A health boost for your portfolio

As a consumer you have probably noticed the trend to watching what you eat and calorie counting. Whole Foods (WFM) America's healthiest grocery store is benefiting from this embrace of a healthier lifestyle. At the end of 2012 WFM operated 335 stores with a long term target of 1,000 just in the US. WFM has also  started to open stores in the UK and Canada. Apart from the financial crisis WFM has averaged same store sales of 8% per year.

Source: Whole Foods Annual Report

In 2012 organic sales were 5% of the overall market with growth at 8% (blue line) in 2010 versus 1% for total food sales (black line see chart below). Buying organic is more expensive and as can be seen in the chart below sales were affected during the recent financial crisis. Given high healthcare costs in the US eating healthy food is seen as being preventative, pay a little extra now so don't pay more later. With low market share we believe growth in natural/organic should continue for a few years to come.

Source: Morgan Stanley and the Organic Trade association

Everyone knows each others salary?

WFM is unique in the way it is run. To be fair all staff details including salary are available to everyone. WFM has an open book policy with staff, staff can find out what their co-workers and even management earn. WFM also caps management income to 19x the average wage including bonuses of all team members. This compares to 350-500 times at large publicly traded companies. The co-founder and co-CEO John Mackey has taken it a step further with a wage of $1 with no bonus and stock options.

Giving back
At WFM 40% of employees own some equity in the company and voluntary turnover is less than 10% unheard of in the retail industry. According to the annual report in 2012 more than 14,500 employees exercised 6.7 million options on average $13,600 each. Customers like to shop because they see familiar faces (less than 10% turnover), for its healthy food and they feel better about themselves. Last year WFM cash and product donations to charity exceeded their goal of 5% of after tax profits.

Get what you pay for
All in all WFM is one of a scarce breed of companies that encourages a healthier lifestyle while also giving back to the community. WFM has always traded at a premium to the market given its growth but just like healthy eating what seems expensive in the short term ends up being cheaper and better for you in the longer run.

Jason

http://www.decisiveassetmanagement.com/

Decisive is long WFM stock

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.

Doctor Walgreens will see you now

Walgreens (WAG) is America's largest drugstore chain. WAG has over 8,000 locations in America with 65% of the population within a 5 kilometre radius. WAG is benefiting from two powerful trends. The aging of the population with more than 10,000 Americans turning 65 every day and the increasing penetration of generic drugs. 2/3 of WAG’s sales are prescription and on average generics generate gross profits of $15 per script compared to branded of $8-$10. Management have plans for WAG to be not just a drugstore but a health and wellness destination.

 

Health and wellness destination?

The CEO believes they can be more than just a store that fulfils prescriptions. "With nearly 70 percent of the U.S. population either without a primary care physician or not utilizing one, and more than 30 million people gaining insurance coverage in 2014 under health care reform, we are well-positioned to fill the void in care,”Greg Wasson, CEO. Having the largest drugstore footprint means convenience for customers and provides an alternative to expensive physician or hospital care. WAG will be the option for customers if they cannot get a doctor's appointment and need after hours help.

WAG believes that they can can lower healthcare costs by delivering health services such as flu shots, health testing, coordinated wellness care and work-site health centers. The work site centres are particularly attractive for companies as instead of employees taking a half day off they can visit the on site clinic run by WAG. It also means enhanced selection such as fresh foods and beauty in addition to health care services.

Health and wellness to the world

WAG is aiming to create the first global pharmacy led health network. WAG has acquired a 45% stake of Alliance Boots in the UK (the largest pharmacy chain in Europe) with plans for full ownership by 2015. Together these two companies are betting that they can create a global drug chain. Consolidating their purchasing power will result in large synergies for the combined company.

Earn reward points by walking?

Last September WAG launched its first ever rewards program. Shoppers can earn points buying items, filling prescriptions, being immunised and joining the company's healthy-lifestyle programs, like Walk With Walgreens. That's right points by walking!

Utilizing technology WAG has made their reward card mobile. Downloading the rewards app customers can scan their phone at checkout no need to carry a card. In just 6 months WAG has enrolled more than 60 million customers. This helps WAG to reduce marketing costs by moving away from print promotions to digital within their rewards loyalty program.

Technology is making WAG even more convenient for customers with mobile apps. This year, the company launched its Pill Reminder mobile app and expanded its mobile prescription refill and transfer capabilities. WAG has also created an in-store map that allows customers to use a digital shopping list to map and locate items in a store and a “find your pharmacist” tool. This tool allows customers to select a pharmacist by matching their health care needs to areas of expertise, like specialties, languages and clinical backgrounds of Walgreens pharmacists. These tools differentiate WAG from independent chains which are estimated to account for 20% of the industry.

Taking the red pill

As with every investment there are risks, ongoing reimbursement pressure from payors like Express Scripts have negatively impacted WAG. Express Scripts is basically the middleman between drug makers and employees, Express pays pharmacies to dispense the drugs to their customers. Hundred of thousands of Express Scripts customers were shut off due to disagreements over payment reimbursement. The dispute last year was estimated to have cost WAG more than $4 billion in revenue. Customers either switched to another pharmacy or paid more for drugs if they stayed with WAG. Both parties have agreed to a new multi-year service agreement however WAG now has to win these customers and their prescriptions back. I suspect that WAGs move to become a health and wellness destination has been motivated to decrease reimbursement pressure.

Reality or wonderland

Just like the Matrix as an investor you have a choice. "You take the blue pill - the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill - you stay in Wonderland, and I show you how deep the rabbit hole goes." Well this is a little less dramatic. In this case no matter what reality you are in WAG is benefiting from longer term trends like the ageing population and the increased usage of generics. There are also shorter term trends like a mobile rewards card and other mobile technology. WAG looks good no matter the choice.

http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long WAG

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.

Zillow.com the realestate.com of America

Zillow.com is America's leading online real estate database similar to realestate.com.au here in Australia. Zillow has estimated market values for all the 110 million homes in the US. The site offers users an estimate of their home and the value over time just like a stockmarket. Zillow has branched out its services to include mortgages, rentals and home improvements.

Mobile 3x more valuable than desktop?
We like mobile centric companies and Zillow is a mobile leader. More traffic comes from mobile than desktop with over 60% of traffic from mobile on the weekends. The problem with a lot of mobile companies is that they monetise less due to smaller screens leading to less advertising. The beauty of Zillow is they monetise more on mobile than desktop. A smartphone user is 3x more likely to contact a realestate agent and generate a lead than on a desktop. Zillow is more dominant on mobile than desktop with mobile unique users 70% greater than than their closer competitor. 75 homes are viewed every second on mobile.

Source Zillow investor day

The interesting thing about Zillow is that it is half the market value of Realestate.com.au but in an economy 10x the size of Australia. See the chart below comparing agent commission to the total value of the respective companies. Zillow was actually founded 11 years after realestate.com.au in 1995. 

                                                        Source Zillow investor day


A good question is how has the US online housing market lagged Australia?

According to Zillow the real estate industry anointed one site to exclusively have all the listings. Sounded good in theory but it was bound by restrictions by the realtors and was not focused on the user leading to a poor consumer experience. This non focus on the consumer lead to the creation of Zillow.com and their own housing database.

Been there, done that

The great thing about the Zillow team is that it is the same team that revolutionised the travel industry when they started Expedia. To management the real estate industry felt much like the travel industry and Expedia in 1996. Zillow built their own real estate database and the popular Zestimate number (estimate of house value) to encourage users to their site and update their own photos and information to increase the accuracy and value of the Zestimate. The focus on the consumer led to an increase in users leading to more real estate agents a virtuous circle.

On a number of metrics Zillows marketshare is still small. 30,000 agents have signed up as Premier Agents while over 400,000 have set up their profiles on Zillow.com. This is out of an overall market of nearly 2 million real estate professionals. As the market leader Zillow is still only at 2.2% of online advertising spend. On many of the metrics below Zillow has a lot of future growth to look forward to. 

                                                         Source Zillow investor day


Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has no position in any of the companies mentioned.

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.

The cloud pioneer

Salesforce.com is the cloud trendsetter. CRM was founded in 1999 on the simple idea that a company could deliver software over the internet. No need to setup hardware and install software in each PC all you need is an internet connection. The cloud makes even more sense in today's mobile world. The introduction of smartphones and tablets mean software is needed on multiple devices and the cloud is a perfect access point. Social has also been a driver with social media increasing the amount of data available to companies about customer product experiences. CRM has adopted its sales software to incorporate this social data giving more insight into customer behavior. CRM is a beneficiary of three powerful trends the cloud, mobile and social. 

Has anyone grown faster than Microsoft and Oracle?
Amazingly CRM has grown faster than Microsoft, Oracle and SAP in the race to $2 billion at the respective stages of their corporate life. As can be seen below it took CRM 12 years to get to $2 billion compared to Microsoft which took 16 years. During this fiscal year CRM have a $4 billion revenue run rate target on the way to their long term $10 billion dream.

Source: CRM investor day

Cloud advantages 
The cloud has the advantage of being lower cost. No extra hardware is required to be bought and no need to employ IT staff to manage the systems. Accessing software through the cloud also means everyone has the access to the same version and support. Another benefit is the ability to pay by subscription, a pay as you go model rather than an upfront perpetual license. This is much more attractive for smaller businesses and has increased the market opportunity for software.

A platform in the cloud?
CRM is the leader in sales software. Potential upside for CRM is in growth as a platform. As the pioneer in cloud computing they are allowing third parties to build applications on their platform force.com utilizing CRM's database, security and user interface expertise. CRM have more than 1 million developers on this platform, and over 3 million apps have already been developed. CRM is pioneering platform as a service.


Valuation in the cloud
Great story but isn't this in the shareprice with a price multiple of 84x next years earnings? Well it is not as expensive if you look at the cash. The great thing with software as a service is that it provides investors with high visibility as revenue is recognised over the term of the subscription rather than lumpy upfront sales. However the issue is in the accounting. Billing software as a service means CRM can only recognise revenue when the software has been used for the month. As result there is a timing mismatch expenses are fully expensed now but the future revenue from the subscription is not recognised as revenue.

CRM's customer churn is in the low teens assuming this means 13% customers tend to subscribe for nearly 8 years this is not recognised in revenue. Luckily for CRM when a customer signs up for a year they pay upfront given the model we think cash is a better indicator than profits. For example Free cash flow per share in FY 2012 was $440 million or $3.25 per share vs Diluted EPS of $(0.09) per share. I have a preference for cash over accounting profits, businesses run on cash not profits.

A pioneer and settler

Revenue rose 37 percent in the past year making CRM the fastest growing company among the top 20 software companies in the world. Cloud, mobile and social are the key ideals CRM was built on. Typically pioneers get the arrows and the settlers get the land but in this case CRM gets the cash upfront a great pioneering model!

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long CRM

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.