Monthly Archive for December, 2008

Medtronic’s Lost Decade

Posted on December 31, 2008, 10:02 am. Closed

People have frequently mentioned the lost decades of the various market indexes where we appeared to have so much progress, but it was all lost in the last year or so. This should lead one to ask, was this progress “real” in the first place or was this just a hyperextension of a credit bubble that began in the 80s? I can’t help but think that we would be slightly better off than we are now than if the government had not intervened in all the previous financial crises of the previous two decades. I also can’t help but think that all previous trust placed in and respect for the Fed has been seriously misguided. An government institution whose job is to produce a natural rate at which money is loaned, whose job is to gauge whether there is too much or too little inflation? This is the same kind of conceited view of economics and human nature we see in communist countries with central planning. Anyways…

I was looking at the long-term charts of companies that have been public for more than 25 years to see how far they’ve come and/or how far they’ve fallen. One company that stuck out was Medtronic.

The current price is exactly the same as it was in late ’98. Without doing any research, I can only surmise that the stock price has languished because of intense competition that has decreased margins and earning power. Also, add in growing costs of R&D and compliance with government rules and regulations, and you’ve got yourself a company that hasn’t been able to increase shareholder value for 10 years.

My only question is whether the price will fall or increase because, from a technical point of view, MDT is now at a point of resistance.

Dow and Rohm and Haas Deal

Posted on December 30, 2008, 8:03 pm. Closed

Dow Chemical (DOW) made an offer to acquire Rohm and Haas (ROH) back in July for $15 billion in cash, which is $78 per share. ROH’s share prices tumbled to the low 60s in October, where I picked up some shares. Despite the horrible temporary conditions back in October, the deal still looked solid to me. One, Dow had very few options if it wanted to back out of the deal — Dow would have to pay $750 million if the deal didn’t go through. Two, Dow had sufficient cash to do the deal. Three, Berkshire Hathaway had given financing to Dow.

The most recent setback to the deal is that the Kuwait government has backed out of a joint venture with Dow, a JV that would have provided additional cash to do the ROH deal. On Monday, ROH was in the low 50s. In my opinion the deal has a great chance of going forward. Kuwait backing out on an agreed-upon joint venture is peanuts compared to that horrible first week of October 2008. Comparatively speaking, I think people are overreacting far more this week than they are now. You can see this in ROH’s share price.

I still think that this is a very good risk-arbitrage opportunity. ROH’s price has already risen more than 11% since Monday.

For further reading, see:

Why Dow-Rohm Is No Huntsman-Hexion (Dealbook)

Thoughts on Kuwait Reneging on Dow Chemical JV (ValuePlays)

Illustration of the 80-20 Rule

Posted on December 29, 2008, 5:49 pm. Closed

Today I was reading through the 2007 annual report of Tower Group (TWGP), an insurance company, and when I got the description of their distribution methods and results, this is what they had to say:

We generate business through independent wholesale and retail agents and brokers, whom we refer to collectively as producers. These producers sell policies for us as well as for other insurance companies. In addition, we have agreements with general agencies that provide full service binding authority programs. We had 931 producers and general agents appointed to generate business in 2007.

As of December 31, 2007, approximately 76% of the 2007 gross premiums written and produced by TRM on behalf of its issuing companies, were produced by our top 172 producers representing 18% of our active agents, brokers and general agencies. These producers have annual written premiums of $550,000 or more. As we build a broader territorial base, the number of producers with significant premium volume with Tower is increasing. In 2006, producers with premium volume of $500,000 or more numbered 121 and contributed 77% of gross premiums written.

I just felt this was a spot-on, real-world illustration of the 80-20 rule, which states that roughly 80% of the effects come from 20% of the causes.

Stock Prices and Bond Issues of Four Major Retailers

Posted on December 27, 2008, 2:36 pm. Closed

Retail sales have plummetted this year as a result of consumers starting to save and pay down their debts. I thought it would be interesting to take a look at the four retailers that I feel have suffered the most: Macy’s (M), J.C. Penney’s (JCP), Kohl’s (KSS), and Nordstrom’s (JWN). The following picture is a comparison chart of their stock prices.

Needless to say, the stock prices of these four have suffered huge declines in the past two years.

Also, each of these four retailers have bond issues. As you can see from the spreadsheet I put together, the yields (YTM) on many of the issues are in the double digits and nearly all are trading substantially under par. With some due diligence, an investor might find that one or several of these debt issues offer substantial value.

One particular issue that might be of interest is the Federated Dept Stores issue that matures on 4/1/2029 (Macy’s was formerly Federated Dept. Stores). It’s trading at 51 and is currently yielding 14.4%. Macy’s has a long history and is a well-recognized brand. It celebrated its 150th year of business this year. On these facts alone, it seems that chances are fair that Macy’s will be able to make its debt payments. However, this is simply a starting point for more detailed research. Macy’s might go BK next year, which is why an investor must do the due diligence.