We apologize if we appeared to make light of the power and prestige of the Federal Reserve yesterday, even if the latest from on high was "nothing to see here." The instant we published the offending comment yesterday afternoon, we were subjected to -- you guessed it -- an earthquake. Right here at Fool HQ.
Want to know how dedicated we are to serving you? We didn't know about it until we saw it on the evening news. Shake, rattle, and roll.
In today's Motley Fool Take:
- AOL's Unhappy Holidays
- Discussion Board of the Day: Time Warner
- Investors Withdraw From Washington Mutual
- Quote of Note
- A New-School IPO
- Shameless Plug: Motley Fool Hidden Gems
- More Fool News
- And Finally...
AOL's Unhappy Holidays
If the familiar "You've Got Mail" arrived in pink and made you shudder, you're likely one of the unfortunate 450 California-based employees being let go by Time Warner's
While the layoffs are modest relative to the company's nearly 20,000 employees, the fact that we're talking subtraction here at all is significant. Other Internet service providers are growing. Word of layoffs at AOL comes a day after EarthLink
So what's eating AOL?
After years of heady growth, the service has lost subscribers to cheaper dial-up providers and a growing fleet of high-speed broadband providers. Ironically, while the company had embraced the move to pricier cable and DSL subscriptions, adoption of the speedy connections has actually backfired.
The company's user-friendly interface and quick-loading content were big advantages in the dial-up days, but with speed leveling the playing field, AOL is losing the battle on price. When you have Wal-Mart
AOL has rolled out bargain-priced standalone access, but it's maintaining its premium status essentially by bulking up on proprietary content. Good move. Time Warner's media empire was built for broadband and exclusivity is a way to earn brand loyalty.
Moreover, AOL must never forget that a user who is willing to pay a premium for access is probably a more attractive target for advertisers. It can't afford to drop the ball on customer service, software feature upgrades, or content. It'll need all that to start growing its subscriber base again.
Some pretty amazing things will happen when that day arrives. For starters, AOL will once again be a major factor in Time Warner's plans for global domination. And its workers, presumably, will receive better holiday news.
Discussion Board of the Day: Time Warner
Will AOL ever win back the love of Time Warner? Was the merger a mistake for America Online or Time Warner? Both? All this and more -- in the Time Warner discussion board. Only on Fool.com.
Investors Withdraw From Washington Mutual
The U.S.'s largest savings and loan, Washington Mutual
Back in August, the Fool's Tom Jacobs asked why Washington Mutual was wastefully spending shareholder money to tout its stock instead of touting its real strengths, which include a 2.08% return on assets and a 19.8% return on equity. This company, rated "A" by Fitch, is managing its money in a world-class manner.
Yesterday the company announced that it was lowering its guidance for 2003 earnings from $4.42 per share to a range of $4.15 to $4.25 per share. At the current price of $38.13, the stock is trading at 9 times earnings -- and, with a payout ratio of 38%, yielding a safe 4.2%. The company is forecasting increased earnings for 2004 (although it lowered the low end of guidance) of $4.30 to $4.80 a share.
Investors interested in mortgage providers should pay attention to the Mortgage Bankers Association (MBA) press releases. The MBA reports that new loan applications have fallen 60% from their May high and adjustable-rate mortgages are at a four-year high. On the other hand, residential loan delinquencies are at a three-year low. Also of interest is news coming from the National Association of Realtors (NAR). After three consecutive years of record sales, the NAR expects home sales to be off slightly in 2004. This is clearly a mixed picture.
Larger drops in home sales, or an increase in interest rates or delinquencies, are the biggest risks for Washington Mutual and its peers as they try to squeeze every last drop from housing's twin booms (housing and refinancing) caused by record-low interest rates.
Expect staff cuts to continue. Just like Countrywide Financial
Quote of Note
"The basis of optimism is sheer terror." -- Oscar Wilde
A New-School IPO
They say necessity is the mother of invention. Case in point, the novel IPO of Volume Services
On the face of it, the new issue had a lackluster birthday. The stock closed up 23 cents from an initial price of $15. Never underestimate an investment banker. See, this particular issue was built for stability, and it may well be a lower-risk IPO alternative.
Volume Services provides concessions, catering, and merchandise services to sports facilities, convention centers, and entertainment facilities throughout the U.S. It is a "cash cow" business, which is what attracted its two main shareholders, Blackstone Group and GE Capital, a division of General Electric
As a rule, private equity firms like these seek out predictable businesses that can be financed with debt. Often, the operations will be restructured and overall debt reduced. Next, it's the public's turn to get in on the action, usually by means of an IPO. Unfortunately, the new-issue market has been sporadic at best.
So, Blackstone and GE Capital got creative, borrowing a deal structure common in Canada. The result was the IDS. Here's how they pulled it off.
The Volume Services offering consisted of common stock and subordinated notes bearing a 13.5% coupon and due in 2013 (the principal is $5.70). After 90 days, the IDS holder can separate the common stock and the note. As for the common, it pays an 8.5% dividend (assuming a $9.30 stock price), which is extremely competitive, especially given lower dividend tax rates. The blended yield currently exceeds 10%.
Meanwhile, Volume Services does volumes of business. It is the second-largest provider to the NFL (10 teams) and third-largest provider for MLB (6 teams). The business is diversified across 128 facilities and the average client relationship dates back more than 15 years.
But no business is guaranteed. Clearly, Volume Services will shell out a big portion of its cash flows to investors. The concern is that the company may not have enough left over to reinvest and thus maintain its competitive edge against major rivals like ARAMARK
On the balance, however, the reception for the IDS offering has been positive. Don't be surprised to see others hitting the market next year.
Shameless Plug: Motley Fool Hidden Gems
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For a list of all our stories from today, see Today's Headlines.
Bob Bobala, Robert Brokamp, W.D. Crotty, Paul Elliott, Mathew Emmert, Jeff Fischer, Jeff Hwang, Tom Jacobs, LouAnn Lofton, Alyce Lomax, Bill Mann, Selena Maranjian, Dave Marino-Nachison, Rex Moore, Rick Munarriz, Reggie Santiago, Tom Taulli, Dayana Yochim