I opened two new positions: Southern Co. (SO) and Garmin (GRMN).
SO is an electric utility company with an annual dividend of around 4.8%. In turbulent times, electric utilities appear to be the last legitimate widows-and-orphans stocks. Pharma has lost that designation, especially after Wyeth's (WYE) plummet today and Pfizer's (PFE) poor historical performance. The problem with having new drugs in the pipeline is if something goes wrong with them at any stage, gains in the stock price suddenly evaporate. That unpredictability makes electric utilities the safer bet, unless regulation becomes unreasonable.
I bought Southern Co. on July 30, 2008, the last day to collect the quarterly dividend, and after earnings had been released. Here's the skinny on the second-quarter earnings: they declined three percent because of a $67 million charge relating to Southern Co.'s development of international energy projects in the 1990s, more specifically, leveraged leases. Still, Southern Co.'s net quarterly income was $416 million, and most of its customers are located in the faster-growing Southeast region of the United States.
I am concerned about more surprises in the leveraged lease area because like CDOs, it's very hard to ascertain how much money a company is losing on a lease when others are involved to limit risk and when the underlying asset is difficult to value. Here is the best definition of a leveraged leased I found, from allbusiness.com's glossaries:
A lease that involves a lender in addition to the lessor and lessee. The lender, usually a bank or insurance company, puts up a percentage of the cash required to purchase the asset, usually more than half. The balance is put up by the lessor, who is both the equity participant and the borrower. With the cash the lessor acquires the asset, giving the lender (1) a mortgage on the asset and (2) an assignment of the lease and lease payments. The lessee then makes periodic payments to the lessor, who in turn pays the lender. As owner of the asset, the lessor is entitled to tax deductions for depreciation on the asset and interest on the loan.
A more detailed review of these leases is necessary to see whether Southern Co. has fully disclosed its potential liabilities and risks on various projects.
GRMN hit a new 52-week low after indicating its much anticipated new product, Nuvifone, would be delayed. GRMN has aviation, marine, and automobile divisions, and all are affected by the increased price of oil. In addition, GRMN has formidable competition from TomTom and Magellan. According to Yahoo Finance, about 18% of GRMN's float is being sold short, so there are plenty of people who dislike this stock. At these prices, however, I consider GRMN to be a long-term value play. I bought shares at 36.06 dollars and may average down if shares continue to go lower.
Eric Savitz's Tech Trader blog has the best earnings summary:
http://blogs.barrons.com/techtraderdaily/2008/07/30/garmin-q2-misses-outlook-weak-nuvifone-delayed/
If you believe oil prices are preternaturally high, and the U.S. dollar will firm back up, GRMN might have some unexpected upside.
On an unrelated note, I just realized something about McAfee's (MFE) shareholder meeting yesterday--every single employee at the shareholder meeting and on the Board appeared to be a white male, except for two white females. A tech company in Silicon Valley without any Asians, Indians, or Persians in the top ranks? That homogeneity makes a company appear very insular and behind the times, especially with Symantec (SYMC) having more diverse key executives.
"And if an epitaph be my story, I'd have a short one ready for my own: I had a lover's quarrel with the world." -- Robert Frost
Wednesday, July 30, 2008
Educational Attainment and Economic Advantage
David Brooks recently wrote a great article about education's impact on the economy:
http://www.nytimes.com/2008/07/29/opinion/29brooks.html?ex=1375070400&en=7286e3c1957017ac&ei=5124&partner=permalink&exprod=permalink
Starting intensive education earlier (Scotland starts its first grade at 4 years old, at least when I was there) and investing in all-day (9AM to 6PM) elementary schools may be a wise choice. When I tutored at UC Davis, I was stunned at how poorly some UC students wrote, especially after the supposedly higher educational requirements for admission. God only knows what teachers and tutors have to deal with in the California State University (CSU) system.
One personal anecdote: the ESL students, usually foreign residents earning math, science, or engineering degrees, worked the hardest on their writing. Some students even hired me for private work. I remember being ecstatic about making 15 dollars an hour when a South Korean student hired me as a private tutor. Back then, 15 dollars was major bling-bling and meant dinner at the local Thai restaurant (Sophie's Kitchen, apparently under different ownership now, so I can't personally vouch for it) rather than the 99 cent chicken sandwich at Jack-in-the-Box. I discovered sushi for the first time in Davis also. Yup, those were the days.
http://www.nytimes.com/2008/07/29/opinion/29brooks.html?ex=1375070400&en=7286e3c1957017ac&ei=5124&partner=permalink&exprod=permalink
Starting intensive education earlier (Scotland starts its first grade at 4 years old, at least when I was there) and investing in all-day (9AM to 6PM) elementary schools may be a wise choice. When I tutored at UC Davis, I was stunned at how poorly some UC students wrote, especially after the supposedly higher educational requirements for admission. God only knows what teachers and tutors have to deal with in the California State University (CSU) system.
One personal anecdote: the ESL students, usually foreign residents earning math, science, or engineering degrees, worked the hardest on their writing. Some students even hired me for private work. I remember being ecstatic about making 15 dollars an hour when a South Korean student hired me as a private tutor. Back then, 15 dollars was major bling-bling and meant dinner at the local Thai restaurant (Sophie's Kitchen, apparently under different ownership now, so I can't personally vouch for it) rather than the 99 cent chicken sandwich at Jack-in-the-Box. I discovered sushi for the first time in Davis also. Yup, those were the days.
Top 25% of Earners Paid 85% of All Taxes in 2006
The numbers the IRS released regarding tax burdens in 2006 is stunning. Basically, the top 10% pay 68% of all income taxes. That means if you're making less than $108,904, your contribution to the pool is fairly small in comparison, and if you're making more, well, thank you.
The above chart is from Kiplinger's:
http://finance.yahoo.com/taxes/article/105468/What%27s-Your-Share-of-the-Nation%27s-Tax-Bill?
This reminds me of a joke I read on Greg Mankiw's (http://gregmankiw.blogspot.com) blog. He told a story about a group of four friends who went out drinking. At first, they divided the bill equally, each paying 10 dollars for a pitcher of beer. Then, the four friends realized that one only made $10/hr, while another made $90/hr. They agreed the higher-earning friend should pay 20 dollars as a "fair" share. The friend agreed, everyone else paid about 7 dollars each, and everyone was happy. Everything was going well, until the other three friends demanded that the higher earner pay 30 dollars as his "fair" share. The friend got ticked off and moved out of the city. The next time the three friends went out for beers, they all paid about 14 dollars each, more than if they had been nicer to the higher wage earner.
The lesson? People will move or take other measures to avoid taxes if they are too high or unreasonable, leaving everyone else with a higher bill.
Update on April 13, 2009: more on income taxes here and here.
Update on August 10, 2012: more on overall tax burdens here: http://online.wsj.com/article/SB10000872396390444246904577571042249868040.html?mod=e2fb (David Wessel, August 6, 2012, The Numbers Inside a Hot-Button Issue)
"In the 1980s, the top 5% averaged 22.6% of income and paid 28.5% of taxes.
In the 1990s, the top 5% averaged 25.3% of income and paid 34.3% of taxes.
In the 2000s, the top 5% averaged 28.4% of the income and paid 40.3% of the taxes."
"Average tax rates have come down for everyone. On average, the tax bite on the rich is bigger--except for those whose income mainly comes from capital gains and dividends."
"The share of taxes paid by the bottom 40% of the population has been shrinking along with their share of income."
BREAKDOWN OF INCOME AND TAXES PAID BY CATEGORY
| |||||||||
Income Category
|
2006 AGI
|
Percent of All Income
|
Percent of Income Taxes Paid
| ||||||
Top 1%
|
Over $388,806
|
22%
|
37%
| ||||||
Top 5%
|
Over $153,542
|
37%
|
57%
| ||||||
Top 10%
|
Over $108,904
|
47%
|
68%
| ||||||
Top 25%
|
Over $64,702
|
66%
|
85%
| ||||||
Top 50%
|
Over $31,987
|
87%
|
97%
| ||||||
Bottom 50%
|
Under $31,988
|
13%
|
3%
| ||||||
The above chart is from Kiplinger's:
http://finance.yahoo.com/taxes/article/105468/What%27s-Your-Share-of-the-Nation%27s-Tax-Bill?
This reminds me of a joke I read on Greg Mankiw's (http://gregmankiw.blogspot.com) blog. He told a story about a group of four friends who went out drinking. At first, they divided the bill equally, each paying 10 dollars for a pitcher of beer. Then, the four friends realized that one only made $10/hr, while another made $90/hr. They agreed the higher-earning friend should pay 20 dollars as a "fair" share. The friend agreed, everyone else paid about 7 dollars each, and everyone was happy. Everything was going well, until the other three friends demanded that the higher earner pay 30 dollars as his "fair" share. The friend got ticked off and moved out of the city. The next time the three friends went out for beers, they all paid about 14 dollars each, more than if they had been nicer to the higher wage earner.
The lesson? People will move or take other measures to avoid taxes if they are too high or unreasonable, leaving everyone else with a higher bill.
Update on April 13, 2009: more on income taxes here and here.
Update on August 10, 2012: more on overall tax burdens here: http://online.wsj.com/article/SB10000872396390444246904577571042249868040.html?mod=e2fb (David Wessel, August 6, 2012, The Numbers Inside a Hot-Button Issue)
"In the 1980s, the top 5% averaged 22.6% of income and paid 28.5% of taxes.
In the 1990s, the top 5% averaged 25.3% of income and paid 34.3% of taxes.
In the 2000s, the top 5% averaged 28.4% of the income and paid 40.3% of the taxes."
"Average tax rates have come down for everyone. On average, the tax bite on the rich is bigger--except for those whose income mainly comes from capital gains and dividends."
"The share of taxes paid by the bottom 40% of the population has been shrinking along with their share of income."
Tuesday, July 29, 2008
WSJ Review, 7/29/08
Just when I'm ready to throw in the towel on the WSJ's steadily "dumbing down" of content and language and subscribe to the LA Times or NYT, it comes out with a fantastic issue. Here are the highlights:
1. One, a great quote from John Adams I'd never seen before, reminding Americans they are a republic, not a true democracy (Letters to the Editor section):
"Democracy never lasts long. It soon wastes, exhausts and murders itself. There was never a democracy that did not commit suicide."
-- John Adams, Letter, April 15, 1814
2. A reference to Frederic Mishkin's final speech as a Federal Reserve Board (FRB) employee:
http://www.federalreserve.gov/newsevents/speech/mishkin20080728a.htm
All FRB speeches in 2008 can be found here:
http://www.federalreserve.gov/newsevents/speech/2008speech.htm
Mishkin advocates for more FRB transparency and a publicly stated inflation target:
"By establishing a transparent and credible commitment to a specific numerical inflation objective, monetary policy can provide a firm anchor for long-run inflation expectations, thereby directly contributing to the objective of low and stable inflation."
Common sense stated simply and persuasively. Sigh. Why can't the FRB hold onto to someone like this? If the Dallas FRB's Fisher leaves, we won't have any inflation hawks left.
3. An article on Turkey's current turmoil caught my eye. Basically, Turkey has mandated secularism. At one point, it outlawed head scarves. This strict separation of religion and citizenry has caused internal turmoil, as more Turkish citizens demand free exercise of religion reminiscent of the original Americans. Turkey seems to have gone too far, because by outlawing certain religious aspects, it has intruded into its citizens' personal lives. Still, it bears noting and repeating: Muslims in the U.S. have greater religious freedom than in many Muslim countries. On the other hand, Malaysia and Indonesia, as prosperous Muslim countries, are good examples of how to run a religiously-inclined state.
4. Speaking of Indonesia, few people know Indonesia is an OPEC member. However, like Iran, Indonesia is experiencing difficulty with very low domestic oil prices, and needs to import more and more of it. As a result, Indonesia's power grid relies somewhat on coal. The problem is Indonesia's privately owned coal companies can get more money exporting coal (33% more, apparently) than selling it domestically. As a result of the difference in pricing, Indonesia's power grid is becoming inconsistent, like Enron's refusal to power California, causing state-wide problems. Hence, the question: should Indonesia pay more to the private coal companies, or does a state have an interest in demanding lower prices because power is a necessary item for its citizens? The coal companies may not pay much in taxes and do benefit from being in Indonesia, with its low labor costs, rich resources, and wonderful people.
I tend to believe in regulation of essential items, such as food and energy, but of course, the question is always, "How much regulation?" One cannot make the usual argument that regulation should be extended up to a point before the coal companies leave and do business elsewhere. Resource-rich countries have more leverage because of the finite nature and necessity of many natural resources; in other words, services may be regulated differently than natural resources because services, unlike natural resources, are usually more fungible. In any case, an interesting discussion can surely be had about this topic.
1. One, a great quote from John Adams I'd never seen before, reminding Americans they are a republic, not a true democracy (Letters to the Editor section):
"Democracy never lasts long. It soon wastes, exhausts and murders itself. There was never a democracy that did not commit suicide."
-- John Adams, Letter, April 15, 1814
2. A reference to Frederic Mishkin's final speech as a Federal Reserve Board (FRB) employee:
http://www.federalreserve.gov/newsevents/speech/mishkin20080728a.htm
All FRB speeches in 2008 can be found here:
http://www.federalreserve.gov/newsevents/speech/2008speech.htm
Mishkin advocates for more FRB transparency and a publicly stated inflation target:
"By establishing a transparent and credible commitment to a specific numerical inflation objective, monetary policy can provide a firm anchor for long-run inflation expectations, thereby directly contributing to the objective of low and stable inflation."
Common sense stated simply and persuasively. Sigh. Why can't the FRB hold onto to someone like this? If the Dallas FRB's Fisher leaves, we won't have any inflation hawks left.
3. An article on Turkey's current turmoil caught my eye. Basically, Turkey has mandated secularism. At one point, it outlawed head scarves. This strict separation of religion and citizenry has caused internal turmoil, as more Turkish citizens demand free exercise of religion reminiscent of the original Americans. Turkey seems to have gone too far, because by outlawing certain religious aspects, it has intruded into its citizens' personal lives. Still, it bears noting and repeating: Muslims in the U.S. have greater religious freedom than in many Muslim countries. On the other hand, Malaysia and Indonesia, as prosperous Muslim countries, are good examples of how to run a religiously-inclined state.
4. Speaking of Indonesia, few people know Indonesia is an OPEC member. However, like Iran, Indonesia is experiencing difficulty with very low domestic oil prices, and needs to import more and more of it. As a result, Indonesia's power grid relies somewhat on coal. The problem is Indonesia's privately owned coal companies can get more money exporting coal (33% more, apparently) than selling it domestically. As a result of the difference in pricing, Indonesia's power grid is becoming inconsistent, like Enron's refusal to power California, causing state-wide problems. Hence, the question: should Indonesia pay more to the private coal companies, or does a state have an interest in demanding lower prices because power is a necessary item for its citizens? The coal companies may not pay much in taxes and do benefit from being in Indonesia, with its low labor costs, rich resources, and wonderful people.
I tend to believe in regulation of essential items, such as food and energy, but of course, the question is always, "How much regulation?" One cannot make the usual argument that regulation should be extended up to a point before the coal companies leave and do business elsewhere. Resource-rich countries have more leverage because of the finite nature and necessity of many natural resources; in other words, services may be regulated differently than natural resources because services, unlike natural resources, are usually more fungible. In any case, an interesting discussion can surely be had about this topic.
Immigrants and Entrepreneurship
An Oklahoma newspaper has an interesting article on immigrants and entrepreneurship:
http://newsok.com/diverse-entrepreneurs-are-changing-face-of-states-small-business/article/3269257/
"The Ewing Marion Kauffman Foundation [http://www.kauffman.org/], a Kansas City, Mo.-based entrepreneurial think tank, says 0.35 percent of immigrants are entrepreneurs compared with 0.28 percent for the native born."
"We are a nation built on immigrants. But there was always a path to the middle class. And that's not so much the case anymore. That's why more immigrants are turning to entrepreneurship. A lot of immigrants see it as the best, if not only, ticket to the American dream."
http://newsok.com/diverse-entrepreneurs-are-changing-face-of-states-small-business/article/3269257/
"The Ewing Marion Kauffman Foundation [http://www.kauffman.org/], a Kansas City, Mo.-based entrepreneurial think tank, says 0.35 percent of immigrants are entrepreneurs compared with 0.28 percent for the native born."
"We are a nation built on immigrants. But there was always a path to the middle class. And that's not so much the case anymore. That's why more immigrants are turning to entrepreneurship. A lot of immigrants see it as the best, if not only, ticket to the American dream."
Monday, July 28, 2008
McAfee Shareholder Meeting, July 28, 2008
McAfee's (MFE) shareholder meeting was a low key event. It appeared less than five non-employees attended. The food consisted of some cookies, what looked like a brownie, and sparking juice (berry flavor).
David Dewalt, McAfee's CEO, did the non-formal part of the presentation. No video presentation was involved--just Mr. DeWalt speaking at the podium for about six or seven minutes. See link for more on Mr. DeWalt.
http://www.mcafee.com/us/about/management/david_dewalt.html
McAfee is a security technology company that secures systems and networks. They are famous for their anti-virus software. The highlights of Mr. DeWalt's speech are as follows:
1. McAfee has 125 million downloads/sales.
2. McAfee has 4,500+ employees worldwide.
3. They have 1.2 billion in cash and no debt.
After these points, much of Mr. DeWalt's speech was difficult to understand because it was very general. I have been to many technology shareholder meetings, and it seemed as if this speech/presentation was designed to motivate employees and the Board rather than explain anything in detail. Mr. DeWalt talked about inter-locking security, securing the premises and new frontiers, and other terms relevant to McAfee's security focus.
I did catch one point about a partnership with VMWare, Inc (VMW). Mr. DeWalt mentioned McAfee being more involved in virtual machines, not just physical machines. (For more information, you can search Wikipedia for "virtual machine.") And just like that, the presentation was done.
Another shareholder, an Apple user, asked how Apple's continued popularity will affect McAfee. Apple users are known for boasting about their OS's superior safety; however, some engineers have said there is no salient difference in security. Their opinion is Apple enjoys an advantage against hacking because of its popularity (I have never met a programmer who likes Microsoft) and lower user adoption of the Tiger OS. In other words, Microsoft dominates the field, so it has more hackers gunning for it, and if Apple ever became too large, its security system would also be exposed after hackers focused on Apple rather than Microsoft. Mr. DeWalt said the company was researching Apple's Tiger system and would be prepared to handle any security needs. McAfee's "Avert Labs" is their research arm. Here is their blog:
http://www.avertlabs.com/research/blog/
I asked a few questions. I first asked how McAfee is different from Symantec (SYMC) and whether there was a "wide moat" (a barrier to being overtaken by competitors). Both McAfee and SYMC are known for their anti-virus software, but I've never been able to tell the difference between the two companies. Mr. DeWalt tried to answer my question, but was very general. I asked for more details, and he talked about McAfee's superior work in several areas, such as its Software-to-Services model ("SAS," pronounced "sass"). He said that McAfee had taken market share from SYMC over the past two years. He implied McAfee's encryption was better than SYMC's. He also referred to the involvement with virtual applications, not just physical applications. He ended by saying McAfee was also better in risk and compliance issues, such as understanding regulations and how to comply with new and existing laws. His speech had earlier cited HIPAA, SOX (Sarbanes-Oxley), and even Basel II.
Hence, my second question. I asked how McAfee was involved in the Basel II Accord. I asked this question because it made no sense for an online security company to refer to a system designed to improve and harmonize international financial dealings. Basel II is a very complex idea. Put simply, it is designed to create some consistency and trust in international banking regulations so one country does not create worldwide problems by poorly regulating their banks. The advanced, first world countries most likely envisioned Basel II as a way to decrease risk when dealing with less-regulated or emerging markets. Hilariously, America's Fannie Mae and Freddie Mac, while not banks per se, just proved the need for a stronger Basel II Accord, or perhaps an entirely new Basel III.
Mr. DeWalt said that he was working with the U.K. and each country had different regulatory bodies. He focused on data security and the data loss. Presumably, Basel II has some requirements for how to store customer data so a James-Bond-type can't download someone's bank account in Switzerland through a laptop.
Mr. DeWalt is an amiable man, but my overall feeling is that he wants to be a visionary and uses grand ideas to establish a vision a la John Kennedy's style. That's great if you want to be president of a nation--but for running a tech company, especially one based on credibility, one must be careful to use words in context and to have specific examples if necessary as support for the grand ideas. Mr. DeWalt didn't really explain who he was working with in Europe to implement Basel II. The EU is implementing Basel II now, but most countries will be implementing Basel II by 2015. Mr. DeWalt's glib response might have been due to a lack of time or his general style, which is geared more towards enthusiasm than specifics. I came away thinking McAfee has grand visions but needs to work on being more specific in its business and expansion plans.
My last question had to do with a line in the "Risk Factors" section of the 10-K. California is auditing McAfee's 2004-2005 income tax returns. No specifics were listed in the 10-K. I asked about the audit, and the CFO indicated the audit involved apportioning income between states. Most states are experiencing budget shortfalls and are going after any source of untapped revenue . A company like McAfee that sells a lot of their products online to an anonymous end user may have a difficult time determining in which state it or its customers should pay taxes, thereby allowing an argument that it is underpaying certain taxes. For example, if someone downloads a program in Kentucky but uses it in California, which state should get the tax? It's also possible McAfee wasn't collecting any taxes at all during 2004-2005, but I am speculating. The CFO indicated there had been no claim and no settlement discussions with the State of California.
The CEO came up to me after the meeting and shook my hand. I handed him my business card, which lists me as a lawyer. His face sort of froze a bit. No one in business likes lawyers. I need to get a new card for shareholder meetings. Still, Mr. DeWalt, while amiable, needs to be more specific about future plans and how exactly he will take McAfee into the future. Having 1.2 billion dollars and no debt is impressive. Perhaps the numbers already speak for themselves or will speak for themselves. McAfee releases earnings on July 31, 2008.
After the meeting, I thought about McAfee's wide moat. I didn't really see one at first. McAfee has competition from not only SYMC, but AVG, which offers a free security application. I use a paid security service for my work computer, but AVG for a home computer. And that's when it hit me. McAfee did have some protection against becoming obsolete because no business will entrust their enterprise or business software protection to a company that gives away its product. Consumers are one small part of the pie when it comes to online security, and McAfee and SYMC probably duke it out for the corporate accounts the way Pepsi and Coke fight for market share. But unlike Coke and Pepsi, when times are tough, people won't cut back on online security. It's the last place any business will skimp on--after all, a business will lose days, maybe even weeks, if hackers access its intranet or files. The new essential product is online security, and a recession won't necessarily affect companies like SCUR, MFE, and SYMC. But the proof is in the pudding, and we will see on July 31, 2008, whether McAfee's numbers satisfy Wall Street.
David Dewalt, McAfee's CEO, did the non-formal part of the presentation. No video presentation was involved--just Mr. DeWalt speaking at the podium for about six or seven minutes. See link for more on Mr. DeWalt.
http://www.mcafee.com/us/about/management/david_dewalt.html
McAfee is a security technology company that secures systems and networks. They are famous for their anti-virus software. The highlights of Mr. DeWalt's speech are as follows:
1. McAfee has 125 million downloads/sales.
2. McAfee has 4,500+ employees worldwide.
3. They have 1.2 billion in cash and no debt.
After these points, much of Mr. DeWalt's speech was difficult to understand because it was very general. I have been to many technology shareholder meetings, and it seemed as if this speech/presentation was designed to motivate employees and the Board rather than explain anything in detail. Mr. DeWalt talked about inter-locking security, securing the premises and new frontiers, and other terms relevant to McAfee's security focus.
I did catch one point about a partnership with VMWare, Inc (VMW). Mr. DeWalt mentioned McAfee being more involved in virtual machines, not just physical machines. (For more information, you can search Wikipedia for "virtual machine.") And just like that, the presentation was done.
Another shareholder, an Apple user, asked how Apple's continued popularity will affect McAfee. Apple users are known for boasting about their OS's superior safety; however, some engineers have said there is no salient difference in security. Their opinion is Apple enjoys an advantage against hacking because of its popularity (I have never met a programmer who likes Microsoft) and lower user adoption of the Tiger OS. In other words, Microsoft dominates the field, so it has more hackers gunning for it, and if Apple ever became too large, its security system would also be exposed after hackers focused on Apple rather than Microsoft. Mr. DeWalt said the company was researching Apple's Tiger system and would be prepared to handle any security needs. McAfee's "Avert Labs" is their research arm. Here is their blog:
http://www.avertlabs.com/research/blog/
I asked a few questions. I first asked how McAfee is different from Symantec (SYMC) and whether there was a "wide moat" (a barrier to being overtaken by competitors). Both McAfee and SYMC are known for their anti-virus software, but I've never been able to tell the difference between the two companies. Mr. DeWalt tried to answer my question, but was very general. I asked for more details, and he talked about McAfee's superior work in several areas, such as its Software-to-Services model ("SAS," pronounced "sass"). He said that McAfee had taken market share from SYMC over the past two years. He implied McAfee's encryption was better than SYMC's. He also referred to the involvement with virtual applications, not just physical applications. He ended by saying McAfee was also better in risk and compliance issues, such as understanding regulations and how to comply with new and existing laws. His speech had earlier cited HIPAA, SOX (Sarbanes-Oxley), and even Basel II.
Hence, my second question. I asked how McAfee was involved in the Basel II Accord. I asked this question because it made no sense for an online security company to refer to a system designed to improve and harmonize international financial dealings. Basel II is a very complex idea. Put simply, it is designed to create some consistency and trust in international banking regulations so one country does not create worldwide problems by poorly regulating their banks. The advanced, first world countries most likely envisioned Basel II as a way to decrease risk when dealing with less-regulated or emerging markets. Hilariously, America's Fannie Mae and Freddie Mac, while not banks per se, just proved the need for a stronger Basel II Accord, or perhaps an entirely new Basel III.
Mr. DeWalt said that he was working with the U.K. and each country had different regulatory bodies. He focused on data security and the data loss. Presumably, Basel II has some requirements for how to store customer data so a James-Bond-type can't download someone's bank account in Switzerland through a laptop.
Mr. DeWalt is an amiable man, but my overall feeling is that he wants to be a visionary and uses grand ideas to establish a vision a la John Kennedy's style. That's great if you want to be president of a nation--but for running a tech company, especially one based on credibility, one must be careful to use words in context and to have specific examples if necessary as support for the grand ideas. Mr. DeWalt didn't really explain who he was working with in Europe to implement Basel II. The EU is implementing Basel II now, but most countries will be implementing Basel II by 2015. Mr. DeWalt's glib response might have been due to a lack of time or his general style, which is geared more towards enthusiasm than specifics. I came away thinking McAfee has grand visions but needs to work on being more specific in its business and expansion plans.
My last question had to do with a line in the "Risk Factors" section of the 10-K. California is auditing McAfee's 2004-2005 income tax returns. No specifics were listed in the 10-K. I asked about the audit, and the CFO indicated the audit involved apportioning income between states. Most states are experiencing budget shortfalls and are going after any source of untapped revenue . A company like McAfee that sells a lot of their products online to an anonymous end user may have a difficult time determining in which state it or its customers should pay taxes, thereby allowing an argument that it is underpaying certain taxes. For example, if someone downloads a program in Kentucky but uses it in California, which state should get the tax? It's also possible McAfee wasn't collecting any taxes at all during 2004-2005, but I am speculating. The CFO indicated there had been no claim and no settlement discussions with the State of California.
The CEO came up to me after the meeting and shook my hand. I handed him my business card, which lists me as a lawyer. His face sort of froze a bit. No one in business likes lawyers. I need to get a new card for shareholder meetings. Still, Mr. DeWalt, while amiable, needs to be more specific about future plans and how exactly he will take McAfee into the future. Having 1.2 billion dollars and no debt is impressive. Perhaps the numbers already speak for themselves or will speak for themselves. McAfee releases earnings on July 31, 2008.
After the meeting, I thought about McAfee's wide moat. I didn't really see one at first. McAfee has competition from not only SYMC, but AVG, which offers a free security application. I use a paid security service for my work computer, but AVG for a home computer. And that's when it hit me. McAfee did have some protection against becoming obsolete because no business will entrust their enterprise or business software protection to a company that gives away its product. Consumers are one small part of the pie when it comes to online security, and McAfee and SYMC probably duke it out for the corporate accounts the way Pepsi and Coke fight for market share. But unlike Coke and Pepsi, when times are tough, people won't cut back on online security. It's the last place any business will skimp on--after all, a business will lose days, maybe even weeks, if hackers access its intranet or files. The new essential product is online security, and a recession won't necessarily affect companies like SCUR, MFE, and SYMC. But the proof is in the pudding, and we will see on July 31, 2008, whether McAfee's numbers satisfy Wall Street.
New Position: EZU
I will not jump back into the market until sometime in September 2008. However, I will be buying small lots so as not to miss an unexpected (and unlikely) rally before then.
I bought 30 shares of EZU today and will look to add more in September 2008. I am placing these stocks on my watch list:
GOOG, STM, WFR, BRCD, BWS, LAZ, SVU, DEG, MITSY, ENH, NVDA, TSM, AIB, IRE
At some point, if this market's volatility increases, the names above may become too cheap to ignore. (I recently bought GOOG, BRCD, and NVDA--very small lots.)
I just bought 25 GOOG @ 478.4794 as a short-term (under 7 days) trade.
The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.
I bought 30 shares of EZU today and will look to add more in September 2008. I am placing these stocks on my watch list:
GOOG, STM, WFR, BRCD, BWS, LAZ, SVU, DEG, MITSY, ENH, NVDA, TSM, AIB, IRE
At some point, if this market's volatility increases, the names above may become too cheap to ignore. (I recently bought GOOG, BRCD, and NVDA--very small lots.)
I just bought 25 GOOG @ 478.4794 as a short-term (under 7 days) trade.
The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.
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