New World Investor Blog

A New Technology for Hybrids?

2007-08-14T15:17:52Z

Energy Conversion Devices (ENER) makes nickel-metal hydride (NiMH) batteries for hybrid cars through its Cobasys joint venture with Chevron (CVX). These are great batteries -- I have them in my Toyota Camry hybrid -- but Cobasys had to work hard to reduce this technology's tendency to bleed oxygen at lower temperatures, and be susceptible to explosions at higher temperatures. Their reward for all their hard work has been to capture a large portion of the value-added in hybrids. Today, the percentage of the overall production cost of a regular car accounted for by electronics and software is about 20% (far more than the cost of the steel, incidentally), but 50% for a hybrid.

A new technology, nanophosphate lithium-ion batteries, is now on the market in the DeWalt portable saw. It takes only five minutes to recharge, does not emit oxygen at any temperature, and is unlikely to explode. For now, it is only applicable to smaller applications like portable power tools, but I think it will eventually scale up to hybrid car size. Combine that with the next generation of plug-in hybrids that can be charged by solar cells on your garage roof, and things could get interesting. Plugging into a service station outlet for five minutes isn't any more onerous or time-consuming than filling up at the pump.

Don't worry about these batteries threatening ENER and Chevron, because the M1 battery in the DeWalt saw is made by a company called A123 Systems and... Cobasys. ENER and Chevron are making sure that if anyone obsoletes their current products, it will be them.

Deep Packet Inspection

2007-08-09T15:40:13Z

Packeteer (PKTR) got quite a write-up in The Wall Street Journal in a July 30 article on Deep Packet Inspection (DPI), which PKTR does better than anyone in the world. DPI gives the customer unprecedented visibility into what is traveling over their network, letting them decide which packets should take priority, which can be slightly delayed or compressed without any negative impact, and which should be stopped because they are computer worms or viruses.

Paketeer's new iShaper is a "branch office in a box" that offers visibility, compression of data to save buying more hardware (while not compressing voice or video, to maintain quality, and acceleration of critical packets. The competitors are promising equivalent products, but only PKTR really has the goods.

The Journal article title and subhead were: "A Question of Priorities -- Faced with clogged networks, companies and college campuses get more sophisticated about which online material gets in first." Colleges are big users of DPI, because students are heavy users of high-bandwidth services like music, movie and video downloads that clog networks. A Ball State network engineer was quoted as saying: "I can't imagine a university in the United States without some kind of DPI technology in their network. It's just that important."

Rawlings Sporting Goods turned to Packeteer to solve their problem, too. During the 2005 holiday season, they had a barrage of complaints from customers about Internet orders taking too long to go through. Rawlings engineers couldn't figure out the cause of the problem until they tried a DPI demo system from Packeteer. It turned out that employees were eating up bandwidth by watching streaming videos. "The network was the last place I would have thought we had problems," said Richard Truex, network manager for Rawlings.

By deploying the Packeteer system, Rawlings was able to improve the flow of network traffic without having to buy more bandwidth, leading to major cost savings. Packeteer's system allowed Mr. Truex to create rules to guarantee bandwidth for important applications, like customer orders, and squeeze bandwidth for others. During peak business hours, streaming videos are nearly shut off to allow the flow of important data.

Knowing that PKTR has the best products for a serious problem does not guarantee that the stock will go up, though. But now that there are a couple of activist private equity funds involved with PKTR, I think something will happen sooner rather than later.

The Competition is Heating Up

2007-08-07T14:14:58Z

Harmonic (HLIT) reported earnings after the close on July 25. The consensus was for $72.65 in sales and 10 cents per share, and the company did $71.3 million, up 34% from last year, and 11 cents. Bookings were strong across the board, and they are now guiding for $150 million to $160 million in sales in the second half of the year, compared with consensus expectations for $146 million. They also predicted 44% to 45% pro forma gross margins in the second half, again above expectations.

Where is the strength coming from? Everywhere, as satellite, cable and telephone companies around the world all plunge into delivering video to the consumer's living room, and that should be followed by high-definition video. In Japan, consumers get 100 megabits-per-second (mbps) fiber-optic Internet service for less than $30 per month. Comcast (CMCSA) will be rolling out Data Over Cable Service Interface Specifications version 3 (DOCSIS-3) over the next two years. DOCSIS-3 cable modems can operate at 150 mbps, compared to the 12 mbps service that I now get. Verizon (VZ), with fiber to the living room, and AT&T (T), with fiber to the curb and then as much copper as it takes to the living room, have to respond to Comcast's new faster Internet offering. We are on the edge of a dramatic increase in Internet speeds, with a much broader area for connections, thanks to WiMAX.

We're also on the edge of a serious price war. Verizon's fiber optic business Internet price schedule was leaked -- only $40 a month for 10 megabits downloading and two megabits uploading, up to $350 a month for 50 megabits downloading and 10 megabits uploading. That will easily replace a couple of T-1 lines, which cost at least $500 a month each. Competition is heating up, and HLIT will be at the front of the markets, providing the top video technology to these companies.

Sandbagging

2007-08-03T19:49:00Z

Comcast (CMCSA) reported before the opening on July 27, hitting their numbers and reaffirming guidance. But a loss of basic cable subscribers rattled investors, and the stock closed down $1.33 that day, and it's lost almost another buck since then.

First, the numbers: Revenues were up 30.5% from last year to $7.71 billion and earnings came in at 19 cents a share, both on target. Guidance remains the same: 2007 revenue growth at least 11%, capital spending $5.7 billion and cable cash flow growth north of 14%.

The company added 670,000 subscribers for its Internet phone service, 2.1 million digital cable boxes and 823,000 new digital cable subscribers -- a very strong number. About 59% of subscribers now get digital video service. Comcast added 330,000 new broadband subscribers, and more than 26% of the video customers also get their cable modem service.

The only soft spots were that basic cable subscribers were down 95,000 in the quarter, and the company did not raise guidance in spite of the strong digital subscriber additions. Comcast said that they expected the decline in basic cable, but it was at the high end of Wall Street expectations. As for the guidance, I think that they are just sandbagging.

Amgen Earnings

2007-07-31T19:47:02Z

Amgen (AMGN) reported after the close on July 27. They did $3.73 billion in sales and $1.12 a share, above Wall Street's expectations for $3.68 billion and $1.06. Of course, the main issues overhanging the stock are Medicare reimbursement and any possible further FDA action against Epogen and Aranesp, but I don't expect them to be able to say much about either of those yet.

In the Sicko department, on July 2 Blue Shield of California changed its reimbursement policy for Aranesp and Epogen from coverage for patients with hemoglobin levels of 11 grams per deciliter (gm/dl) of blood or less, down to 9 gm/dl or less. (Patients with heart conditions would be covered at 10 gm/dl or less.) Essentially, they tried to get doctors to wait to give the medication until an anemic cancer patient's hemoglobin level fell to levels closer to the cutoff for needing a blood transfusion. Doctors protested loudly, and yesterday Blue Shield reversed part of the policy by raising the level to 10 gm/dl for everybody. Blue Shield has three million members in California, and I expect doctors to continue to prescribe Aranesp and Epogen as needed. These two drugs were the top selling biotech drugs in 2006, with sales of $7.2 billion, and Johnson & Johnson's Procrit (Epogen by another name) was fifth with $2.9 billion in sales. This is all about money, not good medicine.

Strength in the PC Market

2007-07-26T19:36:46Z

The worldwide personal-computer market grew at a better-than-expected-by-Wall-Street rate in the June quarter, with shipments up about 12%, according to market researcher IDC. As you know, I have been estimating PC sales above the Street for this year, with the strength coming mostly in the second half. It is a pleasant surprise to see it starting this early.

Intel (INTC) reported an interesting quarter after the close on July 17. The stock hit a 52-week high at $26.33 before the announcement. Sales rose 8% from last year to $8.68 billion, which was just above the consensus estimate for $8.54 billion. Earnings per share excluding a one-time tax gain hit 19 cents, right on the consensus and up 27% from last year.

The reason earnings only hit the consensus, even though revenues came in better than expected, was that product gross margins fell to 46.9% of revenues, at the low end of guidance. The biggest problem was weak demand for NOR flash memory chips, which are mainly used in cell phones. But Intel is in the process of fixing this problem by spinning off this money-losing division to a joint venture. The company also announced that microprocessor selling prices were a little lower than expected. The stock dropped $1.27 yesterday in reaction to the report.

But the really important points that Wall Street is missing are:

The NOR flash memory division is irrelevant, even though Intel can't account for it as a discontinued line of business quite yet.

The company guided for a much better gross profit margin in the September quarter, 52% plus or minus two points.

The company guided for $9.0 to $9.6 billion in sales, in line with the consensus.

The last time Intel reported a gross margin this low, in the third quarter of 2002, their operating profit margin was 16.5%. This time it was 19.3%. That means they have delivered on their promise to get leaner and more productive, holding down expenses. Also, Intel reduced its inventory by 5.5% (almost $250 million) from the March quarter. That is the first sequential quarterly reduction in inventory since 2003, and inventory reductions almost always have a negative impact on gross margins.

Intel's manufacturing efficiency is running far enough above expectations that the company will reduce its 2007 capital spending budget.

Net net, I liked the quarter. And with the semiconductor sector showing strength and PC sales picking up already, I expect Intel to have a strong second half of the year.

The Power of China

2007-07-24T19:33:21Z

I don't think most people realize the power of China. Chinese exports hit $103 billion in June, their first month over $100 billion. Their official foreign exchange reserves now stand at $1.333 trillion dollars. But what is really amazing is that their quarterly inflow is accelerating. Just like the 1800s, when the UK was the manufacturing floor to the world or the 1900s, when the U.S. held that title, the cash is pouring in the door to the manufacturing superpower of the 2000s -- China. Here is the recent quarterly growth in their foreign reserves:

Q4:05 +$49.9 billion
Q1:06 +$56.2 billion
Q2:06 +$66.0 billion
Q3:06 +$46.8 billion
Q4:06 +$78.4 billion
Q1:07 +$135.7 billion
Q2:07 +$130.6 billion

During the first half of the year, they have accumulated $266.3 billion in U.S. dollars, more than all of last year ($247.3 billion). They are banking half a trillion dollars a year, which they have to put somewhere.

So, it was with a mixture of sadness and amusement that I read that our Housing and Urban Development (HUD) Secretary is in Beijing, asking (begging?) them to buy U.S. mortgage-backed securities. So, let's see, we want them to buy securities in a collapsing sector, and then the U.S. Congress is demanding that they revalue the yuan by 20%, guaranteeing China a 20% purchasing power loss on whatever they buy, on top of whatever the credit losses are. If the HUD Secretary can have this conversation with a straight face, it certainly explains why he is qualified for his job and I am not.

A QUIK Pick

2007-07-19T19:28:59Z

Today I want to tell you about a company that has unique technology that is perfectly suited for battery-powered, high-volume consumer electronics -- just the sort of device that gets content on demand to the user. QuickLogic (QUIK) and I go way back. The company was founded in 1988 by my old friends at Morgenthaler Ventures, and almost 20 years later, QUIK's founding CEO Tom Hart is still running the show. QUIK is a semiconductor company that began as a competitor to Xilinx and Altera in programmable logic semiconductors -- these chips can be inserted into a hardware programmer that alters them to do different functions based on what the customer wants. For example, if the customer wants to sell a portable device that plays audio and another model that plays both audio and video, the same QuickLogic chip can be programmed for both of these uses.

The demand for programmable logic semiconductors is growing, and many customers, like Dell (DELL) and Apple (AAPL), are turning to companies like Xilinx (XLNX), Altera (ALTR) and QuickLogic for their chips. The reason for this transition is that it is very expensive to make full-custom chips to do each of the desired tasks. So companies like QuickLogic that made chips that can be altered according to the customers' needs are profiting greatly from this change.

What makes QUIK so interesting right now is that on April 25, QuickLogic introduced the new product that I've been waiting for -- the ArcticLink. It is based on the PolarPro, but in addition to low power consumption, it adds important functions like USB 2.0 and Bluetooth support. These added capabilities are going to drive sales for ArcticLink, as USB and Bluetooth markets are expanding at a rapid clip. The market research firm iSupply projects that by 2010 there will be 750 million handheld units shipped that include USB. The second most popular connection will be Bluetooth, which iSupply projects will be included in 680 million handheld units by 2010. So as you can see, ArcticLink is going to be a huge product for QuickLogic.

The Wonderful World of Topology

2007-07-12T20:19:15Z

Guess what? I can fit my body through a hole in a 3x5 index card. And you can, too. Don't believe me? Check out this interesting experiment by Robert Krampf: http://krampf.com/experiments/Science_Experiment11.html.

Las Vegas Money Show Video

2007-07-09T20:17:45Z

Back in May, I attended the Money Show in Las Vegas. While Vegas is not my favorite place in the world (I think their city motto should be: "Not As Bad As Atlantic City"), I did have a good visit with fellow newsletter advisors and investors. Also, I filmed a short video recording that was posted on MSN Money and the Money Show's main landing page. In the video, I talked with Gary Alexander about two of my favorite biotech companies right now. You can check out the video here.

A Bright Idea?

2007-07-03T20:16:41Z

There is a real problem in the amount of energy that we use in lighting. Incandescent lighting consumes 22% of all the electricity generated in the U.S., and about 33% of all the electricity generated in the world. But the bulbs produce a lot of heat along with their light. This is often referred to by the anti-incandescent crowd as "waste heat." Funny, but in the middle of winter the two 150-watt spotlights over my desk don't feel like waste heat.

So the government came up with a great idea: Trade your 100-watt incandescent reading light for a compact fluorescent bulb (CFL) that costs 3X as much, takes a while to warm up, provides poor quality light, causes headaches in some users (and stands accused of causing cancer in others), and contains five milligrams of mercury to make environmentally benign disposal difficult enough that we can be sure that lots of mercury will wind up loose in the air, ground and water.

The Great State of California has banned incandescents and has set a 2012 deadline for these lights to be completely phased out. So has Canada. Australia is even more aggressive -- banned by 2010. Europe, not to be outdone -- 2009. Congress is talking about a complete U.S. ban by 2017, although my bet is that it will take them nearly that long to pass any important legislation.

If all those incandescents were converted to compact flourescents, we could cut about a third off of that energy bill. But if you're like me and think that the CFL bulb sounds like a bad idea, how about this: Replace every 100-watt bulb in your house with a white LED (light-emitting diode) light. Unlike the compact fluorescent catastrophe, white LEDs give instant-on, excellent quality light with virtually no wasted heat. And they are on the market today. If we replaced every incandescent light in the country with a white LED light, we could cut the electricity usage of the U.S. in half or said another way, we could slash the country's energy consumption by about $18 billion.

Wow! Now that's a Wall Street concept, well worth running stocks up for and getting excited about. The only problem I see is that the bulbs cost $125 each -- no, there isn't supposed to be a decimal point in there. If the manufacturers can drive costs down 40% a year, which is not an easy curve to stay on, they will get down to 10X as expensive as an incandescent light in about 6 ½ years, and match incandescents in about 11 years. Today, a 100-watt incandescent bulb with a 5600-hour life costs about 72 cents. Because LED bulbs last 50X as long as incandescents, the crossover point for people who change their own bulb comes in about 2012, and the crossover point for commercial users should be just about now.

So, this is a market that will s-l-o-w-l-y build as costs come down and various applications become economic. In the meantime, companies like Cree (CREE) that produce white LEDs will have periodic disappointing earnings reports as their basic business fluctuates. Cree will report higher sales for their June fourth quarter compared to last year, but earnings will be only five or six cents a share compared to last year's 18 cents. They'll start the June 2008 fiscal year with comparably crummy results in the September quarter, and it is hard to imagine them guiding up, given the beating that they are taking on profit margins in the cell phone display backlighting business.

WiMAX

2007-06-29T19:32:02Z

Sprint (S) is talking about a joint venture spin-off of its WiMAX operations, which would be good news for the industry. The speculation immediately turned to a joint venture with Craig McCaw's Clearwire (CLWR), and in one of the most blatant "please call us" statements I've ever seen, a Sprint spokesman said: "Having a coordinated, cohesive use of the 2.5 spectrum makes a lot of sense from our perspective and from theirs."

Clearwire has already signed up 258,000 customers for fixed WiMAX in 39 cities in the U.S. Sprint has a successful lower-speed cellular data service, EV-DO, that can reach 203 million people in the U.S. and had $1.2 billion in revenues in the December quarter.

Sprint needs a future network that can handle many more users and much higher speeds, and Clearwire would love to have those customers feeding into a jointly-owned network.
The reason this is good for the industry is that while it may reduce equipment purchases from Clearwire plus Sprint somewhat, it forces many, many other companies to adopt WiMAX or be at a 10X cost disadvantage on wireless data services. That's good news for WiMAX equipment providers.

Soaring Oil Prices

2007-06-26T18:35:41Z

Energy is a hot topic right now, and for good reason -- prices have soared over the past couple of weeks. They started up after a powerful cyclone hit Oman, which shut down a major terminal that ships 650,000 barrels of oil a day. It continued, pushing oil over $67 a barrel, when the Department of Energy announced on June 14 that both a drop in refinery utilization last week due to maintenance downtime and an increase in gasoline inventories for the summer driving season.

I have been on the road a bit more than usual lately, and it sure looks like a lot more RVs and general traffic than the last couple of years. It could be the weak dollar has convinced Americans to vacation at home this year, but high gas prices are not affecting traffic.

Just a few months ago, the official OPEC line was that they are "comfortable" with oil around $50 a barrel. Now they are saying they are "comfortable" with oil between $60 and $65. That's because they don't think there's any low-cost oil left to be found, and they are not worried about the alternatives being available in sufficient volume to make a difference in the next 10 years. They are right on both counts. Many of the new energy technology out there could show incredible growth, without putting a dent in oil prices for five to ten years.

In the "oil shock" in 1981, after long lines at the gas pumps, Exxon spent $40 billion to find new oil. Now, with oil prices about double those "oil shock" levels, Exxon spent about half as much on exploration in 2006 as they did in 1981, while paying much higher prices for labor, drilling rigs and everything else.

BP, the old British Petroleum, has been pumping oil from Alaska's Prudhoe Bay for almost 30 years. Their original estimate for the life of the field was 25 years. To keep it going, they spend billions of dollars maintaining old equipment and pipelines. Recently, they discovered a leak that forced them to shut down a fourth of their production -- 100,000 barrels a day -- and the news caused oil prices to jump. But the entire field is at end of its life and in the oilfield equivalent of intensive care. It will be gone soon.

The same story is playing out at older oil fields around the world. Worldwide oil production is supposed to hit 87 million barrels per day by the end of 2007, but it is going to be tough. This could be the year of peak oil production. With the low level of new discoveries and the high cost of finding oil, it will take just a few more of the old monster fields going into depletion mode to start annual production shrinking
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What does this mean for us? With the hurricane season officially underway, even a return to normal from last summer's extraordinarily quiet period would be an additional shock to the system. A higher-than-normal year, as is being forecast by the same folks who blew the forecast last year, would be a disaster for oil prices -- but great news for energy technology stocks. (You can find one of my favorites in this area in the June 20 post.)

Good News for New Energy Technology

2007-06-20T18:34:42Z

With the summer driving season heating up and oil prices over $50 per barrel for the foreseeable future, there's no doubt that consumers are feeling the pinch at the pump. So now, in my opinion, is a great time to talk about new energy technologies—technology that is being developed to find more oil and ways to use it effectively.

One of these technologies that I'm most interested in is coal-to-liquids. Basically, this is a process that extracts oil from coal and it can be used as gasoline, diesel or jet fuel. One of my favorite companies in this field is Rentech (RTK), as they have been working for 25 years on a clean version of the coal-to-liquids process. Plus, with their version they're able to turn coal into gasoline for less than $35 per barrel.

This technology may seem a bit out there, and not even on your radar screen, but it is on the minds of both houses in Congress. Recently, both houses in a bipartisan agreement put together a coal-to-liquids financing package. If it goes through in the energy bill this summer, it could include $30 billion in loan guarantees for coal-to-liquids plants, a 51-cent-per-gallon tax credit for coal-to-liquids fuels through 2020, automatic subsidies if the price of oil drops below $40 a barrel and permission for the Air Force to sign 25-year contracts for almost a billion dollars a year of coal-based jet fuel. Wow!

Cheaper Computers

2007-06-14T17:31:08Z

There was some interesting news in the PC market recently that dealt with some semiconductor heavy weights. Intel (INTC) has entered a joint venture with Asustek, the world's biggest producer of computer motherboards, to make laptops that will cost only $200 to create mass markets in less developed countries. The Eee PC ("Easy to learn, easy to work, easy to play") will be introduced this summer under the Asustek brand name, and their 2007 sales target is a modest 200,000. The competing XO computer uses an Advanced Micro Devices (AMD) processor and is available in the U.S. Don't rush to get one -- the 7" screen would drive you nuts. But if you are one of the one billion people in the world who has never owned a computer and can only afford to pay $200 for one, it's going to be a big seller.