Trucking services firm YRC Worldwide (YRCW) was able to complete the necessary debt for equity swap with its bondholders in a deal that came down to the wire after six extensions were required.  The deal will convert debt into 37 million shares of common stock and 4.35 million of class A convertible preferred shares, allowing YRC to avoid paying $19 million in interest payments and fees.  Also, this deal will permit them to tap into $160 million from its credit facility which should enable operations to continue.  Of course, management is heralding this as a means to a turnaround, but they will need to find a way to slow their cash burn quickly or it could be just a band-aid for a company that has lost $17 billion over the last 5 quarters.

Industry analysts such as David Ross of Stifel Nicolaus had speculated that if this agreement with bondholders the company would have been required to close its doors as early as this weekend.  That cannot inspire confidence in the businesses who rely on YRCW to transport their goods, and whose merchandise would be in limbo if the company were to shutter operation.  The negotiations with creditors have been made quite public over the past few weeks, with multiple extensions needed to come to agreement.  Excess capacity in the transportation services sector would suggest that YRCW clients would be foolish not to at least investigate other alternatives in the event that they do need to file bankruptcy in the near future.  Competitors of YRCW have reported business is improving so some may already have started to defect.

On Thursday morning, futures markets indicated YRCW would open higher thanks to the announcement that a deal had been reached.  However, shortly after the open the stock took a dive and at the time of writing is down more than 16% because the deal is obviously highly dilutive to existing shareholders.  Competitors of YRCW have taken a hit today as well, as the bankruptcy filing would have likely bolstered their sales.  At Ockham, YRCW stock receives our Fairly Valued rating because it is already pretty close to priced in the prospect of bankruptcy.  That being said, we cannot see a reason to believe that YRCW will soon return to profitability.  It will surprise absolutely no one that this stock has significant risks involved, as without this eleventh hour deal, shareholders would have likely been wiped out.

YRC Worldwide will live to fight on another day, but the company still has a huge amount of debt and equity continues to dwindle.  This company may still require reorganization through bankruptcy before all is said and done, but to this point management is taking every action possible to avoid it.  Although looking at the overall sentiment towards the stock, it may be very challenging to convince investors that the writing is not already on the wall.

The price-to-peak earnings multiple has increased to 12.6x after a cheerful holiday shortened trading week with generally encouraging macroeconomic data.  It is not unusual for the stock market to advance in the week that contains Christmas, as a large portion professional traders leave for vacations and volume stays low.  It is difficult for the boat to rock too much during such a lull in activity.

This week holds the final four trading sessions of 2008, and what a year it has been!  The first two months of the year continued the slide in equities that had started in 2008, until the market finally reached capitulation.  At that point, many investors were rightfully discouraged, but that all turned around when a memo from the Citigroup (C) CEO told his employees that the worst appears to be behind them and they may even make a profit.  Evidence from other troubled financials began to back up the bullish trend and despite significant headwinds the market turned positive and has not looked back.  Up to this week, the S&P 500 benchmark for US stocks has advanced nearly 25%.  Still a far cry from where the market topped out in 2007, but certainly a more normal valuation than those days as well.

The percentage of NYSE stocks selling above their 30-week moving average has ticked-up again to 85%, which is considered extremely high from our point of view.  This reading is an indication of an overbought market over the intermediate term (past 30 weeks), and generally we discourage placing more resources into the market when sentiment seems to be so decidedly bullish.  Of course, no indicator of sentiment is always correct, and we have always held the belief that there are cheap stocks in any market.  The sentiment index for individual investors (AAII) is currently divided right down the middle with 37.7% bullish as well as 37.7% bearish on the future returns of the market.

We would not be surprised to see a pullback in the market after more than 9-months of almost constant advances.  Even a minor 5%-10% retreat would likely bring our sentiment indicator into more normal territory, and may in fact create a buying opportunity for long term value investors.

The end of the year is always a great time for reflection, but investors must always train their focus towards the future.  At Ockham, the past year has been full of surprises and we are excited to get to work in 2010.  We continue to believe that investors should remain in this market, albeit with less exposure to risk than your normal risk tolerance in a portfolio.  The reason is simple: the market has come too far on questionable fundamental strength.  We recognize that the economy is in much better shape than at this time one year ago.  However, many of the problems that started the credit crisis in the first place have not been alleviated to our satisfaction; including foreclosures, consumer credit delinquency/joblessness, and corporate earnings are just beginning to recover.  That is why we think that the market may be vulnerable to losses in the coming year.  As we reported in last week’s EIG, all of the Wall Street strategists believe that the market will roar ahead in 2010, as Warren Buffett would say, “Be fearful when others are greedy. Be greedy when others are fearful.”

From all of us at Ockham, Happy New Year!

Genworth Financial (GNW), a provider of many types of insurance and other financial instruments, was among the most volatile stocks in the entire market during 2009.  The company was on the ropes when the market was reaching its lowest point in March, and even dipped below the $1 mark for some time.  As the economy has recovered through the rest of the year, so has Genworth recovered and it is poised to end the year as one of the top performers on the S&P 500 rising more than 300% in 2009.  With that said, it is not what has happened in the past that matters to investors, and opinions vary widely as far as Genworth’s value going forward.

On Tuesday, Genworth was among five companies who had their credit rating downgraded by Standard and Poor’s (MHP) thanks to their exposure to mortgage insurance.  S&P downgraded the debt of a Genworth subsidiary, Genworth Mortgage Insurance Corp., two notches from BBB+ to BBB- (the lowest grade above junk) and the outlook on the unit remains negative.  The sweeping downgrades by the credit rating agency reflect their opinion that despite improving economic conditions, the recession has had an abnormally large impact on the mortgage market.  The latest data on the growing number of mortgages that are seriously delinquent—across various grades of mortgages from subprime to prime—seems to back up this opinion.

Genworth offered an updated outlook on their mortgage unit in mid-December and said that the company expects the greatest losses from homes sold at the peak of the housing bubble of 2006-2007 will crest in the coming year.  The President of the mortgage insurance unit at Genworth Kevin Schneider said, “There was a lot of product originated in those years that frankly never should have been originated at all.”  Genworth has tightened underwriting standards as a result and has needed to increase rejected claims for losses on loans based upon false information.  In that presentation, Genworth said they expect mortgages underwritten in 2008 and 2009 to be profitable, leading to the unit to return to profitability as soon as 2011.  On the whole, Genworth’s mortgage insurance and all other units combined, swung to a profit after five straight losses in the fiscal third quarter.

At Ockham, we have maintained an Overvalued stance since October because the stock has seen such appreciation well in advance of the fundamentals justifying such gains.  Analysts are expecting fiscal 2010 earnings of $1.10 which would make the valuation look attractive, but that seems to expect quite a bit out of Genworth’s other units if the mortgage unit will see its peak losses in that year.  As capital markets have healed this year, GNW has raised capital through asset sales, a debt offering, and a secondary offering of stock in order to provide a cushion for any future losses.  Can the stock go higher?  Absolutely.  But it would seem to us, a risky investment based on the current valuation.  We would prefer to see the headwinds of mortgage delinquency and unemployment improve before we would look more positively on GNW’s prospects.

“Finally, the big surprise to me this day is what happened with I don’t know if you saw, the British authorities dropped their objections to the proposed Live Nation and Ticketmaster.” – CNBC’s The Call 12/22/2009

Today, a regulatory commission in the United Kingdom reversed course on the proposed merger of the world’s largest concert promoter and the largest ticket seller.  Last February Live Nation (LYV) offered to buy Ticketmaster (TKTM) for about $400 million in stock, but since then the deal has drawn intense scrutiny from various antitrust authorities and consumer advocates.  Obviously, the concern is that the combination of these two companies would reduce competition and increase prices to concert ticket buyers.  The decision released this morning out of the U.K. shows that their analysis does not see the deal as anticompetitive.  One key element to their ruling is a contract that Live Nation already has in place with Ticketmaster competitor CTS Eventim to provide ticketing software and services in the U.K., which will be honored even after a deal closes.

This is just one hurdle that the deal will need to clear, as it still faces challenges in both the U.S. and Canada.  The deal faces opposition among some politicians, musicians, and music fans; those opposed to the deal have created a united front to block the deal which spawned a website called ticketdisaster.org.  The website clearly lays out the opposition argument that this will increase the control over pricing and fees by these two entertainment industry giants.  Furthermore, they claim it will allow Ticketmaster to push smaller ticket brokers out of the way, and their recommendation is that the deal be blocked out right instead of allowed with certain conditions.

Both Live Nation and Ticketmaster are seeing higher prices on the ruling out of the U.K.  Our methodology suggests that Live Nation is currently Fairly Valued.  We do not rate Ticketmaster yet, as it has only been a public company for just about 16 months.  One thing to be aware of, Ticketmaster’s stock has seen substantial appreciation since the deal was announced and the market cap is nearly 80% higher than the offered acquisition price.  So, if the deal does eventually pass the regulatory tests, Live Nation will need to put more money on the table to acquire Ticketmaster, but there is no need to speculate on that unless the deal receives approval.

Take-Two Interactive (TTWO) stock has had a very tumultuous run of late.  Just over two weeks ago, they reported a worse than expected fiscal fourth quarter where both sales and earnings missed analysts’ targets (Bad Quarter Causes Investors to Double Take).  Furthermore, they reduced EPS guidance for the current quarter from a loss of $.26 to a loss of no less than $.40 per share.  However, it appeared that Take-Two would bounce back quickly as the stock began to rise, thanks in part to activist investor Carl Icahn raising his stake in the company in mid-December.  Some analysts upgraded the stock following the disclosure of Icahn’s 11% stake in hopes that he would spearhead a turnaround and perhaps eventually replace some members of the board.

After the bell on Monday, Take-Two announced more disappointing news to their investors as they are selling the company’s video game distribution business.  The Jack of All Games unit, which distributes not only Take-Two’s games but also video game products from Activision Blizzard (ATVI), Electronic Arts (ERTS), and Sony (SNE), will be sold to SYNNEX (SNX) for a total of $43.25 million in cash.  Considering the unit brought in revenue of $282 million in fiscal 2009 (just under a third of revenue), the price seems to be a very cheap.

As a result of the sale of their “non-core” game distribution unit, the company was forced to reduce their guidance once again.  Now management sees a loss of $.45 to $.55 in the fiscal first quarter, and perhaps more distressing sales are now expected to range between $90 million and $140 million, down from the previous guidance of $210 million and $260 million.  If revenue comes in at the midpoint of their range, that would make it just half the average revenue prediction of analysts for the quarter.  Obviously, shares are selling off in after hours activity.

At Ockham, we have a Fairly Valued rating on Take-Two Interactive basically because the stock has been so beaten down that it no longer looked Overvalued.  That being said, we will have to readjust our analysis based on the new asset sale, especially for what amounts to a fire sale price.  It is very likely that we will downgrade Take-Two once these numbers work their way into our analysis.