Streetwise for Sunday Sept. 27, 2009

Streetwise

Lauren Rudd

Sunday, September 27, 2009

We Should Have Listened To Cicero

"The budget should be balanced; the treasury should be refilled; public debt should be reduced; and the arrogance of public officials should be controlled." -Cicero. 106-43 B.C.

Amazing, here we are over 2,000 years later and we still cannot get it right. But then old Cicero did not have to deal with Wall Street and the likes of American Insurance Group.

The possibility of a fourth revision to AIG's bailout has sent AIG's stock price upward once again. Former AIG CEO Maurice “Hank” Greenberg is lobbying Congress to cut the government’s stake in AIG from the current 80 percent and trim the interest on AIG's government loan, while extending its term.

AIG's total bailout package is now $182.5 billion. The rescue includes the government's purchase of billions of dollars of toxic AIG liabilities, along with an $80 billion loan. Now there is a true “cash for clunkers program.”

Greenberg, who ran AIG for 38 years, said he had agreed to help Robert Benmosche, who recently took over as AIG’s CEO, by giving Benmosche advice on how to turn AIG around. Benmosche said he is open to Mr. Greenberg’s efforts. Yet, there is considerable opinion that Greenberg orchestrated much of the risk that brought AIG down.

Greenberg was ousted from AIG in March 2005 after an auditor told the AIG board it couldn't "vouch for the company's numbers." Meanwhile, Greenberg has agreed to arbitration over a $4.3 billion lawsuit, technically won by Greenberg, and other financial matters in dispute between Greenberg and AIG. Now suddenly there is a growing relationship between Greenberg and Benmosche. Imagine that.

While vacationing at his palatial villa with 12 bathrooms overlooking the Adriatic, as he looks after his vineyards on the Peljesac Peninsula, Benmosche told Reuters that he is worried that his children would never accumulate tremendous wealth, so he needs to look after them. "Everything I'm doing, whether it is in New York or here, you will see, provides income." Benmosche also said that New York Attorney General Andrew Cuomo "Acted like a "criminal." Cuomo had sought details on AIG bonuses.

Despite the meteoric rise of AIG’s share price, consider taking AIG off your investment possibilities list. The company is a lot of puffery and little or no substance. While not as sexy, a better candidate is Staples. Posting sales in 2008 of $23 billion, Staples is the world’s largest office products company.

For its second quarter ended August 1, Staples’ sales increased 9 percent to $5.5 billion. Earnings per share were $0.13, as compared to $0.21 a year ago. However, excluding pre-tax integration and restructuring expenses of $30 million results in earnings of $0.16 per share.

While those numbers may not tickle your fancy, take note that Staples generated year-to-date free cash flow of $568 million after $130 million of capital expenditures, compared to free cash flow of $19 million for the same period in 2008.

Staples strong free cash flow enabled it to reduce debt by $256 million during the second quarter, while overall debt has been reduced by $1.5 billion since the acquisition of Corporate Express in July 2008.

Staples ended the second quarter with approximately $1.4 billion in liquidity, including $633 million in cash and cash equivalents and $765 million of available credit. As the economy improves, the demand for office supplies and equipment will increase proportionately and Staples earnings will likely follow suit.