Although the expiration of the federal first-time and move-up homebuyer tax credit has already led to weaker-than-expected buyer traffic during May and June, beleaguered homebuilders may experience some relief as the year progresses and several catalysts likely lead to price-to-book multiple expansion.
“We find the builder space to be attractive on valuation and long-term fundamentals, and suspect an appropriate entry point for equities could occur over the next six months,” said Michael Kim, a senior vice president at CRT Capital Group LLC. Kim points to the sizable tax refunds made available to homebuilders through the Worker, Homeownership and Business Assistance Act of 2009, in addition to these companies’ high levels of cash and shortened construction timelines as several positive dynamics within the homebuilder universe.
“Our thesis has been that we will dance along the bottom for a little while until we get that boost to the broader economy, especially considering housing is estimated to represent almost 30% of GDP. Household formation and favorable demographic trends on a regional level should support a baseline level of demand,” Kim said. “Once you start to see job creation and greater consumer confidence, potential buyers will start looking at the move-up category, which someone like Standard Pacific (SPF) is more focused on.”
And while value investors may be sitting on the sidelines, waiting for the appropriate time to jump into the homebuilders market, Kim says it’s only a matter of time until we start to see more normalized housing starts.
“We suspect builder equities are going to be governed by market technicals rather than fundamentals, which has been the case more recently,” he said. “And we believe investors will gain more conviction for the public builders some time over the next six months, if the macro data provides more visibility on a broader economic recovery.”
From China’s growing urbanization to the U.S. residential real estate market, here’s a look at what’s on the minds of senior managers featured in The Wall Street Transcript‘s newest issue, hot off the presses today and available at www.twst.com.
“When you look at our capital investments, we’re spending about $1 billion this year — almost half of that will be invested in China…We think this is the best opportunity for any global restaurant company for the 21st century.” — Tim Jerzyk, SVP Investor Relations, YUM! Brands
“So if you are looking for a high-return potential investment, I would have to say homebuilders are right near the top. Who needs venture capital when you have the homebuilders?” — John F. Osbon, Founder & CIO, Osbon Capital Management
“In China they enforce the building codes and regulations more strictly than before. So the accountability is higher, as is the willingness to go to the top-quality provider of premium concrete and pay the market price for the assurance of top-quality concrete products and services.” — Jeremy Goodwin, President & CFO, China Advanced Materials Construction Group, Inc.
“[T]he restaurant industry has a lot of growth potential. There are still a lot of great chains out there that have a lot of room to grow. We also think people in general are going to be eating out more 10 years from now than they are today.” — Jonathan Dash, Founder & President, Dash Acquisitions, LLC
The Great Atlantic and Pacific Tea Company GAP (NYSE), often referred to as as supermarket chain A&P, has appointed Sam Martin its new CEO and Chairman. The company has been struggling. Martin who just left his position as COO for Offi
ce Max replaces Ron Marshall as the CEO. Marshall, according to the press release,
left his position just after five months at the helm.
The struggling retailer is faced with another key management change at the top while trying to right itself. Just yesterday as part of the CEO announcement the company also announced its quarterly earnings which were far from reassuring. The firm reported a fiscal quarterly loss of $122 million. While the selection of a CEO at the firm has been an example in how CEO selections should not be made, Martin’s selection may actually be the medicine the firm needs.
Martin, who some speculated wanted to become the CEO of Office Max and may have known he was going to be passed over, has the requisite qualifications to help The Great Atlantic and Pacific Tea Company right itself has both high level operational expertise and a background in the food/supermarket business. Prior to his stint as COO at Office Max, which began back in 2007, Martin served as an executive at Wild Oats before it was acquired by Whole Foods. Prior to his work with Wild Oats Martin served with a number of other supermarket/food chains (Shopko stores and Fred Meyer).
Supermarket chains in general have been struggling during the economic recession as consumers seek out 
new ways to reduce their food bills and still get convenience shopping. Martin has a real challenge ahead of him but he appears to have the right type of expertise and business acumen to make a go of it. Keep a close eye on the company there may be some positive surprises over the next year.
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Riding 10 consecutive months of improving numbers — and five months of year-over-year improvements — temporary job placement continues to outpace permanent employment growth, with professional IT staffing leading the way in temporary worker demand.
“Overwhelmingly, when I speak to professional-oriented staffing companies, the one vertical that they describe as the strongest, as experiencing the most recovery over the last four or five months, is the technology sector. The commentary we received is there is a shortage of highly qualified IT-related people out there that can service a lot of the projects that need to be done,” said Northcoast Research Holdings Analyst John Healy, who’s observed growing demand for IT professionals as companies begin to look into the technology updates they put off during the brunt of the recession.
“There is a little pent-up demand for IT spending, and I think companies are beginning to spend and they need people to come in and help manage and implement projects for them. And as business activity picks up for them, there is also a little bit more need for help desk operators, people to build security walls and firewalls for their business. So the IT demand that we’re seeing is very strong on the temp side,” he said.
Temporary staffing company Kforce (KFRC) is feeling the benefits of this pent-up demand, as are its competitors Manpower (MAN) and Adecco (ADEN), both of which recently purchased IT franchises.
“I think the IT business is growing faster than any end market and professional staffing, including finance and accounting, including legal, engineering, health care services,” Healy added. “And large global staffing companies are anticipating more pickup in demand for tech staffing, and they want to kind of bolster their portfolios.”
With smartphones and devices such as Apple’s new iPad creating strong growth and leading the way in industry-disrupting technology, the telecom industry has been forced to respond with what has now become an overriding trend — the convergence of communications, computing and entertaining, and the subsequent restructuring of the industry along horizontal lines.
“These new [smartphone] devices are seeing amazing innovation in applications because they are not controlled by the service providers. The best example of these trends are in devices like the Droid, the Samsung (SSNLF) Galaxy and Apple’s (AAPL) iPad and the iPhone,” explained Timothy Horan, a managing director at Oppenheimer & Co., Inc. Horan predicts traditional IP and video applications will continue to cannibalize any additional wireline and wireless broadband capacity rolled out over the next several years, driving competition and forcing companies to become more horizontally focused on specific consumer bases.
The analyst specifically recommends companies Comcast (CMCSA) and American Tower (AMT) as his top picks.
“As [these companies] work through a lot of these changes and are benefiting from the convergence between this sector, computing and entertainment, I think many companies that are more horizontally focused are going to be very good longer-term investments,” Horan said. “In the near term, smartphones and new devices like the iPad are created strong growth. This is going to put a lot of pressure on the wireless networks that give them a little bit more pricing power.”
Over a month ago we briefly examined the continuing problems Nokia NOK1V, the world’s largest phone manufacturer, has found itself facing with the explosive growth of the smartphone market. Nokia unlike Apple and even Motorola, HTC, Samsung etc. has been a true laggard in this marketplace. With this growing competition in the smartphone marketplace Nokia’s share price has declined a whopping 67% in the three years since Apple introduced the iPhone (according to an article in Bloomberg). For some time some shareholders and analysts have been calling for the CEO, Olli-Pekka Kallasvuo’s head. The CEO has recognized th
e problems facing Nokia and recently has made some internal management changes to address the issues. Time is running out as shareholder and now possibly board member patience is dissolving. It is hard to see at this point in time as the iPhone4, Google Android phones, Blackberries and other sophisticated smartphones are coming into the marketplace what Nokia can do to reverse its problems. Nokia needs a 
big winner and it needs it soon.
Fair or not it, looks as if Olli-Pekka Kallasvuo’s time as CEO may be limited. It may be the right time for the Finnish based firm to hire a seasoned CEO from outside the firm.
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Peter A. Michel, President and CEO of iSECUREtrac Corporation (ISEC), talked to the Wall Street Transcript about his company iSECUREtrac Corporation Click here to read the complete interview.
TWST: Give our readers a thumbnail sketch of iSECUREtrac. What is the company’s mission?
Mr. Michel: iSECUREtrac Corp. (ISEC) provides a suite of electronic monitoring systems, including GPS tracking, remote alcohol monitoring, house arrest systems and biometric voice verification, as well as client management software and intense monitoring services for use in community supervision. The data provided by the company’s equipment and software concerning a client’s location and status better enables effective compliance management and positive behavior modification. So at a high level, we are in the business of assisting our public agency customers in their community corrections activities. But at a macro level, we help individuals make better choices about their behavior and significantly reduce the cost to society of overall community supervision, both of which have a very positive impact on society.
While permanent hiring remains sluggish and recent Bureau of Labor Statistics numbers leave many disappointed, the temporary staffing sector offers investors a solid growth story amidst the uncertainties of economic recovery.
“Temporary help disproportionately benefits from a low-growth environment. Temporary help returned to healthy sequential growth in October and has shown solid sequential growth every single month through May,” said J.P. Morgan Managing Director Andrew Steinerman. “When you take all this into account, temporary help has reached a year-over-year growth of 16% in May. Also June temporary help seems to be showing further growth.”
Steinerman views niche and global staffing players as those best equipped to compete in this high-demand environment.
“Robert Half (RHI), which is the ‘King Kong’ of accounting staffing, from low-end accounting staffing to high-end accounting services, is in an enviable place to be,” said Steinerman, who also likes global staffing firms Manpower (MAN) and Adecco (ADEN). “We definitely see the value of niche players, especially when they are addressing a large niche. Robert Half has a tremendous dominance in accounting staffing, far surpassing the second and third players in terms of size and recognition from both the candidate as well as the end user.”
Thomas S. Gross, Vice Chairman and Chief Operating Officer, Electrical Sector, for Eaton Corporation (ETN), talked to the Wall Street Transcript about his company Eaton Corporation Click here to read the complete interview.
TWST: Give us an overview of Eaton and a brief explanation of what you do.
Mr. Gross: Eaton today is best characterized as a broad power management company. We make products and provide services that help our customers manage three basic types of power – electrical certainly is one; hydraulic or fluid power, which is used in a number of areas, is the second; and the third is mechanical power that you typically find in vehicles like trucks, and commercial vehicles and automobiles. So our business is electrical, hydraulic and mechanical power systems. These are all in the spotlight today and given how important energy conservation always has been and continues to be, I think what we do matters a lot. The company is rapidly approaching its 100th anniversary. We were founded in 1911, primarily interested at that time in vehicles, and there has been a terrific transformation of Eaton from a vehicle component company to now a much broader power management company.
Microsoft MSFT (NASDAQ) and particularly Steve Ballmer, the firm’s CEO, continues to find itself on the hot seat. More and more analysts and tech pundits are beginning to question the firm’s direction and leadership. Yesterday, Kara Swisher of the Wall Street Journal’s All Things Digital examined some of the problems facing Microsoft and it’s chief executive in her piece entitled, What to make of the Microsoft-Is-Falling-And-Can’t-Get-Up Meme
. Swisher is by no means in the camp seriously worried about the firm’s immediate future but she suggests there is a real need for some change at the firm. According to Swisher,
Microsoft, as all tech companies do, needs to change, and a lot faster than it has so far; the company has been trying mightily to do so in search and recently, in mobile, where it is woefully far behind; its leadership under Ballmer, who took over from co-founder Bill Gates, has been meh enough to keep its stock moribund.
But, by no means recently–even if there is a better CEO for Microsoft out there than Ballmer–have I found the company execs ignorant about the tougher issues or unwilling to consider changes needed.
In fact, in its high-flying days, Microsoft did have a tin ear to criticism. No longer, and I would call its execs appropriately concerned about fixing its issues, although their efforts do suffer from the company’s massive size and inertia in making the right moves.
Thus, they certainly might not be successful at innovating, although these are the very kinds of problems Apple CEO Steve Jobs solved when he returned to a rotten company in what, in its current glory days, seems eons ago.
And Microsoft has been getting the same questions that are beginning to be asked about Google.
… That’s why–at this point–I can see no need for panic to set in about Microsoft…
… As for today, even though we are all terminal, the sky looks like it will remain intact at Microsoft for a little bit longer.
Swisher is rather pragmatic about Microsoft’s situation but pragmatism does not always reign particularly when you are talking about one of the largest and formerly most successful tech firms in history. Keep a close eye on Ballmer and Microsoft.
