Tuesday, July 06, 2010

BAGAKOAA; July 6, 2010 One in a row

Hey look at that. I got one right. The ISM survey came in short as expected, BUT (Behold the Underlying Truth), the market took it in stride after a long holiday. Well the market was kick started by nice overnight numbers in Europe and Asia.

In early morning trading we added to BA, inched back into BAC, added to MCD, IBM, and AAPL.

Regarding BA, do you know what ZA003 is? Well word got out from the Farnborough Airshow in the UK that Boeing will be teasing two new aircraft at the show. ZA003 is the new 787 Dreamliner. They will also be touting their state of the art 747-8F RC503 cargo transport. There are rumors (Buy on the rumors sell on the news) that Fedex and UPS have interest in the 787-8F and could be placing orders at or after the show. BA today was a deal at 61 and change. They have a great dividend and if they had 50% of their back log cancelled (the highest estimate I could find anywhere is 10-15%), they would still double their 2009 sales and be 4 times their market value. This is a long term 85-90 a dollar stock. Look for a nice bump of 2-3% at the air show. (Assuming there are no catastrophic events. A crash would do to Boeing what Deep Water Horizon did to RIG and BP.) Remember that Q 1 2010 profits were adjusted downward due to health care reform charges. Q 2 should be healthy and very promising. This could be one of the major catalysts for a summer spike in equities. DO YOUR HOMEWORK. WE HAVE ABOUT AN HOUR IN HOMEWORK TO COME UP WITH THESE OPTIMISTIC OPINIONS. Now on the down side, China will come on line as a major competitor to Boeing in about 10 years. That sounds like a long time, but in the airline purchasing life cycle, planning begins 10 years out, so while orders might not fly (pardon the pun) to China, buyers might hold up on orders until they get a feel for product design. Keep an eye on this because this is where LINKAGE plays a role. If airlines and cargo companies are holding off on purchases, their commitment to maintenance grows. Check out the key players in that sector and you could see some long term players. Food for thought. Also, keep an eye on the Airbus A350-1000 as a serious threat to the stand alone wide body 777. The A350 is due to come online in 2015. Even with all of that, we are thinking its 85-90 by year end 2011.

We might have a new reader who is starting their career and has the foresight to ask good questions about savings, 401 Ks and company stock. She is not my daughter, but I am proud of her accomplishments. Anyway, she is going to work for Waste Management WM. As many of you know, this has been on and off my watch list for a long time. This was an opportunity to look at the company in a different light as one of our “clan” was going to work for the entity and will probably have the opportunity to buy company stock both in and out of their 401 K. Here is what we discovered.

If you want to play along at home here is there Q 1 SEC filing.

Basic fundamentals look healthy. Their forward looking P/E ratio is an affordable 13.3 at $31.71 That is not a bad multiple for the countries largest collection, transfer, disposal, waste management company. Recent waste to energy initiatives have widened their competitive moat a bit. (There are a lot of confusing investment footnotes in the last 10Q about the waste to energy LLCs, but it looks promising) The have about 22 million customers in all market segments. They also own more than 250 land fills on their balance sheets. They have a real sexy 3.96% yield on their dividends and they are the cheapest of their top 5 rivals. (Republic Services, Stericycle, Shaw Group, Waste Connections, Covanta Holdings)

In evaluating the company’s ability to improve shareholder’s yield (That is how much FCF-Free Cash Flow- the company has and how it is used. Ideally to pay down or eliminate long tern debt, to issue healthy but responsible dividends, to buy back shares, or to make strategic acquisitions and or capital improvements.), they have a respectable 253 million in free cash flow as of Q 1. Their Long term debt is 8.9 billion which is at the high end of their 5 year average, but remember they are a capital intensive business. (Think land fills, mag cranes, crushers, trucks etc.) Their dividend continues to increase over the years. It was interesting to note that the recycling portion of their business almost doubled year to year. This came as a surprise to me until I read the notes on page 33 of the Q 1 report. Recycling includes metals. Most commodity metals did improve over the year and people where looking for monies for their disposables.

At the end of the day like Mr. Buffet and Mr. Gates, “One man’s trash is another man’s treasure”. They both are huge holder’s of Republic Services, Waste Management’s largest competitor and the second largest waste services company in the country. This week I am saying WM seems to be best of breed. I am going to ease my way in at 31 and change. Or an October 30 call if can catch it at $2.75 or less. This stock is fairly valued at 37 and could see a 50 in 12-18 months depending upon the strength of the economic recovery. Economic growth creates garbage.  More food for thought, guess who has the bulk of the gulf states clean up contracts from BP.  It's not Republic Services.  LOOK FOR THE LINKAGE.

Tonight I had a chance to look at the document Regulatory Reform: The New Foundation. It is a US Treasury Document that was prepared for President Obama to reference and or share at the G-20. It is a very interesting document as you read the 80 page summary of the ?2700?+ page financial reformation bill. It is interesting because it defines all the restrictions on banks and financial institutions. While I have some more homework to do, I don’t see how the enactment of most of this verbiage will end in anything other than less capitalization for banks, tighter rules for loans for mortgages and business loans, usurious fees that will get passed on to banking customers and incentives for banking institution to migrate out of the US to more fertile grounds. In other words more job losses and less taxes coming into government coffers. I have more reading to do and would love to see a PDF of the final bill, but it not available yet as they are still working on it. That begs the question, “What the hell did they vote on?” Ok Google hounds if you find a final copy of the bill, please send me the link.

Salve Lucrum


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