A Quick Look: Textron Inc. (NYSE: TXT)

Textron (NYSE: TXT)

Business Profile: Textron Inc. (NYSE: TXT) is one of the world's largest and most successful multi-industry companies. Founded in 1923, we have grown into a network of businesses with total revenues of $11 billion, and approximately 40,000 employees in 32 countries, serving a diverse and global customer base. Headquartered in Providence, Rhode Island, Textron is ranked 190th on the FORTUNE 500 list of largest U.S. companies. Organizationally, Textron consists of numerous subsidiaries and operating divisions, which are responsible for the day-to-day operation of their businesses ("Textron businesses").

Textron’s Business Segments:

Bell: The Bell segment includes Bell Helicopter [2], Textron Systems Corporation [3] and Lycoming Engines [4]. Bell Helicopter is a leader in the global helicopter industry and the pioneer of tiltrotor aircraft. Textron Systems provides innovative technology solutions to meet the needs of the global aerospace and defense industries. Lycoming Engines is the world leader in reciprocating aircraft engines.

Cessna: Cessna Aircraft Company is the leading worldwide manufacturer of general aviation aircraft, with product lines spanning single-engine piston aircraft, utility turboprop aircraft and Citation business jet models. Citation customers have access through a network of 10 company-owned Citation Service Centers.

Industrial: The Industrial segment is a diverse collection of high-powered industrial businesses including Greenlee E-Z-GO, Jacobsen Kautex , and Fluid & Power Group as well as various smaller brands within the Fluid & Power Group.

Finance: Textron Financial is a diversified commercial finance company with core operations in Aviation Finance, Asset-Based Lending, Distribution Finance, Golf Finance, Resort Finance, and Structured Capital.

Textron 2006 Revenue breakdown

Textron 2006 Segment Profit Breakdown

Source: Company website.

Recent Quarter (3Q07):

Textron reported a solid 3^rd quarter with revenue increased 15% (13% organic sales growth) to $3.3 billion. Earnings per share from continuing operation increased 40% compared to 3Q06. The strong operating performance in Textron was continued to be driven by strong demand for business jets (Cessna) and continue strong military spending (Bell). Cessna’s backlog continues to show strength with 609 business jet orders added to date. All of Textron’s business segments show top-line growth and margin expansion. Top-line growth at Textron was mainly driven by increase in volume and offset by inflation. The Finance segment continued to perform in spite of a shaky credit market. Full year free cash flow now expected to come in at $600-650 million. The free cash flow would likely be used for strategic acquisition (recent purchase of UIC), and for shareholder enhancement (shares repurchases).

Risk factors: (Source: Textron 2006 10-K filing)

-Textron might unable to effectively mitigate pricing pressures. (Industrial segment)

-Delays in aircraft delivery schedules or cancellation of orders. (Cessna)

-19% of revenue derived from U.S. Government. (Bell)

-U.S. Gov’t can terminate contracts with Textron at anytime. (Bell – V-22s)

-Cost overruns on U.S. Gov’t contract

-Interruptions of production and supplies chain and labor disruptions (All manufacturing segment)

-Disruptions in the capital market. (Finance segment)

-Macro economics factors: interest rate, currency and raw material prices

-Legal proceeding and claims.

Overall, Textron is a very solid industrial company that is more aerospace and defense oriented. The management was able to keep cost under control as we saw segment profit margin expanded during times of high commodities prices and higher labor costs. The big question for TXT's future is how well can the non-military related segments weather out a potential slow down in the global economy? That has yet to be seen.

3,2,1..... CHINA!

We love China. Why? The Chinese stock market is making new high everyday. And if you were invested in Chinese equity in any way in the last couple of years, you should have done quite well.

Now, I have personally developed this stock market indicator. This indicator is quite accurate. It has accurately predicted the Tech Bubble of 2000. The indicator is called, my dad indicator. The best thing is, the indicator is free.

I remembered that my pop got very vocal about the market in 1999. He was complaining to my mom about selling stocks out too early, and not buying the next best stock. So, he took control of the family savings soon after. He bought some awesome companies. First, he bought Yahoo (Nasdaq: YHOO) at $200 a piece. Then he bought Lucent (Nasdaq: ALU) for about $60 a share. This was, of course, in the early 2000. Well, needless to say, not too soon after he made those trades, everything crumbled into pieces.



All of this bring me back to last couple days where my pop got very vocal again. He was constantly arguing with my mom. They usually argue about b.s. like most married couple, but these days, he was complaining about my mom management of the family savings (which is, for the most part, invested in Chinese equity through H-shares listed Chinese companies). He started to grill stock quotes every night. And he would flip through the finance pages of Chinese newspaper. He would make believe that he is the Chinese Warren Buffett.

I've recently suggested to my mom to buy into a Chinese railroad company (NYSE: GSH HKEX: 0525.HK). So she bought it and it went up about 12-15% since she bought it. It was a nice profit in a short period of time. Yesterday, my pop, would go through his usual routine and checks his stock quotes, and he would complain to me about how bad my pick had lagged the best performers (such as PetroChina NYSE: PTR HK: 0857.HK). I would simply ignore him and tell him to sell it and buy something else. Which he did.

Last Sunday, my pop read about a Chinese coal producer in a Chinese newspaper. The company name is China Shenhua (HK: 1088.HK) and the article in the paper mentioned UBS has just upgraded the stock and gave it a target price of 2x from where it is trading right now. My pop came into my room and inquired about the company. I pulled up the info. on the company real quick on Yahoo Finance and saw that the stock is trading at a P/E of 50. Immediately I said, "expensive, Google is only trading at 30-35 P/E, I would rather have Google if I want to pay that much." He would go on and complain about low P/E stocks never moves.

However, his question in the Chinese coal company got me thinking. As a commodity producer, your top-line revenue growth comes from the price you charge for the commodity you are selling. And the price is determine by the market/demand for the commodity. So it makes sense that a coal producer in China can be very well off because of China's rising demand for energy. Then it hit me like a brick: at a certain price point, it would become cheaper for coal consumers to import coal from other part of the world- this would limit the demand and price paid for Chinese coal. I'm no expert on coal, but the coal in China can't be THAT much better than coal from the U.S. right? So why would anyone pay a premium for a Chinese coal producer over a U.S. coal producer?

The poor Chinese citizens in China are only allow to buy Chinese stocks (A-share and recently H-share). So they don't have access to the U.S. stock market. Poor folks.

And looking at my pop and his recent behavior, I would say the Chinese stock market is closing in on a top (even if it's just a correction).

The Good, the Bad and the Ugly

ECON 101 Review-

Output (GDP) = Consumption (C ) + Government spending ( G ) + Business Investment ( I ) + Net export ( NX )

The Good

Capacity Utilization- The assets are being used to produce. Although not quite at 1990s level, we are producing at a healthy rate. If we are producing, we are growing.

Unemployment Claim- Unemployment claims is at all time low: when people have jobs, they will spend. It’s not that difficult. What worries me is that this indicator is dangerously low- see 1999.

Unemployment rate and earnings- same story here. Earnings are at +4%. The more they make, the more they spend.

Business investment and consumption- No surprise here, both households and businesses are spending at a healthy clip. That’s the I and the C in the equation.

The Bad

Consumer sentiment – We are starting to see some deterioration in consumer sentiment. It is dipping a little bit low. This indicator seems to be more volatile in comparison to last economic expansion in 1990s. My guess is that the high oil price and War in Iraq were constantly on the consumers’ mind.

Consumer confidence – We are slightly above 100 here. These two consumers indicators are important because consumption makes up a good chunks of our GDP.

GDP and Chain Deflator – The weak U.S. residential market has taken the wind out of our economy. The question is can we get back to the normal 3-4%.

ISM- If it’s above 50, we are expanding. And if we are below 50, we are contracting. We are dangerously close to dipping below 50.

Construction – Commercial construction is still healthy, but it looks like we might be close to the peak. And we all know the residential construction story by now.

Durable Goods – If we aren’t buying durable goods, what are we spending on?

CPI – I don’t care about volatility, but how can you measure prices of basket of consumers’ goods without Food and Energy. Last time I check, I need to eat to survive.

Auto sales- We are trending down slightly since the peak at 1999. Why are we buying fewer cars?

Federal Budget – I’m surprised to see that we are actually creeping back to a balance budget. It is still in a horrible shape since we have a surplus in our last economic expansion.

And the Ugly

Housing Starts and permit – Partying like its 1995!

Median New Home Price – What do you want me to say? This is just plain UGLY.

Saving Rate – I suggest a couple of rate hike so we can see saving goes back up again. We are in a serious hole and a major down trend.

Export – China, anyone? A little uptick is cause by recent weakness in the USD.

Well, so far, so good. We have consumption and business investment remain intact, but the problem is- How much longer?

High gasoline prices wouldn’t shake the consumers out of their spending spree. If we are to look at the cost of owning a car, we can easily pinpoint that gasoline is a minor cost in owning a vehicle (you just bought a $35,000 BMW and you can’t afford to put $50 gas in it?). Employment and outlook on employment is the key to today’s economy.

No jobs= no spending = ▼ C = ▼ GDP.

Note: Briefing.com is the best.

Leveraged Debt Boom

So I guess my predictions on the Yankees sweeping the hapless Indians is not going to be true. Little do you people know though that I truly do not care that the Yanks don't true. In fact, it may be even better that the Indians were ALLOWED TO WIN the 1st game of the series. Let's take a look at their record when they win/lose the first game of the ALDS.

2006 Yanks won first game to Detroit, lost series
2005 Yanks won first game against Angels, lost series
2004 Yanks lose first game to Twins, win series
2003 Yanks lose first game to Twins, win series
2002 Yanks won first game to Angels, lost series
2001 Yanks lose first game to As, win series
2000 Yanks lose first game to As, win series
1999 Yanks sweep Texas
1998 Yanks sweep Texas
1997 Yanks won first game against Indians, lost series
1996 Yanks lose first game to Texas, win series
1995 Yanks won first game against Mariners, lost series

Since the beginning of the ALDS series, the Yankees are 2-5 when they win the first game of the series and a PERFECT 5-0 when they lose the first game. Ladies and gentlemen, this is all set up for the Yanks to win the next 3 games (at Yankee Stadium no less and Steinbrenner gets to sell more tixs and concessions) and wipe the pathetic Indians off their playoff run.

Now that I have gotten that off my chest, back to this blog being more Wall Street oriented.

Here is an interesting article from the FT today on Citi selling part of their bridge financing loans to (drumroll) ........ KKR ...... of all entities.

http://www.ft.com/cms/s/0/a4075160-7081-11dc-a6d1-0000779fd2ac.html
http://www.ft.com/cms/s/0/68aa7404-72f6-11dc-b7ff-0000779fd2ac.html
http://www.ft.com/cms/s/0/9c737cfc-71ef-11dc-8960-0000779fd2ac.html

For those not familiar with bridge loans, they are promises to a private equity firm like KKR that the bank will lend them the necessary funds to buy out their target company. In the midst of the subprime loan scandal and thus a credit crunch, the banks were having a difficult time offloading these loans to the investors. PE firms like KKR of course would still benefit because they are getting the financing no matter what the credit environment is whereas the banks obligated to complete the loan. It then became a situation of the loans sitting on the banks' books and thus increasing their risk and aggravating shareholders everywhere.

Now Citi is turning around and attempting to sell off these loans (at discount of course) to .... the same private equity firm that are using the loans like KKR. Does this strike anyone being as ironic?

Think of it this way. Your parents promises to lend you the down payment on your house and it's a promise that you know they are good for. Before you can finalize the closing process, your parents were fired from their jobs and thus are in need of their savings. Now their original commitment to you to fund the down payment is in jeopardy but their word is their word. So what do they do? Instead of trying to decrease the loan commitment, they turn around and borrow the money from you to give back to you for the down payment. Is this odd or what? Basically the only person who benefits is you because you essentially have a free loan in that whatever interest you have to pay to your parents for the loan are negated by the interest your parents owe to you.

Now back to the scenario of Citi selling the loans to KKR which is even better because KKR obtains the loans on a discount, thus boasting the yield (in essence the true interest income) which would offset the interest expense owe to Citi for making the original loan commitment. KKR truly comes out on top as they would save (or even make) money on the deal from 1) interest income vs. interest expense and 2) fees and gains from opening the vulture leveraged debt fund.

Usually it's the investment banks like Citi who makes off good but this time it is heavily in the favor of their clients. Wall Street does not get any better than this. Stay tune for more on this developing drama of private equity fleecing the banks.

Go Yankees!


-Myth

Yankees vs. Cleveland

This is completely unrelated to the premise of the blog but I'm posting it anyway because the Yankees are so great.

Here are some stats for you to chew on as you ponder how it is possible that the “experts” are wrong in predicting the outcome of the Yankees vs. Cleveland.

Game 1
C.C. Sabathia - Lefty

Career versus the Yankees in 8 starts is 1-7 with a 7.13 ERA and a whopping WHIP (walks plus hits per innings pitched) of 1.75 (meaning that he allows close to 2 base runners per inning, not good). Of course pundits will point to the fact that he had not faced the Yankees since 2004 and that his Cy Young caliber season this year (19-7, 3.21 ERA, 1.14 WHIP) makes him a completely different pitcher. I beg to differ as C.C will always be C.C. For proof, I can point to his other great season in 2002 where he went 13-9 with a 3.60 ERA and a 1.30 WHIP. In that season, the Yankees crushed him in his 2 games started and he went an ugly 0-2 with a 5.54 ERA with a 1.38 WHIP.

As for the Yankees hitters faring against this lefty, it is safe to say that A-Rod and Jeter will utterly destroy him as they have gone 474 and 583 OBP respectively in their lifetime. The only worry for the rest of the Yankees lineup is Damon and Abreu who really stinks against Lefty. This is more than countered by Posada, Cano, and Matsui who can hit lefty pitchers just as well as righty. The X factor in all this is Shelley Duncan who hits big (303 BA) against lefty pitching this season.

Conclusion: CC will lose game 1 yielding 5-6 runs although he will keep Cleveland in the game for a while.

Game 2
Fausto Carmona – Righty

Here is the fabulous sophomore pitcher that all the “experts” rave about in the Cleveland lineup. What these “experts” don’t know his that this guy sucks against the potent Yankee lineup. In the 2 games against the Yanks this season, he sports a mediocre ERA of 4.15 but this is a false statistic as he allows the Yanks to hit 292 off of him.

For the Yankee hitters, the reverse of CC holds true as all the lefty does phenomenal against him including Damon and Abreu with A-Rod stinking. Jeter though hits a robust 429 while getting on base 50% of the time.

The only positive for Carmona is that post All-Star he was nothing short of Cy Young like including an exclamation point of going 5-0 with a 1.78 ERA and a whimsy 0.99 WHIP in September. Of course this is all tempered by his other volatile months preceding it.

June: 5.82 ERA 1.50 WHIP
July: 1.74 ERA 1.09 WHIP
August 3.43 ERA 1.24 WHIP
Sep 1.78 ERA 0.99 WHIP

Notice the whipsaw up and downs in ERA and more importantly, WHIP. Seeing how this pattern would unfold, I sense that October would yield a bad month for him and greatness for the Yankees. I’m personally hoping for a repeat of his marvelous June performance.

Conclusion: Fausto will allow at least 5 runs as the heavy lefty hitting Yankee lineup will get to him as well as his see saw pitching history and he will lose the game.

Game 3
Jake “the castoff” Westbrook – Righty

Ah yes, Yankee castoffs. Of all the ones the Yankees had let go, which includes a nice lineup of Eric Milton, Ted Lilly, and Javier Vazquez, it is safe to say that none of them had much affect on the Yanks in the postseason (only exception is Kenny Rogers which is perhaps due to the steroids he is taking that is currently unknown to the press and MLB). Once a castoff, always a castoff, as they would never be good or why else would the Yankees let them go.

The story on Westbrook is pretty much the same as Fausto as lefty hitterse had feasted on him throughout the season. Yankee righties including A-Rod and Jeter also had success with him batting over 300. Coupled our tremendous hitting with the legendary heckling of Yankee castoffs and it is safe to say that Westbrook will falter … horribly.

Conclusion: Yanks will score at least 8 runs and blow out Cleveland.

I haven’t even gone into how horrendous their closer is (blowing the most saves in the regular season and close to singlehandedly killing my fantasy baseball team) so this only goes to prove that even if their starters last, their bullpen will give it right back up.

I smell a SWEEP. As they say, you could take the regular season away from the Indians (96-66 tied for best in MLB) but you can’t take the Indians away from being the Indians (0 championships in the modern era including the big choke in the 1997 WS).


-Myth



Note: My predictions are based on complete, unbiased, statistic backed proof on the greatness of the Yankees which does not include the aging starting lineup and the fragile bullpen aside from Joba so you can take it with confidence.

A-Rod will stay

Just to let you all know this is not just a pure Wall Street blog as I will discuss some sports business, specifically one that concerns the GREATEST sports team of all time ... the NY Yankees.

Now the biggest issue facing my beloved Yankees aside from planning their 27th parade down Boardway at the end of October is whether or not their MVP, league MVP, offensive player of the year, Alex Rodriguez will re-up with the Yankees. Now there are a lot of critics who will argue that Greedy Rod will leave the Yanks for another vaster field of riches like the Cubs who had doled up approx. $300 million to free agents in the past season and has a manager in Lou Pinella who loves A-Rod and vice versa. Again cause of concern for A-Rod is the constant criticisms NY has given him and how he would fare better in a more relax baseball environment like the LA Angels (or even Baltimore there are no standards there anymore) who have the financial flexibility to sign him.

Let me address those causes of concern on the Yankees signing their star player. My take is this: A-ROD ISN'T GOING ANYWHERE BUT TO THE NEW YANKEES STADIUM ACROSS IN THE STREET.

Say all you want about the baseball fans of NY, they hate you and boo you lustfully when you suck but would fall behind you and give you loyalty like no other when you can hammer it up. There is no better market to showcase your talent, skills, and marketability when you succeed in New York since few have. One only have to look at Derek Jeter, who is not even the best shortstop on the team as evidence of how players on the Yankees get overrated and overhyped by the rest of the country.

Everyone knows that the Yankees have money so naturally one would assume that money is not the problem with them. Then the media comes out and stating their sources, go on to say that the Yankees will not overpay A-Rod to keep him in NY and will only pay him a small increase relative to his current salary of $25 million per season. The writers then assume that that future pay would fall into the $27-$30 million range. Playing the shrewd agent that he his, A-Rod's go to guy, Scott Boras comes out and publicly stated that his client is looking for a minimum of $32 million per year before talking. Clinging to that line, the writers of NY pretty much blasted A-Rod and dismissing him for an ex-Yankee in a season in which he is lighting up the offensive numbers.

That my friends, are false assumptions to cling on to. I truthfully, to the bottom of my heart believe that A-Rod will stay as a Yankee with a contract in the range of around $32-$34 million per year for the next 6-7 years (probably an extra 1-2 year option thrown in as well). What leads me to say this is all due to the health of George Steinbrenner.

http://money.cnn.com/2007/08/01/news/companies/yes_sale.fortune/index.htm

The article correctly guesses that the owner is in distress shape and that the sale of the Yankees are eminent. My guess is that within 5 years, the Yankees will no longer belong in the hands of the Steinbrenner family. Of course, if George passes away sooner (may that day never come), all bets are off and within 2 years of that unfortunate event, the team will be sold. Now when the team is up for sale, the assets that you promote to boost the value of the team is the services/products that the team provides. For the NY Yankees, the service is an entertaining baseball team which is known around the world. The product, and this is key here, is the players. For the Yankees, their most marketable players are Derek Jeter and A-Rod. DJ could only get you so much value as he is not big offensive player (save me the whole Mr. Clutch argument) who can singlehandedly drive people to the stadium. In this day and age, people (not only chicks) dig the long ball and the most potent player at that is A-Rod. The Steinbrenners would be extremely foolish if they do not resign their best HR hitter which would thereby stabilize and or boost the values of the stadium. With a new stadium set to open in 2009, this only makes the case to get A-Rod to stay stronger as he would be a pivotal attendance grabber. The best example of how a team would spend to keep/lure in marquee players is the 2007 Chicago Cubs. For a team which historically is not a big spender in the free agent market, it came as a surprise to most baseball experts they would spend about $300 million to bring in a few big name guys. To me though it was not surprising as it was well known that the Tribune company is up for sale and thus the Cubs. Like I says earlier, what better to boost the value of your company then to have valuable assets like Alfonso Soriano, Ted Lilly (vastly underrated front line pitcher), and resigning Aramis Ramirez. In the end, the Tribune company was sold to Sam Zell and the team was up for sale. No sooner was it announced that already the Cubs have several suitors, namely Mark Cuban of the Dallas Maverick fame.

Look, the Yankees will resign A-Rod to give them a big time draw for the new stadium. Players like DJ, Joba, Posada, and A-Rod would help usher in future record setting crowds at the brand new Yankees stadium as well as MLB in general. Having a 27th and perhaps 28th championship banner would only serve to an additional catalyst in that effort. Here is my early congratulations Mr. Alex Rodriguez for remaining a Yankee for the rest of your playing career. In your HOF induction speech, please tell the NY media that I told you so.

New York, New York !!!!!

-Myth

P.S. - big props to Goldman for investing in the YES network early and recognizing the platinum value of the Yankees brand

Hail to the Chief ! Part 2

Here is another interesting article from Bloomberg quoting the opinions of 2 famed investors, Jim Rogers, and Marc Faber on the unnecessary rate cut.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aYBOOiT5mAO0&


Inflation will come back and bite us all on the behind ...............

-Myth

Hail the Fed Chief !!

Those of us who follow Wall Street knew that Helicopter Ben, our Federal Reserve Chairman slashed rates by 50 bps yesterday. May all the homeowners, speculators, bankers and debt-dependent companies be saved! Ben Bernanke, in modern term, "made it rain".

Obviously, "inflation risk remains a concern". And as consumer price index came out better than expected today (http://biz.yahoo.com/ap/070919/economy.html?.v=13). We can now all take a breather.

So far, so good? Not to mention the Dow rocketed 300 pts on a single day. Now we are really on a roll!

Whenever you flood the economy with cheap money, you turn the knob a little higher on inflation risk. But didn't they just report that inflation is lower than expected?! Ohh, of course, we don't want to take food and energy into account because they are all too volatile . So forget the fact that lowering interest rate cause the Dollar to tank and causing oil price to trade at $82 a barrel (because oil is quoted in dollar).

"Outside of food and energy, inflation remained well contained as well in August, rising by 0.2 percent. This core inflation rate had been up by just 0.2 percent or 0.1 percent for the past six months"

Lets not remind ourselves that UPS, Fedex and the railroad companies are passing on fuel charges to businesses and individuals alike (raising prices in the case of railroads, charging "fuel surcharges" in UPS/FDX case). And you wonder why Warren Buffett invest in these things? (http://www.usatoday.com/money/industries/2007-08-31-berkshire-railroads_N.htm)

And did Bernanke really "engineer" a "soft landing"? Or is he simply delaying a "hard landing"? (http://money.cnn.com/2005/10/24/news/newsmakers/bernanke/index.htm) Didn't we learn that business cycle would run its course in Economics 101? I sworn that's what my professor has taught me throughout the years.

Booms are always follow by busts. Booms are created by the excess of GREED. Not the excess of cheap money, not the bubble in asset prices, it is GREED that get us. Or shall we use the term "irrational exuberance" coined by our previous Fed Chairman ? Do I have to remind you of 1998 and what happened follow in March 2000? Or the go-go Golden 20's that followed by the "Great Depression" in 1930s?

As a SMALL stockholders of many corporations, I'm all for the interest rate cut, which give a nice boost to my asset value and make me content about holding EQUITY. But with all the problems surfacing in the face of the economy (housing anyone?http://biz.yahoo.com/ap/070919/housing_construction.html?.v=3), it has me worry. And I'm not saying a recession is coming soon, but it will surface, when the time is right.

Helio Fools

At the time that I'm writing this post and more specifically this sentence, the S&P 500 is down 2.35% (per Yahoo! Finance with 15 minute delay). One of the few companies which had gone up in stock value is a once lovable little broadband high speed internet provider, Earthlink (ELNK) which is up approximately 7.14%.

The big news with ELNK is that the firm is closing 4 of its offices and cutting about 900 staffers, roughly half of its work force. The market is seeing this as a positive news item and signs that the firm will save about $30 this year with additional savings in the future. This couple with the annoucement that the firm will spend about $200 million to buy back shares are driving up the stock price on this otherwise dismal day in the market.

Here is my take on the loving the market is giving to ELNK:

The fools who invested in this company today are most likely going to lose their money. Although savings will come from cutting 900 staffers, this is actually have a negative affect on the firm. With the loss of half of its staff, how will this company operate efficiently. Customer service will suffer and people will be drive to other internet service providers such as their local cable companies and AOL. Additionally, how will the company have enough resources to re-focus on their core strategy (if they ever decide to back out of Helio). In saving approximately $30 million for the next 4 months, ELNK will take a $65M hit, leaving a net loss of $35M from the staff cut. Would future savings be enough to cover current year's loss and customer service?

Now let's take a look at their cash flow situation. Adding back D&A and net working capital, I've come to $33.161M in Net Operating Cash Flow. Subtracting out ELNK's capital expenditures (because it has to spend money to make money) of $23.879M, its FCF is a $9.282M. This is all kosher until you take into account that approximately $11M of this FCF is due to stock base compensation. I don't know about you but I certainly do not want my company to make money from stock options. As such its True FCF which backs out the stock compensation component is a negative $1.5M. With negative cash flow for the first 6 months of the year, how will the firm come up with the necessary funds to buy back $200M worth of stock. The answer would be to borrow the money but in this credit crunch environment rates will definitely be unfavorable. If ELNK was annoucing the funding of stock purchases 2 years ago I would applaud but in today's environment, I am definitely cringing at the thought of paying high interest rates.

In it's agreement with Helio, ELNK has already signed up to extend to them an additional $100M of working capital of which $30M has already been commitmented (as stated in the 2Q07 10-Q) in July. Although the new CEO promised to review all of ELNK's current strategies it is obvious that he is not looking at it thoroughly enough. Why else would he waste more money on a losing venture? Even though ELNK will be receiving a 10% interest on its loan, would Helio survive in business long enough to pay the interest + principal? Additionally, why is the CEO telling the public that ELNK will re-focus on its core strategy of being an ISP when it is making such large commitments to a losing venture that it will plan to shed? Hmmm......

There are just too many questions on about this company. The CEO is currently not performing up to standard on his due diligence. Although I fall short of buying put options on this ELNK, the operations of the the firm is in dire straits. The only positive is that the CEO may put the company back on its original business which would boost the company back to positive cash flow territory. Even if he does this though, how much would the firm be able to grow in this tougher competitive environment where its customer service will lag those of its peers.

For those who ELNK today, I suggest to you to sell now and take small loss rather than losing the entire ship in the coming quarters.

My puny Library

My puny library collection:





Reminiscences of a stock operator

Pit Bull




The New Market Wizards





Liar's Poker





Trader Vic Method of Wall Street Master




Come into my trading room




The essays of Warren Buffett

China shakes the world




Trump Art of Deal




Think and Grow Rich