Pogo Producting Company (NYSE:PPP) shares moved up $1.77, or 3.37%, to $49.55 today after Third Avenue Management LLC voiced their concerns about the company in a Schedule 13D filing with the SEC. This news follows previous concerns about the company's underperformance and valuation voiced by Daniel Loeb's Third Point. Combined, the two activist investors now control roughly 14% of the company's outstanding shares and have both pledged to take further action if necessary to unlock shareholder value. The significant stake in the company along with the threat of a proxy battle may finally warrant a meaningful response from the company's management and board of directors.

What issues do these hedge funds have with the company? Well, Daniel Loeb pointed out in December that the company's stock has appreciated less than half the rate of its peers for every time period in the past decade (on a cumulative basis)! Moreover, he questioned the company's Northrock Resources acquisition in Canada in which spent over $350 million (approximately 20% of the purchase price) in capital trying to improve; however, production in this segment has actually declined 10% from 30,000 barrels of oil equivalents per day to 27,000! Given these failures by management, Third Point recommended that the company immediately put itself up for sale or they would pursue a proxy battle to do it themselves.

Third Avenue Management expressed similar concerns today over the company's mismanagement and poor valuation. The hedge fund pointed out that the company's 2003 net debt has increased by more than six times and net debt per MCFE of proved reserves has increased by more than five times. While this amount of debt may be manageable, TAM pointed out that levering up during a period of historically high commodity prices could cause some major problems in the future. Next, TAM noted that company's production per share has dropped by more than 20% while, on a unit of production basis, lease operating expense has increased by 178% and G&A has tripled. The hedge fund insisted that this combination of higher debt, lower production, higher operating costs, and the underwhelming results from the company's recent acquisition of Northrock Resources were the main factors behind the poor relative performance of Pogo's stock over the last three years. And to top it all off, despite Pogo's poor performance over the past several years, the TAM noted that the company's compensation has been rising! In fact, company executives received an 11.8% increase in their base salary with a bonus that grew by 25% in 2005! The company also issued a restricted stock award valued at approximately $2 million to executives, up a staggering 55% compared to 2004! As a result of all of this, Third Avenue Management said that they would begin talks with other shareholders or take actions on their own in order to solve these problems and unlock shareholder value.

Clearly, if Third Avenue Management and/or Third Point are able to take convince the company to put itself up for sale, it could mean significant share appreciation for investors in a relatively short period of time. While we were not able to get a response yet from either of the two hedge funds, we will keep SECInvestor updated on any new information we receive. Overall, this is definitely a stock worth watching!

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Brooks Automation Inc. (NDAQ:BRKS) shares moved up $0.17, or 1.22%, to $14.08 today after Nierenberg Investment Management said that they strongly disagree with the decision made by Institutional Shareholder Services and Glass Lewis to withhold their votes from several incumbent BRKS directors. Details regarding this proxy vote were disclosed in the company's recent Schedule 14A proxy filing with the SEC. While the company's shares have stalled somewhat during recent years, the stock is trading 32% higher than its 2006 lows.

In their Schedule 13D filing with the SEC, Nierenberg noted:

"We believe that the Board of Directors of BRKS has improved dramatically the quality of its corporate governance in the past year. First, the Board announced that former Chairman and CEO Robert Therrien would not be re-nominated for another term on the Board.  Second, when the Wall Street Journal broke the story last March about the appearance of  back-dated stock option grants made to Mr. Therrien, the Board immediately appointed a special committee  of  newer, independent  directors to examine the matter and empowered the special committee to engage independent legal and accounting counsel. Later, after several months of intensive examination of the Therrien and other suspect stock option grants, the two board  members who had been the Board's compensation committee  at the time the Therrien grants were made resigned from the Board of Directors. Now BRKS' Board has a capable new Chair; the former Lead Director is no longer on the Board; and BRKS' compensation committee and its nominating and governance committee also have new Chairs. The company is publicly committed to cooperating fully with federal examinations of past option practices and to never repeating the unfortunate practices of the past. Fundamentally, we believe that BRKS has a strong balance sheet, a sensible corporate strategy, and excellent management to execute the strategy ... We believe that the formulaic approach taken by ISS and GL would, if followed in this case, cause shareholders  to withhold votes from directors who have been doing difficult work exceptionally well. We believe that doing the right thing should be rewarded, not punished."

Overall, this shareholders meeting will be one to watch closely as many large shareholders are beginning to question the company's leadership. Meanwhile, the company's stock continues to perform well into 2007 and is definitely one to keep an eye on over the next few months.

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Motorola Inc. (NYSE:MOT) shares moved up $0.16, or 6.39%, to $19.47 in early trading today after the company confirmed that it had received notice of Carl Icahn's intent to nominate himself to the board of directors at the next annual meeting. The Schedule 14A filing with the SEC offered no additional information regarding his intentions; however, we know that Carl Icahn is an activist investor that is not afraid to take action to unlock shareholder value. He currently holds a 1.39% stake in the company, which is below the reporting threshold (so no Schedule 13Ds have been filed). We believe, however, that Icahn may intend to take advantage of the company's large cash position (currently standing at around $6 per share). It is not uncommon for activist shareholders to request special dividends, share buybacks, or other measures designed to utilize extra cash to increase the stock's price. Motorola told us that all they are unaware of Mr. Icahn's intentions as stated in the filing, and would not comment on any past communications between the two. However, this is definitely a stock worth keeping an eye on!

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News and Events

Motorola, Inc. (NYSE:MOT) shares moved up today after Carl Icahn disclosed a small stake in the company and said that he wanted a seat on the company's board of directors. Mr. Icahn is well known for his shareholder activism in company's as large as Time Warner. Many expect him to institute a share buyback or special dividend if he attains a seat.

NYSE Group, Inc. (NYSE:NYX) is set to announce a strategic alliance with the Tokyo Stock Exchange tomorrow morning. NYSE Group Chief Executive John Thain and Tokyo Stock Exchange Chief Executive Taizo Nishimuro will attend a briefing to discuss the alliance; however, the company offered no additional comments on any specifics.

Altria Group, Inc. (NYSE:MO) is expected to report higher fourth-quarter results, but news of its plans to spin off its majority stake in Kraft Foods, Inc. (NYSE:KFT) is expected to overshadow these announcements. Some are concerned that Kraft's shares could experience some downside pressure as uninterested MO shareholders immediately sell off their stakes. Meanwhile, even though investors are widely expecting the Kraft news, it is likely to provide a further boost to Altria's share price.

Man Group plc (LON:EMG) said that it would be spinning off its brokerage arm through an initial public offering that could be one of the largest in Wall Street history. According to CNBC, the company has been interviewing investment banking firms to serve as underwriter for an IPO that could take place by the middle of this year, possibly as early as late spring.

US Airways Group Inc. (NYSE:LCC) said that it would stand by its Delta Airlines (OTC:DARLQ) deadline for its $9.87 billion takeover bid. Meanwhile, an unofficial group of Delta Air Lines creditors wants to postpone a February 7th bankruptcy hearing so that creditors can take a closer look at the offer.

Earnings Announcements
69 Positive, 0 Neutral, 40 Negative Expected

Axcelis Technologies, Inc. (NDAQ:ACLS) is expected to report earnings of $0.12 up 1,100% from last quarter's $0.01. The company's stock is up over 2% after-hours today prior to the announcement.

The Allstate Corporation (NYSE:ALL) said that its fourth quarter earnings rose 16.5%, but missed analyst estimates. The insurance company reported earnings of $1.78 per share, slightly less than the analyst consensus of $1.84 per share. The stock fell 2% after-hours.

SanDisk Corporation (NYSE:SNDK) reported higher than expected earnings of 87 cents per share, beating analyst estimates of 72 cents per share. The stock closed up 1.4% on the news today.

Novelis Inc. (NYSE:NVL) shares are up over 24% since last week on reports that Aditya Birla Group could make an offer for the company. The reports cited a $5 to $6 billion offer that would include the assumption of $2.4 billion in debt, which would would put a potential offer at $35 to $49 share. Analysts at Davenport also suggested that there could be other bidders for the company and maintain their belief that NVL shares could be worth around $68 per share on a takeover basis, based on the NPV of free cash flows through 2010. Officially, the company said it was "in discussions with various parties that could lead to a potential sale of the company". Meanwhile, the company's shares moved down today on reports that the company was interested in acquiring Hindalco. While the company has yet to comment, the acquisition would not make much sense for NVL on the surface, as the two would have very few synergies. Overall, this is definitely a stock to keep an eye on as the company continues its discussions with interested parties!

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PYR Energy Corp. (AMEX:PYR) shares moved up $0.13, or 14%, to $1.06 in mid-day trading today after Samson Investment Company made a $1.23 per share offer for the company. The Schedule 13D filing noted that the fund had attempted to contact the company's board several times without receiving a response and therefore decided to make their offer public. Samson said they would acquire 100% of the outstanding common shares at a cash price of $1.23 per share, which represents a 30% premium over Friday's $0.94 share price. Moreover, the investment company said that the buyout would be funded with cash on hand, so no financing would be required. Consequently, Samson said that it could quickly finalize an acquisition agreement and proceed without delay. Finally, they requested a response to the proposal no later than 4:00PM CST on February 1, 2007. Overall, this would be a smooth transaction for both the company and its shareholders. Given the substantial premium of the stock's current market price, the company will likely be forced to at least respond to the offer or risk alienating many of their shareholders. We could not reach the company for comment yet, but we will update this page if and when we hear back from them. Until then PYR is definitely a stock worth keeping an eye on as this situation unfolds!

UPDATE: The company's IR informed us that the they are currently reviewing the offer and offered no further comment.

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Bristol-Myers Squibb Co. (NYSE:BMY) shares moved up $1.72, or 6.56%, to $27.93 in early trading today after rumors surfaced that the company could be acquired by Sanofi-Aventis (NYSE:SNY). La Lettre de l'Expansion - a French newspaper - reported that a pre-merger memorandum has even been signed last week. Meanwhile, both Sanofi-Aventis and Bristol-Myers declined to comment on the speculation.

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News and Events

NYSE Group, Inc. (NYSE:NYX) and the Tokyo Stock Exchange are expected to announce an alliance as early as Tuesday, according to media reports. The alliance would represent a preliminary step to creating the first stock exchange spanning North America, Asia, and Europe.

Prudential Financial, Inc. (NYSE:PRU) finally decided to unload its internet bank, Egg, to Citigroup for £575m. The sale marks an end to a long saga dating back to 2004 when the company attempted to sell the ailing division to both Royal Bank of Scotland and Citigroup.

Merrill Lynch & Co. Inc. (NYSE:MER) said that it had agreed to purchase First Republic Bank (NYSE:FRC) yesterday in a deal worth $1.8 billion - a 44% premium to stock's the prior close. Merrill Lynch said the move was intended to add wealthy clients to its member base. First Republic operates 43 branches and specializes in mortgages for luxury homes.

Verizon Communications, Inc. (NYSE:VZ) announced lower profits, saying that it would continue its aggressive strategy to sign-up more customers to its fiber-television service despite its high costs. Capital expenditures are expected to be approximately $1 billion more than expected as a result of the new strategy; however, the company is already seeing strong penetration into the video markets as a result.

Tesoro Petroleum Corporation (NYSE:TSO) announced a $1.63 billion acquisition of Royal Dutch Shell PLC's Los Angeles refinery in a deal that clearly pleased investors today. Analysts suggest that this acquisition will help boost its flagship presence in Los Angeles and add raise the quality of its asset base. The refinery is also expected to immediately and significantly increase its earnings.

Earnings Highlights
68 Companies Reporting: 28 Negative, 3 Neutral, 37 Positive

Stratex Networks, Inc. (NDAQ:STXN) is expected to report a 500% growth in earnings tomorrow with a consensus at $0.06 up from $0.01 last quarter.

O'Charley's Inc. (NDAQ:CHUX) is expcted to report a 271% growth in earnings tomorrow with a consensus at $0.26 up from $0.07 last quarter.

Con-way Inc. (NYSE:CNW) announced higher profits, supported by the sale of one of its business units. Earnings were down 23% from last quarter, however, as the company said its results are "not up to the standards our shareholders and employees have come to expect".

Sterling Bank Corp. (NYSE:STL) is expected to report a 22% decline in earnings growth with a consensus at $0.24 down from $0.31 last quarter.

Phelps Dodge Corporation (NYSE:PD) reported strong earnings growth of 173% but failed to surprise investors as their stock moved down 2.27% today. The copper producer noted that it was continuing to benefit from strong prices for copper and molybdenum, each of which reflects solid market fundamentals

Eagle Hospitality Properties Trust, Inc. (NYSE:EHP) shares moved up $0.20, or 2.17%, to $9.40 today after the company said that it may put the company up for sale in an 8-K filing with the SEC. According to the associated press release, the Board of Directors has established a Special Committee of independent directors to explore strategic alternatives to enhance shareholder value, which could include a possible sale of the company. The company also said that it has retained Morgan Stanley as its financial adviser.

Eagle Hospitality itself is an REIT focused on acquiring, developing and managing full-service and all-suites hotels. The company's property portfolio consists of nine hotels including Embassy Suites Hotels, Marriott, Hyatt and Hilton. And as of September 2005, the company owned 100% interest in nine hotels and 49% interest in one other hotel within the United States. Financially, the company currently trades below book value (which stands at $10.02) with a debt-to-equity ratio of just 1.4x (below the industry average). And while the company is somewhat inefficiently run (with low ROA and ROIC), it did show vast improvements in several key hotel metrics including its occupancy rates, average daily rates (ADRs), and RevPAR (revenues per room available).

What could be expected in the event of a sale? Well, REITs typically grow through acquisitions of undervalued and mismanaged properties which they utilize their economies of scale to improve. Clearly this makes EHP a great target as it is both undervalued and somewhat inefficiently run but yet improving. Moreover, the company's low market cap, low debt, and decent cash on hand would make it a relatively easy transaction. Valuations themselves come in two flavors: intrinsic valuation and peer valuation. Intrinsically, the company is trading well below its enterprise value with low debt and decent fundamentals. Eagle Hospitality also has a lower valuation compared to its peers, in an industry where buyout premiums typically come between 20% and 30% of the 90 day moving average. Combined, this puts a conservative buyout number somewhere in the area of $11.50 - of course, this is assuming that the Board decides to even put the company up for sale. Overall, EHP is a stock that is definitely worth watching as the Board decides how to best unlock shareholder value.

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Applebees, Inc. (NDAQ:APPB) shares moved down $0.08, or 0.32%, to $24.74 today after Breeden Partners criticized the company's performance and governance and made several recommendations to the company's board of directors in a Schedule 13D/A filing with the SEC. This is not the first time that Breeden has become involved with Applebees either; back in December, the 5% holder pointed out similar problems with the company and threatened to nominate its own candidates to the company's board of directors.

The hedge fund began its letter by pointing out APPB's chronic under-performance compared to other company's in its peer group. They noted Applebee’s performance was 113.3% worse than Darden, 51.7% worse than the S&P 500, and 47.4% worse than the 75th percentile of the casual dining peer group. Next, Breeden pointed out the company's deteriorating fundamentals by showing declining same-store sales (5.2% to -1.0%), declining operating margins (16% to 12.4%), and declining return on capital invested (16% to 10%). The hedge fund noted that many of these problems stemmed from:

1. A fundamentally flawed growth strategy
2. Ineffective leadership during several years prior to Dave Goebel becoming CEO
3. Serious ongoing internal weaknesses in marketing and finance
4. Poor capital allocation policies
5. Excessive overhead costs
6. An ineffective board
7. Poor governance practices of various types
   
8. Inability to make timely decisions of consequence

The letter then moved into an area that is generating an increasing amount of press coverage - executive compensation. Breeden noted that even while the company has lost million in value over the past few years, executives were still granted over $30 million in bonuses! They also uncovered some other highly questionable executive perks, including personal use of corporate aircraft and even the use of shareholder funds to pay executives' personal income taxes. Perhaps the hedge fund said it best:

"We do not believe that shareholder interests are served by turning corporate aircraft into flying limousines for senior executives’ personal vacations. Just as importantly, this practice is inconsistent with the wholesome “neighborhood values” that Applebee’s claims to embody as a company. I am quite certain that most Applebee’s customers would be shocked to find out that a portion of the cost of their meal goes to fly the former CEO back and forth to his beach house aboard a corporate plane ... In addition to not requiring executives to pay any of the costs for their personal travel, the Committee has taken the extraordinary step of requiring shareholders to pay the income taxes owed by the CEO and other senior executives for their aerial vacation tours."

Clearly, there is a disconnect here between management and shareholders that the board is failing to correct. To address these issues, Breeden made several recommendations to the company's board of directors:

1. There should be a moratorium on any incentive compensation for any tier one executives so long as TSR remains negative. Similarly, incentive compensation should be zero if the company remains in the fourth quartile of relative performance in generating TSR.
2. A large proportion of incentive compensation (such as 50-75%) should be based on relative measures of performance compared to the company’s publicly traded casual dining competitors shown on page two of this letter.
3. Growth in average per restaurant royalty fees from franchise operations should be included as an incentive target for relevant executives (including the CEO and CFO), since franchisees represent 73% of the company’s system.
4. The level of free cash flow would be a healthy measure for some portion of incentive opportunities, especially for the CEO and CFO.
5. Minimum relative performance in generating TSR or EVA (such as being in the top 20%) should be a significant part of every executive’s target incentive eligibility. All executives should have a vital stake in the company outperforming its peers.
6. Personal use of corporate aircraft should be banned. Tax gross-up payments made during the last three years should be repaid to the company.
   

In a past filing, the hedge fund also made several recommendations on how to improve the company's performance:

1. Significantly reduce the number of company-owned restaurants by re-franchising a substantial number of restaurants in a multi-year program
2. Cease all further capital expenditures to open new company-owned restaurants, and minimize capital expenditures to renovate company-owned restaurants pending their sale
3. Reduce overall expense levels, especially in corporate level overhead, and dispose of non-core assets
4. Use excess cash generated from these steps and improved performance to increase the return of free cash flow to shareholders
5. Improve various governance practices, including reducing the number of insiders on the company's board, precluding former CEOs from continued board service strengthening independence requirements, eliminating the personal use of corporate aircraft and abolishing your staggered board

Combined, hopefully these changes will be implemented by the company's board of directors and management in order to protect the company's integrity and restore shareholder confidence in the company. The changes could also help the Applebees boost their performance and better motivate management to deliver shareholder value. This makes APPB a stock worth watching closely over the next few months.

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