GrafTech International: Strong Postion in Oligopolistic Industry

Our NY presenter recommended GrafTech International (NYSE: GTI, $13.15). This producer of graphite electrodes has the leading share in an industry, where top 5 players command 65% of the market. GTI has the strongest manufacturing network of all competitors with only one other player having true global presence. The company has locked in supply of needle coke, the raw material essential in manufacturing of GE's. As demand recovers, GrafTech should be able to return to pre-crisis operating rate levels. Leverage in the business model will translate into significant incremental EBIT. The upside is 50%+. The company has paid down debt and has liquidity available to finance expansion.

Roulston Research's Consumer Chair's Thoughts On Spending in the Home Improvement Sector

“The news from Ethan Allen and Haverty this week reinforces everything the sector has seen in the last few months, as furniture sales picked up just after Christmas and big-ticket home projects increased in January when home-improvement retailers started seeing increases in estimates for kitchen and bath projects,” Craig Johnson, President of Customer Growth Partners, and Roulston's Consumer Community Chairman, said in an interview with Dow Jones.

“Housing market turnover, which is starting to pick up, is driving increased sales at furniture and home-improvement companies, he said. People generally spruce up their homes either when they’re about to put them on the market or when they’ve just moved into a new house.”

“Spending on home improvement and furnishings is improving despite 10% unemployment shows people with full-time jobs are starting to spend again, and since consumer spending makes up 70% of the economy and retail accounts for 45% of consumer spending, that has implications for the broader economy as well,” Johnson added

Consumer roundtable with Alan Lacy former CEO of Sears

talked about trends in retail where Alan feels unemployment may be affected by labor hiring instead of capital spending due to the uncertainty of the economy. Other issues in retail emphasized including a continued movement of private label share growth and distribution impact caused by this, as many products will have new channels available via quality and price level differentiation. On Consumer staples and Consumer discretionary products in general he is bullish, as home improvement and automotive cycles he believes can not be deferred much longer for replacement goods, but also because appliance makers in particular have been somewhat successful in creating proactive purchasing driven by water and energy savings and improvements in cleaning capabilities in particular for laundry appliances. In the interest of conservation, there is an offset to the change of behavior with debt use by the consumer.
Lot of discussion with Sears, Kohls, JC Penney and other names in space. Call me for insight and detail. Kmart generating cash while Sears living off legacy and cost cutting changes. I can give you more details and will write more on this.

Member of Obama's Transition Team on Healthcare Reform

Mark Lindsay, Director of The Livingston Group's healthcare practice, former senior advisor to Bill Clinton and member of Obama's transition team, shared his thoughts on the current state of the healthcare debate. Mark still believes, as he stated in our recent healthcare roundtable, that the reform has no chance of getting passed, even via the reconciliation route. In his view, the summit at the White House last week was a political exercise, spurred by premium hikes in California. It's very difficult to scale the current bill back due to the nature of the innerworkings of Congress.

Retail Observations from Roulston's Consumer Expert

Arnie Cohen, the former COO of J.Crew, and one of our experts in the consumer vertical, has shared his observations on a number of retailers. Arnie continues to like Steve Madden. He believes the company is very much in tune with its customer. ANF is still a disaster, their stores and clothes remain irrelevant, loud and "smelly". Coach is problematic, and while their business overseas is gaining, the US operations are troubled. Arnie notes that if the brand is not "cool" in the US, it will stop being cool overseas. While Bath and Body appears to be OK, Arnie is less enthused bout Victoria's Secret, saying they're having supply issues and have lost their edge on Pink. Williams Sonoma is making positive comments, but Arnie is not buying their optimism. He continues to like URBN and J. Crew, with the latter having the best stores in the mall, in his opinion. Customers like J.Crew and the company's successful marketing strategy is making Crew a hip place to be. Arnie is watching Bebe closely for signs of a turnaround and wants to give it till spring/summer. Chico's is improving, but has ways to go yet. Coldwater Creek, in his view, is done and not coming back. He mentions that Macy's, Nordstrom. J. Crew and maybe Saks are gaining from a void in the women's segment.

Tatum/Roulston Report

As we mentioned last month the spike in business conditions in January was sudden and significant. Although the velocity this month slowed, if we look at the trend caused by last month, it shows stability more that specific improvement. The markets and The Tatum Survey seem to be telling us the same thing. We are in a holding pattern. Yes January changed the trend pattern but many of the other components of the Survey including backlogs, capital expenditures, employment and capital availability all show a flat trend that seems to represent a “wait and see” type holding pattern. This is contrary to January and the uptrend that we have seen in the index over the last six months. We would argue trends seem to reflect that inventories got to low and have now been rebuilt with some limited spending. But without capital availability and more importantly visibility in confidence in the outlook a January blip is the exception. The general trend in many of these factors is flat with some (good old American) optimism but a lack of catalyst or stimulus (outside of a faint government effort) is leaving businesses wanting for optimism and consistency.

Looking forward we think the economy is going to have a tough time fighting the political backstabbing that although is causing a lack of government action( a good thing) is more and more looking like the politicos will regulate as a substitute for legislate and continue to confuse, anger and penalize businesses thru rhetoric and partisan bickering.

Electronic Arts: Going Against the Prevailing Sentiment

Our New York presenter still likes Electronic Arts (NASDAQ: ERTS, $16.60). The stock has fallen approximately 20% since early October when it was recommended. The presenter believes management sandbagged EPS guidance on the last earnings call and the company is highly likely to beat the forecast it provided. He is calling for a change at the top. The negative sentiment on the name and a possibility of a takeover are important catalysts going forward.