Company Description

Sonoco manufactures industrial and consumer packaging and packaging solutions at 300 locations in 35 countries with customers in 85 nations. It also produces recycled paperboard and recycles old corrugated containers and other recyclable materials.

Price Increases

On Mar 8, the company announced it would raise prices for uncoated recycled paperboard grades in the United States and Canada by $60 per ton as of Apr 5 as costs continue to rise.

It also is increasing prices on all paperboard industrial converted products in the U.S. and Canada by 5.5% also effective on Apr 5.

“Recovered paper costs have continued to rise rapidly throughout the first quarter of 2010. Key grades, such as old corrugated cartons (OCC), are up by approximately $110 per ton, or 150 percent, since November 2009, according to published lists,” said Harris DeLoach, chairman, president and CEO.

“Actual marketplace prices for recovered paper are currently exceeding listed prices by another $20 to $30 per ton, due to scarcity of supply. As a result, we have no alternative but to pass on these higher raw material costs,” he added.

On Feb 18, the company also increased prices by 19% on nailed wood reels and 11% on plywood reels due to the rise in lumber prices which started in the fourth quarter of 2009. Wet weather has contributed to a supply and demand imbalance at the lumber mills.

Sonoco Surprised by 13.7% in the Fourth Quarter

On Feb 10, for the third quarter in a row, Sonoco beat the Zacks Consensus Estimate. Earnings per share were 58 cents compared to the consensus of 51 cents. The company reported 49 cents in the year ago period.

The company beat its own guidance range due to a slightly improved operating environment and a lower than expected effective tax rate. The company’s consumer packaging segment continued to outperform as it saw its eighth consecutive quarter of year-over-year improvement.

Sales rose 7% to $1 billion from $935 million in the year ago quarter. Volumes improved in the Tube and Cores/Paper, Consumer Packaging and Packaging Services segments.

Outlook for 2010

The year over year improvement is expected to continue. Sonoco expects earnings per share in the range of 40 to 45 cents which is up from the 29 cents it earned in the first quarter of 2009.

2010 earnings per share are forecast between $2.00 and $2.15 which is higher than the company’s first guidance range provided on Dec 4, 2009 of $1.95 to $2.05. The company is seeing slightly stronger business conditions and expects additional reduction in pension expenses.

Zacks Consensus Estimates Rise

Given the company’s guidance, it’s not surprising that the analysts moved to get in-line with the higher estimates. For the full year, the Zacks Consensus Estimate rose 7 cents to $2.10 in the last 30 days.

This is earnings per share growth of 18.2% compared to the year ago quarter.

The first quarter estimate has been holding steady at 43 cents over the last 90 days, which is in the middle of the company’s guidance range.

Value Fundamentals

Sonoco is a Zacks #1 Rank (strong buy) stock. It has a price-to-book ratio of 2.2, which is under the traditional cut-off for a value stock of 3.0, and a P/E of 14.3, which is also under the traditional value cut-off of 15x earnings.

The company also has an outstanding 5-year average return on equity of 16.2%.

As an added bonus, Sonoco pays a dividend currently yielding 3.6% which far exceeds the industry average of 1.6%.

Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the market-beating Zacks Value Trader service.

Zacks Investment Research

(SON) Sonoco Products Company – Earnings Surprised by 13.7% in the Fourth Quarter

Company Description

Neenah Paper manufactures and distributes a wide range of premium and specialty paper grades, with well-known brands such as Classic, Environment, Kimdura, and Munising. The company also produces and sells bleached pulp, primarily for use in the manufacture of tissue and writing papers.

Business Is Improving

Management indicated that its businesses continue to gain momentum with a fourth sequential quarterly increase in sales, EBIT, and margins. The company has been able to maintain cost reduction efforts and increase selling prices.

Additionally, the company is using its cash flow to pay down debt.

Neenah Paper’s improved results and balance sheet caught the attention of Moody’s (MCO), which placed all of its ratings on Neenah Paper on review for possible upgrades. If Moody’s upgrades Neenah Paper’s debt ratings, its borrowing will decrease.

Fourth-Quarter Results

Neenah Paper reported fourth-quarter results on February 24. The company had net sales of $155 million, up 5% from the year-ago quarter, and adjusted earnings of $0.34 per share, compared to an adjusted loss of $0.62 per share in the fourth quarter of 2008. That trounced the Zacks Consensus Estimate of $0.19 per share.

Management also provided its outlook for 2010. The company expects to see a modest recovery in market demand, sustained benefits from most of its 2009 cost reduction initiatives, and higher material input costs that will be partly offset by lower energy costs and higher selling prices.

The company paid a quarterly cash dividend of $0.10 per share on March 2.

Analysts Increase Estimates

After another blow-out quarterly report, analysts are lifting their earnings estimates for the next two years. In the last week, the Zacks Consensus Estimate for 2010 jumped from $0.93 to $1.13, and the Zacks Consensus Estimate for 2011 moved up from $1.50 to $1.55.

Zacks Investment Research

(NP) Neenah Paper – Analysts Increase Earnings Estimates

Quarterly sales of $6.0 billion were 8.7% lower than the year-ago sales of $6.5 billion. The company’s packaging business has been adversely impacted by declining consumer spending, while the paper business is affected by lower commercial printing and advertising activity and deteriorating white-collar employment levels, which impact the usage of copy and laser printer paper.

For the full-year 2009, International Paper reported earnings of 88 cents per share on net sales of $23.4 billion compared to 2008 earnings of $2.01 per share on net sales of $24.8 billion.

Through its strong focus on margin improvement and working capital management, International Paper generated strong free cash flow of approximately $4.1 billion in 2009, compared to $1.7 billion in 2008. The company therefore was able to reduce its debt by $3.1 billion during 2009. As of December 31, 2009, International Paper had $1.9 billion in cash and cash equivalents.

International Paper has been witnessing declining unit volumes in most of its markets since the second half of 2008. The company is adjusting its capacity to match demand levels, as it believes that the accumulative cost of down time is far less than the negative impact of chasing volumes and building excess inventories. We do not expect any significant recovery in the company’s end-markets in the coming months.

We maintain a Neutral rating on the stock.

Zacks Investment Research

(IP) International Paper’s Earnings Beat by 1 Cent

Net sales of $1,521.8 million reported in the fourth quarter were slightly higher (+0.7%) than the prior-year revenue of $1,511.5 million. Currency translation had a positive impact of 4.5% on the fourth quarter sales, which was partially offset by a 0.6% decline in organic sales. The reported quarter had one week less compared to the fourth quarter of 2008 and this had a negative impact of 3.2% on year over year growth.

The Pressure-sensitive Materials segment posted a 5% growth (organic growth of 2%) in sales on a year-over-year basis, primarily due to higher sales of Roll Materials, led by low double digit increase in emerging markets. Sales continued to decline in the Graphics and Reflective Products business.

Net sales in the Retail Information Services segment were down 2% from the corresponding quarter of 2008, reflecting weak apparel demand in the U.S. and Europe, and caution on the part of retailers.

In the Office and Consumer Products business, net sales fell 9% due to slower corporate purchase activity. Net sales in Avery’s other specialty converting businesses improved 1% year over year due to favorable currency translation impact.

Gross profit margin increased 230 basis points to 27.3% in the fourth quarter of 2009, from 25.0% in the comparable quarter of 2008. This growth was primarily a result of restructuring and productivity initiatives as well as the company’s ability to raise and maintain prices.

However, the operating margin declined 10 basis points year over year to 4.8% in the fourth quarter of 2009 due to a 190 basis points increase in marketing, general and administrative (MG&A) expenses as a percentage of sales. The increase in MG&A expenses was led by higher employee costs, currency translation and increased investment in marketing and business development, partially offset by productivity initiatives.

In response to the tough market conditions, Avery started a restructuring program in the fourth quarter of 2008 to reduce costs across its segments. During the reported quarter, the company increased its target to $180 million in annualized savings (previous target was $160 million) from this program by mid-2010. The company delivered approximately $75 million in savings, net of transition costs, in 2009. At the end of 2009, Avery achieved run-rate savings of approximately 75% of its restructuring target.

Avery generated free cash flow of $465.7 million in 2009 and estimates $300-$350 million for 2010. The company had a target of reducing its debt by at least $350 million from the end of the second quarter of 2009 through the end of 2010. It already succeeded in reducing its debt by $300 million during the second half 2009.

While the end-market demand continues to remain soft, Avery forecasts organic sales growth of 0% to 5% for 2010. At 0% organic growth scenario, the company expects full year earnings of $2.00-$2.30 per share. Assuming a 5% organic growth, the company projects 2010 EPS in the range of $2.70 to $3.

Zacks Investment Research

(AVY) Avery Dennison Corporation Reports Below Expectations

The company announced a price hike of $50 per ton for all uncoated recycled paperboard grades. Paperboard industrial converted products’ price will go up by 4.5%. Sonoco attributed these price hikes to the recent increase in raw material costs. The cost of recovered paper, the company’s primary raw material, has gone up almost 40%.

With the severe weather conditions impacting the supply of recovered paper, Sonoco said that it is receiving higher quotes for the raw material to be supplied in the coming weeks. The company aims to recover the higher input costs as soon as possible in order to maintain its margins. Sonoco indicated that it will take further pricing actions, if necessary, in response to the rising raw material costs.

Sonoco adjusts its prices regularly to pass on higher raw material costs. As a result, the company benefited from favorable selling price/material cost relationship in the last two quarters.

However, the company’s long-term contracts with some customers limit its ability to adjust prices according to the increase in raw material costs. In cases where the company had raised its prices to absorb high input costs, it had resulted in loss of market share.

Zacks Investment Research

(SON) Sonoco Products Company Increasing Paperboard Prices

Management said that this acquisition fills an important gap in Sonoco’s existing plastic, plywood and composite wire and cable reel business by adding mid-range diameter plastic and plywood-replacement spools and reels. In a separate announcement, Sonoco revealed its plans to offer semi-chemical corrugating medium starting from January 1, 2010.

The company plans to expand its mill in Hartsville, South Carolina for this purpose. The Hartsville machine currently has 170,000 tons of annual capacity, which it offers exclusively through contract relationships. Sonoco is currently plagued with continued weak demand conditions prevailing in most of its businesses.

However, over the long-term the company is confident of achieving growth equally from acquisitions and organic growth. The company’s investments in acquisitions as well as existing facility expansions are helped by its strong cash generation ability.

Sonoco generated $358 million in cash from operations in the first nine months of 2009. Also, the company generated free cash flow of $194 million in the first nine months and expects to generate full year free cash flow of over $200 million. We maintain a Neutral rating on the stock.

Zacks Investment Research

(SON) Sonoco Products Company Invests in Growth

Quarterly sales of $5.9 billion were 13.1% lower than the year-ago sales of $6.8 billion. The company’s packaging business has been adversely impacted by declining consumer spending, while the paper business is affected by lower commercial printing and advertising activity, and deteriorating white-collar employment levels, which impact the usage of copy and laser printer paper.

To offset the impact of lower sales, the company continues to focus on managing its overhead costs. The company is confident of cutting down its workforce to less than 58,000 employees by the end of the year. The company recently announced plans to close three of its mills, which will reduce its work force by 1,600 employees. Apart from headcount reduction, the company has cut its executive compensation by about 50% and has frozen salary hikes.

Through its strong focus on margin improvement and working capital management, International Paper generated strong free cash flow of approximately $1.3 billion in the quarter.

The company therefore was able to reduce its debt by $1.3 billion during the quarter. International Paper has been witnessing declining unit volumes in most of its markets since the second half of 2008. The company is adjusting its capacity to match demand levels as it believes that the accumulative cost of down time is far less than the negative impact of chasing volumes and building excess inventories. We do not expect any significant recovery in the company’s end-markets for the next couple of quarters.

International Paper’s competitor, MeadWestvaco Corp. (MWV), posted third-quarter earnings of 50 cents, almost two times the Zacks Consensus Estimate of 27 cents, driven by stringent cost reduction measures and productivity improvements.

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(IP) International Paper Tops Expectations

Net sales of $1,549.3 million reported in the third quarter were 10.2% lower than the previous-year level. Avery witnessed soft demand in most of its end markets. The Pressure-sensitive Materials segment posted a 9.1% decline in sales on a year-over-year basis, primarily due to lower sales of Roll Materials, and Graphics and Reflective Products.

Net sales in the Retail Information Services segment were down 14.2% from the corresponding quarter of 2008, reflecting weak apparel demand in the U.S. and Europe, and caution on the part of retailers.

In the Office and Consumer Products business, net sales fell 6.8% due to slower corporate purchase activity, which was partially offset by strong back-to-school sales. Sales from Avery’s other specialty converting businesses were down 12.6% due to a decline in volumes sold to the housing and construction industries.

In response to the tough market conditions, Avery started a restructuring program in the fourth quarter of 2008 to reduce costs across its segments. The company is targeting annualized savings of $160 million from this program by mid-2010. In addition, Avery expects $40 million of carryover savings in 2009 from previously implemented actions. At the end of the reported quarter, the company achieved run-rate savings representing approximately 70% of its restructuring target.

With end-market demand expected to remain weak in the near-term, Avery expects to offset this negative impact on its profits through productivity improvements and its restructuring program.

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(AVY) Avery Dennison Corporation Gains from Restructuring

Net sales during the quarter fell 12.5% to $930.6 million from $1,063.3 million a year ago. The decline in sales was primarily led by lower volumes (particularly in the industrial-focused businesses), lower selling prices and an unfavorable foreign currency translation impact. Despite low volumes, the company’s gross margin was up 120 basis points at 18.6% primarily due to favorable selling price/material cost relationship.

Sales in the Consumer Packaging segment were almost flat compared to last year as higher selling prices offset lower volumes and an unfavorable foreign currency translation impact. Operating profit was up a robust 45.5% as the segment benefited from a favorable price/cost relationship and productivity improvements, which more than offset the impact of lower volume and higher pension costs.

Tubes and Cores/Paper segment sales dropped 20.5% due to lower volumes in North America and Europe, a negative foreign currency translation effect and lower selling prices. The segment’s operating profit was down 48.9% as a result of lower volumes, negative price/cost variance and higher pension costs.

Sales in the Packaging Services segment were down 13.3%, while operating income declined 33.6%. The segment sales were down due to lower volumes in the contract packing operations and a negative foreign currency translation effect. Operating profits decreased due to an unfavorable shift in business mix and higher pension costs.

Year-to-date, Sonoco has generated $358 million in cash from operations. The company reduced its debt by $104 million in the first nine months and ended the third quarter with a debt-to-total capital ratio of 31.0%, down from 37.0% as on Dec. 31, 2008. The company generated free cash flow of $194 million in the first nine months and expects to generate full year free cash flow of over $200 million.

Sonoco raised its earnings guidance for the year 2009. The company now expects EPS in the range of $1.62-$1.67, compared to the previous guidance of $1.55-$1.65. For the next reporting quarter, the company anticipates EPS between 42-47 cents, compared to 49 cents reported in the third quarter of previous year. The updated earnings and free cash flow guidance assume that demand will remain near the levels experienced late in the third quarter and ongoing cost-reduction efforts are successful.

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(SON) Sonoco Products Company Outperforms – Raises Guidance

Also, the company said that it would permanently shut down the previously idled No. 3 machine at its Valliant, Oklahoma, containerboard mill. The Valliant mill’s two other machines will continue to operate.

The company said that the permanent shutdowns were necessary as it does not expect the demand to return to 2008 levels in the near future. These actions will reduce the company’s North American paper and board capacity by 2.1 million tons.

Following these shutdowns, International Paper will have approximately 10 million tons of North American containerboard capacity, 2.6 million tons of North American uncoated freesheet production capacity, and 1.7 million tons of North American coated paperboard capacity. The company is confident that these shutdowns will not impact its ability to serve the customers.

These closures are expected to result in non-cash asset write-offs and accelerated depreciation charges of approximately $1.1 billion and cash severance charges of approximately $60 million in the fourth quarter of 2009 and first quarter of 2010. Also, the company expects to incur additional closure costs.

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(IP) International Paper Shreds Jobs

The first phase of the plant’s shutdown is expected to begin in late November and its workforce will be reduced by half. The company said the plant will remain in partial operation until its closure in March 2010. Production from the Orrville plant will shift to other rigid paper packaging operations in the Ohio area.

The company is experiencing weak volumes in all its businesses. In order to minimize the impact of weak volumes on its earnings Sonoco has implemented various restructuring initiatives.

The company closed several plants in Western Europe and relocated to places such as Turkey and other Eastern European countries to cut costs. Further, to make operations more cost competitive, the company had announced a restructuring program primarily for its overseas operations, mainly Europe. The company has closed a number of facilities as part of this move as well as others outside its formal restructuring plan.

Apart from restructuring activities, Sonoco’s bottom line is benefiting from productivity gains, which were $96.5 million in 2007 and $33.0 million in 2008. Further, in early December 2008, SON announced additional cost reduction measures in an attempt to align its manufacturing capacity and fixed cost structure to match the current market conditions.

This realignment includes closure of approximately 15 plants globally and the reduction of approximately 700 positions.

These cost reduction measures are expected to generate approximately $28 million in annualized pre-tax savings when fully phased in through 2009.

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(SON) Sonoco Products Company Closes Another Plant

Unlike other U.S. activated carbon producers, which make their sorbents from coal or lignite, MeadWestvaco Specialty Chemicals manufactures its carbons from wood. The company produces high quality activated carbons for use in the some of the most challenging purification applications, such as the automotive industry. On the other hand, Albemarle is an established supplier of mercury control solutions and is the largest bromine producer in North America.

Under the terms of this alliance, the two companies will jointly develop brominated wood-based activated carbons for use in mercury control. The company said that through a joint development program, both the companies have developed economical methods to utilize this renewable feedstock for power plant mercury capture.

In a separate statement, MeadWestvaco Corp. announced the launch of Med-Easy®, the company’s latest innovation in medication packaging. Med-Easy is scheduled to launch this September in Europe.

The company said that the new product, which will be available for Rx and OTC applications globally, is convenient, discrete, and easy to use. This is targeted at the customers who need to carry their medication when they are on the move but would like to be discrete when they take their medication in public. The new product joins the company’s wide range of pharmaceutical packaging solutions.

We have an Outperform rating on MeadWestvaco.

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(MWV) MeadWestvaco Forms Strategic Alliance With Albemarle

The proposed power plant to be fueled by wood, waste wood and sawdust will expand the renewable energy portfolio of We Energies. Presently, the utility has two other projects in the pipeline – a 145 MW Blue Sky Green Field Wind Energy Center in Fond du Lac County and a 162 MW Glacier Hills Wind Park in Columbia County. Collectively, these projects will generate around 360 MW of clean energy, which is sufficient to power nearly 120 thousand households.

The biomass plant will provide support to Domtar’s papermaking operations. Moreover, it will help We Energies to comply with Wisconsin state regulations, which require state utilities to meet 10% of retail electricity needs from renewable sources by 2015.

We Energies is the trade name of Wisconsin Electric Power Co. and Wisconsin Gas LLC, which are principal utility subsidiaries of Wisconsin Energy (WEC). We Energies supply electricity to over 1.1 million consumers in Wisconsin and Upper Peninsula and natural gas to over 1 million consumers in Wisconsin.

Shares of Wisconsin Energy closed at $45.10 on Tuesday, trading at 14.3X trailing 12-month EPS versus 11.8X of the peer group. We maintain our Neutral recommendation for the company.

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(UFS) We Energies Plans Biomass Plant

With this index, 50 is the magic number that separates expansion from contraction, so this reading is showing growth in the manufacturing sector.  This was the highest reading on the index since June 2007. It is one more strong bit of evidence that the recession is now over.

The index has risen in every month since December when it hit a record low of 32.9. However, all of the previous improvements simply meant that the manufacturing economy was shrinking at a slower pace. This is the first time we have seen an actual expansion in a very long time.

Manufacturing is a relatively small part of the economy, just about 12%, but it is also much more volatile than services are. That volatility makes it more significant as to the overall direction of the economy than its absolute size would indicate. The ISM will have a separate report out on the services sector of the economy on Thursday.

The internals of the report were also very strong, with 11 of the 18 industries it tracks showing improvement, so this is a fairly broad-based recovery. The sub-index for new orders jumped by 9.6 points, to 64.9 from 55.3. The index of current production rose to 61.9 from 57.9.

There were some weak points as well. The employment sub-index is still below 50 at 46.4, but it is an improvement from the 45.6 last month.

If one steps back for a slightly longer perspective, this is still good news. As recently as May, the employment reading was down at 34.3. Yes, the current reading means that we are still losing manufacturing jobs, but at a vastly slower pace than we were just a few months ago. With new orders and production leaping upwards, the first effect is likely to be a big increase in margins, due to an increase in productivity.

The next effect will be that the hours for current workers will increase, including some overtime. Calling in laid off workers is likely the next step, and then, probably several months down the road, hiring of completely new workers. The report would seem to indicate that profits in the industrial sector will be better than expected in the third quarter.

The indexes of inventories continued to show contraction. The index of companies own inventories rose slightly to 34.4 from 33.5, but is still well below the 50 mark. The index of customers inventories is higher, but falling at 39.0 vs. 42.5 last month. Both indexes are indicating inventories are being drawn down. While that’s not good for the current readings, it sets the stage for more expansion in the future.

One industry that seems to stand out when going through the report is paper, which improved in almost all of the categories. Firms like International Paper (IP) and Mead Westvaco (MWV) have been seeing very large increases in their mean estimates for both this year and next, meaning that the companies are probably conveying positive news to the analysts that this report seems to confirm.

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(IP) Purchasing Managers Index Shows Expansion

Permanent Closure of the Muskegon mill was in response to the weak demand for coated fine paper in the global markets. The company is focusing on improving profitability and returns in all its businesses.

The company said that the closure of the Muskegon Mill will not affect the product lines offered by Sappi Fine Paper North America. Products previously made at Muskegon will continue to be manufactured at the company’s other paper mills in Skowhegan, Maine and Cloquet, Minnesota.

To match its production to current demand levels and reduce inventories, Sappi has implemented various capacity reduction measures across its plants in North America and Europe, including the mills acquired from M-real. The company is also implementing additional cost cutting initiatives in response to the current economic conditions.

We expect the coated paper and pulp demand to remain weak in the near term.

Given the current market conditions, we do not expect any increase in the selling prices. With the market conditions remaining weak and no expectation of pricing gains, we estimate a double digit revenue decline for fiscal 2009. However, we believe that the cost cutting measures implemented by the company, along with the decline in input costs and acquisition synergies will offset some of this negative impact on margins.

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(SPP) Sappi Limited Adjusts Production

Net proceeds from the offering will be used for payment of the purchase price in a tender offer, for up to $250 million in aggregate principal amount of its 6.85% Notes due 2012, which was announced yesterday, and also for general corporate purposes.

MeadWestvaco continues to focus on maintaining its financial strength by aggressively managing working capital and suspending non-critical capital expenditure. The company generated operating cash flow of $266 million in the first half of 2009.

As on June 30, the company had $623 million in cash and cash equivalents on its balance sheet, up from $549 million at the beginning of the year. The company is on track to deliver positive free cash flow for 2009, which will further strengthen its financial position and support its investments across the board.

MeadWestvaco announced a series of cost-cutting initiatives last January with an initial target of $125 million by eliminating 10% of its global workforce and closing or restructuring of 12–14 manufacturing facilities. This helped in saving $46 million during the first half of 2009.

Hence, MeadWestvaco exceeded its initial annual savings target by 10% and plans to reduce its workforce by 15% by the end of 2009. It expects cumulative run-rate savings of $250–$300 million by mid-2010. This will help the company to stay afloat in the challenging economy. Thus, we maintain our Outperform rating on the stock.

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(MWV) MeadWestvaco Raises $250 million

Company Description

Schweitzer-Maudit International Inc. manufactures and sells paper and reconstituted tobacco products to the tobacco industry. The country does business in 90 countries and has a market cap of $718 million.

Shares of SWM have been rallying since early March with the market, but recently gapped open higher after the company reported solid second-quarter results on August 5.

Second-Quarter Results

Sales were down 9% from last year to $183 million, but due to higher prices and aggressive cost cutting, earnings easily beat expectations, coming in at $1.02 against the Zacks Consensus Estimate of 45 cents.

Schweitzer-Maudit noted that for the first 6 months of the year, net cash from operations was up to $22.9 million from $12.3 million last year. Capital spending was also down, totaling $4.6 million from $24 million.

Estimates Spike

After word of the good quarter hit the Street, estimates surged higher. The current-year added almost $2.00, climbing to $3.74 per share. The next-year estimate is bullish, pegged at $4.45, a 19% growth projection.

Valuation

Based upon the current-year estimate, this stock has a P/E multiple of 12.5X, a discount to the overall market with the very nice growth projection in tow.

The Chart

Shares of SWM have been trending higher since early March, but recently gapped open higher after the company reported the strong second-quarter results. Take a look below.

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(SWM) Schweitzer-Maudit International Inc. – estimates spike – very nice growth projection

In an attempt to present matters in historical context, Paul Swartz of the Council on Foreign Relations recently published a chart book showing that the current economic environment has been more severe than a typical recession. He specifically highlights the following four conclusions:

• Financial markets have dramatically improved, but from an extremely low base. Rather than pricing in disaster, they anticipate tough times ahead. For example, the charts on the spread for AAA and BAA bonds show the credit market moving from unprecedented panic to a level of fear that is merely in keeping with the worst experiences since 1945.

• Real economy indicators show signs of stabilization. See in particular the charts on manufacturing sentiment, non-farm payrolls, oil prices, and car sales. Nonetheless, many of these indicators remain worse than anything hitherto experienced in the postwar period.

• The collapse in the federal government’s finances is unprecedented, raising questions about how the government deficit will be brought under control.

• By most measures, the current recession is far milder than the Great Depression. But the appendix shows that house prices have fallen much more sharply than in the 1930s.

The charts below plot current indicators (in red) against the average of all post-World War II recessions (blue). To facilitate comparison, the data are centered on the beginning of the recession (marked by “0?). The dotted lines represent the most severe and the mildest experiences in past cycles. The last few charts specifically compare the current downturn with the Great Depression.

The year-over-year fall in real gross domestic product (GDP) is now competing to be the worst in the postwar period.

The federal budget has deteriorated far more rapidly than in any past recession, in part due to the first economic stimulus and bank bailouts. The current stimulus implies an even larger and more prolonged deficit in the future.

Global trade collapsed in the fourth quarter of 2008 and first quarter of 2009 in a way never seen in the postwar era.

Unemployment initially increased at a rate consistent with past recessions. However, the latest data show the worst labor market in the postwar period.

The fall in nonfarm payroll shows rapid deterioration in the labor market. The deterioration has slowed, but will this improvement be enough to slow knock-on effects?

Industrial production (IP) held up well when the recession began but collapsed in the second half of 2008. The current collapse is creating a new postwar record.

A rise in oil prices is typical before the start of a recession, and a fall is typical as a recession proceeds. This time oil prices initially continued to rise after the onset of the recession. Conversely the recent fall has been larger than usual, even allowing for the rebound in the spring. The recent fall has dramatically changed the geopolitical position of oil exporters.

The ISM survey offers a forward-looking indicator of industrial production. A number above 50 in the ISM survey implies manufacturing growth whereas a number below 50 implies contraction.

Auto sales typically fall by 20% in a recession. This time around they have fallen by over 40%.

Consumer sentiment typically starts falling before the recession begins, but turns around soon after. However, pessimism seems particularly strong this time.

Most post-World War II recessions were preceded by a tightening of monetary policy. This one was not. Easing started sooner and happened faster than is typical. Although the Fed’s ammunition in nominal target rate cuts is gone, it has continued to ease in other ways.

The spread of investment-grade debt – a measure of the risk that high-quality corporate bonds will default – typically rises during a recession. The rise during the current cycle is unprecedented. The credit markets’ recent improvement still leaves spreads at historic highs.

The spread on BAA debt (the lowest investment grade rating) is an indicator of the risk that lower quality companies will default. The recent rise in the BAA spread is unprecedented. As the financial system has stabilized, the credit markets have improved, but the current implied default rates suggest a rough period for corporations.

Equity markets start to fall nearly eight months before a recession begins.
In this cycle, a fall in equity markets preceded the recession. However, the subsequent fall has been larger than normal, and the markets have not recovered on schedule.

The last few charts compare the current recession with the prewar average and the Great Depression.

The thick red line represents the current recession; the thin blue line, the postwar average; the thick green line, the Great Depression; the thin orange line, the prewar average.

Due to financial system deleveraging, the economy is enduring uncomfortably low inflation. The current recession looks more like a prewar recession than a postwar recession or the Great Depression.

Production in this cycle has collapsed relative to the postwar average, but is in line with the prewar average. The current collapse does not compare to that of the Great Depression.

Although the labor market has deteriorated more than at any time since World War II, it is much healthier than during the Great Depression.

US trade – the sum of exports and imports – has collapsed dramatically. But it will have to deteriorate further to compare to the Great Depression.

Government intervention is much less controversial than prior to World War II. Thus government stimulus occurred faster than was the case during the Great Depression. Government net financial investment (bank bailouts) has contributed a substantial portion of expenditures.

So far, equity market performance has lined up with the Great Depression.

One area in which this downturn has been far worse than the Great Depression has been in home prices.

Source: Paul Swartz, Quarterly Update: The Recession in Historical Context, Council on Foreign Relations, June 5, 2009.

View original at: Investment Postcards from Cape Town

(IP) The recession in historical context

On Apr 27, RockTenn reported record adjusted earnings per share that rose 55% to $1.02 compared to 66 cents in the year ago quarter.

Sales fell $9.6 million to $673.3 million from the year ago period due to reduced volumes and decreased recycled fiber pricing. However, sales increased in the Corrugated Packaging segment due to the acquisition of Southern Container.

Lower commodity costs, for both recycled fiber and energy, also helped the company’s performance.

Consensus estimates for the fiscal third quarter have been holding steady over the last 60 days at 86 cents per share. Full-year estimates are up 3.4% to $3.64 from $3.52 per share in the prior 2 months.

Value Fundamentals

When we last reviewed RockTenn on Mar 25, it was a Zacks #1 Rank (strong buy) stock. It has since moved to a Zacks #2 Rank (buy) stock. It is still an attractive value stock with a forward P/E of 11.4 and a price-to-book ratio of 2.36.

The company has a 1-year return on equity (ROE) of 20.77%. As an added bonus, it also pays a dividend with a current yield of 1.00%.

Zacks Investment Research
View original at: Zacks.com News Feed

(RKT) RockTenn Company – Value – Zacks Rank Buy

Company Description

Neenah Paper manufactures premium, performance-based papers and specialty products used in a variety of applications including filtration, printing and writing. The company makes well-known brands like CLASSIC®, ENVIRONMENT®, STARWHITE®, Gessner®, JET-PRO® SofStretch(TM) and varitess®.

Based in Alpharetta, Georgia, Neenah Paper has manufacturing operations in the United States and Germany as well as about 500,000 acres of timberlands in Nova Scotia, Canada.

A Solid Quarter

The company recently reported first-quarter results. While the earnings result was actually a loss of 5 cents per share, it was 88% ahead of the consensus estimate and an improvement from the previous quarter’s 62-cent loss. Last year’s first-quarter earnings totaled 57 cents.

Management said the company is poised to grow stronger as global economies recover. Sean Erwin, Chairman and Chief Executive Officer, commented, “operating results improved by almost $15 million from the fourth quarter of 2008 as we benefited from actions we have taken to reduce costs and from lower input prices. Our liquidity position improved as each of our businesses continues to generate positive cash flows, and we paid down debt for the second consecutive quarter.”

Higher Forecasts

Analysts are bullish on earnings going forward. For the second quarter, Wall Street analysts are forecasting earnings of 5 cents per share, above last month’s estimates of a 15-cent loss.

Full-year 2009 projections of a profit of 15 cents were revised upward from last month’s forecasts of a loss of 60 cents.

Strong Momentum

Neenah Paper, which is a momentum play that happens to pay an industry-leading dividend yield of 4%, saw a recent surge in share price, resulting in market outperformance over the past 3 months. Take a look at its 3-month performance in relation to the S&P 500.

Zacks Investment Research
View original at: Zacks.com News Feed

(NP) Neenah Paper, Inc. – Momentum – Zacks Rank Buy

AuthenTec (NASDAQ: AUTH), the world’s leading provider of fingerprint sensors and solutions to the PC, Wireless and Access Control markets, released their Q1/09 earnings and held their analyst conference call May 12th after the market closed.

As I wrote on my Twitter feed, 3 of the companies in the portfolio reported last week, and all things considered, AuthenTec was not the highest on my priority list by any means.

Sure, I guess that speaks to the status of the company, and I’m seriously considering shuttering the entire position as I’ll discuss below, but for now, it looks like with AuthenTec’s huge cash position (the stock currently trades at less than the $2.31 per share in cash on hand), as well as their intellectual property (IP) and client roster, a larger company can swoop in and buy AuthenTec for pennies on the dollar, and we would get an easy double from here with no sweat.

Results this time around came in ahead of expectations and it appears that things are bottoming out, and that AuthenTec’s cost cutting measures are paying off.

The questions is, will this be enough to see the company through to the other side, or will it at least be enough for them to take advantage of their upcoming products or be acquired by another semiconductor company?

What follows is a summary of AuthenTec’s earnings announcement, conference call highlights, and my take on the company’s latest quarter and results, and what you should do if you own the stock.

New to the AuthenTec story?

AuthenTec, Inc. is a fabless mixed-signal semiconductor company that provides fingerprint authentication sensors and solutions to the high-volume personal computer (PC), wireless device, and access control markets.

AuthenTec offers a range of fingerprint sensors that enable users to access and control multiple functions on an electronic device by touching or sliding their finger across the sensor.

The company’s fingerprint sensors utilize unique information in fingerprints to verify the identity of the individual, as well as the unique, individual fingers on the same person.

With more than 40 million sensors sold worldwide, AuthenTec’s award-winning sensors take full advantage of The Power of Touch® by utilizing the company’s patented TruePrint® technology to deliver the most convenient, reliable and cost-effective means available for enabling touch-powered features that extend beyond user authentication.

These sensors are used in various applications related to security, password replacement, financial transaction authentication, and personalization applications.

The company’s products are used in a range of PC products and related peripherals, including laptops, desktops, memory keys, hard drives, keyboards, mice, and other devices.

In addition, AuthenTec’s products also integrate into various wireless devices, such as mobile phones, and personal digital assistants and personal navigation device, as well as access control devices comprising door locks, time and attendance devices, and remote wireless entry keys.

AuthenTec primarily offers its products to original equipment manufacturers, original design manufacturers, and contract manufacturers and sells its products through a direct sales force, a network of independent sales representatives, and distributors.

Want More?

• Read: my earnings preview where I talk about AuthenTec’s cheap net-net valuation

I’ll break down this report into 4 parts:

• Hit Me With The Numbers: Beats expectations, slightly higher margins
• Other Business Highlights: Higher Q2 guidance, reduction in workforce, cost cutting
• Conference Call Highlights: Management discusses market, new chips
• Bottom Line: AuthenTec remains a hold

Hit Me With Some Numbers

AuthenTec Beats Lowered Estimates, Margins Slightly Higher

Here are some of AuthenTec’s earnings highlights (growth from previous year’s Q1/analyst’s estimates where applicable):

• Q1/09 sales of $7.03 million (down 54.6% from prior year/vs. $6.54 million projected by analysts)
• Non-GAAP Q1/09 net loss of (-$3.6 million), or (-$.12) per share (down from $587,000 million profit, or $.02 per share in the prior year,  and a net loss of $493,000, or (-$0.02) per diluted share, in Q4/08 / vs. (-$.14) per share projected by analysts)
• GAAP Q1/09 net loss of $4.5 million, or (-$0.16) per share (down from a net income of $188,000, or $0.01 per diluted share in the prior year, and a net loss of $1.3 million, or (-$0.05) per share in Q4/08)
• Gross margin of 48.8% (down from 49.6% from prior year, but up from 45.8% in Q4/08, 47.4% in Q3/2008, and down from 48.5% in Q2/2008)

My Take: AuthenTec had stronger order flow towards the end of Q1/09, which allowed them to come in above their expected guidance.

In addition, margins ticked up a bit as product mix was more favorable for the company.

The takeaway from these results, as well as the conference call which I’ll go over in more detail below, was that conditions seemed to point towards a steadying of order flow and demand.

That does not mean however, that things are picking up in any meaningful way, and management was still very cautious, but at the very least, it appears that things have stabilized and that order flow and inventory are getting pushed through the system.

In other words, it appears that we are in the early stages of a bottoming process at the very least.

Other Business Highlights

Raised Guidance, More Cost Cutting in the Works

• Q2/09 revenue expected to range from $7.8 million to $8.3 million ($8.05 million midpoint) vs. analyst’s estimates of $7.62 million.
• Q2/09 non-GAAP loss per share to range between (-$0.8) and (-$0.10) ((-$.09) midpoint) vs. analyst’s estimates of (-$.09) per share loss.
• Ended Q1/09 with approximately $66.1 million in cash and investments, compared to $68.7 million in cash and investments at the end of 2008.
• Operating expenses, excluding stock-based compensation charges and costs related to a reduction in workforce, were $7.2 million, compared to $7.9 million in the first quarter of 2008 and $6.2 million in the fourth quarter of 2008.
• Margins mid-40% range in Q2/09, $6.4-$6.6 million in operating expenses, about 10% less from Q1/09, plus lower interest on their cash.
• $2.5 million expected cash burn in Q2. $13 million revenue run rate keeping margins the same gets them to cash flow break-even.
• Inventory: $4.6 million, 114 days on hand, decline of $1.2 million, compared to $5.8 million or 83 days in Q4/08, expect levels to decline further.
• Days Sales Outstanding (DSO): 40 days, up from 31 days in Q4/08 due to timing of shipments in Q1, weighted towards the end compared to Q4/08.
• Sales breakdown per segment was as follows: PC segment about 69% of total sales, Wireless segment about 23% of total sales, and Access Control was about 8% of total sales.
• Focused on reducing discretionary expenses such as travel, consultants, etc. Is reducing headcount by 20%, cash bonuses are being eliminated, and they are canceling raises.
• $5 million in savings in 2009, offset by legal expenses and other costs, which will rise to about $2.9 million in 2009.
• Litigation costs, $700,00 so far in ‘09, but expect about $500,000 for the rest of the year.

My Take: You will note that the days of inventory on hand went up, even though the actual inventory went down.

This is simply a function of slower sales and lengthening of the sales cycle, which means that the inventory that they do have on hand takes longer to sell.

The good news is that they have lowered the overall inventory levels, thus increasing cash flow, and becoming more lean.

At the same time, the savings that the company was to realize from cutting costs through attrition, layoffs, and freezing bonuses, is going to be offset by their ongoing litigation with Atrua as well as new product introductions which will siphon off some of that extra cash.

What is most pressing now, is that AuthenTec ate into their cash hoard in Q1 for the first time as a public company, and are expected to do so again in Q2.

Their run rate in revenue has to be at least $13 million to break even on a cash flow basis, and they are far from that at the moment.

If sales don’t start to ramp up now, the investment thesis for holding shares on a pure value basis as a result of cash and assets vs. liabilities, starts to diminish.

We knew that this day would come, and AuthenTec has done a nice enough job shaving costs, and coming in a little bit ahead in margins and burn rate, but now we have to see where the supply/demand side of things kicks into gear, and when the PC market turns around.

The introduction of AuthenTec’s 2 new chips (Rogers and Marcy, more below), won’t be revenue generators for the company for at least another 10-12 months, so AuthenTec has to fly with the birds that got them here for now.

Now let’s take a look at the analyst conference all highlights and management’s discussion of the business.

View original at: PeakStocks.com

(IP) AuthenTec: Ripe for an Acquisition?

While AuthenTec Inc. (NASDAQ: AUTH), a maker of fingerprint sensors, is no different, even with a recovery in its stock price from the absolute abyss, AuthenTec is still trading at a close-out price.

Quite literally, AuthenTec is trading at a significant discount to its cash on hand, as well as its liquidation value taking into account all variables.

I have a special treat today as I’ll be previewing AuthenTec’s earnings and we will be joined by guest columnist Jae Jun of Old School Value with a short write-up at the end of this post breaking down AuthenTec’s current valuation and liquidation value.

In essence, we are getting the company for free at today’s prices assuming nothing changes and conditions don’t improve at all!

So what does this mean for our investment in AuthenTec as they look to report earnings on Tuesday, May 12th after the market closes?

In this post I’ll go over the important aspects that we need to be aware of before AuthenTec announces earnings and then break them down into the following parameters:

• What went right in the quarter: What were some of the positive developments that occurred within the company in the last 3 months.
• What went wrong in the quarter: What were some of the negative developments that occurred within the company in the last 3 months.
• What I want to see: All things considered, what I realistically want to see from the company as it relates to their business.
• Jae’s analysis of AuthenTec’s deep net-net value territory
• Bottom Line: What it all means, and what you should do.

New to the AuthenTec story?

AuthenTec, Inc. is a fabless mixed-signal semiconductor company that provides fingerprint authentication sensors and solutions to the high-volume personal computer (PC), wireless device, and access control markets.

AuthenTec offers a range of fingerprint sensors that enable users to access and control multiple functions on an electronic device by touching or sliding their finger across the sensor.

The company’s fingerprint sensors utilize unique information in fingerprints to verify the identity of the individual, as well as the unique, individual fingers on the same person.

With more than 45 million sensors sold worldwide, AuthenTec’s award-winning sensors take full advantage of The Power of Touch by utilizing the company’s patented TruePrint technology to deliver the most convenient, reliable and cost-effective means available for enabling touch-powered features that extend beyond user authentication.

These sensors are used in various applications related to security, password replacement, financial transaction authentication, and personalization applications.

The company’s products are used in a range of PC products and related peripherals, including laptops, desktops, memory keys, hard drives, keyboards, mice, and other devices.

In addition, AuthenTec’s products also integrate into various wireless devices, such as mobile phones, and personal digital assistants and personal navigation device, as well as access control devices comprising door locks, time and attendance devices, and remote wireless entry keys.

AuthenTec primarily offers its products to original equipment manufacturers, original design manufacturers, and contract manufacturers and sells its products through a direct sales force, a network of independent sales representatives, and distributors.

Want More?

• Read: my last quarterly earnings and conference call breakdown here.

What’s Going On At AuthenTec?

Going Out of Business or Take-Over Target?

This is a damn good question, and one that I’ve been waiting around to find out the answer to.

AuthenTec has been hard at work developing newer technologies and lower cost chips so that they can increase their market share and penetration, especially in the new netbook category of laptops.

You’ll recall awhile back, AuthenTec lost one of their largest customers, accounting for a huge drop in expected sales going forward, and the stock suffered mightily as a result.

What we didn’t see coming however, aside from this grim news, was the absolute collapse in the PC and consumer marketplace and AuthenTec’s demand absolutely cratering in conjunction.

Let’s review the quarter that was, and turn our attention to what will be discussed on the conference call.

• What went right in the quarter: There were a few things in the quarter as far as news went for AuthenTec that was positive.

The most important piece of news in the quarter was concerning AuthenTec’s patent infringement update vs. one of their rivals, Atrua.

Essentially, AuthenTec won a judgment that denied Atrua’s motion to add a claim of misappropriation of trade secrets as a counterclaim to AuthenTec’s patent infringement claims against Atrua, and further denied its motion for a preliminary injunction against AuthenTec.

The court had already denied a previous motion for a temporary restraining order and also ruled that Atrua violated a previous court order in the case.

In that same press release, AuthenTec also stated that they added several key patents to their intellectual property (IP) portfolio, including patents for fingerprint reading and verification that are among the foundational IP created for the biometrics industry.

AuthenTec continues to own more fingerprint sensor-related patents than any sensor supplier in the world with 75 filed and pending U.S. patents (as well as additional foreign patents).

You can read more about that update here.

There were a couple product announcements to discuss such as:

• a deal with Motion Computing to incorporate AuthenTec’s biometric fingerprint sensor into the new J3400 rugged tablet personal computer in order to protect the device, its stored data and the networks to which it connects
• a deal with ASUS that incorporated AuthenTec’s fingerprint sensors as a standard feature in the world’s first netbook computer to use a fingerprint sensor.

Other than that, it was status quo for AuthenTec.

• What went wrong in the quarter: Well, if you don’t count a flagging stock price, and disastrous industry trends, nothing really went “wrong” in the quarter that was of particular note.

I will comment however that this ongoing litigation with Atrua has been a drag on AuthenTec’s earnings and will continue to be for the foreseeable future.

Other lawsuits that I haven’t heard any updates about, where the ones filed against AuthenTecc when the company’s stock price plummeted as a result of the shocker that they had essentially lost their largest customer.

These types of suits are standard procedure when a company announces some really bad unexpected news and people’s shares get wiped out.

We’ll see how all of these play out.

Now let’s look at what I want to see from this earnings announcement and turn our attention to valuation…

View original at: PeakStocks.com

(IP) AuthenTec: Cheap By Many Measures, Especially Net Net Deep Value

Company Description

RockTenn manufactures packaging products, bleached and recycled paperboard and merchandising displays. The company has over 200 facilities located in 26 states, Canada, Mexico, Chile and Argentina.

Record First Quarter 2009 Earnings

On Jan 27, RockTenn reported fiscal first quarter 2009 earnings that easily beat analysts estimates by 18.52%. Adjusted earnings per share rose 88% to a record 96 cents compared to 51 cents a year ago. Analysts expected just 81 cents.

Sales jumped 18% to $703.1 million from $596.3 million mainly due to the acquisition of Southern Container which pushed up sales in the Corrugated Packaging segment. Corrugated Packaging segment net sales climbed to $141.8 million from $61.4 million in the first quarter of 2008.

The Paperboard segment was also strong. Bleached paperboard tons shipped increased 8% to 86,338 but market pulp tons shipped declined 2% to 20,705 tons. The average selling price for all paperboard and containerboard grades jumped $11 per ton on a sequential quarter basis even though there were lower market pulp selling prices.

Smaller segments, Merchandising Displays and Specialty Paperboard Products, saw sales decline from a year ago.

“RockTenn’s record adjusted earnings (up 88% over the prior year quarter) result from the resiliency of our food and consumer nondurables focused end markets, the very low cost positions we have achieved in our core businesses, and the continued success of our 2008 acquisition of Southern Container,” said Chairman and Chief Executive Officer James A. Rubright.

“Although our December quarter is our seasonally weakest sales quarter, lower costs for recycled fiber and energy more than offset the effect of lower sales enabling us to increase adjusted earnings 7% over the immediately preceding quarter,” he added.

Second Quarter Outlook

The company expects lower demand to continue in its fiscal second quarter but is betting on lower costs for recycled fiber and for energy to offset the lower sales volume.

RockTenn is scheduled to report fiscal second quarter 2009 earnings on Apr 27.

Consensus Estimates Rise

Given the record earnings in the first quarter, covering analysts have been bullish about the second quarter and the rest of fiscal 2009.

Second quarter consensus estimates are up 5 cents to 97 cents in the last 60 days. 2009 full year estimates gained 11 cents to $3.67 in the last 2 months.

Analysts expect year over year earnings growth in 2009 of 43.23%.

Value Fundamentals

RockTenn is a Zacks #1 Rank (strong buy) stock. RKT has surprised on earnings 2 out of the last 4 quarters.

It has a forward P/E of just 7.2 and its price-to-book is 1.59. The company has a solid 5-year return on equity (ROE) of 10.08%.

RKT also pays a dividend, with a current yield of 1.60%.

Zacks Investment Research
View original at: Zacks.com News Feed

(RKT) RockTenn Company – Value – Zacks Rank Buy

Company Description

Schweitzer-Mauduit International, Inc. manufactures and sells paper and reconstituted tobacco products to the tobacco industry. The company sells its products both domestically and internationally and has a market cap of $294 million.

Third-Quarter Results

Schweitzer’s share price has been rallying since the company reported strong third-quarter results on Nov 12. Sales increased 8% from last year to $199.2 million. Income came in at $6.7 million, up from a loss of $4.3 million last year.

When excluding one-time items, earnings totaled 54 cents per share, ahead of analyst estimates by 22 cents. It was the third consecutive quarter that Schweitzer has beat analyst estimates.

Guidance and Estimates

During the quarterly report, Schweitzer noted that it expected to see to a slight lag in its fourth-quarter results due to underlying economic conditions, but then proceeded to also say that it anticipates its full-year results to be in line with previous expectations between 75 and 90 cents per share.

Moving beyond the current-year period, the analyst community is bullish on the company, with the next-year estimate pegged at $1.51 per share, a 72% earnings growth projection.

The Chart

Shares of SWM have been rallying since finding a short-term bottom just above $13 in mid November. Since then, this stock has climbed beyond the $19 mark and set a new 3-month high. Take a look below.

Content Courtesy: Zacks Investment Research

#1 Ranked Stocks Highlight Archive
To truly take advantage of the Zacks Rank, you need to first understand how it works. That is why we created the free special report: Zacks Rank Guide: Harnessing the Power of Earnings Estimate Revisions.

(SWM) Schweitzer-Mauduit International – 72% earnings growth projection

Yuck.

That’s all I can say about AuthenTec right now…

After shocking the market a on September 8th with a mid-quarter “business update” the stock has cratered and sits now about 80% below previous levels.

At these prices the stock is trading below its cash on hand, and is priced for ultimate failure.

Is this warranted? Should we dump the stock now and get something instead of nothing, or is there a sliver of sound reasoning behind keeping shares for the short term?

Today we’re going to preview PeakStocks.com portfolio recommendation AuthenTec Inc. (NASDAQ: AUTH), which will be announcing their third quarter earnings and hosting their analyst conference call after the market closes on Thursday October 30, 2008.

In this post I’ll go over the important aspects that we need to be aware of before they announce earnings and then break them down into the following parameters:

• What went right in the quarter: What were some of the positive developments that occurred within the company in the last 3 months.
• What went wrong in the quarter: What were some of the negative developments that occurred within the company in the last 3 months.
• What I want to see: All things considered, what I realistically want to see from the company as it relates to their business.
• What we need to see: At the minimum, what we need to see for our investing thesis to still hold and an investment in this company to be prudent.
• What we’ll probably see: After weighing what’s been going on for the last 3 months, what we can realistically expect when they do announce their earnings.
• Bottom Line: What it all means, and what you should do.

New to the AuthenTec story? 

AuthenTec, Inc. is a fabless mixed-signal semiconductor company that provides fingerprint authentication sensors and solutions to the high-volume personal computer (PC), wireless device, and access control markets.

AuthenTec offers a range of fingerprint sensors that enable users to access and control multiple functions on an electronic device by touching or sliding their finger across the sensor.

The company’s fingerprint sensors utilize unique information in fingerprints to verify the identity of the individual, as well as the unique, individual fingers on the same person.

With more than 35 million sensors sold worldwide, AuthenTec’s award-winning sensors take full advantage of The Power of Touch® by utilizing the company’s patented TruePrint® technology to deliver the most convenient, reliable and cost-effective means available for enabling touch-powered features that extend beyond user authentication.

These sensors are used in various applications related to security, password replacement, financial transaction authentication, and personalization applications.

The company’s products are used in a range of PC products and related peripherals, including laptops, desktops, memory keys, hard drives, keyboards, mice, and other devices.

In addition, AuthenTec’s products also integrate into various wireless devices, such as mobile phones, and personal digital assistants and personal navigation device, as well as access control devices comprising door locks, time and attendance devices, and remote wireless entry keys.

AuthenTec primarily offers its products to original equipment manufacturers, original design manufacturers, and contract manufacturers and sells its products through a direct sales force, a network of independent sales representatives, and distributors.

Want More?

• Start: with my initial company overview here.

AuthenTec Inc.

Going Out of Business or Take-Over Target?

AuthenTec (NASDAQ: AUTH) absolutely dropped a bomb on the market when it announced the it was lowering guidance for the remainder of 2008 (not that big a deal), and losing a customer that represented about 30-45% of sales for next year (a HUGE deal).

You can read all about that debacle here.

So the question to ask as AuthenTec gets set to report their third quarter earnings and update us on their business trends is, what does this mean for the company as an ongoing concern, and will AuthenTec be able to make up for that customer loss somehow, and if not, what is their exit strategy?

• What went right in the quarter: Um…nothing really.

I’m not even exaggerating when I say that.

Aside from a couple of new deals announcing fingerprint sensor additions to various new PC models, which we knew were coming anyway, AuthenTec did little this quarter to enhance their standing in the investment community or their standing with analysts, this one included.

It’s all wait-and-see at this point.

• What went wrong in the quarter: Everything, including the very essence of AuthenTec as an ongoing concern, which has seriously been thrown into question at this point due to the severity of the customer loss, decreasing average selling prices for the sensors that AuthenTec sells, and the very fact that their competition is heating up, and hot on their tails.

Included in this bad news was the fact that margins are going to deteriorate further, AuthenTec’s competitive advantages are being eroded due to the very nature of the semiconductor industry, and the fact that PC and mobile phone manufacturers want smaller and cheaper sensors that last longer and use less silicon, and AuthenTec is having trouble meeting those requirements.

In addition, as a result of the slashing of estimates, the customer loss and the precipitous stock price decline, AuthenTec is now faced with several class action lawsuits, of which I and any other stockholder, will automatically be a part of should they be certified as legitimate and achieve class action status.

I’m not worried about those too much, as they always seem to come out of the woodwork when investors get bent out of shape because they were wrong about a company and lost money, but it’s one more thing to add to the negatives list.

You can read all about the earnings revision and mid-quarter conference call here.

Now it’s not all gloom and doom in that AuthenTec still has a large built-in client base, recurring sales and several new upcoming products that are all still positive developments

In addition, AuthenTec is trading below it’s cash value, and by the very nature of their intellectual property (IP), they could be of great value to another semi manufacturer as an add-on to already existing chip sets and product offerings.

With a market cap of about $50 million, and $60 million in cash, it isn’t inconceivable that AuthenTec could get bought out for double where it is at today, or about $4 per share, and still be a total bargain for a large semi, or PC company.

Now let’s look at what I want to see from this earnings announcement.

View original at: PeakStocks.com

(IP) AuthenTec Earnings Preview: Now What?