June 3, 2003 |
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Just over a year ago SEC Insight (the newsletter) said that IBM was being investigated by the SEC. Following the report IBM shares slammed lower, and the SEC, acting as a loyal member of the PPT, immediately stated that the rumors were false. Using the BEA’s measure of corporate earnings, profits only dipped on an annualized basis six times during the 1990s (the most consistent decade on record). The reasons why the type of consistent earnings growth generated in the 1990s is not likely to be replicated today are simple: the U.S. consumer has a higher debt burden today than at any time during the 1990s, corporate balance sheets are more leveraged than they were for most of the 1990s, and capacity utilization rates are mired near record lows. In sum, investors will cheer earnings turnarounds (1Q03) and boo the relapses. There have already been 7 relapses since the first quarter of 2000 versus 6 for the entire 1990s. Keeping a long term perspective, will current fiscal and monetary stimulus plans be enough to mold earnings consistently higher so that ‘high’ market valuations can be maintained? Or will earnings be ‘choppy’ at best in the coming years? Whatever the case may be, and as the earnings atmosphere since 2000 aptly demonstrates, Greenspan pumping does not gurarantee consistently growing corporate profits; the story of Fed intervention has no set ending. The Sometimes Annoying Turnaround Stories Yesterday Tropical Sportswear (TSIC) announced that it was selling its Duck Head brand for $4 million and hiring Merrill to help evaluate strategic alternatives. In and of itself this news would be simply good news given that acquisitions made during the 1990s (after being nearly bankrupt in 1989) have proven to be a drag on business (with the exception of Farah – 1998). However, since Carl Icahn has been purchasing TSIC shares in recent months this ‘good’ news sent TSIC shares skyrocketing yesterday – the bullish speculation being that Merrill’s services and the sale of Duck Head are being undertaken to keep Carl from busting this undervalued company up, or that the company is following Icahn’s orders. There are always a couple of TSIC stories worth investigating. And while most company’s that have been beaten down do not look promising due to treacherous balance sheets, TSIC could successfully turn the corner. To be sure, TSIC was, and still is, trading below its tangible book, it is a low cost producer of garments (primarily pants) in the midst of restructuring (moving its El Paso operations to its Florida cutting plant), and its outlook, while dim, is now much better with Duck Head gone. After all, DH brands accounted for only 5% of revenues and the 16 retail outlets were mostly money losers. Getting $4 million for this asset is almost too good to be true. Suffice it to say, TSIC was a company we were investigating (excel). When yesterday’s news hit we were awaiting a call back from the company concerning two issues – an updated capex estimate for 03, and the company’s stock option policy going forward (stock option benefits have significantly padded earnings in recent years). Yesterday’s news, given that it sent TSIC shares up by more than 20%, making the company less appealing, was most unwelcome. No one at FallStreet has an investment position in any of the company’s mentioned above. |
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