Archive for the ‘Company Specific’ Category

Boeing’s 787 Faces Critical Wing Test Today

March 28th, 2010 Michael McDonough 2 comments

**Update 3/29: Boeing calls initial results of new wing stress test ‘positive’**

Before any new aircraft design is put into service it’s required to pass a wing stress test, which stretches the wing to 150% of the most extreme stresses it will face while in service.  Reasonable enough.  However, what I didn’t realize is that about one year ago, during the same test, the 787 wing had a catastrophic failure at only 100%, causing significant delays in the program.  Unlike past aircraft, the 787 is the first aircraft constructed using composite materials, versus traditional aluminum, arguably making these tests a bit more significant.  The good news is scientist believe they’ve solved the weakness, and their word will be tested today.  But, another failed test could mean more significant delays for the program, and bad news for Boeing.

To my surprise the fact the 787 failed this test a year ago wasn’t nearly the most concerning fact I came across in my research.  Apparently the Airbus A380 also failed this test.  However, unlike the 787, which is being retested, scientists assured authorities they knew what caused the problem, and would be able to fix it without another test.  The plane maker’s comments was apparently enough to convince authorities and from what I can tell the A380 went into service without ever passing the test. I am not an engineer, nor a plane expert, but working in the financial world I know enough not always trust people who perceive themselves as experts in any given field (look at the latest financial crisis).  I am not saying the A380 is an unsafe airplane, but I would have definitely felt a lot more comfortable flying in it in bad turbulence knowing it had passed the test.  Had they tested the world’s first commercial jet liner, the de Havilland Comet, a bit more back in in the late 40’s maybe they might have realized the catastrophic effect of square windows and pressurization.

An older 787 wing test (while not connected to the plane):


Cantor Upgrades DryShips (DRYS) To ‘Buy’ From ‘Hold’

January 25th, 2010 Michael McDonough Comments off

From Cantor Report:

Cantor/DRYS: We Upgrade DRYS To BUY (From HOLD) On Valuation, Rig Exposure

* We raise our price target to $8 (from $7) based on our 7.0x
EV/EBITDA multiple to our new 2010 EBITDA forecast of $558 million
(from $544 million). Given the discrepancy between our target and
the current stock price, we upgrade DRYS to a BUY (from HOLD). Our
price target is also supported by our charter-adjusted NAV of
$7.80 per share.

* With nearly all of its dry bulk fleet fixed under period charter
contracts, we suggest the primary upside catalyst for the stock
over the near-term will be securing employment and financing for
the 5th and 6th drilling rigs.

* We raise our 4Q:09 EPS estimate to $0.27 (from $0.26). For 2010,
we now look for DRYS to report EPS and EBITDA of $1.05 and $558
million (from $1.00 and $544 million), respectively. Finally, we
introduce our 2011 EPS and EBITDA forecasts of $1.22 and $743
million, respectively.

* Our new estimates are based upon our revised dry bulk rate
forecast (see “The Ship’s Log – 4Q:09 Review and 2010 Outlook”)
published concurrently with this note.

* Management has stated its intention of growing the dry bulk fleet
through potential distressed transactions over the near-term, with
a focus on the Panamax and, to a lesser extent, Capesize vessel
classes. However, we believe the primary focus will be on fixing
drilling rigs 5 and 6 under charter contracts, as those charters
will likely be necessary before bank financing can be secured.


More Evidence the Approaching IT Replacement Cycle will Exceed Analysts’ Estimates

January 14th, 2010 Michael McDonough Comments off

Recently, I wrote about how Dell, among some other companies, should benefit from an approaching IT replacement cycle, that I believe is being underestimated by many wall street analysts.  Well I came across this article today, which has the White House budget director blaming old computers for our government’s inefficiencies and ineffectiveness.  It would appear that President Obama is also jumping on the bandwagon being quoted in the article as saying, “Improving the technology our government uses isn’t about having the fanciest bells and whistles on our websites — it’s about how we use the American people’s hard-earned tax dollars to make government work better for them.”

In closing the budget director had this to say “It’s time to bring government into the 21st century,” he continued. “Information technology has the power to transform how government works and revolutionize the ease, convenience and effectiveness by which it serves the American people.”

Might we see a jump in government technology spending in the future? Maybe, but either way I am still bullish on the sector.


Week End Update on my Global Macro Trading Strategies

January 8th, 2010 Michael McDonough Comments off

Here is an updated table containing my global macro trading strategies for retail investors.  **For the details behind my global macro trading hypothesis, please see my past article on this blog and at RealMoney.

Global Macro Trading Ideas


Cantor Raises Price Target for DSX

January 8th, 2010 Michael McDonough Comments off

Cantor Fitzgerald raised the price target for Diana Shipping (DSX) to $18 from $16 based on higher rechartering assumptions.  Cantors presently holds a ‘Buy’ rating on DSX.  DSX is one of the few shippers within the dry bulk space on which I hold a relatively constructive view.  Compared to other shippers the company has a healthy balance sheet, and is well position to take advantage of distressed asset prices.  In fact the company recently initiated a two year expansion program with its purchase of a new vessel.

Source: Bloomberg & Capital Link

Shipping rates over the near-term will likely remain volatile. Why? China.  China still holds a disproportional influence over shipping rates, and when a single player holds that much sway, volatility is inevitable, especially when that player is China. Therefore, anyone closely following the shipping sector needs to be very aware of what is happening in China. The secondary driver is of course a tug-of-war between a growing supply of ships and gradual increments in global demand for the service. Over the long-term, shipping rates should remain volatile through-out the year, but on average remain relatively subdued.


PC Sales Jump Since Windows 7 Release

January 7th, 2010 Michael McDonough Comments off

According to Morgan Stanley and NPD, since the release of Windows 7 computer sales have risen by at least 30% y/y every week through  December 26th, the most recent data point (see chart from Morgan Stanley). Not only does this bode well for Microsoft (MSFT), but provides another reason to be bullish on Dell (DELL).  As I highlighted in a recent piece, Dell is poised to benefit from an approaching IT replacement cycle, and this recent sales data should add further fuel to the fire over the short-term.

Regarding the IT replacement cycle According to Morgan’s report, “MSFT noted in our meetings that the last material upgrade cycle was 2004/2005, and believes the combination of old machines and the pending XP end of support will be powerful drivers for an upgrade cycle, likely beginning in earnest in mid to late CY10.”  I remain bullish on Dell, and believe the company has considerable upside.

Computer Shipments

Note: I hold a long position in DELLI highly recommend you research any investment ideas presented in this piece for its suitability within your own portfolio.


GM’s New Battery Plant

January 7th, 2010 Michael McDonough Comments off

Hearing about GM’s new battery plant I started reminiscing about an article I wrote back in July of 2008.  Will this movement in the U.S. have the same impact it had on Japan?  We will have to wait and see.


HOGS Poised to Benefit from Rising Food Prices in China

January 4th, 2010 Michael McDonough 1 comment

I mentioned this morning that major snow storms in China could place additional pressure on domestic Chinese food prices. I have since received several inquiries about which companies could benefit from this developing pricing dynamic pricing, and here is one answer: Let me take you back to this article on RealMoney, I published on October 9th, where I introduced Zhongpin Inc. (HOGS). HOGS is a Chinese meat and food products company, specializing in pork products. HOGS is poised to benefit from an anticipated run-up in hog prices throughout 2010, only helped by the recent snow storms. Domestic hog prices fell dramatically in 2009 due to an oversupply of pigs, but have since bottomed. HOGS has already risen roughly 15% since I first mentioned it back in October, and I think it is worth another look.


Dell Set to Ride Approaching IT Replacement Cycle

December 30th, 2009 Michael McDonough Comments off

Back in October I mentioned I had a rather bullish view on the tech sector going into 2010, but the only name I mentioned at the time was Apple (APPL).  Recently, I’ve been speaking with quite a few money managers and one name in the sector has been coming up more than most others, and that’s Dell (DELL).  Looking ahead to 2010, low capital costs for businesses combined with increasing confidence will likely lead to increments in business investment and spending on equipment and software.  Investors have already seen hints of this with a 1.5% seasonally adjusted annualized increment in 3Q09 equipment and software investment.  This is likely only the tip of the iceberg, and Dell is well positioned to take advantage of the approaching IT replacement cycle.

Dell 1Y Performance

Dell 1Y Performance

Source: Google Finance

Dell has faced some downward pricing pressure over the last several months after a disappointing 3Q09 earnings report.  However, part of this slack could have been due to the late October release of Windows 7, which likely caused consumers to postpone PC purchases until the 4th quarter.  Additionally, I believe a number of analysts are underestimating the probability and the magnitude of an IT replacement cycle in 2010, giving the stock more upside potential once the cycle materializes.  Roughly 25% of Dell’s revenues are derived from the company’s commercial PC hardware segment, with another 11% coming from server equipment; both segments are poised to benefit from an IT replacement cycle.  According to Dell, PC’s currently installed are on average 9 to 12 months older than the historical average, which should add some fuel to the approaching cycle.

Additionally, as you can see from the chart below, since November Dell has significantly underperformed the NASDAQ’s Computer Index, and I believe it is only a matter of time before Dell begins playing catch-up.  The managers I spoke with fervently believe the stock should be valued somewhere between $20 and $24, and have indicated to me that they have put their money where their mouths are.  The downside risk is of course that the IT replacement cycle does not materialize or is weaker than expectations.

Dell vs. NASDAQ Computer Index

Dell vs. NASDAQ Computer IndexSource: Yahoo Finance

List of my Equity Based Global Macro Investment Ideas:

Trading IdeasSource: Bloomberg

Categories: Company Specific, Equity Markets, US Tags:

A Review of my EQ Based Global Macro Trading Ideas

December 22nd, 2009 Michael McDonough Comments off

Today I wanted to quickly highlight the performance of my equity based trading strategies around my global macro economic investment thesis.

Emerging markets: I continue to believe that emerging-market growth and equity performance — especially in countries with a strong consumer base — will continue to outpace developed nations in 2010. Therefore, you should still consider long positions in iShares Brazil (EWZ) and iShares FTSE/Xinhua China 25 (FXI).

Risks in Brazil include an eventual uptick in the central bank’s Selic rate, which could stymie the country’s growth. In China, early inflationary warnings could eventually lead to tightening actions by the government that could hamper growth. Still, I believe upside potential outweighs the risks over the short term. For more details on this trade idea, please see my piece published on Oct. 9 titled “Easy Money is a Big Driver.”

Steel: The continuing global economic recovery combined with relatively conservative steel demand estimates for 2010 should help propel steel prices in the year ahead. In addition, the potential consolidation of inefficient Chinese steel mills may lead to reduced output, placing excess demand in a favorable pricing environment on South Korea’s Posco (PKX ) and Japan’s JFE Holdings. Strong demand in other emerging markets should help to support Gerdau (GGB). Risks to these investments include a weaker-than-anticipated global recovery or an oversupply of steel weighing on prices. See my column from Oct 16, “Coal Seeing Recovery in Foreign Demand,” for more thoughts on this theme.

Japan: Not much has changed on my bearish view toward the yen since I published a piece called simply, “How to Play Japan” back on Nov. 13. In fact, I would argue that support for any further yen appreciation has dissolved, creating a good entry point for a short position via puts on ProShares Ultra Yen (YCL) or a straight long position in ProShares UltraShort Yen (YCS). This trade depends heavily on timing, and I anticipate that the yen should move back above 100 per U.S. dollar over the coming months.Japan’s woes have recently been noticed by Moody’s, where a senior vice president was recently quoted by Bloomberg as saying, “Things we are most concerned about are the lack of well-articulated long-term fiscal consolidation and a debt reduction plan.”

Rail: Warren Buffett’s purchase of Burlington Northern Santa Fe (BNI) provided a strong boost for railroads and provided Buffett with a bet not only on long-term U.S. recovery, but also on coal. I recommended CSX (CSX), Union Pacific (UNP) and Norfolk Southern (NSC) based on what I assumed to be Buffett’s investment thesis. These positions may not have the same short-term upside potential as some of my other ideas, but they should provide some longer-term value in your portfolio. My piece from Nov. 13, “Coal in Your Stocking: Hypocrisy, Senility or Common Sense?” has more information about this trading idea.

Agriculture: Ag products will see more demand as developing nations begin to eat more like developed countries. Ag stocks also provide investors with a good real-time hedge against inflation and thus far have lagged pricing increments seen in other commodities. I maintain my constructive long-term view on wheat, corn, sugar, soybean, cocoa and hogs. One way you might play these positions is through exchange-traded fund PowerShares DB Agriculture (DBA), which is unique in that it invests in actual commodities futures vs. agricultural companies. For more information on trades in the ag sector, please see my piece published on Nov. 20 called, “Talking Turkey on Agriculture Trends.”

China energy: Very little has changed since I first published my thesis on Chinese energy companies last week, “Three Ways to Play China Oil & Gas for 2010.” I still believe that PetroChina (PTR), Sinopec (SNP), and CNOOC (CEO) are all well positioned to take advantage of China’s growing energy and natural gas market in the year ahead.

Global Macro Trading IdeasSource: Bloomberg