Tuesday, January 11, 2011

Bought 2 OfficeMax Senior Bonds at 97.494/Bought 100 TGA-UN:TO at 10.3 CAD/Duke to Acquire Progress Energy/Alcoa

The jobs report, released last Friday, continues to show anemic job creation in the private sector. Employment Situation Summary  The private sector increase in December was only 113,000, an insufficient number to cover new entrants into the job force let alone those who lost their jobs during the Near Depression.   Large companies contributed only 9% to that unremarkable job growth. While I would expect this number to improve in the months ahead, state and local governments will likely continue to shed jobs due to their growing fiscal problems.   FoxNews During December, there was a net loss of 20,000 jobs in local governments,  reducing the level of local government employment to the lowest level in four years.  I would anticipate that job losses in local governments will accelerate after this Spring, when the funds form the stimulus package dry up. It is just impossible to believe that the decline in the jobless rate to 9.4% is a real number.

General Electric (owned) was raised by UBS to Buy with a $23 twelve month price target.   GE is one of my larger individual stock positions, with shares acquired mostly in the $10 to $16 range.  I am reinvesting the dividends to buy additional shares.  Walmart (owned) was reduced from Buy to Neutral at Goldman Sachs.  That makes no sense to me.

1. Bought 2 OfficeMax Bonds at LIMIT of $97.494/97.894 with Concession  (Junk Bond Ladder Strategy)(See Disclaimer):  A reader brought this bond to my attention last Friday.   It is thinly traded with some trades last week at around 91 and others near 97.5, one or the other.  Since I am not allowed to place a limit order at 91 when the Ask is 97.494, nor is it possible to place a GTC limit order, I just went ahead and hit the ASK price with my limit order.   Hopefully, some day, the trades in the bond market can be placed in the same manner as the stock market. 

The bond was  originally issued by Boise Cascade in 1996.  That company later acquired OfficeMAX and thereafter changed its name to OfficeMax.  As shown on page 70 of the OMX 2009 Annual Report, this bond is an obligation of OMX, formerly known as Boise Cascade.    2009 OfficeMax SEC Filed Annual Report  A brief history of this company can be found at page 1:

"OfficeMax Incorporated (formerly Boise Cascade Corporation) was organized as Boise Payette Lumber Company of Delaware, a Delaware corporation, in 1931 as a successor to an Idaho corporation formed in 1913. In 1957, the Company's name was changed to Boise Cascade Corporation. On December 9, 2003, Boise Cascade Corporation acquired 100% of the voting securities of OfficeMax, Inc. That acquisition more than doubled the size of our office products distribution business and expanded that business into the U.S. retail channel. In connection with the sale of our paper, forest products and timberland assets described below, the Company's name was changed from Boise Cascade Corporation to OfficeMax Incorporated, and the names of our office products segments were changed from Boise Office Solutions, Contract and Boise Office Solutions, Retail to OfficeMax, Contract and OfficeMax, Retail. The Boise Cascade Corporation and Boise Office Solutions names were used in documents furnished to or filed with the SEC prior to the sale of our paper, forest products and timberland assets.

   On October 29, 2004, we sold our paper, forest products and timberland assets to affiliates of Boise Cascade, L.L.C., a new company formed by Madison Dearborn Partners LLC (the "Sale"). With the Sale, we completed the Company's transition, begun in the mid-1990s, from a predominately commodity manufacturing-based company to an independent office products distribution company. On October 29, 2004, as part of the Sale, we invested $175 million in the securities of affiliates of Boise Cascade, L.L.C. Due to restructurings conducted by those affiliates, our investment is currently in Boise Cascade Holdings, L.L.C. (the "Boise Investment")."

This is a link to the 1996 prospectus:www.sec.gov  The bond is not redeemable prior to its maturity on 2/1/2016.  Interest in paid semi-annually in on 2/1 and 8/1.   The note is "unsecured and unsubordinated obligation", in other words a senior unsecured note. The coupon rate is 7.35%.  My confirmation gives the current yield at my cost as 7.5% and the YTM at 7.86%. 

OMX is in a highly competitive industry.  About 80% of its stores are within five miles of one of its competitors which include Office Depot (ODP)  and Staples (SPLS).  I view all of these office supply stores as interchangeable. In the SUV Capital of the World,  I can drive from an Office Depot store to an OfficeMax in about 30 seconds.  I can also buy office supplies online from Amazon and others.  

For OMX, only about 1/2 of their business is derived from store sales.   About 50% of its business is called contract business, where the company delivers office products to businesses.  Revenues in this contract business declined about 2.5% in the last quarter.

The company did improve earnings in the last quarter (Q/E 9/2010), reporting an E.P.S. of 23 cents compared to just 7 cents in the year ago quarter.   Form 10-Q

There is a lot of non-recourse debt on the balance sheet, due to a complicated transaction described at pages 10 and   31-32 of the last filed Form 10-Q.  I made no attempt to assess the accuracy of that claim.

Excluding that non-recourse debt, the fixed rate was shown to be 280.1 million as of 9/30/2011.   Of that amount, I believe that the 2016 debentures represents just 17.967 million of that total. (see page 70 of the 2009 Annual Report:  www.sec.gov)

The current consensus earnings estimate for OMX is for an E.P.S. of 84 cents in 2010 and $1.07 in 2011.


2. Bought 100  TGA-UN.TO at 10.3 CAD Last Thursday (see Disclaimer):  This brings me up to 200 shares of TransGlobe Apartment REIT, listed on the Toronto exchange.  The purchase is part of my ongoing effort to generate income on my Canadian dollar position.   Before the Canadian withholding tax, my yield is around 7.25% with dividends paid monthly, which is the case for all of the Canadian REIT's that I own, as well as my Canadian ETFs.   I last discussed Transglobe when I purchased 100 shares at 10.58 CAD.  The share price has fallen some recently after the company announced a 95.5 million CAD dollars in a share offering at 10.3 CAD per share, as part of its plan to purchase 20 Apartment communities for 277 million.     Transglobe Press Release

3. Duke (DUK) to Acquire Progress Energy (PGN):  I own Duke as part of my core electric utility holdings.  I have bought and sold PGN. DUK an PGN agreed to an all stock merger, announced yesterday, whereby PGN shareholders would receive 2.6125 shares of DUK for each share of PGN.  Joint Press Release I have no idea why the Board at PGN agreed to that price, but I am okay with it as a Duke Energy shareholder.   

PGN includes the old Carolina Power & Light.  If this merger happens, Duke will dominate North Carolina and South Carolina.  Dominion Resources has a small service area and the northeastern tip of NC.  I would be curious to see whether the coop and municipal electric systems in NC will challenge this merger on antitrust grounds.  The Federal Energy Regulatory Commission has to approve it, and it will take into account antitrust issues. 

The analysts view this as a positive for shareholders of both companies: WSJ

My last purchases of Duke common shares were at  $13.56,  $15.79, and $16.25.  I am reinvesting the dividends.

4. Alcoa (owned):  Alcoa reported 4th quarter income of 21 cents, excluding items, above the consensus forecast of 19 cents.  Cash from operations hit an all time record in the 4th quarter at 1.4 billion dollars, up 978 million from the previous quarter.   AA projects that aluminum demand will grow 12% in 2011, and will double by 2020.   According to a  Reuters story, the consensus estimate for revenues was 5.71 billion and AA reported 5.7 billion.  Some financial journalists were claiming last night that the selloff after hours was due to that revenue miss.


  1. POM down near $18= 5.9% yield, S&P says recent sale supports div & 90% of biz is now regulated portion, less volatile than nat gas sales. There will be a 1-time charge in Feb earnings of about .24 due to Conectiv Energy sale so could buy lower I guess.

  2. I do not find electric utilities interesting at the present. I sold out of my POM position in September 2010 at $18.09.

    The extension of the 15% qualified dividend rate for all taxpayers is a plus for electric utility stocks.

    A likely increase in long term rates is a major negative.

    I am just sticking with my core electric utility holdings, and will continue to reinvest the dividends.

    My largest core position is ED followed by DUK. I also own FE and EXC.