Sirius XM - A Lot Riding on Next Week's Earnings

Next Tuesday Sirius XM (SIRI) will be announcing fourth quarter and annual earnings for 2010 and there is a slight chance that the company will announce a positive year for the first time in a long time. In 2006, SIRI lost 79 cents a share, but this amount has been diminishing ever since. Despite the improving earnings, it was not until the second half of 2008 when the stock price plummeted, for obvious external economic reasons. Of course, since then we have seen a recovery, corresponding with their improving earnings, culminating in the run from $1.00 to $1.79 in the last 5 months.

With 135 channels there really is something for every Sirius XM listener, whether it be sports, talk radio, business, comedy, or basically any kind of music you could want to listen to. Their licensing with the major sports leagues and their ability keep huge names on board set them apart from terrestrial radio.

Recent opinion has suggested that this company is overvalued price wise (link) or knock the company for past wrongs (link). However, this stock must be taken for what it is, and people need to realize that future earnings will be much better than the last five years. I shall explain this proclamation, but first, a quip. While writing this, listening to my iTouch (AAPL) on shuffle, Rage Against the Machine offered a very fitting line for this analysis in Guerrilla Radio:

Was is cast for the mass who burn and toil?
Or for the vultures who thirst for blood and oil?
Yes, a spectacle, monopolized.

It was 2007 when Sirius and XM announced their merger, therein by monopolizing the satellite radio industry. Some argue that they have legitimate competitors, such as Pandora, but in reality Pandora is no threat to the auto subscriber base. Of course there is internet radio, and those like me that swear by their iPod docks, but truth be told, Sirius offers a highly unique product with a bright future.

Their hold on the market is very similar to Netflix (NFLX) in that, as stated, once you try you won’t want to let it go and there are few if any bona fide competitors. So the biggest thing is for Sirius to optimize its margins. This does cap the potential market, since there are only so many people driving in the world and you can only charge so much for this product, but they can certainly be profitable for years to come.

Sirius does boast that their service can be used on a computer, in your home, or on your mobile smart-phone, but we all know that the backbone of their revenue comes from in-car units. They claim to have over 20 million subscribers, and the majority of these units are in vehicles. It is also well known that the company benefits much more from renewed subscriptions, rather than new users, because of the cost of the receiver. But, speaking from experience a new user is very likely to fall into the former category after their initial membership expires.

With this in mind, consider the following report from the National Automobile Dealers Association, which offered some very positive guidance last weekend. They predict new vehicle sales of just under 13 million for 2011 which would be significantly hirer than last year. They base this on the improving economic conditions, an apparent shortage of used cars, and consumer credit, among other things. They also believe that rising gas prices will encourage consumers to trade in for more fuel efficient vehicles.

This is good news for SIRI holders, because more new car sales equals more subscriptions. So the question becomes how much will this affect the stock price and what is going to happen to it in the near future. Consider the 1 year chart below.

You can see that for 3 or 4 months the stock was trading in a tight range in and around $1.00. Actually, looking back, there is probably a tenant formation from May to September which caused the breakout that ultimately resulted in this upward trend. Based on the prior analysis, one should argue that this stock is certainly not overvalued, as investors are paying for future prosperity. Things are looking good at Sirius and there is no reason why Sirius could not be turning a profit for years to come; people having realized this have helped to drive the stock up.

-Jeff

Dissecting Disney's Conference Call - What's Behind the Success?

Disney has been around for nearly a century, starting with movie, and then branching out to theme parks, television, media, and several other forms of entertainment. They stand today as one of America's most storied franchises and this articles dives into why that is. It can be found at Seeking Alpha.


-Jeff

Ford: Driving Toward Profitability With a Dividend

This article explores the possibility that Ford may initiate a dividend in the coming years. The full article can be viewed at SeekingAlpha.com.

-Andrew

Railroad Stocks: Training Your Portfolio to Double Digits

This article presents a look at rail traffic along with some trends within the data. The end goal will be a discussion of companies that will benefit from continued growth within this sector. Please see the full article at seekingalpha.com

-Andrew

Investing in PepsiCo: The Power of Brand Recognition

Pepsico does a lot more than just soda and they do it very well. This article dives into these other brands, like Frito-Lay, Quaker Oats, and Gatorade, and proves that PEP would be an awesome holding for the long term. The entire article can be found at Seeking Alpha.


-Jeff

The Football Fans' Guide to Safe Investing

This article offers an innovative look at building a portfolio as if you were putting together a football team. The whole article can be found at Seeking Alpha.


-Jeff

Whats Going On @ Wendy's

2/3/11

I’m sure that several of those following the fast food industry have noticed Wendy’s/Arby’s (WEN) recent two-week 15% run up (which is gaining even as I type this). It may seem very undeserved, since most of this can be accounted to their announcement that they will be selling the Arby’s franchise…and it most likely is.

First things first, I must disclose that I have owned this stock for just over 2 years and bought it while still in undergrad, in the depths of the recession, since, “it would be impossible for anyone selling Junior Bacon Cheeseburgers for a dollar to fail.” (These have gone up 30% in price since). I will admit that I did not really know what I was doing at the time, but it hindsight it wasn’t such a bad play. Furthermore this is going to be more of a macro analysis rather than number crunching because this stock is very volatile and seems to move for no reason at all on a constant basis (plus it’s much more fun to talk about Frosty's than technical analysis). With that said, let’s have at it…

What’s interesting about Wendy’s is that it was trading at over four times it’s current price in 2007. So what has happened in the last four years that has knocked Wendy’s over while allowing other fast foods to recover and prosper? Answer: An abundance of things. We’ll start with Arby’s. I’ve noted on this column before that the particular Arby’s in my hometown has done essentially no business outside of their first two months of operation a decade ago. Interestingly, the Wendy’s that was just over a mile away was closed three years ago because of declining sales but the Arby’s has tried to keep choppin’. It should be noted that within a half mile of this location stands a new Sonic (SONC), a new Five Guys, a Burger King, a McDonald’s (MCD), a Taco Bell (YUM), and countless pizza places. There is no way that Arby’s could stand this sort of competition. They rely on ads that push the quality of their roast beef and the health consciousness of their Market Fresh sandwiches. The roast beef is frozen for just as long as any other beef in the industry and then sits under a hot lamp for hours and most Market Fresh’s have enough calories for me to subsist on for a week. In short, outside of the Jamocha shake, Arby’s food is not good and has price points significantly higher than that of the competition. So yes, the Arby’s franchise has been pulling Wendy’s down and should be thrown overboard. This is basically the best alternative decision to what was originally a terrible decision. But, who is going to want to buy Arby’s? It’s like buying a professional hockey team in Arizona; a losing endeavor with no way out. I would expect that if an Arby’s sale ever does come to fruition it is not going to be anywhere near what Wendy’s wants for it.

For the remaining portion let’s imagine that Arby’s has been sold. Wendy’s also suffers compared to their competition because of their reluctance to expand overseas to the extent that McDonald’s and YUM have. McDonald’s is essentially everywhere and everyone knows about the YUM Chinese initiative. Both also deal extremely well with adversity. McDonald’s is constantly dealing with lawsuits (those Shrek glasses, Happy Meals, making kids fat, etc) and YUM has been able to handle people realizing that there is fake beef in Taco Bell tacos and the onslaught from Domino’s (DPZ) battling Pizza Hut. Wendy’s does not have these problems, mostly because people do not care enough to bring them up.

Like the others, Wendy’s has begun to offer healthier food choices like Garden Sensations Salads and natural cut fries. I have yet to try the fries, but they must be an improvement on the old ones. They also added shakes to their lineup to combat the McDonalds shakes. However, when there are generally comparable products and prices consumers look to things like timeliness of service and satisfaction and that is where McDonald’s dominates. Anyone who’s seen the CNBC special on McDonald’s has seen the living organism at work churning out finished products in no time. This goes against the convoluted idea that if the food takes a while to make it must be fresh.

On the financial front; it is very tough to get behind a stock that is barely treading water earnings wise. Based on their 2010 earnings of $0.14, Wendy’s has a P/E in the high 30s. Compare that to YUM in the low 20s and MCD at 16. So what does this high ratio tell us? It could mean that investors are very hopeful for the future and that earnings will start to accumulate. The alternative is that the stock is overpriced and those holding it are naïve. Personally I’d side with the former, mainly because it would be tough for earnings to go much lower, especially after the Arby’s sale. Additionally, the sale will allow the business to focus it’s efforts on the integral part of the business and not that roast beef pipe dream.

Lastly, everywhere you look recently there are reports on the rising costs of food. This is going to hurt Wendy’s just as much as the next guy, and people are not going to stop buying cheap fast food. The goal has to be to capitalize on this by proving that your food is the food to be buying at the time. Short term Wendy’s does not appear to be going anywhere, but with the eventual sale of Arby’s and a refocusing of corporate minds there is definite upside and this is what the high P/E indicates. Wendy’s should prosper in the future, both as an eating establishment and as a stock (but no more fish commercials, no one eats fish on a bun).

-Jeff

Fuel Your Portfolio With Cameco

As we continue to pollute and destroy our beautiful planet through the use of fossil fuels, expensive products, and harmful carbons, the search for cheap and reliable energy has become more pressing. Well look no further my friends, the answer is nuclear power, which is being brought to us by the wonderful element with the atomic number of 92, or as we know it, Uranium.

Before I continue with my discussion of uranium, I just want to make a few points supporting the further development of nuclear power across the world, especially here in the US of A. For starters, nuclear power plants are far more efficient than in recent years. The development of advanced technology has made these reactors for more durable and safer. This is evident by the continued building of reactors across the globe (which is described in the next paragraph). There are no fossil fuels burned through the use of nuclear power and no carbon dioxide is emitted into the air, significantly reducing the damage to the ozone layer. Safety is also a major concern nowadays, in terms of energy exploration and extraction. Take for example the 2 oil rig explosions in the Gulf, or the WV mine explosions.

Uranium goes a long way in terms of producing energy, meaning only a small amount is needed to produce a significant amount of energy. "In fact, if the cost of uranium doubled, costs would only be increased by 7%. 1 truck of uranium produces as much energy as 1000 trucks of coal!" If nuclear power is developed and utilized here in the US, it will reduce our dependence on foreign nations to export their oil and other precious metals here. As we all know the price of oil is subject to supply and demand, amongst other factors, and can be very volatile, i.e. summer of 2008. If we were to be energy independent, as our President so elegantly puts it, this would reduce our need for oil, and other energy inputs.

I would also like to point out that other forms of renewable energy, like solar and wind, are going to fade out pretty quickly. For starters they are expensive to maintain. These forms of energy also require purchasing land to build these turbines and combines, a resource that is running low. Also, when was the last time the sun consistently shined? The sun can stay hidden behind clouds for days, and last time I checked, the sun usually shined for about 8 hours a day. Nuclear power can run for 24 hours a day. As for using wind as a renewable resource, I will simply say this. When was the last time it was windy? I guarantee one cannot string together multiple days of gusts strong enough power an entire city.

It is estimated that the largest supply of uranium is found in Australia, followed by Kazakhstan, and then Canada. "The World Nuclear Association says demand is projected to grow by 33 percent in the next decade to correspond with a 27 percent projected growth in nuclear reactor capacity. However, more efficient nuclear reactors, such as "fast-reactor" technology, could extend those supplies by more than two thousand years. Experts say spent fuel can be reprocessed for use in reactors but currently is less economical than new fuel. Currently, there are nearly one thousand commercial, research, and ship reactors worldwide; more than fifty are under construction, and 130 are in planning stages." There is also an accord for old Russian weapons to be dismantled and turned into fuel for the power plants. The continued desire for nuclear power will fuel (pun intended) demand for uranium in the years to come, and there is no better company to experience this surge in growth with than Cameco.

Cameco is "major supplier of uranium processing services required to produce uranium fuel" and is the world's second largest producer of Uranium, trailing only AREVA in terms of market share by a slim margin. Cameco currently has 13 utility customers in 4 countries. They are expecting to sell over 300 million pounds, due to long term contracts, through 2030.



Cameco's strategy is to double uranium production by 2018, an ambitious goal to say the least. They anticipate doing this through increased production and upgrades at current facilities, and by continued thorough exploration of future prospects. Thus far in 2010, Cameco has spent about $90 billion on exploration, including expanding mines at Inkai and in Kazakhstan. But, lets start with their exploration in Canada, the home country of both hockey and Cameco. There is extensive work being done in the Athabasca Basin, located in Northern Saskatchewan and Alberta Canada, which is best know for its high grade uranium. It is important to note that they higher the grade of uranium, the cheaper it is to utilize and term into energy. There are currently 23 active exploration projects in Australia, the country containing the world's largest uranium reserves, and Cameco owns the operating rights to 22 of them. In order for Cameco to be able to benefit from exploration, they must own or have significant interest in junior exploration companies. Well Cameco does, and these include UE Corp, Minergia SAC, Western Uranium Corp, and Govi High Power Exploration. Exploration is key to finding deposits, and if said deposits are found through the exploration efforts of the companies above, Cameco will own operating rights to them.

Cameco currently owns and/or operates 7 active mills/mines today, of which 4 are in Canada, 2 are located in the US, and 1 is in Kazakhstan. 2 of the 4 in Canada are the world's largest and cheapest producers of uranium in the world, the McArthur River Mine and the Key Lake Mill. Cameco owns at least 70% in both units. Cigar Lake and Rabbit Lake are the mines for the future, also located in Canada. Cigar Lake is completing renovations this month and is expected to be producing in 2013. The Cigar Lake mine is expected to produce about 15% of the world's supply of uranium. Rabbit Lake currently process all ore from Eagle Point deposits and is expected to be used until 2015. Rabbit Lake is also being updated to be able to handle the increased workload. Cameco is the largest producer in the US, thanks to the Smith Ranch-Highland and Crow Butte mines.

The big daddy of them all is Inkai, located in Kazakhstan, where the world's largest deposit of uranium can be found. This mine is expected to last into 2030. To fuel demand, as well as expected increases in deposits, Cameco is doubling production at blocks 1 and 2 and advancing block 3. The table below describes production and production potential at Cameco's current mines/mills.



Cameco will report earnings on November 8. Back in August, Cameco reduced its full-year forecast for the sale of uranium. This was expected as some customers deferred delivery to next year. They also expect revenue to slip a hit. However, lower costs and more deliveries are expected in the future, which will certainly help to absorb the forecasts of declining revenue. A few positive notes include Cameco beating 4 of the last 5 earnings estimates from analysts, including price targets above $40 a share. Cameco's production of uranium was also 30% higher than the same quarter in 2009.



However, even with the possibility of lower earnings in the future, Cameco has never decreased its dividend and has raised it 4 of the last 5 years. Cameco also split its shares twice, in 2004 and 2006, on a 3 for 1 and 2 for 1 share basis, respectively.

Their cash flow from operating has continually grown over the past few years as the graph below shows.



More importantly, their revenue continues to grow each quarter. Their net income was lower due to higher costs this quarter, which can be related to a stronger Canadian dollar and declining price of uranium



On a closing note, Ill leave you guys with a table of uranium futures contracts. Note the expected increase in prices in the coming years.



-Andrew

How To Play The Bond Bubble And Subsequent Growth

The purpose of this article is shed some light on the treasury yield curve and credit spreads in an attempt to gauge the future prospects of a recession and the health of the US economy. Before we begin, I would like to point out that the best indicator of a recession has been the inversion of the active Treasury yield curve, something that hasn’t happened yet. However, the recent flattening is certainly raised some eyebrows. As I write this article, I like to think of the Jaws theme song, where the music is slow and ominous but steadily grows faster and louder until, SNAP, Jaws swallows the heads of unsuspecting swimmers. In this case, credit spreads are Jaws, and investors are the unsuspecting swimmers. However, I will attempt to prepare investors for the shark and punch it in the nose (a common defense against these man-eaters.)

As you all know, bonds have been supported nicely by the recent fear that the US may slip into another recession, and in particular the long end of the curve. This has led to a noticeable flattening, just as it did prior to the financial crisis in 2008 (albeit for different reasons.) Nonetheless, yields at the long end have plummeted and one is getting about 2.54% (at the time of this writing) for lending money to the government for 10-years. The graph below shows how the curve has flattened since the beginning of the year.

As we peek into the spread between the yields on the active 10-year and 2-year issues, it is clear that there has been an alarming tightening. This sharp and consistent decline reared its ugly head back in Q1 of 2004. What followed was a 3-year tightening of the spread and an inverted yield curve (as shown by the negative spread between the two.) But one also must also look at the previous 2 occurrences of extreme tightening over the past 2-years and see that yields did, in fact, bounce back. Now granted, I understand the circumstances were different back then than they are now. What's important to note is that the curve still remains steep and the red flags don’t need to be put up just yet, however I think a yellow caution flag is in order. The charts below show the recent movement of the 2/10-year spread. Here we have spreads creeping lower, as the 2-year note touches all time lows.

The 2/30-year and 2-year/Fed Funds spreads are also experiencing the same type of tightening. What's particularly interesting is that the 2-year/Fed Funds spread is the tightest since December 2008(when the Fed moved its target for the Funds rate to 0.0%-0.25%) and has shown no signs of slowing down here in 2010. If the Fed leaves rates untouched till the end of 2011, we may see this spread tighten to single digits and possibly even touch negative territory. Which would raise a whole new set of questions because well, what happens with bill rates? Do they approach 0.00%? These scenarios may seem unlikely, but its something to keep in the back of ones head. Personally, I don’t think yields will drop too much further.

As opposed to the tightening of the Treasury spreads, we have the Baa/10-year spread widening to levels not seen since August 2009. This is led by the desire to hold Treasuries amid economic uncertainty and the avoidance of corporate debt. Contributing to the widening of this particular spread could be the amount of corporate issuance. Throughout July and August, there has been a stronger amount of corporate supply, compared to 2009, which could have been driving down the price of this particular debt. We are talking issues with Baa rating in this case, and drop in price will increase the yields, which would widen the spread even further. A lot of companies are attempting to finance expansion with these extremely low rates, clearly evident by the recent increased issuance. However, through August 20 corporate issuance is down about 10-12% compared to 2009.

Moving away from fixed income spreads, we will show how inter-bank lending credit spreads can serve as barometers for the economy. Our first spread is the dollar Libor/OIS. I cite the dollar spread because it has tightened significantly over the past month to levels considered more "normal." The same cannot be said for the European spread, which is the difference between the 3-month Euribor and the 3-month Eonia. This spread continues to widen, allowing us to conclude that EU banks are having problems. More evidence that concludes EU banks are in a scramble for liquidity stems from the fact that banks have gone to the ECB each of the past 3 Wednesday's and bid on dollar deposits. But, that is neither here nor there. Lets move on to the US TED spread, the difference between the 3-month Libor and 3-month T-Bill. As you can see, the spread has tightened considerably and now rests at levels not seen April. Using the TED and Libor/OIS spreads as barometers for the health of the US economy, it can be concluded that things may not be as bad as we think they.

So what does all this mean? Well in conclusion I would like to make a few points that should be taken to heart. It appears that these spreads are leading us in 2 different directions. For starters the yield curve spreads appear to show a flattening of the curve (although it is still steep and healthy) and maybe inverted down the line, which could signal a recession on the horizon. However, I do not think this is the case. Spreads may tighten further down the road, with the Fed's easy money and projected slow growth, but I do not think we will have an inverted curve. Flatter curve? Yes. This does not mean a recession will follow suit. Now, while the flattening of the curve may be troublesome, other credit spreads such as the TED and Libor/OIS spreads don’t seem to be telling that story. In fact, both are back to "normal" levels, after skyrocketing during the European Debt Crisis. This has indicated a healthy inter-banking lending market, which is an important factor in growth.

Now, back to my reference about punching a shark in the nose. By this, I mean shorting Treasuries and/or moving into diverse dividend yielding stocks, as evidenced here by my pal Jefferson Starship. Once the economic data turns positive, I would jump into TBT, which shorts the 30-year, long earl, (OIH or SCO), and maybe even a double long S&P (SSO). I realize these are risky but if they can all be timed right in tandem, once can make a handsome return.

-Andrew