Thursday, February 09, 2012

Earnings: Cisco, Diamond Foods, Groupon

Well, CSCO had a positive surprise today, in which we saw higher sales of networking equipment leading to faster revenue growth for the quarter.  Happily for CSCO common stockholders, or at least Ralph Nader, the company has also decided to increase its quaterly dividend by 33% from 6 cents to 8 cents.  Because of strong bottom line growth, this actually represents a decline in the payout ratio from 22% to 20%, indicating plenty of room for further dividend increases, as Ralph Nader has encouraged.  Nader, self-reported holder of 18,000 CSCO shares, will take home an extra $360 a quarter.

In the short-term at least, the rally in the price and the improvement in the company's performance suggest that investors think CEO John Chambers is doing the right things.  If these results continue, they will be right.  I still have deep reservations about his leadership, and so even though the stock is cheap (although much less to than in the August selloff) I continue to stay away.  My own tech sector bets - MSFT and INTC - have performed admirably and both still have upside.

Diamond Foods, maker of those yummy Diamond nuts, and also owner of Kettle Chips and Pop Secret popcorn had terrible news.  The common is down over 40% in after hours trading, due to the announcement that the CEO and CFO have been placed on administrative leave, and that earnings will have to be restated after an ongoing internal investigation indicated that several payments to suppliers had been missated. This looked like a bit of an overreaction to me, since core products are customer favorites and the company is making money, but it turns out there is a good reason for the decline.

The company is involved in a "purchase" agreement with P&G to acquire the Pringles potato chip business.  This sounds incredible - since it is hard to see why P&G would part with such an asset.  Incredible that is, until you realize that in buying this busienss, they are issuing P&G (together with any other Pringles shareholders) some 26mn shares, which provides P&G a majority stake in return for Pringles.  This is not exactly what I would call a sale, since, ultimately, P&G will retain a majority stake in its signature snack brand and acquire a majority stake in several other brands.  As the majority owner, P&G will be in a position to set dividend policy and also be in a good position to tender for the remaining shares of Diamond Foods sometime in the future. This is really a sale of Diamond Foods to P&G, albeit an installment sale, in return for minority pariticipation in the earnings streams of Pringles for some period.

And that makes this misstatement incredibly significant - because it may be the case that the misstatement was intended to improve margins at DMND while the value of the company was being determined for the sale.  The number of shares received by P&G is dependent on the share price, the higher it is, the lower P&G's post-transaction stake.  Now, even if the transaction goes through, Procter is likely to get an even larger stake, possibly more than 60%, and current shareholders stake in both the existing business, and any future flows from Pringles will be commenurately lower.  If the deal were to fall through, DMND would probably be worth $26-30 purely based on the existing business, provided there aren't additional misstatements that have to be taken.

Finally, Groupon seems to be conducting a firesale of its own stuff.  The company's business model is based heavily on spending lavishly on marketing and sales, so much so that SG&A exceeds gross margins.  This can go on for awhile, and in fairness to Groupon, revenue was up something like 194% over the prior year quarter, so the money spent is having an impact.  But management is going to have to show that that it can continue to grow while maintaing cost controls.

The interesting question is what happens with LinkedIn, which reports on Friday, as both are indicators of the potential growth of social media: which all points to the prospects of Facebook achieving what, in my mind, is a ludicrous $100bn valuation, even if Steven Altucher disagrees.

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