Tuesday, November 4, 2008

Emerson Electric and the Goodyear Tire TC XKK

The earnings report this morning from Emerson Electric was the best that I have seen for the September quarter for an American industrial company.   Earnings increased 10% and the company raised its dividend. Yahoo! Finance  However, the company is forecasting a difficult operating environment for 2009 and 2010.  I am going to wait until the conference call later today before making a decision about adding to my starter position.  Emerson will provide a forecast for 2009 during the call.  I do not listen to these calls, too time consuming, but the web site seeking alpha provides a transcript for most of the companies that I have an interest in buying or in adding to an existing position.  I already have a high opinion of Emerson, and I view it with more respect than General Electric. 

I can not help but note, for those interested in the madness sometimes prevalent in the market for TCs, the severe price discrepancy between two virtually identical ones containing the same AT & T senior bond.  I discussed this issue at some length yesterdayRelationships: Trust Certificates for the Same ATT Bond but the absurdity has become even more pronounced this morning.  I will simply note now that the last trade for GJF was 24.4 whereas the last trade for JZE was 18.42.  Some have asked why I am involved in such an irrational market, being a sober, logical and rational being, and my response is always the same- because it is irrational.  Sometimes, the best market for a rational individual investor will be one that provides opportunities due to the irrational decisions made by others.  The person that sold me JZE a few days ago at 12.5 was not acting in a rational manner.   It would not be rational to buy GJF at 24.4.  It would be rational to sell GJF now if owned and bought during the meltdown at 13 for example and then use part of the proceeds to buy JZE.  This kind of activity is just a gift for me.  However, you have to recognize that the market in TCs  is subject to huge bouts of irrationality, which provides the opportunity and temporary risks.  One risk is that this market sometimes propels a position already owned in a downdraft on very low volume that defies any sensible explanation.  

I said that I was not going to talk about Trust Certificates for a few days, but I have been asked about the TC containing the Goodyear Tire senior bond (XKK), which I  already own.  During the meltdown, this one fell to below $3.   Unlike the other TCs discussed, it has a $10 par value.  The underlying bond is a senior bond from Goodyear Tire (GT) maturing on 3/15/ 2028, currently rated as junk, with a 7% coupon.   The TC has a coupon of 8% or $80 per year in interest for every 100 shares.  Interest in payable semi-annually in March and September.  At $3,  the yield would be almost 27%.  The underlying bond is not actively traded but it never got to a price level that would generate that kind of yield.   At the current price of around 6.25, the yield would be about 12.8%, which is okay but not too enticing.  I did try to buy some more around 5 last week but the order was not filled.  To buy a bond, I think that you have to know the company as well as you would to buy the common stock.  Goodyear Tire is probably a better grade junk credit than Liberty Media.  The company has in the past year or so sold businesses to pay down debt which is something Malone would not do at Liberty Media.  This is what I like to see and it is an excerpt from Goodyear's 2007 Annual Report:  " In April 2007, we completed a refinancing of three of our primary credit facilities, which extended maturities, reduced applicable interest rates and provides us with a more flexible covenant package.
In May 2007, we completed a public equity offering of 26.1 million shares of common stock at a price of $33.00 per share, raising $862 million before offering costs. We used a portion of the $833 million net proceeds from the equity offering to exercise our rights to redeem $175 million of our $500 million 8.625% senior notes due 2011 and $140 million of our $400 million 9% senior notes due in 2015.
In July 2007, we completed the sale of our Engineered Products business for $1.475 billion, which marked the completion of our Capital Structure Improvement Plan that we began in 2003. We recognized an after-tax gain on the sale of our Engineered Products business of $508 million, or $2.19 per share, which is reported in discontinued operations.
In addition, during the third quarter of 2007, we repaid our $300 million third lien secured term loan due 2011. During the fourth quarter of 2007, we completed an offer to exchange our outstanding 4% convertible senior notes due 2034 for a cash payment and shares of our common stock. The exchange offer resulted in the issuance of 28.7 million shares of common stock, a total cash payment, including accrued and unpaid interest, of $23 million, and a reduction of debt of $346 million. On February 1, 2008, we issued notices of redemption to the holders of our $650 million senior secured notes due 2011. That redemption will occur on March 3, 2008."The Goodyear Tire & Rubber Company 10-K at p.28.

So, if I did not own the TC, I would come up now with a plan to buy it at cheaper levels than it is trading today.  One way that I do this is simply to set an email alert to let me know when it hits a target price.  The other way is to enter a GTC limit order to buy at a price that I am comfortable paying. 

The CUSIP for the underlying bond in this TC is 382550AD3


I am not a financial advisor but an individual investor trying to navigate my way through a mind field. In these posts, I am acting as an unpaid financial journalist and an occasional ornery political commentator.   I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.    


  1. Hi. I liked this post and your analysis. I've been offered 1000 shares of XKK at slightly below mkt (settling an estate) in lieu of cash. As it is trading right around $5, I think I'm going to take it into my IRA account.
    The only thing is that I'm concerned about the $1.5 billion in new debt ($700 million net) this last quarter. Is this a continuation of their restructuring, do you think?

  2. JOHN: I did not see your post until tonight. My position in XKK is lumped in my speculative long bond segment which is an extremely small part of my bond portfolio. I can not judge anyone else's risk profile or how a security like XKK fits in someone else's overall portfolio. The underlying bond is currently being priced at about 50% of its par value according to date available at FINRA as of late in 12/08. http://cxa.marketwatch.com/finra/BondCenter/BondDetail.aspx?ID=MzgyNTUwQUQz If this price adequately reflects the current institutional market price, and I do not know that it does given the fact that FINRA only publishes data given to it, then the current price of the TC XKK is close to the market price, with the price of the TC needing to be higher due to its higher coupon of 8% compared to the underlying bond yielding 7%. Junk bonds have been hit particularly hard during the credit crisis. At $5, XKK has a current yield of 16% plus more if Goodyear survives to maturity and pays the $10 par value. As to the debt, I do not know the exact sources of any increase in indebtedness other than Goodyear having to draw down its bank line of credit after its funds got tied up in the problems of the Reserve money market fund described in its recent 10-q at p. 42 as well as some other debt financing activities described in its SEC filing. I would suggest that you look at several pages in that area in GT's latest 10-q. I view Goodyear Tire to be a speculative credit, but the company at least gives me the impression that it is being managed about as well as anyone could manage a tire company, focusing on cutting costs, increasing margins, and paying down debt which is also discussed in this 10-q filing. I currently own 550 shares and I have a GTC limit order in effect to buy another 100 at more than a buck below the current market. I would not expect to increase my holdings above 700 shares. I try to limit my risk in junk credits to a very low amount and choose my spots. Goodyear, so far at least, is one of those spots.