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Thursday, February 25, 2010

More Mixed Signals - Yet, Give Look At This.... WTW to Durable Goods to TAL and Shipping

We may soon update our "How's the Economy Doing" series, but here's a brief cross section of tidbits for consideration - negative, followed by positive:

Weight Watchers (WTW) reported results this afternoon and provided 2010 earnings guidance well below our and Wall Street expectations of around $2.80. More evidence that the consumer economy remains subdued and, in WTW's case, lower earnings expectations may now be compounded by a compressed earnings multiplier for a lower near-term share price. This is the triple whammy that also impacted Clean Harbors (CLH) yesterday: (1) Market disappointment, (2) lower analyst estimates, and (3) lower multiple (although CLH rallied today -- support for a quality business likely trading well below replacement cost).

A return to Y/Y growth for Weight Watchers in 2010 now appears a question mark, although part of the lower-than-expected earnings outlook is a result of planned investments (opex) to build the brand and accelerate future growth.

We prefer to own growing businesses since we believe in John Neff's view that growth usually keeps investors out of trouble. However, we are willing to own out of favor businesses that possess well-established franchises such as Weight Watchers and 1-800-Flowers.com (FLWS) at the right price. Negative/flat top-line performance for these companies may limit near-term upside, yet the Market has been especially perverse over past year. Sometimes, the Market pushed shares of companies with poor fundamentals materially higher, while seemingly keeping others in purgatory (or worse), illustrating the perils of near-term forecasting and investing (or trading). We think high quality "merchandise" (another favorite Neff term we've adopted) purchased at a low multiple will ultimately see better days and take a patient approach.

Commentary from Weight Watchers' release:
  • David Kirchhoff, President and Chief Executive Officer of the Company, said, "In light of the difficult economic environment, I am gratified that we delivered full year 2009 results well within our original earnings guidance. As I look forward, I expect 2010 to remain challenging. While we will continue to aggressively manage our operations to maximize near-term results, we will also continue to invest in initiatives to modernize our offerings to drive long-term growth in our meetings business."
  • The Company provided full year 2010 earnings guidance of between $2.25 and $2.50 per fully diluted share.
Other news today from a NYTs article: Durable Goods Orders Rise; Unemployment Claims Climb:
  • A lackluster report on durable goods on Thursday resurrected doubts about the sustainability of a recovery for manufacturing. In addition, the number of people filing unemployment claims touched a three-month high, and a barometer of home prices unexpectedly fell.
  • Orders for durable goods, items like refrigerators and computers that are expected to last three years, rose 3 percent in January. The Commerce Department attributed the gain largely to a 126 percent increase in commercial aircraft goods. A closely watched measure that excludes volatile transportation orders and military goods fell 2.9 percent, suggesting that businesses remained timid about spending.
NOW, some positive news that is related to our interest in container shipping companies Seaspan (SSW) and Global Ship Lease (GSL):

Yesterday, TAL International Group, Inc. (TAL), "one of the world’s largest lessors of intermodal freight containers and chassis", reported results for 4Q09. Noteworthy commentary from the release:
  • “Leasing demand for dry containers, our largest product line, typically slows in the fourth quarter as the summer peak season fades, but leasing demand improved throughout the fourth quarter of 2009. Our customers have indicated that trade volumes have been stronger than expected since the middle of 2009, and many needed to add container capacity back into their fleets after aggressively returning containers in the first half of the year. Leasing demand in the fourth quarter was also supported by an almost total lack of new dry container production in 2009. Our core utilization (excluding idle factory units) increased 2.7% during the fourth quarter to reach 90.3% as of December 31, 2009, and our operating expenses and disposal gains improved during the quarter as well. The financial impact of improving utilization was partially offset in the fourth quarter by temporary pick-up incentives provided to certain customers and a reduction in fee income due to a sharp decrease in the number of containers returned off lease. However, we finished the year with strong operating momentum and expect our improved operating performance to be more fully reflected in our financial results as we head into 2010.”
AND, TAL is raising its annual dividend back to an implied $1.00 per share, up from $0.04 per share:
  • TAL’s Board of Directors has approved and declared a $0.25 per share quarterly cash dividend on its issued and outstanding common stock, payable on March 25, 2010 to shareholders of record at the close of business on March 11, 2010. Based on the information available today, we believe the distribution will qualify as a return of capital rather than a taxable dividend for U.S. tax purposes. Investors should consult with a tax advisor to determine the proper tax treatment of this distribution.
  • Mr. Sondey concluded “We are very pleased to increase our dividend back to a more significant level. We effectively discontinued the dividend in early 2009 due to the rapid decrease in global trade volumes and uncertainty about future market conditions. However, as I have noted, we were able to deliver solid results in 2009 despite the challenging conditions, and we are now expecting a much improved market environment and improved performance in 2010. Based on this, we decided it was appropriate to restart our dividend program and have set the initial quarterly dividend at $0.25 per share.”
Alas, despite some lackluster results/data scattered across companies and sectors -- often highlighted by the media -- there are positive signals worth considering that should provide comfort to investors (and signal opportunity in certain sectors).

Happy investing,

Jeffrey Walkenhorst

Disclosure: long WTW, SSW, GSL, FLWS.

© 2010 Jeffrey Walkenhorst
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