Never buy stock from someone with a hoodie

Lesson of the day never buy stock from someone with a hoodie! All jokes aside once all the anger around Facebook (FB) dies down, now adding earnings to the disappointment list from the IPO. FB could, in my opinion trade similarly like Amazon a stock that trades based on its future potential. FB will not trade on a similar 82x pe multiple but it could easily sustain an above average 30-40 multiple with the market focused on the potential growth opportunity rather than the usual focus on short term profits. For the time being though anger and frustration will dominate sentiment around the stock. Too many frustrated holders were left holding the bag as the insiders sold out at $38 a share a price which is looking better and better every day.

Source Bloomberg

In the second quarter FB had 955 million monthly active users (MAU) up 29% year on year, while mobile MAU were 545 million up 67% year on year. This shift to mobile affected US ad impressions which were down 2% compared to global impressions up 18%.

Decisive does not have a position in FB but I am impressed by some of their initiatives such as sponsored stories, which is FBs response to solving the mobile problem. These stories are basically user remarks about good experiences they had with a product or service highlighted in newsfeed (the main comment area). The beauty with this approach is that the comments look like they are part of the service and do not look like ads which tend to be too small to fit on a mobile screen. Sheryl Sandberg the COO commented that by the end of Q2 sponsored stories were generating over $1 million per day with half coming from FB mobile. To put that in context revenue for the quarter was $1.184 billion at that run rate around 7% of revenue. They also mentioned on the call that only half their current ads are social suggesting more opportunity to grow these services.

As the stock heads below $25 and hopefully $20 investors should begin to focus again on the opportunity and not on the hoodie.

Jason

By the way really enjoyed this social landmark picture from FB. Picture shows the most checked in places on FB users have shared with friends.  Loved it how Australia’s most checked in location was a casino and New Zealand a rugby park!

Source Facebook

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has no position.

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.

Google Glass not iPatch!

Google (GOOG) had some great earnings last night but what is more interesting is GOOGs new pair of glasses known as google glass. The glasses look more like something out of Star Trek than anything else but the video demonstration (involves skydiving) is really cool. 

The glasses come out next year and will cost $1,500. The glasses make it easy for users to take photos, get directions and incorporate the digital world with reality. It's a nice idea but I can't really think of anyone I know that would wear this. If Apple or anyone else came up with a similar idea they should at least make it look normal enough so that people will use it. Apple should (jokingly) bring out a version called the iPatch!

Jason

http://www.decisiveassetmanagement.com/

Disclosure
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.

Gas lighting up a US manufacturing comeback

The past decade has been tough for American consumers with stagnant wages, high unemployment and a deflated but now stabilising real estate market. It is a doom and gloom scenario but there is light on the horizon (pardon the pun) powered by low natural gas prices. Low natural gas prices are a massive game changer for the US economy. New technologies such as fraccing have opened up shale gas basins that were previously unrecoverable. According to the EIA approximately 7.6 trillion cubic feet of shale gas will be produced this year up from 0.6 trillion cubic feet in 2004 before the introduction of fraccing. The listed company Cheniere Energy personifies the opportunity. A company once touted as being a LNG importer was recently given approval for their first LNG export facility. America’s goal of energy self-sufficiency is no longer a pipedream!

BP is also a believer, in their 2030 energy outlook North America (including Canadian oil sand production) is forecasted to be the only importing region able to turn its energy deficit into a small surplus. This contrasts with other importers such as Europe and China who as a whole will need to import 40% more in 2030 than they do today. See chart below.

Source: BP Energy Outlook 2030

Low gas prices bring many benefits to the US economy the obvious one being manufacturing, energy accounts for 8% of overall input costs with gas 14% of that total the rest being oil and coal. The substitution of some oil and coal with natural gas in particular for power generation will generate massive efficiencies for the economy. Consumers will save through cheaper electricity and heating which could save US households billions of dollars, essentially a permanent tax cut. America would also benefit from less reliance on Middle Eastern oil and potential reductions in US military spending for security in the Middle East.

See the chart below for international gas prices as of the end of 2011. US Henry Hub prices have fallen further to the high $2 range while other countries are suffering from increasing prices. Lower comparable gas prices are a major competitive advantage for US businesses.

Source: BP Statistical review of world energy 2012

It may only be a trickle but there are very tangible signs the outsourcing trend in manufacturing is reversing. Even EADS the producer of airbus has announced plans to open its first production facility in the US, amazing news given that EADS is partly owned by European government. The low comparable gas prices, the availability of skilled labour and lower real estate prices have made American businesses more globally competitive then they have been in decades, foreign companies and even their governments are beginning to take notice.

Jason 

http://www.decisiveassetmanagement.com/

Disclosure
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.

Disney in North Korea?

Kim Jong Un, First Secretary of the Workers’ Party of Korea, First Chairman of the DPRK National Defence Commission and Supreme Commander of the Korean People’s Army was singled out in the crowd attending a stage performance. The North Koreans are famous for their choreography but this was a stage performance with a twist, see the North Korean news clip below. Hang on is that Tigger, Winnie the Pooh and Mickey Mouse on the stage, yes it is.

 

He has probably been waiting years to do this, hopefully he can keep himself busy with these stage performances instead of following his dads footsteps sabre rattling and launching missiles. Note this performance was not authorised by Disney. It does speak to Disney's worldwide appeal and brand power that can entertain even hard edged dictators like Kim.

Jason 

http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long DIS

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.

Tiffany & Co finally on sale

You know you have a hit when a company is not only famous for its jewellery but its boxes. Yes it is Tiffany's (TIF), with its famous little blue boxes it makes men and women swoon, usually for different reasons! TIF jewellery has fascinated everyone for over 150 years with beautiful designs and products, it is a high end purchase but compared to other luxury items has other benefits. Jewellery tends to consist of precious metals and is seen as a store of value, it isn’t necessarily fashion as it is built to last.

However shareholders have not seen any of these benefits with shares down 20% year to date. Shares have been hit by a slowdown in sales from Asian consumers and lower bonuses from Wall Street. TIF reduced sales guidance to 7-8% growth vs earlier expectations for 10% growth. The downgrade so early in the year was disappointing considering 1/3 of annual sales and ½ of earnings are generated in the 4^th quarter. TIF is also suffering from strong growth comparisons last year, see chart of comparable same store sales  (SSS) below.

Source: TIF 10K

These are shorter term issues but what about the longer term outlook? For a company that has been around for so long it surprisingly still has solid long term growth. TIF has long term plans to add 20 stores a year and is looking to add 24 this financial year. This is decent growth considering there were 251 stores at the end of the first quarter. TIF recently reiterated its long term objectives to achieve 10-20% sales growth and deliver at least mid-teens earnings growth. According to Bernstein research only 12% of the jewellery market is branded compared to 50% of the watch market and 80% of perfumes. Further only 5% is in the hands of the large branded jewellers such as TIF and Cartier etc confirming a growth opportunity for years to come.

There were takeover rumours swirling around September last year from Richemont (owner of Cartier) when TIF was trading around $70. In March last year Louis Vuitton Moet Hennessy (LVMH) acquired Bulgari for about $3.7 billion euros or $5.2 billion doubling the size of its watch and jewellery business. These rumours have died down this year no doubt helped by the fact these companies are incorporated in Europe. TIF would still be a big bite for companies such as LVMH and Richemont as TIFs market cap is $6.8 billion. One potential benefit is that there are no large family shareholders that could block a potential deal. In saying all this it is never a good idea to buy based on takeover rumours. With the share price in the low $50’s any takeover premium has disappeared from its share price giving a better entry point for investors.

The US is TIFs largest market around 50% of revenues. TIF leases its stores except for the New York Flagship store which it owns outright. Retail sales in the flagship store represented 8% of worldwide 2011 sales. TIFs average selling prices range from $250 for gold and silver jewellery to $3,800 for engagement rings, see slide below. The average price for rings has increased since the GFC going from an average price of $3,200 in 2009 to $3,800 in 2011, remember ladies and gentlemen timing is everything!

Source: TIF investor presentation

Once specific TIF risk is designer related. In 2009, 2010 and 2011, the designs of a Ms. Peretti accounted for 10% of TIFs sales, approximately $364m. She is famous for designing TIFs open hearts, is 72 years old and receives a royalty for TIFs use of the Peretti Intellectual Property. TIF is currently in negotiations regarding the purchase of her designs. To date they have not agreed on price but given the materiality to sales the amount offered would likely be significant. Interestingly there seems to be an information campaign on TIF websites detailing her history and how she revolutionised jewellery design. TIF is doing whatever it takes, this sort of behaviour cannot be a good sign as it means TIF will likely have to pay up for the designs.

TIF never goes on sale but luckily it shares do. There are risks but that is why TIF is trading at the low end of its historic valuation range around a 12-13x forward multiple. There are not many opportunities to buy such established luxury brands at these valuations. Given TIFs long term high double digit sales growth potential shares are looking like quite a steal.

Jason 

http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long TIF

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.

Disney shares the happiest place on earth

Disneyland is known as the happiest place on earth, some of this magic seems to be rubbing off on Disney (DIS) shares. DIS shares are making all time historic highs with both short term and long term share price catalysts. A shorter term catalyst was the recent announcement that Newscorp will be spinning off its publishing division, this will cause investors to focus their attention on other conglomerates for potential spin-offs. DIS is one of the only major media conglomerates left. It is surprisingly owner of ESPN, the sports channel and is in our opinion a candidate to be spun-off. ESPN is one of the most valuable franchises in the industry earning industry leading subscription fees, it is the major reason why most subscribers have cable. 

DIS also has a great long term story in emerging markets with the upcoming opening of Disneyland Shanghai and has a proven ability to utilise technology to distribute its stories. DIS is brand manager for some of the most recognisable characters in the world. When these characters are combined with the most recognisable attraction that is Disneyland, it is no wonder why DIS is able to create stories and experiences which none can match. A hit DIS show executed to its full potential can become a world-wide franchise. A successful franchise can have its own show on the DIS cable channel, its own ride at Disneyland, its own films, games and even consumer toys/products. DISs ambition is to tell stories with great characters no matter what the medium and in this DIS has plenty of options.

The CEO Bob Iger knows animation is key,  in his words. “A hit animated film is a big wave, and the ripples go down to every part of our business from characters in a parade, to music, to parks to video games, TV, internet , consumer products. If I don’t have wave makers, the company is not going to succeed.”

When Bob became CEO he watched a DIS parade down Main Street and realised that “after ten years of the Lion King, Beauty and the Beast and Aladdin there were then ten years of nothing.”1 The only characters that had been created in the past decade were Pixars. DIS had in fact lost money in the past decade on animation and even worse lost the ability to cross sell and leverage other products. Bob remedied this by acquiring Pixar and putting Pixar management in charge of DIS animation studios.

His second act, the acquisition of Marvel in 2009 seems to playing to the same script with the hit release of the Avengers.  Avengers have the potential to become DIS next big franchise. As of June 2012 it is the 3^rd highest grossing movie of all time behind Titanic and Avatar and was the biggest opening weekend in North America.  During DIS last quarterly call management announced plans for a sequel. They also commented that a lot of product had already been sold out with DIS working hard to stock shelves as fast as possible.

The bad news is that Bob Iger has announced that he would step down as CEO in March 2015 and as chairman in June 2016. It is always hard when a great CEO leaves but what makes us comfortable is the fact he has increased investment spend (see chart below) for future growth and DISs high quality board.

Source:10K

The capital expenditure is funnelled into DISs three growth pillars of creating great family content, making experiences more memorable and accessible through innovative technology and growing internationally mainly through Shanghai China. Shanghai Disney is a joint venture with the local government and is the culmination of a ten year negotiation. It is planned to open at the end of 2015, a population of 330 million live within a 3 hour travel radius. DIS also has a a great board and has always been able to attract smart individuals. Unfortunately Steve Jobs has passed away but a recent addition is Sheryl Sandberg COO of Facebook.

The stock approximately trades around a 10% discount to its historic multiple range and with clear evidence of another franchisee hit (Avengers came out May 4^th after quarter end) and in our opinion potential spin-offs shareholders should continue to benefit from the magic of DIS storytelling. If you can’t get to Disneyland buying the shares should help put you in a happier state of mind.

Source: Happy the dwarf from DIS facebook page

Jason

1. Steve Jobs by Walter Isaacson

www.decisiveassetmanagement.com

Disclosure: Decisive is long DIS

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.