SEC Investor - Tuesday, March 11, 2008 - The Insider's Guide to SEC Filings

Tuesday, March 11, 2008

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The Boeing Company (NYSE: BA) isn’t happy about the U.S. Air Force’s recent decision to award European competitor Northrop Grumman (NYSE: NOC) with a major military contract and it is throwing a very public fit. The aerospace company called the competition for its air tanker contract “seriously flawed” and even so far as to say that the Air Force selected the “wrong airplane” for the warfighter. The move highlights the increasing concerns surrounding military contracts and could result in some widespread industry and governmental changes.

“This is an extraordinary step rarely taken by our company, and one we take very seriously. Based upon what we have seen, we continue to believe we submitted the most capable, lowest risk, lowest (cost) … airplane,” said Jim McNerney, chairman, president and chief executive officer of Chicago-based Boeing. Program manager Mark McGraw added, “Our analysis of the data presented by the Air Force shows that this competition was seriously flawed and resulted in the selection of the wrong airplane for the warfighter.”

Boeing filed a formal protest with the U.S. Government Accountability Office (GAO) regarding the airforce’s decision charging that the Air Force changed the rules for choosing the tanker during the course of the competition, which resulted in the Air Force choosing an inferior plane. Coincidentally, without the contract, Boeing may be forced to shut down its 767 line in Everett by 2012. So, while Boeing has portrayed the government as at fault, it could have other motives.

Let’s not forget when former Boeing chief financial officer Michael Sears received four months in prison for illegally negotiating a $250,000-a-year job for an Air Force contracting officer while she held sway over a potential multibillion-dollar contract sought by the aircraft manufacturer. Then again, problems are hardly limited to Boeing. Many major players in the defense industry have built strong bonds with Air Force personnel in order to sway decision-making.

The apparent corruption in government military contracting has been a much heated debate that is just starting to receive the attention that it should from lawmakers. These regulators are now looking for ways to better control the process and open it up to as many bidders as possible to get the best price possible. Whether or not these decisions will yield any real results remains to be seen, but this event certainly adds gas to the fire!

Tuesday, March 11, 2008 8:24:54 PM UTC

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Google Gets EU Approval (GOOG)

Google Inc. (NASDAQ: GOOG) officially took over ad tracker DoubleClick Inc. today after the EU approved the $3.1 billion deal first announced almost a year ago. The EU found that the deal won't prevent competition in online advertising. Its official statement read:

“The Commission’s in-depth market investigation found that Google and DoubleClick were not exerting major competitive constraints on each other’s activities and could, therefore, not be considered as competitors at the moment.”

Google shares are up almost 5% on the news, with Google CEO and Chairman Eric Schmidt writing in his official blog that he is "pleased to share the news that we completed our acquisition of DoubleClick today. Although it's been nearly a year since we announced our intention to acquire DoubleClick last April, we are no less excited today about the benefits that the combination of our two companies will bring to the online advertising market."

United States regulators cleared it in December. Approval from the EU was the last hurdle before the deal could conclude.

The combination of the two companies led to objections from companies such as Microsoft and Yahoo, who were concerned about Google's potential control over ad prices. U.S. regulators, however, dismissed such concerns in December, and now with EU approval the real question is whether Google will indeed reap benefits from the acquisition.

Schmidt said combining with DoubleClick will allow more rapid ad advances, specifically better ad targeting. The major concern stemming from such promises is not economic but personal privacy. Ad targeting requires knowing the user, and privacy advocates are very concerned about such developments.

Setting aside such concerns, the fact is that this purchase finally gives Google a place in online display ads - which is good news for them and bad news for their competitors.

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Tuesday, March 11, 2008 7:46:41 PM UTC

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Is Target Too Aggressive with Credit? (TGT)

Target Corporation (NYSE: TGT) may be a little too loose with its money after it ended the fourth quarter with $8.62 billion in outstanding loans on its consumer credit card division. The attitude of invincibility has many analysts and investors worried at a time when other credit card issuers like American Express (NYSE: AXP) are suffering from rising defaults. However, others argue that private label cards won’t follow the same trends as pure-play credit card companies. So, are these concerns legitimate or simply the product of an overzealous analyst?

Target is one of the only retailers that is actually expanding its private label credit card business during these tough economic conditions. The company’s $8.62 billion in outstanding loans is up 29% from its $6.71 billion outstanding a year earlier. Worse, Target relies heavily on the division to drive revenues with $103 million of its $128 million in earnings last year coming from credit cards. These issues have many analysts worried that the retailer has taken a far too aggressive stance during a tough economic time period.

Many investors and analysts are concerned that the high lagged loss rate may mean that the company relaxed its underwriting standards too much as it pushed many of its private-label cardholders to Target Visa cards with much greater lines of credit. As a result, many are predicting the company’s loss rate associated with its credit card division to be in excess of 8% for the year. Meanwhile, the company’s high growth rate in the past makes it difficult to see any deterioration in credit that has already happened.

Target officials, however, dismissed these claims as simply unwarranted. Chief Financial Officer Douglas Scovanner told the Wall Street Journal that the growth in the credit card portfolio is absolutely not a function of a loosening of credit standards or a lowering of credit quality in their portfolio. The executive also noted that he expects the company report credit losses on about 7% of its loans this year, which is up from 5.9% in the last fiscal year - but hardly a catastrophe.

In the end, these concerns are certainly warranted given Target’s significantly worse creditworthiness and default rates. However, the company has already forecasted a 7% loss rate that should account for most of these expected losses. The accurate estimate remains to be seen, but this is definitely a situation worth watching given Target’s huge reliance on its credit card division for earnings growth!