This is a response to an economist who suggested that we weren't really losing many manufacturing jobs and it wasn't a big economic deal to begin with. the guys went on about how we would focus on solid productivity as trumping both massive manufacturing job losses and ewer well paying jobs domestically. Both naive views in my mind so I had to do my best to enlighten the easily convinced:
Less people making less to produce more (productivity) is great for the business owner, but it is not in the best interest of us as a nation. When you forsake the ability to produce labor intensive goods you also give up the ability to innovate in the future and create value accordingly. You give up the ability to add value (however small) at each step in the value chain. You can bet your half baked theory that someone will create significant innovations in autos, machinery and the like at some point and it wont be us
There are universities in China that have majors in things like bra engineering - and they now produce differentiated, value added bras that our wives spend $50 and $60 in Vicki's hush hush. For now that value creation is being split nicely in the retailer's favor but its a matter of time till there are bootlegs available for half that price and it then becomes the beginning of the end of another American company. Once upon a time the brits were good manufacturers and had a strong economy, as were the Germans, as were the Japanese and others. As their manufacturing base lost its luster, so too did the economic growth, and real incomes. These countries became second rate economies where too many battle for too few jobs and wages and standards of living collapse. It isn't long till too few are left who can afford the few things still produced domestically. Don't lose sight of the fact that one's spending is another's revenue. The view that we will retain high value added, high paying jobs is naive. The Chinese, Indian's and Brazilians amogst other now have not only cheap labor, but also knowledge, technology and capital to knock off almost everything. As they do, they will put more U.S. businesses and consumers out of commission.
Of course we are using technology and a better educated, more industrious workforce to produce more efficiently and that much is a good thing. But make no mistake about it, the driving force of much of this is little more than labor arbitrage with unintended consequences that will haunt us for years to come because those jobs arent coming back and we aren't manufacturing jobs to replace them.
Employing more Americans which earn a better living than walmart cashiers and greeters, to produce more goods to sell to everyone else globally is a better economic situation for most Americans and us as a nation in the long run than the opposite scenario. If you agree with that, then you ought to agree that we should be promoting policies designed to encourage investment in manufacturing that creates jobs here instead of doing exactly the opposite
Monday, February 23, 2009
Follow-up on a show me story that’s showing up doubters – MYL
Mylan’s comeback is on track! Mylan reported 4Q earnings late last week and the results were excellent. At a time when most long investment theses are deteriorating, this one (http://seekingalpha.com/article/108343-mylan-on-the-comeback-trail) is intact if not strengthened. EPS of $0.26 came on better than expected revenues, margins and cash flow. Although the tax rate was lower than expected, this was a quality beat.
The integration of Merck KG assets is proceeding as planned and there’s now talk of better than initially projected synergies (previously guided at $120M, but now likely materially higher, perhaps as much as $150-160M). Base (generic) revenues are strong and expected to continue growing high single digits (ex-currency) and Mylan expects to generate at least $450M (and as much as $500M) in operating cash flow this year, which appears very doable given $135M generated in the quarter. Both Matrix and Dey also appear to be doing well.
Its hard to poke holes in a clear over deliver like that, but I suspect bears will persist. Sentiment, although not as bad as it was a few months ago, is still pretty bad. Short interest was almost 64m shares as of 1/7 and that was up in the prior few weeks. Although many surely covered on the earnings beat, a good amount are apt to remain in hopes of a stumble in the current quarter. That said, there should be no doubt that Mylan is executing as management has guided, so I have to believe that the burden of proof is shifting to the bears.
Management reiterated EPS guidance of $0.90-$1.10 in 2009 and $1.50-$1.70 in 2010. Despite solid execution on FDA filings and approvals, better sales, solid operating cash flow, and accelerated debt pay down, consensus remains well below guidance for 2010, and the shares trade on a substantial discount to peers as well as its historical range on cash flow and earnings; even though they’ve now doubled off their lows. A few months ago, I argued that the shares should at a conservative 12 times 09’ earnings in the coming months and thought if the company could execute as promised over the next few quarters, investors would start thinking about 12 times the low end of the 2010 guidance ($18).
Although I think it’s still a bit premature to have great confidence in 2010 (especially in light of heightened macro and forex headwinds), I think it is reasonable to expect the shares garner a 13-14 multiple on current year estimates if they can meet expectations and reiterate guidance when they report in May. Furthermore, I do think it reasonable to expect that continued execution, free cash flow (exp. ~$350mm this year and $500mm+ in 2010 by the way) and pay down of debt taken on to do the Merck KG deal should lead to confidence that the low end of management’s 2010 guidance is doable and thus a move to $14 or $15 by year end appears reasonable.
As confidence in management increases and visibility on 2010 improves, then estimates and the multiple can increase, and we might see that $15 sooner than you think. Although I don't recommend chasing anything in this market, I think buying pullbacks in this name makes sense. If it keeps on keeping on near term, put the next earnings date on your calendar and look to take advantage of an opportunity should it arise then.
The integration of Merck KG assets is proceeding as planned and there’s now talk of better than initially projected synergies (previously guided at $120M, but now likely materially higher, perhaps as much as $150-160M). Base (generic) revenues are strong and expected to continue growing high single digits (ex-currency) and Mylan expects to generate at least $450M (and as much as $500M) in operating cash flow this year, which appears very doable given $135M generated in the quarter. Both Matrix and Dey also appear to be doing well.
Its hard to poke holes in a clear over deliver like that, but I suspect bears will persist. Sentiment, although not as bad as it was a few months ago, is still pretty bad. Short interest was almost 64m shares as of 1/7 and that was up in the prior few weeks. Although many surely covered on the earnings beat, a good amount are apt to remain in hopes of a stumble in the current quarter. That said, there should be no doubt that Mylan is executing as management has guided, so I have to believe that the burden of proof is shifting to the bears.
Management reiterated EPS guidance of $0.90-$1.10 in 2009 and $1.50-$1.70 in 2010. Despite solid execution on FDA filings and approvals, better sales, solid operating cash flow, and accelerated debt pay down, consensus remains well below guidance for 2010, and the shares trade on a substantial discount to peers as well as its historical range on cash flow and earnings; even though they’ve now doubled off their lows. A few months ago, I argued that the shares should at a conservative 12 times 09’ earnings in the coming months and thought if the company could execute as promised over the next few quarters, investors would start thinking about 12 times the low end of the 2010 guidance ($18).
Although I think it’s still a bit premature to have great confidence in 2010 (especially in light of heightened macro and forex headwinds), I think it is reasonable to expect the shares garner a 13-14 multiple on current year estimates if they can meet expectations and reiterate guidance when they report in May. Furthermore, I do think it reasonable to expect that continued execution, free cash flow (exp. ~$350mm this year and $500mm+ in 2010 by the way) and pay down of debt taken on to do the Merck KG deal should lead to confidence that the low end of management’s 2010 guidance is doable and thus a move to $14 or $15 by year end appears reasonable.
As confidence in management increases and visibility on 2010 improves, then estimates and the multiple can increase, and we might see that $15 sooner than you think. Although I don't recommend chasing anything in this market, I think buying pullbacks in this name makes sense. If it keeps on keeping on near term, put the next earnings date on your calendar and look to take advantage of an opportunity should it arise then.
Sunday, February 22, 2009
Comment on Barrons predicting golden age of Activist Investing
I submitted this to another site last week and neglected to post here so here goes.
The article's premise is a joke. There were a ton of new activist investors that thought they could buy a big stake and convince operators of businesses to take a shortcut to value creation via some form of financial engineering or another. Most of these guys have gotten smoked many times over because the game is not played on paper. Blocking and tackling is a little harder than it looks. These twenty something hedge fund geniuses assume that managements of companies who generate buckets of cash the old fashioned way (through earning it) can't do the math of share repurchase or are too stupid to realize that they can put their firms on the precipice of bankruptcy by leveraging it to the hilt in order to increase EPS and return on equity without increasing net income or return on capital.
Of course there are companies out there with potentially greater intrinsic values were it not for dumb managements that pay themselves excessively not to create value or allocate capital well. But those are not where most activist attention is focused. Then you have the activists who play a glorified game of pump and dump - acquire a large stake in an apparent value, pump out a few press releases, and hit he CNBC circuit and then sell as copycats fall over themselves to piggyback these.
The problem with thinking we are on the cusp of a golden age in activist investing is that's its all much easier said than done AND current macro conditions are apt to buy many managements time, while otherwise valuable franchise managements will be reluctant to sell on cyclically depressed multiples. Furthermore, if low valuation is your first reason, then why not be a passive investor in better managed companies which are inherently significantly less risky.
In the real world there are many more bad businesses than most want to believe and industry and macroeconomic forces are bigger than either management or hedge funds that want to fancy themselves activist investors. Its amazing how many grand opportunities hedge funds can burn other peoples money on. Activist investing will remain a niche. There's a lot of playboy centerfolds out there who like the average joe the plumber, are more desperate than ever, good luck finding one with a big bank account that will cook, clean, pay your bills and faithfully love you long time. Again, the game is not played on paper; you have to block and tackle and overcome all kinds of seen and unseen obstacles to score.
The article's premise is a joke. There were a ton of new activist investors that thought they could buy a big stake and convince operators of businesses to take a shortcut to value creation via some form of financial engineering or another. Most of these guys have gotten smoked many times over because the game is not played on paper. Blocking and tackling is a little harder than it looks. These twenty something hedge fund geniuses assume that managements of companies who generate buckets of cash the old fashioned way (through earning it) can't do the math of share repurchase or are too stupid to realize that they can put their firms on the precipice of bankruptcy by leveraging it to the hilt in order to increase EPS and return on equity without increasing net income or return on capital.
Of course there are companies out there with potentially greater intrinsic values were it not for dumb managements that pay themselves excessively not to create value or allocate capital well. But those are not where most activist attention is focused. Then you have the activists who play a glorified game of pump and dump - acquire a large stake in an apparent value, pump out a few press releases, and hit he CNBC circuit and then sell as copycats fall over themselves to piggyback these.
The problem with thinking we are on the cusp of a golden age in activist investing is that's its all much easier said than done AND current macro conditions are apt to buy many managements time, while otherwise valuable franchise managements will be reluctant to sell on cyclically depressed multiples. Furthermore, if low valuation is your first reason, then why not be a passive investor in better managed companies which are inherently significantly less risky.
In the real world there are many more bad businesses than most want to believe and industry and macroeconomic forces are bigger than either management or hedge funds that want to fancy themselves activist investors. Its amazing how many grand opportunities hedge funds can burn other peoples money on. Activist investing will remain a niche. There's a lot of playboy centerfolds out there who like the average joe the plumber, are more desperate than ever, good luck finding one with a big bank account that will cook, clean, pay your bills and faithfully love you long time. Again, the game is not played on paper; you have to block and tackle and overcome all kinds of seen and unseen obstacles to score.
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