You can find the not in the downloads section or access it here: CVC Intelligence noteIntelligence note 2009-07-29 00:40:46 926.20 Kb

Published in BoomBustBlog
Tuesday, 28 July 2009 01:00

PNC plus CRE = Doo Doo hitting the Fan

To highlight more of the damage to be done to TARP recipient banks such as Wells Fargo and PNC, I know turn my attention to the commercial mortgage sector (see the previous post BoomBustBloggers appear to be pressuring PNC for background info). We have already hashed out risk in the residential mortgage sector with valuable research that I released for free: see The Re-Release of the Open Source Mortgage Default Model and Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets for our in depth take on loan losses to come for all banks who participated in residential real estate lending. I have visited commercial lending risk many times before, starting with my work on GGP, which is now bankrupt, but not before I gave my readers a warning nearly a year in advance See my posts from 2007 and early 2008:

Now that the nation's second largest mall property owner and REIT has just filed chapter 11, after I warned readers over a year and a half ago of this very distinct possibility, others are finally starting to jump on the bandwagon (See General Growth Files for Protection in Biggest U.S. Real Estate Bankruptcy then go on to read the 80 or so pages of research that I have generated to support riding the share price down from $60 to near zero: GGP and the type of investigative analysis you will not get from your brokerage house.)

You may read more about what is happening in CRE lending in A Micro View of the Macro Damage to be Caused by Imploding Commercial Real Estate, but for now, I want to drill down to what these banks are holding.

Published in BoomBustBlog

It looks as if a BoomBuatBlogger subscriber has made it into the news with a large option trade - STOCKS NEWS US-Bears flock to PNC Financial put options

PNC Financial Services fell 4.33 percent to $35.79. It reported a steep drop in quarterly earnings, hurt by credit losses and in its options, bears clawed at puts in the November contract, said Andrew Wilkinson, market analyst at Interactive Brokers Group. One player apparently enacted a ratio put spread in a bid to profit to the downside, he said. The Nov $36 strike had 20,000 puts bought for an average premium of $4.08 apiece spread against the sale of 40,000 puts at the Nov $31 strike for $1.97. The cost of the trade was 14 cents and yields maximum potential profits of $4.86 if shares fall to $31 by expiration. He also noted new put action at the Nov $29 strike and the $27.5 strike where 15,000 puts traded.

As subscribers know, we have determined that the overly lenient government stress tests (SCAP) will leave more than one bank requiring an additional capital raise before this credit malaise is all said and done. See The Re-Release of the Open Source Mortgage Default Model and Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets for our in depth take on loan losses to come for all banks who participated in residential real estate lending. These are the facts, unfiltered by green shoots mantra. PNC's government mandated $600 million capital raise was a joke,plain and simple. They will probably require multiples of that amount due to their National City acquisition and a careful glance at their balance sheet easily supports that assertion.

I have decided to show all a summary of what is arming subscribers to remain bearish against PNC, among other banks.

Published in BoomBustBlog

HOT's 2Q09 results analysis

Starwood Hotels reported a tough 2Q09 with revenues (excl other revenues from franchised and managed properties which are reimbursements of costs incurred on behalf of managed hotel properties and franchisees) declining 31.5% (y-o-y) to $707 mn in 2Q09 from $1,032 mn in 2Q08. Steep declines in ADR and occupancy are pushing down the REVPAR at owned hotels, resulting in 36.5% (y-o-y) decline in revenues from owned, leased and consolidated joint venture hotels to $394 mn in 2Q09 from $620 mn in 2Q08. REVPAR for comparable owned hotels worldwide declined 32.6% (y-o-y) with hotels in North America witnessing a decline of 31.4% and international hotels recording 34.8% decline. Starwood's management and franchise fees declined 14.2% (y-o-y) to $187 mn in 2Q09 from $218 mn in 2Q08 as the revenues at the managed and franchised hotels plunge due to double digit decline in REVPAR at the managed and franchised hotels. REVPAR for the comparable systemwide hotels, which include worldwide owned, managed and franchised hotels, declined 25.9% with sharp declines recorded across all geographies. Further, the revenues from vacation ownership declined 35.1 %( y-o-y) to $126 mn in 2Q09 from $194 mn in 2Q08.

Published in BoomBustBlog

I have been getting emails from a few people who are interested in long research. I have started offering long biased research, and am in the process of implementing another scan for long candidates this weekend. What I want to remind many of is that this is a fundamental research site, and a pretty good one, at least in my opinion. We have been right roughly 90% of the time in reference to the fundamentals. With that being said, I cannot control stock prices. There are times when stock prices diverge from the fundamentals. Those are the periods that precede money making opportunities. The actual opportunity is (after recognizing the divergence) when reality and stock prices converge.

Now, there are many other methods of making money, ex. momentum/quant/algo trading, etc. That is not what I do. For those who feel that they are missing out on the market rally (which is quite understandable), I cannot give you advice, but I can tell you one simple maneuver that I have used. I have purchased SPX calls that allow me to participate on the broad market upside and provide a hedge against what I consider to be a divergence from the fundamentals. How much of a hedge is quite variable, of course.

Published in BoomBustBlog

A closer look at the CAT - Q2 09 results demands further scrutingy. Let's walk through it with a magnifying glass and an open mind. Below are the main conclusions to be drawn from what was reported: (this is to be read after the CAT report: Caterpillar Inc. Preliminary Analysis Caterpillar Inc. Preliminary Analysis 2009-06-17 10:34:20 666.50 Kb, CAT Forensic Analysis Retail CAT Forensic Analysis Retail 2009-06-25 15:43:20 374.87 Kb, CAT Forensic Analysis Professional CAT Forensic Analysis Professional 2009-06-25 15:44:27 836.39 Kb and for non-subscribers - CAT’s 2Q09 results analysis) . Note and disclaimer: This material was put together from contributions from several readers as well as my own analysts. Please note that this is not investment advice (nor is anything that you get from my site), and everything presented is for illustrative purposes only, with no warranty (explicit or implied) as to accuracy or completeness.

  • Big EPS beat, mostly due to one-timers. We saw a big EPS beat this Q (60 cents actual vs 22 cents expected), but it was entirely due to factors that are not reflective of ongoing profitability or indicative of the health of core operations - currency fluctuations, low cost inventory liquidation, low tax rate. In essence, the accountants seemed to have packed every one timer they could find into this quarter to come up with an estimate beat. Does this fool the Street? Apparently since the stock is rising. Can it be replicated? Hell no!
  • Normalized Q2 09 EPS much lower. Adjusting margins and costs to where they should reasonably be given sharply lower sales offset by very respectable amounts of cost cutting, and we would have seen 18 cents normalized EPS. The logic behind the adjustment is to account for all of the factors included in this quarter that are just highly unlikely to happen again. In other words, what do we expect for next quarter???
  • Since the surprise was one-time in nature, another way of thinking about the one-time nature of this "beat" is to consider that the "beat" was 38 cents, which is 85% of the 45 cent increase in their 2009 guidance. It is the increase in guidance that the media has used to justify the optimism driving the share price rally. Wait a minute! If 85% of the guidance raise was baked into this quarter and this quarter can't be repeated, what does that portend going forward?
  • Conservative valuation calculations: Conservatively driving "normal" sales off the Q1/Q2 average, using the Q2 09 normalized net margin and a conservative 20 multiple implies a fair stock price well below our current $40+, and well below the conservative valuation band given in BoomBustBlog research reports - CAT Forensic Analysis Retail CAT Forensic Analysis Retail 2009-06-25 15:43:20 374.87 Kb, CAT Forensic Analysis Professional CAT Forensic Analysis Professional 2009-06-25 15:44:27 836.39 Kb 
  • Long term view - consensus is wrong (as it usually alwasy is, for some odd reason). If the consensus is correct, this will have been an irrationally short and shallow downturn for CAT from a revenue and profitability standpoint, historically speaking).
  • Leverage remains elevated. Machinery debt declined from $7.3B in Q1 09 to $6.9B in Q2 09. Off of "Debt / Capitalization" using Shareholders Equity, we saw improvement. Off of Debt / Revenues, we saw sharp deterioration.
  • Mgmt calling for very weak Q3, implying they are pinning all hopes on Q4 stabilization. The Q3 appears so weak that they are doing large scale rolling shut downs. Profits no doubt will be tossed out of the window. Their hope, and what it appears they are pinning their guidance on, is Q4 improvement. Basically, they are looking to eat those "green shoots"!

Let's move forward to expand on each and every one of the points above in detail.

HOT's 2Q09 results analysis

Starwood Hotels reported a tough 2Q09 with revenues (excl other revenues from franchised and managed properties which are reimbursements of costs incurred on behalf of managed hotel properties and franchisees) declining 31.5% (y-o-y) to $707 mn in 2Q09 from $1,032 mn in 2Q08. Steep declines in ADR and occupancy are pushing down the REVPAR at owned hotels, resulting in 36.5% (y-o-y) decline in revenues from owned, leased and consolidated joint venture hotels to $394 mn in 2Q09 from $620 mn in 2Q08. REVPAR for comparable owned hotels worldwide declined 32.6% (y-o-y) with hotels in North America witnessing a decline of 31.4% and international hotels recording 34.8% decline. Starwood's management and franchise fees declined 14.2% (y-o-y) to $187 mn in 2Q09 from $218 mn in 2Q08 as the revenues at the managed and franchised hotels plunge due to double digit decline in REVPAR at the managed and franchised hotels. REVPAR for the comparable systemwide hotels, which include worldwide owned, managed and franchised hotels, declined 25.9% with sharp declines recorded across all geographies. Further, the revenues from vacation ownership declined 35.1 %( y-o-y) to $126 mn in 2Q09 from $194 mn in 2Q08.

A closer look at the CAT - Q2 09 results demands further scrutingy. Let's walk through it with a magnifying glass and an open mind. Below are the main conclusions to be drawn from what was reported: (this is to be read after the CAT report: Caterpillar Inc. Preliminary Analysis Caterpillar Inc. Preliminary Analysis 2009-06-17 10:34:20 666.50 Kb, CAT Forensic Analysis Retail CAT Forensic Analysis Retail 2009-06-25 15:43:20 374.87 Kb, CAT Forensic Analysis Professional CAT Forensic Analysis Professional 2009-06-25 15:44:27 836.39 Kb and for non-subscribers - CAT’s 2Q09 results analysis) . Note and disclaimer: This material was put together from contributions from several readers as well as my own analysts. Please note that this is not investment advice (nor is anything that you get from my site), and everything presented is for illustrative purposes only, with no warranty (explicit or implied) as to accuracy or completeness.

  • Big EPS beat, mostly due to one-timers. We saw a big EPS beat this Q (60 cents actual vs 22 cents expected), but it was entirely due to factors that are not reflective of ongoing profitability or indicative of the health of core operations - currency fluctuations, low cost inventory liquidation, low tax rate. In essence, the accountants seemed to have packed every one timer they could find into this quarter to come up with an estimate beat. Does this fool the Street? Apparently since the stock is rising. Can it be replicated? Hell no!
  • Normalized Q2 09 EPS much lower. Adjusting margins and costs to where they should reasonably be given sharply lower sales offset by very respectable amounts of cost cutting, and we would have seen 18 cents normalized EPS. The logic behind the adjustment is to account for all of the factors included in this quarter that are just highly unlikely to happen again. In other words, what do we expect for next quarter???
  • Since the surprise was one-time in nature, another way of thinking about the one-time nature of this "beat" is to consider that the "beat" was 38 cents, which is 85% of the 45 cent increase in their 2009 guidance. It is the increase in guidance that the media has used to justify the optimism driving the share price rally. Wait a minute! If 85% of the guidance raise was baked into this quarter and this quarter can't be repeated, what does that portend going forward?
  • Conservative valuation calculations: Conservatively driving "normal" sales off the Q1/Q2 average, using the Q2 09 normalized net margin and a conservative 20 multiple implies a fair stock price well below our current $40+, and well below the conservative valuation band given in BoomBustBlog research reports - CAT Forensic Analysis Retail CAT Forensic Analysis Retail 2009-06-25 15:43:20 374.87 Kb, CAT Forensic Analysis Professional CAT Forensic Analysis Professional 2009-06-25 15:44:27 836.39 Kb 
  • Long term view - consensus is wrong (as it usually alwasy is, for some odd reason). If the consensus is correct, this will have been an irrationally short and shallow downturn for CAT from a revenue and profitability standpoint, historically speaking).
  • Leverage remains elevated. Machinery debt declined from $7.3B in Q1 09 to $6.9B in Q2 09. Off of "Debt / Capitalization" using Shareholders Equity, we saw improvement. Off of Debt / Revenues, we saw sharp deterioration.
  • Mgmt calling for very weak Q3, implying they are pinning all hopes on Q4 stabilization. The Q3 appears so weak that they are doing large scale rolling shut downs. Profits no doubt will be tossed out of the window. Their hope, and what it appears they are pinning their guidance on, is Q4 improvement. Basically, they are looking to eat those "green shoots"!

Let's move forward to expand on each and every one of the points above in detail.