Harry Rady News

10/04/2011
By Rita Nazareth

While Warren Buffett’s new favorite investment is Berkshire Hathaway Inc., his almost $50 billion pile of cash may be better spent buying companies from Flowserve Corp. (FLS) to McCormick & Co.

Berkshire is generating more than $1 billion in free cash flow a month, pushing reserves to a record, even as Buffett invests more in equities than at any other time this year. With near zero percent interest rates limiting returns in fixed- income markets, Flowserve, the biggest maker of valves, pumps and seals, McCormick, the largest U.S. spice seller, and 29 other companies are cheaper than Berkshire based on its discount to net assets and meet the takeover criteria in Buffett’s annual letter, according to data compiled by Bloomberg.

The 81-year-old chairman of Omaha, Nebraska-based Berkshire said last week he would repurchase stock for the first time in four decades as long as it sold for less than 1.1 times book value, 29 percent less than its decade-long average. While Oscar Gruss & Son Inc. says the plan may have signaled the world’s most successful investor is finding fewer takeover opportunities after agreeing to spend $9 billion on Lubrizol Corp. in March, the global stock selloff is now making it cheaper for Buffett to find deals, according to Highmark Capital Management Inc.

“His gun is loaded,” Todd Lowenstein, who helps oversee $17.2 billion at Highmark, said in a telephone interview from Los Angeles. Flowserve and McCormick are “extremely well positioned. He would be attracted to their competitive positioning and market share. So this is the time when I’d expect him to put money to work,” he said.

Buyback Plan

Buffett didn’t respond to a request for comment e-mailed to his assistant, Carrie Kizer.

Berkshire has preferred to use its profits to buy companies and securities issued by others. Since Buffett took control of the failing textile manufacturer in 1965, “not a dime of cash” has been spent on buybacks or dividends, the billionaire told investors in his annual letter published in February.

While Buffett began buying his own stock and plowing $4 billion into common shares of other companies last quarter, Berkshire may still need acquisitions to help reduce the record $47.9 billion in cash it held at the end of June, according to Mark Bronzo, who helps manage $26 billion at Security Global Investors in Irvington, New York.

“It definitely makes sense to expect a firm like Berkshire to make acquisitions,” he said in a telephone interview.

Buffett Criteria

Buffett prefers “simple” businesses with pretax profit exceeding $75 million, “consistent” earning power and “good” returns on equity while employing little or no debt, according to his report. He has shifted his takeover strategy as Berkshire has grown to focus on “capital intensive businesses,” such as power producers and railroads, which require consistent investment in infrastructure and equipment.

There are 31 companies in developed and emerging markets with equity values from $3 billion to $20 billion that trade at a discount of more than 30 percent to their 10-year average price-book ratios; averaged a return on invested capital in the past five years that exceeds 10 percent; had capital expenses accounting for at least 10 percent of their net fixed assets; generated profit growth in the past five years that ranked in the top 50 percent; and sold for a lower price-earnings ratio over that span than the MSCI World (MXWO) Index or MSCI Emerging Markets Index median, data compiled by Bloomberg show.

So-called value investors such as Buffett also purchase companies when their stock prices are low by historical standards when compared with earnings.

Empire Building

Berkshire, which has a market value of $174 billion, fell to $100,000 a share for the first time in almost two years on Sept. 22. Four days later, it announced the buyback.

The company, which employs more than 250,000 people, owns insurers including Geico and General Re, as well as more than 60 other companies ranging from food distributor McLane Co. and clothing-maker Fruit of the Loom to toolmaker Iscar Metalworking Cos. and utility MidAmerican Energy Holdings Co.

Last month, Berkshire also completed its purchase of Lubrizol, the company’s second-largest since 2006. Wickliffe, Ohio-based Lubrizol, the world’s largest producer of lubricant additives, was one of the American companies that met the acquisition criteria when its takeover was announced, according to data compiled by Bloomberg.

This time around, U.S. companies accounted for almost half the total that passed, data compiled by Bloomberg show.
Flowserve of Irving, Texas, is valued at 1.66 times its assets minus liabilities, versus its average multiple of 2.64 times its book value in the past decade.

Valves, Pumps and Seals

Net income has climbed 87 percent in the past five years and analysts estimate earnings will jump to a record next year, the data show. The stock has slumped 41 percent this year, leaving it with a market value of less than $4 billion.

While Flowserve faces competition from other makers of valves, pumps and seals, the company has an advantage because it’s the only one that produces all three, said Hamzah Mazari, a New York-based analyst for Credit Suisse Group AG. He estimates Flowserve’s stock will more than double to $150 within a year.

Demand for water and petroleum-related products is unlikely to diminish over time, which also benefits Flowserve because it specializes in pumping and filtration services, according to Harry Rady, chief executive officer of Rady Asset Management LLC, a La Jolla, California-based hedge fund firm.

“It’s definitely a Buffett-type of stock,” Rady, who oversees $260 million, said in a telephone interview. “Buffett’s looking for long-term secular trends in a business that’s got a defensible position. Anything related to water has long-term secular trends at its back basically forever.”

Allspice to Tumeric 

Steve Boone, a spokesman at Flowserve, didn’t immediately respond to telephone or e-mail messages seeking comment.

McCormick, which sells everything from allspice to marjoram leaves and turmeric, is the largest seller of spices in the U.S., according to data compiled by Bloomberg.

The company, which has boosted per-share earnings for nine straight years and beaten analysts’ estimates in the past six, has a “dominant brand” of spices that is more appealing to chefs than those of its store-brand competitors, according to Tim Ghriskey, who oversees $2 billion as chief investment officer of Solaris Group LLC in Bedford Hills, New York.

Annual sales at Sparks, Maryland-based McCormick, which currently trades at a 36 percent discount to its average price- book ratio over the past decade, have only declined twice since 1988, according to data compiled by Bloomberg.

‘High Barriers’

“Buffett loves market leaders and often somewhat simple businesses,” Ghriskey said in a telephone interview. McCormick has a “high barrier to entry. The stock is particularly inexpensive. It would certainly, at least on the surface, seem to make a lot of sense for Buffett,” he said.

Lori Robinson, a spokeswoman for McCormick, said it doesn’t comment on takeover speculation.

Joy Global Inc. (JOYG) is another industrial company that Buffett may find attractive as he bets that the U.S. economy will skirt a recession, according to Dan Veru, chief investment officer at Fort Lee, New Jersey-based Palisade Capital Management LLC, which manages $3.4 billion.

Milwaukee-based Joy Global, which has slumped 30 percent this year as concern over a global slowdown pushed the Standard & Poor’s 500 Index to within 1 percent of a so-called bear market, now trades at 11.2 times earnings. That’s 24 percent lower than its five-year average of 14.8 times.

The company, which competes mainly with Caterpillar Inc. (CAT) for sales in mining equipment, makes sense for Buffett because he usually favors industries with only two or three major competitors, according to Highmark’s Lowenstein.

Buying Opportunity

As one of the largest independent makers of underground mining equipment, Joy Global had an average return on invested capital approaching 50 percent over the past five years, data compiled by Bloomberg show. That’s the highest among companies in the industrialized world that met Buffett’s criteria.

Sandy McKenzie of Joy Global’s investor relations department said no one was immediately available to comment.

“He’s really playing on a global recovery and certainly Joy Global would be one of the names that would fit,” Palisade Capital’s Veru said in a telephone interview. “Buffett likes to be opportunistic. A guy like Buffett is going to take advantage of that fear” of a slowdown in economic growth, he said.

Originally posted on - http://www.bloomberg.com/news/2011-10-04/flowserve-converges-with-mccormick-as-targets-using-buffett-math-real-m-a.html?cmpid=msnmoney&industry=IND_ENERGY&isub=

8/16/2011
Geordy Wang

Hey, it looks like the market is starting to bounce ba…nope, it’s down again. Whenever your entire portfolio gets subjected to a brutal bear market take down, like the one we’ve witnessed in the past couple of weeks, it sometimes helps to look to the bright side.

Often that can be hard to find, especially when all you’re seeing is red. Something Rady Asset Management CEO Harry Rady said in an interview with Breakout struck a chord with me. Rady, in comparing the recent market tumble with the plunge during the financial crisis, said,

In 2008 and 2009 I believe we lost a whole generation of investors, and those that we didn’t lose, just got slaughtered again. So I think it’s going to be tough sledding ahead.

One of the most basic principles in psychology is the concept of positive punishment. What the principle essentially states is that when an action is met with an unpleasant consequence, we become conditioned against that action in the future. In investing, this principle takes effect when investors lose huge sums of capital in the stock market during a market crash. Many such investors may swear off investing for good and take their money out of the market permanently.

Think about the investor who was long in big banks like U.S. Bancorp (USB) and Wells Fargo (WFC) during the financial crisis. He sees his capital get wiped out by more than half, decides eventually that enough is enough, pulls his remaining funds out, only to watch the market come roaring back in 2009. Would you blame him for cursing whoever first came up with the idea of a public offering and abandoning the market forever?

How does this benefit you, the investor who decides to stay in the game? Well, stocks obey the economic law of supply and demand just like anything else. If there are a fixed number of companies that are publicly traded, which are divided into a fixed number of shares of ownership, then the less investors there are bidding for those shares, the lower the prices. When we compare today’s market valuations with stock prices in the days of Benjamin Graham, it becomes evident how much more expensive stocks are in modern times. This is in large part because the pool of investors in the market is so much bigger today than it was then.

When the number of investors in the market grows larger, it becomes proportionally harder to outperform. Even legendary investor Warren Buffett said that it’s much harder for him to buy undervalued, quality companies today than it used to be, because there are so many more investors competing for the same stocks and they’re all so much better educated. However, the flip side is also true: the less investors there are in the market, the easier it is to make money.

When one investor loses the stomach to stay in the market, it benefits all of his brethren who remain behind. Note that I’m not talking about bears and short sellers – those guys are sometimes the smartest people in the room. I’m talking about investors who write off the market permanently. The worse the market crash, the more the investor population is trimmed away, which has the macro effect of driving down stock prices for those that remain invested and increasing their potential returns. If you want to look for the silver lining in every market crash, there it is.

Dividend investors tend to benefit from this phenomenon a lot more than growth investors. When you buy a stock like Sirius XM (SIRI), Netflix (NFLX), or SodaStream (SODA), you’re not looking for the company to return profits to you, you’re hoping to sell it to the next guy at a higher price. When there are less investors in the market buying and selling, it means you can bag the stock at a relative discount, but it also means it’s more difficult to pass it off at a premium.

Dividend investors, on the other hand, can afford to be more cavalier when the market value of their portfolio drops, as long as the quarterly income they receive from it remains untouched. When you own a dividend champion like Altria (MO), Annaly Capital Management (NLY), or Kraft Foods (KFT), a reduction in market value always carries at least one benefit for you: driving up your yield. As such, dividend investors almost always benefit from a downsizing in the overall investor population. One may be the loneliest number, but dividend investors would have it no other way.

As originally published  on http://seekingalpha.com/article/287660-the-benefits-of-dividend-investing-in-an-ugly-market

Originally posted on Reuters
by Knut Engelmann

Slow economic growth, skittish trading clients and regulatory worries that just won’t go away — the second quarter has been a punishing one for Wall Street’s top investment banks and their shareholders.

With revenue from trading bonds, currencies and commodities set to have shrunk by a third or more from the first three months of the year, analysts have rushed to downgrade their second-quarter forecasts for big broker/dealer firms such as Goldman Sachs Group (GS.N) and Morgan Stanley (MS.N).

Of 22 analysts providing quarterly coverage for Goldman Sachs, 15 have slashed their earnings per share forecasts since the beginning of June, some by as much as half, according to Thomson Reuters I/B/E/S. Over the same time, half of the 24 analysts covering Morgan Stanley have cut their EPS forecasts.

Average expectations for Goldman’s EPS are $2.89 for the quarter. That’s below the $4.38 the bank earned in the prior quarter, a number that fell to $1.56 after deducting the cost of buying back a stake held by investor Warren Buffett. In the second quarter a year ago, the bank reported EPS of $2.75 before one-time items that cut that number to $0.78.

For Morgan Stanley, average EPS expectations have fallen to 52 cents for the second quarter, compared to 50 cents in the previous three-month period and down from 80 cents a year ago.

Goldman Sachs is due to report interim results on July 19, with Morgan Stanley to follow later the same week.

“I wouldn’t be surprised if the second-quarter numbers are on the weak side,” said Chris Mittleman, chief investment officer at Mittleman Brothers, which manages $75 million in client assets. He says he has stayed clear of Morgan’s and Goldman’s stock because their earnings are too volatile and too dependent on the ups and down of their trading businesses.

Trading, which at Goldman typically contributes more than half of its revenue, has been sidelined by concerns over the pace of recovery in the United States and other big economies, as well as Europe’s sovereign debt crisis. Curbs on trading for the bank’s own account also keep a lid on revenue.

“There’s been a lack of engagement, most of it having to do with the increase in macro headwinds,” said Barclays Capital analyst Roger Freeman, who has long held a “neutral” rating on Goldman Sachs and Morgan Stanley, but says there is value in the stocks for investors willing to wait longer for it.

Commodities, which were good for most banks at the beginning of the year, likely lowered earnings in the April-June period. Oil prices alone fell more than 10 percent in the quarter.

“We believe commodities trading was particularly challenging during the second quarter as the sharp and persistent decline in asset prices may have hurt dealers with long inventory positions,” Credit Suisse analyst Howard Chen told clients in a note.

Investment banking activity was mixed, with a strong run of initial public offerings boosting fee income. Completed mergers and acquisitions were higher than in the prior quarter, but the volume of announced deals fell from the first quarter for the first time in more than a year, Thomson Reuters data show.

CLOUDS OVER WALL STREET

The biggest cloud hanging over Wall Street remains bankers’ and investors’ uncertainty over the extent and long-term effect of major financial reforms being hashed out by regulators after the meltdown of the global financial system in 2008.

The rules are being written, and policymakers have yet to figure out how to curtail the excessive risk taking that is widely seen as contributing to the financial crisis. Already, banks such as Morgan Stanley and Goldman have pared back on trading for their own accounts, on which they staked big parts of their balance sheets in the past.

New global rules on capital mean that banks will have to keep bigger reserves to guard against trading losses, making it even tougher to earn the kind of double-digit returns on equity that investors have come to love.

“Valuations are pretty compelling right now, but there are some issues that need to be resolved before the values can be unleashed, prime among them proprietary trading,” said Keith Davis, a buyside analyst at Washington, D.C.-based firm Farr, Miller & Washington, which manages $730 million in assets.

Goldman’s return on equity, a key measure of profitability, fell to 12 percent at the end of last year from 23 percent at the end of 2009. Before the crisis, Goldman reported returns on equity as high as 33 percent in 2006 and 2007.

“People aren’t convinced that the companies will be able to earn as high a return on equity going forward,” said Mittleman.

EXTRAORDINARILY CHEAP TRAPS

Goldman Sachs shares, down 20 percent this year, last week hit a two-year low. Morgan Stanley shares are down 15 percent. That contrasts with the Dow Jones Industrial Average .DJI, which is up 8.5 percent since the start of 2011.

“Right now the financials are value traps,” said Harry Rady of Rady Asset Management in San Diego, California, which manages $270 million. Rady says it is too early to buy Goldman or Morgan Stanley despite their “extraordinary” low values.

Meanwhile, banks are cutting jobs and other costs to boost their bottom lines. Goldman, for example, hopes to slash $1 billion in non-compensation costs in the next 12 months, and plans 230 layoffs over the next few months. The axe is falling elsewhere on Wall Street too.

Still, some analysts think banks are worth a second look.

“Time to make some money,” the often pessimistic Richard Bove, a Rochdale Securities analyst, told clients last week.

He cited an improvement in the Greek sovereign crisis, Bank of America’s (BAC.N) move to settle mortgage-related litigation and a recent uptick in commodity prices among factors that could spur a summer rally in bank stocks. Bove rates Morgan Stanley a “buy,” but has Goldman stock on a “sell” rating.

His conclusion: “Buy a bank stock today.”

Original article - http://www.reuters.com/article/2011/07/06/wallstreet-preview-idUSN1E7640GW20110706

05/03/2011
Investor’s Business Daily
Ho, Trang

Mutual fund investors enjoyed handsome returns in April as a wave of stellar corporate earnings reports powered the market to new highs despite a torrent of bad news.

Weighing on the market were war in the Middle East, Japan’s nuclear crisis, a free-falling dollar, rising oil prices, the Fed ending its stimulus program and U.S. GDP rising at 1.8% annualized — less than expected.

Bond funds were also broadly higher, helped by stable interest rates, steady if slow U.S. economic improvement and flights to safety in U.S. assets.

Not every May is bad, but any further advance this month would go against the norm. The month marks the beginning of the Dow and S&P 500′s historically “worst six months” of the year, according to Yale and Jeffrey Hirsch of the Stock Trader’s Almanac.

“The list of potential risks does continue to grow, including high energy prices, changing inflationary expectations and U.S. fiscal problems,” Bob Doll, chief equity strategist at BlackRock, wrote in a client note.

“And stocks have come quite far quite fast, suggesting that some sort of near-term consolidation may be coming,” he added.

Small caps, which climbed to a record high, helped push the average stock mutual fund up 2.63% in April and 8.94% year to date.

Small-cap growth and midcap growth funds, both rose 3.90%. Large-cap growth funds, +2.82%, climbed to their highest level in nearly three years. But large caps failed to take leadership as many analysts had expected on cheap valuations.

More Room To Roam

Small and midcaps are expected to continue outpacing large caps because of their ability to grow earnings at a faster clip. They also make for appealing takeover targets at a time when corporate America has lots of cash on the balance sheet and with interest rates likely to remain low for the foreseeable future.

“I think we’re at the beginning of the largest M&A (merger and acquisition) boom that we’ve ever seen,” said fund manager Harry Rady. Rady Contrarian Long/Short has risen 7% year to date and 5% in the trailing 12 months. Rady Opportunistic Value has climbed 8% and 11.6% in those periods.

U.S. companies have “more than a trillion dollars on their balance sheets and so they have to make acquisitions to justify the multiples they’re trading at,” he said.

They’re also having difficulties growing their sales, and profits will have to resort to growing by buying out smaller companies. More than 10 of his portfolio holdings have been acquired in the past year.

Rady buys companies he believes are potential takeover targets and trading far below their intrinsic value. They include BlackBerry maker Research In Motion (RIMM) and cloud-computing giant F5 Networks (FFIV).

“The small and midcaps seem more stretched in valuations, but they can grow earnings at a faster rate too,” said Brian Lazorishak. He co-manages Chase Mid Cap Growth and is a senior quantitative analyst at Chase Investment Counsel, which oversees $1.4 billion in assets. “But at the same time, we can find plenty of stocks that have attractive valuations too.”

Lazorishak has overweighted his portfolio in technology stocks, which account for more than 30% of assets, including CommVault Systems (CVLT), Fiserv (FISV), Informatica (INFA), Teradata (TDC), Tibco Software (TIBX) and VeriFone Systems (PAY).

“They’re all benefiting from improved technology spending both here and overseas,” said Lazorishak. “They continue to have strong earnings momentum and strong earnings growth quarter after quarter.”

As a bottom-up stock picker and as a growth-at-a-reasonable-price (GARP) investor, he pays little attention to macro economic trends. He screens for companies that have at least 10% historical earnings growth annualized for five years and then assesses potential earnings and sales growth drivers, risks, valuation and technical trends. His fund has returned 18% year to date and 36% in the trailing year.

Global health care funds outpaced all sector funds, rising 6.79% in April, pushing their year-to-date return to 14.77%. Another defensive sector, consumer goods funds, rose 5.39% for the month and 7.71% so far this year.

“The knee-jerk reaction when the market goes down is people shift funds into those defensive areas,” said Lazorishak, referring to the market’s brief pullback during the second and third week of April. “Consumer staples have been a laggard, so there’s reversion to the mean there.”

Real estate funds climbed 5.32% in April and 11.93% year to date. Global real estate tagged along with 5.12% and 7.83%.

Lagging all other sectors last month were natural resources funds, up 0.36% and financial funds, up 0.71%.

Batting For The Cycle

Cyclical sectors with large overseas operations capitalizing on stronger emerging market demand, dollar weakness and high commodity prices are expected to post the best year-over-year gains, says Alec Young, equity strategist at Standard & Poor’s.

He recommends that investors overweight energy, industrials, basic materials, while underweighting consumer discretionary and utilities — the sectors dependent on domestic consumption.

With two-thirds of the S&P 500 companies having reported first-quarter results, nearly three in four (72%) have beaten consensus earnings estimates, with 70.9% exceeding top-line forecasts.

International funds eked out a gain despite the lingering economic shock from Japan’s earthquake, war in the Middle East and Europe’s credit crisis.

The average world stock fund gained 4.79% in April, outpacing U.S. stock funds. Europe was the best of the world regions, rising 7.43%. Pacific ex Japan funds followed with 4.84%. Emerging markets funds climbed 3.42%.

China funds gained 3.24%, while Latin America trailed with 2.01%. It’s still the 10-year leader, with an average annual return of 20.06%.

The worst-performing group in April, Japan funds, were still positive with a 1.99% gain.

Original Article - http://www.investors.com/NewsAndAnalysis/Article/570921/201105031801/Small-Caps-Lead-Mutual-Funds-To-Best-Month-Of-11.htm

04/12/2011
CNNMoney.com
La Monica, Paul

About this time a year ago, few people on Wall Street knew who Fabrice Tourre was. That was all about to change very quickly.

April 16, 2010: Goldman Sachs (GS, Fortune 500) is accused by the Securities and Exchange Commission of defrauding investors in a complex pool of mortgage securities known as Abacus. At the center of the charges was a trader who described himself as the “fabulous” Fab.

Tourre and others at Goldman were later dragged in front of Congress to explain themselves. How could we forget the marathon hearing that tested TV censors everywhere thanks to the repeated reading of an e-mail with a naughty, scatological reference by Sen. Carl Levin.

Flash forward to today. Goldman has recovered from the worst of this scandal, but it’s still wounded. The stock, which tumbled last spring and early summer before settling with the SEC for $550 million in July, is up 25% from its lows.

But shares are still about 12% below where they traded before the SEC allegations came to light. Other big banks are still lower than this time last year. However, the broader market has enjoyed a nice rally. The S&P 500 is up nearly 10%.

So where does Goldman go from here? The company arguably stands to benefit even more from the recent uptick in merger activity, initial public offerings and corporate debt sales than just about any other firm on Wall Street.

Is that already reflected in the stock price though? Goldman Sachs currently trades at 12 times 2011 earnings estimates. That may sound inexpensive. But rivals Morgan Stanley (MS, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500) are all trading closer to 10 times this year’s profit forecasts.

Goldman also trades at a premium to its competitors on a price-to-book value ratio basis as well. Book value, which measures how much a company is worth after you subtract its liabilities from its assets, is a common yardstick to compare financial stocks.

Goldman’s price-to-book ratio is about 1.3. JPMorgan is trading around 1.1 times book while Morgan Stanley, BofA and Citi are each trading below book value.

‘Big ugly’ banks left out of market rally

Of course, Goldman has always enjoyed a premium valuation to its peers because of its reputation and leadership role among the blue blood investment banks. But does Goldman still deserve it?

Goldman may have settled with the SEC, but it looks as though investors still don’t completely trust the company. And Goldman continues to make headlines for all the wrong reasons.

Just today for example, there are some wondering if a negative call on commodity prices from Goldman — which up until now had been among the bigger commodity bulls on Wall Street — is turning out to be a self-fulfilling (and self-serving) prophecy.

Crude oil prices plummeted Tuesday, along with the price of gold, silver, corn, wheat and many other hot commodities.

There was also news Tuesday of a lawsuit filed against Goldman by the co-founders of chip company Marvell Technology (MRVL). Executives from Marvell claim that they were forced to sell shares of their company in 2008 due to what they allege was a fraudulent margin call.

It is obviously up to the legal system to decide who is right in this dispute. But the mere fact that Goldman is still being accused of shady practices just shows how risky it is to make bets on big Wall Street firms that, fairly or not, are often presumed guilty by the market.

“Goldman Sachs is likely dead money,” said Harry Rady, president and CEO of Rady Asset Management in San Diego. “The bad press isn’t reflective of the underlying fundamentals at the company. But the headlines are weighing on the stock.”

Bulls face first-quarter profit test

Rady said he sold his firm’s stake in Goldman for those reasons a few months ago. He also dumped Morgan Stanley, arguing that increased capital requirements will create a drag on both firms.

Bob Bacarella, manager of the Monetta Fund (MONTX) in Wheaton, Ill, said he also sold his stake in Goldman. He did so at the end of last year. I actually spoke to Bacarella shortly after the Abacus scandal last April, and at that time he was still bullish on Goldman. So what’s changed?

He said it’s now clear that the fraud charges against Goldman and concerns about how tougher financial regulation (much of which was crafted in the wake of Abacus) will impact the firm, will be an overhang on the stock for a while.

“I still like Goldman Sachs for the long-term,” he said. “But it’s out of favor. It’s not something I’d chase right now.”

Original Article – http://money.cnn.com/2011/04/12/news/companies/thebuzz/index.htm?source=yahoo_quote

04/15/2011
TheStreet.com
Holmes, Robert

Bank of America’s(BAC) first-quarter earnings results fell short of analysts’ estimates due to mortgage woes. Investment managers aren’t giving up on the U.S. bank stock yet.

Concerns over repurchases of soured mortgages, known as putbacks, have dogged Bank of America shares. While the S&P 500 has climbed more than 4% this year, Bank of America shares have underperformed, falling 1.6%. Today, the stock dropped more than 1% to $13.13. Bank of America reported a quarterly profit of 17 cents a share, falling well short of Wall Street’s average target of 27 cents a share.

Fund managers such as Harry Rady say Bank of America is only treading water, held back by the continued uncertainty around the bank’s credit portfolio and mortgage putbacks. Rady, who owns Bank of America in the Rady Opportunistic Value(ROVYX) along with several other funds, says investors should look past the quarterly numbers and understand Bank of America’s real value as a long-term holding.

“The risk/reward profile of Bank of America is attractive,” Rady said by phone Thursday from his San Diego office. “I would look at it as a compressed spring. If they can get this mortgage putback issue behind them, that spring could rocket this stock into the high $20s. Until that happens, I would suggest that it trades between $10 and $20.”

During the first quarter, the mortgage pains were significant for the bank. Bank of America was forced to set aside $1 billion to cover possible requests to repurchase mortgage securities. That’s nearly double the $526 million in the same quarter a year earlier, showing that the cloud of putbacks may continue to hang over Bank of America’s shares.

However, most investors should be well aware of Bank of America’s putback risk. Instead, Rady argues that investors would be wise to buy an institution for Bank of America at tangible book value, which is the estimate of the bank at liquidation values, because of how attractive the franchise name is once the bank can put its issues behind it.

“Any time you get an opportunity to buy a franchise — something with the name ‘Bank of America’ — for tangible book value, that’s like buying a business for the cost of the tables and chairs,” he says. “The downside is protected by the fact that we’re buying it at tangible book value. The upside is that when they fix the credit problems, the putback issues and the economy recovers, they’ll be rewarded for this valuable, irreplaceable franchise that exists.”

Robert Pavlik, chief market strategist at Banyan Partners, is also a fan of Bank of America over the long term. Pavlik says he personally owns shares of Bank of America, understanding that it will take time for the bank to clean up the mortgage foreclosure situation.

“I could probably make better money now if I traded it,” Pavlik acknowledges, “but this is an investment to put away in an IRA account and not look at it every day. Five years down the road, you’ll see these stocks trading higher and you’ll be happy with the return. If we didn’t have this issue surrounding the way they process foreclosures, people would be all over this stock.”

One reason Pavlik finds Bank of America attractive over a longer horizon is the expectations of rising interest rates. “The spreads that these companies are going to be able to capture by lending out money at a higher rate and borrowing at a lower rate,” he says. “That’s the place you want to be.”

Rady agrees, explaining that if interest rates rise, the yield curve would remain steep and allow banks to continue to capitalize on the spread between lending and borrowing.

“For banks, it’s just a spread game,” he says. “It doesn’t really matter what the actual numbers are as long as the spreads exist. In a rising rate environment, the yield curve is anticipating rates continuing to rise, and that means a steep yield curve. As long as the yield curve steep, it doesn’t matter how much rates rise. It certainly matters to the economy, but the bigger issues are credit and the mortgage putback issue.”

Other money managers are even more bullish on Bank of America’s prospects. Cliff Hoover, manager of the Dreman High Opportunity Fund(DRLRX), which owns a stake in Bank of America, says the stock is one of the most undervalued financials he has in the portfolio.

“Bank of America’s retail and small-business footprint is second to none,” Hoover says. “You’re starting to see some commercial lending growth in the U.S. There are improved credit metrics. Capital is strong within Bank of America and they’re building excess capital.”

Hoover says that individual investors are waiting for a “magic catalyst” before they step in to buy Bank of America shares. He says investors would be better off looking at normalized earnings for the bank the way professional investors would. Hoover points out that banks generated massive return on equity (ROE) by using leverage leading up the financial crisis. Given the corrective period bank stocks endured, investors now need to normalize earnings, he says.

“To rationalize these banks going forward, we valued banks back to their traditional ROE levels, realizing that the leverage will go down,” Hoover says. “The bedrock of our thesis is that Bank of America can easily generate a normalized earnings per share of about $3. With a price-to-earnings multiple of 10 on that, you get a $30 stock. That’s not a really aggressive number.”

In the wake of JPMorgan Chase’s(JPM) lower first-quarter revenue and with questions of how Citigroup(C) will fare when it reports quarterly results on Monday, money managers say Bank of America might be worth looking at today as the stock moves on the report.

“At tangible book value, where it’s trading right now, would it be logical to buy half a position at tangible book and if it gets cheaper they fill it out? Yeah, that’s a logical strategy,” Rady says. “It wouldn’t be crazy to buy a full position. At these prices, any strategy is reasonable.”

Original Article - http://www.thestreet.com/story/11083809/1/bank-of-america-still-a-fund-manager-favorite.html?cm_ven=tscmarketwatch&puc=tscmarketwatch

04/19/2011
Bloomberg BusinessWeek
Lachapelle, Tara

Johnson & Johnson, reeling from more than 50 drug and device recalls since the start of 2010, is trying to recapture its younger self by digesting Synthes Inc.

Synthes, the largest maker of devices to treat bone fractures and trauma, has an operating margin of 35 percent, the highest among medical-products makers including J&J with market values of more than $5 billion, according to data compiled by Bloomberg. Synthes has increased the amount of net income generated per dollar of revenue for seven straight years to the best in the industry, while J&J’s profit margin declined in two of the past four years, the data show.

J&J, with almost $28 billion in cash at its disposal, is in talks to acquire Synthes, a $19.4-billion company with only $98 million in debt, as it seeks to revive its image after product recalls and lawsuits over failed artificial hips. The world’s second-biggest maker of health-care products would gain a device company with almost 50 percent of the trauma market. Synthes’s operating margins are 45 percent higher than Smith & Nephew Plc, which investors had speculated was a target for J&J.

“J&J had a severe challenge to its premier reputation given all the recalls,” said Michael Holland, who oversees more than $4 billion, including J&J shares, as chairman of Holland & Co. in New York. “This relatively bold step to buy a premier company is a significant move to regain their luster.”

Share Gains

J&J’s shares rose as much as 1 percent yesterday before closing down 0.2 percent at $60.46 on the New York Stock Exchange. That was still the third-best performance in the Dow Jones Industrial Average, which slid 1.1 percent as Standard & Poor’s cut its outlook on U.S. long-term debt to “negative.”

Synthes advanced 5.6 percent to 146.5 Swiss francs in Zurich yesterday to give it a market value of 17.4 billion Swiss francs ($19.4 billion). The West Chester, Pennsylvania-based company said in a statement that it’s in talks with J&J about a possible combination. Synthes doesn’t intend to provide more information until a definitive agreement is reached or talks are terminated, it said.

William Price, a spokesman for New Brunswick, New Jersey- based J&J, declined to comment in an e-mail.

Shares of J&J climbed 2.2 percent to $61.80 in pre-market trading at 8:26 a.m. New York time today after the company reported first-quarter earnings that beat the average estimate from analysts and raised its full-year forecast. Synthes gained 1.9 percent to 149.3 francs.

‘Change the Focus’

J&J is considering an acquisition of Synthes after product recalls cost the company $900 million in sales last year. J&J removed almost 200 million packages of Tylenol, Motrin and other over-the-counter medications tainted by nauseating odors or improper ingredients. Its DePuy unit has also withdrawn 93,000 hip implants that failed at higher-than-expected rates, forcing repeat surgeries.

After the company’s McNeil Consumer Healthcare unit was charged on March 10 with violating U.S. law, the Food & Drug Administration expanded oversight of three manufacturing plants for at least five years. The settlement doesn’t preclude future criminal charges, the agency said at the time.

“They want to change the focus of the conversation,” said Erik Gordon, a University of Michigan business professor in Ann Arbor who studies the biomedical industry. J&J is “probably thinking, ‘Let’s have the conversation be the potential upside of something,’” he said.

While Synthes and J&J may “fit together,” J&J should be focused on fixing its in-house recall problems, he said.

‘Great Margins’

Synthes had an operating margin of 35 percent in 2010, the best among 17 medical-product companies with market values greater than $5 billion, including J&J at 27 percent, data compiled by Bloomberg show. The company’s efficiency turning revenue into operating income also topped rivals specializing in medical instruments such as Minneapolis-based Medtronic Inc., St. Jude Medical Inc. in St. Paul, Minnesota, and Boston Scientific Corp. in Natick, Massachusetts.

Synthes improved its profit margin to 24.6 percent last year from 6.1 percent in 2003, the data show.

“They have great margins,” said Michael Liss, a Kansas City, Missouri-based portfolio manager at American Century Investments, which oversees $109 billion and owned about 7.8 million shares of J&J as of Dec. 31. “It only helps J&J’s margins overall.”

Synthes has attractive margins because it’s in the orthopedics market and has implemented efficiencies, Gilgian Eisner, a spokesman for the company in Solothurn, Switzerland, said yesterday.

Artificial Hips

J&J had looked at buying Smith & Nephew, Europe’s biggest marker of artificial hips and knees, a person familiar with the plan who declined to be identified because the discussions were private said in January. The U.K. device maker had a 16 percent profit margin in the 2010 calendar year. The London-based company declined 3 percent yesterday, the most since January, after Synthes confirmed it was in talks with J&J.

An acquisition of Synthes would push J&J’s share of the $5.5 billion orthopedic trauma market to 54 percent from about 5 percent, and boost earnings between 4 percent and 5 percent in each of the next three years, Larry Biegelsen, a Wells Fargo & Co. analyst in New York, said in a note to clients yesterday.

The trauma market will grow faster than replacement hips and knees, according to Biegelsen.

J&J’s share of the $9 billion spinal-care market would almost double, he said. The company may have to divest some of Synthes’s spine business, according to Lisa Bedell Clive, a London-based analyst with Sanford C. Bernstein & Co.

‘Called Into Question’

Prices for Synthes’s trauma devices may succumb to the pressure that has narrowed margins for other medical devices, according to Michael Weinstein, a JPMorgan Chase & Co. analyst in New York.

The sustainability of Synthes’s profits “has been and should be called into question,” he wrote in a note yesterday.

Synthes’s exclusive arrangement with the Swiss AO Foundation may draw antitrust scrutiny from U.S. regulators, Bernstein’s Clive said. The non-profit teaches courses for surgeons using only Synthes products, leading to many becoming Synthes customers, she said.

Like J&J, Synthes has also grappled with product recalls. After reports that its Synex II Central Body components had failed in six people, leading to pain and loss of height for some, Synthes recalled the spinal implants in 2009.

Credit Ratings

The company was also ordered to sell its Norian unit, which pleaded guilty in November to one felony and 110 misdemeanor counts for conducting an unauthorized trial of its bone-mending cement products. Three patients died, according to the U.S. Justice Department.

J&J built up $19.4 billion in cash and near cash items and $8.3 billion in short-term investments as of the end of last year that could be tapped for acquisitions, compared with $16.8 billion in total debt, according to data compiled by Bloomberg.

The maker of health-care products is one of only four U.S. companies to have the top credit rating from both Standard & Poor’s and Moody’s Investors Service. Irving, Texas-based Exxon Mobil Corp.; Microsoft Corp. of Redmond, Washington; and Automatic Data Processing Inc. in Roseland, New Jersey, are the others, data compiled by Bloomberg show.

J&J is also ranked AAA in Bloomberg’s Company Credit Ratings, which analyze borrowers based on indebtedness, profitability and other financial ratios. Even if J&J added long-term debt equal to the current market value of Synthes, it would still have a rating of A2L, the fourth-highest investment grade level. J&J’s combined cash and short-term investments outstrip the market capitalization of Synthes by about $8.2 billion, the data show.

Biggest Deal

Synthes, which is not rated by S&P or Moody’s, had total debt of $98.4 million at the end of last year, compared with $736.6 million in cash and near-cash items and $1.25 billion in short-term investments, data compiled by Bloomberg show.

An acquisition of Synthes for about $20 billion would be the biggest deal in J&J’s 125-year history, surpassing the $16.6 billion purchase of New York-based Pfizer Inc.’s consumer health care business in 2006. Pfizer is the world’s largest maker of medical products by sales.

“J&J is what it is. It’s a big powerhouse,” said Harry Rady, who oversees $270 million as chief executive officer of Rady Asset Management LLC, a hedge fund in La Jolla, California. “They could choose to allocate resources to fight all these small battles, or they could make a transformational acquisition like this to really change the face of the company.”

Overall, there have been 7,336 deals announced globally this year, totaling $713.1 billion, a 29 percent increase from the $553.3 billion in the same period in 2010, according to data compiled by Bloomberg.

Original Article - http://www.bloomberg.com/news/2011-04-19/j-j-synthes-merger-obscures-product-recalls-in-instant-makeover-real-m-a.html?cmpid=yhoo

04/27/2011
U.S. News & World Report
Baden, Benjamin

Professional managers use it as a short-term trading opportunity. Should you?

The market has been on a fairly steady upward trend this year, except for a stumble in mid-March following the devastating earthquake and ensuing tsunami in Japan. So far this year, the S&P 500 has returned about 7 percent, and the Dow Jones Industrial Average is up almost 9 percent. That’s likely a reason many investors have become complacent, which is reflected in one of the market’s most closely watched indicators, the Chicago Board Options Exchange Volatility Index, or VIX for short.

The VIX uses options prices to measure expected volatility in the S&P 500 over a 30-day period. It’s often referred to as the “fear gauge” because it measures how fearful or complacent investors are at any given time. Professional money managers often use the VIX as a hedge against volatility because the VIX generally moves in the opposite direction of the S&P 500. Investors can follow the VIX on the Chicago Board Options Exchange website.

This year, the VIX peaked around 31 in March after the earthquake in Japan, but it recently hit lows not seen since the last bull market in mid-2007. The VIX closed at 14.69 on April 21, the lowest level since July 2007, according to TrimTabs Investment Research. Some experts say that low number indicates that investors have become far too complacent in a market that faces many challenges, including higher oil prices, unrest in the Middle East, and growing inflation concerns globally.

“The market has moved up almost every day, and it’s very easy to get lulled into that complacency,” says Harry Rady, CEO of Rady Asset Management, a San Diego, Calif.-based investment management firm. “But that’s the time when you want to have your guard up, because the market has a way of chewing investors up and spitting them out when they’ve been lulled to sleep.”

Rady says options are currently cheap, so investors should take advantage. “I would argue that the risks and the potential for geopolitical economic shocks are significantly greater than 2007,” he says. Therefore, he expects an uptick in the VIX in the near future. He uses exchange-traded notes, including iPath S&P 500 VIX Short-Term Futures (symbol VXX), to invest in the movements of the VIX. This exchange-traded note, which is a complex debt security that trades like an exchange-traded fund, tracks the S&P 500 VIX Short-Term Futures Total Return Index. It usually goes up or down about half as much as the VIX over a given time period, Rady says.

It’s important to read the VIX numbers in context. Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research, says during the last bull market, which lasted from roughly mid-2004 through mid-2007, the VIX trended in the 10-to-15 range. “During the last bull market we saw, a VIX of 15 was actually high,” he says. Detrick says he’s currently bullish on the market and expects the VIX to continue to fall further, closer to 10.

While it may be beneficial to follow the VIX index to get a read on the level of fear in the markets, it may have limited appeal to individual investors. For starters, experts agree that investing directly in the VIX through exchange-traded notes is only for the most experienced investors. (Currently, there are no exchange-traded funds that invest directly in the VIX.) “Any way you slice it, this isn’t a security that can be bought and put away,” Rady says. “It has to be traded.”

Christian Magoon, CEO of asset management consultant firm Magoon Capital, argues that investors only benefit in times of chaos in the markets. “If you look at the overarching history of the equity markets, there has been extreme events, whether it’s a 9/11 or the Japanese sell-off … but the market eventually always recovers,” he says. Spikes in the VIX are usually short in duration, and they generally don’t affect your investments over the long term.

Still, it may be useful for investors to follow the movements in the VIX because they can be a contrarian indicator. Magoon says investors should use the VIX like meteorologists use a barometer for predicting the weather. “It’s one of the vital signs of the market that gives you a look into the psychology of the market,” he says.

Investors can follow the VIX just like they can follow investor sentiment surveys, like the one that American Association of Individual Investors releases each week. When the VIX is low relative to historical standards, it may be a warning sign that a sell-off is near, but most experts say it’s probably not in your best interests to try to time those spikes.

Original Article – http://money.usnews.com/money/personal-finance/mutual-funds/articles/2011/04/27/what-investors-can-learn-from-the-vix

Originally published on Reuters
by Dhanya Skariachan
April 7, 2011

NEW YORK, April 6 (Reuters) – Investing in top U.S. consumer electronics chain Best Buy is not for the faint of heart.

Best Buy’s shares have lost about a third of their value since November and touched a new 52-week low of $28.10 earlier this week. The stock has been in free fall since March 24, when Best Buy forecast a weaker-than-expected fiscal-year profit on sluggish demand for televisions.

The retailer also reported its third straight quarter of same-store sales declines as it lost bargain-hungry shoppers to online retailer Amazon.com Inc and mass merchants Target Corp and Wal-Mart Stores Inc.

Best Buy has admitted that consumers are showing little interest in newer technologies. Analysts also worry about its oversized stores and high overhead costs.

Still, the company has steady cash flow and its shares trade at 8.23 times forward earnings, smaller than the consumer electronics sector average of 10.41.

A GOOD TIME TO BUY?

Many investors say the retailer’s stock has hit a bottom.

“The pessimism about the company is overdone,” said Arnbjorn Ingimundarson, founder of Boston-based private investment firm Vitki LLC. “While it can be dangerous to try to pick a bottom, based on the last couple of days, it seems like the shares may have found a floor, for now.”

Some investors agreed.

“The stock is extraordinarily cheap and confidence in the management strategy is at an extraordinary low,” said Larry Haverty, associate portfolio manager of Gabelli Global Multimedia Trust, which owns 38,500 shares of Best Buy. “My hope is that it’s very close to a bottom. You very rarely see retail stocks sell at this cheap a price.”

There also have been no warning signs about the company’s profitability.

“There is nothing really in recent numbers to show that the profitability of the company is about to collapse. So basically I just see it as a very enticing valuation,” Ingimundarson said.

WHITE ELEPHANTS

But some investors, like Harry Rady, senior portfolio manager of San Diego-based Rady Asset Management, are waiting for the retailer’s shares to fall further before investing.

“At 25 bucks, Best Buy is a best buy,” Rady said.

Other investors have stayed away because of the questions surrounding Best Buy’s long-term prospects.

“While Best Buy is looking more and more attractive every day, we would still have questions of the long-term fundamentals of that business, the size of the store, and how to continue to manage the deflation we’re seeing across their products” said Matthew Lockridge, a buyside analyst at Westwood Holdings Group, which does not own Best Buy shares.

Industry experts urged Best Buy to shrink larger, older stores as many shoppers increasingly buy gadgets online.

“These (large format) stores were built for another era in consumer electronics retailing.” said Craig Johnson, president of Customer Growth Partners.”These stores, unless they are radically reconfigured or shrunk, are white elephants.”

“They either have to work out deals with the landlords to get out of these 10 to 20-year leases and shrink the square footage or they need to take that space and repurpose part of it,” Johnson said, suggesting options such as lending some space to a complementary retailer or subleasing space to carriers such as Verizon and AT&T.

Best Buy made one step in this direction in February by announcing plans to open more small format stores.

There has also been evidence of Best Buy losing market share in the past two quarters. But predicting the store’s future might be harder, said Wedbush Securities analyst Michael Pachter.

“We don’t really know for sure whether they will continue to lose share. It is probably prudent for most investors to just avoid having to make that call and find something else to invest in,” Pachter said.

Original Article: http://www.reuters.com/article/2011/04/07/us-bestbuy-idUSTRE73634B20110407

Originally Posted by Bloomberg
by Tara Lachapelle, Meg Tirrell and Rita Nazareth

Valeant Pharmaceuticals International Inc. (VRX)’s hostile bid for Cephalon Inc. (CEPH) is so low that Valeant could raise the offer by 15 percent and still pay less than any drug takeover in history.
The $73 a share proposal, which lifted Cephalon’s stock 28 percent to $75.44 yesterday, values the Frazer, Pennsylvania- based maker of sleep and cancer drugs at 5.3 times earnings before interest, taxes, depreciation and amortization, the lowest for any acquisition over $1 billion in the drug industry, according to data compiled by Bloomberg. The deal would still be the cheapest even if Valeant raised it to $84, the data show.

While Valeant’s Chief Executive Officer J. Michael Pearson said he wouldn’t get into a bidding contest for Cephalon, traders who wager on mergers and acquisitions are betting on a higher offer that Gabelli & Co. projects will reach at least $80 a share. Pearson says the Mississauga, Ontario-based company can profit from Cephalon, which faces competition from generic drugs and declining earnings, by cutting costs and selling money- losing assets. It would be the sixth deal by Pearson since September, during which time Valeant has surged 90 percent.

“There’s a general awareness this is a steal,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $55 billion. “The deal is as cheap as I’ve seen and public companies rarely trade anything close to that. There could be a higher bid, but it would seem like a reasonable deal at least for Valeant and what they’re looking to do.”
Relative Value

Pearson said on a conference call with investors and analysts yesterday that Valeant was “paying very fair value.”

Natalie de Vane, a spokeswoman at Cephalon, said in a telephone interview today that the company’s board of directors will meet “early next week to further the process of maximizing value for Cephalon shareholders.”

Cephalon’s shares climbed 0.9 percent to $76.08 on the Nasdaq Stock Market today. Valeant slipped 0.5 percent to $49.81 in New York Stock Exchange trading.

Valeant offered to buy Cephalon in a March 18 letter, which it disclosed in a statement on March 29. The $73 a share bid valued the transaction at $5.46 billion including net debt, data compiled by Bloomberg show. At that price, the deal is 5.3 times Cephalon’s trailing Ebitda of $1.04 billion last year, the data show. That’s 65 percent lower than the median 15.1 times for all drug takeovers over $1 billion.
The acquisition becomes more expensive based on future earnings as patent protection losses erode Cephalon’s sales. The deal is valued at 6.9 times analysts’ estimates for Ebitda next year and 8.1 times for 2013, the data show.

‘Significantly More’
Shares of Cephalon climbed 3.3 percent above Valeant’s bid yesterday, indicating that arbitragers are betting on a higher offer. The level above the bid was the second-highest of all U.S. deals over $1 billion announced this year, the data show.

Valeant could increase its offer by $11 a share, or 15 percent, to $84 apiece and still acquire Cephalon for less than the 6.1 times Ebitda that Little Chalfont, England-based Amersham Plc agreed to pay for Nycomed ASA in July 1997 — currently the cheapest drug takeover on record, the data show.
While shares of Cephalon had the biggest advance since 1995 yesterday, Valeant’s U.S.-traded shares also jumped 13 percent, indicating the company has room to increase its offer without the risk of overpaying, according to Harry Rady, who oversees $270 million as chief executive officer of Rady Asset Management LLC, a hedge fund based in La Jolla, California.

“Valeant could raise their price by significantly more than 10 percent and the market would still like it,” he said.

Narcolepsy Drug
Valeant made its offer public after Cephalon lost 19 percent of its value in the prior 12 months.
Cephalon fell on concern its experimental medicines wouldn’t make up for the loss of revenue after its top-selling Provigil drug loses patent protection in 2012, Timothy Chiang, an analyst at CRT Capital Group LLC in Stamford, Connecticut, said in a phone interview yesterday.

Valeant, which in January forecast higher earnings this year than analysts estimated, expects to wring at least $300 million in cost savings from Cephalon, CEO Pearson said on a conference call yesterday.
The company will probably reduce research and development spending and cut jobs, while gaining Cephalon’s “significant” cash flow from its existing drugs, CRT’s Chiang said.

About 40 percent of Cephalon’s $2.81 billion in revenue last year came from Provigil, which is used to treat narcolepsy, a chronic disorder characterized by daytime sleep attacks. Cephalon’s cash flow from operations doubled in the past three years to $782 million in 2010, data compiled by Bloomberg show.

Barbados Tax Treatment
Valeant may also boost Cephalon’s after-tax profit because its operations in Barbados give it a lower tax rate. Valeant pays about 8 percent in taxes, while Cephalon pays closer to 30 percent, CRT’s Chiang said.
“They have a bunch of synergies they can bring to bear in terms of taxes and cost-cutting that will allow them to pay the highest price for this asset,” Eric Schmidt, an analyst at Cowen & Co. in New York, said in a telephone interview.

Valeant plans to fund the deal with debt and anticipates using cash generated by Provigil and the potential sale of Cephalon assets in western Europe to pay it down, Pearson said.

To complete the takeover, Valeant will need to raise $6.7 billion in debt, Pearson said. The company had $400.4 million in cash and equivalents versus $3.6 billion in total debt at the end of 2010, data compiled by Bloomberg show.

‘The Knock’
Valeant is rated B2H, one level below investment grade, according to Bloomberg’s Company Credit Ratings, which analyze borrowers based on indebtedness, profitability and other financial ratios. Adding $6.7 billion to Valeant’s long-term debt to account for the acquisition would lower its rating by three levels to B1H, the data show.

The company will also assume responsibility for Cephalon’s $1.04 billion of total debt, data compiled by Bloomberg show.

Valeant’s $1 billion of 6.875 percent, 8-year notes tumbled 1.69 cents, or 1.7 percent, to 100.25 cents on the dollar yesterday to yield 6.83 percent, according to Bloomberg prices. The drop was the largest since the debt was issued in November.

“The knock on Valeant is: can they continue to sustainably make these kinds of acquisitions, because this is how they’re going to grow,” said CRT’s Chiang. “Rather than do it via an R&D pipeline, you’re going to continue to buy companies.”

The valuation that Valeant is offering for Cephalon makes the acquisition worth the risk, according to Kevin Kedra, an analyst at Gabelli in Rye, New York.

“There’s room for Valeant to raise their bid and still have it be very attractive to them,” he said.
Overall, there have been 6,029 deals announced globally this year, totaling $583.8 billion, a 19 percent increase from the $488.9 billion in the same period in 2010, according to data compiled by Bloomberg.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Meg Tirrell in New York at mtirrell@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.
To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Reg Gale at +1-212-617-2563 or rgale5@bloomberg.net.

Original Article: http://www.bloomberg.com/news/2011-03-31/valeant-offer-for-cephalon-still-lowest-drug-deal-with-15-boost-real-m-a.html