Will Whole Foods (WFMI) get Indigestion from their Wild Oats (OATS) Purchase?

Caution: The author of this piece is a fond shopper of Whole Foods, however does not own any shares in the company.

Tonight Whole Foods made 2 important announcements, their Q1 results and the acquisition of Wild Oats at $18.50 in cash per share, or a 18% premium. I'm quite passionate about WFMI so I thought I would do a small piece on them.

Kicking it off with the Q1 results, comp sales grew 7% in Q1. Gross profit was down 24 bps YOY. Not exactly stellar results.

WFMI indicated that the historical 34% Gross Margins should continue in the future. I find this hard to believe given that WFMI in this quarter showed direct store expenses increasing 35 basis points to 25.8 percent of sales which is higher than their five-year average. Also, WFMI on the call indicated that they are not as well known for low prices that they currently offer their customers. To quote: "While our core customers are not primarily focused on price, our price image is important in terms of appealing to a broader customer base, especially as select natural and organic products are becoming more available through various retail formats." Ok, this tells me they are still experiencing price pressures, especially from the likes of Wal-Mart who has entered the organic food market. Prices at your local Whole Foods may drop further. It's clearly becoming a very competitive market, and WMT will exert it's size/strength by lowering prices further to capture more market share.

In reference to the OATS acquisition, WFMI indicated that most acquisitions take up to two years to transition to WFMI's decentralized operations and implement their incentive programs. OATS has about 100 stores in total vs. 200 for Whole Foods. WFMI expects this acquisition to be similar and that over time will recognize significant synergies through G&A cost reductions, greater purchasing power and increased utilization of support facilities. That's fine so, investors should be dumping this stock NOW and buy it LATER. I think investors should also take interest that recently (3 months ago) the Wild Oats CFO resigned. In most cases, there is a material financial deterioration in a company's fundamentals following a CFO's departure. It is a much more robust indicator than CEO departures, which can actually be a contrarian signal.

WFMI is up 5% in after-hours on Wednesday to $48 per share. I think if the stock runs slightly higher (may even go as high as the low 50's in the coming week), I would advise investors who hold WFMI to take profits (as small as they may be given the stock is still near its 52-week low)and would rate WFMI as a HOLD at best right now, until there is clear evidence that margins improve in light of the increased pricing pressures and the time required to integrate the 2 companies. OATS and WFMI do have similar qulaity merchandise, but OATS' store formats are much smaller than the typical Whole Foods stores, and they will need to realize that a different approach in managing those locations. Whole Foods' CEO John Mackey said it best when he said on the call the next 2 quarters will be messy.

That said, long-term I think WFMI is well positioned and has a respectable CEO (who only takes $1 as a salary). Once the dust settles an entry point into the stock should offer generous long term returns. STAY ON THE SIDELINES IN THE INTERIM, and let WFMI digest OATS. There could a bit more downside for this grocer that trades at 5x Book and a 1.6x PEG ratio.

XM Sirius Merger. Are you Serious?

XM and Sirius to merge. Give me a break. Did we all of a sudden develop Alzheimers and forget about what Federal Communications Commission Chairman Kevin Martin told reporters after a January 2007 FCC meeting that the Commission would not approve a merger between satellite radio rivals Sirius and XM Radio. According to Bloomberg, Martin said that "there is a prohibition on one entity owning both of these business." The transaction is expected to be structured as a merger of equals, but given Sirius' higher enterprise value, shareholders in the Mel Karmazin-led firm will likely come away with a larger piece of the pie. XM Chairman Gary Parsons will retain that title in the merged firm, with Karmazin likely taking the CEO title. It is a bit fuzzy as to what will happen to XM CEO Hugh Panero.

The interesting thing is the merger announcement happened on President's Day, when US markets are closed. So I took the liberty in the closing minutes of trading on Canadian markets to short the stock at $8.30 per share. Total volume on the stock is 73,000 shares, so this sucker is thinly traded. But the stock popped 25% on the news. Is that rational? Is this a done deal. Obviously not given the FCC's comments, and in fact far from it. I think XM and Sirius will obviously pop tomorrow on US exchanges, but probably closer to 15%, not the lofty 25% premium investors awarded the Canadian sub stock today. Last time I checked, both U.S. and Canadian regulators were not in favor of allowing monopolies to exist, however they may consider it. The deal also values XM at a 23% premium to Friday's close. Now that holds true if SIRI's stock holds steady on the news. If it falls, and it may, that premium diminishes because this is stock swap, not an all cash bid. It's interesting to note of course that XM was up 8% on Friday on heavy volume. I smell an insider trading probe on the horizon. I think the SEC needs to crack down on crap like that and investigate the suspicious trading taking place that week.

Now lets also look at the economics here as well. Both of these players still lose money. That will not change when, and if, they do merge. Looking at Lehman's model highlights losses out to 2009. Of course costs would go down on a combined basis. But at the end of the day, will people be willing to pay for the service. At $13 per month, one would be crazy to when they can either customize their ipod for a fraction of the cost or listen to internet radio of any flavour they chose for FREE. I think we will also see more car manufacturer mergers in the coming years, which means fewer cars to have satellite radio pre-installed on. And progressing even further, the new wave will be mobile tv on handheld devices.

Canadian Satellite Radio Holdings operates as XM Canada through its subsidiary, Canadian Satellite Radio Inc. Trades on the Toronto Stock Exchange under the ticker XSR. I expect XSR to sell off 5% to 10% on the news on Tuesday Feb 20, 2007. If there is heavy retail buying in the stock tomorrow, given this will make front page news in the Financial Post and Globe and Mail (2 leading Canadian newspapers), I think that would provide another opportunity for investors looking to take short positions on the stock. The market is full of scenarios where there are over-reactions. This seems to be yet another case. I am a big believer in the old stock adage quoted by many investors, including Warren Buffet, that states: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." This is one time to be fearful.

The Demise of the iPhone - Apple's Stock is Stuck

G-d bless Apple and Steve Jobs. They have transformed the way people listen to music like nothing we imagined. The iPod was the perfect solution. Simple, ergonomic, stylish, classic. Steve Jobs has done a wonderful "job" transforming the company from a has been computer manufacturer into a music gadget empire. So what will the iPhone do for Apple (no longer Apple Computer, they dropped that name recently). The iPhone is sleek no doubt, but it doesn't really offer more than what's out there already. Research in Motion's Blackberry is coming out with a device that has all the iPhone is capable of doing plus GPS capabilities to boot. So if you're thinking about spending the 000's on a GPS for your car, think again. I will let you know ahead of time that I own 2 iPods. However, I have no intentions of spending $500 minimum for an iPhone under a 2 yr contract. I think Apple will be in for a surprise when they will realize how quickly they will have to drop their prices to match the likes of the Blackberry, the Moto Q, or a Samsung BlackJack, or whatever. I think the next big winner in the phone market is the one that caters to watching tv on your phone and offers the greatest amount of content. That will be the winner in my opinion. Right now, the companies offerings are very similar, it's more a matter of getting the esthetics right. Apple's iPhone looks pretty hot, no doubt, but that's not proprietary and I would expect others to come up with sleeker products.

I have a lot of respect for Jobs' passion for the company and the products they produce. However, Jobs seems to also evoke a style of an untouchable character. Cisco is calling him on this, by putting them to the test over the use of the name of the iPhone. I think it was a little presumptuous of Apple to start promoting that product under that name on their website before any settlement with Cisco took place. They had a deadline of midnight this past Thursday and Cisco extended them a break until next week to offer a solution in the matter. While, I think the outcome of this case is immaterial to both parties, including Apple, I think it highlights the fact that Apple has reached a zone and complacency will start to consume the company. I personally think that Apple's stock will likely suffer in the coming months. If you're looking for a winner as far as the iPhone is concerned, go with AT&T, who's Cingular unit will be the sole provider of the product. If you're Canadian, you can go with Rogers, however, Apple has made no formal comments about entering the Canadian market. Ironically enough, Apple would be in dispute with another firm in Canada over the use of the iPhone name there too.

How does this impact the stock price. Just look at the graph of Apple and you'll see how stuck the stock has been in recent months. I would note that the stock is below the recent 200 day moving average for those that are technically inclined. I think the stock may see a pop leading up to the release in June, however I think the stock will be flat to down for the next 3 months until May. Notice how the stock has done vs. the S&P 500 over the past month, and you get a sense that the stock is tired, even with analyst's and their $120 target prices. You want to know something else of interest I picked up on. Senior Vice President of the iPod Division , Anthony Fadell, has been very active in early February 2007 selling 100,000's of shares in options he exercised. These options weren't up for expiry. I think he is as close to the iPod as anyone else other than Jobs himself, and he maybe sending a signal to the market that Apple's stock is starting to get a bit crabby. Time to take profits and duck for cover in the coming months!

Roo Group is The Stock to Own for 2007

OK folks I will admit upfront, being the honest man that I am. I do own this stock. I bought a few weeks ago at $3.15. It is currently at $4.05. Now a bit of background on my investing style. I am more of a value oriented guy, looking for low multiples, P/B, P/E, etc. I like a Margin of Safety. If it works for guys like Buffet, Marty Whitman, Joel Greenblatt, etc. then it's good for this poor schmuck too.

Where did I find this $100 million market cap darling. Ok I was sitting and brainstorming what to invest in. I thought to myself video over the net is really big. Who are the players. Well Brightcove was one, but they are private. They have big names backing them like Barry Diller, Time Warner, Bain Capital, etc. Lot of players. So that one is out. Then there's Roo. How do I know about Roo. Well I play videos all the time on The Street.com Guess who they use? Yup, our boys Roo. So here's a candidate.

Simply put, ROO is a one-stop Internet video specialist which helps thousands of customers around the globe in the fields of entertainment, content publishing, web publishing and advertising to quickly and comprehensively take advantage of the shifting consumer preferences to watch video via the Internet and broadband-connected devices

What are the +ve and -ve of Roo:

Pluses
1. Growing like gangbusters. Just read the recent news flow on these guys. They are winning contracts hand over fist.
2. On Jan 29 News Corp announced a strategic investment in Roo. Ok now that's when I got in. The stock didn't even budge on that news it was such a small cap back then. News corp making a strategic investment. Hmm, reminds me that they bought out MySpace last year. So don't be shocked if this investment bulges into a BUYOUT!!! I think a couple hundred million is chump change to a company with a market cap of billions.
3. Paul Tudor Jones has invested 3.2 million out of 26 outstanding shares. Now if you don't know Paul Tudor Jones, I suggest you wiki him. Convinced? Good enough for a billionaire. Good enough for you.
4. More insulated from market movements. This is not a mainstream stock so it won't fluctuate with the market if that's something you're seeking.
5. A myriad of great customers including Street.com, Financial Times, Wyeth, Lycos, Dscovery Channel, Sprint, Target, MSN, Honda. Should I go on? Ok excite, Fox News, Associated Press, GM, Pfizer, Virgin music. Ok I'll stop at that one. Enough already, we get the point. ALOT of great customers.

Negatives
1. Still losing money
2. Low liquidity in the stock
3. Trades on the bulletin board

So make your decision and vote if you think Roo is a good speculative investment.

Caterpillar Stock Moving Higher?

I must confess I said CAT was not a buy back in the fall when the stock was sub $60. My rationale was not to get involved in any company that will clearly suffer as the economy weakens. Well guess what the economy didn't weaken that much. I made a bad call, and expressed a total reversal of opinion in January. The stock has since shot up, although not based on me pounding the table on this stock. Today's $7.5 billion buyback is HUGE. It's more than 15% of total market cap and it signals to me that they think there won't be any hard landings, and in fact maybe there won't be a landing at all. Now, I personally think the stock has had a fantastic run and may see some cooling off in the near term. Longer term this thing is going higher. It's a DOW dog and we know what a great track record the dogs of the Dow have had. The only -ve I see is the paltry 1.8% dividend yield. But who cares about that when the stock will gain an easy 25% or more in the coming year. Just watch out if interest rates start to head north. After todays testimony by Bernanke, looks like that might be a while off, so I think you can still back up the truck on this one, but be prepared to dump it when and if rates head higher in the summer time. In the meantime I think it is a purrfect stock to include in anyone's portfolio.

Ruth's Chris puts the Sizzle in Steaks

Since this is my first post to the blog, I thought I would talk about my favorite consumable, namely steaks. It came to my attention through researching that in the past year alone some astute investors took the lead and executed buyouts of two highly regarded steak firms in the U.S. The first was the main stream chain of Outback Steakhouse. A great establishment, delivering consistent results with a better than average piece of beef. And of course the infamous Bloomin Onion. Who can blame the takeover artists on that one. Next in line is Smith and Wollensky. I ate there a year ago at a location in Miami. Over priced fare in my opinion.

So, I'm starting to see more investment interest in restaurants period. I believe the next one on deck will be Ruth's Chris Steakhouse. I don't own shares as of this writing, however, I think they are a prime candidate, pardon the pun. Oh, did I do that by design?

This chain is well done in my opinion (enough already), with great attention to service and a unique offering. They sizzle their steaks with butter, similar to the White Castle burger (even though I never ate at White Castle I know this is a key ingredient they utilize). Back to RUTH. 20x forward eps is a little pricey, but the other steak player is Mortons (MRT) who actually loses money. And frankly I'm not surprised. Food is overpriced and is mediocre. Operating margins at 12% at RUTH's make most restaurant operators blush. Back to the P/E of 20x, not that pricey given management guidance of 18% eps growth in 2007 for a PEG of 1.1x for the coming year.

They only have just over 100 restaurants across the U.S. There is still tons of room to grow, they are just very selective in their expansion plans. They don't grow for the sake of growth. I always favour such disciplined approaches to growing a business. In fact plans are for 6-7 company owned locations in 2007 and 6-8 franchise-owned. This is a measured pace. Ruth's is not looking to be the next SBUX of steak. They take pride in their quality, and a hedge fund or private equity firm is likely to take notice, if they haven't already. MAYNARD CAPITAL PARTNERS LLC owns a nice piece, like 6% of the company. They founder of this fund knows restaurants inside out, and they have been accumulating a position in the past year. I suggest you do the same.