Cree (CREE: chart, web, Y!) has been really good to my portfolio.  I’ve basically doubled my money which is probably a first for me.  (I’ve been halved, and halved again, but never doubled up).

So now I’m looking for the next opportunity.  It’s not that I’m turning on Cree, I just need another stock that has as much room to grow as Cree did when I did my first analysis on the company back in June of 2009.

In the spirit of “go with what you know”, I’m looking at Sprint (S: chart, web, Y!).

It’s not that I have any extensive knowledge of the company itself, but I do use their service (ever since I switched from Verizon in January).

Sprint has made a rough go of it in the wireless industry over the last several years.  Customer service has been at the top of the complaint list for many customers, and the Nextel acquisition turned out terribly.

What’s interesting is that the company is silently competitive.  While AT&T and Verizon are in a fierce advertisement battle, Sprint is the lower cost solution with competitive service and products.

Customer service is getting better, coverage is good and getting better, and the company is extensively developing a 4G network in a partnership with Clearwire.

Sprint announces first quarter earnings on Wednesday, and the expectation is that they’ll post another 300,000 subscribers.  Those will most likely be Nextel customers, and I suspect the CDMA side of the business will show a net gain in customers.

The expectation is that Sprint will post a $0.10 per share loss, and they’ll probably meet that expectation (I wouldn’t be surprised if the loss is greater than expected, either).

The silver lining.

Things are getting better.  The Nextel business is essentially dead, and the company will probably just let it die.  Customers (like me) are going to the low-cost solution and letting Verizon and AT&T spend the big bucks on television ads.

The company has a great future in the 4G segment, and will probably revolutionize the wireless industry.

CEO Dan Hesse is rational about the direction of the company; willing to spend money on R&D, and is realistic about the subscriber base.

My plans?

I’ll wait till the numbers come out on Wednesday.  There is more short-term downside potential than upside potential (i.e. through the next week or so after earnings).  That said, I’ll buy on an appreciable pull back under $4.

I wrote a few days ago about CREE (CREE: chart, web, Y!), a company that makes LED lighting components, including the lights themselves.

I feel that LED lights aren’t too far away from replacing incandescent and mercury containing CFL bulbs, and that products are already showing up on local store shelves, although prices have yet to come in at an economic range.

I’ve been perusing the companies 2008 annual report over the last couple days, and studied the financial numbers from the last several years.

Annual Revenue

As of the end of June, 2008, total revenues were on the rise to a level just shy of $500 million, with a 33.6% gross margin on revenues.

LED products (LED chips, components and lighting solutions) made up a total of 84% of total revenues, materials (SiC wafers, etc) made up just under 6% and power and RF products (power and RF switches) made up 4%.  The rest of the revenues came in the form of contracts with government agencies.

At the end of FY08, the company had $371 million in cash and marketable securities on hand and $408 million in working capital.

Diluted incomer per share was $0.36 at the end of FY08, which was down considerably from previous years, the high of which came in 2005 at $1.38 per share.

The company continued its streak of zero debt, a statistic maintained since as far back as 2004 or earlier.

The Most Recent Quarter

Naturally a lot has changed since the end of FY08 (nearly a year ago) and a FY09 report is due out in the next few months.

For Q3 ‘09, revenues of $131 million were 5% higher than the same quarter of 2008, but not surprisingly, down 11% compared to Q2 ‘09.

Operating cash flow for the third quarter came in at $49.9 million and the company generated $40.5 million of free cash flow.

The company built upon its cash reserves, increasing cash and investments to $404.9 million, and has maintained zero debt through the third quarter of fiscal 2009.

Recent News

On May 26th of this year, CREE announced that they are raising their financial targets for the fourth quarter of 2009, which is a pleasant headline to be reading in this economic environment.

The company says that the increase in targets is due to stronger LED component bookings for lighting-related applications such as laptops, displays, etc.

The company forecasts LED product sales to continue to grow into FY 2010 and will continue to spend money on R&D to make that forecast come true.

Corner Office Comments

I am more intrigued with this company the more I read.  The financial numbers look strong, and revenues have been maintained at healthy levels even in a down economy.  This could be a function of the company offering products that equate to energy savings with long product life cycles, making their products attractive to cities and municipalities (among other entities) trying to cut operating expenses when budgets are shrinking.

The zero debt is a major selling point, and the fact that the company has over $400 million in cash to work with makes the deal even sweeter.

I think this is a strong company with a promising product line.  They already market their LR6 downlight product that will replace 65 Watt flood-type recessed lights in your everyday residential application, and I suspect a replacement for traditional round incandescent bulbs is right around the corner.

I see prices coming down as LED lights gain traction in the market (LED’s have already replaced filament type Christmas lights) and CREE should be well positioned to take advantage of the next big technology shift in such a widely used market as home and business lighting applications.

The stock price has been fluctuating for the last several months, but the trend has been overwhelming positive since the beginning of 2009.

I’ll start buying some shares on the next downswing and I think the long term prospects for the stock is very promising.

It’s tough for me to say anything negative about my Verizon Wireless (VZ: chart, web, Y!) service.

It’s always available and it’s been years since I’ve had a dropped call.  It even worked in the Caribbean when I was there on business early last year; so there is something to be said for “the network”.

The only complaint I have is the cost of the service itself in relation to the features provided.  For $59.99 per month (plus the $20 in taxes and fees) I get 550 minutes between my wife and I.  As I’ve mentioned before, we don’t even come close to using those minutes.

I suppose you could say I’m eager to see how these down economic times will shape not just technology, but pricing in the very near future.

I’d love to have something like a Blackberry, and Verizon would practically give me a device for free.  But the $70+ service is really driving me away, and that doesn’t include the additional money for the traditional cell phone service for my wife.

In a fairly recent issue of BusinessWeek, the big three in wireless service here in the United States are seeing competition accelerate as buyers of pricey services and phones have tightened their belts.

The article mentioned that the battle is heating up in wireless data service, and the desire to grow the market while bringing down prices.  AT&T (VZ: chart, web, Y!) for instance has an 8.6% share in wireless data, compared to 16.4% for Sprint (S: chart, web, Y!) and Verizon’s 10.9%.

Verizon tends to be a bit hamstrung by 45% stakeholder Vodafone (VOD: chart, web, Y!)  (popular in Europe) and Sprint has been facing a recurring challenge in attracting and retaining customers.  Service has been spotty, customer support lacking, and product lines have been thin.

AT&T on the other hand holds a 100% stake in wireless and has its fingers in a lot of different telecom markets (a la AT&T UVerse).  They’ve got a decent amount of cash and low capital requirements to maintain their infrastructure.

The Apple (AAPL: chart, web, Y!)  iPhone has almost reached cult status, and I have to admit, I’m not much of an Apple guy, but I love the idea of an iPhone (again, besides the service price) and own a iPod.

I’m going to continue watching how the AT&T vs. Verizon vs. Sprint battle plays out, but I think if prices start coming down and consumer spending starts going up, it may be worth buying some shares of AT&T.

Yesterday Duncan Energy Partners (DEP: chart, web, Y!) posted its Q4 earnings results for 2008, highlighting a a 58 percent increase in net income to $10.8 million or $0.39 per common unit (diluted).  Compare this to $6.8 million (net), or $0.30 per common unit for Q4 ‘07.

For the quarter, distributable cash flow increased 63 percent to $15.4 million compared to $9.4 million in the same quarter of the previous year.  All told, this represents about a 12% return.

It appears that the distribution is stable on the heals of an increase on January 9th, whereby the board of directors of Duncan Energy Partners’ general partner declared an increase in the quarterly cash distribution rate to $0.4275 per unit for Q4 ‘08.

Unfortunately, the market didn’t appreciate the earnings like I did, as the shares slid another 3% on falling crude oil prices.

While the price action was frustrating, the strength of the business is still appealing, even with a heavy portfolio of oil and gas already.  The yield is still flirting with 10% and the prospects of an ever-increasing distribution look healthy.

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I’ve been thinking about a good non-oil related stock to start building a position in.  What do you guys think about Wal-Mart (WMT: chart, web, Y!).

It’s had a good run recently, which makes me wonder if it’s too late to get in.

In no way do I think we’re out of the woods in terms of our countries credit and debt problems, and I think we’re just now seeing the effects of a slimmer wallet.

It’s been a while since I posted anything regarding my investment activities, mostly out of lack of information to report on. I’ve been buying more shares of PVX (PVX: chart, web, Y!) recently, but more significantly, there is some good news on Duncan Energy Partners (DEP: chart, web, Y!).

Second quarter results are out, and things are looking strong. A few snippets:

• The partnership reported a 45 percent increase in net income to $6.6 million for the second quarter of 2008, compared to net income of $4.5 million for the second quarter of 2007.
• Distributable cash flow increased 65 percent to $10.8 million in the second quarter of 2008 from $6.6 million in the second quarter of 2007.
• On July 16, 2008, the board of directors of DEP’s general partner approved an increase in the partnership’s quarterly cash distribution rate paid to partners in respect of the second quarter of 2008 to $0.42 per common unit, or $1.68 per unit on an annualized basis.
• Revenue increased 52 percent to $360.4 million for the second quarter of 2008 from $236.9 million for the second quarter of 2007.
• Gross operating margin for the second quarter of 2008 decreased to $18.7 million from $21.5 million reported in the second quarter of 2007.

Overall I think these are good results, and definitely a sign of strength.

DEP stock has been battered down due to big money fleeing income funds, primarily from the likes of Goldman Sachs.  The company is paying out a 10% return, on growing revenues.

The only down side I see to the report is margin compression, which is to be expected in today’s environment.  The cost of doing business is going up, just like everywhere else.

MJ over at Dyslexic Research asked me to research Petrobras Energia Participaciones S.A. (PZE: chart, web, Y!) in return for looking over Ingersoll-Rand.

Simply stated, Petrobras Energia focuses on oil and gas exploration and production, refining and distribution, and transmission of electricity in Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico, Peru, and Venezuela.

Financial Look

Looking at Petrobras financials, they seem to have a decent set of books.  Profit margin is healthy for a smaller oil and gas producer of 4.22%.  While it’s very lucrative right now to be in the oil business, smaller companies like Petrobras (as compared to Exxon, Chevron, etc) are going to have a lower profit margin due to less leverage available to control expenses.  While the majors here in the US can use their immense overhead to leverage expenses, smaller companies don’t have that luxury (alternatively they can leverage the lack of overhead to control expenses elsewhere in the field).  You can see the effects of this in the operating margin of 11% which is appropriate.

Return on assets, 4.5% and return on equity, 8.8% could be a little stronger, but are still nothing to turn up the nose about.

PZE carries a good bit of debt, $2.35 billion, and equates out a 1.05 debt to equity ratio. I’ve never been one to look at debt as a bad thing (from a business sense) but I’d like to see the debt/equity ratio a bit lower. Effectively, a ratio over 1.0 means that the companies debt outweighs the companies equity; similar to owing more for your house than it’s worth.

The P/E ratio of 15 is about right, and at the current price I really wouldn’t consider the stock overpriced or unreasonably cheap either.

Price History

Looking at a one year chart, the only thing that really sticks out is a price spike to a high of $16.29 at the beginning of 2008 that was related to the sale of a 40% equity interest in Petroquimica Cuyo S.A.I.C. to Admire Trading Company S.A. and Grupo Inversor Petroquimica S.L.

A three month shows that the stock price has closely followed the recent run up in oil ($wtic: chart) and gas ($natgas: chart) prices.

The three-month average volume is just under a half-million shares per day, which is decent and means you could probably get in and out with a thousand shares in a single trading day if you had to.  Typically I like to see volume closer to 1 million shares per day, but with the lesser known foreign-energy stocks, lower volume is to be expected.

A Future Look

What is really interesting is a recent development last month that Petrobras Brasileiro (PBR: chart, web, Y!), a parent company of  plans to order 40 drilling ships and platforms worth about $30 billion for delivery by 2017. This means the group of companies is actively going to the deep water to find oil and gas.  The downside is that the return on this investment is about 10 years down the road.  Additionally, it isn’t well understood how the acquisition will affect PZE and it’s long term outlook in deep water, although I suspect PZE will get a piece of the action.

Corner Office Thoughts

I’m not sure this is the foreign energy stock to own right now.  Effectively PZE is the PBR subsidiary for energy assets in less than stable economies of Argentina, Ecuador, Bolivia, and Columbia.  The risk is that those economies may turn to government regulation in energy markets in efforts to help prop up their own economies (much like our own Government is threatening to do).

If I had to pick between the two, I’d probably turn to PBR, the Brazilian-based oil and gas company with larger assets and more leverage to find more crude.  They’ll benefit the most from the ship and platform acquisition, and have a larger interest in Brazilian energy (which is a big advantage since the Brazilians know how to produce the stuff, but rely on ethanol for consumption).

On a scale comparison, I think the U.S. based XTO Energy (XTO: chart, web, Y!) is a better value and a more frugally run company than the foreign PZE.

Several days ago I asked my buddy MJ over at Dyslexic Research what he thought of Ingersoll-Rand (IR: chart, web, Y!).  I’m not really an industrials guy, as my area of knowledge rests more in energy (specifically oil and gas) and tech.  That said, I’ve been making efforts to broaden my knowledge and diversify my portfolio.

MJ, however, is very much in tune with industrial sector, and I figured he’d have a good opinion on the company.

So it was with great interest that I read his opinion post on the company.

As MJ mentions, Ingersoll-Rand is in early stages of acquiring Trane (TT: chart, web, Y!).  You know, the air conditioner people.  But it turns out that Trane is much larger than I thought, and offer product lines outside of the home HVAC units.

MJ believes that Trane is a stronger company than Ingersoll, and as such, Ingersoll benefits more from the acquisition than Trane does (which is good if you’re looking at Ingersoll stock).  However, he also suggests that this would be a great opportunity for Ingersoll to screw up a fairly healthy company.  And I agree.

I’m not sure I agree with Ingersoll’s sell off of Bobcat, as that seemed to be a very robust product and a fairly bullet-proof brand.  Trane could bring some street-cred back to IR, but it will take some time according to MJ:

After seeing mergers from the inside out, it will take roughly six months to a year for the two companies to properly integrate into one another and see potential synergy savings. After that both companies might be able to flourish. -Source

In my opinion, a lot will depend on how they structure the acquisition.  If Trane operates as a subsidiary, I think the integration process will be fairly smooth, as it will be a matter of book keeping.  However, if it is a merger in the truest sense of the word, I’d look at 18 months before you see signs of a single, well oiled machine.

I’ll let you read about MJ’s outlook on Ingersoll and his official opinion on the stock at his blog, and he’s brought up some very valid concerns.

For now, I’ll keep digging but will keep Ingersoll-Rand on my watch list.

Walgreen’s (WAG: chart, web, Y!) earnings came out today and they ended up beating Street estimates by 2 cents, and second quarter sales increased by 10.5% on comparable-store sales growth of 4.7%.

While the EPS was up, it didn’t match the sales growth, increasing just 6.5%.

So what’s the beef?

Walgreen’s earnings are commendable, but the fact that earnings aren’t out-growing sales leads me to believe margins are tightening. In fact, gross margins were down 14 basis points for a variety of reasons including mix shift and softer seasonal sales.

Expenses were up 11 basis points as a percentage of sales, however most of the expenses related to the opening of 121 new stores for the quarter.

I think there is still potential for Walgreen’s, but I think there is currently more downside risk than upside reward. There is a shift to generic drugs, with less margin still than the name-brand counterpart, and in these market conditions I think there are better opportunities waiting in the wings.

Last Wednesday, Provident Energy (PVX: chart, web, Y!) came out with their 2007 year-end and Q407 report, and also provided an update on reserves.

All around a positive report, and I’m curious as to why the stock dropped almost a dollar in two days on a fairly bullish report. The only thing I can think of is that crude oil ($wtic: chart) dropped $6 and natural gas ($natgas: chart) prices waned almost a dollar in those same two days will a lot of money fleeing commodities.

A few highlights from the report:

• The payout ratio in the fourth quarter of 2007 was strong at 57 percent, down from 64 percent in the fourth quarter of 2006. Full year payout ratio in 2007 was 77 percent, up from 67 percent in 2006.

• Consolidated funds flow from operations increased 8 percent to $468 million ($2.04 per unit) compared to $433 million ($2.20 per unit) in 2006. Consolidated earnings before interest, taxes, depletion, depreciation, accretion and other non-cash items (EBITDA) was $545 million in 2007, an increase of 10 percent compared to $496 million in 2006.

• Consolidated upstream proved plus probable reserve life index (RLI) increased from 12.4 years to 16.9 years, reflecting the increasing quality of the assets and the sustainability of the Trust. Provident’s Canadian proved plus probable RLI increased 24 percent to 9.7 years. Factoring in the long-life midstream assets, Provident’s economic life on a consolidated basis is now approximately 18.5 years.

• On a consolidated basis, Provident drilled 159 net wells with a 99 percent success rate while in Canada 103 net wells were drilled with a 98 percent success rate. Provident’s drilling activities in 2007 were focused primarily on crude oil.

• Consolidated proved plus probable oil and gas reserves increased 111 percent to 322 million barrels of oil equivalent (boe). Canadian proved plus probable oil and gas reserves increased 37 percent to 101 million boe.

I like the fact that Provident is actively increasing their reserves at a rate of nearly 13 times the annual production, thereby procuring the longevity of the trust. I suspect that many of the CANROYS were brought down by the sell off in oil the last few days, and this only makes PVX look more attractive.

We’re moving into the lull for natural gas consumption: the period when demand drops due to increasing temperatures, and right before demand increases due to… well, increasing temperatures. With crude still above the $100 mark, it’s more attractive to use natural gas to generate electricity. Consequently, you’re seeing the price of both the commodity and the associated stocks drop.

If PVX continues to drop below $10, it’s going to be tough to not pick up a few more shares.

Sprint (S: chart, web, Y!) has been down in the dumps lately. Actually for the last several years (or more accurately since they merged with Nextel). They just wrote down $29 billion, or the equivalent of that same Nextel merger.

Sprint is a poorly run company, not just at the executive level, but all across the board (although new CEO Dan Hesse is making a valiant effort to turn that around). Their marketing department never really sold the Nextel technology, and little money went into preserving the customer base Nextel generated. On top of that, Sprint didn’t spend enough time, effort and money keeping their own customers.

Sprint took a massive nose dive on the write down news, and closing last Friday at a measly $7.11 per share. So the question becomes, are they really worth $7.11 or was the dive on negative news an over reaction further fueled by negative overall market sentiment?

Additionally, the low share price could put enough lip stick on this rode rough, put away wet, stock that it looks attractive as a takeover bid by a competitor like Verizon (VZ: chart, web, Y!) or AT&T (T: chart, web, Y!).

If an acquisition were to be in the works, the take over bid would have to account for about $20 billion in debt, which would only serve to increase the cost per customer. On top of that, the differences in Sprints networks as compared to the competition would require some infrastructure modification which would be capital intensive. On the other hand, Sprint does hold the WiMax initiative, which could be attractive to a company like Verizon, or even Comcast (CMCSA: chart, web, Y!).

Right now, it takes little effort on Verizon or AT&T’s part to harvest subscribers from a downtrodden Sprint, which is effectively a free trip past “GO” to collect $200. So why would anyone want to buy Sprint when they can just take customers free of charge? Well while the infrastructure would need modification to provide commonality, the company could be bought well below the net asset value, and integrated just like Cingular was integrated into AT&T.

For now, I’ll sit back and see what happens.

Sprint is hardly a good buy right now, especially with so many other companies out there with stronger fundamentals at a great discount weighed down by flailing market sentiment.

Goldman Sachs Group, Inc. (GS: chart, web, Y!) is in the business of providing investment banking, and investment management services, primarily to corporations and financial institutions.

Goldman has been one of the few big investment banking and financial services firms that has actually held up well through the the fallout of the credit crisis and the housing slump. It’s low involvement in small residential mortgages and favorable short trades among the rest of the sector has worked in its favor.

The black sheep mentality compared to the rest of the sector has held the stock price around $200, and it even saw $250 per share back at the end of October.

Is the other shoe about to fall?

Goldman has insulated itself against residential mortgage problems, but it does have some hefty exposure to corporate debt; a topic that has yet to make its way into the headlines, but fear it will has dragged GS down considerably.

Goldman has been on the receiving end of some critical analyst reports during the last week, all conveying the fear that the company will miss earnings in mid March.

Analyst Jeff Harte of Sandler O’Neill said Goldman’s share price will likely be hit harder than its competitors’ since it has been trading at a “considerable premium over peers for the firm’s apparent ability to outperform in a difficult environment.”

The day before, Deutsche Bank analyst Mike Mayo said he expected Goldman to bring in only $2.63 per share in the first quarter, down from $4.64 per share. He expects Goldman to take a nearly $3.5 billion writedown due to leverage loans and other investments.

Earlier this month, Meredith Whitney of Oppenheimer downgraded Goldman to perform, from outperform, citing the 40% premium its shares were trading at compared with its peers. -Source

The earliest downgrade by Meredith Whitney requires some clarification however:

“Goldman’s franchise remains well ahead of its peers with respect to market share but most importantly execution, and none of that has changed, in our opinion,” she writes. “We simply believe there is more probability of multiple contraction than multiple expansion in the current environment of weak/low margin capital market conditions.” -Source

I tend to agree with her. Goldman is probably the smartest and most savvy of the big boys on Wall Street. They’ve avoided the most volatile hot spots in the financial sector, and bet against their peers when thing really went south in the credit sector.

I’m looking to pick up some Goldman Sachs, but I think I’ll have to wait till it finds a bottom. I agree with Ms. Whitney that the premium in price has put a target on the companies back, and the reaction to any speculative bad news will be grounds for over reaction.

It will be interesting to see how the stock fairs after earnings, and I think we’ll gain some insight into whether the second shoe representing corporate credit problems will bear the weight of a work boot or a flimsy flip-flop.

How well will Goldman weather the second front in the credit storm?

Does GS make for a good buy here?

I’ve been watching Schering-Plough (SGP: chart, web, Y!) since I started looking for my next buy-it and forget-it stock. The stock price has fallen considerably since then on news that a company study produced disappointing results on the effects of Vytorin, a next generation cholesterol drug.

They study showed that Vytorin had no benefit on the buildup of artery plaque over the older drug Zocor. The silver lining to this story that is easily glanced over is that Vytorin cut bad cholesterol 40% more than Zocor or Zetia (Vytorin is a combo pill of Zetia and Zocor).

Opportunity Knocks?

I view these situations as opportunities. Schering is a strong company, whose stock price is being affected by panic selling stimulated by an initial communication from the FDA concerning the results of this inter-company study.

The fact is, Schering isn’t relying on the success of Vytorin to keep the company afloat, just like Merck (MRK: chart, web, Y!) didn’t bet the farm on Vioxx (which they ended up with tens of thousands of liability claims).

Schering is sitting on a P/E of 14.8, which is fairly low for big-pharma players, and the stock price has been driven down by higher than average volume on the news. I suspect that a good portion of the money that’s fleeing the company stock belongs to institutional investors already gun shy about overall market health.

The downside to SGP is that it doesn’t have the return on revenue that other, bigger pharmaceutical players like Pfizer (PFE: chart, web, Y!), GlaxoSmithKline (GSK: chart, web, Y!) and Merck, sitting at just 10.6% compared to 22.8%, 23.2% and 19.8%, respectively.

Buy-it and Forget-it?

I’m still not sure this is a buy-it and forget-it stock. The financial health of the company is good, but there are others out there that are better. However, it may be prudent to take advantage of the stock price while it’s down. Once the whole Vytorin issue blows over, like the Vioxx debacle did, I think there is some considerable upside to the stock itself. After all, there is an inherent upside of nearly 70% if you consider the recent highs of $32 per share.

Schering Plough has been beaten down by over reaction to headlines and overall market sentiment. This could be the kind of opportunity you want to take advantage of in times like these.

Recently our good buddy Winston mentioned a few stock ideas in a discussion about Walgreens. He mentioned that Archer Daniels-Midland (ADM: chart, web, Y!) was his buy-it and forget-stock. So I thought I’d dig into the numbers a bit to see if I agree.

Archer Daniels procures, transports, stores, processes, and merchandises agricultural commodities and products primarily in the United States. They operate in three segments, namely oilseeds and corn processing, and agricultural services. Effectively they refine seeds and beens into vegetable oils for the food (i.e. salad dressing) and feed industries.

The AG-services side of the company engages in buying, storing, cleaning, and transporting agricultural commodities, such as oilseeds, corn, wheat, milo, etc, and reselling these commodities to the agricultural processing industry.

An interesting, yet lightly publicized aspect of Archer Daniels is their interest in processing corn. For those of you who regularly read The Corner Office Blog, you know that I view the ethanol boom as nothing more than a farce. However, if you can make money in the face of a farce, by all means, run with the bulls!

Financial Summary

For the most recent quarter, Archer Daniels first quarter (FY08) net sales increased to $12.83 billion, up 35.8% from $9.45 billion for the same quarter in FY07, stimulated by commodity prices, and strong product demand in processing and AG-services segments. Oilseeds Processing sales increased 42.4% to $4.61 billion, boosted by higher prices and volumes due to strong demand for vegetable oil and soybean meal, and the higher average selling prices of fertilizers and oilseeds exported from South America. Corn Processing sales increased 12.6% to $1.52 billion, due to higher average selling prices in sweeteners and starches despite lower sales volumes and lower average selling prices for ethanol, whose current capacity exceeds customer demands.

AG-services sales increased 39.4% to $5.54 billion, also stimulated by higher commodity prices and increased sales volumes. Commodity market prices of corn, soybeans, and wheat increased approximately 44.0%, 36.0% and 26.0%, respectively, from market price levels a year ago.

Gross profit margin declined 228 basis points to 8.69% from 10.97% a year ago. The cost of products sold jumped 38.7% to $11.90 billion, due to higher agricultural commodity prices and increased sales volumes. Manufacturing costs increased $52.00 million, due to increased employee-related costs, and higher plant maintenance and depreciation costs. Operating margin also contracted 139 basis points to 4.49% from 5.88%.

ADM pays a $0.115 per share dividend, and the company recently bought back 1.84 million shares for roughly $32.63 per share.

Insider Activity

There has been a healthy dose of insider selling going on in the last couple months, which isn’t really a strong indicator of how well insiders think the company will do in the future. Remember, insiders sell for many reasons (hey, they gotta pay the bills too), but they only buy for one.

Industry Peers

There are a couple key players in the farm products industry. Bunge Ltd. (BG: chart, web, Y!), Cargill, and Corn Products International (CPO: chart, web, Y!) are probably the closest to ADM when comparing technicals. Cargill is a privately held company that is nearly twice as large as ADM in terms of revenue, but on nearly equal ground when looking at net income. Cargill also has significantly more employees, hence more overhead and less net income.

ADM has a P/E ratio of 11.49 as compared to 18.93 for Bunge and 16.13 for CPO.

Operating margins for Archer (4.4%) are nearly double that of Bunge (2.8%) but not quite as healthy as CPO’s 9.9% margin.

The Corner Office Thoughts

I think Archer Daniels is a fairly safe bet considering the stability of our current economy. They’re in a industry that is fairly insulated to drastic swings in economic sentiment, as their products will be in demand regardless of how Bernanke and Company screw things up. The fact that they are truly a global player in the farm and food industry makes it look that much more attractive.

They do have significant risk in that their overall financial health is tied largely to commodity prices, but in this day in age, this is fairly common. I don’t see the grain markets falling through the floor anytime soon. I like the fact that they are taking part in the ethanol boom, but don’t have such a large part of their business plan at risk when the boom turns bust.

Currently, I’m still in a wait and see mode, but I’ll take another look at ADM when things start to calm down a bit. As I mentioned the global exposure that this company delivers is very appealing.

All in all, I think Winston is right, this could be a good candidate for a buy-it and fagedaboudit stock…

Back in October, I started looking for the next buy-it and forget-it stock. My initial thoughts were Southern Copper (PCU: chart, web, Y!) and Schering-Plough (SGP: chart, web, Y!). However, through comments on that post, Mike chimed in and mentioned Walgreen Co. (WAG: chart, web, Y!).

At the time Mike mentioned the stock, it was around $39 per share, and has since dropped a bit more and is starting to show signs of increasing value. I must disclose that Mike says he is a pharmacist and individual investor, and worked for almost all of the chain pharmacies (like Walgreens).

Financial Summary

The stock has a 3-month average volume of 9.2 million shares traded per day with a current market cap of $36.8 billion. The company is paying a $0.095 per share dividend on a quarterly basis, which translates into a 1% annual yield.

The price to earnings ratio (P/E) is 18.3 as of the writing of this post, which is a significant discount to the rest of the companies in the sector. The average P/E ratio in the sector is 29.82.

Earnings growth is 18.6 as compared to a 21.41 average for the sector.

Earnings per share (EPS) is $2.03 and continues to increase quarter to quarter.

A few quick facts about the company…

• Walgreen Co. was incorporated as an Illinois corporation in 1909 as a successor to a business founded in 1901. Walgreens is the nation’s largest drugstore chain (based on sales) and recorded its 33rd year of consecutive sales and earnings growth. During the year, the company opened or acquired 563 stores for a net increase of 478 stores after relocations and closings, not including 58 locations acquired from Option Care, Inc. The total number of locations at August 31, 2007 was 5,997 located in 48 states and Puerto Rico. Aggressive growth will continue as the company anticipates operating more than 7,000 locations in 2010.

• During fiscal 2007, Walgreens’ market share in 59 of the top 60 front-end categories increased, as compared to all food, drug and mass merchandise competitors. Today, 139.1 million people live within two miles of a Walgreens and 5.0 million shoppers walk into a Walgreens store daily.

• Walgreens pharmacy sales are expected to continue to grow due, in part, to the aging population, the introduction of lower priced generics and the continued development of innovative drugs that improve quality of life and control healthcare costs. Also, the increase in generic introductions continues to boost the number of prescriptions filled. Although generics reduce sales dollars, they save both patients and payors money and generally offer higher gross profit than brand name drugs.

• Prescription sales continue to become a larger portion of the company’s business. This year prescriptions accounted for 65.0% of sales compared to 64.3% last year. Third party sales, where reimbursement is received from managed care organizations, government and private insurance, were 94.8% of prescription sales compared to 93.1% a year ago. Overall, Walgreens filled approximately 583 million prescriptions in 2007, an increase of 10% from the previous year.

Financial Trends

In 2007 the company reported its 33rd straight year of record sales and earnings growth. Sales rose 13% to $53.8 billion, and earnings before interest and taxes grew by 17%, to $3.2 billion. Sales of lower priced generic drugs are increasing, which means sales growth may be lower than the five-year annual growth rate of 15%.

There is a shift happening from general merchandise to pharmacy drugs, which means that margins may not be all that great (traditionally there is larger margin in merchandise than in name brand prescription drugs). However, this trend may be offset by the increase in generic drugs, in which there is a wider margin.

The companies debt-to-equity ratio is very low at 0.11 and is lower than the industry average. This indicates to me that the company does a good job of managing debt.

Insider Activity

The Walgreen insider roster is fairly extensive with a list of 32 officers or directors. Lately, there has been a slew of insider acquisitions on the non-open market by nearly all of the listed insiders. This appears to be a function of executive stock rights at the end of the fiscal year. However, it should be noted that very few of these shares have been sold since the acquisition.

The Corner Office Thoughts

While Walgreen is starting to show signs of life after a significant sell-off, it will take at least another quarter to determine whether they’re back on the upswing or still struggling to increase growth.

EPS continues to increase each quarter, but the rate is starting to decline. The company has a great track record on increasing sales, which makes for a good buy-it and forget-it stock.

Overall, the company is not as healthy as it’s peers in the sector, and I suspect that the transition from majority sales in high-margin merchandise to lower margin name-brand drugs will not help. On the flip side, an aging population will only increase demand for pharmaceuticals, and wider-margin generic drugs will help offset decreasing sales in merchandise.

At this point in time, Walgreen looks like more of a gamble than I want to take. Some would say that you should buy a stock when it’s fallen, like WAG has, but I would say the time to buy a stock is after it has fallen, and is on it’s way back up. I have no problem leaving buying late with the comfort of knowing things are looking up.

Additional Resources

Read the 2007 annual report

I’ve been doing rather well in my Roth IRA for the last year. I’m holding Provident Energy (PVX: chart, web, Y!), which turns a healthy 11% dividend and pays monthly, Duncan Energy Partners (DEP: chart, web, Y!), which recently increased its dividend by 2.5%, and my company stock, which has better than doubled over the last year.

Being in the oil industry, I think it’s safe to say that I’m overweight in oil and gas; which, at this point in time is not such a bad thing. However, down the road, I foresee a major pullback in crude prices, which will not be such a good thing for the industry.

Naturally, I don’t literally mean forget it. I just don’t want to have to watch the stock price every day with a twitchy trigger finger on the sell button.

I want a stock that I’ll hold for 2 or 3 years at a minimum, pays a bit of a dividend, but has tremendous room for growth, not only as an individual company, but I’d like to see a good forecast for growth in the sector too.

Here are a few options I’m looking at, for various different reasons.

Southern Copper

Southern Copper (PCU: chart, web, Y!) has been on a tear for the last two years. Copper is in high demand, more so in China and India than in the U.S., but the effects of supply and demand are felt globally.

The stock is down from around $140 per share, and some analysts are starting to say that it’s a bit rich for their tastes, and a pull back is near. The company is subject to labor strikes in Peru and Mexico, and local banks have indicated that will negatively affect Q3 earnings.

AMLIMA (Dow Jones)–UBS said Friday that it had downgraded Southern Copper Corp. (PCU) to a neutral rating from a buy, citing a disappointing growth outlook.

The investment bank said it had revised its earnings estimate up by 3% in 2008 and up by 18% in 2009, by incorporating new copper price forecasts in its model.

It cut its 2007 earnings forecast by 8% due to strike-related production shortfalls and high costs. -Source

This latest action by UBS should be taken in stride, as the stock has been downgraded numerous times over the last year and it’s still going up.

It will be interesting to see what comes out of the Q3 earnings.

Schering Plough

Another option is to dive into the pharmaceuticals sector. Schering Plough (SGP: chart, web, Y!) just came out with Q3 earnings on Monday (transcript).

The company posted a profit of $750 million, or 45 cents a share, compared with $309 million, or 19 cents a share, for the same period last year.

This year’s quarter included a gain of $294 million, or 17 cents a share, related to acquisitions and a charge of $20 million for an upfront licensing payment.

Excluding certain items, SGP would have reported adjusted earnings of 28 cents a share. This missed Wall Streets expectations of 30 cents per share, which explains why the price took a dive on the news.

However, this is just the type of dive a guy might just jump in on. Profits are going up by leaps and bounds, yet the stock drops 13% because it missed the consensus for estimates by 2 cents per share?

I could see a future in the drug market!

Yesterday Provident Energy (PVX: chart, web, Y!) entered an agreement to buy out a privately held company with oil assets in southeast Saskatchewan for $79 million in shares.

The short end of this is that PVX is spending money to increase reserves, and add to their daily production. In fact, they’ll add 1,300 barrels per day of production, nearly all of which is crude. Provident’s proved plus probable reserves are estimated at 3.6 million barrels of oil.

“This acquisition provides excellent strategic and economic value to Provident, improving the quality and supporting the sustainability of our existing southeast Saskatchewan assets,” said Provident President and Chief Executive Officer Tom Buchanan. -Source

A side benefit to this is that 17,900 net acres of undeveloped land are part of the deal, and 100 gross drilling opportunities wait in the wings. To top it all off, the operating costs of the existing wells are under $5.00 per barrel.

This is a sweetheart deal for Provident in terms of reserves and increased production, and if you’re conservative, this is a 4 year payout on a $79 million in stock.

Not bad. Provident lost $0.33 per share today on the news combined with retreating crude prices… If I weren’t so overweight in the stock already, it would be an attractive time to pick some more up.

This smaller acquisition is on the heels of the Capital Energy Resources deal back in May.

Last Tuesday Duncan Energy Partners (DEP: chart, web, Y!) raised its quarterly dividend by 2.5% to $0.41 per unit.

Duncan Energy is primarily an oil and natural gas pipeline company, and their primary business is transporting and storing natural gas liquids (NGL’s) and petroleum products. A highly attractive sector that is mildly insulated against changes in crude and natural gas prices.

DEP is an MLP, which means they are required to distribue a certain percentage of their earnings to “partners”. The fact that they are raising the dividend indicates that their finances are doing rather well.

DEP is set to release Q3 earnings next Thursday, October 25th.

Previous Posts on DEP

Bought Duncan Energy Partners (April 16, 2007)

Master Limited Partnership (April 23, 2007)

Stock Thoughts: Duncan Energy Partner (April 10, 2007)

I received an email from Steve Carpenter yesterday. Typically when I receive emails from someone I don’t know, I’m enticed to “file” the message accordingly, however I opened this one, not knowing what to expect.

Steve is the founder and CEO of Cake Financial Corporation.

After reading his email, I found myself intrigued with his new service. Cake is a new online financial service that allows individuals to display their actual portfolio,and keep track of how the portfolio has done over a period of time. It also lets you share your portfolio and real-time trading information with trusted family and friends without ever revealing sensitive personal information like net worth, number of shares, or portfolio sizes.

The way it works is that you link up your brokerage account with Cake, and it keeps track of your performance, and allows you to compare your performance with that of your peers. You can see how others are trading, and even collaborate investment strategies online.

For each Cake member, you can see the overall performance of that persons portfolio over a range of 5 days to 5 years. You can also see what’s on that members watch list, see who’s in their Cake network, and even read their investing journal.

It’s basically a conglomerate of the ultimate financial blog sites. What’s great is that since it’s linked directly to your brokerage account, it lends credibility to your financial performance.

Cake’s number one priority is protecting personal and financial information. Founder and Chief Technical Officer, Doug Reed, has had some experience creating secure financial environments in the past, so he’s got some experience keeping the privacy hacks at bay.

I’ll keep researching Cake, and perhaps have Steven answer a few questions in Corner Office Interview.

Until then, here are some more links to Cake:

Cake Financial Home

Cake Financial Blog

The Cake Financial Players

Cake On Cramer

I’ve been sifting through the Pengrowth Energy filings in my spare time over the last couple weeks, and was not surprised to see them cut their distribution by 10% on September 14.

Reading through the Q2 financial results, I noted that their POR (pay out ratio) is 94%, which is fairly steep, especially for an oil and gas production company.

The fact that they are turning around and paying out 94% of their cash flow does not leave them much for capital expenditures and drilling.

“Development capital for the second quarter of 2007 totaled $44.4 million with approximately 82 percent spent on drilling and completions. Pengrowth participated in drilling 34 gross (15.3 net) wells with a success rate of 94 percent. In addition, Pengrowth participated in the drilling of three injection and one water disposal well (0.9 net).” -Source

That sounds impressive, however $44 million in development capital isn’t all that much considering the cost of services in the oil patch these days.

Also be careful when you read that Pengrowth “participated in drilling 34 gross wells” during 2007. That does not mean that PGH owns the 100% working interest in the wells, it just means they own some working interest in 34 wells. In short, they partnered with some other company to drill the wells.

In a letter from James Kinnear, CEO of Pengrowth, he states:

“Distributions to unitholders during the quarter totaled $0.75 per trust unit and Pengrowth has maintained the monthly distribution at $0.25 per trust unit since December 31, 2005. However, distributions can and may fluctuate in the future. Distributable cash is derived mainly from producing and selling our oil, natural gas and related products and as such, distributable cash is highly dependent on commodity prices. Pengrowth’s board of directors will continue to examine distributions on a monthly basis while considering overall market conditions to set the distribution level each month.” -Source

With crude prices above $80 per barrel, and gas prices maintaining levels above $5 per MCF all summer, it just doesn’t make sense that PGH is cutting their distribution at this time.

I like the DRIP program they’ve made available to US investors. However watching them pay out a better part of their cash flow each month, and only having 6% of that cash flow to use on CAPEX and drilling does not make me feel comfortable dropping a lot of money in the stock, no matter how high the distribution…