This Week's Market Moving Earnings Calls

It's a difficult task to narrow down this week's list of earnings calls/reports from 280 to a manageble 5; however, each day of the upcoming week has reports critical to short to near-term markets. The picks below are concentrated in financials, consumer goods, residential construction, and energy due to their impact on the consumer (consumer spending equals 70% of GDP)--notice the aversion to tech, though AMZN's numbers should be important. The five companies have an equally-weighted return of -33.4% for the period 1/1/07 to 1/25/08. vs. -6.1% for the S&P 500.

Monday - American Express	AXP
Tuesday - Countrywide Financial	CFC
Wednesday - Kraft	KFT
Thursday - Pulte Homes	PHM
Friday - Exxon Mobil	XOM

Merger Arb Plays

BofA put it's $4B+ offer on the table for beleagured mortgage lender Countrywide Financial.

Terms:
-.1822 shares of BofA (40.57) = 7.39 per share for CFC holders
-2Q2008 closing target according to BofA CEO
-Spread: 23.4% for a 3-5 month closing.

Bottom line:
-Faro outlook is positive for small portion of current cash position


FCC and shareholders approved the Bain/Thomas H. Lee buyout for Clear Channel Communications; pending DoJ's nod.

Terms:
-$39.20 cash per share
-Feb 2008 closing target
-Termination fee of $500m or 12% of equity commitment
-Spread: 21.7% for 1 month closing

Bottom line:
-Faro outlook is positive for small portion of current cash position

Reading Expectations through Stock Prices: Discover Financial Services

DFS is a company that generates ~$1B per year in free cash flow and currently trades at book value. Of the underlying drivers of firm value (i.e., top-line growth, ROIC, and cost of capital) the most concerning to me is ROIC. This begs the question: at today's price, what is the market's assumption for free cash flow growth over the next four years? If we assume a near worst-case scenario (widespread fraud and bankrupcty would be the worst--though my opinion does not support this) of 4 consecutive years of only $500m in free cash flow--a fifty percent reduction driven mainly by a huge increase in the current charge off ratio of 5%, followed by a return to $1B of cash flow generation followed by a valuation of 10x cash flow in year 10, the value of the company would be ~$10B vs today's current value of $6B. Clearly, the market is seeing a longer period of uncertainty since the implied cash flows out 4 years are being valued at zero! Or, DFS is being overly discounted during the current economic crisis. My guess it that the charge off ratio will grow as high as 10% but in the end most folks will pay their bills.

Quick Snapshot
Pricing Power: yes
Oligopoly: yes
Recurring Revenue: yes
Brand Strength: so-so
ROIC > Cost of Capital: yes
Balance Sheet Strengh: A

Faro Portfolio Performance

Faro: (9.8%)
S&P: (8.6%)

Highlights: positions have been reduced and shift to cash has slowly occurred throughout Nov. and Dec. 2008 economic stance is flat to slightly down.


inception date: 10/15/2007