Seaworld making a splash

Seaworld (SEAS) is famous for its roller coasters, marine animal shows and water rides satisfying both thrill seekers and animal lovers from all around the world. It owns 5 of the top 20 American theme parks and is the 6th largest by attendance in the world. SEAS is not as large as the major destination parks like Disney and Universal (owned by Comcast) but its much larger than regional parks like Six flags and Cedar fair. SEAS is more hedged than both as in boom times destinations parks like Florida do better while in more depressed times the local regional parks outperform.

Don't work with animals
Everyone in media knows not to work with animals however SEAS theme park business is totally reliant on them for their shows. SEAS believes that they have the largest marine group with approximately
86,000 animals, including approximately 8,000 marine and terrestrial animals and 78,000 fish including the 29 infamous killer whales. More than 80% of their marine mammals were born in human care.

SEAS prices tend to be more reasonable than the other big two Florida parks. The stock is also reasonable SEAS estimate the cost to replicate their portfolio of parks would exceed $5 billion while SEAS market value including debt is $4.1 billion. Last year 65% of attendance was from repeat visitors with international guests accounting for 15% of visits. There is room to get busier as capacity utilisation at SEAS branded parks is 24% overall and 54% during peak season.


Not a whale of a deal
Shamu the famous killer whale is one of the key acts. However in 2010 one of the trainers unfortunately drowned leading to a legal and public relations battle over captive performing animals which continues today. The company also has geographic risk with Florida around 55% of revenues.

Not a deadliest catch
SEAS is still a US story but nature based animal parks can translate well overseas. SEAS is currently in a 6 month negotiation period with a partner under which they would move forward with multiple parks in the Middle East. Importantly for investors this would not be capital intensive as SEAS will lend their brand and operational experience in return for royalties. SEAS also owns the Bush Gardens and Sesame Place parks.

It is estimated that SEAS will not pay tax until 2017 with $656 million of operating losses. After making back the losses SEAS could eventually qualify as a REIT and be exempt from paying income tax if they distribute no less than 90% of their income as taxable dividends.

SEAS marine focus differentiates it from the other theme parks and unlike other parks SEAS has the opportunity to ride the international growth that is still to come.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a position in SEAS 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.

Blackhawk the gift card network

Ever noticed gift cards at the end of the aisle at your local Woolworths or Safeway? Those gift cards are distributed by Blackhawk (HAWK). They are one of the largest third-party distributors of gift cards and a leading prepaid payment network with over 100,000 retail distribution locations and over 500 leading consumer content providers. HAWK is basically the Visa or Mastercard of gift cards earning money by connecting and activating retailers and gift card providers over their network.

Everyone likes gift cards. The most popular?
Gift cards make for great presents as its much more thoughtful than handing someone cash. Gift cards are also good business for retailers. Retailers like the high margins on cards that take up little selling space. The numbers always differ but for every $100, $92 goes to the content provider, $5-6 goes to the retailer and $2-3 they keep. HAWK collects payments from the retailers and then pays the money to content owners holding on average a weeks float of cash. Agreements with retailers typically last for three to five years. It is big business with recent growth driven by international (growing 3x time faster than domestic) and corporate reward programs. The most popular gift card is iTunes.

HAWKS own gift? A spin off
HAWK was created within Safeway. It has grown so much over the years that Safeway now represents only 16% of sales. HAWK is at the stage where it needs to be independent as many retailers like Wal Mart in the US and ASDA in Europe were not keen to do business with an entity that was owned by a competitor. The spin off also allows HAWK to use its own script for acquisitions. See the spin off benefits below. There is also a massive tax benefit for shareholders as post spin-off Albertsons has bid for Safeway. If the transaction goes through Albertsons will assume the corporate tax of the distribution. HAWK shareholders will receive the present value of $4.50 a share in tax savings.

Much like the Visa and Mastercard networks it is hard to build a network. HAWK has connected 100,000 retail distributors and 600 gift card owners. HAWK estimates that they have spent $100m to build the network. New entrants will need a sales force to connect everyone (HAWK has retailers tied up in contracts) and spend $100 million on a settlement engine and accounting. In addition they have to convince retailers to drop HAWK cards, remove the aisle fittings and right off the remaining cards which is disruptive for the retailer when HAWK is growing the category 20%. Its a tough task for a retailer to commit to. HAWK has only lost one distributor in their top 50 accounts since inception.

Digital gift cards like digital birthday cards
The main question is digital which is 3% of their sales. Will digital gift cards kill the business? It is possible but its most likely physical gift cards will still be important like physical birthday cards. No one sends electronic birthday cards, it does not show much thought or effort as a gift. I know I would prefer a physical gift card than an electronic one.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has a long position in HAWKB 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.

Go Pro be a hero

GoPro manufactures the world's most versatile personal camera. It is one of the hottest consumer products around helping the world capture and share their passion. GoPro is famous for the footage that its users produce both professional athletes and amateurs post their videos online to services such as Facebook and Youtube.

Known more as a media company than a product
Go Pro was ranked #1 on Youtube's first ever quarterly brand channel leaderboard. It was more popular than well established brands such as Warner Brothers, Sony and Nintendo receiving more than 450 million video views. GoPro does not make any money from media content but they do have plans to develop a GoPro channel on Xbox Live with Microsoft. Going forward GoPro is viewing themselves as more of a media brand than a consumer product.

Not a camera but capture device
GoPro was the #1 selling camcorder in the US in 2013 and according to the NPD Group had 45% market share ahead Sony and Canon. The growth is impressive considering shipments of digital cameras fell from 142.7 million units in 2011 to 76.2 million last year. Its interesting to see that in their prospectus they refer to their product as a capture device rather than a camera. The shipment table below from their prospectus was concerning with year on year units shipped down for the most recent quarter.

They explain away the decrease due to comparable issues from the previous year. In 2012 their new camera was delayed from 4th quarter 2012 to 1st quarter 2013 which resulted in first quarter seasonality that was not normal. It all sounds a little confusing and the decrease is not something you want to see especially in an IPO. Worringly, product costs for their new 'capture device' were 67% greater than previous versions but the average selling price was 19% higher leading to margin compression.

Easy to sell with footage like this
Their strategy of focusing on specialty retailers rather than consumer electronics paid off. As selling in surf, ski and motorsports outlets meant that GoPro was the only camera device in the store. It is now distributed everywhere including Walmart. Their instore advertising is amazing with mounted TVs. The footage below automatically draws everyone to their product stand. At the end of 2013 they had over 25,000 displays. GoPro is already an international company with 44% of revenue overseas inline with most global companies.

Go Pro be a hero not an IPO
While I love the product I think I'll be a hero on the sidelines and watch the great Youtube footage. The media side of the business is interesting but at the end of the day Gopro is a camera (not a capture device) and consumer electronics businesses are very tough to sustain in the long term.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has no position in GoPro 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.

Domino's which pizza would you buy

Dominos Pizza is one of the world's largest pizza chains on average selling 1.5 million pizzas a day. Domino's is one of the best known brands in Australia ranking highly in the quick service restaurant category behind only McDonalds in top of mind awareness. Many believe Dominos (DMP) is an Australian brand because it is listed here but it is actually a master franchisee of the US listed Dominos (DPZ). Both companies are benefiting from consolidation in the pizza industry and digital pizza ordering.

Pizza company masquerading as a technology company
Historically pizza has been a nice and stable industry for both independents and large chains. But the introduction of digital ordering has boosted business for the major chains who can afford to spend on technology and mobile applications. Technology has helped Domino's to gain share overall as they sell approx 1 in 4 pizzas but online they sell 1 in 3 (see below). Globally digital sales are on a $3 billion run rate. Domino's has become a major e-commerce company. Online ordering has increased sales as customers are now able to order on the way home with their mobile. Online menus allow customers to browse the entire selection at their own pace and they typically end up ordering more. Digital orders also means more accurate orders leading to less waste and less time workers have to spend answering the phone.

Globally digital orders represent over 40% of sales for DPZ in Q4 2013 lagging Australia at 60%. DMP's goal is for digital orders to represent 80% of sales over the next three years. Smartphones and apps are helping to accelerate digital growth with mobile orders representing half of digital purchases. The largest group of employees (one third of employees) at headquarters is in the IT department.

Pizza a $90 billion market
The pizza category is ripe for consolidation. Unlike other markets a lot of the competition is still local and independent. The major chains have 40% of the pizza market this compares to 96% for hamburgers and 82% for Mexican food.

A slice of every pizza
Both Domino's earn royalties with DPZ receiving a 5.5% sales royalty from franchisees in the US and an average rate of 3% internationally they also make money in North America by selling franchisees their dough, cheese and other food. Australian DMP charges its franchisees a royalty rate of 7%, pay the US their average royalty rate of 3% and keep the spread in between.

Longer term Domino's has one of the best international opportunities in consumer brands. These goals are not even reliant on China which is seen as a massive market for many brands. According to Patrick Doyle DPZ's CEO half the toppings are standard offerings around the world but cheese seems to be an issue in China. Diary has only become a part of the Chinese diet recently. DPZ is taking it slow in China so far opening only in the markets of Shanghai and Beijing.

What pizza provides most value for money? Dominos US (DPZ)
The Dominos model is interesting as the US listed DPZ franchises out to master franchisees in each country which then sub-franchise out stores. The model is very compelling as four of the master franchisees are listed giving them ready access to capital. The equity ownership motivates management to achieve the best possible result as they are directly rewarded for the markets that they control. Dominos is listed in the UK with a market cap of $1.6 billion, Jubilant Foodworks market cap of $1.3, Alsea market cap of $2.4 billion and Dominos Australia with a market cap of $1.8 billion. Note both Jubilant and Alsea operate multiple brands. Because of the fact that franchisees are listed DPZ can grow faster than other food brands. From 2008-2012 DPZ has grown its international store count by 43% compared to 23% growth from Yum Brands and McDonalds at 13%.

The combination of digital growth and market consolidation means both Domino's can do well operationally. But as an investment we prefer the listed DPZ in the US as it is the cheaper stock with global exposure and less penetrated digitally at 40% versus Australia's 60%. For Australian investors DPZ allows you to benefit from the local story (they pay royalties to the US parent) as well as benefiting from the longer term international opportunity at a lower multiple of earnings.

 Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has no position in Dominos stock but DPZ is on our watchlist

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.

Internet trends 2014

I always look forward to Kleiner Perkins Caufield Byers (KPCB) internet trends report mainly because its not pages and pages of facts but interesting graphs and pictures. KPCB are a one of the premier venture capital companies in Silicon Valley and have helped fund companies like Facebook, Groupon, Twitter and Zynga. As a result that always have something interesting to share that help explain company behaviour. My favourite charts from their 164 page slide pack.

Its an old media saying that advertisers eventually follow eyeballs. As the advertisers follow eyeballs the biggest winner will be mobile (see below). To put this growth into context this time last year the amount of time spent on mobile was 12% versus 20% currently. It seems this has taken away from time spent on TV with even internet time declining by a percent. The chart helps to explain why investors are long mobile and short print.

Google's Android is the leading operating system. From a fragmented market just a few years ago Google is now in the clear lead with a dominant position similar to Microsoft Windows on the PC.  

This chart is interesting and helps explain why Apple bought Beats, as they not only have cool headphones but have started their own music subscription service. Everyone knows physical music sales are on the decline but not many realise that digital is following track. Ad supported music streaming services like Pandora and Spotify are becoming more popular with users than one by one purchases on iTunes.

This chart helps to explain Facebooks interest in Snapchat and Whatsapp, users from both companies share more photos than Facebook.

This chart shows why investors are willing to place such high values on Facebook and Twitter. They both only monetise at a fraction of Google, the trend is going the right way and if they can monetise anywhere near Google they will make a lot of money.

For younger users online is TV over 1/3 of millennials watching videos online. The most popular services Netflix and Youtube take up more than half of internet traffic during prime time.

While there is some technology excitement it is nothing like in 1999-2000 with the volume and number of IPOs down significantly since the bubble 14 years ago.

You can find the rest of the slide pack at http://www.kpcb.com/internet-trends

 Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has a long position in Facebook 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.