Buy leading brands

Investors around the world are clamouring for income and safety with ten year bonds plumbing new lows at 1.58%. Instead of investing in government bonds I believe investors would be much better off investing in the leading multi-national companies. Just like consumers buy products from the brand names they trust investors should buy shares in companies with leading brands whose products and services they understand.

Globalisation has allowed leading brands to become even stronger with benefits such as increasing economies of scale and the ability to charge premium prices to a new class of emerging consumers aspiring to spend their new found wealth. The results can be quite striking, brand names like Disney (DIS), McDonald’s (MCD), Nike (NKE) and Starbucks (SBUX) have profits and share prices near to or making all-time highs even in this difficult economic climate.

These companies tend to have a combination of income and earnings growth which are much more likely to outpace inflation than government bonds with their current yields. They have much better balance sheets than any other sovereign government and have scope to increase dividend payouts over time. They are also much more flexible than governments with the ability to allocate capital to countries and divisions which show the most promising growth.

Warren Buffet alluded to brand strategy in his latest annual letter believing that the formula to business success involved companies operating within the four words of, “buy commodities, sell brands.” Companies that buy indistinguishable products (commodities) and have leading brands able to charge a premium for their product should continue to do well in these volatile times.


http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long DIS, SBUX

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Apple gets a like

For the last two weeks investors around the world have been selling Apple (AAPL) shares to make way for Facebook’s IPO in their portfolio. Now that Facebook’s IPO is out of the way with a valuation there for all to see investors are heading back, with APPL looking more attractive on a growth and valuation perspective. What was concerning in early April was the exuberance around the stock with an Apple analyst touting a $1,001 share price target. Now that the exuberance has been knocked out of the share price investors should again learn to like AAPL.

At Decisive we are bullish AAPL however some commentators are worried about the sustainability of the growth putting forward examples of what has happened to Nokia, Motorola and RIMM. These commentators tend to miss that these were hardware companies while AAPL combines both the hardware and software. This is a very important difference as the hardware model has little barriers to entry with company after company producing better looking designs and customers flocking to them. Instead the AAPL software/eco-system offers iTunes, over 500,000 applications and iCloud user storage integrating consumers into their system. This is hard to replicate as users (some for many years with the Ipod) have invested plenty of time and money customising their own music and downloading applications they like making it very costly and less likely to change to another system.

The main risk for AAPL is the reliance on mobile subsidies paid by the carriers. These subsidies which are around $400 make the iphone more affordable for the masses. However customers are more concerned with which phone to buy rather than which carrier to join giving AAPL the upper hand in subsidy negotiations. As Tim Cook mentioned in AAPL’s latest call carrier executives have told him that the churn from Iphone customers is the lowest of any phone they sell. This stickiness should lead to more sustainable growth than some commentators expect.

What is interesting is not analyst share price targets or the earnings multiple but the earnings estimates for the next year. Looking at Factset earnings per share estimates for September 2013 $53 vs $47 in September 2012 with analysts expecting an increase of 14% in earnings. A quick look at AAPL’s last quarterly result where APPL beat earnings estimates by 22.5% shows Mac Desktops (see sales split below) growing revenues by 7% year on year. Surely APPL’s other products such as the Iphone and Ipad are growing more quickly and more importantly are more material to overall sales. According to Strategy Analytics total smart phone shipments rose 41% in the past quarter, a lot faster than the macs 7% rate.

Source: 10Q

There is a lot of focus on the iPhone given the materiality to overall sales but I believe that the Ipad opportunity is just as great. The main reason is personal customisation. Being able to download applications that the user wants creates a need to have your own, more so than personal computers suggesting that the Ipad market could become larger than the pc market.  Quoting Tim Cook “just 2 years after we shipped the initial iPad, we’ve sold 67 million. And to put that in some context, it took us 24 years to sell that many Macs and 5 years for that many iPods and over 3 years for that many iPhones”. People tend to forget how successful the Ipad is, AAPL’s last result highlighted how the Ipad now contributes more revenue than desktops and portables combined.

Given the recent pullback and still low earnings estimates for next year investors would do well to like AAPL.

http://www.decisiveassetmanagement.com/


Disclosure: Decisive is long AAPL

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Trip Advisor A 5 star recommendation

Spin-offs typically create value for shareholders through more nimble, focused companies. With direct equity these businesses are able to attract and more appropriately incentivise staff. This is capitalism at its very best. I am bullish TripAdvisor (TRIP) with 50 million unique monthly visitors it is the world's largest online travel company. TRIP was spun off from Expedia (EXPE) late last year. The spinoff had a unique angle as TRIPs customers are EXPEs competitors. As a result the marketing spend from competitors such as Priceline (PCLN), Orbitz and Travelocity was muted. At the end of the day they knew any money spent with TRIP was going into a competitor’s pocket. Now the companies are completely independent of each other. I believe this spells an opportunity for investors.

TRIP has 60 million reviews on 550,000 properties and 900,000 restaurants and attractions. This compares to 13.9 million reviews on Booking.com as at May 2012. At the moment TRIP is only monetising its hotel customers but users are also reviewing restaurants and attractions. This suggests plenty of future revenue opportunities. According to a 2011 International Data Corporation report the global travel industry represents half of all global e-Commerce transactions, yet only 16% of travel advertising is spent online. TRIP also has solid international growth potential with 75% of usage overseas versus 40% of revenue.

TRIP's largest customer as at December 31st, 2011 was EXPE with 33% of revenue. What has caused some concern with investors was a disclosure in the 10K (under risk factors) with TRIP expecting EXPE to lower its cost per click pricing by 10-15% from 2011 levels. Leading to concerns of a long term reduction in EXPE spend over time. However a read of TRIPs Form S-4/A Registration Statement on page 68 allays some of these fears with the disclosure that the Chairman Barry Diller (3.8 million options) and CEO Dara Khosrowshahi (800,000 restricted stock units) will each receive half TRIP and half EXPE stock. This aligns top EXPE management with the performance of TRIP and suggests that marketing spend will not decline as much as some bears expect.

Another customer accounts for 16% of revenues (approx $102 million). The customer has not been disclosed. But given the size in our opinion, expect it to be PCLN the owner of booking.com. According to the latest 10K PCLNs online advertising spend was $919 million with 11% of online advertising spent on TRIP. This compares favorably to EXPE's combined online/offline advertising spend of $796 million with 26.5% spent on TRIP. This suggests some upside with PCLN, a much larger potential customer.

Customer concentration is the main risk, with TRIP managing it by actively growing customers outside of the online travel aggregators. These other customers are the actual hotels with TRIP charging properties directly for business listings, such as displaying phone numbers and emails on the TRIP website. These subscription fees account for 8% of revenue and have grown 76% over pcp. According to the 10K only 6% of current hotels have a business listing, suggesting a lot of potential for a more stable and recurring profit stream.

Historically TRIP relied on the wisdom of crowds to help users make decisions. Recently TRIP has expanded to specifically include the wisdom of friends. Users can see reviews from friends followed by friends of friends. Details can be found in Facebooks (FB) S1 IPO registration document under examples of platform integrated websites. By tapping FB social data TRIP connects users to shared content about where they and their friends have travelled and where they might possibly travel in the future. In our opinion, this information could open many possibilities. It could allow TRIP to give personalised recommendations in the future based on similar profiles and where users friends have been.

Do not just take our word for a bullish view on TRIP, with the shares making new highs another wisdom of crowds i.e. the stockmarket is giving TRIP a 5 star review. Make sure you check in and have a look.

http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long TRIP

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.