Friday, August 18, 2006


The WSJ's "Heard on the Street" column discusses British Sky Broadcasting (BSY), saying that investors in the co's shares who are concerned that CEO James Murdoch is spending too heavily should note: like father, like son. Just as his father, News Corp (NWS) Chmn Rupert, has done many times, James is taking steps that incur short-term losses in pursuit of a longer-term strategy, say analysts, fund managers and News Corp. execs. This year and over the next 3 years, James is spending about $1.33bn to expand into broadband Internet and telephony, a move aimed at fending off competition from telecom co's that are increasingly encroaching on BSkyB's television turf and capturing a large part of fast-growing mkt. It is the biggest investment James has made outside of television since he became CEO. Investors knew about a coming broadband push, but the cost of the venture surprised them. When James explained that it would lower profits by £400m over 3 years, BSkyB shares fell 4%. BSkyB's broadband and telephone strategy is seen as crucial as competition intensifies among cable, satellite and telecom providers. What the industry calls "triple play", offering customers their television, broadband and telephone services all at once and on one bill, is increasingly popular with consumers, and BSkyB risks losing customers if it isn't able to offer all three.

The NY Times reports that hedge funds place big bets on hurricane season. According to the Reinsurance Association of America, $23bn in capital has been raised for new or existing reinsurers since Hurricane Katrina. Hedge funds and private equity firms have led the way in the $7.3bn that has been pumped into Bermuda start-up co's and $3.6bn in "sidecars", special-purpose entities through which hedge funds give additional capital to existing reinsurers. That compares with no new start-ups or sidecars in the 12 months before Katrina, says Frank Nutter, president of the RAA. That hedge funds are suddenly reinsurance experts should be no surprise. Insurers and reinsurers try to create models to determine potential claims they may have to pay, and the co's price premiums accordingly. Having just suffered a 1-in-100 kind of year, the insurance industry can justify increasing premiums to the stratosphere. At the same time, the statistical probability of another 1-in-100 kind of year happening moves further away, the insurers reason. Premiums for the Gulf Coast are up 100-200% since the storms of '05.

According to the Barron's Online, despite an ongoing military campaign in Iraq and threats posed by Iran, N-Korea and rogue terrorist groups, the rate of growth of US defense spending is expected to slow down in the coming years. That may mean that some of the best investments may not be the large defense conglomerates, but stocks of smaller contractors with projects in the hundreds of millions, not billions, projects that may more easily avoid the chopping block. They include names such as $552.84m-mkt cap United Industrial (UIC), which makes computer-controlled reconnaissance planes, or $1.9bn Armor Holdings (AH), which retrofits Humvees with battlefield shielding. "The rev growth of United and some other small-cap vendors could be at least 3x that of Boeing (BA) and the other [big defense contractors]," says Michael Lewis, of BB&T. And mid- and smaller-cap co's do contract work for Boeing and others. What trickles down from the conglomerates could be meaningful rev to niche vendors, says John Burke, of Weiss Research's This focus on smaller co's comes at a time when larger co's will surely feel the acute pain of fiscal belt-tightening. Defense spending increases of 4-5% a year over the next several years mark a slowing from prior years, says Lewis. The Bush administration's request for roughly $500bn for this year and next, including supplementary funding for Iraq, is at the upper end of defense spending for the last two generations, says Loren Thompson of Lexington Institute. There is no time in the last several decades when defense spending has been much higher than it is today,'' he says.

Barron's Online reports that insiders are trimming back on Scotts Miracle-Gro (SMG), suggesting the near-term growth outlook may not look so rosy. Members of the founding family of predecessor co Stern's Miracle-Gro Products (which merged with lawn-care co Scotts in '95) and a longtime co director have grossed nearly $8.2m by selling 213K Scotts shares since the beginning of the month. Ben Silverman, director of research at, says: "Selling on weakness is certainly never a positive," given mgmt's "disappointing forecast" and economic headwinds.

The NY Post reports that two women who were once top executives at DHB Industries (DHBT.PK) were arrested yesterday on charges they made millions in ill-gotten gains by cooking the books of the co. Dawn Schlegel, DHB's CFO until she resigned early this year, and Sandra Hatfield, the co's COO before she stepped down late last year, turned themselves in to FBI agents early yesterday.

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