S&P’s Valuation and Risk Strategies research group has identified six post-IPO laggard companies with a similar profile to Martha Stewart Living Omnimedia (MSO) that could follow the same path of looking for strategic investors or partners.
“The Valuation and Risk Strategies research team decided to review companies that, since their IPO, have fallen in value by more than 79% but now expect a turnaround from loss to profit between 2011 and 2012. According to Capital IQ Estimates, although the firms in our review have not expressed the intent to tap into any strategic Wall Street alternatives and have had share prices substantially below their debut price, they are forecast to return to gains after likely operating in losses this year.”
As a result, the companies may have some appeal to investors that recognize and are willing to take on the existing risks.
The companies are Eagle Bulk Shipping (EGLE), optical communications component maker Opnext (OPXT), window and door manufacturer PGT (PGTI), real estate service provider Market Leader (LEDR), financial information supplier EDGAR Online (EDGR) and enterprise mobility service provider iPass (IPAS).
The full report is available at the Alacra Store.
Visit Alacra Pulse for latest analyst comments on these companies.
Restoring Greece to solvency will require additional financial support beyond the end of the current EUR110bn program expiring in in 2013, says Fitch Ratings.
Following its downgrade of Greece’s sovereign ratings from ‘BB+’ to ‘B+’ and the placement of the ratings on Rating Watch Negative (RWN) on 20 May 2011, Fitch has published a special report further examining the factors behind the rating action.
Fitch remains of the opinion that only the combination of sustained economic recovery and fiscal consolidation, and structural reform offer a credible path to the restoration of sovereign creditworthiness for Greece. However, the scale of the challenge before the Greek authorities, including a new commitment to privatise EUR50bn of state assets by 2015, and their ability to deliver in the face of rising implementation and political risk is increasingly in doubt.
In Fitch’s view, the outcome of the EU Heads of Government Summit on 24-25 March raised market expectations of the inevitability of some form of debt restructuring under the auspices of the newly created European Stabilisation Mechanism.
Investor sentiment towards Greek sovereign risk in the wake of this initiative has deteriorated to such an extent that Fitch now believes that it is highly unlikely that Greece will be able to regain market access during the remaining life of the IMF-EU programme (May 2013).
Incorporated into the ‘B+’ rating is Fitch’s expectation that substantial new money will be forthcoming for Greece from the EU and the IMF and that Greek sovereign bonds will not be subject to a “soft restructuring” or “re-profiling” that would trigger a “credit event” and consequently a default rating from the agency.
Without renewed market access, new money from official creditors will be required to address the fiscal funding shortfalls that are set to reappear in 2012. In Fitch’s opinion additional financial support for Greece would only be credible in providing a path to solvency if it were fully funded beyond the end of the current EUR110bn programme in 2013, implying additional financial support.
The full report, Greece: Diminishing Path to Solvency Triggers Downgrade is available at the Alacra Store.
Moody’s has placed the Government of Japan’s Aa2 local and foreign currency bond ratings on review for possible downgrade, and taken a number of related ratings actions.
The review has been prompted by heightened concern that faltering economic growth prospects and a weak policy response would make more challenging the government’s ability to fashion and achieve a credible deficit reduction target. Without an effective strategy, government debt will rise inexorably from a level which already is well above that of other advanced economies.
Although a JGB funding crisis is unlikely in the near- to medium-term, pressures could build up over the longer term, and which should be taken into account in the rating, even at this high end of the scale. Moreover, at some point in the future, a tipping point could be reached, and at which the market would price in a risk premium to government debt.
More specifically, factors driving the decision are:
- The much larger than initially expected economic and fiscal costs of the March 11 earthquake are magnifying the adverse effects imparted by the global financial crisis from which Japan’s economy has not completely recovered.
- Concern that the policy framework will continue to fall short of achieving deficit reduction on a timely basis.
- The vulnerability of a long-term fiscal consolidation strategy to worsening domestic demographic pressures, as well as to possible, renewed shocks in a fragile and uncertain, post-crisis global economic environment.
The rating action does not affect the Aaa foreign currency bond and bank deposit ceilings, or the Aaa local currency bond and bank deposit ceilings. The ceilings act as a cap on ratings that can be assigned to the domestic or foreign currency obligations of other entities domiciled in the country. The short-term rating is unaffected and remains unchanged at P-1.
A complimentary summary of Moody’s rationale for the downgrade is available at the Alacra Store, along with the full premium report.
Complimentary summaries on a number of related actions by Moody’s are also available, including:
Moody’s reviews 15 Japanese issuers for possible downgrade
Moody’s reviews 5 Japanese Aa3 corporates for possible downgrade
Moody’s reviews Japanese bank-affiliated finance companies for possible downgrade
Fitch Revises Japan’s Outlook to Negative
The double dip in US home prices is here.
from S&P’s HousingViews blog:
Data through March 2011 show that the National Index hit a new recession low with the first quarter’s data (the prior low was the first quarter 0f 2009, and we define this as the “double-dip”). The S&P/Case-Shiller U.S. National Home Price Index declined by 4.2% in the first quarter of 2011, after having fallen 3.6% in the fourth quarter of 2010. Nationally, home prices are back to their mid-2002 levels.
This means that any run-up in home prices between 2002 and the 2006 peak has been erased.
On average home prices are selling at the same value they were nine years ago and are 34% below their 2006Q2 peak.
Click to enlarge.
This is not good for US bank, among others. As noted on ResearchRecap last week, S&P calculates that a double dip in home prices could cost US banks an additional $70-80 billion in loan losses.
The only bright spot in the latest Case-Shiller numbers is the strong performance of the Washington DC area market. HousingViews has a ranking of performance by cities that shows Washington as a clear short- and long-term winner.
The full S&P Case-Shiller report is available here.
After several years of declining loan performance, the rate of deterioration appears to be slowing for U.S. commercial mortgage-backed securities (CMBS) collateral, according to Standard & Poor’s.
Although performance varies by property type, market, and vintage year, we’ve been seeing more instances of improving property operating cash flows. We believe that a recovering commercial real estate sector and increased liquidity are providing the underpinnings for better collateral performance and credit metrics.
In the first quarter, the average loss severity rate fell below 40% after five consecutive quarters of 50% and higher rates. Additionally, CMBS delinquencies saw their smallest quarterly increase (2.6%) since 2007 in the first quarter of this year.
The improving landscape doesn’t appear to have yet spilled over to the retail sector, which still has stubbornly high loss severity rates and the longest resolution times of the major property types. Contributing to the high rate were bankrupt retail tenant stores that were liquidated at above-average loss severity rates.
The CMBS loss severity rate dropped to 37% in the first quarter after hovering in the 50%-60% range in 2009 and in all four quarters of 2010 (see chart 1). One quarter doesn’t make a trend, but we believe that the following positive events may be laying the groundwork for lower loss severity rates in the future:
- Improving property fundamentals;
- Expanding debt issuance;
- Speedier loan resolutions, which limit the amount of servicer advance buildup; and
- Collateral cash flows, which we expect to continue moving in a positive direction, and provide support for higher property valuations and sales prices.
We believe, however, that loss severity rates will remain at fairly high levels—north of 40%—in 2011 and not start to show any meaningful improvement until later in 2012. In 2012, it is our view that property fundamentals will strengthen further, and overall collateral performance across each sector will gain positive momentum. As a result, we expect loss severity rates may start to show a more steady decline.
For details see: CMBS Quarterly Insights: Loss Severity Rates Drop As U.S. CMBS Collateral Performance Shows Early Signs Of Improvement and CMBS Quarterly Insights: A Ceiling For U.S. CMBS Delinquencies May Be Forming
The persistent weakness of the dollar alongside euro-area debt woes have cast doubts over the world’s two major foreign exchange reserve currencies, prompting concern that authorities increasingly will seek to diversify the composition of their reserves.
Nevertheless, Oxford Analytica believes the dollar’s role as the world’s premier exchange currency is not in jeopardy.
The currency composition of foreign exchange reserves is likely to remain relatively stable. Although there could be diversification at the margins, even the emergence of the renminbi, which potentially could disrupt current patterns in the long term, faces serious constraints.
In the short-term, as economic recovery takes firm hold in emerging markets, there is likely to be a reversion to the pre-crisis trend of greater demand for higher-yielding, lower-liquidity foreign exchange assets.
- Despite perceived risks, the dollar role as the global reserve currency will remain secure in the foreseeable future.
- A new crisis would further increase interest in safer assets, especially US Treasuries.
- The renminbi is increasingly attractive for official reserve holdings, but faces major obstacles to becoming a global reserve currency.
For details see INTERNATIONAL: Dollar role as reserve currency is safe
Noting that among rated sovereigns, only Iceland and Ireland have a worse debt ratio than Japan, Fitch Ratings today revised Japan’s outlook to Negative from Stable.
Japan’s ratings have been affirmed at Long-Term Foreign Currency Issuer Default Rating (IDR) ‘AA’; Long-Term Local Currency IDR ‘AA-’ and Short-Term Foreign Currency IDR ‘F1+’. The Country Ceiling has also been affirmed at ‘AAA’.
Japan’s sovereign credit-worthiness is under negative pressure from rising government indebtedness. A stronger fiscal consolidation strategy is necessary to buffer the sustainability of the public finances against the adverse structural trend of population ageing.
Japan’s gross government debt reached 210% of GDP by end-2010, by far the highest ratio for any Fitch-rated sovereign. Japan is less of an outlier against other high-grade sovereigns on net debt measures, partly because the sovereign holds the world’s second-biggest FX reserves stockpile of over USD1trn (end-2010), supporting the one-notch uplift of the Foreign Currency IDR.
However, net government indebtedness is also rising sharply. The projected 56pp rise in the general government gross debt ratio from end-2007 (before the onset of the global financial crisis and recession) to end-2012 is the third-highest for any Fitch-rated sovereign, behind only Ireland and Iceland, both of which have experienced systemic banking crises.
The emergence of a stronger and more credible consolidation plan backed by credible political commitment to its implementation could see the ratings revert to Stable Outlook. Failure to strengthen the commitment to fiscal consolidation, or the emergence of substantial additional fiscal or economic costs from the process of reconstruction post-disaster, could trigger a downgrade.
For details see Fitch Revises Japan’s Outlook to Negative (Premium)
A combination of factors has led Zacks to downgrade its rating on Apple (AAPL) from Outperform to Neutral and to lower its price target from $422 to $351. For details, see this complimentary download from the Alacra Store.
- Apple reported strong second quarter 2011 results, which comprehensively beat the Zacks Consensus Estimate, on the strength of iPhone, Mac and iPad sales.
- We believe Apple remains well positioned to achieve strong growth from higher unit sales of iPad 2 and iPhone in the near term.
- Apple is expected to unveil an upgraded version of Macbook Air and iPhone, which are also expected to drive top-line growth in the coming quarters.
- With a loyal customer base, international expansion, competitive pricing strategy and a solid cash position, we remain positive on Apple s long-term growth.
However, increasing competition in most of its major product segments, possible delays in product launch, higher operating expenses and increasing legal complexities force us to downgrade the stock to Neutral and lower our target price from $422.00 to $351.00.
The stock is trading at 13.6X our forward earnings estimates for 2011, a 7.1% premium to the peer group average of 12.7X. However, the stock has traded historically at a 4.0% average discount, indicating the possibility of downward movement.
Given the mixed signals and the relative softness in Apple s earnings growth expectations over the next five years, we think it is prudent to exercise some caution at this point. We therefore have a Neutral recommendation on the shares, supported by our target price of $351.00 (14.2X P/E).
Although earnings have been increasing at a much faster rate than expected, we remain concerned regarding the quality of Apple s earnings. Apple has been resorting to accounting jugglery such as capitalizing of operating expense, accounting changes for product warranty, reduction in valuation allowances, thus boosting net income. Moreover, the company is using deferred tax assets to lower its tax rate. We provide a word of caution to investors.
Zacks’ 12-page report has been made available free of charge to Research Recap users for 30 days by special arrangement with Zacks Investment Research, an Alacra content partner. After 30 days, the report will revert to its regular Alacra Store price of $24.95)
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Related research on Apple via Alacra Pulse.
Fitch Ratings explains why its assessment of the sovereign debt outlook for Ireland and Portugal is less pessimistic than implied by the market, which is increasingly anticipating the possibility of default.
Spreads for Portugal and Ireland increased dramatically since late 2009 given specific concerns over various EU members. For both these countries, five-year CDS levels increased in excess of 500 basis points (bps) over the past year to the current range of 600-700 bps, a very high level considering the credit ratings, and indicative of very significant market concern over the credit worthiness of these two countries.
Spreads at these levels imply a very sharp jump in the market’s expectation of either a default or a restructuring that would impair creditors’ interests.
By contrast, Fitch maintains its view that public debt stabilization can be achieved given strict adherence to fiscal consolidation targets in these two countries.
The market’s view with regard to Portugal and Ireland has clearly soured and is considerably more pessimistic. The significant reduction in rating for both sovereigns clearly reflects Fitch’s view of the increased risk facing these countries. The two-notch differential in rating and the maintenance of the Negative Rating Watch for Portugal indicate that Fitch believes Portugal’s difficulties may be somewhat harder to overcome than those of Ireland.
In contrast, the market is not differentiating much between the two countries’ prospects, with current spreads implying a very sharp jump in the market’s expectation of either a default or a restructuring that would impair creditors’ interests.
The European Union and International Monetary Fund’s (EU/IMF) ongoing financial support and their commitment to avoid any restructuring within the Eurozone are core to Fitch’s current ratings of Portugal and Ireland.
Importantly, Fitch does not assume burden sharing. An extension of the maturity of Greece’s existing bonds would be considered by Fitch to be a default event and Greece and its obligations would be rated accordingly. If, contrary to Fitch’s expectations, private sector “burden sharing” as a condition for new money extends beyond exhortation and is coercive, the credibility of policy commitments regarding the ESM and EU/IMF programmes for Ireland and Portugal, as well as Greece, would be severely diminished and in Fitch’s opinion would adversely impact financial stability across the euro area.
Specific commentary on Portugal and Ireland can be found in the full report Risks Facing Portugal and Ireland: Contrasting Fitch’s View with That of the Market
Tiffany (TIF) and Signet Jewelers (SIG) are expected to shine as the US jewelry industry slowly emerges from five years of tough market conditions, according to IBISWorld.
IBISWorld predicted that Tiffany would be “a surefire earnings winner” this quarter, and today the company reported strong results that easily beat expectations.
Despite the retailer hiking up its prices, consumers have not turned away, IBISWorld notes. “While Tiffany offers low-priced items like silver charms and rings that target mid-income individuals, the company’s main consumers are wealthy Americans who are less sensitive to price increases. This market segment has been picking up their spending on luxury goods since mid-2010. In fact, increase in prices of luxury prices can actually drive up demand; in some cases, it signifies the exclusivity of the product, which can make it more attractive to the wealthy.”
IBISWorld expects Tiffany to fare even better than in years past, especially as disposable incomes and consumer sentiment return.
Signet operates in the Jewelry Stores industry through its Kay Jewelers locations and Jared the Galleria of Jewelry superstores. (Signet Thursday reported a 47.5% increase in EPS for the first quarter, driven by a 10.2% rise in same store sales).
The company has benefited from shifting its focus to the middle market, namely through its Kay Jewelers customer base, IBISWorld says. “While the economic environment in 2010 was still wavering, Signet’s operations grew 8.0% via targeted marketing promotions and lower price points in its mall-based stores. The company’s charm bracelet products fared especially well, since their price points are lower than the average Signet product.”
For its first reporting quarter in 2011, IBISWorld expects Signet to record revenue increases on the back of its fiscal 2010 jump. Its strategy realignment is likely to garner the business of high-value consumers looking to invest in well-made sentimental pieces of jewelry.
IBISWorld expects industry revenue to inch up only 0.7% between 2010 and 2011. However, as consumers regain confidence and purchasing power over the next five years, revenue growth should accelerate. Per capita disposable income is slated to increase 1.6% in 2012, while industry revenue rises a solid 4.5% to $31.6 billion.
Excerpted from Jewelry – Quarterly Earnings Report (complimentary download)
Premium IBISWorld reports are available at the Alacra Store, including:
Jewelry Stores in the US
Jewelry & Watch Wholesaling in the US
Jewelry Manufacturing in the US
Tiffany and Co Q1 2011 Earnings Conference Call Transcript