At first glance, it looked like a fantastic quarter for the company, as profit rose by a remarkable 82%, but things start to look less than rosy once we take a closer look. Analysts had been expecting to see the company show earnings during the quarter of 24 cents a share, and were disappointed to see the company come in below this, with only 22 cents a share.
This is the second quarter in a row in which the company posted weaker than expected earnings, and is quickly erasing the progress that the stock has been making since the beginning of March.
MOST NOTEWORTHY: Priceline.com, Monster and Internap were today's noteworthy downgrades:
Susquehanna downgraded Priceline.com (NASDAQ: PCLN) to Neutral from Positive as they believe upside may be difficult given the macro environment, competition, and currency headwinds.
JP Morgan lowered Monster (NASDAQ: MNST) to Neutral from Overweight following the company's expectations for higher 1Q08 operating expenses.
Internap (NASDAQ: INAP) was downgraded by Merriman to Neutral from Buy as they believe upside will be limited until the company can complete its integration of the VitalStream CDN acquisition.
First oil. Then copper, then lumber, and coal. And now grain.
The solid economic growth in the world's emerging markets that's caused oil / coal and commodities prices to surge is now fully hitting the grain market.
So much so, that some food producers are calling on the U.S. government to restrict exports due to soaring prices for grains they use to make cereal and other foods. Meanwhile, some farmers are asking the U.S. Government to ease restrictions to enable farmers to plant more acres, The Wall Street Journal reported Thursday [Subscription required].
For food producers, the issue involves limiting a major operating cost. During the past year, spring wheat has risen to an astounding $17.63 per bushel, up from about $4.90 a year ago. Flour, which used to cost about $15 per 100 pounds, now sells for about $45-48 per 100 pounds. Food producers say prices are increasing so fast, they can't pass along price increases quick enough to keep up.
MOST NOTEWORTHY: Athenahealth, Marvell Technology, Broadcom and Nvidia were today's noteworthy initiations:
Athenahealth (NASDAQ: ATHN) was initiated with a Neutral rating at Goldman Sachs. Jefferies started shares of the stock with a Buy rating and $46 target, as they believe their estimates could prove conservative given potential upside from new and existing physicians adopting athenaClinicals.
Kaufman Bros initiated Marvell Technology (NASDAQ: MRVL) with a Hold rating and $18 target, as they believe near-term growth prospects remain uncertain and recommends waiting for more favorable entry points.
The firm also initiated Broadcom Corporation (NASDAQ: BRCM) with a Hold rating and $35 target, and believes the company's growth prospects are priced into shares following the recent rally, and started shares of Nvidia Corporation (NASDAQ: NVDA) with a Buy rating and $42 target, as they believe the company's growth opportunity and competitive strength remain intact and would be buyers at current levels.
OTHER INITIATIONS:
Goldman started shares of Sara Lee (NYSE: SLE) with a Neutral rating and $16 target.
UBS initiated US BioEnergy (NASDAQ: USBE) with a Neutral rating.
Bear Stearns inititated CarMax (NYSE: KMX) with an Underperform rating.
Update: Yesterday's (10-17-07) Wall Street Journal (subscription) article about this investigation began "Prominent American food companies are under scrutiny in a federal probe of possible fraud and corruption in the military's food-supply operations for the Iraq war", and went on to read "The inquiry is focused on whether the food companies set excessively high prices when they sold their goods to the Army's primary food contractor for the war zone." Today's (8-18-07) WSJ article about the investigation reported a very different slant to the story, suggesting that, rather than pursuing American producers, the government was investigating the wholesaler and companies involved in the Kuwait end. Given this change, I find the story I have written below no longer substantiated, and caution readers to wait along with me for more reliable information.
In accordance with our policy of owning up to what we have written, the post will remain.
A number of American food companies including Sara Lee (NYSE:SLE), ConAgra (NYSE: CAG) and Perdue Farms Inc. have come under suspicion of conspiring with Kuwait-based Agility Corp., a logistics supplier for the U.S. troops in Iraq, to inflate food supply costs. In June, Agility received a new, one-year, $2.8 billion contract to provide life support (billeting, motor pool, dining and medical support services) to troops in Iraq. Agility, until recently known as Public Warehousing, has enjoyed a series of support contracts throughout much of the Iraq conflict.
According to Reuters, the Defense and Justice Departments are investigating allegations that Agility may have taken kickbacks from its suppliers, as well as charging the U.S. military unreasonably high prices for provender.
Agility, founded in 1979, was taken public in 1997 and is traded on the Kuwait exchange. It employs over 20,000 people in over 100 countries, with an annual revenue of $4.5 billion. In June, it was also awarded a $43.6 million contract for base operations and maintenance services at U.S. Air Force bases in Spain.
Update: ConAgra has put out a press release claiming that the DOD is looking to them as witnesses, rather than perpetrators.
Branded food companies like Kraft (NYSE: KFT) and Sara Lee (NYSE: SLE) are facing competition from a source that has been an after-thought for years: private label products.
According (subscription required) to The Wall Street Journal, "Food retailers are growing more sophisticated about developing and branding their own products. They're even building brands that bear no resemblance to their store names, such as Target's Archer Farms line of gourmet oils, appetizers and frozen foods, and Safeway Inc. (NYSE: SWY) Eating Right line of frozen dinners, cereal and salad dressings."
Of course, grocers make more money selling products they make (or buy cheaply from a third-party manufacturer without the pricing power of a strong brand) and market themselves, rather than ones the buy from a large brand.
With American consumers not feeling quite as rich as they did during the days of the housing bubble and easy credit, private label brands should continue to gain market-share. Wal-Mart (NYSE: WMT) has reported that that is already happening, as a result of the cash-strapped consumer.
That could spell trouble for companies like Kraft and Sara Lee, and it could be great for grocery stores -- higher margins. Investors may want to pick their food-related investments accordingly.
It's pretty rare that you see analysts or shareholders (or anyone other than management) calling for stronger anti-takeover provisions at a company, but that's exactly what is happening at Sara Lee Corp. (NYSE: SLE). Chairman and CEO Brenda Barnes told analysts on the call that the company has "nothing structurally built in [to the company] that would prevent someone from coming in and offering a good price for the company" after shareholders voted to terminate the company's poison pill last year.
The company's turnaround efforts have been going well, and it's nice to see that Ms. Barnes is focused on building the company (and buying back shares as appropriate) rather than concocting plans to ward off a potential buyout.
I've never understood the need for takeover defenses. Here's the only takeover defense a company needs: If shareholders don't like the deal, they can vote against it. Artificial barriers (poison pills, blank-check preferred stock, shark repellent, etc.) to takeovers can do little other than discourage a potential buyer who might provide shareholders with a compelling offer.
MOST NOTEWORTHY: Alcoa Inc (AA), Marvell Technology Group Ltd (MRVL) Under Armour, Inc (UA), Las Vegas Sands Corp (LVS) and QLogic Corp (QLGC) topped today's list of noteworthy upgrades:
RBC Capital upgraded Alcoa Inc (NYSE: AA) to Sector Perform from Underperform following the bid by Alcan Inc (NYSE: AL).
Marvell Technology Group Ltd (NASDAQ MRVL) was upgraded to buy from Neutral with a $23 target at Oppenheimer based on valuation and the improvements made to HDD PC/Desktop.
Morgan Stanley raised shares of Under Armor Inc (NYSE: UA) to Equal Weight from Underweight with a $47 target, based on valuation and long-term growth.
Stifel upgraded shares of Las Vegas Sands (NYSE: LVS) to Buy from Hold with a $100 target citing valuation.
Morgan Keegan upgraded shares of QLogic Corp (NASDAQ: QLGC) to Outperform from Market Perform on valuation and expectations for strong sequential growth to resume in 2H07.
OTHER UPGRADES:
Friedman Billings upgraded shares of Sonic Corp (NASDAQ: SONC) to Outperform from Peer Perform.
Sara Lee Corp. (NYSE: SLE), founded in 1939, may be mulling a leveraged buyout. The Financial Times has reported the rumor. Moreover, there has been strong volume in Sara Lee's stock options, as well as credit swaps.
Although, the stock price has been tepid today -- up 2% to $16.38.
Option buying is becoming a precursor to a variety of LBO deals, such as the $15 billion transaction for Harrah's Entertainment Inc. (NYSE: HET).
Actually, Sara Lee has been in the midst of a restructuring (announced in February of 2006). Despite several sell-offs of assets, the company's stock price has been lackluster.
Maybe the company can juice things up by going private? And, while private, make the hard choices to improve the performance of the company? Well, some investors are already making that bet in the derivatives market.
Tom Taulli is the author of various books, including the Complete M&A Handbook and operates InvestorOffering.com.
Sara Lee Corporation (NYSE:SLE), manufacturers of Ball Park Franks, Jimmy Dean sausage, and Sara Lee fatty baked snacks, has completed the spin-off of its Hanes division to form a separate company, Hanesbrands, (NYSE:HBI), which began trading yesterday, September 6. Current Sara Lee shareholders received one share of Hanesbrands stock for every eight shares of Sara Lee. The Hanesbrands moniker includes some very common names: Hanes underwear, made famous by Michael Jordan in his series of "you have been briefed" ads; Bali and Wonder bras; as well as L'eggs and Just My Size hoisery.
Several years ago, Sara Lee Coroporation management decided to reduce the range of the portfolio of brands that had grown to cover snack foods, beverages, as well as household and body care products, and a line of intmate and casual clothing. One does have to wonder whoever thought it was a good idea to merge fatty snacks with an underwear company in order 'to achieve transformational synergies' or some such business lunacy. Probably best not to think about the image too long.
Approximately 95 million shares of Hanesbrands stock were distributed to Sara Lee stockholders in the transaction. Sara Lee Corporation received $2.4 billion for the stock from Hanesbrands. In its first day of trading, Hanesbrands stock closed at $22.20, up $1.90, with 3.7 million shares trading hands.
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First oil. Then copper, then lumber, and coal. And now grain. 
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Update: 
Branded food companies like 
Sara Lee Corporation (NYSE:SLE), manufacturers of Ball Park Franks, Jimmy Dean sausage, and Sara Lee fatty baked snacks, has completed the spin-off of its Hanes division to form a 
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