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Thursday, April 8, 2010

Retail and Manufacturing Profits Recovering Smartly - Surpised?

Retailers posted strong same-store-sales ("SSS") results versus March of 2009 when the world was essentially stopped. Please see this AP article for more: Shoppers hand retailers a basket of Easter cash. We're not too surprised by the results, which benefit from easy Y/Y comparisons and are consistent with earlier signs of strength shared in our post on increased demand for cruises and our earlier commentary on retail/railroads.

For a view of historic 2005-2009 quarterly after tax profits for "large retailers", let's turn to charts provided by the U.S. Census Bureau:
And, "large manufacturers":
Both charts reveal solid profit recoveries and, in our view, confirm the following: despite overarching economic concerns about government debt, higher taxes, retirement savings, and [you name the risk], Americans simply can't help but spend money. Our consumer-oriented culture is ingrained and, increasingly, spreading to all corners of the world.

This trend largely explains our interest in still attractively priced container shipping companies Seaspan (SSW) and Global Ship Lease (GSL). Here's another headline from The Journal of Commerce that supports shipping and economic recovery (e.g. illustrated by the retail figures):
  • Freight Shipping Reaches 18-Month High
  • Freight shipping in the United States shot up to its highest level in nearly a year-and-a-half in March, signaling a surge in international shipping had reached U.S. networks, according to a key barometer of the domestic economy released Monday.
On the direct retail side, we recently added to our 1-800-Flowers.com and Bidz.com positions. Both companies have established franchises but remain out of favor as the Market worries about the aforementioned risks. Still, somehow, most retailers appear to climbing out of the abyss just fine, with significantly improved valuations to boot. We don't expect 1-800-Flowers.com's 15-20% free cash flow yield to current buyers to last forever.

Finally, we saw the following headline the other week:
You think? Of course, we suppose the analyst is taking a stand against those nagging, worrisome risk factors. Meanwhile, shares of most hotel companies are already up 3, 4, 5x from the lows of one year ago. What does this analyst like? Everything!
  • "Attie maintained his sector overweight position and "Buy" ratings on Marriott International Inc., Starwood Hotels & Resorts Worldwide Inc., Hyatt Hotels Corp., LaSalle Hotel Properties and Choice Hotels International Inc."
We can't comment on all of these companies, yet we can say that his "buy everything" call is not differentiating and seemingly dismissive of valuation discipline. Risky, in our view, and not our style.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SSW, GSL, BIDZ, FLWS.

© 2010 Jeffrey Walkenhorst
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  1. Hi - a comment and a question.

    First, thanks for sharing your thoughts. Really good stuff.

    Second, I'm curious if there's a filtering process you went through that resulted in SSW/GSL (container ships) vs. dry bulk vs. tankers. Of course, if that's the Walkenhorst "secret sauce," no need to divulge!


  2. Hi Anonymous,

    Thanks for stopping by and for your kind words.

    No special filtering process other than a preference for stable business models with solid forward visibility (esp vis a vis shipping companies with limited lease coverage and, therefore, exposure to spot market). This, plus the fact that the stocks were thrown out with all of the other shippers, attracted me to SSW and GSL last summer. In addition, SSW has significant insider support, with substantial incremental buying by the Washington family last August -


    Large insider buying coupled with a sound business model offered by the Market at a large discount to a reasonable estimate of fair value gave me ample comfort to build a position in SSW. Per my earlier posts, I think it's unlikely that SSW will trade at 3-4 times distributable cash flow in 2012 and think 8-10 times is more reasonable, putting shares at $24-30 in two years (or before if the Market begins to appreciate the stable cash flow). It's too bad the prices paid for previously ordered newbuilds turned out to be much higher than current levels, yet so long as charter agreements are honored, the model still works.

    I will admit that I'm keeping an eye on the other sub sectors and may add small exposure in this area. However, the sizable order book remains a key risk, esp since cancellations/deferrals may simply be rolled forward.

    Hope this helps.



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