Stockwhiz

Well.....

2007-07-20T13:18:00.001-05:00

Was it worth the wait? For the record, if you read my last article on Sandisk and compare to what they said in the conference call and what the analysts are saying now and see how spot on I was. Comments??

Sandisk Stealing Market Share

2007-05-11T13:20:00.000-05:00

NPD group has just released their market share data for the MP3 market for the month of March. Continuing its recent trend, Apple has been ceding ground to rivals in the MP3 business as it focuses on its launch of the iphone and their new operating system, Leopard. Since Apple launched the diminutive shuffle way back in september of '06, they have stalled the release of newer ipods to enter the cell phone market and work on the release of the vaunted OS Leopard. As a result of this stall, Sandisk has taken market share from Apple with its release of 4 new and improved MP3 players. The kicker is that Sandisk has picked different price points and age groups to market their new players.
The "Shaker" is geared for Kids and priced so that they could go out and buy it with their allowance money.
The "Express" is for people on the go who don't need a lot of storage, but want a screen with extra features.
The "Connect" is for those who want the most feature filled MP3 player on the market. The WiFi (the real kind) allows you to download songs as you listen. And then there is the "View", a PMP to watch movies, tv shows, music videos etc. priced very conservatively.

All of the these devices cater to a market that Apple has yet to exploit and as long as Apple continues to push off the introduction of their new ipods (particularly the new Video ipod) look for Sandisk to continue to grab market share.

Sandisk + Microsoft

Sandisk has finally entered into an agreement with Microsoft to package (as of yet undisclosed) software onto Sandisk hardware. This is very similar to the U3 that has been out there for a while with other software vendors. Under the terms of the agreement, Sandisk will provide the hardware technology (TrustedFlashtm) and Microsoft the software. The product will then be licensed to third party hardware vendors who will pay a licensing fee to both Sandisk and Microsoft. This deal underscores Sandisk's position as an IP leader and uses that position to rake in the L&R fees.

NAND Shortage

All indicators are pointing to a shortage of NAND flash memory for the second half of the year. With new devices coming to market that require more capacity manufacturers are going to struggle to meet the heavy demand. There are no new fabs scheduled to come online anytime soon which means the only new capacity that can come about is from transforming Dram to NAND. The probability of that happening, in the near term at least, isn't great though. Most manufacturers are waiting for a rebound in Dram chips as a result of a wide spread adoption of Microsoft Vista. What is interesting to note however is that there are as much as ten new fabrication facilities coming online either in late '07 or '08, and this doesn't include those fabs which are transforming their fabs from 200mm to 300mm. This makes me cautious about the Dram market in general. Right now prices are falling because of little demand, manufacturers loaded up prior to Vista and have yet to clear those chips from inventory. Once those chips clear and the reordering process starts you can expect demand to pick up and once that happens there will be a corresponding price increase. The question is how long will the rally last? With all the new capacity coming to market will demand really be enough to soak up the excess supply? It seems like what happened in the NAND market is going to repeat itself in the Dram market with all the excess supply. Additionally I don't see demand drivers for Dram like I see from NAND, which makes it all the more riskier.

A short term play on Dram might be your only bet, especially at this point with limited visibility. NAND on the other hand is looking at solid growth later this year and through the SSD era.

AT&T subsidies for Apple iphone?

2007-05-08T09:33:00.000-05:00

Heres the latest update from AppleInsider:

Wireless carrier AT&T is looking to use next month's launch of iPhone as an important branding opportunity, but now appears unlikely to offer subsidies on the Apple handset, according to comments made during a recent AT&T investor gathering.

"There was a major focus on the launch of the iPhone, expected in late June (based on Apple’s latest comments)," John Hodulik, an analyst with UBS, wrote in a report following the financial meeting. "While the company would not answer the vast majority of our questions, we were able to infer a couple of new data points."

First off, said Hodulik, AT&T indicated that it plans to use the iPhone launch "as a branding event" and that it will also increase its advertising dollars around the product to cement the "AT&T Mobility" name in the market. The No. 2 U.S. wireless carrier added that it expects Apple to market the product aggressively through its own avenues, as well.

"We expect the wireless market to see increased competitive pressure with the
launch of the iPhone," wrote Hodulik. "Meanwhile, the company will increase advertising and handset subsidies on non-Apple phones to take back postpaid gross add share lost in [the first quarter].

At the same time, however, the UBS analyst said comments made by AT&T management led him to believe the carrier will not subsidize the cost of Apple handsets, as has been widely rumored over past few months.

"In fact, AT&T may generate a small margin on sales of the [iPhone] in its stores," he wrote.

Hodulik add that, "Management would make no comments [sic] on how the phone is activated in its own or Apple owned stores, suggesting that this may be done somewhat differently versus typical handset purchases."

Overall, the analyst said he walked away from the meeting believing that AT&T's revenue share with Apple could be a more meaningful portion of monthly average revenue per user than previously thought. He explained that this is possible given the "significantly better economics" AT&T should realize from iPhone subscribers, given the lower "churn" and cost of adding each user to its network with advertising and branding help from Apple.

"The main concern was the impact of a generous revenue share could have if a large number of iPhone subscribers were existing AT&T Mobility customers," wrote Hodulik. "While giving no details, management suggested this had been contemplated, leading us to believe that the revenue share changes based on whether the customer is a new or upgraded subscriber or that the economics are adjusted based on the actual numbers of each."

Lastly, the UBS analyst said, AT&T expects the Apple phone to help drive traffic into its stores where it will increasingly sell wireline products along side its wireless services. /end

While it appears from here that AT&T will not officially offer rebates for the iphone it remains to be seen if loopholes will be used to circumvent their official policy. A friend of mine called Cingular at the end of his contract and told them he would not be renewing it for the coming year. As an incentive to keep him a customer, they offered him a $300 credit for any phone of his choosing. He obviously asked if this would apply to the upcoming iphone and the rep responded that it would. So at least for existing customers there may be some loophole which would allow for a subsidized phone. This makes sense for an existing customer, it remains to be seen for any new subscribers.

What the hell

2007-05-07T22:38:00.000-05:00

Why not just keep on posting, this is as good a place as any to post my thoughts and hear how ridiculous or genius they sound.

Anyway, regarding a Sandisk Music phone, I believe it is a strong possibility looking at Sandisks evolving business model. It's shift towards a consumer electronics company has opened up a new source of revenue as well as a method of soaking up some supply. If there is a company that is able to do it, it would be Sandisk. Their cost structure is second to none and their IP and partnerships enable them to leverage their technology better than anyone in the business. A phone however would be a tougher item to sell. The market is already flooded with so called "music phones" and consumers cant really pick out a phone that stands out from the others. Samsung's 'upstage' phone is one of them. While it has two screens, everything else about it sucks. Battery life, appearance, quality etc. If Sandisk can come out with a phone that has a distinct design to it, meaning its like an iphone (sorry to say that, but Apple again has done an amazing job at making one device with three distinct functions, unlike the others, which is a phone with an MP3 player attached), if they can do that they may have a chance. This isnt like the MP3 business where the flash memory plays a major role on how much the device will cost. A cell phone has a lot of variables in terms of cost that Sandisk cannot control. The partnership with Quimonda that was just announced however, does signal that Sandisk is looking to get into new markets.
Good things come to people who wait.

Rumor Debunked

2007-01-26T01:08:00.000-06:00

This from Gizmodo

Rumor Smashed: iphone Will NOT Come With 1.5 Years of Free Service

This morning, a reputable investment site made mention that AT&T plans to give away 18 months of service for free with every iPhone. It's not important who said this cough*thestreet.com*cough, but a Cingular rep has told Gizmodo that the rumors are not true:

"The report is nonsense. We've always said the only way you can get the iPhone is with a Cingular rate plan."

We're all for salivating over rumors when labeled as fantasy, but this one is so...

unbelievable that it doesn't even get us half-hard. OK, take the world's most anticipated phone, sell it exclusively. Sounds like a money machine. So, why give away the minutes and data for 18 months, leaving 6 months of paid service on the 2-year contract? Bunk...unless that 50% margin on the totally unsubsidized phone is going into Cingular's pockets. That could rewrite the way phones are sold...UGH, no. Must resist these rumors.

Cingular to give free cell phone service with iphone?

2007-01-25T12:06:00.000-06:00

This from Appleinsider quoting from Jim Cramer:

Cramer: Cingular to give away 18 months of service with iPhone

By AppleInsider Staff

Published: 12:00 PM ESTThursday's hot iPhone rumor comes compliments of CNBC analyst Jim Cramer, who suggests Cingular/ATT will sidestep subsidization of the Apple handset by giving away lengthy service contracts.

"In its call, the company made it very clear that it's going to use Apple's iPhone to get customers from Verizon Wireless by giving away its service for a year and a half to those customers who buy the phone," Cramer explained in his blog posting at TheStreet.com.

The CNBC "Mad Money" host believes the strategy will help the wireless carrier court a flurry of new subscribers while maintaining requests from Apple not to discount the cost of the $499 and $599 mobile devices./ End

I don't know where he got this from, but its an interesting strategy. Should this prove to be true I would assume they would charge the full data fee, which is pretty expensive. For 18 months of free service the iphone is essentially free, this is not including hidden charges which I'm sure there are.

Steve Jobs CNBC Interview

2007-01-23T15:26:00.001-06:00

Last post

2007-01-22T13:06:00.000-06:00

Due to a relatively heavy schedule I will not be able to post again for the foreseeable future.
Any questions and you can feel free to email me at stocksrus@gmail.com.

Apple obliterates estimates

2007-01-17T15:46:00.000-06:00

From PRNewswire

Revenue Exceeds $7 Billion; Record Profit of $1 Billion CUPERTINO, Calif., Jan. 17 /PRNewswire-FirstCall/ -- Apple® today announced financial results for its fiscal 2007 first quarter ended December 30, 2006. The Company posted record revenue of $7.1 billion and record net quarterly profit of $1.0 billion, or $1.14 per diluted share. These results compare to revenue of $5.7 billion and net quarterly profit of $565 million, or $.65 per diluted share, in the year-ago quarter. Gross margin was 31.2 percent, up from 27.2 percent in the year-ago quarter. International sales accounted for 42 percent of the quarter's revenue.

Apple shipped 1,606,000 Macintosh® computers and 21,066,000 iPods during the quarter, representing 28 percent growth in Macs and 50 percent growth in iPods over the year-ago quarter.

"We are incredibly pleased to report record quarterly revenue of over $7 billion and record earnings of $1 billion," said Steve Jobs, Apple's CEO. "We've just kicked off what is going to be a very strong new product year for Apple by launching Apple TV and the revolutionary iPhone."

"We generated over $1.75 billion in cash during the quarter to end with $11.9 billion," said Peter Oppenheimer, Apple's CFO. "Looking ahead to the second fiscal quarter of 2007, we expect revenue of $4.8 to $4.9 billion and earnings per diluted share of $.54 to $.56."/end

21 million ipods sold in a quarter even beat my estimate of 15-20 million. The numbers for Macs were less encouraging. The amount of macs sold actually decreased from the previous quarter and was lower than consensus estimates. That being said, the holiday season tends to be slower for Mac sales than the back to school season which is typically their strongest. YoY growth was at 28% and that is the key number.
While results for this quarter easily crushed the most bullish analysts, the company issued 2nd quarter guidance well below the average consensus. I don't believe people should read too much into though, after all company guidance for this quarter was revenue of $6.2 billion and earnings of $.73. Conservative guidance is as much a given for this company as Mr. Jobs wearing a turtleneck at the macworld conference. All things considered this quarter will be a quiet one, no expected ipod releases, no iphone, initiation of the Apple TV and OS upgrade slated for the spring.

More information as it comes...

A Closer Look At The iPhone

2007-01-16T19:08:00.001-06:00

Macworld review

2007-01-09T14:12:00.000-06:00

First off the itv (renamed "Apple TV") was reintroduced with a full explanation of how it works. There were no noticeable changes from when it was introduced the first time (although it does come with a 40gb hard drive to temporarily store the streaming movies from your computer to the tv), so i'm not going to go into it.
After that Mr. Jobs introduced the much anticipated and hyped iphone. This is everything and more than what people anticipated, naturally. The phone is a significant departure from other smartphones that are currently on the market. I will list some of the features in number format to make it easier.
1. No keyboard. Instead Apple has developed a new technology called "multi-touch". According to Apple it is far more accurate than other touch screens shipped to date. It is so accurate that Apple is confident enough not to include a stylus, instead the technology senses which finger touches are purposeful and which are incidental. Steve compared this technology (revolutionary wise) to the click wheel. This technology obviously eliminates any scratches from the stylus as well.
2. The phone runs on the Mac OS X. This allows for real desktop applications to be run on the phone, not look alikes you find on a lot of smartphones nowadays. (ed. note: This will make a conversion from PC to Mac even easier for people. It allows a cell phone user to familiarize himself with the OS, so the transition is relatively seemless. This may take a year or two for reasons I will mention later.)
3. Everything can be synced from your computer through itunes. Not just music, but all forms of data as well. Email accounts, calender, contacts, photos etc...
4. There is only one button on the entire phone, and that is the home button. Everything else is on the screen in a clear and recognisable format. All too often a person can be confused with which buttons run which application, this design allows someone to know which application he is running without clicking on five different buttons first.
5. Comes with a 2 megapixel camera, which allows a user to snap a picture and email it to someone all the while he is on the phone speaking to that person.
6. Another unique feature about this phone is that comes with three proximity sensors. When you dial a number and put the phone to your ear the screen automatically shuts off to save power and prevent accidental touches. A neat perk, but doesn't enhance the overall operability of the phone.
7. It comes with light sensors which adjusts the backlight of the phone depending on the lighting of the room. Also it comes with an "accelerometer", which detects if the phone is in landscape or portrait mode and adjusts the movie/video/picture/file acordingly.
8. To scroll through artists or songs on the ipod 'section' of the phone there is no clickwheel, all the controls are on screen, so all you do is drag your finger up or down to scroll through your list. This is true with all applications, all the controls are on screen.
9. The voicemail feature really stands out on this phone. Similar to emails where you can sift through which emails you want to read, same here the iphone displays all the voicemails and who they are from and allows you to chose which voicemails you want to listen to.
10. The phone is quad-band, GSM, EDGE (cellular internet). While EDGE is the slower form of internet being used nowadays, even by cingular, the phone comes with WiFi which allows you to connect a whole lot faster. The phone is bluetooth enabled.
11. Photo manager on the phone is really slick. The photo can switch from portrait to landscape, and you can pick a photo out of a group and make it bigger or smaller by widening your fingers or narrowing them. (Dont know how well I explained that, but whatever)
12. The web browser on the phone is Apple's Safari. It is NOT a wap browser, but a fully functional browser which will download any website for you. The website will appear in regular internet format and you can make the page bigger or smaller with just a touch of the screen. The WiFi is always on, so if there is WiFi in your area you can access the internet without switching the modem from EDGE to WiFi.
13. The phone can open multiple windows at a time. Internet, text messaging, email etc. can all have multiple pages open at the same time.
14. If you're listening to music and you get a phone call, the music fades away and the call comes in. When you are finished your phone call the music fades back in again. Nice touch.

Apple has filed for over 200 patents to protect the underlying technology of the iphone. Contrary to initial speculation, there is only one battery on the phone. It allows for 5 hours of talk/video/browsing time and 16 hours of audio playback. Not bad by any standards. The iphone is also the smallest smartphone on the planet right now as you can see from the pictures.
The device will start shipping in June after it gets approved by the FCC. The price tag, with a two year contract, is $499 for the 4gb model, and $599 for the 8gb model. The price is pretty steep considering this is after the two year contract. And even though the original ipod cost a similar amount, then there was next to zero competition, in this case they better be sure they can get away with it. The partner will be Cingular, Apple and Cingular have a multi year exclusive agreement for this iphone. They have been working together for quite some time on different innovations (the voicemail trick was one of them), I am assuming Cingular will take part in the marketing and overall "pushing" of the product.

I am dissapointed that Apple didnt introduce a hard drive version of the video player with a widescreen and touch screen interface. Maybe next time.
Special thanks to engadget.com for covering the event and supplying the photos.

Rumor Summary for MacWorld Conference

2007-01-04T11:11:00.000-06:00

Taken from Appleinsider.com

Apple seen launching new iPod, iTV and iPhone at Macworld

By Prince Mclean

Published: 10:00 AM EST
New Apple product announcements at next week's Macworld Expo in San Francisco could include iTV, a new iPod, and the iPhone, according to a Macworld Rumor Roundup issued by research and investment firm PiperJaffray on Thursday.

"Despite all of the talk regarding new product announcements, or lack thereof, at Macworld, we continue to believe that the announcement of an iPhone would be positive for Apple shares and no sign of this product would be a negative," analyst Gene Munster told clients in the report.

The analyst went on to say that it's his belief that Apple has not missed the boat in the music-enabled handset market. "Apple waited several years to enter the MP3 market, we believe the company is well-positioned to enter the phone market now that early music-enabled handsets have tested the waters," he explained. "Apple will differentiate itself by offering iTunes integration on Macs and PCs, and by leveraging its expertise in software engineering for media playing devices."

Munster also offered his take on several Apple product rumors, including a ranking of certainty and some expected release dates. His analysis on each of the rumors is being published in full for reader appreciation:

Almost Certain (in the next 2-6 months):

1. iPhone entering production phase of 12m units (Certainty rank: 9 out of 10). In Nov-06 two separate reports came from Asian news sources indicating that Taiwanese manufacturer Hon Hai's subsidiary Foxconn had received a 12m unit contract for the iPhone. According to Commercial Time the manufacturer signed the contract with Apple to produce 12m units for a scheduled release in 1H07. Additionally, China Times reported that the manufacturer will produce between 500,000-600,000 units per month starting in early CY07.

2. iTV ($299) release at Macworld with some improvements from September debut (10 out of 10). At a Sep-06 event, Apple introduced the iTV, a wireless media streaming device to view iTunes content on a TV. At the show, the device was simply streaming media (but did not store it locally); we believe Apple could release an improved model with an internal hard disk drive. Downloadable movies average about 1.5GB each on iTunes and one way that Apple can ease capacity restrictions is to add hard drive space to the iTV. We believe Apple will eventually improve on the iTV shown in September, but the improvements may not come until after the initial release.

Likely (in the next 6-12 months):

3. iPhone with candy-bar form factor (9 out of 10). Given the fact that the iPhone will be Apple's first dip into the mobile handset pool, it is likely that the phone will come in a candy-bar form factor. Clamshell devices are often more prone to bugs and glitches, so when Apple releases its first phone, it will probably be a candy-bar style with limited moving parts and simpler software engineering.

4. Widescreen iPod with touch-sensitivity and wireless features (7 out of 10). According to several Apple patents, along with word from component suppliers, Apple is working on a 6th generation widescreen iPod that could feature touch-screen capability. We believe that the new iPod will be a significant improvement to the 5th generation iPod, as the device becomes more video-centric. As such, the iPod line would feature small music-centric and "wearable" players as well as a larger music player with more video-centric features. Eventually, Apple will also likely add wireless syncing technology to the player, but battery drain remains a critical concern before such a feature is added.

5. Second smartphone iPhone model with integrated keyboard (7 out of 10). Indications from component suppliers point to the possibility of a second iPhone model featuring an integrated keyboard. We believe the initial iPhone release will include a single model, but Apple will likely expand the iPhone line to include a smartphone device for instant messaging and emailing at some point.

6. iSight camera, 4GB or 8GB storage on the iPhone (7 out of 10). Recent rumors point to an initial release of two iPhone models: a 4GB version for $249 and an 8GB model for $449. Both models are rumored to feature two separate batteries in the handset, one for the phone and one for the music player. Also, Apple has successfully branded the iSight cameras on the MacBook and MacBook Pro portables and it is likely that they will eventually extend the brand to the iPhone line. With music, photos, and video from iTunes, the iPhone will be a media-rich device and an iSight camera would add to the eco-system of media/communications on the device.

7. Multiple carriers as iPhone providers (vs. Cingular only or MVNO (6 out of 10). We believe Apple will target as broad an audience as possible with the iPhone. Accordingly, the company will likely sell the handset through most or all of the top wireless service providers (Verizon, Sprint, Cingular and T-Mobile in the U.S.). That said it is possible that Cingular could obtain exclusive vending rights for a limited time. Early CY07 could be the ideal time for the release of the iPhone through Cingular. January and February 2007 will include the Macworld keynote on January 9, CES from January 8-11, and key marketing opportunities during the Cingular-sponsored American Idol Premier on January 16 &17 and the Super Bowl on February 4. This may be the "perfect storm" for the release of the iPhone, especially as a Cingular exclusive. An additional option would be for Apple to use a MVNO (Mobile Virtual Network Operator) system. We have not seen any hard evidence that indicates whether Apple will choose to go with an exclusive provider, several providers, or the route of an MVNO (Mobile Virtual Network Operator).

A Stretch (possibly in the next 12-18 months):

8. Ultra-portable 12" MacBook Pro (4 out of 10). With the Intel transition successfully completed, Apple is ready to innovate the product line with the possible addition of an ultra-portable addition to the MacBook family. With the release of the 15" and 17" MacBook Pros, Apple decided not to carry the 12" PowerBook model into the MacBook Pro lineup. If a 12" MacBook Pro is released, we believe the product will address the need for extreme portability; not simply a smaller MacBook Pro. Another possibility is that of a touch-screen tablet Mac. Rather than marketing the tablet computer to business users (like tablet PCs), we believe that a tablet Mac would be targeted at home users desiring to wirelessly control media content. Again, this rumor is 'a stretch' because we have not seen any hard evidence, other than several patent applications, that point to the release of a tablet Mac.

9. Radio-transparent material used for iPhone casing (3 out of 10). Since current iPod casings would serve as poor mobile phone casings, Apple is looking into new casing materials. Specifically, the material must enable radio-waves to penetrate the device's exterior. In a Nov-06 patent application Apple describes a computing device with radio-transparent material like zirconia used as the casing. We see this patent application as evidence that the iPhone is coming, but we hesitate to draw conclusions on the specifics of the device based on such patents.

10. iPhone to feature 'iChat Mobile' video and instant messaging (2 out of 10). Again, we believe that the iPhone will be a media-centric communications device and messaging features would work nicely with such an ecosystem. While it is unlikely that the first iPhone will feature video conferencing, this is certainly a feature the company could add to future models, including a possible smartphone model.

11. OSX 10.5 Leopard release at Macworld (3 out of 10). While Microsoft has delayed the consumer launch of Windows Vista to January 30, 2007, Apple announced plans to release OSX 10.5, Leopard, in "spring 2007." These releases are not necessarily a race to the finish line, but we believe that Apple will work hard to ship Leopard close to the release of Vista.

Quick Update: AAPL, LCC, SNDK

2007-01-01T13:31:00.000-06:00

Apple Computer:

1. Apple computer released its tardy 10k report to the SEC along with its findings in the backdating options scandal. The report essentially clears Mr. Jobs of any wrongdoing primarily because he never gained from the options. It is fully expected that Mr. Jobs will remain with the company.

2. itunes traffic for Christmas day was 4 times as heavy as the previous year, leading analysts to say that ipod sales for the holiday season have bested everyones expectations. Like I said in a previous post this is due to heavy shipments of the ipod shuffle.

3. For the holiday season, best sellers on online retailer Amazon were as follows:
MP3: 6 ipod models placed in the top ten
Laptop computers: 3 macbooks placed in the top ten
Desktop: 4 Macs (3 imac 1 mac mini) placed in the top ten.
What stands out from these numbers is how well Apple did in the desktop category, typically their weakest segment.

4. S&P analyst Richard Stice CFA, upgraded Apple stock from buy to strong buy based on strong fundamental drivers and lower uncertainty in the options probe.

US Airways:
US Airways CEO Doug Parker said that at this time he will not up the offer for Delta. He is standing by his bid of $8.4 billion and hopes the creditors will push Delta management to accept this offer. At the same time Mr. Parker did not rule out the possibility of raising the bid should he come across information that would indicate a greater value for the airline.
Should Delta remain as a standalone carrier it may affect how strongly AirTran will go after Midwest. It is hard to tell how much of a ripple effect will flow through the industry being that it is still in need of some consolidation. From all the talk a couple weeks ago about mass consolidation it appears things have cooled off considerably on all fronts.

Sandisk:
Msystems, which was acquired by Sandisk, has developed a solid state drive (SSD) for use in laptop computers. Rumor has it that this product is now in late stage production and will be available either late in the first quarter of early second quarter. Rumored customers include Dell, HP and Lenovo. The speed for this SSD remains in question. It's read times were very impressive but write and burst speed were somewhat lacking relative to current HDD and Samsungs SSD, which is now available in their own laptops.
It is exciting to see this new product come from Sandisk as it adds to an already impressive array of NAND memory products.

For more details feel free to leave a comment and I will reply as soon as I can.

Airline Briefing

2006-12-20T21:32:00.000-06:00

As I'm sure most of you know, there has been a wave of activity washing through the airline industry. Here is a synopsis of the news in short
1. USAirways has made an official hostile takeover bid for Delta Airlines which is in Bankruptcy protection
2. Airtran has made a hostile takeover offer to Midwest Airlines
3. Rumor has it that United and Continental are in talks for a merger
4. Northwest has hired an advisory group to explore strategic alternatives which include a merger.

So far none of these deals have closed, in fact each airline that has been approached with an offer has balked. Let's see which deals make the most sense.

1. Delta Airlines declared bankruptcy back in 2005 and has been lagging the industry with regard to overall turnaround/profitability. When it comes out of bankruptcy (the company expects to emerge in the spring of '07) the creditors will come looking for whatever is left of the company. Usually when a company comes out of bankruptcy the creditors get pennies on the dollar, now the creditors find themselves in a relative 'sweet spot' with each company saying they will get more money if they stick with their plan. US Airways is offering $8.67 billion, $4 billion in cash and the rest in US Airways stock. Delta hired a financial advisor to evaluate the future value of the company once it steps out of bankruptcy and the number they came to was between $9.4 billion and $12 billion. For the creditors this means a 20% increase (rough average) over US Airways offer. As the deal stands now, the creditors will likely reject it for several reasons.
1. US Airways still hasn't proven to anyone that they can successfully merge two airlines together to create one homogeneous group with tangible synergies. America West merged with US Airways in 2005 and they still haven't integrated the salaries for their employees. Pilots from both airlines are getting paid different salaries while logging the same flying time. Their computerized reservations systems are still separate as are their operating certificates. I think America West/US Air is biting off more than they can chew.
2. This deal may not even pass antitrust regulators. While it may increase profits, ticket prices will also increase. 40% of all major east coast gates will be operated by the combined airline squeezing competition. Even should the deal get approved it will take the justice department a long time to review the proposed merger and during this time Delta will have to sit in bankruptcy. While Delta could petition at any time to remove itself, US Air has clearly stipulated that the deal will only happen with Delta still in bankruptcy, for obvious reasons. Creditors will not like such a scenario, sitting in the dark on worthless pieces of paper while a judge decides if the merger can go through. All the more reason they wont sign off on the merger, at least at the current price.
3. Before the combined company would have a chance to create the synergies necessary to improve profits they will be sitting on a debt load that has never been seen in the industry before. A cyclical downturn, a slowing economy, rising oil prices are all factors that could force the company to declare bankruptcy all over again, and they would be the first to go in the industry. The creditors are sure to be concerned about that being that they will be sitting on $4 billion in stock.
In all likelihood US Air will raise its offer to better compete with estimated valuation of Delta. The creditors will take what they can get from US Air being that it is at least part cash. They may also stipulate that a higher percentage should be in cash as opposed to stock to minimize the risk. Should the creditors stick with Delta, there is no guarantee that they will actually get the higher range proposed by the financial advisor, being that the final price is decided with the offering of shares. Also, there is no guarantee that Delta's turnaround plan will work. Being that the creditors are being paid back entirely in stock any collapse will adversely affect their repayment. A big percentage of the turnaround is on new international routes, some of which have never been serviced before by an American airline. While they do have exclusivity, there may not be the demand needed to make the trip worthwhile.
In short, look for Delta to speed up the process to get out of bankruptcy, then the deal will automatically fall off as the creditors don't have the say anymore, the shareholders do. US Air may attempt to raise the bid, but just because the creditors may accept it doesn't validate the stock in the slightest. It just makes US Air/ America West/ Delta the most bloated underachiever in the industry.

2. Airtran's deal for Midwest makes a little more sense. The two airlines would compliment each other more than they would overlap. Midwest has a hub in Milwaukee which, comparing it to similar cities its size is severely underused. This isn't necessarily a bad thing as it does reduce capacity and doesn't risk sending up empty planes into the skies. The deal would be effective right away, there would be minimal to no cost reductions and no layoffs. According to CEO Joe Leonard the merger would create additional jobs in the Milwaukee area as they work to increase the utilization rate at General Mitchel Int'l. One cost reduction that would come into play would be the mothballing of Midwest's MD-80s which are obsolete by industry standards. By switching over to Airtrans 737's they reduce fuel costs and improve range opening up new long haul routes that have escaped Midwest for the most part.
I don't think Midwest has a choice but to accept the deal and I don't think Airtran has a choice but to raise it. The industry is going under a major consolidation that may squeeze out anyone who cant offer a complete service with a normal amount of departures and destinations. Airtran has Delta right on its heals and Midwest has Northwest breathing down its back. If any airline (Northwest doesn't really count) were to make a semi aggressive push at the Milwaukee market Midwest would be in deep trouble.
I would take a serious look at Midwest airlines (MEH) being that I believe it is a certainty that Airtran (AAI) will raise the bid. Airtran will offer stock and cash as part of the deal, I would hold onto the Airtran stock after that. Another option is skipping the speculation that Airtran will raise the price on Midwest and go straight after Airtran, they are in the best position to deliver growth in the domestic airline industry. An acquisition of Midwest would make it easier and less risky.

3. Continental has in the past rejected overtures for any merger, but people are whispering that Continental is now listening very closely. No formal bids have been made and as such it makes it difficult to comment on. What makes this deal unlikely is the fact that Northwest has the ability to block a merger were it posed for a shareholder vote. Meaning if United were to acquire Continental then Continental would have to submit it to shareholders, should that happen Northwest can reject it outright. Which they will do to keep the playing field equal. The only way to circumvent it is if Continental were the one doing the acquiring, then there would be no shareholder vote, but I don't think United would want to give up its top management seats. It can be worked out, but it is complicated.
Also, this deal would also be subject to anti trust approval before it can be green lighted similar to the US Air-Delta deal. The difference in this merger is its international implications, each airline supports the others international routes whereas in the states there would be more overlapping than complimenting.

4. Nobody is going to buy Northwest.

Level 3 Communications (LVLT)

2006-12-13T12:29:00.000-06:00

According to Mr. Cramer this stock should double within the next 18 months. He sees strong growth in the internet sector and maintains that LVLT is the way to take advantage of this surge in demand. He realizes that LVLT does not have the best balance sheet, with roughly $6.5 billion in debt translating into a debt/equity ratio of over 11.
I find it hard to believe that level 3 will be able to significantly take advantage of further growth in this sector. From 2002 to the present revenue growth has been non existent and until the past couple of quarters they weren't cash flow positive (from operations). What makes you think from 2006 to the future will be any different? I think Level 3 had the same question and they didn't have an answer, so to create an answer they went on a buying spree, snapping up telcos all over the country in an attempt to rejuvenate the company. The idea is to expand into the metropolitan markets with the intention to be able to terminate traffic over its owned facilities as opposed to paying third party fees. In essence all this is doing is cutting costs as opposed to real expansion.
If the company wasn't able to take advantage of the growth of the internet from 2002 'till now I remain skeptical that they will be able outperform in the future.
Looking at the debt structure: (copied from Level 3's 10Q)

10. Long-Term Debt

At September 30, 2006 and December 31, 2005, long-term debt was as follows:

	September 30,			December 31,
(dollars in millions)	2006			2005

Senior Secured Term Loan (11.82% due 2011)	$	730		$	730
Senior Notes (9.125% due 2008)	—			954
Senior Notes (11.0% due 2008)	78			132
Senior Discount Notes (10.5% due 2008)	—			144
Senior Euro Notes (10.75% due 2008)	63			59
Convertible Senior Notes (2.875% due 2010)	374			374
Senior Discount Notes (12.875% due 2010)	488			488
Senior Euro Notes (11.25% due 2010)	132			123
Senior Notes (11.25% due 2010)	96			96
Senior Notes (11.5% due 2010)	692			—
Fair value adjustment on Senior Notes	(64		)	—
Senior Notes (10.75% due 2011)	500			500
Floating Rate Senior Notes (11.42% due 2011)	150			—
Issue discount on Floating Rate Senior Notes	(5		)	—
Senior Notes (12.25% due 2013)	550			—
Issue discount on Senior Notes	(2		)	—
Convertible Senior Notes (5.25% due 2011)	345			345
Convertible Senior Notes (10.0% due 2011)	880			880
Convertible Senior Notes (3.5% due 2012)	335			—
Convertible Senior Discount Notes (9.0% due 2013)	269			252
Convertible Subordinated Notes (6.0% due 2009)	362			362
Convertible Subordinated Notes (6.0% due 2010)	514			514

CBRE Commercial Mortgage (6.86% due 2015)	70			70
Capital Leases	24			—
Other	1			—
	6,582			6,023
Less current portion	(5		)	—
	$	6,577		$	6,023

As you can see (in bold), about $3.2 billion worth is convertible with below average yields. This allows the company to offer shares of stock instead of repaying the principal. While it may save them cash, it will increase their shares outstanding thus further diluting any profits. These notes wont take affect until they mature however and that is still a couple years down the line.
It was recently announced that the company is restructuring their senior notes due 2011(in italics) which totals $500 million with a yield of 10.75%. The new offering will have a yield of 9.25% but with a mturity date of 2014. Hardly makes sense considering they wont be saving any money in the longer term. Unless they are worried they wont be able to meet the payments on the notes by maturity, but if that were the case there are other notes due earlier and with higher yields. I'm guessing the premium on those notes were much higher and any attempt to refinance would have cost them a pretty penny. Either way, this announcement is not a boost of confidence for shareholders who think this company is getting their debt in order.
In short, I would sit on the sidelines and see how well the company does integrating its acquisitions, see if they can sustain consistent revenue growth and work towards net cash flow positive. Without those three things the stock isnt moving.

More on the iphone

2006-12-04T13:25:00.000-06:00

Here is a small article from appleinsider:
In the latest episode of his weekly podcast, Digg founder Kevin Rose claims some knowledge of Apple Computer's initial iPhone product.

According to Rose, the extremely compact device will work with both CDMA and GSM networks, making it compatible with all of the most popular wireless carriers, such as Verizon, Sprint, Cingular and T-Mobile.

Apple is also doing "some unique things" with the device, he said, like building in two separate batteries -- one for the music player portion and the other for the actual phone.

Rose, who has provided accurate information on Apple products in the past, added that Apple is likely to introduce two models of the phone: a $249 4GB model and a $449 8GB model.

It should be noted that his past predictions on Apple products have come within hours, not months, of the formal introduction for those products.

Still, Rose appeared high in his convictions, even adding that a touch-screen may also be in the cards for the face of the device. /End

The fact that the iphone will have both CDMA and GSM capabilities is nice. It will be kind of like the Motorola RAZR in the way most carriers offer it. It still more likely, that Apple Will go with a single carrier such as Cingular. A UBS Telecom analyst is of the opinion that Apple will go with the MVNO option, reselling 'minutes' they buy from other service providers. This option is the least likey for many reasons that I wont get into.
That being the case Apple will probably sell the phone in its own stores, and maybe at bestbuy as well being that they have a nice working relationship.

The fact that the phone will come with two batteries, one for the phone and one for the MP3 player, is a cool idea. The only way this will work however if both batteries aren't compromised. Meaning there will have to be decent battery life on both batteries to make it worth it. With Apples emphasis on size, it will be interesting to see what they come up with.

Additional rumors has the iphone sporting a touchscreen face and a slideout keyboard.

The pricing rumors on the phone are a little hard to understand. The 4gb ipod nano retails on Apple's website for $200, so the 4gb phone selling for $250 makes sense, even cheap maybe.
The 8gb ipod nano is selling on Apple's website for $250, the rumor for the 8gb iphone is $450. That's a $200 price differential between the two phones for only an extra 4gb in capacity!
This leads me to believe one of two things. 1. The pricing rumors are bogus. 2. There will be a significant advantage in the 8gb version, meaning different features. Both options are very possible, but I would like to think that number option number two will be the reality. One way of that happening is if the 8gb version is a smartphone. This would explain the touchscreen face as well as the slideout keyboard. The 4gb version may not have these features, or will only have one of them. Either way, in this scenario I think the prices are fair and will draw significant demand. This will be, in reality, the first mp3/cellphone. The dual batteries are a good indication that the phone and mp3 player will be exclusive of one another, but packaged in the same package. No other cell phone to date has managed to create that type of exclusivity in one, good looking package.

These are my musings based on unsubstantiated rumors. Don't assume anything from this article.

Zune update

2006-11-28T15:03:00.000-06:00

I'm sure you're all wondering how the Zune is doing against the ipod so far this holiday season, so I put together a couple links to news articles for you to catch up with whats happening.

Businessweek

TheStreet.com by Katie Dean

TheStreet.com by Kevin Kelleher

Forbes

AP

Chicago Sun Times

While initially Microsoft/Toshiba ramped production in anticipation of selling around 3 million Zunes by the end of the holiday season it appears that they will be lucky to get to 1 million.
Defenders of the zune are saying that they expected this and for a first edition mp3 player they are satisfied with sales so far. They also say that long term is what counts and that they are confident that with each new edition it will bring them closer to actually competing with the ipod.
Apparently they don't realize that they are where Apple was 5 years ago and you can rest assured that Apple wont be sitting around offering the same version of their current ipod until microsoft has the chance to catch up. Apparently they also don't realize that on Amazon's electronics bestseller list the Zune is selling at number 93, behind 4 ipod accessories, 14 ipods and 7 other mp3 players from Sandisk and creative. Clearly it isn't selling the way they expected. Lets just hope they figure out a way to get the Zune off the shelves before the next generation ipod comes out.

Trouble+Dumb=Wal-Mart+Palm

2006-11-27T12:37:00.000-06:00

Wal-Mart announced sales below their already lowered projections for the month of November. Without going into specifics it was terrible. They announced plans to open a bank in Mexico, I guess people had every right to worry that the "credit card processing" was going to turn into a real bank in the US. Struggling Wal-Mart sales over seas may mean that there is a cultural tendency leaning away from these mamoth discount stores. Announcements that they are cutting back on capital spending will mean slower expansion, which means they will have to turn inward for growth. Anemic same store sales growth (declines) isnt a good start. Urban expansion isnt happening and fashion retail hasnt taken off yet. Wal-Mart is dead money until they can find a strategy that works for them. Possible solution: Buy Kohls or JC Penny or the like.

An article in the Mercury News quoted Mr. Colligan as saying he wasnt worried about the Apple iphone threat. ``We've learned and struggled for a few years here figuring out how to make a decent phone,'' he said. ``PC guys are not going to just figure this out. They're not going to just walk in.'' Looking at the announcement from Palm today apparently they haven't figured it out yet either. Shipments of their Treo 750 was delayed into the third quarter because (from Reuters) " of a delay by a U.S. cellphone carrier in ensuring the Treo 750 is compatible with the carrier's network. It declined to name the carrier." I think the problem was that the carrier was busy ensuring the iphone was compatible with their wireless network. Either way Palm has had execution problems in the past and the updates on their current line of smartphones are cosmetic and won't compete with RIMM or AAPL. (As a side note, Palm's valuation looks a little attractive)

Brief comments

2006-11-22T13:02:00.000-06:00

Apple Computer is the stock to own for '07. 2nd generation ipod shuffle is showing huge demand and will add around 5-7 million units sold for the holiday quarter. An iphone is expected to be introduced in the beginning of the year with high expectations. This alone could add a couple billion dollars in revenue. itv is going to begin shipping in the beginning of the year as well. Strong demand for macbook and macbook pros are continuing for Apple. Margins will decrease this holiday quarter and it should be expected. The shuffle sells for a lower average price and is a decent percentage of total ipod sales. If there is a pullback because investors didn't like the lower gross margins it will prove to be a wonderful buying opportunity.

NVIDIA is looking pretty attractive as we speak as well. Their recent acquisition of PortalPlayer puts them in a good position to enter an expanding mp3 market. Their high priced reality synthesizer secured a place in the new PS3. Due to expected strong demand for this player, this could be a high driver of revenue for NVDA. Like I said before PortalPlayer probably secured a socket in the iphone. This is more or less confirmed. This could drive future business for NVIDIA if they can secure a good working relationship with Apple. With PLAY's experience in chip integration it should be exciting to see what NVDA can do with their chips.
An analyst report from July announced that NVDA secured the multimedia socket in the future vpod due out early '07. This is at the expense of Broadcom. This chip will add 3d graphics capabilities and somewhere down the road may be integrated into one big chip now that NVDA bought PLAY. Somehow I'm starting to think Apple may have arranged this whole merger. Not seriously, but it's kind of interesting how Apple stands to benefit the most out of this.
Increased demand in notebooks and desktops due to the release of Vista should also help drive sales.

Precision Drilling Trust is one of the now infamous Canadian Energy Trusts. While it will be getting taxed like a regular corporation in 2011, that is still 4 years away. For these 4 years you could still be getting a nice 14% yield on your investment. The dividend is payable monthly. I believe the stock has already priced in the news for 2011, trading at 12x expected earnings for that period assuming a full tax rate. The company is not directly related to oil and natural gas prices, but a softening in demand will hurt demand for their services. Their acquisition of Terra Water Group gives them an advantage of being a full service company in the oil fields of Canada. Lots of uncertainty revolves around these trusts. Risky investment.

Nvidia to buy PortalPlayer

2006-11-06T08:34:00.000-06:00

Reuters:

NEW YORK, Nov 6 (Reuters) - Nvidia Corp. on Monday said it agreed to buy PortalPlayer Inc. a maker of semiconductors and software for personal media players.

Under the agreement, Nvidia would pay $13.50 for each share of PortalPlayer, valuing the deal at $357 million, or about $161 million net of cash on PortalPlayer's balance sheet. PortalPlayer shares closed at $13.36 on Friday.

The deal has been approved by the board of each company, Nvidia said. /End

The price is too cheap relative to their book value and their growth prospects. I am still scratching my head why a company with such a strong balance sheet and a defined business model would feel the need to put itself up for sale.

I don't see a bidding war over PortalPlayer partly because both boards have agreed to the deal and because of the limited amount of potential suitors there are out there.

The deal is still subject to shareholder approval and all things being equal, I vote no.

PortalPlayer update

2006-11-04T19:12:00.000-06:00

As usual here is an article to start off with, this time from EEtimes online:

SAN JOSE, Calif. — Apple Computer Inc.'s new iPod shuffle does not contain SigmaTel Inc.'s MP3 decoder chip, as previously thought, according to an analyst.

Instead, Samsung Electronics Co. Ltd. is said to have won the new Pod shuffle socket at Apple, said Craig Berger, an analyst with Wedbush Morgan Securities Inc. (Los Angeles).

SigmaTel had been the incumbent supplier of MP3 processor chips for the older-generation iPod shuffle. But as a result of the apparent design loss for the new iPod shuffle, Berger lowered his estimates for SigmaTel (Austin, Texas), based on the findings in the iPod shuffle, the entry-level MP3 player made by Apple (Cupertino, Calif.). Berger cut his 2007 EPS estimate from minus $0.60 to minus $0.85, but he maintained a ''Hold'' rating on the stock with a $5.50 price target.

According to a teardown of the iPod shuffle by Apple Insider, the MP3 decoder chip had an ''Apple logo'' with a specific part number: 337S3300 844A, according to Berger. This is somewhat similar to the Samsung supplied MP3 chip for the iPod nano, which has a part number 337S3291, according to the analyst

Based on these findings, Berger concluded that Samsung is making the MP3 decoder chips for both the iPod shuffle and nano. In April an executive from South Korea's Samsung (Seoul) said the company won the MP3 media processor business for Apple's next-generation iPods.

That design-win turned out to be for the iPod nano, the mid-range MP3 player from Apple. PortalPlayer Inc., the incumbent chip supplier, lost the business.

But after an apparent ''gaffe'' by the executive from Samsung, Apple reportedly ''punished'' the South Korean semiconductor giant by maintaining its MP3 chip alliance with SigmaTel for the shuffle, according to Berger in May.

In any case, PortalPlayer and SigmaTel are struggling after the apparent design setbacks. ''While [SigmTel] management is now touting a significant and aggressive recovery plan to investors, we remain guarded about the key revenue and gross margin assumptions being used to drive its forecast and expect continued losses in 2007,'' Berger said.

''We do like management's new LCD TV audio focus, and would like to see management leverage their audio processing and/or analog capabilities in more attractive end-markets,'' he said. /End

This all but confirms my suspicion that PortalPlayer lost the Apple business as a result of the Flash memory supply agreement that Samsung has with Apple. Apple however will continue to use PortalPlayer in all other ipod lines. This news alone may be priced into the stock however.
What I would like to point out is a potential new market which PortalPlayer may be designed into. This new market is the, as of yet non-existent, iphone.

Start at the beginning:
At the beginning of the year there was a slew of press releases hyping PortalPlayer's pp5022 chip which will include wifi and bluetooth capabilities. Here is an article detailing the specifics from Appleinsider:

iPod chipmaker PortalPlayer this week said it will team with wireless solutions provider CRS to deliver Wi-Fi and Bluetooth connectivity with its next-generation system-on-chip scheduled to make its debut in the second half of the year.

The San Jose, Calif.-based PortalPlayer, whose system-on-chip audio controllers have been a fixture in the iPod since its inception, currently supplies Apple with chips for all varieties of the digital music player with the exception of the low-end iPod shuffle.

Through a combination of PortalPlayer's PP5022 applications processor family and CSR's UniFi Wi-Fi chip and BlueCore Bluetooth chip, consumer electronics and digital media player makers such as Apple will be able to produce wire-free audio and media players by year's end.

The chip's Wi-Fi capabilities will allow iPods to wirelessly synchronising content with iTunes, download podcasts directly from the Internet and stream audio or video content from a PC or the Internet. It will also allow access the Internet at public Wi-Fi hotspots or in metro Wi-Fi networks and uncork new purchase opportunities in these public venues.

On the other hand, the added Bluetooth compatibility will enable wireless stereo headset connectivity.

"Adding Wi-Fi means the personal media player is no longer a slave to the PC. Consumers will no longer have to dock their media player to change playlists or add new songs, photos and videos," said Scott Tandy, vice president of marketing from PortalPlayer. "We are excited to continue the expansion of our core technology platforms into new and rapidly growing segments like wirelessly connected personal media players."

PortalPlayer has said its PP5022 system-on-chip utilizes dual 32-bit ARM7 microprocessor cores and extensive firmware to provide scaleable performance and maximize battery life.

Meanwhile, CSR, which also has expertise in delivering an optimum balance between battery life and performance, says its UniFi-1 Portable is the world's smallest single-chip solution for standard 802.11a/b/g Wi-Fi. In addition to functioning properly in close proximity to a Bluetooth radio, UniFi will provide multi-mode 802.11a, b or g operation, extremely low power consumption, and built-in antenna diversity processing for extended speed and range.

PortalPlayer and CSR will be showing reference designs and running a Wi-Fi technology demonstration at the 3GSM World Congress 2006 in Barcelona, Spain, which runs from Feb. 13-17.

Apple has traditionally introduced major advancements to its iPod product line in the Fall, usually just a month or so ahead of the holiday shopping rush. /End

In short what this means is that PortalPlayer will have the first fully integrated chip including wifi and bluetooth capabilities. The company partnering with Portalplayer on this also has the needed firmware to allow for maximum battery life.

In Portalplayer's most recent conference call they detailed the customers already signed on for the preface technology. They also announced a cell space win for one of their new chips. They refused to divulge the name of the company who signed on for this chip, which means Apple is written all over it.

Should Portalplayer win the socket for the iphone it would more than make up for any lost revenue in the flash based players.

I am now confident that Portalplayer will remain in all present and future ipods. I am also relatively sure that Portalplayer will be in the new iphone. With regards to the CEO leaving; checking out his profile it seems he has a history of being a journeyman, not spending more than 2-3 years in one location.

I now think Portalplayer is a strong buy based on these assumptions. Do your own due diligence.

Slight delay

2006-10-31T21:44:00.000-06:00

I have just changed location and its taking a little longer than I expected to get everything set up. A couple more days and posting will resume as usual.
Thank you for your patience

NAND, back by popular demand

2006-10-23T00:49:00.000-05:00

I'm sure most of you are wondering what’s going on with one of my favorite picks, Sandisk. On Friday the stock got clobbered more than 20% after they came out with their 4th quarter report. As usual here is an article which briefly but effectively explains their results and why the stock got punished. This time from Forbes.com:

SanDisk Plummets On Pricing Concerns
R.M. Schneiderman, 10.20.06, 5:07 PM ET

If SanDisk's stock price is of any indication, 2007 is going to be a bad year for flash memory manufacturers. On Friday, SanDisk shares took a nosedive, dropping roughly 20% in afternoon trading following its third-quarter earnings announcement.

The memory device company reported third-quarter net income of $103 million, or 51 cents per diluted share, on revenues of $673 million.

Excluding the impact of stock compensation, among other things, net income was $124 million, or 61 cents per diluted share, well above Wall Street's forecast.

On the surface, that should have pleased investors. But because the company said pricing was down 25% and would continue to face pressures going into the fourth quarter, investors balked, selling in droves.

SanDisk expects a pricing decline of 15% to 20% in the fourth quarter. Some analysts have expressed concern that the market for NAND flash memory, which can store data without access to power and is used in devices like MP3 players and cell phones, will be oversupplied.

"Investors were hoping for better margin profile and even stronger outlook going into the fourth quarter," said Eric Gomberg, an analyst for Thomas Weisel Partners, in a research report.

"Pricing turned out to be worse than expected and while management and the company did a good job in terms of execution and lowering their cost structure…folks were hoping for gross margin improvement and potentially a substantial lift in margins in the fourth quarter."

Instead, they saw margins and prices come in below expectations.

Citigroup Research, for example, downgraded the company to "hold" from "buy" and cut its price target to $66 from $69.

Craig Ellis, an analyst for the research firm, also lowered his 2007 earnings-per-share estimate to $2.84 from $2.97.

Others, however, said the market was overreacting as shares of SanDisk fell $12. 26 to $49. 47.

"We believe the stock already discounts the bearish first quarter 2007 consensus view," said Gurinder Kalra, an analyst for Bear Stearns.

"Though we have been forecasting an oversupply in the NAND flash market for 2007, we think 2007 could turn out to be better than the bearish consensus view, which is assuming a considerable oversupply."

He added that manufacturers in the mobile phone market, which is seeing significant demand, appears to be favoring DRAM flash memory of over NAND and that could "lead to more rational supply growth than is currently expected."

Kalra maintained an "outperform" rating on the stock and increased his 2007 earnings-per-share estimate to $2.85 from $2.78. /End

Let’s take a look at this report for a second. Ignoring the pricing issue which I will discuss later at length, this appears to be a solid quarter. Pro Forma revenue and earnings both beat expectations, free cash flow was extremely strong, bullish outlook for cell phone sales, and stabilizing supply/demand in NAND prices heading into the 4^th quarter. All this was either mentioned above or gleaned from their conference call Thursday night.

What investors are worried about is the possibility of future declines in NAND prices and/or a price war with competitors on flash memory products leading to smaller margins. First off, when Sandisk says they expect a further 15%-20% price decline in the fourth quarter it doesn’t mean they are referring to NAND price declines, rather competitive pricing to gain market share. A look at recent prices for NAND flash and you see a significant stabilization of prices, reversing some of the downward trend of the past couple of quarters. Contract prices for the 8gb MLC stands at $12.88 and the 4gb at $6.80. Looking at the spot prices for the same products and you see a significant up tick, the 8gb is selling at $15.39 and the 4gb is $7.83. When spot prices are selling for more than the contract price this indicates an improvement in price. In Samsungs quarterly conference call they point out that while QoQ prices declined 30% and %15 respectively for those products, MoM from September (the last month in the previous quarter) prices are back up 25% and 8% respectively. You don’t have to be a genius to point out that the supply demand balance is evening out. On that very same conference call they point out that they plan on "increasing production for the holiday season, but even with additional ramp ups growth in demand will outpace growth in supply."

A company with a cost structure such as Sandisk can afford to enter price wars with the likes of Apple. Comparing margins of Sandisk and Samsung their chief competitor, you’ll see 26% for Samsung and 32% for Sandisk. So even with the price drops and price wars Sandisk still has a better operating margin than its chief competitor. In the previous quarter Sandisk had operating margins of 32% as well, and then you have price declines of 25% and their operating margin is still 32%! Margins are important don’t get me wrong, but sacrificing margins to increase volume is OK by me. It makes me wonder, if investors are fretting over the margins now, just wait till Msystems gets on board with margins a full 10 percentage points below what Sandisk is at now. Investors are going to have to learn that in business sacrifices are going to have to be made. Just make sure that the business can afford to make those sacrifices and that it works. I think Sandisk can afford it and it is working. It isn’t surprising that investors would act so irrationally towards the stock. In November of ’05 the stock also got hammered when the deal with Apple and Intel/Micron was announced. The fear then was that Sandisk was going to miss out on the MLC license. While that is true so far, it wasn’t cause to send the stock down 16%. Royalty revenue now makes up about 10% of overall revenue and to wipe out 16% of market cap because one joint venture (which wasn’t even off the ground yet) won’t license MLC is ridiculous in my opinion.

In short, I believe this is a good buying opportunity for Sandisk Shares on the cheap. The 4^th quarter will be a good one and while margins may be smaller, you have to look and see why they are smaller. Looking forward to 2007, I don’t see the supply glut analysts are fearing due to a strong 4^th quarter and strong demand sequentially in the first quarter of ’07.

This is a brief analysis on part of a much bigger picture. Do your own due diligence.

Updates will be limited for the next couple days

2006-10-18T16:12:00.000-05:00

Updates will be limited over the next couple of days as I catch up with some coursework for my MBA.

As a side note, just because I couldn't resist and in case you missed the news, Apple reported blowout earnings today. 62 cents a share vs. the consensus of .51 cents a share. Mac shipments totaled 1.6 million units. And as I have said all along, the name of the company is Apple Computer not Apple ipod. I don't care how many ipods they sell, the core business is the computer. Why else would they switch to Intel? Why couldn't they just be satisfied with the status quo and stick with IBM? After all most of their growth is coming from the ipods anyway, why shake the wagon? Because the computer industry is so much bigger with so many different customers i.e government, schools, consumers, etc. that to ignore the core business because of success with another product is ridiculous. For keeping its focus, Apple is being rewarded today. It recently signed a deal with a third ODM to add capacity for Apple notebooks (Which incidentally grew 63% year-over-year, compared to 35% for the ipod ). Bootcamp software is being perfected to enable a seamless change from Microsoft's OS to Tiger or leopard.

Apple already controls 75% of the mp3 market, to maintain that lead they need new products that will attract new and returning customers. In the computer segment they have about a 5% market share (USA), with new and improved products they can increase that number substantially. Basically what I'm saying is, a market which you control is very easy to lose. Look at history and you can see it happen time and time again, it may take time, but it does happen. A market however which you compete in and there is no clear winner, the opportunity is yours to steal market share. With mp3's, if Apple puts out superior products their market share will hover around the same mark it's at now. Sales will grow because the market is growing and people are updating their ipods, but market share will remain stable. With Computers, if Apple puts out superior products they'll gain market share, because there is a greater ratio of people that have the possibility of switching over. 95/5 vs. 25/75.

In short the company will go as far as the computers will take them. And right now it appears that all is well in Cupertino.

PortalPlayer making a comeback?

2006-10-12T22:29:00.000-05:00

I have been reading all over the news as of late about the resurgence of PortalPlayer. Forbes, thestreet.com and Motley Fool have all voiced their positive sentiment on the stocks ability to turn things around heading into '07. Here is the article from Forbes.com as I believe it is the most thorough in detailing PortalPlayers turnaround:

PortalPlayer's Stash Of Cash
John Dobosz 09.14.06, 9:00 AM ET

John Buckingham, editor of The Prudent Speculator and co-editor of The Prudent Speculator TechValue Report, recommends buying shares of PortalPlayer.

The San Jose, Calif., company designs and develops system-on-chip integrated circuits, along with firmware and software, and sells its products to makers of personal media players. Close to 90% of the company's sales last year were to Apple Computer.

Shares of PortalPlayer got whacked in late April of this year when Apple did not select the successor to PortalPlayer's PP5021 media processor chip for its new mid- and high-end iPod Nano media players. After closing at $22.59 on April 19, PLAY dropped 42% on more than ten times normal volume the following day to close at $13.13. Shares ultimately drifted down to $8.76 on July 18.

Since putting in its low, PLAY has given short-term traders an opportunity to make a quick and handsome profit. By Aug. 25, shares had rebounded 47% off of their low, but they have since pulled back to close on Wednesday at $11.61.

Buckingham and fellow TechValue Report editor Mark Mowrey are not short-term traders; they're hardcore value investors looking for stocks that are out of favor and undervalued by traditional metrics, such as price to earnings, sales and book value. They're especially encouraged by troubled companies with balance sheets strong enough to ride out the tough times.

In PortalPlayer, Buckingham likes what he sees. The company has no debt and sports $7.86 per share in cash and equivalents on the books; that's two-thirds of the share price in cash. "Cash is king" is Buckingham's moniker for this genre of battered stocks with sizable cash cushions. He's had success using this approach with companies like Apple Computer in 2002 and Seagate Technology in 2005.

Cash alone, however, cannot revive a business that doesn't have a viable strategy for growth. PortalPlayer has a new technology it calls ‘"Preface," which works with Microsoft's upcoming Windows Vista operating system. Preface enables a secondary LCD screen to display data and pictures and run other useful mini-applications (e-mail, games and music) even when a Preface-enabled notebook is powered down. The company claims that Preface is power-efficient enough to run for "hundreds of hours" without draining notebook battery power.

"Non-Apple business is gaining traction," says Buckingham. "PortalPlayer announced collaborations with two of the largest notebook manufacturers and two of the largest notebook designers in Taiwan. The company also scored its first wireless handset design win and continued to gain complimentary reviews on system performance and features from major wireless phone manufacturers."

Buckingham also applauds PortalPlayer's quick adaptation to the Apple setback by reducing its workforce by 14%. Also, second-quarter profits beat analysts' expectations, and the company's guidance was upbeat. PortalPlayer's management expects net income (non-GAAP) for the current quarter to be in the $0.07 to $0.17 per share range (better than the $0.03 per share loss previously expected by analysts) and revenue to come in between $32 million and $42 million. Analysts had forecast $25.1 million in quarterly revenue.

As for price targets, Buckingham gives PLAY a "liquidity goal" of $27 and a "fundamental goal" of $25. He advises buying PortalPlayer up to $13.60 per share."/End

This pretty much covers everything, but there are a couple points that I would like to bring up.
First of all it should be noted that while Apple kicked PortalPlayer out of its flash based ipods, Sandisk picked them up in their Sansa e200 series of mp3 players. While Sandisk is a far cry from Apple in terms of market share they are solidly entrenched in the number two slot. People looking for an alternative solution other than the strictly itunes relationship that the ipod has will drift to the next logical choice, the competitively priced Sansa. Sandisk currently uses the pp5024 SoC which is the upgraded version of the pp5021 which Apple dumped for its new flash based ipod nano.

With regards to performance, Apple claims to have up to 24 hours of battery time using its SoC supplied by Samsung. Sandisk advertises up to 20 hours without needing a recharge. In regards to quality it is obviously a matter of opinion, so I wont get into it. What is interesting to note is the fact that Samsung is the supplier of flash chips to Apple for their Nano mp3 players, and it is likely that they offered Apple (or Apple demanded) steep discounts on the SoCs as part of the deal. Sandisk which is supplied from the partnership with Toshiba for their flash chips wasn't going to get those discounts and wanted the best quality for their money, hence the deal with PortalPlayer.

Another interesting thing to point out is the fact that Dell is now a reseller of Sandisk mp3 players. Dell dropped their mp3 business a while back because it couldn't keep up with the competition (amazing how Dell figured that out about almost a year ago and Microsoft thinks they can do it now, but I digress) and instead added Sandisk. Adding a power distributor like Dell certainly cant hurt.

It also should be noted that while Apple dropped PortalPlayer from its flash based mp3 players it still uses them for their HD based ipod "video" players. This reinforces what I said before that Samsung offered them a deal they couldn't refuse (or Apple squeezed them based on the flash deal) together with the flash chips, but for Hard drives they still use PortalPlayer. There is a whole lot of uncertainty surrounding Apples future ipods, if Apple will continue to use PortalPlayer in those as well. Based on what I said before I think its very likely Apple will stick with PortalPlayer.

This is all in regard to mp3 players, now lets move on to the future of PC design.

Preface technology is essentially A pp5024 SoC that piggybacks onto Microsoft's "Sideshow", which is one of the features of the new OS Vista. What Sideshow is essentially (in relevance to PortalPlayer), is the ability for a manufacturer to place a second screen on the lid of the laptop. It can also be placed on the keyboard or any other place the ODM can find room.

In reality the manufacturers don't need PortalPlayer for this thing to work. The subsystem is already in place for the manufacturer to include a secondary LCD, this is very important to understand. What PortalPlayer does is just add this chip and that gives sideshow the ability to play back music video audio etc.. on this secondary LCD, similar to what this chip would do in a mp3 player.

To the company's credit, they jumped at this opportunity to be the first ones out marketing this new feature with a "common" chip. Microsoft uses PortalPlayers chip exclusively in testing which is a testament to their quick thinking and recognition of an additional market for an existing product as opposed to an original design in the SoC platform. This being the case I am wondering why the other SoC manufacturers aren't doing more to promote their own chips as a possible competitor to PortalPlayer. Maybe they don't think consumers will react positively to the new feature and it will remain a high end feature that wont add significant revenue to current uses of the chip. Hard to tell.

The way sidewhow, and by extension preface, works is that the manufacturer will install on to the computer a certain amount of flash memory. On this will be written applications and gadgets that will be able to support all different kinds of media and files. Internet will also be accessible for email, stock quotes, weather and other features. If you wish to pull more stuff up off the hard drive that is not currently on the flash memory then the computer will wake itself up, take out the information and then go back into sleeper mode. So it's kind of like a virtual synchronization process between sideshow/preface and the PC. I recently spoke to a rep from PortalPlayer, and she told me that even if the computer is off and you wish to pull up data from the hard drive or update your email, the computer will turn on and off just like it was in sleeper mode.

PortalPlayer has already announced deals with Quanta, Acer and others to offer preface as an option in its laptops. Quanta is the largest supplier of laptop computers, manufacturing and designing for Dell, HP and others. That is huge.

All in all I believe that this is an exciting new use of their current product. I do think however that this new technology is being misunderstood by some people. The IP isn't Portalplayers, meaning the barrier of entry is next to nil. They do have the advantage however, of being the exclusive "partner" of Microsoft in developing this technology. But the chip which manufacturers choose to use is entirely up to them.

The aforementioned article from Forbes notes that PortalPlayer is a pretty safe buy. Book value of $8 a share, cash flow positive, new markets for their products, etc... could lead to some pretty outsized returns. If only I knew for sure that the company will have a place in the ipod next year, then I too would say it's a strong buy. The uncertainty of that however, and the uncertainty of market acceptance of this new feature leads me to say that this is a speculative buy. And the fact that the CEO says he's leaving at the end of the year (which is a whole discussion unto itself) doesn't make it any easier for me either.

You are the weakest link, Goodbye!

2006-10-09T17:14:00.000-05:00

Airbus' problems seem to be growing as another CEO bites the dust; here's the article from thestreet.com:

"Christian Streiff, the chief executive of Airbus, has resigned from his post in the wake of recurring setbacks for the commercial jetmaker's A380 program.

European aeronautic defense & Space, the majority owner of Airbus, said Streiff will also leave the EADS executive committee, effective immediately. EADS Co-CEO Louis Gallois will take over as the chief executive of Airbus and retain his current position.

Streiff's tenure at Airbus lasted only three months. He joined the company in July from Saint-Gobain Group.

Reports emerged late last week that Streiff would quit after Airbus said production of the A380 superjumbo jet would be delayed for a third time, slashing its expected operating profits for the next four years.

France-based Airbus competes with Boeing in the commercial-airplane market."

What could be so bad that he would leave after only three months? He obviously knew about the mechanical and design issues that were bogging down production of the new A380, and I'm sure he knew they were going to have to announce an additional delay as well. So why so hasty? Here's another article found on Yahoo that helps shed some light on the issue:

"PARIS (AFX) - EADS said Airbus CEO Christian Streiff has not submitted his resignation despite press reports saying he did, but a source close to the company said he will indeed quit if he does not get autonomy to implement a major restructuring program that was reluctantly accepted by the board of parent company EADS.
Streiff reportedly threatened to leave when the EADS board initially resisted his plan to revamp the troubled unit. The board finally accepted the broad themes of the plan last week, but left unresolved key details of its implementation, notably how a 30 pct reduction in costs and job cuts will be achieved.
EADS directors representing German shareholders reportedly disliked the plan because of concerns about the future of Airbus' plant in Hamburg, and those representing EADS' French shareholders were concerned about the social impact of Airbus job cuts in the run-up to next spring's French elections.
Streiff now wants 'the means to execute' the restructuring, a source close to the matter said, adding that 'he either gets the autonomy or he leaves.'
This runs counter to EADS' reported aim of increasing its control over Airbus as its pending purchase of BAE Systems' Airbus stake would give EADS 100 pct ownership. It reportedly sees the degree of autonomy that Airbus has had until now as partly responsible for its costly problems with the A380 and other projects.
Another source close to the matter said the management crisis should move toward resolution by Thursday, when French and German government ministers meet.
'This is not going to last forever,' the source said."

So much for "government subsidizing Airbus" complaint. The meddling of different governments into what should be corporate affairs may very well be what delays Airbus from getting competitive again. Boeing on the other hand is experiencing booming demand for its new widebody aircraft as well as the narrowbody 787. Highlighting the gap that is widening between Boeing and Airbus, Boeing has a total of 723 new orders for aircraft year to date compared to 226 for Airbus. Airbus currently leads the market in the narrowbody version, but that could change if it feels the need to redesign the A350. If that should happen Boeing will become the leader in both categories.

While this is not sufficient to make a compelling enough case for Boeing, the reason for this article is to highlight one of their suppliers, Moog Inc. . This is a relatively small company which supplies Boeing (and Airbus) with systems controls. 43% of sales come from this segment which has seen tremendous upside as of late with orders of new aircraft pouring in and backlog piling up. Not to mention the lower cost of oil should translate into lower costs per passenger and then lower cost per ticket. This may help increase overall consumer demand which in turn will lead carriers to buy more planes. A little macro I know, but it makes sense.
Either way, I'm not going to list all the financials you should do your own due diligence, this is just an idea for you to ponder...

McDonald's $10 billion vote of confidence

2006-10-03T20:04:00.000-05:00

McDonalds announced last week that they were increasing their dividend 49% to an even $1. Included with this press release was their intention of returning roughly $10 billion dollars to shareholders over the next three years. This will take the form of dividends and a share repurchase program.

It should be noted that the McDonalds we are seeing now is not the McDonalds of five years ago. What we are witnessing now is a company that is paying attention to their menu, catering to consumer demand for new healthier offerings. Marketing is now a key factor in targeting specific demographics, which has shown to be very successful in the United States. This can be seen by the healthy same store sales over the past several quarters.

McDonalds is now focusing almost exclusively on its flagship brand of restaurants. With the recent spinoff of Chipotle and the subsequent share swap announced by McDonalds it is clear that they are rebuilding from within as opposed to looking to acquire companies not of the arch.
This being the case they are now able to use their available cash flows on enhancing shareholder value. The drivers of growth are now intangibles, the kind of things money cant buy, but make the most sense.

Five years ago the stock traded at about $27, but paid out a $.23 dividend giving it a yield of less than 1%. Now the stock trades near $40 and has a yield of 2.5%. That's a capital gain of 32% and a yield which is better by 150%. What's changed? Before McDonalds was snapping up companies because they saw sales at McDonalds sputter. In an effort to spur growth they looked to diversify into different restaurants and other styles of eateries, be it cafes or traditional ethnic restaurants. This plan backfired, as we saw in '02/'03. McDonalds is so big these new businesses barely put a dent in the operating results of McDonalds and this was when they were turning a profit. Making problems worse was the fact that expansion was slowing down for obvious reasons.

The company is different now, it is a marketing powerhouse that pays attention to its menu. Much like retailers for teenagers need to keep up with the styles and trends that make up the teen society these days, so to McDonalds needs to spice up its menu with new options, healthier or trendier. The company thrives now because they are attracting new customers to existent stores. They spun off Chipotle because it doesn't fit with the new and improved business model.

So confident is McDonalds in its plan that they hiked the dividend by almost 50% and are going to be buying back stock hand over fist even as the stock trades near its all time highs. McDonalds knows full well the history of its dividends, that they haven't missed an increase in 30 years. This didn't stop them from raising it to $1. Look for continued hikes in the future, Mikkey Dee isn't done yet. I am of the opinion that this stock will eventually become an income stock, raising the dividend by measures we have most recently seen until the yield will sit comfortably at or over 4-5%. The reason for this is like I said before, it's all in the intangibles.

WSJ joins the choir. NAND story continued

2006-09-28T22:32:00.000-05:00

New article from the WSJ joins other analysts from Citi and Merrill Lynch in voicing their concern over a potential supply glut in the beginning of '07. The article (as well as the analysts) are basing this on supply, not on demand. The article states: "Unless there is a new killer application which could potentially absorb all the supply, seasonal downturn in the first half of 2007 is somewhat inevitable."

When they say "seasonal downturn" I'm assuming they mean similar to this year when prices came down from their highs. Even then Sandisk had record earnings. Being that they aren't in the business of selling raw NAND they are less affected by the price swings.

The reason why analysts are expressing caution is because they see a heavy buildup of supply in Flash memory for the next couple of quarters and going into next year. So they say if there is no killer application that will soak up all the supply prices will fall. At worst it will be like we had in the beginning of this year. Even though there will be more supply (admittedly by a wide margin) there are numerous amounts of new products that rely on Flash memory for internal memory or expandable card slots. I don't have to tell you, go to the store pick out a cell phone and chances are it has an expandable SD card slot. With the smart phone explosion, these things are selling like hot cakes. Check out the bestselling piece of technology on Amazon.com, 2gb SD card and its been that way for weeks now.

In '07 there will be the new iphone, which you can bet will have internal flash memory,(Estimates/rumors have it selling 25 million units in the first year)and some say it will have an expandable card slot as well.

Also in '07 we will have the Vista release, Microsoft's new OS. They will offer with the OS something called ready drive, flash memory to speed up booting times.

Also in '07 Intel will install flash memory in the motherboard to cut boot up times in half.
These are things that will be new to the market in '07 which we didn't have in '06. This is why manufacturers are increasing their NAND supply, because there will be more demand. Like I said in a previous post, Sandisk introduced a flash based mp3 player to drive demand. Its a relatively new market and there is plenty of room to go around, they aren't a competitor they are an addition.

As I said before, flash prices will not see the correction we saw in the beginning of '06. Prices may decline because of seasonality, but it wont be significant.

Buy Sandisk and then buy it again on every dip.

Microsoft, a day late and a dollar short-again

2006-09-28T14:40:00.000-05:00

By now its old news already and I'm sure most of you have heard about it already, but I would like to make a few points about it anyway. To make it easier on everyone, I'm going to post the whole article from marketwatch.com:

Microsoft Corp. has vowed to put considerable money and effort behind its bid to dethrone Apple Computer Inc.'s market-leading iPod, but it won't be using price as a weapon.

Microsoft announced Thursday that it will charge $249.99 for its new Zune music player, about the same as Apple Computer Inc. charges for an iPod with the same storage capacity.Microsoft's portable music player and its companion online music service will debut on Nov. 14 in the United States, just ahead of the holiday gift-buying rush.

The music service will let people buy songs individually for about 99 cents, the same amount Apple charges for songs from its popular iTunes Music Store. For Zune, Microsoft will use the same payment system as its Xbox Live online video game service, which lets people without credit cards buy prepaid cards at some retail stores.

Microsoft also will offer a Zune Pass subscription service, which will let users listen to any of about 2 million songs for $14.99 per month. RealNetworks Inc. charges the same monthly fee for its online music subscription service, Rhapsody to Go. Scott Erickson, senior director of product management for Zune, said Microsoft is hoping that people will use the subscription service to seek out music they might not have known about, while also buying some songs outright.

Microsoft has said it plans a major promotional effort for Zune, but analysts say the world's largest software maker faces an uphill battle against the iPod and iTunes.

Erickson wouldn't provide financial specifics but said the operation won't make money immediately. "In total we won't be making a profit this year, but we will of course work toward becoming a profitable business in the future," he said.

Other hardware manufacturers, including Creative Technology Ltd. and Samsung Electronics Co., already offer portable media players that support Microsoft's software, but they've had little success against Apple.

The Zune player, to be made by Toshiba Corp., will have 30 gigabytes of memory, enough to hold about 7,500 songs. It also will feature a 3-inch screen and a built-in FM tuner, and will come loaded with about 25 songs and other content. An iPod with a 30-gigabyte hard drive and a 2.5-inch screen sells for $249. Apple also offers lower- and higher-priced versions.

Microsoft is hoping to differentiate itself from the iPod by including wireless technology to let people share some of their favorite songs, playlists or pictures with other Zune users who are close by. The other users can then listen to the songs three times over three days before deciding whether to purchase the tune themselves./End

This is what we have come to expect from Microsoft, it happened with the xbox and the MSN portal. Both products were not first to market, not only that but they entered established markets. These Markets were already dominated by competitors making it an uphill battle ever since Microsoft entered the market.

The thing that stands out and makes this point very clear is the fact that Microsoft is not profitable on either of those ventures. Now again Microsoft will be losing money on its Zune player. They were caught off guard by Apples aggressive pricing which they are able to do because of scale, Making Microsoft hold off on announcing a price for their device until today.

The Zune comes in one capacity so far, 30gb. The wireless feature isn't what it was rumored to be. The song that is "beamed" from one device to the next has a life span to it. There is no wireless downloading.

You would think that Microsoft would learn their lesson about entering an existing market. Time, money and resources invested into products and services that have not turned a profit yet, and those were in emerging markets nonetheless! This time, with the ipod, there is a clear leader with clearly a superior product. And Microsoft says not to worry being that this is part of a "long term strategy". How long? As long as MSN and the Xbox? I don't think investors are willing to wait that long. So as of now, Microsoft still lives and dies with its OS and Office software, anything else is just a smokescreen.

Oh, and get this, on Appleinsider they quote Mr. Wu (American Technology Research) as saying a Zune phone may be in the works! They'll never learn. Then again this is from Mr. Wu

And he calls himself an analyst...

2006-09-27T21:41:00.000-05:00

Shaw Wu of American Technology research said this week that he has removed Apple Computer off its focus list out of concern that investors may have baked in the new (as of yet unannounced) cell phone into the price. This from an Article on appleinsider:

"Since we added Apple about three weeks ago in conjunction with our proprietary analysis of Apple's significant technical progress in its cell phone efforts, shares have appreciated 15 percent versus 3 percent in the NASDAQ," analyst Shaw Wu told clients on Wednesday.*

"While we remain long-term positive, we believe Apple shares may reflect too much near-term cell phone optimism." /end

This strikes me as a bit weird. About a week before the "showtime" event when Apple introduced several new products and services, Mr. Wu got all excited about the Apple cell phone and made it sound like it was going to be announced at the event. He encouraged clients to buy shares aggressively and raised his price target from $75 to $91. The current price is still at a 17% discount to his target price. Another thing is, did he not listen at all to the event? Is he not aware of a new and much improved line of ipods? Is he not aware of the introduction of the "iTV"? Is he not aware of the new itunes and movie downloads? Is he not paying attention to the robust macbook sales? If you ask me, Apples entrance into the living room is significant enough to cause an increase in stock price. I still think people don't recognize the importance of such a device.
I think he got caught up in his own analysis. He got too excited on the cell phone which is evident from his research note to clients on September 5th in which he sounded like another one of those Mac rumor sites. He speculates on Apples next move and then attempts to draw conclusions from those speculations.
It is obvious he isn't paying attention to the whole picture. If he was, then this would be the time to put it on the focus list.

In other news: Thinksecret reported that Apple has reached a deal with Cingular. Cingular will have exclusive rights to the phone for 6 months and after that it will be opened up to other providers. If this proves to be true then Apple will not be renting space from other providers, but will just sell the hardware, which makes the most sense in my opinion. In the same article sources told thinksecret that Apple expects to sell around 25 million "iphones" in '07 alone. I think this is a ridiculously high number and there must be a case of broken telephone somewhere along the line. If it is true that Apple expects such a large amount of sales in the first year, then this carries the risk of excess inventory and subsequently smaller margins, maybe even a writedown if it really goes bad.

To recap, Mr. Wu should be ignored. I don't care if he yells buy sell or hold, he is clearly out of touch with reality. (A good strategy for Apple would be dollar cost averaging. The risk of a "correction" is there as we see it has happened before. Spread the money around.)

Sharper Image getting cloudy

2006-09-26T20:34:00.000-05:00

Sharper Image just announced today the dismissal of CEO and founder Richard Thalheimer. Here's part of the article from AP.

Struggling specialty retailer Sharper Image Corp. on Tuesday announced the ouster of its founder Richard Thalheimer, replacing its chief executive of the past 28 years with Jerry Levin, a member of a dissident investor group that had threatened to seize control six months ago. /End

Investors obviously liked what they heard, sending shares surging more than 10%. The picture is far from clear however. In looking at this stock there is the good the bad and the ugly.

The Good:
The company has extremely good brand recognition. They operate almost in a niche in terms of high end, quirky and extremely cool products. There is limited competition enabling SHRP to have decent pricing power. They also have zero long term debt, a strong positive for a company needing a turnaround. Having no obligations to repay loans and no interest expense enables the company to use its cash on building up the business. The current market cap stands at about 155 million, revenue (while shrinking) stands at over $600 million dollars for the last 12 months. This means that the company is trading at one quarter the value of net sales. Not bad. Book value is over $11 a share making price to book 1:1.

The Bad:
The company would fall into the discretionary product category. With a slight recession in the economy looming in the not too distant future you can expect consumers to shy away from big ticket items especially if your talking about $5,000 arm chair. While they have managed to keep operating cash flow near breakeven this has come at the expense of burning cash. All the while they can't turn around results and increase revenue this will come at the expense of their balance sheet. If the slump continues look for the cash to be replaced by debt.

The Ugly:
Essentially the company sells two types of products. Some are products branded and designed
by Sharper Image, and the others are third party products sold by Sharper Image. Taking a look at the most recent quarterly report it sounds like they are putting all their eggs (the profitable ones at least) in one basket. The products that come from Sharper Image themselves have the healthiest margins, by a wide margin. The focus of the company now is to try and increase sales of these products in the attempt to return to profitability. Now here's the ugly part. Same store sales are in a nose dive. There is controversy over the effectiveness in one of their key products which is driving down sales (consumer reports says their air purifiers don't work). Their stuff is insanely expensive (explains the high margins), which allows for competition to undercut them. Gross margins dipped to 49%, a full 5 percentage points lower than a year ago. Buying and occupancy costs are 20% of revenue! How do you expect to turn a profit when cost of sales and b&o costs already take up more than 70% of revenue?

Salvation will come when Sharper Image can offer new (working) products at competitive prices. Until then stay away. This company has more problems than just the CEO. Changes have to be made. Should the market cap be cut in half again, it may be a good time to buy, all things being equal. Because then a potential buyer would buy it just for the real estate, cash and inventory.

Slicing the Apple

2006-09-26T10:59:00.000-05:00

Today on Businessweek.com there is an article about CinemaNows' new download-to-DVD service.
Here is a part of the article:

The movie download business just got more fast and furious. On Sept. 26, online movie distributor CinemaNow announced it will sell a $9.99 downloadable version of Universal Pictures' new home video release "The Fast and the Furious: Tokyo Drift" that can be burned to a digital video disc and run on standard DVD players.

The deal marks the first time a major studio is releasing a DVD in retail stores and on a download site at the same time. Studios typically release their movies as DVDs in retail stores first, then hold off six weeks or more before making them available for download. /End

So essentially the million dollar question is, does download to DVD pose a threat to traditional download services such as itunes? Another thing to worry about is if CinemaNow is gaining the edge on itunes by securing new releases faster than Apple.

Well, does it work? An article on endgadget.com reports that an anonymous engineer complained to CinemaNow complaining the download-to-DVD didn't work, and it may only work on high-end DVD players or specific kinds of DVDs. CinemaNow responded by saying "tests had the burned DVDs working on 94 percent of DVD players." It is unclear what kind of tests and DVDs they were using, so in reality the number could be much smaller.
Assuming it does work, price checks with walmart and Amazon show pricing consistency between all three. In some cases Walmart coming out cheaper than CinamNows prices.
Now ask yourself this question, would someone go out and buy DVDs, go home and spend G-D knows how long downloading the film to DVD (assuming it works) when you can just go to your nearest Walmart and instead of buying the DVDs, just buy the movie there and save yourself all the hassle and even save yourself a couple bucks!

In short, even if CinemaNow gets the new releases first there is no doubt in my mind that this wont affect Apple in the slightest. Until there is more even ground between downloads and DVDs don't expect new releases to be released to download services at the same time as the DVD. Also, download-to-DVD wont hurt itunes sales. Instead of burning it to DVD you have it on your ipod, and this is not to mention the slick new "iTV" making its debut early next year.

Jim Cramer, entertainment purposes only

2006-09-25T08:57:00.000-05:00

On Jim Cramers "Stop Trading!" segment on Thursday he thought Starbucks was a buy. Here's the entire piece:

Negativity about Starbucks and FedEx ignores the rock-solid fundamentals in place at both companies, Jim Cramer said Friday on CNBC's Stop Trading! segment.

Cramer said Thursday's decision by Seattle-based Starbucks to raise prices by a nickel a cup shows that last month's worries about coffee-market saturation were misguided. "Everyone hated the 4% number," Cramer said, referring to the weak July same-store sales growth figure that fueled last month's selloff. But "I'm a believer because of the price increase."

Cramer said Starbucks shares are down 20% from their high because Wall Street worried that its growth story was over. But the price increase "says there's not saturation," Cramer said, adding that CEO Howard Schultz wouldn't have made the decision if business weren't going well, ahead of a big Oct. 5 analyst meeting. /End

Mr. Cramer and some analysts are deducing from this small price increase that the company believes there is no market saturation and that the growth story continues.

I believe the US market is saturated now with Mcdonalds and other fast food restaurants joining the coffee extravaganza. The number of coffee selling places of business just grew ten fold. Mcdonalds has the advantage in that the prices are cheaper and they appeal to a wider consumer base.

Starbucks also recently announced they are going to add an additional 1,000 stores next year. This leads me to wonder why they would be so aggressive in expanding into an uncertain economic environment. In previous years they have kept the number of new openings to around 6-700 hundred and this was in a strong economy not one that is showing obvious signs of a slowdown.

Starbucks is the discretionary brand/product in the coffee industry. When the economy does slow down I don't think Starbucks will be in the best position to deliver on its 20-25% growth prediction. That being the case I think SBUX is overvalued with a PEG of nearly 2, and this is using the current growth rate.

As long as Starbucks does not put the emphasis on expanding internationally growth will stagnate. The money to be made here is outside the US, and then you can get rid of the ridiculous venture into movies and music etc...

The NAND story. More to follow

2006-09-25T08:18:00.000-05:00

Merril Lynch today downgraded shares of Sandisk from a buy to hold citing "murky" NAND flash pricing going forward.

Here is the news release found on Yahoo:

Sept 25 (Reuters) - Merrill Lynch on Monday lowered its rating on Sandisk Corp. To "neutral" from "buy", citing murky NAND flash outlook.

The brokerage said the stock price may rise as NAND, or flash memory, prices stabilize in the near term, but the risk of a sharp correction in prices over the intermediate term outweighs this possibility.

There are no signs of a decline in NAND supply and NAND prices may come under pressure early next year as supply outstrips demand, the brokerage added in a research note. /End

First off, Merril Lynch notes that the risk of a sharp correction may be in store and that outweighs any stabilizing of prices in the near term. I find it hard to believe that there is a substantial risk at all in Flash prices. I believe this is the whole reason Sandisk entered the market for flash based music players. There is no way anyone is going to dethrone Apple as the king of the mp3 player and Sandisk knows that, the whole industry knows that. What Sandisk is doing is driving overall demand for NAND flash by bringing more flash based players to market. This has a ripple effect on Apple. Apple now has serious competition to bring new and improved products to market, similar to the way they were putting out new ipods in the beginning, fast and furious.

I believe this will stabilize prices for all densities and increase prices for the higher ranges, 6gb and higher.

My take on Sandisk is a buy and a strong buy on any weakness.