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Thursday, July 29, 2010

The Value of the Mediasite Franchise? First, Many Firms Could Clearly Benefit; Second, Ask Massey University and Others Around Globe

Per our mention last weekend, our follow-up post on PetMed Express (PETS) is forthcoming. However, we decided to first write on our micro-cap, late-stage-venture-capital-like holding, Sonic Foundry (SOFO, $7.68), prior to results next Tuesday.

Nonetheless, until just the other day, we honestly weren't sure what to write. Why? Well, we feel like we've pretty much covered the bases on this company over the past year, ranging from:
  • (note: all per share figures in posts prior to 11/03/09 are pre-1:10 reverse split)
So, we've shared our analysis in great detail (including at least a few other posts not listed above). Why have we supported such a small company when, to-date, our investment has represented a sizable opportunity cost and technology companies often deliver poor total returns relative to "old economy" type companies (e.g. see research included in Jeremy Siegel's The Future for Investors)? A handful of reasons, including:
  1. We support any company we believe in, especially when we're an owner and see a meaningful discount to our estimate of intrinsic value with mitigated risk factors.
  2. Mediasite addresses a clearly defined market need and makes life easier (better) for a large, growing addressable market with favorable long-term trends (e.g. video everywhere).
  3. Customers love the product and many keep buying more.
  4. Market leadership position with scale and awareness.
  5. Positive internal morale - our impression is that employees are united around Sonic Foundry's vision: "We live by two main tenets: first, don’t change the way presenters present and second, get this recorded knowledge to the audience as quickly and as easily as possible."
  6. Per prior posts, numerous data points imply that the Mediasite franchise is real and expanding.
OKAY, but what to write this time? We could share recent Mediasite catalogs and presentations:
Or, other news from Sonic Foundry and various industry sources. BUT, no need to rehash what's already out there....

Or, as relayed in our Who on Earth Needs Mediasite? post (January), we could again point out that countless Webcasting companies and even Nasdaq's (NDAQ) Shareholder.com unit need Mediasite, OR that simply more companies need Mediasite to broadcast/capture corporate events. Today's Microsoft (MSFT) Analyst Meeting was Webcast live by Shareholder.com -- video only, no synchronized slides (slides available via separate download):

The Shareholder.com approach here is to shift the active video box (other "boxes" are only still images) between the presenter and slide/other content -- below, note the image that replaced the speaker in the upper left quadrant box (another note: we manually shifted around the speaker bios in the lower right quadrant - these are static no matter who is presenting):

Why do Shareholder.com and other Webcast platforms NOT include automatically synchronized slide/other content like Mediasite? Because the task is not as easy as Mediaste makes it look, which is why Sonic Foundry holds two issued patents with another four pending. Recall that the core Mediasite patent covers the following:
  • "The Mediasite patent covers a production method and system involving the capture, indexing and synchronization of RGB-based content. The captured content can then be sent over a network, such as the Internet, and viewed by others whenever they want. The patented technology allows a person to give a presentation in an office meeting, a classroom or at a conference, while the technology synchronizes what the presenter says with visual aids, and instantly streams both over the Internet."
Given the obvious shortcoming of alternative solutions, another question naturally follows: why would ANY customer NOT use Mediasite for Webcasting?

The news this week of Clifford Chance's selection of Mediasite to connect 29 offices in 20 countries also hits on key reasons for adoption. Clifford Chance, a law firm with 3,200 "legal advisors," commented in the press release:
  • "During our selection process, which was carried out with key business sponsors, procurement and technology teams, we discovered that Mediasite definitely offered the cleanest presentation and online delivery, and best met all our requirements."
  • "Our quarterly employee address is a good example. In the old days, if we had to edit the tape of the videoconference, it would take a minimum of five days to turn around the content. Now we publish it 15 to 20 minutes after the event. Even better, we can do it in real time as well, reaching out to all our offices globally."
  • "With Mediasite, we were able to create a workflow so that IT staff doesn't need to get involved in the publishing of content. We provide the Mediasite webcasting platform and presenters do what they want, when they want. We give them some guidelines, templates and other professional support, but it's their content."
  • "One of the key benefits we wanted to achieve was to centralize all of our video content which is created around the world, and make it available to our global staff and external audience, on-demand or in real-time. That's actually quite a good success story for Mediasite."
BUT, we've digressed.... SO, what did we see the other day that provided especially desirable fodder? A Re-Tweet by Mediasite of a Tweet from Matt Alexander:
  • mediasite Congrats! RT @mattalexandernz: Wahoo! Just topped 50,000 views of our Mediasite content. 20,000 so far for 2010.
50 thousand views? AND, 20 thousand year-to-date in 2010? Sounds pretty solid. Now, we're on to something. Let's dig deeper.

Who is Matt Alexander? He works Information Technology at Massey University in New Zealand. What is Massey University? From Wikipedia, we have:
  • Massey University (Māori: Te Kunenga ki Pūrehuroa) is one of New Zealand's largest universities with approximately 36,000 students. The University has campuses in Palmerston North (sites at Turitea and Hokowhitu), Wellington (in the suburb of Mount Cook) and Auckland (at Albany). In addition, Massey offers most of its degrees extramurally within New Zealand and internationally. It has the nation's largest business college. Research is undertaken on all three campuses.
36,000 students with several campuses = large university.

Let's search for Mediasite + Massey - we find a page dedicated to the solution at the school with a summary schematic of how Mediasite works:
Ah, we then further see this information:
  • Massey University has won the Excellence in Education Award for outstanding achievement in enhancing learning and outreach through rich media at the Mediasite user conference in the United States. Click here to view the winning award submission or the Massey News item.
From the school's press release:
  • "Mediasite technology has been used by Massey for high profile initiatives across the University and collaborative projects with other universities, such as Manu Ao, the Massey-led inter-university Maori academy for academic and professional advancement, and for a range of other valuable projects, such as forming links with other organisations in agriculture, education and across industry sectors."
Finally, we watch Massey's video submission (click here or above link) to hear first-hand about the university's use of Mediasite and future roadmap.

The best insights always come from customers. In this case, readily available information from multiple sources implies that Massey is not alone in lauding Mediasite and making the solution a central part of everyday life for students, professors, researchers, and numerous others. Importantly, this trend is global and not limited to any one country or region.

Thus, we continue to believe the value of the Mediasite franchise remains significantly under-appreciated by the Market. Per our prior posts, estimated replacement cost and private market value suggest fair values at least several multiples of Sonic Foundry's current valuation. Ongoing M&A activity in adjacent spaces -- including BlackBoard's recent acquisition of collaboration companies Elluminate and Wimba at approximately four times 2011E revenue -- provide current reference points for a mid $20s private market valuation of Sonic Foundry.

That said, the value for any company in the eye of the beholder (e.g. fundamental analyst) is often quite different from that awarded by the Market. Right now, with an enterprise value of approximately $33 million (assuming fully diluted shares of 4.5 million and net cash of $1.7 million), the Market places little value on the company.

How might this change? Accelerating revenue growth and positive earnings that lends visibility into a third, critical valuation method: earnings power. Even with school budget risks, we're optimistic that Sonic Foundry's June quarter report next Tuesday will prove a positive catalyst, moving us past the deja vu of last quarter. We shall soon see if seemingly favorable end-market trends prevail and support our franchise thesis.

Addendum - more from Twitter, in this case, the University of Florida and North Carolina State University:
  • mediasite Wow - kudos! RT @robgrau: We hit 200,000 #Mediasite views for 2010 today! That matches last year's total w/ 5 months to go!
We suspect other schools are seeing similar trends.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SOFO.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Tuesday, July 27, 2010

Seaspan Raises Dividend 25% -- Room for More as Fleet (& Cash Flow) Keeps Growing into 2011 and 2012

We received good news from Seaspan (SSW) today: the company is raising it's quarterly divided 25% to 12.5 cents/share from 10.0 cents/share for an implied annual dividend of 50 cents. The move is consistent with our prior discussion of positive shipping news and the stable business models of Seaspan and Global Ship Lease (GSL), our other holding in the sector.

Management commentary from Seaspan's press release:
  • Gerry Wang, Chief Executive Officer of Seaspan, stated, "We are pleased to increase our second quarter dividend by 25% due to our increasing cash flows generated through the strength of our business model and the significantly improved container shipping industry fundamentals. We continue our commitment to capitalize on additional growth opportunities that meet our overall strategic criteria as the long-term outlook for the industry is favorable. Over the past 18 months, we have strengthened our financial flexibility and capital structure and look forward to the delivery of 16 remaining newbuilding vessels that will be on long-term charters to COSCO of China and K-Line of Japan."
Per our earlier posts, we expect to win with Seaspan and Global Ship lease two ways: (1) potential multiple expansion as a slow global recovery continues and (2) potential dividend increases in 2011 or 2012 (reinstatement for GSL). Recall that Seaspan's annual payout peaked at $1.90 per share in 2008 prior to the financial crisis and Seaspan's subsequent preferred financing (dilutive but necessary) to fund previously contracted new vessel builds.

With Seaspan, today's news comes ahead of our expected 2011 timing and we note that the current payout remains well below Seaspan's growing stream of distributable cash flow (which we put at approximately $3.00 per share in 2012 on a fully diluted basis). We expect Seaspan will retain a portion of the estimated 2012 cash flow for debt reduction and/or to purchase new ships, yet the cash flow should leave ample cushion for sizable future dividend increases. As this occurs, we continue to believe it is unlikely that Seaspan's equity will remain at an implied 3-4 times 2012E distributable cash flow.

One more thing: Seaspan isn't alone in increasing its payout. Ship Finance International Limited (SFL) announced an increase to 33 cents/share per quarter ($1.32 annualized) on 5/20 from 30 cents/share and, yesterday, Navios Maritime Partners L.P. (NMM) announced a 1.2% increase in cash distributions to 42 cents per unit ($1.68 annualized). Relatively small increases, but increases nonetheless.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SSW, GSL.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Saturday, July 24, 2010

More Favorable Earnings Reports, including EBAY; One Exception: PetMed Express (PETS) on Company Specific Risks

Earnings reports over the past week seem to support our view that fundamentals across multiple sectors are stable to improving, as discussed in our post last weekend, Psychology Remains Fickle as The Big Bad Wolf Ignores Fundamentals.

In that post, we shared points from a conversation with a friend and former colleague regarding the current market environment. He liked our post, but commented:
  • "One more thing to think about is how street expectations for 2011 have been ratcheted up....for the S&P 500, the number is $90....This is not possible if you do a sector by sector evaluation of earnings......The question one must ask is if stocks can move higher in the wake of negative revisions over next three quarters.....Comparisons are getting much tougher and foreign exchange are also much more of a headwind...."
Fair point from an overall market perspective, but one that we don't have time to address today. For those interested, here's a 1960-2009 S&P Earnings History table from NYU and S&P index data can be found here.

For now, we keep things simple: even if growth is slowing, we're still growing and, ergo, things are getting better. To illustrate, we include another snapshot of headlines from the WSJ on Saturday 7/24 (click to enlarge):

As with the news we shared last Saturday, the reports are mostly positive. Even Amazon (AMZN) -- a negative headline above -- continues to post incredibly rapid growth, with trailing twelve month revenue up 38% Y/Y on an FX neutral basis (from the company's 2Q earnings deck):
Still, Amazon missed rosy Wall Street bottom-line expectations and the high-multiple stock temporarily retreated -- the perils of a high valuation, which we've discussed previously. Netflix (NFLX), also a great franchise, suffered a similar fate.

In other earnings news around our own holdings, eBay (EBAY) delivered the goods. Our view that eBay Remains a Powerhouse stands. Here's a revenue snapshot:

Free cash flow:


Some Wall Street analysts and other investors continue to question the franchise, but we think they miss the forest through the trees: eBay is a household name that addresses multiple large markets and should nicely compound earnings over the medium to long term, all offered at a reasonable multiple (11 times trailing earnings). PayPal is the growth engine while the Marketplaces segment is the cash cow that isn't going anywhere anytime soon (and, hopefully, will deliver improved growth). Even if shares take a pause, the stock had a solid run over the past year. All the while, cash should keep piling up on the balance sheet and allow for reinvestment, acquisitions, debt reduction (*no debt at present), share buyback, or a dividend. As with our shipping companies, we sleep well owning eBay and would buy more at current levels.

Meanwhile, PetMed Express (PETS) posted poor results and brought us to rethink our positive stance as a competitive marketplace clouds the outlook. For the time being, we move to the sidelines and are recoiling our positive thesis as risk factors raise questions as to whether -- in Charlie Munger style (per our initial post one year ago) -- we can sit back, relax and watch net asset value per share grow. We'll explain our caution in an upcoming post.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long EBAY.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Tuesday, July 20, 2010

Energy Demand and China: One Picture is Worth a Thousand Words

According to preliminary calculations from International Energy Agency (IEA), China surpassed the U.S. as "the world's largest energy user." Multiple media outlets covered the story, including the WSJ:
  • China Tops U.S. in Energy Use: China has passed the U.S. to become the world's biggest energy consumer, a milestone that reflects both China's decades-long burst of economic growth and its rapidly expanding clout as an industrial giant.
Bloomberg Businessweek also covered the story, including skepticism from Chinese authorities around IEA data.

Here is the meat of the IEA press release:
  • IEA calculations based on preliminary data show that China has now overtaken the United States to become the world's largest energy user. China's rise to the top ranking was faster than expected as it was much less affected by the global financial crisis than the United States.
  • For those who have been following energy consumption trends closely, this does not come as a surprise. What is more important is the phenomenal growth in demand that has taken place in China over the last decade; also prospects for future growth still remain incredibly strong. Since 2000, China’s energy demand has doubled, yet on a per capita basis it is still only around one-third of the OECD average. Prospects for further growth are very strong considering the country’s low per-capita consumption level and the fact that China is the most populous nation on the planet, with more than 1.3 billion people.
  • China’s demand today would be even higher still if the government had not made such progress in reducing the energy intensity (the energy input per dollar of output) of its economy. It has also very quickly become one of the world’s leaders in renewable energy, particularly wind power and solar energy, and paved the way for a big expansion of nuclear power.
The IEA release includes the below telling graph (very interesting, but this is NOT our "one picture"):

Here's one more tid bit from an AP article with commentary from Peabody Energy (BTU) regarding China's demand for coal:
  • China also has just announced a $30 billion investment in the nation's transmission grid system to further expand electricity availability. China's power demand growth in June was double-digit again, and year-to-date generation is up a robust 19 percent.
How can we quickly understand what's happening in China with respect to energy demand and potential impacts on global commodities/trade?

We can again look to the shipping sector, but this time to drybulk sector. Navios Maritime Holdings (NM), a company we've been tracking, included the below slide in a March investor presentation (click to enlarge):

We think this "picture" is worth a thousand words and, therefore, won't add too much more, aside from answering the next question that naturally follows from the picture: where is all of this coal coming from and which countries are coal rich?

Thanks to Wikipedia we have the following on "coal production trends" -- coal reserves:

AND, production and exports by country (click to enlarge):

Finally, for good measure, we'll throw in one more slide from the Navios deck:

As we conveyed in our "Big Bad Wolf" post last weekend, we think the Chinese train left the station (quite some time ago) and expect continued development to bring incremental demand for imports from the U.S., Europe, and many other regions. This should be support global GDP growth, while raising questions for the global environment (a whole other topic). One caveat: as some observers point out, we acknowledge that some areas of the Chinese economy -- such as real estate -- are arguably overheated and present some risk to China's growth profile.

As a brief aside, the IEA Web site has a plethora of helpful energy data and information for those interested. We used some IEA data in our Alternative Energy presentation from last September.

Happy investing,

Jeffrey Walkenhorst

Disclosure: none.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Saturday, July 17, 2010

Psychology Remains Fickle as The Big Bad Wolf Ignores Fundamentals

We're sorry to keep coming back to the economy and general media headlines, yet we can't help but provide our two cents.

We know there's much to worry about and have covered some of this before: weak job market, weak real estate market, uncertainty over government regulation, mounting fiscal debt and deficits, higher taxes that will squeeze citizens and corporations alike, and on, and on, and on.....

With the possible exception of recent regulatory changes, ALL of these concerns aren't new news, but the Market wants to fixate on them at present and countless pundits perpetuate a wall of worry. The shifting sentiment reminds us of something Wilbur Ross said in a Fortune interview back in March (note title: "Mr. Distress is Ready to Buy"):
  • "For example, people suddenly decide Greece is the problem, and whack, the market is down 10%. If weeks from now people decide California is the problem, markets will move again. Everyone has known for over a year that both places are troubled. Why do we care now? How do we know that the problems of Greece or rescuing that country will make a difference in the economic landscape one way or the other?"
Ah, how fickle Market psychology can be. In discussing current conditions with a friend and former colleague who's now an equity analyst at a large corporate pension fund, he reminded us that "no one cares that second quarter results will be good, the market is a discounting mechanism -- everyone is worried about the outlook." Okay, fair point - higher equity valuations depend on a growing stream of forward earnings (more specifically, free cash flow).

Let's explore this further with a simple sampling of earnings headlines from the WSJ. However, before looking at fundamental-oriented headlines, let's look at the current, number three headline (front and center) as of Friday 7:45pm EST:
  • Stocks Tumble as Optimism Fades - A double dose of discouraging numbers from corporate earnings and a consumer-sentiment gauge pushed the Dow down 261.41 points, or 2.5%, to 10097.90.
Now, let's quickly review which companies are cited in this article as posting "discouraging numbers": Bank of America (BAC), Citigroup (C), General Electric (GE), and Google (GOOG).

Alright, despite Citigroup beating earnings expectations, seeing fewer charge-offs, and reducing loss reserves (see this WSJ article), maybe the banks are wrestling with a slow/no growth environment (partially on more stringent, self-imposed lending practices = good thing). Actually sounds pretty positive; could be worse.

As for Bank of America, we'll forget about the following Dow Jones headline from 7:42 am Friday morning:
That said, we understand that new regulatory burdens may take a large bite of revenue and earnings.... NOT so good and possibly a meaningful cost not only on BofA but on Americans at large. On this topic, our friend noted the multiplier effect, as in lower revenue and earnings for an entire economic sector may result in reduced consumption (and investment) by a factor many times over the direct corporate expense. Higher taxes are also a culprit with regard to the multiplier effect.

Next, it's true that GE's revenue was down slightly Y/Y, although we could note that this global conglomerate remains largely a cyclical, industrial company despite owning NBC Universal and GE Capital. THUS, we might expect GE to lag a recovery and investors should focus more on new orders rather than trailing sales figures. In this regard, here's what was relayed in the company's press release:
  • "GE's economic environment continues to improve," GE Chairman and CEO Jeff Immelt said, citing growth in orders, margins and earnings amid other encouraging signs in the quarter. "Equipment orders increased 17%, including 20% growth in the Energy Infrastructure segment and 14% at Technology Infrastructure. Oil & Gas and Healthcare orders were particular bright spots and helped hold total company orders backlog roughly flat, excluding the impact of foreign exchange.
On the conference call, CEO Immelt opened with this (courtesy of SeekingAlpha):
  • Just at the outset, I'd say I think the GE team had a really great quarter. Our environment continues to improve, media buying was strong, rail loadings were positive, revenue passenger miles were positive, losses have declined and credit demand is up, and equipment orders were positive. But we are still cautious in a few areas. We are working through a difficult commercial real estate cycle. After many quarters of decline, demand for electricity finally rebounded in the second quarter and we think that's encouraging. And as many people have written, we think this is a multi-speed recovery. So it's going to – the economy is going to strengthen at different paces around the world.

AND, toward the end of the prepared remarks:

  • We have a very strong balance sheet with consolidated cash of $74 billion. You go down the walk, you see lots of free cash flow, which is a big part of the GE business model. It's just lots of cash available for capital allocation as we look at the year. So we continue to build the cash balance. We are on track for CFOA for the year. And I think the cash story and the balance sheet strengthening story is a very positive story for GE and our investors.

Finally, on the European crisis:

  • As Keith said, we had a lot of chance to talk to people. I would say while governments are adjusting, the companies are partners that we work with across Europe are all continuing to invest. Lot of them has export franchises. And so there just seems to be a little bit of a disconnect between what has to happen broadly from a macro standpoint and where the individual companies are that we are working with. So as Keith said, we just don't see a big systemic issue coming out of Europe given what we see today.

To summarize: (1) flat orders overall, but strong new orders in certain segments and mixed growth across various markets (to be expected as the whole world can't necessarily boom at once), (2) giant cash flow and cash on balance sheet (like the rest of corporate America and PE/VC funds), and (3) scary headlines related to Europe are disconnected from corporate investment/growth plans. All in all, not too bad.

AND, what about Google (GOOG)? We know why the Market was upset: flat Q/Q revenue growth and a bottom-line miss on higher operating expenses. BUT, from a How's the Economy Doing standpoint, let's consider that revenue increased 24% Y/Y -- impressive for any company, especially now -- and that Google is hiring more employees. The company is using it's war chest of cash to fund new initiatives that may well lead to even more jobs and other innovations that spur the economy. As an aside, we tweeted
an interesting perspective from Bill Gurley of Benchmark Capital (click for article) on why Google trades at less than 20 times forward earnings rather than 30 times: it's business model is simply "too good."

WE ALMOST FORGOT: back to that simple sampling of earnings headlines from the WSJ (click to enlarge - also captured Friday evening):

For what it's worth, we include 14 headlines exactly in the order we captured them from the WSJ Friday evening (starting with left column moving to right). Let's split three ways:

  • Positive bias: Gannett (GCI), Schwab (SCHW), Daimler, Sony Ericsson, Europe Earnings, J.P. Morgan (JPM), AMD (AMD), J.B. Hunt (JBHT), Novartis (NVS)
  • Mixed: Mattel (MAT), GE, banks (including J.P. Morgan), IBM (IBM - tbd Monday)
  • Negative bias: none.

Count 'em. Nine positive, several mixed, and zero -- zippo -- in the negative category. We could even add several more positive headlines, including results and raised guidance from WW Grainger (GWW), a company that "offers over 900,000 products and sells almost everything from abrasives to refrigerants to vacuum valves" (as noted in Reuters article - link above).

We understand that Market psychology is a significant factor to the extent that it can influence real economic behavior, but ARE WE MISSING SOMETHING? OR, are the front page headlines somehow fixated on the flavor of the day, week, or month, feeding into the negative frenzy?

One thing is certain: from the above sampling of large companies, we truly don't see "discouraging numbers from corporate earnings." Stable to better results are a positive, in our book.

We know the outlook remains critical, yet ample evidence of current momentum across multiple sectors -- including global transportation/trade that feeds the world economy -- suggests continued growth that should also benefit U.S. companies. More earnings reports next week will provide additional color, possibly providing a life line of support to fickle psychology.

One other topic: we're always amazed why the Market frets so much over a reduction in China's GDP growth to 10% from 11-12%. No matter what the figure was, is, or will be, China has the political drive and balance sheet to keep funding long-tailed projects well into this decade and probably beyond. As this continues, Chinese consumption grows and the country imports more from the U.S., Europe, et al. As our friend says, "China wants to be number one," which -- admittedly -- has positive and potentially negative ramifications for us. Fortunately, we've much to contribute to China's growth engine. What did GE say about China during call Q&A?

  • Jeff Immelt: I showed a chart at EPG on China, which I think really reflects our perspective, which is it’s a extremely big and strategic market. We’ve got a big footprint of about $6 billion and we plan to grow at double-digits, that our strategy will be multifaceted, we will have businesses that will completely grow in a significant way like health care.

Here's the slide from the 5/19/10 Electrical Products Group (EPG) Conference:

Bottom-line from all of the above: to lose sleep and increase blood pressure, focus on the front page. To rest well (or at least easier), focus on fundamental results highlighted on the side/back page. Fundamentals are what matter most and, ultimately, drive the economy and shareholder value.

Happy investing,

Jeffrey Walkenhorst

Disclosure: none.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Thursday, July 15, 2010

Look at the Bright Side of Retail Sales: STILL UP Y/Y and Don't Forget Recent Commentary from Many Areas

The media had a field day focusing on the month over month decline in "ADVANCE MONTHLY SALES FOR RETAIL TRADE AND FOOD SERVICES" released by the Commerce Department yesterday (please see Economic Indicators . Gov for this and more).
Dim retail sales hurt economy as Fed sees weakness- AP
Inventories Rise as Retail Sales Sag - WSJ

It's true that a sequential M/M increase would be preferable and that sales remain well below the 2008 peak -- from the WSJ article:

Yet, we remain perplexed as to why so few people seem to focus on the Y/Y increase, even if we all know we're up again easy Y/Y comparisons that will soon face more difficult comps. We need to look at the historical figures over many years, but we suspect there may also be some negative impact from summer seasonality (e.g. less shopping, more vacations and leisure time, unless the latter normally offsets the former -- we're not sure). Here's the primary text from the government release (emphasis added):
  • The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $360.2 billion, a decrease of 0.5 percent (±0.5%)* from the previous month, but 4.8 percent (±0.7%) above June 2009. Total sales for the April through June 2010 period were up 6.8 percent (±0.3%) from the same period a year ago. The April to May 2010 percent change was revised from -1.2 percent (±0.5%) to -1.1 percent (±0.2%).
  • Retail trade sales were down 0.6 percent (±0.5%) from May 2010, but 5.0 percent (±0.7%) above last year. Nonstore retailers sales were up 12.1 percent (±2.1%) from June 2009 and gasoline stations sales were up 8.8 percent (±1.8%) from last year.
A chart from the release shows negative auto performance particularly impacted the M/M figures while all areas show Y/Y increases:
We know things aren't great in a number of areas (real estate, per our mention in prior posts) and that the consumer remains strapped, yet we think Y/Y growth is being overlooked. In fact, looking at the full report, all but one area -- department stores -- saw Y/Y growth for the first six months of 2010 versus 2009. We include a partial view here (click to enlarge or see site for full detail):

At least we're seeing Y/Y improvement -- growth is better than the alternative, even if from a low base. Also, remember that we're seeing other positive developments in global trade and manufacturing, with shipping activity stateside implying renewed consumption in many areas. Prior posts around this topic -
From these and other posts, don't forget about commentary from Lincoln Electric (LECO), Baldor Electric (BEZ), Pier One Imports (PIR), and Select Comfort (SCSS).

Finally, if still not convinced, we recommend reading the following 6/18 post from Jeff Matthews Is Not Making This Up, a blog we frequent:
He includes a range of commentary around what's happening in Europe, on the hiring front, and across different sectors. It's all pretty consistent with what we've been seeing and hearing.

Happy investing,

Jeffrey Walkenhorst

Disclosure: none.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Wednesday, July 14, 2010

Perspective on Consumer Trends Around the World from Estee Lauder and Harry Winston

We happened to catch William Lauder, Estee Lauder (EL) Executive Chairman on CNBC a few weeks back, on Thursday 6/24/10. He provided insight on global consumer trends, noting that the consumer is "very local and very different everywhere." Some highlights:
  • Europe - "Consumer seems to be spending but not quite with robust flavor."
  • U.S. - "American consumer is very binary, either in then out. American consumer is back, especially the slightly more affluent middle class consumer... back in meaningful way... Consumer seems to be back with certain level of confidence.... But, if given excuse, she will pull back."
  • China - "Consumer very confident. Attitude that this is going to get better... buying aggressively. We have a lot of confidence in greater China (including Hong Kong, Macau, Taiwan)...."
One minor comment - he mentions boom-time U.S. unemployment rate of 4% as pretty much normal historical full employment, but we would put the "normal" textbook rate at 5-6%. We include the video here:

His commentary is fairly consistent with that relayed by Harry Winston (HWD) regarding the luxury market at the company's recent annual shareholder meeting - from the slide deck:

We acquired shares of Harry Winston in late 2008 and early 2009 at a significant discount to net tangible book value (asset play), but recently reduced our exposure slightly to reallocate capital into current out of favor names. Nonetheless, we still sleep well owning Harry Winston based on normalized earnings power and diamonds as a store of value (beyond retail, the company owns an interest in a valuable Canadian diamond mine) - also from the annual meeting:

In addition to our remaining HWD position, we participate in the global retail market through our positions in eBay (EBAY) and Bidz (BIDZ). We also own Central European Distribution Corp. (CEDC) and Compania Cervecerias Unidas S.A. (CCU), although these alcohol/beverage companies aren't exactly retail. We've not previously covered these names at length, but may in future posts. Prior commentary on eBay and Bidz here:

eBay Remains Powerhouse - Enjoy the "Victory Lap" While it Lasts (April)

BIDZ - Execution Critical to Show/Realize Durable Earnings Power Like QVC/HSN; Risks Remain (March)

Happy investing,

Jeffrey Walkenhorst

Disclosure: long HWD, EBAY, BIDZ, CEDC, CCU.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Tuesday, July 13, 2010

Perspective on the Global Aircraft Leasing Market from Aircastle CEO + Fly Leasing (FLY)

In our 6/29 post, Stocks Zig, Fundamentals Zag? Psychology is Wild Card, we relayed a positive headline buried amidst mostly negative media headlines:

Global Air Cargo Tops Pre-Recession Levels
Global air cargo traffic soared 34.3 percent in May from a year ago and is now above pre-recession levels, the International Air Transport Association said.

CNBC covered this story last Friday, 7/9, by featuring Ron Wainshal, CEO of Aircastle (AYR). We include the CNBC video here:

Per our prior mention, we own shares of Fly Leasing (FLY), an Aircastle competitor.

The company recently changed its name to Fly Leasing from Babcock and Brown. The company is currently trading at approximately 2.5 times distributable cash flow, which we find extremely attractive given Fly's stable business model, relatively young aircraft fleet with high utilization, 8% dividend yield (less than a 20% payout ratio), and shareholder friendly management. We own Fly Leasing even though the company -- like our Seaspan (SSW) and Global Ship Lease (GSL) -- is a highly levered, asset heavy business. We will try to share more details in a future post.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long FLY, SSW, GSL.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Friday, July 9, 2010

Can't Pass Up Irreplaceable Assets: US Ecology and Casella Waste Systems

In May we wrote that we continue to track hazardous waste companies such as Clean Harbors (CLH) and US Ecology (ECOL), as well as solid waste services and recycling company Casella Waste Systems (CWST). We previously mentioned that we acquired shares of Casella last November and relayed additional color in February, including our presentation on Alternative Energy from last September.

Here, we share two things. First, we recently dipped our toe into
US Ecology, unable to resist a company with irreplaceable assets, a debt free balance sheet, a 5% plus dividend yield, and trading near a five year low with stabilizing fundamentals - from Yahoo! Finance (YHOO):

Second, below we share a wee bit more on Casella Waste Systems courtesy of a management presentation from an investor conference in early June: Bank of America Merrill Lynch 2010 SMID Conference. As a reminder, our summary thesis on CWST in September was as follows (still holds, except numbers have shifted around and are not updated below):
  • Casella Waste Systems (CWST) – share price is up 5x from March lows, yet well below a 52-week high of $14.49 last September; levered 4.8x TTM EBITDA, but multi-year investment cycle to expand landfill capacity (now ~30 years) and modernize treatment (gas-to-energy and sorting) are complete; management pulling levers to improve free cash flow and reduce debt (e.g. higher pricing, cost controls) despite challenged fundamentals; potential positive catalysts include bottom-line improvement from pricing initiatives and value recognition of North Eastern landfill assets; CWST trades at an EV/EBITDA of 5.4x and P/S of 0.12x compared to RSG at 9.6x and 1.6x, respectively.

That is, we own Casella Waste Systems as a levered asset play that should benefit from management's strategy to selectively reduce the asset base to repay debt incurred to expand capacity to support long-term waste fundamentals (CWST falls into our "Approach" Caveats Number One and Two). Current and expected U.S. population growth alone should lead to more garbage for Casella's landfills and recycling opportunities for the company.    

Slides from presentation - asset overview:

Improving fundamentals with stable margins:

Delevering plans:

Where would CWST trade assuming reversion to the mean?

With economic concerns again taking center stage, CWST is now back at $4.03 following a run to $5.00 and despite improved operating results and incremental progress with asset sales announced on 7/6/10. While we typically prefer lower debt levels and large, consistent free cash flow generation, we think the company is moving in the right direction and expect patient investors should see increased free cash flow over time. As this occurs, mean reversion is ever more likely, in our view.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long CWST, ECOL, YHOO.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Wednesday, July 7, 2010

Shipping News - Global Economy Better or Worse? You Be the Judge

We can't help but again share headlines from The Journal of Commerce to tell the story of what's really happening in the global economy. By and large, the good news keeps coming and it's not simply feel good, fluffy headlines, but news substantiated by hard figures that suggest global trade is healthy and increasing. This is inline with the global manufacturing expansion we mentioned the other day. Importantly, the news also touches the United States and implies that activity stateside is more vibrant than mainstream headlines reveal.

Following on earlier, positive headlines from the global shipping industry, here is the latest:

CMA CGM Sets Investor Deal Deadline 
CMA CGM plans to reach agreement with new investors over a stake in the ocean container carrier by the end of July, the company said as it unveiled sharply higher first quarter profit and revenue.

Container Shipping Rates to Hit Pre-Downturn Levels, Maersk Says 
Ocean container freight rates likely will return to levels reached before the global economic recession by the end of this year, according to Maersk Line.
Far East-U.S. Container Traffic Hit Record in June 
A shipping consultant estimated ocean container shipments from Asia to the U.S. at 1.23 million 20-foot equivalent units in June, a 32 percent increase on a year ago driven by Chinese exports.

TUI Hikes Hapag-Lloyd Profit Forecast 
TUI AG expects its 43.3 percent stake in Germany's biggest ocean carrier Hapag-Lloyd to generate higher profit than initially forecast due to a "notable" recovery in global container shipping.
Freight Index Jumps 9.1 Percent in June 
The closely watched Cass Freight Index for shipments grew 9.1 percent in June over the previous month, accelerating at a pace that contrasted with other slowing economic signals and reaching a new high for the recovery.
Hong Kong Airport Sets Freight Record 
Air freight exports out of Hong Kong soared 51.5 percent in May, pushing Hong Kong International Airport to what appears to be the busiest air cargo month in its history, according to figures released by the airport authority.

To be balanced, here's one negative headline (although if you read the article, it says "Despite this concern, Drewry increased its global demand growth projection for 2010 to 8.5 percent."):

Drewry Warns of Weaker Container Recovery 
The severe backlog of container shipments delayed by the lack of vessel space is hiding the fact that peak season demand may be less than forecast, according to Drewry Shipping Consultants' latest Container Forecaster.

We continue to sleep well with our container shipping companies Seaspan (SSW) and Global Ship Lease (GSL), both of which are offered by the Market at low multiples of earnings and distributable cash flow. As an example, GSL is currently trading at only 4.1 times annualized 1Q10 earnings and, in our view, the primary risk factor of a potential CMA CGM default (counter-party risk) continues to diminish.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SSW, GSL.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Tuesday, July 6, 2010

The Mobile Internet with Mary Meeker - Great Update on Mobile/Internet Trends from Last April

When it comes to stocks, we do our own research. However, we're not opposed consuming content from a plethora of informative sources. Here, we share a video presentation and slide deck delivered by Mary Meeker at Google Atmosphere (GOOG) on 4/12/10. Mary Meeker is a long-time "sell-side" analyst at Morgan Stanley who has a well-established research franchise and seasoned perspective. Her research is somewhat akin to our former bailiwick at Banc of America Securities.

With this post, as with our SIGMOD/PODS post last week, we again share insights into important happenings in tech-land. Mary Meeker's "The Mobile Internet" includes a tremendous amount of information on key trends in mobile and Internet computing that increasingly touch/impact all of us. For this reason, we share the content here.

Even if you're not interested in technology companies/stocks because the sector changes so rapidly -- as we've noted previously and Ms. Meeker also notes -- you might enjoy perusing the video presentation and slide deck. In this case, while the video was not captured with Sonic Foundry's Mediasite solution (SOFO), the YouTube delivery switches between speaker and slide capture more adeptly than our own attempt last January in our Which Way from Here? presentation.

A few key points:
  • "Mobile Internet is ramping faster than [the] Desktop Internet Did" (slides 7, 41) - one comment: we believe her ~85 million iPhone and iTouch users is cumulative, or "gross", units sold as reported by Apple (AAPL), not actual "net" users in the marketplace. "Net" users would be lower when adjusted for normal churn or disconnects -- even acknowleding that iPhone or iTouch users may be "stickier" than other types of users, some churn is normal course of business
  • "Social Networking [usage] greater Email Usage"
  • "Wealth Creation / Destruction is Material in New Computing Cycles"

Supporting presentation:


Happy investing,

Jeffrey Walkenhorst

Disclosure: long SOFO.

© 2010 Jeffrey Walkenhorst

Please see important Risk Factors & Disclaimer