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Tuesday, September 28, 2010

Weight Watchers (WTW): Plenty of Embedded Upside

In our Who's Driving the Bus? post the other week, we mentioned we'd come back to Weight Watchers (WTW) and 1-800-Flowers.com (FLWS) (click for prior FLWS/retail sector commentary). Here, we briefly touch on the former.

First, a brief bit on buy/sell decisions. When we run through our current portfolio holdings or evaluate a company for purchase or for sale, we always compare the market price to our estimate of fair market (or intrinsic) value. In this sense, we always maintain a view of potential upside or downside on a company by company basis. Then, in aggregate, we have a portfolio view of embedded upside for our long positions and embedded downside (=upside) for any short positions. All the while, we pay special attention to key risk factors that might impact our theses.

We continue to see significant embedded upside for certain holdings, including microcap Sonic Foundry (SOFO), our container shippers Seaspan (SSW) and Global Ship Lease (GSL), and -- if you've been following our recent Yahoo/Facebook posts -- Yahoo (YHOO).

Another holding where we see significant upside is Weight Watchers (WTW), which we first highlighted on CS$ in December of 2009 in Watching the World's Weight with Weight Watchers (WTW). Over the past year, we and our extended family have been buyers of the company in the mid- to high-$20 range.

Although short-term moves often mean very little, shares of Weight Watchers (WTW) are finally catching a bid. Potentially for this reason, the Street.com featured Weight Watchers CEO in a short clip on 9/25:

We're also not overly fazed by other weight loss remedies and believe cash flow will be sufficient to service and/or repay debt. Further, while earnings guidance and estimates for 2010 are slightly lower than our original forecast (from fall 2009) on increased operating expenses related to brand repositioning (see February's 4Q09 release for brief mention of reinvestment), we think earnings power remains intact and durable over the long-run. Accordingly, we continue to believe reasonable fair values are in the $40 range and could extend into the $50s if historical multiples are awarded to the company.

As a result, even with the recent upward move in the share price, we still see a meaningful margin of safety at current levels.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SOFO, SSW, GSL, YHOO, WTW.

© 2009 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Saturday, September 25, 2010

What's Facebook Worth? Is Yahoo or Facebook a Better Investment?

We continue to have a large backlog of topics to share on CS$. YET, we remain intrigued by the Market's disdain for Yahoo (YHOO) relative to the rising popularity of (and infatuation with) Facebook. For now, we continue with this theme. Interestingly, Bloomberg BusinessWeek's cover story this week is even about Facebook:
While we don't think Facebook's rapid growth is finished, it is worth noting that magazine cover stories often signal tops/bottoms. Research supports this conclusion - see Are Cover Stories Effective Contrarian Indicators? (abstract available, fee required for full report) or read Jeff Matthews' excellent 9/7 post, Here They Go Again: “The Death of Housing”.

Per our first post on Facebook (Game Over for Yahoo?), we too are now on Facebook and think highly of the site. We concur that the community platform is driving a shift in Internet/media consumption habits. As an example, set up a "fan page" for CommonStock$ense where -- as with our Twitter feed -- we sometimes share news or other items of interest more frequently than here on CS$.

BUT, does this mean we'd rather own or purchase a piece of Facebook today? OR, what if we could have co-invested alongside Microsoft (MSFT) in October 2007 when it purchased 1.6% of Facebook for $240 million, implying the widely reported enterprise value of $15 billion for Facebook at the time? The question assumes we are, or were, able to invest in Facebook.

We'll come back to this question. First, let's look at the social media sharing phenomena. The other week we Tweeted a popular Yahoo! headline, [Reggie] Bush forfeits Heisman, a slight variation from our normally business-oriented Tweets. We shared the news as part of our Yahoo/Facebook analysis and chose this story because we anticipated plenty of sharing via Facebook and Twitter, both of which are options at the top of the article. However, we also observed something strange:
  • 2.5 hours after Yahoo published the article: 726 Facebook shares and zero Tweets:
  • 6 hours after posting: 1,507 Facebook shares and zero Tweets:
  • Finally, 13 hours, 23 minutes after posting: 1,843 Facebook shares and zero Tweets:
Zero Tweets? Really? We thought this didn't make sense and that, perhaps, the Tweet button (from Tweetmeme.com) might not be working. SO, we clicked on it, and it worked just fine:

We then clicked Tweet and, sure enough, Tweetmeme.com Tweeted the story. BUT, for some reason, the Tweet counter on the Yahoo page didn't update. Apparently, we found a "broken" Tweet counter. So much for our sharing illustration. Alas, things don't always work perfectly on the Web (see also: Facebook Outage [on Thursday] was Biggest Ever via CNN).

Nonetheless, the Facebook counter worked and does show significant sharing of Yahoo content via Facebook. Also, fortunately the Tweet counter appears to be working fine for other Yahoo stories:

Where are we headed with this thread? Per the graphic we shared on 9/11, Facebook leads "sharing" and the self-perpetuating community appears evermore powerful. For this reason, sites like Yahoo, CNN.com, and many other sites now include the ability to shares articles via Facebook. Some even use the Facebook user login for comment posting.

No question, Facebook has done a fine job becoming fairly ubiquitous and it seemingly behooves other companies to enable content sharing. How has Facebook achieved its current, admirable market position? By sponsoring and enabling a large ecosystem of third party application developers -- we found this image on AllFacebook.com (please see link for larger, full image):

The developer community across all three of these platforms is as busy as ever, although Facebook has a nice lead over Apple's (AAPL) iPhone platform and Google's (GOOG) Android platform. In our view, all of the activity is positive for the economy as technological innovation and new areas alleviate concurrent creative destruction in "old media" sectors. New jobs are being created in technology, advertising/PR, management, etc., with a multiplier effect sweeping across all kinds of companies racing to incorporate Web-based services and social media into their business strategies (here and abroad). This is fantastic news and, per our prior posts, should mitigate fears that the sky is falling for the U.S.A.

NOW, let's get to back to our valuation question and investing. The title of the Bloomberg BusinessWeek cover story, Facebook Sells Your Friends, is true to what the company is working toward: monetization of it's half billion plus users. Here, we'll ignore privacy issues and how users feel about this effort, which represent important topics for consideration when evaluating the business model.

According to the article, estimated 2010 revenue is $1.4 billion, up from estimates of $600-700 million in 2009 (per other sources, including Mashable and Wikipedia). Clearly, this is tremendous growth and the company is finding ways to monetize its gigantic, growing traffic. Folks are happy in Silicon Valley and the euphoria is spreading throughout the Web-dom -- for reference, please see this 9/21 WSJ article:
However, remember that what matters to an owner of a business is NOT revenue but net income (and free cash flow), and the ability of the business model to sustainably grow this earnings stream over time (of course, we need growing revenue for the latter to materialize). THUS, the key question for Facebook is: how much revenue is advertising-based versus "pass through" back to developers/content providers? We're not sure, although the Mashable article cited above included some estimates:
  • Inside Facebook broke down Facebook’s estimated 2009 revenue into four key areas: brand advertising, Microsoft advertising, virtual goods and performance advertising.
  • The biggest income stream seems to have been performance advertising, which likely accounted for more than half of Facebook’s 2009 revenues at $350 million. Next was brand-based advertising, which accounted for an estimated $225 million in revenue. Microsoft advertising came in at $50 million and virtual goods income was only $10 million according to these numbers.
Based on this information, the lion's share is apparently advertising-based, although the estimated $10 million for virtual goods seems strikingly low -- perhaps "apps" are somehow captured in the other buckets? Aside from the mix question, the other major unknown is margin. BUT, let's envision a scenario:
  • Imagine Facebook reaches one billion users in one to two years and generates average revenue of $5 per user per year, generously above (2x) an implied $2.55 for 2010 ($1.4 billion divided by average 2010E users of 550 million). This brings us to annual gross revenue of $5.0 billion. If we assign a net margin range of 10-20% (anyone's guess - potentially too optimistic), we derive estimated net income of $500 million to $1.0 billion. This means Microsoft (MSFT) paid a healthy 15-30 times 2011-12E net income when it purchased 1.6% of Facebook back in October 2007.
Facebook is an amazing growth story. YET, forecasting is incredibly difficult, particularly in such a dynamic market such as the Internet. Further, per our simple example, Facebook's implied $15 billion valuation in 2007 already baked in significant future growth. Fortunately, for early investors and Microsoft, the company is, at least, growing into the 2007 valuation as adoption continues around the world.

STILL, we come back to what we shared the other day: we can buy a forlorn Yahoo at an implied FCF yield of 15% or only 6.6 times free cash flow (backing out Yahoo! Japan and Alibaba.com stakes, assuming no tax implications, and assigning NO value to the stake in the Alibaba Group).

We'll take this all day long, especially with significant embedded value in the Alibaba Group holding that should increase over time. We should mention that there is a wide range of values floating around for the Alibaba asset, with $7.5 billion midpoint per Reuters and almost double the implied $4.6 billion EV for the core Yahoo properties (per our prior analysis). Put another way, just like picking up 50 cent dollars, we are literally getting free assets when the values of all Yahoo parts are considered (actually, better than free - $4.6 less $7.5 = negative implied EV of $2.9 billion)! If this isn't the goal of investment research and investing, we're not sure what is. Whether or not Yahoo strives to monetize any of the hidden value in the immediate future or not (e.g. convert to cash for reinvestment elsewhere or other returns to shareholders), the value is there.

Given the head scratching public market discount, common sense would suggest that billions of private equity dollars looking for a home should be extremely interested in Yahoo, a leading franchise that generates fairly steady free cash flow. That said, a sizable control premium would be required to win the business.

MOREOVER, did we mention that comScore released August traffic data for the top 50 U.S. properties the other day? Yahoo was number one, slightly edging out Google as Fantasy Football season kicked in. From the release:
  • Top 50 Properties: Yahoo! Sites ranked as the #1 property in August with 179.0 million visitors, followed by Google Sites with 178.8 million and Microsoft Sites with 165.3 million. Viacom Digital jumped 7 positions in the ranking with 81.5 million visitors, while iVillage.com: The Womens Network also climbed 7 spots to 35.3 million visitors. Facebook.com was the number four property with 148,048 million visitors.
  • Sports Sites Hike as NFL Season Begins: With the start of the NFL season, traffic to Sports sites picked up during the month reaching 123.5 million visitors, a 5-percent gain versus July. Yahoo! Sports, known as a popular destination for fantasy football, ranked #1 in the category with 48.2 million visitors, representing a 23-percent increase from the prior month. FOXSports.com on MSN ranked second with 26.2 million visitors, followed by ESPN with 25.4 million visitors. NFL Internet Group doubled its audience versus July, grabbing the #4 spot with 19.5 million visitors, ranking as the top gaining property for the month.
AGAIN, we can purchase the leading U.S. Internet property at an implied 15% FCF yield plus very valuable hidden assets? Seems too good to be true... except, it's not.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long YHOO.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Wednesday, September 22, 2010

U.S. Ecology (ECOL): Insider Purchases Support Our View that Shares are Bargain

We were pleased to see insider purchases at U.S. Ecology (ECOL) - from Yahoo Finance (YHOO):

We purchased shares in July and family members have been recent buyers of ECOL on our recommendation. Prior commentary discusses our summary thesis on the company and a brief WSJ story, US Ecology Insiders Buy on a Dip, includes more details about the insider purchases. We continue to see current levels as attractive and insider purchases support this view.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long ECOL, YHOO.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Tuesday, September 21, 2010

Yahoo Addendum: Given the Discount, What's the Problem? Plus, Other Topics

As a follow-up to our Yahoo (YHOO) posts last week, we are relaying a few more musings drawn from reader comments and our responses to our subsequent post on SeekingAlpha.com of "Yahoo: Does Facebook Mean Game Over or Will Hidden Value Prevail?" Content is slightly modified below.

Question (paraphrased): given the incredible discount to the sum-of-the-parts (SOTP) value, why aren't institutional investors jumping all over shares of Yahoo?
  • Our response: Why the disconnect? We think the answer might be this simple: the "Market" likes consistent growth and near-term, positive catalysts (beating expectations), which (honestly) we all like if we're actual or prospective owners of a company. Earnings (and free cash flow) growth is what really drives share prices. See the performance of some of the Chinese Internet leaders, BIDU, SOHU, SNDA and, to a lesser extent, SINA. Or, look outside Internet-land at the long-term performance of companies such as DLB, ESRX, or HANS.
  • Until the Market begins to believe AND see (as seeing is believing for the Market) that Yahoo's management team can and will deliver on growth, margin, and ROIC targets, shares may continue to languish, especially when comScore (SCOR) traffic data implies "user engagement" is moving in the wrong direction. That said, this sum of the parts discount can't last forever and should correct in due course. Also, Yahoo's advanced global advertising platform may enable revenue growth even if publicly available/reported traffic figures are slightly negative (for all properties, no doubt with some up and some down on a channel by channel basis). After all, the display ad market should continue growing nicely for the foreseeable future. Yahoo is a leader in this category.
Comment: per NYTs and numerous other articles, CEO Carol Bartz is on record as saying the Alibaba position is not for sale.
  • Our response: The press has been working overtime on this one and the hubbub happened to correspond with our recent posts (first post re: Yahoo/Google/Facebook on Saturday 9/11)... If possible, amidst reported management tensions, we think it's SMART for Yahoo to HOLD onto the Alibaba position as the latter's value should continue to accrete alongside the growth of Alibaba.com, Alipay, Taubao and other assets.
Question: do you understand the search deal with Microsoft (MSFT)?
  • Our response: There are many facets to the search deal and time will tell how it ultimately works out, both operationally and financially. If we're not mistaken, management's high level perspective is that search is becoming more of a commodity, so why not outsource search and focus more on being a content/media company. Yet, even if search is a "commodity" (debatable), scale matters and partnering with Microsoft brings increased scale for both parties to compete against Google (~65% of the US market per comScore/SCOR). As part of the scale strategy, Yahoo will be buying ads for distribution on both Yahoo Search and Bing. Yahoo included a deck on search at its May Investor Day.
Finally, one additional general comment that we should have included in our earlier post:
  • In our back-of-the-envelope FCF analysis (using summary financials from Yahoo Finance) is that we did not consider any potential tax bills due from possible asset sales nor did we remove interest income from our run-rate FCF estimate (e.g. since we used implied FCF yield on EV rather than MC). BUT, our summary analysis still works for illustrative purposes. Our intention was to highlight the hidden value in Yahoo's various assets and the fact that the core business is essentially being given away. The NYTs piece (via Reuters) does include some mention of taxes with regard to the Alibaba position.
It's possible that renewed awareness of Yahoo's valuable international assets may prove a near-term catalyst despite our mention that the Market may need to see to believe. We'll see.

From a common sense perspective,
shares continue to look like a bargain: established, well-recognized global franchise operating in large, growing markets; strong balance sheet with no debt; large free cash flow; and striking SOTP discount. All offered at approximately 6-7 times current FCF (excluding Yahoo! Japan and the publicly traded Alibaba.com asset).

Happy investing,

Jeffrey Walkenhorst

Disclosure: long YHOO.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Thursday, September 16, 2010

Game Over for Yahoo (continued) or Hidden Value? Sentiment Turning on Dime?

The shifting Internet landscape makes Yahoo (YHOO) a bit different than our Casella Waste Systems (CWST), Harry Winston Diamond Corporation (HWD), and Seaspan (SSW). We're 100% certain that Casella will be hauling and recycling waste, Harry Winston will be mining diamonds and selling jewelry, and Seaspan's container ships will be steaming across the oceans in five to ten years. That said, we're 99% certain that the-Internet-as-a-important-medium will be around in five to ten years, although more advanced as technology evolves. We are also fairly certain that Yahoo will be around, although an important question remains: will the company be bigger, better, stronger? Admittedly, the answer is impossible to know for sure and given recent data points around traffic figures, many onlookers might say no. BUT, is there a way we can become comfortable owning equity in Yahoo and even buying more shares?

The other day we shared graphs, data and discussion on Facebook's rapid ascent to overtake both Yahoo and Google (GOOG) in "time spent" on the site. For sure, the "FB" community has an addictive aura to the site that draws in users through constant notifications ("friending," photo tagging, etc.) and various FB applications ("apps"). People are keen to share activities and keep tabs on other "friends." All in all, FB offers a powerful combination of features that have created a new way of content consumption.

Still, we mentioned that the game is still on for Yahoo given the company's heavily trafficked, display ad centric channels, solid balance sheet, large free cash flow and valuable equity interests in international properties. Despite the changing landscape, we see a margin of safety in shares at current levels.

Well, voila! Just like that the "Market" embraced Yahoo yesterday on nearly five times average three month daily trading volume -- from Yahoo Finance:

Why? The realization that, wow, Yahoo's international holdings might just be worth something. In this case, the Market is excited about the company's approximate 40% holding (fully diluted) in the Alibaba Group and the possibility that Yahoo may look to exit the position despite management commentary to the contrary. Please see the following WSJ article for more details: Yahoo Bulls Focus on Alibaba Talk.

Of course, the fact that the international assets have significant value is NOT new information. Former CEO Jerry Yang talked about them and included valuation data in a presentation to shareholders in June 2008 when he provided rationale against the Microsoft (MSFT) offer (click to enlarge):

A few changes since then: the 10% stake in G-Market was sold to eBay (EBAY) and the 1% direct stake in Alibaba.com has also been sold (bringing ownership to 29%. Yet, Yahoo retains the other positions. In fact, management presented the valuations for the publicly traded assets in Yahoo's 2Q10 results deck (click to enlarge):

OKAY, so we have $8.2 billion for 35% of Yahoo! Japan and $3.0 billion for 29% of Alibaba.com = $11.2 billion as of 6/30/10. The footnote says the following:
  • "Note: Our 29% stake in Alibaba.com is held indirectly through our equity interest in Alibaba Group and does not include estimates for the values of Alibaba Group’s privately held businesses. These pre-tax market values are based on public market share prices for Yahoo! Japan and Alibaba.com on June 30, 2010."
SO, we're not seeing any value for Yahoo's approximate 40% stake in the Alibaba Group which, by the way, includes Alibaba.com (online marketplaces for small businesses), Taobao.com (largest Internet retail Website in China), Alipay (leading online payment system), Alibaba Cloud Computing, and China Yahoo! THUS, we can hang our hat on additional value here, and, common sense might imply significant value.

BUT, let's only consider the $11.2 billion for Yahoo! Japan and Alibaba.com. NOW, what is Yahoo's total enterprise value (market cap less net cash on balance sheet)? Again, from Yahoo Finance:

So, we have EV = $15.8 billion less our $11.2 billion = $4.6 billion for ALL of the core Yahoo properties plus the Alibaba Group stake. How much annual free cash flow does Yahoo generate? Here's a summary cash flow statement from Yahoo Finance for 2007-09:

If we take cash flow from operating activities and subtract capex, excess cash flow for 2009A was $876 million. For the last twelve months (not shown), CFO was $1.2 billion with capex of $482 million for free cash flow of $718 million. Note that the cash flow figures do not include the equity investments in Yahoo! Japan or Alibaba, which are non-cash and reversed after being reported as "earnings in equity interests" on the income statement.

HENCE, while down from prior years, Yahoo generates tremendous excess cash flow that can be reinvested in the business, used to acquire other companies, or returned to shareholders through share repurchases (currently happening) or dividends. The company has almost no debt on the books.

Where are we going with all of this? Assuming run rate free cash flow of $700 million (no improvements in revenue, margins, or other key metrics = i.e. management fails to deliver on all guidance), we have an implied FCF yield of 15% for current equity buyers of Yahoo. This represents an entry multiple of only 6.6 times free cash flow. This multiple would be even lower if we were to assign a reasonable value to the Alibaba Group stake. Yahoo is essentially being given away.

Although Yahoo needs to adapt to the dynamic Internet landscape (= risk) to retain users and -- better yet -- increase both users and traffic, the current valuation is extremely pessimistic. The Market is treating the company as an also-ran even though Yahoo remains one of the most widely recognized and visited Internet franchises in the world. Here's U.S. traffic data from comScore (SCOR) for June 2010 - Yahoo ranked number two behind Google:

Finally, per our earlier post, Yahoo's display centric model provides a very different advertising platform for the world's mega brands than Facebook (or even Twitter). The latter need to walk a fine line to not alienate users as they strive to increase advertising revenue on their platforms to generate profits and free cash flow.

Maybe the Market will also begin to see the value in Yahoo. If Wednesday's action was any indication, sentiment may be turning on a dime, as it often does.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long CWST, HWD, SSW, YHOO, EBAY.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Tuesday, September 14, 2010

Who's Driving the Bus? Remember to Ignore the Headlines and Focus on Fundamentals AND, Importantly, VALUE

Monday's top two headlines on the WSJ online around 9am EST were:
followed by
Scratching your head? The first contradicted by the second? We're not kidding.

Of course, this is often par for the course in a sensationalized 24/7 media world, where -- in some cases -- one hand may not be aware of the other hand's actions. We previously called out disconnects between mainstream headlines and major 2Q10 earnings reports in our July post, Psychology Remains Fickle as The Big Bad Wolf Ignores Fundamentals.

On a related note, the other week, someone mentioned to us something to the effect:
  • "Now, all the media talks about is this 'double dip' idea and they seem to want us all to believe that it's happening. As a consequence, the stock market is as volatile as ever. I sure hope institutional investors aren't influenced by all of this nonsense!"
Our response: "Ah, but indeed, you bet they are!" Why? First, everyone is human, driven by psychology and, therefore -- like it or not -- influenced by factors (noise) in the surrounding environment. Second, so much money is short-term focused, trying to game next week, month, or quarter, moving in and out of positions, churning (trading) through portfolio positions. The money primarily moves based on data points ("catalysts") anticipated and/or created by all market participants, including companies, traders, investors, and the media.

Right now, uncertainty rules the day, even among the "pros." No matter that the ratio of equity free cash flow yields to bonds is near 50 year highs (per our prior post). For example, Bloomberg published an article last week highlighting what we've also shared, Dividends Beating Bond Yields by Most in 15 Years (sourced here via Yahoo Finance/YHOO). The article relays a message similar to that relayed by Hersh Cohen on Wealthtrack and in our prior post, Where to Stash Your Cash, opening with:
  • More U.S. stocks are paying dividends that exceed bond yields than any time in at least 15 years as profits rise at the fastest pace in two decades.
  • Kraft Foods Inc. and DuPont Co. are among 68 companies in the Standard & Poor’s 500 Index with payouts that top the 3.80 percent average rate in credit markets, based on data since 1995 compiled by Bloomberg and Bank of America Corp. While Johnson & Johnson sold 10-year debt at a record low interest rate of 2.95 percent last month, shares of the world’s largest health products maker pay 3.68 percent.
  • The combination of record-low interest rates, potential profit growth of 36 percent this year and a slowing economy has forced investors into the relative value reversal. For John Carey of Pioneer Investment Management and Federated Investors Inc.’s Linda Duessel, whose firms oversee $566 billion, it means stocks are cheap after companies raised payouts by 6.8 percent in the second quarter, data compiled by Bloomberg show.
YET, the article then shares commentary from a colleague of Hersh Cohen at Clearbridge:
  • “That’s the tug-of-war that’s going on right now,” said Peter Vanderlee, a money manager at ClearBridge Advisors, a unit of Baltimore-based Legg Mason Inc., which oversees $659 billion. “If we are going into a double-dip recession, maybe we’re not as cheaply priced as one would suggest. The other side of it is that if we’re just experiencing a slowdown, but we’re avoiding a recession, then prices are clearly attractive.”
Bottom-line: institutional investors are weighing the same well publicized risks as mainstream media and Joe Q. Public (e.g. the general public). How to get past the uncertainty? Focus on the underlying fundamentals and the price paid for a company. Listen to the advice relayed by James Grant in our Treasury Bonds are "Not Super Safe" post:
  • advice from Graham and Dodd - "can't know future, therefore seek margin of safety."
  • "in investments in present.... can't know what will happen in 2010 let alone 2017, but can observe two things: opportunities in front of us as now priced; and, how the world is positioning itself for an expected outcome."
Despite many problems, our own view is that fundamentals across many sectors are better than most currently acknowledge since the wall of worry rules the day. Evidence: who would believe that mattresses, landscaping gear, Christmas decorations (in July!?), and perfume are seeing robust sales? More evidence: global shipping trends and international demand for all kinds of goods and services. We see margins of safety in many different names, including our container shipping companies Seaspan (SSW) and Global Ship Lease (GSL). Likewise, in the discretionary sector, even our forsaken 1-800-Flowers.com (FLWS) and now-somewhat appreciated-by-the-Market Weight Watchers (WTW) offer compelling values from an owner's perspective. More on this in upcoming posts.

FINALLY, we were pleased to see one headline today via Yahoo Finance:
Excellent! What ever happened to investing? Consistently making money by trading is incredibly difficult and, in our view, akin to gambling. That said, the article starts with, "Wild gyrations on Wall Street have made U.S investors leery of buying individual stocks and skeptical that the market is a fair place to park their money." Admittedly, THIS SENTIMENT may take time to overcome (=overhang) as recent wounds will take time to heal.

BUT, history implies that humans tend to do the wrong things at exactly the wrong times. That this, as a group, we run to catch the bus along with everyone else, while paying no attention to who's driving the bus or in what direction. Here, the tag line from Bruce Berkowitz's Fairholme Funds is appropriate: "ignore the crowd."

BTW, we still have more to share on stocks versus bonds - this post was not intended as our promised second follow-up on this topic. We merely included the discussion of dividend yields versus bond yields to bring in the quote from the ClearBridge money manager (thank you to Bloomberg and Mr. Vanderlee!). We'll be back with a tad more.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SSW, GSL, FLWS, WTW, YHOO.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Saturday, September 11, 2010

Game Over for Yahoo? Facebook Overtakes Google and Yahoo in "Time Spent" as Users Represent 7% of World's Population

Back in July, we shared a handful of very interesting presentations and mentioned a sector with plenty of available jobs:
In that post, we included this presentation:
Here, we learned that the social networking platform had more than 400 million users (click to enlarge):

A subsequent slide informed us that 70% of Facebook users are outside the United States, which we found surprising. More evidence that the world is more connected than ever, which is mostly good, but sometimes bad (earlier, related post: Stocks Zig, Fundamentals Zag? Psychology is Wild Card - Still Good News Out There for Those Interested).

Then, in July, Facebook passed 500 million users, as reported in the company's Facebook Statistics (which we'd not viewed previously). The "stats" page includes all kinds of information and is worth a look for anyone at least somewhat interested in what's happening with social media. A 7/21/10 article from the U.K.'s Guardian shared some of the stats:
  • "Facebook's own user figures are based on members that have used the site within the past month: of those 500 million, it says, half use the site every day, and for an average of 34 minutes. 150 million users access the site by mobile."
Putting the 500 million figure in perspective, this represents 7% of the entire estimated world population (from Wikipedia: the world population is currently estimated to be 6,868,000,000 by the United States Census Bureau)." An interesting, if not alarming, sidebar is a graphic from Wikipedia highlighting actual and three U.N. projected global population scenarios:

Of course, a rising population helps drive economic growth, so long as the world's resources can support more hungry mouths, which is a whole other topic. Recall we previously shared China's growing energy consumption and dramatic shift to net imports of coal. For an intriguing perspective on global energy trends, we recommend watching this 8/30/10 keynote presentation by Peter Voser, CEO of Shell (RDS-A), at TUDelft University's welcome address (Mr. Voser starts at minute 25:22). BUT, we digress.

Back to Facebook's rapid ascent. We can also look at SKYPE's impressive user growth as reported on page six of the company's August registration statement filed with the SEC:

We regularly use Skype. Note that eBay (EBAY) retains approximately 30% of Skype following a majority sale to an investor consortium in 2009. We continue to view eBay as an undervalued powerhouse.

Regarding Facebook, we were a holdout until not too long ago. We finally hopped aboard primarily for the sake of sharing/seeing pictures and staying in better touch with friends. We can see why 500 million users are on the site: a single community location with integrated messaging, photos, events, etc. works extremely well. Plus, Facebook is accessible almost anywhere (home, office, mobile). We even established a Facebook "page" for Common Stock $ense that Facebook users can "like" -- as with our Twitter feed, we share items of interest here more often than we publish here on CS$. Facebook and Twitter alike are excellent for information exchange around the globe, whether for business, personal, education, or other purpose.

THUS, maybe this week's news from Silicon Alley Insider that "time spent on Facebook" exceeds that on Google (GOOG) and Yahoo (YHOO) isn't all that surprising? Here's Silicon Alley Insider's Chart of the Day (based on comScore/SCOR data):

This chart is accompanied by the following commentary:
  • If Google wasn't already scared of Facebook, this ought to do the trick. Time spent on Facebook was greater than time spent on Google sites in the U.S. in August for the first time in history, according to fresh data from comScore. Meanwhile, Yahoo continues its slide from the top of the heap to the bottom.
We came across another, related slide -- also from Silicon Alley Insider -- in a Mediasite presentation from the 3rd Annual Emerging Technologies for Online Learning Symposium in July:
SO, while email remains important for "sharing," Facebook leads sharing with almost one quarter of all sharing activity (based on this data). Email is second at 11%, Twitter is nearly at 11% and Yahoo is a distant fourth at 5.5%.

One more concerning view for Yahoo - traffic trends from Alexa.com reveals a staircase like rise for Google and a steady rise for Facebook:

Now we finally come to our question: do these trends signify game over for Yahoo? The changing landscape and declining traffic trends no doubt bring agita to Yahoo's hard charging CEO Carol Bartz and, admittedly, raise questions around management plans to not only reignite growth but meaningfully improve margins and returns on invested capital. Are Yahoo's franchise characteristics (touched on in our prior posts) still viable and durable? After all, traffic is down at Yahoo Mail and the company is working to rejigger the platform. From a WSJ article today:
  • Yahoo Mail is the No. 1 Web-based email service in the U.S. with 97 million unique visitors in August—more than Google's Gmail and Microsoft's Hotmail combined, according to research firm comScore Inc. But that figure is down from about 107 million visitors in August of last year.
  • Worldwide, Microsoft still commands a large lead over Yahoo and Google with 355 million visitors in July, up 3% from the same period last year, according to comScore data. Yahoo had 281 million visitors in July, down 7% from a year earlier. Gmail is rising fast, growing by 22% to 185 million visitors in July.
Our short answer: while Facebook's growth should continue and Google is making strides in many areas despite fears of a maturing search market, we think the game is still on for Yahoo. Why? Key "channels" such as Yahoo News, Yahoo Finance, and Yahoo Sports remain daily must reads for millions of Internet users and provide a very different advertising platform for the world's mega brands than Facebook. Yahoo Mail remains a significant channel for advertising, too.

But there's more to the story: solid balance sheet with large free cash flow and valuable equity interests in international properties. We are inclined to purchase more shares at current levels. That said, we'd love to see some Yahoo insiders also purchase shares (rather than incessantly unloading shares).

We will relay a few more details in a future post.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long YHOO, EBAY.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Wednesday, September 8, 2010

Container Shippers: The "Market" Warms to Sector on Solid Fundamentals; Buying More Seaspan and Global Ship Lease

Per our James Grant-Treasury Bonds are "Not Super Safe" post, we will soon follow-up with more on stocks versus bonds. (although we did subsequently relay research from Epoch Investment Partners that shows the "Ratio of equity free cash flow yields to bonds near 50 year highs"). Here, we briefly touch on the shipping sector, which we've also been meaning to come back to on CS$.

We continue to favor container shipping companies Seaspan (SSW) and Global Ship Lease (GSL) and recently added to our positions. In August, both companies posted results that again illustrate the inherent stability of their long-term oriented business models. For those interested, Seaspan presented at an investor conference today in NYC. The company's built-in growth and potential for dividend hikes are particularly compelling, in our view, and are under-appreciated by the Market.

Yet, mainstream media and Wall Street may finally be catching on, with CNBC featuring this story and video segment today:

The message is consistent with news we've been relaying for most of 2010, including this July post, Shipping News - Global Economy Better or Worse? You Be the Judge.

While some concerns remain around ship supply versus demand as the global fleet expands across virtually all shipping subsectors (thanks to the easy credit years) -- from dry bulk and containers to oil/chemical tankers -- Seaspan and Global Ship Lease are more insulated given long-term leasing models that are largely unexposed to the spot market (except as leases gradually expire in future years). Also, new capacity should be absorbed as emerging markets consumers continue to demand more goods and developed markets keep on consuming (even if slightly restrained from pre-recession levels). Of course, exports in both directions should also keep growing to feed this consumption. Don't forget that U.S. exports are growing Y/Y (up 26% Y/Y in June - please see Trading Economics for more) and Europe is also performing better than most people might suspect -- from our 8/11 Tweet:
  • UK: "the vol of exports increased in June to its highest level since Sept 08." U.K. Trade Gap Narrows More Than Ex http://on.wsj.com/aoRT5S
All in all, global commerce expands and our container ships should be there to transport the goods over the long haul (pun intended). In the case of Seaspan, the actual shippers are most major ocean liner companies, while for Global Ship Lease, the counterparty is CMA CGM. One note on the latter: we continue to expect CMA CGM to ultimately raise additional financing to allay debt fears. The carrier reported sharply better first half results just the other week. From the Journal of Commerce on 9/1/10:
  • French ocean carrier CMA CGM swung to a first half net profit of $864 million from a year earlier loss of $518 million on higher traffic volume and freight rates combined with lower costs.
  • The Marseilles-based carrier boosted revenue by 41 percent to $6.77 billion in the six months to June 30 from $4.8 billion in the same period in 2009.
  • Cargo volume jumped nearly 22 percent to 4.4 million 20-foot equivalent units from 3.6 million TEUs a year ago.
  • "The recovery in business that began to emerge in late 2009, gained further momentum during the first six months of 2010," the world's third largest ocean carrier said.
  • CMA CGM earned $1.05 billion before interest, taxes, depreciation and amortization compared with a year-earlier loss of $568 million.
Not too shabby.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SSW, GSL.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Friday, September 3, 2010

Healthy Luxury Market? Harry Winston (HWD) Says Rough Diamond Prices Above Prior Peak; Provides Glimpse of Earnings Power

Shares of Harry Winston Diamond Corporation (HWD) caught a bid yesterday following better than expected earnings results for the company's fiscal 2011 second quarter (end July). From Google Finance:

We last mentioned Harry Winston in our July post, Perspective on Consumer Trends Around the World from Estee Lauder and Harry Winston. As indicated in that post, we did slightly reduce our HWD stake for reallocation into relatively unloved names - including more Seaspan (SSW) and Global Ship Lease (GSL). However, we still hold the majority of our original position in Harry Winston and see incremental upside based on normalized earnings power.

What is normalized earnings power? Fair question with many moving parts that create a range of possible outcomes. The good news is that July quarter results -- EPS of $0.18 excluding a $0.04 foreign exchange benefit -- provided a hint of the company's earnings potential. Now, the Street is ratcheting forecasts upward. Assuming fundamentals keep moving in the right direction, earnings power should become more evident over the next year.

Just how are fundamentals? Another important question. Here are top-line and operating earnings highlights directly from the press release:
Consolidated sales increased 62% to $153.7 million from $94.8 million
in the comparable quarter of the prior year, resulting in earnings
from operations of $28.9 million, compared to a loss from operations
of $3.9 million for the same quarter of the prior year.
- Rough diamond sales rose 89% to $86.8 million from $46.0 million in
the comparable quarter of the prior year. The increase in sales was a
result of a combination of a 62% increase in rough diamond prices and
a 17% increase in volume of carats sold during the quarter.
- Retail sales increased 37% to $66.9 million from $48.8 million for
the same quarter of the prior year. Sales in Europe increased 40% to
$24.7 million, sales in Asia increased 40% to $22.6 million, and US
sales increased 31% to $19.6 million. Earnings from operations of
$2.3 million for the quarter compare favorably to a loss from
operations of $5.6 million, in the same quarter of the prior year.
Moreover, several key points from Q&A on the conference call stood out to us, which we share here to not only relay the Harry Winston story, but also for excellent perspective on trends in the global luxury market and economy. Thanks to SeekingAlpha.com, we have the following:

On sharply higher merchandise inventory for the retail operation:
  • Bob Gannicott, Chairman/CEO: “It's up for very good reasons. We have a very significant pipeline of high jewelry sales at the moment. It's very significant. It's probably more significant than we've had since I've been with the company. And that inventory has been purchased to support largely this pipeline.”
  • Irene Nattel, RBC: “How very interesting. Thank you.”
We agree with the analyst: "how very interesting" and bodes well for upcoming results. Note that Mr. Gannicott was appointed the President and Chief Executive Officer more than a decade ago, in September 1999, although he's been a director since 1992. We presume he's talking about his management role that began in 1999.

On higher rough diamond prices for the mining operation:
  • Des Kilalea, Royal Bank of Canada: “…I think Bob you said last time that you thought prices were about 5% or 10% below peak… Where would you put prices now versus the end of 3Q08?”
  • Bob Gannicott: “We've gone past the peak, by a measurable margin. The only thing is … it's sort of become somewhat uneven. Thankfully, our production is very focused in value from white goods, typical Canadian production. Obviously, the appearance of large volumes of production from Zimbabwe has held back the price increases and in fact probably depressed prices somewhat in smaller, cheaper, off-color goods. So, for our average production, we have gone past the peak that was achieved before the recession.”
Rough diamond prices for Harry Winston Canadian production higher than the prior peak = excellent news.

AND, finally, on demand for "significant pieces" -
  • Frederic de Narp, President and CEO, Harry Winston Inc.: “First of all, I think the wealthy people of the world are growing. In 2009, taking statistics of Merrill Lynch or Capgemini, the ultra-high net worth in the world grew by 19.6% and the high net worth has grown by more than 17% in '09... So there are more wealthy people around the world.
  • Second, it is true that in this volatile world we note that people would rather spend a million dollars on a necklace for the person they love as an investment. Said investment is a glamorous investment, something that they can enjoy instead of some other investments that they don't really know. Also because unique stones and unique pieces have proven to be extremely profitable and the price has been growing tremendously during the last five years.
  • And last, it's a moment where people do not hesitate to celebrate the meaningful moments of their life, investing in some authentic, true value, craftsmanship pieces, and this is what Harry Winston stands for. So we have an offer and we have a brand position and we do with that correspond exactly, precisely to this quest for authentic, unique pieces that people want. So we see it growing exponentially and growing for the next quarters, and growing as a trend…”
So, the global population is wealthier, more people purchase diamond jewelry as an investment, and Harry Winston is a premium, well recognized brand.

The results and commentary illustrate ongoing global shifts in purchasing power and the importance of owning businesses with international exposure. They also reveal the benefit of owning a business that holds a 40% interest in a highly coveted asset -- some of the highest quality diamond deposits in the world. From the company's July presentation:

Harry Winston is not without risk -- the Diavik Diamond Mine is located in a remote part of Canada and is the company's only mining asset -- yet we continue to sleep well owning a piece of the business.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long HWD, SSW, GSL.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Wednesday, September 1, 2010

The View from the Heartland: Encouraging Perspective from Kansas - "Job Shortages" + Aircraft Demand and FLY Leasing

Certain states, such as Kansas, have seen significant improvement in (un)employment levels and are now seeing "job shortages" - from CNBC on Monday:
  • Mark Parkinson, Democratic governor of Kansas, discusses the reasons his state's economy is doing better than most, with CNBC.

Mr. Parkinson's positive update is yet another example that not all is doom and gloom. Also, interesting sidebar: we were unaware that the state's largest employment sector is aircraft manufacturing, beating out the number two and three sectors, agriculture and energy. Note that the governor stated that aircraft sector is now stable and that the other areas are again hiring, with "job shortages" in some areas.

Although we're not sure of Kansas' position in the aviation supply chain (possibly slanted toward smaller aircraft based on Mr. Parkinson's commentary), we do know that Boeing (BA) can't make enough jets at present and plans to increase production. From Aviation International News last May (emphasis added in third bullet):
  • Boeing will move ahead with plans to increase the production rate on the 737 program from 31.5 to 34 airplanes a month in early 2012, the company announced this week. Boeing also said it continues to study the possibility of further rate increases, given strong customer demand for the single-aisle airliners.
  • “The global economy continues to recover this year and we believe that airlines will return to profitability in 2011,” said Randy Tinseth, Boeing Commercial Airplanes' vice president of marketing. “We believe that there will be increased demand for airplanes-especially in the market served by the Next Generation 737-in 2012 and beyond.”
  • The company holds unfilled orders for more than 2,000 of the single-aisle workhorses. At 34 airplanes a month, the new rate accounts for some five years of production.
This is part of the reason we own Fly Leasing (FLY), which continues to trade at a meaningful discount to net tangible book value even with ample demand for new and used aircraft (see link for interview with CEO Colm Barrington). Fly's fleet of 62 aircraft is 86% "narrowbody" with an average age of 7.5 years.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long FLY.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Epoch Investment Partners: "Ratio of equity free cash flow yields to bonds near 50 year highs" = More Value in Stocks than Bonds

Below, we share key messages and several slides from Epoch Investment Partners' (EPHC) 7/20/10 Capital Markets Outlook (*captured with Webex, not our preferred Mediasite - Webcast link is on main home page).

Epoch's investment approach is fairly consistent with our own investment approach: in a nutshell, focus on franchise type companies that generate excess cash and use this cash in shareholder friendly ways. Further, the firm's key messages from the July presentation are largely inline with much of what we've discussed here on CS$:
We recommend viewing the presentation for direct commentary with more detail. We share a handful of slides here (click to enlarge) -

Ratio of equity free cash flow yields to bonds near 50 year highs:

Corporate profits and cash flow improving:

Companies are using excess cash to repurchase shares (positive sign):

Overall summary:

A well-researched presentation with sensible recommendations.

Happy investing,

Jeffrey Walkenhorst

Disclosure: no investments in Epoch funds or EPHC shares.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer