Please see the latest research, it makes for a very interesting read. Professional subscribers should read their document very carefully and in detail, keeping in mind my doubt of the validity of the "green shoots" observations...

CAT Forensic Analysis RetailForensic Analysis Retail 2009-06-25 15:43:20 374.87 Kb

CAT Forensic Analysis ProfessionalForensic Analysis Professional 2009-06-25 15:44:27 836.39 Kb

Published in BoomBustBlog
Wednesday, 17 June 2009 01:00

New Industrial and Manufacturing Research

Fresh research for the bears amongst us. This may be a perspective that many have not considered. Many of these large companies are essentially banks and securitization companies themselves...

Caterpillar Inc. Preliminary Analysis Industrial/Manufacturing Short Bias Preliminary Analysis 2009-06-17 10:34:20 666.50 Kb

Published in BoomBustBlog

From CNBC: The Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing:

The Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing by a June 1 deadline, despite GM's public contention that it could still reorganize outside court, people with knowledge of the plans said during the weekend.

Fritz Henderson, the new chief executive of General Motors , says the company may still be able to reorganize without bankruptcy.

...

The goal is to prepare for a fast “surgical” bankruptcy, the people who had been briefed on the plans said. GM, which has been granted $13.4 billion in federal aid, insists that a quick restructuring is necessary so its image and sales are not damaged permanently.

The preparations are aimed at assuring a GM bankruptcy filing is ready should the company be unable to reach agreement with bondholders to exchange roughly $28 billion in debt into equity in GM and with the United Automobile Workers union, which has balked at granting concessions without sacrifices from bondholders. No matter how you add it up, GM bondholders are going to get the shaft. The most recent asset manager featured in my intelligence note is one of the largest bondholders, both on behalf of clients and as itself. Guess whose going to have a run on assets? To make it even more interesting, this particular company's share price ran up significantly in the most recent bear rally. This can start smelling like opportunity to follow the market price of this stock down to fundamental reality!

President Obama, who was elected with strong backing from labor, remained concerned about potential risk to GM’s pension plan and wants to avoid harming workers, these people said.

None of these people agreed to be identified because they were not authorized to discuss the process. GM declined to comment and the Treasury Department did not comment.

One plan under consideration would create a new company that would buy the “good” assets of GM almost immediately after the carmaker files for bankruptcy.

Less desirable assets, including unwanted brands, factories and health care obligations, would be left in the old company, which could be liquidated over several years.

Treasury officials are examining one potential outcome in which the “good GM” enters and exits bankruptcy protection in as little as two weeks, using $5 billion to $7 billion in federal financing, a person who had been briefed on the prospect said last week.

The rest of GM may require as much as $70 billion in government financing, and possibly more to resolve the health care obligations and the liquidation of the factories, according to legal experts and federal officials. In other words highly insolvent! It is highly unlikely you can strip the best assets from this company, then subtract $70 billion dollar and come up with a positive number.

Since replacing Rick Wagoner on March 31, GM’s chief executive, Fritz Henderson, has sent increasingly clear signals that bankruptcy is probable unless agreements are reached with labor and the bondholders by the administration’s June 1 deadline.

Unlike Mr. Wagoner, who refused until his final days at GM to consider a Chapter 11 filing, Mr. Henderson has deployed staff to work with legal and government advisers, although he does not agree a bankruptcy is inevitable.

Last week, he said GM was proceeding on a dual track, hoping to restructure out of court, but also preparing for a filing.

“If we need to resort to bankruptcy, we have to do it quickly,” Mr. Henderson said in an interview with the Canadian Broadcasting Corporation.

John Paul MacDuffie, an associate professor at the Wharton School at the University of Pennsylvania, said he saw little chance of an out-of-court restructuring, given that the Obama administration had rejected GM’s proposed revitalization plan in March. It was submitted without the concessions that were required from bondholders and the union, and which have still not been reached.

“The simplest way to frame it is that they took the loans, there were conditions on the loans, they didn’t prove their case for financial viability, and they didn’t meet the deadline, either,” Professor MacDuffie said. Sometimes the hard way is the best way.

Lawyers for GM and the government have much work to do before any bankruptcy case can begin, executives with bankruptcy experience said last week.

First and foremost, GM would have to formulate a business plan that addresses virtually every aspect of the company that it hopes to transform while under bankruptcy protection.

It would have to show how it would save billions of dollars through agreements with its bondholders and unions, how many dealers it plans to keep, and the plants and offices it plans to either close or preserve.

The plan also needs to give a candid forecast of the car market, a tricky prospect given the sharp falloff in sales over the last few months, these executives said.

Treasury has hired the Boston Consulting Group to help with the business plan, according to a notice posted April 8 on FedBizOpps.gov, a government procurement Web site.

Participation from banks also may be needed, and because of the weak economic climate, lenders are likely to insist that GM wring as much out of its operations as possible....

Finally, legal experts said, GM would have to try to prevent panic among consumers in the event of a bankruptcy filing. The government has said it will guarantee GM’s vehicle warranties.

...

GM faces an unfunded liability of about $13.5 billion for its plans, which had $84.5 billion in assets and $98 billion in liabilities as of Dec. 31. That amount could sink the pension agency, requiring its own bailout before a GM case could be resolved.

General Motors unsecured debt holders would have to accept two-thirds less than the face value of their bonds which would result in and additional 33% loss. Resultantly, some of the biggest holders of GM debt including Franklin Resources Inc., Fidelity Investments and Capital Research & Management Co might have to record significant losses.

http://www.cfo.com/article.cfm/13354418/?f=rsspage

http://www.bloomberg.com/apps/news?sid=ahJ7iV0RMPrs&pid=20601103

http://www.financialexpress.com/news/Pimco-Franklin-GM-debt-value-may-fall-75-in-aid-bid/391011/

http://www.bloomberg.com/apps/news?pid=20601087&sid=aR48OgeFqVMM&refer=home

However most of the above losses would not be borne directly by asset manager shareholders' but by investors in the Assets Uner Management since majority of fixed income investment is towards AUM. As of December 31, 2008 the asset manager we analyzed had $132 bn investments in fixed income (total AUM of $439 bn) of which US fixed income was at $30 bn. In contrast the company had total investment of $2.4 bn including Equities, US treasuries and other debt securities. However the company would be impacted via its $0.80 bn investment in Sponsored investment products (investment in own AUM) which would take a substantial hit following decline in bond prices. In addition the company would also get impacted on account of lower AUM fee through greater outflow of funds resulting in lower AUM fee and lower profit sharing fee.

Subscribers can download the relevant research below. I will be issuing updated research using my stress testing methodology for this asset manager as well. Spreads will most likely widen, I have the model and stress test complete and we are just tightening up the assumptions before I release it to subscribers. There is much, much more content on the way. I advise those who are risk adverse to stay out of the markets for the time being, but those who have a longer term horizon and an appetite for risk and hunger for fundamentals may see a big profit horizon coming.

pdf Asset Manager Intelligence Note 2009-03-09 11:01:30 351.07 Kb

Published in BoomBustBlog
Sunday, 22 February 2009 23:00

Questions Abound Concerning Intrepid Potash

I have been looking into this company (Intrepid Potash, IPI) at the behest of a reader who felt that there may have been some hanky panky going on. I will leave it up to my readers to draw their own conclusions from what I have found - better yet if anyof you can shed some light on this it would be helpful.

My Take on IPI

According to initial prospectus filed on April 07, 2008 (registered users can download it here as a zip file: pdf Intrepid Potash Prospectus Apr 23, 2008 2009-02-23 14:39:12 491.91 Kb ) the company offered 24 mn shares at price band of $24-$26 per share (P/E band of 96.0x -104.0x). Subsequently according to Free Writing Prospectus filed on April 17, 2008 shares offered were raised to 30 mn with price band of $27-$29 (P/E band of 108.0x-116.0x). Later, the company filed another to offer 30 mn shares to public at $32 per share (P/E of 128.0x).

According to prospectus, the company intended to use the proceeds to acquire Intrepid Mining for $757 mn and re-pay debt of $82.5 mn and the balance $60 mn towards general corporate expenses. As per the cash flow statements for subsequent periods, the company seems to have allocated the IPO proceeds in line with the objectives stated in IPO. The company had used $87 mn for repayment of its long term debt and $893 mn to Intrepid Mining LLC.

o Although technically the proceeds of IPO were used according to stated objectives, it is interesting to note that Intrepid Mining was controlled by the promoters with Harvey Operating and Production Company, Intrepid Production Corporation and Potash Acquisition, each having 40%, 40% and 20% stake, respectively in the Intrepid Potash.

§ Robert P. Jornayvaz III, Chairman of the Board and Chief Executive Officer of Intrepid Potash, had 100% ownership interest in Intrepid Production Corporation

§ Hugh E. Harvey, Jr, Executive Vice President of Technology and Director of Intrepid Potash , had 100% ownership interest in Harvey Operating and Production Company.

  • The company offered 30 mn (40%) shares to the public while the balance 44.8 mn was held by 3 promoters - Harvey Operating and Production Co (24%), Intrepid Production Corporation (24%) and Potash Acquisition, LLC (12%). As of December 8, 2008 (last reported filings) Harvey Operating and Production Company and Intrepid Production Corporation both had reduced their holdings by 10% to 16.1 mn shares (each having 21.6% of total shares outstanding). On November 14, 2008, Potash Acquisition distributed 8.0 mn shares to its members and certain persons with indirect interests in Potash Acquisition according to pro rata interest in the company.
  • Insiders have sold a nominal amount of shares to the public worth $5.72 mn with an average price of $17.9 per share between November 24, 2008 to December 5, 2008.
  • As regards accounting shenanigans relating to inventory on the prima face, we believe the facts stated in your mail may not be correct. Although the company's inventory have increased marginally from $18.5 mn as of December 2007 to $$23.1 mn as of September 2008, its backed by 6% increase in sales. Inventory turnover days of the company as of September 2008 is also comparable at 37.2 compared with 31.6 as of December 2007.
  • Also, we wanted to highlight that the company's gross margins have increased substantially to 61% in 3Q2008 from 24.6% in FY07 on back of considerable increase in potash price. Average sale price of potash had increased 223% to $623 in 3Q2008 from $193 in 3Q2007.

Registered users can download the financial statistics and things of interest spreadsheet here: pdf Intrepid Potash Financial Statistics of Interest 2009-02-23 14:40:50 96.00 Kb

The company managed to raise 67% more than the initial expectations.
Date of filing Shares offered to public (mn) Price band P/E Band Expected amt to be raised ($ mn) Underwriters' option to purchase Shares O/S
(mn)
% increase (per share from initial minium offering) % increase in total offer from initial minium offering
Minimum Maximum Minimum Maximum Minimum Maximum
07-Apr-08 24.0 24.0 26.0 96.0x 104.0x 576 624 3.60 74.8
17-Apr-08 30.0 27.0 29.0 108.0x 116.0x 810 870 4.50 74.8 21% 51%
21-Apr-08 30.0 32.0 128.0x 960 4.50 74.8 33% 67%
$757.4 mn, or 84.4% of the net proceeds tol be paid to Intrepid Mining in exchange for all of Intrepid Mining's assets other than cash
$82.5 mn, or 9.2% of the net proceeds, to be used by for repayment of debt assumed from Intrepid Mining pursuant to the exchange agreement, leaving the company with no outstanding debt
$59.5 mn to be used to fund production expansions and other growth opportunities and for general corporate purposes.
Shareholding pattern Just after IPO Current Position
Public stockholders 40.1% 30.0 56.2% 42.1
Harvey Operating and Production Company 24.0% 17.9 21.6% 16.1
Intrepid Production Corporation 24.0% 17.9 21.6% 16.1
Potash Acquisition, LLC 11.9% 9.0 0.0% 0.0
Other propmoters 0.4% 0.3
Sissel 0.3% 0.2
Total 100.0% 74.8 100.0% 74.8
IPO Investors had immediate dilution impact of $29.78 per share after the offering
Pro forma combined net tangible BVPS as of Dec 31, 2007 0.12
Increase in net tangible BVPS attributable to new investors 11.99
Decrease in net tangible BVPS distributed to existing stockholders -9.89
Pro forma combined as adjusted net tangibleBVPS after the offering 2.22
Initial public offering price per share 32.00
Pro forma dilution per share to new investors -29.78
On November 14, 2008, PAL distributed 8,058,000 shares of Common Stock pro rata in accordance with its governing instruments to its members. The members of PAL and certain persons with indirect interests in PAL thereupon successively distributed substantially all of the shares received pro rata in accordance with their respective governing instruments to their partners and members

Additional observations from an astute BoomBustBlogger whose opinion I value:

"Still looking into this.
But I had a couple things which smelled a bit funny the first time through.

This
was a little weird - their Interim CFO was the primary owner of Quinn &
Associates, a really small accounting firm. In 2006, Q&A got a full
33% of their revenues Intrepid Mining. We've seen a few instances now where
small accounting firms are a "tell" that the quality of the old
accounting might not have been much good.

"Relationship with
Quinn & Associates, P.C.

Mr. Quinn,
our Interim Chief Financial Officer, is an independent contractor and performs
services for us through the accounting firm of Quinn & Associates, P.C., of
which he is the primary owner. In 2006, we paid Q&A $468,456 for services
rendered on our behalf by Mr. Quinn and other employees of Q&A,
$175,175 of which was attributable directly to services performed by
Mr. Quinn. In 2006, payments from Intrepid Mining represented
approximately one-third of Q&A's annual revenue.
" (source - 12/20/07)

It
also looks like management emptied out the piggy bank before getting Intrepid
Mining bought out, with "special distributions" and interests in
other entities:

"Intrepid Mining
Transactions with Members

Intrepid Mining declared
special distributions to its members of $3.9 million and $15.0 million in June
2007 and October 2007, respectively. These distributions were funded by draws
upon the existing revolving line of credit, and were permitted under the
existing senior credit facility.

In early 2007, Intrepid
Mining decided to distribute its remaining interests in Intrepid Oil and Gas,
LLC (IOG) to its members. The amount of the equity distribution was $0.8
million.

Intrepid
Mining made advances from time to time to its managing members. At
December 31, 2006 and 2005, the outstanding advances were approximately
$0.4 million and $0.2 million, respectively. All such advances have been repaid
to Intrepid Mining.
" (source - 12/20/07)

Regarding
Jornayvaz's fiduciary duty to Intrepid Potash, I totally agree with you.
At the same time though, while their contract specifies they must devote their
full time to the company, the contract also says basically "except they
can also manage their personal investments" [see red below]:

"We expect to enter into
employment agreements with Messrs. Jornayvaz and Harvey in connection with
the completion of this offering
in order to secure their
services on a long-term basis and to protect the company following their
termination of employment by securing their agreement not to compete with us.
The anticipated terms of the employment agreements were developed based on
recommendations by Towers Perrin and input from counsel and the principal
owners.

Pursuant
to the terms of these agreements, Mr. Jornayvaz will agree to serve as our
Chairman and Chief Executive Officer and Mr. Harvey will agree to serve as our
Executive Vice President of Technology. We expect that Messrs. Jornayvaz and
Harvey will devote substantially full-time attention to their employment with
us.
In addition, they may continue to manage
their personal investments owned in whole or in part by each executive,
including Intrepid Oil & Gas, provided the management of such
investments does not interfere substantially with the performance of their
duties for Intrepid Potash
. We expect the
employment agreements to be for initial terms of 18 months from the completion
of this offering, with automatic extensions for successive terms of 12 months
each, unless notice of termination is given by us or the executive 90 days
prior to the end of the initial or any successive term. The agreements will
provide for an annual base salary of $487,500, subject to annual review by the
compensation committee with adjustments to be consistent with salaries paid to
executives holding similar positions at peer group companies. We expect that
the agreements will provide for the executives to be eligible for all benefits
offered generally to senior management, for participation in the senior
management bonus programs established by the compensation committee, for grants
under the Intrepid Potash Inc. 2008 Equity Incentive Plan in such amounts and
subject to such terms and conditions as are established by our compensation
committee and for all perquisites available generally to senior management.
Each of Messrs. Jornayvaz and Harvey shall be entitled to a company-provided
automobile of his choice valued at under $75,000, to personal use of our
aircraft for 45 hours of flight time per year and the right to dry lease our
aircraft for personal use on the same terms as we dry lease the aircraft to
unrelated third parties.
" (source - 12/20/07)

This doesn't make his actions any less
slimy. But in terms of legality, he does seem to have some wiggle
room. He is clearly pushing it hard though.




I need more time to think through this special dividend, and just work out the
numbers."


Published in BoomBustBlog

I performed a scan of chemical and chemical specialty companies and came up with the sector's version of the Doo Doo 32.
I have not taken any positions in these companies for I felt there were
better risk/reward opportunities elsewhere, but I decided to release
the list to the blog to get the reader's feedback.Those who have
expertise in the industry are urged to let me know if I have overlooked
something. Keep in mind that this screen is from a short seller's
perspective and companies whose share price have already fallen
significantly have been excluded by default.

Published in BoomBustBlog

For those who are knocking the Big Three automakers in Detroit for
underperformance and mismanagement (which they are all guilty of in
varying degrees), you should take a more global perspective, from the UK Guardian:

 It should be obvious to all that we are entering a global depression. I ask all of you, in your lifetime, have you ever witnessed anything like this? I know there are a lot of super smart economists, analysts, investors and pundits that may say otherwise, but I query, who are you gonna trust, them or your LYING eyes?! Why wasn't there so much doubt over the last 15 years when we were experience a global equity and asset boom? I know, I know... Things can go up and do well, but they really can't go down and go bad.

Published in BoomBustBlog

The recent oil shipping research that I released was actually quite timely. What appears to be adverse price movement (as can be said with the financial cos. research as well) is actually an opportunity. Be sure to attain positions in small increments. I will elaborate below, but first lets peruse this news item born from the bullish comments of Frontline's CEO.

From Bloomberg:

Oil traders are seeking as many as 10 supertankers to store crude, potentially taking the amount hoarded at sea to almost five days of European Union demand, according to Frontline Ltd., the largest owner of the vessels.

About 25 of the carriers, each able to hold about 2 million barrels of crude, were already hired for storage. There are enquiries for 5 to 10 more, Jens Martin Jensen, Singapore-based interim chief executive officer of the company’s management unit, said by phone today. Traders are storing crude to take advantage of higher prices for supply in the future.

Thirty-five supertankers represent about 7 percent of the global fleet of very large crude carriers, according to data from London-based Drewry Shipping Consultants Ltd. Storing oil in tankers may buoy rental rates that fell by a record 78 percent last year as slower economic growth sapped demand for energy.

“I’ve never before seen storage demand on this scale,” said Didier Labat, a Paris-based shipbroker at Barry Rogliano Salles who has worked in tanker markets for about 20 years.

Commodities prices fell the most in five decades last year, with crude dropping more than $100 from the peak of $147.27 a barrel in July, as simultaneous recessions hit the U.S., Europe and Japan. Oil demand in 2008 fell for the first time since 1983, according to the Paris-based International Energy Agency.

Traders are seeking to lease ships for three to nine months, Jensen said. Crude oil for December delivery traded at $61.90 a barrel as of 10:49 a.m. in London, $13.66 more than the February contract. Oil companies and traders may be able to profit from storing the oil, assuming shipping, insurance and financing costs are covered.

...

Iran, the second-largest member of the Organization of Petroleum Exporting Countries after Saudi Arabia, idled as many as 15 of its biggest ships in May to store crude oil. That contributed to three consecutive months of higher rental rates for ships.

The cost of delivering Middle East oil to Asia, the world’s busiest route for supertankers, rose yesterday for the first time since Dec. 5, according to the Baltic Exchange in London.

Forward freight agreements advanced. The derivatives are used by traders to bet on the future price of hauling Saudi Arabian cargoes to Japan, an industry benchmark.

The contracts traded at about 46 Worldscale points for the fourth quarter, according to prices from Oslo-based broker Imarex ASA as of 10:34 a.m. London time. They closed at 45 yesterday.

...

Worldscale points are a percentage of a nominal rate for more than 320,000 specific routes. They give owners and oil companies a starting point for negotiating hire rates without having to calculate the value of each deal from scratch.

Frontline, based in Bermuda, has advanced 13 percent in Oslo trading this year. The five-member Bloomberg Tanker Index has gained 12 percent...

To contact the reporter on this story: Alaric Nightingale in London at Anightingal1@bloomberg.net

and this just crossing the wires as I type this article:

"US Crude Oil Inventories Rose 6.68 Million Barrels
Last Week"
, hmmm! Methinks there may be some softening still, in these markets.

Now, what does this mean to my susbscribers? Well....

Frontline
has been hired for floating storage for up to 50 mn barrels of oil, or roughly
20 to 25 oil supertankers over the past two months. There has been a recently
surge in bookings for Very Large Crude Carriers (VLCC), which carries 2 mn
barrels of oil, to store crude oil for future delivery owing to the oil
market's contango structure wherein traders can buy oil and store it and
simultaneously enter a forward sell contract. We believe that this
arbitrage trading would not be sustainable once the spread between current spot
and future prices normalizes to historical levels. We have computed historical
Contango (Backwardation) for 1 month, 2 month, 3 month and 12 month oil price
futures. The present contango for oil prices is highest since 2000. At present
the 2 month, 3 month and 12 month oil futures are trading at a premium
(discount) of $4.55, $6.76 and $14.51, respectively against average premium
(discount) of $0.18, $0.21 and -$0.84, respectively, since 2000.

(click the graph to enlarge to print quality)

image001.png

According
to International Energy Agency, the cost of storage in VLCCs is around 90 cents
a barrel per month and an additional 30 cents a barrel or more to cover capital
costs, insurance and other costs. We have determined the possible arbitrage
opportunity taking into consideration the above storage cost assuming that a
trader buys oil at spot and stores oil for specific duration and simultaneously
enters a short futures contract. Due to high contango in the futures contract
there has been an arbitrage opportunity for an investor particularly in the
month of December.

As a result many players (Royal Dutch Shell PLC, BP
PLC, and Koch Industries) had booked VLCC for storage in December to exploit
this trading opportunity. As premium in the future market normalizes due to
market forces (in fact the premium in 3 month future contract has already
declined from $13.3 as of December 22, 2008 to $6.7 as of January 6, 2008),
speculative demand of vessels for storage purpose will ease. (We
have already built in high capacity utilization rates for FRO in our model with
net capacity utilization of 98% for own fleet vessels and 96.2% fir Managed
fleet vessels for 4Q2008) Also we regard this news as negative for
Frontline, since it reinforces our view that the company is finding it
difficult to charter ships on voyages, in a markets already plagued by lower
freight rates, and is resorting to short term demand fulfillment.

image003.png

I welcome my subscribers to revisit the Frontline analysis as well as download the oil price arbitrage spreadsheet that accompanies this article. Professional subscribers should take particular notice of the macro argument made in the thesis.

pdf Oil Price Arbitrage Addendum (Excel 2003) 2009-01-07 09:55:07 1.31 Mb

pdf Frontline Investment Summary - Retail 2008-12-18 14:13:16 363.84 Kb

pdf Frontline investment highlights - Pro 2008-12-18 14:16:07 473.47 Kb

Published in BoomBustBlog
Tuesday, 06 January 2009 23:00

Insulet Corporation (PODD)

We performed some preliminary analysis on Insulet Corporation (PODD) with a focus on their latest quarterly results. With its stock price currently trading in the region of US$7-$8 per share, it fails in the very first parameter that we use for screening short candidates, and that is a company's share price must be at a level to provide X% return given Y investment. In other words, the share price is already too low. Since I do not consider it a candidate for my own prop trading program, I am releasing this cursory overview to the public.

The stock price has traded in the range of $3-$21 in the last 52 weeks and there could be further downside left from the current levels to make it an attractive short opportunity for the right type of speculator, but rationalization of their cost structure with most of the production being shifted to China and their preparation for an entry into Europe could well turn out to be positives and result in a rally in the near term. Following are some of our initial observation on the company's financials / fundamental strength:

  • Insulet posted strong revenue growth for the three months and nine months ended September 2008. Revenue for Q3 2008 rose 167% year-on-year to US$10.1 million mainly due to a 20% increase in the number of patients using OmniPod driven by the company's sales and marketing efforts. For the nine months ended September 2008 revenues increased 169% to US$24.2 million. Insulet has agreements with Abbott Diabetes Care Inc. and DexCom Inc. to integrate their continuous glucose monitoring technologies with its Personal Diabetes Manager (PDM). The company realized revenues of US$1.2 million in Q3 2008 and US$1.4 million for the three and nine months ended September 2008 in relation to the Abbott agreement. In June 2008, the company also signed an agreement with Ferring Pharmaceuticals to develop the OmniPod System for the delivery of drugs developed by Ferring. In fact, this is Insulet's first development agreement for a non-diabetes drug delivery application. Additionally the company has deferred revenue of US$2.3 million as of September 30, 2008.
  • In order to achieve profitability, Insulet aims to reduce production cost. In line with this strategy, the company outsourced the production of OmniPod to a subsidiary of Flextronics International Ltd in China in 2007. This move helped Insulet reduce per unit cost due to increased production and resultant higher absorption of overhead costs. Gross loss was US$87,000 in Q3 2008 as compared to US$3.8 million in Q3 2007. For the nine months ended September 2008, gross loss was US$5.8 million as compared to US$10 million for the corresponding period last year. Production is currently being undertaken on a partially automated manufacturing line at the Chinese facility. By completely automating the manufacturing process, the company aims to further expand production and improve gross margins in the coming quarters.
  • Since the commencement of commercial sales of the OmniPod System in the United States in October 2005, Insulet has expanded its sales and marketing efforts to increase market penetration of the OmniPod system throughout the US starting with the Eastern states. The OmniPod System is currently available in all 50 states. In Q3 2008, sales and marketing expenses increased by 146% y-o-y to US$10.2 million while that for the nine months ended September 2008 increased by 179% y-o-y to US$29.7 million due to additional hiring and trade shows. Additionally, general and administrative expenses increased by 86% y-o-y to US$6.3 million in Q3 2008 and by 91% y-o-y to 16.9 million for the nine months ended September 2008 as a result of expanding business. The significant increase in expenses led to an operating loss of US$19.8 million in Q3 2008 as compared to US$14.5 million in Q3 2007. The company expects operating expenses to continue to increase in the near term.
  • Insulet incurred interest expense of approximately US$1.1 million and US$1.3 million for the three and nine months ended September 30, 2008, respectively. This is in connection with the private placement of 5.375% Convertible Senior Notes worth US$85 million due on June 15, 2013. As a result, interest expense more than doubled to US$1.4 million in Q3 2008. This factor, in addition to the operating loss of US$19.8 million led to a net loss of US$20.8 million in Q3 2008 as compared to a net loss of 13.6 million in Q3 2007. For the nine months ended September 2008, net loss was US$64.5 million as compared to US$37.9 million for the corresponding period last year. Insulet is expected to continue incurring losses in the near term.
  • Insulet's cash balance as on September 30, 2008 stands at US$74.1 million. This includes US$81.5 million raised through the Convertible Notes issue. Approximately $23.2 million of the net proceeds of the issue were used to repay old debt while the remainder is intended to be used for general corporate purposes. As Insulet continues to expand its business it will need additional capital to increase market penetration amid stiff competition and increase manufacturing capacity. The company expects a capital expenditure of at least US$10 million in FY08 for the expansion and automation of the manufacturing capacity. As a result, the company may have to raise additional debt or issue shares - extremely difficult in the current market environment. While it has historically been successful in doing so (Insulet has raised US$327 million since its inception in 2000), the current market turmoil poses a challenge. The company recently declared a dividend distribution of one preferred stock purchase right for each outstanding equity share to existing shareholders. The rights will become exercisable if a person acquires 15% or more of Insulet's common stock.
Published in BoomBustBlog

From Yahoo News:

Analysts downgrade oil tankers on fears that shipping rates will dwindle in economic weakness

NEW YORK (AP) -- A pair of analysts downgraded several oil tanker companies on Monday, predicting that shipping rates might have reached their peaks as the global economy weakens and an influx of ships approaches the market.

Jefferies analyst Douglas Mavrinac cut shares of Frontline Ltd. and Nordic American Tanker Shipping Ltd. to "Underperform" from "Hold," citing both companies' heavy reliance on the spot charter market, where rates could be "significantly weaker" in 2009.

Mavrinac also lowered his rating on Tsakos Energy Navigation Ltd. and Overseas Shipholding Group Inc. to "Hold" from "Buy," suggesting the stocks have little room to grow if shipping rates fall as expected next year.

The analyst also cut his 2009 earnings estimates and price targets for most of the oil tanker stocks he covers.

Also Monday, JPMorgan analyst Jonathan B. Chappell cut his rating on Nordic American Tanker Shipping to "Underweight" from "Neutral," and downgraded General Maritime Corp. and Teekay Tankers Ltd. to "Neutral" from "Overweight." The analyst suggests that earnings will be dragged down as tanker rates get weaker over the next 12 months.

But he upgraded shares of Overseas Shipholding to "Overweight" from "Neutral," suggesting the stocks strong financial position will be enough to weather -- and possibly benefit from -- the global financial crisis.

Keep in mind that you can ease into a position, and opportunity abounds as momentum traders push it significantly outside of its practical valuation band, which is clearly delineated in the shipping report that I released a few weeks ago. See

Published in BoomBustBlog
Thursday, 25 December 2008 23:00

Comment on the shipping industry

A few days ago, BoomBustBlogger Stuart made the following comments:

I'd be curious to see where you think GNK fits into the mix. They popped up on a screen so I briefly looked at them. Their latest 10Q has a investment in a company called Jinhui. That company trades on the Oslo bors (ticker JIN) and is 54% owned by a Hong Kong company. GNK values their stake at $200 million based on a Sept 2007 stock price. Problem is that JIN has lost about 90% of its value since that time. I don't short stocks so I just eliminated it and moved on. But might be worth a closer look for subscribers, esp if a write down triggers collateral posting requirements under their 2007 credit facility.

On a broader note, this research note [the latest shipping company research note] seemed to rely heavily on the order book to current fleet ratio, which would indicate price will not be rising to prior highs anytime soon. But, how reliable is that number? Shipping co's have been canceling right and left and I expect that trend to accelerate as it becomes clear that China will not miraculously boom during a rest of the world downturn. If few of these cancelled ships are completed, then I would expect the order book to current fleet ratio not to accurately predict future supply. For example, with respect to bulk carriers, the Business Times reported recently that an astounding 30% were placed with "greenfield" yards in China. It would shock me if the majority of those vessels (or even a large portion) ever got built. This makes me think that relying on current order book to predict future supply is not reliable and in fact may be wildly off.

We have looked at Genco Shipping, a carrier of iron ore, coal, grain, steel products and other dry bulk cargoes. Following are some of our observations on the company based on preliminary investigations –

Published in BoomBustBlog
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