Dollar Store of the American Skies!

This post is syndicated at The Motley Fool Network:
http://beta.fool.com/malayappan/2012/11/28/dollar-store-american-skies/17328/

In an interview with the Wall Street Journal that was published last week, Ben Baldanza, CEO of Spirit Airlines (NASDAQ: SAVE) discussed his company’s aggressive nickel and dime strategy of profit making.  In the interview, Mr. Baldanza says that the airline’s core mantra is about offering the lowest price and how this drives everything that they do.  This strategy is amplified by the airline’s ticker symbol – SAVE! Fair enough!  Let us see how this makes Spirit a better investment.

Good for you, Good for Business

On Election Day, Spirit introduced the $100 per carry on bag at the gate for those passengers who chose not to prepay. Outrageous as it might seem, the airline’s spokesperson, Misty Pinson says that this is actually a way to deter customers from holding up the boarding process by encouraging them to pay for the bag in advance.  I have never flown Spirit Airlines before and I doubt that I ever will and I suspect that a majority of travelers feel this way.  Why?  Think of a buffet. What happens when the choices are too numerous and actually turns you off instead of stoking your desire and pleasing your palate?  The natural instinct is to turn away. Similarly, the myriad categories of fees and options available to a Spirit customer are mind-boggling!  I would want no part of that.

Mr. Baldanza feels differently.  His position is that the “unbundling” of fees serves to allow passengers to pay only for what they want and effectively not “subsidize” other passengers.  Theoretically, it might be true.  After all, a business passenger with just one carry-on, is not on an equal footing with a family of four traveling on leisure with an assortment of luggage.  Other airlines have taken care of this problem also and it is impossible to get on any airline as an infrequent passenger and not have to pay for luggage in some way, shape or form.  However, Spirit has taken this a la carte pricing to an extreme and Mr. Baldanza argues that this makes for greater profitability.  He says that with a plan to triple Spirit’s share of air traffic from 1% today to 3% in a few years, they will continue to cater to a segment of the population that cares about price above everything else.  In other words, the airline claims that it is doing well by the customer and in turn, doing well for their shareholders by focusing on a unique approach to profitability.

Flying the Cheap Skies

Mr Baldanza does not dispute (in answering the reporter’s question), that Spirit’s strategy could be a huge turn off to a significant number of airline customers, but says that there is demand for the lowest price, despite extreme nickel and diming.  There is no denying the fact that Spirit’s stock has soared from around $11 to about $17 as of November– that is about 50%.  No wonder, investors like this stock and Mr. Baldanza is so upbeat about how he runs his airline.  Airline stocks in general are not the best investment and the performance of Spirit’s direct competitors says it all.  Southwest Airlines (NYSE: LUV) lost about 20% in stock value during the same period, while Jet Blue lost 15%. 

Granted that Spirit just had an IPO in 2011, while its competitors have been public for a while, but as the Wall Street Journal reports, Spirit is “pound for pound, the most profitable airline in the U.S.” Spirit reported third quarter adjusted net income of $25.2 Million on October 31. Operating revenue was $342.3 Million, an increase of $53.6 million over third quarter 2011 according to Spirit’s earnings release.  In contrast, Southwest’s operating revenue decreased to $208 million from $285 million over the same period according to their earnings release. Southwest admits to “sluggish revenue growth” in light of the weaker economy, but it appears that Spirit is doing much better than its competitors in the same skies.  Not bad for a famously el cheapo airline!

Sustainable Growth

From all indications, Spirit is well poised to continue on its growth trajectory in an economic climate where a segment of the traveling public has embraced its pricing structure.  Mr. Baldanza claims that the airline will continue to grow 15 to 20% a year without sacrificing margins.  He must feel pretty strongly about this.  He says so in the WSJ interview and says so in the latest third quarter earnings release as well.  We better believe it!

Walgreen Still Loses After Signing New Agreement With Express Scripts

This post is syndicated at The Motley Fool Network: http://beta.fool.com/malayappan/2012/10/24/walgreens-still-loses-after-signing-new-agreement-/14519/

Strange are the ways of Big Corporations and Wall Street.  The ones who get squeezed are you and I as retail consumers!  We are nothing but numbers for corporate bean counters and we are at the mercy of companies like Express Scripts that resort to back door machinations and shenanigans in an effort to fool main street and perhaps Wall Street as well.  It appears that Express Scripts just resorted to some of the worst underhand and unscrupulous dealings with Walgreen under their new agreement.  Walgreen is either blissfully unaware of what hit them or worse still, perhaps knowingly agreed to new onerous terms and conditions and neglected to inform the rest of us!  What do I mean?  Read on..

Recently, with much fanfare and trumpet, the newly inked agreement between Express Scripts(NASDAQ: ESRX) and Walgreen (NYSE: WAG) went into effect on September 15 (SEE LINK).  Fiercely loyal customers of Walgreen (including yours truly), rejoiced at the restored opportunity to return back to Walgreen and renew relationships and friendships with their superb Pharmacy staff.  I personally have been a loyal customer of Walgreen for over a decade and regretted NOT a moment of it. When the announcement came that Express Scripts and Walgreen had come to a new agreement, I was elated and so was Wall Street.  In fact,Goldman Sachs added Walgreen to their conviction buy list (SEE LINK). Unfortunately, that optimism was based on their perception that the agreement between Walgreen and Express Scripts was rooted in full disclosure and honesty and as it turns out, such was not the case. 

Wall Street is upbeat about the prospects of Walgreen and considers the pharmacy chain to be a growth story again (SEE LINK).  Unfortunately, it is not quite that simple. Why? Because, under the new agreement, Express Scripts now has the ability to offer Plan Sponsors (the ones who pay the bills), the opportunity to select a cheaper drug benefit plan that DOES NOT INCLUDE Walgreen!  Guess what happens when a plan sponsor gets offered such a choice?  Of course, they would go out and select the cheaper distribution network that does not include Walgreen. Who gets mostly ripped off in the process?  Walgreen and its investors because this part of the agreement was never disclosed to the general public or Wall Street.  Perhaps, Wall Street will get wind of this fact eventually, but in the meantime, investors are blissfully unaware! 

Here is the note from Express Scripts to me -

Important pharmacy network update

You may have heard that Express Scripts reached an agreement to bring Walgreen back into our back into our broadest network of retail pharmacies. However, to help manage the cost of your prescription-drug benefit, your plan sponsor selected a retail pharmacy network that does not include Walgreen.

What does this mean for a retail investor?  You now have to decide whether the new contract between Express Scripts is a net plus for Walgreen or whether the damage has already been done.  Will Walgreen ever regain those customers who are already lost to Rite Aid, CVS Pharmacy and other competitors?   I think there is little hope for recovery because common sense tells us that Express Scripts is probably offering this network choice to all of its plan sponsor customers.  Why would any plan sponsor in their right mind refuse such an offer?  What incentive do they have to offer Walgreen as a choice to their plan members?  It is not like Walgreen is the only choice in many neighborhoods.  When Express Scripts announced the rift between them and Walgreen they touted the fact that there were several alternative pharmacy options within a small perimeter of any Walgreen location!

Walgreen picked a fight that they could not win and should have known that.  A pharmacy store is a commodity like many other retail stores.  If you can get one item at a store, you can probably find it in any other store except for specialty items.   Have you ever been turned away from a pharmacy because they do not carry your particular medication?  In the worst case scenario, the particular store might not have your medication in stock but in most cases are able to order it for you the very next day.  The same medical distributor that distributes to your favorite neighborhood pharmacy likely supplies all pharmacies in the immediate vicinity and in some cases entire towns and cities.  Pharmacy distribution is like any other.  Your Mom and Pop pharmacy has the same access as a national drugstore chain like Walgreen or CVS.  The only difference is that if you need choices between locations (for example if you are traveling and forgot your medication), you have options. 

There have been quite a few occasions where I have traveled to my destination and found that I had forgotten a particular medication.  It used to be very easy for me to call the local Walgreen pharmacy and ask them to pull up my records and transfer the refill from my home town pharmacy and the entire process would usually take an hour or two at the most.  However, this was likely a short lived advantage for Walgreen.  Other pharmacies, such as CVS, with a nationwide presence also now offer the same benefit.  In short, Walgreen does not appear to have a competitive advantage.

Unfortunately for me as a patient and customer, I had little choice but to go back to the pharmacy that I had transferred my prescription to after the rift last year.  I was disappointed as a consumer, but as an investor, I now see an opportunity.  Retail investors are in a position to place bets ahead of money managers on Wall Street who likely have not caught wind of this loophole in the agreement and its ramifications.  The situation could evolve once the market catches wind of this rather lopsided agreement, but given the fact that it took almost a year for the two to reach a new agreement, the possibility of an early revision to the current agreement seems unlikely.  I rate Walgreen as a short or sell and Express Scripts as a buy or hold.  

Betting the Bank on Bank of America

This post is syndicated at The Motley Fool Network: http://beta.fool.com/malayappan/2012/10/25/betting-bank-bofa/15187/

Bank of America (NYSE: BAC) has had a roller coaster ride over the past few years.  Emerging with quite a few bruises from the financial crash of 2008, Bank of America deserves a serious look now--not that all of its woes have disappeared completely, but the worst of the storms appear to have passed.  BofA, as Bank of America is often referred to, beckons even the most timid and reticent of investors.

The first indication that the skies are clear for any stock is its ability to brush off any negative news.  On Oct. 24, news emerged that Federal Prosecutors were suing BofA for $1 Billion (SEE LINK).  The lawsuit alleged that Countrywide Financial, the mortgage issuer that BofA had acquired, had rapidly issued loans without properly vetting the borrowers. According to the Feds, this was part of a scheme called the “Hustle” that sought to speed up the process of loan origination and reselling to Fannie Mae and Freddie Mac (SEE LINK).  BofA's stock barely moved in response to this announcement.  This is in stark contrast to previous occasions where the slightest whiff of a lawsuit resulted in massive stock moves.

BofA’s most recent earnings report was decent, although not spectacular, and the market shrugged that off too (SEE LINK).  Total average deposit balances rose by 6% from the previous quarter, and this is always a good sign.  More importantly, first lien mortgage production increased by 13% from the previous quarter. There are other positives as well, but it is heartening to note that the bread and butter business of BofA is improving.  It appears now that the bank is on the road to appreciation and recovery, although the process is likely to be slow.  More importantly, Wall Street is finally showing patience with this stock.

Taking a look at the core metrics of the stock itself, there appears to be room for growth.  The Book Value per share is $20.40, which is more than what Bank of America is currently trading at (about $9.35).  Of course, this is widely known and often offered up as a compelling reason to buy the stock.  However, it is only now that this claim appears to be obtaining some “street cred.” 

Earlier this year, BofA shot up to about $9.55, only to fall back to about $7.35 barely a couple of months later.  The recent gains have been more gradual and appear to be better sustained.  The current P/E is below 10 and appears to be fair for a bank, and the fact that the assets are increasing means that a healthier P/E is justified down the road.

From an investor’s perspective, it helps that one can place a bet on this stock alongside Warren Buffett, who made a $5 billion investment in 2011.  Although his investment was largely in Preferred Stock, along with warrants for 700 million shares of common stock at a strike price of $7.14, it still represents substantial faith in the future of this company.  More recently, BofA’s CEO boasted about his bank’s “top capital” balance sheet, and hinted at higher dividends down the road (SEE LINK).  Obviously, higher dividends means there will be more buyers of the stock later on, and therefore more stock price appreciation.

It appears that BofA is in an attractive place right now and worth taking a second look.  I rate Bank of America a buy.

Of Apple and Amazon and the Bernanke Freight Train!

This post is syndicated at The Motley Fool Network: http://beta.fool.com/malayappan/2012/10/30/of-apple-and-amazon-and-the-bernanke-freight-train/15255/

Investors waited with great trepidation on October 25 as two technology giants - Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) were positioned to release their third quarter results after the bell. A week earlier, the fiasco of Google (NASDAQ: GOOG) was fresh in everyone's minds as the stock tanked massively as a result of an unintended premature earnings release as well as poor performance.  Google lost about 8% in a day after huge seesaw action when trading on the stock had to be halted due to the unexpected early release as well as poor results.  Since Google, Apple and Amazon are all very popular stocks, Investors were anxious about the results to be announced yesterday because the possibility of a repeat performance weighed heavily in their minds.  Turns out, the fears were overblown and let’s figure out the reasons why.  It might save our portfolios, at least in the near term!

First, the reaction to a disappointing report from Google appears to have been an anomaly in the current investing environment and attributable mostly to the early and premature earnings release during the day.  It was an over-reaction and it is quite possible that had this not happened, the stock would not have lost so much as a result, despite the results.  Second, third quarter expectations for most stocks was quite tempered.  In other words, the bar was not set too high and when this is so, disappointing numbers typically don't result in a huge stock decline post earnings in such cases.  However, after watching the reaction to Google's announcement last week, Investors were not so sure.  Therefore, what happened after the earnings announcement of Apple and Amazon on October 25 is important to note.

As of market close on Friday, Amazon was up about 7% and Apple was down about 1%.  In light of the fact that Amazon missed earnings estimates and Apple reported mixed results, this is noteworthy.  The market usually punishes such stocks when expectations are not met and initially this is what happened after hours and for some part of the trading day of October 26.  Then, both stocks rallied presumably because Investors viewed the pull back as a buying opportunity and therein lies the clue! 

Fed Chairman Ben Bernanke's third round of bond buying commonly known as QE3 has generated such enormous liquidity in the market that there is plenty of equity purchasing power floating around.  Some call this the "Bernanke Freight Train" and an investor better not be in front of it, lest he or she be crushed by it!  Bottom line is that if one goes short on a stock just because it is appears quite expensive in a volatile investing environment, it does not mean that this is the best time to short it. 

Investors commonly justify stock valuation in terms of P/E ratios and since Apple and Google have forward P/E ratios of 10 and 14 respectively they might very well continue buying.  Amazon on the other hand has a forward P/E of 130, yet amazingly enough, the stock appreciated after the earnings report!  It would appear that what could be termed "expensive" is simply in the eyes of the beholder.

There are exceptions though.  One notable one was Chipotle Mexican Grill (NYSE: CMG).  Chipotle dropped nearly 10% after failing to meet estimates.  However, in this case there already was considerable overhang on the stock courtesy of money manager - David Einhorn, who recommended shorting the stock due to increased competition from Taco Bell whose parent company is YUM! Brands (NYSE: YUM).  Taco Bell has now introduced a new gourmet line called Cantina Bell that supposedly rivals the fast casual menu that Chipotle is famous for.  It is important to note that Chipotle’s P/E ratio before the drop was over 30 which together with the rationale provided by Mr. Einhorn led many to believe that Chipotle shares were over-valued.

Of course, it is possible that analysts could come in later and reduce price targets and earnings estimates in light of the Q3 earnings.  However, given the price action in play after observing the earnings reports so far, it appears unlikely that there would be substantial downward pressure as a result of downgrades unless they are quite severe.  This is not a good time to be a Bear due to the bullish trend of the market despite occasional dips as the market heads towards year end.  It is safe to say that while there is substantial concern over the headwinds generated by the prospect of the coming "Fiscal Cliff" which is simply a colloquial term for a coming expected automatic combination of tax increases and spending cuts, the tailwinds generated by the QE3 actions by Mr. Bernanke quite effectively counter it.  

So, what is an Investor to do?  The safest approach if one decides to buy would be to look for healthy stocks with an excellent growth story that could benefit with attention from investors flush with liquidity.  An example is NCR (NYSE: NCR), which is a well-known supplier of Point of Sales (POS) equipment (SEE LINK).  It turns out that NCR is a leader in supplying the new type of banking ATM's that have disposed with the use of envelopes for making deposits and directly scan and read checks and cash and send a rich email confirmation.  They bring a whole new experience to automated banking and are quite popular.  

On the other hand, one could also hold, watch and wait until there is more clarity in the horizon.  Making huge bets ahead of the key events mentioned in this post might be tempting, but certainly not the brightest idea and highly discouraged!  At the very least, it is best not to discount the Bernanke Freight Train!

Is it Time to Cross the "Ford"?

This post is syndicated at The Motley Fool Network: http://beta.fool.com/malayappan/2012/11/02/is-it-time-to-cross-the-ford/15498/

Ford Motor Company (NYSE: F) released its results today on Tuesday, October 30 despite Hurricane Sandy shutting down Wall Street.  It was hard to miss the irony - while hurricane Sandy was bringing torrential rain into the eastern seaboard of the USA; FORD’s results were essentially making the case to investors to symbolically “cross the Ford.” The dictionary meaning of FORD is a crossing across a shallow body of water through wading.  The question is this – are investors now able to take the recovery signs seriously enough to step into the “Ford” and go buy Ford shares?  Turns out, the answer is "Yes"!

Ford delivered extraordinary results for the third quarter, with $2.2 billion in operating profit along with net income of $1.6 billion.  According to Ford, this is their best ever third quarter pre-tax profits, driven by record North American results.  Analyst expectations were for 30 cents a share in earnings.  Ford beat that by 10 cents with 40 cents in earnings per share.  Furthermore, Ford states that this is the highest quarterly profit and operating margin that its North American unit has shown since the year 2000.  This is correct when the results were broken out with the North American region as a separate business entity.  In effect, this appears to be a solid North American growth story.

Ford’s results are more solid than the generally better third quarter performance by its North American based rivals for the third quarter.  General Motors (NYSE: GM) and FIAT both reported better than expected earnings this week as well.  FIAT owns Chrysler, the brand that obtained the US government bailout along with GM. According to FIAT, US Vehicle sales increased by 14% for Q3 and interestingly, sales of the Dodge RAM pickup had its best September sales performance since 2007.  Pretty impressive given where gas prices have been lately.  A glance at the earnings report shows North American automotive sales performance via the Chrysler unit is better for the most part compared to FIAT’s other units across the world.

GM also reported profits although its Q3 results were affected by poor performance in Europe, just like Ford.  GM’s income for this quarter was $1.5 billion compared to $1.7 billion a year ago for the same quarter and its European business appears to be a drag as well and explicitly called out in their earnings release. According to the release, there is a “still a lot of work to do.”  I wouldn’t be surprised if there is restructuring in the horizon for GM’s European operations as well.  Sales for GM’s North American unit were lighter than last year’s Q3 numbers and also affected the earnings. Earnings expectations were a consensus of $0.68 per share and GM did better with $0.89.  No wonder the shares rallied and Investors appeared to agree with CEO Dan Akerson’s assessment that “GM had a solid quarter.”   

Compared to GM and FIAT, Ford appears to be best positioned to do substantially better than its peers.  After all, FIAT’s commitment to Chrysler is still unconvincing and the US government’s stake in GM continues to be an overhang on the stock.  The US government could unwind some or all of its holdings at an inopportune time and that could put pressure on the stock just when it starts to look good.  So, what is Ford’s Achilles heel?  Well, thanks to last week’s announcement regarding Ford’s plan to restore profitability and growth in Europe, we know.  On October 25, Ford announced a restructuring plan that included the closure of some facilities in Europe, workforce reductions and productivity improvements.  The third quarter profitabilityannouncement is all the more remarkable after Ford disclosed last week that the loss that it has suffered in European operations is expected to exceed $1.5 billion.  The current plan calls for a return to profitability in Europe by 2015. 

Ford shares have been in decline since January 2011 from about $18 after a meteoric rise from about a couple of dollars per share in January 2009.  Ford has strong and committed management and we must remember that it is the only American automobile manufacturer who chose to slog it through the 2008 depression without government bailout funds.  Through either prescient planning or fortuitous decision making, Ford had lined up private sector financingahead of the stock market crash of September 2008.  Not that avoiding bankruptcy or using government bailout funds is a huge reflection of superior management competency, but it does show that Ford does plan ahead and does so consistently.  The recent European plan announcement is a reflection of that trend.

Ford shares have been on a slight upward trajectory since August 2012 and have a forward P/E ratio of about 7.  That is slightly below peers and overall, Ford does have room for growth as automotive sales throughout the world is showing signs of picking up. In addition, Ford has a vastly improved reputation with existing and new customers and this is mostly due to the way the company has conducted itself in recent years.  As the economy improves over the next year and beyond and as consumers who have put off car purchases start buying again, the Ford story is only going to get better.  I rate Ford a Buy.      

Can This Company "Compound" Another Miracle?

This post is syndicated at The Motley Fool Network: http://beta.fool.com/malayappan/2012/11/05/can-company-compound-another-miracle/15697/

Pfizer (NYSE: PFE) reported third quarter results on Thursday, November 2, 2012, which was weak, disappointing and did not meet analyst expectations without excluding one time charges.  This company, once a purveyor of the world’s leading drug – Lipitor reported dismal sales of Prevnar, its bestselling vaccine for children, further decline in Lipitor sales and uneven growth in sales in emerging markets due to government purchase programs.  Pfizer’s block buster drug, Lipitor lost patent protection status about a year ago and the company has sought to stem the defection to much cheaper generics by doctors and customers.  Turns out, the bleeding continues and eats further into its bottom-line.

Analysts expected $0.49 cents per share and Pfizer reported $0.43 cents per share.  According to the company, Lipitor’s declining sales; especially in “developed Europe” was the primary reason for the poor Q3 performance, thus showcasing the huge impact that this drug has had on the company’s revenue.  The company also blames the “unfavorable impact of foreign exchange,” as another factor because international revenues represent 60% of the total. Also cited is the loss of patent protection for several other drugs such as Xalatan and Geodon in “developed Europe” and the USA. In case you were wondering, “developed Europe” consists of the countries that exclude formerly eastern European countries, Russia etc., although I don’t see a definitive list anywhere.

Competition From Generics

So, Pfizer’s Lipitor sales is in decline, its pediatric vaccine – Prevnar is losing ground and loss of other patent protected drugs is sending customers into the open arms of aggressive manufacturers of generics such as TEVA Pharmaceuticals (NYSE: TEVA) and Ranbaxy Pharmaceuticals (RBXZF.PK). Another manufacturer of generics, Watson Pharmaceuticals(NYSE: WPI) actually has an agreement with Pfizer to redistribute the generic version of Lipitor made by Pfizer itself.  Watson is especially interesting.  It has had phenomenal growth, its stock has practically doubled over the past four years and it reported excellent Q3 results with $1.35 per share versus analyst estimates of $1.28 per share.  Watson Pharmaceuticals also just completed the acquisition of Actavis group, its partner from Switzerland for $5.9 billion and also guided earnings per share for 2012 at a range higher than analyst estimates.  In 2013, Watson will rename itself as Actavis and after the acquisition is now the world’s third largest generics manufacturer after Teva and the generic unit of Novartis (NYSE: NVS) called Sandoz.

Ranbaxy actually was the first to legally challenge Pfizer’s Lipitor patent and is a large Indian Pharmaceutical manufacturer with a huge customer base in India alone.  Ranbaxy has a large customer base abroad, is well positioned in the African market and is making large inroads into the European and American market as well.  The Indian population has a vastly disproportionate incident of heart diseases, so expect Ranbaxy to profit from increased revenue derived from generic Lipitor sales.  Teva is an Israeli manufacturer with substantial presence in the US market and reported Q3 revenues of $5 billion.  This actually represented a loss of $0.09 cents per share versus the consensus estimates of $1.25 per share due to the absorption of one time charges.  Still, the market rewarded Teva, post earnings.

Prospects for Another Blockbuster

So, the question is, in the face of fierce competition from generics manufacturers, can Pfizer hope to regain the once hallowed status as “the world’s leading pharmaceutical compounder?”  Reading the earnings report and other financial releases and press releases of Pfizer, one does not get the sense that there is another blockbuster drug in the making.  The company’s stated strategy appears to be increased share buybacks and sales of some of its core units to companies such as Nestle (NESN.VX).  In fact, upon reading the earnings report, it is clear that the sale of Pfizer’s Nutrition unit to Nestle is expected to fuel some if not all of the costs related to the share buyback program.  Also, Pfizer narrowed its full year earnings forecast and effectively lowered it.  It would be safe to presume that management has no pretensions of "compounding" another mega blockbuster in the same scale as Lipitor!  Absent another "miracle drug" in the making, no wonder management is doing whatever is practically necessary in order to entice new Investors and keep existing ones happy.

Strong Push Towards Prescribing Generics

Across the board, in the USA, where Pfizer gets 40% of its revenues, medical insurance companies as well as Medicare and Medicaid are switching the bulk of their pharmacy benefits to generic drug formulations.  It is a trend that has now become quite an avalanche.  Pharmacy Benefit Managers (PBM’s) such as Express Scripts (NASDAQ: ESRX), now provide patients with a preferred drug list (also known as a “formulary”) and in fact disallow brand name drugs when a generic substitution is available.  In the past, doctors were only “encouraged” to prescribe generics if “medically appropriate” and they were asked to check a box on their prescription stating that generic substitution was okay.  The difference now is that the doctor might not have a choice anymore when it comes to some brand name drugs on the PBM’s formulary. So, while brand name Lipitor is still available at your local pharmacy, the doctor will need to always prescribe the generic equivalent if the PBM says that the doctor does not have a choice.  That's a big, new difference in a scenario where the doctor habitually only prescribes Lipitor!

So, what is Pfizer to do?  Make no mistake – the company still has a substantial portfolio which includes an “Animal Health” unit that is also being divested.  Pfizer could also materially benefit from the continued implementation of the 2010 Patient Protection and Affordable Care Act (also called “Obamacare”). There are drugs in the making that could potentially turn out to be great money makers but one never knows.  It is notable that the company is resorting to share buybacks, unit sales and possible further spin-offs of its established businesses as independent entities.  Shareholders are becoming impatient and potential Investors are reluctant to step in until they see better prospects.  The two drugs that are awaiting FDA approval are Tofacitiniband Eliquis.  Eliquis was actually disapproved by the FDA earlier this year but has agreed to again review their decision in March of 2013. In the meantime, although the stock has appreciated in 2012, right now it is time to hold if you already own the shares and if you plan on buying, do so over the coming months in installments.  Pfizer does pay a dividend and is planning to pay a dividend of 0.22 cents per share for Q4.      

Will Fibonacci Save Microsoft?

This post is syndicated at The Motley Fool Network: http://beta.fool.com/malayappan/2012/11/05/will-fibonacci-save-microsoft/15779/

Microsoft Corporation (NASDAQ: MSFT) just released Windows 8, on October 26, sporting an entirely new Interface that encompasses both touch screen and traditional windows capabilities.  Windows 8 is Microsoft’s newest operating system and almost $2 billion was poured into its marketing according to Forbes magazine.  This makes one wonder if that kind of marketing heft took the much vaunted Fibonacci numbers into account.  Especially, the number "8" and the impact that it might bring to bear on Microsoft's stock!

What exactly is a Fibonacci number?  In essence, it is a mathematical sequence consisting of numbers that are the sum of the preceding two numbers.  For example, 0, 1, 1, 2, 3, 5, 8, 13 etc. are all numbers in the Fibonacci sequence. Many traders on Wall Street love the Fibonacci number to help make price movement predictions and then trade stocks based on those predictions.  They call themselves “Fibonacci Traders,” and claim to divine market movements with such accuracy that their frenzied chatter is bound to send the average Investor into a tizzy.  For us Foolish Investors, suffice it to watch the fun from the sidelines, but nevertheless we should understand that Fibonacci has an influence on Wall Street.  Is the choice of the moniker –Windows 8 perhaps based on a prophesy that the number 8 could somehow revitalize and rejuvenate Microsoft's stock?  Will this new operating systems release somehow make a difference to a mature company’s prospects?  Let us look at it from a Foolish perspective, shall we?

No Sense of Urgency

First, you need to know that I practically grew up with Microsoft DOS (aka MSDOS), Windows 3.1 and the various flavors on both the consumer side and the server (IT department) side since 1990.  I was certified on several Microsoft products and my livelihood as a database technology consultant means that I still actively use the products made by Microsoft on a daily basis.  I had the ability to preview Windows 8 for over a year and had access to the full blown retail product that was released on October 26 long before the release date.  Yet, at the time of this writing I have still not installed, tested or evaluated Windows 8.  Not because I did not have the time and certainly not because I was lazy.  The fact of the matter is, I never felt the need because I was perfectly happy with Windows 7 which currently powers my laptops and desktop computers around my work and my home.  Windows 7 by the way was released in 2009, but it reached widespread installation and use late into 2010 and early 2011.  In fact, many corporate IT departments around the world are still rolling out Windows 7! The previous version, Windows Vista was in most respects an unmitigated disaster and companies and individuals held off upgrading until Windows 7 came along.  Now, Microsoft is asking all these people to upgrade to Windows 8 again, so soon?  Therein lies the problem.  Where is the urgency?  Gartner Inc.(NYSE: IT), the IT research and advisory company, cautions that Windows 8 adoption is likely to be slow and a “big gamble.”

Touchscreen Revolution

Microsoft is banking on the fact that the touchscreen revolution that earned Apple (NASDAQ:AAPL), millions of new fans around the world will quickly embrace Windows 8 as well now that the Windows world is touch enabled!  There is a paradigm shift with this new way of navigating the Windows environment and for those who don’t care for the touch screen environment (including your’s truly), this is a problem.  Apple products have their space and their place in the minds of consumers, but many of these same consumers appreciate the Windows environment in a different context and seldom do these two worlds intertwine.  Unless one is an Apple fanatic, most people I know use a Windows computer to do productive work (that includes typing) and use touch screen devices such as Apple’s iPad and iPhone’s and Motorola Mobility’s Android driven phones to do lighter tasks.  Motorola Mobility has now been acquired by Google(NASDAQ: GOOG).  Google owns the Android software that it gives away to everyone including companies such as Samsung Electronics for free to power their touch screen smart phones and devices. 

Wowing the World & Wall Street

Microsoft is banking on the Windows 8 operating system to enable it to develop a commanding presence in the tablet and smart phone markets as well as cementing its role as the dominant, de facto corporate standard.  The last time it went all out to wow the world was with the launch of Windows 95 in 1995.  If you take the “9” out, “5” is a Fibonacci number and if there was any prediction out there that Microsoft would do well with Windows 95, then that prediction came true!  However, Fibonacci number or not, “8” is not likely to bring much muster to Microsoft’s “gamble.”  Well, at least not in the near horizon.  Gartner expects widespread adoption by corporate IT departments no earlier than 2015!  That is a long wait for Investors in Microsoft stock.  Mind you, this is not a stock with a likely growth trajectory like Apple.  Microsoft is a mature yet stable company with an enormous user base across the corporate and social spectrum throughout the world.  That base is unlikely to abandon ship anytime soon.  The company might want to grow and expand this base, but unless another billion users around the world join the billion Windows users that exist already, expect to sit on a relatively mature and mostly stable stock.  Microsoft also pays a decent dividend which for the past four quarters was $0.20 cents per share.  Just don’t expect to double your money!

So, what should you do if you want to invest in the stock as a new Investor?  If you want to buy, do so for the fundamental reasons, not because you expect something spectacular to happen in the next few months or even years.  As always, I recommend that any buying decision should involve small lot purchases over time.  That way, one always gets to take advantage of dollar cost averaging.  If you are already an owner of Microsoft stock, then hold it.  Lack of fast adoption of Windows 8 is unlikely to massively tank the stock because despite the media hype, market expectations are not that great anyways.

Can CVS and Express Scripts Sustain Their Rebound Relationship?

This post is syndicated at The Motley Fool Network:
http://beta.fool.com/malayappan/2012/11/06/can-cvs-and-express-scripts-sustain-their-rebound-/15827/

Express Scripts (NASDAQ: ESRX) and CVS Caremark (NYSE: CVS) report third quarter results on Monday, Nov. 5 and Tuesday, Nov. 6, respectively.  What they report should be interesting to watch because they are both apparently in a rebound relationship after Express Scripts broke up with Walgreen (NYSE: WAG) over contractual terms last year.  Unfortunately for Walgreen, Express Scripts apparently had the upper hand as patients migrated over to CVS and Rite Aid (NYSE: RAD).  Walgreen and Express Scripts kissed and patched up recently, and I wrote about how Walgreen perhaps turned out to be the loser.

Express Scripts is a Pharmacy Benefits Manager (PBM), and therefore the primary contract holder for drug benefits for millions of patients across the country.  Self-insured companies and Health Insurance plans negotiate with PBM’s like Express Scripts and Caremark (owned by CVS) to obtain the most cost effective rates for drug distribution.  Express Scripts, in turn, relies on Pharmacy networks such as Walgreen and Rite Aid to reach patients, in addition to operating its own mail order pharmacy. 

After the spat with Walgreen, Express Scripts tried aggressively marketing its mail order pharmacy as a convenient, cost effective and more efficient alternative to retail pharmacies. However, perhaps in order to lessen the pain, Express Scripts also pointed out to Walgreen customers the existence of alternatives, such as CVS Pharmacy and Rite Aid, within a mile of any Walgreen. 

Complicated Relationship

The relationship between a PBM like Express Scripts and a retail pharmacy network like CVSor Walgreen is complicated.  On the one hand Express Scripts depends on the retail locations that these pharmacy networks offer.  On the other hand, these networks themselves pose a threat to Express Scripts, since they themselves own PBM’s that pose a competitive threat.  CVS owns Caremark, which is a huge PBM.  Express Scripts took steps to counter the challenge, and became bigger by merging with another PBM, Medco Health Solutions, for $29.1 billion.

Walgreen does not currently own a PBM and therefore did not have the wherewithal to pose a threat in the PBM space to Express Scripts.  Walgreen did own a PBM before called Walgreen Health Initiatives that it sold to Catamaran .  No wonder Express Scripts had a vested interest in developing a close relationship with Walgreen versus CVS.  It was an open secret as to how much Express Scripts and Walgreen depended on each other. 

However, it appears that Walgreen might be preparing to create another PBM that could directly compete with Express Scripts.  In June 2012, Walgreen acquired a 45% stake worth $6.7 billionin Alliance Boots, the United Kingdom’s largest pharmaceutical distributor.  Walgreen has the option of acquiring the remaining 55% in the next three years.  Alliance Boots is not yet a Pharmacy Benefit Manager in the USA, but it appears that Walgreen is positioning it to become one by creating a new joint venture!  According to Walgreen this is part of the strategic partnership relationship program.  It appears that the love-hate affair between the two might be just heating up.

Migration of Customers to CVS and Rite Aid

Both Rite Aid and CVS reported that after the rift between Express Scripts and Walgreen they were able to pick up much of the approximately 60 million prescriptions that Walgreen lost as a result of the contract termination.  CVS especially reported in its Q2 earnings report that there was a “significant benefit” from the dispute.  Rite Aid reported in its Q2 earnings announcementin September that there was a benefit of additional prescriptions from the dispute.  Walgreenreported Q4 results on Sept. 28, and not surprisingly disclosed the negative impact of the dispute with Express Scripts.

It is important to note that standalone drugstores are not the only options available to a patient.  Supermarkets such as Wal-mart, Target and Kmart - owned by Sears Holdings have a pharmacy section as well.  Grocery stores such as Kroger, Publix and Super Stop and Shop have pharmacy sections also. In fact, pharmacy units of such stores offer extra incentives such as rock bottom $4 prescription refills for popular generics targeted towards customers without medical insurance.  Such discount drug programs build a loyal customer base by enrolling those without insurance who might later continue even after becoming insurance eligible.  Suffice it to say that there are plenty more alternatives out there than one might realize.

Different Expectations?

Now that Walgreen and Express Scripts appear to have patched up their differences and signed a new agreement, should we expect different results from Express Scripts and CVS Caremark next week?  I don't think so.  It is too soon to see the impact of the new agreement, and as I mentioned in my recent post there are aspects of the agreement that gives us pause.  Express Scripts claims that Walgreen is a member of its “broadest network of pharmacies.”  It neglects to mention that while this may be true, there might be several new networks that do not include Walgreen. 

Under the new agreement, former Walgreen customers like me are unable to switch back because my company chose a lower cost network that continues to exclude Walgreen.  The new contractual provisions of the agreement might not give patients any choice!  It is quite conceivable that CVS and Rite Aid might get to keep a substantial portion of their new customers from Walgreen after all.  CVS might report good results anyway since they have cannibalized Walgreen customers successfully for over two quarters.

Express Scripts is another story.  The only way they could show greater margins is if they have successfully steered away customers towards generics, which generate less revenue but more profits.  Additionally, it remains to be seen if they have also convinced more customers to try out their mail order pharmacy because that also generates greater revenue and profits by cutting out the retail pharmacy in the distribution chain. In addition, investors will need to figure out how the Medco acquisition affects the bottom line.  The forward P/E ratio for ESRX is 13.78, which is roughly halfway between that of competitors such as WellPoint (NYSE: WLP), which has a P/E of 7.6, and Catamaran, which has a P/E of about 28.

I rate Express Scripts a hold and CVS a buy.

Banking on Goodwill Through Hurricane Sandy!

This post is syndicated at The Motley Fool Network: http://beta.fool.com/malayappan/2012/11/09/banking-goodwill-through-hurricane-sandy/16075/

Last week, on Oct. 29, Superstorm Sandy tore through the New York Tri-State area (New York, Connecticut and New Jersey) with a vengeance.  This was the second time that the area, and Connecticut in particular, was affected right before Halloween, prompting cancellations of trick or treating.  Last year in 2011, the area was slammed by a freak snowstorm that caused enormous damage in Connecticut and some parts of New York, but appeared to have largely escaped notice by the media. The area actually suffered quite a bit in 2011, more perhaps than many people realize. 

Unprecedented Response from Businesses

Hurricane Sandy, or “Superstorm Sandy” as it was called, evoked a totally different reaction.  The response from everyone - media, government, social organizations and concerned folks around the country - was overwhelming.  It is what you might expect in any natural calamity.  However, this response included a little-talked about difference.  Businesses such as banks, insurance companies, and online retailers like Amazon (NASDAQ: AMZN), tripped over each other trying to assure us that our welfare and well-being was uppermost in their minds, and that they would do everything in their power to ensure a painless experience!  Banks and credit card companies such as Citibank (NYSE: C), American Express (NYSE: AXP), JP MorganChase (NYSE: JPM), and others told us that they would be extraordinarily gracious and helpful to us in this time of need.  They offered extremely generous terms that included waiving late fees, overdraft fees, and other unprecedented actions.  I had to pinch myself to make sure this was all for real!

I don’t know how or why this all started, except that a trickle turned into an avalanche.  First, my insurance company sent out the following note:“If you suffer a loss as a result of this storm, you can file a claim anytime day or night.”  Sounds reasonable, I thought.  That was reassuring, although it is a service they already offer.  Next came an innocuous message from Walgreen(NYSE: WAG) saying, “Be Hurricane Ready – We have your emergency essentials right around the corner.”  Well, I would have thought they would be stocked on those things.  Also, since I had subscribed to their alerts, I didn’t mind that they reminded me.  Later, I received this message from Citibank:

We hope you and your family are safe. We also would like to make you aware of services that are always available during any emergency situation.

Please know we are ready to provide financial recovery solutions should you be in need of assistance, including access to cash and waiving fees, if you have been impacted by the storm. We encourage you to contact customer service and we will work to help with your individual needs.

As always, thank you for banking with Citi.

Now, that was interesting!  Citibank was going to waive fees? Provide access to cash? What exactly did that mean?  Before I could dwell upon it, emails started streaming in to my email inbox.  The other banks that I have a relationship with started sending similar messages.  JP Morgan Chase sent out the broadest ranging message of them all:

Earlier this week, we announced we will waive or automatically refund a number of fees through October 31st for our customers in Connecticut, Delaware, Maryland, New Jersey, New York, Pennsylvania, Virginia and the District of Columbia. As the storm cleanup continues,we are extending those waivers through Thursday, November 1st, and to customers in Massachusetts, New Hampshire and Rhode Island. Those fees include:

Overdraft Protection Transfer, Extended Overdraft, Returned Item and Insufficient Funds Fees for deposit accounts.

Late fees on credit cards, business and consumer loans, including mortgages, home-equity, auto and student loans.

Wow!  That kind of blanket gesture was unprecedented at least for me.  I am not sure if this kind of proactive gesture was extended in other previous calamities such as Hurricane Katrina or Hurricane Andrew.  Judging by the fact that the average Overdraft Fee is in the $30 to $35 range, this gesture is by no means small.  Other fees are in a comparable range, and those who could benefit from this “hurricane forgiveness” will likely be thankful to the banks.  The question is, how big of a hit was this to the banks?  The most likely answer is “small.” The question that we really need an answer to is, “why;” the answer to that will help us as investors.

Reasons for the Goodwill Gesture

Consumer belt tightening post-2008 likely means that extending such enormous goodwill posed little risk to the banks.  However, I am sure that the anticipated benefits were huge.  Most consumers are taking steps towards not putting themselves on the “fees radar” of banks and taking proactive steps to avoid paying unnecessary fees under any circumstances.  So, this untimely storm would have not unduly disrupted the banking life of most customers targeted by these companies. 

In addition, consumers are getting information and protection from the Consumer Financial Protection Bureau, a new consumer watchdog setup under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  The agency’s charter is to “protect families from unfair, deceptive, and abusive financial practices.” It is likely that financial companies want to stay ahead of the game by preempting investigations and generating goodwill. 

Non-financial companies like Amazon, Walgreen, and others likely want to show that they care enough by proactively reaching out.  They reached out to those consumers that they have a relationship with and likely generated further business through goodwill.  In any case, the cost to these companies was likely minimal.  However, the fact that they chose this natural disaster to demonstrate their commitment to their customers is an important milestone.  It was done without much fanfare, and sets up future expectations. 

So, why didn’t they do it sooner?  Two words: Social Media!  LinkedIn (NYSE: LNKD) andFacebook (NASDAQ: FB) would have been abuzz with a flood of messages if they had screwed up or appeared insensitive in a time of need.  Imagine thousands of wall posts from consumers gouged by a plethora of fees just because they could not get to the bank to deposit a check or get to the post office to drop off a payment.  That might help them earn the goodwill and trust necessary to generate additional business.  Bottom line – a small investment in goodwill brings huge returns!

Banks might have recently earned a reputation as sleazy, untrustworthy businesses that took advantage of consumers when the going was good.  However, they are taking steps to redeem themselves and are ramping up on their efforts to repair relationships and increase retail banking revenue and this is one of their first steps.  I rate JP Morgan and Citibank as buys.

Serving up "Bluebird" for a Song!

This post is syndicated at The Motley Fool Network: http://beta.fool.com/malayappan/2012/11/12/serving-bluebird-song/16143/

There is a quiet prepaid card revolution happening out there and American Express (NYSE:AXP) is at its forefront.  Long a purveyor of charge cards to the wealthy and well off, this card issuer and bank has slowly but steadily expanded to credit cards and now prepaid cards.  American Express operates several businesses which include a travel business, an insurance business and a traditional bank among others.  In contrast to rivals such as Bank of America or JPMorgan Chase (NYSE: JPM), American Express had and still has a cachet among upper income families and Americans in particular.  Even today, carry an American Express card across the border to Canada or across the "pond" to Europe and you will instantly get identified as an American.

Bluebird for a Song

In October, American Express and Wal-Mart (NYSE: WMT) announced in a news release that they had teamed up together to offer Bluebird, which according to them is a new alternative to checking accounts and debit cards.  This credit card like product is available at Wal-Mart stores countrywide as well as online at www.bluebird.com. The news release goes on to position Bluebird as the best alternative to traditional banking products for “poorly served consumers.”  In fact, I read it differently.  The product is likely tailored for poor consumers who are unlikely to have a traditional checking account and rely on check cashing storefronts such as Western Union or Moneygram International. Now, these customers will have access to a Bluebird kiosk at every Wal-Mart and pay little or no fees for almost every convenience.  American Express and Wal-Mart would love to tell you that they are offering the Bluebird card for a song!    

A quick glance at this product actually produces a very satisfying first take.  The FAQ’s describe various scenarios where a fee will not be applied and it turns out that the only fee that is assessed is the $2 ATM withdrawal fee.  I called the American Express toll free number for Bluebird and questioned them extensively on the terms and conditions.  To sign up, you could buy a $5 “starter kit” from Wal-Mart and then sign up online to get a personalized credit card that comes to you in 7 to 10 days.  However, the kit is designed to get you up and running immediately after you load it up with funds.  Alternatively, you can go online and directly sign up for free in order to avoid the $5 starter kit fee.  The only catch is that you have to wait for 7 to 10 days to get your personalized card.  Either way, you get access to an amazingly well thought out brand name pre-loaded debit card that offers most of the benefits available to a full service American Express charge card customer including the very valuable 90 day buyer protection.

Serving up Prepaid

I was actually surprised that the Bluebird card came so close on the heels of the other similarly designed card from American Express called Serve.  A few months ago, I signed up for the card after I got an email solicitation offering me a $25 deposit bonus for signing up.  All I had to do was to initially load up with $25 from my checking account.  Serve offers up many of the same benefits available to a Bluebird card holder including making "person to person" payments, meaning to those who have a Serve or Bluebird account as well or agree to sign up for one.  According to American Express, with Serve, “consumers can make purchases and person-to-person (P2P) payments online (serve.com), via mobile phones, and at millions of merchants who accept American Express cards.”  The cornerstone of the Serve or the Bluebird card is the ability to use a smartphone app to make payments, send and receive money and manage their entire account including the reloading part. 

When you look closely at both Serve and Bluebird and a third product called American Express Prepaid, they all appear to share the same platform and offer for the most part seemingly identical features. However there appear to be slight differences.  Serve allows the creation of “personal widgets” that one could use in “shopping carts” on personal webpages or for funding charity fundraisers.  Plus American Express has partnered up Serve with Zinga to offer a rewards program that allows point accumulation for use in Zynga’s online games.  Other than that, American Express has done a nifty job of deftly branding its products so that they appeal to their respective target audiences.  As mentioned before, you can send and receive money from anyone with a like account such as Bluebird or Serve.  However, the ability to negotiate such amounts (in case of buyer-seller transactions on the Internet is named differently.  Serve calls it “negotiation” and Bluebird calls it “suggest new amount.”  Notice the subtle difference?  Of course.  Serve is seemingly intended for a more sophisticated audience while Bluebird is well, aimed at the common man on the street.  Either way, American Express wins and makes more money!

Going Liquid with Chase

The closest direct competitor is Liquid from Chase.  However, Liquid comes with a $4.95 monthly fee although Chase tells you that there are ways to avoid the fee by exceeding some account thresholds.  There are arguably some conceivable advantages to use the more widely accepted VISA branded Liquid card.  Backed by a major, easily recognizable bank, Liquid is definitely a direct alternative to the prepaid products from American Express.  The other significant competitor is GreenDot (NYSE: GDOT), that until recently was the undisputed leader of the prepaid world.  There is a $5.95 monthly fee for using Greendot’s products and fees for other items as well.  Similar to Liquid, Greendot says that the monthly fees can be avoided through certain actions such as loading high amounts onto the card or performing a set number of transactions.  Either way, neither Liquid nor Greendot can match the newly energized prepaid cards from American Express and therein lies the Investment opportunity!

Going Long with American Express

AXP has a forward P/E of 11.75 and a 5 year PEG ratio of 1.16.  Its prepaid competitors - JPMorgan Chase in contrast has a P/E of 7.59 and a PEG ratio of 1.24 while Greendot has a P/E of 8.16 and a PEG ratio of 0.44.  At first glance, GDOT might appear cheap compared to JPM and AXP.  There is a reason for it and it is because American Express is poised to eat Greendot's lunch.  While prepaid cards are one line of business for both Chase and American Express, Greendot depends on it!  Now, with American Express going aggressively after GDOT’s core business, guess who is going to win? So, compared to GDOT, is AXP’s higher P/E justified?  Judging by the substantial inroads that American Express has made into the prepaid market, you bet!

I rate AXP a buy.​