Thursday, November 3, 2011

Earnings: LEAP OMX PCS GABC PVR/FED Raises Unemployment and Lowers GDP Forecasts 2011-2013/EU & US Manufacturing Surveys

Louise Yamada made some comments yesterday consistent with my Vix Asset Allocation Model. (starting at 3:40 at  BreakoutVix Asset Allocation Model Explained Simply  Mark Hulbert and the Use of the VIX as a Timing Model More Discussion on Asset Allocation in Unstable Vix Patterns VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern VIX and S & P Compared 1990 to 1997

Yesterday, the FED increased its projection for unemployment and decreased its forecast for GDP growth for 2011 through 2013, compared to its prior forecasts made in June 2011. The FED did raise its PCE (personal consumption expenditures) inflation forecast for 2011, apparently bending to reality. However, the FED continues to maintain that  PCE inflation will decrease in 2012 to 1.5% to 2% and then remain stable in that range through 2014. (see table at page 1: That inflation forecast, which discounts current trends as unsustainable, is necessary to sustain the Fed's Jihad against the Savings Class for another two years. If inflation continues to run hot well into 2012, the FED will lose more credibility by continuing to maintain its low inflation forecast.

Bernanke claimed in his press conference yesterday that zero interest rates will benefit savers in the long run. I found his argument to be frivolous.

Markit's manufacturing survey for October showed contraction at a 47.1 final reading. The readings for Germany and the Netherlands hit  27 month lows. As noted in the report, Eurozone manufacturing, new orders and new export orders contracted at the fastest rate in almost 2 1/2 years.

The ISM survey for manufacturing in the U.S. was reported at 50.8% in October, slightly lower than the consensus forecast. For both of these surveys, any number above 50 shows expansion, whereas numbers below 50 indicate contraction.  The U.S. is skating at the edge of contraction while the Eurozone has been contracting for a few months now in a clearly worrisome trend.

In this post, I am going to briefly discuss earnings reports from companies where my position is solely in one or more of their senior bonds and one regional bank.

I am now going to rail some against the laziness of many individual investors. Any investor who owns a bond has to make a continuous informed judgment about the credit risk and the likelihood of being paid back. I will make that judgment primarily based on earnings reports, the firm's refinancing requirements, and important news developments. I have a portfolio at Yahoo Fiance that consists solely of stock symbols for companies where I own only the debt.  

Unfortunately, many investors will buy a security without taking the time to learn much of anything material about it and will thereafter refuse to review important information relevant to that investment. Before the advent of the Internet, those lazy and incompetent investors at least had an excuse, since original source information from the SEC and elsewhere was difficult and expensive to acquire. Now, there is no excuse. All publicly available information, relevant to investment decision making, is readily and quickly accessible to anyone with an Internet connection. Yet, investors still will not avail themselves of that information before making significant investment decisions, nor do they take the time to fully understand what they are buying or the risks connected with the investment.   

1. Leap Wireless (own 1 bond only: FINRA): Leap reported a greater than expected loss for the third quarter. Leap lost 90 cents per share on $763.3 million in revenues. The consensus estimates were an 81 cent loss on $766.2 million in revenue.   The company did add a net 10,000 customers which was better than the estimated 67,000 customer loss. The net voice additions were 73,000, a substantial improvement over the 200,000 loss in the third quarter of 2010. The average monthly revenue per customer increased 11.3%, primarily due to smartphone customers. Leap Press Release I own just 1 bond:Bought 1 Cricket Communications 7.75% Senior Note Maturing on 10/15/2020 at 96.5

2. OfficeMax (own 2 bonds only: FINRA): OMX reported net income of $21.5 million or 25 cents per share for the third quarter. While the E.P.S. number beat expectations by 1 cents, revenues were reported at $1.775 billion below the $1.81 billion dollar consensus estimate OfficeMax Incorporated Earnings Release dated October 27, 2011 I own two lightly traded bonds. Bought 2 OfficeMax Senior Bonds at 97.494 I am not yet concerned about being repaid.

3. MetroPCS (own 1 bond only:FINRA)MetroPCS (PCS) had another disappointing earnings report, significantly missing the recently reduced analyst consensus expectation. The company reported an E.P.S. of 19 cents compared to expectations of 22 or 23 cents depending on the service providing the consensus estimate. The company did add 68.000 customers during the third quarter. The churn rate, however, increased to 4.5% from 3.8%. PCS spent $343 million on smartphones, up from $256 million in the year ago quarter. (see page 26 of MetroPCS 10-Q - 2011 Q3) Equipment revenues fell to $74+ million from $78+ million in the 2010 third quarter.

This company has a lot of debt which is my main concern given the competition in the wireless industry. Long term debt was over 4.7 billion as of 9/30/11. While PCS has a lot of cash on the balance sheet, it also has to spend a lot in capital expenditures and to buy spectrum from time to time. Cash and cash equivalents were at $1.840761 billion, with short term investments at $299.981 million, both as of 9/30/11.  

I own just one bond. Bought 1 MetroPCS 7.875% Senior Bond Maturing 9/1/2018 at 98

4.  German American Bancorp (own: Regional Bank Stocks Basket Strategy): German American Bancorp (GABC) reported net income of 5 million dollars or 41 cents per share, up from $.32 earning in the third quarter of 2010. The consensus estimate was for 38 cents.  As of 9/30/11, the net interest margin was 3.83%; NPLs to total loans stood at 1.33%; and the efficiency ratio was at 56.95% (down from 58.67% as of 6/30/11). I did not see anything in the press release about capital ratios. Overall, this was a good report. {In GABC's SEC Form 10-Q for the second quarter, the total capital to risk-adjusted assets was reported to be 13.54% and the tier 1 capital ratio to risk-adjusted assets was 10.47%. (page 68:  GABC 10-Q for Q/E 6/2011)}

5. Penn Virginia Resource Partners (PVR)(own 1 bond: FINRA): PVR is a publicly traded limited partnership. For the third quarter, PVR reported EBITDA of $60 million, compared to 50.4 million in the year ago quarter.  SEC Filed Press Release Adjusted net income rose to $20.5 million from $18.7 million.

Link to SEC Form 10-Q for the Q/E 9/2011.

Bought 1 Penn Virginia Resources 8.25% Senior Bond Maturing 4/15/2018 at 98 & 1 Vulcan Materials 7% Senior Bond Maturing 6/15/2018 at 95.5

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