This week, we spoke to a few analysts about the state of Coal, which is doing quite well in this economy.

Analyst David Khani gave us his pick in the coal area: CONSOL Energy (CNX):

TWST: What puts CONSOL Energy at the top of the heap?

Mr. Khani: It has great coal reserves within the Northern Appalachia region and owns most of its coal in-fee (no royalties). They are a very low cost producer, and they are at the edge of a 30%-40% production growth phase. The last part of it is that they own 80% of a great natural gas business. That business is also a very high margin business with 15% plus annual production growth. They are unearthing new play types and have a tremendous amount of undeveloped acreage that should give them very visible growth probably for the next 10 to 15 years.

For the full interview with Mr. Khani, including a complete overview of the coal space and more stock picks, click here.

For the TWST interview with Thomas Hoffman, former CEO of CONSOL, click here.

 Wachovia WB (NYSE) late Wednesday announced the selection of Robert K. Steel, the under secretary for domestic finance for the United States Treasury. It appears Wachovia, who has lost over 60% of its share value in the last year, chose to go with a risk manager with government/regulatory expertise as its top executive rather than a commercial/retail banker. While Wachovia is a large retail bank the decision makes a lot sense on a variety of different levels. Steel has been a close confidant of the current Secretary of the Treasury, Hank Paulson who had previously been the former Chairman of Goldman Sachs. Steel is also a former key player with Goldman. He left the firm as Vice Chairman in 2004 after Lloyd Blankfein solidified his position at the top of the firm. Steel worked for Goldman starting in 1976 and moved rapidly up the ranks. According to a story by David Mildenberg and Ari Levy of Bloomberg in his position at Treasury,

Steel helped hammer out the agreement that culminated in JPMorgan’s purchase of Bear Stearns Cos.      

Analysis of Steel’s selection has been all over the map and will continue to do so for the next number of months. Many specialists have expressed their concern over his lack of retail and commercial banking expertise while others find his regulatory expertise/Washington connections extremely important. What was even more fascinating, however, have been the many comments offered by people that have worked with him or known him concerning his special talent to work with others and his unique abilities to multitask while handling extremely difficult challenges all at once. Steel is the Chairman of the Board of Trustees of Duke University his alma mater. According to a story by Rick Rothhacker for The Charlotte Observer,

Steel joined Duke’s board of trustees in 1996 and was chairman of the committee that selected Richard Brodhead as president in 2003.  

In that role, Steel stood out for his ability to quickly assess the university’s needs and get people working toward a common goal, said Sara Sun Beale, a Duke University law professor who worked with him on the search committee.   

“You will be working on an assignment, and he is working just as hard as you are on the same assignment, and then you realize he is also working on four other things,” Beale said. “Then you find out he is equally effective in those areas, too. It’s pretty amazing.”    

At first glance, Steel’s appointment seems to confirm statements from Chairman Lanty that Wachovia intends to remain independent. Lanty made this statement as speculation continued to grow that the fourth largest bank in the United States was looking to be acquired. But speculation on Wachovia’s status as an independent company will surely continue. Steel is a former Goldman Sachs executive. Goldman of late has been intimately involved in many of the problems facing the bank and is even considered one company that may acquire the firm. Goldman has been hired to examine the bank’s loan portfolio and has been instrumental in helping the firm raise money this year. According to the Biz Journal,

The choice of Steel strikes some analysts as interesting given that Wachovia has hired Goldman to analyze its loan portfolio and to “evaluate various alternatives.”Goldman helped the company raise $8 billion earlier this year through the sale of common and preferred stock.            

Speculation also continues that JP Morgan might push to acquire Wachovia. Steel has a great deal to learn in a very short time frame. Considering the problems Wachovia faces in this extremely difficult marketplace, I am impressed with his selection. Hopefully, he has sufficient time to help the company without being forced to make hasty decisions that could backfire. Stay tuned. For more:Guardian UKForbes (AP)Wall Street JournalReuters  

Rick Rothacker of The Charlotte Observer wrote a story today in which he posited what he thought were thirteen potential candidates to replace former Wachovia WB (NYSE) CEO, Ken Thompson, who was forced out as CEO back in early June (see earlier blog). Rothacker’s piece also focused on the stealth aspect of the search for Thompson’s replacement. The story opens with the following question:

Who’s the boss?

That’s the big question hanging over Wachovia Corp., as the
Charlotte bank’s search for a new chief executive extends beyond a
month.

The uncertainty is weighing on employees as well as investors. The
stock is down nearly 35 percent since the board ousted Ken Thompson on June 1…

Check out the list of potential contenders. Does anyone know of other potential candidates?

It’s been reported yesterday that Oceaneering International (OII) has been awarded a contract by Shell for the fabrication and installation of subsea hardware on Shell’s ultra-deepwater Perdido Regional Development project in the Gulf of Mexico.

This, under a month after Oceaneering International signed a contract with NASA to make the next generation of space suits, makes this company one to look out for.

Read TWST’s exclusive interview with current CEO T. Jay Collins for a full overview of how this company does what they do, and where they’re looking in the future.

Charming Shoppes CHRS (NASDAQ), the embattled women’s retailer, announced the immediate resignation of its CEO, Dorrit Bern. Bern, who originally came to the company back in 1995 as president, CEO and vice chair of the board, has been under growing pressure from activist investors unhappy with management and the company’s overall performance. While activist shareholders (Myca Partners and Crescendo Partners) have been rightfully concerned with the company’s performance over the last year, Bern was instrumental in growing the firm from the time she first arrived. According to the company’s website, under her leadership corporate revenues increased from $1 billion to $3 billion by 2006. According to the company’s press release,

Growth, however, is now at a standstill and the firm has been facing increasing problems. According to Women’s Wear Daily,

Bern has initiated a series of changes over the last year and a half including reductions in staff and management and better inventory control. While the changes were needed they have not been viewed by many analysts and shareholders as sufficient. While earnings have continued to remain anemic Charming Shoppes took forceful steps to fight off attempts by activist shareholders to make changes on the company’s board and management. The company even initated a lawsuit but in the end activist shareholders seemed to have gotten the upper hand. After back and forth negotiations the company caved and allowed two activist sharehodler candidates to be elected to the board.

As part of the company’s management change announcement, the firm made recently appointed Chairman, Alan Rosskamm, the interim CEO. Rosskamm was previously the Chairman and CEO of Jo-Ann Stores and has been a long time member of Charming Shoppes’ board. Charming Shoppes has a great deal more to do to help solidify its weakening retail position.

Keep a close eye on who the company comes up with to permanenetly replace Bern and what role the key activist shareholderes play going forward. There are likely more changes to come.

For more:

CNN
Philly.com
MSN Money
Triangle Business Journal
Portfolio.com

Our special focus this week is on Western Banks- obviously a tough sector in these turbulent times. As part of our series of “Off the Record” comments, we asked the CEOs and analyst that we interviewed to give us their personal picks.

One of them this week  simply couldn’t:

“To tell you the truth, I can’t think of any banks that I’d recommend, truly. They seem to have done some things just because they wanted growth and near-term earnings. They have loaded the banks up with real estate and you do that, eventually you are going to get caught, and sure enough, they are caught in a market that could absolutely destroy the banks. I see that over and over again, especially in California and I just think it’s wrong. There are probably some good banks around, but for me to give you a name now, I don’t think I could. Many of us, including myself, can be very impatient and we want what we want now. So, if these executives have a challenge to grow the bank and they are looking for returns, where better to put money than in real estate? And California, that’s a very easy thing to do. They are not thinking that the value of a bank is in its core deposits and they fund themselves with money that is far more expensive. They think there is such a margin in real estate that they don’t have to worry about the core deposits. But eventually that catches up with you. Many of the banks are changing their philosophical outlooks but I’m afraid they’ve entrenched themselves in the real estate market to such an extent that we are going to see a lot more problems in the banking industry before this is done.”

Others had a few ideas:

Centennial Bank (Owned by LandAmerica (LFG)):

 ”There’s a small bank in Orange County called Centennial Bank, which is owned by LandAmerica. This is a non-duplicable kind of operation in the sense that they
run with so few people, I don’t even know how they stay alive. They have an amazingly efficient place.”

CVB Financial (CVBF)

“I think CVB Finanicial, the holding company for Citizens Business Bank, has an excellent management team and you can point to the fact that they are in the Inland Empire; they’re headquartered in Ontario, California, and so far have had no credit issues whatsoever. As an example of how their strong management has proved out in the current environment, they have not been aggressive with construction and the company has done well, which I believe will continue to be he case. So CVBF would be one name that I would mention.”

“CVB Financial is a name I’ll mention. This company has managed to steer away from significant credit problems even though they are based right in the heart of the Inland Empire. Because they didn’t go substantially into residential construction lending, they’re taking an opportunity to try to become more bank-
like in terms of their product offerings and their marketing outlook. I like that one.”

For the full off the record article on Western Banks, including a variety of other stock picks in this turbulent time, click here.  

It was reported this morning that Cardinal Health (CAH) is cutting 600 jobs, and freezing all hiring in a attempt to restructure. Of the 600 jobs cut, 140 of them will not be refilled. The move will consolidate the company’s workforce into two primary segments- grouping product distribution centers and nuclear pharmacies in one and medical devices in another.

How will this change affect the future of Cardinal Health? To learn more about the company, click here for an interview with former CEO Richard Miller. 

For more perspectives on the strength of Cardinal Health, read TWST’s interview with Healthcare analyst John Ransom of Raymond James  or TWST’S interview with portfolio manager David Labiak of Trent Capital Managment 

Avanex Corporation AVNX (NASDAQ), a global provider of Intelligent Photonic Solutions(TM) designed to meet the needs of fiber optic communications networks announced today the termination of its president and CEO, Jo Major, PhD. Dr. Major will also be leaving the board. In addition to Major’s termination, the company’s CFO, Marla Sanchez, also resigned her position.According to the company’s press release the termination was,

… due to the inability of Dr. Major and the Board of Directors to work together effectively.    

… The departure of Dr. Major and Ms. Sanchez is not related to the Company’s operational performance or financial condition. The Company is reconfirming its fiscal fourth quarter revenue guidance of between $50.0 million and $53.0 million. In addition, the Company anticipates positive cash flow for its fiscal fourth quarter.

In the interim period the company has appointed, 

Dr. Giovanni Barbarossa as Interim Chief Executive Officer. Dr. Barbarossa has worked at Avanex since February 2000 and has served as Senior Vice President and Chief Technology Officer since May 2002. Previously he ran the Active Component Business Unit. Dr. Barbarossa joined Avanex prior to its initial public offering and has been a member of the executive team for over six years.    

The company has already initiated a search for permanent replacements through a board committee. Paul Smith, a member of the board has been appointed as Noon executive Chairman of the Board. It is difficult to determine from available information what exactly was the reason behind Dr. Major’s termination. The company has been facing serious problems. According to RTT News,  

The company last month regained Nasdaq compliance. In March, Avanex stock closed below $1 per share for 30 consecutive trading days, below the minimum required under Nasdaq rules.Avanex is expected to hold its annual stockholders meeting July 9, where shareholders will vote on a proposed reverse stock split. The reverse stock split will help boost the value of each share, thus making it easier for the company to stay listed on the exchange.  

 Keep a close eye on the company as it gets ready for its annual stockholders meeting and what actually comes out of the meeting. For more:  CFO.comReuters Barrons Blog East Bay Business Times      

In a surprise announcement VMware VMW (NYSE), the company that creates and develops software designed to manage virtual machines, made public the immediate resignation of its co-founder and CEO, Diane Greene. The resignation comes in the wake of the company’s latest announcement that its 2008 sales will be lower than earlier projections. In Greene’s place, the company has selected Paul Moritz, a former Microsoft executive who retired from the firm in 2000 after fourteen high-profile years with the company. According to the Silicon Valley/San Jose Business Journal during his time with Microsoft,

Moritz managed the development and marketing of many of the company’s major products, including Windows 95, Windows NT, Database, Tools and Applications.In 2003 he founded Pi Corp., a startup software company focused on building Cloud-based solutions. Pi was acquired by EMC Corp. in February 2008.     

In the company press release, VMware did not give a reason for the departure of Greene. VMware had been a high flying stock at the time of its initial IPO back in the summer of 2007. Even before the IPO, VMware was considered a star in the computer virtualization space. The company remains the leader in the field but has found itself lately in competition with a number of the biggest players including Microsoft, Oracle, Dell, Red Hat and many others. To make matters worse many companies have turned to open source software as a way to manage virtualization an approach that VWware has refused to take and has helped to place the firm at an even further potential disadvantage going forward.Greene’s departure may be due to lower sales, growing competition or the fact that the firm needs new executive blood for it to find a way to successfully compete and remain on top. VMware remains majority owned by EMC which very likely had a hand in today’s management change.This is definitely a company that should be watched closely as new management takes over. For more:BloombergReutersMarket WatchBarron’s BlogMSN Money Giga Om MarketWatch (later in day)

Our top 5 picks this week come from portfolio manager Ted Kellner, chairman and CEO of Fiduciary Management, Inc. Fiduciary is a nearly 30 year old firm that focuses on value-investing in large and small cap stocks. Here are the companies he’s looking at positively in this tough environment:

• Wall-Mart (WMT)- “Wal-Mart is a company that Wall Street looked on negatively. Yet when you looked at Wal-Mart, based on what I just mentioned, the return on invested capital, on virtually every metric that you would look at in that regard, it was doing an excellent job. The company had continued to improve its return on invested capital, it continued to increase its free cash flow, it had improved its balance sheet, and it was selling two years ago, when we started the investment, at about a 12-year low in terms of its valuation. The stock initially went down, but we continued to buy it and looking at Wal-Mart in the last year, it’s arguably the strongest performing large cap retail stock in America, both from the standpoint of
  company performance and stock performance. It’s been a very good stock for us.”
• Time Warner (TWX)- “We still viewed the cable ROIC favorably When you look at Time Warner, our sum of the parts valuation hasn’t changed and the stock should trade up to our $22 to $25 intrinsic value. With the stock in the $15 and $16 price range today, we still deem it an attractive stock in this market.”
• Best Buy (BBY)- “”We did buy Best Buy (BBY) late last year and we continued to buy it early this year. It’s a company that is a dominant company in the industry. The stock is down from where we initially purchased it in the high $40s but they have competed very effectively against all of their competitors and continued to take market share.”
• Family Dollar (FDO)- “Family Dollar (FDO) is our seventh largest holding in small cap, about 3.5% of the portfolio. In the environment that we’re in, with consumers extended, there is an element of trading down occurring. But Family Dollar has a very strong balance sheet with only about 18% debt and return on invested capital in the 14% to 15% range. The stock here we think is very attractive; it’s about 14 times this year’s estimate and only about 12.5 times next year’s estimate.”
• Beacon Roofing (BECN)- “Beacon Roofing (BECN) was something that we bought about a year ago. We started buying it in the high teens. With the housing demise, even though 75% of Beacon’s product goes into replacement, the stock came down significantly, into the $7 or $8 range. But the company has continued to do actually quite well. We took advantage of the price decline to add to it and the stock today is back up at about $13 per share.”
  

For the full interview with Mr. Kellner, including an overview of the current market climate and a look at his company’s investment philosophy, click here.