. Price should approach $6.50 - $7.00 in 2-4 weeks as the consummation of the merger appears more certain. Analysts have been having a field day see-sawing the price by their comments lately, though. Not a stock for the faint of heart.

Meanwhile, the bearish sahzies thinks that BofA may well be rethinking its options:

The only reason this company is still around is because Bank of America is buying them and now that they're talking about lowering the price again don't expect this stock to do very well...

So what's your take on the Bank of America buyout of Countrywide? Head over to CAPS and let the 100,000 CAPS investors know what you think.

Start using the MSN CAPS stock-picking system and you could win $15,000. To learn more, read this.

Disclosure: The author owns shares of Bank of America. The Motley Fool has a disclosure policy.

Petroleum engineer is the new hot job

2008-05-06T07:05:00Z

If soaring gasoline prices are blowing a hole in your commuting budget, perhaps you ought to consider going to work for an oil company. That seems to be the employment road to riches these days, as the industry reportedly faces the loss of half of its aging work force over the next decade.

According to a report by Cambridge Energy Research Associates, the energy industry will lose as many as 15% of its engineers in just two years to retirement, and has therefore launched an all-out assault on finding, training and retaining new young staffers. It sounds like the boom in demand for software developers in Silicon Valley in the '90s. Bonuses and perks are escalating as companies vie for talent. Report author Pritesh Patel said new workers will stream into the industry from around the world, but there will still be a “knowledge gap” that will hamper efforts to find and exploit new oil and gas reserves.

It sounds like this is a better direction for college graduates to head than the traditional havens of medicine and law. The Society of Petroleum Engineers has published a survey that shows the average base salary for petroleum engineers was $122,458 in 2007, up 5% from 2006. Bonuses, housing allowances, retirement plan contributions and the like reportedly push the average compensation to $167,712. All this at a time when doctors and IT pros are facing cutbacks.

The Financial Times reports that the talent shortage will worsen soon, as fewer than 1,000 students are being produced annually by geociences grad schools, a figure that’s down 90% from 1982. With talent so hard to find, The FT reports that oil and gas companies have begun to scour high schools to offer internships and scholarships to entice kids to enter the field. Also sought-after: financial support staff skilled in the special needs of the industry.

So if you’ve got a son or daughter entering college next fall who’s as comfortable with an HP 35 scientific calculator as with an iPod, point them in the direction of the geophysics department on their new campus. That’s where the jobs are going to be when they’re ready to graduate. It's actually a pretty cool occupation for young people, as they are virtually guaranteed to travel the world, from Angola and Kazakhstan to Indonesia and Brazil, to help energy companies slake the world's insatiable thirst for new oil and gas sources.

Yahoo! legal exposure: $6 billion

2008-05-05T13:21:00Z

Pegging Yahoo!'s potential financial exposure from shareholder lawsuits after it turned down an offer of about $33 from Microsoft is hard. It starts with the difference between the offer and where the stock falls after the rejection. That price could be $22 or lower. Investors would have lost $12 billion, and perhaps more.

Yahoo! is lucky, if one can call it that. Proving damages beyond the actual financial set-back to shareholders will be hard. Investors were not "damaged" as much as they simply lost money.

SPECIAL COVERAGE: Microsoft and Yahoo

The other factor to Yahoo!'s advantage is that some groups of stockholders may not sue it at all. That would include the company's founders. Along with some large shareholder who supported the company walking away, probably 20% of the stock is in hands of people who would take no action. But, large class actions suits, especially if they are making progress, could be joined by that majority of the stockholder base who held shares three months ago as well as when the offer was rejected.

The issue of who held shares and when is critical to the math. Many owners sold their shares the day the offer was public. Shareholders who were in at $19, where the stock traded before the offer, can't get the full difference between that and $33, if Yahoo!'s share price moves up again. And, it could, if the company cuts a deal with Google to sell its search advertising.

Suffice it to say, Yahoo!'s board took a very long bet, especially when it comes to shareholder liability, when it turned the offer down. Depending on how many shareholders actually saw $14 in profit go down the drain, a lawsuit lost by the company could cost a fortune.

That does not include the tremendous burden on management to defend any suits or the tens of millions of dollars in legal costs. Otherwise, rejected the offer was just a fine idea.

Why Microsoft should mull Baidu buyout

2008-05-05T13:15:00Z

Google rules the search world in all but one important country. China not only has the largest population in the world, it has the largest number of people online totaling 221 million users. It passed the US last month for total number of internet citizens. At some point China could have 500 million people on the worldwide web, more than double the US.

Google's share of the search market in China is only 25%. Local search engine Baidu has 60%.

Baidu is a very small company when put along side Google. Revenue at the Chinese company many hit $200 million this year. Operating income might be $60 million. Google's revenue will be well over $20 billion this year. Operating income should be almost $10 billion. Still, Google can't make progress in China.

Baidu has a market cap of $12 billion. Microsoft was willing to spend $47 billion on Yahoo!. The US portal is the larger company, but Baidu's revenue is moving up at the rate of almost 100% a year.

SPECIAL COVERAGE: Microsoft and Yahoo

Even if Microsoft buys AOL or MySpace, it picks up modest market share in search by spreading its offering across a larger number of users But, if the online community does not like the Microsoft search function moved onto properties which it might buy, consumers are like to turn back to Google anyway.

It is not clear what government hurdles Microsoft would face making a move to buy Baidu. The Chinese company has started a version of its successful business in Japan. That gives it another beach-head. With Microsoft's money, it could move into a great deal more of Asia. And, that region is the future of internet growth.

The top-paid CEOs in tech

2008-05-02T17:33:00Z

It's no surprise that Oracle's Larry Ellison tops Forbes' list of the best-paid CEOs in technology. Ellison is #14 on the list of world billionaires and gets big money from his company every year. His salary last year was only $1 million, but he got $182 million more through exercising stock options, according to Forbes.

Oracle shareholders can't be too upset. The company's total return in the fiscal year was 36.3%, according to Forbes. A year ago Oracle shares were in the $19 range. They reached the $23 mark in January and are now trading at around $21.34.

Here are the others on Forbes' list of top-paid tech CEOs:

2. Nabeel Gareeb, MEMC Electronic Materials -- $79.6 million in compensation

3. John Chambers, Cisco Systems -- $54.8 million

4. Mark Hurd, Hewlett-Packard -- $27.6 million

5. Jen-Hsun Huang, Nvidia -- $24.6 million

6. Samuel Palmisano, IBM -- $24.3 million

7. Wendell Weeks, Corning -- $22.6 million

8. Joseph Tucci, EMC -- $20 million

9. William Sullivan, Agilent Technologies -- $17.4 million

10. Paul Otellini, Intel -- $16.3 million

11. Steve Jobs, Apple -- $14.6 million in compensation

12: Jonathan Schwartz, Sun Microsystems -- $13.5 million

So which of these guys actually deserve their mega-salaries? Who's overpaid? Let me know your thoughts in the comments.

I think Steve Jobs is worth every penny of his $14.6 million for getting Apple's iPhone out last year. Biggest waste of money? I'll give it to Jonathan Schwartz. Yes, he managed to return Sun to profitability last year, but yesterday's devastating earnings report makes it unlikely that Sun can deliver on promises of revenue and profit growth.

Pay dearly for TV on your cell

2008-05-01T17:53:00Z

I love the idea of watching television shows on my cell phone. But would I pay for it? Eh. I'm not alone here -- only about 5% of consumers are willing to pay for mobile TV. Yet that isn't stopping AT&T from launching a paid service next week that broadcasts TV programs on cell phones.

AT&T is shooting itself in the foot by setting the financial bar so high that few users will sign up. According to the WSJ, you have to buy one of two new phones (at $200 or $300) to get started. Then you have to pay $15 a month on top of what you already pay for voice and data plans. The traditional two-year commitment probably applies as well. Still, investors seem to be happy with the news, because AT&T shares were up 3% at last check to nearly $40.

The service has a 150-program lineup of programs from CBS, Comedy Central, Fox and NBC. It will be hard to add many more or improve the video quality, because the service is on the same network used for voice signals and can't take up too much room.

No thanks. But we can dream, can't we, of taking the couch away from the potato and being able to fire up an episode of "The Office" in the dentist's waiting room. In a year or two, TV on the cell phone might be a more reasonable proposition. But right now, I'm saving my money for a 3G iPhone.

AT&T will run its service on a Qualcomm-owned network called MediaFLO. Verizon uses that network also, though to call it a success would be a reach. Qualcomm CEO Paul Jacobs bemoaned the slow rollout of MediaFLO recently, saying phone carriers aren't advertising it much.

Other companies are invested in this space, including Dish Network and MobiTV. AT&T is trying to get in the game early before consumer interest peaks, but it will need to reduce prices to appeal to the mainstream.

Garmin falls from its pedestal

2008-04-30T17:20:00Z

Garmin's days as a high-flying stock are over. Shares are down 11% today, hitting a two-year low after the company reported weak first-quarter profit and sales numbers. The quarter wasn't bad -- profit rose nearly 6% and sales were up 35% -- but analysts were simply expecting more. Garmin shares have dropped 66% in the last six months.

Garmin put on a happy face with the earnings, noting that "the global economic slowdown has impacted companies across the board." Executives also said that the first quarter is usually the slowest in terms of sales. But CFO Kevin Rauckman acknowledged that economic conditions are bringing some risk to future growth. Garmin has said it expects $4.5 billion in revenue this year, which one analyst said now "looks like quite a reach at this stage."

The company's biggest problem right now is margins. The average price for a Garmin device dropped 35% in the last year and is on track to fall another 25% this year in a brutal price war with rivals. That's great news for consumers, but will have a disastrous impact on Garmin's future growth.

Garmin isn't alone here. One of its main competitors, TomTom, saw its first-quarter earnings fall 83%, mainly because of price cuts on products and a slowdown in orders from retailers.

Garmin is trying to compete by introducing some cool new products, including GPS devices that also show movie times and gas prices. Some of them will also receive television signals. The company's GPS-enabled cell phone, called "nuvifone," is set to come out before the holidays.

The company is smart to seek out higher-margin devices. But the competition will be fierce, with more cell phones incorporating navigation features and with TomTom continuing an aggressive push into North America. Garmin has a tough road ahead.