Tellabs, Inc. - Talking to the Hand

The world has become instantaneous.

At any time of the day or night, on any day of any week during any month, companies have developed technology that allows any person anywhere in the world, to communicate with any other person, anywhere in the world.

Consider that for a minute.

How many of you have seen the live feeds coming from the Deepwater Horizon disaster in the Gulf of Mexico? We just took a look and there is approximately 40 seconds of delay between our computer and the camera taking the pictures which is located 5000 feet below the surface of the ocean. To us, that is just incredible.

A couple of days ago, we came across an article about Tellabs, Inc. (Nasdaq: TLAB), a company we had not thought about since the dot com bubble of the late 1990s.

Curious, we looked up the price of the stock and were a bit surprised to it trading below $7.00. Granted, we have been out of the broadband loop for a good while, and during that time much has changed with the world economy, but below $7.00! Could that be right?

Here we thought is one of the reasons, that we were able to watch a live video feed originating from the bottom of the ocean, and the reason was selling for less than $7.00. Could there be something wrong with this picture?

Basis 
Financial information related to Tellabs, Inc., contained in this report, is based on the company's most recent SEC Form 10-K filing, for year ending December 31, 2009, as filed with the Securities and Exchange Commission on March 01, 2010. 

What They Do 
Tellabs, Inc., is engaged in the design and marketing of equipment and services to communications services providers worldwide. The company’s products and services enable its customers to deliver wireline and wireless voice, data and video services to business and residential customers.

The company sells its products domestically and internationally through its field sales force and distributors/partners. The company’s customers are primarily communication services providers, including local exchange carriers (LECs), global wireline and wireless service providers, multiple system operators (MSOs) and competitive service providers (CSPs). Its customer base also includes distributors, original equipment manufacturers (OEMs), system integrators and government agencies.

The company was incorporated in 1975 as an Illinois corporation. In 1992, shareholders approved the formation of a holding company structure. Under that new structure the shareholders of Tellabs, Inc., an Illinois corporation, became the shareholders of a new holding company, Tellabs, Inc., a Delaware corporation.

In December 2009, the company acquired WiChorus, Inc. (WiChorus), a supplier of infrastructure products for the mobile Internet. This acquisition will enable the company to quickly enter a large and fast growing market with a purpose-built 4G, LTE, and WiMax mobile-network solution that can be used in today’s 3G networks and complements the compan's IP mobile backhaul portfolio.

In November 2004, the company acquired Advanced Fibre Communications, Inc. (AFC) of Petaluma, California, a supplier in North America of “last-mile access” products, over which are delivered residential voice, data and video services.

In addition, in December 2004, the company acquired Vinci Systems, Inc. (Vinci), a privately held developer of customer-premises equipment used for fiber access. This acquisition accelerated the company's ability to deliver cost-reduced and feature-enhanced components.

While the company retains its residential access business, in 2008, the company shifted its focus to more profitable opportunities in the mobile, optical, and business markets. 

Short-Term Investment
To us, it appears that the stock price may be at a bottom. The MACD is at its lowest point in over a year, and the Stochastic trend is now reflecting the stock's Oversold position. Barring an foreseen event, this would be the perfect point to take a position in the stock.

With a recent close of $6.37 and First Resistance at $6.97, a 9% increase from a recent close, the upside appears extremely limited. Couple that with First Support at $4.96, a 22% decline from a recent close, and it almost appears that shorting the stock would be the order of the day.

But it is important that short-term investors keep their eye on the ball here, and realize that Short-Term means a trading period based on a 13 day moving average, not a 50 day moving average or a 52 week high or low.

Long-Term (5 Year Hold) Investment
We reviewed the company's FY09 financials which seemed to us, quite solid, given the upheavals of the world economies. The company's Current Ratio, a Quick Ratio, and Cash Ratio, were all what we consider investment quality.

In addition, the company has kept its Debt at near zero, finishing FY09 with total Debt of $0.02 per share, and at the same time, managed to turn its Inventory over almost 6.5 times during the year. Both of these things are, to us, outstanding achievements considering yet again the economies of the world.

Yet all is not perfect. Over the past several years the company has acquired several companies. The results of these acquisitions, at least to us, do not seem to have improved the company's bottom line. They have however, managed to increase the company's Intangibles and Goodwill to a little more than 12.5% of Total Assets.

This may not be a big deal to many investors, but for us it is of some concern, since we tend examine the balance between risk and reward when considering a company for investment.

One other item of note centers around management, and is something we see often. The company's Accounts Receivable are outstanding an average of 99 days, while the company's Accounts Payables are outstanding an average of 32 days.

What irritates us about this sort of situation is why management would allow the company to make a 60+ day interest free loan to its customers? Management needs to get a grip and realize they are in the electronics business and not the electronic banking business. 

Valuations 
Based on our preliminary review of the company's FY09 financial information, we believe a Reasonable Value Estimate for the company, assuming a 5 year hold, is in the $12 to $15 range.

Considering our discussion regarding the stock as a short-term investment, we think starting a position at this time may be a wise move. Certainly we would not take a full position, which to us is between 2.5% and 3%, but would instead take a 1% to 1.5% position at current levels, adding to our position on pricing pullbacks and economic uncertainty. 

Final Thoughts 
The world continues to change, to evolve, perhaps according to some strategic plan put in place eons ago, perhaps according the wants of the people that inhabit it. Regardless of the reasons why, the demand for information, for entertainment, for communication, continue to grow.

Recent changes in mobile technology have created the latest craze, 4G Technology, which is supposed to deliver greater content rich communications, something we admit, is completely lost on us.

And while we personally may not be interested in watching an Orangutan drive a submarine through a traffic light in Manhattan, or spend 24 hours a day watching oil spew from a pipe at the bottom of the sea, we realize we are in the minority with our thinking.

So line up America, and please continue to spend your money on glitter and gadgets, as we appreciate your contribution to our retirement efforts. 

Wax 

Worksheet 
To download the Tellabs, Inc. Raw Vale worksheet, please click here.

Battery Technology - Making Constance Happy

We noticed an article titled Buffett's Bet Sits Out Battery Rally. The article mentioned that it was a strong performance week for Energy Storage and Battery Technology stocks, with few exceptions.

Admittedly, this is a market segment that we had never really heard of, but it did pique our curiosity about some of the companies mentioned in the article. So being the inquisitive individuals we are, we checked out a few of the mentioned companies. 

The Companies 

First up was Ener1, Inc. (Nasdaq: HEV) a company that designs and manufacturers lithium-ion batteries. The company recently partnered with Russia's Federal Grid Company to develop energy storage opportunities which we think is sort of like saying a guy with no underwear walked around all day with his zipper down.

While we weren't very impressed you could be. To download the Ener1 worksheet, please click here.

Next on the list was Polypore International, Inc. (NYSE: PPO). What we found so curious about this company is that they make filtration membranes, or so we thought. But surprise surprise, the company also makes membrane separators, an item critical in the manufacture of lithium and lead-acid batteries. Of the companies we looked at, this was the only one that had a Reasonable Value Estimate greater than zero.

To download the Polypore International worksheet, please click here.

This brings us to Valenace Technology, Inc. (Nasdaq: VLNC) a company that we honestly thought was a start-up, only to find out that the company was founded in 1989. The company comes very very close to having a Tangible Book Value, but not quite as close when it comes to its technology, which we finally decided, must not be very unique, explaining why the stock is trading under $1.

To download the Valenace Technology worksheet, please click here.

The last company with breath taking lithium-ion technology was A123 Systems, Inc. (Nasdaq: AONE), which we finally agreed, was just another retread of all of the rest of the companies mentioned in the article. The company does have a Tangible Book Value of about $5.00, but really doesn't make any money. With such a catchy company name, we think longer-term investors might be better served just investing in any company from Nebraska that makes socks.

To download the A123 Systems worksheet, please click here. 

Final Thoughts 

She stood in the doorway listening for the feint buzzing sound, keenly aware of just what it would mean. Straining, the sound simply could not be heard. She stood still, every fiber aroused, every hair on the back of her neck standing up, every one of her senses operating in high gear.

Finally! There it was, the low slow buzzing sound she had been anticipating, finally he had put all of the clues together.

She crept toward the bed, not making a sound, anxious to arrive unnoticed, in a deft attempt to become one with him, to experience the firmness she knew was there.

At last she arrived at the bed and with one continuous motion arrived atop of what she had been craving all night.

Startled, he reached out to find her already working to become prone on the object of her desire, the need now so great.

He looked at her and extend his arm. I hope the fan doesn't keep you awake, it took me a while to find the battery, but don't fret, the power should be restored in a few hours.

But by the time his words were out, Constance had curled up on his stomach, and purring loudly, fallen into a contented sleep. 

Wax

GameStop - Tutu Fishing With Karl

Back in February, we wrote an article about GameStop Corporation (NYSE: GME) titled GameStop - Tadpoles in the Stew. While the piece cited GameStop, it was more about the self-proclaimed Internet analysts, those with no credentials whatsoever, and how their cockroach mentality has the ability to hurt the working person investor.

An e-mail yesterday asked if we would follow up on the company itself as the author of the e-mail was considering a purchase of the stock. And that to us, ain't no game.

Basis

Financial information related to GameStop Corporation, contained in this report, is based on the company's most recent SEC Form 10-K filing, for year ending January 31, 2010, as filed with the Securities and Exchange Commission on March 30, 2010.

What They Do

GameStop Corporation, together with its predecessor companies, is the world’s largest retailer of video game products and PC entertainment software, selling new and used video game hardware, video game software and accessories, as well as PC entertainment software and related accessories and other merchandise.

As of January 30, 2010, the company operated 6,450 stores in the United States, Australia, Canada and Europe, primarily under the names GameStop and EB Games. The company also operates electronic commerce Web sites, including www.gamestop.com, and publishes Game Informer, the industry’s largest multi-platform video game magazine in the United States based on circulation, with approximately 4.0 million subscribers.

Short-Term Investment

The stock had a recent close of $21.66, with resistance at $22.75, a 5% increase from the recent close, and support at $17.12, a 21% decline from a recent close, it is hard to get to excited about a short-term investment in this stock.

The stock price is currently trending down, but reviewing some of the technical indicators, the case could be made that the downward trend is about to reverse.

Regardless, with the current (16%) spread between resistance and support, we simply don't think a short-term investment is warranted at this time.

Long-Term (5 Year Hold) Investment

The company's financials seem to change little year over year with Adjusted Operating Income continuing in the 8.5% range and Free Cash Flow in the $3.30 plus, per share range.

In addition, the spread between Days Receivables Outstanding and Days Payables Outstanding continues to be about 50 days, meaning the company is able to use suppliers money for free for that period of time.

However, without exception, the single most impressive thing about the company's performance, at least to us, is Return on Invested Capital, coming in for FY10 just above 218%, an 11% increase over FY09.

Valuations

Based on our review of the company's FY10 financial information, we believe a Reasonable Value Estimate for the stock, assuming a 5 year hold, is between $58 and $64 per share.

With the current uncertainty in the markets as well as the global economy, we think a reasonable entry target for the stock should be below $25.

In addition, for exactly the reasons we cite, namely the world economic uncertainty, we would include a Stop setting, adjusting it upward as the stock price increased.

Final Thoughts

The stock continues to hover in the $21-$23 range, where it has languished for some time. Regardless of the company's positive year over year financial results, we simply have no interest in owning this stock.

Certainly as the economy continues to struggle, we would not be at all surprised to see sales continue to increase, but we remind investors that an increase in sales does not always create an increase in earnings, and earnings are what increase shareholder value.

Wax

Worksheet

For the GameStop Corporation worksheet, please click here.

BP plc - Plugging Cracks

Writing this is going to be hard. As the matter of fact it is going to be one of the hardest things we have ever done. And the reason that's so, is because we all work for a living, we all have families, and in some cases, not only have we worked in Lower Plaquemine's Parish, some of us work for big oil.

Because we have a bit of a unique perspective, we see the massive oil leak in the Gulf of Mexico as an event that will have human and ecological consequences lasting for generations, just as we know there is no amount of money that can be spent that will bring back the lives of the 11 people that perished when the Deepwater Horizon caught fire and sank.

But we understand the spirit of the people that live in that part of the country, and we know not only will they move forward with their lives in positive and constructive ways, they would want the rest of us to do the same.

Usually doing what we do is a labor of love, something we enjoy sharing with other folks that actually sweat for a living just like we do. So we hope that everyone appreciates our reticence at having waited almost three weeks to answer the numerous e-mails we received, asking if we thought BP plc  (NYSE: BP)  was a good investment.

We just thought a respectful period of time was required to allow the rest of the world to accept that 11 people were no longer apart of the lives of people that loved and needed them. 

Basis 

Financial information related to BP plc, contained in this report, is based on the company's most recent SEC Form 20-F filing for fiscal year ending December 31, 2009, as filed with the Securities and Exchange Commission on March 05, 2010. 

What They Do 

The company, incorporated in 1909, is an international oil and gas company operating in more than 80 countries. The company operates two segments: Exploration and Production, and Refining and Marketing.

Exploration and Production’s activities cover three key areas. Upstream activities include oil and natural gas exploration, field development and production. Midstream activities include pipeline, transportation and processing activities related to its upstream activities.

Marketing and trading activities include the marketing and trading of natural gas, including liquefied natural gas (LNG), together with power and natural gas liquids (NGLs).

Refining and Marketing’s activities include the supply and trading, refining, manufacturing, marketing and transportation of crude oil, petroleum and petrochemicals products and related services.

During the year ended December 31, 2009, it sold its interest in BP West Java Limited, Kazakhstan Pipeline Ventures LLC and LukArco. In February 2010, the company announced that Rubis acquired its France's 50% stake in Frangaz, thus becoming its sole shareholder. 

Exploration and Production 

The company conducts upstream and midstream activities in 30 countries with its principal areas of production in Angola, Asia Pacific, Azerbaijan, Egypt, Latin America, the Middle East, Russia, Trinidad, the United Kingdom and the United States.

Midstream activities involve the ownership and management of crude oil and natural gas pipelines, processing facilities and export terminals, LNG processing facilities and transportation, and its NGL extraction businesses in the United States, the United Kingdom, Canada and Indonesia.

Its midstream pipeline interests are the Trans-Alaska Pipeline System in the United States, the Forties Pipeline System and the Central Area Transmission System pipeline, both in the United Kingdom sector of the North Sea, the South Caucasus Pipeline (SCP), which takes gas from Azerbaijan through Georgia to the Turkish border and the Baku-Tbilisi-Ceyhan pipeline, running through Azerbaijan, Georgia and Turkey. Major LNG activities are located in Trinidad, Indonesia and Australia. BP is also investing in the LNG business in Angola.

The company’s oil and natural gas production assets are located onshore and offshore and include wells, gathering centers, in-field flow lines, processing facilities, storage facilities, offshore platforms, export systems (transit lines), pipelines and LNG plant facilities.

Upstream operations in Argentina, Bolivia, Chile, Abu Dhabi, Kazakhstan, Venezuela and Russia, as well as some of its operations in Angola, Canada and Indonesia, are conducted through equity-accounted entities. 

Refining and Marketing 

The company’s Refining and Marketing business is responsible for the supply and trading, refining, manufacturing, marketing and transportation of crude oil, petroleum, petrochemicals products and related services to wholesale and retail customers, marketing its products in more than 80 countries.

The company has operations in Europe and North America and also manufactures and markets its products across Australasia, in China and other parts of Asia, Africa and Central and South America.

Its organization is managed through two main business groupings: fuels value chains (FVCs) and international businesses (IBs). The FVCs integrate the activities of refining, logistics, marketing, supply and trading, on a regional basis, recognizing the geographic nature of the markets.

The IBs include the manufacturing, supply and marketing of lubricants, petrochemicals, aviation fuels and liquefied petroleum gas (LPG).

In the United States, the company owns or has a share in five refineries and markets primarily under the Amoco, ARCO, BP and Castrol brands. In Europe, the company owns or has a share in seven refineries, marketing across the primarily under the Aral, BP and Castrol brands.

The company manufactures and markets lubricants and related products and services to the automotive, industrial, marine and energy markets across the world, primarily through its major brands of Castrol and BP, and also the Aral brand in some specific markets.

BP marine lubricants are a supplier of lubricants to the marine industry, supplying many types of vessels from bulkers to container ships to dredgers and cruise ships, with global presence in over 850 ports.

The company's industrial lubricants business is a supplier to those sectors of the market involved in the manufacture of automobiles, trucks, machinery components and steel and the company is also a supplier of lubricants for the offshore oil and aviation industries.

The company's petrochemical operations consist of a global Aromatics & Acetyls business and an Olefins & Derivatives (O&D) businesses, predominantly in Asia.

The company competes with ExxonMobil (NYSE: XOM), Chevron Corporation (NYSE: CVX)  and ConocoPhillips (NYSE: COP). 

Short-Term Investment 

The stock price is currently almost 14% below its 13 day moving average, 40% below its 50 day moving average, and almost 50% below its 200 day moving average. The stock price will find support at $36.20, a 3% decline from its recent $37.16 close.

We believe that recent minor successes in the Gulf of Mexico will only serve to keep short term investors on the fence, since the trend lines, like tea leaves, are a bit hard to read with all of the controversy currently surrounding the company, controversy we expect to continue through the summer months. 

Long-Term (5 Year Hold) Investment
The company's FY09 financial statements are, in our opinion, not all that impressive, and of the 17 metrics we like to focus on, only 10 were what we would consider investment quality.

Certainly with the stock price so beat up of late, the company's dividend yield has increased and is currently above 9%. Likewise the company's FY09 earnings yield has increased and is currently above 18%, almost double that of its competitors.

But aside from the earnings yield, there really is little difference in the FY09 financials of any of the company's in the sector, leading us to wonder what the long-term investment attraction might be. 

Valuations 

Based on our preliminary review of the company;s FY09 financial information, we think a Reasonable Value Estimate for the stock is in the $68 to $72 range, and while there may be great swings in the stock price over the coming months, we don't see these price swings as being material to our valuation estimate since the company generates more than enough cash to pay any and all claims arising from the Deepwater Horizon incident. 

Final Thoughts

The events of the past 45 days have been horrific, and as the days and weeks pass, more and more images will be produced reminding many Americans why they distrust "big oil".

Certainly, in our opinion, the leadership of BP is as inept as any we have ever seen when it comes to transparency, having watched with our mouths open as BP leadership told lie after lie as evidence to the contrary was being broadcast to the world.

But the main issue for us are the families of the 11 workers killed in the incident, as well as the families that have lost and are loosing their livelihood and way of life because of the willful disregard for operational safety displayed by BP.

Which makes us wonder. If the company is that uninterested in the safety of its workers, why would it be concerned about the safety of its shareholders. 

Wax

Worksheet

To download the BP plc Raw Value Worksheet, please click here.