Time for Time Warner

Time Warner (TWX) was a media conglomerate that has slimmed itself down to a video content owner (see below). Its library of hits include Friends, ER, Harry Potter and Lord of the Rings. The slimmed down TWX was attractive enough for Rupert Murdoch's Fox to offer around $80 billion for the company. TWX successfully rebuffed Fox but in response management have hosted an investor day to showcase the growth potential of the business. Management now believe they can deliver close to $6 per share in adjusted EPS by 2016, and over $8 a share by 2018 versus previous analyst estimates of $7.

Source: TWX investor day

HBO the king of content
The biggest driver of that growth will be HBO. HBO will go direct to the consumer. According to TWX there are 10 million households with broadband who have cut the cable cord that could become potential customers. Information on pricing has not been released but it is rumoured to be priced similar to cable around $15 a month for access to over 2,200 titles. Its a massive change for TWX who has previously relied on cable companies to distribute, market and bill customers. This announcement surprised some of their cable partners including giant Comcast who are concerned it might cannibalize their lucrative pay TV business. It's a great move for HBO but it will compete even more closely with Netflix. HBO have trialed internet streaming services overseas and according to businessweek HBO's standalone streaming service in the Nordics has attracted less than 10% of the audience of Netflix. But when you are the king of content including Game of Thrones you have a good chance against the competition.

Source: HBO

Game of Thrones is the biggest show in the history of HBO with 19 million viewers in the US. Australians set off piracy records leading the world for illegal downloads of the show. Daenerys the Dragon Queen played by Emilia Clarke is so popular that 146 baby girls were named Khaleesi in 2013!

The industry trend from physical DVD's to digital has been great for TWX. The growth in digital sales has offset the decline in physical sales with the benefit of 85-95% contribution margins versus 55%-65% physical. HBO is also making money by licensing their older content to Amazon but have kept some of their most iconic series including Thrones and Entourage.

Comic books are back
The success of Marvel and Disney has seen TWX double down on its DC Entertainment unit. TWX is the largest comic book publisher with the some of the best known superheros like Superman, Batman and Wonder women. They are bringing out out a Batman v Superman movie in 2016 (see schedule below).

                                                             Source: TWX investor day

TWX also owns Turner with TNT and TBS two of the top-five cable networks in the US. They recently extended their NBA rights for 9 years. Even though costs have increased sports has become the must have content. Advertising is an issue for media companies as with DVR's and streaming ads are either skipped or not watched live. Sports seems to be immune to this trend. TWX have disclosed that sports represents only 4% of their programming but 25% of advertising as advertisers are willing to pay up for the live exposure making it more likely their ad will be watched. Overall TWX's ad exposure is the lowest among their media peers at 17% of total revenue.

TWX upgraded growth targets should be well received by investors. Especially as it will be driven by subscription growth which is more stable recurring income than advertising which could lead to a higher P/E multiple. Importantly TWX's content is king, a slimmed down TWX was attractive enough for Rupert which should be attractive enough for everyone else.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has no position in Time Warner (TWX) 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.

Not so Yummy

Yum brands (YUM) is the owner of KFC, Pizza Hut and Taco Bell. Its has over 40,000 restaurants in more than 125 countries with 70% of sales outside the US. For most investors YUM has become a way to invest in the growth of the Chinese consumer. Of its 40,618 global stores 6,419 are in China. This China exposure has provided great returns for shareholders.

KFC finger licking good
YUMs most important brand in China is KFC with over 4,600 restaurants in nearly 1,000 cities across the country. YUM is opening 700 new stores in China this year the aggressive roll out of stores has made KFC one of the most well known foreign brands in China. 90% of KFC's profits come from overseas.

Source: YUM brands investor presentation

China causing indigestion
YUM brands is dominant in China with 39% market share. The growth story is that YUM will have well over 20,000 restaurants across all their concepts in China. YUM has five restaurants per 1 million people in China compared to 60 restaurants per 1 million people in the United States. But recently YUM has struggled. Customers dine at YUM and pay a premium to local prices because they believe the food is clean and the brand can be trusted. With two supply issues in the past two years customers are already looking elsewhere (see above for 2013 figures). KFC will eventually bounce back but it may not be to the same sale levels given recurring supply issues and increasing local competition.

There is another but its struggling too
YUM's other power brand is Pizza Hut but its growth is slowing in the US. Long known for dine in pizza, Pizza Hut is struggling with the move to online. Pizza Hut recently reported a (2%) same store sales decline in the US. Compared to a reinvigorated Domino's which reported a 7.7% increase in US same store sales. Domino's smaller store format and leadership in technology with one of the most downloaded apps means Pizza Hut has a lot of work to do just to catchup.  Pizza Hut in China is also suffering from similar supply issues as KFC. Amazingly only 30% of sales at Pizza Hut is pizza the majority is past, rice, soups and salads! See below.

                                                Source: YUM brands investor presentation


Their other major brand Taco Bell operates only in the US. It grew a respectable 3% in same store sales though these numbers were inflated with the introduction of breakfast earlier this year. Given these results YUM is trying to tap into the general move to higher quality, fresh ingredients with meals that are better for you. Following in the footsteps of Chipotle YUM are trialing a Vietnamese street food chain Banh Shop and a more upscale Taco Bell called Taco Co.

Change is not always good
David Novak has been a great leader at YUM with a great track record of growth. But he is stepping down as CEO transitioning to the chairman role. He has been one of the major reasons for success since the spin off from Pepsico being CEO from 2000 onwards. As an investor its never a good sign when a long term leader leaves.

No tip for you
While China will likely bounce back the fact that this is the second time there has been a supply issue means that there will be a perception problem for longer. Especially as locals trial other chains that are at lower price points. While YUM has bounced back from China issues before one difference this time is weak performance in the US from Pizza Hut and Taco Bell. Flat to negative growth for KFC and Pizza Hut in the US is not a great sign as the West moves away from fast food to more healthier fare developing markets are sure to follow. YUM has a great position in China but with two supply issues and struggles in the US we believe the stock will continue to provide short term indigestion for investors.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has no position in Yum Brands (YUM) stock but is long Dominos (DPZ) 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.

The secret behind Victoria Secret

Leslie Wexner knows what women want. He is responsible for founding The Limited, Abercrombie and Fitch, Express and L Brands (LB). L Brands is the owner of Bath & Body Works and the greatest brand known to man Victoria's Secret. It's surprising to learn that the owner is a 77 year old from Ohio. He is the longest serving CEO of a Fortune 500 company and is one of the few CEOs to make you an annual return of 20% over 20 years. He has bought and sold many retail businesses but has kept Victoria's Secret because they are so dominant. As a brand they have no real competitor.

Ads so good they get paid for them
The Victoria Secret fashion show is famous all around the world, its basically a one hour advertisement for the company. According to forbes CBS pays Victoria Secret $1m a year to televise the event. Its the only one hour show dedicated to a single brand that plays all around the world in 192 countries. The showpiece of the show is the diamond studded fantasy bra. The showpiece bra has never been sold. Last years asking price was $10 million see Candice Swanepoel below with the 2013 piece. This exposure is invaluable to the brand and investors. The models also benefit, 16 out of the 21 models on Forbes highest paid model list have been or are Victoria Secret angels. As an ex-angel Australia's Miranda Kerr makes the top ten.

Source: Victoria Secret

International runway
Its amazing that such a global brand has only 17 Victoria Secret stores internationally. The global push is accelerating this year as the show will be run in London and not New York. The show will air December 9th. LB plans to grow overseas through a small number of franchisees. LB will receive a royalty retaining control over assortment, pricing and store design. One problem with overseas growth is that LB does not sell handbags one size does not fit all in lingerie products which will have to be tailored to each region.

Source: L Brands investor relations

The beauty of this business is literally beauty
Victoria secret is not just lingerie but also personal care. LB have opened 230 stand alone beauty and accessory stores on target for 300 at the end of the year. 60% of sales from these stores are beauty products with a focus on fragrance which are great gifts and travel easily internationally. There is the potential for 1,000 of these stores. LB also owns Bath and Body Works which they can leverage from. It is an important part of the business with the majority of stores (1,638 stores see below) yet Victoria Secrets contributes 62% of revenue. Importantly beauty, fragrance and lingerie are all high margin, high loyalty categories. The demand is so great that nearly all of their stores turn a profit.

Source: L Brands investor relations

Capital management has also been fantastic LB has returned $15.4 billion since 2000 more than half its current enterprise value of $23.5 billion. The 2% dividend is great when you have LB's international runway. Unfortunately the P/E multiple at 19x is quite high for the low double digit growth but it does have great long term potential. Just like the Victoria Secret show LB stock is one to watch.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has no position in Limited Brands (LB) 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.