The high cost of oil (settling above $53 today) is taking a bite out of our gross domestic product, according to Fed Chairman Alan Greenspan. In a speech at the National Italian American Foundation today, he said, "So far this year, the rise in the value of imported oil -- essentially a tax on U.S. residents -- has amounted to about three-quarters of one percent of GDP."
It's almost enough to make you kick your gas addiction and bike to work, isn't it? Fool Seth Jayson does. Then again, he's battling all sorts of other addictions.
In today's Motley Fool Take:
- How Low Can Netflix Go?
- Foolanthropy 2004 Launches!
- Discussion Board of the Day: Great Movies
- Sun's Investors in the Dark
- Quote of Note
- Trouble at Marsh & McLennan
- Coventry Revives First Health
- More on Fool.com Today
How Low Can Netflix Go?
Limbo is a game for the agile. However, if you ask a company like Dell
The news comes as a shock for two reasons. The first is that over the summer it had bumped up the rate on its basic plan, which allows for three DVD rentals out at any given time, from $19.99 to $21.99. Dropping it down to $17.99 a few months later doesn't give an investor a whole lot of confidence that the company is thinking its pricing strategies through.
The second reason why the news is alarming is that Netflix seemed to be doing just fine with the higher membership plans. Last week it announced that it wrapped up September with 2.2 million subscribers, a 73% improvement over last year's tally. That upbeat spurt was acknowledged last night when the company reported quarterly earnings of $0.29 a share as revenue nearly doubled to $141.6 million.
However, all that growth is out the window as the company says it will likely only break even next year due to its cutthroat pricing strategy. Before you wonder why Netflix would do such a thing, it's worth mentioning that during its conference call, the company said that several sources indicated that Amazon
So this scorched-earth retreat isn't entirely baseless. The competition was already starting to drool when Netflix hiked its monthly rates back in June. Wal-Mart
The stock is naturally taking a beating this morning on the news. While the company was teasing the market last week with higher earnings projections and visions of gross profit margins topping the 50% mark, it was all rescinded awfully quickly.
The end result is that Netflix will keep its pie. It has the 2.2 million subscribers. It has the lean overhead and an efficient and established network of distribution centers. Wal-Mart, a fiscally sensible company, will take a look at its hand and probably fold if a much larger player is willing to play a break-even game. Blockbuster will stick around because it has more at stake. It also has its free in-store rentals to give its mail-order DVD rental service something distinctive.
And what about Amazon? As powerful and knowledgeable as it may be when it comes to e-commerce, if it did have a new service in the works, it doesn't stand a chance unless it prices its offering below Netflix's reduced price. This might be the move that keeps the monster under the bed in the near term.
So, sure, Netflix can get back to its pie. It's definitely a growing one. But shareholders will be quick to notice that the pie is missing something in terms of taste. Limbo is for losers.
Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and investor -- since 2002. He is part of the Rule Breakers analytical team that will be looking to unearth the next Netflix -- while it's still in Pampers instead of Depends.
Foolanthropy 2004 Launches!
Over the years, we've raised $2,137,000 -- and counting -- for some very Foolish charities. David Gardner announces this year's charity drive and how you can pick the organizations Fools the world over will donate to.
Discussion Board of the Day: Great Movies
With Netflix's lower subscription plans likely to sway even more members, have you rented any incredible DVDs lately? How big is your Netflix queue these days? What is the greatest film of all time? All this and more in the Great Movies discussion board. Only on Fool.com.
Sun's Investors in the Dark
The more I stare at the recent results from Sun Microsystems
To judge by the confusing numbers and tumultuous conference call yesterday, Sun may end up leaving many investors feeling the same way. To begin with the nitty-gritty: Sun's quarterly loss was less than last year's, coming to one negative nickel per share instead of -$0.09.
But that second consecutive increase in revenues touted in the headline to the earnings release? Almost a whopper. The reported 3.6% sounds pretty slim already, but when you strain out the 3% gimme resulting from the dollar's continued freefall, the progress stands at a measly 0.6%. (Yeah, nice of them to leave that little tidbit out of the release.)
If that's not enough reason to convince you Fools to check out the conference call, yesterday's sparring between inquisitive analysts and tight-lipped management should make you reconsider. These folks ducked more questions than the presidential candidates.
Among the un- and poorly explained mysteries: What's the deal with the big drawdown in backlog? What are the real numbers of the AMD
Here's a question for prospective investors to answer. Is this the kind of company you want to do business with? Even when you get the answers you want, it's tough enough to judge the prospects of a firm that's slugging it out with heavyweights such as Hewlett-Packard
With much confusion, it seems. The dizzying variation of analyst predictions for Sun's 2005 runs from -$0.11 to $0.25. Leave the stock alone until events or management shed some light on future prospects. This sun may not rise for a while.
For related Foolishness:
- Sun makes nice with Kodak.
- Just how badly is AMD's Opteron whomping Intel?
- Should you ring up some Red Hat instead?
Seth Jayson thinks Sun's technology looks pretty nifty, but he prefers a bit more candor from management. At the time of publication, he had positions in no firm mentioned. View his stock holdings and Fool profile here. Fool rules are here.
Quote of Note
"If it weren't for baseball, many kids wouldn't know what a millionaire looked like." -- Phyllis Diller
Trouble at Marsh & McLennan
Yesterday, New York Attorney General Eliot Spitzer dropped a lawsuit on Marsh & McLennan's
Other companies named in the civil suit were Hartford Financial Services
To consider why this is bad, understand what it is that Marsh's clients pay it to do: companies and individuals who need insurance, rather than trying to figure such a complicated market out themselves, go to Marsh to serve as their advocate. Marsh figures out their insurance policy needs and then goes out into the market to negotiate with carriers on clients' behalf to maximize coverage at the lowest possible price. So if Marsh has side deals to steer deals to one insurance company or another -- even if they are disclosed to the customer -- the end result is that it has a built-in conflict of interest. And as the lawsuit spells out in lurid detail, this conflict seems to have become too much of a moral hazard for Marsh. A Marsh executive told the attorney general that these contingent commissions amounted to about $800 million in revenues for Marsh in 2003.
In his news conference yesterday, Spitzer absolutely savaged Marsh, saying that he was "misled at the very highest levels of that company" and that he very possibly might press for criminal charges against Marsh to go along with the civil suit. He also noted that evidence that his office has uncovered thus far suggests that illegal practices extend to every major insurance broker through every line of insurance. Marsh is the largest American insurance broker: Its biggest competitors, Aon
Contingent commissions are a long-standing practice in the industry and are not illegal. But Marsh claims that it considers its customers' interests above all when binding insurance, and such blatant conflicts have rightly been questioned for some time. Now it looks like the conflict was even worse than widely perceived. I'll provide more coverage on this in my regular commentary column on Monday.
Want more? See also:
- Bill Mann's AIG Lies Down With Dogs,
- or his Three Financials Behaving Badly,
- or how about Shannon Zimmerman's Surviving the Fund Scandal?
Coventry Revives First Health
Four months ago, Motley Fool co-founder and Motley Fool Stock Advisor co-author Tom Gardner penned some prophetic words about his two-time recommendation, managed health care provider First Health Group
First Health Group has been nothing short of disastrous. Management has consistently overpromised and underdelivered, while spending substantial amounts of capital to buy back stock rather than shore up its business model. I'm not recommending that you sell because I hope FHCC will bring in new management, perhaps in the form of an acquisition.
That was prophetic in two senses. First, in the biblical sense of calling for fire to rain down from Heaven and consume this blighted company and its wealth-destroying ways. Second, in the usual sense: Yesterday, First Health announced that it is in fact getting bought out by Coventry Health Care
At the time Tom penned those words, First Health was selling for roughly $15. On Wednesday, it closed at $15.04 a share. Forgive the pun, but this little PPO has been flatlining for months now. It was about time someone came along and put it out of its (and its shareholders') misery. On Thursday that happened, and First Health's shares jumped $2.00 in response, closing at $17.04.
Of course, no good deed goes unpunished. No sooner had the buyout news gone out than 11% of Coventry's market capitalization vanished, and McGraw-Hill's
So what's a First Health shareholder to do? One option is to wait around and see whether Coventry can make some money off of this business. Despite having a profit margin just a fraction of First Health's, Coventry sports an almost identical return on equity, so the company is good at doing more with less. On the other hand, First Health shares are now being quoted at close to Tom's June estimate of their intrinsic value. (Click here for a risk-free subscription to Stock Advisor, and we'll give you the magic number.) Sometimes, getting while the getting's good is the prudent choice.
Fool contributor Rich Smith does not own shares in any of the companies mentioned here.
More on Fool.com Today
Satellite radio is ready for your ears -- and maybe your portfolio, Rick Munarriz says in Is Sirius a Rule Breaker?... Tired of watching your portfolio twist in the wind? In Save Your Portfolio, Tom Gardner offers another way.... In Taking Timberland for a Walk, Lawrence Meyers learns that one great metric for a company does not make for an automatic buy.
In other news:
- TV Anywhere
- Microsoft's Strategy: Be Apple
- Starbucks' Chocolate Culture
- Analysts Underpromise, Nokia Overdelivers
For a list of all our stories from today, see our Today's Headlines page.